Alliance Global Services IT India Private Limited (Earlier known as Alliance IT Consulting India Private Limited), Hyderabad V. Dy.CIT, Circle-1(1), Hyderabad

ITA 58/HYD/2014

• Counselvise Citation: 5822514 RSA 2014
• Duration Of Justice: 1 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-03-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 06-02-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 17-01-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G APARNA RAO
• Assessee Lawyers: UTPAL SENABHIROOP BHARGAV
• Keywords: Transfer pricing; International transaction; Bad and doubtful debts
• Section: 143(3); 234B; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 58/HYD/2014 ASSESSMENT YEAR: 2009-10 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD., (EARLIER KNOWN AS ALLIANCE IT CONSULTING INDIA PVT. LTD.), HYDERABAD PAN AAACW2012R VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 1(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI UTPAL SEN/ABHIROOP BHARGAV REVENUE BY : SMT. G. APARNA RAO DATE OF HEARING 20-02-2015 DATE OF PRONOUNCEMENT 20-03-2015 O R D E R PER SAKTIJIT DEY, J.M.: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST TH E ASSESSMENT ORDER PASSED U/S 143(3) READ WITH SECTION 144C IN C ONSEQUENCE UPON THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP ). THE APPEAL IS PERTAINING TO AY 2009-10. 2. BRIEFLY THE FACTS ARE, ASSESSEE AN INDIAN COMPAN Y IS A SUBSIDIARY OF ALLIANCE HOLDINGS INC., USA. BASICALL Y, ASSESSEE IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT AND CONSU LTING SERVICES TO ITS ASSOCIATED ENTERPRISES (AES). TO BE SPECIFIC , ASSESSEE RENDERS CUSTOM APPLICATION DEVELOPMENT, TESTING AND E-BUSIN ESS SERVICES TO ITS AES. FOR THIS PURPOSE, ASSESSEE HAS ENTERED INT O SERVICE AGREEMENT AS PER WHICH ASSESSEE IS REMUNERATED AT C OST PLUS MARK 2 ITA NO. 58 /HYD/2014 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. UP OF 12%. FOR THE ASSESSMENT YEAR UNDER CONSIDERAT ION, ASSESSEE ORIGINALLY FILED ITS RETURN OF INCOME ON 26/09/2009 DECLARING TOTAL INCOME OF RS. 1,00,45,150. LATER, ASSESSEE FILED RE VISED RETURNS OF INCOME ON 10/10/2009 & 19/12/2009 DECLARING TOTAL I NCOME RS. 1,01,01,040 AND RS. 33,81,240 RESPECTIVELY AFTER CL AIMING DEDUCTION U/S 10B OF THE IT ACT. IN COURSE OF ASSESSMENT PROC EEDING, AO NOTICING THAT ASSESSEE HAS ENTERED INTO INTERNATION AL TRANSACTIONS WITH ITS AES DURING THE RELEVANT PREVIOUS YEAR MADE A RE FERENCE TO THE TRANSFER PRICING OFFICER (TPO) TO DETERMINE THE ARM S LENGTH PRICE (ALP). IN COURSE OF PROCEEDING BEFORE HIM, THE TPO NOTICED THAT AS PER 3CEB REPORT ASSESSEE HAS UNDERTAKEN THE FOLLOWI NG INTERNATIONAL TRANSACTIONS: AE NATURE OF TRANSACTION AMOUNT (RS.) ALLIANCE CONSULTING GROUP ASSOCIATES INC., SOFTWARE DEVELOPMENT AND CONSULTING SERVICES 34,53,32,211 ALLIANCE GLOBAL SERVICES INC. -DO- 9,40,43,658 43,93,75,869 HE FURTHER NOTICED, FOR ESTABLISHING THE ARMS LENG TH MARGIN OF PRICE CHARGED TO ITS AE ASSESSEE HAS UNDERTAKEN ECONOMIC ANALYSIS THROUGH AN EXTERNAL CONSULTANT. IN THE TP STUDY ASS ESSEE WAS TAKEN AS THE TESTED PARTY. TRANSACTION NET MARGIN METHOD (TNMM) WAS ADOPTED AS MOST APPROPRIATE METHOD WITH OPERATING P ROFIT TO TOTAL COST AS THE PROFIT LEVEL INDICATOR (PLI). A SEARCH WAS U NDERTAKEN IN PROWESS AND CAPITALINE DATABASES IN SOFTWARE DEVELO PMENT SEGMENT, WHICH YIELDED 16 COMPARABLE COMPANIES WITH AVERAGE ARITHMETIC MEAN OF 12.05%. AS MARGIN SHOWN BY ASSESSEE WAS 13. 13%, PRICE CHARGED TO AES FOR INTERNATIONAL TRANSACTION WAS FO UND TO BE WITHIN ARMS LENGTH. THOUGH TPO ACCEPTED TNMM AS MOST APPR OPRIATE METHOD WITH OP/TC AS PLI, HOWEVER, HE REJECTED ASSE SSEES TP STUDY, INTER-ALIA, ON THE FOLLOWING REASONINGS: 3 ITA NO. 58 /HYD/2014 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. I) INAPPROPRIATE FILTERS HAVE BEEN APPLIED WHILE SE LECTING COMPARABLES. II) VERITICALS/HORIZONTALS WITHIN SOFTWARE INDUSTRI ES WERE NOT GONE INTO WHILE UNDERTAKING COMPARABILITY STUDY. III) INSTEAD OF CONFINING TO CURRENT YEAR DATA, MUL TIPLE YEAR DATA HAVE BEEN CONSIDERED WHILE SELECTING COMPARABLES. 3. AFTER REJECTING THE TP REPORT, TPO UNDERTOOK A S EARCH HIMSELF BY APPLYING SOME OF THE FILTERS APPLIED BY ASSESSEE AS WELL AS SOME ADDITIONAL FILTERS WHICH YIELDED 17 COMPARABLES WITH ARITHMETIC MEAN PLI OF 22.03%. AFTER ALLOWANCE OF 0.32% TOWARDS WOR KING CAPITAL ADJUSTMENT, THE ADJUSTED ARITHMETIC MEAN PLI WAS WO RKED OUT TO 21.71% AND THE ALP OF INTERNATIONAL TRANSACTION WAS DETERMINED AT RS. 47,29,94,465 AS AGAINST PRICE CHARGED BY ASSESS EE OF RS. 45,01,77,236. THE RESULTANT SHORTFALL OF RS. 2,28,1 7,229 WAS TREATED AS THE ADJUSTMENT U/S 92CA(3). THE COMPARABLES SELE CTED BY TPO ARE AS UNDER: S.NO. COMPANY NAME OP/OC 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 12.41 2. BODHTREE CONSULTING LTD. 68.43 3. COMP-U-LEARN TECH INDIA LTD. 28.00 4. IGATE GLOBAL SOLUTIONS LTD. 21.97 5. INFOSYS LTD. 41.34 6. KALS INFORMATION SYSTEMS (SEG.) 23.11 7. LGS GLOBAL 20.51 8. MINDTREE LTD. (SEG) 5.56 9. NEILSOFT LTD. 9.05 10. PERSISTENT SYS 18.49 11. RS SOFTWARE (INDIA) LTD. 9.99 12. R SYSTEMS INTERNATIONAL LTD. (SEG.) 17.53 13. SASKEN COMMUNICATION TECHNOLOGIES LTD. 17.30 14. TATA ELXSI LTD. (SEG.) 22.82 15. THINKSOFT GLOBAL 20.80 15. THIRDWARE SOLUTIONS 22.28 16. ZYLOG SYSTEMS LTD. 15.00 374.59 22.03 4 ITA NO. 58 /HYD/2014 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. 4. IN PURSUANCE TO THE ORDER OF TPO, AO PASSED DRAF T ASSESSMENT ORDER PROPOSING ADDITION OF RS. 2,28,17,229 BEING T P ADJUSTMENT. AO ALSO RECOMPUTED DEDUCTION U/S 10B BY REDUCING LEASE LINE/ COMMUNICATION CHARGES FROM EXPORT TURNOVER. 5. ASSESSEE RAISED OBJECTIONS AGAINST DRAFT ASSESSM ENT ORDER BEFORE THE DRP ON TRANSFER PRICING ADJUSTMENT AS WE LL AS CORPORATE ISSUES. HOWEVER, NONE OF THE OBJECTIONS RAISED BY A SSESSEE FOUND FAVOUR WITH THE DRP. AS A RESULT, IN TERMS WITH THE DIRECTIONS OF DRP, AO PASSED THE IMPUGNED ASSESSMENT ORDER ON 03/12/20 13. 6. BEING AGGRIEVED, ASSESSEE IS BEFORE US RAISING, IN TOTAL 12 GROUNDS. GROUND NOS. 1 TO 9 ARE ON TRANSFER PRICI NG ISSUES, WHEREAS, GROUND NOS. 10 TO 12 ARE ON CORPORATE TAX ISSUES. AS FAR AS TRANSFER PRICING ISSUES ARE CONCERNED, LD. AR CONFINED HIS A RGUMENT TO SELECTION OF CERTAIN COMPANIES AS COMPARABLES AS RA ISED IN GROUND NOS. 4 AND 6 AND ISSUE OF NON-CONSIDERATION OF BAD DEBT AS PART OF THE OPERATING COST AS RAISED IN GROUND NO. 9. IN VIEW O F THE ABOVE, REST OF THE GROUNDS RAISED ON TP ISSUES ARE DISMISSED AS NO T PRESSED. AT THE OUTSET, WE WILL TAKE UP THE ISSUES RELATING TO SELE CTION OF COMPARABLES AS RAISED IN GROUND NO. 4 & 6. OUT OF THE SEVENTEEN COMPARABLES SELECTED BY TPO, ASSESSEE HAS OBJECTIONS IN RESPECT OF FOUR COMPARABLES AS UNDER: I) INFOSYS BPO LTD. II) BODHTREE CONSULTING LTD. III) KALS INF. SYSTEMS LTD. (SEG.) IV) TATA ELXSI LTD. (SEG.) 7. BRIEF SUBMISSIONS OF THE LD. AR AGAINST THE SELE CTION OF THE AFORESAID COMPARABLES ARE AS UNDER: S.NO. NAME OF THE COMPARABLE REASONS FOR REJECTIONS 1. INFOSYS LTD. I)INCOMPARABLE SCALE OF OPERATIONS: REVENUE OF INFOSYS IS 453 TIMES 5 ITA NO. 58 /HYD/2014 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. MORE THAN THE REVENUE OF ASSESSEE AND OPERATIONS OF THE ASSESSEE. II) SIGNIFICANT BRAND PRESENCE IN THE MARKET AND INCURS SUBSTANTIAL ADVERTISEMENT AND MARKETING AND DISTRIBUTION EXPENSES. III) ESTABLISHED PLAYER AND MARKET LEADER WITH ASSETS VALUING INR 3779 CR AND HAS EMPLOYED 27639 EMPLOYEES. IV) ENGAGED IN THE DEVELOPMENT OF PRODUCTS-DEVELOPS FINACLE. 2. BODHTREE CONSULTING LTD. FUNCTIONALLY DIFFERENT: ENGAGED IN E SALE OF PRODUCTS. 3. KALS INF. SYSTEMS LTD. (SEG). FUNCTIONALLY DIFFERENT: THIS COMPANY IS A FULL-FLEDGED SOFTWARE PRODUCT DEVELOPMENT COMPANY AS IT IS ENGAGED IN DEVELOPING PRODUCTS LIKE SHINE ERP SOFTWARE, DOCUFLO, DAC4CAST ETC. 4. TATA ELXSI LTD. (SEG.) FUNCTIONALLY DIFFERENT: PRODUCT DESIGN SERVICES, MECHANICAL DESIGN WITH A FOCUS ON INDUSTRIAL DESIGN AND DEALS IN HIGH END ENGINEERING SERVICES. LD. AR SUBMITTED, THE COORDINATE BENCHES OF THIS TR IBUNAL HAVE HELD THE AFORESAID COMPANIES NOT TO BE COMPARABLE WITH P URE SOFTWARE DEVELOPMENT PROVIDERS IN VARIOUS CASES INCLUDING TH E FOLLOWING CASES: 1. KENEXA TECHNOLOGIES PVT. LTD. VS. DCIT IN ITA NO . 243/HYD/14. 2. CISCO SYSTEMS (INDIA) PVT. LTD. VS. DCIT, BANGAL ORE IN IT(TP) NO. 130/BANG/14 DATED 14/08/14. 3. CIT VS. AGNITY INDIA TECHNOLOGIES LTD., 219 TAXM AN 26 (DEL.) 8. THE LD. DR, HOWEVER, SUPPORTED THE ORDER OF THE DRP/TPO. 6 ITA NO. 58 /HYD/2014 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. 9. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE ORDERS OF THE DEPARTMENTAL AUTHORITIES AS WELL AS OTHER MATERIALS ON RECORD. THERE IS NO DISPUTE TO THE FACT THAT TPO HAS CLASSIFIED ASSESSEE AS A SOFTWARE DEVELOPMENT SERVICE PROVIDER . AS CAN BE SEEN FROM THE MATERIALS ON RECORD, COMPARABILITY OF INFOSYS LTD., KALS INFORMATION SYSTEMS LTD. AND BODHTREE CONSULTING LT D. WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDER CAME UP FOR C ONSIDERATION BEFORE THE COORDINATE BENCHES OF THIS TRIBUNAL IN A NUMBER OF CASES. THE TRIBUNAL AFTER EXAMINING THE FUNCTIONALITY OF T HESE COMPANIES ON THE BASIS OF MATERIALS ON RECORD, HELD THE AFORESAI D COMPANIES NOT TO BE COMPARABLE WITH A CAPTIVE SOFTWARE DEVELOPMENT S ERVICE PROVIDER. THE COORDINATE BENCH IN CASE OF M/S CISCO SYSTEMS (INDIA) PVT. LTD. VS. DCIT (SUPRA) AFTER EXAMINING IN DETAIL, EXCLUDE D INFOSYS LTD., BODHTREE CONSULTING LTD., AND KALS INFORMATION SYST EMS. THE RELEVANT OBSERVATIONS OF THE ITAT BANGALORE BENCH IN RESPECT TO EACH OF THE AFORESAID COMPANIES ARE REPRODUCED HEREUNDER FOR TH E SAKE OF CLARITY: 26.1 BODHTREE CONSULTING LTD.:- AS FAR AS THIS COMP ANY IS CONCERNED, IT IS NOT IN DISPUTE THAT IN THE LIST OF COMPARABLES CHOSEN BY THE ASSESSEE, THIS COMPANY WAS ALSO INCLU DED BY THE ASSESSEE. THE ASSESSEE, HOWEVER, SUBMITS BEFORE US THAT LATER ON IT CAME TO THE ASSESSEES NOTICE THAT THIS COMPA NY IS NOT BEING CONSIDERED AS A COMPARABLE COMPANY IN THE CAS E OF COMPANIES RENDERING SOFTWARE DEVELOPMENT SERVICES. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS BROUGH T TO OUR NOTICE THE DECISION OF THE MUMBAI BENCH OF THE TRIB UNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. V. ITO, ITA NO.7633/MUM/2012, ORDER DATED 6.11.2013. IN THIS CA SE, THE TRIBUNAL FOLLOWED THE DECISION RENDERED BY THE MUMB AI BENCH OF THE TRIBUNAL IN THE CASE OF WILLS PROCESSING SER VICES (I) P. LTD., ITA NO.4547/MUM/2012. IN THE AFORESAID DECISI ONS, THE TRIBUNAL HAS TAKEN THE VIEW THAT BODHTREE CONSULTIN G LTD. IS IN THE BUSINESS OF SOFTWARE PRODUCTS AND WAS ENGAGED I N PROVIDING OPEN & END TO END WEB SOLUTIONS SOFTWARE CONSULTANC Y AND DESIGN & DEVELOPMENT OF SOFTWARE USING LATEST TECHN OLOGY. THE DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUN AL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. (SUPRA) IS IN RE LATION TO A.Y. 2008-09. IT WAS AFFIRMED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES IN THE PR ESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AND CIRCUMSTANC ES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARABLE COM PANY IS 7 ITA NO. 58 /HYD/2014 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. CONCERNED. FOLLOWING THE AFORESAID DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, WE HOLD THAT BODHTREE CONSUL TING LTD. CANNOT BE REGARDED AS A COMPARABLE. IN THIS REGARDS , THE FACT THAT THE ASSESSEE HAD ITSELF PROPOSED THIS COMPANY AS COMPARABLE, IN OUR OPINION, SHOULD NOT BE THE BASIS ON WHICH THE SAID COMPANY SHOULD BE RETAINED AS A COMPARABLE , WHEN FACTUALLY IT IS SHOWN THAT THE SAID COMPANY IS A SO FTWARE PRODUCT COMPANY AND NOT A SOFTWARE DEVELOPMENT SERVICES COM PANY. 26.2 INFOSYS LTD.:- AS FAR AS THIS COMPANY IS CONCE RNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CON SIDERED TO BE FUNCTIONALLY DIFFERENT FROM A COMPANY PROVIDING SIMPLE SOFTWARE DEVELOPMENT SERVICES, AS THIS COMPANY OWNS SIGNIFICANT INTANGIBLES AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IN THIS REGARD, WE FIND THAT THE BANGALOR E BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TDPLM SOFTWARE SOL UTIONS LTD. V. DCIT, ITA NO.1303/BANG/2012, BY ORDER DATED 28.1 1.2013 WITH REGARD TO THIS COMPARABLE HAS HELD AS FOLLOWS: - 11.0 INFOSYS TECHNOLOGIES LTD. 11.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEF ORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY IN THE SET OF COMPARABLES, ON THE GROUNDS O F TURNOVER AND BRAND ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASP ECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELO PMENT SEGMENT. 11.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATI VE CONTENDED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND. THE LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTIO N TO VARIOUS PARTS OF THE ANNUAL REPORT OF THIS COMPANY TO UBMIT THAT THIS COMPANY COMMANDS SUBSTANTIAL BRAND VALUE, OWNS INTELLECTUAL PROPERTY RIGHTS AND IS A M ARKET LEADER IN SOFTWARE DEVELOPMENT ACTIVITIES, WHEREAS THE ASSESSEE IS MERELY A SOFTWARE SERVICE PROVIDER OPER ATING ITS BUSINESS IN INDIA AND DOES NOT POSSESS EITHER A NY BRAND VALUE OR OWN ANY INTANGIBLE OR INTELLECTUAL P ROPERTY RIGHTS (IPRS). IT WAS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT :- (I) THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE C ASE OF 24/7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BANG/2010 HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT B E COMPARED TO A LOW RISK CAPTIVE SERVICE PROVIDER WH O DOES NOT OWN ANY INTANGIBLE AND HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. IT IS SUBMITTED THAT 8 ITA NO. 58 /HYD/2014 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. THIS DECISION IS APPLICABLE TO THE ASSESSEE'S CASE, AS THE ASSESSEE DOES NOT OWN ANY INTANGIBLES AND HENCE INF OSYS TECHNOLOGIES LTD. CANNOT BE COMPARABLE TO THE ASSES SEE; (II) THE OBSERVATION OF THE ITAT, DELHI BENCH IN TH E CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.38 56 (DEL)/2010 AT PARA 5.2 THEREOF, THAT INFOSYS TECHNO LOGIES LTD. BEING A GIANT COMPANY AND MARKET LEADER ASSUMI NG ALL RISKS LEADING TO HIGHER PROFITS CANNOT BE CONSI DERED AS COMPARABLE TO CAPTIVE SERVICE PROVIDERS ASSUMING LI MITED RISK ; (III) THE COMPANY HAS GENERATED SEVERAL INVENTIONS AND FILED FOR MANY PATENTS IN INDIA AND USA ; (IV) THE COMPANY HAS SUBSTANTIAL REVENUES FROM SOFT WARE PRODUCTS AND THE BREAK UP OF SUCH REVENUES IS NOT AVAILABLE ; (V) THE COMPANY HAS INCURRED HUGE EXPENDITURE FOR RESEARCH AND DEVELOPMENT; (VI) THE COMPANY HAS MADE ARRANGEMENTS TOWARDS ACQUISITION OF IPRS IN AUTOLAY, A COMMERCIAL APPLICATION PRODUCT USED IN DESIGNING HIGH PERFORMA NCE STRUCTURAL SYSTEMS. IN VIEW OF THE ABOVE REASONS, THE LEARNED AUTHORISE D REPRESENTATIVE PLEADED THAT, THIS COMPANY I.E. INFO SYS TECHNOLOGIES LTD., BE EXCLUDED FORM THE LIST OF COMPARABLE COMPANIES. 11.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE ASSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERE LY ON THE BASIS OF SCALE OF OPERATIONS AND THE BRAND ATTR IBUTABLE PROFIT MARGINS OF THIS COMPANY HAVE NOT BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTM ENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMP ANIES. 11.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE AS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABLISH THAT THIS COMPANY IS FUNCTION ALLY DIS-SIMILAR AND DIFFERENT FROM THE ASSESSEE AND HEN CE IS NOT COMPARABLE AND THE FINDING RENDERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2007-08 IS APPLICABLE TO THIS YEAR ALSO. WE ARE INCLINED TO CONCUR WITH THE ARGUMENT PUT FOR TH BY THE ASSESSEE THAT INFOSYS TECHNOLOGIES LTD IS NOT 9 ITA NO. 58 /HYD/2014 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. FUNCTIONALLY COMPARABLE SINCE IT OWNS SIGNIFICANT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PROD UCTS. IT IS ALSO SEEN THAT THE BREAK UP OF REVENUE FROM S OFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERED ACCORDINGLY. THE DECISION RENDERED AS AFORESAID PERTAINS TO A.Y. 2008-09. IT WAS AFFIRMED BY THE LEARNED COUNSEL FOR THE ASSESSE E THAT THE FACTS AND CIRCUMSTANCES IN THE PRESENT YEAR ALSO RE MAINS IDENTICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREV AILED IN AY 08-09 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNE D. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT INFOSYS LTD. BE EXCLUDED FROM T HE LIST OF COMPARABLE COMPANIES. 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 CONSIDERED AS NOT COMPARABLE TO A PURE SOFTWAR E DEVELOPMENT SERVICES COMPANY BY THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TRILOGY E-BUSINESS SOF TWARE INDIA PVT. LTD. (SUPRA). THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVE NUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCT S. BESIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THI S COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS AL SO SUBMITTED THAT AS PER THE ANNUAL REPOT, THE SALARY 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 DECISION OF THE ITAT IN THE C ASE 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 OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXT RACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARAB LE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN 10 ITA NO. 58 /HYD/2014 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND I S NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDE D BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTRAC T ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDIN G OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE AS PECTS HAVE NOT BEEN FACTUALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOU LD BE REJECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PU BLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN TH E SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPA NY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21. 6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFER RED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELO PING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT T HE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, W E HOLD THAT KALS INFORMATION SYSTEMS LTD. SHOULD NOT BE REGARDE D AS A COMPARABLE. 10. ITAT, HYDERABAD BENCH FOLLOWING THE AFORESAID D ECISION OF THE ITAT, BANGALORE BENCH ALSO EXCLUDED THESE THREE COM PANIES IN CASE OF M/S KENEXA TECHNOLOGIES PVT. LTD. VS. DCIT IN IT A NO. 243/HYD/2014 DT. 14/11/2014. RESPECTFULLY FOLLOWING AFORESAID DECISIONS OF COORDINATE BENCHES, WE DIRECT AO/TPO T O EXCLUDE INFOSYS LTD., BODHTREE CONSULTING LTD., AND KALS IN FORMATION SYSTEMS LTD. 11. AS FAR AS TATA ELXSI LTD. (SEGMENT) IS CONCERNE D, THE REASON ON WHICH ASSESSEE HAS SOUGHT EXCLUSION IS, IT IS A FUN CTIONALLY DIFFERENT 11 ITA NO. 58 /HYD/2014 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. COMPANY AS IT PROVIDES HIGH END SERVICES. HOWEVER, ON GOING THROUGH THE SEGMENTAL DETAILS OF SERVICES PROVIDED BY TATA ELXSI LTD. AS CONTAINED IN ANNUAL REPORT, A COPY OF WHICH IS AT P AGE 707 OF THE ASSESSEES PAPER BOOK VIS--VIS, THE FUNCTIONS OF T HE ASSESSEE AS ENUMERATED IN TP STUDY, A COPY OF WHICH FORMS PART OF ASSESSEES PAPER BOOK, WE ARE OF THE VIEW THAT UNLESS PROPER A NALYSIS IS MADE WITH REGARD TO THE FUNCTIONS OF BOTH THE COMPANIES IT CANNOT BE SAID THAT SERVICES PERFORMED/PROVIDED BY TATA ELXSI LTD. IS HIGH END SERVICES WHEREAS SERVICES PROVIDED BY ASSESSEE ARE LOW END SERVICES. AS THE ISSUE REQUIRES THOROUGH EXAMINATIO N IN SO FAR AS IT RELATES TO EXACT NATURE OF SERVICES RENDERED BY BOT H THE COMPANIES, WE REMIT THE COMPARABILITY OF THE AFORESAID COMPANY TO THE FILE OF AO/TPO FOR CONSIDERING AFRESH AFTER AFFORDING DUE O PPORTUNITY OF BEING HEARD TO ASSESSEE. IT IS WORTH MENTIONING, LD . AR WHILE SEEKING REMOVAL OF THE AFORESAID COMPANY HAS RELIED UPON A DECISION OF ITAT BANGALORE BENCH IN CASE OF CISCO SYSTEMS (INDIA) PV T. LTD. VS. DCIT, BANGALORE IN IT(TP) NO. 130/BANG/14 DATED 14/ 08/14. HOWEVER, ON PERUSAL OF THE SAID DECISION, IT IS NOTICED THAT TATA ELXSI LTD. WAS EXCLUDED AS A COMPARABLE BASICALLY FOR THE REASON T HAT IN THE IMMEDIATELY PRECEDING AY IN ASSESSEES OWN CASE, TA TA ELXSI LTD. WAS CONSIDERED AS UN COMPARABLE. HOWEVER, THAT IS N OT THE CASE WITH ASSESSEE BEFORE US. 15. IN GROUND NO. 9, ASSESSEE HAS RAISED THE ISSUE OF NON- CONSIDERATION OF PROVISION FOR BAD AND DOUBTFUL DEB TS AS PART OF OPERATING COST WHILE COMPUTING MARGINS OF COMPARABL ES. 16. THE LD. AR SUBMITTED BEFORE US THAT TPO HAS NOT CONSIDERED CERTAIN EXPENSES WHILE COMPUTING THE MARK-UP OF THE COMPARABLE COMPANIES ON THE PREMISE THAT THESE ARE NOT THE ROU TINE OPERATING COSTS AND SPECIFICALLY TPO HAS EXCLUDED PROVISION F OR DOUBTFUL DEBTS IN COMPUTING THE MARK UP ON TOTAL COST OF THE COMPA NIES SELECTED AS COMPARABLES. LD. AR SUBMITTED, AS PER TPO, PROVISIO N FOR DOUBTFUL DEBTS CAN BE CONSIDERED AS OPERATING ONLY WHEN THE SAME EXPENSES 12 ITA NO. 58 /HYD/2014 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. ARE INCURRED EVERY YEAR FOR THE LAST THREE YEARS UP TO AND INCLUDING FY 2008-09 AND IF THESE EXPENSES ARE INCURRED AT ALMOS T CONSISTENT LEVEL IN TERMS OF ITS RATIO WITH THE TURNOVER. OTHERWISE, ACCORDING TO TPO, IT HAS TO BE TREATED AS EXTRAORDINARY EXPENSES WHICH S HALL BE EXCLUDED FROM THE CALCULATION OF THE TOTAL OPERATING EXPENSE S. HE SUBMITTED, AS PROVISIONS FOR DOUBTFUL DEBTS ARE CLOSELY INTERL INKED WITH THE BUSINESS OPERATIONS FOR EACH RELEVANT YEAR AND CONS TITUTE OPERATING EXPENSE, THE SAME MUST NOT BE TREATED AS EXTRAORDIN ARY AND SHOULD BE TAKEN INTO CONSIDERATION FOR THE CALCULATION OF THE PLI IRRESPECTIVE OF THE TREND IN PRIOR YEARS. IN SUPPORT OF HIS CONT ENTION, LD. AR RELIED ON THE DECISION OF ITAT, HYDERABAD BENCH IN CASE OF KENEXA TECHNOLOGIES PVT. LTD. VS. DCIT IN ITA NO. 243/HYD/ 2014 DATED 14/11/2014. 17. THE LD. DR, ON THE OTHER HAND, RELIED UPON THE REASONING OF TPO/DRP. 18. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. IN PRINCIPLE WE AGREE WITH THE CONTENTION OF LD. AR THAT PROVISION FOR BAD AND DOUBTFUL DEBTS AN D BAD DEBTS SHOULD FORM PART OF THE OPERATING EXPENDITURE. IN THIS CON NECTION, WE RELY ON THE OBSERVATIONS OF THE COORDINATE BENCH IN CASE OF M/S KENEXA TECHNOLOGY PVT. LTD. VS. DCIT (SUPRA), WHICH ARE AS UNDER: 41. WE PLACE RELIANCE ON THE DECISION OF ITAT DELH I BENCH IN THE CASE OF SONY INDIA PVT. LTD. VS. DCIT, ITA NO. 1189/DEL/2005, 819/DEL/2007 AND 820/DEL/2007. THE R ELEVANT PORTION IS EXTRACTED BELOW: '106.2 THUS, CREATION O F UNPAID LIABILITY AND ITS WRITE BACK IS A NORMAL INCIDENT O F A BUSINESS OPERATION WHICH IS CARRIED EVERYWHERE IN ACCOUNTS T O HAVE TRUE PICTURE OF PROFITS OF THE RELEVANT PERIOD. HAVING R EGARD TO STATUTORY PROVISIONS, IT CANNOT BE SAID THAT PROVIS IONS OR WRITING BACK OF LIABILITY IS NOT PART OF OPERATING PROFIT O R WOULD NOT BE TAKEN INTO CONSIDERATION FOR COMPUTING THE SAME. WE CAN THEREFORE MAKE A GENERAL OBSERVATION THAT ALL BUSIN ESS ENTERPRISES ARE MAKING AND WRITING BACK LIABILITIES AS A NORMAL INCIDENT OF OPERATING BUSINESS. THEREFORE ON FACTS WE DO NOT SEE ANY JUSTIFICATION FOR EXCLUDING PROVISIONS WRIT TEN BACK IN THE PROFIT AND LOSS ACCOUNT AS NOT FORMING PART OF THE OPERATING 13 ITA NO. 58 /HYD/2014 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. PROFIT OF THE TAXPAYER. ACCORDINGLY CLAIM OF THE TA XPAYER IS ACCEPTED. 107. THE NEXT ITEM RELATES TO BALANCES WR ITTEN BACK. IN OUR CONSIDERED OPINION, FINDING GIVEN IN RESPECT OF PROVISIONS WRITTEN BACK IS EQUALLY APPLICABLE TO BALANCES WRIT TEN BACK MORE PARTICULARLY WHEN LD. CIT(A) HAS NOT GIVEN ANY SEPA RATE FINDING AND THE TRANSFER PRICING OFFICER HAS SAID NOTHING S PECIFICALLY ON THIS ITEM. THE BALANCES WRITTEN BACK SHOULD ALSO BE TREATED AS PART OF OPERATING PROFIT. WE DIRECT ACCORDINGLY.' 42. WE ARE OF THE VIEW THAT IN THE INSTANT CASE BAD DEBTS AND PROVISION FOR BAD AND DOUBTFUL DEBTS ARE PART OF TH E OPERATING EXPENSES AND WE DIRECT THE TPO TO RE-COMPUTE THE MA RGINS OF 24 COMPARABLE COMPANIES BY INCLUDING BAD DEBTS AND PROVISION FOR BAD AND DOUBTFUL DEBTS AS OPERATING EXPENSES FO R THE PURPOSE OF COMPUTING PROFIT AND LOSS OF COMPARABLE COMPANIES. RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINA TE BENCH, WE REMIT THIS ISSUE TO THE FILE OF AO/TPO FOR CONSIDERING AF RESH IN THE LIGHT OF THE SAID DECISION OF THE COORDINATE BENCH. 19. IN VIEW OF THE AFORESAID, AO/TPO IS DIRECTED TO COMPUTE ALP AFRESH IN TERMS WITH OUR DIRECTIONS HEREIN BEFORE. 20. IN GROUND NO. 10 & 11, THE ASSESSEE HAS CHALLEN GED THE ACTION OF THE AO IN EXCLUDING COMMUNICATION EXPENSES FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S 10B OF THE A CT. THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE BOM BAY HIGH COURT IN CASE OF CIT VS. GEMPLUS JEWELLERY, 330 ITR 175 AND ITO VS SAKSOFT LTD (313 ITR AT 353 (CHENNAI) SB). FOLLOWING THE RA TIO LAID DOWN IN THE AFORESAID DECISIONS, WE DIRECT THE AO TO EXCLUD E THE COMMUNICATION EXPENSES FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S 10B OF THE A CT. 21. GROUND NO. 12 IS CHALLENGING LEVY OF INTEREST U /S 234B AND 234D OF THE ACT. AS THE ISSUE RAISED IN THE AFORESA ID GROUND IS CONSEQUENTIAL, IT IS NOT REQUIRED TO BE ADJUDICATED AT THIS STAGE. 14 ITA NO. 58 /HYD/2014 ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD. 22. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 20 TH MARCH, 2015. SD/- SD/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: MARCH, 2015 KV COPY TO:- 1) ALLIANCE GLOBAL SERVICES IT INDIA PVT. LTD., 3 RD & 4 TH FLOOR, NORTH WING, PLOT NO. 5, SOFTWARE UNITS LAYOUT, MADHAPUR, HYDERABAD 500 033 2)DCIT,CIRCLE 1(1), HYDERABAD 3)DRP, HYDERABAD 4) TPO, HYDERABAD 4) DIT (INTERNATIONAL TAXATION & TP), HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.