HOV Services Ltd., Pune V. Joint Commissioner of Income-tax,

ITA 1896/PUN/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 1009 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 09-12-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 22-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HITENDRA NINAWE
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Additional evidence
• Section: 234B

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . . , ! , # $ BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1896/PN/2013 #& & / ASSESSMENT YEAR : 2009-10 HOV SERVICES LTD., 3 RD FLOOR, SHARDA ARCADE, SATARA ROAD, PUNE 411037 PAN :AAACC8675N . / APPELLANT V/S JCIT (OSD), CIRCLE - 1(2), PUNE . /RESPONDENT . / ITA NO.1969/PN/2013 #& & / ASSESSMENT YEAR : 2009-10 DCIT, CIRCLE - 1(2), PUNE . /APPELLANT V/S HOV SERVICES LTD., 3 RD FLOOR, SHARDA ARCADE, SATARA ROAD, PUNE 411037 PAN :AAACC8675N . /RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK REVENUE BY : SHRI HITENDRA NINAWE / ORDER PER R.K.PANDA, AM : THESE ARE CROSS APPEALS. THE FIRST ONE IS FILED BY THE ASSE SSEE AND THE SECOND ONE BY THE REVENUE AND ARE DIRECTED A GAINST THE ORDER DATED 13-08-2013 OF THE CIT(A)-IT/TP, PUNE RELATIN G TO ASSESSMENT YEAR 2009-10. FOR THE SAKE OF CONVENIENCE THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. / DATE OF HEARING :04.08.2016 / DATE OF PRONOUNCEMENT: 31.08.2016 2 ITA NO.1896 & 1969/PN/2013 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A LISTED PUBLIC LIMITED COMPANY AND IS ENGAGED IN PROVIDING IT ENABLE D SERVICES. IT FILED ITS RETURN OF INCOME ON 09-10-2009 DECLA RING LOSS OF RS.2,68,14,081/-. DURING THE COURSE OF ASSESSMENT PROCE EDINGS THE AO OBSERVED THAT THE ASSESSEE COMPANY PROVIDES V ARIOUS BPO/ITES SERVICES TO ITS AES. FROM THE TRANSFER PRICING (TP DOCUMENTS FURNISHED) FOR THE IMPUGNED ASSESSMENT YEAR, H E OBSERVED THAT THE ASSESSEE COMPANY HAS ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AE : SR.NO. NATURE OF TRANSACTION AMOUNT (RS.) METHOD USED 1 PROVISION OF BPO SERVICES 3,88,38,097 TNMM 3. FROM THE TP STUDY REPORT SUBMITTED BY THE ASSESSE E AND DETAILS/EXPLANATION SUBMITTED DURING THE COURSE OF ASSESSM ENT PROCEEDINGS, THE AO NOTED THAT CERTAIN FACTS RELATING TO THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE A ND THEIR BENCHMARKING DONE DOES NOT COMPLY TO THE TRANSFER PRIC ING REGULATIONS OF INDIA. HE, THEREFORE, ISSUED A SHOW CAUSE N OTICE TO THE ASSESSEE ASKING HIM TO JUSTIFY THE TP STUDY. FROM THE DETAILS FURNISHED BY THE ASSESSEE, HE OBSERVED THAT THE ASSESS EE HAS SELECTED THE FOLLOWING 8 COMPANIES AS COMPARABLE ON THE BA SIS OF THE SEARCH CONDUCTED IN THE PUBLIC DATABASE, I.E. PROWESS AND CAPITALINE. THE PLI (OPERATING PROFIT TO OPERATING COST RAT IO) OF THE COMPARABLES CONSIDERING DATA FOR A.Y. 2008-09 ARE AS UNDER : SR.NO. COMPANY NAME OP/OC(%) 1 CAPRICORN SYSTEMS GLOBAL SOLUTIONS LTD. 1.83 2 CAT TECHNOLOGIES LTD. 34.87 3 INFINITE DATA SYSTEMS PVT. LTD. 29.51 4 NET4NUTS LTD. 8.60 5 PERSISTENT EBUSINESS SOLUTIONS LTD. 3.55 6 SAVEN TECHNOLOGIES LTD. 2.52 7 SHEOREY DIGITAL SYSTEMS LTD. 28.77 3 ITA NO.1896 & 1969/PN/2013 8 SPRY RESOURCES INDIA P. LTD. 16.71 MEAN 15.79 4. HE OBSERVED THAT THE SEARCH CRITERIA AND THE ACCEP TANCE REJECTION MATRIX APPLIED BY THE ASSESSEE FOR ARRIVING AT FINAL COMPARABLE SET ARE AS UNDER : A. COMPANIES WITH INCOME FROM ITES/BPO > 75% OF THE REVENUE OR SEGMENTAL REVENUE ACCEPTED BY TPO B. COMPANIES WITH LESS THAN 75% EARNINGS FROM EXPORTS REJECTED BY TPO. C. COMPANIES WITH LESS THAN 25% RELATED PARTY TRANSACTI ONS ACCEPTED BY TPO D. COMPANIES WITH PECULIAR CIRCUMSTANCES ARE REJECTED. 5. ACCORDING TO THE AO COMPANIES WITH INCOME OF MORE THA N 75% FROM ITES/BPO AND COMPANIES WITH LESS THAN 25% RPT MAY BE SELECTED. HE THEREFORE APPLIED THESE ADDITIONAL/MODIFIED FILTERS OR CRITERIA FOR SELECTING APPROPRIATE COMPARABLES FUNCTIONALLY S IMILAR TO THAT OF THE ASSESSEE. IN VIEW OF THE ABOVE, THE TPO WAS OF THE OPINION THAT ONLY ONE COMPANY, I.E. INFINITE DATA SYSTEMS P VT. LTD. IS COMPARABLE AND THE REST OF THE COMPANIES SELECTED BY TH E ASSESSEE ARE NOT AT ALL COMPARABLE. THE REASONS GIVEN BY THE TPO FOR SUCH REJECTION ARE AS UNDER : SR. NO. NAME OF THE COMPARABLE REMARKS 1 CAPRICORN SYSTEMS GLOBAL SOLUTIONS LTD. IT FAILS 25% RPT FILTER APPLIED BY THE AO, THUS IT IS NOT CONSIDERED AS A COMPARABLE 2 CAT TECHNOLOGIES IT IS ENGAGED IN SOFTWARE DEVELOPMENT AND CONSULTANCY SERVICES, HENCE FUNCTIONALLY DIFFERENT, THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 3 INFINITE DATA SYSTEMS PVT. LTD. COMPARABLE 4 NET4NUTS LTD. THE COMPANY FAILS EXPORT EARNINGS FILTER, THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 4 ITA NO.1896 & 1969/PN/2013 5 PERSISTENT EBUSINESS SOLUTIONS LTD. THE COMPANY FAILS EXPORT EARNINGS FILTER, THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 6 SAVEN TECHNOLOGIES LTD. THE COMPANY FAILS EXPORT EARNINGS FILTER, THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 7 SHEOREY DIGITA L SYSTEMS LTD. THE COMPANY FAILS EXPORT EARNINGS FILTER, THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 8 SPRY RESOURCES INDIA P. LTD. THE COMPANY FAILS EXPORT EARNINGS FILTER, THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLE 6. THE TPO FURTHER NOTED THAT THE FOLLOWING PERTINENT DEFE CTS HAVE BEEN FOUND IN THE TP ANALYSIS CARRIED ON BY THE AS SESSEE WHICH ARE AS UNDER : 1. SOME OF THE ASSESSEES COMPARABLES DO NOT STAND SCRUTI NY OF FAR ANALYSIS. 2. SOME COMPANIES THOUGH QUALIFY ALL THE FILTERS APP LIED BY THE TAX PAYER BASED ON THE DATA PERTAINING TO THE F.Y. 2007- 08, THEY HAVE NOT BEEN SELECTED. 3. THE ASSESSEE SELECTED COMPANIES HAVING PREDOMINANT DOM ESTIC OPERATIONS THOUGH THE ASSESSEE IS MAINLY AN EXPORT ORIENT ED IT ENABLED SERVICE PROVIDER. IN VIEW OF THE ABOVE, HE HELD THAT THE ALP DETERMINED BY THE ASSESSEE IS NOT RELIABLE AND CORRECT. HE, THEREFORE, INVOKE D THE PROVISIONS OF SECTION 92C(3)(C). 7. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE, TH E AO NOTED THAT THE OPERATING REVENUE, OPERATING EXPENSES A ND OPERATING PROFIT OF THE ASSESSEE CAN BE COMPUTED AS UNDER : AMOUNT (RS.) SALES 43773517 FOREX GAIN 2696077 OPERATING INCOME 46469594 TOTAL COST 58964581 LESS : INTEREST 135821 OPERATING COST(OC) 58828760 OPERATING PROFIT (OP) - 12359166 OP/OC (%) - 21.01 5 ITA NO.1896 & 1969/PN/2013 8. HE FURTHER OBSERVED THAT THE ASSESSEE HAD ALSO ADJ USTED ITS PLI ON ACCOUNT OF EXPENSES IN RELATION TO THE RAISING OF FIN ANCE AND BUY BACK ON THE GROUND THAT THESE ARE EXTRAORDINARY OR NON OPERATING EXPENSES. SINCE THE ASSESSEE DID NOT PRODUCE ANY DOCUMENTARY EVIDENCE TO SUBSTANTIATE THE CLAIM AND SINCE THERE WAS NO SUCH COMMENT IN THE TAX AUDIT REPORT AND THE ASSE SSEE HAS NOT DISALLOWED SUCH EXPENSES IN THE COMPUTATION OF INCOME, IF IT WERE RELATED TO RAISING OF CAPITAL AS CLAIMED BY THE ASSESSEE, T HE AO REJECTED THE CLAIM OF THE SAME AS EXTRAORDINARY OR NON OPERATING EXPENSES. 9. SO FAR AS THE ADJUSTMENT OF TAX REFUND CLAIM TREATING THE SAME AS PRIOR PERIOD EXPENSES, THE AO ALSO REJECTED THE SAME ON THE GROUND THAT ASSESSEE HAS NOT PRODUCED ANY DOCUMENTA RY EVIDENCE TO SUBSTANTIATE THE CLAIM AND THERE WAS NO SUCH COMMEN T IN THE TAX AUDIT REPORT AND THE ASSESSEE HAS NOT DISALLOWED THE SA ID EXPENSES IN THE COMPUTATION OF INCOME. AS REGARDS THE TREATMENT OF SALA RY EXPENSES OF ACCOUNTING AND MIS PROCESS AS EXTRAORDINAR Y EXPENSES, THE TPO HELD THAT THESE ARE NOT EXTRAORDINARY EXPENSE S AND ARE ROUTINE EXPENSES. SO FAR AS THE TREATMENT OF SALARY EX PENSES OF SOFTWARE TEAM WHICH IS NOT CAPITALIZED ON ACCOUNT OF SOFTWA RE NOT SUCCEEDED AND CONSIDERED BY THE ASSESSEE AS EXTRAORD INARY EXPENSES IS CONCERNED, THE TPO OBSERVED THAT ASSESSEE DID NOT PRODUCE ANY DOCUMENTARY EVIDENCE TO SUBSTANTIATE THE CLAIM NOR ANY SUCH COMMENT IN THE TAX AUDIT REPORT AND THE ASS ESSEE HAS NOT DISALLOWED SUCH EXPENSES IN THE COMPUTATION OF INCOME. IN VIEW OF THE ABOVE, THE TPO HELD THAT THE ABOVE-MENTIONED EXPEN SES ARE NEITHER EXTRAORDINARY NOR NON OPERATING EXPENSES. THER EFORE, HE CONSIDERED THESE EXPENSES AS OPERATING AND BOOKED AS OPERATING 6 ITA NO.1896 & 1969/PN/2013 COST. THE AO, THEREAFTER SELECTED 3 NEW COMPANIES AS CO MPARABLES AND DETERMINED THE OPERATING PROFIT MARGIN AT 33.07% WHIC H IS AS UNDER : SR.NO. NAME OF THE COMPARABLE OP/OC (%) 1 INFINITE DATA SYSTEMS PVT. LTD. 30.87 2 CORAL HUBS LTD. (FORMERLY VISHAL INFORMATION TECHNOLOGIES LTD.) 38.69 3 CROSSDOMAIN SOLUTIONS LTD. 29.40 4 E 4E HEALTHCARE SOLUTIONS LTD. (EARLIER KNOWN AS NITTANY OUTSOURCING SERVICES PVT. LTD. 33.31 ARITHMETIC MEAN 33.07 10. THE ASSESSEE AGITATED THE MATTER BEFORE THE CIT(A). IT WAS SUBMITTED THAT THE TP ADJUSTMENT HAS ARISEN PRIMARILY B ECAUSE OF THE DENIAL OF ADJUSTMENT BY THE TPO TO ITS OPERATING PRO FIT AND ALSO BECAUSE OF REJECTION OF CERTAIN LOSS MAKING COMPANIES AS COMPARABLES. IT WAS ARGUED THAT IF THE CONTENTION OF TH E ASSESSEE ON THESE 2 ISSUES ARE ACCEPTED, THEN THE VARIOUS OTHER GR OUNDS RAISED BY THE ASSESSEE BEFORE THE CIT(A) MAY NOT BE NECESSARY BECAUSE THE ASSESSEE WILL BE FALLING WITHIN THE SAFE HARBOUR RANGE OF +/- 5%. IT WAS SUBMITTED THAT IT HAD INCORRECTLY APPLIED THE FILTER OF LOSS MAKING COMPANIES RESULTING IN EXCLUSION OF COMPANIES WITH LOSS ES AS COMPARABLE. THE TPO ALSO ACCEPTED THIS FILTER AS APPLIED BY THE ASSESSEE AND EXCLUDED LOSS MAKING COMPANIES FROM THE LIST OF THE COMPARABLE COMPANIES. HOWEVER, IT REALIZED LATER THAT FILTER OF LOSS MAKING COMPANIES IS NOT APPROPRIATE IN THE FACTS OF ITS CAS E. IT WAS SUBMITTED THAT THE ASSESSEE HAS INCURRED SIGNIFICANT LOSS DUE TO CERTAIN UNPRECEDENTED AND EXTRAORDINARY EVENTS LIKE ESO P ISSUE, BUYBACK OF SHARES AND FALL IN GDR ISSUE. IT WAS SUBMITTED THAT ABOVE EXTRAORDINARY COST, IF IGNORED, THEN THE COMPANY WO ULD MAKE SIGNIFICANT OPERATING PROFIT. IT WAS ACCORDINGLY ARGUED THA T IT WOULD NOT BE APPROPRIATE TO REJECT THE COMPANIES WITH OPERAT ING LOSS. 7 ITA NO.1896 & 1969/PN/2013 THEREFORE, THE FILTER APPLIED BY THE ASSESSEE AS WELL AS THE TPO TO EXCLUDE THE COMPANIES WITH NEGATIVE PBIT WILL NOT BE JUSTIFIE D IN THIS CASE. FURTHER, INCURRING OF PROFIT OR LOSS IS PART OF THE N ORMAL BUSINESS CYCLE. THEREFORE, IF VIEWED FROM THIS PERSPECTIVE, LOSS MAKING COMPANIES SHOULD BE EXCLUDED AS COMPARABLES. 11. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE CIT(A) HELD THAT THE ASSESSEE HAS NOT PROVED THE CORRECTNES S OF THE ACCEPTANCE BEFORE THE AO AND NO DOCUMENTARY EVIDENCE WERE ALSO SUBMITTED BEFORE HIM TO SUBSTANTIATE THE SAME. THEREFOR E, WHEN THE EXPENDITURE ITSELF IS NOT PROVED THE DISCUSSION ON THIS EXT RAORDINARY NATURE IS IRRELEVANT. THUS, THE CIT(A) CONFIRMED THE ACTION OF THE AO IN HOLDING THAT THESE EXPENSES ARE NEITHER EXTRAORDINARY NOR NON- OPERATING AND THEREFORE HAS TO BE INCLUDED WHILE COMPUTI NG THE OPERATING MARGIN OF THE ASSESSEE COMPANY. 12. SO FAR AS THE VARIOUS COMPARABLES SELECTED BY THE A O IS CONCERNED, HE ACCEPTED THE CONTENTION OF THE ASSESSEE AND HELD THAT THERE IS NO REASON TO EXCLUDE LOSS MAKING COMPANIES IN TH E FINAL LIST OF COMPARABLES. HE ACCORDINGLY DIRECTED THE AO TO INCLUDE THE LOSS MAKING COMPANIES IN THE LIST OF COMPARABLES. THE FINDINGS GIVE N BY THE CIT(A) ON BOTH THE ISSUES AT PARA 2.1.4 TO 2.1.8 READ AS UNDER : FINDINGS : 2.1.4 I HAVE CONSIDERED THE ARGUMENTS OF THE APPELLAN T. I FIND THAT THE APPELLANTS ARGUMENT IS THAT IT HAD INCORRECTLY APPLI ED THE FILTER OF LOSS MAKING COMPANIES IN THE TRANSFER PRICING ASSESSMENT PROC EEDINGS. THEREFORE, IT SHOULD BE PERMITTED TO CORRECT ITS ERRO R IN THE APPELLATE PROCEEDINGS. IN THIS CONNECTION, IT MAY BE NECESSARY TO DISCUSS AS TO WHETHER THE APPELLANT CAN CHANGE STAND TAKEN BY IT D URING THE TRANSFER PRICING ASSESSMENT PROCEEDINGS AT THE LATER STAGE. IN MY VIEW, BOTH THE SIDES; BE IT ASSESSEE OR THE AO; ARE PERMITTED TO CORREC T THEIR ADMITTED POSITION PROVIDED SUCH CHANGE IS BONAFIDE, DOES NOT CAU SE PREJUDICE TO THE VESTED RIGHTS OF OTHERS AND WHEN SUCH CHANGE IS NOT EXPRESSLY 8 ITA NO.1896 & 1969/PN/2013 PROHIBITED BY LAW. THERE ARE SEVERAL TRIBUNAL JUDGME NTS HOLDING THAT THE ASSESSEE IS NOT BOUND BY ITS TRANSFER PRICING STUDY REP ORT. 2.1.5 IN THIS CASE, THE APPELLANT IS A LOSS MAKING COMPA NY. IT HAS CONTENDED THAT IT WILL TURN IN TO PROFIT MAKING COM PANY, IF SELF- ADJUSTMENT SOUGHT ON ACCOUNT OF EXTRA-ORDINARY EXPEND ITURE IS PERMITTED. THE APPELLANT HAS SOUGHT SELF-ADJUSTMENT ON ACCOUNT OF INCURRING OF CERTAIN EXPENDITURE, WHICH IN ITS OPINI ON ARE EXTRA-ORDINARY ITEMS. I FIND THAT THE APPELLANT HAS NOT PROVED CORRE CTNESS OF THE EXPENDITURE BEFORE THE LEARNED TPO. THE LEARNED TPO IN PARA 6.4 OF HIS ORDER HAS RECORDED HIS FINDING THAT THE APPELLANT HAS NEITHER PRODUCED ANY DOCUMENTARY EVIDENCE TO SUBSTANTIATE CLAIM NOR HA S MADE ANY SUCH COMMENT IN THE TAX AUDIT REPORT IN FORM 3CD. THE AP PELLANT HAS NOT CHALLENGED THIS FINDING IN ANY OF THE GROUNDS OF APPE AL FILED BEFORE ME NOR HAS IT FILED ADDITIONAL EVIDENCE IN SUPPORT OF EX PENDITURE IN THE APPELLATE PROCEEDINGS. WHEN EXPENDITURE ITSELF IS NOT PROVED ON FACTS, DISCUSSION ON ITS EXTRA-ORDINARY NATURE IS IRRELEVANT. W HEN THE FACT OF EXPENDITURE IS NOT ESTABLISHED, IT CANNOT BE PRESUMED TO HAVE BEEN EXPENDED FOR THE PURPOSE OF BUSINESS OR FOR THAT MATTER , AS AN OPERATING EXPENDITURE. IN THESE CIRCUMSTANCES, I CONFIRM THE DE CISION OF THE LEARNED TPO TO DENY SELF-ADJUSTMENT ON ACCOUNT OF EXT RA-ORDINARY EXPENSES. WITH THE RESULT, THE APPELLANT WILL BE A LOSS MAKING COMPANY. 2.1.6 AS FAR AS COMPARABILITY OF LOSS MAKING COMPANY IS CONCERNED, ACCORDING TO. ME, IT WOULD BE INAPPROPRIATE TO COMP ARE THE SAME WITH PROFIT MAKING COMPANIES. IT IS FUNDAMENTAL THAT ORAN GES CANNOT BE COMPARED WITH APPLES. THEREFORE, IN MY VIEW FILTER OF LOSS MAKING COMPANY CANNOT BE USED TO EXCLUDE SUCH COMPANIES. THE APPELLANT HAS ALSO SUBMITTED THAT ACCORDING TO ITS BUSINESS MODEL, IT H AS NOT PROVIDED SERVICES BY FOLLOWING 'COST PLUS' BUSINESS MODEL. IT HAS CHARGED ITS AE ON THE HOURLY BASIS. IT HAS FURNISHED COPIES OF THE INVOICE S TO SUBSTANTIATE ITS CLAIM IN SUPPORT OF THE SAME. 2.1.7 I AM OF THE CONSIDERED VIEW THAT THE APPELLANT 'S CASE ITSELF BEING A LOSS MAKING, IT WOULD BE UNFAIR AND AGAINST THE PRINCI PLES OF TRANSFER PRICING COMPARE ONLY WITH PROFIT MAKING COMPANIES. A CCORDINGLY, I DIRECT THE LEARNED AO TO INCLUDE LOSS MAKING COMPANIE S ALSO IN THE LIST OF THE COMPARABLE COMPANIES. 2.1.8 THE APPELLANT HAS SUBMITTED THAT ONCE LOSS MAKIN G COMPANIES ARE INCLUDED IN THE LIST OF THE COMPARABLE COMPANIES THEN ' THE AVERAGE NET MARGIN OF THE COMPARABLE COMPANIES WOULD FALL WITHIN THE +/- 5% SAFE HARBOUR RANGE U/S 92C(2). SINCE, THIS GROUND OF APPEA L DECIDED IN FAVOUR OF THE APPELLANT, IT WOULD RESULT INTO DELETI ON OF THE TRANSFER PRICING ADJUSTMENT. THEREFORE, IT IS NOT NECESSARY TO ADJUDICATE OTHER GROUNDS OF APPEAL. ACCORDINGLY, I DO NOT DISCUSS AND GI VE MY FINDINGS ON THE OTHER GROUNDS OF APPEAL. 13. THE CIT(A) FURTHER HELD THAT ONCE LOSS MAKING COMPANIE S ARE INCLUDED IN THE LIST OF COMPARABLES, THEN THE AVERAGE NET M ARGIN OF THE COMPARABLE COMPANIES WOULD FALL WITHIN +/-5% OF SAFE HAR BOUR 9 ITA NO.1896 & 1969/PN/2013 RANGE U/S.92C(2) AND THEREFORE THE ADDITION MADE ON ACCOU NT OF TP ADJUSTMENT WILL BE DELETED. 14. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : GROUNDS BY THE ASSESSEE : T HE FOLLOWING GROUNDS ARE TAKEN W I THOUT PREJUDICE TO EACH OTHER- ON F ACT S AND I N L AW , 1] THE ASSESSEE SUBMITS THAT 3 COMPANIES NAMELY CORAL HUBS LTD. (FORMERLY VISHAL INFORMATION TECHNOLOGIES LTD.), CROSSD OMAIN SOLUTIONS LTD. AND E4E HEALTHCARE SOLUTIONS LTD. (FOR MERLY AS NITTANY OUTSOURCING SERVICES PVT. LTD.) AS SELECTED BY THE TRAN SFER PRICING OFFICER (TPO) ARE NOT COMPARABLE WITH THE ASSESSEE COMP ANY AND THESE COMPANIES SHOULD BE REJECTED AS COMPARABLES WHILE DETE RMINING THE ARM'S LENGTH PRICE (ALP). 2] THE LD. CIT(A) ERRED IN CONFIRMING THE OPERATING PROFIT MARGIN COMPUTED BY THE LD. TPO AT (-) 21.01% AS AGAINST THE OPERATING PROFIT MARGIN OF (+) 22.05% COMPUTED BY THE APPELLANT IN ITS TRANSFER PRIC ING STUDY REPORT AFTER MAKING CERTAIN ADJUSTMENTS. 2.1] THE LD . CIT(A ) ERRED IN RE J ECTING ALL THE ADJUSTMENTS MADE BY THE APPE L LANT WHILE COMPUT I NG THE OPERATING COST AS WELL AS OPERATING PROFIT WITHOUT GIVING AN Y CONCRETE OR R ATIONAL JUSTIFICATION FO R R EJECT I NG THE SAME. 2.2] THE LD. CIT(A) FAILED TO APPRECIATE THAT THE FINANCE RAIS I NG COST , PRIOR PERIOD I TEMS WRITTEN OFF AND EXTRA ORDINARY ITEMS WERE TO BE EXCLUDED WHILE DETERM I N I NG THE OPERATING PROFIT AND OPE R ATING COST WHILE DETERMINING THE ALP OF T HE I NTERNAT I O N A L TRANSACTIONS ENTERED I NTO BY THE APPELLANT COMPANY . 3] THE CIT(A) HAS FA I LED TO GRANT THE WORKING CAPITAL ADJUSTMENT I N RESPECT OF COMPARABLE COMPANIES SELECTED BY THE LD . TPO. 4] THE ASSESSEE SUBMITS THAT IT SHALL BE ALLOWED THE CRE DIT FOR ALL THE LAWFUL PREPAID TAXES LIKE ADVANCES TAX AND TAX DEDUCT ED AT SOURCE, WHICH THE APPELLANT WAS EL I GIBLE TO CLAIM . 5] THE ASSESSEE SUBMITS THAT NO INTEREST IS L EVIABLE U/S . 234A OF THE ACT , AS R ETURN OF I NCOME WAS FURNISHED WITHIN THE TIME LIMIT PRESCRIBED U/S . 139(1 ) OF THE ACT AND THAT NO I NTEREST MAY BE LEVIED U/S . 234B OF THE ACT IN RESPECT OF UNANTICIPATED ADDITIONS MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 6] THE APPELLANT RESERVES ITS RIGHT TO ADD, ALTER, AME ND OR WITHDRAW ANY GROUND OF APPEAL EITHER BEFORE OR AT THE TIME O F HEARING OF THIS APPEAL. 10 ITA NO.1896 & 1969/PN/2013 GROUNDS BY THE REVENUE : 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME -TAX (APPEALS) IS CONTRARY TO LAW AND TO THE FACTS AND CIRCUMSTANCES O F THE CASE. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) G ROSSLY ERRED IN ACCEPTING THE ASSESSEE'S CLAIM THAT IT HAD INCO RRECTLY APPLIED THE FILTER OF LOSS MAKING COMPANIES IN THE TRANSFER PR ICING ASSESSMENT PROCEEDINGS AND, THEREFORE, IT SHOULD BE PERMITTED TO CORRECT ITS ERROR IN THE APPELLATE PROCEEDINGS. 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) G ROSSLY ERRED IN HOLDING THAT THE ASSESSEE CAN CHANGE THE STAND TAKEN DURING THE TRANSFER PRICING ASSESSMENT PROCEEDINGS AT A LATER STA GE. 4. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) G ROSSLY ERRED IN DIRECTING THE ASSESSING OFFICER TO INCLUDE LOSS -MAKING COMPANIES AS A COMPARABLE WHEN THE TRANSFER PRICING OF FICER / ASSESSING OFFICER HAD EXCLUDED LOSS-MAKING COMPANIES BY A CCEPTING THE FILTER AS APPLIED BY THE ASSESSEE ITSELF AND ALSO WHEN TH E ASSESSEE HAD NOT SUBMITTED THE LIST OF LOSS-MAKING COMPARABLE COMPA NIES EITHER BEFORE THE ASSESSING OFFICER OR BEFORE THE LD. COMMISSION ER OF INCOME- TAX(APPEALS). 5. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) G ROSSLY ERRED IN CONCLUDING THAT ONCE LOSS MAKING COMPANIES AR E INCLUDED IN THE LIST OF THE COMPARABLE COMPANIES THEN THE AVERAGE NET MARGIN OF THE COMPARABLE COMPANIES WOULD FALL WITHIN THE + / -5% SAFE HARBOUR RANGE U/S. 92C(2) AND HENCE THE ADDITION MADE ON ACC OUNT OF TRANSFER PRICING ADJUSTMENT WILL BE DELETED. 6. FOR THESE AND SUCH OTHER GROUNDS AS MAY BE URGED AT THE TIME OF THE HEARING, THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) MAY BE VACATED AND THAT OF THE ASSESSING OFFIC ER BE RESTORED. 7. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER O R DELETE ANY OF THE ABOVE GROUNDS OF APPEAL DURING THE COURSE OF THE APPELLATE PROCEEDINGS BEFORE THE HONBLE TRIBUNAL. 15. SO FAR AS GROUND OF APPEAL NO.1 IS CONCERNED, THE LD. C OUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AO HAS SELECTED 4 COMPANIES AS COMPARABLES OUT OF WHICH 3 COMPANIES ARE NOT AT ALL COMPA RABLE WITH THE ASSESSEE COMPANY. SO FAR AS CORAL HUBS LTD. IS CONCERNED, HE SUBMITTED THAT THE EMPLOYEE COST IS THE MAIN ITEM OF E XPENDITURE IN THE LINE OF BUSINESS CARRIED OUT BY THE ASSESSEE COMP ANY. HOWEVER, IN THE CASE OF CORAL HUBS LTD. THE EMPLOYEE COST IS HARDLY 3% WHICH IS EVIDENT FROM PAGE 206 OF THE PAPER BOOK. HE SUBMITTED 11 ITA NO.1896 & 1969/PN/2013 THAT THE TURNOVER OF CORAL HUBS LTD. HAS INCREASED FRO M RS.38.07 CRORES TO RS.61.73 CRORES WHILE ITS EMPLOYEE COST HAS INCR EASED MARGINALLY FROM RS.1.11 CRORES TO RS.1.22 CRORES IN THE FIN ANCIAL YEAR ENDING 31-03-2008 AND 31-03-2009 RESPECTIVELY. F URTHER, THE RELATED PARTY TRANSACTIONS IN THIS COMPANY IS MORE THAN 25%. REFERRING TO THE DECISION OF THE PUNE BENCH OF THE TRIBUNA L IN THE CASE OF BNY MELLON INTERNATIONAL OPERATIONS (INDIA) PVT. LT D., VS. DCIT REPORTED IN (2015) 55 TAXMANN.COM 386 HE SUBMITTED THAT THE TRIBUNAL IN THE SAID DECISION, AFTER CONSIDERING THE NATURE O F BUSINESS CARRIED OUT HAS HELD THAT CORAL HUBS LTD. IS TO BE REJECTED AS A COMPARABLE. 16. SO FAR AS SELECTION OF CROSS DOMAIN SOLUTIONS LTD. AS A COMPARABLE IS CONCERNED, HE SUBMITTED THAT THIS COMPANY IS ENGAGED IN HIGH SKILLED IT SERVICES WHICH CANNOT BE COMPAR ED WITH THE SERVICES RENDERED BY THE ASSESSEE COMPANY. REFERR ING TO THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BNY MELLON INTERNATIONAL OPERATIONS (INDIA) PVT. LTD. (SUPRA) HE SUBMITT ED THAT CROSS DOMAIN SOLUTIONS LTD. HAS BEEN REJECTED AS COMPAR ABLE ON THE ABOVE GROUND. 17. SO FAR AS E4E HEALTHCARE SOLUTIONS LTD. IS CONCERNED, H E SUBMITTED THAT THE ABOVE COMPANY IS ENGAGED IN DIFFERENT BUSINESS, I.E. BUSINESS OF PROVIDING HEALTHCARE OUTSOURCING SERVICES FOR THE HEALTHCARE INDUSTRY IN THE US WHICH IS EVIDENT FROM THE CO PY OF THE ANNUAL REPORT, COPY OF WHICH IS PLACED AT PAGE 243 OF THE PAPER BOOK AT PARA 1.1. THEREFORE, THIS COMPANY SHOULD BE EXCLUDED A S A COMPARABLE. 12 ITA NO.1896 & 1969/PN/2013 18. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER H AND HEAVILY RELIED ON THE ORDERS OF THE AO AND THE CIT(A) ON THIS ISSUE. 19. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS CITED BEFORE US. WE FIND THE ASSESSEE IN ITS TP ST UDY REPORT HAS CONSIDERED 8 COMPANIES AS COMPARABLE. HOWEVE R, THE AO CONSIDERED ONLY INFINITE DATA SYSTEMS PVT. LTD. AS COMPA RABLE AND REJECTED THE 7 OTHER COMPANIES SELECTED BY THE ASSESS EE AS NOT COMPARABLE. THE AO IN THE FRESH T.P. STUDY CONSIDERED 3 NE W COMPANIES AS COMPARABLE, THE DETAILS OF WHICH HAS ALREADY GIVEN AT PARA 9 OF THIS ORDER. IT IS THE SUBMISSION OF THE LD. CO UNSEL FOR THE ASSESSEE THAT THE 3 NEW COMPANIES SELECTED BY THE TPO AS COMPARABLE WHICH HAS BEEN UPHELD BY THE CIT(A) ARE NOT COMPARABLE. SO FAR AS THE CORAL HUBS LTD. IS CONCERNED, WE FIND THE EMPLOYEE COST OF THE SAID COMPANY IS HARDLY 3% OF THE RE VENUE WHICH IS EVIDENT FROM THE PROFIT AND LOSS ACCOUNT, COPY OF W HICH IS PLACED AT PAGE 206 OF THE PAPER BOOK. A PERUSAL OF THE PROFIT AND LOSS ACCOUNT SHOW THAT THE PERSONNEL COST HAS BEEN SH OWN AT RS.1,22,28,432/- AS AGAINST THE TURNOVER OF RS.61,08,57,165/- . FURTHER, THE TURNOVER HAS GONE UP FROM RS.38.08 CRORES IN F.Y. 2007-08 TO RS.61.09 CRORES IN FINANCIAL YEAR ENDING 31-03-2 009. HOWEVER, THE EMPLOYEE COST HAS GONE UP FROM RS.1.11 CROR ES TO ONLY RS.1.22 CRORES. THE SUBMISSION OF THE LD. COUNSEL FOR THE A SSESSEE THAT THE RELATED PARTY TRANSACTIONS OF THE ABOVE COMPA NY IS MORE THAN 25% COULD NOT BE CONTROVERTED BY THE LD. DEPARTM ENTAL REPRESENTATIVE. FURTHER, THE NOTES FORMING PART OF ACCO UNTS FOR THE YEAR ENDED 31-03-2009, COPY OF WHICH IS PLACED AT PAGES 213 AND 13 ITA NO.1896 & 1969/PN/2013 214 OF THE PAPER BOOK (PAGE 75 AND 76 OF THE ANNUAL AUD ITED ACCOUNTS) SHOW THAT THE RELATED PARTY TRANSACTIONS ARE MORE THAN 25%, THE DETAILS OF WHICH ARE GIVEN AS UNDER : 9. RELATED PARTY TRANSACTIONS NAME OF THE PARTY COUNTRY HOLDING AS AT 31-03-2009 AS AT 31-03-2008 BASIZ FUND SERVICE PVT. LTD. INDIA 86.84% 86.92% TUTIS DIGITAL PUBLISHING PVT. LTD. INDIA 79.37% - DIGITAL CONTENT SOLUTIONS LTD. UK 100% - WE THEREFORE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN VIEW OF THE LOW EMPLOYEE COST AND HIGH R ELATED PARTY TRANSACTIONS CORAL HUBS LTD. SHOULD BE EXCLUDED FRO M THE COMPARABLES. 20. WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF B NY MELLON INTERNATIONAL OPERATIONS (INDIA) PVT. LTD. (SUPRA) HA S HELD THAT CORAL HUBS LTD. (FORMERLY KNOWN AS VISHAL INFORMATION TECHNOLOGY LTD.) CANNOT BE INCLUDED AS COMPARABLE. THE RE LEVANT OBSERVATION OF THE TRIBUNAL AT PARA 24 TO 26 READ AS UNDER : 24. THE NEXT OBJECTION OF THE ASSESSEE IS WITH REGARD TO THE INCLUSION OF CORAL HUBS LTD. (FORMERLY KNOWN AS VISHAL INFORMATI ONAL TECHNOLOGIES LTD.) IN THE FINAL SET OF COMPARABLES. T HE PLEA OF THE ASSESSEE IN THIS REGARD HAS BEEN NOTED BY THE TPO IN PAR A 29 OF HIS ORDER. IT WAS CANVASSED BY THE ASSESSEE THAT THE SAID CO NCERN WAS FUNCTIONALLY DISSIMILAR TO THE ACTIVITIES UNDERTAKEN B Y THE ASSESSEE. IT WAS POINTED OUT THAT THE SAID CONCERN WAS INVOLVED IN DIGITIZATION ACTIVITY AND WAS ALSO IN E-PUBLISHING ARENA. IT WAS AL SO POINTED OUT THAT IT HAD ENTERED INTO A NEW BUSINESS OF DIGITAL LIBRARY & PRINT ON DEMAND (POD) ACTIVITIES, WHICH ARE QUITE DIFFERENT FROM THE ACTIVITIES OF BPO UNDERTAKEN BY THE ASSESSEE. BY ANALYZING THE EMPLOYEE COST RATIO TO SALES OF THE SAID CONCERN, ASSESSEE ALSO POINTED OUT BEFORE THE TPO THAT THE SAID CONCERN WAS OPERATING WITH A DIFFERENT BUSINE SS MODEL. IN THE CASE OF CORAL HUBS LTD., THE EMPLOYEE COST AS A PERCENT AGE OF SALES STOOD AT 1.22% FOR THE FINANCIAL YEAR UNDER CONSIDERATION WHEREAS THE EMPLOYEE COST AS A PERCENTAGE OF SALES STOOD AT 54.22% I N THE CASE OF THE ASSESSEE. IT WAS ALSO POINTED OUT THAT, M/S CORAL HUB S LTD. WAS HAVING MAJOR VENDOR PAYMENTS WHICH SHOWED THAT IT WAS OUTSOURCING ITS ACTIVITIES TO THIRD PARTIES ON A SUBSTANTIAL LEVEL, WHEREAS ASSESSEE WAS OPERATING THROUGH ITS EMPLOYEES. ALL THE AFORESAID PLEAS OF THE ASSESSEE HAVE BEEN SUMMARILY REJECTED BY THE TPO. 14 ITA NO.1896 & 1969/PN/2013 25. BEFORE US, THE LD. REPRESENTATIVE FOR THE ASSESSEE H AS REITERATED THE SUBMISSIONS PUT-FORTH BEFORE THE TPO AND HAS ALSO POI NTED OUT THAT IN A SIMILAR SITUATION, THE PUNE BENCH OF THE TRIBUNA L IN THE CASE OF PTC SOFTWARE (INDIA) PRIVATE LIMITED (SUPRA) HAS FOUND T HE SAID CONCERN TO BE FUNCTIONALLY DISSIMILAR TO A CONCERN ENGAGED IN RE NDERING OF BPO SERVICES (ITES). THE FOLLOWING DISCUSSION IN THE ORDER OF THE TRIBUNAL IN THE CASE OF PTC SOFTWARE (INDIA) PRIVATE LIMITED (SUP RA) HAS BEEN RENDERED TO :- 45. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE RECORD. IN THE TP STUDY CARRIED OUT BY THE TPO IN THE ITES SEGMENTS, FRESH SEARCH CRITERIA WERE APPLIED BY THE TPO AND LIST OF COMPARABLES WHICH WERE NOT SELECTED BY THE ASSESSEE WERE PICKED UP IN THE TP STUDY AND THE MARGINS OF THE SAID COMPARABLES WERE APPLIED TO DETERMINE THE ARMS LENGTH PRICE OF THE TRANSACTION S OF THE ASSESSEE IN ITES SEGMENTS. THE ASSESSEE WAS AGGRIEVED BY TH E SELECTION OF THE SAID COMPARABLES AND THE PLEA OF THE ASSESSEE W AS THAT IN CASE SAID COMPARABLES WERE NOT INCLUDED IN THE TP STUDY, THE MARGINS SHOWN BY THE ASSESSEE WOULD BE AT ARMS LENGTH. TH E FIRST COMPARABLE REFERRED TO BY THE LEARNED AUTHORIZED RE PRESENTATIVE FOR THE ASSESSEE WAS M/S. VISHAL INFORMATION TECHNOLOGI ES LTD. THE SAID COMPANY WAS PROVIDING IT ENABLED SERVICES AND WAS ALSO ENGAGED IN OTHER DIVERSIFIED ACTIVITIES. FURTHER, IT HAS OUTSOURCED ITS SERVICES TO THIRD PARTY VENDOR AND ACTED AS INTERME DIARY BETWEEN THE FINAL CUSTOMER AND THE VENDOR. THE ASSESSEE ON THE OTHER HAND WAS ENGAGED IN THE RUNNING OF A CALL CENTRE AND WAS PROVIDING TECHNICAL SUPPORT TO ITS AES. WE FIND THAT THE TRI BUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 2006-07 IN ITA NO.1346/PN/2010 AND IN ASSESSMENT YEAR 2007-08 IN I TA NO.1605/PN/2011 HAD EXCLUDED THE SAID COMPARABLES O BSERVING AS UNDER: 30. THE NEXT POINT RAISED BY THE ASSESSEE IS AGAIN ST THE INCLUSION OF VISHAL INFORMATION TECHNOLOGIES LTD., APPEARING AT ITEM (10) IN THE TABULATION IN PARA 25 AS A COMPARABLE C ASE. THE TPO HAS DISCUSSED THE ISSUE IN PARA 6.9.6. OF THE ORDER . AS PER THE TPO, THE SAID CONCERN IS FUNCTIONALLY COMPARABLE TO THE IT-ENABLED SERVICES SEGMENT OF THE ASSESSEE AND FOR THAT REASO N, THE SAID CONCERN HAS BEEN INCLUDED AS A COMPARABLE FOR THE P URPOSES OF COMPARABILITY ANALYSIS. IN THIS CONNECTION, THE PL EA SET UP BY THE ASSESSEE IS THAT THE SAID CONCERN IS ENGAGED IN NOT ONLY IT-ENABLED SERVICES, BUT ALSO IN PROVIDING QUALITY PRODUCTS AN D IN THE CREATION OF ANIMATED FILMS AND BOOKS. IT HAS ALSO BEEN ASCERTA INED BY REFERRING TO THE ANNUAL REPORT OF THE SAID CONCERN THAT IT IS ENGAGED IN PROVIDING AGENCY SERVICES BY WAY OF OUTSOURCING THE SERVICES TO THIRD PARTY VENDORS AND ACTING AS AN INTERMEDIARY B ETWEEN THE FINAL CUSTOMER AND THE VENDOR. THE ASSESSEE FURNISHED DE TAILED SUBMISSIONS IN THIS REGARD BEFORE THE LOWER AUTHORI TIES, COPIES OF WHICH HAVE BEEN PLACED IN THE PAPER BOOK AT PAGES 4 20.8 TO 420.31. BY REFERRING TO THE WRITTEN SUBMISSIONS, IT IS ALSO SOUGHT TO BE POINTED OUT THAT THE INTERMEDIARY FUNCTIONS PERF ORMED BY THE SAID CONCERN CAN BE COMPARED TO THAT OF A DISTRIBUTOR WH ICH TAKES TITLE TO SERVICE/PRODUCT FOR RESALE TO THE CUSTOMERS. THE A FORESAID ASSERTION IS SOUGHT TO BE SUBSTANTIATED BY THE DETAILS OF PAY MENTS MADE BY THE SAID CONCERN FOR DATA ENTRY AND VENDOR PAYMENTS , PERSONNEL 15 ITA NO.1896 & 1969/PN/2013 COSTS AND SALES. IT IS, THEREFORE, CONTENDED THAT THE SAID CONCERN IS FUNCTIONALLY DISSIMILAR TO THAT OF THE IT-ENABLED S ERVICES SEGMENT OF THE ASSESSEE. IT HAS ALSO BEEN ARGUED THAT THE SAI D CONCERN HAS EARNED SUPERNORMAL PROFITS AS HIGH AS 59.19% AND TH EREFORE, THE SAME IS NOT INCLUDIBLE IN THE LIST OF COMPARABLES S O AS TO AVOID SKEWING OF THE COMPARABILITY ANALYSIS. ON THE OTHER HAND, THE STAND OF THE REVENUE AS BROUGHT OUT BY THE TPO IN PARA 6. 9.6. OF THE ORDER IS TO THE EFFECT THAT THE SAID CONCERN BEING CATEGORIZED AS AN IT-ENABLED SERVICES CONCERN, THE SAME IS LIABLE TO BE INCLUDED. 31. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS ON THIS ASPECT. AT THE OUTSET, WE MAY REFER TO PAGE 810 OF THE PAPER BOOK, WHEREIN THE NOTES TO ACCOUNTS FOR THE YEAR ENDED 31 .3.2007 OF THE SAID CONCERN HAVE BEEN PLACED. AS PER THE AVAILABL E INFORMATION, THE SAID CONCERN HAS RELATED PARTY TRANSACTIONS AS REPORTED BY THE CONCERN AT PARA 7 OF THE SAID NOTES AT 86.92%, WHIC H BREACHES THE RPT FILTER. FURTHERMORE, THE FUNCTIONAL PROFILE O F THE SAID CONCERN BROUGHT OUT BY THE ASSESSEE ALSO REVEALS DIFFERENTI ATION IN THE ACTIVITY PROFILE. THE TPO, IN OUR VIEW, HAS NOT A PPRECIATED THE QUALITATIVE DIFFERENCE IN THE FUNCTIONS PERFORMED B Y THE SAID CONCERN AS SOUGHT OUT TO BE BROUGHT OUT BY THE ASSESSEE. C ONSIDERING THE AFORESAID, WE THEREFORE, FIND THAT THE ASSESSEE WAS JUSTIFIED IN ASCERTAINING THAT THE SAID CONCERN BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE REASONS CANVASSED. THUS, ON TH IS ASPECT ASSESSEE SUCCEEDS. 46. THE TRIBUNAL IN THE ASSESSEES OWN CASE HAD HEL D THAT THE SAID CONCERN WAS FOUND TO BE OPERATING IN DIFFERENT FUNCTIONAL ENVIRONMENT AND THE SAME WAS EXCLUDED FOR THE PURPO SE OF COMPARABILITY ANALYSIS. FOLLOWING THE RATIO LAID D OWN BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEARS 2006-07 AND 2007-08 (SUPRA), WE UPHOLD THE PLEA OF THE ASSESSEE IN EXCL UDING THE MARGINS OF THE SAID CONCERN M/S. VISHAL TECHNOLOGIE S LTD. 26. IN THE CONTEXT OF THE AFORESAID PRECEDENT, NO CO GENT REASONING HAS BEEN ADVANCED BY THE LD. DEPARTMENTAL REPRESENTAT IVE AND THEREFORE, WE UPHOLD ASSESSEES PLEA FOR EXCLUSION OF COR AL HUBS LTD. (FORMERLY KNOWN AS VISHAL INFORMATIONAL TECHNOLOGIES L TD.) FROM THE FINAL SET OF COMPARABLES. 21. IN VIEW OF THE ABOVE DISCUSSION, WE ACCEPT THE PLEA O F THE LD. COUNSEL FOR THE ASSESSEE THAT CORAL HUBS LTD. HAS TO BE REJECTED AS COMPARABLE. 22. SO FAR AS CROSS DOMAIN SOLUTIONS LTD. IS CONCERNED, WE FIND THE TRIBUNAL IN THE CASE OF BNY MELLON INTERNATIONAL OPERA TIONS (INDIA) PVT. LTD. (SUPRA) HAS EXCLUDED THE ABOVE COMPANY A S NOT 16 ITA NO.1896 & 1969/PN/2013 COMPARABLE. THE RELEVANT OBSERVATION OF THE TRIBUNAL FROM PARA 12 TO 15 OF THE YEAR READ AS UNDER : 12. ANOTHER PLEA RAISED BY THE ASSESSEE IS FOR EXCLUSION OF CROSSDOMAIN SOLUTIONS LTD. FROM THE FINAL SET OF COMPA RABLES. IN THIS REGARD, ASSESSEE CANVASSED BEFORE THE TPO THAT THE SAID CO NCERN WAS FUNCTIONALLY NOT COMPARABLE TO THE ACTIVITY OF IT E NABLED SERVICES BEING CARRIED OUT BY THE ASSESSEE. IT WAS POINTED OUT BY THE ASSESSEE BEFORE THE TPO THAT THE SAID CONCERN WAS INVOLVED IN VARIOUS ACTIVITIES WHICH INVOLVED OUTSOURCING, HUMAN RESOURCES, INSURANCE, HEALTHCARE/ACCOUNTING AND CONSULTING, BUSINESS EXCELLEN CE, MARKET RESEARCH/ANALYSIS AND IT SERVICES. IT WAS POINTED OUT TH AT THE ABOVE FUNCTIONS BEING PERFORMED BY THE SAID CONCERN WERE NO T COMPARABLE TO THE ACTIVITY OF AN IT ENABLED SERVICE PROVIDER UNDER TAKEN BY THE ASSESSEE. IT WAS ALSO CANVASSED THAT THERE WAS NO SEGMENTAL PROFITABILITY AVAILABLE FROM THE ANNUAL FINANCIAL ST ATEMENT OF THE ASSESSEE AND THE SAID CONCERN WAS NOT A COMPARABLE CONCER N ON THE ENTITY LEVEL. THE TPO HAS REJECTED THE PLEA OF THE ASSESSEE ON SIMILAR GROUNDS AS TAKEN BY HIM FOR REJECTING THE ASSESSEES PLEA FOR EXCLUSION OF ACCENTIA TECHNOLOGIES LTD. 13. BEFORE US, THE LD. REPRESENTATIVE HAS RELIED UPON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DCI T VS. M/S WILLIS PROCESSING SERVICES (INDIA) PVT. LTD. VIDE ITA NO.2152 /MUM/2014 DATED 10.10.2014 IN ORDER TO JUSTIFY THE EXCLUSION OF CROSSDOMAIN SOLUTIONS LTD.. 14. WE FIND THAT M/S WILLS PROCESSING SERVICES (INDIA) PVT. LTD. (SUPRA) WAS A CONCERN WHERE THE TESTED PARTY WAS PROVID ING IT ENABLED SERVICES TO ITS VARIOUS GROUP CONCERNS AND ACTIVITIES WE RE QUITE SIMILAR TO THE ACTIVITY OF IT ENABLED SERVICES RENDERED BY ASSE SSEE TO ITS AFFILIATES. IN THIS CONTEXT, THE CONCERN, M/S CROSSDOMA IN SOLUTIONS LTD. WAS FOUND TO BE FUNCTIONALLY NOT COMPARABLE BY THE D RP AND SUCH DECISION WAS AFFIRMED BY THE TRIBUNAL BY MAKING THE F OLLOWING DISCUSSION :- 3. M/S CROSSDOMAIN SOLUTIONS LTD. THIS COMPANY HAS BEEN REJECTED BY THE DRP ON THE GR OUND THAT IT IS INDULGED IN HIGH SKILL IT SERVICES WHICH ARE NOT CO MPARABLE TO THE ROUTINE I.T. ENABLED SERVICES. THE TRIBUNAL HYDERA BAD BENCH IN THE CASE OF M/S MARKET TOOLS RESEARCH PVT. LTD. IN ITA NO.1811/HYD/2012 HAS HELD THAT THIS COMPANY IS PROV IDING SERVICES WHICH ARE IN THE NATURE OF KPO. FURTHER, THE COMPANY IS ENGAGED IN PROVIDING NICHE SERVICES AS WELL AS DEVE LOPED ITS OWN BRAND EXDION TO TARGET THE INSURANCE INDUSTRY IN US. THE TRIBUNAL FOLLOWED THE FINDINGS OF THE BANGALORE BEN CH IN THE CASE OF M/S SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD. IN ITA NO.1316/BANG/2012 WHILE REJECTING THE ISSUE OF THIS COMPANY IN THE FINAL SET OF COMPARABLES. RESPECTFULLY FOLLOWI NG THE FINDINGS OF THE CO-ORDINATE BENCH, WE UPHOLD THE DIRECTIONS OF THE DRP FOR THE REJECTION OF THIS COMPANY FROM THE FINAL LIST OF CO MPARABLE. 17 ITA NO.1896 & 1969/PN/2013 15. FOLLOWING THE AFORESAID PRECEDENT, WHICH HAS BEE N RENDERED IN THE CONTEXT OF THE SAME ASSESSMENT YEAR, WE UPHOLD ASSESSEE S PLEA FOR EXCLUSION OF CROSSDOMAIN SOLUTIONS LTD. FROM THE FINAL SET OF COMPARABLES. WE HOLD SO. 23. FOLLOWING THE DECISION OF THE COORDINATE BENCH OF THE TR IBUNAL IN THE CASE OF BNY MELLON INTERNATIONAL OPERATIONS (INDIA) P VT. LTD. (SUPRA) AND CONSIDERING THE FACT THAT CROSS DOMAIN SOLUTIO NS LTD. IS ENGAGED IN HIGH SKILLED IT SERVICES WHICH CANNOT BE COMP ARED WITH THE SERVICES RENDERED BY THE ASSESSEE, WE DIRECT T HE TPO TO EXCLUDE THE SAID COMPANY FROM THE LIST OF COMPARABLES. 24. SO FAR AS EXCLUSION OF E4E HEALTH CARE SOLUTIONS IS CONC ERNED, WE FIND FROM PAGE 243 OF THE PAPER BOOK ABOUT THE BACKG ROUND OF THE COMPANY AS GIVEN AT PARA 1.1 AND WHICH READS AS UNDER : 1.1 BACKGROUND : E4E HEALTHCARE BUSINESS SERVICES PRIVATE LIMITED (FORME RLY NITTANY OUTSOURCING SERVICES PRIVATE LIMITED) [E4E H EALTHCARE OR THE COMPANY] IS A PRIVATE LIMITED COMPANY INCOR PORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 (THE ACT) ON 26 FEBRUARY 2003. THE REGISTERED OFFICE OF THE COMP ANY IS LOCATED IN BANGALORE AND ITS OPERATIONS ARE LOCATED I N CHENNAI. THE COMPANY IS PRIMARY ENGAGED IN THE BUSINESS OF PROVI DING HEALTHCARE OUTSOURCING SERVICES FOR THE HEALTHCARE IND USTRY IN UNITED STATES OF AMERICA. THE COMPANY IS A SUBSIDIARY OF E4E HOLDINGS LIMITED, MAURITIOUS (THE HOLDING COMPANY). EFFECTIVE JUNE, 2009, THE NAME OF THE COMPANY HAS BE EN CHANGED TO E4E HEALTHCARE BUSINESS SERVICES PRIVATE LIMITED F ROM NITTANY OUTSOURCING SERVICES PRIVATE LIMITED 25. SINCE THE ABOVE COMPANY IS ENGAGED IN BUSINESS OF PRO VIDING HEALTHCARE OUTSOURCING SERVICES FOR THE HEALTHCARE INDUST RIES, THE SAME IN OUR OPINION CANNOT BE COMPARED WITH THE ASSESSE E WHICH IS ENGAGED IN PROVIDING ITES ENABLED SERVICES. THEREFORE, WE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ABOVE COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. GROUND OF APPEAL NO. 1 RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 18 ITA NO.1896 & 1969/PN/2013 26. THE LD. COUNSEL FOR THE ASSESSEE WHILE ARGUING GROUND OF APPEAL NO.2 SUBMITTED THAT THE MAIN DISPUTE RAISED BY THE ASSESSEE IS WITH REGARD TO THE DENIAL OF ADJUSTMENT IN RESPECT OF EXTRAORDINARY/NON-OPERATING EXPENSES. HE SUBMITTED THA T THE LOWER AUTHORITIES HAVE ERRED IN NOT ALLOWING THE ADJUSTMENT ON ACCOUNT OF VARIOUS EXPENSES ON THE GROUND THAT THESE ARE NOT EXTRAORDINARY/NON OPERATING EXPENSES. SO FAR AS THE EX PENSES IN RELATION TO RAISING OF FINANCE AND BUYBACK IS CONCERNED, HE SUBMITTED THAT THE ASSESSEE HAS INCURRED THESE EXPENSES ON A CCOUNT OF GDR ISSUE, BUYBACK OF SHARES, RESTRUCTURING OPTIONS LIKE ESOP ETC. THE TOTAL EXPENSES ON THESE ITEMS WHICH WERE CLAIME D AS NON- OPERATING IS RS.1,02,17,339/-. 27. REFERRING TO PAGE 138 OF THE PAPER BOOK THE LD. COUN SEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO ANNEX URE-1 CONTAINING SUCH EXPENSES WHICH TOTAL TO RS.1,02,17,339/-. H E SUBMITTED THAT THE ASSESSEE HAD PAID AN AMOUNT OF RS.10 ,56,766/- TO J.M. FINANCIAL CONSULTANTS PVT. LTD. FOR CONSULTANCY OF BUYBACK ISSUE. REFERRING TO PAGES 141 TO 145 OF THE PAPER BOOK THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENC H TO THE RELEVANT AGREEMENT WITH JM FINANCIALS CONSULTANTS PVT. LTD . AND THE INVOICES RAISED BY THEM. HE SUBMITTED THAT AN AMOUN T OF RS.45,00,300/- HAS BEEN PAID TO EDELWEISS CAPITAL LTD. FOR CONSULTANCY OF GDR ISSUE. REFERRING TO PAGES 154 TO 158 OF THE PAPER HE DREW THE ATTENTION OF THE BENCH TO THE LETTER RECEIVED FROM THE ABOVE COMPANY AND THE INVOICES RAISED BY THEM. HE SUBMITTED THAT THE EXPENDITURE ON GDR ISSUE OR BUYBACK OF SHARES IS NOT RELEVANT TO PROVIDING OF BPO SERVICES TO THESE AES. ALL T HESE EXPENSES HAVE NO CONNECTION TO THE PROVIDING OF SERVICES TO THE AES 19 ITA NO.1896 & 1969/PN/2013 AND THEREFORE THESE EXPENSES SHOULD BE CONSIDERED AS N ON-OPERATING EXPENSES WHILE DETERMINING THE OPERATING MARGIN OF THE ASSESSEE. 28. AS REGARDS THE OBSERVATION OF THE CIT(A) THAT NO DE TAILS WERE SUBMITTED BY THE ASSESSEE HE SUBMITTED THAT ALL THOSE D ETAILS IN RESPECT OF THE EXPENSES INCURRED ON RAISING OF FINANCE AND BUYBACK OF SHARES WERE SUBMITTED TO THE AO AND THE CIT(A). REFE RRING TO PAGES 91 TO 109 OF THE PAPER HE DREW THE ATTENTION OF THE BENCH TO THE LETTER ADDRESSED TO THE CIT(A) VIDE LETTER DATED 21 -12-2012 WHEREIN THE ISSUE RELATING TO THE EXPENDITURE ON RAISING O F FINANCE AND BUYBACK OF SHARES IS CLARIFIED. REFERRING TO PAGES 180 TO 197 OF THE PAPER BOOK HE DREW THE ATTENTION OF THE BENCH TO THE LETTER ADDRESSED TO THE AO VIDE LETTER DATED 26-12-2011 WHER E ALL THOSE DETAILS WERE SUBMITTED. 29. SO FAR AS REJECTED TAX REFUND CLAIM WRITTEN OFF IS CONCE RNED, HE SUBMITTED THAT THE ASSESSEE DURING THIS YEAR HAS WRITTE N OFF THE SERVICE TAX AND VAT CLAIMED AS REFUNDABLE FROM THE GOVERN MENT SINCE THE REFUND CLAIM WAS REJECTED. THE TOTAL AMOUNT CLA IMED IS RS.11,25,502/-. REFERRING TO PAGES 138 AND 159 TO 162 AN D 187 TO 189 OF THE PAPER BOOK THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH AND SUBMITTED THAT ALL THESE DETA ILS WERE FILED BEFORE THE AO AND THIS EXPENDITURE WAS NOT RELATED TO T HE PROVIDING OF SERVICES TO THE AES. REFERRING TO LETTER DATED 21-12 -2011 ADDRESSED TO THE CIT(A), COPY OF WHICH IS PLACED AT PAGES 91 TO 109 OF THE PAPER BOOK, HE SUBMITTED THAT THIS FACT WAS ALSO CLARIFIED BEFORE THE CIT(A) AT PAGE 99 OF THE PAPER BOOK. THEREFO RE, THE OBSERVATION OF THE AO AND THE CIT(A) THAT NO DETAILS WERE GIVEN IS WRONG. 20 ITA NO.1896 & 1969/PN/2013 30. SO FAR AS THE SALARY EXPENSES OF ACCOUNTING AND MIS PROCESS IS CONCERNED, HE SUBMITTED THAT THE ASSESSEE HAD SUBMITTE D BEFORE THE AO THAT F.Y. 2008-09 WAS YEAR OF RECESSION AND DUE TO THIS THE CUSTOMERS TERMINATED ACCOUNTING AND MIS PROJECTS. THE EMPLOYEES ASSIGNED ON THIS PROJECT HOWEVER CONTINUED WITH A HOPE TO GET SOME ALTERNATE PROJECT. SINCE NO NEW PROJECTS WERE RECEIVE D, THEREFORE, THE ASSESSEE CONSIDERED SALARY EXPENSES OF THESE EMPLOYEES AMOUNTING TO RS.19,35,527/- AS EXTRAORDINARY ITEM. REFERRING TO PAGE 139 OF THE PAPER BOOK HE DREW THE ATTENTION OF THE BENCH TO THE DETAILS OF SUCH SALARY EXPENSES OF EMPLOYEES OF ACCOUNTING AND MIS DIVISION. REFERRING TO PAGES 187 TO 189 OF THE PAPER BOOK HE DRE W THE ATTENTION OF THE BENCH TO THE REPLY GIVEN TO THE AO ON THIS ISSUE. 31. SO FAR AS SALARY EXPENSES OF SOFTWARE TEAM IS CONCERN ED HE SUBMITTED THAT VARIOUS EMPLOYEES WERE WORKING ON SOFTWA RE PROJECTS. HOWEVER, THESE PROJECTS WERE TERMINATED AND THE COST INCURRED, WHICH WAS CAPITALIZED IN THE BOOKS TILL EARLIER YEAR, WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT. REFERRING TO PAGE 140 OF THE PAPER BOOK HE DREW THE ATTENTION OF THE BENCH TO THE TOTAL EXPENDITURE AT RS.68,35,875/-. HE SUBMITTED THAT TILL EARLIER YEAR THESE EXPENSES WERE TREATED AS CAPITAL WORK IN PROGRES S AND THE SAME IS EVIDENT FROM THE SCHEDULE OF FIXED ASSETS GIVEN A T PAGE 11 OF THE PAPER BOOK. HE SUBMITTED THAT INSTEAD OF CAPITALIZING IN THE BOOK THE ASSESSEE IN THIS YEAR HAS DEBITED THE SAID EX PENDITURE TO THE PROFIT AND LOSS ACCOUNT SINCE THE PROJECT ON WHICH THESE EMPLOYEES ARE WORKING DID NOT MATERIALISE. REFERRING TO P AGE 100 OF THE PAPER BOOK HE SUBMITTED THAT RELEVANT DETAILS WERE SUBMITTED TO THE CIT(A). REFERRING TO PAGES 187 TO 189 OF THE PAPER B OOK HE SUBMITTED THAT ALL THESE DETAILS WERE GIVEN TO THE AO. 21 ITA NO.1896 & 1969/PN/2013 32. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ALL T HE ABOVE 4 EXPENSES ARE NON OPERATING EXPENDITURE AND HAS NO R ELATION TO PROVIDING OF SERVICES TO THE AES. SINCE THESE EXPENSES ARE NOT OPERATING IN NATURE, THEREFORE, THESE ARE TO BE EXCLUDED WHILE DETERMINING THE OPERATING MARGIN OF THE ASSESSEE COMPAN Y. FOR THE ABOVE PROPOSITION, HE RELIED ON THE FOLLOWING DECISIONS : 1. MARUBENI INDIA PVT. LTD. VS. DIT REPORTED IN 354 ITR 0638 (DELHI) 2. HCL TECHNOLOGIES BPO SERVICES LTD. ITA NOS. 3547 & 5071/DEL/2010 ORDER DATED 10-07-2015 3. EXXON MOBIL GAS INDIA PVT. LTD. ITA NO.417/DEL/ 2011 ORDER DATED 13-11-2014. 4. TRANSWITCH INDIA PVT. LTD. REPORTED IN 151 TTJ 17 7 33. HE SUBMITTED THAT IN THIS YEAR THE ASSESSEE HAS INC URRED LOSS DUE TO THE ABOVE EXTRAORDINARY EXPENSES/NON-OPERATING ITEMS. REFERRING TO PAGE 286 OF THE PAPER BOOK HE DREW THE AT TENTION OF THE BENCH TO THE YEAR-WISE DETAILS OF THE OPERATING REVENUE, EXPENDITURE AND PROFIT. HE SUBMITTED THAT ONLY IN A.Y. 2009-10 THE AS SESSEE HAS INCURRED LOSS WHILE FOR OTHER YEARS THE ASSESSEE HAS GE NERATED SUBSTANTIAL PROFIT. HE SUBMITTED THAT THE ASSESSEE IS ENJ OYING DEDUCTION U/S.10B AND ITS ENTIRE INCOME IS EXEMPT FROM TAX . REFERRING TO PAGES 282 TO 285 OF THE PAPER BOOK HE SU BMITTED THAT IN THE YEAR FOR A.Y. 2007-08 THE DEPARTMENT HAS ALSO PASSE D AN ORDER WHERE IT HAS BEEN HELD THAT THE ASSESSEE HAS GENERATE D MORE THAN REASONABLE PROFIT. HE SUBMITTED THAT IN THE EARLIER YEARS AS WELL AS IN THE LATER YEARS THE ASSESSEE HAS ENTERED INTO TRANS ACTIONS WITH ITS AES AND THE ASSESSEE HAS SHOWN SUBSTANTIAL PROFIT DURING THOSE YEARS. ONLY IN A.Y. 2009-10 THE ASSESSEE HAS INCURRED A LOSS 22 ITA NO.1896 & 1969/PN/2013 BECAUSE OF INCURRING OF THESE EXTRAORDINARY EXPENSES AND DUE TO RECESSION IN THE INDUSTRY FOR WHICH THE ASSESSEE DID NOT GET SUFFICIENT ORDERS. HE SUBMITTED THAT ITS EXPENSES HAS INC REASED, WHICH IS EVIDENT FROM THE FACT THAT THE OPERATING INCOME IN THIS YEAR IS RS.4.64 CRORES AS AGAINST RS.6.22 CRORES IN A.Y. 2008-09. THE EMPLOYEE COST HAS INCREASED FROM RS.2.34 CRORES IN A.Y. 2 008-09 TO RS.3.72 CRORES IN A.Y. 2009-10. THUS ON ONE HAND, THE TU RNOVER OF THE ASSESSEE HAS REDUCED SUBSTANTIALLY IN THIS YEAR WHILE ON THE OTHER HAND THE EMPLOYEE COST AND OTHER EXPENSES HAVE INCREASED. HE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE CIT(A) ON THIS ISSUE BE REVERSED AND THE OPERATING PROFIT OF THE ASSESSEE CO MPANY BE COMPUTED BY EXCLUDING THESE EXTRAORDINARY ITEMS. 34. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER H AND HEAVILY RELIED ON THE ORDER OF THE CIT(A). 35. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH TH E SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS CITED BEFORE US. WE FIND THE ASSESSEE IN THE INST ANT CASE IS ENGAGED IN PROVIDING ITES ENABLED SERVICES AND IS A 100 % EOU AND IS ENTITLED FOR DEDUCTION U/S.10B IN RESPECT OF ITS PROFIT S. THE ASSESSEE FILED ITS RETURN OF INCOME DECLARING LOSS OF RS. 2,68,14,081/-. THE ASSESSEE IS INTO PROVIDING BPO SERV ICES TO ITS AES TO THE TUNE OF RS.3,88,38,097/- AND HAS ADOPTED T NMM FOR DETERMINING THE ARMS LENGTH PRICE. THE ASSESSEE HAD CON SIDERED ITS OPERATING MARGIN AT 22.05% BY ADJUSTING THE FOLLOWING EX PENSES WHILE COMPUTING THE OPERATING MARGIN : 23 ITA NO.1896 & 1969/PN/2013 SR. NO. NAME OF EXPENDITURE AMOUNT (RS.) 1 EXPENSES IN RELATION TO RAISING OF FINANCE AND BUYBACK 1,02,17,339/ - 2 REJECTED SERVICE TAX REFUND CLAIM EXPENSED OUT 11,25,502/ - 3 SALARY EXPENSES OF ACCOUNTING AND MIS PROCESS 19,35,527/ - 4 SALARY EXPENSES OF SOFTWARE TEAM 68,35,875/ - 36. THE AO IN THE ASSESSMENT ORDER HELD THAT THE ABOVE ADJUSTMENTS MADE BY THE ASSESSEE AS NON OPERATING EX PENDITURE IS NOT JUSTIFIED SINCE ACCORDING TO HIM THESE ARE NEITHER EXT RAORDINARY NOR NON-OPERATING. FURTHER, THE AO HELD THAT THE ASSES SEE HAS NOT GIVEN FULL DETAILS OF SUCH EXPENDITURE NOR HAS MADE ADJUSTM ENT IN THE COMPUTATION OF INCOME. WE FIND THE CIT(A) UPHELD THE A CTION OF THE AO ON THE GROUND THAT ASSESSEE HAS NOT PROVED T HE CORRECTNESS OF THE EXPENSES BEFORE THE AO AND FURTHER NO DOCUMENTA RY EVIDENCES WERE SUBMITTED TO SUBSTANTIATE ITS CLAIM. HE FUR THER HELD THAT WHEN THE EXPENSES ITSELF IS NOT PROVED THE DISCUSSIO N ON THIS EXTRAORDINARY NATURE IS IRRELEVANT. 37. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSE E THAT FULL DETAILS WERE GIVEN JUSTIFYING THE EXCLUSION OF THE ABOVE 4 ITEMS FOR COMPUTING THE OPERATING MARGIN. HOWEVER, THE LOWER AU THORITIES HAVE ERRONEOUSLY IGNORED SUCH CLAIM AND HELD THAT ASSES SEE HAS NOT GIVEN FULL DETAILS. 38. WE FIND MERIT IN THE ABOVE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE. SO FAR AS THE EXPENSES IN RELATION TO RAIS ING OF FINANCE AND BUYBACK IS CONCERNED, WE FIND THE ASSESSEE VIDE LETTE R DATED 26-12-2011 ADDRESSED TO THE AO, COPY OF WHICH IS PLACED AT PAGES 180 TO 197 OF THE PAPER BOOK, AT PAGE 187 HAD EXPLAINE D THE 24 ITA NO.1896 & 1969/PN/2013 REASONS FOR EXCLUSION OF SUCH EXPENDITURE. WE FIND AT PARA 2.4 IN THE SAME LETTER ADDRESSED TO THE AO THE ASSESSEE HAS GIVEN ITS COMMENTS AGAINST THE REMARKS OF THE AO. IT HAS BEEN C ATEGORICALLY MENTIONED THAT THE ASSESSEE HAS ALREADY SUBMITTED THE DOCUMENTARY EVIDENCES OF INCURRING OF SUCH EXPENDITURE ALO NG WITH REASONS GIVEN FOR EXCLUSION OF SUCH EXPENDITURE WHILE COMPU TING THE OPERATING MARGIN. SO FAR AS THE REJECTED TAX REFUND C LAIM WRITTEN OFF IS CONCERNED, WE FIND THE ASSESSEE IN THE SAID LA TTER HAS ALSO GIVEN ITS JUSTIFICATION. SIMILARLY, AT PAGE 99 OF THE PAPE R BOOK, THE ASSESSEE HAD ALSO CLARIFIED BEFORE THE CIT(A) REGARDING THE EXCLUSION OF SUCH EXPENDITURE FOR COMPUTING THE OPERATING MARGIN. SIMILAR IS THE CASE WITH THE SALARY EXPENSES OF ACCOUNTING AND MIS PROCESS AND THE SALARY EXPENSES OF SOFTWARE TEAM. 39. WE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE EXPENDITURE INCURRED ON ACCOUNT OF GDR ISSUE, BUYBACK OF SHARES AND RESTRUCTURING OPTIONS LIKE ESOP ET C. AMOUNTING TO RS.1,02,17,339/- SHOULD BE CONSIDERED AS NON - OPERATING EXPENSES WHILE DETERMINING THE OPERATING MARGIN OF THE ASSESSEE. SIMILAR IS THE CASE WITH REJECTED TAX REFUND CLA IM WRITTEN OFF SINCE THE SAID EXPENDITURE WAS NOT RELATED TO PROVIDIN G OF SERVICES TO ITS AES. AS REGARDS THE EXPENSES OF ACCOUN TING AND MIS PROCESS IS CONCERNED, WE FIND BECAUSE OF TERMINATION OF CER TAIN PROJECTS BY THE CUSTOMERS, THE ASSESSEE, ON THE HOPE OF GETTING SO ME ALTERNATE PROJECTS RETAINED ITS EMPLOYEES ASSIGNED TO TH OSE PROJECTS. SINCE NO NEW PROJECTS WERE RECEIVED, THE SALARY COST OF THESE EMPLOYEES AMOUNTING TO RS.19,35,527/- WAS CLAIMED AS EXTRAORDINARY ITEM. SINCE THE ASSESSEE HAD TO RETAIN EMP LOYEES WHO ARE ASSIGNED TO CERTAIN PROJECTS WHICH ARE TERMINATED, T HEREFORE, IN 25 ITA NO.1896 & 1969/PN/2013 OUR OPINION, SALARY COST OF THESE EMPLOYEES HAS RIGHTLY B EEN CONSIDERED BY THE ASSESSEE AS EXTRAORDINARY ITEM. AS R EGARDING THE EXPENSES OF SOFTWARE TEAM IS CONCERNED, WE FIND THE ASSES SEE DURING THIS YEAR HAS DEBITED SUCH EXPENDITURE TO THE PROFIT AN D LOSS ACCOUNT INSTEAD OF CAPITALIZING THE SAME IN THE BOOK AS WA S DONE IN EARLIER YEARS. SINCE THE PROJECTS IN WHICH THE EMPLOYEES WERE WORKING WERE TERMINATED AND THE ASSESSEE WAS CAPITALIZING THE COST INCURRED IN THE BOOK TILL EARLIER YEAR HAS DEBITED SUCH EXP ENSES TO THE PROFIT AND LOSS ACCOUNT DURING THIS YEAR, THEREFORE, TH IS IN OUR OPINION IS ALSO AN EXTRAORDINARY ITEM. 40. WE FIND IN THE CASE OF MAREBENI INDIA PVT. LTD. (SUPRA) TH E ASSESSEE COMPANY HAD PAID COMPENSATION FOR CLOSURE OF IT S INDIA UNITS AND THIS EXPENDITURE WAS CLAIMED AS NORMAL EXPENDITURE. THE HONBLE DELHI HIGH COURT HELD THAT THIS EXPENDITURE WOULD REPRESENT ABNORMAL COST AND THE SAME HAS TO BE EXCLUD ED WHILE COMPUTING THE OPERATING MARGIN. THE RELEVANT OBSERVATION OF THE HONBLE HIGH COURT READS AS UNDER : 17. QUESTION NO.6 RELATES TO THE FINDING OF THE TRI BUNAL THAT THE EXPENSES RELATING TO THE CLOSURE OF THE BUSINESS WERE ABN ORMAL EXPENSES AND CANNOT BE CONSIDERED RELEVANT WHILE ARRIV ING AT THE ALP I N RESPECT OF THE INTERNATIONAL TRANSACTION . IT ALSO REFERS TO THE FINDING OF THE TRIBUNAL THAT NONE OF THE COMPARABLE COMPANI ES HAD INCURRED SUCH EXPENSES. THE ASSESSEE HAD PAID COMPENSATION FOR CLOSUR E OF I TS UNITS, INCLUDING THE DELHI AND CHENNAI OFFICES, IN AN AMOUNT OF RS . 68,97,992/-. THE ASSESSEE SOUGHT INCLUSION OF THE COMPEN SATION IN THE OPERATING COSTS, ON THE FOOTING THAT THE CLOSURE OF THE UNITS DOES NOT BENEFIT THE ASSOC I ATED ENTERPRISE. IT WAS FURTHER SUBMITTED BY THE ASSESSEE THAT ITS INDIAN BUSINESS WAS BEING RUN AS A TOTALLY INDEPENDENT UN I T WITH AUTHORITY TO THE MANAGEMENT IN INDIA TO TAKE DECISI ONS REGARDING CLOSURE OF THE OFFICES IN INDIA . ACCORDING TO THE ASSESSEE, THE ASSOCIATED ENTERPRISE IS NOT ALLOWED TO INTERFERE IN SUC H DECISIONS WHICH ARE ADMINISTRATIVE IN NATURE. THE PAYMENT OF C OMPENSATION FOR CLOSURE OF THE INDIAN UNITS WAS AN ABNORMAL ITEM OF EX PENSE AND THEREFORE, OUGHT TO HAVE BEEN EXCLUDED FROM THE OPE RATING COSTS WHILE ARRIVING AT THE ALP OF THE INTERNATIONAL TRANSACTION . THE CASE MADE OUT BY THE INCOME TAX DEPARTMENT WAS THAT SINCE THE ASSESSEE IS A CAPTIVE 26 ITA NO.1896 & 1969/PN/2013 UNIT OF ITS ASSOCIATED ENTERPRISE, IT WAS ACTUALLY THE L ATTER WHICH UNDERTOOK THE ENTIRE RISK, THAT THE ASSOCIATED ENTERP RISE WAS PAYING THE ASSESSEE AT THE RATE OF COST PLUS 10 PERCENT THAT IF THE INDIAN UNITS ARE CLOSED THEN THE OPERATING COSTS WOULD CORRESPONDINGLY B E REDUCED AND THEREFORE, THE COMPENSATION PAID WOULD FORM PART OF THE OPERATING COSTS AND WOULD THUS BE RELEVANT FOR ARRIVING AT THE A LP. 18. THE AFORESAID ISSUES WERE CONSIDERED BY THE TRIBUNAL . IT NOTED THAT DESPITE A SPECIFIC DIRECTION ISSUED BY THE CIT(APPEALS) , THE ASSESSEE WAS UNABLE TO ADDUCE ANY DOCUMENTARY EVIDENCE TO SHOW THAT THE DECISION TO CLOSE THE INDIAN UNITS WAS TAKEN BY THE ASSES SEE INDEPENDENTLY AND WITHOUT BEING INFLUENCED BY THE A SSOCIATED ENTERPRISE. THE TRIBUNAL THUS APPEARS TO HAVE DOUBTED THE ASSESSEE'S CLAIM THAT IT WAS AN INDEPENDENT DECISION, TAKEN WITH OUT CONSULTING THE ASSOCIATED ENTERPRISE, TO CLOSE DOWN THE INDIAN OFFICES. THE TRIBUNAL FURTHER AGREED THAT THE STAND TAKEN BY THE REVENUE A UTHORITIES THAT THE CLOSURE OF THE INDIAN BRANCHES WOULD CORRESPONDINGLY R EDUCE THE COSTS OF THE ASSOCIATED ENTERPRISE AND THEREFORE, IT WOULD B E RELEVANT ITEM FOR CONSIDERATION IN THE MATTER OF ARRIVING AT THE APPRO PRIATE ALP. THE TRIBUNAL OPINED THAT TRANSFER PRICING IS NOT AN EXACT SCIENCE AND IT IS DIFFICULT TO ARRIVE AT THE ALP WITH ANY AMOUNT OF C ERTAINTY OR DEFINITENESS; AN ELEMENT OF GUESS WORK WAS ALWAYS A PART OF THE PROCESS. THE TRIBUNAL AGREED WITH THE ASSESSEE THAT THE C OMPENSATION RECEIVED ON ACCOUNT OF CLOSURE OF THE INDIAN UNITS MA Y BE A REGULAR PHENOMENON BUT HELD THAT BY CLOSING DOWN CERTAIN BRA NCHES IN INDIA THE ASSESSEE HAD ACTUALLY REDUCED THE COSTS OF ASSOCIATED E NTERPRISE. IT IS ACCORDING TO THE TRIBUNAL MEANT THAT THE CLOSURE O F THE BRANCHES HAD DIRECT LINK WITH THE INTERNATIONAL TRANSACTION. FOR THESE REASONS THE TRIBUNAL HELD THAT THE REVENUE WAS RIGHT IN UPHOLDIN G THAT THE COSTS OF CLOSURE ARE NOT TO BE EXCLUDED FROM COMPUTING THE OP ERATING EXPENSES. 19. THE CONTENTION OF THE COUNSEL FOR THE ASSESSEE BEFOR E US IS THAT THE ASSESSEE WAS BEING COMPENSATED BY WAY OF A COMMISSION OF FE ES BY THE ASSOCIATED ENTERPRISE AND NOT ON COST PLUS BASIS AS ERRONEO USLY HELD BY THE TRIBUNAL . IT WAS SUBMITTED THAT IN THIS CONTEXT, THE COMPENSATI ON PAID IN CONNECTION WITH THE CLOSURE OF THE INDIAN UN ITS REPRESENTS ABNORMAL COSTS WHICH HAVE TO BE EXCLUDED FOR DETERMIN ING THE ALP. COUNSEL ALSO POSED THE QUESTION WHETHER THE CLOSURE OF T HE INDIAN UNITS WOULD BENEFIT THE ASSOCIATED ENTERPRISE AND ANSWERED TH E SAME IN THE NEGATIVE, AND SUBMITTED THAT IN SUCH A CASE, THE ABNOR MAL OR EXTERNAL COSTS SHOULD NOT BE TAKEN INTO CONSIDERATION WHILE ARRI VING AT THE ALP. 20. IT MAY NOT BE POSSIBLE TO LAY DOWN A FORMULA THAT WOULD BE APPLICABLE UNIVERSALLY TO DETERMINE WHETHER A PARTIC ULAR EXPENDITURE OR COST INCURRED BY THE ASSESSEE IS A NORMAL OR ABNORMAL ITEM OF EXPENSE, IN CASES RELATING TO TRANSFER PRICING. IF AS H ELD BY THE TRIBUNAL, THE ASSESSEE IS COMPENSATED FOR ITS SERVICE ON THE BASIS OF C OST PLUS 10 PERCENT THEN AGAIN THE QUESTION MAY ARISE AS TO WHETHE R THE COMPENSATION PAID FOR CLOSURE OF THE INDIAN UNITS CAN BE CONSIDERED TO BE NORMAL OR ABNORMAL COST, BECAUSE THE COMPENSATION W OULD DIRECTLY DEPEND OR VARY ACCORDING TO THE QUANTUM OF THE COSTS. IN SUCH CASE IT WOULD BE RELEVANT TO CONSIDER WHETHER THE COMPENSATIO N PAID FOR CLOSURE OF THE INDIAN UNITS WOULD AMOUNT TO NORMAL OR ABNORMAL EXPENSE. BUT AS RIGHTLY POINTED OUT BY THE COUNSEL FOR THE ASSESSEE, THE ASSESSEE IS BEING COMPENSATED BY A FEE OR COMMISSION WHICH HAS NO 27 ITA NO.1896 & 1969/PN/2013 CONNECTION WITH THE COSTS INCURRED. THIS HAS BEEN REFE RRED TO EVEN IN THE ASSESSMENT ORDER AT PARAGRAPH 6.3 AS FOLLOWS:- 'FOR THE AGENCY AND MARKET SUPPORT SERVICES, MIPL HAS R ECEIVED TWO KINDS OF REMUNERATION. A. HANDLING COMMISSION - WHICH VARIES FROM TRANSACTION TO TRANSACTION AND DEPENDS ON THE PRODUCT, VOLUME ETC.; (DURING THE PROCEEDINGS THE ASSESSEE WAS ASKED TO GIVE TRANSACTION WISE BREAK UP OF COM MISSION RECEIVED BUT INABILITY IN THIS REGARD WAS EXPRESSED AS I T WAS STATED THAT THE TRANSACTIONS WERE NUMEROUS AND COULD NOT COLLATED ); B. SERVICES FEES - FIXED FEES FOR RENDERING MARKETING SUPPORT IN FORM OF MARKET SURVEY ETC . ' THE CIT (APPEALS) PROCEEDED TO DECIDE THE ISSUE ON TH E BASIS THAT THE ASSESSEE WAS UNABLE TO PRODUCE ANY DOCUMENT TO SHOW THE CIRCUMSTANCES UNDER WHICH THE DECISION TO CLOSE THE OFF ICES WAS TAKEN. HE ALSO ASSUMED THAT THE RELEVANCE OF THE CLOSURE OF TH E INDIAN UNITS AND THE PAYMENT OF COMPENSATION BOTH WOULD HINGE UPO N AS TO WHOSE DECISION IT WAS TO CLOSE DOWN THE INDIAN UNITS. HE HELD THAT THE DECISION WAS TAKEN AT THE BEHEST OF THE ASSOCIATED ENTERPRISES AND THEREFORE, FOR TRANSFER-PRICING PURPOSES THE ASSESSEE MUST BE COMPENSATED B Y THEM AND ACCORDINGLY THE COSTS OF CLOSURE ARE NOT TO BE EXC LUDED FOR COMPUTING THE OPERATING EXPENSES. THE DECISION OF THE CIT(APPEALS) WAS ENDORSED BY THE TRIBUNAL WHICH NOTED THAT SINCE MC J WAS PAYING THE ASSESSEE ON THE BASIS OF COST PLUS 10 PERCENT, THE A CL OSURE OF THE INDIAN UNITS WOULD AUTOMATICALLY REDUCE THE COSTS OF T HE ASSOCIATED ENTERPRISE AND THEREFORE, WOULD BE A RELEVANT ISSUE FO R INCLUSION IN THE OPERATING COSTS. IN ARRIVING AT SUCH A DECISION, IT SEE MS TO US THAT THE REVENUE AUTHORITIES AND THE TRIBUNAL FAILED TO KEEP IN MIND THAT EVEN ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE WAS BEING C OMPENSATED FOR ITS AGENCY AND MARKET SUPPORT SERVICE BY WAY OF HA NDLING COMMISSION AND FIXED SERVICE FEE. IT SEEMS RATHER REMOTE THAT CONSIDERING THE NATURE OF THE REMUNERATION RECEIVED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISE, THE PAYMENT OF COMPENSAT ION ON CLOSURE OF THE INDIAN OFFICES WOULD HAVE ANY IMPACT ON THE T RANSFER PRICING ISSUE OR IN THE FIXING OF THE ALP. IT THEREFORE, APPE ARS TO US THAT HAVING REGARD TO THE NATURE AND MANNER IN WHICH THE ASSESSEE I S REMUNERATED FOR ITS SERVICES, THE PAYMENT OF COMPENSATION TO THE IN DIAN UNITS ON THEIR CLOSURE WOULD REPRESENT ABNORMAL COSTS WHICH HAVE TO BE EXCLUDED IN THE DETERMINATION OF THE ALP. IN OUR VI EW, THE INCOME TAX AUTHORITIES AS WELL AS THE TRIBUNAL HAVE ERRED IN HOLD ING TO THE CONTRARY. WE ACCORDINGLY, ANSWER THE QUESTION NO.6 IN THE NEGATIVE, IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 41. THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF HCL TECHNOLOGIES BPO SERVICES LTD. (SUPRA) HAS HELD THAT WHILE COMPUTING OPERATING COST, ABNORMAL COSTS INCURRED ON ACC OUNT OF START UP OF BUSINESS LIKE, SALARY, RENT AND DEPRECIATION ETC . HAVE TO 28 ITA NO.1896 & 1969/PN/2013 BE EXCLUDED. SIMILARLY, THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF EXXON MOBIL GAS INDIA LTD. (SUPRA) HAS HELD THAT BOTH NON - OPERATING INCOMES AND NON-OPERATING EXPENSES SHOULD BE EXCLUDED WHILE COMPUTING THE NET OPERATING PROFIT UNDER TNMM. THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF TRANSWITCH INDIA PVT. LTD. (SUPRA) HAS HELD THAT THE EXPENDITURE INCURRED ON RELOC ATION OF ITS OFFICE BY THE ASSESSEE, ADDITIONAL RENT PAID FOR TWO MONTHS AND SALARY PAID FOR UNPRODUCTIVE/IDLE HOURS SHOULD BE CONSIDERE D AS NON-OPERATING EXPENSES. 42. SINCE THE ASSESSEE IN THE INSTANT CASE HAS GIVEN FULL DETAILS OF THE VARIOUS EXPENSES JUSTIFYING ITS TREATMENT AS NON-OP ERATING EXPENDITURE, THEREFORE, CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE AND IN THE LIGHT OF THE DECISIONS CITED ABOVE, WE HOLD THAT THE ASSESSEE WAS FULLY JUSTIFIED IN ADJUSTING THE ABOVE EXPENS ES FOR COMPUTING ITS OPERATING MARGIN. THEREFORE, WE SET ASIDE T HE ORDER OF THE CIT(A) ON THIS ISSUE AND DIRECT THE AO TO COMPUTE THE OPERATING MARGIN OF THE ASSESSEE COMPANY BY ADJUSTING THE ABOVE EXPENSES. GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE ARE ACCORDINGLY ALLOWED. 43. SO FAR AS GROUND OF APPEAL NO.3 IS CONCERNED THE SA ME RELATES TO NON GRANTING OF WORKING CAPITAL ADJUSTMENT IN RESPECT OF COMPARABLE COMPANIES SELECTED BY THE TPO. 44. AFTER HEARING BOTH THE SIDES, WE FIND THE DIFFERENT BENC HES OF THE TRIBUNAL ARE CONSISTENTLY TAKING THE VIEW THAT ADJUS TMENT ON ACCOUNT OF WORKING CAPITAL SHOULD BE PROVIDED. ALTHOUGH TH IS GROUND WAS RAISED BEFORE THE CIT(A) HE HAS NOT ADJUDICA TED THE ISSUE. WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ARISTON 29 ITA NO.1896 & 1969/PN/2013 THERMO INDIA LTD. REPORTED IN 36 TAXMANN.COM 501 AT PAR A 19-21 OF THE ORDER HAS OBSERVED AS UNDER : 19. IN OUR CONSIDERED OPINION, THE ISSUE WHETHER OR N OT WORKING CAPITAL REQUIREMENTS CAN CONSTITUTE AN ITEM OF DIFFER ENCE SO AS TO REQUIRE AN ADJUSTMENT IN THE PROFIT MARGIN ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS WHILE BENCHMARKING THE INTE RNATIONAL TRANSACTION OF THE TESTED PARTY, IS NO LONGER RES-INTEGRA AND HAS BEEN SUBJECT MATTER OF ADJUDICATION BY THE TRIBUNAL IN QU ITE A FEW PRECEDENTS. OF COURSE, THE ADJUSTMENTS PERMISSIBLE HAVE TO BE WITHIN THE PARA- METERS PROVIDED IN RULE 10B(1)(E)(III) OF THE RULES. WE MAY OBSERVE THAT ADJUSTMENT ON THE ASPECT OF WORKING CAPITAL DIFF ERENCE BETWEEN THE TESTED PARTY AND THE COMPARABLE UNCONTROLLED ENTITIE S/TRANSACTIONS IS PERMISSIBLE ONLY WHERE THE REQUIREMENTS OF RULE 10B(1) (E)(III) R.W. RULE 10B(3) OF THE RULES ARE SATISFIED. IN THIS BACKGROUND, THE LEARNED COUNSEL FOR THE ASSESSEE STATED THAT SINCE ASSESSEES PLEA HAS N OT BEEN FACTUALLY VERIFIED, IT MAY BE SENT BACK TO THE ASSESSING OFFICER FOR VERIFICATION. 20. THE PLEA OF THE ASSESSEE HAS NOT BEEN SERIOUSLY OPPOSED BY THE LEARNED CIT(DR). 21. THEREFORE, WE ARE INCLINED TO REMIT THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WHO SHALL EXAMINE AS TO WHETHER OR NOT IN THE PRESENT CASE THE WORKING CAPITAL REQUIREMENT CONSTITUT E AN ITEM OF DIFFERENCE SO AS TO REQUIRE ADJUSTMENT AS PER THE PARAM ETERS LAID DOWN BY RULE 10B(1)(E)(III) R.W.RULE 10B(3) OF THE RULES FOR THE PURPOSES OF ANALYZING THE COMPARABILITY OF THE COMPARABLE UNCON TROLLED TRANSACTIONS WITH THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. NEEDLESS TO SAY, THE ASSESSING OFFICER SHALL ALLOW THE ASSES SEE A REASONABLE OPPORTUNITY TO PUT-FORTH MATERIAL AND SUBM ISSIONS IN SUPPORT OF ITS STAND AND ONLY THEREAFTER HE SHALL PASS A N ORDER AFRESH ON THIS ASPECT AS PER LAW. THUS, ON THIS ASPECT, ASSESSEE SUCCEED S. 45. RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BE NCH OF THE TRIBUNAL, WE RESTORE THE ISSUE TO THE FILE OF THE AO WIT H A DIRECTION TO DECIDE THE ISSUE OF WORKING CAPITAL ADJUSTMENT IN THE LIGHT OF THE DECISION OF THE TRIBUNAL CITED (SUPRA). THIS GROU ND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSE S. 46. SO FAR AS APPEAL FILED BY THE REVENUE IS CONCERNED, T HE REVENUE IS AGGRIEVED WITH THE DIRECTION OF THE CIT(A) TO INC LUDE LOSS MAKING CONCERNS. THE RELEVANT OBSERVATION OF THE CIT(A) HAS ALREA DY BEEN REPRODUCED IN THE PRECEDING PARAGRAPHS. IN OUR O PINION, IF A COMPANY SATISFIES THE FAR ANALYSIS THE SAME SHOULD BE INC LUDED 30 ITA NO.1896 & 1969/PN/2013 AND ONLY BECAUSE IT HAS INCURRED LOSS CANNOT BE A GROU ND TO REJECT THE SAME. THE VARIOUS DECISIONS RELIED ON BY THE LD. COU NSEL FOR THE ASSESSEE SUPPORTS ITS CASE. THE HONBLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. REPORTED IN (2015) 56 TAXMANN.COM 417 HAS HELD THAT MERE FACT OF AN ENTITY MAKES HIGH/EXTREMELY HIGH PROFIT/LOSS DOES NOT IPSO FACTO LEAD TO ITS EXCLUSION FROM THE LIST OF COMPARABLES FOR PURPOSES OF DETE RMINATION OF ALP. SIMILAR VIEW HAS BEEN TAKEN BY THE PUNE BENCH O F THE TRIBUNAL IN THE CASE OF CUMMINS TURBO TECHNOLOGIES LTD. (SUP RA). THE TRIBUNAL AT PARA 13 AND 14 OF THE ORDER HAS OBSERVED AS UNDER : 13. WE HAVE ALSO HEARD THE LD. DR. WE FIND FORCE IN THE ARGUMENT OF THE LD. COUNSEL. WE FIND THAT THE DATA BASE ADOPTED BY THE ASSESSEE FOR SELECTING THE COMPARABLES CAN BE TESTED ON FAR AND THE RE IS LIKELY TO BE SOME DIFFERENCE. MERELY BECAUSE SOME LOSS MAKING COMPANI ES ARE THERE THOSE CANNOT BE STRAIGHTLY REJECTED AS COM PARABLES UNL ESS THE ABNORMAL LOSS IS PROJECTED. AS THE SAME WAY, SUPER PROFI T COMPARABLES ALSO SHOULD NOT BE INCLUDED. TRANSFER PRICING ADJUSTMEN T IS NOT A LAW IN STRICT SENSE THOUGH BASE ON CERTAIN LEGAL PRINCIPLES BU T IT IS ARITHMETIC AND WHILE MAKING THE PLUS MINUS, THE BALANCE IS REQU IRED TO BE MAINTAINED. THE OECD GUIDELINES, WHILE PROVIDING GUI DANCE ON THE APPLICATION OF THE TRANSACTIONAL NET MARGIN METHOD, STATES AS FOLLOWS: 'IT IS ALSO IMPORTANT TO TAKE INTO ACCOUNT A RANGE OF RESULTS WHEN USING THE TRANSACTIONAL NET MARGIN METHOD. THE USE OF THE RANGE IN THIS CONTEXT COULD HELP REDUCE THE EFFECTS OF DIFF ERENCES IN THE BUSINESS CHARACTERISTICS OF ASSOCIATED ENTERPRISES AND ANY INDEPENDENT ENTERPRISES ENGAGED IN COMPARABLE UNCONT ROLLED TRANSACTIONS, BECAUSE THE RANGE WOULD PERMIT RESULTS TH AT WOULD OCCUR UNDER A VARIETY OF COMMERCIAL AND FINANCIAL C ONDITION.' 14. WE FIND THAT IN RESPECT OF THE SELECTION OF THE C OMPARABLES, THE TRIBUNAL HAS TAKEN THE CONSISTENT STAND THAT AS THE SUPER PROFIT COMPANIES SHOULD NOT BE INCLUDED, THE SAME WAY, SUPER L OSS MAKING COMPANIES SHOULD ALSO BE EXCLUDED. THOUGH WE AGREE WIT H THE TPO THAT SOME OF THE COMPARABLES FOR THE PURPOSE OF PLI ADOPTED BY THE ASSESSEE ARE SHOWING THE LOSS, BUT THE BURDEN IS ON THE TPO TO PROVE WHERE THOSE COMPANIES ARE CONSISTENTLY LOSS MAKING COMPAN IES. MOREOVER, EXCEPT UNSUPPORTED REASONING, NO DATA HAS BE EN BROUGHT ON RECORD BY THE TPO FOR EXCLUDING THE COMPARABLES SELEC TED BY THE ASSESSEE IN THE TRANSFER PRICING STUDY REPORT. WE, THEREF ORE, FIND NO JUSTIFICATION TO THE ADJUSTMENT MADE U/S.92CA(3) OF TH E ACT. WE ACCORDINGLY DELETE THE SAME. IN THE RESULT, RELEVANT GROUNDS ARE ALLOWED 31 ITA NO.1896 & 1969/PN/2013 47. IN VIEW OF THE DECISIONS CITED ABOVE AND IN VIEW OF TH E DETAILED REASONING GIVEN BY THE CIT(A), WE FIND NO INFIRMITY IN HIS ORDER DIRECTING THE AO TO INCLUDE THE LOSS MAKING COMPANIES ALSO IN THE LIST OF COMPARABLE COMPANIES. GROUNDS OF APPEAL NO. 1 TO 4 BY THE REVENUE ARE ACCORDINGLY DISMISSED. 48. SO FAR AS GROUND OF APPEAL NO.5 IS CONCERNED, WE FIND T HE REVENUE IS AGGRIEVED WITH THE OBSERVATION OF THE CIT(A) THAT ONCE LOSS MAKING COMPANIES ARE INCLUDED IN THE LIST OF COMPARABLE COMP ANIES, THEN THE AVERAGE NET MARGIN OF THE COMPARABLE COMPANIES WOULD FALL WITHIN +/-5% OF SAFE HARBOUR RANGE U/S.92C(2) AND THE ADDIT ION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT SHOULD B E DELETED. WE DO NOT FIND ANY INFIRMITY IN THE ABOVE OBSERVATION OF THE LD.CIT(A). THEREFORE, GROUND OF APPEAL NO.5 BY THE REVENUE IS DISMISSED. 49. GROUND OF APPEAL NO.6 BY THE REVENUE BEING GENERAL IN NATURE IS DISMISSED. 50. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOW ED AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31-08-2016. SD/- SD/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE; ! DATED : 31 ST AUGUST, 2016. 32 ITA NO.1896 & 1969/PN/2013 ) *#,! -!/ COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3 . THE CIT(A ) - I T/TP, PUNE 4. 5. 6. THE CIT - IT/TP, PUNE # &&' , ' , / DR, ITAT, B PUNE; * / GUARD FILE. / BY ORDER, // TRUE COPY // // # & //TRUE ,- & ' / SR. PRIVATE SECRETARY ' , / ITAT, PUNE