M/s Unisys India Private Ltd, Bangalore V. DCIT, Bangalore

ITA 8/BANG/2011

• Counselvise Citation: 821114 RSA 2011
• Duration Of Justice: 4 year(s) 5 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-06-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 14-05-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 07-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: MADHAWI RATI
• Keywords: Business income; Transfer pricing; Business expenditure; International transaction; Additional evidence; Working capital adjustments
• Section: 143(3); 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ , ACCOUNTANT MEMBER IT(TP)A NO.8/BANG/2011 ASSESSMENT YEAR : 2006-07 M/S. UNISYS INDIA PRIVATE LTD., PURVA PREMIER, 135/1, RESIDENCY ROAD, BANGALORE 560 025. PAN: AAACU 1502G VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(5), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SMT. MADHAWI RATI, CA RESPONDENT BY : SHRI FARAHAT HUSSAIN QURESHI, CIT-II(DR) DATE OF HEARING : 29.05.2015 DATE OF PRONOUNCEMENT : 19.06.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 21.10.2010 OF THE DY. CIT, CIRCLE 12(5), BANGALORE PASSED U/S. 143(3) R.W.S. 144C(13) OF THE INCOME-TAX ACT, 1961 [THE ACT]. IT(TP)A NO. 8/BANG/2011 PAGE 2 OF 18 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE ARE CLASSIFIED INTO TWO PARTS VIZ., TRANSFER PRICING (TP) RELATED GROUNDS A ND OTHER THAN TP RELATED GROUNDS. 3. WE SHALL FIRST TAKE UP FOR CONSIDERATION GROUNDS OF APPEAL RELATING TO TP. THE ASSESSEE OR M/S.UNISYS INDIA PRIVATE LIMI TED (UNISYS INDIA) WAS INCORPORATED IN INDIA ON NOVEMBER 28, 1994. ALL SHARES OF THE ASSESSEE ARE HELD BY UNISYS MAURITIUS LIMITED, WHIC H IS ULTIMATELY HELD BY UNISYS CORPN., USA. DURING FY 2005-06, UNISYS INDIA WAS ESSENTIALLY ENGAGED IN PROVIDING IT ENABLED SERVICES(ITES) AND SOFTWARE DEVELOPMENT (IT) TO ITS OVERSEAS GROUP COMPANIES. THE ASSESSEE IS ORGANIZED INTO TWO OPERATING DIVISIONS ONE IN BANGALORE AND ONE IN MUM BAI. THE BANGALORE DIVISION PRIMARILY PROVIDES SOFTWARE AND BPO SERVIC ES WHILE MUMBAI DIVISION IS PRIMARILY ENGAGED IN PURCHASE AND RESAL E OF UNISYS PRODUCTS AND PROVISION OF SUPPORT SERVICES. 4. THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED E NTERPRISES (AES) REPORTED IN FORM 3CEB RELEVANT TO THIS APPEAL WERE AS FOLLOWS:- S. NO. NATURE OF TRANSACTION AMOUNT (INR) METHOD USED PLI 1 PROVISION FOR BPO SERVICES 184,661,067 TNMM OP/TC 2 PROVISION OF SOFTWARE DEVELOPMENT SERVICES 331,562,802 TNMM OP/TC 3 ALLOCATION OF HUMAN RESOURCES AND ADMINISTRATION COSTS 938,937 CUP NA 4 REIMBURSEMENT OF EXPENSES 13,825,805 NA NA 5 INTEREST ON OVERDUE OUT STANDINGS 300,959 CUP NA 6 IMPORT AND RESALE OF HARDWARE AND 6,628,593 RPM CP/SALES IT(TP)A NO. 8/BANG/2011 PAGE 3 OF 18 SOFTWARE 7 EXPORT OF SPARES PARTS 685,749 TNMM OP/SALES 8 PROVISION OF SOFTWARE MAINTENANCE SERVICES 13,497,927 TNMM OP/SALES 9 AVAILING OF ADMINISTRATIVE SUPPORT SERVICES 5,879,022 CPM OP/SALES 10 IMPORT OF FIXED ASSETS 850,475 CUP NA 11 AVAILING OF CONSULTANCY SERVICES 6,248,580 TNMM OP/TC 12 INTEREST ON EXTERNAL COMMERCIAL BORROWINGS 874,031 CUP NA 13 INTEREST ON CURRENT ACCOUNT BALANCES 12,060,796 CUP NA 14 REIMBURSEMENT OF EXPENSES (PAID) 6,405,931 NA NA 15 REIMBURSEMENT OF EXPENSE (RECEIVED) 4,646,727 NA NA 5. THE OP/TC MARGIN EARNED BY THE ASSESSEE IN THE S OFTWARE DEVELOPMENT SEGMENT WAS 10.63%. THE MARGIN OF COMPA RABLE COMPANIES IN THE TRANSFER PRICING DOCUMENTATION PREPARED BY T HE ASSESSEE WAS 7.92% WITH WORKING CAPITAL ADJUSTMENT. 6. THE TPO, HOWEVER, DID NOT AGREE WITH THE TRANSFE R PRICING ANALYSIS CARRIED OUT BY THE ASSESSEE. HE SUGGESTED 36 COMPA RABLE COMPANIES AND AFTER HEARING THE OBJECTIONS OF THE ASSESSEE, FINAL LY CHOSE 33 COMPARABLE COMPANIES AS FOLLOWS:- IT(TP)A NO. 8/BANG/2011 PAGE 4 OF 18 THE FINAL SET OF COMPARABLE CHOSEN BY THE TPO IS O NLY 33 AND HAS WRONGLY BEEN GIVEN AS 34 IN THE ABOVE CHART. THIS IS BECAU SE THE COMPANY BY NAME, MAARS SOFTWARE INTERNATIONAL LTD. HAS BEEN LI STED TWICE IN THE ABOVE CHART AT SL.NOS.17 AND 24. IT(TP)A NO. 8/BANG/2011 PAGE 5 OF 18 7. THE ASSESSEE PRAYED FOR WORKING CAPITAL ADJUSTME NT TO ITS MARGIN AS WELL AS MARGINS OF THE COMPARABLES CHOSEN BY THE TP O. THE TPO DID NOT ALLOW THE AFORESAID CLAIM OF THE ASSESSEE FOR THE F OLLOWING REASON:- 26. THE ASSESSEE HAS NOT GIVEN ANY DETAILS AS TO H OW THE WORKING CAPITAL ADJUSTMENT CALCULATION HAS BEEN DON E IN THE CASE OF THE COMPARABLES. NO SUPPORTING DOCUMENTS / ANNUA L REPORTS HAVE BEEN PROVIDED TO SUBSTANTIATE THE WORKING CAPI TAL REQUIREMENTS OF THE COMPARABLES. TO SUM UP THE CLAI M OF ASSESSEE FOR WORKING CAPITAL ADJUSTMENT HAS BEEN RE JECTED ON THE GROUNDS AS DISCUSSED IN THE PRECEDING PARAGRAPHS. 8. THE TPO FINALLY DETERMINED THE ALP OF THE INTERN ATIONAL TRANSACTION ON RENDERING SOFTWARE DEVELOPMENT SERVICES TO THE A E AS FOLLOWS:- (IN RS.) TOTAL COST OF PROVISION OF SERVICES BY THE ASSESSEE (A) 29,97,07,226 OP/OC 16.67 MARGIN @ 16.67% AS DISCUSSED ABOVE (B) 4,99,61,194 ARMS LENGTH PRICE A (A+B) 34,96,68,420 PRICE AT WHICH INTERNATIONAL TRANSACTION HAS BEEN UNDERTAKEN B 33,15,62,802 DIFFERENCE 1,81,05,618 % OF DIFFERENCE WITH B ABOVE 5.46% 9. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) CONF IRMED THE ADJUSTMENT OF RS.1,81,05,618 MADE BY THE AO BY WAY OF ADJUSTMENT, CONSEQUENT TO DETERMINATION OF ALP. 10. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNSE L FOR THE ASSESSEE AND THE LD. DR ON THE TP ADJUSTMENT MADE IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES SEGMENT. THE LD. COUNSEL FOR THE ASSESSEE PRAYED IT(TP)A NO. 8/BANG/2011 PAGE 6 OF 18 THAT INFOSYS TECHNOLOGIES LTD., WHICH WAS A COMPARA BLE CHOSEN BY THE TPO AND WHICH IS AT SL.NO.3 OF THE LIST OF COMPARAB LES DRAWN BY THE TPO SHOULD BE EXCLUDED. IN THIS REGARD, THE LD. COUNSE L FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE ITAT DELHI BENCH IN AGNITY INDIA TECHNOLOGIES PVT. LTD. V. ITO, ITA NO.3856DEL/2000 FOR A.Y. 2006-07 . IN THE AFORESAID DECISION, THE DELHI BENCH OF THE TRIB UNAL IN THE CASE OF A SOFTWARE DEVELOPMENT SERVICES COMPANY SUCH AS THE A SSESSEE, OBSERVED IN PARA 5.2 OF ITS ORDER AS FOLLOWS:- 5.2 VARIOUS ARGUMENTS, AS STATED EARLIER, WERE TA KEN BEFORE THE DRP WHICH INTER-ALIA INCLUDED REJECTION OF COMPARAB LE CASES; APPLICATION OF ARBITRARY FILTER OF WAGE TO SALES RA TIO; IGNORING THAT THE ASSESSEE IS A LIMITED RISK COMPANY; INCLUSION O F INFOSYS TECHNOLOGIES LTD.; AND INCLUSION OF SATYAM COMPUTER S SERVICES LTD. IN SPITE OF THE FACT THAT ITS DATA IS NOT RELI ABLE AS PUBLICLY KNOWN. ON THE BASIS OF THESE ARGUMENTS, THE DRP EXC LUDED THE CASE OF SATYAM COMPUTERS SERVICES LTD., THEREBY RED UCING THE ARMS LENGTH MARGIN TO 25.6%. IT IS ARGUED THAT THE CASE OF THE ASSESSEE IS NOT COMPARABLE WITH INFOSYS TECHNOLOGIE S LTD., THE REASON BEING THAT THE LATTER IS GIANT IN THE AREA O F DEVELOPMENT OF SOFTWARE AND IT ASSUMES ALL RISKS, LEADING TO HIGHE R PROFIT. ON THE OTHER HAND, THE ASSESSEE IS A CAPTIVE UNIT OF ITS P ARENT COMPANY IN THE USA AND IT ASSUMES ONLY LIMITED CURRENCY RISK. HAVING CONSIDERED THESE POINTS, WE ARE OF THE VIEW THAT TH E CASE OF AFORESAID INFOSYS AND THE ASSESSEE ARE NOT COMPARAB LE AT ALL AS SEEN FROM THE FINANCIAL DATA ETC. OF THE TWO COMPAN IES MENTIONED EARLIER IN THIS ORDER. THEREFORE, WE ARE OF THE VIE W THAT THIS CASE IS REQUIRED TO BE EXCLUDED. ONCE THAT IS DONE, IT IS T HE ACCEPTED POSITION OF BOTH THE PARTIES THAT THE RESULTS OF TH E ASSESSEE ARE IN LINE WITH THE MEAN MARGIN OF COMPARABLE CASES EVEN IF NO ADJUSTMENT IS MADE ON ACCOUNT OF CAPITAL ETC. THERE FORE, IT IS HELD THAT NO ADJUSTMENT WAS REQUIRED TO BE MADE TO THE R ESULTS DECLARED BY THE ASSESSEE COMPANY. IT(TP)A NO. 8/BANG/2011 PAGE 7 OF 18 11. THE AFORESAID DECISION OF THE DELHI BENCH OF TH E TRIBUNAL HAS SINCE BEEN CONFIRMED BY THE HONBLE DELHI HIGH COURT IN T HE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD., ITA NO.1204/2011, JUDGMENT DATED 10.7.2013. WE ARE OF THE VIEW THAT THE DECISION OF THE DELHI BENC H OF THE TRIBUNAL AS CONFIRMED BY THE HONBLE DELHI HIGH COURT REFERRED TO ABOVE WILL BE SQUARELY APPLICABLE TO THE CASE OF THE ASSESSEE. A CCORDINGLY, WE DIRECT INFOSYS TECHNOLOGIES LTD. BE EXCLUDED FROM THE FINA L LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. 12. THE NEXT COMPANY FROM THE LIST OF COMPARABLES C HOSEN BY THE TPO THAT IS SOUGHT BY THE ASSESSEE TO BE EXCLUDED IS SA TYAM COMPUTER SERVICES LTD. THE DRP IN ITS DIRECTIONS AT PAGE 9 HAS ACCEPTED THE CLAIM OF ASSESSEE THAT SATYAM COMPUTER SERVICES LTD. CANNOT BE REGARDED AS A COMPARABLE. DESPITE THE AFORESAID DIRECTIONS OF TH E DRP, THE TPO WHILE PASSING THE FINAL ASSESSMENT ORDER AFTER THE DIRECT IONS OF THE DRP, HAS FAILED TO EXCLUDE THE AFORESAID COMPANY FROM THE LI ST OF COMPARABLES. WE HAVE PERUSED THE ORDER OF THE DRP AND WE FIND THAT IN PARA 5.2(IV), THE DRP HAS GIVEN A CLEAR DIRECTION THAT THE OBJECTION BY THE ASSESSEE TO INCLUDE SATYAM COMPUTER SERVICES LTD. IS FOUND ACCE PTABLE. IN VIEW OF THE ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE SATYAM COMPU TER SERVICES LTD. FROM THE FINAL LIST OF COMPARABLES. 13. THE NEXT SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE IS WITH REGARD TO THE MARGINS OF VISUALSOFT TECHNOLOGIES LT D., WHICH IS AT SL.NO.15 IT(TP)A NO. 8/BANG/2011 PAGE 8 OF 18 OF THE LIST OF COMPARABLES CHOSEN BY THE TPO. THE ASSESSEES OBJECTION IS WITH REGARD TO COMPUTATION OF MARGINS FOR THE PURPO SE OF COMPARISON AS DONE BY THE TPO WAS AS FOLLOWS:- INCORRECTLY COMPUTING THE OP/TC MARGIN FOR VISUALS OFT TECHNOLOGIES LTD.; 3 168 IN THE TP ORDER THE LD TPO HAS CONSIDERED TH E OP/TC MARGIN OF THE IT SERVICES SEGMENT OF THIS COMPANY A T 36.89%. 3.169 IN THIS REGARD, IT MAY BE NOTED THAT THE COR RECT OP/TC MARGIN OF THE IT SERVICES SEGMENT OF THIS COMPANY I S PROVIDED BELOW FOR YOUR HONOURS READY REFERENCE: PARTICULARS AMOUNT (IN RS. CRORE) TOTAL SALES (COMPANY LEVEL) 160.25 SEGMENTAL SALES (IT SERVICES SEGMENT) 157.05 ALLOCATED EXPENDITURE (IT SERVICES SEGMENT) 114.73 UNALLOCATED EXPENDITURE FOR SEGMENT 16.37 TOTAL COST (TC) 131.11 OPERATING PROFIT (OP) 25.94 OP/TC 19.79% 3.170 IT IS SUBMITTED THAT THE ABOVE MARGIN OF 19. 79% SHOULD BE CONSIDERED WHILE ADJUDICATING ON THE TRANSFER PRICE S FOLLOWED BY THE ASSESSEE IN RESPECT OF ITS SOFTWARE DEVELOPMENT SERVICES. 14. ON THE ABOVE OBJECTIONS, THE DRP HAS OBSERVED T HAT THE MARGIN OF THIS COMPANY PROVIDED BEFORE THE DRP WERE SEGMENTAL MARGINS AND THE TPO HAS TAKEN ENTITY LEVEL MARGIN FOR COMPARISON BE CAUSE OF NON- AVAILABILITY OF SEGMENTAL INFORMATION IN THE PUBLIC DOMAIN. THE DRP WAS IT(TP)A NO. 8/BANG/2011 PAGE 9 OF 18 THEREFORE OF THE VIEW THAT THE ACTION OF THE TPO DO ES NOT CALL FOR ANY INTERFERENCE. 15. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE DRE W OUR ATTENTION TO PAGE 606 OF THE PAPERBOOK IN WHICH THE ASSESSEE HAS PLACED THE ANNUAL REPORT OF VISUALSOFT TECHNOLOGIES PVT. LTD. FOR THE YEAR ENDING MARCH, 2006. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE INFORMATION PROVIDED BY THE ASSESSEE BEFORE THE DRP WAS BASED ON THE ANNUAL REPORT WHICH IS AVAILABLE IN THE PUBLIC DOMAIN AND THE OBSERVATIONS OF THE DRP IN THIS REGARD ARE ERRONEOUS AND CONTRARY TO MATERIAL ON RE CORD. THE LD. COUNSEL THEREFORE PRAYED THAT THE MARGINS AS CLAIMED BY THE ASSESSEE IN THE OBJECTIONS BEFORE THE DRP SHOULD BE CONSIDERED. 16. THE LD. DR, ON THE OTHER HAND, SUBMITTED THAT T HE ISSUE REQUIRES VERIFICATION BY THE AO/TPO AND THEREFORE OBJECTIONS OF THE ASSESSEE IN THIS REGARD SHOULD BE DIRECTED TO BE VERIFIED BY THE AO/ TPO. 17. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO T HE RIVAL SUBMISSIONS AND ARE OF THE VIEW THAT THE BASIS ON WHICH THE DRP CAME TO THE CONCLUSION THAT THE SEGMENTAL DETAILS ARE NOT AVAIL ABLE IN THE PUBLIC DOMAIN IS ERRONEOUS, AS THE DATA TAKEN BY THE ASSESSEE ARE BASED ON THE ANNUAL REPORT OF THIS COMPANY, A COPY OF WHICH IS PLACED A T PAGE 456 OF THE ASSESSEES PAPERBOOK. WE ARE THEREFORE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO SET ASIDE THE DIRECTIONS OF THE DRP IN THIS REGARD AND DIRECT THE TPO/AO TO VERIFY THE CLAIM OF THE ASSESS EE AND IF FOUND CORRECT, IT(TP)A NO. 8/BANG/2011 PAGE 10 OF 18 TO TAKE ONLY THE SEGMENTAL MARGINS OF THIS COMPANY AS PLEADED BY THE ASSESSEE. 18. THE NEXT OBJECTION OF THE ASSESSEE IS THAT THE TPO HAS NOT GIVEN WORKING CAPITAL ADJUSTMENTS. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE OBJECTIONS FILED BY THE ASSESSEE TO THE DRP IN WHICH THE ASSESSEE HAS HIGHLIGHTED AS TO H OW WORKING CAPITAL ADJUSTMENT IS ESSENTIALLY AN ADJUSTMENT FOR THE OPP ORTUNITY COST OF MAKING INVESTMENTS IN WORKING CAPITAL (IE ENTITIES, ACCOUN TS RECEIVABLE/DEBTORS AND ACCOUNTS PAYABLE/CREDITORS) WHICH REQUIRE CAPITAL A ND OPERATING ASSETS. AT ARMS LENGTH. AN UNCONTROLLED ENTITY WILL EXPECT TO EARN A MARKET RATE OF RETURN ON THAT CAPITAL, INDEPENDENT OF ITS OPERATIO NS. HOWEVER, THE AMOUNT OF CAPITAL REQUIRED VARIES GREATLY, BECAUSE THE LEV EL OF INVENTORIES, DEBTORS AND CREDITORS MEASURED AS A PERCENTAGE OF THE TOTAL COST VARIES. THERE IS AN EFFECT ON PROFITS FROM INVESTING IN DIFFERENT LE VELS OF WORKING CAPITAL DUE TO DIFFERENCES REFLECTED IN CASH COLLECTION CYCLE. SUCH DIFFERENCES IN COLLECTION CYCLE IMPLY DIFFERENCES IN CREDITS GRANT ED TO CUSTOMERS AND SUCH A CREDIT FUNCTION IS AKIN TO AN ADDITIONAL SERVICE FOR WHICH MARKETS ARE WILLING TO PAY. HIGH LEVELS OF WORKING CAPITAL CRE ATE COSTS ETHER IN THE FORM OF INCURRED INTEREST OR IN THE FORM OF OPPORTUNITY COSTS. THEREFORE NO PROFIT MAXIMIZING/ENTREPRENEURIAL FIRM WOULD HOLD WORKING CAPITAL WITHOUT A RETURN. A WORKING CAPITAL ADJUSTMENT ANALYSIS SEEKS TO ADJU ST THE PROFITABILITY OF EACH COMPARABLE COMPANY BASED ON THE WORKING CAPITA L POSITION OF THE ASSESSEE TO REFLECT THE DIFFERENCES IN WORKING CAPI TAL INVESTMENT. THUS, THE IT(TP)A NO. 8/BANG/2011 PAGE 11 OF 18 ADJUSTMENT TRIES TO ISOLATE THE INTEREST EFFECTS (T AKING INTO ACCOUNT THE TIME VALUE OF MONEY) THAT RESULT FROM THE OPPORTUNITY CO STS OF HOLDING WORKING CAPITAL. THE INTEREST EFFECTS IN THE COMPARABLE COM PANYS DATA ARE NOT COMPLETELY ELIMINATED HUT RATHER ADJUSTED TO THE AS SESSEES LEVEL OF INTEREST EFFECTS. PRIME LENDING RATE (PLR) IS USED AS THE AP PROPRIATE COST OF CAPITAL BECAUSE IT CAN BE DETERMINED WITH REASONABLE ACCURA CY AND IS THE BEST AVAILABLE ESTIMATE OF THE COST OF CAPITAL. FOR THIS PURPOSE THE PLR IS SECURED FROM CMIE (IE CENTER FOR MONITORING INDIAN ECONOMY) AND RESERVE BANK OF INDIA PUBLICATIONS. 19. THE ASSESSEE ALSO GAVE A WORKING CAPITAL MARGIN CALCULATION. THE SAME IS AT PAGE 165 TO 168 OF THE ASSESSEES PAPERB OOK. THE DRP, HOWEVER, DID NOT AGREE WITH THE CLAIM OF THE ASSESS EE FOR THE VERY SAME REASON ASSIGNED BY THE TPO. THE LD. COUNSEL FOR T HE ASSESSEE DREW OUR ATTENTION TO APPLICATION FILED BY THE ASSESSEE SEE KING TO FILE THE ANNUAL REPORT OF THE ASSESSEE AND THE COMPARABLE COMPANIES CHOSEN FOR THE PURPOSE OF CALCULATING WORKING CAPITAL ADJUSTMENT. ACCORDING TO LD. COUNSEL, THE INFORMATION BASED ON WHICH WORKING CAP ITAL ADJUSTMENTS WERE CALCULATED BY THE ASSESSEE WAS AVAILABLE IN THE PUB LIC DOMAIN I.E., IN THE ANNUAL REPORTS OF THE RESPECTIVE COMPANIES AND THER EFORE THE ASSESSEE DID NOT FILE THESE ANNUAL REPORTS BEFORE THE TPO/DRP. IT WAS FURTHER SUBMITTED THAT SINCE THE AFORESAID DOCUMENTS ARE NECESSARY FO R THE PURPOSE OF PROPER ADJUDICATION OF THE DISPUTE BEFORE THE TRIBUNAL, TH E SAME SHOULD BE ADMITTED AS ADDITIONAL EVIDENCE. IT(TP)A NO. 8/BANG/2011 PAGE 12 OF 18 20. WE HAVE CONSIDERED THE PRAYER OF THE LD. COUNSE L FOR THE ASSESSEE AND ARE OF THE VIEW THAT THE SAME DESERVES TO BE AC CEPTED. ACCORDINGLY, THE ANNUAL REPORTS OF THE COMPARABLE COMPANIES CHOS EN FOR THE PURPOSE OF CALCULATING WORKING CAPITAL ADJUSTMENT ARE ACCEPTED AS ADDITIONAL EVIDENCE. THE ISSUE, HOWEVER, REQUIRES VERIFICATION BY THE TP O/AO AND THEREFORE THE ORDER OF THE DRP IN THIS REGARD IS SET ASIDE AND TH E ISSUE IS REMANDED TO THE TPO/AO FOR FRESH CONSIDERATION IN LIGHT OF THE MATERIAL NOW MADE AVAILABLE BY THE ASSESSEE. 21. THE TPO IS ACCORDINGLY DIRECTED TO COMPUTE THE ALP AFTER GIVING EFFECT TO THE DIRECTIONS REFERRED TO ABOVE. 22. THE OTHER ISSUES RAISED IN THE GROUNDS OF APPEA L REGARDING TP ADJUSTMENT IN THE SOFTWARE DEVELOPMENT SECTOR WERE NOT ARGUED AND ACCORDINGLY THE SAME ARE NOT DECIDED. 23. THE LD. COUNSEL FOR THE ASSESSEE THEN DREW OUR ATTENTION TO THE DETERMINATION OF THE ALP IN THE ITES SECTOR. AS FA R AS ITES SEGMENT IS CONCERNED, THE ASSESSEE IN ITS TP STUDY SUBMITTED T HAT THE OP/TC MARGIN EARNED BY THE ASSESSEE IN THE ITES SEGMENT WAS 12.6 2%. THE SINGLE YEAR MARGIN OF COMPARABLE COMPANIES IN THE TRANSFER PRIC ING DOCUMENTATION PREPARED BY THE ASSESSEE WAS 7.90% AFTER WORKING CA PITAL ADJUSTMENT AND THUS THE ASSESSEE CLAIMED THAT THE PRICE CHARGED BY IT WAS AT ARMS LENGTH. IT(TP)A NO. 8/BANG/2011 PAGE 13 OF 18 24. THE TPO REJECTED THE CLAIM OF THE ASSESSEE AND HE CHOSE A SET OF 6 COMPARABLE COMPANIES AS FOLLOWS:- 25. THE TPO AFTER DENYING THE BENEFIT OF WORKING CA PITAL ADJUSTMENT DETERMINED THE ALP IN THE ITES SEGMENT AS FOLLOWS:- TOTAL COST OF PROVISION OF SERVICES BY THE ASSESSEE (A) RS. 16,39,64,751 OP/OC 20.03 MARGIN @ 20.03% AS DISCUSSED ABOVE (B) RS.3,28,42,140 ARMS LENGTH PRICE A (A+B) RS.19,68,06,890 PRICE AT WHICH INTERNATIONAL TRANSACTION HAS BEEN UNDERTAKEN B RS.18,46,61,067 DIFFERENCE A B RS.1,21,45,823 % OF DIFFERENCE WITH B ABOVE 6.57% 26. ADJUSTMENT ON ACCOUNT OF DETERMINATION OF ALP O F RS.1,21,45,823 WAS ADDED TO THE TOTAL INCOME BY THE AO IN THE FINA L ASSESSMENT ORDER. ON APPEAL BY THE ASSESSEE, THE DRP CONFIRMED THE ORDER OF TPO. BEFORE US, THE LIMITED PRAYER OF THE LD. COUNSEL FOR THE ASSES SEE IS TO EXCLUDE ALLSEC IT(TP)A NO. 8/BANG/2011 PAGE 14 OF 18 TECHNOLOGIES LTD., WHICH WAS A COMPARABLE CHOSEN BY THE TPO FROM THE LIST OF COMPARABLES. IN THIS REGARD, IT TRANSPIRED IN THE COURSE OF HEARING THAT BEFORE THE TPO, THE ASSESSEE DID NOT OBJECT TO THIS COMPANY BEING CHOSEN AS A COMPARABLE. HOWEVER, BEFORE THE DRP, T HE ASSESSEE HAS RAISED THE OBJECTION FOR CHOOSING THIS COMPANY AS A COMPARABLE ON SEVERAL GROUNDS, INCLUDING THE GROUND THAT THIS COMPANY UND ERWENT BUSINESS RESTRUCTURING AND THEREFORE ITS MARGINS SHOULD NOT BE CONSIDERED FOR COMPARISON. THE OBJECTIONS BEFORE THE DRP BY THE A SSESSEE ARE CONTAINED IN PAGE 26 OF THE OBJECTIONS BEFORE THE D RP IN PARAS 3.77 TO 3.92. THE DRP DID NOT ACCEPT THE CLAIM OF ASSESSEE ON EXCLUSION OF THE AFORESAID COMPANY. 27. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE BRO UGHT TO OUR NOTICE THE DECISION OF ITAT HYDERABAD BENCH IN THE CASE OF CES PVT. LTD. V. ACIT, ITA NO.1445/HYD/2010 FOR AY 2006-07. IN THE AFORES AID DECISION, THE OBJECTION BY A COMPANY ENGAGED IN THE BUSINESS OF P ROVIDING ITES TO REGARD IT AS A COMPARABLE WAS AS FOLLOWS:- 6. ALLSEC TECHNOLOGIES LTD. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMISSION IS TO EXCLUDE THE SAID COMPANY FROM THE LIST OF COMPARABLES ON THE GR OUND THAT THIS COMPANY IS HAVING SUPER NORMAL PROFITS. FURTHER IT HAS BEEN EXPERIENCING EXTRAORDINARY EVENTS. DURING THE FY 20 05-06, THIS COMPANY HAD GONE FOR A IPO DURING THE RELEVANT PREV IOUS YEAR AND ALSO THE COMPANY HAD ENTERED INTO A SHARE PURCH ASE AGREEMENT WITH SHAREHOLDER OF B2K CORPORATION PVT. LTD., WHICH IS ENGAGED IN THE BUSINESS OF INBOUND AND OUTBOUND VOICE, EMAIL IT(TP)A NO. 8/BANG/2011 PAGE 15 OF 18 CHAT SERVICES AND INFORMATION TECHNOLOGY SERVICES. HE RELIED ON THE FOLLOWING CASE LAW: 1. BANGALORE ITAT ORDER IN THE CASE OF GOOGLE INDIA PVT. LTD. VIDE 1368/BANG/2010 WHERE THIS COMPANY IS REJECTED AS COMPARABLE TO ITES. 2. HYDERABAD ITAT ORDER IN THE CASE OF CAPITAL IQ I NFORMATION SYSTEMS (INDIA) LTD. VIDE PARA 11 AND 15. 3. MUMBAI ITAT ORDER IN TEVA INDIA PVT. LTD. VS. DC IT MUMBAI. 28. THE ITAT HYDERABAD BENCH ACCEPTED THE CLAIM OF THE ASSESSEE IN THIS REGARD IN PARA 17 OF ITS ORDER, WHICH READS AS FOLLOWS:- 17. WE HAVE CONSIDERED THE VARIOUS OBJECTION IN TH E LIGHT OF MATERIAL PLACED BEFORE US. VARIOUS COORDINATE BENC HES HAVE ALREADY CONSIDERED THE ABOVE OBJECTIONS ON SIMILARL Y PLACED SOFTWARE DEVELOPMENT COMPANIES. ACCORDINGLY, THESE OBJECTIONS OF THE ASSESSEE ARE ACCEPTED AND THE TPO DIRECTED T O EXCLUDE THE ABOVE COMPANIES AND REWORK OUT ARITHMETIC MEAN OF P LI. 29. IN LIGHT OF THE DECISION OF THE ITAT HYDERABAD BENCH IN THE CASE OF A COMPANY SIMILAR TO THAT OF THE ASSESSEE IN THE PRES ENT CASE, WE ARE OF THE VIEW THAT ALLSEC TECHNOLOGIES LTD. SHOULD BE EXCLUD ED FROM THE LIST OF COMPARABLE COMPANIES. 30. THE NEXT CLAIM OF THE ASSESSEE WITH REGARD TO T HE ACTION OF THE REVENUE IN NOT ALLOWING WORKING CAPITAL ADJUSTMENT. WHILE DECIDING SIMILAR GROUND IN SOFTWARE DEVELOPMENT SERVICES SEGMENT, WE HAVE ALREADY HELD THAT WORKING CAPITAL ADJUSTMENT NEEDS TO BE ALLOWED , SUBJECT TO VERIFICATION IT(TP)A NO. 8/BANG/2011 PAGE 16 OF 18 OF DETAILS FILED BY THE ASSESSEE IN THIS REGARD. W E ARE OF THE VIEW THAT THE SAID DIRECTIONS WILL HOLD GOOD FOR ITES ALSO. THE TPO/AO IS ACCORDINGLY DIRECTED TO ALLOW WORKING CAPITAL ADJUSTMENT AFTER VERIFICATION OF DETAILS FILED BY THE ASSESSEE. 31. WE SHALL NOW GO TO NON-TP RELATED ISSUES RAISED BY THE ASSESSEE. 32. THE FIRST GROUND IN THIS REGARD IS WITH REGARD TO ACTION OF THE AO AND THE DRP IN NOT ALLOWING CLUB EXPENSES OF RS.89,746 AS A DEDUCTION U/S. 37(1) OF THE ACT. ON THE ABOVE ISSUE, THE REVENUE AUTHORITIES DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE SA ME WERE PERSONAL IN NATURE AND CANNOT BE REGARDED AS EXPENDED WHOLLY AN D EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. BEFORE US, THE LD. COUNSEL FO R THE ASSESSEE BROUGHT TO OUR NOTICE THAT THE HONBLE SUPREME COURT IN THE CASE OF CIT V. UNITED GLASS MFG. CO. LTD., IN CIVIL APPEAL NO.1647 & 1648 /2012, JUDGMENT DATED 12.9.2012, HAD TAKEN THE VIEW THAT CLUB MEMBERSHIP FEES OF EMP LOYEES INCURRED BY THE ASSESSEE IS BUSINESS EXPENSES U/S. 37 OF THE ACT. IN VIEW OF THE AFORESAID DECISION OF THE HONBLE SUPREME CO URT, WE ARE OF THE VIEW THAT THE CLAIM OF ASSESSEE IN THIS REGARD HAS TO BE ALLOWED. 33. THE OTHER GROUND OF APPEAL WITH REGARD TO CORPO RATION TAX MATTERS IS DISALLOWANCE OF EMPLOYEE PROVIDENT FUND LIABILITY A MOUNTING TO RS.34,965 U/S. 36(1)(VA) OF THE ACT. IT(TP)A NO. 8/BANG/2011 PAGE 17 OF 18 34. IT IS NOT DISPUTED THAT THE AFORESAID EMPLOYEES CONTRIBUTION TO PROVIDENT FUND WAS PAID BY THE ASSESSEE ON OR BEFOR E THE DUE DATE FOR FILING RETURN OF INCOME FOR AY 2006-07. IN SUCH CIRCUMSTA NCES, NO DISALLOWANCE CAN BE MADE U/S. 36(1)(VA). IN THIS REGARD, THE LD . COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. SABARI ENTERPRISES & ORS., 298 ITR 141 (KARN ) WHEREIN IT WAS HELD THAT EMPLOYEES CONTRIBUTIONS TO PROVIDENT FUND ARE ALLOWABLE DEDUCTIONS, EVEN THOUGH MADE BEYOND THE DUE DATE OF FURNISHING RETURN OF INCOME AS PER SECTION 139(1). IN VIEW OF THE AFOR ESAID DECISION OF HONBLE JURISDICTIONAL HIGH COURT, WE ARE OF THE VIEW THAT THE DISALLOWANCE MADE BY THE REVENUE AUTHORITIES HAS TO BE DELETED. ACCORDI NGLY, THE SAME IS DIRECTED TO BE DELETED. 35. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 19 TH DAY OF JUNE , 2015 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 19 TH JUNE, 2015 . /D S/ IT(TP)A NO. 8/BANG/2011 PAGE 18 OF 18 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR/ SENIOR PRIVATE SECRETARY ITAT, BANGALORE.