International Speciality Products (India) Private Limited, Hyderabad V. ITO, Ward 2 (1), Hyderabad

ITA 218/HYD/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87205 (ITAT-HYDERABAD)
• Duration Of Justice: 10 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-01-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 12-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJEEV BENJWAL
• Keywords: Business income; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 218/HYD/2014 ASSESSMENT YEAR: 2009-10 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD., HYDERABAD PAN AABCI 8200Q VS. INCOME-TAX OFFICER, WARD 2(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI P.V.S.S. PRASAD REVENUE BY : SHRI RAJEEV BENJWAL DATE OF HEARING 12-11-2014 DATE OF PRONOUNCEMENT 07-01-2015 O R D E R PER SAKTIJIT DEY, J.M.: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST AS SESSMENT ORDER DATED 31/12/2013 PASSED U/S 143(3) READ WITH SECTION 92CA(3) AND 144C(5) OF THE IT ACT IN PURSUANCE TO DIRECTION OF THE DISPUTE RESOLUTION PANEL (DRP), HYDERABAD PERTAINING TO THE ASSESSMENT YEAR 2009-10. 2. BRIEFLY THE FACTS EMANATING FROM THE MATERIALS O N RECORD ARE, ASSESSEE, AN INDIAN COMPANY INCORPORATED ON 20/08/2 007, IS A WHOLLY OWNED SUBSIDIARY OF ISP GROUP HAVING ITS HEADQUARTE RS IN WAYNE, NEW JERSEY, USA. THE ISP GROUP IS ENGAGED IN DEVELO PING, MANUFACTURING AND SUPPLYING INNOVATIVE SPECIALTY IN GREDIENTS THAT ENHANCE PRODUCT PERFORMANCE. ASSESSEE ON ITS PART P ROVIDES APPLICATION SUPPORT, ANALYTICAL SUPPORT, R&D SERVIC ES TO ITS AES. THE BUSINESS ACTIVITY OF THE ASSESSEE IS BASICALLY IN T HREE SEGMENTS. THE RESEARCH AND DEVELOPMENT SERVICES DIVISION IS ENGAG ED IN PROVIDING 2 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . RESEARCH AND DEVELOPMENT SERVICES TO ITS GROUP COMP ANIES. FOR THIS PURPOSE, ASSESSEE HAS SET UP A R&D CENTRE AT SOMAJI GUDA, HYDERABAD. THE CORPORATE SUPPORT SERVICES DIVISION IS ENGAGED IN PROVIDING CORPORATE SUPPORT SERVICES (BPO SERVICES) TO ITS GROUP COMPANIES. THOUGH, APART FROM THESE TWO DIVISIONS A SSESSEE ALSO HAS A TRADING DIVISION, SINCE NO SALES HAS BEEN EFFECTE D DURING THE YEAR, IT HAS NO RELEVANCE FOR THE YEAR UNDER CONSIDERATION. FOR THE AY UNDER CONSIDERATION, ASSESSEE FILED ITS RETURN OF INCOME ON 30/09/2009 DECLARING LOSS OF RS. 32,79,605. SUBSEQUENTLY, A RE VISED RETURN WAS FILED DECLARING LOSS OF RS. 45,14,288. DURING THE S CRUTINY ASSESSMENT PROCEEDING, AO NOTICED THAT ASSESSEE HAS ENTERED IN TO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) AS UNDER: (RS.) I) PROVISION OF CORPORATE SUPPORT SERVICES 4,09,76,856 II) PROVISION OF R&D SERVICES TO AE 6,91,62,304 III) PAYMENT OF MANAGEMENT FEE TO AE 41,92,324 IV) PURCHASE OF BUSINESS UNDERTAKING FROM AE 13,18,91,892 V) PURCHASE OF BUSINESS FINISHED GOODS FROM AE 1,42,234 VI) REIMBURSEMENT OF EXPENSES BY AE 2,95,67,179 3. AS THE REVENUE EARNED BY ASSESSEE FROM THE INTER NATIONAL TRANSACTIONS WITH THE AES WAS MORE THAN RS. 15 CROR ES, AO MADE A REFERENCE U/S 92CA(1) TO THE TRANSFER PRICING OFFIC ER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP). IN COURSE OF PROCEEDING BEFORE TPO, ASSESSEE SUBMITTED A TP STUDY REPORT CA RRIED OUT THROUGH AN EXTERNAL AGENCY. IN THE TP ANALYSIS, BOT H FOR CORPORATE SUPPORT SERVICES SEGMENT AS WELL AS R&D SEGMENT, AS SESSEE WAS CHOSEN AS THE TESTED PARTY AND TRANSACTION NET MARG IN METHOD (TNMM) WAS ADOPTED AS THE MOST APPROPRIATE METHOD W ITH OPERATING PROFIT TO OPERATING COST (OP/OC) AS PROFIT LEVEL IN DICATOR (PLI). IN CORPORATE SUPPORT SERVICES SEGMENT SEVEN COMPANIES WITH ARITHMETIC MEAN (OP/OC) OF 14.50% WERE SELECTED AS COMPARABLE S. ASSESSEES 3 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . OP/OC BEING 10%, THE PRICE CHARGED TO AE WAS CONSID ERED TO BE WITHIN ARMS LENGTH. SIMILARLY, FOR R&D SERVICES SE GMENT ASSESSEE SELECTED TWO COMPANIES WITH AVERAGE OP/OC OF 10.08% AS COMPARABLES. ASSESSEES OP/OC BEING 10%, PRICE CHAN GED TO AE WAS CONSIDERED TO BE WITHIN ARMS LENGTH. 4. THE TPO THOUGH ACCEPTED TNMM AS THE MOST APPROPR IATE METHOD WITH OP/OC AS THE PLI FOR BOTH THE SEGMENTS I.E. CORPORATE SUPPORT SERVICES AND R&D, BUT, AFTER ANALYZING THE TP STUDY REPORT AS WELL AS REPLY GIVEN BY ASSESSEE TO THE QUERIES MADE BY HIM, WAS OF THE OPINION THAT OUT OF THE SEVEN COMPARABLES SELEC TED BY ASSESSEE IN CORPORATE SUPPORT SERVICES SEGMENT TWO COMPANIES , NAMELY, CG VAK SOFTWARE AND EXPORT LTD. AND CEPHA IMAGING PVT. LTD. ARE NOT COMPARABLE TO ASSESSEE. ACCORDINGLY, TPO OUT OF THE SEVEN COMPARABLES SELECTED BY ASSESSEE RETAINED FIVE WHIL E REJECTING THE AFORESAID TWO COMPANIES. THE ARITHMETIC MEAN OF THE FIVE COMPANIES RETAINED BY TPO BEING 28.58% AS AGAINST OP/OC OF 10 % SHOWN BY ASSESSEE, THE ALP WAS DETERMINED AT RS. 4,78,98,219 . ALP SHOWN BY ASSESSEE BEING 4,09,76,856, THE SHORT FALL OF RS. 69,21,363 WAS TREATED AS TRANSFER PRICING ADJUSTMENT TO BE MADE T O THE ALP. AS FAR AS RESEARCH & DEVELOPMENT SUPPORT SERVICES SEGMENT IS CONCERNED, TPO, THOUGH, ACCEPTED THE TWO COMPANIES SELECTED BY ASSESSEE AS COMPARABLES, BUT, HE NEVERTHELESS SELECTED TWO MORE COMPANIES AS COMPARABLES IN ADDITION TO THE TWO COMPANIES SELECT ED BY ASSESSEE. THE TWO COMPANIES SELECTED BY TPO ARE CELESTIAL BIO LABS LTD., AND TCG LIFESCIENCE LTD. THE ARITHMETIC MEAN OF THE FOU R COMPARABLES SELECTED BY TPO BEING 32.4%, THE ALP WAS DETERMINED AT RS. 8,32,46,264 AS AGAINST RS. 6,91,62,304 SHOWN BY ASS ESSEE. THE RESULTANT SHORTFALL OF RS. 1,40,83,960 WAS RECOMMEN DED FOR ADDITION TOWARDS TP ADJUSTMENT TO THE ALP. THUS, THE TOTAL A DDITION RECOMMENDED BY THE TPO UNDER BOTH THE SEGMENTS WAS TO THE TUNE OF RS. 2,10,05,323. TPO ALSO DID NOT ALLOW ANY DEDUCTI ON ON ACCOUNT OF RISK/WORKING CAPITAL ADJUSTMENT. IN PURSUANCE TO T HE ORDER PASSED BY 4 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . TPO, AO PROPOSED A DRAFT ASSESSMENT BY INCORPORATIN G THE ADDITIONS RECOMMENDED BY TPO ON ACCOUNT OF TP ADJUSTMENT. ASS ESSEE OBJECTED TO THE DRAFT ASSESSMENT ORDER BEFORE THE D RP. 5. IN COURSE OF PROCEEDING BEFORE DRP, ASSESSEE APA RT FROM CHALLENGING THE DECISION OF THE TPO IN REJECTING TW O OF THE COMPANIES SELECTED AS COMPARABLE IN THE CORPORATE SUPPORT SER VICES SEGMENT ALSO SOUGHT EXCLUSION OF THREE COMPANIES OUT OF FIV E COMPANIES RETAINED BY TPO WHICH WERE ALSO SELECTED BY ASSESSE E ITSELF IN THE TP STUDY. IN RESPECT OF ONE COMPANY I.E. R SYSTEMS INTERNATIONAL LTD., ASSESSEE RAISED OBJECTIONS WITH REGARD TO MAR GIN COMPUTATION. IN SO FAR AS RESEARCH & DEVELOPMENT SUPPORT SERVICE S IS CONCERNED, ASSESSEE CHALLENGED THE SELECTION OF TWO ADDITIONAL COMPARABLES BY TPO. THE DRP AFTER CONSIDERING THE SUBMISSIONS OF A SSESSEE AND THE REMAND REPORT SUBMITTED BY TPO DID NOT FIND MERIT I N ANY OF THE CONTENTIONS RAISED BY ASSESSEE AND ACCORDINGLY DIRE CTED AO TO FINALISE THE DRAFT ASSESSMENT ORDER. IN PURSUANCE T O THE DIRECTIONS OF DRP, AO PASSED THE IMPUGNED ASSESSMENT ORDER INCORP ORATING THE ADDITIONS PROPOSED IN THE DRAFT ASSESSMENT ORDER TO WARDS TP ADJUSTMENT. 6. BEING AGGRIEVED, ASSESSEE IS BEFORE US RAISING I N TOTAL TEN GROUNDS. HOWEVER, AT THE TIME OF HEARING, LEARNED A R CONFINED HIS ARGUMENT TO SELECTION/REJECTION OF COMPARABLES IN B OTH THE SEGMENTS AS RAISED IN GROUND NOS. 2, 3 & 4, NOT ALLOWING ECO NOMIC ADJUSTMENT AS RAISED IN GROUND NO. 7 AND LEVY OF INTEREST U/S 234B IN GROUND NO. 9. IN VIEW OF THE AFORESAID, WE WILL CONFINE OUR F INDING TO THE AFORESAID GROUNDS CANVASSED BY LD. AR BEFORE US. CORPORATE SUPPORT SERVICES SEGMENT 7. AS WE HAVE ALREADY DISCUSSED EARLIER, IN THE TP STUDY REPORT ASSESSEE SELECTED SEVEN COMPANIES AS COMPARABLES, O UT OF WHICH, TPO RETAINED FIVE COMPANIES WHILE REJECTING TWO. EV EN, OUT OF THE FIVE 5 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . COMPANIES RETAINED BY TPO, ASSESSEE HAS RAISED OBJE CTIONS IN RESPECT OF THREE COMPANIES BEFORE US, WHICH ARE AS UNDER: 1. CALIBERPOINT BUSINESS SOLUTIONS LTD. 2. COSMIC GLOBAL LTD. 3. INFOSYS BPO LTD. 7.1. HEREINAFTER WE WILL DEAL WITH THE COMPANIES OB JECTED BY ASSESSEE. 8. THE LD. AR OBJECTING TO THE SELECTION OF THE CAL IBER POINT BUSINESS SOLUTIONS LTD., SUBMITTED THAT IT CANNOT BE TREATED AS COMPARABLE AS IT DOES NOT SATISFY MORE THAN 25% RPT FILTER APPLIED BY TPO HIMSELF. LD. AR REFERRING TO THE ANNUAL REPORT OF THE SAID COMPANY FOR THE YEAR ENDED 31/12/2008, SUBMITTED TH AT RPT AS A PERCENTAGE OF SALES IS 34.20%, HENCE, IT CANNOT BE CONSIDERED TO BE A COMPARABLE TO ASSESSEE. 8.1 IN SO FAR AS COSMIC GLOBAL LTD. IS CONCERNED, L D. AR SUBMITTED THAT THE COMPANY IS FUNCTIONALLY DIFFERENT, HENCE, CANNOT BE COMPARABLE TO ASSESSEE. IT WAS SUBMITTED THAT COSMI C GLOBAL LTD., OUTSOURCED ITS ACTIVITIES WHICH IS EVIDENT FROM THE LOW EMPLOYEE COST WHICH IS LESS THAN 21% OF THE SALES. LD. AR SUBMITT ED THAT THE LOW EMPLOYEE COST IS A DEFINITE INDICATION THAT THE COM PANY IS NOT A SERVICE COMPANY OR INTO FURTHER OUTSOURCING OF WORK OR A DISTRIBUTOR COMPANY. IN SUPPORT OF SUCH CONTENTION, LD. AR RELI ED ON THE FOLLOWING DECISION OF THE ITAT: 1. COSMIC GLOBAL LTD. VS. ACIT, ITA NO. 744/MDS/201 4, DT. 30/07/14 2. DELOITTE CONSULTING INDIA PVT. LTD. ITA NO. 108 2/HYD/10, 3. SYMPHONY MARKETING SOLUTIONS PVT. LTD. (2013) 38 TAXMAN.COM 55 8.2 AS REGARDS INFOSYS BPO LTD., THE LD. AR SUBMIT TED THAT CONSIDERING THE SIGNIFICANT BRAND VALUE, INTANGIBLE S OWNED, ECONOMIES 6 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . OF SCALE DUE TO SIZE AND PREMIUM PRICING, IT CANNOT AT ALL BE CONSIDERED TO BE A COMPARABLE WITH A START UP CAPTI VE SERVICE PROVIDE LIKE ASSESSEE. IN SUPPORT OF SUCH CONTENTION, HE RE LIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD., JUDGMENT DATED 10/07/2013 I N ITA 1204/2011 AND A NUMBER OF DECISIONS OF ITAT. 8.3 THE LD. DR STRONGLY CONTESTING THE CLAIM OF ASS ESSEE SUBMITTED BEFORE US THAT ALL THESE COMPANIES HAVING BEEN SELE CTED BY ASSESSEE ITSELF IN THE TP STUDY, TPO HAS MERELY GONE IN TO T HE FUNCTIONAL PROFILES OF THESE COMPANIES AND DID NOT APPLY ANY F ILTER TO ACCEPT/REJECT THE COMPARABLES PROPOSED BY ASSESSEE. THEREFORE, TPOS DECISION IN RETAINING THESE COMPANIES AS COMP ARABLE SHOULD BE UPHELD. FURTHER, LD. DR SUBMITTED THAT THE ISSU E WHETHER CALIBERPOINT BUSINESS SOLUTIONS LTD. HAS FAILED MOR E THAN 25% RPT FILTER WAS NEVER RAISED BY ASSESSEE BEFORE TPO. AS FAR AS COSMIC GLOBAL LTD. IS CONCERNED, LD. DR ARGUED THAT THE FA CT WHETHER THIS COMPANY DOES NOT SATISFY THE EMPLOYEES COST FILTER WAS NEVER BROUGHT TO THE NOTICE OF TPO, HENCE, THERE WAS NO OCCASION FOR THE TPO TO APPLY EMPLOYEE COST FILTER WHILE SELECTING THIS COM PANY. WITH REGARD TO INFOSYS BPO LTD., LD DR SUBMITTED THAT BRAND VAL UE IN A SERVICE INDUSTRY MAY DRIVE ITS REVENUES BUT MAY NOT AFFECT THE PROFITABILITY OF A COMPANY. IT WAS SUBMITTED, THE BRAND VALUE OF AN I TES COMPANY DOES NOT DETERMINE ITS PROFIT MARGIN. HE FURTHER SU BMITTED THAT THERE IS NO RELEVANCE BETWEEN THE SIZE OF THE COMPANY AND EC ONOMIES OF SCALES IN THE ITES SECTOR. LD. DR SUBMITTED THAT SC ALE HAS NO INFLUENCE ON THE PROFITABILITY OF A COMPANY IN THE ITES INDUSTRY. 8.4 IN THE REJOINDER, LD. AR SUBMITTED THAT EVEN IF THE ASSESSEE MIGHT HAVE INITIALLY SELECTED SOME OF THE COMPANIES AS COMPARABLES, BUT, THAT CANNOT PRECLUDE ASSESSEE FROM SEEKING EXC LUSION OF THOSE COMPANIES WRONGLY SELECTED. IN SUPPORT OF SUCH CONT ENTION, HE RELIED ON THE DECISION OF THE ITAT SPECIAL BENCH IN CASE O F DCIT VS. QUARK SYSTEMS P. LTD. 38 SOT 307 (CHD.) AND THE DECISION OF THE ITAT DELHI 7 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . BENCH IN CASE OF ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT [2014] 45 TAXMAN.COM 244. 8.5 HAVING CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIALS ON RECORD, WE RECORD OUR FINDING AS U NDER: 8.6 THE PRELIMINARY OBJECTION OF THE DEPARTMENT IS, ASSESSEE ITSELF HAVING SELECTING THESE COMPANIES AND TPO HAVING ACC EPTED THEM WITHOUT APPLYING ANY FILTER TO ACCEPT/REJECT, ASSES SEE CANNOT SEEK EXCLUSION OF THE COMPANIES SELECTED BY IT. HOWEVER, WE ARE NOT CONVINCED WITH THE ARGUMENTS OF LD. DR. IN CASE OF DCIT VS. QUARK SYSTEMS P. LTD. (SUPRA), ITAT SPECIAL BENCH HAS HEL D THAT IF THE ASSESSEE HAS WRONGLY INCLUDED SOME COMPARABLES, WHI CH IS NOT DISTURBED BY TPO, THEN, ASSESSEE CANNOT BE PRECLUDE D FROM SEEKING EXCLUSION OF THOSE COMPANIES SUBSEQUENTLY. FOLLOWIN G THE AFORESAID DICTUM OF THE SPECIAL BENCH OF ITAT, ITAT DELHI BEN CH IN CASE OF ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. (SUPRA) H ELD AS UNDER: 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET IT IS RE LEVANT TO NOTE THAT THE AREA OF DISPUTE IN THE PRESENT APPEAL IS C ONFINED TO INCLUSION OR EXCLUSION OF THESE TWO CASES. THE ASSE SSEE IS SATISFIED ON ALL OTHER ISSUES. IT IS RELEVANT TO NO TE THAT THE ASSESSEE SUO MOTU INCLUDED THESE TWO CASES IN ITS T RANSFER PRICING STUDY. HOWEVER, IT WAS ARGUED BEFORE THE AU THORITIES BELOW THAT THESE CASES WERE NOT COMPARABLES. THE SP ECIAL BENCH OF THE TRIBUNAL IN DY. CIT VS. QUARK SYSTEMS (P.) LTD., [2010] 38 SOT 307 (CHD.)(SB) HAS HELD THAT IF THE A SSESSEE HAS WRONGLY INCLUDED SOME CASES IN THE LIST OF COMPARAB LES, WHICH POSITION HAS NOT BEEN DISTURBED BY THE TPO, THEN TH ERE CAN BE NO EMBARGO ON PLEADING BY THE ASSESSEE FOR THE EXCL USION OF SUCH A CASE. IN THE LIGHT OF THE ABOVE SPECIAL BENC H DECISION, WE HOLD THAT THE ASSESSEE CAN CONTEND FOR THE EXCLU SION OF THESE CASES BEFORE THE TRIBUNAL NOTWITHSTANDING THE FACT THAT IT INCLUDED SUCH CASES IN THE LIST OF COMPARABLES. 8.7 MOREOVER, WHEN THE TPO HAS REJECTED TWO COMPANI ES SELECTED BY ASSESSEE BY GOING INTO THEIR FUNCTIONALITY BY AP PLYING CERTAIN FILTERS, IN ALL FAIRNESS HE SHOULD HAVE DONE SIMILA R EXERCISE IN RESPECT OF OTHER COMPARABLES ALSO. 8 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . 8.8 HAVING HELD THAT ASSESSEE IS ENTITLED TO OBJECT TO CERTAIN COMPARABLES SELECTED BY TPO WHICH WERE ALSO INITIAL LY SELECTED AS COMPARABLES BY ASSESSEE ITSELF, WE WILL NOW CONSIDE R THE MERITS OF THE ARGUMENTS OF THE PARTIES WITH REGARD TO SELECTI ON OF THE THREE COMPANIES AS COMPARABLES BY TPO. 9. CALIBERPOINT BUSINESS SOLUTIONS LTD. 9.1. ASSESSEE HAS SOUGHT EXCLUSION OF THE AFORESAID COMPANY ON THE GROUND THAT IT FAILS MORE THAN 25% RPT FILTER APPLI ED BY TPO. ON A PERUSAL OF THE FINANCIALS OF THIS COMPANY AS SHOWN IN THE ANNUAL REPORT, A COPY OF WHICH IS PLACED AT PAGE 133 OF AS SESSEES PAPER BOOK AND WORKING FURNISHED BY ASSESSEE, IT IS TO B E SEEN THAT THE RPT AS A PERCENTAGE OF SALES IS 34.20%. FURTHER, IT IS SEEN FROM THE ORDER OF TPO THAT HE HIMSELF CONSIDERS COMPANIES HA VING MORE THAN 25% RPT NOT TO BE TREATED AS COMPARABLES. THAT BEIN G THE CASE, IF ACTUALLY THE RPT OF CALIBERPOINT BUSINESS SOLUTION S LTD. IS MORE THAN 25%, IT CANNOT BE TREATED AS A COMPARABLE TO ASSES SEE. ACCORDINGLY, WE DIRECT AO/TPO TO VERIFY THIS ASPECT AND IF IT IS FOUND THAT RPT AS A PERCENTAGE OF SALES IS MORE THAN 25%, THEN, THIS CO MPANY CANNOT BE TREATED AS COMPARABLE TO ASSESSEE. 10. COSMIC GLOBAL LTD. 10.1 THE GROUND ON WHICH ASSESSEE SEEKS EXCLUSION O F THE AFORESAID COMPANY IS, IT OUTSOURCES ITS ACTIVITIES. ON A PERU SAL OF THE PROFIT & LOSS ACCOUNT OF COSMIC GLOBAL LTD. FOR THE YEAR END ED 31 ST MARCH, 2009, A COPY OF WHICH IS ENCLOSED IN ASSESSEES PA PER BOOK, IT IS SEEN THAT AGAINST OPERATIONAL INCOME OF 7,37,02,584 , THE EXPENDITURE INCURRED TOWARDS SALARIES AND WAGES WAS RS. 1,57,11 ,463. WHEREAS THE COMPANY HAS PAID TRANSLATION CHARGES OF RS. 3,0 0,25,326. THESE FIGURES TO CERTAIN EXTENT DO INDICATE THAT THE SAID COMPANY IS 9 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . OUTSOURCING ITS ACTIVITIES. THIS FACT IS ALSO EVIDE NT FROM THE ORDER OF THE ITAT IN A CASE RELATING TO THIS COMPANY IN ITA NO. 744/MDS/14 DATED 30/07/14 WHEREIN THE ITAT HAS CATEGORICALLY R ECORDED A FINDING OF FACT THAT THE SAID COMPANY RECEIVES WORK ORDER F ROM ITS CLIENTS AROUND THE WORLD AND GETS THE WORK DONE FROM TRANSL ATORS IN INDIA AND OVERSEAS. SINCE IT IS EVIDENT FROM RECORD THAT COS MIC GLOBAL LTD. OUTSOURCES ITS WORK, IT CANNOT BE TREATED AS COMPAR ABLE TO ASSESSEE. FOR COMING TO SUCH VIEW, WE RELY UPON THE DECISION OF THE COORDINATE BENCHES OF THE TRIBUNAL IN CASE OF DELLOITTE CONSUL TING INDIA P. LTD. (SUPRA) AND SYMPHONY MARKETING SOLUTIONS INDIA P. L TD. (SUPRA). THEREFORE, WE DIRECT AO/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 11. INFOSYS BPO LTD. 11.1 AS FAR AS THIS COMPANY IS CONCERNED, WE ARE OF THE VIEW THAT IT CANNOT AT ALL BE CONSIDERED AS A COMPARABLE TO ASSE SSEE NOT ONLY BECAUSE OF ITS SIZE BUT ALSO DUE ITS BRAND VALUE, D IVERSIFIED ACTIVITIES, AND OTHER FUNCTIONAL DISSIMILARITIES. DIFFERENT BEN CHES OF THIS TRIBUNAL ARE CONSISTENT IN THEIR VIEW THAT THIS COMPANY CANN OT BE TREATED AS A COMPARABLE TO A CAPTIVE SERVICE PROVIDER LIKE ASSES SEE. EVEN THE HONBLE DELHI HIGH COURT HAS ALSO AFFIRMED SUCH VIE W IN CASE OF CIT VS. AGNITY INDIA (SUPRA). IN THE AFORESAID VIEW OF THE MATTER, WE DIRECT AO/TPO TO EXCLUDE THIS COMPANY AS COMPARABLE. 12. ASSESSEE HAS ALSO OBJECTED TO REJECTION OF THE FOLLOWING TWO COMPARABLES: 1. CG VAK SOFTWARE AND EXPORTS LTD. 2. CEPHA IMAGING P. LTD. 13. AS FAR AS CG VAK SOFTWARE AND EXPORTS LTD. IS C ONCERNED, THE LD. AR SUBMITTED BEFORE US THAT TPO AND DRP WERE NO T CORRECT IN 10 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . REJECTING THE AFORESAID COMPANY AS COMPARABLES ON G ROUND OF FUNCTIONAL DISSIMILARITY. THE LD. AR SUBMITTED THAT SEGMENTAL DETAILS OF BOTH SOFTWARE DEVELOPMENT SEGMENT AND BPO SERVICES SEGMENT ARE AVAILABLE IN THE ANNUAL REPORT OF THE COMPANY. HENC E, THE TPO WAS NOT JUSTIFIED IN REJECTING THE SAID COMPANY ON THE GROUND OF LOW TURNOVER FROM BPO SECTOR. 13.1 AS FAR AS CEPHA IMAGING P. LTD. IS CONCERNED, LD AR REFERRING TO THE ANNUAL REPORT OF THE COMPANY, SUBMITTED THAT IT IS ENGAGED IN RENDERING BPO SERVICES AND RELATED PARTY TRANSACTIO N IS ONLY 16.59%, HENCE, THIS COMPANY SHOULD NOT HAVE BEEN REJECTED B Y TPO AND DRP. 14. LD. DR ON THE OTHER HAND, SUBMITTED THAT SEGMEN TAL DETAILS OF CG VAK IS NOT AVAILABLE IN THE ANNUAL REPORT. FURTH ER, THE BPO SERVICES CONSTITUTES ONLY 12% OF THE TOTAL TURNOVER . THEREFORE, AS REVENUE FROM BPO SERVICES IS LESS THAN 1 CRORE, IT CANNOT BE CONSIDERED AS A COMPARABLE. AS FAR AS CEPHA IMAGING P. LTD. IS CONCERNED, LD. DR SUPPORTING THE ORDER OF DRP AND T PO SUBMITTED THAT THE COMPANY BEING INTO SOFTWARE DEVELOPMENT AN D RPT BEING MORE THAN 25% CANNOT BE TREATED AS A COMPARABLE. 15. HAVING CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIAL ON RECORD, WE ARE OF THE VIEW THAT CG VAK SOFTWARE CANNOT BE TREATED AS COMPARABLE TO ASSESSEE. AS CAN BE SEEN FROM THE ANNUAL REPORT OF THE COMPANY, A COPY OF WHICH I S AT PAGE 159 OF ASSESSEES PAPER BOOK, IT IS PREDOMINANTLY A COMPUT ER SOFTWARE DEVELOPMENT COMPANY. WHILE REVENUE EARNED FROM SOFT WARE SERVICES IS TO THE TUNE OF RS. 637.29 CRORES, THAT FROM BPO SERVICES IS ONLY 86.10 CRORE. FURTHER, THOUGH ASSESSEE SUBMITTED THA T SEGMENTAL DETAILS ARE AVAILABLE BUT ON A PERUSAL OF THE ANNUA L REPORT, IT IS FOUND THAT SEGMENTAL DETAILS OF EXPENDITURE ARE NOT AVAIL ABLE. IN THE AFORESAID VIEW OF THE MATTER, WE DO NOT FIND ANY RE ASON TO DISTURB THE FINDING OF THE DRP AND TPO WITH REGARD TO THE AFORE SAID COMPANY. 11 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . 16. AS FAR AS CEPHA IMAGING P. LTD IS CONCERNED, ON A PERUSAL OF THE ORDER PASSED BY TPO, IT IS TO BE NOTED THAT HE HAS EXCLUDED THIS COMPANY MAINLY FOR THE REASON THAT IT IS A SOFTWARE DEVELOPMENT COMPANY AND SECONDLY RPT IS MORE THAN 25%. HOWEVER, ON A PERUSAL OF THE ANNUAL REPORT OF THE COMPANY, COPY OF WHICH IS PLACED AT PAGE 169 OF ASSESSEES PAPER BOOK, IT IS SEEN THAT THE A CTIVITIES CARRIED ON BY THIS COMPANY CAN BE CATEGORIZED AS BPO SERVICES. THERE IS NOTHING IN THE ANNUAL REPORT TO SUGGEST THAT IT IS INTO SOFTWARE DEVELOPMENT. FURTHER FROM THE ANNUAL REPORT AS WELL AS WORKING SUBMITTED BY ASSESSEE IT APPEARS THAT THE RPT AS A PERCENTAGE OF SALE IS 16.59%. IN THE AFORESAID VIEW OF THE MATTER , WE DIRECT AO/TPO TO VERIFY THIS ASPECT AND IF IT IS FOUND THAT RPT O F THIS COMPANY IS LESS THAN 25%, THEN, THIS COMPANY CANNOT BE REJECTED AS A COMPARABLE. RESEARCH & DEVELOPMENT SERVICES SEGMENT 17. THE ASSESSEE HAS OBJECTED TO THE SELECTION OF T HE FOLLOWING COMPANIES AS COMPARABLES IN THIS SEGMENT: 1. CELESTIAL BIOLABS LTD. 2. TCG LIFE SCIENCE LTD. 17.1 OBJECTING TO THE SELECTION OF THE AFORESAID TW O COMPANIES, LD. AR SUBMITTED BEFORE US THAT CELESTIAL BIOLABS LTD. IS A PRODUCT COMPANY, HENCE, CANNOT BE TREATED AS COMPARABLE TO A PURELY IT SERVICE PROVIDER LIKE ASSESSEE. IN SUPPORT OF SUCH CONTENTION HE RELIED ON A DECISION OF THE ITAT BANGALORE BENCH IN CASE O F M/S MILLIPORE (INDIA) P. LTD. VS. DCIT, IT(TP)A NO. 689/BANG/12, DATED 04/07/2014. LD. AR SUBMITTED FOR THIS REASON ALSO OTHER BENCHE S OF THE TRIBUNAL HAVE ALSO REJECTED THIS COMPANY FROM BEING TREATED AS A COMPARABLE TO A BPO SERVICE PROVIDER. AS FAR AS TCG LIFE SCIEN CE LTD. IS CONCERNED, LD. AR SUBMITTED BEFORE US THAT THIS COM PANY CANNOT BE TREATED AS COMPARABLE TO ASSESSEE AS IT HAS SUBSTAN TIAL SALES FROM MANUFACTURING ACTIVITY. LD. AR REFERRING TO THE ANN UAL REPORT OF THE SAID COMPANY, SUBMITTED THAT A COMPANY WHICH IS SEL ECTED AS 12 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . COMPARABLE SHOULD BE ENGAGED IN SUBSTANTIAL SIMILAR ACTIVITY AS THE TESTED PARTY. IT WAS SUBMITTED BY LD. AR THAT AS TH E MANUFACTURING ACTIVITY AMOUNTS TO 25.16% OF THE TOTAL SALES OF TH E COMPANY IT FAILS THE FILTER OF 75% REVENUE FROM R&D ACTIVITY, THEREF ORE, IT CANNOT BE TREATED AS A COMPARABLE. 17.2 THE LD. DR ON THE OTHER HAND, JUSTIFIED SELECT ION OF THE AFORESAID TWO COMPANIES AS COMPARABLES TO THE ASSES SEE. 17.3 WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES AND PERUSED THE MATERIALS ON RECORD. AS FAR AS CELESTIAL BIOLAB S LTD. IS CONCERNED, WE ARE OF THE VIEW THAT THIS COMPANY CANNOT BE TREA TED AS COMPARABLE TO ASSESSEE AS IT IS ENGAGED IN VARIOUS ACTIVITIES. THE COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF M/S MILLIPORE (IN DIA) P. LTD. VS. DCIT (SUPRA) APPROVED THE ORDER OF CIT(A) IN REJECTING T HE AFORESAID COMPANY AS IT IS ENGAGED IN DIVERSIFIED ACTIVITIES. THEREFORE, FOLLOWING THE AFORESAID DECISION OF COORDINATE BENCH, WE DIRE CT AO/TPO TO EXCLUDE THIS COMPANY AS COMPARABLE. AS FAR AS TCG L IFE SCIENCE LTD. IS CONCERNED, AS CAN BE SEEN THE ONLY OBJECTION OF THE ASSESSEE IS REVENUE FROM MANUFACTURING ACTIVITY AS A PERCENTAG E OF TOTAL SALES IS 25.16% WHICH EXCEEDS THE 75% REVENUE TO BE EARNED F ROM R&D ACTIVITIES FILTER ADOPTED BY TPO. IN OUR VIEW, THE CONTENTION OF ASSESSEE IS NOT TENABLE. AS CAN BE SEEN FROM FACTS ON RECORD, SUBSTANTIAL REVENUE EARNED BY THE COMPANY IS FROM R &D ACTIVITIES. THEREFORE, ONLY BECAUSE REVENUE FROM MANUFACTURING ACTIVITIES EXCEED THE CUT OFF MARK BY 0.16%, THE COMPANY CANNO T BE TREATED AS UN-COMPARABLE TO ASSESSEE. ACCORDINGLY, WE UPHOLD T HE SELECTION OF THE COMPANY AS COMPARABLE TO ASSESSEE. 17.4 IT NEEDS TO BE MENTIONED, IN COURSE OF HEARING LD. DR HAD SUBMITTED, RESTRICTING COMPARABILITY ANALYSIS TO TW O OR THREE COMPANIES WILL RESULT IN UNHEALTHY COMPARATIVE ANAL YSIS, HENCE, TPO MAY BE DIRECTED TO CONDUCT A FRESH SEARCH FOR SELEC TING COMPARABLES. HOWEVER, WE DO NOT FIND MERIT IN SUCH CONTENTION OF LD. DR. ON A 13 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . PERUSAL OF RULE 10B, IT BECOMES CLEAR, THERE IS NOT HING IN THE SAID PROVISION TO INDICATE THAT CERTAIN MINIMUM NUMBER O F COMPANIES ARE REQUIRED TO BE SELECTED FOR THE PURPOSE OF COMPARAT IVE ANALYSIS FOR DETERMINING ALP UNDER TNMM. 18. IN THE RESULT, WE DIRECT THE AO/TPO TO COMPUTE THE ALP OF THE INTERNATIONAL TRANSACTIONS UNDER BOTH THE SEGMENTS KEEPING IN VIEW OUR DIRECTIONS HEREIN ABOVE. 19. THE NEXT ISSUE AS RAISED IN GROUND NO. 7 IS WIT H REGARD TO ALLOWANCE OF RISK/WORKING CAPITAL ADJUSTMENT. 20. LD. AR SUBMITTED BEFORE US THAT ASSESSEE IS IN ITS FIRST YEAR OF OPERATIONS AND HAS USED UNUTILIZED CAPACITY. HE SUB MITTED THAT ASSESSEE IS REMUNERATED AT A COST PLUS MARK UP BASI S AND IT FUNCTIONS UNDER A LIMITED RISK ENVIRONMENT AS MOST OF THE RI SK IS BEING ASSUMED BY ITS AES. HENCE, NECESSARY RISK ADJUSTMENT HAS TO BE ALLOWED WHILE DETERMINING THE ALP. HE ALSO SUBMITTED THAT NECESSA RY ADJUSTMENT TOWARDS RISK AND WORKING CAPITAL NEED TO BE MADE TO THE MARGINS OF COMPARABLE TO ELIMINATE DIFFERENCES ON ACCOUNT OF D IFFERENT FUNCTIONS, ASSETS, AND RISKS IN DETERMINATION OF ALP. IN SUPPO RT OF SUCH CONTENTION, HE RELIED UPON SOME DECISIONS AS REFERR ED TO IN THE WRITTEN SUBMISSIONS. 21. THE LD. DR ON THE OTHER HAND SUBMITTED THAT UND ER TNMM THE STANDARDS OF COMPARABILITY ARE RELATIVELY RELAXED A ND ONLY BROAD SIMILARITY OF FUNCTIONS IS REQUIRED. TNMM CAN BE US ED WITH DATA FOR COMPANIES THAT ARE BROADLY COMPARABLE TO THE TAX PA YER AS FUNCTIONAL DIFFERENCES ARE LIKELY TO BE REFLECTED IN THE LEVEL OF OPERATING EXPENSES INCURRED BY EACH COMPANY. THESE EXPENSES A RE DEDUCTED IN THE CALCULATION OF OPERATING PROFIT AND ARE ACCO RDINGLY TAKEN ACCOUNT OF IN THE COMPARABILITY ANALYSIS. HE SUBMIT TED, CONSIDERING THESE ASPECTS ASSESSEE HAVING ADOPTED NET MARGIN OR OPERATING PROFIT AS THE MOST RELIABLE OR VIABLE INDICATOR OF PROFIT LEVEL, SELECTIVE ARGUMENT AGAINST UNUTILIZED CAPACITY IS UNCALLED FO R. HE SUBMITTED, 14 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . ASSESSEE IS BEING REMUNERATED ON COST PLUS MARK-UP WHICH INCLUDES THE COST OF UNUTILIZED CAPACITY ALSO. THE COMPARABL ES SELECTED BY THE TPO BROADLY UNDERTAKE EXPENSES SIMILAR TO THAT OF T HE ASSESSEE AND ARE PART OF THE R&D SERVICE PROVIDERS AND HENCE SUC H COMPARABLES CANNOT BE REJECTED SIMPLY ON THE GROUND OF DIFFEREN CES IN FUNCTIONS AND PROFITS. 22. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. IT IS A FACT THAT IN THE T P STUDY ASSESSEE HAS NOT WORKED OUT ANY ADJUSTMENT ON ACCOUNT OF RISK OR WORKING CAPITAL. HOWEVER, SINCE WE HAVE DIRECTED THE AO/TPO TO COMPU TE ALP IN ACCORDANCE WITH DIRECTIONS GIVEN BY US ON COMPARABL ES, WHILE DOING SO, HE SHALL ALSO CONSIDER ASSESSEES CLAIM TOWARDS ADJUSTMENTS TO BE MADE ON ACCOUNT OF RISK/WORKING CAPITAL ETC. AFTER ALLOWING OPPORTUNITY OF BEING HEARD TO ASSESSEE. THIS GROUND IS CONSIDERED TO BE ALLOWED FOR STATISTICAL PURPOSES. 23. IN GROUND NO. 9 ASSESSEE HAS CHALLENGED THE LEV Y OF INTEREST U/S 234B. SINCE THE CHARGEABILITY OF INTEREST U/S 2 34B WILL ULTIMATELY DEPEND UPON THE INCOME TO BE DETERMINED IN ACCORDAN CE WITH OUR DIRECTIONS CONTAINED HEREINABOVE, AT THIS STAGE IT IS PREMATURE TO DWELL UPON THIS ISSUE. IT IS OPEN FOR ASSESSEE TO R AISE THE ISSUE AT THE APPROPRIATE STAGE. 24. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. PRONOUNCED IN THE OPEN COURT ON 07/01/2015. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 7 TH JANUARY, 2015 KV 15 ITA NO. 218/HYD/2014 INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD . COPY TO:- 1) M/S INTERNATIONAL SPECIALTY PRODUCTS (INDIA) PVT . LTD. LEVEL 3, RVR TOWERS, RAJ BHAVAN ROAD, SOMAJIGUDA, HYDERABAD 2) ITO, WARD 2(1), ROOM NO. 837, C-BLOCK, 8 TH FLOOR, IT TOWERS, AC GUARDS, HYDERABAD 500 004 3)DRP, HYDERABAD 4) DIT (INTERNATIONAL TAXATION), HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.