Cummins Turbo technologies Limited(Formerly Know as "Holset Engineering Company Limited), Pune V. DDIT(IT)-1, Pune, Pune

ITA 118/PUN/2011

• Counselvise Citation: 11824514 RSA 2011
• Duration Of Justice: 2 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 25-07-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 28-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K SINGH
• Keywords: Transfer pricing; International transaction; Permanent establishment; Working capital adjustments
• Section: 92C; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI R.S.PADVEKAR, JUDICIAL MEMBER AND SHRI R.K.PANDA, ACCOUNTANT MEMBER. ITA.NO.118/PN/2011 (ASSTT. YEAR : 2006-07) CUMMINS TURBO TECHNOLOGIES LIMITED, (FORMERLY KNOWN AS HOLSET ENGINEERING COMPANY LIMITED), TECHNOVA HOUSE, 9/1-A/2, OFF KARVE ROAD, ERANDWANE, PUNE 411004. .. APPELLANT VS. DDIT(INTERNATIONAL TAXATION)-1, PUNE. .. RESPONDENT ASSESSEE BY : SHRI RAJAN VORA DEPARTMENT BY : SHRI S.K.SINGH DATE OF HEARING : 20.05.2013 DATE OF PRONOUNCEMENT : 31.05.2013 ORDER PER R.S.PADVEKAR, JM : IN THIS APPEAL THE ASSESSEE HAS CHALLENGED THE ASS ESSMENT ORDER PASSED BY THE ASSESSING OFFICER FOR THE A.Y. 2006-07 U/S.143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1 961, AS THE IMPUGNED ASSESSMENT ORDER IS PASSED IN COMPLIANCE W ITH THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL (D RP), PUNE, U/S.144C(5) OF THE ACT AND HENCE, THE IMPUGNED ASSE SSMENT ORDER IS DIRECTLY CHALLENGED BEFORE US. 2. THE CONTROVERSY IN THE APPEAL IS MAINLY REVOLVIN G AROUND TWO ADJUSTMENTS MADE BY THE TRANSFER PRICING OFFICER (T PO) U/S.92CA(3) OF THE ACT WHICH HAD BEEN CONFIRMED BY THE DRP WHIL E GIVING DIRECTIONS U/S.144C(5) OF THE ACT. THE ASSESSEE HA S RAISED THE FIRST 2 GRIEVANCE IN RESPECT OF THE ADJUSTMENT OF RS.9,72,8 74/- TO THE TRANSACTIONS OF THE PURCHASES REPORTED BY THE ASSES SEE WITH THE ASSOCIATE ENTERPRISES(AE). 3. THE ASSESSEE IS A FOREIGN COMPANY AND HAS INTERN ATIONAL TRANSACTIONS WITH THE AES ARE REPORTED. THE ASSESS ING OFFICER MADE REFERENCE TO THE TPO U/S.92CA(1) OF THE ACT. AS PE R THE TRANSFER PRICING STUDY REPORT FILED BY THE ASSESSEE IN FORM NO.3CEB, ASSESSEE HAS TOTALLY REPORTED 8 CATEGORIES OF THE T RANSACTIONS. SO FAR AS THE PURCHASE OF THE GOODS, ASSESSEE HAS PURC HASED THE GOODS FROM CTTL INDIA TO THE EXTENT OF RS.54,02,60,392/-. IT WAS NOTICED BY THE TPO THAT THE CORRESPONDING FIGURES OF SALES BY CTTL INDIA TO THE ASSESSEE AS REPORTED IN THEIR AUDIT REPORT WAS OF RS.53,92,87,518/-, WHICH RESULTING INTO A DIFFERENC E OF RS.9,72,874/-. THE ASSESSEE CONTENDED THAT IT IS O NLY A REPORTING ERROR. THE TPO OBSERVED THAT IF IT WAS THE CASE OF ERROR, THE ASSESSEE COULD HAVE REVISED ITS AUDIT REPORT IN FOR M NO.3CEB BY GIVING THE CORRECTED FIGURES. THE TPO ALSO OBSERVE D THAT THE AUDITOR WHO IS REQUIRED TO PREPARE THE AUDIT REPORT IS TO VERIFY THE TRANSACTIONS AND PREPARE THE AUDIT REPORT. AS OBSE RVED BY THE TPO, CERTAIN ITEMS OF PURCHASES HAS BEEN ERRONEOUSLY DEB ITED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE FOR WHICH THE VALU E OF INTERNATIONAL TRANSACTIONS HAS BEEN INCREASED TO TH E EXTENT OF RS.9,72,874/-, THAT THE SAID DIFFERENT CANNOT BE TR EATED AS AN ERROR. 3.1. WHEN THE ISSUE REACHED BEFORE THE DRP, THE ADJ USTMENT MADE BY THE TPO WAS CONFIRMED. THE ASSESSEE REITERATED THE ARGUMENT WHICH WAS TAKEN BEFORE THE TPO BY TAKING THE STAND THAT THE DIFFERENCE OF RS.9,72,874/- IN THE VALUE OF PURCHAS ES BY CTTL INDIA WAS ONLY ON ACCOUNT OF AN ERROR IN REPORTING THE VA LUE OF THE TRANSACTIONS. MOREOVER, THE PURCHASES TRANSACTIONS IS NOT TAX DEDUCTIBLE IN THE HANDS OF THE CTTL UK IN INDIA. A SSESSEE ALSO CONTENDED THAT IT BELIEVED THAT THERE WAS NO REQUIR EMENT TO SEPARATELY REPORT SUCH TRANSACTIONS IN FORM NO.3CEB AND, THEREFORE, CTTL UK OBTAINED AND FILED A REVISED REP ORT IN FORM 3 NO.3CEB WHEREIN THE NON-TAXABLE TRANSACTIONS INCLUD ING THE TRANSACTION OF PURCHASE OF GOODS WAS NOT REFLECTED AS AN INTERNATIONAL TRANSACTION. THE ASSESSEE ALSO PLEAD ED BEFORE THE DRP THAT TRANSFER PRICING PROVISIONS DO NOT APPLY T O INTERNATIONAL TRANSACTIONS NOT LIABLE TO INCOME TAX IN INDIA. BU T THE ASSESSEE DID NOT FIND ANY FAVOUR FOR HIS SUBMISSIONS. 4. THE LD. COUNSEL SUBMITS THAT THERE ARE CERTAIN T RANSACTIONS OF PURCHASE/ SALE OF GOODS BY CTT UK TO CTTL INDIA. H E SUBMITS THAT SO FAR AS THE TRANSACTIONS OF PURCHASE IS CONCERNED , THE SAID TRANSACTION DID NOT RESULT INTO ANY TAX LIABILITY I N INDIA AS THE SAID TRANSACTIONS ARE ENTERED INTO OUTSIDE INDIA. HE FU RTHER SUBMITS THAT THE ASSESSEE HAS NO PERMANENT ESTABLISHMENT (P E) IN INDIA AND, THEREFORE, NO COVERED U/S.5 OF THE ACT. HE SU BMITS THAT THE PURCHASE TRANSACTIONS OF RS.54,02,60,392/- ARE REPO RTED IN THE ORIGINAL FORM NO.3CEB ON THE DISCLOSURE IN THE RELA TED PARTY SCHEDULE, BUT CORRESPONDING FIGURES OF SALES REPORT ED BY CTTL INDIA WAS AT RS.53,92,87,518/- WHICH PRIMA FACIE DISCLOSE D DIFFERENCE OF RS.9,72,874/-. SUBSEQUENTLY CCTL INDIA CLARIFIED T HAT THERE WAS AN ERROR IN REPORTING IN RELATED PARTY SCHEDULE IN THE AUDIT REPORT. HE THEREFORE PLEADED FOR DELETING THE ADJUSTMENT MA DE U/S.92CA(3) OF THE ACT. 5. WE HAVE HEARD THE LD. DR. WE FIND FORCE IN THE ARGUMENT OF THE LD. COUNSEL. THE BASIS OF THE ADJUSTMENT MAD E BY THE TPO IS THAT WHILE REPORTING THE TRANSACTIONS OF THE RELATE D PARTY, THE ASSESSEE HAS SHOWN THE VALUE OF THE PURCHASES MORE THAN THE SALES DISCLOSED BY CTTL INDIA BY RS.9,72,874/-. THE DRP HAS NOT AT ALL DISCUSSED ANYTHING ON THE SUBMISSION MADE BY THE AS SESSEE NOR HAS TAKEN ANY PAINS TO VERIFY THE CORRECTNESS OF TH E ASSESSEES CLAIM. THE ASSESSEE HAS FILED THE PAPER BOOK IN W HICH THE REVISED COPY OF THE AUDIT REPORT IS ALSO FILED. IN OUR OPI NION, THE DIFFERENCE IN THE FIGURE CANNOT BE TREATED ONLY ON THE SURMISE S AND PRESUMPTION BASIS FOR MAKING THE ADJUSTMENT U/S.92C A(3) OF THE ACT. MOREOVER, WE ALSO FIND THAT IT IS PURELY A PU RCHASE TRANSACTION 4 AND ASSESSEE HAS NO PE IN INDIA. OTHERWISE ALSO IN OUR OPINION, THERE IS NO TAX IMPLICATION EVEN THOUGH THERE IS A DIFFERENCE. WE ACCORDINGLY ALLOW THE RESPECTIVE GROUND TAKEN BY TH E ASSESSEE AND DELETE THE ADDITION. 6. THE NEXT GRIEVANCE OF THE ASSESSEE IS IN RESPECT OF ADJUSTMENT OF RS.6,33,761/- MADE TO THE VALUE OF THE INTERNATI ONAL TRANSACTIONS RENDERING INFORMATION TECHNOLOGY ENABLED SERVICES ( ITES). THE MAIN GRIEVANCE OF THE ASSESSEE IS THAT THE COMPARAT IVE ANALYSIS IN THE FORM OF TRANSFER PRICING STUDY REPORT HAS BEEN REJECTED BY THE TPO AS WELL AS THE DRP WITHOUT APPRECIATING THAT TH E COMPARABLES WHICH ARE SHOWN BY THE ASSESSEE FOR BENCH MARKING A RE IN COMPLIANCE WITH TEST OF FAR. IN RESPECT OF THIS AD JUSTMENT FOR THE PURPOSE OF THE BENCHMARKING, I.E., FOR ITES, ASSESS EE ADOPTED TNM METHOD AS MOST APPROPRIATE METHOD AND OPERATING PRO FIT/OPERATING COST HAS BEEN TAKEN AS PROFIT LEVEL INDICATOR(PLI). ASSESSEE HAS TAKEN 14 EXTERNAL COMPARABLES AND WEIGHTED AVERAGE MARGIN HAS BEEN TAKEN AS PLI FOR THE SET OF COMPARABLES. THE COMPARABLES ADOPTED BY THE ASSESSEE ARE AS UNDER: SR. NO. COMPANY MARGIN FOR THE FINANCIAL YEAR(%) OPERATING PROFIT ON OPERATING COST F.Y. 03-04 F.Y. 04-05 F.Y. 05-06 1 ACE SOFTWARE EXPORT S LTD. 0.72% 15.42% N.A. 8.69% 2 ALLSEC TECHNOLOGIES LTD. - 37.68% 26.19% N.A. - 3.66% 3 C S SOFTWARE ENTERPRISES LTD. 13.36% 9.89% N.A. 11.48% 4 FORTUNE INFOTECH LTD. 34.07% 14.12% N.A. 23.08% 5 GENESYS INTERNATIONAL CORPORATION LTD. (CONSOLIDATED SEGMENTAL) 14.47% - 2.15% N.A. 6.30% 6 KIRLOSKAR COMPUTER SERVICES LTD. (SEGMENTAL) 25.85% - 35.16% N.A. - 12.19% 7 MERCURY OUTSOURCING MANAGEMENT LTD. 5.70% - 36.94% N.A. 15.03% 8 NUCLEUS NETSOFT AND GIS(INDIA) LTD. 16.88% 41.33% N.A. 30.20% 9 PENTASOFT TECHNO LOGIES LTD. (SEGMENTAL) 13.21% 6.70% N.A. 11.28% 10 SPANCO TELESYSTEMS AND SOLUTIONS LTD. (SEGMENTAL) 29.71% 13.07% N.A. 18.16% 11 TRANSWORKS INFORMATION SERVICES LTD. - 12.17% 2.09% N.A. - 1.33% 5 12 TRICOM INDIA LTD. 45.75% 43.87% N.A. 44.59% 13 VISHAL I NFORMATION TECHNOLOGIES LTD. 48.32% 45.62% N.A. 46.69% 14 WIPRO BPO SOLUTIONS LTD. 30.63% 23.35% N.A. 26.19% GRANT AVERAGE 13.89% OP/OC OF THE COMPANY 14.15% 7. AS PER THE ABOVE CHART, THE WEIGHTED MEAN OF OPE RATING PROFIT/OPERATING COST MEAN OF COMPARABLES IS 13.89% AND OPERATING PROFIT/OPERATING COST OF THE COMPANY IS W ORKED OUT AT 14.15%. THE ASSESSEE, THEREFORE, TOOK THE STAND TH AT THE TRANSACTIONS BETWEEN ASSESSEE AND ITS AES RELATING TO ITES ARE CONSISTENT WITH THE ARMS LENGTH STANDARD FROM THE INDIAN TRANSFER PRICING PERSPECTIVE. IN THE COURSE OF THE ASSESSME NT PROCEEDINGS, THE ASSESSEE UPDATED THE PLIS IN RESPECT OF SOME CO MPARABLES CONSIDERING THE DATA AVAILABLE FOR THE F.Y. 2005-06 , WHICH IS AS UNDER: SR. NO. COMPANY OPERATING MARGIN RATIO 1 ACE SOFTWARE EXPORTS LTD. 7.92 % 2 ALLSEC TECHNOLOGIES LTD. 28.61 % 3 C S SOFTWARE ENTERPRISES LTD. 18.78 % 4 FORTUNE INFOTECH LTD. 13.12 % 5 GENESYS INTERNATIONAL CORPORATION LTD. (CONSOLIDATED SEGMENTAL) - 0.11 % 6 KIRLOSKAR COMPUTER SERVICES L TD. (SEGMENTAL) - 25.15 % 7 MERCURY OUTSOURCING MANAGEMENT LTD. 40.24 % 8 NUCLEUS NETSOFT AND GIS(INDIA) LTD. N.A. 9 PENTASOFT TECHNOLOGIES LTD. (SEGMENTAL) 2.46% 10 SPANCO TELESYSTEMS AND SOLUTIONS LTD. (SEGMENTAL) 19.13% 11 TRANSWORKS INFORMATION SERVI CES LTD. 24.01% 12 TRICOM INDIA LTD. 51.86% 13 VISHAL INFORMATION TECHNOLOGIES LTD. 48.03% 14 WIPRO BPO SOLUTIONS LTD. N.A. ARITHMETIC MEAN 12.37% 8. THE ASSESSING OFFICER PROCEEDED TO EXCLUDE THE F OLLOWING COMPARABLES ADOPTED BY THE ASSESSEE FOR THE BENCHMA RKING PURPOSES: 1. KIRLOSKAR COMPUTER SERVICES LTD. 2. MERCURY OUTSOURCING MANAGEMENT LTD. 3. PENTASOFT TECHNOLOGIES LTD. 6 4. NUCLEUS NETSOFT AND GIS (INDIA) LTD. 5. WIPRO BPO SOLUTIONS LTD. 8.1. THE TPO GAVE THE FOLLOWING REASONS FOR EXCLUDI NG THE ABOVE COMPARABLES WHICH WERE OTHERWISE ADOPTED BY THE ASS ESSEE FOR THE BENCHMARKING PURPOSES: A) KIRLOSKAR COMPUTER SERVICES LTD. THE COMPANY IS INTO DATA PROCESSING, SOFTWARE CONS ULTANCY AND IN OTHER FIELDS. DURING THE YEAR UNDER CONSIDERATI ON, A MAJOR CLIENT WITHDREW FROM THE SERVICES OF THE COMPANY WHICH HAS RESULTED IN A SUBSTANTIAL FALL IN THE REVENUE. THIS FACT HAS F OUND TO BE MENTIONED IN THE COMPANYS MANAGEMENT DISCUSSION AN D ANALYSIS FOR F.Y. 2005-06. FURTHER, THE COMPANY IS A PERPET UAL LOSS MAKER AND HAS INCURRED LOSSES IN THE IMMEDIATE PRECEDING YEAR, IN THE YEAR UNDER CONSIDERATION AND EVEN IN SUBSEQUENT YEA RS. IT MAY BE SEEN FROM THE FAR ANALYSIS GIVEN OF THE ASSESSEE , THAT IT IS INTO THE GLOBAL PLANNING, DATA BASE SUPPORT, PRODUCT MAN AGEMENT, SUPPLY CHAIN MANAGEMENT, IT SERVICES, FINANCE AND M ARKETING. ACCORDINGLY, THE DATA PROCESSING IS NOT ONE OF THE MAJOR FUNCTIONS OF THE ASSESSEE. FURTHER, THE ASSESSEE COMPANY IS REMUNERATED ON THE COST PLUS MARK-UP BASIS AND ACCORDINGLY, CAN NEVER INCUR LOSSES IN ITS RENDERING OF SERVICES TO THE HEADQUAR TER. IN VIEW OF THE FACTS AS ABOVE, THE COMPANY KIRLOSK AR COMPUTER SERVICES LTD. IS NOT ONLY FOUND TO BE FUNCTIONALLY DIFFERENT, BUT ALSO IT BEING A LOSS MAKING ENTITY WOULD HAVE DIFFERENT RISK PERCEPTIONS COMPARED TO A COST PROTECTED ENTITY LIKE ASSESSEE. ACCORDINGLY, THIS COMPANY IS PROPOSED TO BE EXCLUDED FROM THE SE T OF COMPARABLES. B) MERCURY OUTSOURCING MANAGEMENT LTD. THIS COMPANY IS ENGAGED IN PROVIDING IT ENABLED SE RVICES AND HAS INCURRED SUBSTANTIAL LOSSES FOR THE YEAR UNDER CONSIDERATION AND AS WELL AS, IN THE IMMEDIATE PREVIOUS YEAR. AN ATTEMPT WAS MADE TO LOCATE THE DATA OR THE DETAILS OF THIS COMP ANY FOR THE SUBSEQUENT YEAR TO SEE WHETHER THE COMPANY WAS IN A NY WAYS INTO OPERATIONS OR NOT, BUT NO SUBSEQUENT DATA HAS BEEN FOUND IN THE DATA BASES. FOR THE YEAR UNDER CONSIDERATION, AGAINST THE TURNOVER OF RS.45.33 LAKHS, THIS COMPANY HAS INCURR ED A NET LOSS OF RS.30.52 LAKHS. FURTHER, FOR THE IMMEDIATE PREC EDING YEAR, THE TURNOVER OF THE COMPANY WAS RS.60.95 LAKHS AGAINST WHICH THE LOSS INCURRED WAS OF RS.35.7 LAKHS. THUS, IT COULD BE SEEN THAT THE COMPANY IS INTO SUBSTANTIAL LOSS AND FURTHER, WHETH ER ITS BUSINESS IS CONTINUING OR NOT, IS NOT KNOWN. THE ASSESSEE C OMPANY IS A COST PROTECTED ENTITY AND THEREFORE, CANNOT INCUR LOSSES . IN VIEW OF THE FACTS AS AFORESAID, THE COMPANY IS FOUND TO BE NOT COMPARABLE FOR THE REASON OF ITS EXTRAORDINARY LOSS ES, WHICH COULD ONLY BE FOR THE REASONS OF CERTAIN EXTRAORDINARY FA CTORS AND CANNOT 7 BE COMPARED WITH AN ENTITY LIKE THAT OF THE ASSESSE E, WHICH IS COST PROTECTED. C) PENTASOFT TECHNOLOGY LTD. THIS COMPANY IS INTO ENGINEERING SERVICES CAD/CA M/CAE PROJECTS, ENTERPRISE DIVISION AND IS INTO EDUCATION AND TRAINING AS WELL. IT IS SEEN FROM THE DETAILS GIVEN IN THE DAT A BASES THAT IT HAS REVENUES OF RS.7.73 CRORES FROM PRODUCTS AND SERVIC ES, RS.5.67 CRORES FROM PROJECTS AND RS.2.73 CRORES FROM EDUCAT ION AND TRAINING. THEREFORE, IT COULD BE SEEN THAT DURING THE YEAR UNDER CONSIDERATION, THE REVENUES ARE FROM THE AFORESAID AREAS. IT APPEARS FROM THE DETAILS GIVEN IN ATTACHMENT 3 OF T HE TRANSFER PRICING REPORT THAT THE ENGINEERING SERVICES SEGMEN T OF THIS COMPANY HAS BEEN CONSIDERED TO BE COMPARABLE IN THI S CASE. HOWEVER, FOR THE PERIOD ENDED ON 31/3/2006, THERE I S NO SEPARATE SEGMENTAL REPORTING IN CASE OF THIS COMPANY FOR ENG INEERING SERVICES SEGMENT. MOREOVER, THE ENGINEERING SERVIC ES SEGMENT EVEN IF THE DATA WAS AVAILABLE, IS WAY DIFFERENT CO MPARED TO THE FUNCTIONS WHICH ARE PERFORMED BY THE ASSESSEE IN RE NDERING SERVICES TO ITS HEADQUARTER. IN VIEW OF THE FACTS AS AFORESAID, THE COMPANY PEN TASOFT TECHNOLOGY LTD. IS NOT FOUND TO BE COMPARABLE, AND IS ACCORDINGLY PROPOSED TO BE EXCLUDED FROM THE SET OF COMPARABLES . D) NUCLEUS NETSOFT AND GIS (INDIA) LTD. AND WIPRO BPO SOLUTIONS LTD. IT IS ALSO SEEN THAT DATA FOR THE COMPANIES NUCLEU S NETSOFT AND GIS (INDIA) LIMITED AND WIPRO BPO SOLUTIONS LIMITED IS NOT AVAILABLE FOR THE YEAR ENDING 31.03.2006. ACCORDIN GLY THESE TWO COMPANIES ARE ALSO PROPOSED TO BE EXCLUDED. 9. IN SUM AND SUBSTANCE THE TPO CONSIDERED ONLY 8 C OMPARABLES FROM THE COMPARABLES ADOPTED BY THE ASSESSEE AND WO RKED OUT THE AVERAGE OPERATING PROFIT/OPERATING COST AT 26.43%. THE ASSESSING OFFICER PROCEEDED TO MAKE THE ADJUSTMENT OF RS.9,16 ,677/- THAT IT CONSIDERING DIFFERENCE BETWEEN THE ARITHMETIC MEAN OF PLIS OF COMPARABLES AND THAT OF THE ASSESSEE, I.E. 26.43% M INUS 14.15%, I.E., 12.28% AND THIS PERCENTAGE WAS WORKED OUT ON THE TOTAL OPERATING COST RELATING TO THE INTERNATIONAL TRANSA CTIONS AT RS.74,64,793/-. THE ASSESSEE RESISTED THE ACTION O F THE TPO FOR EXCLUDING CERTAIN COMPARABLES AS MENTIONED ABOVE. THE ASSESSEE JUSTIFIED HIS COMPARABLES ON FOLLOWING REASONS: 8 A) GENESYS INTERNATIONAL CORPORATION LTD. (GENESYS): IN RESPECT OF THIS COMPANY, THE COMPANYS BACKGROUN D AS GIVEN IN THE NOTES TO THE ACCOUNTS IN THE ANNUAL REPORT H AS BEEN MENTIONED, AND IT HAS BEEN SUBMITTED THAT GIS ACTIV ITY IS AN I.T. ENABLED SERVICE, AND THEREFORE, COMPARABLE TO THE I .T. ENABLED SERVICES RENDERED BY CTT INDIA BRANCH. QUOTING PAR A 3.45 OF THE OECD GUIDELINES AND PROVISO TO SUB-SECTION 2 OF SECTION 92C AND FURTHER, CONTENDING THAT IN TERM INCOME, INCLUDES PROFITS AS WELL AS LOSS, IT HAS BEEN CONTENDED THAT IT IS NOT APPROPRIATE TO REJECT COMPANIES UNDER CONSIDERATION MERELY, BECAUSE THE COMPANY HAS MADE LOSS DURING THE YEAR; THAT THE PERSISTENT LOSS MAKERS HAVE ANYWAYS BEEN REJECTED O N THE MOST CONSERVATIVE BASIS, AND THE VERY FACT THAT THESE CO MPANIES CONTINUE TO OPERATE, INDICATES THAT THEY ANTICIPATE EARNING PROFITS IN FUTURE, AND THAT IT IS ONLY INHERENT RIS K IN THE MARKET WHICH IS DRIVING SUCH COMPANIES TO A LOSS. IT HAS FURTHER BEEN CONTENDED, THAT IN THE EVENT IT IS PROPOSED TO ELIM INATE THE LOSS MAKING COMPANIES, THEN EVEN HIGHER THAN THE NORMAL PROFIT MAKING COMPANIES NEED TO BE ELIMINATED AS COMPARABL ES, TO NORMALISE THE RESULTS. THE ASSESSEE HAS RELIED ON THE OBSERVATIONS OF HON'BLE ITAT DELHI IN THE CASE OF M ENTOR GRAPHICS (P) LTD. VS. DCIT (112 TTJ 408), AND FURTH ER IN THE CASE OF M/S.SONY INDIA (P) LTD. VS. DCIT, AND HAS CONTEN DED THAT THE COMPANIES, THAT HAVE INCURRED LOSSES BUT HAVE NOT I NCURRED LOSSES PERSISTENTLY OVER A PERIOD OF SEVERAL YEARS, SHOULD NOT BE REJECTED. B) KIRLOSKAR COMPUTER SERVICES LIMITED (KORLOSKAR) : IN THIS REGARD, IT HAS BEEN SUBMITTED THAT THE FUN CTIONS OF CTT INDIA BRANCH INHERENTLY INVOLVED DATA PROCESSIN G AND ACCORDINGLY, THE FUNCTIONS OF KIRLOSKAR CONSISTING OF DATA PROCESSING WOULD BE COMPARABLE TO THE FUNCTIONS OF CTT INDIA BRANCH. THAT FOR THE PURPOSES OF TNMM, IT IS NOT N ECESSARY THAT THE COMPANY MUST HAVE EXACTLY SAME FUNCTIONS, BUT E VEN COMPANIES WITH SIMILAR FUNCTIONS QUALIFY AS COMPARA BLES, THAT FOR THE REASONS GIVEN AGAINST THE EXCLUSION OF LOSS MAKING COMPANIES UNDER GENESYS, ARE APPLICABLE HERE ALSO, AND THEREFORE, KIRLOSKAR CANNOT BE REJECTED MERELY BECA USE IT HAS INCURRED LOSSES. FURTHER, KIRLOSKAR COMPUTER SERVIC ES LTD. HAS OPERATING PROFITS IN F.Y. 2003-04 AND THEREFORE, IT CANNOT BE CALLED AS PERSISTENT LOSS MAKER, AND ACCORDINGLY TH E SAME WAS ACCEPTED AS COMPARABLES. C) MERCURY OUTSOURCING MANAGEMENT LIMITED (MERCURY) : MERCURY HAS OPERATING PROFIT IN F.Y. 2003-04, AND HENCE, CANNOT BE SAID TO BE A PERSISTENT LOSS MAKER, AND I T HAS BEEN FURTHER CONTENDED THAT THE LOSSES ARE OPERATING IN NATURE, AND NOT DUE TO EXTRAORDINARY REASONS. IT HAS BEEN CONT ENDED, THAT THE COMPARABILITY OF COMPANIES HAVING INCURRED LOSS ES AND THE RELEVANT SUBMISSION IN THIS REGARD, HAS BEEN GIVEN WHILE 9 DEALING WITH THE COMPANY GENESYS, AND THE SAME IS A PPLICABLE HERE ALSO. D) PENTASOFT TECHNOLOGIES LIMITED (PENTASOFT) : THAT THE SEGMENTAL RESULTS OF ENGINEERING SERVICES SEGMENT IS AVAILABLE, WHICH IS BASICALLY THE PROJEC T SEGMENT OF THE COMPANY; THAT THE CAD/CAM/CAE PROJECTS ARE NOTH ING BUT I.T. ENABLED SERVICES, AND THEREFORE, ENGINEERING S ERVICES OF PENTASOFT CATEGORIZED UNDER THE PROJECT SEGMENT FOR THE F.Y. 2005-0, IS AN I.T. ENABLED SERVICE, AND THEREFORE, COMPARABLE TO THE SERVICES OF CTT INDIA BRANCH. ACCORDINGLY, IT WOULD BE INCORRECT TO REJECT THE COMPANY ON THE GROUNDS MENT IONED IN THE NOTICE. 10. THE TPO REJECTED THE OBJECTIONS OF THE ASSESSEE BY GIVING THE FOLLOWING REASONS WHILE MAKING THE FINAL ADJUSTMENT TO THE ITES RENDERED, THE TPO MADE FINAL ADJUSTMENT TO RS.6,33, 761/-. THE REASONS GIVEN BY THE TPO ARE AS UNDER: IT CAN BE SEEN THAT RULE 10B (4) PRESCRIBES USE OF DATA FOR THE F.Y. IN WHICH AN INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO AND IN THE PROVISO WHAT HAS BEEN FURTHER PERMI TTED IS THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO Y EARS PRIOR TO SUCH F.Y. MAY ALSO BE CONSIDERED, IF CONDITIONS GIVEN THERE ARE SATISFIED (EMPHASIS SUPPLIED). THE WORD 'ALSO' GIVEN IN PROVISO OF RULE 10B(4) WOULD ONLY MEAN THAT UNDER S OME PARTICULAR CIRCUMSTANCES AS HAS BEEN DETAILED IN TH E RULE, DATA FOR EARLIER TWO YEARS CAN BE USED IN ADDITION TO THE DATA FOR THE YEAR IN WHICH INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. IT CANNOT BE INTERPRETED TO MEAN THAT EVEN IF THE DATA FOR THE YEAR IN WHICH THE INTERNATIONAL TRANSA CTION HAS BEEN ENTERED INTO, IS NOT AVAILABLE, THEN TOO THE D ATA FOR THE TWO YEARS PRIOR TO THE F.Y. CAN BE USED. THE CONTENTION OF THE ASSESSEE THAT THE DATA SHOULD BE CONTEMPORANEOUS AND DATA AVAILABLE AT THE TIME OF A NALYSIS WHEN THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO ONLY SHOULD BE USED IS NOT ACCEPTABLE IN VIEW OF THE RUL E 10B (4) REPRODUCED ABOVE. WHAT THE RULE PROVIDES IS USE OF THE DATA RELATING TO THE FINANCIAL YEAR IN -WHICH THE INTERN ATIONAL TRANSACTION HAS BEEN ENTERED INTO AND DOES NOT SAY ANYTHING ABOUT CONTEMPORANEOUS OF DATA OR ANYTHING OF THE SO RT THAT SUCH DATA SHOULD BE AVAILABLE AT THE TIME OF TRANSACTION/ANALYSIS. ASSESSEE'S CONCLUSION IS BASE D ON THE RULE 10D (4) OF I.T. RULES, 1962. RULE 10 D (4) ONL Y PUTS AN OBLIGATION ON THE ASSESSEE THAT THE INFORMATION AND DOCUMENTS WHICH AN ASSESSEE IS REQUIRED TO MAINTAIN 'SHOULD, AS FAR AS POSSIBLE, BE CONTEMPORANEOUS AND SHOULD E XIST LATEST BY THE SPECIFIED DATE REFERRED TO IN CLAUSE (IV) OF SECTION 92F. 10 BUT THIS IS NOT INDICATIVE OR SUGGESTIVE OF THE FAC T THAT THE DATA TO BE USED FOR THE ANALYSIS/BENCHMARKING OF INTERNA TIONAL TRANSACTION SHOULD NECESSARILY EXIST AT THE TIME OF UNDERTAKING THE TRANSACTION/ ANALYSIS CONDUCTED BY THE ASSESSEE FOR ITS BENCHMARKING AND THAT EVEN IF THE DATA FOR THE RELE VANT PERIOD IS AVAILABLE AT THE TIME OF CONDUCTING ANALYSIS BY THE DEPARTMENT, THE SAME CANNOT/SHOULD NOT BE USED. USE OF DATA FOR THE PURPOSES OF ANALYSIS IS GOVERNED BY RULE 10 B(4) OF I.T. RULES, 1962 AND WHEN A SPECIFIC RULE IS GIVEN IN RE SPECT OF DATA TO BE USED FOR THE PURPOSES OF COMPARABILITY O F AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION, THEN TO DRAW AN INDIRECT INFERENCE BASED ON THE RUL E 10D (4) WHICH ONLY ENCUMBERS, MAINTENANCE OF TYPE OF INFORMATION/DOCUMENTS BY THE ASSESSEE, IN RESPECT O F AN INTERNATIONAL TRANSACTION WOULD NOT ONLY BE OUT OF PLACE BUT INCORRECT ALSO AND FURTHER EVEN IF THE INFERENCE IS DRAWN FROM THERE THEN THE SAME CAN IN NO WAY SUPERSEDE THE PRO VISION GIVEN IN THE RULE 10 B (4) WHICH DIRECTLY DEALS WIT H USE OF DATA FOR COMPARABILITY. IN VIEW OF THE FACTS AS AFORESAI D AND DISCUSSION AS ABOVE, THE DECISION QUOTED OF HON'BLE SUPREME COURT IN THE CASE OF SUPD OF TAXES, DHUBRI AND OTHE RS REPORTED AT 1975 CTR 172 IS FOUND TO BE NOT APPLICA BLE. [2.1.2] ASSESSEE HAS ALSO QUOTED FROM CIRCULAR 12 O F THE 2001 OF THE CBDT AND HAS CONTENDED THAT THE TAX PAYER SH OULD NOT BE PUT TO AVOIDABLE HARDSHIP. IN THIS REGARD IT IS STATED THAT BY CONDUCTING ANALYSIS AS PER THE LAW AND RULES GOVERN ING THE SAME, THE ASSESSEE IS NOT PUT ANY AVOIDABLE HARDSHI P. [2.1.3] ASSESSEE HAS ALSO BASED ITS ARGUMENTS ON TH E PARA 5.9 AND 5.10 OF THE OECD GUIDELINES. FOR THE SAKE OF CL ARITY THE PORTIONS QUOTED BY THE ASSESSEE ARE REPRODUCED AS U NDER: PARA 5.9 OF THE OECD GUIDELINES: 'TAX ADMINISTRATIONS ALSO SHOULD LIMIT REQUESTS FOR DOCUMENTS THAT BECAME AVAILABLE ONLY AFTER THE TRANSACTION IN QUESTION OCCURRED TO THOSE THAT ARE REASONABLY LIKELY TO CONTAIN RELEVANT INFORMATION A S DETERMINED UNDER PRINCIPLES GOVERNING THE USE OF MULTIPLE YEAR DATA IN CHAPTER 1 OR INFORMATION ABOU T THE FACTS THAT EXISTED AT THE TIME THE TRANSFER PRICING WAS DETERMINED. IN CONSIDERING WHETHER DOCUMENTATION IS ADEQUATE, A TAX ADMINISTRATION SHOULD HAVE REGARD TO THE EXTENT TO WHICH THAT INFORMATION REASONABLY COULD H AVE BEEN AVAILABLE TO THE TAXPAYER AT THE TIME TRANSFER PRICING WAS ESTABLISHED. ' PARA 5.10 OF THE OECD GUIDELINES: 'TAX ADMINISTRATIONS FURTHER SHOULD NOT REQUIRE TAXPAYERS TO PRODUCE DOCUMENTS THAT ARE NOT IN THE ACTUAL POSSESSION OR CONTROL OF THE TAXPAYER OR OTH ERWISE REASONABLY AVAILABLE, EG INFORMATION THAT CANNOT BE 11 LEGALLY OBTAINED, OR THAT IS NOT ACTUALLY AVAILABLE TO THE TAXPAYER BECAUSE IT IS CONFIDENTIAL TO THE TAXPAYER 'S COMPETITOR OR BECAUSE IT IS UNPUBLISHED AND CANNOT BE OBTAINED BY NORMAL ENQUIRY OR MARKET DATA. ' THE OECD GUIDELINES AT PARA 5.9 AND 5.10 ARE IN RES PECT OF THE KIND OF DATA WHICH SHOULD BE ASKED BY TAX ADMIN ISTRATOR. FROM THE GUIDELINES, IT CAN BE SEEN THAT IT IS CLEA RLY MENTIONED THERE THAT THE RELEVANT DOCUMENT THAT ARE REASONABL Y LIKELY TO CONTAIN THE RELEVANT INFORMATION AND WHICH IS OTHER WISE AVAILABLE IN PUBLIC DOMAIN CAN BE CALLED FOR BY THE TAX ADMINISTRATOR. THE AFORESAID GUIDELINES OF THE OECD DO NOT SUGGEST THAT THE ANALYSIS CANNOT BE CONDUCTED BASED ON THE INFORMATION WHICH IS CURRENTLY AVAILABLE IN THE PUB LIC DOMAIN AS HAS BEEN CONTENDED BY THE ASSESSEE. [2.1.4] IN VIEW OF THE FACTS OF THE CASE AND DISCUS SION AS ABOVE THE CONTENTION OF THE ASSESSEE IN RESPECT OF USE OF FINANCIAL INFORMATION OF THE COMPARABLES PERTAINING TO F.Y. 2 005-06 WHICH WAS NOT AVAILABLE AT THE TIME OF PREPARING TH E DOCUMENTATION REPORT IS NOT FOUND TO BE ACCEPTABLE AND IS ACCORDINGLY REJECTED. [2.2] USE OF MULTIPLE YEAR DATA : [2.2.1] IN THE SHOW CAUSE NOTICE, FOR THE PURPOSES OF COMPUTATION OF PLI, USE OF DATA FOR F.Y. 2005-06 HA S BEEN PROPOSED. IN THIS REGARD ASSESSEE HAS CONTENDED THA T THE USE OF FINANCIAL INFORMATION OF THE COMPARABLE COMPANIE S FOR A PERIOD OF EARLIER TWO YEARS I.E. 2003-04 AND F.Y 20 04-05 WHICH WERE AVAILABLE TO THE COMPANY AT THE TIME OF COMPLY ING WITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENTS IS IN ACCORDANCE WITH RULE 10B (4) AND IT HAS BEEN FURTHE R CONTENDED THAT THE WEIGHTED AVERAGE MARGINS OF THRE E YEARS SHOULD BE USED TO DECREASE ANY VARIABILITY/DISTORTI ONS BETWEEN THE COMPARABLES AND ASSESSEE. FURTHER THE USE OF SI NGLE YEAR DATA MAY NOT ADEQUATELY CAPTURE THE MARKET CYCLE AN D THAT THE USE OF SINGLE YEAR DATA WOULD BE CONTRARY TO TH E PROVISIONS OF THE ACT AND RULES. THE RULE 10B (4) OF I.T. RULE S 1962 WHICH STIPULATES ABOUT THE USE OF DATA READS AS UND ER : 'THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING M ORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFL UENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED.' FROM THE PLAIN READING OF ABOVE RULE, IT IS CLEAR T HAT DATA TO BE USED FOR THE COMPARABILITY SHALL BE DATA OF THE FIN ANCIAL YEAR IN 12 WHICH THE TRANSACTION HAS TAKEN PLACE, AND ONLY IN SUCH CIRCUMSTANCES DATA FOR THE PREVIOUS TWO YEARS COULD BE USED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUEN CE ON DETERMINATION OF TRANSFER PRICE IN RELATION TO THE TRANSACTION BEING COMPARED. ASSESSEE'S SUBMISSION THAT USE OF D ATA FOR THREE YEARS DECREASES ANY VARIABILITY/DISTORTIONS I S NOT COMING OUT OF THE FACTS OF THE CASE, WHAT ARE THE VARIABIL ITY/DISTORTIONS WHICH ARE HAVING EFFECT ON DETERMINING THE TRANSFER PRICE OF THE INTERNATIONAL TRANSACTION? AND HOW ARE THEY SUPPOSE D TO BE ADDRESSED BY TAKING MULTIPLE YEAR DATA? THESE ASPEC TS HAVE NOT BEEN DETAILED WITH FACTS AND FIGURES. THEREFORE IT IS NOWHERE DEMONSTRATED THAT DATA PERTAINING TO TWO YE ARS PRIOR TO THE FINANCIAL YEAR 2005-06 HAVE ANY INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED. FURTHER RELIANCE IS PLACED ON THE I TAT DECISION IN CASE OF RANBAXY LABORATORIES LTD. V. AD DL. CIT, RANGE 15, NEW DELHI (ITA NO.2146 DELHI OF 2007, A.Y .2004-05) AND MENTOR GRAPHICS (NOIDA) PVT. LTD. V. DY. COMMIS SIONER OF INCOME TAX (ITA NO. 1969/D/2006 A.Y.2002-03) ON THE OBSERVATIONS PERTAINING TO THE USE OF DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTI ON HAS BEEN ENTERED INTO. ACCORDINGLY THE ASSESSEE'S CONTENTION ABOUT USE OF MULTIPLE YEAR DATA IS NOT FOUND TO BE ACCEPTABLE . [2.2.2] ASSESSEE IN ITS SUBMISSION HAS QUOTED FROM PARA 1.49, 1.50 AND 3.44 OF THE OECD GUIDELINES IN SUPPORT OF USE OF MULTIPLE YEAR DATA. FOR THE SAKE OF CLARITY THE POR TION QUOTED IN THE REPLY OF THE ASSESSEE ARE REPRODUCED AS UNDE R: 'PARA 1.49 OF THE OECD GUIDELINES: 'IN ORDER TO OBTAIN A COMPLETE UNDERSTANDING OF THE FACTS AND CIRCUMSTANCES SURROUNDING THE CONTROLLED TRANSACTION, IT GENERALLY MIGHT BE USEFUL TO EXAMIN E DATA FROM BOTH - THE YEAR UNDER EXAMINATION AND PRIOR YE ARS. THE ANALYSIS OF SUCH INFORMATION MIGHT DISCLOSE FAC TS THAT MAY HAVE INFLUENCED (OR SHOULD HAVE INFLUENCED ) THE DETERMINATION OF THE TRANSFER PRICE' PARA 1.50 OF THE OECD GUIDELINES : 'MULTIPLE YEAR DATA WILL ALSO BE USEFUL IN PROVIDIN G INFORMATION ABOUT THE RELEVANT AND PRODUCT LIFE CYC LES OF THE COMPARABLE. DIFFERENCES IN BUSINESS OR PRODUCT LIFE CYCLES MAY HAVE A MATERIAL EFFECT ON TRANSFER PRICI NG CONDITIONS THAT NEEDS TO BE ASSESSED IN DETERMINING COMPARABILITY. THE DATA FROM EARLIER YEARS MAY SHOW WHETHER THE INDEPENDENT ENTERPRISE ENGAGED IN A COMPARABLE TRANSACTION WAS AFFECTED BY COMPARABLE ECONOMIC CONDITIONS IN A COMPARABLE MANNER OR WHETH ER DIFFERENT CONDITIONS IN AN EARLIER YEAR MATERIALLY AFFECTED ITS PRICE OR PROFIT SO THAT IT SHOULD NOT BE USED A S A COMPARABLE ' PARA 3.44 OF THE OECD GUIDELINES: 13 'MULTIPLE YEAR DATA SHOULD BE CONSIDERED IN THE TRANSACTIONAL NET MARGIN METHOD FOR BOTH THE ENTERP RISE UNDER EXAMINATION AND INDEPENDENT ENTERPRISES TO TH E EXTENT THEIR NET MARGINS ARE BEING COMPARED, TO TAK E INTO ACCOUNT THE EFFECTS ON PROFITS OF PRODUCT LIFE CYCL ES AND SHORT TERM ECONOMIC CONDITIONS. ' IT CAN BE SEEN FROM THE AFORESAID GUIDELINES THAT T HE PARA 1.49 DEALS WITH THE ASPECT THAT EXAMINATION OF DATA OF Y EAR CONSIDERATION AND OF THE PRIOR YEAR MIGHT BE USEFUL AS THE SAME MAY DISCLOSE FACTS THAT MAY HAVE INFLUENCED TH E DETERMINATION OF TRANSFER PRICE. WHAT THIS GUIDELIN ES STIPULATES IS SUCH EXAMINATION MAY BE ESSENTIAL IN ORDER TO UN DERSTAND THE FACTS AND CIRCUMSTANCES SURROUNDING THE CONTROL LED TRANSACTION AND AS SUCH THESE GUIDELINES DO NOT SUG GEST THAT THE DATA OF THE COMPARABLES SHOULD BE USED OF THE E ARLIER YEARS WITHOUT GOING INTO THE FACTS AND CIRCUMSTANCES OF T HE CONTROLLED TRANSACTION FOR THE EARLIER YEARS. THE P ARA 1.50 SUGGESTS THAT MULTIPLE YEAR DATA WILL ALSO BE USEFU L IN PROVIDING INFORMATION ABOUT RELEVANT BUSINESS AND P RODUCT LIFE CYCLES OF THE COMPARABLES. IN THE CASE ON HAND THER E IS NOTHING LIKE BUSINESS OR THE PRODUCT LIFE CYCLE AS THE INTERNATIONAL TRANSACTION IS RELATING TO PROVISIONI NG OF IT ENABLED SERVICES AND AS SUCH DOES NOT INVOLVE ANY B USINESS OR PRODUCT CYCLE. FURTHER THE GUIDELINES ONLY STIPULAT E THE EXAMINATION OF THE DATA OF THE MULTIPLE YEARS DATA TO ARRIVE AT THE VALIDITY OF THE COMPARABLE TO BE USED AND NOT T HE USE OF THE MULTIPLE YEARS DATA IN ARRIVING AT THE TRANSFER PRICE OF THE INTERNATIONAL TRANSACTION. PARA 3.44 STIPULATES THA T MULTIPLE YEAR DATA SHOULD BE USED FOR BOTH THE TESTED PARTY AND THE COMPARABLES TO THE EXTENT THEIR NET MARGINS ARE BEI NG COMPARED TO TAKE INTO ACCOUNT THE EFFECTS ON PROFIT S OF PRODUCTS LIFE CYCLES AND SHORT TERM ECONOMIC CONDIT ION. BUT IN THE ANALYSIS CONDUCTED BY THE ASSESSEE IT CANVASSES TO TAKE MULTIPLE YEAR DATA ONLY IN RESPECT OF THE COMPARABL ES AND FOR THE COMPANY ONLY THE DATA FOR THE CURRENT YEAR HAS ONLY BEEN CONSIDERED WHICH GOES AGAINST THE GUIDELINES OF OEC D AT PARA 3.44. ACCORDINGLY THE CONTENTION OF THE ASSESSEE IN RESPECT OF USE OF MULTIPLE YEAR DATA FOR THE COMPARABLES IS NO T FOUND TO BE ACCEPTABLE. [2.2.3] IN RESPECT OF THE SUBMISSION OF THE ASSESSE E OF PARA 1.482-L(F)(III) OF US TREASURY REGULATIONS AND THE AUSTRALIAN TAX OFFICE TAXATION RULING 97/20 (CHAPTER 1; PART G ), IT IS STATED THAT THERE IS NO AMBIGUITY IN THE INDIAN LAW SO FAR USE OF DATA FOR THE PURPOSES OF COMPARABILITY AND ANALY SIS OF TRANSFER PRICE IS CONCERNED, ACCORDINGLY THE STIPUL ATIONS IN THE US TREASURY REGULATIONS OR THE AUSTRALIAN TAX OFFIC E ARE NOT FOUND TO BE RELEVANT AT ALL. FURTHER EVEN THESE STI PULATION OF US TREASURY REGULATIONS AND AUSTRALIAN TAX OFFICE A LSO PROVIDE FOR THE SAME PRINCIPLE OF THE USE OF MULTIP LE YEAR DATA TO TAKE IN TO ACCOUNT EFFECT OF BUSINESS CYCLES AND PRODUCT LIFE 14 CYCLES, IT FURTHER STIPULATES THAT THE DATA FOR THE BOTH THE CONTROLLED AND UNCONTROLLED TRANSACTION SHOULD BE U SED FOR THE SAME PERIOD AND NOT THAT THE DATA OF THE TESTED PAR TY BE USED FOR THE CURRENT YEAR AND FOR THE COMPARABLES OF THE EARLIER TWO YEARS AS WELL. [2.2.4] IN VIEW OF THE FACTS OF THE CASE AND DISCUS SION AS ABOVE THE CONTENTION OF THE ASSESSEE IN RESPECT OF USE OF MULTIPLE YEAR DATA IS NOT FOUND TO BE ACCEPTABLE AND IS ACCO RDINGLY REJECTED. [2.3] REJECTION OF CERTAIN COMPARABLES IDENTIFIE D BY CTT INDIA BRANCH : ASSESSEE HAS GIVEN IT SUBMISSIONS IN RESPECT OF THE COMPANIES PROPOSED TO BE EXCLUDED FROM THE SET OF COMPARABLES ADOPTED BY IT IN ITS BENCHMARKING ANALYSIS. THE SUBMISSIONS OF THE ASSESSEE IN RESPECT OF THE INDIVIDUAL COMPANIES ARE BEING DISCUSSED HERE IN UNDER: A) GENESYS INTERNATIONAL CORPORATION LTD.: IT IS SEEN FROM THE DETAILS AVAILABLE ABOUT THE COM PANY IN THE PUBLIC DOMAIN THAT 'GENESYS INTERNATIONAL CORPORATI ON LIMITED IS ENGAGED IN PROVIDING GEOGRAPHICAL INFORM ATION SERVICES COMPRISING PHOTOGRAMMETRY, REMOTE SENSING, CARTOGRAPHY, DATA CONVERSION, RELATED COMPUTER BASE D SERVICES AND INFORMATION TECHNOLOGY ENABLED AND OTH ER RELATED SERVICES.' FURTHER GENESYS HAS CAPABILITIES RELATING TO PHOTOGRAMMETRY/REMOTE SENSING SERVICES, CADASTRAL M APPING, 3D MAPPING AND NAVIGATION MAPS. FROM THE BACK GROUN D AS MENTIONED ABOVE AND THE CAPABILITIES WHICH GENESYS HAS, IT IS CLEAR THAT THE COMPANY IS IN TO GIS AND SEES THIS A S THEIR DOMAIN SPECIALIZATION. FURTHER WHAT HAS BEEN MENTIO NED IN THE SHOW CAUSE NOTICE HAS NEITHER BEEN CONTROVERTED BY THE ASSESSEE IN ITS SUBMISSION NOR HAS THE SAME BEEN FO UND TO BE FACTUALLY INCORRECT. GEOGRAPHIC INFORMATION SYSTEM (GIS) IS A COMPUTER SYSTEM FOR CAPTURING, STORING, CHECKING, I NTEGRATING, MANIPULATING, ANALYZING AND DISPLAYING DATA RELATED TO POSITIONS ON THE EARTH'S SURFACE; THAT TYPICALLY, A GIS IS USED FOR HANDLING MAPS OF ONE KIND OR THE OTHER. GIS TEC HNOLOGY PROVIDES EXCELLENT SUPPORT FOR LAND USE PLANNING PR OJECTS, ECOLOGICAL AND HYDROLOGICAL INVESTIGATIONS, ENVIRON MENTAL ASSESSMENTS, WATERSHED ASSESSMENTS, WELLHEAD PROTEC TION PROGRAMS, WATER QUALITY MONITORING AND ASSESSMENT PROGRAMS, WATER RESOURCE DEVELOPMENT PROJECTS, DESI GN AND CONSTRUCTION OF WATER SYSTEM INFRASTRUCTURE, PUBLIC OUTREACH AND EDUCATION PROGRAMS ETC. THE CTT UK BASICALLY PROVIDES SERVICES IN RESPECT O F GLOBAL PLANNING, DATABASE SUPPORT, PRODUCT MANAGEMENT, SUP PLY CHAIN MANAGEMENT, INFORMATION TECHNOLOGY SERVICES, FINANCE 15 AND MARKETING TO ITS AE. THUS THE FUNCTIONS OF THE CTT UK AND THE SERVICES INVOLVING GIS CAN HARDLY BE COMPAR ED. ACCORDINGLY THIS COMPANY IS FOUND TO FUNCTIONALLY D IFFERENT THEN THE IT ENABLED SERVICES PROVIDED BY THE CTT UK -INDIA BRANCH TO CTT UK. FURTHER WHILE DECIDING THE COMPAR ABILITY OF THE COMPARABLE, THEN THE SAME HAS TO ARRIVED AT BY RESORTING TO FAR ANALYSIS. FUNCTIONAL SIMILARITY COULD BE ONL Y ONE ASPECT OF THE COMPARABILITY ANALYSIS. WHAT FURTHER NEEDS T O BE SEEN IS THE COMPARABILITY ON THE BASIS OF ASSETS AND RISKS. THE ASSESSEE FOR THE PROVISIONING OF IT ENABLED SERVICE S IS A COMPANY WHICH IS A RISK MITIGATED COMPANY AND IS CO ST PROTECTED AND ACCORDINGLY IN THIS MODE OF BUSINESS CANNOT INCUR LOSSES. THEREFORE A COMPANY WHICH IS INTO LOS SES WOULD DEFINITELY HAVE DIFFERENT RISK PERCEPTION WHICH COU LD EARN PROFIT IN ONE YEAR AND THE LOSSES IN THE OTHER YEAR. SUCH COMPANY WITH DIFFERING RISK PERCEPTION WOULD NOT BE COMPARA BLE TO THE ASSESSEE COMPANY WHICH IS RISK MITIGATED AND COST P ROTECTED. ACCORDINGLY FOR THE REASON THAT THE COMPANY GENESYS IS FOUND TO FUNCTIONALLY DISSIMILAR TO THE ASSESSEE AND FURT HER ITS RISK PERCEPTION IS NOT FOUND TO BE COMPARABLE TO THAT OF THE ASSESSEE, GENESYS IS NOT FOUND TO COMPARABLE WITH T HE ASSESSEE. FURTHER THE RULING SIGHTED BY THE ASSESSE E OF HON'BLE ITATS ARE DISTINGUISHABLE ON THE FACTS OF THE CASE AND ACCORDINGLY HAVE NOT BEEN FOUND TO BE APPLICABLE IN THE INSTANT CASE. THEREFORE GENESYS IS EXCLUDED FROM THE SET OF COMPARABLES FOR THE PURPOSES OF BENCHMARKING THE INTERNATIONAL TRANSACTION RELATING TO PROVISIONING OF IT ENABLED SERVICES BY THE ASSESSEE TO ITS UK PARENT. B) KIRLOSKAR COMPUTER SERVICES LIMITED : IN RESPECT OF THIS COMPANY THE FACTS GIVEN IN THE S HOW CAUSE NOTICE HAVE NOT BEEN DISPUTED BY THE ASSESSEE. THE COMPANY IS INTO DATA PROCESSING AND IS INTO LOSSES FROM THE FY 2004-05 TO THE EVEN THE YEARS SUBSEQUENT TO THE YEAR UNDER CONSIDERATION. IT COULD BE THUS SEEN THAT DATA PROC ESSING IS NOT EVEN ONE OF SERVICES THAT THE ASSESSEE PROVIDES AND THE SERVICES PROVIDED ARE IN RESPECT OF GLOBAL PLANNING , DATABASE SUPPORT, PRODUCT MANAGEMENT, SUPPLY CHAIN MANAGEMEN T, INFORMATION TECHNOLOGY SERVICES, FINANCE AND MARKET ING TO THE AE. THE ASSESSEE FOR THE PROVISIONING OF IT ENABLED SERVICES IS A COMPANY WHICH IS RISK MITIGATED COMPANY AND IS CO ST PROTECTED AND ACCORDINGLY IN THIS MODE OF BUSINESS CANNOT INCUR LOSSES. THEREFORE A COMPANY WHICH IS INTO LOS SES WOULD DEFINITELY HAVE DIFFERENT RISK PERCEPTION WHICH COU LD EARN PROFIT IN ONE YEAR AND THE LOSSES IN THE OTHER YEAR. AS FA R AS KIRLOSKAR IS CONCERNED, IT HAS CONSISTENTLY INCURRE D LOSSES FROM THE FY 2004-05 TO THE YEAR TILL ITS DATA IS AV AILABLE IN THE PUBLIC DOMAIN. THEREFORE SUCH COMPANY WITH DIFFERIN G RISK PERCEPTION WOULD NOT BE COMPARABLE TO THE ASSESSEE COMPANY WHICH IS RISK MITIGATED AND COST PROTECTED. ACCORDI NGLY FOR THE REASON THAT THE COMPANY KIRLOSKAR IS FOUND TO FUNCT IONALLY DISSIMILAR TO THE ASSESSEE AND FURTHER ITS RISK PER CEPTION IS NOT 16 FOUND TO BE COMPARABLE TO THAT OF THE ASSESSEE, KIR LOSKAR IS NOT FOUND TO COMPARABLE WITH THE ASSESSEE. C) MERCURY OUTSOURCING MANAGEMENT LIMITED : IN RESPECT OF THIS COMPANY THE FACTS GIVEN IN THE S HOW CAUSE NOTICE HAVE NOT BEEN DISPUTED BY THE ASSESSEE. THE COMPANY IS INTO LOSSES FROM THE FY 2004-05 TO EVEN THE YEAR S SUBSEQUENT TO THE YEAR UNDER CONSIDERATION. AN ATTE MPT WAS MADE TO LOCATE THE DATA OR THE DETAILS OF THIS COMP ANY FOR THE SUBSEQUENT YEARS TO SEE WHETHER THE COMPANY WAS IN ANY WAYS INTO OPERATIONS OR NOT, BUT NO SUBSEQUENT DATA HAS BEEN FOUND IN THE DATA BASES. FOR THE YEAR UNDER CONSIDE RATION, AGAINST THE TURNOVER OF RS. 45.33 LAKHS, THIS COMPA NY HAS INCURRED A NET LOSS OF RS. 30.52 LAKHS. FURTHER, FO R THE IMMEDIATE PRECEDING YEAR, THE TURNOVER OF THE COMPA NY WAS RS. 60.95 LAKHS AGAINST WHICH THE LOSS INCURRED WAS OF RS. 35.7 LAKHS. THUS, IT COULD BE SEEN THAT THE COMPANY IS INTO SUBSTANTIAL LOSS AND FURTHER, WHETHER ITS BUSINESS IS CONTINUING OR NOT, IS NOT KNOWN. THE ASSESSEE COMPA NY IS A COST PROTECTED ENTITY AND THEREFORE, CANNOT INCUR L OSSES. THEREFORE SUCH COMPANY WITH DIFFERING RISK PERCEPTI ON AND FOR THE REASONS OF ITS SUBSTANTIAL/EXTRAORDINARY LOSSES AND FURTHER THE FACT WHETHER IT IS CONTINUING ITS BUSINESS IN T HE SUBSEQUENT YEARS IS NOT ASCERTAINABLE AND ACCORDING LY SUCH A COMPANY WOULD NOT BE COMPARABLE TO THE ASSESSEE COM PANY WHICH IS RISK MITIGATED AND COST PROTECTED. ACCORDI NGLY MERCURY IS NOT FOUND TO COMPARABLE WITH THE ASSESSE E. D) PENTASOFT TECHNOLOGIES LIMITED : IN THE SUBMISSION OF THE ASSESSEE IT HAS BEEN CONTE NDED THAT THE ENGINEERING SERVICES RENDERED BY THE PENTASOFT THAT IS CAD/CAM/CAE ARE IT ENABLED SERVICES AND ACCORDINGLY THE COMPANY IS COMPARABLE TO THE ASSESSEE. IN THIS REGA RD IT IS STATED THAT CTT UK BASICALLY PROVIDES SERVICES IN R ESPECT OF GLOBAL PLANNING, DATABASE SUPPORT, PRODUCT MANAGEME NT, SUPPLY CHAIN MANAGEMENT, INFORMATION TECHNOLOGY SER VICES, FINANCE AND MARKETING TO ITS AE AND AS SUCH CANNOT BE SAID TO IN THE PROVISIONING OF ENGINEERING SERVICES AS T HE CASE OF PENTASOFT. ACCORDINGLY PENTASOFT IS FOUND TO FUNCTI ONALLY DISSIMILAR. [2.4] NEED FOR WORKING CAPITAL AND RISK ADJUSTMENT: DRAWING STRENGTH FROM RULE 10B(2) AND 10B(3), AND F URTHER RELYING ON A DECISION OF HON'BLE ITAT DELHI IN THE CASE OF MENTOR GRAPHICS (NOIDA) PVT. LTD. (TTA NO .. 1969/D/2006), AZTECH SOFTWARE & TECHNOLOGY SERVICES LIMITED VS. A CIT AND DECISION IN THE CASE OF E-GAIN COMMUNICATION PVT. L TD. OF HON'BLE ITAT PUNE, IT HAS BEEN CONTENDED THAT IT IS IMPERATIVE TO DO AN ADJUSTMENT TO THE COMPARABLES' OPERATING M ARGINS TO MAKE THEM COMPARABLE TO ASSESSEE'S RECEIPT OF IT EN ABLED SERVICES, AS CTT UK IS A RISK MITIGATED ENTITY UNDE RTAKING NO BUSINESS OR MARKET RISK, WHERE AS THE COMPARABLES A RE FULL 17 RISK BEARING ENTITIES. ACCORDINGLY, ASSESSEE HAS SO UGHT THE WORKING CAPITAL ADJUSTMENT. IN THIS REGARD IT IS ST ATED THAT ASSESSEE FOR ITS OPERATIONS RECEIPT OF IT ENABLED S ERVICES IS A LIMITED RISK COMPANY AND THE WORKING CAPITAL ADJUST MENT IS ONE OF THE METHODS FOR THE RISK ADJUSTMENTS ONLY. T HE WORKING CAPITAL ADJUSTMENTS TAKES CARE OF MARKET RISK, CONT RACT RISK, FINANCIAL RISK, CREDIT RISK ETC. THE OTHER RISKS SU CH AS FOREIGN EXCHANGE RISK, LEGAL AND STATUTORY RISK, POLITICAL RISK, MANPOWER RISK OR THE SO CALLED SYSTEMATIC RISKS ARE COMMON TO THE ASSESSEE AND THE COMPARABLES. IN VIEW OF THE SAME IT IS CONSIDERED SUITABLE AND JUSTIFIED TO ALLOW THE WORK ING CAPITA! ADJUSTMENT TO THE ASSESSEE AND FURTHER NO ADJUSTMEN T IS CONSIDERED NECESSARY FOR THE SO CALLED SYSTEMATIC R ISKS. IT MAY BE MENTIONED HERE THE COMPUTATION OF THE WORKING CA PITAL ADJUSTMENT AS GIVEN BY THE ASSESSEE AND ENCLOSED AS ATTACHMENT 4 OF ITS SUBMISSION DATED 05.10.2009 IS FOUND TO BE ACCEPTABLE. THE COMPUTATION OF THE WORKING CAPIT AL ADJUSTMENT IN RESPECT OF THE COMPARABLES PROPOSED I N THE SHOW CAUSE NOTICE IS GIVEN IN ANNEXURE-I OF THIS OR DER FORMING PART OF THE ORDER. AFTER THE WORKING CAPITAL ADJUST MENT THE ADJUSTED PLI OF THE SET OF COMPARABLES IS AS UNDER: SR. NO. COMPANY OPERATING MARGIN ON OPERATING COST RATIO ADJUSTED OPERATING MARGIN ON OPERATING COST RATIO 1 ACE SOFTWARE EXPORTS LTD. 7.92% 7.56% 2 ALLSEC TECHNOLOGIES LTD 28.61% 26.61% 3 C S SOFTWARE ENTERPRISES LTD. 18.78% 13.92% 4 FORTUNE INFOTECH LTD. 13.12% 10.06% 5 SPANCO TELESYSTEMS AND SOLUTIONS LTD. (SEGMENTAL) 19.13% 15.17% 6 TRANSWORKS INFORMATION SERVICES LTD. 24.01% 22.21% 7 TRICOM INDIA LTD. 51.86% 46.12% 8 VISHAL INFORMATION TECHNOLOGIES LTD. 48.03% 39.49% AVERAGE OPERATING PROFIT OVER OPERATING COST OF COMPARABLE COMPANIES 26.43% 22.64% CONSIDERING THE ADJUSTED PLIS OF THE SET OF COMPARA BLES THE WORKING OF THE ADJUSTMENT IS GIVEN HERE IN UNDER: THE VALUE OF THE INTERNATIONAL TRANSACTION = RS.84, 70,726/- THE TOTAL OPERATING COST RELATING TO THE INTERNATIO NAL TRANSACTION = RS.74,64,794/- DIFFERENCE BETWEEN THE ARITHMETIC MEAN OF THE PLIS OF THE COMPARABLES AND THAT OF THE COMPANY = 22.64 14.15 % = 8.49%. 18 THE AMOUNT OF ADJUSTMENT = 74,64,794 * 8.40/100 = RS.6,33,761/- 11. IN SUM AND SUBSTANCE, THE FINAL ADJUSTMENT WAS CONCLUDED AT RS.6,33,761/-. THE DRP CONFIRMED THE ADJUSTMENT MA DE BY THE TPO. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PART IES AND PERUSED THE RECORD. IN RESPECT OF THE REJECTION OF THE COMPARABLES BY THE TPO, THE COMPANY-WISE THE LD. COUNSEL MADE T HE FOLLOWING ARGUMENTS: 12.1. HE SUBMITS THAT GENESIS INTERNATIONAL CORPOR ATION LTD. (GIS) HAS BEEN CLASSIFIED AS ITES BY THE REPORT FROM CRIS INFAC (REPORT IS GIVEN AT PAGE 235 OF THE PAPER BOOK -I) AND NOTIFIC ATION NO. 890(E) DATED 26 SEPTEMBER 2000 FROM CBDT (RELEVANT EXTRACT OF THE NOTIFICATION IS GIVEN AT PAGE 80 OF THE APPEAL MEMO DATED 27 JANUARY 2011). HE SUBMITS THAT FOR DETERMINING THE AVERAGE PRICE/ MARGIN OF AN INDUSTRY, ALL COMPANIES IN THE INDUSTR Y (WHETHER INCURRING LOSSES OR EARNING PROFITS) WHICH ARE COMP ARABLE TO THE TESTED PARTY NEED TO BE CONSIDERED SO THAT THE ARIT HMETIC MEAN IS REPRESENTATIVE OF THE NORMAL PROFITS/ LOSSES EARNED BY COMPANIES IN THAT INDUSTRY. 12.2. HE SUBMITS THAT THE OECD GUIDELINES DO NOT PRESCRIBE CONSIDERING THE RANGE OF RESULTS OF ONLY PROFIT MAK ING COMPANIES AND IGNORING COMPANIES INCURRING LOSSES. FURTHER, IT SPECIFICALLY POINTS OUT THE FACT THAT COMPARABLE COMPANY CAN BE OF A WIDE VARIETY AS FAR AS FINANCIAL CONDITION IS CONCERNED. HE SUBMITS THAT THE SAMPLE REFLECTS A PROPER REPRESENTATION OF THE COMPARABLES FUNCTIONING IN THE OPEN MARKET WHICH ARE AFFECTED B Y MARKET FORCES. IF THIS RESULTS IN LOSS MAKING COMPANIES THEN THE S AME SHOULD BE INCLUDED SINCE IT IS NOTHING BUT AN ACTUAL REPRESEN TATION OF THE PREVAILING MARKET CONDITIONS IN WHICH THE PARTICULA R COMPANY IS OPERATING. THE TERM 'INCOME' INCLUDES PROFITS AS WE LL AS LOSSES. 19 THEREFORE, IT WOULD BE PRUDENT TO CONSIDER BOTH PRO FIT MAKING AS WELL AS LOSS MAKING COMPANIES AS COMPARABLES AS LON G AS THEY SATISFY THE COMPARABILITY CRITERIA AS SPECIFIED UND ER THE RULES. HE SUBMITS THAT WITHOUT PREJUDICE TO ABOVE SUBMISSIONS THAT LOSS MAKING COMPANIES SHOULD NOT BE ELIMINATED, IN THE E VENT IT IS PROPOSED TO ELIMINATE SUCH COMPANIES, THEN EVEN HIG HER THAN NORMAL PROFIT MAKING COMPANIES NEED TO BE ELIMINATE D AS COMPARABLES, TO 'NORMALIZE' THE RESULTS (REFER PARA 39 BELOW FOR THE DETAILED SUBMISSION IN THIS REGARD). FURTHER, IF T HE ARGUMENT THAT CTT INDIA BRANCH BEING A RISK MITIGATED ENTITY CANN OT BE COMPARED WITH THE COMPANIES INCURRING LOSSES (SINCE THEY BEA R RISK) IS TO BE ACCEPTED, THEN IT MAY BE NOTED THAT NO RISK MITIGAT ED COMPANY WOULD BE UNCONTROLLED AND THEREBY, NO COMPANY WOULD BE COMPARABLE TO THE ASSESSEE. 12.3. AS REGARDS THE CONTENTION OF THE TPO THAT LOSS MAKING COMPANIES CANNOT BE COMPARED WITH A RISK MITIGATED ENTITY IE CTT INDIA BRANCH. THE LD. COUNSEL PLACES HIS RELIANCE ON THE FOLLOWING JUDICIAL PRECEDENTS: I) SONY INDIA (P) LIMITED VS. DCIT [118 TTJ (DEL) 865] II) M/S.TEVA INDIA PVT LTD VS DCIT [57 DTR(MUMBAI)(TRIB )212] III) M/S.TECNIMOUNT ICB PVT LTD VS ACIT (ITANO.7098/MUM. /2010) IV) COWI INDIA PRIVATE LIMITED VS ASST CIT (1TA NO. 505 2/DEL/2010) V) DCIT VS MONSANTO HOLDINGS PVT. LTD. (ITA NO.ITA NO.3423/MUM/2008 VI) ACIT VS FROST & SULLIVAN (I) PVT LTD. (ITA NO. :207 3/MUM/2010) 12.4. IN RESPECT OF REJECTION OF ASSESSEES COMP ARABLE, LD. COUNSEL EXPLAIN HOW THESE COMPARABLES COMPLY TESTS OF FAR, KEY POINTS OF ARGUMENTS ARE AS UNDER: A) KIRLOSKAR COMPUTER SERVICES LTD. FUNCTIONS OF CTT INDIA BRANCH INHERENTLY INVOLVE DA TA PROCESSING AND FOR THE PURPOSE OF TNMM METHOD, IT IS NOT NECES SARY THAT 20 COMPARABLE COMPANIES MUST UNDERTAKE EXACTLY SAME FU NCTION, EVEN COMPANIES WITH SIMILAR FUNCTIONS QUALIFY AS CO MPARABLES. USING DATA AVAILABLE AT THE TIME OF CONDUCTING ANAL YSIS BY THE DEPARTMENT IS NOT JUSTIFIED AS THE APPELLANT IS REQ UIRED TO COMPARE ITS INTERNATIONAL TRANSACTION WITH DATA OF WHICH IT HAD NO KNOWLEDGE AND WHICH WAS NOT PUBLICLY AVAILABLE A T THE TIME OF COMPLYING WITH THE TRANSFER PRICING REGULATIONS. F URTHER, KIRLOSKAR HAS EARNED PROFITS IN FY 2003-04. B) MERCURY OUTSOURCING MANAGEMENT LTD. USING DATA AVAILABLE AT THE TIME OF CONDUCTING ANAL YSIS BY THE DEPARTMENT IS NOT JUSTIFIED AS THE APPELLANT IS REQ UIRED TO COMPARE ITS INTERNATIONAL TRANSACTION WITH DATA OF WHICH IT HAD NO KNOWLEDGE AND WHICH WAS NOT PUBLICLY AVAILABLE A T THE TIME OF COMPLYING WITH THE TRANSFER PRICING REGULATIONS. FURTHER, MERCURY HAS OPERATING PROFITS IN FY 2003-04. ALSO, THE LEARNED TPO HAS FAILED TO COMMENT ON THE NATURE OF THE LOSSES. AS PER THE PROFIT AND LOSS ACCOUNT, NOTES T O ACCOUNTS AND DIRECTOR'S REPORT OF MERCURY FOR THE FINANCIAL YEAR ENDED 31 MARCH 2006 (REFER PAGE 236 TO 242 OF PAPER BOOK I) AS EXT RACTED FROM THE DATABASE, IT IS EVIDENT THAT THE LOSSES OF MERC URY ARE OPERATING IN NATURE AND NOT DUE TO EXTRAORDINARY RE ASONS. HENCE THE CONTENTION OF THE LEARNED TPO THAT THE LOSSES A RE DUE TO EXTRAORDINARY REASONS IS NOT VALID. C) PENTASOFT TECHNOLOGIES LTD. THE SURVEY REPORT FOR YEAR 2006 PUBLISHED BY DEPART MENT OF ECONOMIC STATISTIC OF DELHI GOVERNMENT (REFER PAGE 243 AND 244 OF PAPER BOOK-I) HAS SPECIFICALLY MENTIONED BPO SER VICES TO INCLUDE CAD/CAM SERVICES AND ACCORDINGLY, IT IS SUB MITTED THAT THE ENGINEERING SERVICES OF PENTASOFT CATEGORIZED U NDER PROJECTS SEGMENT FOR FY 2005-06 IS ITES AND THEREFORE COMPAR ABLE TO THE SERVICES RENDERED BY CTT INDIA BRANCH. 21 13. WE HAVE ALSO HEARD THE LD. DR. WE FIND FORCE I N THE ARGUMENT OF THE LD. COUNSEL. WE FIND THAT THE DATA BASE ADO PTED BY THE ASSESSEE FOR SELECTING THE COMPARABLES CAN BE TESTE D ON FAR AND THERE IS LIKELY TO BE SOME DIFFERENCE. MERELY BECA USE SOME LOSS MAKING COMPANIES ARE THERE THOSE CANNOT BE STRAIGHT LY REJECTED AS COMPARABLES UNLESS THE ABNORMAL LOSS IS PROJECTED. AS THE SAME WAY, SUPER PROFIT COMPARABLES ALSO SHOULD NOT BE IN CLUDED. TRANSFER PRICING ADJUSTMENT IS NOT A LAW IN STRICT SENSE THOUGH BASE ON CERTAIN LEGAL PRINCIPLES BUT IT IS ARITHMETIC AN D WHILE MAKING THE PLUS MINUS, THE BALANCE IS REQUIRED TO BE MAINTAINE D. THE OECD GUIDELINES, WHILE PROVIDING GUIDANCE ON THE APPLICA TION OF THE TRANSACTIONAL NET MARGIN METHOD, STATES AS FOLLOWS: 'IT IS ALSO IMPORTANT TO TAKE INTO ACCOUNT A RANGE OF RESULTS WHEN USING THE TRANSACTIONAL NET MARGIN METHOD. THE USE OF THE RANGE IN THIS CONTEXT COULD HELP REDUCE THE EFF ECTS OF DIFFERENCES IN THE BUSINESS CHARACTERISTICS OF ASSO CIATED ENTERPRISES AND ANY INDEPENDENT ENTERPRISES ENGAGED IN COMPARABLE UNCONTROLLED TRANSACTIONS, BECAUSE THE R ANGE WOULD PERMIT RESULTS THAT WOULD OCCUR UNDER A VARIE TY OF COMMERCIAL AND FINANCIAL CONDITION.' 14. WE FIND THAT IN RESPECT OF THE SELECTION OF THE COMPARABLES, THE TRIBUNAL HAS TAKEN THE CONSISTENT STAND THAT AS THE SUPER PROFIT COMPANIES SHOULD NOT BE INCLUDED, THE SAME WAY, SUP ER LOSS MAKING COMPANIES SHOULD ALSO BE EXCLUDED. THOUGH W E AGREE WITH THE TPO THAT SOME OF THE COMPARABLES FOR THE PURPOS E OF PLI ADOPTED BY THE ASSESSEE ARE SHOWING THE LOSS, BUT T HE BURDEN IS ON THE TPO TO PROVE WHERE THOSE COMPANIES ARE CONSISTE NTLY LOSS MAKING COMPANIES. MOREOVER, EXCEPT UNSUPPORTED REA SONING, NO DATA HAS BEEN BROUGHT ON RECORD BY THE TPO FOR EXCL UDING THE COMPARABLES SELECTED BY THE ASSESSEE IN THE TRANSFE R PRICING STUDY REPORT. WE, THEREFORE, FIND NO JUSTIFICATION TO TH E ADJUSTMENT MADE U/S.92CA(3) OF THE ACT. WE ACCORDINGLY DELETE THE SAME. IN THE RESULT, RELEVANT GROUNDS ARE ALLOWED. 22 14. SO FAR AS GROUND NO.6 IS CONCERNED, AS THE ENTI RE ADJUSTMENT HAS BEEN DELETED, SAME BECOMES INFRUCTUOUS AND DOES NOT REQUIRE ANY DELIBERATIONS. SO FAR AS GROUND NO.7 IS CONCER NED, IT IS IN RESPECT OF INCORRECT COMPUTATION OF INTEREST. WE A CCORDINGLY GIVE THE DIRECTIONS TO THE ASSESSING OFFICER TO VERIFY W HETHER THE INTEREST IS CORRECTLY COMPUTED U/S.234B OR NOT. 15. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED PRONOUNCED IN THE OPEN COURT ON THIS THE 31 ST DAY OF MAY, 2013. SD/- SD/- ( R.K.PANDA ) ( R.S.PADVEKAR ) ACCOUNTANT MEMBER JUDICIAL MEMBER GSPS PUNE, DATED THE 31 ST MAY, 2013 COPY OF THE ORDER IS FORWARDED TO: 1. THE ASSESSEE 2. THE DDIT(INTERNATIONAL TRANSACTIONS)-1, PUNE. 3. THE CIT CONCERNED. 4. THE DR B BENCH, PUNE. 5. GUARD FILE. BY ORDER //TRUE COPY// PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUNE.