IN INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES : HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA.No.115/Hyd/2015 Assessment Year 2010-2011 DCIT, Circle-16(1) M/s. Net Cracker Technology Hyderabad. vs. Solutions (India) P. Ltd., Hyderabad. PAN AACCC0701B (Appellant) (Respondent) ITA.No.235/Hyd/2015 Assessment Year 2010-2011 M/s. Net Cracker Technology Solutions (India) P. Ltd., vs. DCIT, Circle 16(1), Hyderabad. Hyderabad. PAN AACCC0701B (Appellant) (Respondent) For Revenue : Mr. SVSS. Prasad For Assessee : Mr. Dhanesh K. Bafna Date of Hearing : 28.09.2016 Date of Pronouncement : 28.09.2016 ORDER PER D. MANMOHAN, V.P. These cross-appeals are directed against order passed by DCIT, Circle-16(1), Hyderabad. In appeal filed by assessee, order passed by Assessing Officer under section 143(3) read with section 92CA(3) and 144C of Act was challenged by raising following grounds : 2 ITA.No.115 & 235 /H/2015 M/s. Net Cracker Technology Solutions (India) P. Ltd., Hyderabad. grounds mentioned herein are without prejudice to one another. 1. On facts and in circumstances of case and in law, Ld. AO / Ld. Panel/Transfer Pricing Officer ("Ld. TPO") erred in making adjustment of Rs.11,83,65,791 to provision of software development and support services. 2. On facts and in circumstances of case and in law, Ld. AO / Ld. Panel / Ld. TPO erred in: (i) Rejecting Transfer Pricing study which was maintained in good faith and with due diligence; (ii) Rejecting search process followed by Appellant; (iii) Rejecting multiple year data; (iv) Including certain comparables, which were not comparable; (v) Not including certain comparables selected by Appellant in its TP Study (vi) Not including certain comparables forming part of TPO's search, which ought to be included in final set of comparable; (vii) Not applying filter on research and development expenses and different financial year ending filter adopted by Appellant for eliminating companies during search process; (viii) Applying filter on export sales, employee cost filter, diminishing revenue filter and persistent losses filter for selection of companies; and (ix) Not granting risk adjustment. 3. appellant prays that appropriate relief be granted. 3 ITA.No.115 & 235 /H/2015 M/s. Net Cracker Technology Solutions (India) P. Ltd., Hyderabad. 4. On facts and in circumstances of case and in law, Ld. AO erred in levying interest under section 234B of Act. Appellant craves leave to add to and/or to alter, amend, rescind, modify grounds herein above or produce further documents before or at time of hearing of this Appeal. 2. Thereafter, assessee also filed following additional grounds : "2 (x). On facts and in circumstances of case and in law, Ld. AO/Ld. TPO erred in computing operating mark-up on total cost of Appellant by including "other income" as part of operating income and excluding provision for doubtful debts from "operating cost"" 3. Facts in brief are that assessee company is engaged in business of software development. assessee furnished its return of income by declaring total income of Rs.6,21,103 which was processed accordingly. Subsequently, case was taken-up for scrutiny by issuing notice under section 143(2) of Act wherein, based on ALP determined by TPO, assessment was completed by determining total income at Rs.11,95,45,890 by making certain adjustments. Some of comparable cases taken into consideration by TPO were challenged by assessee before us. 4. Both parties admitted that though margin of profit declared by assessee works-out to 23.49%, after making some adjustments referable to Forex losses etc., it finally works out to 14.15%. As per Assessing Officer, arithmetic mean margin of comparables work-out to 21.84% and thus Assessing Officer sought to make certain adjustments; on 4 ITA.No.115 & 235 /H/2015 M/s. Net Cracker Technology Solutions (India) P. Ltd., Hyderabad. other hand case of assessee is that if one of comparable i.e., E-Infochips Bangalore Ltd., is not taken into consideration arithmetic mean margin of comparables would be around 18% in which event, safe harbour rule comes into play and no adjustment can be made to income declared. 5. In this regard, Learned Counsel for assessee, submitted that profit margin of E-Infochips Bangalore Ltd., which is one of comparables that was taken into consideration by TPO, works out to 68.86%, but said company being software developer and also engaged in ITES, functions of said company also being different from nature of business of assessee, same cannot be taken as comparable, apart from fact that segmental details of said company are not available and under identical circumstances ITAT, Hyderabad Bench in case of Parexel Internatinoal (Indi) P. Ltd., Hyderabad vs. ACIT, Circle-16(2), Hyderabad (ITA.No.1918/Hyd/ 2014 dated 08.01.2016) observed (vide para- 7 onwards) that said company is not comparable since it s functions are different. In said order, ITAT, Hyderabad Bench, relied upon earlier decision of Hyderabad Bench in case of Pegasystems Worldwide India P. Ltd., Hyderabad vs. ACIT, Circle-16(2), Hyderabad (ITA.No.1758/Hyd/2014) dated 16.10.2015) wherein Bench observed as under : 8.1. It was contended that AO relied on annual report of FY. 2010-11 and used information applicable to FY. 2009- 10 from that report, as information for FY. 2009-10 was not available in public domain. It is also submitted that this company was never selected either by TPO in earlier year or in later year. It was also submitted that profitability varies from year to year and in this year, there was abnormally very high margin, reasons of which could not be analysed in absence of annual report. It was further contended that segmental information was not 5 ITA.No.115 & 235 /H/2015 M/s. Net Cracker Technology Solutions (India) P. Ltd., Hyderabad. available. On argument that said company is providing both software development and IT enabled services Ld. Counsel placed disclosures in annual report of FY. 2008-09 and annual report of FY. 2009-10 to submit that company is primarily engaged in software development and IT enabled services and has reported both of them as one segment. Therefore, company is not comparable with Assessees on functional analysis. It was further submitted that company has merged in 2012 with another company and it will be difficult to obtain further information/segmental information about company now. In view of its fluctuating profits over years, this company was not selected as comparable earlier or in later years by Revenue. Since disclosure in annual report is common, Assessee relied on decision of Ahmadabad Bench of ITAT in case of All Scrips (India) Private Ltd., in ITA No. 771/AHD/2014 for AY. 2009-10, wherein this comparable was rejected on basis of lack of segmental information. Assessee relied on para 10 of Co-ordinate Bench order, which is as under: Para 10 With respect to E-Infochip Bangalore Ltd., we find that in annual accounts of company, with respect to segment information it is stated that company is primarily engaged in software development and I.T enabled services which is considered only reportable business segment as per Accounting Standard AS-17 segment reporting prescribed in Companies (Accounting Standard) Rules, 2006. We thus find that no segmental information is available ..Considering aforesaid facts, we are of view that aforesaid two companies needs to be excluded while working out comparability analysis and therefore uphold plea of Assessee in excluding margins of aforesaid 2 companies . 8.2. Ld. DR, however, referred to extracts made by TPO in order to submit that Assessee is comparable company with that of Assessee. 8.3. After considering rival contentions and perusing annual reports placed on record, we are of opinion that this company cannot be selected as comparable company for TP analysis. First of all, this company is engaged in both software development as well as ITES. Assessee being only captive service provider, above company cannot be considered as comparable on functional basis. Not only that, as pointed out, segmental information pertaining to above company is not available. As seen from TP orders, documents placed on record, TPO relied 6 ITA.No.115 & 235 /H/2015 M/s. Net Cracker Technology Solutions (India) P. Ltd., Hyderabad. on later year s annual report in extracting information. Variation in profitability over years alone cannot be reason to exclude company from comparability analysis but as rightly pointed, absence of segmental information, how much profit earned was on software development or ITES cannot be examined. In absence of clarity on operational details and comparable company having diversified activities, we are of opinion that this company cannot be chosen as comparable company in Assessee s case in this assessment year. We are also aware of decision of Co-ordinate Bench given in earlier assessment year on reason that segmental reporting was not available. Be that as it may, since said company is functionally different from Assessee s activities and in absence of segmental information, we direct AO/TPO to exclude above while working out comparability analysis. We uphold plea of Assessee in this regard. 5.1. Tribunal categorically observed that there is no clarity on operational details and functions and said company is not comparable. Both parties admitted that there is no dispute with regard to facts. Under these circumstances, we hold that E- Infochips Bangalore Limited, which has shown 68.86% profit, is functionally different and therefore, should not be taken into consideration as comparable case. 5.2. Though most of other comparables, which are adopted by TPO, were also challenged by assessee and supported by orders of ITAT in assessee s own case for earlier years or orders passed by ITAT, Hyderabad Benches in several other cases, Learned Counsel for assessee submitted that if E-Infochips Bangalore Limited is not taken into consideration, profit margin declared by assessee and arithmetic mean margin of comparables adopted, sans E-Infochips Bangalore Limited, would fall within safe harbour rule and therefore, it is not necessary for us to go into correctness of taking into account other companies as comparable companies. Accordingly, we do not wish to go into other issues and direct Assessing Officer to exclude E-Infochips 7 ITA.No.115 & 235 /H/2015 M/s. Net Cracker Technology Solutions (India) P. Ltd., Hyderabad. Bangalore Limited for purpose of computation of arithmetic mean margin of comparables. 6. Now, we take-up departmental appeal wherein only ground urged by Revenue reads as under : DRP erred both in law and on facts and circumstances of case in granting relief to assessee by excluding communication charges from export turnover and as well as total turnover. 7. This issue has come-up before ITAT, Hyderabad Bench in assessee s own case for A.Y. 2008-09 as well as 2009-10 (ITA.No.86/Hyd/2013 & ITA.No.70/Hyd/2016). In para- 6 of order passed by ITAT for A.Y. 2008-09 (in ITA.No.86/Hyd/2013) Tribunal observed as under : 6. As briefly stated, A.O. excluded communication charges from export turnover holding that they are not to be included in Export turnover. Assessee contested same stating that data link charges cannot be considered as attributable to export service, however, alternate plea was made that if same was excluded from export turnover, same was also to be excluded from total turnover while computing deduction under section 10A. Following decision of ITAT in case of CIT vs. Mentor Graphics (I) P. Ltd., in ITA no.696/Hyd/2009 dated 18.08.2009 and Special Bench decision in case of ITO vs. Saksoft 313 ITR (AT) 353, DRP should have given direction to exclude communication charges from total turnover as well. Since issue is held in favour of assessee in case of ITO vs. Sak Soft Limited 313 ITR (AT) 353 and also as approved by Hon ble Bombay High Court in case of CIT vs. Gemplus Jewellery Ltd., 330 ITR 175, we direct AO to exclude communication charges from total turnover as well. Ground is allowed accordingly. 8 ITA.No.115 & 235 /H/2015 M/s. Net Cracker Technology Solutions (India) P. Ltd., Hyderabad. 7.1. By respectfully following decision of ITAT, Hyderabad Bench in assessees own case for earlier year, we dismiss ground urged by Revenue. 8. In result, appeal filed by assessee is treated as allowed for statistical purposes and appeal filed by Revenue is dismissed. Order pronounced in open Court on 28.09.2016. Sd/- Sd/- (B. RAMAKOTAIAH) (D.MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT Hyderabad, Dated 28th September, 2016 VBP/- Copy to 1. DCIT, Circle-16(1), Room No.612, 6th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad. 2. M/s. Net Cracker Technology Solutions (India) P. Ltd., (formerly known as Convergys Information Management (India) P. Ltd., Plot No.5 & 43, Survey No.6H, Hi-Tech City, Madhapur, Hyderabad 500 081. 3. Disputes Resolution Panel, 2nd Floor, I.T.Towers, 10-2-3, A.C. Guards, Hyderabad. 4. Director of Income Tax (I.T. & T.P.), Hyderabad 5. Addl. CIT (Transfer Pricing), Hyderabad. 6. CIT(A)/Member, D.R.P. Hyderabad. 7. D.R. ITAT Bench, Hyderabad. 8. Guard File DCIT, Circle-16(1) Hyderabad v. M/s. Net Cracker Technology Solutions (India) P. Ltd