Palred Technologies Limited , Hyderabad V. Dy. Commissioner of Income Tax , Circle-16(2), Hyderabad

ITA 581/Hyd/2020

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 6585 (ITAT-HYDERABAD)
• Duration Of Justice: 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-09-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-B
• Assessment Year: 2008-2009
• Appeal Filed On: 23-10-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Bad and doubtful debts
• Section: 143(3); 234B; 133(6); 144C; 254(2)

Judgement Text

ITA NO 581 OF 202 0 PALRED TECHNOLOGIES LTD HYDERABAD PAGE 1 OF 11 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD (THROUGH VIDEO CONFERENCING) BEFORE SHRI S.S. GODARA, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER ITA NO.581/HYD/2020 ASSESSMENT YEAR: 2008-09 PALRED TECHNOLOGIES LTD HYDERABAD PAN:AAACF4464A VS. DY. C.I.T CIRCLE 16(2) HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY: SRI RAVI BHARADWAJ REVENUE BY : SRI ROHIT MUJUMDAR, DR DATE OF HEARING: 14/07/2021 DATE OF PRONOUNCEMENT: 08/09/2021 ORDER PER S. S. GODARA, J.M. THIS ASSESSEES APPEAL FOR THE A.Y 2008-09 ARISES AGAINST THE DY.CIT, CIRCLE-16(2) HYDERABAD ASSESSME NT DATED 24.8.2020 FRAMED IN FURTHERENCE TO THE DISPUTE RESO LUTION PANEL- 1, BENGALURU DRP DIRECTIONS DATED 29.5.2020 IN PR OCEEDINGS U/S 143(3) R.W.S. 144C R.W.S. 254 OF THE ACT. THE ASSESSEE HAS RAISED THE FOLLOWING SUBSTANTIVE GROUNDS: TRANSFER PRICING MATTERS - RELATING TO DETERMINATI ON OF ARM'S LENGTH PRICE (' ALP') IN RESPECT OF PROVISION OF SOFTWARE SERVICES TO ASSOCIATED ENTERPRISES (' AES') BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LEARNED ASSESSING OFFICER (' AO') / LEARNED TRA NSFER PRICING OFFICER ('TPO') AND THE HON'BLE DISPUTE RES OLUTION PANEL ('DRP') ERRED IN THE FOLLOWING: ITA NO 581 OF 202 0 PALRED TECHNOLOGIES LTD HYDERABAD PAGE 2 OF 11 REJECTION OF INTERNAL COMPARABLE TRANSACTIONS 1. NOT CONSIDERING THE INTERNAL UNCONTROLLED TRANSA CTIONS OF THE APPELLANT FOR DETERMINING THE ARM'S LENGTH PRIC E DESPITE SPECIFIC DIRECTIONS BY THE HON'BLE TRIBUNAL. SELECTION OF INCOMPARABLE 2. NOT UNDERTAKING AN OBJECTIVE COMPARATIVE ANALYSI S AND INTER ALIA SELECTING THE FOLLOWING COMPANIES AS COM PARABLE TO THE SOFTWARE SERVICES OF THE APPELLANT: A) AVANICINCOM TECHNOLOGIES LTD B) BODHTREE CONSULTING LTD. (SEG.) C) E-ZEST SOLUTIONS LTD. D) LGS GLOBAL LTD ' E) PERSISTENT SYSTEMS LTD F) SOFTSOL INDIA LTD. G) THIRDWARE SOLUTIONS LTD H) KALS INFORMATION SYSTEMS TP ADJUSTMENT ON TRANSACTIONS WITH NON-AES 3. DETERMINING THE TP ADJUSTMENT ON THE TRANSACTION S WITH NON-AES. INCORRECT WORKING CAPITAL ADJUSTMENT 4. COMPUTATION OF WORKING CAPITAL ADJUSTMENT BY ALL OCATING THE TOTAL RECEIVABLES AND PAYABLES OF THE APPELLANT TO THE INTERNATIONAL TRANSACTIONS WITH AE AND MAKING A NEG ATIVE WORKING CAPITAL ADJUSTMENT TO THE ARITHMETIC MEAN M ARGIN OF THE COMPARABLES SELECTED. MARK-UP ON REIMBURSEMENT TRANSACTIONS 5. DETERMINING THE ARM'S LENGTH MARK UP OF 5% ON TH E FOLLOWING REIMBURSEMENTS BY AES (RS 7,40,60,178) FO R PAYMENTS MADE ON BEHALF OF AES DESPITE SPECIFIC DIR ECTIONS BY THE HON'BLE TRIBUNAL: PAYROLL AND RELATED COST OF DEPUTED EMPLOYEES AND OTHER MISCELLANEOUS RS 6,79,17,541; AND TRAVEL- RS 58,34,419; OTHER MISCELLANEOUS - RS 3,08,218. LEVY OF INTEREST UNDER SECTION 234B 6. IMPOSING INTEREST UNDER SECTION 234B OF THE ACT ON THE TRANSFER PRICING ADJUSTMENTS; 7. INITIATING THE PENALTY PROCEEDINGS U/S 271 (1 (C ) OF THE ACT. ITA NO 581 OF 202 0 PALRED TECHNOLOGIES LTD HYDERABAD PAGE 3 OF 11 THE APPELLANT CRAVES, TO CONSIDER EACH OF THE ABOVE GROUNDS OF APPEAL WITHOUT PREJUDICE TO EACH OTHER AND CRAVE S LEAVE TO ADD, ALTER, DELETE OR MODIFY ALL OR ANY OF THE ABOV E GROUNDS OF APPEAL. 2. WE NOTICE AT THE OUTSET THAT THE ASSESSEES FORM ER TWIN SUBSTANTIVE GROUNDS REGARDING SELECTION OF COMPARAB LES ARE NO MORE RES INTEGRA IN VIEW OF THE FACT THAT THE TRIBU NALS FIRST ROUND OF REMAND DIRECTIONS IN ITA NO.1686/HYD/2012 DECIDE D ON 28.9.2016 HAD OBSERVED AS UNDER: 9. AGGRIEVED WITH THE ABOVE ORDER, ASSESSEE IS IN A PPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: TRANSFER PRICING MATTE RS - RELATING TO DETERMINATION OF ARM'S LENGTH PRICE (' ALP ') IN RE SPECT OF PROVISION OF SOFTWARE SERVICES TO ASSOCIATED ENTERPRISES (' AES' ) BASED ON THE FACTS 'AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED A SSESSING OFFICER (' AO') I LEARNED TRANSFER PRICING OFFICER ('TPO') AND THE HO N'BLE DISPUTE RESOLUTION PANEL ('DRP') ERRED IN THE FOLLOWING: REJECTION OF TRANSFER PRICING DOCUMENTATION MAINTAINED AND UNDERTAKING FRESH SEAR CH OF COMPARABLES: 1. REJECTION OF THE TRANSFER PRICING DOCUMENTATION MAINTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ W ITH THE INCOME TAX RULES, 1962 ('RULES') AND UNDERTAKING A FRESH ECONOMIC ANA LYSIS DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND ACCORDINGLY MAKING AN AD JUSTMENT OF RS 9,48,05,292 TO THE INTERNATIONAL TRANSACTIONS RELAT ING TO PROVISION OF SOFTWARE SERVICES TO ITS AE. REJECTION OF USE OF MULTIPLE YE AR DATA 2. REJECTING THE USE OF MULTIPLE YEAR DATA AND USIN G DATA FOR THE FY 2007-08 ONLY; ELIGIBILITY UNDER SECTION 10A 3. NOT APPRECIATING THAT THE COMPANY IS ELIGIBLE FO R TAX HOLIDAY BENEFIT U/S 10A OF THE ACT, AND THERE IS NO INCENTIVE FOR SHIFTING OF PROFITS; REJECTION OF INTERNAL COMPARABLE TRANSACTIONS 4. NOT CONSIDERING THE INTERNAL UNCONTROLLED TRANSA CTIONS OF THE APPELLANT FOR DETERMINING THE ALP. INFORMATION OBTAINED UNDER SEC TION 133(6) 5. A) USING INFORMATION/ DOCUMENTS OBTAINED BY EXER CISING POWERS U/ S 133(6) OF THE ACT WHICH ARE NOT AVAILABLE IN PUBLIC DOMAIN ; AND B) FURTHER NOT PROVIDING ANY OPPORTUNITY TO APPELLANT TO CROSSEXAM INE THE SAME. USE OF ADDITIONAL FILTERS 6. INTER-ALIA USE OF THE FOLLOWING ADDITIONAL FILTE RS IN UNDERTAKING THE COMPARATIVE ANALYSIS TO REJECT COMPARABLE COMPANIES HAVING A) DIMINISHING REVENUE/LOSS MAKING COMPANIES; B) DIFFERENT FINANCI AL YEAR-END. C) ONSITE REVENUE IN EXCESS OF 75%; SELECTION OF COMPANIES EA RNING ABNORMAL HIGH MARGINS 7. SELECTION OF COMPANIES EARNING ABNORMAL HIGH MAR GINS AS COMPARABLE TO THE APPELLANT; SELECTION OF UNCOMPARABLES 8. NOT UNDERTAKING AN OBJECTIVE COMPARATIVE ANALYSI S AND INTER ALIA SELECTING THE FOLLOWING COMPANIES AS COMPARABLE TO THE SOFTWA RE SERVICES OF THE APPELLANT: A) AVANI CINCOM TECHNOLOGIES; B) BODHTRE E CONSULTING LTD (SEG); - C) E-ZEST SOLUTIONS LTD; D) LGS GLOBAL LTD; E) PERSIST ENT SYSTEMS LTD; F) QUINTEGRA SOLUTIONS LTD G) SOFTSOL INDIA LTD; H) THIRDWARE SO LUTIONS LTD; I) INFOSYS ITA NO 581 OF 202 0 PALRED TECHNOLOGIES LTD HYDERABAD PAGE 4 OF 11 TECHNOLOGIES LIMITED; J) KALS INFORMATION SYSTEMS L TD; K) TATA ELXSI LIMITED (SEG); AND I) WIPRO LIMITED (SEG). REJECTION OF COM PARABLES 9. NOT UNDERTAKING AN OBJECTIVE COMPARATIVE ANALYSI S AND INTERALIA REJECTING THE FOLLOWING COMPARABLE COMPANIES: A) ADITYA BIRLA MINACS IT SERVICES LTD; B) ADITYA BIRLA MINACS TECHNOLOGIES LTD; C) CG-VAK SOF TWARE EXPORTS LTD (SEG); D) GOLDSTONE TECHNOLOGIES LTD; E) INDIUM SOFTWARE INDI A LTD; F) THINKSOFT GLOBAL SERVICES LTD; G) LARSEN & TOUBRO INFOTECH LTD; H) V M F SOFTECH LTD. TP ADJUSTMENT ON TRANSACTIONS WITH NON-AES 10. DETERMINING THE TP ADJUSTMENT ON THE TRANSACTIO NS WITH NONAES. INCORRECT WORKING CAPITAL ADJUSTMENT 11. COMPUTATION OF WORKING CAPITAL ADJUSTMENT BY AL LOCATING THE TOTAL RECEIVABLES AND PAYABLES OF THE APPELLANT TO THE IN TERNATIONAL TRANSACTIONS WITH AE AND MAKING A NEGATIVE WORKING CAPITAL ADJUS TMENT TO THE ARITHMETIC MEAN MARGIN OF THE COMPARABLES SELECTED. INCLUSION OF CERTAIN AMOUNTS IN OPERATING COST 12. INCLUDING THE FOLLOWING REIMBURSEMENTS BY AES ( RS 7,40,60,178) FOR PAYMENTS TRANSACTIONS RELATING TO PROVISION OF SOFT WARE SERVICES: PAYROLL AND RELATED COST OF DEPUTED EMPLOYEES AND OTHER MISCELL ANEOUS RS 6,79,17,541; AND TRAVEL- RS 58,34,419; OTHER MISCELLANEOUS - RS 3,08,218. ADJUSTMENT FOR RISK DIFFERENCES 13. NOT ADJUSTING THE NET MARGINS OF THE COMPARABLE COMPANIES SELECTED TAKING INTO ACCOUNT THE FUNCTIONAL AND RISK DIFFERE NCES BETWEEN THE INTERNATIONAL TRANSACTION OF THE APPELLANT AND THE COMPARABLE COMPANIES IN ACCORDANCE WITH THE PROVISIONS OF RULE 10B(1)(E); A PPLICABILITY OF PROVISO TO SECTION 92C(2) 14. NOT ALLOWING THE OPTION UNDER THE PROVISO TO SE CTION 92C(2) OF THE ACT IN LIMITING THE ADJUSTMENT AT A VARIATION OF 5 PERCENT TO THE ARM'S LENGTH PRICE; CORPORATE GUARANTEE PROVIDED TO THE AES 15. A) APPLYING THE TRANSFER PRICING PROVISIONS TO THE CORPORATE GUARANTEE PROVIDED TO ICICI BANK IN RELATION TO THE LOAN TAKE N BY ITS WHOLLY OWNED SUBSIDIARY FOR ACQUISITION OF COMPANIES IN EUROPE; B) DETERMINING THE ALP ON THE CORPORATE GUARANTEE @ 3.75% P.A. ON THE GUARANT EE AMOUNT WITHOUT UNDERTAKING ANY ECONOMIC ANALYSIS FOR THE SAME; AND C) NO APPRECIATING THAT THE ACQUISITION WAS IN THE SAME BUSINESS AS THAT TH E APPELLANT AND ACCORDINGLY BENEFICIAL TO THE APPELLANT; NON-DISCRIMINATION UND ER INDIA - NETHERLANDS TAX TREATY 16. DISCRIMINATING ITS NETHERLANDS SUBSIDIARY IN DE TERMINING THE ALP FOR CORPORATE GUARANTEED PROVIDED VIS-A-VIS SIMILAR COR PORATE GUARANTEE PROVIDED BY COMPANIES ON BEHALF OF THEIR INDIAN SUBSIDIARIES RESULTING IN VIOLATION OF ARTICLE LEVY OF INTEREST UNDER SECTION 234B 17. IMPOSING INTEREST UNDER SECTION 234B OF THE ACT ON THE TRANSFER PRICING ADJUSTMENTS; 18. INITIATING THE PENALTY PROCEEDINGS U/ S 271(1(C ) OF THE ACT. THE APPELLANT CRAVES, TO CONSIDER EACH OF THE ABOVE GROUNDS OF AP PEAL WITHOUT PREJUDICE TO EACH OTHER AND CRAVES LEAVE TO ADD, ALTER, DELETE O R MODIFY ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL. 10. THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE T PO HAS ADOPTED VARIOUS FILTERS TO SELECT COMPARABLES OUT OF WHICH ONE OF T HE FILTERS ARE COMPARABLE COMPANIES SHOULD HAVE AT LEAST 75% OF ITS REVENUE F ROM THE SOFTWARE DEVELOPMENT SERVICES CONSIDERING THE FACT THAT THE ASSESSEE COMPANY IS PREDOMINANTLY SERVICE COMPANY AS THE MAJORITY OF TH E REVENUES ARE DERIVED BY THE ASSESSEE FROM THE SOFTWARE DEVELOPMENT SERVICES . CONSIDERING THIS FILTER, ITA NO 581 OF 202 0 PALRED TECHNOLOGIES LTD HYDERABAD PAGE 5 OF 11 TPO SHOULD HAVE SELECTED ONLY THOSE COMPANIES WHICH HAVE 75% OF ITS REVENUES FROM THE SERVICES AND EXCLUDED THOSE COMPA NIES IN WHICH SEGMENTAL INFORMATIONS ARE NOT AVAILABLE. IT IS PERTINENT TO NOTE THAT THE TPO HAS SELECTED EIGHT COMPARABLES IN WHICH THERE IS NO SEGMENTAL IN FORMATION AVAILABLE, WHICH ARE AS UNDER: 1. AVANI CINCOM TECHNOLOGIES LTD. 2. BODHTREE CONSULTING LTD. (SEG.) 3. E-ZEST SOLUTIONS LTD. 4. LGS GLOBAL LTD. 5. PERSISTENT SYSTEMS LTD. 6. SOFTSOL INDIA LTD. 7. THIRDWARE SOLUTIONS LTD. 8. KALS INFORMATION SYSTEMS LTD. WHEN THERE IS NO SEGMENTAL INFORMATION AVAILABLE ON THE FINANCIAL REPORTS, IT IS DIFFICULT TO DETERMINE THE REVENUE FROM SERVICES AN D OTHER REVENUES PROPERLY. IT IS HEREBY SUBMITTED THAT THESE COMPARABLE SHOULD BE ELIMINATED. FURTHER, AR OF THE ASSESSEE SUBMITTED THAT APART FROM SEGMENTAL INFORMATION IS NOT AVAILABLE, THERE ARE OTHER ASPECTS WHICH ALSO FUNCT IONALLY DIFFERENT AND THE SAME ALSO SHOULD BE EXCLUDED FROM COMPARABLES. HOWE VER, HE SUBMITTED THAT ASSESSEE HAS NO ISSUE IF THE TPO ADOPTS THE ABOVE F ILTER OF 75% OF REVENUE FROM SOFTWARE SERVICES TO ALL THE COMPARABLES BY CO LLECTING THE RELEVANT INFORMATION FROM THE RESPECTIVE COMPARABLES U/S 133 (6) OF THE ACT. 11. LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORIT IES. 12. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. AS SUBMITTED BY THE LD. AR THAT MOST OF THE COMPARA BLES ADOPTED BY TPO DOES NOT HAVE SEGMENTAL INFORMATION. WITHOUT THE SEGMENT AL INFORMATION ON RECORD, IT IS DIFFICULT TO ADOPT THE FILTER OF 75% OF REVENUE FROM SERVICES. WE ARE NOT SURE, HOW THE TPO HAS ADOPTED THIS FILTER WITHO UT THIS BASIC INFORMATION. ACCORDINGLY, WE DIRECT THE TPO TO COLLECT INFORMATI ON FROM THE RESPECTIVE COMPARABLES AND ADOPT THIS FILTER WITH THE SEGMENTA L INFORMATION. TPO CAN DETERMINE THE COMPARABLES BY ADOPTING THE ABOVE FIL TER. HENCE, WE FIND IT APPROPRIATE TO REMIT THIS MATTER BACK TO THE FILE O F AO/TPO TO DETERMINE THE COMPARABLES AFRESH BY ADOPTING THE ABOVE FILTER. TH E ASSESSEE MAY BE GIVEN PROPER OPPORTUNITY OF BEING HEARD. ACCORDINGLY, GRO UNDS RAISED BY THE ASSESSEE IN THIS REGARD ARE ALLOWED FOR STATISTICAL PURPOSES. 13. GROUND NOS. 2, 3, 7 & 14 ARE NOT PRESSED AT THE TIME OF HEARING BEFORE US AND THE SAME ARE DISMISSED AS NOT PRESSED. 14. AS REGARDS THE ISSUE OF REIMBURSEMENT OF INCOME AND EXPENDITURE, WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2007-08 IN ITA NO. 1903/HYD/2011, WHEREIN THE COORDINATE BENCH HAS HELD AS UNDER: 10 . WE HAVE HEARD THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ON PERU SAL OF THE TP ORDER IT IS TO BE SEEN THAT IN PARA 2.4.1 THE TPO HAS ADMITTED THA T THE ASSESSEE HAS SUBMITTED SEGMENTAL FINANCIALS SEPARATELY IN RESPEC T OF AE AND NON-AE TRANSACTIONS. AS PER THE AFORESAID SEGMENTAL FINANC IALS (REPRODUCED AT PAGE 4 OF TP ORDER), THE MARGIN IN RESPECT OF TRANSACTIONS WITH AES IS 39.26% AS AGAINST MARGIN OF 6.30% IN RESPECT OF NON AE TRANSA CTIONS. THEREFORE, WHEN SEGMENTAL DETAILS HAVE BEEN FURNISHED BY THE ASSESS EE THE TPO SHOULD HAVE ITA NO 581 OF 202 0 PALRED TECHNOLOGIES LTD HYDERABAD PAGE 6 OF 11 CONSIDERED THEM PROPERLY INSTEAD OF REJECTING THEM WITH BROAD AND SWEEPING ALLEGATIONS. IT SEEMS, THE TPO HAS NOT PROPERLY ALL OCATED THE SEGMENTAL EXPENDITURES. IF THE BAD DEBTS ETC. ARE NOT RELATED TO AE TRANSACTIONS THEY CANNOT BE CONSIDERED AS PART OF OPERATING COST FOR DETERMINING ALP OF THE TRANSACTIONS WITH AE. SIMILARLY, REIMBURSEMENT ON C OST TO COST BASIS ALSO CANNOT BE INCLUDED IN THE OPERATING COST. UNFORTUNA TELY, THE DRP WITHOUT DEALING WITH THIS ISSUE AT DEPTH HAS FINISHED ITS J OB BY SIMPLY COMMENTING THAT TPO HAS DEALT WITH THE ISSUE APPROPRIATELY. SINCE THE ISSUE IN THE CURRENT AY IS IDENTICAL TO THAT OF AY 2007-08, RESPECTFULLY FOLLO WING THE DECISION OF THE COORDINATE BENCH IN THAT YEAR, WE REMIT THE ISSUE T O THE FILE OF THE TPO/AO TO DECIDE THE ISSUE FOLLOWING THE DIRECTIONS GIVEN BY THE TRIBUNAL IN AY 2007-08 . 3. CASE RECORDS FURTHER INDICATE THAT THE ASSESSEE THEREAFTER FILED M.A. NO.19/HYD/2017 WHICH WAS ALLO WED BY THE LEARNED COORDINATE BENCH ON 27.07.2017 AS UNDER: 2. IN THE M.A., THE ASSESSEE STATED THAT AMONG THE OTHER GROUNDS, THE FOLLOWING GROUNDS ON DETERMINATION OF ARMS LENGTH PRICE (ALP) UNDER TRANSACTION NET MARGIN METHOD (TNMM) IN RESPECT OF THE SOFTWARE DEVELOPMENT SERVICES TRANSACTIONS OF T HE ASSESSEE WERE RAISED FOR CONSIDERATION BEFORE THE TRIBUNAL, WHICH HAVE NOT BEEN ADJUDICATED BY THE TRIBUNAL: 4. REJECTION OF INTERNAL COMPARABLE TRANSACTIONS: NOT CONSIDERING THE INTERNAL UNCONTROLLED TRANSACTI ONS OF THE APPELLANT FOR DETERMINING THE ALP. 10. TP ADJUSTMENT ON TRANSACTION WITH NON-AES DETERMINING THE TP ADJUSTMENTS ON THE TRANSACTIONS WITH NON-AES. 11. INCORRECT WORKING CAPITAL ADJUSTMENT COMPUTATION OF WORKING CAPITAL ADJUSTMENT BY ALLOCA TING THE TOTAL RECEIVABLES AND PAYABLES OF THE APPELLANT TO THE INTERNATIONAL TRANSACTIONS WITH AE AND MAKING A NEG ATIVE WORKING CAPITAL ADJUSTMENT TO THE ARITHMETIC MEAN M ARGIN OF THE COMPARABLES SELECTED. 3. REFERRING TO THE ABOVE FACTUAL BACKGROUND, THE L D. AR OF THE ASSESSEE SUBMITTED THAT THE TRIBUNAL HAS NOT ADJUDICATED THE AFORESAID GROUNDS WHILE ADJUDICATIN G THE OTHER GROUNDS IN THE ORDER PASSED ON 28/10/2016. HE SUBMITTED THAT THE SAID GROUNDS WERE COVERED BY THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL I N ASSESSEES OWN CASE FOR AYS 2006-07 AND 2007-08. HE , THEREFORE, SUBMITTED THAT THE ABOVE GROUNDS MAY BE ADJUDICATED BY MODIFYING THE SAID ORDER. 4. THE LD. DR, ON THE OTHER HAND, CONCEDED TO THE SUBMISSIONS OF LD. AR. ITA NO 581 OF 202 0 PALRED TECHNOLOGIES LTD HYDERABAD PAGE 7 OF 11 5. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL FACTS ON RECORD. ON GOING THROUGH THE APPEAL ORDER OF THE TRIBUNAL, WE FIND THAT NO DECISION HAS BEEN RENDERED ON GROUND NO. 4, 10 & 11 BY THE TRIBUNAL. THAT BEING THE CASE, THERE IS A MISTAKE APPARENT ON THE FACE OF RECORD AS ENVISAGED U/S 254(2) DUE TO NON-CONSIDERA TION OF THE GROUNDS RAISED BY THE ASSESSEE. THEREFORE, T HE SAID GROUNDS ARE BEING ADJUDICATED AS UNDER AFTER T AKING INTO CONSIDERATION THE ARGUMENTS ADVANCED DURING TH E COURSE OF HEARING OF THE APPEAL. 6. WE FIND THAT THE SAID GROUNDS ARE SQUARELY COVER ED BY THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUN AL IN ASSESSEES OWN CASE FOR AY 2006-07 AND 2007-08. IN AY 2007-08 IN ITA NO. 1903/HYD/2011 VIDE ITS ORDER DAT ED 28/03/2014, THE COORDINATE BENCH HAS HELD AS UNDER: 10. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ON PERUSAL OF THE TP ORDER IT IS TO BE SEEN THAT IN PARA 2.4.1 THE TPO HAS ADMITTED THA T THE ASSESSEE HAS SUBMITTED SEGMENTAL FINANCIALS SEPARATELY IN RESPECT OF AE AND NON-AE TRANSACTIONS . AS PER THE AFORESAID SEGMENTAL FINANCIALS (REPRODUC ED AT PAGE 4 OF TP ORDER), THE MARGIN IN RESPECT OF TRANSACTIONS WITH AES IS 39.26% AS AGAINST MARGIN O F 6.30% IN RESPECT OF NON AE TRANSACTIONS. THEREFORE, WHEN SEGMENTAL DETAILS HAVE BEEN FURNISHED BY THE ASSESSEE THE TPO SHOULD HAVE CONSIDERED THEM PROPERLY INSTEAD OF REJECTING THEM WITH BROAD AND SWEEPING ALLEGATIONS. IT SEEMS, THE TPO HAS NOT PROPERLY ALLOCATED THE SEGMENTAL EXPENDITURES. IF T HE BAD DEBTS ETC. ARE NOT RELATED TO AE TRANSACTIONS T HEY CANNOT BE CONSIDERED AS PART OF OPERATING COST FOR DETERMINING ALP OF THE TRANSACTIONS WITH AE. SIMILA RLY, REIMBURSEMENT ON COST TO COST BASIS ALSO CANNOT BE INCLUDED IN THE OPERATING COST. UNFORTUNATELY, THE DRP WITHOUT DEALING WITH THIS ISSUE AT DEPTH HAS FINISH ED ITS JOB BY SIMPLY COMMENTING THAT TPO HAS DEALT WITH TH E ISSUE APPROPRIATELY. IN THIS CONTEXT, IT IS TO BE N OTED THAT WHEN IDENTICAL ISSUE WAS AGITATED BY THE ASSESSEE BEFORE THE TRIBUNAL FOR THE ASSESSMENT YEAR 2006-07 , A COORDINATE BENCH OF THIS TRIBUNAL IN ITA NO. 1495/HYD/10 DT. 09/09/2011 HELD AS UNDER: 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED 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 COMPANY ARE IN RESPECT ITA NO 581 OF 202 0 PALRED TECHNOLOGIES LTD HYDERABAD PAGE 8 OF 11 OF TRANSACTIONS, WHICH ARE NOT RELATED TO ASSOCIATED ENTERPRISES. THIS CONTENTION OF THE ASSESSEE HAS NOT BEEN CONTROVERTED 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 CANNOT BE TAKEN INTO ACCOUNT FOR COMPUTING THE MARGIN OF THE ASSESSEE FROM THE TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO FILED BEFORE US A COMPARATIVE CHART EXPLAINING THE COMPUTATION OF NET MARGIN, EXCLUDING THE BAD DEBTS AND CLEARLY DEMONSTRATED BEFORE US THAT IF THE BAD DEBTS/REIMBURSEMENTS ARE EXCLUDED FOR THE PURPOSE OF COMPUTING THE MARGINS ON THE TRANSACTIONS RELATING TO THE ASSOCIATED ENTERPRISES, THE NET MARGIN COMES TO 19.07%, WHICH IS WELL COMPARABLE WITH THE ARMS LENGTH MARGIN OF 19% DETERMINED BY THE TRANSFER PRICING OFFICER. IN OUR CONSIDERED VIEW, FOR COMPUTING THE NET MARGIN OF THE ASSESSEE FOR THE PURPOSES OF TRANSFER PRICING, ONLY 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 INTERNATIONAL TRANSACTION WITH THE ASSESSEE'S ENTERPRISE IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. IN THAT PROCESS, BAD DEBTS/REIMBURSEMENTS HAS TO BE EXCLUDED AND SEGMENTAL PROFITABILITY HAS TO BE ADOPTED. WE FIND SUPPORT IN THIS BEHALF FROM VARIOUS DECISIONS OF THE TRIBUNAL RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE DULY FILING COPIES THEREOF IN THE PAPER-BOOK, WHICH HAVE BEEN NOTED HEREINABOVE. THAT BEING SO, THE TPO SHOULD HAVE DETERMINED THE ARMS LENGTH PRICE FOR THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES CONSIDERING ONLY THE OPERATING COST ALLOCABLE TO THE ASSOCIATED ENTERPRISES SEGMENT. SINCE THE ASSESSING OFFICER HAD NO OCCASION TO VERIFY THE VERACITY OF THE SEGMENTAL FINANCIALS PREPARED BY THE ASSESSEE COMPANY, FOR LIMITED PURPOSE, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE SEGMENTAL FINANCIALS PREPARED BY THE ASSESSEE COMPANY AND ADOPT THE SAME FOR ARRIVING AT THE NET MARGIN ON THE INTERNATIONAL TRANSACTION WITH AES IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. WE DIRECT ACCORDINGLY. ITA NO 581 OF 202 0 PALRED TECHNOLOGIES LTD HYDERABAD PAGE 9 OF 11 RESPECTFULLY FOLLOWING THE AFORESAID OBSERVATION OF THE COORDINATE BENCH IN ASSESSEES OWN CASE, WE REMIT T HIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER/TPO TO DETERMINE THE ALP IN TERMS WITH THE DIRECTION OF TH E COORDINATE BENCH EXTRACTED HEREINABOVE. ANOTHER CONTENTION OF THE LD. AR IS WHILE MAKING TP ADJUSTM ENT AND COMPUTING WORKING CAPITAL ADJUSTMENT UNDER TNMM , THE TPO HAS CONSIDERED MARGINS AT THE ENTITY LEVEL. IT WAS THEREFORE CONTENDED THAT THE TP ADJUSTMENT HAS TO BE RESTRICTED ONLY TO TRANSACTIONS WITH AE. WE FIND FORCE IN THE CONTENTIONS OF THE LD. AR. THE ASSESSING OFFICER/TPO IS DIRECTED TO DETERMINE THE ALP ONLY CONSIDERING THE RECEIVABLES AND PAYABLES IN RESPECT OF TRANSACTIONS WITH AES ONLY. RESPECTFULLY FOLLOWING THE AFORESAID OBSERVATION OF THE COORDINATE BENCH IN ASSESSEE'S OWN CASE, WE REMIT T HIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER/TPO TO DETERMINE THE ALP IN TERMS WITH THE DIRECTION OF TH E COORDINATE BENCH EXTRACTED HEREINABOVE. ANOTHER CONTENTION OF THE ID. AR IS WHILE MAKING TP ADJUSTM ENT AND COMPUTING WORKING CAPITAL ADJUSTMENT UNDER TNMM , THE TPO HAS CONSIDERED MARGINS AT THE ENTITY LEVEL. IT WAS THEREFORE CONTENDED THAT THE TP ADJUSTMENT HAS TO BE RESTRICTED ONLY TO TRANSACTIONS WITH AE. WE FIND FORCE IN THE CONTENTIONS OF THE ID. AR. THE ASSESSING OFFICER/TPO IS DIRECTED TO DETERMINE THE ALP ONLY CONSIDERING THE RECEIVABLES AND PAYABLES IN RESPECT OF TRANSACTIONS WITH AES ONLY.' 6.1 FROM THE ABOVE ORDER OF THE COORDINATE BENCH IN ASSESSEE'S OWN CASE FOR THE PREVIOUS YEARS, WE FIND THAT THE BENCH HAS OBSERVED THAT 1. WHEN SEGMENTAL DETAILS HAVE BEEN FURNISHED BY TH E ASSESSEE WITH REGARD TO AE AND NON AE TRANSACTIONS THE SAME SHOULD BE CONSIDERED FOR THE PURPOSE OF ASSESSMENT. THOUGH, THERE IS NO SPECIFIC DIRECTION BY THE TRIBUNAL, WE ARE OF THE OPINION THAT THE ASSESS EES CONTENTION THAT WHERE THERE ARE COMPARABLE TRANSACTIONS FROM AE AS WELL AS NON AES AND WHEN TH EIR SEGMENTAL INFORMATION IS AVAILABLE, INTERNAL TNMM H AS TO BE APPLIED FOR THE PURPOSE OF BENCHMARKING NEEDS CONSIDERATION BY THE AO. 2. FURTHER, TRANSFER PRICING PROVISIONS ARE APPLICA BLE ONLY TO TRANSACTIONS WITH AES AND HENCE, FOR COMPUT ING THE NET MARGIN OF THE ASSESSEE FOR THE PURPOSES OF TRANSFER PRICING, ONLY THE COST RELATED TO THE TRAN SACTION WITH THE AE HAS TO BE CONSIDERED; ITA NO 581 OF 202 0 PALRED TECHNOLOGIES LTD HYDERABAD PAGE 10 OF 11 3. THUS, TP ADJUSTMENT HAS TO BE RESTRICTED ONLY TO TRANSACTIONS WITH AE AND WORKING CAPITAL ADJUSTMENT HAS TO BE UNDERTAKEN AFTER CONSIDERING THE RECEIVAB LES AND PAYABLES IN RESPECT OF TRANSACTIONS WITH AES ON LY. 6.2 THE AO/TPO IS THEREFORE DIRECTED TO VERIFY THE SEGMENTAL FINANCIALS OF ASSESSEE AS OBSERVED ABOVE AFTER PROVIDING DUE OPPORTUNITY OF BEING HEARD TO T HE ASSESSEE AND ACCORDINGLY DETERMINE THE ALP. ACCORDINGLY GROUNDS RAISED VIZ., 4, 10 & 11 ARE ALL OWED FOR STATISTICAL PURPOSES . 4. IT IS THEREFORE, CLEAR THAT THE LEARNED COORDINA TE BENCH HAD ALREADY MADE IT CLEAR IN THE SAID FORMER ROUND THAT THE TPO HAD TO APPLY INTERNAL TNMM ONLY FOR THE PURPOSE OF IMPUGNED BENCHMARKING. WE THEREFORE, FIND NO MERIT IN THE RE VENUES ARGUMENTS SUPPORTING COMPARABLES ENLISTED IN A TO H. THE TPO IS THEREFORE, DIRECTED TO COMPUTE THE ASSESSEES AL P ONLY ON THE BASIS OF ASSESSEES INTERNAL SEGMENTAL COMPARABLES. THIS FORMER SUBSTANTIVE GROUND IS ACCEPTED IN ABOVE TERMS. 5. LEARNED COUNSEL IS FAIR ENOUGH IN NOT PRESSING F OR ASSESSEES THIRD GROUND IN VIEW OF OUR PRECEDING DI RECTIONS. 6. COMING TO WORKING CAPITAL ADJUSTMENT, BOTH THE LEARNED REPRESENTATIVES ARE IN AGREEMENT DURING THE COURSE OF HEARING THAT THE SAME IS ESSENTIALLY REQUIRES THE A SSESSEE TO FILE ALL THE NECESSARY DETAILS FOLLOWED BY TPOS FACTUAL VERIFICATION. WE THEREFORE, ACCEPT THE ASSESSEES INSTANT 4 TH SUBSTANTIVE GROUND OF WORKING CAPITAL ADJUSTMENT FOR STATISTICAL PURPOSES . 7. NEXT COMES THE ISSUE OF MARK-UP ON EXPENDITURE REIMBURSEMENT TRANSACTIONS. IT HAS COME ON RECORD T HAT THIS TRIBUNALS FIRST ROUND OF DIRECTIONS HAD MADE IT CL EAR THAT THE ISSUE HAS ALREADY COVERED IN THE ASSESSMENT YEAR 20 07-08S ITA NO 581 OF 202 0 PALRED TECHNOLOGIES LTD HYDERABAD PAGE 11 OF 11 FINDINGS IN ITA NO.1903/HYD/2018 WHEREIN THE ASSESS EE HAD BEEN HELD TO HAVE ENTERED INTO COST TO COST TRANSAC TION ONLY. IT FURTHER EMERGES THAT THE DEPARTMENT HAS NOT MADE AN Y ADDITION IN A.YS 2007-08 TO 2009-10 APART FROM THE IMPUGNED ASSESSMENT YEAR. WE THEREFORE, DIRECT THE TPO TO ADOPT CONSIST ENCY IN THE LIGHT OF THESE FINDINGS IN THE SAID PRECEDENTS AND SUCCEEDING ASSESSMENT YEAR AND FRAME CONSEQUENTIAL COMPUTATION AS PER LAW. NO OTHER GROUND HAS BEEN PRESSED BEFORE US. 8. THIS ASSESSEES APPEAL IS PARTLY ALLOWED FOR STA TISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 8 TH SEPTEMBER, 2021. SD/- SD/- (LAXMI PRASAD SAHU) ACCOUNTANT MEMBER (S.S. GODARA) JUDICIAL MEMBER HYDERABAD, DATED 8 TH SEPTEMBER, 2021. VINODAN/SPS COPY TO: S.N O AD DRESSES 1 M/S.PALRED TECHNOLOGIES LTD, PLOT NO.2-8-703/2/B ROAD NO.12, BANJARA HILLS, HYDERABAD 500034 2 DY.CIT , CIRCLE 16(2) 2 ND FLOOR, IT TOWERS, HYDERABAD 500 029 3 DRP - 1, KENDRIYA SADAN, 4 TH FLOOR, C WING, BENGALURU 560034 4 PR. CIT -4, HYDERABAD 5 DR, ITAT HYDERABAD BENCHES 6 GUARD FILE BY ORDER