Income Tax Appellate Tribunal - HyderabadSumtotal Systems India Private ... vs Assessee on 23 September, 2016ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



            IN THE INCOME TAX APPELLATE TRIBUNAL
                Hyderabad ' B ' Bench, Hyderabad

        Before Smt. P. Madhavi Devi, Judicial Member
                            AND
         Shri S. Rifaur Rahman, Accountant Member

                     ITA No.255/Hyd/2015
                   (Assessment Year: 2010-11)

M/s. SumTotal Systems               Vs       Dy. Commissioner of Income
India Private Limited                        Tax, Circle 3(2)
Hyderabad                                    Hyderabad
PAN: AABCC 9379 C

             For Assessee:                   Shri Ajit Tolani and
                                             Shri Darpan Kirpalani
             For Revenue:                    Smt. S. Narasamma, CIT(DR)

         Date of Hearing:                    28 .07.2016
         Date of Pronouncement:              23.09.2016

                                          ORDER

Per Smt. P. Madhavi Devi, J.M.This is assessee's appeal for the A.Y 2010-11. In this
appeal, the assessee is aggrieved by the assessment order passed
u/s 143(3) r.w.s. 144C(13) of the I.T. act in accordance with the
directions of the DRP.2.         Brief facts of the case are that the assessee company,
which is in the business of software development and support
services, filed its original return of income for the A.Y 2010-11 on
1.10.2007 by declaring an income of Rs.27,72,181 and a book
profit of Rs.6,10,62,281. The return was subsequently revised on
10.09.2011 claiming Rs.11,24,77,537 as a deduction u/s 10A of
the Act and in arriving at the taxable income of Rs.1,17,45,161.
During the assessment proceedings u/s 143(3) of the Act, the AOPage 1 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



observed that the assessee has entered into international
transactions with its AE for providing software development
services to its AEs. Since the assessee's turnover with the AEs
during the financial year 2009-10 was more than Rs.15.00 crores,
the AO referred the matter to the TPO for determination of the
Arm's Length Price (ALP) of its international transactions. The
TPO, vide order u/s 92CA(3) of the Act dated 31.12.2013,
determined the ALP of the transaction at Rs.66,01,06,695 as
against the price of Rs.60,22,99,470 received by the assessee
from the AEs and determined the adjustment u/s 92CA of the Act
at Rs.5,78,67,225. The AO made the adjustment of the shortfall at
Rs.92,24,926. AO accordingly passed the draft assessment order,
aggrieved by which, the assessee preferred its objections before
the DRP. The DRP, vide order dated 13.11.2014, directed the AO
to exclude two companies i.e. Infosys Technologies Ltd and L&T
InfoTech Ltd, from the list of 18 comparables and directed the AO
to re-work out the ALP. Consequent to the directions of the DRP,
the AO re-computed the ALP at Rs.65,21,84,748 and taking into
consideration the fact the assessee has offered an amount of
Rs.4,84,42,265 as voluntary TP addition in the revised return, the
AO determined the shortfall at Rs.14,43,013. Thereafter, while
computing the taxable income of the assessee, the AO excluded
Telecommunication charges attributing to delivery of software
outside India and also the TP adjustment made u/s 92CA of the
Act for the purpose of the deduction u/s 10A of the Act included.
He accordingly determined the taxable income of the assessee at
Rs.5,32,01,336.3.         Aggrieved, the assessee is in appeal before us by
raising the following grounds of appeal:Page 2 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



"TRANSFER PRICING MATTERS - Relating to
determination of Arm's Length Price ("ALP") in
respect of provision of software services provided to
the   Associated      Enterprises    ("AEs")   under
Transactional Net Margin Method ("TNMM")

Based on the facts and circumstances of the case
and in law, the learned Assessing Officer (" AO") /
learned Transfer Pricing Officer ("TPO") and the
Hon'ble Dispute Resolution Panel ('ORP') erred in:Rejection of       transfer          pricing       documentation
maintained1. Rejecting the transfer pricing documentation
maintained by the Appellant in accordance with the
provisions of the Act read with the Income Tax
Rules, 1962 ('Rules') and making adjustment of Rs
14,43,013.Rejection of use of contemporaneous data and
multiple year data2. Using single year data of companies to determine
the arm's length price of the international
transactions without considering the fact that the
same was not available to the Appellant at the time
of   complying     with    the    transfer   pricing
documentation requirements and disregarding the
Appellant's claim for use of multiple year data for
computing the arm's length price.Selection of comparables3. Not undertaking an objective comparative
analysis and interalia selecting the following
companies as comparable to the software services
of the Appellant:• Comp-U-Learn Tech India Ltd;• E Infochips Bangalore Ltd
• KALS Info Systems Ltd; and
• Tata Elxsi Ltd (Seg.)

Rejection of comparablesPage 3 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad4. Not undertaking an objective comparative
analysis and interalia rejecting the following
comparable companies.* Akshay Software Technologies Ltd
* CG VAK Software and Exports Ltd and
* Satyam Computers Services Ltd
Error in margin computation5. Computation of net margins of the following
companies selected as comparables by excluding
provision for bad and doubtful debts:i) CAT Technologies Ltd;ii) E-Infochips Bangalore Ltd;iii)E-Zest Solutions Ltd;iv) Kuliza Technologies Pvt Ltdv) Kals Information Systems Ltd (Seg); andvi) Tata Elxsi Ltd (Seg)
A Skillsoft Company

Adjustment for risk differences6. Not adjusting the net margins of the comparable
companies taking into account the functional and
risk   differences   between    the    international
transaction of the Appellant and the comparable
companies in accordance with the provisions of
Rule 10B(1)(e);Corporate Tax Issues7. Not allowing deduction u/ s lOA of the Act on
voluntary TP adjustment of Rs. 4,84,42,265 offered
by the Appellant.8. Not considering the revised return of income filed
by the Appellant while computing deduction u/ s
lOA of the Act.9. (a) Reducing the internet connection charges of
Rs. 44,28,798 from the export turnover, by
considering the same as expenditure not forming
part of export turnover for arriving at the deduction
u/ s lOA of the Act.(b) Not following the directions of the DRP for
reducing communication charges from both exportPage 4 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



           turnover and total turnover for the purpose of
           computing deduction u/ s 10A of the Act.10. Not granting the Appellant an opportunity to
           provide explanation/clarification on the proposed
           adjustments in draft assessment order and thus
           violated the principles of natural justice.11. Imposition of interest u/ s 234B and 234C of
           the Act.12. Initiating penalty proceedings u/s 271(1)( c) of
           the Act.The Appellant craves, to consider each of the above
           grounds of appeal without prejudice to each other
           and craves leave to add, alter, delete or modify all
           or any of the above grounds of appeal".4.         At the time of hearing, the learned Counsel for the
assessee placed reliance upon the averments made by the
assessee before the authorities below and also on the case law
submitted in the form of paper book before us. The learned DR,
on the other hand, supported the orders of the authorities below.5.         Having regard to the rival contentions and the material
on record, we proceed to dispose of the appeal as under:6.         Ground No.1 being general in nature, needs no
adjudication.7.         Ground No.2 is against the rejection of use of
contemporarious data and multiple year data. This ground is
rejected as it has been held in a number of cases by the
Coordinate Benches of this Tribunal that it is only the data
pertaining to the relevant financial year that has to be consideredPage 5 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



for determination of the ALP and multiple data is not to be
considered.8.         As regards Ground No.3, we find that the assessee's
grievance is against the inclusion of the following companies as
comparable to the assessee:a)            Comp - U-Learn Tech India Ltd
           b)            E Infochips Bangalore Ltd
           c)            KALS Info Systems Ltd and
           d)            Tata Elxsi Ltd (Seg.)9.         At the time of hearing, the learned Counsel for the
assessee has drawn our attention to the assessee's objections
before the TPO and the DRP against these companies and
submitted that on the very same grounds, the Coordinate Bench
of this Tribunal in the case of Pega Systems World Wide (P) Ltd inITA No.1758/Hyd/2014 vide orders dated 16.10.2015 for the A.Y2010-11, has considered and held these companies not to be
comparable to a software development services company like the
assessee. We find that Pega Systems World Wide (P) Ltd and the
assessee are both engaged in similar activities and the A.Y
involved is also the same i.e. A.Y 2010-11. Further, we also find
that the TPO also has taken the very same companies are
comparables in the case of both the assessees. Therefore, we are
satisfied that the decision of the Tribunal in the case of Pega
Systems Worldwide (P) Ltd applies to the case before us as well.
Let us therefore, now consider each of the companies in the light
of the above decision.10.        As far as Comp-U-Learn Tech India Ltd is concerned,
we find that the assessee had objected to taking this company as
comparable before the TPO as recorded at Page 37 of the T.P.Page 6 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



order on the ground that the said company is into software
product development services. The objections of the assessee are
also recorded at Page 7 of the DRP's order. In the case of Pega
System, the Tribunal at Para 9 to 9.2 of its order has considered
and has held that the said company is not comparable to the
assessee therein which is also providing similar services as the
assessee herein. For the sake of ready reference, the relevant
Paras are reproduced hereunder:Comp-U-Learn Tech India Ltd., : 9. This company was selected by TPO
           as one of the comparable companies. Assessee objected stating that
           this company is engaged in two segments i.e. IT enabled services and
           software products solutions as per the annual report and it has
           exceptionally abnormal growth of profits of 160% as against
           industrial norm of 13 to 15%. It was also objected stating that the
           growth is more than 10 times the industrial growth and company in
           its standard financial performance has mentioned that it has spent
           sizeable amount towards R&D in pharmaceutical sector for the
           purpose of coming out with unique products and solutions for
           facilitating operational efficiency, effective inventory management
           and complete financial control for the sector. TPO however,
           considered the exceptional growth was only 1.6 times compared to
           last year and not an exceptional increase. Further, he extracted
           schedule 12, to come to a conclusion that as per annual report
           income from software development was about Rs. 14.11 Crores as
           against total income of Rs. 14.31 Crores. The Soft ware services
           worked out to 98% of total revenue. He concluded that the company
           is predominantly software development services and accordingly
           comparable for software development services provider for the year.
           He also stated that company categorically stated that it was pure
           software development services provider. He also rejected objection
           on strategic acquisitions stating that the same does not have any
           impact on standalone financials of Assessee company. With regard to
           objection on R&D, he considered that it was a general note as no
           expenditure appears to have been booked in P&L A/c. He was of the
           opinion that in most of the cases, R&D will actually be activities
           aimed at cost cutting and improving organizational set up etc. In
           view of the above, the contentions of Assessee are rejected and
           company is retained as comparable.9.1. Relying on the objections raised before DRP who rejected the
           same, Ld. Counsel submitted that this year is an exceptional profit
           year for the company and referred to the report of the company for
           the year under consideration. Vide page 207 of the Paper Book, Ld.
           Counsel referred to the structural initiatives, wherein it was stated
           "your company was originally into business of software development
           and education training. During the past two years, our focus wasPage 7 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



shifted to e-governance solutions to Government departments of
State and Central Governments. Further, as explanatory statement toSection 173(2)of the Companies Act, at item No. 8, it was reported as
under: 'As part of overall growth strategy, company had
exceptionally its operations in its core activity, software development,
e-governance solutions, IT Services, IT enabled services etc'. In Item
No. 9, it was reported that 'the company presently carries on business
of software development, E-Governance solutions, IT and IT enabled
services'. Referring to page 213 of the Paper Book, it was stated that
it has spent sizeable amount towards R&D in pharmaceutical sector
for the purpose of coming out with unique products and solutions for
facilitating operational efficiency, effective inventory management
and complete financial control for the sector. He later referred to the
'strategic acquisitions, alliances and subsidiaries' reported in the
annual report of the company. Referring to pg. 215, it was submitted
that R&D Sector was established to enhance the quality of its
products. Further, referring to revenue recognition in schedule 14
(page 219 of the Paper Book), it was submitted that 'revenue in
respect of brand license fee is accounted on execution of agreement.Revenue for software development is recognized on the basis of
chargeable time or achievement of prescribed milestone as relevant
to each contract. Revenue from sale of software products and
courseware materials is recognized when the same has been
completed with the passing of title or licenses or raising invoices as
the case may be'. Referring to the above, it was submitted that, that
company is in diversified activities and not exclusively as software
development service provider in which Assessee is functioning.
Therefore, the company is functionally different.9.2. After considering the rival contentions, we are of the opinion that
on the basis of information available, Comp-U-Learn Tech India Ltd.,
cannot be selected as a functionally comparable company as it has
diversified activities. Only if there are segmental reports pertaining to
software development services, then only the company can be taken
as comparable company. In the absence of such information, it is very
difficult to hold that the selected company is comparable to Assessee-
company. There is no information about the segmental profits. What
that company has reported in its annual report is 'Income from
software development' which cannot be equated as 'Income from
services'. The software development may include sale of products. In
the absence of segmental information, this case cannot be selected
as comparable. However, whether TPO could obtain any segmental
information is not known to us. we are of the opinion that TPO should
examine whether there are any segmental information which can be
obtained from the company or available in the public domain so as to
compare Assessee's software development services with that of
software development services of Comp-U-Learn Tech India Ltd.
Therefore, we are of the opinion that the issue of selection of this
company is a comparable should be restored to the file of AO/TPO to
examine the available data in public domain/or obtaining
information U/s. 133(6) of the Act for segmental informationPage 8 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



            pertaining to software development services and then decide after
            giving due opportunity to Assessee whether the said company can be
            selected as comparable. For the time being, Assessee's objections are
            considered valid and issue is restored to the file of AO for undertaking
            analysis afresh as far as this company is concerned".11.         With similar directions, this issue is set aside to the
file of the AO for undertaking fresh analysis and re-consideration
in accordance with law.12.         As regards E-Infochips Bangalore is concerned, we find
that the assessee's objections are recorded in the TPO's order at
Page 39 and at Pages 7 & 8 of the DRP's order. We find that in the
case of Pega Systems, this company was also considered at Para 8
to 8.3. The Tribunal has considered the issue at length and held
as under:"E infochips Bangalore Ltd., :8. This company is selected by TPO even though Assessee objected to the
            same (vide page 34 and 35 of the order of TPO). Assessee objected that
            the information for FY. 2009-10 was not available in public domain. It was
            further contended that company is functionally different and is having two
            different segments i.e., software development services and ITES. Company
            offers broad portfolio of services comprising new products, product
            development, product sustenance and maintenance, Product Qualitative
            Analysis (QA) and independent testing hardware and software design etc.
            TPO did not accept Assessee's documents by referring to the schedules like
            research and development, inventories, sales and other incomes. He also
            reported that company in the notes to the accounts has stated that it is
            engaged in the development and maintenance of computer software. The
            production and sales of software cannot be expressed in any generic unit.Thus, TPO rejected Assessee's objections and retained it as a comparable.
            DRP also agreed with TPO.8.1. It was contended that AO relied on the annual report of FY. 2010- 11
            and used the information applicable to FY. 2009-10 from that report, as
            the 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 arbnormally very high
            margin, the reasons of which could not be analyzed in the absence of
            annual report. It was further contended that segmental information was
            not available. On the argument that the said company is providing both
            software development and IT enabled services Ld. Counsel placed thePage 9 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



disclosures in annual report of FY. 2008-09 and annual report of FY. 2009-
10 to submit that the 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 the company now. In view of its
fluctuating profits over the years, this company was not selected as a
comparable earlier or in later years by Revenue. Since the disclosure in
annual report is common, Assessee relied on the decision of Ahmadabad
Bench of ITAT in the case of All Scrips (India) Private Ltd., in ITA No.
771/AHD/2014 for AY. 2009-10, wherein this comparable was rejected on
the basis of lack of segmental information. Assessee relied on Para 10 of
the Co-ordinate Bench order, which is as under:"Para 10 - 'With respect to E-Infochip Bangalore Ltd., we
                find that in the annual accounts of the company, with
                respect to the segment information it is stated that the
                company is primarily engaged in software development
                and I.T enabled services which is considered the 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 the
                aforesaid facts, we are of the view that the aforesaid two
                companies needs to be excluded while working out the
                comparability analysis and therefore uphold the plea of
                the Assessee in excluding the margins of the aforesaid 2
                companies".8.2. Ld. DR, however, referred to the extracts made by TPO in the order to
submit that Assessee is a comparable company with that of Assessee.8.3. After considering the rival contentions and perusing the annual
reports placed on record, we are of the 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, the above company cannot
be considered as comparable on functional basis. Not only that, as pointed
out, segmental information pertaining to the above company is not
available. As seen from the TP orders, documents placed on record, TPO
relied on later year's annual report in extracting the information. Variation
in profitability over the years alone cannot be a reason to exclude the
company from comparability analysis but as rightly pointed, the absence
of segmental information, how much profit earned was on the software
development or ITES cannot be examined. In the absence of clarity on
operational details and comparable company having diversified activities,
we are of the opinion that this company cannot be chosen as a
comparable company in Assessee's case in this assessment year. We are
also aware of the decision of the Co-ordinate Bench given in earlier
assessment year on the reason that segmental reporting was not
available. Be that as it may, since the said company is functionallyPage 10 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



           different from Assessee's activities and in the absence of segmental
           information, we direct AO/TPO to exclude the above while working out the
           comparability analysis. We uphold the plea of Assessee in this regard"Respectfully following the same, we direct the AO to exclude the
said company from the final list of comparables while determining
the ALP of the international transaction.13.        As far as KALS Information Systems Ltd is concerned,
we find that the objections of the assessee are recorded in page 44
of the T.P order and at Pages 7 & 8 of the DRP's order. We find
that for the very same reasons, the Tribunal had directed the said
company to be excluded in the case of Pega Systems World Wide
(P) Ltd cited (Supra). For the purpose of ready reference, the
relevant Paras of the Tribunal's order are reproduced hereunder:" Kals Information Systems Ltd :10. Assessee objected to the above company before TPO stating that
           the above said company is functionally different as it is engaged in the
           development of software and software products. It has inventories
           equivalent to 27% of the revenue. TPO however rejected Assessee's
           contentions stating that company classified itself as pure software
           development service provider. Further, extracting page No. 22 of the
           annual report of the company, TPO opined that the segmental
           information indicates that revenue is shown to have been earned from
           application software and training. Accordingly, he rejected Assessee's
           objections and included as the comparable company. DRP confirmed
           the same.10.1. Assessee's main objection before us is on functionality of the
           comparable company. As seen from the annual report of 2008-09 and
           2009-10 and comparative statement placed by Assessee, the company
           classified itself as 'the company engaged in development of software
           and software products since its inception'. The company consisting of
           STPI unit engaged in development of software and software products
           and a training centre engaged in training of software professionals on
           on-line projects. This indicates that company is engaged in
           development of software and products and its inventory also indicates
           that Assessee has been using its readymade libraries for sales. This
           company was rejected in earlier year on functional analysis by ITAT in
           the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 where in it
           was held that company is engaged in development of software
           products. Since its annual report states the same facts in thisPage 11 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



           assessment year also, we are of the opinion that the company cannot
           be selected as a comparable as it was engaged in development of
           software and software products. Accordingly, Assessee's objections are
           accepted and AO is directed to exclude the company".14.        For the above reasons, this company is directed to be
excluded from the final list of comparables.15.        As regards Tata Elxsi Ltd, we find that the assessee's
objections are recorded at Page 46 of the T.P. order and at page 7
of the DRP's order. We also find that this company is also directed
to be excluded in the case of Pega Systems Worldwide (P) Ltd and
relevant portion of the Tribunal's order at Paras 12 to 12.1 are
reproduced hereunder:"Tata Elxsi Ltd (Seg):12. Before TPO, Assessee contended that the above said company is
           functionally different as it specialized in embedded software
           development technology. It was also objected before TPO that in earlier
           year this company has clearly stated that it cannot be compared to any
           other software services company due to complex nature of its business.Assessee relied on the decisions of ITAT in the case of Conexant Systems
           India Pvt. Ltd. (ITA No.1429/Hyd/2010 and 1978/Hyd/2011) and other
           cases as stated by TPO in page 41 of his order. However, TPO did not
           agree with the objections stating that the company has two segments
           including software development services and revenue from software
           development services is Rs. 33,649 Crores out of total turnover of Rs.
           37,637 Crores, which is at 89.52%. This signified the fact that company is
           predominantly into software development services. TPO rejected the
           objections of Assessee so as DRP.12.1. It was the objection of Assessee that above company is
           predominantly into product design services, Innovation Design
           Engineering and visual computing labs division which are specialized
           services. He referred to the order of ITAT in AY. 2009-10 in the case of
           Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 (supra), wherein this
           company was rejected on the reason that it is engaged in multiple
           segments. There is no break-up in the annual report and data on which
           margin from software services activity only can be computed is also not
           available. Moreover, the company itself has indicated that it cannot be
           compared with any other software service company because of its
           complex nature. Similar view was taken by many of the Co-ordinate
           Benches in earlier years that Tata Elxsi Ltd., cannot be selected as
           comparable company. Consistent with the above view, we are of the
           opinion that a company like Tata Elxsi Ltd., which has complex activitiesPage 12 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



            and segmental information of which is not available cannot be selected
            as comparable company to Assessee. Moreover, as seen from the
            turnover as reported by TPO itself, it was many times Assessee's
            turnover and therefore cannot be exactly considered as a similar
            company unless the nature of activity, the incomes are analyzed in
            detail. Since no segmental data is available, considering the software
            development services as a segment by TPO cannot be considered as
            segmental data, unless the services rendered by that company are
            similar to the services rendered by Assessee. In view of this, we are of
            the opinion that this company cannot be selected as comparable. AO is
            directed to exclude the same".16.         For the above reasons, we direct the AO to exclude this
Company also from the final list of comparables. Accordingly,
Ground of appeal No.3 is allowed.17.         As regards Ground No.4 against the exclusion of three
companies which have been selected by the assessee as
comparable to the assessee, the learned Counsel for the assessee
submitted that if Ground of appeal No.3 is allowed the assessee's
case would fall within (+/_) 5% of the margin of the comparable
companies and thereafter adjudication of this ground of appeal
would become only academic. Since we have already allowed
Ground No.3 and directed the exclusion of the companies
mentioned therein, we do not see any reason to adjudicate this
ground of appeal at this stage. This ground is accordingly
rejected.18.         As far as Ground No.5 is concerned, it is the case of
the assessee that the margins of the comparable companies have
been computed erroneously by not considering the provision for
bad and doubtful debts from their operating income. He
submitted that the issue is covered by the decision of the
Coordinate Bench of this Tribunal in the case ofKenexa
Technologies Private Ltd vs. DCITin ITA No.243/Hyd/2014Page 13 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



wherein at Paras 40 to 42, the Tribunal has held that the bad
debts and the provision for bad and doubtful debts are part of the
operating expenses and are to be taken into consideration while
computing     the     comparable            companies.            For      the         sake   of
convenience, the relevant Paras are reproduced hereunder:"40. With respect to ground No. 2.6.3 and 2.6.4, it was argued by the
            learned counsel that the TPO erred in computing the margins of
            comparable companies by considering the provision for bad and doubtful
            debts and bad debts as non-operative expenditure.41. We place reliance on the decision of ITAT Delhi Bench in the case ofSony India Pvt. Ltd. vs. DCIT, ITA No. 1189/Del/2005, 819/Del/2007 and
            820/Del/2007. The relevant portion is extracted below:"106.2 Thus, creation of unpaid liability and its write back
                            is a normal incident of a business operation which is
                            carried everywhere in accounts to have true picture of
                            profits of the relevant period.Having regard to statutory provisions, it cannot be said
                            that provisions or writing back of liability is not part of
                            operating profit or would not be taken into consideration
                            for computing the same.We can therefore make a general observation that all
                            business 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 written back in the profit and loss
                            account as not forming part of the operating profit of the
                            taxpayer. Accordingly claim of the taxpayer is accepted.107. The next item relates to balances written back. In our
                            considered opinion, finding given in respect of provisions
                            written back is equally applicable to balances written back
                            more particularly when ld. CIT(A) has not given any
                            separate finding and the Transfer Pricing Officer has said
                            nothing specifically 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 the operating expenses and we direct
            the TPO to re-compute the margins of comparable companies by including
            bad debts and provision for bad and doubtful debts as operating expenses
            for the purpose of computing profit and loss of comparable companies"Page 14 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad19.        Respectfully following the decision of the Coordinate
Bench we direct the AO to treat the provisions for bad and
doubtful debts of the comparable companies as part of their
operating expenses and to re-compute the margins of the
comparable companies accordingly. This ground of appeal is
treated as allowed for statistical purposes.20.        As regards Ground No.6 against not adjusting the net
margins of the companies by taking into account the functional
and risk differences between the international taxation of the
assessee and the comparable companies, we reject the same as
adjudication of the same would only result in an academic
exercises consequent to the allowing of Ground No.3 in the
appeal.21.        As regards Grounds No. 7 & 8 are concerned, we find
that they are against the non-allowing of deductionu/s 10Aof the
Act on voluntary TP adjustment of Rs.4,84,42,265 offered by the
assessee by not considering the revised return filed by the
assessee for computing the deductionu/s 10Aof the Act. We find
that this issue is covered in favour of the assessee by the
judgment of the Hon'ble Karnataka High Court in the case of
iGATE Global Solutions Ltd in ITA No.453/2008 dated 17.6.2014
wherein the decision of the Tribunal in ITA Nos. 248 &
249/Bang/2007 was confirmed. We find that in the said order the
Tribunal has at Paras 21 to 23 held as under:"21. The last grievance is in respect of not allowing
           deduction under section 10A on the adjustment
           made by the assessee to the arm's length price.22. In the instant case, the assessee company
           entered into transaction with associated enterprise.Page 15 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



The assessee company determined arm's length
price and accordingly made adjustment to the income
because arm's length price determined was more
than the consideration, at which the transactions
were shown in the books of account. The deduction
under section 10A has not been allowed as per
proviso to section 92C(4). As per this proviso, no
deduction under section 10A or 10B or under
Chapter VI·A is to be allowed in respect of amount of
income, by which the total income of the assessee is
enhanced after computation of income under the sub-
section. The learned Authorized Representative
during the course of proceedings has referred to the
word 'enhanced'. In case the income is enhanced,
then deduction is not permissible. However, in the
instant case, income has not been enhanced because
the same was already returned by the assessee. In
the Memo Explaining the Provisions of Finance Bill,
2006, it has been mentioned as under :-[2006) 201 CTR (St) 147: [2006) 281 ITR (St) 196

"Under sub-section (4), it has been provided that on
the basis of arm's length price so determined, the
Assessing Officer may compute the total income of an
assessee. The first proviso to sub-section (4) provides
that where the total income of the assessee as
computed by Assessing Officer is higher than the
income declared by the assessee, no deduction
under section 10A or section 10B or under Chapter
VI·A will be allowed in respect of the amount of
income, by which the total income of the assessee is
enhanced after computation of income under sub-
section."23. From the Memo Explaining the Provisions of
Finance Bill, 2006 as well as from the literal
meaning of the word 'enhanced', it is clear that if
income increased, as a result of computation of arm's
length price, then such increase is not to be
considered for deduction under section 10A. In the
instant case, the assessee himself has computed the
arm's length prices and has disclosed the income on
the basis of arm's length prices. It is not a case,
where there is an enhancement of income due toPage 16 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad



            determination of arm's length price. Hence, it is held
            that assessee was entitled to deduction under
            section 10A in respect of income declared in the
            return of income on the basis of computation of arm's
            length price".22.         Respectfully following the same, we direct the AO to
allow the deductionu/s 10Aof the Act on the ALP adjustment
voluntarily offered by the assessee. Grounds No. 7 & 8 are
accordingly allowed.23.         As regards Ground No.9 against the exclusion of the
internet connection charges only from the export turnover while
computing deductionu/s 10Aof the Act, we direct the AO to
exclude them from both the export turnover as well as total
turnover for the purpose of computationu/s 10Aof the Act as
held by the Hon'ble Karnataka High Court in the case of Tata
Elxsi Ltd, reported in 349 ITR 98 (Karn.) This ground of appeal is
accordingly allowed.24.         As regards Ground No.10 against not providing
opportunity    to   the    assessee         to      explain       on     the         proposed
adjustments in the draft assessment order, the learned Counsel
for the assessee did not advance any arguments on this ground of
appeal. Therefore, this ground of appeal is rejected.25.         Ground No.11 is against the levy of interestu/s 234Band234Cof the Act and is consequential in nature. Therefore, the
AO is directed to give consequential relief to the assessee, if any,
while giving effect to this order.Page 17 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad26.           As regards Ground No.12 is concerned, it is against
the initiation of penalty proceedingsu/s 271(1)(c)of the Act, we
reject the same as it is premature.27.           In the result, assessee's appeal is partly allowed.Order pronounced in the Open Court on 23rd September, 2016.Sd/-                                              Sd/-
         (S.Rifaur Rahman)                                (P. Madhavi Devi)
        Accountant Member                                  Judicial Member

Hyderabad, dated 23rd September, 2016.
Vinodan/sps
Copy to:1  M/s.SumTotal Systems India (P) Ltd, 7th Floor, Building 2B,
   Maximus Towers, K.Raheja I.T. Park, Madhapur, Hyderabad
   500081
2  Dy.CIT, Circle 3(2), 7th Floor, IT Towers, AC Guards, Hyderabad
3  DRP Hyderabad
4  CIT -International Taxation, IT Towers, 10-2-3 AC Guards,
   Hyderabad
5   CIT-3 Hyderabad
6  The DR, ITAT Hyderabad
7  Guard File

                                   By OrderPage 18 of 18