Sanmina-SCI India Private Limited, Kancheepuram V. DCIT, CHENNAI

ITA 1194/CHNY/2014

• Counselvise Citation: 119421714 RSA 2014
• Duration Of Justice: 1 year(s) 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2015
• Appeal Filed By: Assessee
• Bench Allotted: D
• Assessment Year: 2009-2010
• Appeal Filed On: 05-05-2014
• Court: TRIBUNAL
• Department Lawyers: PATHALAVATH PEERYA
• Assessee Lawyers: N V BALAJI
• Keywords: Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Wholly owned subsidiary
• Section: 92C; 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , . !' , # $ % [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ] ./ I.T.A.NO.1194/MDS/2014 / ASSESSMENT YEAR : 2009-10 M/S SANMINA SCI INDIA PVT. LTD OZ-1, SIPCOT HI TECH SEZ ORAGADAM, SRIPERUMBUDUR TALUK KANCHEEPURAM DISTRICT TAMIL NADU 602 105 VS. THE DY. COMMISSIONER OF INCOME-TAX COMPANY RANGE VI(1) CHENNAI [PAN AAFCS 8737 E] ( &' / APPELLANT) ( ()&' /RESPONDENT) ./ I.T.A.NO.1379/MDS/2014 / ASSESSMENT YEAR : 2009-10 THE DY. COMMISSIONER OF INCOME-TAX COMPANY RANGE VI(1) CHENNAI VS. M/S SANMINA SCI INDIA PVT. LTD OZ-1, SIPCOT HI TECH SEZ ORAGADAM, SRIPERUMBUDUR TALUK KANCHEEPURAM DISTRICT TAMIL NADU 602 105 ( &' / APPELLANT) ( ()&' /RESPONDENT) ASSESSEE BY : SHRI N.V. BALAJI, ADVOCATE DEPARTMENT BY : SHRI PATHALAVATH PEERYA, CIT / DATE OF HEARING : 28 - 05 - 2015 / DATE OF PRONOUNCEMENT : 24 - 0 7 - 2015 ITA NO.1194 & 1379/14 :- 2 -: / O R D E R PER N.R.S.GANESAN, JUDICIAL MEMBER BOTH THE ASSESSEE AND REVENUE FILED APPEALS AGA INST THE ORDER OF THE ASSESSING OFFICER CONSEQUENT TO THE DI RECTION OF THE DISPUTE RESOLUTION PANEL. 2. SHRI N.V. BALAJI, LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT THE ASSESSING OFFICER MADE ADJUSTMENT OF BROUGHT FO RWARD LOSSES BEFORE ALLOWING DEDUCTION U/S 10A OF THE ACT. REF ERRING TO THE DRAFT ASSESSMENT ORDER, THE LD. COUNSEL POINTED OUT THAT SUCH ADJUSTMENT WAS NOT MADE IN THE DRAFT ASSESSMENT ORDER. ACCORD ING TO THE LD. COUNSEL, AS PER SEC. 144C OF THE ACT, THE ASSESSING OFFICER SHALL FORWARD PROPOSED DRAFT ASSESSMENT ORDER TO THE AS SESSEE IF HE PROPOSES TO MAKE ANY VARIATION IN THE INCOME OR LOS S RETURNED WHICH IS PREJUDICIAL TO THE INTEREST OF THE ASSESSEE. IN T HIS CASE, THE ASSESSING OFFICER HAS NOT MADE ANY VARIATION IN THE INCOME RE TURNED BY THE ASSESSEE WHILE DRAFTING THE DRAFT ASSESSMENT ORDER WITH REGARD TO BROUGHT FORWARD LOSSES. EVEN IN THE ORDER OF DRP, THERE WAS NO DIRECTION FOR MAKING ADJUSTMENT OF BROUGHT FORWARD LOSSES BEFORE ALLOWING DEDUCTION U/S 10A OF THE ACT. REFERRING TO SECTION 144C(13) OF THE ACT, THE LD. COUNSEL SUBMITTED THAT THE POWE R OF THE ASSESSING OFFICER IS TO PASS AN ORDER IN CONFORMITY WITH THE DIRECTION OF THE DRP. SINCE NO VARIATION WAS MADE IN THE DRAFT ASSESSMENT ORDER WITH REGARD ITA NO.1194 & 1379/14 :- 3 -: TO ADJUSTMENT OF BROUGHT FORWARD LOSSES BEFORE ALLO WING DEDUCTION U/S 10A AND THERE WAS NO DIRECTION FROM THE DRP, ACCORD ING TO THE LD. COUNSEL, THE ADJUSTMENT MADE BY THE ASSESSING OFFIC ER IN THE FINAL ASSESSMENT ORDER IS BEYOND HIS JURISDICTION. 3. THE LD. COUNSEL FURTHER POINTED OUT THAT SINCE NO VARIATION WAS MADE IN THE DRAFT ASSESSMENT ORDER, THE ASSESS EE HAS NO OCCASION TO FILE ANY OBJECTION TO THE PROPOSED DRAF T ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER. THEREFORE, THERE WAS A VIOLATION OF PRINCIPLES OF NATURAL JUSTICE IN MAKING ADJUSTMENT WITH REGARD TO DEDUCTION U/S 10A OF THE ACT. THE LD. COUNSEL FUR THER SUBMITTED THAT DEDUCTION U/S 10A OF THE ACT SHALL BE ALLOWED WITH RESPECT TO PROFITS AND GAINS DERIVED BY AN UNDERTAKING FROM EXPORT OF ARTICLES OR THINGS. THE DEDUCTION IS AVAILABLE AT THE STAGE OF COMPUTIN G THE PROFITS AND GAINS OF THE BUSINESS. THE LD. COUNSEL FURTHER P OINTED OUT THAT SECTIONS 70 AND 71 WHICH PROVIDE FOR SET OFF OF BRO UGHT FORWARD LOSSES ARE TO BE CONSIDERED IN A LATER STAGE. REFERRING T O SECTION 80A(2), THE LD. COUNSEL SUBMITTED THAT SECTION 80A REQUIRES COM PUTATION OF ELIGIBLE PROFITS. THE ELIGIBLE DEDUCTION SHALL NOT IN ANY C ASE EXCEED THE GROSS TOTAL INCOME OF THE ASSESSEE. THE LD. COUNSEL PLA CED HIS RELIANCE ON THE DECISION OF THE DELHI BENCH OF THIS TRIBUNAL IN TEI TECHNOLOGIES 78 DTR 225 AND JUDGMENT OF THE KARNATAKA HIGH COURT IN YOKOGAWA INDIA LTD 341 ITR 385. THE LD. COUNSEL HAS ALSO PLACED H IS RELIANCE ON THE ITA NO.1194 & 1379/14 :- 4 -: JUDGMENT OF BOMBAY HIGH COURT IN BLACK & VEATCH CON SULTING PVT. LTD 348 ITR 72. THE LD. COUNSEL HAS ALSO PLACED HIS R ELIANCE ON THE DECISION OF SPECIAL BENCH OF THIS TRIBUNAL IN SCIEN TIFIC ATLANTA 129 TTJ 273. 4. REFERRING TO THE ADJUSTMENT MADE IN ARMS LENGTH PR ICE WITH REGARD TO INTERNATIONAL TRANSACTION, THE LD. COUNSE L SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURIN G ELECTRICAL PRODUCTS FOR TELECOMMUNICATION, MEDICAL, DEFENCE ET C. FOR THE PURPOSE OF TRANSFER PRICING DOCUMENTATION, THE ASS ESSEE FOLLOWED TRANSACTIONAL NET MARGIN METHOD(TNMM) AS THE MOST A PPROPRIATE METHOD. ACCORDING TO THE LD. COUNSEL, THE ASSESSEE HAS IDENTIFIED UNCONTROLLED COMPARABLES AND COMPUTED THE PROFIT LE VEL INDICATOR(PLI) AT 18.56%. THE LD. COUNSEL FURTHER SUBMITTED THAT THE ASSESSEES GROSS MARGIN WAS 16.96%. SINCE THE GROSS PROFIT MA RGIN WAS WITHIN 5% OF THE ARITHMETIC MEAN OF THE COMPARABLE COMPANI ES, THE ASSESSEE CONSIDERED THE INTERNATIONAL TRANSACTION O F PURCHASE FROM AES TO BE AT ARMS LENGTH. 5. REFERRING TO THE ORDER OF THE TPO, THE LD. COUNSEL SUBMITTED THAT THE ASSESSEE HAS SELECTED EIGHT COMPANIES AS C OMPARABLES. HOWEVER, THE TPO REJECTED ALL THE COMPANIES AS NOT COMPARABLE ONE. REFERRING TO M/S ALLSEC TECHNOLOGIES LTD., THE LD. COUNSEL SUBMITTED ITA NO.1194 & 1379/14 :- 5 -: THAT M/S ALLSEC TECHNOLOGIES LTD IS PRIMARILY ENGA GED IN THE BUSINESS OPERATING A CALL CENTRE WHICH IS FUNCTIONALLY COMPA RABLE WITH THE ASSESSEE. THEREFORE, THE ASSESSEE SELECTED THE SA ME AS COMPARABLE IN THE TRANSFER PRICING DOCUMENTATION. HOWEVER, TH E TPO REJECTED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT M/S ALLSE C TECHNOLOGIES LTD. SUFFERED LOSS FOR TWO CONSECUTIVE YEARS. THE TPO H AS ALSO FOUND THAT M/S ALLSEC TECHNOLOGIES LTD. IS SELLING ITS PRODUCT S TO ITS SUBSIDIARY COMPANY. THE CLAIM OF THE ASSESSEE THAT M/S ALLSE C TECHNOLOGIES LTD. EARNED PROFIT IN ONE YEAR OUT OF THE THREE CONSECUT IVE YEARS, THEREFORE, IT CANNOT BE CONSTRUED TO BE A PERSISTENT LOSS MAKI NG COMPANY WAS REJECTED BY THE TPO. REFERRING TO THE ORDER OF THE DRP, THE LD. COUNSEL SUBMITTED THAT THE DRP DIRECTED THE TPO TO INCLUDE M/S ALLSEC TECHNOLOGIES LTD. AS COMPARABLE IF THE SAME WAS REJ ECTED FOR THE REASON FOR INCURRING LOSSES CONSECUTIVELY FOR TWO Y EARS. WHILE GIVING EFFECT TO THE ORDER OF THE DRP, THE TPO AGAIN REJEC TED THE CLAIM OF THE ASSESSEE ON THE GROUND OF EXTRAORDINARY DISSOLUTION OF THE SUBSIDIARY COMPANY NAMELY, M/S BZK CORPORATION INC. 6. THE LD. COUNSEL SUBMITTED THAT THE DISSOLUTION OF T HE SUBSIDIARY COMPANY NAMELY, M/S BZK CORPORATION INC. CANNOT BE CONSIDERED TO BE AN EXCEPTIONAL EVENT AFFECTING PRO FITS OF M/S ALLSEC TECHNOLOGIES LTD. ACCORDING TO THE LD. COUNSEL, M/ S BZK CORPORATION INC. WAS A SEPARATE LEGAL ENTITY, THEREFORE, ITS DI SSOLUTION DOES NOT ITA NO.1194 & 1379/14 :- 6 -: AFFECT THE OPERATING MARGIN OF M/S ALLSEC TECHNOLOG IES LTD. THE LD. COUNSEL FURTHER SUBMITTED THAT THE ASSESSING OFFICE R HAS TRAVELLED BEYOND THE DIRECTION OF THE DRP. REFERRING TO THE ACQUISITION OF A DIVISION OF I2I TELESOURCES PVT. LTD., WHICH IS EN GAGED IN SIMILAR ACTIVITY AS THAT OF THE ASSESSEE, THE LD. COUNSEL SUBMITTED THAT THE SAME CANNOT BE CONSIDERED TO BE AN EXTRAORDINARY IT EM FOR REJECTING M/S ALLSEC TECHNOLOGIES LTD AS COMPARABLE ONE. THE NET ASSET OF I2I TELESOURCES WAS ` 2,33,77,000/- AS AGAINST THE NET ASSET OF M/S ALLS EC TECHNOLOGIES LTD. OF ` 143,55,77,000. THIS NET ASSET SHOWS THAT THE MERGER WAS A SIGNIFICANT EVENT TO ALTER OPERATING R ESULT OF THE ENTITY TO A GREAT EXTENT. PLACING RELIANCE ON THE DECISION O F THE MUMBAI BENCH OF THIS TRIBUNAL IN M/S WILLIS PROCESSING SERVICES) (I) P LTD IN I.T.A.NOS.4547 & 4429/MUM/2012 AND THE DECISION OF THE BANGALORE BENCH OF THIS TRIBUNAL IN EMC DATA STORAGE SYSTEMS (INDIA) PVT. LTD IN I.T.A.NO. 973/BANG/2010, THE LD. COUNSEL SUBMITTED THAT MERGER OF COMPANY WITH A COMPANY ENGAGED IN SIMILAR ACTIVITY CANNOT RESULT EXCEPTIONAL PROFIT IN THE YEAR OF MERGER. ACCORDIN G TO THE LD. COUNSEL, RESULT CAN BE ACHIEVED BY ORGANIC EXPANSION WHICH I S COMPARABLE WITH THE INORGANIC EXPANSION BY MERGER. THE LD. COUNSEL FURTHER SUBMITTED THAT IT MAY NOT BE CORRECT TO CONCLUDE THAT ORGANI C MODE WOULD NOT BE EXCEPTIONAL AND INORGANIC MODE IS EXCEPTIONAL. THE LD. COUNSEL FURTHER SUBMITTED THAT M/S ALLSEC TECHNOLOGIES LTD. WAS ABL E TO INCREASE ITS ITA NO.1194 & 1379/14 :- 7 -: OPERATIONS WHICH RESULTED IN REDUCTION OF LOSSES AS COMPARED TO PREVIOUS YEAR. THEREFORE, ACCORDING TO THE LD. COU NSEL, REJECTION OF M/S ALLSEC TECHNOLOGIES LTD. AS COMPARABLE CASE IS NOT JUSTIFIED. 7. REFERRING TO M/S CG-VAK SOFTWARE & EXPORTS LTD., TH E LD. COUNSEL SUBMITTED THAT M/S CG-VAK SOFTWARE & EXPORT S LTD. HAS THREE SEGMENTS. THE FIRST ONE IS SOFTWARE SERVICES, THE SECOND IS BPO SERVICES AND THIRD IS TRAINING. THE ASSESSEE IN I TS TRANSFER PRICING DOCUMENTATION CONSIDERED THE BPO SERVICES AS COMPAR ABLE TO ITS OPERATIONS. HOWEVER, THE TPO REJECTED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE TURNOVER OF BPO SEGMENT OF M/S CG-VAK SOFTWARE & EXPORTS LTD. WAS LESS THAN ` 1 CRORE. THE LD. COUNSEL FURTHER SUBMITTED THAT THE TPO HAS NOT EXPLAINED FOR ADOPTI NG THE FILTER OF ` 1 CRORE FOR SELECTING THE COMPARABLE CASES. REFERRIN G TO THE OBSERVATION MADE BY THE TPO THAT THE COMPANIES WITH LOW TURNOVE R WAS SUBJECTED TO MARKET ADVERSARIES, THE LD. COUNSEL SUBMITTED TH AT WHEN THE FUNCTIONAL COMPARABILITY OF BPO SEGMENT WAS NOT IN DISPUTE, THE CONCLUSION OF THE TPO THAT THE COMPANIES WITH TURNO VER OF LESS THAN ` 1 CRORE ARE SUBJECT TO MARKET ADVERSARIES, IS WIT HOUT ANY BASIS. 8. ACCORDING TO THE LD. COUNSEL, VARIOUS DECISIONS OF THIS TRIBUNAL HELD THAT TURNOVER FILTER OF ` 1 CRORE TO ` 200 CRORES HAS TO BE TAKEN INTO CONSIDERATION AS COMPARABLES. HOWEVER, BOTH TPO AS WELL ITA NO.1194 & 1379/14 :- 8 -: AS THE DRP HAVE NOT CONSIDERED THE DECISIONS OF THI S TRIBUNAL. THE LD. COUNSEL FURTHER SUBMITTED THAT THE TURNOVER OF BPO SEGMENT OF M/S CG-VAK SOFTWARE & EXPORTS LTD. IS ` 86 LAKHS WHICH IS LESS THAN THE FILTER OF ` 1 CRORE APPLIED BY THE TPO. ACCORDING TO THE LD. COUNSEL M/S CG-VAK SOFTWARE & EXPORTS LTD. SHALL BE CONSIDERED AS COMPARABLE WITH THAT OF THE ASSESSEE SINCE FUNCTIONALLY BOTH ARE SAME. 9. REFERRING TO M/S ACCENTIA TECHNOLOGIES LTD., THE LD . COUNSEL SUBMITTED THAT THIS COMPANY PROVIDES BUSINESS AND T ECHNOLOGY SOLUTIONS AND SERVICES LIKE SOFTWARE AS A SERVICE ( SAAS) WHICH MANAGES ALL CLINICAL DOCUMENTATION NEEDS, RECEIVABL ES MANAGEMENT NEEDS, PERFORMANCE TRACKING AND REPORTING, ELECTRON IC MEDICAL RECORD AND HEALTHCARE RECEIVABLES CYCLE MANAGEMENT. THE ASSESSEE IN FACT REJECTED M/S ACCENTIA TECHNOLOGIES LTDS CASE FOR B EING FUNCTIONALLY DIFFERENT. HOWEVER, THE TPO FOUND THAT THE FUNCT ION OF THE ASSESSEE IS COMPARABLE WITH THAT OF THE FUNCTION OF M/S ACCE NTIA TECHNOLOGIES LTD. THE LD. COUNSEL FURTHER SUBMITTED THAT M/S AC CENTIA TECHNOLOGIES LTD. IS ENGAGED IN IN-HOUSE DEVELOPMENT AND MAINTEN ANCE OF SOFTWARE WHICH IS USED FOR PROVISION OF THESE SERVICES. THI S IS EVIDENT FROM THE ANNUAL REPORT FOR THE ASSESSMENT YEAR 2010-11. PL ACING RELIANCE ON THE DECISION OF PUNE BENCH OF THIS TRIBUNAL IN PTC SOFTWARE (INDIA) PVT LTD IN I.T.A.NO. 336/PN/2014, THE LD. COUNSEL S UBMITTED THAT THIS TRIBUNAL FOUND THAT M/S ACCENTIA TECHNOLOGIES LTD. IS ENGAGED IN IN- ITA NO.1194 & 1379/14 :- 9 -: HOUSE DEVELOPMENT FOR THE SAME ASSESSMENT YEAR. TH E LD. COUNSEL FURTHER SUBMITTED THAT M/S ACCENTIA TECHNOLOGIES LT D. HAS SUBSTANTIAL GOODWILL BEING A PARENT COMPANY, THEREFORE, THE SAM E CANNOT BE TREATED AS A COMPARABLE ONE WITH THAT OF THE ASSES SEE-COMPANY WHICH IS ONLY A CAPTIVE SERVICE PROVIDER. THE LD. COUNS EL PLACED HIS RELIANCE ON THE DECISION OF THE MUMBAI BENCH OF THIS TRIBUNA L IN I.T.A.NO. 2492/MUM/2014. 10. REFERRING TO M/S COSMIC GLOBAL LTD., THE LD. COUNSE L SUBMITTED THAT THIS COMPANY IS ENGAGED IN IT ENABLE D TRANSLATION SERVICES. ACCORDING TO THE LD. COUNSEL, THE MAIN S OURCE OF REVENUE OF THIS COMPANY IS FROM MEDICAL TRANSCRIPTION SERVICES , TRANSLATION CHARGES AND ACCOUNTS BPO. THE LD. COUNSEL FURTHER POINTE D OUT THAT 53% OF THE REVENUE OF THIS COMPANY IS FROM MEDICAL TRANSC RIPTION AND 4% OF THE REVENUE IS FROM ACCOUNT BPO. THE REMAINING 43% IS FROM TRANSLATION SERVICES. INSPITE OF OBJECTION OF THE ASSESSEE, THE TPO INCLUDED M/S COSMIC GLOBAL LTD, AS A COMPARABLE ONE . ACCORDING TO THE LD. COUNSEL, THE ASSESSEE IS NOT IN TRANSLA TION SERVICES AND THE TRANSLATION SERVICES PROVIDED BY M/S COSMIC GLOBAL LTD. IS NOT FUNCTIONALLY COMPARABLE WITH THE SERVICES OF THE AS SESSEE-COMPANY. THE LD. COUNSEL FURTHER POINTED OUT THAT M/S COSMIC GLOBAL LTD. DOES NOT HAVE SEGMENTAL INFORMATION REGARDING ITS INCOME FROM TRANSLATION ITA NO.1194 & 1379/14 :- 10 -: SERVICES AND MEDICAL TRANSCRIPTION SERVICES. IN TH E ABSENCE OF SEGMENTAL INFORMATION REGARDING THE FUNCTIONALLY CO MPARABLE OPERATIONS, M/S COSMIC GLOBAL LTD. SHOULD NOT BE CO NSIDERED AS A COMPARABLE, MORE PARTICULARLY, WHEN 43% OF THE REVE NUE IS FROM TRANSLATION SERVICES. THE LD. COUNSEL PLACED HIS R ELIANCE ON THE DECISION OF HYDERABAD BENCH OF THIS TRIBUNAL IN M/S BRIGADE GLOBAL SERVICES PVT. LTD VS ITO TS-730-ITAT-2012(HYD)-TP . 11. THE LD. COUNSEL FURTHER SUBMITTED THAT THE REVENUE MADE AN ATTEMPT TO REMOVE LOW MARGIN COMPARABLES WITHOUT AN Y BASIS. ACCORDING TO THE LD. COUNSEL, IF THE LOW MARGIN COM PARABLES ARE NOT CONSIDERED, FOR THE VERY SAME REASONS, HIGH MARGIN COMPARABLES LIKE M/S ACCENTIA TECHNOLOGIES LTD., COSMIC GLOBAL LTD. AND GENESYS INTERNATIONAL CORPORATION LTD. ARE ALSO REQUIRED TO BE ELIMINATED FROM THE COMPARABLE CASES. ACCORDING TO THE LD. COUNSEL, THE EXCEPTIONAL PROFIT IN THE COMPARABLE CASES WOULD AFFECT THE VER Y BASIS OF COMPARISON AND THEREFORE, THE SAID EXCEPTIONAL PROF IT COMPANIES SHOULD NOT BE CONSIDERED. 12. REFERRING TO RULE 10B(4) OF THE INCOME-TAX RULES, T HE LD. COUNSEL SUBMITTED THAT THE ASSESSEE CANNOT BE ASKE D TO PRODUCE THE DATA WHICH IS NOT AVAILABLE AT THE TIME OF TRANSFER PRICING STUDY. THE MULTIPLE YEAR DATA WAS USED SINCE THE COMPARABLES A RE IN CONTINUOUS ITA NO.1194 & 1379/14 :- 11 -: PROJECTS, THEREFORE, THE MARGINS/PROFITS HAVE DEFIN ITELY A BEARING ON OTHER YEARS AS WELL. ACCORDING TO THE LD. COUNSEL, THE DRP FAILED TO APPRECIATE THAT THE COMPARABLES ARE COVERED UNDER T HE PROVISO TO RULE 10B(4) OF THE INCOME-TAX RULES. THEREFORE, ACCORDI NG TO THE LD. COUNSEL, THE DIRECTION OF THE DRP WAS FRUSTRATED BY COMPARING THE COMPANIES WHICH ARE NOT FUNCTIONALLY SIMILAR TO THA T OF THE ASSESSEE. 13. ON THE CONTRARY, SHRI PATHALAVATH PEERYA, LD. DEPAR TMENTAL REPRESENTATIVE SUBMITTED THAT ON THE REFERENCE MADE BY THE ASSESSING OFFICER TO DETERMINE THE ALP OF THE INTERNATIONAL T RANSACTION, THE TPO FOUND THAT THE ASSESSEE HAS ENTERED INTO TRANSACTI ON WITH SANMINA- SCI CORPORATION TO THE EXTENT OF ` 18,88,64,521/-. ACCORDING TO THE LD. DR, THE ASSESSEE-COMPANY IS A PART OF SANMINA-SCI G ROUP, UNITED STATES OF AMERICA. THE ASSESSEE-COMPANY WAS INCORP ORATED ON 1.2.2002 AS A WHOLLY OWNED SUBSIDIARY COMPANY OF M/ S SANMINA-SCI GROUP. ACCORDING TO THE LD. DR THE ASSESSEE-COMPAN Y IS ENGAGED IN PROVIDING INFORMATION TECHNOLOGY ENABLED SERVICES A ND PROJECT MANAGEMENT SERVICES TO M/S SANMINA-SCI GROUP ENTIT IES. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE-COMPANY ENTE RED INTO FIVE INTERNATIONAL TRANSACTIONS WITH AES. ON THE BASIS OF THE ALP ADJUSTMENT MADE BY THE TPO, THE ASSESSING OFFICER M ADE UPWARD ADJUSTMENT OF ` 2.29 CRORES TO THE ALP DETERMINED BY THE ASSESSEE . ITA NO.1194 & 1379/14 :- 12 -: REFERRING TO THE COMPARABLE CASES, MORE PARTICULARL Y, M/S ACCENTIA TECHNOLOGIES LTD., THE LD. DR SUBMITTED THAT THIS C OMPANY IS ENGAGED IN MEDICAL TRANSCRIPTION SERVICES. REFERRING TO TH E NOTIFICATION ISSUED BY THE CBDT DATED 26.9.2000, THE LD. DR POINTED OUT THAT MEDICAL TRANSCRIPTION IS ALSO ONE OF THE INFORMATION TECHNO LOGY ENABLED SERVICES, THEREFORE, THE CONTENTION OF THE ASSESSE E THAT M/S ACCENTIA TECHNOLOGIES LTD. IS NOT A COMPARABLE ONE CANNOT BE ACCEPTED. REFERRING TO THE COPY OF THE NOTIFICATION ISSUED BY THE CBDT DATED 26.9.2000, THE LD. DR POINTED OUT THAT CREATION AND MAINTENANCE OF MEDICAL TRANSCRIPTION EXCLUDING MEDICAL ADVICE WAS CONSIDERED TO BE AN IT ENABLED SERVICES UNDER THE INCOME-TAX RULES. TH E LD. DR FURTHER POINTED OUT THAT TRANSLATION SERVICE IS ALSO AN IT ENABLED SERVICE. REFERRING TO THE DECISION OF THIS TRIBUNAL IN THE C AAES OF M/S WILLIAM LEA INDIA PVT LTD IN I.T.A.NO. 1038/MDS/2014, THE L D. DR SUBMITTED THAT THIS TRIBUNAL ACCEPTED THAT MEDICAL TRANSCRIPT ION IS ALSO AN IT ENABLED SERVICE. REFERRING TO THE OECD GUIDELINE, MORE PARTICULARLY, PARA 2.62, THE LD. DR SUBMITTED THAT IN FACT THE A SSESSEE INSISTED FOR SERVICE SIMILARITY TO THE EXTENT IT IS REQUIRED UND ER CUP METHOD AND NOT UNDER TNMM. ACCORDING TO THE LD. DR, THE DIFFERENC ES IN THE FUNCTIONS PERFORMED BETWEEN ENTERPRISES ARE OFTEN REFLECTED I N VARIATIONS IN OPERATING EXPENSES, THEREFORE, THERE MAY BE A WIDE RANGE OF GROSS PROFIT MARGINS. HOWEVER, SIMILAR LEVEL OF NET OPER ATING PROFIT INDICATORS ITA NO.1194 & 1379/14 :- 13 -: NEEDS TO BE TAKEN INTO CONSIDERATION. DUE TO LACK OF CLARITY IN THE PUBLIC DOMAIN WITH RESPECT TO THE CLASSIFICATION OF EXPENSES IN THE GROSS OR OPERATING PROFITS MAY MAKE IT DIFFICULT TO EVALUATE THE COMPARABILITY OF GROSS MARGINS WHILE THE USE OF NET PROFIT INDICATORS MAY AVOID PROBLEMS. ACCORDING TO THE LD. DR, M/S ACCENTIA TECHNOLOGIES LTD. WAS NOT ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCT DURING THE FINANCIAL YEAR 2008-09 AS CLAIME D BY THE ASSESSEE. THE STATEMENT MADE BY THE ASSESSEE ON THE BASIS OF THE ANNUAL REPORT FOR THE FINANCIAL YEAR 2010-11 AND NOT BASED ON FINANCIAL YEAR 2008-09. 14. THE LD. DR FURTHER POINTED OUT THAT THE ASSESSEE C LAIMED THAT THE PROFIT OF M/S ACCENTIA TECHNOLOGIES LTD. I S INCREASED BY 65.86% ON COMPARISON WITH FINANCIAL YEAR 2007-08. HOWEVER, THE ASSESSEE COULD NOT DEMONSTRATE BEFORE THE TPO OR DR P THAT M/S ACCENTIA TECHNOLOGIES LTD. EARNED HIGH PROFIT ON AC COUNT OF CERTAIN EXTRAORDINARY ECONOMIC FACTOR. ACCORDING TO THE LD. DR, HIGH PROFIT IS MERELY THE CONSEQUENCE OF OPERATIONS CARRIED BY THE COMPANY ON ITS REGULAR COURSE OF BUSINESS, THEREFORE, THE SAME CAN NOT BE REJECTED AS HIGH MARGINS EARNED BY THE M/S ACCENTIA TECHNOLOGI ES LTD.. REFERRING TO ACQUISITION OF OAK TECHNOLOGIES INC, USA BY M/S ACCENTIA TECHNOLOGIES LTD., THE LD. DR SUBMITTED THAT THIS A CQUISITION DOES NOT ITA NO.1194 & 1379/14 :- 14 -: HAVE ANY IMPACT ON THE MARGINS OF M/S ACCENTIA TECH NOLOGIES LTD. ACCORDING TO THE LD. DR, M/S ACCENTIA TECHNOLOGIES LTD. IS A STANDALONE FINANCIERS. 15. THE LD. DR FURTHER SUBMITTED THAT M/S E4E HEALTHCAR E BUSINESS SERVICES PVT. LTD IS ENGAGED IN PROVIDING SERVICES TO HEALTH CARE INDUSTRY AND ALSO ENGAGED IN SOFTWARE DEVELOPM ENT SERVICES. THE SERVICES PROVIDED TO HEALTH CARE INDUSTRY ARE TO BE CONSIDERED AS IT ENABLED SERVICES. THE LD. DR FURTHER SUBMITTED THA T M/S COSMIC GLOBAL LTD IS ENGAGED IN TRANSLATION SERVICES. REFERRING TO SUPER NORMAL PROFIT, THE LD. DR SUBMITTED THAT THE SUPER NORMAL PROFIT OF A COMPANY CANNOT BE A DECIDING FACTOR TO CONSIDER A COMPANY A S A COMPARABLE ONE. ACCORDING TO THE LD. DR, COMPARABLE COMPANIES WHICH ARE FUNCTIONALLY SIMILAR CANNOT BE EXCLUDED ONLY FOR TH E REASON THAT THEY ARE HAVING SUPER PROFIT MARGIN. ACCORDING TO THE L D. DR, FUNCTIONAL COMPARABILITY HAS TO BE ESTABLISHED BEFORE CONSIDER ING A COMPANY AS A COMPARABLE ONE. ACCORDING TO THE LD. DR, THERE IS NO NEED FOR GOING INTO THE MARGINS OF ANY PARTICULAR COMPANY. ACCORD ING TO THE LD. DR, ANY COMPARABILITY ANALYSIS LOSS OR HIGHER MARGIN IS NOT A DETERMINING FACTOR UNLESS THERE ARE ANY PECULIAR CIRCUMSTANCES IN A CASE MAKING IT FUNCTIONALLY NOT COMPARABLE. THE LD. DR FURTHER SU BMITTED THAT IF THE FUNCTIONAL TRANSACTION HAS BEEN UNDERTAKEN AND THE FUNCTIONAL PROFIT OF THE COMPARABLE IS SAME AS THAT OF THE ASSESSEE THE N SUCH A COMPANY ITA NO.1194 & 1379/14 :- 15 -: CANNOT BE REJECTED MERELY BECAUSE IT HAS A HIGH PRO FIT MARGIN. IN THE ABSENCE OF ANY MATERIAL TO INDICATE THAT THE HIGH P ROFIT MARGIN WAS ON ACCOUNT OF EXTRAORDINARY ECONOMIC FACTOR FOR WHICH NECESSARY ADJUSTMENT HAS TO BE MADE TO BRING THE PROFIT OF TH E COMPARABLE COMPANY AT THE SAME LEVEL AT WHICH IT WAS TESTED BY A PARTY OPERATING IN THE SAME ECONOMIC SCENARIO. HOWEVER, THE COMPARA BLES CARRYING ON SIMILAR FUNCTIONS ARE EXCLUDED ON THE GROUND THAT I T EARNED HIGH PROFIT MARGIN THEN THE TRANSFER PRICING STUDY WOULD BE FRU STRATED. 16. ACCORDING TO THE LD. DR, WHILE COMPUTING THE ALP BY TAKING ARITHMETIC MEAN, THE DIFFERENCES ON ACCOUNT OF LOW MARGINS AS WELL AS HIGH MARGIN ULTIMATELY AVERAGE OUT. ACCORDING TO T HE LD. DR, IT IS FOR THE ASSESSEE TO DEMONSTRATE THAT THERE ARE PECULIA R ECONOMIC CIRCUMSTANCES WHICH WARRANT EXCLUSION OF FUNCTIONAL LY COMPARABLE CASES ON ACCOUNT OF EARNING OF HIGH PROFIT MARGIN. 17. THE LD. DR FURTHER SUBMITTED THAT THE ASSESSEE CLA IMED BEFORE THE DRP THAT THE TURNOVER FILTER OF LESS THA N ` 1 CRORE AND PERSISTENT LOSS MAKING COMPANIES SHOULD NOT BE CONS IDERED FOR FILTER TO FIND OUT THE MOST APPROPRIATE COMPARABLES. THE APP LICATION OF TURNOVER FILTER OF LESS THAN ` 1 CRORE HAS BEEN UPHELD BY THIS TRIBUNAL. THEREFORE, ACCORDING TO THE LD. DR, THE OBJECTION O F THE ASSESSEE FOR APPLYING TURNOVER FILTER AND PERSISTENT LOSS FILTER CANNOT BE SUSTAINED. ITA NO.1194 & 1379/14 :- 16 -: ACCORDING TO THE LD. DR, FOR COMPUTING THE ALP THE DATA RELEVANT TO RESPECTIVE FINANCIAL YEAR ALONE HAS TO BE CONSIDERE D. THE MULTIPLE YEAR DATA CANNOT BE CONSIDERED FOR COMPARISON. 18. REFERRING TO THE RISK PROFILE, THE LD. DR POINTED O UT THAT ECONOMIC ADJUSTMENT TOWARDS RISK CANNOT BE GIVEN TO THE ASSESSEE SINCE THE ASSESSEE-COMPANY IS NOT TOTALLY RISK FREE ENTITY AS CLAIMED BY IT. THE ASSESSEE-COMPANY HAS A SINGLE CUSTOMER. I T ALSO HAS SOVEREIGN RISK, FOREIGN COUNTRY POLICY RISK AND LAB OUR RISK ETC. IN THE ABSENCE OF ANY ADEQUATE DATA ON RECORD, IT MAY NOT BE POSSIBLE TO ASCERTAIN THE RISK OF COMPARABLE COMPANIES. REFERR ING TO RULE 10C(2)(D), THE LD. DR POINTED OUT THAT SELECTION OF MOST APPROPRIATE METHOD WOULD PERMIT RELIABLE AND ACCURATE ADJUSTMEN T BEING MADE TO ACCOUNT FOR DIFFERENCES. PLACING RELIANCE ON THE D ECISION OF HYDERABAD BENCH OF THIS TRIBUNAL IN M/S DELOITTE CONSULTING I NDIA PVT. LTD IN I.T.A.NO. 1082, 1084/HYD/2010, THE LD. DR SUBMITTED THAT MARKET RISK, ENVIRONMENT RISK, ENTREPRENEURIAL RISK AND FUNCTION AL RISK ETC WOULD AFFECT THE RESULT OF THE COMPANY AND THEREFORE, IT CANNOT BE SAID THAT THE ASSESSEE WAS NOT OPERATING IN A RISK FREE ENVI RONMENT. THE LD. DR FURTHER POINTED OUT THAT THE PLI OF THE ASSESSEE IS NOT WITHIN 5% OF THE PLI OF THE COMPARABLE CASES, THEREFORE, THE NEC ESSARY AND SUITABLE ADJUSTMENT HAS TO BE MADE. THE LD. DR FURTHER POIN TED OUT THAT ITA NO.1194 & 1379/14 :- 17 -: FUNCTIONALLY SIMILAR COMPANIES ALONE NEED TO BE COM PARED. THEREFORE, THE TPO AND THE DRP HAS RIGHTLY REJECTED THE COMPAR ABLES SELECTED BY THE ASSESSEE FOR MAKING ADJUSTMENT OF ALP IN RESP ECT OF THE TRANSACTION WITH AE. 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. THE OBJECTION OF THE ASSESSEE IS THAT WITH REGARD TO BROUGHT FORWARD LO SSES BEFORE ALLOWING DEDUCTION U/S 10A, THE ASSESSING OFFICER HAS NOT M ADE ANY SUCH ADJUSTMENT IN THE DRAFT ASSESSMENT ORDER. MOREOVER , THERE WAS NO DIRECTION FROM THE DRP. WE HAVE CAREFULLY GONE THR OUGH THE DRAFT ASSESSMENT ORDER A COPY OF WHICH IS AVAILABLE ON RE CORD. AS RIGHTLY SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE, THE ASSESSING OFFICER HAS NOT MADE ANY ADJUSTMENT OF BROUGHT FORWARD LOSS ES BEFORE ALLOWING DEDUCTION U/S 10A IN THE DRAFT ASSESSMENT ORDER. WE HAVE ALSO GONE THROUGH THE ORDER OF THE DRP. IN FACT, T HE DRP HAS ALSO NOT CONSIDERED THE BROUGHT FORWARD LOSSES FOR ALLOWING DEDUCTION U/S 10A OF THE ACT. HOWEVER, WHILE COMPUTING THE INCOME CO NSEQUENT TO THE DIRECTION OF THE DRP, THE ASSESSING OFFICER MADE AD JUSTMENT OF BROUGHT FORWARD LOSSES BEFORE ALLOWING DEDUCTION U /S 10A OF THE ACT. WE HAVE CAREFULLY GONE THROUGH THE PROVISIONS OF SE CTION 144C OF THE ACT. SEC. 144C(1) ENABLES THE ASSESSING OFFICER TO FORWARD A DRAFT OF THE PROPOSED ASSESSMENT ORDER TO THE ELIGIBLE ASSE SSEE IF HE PROPOSES ITA NO.1194 & 1379/14 :- 18 -: TO MAKE ANY VARIATION ON THE INCOME OR LOSS RETURNE D WHICH IS PREJUDICIAL TO THE INTEREST OF THE ASSESSEE. CLAU SE (13) OF SEC. 144C ENABLES THE ASSESSING OFFICER TO PASS THE ASSESSMEN T ORDER IN CONFORMITY WITH THE DIRECTION OF THE DRP AND COMPLE TE THE ASSESSMENT WITHOUT ANY FURTHER OPPORTUNITY TO THE ASSESSEE. THE CONTENTION OF THE ASSESSEE IS THAT BY MAKING ADJUSTMENT OF BROUG HT FORWARD LOSSES BEFORE ALLOWING DEDUCTION U/S 10A, THE ASSESSING O FFICER MADE VARIATION IN THE TOTAL INCOME RETURNED BY THE ASS ESSEE. SUCH VARIATION COULD BE MADE BY THE ASSESSING OFFICER PR OVIDED THERE WAS A DIRECTION FROM THE DRP. IN THIS CASE, APPARENTLY, THE DRAFT OF THE PROPOSED ASSESSMENT ORDER FORWARDED TO THE ASSESSE E IS SILENT ABOUT THE ADJUSTMENT OF BROUGHT FORWARD LOSSES. IN OTHER WORDS, THE ASSESSING OFFICER HAS NOT MADE ANY ADJUSTMENT OF BR OUGHT FORWARD LOSSES WITH REGARD TO DEDUCTION U/S 10A OF THE ACT . THE DIRECTION OF THE DRP ALSO DOES NOT CONTAIN ANY SUCH ADJUSTMENT W ITH REGARD TO BROUGHT FORWARD LOSSES BEFORE ALLOWING DEDUCTION U /S 10A OF THE ACT. 20. UNDER THE SCHEME OF THE INCOME-TAX ACT, 1961, IF THE ASSESSING OFFICER INTENDS TO MAKE ANY ADJUSTMENT TO WARDS THE ALP DETERMINED BY THE ASSESSEE, A DRAFT ASSESSMENT ORD ER HAS TO BE FIRST FORWARDED TO THE ASSESSEE BY MAKING VARIATION IN T HE INCOME OR LOSS RETURNED WHICH IS PREJUDICIAL TO THE INTEREST OF TH E ASSESSEE. ON RECEIPT OF SUCH DRAFT ASSESSMENT ORDER, THE ELIGIBL E ASSESSEE IS ENTITLED ITA NO.1194 & 1379/14 :- 19 -: TO FILE ITS OBJECTIONS TO THE VARIATION MADE BY THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER. AFTER RECEIVING THE OB JECTION, THE DRP, AFTER GIVING AN OPPORTUNITY TO THE ASSESSEE AND TH E ASSESSING OFFICER, HAS TO MAKE FURTHER ENQUIRY AS IT THINKS FIT, AND M AY CONFIRM OR REDUCE OR ENHANCE THE VARIATION PROPOSED IN THE DRAFT ASSE SSMENT ORDER. HOWEVER, THE DRP SHALL NOT SET ASIDE THE PROPOSED V ARIATION OR ISSUE ANY DIRECTION FOR FURTHER ENQUIRY AND PASS THE ASSE SSMENT ORDER. UNDER SEC. 144C(13) OF THE ACT, THE ASSESSING OFFIC ER HAS TO GIVE EFFECT TO THE DIRECTION OF THE DRP WITHOUT PROVIDING ANY F URTHER OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THEREFORE, IN THI S CASE, THE ASSESSEE HAS NO OCCASION TO EXPLAIN BEFORE THE AUTHORITIES W HY THE ADJUSTMENT OF BROUGHT FORWARD LOSSES BEFORE ALLOWING DEDUCTION U/S 10A SHOULD NOT BE MADE. THIS TRIBUNAL IS OF THE CONSIDERED OP INION THAT IN THE ABSENCE OF ADJUSTMENT OF BROUGHT FORWARD LOSSES WHI LE COMPUTING DEDUCTION U/S 10A IN THE DRAFT ASSESSMENT ORDER FO RWARDED TO THE ASSESSEE AND IN THE DIRECTION OF THE DRP, THE ASSE SSING OFFICER CANNOT MAKE SUCH ADJUSTMENT IN THE FINAL ASSESSMENT ORDER WHICH WAS PASSED CONSEQUENT TO THE DIRECTION OF THE DRP. UNDER SEC. 144C(13) OF THE ACT, THE ASSESSING OFFICER HAS TO PASS AN ORDER IN CONFORMITY WITH THE DIRECTION OF THE DRP WITHOUT GIVING ANY FURTHER OPP ORTUNITY TO THE ASSESSEE. IN CASE THERE WAS NO DIRECTION WITH REGA RD TO BROUGHT FORWARD LOSSES BEFORE DEDUCTION U/S 10A, THE ASSES SING OFFICER CANNOT ITA NO.1194 & 1379/14 :- 20 -: GO BEYOND THE DIRECTION OF THE DRP AND MAKE ADJUSTM ENT OF BROUGHT FORWARD LOSSES BEFORE ALLOWING DEDUCTION U/S 10A O F THE ACT. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE ASSE SSING OFFICER HAS EXCEEDED HIS JURISDICTION IN PASSING THE FINAL ASSE SSMENT ORDER IN CONFORMITY WITH THE DIRECTION OF THE DRP BY MAKING ADJUSTMENT OF BROUGHT FORWARD LOSSES BEFORE ALLOWING DEDUCTION U /S 10A OF THE ACT. THEREFORE, THE ADJUSTMENT MADE BY THE ASSESSING OFF ICER WITH REGARD TO BROUGHT FORWARD LOSSES BEFORE ALLOWING DEDUCTION U/S 10A OF THE ACT, IS SET ASIDE AND THE ASSESSING OFFICER IS DIRE CTED TO GRANT DEDUCTION U/S 10A BEFORE MAKING ANY ADJUSTMENT OF BROUGHT FORWARD LOSSES. 21. NOW COMING TO DETERMINATION OF ALP IN RESPECT OF M/ S ALLSEC TECHNOLOGIES LTD., THE DRP DIRECTED THE TPO TO INCL UDE M/S ALLSEC TECHNOLOGIES LTD. AS COMPARABLE IF THE SAME WAS REJ ECTED FOR THE REASON OF INCURRING LOSSES CONSECUTIVELY FOR TWO YE ARS. SECTION 144C(8) OF THE ACT EMPOWERS THE DRP TO CONFIRM, RED UCE OR ENHANCE THE VARIATION PROPOSED IN THE DRAFT ASSESSMENT ORDE R. HOWEVER, THE DRP SHALL NOT SET ASIDE ANY PROPOSED VARIATION OR I SSUE ANY DIRECTION FOR FURTHER ENQUIRY AND PASS THE ASSESSMENT ORDER. IN THE CASE BEFORE US, THE CONTENTION OF THE ASSESSEE IS THAT THE DRP DIRECTED THE TPO TO INCLUDE M/S ALLSEC TECHNOLOGIES LTD. IF THE SAME W AS REJECTED FOR THE REASON OF INCURRING LOSSES IN FINANCIAL YEARS 2007- 08 AND 2008-09. WE ITA NO.1194 & 1379/14 :- 21 -: HAVE CAREFULLY GONE THROUGH THE DIRECTION OF THE DR P, MORE PARTICULARLY, PAGE 14. IN FACT, THE DRP HAS OBSER VED AS FOLLOWS: THIS PANEL THEREFORE, DIRECT THE TPO TO INCLUDE TH IS COMPARABLE IN THE SET OF COMPARABLES IF IT WAS EXCLU DED ONLY ON THE BASIS THAT IT HAD PERSISTENT LOSS IN FY 2007-08 A ND 2008-09. THIS DIRECTION OF THE DRP IS CONTRARY TO SECTION 14 4C(8) OF THE ACT. SEC. 144C(8) OF THE ACT PROHIBITS THE DRP FROM ISSU ING ANY DIRECTION FOR FURTHER ENQUIRY AND PASS THE ASSESSMENT ORDER. THEREFORE, THE DIRECTION OF THE DRP TO VERIFY THE COMPARABLES AND INCLUDE THE SAME IF IT WAS EXCLUDED ON THE BASIS OF PERSISTENT LOSS FOR FINANCIAL YEARS 2007- 08 AND 2008-09 IS UNWARRANTED. APART FROM THAT, WH ILE DISCUSSING THE ISSUE OF PERSISTENT LOSS MAKING COMPANY, THE DRP RE JECTED THE REQUEST OF THE ASSESSEE TO CONSIDER THREE YEAR DATA FOR DE TERMINING LOSSES. THIS IS APPARENT FROM PAGE 7 & 8 OF THE DRPS ORDER . 22. WE HAVE ALSO GONE THROUGH THE PROVISIONS OF RULE 1 0B OF THE INCOME-TAX RULES WHICH PROVIDES METHOD FOR DETE RMINATION OF ALP U/S 92C OF THE ACT. RULE 10B(2) PRESCRIBES THE MET HOD FOR COMPARABILITY OF INTERNATIONAL TRANSACTION WITH THA T OF UNCONTROLLED TRANSACTION. FOR THE PURPOSE OF CONVENIENCE, RULE 10B(2) IS REPRODUCED HEREUNDER: ITA NO.1194 & 1379/14 :- 22 -: 10B (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY:- (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSF ERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, B Y THE RESPECTIVE PARTIES TO THE TRANSACTIONS; (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS AR E FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE P ARTIES TO THE TRANSACTIONS; (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INC LUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LE VEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE O R RETAIL. 23. IN VIEW OF THE ABOVE RULE, IT IS MANDATORY FOR THE DRP TO CONSIDER THE SPECIFIC CHARACTERISTICS OF SERVICE PR OVIDED BY THE ASSESSEE AND THE COMPARABLE COMPANIES. IT IS ALSO NECESSARY TO EXAMINE THE FUNCTIONS PERFORMED BY THE ASSESSEE AN D THE COMPARABLE COMPANIES. WHILE COMPARING THE FUNCTIONS PERFORMED BY THE ASSESSEE AND OTHER COMPANIES, IT IS NECESSARY TO TA KE INTO ACCOUNT THE ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ASSESSEE AND OTHER COMPARABLE COMPANIES. AT THE VERY SAME TIME, THE R ISK ASSUMED BY THE ASSESSEE AND OTHER COMPARABLE COMPANIES ALSO N EEDS TO BE TAKEN INTO CONSIDERATION. APART FROM THAT, THE CONTRACTU AL TERMS OF TRANSACTION NEEDS TO BE EXAMINED AND FIND OUT HOW T HE ITA NO.1194 & 1379/14 :- 23 -: RESPONSIBILITIES, RISK AND BENEFITS ARE DIVIDED BET WEEN THE RESPECTIVE PARTIES TO THE TRANSACTION. APART FROM THAT, THE C ONDITIONS PREVAILING IN THE MARKET IN RESPECT OF THE RESPECTIVE PARTIES INC LUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, LAWS PREVAILING IN THE RESPECTIVE TERRITORIAL JURISDICTION, COST OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION IN THE MARKET NEED TO BE EXAMINED. APART FROM THAT WHETHE R THE MARKET IS WHOLESALE OR RETAIL HAS ALSO NEEDS TO BE EXAMINED. 24. IN THE CASE BEFORE US, THE DRP EXAMINED THE COMPAR ABLES BY USING TURNOVER FILER, WORKING CAPITAL ADJUSTMENT , RISK ADJUSTMENT ETC. WHILE CONSIDERING THE TURNOVER FILTER, THE DR P INCLUDED M/S ACCENTIA TECHNOLOGIES LTD. THE ASSESSEE CLAIMS TH AT M/S ACCENTIA TECHNOLOGIES LTD. EARNED HIGH PROFIT. FOR THE FINA NCIAL YEAR 2007-08 THE PROFIT OF M/S ACCENTIA TECHNOLOGIES LTD. WAS IN CREASED TO 65.86%. THEREFORE, THE ASSESSEE CONTENDED THAT M/S ACCENTI A TECHNOLOGIES LTD. CANNOT BE TAKEN AS COMPARABLE. ADMITTEDLY, M/ S ACCENTIA TECHNOLOGIES LTD. HAD ENGAGED ITSELF IN MEDICAL TRA NSCRIPTION, BILLING, COLLECTION AND CODING ETC. THE REVENUE AUTHORITIES FOUND THAT M/S ACCENTIA TECHNOLOGIES LTD. ALSO PROVIDES BPO SERVIC E INTO MEDICAL TRANSCRIPTION. SINCE M/S ACCENTIA TECHNOLOGIES LTD . EARNED 90% OF THE TOTAL REVENUE FROM CALL CENTRE AND BACK OFFICE SUPP ORT SERVICE THE DRP REJECTED THE CONTENTION OF THE ASSESSEE. THE DRP HAS ALSO PLACED ITS ITA NO.1194 & 1379/14 :- 24 -: RELIANCE ON THE DECISION OF THE BANGALORE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S NETLINX INDIA PVT. LTD IN I.T.A.NO.454/ BNG/2011. AFTER REFERRING TO THE DECISION OF THE BANGALORE BENCH OF THIS TRIBUNAL IN 24/7 CUSTOMER.COM PVT. LTD VS DCIT IN I.T.A.NO. 227 /BNG/2010, IT WAS FOUND THAT TP RULES IN INDIA SPECIFICALLY DEVIATE FROM OECD GUIDELINES AND SPECIFY THE ARITHMETIC MEAN FOR DETERMINING ALP . IN THE ABSENCE OF ANY MATERIAL TO DEMONSTRATE THAT THE PROFIT OF T HE COMPARABLE WAS ABNORMALLY HIGH, THE CLAIM OF THE ASSESSEE WAS REJ ECTED. THE DRP HAS ALSO TAKEN NOTE OF THE FACT THAT DURING FINANCI AL YEAR 2008-09 M/S ACCENTIA TECHNOLOGIES LTD. HAD EARNED MORE THAN 90% OF ITS TOTAL REVENUE FROM CALL CENTRE AND BACK OFFICE SUPPORT SE RVICE. 25. NOW COMING TO M/S COSMIC GLOBAL LTD., THE CONTENTIO N OF THE ASSESSEE IS THAT THE MAIN SOURCE OF REVENUE IS FROM MEDICAL TRANSCRIPTION, TRANSLATION SERVICES AND ACCOUNTS BP O. THE CBDT IN ITS NOTIFICATION DATED 26.9.2000 SPECIFIES THE FOLLOWIN G SERVICES AS INFORMATION TECHNOLOGY ENABLED SERVICES OR PRODUCTS . FOR THE PURPOSE OF CONVENIENCE, NOTIFICATION NO.11521 DATED 26.9.20 00 ISSUED BY THE CBDT IS REPRODUCED HEREUNDER: IN EXERCISE OF THE POWERS CONFERRED BY CLAUSE (B) O F ITEM (I) OF EXPLANATION 2 OF SECTION 10A, CLAUSE (B) ITEM (I) OF EXPLANATION 2 OF SECTION 10B AND CLAUSE (B) OF EXPLANATION TO SECTION 80HHE OF THE INCOME-ACT, 1961 (43 OF 1961), THE CENTRAL BOARD OF DIRECT TAXES HEREBY SPECIFIES THE FO LLOWING INFORMATION TECHNOLOGY ENABLED PRODUCTS OR SERVICES , AS THE CASE MAY BE, FOR THE PURPOSE OF SAID CLAUSES, NAMEL Y :- ITA NO.1194 & 1379/14 :- 25 -: (I) BACK-OFFICE OPERATIONS; (II) CALL CENTRES ; (III) CONTENT DEVELOPMENT OR ANIMATION; (IV) DATA PROCESSING; (V) ENGINEERING AND DESIGN (VI) GEOGRAPHIC INFORMATION SYSTEM SERVICES; (VII) HUMAN RESOURCES SERVICES; (VIII) INSURANCE CLAIM PROCESSING; (IX) LEGAL DATABASES ; (X) MEDICAL TRANSCRIPTION; (XI) PAYROLL ; (XII) REMOTE MAINTENANCE; (XIII) REVENUE ACCOUNTING (XIV) SUPPORT CENTRES, AND; (VX) WEB-SITE SERVICES 26. IN FACT, THIS TRIBUNAL IN M/S WILLIAM LEA INDIA PVT . LTD IN I.T.A.NO. 1038/MDS/2014 HAS CONSIDERED THIS NOTIFIC ATION AND FOUND THAT MEDICAL TRANSCRIPTION IS ALSO ONE OF THE IT EN ABLED SERVICES OR PRODUCT FOR THE PURPOSE OF COMPUTING SECTION 10A/10 B DEDUCTION. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPI NION THAT THE DRP HAS RIGHTLY REJECTED THE CLAIM OF THE ASSESSEE. THE C LAIM OF THE ASSESSEE IS PRIMARILY ON THE GROUND THAT 43% OF ITS REVENUE IS FROM TRANSLATION SERVICE. IN FACT, TRANSLATION SERVICE IS ALSO ONE OF THE IT ENABLED SERVICE AS PROVIDED IN THE INCOME-TAX RULES. THERE FORE, THE DECISION OF THE HYDERABAD BENCH OF THIS TRIBUNAL IN M/S BRIG ADE GLOBAL SERVICES PVT LTD(SUPRA) MAY NOT BE APPLICABLE TO THE FACTS O F THE CASE. 27. COMING TO WORKING CAPITAL ADJUSTMENT, THE DRP FOUND THAT THE ASSESSEE HAS NOT PROVIDED ANY WORKING CAPITAL COMPUTATION BUT ITA NO.1194 & 1379/14 :- 26 -: SIMPLY CLAIMED THAT THE MARGINS WERE REDUCED TO 15. 89% AFTER WORKING CAPITAL ADJUSTMENT. HOWEVER, THE TPO COMP UTED THE WORKING CAPITAL ADJUSTMENT SEPARATELY AND IT HAS GONE UP TO 33.9%. 28. COMING TO RISK ADJUSTMENT, THE ASSESSEE CLAIMS THA T THE SIPL IS CHARACTERIZED AS A RISK MITIGATED SERVICE P ROVIDER ASSUMING LEAST BUSINESS, MARKETS AND OPERATIONAL RISKS. THE ASSESSEE-COMPANY CALCULATED THE DIFFERENCE BETWEEN AVERAGE PLR AND A VERAGE BANK RATE DURING FINANCIAL YEAR 2008-09 AND CLAIMED THE DIFFE RENCE AS RISK ADJUSTMENT. THIS CLAIM OF THE ASSESSEE WAS REJECT ED BY THE DRP. THE ASSESSEE HAS ALSO CLAIMED BEFORE THE DRP THAT IT DO ES NOT ESTIMATE ANY CRITICAL RISK AND IT WAS A RISK FREE ENTITY. H OWEVER, THE DRP FOUND THAT THE ASSESSEE ASSUMED MORE CRITICAL RISK AS CO MPARED TO AE AND ENTITLED FOR HIGHER REMUNERATION. HOWEVER, THE DRP HAS NOT MADE ANY ADJUSTMENT TOWARDS RISK ANALYSIS SINCE THE TPO HAS NOT MADE ANY ADJUSTMENT AT ALL. 29. FOR THE PURPOSE OF COMPARING A COMPARABLE COMPANY, THE RISK ASSUMED BY THE ASSESSEE-COMPANY WHILE HAVING T RANSACTION WITH AE AND THE UNCONTROLLED COMPANY WHILE HAVING TRANSA CTION WITH OTHER COMPANIES HAS TO BE EXAMINED FOR THE PURPOSE OF DET ERMINING ALP. IN THE CASE BEFORE US, SUCH ANALYSIS WAS NOT DONE SINC E THE DRP WAS OF THE CONSIDERED OPINION THAT MAKING SUCH ADJUSTMENT WOULD VIOLATE THE PRINCIPLES OF NATURAL JUSTICE. THIS TRIBUNAL IS O F THE CONSIDERED OPINION ITA NO.1194 & 1379/14 :- 27 -: THAT EXAMINATION OF THE RISK ASSUMED BY THE ASSESS EE AND OTHER COMPARABLE COMPANIES IS ONE OF THE RELEVANT FACTOR UNDER RULE 10B(2)(B). THEREFORE, THE MATTER NEEDS TO BE EXAMI NED BY THE DRP AFTER GIVING AN OPPORTUNITY TO THE ASSESSEE. MERE LY BECAUSE THE TPO HAS NOT CONSIDERED THE RISK ASSUMED BY THE RESPECTI VE PARTIES WHICH DOES NOT MEAN THAT THE DRP SHOULD NOT CONSIDER THE SAME. THE MANDATORY REQUIREMENT PROVIDED UNDER RULE 10B(2) OF THE INCOME-TAX RULES NEEDS TO BE FOLLOWED WHILE DETERMINING THE CO MPARABLE COMPANIES FOR DETERMINATION OF ALP. WHAT IS REQUIR ED IS AN OPPORTUNITY SHALL BE GIVEN TO THE ASSESSEE. 30. WHILE CONSIDERING THE TURNOVER FILTER, THE DRP FOU ND THAT THE COMPANIES WHOSE TURNOVER IS LESS THAN ` 1 CRORE ARE PRONE TO MARKET ADVERSARIES. TURNOVER IS ALSO ONE OF THE FACTOR W HICH DETERMINES THE COMPARABILITY OF THE CASES. IN FACT, THE HYDERABAD BENCH OF THIS TRIBUNAL IN HYUNDAI MOTORS INDIA VS ITO IN I.T.A.N O. 1850/HYD/2012, DATED 21.2.2014 FOUND THAT TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING TURNOVER OF ` 1 CRORE TO ` 200 CRORE HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE THE TURNOVER OF ` 1 CRORE TO ` 200 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. IN VIEW OF THE ABOVE OBSERVATION OF THE HYDERABAD BENCH OF THIS TR IBUNAL, IT IS ALSO ITA NO.1194 & 1379/14 :- 28 -: NECESSARY TO EXAMINE THE COMPARABILITY OF TURNOVER BETWEEN THE ASSESSEE AND THE COMPARABLE COMPANIES. IN THE CASE BEFORE US, NO MATERIAL IS AVAILABLE ON RECORD TO INDICATE THE ACT UAL TURNOVER OF THE ASSESSEE-COMPANY AND OTHER COMPARABLE COMPANIES. 31. THE DRP HAS NOT EXAMINED THE CONTRACTUAL TERMS OF TRANSACTION AS PROVIDED IN RULE 10B(2)(C) OF THE IN COME-TAX RULES. UNLESS AND UNTIL THE CONTRACTUAL TERMS OF TRANSACTI ON WAS EXAMINED, WE MAY NOT BE ABLE TO SAY HOW THE RESPONSIBILITY RI SK AND BENEFITS ARE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANS ACTION. NO MATERIAL IS AVAILABLE ON RECORD WITH REGARD TO CONTRACTUAL T ERMS OF TRANSACTION BETWEEN THE PARTIES. APART FROM THAT, THE DRP HAS NOT EXAMINED THE TRANSACTION BETWEEN THE PARTIES WITH REGARD TO GEOG RAPHICAL LOCATION, COST OF THE LABOUR INVOLVED, THE LEVEL OF COMPETITI ON IN THE MARKET ETC. THE DRP HAS NOT EXAMINED THE ASSET EMPLOYED BY THE ASSESSEE AND OTHER COMPARABLE CASES. WHAT WAS EXAMINED IS ONLY A WORKING CAPITAL ADJUSTMENT. THE ASSETS EMPLOYED BY THE ASSESSEE NE ED TO BE CONSIDERED BY THE DRP IN THE LIGHT OF THE PROCEDURE PROVIDED IN RULE 10B(2). ITA NO.1194 & 1379/14 :- 29 -: 32. NOW COMING TO THE REVENUES APPEAL, THE ONLY GROUND RAISED IS WITH REGARD TO EXCLUSION OF TWO COMPARABLE COMPA NIES NAMELY, M/S GENESIS INTERNATIONAL CO. LTD AND M/S VISHAL INFORM ATION TECHNOLOGIES LTD (CORAL HUB LTD.). 33. AFTER HEARING BOTH PARTIES, WE FIND THAT THE DRP DI RECTED THE ASSESSING OFFICER TO EXCLUDE M/S VISHAL INFORMATION TECHNOLOGIES LTD AND M/S GENESIS INTERNATIONAL CO. LTD. SINCE THE D RP HAS NOT EXAMINED THE RESPONSIBILITIES, RISK ASSUMED, BENEFI TS SHARED BY THE RESPECTIVE PARTIES IN TERMS OF CONTRACTUAL AGREEMEN T, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE MATTER NEEDS TO BE REEXAMINED IN RESPECT OF THESE TWO COMPANIES WHICH ARE DIRECTED T O BE EXCLUDED BY THE DRP. ACCORDINGLY, THE ORDERS OF THE LOWER AUTH ORITIES ARE SET ASIDE AND THE ENTIRE ISSUE IS REMITTED BACK TO THE FILE O F THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL REFER THE MAT TER ONCE AGAIN TO THE DRP AND THE DRP SHALL EXAMINE THE COMPARABLES IN TH E LIGHT TO RULE 10B(2) OF THE INCOME-TAX RULES AFTER GIVING A REASO NABLE OPPORTUNITY TO THE ASSESSEE. 34. IN THE RESULT, BOTH, THE APPEAL OF THE ASSESSEE AN D THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSES. ITA NO.1194 & 1379/14 :- 30 -: ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH OF JULY, 2015, AT CHENNAI. SD/- SD/- ( . !' ) (A. MOHAN ALANKAMONY) # / ACCOUNTANT MEMBER ( . . . ) ) (N.R.S. GANESAN) / JUDICIAL MEMBER / CHENNAI ! / DATED: 24 TH JULY, 2015 RD !' # $% &% / COPY TO: 1 . '( / APPELLANT 3. ) () / CIT(A) 5. %+, # - / DR 2. #.'( / RESPONDENT 4. ) / CIT 6. ,/ 0 / GF