Appeal details
Counselvise Citation
[2014] 140 COUNSELVISE.COM (IT) 79590 (ITAT-PANAJI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 3 month(s) 3 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
11-04-2014
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
DB
Next Hearing Date
20-03-2014
Assessment Year
2005-2006
Appeal Filed On
08-01-2013
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P.K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO. 01/PNJ/2013 : (ASST. YEAR : 2005 - 06) M/S. PENTAIR WATER INDIA PVT. LTD., L - 55, VERNA INDUSTRIAL ESTATE, VERNA, SALCETTE, GOA 403 722. PAN : AABCS8856L (APPELLANT) VS. ADDL. COMMISSIONER OF INCOME TAX, MARGAO RANGE, MARGAO, GOA (RESPONDENT) ITA NO. 04/PNJ/2013 : (ASST. YEAR : 2005 - 06) ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 1, MARGAO (APPELLANT) VS. M/S. PENTAIR WATER INDIA PVT. LTD., L - 52/ 55, VERNA INDUSTRIAL ESTATE, VERNA, SALCETTE, GOA 403 722. PAN : AABCS8856L ( RESPONDENT ) ASSESSEE BY : RAKESH AGRAWAL , CA REVENUE BY : ASHA DESAI, LD. DR DATE OF HEARING : 20/03/2014 DATE OF PRONOUNCEMENT : 11 /04/2014 O R D E R PER P.K. BANSAL 1. THESE CROSS APPEALS HAVE BEEN FILED AGAINST THE ORDER OF CIT(A) - IV, BENGALURU DT. 19.11.2012 FOR A.Y 2005 - 06. 2. THE ASSESSEE IN HIS GROUNDS OF APPEAL HAS NOT PRESSED GROUND NOS. 8 & 9, THEREFORE, THEY ARE DISMISSED AS SUCH. GROUND NO. 1 IS GENERAL, THEREFORE, DOES NOT REQUIRE ANY ADJUDICATION. NOW, THE EFFECTIVE GROUNDS WHICH SURVIVE FOR OUR ADJUDICATION ARE AS UNDER : 2. THE LD. CIT (A) ERRED IN CALCULATING THE OPERATING MARGIN OF COMPARABLE COMPANIES ENGAGED IN ITES SECTOR 20.96% AS AGAINST THE MARGIN CALCULATED BY APPELLANT COMPANY @ 13.50% FOR THE PURPOSES OF COMPUTING ARMS LENGTH PRICE 2 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) (ALP) FOR TRANSFER PRICE ADJUSTM ENT IN RELATION TO CDR DIVISION OF THE APPELLANT (VIDE PARA 68 ON PAGE 21 OF THE APPEAL ORDER). 3. THE LD. CIT (A) ERRED IN NEITHER CONSIDERING NOR PASSING A SPEAKING ORDER ON THE ADJUSTMENT IN THE OPERATING MARGIN OF CDR UNIT, AS HAS BEEN ASKED FOR BY AP PELLANT, IN RELATION TO IN - HOUSE WORK PERFORMED BY CDR UNIT OF THE COMPANY FOR ITS MANUFACTURING PLANT AT GOA AND THEREBY DISREGARDING REVENUE OF RS. 23,03,510/ - . 4. THE LD. CIT (A) ERRED IN APPLYING THE UPPER FILTER FOR TURNOVER OF RS. 200 CRORE FOR SEL ECTING COMPARABLE COMPANIES AS AGAINST THE TURNOVER OF THE APPELLANT UNIT THAT WAS ONLY RS. 1.34 CRORE. 5. THE LD. CIT (A) ERRED IN CONFIRMING THE STAND OF AO ON SELECTING VISHAL INFORMATION TECHNOLOGIES AND TULSYAN TECHNOLOGIES AS COMPARABLE COMPANIES (V IDE PARA 38 ON PAGE 13 OF THE APPEAL ORDER). 6. THE LD. CIT (A) ERRED IN NEITHER CONSIDERING NOR PASSING A SPEAKING ORDER ON THE RELIEF FOR BUSINESS & OPERATIONAL RISK ADJUSTMENT @ 5.25%, AS WAS ASKED FOR BY THE APPELLANT. 7. THE LD. CIT (A) ERRED IN NOT CONSIDERING THE FUNCTIONAL DIFFERENCES BETWEEN THE APPELLANTS CDR UNIT AND COMPARABLE COMPANIES SELECTED BY TPO. 3. IN REVENUES APPEAL, THE REVENUE HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL : 1. THE LD CIT(A) HAS ERRED IN HOLDING THAT THE SIZE & TURNOVER OF THE COMPANY ARE DECIDING FACTORS FOR TREATING A COMPANY AS A COMPARABLE AND ACCORDINGLY ERRED IN EXCLUDING M/S WIPRO LTD. AND M/S WIPRO BPO SOLUTIONS LTD. IN ITES SEGMENT AS COMPARABLE COMPANIES. 2. THE LD. CIT(A) HAS ERRED IN EXCLUDING M/S MAPLE - E - SOLUTIONS LTD., AS A COMPARABLE IN THE ITES SEGMENT OF THE ASSESSEE. 3. THE LD. CIT(A) HAS ERRED IN EXCLUDING M/S NUCLEUS NETSOFT AND GIS (INDIA) LTD ON THE GROUND OF RELATED PARTY TRANSACTIONS. 4. IN VIEW OF THE INTRODUCTION OF SEC. 92C( 2A) OF THE IT ACT, 1961. WITH RETROSPECTIVE EFFECT FROM 01.04.2002, THE ORDER OF THE CIT(A) THAT THE ASSESSEE IS ENTITLED TO 5% STANDARD DEDUCTION IS CONTRARY TO THE PROVISIONS OF LAW. IN THE APPEAL FILED INITIALLY, THE REVENUE HAS ALSO TAKEN THE FOLLOWING GROUNDS : 3 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) 1. THE LD CIT(A) HAS ERRED IN DIRECTING AO TO ALLOW AN ADJUSTMENT OF 12.31%, FOR MARKETING EXPENSES AFTER DUE VERIFICATION WITH RESPECT TO EXPORT OF FINISH GOOD, WHICH TPO HAS ALREADY ALLOWED AS ADJUSTMENT TOWARDS EXPENSES INCURRED BY THE ASSESSEE FOR MARKETING EXPENSES OF FINISHED GOODS. 2. THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 1,07,017/ - , ON ACCOUNT OF T.P. ADJUSTMENT ON IMPORT OF COMPONENT AND SPARES W HICH WAS ALREADY CONSIDERED BY THE TPO. 3. THE LD. CIT(A) HAS ERRED IN DIRECTING AO TO CONSIDER AVERAGE MARGIN @20.96% FOR COMPUTATION OF TP MARGIN W.R.T. IT ENABLE ENGINEERING SUPPORT SERVICE, WHICH TPO HAS ALREADY CONSIDERED THE RATIO OF OPERATING MARGI N TO OPERATING COST OF VARIOUS COMPANY WORKING UNDER SIMILAR CONDITIONS. 4. THE LD. CIT(A) HAS ERRED IN ALLOWING ASSESSEES CLAIM OF DEPRECIATION ON GOODWILL (INTANGIBLE ASSETS) 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN MANUFACT URE OF FIBRE GLASS PRESSURE VESSEL USED FOR WATER TREATMENT. RETURN SHOWING INCOME OF RS.2,71,28,828/ - WAS FILED ON 29.10.2005. THE AO MADE REFERENCE TO JOINT DIRECTOR OF INCOME TAX (TRANSFER PRICING), BENGALURU FOR DETERMINATION OF THE ARMS PRICE LENGT H IN RESPECT OF THE ASSESSEES TRANSACTION WITH ASSOCIATED ENTERPRISES. TPO PASSED ORDER U/S 92CA ON 31.1.2008 SUGGESTING TRANSFER PRICE ADJUSTMENT OF RS.3,75,96,334/ - . THE AO ADDED THE SAID AMOUNT IN THE ORDER PASSED U/S 143(3). BESIDES THIS, THE AO AL SO DISALLOWED DEPRECIATION ON THE GOODWILL AMOUNTING TO RS.47,19,133/ - . THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). CIT(A) HAS PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. BOTH THE PARTIES HAVE COME IN APPEAL BEFORE US. 5. GROUND NO. 3 IN REVENUES APPEAL FILED ORIGINALLY AND G ROUND NOS. 1 - 4 IN THE GROUNDS OF APPEAL FILED BY THE REVENUE ON 7.2.2013 AND GROUND NOS. 2 - 7 IN THE ASSESSEES APPEAL RELATE TO THE COMMON ISSUE RELATING TO ADJUSTMENT IN THE OPERATING MARGIN OF CDR UNIT AND THEREBY MAKING ADDI TION THEREIN TO THE EXTENT OF RS. 19,05,947/ - BY THE AO WHICH WAS BY TAKING AVERAGE OPERATING MARGIN @ 4 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) 23.68% WHILE THE CIT(A) DIRECTED THE AO TO TAKE THIS MARGIN @ 20.96% AND SUSTAINED THE ADDITION ON THAT BASIS BY HOLDING AS UNDER : 28. I HAVE CONSIDERED THE APPELLANTS ARGUMENTS ON THE TURNOVER FILTER ADOPTED BY THE TPO. WHILE I CONSIDER THAT USE OF THIS FILTER IS VALID, I AM OF THE OPINION THAT IF THERE IS A LIMIT AT THE LOWER END OF TURNOVER FOR IDENTIFYING COMPARABLES, THERE IS NO RE ASON WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO, AS SIZE MATTERS IN BUSINESS. THIS PRINCIPLE WAS UPHELD BY THE HONBLE BENGALURU BENCH OF ITAT IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) (P.) LTD. V. DCIT [2012] 53 SOT 159 (BANG) , WHERE IT WAS OBSE RVED THAT WHILE A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN THE PRICE, ATTRACT MORE CUSTOMERS AND HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO WERE ABLE TO GIVE BETTER OUTPUT, A SMALL COMPANY MIGHT NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT MARGIN. THUS, WHEN COMPANIES WHICH WERE LOSS MAKING WERE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER AND OF CLASSIFICATION MADE BY DUN & BRADSTREET, THE TURNOVER FILTER WAS VERY IMPORTANT AND COMPANIES WHICH HAD TURNOVER OF RS. 1 TO RS. 200 CRORE SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. 29. THE HONBLE DELHI BENCH OF ITAT HAS, IN THE CASE OF SONY INDIA (P.) LTD. V. DCIT [2008] 114 ITD 448 (DEL) , UPHELD THE OBJECTION OF ASSESSEE ON INCLUSION OF A COMPARABLE WHEN THE DISTINCTIVE DIFFERENCES LIKE SIZE AND TURNOVER MATERIALLY AFFECTED PERFORMANCE OR PRICES OF PRODUCTS. IT WAS HELD IN E - GAIN COMMUNICATION PRIVATE LIMITED (2008 - TIOL - 282 - ITAT - PUNE) , THAT THERE WAS NO JUSTIFICATION FOR CONSIDERING OVERSIZED COMPANIES. I ALSO RELY ON THE RATIO LAID DOWN IN THE CASE OF DELOITTE CONSULTING INDIA PVT. LIMITED. V. DCIT (ITA NO 10 82/HYD/20L0) THAT IN THE EVENT OF USE OF THE TPOS FILTER OF A TURNOVER OF LESS THAN RS. 1 CRORE, IT WOULD BE APPROPRIATE TO REJECT COMPANIES HAVING HIGHER SALES TURNOVER AS WELL, TO NEUTRALISE THE IMPACT OF BOTH LOW AND HIGH TURNOVER COMPANIES AND TO PROV IDE A MORE RELIABLE RESULT. 30. FOLLOWING THESE DECISIONS AND CONSIDERING THAT THE APPELLANTS TURNOVER IN THE RELEVANT BUSINESS SEGMENT DURING THE YEAR UNDER APPEAL WAS LESS THAN RS. 2 CRORE, I DIRECT THE AO TO APPLY, FOR COMPUTING THE ARITHMETIC MEAN OF NET MARGINS, THE TURNOVER FILTER AT BOTH THE LOWER AND UPPER ENDS AND EXCLUDE FROM THE FINAL SET OF COMPARABLES THE FOLLOWING COMPANY CONSIDERED BY THE TPO : SL. NO. COMPARABLE COMPANY TURNOVER (RS. CRORE) OP/TC (%) 1 WIPRO BPO SOLUTIONS LTD. 617.71 18.59 5 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) 31. THE APPELLANT FURTHER SUBMITTED THAT THE COMPARABLES SELECTED BY THE TPO WERE INCORRECT AND LIABLE TO BE REJECTED FOR THE FOLLOWING REASONS: M/S ALLSEC TECHNOLOGIES LTD. 32. IT WAS ARGUED THAT M/S ALLSEC TECHNOLOGIES LTD. HAD A TURNOVER OF RS. 57.56 CRORE AND SHOULD THEREFORE BE REJECTED, APPLYING THE UPPER TURNOVER FILTER OF RS. 20 CRORE. THE TPO HAD INCORRECTLY COMPUTED THE MARGIN OF THIS COMPANY AT 29.85%, AS AGAINST THE CORRECT MARGIN OF 26.91%. 33. I AM NOT IN AGREEMENT WITH THE APPELL ANT THAT GIVEN ITS SEGMENTAL TURNOVER OF RS. 1.34 CRORE, A TURNOVER RANGE OF RS. 1 CRORE TO RS. 20 CRORE OUGHT TO BE ADOPTED. AS THIS GOES AGAINST THE BASIS LAID DOWN IN GENISYS INTEGRATING SYSTEMS (INDIA) (P.) LTD. (SU P RA) FOR CONSIDERING COMPANIES WITHIN THE TURNOVER RANGE OF RS. 1 CRORE TO RS. 200 CRORE, I REJECT THIS ARGUMENT. HOWEVER, I FIND FROM A PERUSAL OF THE COMPANYS PROFIT AND LOSS ACCOUNT THAT ITS OPERATING INCOME WAS RS. 57,55,24,067, AS AGAINST OPERATING EXPENSES OF RS. 45,35,00,314, RESULTIN G IN AN OPERATING PROFIT OF RS. 12,20,24,293. THUS THE RATIO OF OPERATING MARGIN TO OPERATING COST WORKS OUT TO 26.91%. I THEREFORE DIRECT THE AO TO ADOPT THE CORRECT OPERATING MARGIN OF 26.91% IN RESPECT OF THIS COMPANY . M/S. MAPLE E SOLUTIONS LTD. 34. IT WAS ARGUED THAT THE TPO HAD CONSIDERED M/S MAPLE E SOLUTIONS LTD. AS A COMPARABLE AND COMPUTED ITS MARGIN AT 28.75%. HOWEVER, THE HONBLE DELHI BENCH OF ITAT HAD HELD IN THE CASE OF ACIT V. M/S. CRM SERVICES INDIA P. LTD 14 TAXMANN.COM 96 THAT THIS COM PANY COULD NOT BE SELECTED AS A COMPARABLE FOR ITES COMPANIES AS THE MANAGEMENT OF THIS COMPANY WAS TAINTED, AS THE DIRECTORS OF THE COMPANY WERE INVOLVED IN A FRAUD. THE BUSINESS REPUTATION OF THE RESTAGE GROUP WHICH OWNED M/S MAPLE E SOLUTIONS WAS UNDER SERIOUS INDICTMENT AND IN VIEW OF A QUESTION MARK ON THE REPUTATION OF ITS OWNER, ALBEIT FOR EARLIER YEARS, IT WOULD BE UNSAFE TO TAKE THEIR RESULTS FOR COMPARISON OF THE PROFITABILITY OF THE ASSESSEE. 35. I AM OF THE OPINION THAT THE FINANCIAL RESULTS OF A COMPANY WHOSE DIRECTORS AND BUSINESS REPUTATION WERE UNDER CLOUD WOULD BE OF QUESTIONABLE INTEGRITY. ALSO TPOS HAVE BEEN REJECTING OTHER SIMILAR COMPANIES LIKE M/S. SATYAM COMPUTERS LTD. FOR THE SAME REAS ONS. I THEREFORE, DIRECT THE AO TO EXCLUDE THIS COMPANY FROM THE FINAL LIST OF COMPARABLE. M/S VISHAL INFORMATION TECHNOLOGIES LTD. & M/S TULSAN TECHNOLOGIES L.TD. CFI 36. THE APPELLANT CONTENDED THAT THE TPO HAD SELECTED M/S VISHAL INFORMATION TECHNOLO GIES LTD. AND M/S TULSYAN TECHNOLOGIES LTD. AS COMPARABLES, BUT THE 6 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) COMPANIES FAILED THE EMPLOYEE COST FILTER, SINCE THEIR SALARY EXPENSE AT RS. 19 LAKH AND RS. 28 LAKH WERE LESS THAN ONE PERCENT AND 15 PERCENT OF THEIR RESPECTIVE REVENUES OF RS. 20.82 CRO RE AND RS. 1.90 CRORE. FURTHER, BOTH COMPANIES HAD OUTSOURCED MOST OF THEIR WORK, IN CONTRAST TO THE APPELLANT COMPANY WHICH HAD HIRED ITS OWN EMPLOYEES. THUS THE BUSINESS MODELS OF THE TWO COMPANIES WERE DIFFERENT AND THIS COMPANY SHOULD THEREFORE BE REJE CTED. 37. RELIANCE WAS PLACED IN THIS CONTEXT ON THE DECISION OF THE HONBLE MUMBAI BENCH OF ITAT IN THE CASE OF ACIT V. M/S. MAERSK GLOBAL SERVICE CENTER (LNDIA) P. LTD., [2012] 22 TAXMANN.COM 33 (MUM.), WHERE IT WAS HELD THAT INSOFAR AS THE CASES OF M/S TULSYAN TECHNOLOGIES LTD. AND M/S VISHAL INFORMATION TECHNOLOGIES LTD. WERE CONCERNED, IT WAS NOTICED FROM THEIR ANNUAL ACCOUNTS THAT THESE COMPANIES HAD OUTSOURCED A CONSIDERABLE PORTION OF THEIR BUSINESS AND AS THE ASSESSEE HAD CARRIED OUT THE ENTIRE OP ERATIONS BY ITSELF, THESE TWO CASES WERE RIGHTLY EXCLUDED. 38. I HAVE CAREFULLY CONSIDERED THE APPELLANTS SUBMISSIONS. THOUGH EMPLOYEE COST MAY FORM A SIGNIFICANT PORTION OF THE TOTAL COSTS OF A SOFTWARE COMPANY, THE PROBLEM LIES IN CORRECTLY GAUGING SUC H COSTS. ALL COMPANIES DO NOT FOLLOW A UNIFORM POLICY IN CLASSIFYING EMPLOYEE COST, BUT CATEGORISE IT VARIOUSLY AS ADMINISTRATIVE, MARKETING, OPERATING, OR SOFTWARE DEVELOPMENT EXPENSES AND NOT NECESSARILY AS PERSONNEL EXPENSES IN THE PROFIT AND LOSS ACCOU NT. FURTHER, AS IN THESE TWO CASES, COMPANIES MAY OUTSOURCE TASKS RATHER THAN EMPLOY THEIR OWN PERSONNEL AND OUTSOURCING COSTS MAY BE DISCLOSED UNDER HEADS LIKE LEGAL AND PROFESSIONAL CHARGES, CONTRACTS COSTS, ETC. AS THERE IS NO WAY OF TRACKING OR IDENTIF YING EMPLOYEE COSTS, COMPANIES MAY NOT BE PARTICULARLY AMENABLE TO BE USED AS A FILTER IN THE SELECTION OR REJECTION OF COMPARABLES. I THEREFORE REJECT THE APPELLANTS ARGUMENT THAT THE TWO COMPANIES OUGHT TO HAVE BEEN REJECTED ON THE GROUND THAT THEIR EM PLOYEE COSTS WERE LESS RELATIVE TO TURNOVER. 39. AS REGARDS OUTSOURCING AS A BUSINESS MODEL, I DO NOT AGREE WITH THE APPELLANT THAT COMPANIES OUGHT TO BE HELD AS INCOMPARABLE MERELY BECAUSE THEY OUTSOURCED SOME OR MOST OF THEIR TASKS AND HAD NOT HIRED T HEIR OWN EMPLOYEES, IF THEY PASSED THE OTHER FILTERS INCLUDING FUNCTIONALITY. RELIANCE BY THE APPELLANT ON THE DECISION IN ACIT V. M/S. MAERSK GLOBAL SERVICE CENTER (INDIA) P. LTD. (SUPRA) DOES NOT HELP, AS THE HONBLE ITAT HAD ACTUALLY REMANDED THE CASE A ND HAD ONLY REFERRED TO THE RESPONDENTS ARGUMENT THAT COMPANIES THAT HAD OUTSOURCED A CONSIDERABLE PORTION OF THEIR BUSINESS NEEDED TO BE EXCLUDED FROM COMPARISON. M/S WIPRO LTD. 40. THE APPELLANT HAS POINTED OUT THAT M/S WIPRO LTD. WAS 460 TIMES BIGGE R THAN ITSELF AND WIPRO WAS THUS SIGNIFICANTLY DISSIMILAR IN SIZE. 7 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) 41. I HAVE ALREADY HELD IN THE PRECEDING PARAGRAPHS THAT M/S WIPRO LTD. CANNOT BE CONSIDERED AS COMPARABLE TO THE APPELLANT COMPANY IN VIEW OF THE FORMERS HUGE TURNOVER AND DIRECTED THE A O TO EXCLUDE THIS COMPANY FROM THE FINAL SET OF COMPARABLES. M/S NUCLEUS NETSOFT AND GIS (LNDIA) LTD. 42. THE APPELLANT OBJECTED TO THE SELECTION OF M/S NUCLEUS NETSOFT AND GIS (INDIA) LTD. AS A COMPARABLE ON THE GROUND THAT ITS EXPORT REVENUE AT RS . 1.24 CRORE WAS 44% OF ITS TOTAL OPERATING REVENUE OF RS 2.79 CRORE AND THUS IT FAILED THE EXPORT REVENUE FILTER. THE TPO HAD ADOPTED THE EXPORT REVENUE FILTER OF MORE THAN 25% ON THE GROUND THAT MARKET AND ECONOMIC CONDITIONS WERE DIFFERENT FOR EXPORT AN D DOMESTIC SALES. IF THE EXPORT AND DOMESTIC MARKETS ARE DIFFERENT, IT WOULD BE MORE APPROPRIATE TO ADOPT EXPORT REVENUE FILTER OF 75% RATHER THAN 25% AS ADOPTED BY THE TPO. THE CIT(A) HAD, IN THE CASE OF ELECTRONICS FOR IMAGING INDIA PRIVATE LIMITED V. DC IT (ITA NO. 9/RANGE - 11/2010 - 11) , REJECTED COMPANIES HAVING EXPORT REVENUE OF LESS THAN 75% OF OPERATING REVENUE. 43. IT WAS FURTHER ARGUED THAT THE TPO HAD CONCLUDED THAT THIS COMPANY DID NOT HAVE RPT. THOUGH DETAILS OF RPT WERE NOT AVAILABLE IN THE ANNU AL REPORT OF THE COMPANY FOR FY 2004 - 05, THE TPOS PRESUMPTION ABOUT RPT WAS BAD IN LAW. THE HONBLE DELHI BENCH OF ITAT HAD HELD IN THE CASE OF ACIT V. CRM SERVICES INDIA P. LTD. 14 TAXMANN.COM 96 , THAT RPT OF THE COMPANY WAS 22.28% OF ITS OPERATING INCOM E IN AY 2004 - 05, WHICH RENDERED IT INCOMPARABLE AS THE TOLERABLE LIMIT OF RELATED PARTY TRANSACTIONS WOULD BE IN THE VICINITY OF 10% TO 15%. AS M/S NUCLEUS NETSOFT HAD SUBSTANTIAL RPT IN THE EARLIER YEAR, IT WAS LOGICAL TO CONCLUDE THAT THE COMPANY WOULD H AVE HAD SUBSTANTIAL RPT IN THE CURRENT YEAR AS WELL, AS FACTS AND CIRCUMSTANCES OF THE CASE HAD REMAINED SAME, AS EVIDENT FROM THE ANNUAL REPORT OF THE COMPANY. IN THE ABSENCE OF ADEQUATE DETAILS FOR ANALYSIS, THIS COMPANY SHOULD BE REJECTED AS COMPARABLE. 44. I DO NOT AGREE WITH THE APPELLANTS ARGUMENT ABOUT THE EXPORT REVENUE FILTER. THE TPO HAS MENTIONED ON PAGE 63 OF HIS ORDER THAT HE HAD THOUGHT IT PROPER TO EXCLUDE COMPANIES THAT DID NOT HAVE EXPORT TURNOVER THAT WAS AT LEAST 25% OF THEIR TOTAL TURN OVER IN VIEW OF THE FACT THAT THE APPELLANT WAS A 100% EXPORT COMPANY. THE APPELLANT HAS MISINTERPRETED THE FILTER TO IMPLY THAT COMPANIES WITH EXPORT TURNOVER OF MORE THAN 25% OF TOTAL REVENUE WERE REJECTED, WHEREAS THE ACTUAL IMPLICATION OF THE FILTER WA S TO EXCLUDE COMPANIES WITH EXPORT TURNOVER OF LESS THAN 25% OF TURNOVER. THEREFORE, ITS SUGGESTION TO REJECT COMPANIES WITH EXPORTS OF MORE THAN 75% OF REVENUE IS SUPERFLUOUS. AS THE EXPORT REVENUE OF THIS COMPANY WAS 44% OF REVENUE BY THE APPELLANTS OWN ADMISSION, THERE IS NO DOUBT THAT THE EXPORT TURNOVER WAS SATISFIED IN THIS CASE. 8 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) 45. THE APPELLANTS CONTENTION WITH REGARD TO THE RPT FILTER IS ALSO QUESTIONABLE, AS ONE CANNOT ASSUME ON THE BASIS OF A PRECEDING YEARS RPT INFORMATION EMANATING FROM TH E CASE LAW CITED BY THE APPELLANT THAT RPT WAS MORE THAN 25% IN THE CURRENT YEAR AS WELL. HOWEVER, I AM IN AGREEMENT WITH THE APPELLANT THAT IN THE ABSENCE OF SPECIFIC AND CORRECT INFORMATION, IT WOULD BE SAFER TO EXCLUDE THE COMPANY FROM COMPARISON. I TH EREFORE DIRECT THE AO TO EXCLUDE THIS COMPANY FROM THE FINAL SET OF COMPARABLES. M/S SAFFRON GLOBAL LTD. AND M/S TRANSWORKS INFORMATION SERVICES LTD. 46. THE APPELLANT HAS SOUGHT THE EXCLUSION OF THESE TWO COMPANIES ON THE GROUND THAT THEIR TURNOVER WAS MORE THAN 20 CRORE. 47. I DO NOT ACCEPT THE APPELLANTS CONTENTION AS IT GOES AGAINST THE BASIS LAID DOWN IN GENISYS INTEGRATING SYSTEMS (INDIA) (P.) LTD. (SUPRA) FOR CONSIDERING COMPANIES WITHIN THE TURNOVER RANGE OF RS. 1 CRORE TO RS. 200 CRORE. I THER EFORE DECLINE TO INTERFERE WITH THE TPOS ORDER ON THIS ASPECT . 48. IN THE LIGHT OF DIRECTIONS GIVEN IN THE PRECEDING PARAGRAPHS, THE FOLLOWING IS THE SET OF COMPANIES TO BE CONSIDERED BY THE AO FOR DETERMINATION OF THE AVERAGE MARGIN OF COMPARABLES: SL. NO. COMPANY OP/TC (%) 1 ACE SOFTWARE EXPORTS LTD. 14.50 2 ALLSEC TECHNOLOGIES LTD. 26.91 3 SAFFRON GLOBAL LTD. 24.88 4 TRANSWORKS INFORMATION SERVICES LTD. 02.81 5 TULSYAN TECHNOLOGIES LTD. 17.02 6 VISHAL INFORMATION TECHNOLOGIES LTD. 45.62 ARITHMETIC MEAN 21.96 49. THE AVERAGE MARGIN OF 21.96% AS SHOWN ABOVE NEEDS TO BE REDUCED BY 1.00% FOR WORKING CAPITAL ADJUSTMENT ALLOWED BY THE TPO, RESULTING IN AN ADJUSTED MEAN MARGIN OF 20.96%. THE AO MAY COMPUTE THE NECESSARY TP ADJUSTMENT ACCORDINGLY . 5.1 THE LD. AR BEFORE US CONTENDED THAT THE ASSESSEE IS AN INDUSTRIAL PRODUCT MANUFACTURER AND DERIVES 98% OF ITS REVENUE FROM MANUFACTURING OPERATIONS. IT HAS SET UP A DIVISION IN THE YEAR 1998 - 99 FOR PROVIDING IN - HOUSE SUPPORT ENGINEERING SERVICES IN THE FIELD OF PRODUCT QUALITY ASSURANCE, DESIGNING AND 9 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) PRODUCT DEVELOPMENT. THE SAID DIVISION IS INTERNALLY NAMED AS CDR DIVISION. FROM THIS DIVISION, THE ASSESSEE HAS GENERATED REVENUE FROM EXPORT SERVICES AMOUNTING TO RS.1,34,20,939/ - . THIS DIVISION WAS ALSO RENDERING SERVICES TO THE OTHER DIVISIONS OF TH E ASSESSEE IN INDIA. THE TOTAL OPERATING COSTS INCURRED BY THE ASSESSEE WAS TO THE EXTENT OF RS.1,23,92,372/ - WHICH HAS NOT BEEN DISPUTED BY THE TPO. FOR THIS, OUR ATTENTION WAS DRAWN TOWARDS THE ORDER THE TPO AND IT WAS CONTENDED THAT WHILE COMPUTING TH E OPERATING MARGIN, THE AO HAS COMPUTED THE OPERATING PROFIT ONLY IN RESPECT OF THE SAID ACTIVITIES BY REDUCING FROM THE REVENUE RECEIVED FROM SUPPORT SERVICES , THE OPERATING M A R G I N @ 8.30% WHILE IN FACT IF THE NOTIONAL REVENUE WAS WORKED OUT IN RESPECT OF THE SERVICES RENDERED TO THE ASSESSEES GOA PLANT AT THE SAME RATE AT WHICH SERVICES WERE RENDERED TO THE AE ABROAD, THE OPERATING PROFIT WOULD HAVE COME @ 26.06% . IT WAS CONTENDED THAT ON AN AVERAGE THE REVENUE HAS BEEN RECEIVED FROM THE AE ABROAD @ RS. 452/ - AS THE CDR UNIT HAS SPENT 29,685 HRS. WHILE TO THE GOA UNIT, THE SERVICES WERE RENDERED FOR 4,870 HRS. IF THE SAID 4,870 HRS. ARE TAKEN INTO CONSIDERATION, THE REVENUE FROM THE ENTIRE DIVISION WOULD HAVE BEEN RS.22,01,240/ - . THUS, IT WAS CONTENDED THAT THERE CANNOT BE ANY ADDITION AS THE OPERATING MARGIN IN THE CASE OF THE ASSESSEE WOULD HAVE COME TO MORE THAN 26% WHILE THE TPO HAS CALCULATED THE MARGIN AT 23.68% AND MADE ADDITION ON THAT BASIS WHILE THE CIT(A) HAS REDUCED IT TO 20.96%. IT WAS CONT ENDED THAT THE ASSESSEE HAS SELECTED A SET OF 4 COMPARABLE COMPANIES. THE AVERAGE OPERATING PROFIT TO OPERATING PERCENTAGE ON THE BASIS OF THE SELECTION OF THE COMPARATIVE COMPANIES WAS 10.04%. THE LIST OF THE COMPARATIVE COMPANIES IS AS UNDER : SL. NO. COMPANY NAME TURNOVER (INR IN CRS) OPERATING COST (INR IN CRS) OPERATING MARGIN ON COST 1 ACE SOFTWARE EXPORTS LTD 5.14 4.75 8.21% 2 VJIL CONSULTING LTD 15.83 14.07 12.50% 3 C S SOFTWARE ENTERPRISES LTD 8.08 7.09 13.96% 4 VAMA INDUSTRIES LTD. 1.54 1.46 5.48% ARITHMETIC MEAN 10.04% 10 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) THE TPO REJECTED THE SELECTION OF THE ASSESSEE BUT HE HAS SELECTED A DIFFERENT SET OF COMPARABLES, THE DETAILS OF WHICH ARE AS UNDER : SL. NO. COMPANY NAME TURNOVER (INR IN CRS) OPERATING MARGIN ON COST 1 ALLSEC TECHNOLOGIES LIMITED 57.76 29.85% 2 SAFFRON GLOBAL LTD. 27.78 24.88% 3 VISHAL INFORMATION TECHNOLOGY LTD. 20.82 45.62% 4 COSMIC GLOBAL LTD. 1.90 17.02% 5 TRANSWORKS INFORMATION SERVICES LTD. 108.23 2.81% 6 WIPRO BPO SOLUTIONS LTD. 617.71 18.59% 7 ACE SOFTWARE EXPORTS LTD. 5.90 14.50% 8 NUCLEUS NETSOFT & GIS LTD. 2.79 40.06% 9 MAPLE E SOLUTIONS LTD 1.47 28.75% ARITHMETIC MEAN 24.68% 5.1.1 THE PRIMARY OBJECTION OF THE ASSESSEE WAS SELECTION OF COMPARABLE COMPANIES BY THE TPO AND THE CALCULATION OF THE REVENUE FOR CDR UNIT. THE LD. AR HAS GIVEN THE FOLLOWING GIST OF ASSESSEES OBJECTIONS O N T H E DECISION OF CIT(A) IN HIS WRITTEN SUBMISSION AT PG. 4 & 5. SL. NO. COMPANY NAME TURNOVER (INR IN CRS) OPERATING MARGIN ON COST REMARKS 1 ALLSEC TECHNOLOGIES LIMITED 57.76 26.91% OBJECTION OF APPELLANT - THERE WAS A CALCULATION MISTAKE IN THE COMPUTATION OF OPERATING MARGIN BY TPO. TPO CALCULATED MARGIN PERCENTAGE @ 29.85% WHILE THE CORRECT CALCULATION COMES TO 26.91%. IT WAS POINTED OUT BY APPELLANT TO CIT(A) AND HE AGREED TO CORRE CT IT. (PARA 32 & 33 OF APPEAL ORDER). RELIEF WAS GRANTED BY CIT(A). 2 SAFFRON GLOBAL LTD 27.78 24.88% NO ISSUE 3 VISHAL INFORMATION 20 . 82 45 . 62% OBJECTION OF APPELLANT - COMPANYS BUSINESS MODEL IS DIFFERENT FROM THAT OF 11 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) TECHNOLOGIES LTD ASSESSEE AND THE SELECTED COMPANY HAD SUPER PROFIT. BUT CIT (A) DID NOT AGREE TO THE OBJECTION OF THE APPELLANT. COMPANY ENJOYING TAX FREE PLATFORM INCOME EXEMPT U/S 10 A. RELIEF WAS DENIED BY CIT(A). 4 COSMIC GLOBAL LTD 1.9 17.02% OBJECTION OF APPELLANT - C OMPANYS BUSINESS MODEL IS DIFFERENT FROM THAT OF ASSESSEE - BUT CIT(A) DID NOT AGREE TO THE OBJECTION OF THE APPELLANT. COMPANY ENJOYING TAX FREE PLATFORM INCOME EXEMPT U/S 10 A. RELIEF WAS DENIED BY CIT( A). 5 TRANSWORKS INFORMATION SERVICES LTD 108.23 2.81% NO ISSUE 6 WIPRO BPO SOLUTIONS LTD 617.71 0.00% OBJECTION OF APPELLANT SELECTED COMPANYS TURNOVER WAS VERY HIGH THAN OF THE ASSESSEE AND SIZE WISE IS NOT COMPARABLE. CIT(A) AGREED TO THE OBJECTION OF APPELLANT ASSESSEE AND EXCLUDED THIS COMPANY FROM THE LIST OF COMPARABLE COMPANIES (PARA 30 OF APPEAL ORDER). RELIEF WAS GRANTED BY CIT(A). 7 ACE SOFTWARE EXPORTS LTD 5.9 14.5 0 % NO ISSUE 8 NUCLEUS NETSOFT & GIS LTD 2.79 0.00% OBJECTION OF APPELLANT SELECTED COMPANY DOES NOT QUALIFY TO BE SELECTED IN THE LIST OF COMPARABLE COMPANIES ON TWO COUNTS - (1) EXPORT REVENUE OF THIS COMPANY WAS 44% OF ITS TOTAL REVENUE, AND (2) THIS COMPANY HAS SUBSTANTIAL SIZE OF RELATED PARTY TRANSACTIONS (RPT). HENCE IT FAILS ON TH E TESTS OF EXPORT TURNOVER AND RPT SO SHOULD NOT BE INCLUDED IN THE LIST OF COMPARABLE COMPANIES. THE OPERATING MARGIN OF THE COMPANY WAS 40.06%. THE CIT(A) PARTY AGREED TO THE 12 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) OBJECTION OF APPELLANT ASSESSEE (LIMITED ON THE ISSUE OF RPT) AND EXCLUDED THIS COMPANY FROM THE LIST OF COMPARABLE COMPANIES (PARA 45 OF APPEAL ORDER). RELIEF WAS GRANTED BY CIT(A). 9 MAPLE E SOLUTIONS LTD 1.47 0.00% OBJECTION OF APPELLANT - THE MANAGEMENT OF THE COMPANY IS TAINTED AS SUCH ITS RESULTS CANNOT BE RELIED UPON. THE DECISION OF ITAT IN THE CASE OF ACIT VS. CRM SERVICES INDIA PVT. LTD. (14 TAXMANN.COM 96), SUPPORTS THE VIEW POINT OF APPELLANT ASSESSEE. ACCOR DINGLY THE COMPANY DOES NOT QUALIFY TO BE SELECTED IN THE LIST OF COMPARABLE COMPANIES. THE OPERATING MARGIN OF THE COMPANY WAS 28.75%. THE CIT(A) AGREED TO THE OBJECTION OF APPELLANT ASSESSEE AND EXCLUDED THIS COMPANY FROM THE LIST OF COMPARABLE COMPANIES (PARA 34 & 35 OF APPEAL ORDER) RELIEF WAS GRANTED BY CIT(A) ARITHMETIC MEAN 21.96% 5.1.2 HE FURTHER PLEADED THAT THE TPO HAS SELECTED COMPANIES THAT ARE ECONOMICALLY AND FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE. THE COMPARISON SHOULD BE MADE WITH LIKE SIZE COMPANIES. WIPRO IS HAVING TURNOVER MORE THAN RS. 617 CRORES WHILE THE ASSESSEE IS HAVING TURNOVER OF RS.1.34 CRORE. THE ASSESSEE REQUESTED THE CIT(A) TO CONSIDER ONLY THE COMPANIES WHICH HAVE A TURNOVER FROM RS. 1 20 CRORES. CIT(A) AGREED WITH THE UPPER FILTER BUT WITHOUT SPECIFYING THE LIMIT. SIZE AS CRITERIA FOR COMPARISON IS ALSO RECOMMENDED BY OECD IN ITS TP GUIDELINES , 2010. FOR THIS, ATTENTION WAS DRAWN TOWARDS PARA 3.43 OF CHAPTER ON GUIDELINES DEA LING WITH SELECTING OR REJECTING POTENTIAL COMPARABLES. THE LD. AR ALSO RELIED IN THIS REGARD ON THE FOLLOWING DECISIONS OF THE TRIBUNAL IN WHICH CRITERIA OF SIZE HAS BEEN RECOGNISED AS ONE OF THE SELECTION CRITERIA : 13 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) I) DCIT VS. QUARK SYSTEMS PVT. LTD., 20 10 - TIOL - 31 - ITAT - CHD - SB II) GENISYS INTEGRATING SYSTEMS (INDIA) (P.) LTD. V. DCIT [2012] 20 TAXMANN.COM 715 (BANG.) SUPER PROFIT MAKING COMPANIES TO BE EXCLUDED. III) E - GAIN COMMUNICATIONS PVT. LTD. V. ITO 118 TTJ 354 (PUNE) THE COMPANIES WHICH ALSO HAVE TURNOVE R OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. IV) M/S. SONY INDIA (P) LIMITED V DCIT, 114 ITD 448 (DELHI) V) ITO V CRM SERVICES INDIA P LTD. ITA NO. 4068/DEL/2009 WHETHER WHERE TURNOVER OF ASSESSEE IN INST AN T YEAR AMOUNTED TO RS.31.64 CRORES, WHEREAS TURNOVER OF COMPARABLE CASE FROM SIMILAR BUSINESS WAS RS.91.24 LAKHS ONLY AND THUS, HAVING DIFFERENCE OF ABOUT 33 TIMES IN TURNOVER FROM SAME BUSINESS, SUCH A CASE COULD NOT BE TAKEN AS A COMPARABLE CASE (14.2) VI) AGNITY INDIA TECHNOLOGIES PVT. LTD. V INCOME - TAX OFFICER ITA NO. 3856(DEL)/2010 VII) PHILIPS SOFTWARE CENTRE PVT. LTD. 26 SOT 226 (BANG) VIII) M/S DELOITTE CONSULTING INDIA PVT LTD V DCIT, ITA NO.1084/HYD/2010 HIGH TURNOVER TO BE EXCLUDED IX) FROST & SULLIVAN (I) PVT. LTD. V. ACIT, ITA NO. 2073/MUM/2010 AY: 2004 - 05 PARA 9 HIGH PROFIT MAKING COMPANIES TO BE EXCLUDED. X) CIT V. RAKHRA TECHNOLOGIES PVT LTD., 15 TAXMANN.COM 266 PUNJAB & HARYANA HIGH COURT DECLINED TO INTERFERE WITH ITATS DIRECTION TO EXCLUDE HIGH TURNOVE R COMPANIES. ON THE BASIS OF THESE DECISIONS IT WAS VEHEMENTLY CONTENDED THAT THE UPPER FILTER BE RESTRICTED TO RS. 20 CRORES AS THE ASSESSEE COMPANY IS A VERY SMALL SIZED COMPANY. 14 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) 5.1.3 IT WAS ALSO CONTENDED THAT THE FUNCTIONALITY OF THE ASSESSEE COMP ANY IS DIFFERENT FROM THE INSTANCES TAKEN BY THE AO. THE ASSESSEE IS PRIMARILY A PRODUCT MANUFACTURING COMPANY RELATED TO WATER FILTRATION INDUSTRY WHILE THE SELECTED COMPANIES BY TPO ARE IN THE CORE BUSINESS OF IT. A SMALL IT DIVISION OF A NON - IT COMPAN Y CANNOT BE COMPARED WITH A FULL - FLEDGED IT COMPANY . AS SUCH THE KEY ACTIVITY AND NATURE OF BUSINESS OF THE ASSESSEE IS NOT ON THE DEVELOPMENT OF IT RELATED BUSINESS WHILE THE COMPANIES SELECTED FOR COMPARISON ARE EXCLUSIVELY IN IT SECTOR, SO CORE ACTIVIT Y IS IT RELATED AND TOTAL FOCUS OF THE COMPANIES IS ON THE IT RELATED BUSINESS. THE CDR DIVISION IS FUNCTIONALLY CONFINED TO PROVIDING ENGINEERING SERVICES IN WATER TREATMENT RELATED LINE OF ACTIVITY. THE OTHER COMPANIES FUNCTIONALLY HAVE BROAD BASE. TH E APPLICATION OF ARMS LENGTH PRINCIPLE IS BASED ON A COMPARISON OF THE CONDITIONS IN A CONTROLLED TRANSACTION WITH THE CONDITIONS IN AN UNCONTROLLED TRANSACTION BETWEEN INDEPENDENT ENTERPRISES. FOR THE PURPOSE OF SUCH COMPARISON, ECONOMICALLY RELEVANT CH ARACTERISTICS MUST BE SUFFICIENTLY COMPARABLE. TWO PARTIES ARE TO BE PLACED IN SIMILAR SITUATION TO MAKE THE COMPARISON OF LIKE WITH LIKE POSSIBLE. IT WAS SUBMITTED THAT TWO COMPANIES SHOULD BE REJECTED ON ACCOUNT OF PRACTISING OF DIFFERENT BUSINESS MODE L NAMELY, VISHAL INFORMATION TECHNOLOGIES LTD. AND TULSYAN TECHNOLOGIES LTD. (EARLIER COSMIC GLOBAL) . BOTH THESE COMPANIES HAVE ADOPTED BUSINESS MODEL OF OUTSOURCING ITS JOBS. SUPER HIGH PROFIT COMPANY, VISHAL INFORMATION TECHNOLOGIES LTD. SHOULD ALSO BE IGNORED. IN THIS REGARD RELIANCE WAS PLACED ON THE FOLLOWING CASES : I) ACIT V. MAERSK GLOBAL SERVICES CENTRE (ITA NO. 3774/M/2011 & CO 111/M/2011) 48. INSOFAR AS THE CASES OF TULSYAN TECHNOLOGIES LIMITED AND VISHAL INFORMATION TECHNOLOGIES LIMITED ARE CONCERNED, IT IS NOTICED FROM THEIR ANNUAL ACCOUNTS THAT THESE COMPANIES OUTSOURCED A 15 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) CONSIDERABLE PORTION OF THEIR BUSINESS. AS THE ASSESSEE CARRIED OUT ENTIRE OPERATIONS BY ITSELF, IN OUR CONSIDERED OPINION, THESE TWO CASES WERE RIGHTLY EXCLUDED. II) SAPIENT CORPORATION PVT. LTD. VS. DCIT (ITAT DELHI) HELD THAT LOSS - MAKING & SUPER - PROFIT COMPANIES ARE NOT COMPARABLE. IN BRIEF, IT WAS CONTENDED AT THE COST OF REPETITION THAT : - 1. C OMPANIES HAVING TURNOVER EXCEEDING 20 CRORE SHOULD NOT CONSIDERED AS COMPARABLE TO THAT OF THE ASSESSEES UNIT THAT HAD A TURNOVER OF RS.1.34 CRORE ONLY. 2. VISHAL INFORMATION TECHNOLOGY THAT EARNED OPERATING MARGIN OF 45.62% SHOULD BE CONSIDERED AS SUPER PRO FIT MAKING COMPANY AND BE EXCLUDED FROM THE LIST OF COMPARABLES. 3. IN VIEW OF THE DECISION OF ITAT DELIVERED IN MAERSK GLOBAL SERVICES CENTER (SUPRA), M/S COSMIC GLOBAL & VISHAL INFORMATION SHOULD BE NOT CONSIDERED FOR COMPARISON AS THEY FOLLOWED ENTIRELY DI FFERENT BUSINESS MODEL FOR JOB EXECUTION. BESIDES THE ABOVE TWO COMPANIES, ANOTHER COMPANY NAMELY SAFFRON GLOBAL SHOULD ALSO BE EXCLUDED AS IT BELONGS TO THE TAINTED MANAGEMENT GROUP OF MAPLE E - SOLUTIONS AND TRITON CORP LTD. SAFFRON WAS MERGED IN TRITON I N 2005 AND LATER IN 2007 TRITON ACQUIRED MAPLE E - SOLUTIONS. TRITON WAS ORIGINALLY A GARMENT MANUFACTURING COMPANY AND OPERATED UNDER THE NAME OF STENCIL APPAREL BRANDS LTD. IN RESPECT OF MAPLE E - SOLUTIONS & TRITON, IT HAS ALREADY BEEN HELD BY HON'BLE DEL HI ITAT IN THE CASE OF CRM SERVICES INDIA PVT. LTD. [(2011) 14 TAXMANN.COM 96 (DELHI)] THAT THESE ARE TAINTED COMPANIES HENCE SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. SINCE SAFFRON WAS ALSO UNDER THE SAME MANAGEMENT AS OF TRITON, IT SHOUL D ALSO BE EXCLUDED. 16 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) AFTER DELETING THE THREE COMPANIES VISHAL INFORMATION, COSMIC GLOBAL AND SAFFRON, THE FINAL SELECTION SHALL BE AS UNDER : SL. NO. COMPANY NAME TURNOVER (INR IN CRS) OP/OC TPO OP/OC CIT(A) OP/OC OUR PRAYER TO ITAT 1 ALLSEC TECHNOLOGIES LIMITED 57.76 29.85% 26.91% 26.91% 2 SAFFRON GLOBAL LTD 27.78 24.88% 24.88% 3 VISHAL INFORMATION TECHNOLOGIES LTD 20.82 45.62% 45.62% 4 COSMIC GLOBAL LTD 1.9 17.02% 17.02% 5 TRANSWORKS INFORMATION SERVICES LTD 108.23 2.81% 2.81% 2.81% 6 WIPRO BPO SOLUTIONS LTD 617.71 18.59% 7 ACE SOFTWARE EXPORTS LTD 5.9 14.50% 14.50% 14.50% 8 NUCLEUS NETSOFT & GIS LTD 2.79 40.06% 9 MAPLE E SOLUTIONS LTD 1.47 28.75% ARITHMETIC MEAN 24.68% 21.96% 14.74% IT WAS FURTHER SUBMITTED THAT THE CDR UNIT OF THE ASSESSEE COMPANY IS A CAPTIVE SERVICE PROVIDING UNIT. IT BEARS LESS THAN NORMAL RISK WHICH AN INDEPENDENT ENTERPRISE BEARS. THERE IS NO MARKET OR TECHNOLOGY RISK IN CASE OF THE ASSESSEES UNIT WHEREAS THE Y EXIST IN THE NORMAL BUSINESS AND THEREFORE NORMAL BUSINESS ENTERPRISES DUE TO THE RISK HAVE TO CHARGE MORE FOR ITS SERVICES AND ADJUSTMENT FOR THE RISK FACTOR SHOULD ALSO BE MADE. THE ASSESSEE HAS TAKEN THE RISK FACTOR ALSO BEFORE THE CIT(A) BUT CIT(A) S ORDER IS SILENT ON THIS ASPECT. RELIANCE WAS ALSO PLACED IN THIS REGARD ON THE DECISION OF THE BANGALORE TRIBUNAL IN THE CASE OF PHILIPS SOFTWARE CENTRE PVT. LTD. , 26 SOT 226 (BANG) IN WHICH IT WAS HELD THAT 17 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) THE DIFFERENCE BETWEEN THE PRIME LENDING RATE AND THE BANK RATE CAN BE CONSIDERED AS RISK PREMIUM. THUS, IT WAS CONTENDED THAT THE GROUNDS TAKEN BY THE ASSESSEE BE ALLOWED. 5.2 THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO AND VEHEMENTLY CONTENDED THAT THE CIT( A) WAS NOT CORRECT IN EVEN ALLOWING RELIEF TO THE ASSESSEE. IN THIS REGARD AN ADJUSTMENT U/S 92CA WAS REQUIRED TO BE MADE. THE ASSESSEE HAS INCURRED OPERATING COSTS OF RS.1,23,92,372/ - IN THE CDR UNIT AND IF THE ADJUSTMENT AT ARMS LENGTH MARGIN @ 23.68% IS MADE, THE REVENUE RECEIVED SHOULD HAVE BEEN RS.1,53,26,886/ - AGAINST WHICH THE ASSESSEE HAS RECEIVED REVENUE OF RS.1,34,20,939/ - FROM THE ASSOCIATED ENTERPRISES. IT WAS CONTENDED THAT THE TRANSFER PRICING CANNOT BE AN EXACT SCIENCE. EVALUATION OF THE TRANSACTION THROUGH WHICH PROCESS OF DETERMINATION IS CARRIED OUT IS AN ART WHERE MATHEMATICAL CERTAINTY IS INDEED NOT POSSIBLE AND SOME APPROXIMATION CANNOT BE RULED OUT. THE INSTANCE S TAKEN BY THE TPO WERE TOTALLY COMPARABLE INSTANCES. THE ASSESSEE WA S GIVEN SUFFICIENT OPPORTUNITY. ON AN INQUIRY FROM THE BENCH WHY THE NOTIONAL REVENUE IN RESPECT OF THE TIME SPENT FOR THE SERVICES RENDERED BY THE CDR UNIT TO GOA PLANT WAS NOT TAKEN INTO ACCOUNT FOR THE PURPOSE OF COMPUTING THE OPERATING PROFIT RATIO OF THE CDR UNIT, THE LD. DR COULD NOT EXPRESS ANYTHING ON THIS EXCEPT RELYING ON THE ORDER OF THE TPO. 5.3 WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD ALONGWITH THE ORDER OF THE TAX AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE V ARIOUS CASE LAWS AS HAS BEEN RELIED ON. WE NOTED THAT IN THIS CASE THE TPO HAS COMPUTED THE PROFIT MARGIN OF THE CDR UNIT , WHICH WAS RENDERING THE SERVICES NOT ONLY TO THE ASSOCIATED CONCERNS OUTSIDE INDIA BUT ALSO TO THE OTHER UNITS OF THE ASSESSEE COMPANY , BY TAKING THE REVENUE RECEIVED FROM THE EXPORT OF SERVICES TO THE ASSOCIATED CONCERNS AND WITHOUT TAKING ANY REVENUE INTO CONSIDERATION IN RESPECT OF THE SERVICES RENDERED BY THE CDR UNIT OF THE 18 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) ASSESSEE TO THE OTHER UNIT IN GOA. WE ALSO NOTED T HAT THE TPO HAS CONSIDERED THE TOTAL OPERATING COSTS OF THE CDR UNIT WHICH HAS BEEN INCURRED BY THE UNIT NOT ONLY IN RESPECT OF SERVICES RENDERED TO THE ASSOCIATED CONCERNS OUTSIDE INDIA BUT ALSO IN RESPECT OF SERVICES RENDERED TO THE UNIT IN INDIA AND ON THAT BASIS THE OPERATING PROFIT WAS WORKED OUT IN THE FOLLOWING MANNER : S.NO. PARTICULARS AMOUNT IN INR 1 REVENUE FROM EXPORT OF SERVICES 1,34,20,939 2 OPERATING COST 1,23,92,372 3 OPERATING PROFIT 10,28,567 4 OPERATING MARGIN (OP/OC) 8.30% IT IS NOT DENIED IN THIS CASE THAT THE CDR UNIT WAS RENDERING SERVICES NOT ONLY TO THE ASSOCIATED ENTERPRISES OUTSIDE INDIA BUT ALSO WAS RENDERING SERVICES TO THE OTHER DIVISIONS OF THE ASSESSEE COMPANY. NO NOMINAL VALUE HAS BEEN ASSIGNED IN RESPECT OF TH E SERVICES RENDERED BY THE CDR UNIT TO THE INDIAN DIVISION. THE CDR UNIT HAS RENDERED SERVICES TO THE AE UNITS ABROAD FOR 29685 HRS. WHILE IN RESPECT OF GOA PLANT, SERVICES WAS RENDERED FOR 4870 HRS. THE AVERAGE REVENUE RECEIVED BY THE CDR UNIT FROM THE ASSOCIATED ENTERPRISES ABROAD COMES TO RS.452/HOUR . WHEN THE TOTAL REVENUE RECEIVED FROM THE ASSOCIATED ENTERPRISES ABROAD IS RS.1,34,20,939/ - , IF WE APPLY THE SAME RATE IN RESPECT OF THE SERVICES RENDERED TO GOA PLANT, THE NOMINAL REVENUE WHICH SHOULD HA VE BEEN CREDITED TO CDR UNIT AND DEBITED TO THE GOA PLANT COMES TO RS.22,01,240/ - . IN OUR OPINION, WHILE COMPUTING THE TRUE PROFIT OF A PARTICULAR DIVISION, IT IS NECESSARY THAT THE VALUE SHOULD BE ASSIGNED IN RESPECT OF SERVICES RECEIVED BY THE OTHER UN IT AND IT SHOULD BE TAKEN AS PART OF THE REVENUE OF THAT PARTICULAR UNIT. IN THIS CASE, WE NOTED THAT THE TPO HAS TAKEN THE TOTAL OPERATING COST OF THE CDR UNIT WHICH CONSISTS OF THE COST NOT ONLY IN RESPECT OF THE SERVICES RENDERED TO THE ASSOCIATED ENTE RPRISES BUT ALSO IN RESPECT OF THE SERVICES RENDERED TO THE GOA 19 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) PLANT BY THE CDR UNIT. SINCE THE TOTAL COST OF THE CDR UNIT HAS BEEN TAKEN, THEREFORE, THE NOTIONAL REVENUE IN RESPECT OF GOA PLANT SHOULD ALSO BE CONSIDERED WHILE COMPUTING THE NET OPERATING PROFIT. IF THE NOTIONAL REVENUE FOR RENDERING SERVICES TO THE GOA PLANT IS TAKEN INTO ACCOUNT, WE NOTED THAT THE OPERATING PROFIT ON THE BASIS OF THE FORMULA ADOPTED BY THE TPO FROM THE CDR UNIT WILL WORK OUT AS UNDER : BEFORE CONSIDERING IN HOUSE SERVICE TO GOA PLANT AFTER CONSIDERING IN HOUSE SERVICE TO GOA PLANT PARTICULARS HOURS AVERAGE PER HOUR RATE INR ASSESSEE ASSESSEE REVENUE FROM RENDERING OF ENGINEERING SUPPORT SERVICES TO AES ABROAD 29,685 452 13,420,939 13,420,939 NOTIONAL REVENUE FOR RENDERING SERVICES TO GOA PLANT 4,870 452 2,201,240 TOTAL 34,555 13,420,939 15,622,179 TOTAL OPERATING COST 12,392,372 12,392,372 OPERATING PROFITS 1,028,567 3,229,807 NET OPERATING PROFIT/ OPERATING COST 8.30% 26.06% THUS, IF NOTIONAL REVENUE IS ASSIGNED TO THE SERVICES RENDERED BY THE CDR UNIT TO THE GOA PLANT AND TAKEN INTO ACCOUNT, THE NET OPERATING PROFIT WILL BE 26.06% WHICH IS MUCH MORE THAN THE MARGIN CALCULATED BY THE TPO. THE TPO, IN THIS CASE, WE NOTED, HAS CALCULATED THE MARGIN AT 23.68%. THEREFORE, EVEN IF WE REJECT ALL THE SUBMISSIONS OF THE ASSESSEE SO FAR AS SELECTION OF THE COMPARABLE IS CONCERNED, IN OUR OPINION, IN THIS CASE NO ADDITION CAN BE MADE OR SUSTAINED. ON THIS BASIS ITSELF, IN OUR OPINION, NO ADDITION IN RESPECT OF IT - ENABLED ENGINEERING SERVICES CAN BE MADE. WE HAVE ALSO GONE THROUGH THE OTHER SUBMISSIONS OF THE ASSESSEE WHICH RELATE TO THE SELECTION OF COMPARABLES. WE FIND THE SUBMISSIONS MADE BY THE ASSESSEE ARE DULY SUPPORTED BY THE V ARIOUS CASE LAWS ON WHICH THE ASSESSEE HAS RELIED BUT SINCE IN THIS CASE EVEN ON THE 20 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) BASIS OF THE OPERATING PROFIT, IN OUR OPINION, NO ADDITION CAN BE SUSTAINED, WE, THEREFORE, ARE NOT TAKING INTO CONSIDERATION THE OTHER SUBMISSIONS OF THE ASSESSEE. WE, A CCORDINGLY, ALLOW THE GROUND NOS. 2 TO 7 OF THE ASSESSEE AND DISMISS GROUND NOS. 1 TO 4 OF THE REVENUE TAKEN IN THE GROUNDS OF APPEAL FILED ON 7.2.2013 AND GROUND NO. 3 OF REVENUES GROUNDS FILED ORIGINALLY . 6. GROUND NO. 1 IN REVENUES APPEAL RELATES TO THE DELETION OF THE ADDITION BY THE CIT(A) BY ALLOWING AN ADJUSTMENT OF 12.31% OF MARKETING EXPENSES. 6.1 THE FACTS RELATING TO THIS GROUND ARE THAT THE TPO MADE TP ADJUSTMENT IN RESPECT OF EXPORT OF FINISHED GOODS TO AE. THE ASSESSEE CONTENDED BEFORE THE CIT(A) THAT ASSESSEE HAD INCURRED MARKETING EXPENSES AMOUNTING TO RS.8,41,13,120/ - FOR SOLICITING BUSINESS AND PROCURING SALES ORDER. THESE EXPENSES RELATE TO SALES (BOTH DOMESTIC AND EXPORTS) TO UNRELATED P ARTIES. ALTHOUGH THE RATIO OF THE MARKETING EXPENSES TO NON - AE SALES WORKED OUT TO 22%, THE ASSESSEE MADE A CONSERVATIVE DOWNWARD ADJUSTMENT OF 20% TO THE SALE PRICE OF UNRELATED PARTIES FOR APPLYING THE COMPARABLE UNCONTROLLED PRICE METHOD. THE TPO HAS CONSIDERED ONLY THE NET MARKETING EXPENSES OF RS.50,18,384/ - RELATING TO THE DUBAI OFFICE AS A LIKE AMOUNT HAD BEEN DEBITED UNDER THE HEAD ADVERTISEMENT, PUBLICITY AND OTHER SELLING EXPENSES IN THE PROFIT & LOSS ACCOUNT AND ALLOWED AN ADJUSTMENT IN ALP OF ONLY 4.08%. BEFORE CIT(A), IT WAS CONTENDED THAT THE ASSESSEE HAD MARKETING OFFICE AT DUBAI WHICH ALSO RENDERED SERVICES TO OTHER AES WORLDWIDE TO MARKET THEIR PRODUCT IN MIDDLE EAST REGION . THE ASSESSEE HAD CHARGED COMMISSION FROM SUCH AES @ 10% AND EAR NED INCOME OF RS. 2.02 CRORE THEREFROM. THE TPO HAD DEDUCTED THIS INCOME FROM THE MARKETING EXPENSES OF DUBAI OFFICE AND TAKEN THE NET BALANCE FOR WORKING OUT THE EXPENSE RATIO. HOWEV ER, IT COULD NOT HAVE BEEN DONE. OFFICE EXPENSES REMAINED UNCHANGED IR RESPECTIVE OF THE INCOME OR RECOVERY. PENTAIR ITALY HAD ONLY COMPENSATED THE ASSESSEE @ 10% OF ITS SALES 21 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) IN THE REGION AND THE CORRECT RATIO OF THE EXPENSES TO REVENUE WAS CLAIMED @ 17.64% INSTEAD OF 4.08% AS TAKEN BY TPO IN THE FOLLOWING MANNER : 1. EXPENSES OF DUBAI OFFICE (RS.) 2,52,83,510 2. COMMISSION EARNED FROM AES FOR USING DUBAI OFFICE (RS.) 2,02,65,126 3. APPELLANTS SALES FROM DUBAI OFFICE (RS.) 12,30,55,612 4. APPELLANTS GROSS REVENUE FROM DUBAI OFFICE [(2)+(3)] (RS.) 14,33,20,738 5. RATIO OF EXPENSES TO REVENUE [(1)/(4)] ( % ) 17.64 THE AO RELIED ON THE ORDER OF THE CIT(A) FOR THE PRECEDING A.Y 2004 - 05 WHICH WAS CONFIRMED BY THE ITAT. U LTIMATELY, ON THE BASIS OF THE A.Y 2004 - 05 AN ADJUSTMENT OF 19.35% WAS CLAIMED IN THE FOLLOWING MANNER : 1. NON - AE EXPORT SALES (RS.) 23,21,91,702 2. NON - AE DOMESTIC SALES (RS.) 21,27,38,585 3. COMMISSION INCOME FROM AES (RS.) 2,02,65,126 5. EXPENSES OF MARKETING OFFICE IN DUBAI (RS.) 2,52,83,510 6. EXPENSES OF MARKETING REPRESENTATIVE IN EUROPE (RS.) 54,07,237 7. EXPENSES OF INTERNATIONAL MARKETING FROM INDIA OFFICE (RS.) 1,81,57,262 8. TOTAL EXPENSES ON INTERNATIONAL MARKETING [(4+5+6)] (RS.) 4,88,48,009 9. RATIO OF INTERNATIONAL MARKETING EXPENSES TO INTERNATIONAL SALES (%) [(1+3)/7] 19.35 CIT(A) AFTER GETTING THE REMAND REPORT FROM THE TPO DIRECTED THE AO TO ALLOW ADJUSTMENT OF 12.31% OF THE MARKETING EXPENSES CONSISTENT WITH THE CIT(A)S DIRECTION AS CONFIRMED BY ITAT IN A.Y 2004 - 05 IN THE FOLLOWING MANNER : 15. I HAVE CAREFULLY CONSID ERED THE APPELLANTS SUBMISSIONS. MY PREDECESSOR HAD, VIDE HIS LETTER DATED 09.01.2012, CALLED FOR THE TPOS COMMENTS ON THE APPELLANTS PLEA FOR A HIGHER RATE OF ADJUSTMENT FOR MARKETING COST AND ON WHETHER THE WORKING SUBMITTED BY THE APPELLANT ON THE D ESIRED ADJUSTMENT FOR MARKETING COST WAS IN ACCORDANCE WITH THE COMPUTATION MADE BY THE TPO IN AY 2004 - 05 IN PURSUANCE OF THE CIT(A)S ORDER. IN HIS REPLY DATED 24.05.2012, THE TPO HAS STATED THAT THE DIFFERENCE BETWEEN THE ADJUSTMENT OF 4.06% ALLOWED BY THE TPO AND THE ADJUSTMENT OF 19.35% SOUGHT BY THE APPELLANT WAS DUE TO THE EXCLUSION BY THE TPO OF INTERNATIONAL MARKETING EXPENSES INCURRED IN EUROPE AND INDIA AND TO THE NETTING OFF OF THE COMMISSION INCOME FROM DUBAI OFFICE AGAINST EXPENSES INCURRED IN THAT OFFICE. HE FURTHER STATED THAT IF THE COMPUTATION WERE MADE BY THE TPO IN AY 2004 - 05 IN PURSUANCE OF THE CIT(A)S ORDER WERE ADOPTED IN THE CURRENT AY, THE ADJUSTMENT FOR MARKETING EXPENSES OUGHT TO BE AS FOLLOWS : 22 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) 1 EXPENSES OF MARKETING OFFICE IN DUBAI (RS.) 2,52,83,510 2 COMMISSION INCOME FROM AES (RS.) 2,02,65,126 3 NET EXPENSES OF DUBAI OFFICE (RS.) [1 - 2] 50,18,384 4 EXPENSES OF MARKETING REPRESENTATIVE IN EUROPE (RS.) 54,07,237 5 EXPENSES OF MARKETING FROM INDIA OFFICE (RS.) 1,81,57,262 6 TOTAL MARKETING EXPENSES ATTRIBUTABLE TO NON - AE EXPORTS (RS.) [3+4+5] 2,85,82,883 6 NON - AE EXPORT SALES (RS.) 23,21,91,702 7 RATIO OF NET MARKETING EXPENSES TO NON - AE EXPORT SALES (%) [(6/7)*100] 12.31 16. IT IS TO BE INFERRED FROM THE TPOS REMAND REPORT DISCUSSED ABOVE THAT IN ALLOWING AN ADJUSTMENT OF 4.06% FOR MARKETING EXPENSES, THE TPO HAD WRONGLY CONSIDERED THE EXPENSES INCURRED BY THE APPELLANT ONLY IN DUBAI OFFICE, WHILE THE CIT(A)S DIRECTION WAS T O ADOPT TOTAL MARKETING EXPENSES, INCLUDING THOSE INCURRED IN THE COMPANYS EUROPEAN AND INDIAN OFFICES. SECONDLY, THE TPO HAD NETTED OFF THE DUBAI OFFICE EXPENDITURE AGAINST THE DUBAI OFFICE INCOME, WITHOUT CONSIDERING THE RATIO OF TOTAL MARKETING EXPENS ES TO TOTAL NON - AE EXPORT SALES AS DIRECTED BY THE CIT(A). 17. THAT THERE IS MERIT IN THE APPELLANTS CONTENTION SEEKING A HIGHER RATE OF ADJUSTMENT WAS ACCEPTED BY CIT(A) IN AY 2004 - 05, FOLLOWING WHICH AN UPWARD ADJUSTMENT WAS MADE IN THAT YEAR FROM 4.39% TO 14.80%. AS THE FACTS AND CIRCUMSTANCES OF THE CASE ARE IDENTICAL IN THE CURRENT YEAR, THE SAME PRINCIPLE NEEDS TO BE FOLLOWED. THEREFORE, CONSIDERING THE MERIT OF THE APPELLANTS CONTENTIONS AND THE TPOS REMAND REPORT, I DIRECT THE AO TO ALLOW AN ADJUSTMENT OF 12.31% FOR MARKETING EXPENSES CONSISTENT WITH THE CIT(A)S DIRECTION. HOWEVER, THE AO MAY THOROUGHLY VERIFY THE CORRECTNESS OF THE RELEVANT DATA BEFORE ALLOWIN G RELIED AS DIRECTED ABOVE. 6.2 THE LD. DR RELIED ON THE ORDER OF THE TPO WHILE THE ASSESSEE RELIED ON THE ORDER OF CIT(A). 6.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. IN OUR OPINION, NO INTERFERENCE IS CALLED FOR IN THE ORDER OF CIT(A). CIT(A) HAS RIGHTLY DIRECTED THE AO TO ALLOW ADJUSTMENT OF 12.31% OF THE MARKETING EXPENSES AFTER VERIFYING THE CORRECTNESS OF THE DATA SUBMITTED BY THE ASSESSEE FOR ALLOWING RELIEF. THESE DIRECTIONS, WE NOTED, HAVE BEEN GIVEN BY THE CIT (A) FOLLOWING HIS ORDER FOR AY 2004 - 05 WHICH HAS BEEN CONFIRMED BY THE ITAT. 23 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) SINCE THE ISSUE IS COVERED IN THE CASE OF THE ASSESSEE BY THE DECISION OF THIS TRIBUNAL FOR THE EARLIER YEAR AND THE LD. DR COULD NOT BRING ANY COGENT MATERIAL OR EVIDENCE BEFORE US WHICH MAY COMPEL US TO REVERSE THE FINDING OF CIT(A), WE, THEREFORE, CONFIRM THE FINDING OF CIT(A). THUS, THIS GROUND STANDS DISMISSED. 7. GROUND NO. 2 RELATES TO THE DELETION OF THE ADDITION OF RS. 1,07,017/ - . 7.1 THE BRIEF FACTS RELATING TO THIS GROUND ARE THAT THE TPO NOTED THAT THE ASSESSEE HAS USED RPM METHOD TO ADJUST ALP OF ITS INTERNATIONAL TRANSACTION RELATING TO PURCHASE OF COMPONENT AND SPARES FROM ASSOCIATED ENTERPRISES. TPO WAS OF THE OPINION THAT THE R PM WAS NOT THE MOST APPROPRIATE METHOD AS THE ASSESSEE HAD IMPORTED COMPONENTS AND SPARES FOR FURTHER USE IN MANUFACTURE AND HAD NOT RE - SOLD THE IMPORTED COMPONENTS AND SPARES IN THE DOMESTIC MARKET. HE WORKED OUT THE DIFFERENCE BETWEEN THE PRICE PAID TO THE AE AND THAT PAID TO THE DIRECT VENDORS IN RESPECT OF EACH OF THE 6 COMPONENTS AND SPARES IMPORTED AND WORKED OUT THE DIFFERENCE OF RS.1,07,017/ - . THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). CIT(A) DELETED THE ADDITION BY OBSERVING AS UNDER : 23. ON A CAREFUL CONSIDERATION OF THE APPELLANTS ARGUMENTS, I FIND LITTLE SUBSTANCE IN THE TPOS ANALYSIS IN THIS SEGMENT. HE HAS OBSERVED ON PAGE 20 OF HIS ORDER THAT THE TAXPAYER COMPANY HAD SELECTED RPM IN RESPECT OF PURCHASES MADE FROM ITS AES, BUT ON P AGE 53 OF THE TP DOCUMENTATION, THE APPELLANT HAS CLEARLY STATED THAT CUP METHOD WAS APPLIED FOR IMPORTS MADE BY THE COMPANY FROM THE AES. ANNEXURE - 5 TO FORM 3CEB GIVES DETAILS OF COMPARATIVE PRICES OF IMPORTS FROM AES AND PURCHASES FROM DIRECT VENDORS FO R ANALYSING PRICES UNDER CUP METHOD. FURTHER, ON PAGE 21 OF HIS ORDER, THE TPO HIMSELF MENTIONS THAT THE ALP OF INTERNATIONAL TRANSACTIONS REPRESENTING PURCHASES FROM AES WAS DETERMINED UNDER CUP METHOD. 24. HE HAS CONSIDERED ONLY EIGHT OUT OF 19 PRODUCT S LISTED IN ANNEXURE - 5 WHERE PRICES PAID TO THE AES HAPPENED TO BE HIGHER THAN THOSE PAID TO LOCAL VENDORS, BUT HAS SIMPLY IGNORED 11 OTHER PRODUCTS WHERE PRICES PAID TO THE AES HAPPENED TO BE MUCH LOWER THAN DOMESTIC PRICES. IF THE AVERAGE OF PRICES PAID FOR ALL THE 19 PRODUCTS WERE CONSIDERED, IT TURNS OUT THAT THE AVERAGE PRICE PAID FOR IMPORTS WAS MUCH LOWER AT RS.195.58 THAN THE AVERAGE PRICE OF RS.204.68 PAID TO LOCAL VENDORS. 24 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) 25. THUS, I FIND THAT THE TPOS ANALYSIS IN THIS SEGMENT SUFFERS FROM FAC TUAL ERRORS, INCONSISTENCY IN CONSIDERING ONLY A PART OF THE TRANSACTIONS, AND A BIAS AGAINST THE APPELLANT, WHICH RENDER THE ANALYSIS UNRELIABLE. FURTHER, PURCHASES OF COMPONENTS AND SPARES FROM AES CONSTITUTED AN INSIGNIFICANT 3% OF THE TOTAL PURCHASES AND ONE CANNOT ARGUE THAT THE APPELLANT HAD UNDERSTATED ITS PURCHASES OF THE VALUE OF RS.3 CRORE BY RS. 1 LAKH FOR THE PURPOSE OF SHIFTING OF PROFITS OUTSIDE INDIA. FOR THESE REASONS, I DELETE THE ADDITION OF RS. 1,07,017 ON ACCOUNT OF TP ADJUSTMENT ON IM PORT OF COMPONENTS AND SPARES . 7.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME ALONGWITH THE ORDER OF THE TAX AUTHORITIES BELOW. THE LD. DR EVEN THOUGH VEHEMENTLY RELIED ON THE ORDER OF THE TPO BUT COULD NOT PROVE THAT THERE IS NO FACTUAL ERROR OR INCONSISTENCY AS FOUND BY THE CIT(A) IN THE ANALYSIS MADE BY THE TPO IN RESPECT OF PURCHASE OF THESE COMPONENTS FROM AES. IT IS A FACT THAT THE PURCHASE OF THE COMPONENTS AND SPARES FROM THE AES CONSTITUTED AN INSIGNIFICANT 3% OF THE PURCHASES. IT IS ALSO A FACT THAT THE ASSESSEE HAS MADE PURCHASES TO THE EXTENT OF MORE THAN RS. 3 CRORES AND IN RE SPECT OF OTHER PRODUCTS, IF TAKEN TOGETHER, THE AVERAGE PRICE PAID FOR IMPORTS ARE MUCH LOWER THAN THE AVERAGE PRICE OF THE LOCAL VENDORS. UNDER THESE FACTS AND CIRCUMSTANCES, WE DO NOT FIND THAT THERE IS ANY INCONSISTENCY OR ILLEGALITY IN THE FINDING OF THE CIT(A) IN DELETING THE ADDITION. WE CONFIRM THE ORDER OF CIT(A) ON THIS ISSUE AND DISMISS THE GROUND TAKEN BY THE REVENUE. 8. GROUND NO. 4 IN REVENUES APPEAL FILED ORIGINALLY RELATES TO THE ASSESSEES CLAIM OF DEPRECIATION ON GOODWILL. THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SMISS SECURITY LTD ., 348 ITR 302 IN WHICH THE HON'BLE SUPREME COURT HAS HELD THAT GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO SEC. 32(1). WE, THEREFORE, DISMISS THE GROUND TAKEN BY THE REVENUE. 25 ITA NOS. 01 & 04/PNJ/2013 (ASST. YEAR : 200 5 - 06) 9. IN THE RESULT, THE APPEAL FILED BY THE REVENUE STANDS DISMISSED WHILE THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. 10. ORDER PRONOUNCED IN THE OPEN COURT ON 1 1 / 04 / 2014. S D / - (D.T.GARASIA) JUDICIAL MEMBER S D / - (P.K. BANSAL) ACCOUNTANT MEMBER PLACE : PANAJI / GOA DATED : 1 1 /04/ 201 4 *SSL* COPY TO : (1) APPELLANT (2) RESPONDENT (3) CIT CONCERNED (4) CIT(A) (5) D.R (6) GUARD FILE TRUE COPY, BY ORDER
