Appeal Details
Counselvise Citation
[2012] 140 COUNSELVISE.COM (IT) 66497 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
1 year(s) 11 month(s) 27 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
26-11-2012
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
Not Allotted
Assessment Year
2004-2005
Appeal Filed On
29-11-2010
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI CHANDRA POOJARI, MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER I.T.A. NO. 1494/HYD/2010 ASSESSMENT YEAR 2004-05 M/S. BRIGADE GLOBAL SERVICES PVT. LTD., HYDERABAD PAN: AAACW4748A VS. THE INCOME TAX OFFICER WARD-1(1) HYDERABAD APPELLANT RESPONDENT I.T.A. NO. 988/HYD/2011 ASSESSMENT YEAR 2005-06 M/S. BRIGADE GLOBAL SERVICES PVT. LTD., HYDERABAD PAN: AAACW4748A VS. THE INCOME TAX OFFICER WARD-1(2) HYDERABAD APPELLANT RESPONDENT APPELLANT BY: SRI I. RAMA RAO RESPONDENT BY: SRI NARAHARI BISWAL DATE OF HEARING: 11.10.2012 DATE OF PRONOUNCEMENT: 26.11.2012 O R D E R PER CHANDRA POOJARI, AM: THE ABOVE TWO APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST DIFFERENT ORDERS OF THE CIT(A)-III, HYDERAB AD ASSESSMENT YEARS 2004-05 AND 2005-06. AS CERTAIN ISSUES INVOL VED IN THESE TWO APPEALS ARE COMMON IN NATURE, THE APPEALS ARE C LUBBED AND HEARD TOGETHER AND ARE BEING DISPOSED OF BY THE COM MON ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST WE WILL TAKE UP ITA NO. 1494/HYD/2010 . 3. BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN PROVIDING BACK OFFICE PROCESSING SERVICE S. FOR THE 2 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ A.Y. 2004-05, IT HAS FILED RETURN OF INCOME ON 27.1 0.2004 SHOWING INCOME OF RS. 1,470/- AFTER CLAIMING DEDUCT ION OF RS. 13,30,153 U/S. 10A OF THE ACT. DURING SCRUTINY OF THIS RETURN, THE ASSESSING OFFICER NOTICED THAT DURING THE PREVI OUS YEAR, THE ASSESSEE HAS GROSS RECEIPTS FROM EXPORTS SHOWN AT R S. 13,05,32,325, SHOWN UNDER BPO SERVICES, AND FOREIGN EXCHANGE GAIN OF RS. 11,46,821 AND INTEREST INCOME OF RS. 1, 470 SHOWN UNDER OTHER SOURCES. HE FURTHER NOTICED THAT IN THE PROFIT & LOSS ACCOUNT, THE ASSESSEE HAS CLAIMED AN AMOUNT OF RS. 1,00,71,383 TOWARDS COMMUNICATION EXPENSES, WHICH W AS ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE A BROAD, SHOWN UNDER BPO SERVICES. REFERRING TO THE DEFINITION OF 'EXPORT TURNOVER' AS GIVEN IN CLAUSE (IV) TO EXPLANATION-2 TO SECTION 10A OF THE ACT, WHICH SAYS CONSIDERATION IN RESPECT OF EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE RECEIVED BY AN ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE, BUT DOES NOT INCLU DE FREIGHT, TELECOMMUNICATION CHARGES, INSURANCE ATTRIBUTABLE T O DELIVERY OF SUCH ARTICLE OUTSIDE INDIA AND EXPENSES IF ANY, INC URRED IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OU TSIDE INDIA, HE HELD THAT SUCH COMMUNICATION EXPENSES, WHICH WAS INCURRED BY THE ASSESSEE FOR DELIVERY OF THE SOFTWARE UNDER BPO SERVICES ABROAD, HAS TO BE EXCLUDED FOR COMPUTING THE 'EXPOR T TURNOVER' FOR THE PURPOSE OF COMPUTING DEDUCTION U/S. 10A. TH EREFORE, AFTER EXCLUDING THE SAID AMOUNT OF RS. 1,00,71,383 TOWARDS TELECOMMUNICATION CHARGES, FROM THE FIGURE OF RS. 1 3,16, 79,146 AS EXPORT TURNOVER CONSIDERED BY THE ASSESSEE, HE C OMPUTED THE 'ELIGIBLE EXPORT TURNOVER' AT RS. 12, 16,07,763, AN D ACCORDINGLY, COMPUTED THE ALLOWABLE DEDUCTION U/S. 10A AT RS. 12 ,28,417. HE, THUS, DISALLOWED AN AMOUNT OF RS. 1,01,736 TOWA RDS EXCESS DEDUCTION CLAIMED U/S. 10A OF THE ACT. 3 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ 4. THE ASSESSING OFFICER FURTHER NOTICED THAT DURING T HE PREVIOUS YEAR THE ASSESSEE HAS ENTERED INTO INTERNA TIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE (AE IN SHORT) M/S. WEBHELP INC, USA, VALUE OF WHICH WAS SHOWN AT RS. 13,05,32,325/-. FOR DETERMINING THE ARM'S LENGTH PR ICE (ALP) OF SUCH TRANSACTIONS, DURING THE ASSESSMENT PROCEEDING S, THE ASSESSING OFFICER HAS MADE A REFERENCE TO THE ADDL. CIT, (TRANSFER PRICING) (TPO IN SHORT) U/S. 92CA(1) OF T HE ACT ON 5.9.2006. IN RESPONSE TO THE SAME, AFTER MAKING NEC ESSARY VERIFICATION AND ENQUIRIES IN THE MATTER, THE TPO V IDE HIS ORDER DATED 22.12.2006 PASSED U/S. 92CA(3) OF THE ACT, DE TERMINED THE ALP OF SUCH INTERNATIONAL TRANSACTIONS AT RS. 1 7,73,86,758 THEREBY SUGGESTING FOR ADJUSTMENT OF RS. 4,68,54,43 3 U/S. 92CA OF THE ACT. LATER, IN CONFORMITY WITH SUCH ORDER P ASSED BY THE TPO THE ASSESSING OFFICER MADE AN ADDITION OF RS. 4 ,68,54,433 TO THE INCOME OF THE ASSESSEE, TOWARDS ADJUSTMENT T O THE ALP OF SUCH INTERNATIONAL TRANSACTIONS U/S. 92CA OF THE AC T. WITH BOTH THE ABOVE ADDITIONS AND TAKING INTO ACCOUNT TH E INCOME FROM OTHER SOURCES SHOWN SEPARATELY AT RS. 1,470 TH E ASSESSING OFFICER COMPUTED THE ASSESSMENT DETERMINING TOTAL I NCOME AT RS. 4,69,57,639 VIDE HIS ORDER DATED 29.12.2006 PAS SED U/S. 143(3) OF THE ACT. 5. BEFORE THE CIT(A) THE ASSESSEE CHALLENGED REDUCTION OF COMMUNICATION EXPENSES FROM THE EXPORT TURNOVER. O N THIS ISSUE THE CIT(A) OBSERVED THAT IN VIEW OF CLAUSE (I V) TO EXPLANATION-2 TO SECTION 10A OF THE INCOME-TAX ACT, 1961 COMMUNICATION EXPENSES ARE TO BE REDUCED FROM ELIGI BLE EXPORT TURNOVER FOR THE PURPOSE OF DEDUCTION U/S. 10A OF T HE ACT. ACCORDINGLY, HE CONFIRMED THE REDUCTION OF COMMUNIC ATION EXPENSES FROM ELIGIBLE EXPORT TURNOVER. HOWEVER, H E HAS GIVEN A FINDING THAT THE TELECOMMUNICATION EXPENSES WHAT AR E DEDUCTED 4 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ FROM EXPORT TURNOVER THE SAME TO BE DEDUCTED FROM T OTAL TURNOVER ALSO. 6. REGARDING ADJUSTMENT UNDER ALP OF THE INTERNATIONAL TRANSACTIONS U/S. 92CA OF THE ACT, ASSESSEE CHALLEN GED SELECTION OF COMPARABLES. THE ASSESSEE SHOWN THE VALUE OF TH E INTERNATIONAL TRANSACTIONS AT RS. 13,05,32,325 IN A DDITION TO AN AMOUNT OF RS. 19,16,518 TOWARDS RECHARGES. THE ASS ESSEE FOLLOWED TNM METHOD FOR THE PURPOSE OF ANALYSING TH E TRANSFER PRICING AS MOST APPROPRIATE METHOD. FOR COMPARABIL ITY ANALYSIS THE ASSESSEE HAS USED DATA BELONGING TO THE PERIOD APRIL 2001 TO 16 TH FEBRUARY, 2004 AND HAS SELECTED 17 COMPARABLES FOR A.Y. 2004-05. HOWEVER, THE TPO CONSIDERING THE PROVISIO NS OF RULE 10B(4) OF THE INCOME-TAX RULES, 1962, FURTHER CONSI DERING THE CONTEMPORANEOUS DATA I.E., THE DATA BELONGING TO TH E FINANCIAL YEAR 2003-04, HAS EXCLUDED THE COMPANIES FROM THE L IST OF COMPARABLES ORIGINALLY SELECTED AND FURNISHED THE C OMPARATIVE RESULTS IN RESPECT OF 8 COMPANIES. HOWEVER, OUT OF THE 8 COMPANIES IN RESPECT OF WHICH THE ASSESSEE FURNISHE D THE FINANCIAL DATA, TAKING INTO ACCOUNT THE FINANCIAL R ESULTS FOR THE FINANCIAL YEAR 2003-04, THE TPO SELECTED TWO COMPAN IES I.E., NUCLEUS NETSOFT & GIS INDIA LTD. AND TRICOM INDIA L TD. AND REJECTED THE OTHER SIX COMPANIES. FURTHER HE SELEC TED THE FOLLOWING SIX COMPANIES FOR THE PURPOSE OF COMPARAB LE ANALYSIS FOR THE A.Y. 2004-05: A) FORTUNE INFOTECH LTD. B) VISHAL INFORMATION TECHNOLOGIES LTD. C) WIPRO BPO SOLUTIONS LTD. D) SPANCO TELESYSTEMS (SEGMENTAL) E) MERCURY OUTSOURCING F) ULTRAMARINE & PIGMENTS LTD. (SEGMENTAL) 7. THUS, THE TPO FINALLY SELECTED 8 COMPARABLES FOR DETERMINING ALP OF THE INTERNATIONAL TRANSACTIONS F OR A.Y. 2004- 5 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ 05. TAKING INTO ACCOUNT THE PLI FOR THE FINANCIAL YEAR 2003-04 IN RESPECT OF THE ABOVE 8 COMPARABLES, HE ARRIVED A T THE AVERAGE PROFIT MARGIN I.E., ARITHMETIC MEAN PLI AT 36.82% A FTER ALLOWING DEDUCTION OF 2% TOWARDS WORKING CAPITAL ADJUSTMENT, HE ARRIVED AT THE ADJUSTED ARITHMETIC MEAN PLI AT 34.82%. FUR THER, THOUGH THE ASSESSEE FURNISHED THE OPERATING EXPENSE S AT RS. 11,74,52,779, THE ASSESSING OFFICER CONSIDERED THE OPERATING COST AT RS. 13,15,73,029. AFTER APPLYING THE ABOVE ADJUSTED ARMS-LENGTH MARGIN OF 34.82% TO SUCH OPERATIONAL CO ST THE TPO COMPUTED THE ALP OF THE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AES) DURING THE A.Y. 2004-05 AT RS. 17,73,86,758. SINCE THE ASSESS EE HAS SHOWN SUCH PRICE AT RS. 13,05,32,325, HE ADDED RS. 4,68,54,433 TOWARDS ADJUSTMENT U/S. 92CA OF THE ACT . HOWEVER, HE HAS ACCEPTED THE VALUE OF TRANSACTIONS SHOWN UNDER RECHARGES AT RS. 19,16,518. AGAINST THE COMP UTATION OF ALP, THE ASSESSEE RAISED THE FOLLOWING GROUNDS OF A PPEAL: 1.0 THE ORDERS PASSED BY THE LOWER AUTHORITIES, INSOFAR AS ISSUES DECIDED AGAINST THE ASSESSEE ARE AGAINST THE LAW, FACTS, CIRCUMSTANCES, NATURAL JUSTICE, EQUITY AND ALL OTHER KNOWN PRINCIPLES OF LAW. 1.1 THE ORDER PASSED BY THE LEARNED TPO UNDER THE PROVISIONS OF SECTION 92CA OF IT ACT IS BAD IN LAW AND THE LEARNED AO ERRED IN RELYING ON SUCH ORDER. 1.2 THE ORDER OF THE LEARNED CIT(A) ON THE ISSUE OF 'TRANSFER PRICING' TO THE EXTENT DETERMINED AGAINST THE APPELLANT, IS IN ERROR AND THE FINDINGS ARE IN VIOLATION OF PROVISIONS OF SECTION 92C OF IT ACT. 1.3 THAT THE AUTHORITIES BELOW FAILED TO APPRECIATE THE ENTIRE ISSUE IN THE RIGHT PERSPECTIVE, INSTEAD, THE FINDINGS ARE TOTALLY AGAINST THE FACTS ON RECORD. 6 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ 1.4 THE RELIANCE PLACED BY THE LEARNED ASSESSING OFFICER ON THE CONTEMPORANEOUS DATA OF THE FINANCIAL YEAR 2003-04 WAS NOT MADE AVAILABLE/ ACCESSIBLE, THEREFORE, THE ORDERS PASSED ARE ONE SIDED AND ARE CONTRARY TO THE PRINCIPLES OF NATURAL JUSTICE. 1.5 BOTH THE AO AND AS WELL AS CIT(A) ERRED IN REJECTING THE LOSS MAKING COMPARABLES IN VIOLATION OF OECD GUIDELINES, INSTEAD, SUMMARILY AND WITHOUT ANY BASIS CONCLUDED THAT THE COMPARABLES SHALL BE OF THOSE COMPANIES WHICH HAVE SHOWN PROFIT. 1.6 THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER WHO REJECTED CERTAIN COMPANIES RELIED BY THE ASSESSEE AS COMPARABLES, ON THE ALLEGED GROUND OF FUNCTIONAL DIFFERENCES, WHICH FINDINGS ARE NOT SUPPORTED BY COGENT REASONS ACCEPTABLE UNDER LAW. 1.7 THE LEARNED CIT(A) IS NOT CORRECT IN APPROVING THE COMPARABLES SELECTED BY THE AO/TPO, SINCE UNDER THE FACTS, CIRCUMSTANCES, THE ALLEGED COMPARABLES SELECTED DO NOT FALL UNDER CATEGORY OF 'COMPARABLES. 1.8 THE LEARNED CIT(A) FAILED TO READ THE SECOND PROVISO TO SECTION 92C(2) OF THE IT ACT IN THE RIGHT PERSPECTIVE AND MISLED HIMSELF, INSOFAR AS THE OPTION TO USE 5%, WHILE DETERMINING ALP. 1.9 THE LOWER AUTHORITIES OUGHT TO HAVE ALLOWED DOWNWARD ADJUSTMENT PERTAINING TO WORKING CAPITAL DIFFERENCES ON A SCIENTIFIC BASIS, INSTEAD, ALLOWED THE SAME AT 2% ON A MERE SUMMARY BASIS. 1.10 THE LEARNED CIT(A) IS NOT CORRECT IN REDUCING THE COMMUNICATION EXPENSES FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S. 10A OF THE IT ACT, THIS IS ESPECIALLY SO WHEN THESE EXPENSES WERE NOT PART OF EXPORT TURNOVER. 7 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ 1.11 FOR THESE AND OTHER REASONS THAT ARE TO BE URGED AT THE TIME OF HEARING OF THE CASE, THE APPELLANT PRAYS THAT THE ORDERS PASSED BY THE LOWER AUTHORITIES ARE TO BE SET ASIDE IN THE INTEREST OF JUSTICE AND PRAYS FOR APPROPRIATE RELIEF BASED ON THE ABOVE GROUNDS. 8. THOUGH THE ASSESSEE RAISED THE ABOVE GROUNDS, CONFI NED ITS ARGUMENTS AS MENTIONED IN ITS WRITTEN SUBMISSIO N. BEING SO, WE CONSIDER THE ARGUMENTS IN THE WRITTEN SUBMIS SIONS. 9. THE LEARNED AR SUBMITTED THAT GROUND NOS. 1.0, 1.2 , 1.3 AND 1.11 ARE GENERAL IN NATURE AND DO NOT REQUIRE A NY ADJUDICATION. ACCORDINGLY, THESE GROUNDS ARE NOT C ONSIDERED FOR ADJUDICATION AND DISMISSED. 10. GROUND NOS. 1.1 AND 1.4 ARE PERTAINING TO VALIDITY, LEGALITY AND PROPRIETY OF THE PROCEDURE ADOPTED BY THE TPO W HILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO NS ENTERED BY THE ASSESSEE WITH ITS AES. THE AR SUBMITTED THAT T HE TPO IN THE PROCESS OF DETERMINATION OF ALP HAS REJECTED 6 COMPANIES FROM THE LIST OF COMPARABLES FURNISHED BY THE ASSES SEE AND INCLUDED ANOTHER 6 COMPANIES CHOSEN BY HIM IN THE F INAL LIST OF COMPARABLES. IN THIS PROCESS, THE TPO HAD NOT GIVE N OPPORTUNITY TO FURNISH CERTAIN OTHER CASES WHICH AR E REALLY COMPARABLES. INSTEAD, THE TPO HAD PROCEEDED TO CHO OSE HIS OWN CASES OF COMPANIES, WHICH IS AGAINST THE RATIO LAID DOWN BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AZ TEC SOFTWARE & TECHNOLOGY SERVICES LTD. VS. ASST. CIT (109 TTJ 8 92) (BANG.) (SB), 107 ITD 141 (BANG) (SB) AND REITERATED BY MUM BAI BENCH OF ITAT IN THE CASE OF BAYER MATERIAL SCIENCE (P) L TD. VS. ADDL. CIT (148 TTJ 581) (MUM). 11. THE LEARNED DR RELIED ON THE ORDER OF THE CIT(A). 8 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ 12. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. FOR TRANSFER PRICING ANALYSIS IN THIS C ASE, THE ASSESSEE HAS USED DATA OF DIFFERENT COMPANIES PERTA INING TO THE PERIOD FROM APRIL, 2001 TO FEBRUARY 16, 2004. THUS, THE ASSESSEE HAS USED DATA OF THE PRECEDING TWO FINANCI AL YEARS AND PARTLY OF THE CURRENT FINANCIAL YEAR, FROM APRIL 1, 2003 TO FEBRUARY 16, 2004. HOWEVER, UNDER INDIAN TRANSFER P RICING REGULATION, FOR THE PURPOSE OF COMPARABILITY ANALYS IS, AN ASSESSEE IS BOUND TO USE THE DATA OF RELEVANT FINAN CIAL YEAR, IN WHICH IT HAS ENTERED INTO INTERNATIONAL TRANSACTION . UNDER RULE 10B(4), IT SAYS THE DATA TO BE USED IN ANALYZING TH E COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH A N INTERNATIONAL TRANSACTION, SHALL BE THE DATA RELATI NG TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTI ON HAS BEEN ENTERED INTO. THUS, AS PER THE ABOVE PROVISIONS, US ER OF DATA OF THE CURRENT FINANCIAL YEAR, IN WHICH INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO BY AN ASSESSEE, IS MANDATORY. THERE IS NO OPTION BUT TO USE THE DATA OF ONLY THE RELEVANT FIN ANCIAL YEAR, IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERE D INTO BY THE ASSESSEE, FOR COMPARABILITY ANALYSIS. THOUGH, I N THE PROVISO BELOW THE SAID RULE 10B(4), IT SAYS THAT DATA RELAT ING TO THE PRECEDING TWO FINANCIAL YEARS MAY ALSO BE CONSIDERE D, IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED, SINCE IN THE INSTANT CASE, THE ASSE SSEE HAS NOT BEEN ABLE TO REVEAL ANY FACTS PERTAINING TO THE EAR LIER FINANCIAL YEARS WHICH HAD AN INFLUENCE ON THE DETERMINATION . OF TRANSFER PRICES WITH REFERENCE TO THOSE COMPARABLE COMPANIES , THE TPO JUSTIFIED IN USING THE DATA OF ONLY THE CURRENT FIN ANCIAL YEAR 2003-04, FOR DETERMINING THE ALP IN THIS CASE. IN S UPPORT OF THIS STAND, WE PLACE RELIANCE ON THE DECISION OF ITAT, P UNE BENCH, IN 9 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ THE CASE OF HONEYWELL AUTOMATION INDIA LTD VS. DCIT (2009- TIOL-104-ITAT PUNE) AND THE DECISION OF THE TRIBUNA L, DELHI BENCHES, IN THE CASE OF CUSTOMER SERVICES INDIA PVT . LTD., VS. ACIT, (30 SOT 486). THESE GROUNDS ARE REJECTED. 13. GROUND NOS. 1.5, 1.6 AND 1.7 ARE WITH REGARD TO SEL ECTION OF COMPARABLES. 14. THE AR SUBMITTED THAT THE TPO REJECTED THE FOLLOWIN G COMPANIES AS COMPARABLES: (A) C.S. SOFTWARE LTD. (B) M.C.S. LTD. (C) MUKUND ENGINEERS LTD. (D) CARBORUNDUM UNIVERSAL LTD. (E) SUPRAWIN TECHNOLOGIES LTD. (F) TULSYAN TECHNOLOGIES LTD. (G) F.I. SOFEX LTD. (H) ACE SOFTWARE EXPORTS LTD. AND (I) VANS INFORMATION LTD. 15. HE DREW OUR ATTENTION TO THE DATA OF FOLLOWING COMP ANIES AND THEIR DETAILS: S. NO. COMPANY NAME STATUS ISSUE JUSTIFICATION 1 NUCLEUS NETSOFT & GIS INDIA LIMITED ACCEPTED BOTH BY THE TRANSFER PRICING OFFICER (TPO) AND THE APPELLANT A DIFFERENCE OF ABOUT 7% IN THE OPERATING PROFIT ON COST ARRIVED BY THE TRANSFER PRICING OFFICER AND THE APPELLANT THE TPO HAD INCLUDED THE CREDIT OF RS. 11.15 LAKHS ARISING ON DEFERRED TAX FOR COMPUTING OPERATING PROFIT, WHICH IS INCORRECT EXCLUDING THE SAME, THE RATIO WORKS OUT TO 9.85% ONLY. 2 TRICOM INDIA LIMITED ACCEPTED BOTH THE TRANSFER PRICING OFFICER (TPO) AND THE APPELLANT A DIFFERENCE OF ABOUT 7% IN THE OPERATING PROFIT ON COST ARRIVED BY THE TRANSFER PRICING OFFICER AND THE APPELLANT AS PER THE TPO, THE OPERATING PROFIT/ COST EQUALS 45.74% FOR THE FINANCIAL YEAR 2003-04, BUT, FACTUALLY IT WORKS OUT TO 38.37% ONLY. 3 DATAMATICS TECHNOLOGIES LIMITED REJECTED BY THE TRANSFER PRICING OFFICER (TPO) AND REJECTION ACCEPTED BY THE APPELLANT REJECT ION ACCEPTED BY THE APPELLANT. 4 HINDUJA TMT LIMITED REJECTED BY THE TRANSFER PRICING OFFICER (TPO) AND REJECTION ACCEPTED BY THE APPELLANT REJECTION ACCEPTED BY THE APPELLANT. 10 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ 5 WEAL INFOTECH LIMITED REJECTED BY THE TRANSFER PRICING OFFICER (TPO) AND REJECTION ACCEPTED BY THE APPELLANT THE SEGMENTAL DATA FOR 2004 WAS NOT AVAILABLE AND NO ANNUAL REPORT HAD BEEN PRODUCED BY THE APPELLANT REJECTION ACCEPTED BY THE APPELLANT. 6 CARBORUNDUM UNIVERSAL LIMITED REJECTED BY THE TRANSFER PRICING OFFICER (TPO) AND REJECTION ACCEPTED BY THE APPELLANT. THE COMPANY IS FUNCTIONALLY DIFFERENT AND SEGMENTAL DATA FOR 2004 WAS NOT AVAILABLE. REJECTION ACCEPTED BY THE APPELLANT. 7 MAX HEALTHSCRIBE LIMITED REJECTED BY THE TRANSFER PRICING OFFICER (TPO) AND REJECTION ACCEPTED BY THE APPELLANT. DATA FOR 2004 IS NOT AVAILABLE REJECTION ACCEPTED BY THE APPELLANT. 8 TATA SERVICES LIMITED REJECTED BY THE TRANSFER PRICING OFFICER (TPO), BUT, REJECTION DISPUTED BY THE APPELLANT. THE COMPANY IS HAVING A DIFFERENT BUSINESS PROFILE AND THE BUSINESS IS BEING CONDUCTED ON A NO-PROFIT- NO-LOSS BASIS. THE COMPANY IS INTO SERVICES AKIN TO BPO, HENCE, IT IS NOT FUNCTIONALLY DIFFERENT. IT IS A COMMERCIALLY OPERATING COMPANY AND NOT A TRUST; HENCE, NO PROFIT NO LOSS CONCEPT DOES NOT ARISE HERE AT ALL. 9 ACE SOFTWARE EXPORTS LIMITED REJECTED BY THE TRANSFER PRICING OFFICER (TPO), BUT, REJECTION DISPUTED BY THE APPELLANT. THE COMPANY IS CATERING ONLY TO A SINGLE CUSTOMER APEX DATA SERVICES INC. AND BOT THE COMPANIES BEING ASSOCIATED ENTERPRISES U/S 92A(2), ITS TRANSACTIONS WITH CUSTOMERS CANNOT BE TREATED AS UNCONTROLLED TRANSACTIONS. THOUGH APEX DATA SERVICES INC., USA IS AN ASSOCIATED COMPANY OF ACE SOFTWARE, IT ACTED AS AN INTERMEDIARY THROUGH WHOM DIFFERENT CLIENTS WERE INTRODUCED TO ACE SOFTWARE AND THUS GENERATED BUSINESS FOR THE COMPANY. HOWEVER, THE APPELLANT DID NOT HAVE ANY SALE OR PURCHASE FROM AND/OR TO APEX DATA SERVICES INC. WHICH IS CONFIRMED BY ITS FINANCIAL STATEMENTS. 10 C S SOFTWARE ENTERPRISES LIMITED REJECTED BY THE TRANSFER PRICING OFFICER (TPO), BUT, REJECTION DISPUTED BY THE APPELLANT. THERE WAS NOT FOREX REVENUE AND HENCE NOT CATERING TO OVERSEAS MARKET AND ALSO DUE TO BUSINESS FUNCTIONS, RISKS AND ASSETS BEING NOT SIMILAR TO THAT OF THE APPELLANT. THE FINANCIALS OF THE COMPANY FOR THE FINANCIAL YEAR 2003-04 DISCLOSES LOSS ON ACCOUNT OF FOREIGN CURRENCY TRANSACTIONS AND NOTES ON ACCOUNTS TALKS ABOUT ACCOUNTING POLICY ADOPTED WITH RESPECT TO FOREIGN EXCHANGE TRANSACTIONS. ALSO, THE COMPANY IS INTO SIMILAR BUSINESS. 11 F I SOFEX LIMITED REJECTED BY THE TRANSFER PRICING OFFICER (TPO), BUT, REJECTION DISPUTED BY THE APPELLANT. SEGMENTAL TOTAL COST NOT AVAILABLE AND THAT THE SUBSIDIARY IN INDIA INCURRED A LOSS DUE TO WHICH THE ENTIRE INVESTMENT AS WELL AS RECOVERABLE ADVANCE HAD BEEN FULLY PROVIDED FOR IN THE BOOKS OF ACCOUNTS. THE DETAILED REVENUE, PBIT AND COMMON COSTS OF EACH SEGMENT IS AVAILABLE IN THE DATABASE. ALSO, PROVISION FOR DOUBTFUL DEBTS IS AN OPERATING EXPENSE FOR ANY COMPANY. MOREOVER, LIKE PROFIT, LOSS IS ALSO A PART AND PARCEL OF THE BUSINESS AND TO ARRIVE AT AN INDUSTRY AVERAGE, LOSS 11 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ SUFFERING UNITS CANNOT BE IGNORED WHICH IS IN LINE WITH THE OECD GUIDELINES CLAUSE 3.45 ON APPLICATION OF TNMM. 12 M C S LIMITED REJECTED BY THE TRANSFER PRICING OFFICER (TPO), BUT, REJECTION DISPUTED BY THE APPELLANT. THE REASONS BEING THERE WAS NO FOREX REVENUE AND THAT IT IS FUNCTIONALLY DIFFERENT FROM A BPO. THE COMPANY IS ENGAGED IN SHARE REGISTRY SERVICES WHICH IS VERY MUCH SIMILAR TO BPO SERVICES AND THE FINANCIALS OF THE COMPANY FOR THE FINANCIAL YEAR 2003-04 DISCLOSES INCOME ON ACCOUNT OF FOREIGN CURRENCY AND POINT NO. : 1(X) OF NOTES ON ACCOUNTS TALKS ABOUT ACCOUNTING POLICY ADOPTED WITH RESPECT TO FOREIGN EXCHANGE TRANSACTIONS. 13 VANS INFORMATION LIMITED REJECTED BY THE TRANSFER PRICING OFFICER (TPO), BUT, REJECTION DISPUTED BY THE APPELLANT. THE COMPANY HAS INCURRED LOSSES CONTINUOUSLY FOR THREE YEARS. THE PROVISIONS RELATED TO TRANSFER PRICING DO NOT PROVIDE FOR REJECTION BASED ON LOSSES. 14 SUPRAWIN TECHNOLOGIES LIMITED REJECTED BY THE TRANSFER PRICING OFFICER (TPO), BUT, REJECTION DISPUTED BY THE APPELLANT. THE COMPANY HAVE INCURRED LOSSES CONTINUOUSLY FOR THREE YEARS; NO SEGMENTAL RESULTS ARE AVAILABLE AND THAT THE COMPANY IS CONTINUOUSLY ENGAGED IN RESEARCH & DEVELOPMENT OF PRODUCTS LIKE ERP & CRM. THE PROVISIONS RELATING TO TRANSFER PRICING DO NOT PROVIDE FOR REJECTION BASED ON LOSSES. ALSO, THE OFFICIAL WEBSITE OF DEPARTMENT OF IT AND BIOTECHNOLOGY HAS GIVEN DETAILS OF PARTICIPANTS IN THE IT.COM SHOW CONDUCTED IN THE FY 2003-04, WHERE SUPRAWIN HAD PUT UP ITS STALL AND THE WEBSITE HAS CLEARLY CHARACTERIZED SUPRAWIN AS A BPO. 15 TULSYAN TECHNOLOGIES LIMITED (PRESENTLY KNOWN AS COSMIC GLOBAL LIMITED) REJECTED BY THE TRANSFER PRICING OFFICER (TPO), BUT, REJECTION DISPUTED BY THE APPELLANT. THE SERVICE INCOME DOES NOT CLEAR QUANTITATIVE FILTER OF SALES IS MORE THAN RS. 1 CRORE, NO SEGMENTAL RESULTS AVAILABLE AND THAT THE BUSINESS CONSTITUTED SOFTWARE DEVELOPMENT AND ITES. THE AVERAGE TURNOVER FOR FINANCIAL YEARS 2002-03 AND 2003-04 IS MORE THAN 1 CRORE AND ALSO, SINCE THE COMPANY IS MAINLY INTO ITES, IT QUALIFIES AS A COMPARABLE. 16 MUKAND ENGINEERS LIMITED REJECTED BY THE TRANSFER PRICING OFFICER (TPO), BUT, REJECTION DISPUTED BY THE APPELLANT. THE REASONS BEING THERE WAS NO FOREX REVENUE AND THAT IST IS FUNCTIONALLY DIFFERENT. THE FINANCIALS OF THE COMPANY FOR THE FINANCIAL YEAR 2003-04 DISCLOSES INCOME FROM FOREIGN EXCHANGE GAIN AND POINT NO. : A (7) OF NOTES TO ACCOUNTS TALKS ABOUT FOREIGN EXCHANGE ACCOUNTING POLICY ADOPTED BY THE COMPANY. ALSO, THE SEGMENT INFORMATION DISCLOSES INFORMATION RELATING TO THE INFOTECH DIVISION OF THE COMPANY. 17 ULTRAMARINE & PIGMENTS LIMITED ACCEPTED BY THE TRANSFER PRICING OFFICER (TPO), BUT, REJECTED BY THE COMPARABLE HAD BEEN ORIGINALLY FURNISHED BY THE APPELLANT AND ACCEPTED BY THE DIRECTORS REPORT FOR THE FINANCIAL YEAR 2003-04 STATES THAT THE IT 12 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ THE APPELLANT. THE TRANSFER PRICING OFFICER, BUT, SUBSEQUENTLY / LATER, REJECTED BY THE APPELLANT. ENABLED SERVICES DIVISIONS HAS MORE THAN DOUBLED ITS REVENUE AND THE OPERATING PROFIT OF THE DIVISION WAS RS. 43 LAKHS (PREVIOUS YEAR LOSS OF RS. 63 LAKHS). HENCE, IT APPEARS THAT THERE HAS BEEN AN EXTRAORDINARY MOVEMENT DURING THE YEAR AND THE PROFIT EARNED DOES NOT SEEM TO BE ORDINARY PROFIT EARNED IN THE NORMAL COURSE OF BUSINESS. AS SUCH, THE COMPARABLE IS REJECTED. 18 FORTUNE INFOTECH LIMITED INTRODUCED BY THE TRANSFER PRICING OFFICER (TPO) AND ACCEPTED BY THE APPELLANT. THERE IS A DIFFERENCE OF ABOUT 4% IN THE OPERATING PROFIT ON COST ARRIVED BY THE TRANSFER PRICING OFFICER AND THE APPELLANT. FACTUALLY, THE FINANCIALS OF THE COMPANY FOR THE FINANCIAL YEAR 2003-04 INDICATE THAT THE OPERATING PROFIT / COST EQUALS 35.34% ONLY AS AGAINST 39.35% ADOPTED BY THE TPO. 19 MERCURY OUTSOURCING MANAGEMENT LIMITED. INTRODUCED BY THE TRANSFER PRICING OFFICER (TPO) AND ACCEPTED BY THE APPELLANT. THE COMPARABLE HAD BEEN INTRODUCED BY THE TRANSFER PRICING OFFICER BUT, INITIALLY REJECTED BY THE APPELLANT SINCE THE DATA REGARDING THE FUNCTIONS WERE NOT AVAILABLE IN THE PUBLIC DOMAIN AND THE DIRECTORS REPORT AND NOTES TO ACCOUNTS DID NOT ELABORATE MUCH ON THE FUNCTIONS OF THE COMPANY. SUBSEQUENTLY, ON OBTAINING ALL RELEVANT INFORMATION AND DATA, THE APPELLANT ACCEPTED THE COMPARABLE. 20 VISHAL INFORMATION TECHNOLOGIES LIMITED INTRODUCED BY THE TRANSFER PRICING OFFICER (TPO) BUT REJECTED BY THE APPELLANT. THE COMPARABLE HAD BEEN INTRODUCED BY THE TRANSFER PRICING OFFICER. THE COMPANYS EMPLOYEE COST TO TOTAL COST RATIO IS 2% AS PER ITS ANNUAL REPORT WHEREAS THE INDUSTRY AVERAGE IS 30- 50%. THE APPELLANT COMPANYS EMPLOYEE COST TO TOTAL COST RATIO IS 47%. THE COMPANY IS REJECTED AS A COMPARABLE AS THE BUSINESS MODEL IS TOTALLY DIFFERENT. 21 WIPRO BPO LIMITED INTRODUCED BY THE TRANSFER PRICING OFFICER (TPO) BUT REJECTED BY THE APPELLANT. THE COMPARABLE HAD BEEN INTRODUCED BY THE TRANSFER PRICING OFFICER. THE COMPANY IS EXCEPTIONALLY LARGE SEGMENTAL INFORMATION PERTAINING TO THEIR ITES ACTIVITIES IS NOT AVAILABLE. 20 SPANCO TELESYSTEMS AND SOLUTIONS LIMITED INTRODUCED BY THE TRANSFER PRICING OFFICER (TPO) BUT REJECTED BY THE APPELLANT. THE COMPARABLE HAD BEEN INTRODUCED BY THE TRANSFER PRICING OFFICER. THE FINANCIALS OF THE COMPANY INDICATE THAT THE TURNOVER OF THE COMPANY DURING THE FINANCIAL YEAR 2003-04 WAS RS. 61 CRORES WHILE THAT OF THE APPELLANT COMPANY WAS ONLY AROUND RS. 13 CRORES. OWING TO THE WIDE VARIATION IN SIZE, THE TWO DOES NOT SEEM TO BE COMPARABLE COMPANIES. 13 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ 16. ACCORDING TO THE LEARNED AR THE DATA OF FOLLOWING C OMPANIES HAS TO BE CONSIDERED AS COMPARABLES: SL. NO. NAME OF THE COMPANY OP/TC % 1. NUCLEUS NETSOFT & GIS INDIA LTD. 9.85 2. TRICOM INDIA LTD. 38.37 3. TATA SERVICES LTD. 0.29 4. ACE SOFTWARE EXPORTS LTD. 16.59 5. CS SOFTWARE ENTERPRISES LTD. (FOR F.Y. 2002 - 03) - 12.00 6. FI SOFEX LTD. (SEGMENTAL) - 72.76 7. MCS LTD. 1.65 8. VANS INFORMATION LTD. - 59.11 9. SUPRAWIN TECHNOLOGIES LTD. - 14.37 10. TULSYAN TECHNOLOGIES LTD. (PRESENTLY COSMIC GLOBAL LTD.) - 21.31 11. MUKUND ENGINEERS LTD. (SEGMENTAL) - 28.12 12. FORTUNE INFOTECH LTD. 35.34 13. MERCURY OUTSOURCING MANAGEMENT LTD. 5.88 ARITHMETIC MEAN - 7.31 ARITHMETIC MEAN AS PER FINAL SUBMISSION AS ABOVE, W ORKS OUT TO -7.31 % ONLY. 17. FURTHER HE SUBMITTED THAT IN RESPECT OF C.S SOFTWAR E ENTERPRISES LTD., MCS LTD. AND MUKUND ENGINEERS LTD . (NOS. 10, 12 AND 16 IN THE CHART), THE TPO AS WELL AS THE COMMISSIONER OF INCOME TAX (APPEALS) HAD UPHELD THE REJECTION AS COMPARABLES ON THE SOLE GROUND THAT THERE WAS NO FOREIGN EXCHANGE EARNINGS. THE AR SUBMITTED THAT THE 'NOTES ON ACCOUNTS' OF RESPECTIVE COMPANIES, REVEAL THAT THER E ARE GAINS OR LOSSES ON ACCOUNT OF FOREIGN EXCHANGE, WHICH IMPLIE S THAT THERE ARE FOREIGN EXCHANGE TRANSACTIONS. IN ANY EVENT, IT IS POSSIBLE THAT THE EXPORT PROCEEDS WOULD NOT HAVE BEEN RECEIV ED PHYSICALLY; BUT, THEY WOULD HAVE BEEN SHOWN AS 'REC EIVABLES' ON ACCOUNT OF WHICH THERE MAY BE GAINS OR LOSSES ON AC COUNT OF FOREIGN EXCHANGE RATE FLUCTUATIONS. EVEN ASSUMING F OR A MOMENT THAT THERE ARE NO EXPORTS SALES FROM THOSE C OMPANIES, IT CANNOT BE REJECTED AS COMPARABLES FOR THE SIMPLE REASON THAT IT IS NOT A PRE-CONDITION EVEN DOMESTIC SALES CAN B E CONSIDERED FOR THE PURPOSE OF COMPARABILITY. THUS, THE COMMISS IONER OF 14 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ INCOME TAX (APPEALS) AS WELL AS TPO ARE NOT JUSTIFI ED IN REJECTING THOSE COMPANIES AS COMPARABLES. 18. THE DR SUBMITTED AS FOLLOWS OVER THE ABOVE COMPARAB LES:. (1) C.S. SOFTWARE LIMITED : IT WAS SUBMITTED BY THE ASSESSEE THAT THE TPO REJECTED THE ABOVE COMPANY ON THE GROUND THAT THERE ARE NO FOREIGN EXCHANGE TRANSACTIONS. IT WAS STATED THAT OPERATIONS ARE DETERMINED BY PREVAILING MARKET CONDITIONS AND NOT MERELY BY CURRENCY IN WHICH THEY TRANSACT. STATING THAT LACK OF FOREIGN TRANSACTIONS WILL NOT BE DETRI MENTAL TO THE RESULTS, THE AR CONTENDED THAT THE TPO WAS UNJUSTIFIED IN REJECTING THE ABOVE COMPANY AS A COMPARABLE. AS NOTED BY THE TPO, THERE WAS NO FOREI GN EXCHANGE REVENUE IN THE CASE OF THE ABOVE COMPANY DURING FINANCIAL YEAR 2003-04, AND HENCE IT WAS NOT CATERING TO OVERSEAS MARKET. IT WAS SUBMITTED THAT NORMALLY THE PROFIT MARGIN/RETURN FROM EXPORT SALES IS HIGHER WHEN COMPARED WITH THE SAME FROM DOMESTIC TURN OVER. THE DR STATED THAT FOR THE SAME REASON I .E. IN ABSENCE OF EXPORT SALES DURING FINANCIAL YEAR 20 03- 04, IN THE CASE OF DELOITTE CONSULTING INDIA PVT. L TD., FOR THE ASST. YEAR 2003-04, VIDE ORDER IN ITA NO. 0062/CIT(A)-III/08-09, DT. 31.05.2010, IT WAS HELD THAT THE ABOVE COMPANY I.E. C.S. SOFTWARE LTD., CANNOT B E CONSIDERED AS A COMPARABLE FOR THE PURPOSE OF DETERMINING ALP OF THE INTERNATIONAL TRANSACTIONS. (2) MCS LTD. : IT IS FUNCTIONALLY DIFFERENT FROM A BPO AND IT HAS NO FOREX EARNINGS, THE TPO HAS REJECTED THIS COMPANY AS A COMPARABLE. HOWEVER, STATING THAT BUSINESS OPERATIONS ARE DETERMINED BY PREVAILING 15 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ MARKET CONDITIONS AND LACK OF FOREIGN TRANSACTIONS WILL NOT BE DETRIMENTAL TO THE FINANCIAL RESULTS, THE ASSESSEE HAS CONTENDED THAT THE TPO WAS NOT JUSTIFI ED IN REJECTING THIS COMPANY AS A COMPARABLE. FROM THE OBSERVATIONS MADE BY THE TPO IN PARA-7.2,4 OF HIS ORDER, APART FROM BEING FUNCTIONALLY DIFFERENT, THE SALES REVENUE DURING FINANCIAL YEAR 2003-04 IN THE CASE O F MCS LTD., WERE ENTIRELY FROM DOMESTIC OPERATIONS. SINCE THERE WAS NO EXPORT SALE DURING FINANCIAL YEA R 2003-04, FOR THE REASONS STATED IN THE CASE OF C.S. SOFTWARE ENTERPRISES LTD., THE ABOVE COMPANY CANNOT BE CONSIDERED AS A COMPARABLE IN THIS CASE. (3) MUKAND ENGINEERS LTD. : THIS COMPANY APART FROM BEING FUNCTIONALLY DIFFERENT, FOR THE REASON OF ABS ENCE OF FOREIGN EXCHANGE REVENUE, THE TPO HAS NOT CONSIDERED THIS COMPANY AS A COMPARABLE. HOWEVER, STATING THAT LACK OF FOREIGN TRANSACTIONS WILL NOT BE DETRIMENTAL TO THE RESULTS, THE ASSESSEE HAS CONTEN DED THAT THE TPO WAS NOT JUSTIFIED IN REJECTING THIS COMPANY AS A COMPARABLE. HOWEVER, THE DR NOT AGREED WITH SUCH CONTENTION OF THE ASSESSEE. IN ABSENCE OF ANY EXPORT TURN OVER DURING FINANCIAL YE AR 2003-04, FURTHER FOR THE SAME REASONS AS STATED IN CASE OF C.S. SOFTWARE ENTERPRISES LTD. ABOVE, THE T PO WAS JUSTIFIED IN NOT CONSIDERING THE ABOVE COMPANY AS A COMPARABLE. 19. WE HAVE HEARD ON THIS ISSUE OF REJECTION OF COMPARA BLES. WITH REGARD TO EXCLUSION OF GAIN ON ACCOUNT OF FORE IGN EXCHANGE FLUCTUATION, WHILE COMPUTING THE NET MARGIN, AS CLA IMED BY THE ASSESSEE, WE FIND THAT THE EXCHANGE FLUCTUATION GAI NS ARISE OUT 16 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ OF SEVERAL FACTORS, FOR INSTANCE, REALISATION OF EX PORT PROCEEDS AT HIGHER RATE, IMPORT DUES PAYABLE AT LOWER RATE. SI NCE THE GAIN OR LOSS IS ON ACCOUNT OF EXCHANGE FLUCTUATION ARISI NG IN THE NORMAL COURSE OF BUSINESS TRANSACTION, THE SAME SHO ULD BE CONSIDERED WHILE COMPUTING THE NET MARGIN FOR THE I NTERNATIONAL TRANSACTIONS WITH THE AES OF THE ASSESSEE. OUR VI EW IN THIS BEHALF IS FORTIFIED BY THE ORDER OF THE TRIBUNAL BA NGALORE BENCH IN THE CASE OF SAP LABS INDIA LTD. VS. ACIT (44 SOT 156) (BANG.) AND ALSO ORDER OF THE TRIBUNAL MUMBAI BENCH IN THE CASE OF DEUTSCHE BANK A.G. VS. DCIT (86 ITD 431). IF THE G AIN ON ACCOUNT OF FOREIGN EXCHANGE RATE FLUCTUATION IS TO BE TAKEN AS OPERATING GAIN IN NATURE, THE NET MARGIN DECLARED B Y THE ASSESSEE FOR THE INTERNATIONAL TRANSACTION WITH THE AES, GOES UP STILL FURTHER. HOWEVER, IF THE LOSS OF THE COMPARA BLE IS ABNORMAL AND THERE IS NO TRADING ACTIVITY OF WHATSOEVER, DAT A OF SUCH COMPANY CANNOT BE CONSIDERED. ACCORDINGLY, WE DIRE CT THE ASSESSING OFFICER TO CONSIDER THE DATA OF MCS LTD. AS COMPARABLE WHILE COMPUTING THE ALP AND TO EXCLUDE O THER TWO COMPANIES FROM COMPARABLES. 20. THE AR SUBMITTED, IN RESPECT OF F.I. SOFEX LTD., VA NS INFORMATIONS LTD. AND SUPRAWIN TECHNOLOGIES LTD. (I TEMS NOS. 11, 13 AND 14 IN THE CHART), THAT THESE COMPANIES W ERE INTRODUCED AS COMPARABLES BY THE ASSESSEE, BUT WERE REJECTED BY BOTH LEARNED TPO AS WELL AS COMMISSIONER OF INCO ME TAX (APPEALS) ON THE SOLE GROUND THAT THEY WERE LOSS MA KING COMPANIES. HE SUBMITTED THAT THE SPECIAL BENCH OF C HANDIGARH TRIBUNAL IN THE CASE OF DCIT V. QUARK SYSTEMS (P.) LTD. (38 SOT 307/4 ITR (TRIB.) 606/132 TTJ 1 (CHD.) (SB) HELD TH AT MERELY BECAUSE A COMPARABLE IS MAKING LOSS, IT CANNOT BE E XCLUDED FROM THE LIST OF COMPARABLE FOR THE PURPOSES OF COM PUTATION OF ALP. THE MUMBAI TRIBUNAL IN THE CASES OF ASST. CIT V. 17 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ WOCKHARDT LTD. 6 TAXMANN.COM 78 (MUM. - ITAT) AND U CB INDIA (P) LTD. V. ASST. CIT [2009] 121 ITD 131 (MUM .) REITERATED THE SAME POSITION. THEREFORE, IN THE LIGHT OF THE DECISION OF THE SPECIAL BENCH, THE REJECTION OF THESE COMPANIES AS COMPARABLE IS NOT JUSTIFIED AND UNSUSTAINABLE IN THE EYE OF LA W. 21. THE DR SUBMITTED THAT THESE COMPANIES ARE REJECTED ON THE FOLLOWING REASONS: 22. REGARDING F.I. SOFEX LIMITED THE DR SUBMITTED THAT IT WAS REJECTED ON THE GROUND THAT, IT HAD EXTRAORDINARY I TEMS AS PART OF ITS OPERATING EXPENSES. 23. IN THIS CONTEXT, FURTHER THE DR SUBMITTED THAT THE TPO IN HIS REMAND REPORT, HAS SUBMITTED THAT PBIT IN THE C ASE OF THE ABOVE COMPANY IS NOT CLEAR AS PER THE PUBLIC DATA B ASE. HE HAS FURTHER MENTIONED THAT THERE WAS NO SEGMENTAL UN-AL LOCABLE EXPENDITURE IN THE PUBLIC DATA BASE. FURTHER, HE SU BMITTED THAT BAD DEBTS WRITTEN OFF CAN BE ALLOWED AS DEDUCTION A S PER ACCOUNTING STANDARDS AND AS PER PROVISIONS OF INCOM E TAX ACT. THE BAD DEBTS, CANNOT BE CONSIDERED AS A ROUTINE/RE GULAR BUSINESS EXPENDITURE FOR ARRIVING AT THE TOTAL OPER ATIONAL COST. CLAIM FOR BAD DEBTS ARISES, ONLY WHEN AN ASSESSEE I S NOT ABLE TO RECOVER ITS SALE PROCEEDS FROM ANY PARTY. HOWEVER, THE SAME CANNOT BE CONSIDERED AS A NORMAL OPERATIONAL EXPEND ITURE FOR EARNING INCOME DURING ANY YEAR. HENCE, THE SAME CAN NOT BE ALLOWED DEDUCTION FOR ARRIVING AT THE TOTAL OPERATI ONAL COST IN THE CONTEXT OF DETERMINING THE PLI (OP/TC%). FURTHER, WHILE FURNISHING THE SEGMENTAL INFORMATION IN RESPECT OF THE ABOVE COMPANY BEFORE THE TPO, THE PLI IS SHOWN AT -73%. T HE DETAILS IN THIS REGARD FURNISHED BY THE ASSESSEE, ARE REFER RED TO AT PAGE- 21 OF THE TP ORDER. SINCE AS PER SUCH SEGMENTAL DAT A 18 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ FURNISHED/WORKED OUT BY THE APPELLANT IN THE CASE O F THE ABOVE COMPANY, THERE WAS NO OPERATIONAL PROFIT/POSITIVE I NCOME, BUT ONLY LOSS, FOR THE REASONS DISCUSSED IN THE CASE OF SUPRAWIN TECHNOLOGIES LTD, THE SAID COMPANY, SHOULD NOT BE C ONSIDERED AS A COMPARABLE. THEREFORE, AND FOR THE REASONS STA TED BY THE TPO IN PARA 7.2.3 OF HIS ORDER, HE WAS JUSTIFIED IN REJECTING THE ABOVE COMPANY I.E., FI SOFEX LIMITED, AS A COMPARAB LE FOR THE PURPOSE OF DETERMINING ALP IN THIS CASE. 24. REGARDING VANS INFORMATION LIMITED, IT WAS SUBMITTE D BY THE DR THAT AS STATED BY THE TPO IN PARA 7.2.13(I) OF HIS ORDER, THIS COMPANY HAS BEEN INCURRING LOSSES CONTINUOUSLY FOR THREE YEARS. HOWEVER, IT WAS WRONGLY STATED BY THE AR THA T THE PROVISIONS RELATING TO TRANSFER PRICING DO NOT PROV IDE FOR REJECTION BASED ON LOSSES, THE APPELLANT CONTENDED THAT THE TPO WAS NOT JUSTIFIED IN REJECTING THE COMPANY. IN THE FACE OF SUCH CONTINUOUS LOSSES OVER THE YEARS AND SINCE THERE WA S NO PROFIT/POSITIVE INCOME DURING THE CURRENT FINANCIAL YEAR, FOR THE REASONS DISCUSSED IN THE CASE OF SUPRAWIN TECHNOLOG IES LTD., THE TPO WAS JUSTIFIED IN NOT CONSIDERING THE ABOVE COMPANY AS COMPARABLE. 25. REGARDING SUPRAWIN TECHNOLOGIES LTD., IT WAS SUBMIT TED BY THE DR THAT THIS COMPANY WAS HAVING LOSSES CONTI NUOUSLY FOR THREE YEARS. IT IS FUNCTIONALLY DIFFERENT FROM THA T OF THE ASSESSEE AND MORE OVER NO SEGMENTAL RESULTS ARE AVAILABLE IN THE CASE OF THIS COMPANY. THE ASSESSEE HAS SUBMITTED THAT PROVI SIONS RELATING TO TRANSFER PRICING DO NOT PROVIDE FOR REJ ECTION BASED ON LOSSES. FROM THE SUBMISSION OF THE ASSESSEE, IT MAY BE SEEN THAT SUCH FINDING OF THE TPO REGARDING INCURRING OF CONTINUOUS LOSSES INCLUDING DURING THE CURRENT YEAR, HAS NOT B EEN DISPUTED. AS ALREADY DISCUSSED ABOVE, IN THE CASE OF THE ASSE SSEE, IT WAS 19 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ EARNING PROFIT FROM THE PRICE CHARGED BY IT FOR THE SERVICES RENDERED TO ITS AE. SINCE FOR THE PURPOSE OF DETERM INING ALP, THE OPERATING PROFIT MARGIN (%) ON THE TOTAL COST I N CASE OF COMPARABLE COMPANY HAS TO BE TAKEN INTO ACCOUNT, TH E TPO WAS RIGHT IN NOT CONSIDERING THE ABOVE COMPANY WHERE TH ERE WAS NO PROFIT/ POSITIVE INCOME FROM OPERATIONS DURING THE FINANCIAL YEAR 2003-04. HENCE, THE TPO WAS JUSTIFIED IN REJECTING THE ABOVE COMPARABLE. 26. WE HAVE HEARD BOTH THE PARTIES ON THESE COMPARABLES . THE CONTENTION OF THE ASSESSEE IS THAT THE LOSS MAK ING COMPANIES WERE NOT TO BE TAKEN OUT FROM THE COMPARA BLES WHILE DETERMINING THE ALP. WE FIND MERIT IN THE ARGUMENT OF THE ASSESSEES COUNSEL. DETERMINING OF ALP IS DEPEND U PON THE COMPARABLES OF IDENTICAL OR SIMILAR IN CONTROLLED TRANSACTIONS IN SIMILAR OR COMPARABLE CIRCUMSTANCES AND THEREAFTER SUITABLE ADJUSTMENT HAS TO BE MADE TO SET OFF THE DIFFERENCE TO MAKE THE TRANSACTION COMMERCIALLY COMPARABLE. UPON CAREFUL CONSIDERATION OF THE ASSESSEES COUNSEL PLEA, WE FI ND OURSELVES IN AGREEMENT WITH THE ASSESSEES CONTENTION THAT O NLY ABNORMAL LOSS MAKING COMPANIES ARE TO BE TAKEN OUT FROM THE COMPARABLES. THE JUDGEMENT RELIED ON BY THE ASSESS EES COUNSEL IN QUARK SYSTEMS PVT. LTD. (32 TTJ 1) (CHD. )(SB) SUPPORTS THE ASSESSEES COUNSEL ARGUMENTS. BEING S O, FOR PROPER COMPARABLES THESE THREE COMPANIES VIZ., ITEM S AT 11, 13 AND 14 ARE TO BE INCLUDED IN THE COMPARABLES IF THE IR LOSS IS ON ACCOUNT OF NORMAL BUSINESS REASONS AND SEGMENTAL TU RNOVER IS ABOVE RS. 1 CRORE. THIS VIEW OF OURS IS ALSO SUPPO RTED BY THE ORDER OF THE TRIBUNAL DELHI BENCH IN THE CASE OF SA PIENT CORPORATION PVT. LTD. (15 ITR (TRIB) 285), GENISYS INTEGRATING SYSTEMS INDIA PVT. LTD. (15 ITR (TRIB) 475) (BANGAL ORE BENCH) WHEREIN HELD THAT WHEN COMPANIES WHICH ARE LOSS MAK ING ARE 20 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ EXCLUDED FROM COMPARABLES, THEN SUPER PROFIT MAKING COMPANIES ARE ALSO TO BE EXCLUDED FROM THE COMPARAB LES FOR DETERMINING THE ALP. BEING SO, IN OUR OPINION, THE ASSESSING OFFICER HAS TO RECALCULATE THE ALP AFTER EXCLUDING ONLY THE DATA OF THE COMPANIES WHICH HAVE LOSSES DUE TO EXTRAORDI NARY REASONS. IN OTHER WORDS, IF THERE IS LOSS IN ORDIN ARY COURSE OF BUSINESS WHICH IS NORMAL/NOMINAL CANNOT BE EXCLUDED FROM THE COMPARABLES. HOWEVER, WE MAKE IT CLEAR THAT IF T HERE IS ANY ABNORMAL LOSS OR IF THERE IS CONTINUOUS LOSS YEAR B Y YEAR, IN SUCH SITUATION THAT COMPANY DATA CANNOT BE CONSIDER ED AS COMPARABLE WITH THE ASSESSEE COMPANY. FOR EXAMPLE, F.I. SOFEX LTD., VANS INFORMATION LTD. AND MUKUND ENGINEERS LT D. AND THESE COMPANIES ARE TO BE EXCLUDED FROM THE COMPARA BLES. 27. THE AR SUBMITTED THAT WIPRO BPO LTD. AND SPANCO TELESYSTEMS & SOLUTIONS LTD. (ITEMS NOS. 21 AND 22) INTRODUCED BY THE TPO AS COMPARABLES AND NOT ACCEPTED BY THE A SSESSEE, THE SCALE OF OPERATION OF THOSE COMPANIES ARE EXCEP TIONALLY LARGE AND THEREFORE, CANNOT BE ACCEPTED AS COMPARABLE. TH E MUMBAI TRIBUNAL IN THE CASE OF DHL EXPRESS (INDIA) (P.) LT D. V. ASST. CIT [2011] 11 TAXMANN.COM 40 (MUM. - ITAT) HELD THAT WH ERE THERE IS A LARGE DIFFERENCE IN THE SCALE OF OPERATIONS, T HOUGH OPERATING IN THE SAME FIELD, CANNOT BE TAKEN AS COMPARABLE. S AME POSITION WAS REITERATED AGAIN IN THE CASE OF SYMANT EC SOLUTIONS (P.) LTD. V. ASST. CIT, (11 TAXMANN.COM 264) (MUM.) 15 ITR (TRIBUNAL) 323. 28. THE DR SUBMITTED THAT FINANCIAL DATA OF SPANCO TELESYSTEMS & SOLUTIONS LIMITED INDICATE THAT THE TURNOVER OF THE COMPANY DURING THE F.Y 2003-04 WAS RS. 61 CRORE S. THE TURNOVER IN THE CASE OF THE ASSESSEE WAS ONLY AROUN D RS. 13 CRORES. THE ASSESSEE CONTENDED THAT OWING TO WIDE VARIATION IN 21 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ SIZE, THE ABOVE COMPANY SHOULD NOT BE CONSIDERED AS A COMPARABLE. THE DR STATED THAT THE TPO HAS TAKEN I NTO ACCOUNT THE FINANCIAL RESULTS OF ONLY ONE SEGMENT I N THE CASE OF THE ABOVE COMPANY FOR COMPARABILITY ANALYSIS IN THI S CASE AND THE TPO IS JUSTIFIED. 29. REGARDING EXCLUSION OF BIG COMPANIES, IN OUR OPINIO N, THE SIZE OF THE COMPARABLES MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN THE PRICE AND ALS O ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKIL LED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPAN Y MAY NOT HAVE THESE ADVANTAGES AND, THEREFORE, THE TURNOVER ALSO WOULD COME DOWN WHICH RESULTS IN REDUCING THE PROFIT MARG IN. THIS IS AS HELD BY VARIOUS BENCH OF THE TRIBUNAL, THE COMPA NIES HAVING HUGE TURNOVER ARE TO BE EXCLUDED FROM COMPARABLES. FOR THIS PURPOSE WE PLACE RELIANCE ON THE JUDGEMENT OF GENIS YS INTEGRATING SYSTEMS INDIA PVT. LTD. (15 ITR (TRIB) 475) (BANG.). ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO EXC LUDE THESE TWO COMPANIES (ITEM NO. 21 AND 22 IN THE CHART) FROM TH E LIST OF COMPARABLES. 30. THE AR SUBMITTED IN RESPECT OF ACE SOFTWARE EXPORTS LTD. (ITEM NO. 9 IN THE CHART) THAT THIS COMPANY INTRODU CED BY THE ASSESSEE BUT REJECTED BY THE TPO AS WELL AS THE LEA RNED COMMISSIONER OF INCOME TAX (APPEALS) ON THE GROUND THAT IT HAD RELATED PARTY TRANSACTIONS. WHEREAS THE FACTUAL MATRIX IS THAT THE COMPANY HAD NO RELATED PARTY TRANSACTIONS. 31. REGARDING ACE SOFTWARE EXPORTS LTD. THE DR SUBMITTE D THAT ACCORDING TO THE ASSESSEE, THE TPO ERRED IN EX CLUDING THIS COMPANY FOR COMPARISON ON THE GROUND THAT DIRECTOR' S REPORT OF THE COMPANY MENTIONS THAT IT HAS CATERED SERVICE EX CLUSIVELY TO 22 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ APEX DATA SERVICES INC, A GROUP COMPANY, THAT MAKES BOTH ACE EXPORTS AND APEX DATA AS ASSOCIATED ENTERPRISES U/S . 92A(2)(I) OF THE ACT. IT WAS STATED THAT THE TPO HAS IGNORED THE FACT THAT, THE FINANCIAL STATEMENTS NOWHERE MENTION THAT ANY S ALE/ PURCHASE TRANSACTIONS HAVE TAKEN PLACE WITH APEX IN C. DURING THE RELEVANT FINANCIAL YEAR. IT WAS FURTHER SUBMITT ED THAT THE AO ERRED IN TREATING THE ABOVE COMPANY AS FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE COMPANY. IT WAS SUBMITTED THAT AS SEEN FROM THE ANNUAL REPORT OF ACE SOFTWARE LTD., FOR THE YEAR ENDED 31.03.2004, THE SALE TRANSACTION MADE BY ACE SOFTWARE EXPORTS DURING THE F.Y 2003-04 WERE CONTROLLED TRAN SACTIONS AND THIS COMPANY, SHOULD NOT BE CONSIDERED AS A COM PARABLE. THEREFORE, THE TPO WAS JUSTIFIED IN REJECTING THE A BOVE COMPANY AS COMPARABLE IN THIS CASE. 32. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. IN O UR OPINION, CONTROLLED TRANSACTION WITH RELATED PARTIE S WHICH MAKES IT UN-COMPARABLE WITH THE ASSESSEE. IN THE PRESEN T CASE, RELATED PARTY DISCLOSURE IN ACE ANNUAL REPORT SHOWS NO SERVICES ARE PROVIDED TO APEX DATA SERVICES. RELATIONSHIP H AS TO BE EXAMINED AS PER DEFINITION OF ASSOCIATED ENTERPRISE S (AES) AS PER SECTION 92A OF THE ACT. IT WAS STATED BEFORE U S THAT APEX DATA SERVICES IS HAVING 7% SHARE CAPITAL IN ACE SOF TWARE EXPORTS LTD. EVEN OTHERWISE PROVISIONS OF SECTION 92A(2)(I) DEEMS TWO COMPANIES AS AES ONLY, IF 100% GOODS ARE PURCHASED AND SOLD. THOUGH THE TRANSACTIONS WITH RELATED PA RTIES CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPARISON, IN THE PRESENT CASE CONSIDERING THE FACTS, REJECTION IS NOT JUSTIF IED. 33. THE AR SUBMITTED THAT, IN RESPECT OF F.I. SOFEX (I TEM NO. 11 IN THE CHART) INTRODUCED BY THE ASSESSEE BUT REJ ECTED BY LEARNED CIT (APPEALS) AS WELL AS TPO ON THE GROUND THAT NO 23 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ SEGMENTAL DETAILS WERE AVAILABLE. WHEREAS THE FACT REMAINS THAT THE ASSESSEE HAD FURNISHED THE SEGMENTAL DATA. THE MUMBAI TRIBUNAL IN THE CASE OF ADDL. CIT V. TECHNIMONT ICB INDIA (P) LTD. 148 TTJ (MUMBAI) (TM) 547 HAD HELD THAT WHERE THE SEGMENTAL DATA WAS FURNISHED REJECTION OF SUCH CASE S AS COMPARABLE IS NOT JUSTIFIED. IT WAS FURTHER HELD BY BOTH THE LOWER AUTHORITIES THAT BAD DEBTS WRITTEN OFF CANNOT BE AL LOWED AS OPERATING COST. THE ASSESSEE RESPECTFULLY SUBMITS T HAT BAD DEBTS WRITTEN OFF FORMS PART OF OPERATING COST. IN THIS CONNECTION, RELIANCE IS PLACED ON THE DECISION OF T RIBUNAL IN THE CASES OF CA COMPUTER ASSOCIATES (P.) LTD. V. DY. CI T [2010] 37 SOT 306 (MUM. TRIBUNAL) AND DY. CIT V. VERTEX CUSTO MER SERVICES INDIA (P.) LTD. [2009] 34 SOT 532 (DELHI). 34. THE DR SUBMITTED THAT SEGMENTAL TOTAL COST NOT AVAI LABLE AND THAT THE SUBSIDIARY IN INDIA INCURRED A LOSS DU E TO WHICH THE ENTIRE INVESTMENT AS WELL AS RECOVERABLE ADVANC E HAD BEEN FULLY PROVIDED FOR IN THE BOOKS OF ACCOUNT. BEING SO IT IS NOT COMPARABLE WITH THE ASSESSEE COMPANY. 35. WE HAVE CONSIDERED THE ARGUMENTS OF BOTH THE PARTIE S. IN OUR CONSIDERED VIEW FOR COMPUTING THE NET MARGIN OF THE ASSESSEE FOR THE PURPOSE OF TRANSFER PRICING ONLY T HE COST RELATED TO THE TRANSACTION WITH THE AES HAS TO BE CONSIDERE D AND ACCORDINGLY, WE AGREE WITH THE ARGUMENT THAT SEGMEN TAL FINANCIAL DATA IS TO BE CONSIDERED FOR THE PURPOSE OF ARRIVING AT THE NET MARGIN ON AN INTERNATIONAL TRANSACTION WITH THE ASSESSEES ENTERPRISES IN RESPECT OF TRANSACTIONS C ARRIED ON BY THE ASSESSEE. THIS VIEW OF OURS IS ALSO SUPPORTED BY THE ORDER OF THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF FOURSOFT LTD. VS. DCIT (62 DTR 308) (HYD). SAME VIEW HAS BE EN TAKEN BY THE TRIBUNAL IN VARIOUS CASES STATED BY THE ASSESSE E IN ITS 24 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ ARGUMENTS. BEING SO, SEGMENTAL DATA OF THE COMPANY F.I. SOFEX LTD., OUGHT TO BE CONSIDERED AS COMPARABLE IF THERE IS NORMAL LOSS. IN THIS CASE, THERE IS ABNORMAL LOSS ON ACCOU NT OF EXTRAORDINARY REASONS, THEN IT IS NOT COMPARABLE AN D TO BE EXCLUDED FROM COMPARABLES. THUS, F.I. SOFEX LTD., H AS TO BE EXCLUDED BY THE ASSESSING OFFICER. 36. THE AR FURTHER SUBMITTED, IN RESPECT OF TULSYAN TECHNOLOGIES LTD. (ITEM NO. 15 IN CHART) INTRODUCED BY THE ASSESSEE BUT REJECTED BY BOTH THE LOWER AUTHORITIES ON THE GROUND OF FUNCTIONAL DIFFERENCES BUT AS PER THE CLA RIFICATION GIVEN BY THE CBDT THE BUSINESS OF THE COMPANY CONST ITUTES ITES AND THEREFORE, CANNOT BE REJECTED AS COMPARABL E. 37. THE DR SUBMITTED THAT TULSYAN TECHNOLOGIES LTD : AS STATED BY THE TPO, IN PARA-7.2.6.1 OF HIS ORDER, TH E BUSINESS IN THE CASE OF THIS COMPANY COMPRISES BOTH SOFTWARE DE VELOPMENT AND ITES. FURTHER STATING THAT THE SERVICE INCOME W AS ONLY RS. 95,00,000 I.E. LESS THAN RS. 1 CRORE, AND NO SEGMEN TAL RESULTS ARE AVAILABLE, THE TPO REJECTED THIS COMPANY AS A C OMPARABLE. HOWEVER, STATING THAT THE AVERAGE TURNOVER DURING F INANCIAL YEAR 2002-03 AND 2003-04 WAS MORE THAN RS. 1 CRORE AND F URTHER STATING THE COMPANY WAS MAINLY INTO ITES, THE ASSES SEE HAS CONTENDED THAT THE ABOVE COMPANY QUALIFIES AS A COM PARABLE. HOWEVER, IT CANNOT AGREED WITH SUCH CONTENTION OF T HE APPELLANT. AS MAY BE SEEN, THE ASSESSEE ADMITTED TH AT REVENUE FROM SERVICES IN THE CASE OF THE ABOVE COMPANY DURI NG FINANCIAL YEAR 2,003-04 WAS LESS THAN RS. 1 CRORE. IN VIEW OF THIS FACT, AND SINCE SEGMENTAL RESULTS IN CASE OF TULSYAN TECHNOLO GIES LTD., WAS NOT AVAILABLE DURING THE PROCEEDINGS BEFORE HIM , THE TPO, WAS JUSTIFIED IN NOT CONSIDERING THE ABOVE COMPANY AS A COMPARABLE IN THIS CASE. 25 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ 38. WE HAVE HEARD THE PARTIES. THE ALP IS TO BE COMPUT ED ON THE BASIS OF COMPARABLES WHEREIN THEY SHOULD BE FUN CTIONAL COMPARABLES. THE ASSESSEE COMPANY IN THE PRESENT C ASE IS ENGAGED IN PROVIDING BACK OFFICE PROCESSING SERVICE S. M/S. TULSYAN TECHNOLOGIES LTD., IS ENGAGED IN INFORMATIO N TECHNOLOGY ENABLED SERVICES (ITES). THE ASSESSING OFFICER IS DIRECTED TO CONSIDER THE SEGMENTAL DATA RELATING TO ITES AND SO FTWARE AND CONSIDER THE SAME FOR THE PURPOSE OF COMPARISON IF THE SERVICE INCOME IS MORE THAN RS. 1 CRORE AFTER MAKING SUITAB LE ADJUSTMENT. 39. AR SUBMITTED IN RESPECT OF ULTRAMARINE & PIGMENT LT D. (ITEM NO. 17 IN THE CHART) INTRODUCED BY THE ASSESS EE AND ACCEPTED BY LOWER AUTHORITIES BUT LATER ON REJECTED BY THE ASSESSEE ON THE GROUND THAT DURING THE CURRENT FINA NCIAL YEAR, THE COMPANY HAD MADE ABNORMAL PROFITS. THE AR SUBMI TTED THAT THE COMPANY SHOWING ABNORMAL PROFITS, WHICH IS BEYOND THE NORMS OR THE STANDARDS OF INDUSTRY CANNOT BE TA KEN AS COMPARABLES. RELIANCE FOR THIS PROPOSITION IS PLACE D ON THE DECISION OF MUMBAI BENCH IN THE CASES OF ADOBE SYST EMS INDIA PVT. LTD. V. ADDL. CIT (44 SOT 49) (DELHI-URO), ITO V. SAUNAY JEWELS PVT. LTD. (42 SOT 4) (MUM. - URO), MENTOR GR APHICS, 2007-(112)-TTJ-0408-TDEL AND THE CASE OF ITAT, PUNE BENCH IN THE CASE OF E-GAIN COMMUNICATIONS VS. ITO 118 TT J 354 AND SAPIENT CORPORATION PVT. LTD. VS. DCIT (2012) 15 IT R (TRIB.) 285 DELHI. 40. THE DR SUBMITTED THAT M/S. ULTRAMARINE PIGMENTS LIMITED CANNOT BE EXCLUDED FROM COMPARABLES. ACCORD ING TO THE ASSESSEE COUNSEL, THE AO WAS NOT CORRECT IN ACCEPTI NG THIS COMPANY WHICH HAS 123% INCREASE IN REVENUE IN ONE Y EAR, AS A 26 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ COMPARABLE IN THIS CASE. HOWEVER, THE ASSESSEE ITSE LF HAS PROPOSED THIS COMPANY AS A COMPARABLE IN THEIR TP DOCUMENTATION. FURTHER, IT IS SEEN THAT THE TPO HAS CONSIDERED ONLY THE SEGMENTAL RESULTS, PERTAINING TO F.Y 2003- 04 IN THE CASE OF THE ABOVE COMPANY FOR COMPARABILITY ANALYSI S IN THIS CASE. AS PER THE FINANCIAL DATA PERTAINING TO SUCH SEGMENTAL RESULTS, THE AMOUNT OF INCOME IS SHOWN AT RS. 10.9 CRORES, WHICH IS COMPARABLE, KEEPING IN VIEW THE TURNOVER O F RS. 13.05 CRORES SHOWN BY THE ASSESSEE FOR THE ASST. YEAR 200 4-05. IT IS ALSO RELEVANT TO MENTION HERE THAT, THE TPO HAS NOT ED THAT THE EXTRAORDINARY PROFITS EARNED IN SUBSEQUENT FINANCIA L YEAR 2004- 05, IS NOT RELEVANT AS THE MATTER HERE PERTAINS TO F.Y. 2003-04. HAVING REGARD TO SUCH FACTS, THE TPO WAS JUSTIFIED IN CONSIDERING THE SEGMENTAL RESULTS IN RESPECT OF THE ABOVE COMPANY, FOR COMPARABILITY ANALYSIS IN THIS CASE. ACCORDINGLY, THE AO WAS ALSO JUSTIFIED IN ACCEPTING SUCH SEGMENT AL RESULTS IN RESPECT OF THE ABOVE COMPANY FOR COMPARABILITY ANAL YSIS IN THIS CASE. 41. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. IT I S AN ADMITTED FACT THAT THE CASES WHICH WERE SHOWING ABN ORMAL TRADING RESULTS, AS DISCUSSED IN EARLIER PARAS, BY RELYING ON THE ORDER OF THE BANGALORE BENCH IN THE CASE OF GENISYS INTEGRATION SYSTEMS INDIA PVT. LTD. (SUPRA), COMPANIES SHOWING ABNORMAL RESULTS CANNOT BE CONSIDERED AS COMPARABLES. IT I S AN ADMITTED VIEW THAT THE COMPANIES MAKING ABNORMAL PROFITS AS COMPARED TO THE ASSESSEE CANNOT BE CONSIDERED AS COMPARABLES WHILE DETERMINING THE ALP. FOR THIS PURPOSE WE PLACE REL IANCE ON THE DECISION OF SPECIAL BENCH IN THE CASE OF DY. CIT VS . QUARK SYSTEMS LTD. (132 TTJ 1) (CHD.) (SB). ACCORDINGLY, IN OUR OPINION, SUPER PROFIT COMPANIES PER SE ARE LIABLE T O BE EXCLUDED FROM THE COMPARABLES. 27 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ 42. THE AR SUBMITTED THAT IN RESPECT OF VISHAL INFORMAT ION TECHNOLOGIES (ITEM NO. 20 IN CHART) INTRODUCED BY T HE LEARNED TPO AND DISPUTED BY THE ASSESSEE, SUBMITTED THAT FR OM THE FINANCIAL STATEMENTS OF THE COMPANY, IT IS CRYSTAL CLEAR THAT MAJOR PORTION OF THE WORK WAS OUTSOURCED AND THIS C ANNOT BE TAKEN AS COMPARABLE CASE. RELIANCE IN THIS REGARD I S PLACED IN THE CASE OF M/S. MAERSK GLOBAL SERVICE CENTRES VS. ACIT IN ITA NO. 858/MUM/2011. 43. REGARDING TATA SERVICES LTD. (ITEM NO. 8 IN THE CHA RT) THE AR SUBMITTED THAT THE COMPANY IS IN INTO SERVICES A KIN TO BPO, HENCE IT IS NOT FUNCTIONALLY DIFFERENT. IT IS A COM MERCIALLY OPERATING COMPANY AND NO PROFIT NO LOSS DOES NOT MEAN THAT THE ASSESSEE IS TRUST. 'NO PROFIT NO LOSS' CONCEP T DOES NOT ARISE HERE AT ALL. 44. THE DR SUBMITTED THAT VISHAL INFORMATION TECHNOLOGI ES LTD., AS PER THE ANNUAL REPORT IN THE CASE OF THIS COMPANY, THE EMPLOYEE COST TO TOTAL COST RATIO IS 2%. STATING TH AT THEIR EMPLOYEE COST TO TOTAL COST RATIO IS 47%, THE ASSES SEE CONTENDED THAT THE ABOVE COMPANY SHOULD NOT BE CONSIDERED AS A COMPARABLE. HOWEVER, THE CIT(A) AGREED WITH THE SU BMISSION OF THE TPO MADE IN HIS REMAND REPORT, COPY OF WHICH HA S BEEN FURNISHED TO THE ASSESSEE FOR COMMENTS, THAT ALLOCA TION OF SALARIES OF EMPLOYEES UNDER PARTICULAR HEAD, DEPEND S ON THE METHOD FOLLOWED BY THE COMPANY. IN THE SAID REPORT , HE HAS FURTHER MENTIONED THAT SOME ASSESSES MAY CATEGORIZE SUCH EXPENDITURE AS OPERATING COST. HAVING REGARD TO HIS SUCH SUBMISSION, WHICH HAS NOT BEEN CONTROVERTED BY THE ASSESSEE AND SINCE UNDER 'TRADING AND OPERATING EXPENSES' IN THIS CASE, THERE IS CLAIM OF EXPENDITURE OF RS. 7,69,28,836 AN D MOREOVER, IT IS FUNCTIONALLY SIMILAR TO THE ASSESSEE, ACCORDINGL Y, THE TPO WAS 28 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ JUSTIFIED IN CONSIDERING THE ABOVE COMPANY I.E., VI SHAL INFORMATION TECHNOLOGY LIMITED, AS A COMPARABLE FOR THE PURPOSE OF DETERMINING ALP IN THIS CASE. 45. THE DR SUBMITTED WITH REGARD TO TATA SERVICES LIMIT ED THAT THE ASSESSEE HAS OBJECTED TO REJECTION OF THIS COMPANY BY THE TPO, IN ITS GROUNDS OF APPEAL BEFORE THE CIT(A) . HOWEVER, THE ASSESSEE HAS ACCEPTED THE REJECTION OF THE ABOV E COMPANY BEFORE THE CIT(A) IN ITS WRITTEN SUBMISSION FILED O N 23.7.2010. ACCORDINGLY, REJECTION OF THE ABOVE COMPARABLE BY T HE TPO/AO WAS JUSTIFIED. 46. WE HAVE HEARD BOTH THE PARTIES ON THE ABOVE TWO COMPARABLES. REGARDING VISHAL INFORMATION TECHNOLO GIES LTD., THE EMPLOYEES COST TO TOTAL COST RATIO IS WORKED O UT AT 2% AS COMPARED TO THE INDUSTRY AVERAGE OF 30 TO 40%. THE ASSESSEES EMPLOYEES COST TO TOTAL COST RATIO IS WORKED OUT A T 47%. SINCE THE EMPLOYEES COST FORM MAJOR COST BASE IN ITES SE RVICE INDUSTRIES, THE LOW RATIO OF COMPARABLES IMPLIES TH AT IT WOULD NOT BE PROVIDING SERVICES BY EMPLOYING ITS OWN SOUR CES. BEING SO, THE ASSESSEE IS NOT ALIKE TO M/S. VISHAL INFORM ATION TECHNOLOGIES LTD. ACCORDINGLY, M/S. VISHAL INFORMA TION TECHNOLOGIES LTD., CANNOT BE CONSIDERED AS COMPARAB LES AND IT IS TO BE EXCLUDED FROM COMPARABLES. 47. AS HELD IN EARLIER PARAS ELSEWHERE IN THIS ORDER, FUNCTIONALLY DIFFERENT COMPANIES CANNOT BE CONSIDER ED AS COMPARABLES WITH THE ASSESSEE COMPANY. BEING SO, T ATA SERVICES LTD., WHICH IS OPERATING ON NO PROFIT NO L OSS BASIS CANNOT BE CONSIDERED AS A COMPARABLE CASE AND THE R EJECTION IS JUSTIFIED. 29 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ 48. WITH REGARD TO NUCLEUS NETSOFT AND GIS INDIA AND M/ S. TRICOM INDIA (ITEMS NOS. 1 AND 2 IN THE CHART), THE AR SUBMITTED THAT THERE IS A DIFFERENCE OF 7% IN WORKING OUT THE PERCENTAGE OF OPERATING PROFIT AND COST. IN OTHER WORDS, ONLY OP ERATING INCOME SHOULD BE CONSIDERED. RELIANCE IN THIS REGARD IS P LACED ON THE DECISION OF DELHI TRIBUNAL IN THE CASE OF MENTOR GR APHICS (NOIDA) P. LTD. VS. DCIT (109 ITD 101) AND SONY IND IA P. LTD. VS. DCIT (315 ITR (AT) 150) (DELHI). WE ARE IN AGREEMEN T WITH THE ASSESSEES COUNSEL THAT ONLY OPERATING PROFIT IS TO BE CONSIDERED WHILE SELECTING THE COMPARABLES. 49. THE AR SUBMITTED THAT THE OTHER GROUND OF APPEAL RE LATES TO THE WORKING OUT THE PERCENTAGE OF OPERATING PROF IT ON THE COST IN THE CASE OF THE ASSESSEE ITSELF. DURING THE CUR RENT YEAR, THE ASSESSEE HAD INCURRED EXCESSIVE RENT OF RS. 1,41,20 ,250 ON ACCOUNT OF KEEPING THE PREMISES IDLE IN VIEW OF PRO POSED SHIFTING OF THE OFFICE PREMISES. THIS ADJUSTMENT IS HELD TO BE PERMISSIBLE IN THE CASE OF TRANSWITCH INDIA PVT. LTD. V. DCIT I N ITA NO. 6083/DEL/2010 AND ALSO IN THE CASE OF DCIT V. VERTE X CUSTOMER SERVICES INDIA (P.) LTD. (34 SOT 532) (DELHI). THES E ARE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE. AFTER C ONSIDERING THE REASONS OFFERED BY THE ASSESSEE, WE ARE INCLINED TO ADMIT THE SAME FOR ADJUDICATION. 50. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. WE A RE IN AGREEMENT WITH THE PLEA OF THE ASSESSEE THAT ASSESS EE HAD INCURRED EXCESSIVE RENT ON ACCOUNT OF KEEPING THE P REMISES IDLE. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO MAK E NECESSARY ADJUSTMENTS TOWARDS RENT. 51. THE AR SUBMITTED THAT, AS AGAINST THE ARITHMETIC ME AN OF 10.05%, AFTER ADJUSTING FOR WORKING CAPITAL @ 2%, I T COMES TO 30 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ 8.5% AND WHEREAS THE ASSESSEE HAD BENCHMARKED HIS TRANSACTION WITH ASSOCIATE ENTERPRISE AT 11% (AFTER ADJUSTING OPERATIONAL COST TO THE ABNORMAL RENT INCURRED AS S UBMITTED VIDE PARA 16 SUPRA. IN ANY EVENT, IT WILL BE WITHIN THE RANGE OF (+) OR (-) 5% AND THEREFORE, NO ADJUSTMENT IS REQUI RED. 52. THE AR FURTHER SUBMITTED WITH REGARD TO GROUND NO. 1.8 THAT, NOTWITHSTANDING THE ABOVE, THE ASSESSEE IS E NTITLED TO THE BENEFIT OF PROVISO TO SEC. 92C(2) OF 5% ADJUSTMENT IRRESPECTIVE OF RANGE OF ACTUAL VARIATION BETWEEN THE MARGIN DISCLO SED BY ASSESSEE AND THE AVERAGE MEAN MARGIN SO CALCULATED AS HELD BY ITAT IN THE CASES OF :- (1) EMERSONS PROCESS MANAGEMENT INDIA PVT. LTD. VS. ACI T, 2011- TII-102-ITAT-MUM- TP; (2) M/S. DIAGEO INDIA PVT. LTD. VS. DCIT 2011-TII-94-IT AT-MUM-TP; (3) CAPGEMINI INDIA (P) LTD. VS. ACIT (2011) 141 TTJ 33 (MUM) (URO); (4) PHOENIX MECANO INDIA LTD. VS. DCIT IN ITA NO. 7647/ M/2011; (5) ACIT VS. UE TRADE CORPN (I) PVT. LTD. (2011) 136 TT J 297 (DEL.); (6) TNT INDIA P. LTD., VS. ACIT (2012) 15 ITR (TRIB.) 2 63 (BANG); (7) SCHEFENACKER MOTHER SON LTD. VS. ITO (2010) 2 ITR ( TRIB.) 1961 DELHI; (8) CUMMINS INDIA LTD. V. DCIT [2012] 15 ITR (TRIB) 252 (PUNE). 53. THE AR SUBMITTED THAT THE MUMBAI BENCH IN THE CASE OF EMERSONS PROCESS MANAGEMENT INDIA PVT. LTD. VS. ACI T (SUPRA) WHEREIN IT WAS HELD THAT PRIOR TO AMENDMENT IN SECO ND PROVISO TO SEC. 92C W.E.F. 01.10.2009, ISSUES IS NO LONGER RES INTEGRA AND THE BENEFIT OF 5% IS TO BE ALLOWED EVEN IN THE CASES WHERE DIFFERENCE IN VALUE OF INTERNATIONAL TRANSACTIONS A T ITS ALP IS MORE THAN 5%. 54. REGARDING GRANTING OF DEDUCTION AS PER PROVISO TO S ECTION 92C(2) OF THE ACT, THE DR SUBMITTED THAT IF THE DIF FERENCE BETWEEN THE ALP DETERMINED BY THE TPO DOES NOT EXCE ED 5% OF THE PRICE OF THE INTERNATIONAL TRANSACTIONS SHOWN B Y THE 31 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ ASSESSEE, THEN SUCH PRICE SHOWN BY THE ASSESSEE SHA LL BE DEEMED TO BE THE ALP. ACCORDING TO THE DR, IN THE PRESENT CASE, THE DIFFERENCE EXCEEDS 5% BETWEEN THE ALP DETERMINE D BY THE TPO AND THE PRICE OF THE INTERNATIONAL TRANSACTIONS SHOWN BY THE ASSESSEE. BEING SO, NO SUCH DEDUCTION COULD BE GRANTED. THE DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIE S. 55. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN OUR OPINION, THE ASSESSEE IS ENTITLED FOR DEDUCTION 5% IF THE DIFFERENCE BETWEEN THE ALP DETERMINED BY THE TPO AND THE ASSESSEE IS WITHIN THE RANGE OF 5%, THEN, AS PRESCRIBED IN SECTION 92C(2) OF THE ACT, AS HELD BY VARIOUS DECIS IONS RELIED ON BY THE ASSESSEES COUNSEL, THE DEDUCTION AT 5% SHOU LD BE GIVEN ON ALP COMPUTED BY THE ASSESSING OFFICER. 56. COMING TO GROUND NO. 1.9 WITH REGARD TO ADJUSTMENT TOWARDS WORKING CAPITAL AT 2%, WE ARE OF THE OPINIO N THAT THE PLEA OF THE ASSESSEE SHOULD BE ALLOWED IN THE LIGHT OF ORDER OF THE TRIBUNAL IN THE CASE OF LOGIX MICRO SYSTEMS LTD. VS . ACIT (8 ITR (TRIB) 159) (BANG.) AND ALSO TALLY SOLUTIONS PVT. L TD. VS. DCIT (13 ITR (TRIB) 245) (BANG.). 57. WITH REGARD GROUND NO. 1.10 WITH REGARD TO REDUCTIO N OF COMMUNICATION EXPENSES FROM THE EXPORT TURNOVER WHI LE COMPUTING DEDUCTION U/S. 10A OF THE IT ACT, WE ARE OF THE OPINION THAT, AS HELD BY THE SPECIAL BENCH IN THE C ASE OF INCOME TAX OFFICER VS. SAK SOFT LTD. [121 TTJ (CHEN NAI) (SB) 865], FOR THE PURPOSE OF APPLYING THE FORMULA UNDER SUBSECTION (4) OF SECTION 10B, THE FREIGHT, TELECOM CHARGES AN D INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INC URRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICE S OUTSIDE 32 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNO VER AND FROM THE TOTAL TURNOVER, WHICH ARE NUMERATOR AND DENOMIN ATOR, RESPECTIVELY IN THE FORMULA. ACCORDINGLY, WE CONFI RM THE ORDER OF THE CIT(A) ON THIS ISSUE. 58. COMING TO THE ASSESSMENT YEAR 2005-06 IN ITA NO. 988/HYD/ 2011. THE ASSESSEE RAISED THE FOLLOWING G ROUNDS OF APPEAL: 1.0 THE ORDERS PASSED BY THE LOWER AUTHORITIES, INSOFAR AS ISSUES DECIDED AGAINST THE ASSESSEE ARE AGAINST THE LAW, FACTS, CIRCUMSTANCES, NATURAL JUSTICE, EQUITY AND ALL OTHER KNOWN PRINCIPLES OF LAW. 1.1 THE LEARNED CIT(A) AS WELL AS THE LEARNED AO/TPO HAVE ERRED IN LAW AS WELL AS FACTS OF THE CASE IN NOT ACCEPTING THE ARM'S LENGTH PRICE (ALP) DETERMINED BY THE APPELLANT. 1.2 THE LEARNED CIT(A), AS WELL AS LEARNED AO/TPO HAVE ERRED IN SELECTING AND USING CERTAIN COMPANIES AS COMPARABLES TO DETERMINE THE ALP BY NOT APPRECIATING THE FACT THAT THE COMPARABLE COMPANIES SELECTED ARE NOT COMPARABLES TO THE APPELLANT AND HENCE, CANNOT BE USED IN THE INSTANT CASE. 1.3 BOTH THE LEARNED CIT(A) AND AS WELL AS AO/TPO ERRED IN REJECTING THE LOSS MAKING COMPARABLES, IN VIOLATION OF OECD GUIDELINES, INSTEAD, SUMMARILY WITHOUT ANY BASIS CONCLUDED THAT THE COMPARABLES SHALL BE OF THOSE COMPANIES WHICH HAVE SHOWN PROFIT. 1.4 THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF EXPENDITURE PERTAINING TO INTERNET SERVICES UTILISED FROM VSNL ON THE GROUND THAT THE PAYMENT FALLS UNDER THE CATEGORY OF FEES FOR TECHNICAL SERVICES AND ASSESSEE FAILED TO DEDUCT TAX AT SOURCE. 1.5 THE LEARNED CIT(A) IS NOT CORRECT IN UPHOLDING THE AD-HOC DISALLOWANCE OF 15% OF THE EXPENDITURE EXCLUDING RENT, ELECTRICITY CHARGES, 33 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ COMMUNICATION CHARGES, INSURANCE AND FOREIGN EXCHANGE LOSS. 1.6 THE LEARNED CIT(A) FAILED TO DISPOSE OF THE CONTEST OF THE ASSESSEE IN SO FAR AS AO FINDING TO EXCLUDE COMMUNICATION CHARGES FROM THE EXPORT TURNOVER FOR COMPUTATION OF DEDUCTION U/S. 10A OF THE IT ACT. 1.7 THE LEARNED CIT(A) IS NOT CORRECT IN REDUCING THE COMMUNICATION EXPENSES FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S. 10A OF THE IT ACT, THIS IS ESPECIALLY SO WHEN THESE EXPENSES WERE NOT PART OF EXPORT TURNOVER. 1.8 FOR THESE AND OTHER REASONS THAT ARE TO BE URGED AT THE TIME OF HEARING OF THE CASE, THE APPELLANT PRAYS THAT THE ORDERS PASSED BY THE LOWER AUTHORITIES ARE TO BE SET ASIDE IN THE INTEREST OF JUSTICE AND PRAYS FOR APPROPRIATE RELIEF BASED ON THE ABOVE GROUNDS. 59. GROUND NOS. 1.0, 1.8 AND 1.11 ARE GENERAL IN NATURE AND DO NOT REQUIRE ANY ADJUDICATION. ACCORDINGLY, THES E GROUNDS ARE DISMISSED. 60. GROUND NO. 1.2 AND 1.3 ARE WITH REGARD TO SELECTION OF COMPARABLES. SIMILAR ISSUE IS DISPOSED OF IN THE E ARLIER PARAS OF THIS ORDER FOR ASSESSMENT YEAR 2004-05. APPLYING T HE SAME RATIO, THESE GROUNDS ARE DECIDED ACCORDINGLY AND TH E ASSESSING OFFICER IS DIRECTED TO CONSIDER THE COMPARABLES ON THE SIMILAR LINES. 61. GROUND NO. 1.6 AND 1.7 ARE WITH REGARD TO EXCLUSION OF COMMUNICATION CHARGES FROM EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER. THIS ISSUE IS ALSO DECIDED IN EARL IER PARA NO. 57 OF THIS ORDER. THESE GROUNDS ARE DISMISSED ACCORDI NGLY. 62. GROUND NO. 1.4 READS AS UNDER: 34 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ 1.4 THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF EXPENDITURE PERTAINING TO INTERNET SERVICES UTILISED FROM VSNL ON THE GROUND THAT THE PAYMENT FALLS UNDER THE CATEGORY OF FEES FOR TECHNI CAL SERVICES AND ASSESSEE FAILED TO DEDUCT TAX AT SOURC E. 63. BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSEE HAS OBJECTED TO THE DISALLOWANCE OF RS. 13,09,362 MADE IN THE AS SESSMENT. IN THE WRITTEN SUBMISSIONS FILED BY THE AR, IT WAS SUB MITTED THAT DURING THE PREVIOUS YEAR THE ASSESSEE COMPANY HAS U TILIZED INTERNET SERVICES FROM VSNL AND MADE PAYMENT TOWARD S THE SAME. OBJECTING TO SUCH DISALLOWANCE MADE BY THE AO , IT WAS STATED THAT MERE PURCHASE OF INTERNET BANDWIDTH DOE S NOT LEAD TO AVAILING TECHNICAL SERVICE. THOUGH SOPHISTICATED EQUIPMENTS ARE USED AND THE CONNECTION OF THE INTERNET IS THRO UGH A SATELLITE LINK, IT CANNOT BE SAID THAT THE ASSESSEE IS AVAILI NG TECHNICAL SERVICES. STATING THAT THE COMPANY HAS AVAILED GEN ERAL INTERNET SERVICE LIKE ANY OTHER USER, FROM VSNL, THE AR CONT ENDED THAT THE PAYMENT MADE FOR THE SAME CANNOT TREATED AS FEE S FOR TECHNICAL SERVICES. FURTHER STATING THAT SUCH PAYME NT MADE BY THE ASSESSEE WAS NOT LIABLE FOR DEDUCTION OF TAX AT SOURCE, HE CONTENDED THAT SUCH DISALLOWANCE MADE BY THE ASSESS ING OFFICER IN THE ASSESSMENT IS NOT JUSTIFIED. IN THI S REGARD, THE AR RELIED ON THE DECISION OF MADRAS HIGH COURT IN THE CASE OF SKYCELL COMMUNICATIONS LTD., & ANR. VS. DCIT [251 I TR 53] AND THE DECISION OF THE ITAT, DELHI BENCH, IN DCIT VS. M/S. ESTEL COMMUNICATIONS PVT. LTD., IN ITA NO. 3375/DEL./2007 DATED 10.03.2008. 64. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE AR AND THE FACTS OF THE CASE. FIRST OF ALL, IT MAY BE STATED HERE THAT THE ASSESSING OFFICER HAS MADE SUCH DISALLOWANCE AF TER REFERRING TO THE DECISION OF HON'BLE ITAT, KOLKATA, IN THE CA SE OF HUTCHISON TELECOM EAST LTD., VS. CIT [16 SOT 404]. THE 35 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ ASSESSEE HAS SUBMITTED THAT IN THEIR CASE THERE WAS ONLY PURCHASE OF INTERNET BANDWIDTH FROM VSNL. IT IS FU RTHER STATED THAT THOUGH THERE WAS USER OF SOPHISTICATED EQUIPME NTS AND THE CONNECTION OF THE INTERNET IS THROUGH A SATELLITE L INK, IT CANNOT BE SAID THAT THE ASSESSEE WAS AVAILING TECHNICAL SE RVICES. HOWEVER, AS MAY BE SEEN, THE ASSESSEE HAS NOT STATE D THAT THERE WAS NO INVOLVEMENT HUMAN SKILL IN SUCH SERVICES AVA ILED FROM THE SAID INTERNET SERVICE PROVIDER. THE ASSESSEE HA S REMAINED SILENT WITH REFERENCE TO THAT ASPECT. IN OUR CONSI DERED VIEW, IN AVAILING SUCH SERVICE FACILITY FROM VSNL, THERE IS INVOLVEMENT OF HUMAN SKILL. IN OTHER WORDS, EFFORTS OF TECHNICAL P ERSONNEL WERE INVOLVED IN AVAILING THE SAID INTERNET CONNECTION A ND THE INCIDENTAL SERVICES AVAILED FROM VSNL. UNDER THE C IRCUMSTANCE, IN OUR VIEW, SUCH PAYMENT MADE BY THE ASSESSEE TO T HAT SERVICE PROVIDER HAS TO BE TREATED AS FEES FOR TECHNICAL SE RVICES AND HENCE THE ASSESSEE WAS UNDER OBLIGATION TO DEDUCT T AX AT SOURCE FROM THE SAME. 65. IN SUPPORT OF HIS CONTENTION, THE ASSESSEE HAS REFE RRED TO THE DECISION IN SKYCELL COMMUNICATIONS LTD., (SUPRA ). IN THAT CASE PAYMENT WAS MADE BY THE ASSESSEE FOR CELLULAR MOBILE SERVICE AND IT WAS HELD BY HON'BLE MADRAS HIGH COUR T THAT WHEN A PERSON SUBSCRIBES TO A CELLULAR TELEPHONE SERVICE , HE DOES NOT CONTRACT TO RECEIVE A TECHNICAL SERVICE. IT WAS FU RTHER HELD THAT THE FACT THAT TELEPHONE SERVICE PROVIDER HAS INSTAL LED SOPHISTICATED EQUIPMENTS IN THE EXCHANGE, DOES NOT ON THAT SCORE, MAKE IT A PROVISION OF A TECHNICAL SERVICE T O THE SUBSCRIBER FOR THE PURPOSE OF SECTION 194J. IN OUR VIEW, THE FACTS IN THAT CASE ARE DIFFERENT FROM THAT OF ASSES SEE. FURTHER, IN THE OTHER DECISION IN THE CASE OF ESTEL COMMUNICATI ON PVT. LTD. (SUPRA), ITAT, DELHI BENCH, FOLLOWING THEIR EARLIER ORDER, HELD THAT THE PAYMENT MADE FOR INTERNET BANDWIDTH IS NOT TOWARDS 36 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTAN CY SERVICES AND THE SAME CANNOT BE DISALLOWED U/S. 40(A)(I). HO WEVER, HAVING REGARD TO THE SAID DECISION OF THE HON'BLE I TAT, KOLKATA BENCH, RELIED ON BY THE ASSESSING OFFICER AND SINCE THERE WAS HUMAN SKILL INVOLVED IN THE SAID INTERNET BANDWIDTH AND OTHER FACILITIES AVAILED BY THE ASSESSEE FROM VSNL, THE S AID PAYMENT WAS IN THE NATURE OF FEE FOR TECHNICAL SERVICES. UN DER THE CIRCUMSTANCE, FOR NON DEDUCTION OF TAX AT SOURCE ON THE SAME, THE ASSESSING OFFICER WAS JUSTIFIED IN DISALLOWING THE SAID AMOUNT U/S. 40(A)(IA) OF THE ACT. WE DO NOT FIND A NY INFIRMITY IN THE ORDER OF THE CIT(A) AND THE SAME IS UPHELD. TH IS GROUND IS REJECTED 66. GROUND NO. 1.5 READS AS UNDER: THE LEARNED CIT(A) IS NOT CORRECT IN UPHOLDING THE AD- HOC DISALLOWANCE OF 15% OF THE EXPENDITURE EXCLUDIN G RENT, ELECTRICITY CHARGES, COMMUNICATION CHARGES, INSURANCE AND FOREIGN EXCHANGE LOSS. 67. FACTS OF THE CASE ARE THAT THE ASSESSEE HAS OBJECTE D TO THE DISALLOWANCE OF EXPENDITURE OF RS. 2,15,33,810 MADE IN THE ASSESSMENT. IT IS STATED THAT BOOKS OF ACCOUNTS HAV E BEEN PRODUCED BY THE ASSESSEE BEFORE THE ASSESSING OFFIC ER FOR HIS VERIFICATION. IT IS FURTHER STATED THAT THE ASSESSE E BEING A REGISTERED STPI UNIT, ELIGIBLE TO CLAIM EXEMPTION F OR ITS PROFITS U/S. 10B, THERE IS NO NEED FOR THE ASSESSEE TO INFL ATE ITS PROFITS. AS SUCH, THE ITO'S CLAIM THAT EXCESSIVE EXPENDITURE HAD BEEN RECORDED BY THE ASSESSEE IS TOTALLY INCORRECT. IT I S FURTHER STATED, ACCORDINGLY, THE DISALLOWANCE OF 15% OF TOTAL EXPEN DITURE TO THE TUNE OF RS. 2,15,33,810 IS UNWARRANTED AND WRONG. 68. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD AND GONE THROUGH THE SUBMISSIONS OF THE A R AND THE FACTS OF THE CASE. THOUGH THE ASSESSEE HAS CLARIFIE D ABOUT THE 37 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ NATURE OF VARIOUS EXPENDITURE CLAIMED BY IT, IT HAS NOT BEEN EXPLAINED AS TO WHY AND UNDER WHICH CIRCUMSTANCES I T COULD NOT PRODUCE THE BOOKS OF ACCOUNTS AND THOSE BILLS A ND VOUCHERS FOR VERIFICATION BEFORE THE ASSESSING OFFICER DURIN G THE ASSESSMENT PROCEEDINGS. AS SEEN FROM THE ASSESSMENT RECORD, AT THE TIME OF HEARING ON 12.12.2008, ASSESSING OFF ICER HAS REQUESTED THE AR OF THE ASSESSEE TO PRODUCE BOOKS O F ACCOUNTS AND VOUCHERS OF EXPENSES FOR VERIFICATION BEFORE HI M. THE CASE WAS ADJOURNED ON THAT DATE TO 22.12.2008. IT APPEAR S ON 22.12.2008 THERE WAS NO HEARING. HOWEVER, ON 30.12. 2008, WHEN THE NEXT HEARING WAS MADE, THE AR OF THE ASSES SEE HAS MADE SUBMISSIONS PARTLY. AS NOTED BY THE ASSESSING OFFICER, THE AR HAS EXPRESSED INABILITY TO FURNISH THE BALANCE I NFORMATION CALLED FOR BY HIM. FROM THE FINDINGS OF THE CIT(A), IT IS SEEN THAT THE ASSESSEE HAS NOT PRODUCED THE BOOKS OF ACCOUNTS AND BILLS AND VOUCHERS FOR VERIFICATION ON THAT DATE. UNDER T HE CIRCUMSTANCES, I.E., WHEN THE ASSESSEE HAS NOT BEEN ABLE TO PRODUCE THE BOOKS OF ACCOUNTS AND BILLS AND VOUCHER S FOR VERIFICATION BEFORE THE ASSESSING OFFICER, DISALLOW ANCE IS CALLED FOR FROM SUCH CLAIM OF EXPENSES MADE BY THE ASSESSE E IN ITS RETURN. THUS, WE UPHOLD ACTION OF THE CIT(A) IN DIS ALLOWING A PART OF SUCH EXPENSES CLAIMED BY THE ASSESSEE FOR T HIS ASSESSMENT YEAR. 69. FURTHER, EVEN THOUGH THE AR HAS NOW SUBMITTED THAT THE ASSESSEE IS HAVING BILLS AND VOUCHERS IN RESPECT OF THE OTHER EXPENSES, SINCE THE SAME HAVE NOT BEEN PRODUCED FOR VERIFICATION BEFORE THE ASSESSING OFFICER, DURING T HE ASSESSMENT AND NO JUSTIFICATION HAS BEEN GIVEN FOR NOT PRODUCI NG THE SAME DURING THE ASSESSMENT PROCEEDINGS, SUCH REQUEST OF THE ASSESSEE AT THIS STAGE, CANNOT BE ACCEDED TO. FURTH ER, IT IS DIFFICULT TO COMMENT ON THE SANCTITY OF SUCH VOUCHE RS IN RESPECT 38 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ OF THOSE REMAINING EXPENSES. UNDER THE CIRCUMSTANC E, WE UPHOLD THE DISALLOWANCE OF 15% EXPENDITURE IN RESPE CT OF THOSE EXPENSES. WE DO NOT FIND ANY INFIRMITY IN THE ORDE R OF THE CIT(A) AND THE SAME IS UPHELD. THIS GROUND OF THE ASSESSE E IS DISMISSED. 70. WITH REGARD TO GROUND NOS. 1.6 AND 1.7 IN THIS APPE AL, THIS ISSUE IS ALREADY DISCUSSED BY US IN ITA NO. 14 94/HYD/2010 ELSEWHERE IN EARLIER PARAS BY PLACING RELIANCE ON T HE ORDER OF THE SPECIAL BENCH OF CHENNAI IN THE CASE OF ITO VS. SAK SOFT LTD. (121 TTJ 865). ACCORDINGLY, THESE GROUNDS ARE DISM ISSED. 71. THE ASSESSEE FILED ADDITIONAL GROUND THAT THE CIT(A ) OUGHT TO HAVE APPRECIATED THAT WHEN THE ADDITIONS ARE MAD E UNDER BUSINESS HEAD, THE SAME WOULD ONLY GO TO INFLATE THE BUSINESS INCOME WHICH QUALIFIES FOR EXEMPTION U/S. 10A OF TH E IT ACT, 1961 AS HELD BY THE BOMBAY HIGH COURT IN THE CASE O F CIT VS. GEM PLUS JEWELLERY LTD. (330 ITR 175). 72. THE ASSESSEE FILED PETITION FOR ADMISSION OF ADDITI ONAL GROUND STATING THAT THE ISSUE RAISED IN ADDITIONAL GROUND IS PURELY ON QUESTION OF LAW DOES NOT INVOLVE ANY INVE STIGATION INTO THE FACTS OF THE CASE. FOR THE PURPOSE OF ADMISSIO N OF ADDITIONAL GROUND, HE RELIED ON THE JUDGEMENT IN THE CASE OF N ATIONAL THERMAL POWER CO. LTD., VS. CIT (229 ITR 383) (SC) WHEREIN HELD THAT THE POWER OF THE TRIBUNAL IN DEALING WITH THE APPEALS IS EXPRESSED IN THE WIDEST POSSIBLE TERMS AND THIS TRI BUNAL HAS JURISDICTION TO EXAMINE THE QUESTION OF LAW WHICH A RISES FROM THE FACTS BEFORE THE AUTHORITIES BELOW AND HAVING B EARING ON THE LIABILITY ON THE ASSESSEE EVEN IF SUCH QUESTION WAS NOT RAISED BEFORE THE AUTHORITIES BELOW. 39 ITA NO. 1494/HYD/2010 & ANR. M/S. BRIGADE GLOBAL SERVICES PVT. LTD. ============================ 73. WE HAVE HEARD BOTH THE PARTIES ON THE ISSUE RELATIN G TO ADMISSION OF ADDITIONAL GROUND AND ALSO ON MERIT. WE FIND REASONABLE CAUSES FOR NOT RAISING THIS ISSUE BEFORE THE LOWER AUTHORITIES AS THE ISSUE RELATING TO TREATMENT OF D ISALLOWANCE MADE BY THE ASSESSING OFFICER WHILE COMPUTING THE I NCOME TO BE CONSIDERED FOR EXEMPTION U/S. 10A OF THE IT ACT AND THESE ADDITIONS MADE BY THE ASSESSING OFFICER WOULD FORM PART OF THE ASSESSED INCOME. BEING SO, WE ARE INCLINED TO DECI DE THE ISSUE IN FAVOUR OF THE ASSESSEE BY PLACING RELIANCE ON TH E JUDGEMENT OF CIT VS. GEM PLUS JEWELLERY INDIA LTD. (330 ITR 175) (BOM) WHEREIN HELD THAT THE INFLATED BUSINESS INCOME ON A CCOUNT OF DISALLOWANCE OF EXPENDITURE QUALIFIES FOR DEDUCTION U/S. 10A OF THE IT ACT. ACCORDINGLY, THIS GROUND IS ALLOWED. 74. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH NOVEMBER, 2012. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED 26 TH NOVEMBER, 2012 TPRAO COPY FORWARDED TO: 1. M/S. BRIGADE GLOBAL SERVICES PVT. LTD., PLOT NO. 30 & 31, BRIGADE TOWERS, FINANCIAL DISTRICT, NANAKRAMGUDA, HYDERABAD-500 032. 2. INCOME TAX OFFICER, WARD - 1(1), HYDERABAD. 3. INCOME TAX OFFICER, WARD - 1(2), HYDERABAD. 4 . THE CIT(A) - III, HYDERABAD. 5 . THE CIT - I, HYDERABAD 6 . THE DR A BENCH, ITAT, HYDERABAD
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