M/s. Tech Books Electronics Pvt. Ltd., New Delhi V. ACIT, New Delhi

CO 15/DEL/2013

• Counselvise Citation: [2015] 123 COUNSELVISE.COM (IT) 1696 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s) 15 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 02-12-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 30-11-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 17-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: SANDEEP S KARH AIL S
• Keywords: Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Right to appeal
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM ITA NO.6081/DEL/2012 ASSESSMENT YEAR : 2007-08 ACIT, CIRCLE 16(1), NEW DELHI. VS. TECH BOOKS ELECTRONICS PVT. LTD., A-28, MOHAN COOPERATIVE INDUSTRIAL ESTATE, MATHURA ROAD, NEW DELHI. PAN: AAACT6050A CO NO.15/DEL/2013 (ITA NO.6081/DEL/2012) ASSESSMENT YEAR : 2007-08 TECH BOOKS ELECTRONICS PVT. LTD., A-28, MOHAN COOPERATIVE INDUSTRIAL ESTATE, MATHURA ROAD, NEW DELHI. PAN: AAACT6050A VS. ACIT, CIRCLE 16(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESWAR RAO, & SHRI SANDEEP S. KARHAIL, ADVOCATES DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT, DR ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 2 DATE OF HEARING : 30.11.2015 DATE OF PRONOUNCEMENT : 02 .12.2015 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE REVENUE AND CROSS OBJECTION BY THE ASSESSEE ARISE OUT OF THE ORDER PASSED BY THE CIT(A) ON 3.10 .2012 IN RELATION TO THE ASSESSMENT YEARS 2007-08. 2. THE ONLY ISSUE RAISED BY THE REVENUE IN ITS APPE AL IS AGAINST THE DELETION OF ADDITION OF RS.29,69,715/- MADE BY THE ASSESSING OFFICER (AO) ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN C OMPUTING THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION . THE ASSESSEE IN ITS CROSS OBJECTION IS AGGRIEVED AGAINST EXCLUSION OF O NE COMPANY, NAMELY, VISHAL INFORMATION TECHNOLOGY LTD., FROM THE FINAL SET OF COMPARABLES AS APPROVED BY THE LD. CIT(A). 3.1. BRIEFLY STATED, THE FACTS OF THE CASE AS RECOR DED IN THE TPOS ORDER ARE THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF APTARA. ITS PRIMARY FUNCTIONS INCLUDE THE PROVISION OF ELECTRONIC PUBLI SHING SERVICES, SUCH AS, COMPUTERIZED DATA CONVERSION, WEB-PAGE CONSTRUC TION, DATA ENTRY/KEY ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 3 BOARDING, COPYEDITING, AND CAD/CAM/GIM MAPPING SERV ICES TO ITS AE. THE ASSESSEE UNDERTOOK ONE INTERNATIONAL TRANSACTIO N OF: PROVISION OF IT-ENABLED DATA CONVERSION SERVICES VALUED AT RS.4 ,38,06,911/-. IT USED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF ITS I NTERNATIONAL TRANSACTION. PROFIT LEVEL INDICATOR (PLI) OF OPERA TING PROFIT/TOTAL COST (OP/TC) WAS USED. THE ASSESSEE REPORTED ITS OP/TC AT 15.50% AND 15 COMPARABLE COMPANIES WITH THEIR WEIGHTED AVERAGE MA RGIN OF THREE FINANCIAL YEAR ENDINGS 2005 TO 2007 AT 21.51%. THE AO REFERRED THE MATTER OF DETERMINATION OF THE ALP OF THIS INTERNAT IONAL TRANSACTION TO THE TRANSFER PRICING OFFICER (TPO). THE TPO REQUIR ED THE ASSESSEE TO FURNISH MARGIN OF COMPARABLES USING CURRENT YEAR DA TA ALONE, WHICH WAS CALCULATED BY THE ASSESSEE AT 14.61%. THE TPO EXAM INED THE LIST OF COMPARABLE COMPANIES GIVEN BY THE ASSESSEE. AFTER MAKING CERTAIN ALTERATIONS, HE SHORTLISTED 11 COMPANIES AS COMPARA BLE WHICH HAVE BEEN TABULATED ON PAGES 16 AND 17 OF HIS ORDER WITH TH EIR RESPECTIVE OP/TC, AS UNDER :- ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 4 S.NO. COMPANY NAME OP/TC 1. ACE SOFTWARE EXPORTS LTD. 2.03% 2. ALLSEC TECHNOLOGIES LIMITED 27.21% 3. APEX ADVANCED TECHNOLOGY PVT. LTD. 39.73% 4. COSMIC GLOBAL LIMITED 11.31% 5. CG-VAK 4.97% 6. GENESYS INTERNATIONAL CORPORATION LIMITED 12.52% 7. MAPLE E-SOLUTIONS LIMITED 33.96% 8. R. SYSTEMS INTERNATIONAL LTD. 13.54% 9. SPANCO LTD. 24.82% 10. TRITON CORP. LIMITED 34.49% 11. VISHAL INFORMATION TECHNOLOGIES LIMITED 51.64% AVERAGE 23.29% 3.2. THE TPO ACCEPTED THE ASSESSEES COMPUTATION OF OP/TC AT 15.50%, AS UNDER :- PARTICULARS AMOUNT (RS.) IT ENABLED SERVICES 4,38,06,911 SCRAP SALES 1,62,019 MISCELLANEOUS INCOME 62,150 TOTAL OPERATING INCOME 4,40,31,080 EXPENDITURE TOTAL OPERATING EXPENSES 3,81,22,147 OP 59,08,933 OP/TC 15.50% ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 5 3.3. BY CONSIDERING THE ARMS LENGTH MARGIN OF COMP ARABLES AT 23.29%, THE TPO WORKED OUT TRANSFER PRICING ADJUSTMENT TO T HE TUNE OF RS.29,69,715/-. THE AO MADE THIS ADDITION VIDE HIS ORDER DATED 28.1.2011 PASSED U/S 143(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED `THE ACT). THE ASSESSEE CHALLENGED TH E ASSESSMENT ORDER BEFORE THE LD. CIT(A), WHO DELETED THE ENTIRE ADDIT ION BY EXCLUDING VISHAL INFORMATION TECHNOLOGIES LIMITED FROM THE CO MPARABLES SELECTED BY THE TPO; ALTERING THE FIGURE OF PROFIT MARGIN OF ACE SOFTWARE EXPORTS LTD.; AND INCLUDING ASK ME INFO HUBS LTD. IN THE LI ST OF COMPARABLES WHICH WAS EXCLUDED BY THE TPO. BOTH THE SIDES ARE I N APPEAL ON THEIR RESPECTIVE STANDS. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL. AT THE OUTSET, WE WANT TO MAKE IT CLEAR T HAT THERE IS NO DISPUTE ON THE SELECTION OF TNMM AS THE MOST APPROPRIATE ME THOD APPLIED BY THE ASSESSEE AS ACCEPTED BY THE TPO; COMPUTATION OF THE ASSESSEES OWN ALP WITH ITS OP/TC AT 15.50%; ADOPTION OF FIGURES O F OP/TC OF COMPARABLES ON THE BASIS OF CURRENT YEAR DATA ALONE INSTEAD OF WEIGHTED ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 6 AVERAGE OF MULTIPLE YEARS DATA THAT WAS INITIALLY C ONSIDERED BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY REPORT. THE AREA OF DISPUTE IS ONLY IN RESPECT OF THREE COMPARABLE COMPANIES, VIZ., VIS HAL INFORMATION TECHNOLOGIES LTD., ACE SOFTWARE EXPORTS LTD AND ASK ME INFOR HUBS LTD. 5.1. IN ORDER TO PRECISELY ASCERTAIN THE COMPARA BILITY OR OTHERWISE OF THE COMPANIES IN DISAGREEMENT, WE FIRST NEED TO FIN D OUT THE EXACT NATURE OF SERVICES RENDERED BY THE ASSESSEE. THE TRANSFER PRICING STUDY REPORT OF THE ASSESSEE IS AVAILABLE ON RECORD WHICH GIVES THE PROFILE OF THE ASSESSEE EXACTLY ON THE SAME LINES AS HAS BEEN INCORPORATED ABOVE FROM THE RELEVANT PART OF THE TPOS ORDER. WE HAVE GONE THR OUGH THE MASTER SERVICES AGREEMENT (HEREINAFTER THE `AGREEMENT) DA TED 1.10.2003, BETWEEN THE ASSESSEE AND ITS AE, NAMELY, TECH ENTER PRISES INC., A FAIRFAX BASED INCORPORATION HAVING ITS REGISTERED O FFICE AT FAIRFAX, VIRGINIA, USA. THIS AGREEMENT IS VALID FOR THE YEAR UNDER CONSIDERATION AS WELL, WHOSE COPY IS AVAILABLE AT PAGE 263 ONWARD S OF THE PAPER BOOK. AS PER THIS AGREEMENT, THE ASSESSEE SPECIALIZES IN PROVISION OF TECHNICAL ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 7 SERVICES, SUCH AS, DATA CONVERSION, WEB-PAGE CONSTR UCTION, DATA ENTRY/KEY BOARDING AND SOFTWARE DEVELOPMENT. THE ASSESSEE UND ER THIS AGREEMENT HAS UNDERTAKEN TO RENDER INCLUDED SERVICES WHICH HAVE BEEN DESCRIBED IN EXHIBIT-A. THIS EXHIBIT IS `STATEMENT OF WORK WHICH EMBODIES THE TERMS OF THE RELATIONSHIP BETWEEN THE ASSESSEE AND TECH ENTERPRISES INC. PARA 2 OF THE EXHIBIT DIVULGES THAT THE ASSESSEE IS RESPONSIBLE FOR PROVIDING THE SERVICES DEFINED IN PARA 3 BELOW, WHI CH IS AS UNDER:- 3.1 NATURE OF SERVICES: THE NATURE OF WORK THAT T ECHBOOKS INTERNATIONAL PVT. LTD. PERFORMS IS ELECTRONIC PUBL ISHING AND PRE PRESS SERVICES INCLUDING PRINT READY FILES TO PRINT ERS AND ELECTRONIC DELIVERABLES FOR ON-LINE PUBLISHING, IN ADDITION TO SERVING THE PUBLISHERS, TECHBOOKS ALSO WORKS WITH C ORPORATE AND INFORMATION AGGREGATORS TO COVERT DATA FROM ONE FIL E FORMAT TO ANOTHER WHICH INCLUDE CONVERSION OF LEGACY MATERIAL TO ELECTRONIC FORMATS, CONVERSION FROM ONE ELECTRONIC TO ANOTHER FOR VARIOUS NEEDS OF INFORMATION PROCESSING, DATA MANAGEMENT, S TORAGE, ARCHIVAL AND RE-PURPOSING OF INFORMATION FOR VARIOU S END USES AS REQUIRED BY THE CUSTOMERS. 5.2. THE SERVICES SO AVAILED BY THE ASSESSEES AE ARE ULTIMATELY GIVEN TO END-CUSTOMERS WHOSE LIST HAS BEEN GIVEN IN PARA 3.2 OF THE AGREEMENT WHICH INCLUDES: BLACKWELL PUBLISHING, JOHN WILEY AN D SONS LTD., ELSEVIER SCIENCE, CAMBRIDGE UNIVERSITY PRESS, SPRIN GER SBM, I ARCHIVES AND PEARSON EDUCATION. PARA 5 OF THE AGRE EMENT OUTLINES THE ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 8 MANNER OF REMUNERATION TO BE PAID TO THE ASSESSEE, WHICH IS 100% OF THE ACTUAL COSTS AND EXPENSES INCURRED IN THE PROVISION OF SUCH SERVICES PLUS AN APPROPRIATE MARK-UP. THE ABOVE NARRATION OF THE RELEVANT CLAUSES OF THE AGREEMENT DELINEATES THE NATURE OF WORK CARRIED OUT BY THE ASSESSEE, WHICH PRECISELY IS ELECTRONIC PUBLISHING AND PRE-PR ESS SERVICES INCLUDING PRINT READY FILES TO PRINTERS AND ELECTRONIC DELIVE RABLES FOR ON-LINE PUBLISHING BY CONVERTING DATA FROM ONE FILE FORMAT TO ANOTHER, MANAGING AND STORING SUCH DATA FOR THE ULTIMATE USE AS REQUI RED BY THE CUSTOMERS. WITH THIS BACKGROUND OF THE FUNCTIONAL PROFILE OF T HE ASSESSEE IN MIND, WE WILL EXAMINE THE COMPARABILITY OF THE COMPANIES UNDER CHALLENGE. I) VISHAL INFORMATION TECHNOLOGIES LTD . 6.1. THE ASSESSEE HAS RESISTED THE INCLUSION OF THI S COMPANY AS COMPARABLE BY CONTENDING THAT IT IS ENGAGED IN FOUR PRIMARY AREAS OF DATA DIGITIZATION; E-PUBLISHING; DIGITAL LIBRARY SO LUTIONS; AND PRINT ON DEMAND CONVERSION. IT WAS ALSO SUBMITTED THAT THIS COMPANY INCURRED MORE THAN 65% OF ITS TOTAL COSTS ON OUTSOURCING OF CONTRACTS TO EXTERNAL VENDORS AND ITS OWN EMPLOYEES COST WAS ONLY 3% OF I TS TOTAL COST, IN ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 9 CONTRAST TO THE ASSESSEE ADOPTING AN ALTOGETHER DIF FERENT BUSINESS MODEL OF RENDERING IN-HOUSE SERVICES. THE TPO HELD THIS COMPANY TO BE FUNCTIONALLY SIMILAR AND, ACCORDINGLY, INCLUDED IT IN THE LIST OF COMPARABLES WITH ITS OP/TC AT 51.64%. THE LD. CIT(A ) ECHOED THE ASSESSMENT ORDER ON THIS POINT. THE ASSESSEE IS AGG RIEVED AGAINST THE TREATMENT OF THIS COMPANY AS COMPARABLE. 6.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS COMPANY IS, INTER ALIA , ENGAGED IN E- PUBLISHING, WHICH IS AN ACTIVITY SIMILAR TO THE ONE DONE BY THE ASSESSEE. EVEN THE ACTIVITIES OF DATA DIGITISATION AND PRI NT ON DEMAND CONVERSION ARE ALSO SIMILAR TO THOSE UNDERTAKEN BY THE ASSESSEE. HOWEVER, DESPITE HAVING FUNCTIONALLY SIMILARITY TO A GREATER EXTENT, THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE BECAUSE OF A DIFFERENT BUSINESS MODEL ADOPTED BY IT. ITS ANNUAL ACCOUNTS F OR THE YEAR ENDING 31.3.2007 ARE AVAILABLE ON RECORD. IT CAN BE SEEN THAT ITS `OPERATING EXPENSES ARE TO THE TUNE OF RS.17.35 CRORE OUT OF WHICH A SUM OF RS.13.12 CRORE IS ON ACCOUNT OF DATA ENTRY CHARGES & VENDOR ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 10 PAYMENTS. THIS SHOWS THAT 75% OF THE OPERATING EXP ENSES OF THIS COMPANY ARE ON OUTSOURCING. AS AGAINST THIS, THE A SSESSEES JOB WORK TO TOTAL COST RATIO IS ONLY 5%. THIS DEMONSTRATES THA T VISHAL INFORMATION TECHNOLOGIES LTD., THOUGH IN ALMOST SIMILAR LINE OF BUSINESS FUNCTIONALLY, CEASES TO BE COMPARABLE, BECAUSE OF T HE ADOPTION OF A DIFFERENT BUSINESS MODEL AS PER WHICH THE ACTIVITIE S ARE MOSTLY OUTSOURCED. IN CONTRAST, THE ASSESSEE IS PROVIDING MAJORITY OF ITS ACTIVITIES IN-HOUSE. IT GOES WITHOUT SAYING THAT T HERE IS A MARKED DIFFERENCE IN PROFITABILITY WHEN THE SERVICES ARE O UTSOURCED OR PROVIDED IN-HOUSE. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBU NAL IN SEVERAL CASES REMOVING VISHAL INFORMATION TECHNOLOGIES LTD. ON TH E BASIS OF SUCH BUSINESS MODEL. UNDER SUCH CIRCUMSTANCES, WE CONSID ER VISHAL INFORMATION TECHNOLOGIES LTD., AS NOT COMPARABLE AN D DIRECT TO ELIMINATE IT FROM THE LIST OF COMPARABLES. THE VIE W TAKEN BY THE LD. CIT(A) IN CONTINUING TO INCLUDE THIS COMPANY IN THE FINAL SET OF COMPARABLES IS, THEREFORE, OVERTURNED AND THE ASSES SEES SOLE EFFECTIVE GROUND IN CROSS OBJECTION IS ALLOWED. ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 11 II) ACE SOFTWARE EXPORTS LTD . 7.1. THE ASSESSEE CONSIDERED THIS COMPANY AS COMPAR ABLE IN ITS TRANSFER PRICING STUDY REPORT BY COMPUTING ITS OP/TC FOR THE YEAR AT 8.24%. THE TPO CONTINUED TO INCLUDE THIS COMPANY IN THE LIST O F COMPARABLES, BUT, RE-WORKED OUT ITS OP/TC AT 2.03%. THE LD. CIT(A) C ONCURRED WITH THE SUBMISSIONS ADVANCED ON BEHALF OF THE ASSESSEE AND RESTORED THE ASSESSEES STAND. THE REVENUE IS AGGRIEVED AGAINST THE COMPUTATION OF OP/TC OF THIS COMPANY AT A LOWER LEVEL. 7.2. THE LD. DR RAISED A PRELIMINARY OBJECTION TO T HE EFFECT THAT ACE SOFTWARE EXPORTS LTD. IS FUNCTIONALLY DIFFERENT AND , HENCE, THE SAME SHOULD BE EXCLUDED IN TOTALITY. ON A SPECIFIC QUES TION AS TO WHETHER THE TPO DISPUTED THE FUNCTIONAL SIMILARITY OF THIS COMP ANY WITH THE ASSESSEE, THE LD. DR SUBMITTED THAT THOUGH THE TPO ACCEPTED IT AS COMPARABLE, BUT, IN REALITY, THIS COMPANY IS NOT CO MPARABLE. THAT BEING SO, HE CONTESTED THE INCLUSION OF THIS COMPANY IN T HE FINAL LIST OF COMPARABLES. THE LD. AR OPPOSED THE DEPARTMENTAL S TAND OF EXCLUDING A COMPANY WHICH WAS CONSIDERED BY THE TPO HIMSELF AS COMPARABLE. ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 12 7.3. A BRIEF QUESTION WHICH FALLS FOR OUR CONSIDE RATION IS WHETHER THE LD. DR CAN LEGALLY CHALLENGE THE ACTION OF THE AO IN CO NSIDERING A PARTICULAR COMPANY AS COMPARABLE AT HIS OWN WITHOUT ANY EXTERN AL INTERFERENCE BY SOME INCOME-TAX AUTHORITY. IN THIS REGARD, IT IS NO TED THAT THE REVENUE HAS PREFERRED APPEAL AGAINST THE DELETION OF ADDITI ON ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. ACCORDINGLY, WHAT HAS BEEN CHALLENGED IS THE DECISION GIVEN BY THE LD. CIT(A) ON ISSUES DECI DED AGAINST THE REVENUE, WHICH IN RELATION TO ACE SOFTWARE LTD., IS THE CALCULATION OF ITS PROFIT RATIO. WHEN THE TPO HIMSELF CONSIDERED THIS COMPANY AS COMPARABLE, IN OUR CONSIDERED OPINION, THERE CAN BE NO REASON FOR THE LD. DR TO BE AGGRIEVED AGAINST ITS INCLUSION IN THE APP EAL FILED BEFORE THE TRIBUNAL. THE DEPARTMENT CAN TAKE RECOURSE TO THE O THER LEGAL REMEDIES, IF ANY, AVAILABLE AS PER LAW IN SO FAR AS ITS GRIEV ANCE AGAINST THE DECISION OF THE AO/TPO IS CONCERNED. 7.4. EVEN RULE 27 OF THE ITAT RULES, 1963, DOES NOT COME TO THE RESCUE OF THE LD. DR FOR ASSAILING THE CORRECTNESS OF THE ORDER OF THE AO/TPO IN APPEAL BEFORE THE TRIBUNAL. ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 13 7.5. THIS RULE PROVIDES THAT : THE RESPONDENT, THOUGH HE MAY NOT HAVE APPEALED, MAY SUPPORT THE ORDER APPEALED AGAINST ON ANY OF THE GROUNDS DECIDED AGAINST HIM. THIS RULE MANIFESTS THAT THE RESPONDENT, WITH OR WITHOUT HAVING FILED ANY CROSS APPEAL OR CROSS OBJECTION CAN SUPPORT THE IMPUGNED ORDER ON ANY OF THE GROUNDS DECIDED AGAINST HIM. TWO ESSENTIAL ELEMENTS OF THE RULE 27 COME TO THE FORE. FIRST IS THE CONDITION PRECEDENT FOR INVOKING THIS RULE A ND THE SECOND IS SCOPE OF INTERFERENCE BY THE RESPONDENT. INSOFAR AS THE F IRST ELEMENT IS CONCERNED, WE FIND THAT THIS RULE HAS BEEN ENSHRINE D WITH A VIEW TO DISPENSE JUSTICE TO A RESPONDENT WHO IS OTHERWISE L EGALLY ENTITLED TO ASSAIL THE CORRECTNESS OF THE IMPUGNED ORDER BY FIL ING APPEAL OR CROSS OBJECTION, WHETHER OR NOT ACTUALLY FILED. THIS IS B ORNE OUT FROM THE EXPRESSION ` THOUGH HE MAY NOT HAVE APPEALED USED IN THE CONTEXT OF A RESPONDENT. THIS AMPLY INDICATES THE EXISTENCE OF A PRE-RIGHT OF THE RESPONDENT TO APPEAL, WHICH MAY HAVE REMAINED UNAVA ILED. THIS RULE CANNOT HELP THE RESPONDENT IN A SITUATION WHERE HE IS OTHERWISE DEBARRED FROM FILING CROSS APPEAL OR CROSS OBJECTION ON A PA RTICULAR POINT. IF NO ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 14 RIGHT TO FILE AN APPEAL OR CROSS OBJECTION STATUTOR ILY VESTS IN THE RESPONDENT ON A PARTICULAR POINT, THEN IT CANNOT BE INFERRED INDIRECTLY BY TAKING RECOURSE TO RULE 27. WE HAVE NOTICED ABOVE THAT THOUGH THE REVENUE HAS A RIGHT TO FILE CROSS APPEAL OR CROSS O BJECTION AGAINST THE ADVERSE ORDER OF THE CIT(A), BUT IT HAS NO RIGHT TO FILE APPEAL AGAINST THE VIEW TAKEN BY THE AO/TPO HIMSELF, WHICH WAS NOT DIS TURBED IN THE FIRST APPEAL. SINCE THE CONDITION PRECEDENT FOR SEEKING R ELIEF IN TERMS OF THE SECOND ELEMENT OF RULE 27 IS WANTING, THE VERY RIGH T OF TAKING RECOURSE TO RULE 27 IS LOST. AS SUCH, WE ARE NOT INCLINED TO AC CEPT THE ARGUMENT OF THE LD. DR TO TREAT ACE SOFTWARE EXPORT LTD. AS FUNCTIO NALLY DISSIMILAR AND DELETE IT FROM THE LIST OF COMPARABLES, AS THE SAME HAS BEEN TREATED BY THE TPO AS COMPARABLE AND THE LD. CIT(A) HAS NOT TI NKERED WITH THIS CONCLUSION OF THE AO/TPO. 7.6. ON MERITS, THE CONTROVERSY ROTATES AROUND T HE COMPUTATION OF OP/TC OF THIS COMPANY. THE TPO COMPUTED IT PROFIT MARGIN ON PAGE 15 OF HIS ORDER IN THE FOLLOWING MANNER:- ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 15 OPERATING INCOME: 4.53 CRS. OPERATING EXPENSES: 4.44 CRS. OPERATING PROFIT: 0.09 CRS OP/OE: 2.03% 7.7. THE ASSESSEE CONTENDED BEFORE THE LD. CIT(A) T HAT A SUM OF RS.42,44,736/- HAS BEEN DEBITED BY THIS COMPANY TOW ARDS COST VARIANCE AND SHOWN UNDER THE HEAD INCOME AS A NE GATIVE FIGURE WHICH THE TPO OMITTED TO CONSIDER IN COMPUTING OP/TC OF T HIS COMPANY. THE LD. CIT(A) AGREED THAT STOCK VARIANCE OF RS.42.44 LAC WAS LIABLE TO BE CONSIDERED FOR CALCULATING ITS OP/TC. HE ACCEPTED THE ASSESSEES CALCULATION OF OP/TC OF THIS COMPANY AT (-) 6.98% A S UNDER:- OPERATING INCOME 4.53 CR. OPERATING EXPENSES (OE) INCLUSIVE OF STOCK VARIANCE 4.87 CR. OPERATING PROFIT (OP) (0.34) CR. OP/OE (6.98%) ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 16 7.8. NOW, THE QUESTION IS WHETHER THE CALCULATIO N OF OP/TC OF ACE SOFTWARE EXPORTS LTD. AS DONE BY THE CIT(A) IS CORRECT ? PROFIT LEVEL INDICATOR HAS BEEN TAKEN AS OPERATING PROFIT TO TOTAL COST. `OPERATING PROFIT REFERS TO NET PROFIT AS INCREASE D BY NON-OPERATING EXPENSES, SUCH AS, INTEREST EXPENSE AND AS REDUCED BY NON-OPERATING INCOMES, SUCH AS, GAIN ON SALE OF ASSETS. THE CALCU LATION OF OPERATING INCOME AT RS.4.53 CRORE OF THIS COMPANY AS DETERMIN ED BY THE LD. CIT(A) REMAINS AT THE SAME LEVEL AS FOUND BY THE TP O. DIFFERENCE HAS ARISEN IN THE CALCULATION OF THE FIGURE OF `TOTAL O PERATING COST, WHICH REFERS TO COST OF GOODS SOLD (COGS) PLUS OTHER OPER ATING EXPENSES, SUCH AS, SELLING EXPENSES AND DEPRECIATION. COST OF GOOD S SOLD IS EQUAL TO OPENING STOCK PLUS PURCHASES AND OTHER DIRECT EXPEN SES DEBITED TO THE TRADING ACCOUNT AS REDUCED BY THE AMOUNT OF CLOSIN G STOCK. THIS SHOWS THAT COGS CANNOT BE COMPUTED WITHOUT CONSIDERING TH E FIGURES OF OPENING AND CLOSING STOCKS. IF WE ADOPT THE FIGURE OF DIRECT EXPENSES DEBITED TO THE TRADING ACCOUNT WITHOUT ADJUSTING IT WITH OPENING AND CLOSING STOCK VALUES, THE RESULTANT FIGURE CANNOT B E TERMED AS COGS. ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 17 7.9. COMING BACK TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE LD. CIT(A) HAS COMPUTED `TOTAL COSTS BY CONSIDERING CO GS, THAT ALSO INCORPORATES THE EFFECT OF THE AMOUNT OF OPENING AN D CLOSING STOCKS, WHICH WAS OMITTED BY THE TPO. AS SUCH, WE COUNTENAN CE THE VIEW TAKEN BY THE LD. FIRST APPELLATE AUTHORITY IN ADDING THE AMOUNT OF OPENING STOCK OF THIS COMPANY TO THE OTHER OPERATING EXPENSES AND THEN REDUCING THE AMOUNT OF ITS CLOSING STOCK, TO FIND OUT THE AMOUNT OF `TOTAL OPERATING COSTS AT RS.4.87 CRORE. CONSEQUENTLY, THE OBJECTIO N TAKEN BY THE DEPARTMENT IS REPELLED. III) ASK ME INFO HUBS LTD . 8.1. THE ASSESSEE CONSIDERED THIS COMPANY AS COMPAR ABLE. THE TPO REFUSED TO ACKNOWLEDGE IT AS COMPARABLE BY NOTICING THAT THERE WAS A DECLINING TURNOVER AND DECLINING PROFITABILITY OF T HIS COMPANY WHICH INDICATED THAT IT WAS IN A NEGATIVE PHASE OF ECONOM IC CYCLE. THE LD. CIT(A) FOUND THE TPOS OBSERVATIONS AS FACTUALLY UN FOUNDED AND RESTORED THE INCLUSION OF THIS COMPANY IN THE FINAL LIST OF COMPARABLES. THE REVENUE IS AGGRIEVED AGAINST THE INCLUSION OF T HIS COMPANY. ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 18 8.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. IT CAN BE SEEN FROM PAGE 15 OF THE TPOS ORDER THAT THE OTHERWISE FUNCTIONAL SIMILARITY OF THIS COMPANY WITH THE ASSESSEE WAS NOT DISPUTED BY THE OFFICER. THE EXCLUSION HAS BEEN MADE SIMPLY ON THE GROUND THAT: THIS COMPANY HAS DECLINING TUR NOVER, DECLINING PROFITABILITY AND IT IS IN THE NEGATIVE PHASE OF EC ONOMIC CYCLE. THIS VIEWPOINT OF THE TPO IS CONTRARY TO THE FACTUAL POS ITION STATED BEFORE HIM ABOUT THIS COMPANY WHICH IS AS UNDER:- YEAR SALES OPERATING MARGINS FY 2003-04 RS.9,917,965 1.34% FY 2004-05 RS.23,963,134 (-) 13.92% FY 2005-06 RS.47,065,140 5.05% FY 2006-07 RS.29,776,679 0.67% 8.3. IF WE PERUSE THE ABOVE TABLE, IT BECOMES EV IDENT THAT THERE IS NO NEGATIVE PHASE OF THIS COMPANY EITHER IN TERMS O F TURNOVER OR OPERATING PROFIT MARGIN. WHEREAS ITS TURNOVER FOR THE FINANCIAL YEAR 2004-05 STOOD AT RS.2.39 CRORE, IT INCREASED TO RS. 4.70 CRORE IN THE ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 19 FINANCIAL YEAR 2005-06 AND CAME DOWN TO RS.2.97 CRO RE IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDER ATION. SIMILAR IS THE POSITION REGARDING OPERATING MARGINS OF THIS COMPAN Y WHICH WAS AT A LOSS OF 13.92% FOR THE FINANCIAL YEAR 2004-05; SUCH LOSS GOT CONVERTED INTO PROFIT AT 5.04% DURING THE FINANCIAL YEAR 2005 -06 AND TO 0.67% FOR THE YEAR UNDER CONSIDERATION. WE ARE UNABLE TO FIN D ANY NEGATIVE PHASE OF ECONOMIC CYCLE OF THIS COMPANY WHICH IS, IN FACT , IN SYNC WITH THE INCREASE AND DECREASE OF THE ASSESSEES TURNOVER AN D PROFITABILITY IN THE EARLIER TWO YEARS VIS--VIS THE YEAR UNDER CONSIDERATION AS HAS BEEN NOTICED BY THE LD. CIT(A) ON PAGE 8 OF THE IMPUGNED ORDER. UNDER THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE VIEW TAKEN BY THE LD. CIT(A) IN ORDERING THE INCLUSION OF THIS COMPANY CA NNOT BE INTERFERED WITH. WE, THEREFORE, UPHOLD THE SAME AND DISMISS TH E GROUND TAKEN BY THE REVENUE. 9. BUT FOR THE ABOVE DISCUSSED THREE ISSUES, NEITHE R THE ASSESSEE NOR THE REVENUE HAS CHALLENGED ANY OTHER ASPECT OF THE COMPUTATION OF ALP OF THE ASSESSEES INTERNATIONAL TRANSACTION. WE, TH EREFORE, SET ASIDE THE ITA NO.6081/DEL/2012 CO NO.15/DEL/2013 20 IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR COMPUTING THE ALP OF THIS INTERNATIONAL TRANSACTION AFRESH IN CONFORMITY WITH THE VIEW EXPRESSED BY US HEREIN ABOVE. NEEDLES S TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY O F HEARING IN SUCH FRESH PROCEEDINGS. 10. IN THE RESULT, THE CROSS OBJECTION OF THE ASSES SEE IS ALLOWED AND THE APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATIST ICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 02.12.201 5. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 02 ND DECEMBER, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.