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ITA 154/DEL/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6456 (ITAT-DELHI)
• Duration Of Justice: 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-12-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 07-12-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 11-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Related party transaction; Transfer pricing; International transaction; Retrospective amendment; Question of law
• Section: 143(3); 92B; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM & SMT. BEENA A. PILLAI, JM ITA NO.154/DEL/2016 ASSESSMENT YEAR : 2011-12 MCKINSEY KNOWLEDGE CENTRE PVT. LTD., 3 RD FLOOR, BLOCK-III, VATIKA BUSINESS PARK, SECTOR-49, SOHNA ROAD, GURGAON. PAN: AACCM2356G VS. DCIT, CIRCLE-16(2), NEW DELHI. ITA NO.499/DEL/2016 ASSESSMENT YEAR : 2011-12 DCIT, CIRCLE-16(2), NEW DELHI. MCKINSEY KNOWLEDGE CENTRE PVT. LTD., 3 RD FLOOR, BLOCK-III, VATIKA BUSINESS PARK, SECTOR-49, SOHNA ROAD, GURGAON. PAN: AACCM2356G (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI PORUS KAKA, SR. ADVOCATE & SHRI DIVESH CHAWLA, ADVOCATE DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT, DR & SHRI NEERAJ KUMAR, SR. DR DATE OF HEARING : 13.12.2016 DATE OF PRONOUNCEMENT : 15.12.2016 ITA NO.154/DEL/2016 2 ORDER PER R.S. SYAL, AM: THESE TWO CROSS APPEALS ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE - ARE DIRECTED AGAINST THE FINAL ASSESSMENT ORDER DATED 10.12.2015 PASSED BY THE ASSESSING OFFICER (AO) U/S 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFT ER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2011-12. A. RESEARCH AND INFORMATION SERVICES 2. THE FIRST ISSUE RAISED BY THE ASSESSEE IN ITS AP PEAL IS AGAINST THE TRANSFER PRICING ADJUSTMENT IN RESPECT OF PROVISIO N FOR RESEARCH AND INFORMATION SERVICES. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT MCKINSEY IS A `MANAGEMENT CONSULTING CONCERN HEADQ UARTERED IN NEW YORK WITH MORE THAN 90 BRANCH OFFICES IN OVER 50 CO UNTRIES. THE MCKINSEY GROUP CATERS TO THE MANAGEMENT NEEDS OF DI VERSE RANGE OF INDUSTRIES, SUCH AS, AUTOMOTIVE AND ASSEMBLY, BANKI NG AND SECURITIES, INSURANCE, PHARMACEUTICALS AND MEDICAL PRODUCTS, PR IVATE EQUITY ET AL . THE ASSESSEE WAS ESTABLISHED IN FEBRUARY, 1999 TO P ROVIDE RESEARCH AND ITA NO.154/DEL/2016 3 INFORMATION SERVICES TO MCKINSEY GROUP OF COMPANIES FOR ASSISTANCE IN THEIR PROJECTS. THE INFORMATION IS REQUIRED TO BE GIVEN TO QUERIES PLACED BY CONSULTANTS, WHICH IS OBTAINED BY ACCESSING VARI OUS INTERNET BASED DATABASES, SUCH AS, BLOOMBERG, REUTERS, ONE SOURCE, DOW JONES, DIALONG AND DATASTREAM. IN THE YEAR 2004, THE ASSES SEE ALSO STARTED PROVIDING IT SUPPORT SERVICES TO MCKINSEY GROUP OF COMPANIES. TWO INTERNATIONAL TRANSACTIONS WERE REPORTED BY THE ASS ESSEE IN FORM NO.3CEB FOR THE YEAR UNDER CONSDIERATION, WHICH IN CLUDE PROVISION FOR RESEARCH AND INFORMATION SERVICES TO MCKINSEY & CO . INC., USA, CURRENTLY UNDER CONSIDERATION, WITH TRANSACTED VALU E OF RS.1,36,09,15,539/-. THE AO REFERRED THE MATTER OF DETERMINATION OF THE ARMS LENGTH PRICE (ALP) OF BOTH THE INTERNATIONAL TRANSACTIONS TO THE TRANSFER PRICING OFFICER (TPO). THE TPO NOTICED TH AT THE ASSESSEE USED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DECLARING ITS INTERNATIONAL TRANSACTION OF PROVISION FOR RESEARCH AND INFORMATION SERVICES AT ALP. THE ASS ESSEE DECLARED ITS PROFIT LEVEL INDICATOR (PLI), BEING, OPERATING PROF IT/OPERATING COST (OP/OC) AT 15.17%. 16 COMPARABLES COMPANIES, INCLUD ING SOME NON- ITA NO.154/DEL/2016 4 INDIAN ENTITIES, WERE CHOSEN BY THE ASSESSEE TO SHO W THAT THE ASSESSEES PLI WAS AT ALP. THE TPO OBSERVED THAT THE ASSESSEE WAS SHOWING PROFIT MARGINS AT NET LEVEL IN THIS SEGMENT OVER TH E YEARS. IT WAS SEEN THAT OP/OC OF THIS SEGMENT FOR THE F.YS. 2007-08, 2008-0 9 AND 2009-10 WAS 35.34%, 131.48% AND 53.34%, RESPECTIVELY. AS AGAIN ST THIS HUGE PROFIT MARGIN, THE ASSESSEE HAD SHOWN ITS OP/OC FOR THE CU RRENT YEAR ONLY AT 15.17%. 14 COMPANIES INCLUDING ALL NON-INDIAN ENTI TIES CHOSEN BY THE ASSESSEE WERE EXCLUDED AND SOME NEW COMPANIES WERE INTRODUCED BY THE TPO IN THE LIST OF COMPARABLES. A FINAL LIST O F 8 COMPARABLE COMPANIES, INCLUDING THE TWO CHOSEN BY THE ASSESSEE , HAS BEEN DRAWN ON PAGES 35 AND 36 OF THE TPOS ORDER, WHICH IS AS UNDER : - COMPANY NAME OP/OC ADITYA BIRLA CAPITAL ADVISORS PVT. LTD. 38.50% APTICO LTD. 25.17% ICRA LTD. 82.40% ICRA MANAGEMENT CONSULTING SERVICES LTD. 16.14% KITCO LTD. 27.48% IDC (INDIA) LTD. 10.29% BIRLA SUNLIFE ASSET MANAGEMENT COMPANY LTD. 52.05% LADDERUP CORPORATE ADVISORY PVT. LTD. 52.42% AVERAGE 38.0 6% ITA NO.154/DEL/2016 5 3. APPLYING THE MEAN PROFIT MARGIN OF 38.06% T O THE ASSESSEES OPERATING COSTS RELATING TO TRANSACTIONS WITH ITS A E AMOUNTING TO RS.1,18,20,33,553 UNDER THIS SEGMENT, THE TPO PROPO SED TRANSFER PRICING ADJUSTMENT OF RS.27,05,45,360/-. THE ASSES SEE APPROACHED THE DISPUTE RESOLUTION PANEL (DRP) AGAINST THE DRAFT OR DER INCORPORATING THE TRANSFER PRICING ADJUSTMENT UNDER THIS SEGMENT. AF TER CONSIDERING THE DIRECTIONS GIVEN BY THE DRP, THE AO MADE TOTAL ADDI TION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN BOTH THE SEGMENTS OF THE ASSESSEE AT RS.25,94,83,125/- AS AGAINST THE ORIGINAL TRANSFER PRICING ADJUSTMENT RECOMMENDED BY THE TPO AMOUNTING TO RS.28,45,51,840 /- IN BOTH THE SEGMENTS, INCLUDING PROVISION FOR RESEARCH AND INF ORMATION SERVICES SEGMENT AT RS.27,33,96,137/-. THE ASSESSEE IS AGGR IEVED AGAINST THE ADDITION TO THIS EXTENT. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD. IT IS EVIDENT THAT THERE IS NO DISPUTE ON THE SELECTION OF TNMM AS THE MOST APPROPRIATE METHOD OR THE PLI OF OP/OC ETC. IN FACT, NO OTHER ASPECT OF THE TPOS ORDER HAS BEEN C HALLENGED EXCEPT THE ITA NO.154/DEL/2016 6 INCLUSION OF FOUR NEW COMPARABLES INTRODUCED BY THE TPO, NAMELY, ADITYA BIRLA CAPITAL ADVISORS PVT. LTD., ICRA LTD., BIRLA SUNLIFE ASSET MANAGEMENT COMPANY LTD. AND LADDERUP CORPORATE ADV ISORY PVT. LTD. 5. BEFORE EMBARKING UPON THE COMPARABILITY OR OTHERWISE OF THESE COMPANIES, IT IS SINE QUA NON TO ASCERTAIN THE CORRECT NATURE OF THE OPERATIONS CARRIED OUT BY THE ASSESSEE UNDER THIS S EGMENT. THE TPO HAS RECORDED ON PAGE 2 OF HIS ORDER THAT THE `RESEARCH AND ANALYTICS SERVICES PROVIDED BY THE ASSESSEE UNDER THE INSTANT SEGMENT INCLUDE: (A) KNOWLEDGE ON CALL; (B) PRACTICE RESEARCH; AND (C) A NALYTICS GROUP, THE DETAILED ELABORATION OF WHICH, AS EXTRACTED FROM TH E TRANSFER PRICING STUDY REPORT, IS AS UNDER : - KNOWLEDGE ON CALL GROUP: PROVIDES GENERALIST RESEAR CH AND INFORMATION SUPPORT. THE SERVICES OFFERED INCLUDE FINANCIAL ANALYSES, FACT PACKS, PRESS SEARCH, DOCUMENT SEARCH , ETC. THE GROUP CONSISTS OF AROUND 130 PERSONNEL, MOSTLY WITH 0-2 Y EARS OF EXPERIENCE. PRACTICE RESEARCH GROUP: THIS SUB-GROUP IS FOCUSED ON DOMAIN SPECIFIC RESEARCH SUPPORT. WITH A TEAM SIZE OF OVE R 90, IT PROVIDES SECTOR DATA AND ANALYSES, CAPITAL MARKET INSIGHTS, PERSPECTIVES AND INDUSTRY TRENDS. ANALYTICS GROUP: THE PRIMARY FOCUS OF THE ANALYTICS GROUP IS ON DATA INTENSIVE ANALYSIS REQUIRING EXPERTISE IN ANAL YTICAL TOOLS AND TECHNIQUES. IT UNDERTAKES DATA ANALYSIS, MODEL/TOO L DEVELOPMENT, ITA NO.154/DEL/2016 7 PROPRIETARY DATABASE MANAGEMENT, PRACTICE SPECIALIZ ED ANALYTICS, ETC. 6. THE LD. AR CONTENDED THAT THE ASSESSEE REN DERED THESE SERVICES TO WORLDWIDE MCKINSEY GROUP OF COMPANIES PURSUANT TO A N MASTER SERVICES AGREEMENT DATED 1.4.2010 WITH MCKINSEY IN C., USA, WHOSE COPY IS AVAILABLE ON PAGE 182 ONWARDS OF THE PAPER BOOK. CLAUSE 1 OF THE AGREEMENT, DEFINING THE NATURE OF WORK, IS REPR ODUCED AS UNDER:- 1. ENGAGEMENT OF MCKC THE CLIENT HEREBY ENGAGES MCKC TO RENDER THE BELOW MENTIONED SERVICES (THE SERVICES): (A) DEVELOP, MAINTAIN AND SERVICE THE SOFTWARE AND INFORMATION/RESEARCH RELATED PRODUCTS AND SERVICES; AND (B) KNOWLEDGE MANAGEMENT SYSTEMS AND INFRASTRUCTURE ISS UES WHICH WOULD ENCOMPASS INFRASTRUCTURE SUPPORT, APPLI CATION SUPPORT, APPLICATION OPERATIONS GROUP AND SURVEY DE VELOPMENT CENTER AND SUCH OTHER SERVICES AS MAY BE REQUESTED FROM TIME TO TIME. 7. ON A SPECIFIC QUERY, THE LD. AR CONTENDED THAT THIS AGREEMENT IS COMMON TO BOTH THE SERVICES PROVIDED BY THE ASSESSE E. HE SUBMITTED THAT ONLY THE LATER PART OF SUB-CLAUSE (A) OF CLAUSE (1) OF THE AGREEMENT, WHICH TALKS OF INFORMATION/RESEARCH RELATED PRODUC TS AND SERVICES, IS RELEVANT FOR THE SERVICES UNDER THE INSTANT SEGMENT . SINCE THERE IS NOT ITA NO.154/DEL/2016 8 MUCH ELABORATION ABOUT THE EXACT NATURE OF SERVICES RENDERED UNDER THIS SEGMENT AVAILABLE IN THE AGREEMENT, AND IT WAS CL AIMED THAT THE NATURE OF SERVICES CONTINUES TO REMAIN THE SAME OVER THE Y EARS, WE ASKED THE LD. AR TO TAKE US THROUGH THE PREDECESSOR AGREEMENT. F ROM SUCH EARLIER AGREEMENT, WE FIND THAT THE DESCRIPTION OF SERVICES IS VERBATIM REPRODUCTION OF WHAT HAS BEEN SET OUT IN THE MASTER SERVICES AGREEMENT REPRODUCED ABOVE. 8. THE LD. AR CONTENDED THAT THE ASSESSEE UNDER THIS SEGMENT HAS RENDERED DATA PROCESSING SERVICES WHICH ARE IN THE NATURE OF BUSINESS PROCESS OUTSOURCING (BPO). THIS WAS COUNTERED BY TH E LD. DR, WHO SUBMITTED THAT THE ASSESSEE PROVIDED KNOWLEDGE PROC ESS OUTSOURCING (KPO) SERVICES TO ITS AE AND NON-AES AND THE CONTEN TION OF THE ASSESSEE THAT IT WAS MERELY COLLATING DATA FROM THE DATABASE S, WAS NOT CORRECT. REFERRING TO CERTAIN DOCUMENTS, HE SUBMITTED THAT T HE WORK FORCE OF THE ASSESSEE CONSISTED OF RESEARCHERS, EXPERTS AND ANAL YSTS. HE ALSO REFERRED TO THE EARLIER MASTER AGREEMENT FOR IDENTI CAL SERVICES, WHICH INDICATED THAT THERE WAS A CHARGE OF US $ 1500 PER DAY FOR ANALYTICS ITA NO.154/DEL/2016 9 MANAGER. THE LD. DR ALSO TOOK US THROUGH THE EXTRA CT FROM WEBSITE OF MCKINSEY GROUP WHICH, SPECIFICALLY, COVERS MCKINSEY KNOWLEDGE CENTRE, NAMELY, THE ASSESSEE. IT HAS BEEN SHOWN THA T THE ASSESSEE IS: PROVIDING INDUSTRY AND FUNCTIONAL EXPERTISE, ADVAN CED ANALYTICS, BUSINESS RESEARCH AND PROPRIETARY TOOLS AND DATA. IN THE BACKGROUND OF THE PORTRAYAL OF THE ASSESSEES NATURE OF WORK, THE LD. DR CONTENDED THAT THE ASSESSEE WAS NOT MERE COLLATING DATA BEFOR E ONWARD TRANSMISSION TO MCKINSEY GROUP COMPANIES, BUT, ALSO CONDUCTING E XTENSIVE RESEARCH. HE STATED THAT THE ASSESSEE IS BASICALLY DOING DATA INTENSIVE ANALYSIS REQUIRING EXPERTISE IN ANALYTICAL TOOLS AND TECHNIQ UES. HE, ERGO, SUMMED UP THAT THE ASSESSEE IS RENDERING KPO SERVICES. 9. THE FIRST QUESTION WHICH HAS BEEN DEBATED AND FALLS FOR OUR CONSIDERATION IS TO DECIDE IF THE ASSESSEE RENDERED BPO OR KPO SERVICES. BEFORE ANSWERING THIS QUESTION, LET US APPRECIATE T HESE TWO CONCEPTS. IN COMMON PARLANCE, BPO MEANS OUTSOURCING OF SOME OF T HE BASIC AND ROUTINE BUSINESS FUNCTIONS TO A THIRD PARTY, WHICH MAY BE BACK OFFICE OR FRONT OFFICE OPERATIONS. WHILE FRONT OFFICE SERVICE S ARE RELATED TO CLIENT ITA NO.154/DEL/2016 10 INTERACTION AND CUSTOMER SUPPORT, BACK OFFICE SERVI CES ARE RELATED TO FINANCE AND HR ETC. ON THE OTHER HAND, KPO IS OUTSO URCING OF SPECIALIZED AND KNOWLEDGE BASED SERVICES/PROCESSES, SUCH AS, R&D, MARKET RESEARCH, ANALYTICAL BASED SERVICES AND ENGI NEERING DESIGN, CAPITAL AND INSURANCE MARKET SERVICES. IN FACT, KPO IS AN EXTENSION OF BPO, WHICH REQUIRES HIGH SKILL AND EXPERTISE OF P EOPLE WHO CARRY IT OUT. THE HONBLE DELHI HIGH COURT IN RAMPGREEN SOLUTIONS PVT. LTD VS. CIT (2015) 377 ITR 533 (DEL) HAS HELD THAT : `THE EXPRESSION BPO AND KPO ARE, PLAINLY, UNDERSTOOD IN THE SENSE THAT WH EREAS, BPO DOES NOT NECESSARILY INVOLVE ADVANCED SKILLS AND KNOWLEDGE; KPO, ON THE OTHER HAND, WOULD INVOLVE EMPLOYMENT OF ADVANCED SKILLS A ND KNOWLEDGE FOR PROVIDING SERVICES. 10. ARMED WITH THE ABOVE UNDERSTANDING, LET US SEE IF THE SERVICES RENDERED BY THE ASSESSEE IN THIS SEGMENT ARE BPO OR KPO? HERE IT IS RELEVANT TO NOTE THAT MCKINSEY GROUP OF COMPANIES I S ENGAGED IN PROVIDING MANAGEMENT CONSULTANCY SERVICES TO ITS CL IENTS IN THE FIELDS OF BUSINESS TECHNOLOGY, OPERATIONS, STRATEGY, ORGANIZA TION MARKETING AND ITA NO.154/DEL/2016 11 SALES AND CORPORATE FINANCE. THESE COMPANIES, SEEK ASSISTANCE OF THE ASSESSEE FOR ENABLING THEM TO RENDER SERVICES OF CONSULTANCY. WE HAVE EXTRACTED ABOVE FROM THE TRANSFER PRICING STUDY REP ORT THAT THE ASSESSEE IS PROVIDING BROADLY THREE TYPES OF SERVICES UNDER THIS SEGMENT, NAMELY, (A) KNOWLEDGE ON CALL; (B) PRACTICE RESEARCH; AND ( C) ANALYTICS GROUP. ON A SPECIFIC QUERY, THE LD. AR ADMITTED THAT NO SE PARATE REVENUES OR COSTS RECORD OF THE ABOVE THREE TYPES OF SERVICES W AS MAINTAINED AND IT WAS ALL IN A COMMON POOL. 11. SERVICES UNDER THE KNOWLEDGE ON CALL GROUP ARE OF GENERAL RESEARCH AND INFORMATION SUPPORT, ELEMENTARY IN NAT URE, REQUIRING THE ASSESSEE TO PICK UP THE RELEVANT DATA FROM INTERNET BASED DATABASES. THESE SERVICES INCLUDE FINANCIAL ANALYSES, FACT PAC KS, PRESS SEARCH, DOCUMENT SEARCH, ETC. A SPECIMEN OF SUCH SERVICES GIVEN BY THE LD. AR IS A REQUEST MADE FOR PROVIDING OFF-THE-SHELF COMPA NY PROFILES OF CERTAIN COMPANIES, WHICH THE ASSESSEE COMPILED, ORGANIZED I NTO TEMPLATES IN EXCEL, POWER POINT ETC. AND THEN TRANSMITTED OUTSID E INDIA AS ITS OUTPUT. ITA NO.154/DEL/2016 12 12. SERVICES UNDER PRACTICE RESEARCH ARE FOC USED ON DOMAIN SPECIFIC RESEARCH SUPPORT COLLATING DATA OF A PARTICULAR LIN E OF BUSINESS AS REQUESTED, COMPILING AND THEN SENDING AFTER NECESSA RY CONVERSION IN TO THE DESIRED FORMAT. THE INFORMATION GIVEN UNDER THI S SUB-GROUP IS SECTOR DATA AND ANALYSES, CAPITAL MARKET INSIGHTS, PERSPEC TIVES AND INDUSTRY TRENDS. A SPECIMEN OF SUCH SERVICES GIVEN BY THE LD. AR IS A REQUEST MADE BY ROGER ROUHANA SEEKING DETAILS ABOUT PRIVATE BANKING PLAYERS IN ASIA, TO WHICH THE ASSESSEE FURNISHED THE DETAILS B Y MENTIONING THAT: IT DID AN EXHAUSTIVE PRESS SEARCH TO GAUGE WHICH ALL B ANKS HAVE COMMITMENTS TO EXPAND PRIVATE BANKING BUSINESS IN A SIA AND BRIEF ON WHAT THEY INTEND TO DO. BANK-WISE DESCRIPTION OF I MMEDIATE GOALS COVERED IN PRESS WAS SUBMITTED. 13. SERVICES UNDER THE ANALYTICS GROUP ARE M OST COMPLEX SERVICES, WHICH THE ASSESSEE ITSELF HAS DESCRIBED IN ITS TRAN SFER PRICING STUDY REPORT THAT : `THE PRIMARY FOCUS ITS ANALYTICS GROUP IS ON DATA INTENSIVE ANALYSIS REQUIRING EXPERTISE IN ANALYTICAL TOOLS AND TECHNIQ UES. IT UNDERTAKES DATA ANALYSIS, MODEL/TOOL DEVELOPMENT, PROPRIETARY DATABASE ITA NO.154/DEL/2016 13 MANAGEMENT, PRACTICE SPECIALIZED ANALYTICS, ETC. A SPECIMEN OF SUCH SERVICES IS A REQUEST BY A GROUP COMPANY - CURRENT LY WORKING TO UPDATE THE LIST OF HOSPITALS WITH NEWLY ACCESSED STENT DAT A. THE ASSESSEE WAS REQUESTED TO: MATCH STENT DECILE FROM FILE HOSPI TAL LIST WITH THE RESPECTIVE HOSPITALS IN FILE STENT DATA. IT WAS FU RTHER REQUESTED TO PUT THE HOSPITAL ID NO. IN THE STENT DATA FILE FROM COLUM N A OF THE HOSPITAL LIST FILE. THEN, THERE ARE DETAILS AND CERTAIN ASS UMPTIONS WHICH SHOULD BE TAKEN BY THE ASSESSEE. THEN, CAVEAT HAS BEEN AD DED REQUESTING NOT TO CHANGE NAME OF FILE STENT DATA AND NOT TO CHANGE THE NAME OF TAB INDEX AND ITS STRUCTURE. THEREAFTER, SPECIFIC PRO FORMA WAS GIVEN IN WHICH THE INFORMATION WAS DESIRED. THE ASSESSEE COM PILED THE DATA AS REQUESTED AFTER DUE RESEARCH, WHICH REPORT RUNS INT O 67 PAGES, AND THE SAME HAS ALSO BEEN PLACED BEFORE US. 14. A CLOSE LOOK AT THE NATURE OF SERVICES IN A LL THE THREE SUB-GROUPS TRANSPIRES THAT THERE IS A VARYING DEGREE OF COMPLE XITY IN ALL THE THREE SUB-GROUPS. HOWEVER, A COMMON THREAD RUNNING THROUG H THESE IS THAT IN EACH OF THESE SUB-GROUPS, THE ASSESSEE HAS TO CARRY OUT RESEARCH FROM THE ITA NO.154/DEL/2016 14 INTERNET BASED DATABASES OR OTHER SOURCES TO COMPIL E THE DATA, WHICH IS THEN CUSTOMIZED/PROCESSED IN ACCORDANCE WITH THE R EQUIREMENTS OF THE REQUESTOR BEFORE TRANSMITTING IT OUTSIDE INDIA AFTE R ORGANIZING INTO TEMPLATES IN EXCEL, POWER POINT ETC. THUS, IT IS EV IDENT THAT THE ASSESSEE IS MAKING VALUE ADDITION TO THE INFORMATION ACCESSE D BY IT FROM DATABASES ETC. 15. THE ASSESSEE HAS ITSELF GIVEN FULL COMPOSI TION OF ITS TEAM OF 621 PERSONS RENDERING SUCH SERVICES AS COMPRISING OF `R ESEARCH MANAGER, `RESEARCH TEAM LEADER/KNOWLEDGE EXPERT, `KNOWLEDGE /PRACTICE SPECIALIST, `SENIOR RESEARCH ANALYST, `RESEARCH A NALYST, `JUNIOR RESEARCH ANALYST. THIS MEANS THAT THE ASSESSEE WA S RENDERING THE SERVICES UNDER THIS SEGMENT WITH THE HELP OF SO MAN Y RESEARCHERS, SPECIALISTS AND ANALYSTS. 16. THE MATTER DOES NOT END AT MERE DESIGNATIONS OF ITS WORK FORCE. IT IS FURTHER NOTICEABLE THAT IN THE EARLIER YEAR ALSO THE ASSESSEE WAS RENDERING SIMILAR SERVICES WHEN THE CHARGE WAS ON P ER DIEM BASIS. THE ASSESSEE CHARGED FOR ANALYTICS MANAGER AT 1500 US $ PER DAY FOR SEVEN ITA NO.154/DEL/2016 15 HOURS, TEAM LEADER/EXPERT AT 850 US $ PER DAY FOR S EVEN HOURS, PROJECT LEADER/ANALYTICS SPECIALIST AT 750 US $ PER DAY FO R SEVEN HOURS, SR. ANALYST AT 600 US $ PER DAY FOR SEVEN HOURS, ANALYS T AT 500 US $ PER DAY FOR SEVEN HOURS AND JUNIOR ANALYSTS AT 375 US $ PER DAY FOR SEVEN HOURS. SUCH HUGE AMOUNTS CHARGED FOR ANALYTICS MAN AGER, TEAM LEADER/EXPERT AND PROJECT LEADER/ANALYTICS SPECIALI ST, ETC. DO NOT JUSTIFY THE ASSESSEES STAND OF ACCESSING DATA OR CONDUCTIN G A RESEARCH OF CASUAL NATURE. 17. THE LD. AR PLACED A GREAT DEAL OF EMPHASIS ON THE STAND OF THE AO ON THE NATURE OF SERVICES RENDERED IN DENYING DEDUC TION U/S 10A AND ON THE NATURE OF SERVICES AT THE TIME OF SELECTING COM PARABLES. HE INVITED OUR ATTENTION TOWARDS THE FACT THAT THE AO IN EARLI ER YEARS, WHILE CONSIDERING SIMILAR SERVICES, DENIED THE BENEFIT O F DEDUCTION U/S 10A BY OPINING THAT THE SERVICES PROVIDED BY THE ASSESSEE WERE NOT IT ENABLED SERVICES AS THESE WERE NOT MAKING ANY VALUE ADDITIO N IN THE OUTBOUND INFORMATION TO THE MCKINSEY GROUP OF COMPANIES. IT WAS THUS CONTENDED THAT THE REVENUE WAS NOT ENTITLED TO SHIF T ITS ORIGINAL STAND ITA NO.154/DEL/2016 16 THAT THE ASSESSEE WAS NOT MAKING ANY VALUE ADDITION TO THE INFORMATION ACCESSED FROM INTERNET BASED DATABASES BEFORE PROVI DING IT TO MCKINSEY GROUP COMPANIES. 18. IT WAS SUBMITTED BY THE LD. AR THAT THE TR IBUNAL REVERSED THE FINDING OF THE AO AND RESTORED THE CLAIM OF DEDUCTI ON U/S 10A FOR THE A.Y. 2006-07, WHOSE COPY HAS BEEN PROVIDED IN THE P APER BOOK. IT WAS FURTHER STATED THAT THE HONBLE HIGH COURT HAS UPH ELD THE DECISION OF THE TRIBUNAL ON THIS ISSUE. 19. AT THIS JUNCTURE, IT WOULD BE APT TO CONSIDE R THE RELEVANT PARTS OF SECTION 10A. SUB-SECTION (1) OF THE SECTION PROVIDE S THAT : `SUBJECT TO THE PROVISIONS OF THIS SECTION, A DEDUCTION OF SUCH PRO FITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICL ES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE SUCH A RTICLES OR THINGS OR COMPUTER SOFTWARE, AS THE CASE MAY BE, SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSESSEE. EXPLANATIO N 2 TO THIS SECTION ITA NO.154/DEL/2016 17 EXPLAINS THE TERM `COMPUTER SOFTWARE TO MEAN : `(A ) ANY COMPUTER PROGRAMME RECORDED ON ANY DISC, TAPE, PERFORATED ME DIA OR OTHER INFORMATION STORAGE DEVICE; OR (B) ANY CUSTOMIZED ELECTRONIC DATA OR ANY PRODUCT OR SERVICE OF SIMILAR NATURE , AS MAY BE NOTIFIED BY THE BOARD, WHICH IS TRANSMITTED OR EXPORTED FROM INDIA TO ANY PLACE OUTSIDE INDIA BY ANY MEANS. THUS IT IS APPARENT THAT DEDUCTION IS A VAILABLE NOT ONLY FOR EXPORT OF `COMPUTER PROGRAMME AS SUCH BUT ALSO FOR EXPORT OF CUSTOMIZED ELECTRONIC DATA OR PRODUCT OF A SIMILAR NATURE, WHICH IS ADMITTEDLY THE CASE OF THE ASSESSEE. NOW, LET US S EE WHAT SORT OF CUSTOMIZED ELECTRONIC DATA WAS BEING EXPORTED BY TH E ASSESSEE, WHICH ENTITLED IT TO DEDUCTION BY THE TRIBUNAL AS AFFIRME D BY THE HONBLE HIGH COURT. 20. COPIES OF THE TRIBUNAL ORDER PASSED FOR THE A.Y. 2006-07 REVERSING THE VIEW OF THE AO ON THE DENIAL OF DEDUCTION U/S 1 0A AND THEN THE JUDGMENT OF THE HONBLE HIGH COURT AFFIRMING THE VI EW OF THE TRIBUNAL HAVE BEEN PLACED BY THE LD. AR IN ITS PAPER BOOK. I T CAN BE SEEN FROM THE TRIBUNAL ORDER, THAT THE AO DENIED DEDUCTION BY HO LDING THAT THE SERVICES ITA NO.154/DEL/2016 18 UNDERTAKEN BY THE ASSESSEE WERE NOT I.T. ENABLED SE RVICES AS THE ADDED VALUE FOR CUSTOMER WAS NOT GENERATED, LEAST SIGNIFI CANTLY, THROUGH THE USE OF INFORMATION AND COMMUNICATION TECHNOLOGIES USING NETWORK SOFTWARE. THE ASSESSEE WAS FOUND TO HAVE USED NETWORK SOFTWAR E ONLY TO SEND CUSTOMIZED DATE ELECTRONICALLY ON EXCEL SHEET, POWE R POINT, ETC. THE AO OBSERVED THAT THERE WAS NO VALUE ADDITION THROUGH T HE NETWORK SOFTWARE WHICH IS MOST VITAL ASPECT FOR DETERMINATION OF SER VICE AS I.T. ENABLED SERVICE OR OTHERWISE. HE FURTHER NOTICED THAT THE U SE OF NETWORK SOFTWARE IN THE CASE OF THE ASSESSEE WAS LIMITED ONLY FOR TH E PURPOSE OF TRANSMISSION OF CUSTOMIZED DATE TO ITS PARENT COMPA NY. THE ASSESSEE, INTER ALIA , CONTENDED IN FIRST APPEAL, AS HAS BEEN REPRODUCED ON PAGE 5 OF THE TRIBUNAL ORDER, THAT THE ASSESSEE, AFTER RECEIVING THE REQUEST WAS COLLATING THE INFORMATION FROM SPECIALIZED DATA SOU RCES/DATA BASES. `(D) THE DATA WAS THEN CUSTOMIZED/PROCESSED IN ACCORDANC E WITH THE REQUIREMENTS OF THE REQUESTOR ; (E) THE CUSTOMIZED/PROCESSED DATA WAS THEN ORGANIZED INTO TEMPLATES IN EXCEL, POWER POINT ETC. AND WAS TRANSMITTED OUTSIDE INDIA THROUGH ELECTRONIC MEANS; (F) THUS, THE ASSESSEE WAS ENGAGED IN DATA PROCESSING/CUSTOMIZATI ON OF DATA AS IT ITA NO.154/DEL/2016 19 ENABLED CONVERSION OF DATA INTO INFORMATION BY USE OF COMPUTER SYSTEM BASED ON THE REQUIREMENTS OF THE REQUESTOR AND THE INFORMATION WAS EXPORTED ELECTRONICAL LY . ALLOWING THE ASSESSEES CLAIM, THE CIT(A) HELD : `THAT IT IS EVIDENT THAT THE APPELLANT IS CUSTOMI ZING DATA, WHAT IS ACCESSED BY THE APPELLANT IN THE DATABASES AND WHAT IS DELIVERED TO ITS PARENT COMPANY ARE TWO DIFFERENT PRODUCTS, I.E. DAT A IS CUSTOMIZED TO SUIT THE NEEDS OF THE REQUESTER AND THEREAFTER EXPORTED OUT OF INDIA. AFTER RECORDING THE OBSERVATIONS OF THE AO AND CIT(A), TH E TRIBUNAL NOTED ON PAGE 7 OF ITS ORDER THAT :`IT IS CLEAR FROM THE MOD US OPERANDI THAT WHAT WAS ACCESSED BY THE ASSESSEE AT THE STP UNIT AND WH AT WAS DELIVERED TO MCKINESEY (PARENT COMPANY) AFTER THE CONVERSION TOO K PLACE WERE TWO DIFFERENT PRODUCTS/SERVICES WHICH IS DESCRIBED AS C USTOMIZATION OF DATA/DATA PROCESSING. THE STP UNIT UNDERTOOK THE SE RIES OF OPERATION OF THE DATA RECEIVED FORM VARIOUS DATABASES BEFORE IT WAS FINALLY DELIVERED TO THE CUSTOMER. THUS, THERE WAS VALUE ADDITION MAD E BY THE STP UNIT ON THE DATA . WE, THEREFORE, ARE NOT IN AGREEMENT WITH THE FINDIN GS OF AO THAT THERE WAS NO VALUE OF ADDITION ON THE DATA OBT AINED FROM VARIOUS DATA BASES FROM PARENT COMPANY. THE APPEAL FILED B Y THE REVENUE ITA NO.154/DEL/2016 20 AGAINST THE TRIBUNAL ORDER HAS BEEN DISMISSED BY TH E HONBLE HIGH COURT VIDE ITS JUDGMENT DATED 27.3.2015, THEREBY COUNTENA NCING THE CONCLUSIONS DRAWN BY THE CIT(A) AND THE TRIBUNAL OV ERTURNING THE VIEW OF THE AO. 21. THERE IS NO FORCE IN THE CONTENTION OF THE LD. AR THAT THE AO HAVING HELD THAT THE ASSESSEE DID NOT MAKE ANY VALU E ADDITION TO THE DATA FROM DATABASES AND HENCE WAS INELIGIBLE FOR DEDUCTI ON U/S 10A, COULD NOT HAVE TAKEN A CONTRARY VIEW IN DETERMINING THE N ATURE OF THE ASSESSEES ACTIVITY AS THAT OF THE KPO. IT IS RATHE R THE OTHER WAY AROUND. THE ASSESSEE HAS VEHEMENTLY ARGUED BEFORE THE AUTHO RITIES BELOW THAT IT WAS MAKING A GREAT VALUE ADDITION TO THE DATA RECEI VED FROM DATABASES BEFORE EXPORTING IT, AND WHEN SUCH A CONTENTION HA S BEEN ACCEPTED FOR THE PURPOSES OF DEDUCTION U/S 10A, NOW IT CANNOT SW ITCH BACK TO CONTEND THAT IT IS SIMPLY COLLECTING DATA FROM DATABASES BE FORE SENDING IT TO ITS GROUP COMPANIES. IT IS OVERT THAT THE AOS STAND O N THE ASSESSEE DOING NO VALUE ADDITION TO THE DATA SOURCED FROM DATABASE S, HAS BEEN JETTISONED. ALL THE APPELLATE AUTHORITIES UP TO THE HONBLE HIGH COURT ITA NO.154/DEL/2016 21 HAVE APPROVED THE ASSESSEES VIEWPOINT OF VALUE ADD ITION MADE BY THE ASSESSEE BY UNDERTAKING SERIES OF OPERATIONS TO THE DATA RE CEIVED FORM VARIOUS DATABASES BEFORE FINALLY DELIVERING TO THE CUSTOMER . 22. IT IS THUS ESTABLISHED THAT THE ASSESSEE IS CARRYING ON RESEARCH FROM THE INTERNET BASED DATABASES OR OTHER SOURCES TO CO MPILE THE DATA, WHICH IS THEN CUSTOMIZED/PROCESSED IN ACCORDANCE WITH THE REQUIRE MENTS OF THE REQUESTOR THROUGH A SERIES OF OPERATIONS CARRIED OU T BY ITS RESEARCH MANAGERS, KNOWLEDGE EXPERTS, PRACTICE SPECIALISTS A ND SENIOR RESEARCH ANALYST ETC. BEFORE FINALLY TRANSMITTING I T OUTSIDE INDIA AFTER ORGANIZING INTO TEMPLATES IN EXCEL, POWER POINT ETC . THUS, IT IS EVIDENT THAT THE ASSESSEE IS MAKING VALUE ADDITION TO THE INFORM ATION ACCESSED BY IT FROM DATABASES ETC . WHEN WE APPLY THE REQUISITES OF KPO TO THE SERVICES RENDERED BY THE ASSESSEE UNDER THIS SEGMEN T, THERE REMAINS HARDLY ANY DOUBT THAT THE ASSESSEE IS RENDERING KP O SERVICES UNDER THIS SEGMENT INVOLVING HUGE EXPERTISE AND SKILLS. ITA NO.154/DEL/2016 22 23. HAVING SEEN THE NATURE OF SERVICES RENDERED BY THE ASSESSEE UNDER THIS SEGMENT, LET US EXAMINE THE COMPARABILITY OR O THERWISE OF THE COMPANIES ASSAILED BY THE ASSESSEE BEFORE US. 24. BEFORE THAT, WE WOULD LIKE TO DEAL WITH A SUB MISSION ADVANCED BY THE LD. AR, WHICH IS COMMON TO MOST OF SUCH COMPANI ES, THAT CERTAIN BENCHES OF THE TRIBUNAL IN OTHER CASES HAVE HELD TH EM TO BE NOT COMPARABLE. IN THAT VIEW OF THE MATTER, IT WAS URG ED THAT THOSE COMPANIES, BEING EX FACIE INCOMPARABLE, BE EXCLUDED FROM THE LIST OF COMPARABLES DRAWN BY THE TPO. 25. WE EXPRESS OUR RESERVATIONS IN ACCEPTING SUCH A BROAD PROPOSITION. IT IS AXIOMATIC THAT IF COMPANY A IS FUNCTIONALLY DIFFERENT FROM COMPANY B, THEN, SUCH A COMPANY CANNOT BE CONSIDE RED AS COMPARABLE. TWO COMPANIES CAN BE TREATED AS COMPARA BLE WHEN BOTH ARE DISCHARGING THE OVERALL SIMILAR FUNCTIONS, THOUGH T HERE MAY BE SOME MINOR DIFFERENCES IN SUCH FUNCTIONS, NOT MARRING TH E OTHERWISE COMPARABILITY. NOTWITHSTANDING THE FUNCTIONAL SIMIL ARITY, MANY A TIMES A COMPANY CEASES TO BE COMPARABLE BECAUSE OF OTHER RE ASONS AS WELL. TO ITA NO.154/DEL/2016 23 CITE AN EXAMPLE, IF COMPANY A, THOUGH FUNCTIONALL Y SIMILAR TO COMPANY B, BUT HAS RELATED PARTY TRANSACTIONS (RP TS) BREACHING A PARTICULAR LEVEL, THEN, SUCH COMPANY CANNOT BE CONS IDERED AS COMPARABLE TO COMPANY A IN THE YEAR IN WHICH THE RPTS BREACH SUCH A LEVEL. IF, HOWEVER, IN THE SUBSEQUENT YEAR, THE RELATED PARTY TRANSACTIONS FALL BELOW THAT BARRIER, THEN SUCH COMPANY WOULD AGAIN BECOME COMPARABLE. IN THE LIKE MANNER, A COMPANY MIGHT HAVE BEEN TREATED AS N ON-COMPARABLE DUE TO THE TPO ADOPTING ITS ENTITY LEVEL RESULTS FOR CO MPARISON WITH THE SEGMENTAL RESULTS OF THE CASE BEFORE HIM, BUT IN A LATER CASE, THE TPO MAY TAKE ONLY THE RELATED SEGMENT RESULTS. IN SUCH A LATER CASE, THE COMPANY TREATED AS NON-COMPARABLE TO THE FIRST COMP ANY MAY BECOME COMPARABLE TO THE SECOND COMPANY. TO PUT IT SIMPLY, IF COMPANY A HAS BEEN HELD TO BE INCOMPARABLE VIS-A-VIS COMPANY B, THEN IT IS NOT ESSENTIAL THAT COMPANY A WOULD BE INCOMPARABLE TO COMPANY C ALSO. WHAT IS RELEVANT TO CONSIDER IS, FIRSTLY, THE FUNCT IONAL PROFILE OF COMPANY A VIS-A-VIS COMPANY C. IF BOTH ARE FUNCTIONALLY SIMILAR, THE N NOTWITHSTANDING THE FACT THAT COMPANY A WAS HELD TO BE INCOMPARABLE TO COMPANY B, IT MAY STILL BE COMPARABLE TO COMPA NY C. DESPITE THE ITA NO.154/DEL/2016 24 FACT THAT COMPANY A IS FUNCTIONALLY SIMILAR TO CO MPANY B, IT STILL MIGHT HAVE BEEN DECLARED AS INCOMPARABLE TO COMPANY B BECAUSE OF OTHER RELEVANT REASONS. IF COMPANY A PASSES THE SAME REASONS VIS-A- VIS COMPANY C, THEN COMPANY A WILL FIND ITS PLACE I N THE LIST OF COMPARABLES OF COMPANY C, NOTWITHSTANDING THE F ACT THAT IT WAS HELD TO BE INCOMPARABLE TO COMPANY B. THE CRUX OF THE MATTER IS THAT THE MERE FACT THAT COMPANY A HAS BEEN HELD TO BE NOT COMPARABLE IN A JUDICIAL ORDER PASSED IN THE CASE OF COMPANY B, D OES NOT PER SE MAKE IT INCOMPARABLE IN ALL THE SUBSEQUENT CASES TO FOLLOW. NOT ONLY COMPANY A HELD TO BE INCOMPARABLE TO COMPANY B CAN BE C OMPARABLE TO COMPANY C, BUT COMPANY X HELD TO BE COMPARABLE TO COMPANY Y CAN ALSO BE INCOMPARABLE TO COMPANY Z, DEPENDING UPON THE FUNCTIONAL PROFILE AND THE APPLICABILITY OR OTHERWI SE OF THE RELATED FACTORS. THUS, IT IS CLEARLY DEDUCTIBLE THAT IF A PARTICULAR COMPANY HAS BEEN HELD TO BE NOT COMPARABLE IN THE CASE OF ANOTH ER COMPANY, THEN SUCH FORMER COMPANY WILL ALSO CEASE TO BE COMPARAB LE TO THE ASSESSEE COMPANY ALSO. THE COMPARABILITY OF EACH COMPANY NEE DS TO BE ASCERTAINED ONLY AFTER MATCHING THE FUNCTIONAL PROF ILE AND THE RELEVANT ITA NO.154/DEL/2016 25 REASONS OF THE OTHER COMPANY. ERGO, THIS PRELIMINAR Y CONTENTION RAISED ON BEHALF OF THE ASSESSEE IS REJECTED AS DEVOID OF MERITS. NOW, WE TAKE UP, ONE BY ONE, THE COMPANIES ASSAILED BEFORE US AS NOT COMPARABLE,. (I) ADITYA BIRLA CAPITAL ADVISORS PVT. LTD., 26.1. THE TPO PROPOSED THIS COMPANY AS COMPARABLE WHICH WAS OBJECTED BY THE ASSESSEE ON THE GROUND THAT IT WAS A COMPANY RENDERING ASSET MANAGEMENT SERVICES AND, HENCE, FUNCTIONALLY DISSIMILAR. THE TPO TREATED IT AS COMPARABLE, WHICH WAS APPROVED BY THE DRP. THE ASSESSEE IS AGGRIEVED AGAINST SUCH INCLUSION. 26.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS COMPANY, AS N OTED BY THE TPO HIMSELF ON PAGE 20 OF HIS ORDER : `OFFERS INVESTMEN T MANAGEMENT AND ADVISORY SERVICES AS ADITYA BIRLA PRIVATE EQUITY TO DOMESTIC AND GLOBAL INVESTORS. THIS COMPANY IS `MANAGING A SERIES OF PRIVATE EQUITY FUNDS TO INVEST IN AND HARVEST BUSINESS GROWTH OPPORTUNIT IES. WHEN WE VIEW THE ANNUAL REPORT OF THIS COMPANY, A COPY OF WHICH IS PLACED ON PAGE 246 OF THE PAPER BOOK, IT TURNS OUT THAT: THE COMP ANYS FOCUS CONTINUES ITA NO.154/DEL/2016 26 ON THE ALTERNATIVE ASSETS EXCLUDING REALTY AND HARD INFRASTRUCTURE INVESTMENTS. AT THE CURRENT ACTIVITY LEVELS, THE C OMPANY HAS RAISED AND MANAGEMENTS TWO SECTOR AGNOSTIC DOMESTIC FUNDS, NA MELY, ADITYA BIRLA PRIVATE EQUITY FUND-I AND ADITYA BIRLA PRIVATE EQUI TY - SUNRISE FUND. BREAK-UP OF REVENUE FROM OPERATIONS GIVEN ON PAG E 253 OF THE PAPER BOOK GIVES THE DESCRIPTION OF THE NATURE OF ITS REV ENUES, NAMELY: MANAGEMENT FEES. THUS, IT IS APPARENT THAT THE N ATURE OF BUSINESS OF THIS COMPANY, BEING RAISING OF FUNDS AND DEPLOYING THE SAME, IS ENTIRELY DIFFERENT FROM WHAT THE ASSESSEE IS DOING IN THIS S EGMENT, NAMELY, RENDERING SERVICES IN THE NATURE OF KNOWLEDGE ON CA LL, PRACTICE RESEARCH AND ANALYTICS. THIS COMPANY IS, THEREFORE, DIRECTE D TO BE EXCLUDED FROM THE LIST OF COMPARABLES. (II) BIRLA SUN LIFE ASSET MANAGEMENT COMPANY LTD . 27.1. THIS COMPANY WAS PROPOSED BY THE TPO AS COM PARABLE, WHICH WAS OBJECTED BY THE ASSESSEE ON THE GROUND OF FUNC TIONAL DISSIMILARITY. SUCH OBJECTION WAS REJECTED AND THE SAME WAS FINALL Y INCLUDED IN THE FINAL TALLY OF COMPARABLES. ITA NO.154/DEL/2016 27 27.2. HAVING HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD, IT IS FOUND THAT THIS COMPANY, AS NOTED BY THE TPO ON PAGE 22 OF HIS ORDER, IS : THE INVESTMENT MANAGER OF BIRLA SUN LIFE MUTUAL FUNDS, IS A JOINT VENTURE BETWEEN THE ADITYA BIRLA GROUP AND THE SUN LIFE FINANCIAL INC. OF CANADA. THE TPO HAS FURTHE R RECORDED THAT THIS COMPANY IS MANAGING ASSETS OF LARGE INVESTOR BASE W ITH SOLUTIONS OFFERING A RANGE OF INVESTMENT OPTIONS INCLUDING DI VERSIFIED SECTOR SPECIFIC EQUITY SCHEMES. PAGE 280 OF THE PAPER BOOK IS A COPY OF PROFIT & LOSS ACCOUNT OF THIS COMPANY WHICH DESCRIBES ITS REVENUE AS: MANAGEMENT AND ADVISORY FEES, PORTFOLIO MANAGEMENT FEES, REAL ESTATE MANAGEMENT FEES AND INVESTMENT INCOME. IT I S FURTHER PERTINENT TO NOTE FROM PAGE 287 OF THE PAPER BOOK THAT THIS C OMPANY IS REGISTERED WITH SEBI AS AN INVESTMENT MANAGER TO BIRLA SUN LIF E MUTUAL FUND. APART FROM RENDERING THESE SERVICES, THIS COMPANY H AS ALSO ITS OWN INVESTMENT PORTFOLIO FROM WHICH DIVIDEND HAS BEEN R ECEIVED AND IT HAS ALSO EARNED PROFIT ON SALE OF INVESTMENTS, DEPICTED ON PAGE 281 OF THE PAPER BOOK. PAGE 303 OF THE PAPER BOOK CLEARLY MEN TIONS UNDER NOTES TO ACCOUNTS - POINT (XIV) SEGMENT INFORMATION FOR TH E YEAR ENDING 31 ST ITA NO.154/DEL/2016 28 MARCH, 2011, THAT: THE COMPANYS OPERATIONS MAINLY RELATE TO PROVIDING ASSET MANAGEMENT SERVICES AND PORTFOLIO M ANAGEMENT SERVICES . HENCE SEPARATE..SEGMENT REPORTING IS NOT REQU IRED AS THE COMPANYS BUSINESS IS RESTRICTED TO SINGLE SEGMENT, I.E., ASSET MANAGEMENT SERVICES. IT IS DISCERNIBLE FROM THE A NNUAL REPORT OF THIS COMPANY AND THE REFERENCES MADE BY THE TPO IN HIS O RDER TO ITS NATURE OF BUSINESS THAT THERE IS NO SIMILARITY WHATSOEVER BETWEEN ITS FUNCTIONAL PROFILE AND THE ASSESSEE. THIS COMPANY IS ALSO DIR ECTED TO BE ELIMINATED FROM THE LIST OF COMPARABLES. (III) ICRA LIMITED . 28.1. THE ASSESSEE OBJECTED TO THE INCLUSION O F THIS COMPANY IN THE FINAL SET OF COMPARABLES BY CONTENDING THAT IT IS F UNCTIONALLY DISSIMILAR. NOT CONVINCED, THE TPO INCLUDED THE SAME. 28.2. AFTER GOING THROUGH THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUA L REPORT OF THIS COMPANY WHICH IS AVAILABLE ON PAGES 309 ONWARDS OF THE PAPER BOOK THAT IT IS PROVIDING `RATING SERVICES COMPRISING O F CREDIT RATING, BANK ITA NO.154/DEL/2016 29 LOAN RATING, CORPORATE GOVERNANCE RATING, STAKEHOLD ER VALUE AND GOVERNANCE RATING, RATING OF CLAIMS PAYING ABILITY OF INSURANCE COMPANIES, PROJECT FINANCE RATING AND ALSO `GRADING SERVICES COMPRISING OF IPOS, MICRO FINANCIAL INSTITUTIONS, CONSTRUCTION ENTITIES, REAL ESTATE DEVELOPERS AND PROJECTS, ETC. THE DESC RIPTION OF THE NATURE OF SERVICES RENDERED BY THIS COMPANY MAKES IT VIVID THAT IT HAS NO PROXIMITY TO THE NATURE OF SERVICES RENDERED BY THE ASSESSEE UNDER THIS SEGMENT, WHICH IS BASICALLY IN THE NATURE OF CARRYI NG OUT RESEARCH FROM THE INTERNET BASED DATABASES FOR COMPILING THE DATA , WHICH IS THEN CUSTOMIZED/PROCESSED IN ACCORDANCE WITH THE REQUIRE MENTS OF THE REQUESTER AND THEN ORGANIZED INTO TEMPLATES IN EXCE L, POWER POINT, ETC., BEFORE TRANSMITTING OUTSIDE INDIA. THERE BEING NO C LOSENESS WITH THE FUNCTIONS PERFORMED BY THE ASSESSEE, THIS COMPANY I S DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. (IV) LADDERUP CORPORATE ADVISORY PVT. LTD . 29.1. AGAINST THE TPOS PROPOSAL FOR THE INCLUS ION OF THIS COMPANY, THE ASSESSEE OBJECTED THAT THE SAME WAS A COMPANY RENDERING ITA NO.154/DEL/2016 30 INVESTMENT BANKING SERVICES. NOT CONVINCED, THE TP O INCLUDED THE SAME IN THE LIST OF COMPARABLES. 29.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE TPOS ORDER PA GE 26 THAT THIS COMPANY: PROVIDES ONE-STOP FINANCIAL ADVISORY AND FUND RAISING SOLUTIONS IN INVESTMENT BANKING, CAPITAL MARKETS, W EALTH MANAGEMENT PROJECT FINANCE AND GROWTH STAGE INVESTING. PROFI T & LOSS ACCOUNT OF THIS COMPANY, COPY PLACED ON PAGE 469 OF THE PAPER BOOK, SHOWS OPERATIONAL INCOME OF RS.11.18 CRORE WHOSE DESCRIPT ION HAS BEEN GIVEN IN SCHEDULE 11 AS: FINANCIAL AND MANAGEMENT CONSUL TANCY FEES. THE LD. AR HAS PLACED ON RECORD AN EXTRACT FROM THE WEB SITE OF THIS COMPANY, WHICH SHOWS THAT ON JULY, 22, 2010, BEING A PERIOD RELEVANT TO THE YEAR UNDER CONSIDERATION, THIS COMPANY: RECEIVED A CATE GORY-1 MERCHANT BANKING REGISTRATION FROM THE SECURITIES AND EXCHAN GE BOARD OF INDIA. ON AN OVERVIEW OF THE NATURE OF BUSINESS CARRIED OU T BY THIS COMPANY, IT IS MANIFEST THAT THE SAME IS ABSOLUTELY DIFFERENT F ROM THE ASSESSEES ITA NO.154/DEL/2016 31 RESEARCH SERVICES. WE, THEREFORE, ORDER FOR THE EX CLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. 30. THE LD. DR VEHEMENTLY ARGUED THAT THE COMPA NIES CONSIDERED BY THE TPO ARE BROADLY SIMILAR. IT WAS CONTENDED THAT DOT-TO-DOT FUNCTIONAL COMPARABILITY IS COMPROMISED UNDER THE TNMM AND HEN CE NO FAULT CAN BE FOUND WITH THE SELECTION OF FOUR COMPARABLES BY THE TPO WHICH HAVE BEEN CHALLENGED. 31. WE ARE NOT AGREEABLE WITH THIS LINE OF ARGUME NT. THE HONBLE JURISDICTIONAL HIGH COURT IN RAMPGREEN SALES PVT. LTD. VS. CIT (2015) 377 ITR 533 (DEL) HAS HELD THAT THE COMPARABLES SHOULD BE SELECTED O N THE BASIS OF SIMILARITY. THUS IT IS EVIDENT THAT TH E FUNCTIONAL COMPARABILITY CANT BE SEEN ON A BROADER CATEGORIZA TION BUT ON FUNCTIONAL LEVEL. THE HONBLE COURT FURTHER LAID DO WN THAT SELECTION OF COMPARABLES DOES NOT DIFFER WITH THE METHOD ADOPTED . EX CONSEQUENTI , IT IS NO MORE OPEN TO ARGUE THAT THE FUNCTIONAL DISSIM ILARITY OF THE COMPANIES UNDER THE OVERALL BROADER CATEGORY CAN BE IGNORED UNDER THE TNMM. ITA NO.154/DEL/2016 32 32. NEXT LINE OF ARGUMENT BY THE LD. DR WAS TO ACCEPTANCE BY THE TPO OF TWO CASES FROM THE ASSESSEES LIST OF COMPAR ABLES, VIZ., ICRA MANAGEMENT CONSULTING SERVICES LTD. (16.14%) AND I DC (INDIA) LTD. (10.29%). IT WAS SUBMITTED THAT THESE TWO COMPANIE S WERE ALSO DOING THE SAME NATURE OF WORK AS WAS DONE BY THE ENTITIES ARGUED BY THE LD. AR FOR EXCLUSION. HE SUBMITTED THAT THE TPO APPLIED B ROAD FUNCTIONAL COMPARABILITY FOR SELECTING COMPARABLE COMPANIES, I NCLUDING THE ABOVE TWO COMPANIES FROM THE ASSESSEES LIST. AS PER THE LD. DR, THE TPO DID NOT GO BY THE STRICT COMPARABILITY. HE URGED THAT I F THE COMPANIES ARGUED BY THE LD. AR FOR EXCLUSION ARE ELIMINATED ON THE B ASIS OF STRICT COMPARABILITY, THEN THE TWO COMPANIES AS CHOSEN BY THE ASSESSEE AND APPROVED BY THE TPO SHOULD ALSO BE EXCLUDED AND A F RESH SELECTION PROCESS OF COMPARABLES BE DIRECTED. 33. DESPITE THE FACT THAT NO SUCH GROUND HAS BEE N TAKEN IN THE APPEAL FILED BY THE REVENUE, HE RAISED SUCH AN ORAL GROUND AND REQUESTED FOR ITS CONSIDERATION AND DECISION. IN SUPPORT OF THIS ARG UMENT, HE RELIED ON THE ORDER OF THE DELHI BENCH OF THE TRIBUNAL IN ITO VS. GURINDER KAUR ITA NO.154/DEL/2016 33 (2006) 102 ITD 189 (DEL) IN WHICH IT HAS BEEN LAID DOWN THAT IT IS OPEN TO THE RESPONDENT IN AN APPEAL BEFORE THE TRIBUNAL TO RAISE NEW POINTS OR CONTENTIONS PROVIDED THEY DO NOT INVOLVE INVESTIGAT ION INTO FACTS AND AN OPPORTUNITY IS GIVEN TO OTHER SIDE TO MEET THE CONT ENTIONS. AU CONTRAIRE, THE LD. AR STRONGLY OBJECTED, FIRSTLY, TO THE MAKIN G OF SUCH AN ORAL REQUEST OF THE LD. DR DESPITE THIS ISSUE NOT BEING CHALLENGED IN ITS APPEAL AND SECONDLY, FOR THE EXCLUSION OF THE TWO COMPANI ES WHICH WERE EARLIER ACCEPTED BY THE TPO AS COMPARABLE. 34. WE ARE INCLINED TO ACCEPT THE REQUEST OF THE LD. DR ABOUT HIS ENTITLEMENT TO RAISE A FRESH ISSUE DE HORS NO FORMAL APPLICATION UNDER RULE 27 OF THE ITAT RULES, 1963 OR SUCH A GROUND NO T TAKEN IN THE DEPARTMENTAL CROSS APPEAL. AN ORAL REQUEST CAN BE ACCEPTED AS A SUBSTITUTE OF A FORMAL APPLICATION. DELHI BENCH OF THE TRIBUNAL IN ITO VS. GURINDER KAUR (2006) 102 ITD 189 (DEL) , FOLLOWING HUKUMCHAND MILLS LTD. VS. CIT (1967) 63 ITR 232 (SC), HAS HELD THAT EVEN WITHOUT RULE 27, IT IS OPEN TO THE RESPONDENT IN AN APPEAL BEFORE TH E TRIBUNAL TO RAISE A NEW GROUND IN DEFENCE OF THE ORDER APPEALED AGAINST . ITA NO.154/DEL/2016 34 35. NOW, WE ESPOUSE THE CONTENTION OF THE LD. D R FOR THE EXCLUSION OF TWO COMPARABLES COMPANIES CHOSEN BY THE ASSESSEE AN D APPROVED BY THE OFFICER IN THE PROCEEDINGS. THE TPO, AS PER THE LD . DR, ACCEPTED THE SAME NOTWITHSTANDING THE FACT THAT THESE WERE NOT F UNCTIONALLY STRICTLY SIMILAR. WE DO NOT APPROVE SUCH A STAND OF THE REVE NUE. ONCE TPO EXPRESSLY ACCEPTS A COMPANY WITH LOW MARGIN AS COMP ARABLE VIS-A-VIS THE ASSESSEES HIGH MARGIN, AFTER DUE APPLICATION O F MIND, THEN THE LD. DR CANNOT BE ALLOWED TO CONTEND THAT THE TPO FELL I N ERROR IN ACCEPTING SUCH COMPARABILITY AND THE SAME SHOULD BE EXCLUDED. THERE IS NO DEARTH OF DECISIONS TO THE EFFECT THAT DR CANNOT IMPROVE THE ASSESSMENT ORDER. IT IS THE PREROGATIVE OF THE AO/TPO TO ACCEPT OR RE JECT A COMPANY AS COMPARABLE AFTER CONSIDERING ALL THE RELEVANT ASPEC TS. ONCE THE TPO/AO ACCEPT A COMPANY OFFERED BY THE ASSESSEE AS COMPARA BLE, THEN THAT BECOMES FINAL QUA THE REVENUE. THE DR CANNOT STEP INTO THE SHOES OF THE TPO TO UNDO WHAT WAS DONE BY HIM. IF THIS LINE OF ARGUMENT IS ACCEPTED AND GIVEN A LOGICAL CONCLUSION, THEN INVAR IABLY ALL THE CASES PENDING BEFORE THE TRIBUNAL WILL REQUIRE RESTORATIO N TO THE TPO, NOT ONLY FOR EXCLUDING THE COMPANIES APPROVED BY THE TPO, BU T ALSO FOR ITA NO.154/DEL/2016 35 UNDERTAKING A FRESH PROCESS OF SELECTION ON THE BAS IS OF COMPARABILITY, WHICH THE DR CONSIDERS AS APPROPRIATE. CRUX OF THE MATTER IS THAT THE DR CANNOT IMPROVE THE ORDER OF THE TPO. EVEN IF THE INDEPENDENT ORDER OF THE AO/TPO WENT WRONG QUA THE REVENUE, THEN REMEDY LIES ELSEWHERE IN ACCORDANCE WITH OTHER RELEVANT PROVISI ONS OF THE ACT, BUT CERTAINLY NOT WITH THE DR. 36. WE ARE CONSCIOUS OF THE ORDER OF THE SPECIA L BENCH OF TRIBUNAL IN DCIT VS. QUARK SYSTEMS PVT. LTD. (2010) 132 TTJ (CH D) (SB) 1 HOLDING THAT A COMPANY INCLUDED BY THE ASSESSEE IN ITS LIST OF COMPARABLES AND ALSO ACCEPTED BY THE TPO AS SUCH AT THE TIME OF COM PUTING THE ALP, CAN BE EXCLUDED, IF THE ASSESSEE PROVES BEFORE THE TRIB UNAL THAT THE SAME WAS WRONGLY INCLUDED. THE RATIO OF THIS DECISION CANNOT BE APPLIED TO INSTANT FACTS. IT IS SO FOR THE REASON THAT A COMPANY TREAT ED AS COMPARABLE MAY HAVE LOWER OR HIGHER PROFIT MARGIN THAN THAT OF THE ASSESSEE. IF THE PROFIT MARGIN OF SUCH COMPANY IS HIGH, THE TPO WILL ACCEPT THE COMPARABILITY WITHOUT ANY HESITATION, EVEN IF HE FINDS IT AS INCO MPARABLE. THE ASSESSEE, IN SUCH CIRCUMSTANCES, CAN CHALLENGE THE SUO MOTU WRONG INCLUSION OF ITA NO.154/DEL/2016 36 THIS COMPANY IN THE LIST OF COMPARABLES BEFORE THE TRIBUNAL, BECAUSE UNDUE ADVANTAGE WAS TAKEN BY THE TPO IN ACCEPTING A COMPANY AS COMPARABLE, WHICH WAS ACTUALLY NOT. ON THE OTHER H AND, IF THE TPO ACCEPTS A COMPANY AS COMPARABLE DESPITE FINDING ITS PROFIT MARGIN LOWER THAN THAT OF THE ASSESSEE, IT SHOWS THAT HE WAS FUL LY SATISFIED WITH THE COMPARABILITY OF SUCH A COMPANY AND CONSCIOUSLY AC CEPTED IT AS COMPARABLE AFTER DUE APPLICATION OF MIND. UNLIKE T HE FIRST SITUATION, IN WHICH THE TPO WAS NOT FAIR TO CORRECT THE ASSESSEE S MISTAKE IN INCLUDING A WRONG COMPANY AS COMPARABLE, ENTITLING THE ASSESSEE TO SEEK REDRESSAL OF ITS GRIEVANCE BEFORE THE TRIBUNAL, IN THE SECOND SITUATION, THE TPO EXPLICITLY ACCEPTED A COMPANY AFTER HAVING FULL OPPORTUNITY OF EXAMINING THE ASSESSEES MISTAKE IN INCLUDING A WRO NG COMPANY AS COMPARABLE. NOW, IF THE TPO HAS SUPPOSEDLY DONE SOM E WRONG, THE DR CANNOT ASSUME THE ROLE OF A TPO TO POINT OUT THAT T HE LATER SHOULD NOT HAVE DONE THIS OR THAT AND HENCE IT MAY BE CORRECTE D BEFORE THE TRIBUNAL. THERE IS APPROPRIATE COMPARTMENTALIZATION OF THE PO WERS AND LIMITATIONS OF THE AUTHORITIES UNDER THE ACT. NO ONE CAN USURP THE POWER OF ANOTHER, EVEN IF HE IS SENIOR IN RANK. ROLE OF DR, IN AN APP EAL BY THE ASSESSEE, IS ITA NO.154/DEL/2016 37 LIMITED TO DEFENDING THE ORDER OF THE AO. HE CANNOT DO WHAT THE TPO COULD HAVE DONE BUT FAILED TO DO. THE HONBLE BOMBA Y HIGH COURT IN CIT VS. MAERSK GLOBAL SERVICE CENTRE (I) PVT. LTD. VIDE ITS JUDGMENT DATED 22.8.2014 IN ITA NO. 692/693 OF 2012 HAS UPHE LD THE VIEW TAKEN BY THE TRIBUNAL IN NOT ALLOWING THE REVENUES REPRE SENTATIVE TO TRAVEL BEYOND THE ORDER OF THE TRANSFER PRICING OFFICER AN D THE ASSESSING OFFICER SO AS TO MAKE OUT SOME DIFFERENT CASE. 37. INSOFAR AS THE RELIANCE OF THE LD. DR ON GURINDER KAUR (2006) 102 ITD 189 (DEL) IS CONCERNED, WE FIND THAT THE SAME DOES NOT BUTT RESS HIS POINT OF VIEW. IN THAT CASE, IT WAS HELD THAT IT IS OPEN TO THE RESPONDENT IN AN APPEAL BEFORE THE TRIBUNAL TO RAISE A NEW GROUND IN DEFENCE OF THE ORDER APPEALED AGAINST PROVIDED THEY DO NOT INVOLVE INVESTIGATION INTO FACTS AND AN OPPORTUNITY IS GIVEN TO OTHER SIDE TO MEET THE CONTENTIONS. 38. NOW LET US EXAMINE IF THE CONTENTION OF THE L D. DR FOR EXCLUDING THE TWO COMPANIES IS IN DEFENCE OF THE FINAL ORDER OF THE AO? ON A SPECIFIC QUERY, IT WAS SUBMITTED BY THE LD. DR THAT THROUGH THE EXCLUSION OF THE TWO COMPANIES CHOSEN BY THE ASSESSEE, HE WAS TRYING TO DEFEND ITA NO.154/DEL/2016 38 THE ADDITION ULTIMATELY MADE BY THE AO. IN OUR CONS IDERED OPINION, THIS PROPOSITION IS SHORT SIGHTED. ON A MICRO LEVEL, TH E LD. DR CANNOT BE SAID TO DEFENDING THE ORDER OF THE AO/TPO BY SEEKING THE EXCLUSION OF THE COMPANIES, WHOSE INCLUSION WAS APPROVED BY THE TPO HIMSELF. EVEN ON MACRO LEVEL, THE LD. DR CANNOT BE SAID TO DEFENDING THE ORDER OF THE AO/TPO BY CONTENDING THAT HE WAS SUPPORTING THE SUS TENANCE OF TRANSFER PRICING ADDITION BY URGING THE EXCLUSION O F THESE TWO COMPANIES. THE FRESH COMPARABLES CHOSEN BY THE TPO AND CHALLEN GED BEFORE US HAVE BEEN HELD ABOVE AS NOT COMPARABLE. WITH THEIR EXCLUSION, THE TRANSFER PRICING ADDITION WILL EITHER STAND DELETED OR GET REDUCED TO A CONSIDERABLE EXTENT. NOW, IF WE ACCEPT THE CONTENTI ON OF THE LD. DR AND DIRECT THE EXCLUSION OF THESE TWO COMPANIES, THE CO NSEQUENTIAL NIL OR LOWER ADDITION WILL MOVE NORTHWARDS. THUS, IT IS MA NIFEST THAT THE EXCLUSION OF THESE TWO COMPANIES AS CONTENDED BY TH E LD. DR, DOES NOT IN ANY MANNER HAS THE EFFECT OF DEFENDING THE ORDER . 39. THE LD. DR TOOK TWO NEW ASPECTS FOR CONSIDE RATION WHICH WERE NOT TAKEN NOTE OF BY THE TPO/DRP. HE TOOK PAINS IN EXPLAINING THE FIRST ITA NO.154/DEL/2016 39 ONE THAT THERE WAS AN INTERNALLY COMPARABLE UNCONTR OLLED TRANSACTION AVAILABLE IN THIS CASE BY WHICH THE ASSESSEE RENDER ED SIMILAR SERVICES UNDER THIS SEGMENT TO M/S SAMSUNG. HE CONTENDED THA T THE TPO WENT WRONG IN APPLYING THE TNMM WHEN A COMPARABLE UNCONT ROLLED TRANSACTION WAS AVAILABLE. IT WAS SUBMITTED THAT TH E COMPARABLE UNCONTROLLED PRICE (CUP) METHOD SHOULD BE DIRECTED TO BE APPLIED AND THE MATTER BE SENT BACK TO THE AO/TPO FOR REDETERMI NING THE ALP OF THE INTERNATIONAL TRANSACTION UNDER THIS SEGMENT BY CON SIDERING M/S SAMSUNG AS AN INTERNALLY COMPARABLE UNCONTROLLED TR ANSACTION. 40. HE EXPLAINED THE SECOND ASPECT THAT THE AS SESSEE WAS SHOWING HIGHER PROFIT IN EARLIER YEARS IN RESPECT OF ITS GU RGAON STP UNIT BECAUSE OF THE AVAILABILITY OF THE DEDUCTION U/S 10A. THE A GREEMENT WITH ITS AE FOR REMUNERATION ON PER DIEM BASIS, WHICH WAS PREVA LENT UP TO THE LAST YEAR WAS GIVING HANDSOME RETURNS. HE SUBMITTED THA T THE PERIOD OF DEDUCTION FROM GURGAON UNIT EXPIRED IN THE LAST YEA R AND THAT IS THE REASON FOR THE ASSESSEE CONVERTING TO A NEW MODEL O F REMUNERATION OF COST PLUS 15% FROM THIS YEAR ONWARDS. SUCH NEW METH OD WAS CLAIMED TO ITA NO.154/DEL/2016 40 HAVE RESULTED INTO SHIFTING OF INCOME FROM INDIA VIS--VIS THE EARLIER YEARS. IT WAS ARGUED THAT THE ASSESSEE RESORTED TO TAX AVOIDANCE BY CHANGING THE MODEL OF REMUNERATION. RELYING ON MCDOWELL & CO. LTD. VS. CTO (1985) 154 ITR 148 (SC) , THE LD. DR URGED THAT THE ASSESSEES ATTEMPT TO THWART THE PAYMENT OF LEGITIMATE TAXES I N INDIA SHOULD BE PUT TO REST. TAKING SUPPORT FROM THE DEFINITION OF `IN TERNATIONAL TRANSACTION AS GIVEN IN CLAUSE (E) OF EXPLANATION TO SECTION 92 B, THE LD. DR CONTENDED THAT THERE SHOULD BE A SEPARATE DETERMINA TION OF THE ALP OF THIS TRANSACTION. 41. WE ARE NOT CONVINCED WITH BOTH THE ABOVE SUBM ISSIONS MADE ON BEHALF OF THE REVENUE. INSOFAR AS THE FIRST ARGUMEN T IS CONCERNED, IT IS SEEN THAT ADMITTEDLY THE ASSESSEE, APART FROM RENDE RING SERVICES TO ITS AE, ALSO RENDERED SERVICES TO M/S SAMSUNG, A NON-AE , WHICH FACT IS EVIDENT FROM TABLE OF REVENUE PLACED BY THE ASSESSE E ON PAGE 165 OF THE PAPER BOOK. THIS PAGE SHOWS TOTAL REVENUE AMOUNTING TO RS.143.34 CRORE UNDER THE SEGMENT OF `RESEARCH ANALYSIS AND INFORMA TION SERVICES. AS AGAINST THIS, THE REVENUE FROM AE IS TO THE TUNE OF RS.136.09. THIS ITA NO.154/DEL/2016 41 SHOWS THAT THE REMAINING REVENUE OF RS.7.25 CRORE W AS EARNED BY THE ASSESSEE FROM ITS NON-AE, WHICH HAS BEEN STATED TO BE M/S SAMSUNG. WE FIND THAT THE TPO NEITHER CONSIDERED M/S SAMSUNG AS AN INTERNALLY COMPARABLE UNCONTROLLED TRANSACTION FOR BENCHMARKIN G THIS INTERNATIONAL TRANSACTION, NOR DETERMINED SEPARATE OP/OC FROM SUC H TRANSACTION. ON A SPECIFIC QUERY, THE LD. AR SUBMITTED THAT NO OP/OC FROM THE TRANSACTION WITH NON-AE WAS SEPARATELY AVAILABLE FOR COMPARISON AS THE SAME WAS NOT EVEN QUESTIONED BY THE TPO. APPLICATION OF THE TNMM AS THE MOST SUITABLE METHOD HAS ALSO NOT BEEN DISPUTED BY THE T PO. AS THE TPO HAS HIMSELF NOT CONSIDERED M/S SAMSUNG, A NON-RELATED E NTERPRISE, AS A RELEVANT COMPARABLE, WE FAIL TO SEE HOW THE LD. DR CAN ASK FOR CONSIDERING IT SO. AT THE COST OF REPETITION, WE OB SERVE THAT THE DR HAS NO ROLE IN THE SELECTION OF COMPARABLES, WHICH POWE R VESTS WITH THE TPO ALONE. HIS JOB IS TO DEFEND THE ORDER OF THE AO/TP O AND NOT IMPROVING THE SAME. 42. SIMILAR IS THE POSITION FOR THE SECOND ARG UMENT ADVANCED BY THE LD. DR. THE ENTIRE SCENARIO OF THE HIGHER PROFIT RA TE IN THE PRECEDING YEAR ITA NO.154/DEL/2016 42 ON THE BASIS OF THE FIXED PRICE MODEL OF REMUNERATI ON AND LOWER PROFIT RATE IN THE CURRENT YEAR ON THE BASIS OF COST PLUS MODEL OF REMUNERATION WAS NOT ONLY BEFORE THE TPO, BUT HE ALSO TOOK A NOT E OF THE SAME IN HIS ORDER. HE HAS NOWHERE HELD THE SWITCHING OVER TO TH E NEW MODEL OF REMUNERATION AS A TAX AVOIDANCE DEVICE. NOW, AT THI S STAGE, IT IS NOT OPEN TO THE LD. DR TO BRING THE CASE WITHIN THE FOLD OF TAX AVOIDANCE, WHICH THE AO/TPO DID NOT. 43. EVEN OTHERWISE, WE FIND THAT THERE IS NO L OGIC IN ADVANCING SUCH AN ARGUMENT. THE RATIONALE OF THE TRANSFER PRICING PROVISIONS IS TO ENSURE THAT THE ASSESSEE IN INDIA DECLARES PRICE/PROFIT IN /FROM AN INTERNATIONAL TRANSACTION WHICH IS COMPATIBLE WITH THE PRICE/PROF IT RATE DECLARED BY UNRELATED PARTIES IN A COMPARABLE UNCONTROLLED SITU ATION. OBJECT OF SECTION 92, AS IT TRANSPIRES FROM ITS LANGUAGE, IS THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHOULD BE COMPUTE D HAVING REGARD TO THE ARM'S LENGTH PRICE. THIS PROVISION IS NOT AIMED AT MAXIMIZATION OF CHARGEABLE PROFIT FROM AN INTERNATIONAL TRANSACTION . NOTWITHSTANDING THE FACT THAT THE ASSESSEE EARNED MORE PROFIT IN EARLIE R YEAR, THERE CAN BE NO ITA NO.154/DEL/2016 43 TRANSFER PRICING ADJUSTMENT IN A LATER YEAR SO LONG AS THE INTERNATIONAL TRANSACTION IS AT ALP. RULE 10B OF INCOME-TAX RULES , 1962 PROVIDES, UNDER ALL THE METHODS, TO DETERMINE THE ALP WITH RE FERENCE TO THE PRICE/PROFIT OF COMPARABLE INSTANCES FOR THE CURREN T YEAR ALONE. LAW NOWHERE ENJOINS FOR DETERMINING THE ALP W.R.T. THE PRICE/PROFIT OF THE EARLIER YEARS. WHAT IS REQUIRED TO BE SEEN IS TO C HECK THE PRICE CHARGED OR PROFIT EARNED BY COMPARABLES IN UNCONTROLLED TRA NSACTIONS DURING THE YEAR AND THEN COMPARE IT WITH THE PRICE CHARGED OR PROFIT EARNED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION. IF THE ASSESSEES PRICE/PROFIT IS AT ALP, EVEN IF IT IS LOWER THAN THAT OF THE PRE CEDING YEAR, THE SAME HAS TO BE ACCEPTED. THERE IS NO SIGNIFICANCE OF THE EARLIER YEARS HIGHER/LOWER PRICE OR PROFIT INSOFAR AS THE DETERMI NATION OF ALP OF A LATER YEARS INTERNATIONAL TRANSACTION IS CONCERNED . 44. REVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT EVEN IF THE OP/OC OF THE ASSESSEE FOR THE CURRENT YEAR IS LESS THAN THAT OF THE PRECEDING YEARS, NOTHING TURNS OUT ON THIS SCORE, S O LONG AS SUCH PRICE CHARGED OR PROFIT EARNED IS AT ALP W.R.T. THE COMPA RABLE UNCONTROLLED ITA NO.154/DEL/2016 44 TRANSACTIONS TAKEN BY THE TPO FOR THE CURRENT YEAR. EVEN IF WE ACCEPT THE CONTENTION OF THE LD. DR THAT THE ASSESSEE DECLARED MORE PROFIT IN THE PRECEDING YEARS TO AVAIL HIGHER AMOUNT OF DEDUCTION U/S 10A, THEN IT WAS FOR THE AO TO APPROPRIATELY RESTRICT THE AMOUNT OF DEDUCTION. ALLOWING EXCESS DEDUCTION IN EARLIER YEARS ON THE BASIS OF E XAGGERATED PROFITS, IF ANY, CANNOT BE A REASON TO DISTURB THE ALP OF THE I NTERNATIONAL TRANSACTION FOR THE CURRENT YEAR. 45. NOW WE, ESPOUSE THE NEXT LEG OF THE SUBMISS ION OF THE LD. DR W.R.T. THE CLAUSE (E) OF EXPLANATION TO SECTION 92 B. BEFORE THAT, LET US HAVE A LOOK AT THE RELEVANT PROVISION, WHOSE RELEVA NT PART READS AS UNDER:- `EXPLANATION.FOR THE REMOVAL OF DOUBTS, IT IS HERE BY CLARIFIED THAT (I) THE EXPRESSION 'INTERNATIONAL TRANSACTION' SH ALL INCLUDE (E) A TRANSACTION OF BUSINESS RESTRUCTURING OR RE ORGANISATION, ENTERED INTO BY AN ENTERPRISE WITH AN ASSOCIATED ENTERPRISE, IRRESP ECTIVE OF THE FACT THAT IT HAS BEARING ON THE PROFIT, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES AT THE TIME OF THE TRANSACTION OR AT ANY FUTURE DATE; 46. THIS PROVISION SIMPLY PROVIDES THAT A TRANSA CTION OF BUSINESS RESTRUCTURING OR REORGANISATION, ENTERED INTO BY AN ENTERPRISE WITH AN ITA NO.154/DEL/2016 45 ASSOCIATED ENTERPRISE, IRRESPECTIVE OF THE FACT THA T IT HAS BEARING ON THE PROFIT, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISE S AT THE TIME OF THE TRANSACTION OR AT ANY FUTURE DATE SHALL BE TREATED AS AN INTERNATIONAL TRANSACTION. WE ARE UNABLE TO COMPREHEND THE APPLICABILITY OF T HIS PART OF THE EXPLANATION TO THE FACTS OF THE INSTANT CASE . FIRSTLY, THERE IS NO BUSINESS RESTRUCTURING OR REORGANIZATION. THE BUSIN ESS CONTINUES AS SUCH. IT IS ONLY THE MODEL OF REMUNERATION THAT HAS CHANG ED FROM A FIXED RATE TO COST PLUS BASIS. FURTHER, THERE IS NO DISPUTE AB OUT THE EXISTENCE OF SUCH AN INTERNATIONAL TRANSACTION OF `RESEARCH AND INFOR MATION SERVICES, WHICH IS INSTANTLY UNDER CONSIDERATION. THIS CONTEN TION IS ALSO, ERGO, REPELLED. 47. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT NOTWITHSTANDING THE ARGUMENT OF THE LD . DR OF FUNCTIONALLY DISSIMILARITY, THE TWO COMPANIES AS INCLUDED BY TH E ASSESSEE AND APPROVED BY THE TPO AS COMPARABLE, CANNOT BE EXCLU DED ON THE REQUEST OF THE LD. DR. THE AO/TPO IS DIRECTED TO DETERMINE THE ALP OF THE ITA NO.154/DEL/2016 46 INTERNATIONAL TRANSACTION OF `RESEARCH AND INFOR MATION SERVICES IN ACCORDANCE WITH THE ABOVE DISCUSSION. B. INFORMATION TECHNOLOGY SUPPORT SERVICES 48. THE ASSESSEE REPORTED ANOTHER INTERNATIONAL TRANSACTION OF PROVISION OF INFORMATION TECHNOLOGY SUPPORT SERVIC ES TO MCKINSEY & CO. INC., USA WITH TRANSACTED VALUE OF RS.6,74,54,7 61/-. THE ASSESSEE USED TNMM AS THE MOST APPROPRIATE METHOD WITH PLI O F OP/OC. 14 COMPANIES WERE SELECTED AS COMPARABLE WITH AVERAGE MARGIN OF 17.13%. THE ASSESSEES OWN MARGIN AT 15.40% WAS SHOWN TO BE AT ALP. THE TPO MADE CERTAIN INCLUSIONS AND EXCLUSIONS IN/FROM THE LIST OF COMPARABLES DRAWN BY THE ASSESSEE AND A FINAL TALLY OF 8 COMPARABLES WAS MADE WITH AVERAGE OP/OC AT 29.53%. THIS ARMS LENGTH PROFIT RATE WAS APPLIED FOR PROPOSING A TRANSFER PRICING ADJUST MENT OF RS.1,02,66,664/-. THE AO MADE NECESSARY ADDITION A FTER CONSIDERING THE DIRECTION GIVEN BY THE DRP. 49. THE ASSESSEE HAS DISPUTED THE INCLUSION OF E-CLERX SERVICES LTD. AND NON-INCLUSION OF TWO COMPARABLE COMPANIES CITED BY THE ASSESSEE, ITA NO.154/DEL/2016 47 NAMELY, INFORMED TECHNOLOGIES INDIA LTD., AND MICRO GENETICS LTD. NO OTHER ASPECT OF DETERMINATION OF ALP UNDER THIS SEG MENT WAS CHALLENGED. 50. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. IT GOES WITHOUT SAYING THAT TH E COMPARABILITY OR OTHERWISE OF A COMPANY CAN BE JUDGED ONLY AFTER HAV ING AN INSIGHT INTO THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE. T HE TPO HAS EXTRACTED NATURE OF SERVICES UNDER THIS SEGMENT ON PAGE 2 OF HIS ORDER BY BORROWING THEM FROM THE TRANSFER PRICING STUDY REPO RT TO THE EFFECT THAT THESE : `INCLUDE DATABASE ADMINISTRATION, SUPPORT FOR MAINTENANCE OF APPLICATION INFRASTRUCTURE, LOADING AND CORRECTION OF DATA OF SERVERS, ETC. RELEVANT DISCUSSION ABOUT THE ALP OF THE INTERNATIO NAL TRANSACTION STARTS FROM PAGE 48 OF THE TPOS ORDER. THERE IS NO ELABOR ATION OF THE NATURE OF SERVICES UNDER THIS SEGMENT EXCEPT THE TPO NOTING O N PAGE 66 OF HIS ORDER THAT THE ASSESSEE IS ENGAGED IN KPO ACTIVITI ES. ON A POINTED QUERY, THE LD. AR CONTENDED THAT THE ASSESSEE WAS M ERELY RENDERING HELP-DESK SERVICES UNDER THIS SEGMENT, WHICH IS A S IMPLEST FORM OF BPO ITA NO.154/DEL/2016 48 SERVICES. WE FIND AN APPARENT CONFLICT BETWEEN THE DESCRIPTION OF SERVICES AS STATED BY THE LD. AR AND AS RECORDED IN THE ORDER OF THE TPO. 51. IN AN ATTEMPT TO ASCERTAIN THE CORRECT NATURE OF SERVICES, WE REFER TO THE MASTER SERVICES AGREEMENT ENTERED INTO BY THE A SSESSEE WITH MCKINSEY AND CO. INC., USA W.E.F. 1 ST APRIL, 2010. IT IS A COMMON AGREEMENT BETWEEN THE ASSESSEE AND MCKINSEY, USA FO R PROVIDING BOTH THE `RESEARCH AND INFORMATION SERVICES AND AL SO `IT SUPPORT SERVICES. THE PREAMBLE PART OF THIS AGREEMENT PRO VIDES AS UNDER:- WHEREAS: (A) THE CLIENT IS IN NEED OF ASSISTANCE IN THE DEVELOPM ENT, MAINTENANCE AND SERVICE SOFTWARE AND INFORMATION/RESEARCH RELATED PRODUCTS AND SERVICES. FURTHER, THE CLIENT REQUIRES ASSISTANCE WITH RESPECT TO KNOWLEDGE MANAGEMENT SYS TEMS AND INFRASTRUCTURE RELATED ISSUES LIKE SERVER PROBLEMS, HOSTING OF NOTES DATABASES, PROBLEMS WITH DOCUMENTS IN THE NOT ES DATABASES. 52. THE LD. AR WHILE ARGUING RESEARCH AND INFO RMATION SERVICES SUBMITTED THAT ONLY INFORMATION/RESEARCH RELATED P RODUCTS AND SERVICES FROM THE PREAMBLE PART ARE COVERED UNDER `RESEARCH AND INFORMATION SERVICES AND THE REMAINING PART PERTAINS TO IT SU PPORT SERVICES, NAMELY, ` ASSISTANCE IN THE DEVELOPMENT, MAINTENANCE AND SERV ICE ITA NO.154/DEL/2016 49 SOFTWARE, ASSISTANCE WITH RESPECT TO KNOWLEDGE MAN AGEMENT SYSTEMS AND INFRASTRUCTURE RELATED ISSUES LIKE SERVER PROBL EMS, HOSTING OF NOTES DATABASES, PROBLEMS WITH DOCUMENTS IN THE NOTES DAT ABASES . 53. WE HAVE ALSO REPRODUCED ABOVE CLAUSE 1 OF THE MASTER SERVICES AGREEMENT DEFINING THE NATURE OF WORK, WITH THE CAP TION : `ENGAGEMENT OF MCKC. WHILE ARGUING THE SEGMENT OF RESEARCH AN D INFORMATION SERVICES, THE LD. AR SUBMITTED THAT ONLY INFORMA TION/RESEARCH RELATED PRODUCTS AND SERVICES COVERED UNDER CLAUSE 1(A) AR E RELEVANT FOR `RESEARCH AND INFORMATION SERVICES SEGMENT AND TH E REMAINING PART OF CLAUSE 1(A) AND WHOLE OF THE CLAUSE 1(B) PERTAINS T O `IT SUPPORT SERVICES. THEREFORE, IT IS DEDUCIBLE THAT THE NATURE OF SERVI CE COVERED UNDER THE `IT SUPPORT SERVICES SEGMENT ARE `(A) DEVELOP, MAINTAI N AND SERVICE THE SOFTWARE AND (B) KNOWLEDGE MANAGEMENT SYSTEMS AND INFRASTRUCTURE ISSUES WHICH WOULD ENCOMPASS INFRASTRUCTURE SUPPORT , APPLICATION SUPPORT, APPLICATION OPERATIONS GROUP AND SURVEY DE VELOPMENT CENTER AND SUCH OTHER SERVICES AS MAY BE REQUESTED FROM TI ME TO TIME. THUS, IT IS OVERT THAT THERE IS A VAST DIFFERENCE ABOUT THE NATURE OF SERVICES AS ITA NO.154/DEL/2016 50 ARGUED BY THE LD. AR UNDER THIS SEGMENT AS THAT OF `HELP DESK SERVICES, BEING BPO; AND WHAT IS COMING OUT FROM THE MASTER SERVICES AGREEMENT AS ALSO INCLUSIVE OF ` KNOWLEDGE MANAGEMENT SYSTEMS AND INFRASTRUCTURE ISSUES WHICH WOULD ENCOMPASS INFRAST RUCTURE SUPPORT, APPLICATION SUPPORT, APPLICATION OPERATIONS GROUP A ND SURVEY DEVELOPMENT CENTER, WHICH ARE KPO IN NATURE. 54. PAGE 8 OF THE 4TH PAPER BOOK OF THE ASSESSEE GIVES DETAILS OF 27 EMPLOYEES ENGAGED IN RENDERING `IT SUPPORT SERVICES . WHEN WE LOOK AT THEIR DESIGNATIONS GIVEN THEREIN, IT COMES OUT T HAT THEY CONSIST OF 17 IT ANALYSTS, APART FROM FAST REGIONAL MANAGER- ASIA PA C, 2 OPERATIONS MANAGERS, TECHNOLOGY LINE LEADER, TEAM LEADER, AND ONLY 1 TEAM ASSISTANT. SUCH A TEAM OF EXPERTS CANNOT BE RECRUI TED ONLY FOR RENDERING HELP-DESK SERVICES. THIS PRIMA FACIE DISAPPROVES THE ASSESSEES CONTENTION OF RENDERING HELP DESK SERVICES ALONE. U NLIKE THE OTHER SEGMENT OF `RESEARCH AND INFORMATION SERVICES FOR WHICH THE LD. AR PLACED ON RECORD CORRESPONDENCE OF THE ASSESSEE WIT H THE MCKINSEY COMPANIES TO DIVULGE THE NATURE OF SERVICES UNDER A LL THE THREE SUB- ITA NO.154/DEL/2016 51 GROUPS SEPARATELY, NAMELY KNOWLEDGE ON CALL, PRACTI CE RESEARCH AND ANALYTICS, NO EVIDENCE THE LD. AR HAS BEEN PLACED O N RECORD TO SHOW THE NATURE OF SERVICES RENDERED UNDER THE SEGMENT OF `I T SUPPORT SERVICES. 55. IN VIEW OF THE APPARENT CONFLICT IN WHAT TH E ASSESSEE IS STATING AND WHAT IS PRIMA FACIE COMING OUT FROM RECORD, WITHOUT THERE BEING ANY MATERIAL TO SHOW THE EXACT NATURE OF SERVICES, WE A RE HELPLESS TO DECIDE THE COMPARABILITY OR OTHERWISE OF THE COMPANIES CHA LLENGED BEFORE US. UNDER THESE CIRCUMSTANCES, WE SET ASIDE THE IMPUGNE D ORDER TO THIS EXTENT AND REMIT THE MATTER TO THE AO/TPO FOR FIRST DETERMINING AND ELABORATING THE CORRECT NATURE OF SERVICES IN THE O RDER AND THEN DECIDING THE COMPARABILITY OF THE COMPANIES CHALLENGED BEFOR E US. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPO RTUNITY OF BEING HEARD IN THIS REGARD. C. INTEREST ON RECEIVABLES 56. THE NEXT ISSUE RAISED BY THE LD. AR IS AGAIN ST THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF INTEREST ON RECEIVABLES. B RIEFLY STATED THE FACTS OF THE CASE ARE THAT ON EXAMINATION OF THE ASSESSEE S BALANCE SHEET, IT ITA NO.154/DEL/2016 52 WAS NOTICED BY THE TPO THAT PAYMENTS AGAINST THE I NVOICES RAISED BY THE ASSESSEE WERE NOT RECEIVED WITHIN THE STIPULATED TI ME AS PROVIDED IN THE AGREEMENT. ON BEING CALLED UPON TO EXPLAIN THAT WH Y THE DELAYED PAYMENTS BE NOT TREATED AS UNSECURED LOANS ADVANCED TO THE AES, THE ASSESSEE SUBMITTED THAT IT WAS NOT AN INTERNATIONAL TRANSACTION WARRANTING BENCHMARKING. THE TPO REJECTED THIS CONTENTION AN D HELD THAT INTEREST WAS CHARGEABLE AT ARMS LENGTH LEVEL IN RESPECT OF DELAYED RECEIPT OF INVOICE VALUES. THE DRP AFFIRMED THE VIEW OF THE T PO, AGAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE US. 57. THE LD. AR SUBMITTED AT THE OUTSET THAT THE DE LHI BENCH OF THE TRIBUNAL IN AMERIPRISE INDIA PVT. LTD. VS. ACIT IN ITA NO.2010/DEL/2014 (AUTHORED BY THE AM OF THIS ORDER) HAS HELD SUCH INTEREST ON RECEIVABLES AS AN INTERNATIONAL TRANSA CTION. HE SUBMITTED THAT IN CERTAIN OTHER ORDERS, A CONTRARY VIEW HAS BEEN T AKEN. IT WAS, THEREFORE, CONTENDED THAT A REASONABLE VIEW BE TAKEN. IN THE O PPOSITION, THE LD. DR SUPPORTED THE IMPUGNED ORDER. ITA NO.154/DEL/2016 53 58. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD. IT IS SEEN THAT SIMILAR ISSUE C ROPPED UP IN THE CASE OF AMERIPRISE (SUPRA) AND ALSO TECHBOOKS INTERNATIONAL PVT. LTD. VS. DCIT IN ITA NO.240/DEL/2015. IN THE FORMER CASE, THE BENCH, AFTER TAKING NOTE OF THE VIEW TAKEN IN TECHBOOKS (SUPRA) NOTED THAT THE FINANCE ACT, 2012 HAS INSERTED EXPLANATION TO SECTION 92B WITH RETROS PECTIVE EFFECT FROM 1.4.2002. CLAUSE (I) OF THIS EXPLANATION, WHICH IS OTHERWISE ALSO FOR REMOVAL OF DOUBTS, GIVES MEANING TO THE EXPRESSION INTERNATIONAL TRANSACTION IN AN INCLUSIVE MANNER. SUB-CLAUSE (C ) OF CLAUSE (I) OF THIS EXPLANATION, WHICH IS RELEVANT FOR OUR PURPOSE, PRO VIDES AS UNDER:- ` EXPLANATION. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY CLARIFIED T HAT (I) THE EXPRESSION 'INTERNATIONAL TRANSACTION' SHALL INCLUDE (A) (B) .. (C) CAPITAL FINANCING, INCLUDING ANY TYPE OF LONG-TERM OR SHORT- TERM BORROWING, LENDING OR GUARANTEE, PURCHASE OR S ALE OF MARKETABLE SECURITIES OR ANY TYPE OF ADVANCE, PAYME NTS OR DEFERRED PAYMENT OR RECEIVABLE OR ANY OTHER DEBT ARISING DURING THE COURSE OF BUSINESS; . ITA NO.154/DEL/2016 54 59. ON GOING THROUGH THE RELEVANT PART OF THE EX PLANATION INSERTED WITH RETROSPECTIVE EFFECT FROM 1.4.2002, THEREBY ALSO CO VERING THE ASSESSMENT YEAR UNDER CONSIDERATION, THE BENCH FOUND THAT APA RT FROM ANY LONG- TERM OR SHORT-TERM LENDING OR BORROWING, ETC., OR A NY TYPE OF ADVANCE PAYMENTS OR DEFERRED PAYMENTS, ANY OTHER DEBT ARISING DURING THE COURSE OF BUSINESS HAS ALSO BEEN EXPRESSLY RECOGNIZED AS AN INTERNATIONAL TRANSACTION. THAT BEING SO, THE PAYM ENT/NON-PAYMENT OF INTEREST OR RECEIPT/NON-RECEIPT OF INTEREST ON THE LOANS ACCEPTED OR ALLOWED IN THE CIRCUMSTANCES AS MENTIONED IN THIS C LAUSE OF THE EXPLANATION , ALSO BECOMES INTERNATIONAL TRANSACTIONS, REQUIRIN G THE DETERMINATION OF THEIR ALP. IF THE PAYMENT OF INTER EST IS EXCESSIVE OR THERE IS NO OR LOW RECEIPT OF INTEREST, THEN SUCH I NTEREST EXPENSE/INCOME NEED TO BE BROUGHT TO ITS ALP. THE EXPRESSION DEBT ARISING DURING THE COURSE OF BUSINESS IN COMMON PARLANCE ENCOMPASSES, INTER ALIA, ANY TRADING DEBT ARISING FROM THE SALE OF GOODS OR SERVICES RENDERED IN THE COURSE OF CARRYING ON THE BUSINESS. ONCE ANY DEBT A RISING DURING THE COURSE OF BUSINESS HAS BEEN ORDAINED BY THE LEGISLA TURE AS AN INTERNATIONAL TRANSACTION, IT IS, BUT, NATURAL THAT IF THERE IS ANY DELAY IN THE ITA NO.154/DEL/2016 55 REALIZATION OF SUCH DEBT ARISING DURING THE COURSE OF BUSINESS, IT IS LIABLE TO BE VISITED WITH THE TP ADJUSTMENT ON ACCOUNT OF INTEREST INCOME SHORT CHARGED OR UNCHARGED. THUS, THE CONTENTION TAKEN B Y THE ASSESSEE BEFORE THE TPO THAT INTEREST ON RECEIVABLES IS NOT AN INTE RNATIONAL TRANSACTION, WAS FOUND BY THE BENCH TO BE BEREFT OF ANY FORCE. 60. WE FIND THAT THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PATNI COMPUTER SYSTEMS LTD., (2013) 215 TAXMANN 108 (BOM.) DEALT, INTER ALIA , WITH THE FOLLOWING QUESTION OF LAW:- (C) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL DID NOT ERR IN HOLDING THAT THE LOSS SUFFERED BY THE ASSESSEE BY ALLOWING EXCESS PERIOD OF CREDIT TO THE ASSOCIATED ENTERPRISES WITHOUT CHARGING AN INTEREST DURING SUCH CREDIT PERIOD WOULD NOT AMOUNT TO INTERNATIONAL TRA NSACTION WHEREAS SECTION 92B(1) OF THE INCOME-TAX ACT, 1961 REFERS TO ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFI TS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES? 61. WHILE ANSWERING THE ABOVE QUESTION, THE HON BLE HIGH COURT NOTICED THAT AN AMENDMENT TO SECTION 92B HAS BEEN C ARRIED OUT BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 1. 4.2002. SETTING ASIDE ITA NO.154/DEL/2016 56 THE VIEW TAKEN BY THE TRIBUNAL, THE HONBLE HIGH CO URT RESTORED THIS ISSUE TO THE FILE OF THE TRIBUNAL FOR FRESH DECISIO N IN THE LIGHT OF THE LEGISLATIVE AMENDMENT. 62. THE FOREGOING DISCUSSION DIVULGES THAT NON-C HARGING OR UNDER- CHARGING OF INTEREST ON THE EXCESS PERIOD OF CREDIT ALLOWED TO THE AE FOR THE REALIZATION OF INVOICES AMOUNTS TO AN INTERNATI ONAL TRANSACTION AND THE ALP OF SUCH AN INTERNATIONAL TRANSACTION IS REQ UIRED TO BE DETERMINED. 63. THE DELHI BENCH IN AMERIPRISE (SUPRA) AND TECHBOOKS (SUPRA) DID NOT APPROVE THE REASONING ABOUT SUCH INTEREST SUBSU MING IN WORKING CAPITAL ADJUSTMENT. IT FOUND THAT THE WORKING CAPI TAL ADJUSTMENT IS IN RESPECT OF INTERNATIONAL TRANSACTION OF RENDERING S ERVICES TO THE AE. INTEREST FOR THE CREDIT PERIOD ALLOWED AS PER THE A GREEMENT IS FACTORED IN THE PRICE CHARGED FOR THE RENDERING OF SERVICES. I N THE OPPUGNATION, THE NON-REALIZATION OF INVOICE VALUE BEYOND THE STIPULA TED PERIOD IS A SEPARATE INTERNATIONAL TRANSACTION, WHOSE ALP IS RE QUIRED TO BE DETERMINED. GRANTING OF WORKING CAPITAL ADJUSTMENT HAS BEEN HELD TO BE ITA NO.154/DEL/2016 57 CONFINED TO THE INTERNATIONAL TRANSACTION OF RENDER ING OF SERVICES, WHOSE ALP IS SEPARATELY DETERMINABLE. ON THE OTHER HAND, THE INTERNATIONAL TRANSACTION OF INTEREST RECEIVABLE FROM ITS AES FOR LATE REALIZATION OF INVOICES BEYOND SUCH STIPULATED PERIOD IS A SEPARAT E INTERNATIONAL TRANSACTION. ALLOWING WORKING CAPITAL ADJUSTMENT I N THE INTERNATIONAL TRANSACTION OF RENDERING SERVICES HAS BEEN HELD TO HAVE NO IMPACT ON THE DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTI ON OF INTEREST ON RECEIVABLES FROM AES BEYOND THE STIPULATED PERIOD A LLOWED AS PER THE AGREEMENT. IN OUR CONSIDERED OPINION, WHEREAS, THE INTERNATIONAL TRANSACTION OF PURCHASE/SALE OF GOODS FROM/TO AE CO NTEMPLATES COMPARISON OF THE PRICE CHARGED/PAID FOR SUCH GOODS BY IMPLIEDLY INCLUDING THE INTEREST FOR THE PERIOD ALLOWED FOR R EALIZATION OF INVOICES AS PER THE TERMS OF THE AGREEMENT, THE INTERNATIONAL T RANSACTION OF CHARGING INTEREST ON LATE RECOVERY OF TRADE RECEIVABLE COVER S THE PERIOD WHICH STARTS WITH THE TERMINATION OF THE PERIOD OF CREDIT ALLOWED UNDER THE AGREEMENT, WHICH IS SUBJECT MATTER OF THE INTERNATI ONAL TRANSACTION OF PURCHASE/SALE OF GOODS. THERE IS ONE MORE FALLACY I N THE ARGUMENT ABOUT THE SUBSUMING OF INTEREST INCOME IN THE WORKING CAP ITAL ADJUSTMENT. IT IS ITA NO.154/DEL/2016 58 SIMPLE THAT WORKING CAPITAL ADJUSTMENT IS ORDINARIL Y COMPUTED BY CONSIDERING THE AVERAGE OF THE OPENING AND CLOSING VALUES OF INVENTORIES, RECEIVABLES AND PAYABLES. A TRANSFER PRICING ADJUST MENT ON ACCOUNT OF INTEREST ON DELAYED REALIZATION OF INVOICE VALUE HA S NOTHING TO DO WITH THE CLOSING OR OPENING VALUES. IT DEPENDS ON THE PE RIOD OF REALIZATION ON TRANSACTION TO TRANSACTION BASIS. TO PUT IT DIFFERE NTLY, SUPPOSE AN INVOICE IS RAISED ON 1 ST MAY; PERIOD ALLOWED FOR REALIZATION IS TWO MONTHS; AND THE INVOICE IS ACTUALLY REALIZED ON 31 ST DECEMBER. NOTWITHSTANDING THE FACT THAT INTEREST ON SUCH LATE REALIZATION WOULD BECOME CHARGEABLE FOR A PERIOD OF 6 MONTHS (FROM 1 ST JULY TO 31 ST DECEMBER), BUT THE AMOUNT OF INVOICE WILL NOT BE RE CEIVABLE AS AT THE END OF THE FINANCIAL YEAR ON 31 ST MARCH. AS SUCH, THIS RECEIVABLE WOULD NOT HAVE AN IMPACT ON THE WORKING CAPITAL ADJUSTMEN T IN ANY MANNER, BUT WOULD CALL FOR ADDITION ON ACCOUNT OF THE LATE REAL IZATION OF INVOICE VALUE FOR A PERIOD OF SIX MONTHS. FOLLOWING THE ORDERS IN AMERIPRISE (SUPRA) AND TECHBOOKS (SUPRA), WE UPHOLD THE VIEW TAKEN BY THE TPO ON THIS ISSUE. INTEREST ON LATE REALIZATION OF INVOICES IS DIRECTED TO CHARGED IN LINE ITA NO.154/DEL/2016 59 WITH THE DIRECTIONS GIVEN IN THE ABOVE ORDERS OF TH E DELHI BENCH OF THE TRIBUNAL. D. FOREX LOSS 64. THE ONLY ISSUE RAISED BY THE REVENUE IN ITS APP EAL IS AGAINST THE TREATMENT OF FOREIGN EXCHANGE (FOREX) GAIN/LOSS AS AN ITEM OF OPERATING NATURE IN THE COMPUTATION OF THE ALP OF BOTH THE TR ANSACTIONS. THE LD. DR. SUBMITTED THAT SUCH FOREX GAIN/LOSS WAS RIGHTLY CONSIDERED BY THE TPO AS NON-OPERATING IN THE COMPUTATION OF THE ALP AND HENCE SUCH A VIEW SHOULD NOT HAVE DISTURBED. THIS WAS OPPOSED BY THE LD. AR, WHO CONTENDED THAT FOREX GAIN/LOSS RELATES TO THE TRADI NG TRANSACTIONS OF THE ASSESSEE AND HENCE THE SAME WAS OPERATING IN THE CO MPUTATION OF OP/OC UNDER THE TNMM. 65. WE FIND MERIT IN THE CONTENTION RAISED ON BEHAL F OF THE ASSESSEE ABOUT THE INCLUSION OF FOREIGN EXCHANGE GAIN/LOSS I N THE OPERATING REVENUE/COSTS OF THE ASSESSEE AS WELL AS THAT OF TH E COMPARABLES. WHEN WE ADVERT TO THE NATURE OF SUCH FOREIGN EXCHANGE GA IN EARNED BY THE ASSESSEE, IT HAS NOT BEEN CONTROVERTED BY THE LD. DR THAT THE SAME IS IN ITA NO.154/DEL/2016 60 RELATION TO THE TRADING ITEMS EMANATING FROM THE IN TERNATIONAL TRANSACTIONS. IF THE FOREIGN EXCHANGE GAIN/LOSS DIR ECTLY RESULTS FROM THE TRADING ITEMS, WE FAIL TO APPRECIATE AS TO HOW SUC H FOREIGN EXCHANGE FLUCTUATION LOSS CAN BE CONSIDERED AS NON-OPERATING . 66. THE SPECIAL BENCH OF THE TRIBUNAL IN ACIT VS PRAKASH I. SHAH (2008) 115 ITD 167 (MUM)(SB) HAS HELD THAT THE GAIN DUE TO FLUCTUATIONS IN THE FOREIGN EXCHANGE RATE EMANATING FROM EXPORT IS ITS INTEGRAL PART AND CANNOT BE DIFFERENTIATED FROM THE EXPORT PROCEE DS SIMPLY ON THE GROUND THAT THE FOREIGN CURRENCY RATE HAS INCREASED SUBSEQUENT TO SALE BUT PRIOR TO REALIZATION. IT WENT ON TO ADD THAT WH EN GOODS ARE EXPORTED AND INVOICE IS RAISED IN CURRENCY OF THE COUNTRY WH ERE SUCH GOODS ARE SOLD AND SUBSEQUENTLY WHEN THE AMOUNT IS REALIZED I N THAT FOREIGN CURRENCY AND THEN CONVERTED INTO INDIAN RUPEES, THE ENTIRE AMOUNT IS RELATABLE TO THE EXPORTS. IN FACT, IT IS ONLY THE T RANSLATION OF INVOICE VALUE FROM THE FOREIGN CURRENCY TO THE INDIAN RUPEES. THE SPECIAL BENCH HELD THAT THE EXCHANGE RATE GAIN OR LOSS CANNOT HAVE A D IFFERENT CHARACTER FROM THE TRANSACTION TO WHICH IT PERTAINS. THE BENCH FOU ND FALLACY IN THE ITA NO.154/DEL/2016 61 SUBMISSION MADE ON BEHALF OF THE REVENUE THAT THE E XCHANGE RATE DIFFERENCE SHOULD BE DETACHED FROM THE EXPORTS AND BE CONSIDERED AS AN INDEPENDENT TRANSACTION. EVENTUALLY, THE SPECIAL BE NCH HELD THAT SUCH EXCHANGE RATE FLUCTUATION GAIN/LOSS ARISING FROM EX PORTS CANNOT BE VIEWED DIFFERENTLY FROM SALE PROCEEDS. 67. IN THE CONTEXT OF TRANSFER PRICING, THE BAN GALORE BENCH OF THE TRIBUNAL IN SAP LABS INDIA PVT. LTD. VS ACIT (2011) 44 SOT 156 (BANGALORE) HAS HELD THAT FOREIGN EXCHANGE FLUCTUATION GAIN IS PART OF OPERATING PROFIT OF THE COMPANY AND SHOULD BE INCLU DED IN THE OPERATING REVENUE. SIMILAR VIEW HAS BEEN TAKEN IN TRILOGY E BUSINESS SOFTWARE INDIA (P) LTD. VS DCIT (2011) 47 SOT 45 (URO) (BANG ALORE) . THE MUMBAI BENCH OF THE TRIBUNAL IN S. NARENDRA VS ADDTL. CIT (2013) 32 TAXMAN.COM 196 HAS ALSO LAID DOWN TO THIS EXTENT. 68. THE RELIANCE OF THE LD. DR ON SAFE HARBOUR RUL ES TO CONTEND THAT FOREIGN EXCHANGE GAIN OR LOSS BE TAKEN AS NON-OPERA TING, IS NOT SUSTAINABLE. THERE IS NO DOUBT THAT IN SUCH RULES, FOREX GAIN/LOSS HAS BEEN TREATED AS NON-OPERATING. HOWEVER IT IS RELEVANT TO NOTE THAT SUCH RULES ITA NO.154/DEL/2016 62 ARE NOT APPLICABLE TO THE ASSESSMENT YEAR UNDER CON SIDERATION. EVEN THE RELIANCE OF THE LD. DR ON CERTAIN DECISIONS TAKING COGNIZANCE OF SAFE HARBOUR RULES FOR THE PERIOD ANTERIOR TO THEIR INSE RTION IN OTHER CONTEXTS DOES NOT IMPROVE THE CASE OF THE DEPARTMENT BECAUSE THE HONBLE DELHI HIGH COURT IN PR. CIT VS. CASHEDGE INDIA PVT. LTD., VIDE ITS JUDGMENT DATED 4.5.2016 IN ITA 279/2016, HAS HELD THAT : `S O FAR AS THE QUESTION OF FLUCTUATION OF FOREIGN EXCHANGE WAS CONCERNED, T HE ITAT RULED THAT THE RELEVANT PROVISION, I.E. `SAFE HARBOUR RULES H AD NOT BEEN NOTIFIED FOR THE CONCERNED ASSESSMENT YEAR AND WERE, THEREFO RE, INAPPLICABLE. THUS THE HONBLE HIGH COURT DID NOT DISTURB THE OPE RATING NATURE OF FOREX GAIN/LOSS AS HELD BY THE TRIBUNAL. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT T HE AMOUNT OF FOREIGN EXCHANGE GAIN/LOSS ARISING OUT OF REVENUE TRANSACTI ONS IS REQUIRED TO BE CONSIDERED AS AN ITEM OF OPERATING REVENUE/COST, BO TH FOR THE ASSESSEE AS WELL AS THE COMPARABLES. THE GROUND TAKEN BY THE DE PARTMENT IS, THEREFORE, DISMISSED. ITA NO.154/DEL/2016 63 69. TO SUM UP, WE SET ASIDE THE IMPUGNED ORDER AN D REMIT THE MATTER TO THE FILE OF AO/TPO FOR A FRESH DETERMINATION OF THE ALP OF BOTH THE INTERNATIONAL TRANSACTIONS IN CONFORMITY WITH THE F OREGOING DISCUSSION. 70. THE OTHER GROUNDS TAKEN BY THE ASSESSEE IN ITS APPEAL ARE EITHER GENERAL OR CONSEQUENTIAL, NOT REQUIRING SPECIFIC AD JUDICATION. 71. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSES AND THAT OF THE REVENUE IS DIS MISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 15.12.201 6. SD/- SD/- [BEENA A. PILLAI] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 15 TH DECEMBER, 2016. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.