M/s. TNS India Private Limited, Hyderabad V. Addl. CIT, Hyderabad

ITA 108/HYD/2011

• Counselvise Citation: 10822514 RSA 2011
• Duration Of Justice: 3 year(s) 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 06-07-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 20-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Assessee Lawyers: PANKAJ JAINSUVIBHA
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Retrospective amendment
• Section: 143(3); 92B; 92A; 234B; 133(6); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 108/HYD/2011 ASSESSMENT YEAR : 2006-07 M/S TNS INDIA PVT. LTD., HYDERABAD 500 082. PAN AABCN2278F) ADDITIONAL COMMISSIONER OF INCOME-TAX, RANGE 12, HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI PANKAJ JAIN/SUVIBHA REVENUE BY SHRI P. SOMA SEKHAR REDDY DATE OF HEARING 07-05-2014 DATE OF PRONOUNCEMENT 27-06-2014 O R D E R PER SAKTIJIT DEY, J.M.: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 29/11/2010 PASSED U/S 143(3) R.W.S. 92CA & 144C OF THE ACT IN PURSUANCE OF THE DIRECTIONS ISSUED BY THE DISPUTE R ESOLUTION PANEL (DRP). THE APPEAL PERTAINS TO THE ASSESSMENT YEAR 2 006-07. 2. BRIEFLY THE FACTS ARE, ASSESSEE A COMPANY INCOR PORATED UNDER THE COMPANIES ACT, 1956 HAS ITS REGISTERED OFFICE A T HYDERABAD. ASSESSEE IS A PART OF TNS GROUP WHICH IS A GLOBAL M ARKET INFORMATION CONGLOMERATE AND IS ONE OF THE WORLDS LEADING MARK ET INFORMATION GROUPS PROVIDING MARKET MEASUREMENT, ANALYSIS, INSI GHT AND ADVICE IN MORE THAN 110 COUNTRIES. ASSESSEE IS BASICALLY ENGA GED IN RENDERING MARKET RESEARCH AND RELATED INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) FOR DOMESTIC AND INTERNATIONAL CLIE NTS. ASSESSEES OFFSHORE RESEARCH SERVICE CENTRE (ORSC) IS REGISTER ED WITH SOFTWARE 2 ITA NO. 108/H/11 TNS INDIA PVT. LTD. TECHNOLOGY PARK OF INDIA AND PROVIDES ITES TO ITS G ROUP COMPANIES. DURING THE YEAR, ASSESSEE HAS PROVIDED ITES BOTH IN INDIA AS WELL AS OVERSEAS EARNING TOTAL REVENUE OF RS. 87,09,36,063/ -. SO FAR AS INTERNATIONAL TRANSACTIONS ARE CONCERNED ASSESSEE H AS PROVIDED ITES TO AE AND NON-AE. HOWEVER, REVENUE EARNED FROM INTE RNATIONAL TRANSACTIONS WITH AE AS PER 92CE REPORT ARE AS UNDE R: SALE OF SERVICES I) PROVISION OF DATA PROCESSING (IT ENABLED SERVICES) II) MARKET RESEARCH 26,06,79,292/- 6,29,81,801/- BUSINESS SOLUTIONS LICENSE FEES 78,52,761/- PAYMENT OF LICENSE FEES 1,68,77,683/- GROUP OVERHEAD ALLOCATION COSTS 1,41,25,663/- ASIA PACIFIC OVERHEAD ALLOCATION 1,48,54,475/- TRADEMARK LICENSE FEE 1,06,11,398/- REIMBURSEMENT OF EXPENSES (PAID) 4,15,50,234/- REIMBURSEMENT OF EXPENSES (RECEIVED) 2,13,26,742/- 2.1 FOR THE IMPUGNED ASSESSMENT YEAR ASSESSEE FILED ITS RETURN OF INCOME ON 30/11/2006 DECLARING NET INCOME OF RS. 9, 71,44,588/- AFTER CLAIMING DEDUCTION U/S 10A OF THE ACT. TO BENCHMARK ITS INTERNATIONAL TRANSACTION WITH AE ASSESSEE CONDUCTED A TP STUDY B Y SELECTING TRANSACTION NET MARGIN METHOD (TNNM) AS THE MOST AP PROPRIATE METHOD. BY APPLYING CERTAIN FILTERS A SEARCH WAS CO NDUCTED IN THE DATABASES WHICH YIELDED 17 COMPANIES IN THE ITES SE CTOR AS COMPARABLES HAVING AVERAGE ARITHMETIC MEAN OF 11.76 %. AS ASSESSEES MARGIN ON OPERATING COST WAS 14.84%, THE PRICE CHARGED TO THE AE FOR INTERNATIONAL TRANSACTION WAS FOUND T O BE WITHIN ARMS LENGTH. DURING THE SCRUTINY ASSESSMENT PROCEEDING, THE AO NOTICING THAT ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSA CTIONS MADE A REFERENCE TO THE TPO U/S 92CA(1) OF THE ACT FOR DET ERMINING ALP. THE TPO AFTER EXAMINING TP DOCUMENTATION OF THE ASSESSE E AS WELL AS OTHER INFORMATIONS SUBMITTED BEFORE HIM NOTED THAT WHILE SELECTING COMPARABLES IN ITES-BPO CATEGORY, ASSESSEE HAS NOT GONE INTO VERTICALS/HORIZONTALS OF THE INDUSTRY. FURTHER, AS SESSEE HAS WRONGLY APPLIED ACCEPT/REJECT MATRIX AS A RESULT OF WHICH U NCOMPARABLES HAVE 3 ITA NO. 108/H/11 TNS INDIA PVT. LTD. BEEN SELECTED AS COMPARABLE WHILE LEAVING OUT COMPA RABLES. IGNORING THE PROVISIONS OF RULE 10B(4) ASSESSEE HAS USED EIT HER PRECEDING YEARS DATA OR THREE YEARS DATA INSTEAD OF CURRENT Y EAR DATA ONLY. THUS, POINTING OUT VARIOUS DEFECTS AND DEFICIENCIES , TPO REJECTED THE TP STUDY OF THE ASSESSEE, THOUGH, HE ACCEPTED TNMM AS MOST APPROPRIATE METHOD. OUT OF 17 COMPARABLES SELECTED BY ASSESSEE, TPO FOUND ONLY TWO COMPANIES AS COMPARABLE TO ASSES SEE. THEREFORE, TPO BY APPLYING CERTAIN ADDITIONAL FILTE RS SEARCHED THE DATABASES AND IN THE PROCESS SELECTED 13 COMPARABLE S INCLUDING 2 OUT OF ASSESSEES COMPARABLES WITH AVERAGE MARGIN O F 24.00%. AFTER NEGATIVE WORKING CAPITAL ADJUSTMENT OF (-) 2.12% AD JUSTED ARITHMETIC MEAN PLI WAS WORKED OUT TO 26.12%. BY APPLYING THIS ADJUSTED ARITHMETIC MEAN PLI OF 26.12% TO OPERATING COST OF RS. 30,68,26,742/- ALP WAS DETERMINED AT RS. 38,69,69,8 87/-. PRICE CHARGED BY THE ASSESSEE FOR THE INTERNATIONAL TRANS ACTIONS WITH AE BEING RS. 32,36,61,093/-, SHORTFALL OF RS. 6,33,08, 794/- WAS TREATED AS THE ADJUSTMENT U/S 92CA OF THE ACT. SO FAR AS PAYME NT OF MANAGEMENT FEE OF RS. 2,89,80,138/- IS CONCERNED, T PO INFERRED THAT AS SUCH PAYMENT IS NOT RELATABLE TO ANY SPECIFIC TA NGIBLE SERVICE RENDERED EITHER BY HEAD OFFICE OR REGIONAL OFFICE A ND AS THE ASSESSEE HAS NOT DERIVED ANY COMMERCIAL BENEFIT, TH E PAYMENT IS IN NATURE OF EXGRATIA. TPO HELD THAT AS THERE ARE NO COMPARABLES WHO HAVE PAID MANAGEMENT FEE TO MARKET RESEARCH INDUSTR IES, ALP OF SUCH TRANSACTION IS TO BE TREATED AS NIL (ZERO). AC CORDINGLY, MANAGEMENT FEE OF RS. 2,89,80,138/- WAS TREATED AS ADJUSTMENT TO BE MADE U/S 92CA. AFTER RECEIVING THE ORDER OF THE TPO , AO FRAMED A DRAFT ASSESSMENT ORDER INCORPORATING THE ADJUSTMENT S PROPOSED BY TPO. FURTHER, AO ALSO MODIFIED THE DEDUCTION CLAIM ED U/S 10A OF THE ACT. ASSESSEE OBJECTED TO THE DRAFT ASSESSMENT ORDE R BEFORE THE DRP. THOUGH ASSESSEE HAD CHALLENGED THE ORDER OF TH E TPO ON VARIOUS GROUNDS BUT DRP REJECTED MOST OF THEM. ONLY IN CASE OF REIMBURSEMENT OF RS. 2,13,26,742/-, DRP AFTER CONSI DERING CLARIFICATION OF TPO DIRECTED FOR REDUCTION OF RS. 2,13,26,742/- FROM 4 ITA NO. 108/H/11 TNS INDIA PVT. LTD. THE ADJUSTMENT PROPOSED BY TPO. FURTHER, WITH RESPE CT TO DEDUCTION CLAIMED U/S 10A ALSO DRP CONFIRMED THE DRAFT ASSESS MENT ORDER. IN CONFORMITY WITH THE DIRECTION OF DRP, AO PASSED THE IMPUGNED ASSESSMENT ORDER. 3. THOUGH GROUND NOS. 1TO 17 ARE ON TP ISSUES BUT A T THE OUTSET LEARNED AR EXPRESSED HIS INTENTION TO CONFINE HIS A RGUMENT TO THE FOLLOWING ISSUES: I) SELECTION OF COMPARABLES. II) REJECTION OF COMPARABLES. III) CONSIDERATION OF MANAGEMENT FEES DISALLOWED IN COMPUTATION OF OPERATING MARGIN. IV) COMPUTATION OF WORKING CAPITAL ADJUSTMENT. 4. HEREINAFTER, WE WILL DEAL WITH EACH OF THE ISSUE S SPECIFICALLY ARGUED BEFORE US AT THE TIME OF HEARING: I. SELECTION OF COMPARABLES: I) IN GROUND NO. 10 OF THE MAIN GROUND, ASSESSEE HA S OBJECTED TO THE FOLLOWING TWO COMPANIES: 1. VISHAL INFORMATION TECHNOLOGY LTD. 2. GOLDSTONE INFRATECH LTD. II) BEFORE US, ASSESSEE HAS RAISED ADDITIONAL GROU ND MODIFYING GROUND NO. 10 BY OBJECTING TO THE FOLLOWING THREE C OMPARABLES ALSO: 1. NUCLEUS NET SOFT & GIS INDIA. 2. DATAMATICS FINANCIAL SERVICES (SEG) 3. MAPPLE E SOLUTIONS LTD. III) HEREINAFTER, WE WILL DEAL WITH THE COMPARABLES OBJECTED TO BY THE ASSESSEE: 5 ITA NO. 108/H/11 TNS INDIA PVT. LTD. 1. VISHAL INFORMATION TECHNOLOGIES LTD.: I) OBJECTING TO THE SELECTION OF THE AFORESAID COMP ANY, LEARNED AR SUBMITTED THAT THIS COMPANY CANNOT BE SELECTED AS A COMPARABLE AS IT FAILS THE EMPLOYEE COST FILTER ADOPTED BY THE TPO H IMSELF. IT WAS SUBMITTED THAT THE EMPLOYEE COST AS A PERCENTAGE OF THE TURNOVER OF THIS COMPANY DURING THE YEAR IS ONLY 1.25%. HENCE, IT PRESUPPOSES THAT IT HAS OUTSOURCED ENTIRE WORK TO THIRD PARTIES . IT WAS SUBMITTED THAT MORE THAN 65% OF THE COMPANYS COST IS TOWARDS DATA ENTRY CHARGES AND VENDOR PAYMENTS. FURTHER, ON SITE EXPEN SES OF RS. 14.42 CRORES IMPLIES THAT MORE THAN 75% OF ITS INCOME IS FROM ONSITE SERVICES. THAT APART COMPANY EARNS SUPER PROFIT AS COMPARED TO THE AVERAGE INDUSTRY TREND. THUS, THIS COMPANY CANNOT B E TREATED AS COMPARABLE TO THE ASSESSEE. IN SUPPORT OF SUCH CONT ENTION, LEARNED AR RELIED UPON THE FOLLOWING RULINGS OF THE ITAT: 1. MAERSK GLOBAL SERVICE CENTRE (INDIA) PVT. LTD., ITA NO. 7466/MUM/2012). 2. M.S HSBC ELECTRONIC DATA PROCESSING INDIA LTD. V S. ACIT, ITA NO. 1624/HYD/2010. 3. CES PVT. LTD., ITA NO. 1445/HYD/2010. 4. CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD., ITA NO. 1961/HYD/2011 AND 5. M/S STREAM INTERNATIONAL SERVICES PVT. LTD. VS. ACIT, ITA NO. 8997/MUM/2010. II) THE LEARNED DR, ON THE OTHER HAND, SUBMITTED T HAT TPO HAVING CONSIDERED ALL THE OBJECTIONS OF THE ASSESSEE BEFOR E SELECTING AFORESAID COMPANY AS A COMPARABLE, THERE IS NO JUST IFICATION TO EXCLUDE IT FROM THE LIST OF COMPARABLES. III) WE HAVE CONSIDERED SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD. AS CAN BE SEEN FROM THE FACTS ON RECORD, ASSESSEE AS WELL AS TPO HAS NOT GONE INTO VERTICALS /HORIZONTALS OF THE ITES SECTOR WHILE SELECTING COMPARABLES. HOWEVE R, AS CAN BE SEEN FROM THE MATERIALS PLACED ON RECORD, THE EMPLO YEE COST OF THIS 6 ITA NO. 108/H/11 TNS INDIA PVT. LTD. COMPANY IS ABNORMALLY LOW COMPARED TO THE ASSESSEE, WHICH PRESUPPOSES THAT IT HAS OUTSOURCED MAJOR PORTION OF ITS WORK TO THIRD PARTIES. ITAT MUMBAI BENCH IN CASE OF MAERSK GLOBAL SERVICES CENTRE (INDIA) PVT. LTD., (14 ITR [TRIB.] 541) AFTE R CONSIDERING THIS ASPECT REJECTED IT AS A COMPARABLE. FOLLOWING THE A FORESAID DECISION OF THE ITAT MUMBAI BENCH, THE COORDINATE BENCH OF T HIS TRIBUNAL IN CASE OF M/S HSBC ELECTRONIC DATA PROCESSING INDIA L TD., VS. ADDL. CIT IN ITA NO. 1624/HYD/2014 DATED 28/06/2013 HAS D IRECTED THE AO TO EXCLUDE THIS FROM THE LIST OF COMPARABLES. THE F INDING OF THE COORDINATE BENCH IS EXTRACTED HEREUNDER FOR CONVENI ENCE: 9.2 AFTER CONSIDERING THE RIVAL CONTENTIONS, WE FIN D CONSIDERABLE FORCE IN THE CONTENTIONS ADVANCED BY T HE LEARNED COUNSEL. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT MOST OF THE COST INCURRED BY THE COMPANY TAKEN AS COMPAR ABLE IS OUTSOURCING COST, AS CAN BE SEEN FROM THE ANNUAL RE PORT PLACED IN THE PAPER BOOK AND ITAT, MUMBAI IN THE CASE OF M AERSK GLOBAL SERVICE CENTRE (SUPRA) HAS ANALYSED AND REJE CTED THIS COMPANY AS COMPARABLE, DUE TO THE REASON THAT IT HA S OUTSOURCED A CONSIDERABLE PORTION OF ITS BUSINESS A ND IT IS FUNCTIONALLY DIFFERENT. THIS FACTOR WAS ALSO APPROV ED BY THE DRP IN ASSESSEES OWN CASE IN THE LATER YEAR, AS CAN BE SEEN FROM THE COPY OF THE ORDER PLACED ON RECORD, FOR ASSESSM ENT YEAR 2008-09. IN VIEW OF THIS, WE DIRECT THE AO TO EXCLU DE THIS COMPANY FROM THE LIST OF COMPARABLES. IV) SINCE THE AFORESAID DECISIONS OF THE COORDINATE BENCHES PERTAIN TO THE SAME ASSESSMENT YEAR, FOLLOWING THE VIEW EXP RESSED THEREIN, WE ALSO DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMPANY FROM THE LIST OF COMPARABLES. 2. GOLDSTONE INFRATECH LTD. I) THE LEARNED AR OBJECTED TO THE AFORESAID COMPAN Y AS COMPARABLE FOR THE FOLLOWING REASONS: 1. AS PER THE INFORMATION CONTAINED IN THE ANNUAL R EPORT THIS COMPANY FAILS EMPLOYEE COST FILTER APPLIED BY THE L D. TPO (ONLY 9.38% OF TOTAL COST) 7 ITA NO. 108/H/11 TNS INDIA PVT. LTD. 2. AS PER THE ANNUAL REPORT, THE COMPANYS FOREX EA RNINGS ARE LESS THAN 1% TOTAL TURNOVER. FURTHER, THE ONLY INCO ME FROM EXPORTS IS FROM EXPORT OF GOODS AND THERE IS NO EXP ORT OF SERVICES. 3. BPO SEGMENT OF THE COMPANY DOES NOT SATISFY THE DIMINISHING REVENUE FILTER CRITERIA APPLIED BY THE LD. TPO. 4. THE COMPANY IN ITS RESPONSE TO NOTICE U/S 133(6) HAS STATED THAT DUE TO SLOWDOWN IN CALL CENTRE BUSINESS IT HAS GIVEN INFRASTRUCTURE ON LEASE TO A THIRD PARTY. THE LD. T PO DID NOT OBTAIN DETAILS OF LEASE INCOME INCLUDED IN BPO SERV ICES INCOME OF THE COMPANY. II) IN SUPPORT OF THE SAID CONTENTIONS, THE LEARNED AR RELIED ON THE FOLLOWING PRECEDENTS: 1. M.S HSBC ELECTRONIC DATA PROCESSING INDIA LTD. VS. ACIT, ITA NO. 1624/HYD/2010. 2. CES PVT. LTD., ITA NO. 1445/HYD/2010. 3. M/S STREAM INTERNATIONAL SERVICES PVT. LTD. VS. ACIT, ITA NO. 8997/MUM/2010. III) THE LEARNED DR, HOWEVER, SUPPORTED THE ORDER O F THE TPO AND DRP ON THE SELECTION OF THIS COMPANY AS COMPARABLE. IV) WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. IT IS SEEN THAT COORDINAT E BENCH OF THIS TRIBUNAL IN CASE OF HSBC ELECTRONIC DATA PROCESSING INDIA LTD. (SUPRA) WHILE CONSIDERING COMPARABILITY OF THE AFOR ESAID COMPANY, FOLLOWED THE DECISION OF ITAT MUMBAI BENCH IN CASE OF M/S STREAM INTERNATIONAL SERVICES PVT. LTD. IN ITA NO. 8997/MU M/10, DATED 11/01/2013 AND HELD AS UNDER: 10.1. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE A RE OF THE OPINION THAT THE `BUSINESS MODEL OF THE ABOVE COMPANY IS DIFFERE NT FROM THAT OF THE ASSESSEE. IN THIS CASE, THE FOREIGN EXCHANGE REVENU E IS LESS THAN 1% OF THE TOTAL TURNOVER. THEREFORE, IT FAILS THE FILTER PROVIDED BY THE ASSESSING OFFICER, ON THE BASIS OF THE FOREIGN EXCHANGE EARNI NGS. FURTHER, THE REVENUE FROM BPO IS FAILING OVER A PERIOD OF THREE YEARS. THIS ISSUE WAS 8 ITA NO. 108/H/11 TNS INDIA PVT. LTD. CONSIDERED BY THE COORDINATE BENCH (MUMBAI BENCH) O F THE TRIBUNAL IN THE CASE OF STREAM INTERNATIONAL SERVICES LTD.(SUPR A)WHEREIN IT WAS CONSIDERED AS UNDER- 14. THE INCLUSION OF SECOND CASE OBJECTED TO BY TH E LD. AR IS THAT OF GOLDSTONE INFRATECH LIMITED (SEG) (EARLIER KNOWN AS GOLDSTONE TELESERVICES LIMITED). HERE IT IS RELEVANT TO NOTE THAT THE TPO, INTER ALIA, APPLIED FILTER OF COMPANIES WITH EXPOR T REVENUES MORE THAN 25% OF THE REVENUES. ANNUAL ACCOUNTS OF GOLDS TONE TELESERVICES LIMITED INDICATE TOTAL REVENUE OF THE COMPANY AT RS. 30.89 CRORE FROM THREE SEGMENTS, VIZ., TELECOMMUNIC ATION AT RS. 13.63 CRORE, BPO AT RS. 5.02 CRORE AND INSULATOR A T RS. 12.23 CRORE. THE BREAK UP OF SUCH REVENUE OF GOLDSTONE TE LESERVICES LIMITED HAS BEEN PROVIDED AT PAGE 236 OF THE PAPER BOOK. SCHEDULE FORMING PART OF THE ANNUAL ACCOUNTS OF GOL DSTONE TELESERVICES LIMITED DIVULGES EARNINGS IN FOREIGN C URRENCY AT RS. 4.24 LAKH. SUCH DETAIL IS AVAILABLE AT PAGE 239 OF THE PAPER BOOK. WHEN WE COMPARE EARNING IN FOREIGN CURRENCY AT RS. 4.24 LAKH WITH THE EARNINGS OF BPO AT RS. 5.02 CRORE OR FOR T HAT PURPOSE OF THE ENTITY AS A WHOLE AT RS. 30.89 CRORE, IT BECOME S MANIFEST THAT THIS CASE DOES NOT PASS THROUGH THE FILTER ADOPTED BY THE TPO, BEING, THE COMPANIES WHOSE EXPORT REVENUES ARE MOR E THAN 25% OF THE REVENUES. THEREFORE, WE ARE OF THE OPINION, THAT THIS COMPANY CANNOT BE ONSIDERED AS A COMPARABLE FOR THE PURPOSE OF DETERMINING THE ALP IN THIS CASE. WE DIRECT THE SAME TO BE EXCLUDED. V) FOLLOWING THE VIEW EXPRESSED BY THE COORDINATE B ENCH AS AFORESAID, WE DIRECT EXCLUSION OF THE AFORESAID COM PANY. 3. ASIT C MEHTA FINANCIAL SERVICES LTD. (EARLIER K NOWN AS NUCLEUS NETSOFT & GIS (INDIA) LTD.) I) THE LEARNED AR OBJECTED TO THE AFORESAID COMPAN Y AS COMPARABLE FOR THE REASON THAT THE SAID COMPANY FAI LS EMPLOYEE COST FILTER APPLIED BY THE TPO. FOR THIS PROPOSITION HE RELIED ON THE FOLLOWING DECISIONS: 1. M.S HSBC ELECTRONIC DATA PROCESSING INDIA LTD. VS. ACIT, ITA NO. 1624/HYD/2010. 2. CES PVT. LTD., ITA NO. 1445/HYD/2010. II) THE LEARNED DR, HOWEVER, SUPPORTED THE ORDER OF THE TPO AND DRP ON THE SELECTION OF THIS COMPANY AS COMPARABLE. 9 ITA NO. 108/H/11 TNS INDIA PVT. LTD. III) WE HAVE CONSIDERED THE SUBMISSIONS OF THE PAR TIES AND PERUSED THE MATERIALS ON RECORD AS WELL AS THE ORDERS OF TP O ON THIS ISSUE. ON PERUSAL OF THE DECISION OF THE COORDINATE BENCH IN CASE OF HSBC ELECTRONIC DATA PROCESSING INDIA LTD. (SUPRA), IT I S TO BE SEEN THAT THE AFORESAID COMPANY WAS EXCLUDED WITH THE FOLLOWING OBSERVATIONS: 13.1 AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE A RE OF THE OPINION THAT THIS COMPANY CANNOT BE SELECTED AS A COMPARABLE NOT ONLY ON THE REASON OF FAILING EMPLOYEE COST FILTER, BUT ALSO DUE TO AMALG AMATION DURING THE YEAR, WHICH HAS CHANGED THE BUSINESS MODEL OF THE COMPANY . 14. IN VIEW OF THE FOREGOING DISCUSSION, WE AGREE W ITH THE ASSESSEES OBJECTION THAT THE ABOVE FIVE COMPARABLES SHOULD BE EXCLUDED. IV) SINCE THE VIEW EXPRESSED BY THE COORDINATE BENC H PERTAINS TO SAME AY, WE FOLLOW THE SAME AND DIRECT THE AO/TPO T O EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 4. DATAMATICS FINANCIAL SERVICES LTD. I) LEARNED AR SOUGHT EXCLUSION OF THE AFORESAID COM PANY FOR THE REASON THAT IT FAILS RELATED PARTY TRANSACTIONS FIL TER ADOPTED BY THE TPO AS RPT EXCEEDS 25% OF SALES. IN SUPPORT OF THE SAI D CONTENTIONS, HE RELIED ON THE FOLLOWING DECISIONS: 1. M.S HSBC ELECTRONIC DATA PROCESSING INDIA LTD. VS. ACIT, ITA NO. 1624/HYD/2010. 2. CES PVT. LTD., ITA NO. 1445/HYD/2010. 3. M/S STREAM INTERNATIONAL SERVICES PVT. LTD. VS. ACIT, ITA NO. 8997/MUM/2010. III) THE LEARNED DR, HOWEVER, SUPPORTED THE ORDER O F THE TPO AND DRP ON THE SELECTION OF THIS COMPANY AS COMPARABLE. IV) WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. AS CAN BE SEEN THE ASSESSE E HAS OBJECTED TO 10 ITA NO. 108/H/11 TNS INDIA PVT. LTD. THE INCLUSION OF THE AFORESAID COMPANY FOR THE REAS ON THAT IT FAILS RPT FILTER APPLIED BY THE TPO HIMSELF AS THE RPT EXCEED S 25% OF THE SALES. IN SUPPORT OF SUCH CONTENTION, HE RELIED ON THE DECISION OF THE COORDINATE BENCH IN CASE OF HSBC (SUPRA). ON PERUSA L OF RULING OF THE COORDINATE BENCH IN CASE OF HSBC IT IS SEE THAT ON CONSIDERING SIMILAR ARGUMENT ADVANCED BY THE ASSESSEE, IT WAS HELD AS U NDER: 11. THE ASSESSEES OBJECTION TO INCLUSION OF THIS COMPARABLE IS ON THE BASIS OF RELATED PARTY TRANSACTIONS FILTER. IT WAS SUBMITTED THAT RPT EXCEEDS 25% OF THE SALES AND THEREFORE, TO BE EXCLU DED. THE ASSESSEE RELIED ON THE DECISION OF THE COORDINATE BENCH OF T HE TRIBUNAL (MUMBAI BENCH) IN THE CASE OF STREAM INTERNATIONAL SERVICES (SUPRA), WHEREIN, WHEREIN WITH REFERENCE TO THIS COMPARABLE COMPANY, IT WAS HELD AS UNDER- 11. THE FIRST IS M/S. DATAMATICS FINANCIAL SERVICE S LIMITED. IT CAN BE OBSERVED THAT THE TPO APPLIED FILTER OF COMPANI ES WITH LESS THAN 25% RELATED PARTY TRANSACTIONS. THE LEARNED C OUNSEL FOR THE ASSESSEE TOOK US THROUGH THE ANNUAL ACCOUNTS OF DAT AMATICS FINANCIAL SERVICES LIMITED, AND SUBMITTED THAT THE GROSS INCOME OF THIS COMPANY FOR THE YEAR ENDING ON 31.03.2006 W AS AT RS. 2.31 CRORE AS AGAINST TOTAL EXPENSES OF RS. 1.84 CR ORE. REFERRING TO PAGES 319 AND 320 OF THE PAPER BOOK, OUR ATTENTI ON WAS DRAWN TOWARDS ANNEXURE-2 TO DEMONSTRATE THAT THE TRANSAC TIONS WITH THE ASSOCIATED PARTIES WITHIN THE MEANING OF SECTIO N 92A AND 92B OF THE INCOME-TAX ACT, 1961 SHOWED ONE MAJOR TRANS ACTION WITH DATAMATICS LIMITED TOWARDS RE-IMBURSEMENT OF EXPEN SES AT RS. 99.14 LAKH. THE LEARNED AR CONTENDED THAT THE TRANSACTIONS OF DATAMATICS FINAN CIAL SERVICES LIMITED WITH OTHER AES AMOUNTED TO RS. 14.31 LAKH M AKING TOTAL OF TRANSACTIONS WITH THE AES AT RS. 13 CRORE. IT WAS SUBMITTED THAT THE PERCENTAGE OF TRANSACTION WITH RELATED PARTIES IS MUCH MORE THAN 25%, BEING, THE FILTER ADOPTED BY THE TPO HIMS ELF AND HENCE THE SAME SHOULD BE EXCLUDED. 12. IN THE OPPOSITION, THE LEARNED DEPARTMENTAL REP RESENTATIVE CONTENDED THAT THE MAJOR TRANSACTION OF RS. 99.14 L AKH OF DATAMATICS FINANCIAL SERVICES LIMITED WITH DATAMAT ICS LIMITED WAS TOWARDS REIMBURSEMENT OF EXPENSES. SINCE THE REIMBURSEMENT OF EXPENSES DOES NOT INCLUDE ANY PROF IT ELEMENT, THE LD. DR URGED THAT THE SAME BE EXCLUDED. HE STAT ED THAT ONCE THIS TRANSACTION IS EXCLUDED, THE OTHER TRANSACTION OF RS. 14.31 LAKH ARE LESS THAN 25% OF THE TOTAL TRANSACTION WIT H RELATED PARTIES. 13. WE DO NOT FIND ANY FORCE IN THE CONTENTION ADVA NCED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE EXCLUSI ON OF 11 ITA NO. 108/H/11 TNS INDIA PVT. LTD. TRANSACTIONS WITH DATAMATICS LIMITED TOWARDS REIMB URSEMENT OF EXPENSES FROM THE OVERALL TRANSACTIONS ENTERED INT O BY DATAMATICS FINANCIAL SERVICES LTD. WITH ITS AES. SE CTION 92F(V) DEFINES TRANSACTION IN THE CONTEXT OF TRANSFER PR ICING PROVISIONS TO INCLUDE AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT WHETHER OR NOT IT IS FORMAL OR IN WRITING OR WHETHE R OR NOT IT IS INTENDED TO BE ENFORCEABLE BY LEGAL PROCEEDING. THE RE IS NO REFERENCE TO ANY TRANSACTION HAVING NECESSARILY INC LUDING PROFIT ELEMENT OR MARK-UP SO AS TO FALL WITHIN THE DEFINIT ION OF TRANSACTION UNDER CHAPTER X OF THE INCOME-TAX ACT . SINCE THE TPO APPLIED FILTER OF HAVING COMPANIES WITH LESS TH AN 25% RELATED PARTY TRANSACTIONS, IT IS NOT OPEN TO ARGUE THAT TH E TRANSACTIONS OF REIMBURSEMENT OF EXPENSES DULY REPORTED BY DATAMATI CS FINANCIAL SERVICES LIMITED AS AN INTERNATIONAL TRA NSACTION WITHIN THE MEANING OF SECTION 92B SHOULD BE IGNORED SIMPLY BECAUSE THEY REPRESENT REIMBURSEMENT OF EXPENSES. IF THE CO NTENTION OF THE LD. DR THAT THE REIMBURSEMENT OF EXPENSES NOT I NVOLVING PROFIT ELEMENT SHOULD NOT BE CONSTRUED AS A TRANSACTION, I S TAKEN TO A LOGICAL CONCLUSION, IT WOULD MEAN THAT ALL SUCH DEA LINGS WILL CEASE TO BE TRANSACTIONS FOR THE PURPOSES OF CHAPTER-X OF THE ACT. ONCE THESE DEALINGS ARE NOT CONSIDERED AS TRANSACTIONS , THESE WILL ALSO CEASE TO BE INTERNATIONAL TRANSACTIONS, GOING OUT O F THE PURVIEW OF SECTION 92 ITSELF. OBVIOUSLY, SUCH A VIEW POINT IS CONTRARY TO THE CLEAR INTENTION AND THE LANGUAGE OF THE RELEVANT PR OVISIONS. A PURE REIMBURSEMENT OF EXPENSES BY ONE AE TO ANOTHER AE I S VERY MUCH A TRANSACTION AS PER SECTION 92F(V) AND CONS EQUENTLY IS EQUALLY AN INTERNATIONAL TRANSACTION AS PER SECTION 92B REQUIRING CONSIDERATION AS PER SECTION 92 OF THE ACT. BE THAT AS IT MAY, THE LEARNED DEPARTMENTAL REPRESENTATIVE COULD NOT DEMON STRATE THE FACT THAT SUCH REIMBURSEMENT OF EXPENSES WAS WITHOU T ANY MARKUP. AS THE SO CALLED COMPARABLE CASE OF DATAMAT ICS FINANCIAL SERVICES LIMITED WAS INCLUDED BY THE TPO IN THE FINAL LIST OF COMPARABLES, IN OUR CONSIDERED OPINION, THE SAME IS LIABLE TO BE EXCLUDED AS IT INVOLVES RELATED PARTY TRANSAC TIONS AT MUCH HIGHER LEVEL, AS AGAINST THE FILTER ADOPTED BY THE TPO HIMSELF, BEING COMPANIES WITH LESS THAN 25% RELATED PARTY TR ANSACTIONS. WE ORDER ACCORDINGLY. IN VIEW OF THE ABOVE, SINCE THIS COMPANY FAILS IN T HIS FILTER ADOPTED BY THE TPO, WE DIRECT THE TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES ADOPTED. V) FACTS BEING IDENTICAL, FOLLOWING THE AFORESAID VIEW EXPRESSED BY THE COORDINATE BENCH, WE DIRECT THE AO/TPO TO EXCLU DE THIS COMPANY FROM THE LIST OF COMPARABLES. 12 ITA NO. 108/H/11 TNS INDIA PVT. LTD. 5. MAPLE E SOLUTIONS LTD. I) OBJECTING TO THE SELECTION OF THE AFORESAID COMP ANY, THE LEARNED AR SUBMITTED THAT THIS COMPANY CANNOT BE TREATED AS A COMPARABLE BECAUSE OF THE FACT THAT THE FINANCIALS OF THIS COM PANY ARE NOT RELIABLE AS DIRECTORS OF THE COMPANY WERE FOUND TO BE INVOLV ED IN FRAUD. IT WAS SUBMITTED THAT IN A SERIES OF DECISIONS DIFFERENCE BENCHES OF THIS TRIBUNAL HAVE HELD THAT THIS COMPANY CANNOT BE CONS IDERED AS A COMPARABLE DUE TO SERIOUS INDICTMENT ON THE BUSINES S REPUTATION OF OWNER. IN SUPPORT OF SUCH CONTENTION, HE RELIED ON THE FOLLOWING DECISIONS: 1. M.S HSBC ELECTRONIC DATA PROCESSING INDIA LTD. VS. ACIT, ITA NO. 1624/HYD/2010. 2. CRM SERVICES INDIA (P) LTD. VS. ITO (2011-TII-86 - ITAT-DEL-TP) 3. STREAM INTERNATIONAL SERVICES PVT. LTD., ITA NO. 8997/MUM/2010. II) THE LEARNED DR, HOWEVER, SUPPORTED THE ORDERS O F THE TPO AND DRP. III) WE HAVE HEARD THE PARTIES AND PERUSED THE MAT ERIALS ON RECORD. THE FACT THAT DIRECTORS OF THE SAID COMPANY WERE FO UND TO BE INVOLVED HAS NOT BEEN CONTROVERTED BY THE DEPARTMENT. IT IS SEEN THAT IN CASE OF CRM SERVICES INDIA PVT. LTD. VS. ITO, ITA NO. 46 8/DEL/09 AND STREAM INTERNATIONAL SERVICES PVT. LTD., ITA NO. 89 97/MUM/2010, ITAT DELHI AND MUMBAI BENCHES HAVE HELD THAT THE AF ORESAID COMPANY CANNOT BE TREATED AS COMPARABLE AS FINANCIA LS OF THE COMPANY ARE NOT RELIABLE. FOLLOWING THE AFORESAID D ECISION OF THE ITAT MUMBAI BENCH IN STREAM INTERNATIONAL SERVICES PVT. LTD., THE COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF HSBC ( SUPA) WHILE EXCLUDING THE AFORESAID COMPANY FROM THE LIST OF CO MPARABLES HELD AS UNDER: 13 ITA NO. 108/H/11 TNS INDIA PVT. LTD. 12.1. WE HAVE CONSIDERED THE RIVAL SUB MISSIONS. W E AGREE WITH THE OBJECTIONS OF THE ASSESSEE. IN THE CASE OF STREAM I NTERNATIONAL SERVICES P. LTD. (SUPRA), IT IS HELD WITH REFERENCE TO THIS COM PANY AS UNDER- 18. WE ARE UNABLE TO UPHOLD THE CONTENTION RAISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. IT IS APPARENT FROM TWO ORDERS PASSED ONE BY THE DELHI BENCH AND THE OTHER BY THE HYDERABAD BENCH OF THE TRIBUNAL THAT THE CASE OF MAPLE ESOLUTIONS LIMITED HAS BEEN DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. AS THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2006- 2007 AND THE DELHI BENCH OF THE TRIBUNAL HAS ALSO CONSIDERED THE SAME ASSESSMEN T YEAR WHILE DIRECTING THE EXCLUSION OF THE CASE OF MAPLE E SOLUTIONS LIMITED FROM THE LIST OF COMPARABLES, WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE LD. DR IN THIS REGARD. IT IS MORE SO BECAUSE NO CONTRARY VIEW HAS BEEN BROUGHT BY THE LD . DR TO OUR NOTICE. RESPECTFULLY FOLLOWING THE PRECEDENTS, WE DIRECT THE E XCLUSION OF THIS CASE FROM THE FINAL LIST OF COMPARABLES. SINCE THE DRP IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007-08 ALSO CONSIDERED AND EXCLUDED THIS COMPANY, WE UPHOLD THE ASSESSEES OBJECTION IN THIS REGARD AND DIRECT THE ASSESSING OFFICER TO EXCLUDE THIS COMPANY FROM THE COMPARABLES ADOPTED. IV) FOLLOWING THE CONSISTENT VIEW OF DIFFERENT BENC HES OF THE TRIBUNAL INCLUDING ITAT, HYDERABAD BENCHES, WE DIRECT EXCLUSION OF AFO RESAID COMPANY FROM THE LIST OF COMPARABLES. II. REJECTION OF COMPARABLES: I) THE ASSESSEE HAS ALSO CHALLENGED REJECTION OF TH E FOLLOWING COMPARABLES SELECTED BY IT: 1. GENESYS INTERNATIONAL CORP. LTD. (SEG) 2. GOLDSTONE TECHNOLOGIES LTD. 3. VISUALSOFT TECHNOLOGIES LTD. (SEG) 4. QUANTUM ESERVICES PVT. LTD. II) LEARNED AR SUBMITTED THAT GENESYS INTERNATIONAL CORP. LTD. HAS BEEN REJECTED BY THE TPO ON THE GROUND THAT COMPANY FAILS RPT FILTER. HOWEVER, IT IS THE CONTENTION OF THE LEARNED AR THA T RPT OF THE COMPANY AS A PERCENTAGE OF SALES IS ONLY 7.63%. IT WAS SUBMITTED THAT TPO HAS COMPUTED THE RPT AT 26.34% BY INCLUDIN G REIMBURSEMENT TRANSACTIONS WHICH IS NOT PROPER. 14 ITA NO. 108/H/11 TNS INDIA PVT. LTD. III) IN RESPECT OF GOLDSTONE TECHNOLOGIES LTD., IT IS CONTENDED BY THE LEARNED AR TPO HAS REJECTED THIS COMPANY BY STATING THAT IT IS A BPO SERVICE PROVIDER, HOWEVER, AS PER COMPANYS RESPONS E TO NOTICE U/S 133(6) OF THE ACT, ITS REVENUE IS DERIVED FROM THE EXPORT FROM ITES SEGMENTS AS THE COMPANY SATISFIES ALL THE FILTERS A PPLIED BY THE TPO, IT SHOULD NOT HAVE BEEN REJECTED AS COMPARABLE. IV) SO FAR AS THE VISUAL SOFT TECHNOLOGIES LTD. AN D V) QUANTUM ESOLUTIONS PVT. LTD. ARE CONCERNED, IT IS THE CONTE NTION OF THE LEARNED AR THAT BOTH THESE COMPANIES HAVE BEEN REJECTED BY THE TPO BY APPLYING PERSISTENT LOSS MAKING FILTER. IT WAS SUBM ITTED BY THE LEARNED AR THAT VISUAL SOFT TECHNOLOGIES LTD. AS A WHOLE IS NOT A LOSS MAKING COMPANY AS ONLY BPO SEGMENT IS MAKING LOSS. IT WAS SUBMITTED THAT SINCE ONE OF THE SEGMENT IS LOSS MAKING, THE COMPAN Y SHOULD NOT BE REJECTED AS COMPARABLE. IN RESPECT OF QUANTUM ESOLU TIONS PVT. LTD., IT IS THE CONTENTION OF THE LEARNED AR THAT FY 2005-06 BEING FIRST YEAR OF OPERATION OF THE COMPANY IT CANNOT BE TREATED AS PE RSISTENT LOSS MAKING COMPANY. V) THE LEARNED DR SUPPORTING THE ORDERS OF THE TPO AND DRP SUBMITTED, SINCE TPOS REASONING FOR EXCLUSION OF T HE AFORESAID COMPANIES ARE WELL FOUNDED, THERE IS NO NEED TO CON SIDER THESE COMPANIES AS COMPARABLES. VI) WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES AND PERUSED THE MATERIALS ON RECORD. AS CAN BE SEEN FROM THE AN NUAL REPORT OF THE GENYSIS INTERNATIONAL CORP. LTD., THIS COMPANY IS E NGAGED IN GEOSPATICAL AND MAPPING ACTIVITIES, ENGINEERING SER VICES, ETC. ITS BUSINESS MODEL IS COMPLETELY DIFFERENT FROM THE ASS ESSEE AND AS SUCH IT IS FUNCTIONALLY DIFFERENT. FURTHER, WE HAVE COME ACROSS A NUMBER OF CASES WHERE TAXPAYERS HAVE OBJECTED TO THE AFORESAI D COMPANY BEING TREATED AS COMPARABLE TO COMPANIES IN ITES SECTOR. THAT BEING THE 15 ITA NO. 108/H/11 TNS INDIA PVT. LTD. CASE, WE ARE OF THE VIEW THAT THE AFORESAID COMPANY CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE COMPANY. VII) SO FAR AS GOLDSTONE TECHNOLOGIES LTD. IS CONCE RNED, THE COORDINATE BENCH IN CASE OF HSBC (SUPRA) HAS HELD T HAT AFORESAID COMPANY BEING ENGAGED IN PROVIDING CONSULTATION SER VICES WITH VARIOUS MIDDLE WARE PRODUCTS IS NOT FUNCTIONALLY S IMILAR TO THE COMPANIES IN THE ITES SECTOR. IN VIEW OF THE AFORE SAID DECISION OF THE COORDINATE BENCH, THIS COMPANY CANNOT BE CONSID ERED AS COMPARABLE TO THE ASSESSEE. VIII) SO FAR AS THE VISUAL SOFT TECHNOLOGIES PVT LT D. AND QUANTUM E- SOLUTIONS SERVICES PVT. LTD., ARE CONCERNED, IT IS SEEN THAT WHILE THE LOSS OF VISUAL SOFT TECHNOLOGIES LTD. FOR THE YEAR UNDER CONSIDERATION IS (-)57.63% THAT OF QUANTUM E-SOLUTIONS SERVICES IS (-) 14.11%. WHEN THE ASSESSEE IS OBJECTING TO SUPER NORMAL PROF IT MAKING COMPANIES BY APPLYING SAME STANDARD LOSS MAKING COM PANIES ALSO CANNOT BE TREATED AS COMPARABLE. HENCE, TPOS DECIS ION IN RESPECT OF THESE COMPANIES CANNOT BE INTERFERED WITH. III. CONSIDERATION OF MANAGEMENT FEES DISALLOWED IN COMPUTATION OF OPERATING MARGIN I) THE LEARNED AR SUBMITTED BEFORE US THAT THERE IS DOUBLE ADDITION OF MANAGEMENT FEES OF RS. 2,89,80,138/-. I T WAS SUBMITTED THAT ASSESSEE DURING THE PREVIOUS YEAR RELEVANT TO AY UNDER DISPUTE HAS PAID MANAGEMENT FEES OF RS. 2,89,80,138/- TO IT S AE TOWARDS SERVICES RENDERED. HOWEVER, THE TPO HAS DISALLOWED THE MANAGEMENT FEES BY TREATING ALP AT NIL. AT THE SAME TIME, THE TPO HAS ALSO INCLUDED IT WHILE COMPUTING OPERATING MARG IN OF THE ASSESSEE. IT WAS SUBMITTED THAT IN THE PROCESS THER E IS DOUBLE ADDITION OF MANAGEMENT FEES. 16 ITA NO. 108/H/11 TNS INDIA PVT. LTD. II) THE LEARNED DR SUBMITTED THAT THIS ASPECT CAN B E LOOKED INTO BY THE TPO AND IN CASE OF DOUBLE ADDITION THE SAME CAN BE CONSIDERED FOR EXCLUSION. III) WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES AND PERUSED THE MATERIALS ON RECORD. IT IS THE CONTENTION OF TH E LEARNED AR THAT THOUGH THE TPO HAS DISALLOWED THE PAYMENT OF MANAGE MENT FEES BY DETERMINING THE ALP AT NIL, BUT, AT THE SAME TIME, HE HAS CONSIDERED THE SAME WHILE COMPUTING OPERATING MARGIN OF THE AS SESSEE. WE ARE OF THE VIEW THAT WHEN THE TPO IS DISALLOWING THE PA YMENT OF MANAGEMENT FEES, IT CANNOT BE CONSIDERED FOR THE PU RPOSE OF COMPUTATION OF OPERATING MARGIN, OTHERWISE, IT WILL AMOUNT TO DOUBLE ADDITION. WE, THEREFORE, REMIT THIS ISSUE BACK TO T HE FILE OF THE AO/TPO TO LOOK INTO THIS ASPECT AND DECIDE THE ISSU E AFTER AFFORDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. IV. COMPUTATION OF WORKING CAPITAL ADJUSTMENT I) AS ALREADY DISCUSSED EARLIER, WHILE COMPUTING AD JUSTED ARITHEMATIC MEAN PLI OF COMPARABLES, THE AO MADE NE GATIVE CAPITAL ADJUSTMENT OF (-) 2.12%. THE DRP ALSO REJECTED ASSE SSEES OBJECTION TO THE SAME. THE LEARNED AR CONTENDED BEFORE US THA T THE TPO WHILE COMPUTING WORKING CAPITAL ADJUSTMENT HAS COMMITTED AN ERROR BY ALLOCATING TOTAL RECEIVABLES AND PAYABLES TO THE IN TERNATIONAL TRANSACTIONS WITH AE ONLY. IT WAS SUBMITTED BY THE LEARNED AR THAT SINCE THE ASSESSEE HAS ALSO ENTERED INTO INTERNATIO NAL TRANSACTIONS WITH NON-AES, AO SHOULD HAVE ALLOCATED PROPORTIONAT E RECEIVABLE AND PAYABLES TO NON-AE TRANSACTIONS AS THE ASSESSEE HAS FURNISHED ALL THE DETAILS BEFORE THE TPO. THE LEARNED AR SUBMITTE D THAT IF RECEIVABLES AND PAYABLES ARE PROPERLY ALLOCATED TO AE AND NON-AE TRANSACTIONS INSTEAD OF NEGATIVE WORKING CAPITAL OF 2.12%, IT WILL BE A POSITIVE FIGURE OF 2.29%. IN THIS CONTEXT, LEARNED AR REFERRED TO 17 ITA NO. 108/H/11 TNS INDIA PVT. LTD. SUMMARY OF WORKING CAPITAL ADJUSTMENT AT PAGE 338 O F THE PAPER BOOK. II) THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE TPO AND DRP ON THIS ISSUE. III) WE HAVE CONSIDERED THE SUBMISSIONS OF THE PAR TIES AND PERUSED THE MATERIALS ON RECORD. IT IS SEEN FROM THE ORDER OF THE DRP THAT THOUGH THE ASSESSEE HAS RAISED SIMILAR ARGUMENTS BE FORE THE DRP BUT THE DRP HAS REJECTED THE SAME BY STATING THAT T HE ASSESSEE HAS NOT MAINTAINED SEGMENTAL ACCOUNTS, HENCE, ALLOCATIO N OF COST TO RESPECTIVE SEGMENTS CANNOT BE ASCERTAINED. DRP HEL D THAT SINCE THE TPO HAS WORKED OUT THE WORKING CAPITAL ADJUSTMENT O N THE BUSINESS OF A TRANSPARENT METHOD ADOPTED IN CASE OF ALL TA XPAYERS IT CANNOT BE QUESTIONED. HOWEVER, WE ARE OF THE VIEW THAT IF THE ASSESSEE HAS MAINTAINED SEPARATE RECORDS AND CAN SUBSTANTIATE AL LOCATION OF EXPENDITURE TO THE INTERNATIONAL TRANSACTIONS WITH AE AND NON-AE THERE IS NO REASON WHY WORKING CAPITAL ADJUSTMENT S HOULD NOT BE MADE ACCORDINGLY. IN THAT VIEW OF THE MATTER, WE RE MIT THE ISSUE BACK TO THE FILE OF THE AO/TPO FOR DECIDING THE SAME AFR ESH AFTER AFFORDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. TPO MUST CONSIDER THE SUBMISSIONS OF THE ASSESSEE IN THE CON TEXT OF THE FACTS AND MATERIALS PLACED BEFORE DECIDING THE ISSUE. ACC ORDINGLY, WE DIRECT THE AO/TPO TO COMPUTE ALP IN CONFORMITY WITH OUR DI RECTIONS HEREINABOVE AND WORK OUT ADJUSTMENT IF ANY TO BE MA DE U/S 92CA OF THE ACT. 5. GROUND NOS. 18 & 19 RELATE TO THE ISSUE OF DENIA L OF EXEMPTION CLAIMED U/S 10A OF THE ACT ON THE PROFIT RELATING T O OFFSHORE RESEARCH SERVICES CENTRE (ORSC) UNIT OF THE ASSESSEE. AS CAN BE SEEN FROM THE DRAFT ASSESSMENT ORDER, THE AO WHILE FRAMING DR AFT ASSESSMENT ORDER REJECTED EXEMPTION CLAIMED U/S 10A OF THE ACT IN RESPECT OF ORSC UNIT BY HOLDING THAT THE AFORESAID UNIT HAVING BEEN SET UP BY 18 ITA NO. 108/H/11 TNS INDIA PVT. LTD. SPLITTING UP/RECONSTRUCTION OF THE EXISTING BUSINES S EXEMPTION CLAIMED CANNOT BE GRANTED. ASSESSEE OBJECTED TO THE DENIAL OF EXEMPTION U/S 10A OF THE ACT BEFORE THE DRP. HOWEVER, THE DRP ALS O UPHELD THE VIEW OF THE AO BY REJECTING GROUND OF THE ASSESSEE. 6. THE LEARNED AR REITERATING THE STAND TAKEN BEFOR E THE TAX AUTHORITIES SUBMITTED BEFORE US THAT THE ORSC UNIT HAS BEEN STARTED IN A NEW PREMISES TAKEN ON LEASE AND IS RECOGNIZED BY THE STPI. THEREFORE, THE AOS CONCLUSION THAT IT HAS BEEN FOR MED BY SPLITTING UP/RECONSTRUCTION OF EXISTING BUSINESS IS NOT CORRE CT. ALTERNATIVELY, LEARNED AR CONTENDED THAT IF AT ALL THE AOS VIEW I S TO BE INFERRED AS CORRECT, THEN, THE ORSC UNIT HAVING BEEN CONVERTED FROM DOMESTIC TARIFF AREA (DTA) UNIT INTO STPI UNIT DEDUCTION U/S 10A OF THE ACT IS ADMISSIBLE FOR THE UNEXPIRED PERIOD. THE LEARNED AR SUBMITTED THAT UPON CONSIDERING SIMILAR ARGUMENT, DRP IN ASSESSEE S OWN CASE RELATING TO AY 2008-09 HAS ALLOWED THE CLAIM OF ASS ESSEE BY HOLDING THAT WHEN DTA UNIT IS CONVERTED INTO 100% EOU, IT B ECOMES ELIGIBLE FOR DEDUCTION U/S 10A FOR THE REMAINING PERIOD. IN THIS CONTEXT, HE REFERRED TO A COPY OF THE ORDER OF THE DRP FOR AY 2 008-09 PLACED AT PAGE 264 OF THE PAPER BOOK. 7. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE O RDER OF THE DRP. 8. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERI ALS ON RECORD AS WELL AS THE ORDERS OF THE DRP ON THIS ISSUE. SO FAR AS THE FIRST CONTENTION OF THE ASSESSEE THAT ORSC IS A NEW UNIT , WE ARE UNABLE TO ACCEPT SUCH CONTENTION IN VIEW OF THE SPECIFIC F INDING OF THE AO, WHICH HAS NOT BEEN CONTROVERTED BY THE ASSESSEE BY BRINGING SUFFICIENT MATERIAL TO SUBSTANTIATE ITS CLAIM. HOWE VER, SO FAR AS ALTERNATIVE CONTENTION OF THE ASSESSEE FOR ALLOWING CLAIM OF DEDUCTION U/S 10A OF THE ACT DUE TO CONVERSION FROM DTA UNIT TO STPI UNIT, WE FIND FORCE IN SUCH CONTENTION OF THE LEARNED AR. I T IS NOT IN DISPUTE 19 ITA NO. 108/H/11 TNS INDIA PVT. LTD. THAT ORSC UNIT IS RECOGNIZED AS A STPI UNIT. ON PER USAL OF THE ORDER PASSED BY THE DRP FOR THE AY 2008-09, IT IS SEEN TH AT IN PARA 12 OF THE SAID ORDER, THE DRP HAS HELD THAT WHEN ORSC UNI T IS CONVERTED FROM DOMESTIC TARIFF AREA TO STPI UNIT, IT IS ELIGI BLE FOR DEDUCTION U/S 10A OF THE ACT FOR THE REMAINING PERIOD OUT OF 10 C ONSECUTIVE ASSESSMENT YEARS STARTING FROM THE YEAR IN WHICH IT WAS APPROVED AS STPI UNIT. IN VIEW OF SUCH FINDING OF THE DRP FOR THE AY 2008-09, WE DIRECT THE AO TO ALLOW DEDUCTION U/S 10A OF THE ACT FOR THE IMPUGNED ASSESSMENT YEAR ALSO. 8.1 THE ASSESSEE HAS RAISED ONE MORE ADDITIONAL GRO UND AT THE TIME OF HEARING BEFORE US WHICH IS AS UNDER: WITH REFERENCE TO GROUND NO. 18 AND 19, WE REQUEST THE HONBLE TRIBUNAL TO DIRECT THE LEARNED AO TO CONSID ER THE APPELLANTS REVISED CLAIM IN RESPECT OF DEDUCTION U /S 10A OF THE ACT MADE DURING THE ASSESSMENT PROCEEDINGS. 8.2 IN THIS CONTEXT, LEARNED AR HAS REFERRED TO THE WORKING OF COMPUTATION U/S 10A DEDUCTION AS CONTAINED IN REPL Y DATED 17/12/2005 BEFORE THE ADDITIONAL COMMISSIONER OF IN COME-TAX, A COPY OF WHICH IS PLACED AT PAGE 119 OF THE PAPER BOOK. 8.3 CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, WE REMIT THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO LOO K INTO THIS ASPECT AND TAKE A DECISION IN THE MATTER AFTER VERIFYING THE C LAIM OF THE ASSESSEE AND AFTER GIVING DUE OPPORTUNITY OF HEARING IN THE MATTER TO THE ASSESSEE. 9. IN GROUND NO. 20, THE ASSESSEE HAS CHALLENGED LE VY U/S 234B OF THE ACT. IT IS THE CONTENTION OF THE LEARNED AR THAT IN VIEW OF RETROSPECTIVE AMENDMENT TO SECTION 92C(2) OF THE A CT, NO INTEREST CAN BE CHARGED U/S 234B OF THE ACT FOR SHORTFALL IN PAYMENT OF ADVANCE TAX. 20 ITA NO. 108/H/11 TNS INDIA PVT. LTD. 10. HAVING CONSIDERED THE SUBMISSIONS OF THE PARTIE S, WE ARE OF THE VIEW THAT AT THIS STAGE, THIS GROUND IS NOT REQUIRE D TO BE ADJUDICATED UPON AS LEVY OF INTEREST U/S 234B IS CONSEQUENTIAL TO THE FINAL DETERMINATION OF INCOME. 11. IN GROUND NO. 21, ASSESSEE HAS CHALLENGED INITI ATION OF PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT. THIS GROUND I S PREMATURE, HENCE, IS NOT REQUIRED TO BE ADJUDICATED UPON AT TH IS STAGE. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 27/06/2014. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 27 TH JUNE, 2014 KV COPY TO:- 1) M/S TNS INDIA PVT. LTD., 2 ND FLOOR, SHREE PRASHANTHI SAI TOWERS, PLOT NO. 68, H.NO. 8-2-248, SREE NAGARJUNA COOP ERATIVE HOUSING SOCIETY, PANJAGUTTA, , HYDERABAD 500 082 2) ADDL. CIT, RANGE 2, , IT TOWERS, MASAB TANK, HYD ERABAD. 3)DRP, HYDERABAD. 4) THE ADDL. CIT(TP), HYDERABAD 5)THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDER ABAD.