M/s Heartland Bangalore Transcription and Services Pvt. Ltd., New Delhi V. ITO, New Delhi

CO 214/DEL/2011

• Counselvise Citation: [2018] 122 COUNSELVISE.COM (IT) 3997 (ITAT-DELHI)
• Duration Of Justice: 7 year(s) 3 month(s) 1 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 05-10-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I2
• Next Hearing Date: 12-07-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 04-07-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: SANJAI KUMAR YADAV
• Keywords: Related party transaction; Depreciation; Transfer pricing; Principle of natural justice; International transaction
• Section: 143(3); 92A

Judgement Text

PAGE | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 2 : NEW DELHI BEFORE SHRI AMIT SHUKLA , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 2373/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 ) ITO, WARD - 12(3), NEW DELHI VS. TRANSCEND M T SERVI C ES PVT LTD (FORMERLY HEARTLAND BANGALORE TRANSCRIPTION AND SERVICES PVT. LTD MERGED WITH HEARTLAND INFORMATION AND CONSULTANCY SERVICES (P) LTD ) PLOT NO. 14, SAGAR TOWER, DISTRICT CENTRE, JANAKPURI, NEW DELHI PAN: AAACH9232J (APPELLANT) (RESPONDENT) CO NO. 214/DEL/2011 (IN ITA NO. 2373/DEL/2011) (ASSESSMENT YEAR: 2004 - 05) TRANSCEND M T SERVI C ES PVT LTD (FORMERLY HEARTLAND BANGALORE TRANSCRIPTION AND SERVICES PVT. LTD MERGED WITH HEARTLAND INFORMATION AND CONSULTANCY SERVICES (P) LTD) PLOT NO. 14, SAGAR TOWER, DISTRICT CENTRE, JANAKPURI, NEW DELHI PAN: AAACH9232J VS. ITO, WARD - 12(3), NEW DELHI ASSESSEE BY : SHRI SANJAI KUMAR YADAV, SR. DR REVENUE BY: SHRI VISHAL KALRA, ADV DATE OF HEARING 10/07 / 2018 DATE OF PRONOUNCEMENT 0 5 / 10 / 2018 O R D E R PER PRASHANT MAHARISHI, A. M. ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 2 1. THIS IS AN APPEAL FILED BY THE REVENUE AND THE CROSS OBJECTION FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD CIT(A) - XX, NEW DELHI DATED 28.02.2011 FOR THE ASSESSMENT YEAR 2004 - 05. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) HAS ERRED IN NOT AFFORDING ANY OPPORTUNITY TO THE TPO BEFORE PROCEEDINGS TO COMPUTE THE MARGINS OF THE COMPARABLES AND THE ASSESSEE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 3,16,16,086/ - MADE BY THE AO ON ACCOUNT OF ARMS LENG TH PRICE. 3. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL IN CROSS OBJECTION: - 1. USING FINANCIAL INFORMATION OF THE COMPARABLE COMPANIES RELATING TO THE FINANCIAL YEAR (FY) 2003 - 04 ALTHOUGH SUCH INFORMATION WAS NOT AVAILABLE TO THE ASSESSEE AT THE TIME OF PREPARATION OF DOCUMENTATION AS PER THE REQUIREMENT OF THE ACT. 2. REJECTING CER TAIN FUNCTIONALLY COMPARABLE COMPANIES ON UNJUST GROUNDS SUCH AS A. NO FOREIGN EXCHANGE REVENUE B. STARTUP ENTITY 3. NOT GRANTING COMPARABILITY ADJUSTMENTS ON ACCOUNT OF DIFFERENCE IN RISK ASSUMED BY THE ASSESSEE VIS A VIS THE COMPARABLE COMPANIES AND IN IGNORING THE QUANTIFICATION OF THE SAME. 4. NOT ADJUDICATING ON THE AVAILABILITY OF THE BENEFIT OF PROVISO TO SECTION 92CA OF THE ACT TO THE ASSESSEE AND 5. REJECTING THE PLEA THAT THE ASSESSEE IS A STPI UNIT WHICH IS ENTITLED TO TAX HOLIDAY AND CONSEQUENTLY THERE IS NO MOTIVATION OF SHIFTING PROFITS THROUGH TRANSFER PRICING MECHANISM. 4. THE ASSESSEE HAS ALSO RAISED THE ADDITIONAL GROUND OF APPEAL IN CROSS OBJECTION: - ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 3 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW AO/ TPO HAVE ERRED IN SELECTING CERTAIN COMPANIES WHICH ARE NOT COMPARABLE TO THE ASSESSEE IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED, AND/ OR HAVE SUBSTANTIAL RELATED PARTY TRANSACTIONS. FURTHER, CIT(A) ERRED IN UPHOLDING THE SAME. 5. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS A COMPANY M/S. HEARTLAND BANGALORE TRANSCRIPTION PVT. LTD NOW MERGED WITH HEARTLAND INFORMA TION AND CONSULTANCY SERVICES PVT. LTD AND FURTHER NOW NAMED AS TRANS CEND MT SERVICES PVT. LTD . 6. THE ASSESSEE FILED ITS RETURN OF INCOME ON 28.10.2004 DECLARING INCOME OF RS. 35981/ - . THE ASSESSEE HAS CLAIMED DEDUCTION U/S 10A OF RS. 33734953/ - .THE CASE WAS SELECTED FOR SCRUTINY. THE LD AO NOTED THAT THE ASSESSEE HAS ENTERED IN TO AN INTERNATIONAL TRA NSACTION AND HENCE REFERENCE WAS MADE TO DETERMINE THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION AMOUNTING TO RS 128264341/ - . THE LD TRANSFER PRICING OFFICER (THE LD TPO) PASSED AN ORDER U/S 92CA DETERMINING ALP OF THE INTERNATIONAL TR ANSACTION AT RS. 159882427/ - AND THEREBY PROPOSED AN ADJUSTMENT OF RS. 31616086/ - . THE LD AO PASSED AN ORDER U/S 143(3) OF THE ACT 26.12.2006 WHERE THE TOTAL INCOME OF THE ASSESSEE WAS ASSESSED AT RS. 31652067/ - INCORPORATING ABOVE ADJUSTMENT PROPOSED BY T HE LD TPO. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD CIT ( A). THE LD CIT ( A) PASSED AN ORDER ON 28.02.2011. IN THE APPELLA TE ORDER HE DELETED THE ADJUSTMENT MADE BY THE LD TPO OF RS. 31616086/ - . THEREFORE, THE REVENUE IS IN APPEAL BEFORE US. THE ASSE SSEE HAS ALSO FILED CROSS OBJECTION. THE ONLY ISSUE IN DISPUTE IS DETERMINATION OF ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION QUA SELECTION OF ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 4 COMPARABLES . CERTAIN COMPARABLES ASSESSEE WANTS INCLUSION / EXCLUSION. SIMILARLY, AO/ TPO IN APPEAL ARE CONT ESTING CERTAIN COMPARABLES REMOVED BY THE LD CIT (A) TO BE INCLUDED. 7. THE BRIEF FACT SHOWS THAT THE COMPANY IS ENGAGED IN MEDICAL TRANSCRIPTION BUSINESS. THE BUSINESS PROFILE OF THE ASSESSEE COMPANY IS NOT IN DISPUTE . A SSESSEE IS PRIMARILY ENGAGED IN THE BUSINESS OF PROVISION OF IT ENABLED SERVICES IN THE AREA OF MEDICAL TRANSCRIPTION TO ITS ASSOCIATES ENTERPRISE AND IT PROVIDES SUCH SERVICES EXCLUSIVELY TO ITS FOREIGN AE I.E . M/S. HEARTLAND MEDICAL INFORMATION SERVICES INC ., USA. ASSESSEE IS RE MUNERATED ON TOTAL COST PLUS BASIS FOR SERVICES RENDERED. 8. THE ASSESSEE IN ITS TP STUDY REPORT HAS ADOPTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD AND ADOPTED OPERATING MARGINS AS A PERCENTAGE OF OPERATING COST (OP/OC) AS THE PROFIT LEVEL INDICATOR (PLI) . THE ASSESSEE IN ITS TP STUDY REPORT DETERMINED THE AVERAGE OPERATING MARGIN OF 16 COMPARABLES AT 14% AND STATED THAT THE ASSESSEES MARGIN (PLI) IS 10%. ASSESSEE FURTHER ADOPTED THE (+)( - ) 5% RANGE AND STATED THAT INTERNATIONAL TRA NSACTION OF THE ASSESSEE IS AT ARMS LENGTH. 9. THE LD TPO ACCEPTED THE CHARACTERIZATION AND CHOICE OF THE TESTED PARTY AND THE MOST APPROPRIATE METHOD AS TNMM ADOPTED BY THE ASSESSEE. EVEN THE PLI OF THE ASSESSEE WAS ACCEPTED. HOWEVER, AS THE ASSESSEE HAS ADOPTED MULTIPLE YEAR DATA FOR THREE YEARS THE LD TRANSFER PRICING OFFICER REJECTED THE SAME AND ADOPTED THE RELEVANT YEAR DATA FOR COMPUTING THE ALP. OUT OF 16 COMPARABLES SELECTED BY ASSESSEE , THE LD TRANSFER PRICING OFFICER REJECTED 1 3 COMPARABLES. THE TPO INTRODUCED THREE COMPARABLES AND ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 5 ASSESSEE R EQUESTED FOR INTRODUCTION OF FIVE NEW COMPARABLES. THE LD TPO ACCEPTED OUT OF THE FIVE , TWO COMPARABLES AND THEREBY ADOPTED THE FINAL SET OF 8 COMPARABLES . HE ALSO GRANTED ADHOC WORKING CAPITAL ADJUSTMENT OF 2 %. HE DETERMINED THE ADJUSTED MARGINS OF COMPARABLES OF 33.1 % AND DETERMINED ALP @ RS 159880427/ - . 10. THEREFORE, IN THIS CASE ONLY DISPUTE IS WITH RESPECT OF THE SELECTION OF COMPARABLES. OUT OF 16 COMPARABLES SELECTED BY THE ASSESSEE, THE LD TPO REJECTED 13 COMPARABLES ON THE GROUND OF NON AVAILA BILITY OF ANNUAL REPORT, EXISTENCE OF RELATED PARTY TRANSACTION, ABSENCE OF FOREX REVENUE, TURNOVER BEING LESS THAN RS. 1 CRORE AND SINGLE CUSTOMER BASIS. HE FURTHER INTRODUCED WIPRO BPO SOLUTION, VISHAL INFORMATION TECHNOLOGIES, AND FORTUNE INFOTECH LTD O N FRESH SEARCH. THE ASSESSEE FURTHER REQUESTED FOR INCLUSION OF CERTAIN COMPARABLES, WHICH WERE TESTED BY THE AO. 11. HOWEVER, NOW THE ASSESSEE CLAIMS THAT FOLLOWING COMPARABLES SELECTED BY TPO OR EVEN THOUGH SOME OF THEM SELECTED BY THE ASSESSEE IN T P STUDY REPORT ARE TO BE EXCLUDED. THE DISPUTE HAS CRYSTALLIZED WITH RESPECT TO THE FOLLOWING COMPARABLES AS UNDER: - A. VISHAL INFORMATION TECHNOLOGIES LTD HAS BEEN INCLUDED BY THE LD TPO WHICH IS NOW DISPUTED BY THE ASSESSEE THAT SAME SHOULD BE EXCLUDED. B. ULTRAMINE AND PIGMENTS LTD, WHICH WAS SELECTED BY THE APPELLANT IN ITS TP STUDY REPORT AND ALSO INCLUDED BY THE LD TPO WHICH ASSESSEE CONTESTED BEFORE THE LD CIT(A), NOW CONTESTED BY THE ASSESSEE TO BE REJECTED. ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 6 C. FORTUNE INFOTECH LTD WHICH HAS BEEN INC LUDED BY THE LD TRANSFER PRICING OFFICER AND RETAIN ED BY THE LD CIT(A) IS CONTESTED FOR REJECTION D. TRICOM INDIA LTD WHICH WAS ACCEPTED BY THE ASSESSEE IN ITS TP STUDY REPORT AND ALSO ACCEPTED BY THE TPO AND ALSO RETAINED BY THE LD CIT(A) IS REQUESTED FOR E XCLUSION. WE WILL DEAL WITH THESE COMPARABLES LATER ON. 12. ON COMING TO THE GROUNDS OF APPEAL OF THE REVENUE, THE FIRST GROUND IS WITH RESPECT TO NOT AFFORDING ANY OPPORTUNITY OF HEARING TO THE LD TRANSFER PRICING OFFICER BEFORE THE PROCEEDING TO COMPUTE THE MARGINS OF THE COMPARABLES . 13. THE LD SR DR VEHEMENTLY SUBMITTED THAT THE ASSESSEE WAS GIVEN COMPLETE OPPORTUNITY BEFORE THE LD CIT(A) HOWEVER, NO OPPORTUNITY WAS AFFORDED TO THE LD TP O. THEREFORE, THE ORDER IS BAD IN LAW. 14. THE LD AUTHORISED REPRESENTATIVE SUBMITTED THAT THE LD CIT(A) HAS OBTAINED THE REMAND REPORT AND THEREFORE, THERE IS NO VIOLATION OF PRINCIPLES OF NATURAL JUSTICE. 15. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND ON PERUSAL OF THE ORDER OF THE LD CIT (A), IT WAS FOUND THAT HE HAS OBTAINED THE REMAND REPORT DURING THE COURSE OF HEARING WHICH WAS MENTIONED AT SL NO. 8 OF TITLE OF HIS ORDER. HENCE, THERE WAS PROPER OPPORTUNITY OF HEARING TO THE LD AO/TPO. THER EFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD CIT(A) HENCE, THIS GROUND IS DISMISSED. ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 7 16. GROUND NO. 2 OF THE APPEAL IS AGAINST THE ORDER OF THE LD CIT(A) DELETING THE ADJUSTMENT OF RS. 31616086/ - ON ACCOUNT OF ARMS LENGTH PRICE OF THE INTERNATI ONAL TRANSACTION. 17. THE LD DR SUPPORTED THE ORDER OF THE LD TRANSFER PRICING OFFICER AND VEHEMENTLY STATED THAT THE LD CIT(A) HAS ERRED IN REMOVAL OF THE COMPARABLES SUCH AS WIPRO BPO SOLUTION LTD AND REJECTING OTHER COMPARABLES SELECTED BY THE TPO. HE READ OUT THE ORDER OF THE LD TPO IN THIS REGARD AND SUPPORTED HIS ORDER. 18. THE LD AUTHORISED REPRESENTATIVE VEHEMENTLY CONTESTED THAT THE LD CIT(A) ERRED IN RETAINING VISHAL INFORMATION TECHNOLOGIES , ULTRAM ARINE AND PIGMENTS LTD, FORTUNE INFOTECH LTD AND TRICOM INDIA. HE REFERRED TO HIS CHART AND STATED THAT VISHAL INFORMATION AND ULTRA M ARINE ARE FUNCTIONALLY NOT COMPARABLE. WITH RESPECT TO FORTUNE INFOTECH HE SUBMITTED THAT THE COMPARABLE HAS UNIQUE SOFTWARE FOR PERFORMING SPECIALIZED SERVICES. WITH RESPECT TO TRICOM INDIA HE SUBMITTED THAT COMPANYS PROFIT IS IMPACTED DUE TO UNIQUE SOFTWARE AND RESEARCH AND DEVELOPMENT ACTIVITIES. HE FURTHER STATED THAT COMPANY HAS INHOUSE DEVELOPED THE UNIQUE SOFTWARE WHICH IS USED FOR SERVICES AND GIVES THE COMPANY HIGHER M ARGINS. HE FURTHER REFERRED TO THE ABNORMAL GROWTH IN THE BUSINESS OF THE COMPARABLE. HE FURTHER SUBMITTED THAT WITH RESPECT TO THE OTHER COMPARABLES WHICH HAVE BEEN RETAINED AND NOT CONTESTED BY THE ASSESSEE HE RELIED ON THE ORDER OF THE LD CIT(A). 19. WE HA VE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND ALSO PERUSED THE ORDERS OF LD TRANSFER PRICING OFFICER, AO AND CIT(A). WE HAVE ALSO PERUSED THE DETAIL ED CHART SUBMITTED BY THE ASSESSEE REQUESTING FOR EXCLUSION OF FOUR COMPARABLES. THE LD CIT ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 8 (A) HAS HELD THAT LD TRANSFER PRICING OFFICER HAS CORRECTLY CONSIDERED THE SINGLE YEAR DATA WHICH IS SUPPORTED BY THE PROVISIONS OF THE INCOME TAX ACT AND THE INCOME TAX RULES, AND THEREFORE, NO INFIRMITY IS FOUND IN THE ORDER OF THE LD CIT(A). HE HAS ALSO HELD THAT IN ABSENCE OF REASONABLE BASIS FOR ARRIVING AT THE RISK ADJUSTMENT, SAME CANNOT BE GRANTED. NO INFIRMITY WAS SHOWN TO US WITH RESPECT TO THESE FINDING. WITH RESPECT TO THE WORKING CAPITAL ADJUSTMENT HE HAS HELD THAT AS TPO IN PRINCIPAL HAS AGREED FOR THE WORKING CAPITAL ADJUSTMENT AND GRANTED ADHOC ADJUSTMENTS OF 2 %. THE LD CIT (A) HAS ACCEPTED THE ARGUMENT OF THE ASSESSEE AND GRANTED THE WORKING CAPITAL ADJUSTMENT AS PER OECD GUIDELINES 2010. THEREFORE, NO INFIRMITY CAN BE FOUND IN THE ORDER OF T HE LD CIT(A). 20. NOW WE COME TO THE ISSUE OF COMPARABLES WHICH IS DEALT WITH AS UNDER: - A. VISHAL INFORMATION TECHNOLOGIES THE LD TPO HAS INTRODUCED THIS COMPARABLE. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE ABOVE COMPANY IS OUTSOURCING THE WORK TO THIRD PARTY VENDOR AND TO DEMONSTRATE THIS IT IS STATED THAT ITS WAGES TO TOTAL COST RATIO IS ONLY 1.38% COMPARED TO THE ASSESSEE WHICH IS 51.22% . THE REFERENCE TO THE ANNUAL REPORT FURNISHED WAS MADE AND SUBMITTED THAT THE COMPARABLE HAS THE OUTSOURCING MODEL WHICH IS NOT COMPARABLE WITH THE BUSINESS MODEL OF THE ASSESSEE. HE FURTHER SUBMITTED THAT FOR AY 2005 - 06 AND 2006 - 07 THIS COMPANY WAS EXCLUDED IN COMPARABILITY ANALYSIS BY ITAT. IT WAS FURTHER STATED THAT THE ABOVE COMPANY IS ENGAGED IN PROVIDING SE RVICES OF DATA ANALYTICS ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 9 AND DATA PROCESSING SERVICES . HE FURTHER STATED THAT BUSINESS ANALYTIC SERVICES HAS BEEN SPECIFICALLY CLASSIFIED AS KPO SERVICES AS PER RULE 10 T A(G) OF THE INCOME TAX RULES. HE FURTHER STATED THAT KNOWLEDGE PROCESSING OUTSOUR CING SERVICES IS NOT AT ALL COMPARABLE TO THE BUSINESS OF ITES SEGMENT. THE LD DR RELIED UPON THE ORDER OF THE LD CIT(A) AND STATED THAT THE LD CIT(A) HAS OBTAINED THE REMAND REPORT AND HAS HELD THAT VISHAL INFORMTECH IS IN THE ITES SEGMENT THEREFORE , IT CANNOT BE SAID THAT IT IS FUNCTIONALLY DIFFERENT. FURTHER, HE STATED THAT IN THE DIRECT ENQUIRY FROM VISHAL IT WAS STATE D THAT THE PAYMENT ARE FOR THE VARIOUS STEP AND IS A PAYMENT FOR VENDOR WHO PROVIDED STAFF AND PERSONNEL WORKING FROM THE PREMISES OF THE COMPANY, THEREFORE, THERE IS NO STRENGTH IN THE ARGUMENT OF THE LD AR. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. THE ANNUAL ACCOUNT OF THE ABOVE COMPARABLE COMPANY IS FURNISHED AT PAGE NO. 431 OF THE PAPER BOOK. ACCORDING TO THE AUDITED ACCOUNTS AS ON 31.03.2004 , THE DATA ENTRY CHARGES AND VENDOR PAYMENT OF THE ASSESSEE WAS RS. 95478836/ - COMPARED TO THE INCOME FROM IT ENABLED SERVICES OF RS. 138822227/ - . IT IS ALMOST 68.77% OF THE TOTAL REVENUE OF THE COMPANY. FURTHER, AS PER SCHEDULE 16 OF THE BALANCE SHEET THE PERSONNEL COST OF THE COMPARABLE IS ONLY RS. 1915371/ - . THEREFORE, IT IS EVIDENT THAT THE COMPARABLE COMPANY AS OUTSOURCING MODEL. THIS COMPARABLE HAS SUBSIDIARY OF AMEX INFORMATION TECHNOLOGIES LTD AND IS PROPOSED TO BE MERGED SOON. IN THE RATIONAL BEHIND THE ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 10 MERGER AT PAGE NO. 14 OF THE ANNUAL REPORT ALSO SHOWS THAT THE MERGED ENTITY CAN TAKE ADVANTAGE OF VISHALS VENDOR MANAGEMENT CAPABILITIES WHICH CAN BRING DOWN THE OVERALL PRODUCTION COST. THIS ITSELF CONFIRM THE CLAIM OF THE ASSESSEE THAT COMPARABLE IS CARRYING ON ITS BUSINESS BY OUTSOURCING. SAME HAS ALSO BEEN CONFIRMED IN INDEPENDENT ENQUIRY MADE BY THE AO DURING REMAND PROCEEDINGS. IT HAS BEEN FURTHER HELD IN AMERICAN EXPRESS INDIA PVT. LTD VS. DCIT THAT COMPAN Y ENGAGED IN PROVISION OF ITES SERVICES THROUGH ITS OWN EMPLOYEES CANNOT BE COMPARED WITH A COMPANY WHICH HAD OUTSOURCED SIGNIFICANT PART OF ITS ACTIVITIES. REGARDING THE FUNCTIONAL SIMILARITY OF THE COMPANY WITH THE COMPARABLE IT IS APPARENT THAT BALANCE SHEET SUBMITTED BY THE ASSESSEE AT PAGE NO. 495 TO 513 DOES NOT SHOW THAT WHAT FUNCTIONS ARE CARRIED OUT BY THIS COMPANY. THEREFORE, WE REJECT THE ARGUMENT OF THE LD AR THAT IT IS ENGAGED IN THE BUSINESS OF DATA ANALYTICS AND DATA PROCESSING . FURTHER, THE LD AR ALSO TRIED TO COMPARE THE SERVICES OF DATA ANALYTICS WITH THE SERVICES OF BUSINESS ANALYTICS. WE ARE NOT AMUSED BY THIS ARGUMENT AND HENCE WE REJECT THE SAME. HOWEVER, ON ACCOUNT OF DIFFERENT BUSINESS MODEL , WE DIRECT THE LD AO/ TPO TO EXCLUDE TH E SAME FOR COMPARABILITY STUDY. ACCORDINGLY, WE REVERSE THE FINDING OF THE LD CIT(A) WITH RESPECT TO THIS COMPARABLE. B. ULTRA MARINE AND PIGMENTS LTD THIS COMPANY WAS SELECTED AS COMPARABLE BY THE ASSESSEE TPO HAS ALSO ACCEPTED THE SAME. THE LD CIT(A) HAS A LSO HELD THAT COMPANY IS TO BE RETAINED AS THE COMPARABLE. ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 11 THE LD AR HAS SUBMITTED THAT T HIS COMPANY IS FUNCTIONALLY NOT COMPARABLE AS ITS ITES SEGMENT IS PROVIDING ENGINEERING SERVICES TO OVERSEAS AND DOMESTIC CUSTOMERS WHICH REQUIRES OF HIGH LEVEL OF HU MAN RESOURCES. FURTHER, ITS ITES DIVISION IS KNOWN AS LAPIZ DIGITAL SERVICES AND AS PER THE WEBSITE INFORMATION IT IS CARRYING ON THE CONTRACTUAL R&D AND PROJECT IMPLEMENTATION. FURTHER, IT WAS STATED THAT IT HAS DOUBLED ITS REVENUE HENCE, THERE ARE EXTR A ORDINARY MOVEMENTS IN THE PROFITABILITY. IT WAS FURTHER STATED THAT THE TPO HIMSELF HAS REJECTED THE SAME IN AY 2005 - 06. THE LD DR VEHEMENTLY SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. THE ASSESSE E IS CHANGING ITS STAND EVERY TIME BEFORE THE LD CIT(A) IT WAS CONTENDED THAT THIS COMPANY HAS RELATED PARTY TRANSACTIONS OF 25% OF THE SALES. THEREFORE, THE LD CIT(A) COMPUTED AND FOUND THAT THE COMPARABLE HAS RELATED PARTY TRANSACTION OF MERELY 10%. BEF ORE US THE ASSESSEE HAS RAISED AN ALTOGETHER NEW ARGUMENT AND HAS NOT UTTERED A WORD ABOUT THE RELATED PARTY TRANSACTION OF THIS COMPANY. IT IS AN ADMITTED FACT THAT ASSESSEE HAS STATED THE SAME TO BE FUNCTIONALLY COMPARABLE BEFORE THE LD TPO. THE TPO HAS ALSO ACCEPTED THE ARGUMENT OF THE ASSESSEE. WE HAVE PERUSED THE ANNUAL ACCOUNTS PLACED BY THE ASSESSEE AT PAGE NO. 548 - 557 OF THE PAPER BOOK. ON PERUSAL OF THE SAME IT IS EVIDENT THAT ASSESSEE HAS FURNISHED THE ANNUAL ACCOUNT OF MARCH 2003 AND NOT MARCH 2 004. THE ARGUMENTS OF THE ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 12 ASSESSEE ARE ALSO BASED ON BALANCE SHEET OF THE LAST YEAR. THE EXTRACT OF THE ANNUAL ACCOUNTS ARE FILED BY THE ASSESSEE, HOWEVER, NO COMPLETE ANNUAL ACCOUNTS WERE FILED. ON THE BASIS OF LIMITED INFORMATION THE ASSESSEE HAS TRIED T O BELIEVE US THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE. FURTHER, THE ASSESSEE HAS ALSO PLACED AT PAGE NO 558 THE WEBSITE CONTENT OF LAPIZ. HOWEVER, IT WAS NOT KNOWN TO WHICH YEAR THIS INFORMATION BELONGS TO. MERELY, THE EXTRACT OF THE WEBSITE WITHOU T ANY REFERENCE TO THE ASSESSMENT YEAR AND IN ABSENCE OF ITS IMPACT ON THE PROFIT AND LOSS ACCOUNT WE ARE NOT INCLINED TO ACCEPT THE ARGUMENT OF THE ASSESSEE. IT WAS NOT DEMONSTRATED BEFORE US THAT FOR WHAT REASON IS SUBSEQUENT YEAR TPO HAS EXCLUDED IT. HE NCE, WE FIND NO INFIRMITY IN THE ORDER OF THE LD CIT(A) AND TPO IN INCLUDING THE ABOVE COMPANY FOR COMPARABILITY. HENCE, THE TPO/ AO IS DIRECTED TO RETAIN THE SAME. C. FORTUNE INFOTECH LTD. THE ABOVE COMPANY HAS BEEN INCLUDED BY THE LD TPO . THE LD AR SUBMITTED THAT THE COMPANYS PROFIT HAVE BEEN IMPACTED DUE TO UNIQUE SOFTWARE IN MEDICAL TRANSCRIPTION AND PATIENT RECORD MANAGEMENT. THE LD DR STATED THAT THIS COMPANY IS NOT AT ALL BEEN OBJECTED BY THE ASSESSEE BEFORE THE LD CIT(A), THEREFORE, IT CANNOT BE OBJECTED NOW. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND FIND THAT CONTENTION OF THE LD DR IS CORRECT AND THE LD AR COULD NOT SHOW US THE RELEVANT PARAGRAPHS WHERE THE ASSESSEE HAS OBJECTED TO THIS COMPARABLE. WE HAVE ALSO ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 13 LOOKED AT THE ANNUAL ACCOUNTS OF THIS COMPANY AT PAGE NO. 560 TO 603 OF THE PAPER BOOK. AS PER PAGE NO. 573 OF THE PAPER BOOK IT IS APPARENT THAT THE COMPARABLE IS CARRYING ON THE BUSINESS OF MEDICAL TRANS C RIPTION ONLY. THE INCOME FROM OPERATIONS AT PAGE NO. 56 9 OF THE ASSESSEE ALSO SHOWS THAT IT IS IN THE BUSINESS OF BPO. MERELY BECAUSE THE ASSESSEE IS CARRYING ON ITS BUSINESS THROUGH DIFFERENT TOOLS SIMPLY CANNOT MAKE IT NON COMPARABLE , IF THE FUNCTIONS PERFORMED BY THEM AND VARIOUS FILTERS APPLIED IN ACCEPT / REJECT MATRIX ALLOWS IT TO BE INCLUDED. THE ASSESSEE IS RELYING ON ANNEXURE A TO THE DIRECTORS REPORT WHERE THE ASSESSEE IS REQUIRED TO SHOW THE EFFORTS MADE BY IT IN TECHNOLOGY ABSORPTION AND INNOVATION. FURTHER, THE REPORT SAYS THAT THE COMPANY HAS MADE CONSIDERABLE PROGRESS IN DEVELOPMENT OF ITS OWN WEB BASED SOFTWARE. THEREFORE, IT IS APPARENT THAT FOR THE YEAR IT DID NOT CARRY ITS BUSINESS WITH DIFFERENT TOOLS. ACCORDINGLY, WE FIND NO INFIRMITY IN THE ORDER OF THE LD TPO TO INCLUDE THE FORTUNE INFOTEC H LTD IN COMPARABILITY ANALYSIS. D. TRI COM LTD THE ABOVE COMPARABLE COMPANY WAS SELECTED BY THE ASSESSEE IN ITS TP STUDY AND FURTHER ACCEPTED BY THE LD TPO. NOW THE ARGUMENT OF THE ASSESSEE IS THAT PROFIT OF THE COMPANY IS IMPACTED DUE TO UNIQUE SOFTWARE. THE ABOVE COMPARABLE COMPANY WAS ALSO NOT CONTE STED BEFORE THE LD CIT(A). WE HAVE EXAMINED THE BALANCE SHEET PLACED AT PG NO. 604 - 648. THE ASSESSEE HAS ALSO ONCE AGAIN PICKED UP THE USE OF THE SOFTWARE BY THE ASSESSEE IN CARRYING ON ITS ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 14 BUSINESS. AT PAGE NO. 617 RELIED BY THE LD AR SHOWS THAT ASSESSEE HAS A PROCESS OF CONTINUOUS ENHANCE R&D. WE DO NOT FIND THAT ANY SUCH ACTIVITY WILL MAKE THE COMPANY NOT COMPARABLE WHEN THE FUNCTIONS PERFORMED ARE SIMILAR. FURTHER, THE LD AR HAS ALSO STATED THAT THERE IS AN ABNORMAL GROWTH OF 33% INCREASE IN PAT DUE TO U NIQUE SOFTWARE DEVELOPED BY THE COMPARABLE. WE DO NOT AGREE WI TH THIS CONTENTION AS THE PROFITABILITY STATEMENT DOES NOT SAY SO. IN VIEW OF THIS WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD TPO IN ACCEPTING THE COMPARABLE SELECTED BY THE ASSESSEE M ORE SO WHEN SAME WAS NOT OBJECTED BEFORE THE LD CIT(A). E. WIPRO BPO SOLUTIONS PVT. LTD. NOW COMING TO THE COMPARABLES EXCLUDED BY THE LD CIT(A) AND THEREFORE, AO IS AGGRIEVED BY THE EXCLUSION OF COMPARABLES BY THE LD CIT(A) OF WIPRO BPO SOLUTIONS LTD . THI S COMPARABLE IS INCLUDED BY THE LD TPO ON THE FRESH SEARCH. THE LD TPO NOTED AT PAGE NO. 21 OF HIS ORDER WHEREIN, THE FUNCTIONAL PROFILE OF THE COMPARABLE WAS ACCEPTED BY THE ASSESSEE HOWEVER, ONLY OBJECTION NOTED WAS RELATED PARTY TRANSACTION IN THIS CASE . THE TPO REJECTED THE ARGUMENT OF THE ASSESSEE HOLDING THAT THIS COMPANY HAS RELATED PARTY TRANSACTION BUT THEY ARE ONLY 7% AND THEREFORE, HE REJECTED THE CONTENTION OF THE ASSESSEE. BEFORE THE LD CIT(A) HE EXCLUDED THE SAME AS THE TURNOVER WAS VERY HIGH COMPARED WITH APPELLANT RELYING UPON THE DECISION OF THE COORDINATE BENCH IN CASE OF SONY INDIA PVT. LTD. ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 15 THE LD DR VEHEMENTLY STATED THAT THIS WAS NOT THE ARGUMENT OF THE ASSESSEE BEFORE TPO. IT WAS STATED THAT HIGH TURNOVER IS NOT THE REASON FOR EXCLUSIO N OF A COMPARABLE. THE LD AR RELIED UPON THE ORDER OF THE LD CIT(A) AS WELL AS THE ARGUMENT OF THE HIGH TURNOVER OF COMPARABLE AS WELL AS BRAND OWNERSHIP AND CONSEQUENT PREMIUM PRICING. HE RELIED UPON SEVERAL DECISIONS. WE HAVE CAREFULLY CONSIDERED THE R IVAL CONTENTIONS. WE FIND THAT WIPRO BPO SOLUTIONS LTD HAS TURNOVER OF RS. 438 CRORES COMPARED TO TURNOVER OF RS. 13 CRORES OF THE ASSESSEE. IT SHOWS THAT THE TURNOVER OF THE COMPARABLE IS 30 TIMES HIGHER THAN THE TURNOVER OF ASSESSEE. THE PROFIT AND LOSS ACCOUNT OF THIS COMPANY IS PLACED AT PAGE NO. 385, WHEREIN, THE TURNOVER IS RS. 430 CRORES AND THE NET PROFIT OF THE ASSESSEE IS RS. 103 CRORES. FURTHER, THIS COMPARABLE HAS PAID TECHNOLOGY OPERATING CHARGES TO THE TUNE OF RS. 66.34 CRORES. IN VIEW OF THIS WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE DL CIT(A) IN EXCLUDING WIPRO BPO SOLUTIONS LTD FROM THE COMPARABILITY ANALYSIS. THE SIMILAR ISSUE HAS BEEN DECIDED BY HON'BLE BOMBAY HIGH COURT IN 381 ITR 216 WHERE THE COMPANY IS HAVING TUR NOVER MORE THAN 23 TIMES WAS HELD TO BE EXCLUDIBLE IN THE COMPARABILITY ANALYSIS. THEREFORE, RESPECTFULLY THE DECISION OF THE HON'BLE BOMBAY HIGH COURT WE UPHELD THE EXCLUSION OF WIPRO BPO SOLUTIONS PVT. LTD F. ACE SOFTWARE THE ABOVE COMPANY WAS INCLUDED BY THE ASSESSEE IN ITS TP STUDY REPORT, HOWEVER, THE LD TPO REJECTED THE SAME STATING THAT THIS PROVIDED SERVICES TO THE SINGLE CUSTOMER. THE LD ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 16 CIT(A) HAS ACCEPTED IT AS A GOOD COMPARABLE VIDE PARA NO. 9.7 OF HIS ORDER AS UNDER: - 9.7. ACE SOFTWARE LTD. : THE TPO HAS REJECTED THIS COMPANY STATING THAT IT PROVIDE SERVICES TO A SINGLE CUSTOMER. FOLLOWING IS THE RELEVANT EXTRACTS FROM THE ORDER OF THE TPO: HERE THE QUESTION IS WHERE TO CATEGORIZE THE CUSTOMER OF THE COMPANY, BUT THE QUESTION IS THAT 100% OF HIS SERVICES ARE BOUGHT BY M/S. APEX DATA SERVICES INC., USA, THEREBY THE TRANSACTIONS CAN BE CONTROLLED BY APEX DATA SERVICES INC., USA AS HE IS THE SINGLE CUSTOMER. THE SAME IS ALLEGED AS A RISK FACTOR BY THE COMPANY ITSELF IN THE DIRECTORS REPORT. SIN CE THE TAXPAYER AGREES THAT 100% OF THE SERVICES ARE RENDERED TO APEX DATA SERVICES INC., USA AND A SINGLE PARTY RISKS ARE IDENTIFIED BY THE COMPANY ITSELF, THE TPO SEES NO REASON NOT TO REJECT THE COMPANY AS A COMPARABLE. THIS VIEW IS TAKEN WITHOUT GOING IN DEPTH OF THE DEFINITION OF THE RELATED PARTIES ULS.92A(2). IN RESPONSE TO THIS THE APPELLANT HAS SUBMITTED AS UNDER: ACE SOFTWARE LTD.: THE ID. TPO HAS REJECTED ACE SOFTWARE LTD ON THE GROUND THAT ALL THE SERVICES ARE RENDERED TO A SINGLE CUSTOMER AND THEREFORE THE TRANSACTIONS CAN BE CONTROLLED BY THE CUSTOMER. THE TPO ALSO AT THE TIME OF ASSESSMENT PROCEEDINGS QUOTED SECTION 92A(2)(I), AND HELD THAT ACE SOFTWARE LTD AND THE CUSTOMER ARE ASSOCIATED ENTERPRISES WITHIN ACT. THE APPELLANT VIDE HIS SUBMIS SION DATED 18TH OCTOBER, 2006 (ATTACHED AS APPENDIX - 3, PAGE 181 OF PAPER BOOK), HAS SUBMITTED AS FOLLOWS: QUOTE TRANSACTION WITH SINGLE CUSTOMER - THE COMPARABLE IS PROPOSED TO BE REJECTED ON THE GROUND THAT IT HAS EXCLUSIVE TRANSACTIONS WITH A SINGLE C USTOMER, DRAWING REFERENCE TO SECTION 92A (2) (I) OF THE INCOME - TAX ACT. WE REPRODUCE BELOW, THE DEFINITION OF U/S 92A (2), THAT DEFINES ASSOCIATED ENTERPRISE FOR THE PURPOSE OF THE PROVISIONS OF CHAPTER X. (2) TWO ENTERPRISES SHALL BE DEEMED TO BE ASSOCIA TED ENTERPRISES IF, AT ANY TIME DURING THE PREVIOUS YEAR, (A) (I) THE GOODS OR ARTICLES MANUFACTURED OR PROCESSED BY ONE ENTERPRISE, ARE SOLD TO THE OTHER ENTERPRISE OR TO PERSONS ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 17 SPECIFIED BY THE OTHER ENTERPRISE, AND THE PRICES AND OTHER CONDITIONS RELA TING THERETO ARE INFLUENCED BY SUCH OTHER ENTERPRISE; OR COMPARABLE CONSIDERED - ACE SOFTWARE EXPORT LTD SUBMISSION: WE SUBMIT THAT THE ABOVE CLAUSE SHALL APPLY IN CASE OF ENTERPRISE THAT MANUFACTURE OR PROCESS GOODS OR ARTICLES. IN THE PRESENT CASE, HOWE VER THE COMPARABLE COMPANY UNDER CONSIDERATION (I.E. ACE SOFTWARE EXPORTS) IS IN THE BUSINESS OF PROVIDING SERVICE TO APEX DATA SERVICES AND HENCE NOT COVERED WITHIN THE DEFINITION MENTIONED ABOVE. IT CANNOT BE SAID THAT THE PRICES AND OTHER CONDITIONS REL ATING THERETO ARE INFLUENCED BY APEX DATA SERVICES INC. FURTHER, THE COMPARABLE HAS TRANSACTIONS WITH APEX DATA SERVICES INC., WHICH IS NOT REFLECTED AS AN ASSOCIATED ENTERPRISE / RELATED PARTY IN THE SCHEDULES TO THE AUDITED FINANCIAL RESULTS OF THE COMPA NY. CONSEQUENTLY, ACE SOFTWARE EXPORT LTD. CANNOT BE REJECTED AS COMPARABLE. IN FACT IT IS GOOD COMPARABLE AS IT SERVICES A SINGLE CUSTOMER IN AN UNCONTROLLED ENVIRONMENT, VERY SIMILAR TO THE NATURE OF BUSINESS OF THE TAX PAYER. UNQUOTE ON THE BASIS OF AB OVE, IT CAN BE CONCLUDED THAT THE ID. TPO HAS GROSSLY ERRED IN APPLICATION OF PROVISION OF SECTION 92A OF THE ACT. FURTHER, ID. TPO HAS USED HIS OWN WISDOM, WITHOUT ANY LEGAL BASIS TO CONCLUDE THAT THE BUYER CAN CONTROL THE PRICE AND HENCE THE COMPARABLE I S REJECTED. THE ID TPO HAS HIMSELF RESILED FROM HIS EARLIER POSITION THAT THE TRANSACTIONS OF ACE SOFTWARE LIMITED WITH ITS CUSTOMER ARE NOT UNCONTROLLED WITHIN THE MEANING OF SECTION 92A(2)(I) OF THE ACT BY MENTIONING THAT, THIS VIEW IS TAKEN WITHOUT GOIN G IN DEPTH OF THE DEFINITION OF THE RELATED PARTIES ULS.92A(2). THIS SHOWS THE BAISED APPROACH OF ID TPO WITH ONLY INTENTION OF MAKING ADJUSTMENTS. ON THE BASIS OF ABOVE WE REQUEST YOUR GOOD SELF THAT THE ABOVE COMPARABLE SHOULD BE INCLUDED AS FOR THE PUR POSE OF ARMS LENGTH ANALYSIS. I HAVE CAREFULLY CONSIDERED THE SUBMISSION BY THE APPELLANT AND DOCUMENTS ON RECORD. THE TPO HAS REJECTED THIS COMPANY PRIMARILY ON THE GROUND OF SINGLE CUSTOMER I.E. APEX DATA SERVICES. ADMITTEDLY THE TRANSACTION WITH A SIN GLE CUSTOMER DOESNT GIVE RISE TO AN ASSOCIATION AS ENVISAGED UNDER SECTION ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 18 92A(2) OF THE ACT. THE TPO HAS FAILED GROSSLY TO DEMONSTRATE THAT WHETHER THE BUYER I.E. APEX DATA SERVICES HAS CONTROLLED THE PRICE IN THIS PARTICULAR CASE. THE TPO HAS NOT USED A NY RELIABLE DATA TO PROVE THAT THE APEX DATA SERVICES HAS ANY INFLUENCE ON ACE SOFTWARE TO AFFECT THE PRICING. THE TPO HAS NO OBJECTION ON THE FUNCTIONAL COMPARABILITY OF ACE SOFTWARE EXPORTS LIMITED AND ONLY REJECTED THE COMPARABLE ON THIS UNSUSTAINABLE G ROUND OF SINGLE CUSTOMER. IN VIEW OF ABOVE, APPELLANTS PLEA IN THIS CASE IS FOUND ACCEPTABLE AND HENCE THE COMPANY ACE SOFTWARE EXPORTS LIMITED IS ACCEPTED AS COMPARABLE. THE REASONS GIVEN BY THE LD CIT(A) ARE BASED ON THE FACTS AND THE LD TPO HAS FAILED TO SHOW THAT WHETHER THE BUYER HAS CONTROLLED THE PR ICES IN CASE OF THE COMPARABLE. THE LD DR COULD NOT POINT OUT ANY INFIRMITY IN THE ORDER OF THE LD CIT(A). THEREFORE, WE CONFIRM HIS FINDINGS AND HOLD THAT ACE SOFTWARE EXPORT LTD IS A GOOD COMPARABLE. G. TULISIAN TECHNOLOGIES THIS COMPARABLE WAS SELECTED BY THE ASSESSEE, HOWEVER, SAME WAS REJECTED BY THE LD TPO HOLDING THAT ITS TURNOVER IS LESS THAN RS. 1 CRORE. THE LD CIT(A) HAS GIVEN A FINDING THAT THE TURNOVER OF THIS COMPANY IS MARGINALLY LESS IN THIS YEAR ONLY. HE HELD SO VIDE PARA NO. 9.11 OF HIS ORDER AS UNDER: - 9.11 TULSYAN TECHNOLOGIES LTD.: THE TPO REJECTED THIS COMPANY ON THE FOLLOWING GROUND: THE REVENUE IS ONLY RS. 94 LACS. ONE OF THE CRITERIA FOR SELECTING THE COMPARABLES ADOPTED BY THE TA XPAYER HIMSELF IS THAT INCOME SHOULD BE MORE THAN RS. 1 CRORE - HENCE REJECTED AS A COMPARABLE. THE TPO FURTHER STATED AS UNDER: THE DATA TO BE TAKEN WHETHER CONTEMPORANEOUS OR PRIOR YEAR DATA IS DEALT SEPARATELY IN THE COMING PARAS. THE DATA TAKEN FOR THE STUDY BEING CONTEMPORANEOUS AND THE COMPANY FAILED TO QUALIFY THE ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 19 REQUIRED PARAMETERS ADOPTED BY THE TAXPAYER HIMSELF THE COMPANY IS NOT BEING TAKEN AS A COMPARABLE. IN RESPONSE TO THIS THE TAXPAYER SUBMITTED AS UNDER: THE ID. TPO HAS REJECTED THE COMPANY ON THE GROUND THAT THE SALES OF THE COMPANY IN FY 2003 - 04 IS LESS THAN RS. 1 CR. IN RESPONSE TO THIS THE APPELLANT HAD FILED A DETAILED REPLY WIDE SUBMISSION DATED 18TH OCTOBER, 2006 (ATTACHED AS APPENDIX - 3, PAGE 181 OF PAPER BOOK). IN ADDITION T O THIS THE APPELLANT FURTHER WANTS TO SUBMIT THAT ID. TPO HAS USED THE LATEST YEAR DATA WHICH HAS BEEN CONTESTED IN THIS SUBMISSION AS PER POINT 1 ABOVE. WITHOUT PREJUDICE TO ABOVE THE APPELLANT SUBMITS THAT AT THE TIME WHEN TP STUDY WAS PREPARED, DATA FOR FY 2001 - 02 & FY 2002 - 03 WAS CONSIDERED AND WEIGHTED AVERAGE SALES WAS GREATER THAN RS. 1 CR. FURTHER, THE FOLLOWING TABLE SHOWS THAT THE TURNOVER OF TULSYAN TECHNOLOGIES LTD OVER THE YEARS IS CONSISTENTLY ABOVE INR 1 CRORE: YEAR 2005 2006 2007 2008 2009 S ALES (INR) 1.9 CRORE 3.11 CRORE 4.28 CRORE 5.87 CRORE 7.37 CRORE TABLE 7: TURNOVER OF TULSYAN TECHNOLOGIES LTD. ON THE BASIS OF ABOVE DISCUSSION WE HUMBLY SUBMIT THAT THE REJECTION OF TULSYAN TECHNOLOGIES LIMITED IS UNJUST AND IT SHOULD BE ACCEPTED AS COMP ARABLE. I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE APPELLANT BEFORE ME AND BEFORE THE TPO IN RESPECT OF THIS COMPANY. THE RATIONALE FOR > INR 1 CRORE FILTER, IS TO ELIMINATE THE COMPANIES WHICH ARE OFTEN CONTROLLED BY ITS KEY EMPLOYEES WHO ARE THE SHARE HOLDERS IN THE COMPANY. THE FINANCIAL RESULTS OF THESE COMPANIES MAY BE TAINTED. FURTHER, AS PER THE TP STUDY SUBMITTED BY THE APPELLANT, THE FILTER OF SALES > INR1 CRORE IS APPLIED AS THE RELIABILITY OF THE FINANCIAL DATA FOR COMPANIES WITH LOW LEVELS OF SALES CAN BE SIGNIFICANTLY REDUCED BECAUSE THE SAME PERSONS ARE OFTEN BOTH MAJOR SHAREHOLDERS AND KEY EMPLOYEES, DIMINISHING THE ECONOMIC DISTINCTION BETWEEN PROFITS AND SALARIES. FURTHER THE APPELLANT CONTENDED THAT FOR AN EFFECTIVE ANALYSIS OF THE AFORES AID FILTER IT IS IMPERATIVE THAT THIS FILTER IS APPLIED ON THE BASIS OF WEIGHTED AVERAGE DATA OF TWO YEARS AND THE COMPANY HAS QUALIFIED THIS FILTER ON THE BASIS OF WEIGHTED AVERAGE DATA. I AGREE WITH THE REASONS STATED BY THE APPELLANT THAT FOR THE CORREC T APPLICATION OF THIS FILTER, DATA OF MORE THAN ONE YEAR NEEDS TO BE CONSIDERED. THE APPELLANT HAS ALSO DEMONSTRATED THAT TULSIYAN TECHNOLOGIES LIMITED HAS SALES CONSISTENTLY GREATER THAN INR 1 ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 20 CRORE OVER THE NEXT FIVE YEARS I.E. TILL THE DATE DATA WAS AVA ILABLE. THIS IS VISIBLE FROM THE TABLE BELOW: YEAR 2005 2006 2007 2008 2009 SALES (INR) 1.9 CRORE 3.11 CRORE 4.28 CRORE 5.87 CRORE 7.37 CRORE THE EXPLANATION PROVIDED BY THE APPELLANT IS FOUND TO BE SATISFACTORY, HENCE A FUNCTIONAL COMPARABLE COMPANY, ONLY BECAUSE IN ONE OF THE YEARS THE SALES IS LESS THAN INR 1 CRORE CANNOT BE REJECTED. TULSIYAN TECHNOLOGIES LIMITED IS THEREFORE ACCEPTED AS COMPARABLE. THE LD DR COULD NOT POINT OUT ANY INFIRMITY IN THE ORDER OF THE LD CIT(A). THEREFORE, WE CONFIRM HI S FINDINGS AND HOLD THAT TULSIAN TECHNOLOGIES IS A GOOD COMPARABLE. H. TRANSWORK INFORMATION TECHNOLOGIES LTD. : TRANSWORK INFORMATION TECHNOLOGIES LTD IS REJECTED BY THE TPO AS CONSISTENT LOSS MAKING COMPANY. THE LD CIT(A) HAS HELD THAT THE ABOVE COMPANY IS A GOOD COMPARABLE. IT IS FURTHER STATED BEFORE US THAT TPO HAS ACCEPTED THE ABOVE COMPANY IN AY 2005 - 06 AND 2006 - 07. OVER AND ABOVE THE REASONS GIVEN BY THE LD CIT(A) WHEN THE TPO HAS ACCEPTED IN SUBSEQUENT YEARS WHEN THERE ARE LOSSES FOR THIS SIMILAR REAS ON FOLLOWING THE CONSISTENCY PRINCIPLE WE FIND NO INFIRMITY IN THE ORDER OF THE LD CIT(A) IN INCLUDING THE ABOVE COMPARABLE. I. MAPRO INDUSTRIES : THIS COMPARABLE HAS BEEN REJECTED BY THE LD TPO FOR THE NON UTILIZATION OF THE ASSETS. THE WHOLE FACTS ARE CAPTURED BY THE LD CIT(A) IN PARA NO. 9.16 OF HIS ORDER AS UNDER: - MAPRO INDUSTRIES: THE TPO REJECTED THIS COMPANY ON THE ISSUE OF PROPER UTILIZATION OF THE ASSETS. THE FOLLOWING IS THE OBSERVATION OF THE TPO: ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 21 THE MAJOR OBJECTION OF THE TPO IS THE PROPER UTILIZATION OF THE ASSETS. THE COMPANYS SALES ARE NOT EVEN 26% OF THE ASSETS UTILIZED, WHERE AS IN THE CASE OF THE TAXPAYER IT IS 328% OF THE ASSETS UTILIZED. IF THIS IS THE CASE, THEN IT NEED NOT BE SAID THAT THE COSTS TO MAINTAIN THESE UNUTILIZED ASSET S, DEPRECIATION AND OTHER RELATED COSTS (NOT BEING PART OF THE TRANSACTION FOR WHICH THE COMPANY IS RENDERING SERVICES) WILL ALSO FORM PART OF THE EXPENSES PART OF THE COMPANYS MEDICAL TRANSCRIPTION SEGMENT. SINCE IT IS NOT POSSIBLE TO HAVE THE PROPER EXP ENDITURE RELATING TO THE TRANSACTION BE QUANTIFIED, THE COMPANY CANNOT BE TAKEN AS A COMPARABLE FOR WANT OF SUFFICIENT INFORMATION. FURTHER THE TAXPAYER HIMSELF REJECTED THE COMPARABLES (AS PER THE TP DOCUMENT) IF THEIR RATIO OF NET FIXED ASSETS TO SALES I S MORE THAN 200%. IN THIS CASE IT IS 380%. THIS COMPANY CANNOT BE CONSIDERED EVEN ON THIS COUNT. THE APPELLANT IN THIS REGARD HAS SUBMITTED AS UNDER: THE APPELLANT HAS INTRODUCED THE COMPANY IN THE FRESH SEARCH CONDUCTED BY HIM. THE ID. TPO HAS REJECTED THIS COMPANY IN THE ORDER ON THE GROUND THAT THE COMPANY HAS NOT UTILIZED THE ASSETS PROPERLY AND ITS NET SALES/FIXED ASSETS RATIO IS LESS THAN 26%. IN THIS REGARD THE APPELLANT WANTS TO PUT FORWARD THAT THE COMPANY IS ENGAGED MAINLY IN TWO SEGMENTS - GAS AND MEDICAL TRANSCRIPTION. THE APPELLANT HAS SELECTED THE MEDICAL TRANSCRIPTION SEGMENT FOR THE PURPOSE OF ANALYSIS. IT WOULD BE WORTHWHILE TO NOTE HERE THAT THE APPELLANT IS ALSO OPERATING IN THE AREA OF MEDICAL TRANSCRIPTION, HENCE THE APPELLANT REQUESTS YOUR GOOD SELF THAT THE COMPANY SHOULD BE TAKEN AS COMPARABLE COMPANY FOR DETERMINING THE ARMS LENGTH MARGIN OF THE INTERNATIONAL TRANSACTION BETWEEN THE APPELLANT AND ITS AES. I HAVE CONSIDERED THE CONTENTION OF THE APPELLANT AND THE TPO AND FOUND FORC E IN THE SUBMISSION OF THE APPELLANT. NFA/SALES IS A QUANTITATIVE FILTER WHICH IS USED PRIMARILY TO REJECT COMPANIES WHICH ARE IN TO THE MANUFACTURING BUSINESSES. FURTHER, THE APPELLANT HAS ACCEPTED THE MEDICAL TRANSCRIPTION SEGMENT OF THIS COMPANY FOR COM PARABILITY PURPOSES. THEREFORE THIS COMPANY BEING CLOSEST TO THE BUSINESS OF THE APPELLANT CANNOT BE REJECTED. THUS THE COMPANY IS ACCEPTED AS COMPARABLE. THE LD DR COULD NOT POINT OUT ANY INFIRMITY IN THE ORDER OF THE LD CIT(A) AND THE NATURE OF FILTER A PPLIED BY THE TPO WHICH IS GENERALLY NOT APPLICABLE IN SERVICE INDUSTRY. THE NON UTILIZATION OF ITO VS TRANSCEND M T SERVICES PVT LTD ITA NO. 2373/DEL/2011 AND CO NO. 214/DEL/2011 (ASSESSMENT YEAR: 2004 - 05) PAGE | 22 THE ASSETS OR UNDER UTILIZATION THEREOF MAY BE INTERNAL INEFFICIENCY BUILT IN OF THE COMPARABLE COMPANY HOWEVER, WHEN IT IS FUNCTIONALLY COMPARABLE IT CANNOT BE REJECTED. ACCORDINGLY, WE UPHOLD THE ORDER OF THE LD CIT(A) IN DIRECTING THE TPO FOR INCLUSION OF THE SAME. 21. NO OTHER GROUNDS WERE PRESSED BEFORE US IN CASE OF APPEAL OF THE ASSESSEE. IN VIEW OF THIS SAME ARE NOT ADJUDICATED AND CONSIDERED AS FUTILE AND H ENCE, DISMISSED. 22. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED AND CROSS OBJECTION OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 0 5 / 10 / 2018 . - S D / - - S D / - ( AMIT SHUKLA ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 0 5 / 10 / 2018 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI