Appeal details
Counselvise Citation
124824514 RSA 2012
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 22 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
30-06-2014
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
A
Next Hearing Date
05-12-2013
Assessment Year
2004-2005
Appeal Filed On
08-06-2012
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER, AND SHRI G.S. PANNU, ACCOUNTANT MEMBER ITA NO.1248/PN/2012 (A.Y: 2004-05) NIHILENT TECHNOLOGIES PVT. LTD., 403/404, 4 TH FLOOR, BLOCK-D, WEIKFIELD IT CITI INFOPARK, PUNE NAGPUR ROAD, PUNE 411014 PAN: AABCN0867G APPELLANT VS. DY.CIT, CIRCLE-2, PUNE RESPONDENT APPELLANT BY : SHRI NIKHIL PATHAK RESPONDENT BY : SHRI L. R AMJI RAO DATE OF HEARING: 17.06.2014 DATE OF ORDER : 30.06.2014 ORDER PER SHAILENDRA KUMAR YADAV, J.M: THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEAL)-I, [IN SHORT CIT(A)] PUNE, DATED 08.12.2011 FOR A.Y. 2004-05 ON THE FOLLOWING GROUNDS. 1] THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADDI TION OF RS.5,38,18,843/- OUT OF THE ADDITION OF RS. 10,72,61,030/- MADE BY THE A.O. U/S 92C OF THE IT ACT. 2] IN CONFIRMING THIS ADDITION, THE LEARNED CIT(A) ERRED IN HOLDING THAT THE RATE CHARGED BY THE APPELLANT COMPANY TO THE ASSOCIATED ENTERPRISE (HEREINAFTER REFERRED TO AS 'AE') WAS NOT AT ARM'S LENGTH PRICE (ALP) AND AS A CONSEQUENCE, ERRED IN HOLDING THAT THE ALP OF THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT COMPANY WITH THE AE BE DETERMINED AT RS. 29,33,52,748/- AS AGAINST THE CONSIDERATION SHOWN B Y 2 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. THE APPELLANT COMPANY OF RS.23,95,33,905/- RESULTIN G IN AN ADDITION OF RS. 5,38,18,843/- 3] THE LEARNED CIT(A) ERRED IN NOT APPRECIATING TH E FACT THAT THE REFERENCE MADE BY THE AO TO TPO UNDER SECTION 92CA(1) OF THE ACT WAS BAD IN LAW AND WHILE DOING SO, THE AO HAS NOT ARRIVED AT AN OBJECTIVE DETERMINATION OF NECESSITY OR EXPEDIENCY OF REFERRI NG THE CASE TO TPO AS REQUIRED UNDER THE PROVISION OF SECTION 92CA(1) OF THE ACT. 4] THE LEARNED CIT(A) ERRED IN NOT APPRECIATI NG THAT - I. THE DEPT. HAVING NOT DISCHARGED THE BURDEN U/S. 92CA PROPERLY WAS NOT JUSTIFIED IN MAKING ANY ADDITION UNDER U/S. 92C ON ACCOUNT OF ADJUSTMENT TO THE ALP IN THE TRANSACTIONS WITH THE AE. II. IN VIEW OF ARTICLE 9 OF THE DTAA BETWEEN INDIA AND S.A., NO ADDITION WAS WARRANTED ON ACCOUNT OF ANY ADJUSTMENT TO THE ALP U/S 92C AS THE COMPARABLE DATA CLEARLY INDICATED THAT THE APPELLANT COMPANY HAD CHARGED TO THE AE ARM'S LENGTH PRICE AND THE DEPT. HAD NOT PROVED THAT FOR SIMILAR TRANSACTIONS IN IDENTICAL CIRCUMSTANCES, THE RATE CHARGED WAS HIGHER THAN WHAT THE APPELLANT HAD CHARGED TO THE A.E. III. SUCH AN ADHOC ADDITION U/S 92C WAS NOT PERMISSIBLE / WARRANTED UNDER THE LAW IN VIEW OF THE DECISION OF S.C. IN THE CASE OF SHRI. K. P. VERGHESE 131 ITR 597. IV. THE ADJUSTMENT OF RS.5,38,18,843/- MADE TO THE TOTAL INCOME AS RETURNED IS BEYOND THE SCOPE OF TOTAL INCOME AS DEFINED IN SECTION 5 OF THE ACT. THE LEARNED CIT(A) ALSO ERRED IN NOT APPRECIATING THE FACT THAT THE ADJUSTMENT OF RS 5,38,18,843/- DOES NOT PARTAKE THE CHARACTER OF INCOME AS DEFINED IN SECTION 2 OF THE ACT. 5] THE LEARNED CIT(A) ERRED IN HOLDING THAT THE CU P METHOD WAS NOT THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP IN THE PRESENT CASE. HE ERRED I N HOLDING THAT THE CUP METHOD WAS NOT APPLICABLE TO SOFTWARE INDUSTRY AND THEREFORE, THE ALP IN THE ASSESSEE'S CASE COULD NOT BE DETERMINED BY APPLYING THE CUP METHOD. 3 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. 5A] THE LEARNED CIT(A) ERRED IN HOLDING THAT THE CU P METHOD CAN BE APPLIED ONLY WHEN THE RELATED PARTY TRANSACTIONS AND THIRD PARTY TRANSACTIONS ARE IDENT ICAL IN ALL RESPECTS. HE FAILED TO APPRECIATE THAT RULE 10B ITSELF PROVIDED FOR ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS AND IN THIS CASE, THE TRANSACTIONS REL IED UPON BY THE APPELLANT COMPANY IN SUPPORT OF THE CUP METHOD WERE NOT COMPARABLE WITH THE TRANSACTIONS WITH THE AE. 5B] THE LEARNED CIT(A) FAILED TO APPRECIATE THAT T HE RATE CHARGED BY THE APPELLANT COMPANY TO THE AES WAS COMPARABLE TO THE RATE CHARGED BY IT TO THEM IN THE EARLIER YEARS WHICH WAS MUCH HIGHER THAN THE RATE CHARGED BY ZENSAR TECHNOLOGIES LTD. TO NEDCOR BANK FOR SIMILAR SERVICES IN F.Y. 1999-00 AND HENCE, AS PER THE CUP METHOD, THE APPELLANT HAD CHARGED THE AES A T ALP AND NO ADDITION WAS WARRANTED ON THIS ACCOUNT. THE ABOVE COMPARABLES WERE PROPERLY JUSTIFIED AND T HE REASONING GIVEN BY THE TPO FOR REJECTING THEM WAS N OT JUSTIFIED. 5C] THE LEARNED CIT(A) FAILED TO APPRECIATE THAT - A. THE APPELLANT COMPANY HAD PROVIDED SUFFICIENT INTERNAL COMPARABLES WHICH PROVIDED SUFFICIENT DATA TO PROVE THAT THE RATE CHARGED TO AE WAS AT ALP. B. FURTHER, THE APPELLANT COMPANY HAD PROVIDED EXTERNAL COMPARABLES WHICH PROVIDED SUFFICIENT COMPARABLE DATA TO PROVE THAT THE RATE CHARGED BY THE ASSESSEE COMPANY TO THE AE WAS AT ALP. C. THE ABOVE COMPARABLES WERE PROPERLY JUSTIFIED AND THE REASONING GIVEN BY THE TPO AND CONFIRMED BY CIT(A) FOR REJECTING THEM WAS NOT JUSTIFIED. D. THOUGH THE APPELLANT IS A START UP COMPANY, ITS RESULTS ARE BETTER THAN OTHER COMPANIES IN THIS PHASE. HE HAS FAILED TO APPRECIATE THE REASONS FOR INCURRING LOSSES BY THE APPELLANT. THE CIT (A) DID NOT APPRECIATE THE CORRECT REASONS FOR THE 4 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. APPELLANT COMPANY INCURRING LOSSES IN THE PRESENT YEAR. E. THE AE HAD NO CONTROL OVER THE OPERATIONS OF T HE APPELLANT COMPANY SO AS TO INFLUENCE THE PRICE CHARGED BY THE APPELLANT TO THE AE. F. NEDCOR BANK (SUBSEQUENTLY NAME CHANGED TO NEDBANK LIMITED) CEASED TO BE AN AE OF THE APPELLANT DURING THE SUBSEQUENT FINANCIAL YEARS, AND STILL THE RATES CHARGED WERE SIMILAR TO THE RATES CHARGED WHEN NEDCOR BANK WAS THE AE. THIS FACT INDICATES THAT THE NATURE OF RELATIONSHIP BETWEEN THE APPELLANT AND ITS AES DOES NOT HAVE ANY IMPACT ON THE PRICE OF THE INTERNATIONAL TRANSACTIONS BETWEEN THE APPELLANT AND ITS AES. 6] WITHOUT PREJUDICE TO ABOVE GROUNDS, THE LEARNED CIT(A) FAILED TO APPRECIATE THAT IF CUP METHOD WAS NOT THE MOST APPROPRIATE METHOD, THE COST PLUS METHOD SHOUL D HAVE BEEN FOLLOWED FOR DETERMINING THE ALP INSTEAD OF TNM METHOD. 7] THE LEARNED CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT THE TNM METHOD WAS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP IN THIS CASE. 7A] THE LEARNED CIT(A) WAS NOT JUSTIFIED IN RELYIN G UPON THE DATA OF 11 COMPANIES SELECTED BY THE TPO FOR ADOPTI NG THE TNM METHOD WHEN THESE COMPANIES WERE NOT COMPARABLE WITH THE ASSESSEE COMPANY AND THE DATA ITSELF INDICATED THAT SOME OF THOSE COMPANIES HAD INCURRED LOSSES THEMSELVES. 7B] THE LEARNED CIT(A) FAILED TO APPRECIATE THAT TH E COMPARABLE COMPANIES SELECTED BY THE TPO FOR FOLLOWING TNM METHOD ARE NOT AT ALL COMPARABLE WITH THE APPELLANT COMPANY FOR THE FOLLOWING REASONS I. THE COMPANIES FORMED PRIOR TO 2000 COULD NOT BE COMPARED WITH THE APPELLANT COMPANY. II. THE BUSINESS MODEL OF THE COMPANIES SELECTED WAS DIFFERENT FROM THE BUSINESS MODEL OF THE ASSESSEE COMPANY. III. THERE WAS NO SIMILARITY IN THE TURNOVER, AREAS OF BUSINESS ETC. BETWEEN THE COMPANIES SELECTED AND THE ASSESSEE COMPANY. 5 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. 7C] WHILE APPLYING THE TNM METHOD, THE LEARNED CIT( A) IGNORED THE COMPARABLE CASES CITED BY THE APPELLANT COMPANY. 7D] WHEN THE SAMPLE COMPANIES SELECTED BY THE TPO THEMSELVES INDICATED A GREAT VARIATION IN PROFIT MA RGIN AMONGST THEMSELVES, ADOPTING AN AVERAGE PROFIT MARGIN OF ALL SUCH COMPANIES TO DETERMINE THE ALP I N THE CASE OF THE APPELLANT COMPANY WAS SIMPLY NOT JUSTIFIED ON THE PART OF THE LEARNED CIT(A). 8] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, ASSUMIN G WITHOUT ADMITTING THAT THE TNM METHOD WAS APPLICABLE, IT IS SUBMITTED THAT THE NET PROFIT MAR GIN ADOPTED BY THE A.O. AND CONFIRMED BY CIT(A) IS VERY HIGH AND IS REQUIRED TO BE REDUCED. 9] THE LEARNED CIT(A) ERRED IN ESTIMATING THE COST / EXPENSES PERTAINING TO THE TRANSACTIONS WITH THE AE WRONGLY ON TURNOVER BASIS WITHOUT APPRECIATING THE FACTS OF THE CASE IN THIS REGARD CORRECTLY. 10] WITHOUT PREJUDICE TO THE ABOVE AND TO THE APPE LLANT'S CONTENTION IN THE EARLIER ASSESSMENT YEARS I.E. A.Y . 2002-03 & 2003-04 THAT THE COMPANIES SELECTED BY TH E A.O. FOR DETERMINING THE ALP AS PER TNM METHOD WERE NOT COMPARABLE WITH THE ASSESSEE COMPANY, IT IS SUBMITTED THAT IF AT ALL, THE TNMM METHOD WAS TO BE APPLIED IN THE CURRENT YEAR, THE SAME 10 COMPANIES AS SELECTED BY THE TPO IN A.Y. 2002-03 AND 2003-04 SHOULD HAVE BEEN ADOPTED AND ACCORDINGLY, THERE WAS NO REASON TO MAKE ANY ADDITION FOR THIS YEAR. 11] THE LEARNED CIT(A) ERRED TO APPRECIATE THE FAC T THAT IF TPO HAVE SELECTED 10 COMPARABLES SELECTED IN A.Y.2002-03 & A.Y.2003-04, THEN NET MARGIN FOR A.Y.2004-05 WOULD BE (-) 15.04%, RESULTING INTO NIL ADDITION ON ACCOUNT OF TRANSFER PRICING. 12] THE ASSESSEE SUBMITS THAT WITHOUT PREJUDICE TO ITS CONTENTION THAT THE ADDITION MADE U/S 92CA IS NOT WARRANTED AT ALL, IT IS SUBMITTED THAT THE LEARNED DRP OUGHT TO HAVE GRANTED THE BENEFIT OF 5% TO THE ASSE SSEE COMPANY AS PER THE PROVISO TO SECTION 92C(2). 2. THE DY. CIT(A) HAS ASSESSED THE TOTAL INCOME AT 2,32,74,190/- AS AGAINST THE RETURNED LOSS OF 4,15,40,730/- AFTER MAKING AN ADJUSTMENT OF 10,72,61,030/- ON THE BASIS OF 6 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. REPORT RECEIVED FROM THE ADDL. CIT, TPO, MUMBAI IN RESPECT OF INTERNATIONAL TRANSACTIONS CARRIED OUT WITH ASSOCIA TE ENTERPRISES AND ALSO SETTING OFF OF THE BROUGHT FORWARD LOSSES AND DEPRECIATION OF EARLIER YEARS. THE MATTER WAS CARR IED BEFORE THE FIRST APPELLATE AUTHORITY, WHEREIN THE VARIOUS CONT ENTIONS WERE RAISED ON BEHALF OF ASSESSEE AND HAVING CONSIDERED THE SAME, HAS DECIDED THE APPEAL AGAINST THE ASSESSEE BY OBSERVIN G AS UNDER: 15.2 I AM IN AGREEMENT WITH THE ORDERS OF MY PREDECESSORS AND RESPECTFULLY FOLLOWING THE SAID OR DERS FOR A.Y. 2002-03 & A.Y. 2003-04, I FIND THAT GROUND NO. 24 RAISED BY THE APPELLANT HAS NO MERITS AND THEREFORE , IS TREATED AS DISMISSED. 16. GROUND NO. 25 STATES THAT LEARNED A.O. / TPO ER RED IN NOT APPLYING THE PROVISION OF SECTION 92C(2) OF THE ACT REQUIRING THE APPLICATION OF 5% RANGE TO THE ARM'S LENGTH PRICE AS DETERMINED BY THEM AND THEREBY ERRED IN MA KING AN ADJUSTMENT OF RS.10,72,61,030/-. 16.1 SECTION 92C(2) STATES THAT IF MORE THAN ONE PR ICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ALP SHOULD BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDI NG FIVE PER CENT OF SUCH ARITHMETICAL MEAN. HOWEVER, IN THE PRESENT CASE, BY APPLYING THE TNM METHOD WHICH IS THE MOST APPROPRIATE METHOD IN THIS CASE FOR DETERMINING THE ALP, ONLY ONE PRICE IS BEING DETERMINED AS THE ALP AND H ENCE, THIS SECTION IS NOT APPLICABLE TO THE PRESENT CASE. FURTHER, THE DIFFERENCE BETWEEN THE ALP DETERMINED BY THE AS SESSEE AND THE A.O. IS MUCH HIGHER THAN 5%. IN FACT, EVEN AFTER GIVING THE RELIEF AS PER PARA 13.2 ABOVE, THE DIFFE RENCE IS STILL HIGHER THAN 5% AND HENCE, THERE IS NO MERIT IN THE SUBMISSION OF THE ASSESSEE. THUS, THIS GROUND OF AP PEAL IS DISMISSED. 17. GROUND NO. 26 OF APPEAL SAYS THAT APPELLANT BE ALLOWED TO ALTER, AMEND, ADD, DELETE, REPLACE OR SUPPLEMENT ANY OR MORE GROUNDS OF APPEAL AT THE TIME OF APPELLATE PRO CEEDINGS. NO SUCH OPTION HAS BEEN EXERCISED BY THE APPELLANT DURING THE APPELLATE PROCEEDINGS. THEREFORE, IT IS CLEAR THAT THIS GROUND OF APPEAL IS ACADEMIC IN NATURE AND NO DECIS ION IS REQUIRED IN RESPECT OF THIS GROUND OF APPEAL. IN T HE RESULT, THIS SHOULD BE TAKEN TO BE DISMISSED GROUND OF APPE AL. 7 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. 18. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED 3. IN APPEAL BEFORE US, THE LEARNED AUTHORIZED REPR ESENTATIVE HAS POINTED OUT THAT THE CIT(A) HAS DISMISSED THE A PPEAL OF THE ASSESSEE FOLLOWING HIS PREDECESSORS ORDER FOR A.Y. 2002-03 & 2003-04 AS DISCUSSED ABOVE AND HAS POINTED OUT THAT THIS ISSUE HAS BEEN DISCUSSED AND DECIDED BY ITAT, PUNE A BE NCH IN FAVOUR OF ASSESSEE IN HIS OWN CASE FOR A.Y. 2002-03 AND 2003-04 BY OBSERVING AS UNDER. 7. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFI CER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF TH E ASSESSEE. WE HAVE ALSO GONE THROUGH THE VARIOUS DE CISIONS CITED BEFORE US. WE FIND THE ASSESSEE IN THE INSTA NT CASE HAS RENDERED SOFTWARE DEVELOPMENT AND CONSULTANCY SERVICES TO ITS AE NAMELY NEDCOR BANK LTD. OF SOUTH AFRICA AND THE TOTAL VALUE OF SUCH SERVICES IS RS.13,25,65 ,974/-. THE ASSESSEE APPLIED CUP METHOD FOR DETERMINATION O F THE ALP ON THE GROUND THAT THE RATES CHARGED TO THE UNR ELATED PARTIES WERE COMPARABLE WITH THE RATES CHARGED TO T HE AE. ACCORDING TO THE ASSESSEE IT HAS CHARGED ALMOST SAM E RATE OR SLIGHTLY HIGHER RATE FOR MUCH SUPERIOR LEVEL OF EMPLOYEES TO UNRELATED PARTIES AS COMPARED TO THE RATE CHARGE D TO AE FOR JUNIOR LEVEL EMPLOYEES. WE FIND THE TPO/AO REJ ECTED THE CUP METHOD AND FOLLOWED TNMM METHOD ON THE GROUND THAT (A) FOR APPLICABILITY OF THE CUP METHOD THE 2 TRANSACTIONS SHOULD BE IDENTICAL IN ALL RESPECTS (B ) VOLUME OF WORK IS NOT COMPARABLE (C) IN THE CASE OF MICROSOFT THE ASSESSEE HAD ACCEPTED THE CONTRACT ON THE BASIS OF MARGINAL COSTING (D) CONTRACT WITH MICROSOFT IS NOT COMPARAB LE (E) THE ASSESSEE MIGHT NOT HAVE ACTUALLY CHARGED THE RATES TO MOST COMPARABLES. WHILE ADOPTING THE TNMM METHOD, THE T PO SELECTED 10 COMPANIES AS COMPARABLE AND TOOK THE AV ERAGE MARGIN OF THOSE COMPANIES AT 9.81% AS THE ALP AND DETERMINED THE ALP OF THE INTERNATIONAL TRANSACTION AT RS.26,35,72,979/-. 7.1 WE FIND IN APPEAL THE LD.CIT(A) BIFURCATED THE SERVICES RENDERED TO AE AND NON-AE AND DETERMINED THE INCOME FROM INTERNATIONAL TRACTION WITH AE AT RS.21,32,32, 502/-. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASS ESSEE THAT THE ASSESSEE IS AN INDEPENDENT COMPANY AND NOT DEPE NDANT ON AE FOR ITS BUSINESS, THAT OVER THE YEARS ITS BUS INESS WITH THE AE HAS BEEN REDUCED SUBSTANTIALLY AND THAT THE 8 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. ASSESSEE HAS BAGGED A CONTRACT FROM ABSA BANK, A MA JOR COMPETITOR OF THE AE. IT IS ALSO THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN SOFTWARE INDUSTRY NO 2 CONTRACTS ARE SIMILAR AND THE DIFFERENCE IN THE RAT ES OF THE EMPLOYEES TAKE CARE OF THE DIFFERENCE BETWEEN THE 2 CONTRACTS. FURTHER, ACCORDING TO THE LD. COUNSEL FO R THE ASSESSEE, THE ASSESSEE HAS DEVELOPED DIFFERENT SOFT WARE USING THE SAME LEVEL OF EMPLOYEES AND THE RATE CHAR GED IS ALSO SAME. THE LD. DEPARTMENTAL REPRESENTATIVE COU LD NOT CONTROVERT ANY OF THE ABOVE SUBMISSION OF THE LD. C OUNSEL FOR THE ASSESSEE. 7.2 FROM THE VARIOUS DETAILS FURNISHED BY THE ASSES SEE WE FIND FROM SOME OF THE INVOICES RAISED BY ZENSAR ON NEDCOR THAT THE RATE CHARGED BY ZENSAR IS LOWER THAN THE R ATE CHARGED BY THE ASSESSEE TO NEDCOR. WE FURTHER FIND FROM THE DETAILS FURNISHED BY THE ASSESSEE THAT AS AGAIN ST CHARGE OF US$8000 FOR THE MICROSOFT CONTRACT FOR AN ANALYS T, THE ASSESSEE HAS CHARGED US$10000, FOR A SIMILAR PERSON DEPUTED TO NEDCOR. THUS, THE ASSESSEE HAS CHARGED MORE RATE TO THE AE THAN TO A THIRD PARTY PLACED AT THE SAME REGION, I.E. AT SOUTH AFRICA. EVEN FOR OFF-SHORE SE RVICES WE FIND FROM THE DETAILS FURNISHED BY THE ASSESSEE THA T THE ASSESSEE HAS CHARGED US$5000 PER MAN MONTH TO NEDCO R WHICH WAS NEARLY 30% HIGHER THAN THE RATE CHARGED T O THIRD PARTIES. WE FIND FROM THE DETAILS FURNISHED BY THE ASSESSEE THAT THE RATE CHARGED TO NEDCOR BY OTHER SOUTH AFRI CAN SERVICE PROVIDERS FOR SIMILAR SERVICES WAS LESS THA N THE RATE CHARGED BY ASSESSEE TO NEDCOR. 7.3 SO FAR AS THE OBJECTION OF THE TPO THAT FOR APP LICABILITY OF THE CUP METHOD, 2 TRANSACTIONS SHOULD BE IDENTIC AL, WE ARE OF THE OPINION THAT THE ABOVE CONTENTION OF THE TPO IS NOT CORRECT UNDER THE FACTS AND CIRCUMSTANCES OF TH E PRESENT CASE. FROM THE VARIOUS DETAILS FURNISHED B Y THE ASSESSEE IN THE PAPER BOOK WE FIND IT HAS DEVELOPED DIFFERENT TYPES OF SOFTWARE FOR NEDCOR AND THE RATE IS CHARGE D AS PER QUALIFICATION/DESIGNATION OF THE EMPLOYEES. THUS, THE SAME INDICATES THAT THE RATE IS DEPENDENT ON THE QUALIFICATION/EXPERIENCE OF THE PERSON DEPUTED AND NOT ON THE BASIS OF SOFTWARE DEVELOPED OR VOLUME OF WORK. AS REGARDS THE CONTENTION OF THE TPO THAT THE ASSESSEE HAS ACCEPTED THE CONTRACT FROM MICROSOFT ON MARGINAL CO STING WE FIND THE SAME IS NOT CORRECT. FROM THE VARIOUS DET AILS FURNISHED BY THE ASSESSEE WE FIND THAT THE PERSONS WHO WERE EARLIER POSTED AT SOUTH AFRICA HAD COME TO IND IA AND FROM INDIA THEY HAVE AGAIN GONE TO SOUTH AFRICA FOR THE MICROSOFT PROJECT. AS REGARDS THE OBJECTION OF THE TPO THAT CONTRACT WITH MICROSOFT IS NOT COMPARABLE WE FIND F ORCE IN 9 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT AS FAR AS ASSESSEE IS CONCERNED THE CONTRACT WITH NEDC OR AND MICROSOFT WERE ON THE SAME FOOTING AND COMPARABLE. 7.4 WE FIND PROVISIONS OF SECTION 92C(3) READ AS UN DER : (3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR THE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT (A) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION [ OR SPECIFIED DOMESTIC TRANSACTION] HA S NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR (B) ANY INFORMATION AND DOCUMENT RELATING TO AN INTERNATIONAL TRANSACTION [OR SPECIFIED DOMESTIC TRANSACTION] HAVE NOT BEEN KEPT AND MAINTAINED BY T HE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS CONTAINE D IN SUB-SECTION (1) OF SECTION92D AND THE RULES MADE IN THIS BEHALF; OR (C) THE INFORMATION OR DATA USED IN COMPUTATION OF THE ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR (D) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH H E WAS REQUIRED TO FURNISH BY A NOTICE ISSUED UNDER SU B- SECTION (3) OF SECTION 92D. THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNAT IONAL TRANSACTION [ OR SPECIFIED DOMESTIC TRANSACTION] IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2), ON THE BA SIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILAB LE WITH HIM. PROVIDED THAT AN OPPORTUNITY SHALL BE GIVEN BY THE ASSESSING OFFICER BY SERVING A NOTICE CALLING UPON THE ASSESSEE TO SHOW CAUSE, ON A DATE AND TIME TO BE SPECIFIED IN THE NOTICE, WHY THE ARMS LENGTH PRICE SHOULD NOT BE SO DETERMINED ON THE BASIS OF MATERIA L OR INFORMATION OR DOCUMENT IN THE POSSESSION OF THE ASSESSING OFFICER. 7.5 FROM THE ABOVE, IT IS CLEAR THAT THE AO SHOULD SHOW THAT THE ALP DETERMINED BY THE ASSESSEE IS NOT JUST IFIED U/S.92C(1)/92C(2) AND THE METHOD ADOPTED BY HIM IS THE MOST APPROPRIATE METHOD. THE BURDEN IS ON THE 10 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. DEPARTMENT TO PROVE THAT THE METHOD ADOPTED BY THE AO/TPO GIVES MUCH MORE ACCURATE RESULTS THAN RESULT S FROM THE ASSESSEES METHOD. IN THIS CASE, WE FIND NO SUCH BURDEN IS DISCHARGED BY THE ASSESSEE. 7.6 WE FIND FROM THE REMAND REPORT OF THE TPO TO CI T(A) FOR A.Y. 2004-05, (A COPY OF WHICH WAS FILED DURING THE COURSE OF HEARING) THAT THE AVERAGE OF THE 10 COMPA NIES SELECTED FOR TNMM METHOD AT 9.81% FOR A.Y. 2002-03 HAS GONE DOWN TO (-) 9.29% FOR A.Y. 2004-05. THE RELEV ANT OBSERVATION OF THE TPO IS AS UNDER : TO THE COMMISSIONER OF INCOME TAX(APPEALS)-II, PUNE PMT BUILDING A WING, 3 RD FLOOR, A WING, SWARGATE, SHANKARSHETH ROAD, PUNE 411037. SIR, SUB : REMAND REPORT U/S.250(4) IN THE CASE OF NIHIL ENT TECHNOLOGIES PVT. LTD. A.Y. 2004-05 REG. REF : YOUR ORDER U/S.250(4) DATED 03-08-2007. 1. IN THE TRANSFER-PRICING ORDER PASSED U/S.92CA(3) FOR THE AFORESAID A.Y. 2004-05, AS WAS DONE IN THE TRANSFER-PRICING ORDERS FOR THE EARLIER A.YS. 2002- 03, 2003-04, THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD ADOPTED BY THE ASSESSEE WAS REJECTED AND INSTEAD THE TRANSACTIONAL NET MARGIN METHOD (TNMM) WAS APPLIED AS BEING THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES OF THE CASE. REASONS F OR SELECTING THE TNMM AS THE MOST APPROPRIATE METHOD HAVE BEEN DISCUSSED IN THE ORDERS. FOR APPLYING TH E TNMM THE TPOS HAD ADOPTED EXTERNAL COMPARABLES BEING OTHER COMPANIES IN THE SAME LINE OF BUSINESS ACTIVITY. 2. FOR THE A.Y. 2002-03, 10 COMPANIES WERE ADOPTED AS COMPARABLES. FOR THE FOLLOWING A.Y. 2003-04, THESE SAME 10 COMPANIES WERE ADOPTED AS COMPARABLES. THESE COMPANIES AND THEIR RESPECTIVE RELEVANT FINANCIAL INDICIA FOR THE RELEVANT FINANCIAL YEARS ARE : F.Y. 2001 - 02 F.Y. 2002 - 03 A.Y. 2002 - 03 A.Y. 2003 - 04 SALES OP/COST% SALES OP/COST% 1 ARNIT INFOTECH 2.37 9.72 1.44 17.07 11 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. LTD. 2 ASIA HR TECHNOLOGIES 4.65 0.87 4.65 0.65 3 CONTECH SOFTWARE LTD. 8.1 8.66 4.52 - 26.86 4 E STAR INFOTECH LTD. 17.14 29.55 22.9 26.31 5 ESCOSOFT TECHNOLOGIES 7.92 - 27.75 9.22 - 33.62 6 FOUR SOFT. LTD., 3.07 1.3 7.31 69.21 7 FOURTH GENERATION INFORMATION 17.73 24.17 8.65 0.12 8 LANCO GLOBAL SYSTEMS 6.09 18.25 2.78 17.8 9 ONLINE MEDIA SOLUTIONS 2.79 2.55 1.71 1.79 10 SARK SYSTEMS INDIA 22.55 30.75 3.94 22.74 AVERAGE 9.81% 9.52% 3. FOR THIS A.Y. 2004-05, THE SAME 10 COMPANIES FINANCIALS IN THE PROWESS DATABASE WERE INITIALLY ANALYSED, AND THE PICTURE EMERGED AS UNDER : F.Y. 2003 - 04 SALES OPERATING PROFIT/OPERATING COSTS % (OP/OC) 1 ARNIT INFOTECH LTD. 0 - 100 2 ASIA HR TECHNOLOGIES 3.15 7.14 3 CONTECH SOFTWARE LTD. 1.85 - 46.38 4 E STAR INFOTECH LTD. 17.82 13.44 5 ESCOSOFT TECHNOLOGIES (N.A) (N.A) 6 FOUR SOFT LTD. 13.98 55.16 7 FOURTH GENERATION INFORMATION 1.46 - 38.36 8 LANCO GLOBAL SYSTEMS 2.88 8.68 9 ONLINE MEDIA SOLUTIONS 1.20 - 7.69 10 SARK SYSTEMS INDIA* 2.91 24.3 AVERAGE -9.29% *: NOTE AVAILABLE/UPDATED IN THE PROWESS DATABASE A S AT THE TIME OF PASSING THE TP ORDER. THESE 10 COMPANIES RESPECTIVE PROFIT & LOSS A/CS A RE ATTACHED AS ANNEXURES TO THIS REPORT. PERUSAL OF THE FINANCIAL INDICIA FOR THE RELEVANT FINANCIAL YEAR, AND ALSO COMPARING WITH THE EARLIER YEARS PERFORMANCE, MADE IT WAS VERY OBVIOUS THAT 12 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. THESE COMPANIES WERE GOING THROUGH ABNORMAL ODDITIES. THESE ARE DISCUSSED INDIVIDUALLY HEREUND ER. ARNIT INFOTECH LTD. HAS NO INCOME/BUSINESS AT ALL F OR THE YEAR. ASIA HR TECHNOLOGIES, THOUGH IT REPORTED PROFIT FOR THE YEAR WITH OP/OC AT 7.14%; HOWEVER ITS PAST YEARS PROFIT WERE JUST SCRAPING THROUGH WITH OP/OC AT 0.65%, 0.87%. CONTECH SOFTWARE LTD. IS TOO TOO DEEP IN THE RED WI TH ITS OP/OC AT 46.38%. ITS BEEN IN THE RED SINCE TH E PRECEDING YEAR WITH OP/OC AT -26.86%. E STAR INFOTECH LTD. OP/OC IS 13.44%; YET IT HAS FA LLEN DRASTICALLY FROM THE LEVELS OF THE PRECEDING YEARS AT 26.31%, 29.55%. ESCOSOFT TECHNOLOGIES FINANCIALS ARE NOT AVAILABLE IN THE PROWESS DATABASE. PERUSAL OF ANOTHER DATABASE CAPITALINE SHOWS THAT THERE WAS NO REPORTED BUSIN ESS ACTIVITY FOR THE YEAR. IT HAD ALREADY BEEN TOO DEE P IN THE RED IN THE PRECEDING YEARS WITH OP/OC AT -33.62 %, -27.75%. FOUR SOFT LTD. OP/OC IS TOO HIGH AT 55.16%. THIS COMPANYS PERFORMANCE ARE HIGHLY SKEWED AS THE PRECEDING YEARS OP/OC ARE AT 69.21%, 1.3%. FOURTH GENERATION INFORMATION IS DEEP IN THE RED AT - 38.36%. PRECEDING YEARS OP/OC WERE AT 0.12%, 24.17%. THE PERFORMANCE HAS DOWNSLIDED VERY RAPIDLY. LANCO GLOBAL SYSTEMS OP/OC IS AT 8.68%. IT HAS REDUCED QUITE SIGNIFICANTLY FROM THE PRECEDING YEAR S OP/OC WHICH WERE AT 17.18%, 18.25%. ONLINE MEDIA SOLUTIONS OP/OC IS NEGATIVE AT -7.69%. ITS PRECEDING YEARS OP/OC WERE LOW AT 1.79%, 2.55%. SARK SYSTEMS INDIA OP/OC IS AT 24.36%. ITS PRECEDING YEARS OP/OC WERE AT 22.74%, 30.75%. ONLY THIS COMPANY SEEMS TO HAVE NOT BEEN THROUGH ABNORMAL BUSINESS CONDITIONS. BUT EVEN SO, ITS PROFITABILITY IS RATHER QUITE HIGH AS COMPARED TO T HE INDUSTRY AVERAGE. . . . . . . . . . . . . . . . 13 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. FROM THE ABOVE IT IS SEEN THAT MOST OF THE COMPARAB LES ADOPTED BY THE TPO/ASSESSING OFFICER HAVE INCURRED HUGE LOSSES IN SUBSEQUENT YEARS AND THEREFORE THERE IS S ERIOUS DOUBT ABOUT THEIR COMPARABILITY. 7.7 SO FAR AS THE ARGUMENT OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT LAW DOES NOT PERMIT PER MONTH RATE FOR COMPARABILITY UNDER CUP METHOD, WE ARE OF THE OPINI ON THAT THE LAW ALSO DOES NOT DENY SUCH A RATE. WE FIND IN THE CASE OF GENESYS INTERNATIONAL CORPORATION MUMBAI, WHICH IS A SUBSIDIARY OF GENESYS USA, IT SUPPLIED SOFTWARE TO THE AE AND ADOPTED CUP METHOD FOR DETERMINING ALP . . . . . . .. THE CONTENTION OF THE ASSESSEE WAS THAT THE RATES CHARG ED TO THE AE ARE COMPARABLE WITH THE RATES CHARGED TO THE THI RD PARTIES. ASSESSEE BENCH MARKED ITS TRANSACTIONS ON THE BASIS OF PER HOUR RATE RECEIVED FROM UNRELATED PART IES VIS-A- VIS THE RATES RECEIVED FROM THE AE. THE TPO FOLLOWE D THE TNMM METHOD. ASSESSEE CONTENDED THAT TPO HAS NOT M ADE OUT ANY CASE FOR DISREGARDING CUP METHOD. SECONDLY, ASSESSEE RELIED ON ITAT, PUNE DECISION IN THE CASE OF ACIT V. MSS INDIA PVT. LTD. WHEREIN IT IS HELD THAT TNMM IS A METHOD OF LAST RESORT AND IT IS TO BE APPLIED WHEN THE TRADITIONAL METHOD LIKE CUP CANNOT REASONABLY BE AP PLIED. ACCORDINGLY, THE TRIBUNAL IN THE CASE OF M/S. GENES YS INTERNATIONAL CORPORATION VS. DIT (SUPRA) CONFIRMED THE DELETION OF THE ADDITION MADE BY THE TPO AND FOLLOW ED THE CUP METHOD BY OBSERVING AS UNDER : 26. WE HAVE CONSIDERED SUBMISSIONS OF LD REPRESENTATIVES OF PARTIES AND ORDERS OF AUTHORITIE S BELOW. WE OBSERVE THAT ASSESSEE IN ITS TRANSFER PRI CING STUDY TO TPO STATED THAT IT HAS SELECTED CUP METHOD AS THE PRIMARY METHOD IN AL ANALYSIS. IT WAS ALSO STATED THAT THE RATE CHARGED TO ITS AES ARE SAME TO THE RATES CHARGED TO INDEPENDENT THIRD PARTY WHO OPERAT E IN THE SAME GEOGRAPHICAL REGION AVAILING SIMILAR SERVICES. WE OBSERVE THAT ASSESSEE FURNISHED DETAIL S OF THE SAID WORKING TO THE TPO. MOREOVER, LD CIT(A) HA S ALSO TABULATED IN PARA 7.8 AT PAGE 5 OF THE IMPUGNE D ORDER THE DETAILS OF COMPARABLE SERVICES AND RATES CHARGED BY THE ASSESSEE FROM ITS AES AND NON-AES IN THE RELEVANT FINANCIAL YEAR. THE DETAILS OF WHICH W E HAVE ALSO REPRODUCED HEREINABOVE IN PARA 20. WE OBSERVE THAT ASSESSEE CHARGED HIGHER RATE FROM ITS AES THAT WHAT IT CHARGED FROM THIRD PARTY. THE DEPARTME NT HAS ALSO NOT BROUGHT ANY EVIDENCE ON RECORD TO CONTROVERT THE SUBMISSIONS OF ASSESSEE THAT THE SERVICES RENDERED TO THE AES AND THIRD PARTIES ARE OF SIMILAR TYPE AND OPERATE IN THE SAME GEOGRAPHICAL 14 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. REGION. LD D.R. CONTENDED THAT WHILE WORKING OUT TH E ALP, THE GEOGRAPHIC MARKET IS ONE OF THE ECONOMIC CIRCUMSTANCES THAT HAS TO BE CONSIDERED WHILE CONSIDERING COMPARABILITY. IN THIS REGARD, LD D.R. ALSO PLACED THE DECISION OF ITAT IN THE CASE OF M/S. INT ERVET INDIA PVT LTD VS. ACIT AND ALSO THE DECISION OF ITA T IN THE CASE OF ACIT VS. DUFON LABORATORIES (SUPRA). WE AGREE WITH LD D.R. THAT THE GEOGRAPHICAL CONSIDERAT ION HAVE TO BE KEPT IN MIND WHILE CONSIDERING THE RATES AND TO DETERMINE THE ALP WHILE APPLYING CUP METHOD. WE OBSERVE THAT IN THE CASE BEFORE US, ASSESSEE HAS SUBMITTED BEFORE THE TPO AS WELL AS BEFORE THE AUTHORITIES BELOW THAT AES AS WELL AS THIRD PARTY A RE LOCATED IN THE SAME REGION AND AVAILING SIMILAR SER VICES AND THE DEPARTMENT HAS NOT BROUGHT ANY EVIDENCE ON RECORD TO CONTROVERT THE SAME CONTENTION OF ASSESSE E. THEREFORE, ABOVE CONTENTION OF LD D.R. SUPPORT THE CASE OF THE ASSESSEE. HENCE, LD D.R. HAS NO MERIT TO FIN D FAULT WITH THE ORDER OF LD CIT(A) THAT CUP METHOD A S ADOPTED BY THE ASSESSEE IS NOT JUSTIFIABLE. IN VIEW OF ABOVE FACTS, WE HOLD THAT LD CIT(A) HAS RIGHTLY HEL D THAT AO/TPO HAS NOT BROUGHT OUT A CASE FOR MAKING ANY ADJUSTMENT ON ACCOUNT OF ALP. THEREFORE, WE UPHOLD THE ORDER OF LD CIT(A) AND REJECT GROUNDS OF APPEAL TAKEN BY DEPARTMENT. 7.8 WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. MSS INDIA (P) LTD. VIDE ITA NO.393/PN/2007 ORDER DATED 29-05-2009 HAS HELD AS UNDER: 22. IN A SITUATION IN WHICH THE REVENUE AUTHORITIE S SEEK TO DISTURB THE METHOD OF DETERMINING THE ALP, AS ADOPTED BY THE ASSESSEE, IT IS NECESSARY FOR THEM T O DEMONSTRATE THAT, ON THE GIVEN FACTS OF THE CASE, A PARTICULAR METHOD WILL BE MORE APPROPRIATE VIS-A-VI S THE METHOD ADOPTED BY THE ASSESSEE, AND SUCH AN APPROPRIATENESS OF METHOD MUST BE SHOWN ON THE TOUCHSTONE OF THE FACTORS SET OUT IN R. 10C(2) ABOV E. THE ALP ADJUSTMENTS ARE COUNTER MEASURES TO ENSURE THAT THE PRICES AT WHICH INTERNATIONAL TRANSACTIONS ARE ENTERED INTO BY THE AES ARE NOT SO CONTRIVED AS TO ADVERSELY AFFECT THE DOMESTIC TAX BASE, AND, THEREF ORE, MOST APPROPRIATE METHOD SHOULD BE DECIDED IN THE LIGHT OF THIS BASIC GOVERNING PRINCIPLE ALONE. THE CONSIDERATION AS TO WHICH METHOD WILL BE MORE BENEFICIAL TO THE REVENUE AUTHORITIES IS CERTAINLY NOT GERMANE TO THE SELECTION OF MOST APPROPRIATE METHOD . WHILE THERE IS NO PARTICULAR ORDER OR PRIORITY OF 15 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. METHODS WHICH THE ASSESSEE MUST FOLLOW, AND NO METHOD CAN INVARIABLY BE CONSIDERED TO BE MORE RELIABLE THAN OTHERS, ON A CONCEPTUAL NOTE, TRANSACTIONAL PROFIT METHODS (I.E., TNMM AND PROFIT SPLIT METHOD) ARE TREATED AS METHODS OF LAST RESORT WHICH ARE PRESSED INTO SERVICE ONLY WHEN THE STANDA RD METHODS, WHICH ARE ALSO TERMED AS TRADITIONAL METHODS (I.E. CUP METHOD, RESALE PRICE METHOD AND COST PLUS METHOD) CANNOT BE REASONABLY APPLIED. THE OECD GUIDELINES ALSO RECOGNIZE THIS FACT AND STATE THAT TRANSACTIONAL PROFIT METHODS MIGHT BE USED TO 'APPROXIMATE ARMS LENGTH CONDITIONS WHEN TRADITIONA L METHODS CANNOT BE APPLIED ALONE OR EXCEPTIONALLY CANNOT BE APPLIED AT ALL. IN A SITUATION IN WHICH T HE ASSESSEE HAS FOLLOWED ONE OF THE STANDARD METHODS O F DETERMINING ALP, SUCH A METHOD CANNOT BE DISCARDED IN PREFERENCE OVER TRANSACTIONAL PROFIT METHODS UNL ESS THE REVENUE AUTHORITIES ARE ABLE TO DEMONSTRATE THE FALLACIES IN APPLICATION OF STANDARD METHODS. IN AN Y EVENT, ANY PREFERENCE OF ONE METHOD OVER THE OTHER METHOD MUST BE JUSTIFIED BY THE TPO ON THE BASIS OF COGENT MATERIAL AND SOUND REASONING. ONCE IT IS NOT IN DISPUTE THAT THE BILLING BY THE A E FOR RAW MATERIALS SUPPLIED TO THE ASSESSEE IS DONE ON T HE BASIS OF THE LONDON METAL EXCHANGE PRICES PLUS CERTAIN MARK UP, THERE IS NO FURTHER NEED OF THE INTERNAL COMPARABLES SINCE LONDON METAL EXCHANGE, BEING AN INDEPENDENT ORGANIZATION ENTERING INTO TRANSPARENT AND ARMS LENGTH TRANSACTIONS WITH A NUMBER OF OTHER ORGANIZATIONS, PROVIDES THE MOST RELIABLE PRICES AT WHICH UNCONTROLLED COMPARABLE TRANSACTIONS ARE ENTERED INTO. THE COMPARABLE PRICE S OF UNCONTROLLED TRANSACTIONS ARE AVAILABLE IN THE PUBL IC DOMAIN AND IN FACT THESE COMPARABLE PRICES ARE THE PRICES WHICH ARE THE BASIS OF PRICES AT WHICH THE INTERNATIONAL TRANSACTIONS HAVE BEEN ENTERED INTO W ITH THE AES. THE ONLY VARIATION, WHICH WAS BETWEEN 2 PE R CENT TO 6 PER CENT IN THESE PRICES, IS THE MARK UP FACTOR AND THAT MARK UP IS ATTRIBUTED TO THE COSTS OF SIGNIFICANT SERVICE IN PROCURING THE RAW MATERIAL AND FREIGHT AND INSURANCE WHICH IS PAID BY THE AE. TH ERE IS NO DISPUTE ABOUT THIS POSITION AS EVIDENT FROM T HE OBSERVATIONS MADE BY THE TPO HIMSELF. IT IS NOT EVE N THE CASE OF THE REVENUE AUTHORITIES THAT THE CONSIDERATION PAID BY WAY OF THIS MARK UP IS EXCESS IVE OR UNREASONABLE VIS-A-VIS, TO USE THE WORDS OF THE TPO, SIGNIFICANT SERVICES PROVIDED IN PROCURING THE RAW MATERIAL AND FREIGHT AND INSURANCE COSTS. ONE OF THE 16 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. OBJECTION TAKEN BY THE TPO IS THAT THE SERVICE CHAR GES CHARGED BY THE AE FROM OTHER UNCONTROLLED TRANSACTIONS ARE NOT AVAILABLE BUT THEN IT IS NOBOD YS CASE THAT THE AE IS ENGAGED IN PROVIDING SIMILAR SERVICES TO UNRELATED ENTERPRISES. THE EXTERNAL CUP , BY WAY OF LONDON METAL EXCHANGE PRICES, IS THE BASIS O F DETERMINATION OF TRANSACTION PRICES AND ALL THAT TH E TPO IS TO SEE IS WHETHER THE VARIATION IN SUCH PRIC ES VIS-A-VIS THE PRICES AT WHICH THE ASSESSEE HAS ENTE RED INTO TRANSACTIONS WITH THE AE IS REASONABLY EXPLAIN ED. AS A MATTER OF FACT, R. 10B(1)(A)(II) CATEGORICALLY PROVIDES THAT PRICE CHARGED FOR THE PROPERTY TRANSF ERRED IN COMPARABLE UNCONTROLLED TRANSACTION, WHICH LONDO N METAL EXCHANGE PRICE INHERENTLY IS, TO BE 'ADJUSTED ON ACCOUNT OF DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTIONS AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISE S ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET'. WH AT IT TRANSLATES INTO, ON THE FACTS OF THE PRESENT CASE, IS THAT THE ADJUSTMENTS ON ACCOUNT OF SERVICES RENDERED BY THE AE AND THE INSURANCE AND FREIGHT COSTS ARE REQUIRED TO BE MADE TO THE LME PRICES. AN ADJUSTMEN T OF 2 PER CENT TO 6 PER CENT, FOR SUCH FACTORS, CANN OT BE SAID TO BE UNJUSTIFIED. THE TPO HAS MADE NO EFFORTS TO DEMONSTRATE UNREASONABLENESS OF THIS MARK UP. IN AN Y EVENT, IN VIEW OF A SERIES OF JUDGMENTS OF THIS TRI BUNAL, THE BENEFIT OF THE + 5 PER CENT RANGE IS AVAILABLE TO THE TAXPAYERS IN ALL THE CASES AND THE TP ADJUSTMENT SHOULD BE RESTRICTED ONLY ON THE NET AMOUNT REMAINI NG AFTER ALLOWING THE BENEFIT OF 5 PER CENT RANGE PROVISIONS. THEREFORE, EVEN IF WE WERE TO ASSUME TH AT, WHAT THE TPO HIMSELF TERMS AS SIGNIFICANT SERVICES PROVIDED IN PROCURING THE RAW MATERIAL WERE WORTH NOTHINGAN UNREALISTIC ASSUMPTION ANYWAY, AT BEST AN ADJUSTMENT COULD BE MADE IN THE CASES OF UNCONTROLLED TRANSACTION PRICE, I.E., LME PRICE, WA S FOUND TO BE LESS THAN 5 PER CENT OF THE INTERNATION AL TRANSACTION PRICE MINUS FREIGHT AND INSURANCE COSTS . WHEN ADMITTEDLY THE MAXIMUM MARK UP IS 6 PER CENT AND THE FREIGHT AND INSURANCE COSTS FAR IN EXCESS O F 1 PER CENT, OBVIOUSLY NO SUCH ADJUSTMENTS ARE REALLY POSSIBLE. WE HAVE NOTED THAT THE TPO, IN HIS REMAND REPORT, OBSERVED THAT 'WHILE DETERMINING THE PRICES , THE AE CONSIDERS ITS OWN PRICES BUT DOES NOT CONSID ER THE RETURN THAT THE ASSESSEE SHOULD HAVE EARNED', B UT THEN WE ARE UNABLE TO UNDERSTAND RELEVANCE OF THIS OBSERVATION IN DECIDING THE ALP. AS LONG AS THE ASSESSEE HAS ENTERED INTO RAW MATERIAL PURCHASE 17 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. TRANSACTION WITH THE AE AT AN ALP, IT IS OF NO CONSEQUENCE WHETHER OR NOT THE ASSESSEE MAKES SUFFICIENT PROFITS ON MANUFACTURING PRODUCTS FROM S UCH RAW MATERIAL. THERE ARE A NUMBER OF FACTORS GOVERNI NG THE PROFITS THAT THE ASSESSEE EARNS IN ITS BUSINESS AND MERELY BECAUSE THE ASSESSEES BUSINESS RESULTS ARE NOT SHOWING PROFITS, OR SHOWING LESSER PROFITS THAN INDUSTRY AVERAGES, SUCH PROFITS PER SE CANNOT LEAD TO THE CONCLUSION THAT PURCHASE OF RAW MATERIAL IS NOT AT AN ALP. ON THE GIVEN FACTS, PARTICULARLY WHEN THE C UPS OF THE RAW MATERIALS ARE READILY AVAILABLE, IT IS N OT AT ALL NECESSARY TO JUMP TO TNMM. THE ONLY FACTOR WHICH HA S PREVAILED ON THE TPO IN REJECTING THE METHOD ADOPTE D, OR CANVASSED, BY THE ASSESSEE IS THE FACT THAT THE ASSESSEE HAS INCURRED LOSS IN THE RELEVANT PREVIOUS YEAR, BUT, IN OUR HUMBLE UNDERSTANDING, SUCH A CONSIDERATION IS WHOLLY IRRELEVANT. THE TNMM, ON A CONCEPTUAL NOTE, IS DESCRIBED AS ONE OF THE METHOD OF LAST RESORT AND IS PUT INTO SERVICE ONLY WHEN NO STANDARD OR TRADITIONAL METHOD OF ALP DETERMINATION IS APPROPRIATE FOR DETERMINATION OF ALP. 7.9 WE FIND THE MUMBAI BENCH OF THE TRIBUNAL IN TH E CASE OF ACIT VS. VISTAAR SYSTEMS PVT. LTD., VIDE IT A NO.3065/MUM/2008 AND OTHERS ORDER DATED 25-05-2012 HAS HELD AS UNDER: 14. THE ASSESSEE IS A SUBSIDIARY OF A U.S. COMPAN Y AND HAS PROVIDED SOFTWARE DEVELOPMENT SERVICES. AS PER CLAUSE-4 OF THE AGREEMENT, WHICH IS PLACED AT PAPER BOOK ANNEXURE-A, IT IS STATED THAT THE BILLIN G SHALL BE LINKED TO COMPARABLE MARKET RATES IN INDIA FOR SIMILAR SERVICES. THE ASSESSEE HAS, DUE TO NON- AVAILABILITY OF PERSONNEL, WITH A CERTAIN SET OF SK ILLS THAT WERE REQUIRED FOR DEVELOPING CERTAIN SOFTWARE, HAD OUTSOURCED THIS JOB TO L&T SOFTWARE, TCS, ETC. THES E COMPANIES HAVE CHARGED THE ASSESSEE @ ` 1,250, PER HOUR AND ` 625 PER HOUR FOR THE TOTAL NUMBER OF MAN HOURS SPENT BY THEIR PERSONNEL IN PERFORMING THE TA SK OUTSOURCED TO THEM. 15. THE RATES CHARGED BY THEM TO AE, ARE COMPARABL E TO THE RATE CHARGED BY THE L&T SOFTWARE AND TCS TO THE ASSESSEE FOR THE VERY SAME JOB WORK. THE UNDISPUTED FACTS ARE THAT L&T SOFTWARE AND TCS ARE GIANTS IN THE SOFTWARE INDUSTRIES AND ARE COMPANIES WITH HIGH REPUTATION. THE AMOUNTS PAID TO THEM, REPRESENT FAIR MARKET VALUE. WHEN THE ASSESSEE ADOP TS THESE RATES AS COMPARABLE UNDER CUP METHOD NO FAULT 18 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. CAN BE FOUND. IN VIEW OF THE ABOVE DISCUSSION, WE UPHOLD THE FOLLOWING FINDINGS OF THE FIRST APPELLAT E AUTHORITY. I) THE RATES CHARGED BY THE ASSESSEE COMPANY ARE IDENTICAL TO THE RATES CHARGED BY THE THIRD PARTIES IN THE SAME LINE OF BUSINESS FOR THE SAME JOB AND THE ASSESSEE HAS PROVED THE SAME WITH EVIDENCE. II) THE TPO HAS NOT BROUGHT OUT ANY MATERIAL ON REC ORD TO PROVE THAT THE PER HOUR RATE CHARGED BY THE ASSE SSEE COMPANY IS LOWER THAN THAT CHARGED BY THE THIRD PARTIES IN THE SAME LINE OF BUSINESS; III) NO REASON IS GIVEN FOR REJECTING THE CUP METHO D; IV) OECD GUIDELINES STATE THAT CUP METHOD IS MOST DIRECT AND RELIABLE METHOD WHEN COMPARABLE UNCONTROLLED TRANSACTIONS ARE AVAILABLE; V) THE ASSESSING OFFICER HAS NOT GIVEN ANY REASON T HAT TNM IS THE BEST METHOD AND THE CUP METHOD IS NOT APPROPRIATE; VI) THE TPO HAS NOT DEALT WITH THE ARGUMENTS OF THE ASSESSEE THAT THE ASSESSEE IS NOT A NORMAL SOFTWARE SERVICE COMPANY AND IS IN FACT ENGAGED IN B.I/ERP PROJECT DEVELOPMENT WHICH IS A KIND OF R&D ACTIVITY FOR WHICH THE REVENUE WOULD ARISE ONLY AFTER DEVELOPMENT OF THE PROJECT FULLY; VII) THE TPO IGNORED THE AGREEMENT OF THE ASSESSEE WITH THE AE THAT IT HAS BEEN GIVEN ABSOLUTE RIGHT F OR EXPLOITATION OF THE PROJECT IN THE INDIAN REGION AN D NEARBY TERRITORY AFTER ITS DEVELOPMENT; 16. THUS, WE UPHOLD THE AFORESAID FINDINGS OF THE COMMISSIONER (APPEALS) AND DISMISS THE GROUND OF TH E REVENUE. 7.10 FROM THE VARIOUS DETAILS FURNISHED BY THE ASSE SSEE IN THE PAPER BOOK WE FIND IN THE INSTANT CASE THE RATE S CHARGED BY THE ASSESSEE TO THE AE ARE COMPARABLE WITH THE R ATES CHARGED BY THE ASSESSEE TO MICROSOFT AND THE RATES CHARGED BY ZENSAR TO NEDCOR TECHNOLOGIES IN THE EARLIER YEA RS. WHEN THESE DIRECT EVIDENCES ARE AVAILABLE, THEREFOR E, THE QUESTION OF APPLYING TNMM IN OUR OPINION DOES NOT A RISE. THE VARIOUS DECISIONS RELIED ON BY THE LD. DEPARTME NTAL REPRESENTATIVE ARE NOT APPLICABLE TO THE FACTS OF T HE PRESENT CASE. IN THIS VIEW OF THE MATTER AND IN THE LIGHT OF OUR 19 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. DISCUSSION IN THE PRECEDING PARAGRAPHS AND FOLLOWIN G THE VARIOUS DECISIONS CITED (SUPRA) WE ARE OF THE CONSI DERED OPINION THAT THE CUP METHOD FOLLOWED BY THE ASSESSE E IN THE INSTANT CASE IS THE MOST APPROPRIATE METHOD. W E, THEREFORE HOLD THAT THE LD.CIT(A) IS NOT JUSTIFIED IN REJECTING THE CUP METHOD FOLLOWED BY THE ASSESSEE FOR DETERMI NING THE ALP. WE ACCORDINGLY SET-ASIDE THE ORDER OF LD. CIT(A) AND DIRECT THE AO TO ACCEPT THE ALP DETERMINED BY T HE ASSESSEE IN ITS TP STUDY REPORT AND DELETE THE ADDI TION. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE ARE ACCORDI NGLY ALLOWED. 4. FACTS BEING SIMILAR, SO FOLLOWING THE SAME REASO NING, WE ARE OF THE VIEW THAT IN THE INSTANT CASE THE RATES CHAR GED BY THE ASSESSEE TO THE AE ARE COMPARABLE WITH THE RATES CH ARGED BY THE ASSESSEE TO MICROSOFT AND THE RATES CHARGED BY ZENS AR TO NEDCOR TECHNOLOGIES IN THE EARLIER YEARS. WHEN THESE DIRE CT EVIDENCES ARE AVAILABLE, THEREFORE, THE QUESTION OF APPLYING TNMM WAS NOT JUSTIFIED. NOTHING CONTRARY WAS BROUGHT TO OUR KNOW LEDGE ON BEHALF OF REVENUE. FACTS BEING SIMILAR TO A.Y. 200 2-03 AND 2003-04, FOLLOWING THE SAME REASONING WE HOLD THAT THE CUP METHOD FOLLOWED BY THE ASSESSEE IN THE INSTANT CASE IS THE MOST APPROPRIATE METHOD. WE ACCORDINGLY SET-ASIDE THE O RDER OF CIT(A) AND DIRECT THE AO TO ACCEPT THE ALP DETERMINED BY T HE ASSESSEE IN ITS TP STUDY REPORT BY FOLLOWING CUP METHOD. AC CORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITIO N MADE BY HIM U/S.92C OF THE ACT. 5. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS A LLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE DAY 30 TH OF JUNE, 2014. SD/- SD/- (G.S. PANNU) (SHAILENDRA KUMAR YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED: 30 TH JUNE, 2014 GCVSR 20 ITA NO.1248/PN/12 NIHILENT TECHNOLOGIES PVT. LTD. COPY TO:- 1) ASSESSEE 2) DEPARTMENT 3) THE CIT(A)-I, PUNE 4) THE CIT-I, PUNE 5) THE DR, A BENCH, I.T.A.T., PUNE. 6) GUARD FILE BY ORDER //TRUE COPY// SENIOR PRIVATE SECRETARY, I.T.A.T., PUNE
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