24/7 Customer Private Limited, Bangalore V. DCIT, Bangalore

ITA 227/BANG/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63793 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 8 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-11-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 31-07-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 26-02-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA
• Assessee Lawyers: K R SEKAR
• Keywords: Related party transaction; Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Retrospective amendment
• Section: 92C; 143(3); 92D; 92B; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. NO. 227 /BANG/20 10 (ASSESSMENT YEAR : 2004-05) 24/7 CUSTOMER .COM PVT. LTD., EMBASSY GOLF LINK, BUSINESS PARK, CHALLAGHATTA VILLAGE, INTERMEDIATE RING ROAD, VARTHUR HOBLI, BANGALORE SOUTH TALUK, BANGALORE. PAN AAACZ1014A VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 11(2), BANGALORE. APPELLANT RESPONDENT. APPELLANT BY : SHRI K.R.SEKAR. RESPONDENT BY : SHRI S.K. AMBASTHA. DATE OF HEARING : 11.09.2012. DATE OF PRONOUNCEMENT : 9.11.2012. O R D E R PER SHRI JASON P. BOAZ, A.M . : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-IV, BANGALORE DT.30.11.2009 FOR ASSES SMENT YEAR 2004-05. 2. THE FACTS OF THE CASE, IN BRIEF, ARE AS UNDER : 2.1 THE ASSESSEE, AN INDIAN COMPANY ENGAGED IN THE BUSINESS OF PROVIDING CALL CENTRE SERVICES EXCLUSIVELY TO ITS ASSOCIATED ENTERPRISE (A.E.), 24 /7 CUSTOMER.COM.INC., USA (24/7 USA), FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2004-05 ON 22.11.2004 DECLARING A TOTAL LOSS OF RS.40,84,968. THE CASE WAS PROCESSED UNDER SECTION 143(1) OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS 'THE ACT') AND THE CASE WAS TA KEN UP FOR SCRUTINY BY ISSUE OF NOTICE UNDER SECTION 143(2) OF THE ACT. A REFERENCE UNDER SECTI ON 92CA(1) OF THE ACT WAS MADE BY THE 2 ITA NO.227/BANG/2010 ASSESSING OFFICER TO THE TRANSFER PRICING OFFICER ( TPO) IN RESPECT OF THE FOLLOWING INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE WITH ITS A.ES. NATURE OF INTERNATIONAL TRANSACTIONS VALUE RS. CALL CENTRE SERVICES 66,00,46,029 IMPORT OF CAPITAL EQUIPMENT 45,43,167 REIMBURSEMENT OF EXPENSES 1,78,60,545 CROSS CHA R GE OF EXPENSES 33,56,693 TOTAL : 68,58,06,434 THE TPO PASSED AN ORDER UNDER SECTION 92C R.W.S. 92CA(1) OF THE ACT DT.15.12.2006 MAKING AN UPWARD ADJUSTMENT OF RS.15,23,42,536 TO THE INTERNA TIONAL TRANSACTIONS OF THE ASSESSEE IN RESPECT TO CALL CENTRE SERVICES. 2.2 AFTER RECEIPT OF THE ORDER OF THE TPO UNDER SEC TION 92CA(1) R.W.S. 92C OF THE ACT, THE ASSESSING OFFICER COMPLETED THE ASSESSMENT BY AN OR DER UNDER SECTION 143(3) OF THE ACT ON 28.12.2006 DETERMINING THE INCOME OF THE ASSESSEE A T RS.15,40,92,002. IN THE ORDER OF ASSESSMENT, THE ASSESSING OFFICER MADE THE FOLLOWIN G ADDITIONS / DISALLOWANCES : I) EXCLUSION OF TELECOMMUNICATION CHARGES INCURRED IN FOREIGN EXCHANGE FROM 'EXPORT TURNOVER' BUT NOT FRO M 'TOTAL TURNOVER' WHILE COMPUTING DEDUCTION UNDER SE CTION 10A RS. 64,34,198 II) EXCLUSION OF LEASED HIRE CHARGES INCURRED IN FO REIGN EXCHANGE FROM 'EXPORT TURNOVER' BUT NOT FROM 'TOTAL TURNOVER' WHILE COMPUTING DEDUCTION UNDER SECTION 1 0A RS. 3,2 3,02,116 III) TRANSFER PRICING ADJUSTMENT RS. 15,23,42,536 2.3 AGGRIEVED BY THE ORDER OF ASSESSING OFFICER DT. 28.12.2006, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT (APPEALS). THE CIT (APPEALS) DISPOS ED OFF THE ASSESSEE'S APPEAL BY ORDER DT.30.11.2009 ALLOWING THE ASSESSEE PARTIAL RELIEF. THE LEARNED CIT (APPEALS) ALLOWED RELIEF TO THE ASSESSEE ON THE FIRST TWO ISSUES AT (I) AND (II ) (SUPRA) DIRECTING THE ASSESSING OFFICER TO 3 ITA NO.227/BANG/2010 RECOMPUTE THE DEDUCTION UNDER SECTION 10A OF THE AC T AFTER REDUCING THE COMMUNICATION AND LEASED HIRE EXPENSES FROM BOTH 'EXPORT TURNOVER' AN D 'TOTAL TURNOVER'. THE LEARNED CIT (APPEALS) HAS HOWEVER UPHELD THE TRANSFER PRICING A DJUSTMENT OF RS.15,23,42,536 PROPOSED BY THE TPO AND CARRIED OUT BY THE ASSESSING OFFICER. 3. AGGRIEVED BY THE ORDER OF THE LEARNED CIT(APPEAL S) DT.30.11.2009 FOR THE ASSESSMENT YEAR 2004-05, THE ASSESSEE IS NOW IN APPEAL BEFORE US. THE ASSESSEE INITIALLY FILED ELABORATE GROUNDS THAT WERE NARRATIVE AND ARGUMENTATIVE. IT S UBSEQUENTLY FILED CONCISE GROUNDS OF APPEALS WHICH ARE EXTRACTED AND REPRODUCED HEREUNDER : GROUND 1 : ADJUSTMENT TO THE ARMS LENGTH MARGIN - THE LEARNED CIT (APPEALS) ERRED IN UPHOLDING THE ADJUSTMENTS MADE BY THE LEARNED TPO TO THE ARMS LENGTH MARGINS COMPUTED BY THE APP ELLANT IN RESPECT OF RENDERING OF CALL CENTRE SERVICES TO ITS ASSOCIATED ENTERPRISE. - THE LEARNED CIT (APPEALS) ERRED IN ACCEPTING COMP ARABLE COMPANIES HAVING RELATED PARTY TRANSACTIONS, AS PROPOSED BY THE TPO. - THE LEARNED CIT (APPEALS) ERRED IN ACCEPTING COM PARABLE COMPANIES HAVING ECONOMIES OF SCALE, AS PROPOSED BY THE TPO. - THE LEARNED CIT (APPEALS) ERRED IN ACCEPTING COMP ARABLE COMPANIES OWNING INTANGIBLES, AS PROPOSED BY THE TPO. - THE LEARNED CIT (APPEALS) ERRED IN REJECTING THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT ON THE ACCOUNT OF USE OF NON-CONTEMPO RANEOUS DATA. GROUND 2 : REVISED BENCHMARKING - THE LEARNED CIT (APPEALS) ERRED IN NOT TAKING INT O CONSIDERATION THE FRESH BENCH MARKING ANALYSIS CONDUCTED AFTER ADOPTING THE CRITE RIA POSTULATED BY THE LEARNED TPO. GROUND 3 : APPLICABILITY OF MULTIPLE YEAR DATA - THE LEARNED CIT (APPEALS) OUGHT TO HAVE ACCEPTED THE USE OF MULTIPLE YEAR DATA FOR COMPUTING THE FINAL MARGIN OF THE COMPARABLE. - THE LEARNED CIT (APPEALS) OUGHT TO HAVE ACCEPTED THE FACT THAT CURRENT YEAR DATA WERE NOT AVAILABLE IN THE PUBLIC DOMAIN TO CALCULAT E THE MARGINS OF COMPARABLE COMPANIES. GROUND 4 : ADJUSTMENTS FOR VARIOUS RISKS - THE LEARNED CIT (APPEALS) HAS ERRED IN CONCLUDING THAT THE BUSINESS RISK IS BORNE BY THE APPELLANT AND THEREFORE DID NOT WARRANT A MARKE T RISK ADJUSTMENT. 4 ITA NO.227/BANG/2010 GROUND 5 : SAFE HARBOR - THE LEARNED CIT (APPEALS) SHOULD HAVE ALLOWED THE BENEFIT OF SAFE HARBOR PROVISIONS OF / - 5% AS SET OUT UNDER THE PROVISO TO SECTION 92C(2) OF THE INCOME TAX ACT, 1961. GROUND 6 : PARENT COMPANY LOSS - THE LEARNED CIT (APPEALS) OUGHT TO HAVE APPRECIAT ED THE FACT THAT THE PARENT COMPANY OF THE APPELLANT HAS INCURRED LOSS DURING T HE YEAR AND THE ASSESSEE CANNOT BE EXPECTED TO EARN MARGINS BEYOND THE GLOBAL PROFI T OF THE GROUP AS A WHOLE. 4. BEFORE PROCEEDING TO DEAL WITH THE ABOVE GROUNDS OF APPEAL, THE APPROACH OF THE TPO VIS- -VIS THAT OF THE ASSESSEE IN ITS TRANSFER PRICING STUDY SUBMITTED BEFORE THE TPO IS BRIEFLY SUMMARIZED AS UNDER. 5.1 THE ASSESSEE'S APPROACH : THE ASSESSEE TREATED ITSELF AS ENGAGED IN CUSTO MER RELATIONSHIP MANAGEMENT SERVICES OR CALL CENTRE SER VICES AND AGGREGATED ALL THE INTERNATIONAL TRANSACTIONS APPLYING THE TRANSACTIONAL NET MARGIN METHOD (TNMM). THE ASSESSEE ;ADOPTED OPERATING PROFIT TO OPERATING COST AS THE PROFIT LEVEL INDICATOR (PLI) AND HAS USED TWO WIDELY AVAILABLE PUBLIC DATA BASES; I.E. PROWESS AND CAPIT ALINE. THE ASSESSEE USED EARLIER PERIODS / YEARS DATA I.E. DATA PERTAINING TO THE EARLIER FINANCIAL YEARS, 2001-02 AND 2002-03. I) COMPANIES ENGAGED IN BPO, SOFTWARE SERVICES, BUS INESS SERVICES AND MISCELLANEOUS SERVICES. II) COMPANIES DATA AVAILABLE FOR MARCH 31, 2002 OR LATER WERE CONSIDERED. III) COMPANIES WITH TURNOVER OF LESS THAN RS.1 CROR E WERE EXCLUDED. IV) COMPANIES PROVIDING BUSINESS PROCESS OUTSOURCIN G SERVICES WERE CONSIDERED. V) COMPANIES WITH FOREIGN SHAREHOLDING > 26% WERE E XCLUDED. VI) INDIAN COMPANIES HAVING SUBSIDIARIES / HOLDING COMPANIES ABROAD WERE EXCLUDED. VII) COMPANIES MAKING PROFITS AND NOT MAKING ABNORM AL GROWTH WERE CONSIDERED. 5 ITA NO.227/BANG/2010 5.2 THE ABOVE SEARCH YIELDED 7 COMPANIES AS COMPARA BLES. THE OPERATING PROFIT MARGIN OF THE ASSESSEE IS COMPUTED AT 10.60% ON COST, WHEREAS THE ARITHMETICAL MEAN OF THE SAME FOR THE SET OF SEVEN COMPARABLE COMPANIES CONSIDERED BY THE ASSESSEE WORKS OUT TO 9.5% ON COST. AS THE MARGIN OF THE ASSESSEE WAS ABOVE THE ARITHMETIC AL MEAN MARGIN OF THE COMPARABLES, THE ASSESSEE HELD THAT ITS INTERNATIONAL TRANSACTIONS W ERE AT ARMS LENGTH. 5.3 THE TPOS APPROACH : THE TPO ANALYSED THE TRNASFER PRICING REPORT SU BMITTED BY THE ASSESSEE AND THE EXPORT AND DOMESTIC SECTOR OF IT E NABLED SERVICES (ITES) AND APPLIED THE FOLLOWING ADDITIONAL CRITERIA. I) COMPANIES WITH DATA AVAILABLE FOR 31.3.2004 WERE CONSIDERED AS MANDATED BY RULE 10B(4) OF IT RULES, 1962. II) COMPANIES PROVIDING ITES (AS CALL CENTRE SERVIC ES ARE ITES) WHOLLY OR MAINLY TO EXPORT MARKETS WERE CONSIDERED AS THE ASSESSEE IS RENDERIN G 100% OF ITS SERVICES TO THE EXPORT MARKET. III) COMPANIES WITH SIGNIFICANT RELATED PARTY TRANS ACTIONS WERE EXCLUDED. IV) COMPANIES PROVIDING ITES WERE CONSIDERED. 5.5 ACCORDINGLY, THE FOLLOWING 8 COMPARABLES WERE I DENTIFIED BY THE TPO AS THE FINAL SET OF COMPARABLE COMPANIES. S.NO. NAME OF THE COMPARABLE OPERATING REVENUE OPERATING COST (OC) OP ERATING PROFIT (OP) OP/OC 1. NUCLEUS NETSOFT & G.S. INDIA LTD. 1.66 1.94 0.28 16.81 % 2. VISHAL INFORMATION TECHNOLOGIES LTD. 9.37 13.88 4.51 48.13 % 3. WIPRO BPO LTD. 322.3 430.31 108.01 33.51 % 4. TRICOM INDIA LTD 6.34 9.24 2.90 45.74 % 5. FORTUNE INFOTECH LTD 8.08 11. 3 8 3.30 40.84 % 6 ITA NO.227/BANG/2010 6. SPAR CO TELESYSTEMS & SOLUTIONS LTD. 10.32 15.44 4.57 40.10 % 7. ULTRAMARINE PIGMENTS LTD. 6.18 10.99 3.91 63.27 % 8. ALLSEC TECHNOLOGIES LTD. 24.10 24.94 0.83 3.44 % ARITHMATICAL MEAN 36.49% 5.6 AS PER THE CALCULATION ABOVE, THE TPO ARRIVED A T THE ARITHMETICAL MEAN MARGIN OF 36.45% ON COST. AFTER CONSIDERING THE OBJECTIONS RAISED B Y THE ASSESSEE, THE TPO USED THE ABOVE 8 COMPANIES AS THE FINAL COMPARABLES WITH THE ARITHME TICAL MEAN PLI OF 34.49%, AFTER ALLOWING 2% DEDUCTION TOWARDS WORKING CAPITAL ADJUSTMENT. BASE D ON THE ABOVE, ARITHMETICAL MEAN MARGIN, THE ARMS LENGTH PRICE OF THE CALL CENTRE SERVICES R ENDERED BY THE ASSESSEE WAS ARRIVED AT RS.81,23,88,565 AS AGAINST THE PRICE SHOWN AT RS. 6 6,00,46,029 RESULTING IN A TRANSFER PRICING ADJUSTMENT OF RS.15,23,42,536. 6.0 WE HAVE HEARD BOTH PARTIES, CAREFULLY PERUSED A ND CONSIDERED THE ORDER OF THE TPO UNDER SECTION 92CA OF THE ACT, THE ORDER OF ASSESSM ENT, THE ORDER OF THE LEARNED CIT (APPEALS), THE SUBMISSIONS OF THE ASSESSEE / LEARNE D COUNSEL FOR THE ASSESSEE AND THE JUDICIAL DECISIONS RELIED ON BY THE ASSESSEE. WE NOW PROCEE D TO EXAMINE THE VARIOUS ISSUES RAISED BY THE ASSESSEE. 7.0 ADJUSTMENTS TO ARMS LENGTH MARGIN AT THE OUTSET THE LEARNED COUNSEL FO R THE ASSESSEE STATED THAT THE SUB-GROUND IN GROUND NO.1 : ADJUSTMENT TO ARMS LENGTH MARGIN CHALLENGING THE LEARNED CIT (APPEALS)S ACTION IN REJECTING THE COMPARABLE COMPANIES SELECTED BY T HE ASSESSEE ON ACCOUNT OF USE OF NON- CONTEMPORANEOUS DATA (SUPRA) IS NOT PRESSED IN THIS APPEAL. IN THIS VIEW OF THE MATTER, WE DISMISS THIS GROUND AS INFRUCTUOUS. 7 ITA NO.227/BANG/2010 8.0 APPLICABILITY OF MULTIPLE YEAR DATA 8.1 THE LEARNED COUNSEL FOR THE ASSESS EE ALSO SUBMITTED THAT THE GROUND RAISED AT S.NO.3 APPLICABILITY OF MULTIPLE YEAR DATA WAS ALSO NOT BEING PRESSED IN THIS APPEAL. CONSEQUENTLY, WE THEREFORE DISMISS THIS GROUND AS I NFRUCTUOUS. 8.2 EVEN OTHERWISE, THIS GROUND OF THE ASSESSEE IS LIABLE TO BE DISMISSED. RULE 10B (4) OF THE IT RULES, 1962 SPECIFIES THE REQUIREMENT REGARDING DATA TO BE USED FOR ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH A N INTERNATIONAL TRANSACTION WHICH READS AS UNDER : RULE 10 B(4) THE DATA TO BE USED IN ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNA TIONAL TRANSACTION HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED. 8.3 THE USE OF THE WORD SHALL IN THE MAIN PROVISI ON OF THE RULE MAKES IT ABUNDANTLY CLEAR THAT THE USE OF DATA OF THE CURRENT FINANCIAL YEAR (I.E. OF THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION WAS ACTUALLY ENTERED INTO ) IS A MANDATORY REQUIREMENT OF LAW IN THE COMPARABILITY ANALYSIS TO BE UNDERTAKEN AS AS PER INDIAN T.P. REGULATIONS. IT IS ONLY THE PROVISO TO RULE 10B(4) THAT MAKES AN EXCEPTION IN ALLOWING THE USE OF DATA OF THE TWO PRECEDING YEARS, IF AND ONLY, IF IT IS ESTABLISHED THAT THE DATA REVEAL S FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE. THE MANDATORY REQ UIREMENT OF LAW FOR THE USE OF DATA OF THE CURRENT FINANCIAL YEAR CANNOT BE DISPENSED WITH EVE N IF THE RELEVANT DATA WAS NOT AVAILABLE TO THE 8 ITA NO.227/BANG/2010 ASSESSEE IN THE PUBLIC DATA BASE AT THE TIME OF PRE PARATION OF THE T.P. REPORT. NON-AVAILABILITY OF INFORMATION IN THE PUBLIC DATA BASE CAN AT BEST BE RELEVANT TO EXPLAIN THE DISCHARGE OF THE ASSESSEE'S OBLIGATION OF MAINTAINING THE PRESCRIBED DOCUMENTATION UNDER SECTION 92D(I) OF THE ACT R.W. RULE 10D OF THE IT RULES, 1962. HOWEVER, SUCH NON-AVAILABILITY WILL NOT DISPENSE WITH THE MANDATORY REQUIREMENT OF RULE 10B(4) FOR USING CURRENT FINANCIAL YEAR DATA IN CONDUCTING COMPARABILITY ANALYSIS AND IN DETERMINING THE ALP IN ACCORDANCE WITH SECTION 92C (1) AND 92C(2) OF THE ACT. 8.4 AS IT IS MANDATORY REQUIREMENT OF LAW TO UTILIZ E DATA OF THE CURRENT FINANCIAL YEAR TO CONDUCT THE COMPARABILITY ANALYSIS AT THE TIME OF T RANSFER PRICING PROCEEDINGS, THE TPO IS NOT ONLY EMPOWERED BUT IS ALSO DUTY BOUND TO DETERMINE THE ALP USING SUCH CONTEMPORANEOUS DATA FOR THIS PURPOSE EVEN IF SUCH DATA WAS NOT AVAILABL E TO THE ASSESSEE IN THE PUBLIC DATA BASES AT THE TIME OF PREPARATION OF ITS REPORT ON THE T.P. S TUDY. FURTHER, WE ARE ALSO OF THE VIEW THAT THE TPO RIGHTLY REJECTED THE USE OF EARLIER YEARS DATA BY THE ASSESSEE, AS THE ASSESSEE FAILED TO ESTABLISH BEFORE THE TPO, CIT (APPEALS) OR THE T RIBUNAL HOW SUCH EARLIER YEARS DATA HAD AN INFLUENCE ON THE PRICES OF THE CURRENT FINANCIAL YE ARS. 8.5 USE OF DATA BY THE TPO AFTER THE CUT OFF D ATE . AS REGARDS THE DATA USED BY THE TPO WHIL E DETERMINING THE ALP, WE FIND THAT IT IS TO BE AS PER THE PROVISIONS OF SECTION 92D OF THE ACT THA T EVERY PERSON WHO HAS ENTERED INTO INTERNATIONAL TRANSACTIONS IS REQUIRED TO MAINTAIN INFORMATION AND DOCUMENTATION THEREOF. RULE 10B(4) PROVIDES THAT THE INFORMATION AND DOCUMENTS AS SPECIFIED UNDER RULE 10B(1) AND 10B(2) SHOULD AS FAR AS POSSIBLE BE CONTEMPORANEOUS AND SH OULD EXIST LATEST BY THE SPECIFIED DATE REFERRED TO IN SECTION 92F(4) WHICH HAS THE SAME M EANING AS DUE DATE IN EXPLANATION 2 TO 9 ITA NO.227/BANG/2010 SECTION 139(1) OF THE ACT. IN THE ASSESSEE'S CASE, THIS WOULD BE 30 TH DAY OF SEPTEMBER AS IT IS A COMPANY. IT IS CLEAR, AFTER GOING THROUGH THE RE LEVANT PROVISIONS OF LAW, THAT THE ACT HAS NOT PROVIDED FOR ANY CUTOFF DATE UP TO WHICH ONLY THE I NFORMATION IN THE PUBLIC DOMAIN HAS TO BE TAKEN INTO CONSIDERATION BY THE TPO WHILE ARRIVING AT THE ALP OR MAKING TP ADJUSTMENTS. BOTH THE ASSESSEE AND REVENUE BEING BOUND BY THE PROVISI ON OF THE ACT AND RULES ARE REQUIRED TO TAKE INTO CONSIDERATION CONTEMPORANEOUS DATA RELEVANT TO THE PREVIOUS YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS TAKEN PLACE. THE ASSESSEE IS OBLIG ED TO MAINTAIN THE INFORMATION AND DOCUMENTATION AS REQUIRED RELATING TO INTERNATIONAL TRANSACTIONS AS PER THE SPECIFIED DATE SO THAT IT CAN BE MADE AVAILABLE TO THE TPO OR THE ASS ESSING OFFICER OR ANY OTHER AUTHORITY IN ANY PROCEEDINGS UNDER THE ACT. WE ARE, THEREFORE, OF T HE VIEW THAT THERE IS NO INFIRMITY IN THE ACTION OF THE TPO IN USING CONTEMPORANEOUS DATA AT THE TIME OF TRANSFER PRICING AUDIT, THOUGH THE SAME MAY NOT HAVE BEEN AVAILABLE TO THE ASSESSE E AT THE TIME OF PREPARATION OF STATUTORY TRANSFER PRICING STUDY / DOCUMENTATION. SAFE HARBOUR 9.1 IN THE GROUND NO.5 ON SAFE HARBOUR - THE ASSESSEE HAS SOUGHT THE BEN EFIT OF + / - 5% AS SET OUT UNDER THE PROVISO TO SECTION 92 C(2) OF THE ACT CITING SEVERAL JUDICIAL DECISIONS IN SUPPORT OF THIS PROPOSITION. PRIOR TO THE AMENDMEN T MADE BY FINANCE (NO.2) ACT, 2009 AND THE FINANCE ACT, 2012, THE PROVISO TO SECTION 92C(2) OF THE ACT PROVIDED THAT THE ALP WOULD BE TAKEN TO BE THE ARITHMETICAL MEAN (AM) OR AT THE OP TION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE A.M. BY AN AMOUNT NOT EXCEEDING 5% OF SUC H A.M. THUS, THE ALP WAS + / - 5% OF SUCH A.M. THUS, THE ALP WAS + / - 5% FROM THE A.M. TH IS ISSUE IS MORE OF AN ACADEMIC NATURE AND CASE LAWS CITED BY THE ASSESSEE ARE NOT APPLICABLE TO THE FACTS OF THE CASE, AS THE IT ACT, 1961 HAS BEEN AMENDED WITH RETROSPECTIVE EFFECT FROM 1.4 .2002 BY THE INTRODUCTION OF A CLARIFICATORY 10 ITA NO.227/BANG/2010 AMENDMENT IN WHICH THE SECTION 92C (2A) WAS INSERTE D, WHICH AS PER THE FINANCE ACT, 2012 READS AS FOLLOWS : (2A) WHERE THE FIRST PROVISO TO SUB-SECTION (2) AS IT STOOD BEFORE ITS AMENDMENT BY FINANCE (NO.2) ACT, 2009 (33 OF 2009), IS APPLIC ABLE IN RESPECT OF INTERNATIONAL TRANSACTIONS FROM AN ASSESSMENT YEAR AND THE VARIAT ION BETWEEN THE ARITHMETICAL MEAN REFERRED TO IN THE SAID PROVISO AND THE PRICE AT WHICH SUCH TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN EXCEEDS FIVE PER CENT OF T HE ARITHMETICAL MEAN, THEN, THE ASSESSEE SHALL NOT BE ENTITLED TO EXERCISE THE OPTI ON AS REFERRED TO IN THE SAID PROVISO. 9.2 THE NEW SECTION 92C(2A) MANDATES THAT IF THE ARITHMETICAL MEAN PRICE FALLS BEYOND + / - 5% FROM THE PRICE CHARGED IN THE INTERNATIONAL TRAN SACTIONS, THEN THE ASSESSEE DOES NOT HAVE ANY OPTION REFERRED TO IN SECTION 92C(2). THUS, AS PER THE ABOVE AMENDMENT, IT IS CLEAR THAT THE + / - 5% VARIATION IS ALLOWED ONLY TO JUSTIFY THE P RICE CHARGED IN THE INTERNATIONAL TRANSACTIONS AND NOT FOR ADJUSTMENT PURPOSES. THE AFORESAID AME NDMENT HAS SETTLED THE ISSUE AND ACCORDINGLY THE 5% BENEFIT IS NOT ALLOWABLE IN THE ASSESSEE'S CASE. THE VARIOUS JUDICIAL DECISIONS CITED PERTAIN TO THE PERIOD PRIOR TO THE RETROSPECT IVE AMENDMENT IN SECTION 92C(2A) OF THE ACT AND ARE NOT APPLICABLE TO THE FACTS OF THE ASSESSEE 'S CASE. IN VIEW OF THE AMENDMENT BROUGHT ABOUT THEREIN BY FINANCE ACT, 2012, THIS GROUND RAI SED BY THE ASSESSEE IS NOT MAINTAINABLE AND IS ACCORDINGLY DISMISSED. 10. GROUND NO.2 REVISED BENCHMARKING THIS GROUND CHALLENGING THE BENCHMARKING IS GENERAL IN NATURE AND WAS NOT AGITATED BEFORE US IN THE COURSE OF APPELLATE PROCEEDINGS. IN THIS VIE W OF THE MATTER, THE GROUND RAISED BEING GENERAL IN NATURE, NO ADJUDICATION IS CALLED FOR TH EREON AND THE GROUND IS THEREFORE DISMISSED AS INFRUCTUOUS. 11 ITA NO.227/BANG/2010 11. REJECTION OF T.P. STUDY 11.1 THE LEARNED COUNSEL FOR THE ASSESSEE VEHEME NTLY ARGUED THAT THE TPO ERRONEOUSLY REJECTED THE PROCEDURE ADOPTED BY THE ASSESSEE IN I DENTIFYING THE LIST OF COMPARABLE COMPANIES. IN THIS APPEAL, IT IS SEEN THAT THE TPO REJECTED TH E TRANSFER PRICING DOCUMENTATION PREPARED AND MAINTAINED BY THE ASSESSEE MAINLY DUE TO THREE DEFE CTS, NAMELY, I) THE ASSESSEE DID NOT USE DATA OF THE RELEVANT YE AR IE. FINANCIAL YEAR 2003-04, II) INADEQUATE SEARCH OF COMPARABLES AND III) THE ASSESSEE CONSIDERED COMPARABLES CATERING T O THE DOMESTIC SECTOR WHEREAS THE ASSESSEE IS CATERING TO THE EXPORT SECTOR. 11.2 WE HAVE CAREFULLY CONSIDERED THE SUBMISSI ONS OF THE LEARNED COUNSEL FOR THE ASSESSEE. THE USE OF CURRENT YEAR DATA IS MANDATED BY THE REL EVANT IT RULES, 1962 AND BY NOT ADHERING THERETO, THE ASSESSEE HAS RENDERED INTO T.P. STUDY UNRELIABLE. IN THIS VIEW OF THE MATTER, WE ARE OF THE OPINION THAT THE TPO WAS RIGHT IN REJECTING THE T.P. STUDY SUBMITTED BY THE ASSESSEE. 12.0 GROUND NO.1 : ADJUSTMENT TO ARMS LENGTH MARGIN 12.1 THE GROUND RAISED BY THE ASSESSEE THAT THE LEA RNED CIT (APPEALS) ERRED IN UPHOLDING THE ADJUSTMENTS MADE BY THE TPO IN RESPECT OF RENDERING CALL CENTRE SERVICES TO ITS AE IS GENERAL IN NATURE AND THEREFORE NO ADJUDICATION IS CALLED FOR THEREON. 13.0 RELATED PARTY TRANSACTIONS IN RESPECT OF THE GROUND RAISED AT S.NO. 1 REGARDING ACCEPTANCE OF COMPARABLE COMPANIES HAVING RELATED PARTY TRANSACTIONS AS PROPOSED BY THE TPO, THE LEARNED COUNSEL FOR TH E ASSESSEE ARGUED THAT THE TRANSFER PRICING REGULATIONS DO NOT STIPULATE ANY MINIMUM LIMIT OF RELATED PARTY TRANSACTIONS WHICH FORM THE THRESHOLD FOR EXCLUSION AS A COMPARABLE. IN THIS REGARD, THE 12 ITA NO.227/BANG/2010 LEARNED COUNSEL FOR THE ASSESSEE OBJECTED TO THE TP OS SETTING A LIMIT OF 25% ON RELATED PARTY TRANSACTIONS. HE OBJECTED TO THE INCLUSION OF COMP ARABLES BEING RELATED PARTY TRANSACTIONS IN EXCESS OF 15% OF SALES / REVENUE. IN SUPPORT OF T HIS PROPOSITION, THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HON 'BLE BENCH OF THE ITAT, DELHI IN THE CASE OF SONY INDIA (P) LTD. REPORTED IN 2008-TIOL-439-ITAT- DELHI DT.23.12.2008. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO PARA 115.3 O F THE ORDER WHEREIN THE TRIBUNAL HAS HELD THAT - ..WE ARE FURTHER OF THE VIEW THAT AN ENTITY CA N BE TAKEN AS UNCONTROLLED IF ITS RELATED PARTY TRANSACTIONS DO NOT EXCEED 10 TO 15% OF TOTAL REVENUE. WITHIN THE ABOVE LIMIT, TRANSACTIONS CANNOT BE HELD TO BE SIGN IFICANT TO INFLUENCE THE PROFITABILITY OF THE COMPARABLES. FOR THE PURPOSE OF COMPARISON WHAT IS TO BE JUDGED IS THE IMPACT OF THE RELATED PARTY TRANSACTI ONS VIS--VIS SALES AND NOT PROFIT SINCE PROFIT OF AN ENTERPRISE IS INFLUENCED BY LARG E NUMBER OF OTHER FACTORS . RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF SONY INDIA (P) LTD (SUPRA), THE ASSESSING OFFICER / TPO ARE DIRECTED TO EXCLUDE AFT ER DUE VERIFICATION THOSE COMPARABLES FROM THE LIST WITH RELATED PARTY TRANSACTIONS OR CONTROL LED TRANSACTIONS IN EXCESS OF 15% OF TOTAL REVENUES FOR THE FINANCIAL YEAR 2003-04. 14.0 ECONOMIES OF SCALE 14.1 IN GROUND NO.1 : THE ASSESSEE HAS CONTENDED THAT THE LEARNED CIT ( APPEALS) ERRED IN ACCEPTING COMPARABLE COMPANIES HAVING ECONOMIES OF SCALE AS PROPOSED BY THE TPO. THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT S IZE IS AN IMPORTANT FACET OF AN ENTERPRISE LEVEL DIFFERENCE. HE SUBMITTED THAT S IZE AS ONE OF THE SELECTION CRITERIA HAS BEEN APPROVED BY VARIOUS BENCHES OF THE ITAT IN MANY CAS ES. IT WAS FURTHER SUBMITTED THAT SIZE AS A CRITERION FOR SELECTION OF COMPARABLES IS ALSO RECO MMENDED BY THE OECD IN ITS T.P. GUIDELINES. HENCE, THE LEARNED COUNSEL FOR THE ASSESSEE CONTEND ED THAT AN APPROPRIATE TURNOVER RANGE 13 ITA NO.227/BANG/2010 SHOULD BE APPLIED IN SELECTING A COMPARABLE OF UNCO NTROLLED COMPANIES. IN THIS REGARD, HE DREW OUR ATTENTION TO THE DECISION OF THE CO-ORDINATE BE NCH OF THIS TRIBUNAL IN THE CASE OF M/S. GENYSYS INTEGRATING SYSTEMS INDIA (P) LTD VS. DCIT IN ITA NO.1231/BANG/2010 DT.5.8.2010, WHEREIN THE BENCH WAS OF THE VIEW THAT SIZE MATTERS IN BUSINESS AND AT PARA 9 ON PAGE 32 THEREOF HELD THAT : . WE HOLD THAT THE TURNOVER FILTER IS VERY IMPO RTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1 CRORE TO RS.200 CRORES HAVE TO BE TAKEN AS A PARTICULAR AND THE ASSESSEE BEING IN THAT RANGE HAVING A TURNOVER OFRS .8.15 CRORES, THE COMPANIES WHICH ALSO HAVE A TURNOVER OF RS.1 TO RS.200 CRORES ONLY SHOULD BE TAKEN INTO ACCOUNT FOR CONSIDERATION FOR THE PURPOSE OF MAKING T.P.STUDY. IN THESE CIRCUMSTANCES, THE LEARNED COUNSEL FOR TH E ASSESSEE PLEADED THAT WIPRO BPO LTD., ONE OF THE COMPARABLES TAKEN BY THE TPO AND HAVING A T URNOVER OFRS.322.3 CRORES BE EXCLUDED AS IT FALLS OUTSIDE THE RANGE OFRS.1 CRORE TO RS.200 CROR ES LAID DOWN IN THE CITED CASE. 14.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 14.3 WE HAVE HEARD BOTH PARTIES, CAREFULLY CONSIDE RED THE SUBMISSIONS MADE, JUDICIAL DECISION RELIED ON AND THE MATERIAL ON RECORD. THE TRIBUNAL IN THE CASE OF GENYSYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. (SUPRA) HELD THAT ONLY COMPANIES WITHIN THE TURNOVER RANGE OFRS.1 CRORE TO RS.200 CRORES SHOULD BE TAKEN INTO CONSIDERATION FO R THE T.P.STUDY. WE ARE OF THE CONSIDERED VIEW THAT THE CITED CASE SQUARELY APPLIES TO THE AS SESSEE'S CASE AS THE TURNOVER OF THE ASSESSEE BEING APPROXIMATELY RS. 66 CRORES FALLS WITHIN THE RANGE OF RS.1 CRORE TO RS.200 CRORES. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF T HE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF GENYSYS INTEGRATING SYSTEMS (INDIA) PVT LTD . (SUPRA), WE DIRECT THE ASSESSING OFFICER / TPO THAT ONLY THOSE COMPANIES HAVING A TURNOVER OFR S.1 CRORE TO RS.200 CRORES BE TAKEN AS 14 ITA NO.227/BANG/2010 COMPARABLE COMPANIES AND TO CONSEQUENTLY EXCLUDE WI PRO BPO LTD WHICH HAS A TURNOVER OF RS.322 CRORES IN THE RELEVANT PERIOD. 15.0 COMPARABLES COMPANIES OWNING INTANGIABLES 15.1 IN GROUND NO.1 , THE ASSESSEE HAS CONTENDED THAT THE LEARNED CIT(A PPEALS) ERRED IN ACCEPTING COMPARABLE COMPANIES OWNING INTANGIBLES A S PROPOSED BY THE TPO. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS A C APTIVE SERVICE PROVIDER ENGAGED IN THE BUSINESS OF PROVIDING CALL CENTRE SERVICES AND WOUL D FALL UNDER THE IT ENABLED SERVICE SECTOR. IT IS ARGUED THAT WHILE THE ASSESSEE DOES NOT OWN BRAN D INTANGIBLES SOME OF THE COMPARABLES CHOSEN BY THE TPO HAVE THEIR OWN, SOFTWARE PRODUCTS AND HENCE OWN INTANGIBLES. IT IS SUBMITTED THAT SUCH COMPANIES, HAVING THE ABILITY TO DELIVER SERVICES, PENETRATE THE MARKET AND PROVIDE FASTER DELIVERY, OUGHT NOT TO HAVE BEEN TAKEN AS COMPARABLE COMPANIE S AS HAS BEEN DONE IN THE CASE OF WIPRO BPO LTD., TRICOM INDIA LTD AND FORTUN E INFOTECH LTD. IT IS URGED THAT THESE COMPANIES OUGHT TO BE EXCLUDED FROM THE LIST OF COM PARABLES. THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT INTANGIBLE ASSETS, IN THE NORM AL COMMERCIAL SENSE, ARE THOSE WHICH HAVE INTRINSIC PRODUCTIVE VALUE, EVEN THOUGH THEY MAY NO T HAVE ANY INTANGIBLE FORM AND SUBSTANCE SUCH AS RESEARCH & DEVELOPMNET, PATENTS AND SOFTWARE. H E QUOTED FROM THE SYNTHESIS REPORT OF THE OECD, WHICH FORMS PART OF THE PAPER BOOKS, TO STRES S THAT INTANGIBLE ASSETS PLAY AN IMPORTANT ROLE IN VALUE CREATION AND ENABLING PRODUCTIVITY AN D EFFICIENCY TO REAP ECONOMIC GAINS. IT WAS CONTENDED THAT IN THE SERVICE INDUSTRY, SERVICE PRO VIDERS WHO HAVE BETTER BRAND OR OTHER INTANGIBLE ASSETS GET BETTER PREMIUM FOR THEIR SERV ICES, AS IN THE CASE OF SOME OF THE COMPARABLE COMPANIES SELECTED BY THE TPO. WHEREAS , IT IS SUBMITTED THAT, THE ASSESSEE IS ONLY 15 ITA NO.227/BANG/2010 RENDERING CALL CENTRE SERVICES AND DOES NOT POSSESS ANY INTANGIBLES NOR DOES IT DERIVE ANY BENEFIT FROM INTANGIBLES IN PROVIDING THESE SERVICES. 15.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE ON HIS PART SUPPORTED THE ORDERS OF THE LEARNED CIT(APPEALS) WHICH HE CONTENDED WAS WELL EX PLAINED. IT WAS SUBMITTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE ASSESSEE HAD N OT POINTED OUT ANY PROVISIONS IN THE ACT OR RULES OR OECD GUIDELINES WHICH IMPOSES ANY PROHIBIT ION IN TAKING COMPARABLES WITH INTANGIBLES SO LONG AS THERE IS FUNCTIONAL SIMILARITY OF COMPARAB LES VIS--VIS THE TESTED PARTY. THE LEARNED DEPARTMENTAL REPRESENTATIVE ARGUED THAT BRANDS CAN GIVE BUSINESS BUT NOT PROFITS. THE LEARNED DEPARTMENTAL REPRESENTATIVE POINTED OUT THE ASSESS EE ITSELF DOES NOT HAVE ANY CONSISTENT STAND IN THE MATTER AS IN ITS OWN T.P. STUDY THE ASSESSEE HAS TAKEN COMPANIES LIKE TATA SHARE REGISTRY AND MAX HEALTH WHICH HAD THEIR OWN INTANGIBLES. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ARGUMENTS PUT FORTH BY THE ASSES SEE SHIFTED TO SUITE ITS OWN PURPOSE. IN THESE CIRCUMSTANCES, THE LEARNED DEPARTMENTAL REPRE SENTATIVE CONTENDED THAT THE FINDINGS OF THE LEARNED CIT(APPEALS) BE UPHELD. 15.3.1 WE HAVE HEARD BOTH PARTIES AND HAVE CAREFUL LY PERUSED AND CONSIDERED THE SUBMISSIONS MADE, DETAILS FILED AND MATERIAL ON REC ORD. IT IS A WELL ACCEPTED PRINCIPLE THAT ONLY THOSE COMPANIES WHICH ARE ON SIMILAR STANDARDS NEED TO BE CONSIDERED FOR COMPARABILITY. IN THIS CONTEXT, A CO-ORDINATE BENCH OF THIS TRIBUNAL IN TH E CASE OF GENYSYS INTEGRATING SYSTEMS (INDIA) PVT LTD IN ITA NO.1231(BANG)/2010 DT.5.8.20 11 HAS REITERATED THAT ALL THE COMPARABLES HAVE TO BE COMPARED ON SIMILAR STANDARDS. THEREFOR E, COMPANIES WHICH POSSESS THEIR OWN UNIQUE SOFTWARE INTANGIBLES CANNOT BE COMPARED WITH THE AS SESSEE, AS THE FORMER WOULD DERIVE 16 ITA NO.227/BANG/2010 SIGNIFICANT ADVANTAGE FROM UNIQUE SOFTWARE COMPARE D WITH THE ASSESSEE, WHICH IS PERFORMING CALL CENTRE SERVICES FOR ITS A.E. IN THE USA. 15.3.2 IN THE CASE OF M/S. WIPRO BPO LTD , THIS COMPARABLE IS UNDER CONSIDERATION FOR EXCLUSION AS A COMPARABLE, IN THIS CASE FOR THIS AS SESSMENT YEAR 2004-05, ON ACCOUNT OF THE APPLICATION OF THE TURNOVER FILTER OF RS.1 CRORE TO RS.200 CRORES. (REFER PARA 14.3 SUPRA) 15.3.3 IN RESPECT OF M/S. TRICOM INDIA LTD. , THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT IT HAS REGISTERED AN ABNORMAL GROWTH OF 33% INCREASE IN PAT IN THE RELEVANT PERIOD DUE TO THE FACT THAT IT HAS DEVELOPED ITS UN IQUE SOFTWARE TO PROVIDE BPO SERVICES TO ITS CUSTOMERS. THE LEARNED COUNSEL FOR THE ASSESSEE RE FERRED TO THE ANNUAL REPORT OF THIS COMPARABLE, WHEREIN IT IS MENTIONED THAT IT DOES SP ECIALIZED SERVICES SUCH AS TITLE PLANT MAINTENANCE AND ELECTORNIC DATA DISCOVERY WHICH GIV ES IT AN EDGE OVER OTHER INDIAN COMPANY COMPETITION THEREBY ENABLING IT TO GENERATE HIGHER REVENUES AND MARGINS. IT WAS ALSO SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT IT HAS A PROCESS OF CONTINUOUS IN HOUSE R & D PROCESS FOR UPGRADATION OF SOFTWARE AND TRAINING IT S PROFESSIONALS TO DEVELOP ITS OWN SOFTWARE TO CATER TO THE NEEDS OF ITS CLIENTS. ON APPRAISAL OF THE SUBMISSIONS AND THE MATERIAL O N RECORD, IT WOULD CERTAINLY STAND TO REASON THAT A COMPANY HAVING UNIQUE SOFTWARE DEVELO PED IN HOUSE WHICH ALSO RENDERS SPECIALIZED SERVICES IN ITS AREA OF SPECIALIZATION GETS THAT SO RT OF COMPETITIVE EDGE THAT GIVES IT AN ADVANTAGE. APPLYING THE PRINCIPLE THAT COMPANIES W HICH ARE ON SIMILAR STANDARDS ONLY SHOULD BE TAKEN AS COMPARABLES, WE HOLD THAT THIS COMPANY WHI CH HAS UNIQUE INTANGIBLES CANNOT BE TAKEN AS A COMPARABLE FOR THE ASSESSEE AND ACCORDINGLY DIREC T THE ASSESSING OFFICER / TPO TO EXCLUDE IT FROM THE LIST OF COMPARABLES IN THIS CASE. 17 ITA NO.227/BANG/2010 15.3.4 M/S. FORTUNE INFOTECH LTD. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THA T THIS COMPANY WAS USING WEB BASED SOFTWARE, UNIQUE TECHNOLOGY AND TECHNICAL KNOW HOW IMPORTED FROM ITS BUSINESS PARTNER FOR PROVIDING BPO SERVICES AND SUBMITTED LETTER DT.11.9 .2012, ENCLOSING WEB SITE EXTRACTS DETAILING THE INTANGIBLES DEVELOPED BY THIS COMPANY. ON PERUSAL OF THE DETAILS FURNISHED AND SUBMISSION S MADE, IT IS SEEN THAT THIS COMPANY HAS DEVELOPED ITS OWN SOFTWARE CALLED FINETRAN AN D IMAGE INDEX FOR PERFORMING SPECIALIZED SERVICES IN MEDICAL TRANSCRIPTION AND PATIENT RECOR D MANAGEMENT. ON APPRAISAL OF THE SAME, WE ARE OF THE OPINION THAT THIS COMPARABLE COMPANY HAS DEVELOPED UNIQUE SOFTWARE FROM WHICH IT WOULD DERIVE SUBSTANTIAL BENEFITS /ADVANTAGES WHEN COMPARED WITH THE ASSESSEE WHICH IS UNDERTAKING PURE CALL CENTRE SERVICES. APPLYING TH E PRINCIPLE THAT COMPANIES WHICH ARE ON SIMILAR STANDARDS ONLY SHOULD BE TAKEN AS COMPARABLES, WE H OLD THAT THIS COMPANY WHICH HAS UNIQUE INTANGIBLES CANNOT BE TAKEN AS A COMPARABLE FOR THE ASSESSEE AND ACCORDINGLY DIRECT THE ASSESSING OFFICER / TPO TO EXCLUDE IT FROM THE LIST OF COMPARABLES IN THIS CASE. 16.0 PARENT COMPANY LOSSES 16.1 IN THE GROUND RAISED AT S.NO.6 , THE ASSESSEE ARGUED THAT THE PARENT COMPANY IS UN DER LOSSES AND THUS THERE IS NO SITUATION WHERE PROFITS ARE SHIFTED OUTSIDE INDIA. 16.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPOR TED THE ORDERS OF AUTHORITIES BELOW. 16.3 BOTH PARTIES HAVE BEEN HEARD AND THE SUBMISSIO NS MADE CONSIDERED. IN RESPECT OF THE ISSUE OF PARENT COMPANY LOSSES, IT IS TO BE STATED THAT CLEARLY THE ASSESSEE IS COMPARED AS IF IT IS A SEPARATE ENTITY. WHEN A SEPARATE ENTITY DEALS WI TH ITS CUSTOMERS, IT WOULD NOT SEE WHETHER SUCH DEALING WOULD RESULT INTO PROFIT OR LOSS FOR H IM. WHILE DEALING AT ARMS LENGTH, THE PARTIES TO 18 ITA NO.227/BANG/2010 THE TRANSACTION WOULD NOT SEE THE IMPACT OF THE SAM E ON THE PROFITABILITY OF OTHERS. WHAT IS IMPORTANT IS THE ARMS LENGTH NATURE OF SUCH TRANSA CTIONS AND THE PROFIT THAT COULD HAVE RESULTED IN SIMILAR CIRCUMSTANCES WHEN DEALT WITH AT ARMS LENGTH. IT WOULD NOT BE CORRECT TO ASSUME THAT MERELY BECAUSE A GROUP WAS MAKING A LOSS, THEN THE ASSESSEE COMPANY SHOULD ATTRACT ITS FAIR SHARE OF LOSSES. EACH CASE WOULD HAVE TO BE LOOKE D AT ON THE BASIS OF ITS OWN FACTS. 16.4 THE ISSUE OF PARENT COMPANY UNDER LOSSES WAS C ONSIDERED AND EXAMINED BY THE DELHI ITAT IN THE CASE OF DCIT VS. CARRARO INDIA LTD ( 20 08-TIOL-519-ITAT-DEL ) AND IT HELD AS UNDER : WHERE A BUSINESS IS CARRIED ON BETWEEN A RESIDEN T AND A NON-RESIDENT AND IT APPEARS TO THE ASSESSING OFFICER THAT, OWING TO THE CLOSE CONNECTION BETWEEN THEM, THE COURSE OF BUSINESS IS SO ARRANGED THAT BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE RESIDENT EITHER NO PROFITS OR LESS THAN ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN THAT BUSINESS, THE ASSESSI NG OFFICER SHALL DETERMINE THE AMOUNT OF PROFITS WHICH MAY REASONABLY BE DEEMED TO HAVE BEEN DERIVED THEREFROM AND INCLUDE SUCH AMOUNT IN THE TOTAL INCOME OF THE RESIDENT. IN THE SAME DECISION AT PARA 17 THEREOF, IT WAS HE LD THAT THE BURDEN WAS ON THE APPELLANT TO SHOW THAT THIS CASE OF NO PROFIT IS NOT ON ACC OUNT OF ANY ARRANGEMENT BETWEEN THE PARTIES. SIMILAR TRANSACTIONS CARRIED ON BETWEEN UNRELATED P ARTIES WERE TO BE SEEN. 16.5 THE ABOVE DECISION IS BASED ON THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF MAZAGON DOCK LTD VS. CIT AND EXCESS PROFITS TAX REPORTED IN 34 ITR 3 68 (SC), WHEREIN IT WAS HELD THAT THE QUESTION OF THE PARENT COMPANY UNDER LOSSES IS IRRELEVANT WHILE COMPUTING THE PROFITS OF A RESIDENT. THIS PRINCIPLE WAS UPHELD A S UNDER : (III) THE FACT THAT THE NON-RESIDENT COMPANIES CA RRIED ON THEIR BUSINESS IN SUCH A MANNER THAT NO PROFITS COULD ACCRUE TO THEM WAS IRRELEVANT. IN THIS CASE, THE FINDING WAS GIVEN AS UNDER : 19 ITA NO.227/BANG/2010 WHERE A NON-RESIDENT PERSON CARRIES ON BUSINESS W ITH A RESIDENT AND OWING TO THE CLOSE CONNECTION BETWEEN THEM THE COURSE OF THE BUS INESS IS SO ARRANGED THAT THE BUSINESS PRODUCES EITHER NO PROFITS OR LESS THAN TH E ORDINARY PROFITS TO THE RESIDENT, THE SUBJECT OF THE CHARGE UNDER SECTION 42(2) OF TH E ACT IN THE BUSINESS OF THE RESIDENT AND NOT OF THE NON-RESIDENT, AND WHAT THE COURT HAS TO DECIDE IS NOT WHETHER THE NON-RESIDENT MADE PROFITS IN HIS DEALING WITH T HE RESIDENT BUT WHETHER, HAVING REGARD TO THE COURSE OF DEALINGS BETWEEN THE NON-RE SIDENT AND RESIDENT, IT CAN BE SAID OF THE NON-RESIDENT THAT HE CARRIED ON BUSINES S WITH THE RESIDENT; AND FOR THAT PURPOSE IT IS IMMATERIAL THAT THE BUSINESS WAS CARRIED ON IN SUCH A MANNER THAT NO PROFIT COULD ACCRUE TO THE NON- RESIDENT THEREFROM. 16.6 AS PER A PLAIN READING OF THE LANGUAGE OF THE PROVISIONS OF SECTION 92 OF THE ACT, IT IS CLEAR THAT THE INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SIMILAR TRANSACTIONS CAR RIED ON BETWEEN UNRELATED PARTIES WERE TO BE SEEN TO COME TO A CONCLUSION WHETHER THE PROFITS EA RNED BY THE ASSESSEE IS JUSTIFIED. THUS, THE ARGUMENTS THAT THE PROFITS EARNED BY THE ASSESSEE I S JUSTIFIED BECAUSE THE PARENT COMPANY IS UNDER LOSSES IS AGAINST THE PRINCIPLE OF ARMS LENGT H PRICE. TO SUM UP, THE ASSESSEE'S ARGUMENTS THAT IT HAS NOT SHIFTED PROFITS OUTSIDE INDIA BASED ON THE LOSS INCURRED BY THE PARENT COMPANY IS NOT ACCEPTABLE. 16.7 THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED TH AT T.P. REGULATIONS IS NOT A DEEMING PROVISION BUT A FACT WORKING PROVISION AND THE ENTI RE EXERCISE OF T.P. AUDIT IS TO PREVENT SHIFTING OF PROFITS OUT OF THE COUNTRY BY MANIPULATING INTER NATIONAL TRANSACTIONS. IT IS CONTENDED THAT THE BASIC INTENTION UNDERLYING THE T.P. REGULATIONS IS TO PREVENT SHIFTING OUT OF THE PROFITS BY MANIPULATING PRICES CHARGED OR PAID IN INTERNATIONA L TRANSACTION, THEREBY ERODING THE COUNTRYS TAX BASE. THUS, THE ASSESSEE MAINLY STATES THAT TH E T.P. REGULATIONS BEING ANTI AVOIDANCE LEGISLATION, THE TPO HAS TO PROVE THAT TAX AVOIDANC ES HAD IN FACT TAKEN PLACE BEFORE MAKING ANY T.P. ADJUSTMENT. IN FACT ON THIS ISSUE, THE SPECIA L BENCH OF THE ITAT, BANGALORE IN THE CASE OF 20 ITA NO.227/BANG/2010 AZTEC SOFTWARE TECHNOLOGY SERVICES LTD REPORTED IN 107 ITD 141 BANG) (S.B.) HAS HELD THAT IT IS NOT NECESSARY TO PROVE THAT PROFITS ARE SHIFTED OUT OF INDIA FOR MAKING A TRANSFER PRICING ADJUSTMENT. IN THIS VIEW OF THE MATTER, RESPECTFUL LY FOLLOWING THE DECISION OF AZTECH SOFTWARETECHNOLOGY SERVICE LTD (SUPRA), WE HOLD THA T IT IS NOT NECESSARY FOR THE TPO TO DEMONSTRATE TAX AVOIDANCE AND DIVERSION OF TAX / IN COME BEFORE INVOKING THE PROVISIONS OF SECTION 92C AND 92CA OF THE ACT. 16.8 IN THE CASE OF COCA COLA INDIA INC VS. ACIT (3 09 ITR 194) (P & H), THE PUNJAB AND HARYANA HIGH COURT DEALT WITH THE MATTER OF ANTI-AV OIDANCE AND TRANSFER PRICING IN DETAIL AND HELD THAT IT WAS NOT NECESSARY FOR THE ASSESSING OF FICER / TPO TO SHOW THAT THE PROFITS WERE SHIFTED OUT OF INDIA TO DETERMINE THE ARMS LENGTH N ATURE OF ANY INTERNATIONAL TRANSACTIONS. CONSEQUENTLY, IT IS WRONG IN ATTACHING IMPORTANCE T O THE FACT THAT THE ASSESSEE ASSOCIATED ENTERPRISE (A.E.) IS EARNING LOSSES. THE THEORY OF SHIFTING OF PROFITS CAN BE TESTED ONLY WHEN THE TAX PAYERS PROFITS ARE COMPARED WITH THAT OF A COM PANY ACTING UNDER UNCONTROLLED CONDITIONS AND SITUATED IN INDIA; OPERATING IN SIMILAR MARKETS AS THAT OF THE ASSESSEE, PERFORMING SIMILAR FUNCTIONS AS THAT OF THE ASSESSEE. SHIFTING PROFIT S OUT OF INDIA IS ONE OF THE REASONS FOR INTRODUCING THE TRANSFER PRICING PROVISIONS IN THE ACT. HOWEVER, THE RELEVANT T.P. PROVISIONS DO NOT REQUIRE THE TPO TO ESTABLISH SUCH A MOTIVE INDE PENDENTLY AND DISTINCT FROM THE DETERMINATION OF ALP. AS PER LAW, THE TPO IS REQUI RED TO EXAMINE AND FIND OUT WHETHER THE ASSESSEE'S INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH OR NOT. LAW WARRANTS AN ADJUSTMENT TO THE ASSESSEE'S INCOME IF THE INTERNATIONAL TRANSACT IONS ARE NOT AT ARMS LENGTH. THE MECHANISM FOR DETERMINING THE ALP IS PROVIDED IN THE ACT AND THE RELEVANT RULES FRAMED IN THIS REGARD. TO 21 ITA NO.227/BANG/2010 SUM UP, THE ASSESSEE'S ARGUMENT THAT IT HAS NOT SH IFTED PROFITS OUT OF INDIA BASED ON THE REASONING THAT THE AE IS UNDER LOSSES IS REJECTED. 17.0 INDIVIDUAL COMPANIES FOR COMPARABILITY 17.1 HAVING HELD THAT THERE WAS NO INFIRMITY IN THE ACTION OF THE TPO IN REJECTING THE TP STUDY OF THE ASSESSEE AND HAVING DECIDED THE PRINCI PLES AS DISCUSSED IN THE PRECEDING PARAGRAPHS, WE NOW PROCEED TO EXAMINE THE INDIVIDUA L COMPANIES CHOSEN AS COMPARABLES. AS MENTIONED EARLIER, THE ASSESSEE HAD SELECTED A LIST OF 7 COMPANIES IN THE TP STUDY. DURING THE TRANSFER PRICING AUDIT PROCEEDINGS, THE ASSESSEE UP DATED THE COMPARABILITY ANALYSIS BASED ON CURRENT YEARS DATA AND SUBMITTED A LIST OF SEVEN C OMPARABLE COMPANIES. THE TPO CONSIDERED THE UPDATED SET OF COMPARABLES SUBMITTED BY THE ASS ESSEE AND COME UP WITH A FINAL SET OF EIGHT COMPARABLE COMPANIES, WHICH ARE AS UNDER : S.NO. NAME OF THE COMPARABLE OPERATING REVENUE OPERATING COST (OC) OPERATING PROFIT (OP) OP/OC 1. NUCLEUS NETSOFT & G.S. INDIA LTD. 1.66 1.94 0.28 16.8 7 % 2. VISHAL INFORMATION TECHNOLOGIES LTD. 9.37 13.88 4.51 48.13 % 3. WIPRO BPO LTD. 322.3 430.31 108.01 33.51 % 4. TRICOM INDIA LTD 6.34 9.24 2.90 45.74 % 5. FORTUNE INFOTECH LTD 8.08 11.28 3.30 40.84 % 6. SPARES TELESYSTEMS & SOLUTIONS LTD. 10.32 15.44 4.57 40.10 % 7. ULTRAMARINE PIGMENTS LTD. 6.18 10.99 3.91 63.27 % 8. ALLSEC TECHNOLOGIES LTD. 24.10 24.94 0.83 3.44 % ARITHMATICAL MEAN 36.49% FROM THE RECORD, IT IS SEEN THAT THE TPO REJECTED T HE TRANSFER PRICING DOCUMENTATION MENTIONED BY THE ASSESSEE MAINLY ON THREE PARAMETERS / DEFECT S NAMELY : I) THE ASSESSEE DID NOT USE DATA OF THE RELEVANT FINAN CIAL YEAR I.E. 2003-04 22 ITA NO.227/BANG/2010 II) THE ASSESSEE REJECTED CERTAIN COMPANIES AS COMPARAB LES EVEN THOUGH THEY ARE FUNCTIONALLY COMPARABLE. III) THE ASSESSEE CONSIDERED CERTAIN COMPANIES CATERING TO THE DOMESTIC SECTOR, WHEREAS THE ASSESSEE IS CATERING TO THE EXPORT SECTOR. 17.2 NUCLEUS NETSOFT GIS INDIA : IN RESPECT OF THIS COMPARABLE, BOTH THE ASSESSE E AND THE TPO AGREE THAT THERE IS NO DISPUTE AS THIS IS A COMPARABLE COMPANY. 17.3 VISHAL INFORMATION TECHNOLOGIES LTD. (VIT) - IN THE CASE OF THIS COMPARABLE, WE FIND THAT THE MUMBAI TRIBUNAL IN THE CASE OF MEARSK GLOBAL SERVICES (I) PVT LTD IN ITA NO.3774/MUM/2011 BY ORDER DT.9.11.2011 HAS HELD THA T SINCE VISHAL INFORMATION TECHNOLOGIES LTD IS OUTSOURCING MOST OF ITS WORK IT HAS TO BE EXCLUDED FROM THE LIST WHEREAS THE ASSESSEE IN THE CITED CASE WAS CARRYING OUT THE WORK BY ITSELF. IN THE INSTANT CASE OF THE ASSESSEE ALSO THE ASSESSEE WAS CARRYING OUT ITS WOR K BY ITSELF WHEREAS IN THE CASE OF VITL, IT IS OUTSOURCING MOST OF ITS WORK. W E ARE THEREFORE OF THE CONSIDERED OPINION THAT THE DECISION OF THE ITAT, MUMBAI IN THE CITED CASE ON T HE ISSUE OF EXCLUDING VITL AS A COMPARABLE SQUARELY APPLIES. THIS DECISION WAS FO LLOWED BY THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF NETLINX INDIA (P) LTD IN ITA NO.454/BANG/2011 DT.19.10.2012 WHEREIN IT WAS HELD THAT VISHAL INFOR MATION TECHNOLOGIES LTD CANNOT BE CONSIDERED AS A COMPARABLE. WE, THEREFORE, RESPEC TFULLY FOLLOWING THE DECISIONOF THE MUMBAI TRIBUNAL IN THE CASE OF MEARSK GLOBAL SERVIC ES (I) PVT LTD, DIRECT THE ASSESSING OFFICER / TPO TO EXCLUDE VISHAL INFORMATION TECHNOL OGIES LTD. FROM THE LIST OF COMPARABLES. 23 ITA NO.227/BANG/2010 17.4 WIPRO BPO LTD AS PER THE DETAILS ON RECORD, THE TURNOVER / REVEN UE OF WIPRO BPO LTD IN THE PERIOD RELEVANT TO ASSESSMENT YEAR 2004-05 IS RS.322 CRORE S. FURTHER, THIS COMPANY HAVING THE INFLUENCE OF WIPRO BRAND MAY BE SEEN AS HAVING IT S UNIQUE INTANGIBLES. FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF GENYSYS INTEGRATING SYSTEMS (INDIA) PVT LTD IN ITA NO.1231(BANG)/2010 D T.5.8.2011, WE HAVE ALREADY HELD THAT COMPANIES WHOSE TURNOVER IS OUTSIDE THE RANGE OF RS .1 CRORE TO RS.200 CRORES ARE TO BE EXCLUDED FROM THE SET OF COMPARABLES AND ACCORDINGL Y DIRECT THE ASSESSING OFFICER / TPO TO EXCLUDE WIPRO BPO LTD FROM THE LIST / SET OF COMPAR ABLE COMPANIES FOR THE ASSESSEE'S CASE IN ASSESSMENT YEAR 2004-05. 17.5 TRICOM INDIA LTD. THIS COMPARABLE HAS ALREADY BEEN CONSIDERED AND DE ALT WITH BY US IN PARA 15.3.3 OF THIS ORDER (SUPRA) WHEREIN WE HAVE DIRECTED THE ASSESSIN G OFFICER / TPO TO EXCLUDE IT FROM THE LIST OF COMPARABLES FOR THE ASSESSEE'S CASE IN ASSE SSMENT YEAR 2004-05. 17.6 FORTUNE INFOTECH LTD. THIS COMPARABLE HAS ALSO BEEN CONSIDERED AND DEALT WITH BY US IN PARA 15.3.4 OF THIS ORDER (SUPRA) WHEREIN WE HAVE DIRECTED THE ASSESSING OFFI CER / TPO TO EXCLUDE IT FROM THE LIST OF COMPARABLES FOR THE ASSESSEE'S CASE FOR ASSESSMENT YEAR 2004-05. 17.7 SPANCO TELESYSTEMS & SOLUTIONS LTD. THE ASSESSEE'S MAIN CONTENTION WAS THAT THIS COMPA NY SHOULD BE REJECTED AS A COMPARABLE AT THE SEGMENTAL LEVEL (CALL CENTRE ACTIVITY) AND A S IT HAD RELATED PARTY TRANSACTIONS OF ABOUT 12% OF TOTAL SALES. THE LEARNED COUNSEL FOR THE AS SESSEE RELIED ON THE DECISION OF THE ITAT, 24 ITA NO.227/BANG/2010 MUMBAI IN THE CASE OF DHL EXPRESS (I) PVT LTD VS.AC IT (ITA NO.2423/MUM/2006) IN WHICH CASE THE TRIBUNAL WAS OF THE VIEW THAT SEGMENTAL RE SULTS OF COMPARABLE COMPANY ENGAGED IN MULTIPLE ACTIVITIES NEED NOT BE CONSIDERED WHEN DIR ECT COMPARABLES ARE AVAILABLE. FROM AN APPRAISAL OF THE DETAILS ON RECORD, WE FIN D THAT THIS COMPANY HAS A CLEARLY DEMARCATED CALL CENTRE SEGMENT AND SEGMENTAL RESULT S ARE AVAILABLE IN THE AUDITED FINANCIAL STATEMENTS OF THE COMPANY AND THEREFORE SEE NO REAS ON WHY THIS COMPANY SHOULD NOT BE CONSIDERED AS A COMPARABLE. FURTHER, AS ALREADY HE LD BY US IN THIS ORDER ABOVE, THAT RELATED PARTY TRANSACTIONS TO THE EXTENT OF 15% OF SALES WO ULD NOT DISTORT THE COMPARABILITY, THIS COMPANY HAVING RELATED PARTY TRANSACTIONS TO THE EX TENT OF 12% OF ITS SALES IN THE PERIOD RELEVANT TO ASSESSMENT YEAR 2004-05, THE ASSESSEE'S GROUNDS SEEKING ITS EXCLUSION IS REJECTED. THIS COMPANY IS, THEREFORE, TO BE RETAIN ED AS A COMPARABLE FOR THE ASSESSEE'S CASE FOR ASSESSMENT YEAR 2004-05. 17.8 M/S. ULTRA MARINE PIGMENTS LTD. THE ASSESSEE CONTENDED THAT THIS COMPANY HAS EARNED ABNORMAL PROFITS OF 63.27% AND HAD ALSO BEEN REJECTED BY THE TPO AS A COMPARABLE FOR A SSESSMENT YEAR 2005-06. IT WAS ALSO SUBMITTED THAT THE ASSESSEE IS ENGAGED IN A HOST OF SERVICES LIKE LAUNDRY AND ALLIED PRODUCTS, PACKAGING PRODUCTS AND OTHERS BESIDES IT ENABLED SE RVICES (ITES) AND HENCE OUGHT NOT TO BE TAKEN AS A COMPARABLE CITING A CATENA OF DECISIONS AND THE OECD GUIDELINES. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE SEEKING THE EXCLUSION OF THIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT HAS HIGH PRO FITS OF 63.27% AND THAT IT HAS VARIOUS SEGMENTAL APART FROM ITES AND THAT THERE WERE A CAT ERA OF DECISIONS IN SUPPORT OF THE ASSESSEE'S PROPOSITION. A SIMILAR MATTER OFSUPER PROFITS WAS CONSIDERED BY A CO-ORDINATE BENCH 25 ITA NO.227/BANG/2010 OF THIS TRIBUNAL IN THE CASE OF M/S. NETLINX INDIA PVT LTD (ITA NO.454/BANG/2011) TO WHICH BOTH OF US WERE A PARTY. IN THAT ORDER, IT WAS HEL D THAT THE WORD SUPER IS A SUPERLATIVE WORD WHICH DENOTES SOMETHING EXTRAORDINARY AND NOTED THA T IN ALL THE CASES / DECISIONS WHERE THESE SUPER PROFIT MAKING COMPANIES WERE DIRECTED TO BE E XCLUDED, THE TPO WAS COMPARING CASES LIKE INFOSYS, WIPRO, ETC. WHERE THE TURNOVER WAS MORE TH AN 10 TIMES THAT OF THE ASSESSEE OR THE PROFIT MARGIN WAS ABNORMALLY HIGH. IN THE CASE OF EXXON MOBILE COMPANY INDIA PVT LTD VS. DCIT (ITA NO.8311/MUM/2010 DT.10.6.2011), THE ITAT, MUMBAI HELD THAT : A COMPARABLE CANNOT BE ELIMINATED JUST BECAUSE IT IS A LOSS MAKING UNIT. SIMILARLY, A HIGHER PROFIT MAKING UNIT CANNOT ALSO BE AUTOMATICALLY ELI MINATED JUST BECAUSE THE COMPARABLE COMPANY EARNED HIGHER PROFITS THAN THE AVERAGE. IN OTHER W ORDS, AS A GENERAL PRINCIPLE, BOTH LOSS MAKING UNIT AND HIGH PROFIT MAKING UNIT CANNOT BE ELIMINAT ED FROM THE COMPARABLES UNLESS, THERE ARE SPECIFIC REASONS FOR ELIMINATING THE SAME WHICH IS OTHER THAN THE GENERAL REASON THAT THE COMPARABLE HAS INCURRED LOSS OR MADE ABNORMAL PROFI TS. FURTHER, INDIA TP RULES SPECIFICALLY DEVIATE FROM OECD GUIDELINES IN THIS ASPECT AND SPECIFY THE ARITHMETIC MEAN FOR DETERMINING ALP. I N THE QUARTILE METHOD, THE COMPANIES THAT FALL IN THE EXTREME QUARTILES GET EXCLUDED AND ON LY THOSE THAT FALL IN THE MIDDLE QUARTILE ARE RETAINED FOR COMPARABILITY THEREBY AUTOMATICALLY EL IMINATING OUTLINERS WHEREAS IN THE ARITHMETIC MEAN METHOD ALL COMPANIES THAT ARE IN THE SAMPLE A RE CONSIDERED, WITHOUT EXCEPTION, AND THE AVERAGE OF ALL THE COMPANIES ARE CONSIDERED AS ALP. THEREFORE AS A GENERAL RULE THAT COMPANIES WITH ABNORMAL PROFITS SHOULD BE EXCLUDED MAY BE IN LINE WITH THE PRINCIPLES ENUMERATED IN THE OECD GUIDELINES, BUT CANNOT BE SAID TO BE IN TUNE W ITH INDIAN TP REGULATIONS. THE ASSESSEE HAS 26 ITA NO.227/BANG/2010 NOT BEEN ABLE TO ESTABLISH OR DEMONSTRATE WITH ANY EVIDENCE ANY REASON TO SUPPORT THE PROPOSITION THAT THE PROFIT OF THE COMPARABLE COMPA NY WAS ABNORMALLY HIGH. IT MUST NOT BE OVERLOOKED THAT HIGH PROFITS REFLECT BETTER BUSINES S SENSE AND PRACTICES ALSO. THE NET ARITHMETIC MEAN MARGIN OF 36.49% WAS ARRIVED AT AFT ER TAKING INTO ACCOUNT BOTH 63.27% AND ALSO 3.44% WHICH IS THE LOWEST IN THE RELEVANT ITES INDUSTRY. WE ALSO FIND FROM THE MATERIAL ON RECORD THAT THIS COMPANY HAS A CLEARLY DEMARCATED C ALL CENTRE SEGMENT AND SEGMENTAL RESULTS ARE AVAILABLE IN THE AUDITED FINANCIAL STATEMENTS O F THE COMPANY. WE, THEREFORE, SEE NO REASON WHY THE M/S. ULTRA MARINE PIGMENTS LTD SHOULD NOT B E CONSIDERED AS A COMPARABLE AND THEREFORE REJECT THE ASSESSEE'S GROUNDS SEEKING ITS EXCLUSION . THIS COMPANY IS, THEREFORE, DIRECTED TO BE RETAINED AS A COMPARABLE FOR THE ASSESSEE FOR ASSE SSMENT YEAR 2004-05. 18.1 WE SHALL NOW DEAL WITH THE OBJECTIONS RAISED BY THE ASSESSEE FOR EXCLUDING CERTAIN COMPANIES FROM THE SET OF COMPARABLE COMPANIES BY T HE TPO. FROM THE DETAILS ON RECORD, IT IS SEEN THAT THE TPOS SET OF COMPARABLES EXCLUDED THE FOLLOWING 4 COMPANIES SELECTED BY THE ASSESSEE. I) ACE SOFTWARE LTD. II) APOLLO HEALTH STREET LTD. III) MCS LTD IV) TATA SHARE REGISTRY. 18.2 ACE SOFTWARE LTD. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THE COMPANY IS ENGAGED IN CAD / CAM SERVICES, WHICH ARE IN THE NATURE OF ITES AND THERE FORE IT OUGHT TO BE ACCEPTED AS A COMPARABLE. THE TPO ON EXAMINATION OF THE ANNUAL R EPORT NOTED THAT IT HAD AN AGREEMENT WITH 27 ITA NO.227/BANG/2010 APEX DATA SERVICES INC. USA ON BUYBACK OF 100% OF I TS PRODUCTION. THE TPO REJECTED THIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT SUPP LIES 100% OF ITS SERVICES TO A SINGLE ENTERPRISE. IT IS AN A E AS PER THE PROVISIONS OF SECTION 92B OF THE ACT AND THUS ITS TRANSACTIONS WITH THE A E ARE CONTROLLED TRANSACTIONS. WE HAVE PERUSED AND CONSIDERED THE SUBMISSIONS MAD E AND ARE IN AGREEMENT WITH THE FINDING OF THE TPO THAT SINCE THE ENTIRE SERVICES O F THE COMPANY ARE RENDERED TO A SINGLE ENTERPRISE, IT BECOMES AN AE AND AS SUCH ALL ITS TR ANSACTIONS ASSUME THE CHARACTER OF CONTROLLED TRANSACTIONS. WE, THEREFORE, HELD THAT THE TPO WAS CORRECT IN REJECTING THIS AS A COMPARABLE COMPANY. 18.3 APOLLO HEALTH STREET LTD. THE TPO HAD REJECTED THIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT HAD RELATED PARTY TRANSACTIONS IN EXCESS OF 40% OF ITS TURNOVER . THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT AS PER THE ANNUAL REPORT O F THIS COMPANY FOR F.Y. 2003-04, THERE ARE NO RELATED PARTY TRANSACTIONS AT ALL AND THEREFORE THIS COMPANY SHOULD BE ACCEPTED AS A COMPARABLE. WE HAVE PERUSED AND CONSIDERED THE MATERIAL ON REC ORD. IT IS SEEN THAT THE TPO IN HER ORDER HAS MENTIONED RELATED PARTY TRANSACTIONS AMO UNTING TO MORE THAN 40% OF TURNOVER AS THE REASON FOR REJECTION AS A COMPARABLE. FROM A PERUS AL OF ITS ANNUAL REPORT FOR F.Y. 2003-04 THOUGH IT DOES NOT APPEAR TO HAVE ANY RELATED PARTY TRANSACTIONS, IT IS SEEN THAT OUT OF ITS TOTAL REVENUES OF RS.12.2 CRORES, ONLY RS.6.50 CRORES IE. ABOUT 54% OF ITS REVENUE WAS RECEIVED FROM ITES. THIS SHOWS THAT SIGNIFICANT REVENUE EARNING OF ABOUT 46% IS NOT FROM IT ENABLED SERVICES WHICH WILL RENDER IT FUNCTIONALLY DIFFEREN T AND NOT COMPARABLE TO THE ASSESSEE WE, 28 ITA NO.227/BANG/2010 THEREFORE, DIRECT THE TPO TO VERIFY THE CLAIM OF TH E ASSESSEE IN RESPECT OF RELATED PARTY TRANSACTIONS AND ALSO OUR OBSERVATION AS TO WHETHER THE COMPANY IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE IN VIEW OF 46% OF ITS REVENUE BEING FR OM NON-ITES BUSINESS. 18.4 MCS LTD & TATA SHARE REGISTRY IN RESPECT OF THESE TWO COMPANIES, IN THE BUSINESS OF SHARE TRANSFER AGENTS, THE ASSESSEE CONTENDS THAT THEY ARE ENGAGED IN DATA PRO CESSING ACTIVITIES WHICH ARE AKIN TO ITES AND THEREFORE SHOULD BE INCLUDED AS COMPARABLES. T HE TPO, HOWEVER, NOTED THAT THESE COMPANIES HANDLE SHARE REGISTRY ACTIVITIES, MUTUAL FUND OPERATIONS ETC AND ARE FUNCTIONALLY DIFFERENT FROM A BPO. FURTHER, THE TPO HELD THAT T HERE ARE NO FOREX EARNINGS AND HENCE IT WOULD NOT PASS THE EXPORT FILTER. IN THIS VIEW OF THE MATTER, THE TPO REJECTED BOTH THESE COMPANIES AS COMPARABLES. WE HAVE HEARD BOTH PARTIES AND PERUSED THE MATERIA L ON RECORD. IT IS A FACT THAT THE ASSESSEE CATERS TO THE EXPORT MARKET, WHEREAS THESE TWO COMPANIES CATER TO THE DOMESTIC MARKET. WE FIND THAT THE TPO HAS GIVEN ELABORATE R EASONING AS TO WHY COMPANIES CATERING SIGNIFICANTLY TO DOMESTIC MARKET WOULD NOT BE APT C OMPARABLES FOR THOSE ASSESSEES CATERING TO THE EXPORT MARKET. WE AGREE WITH THE TPO THAT PRIC ING AND PROFITABILITY IN EXPORT AND DOMESTIC MARKET IN ITES SECTOR ARE NOT LIKELY TO BE THE SAME FOR THE FOLLOWING REASONS : A) CONDITIONS PREVAILING IN THE EXPORT AND DOMESTIC MA RKET IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE ARE DIFFERENT. B) GEOGRAPHICAL LOCATIONS (DOMESTIC AND EXPORT) ARE DI FFERENT. C) SIZE OF THE MARKETS (DOMESTIC AND EXPORT) TO WHICH COMPANIES CATER TO ARE DIFFERENT. D) COST OF LABOUR AND CAPITAL IN THE MARKETS (DOMESTIC AND EXPORT) ARE DIFFERENT. 29 ITA NO.227/BANG/2010 E) OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON IS DIFFERENT. F) GOVERNMENT INCENTIVES LIKE TAX INCENTIVES ETC ARE A VAILABLE ONLY FOR EXPORTERS. G) AS THE PRICING FOR SERVICES DIFFERS IN THE DOMESTIC MARKET VIS--VIS THE EXPORT MARKET, THE LEVEL OF COMPETITION, SIZE OF THE MARKET ETC AR E DIFFERENT IN THE DOMESTIC AND EXPORT SECTORS. IN VIEW OF THE FACTS OF THE MATTER AS DISCUSSED ABO VE, WE UPHOLD THE ACTION OF THE TPO IN REJECTING THESE TWO COMPANIES AS COMPARABLES OR THE ASSESSEE ON THE GROUND OF BOTH FUNCTIONAL DIS-SIMILARITY AND ALSO FOR FAILING THE EXPORT FILT ER. 18.5 ALLSEC TECHNOLOGIES LTD. BOTH THE ASSESSEE AND THE TPO AGREE THAT THIS COMP ANY IS TO BE CONSIDERED AS A COMPARABLE. THE ASSESSEE, HOWEVER, HAS DISPUTED TH E COMPUTATION OF THE MARGIN TAKEN BY THE TPO. THE TPO WHILE EXAMINING THE CONCERNED DETAILS , NOTED THAT TWO ITEMS OF ABNORMAL EXPENDITURE, NAMELY, CONNECTIVITY COST AND DATA BAS E COST, AMOUNTING TO MORE THAN 60% OF THE REVENUE CANNOT BE TREATED AS REGULAR OPERATING COST S AND HENCE AVERAGED THE COSTS INCURRED ON THESE ITEMS FOR THE EARLIER YEARS FOR COMPARABILITY . THE ASSESSEE CONTENDS THAT THESE ARE NORMAL REASONABLE EXPENSES AND WERE INCURRED AS THE COMPANY WAS IN AN EXPANSION MODE WHICH HAS BEEN MISCONSTRUED AS EXTRAORDINARY EXPENSES AND THEREFORE THE ADJUSTMENTS MADE BY THE TPO ARE NOT CALLED FOR. WE HAVE CONSIDERED THE MATERIAL ON RECORD. WE FIN D THAT THE TPO IN HER ORDER HAS NOT EXPLAINED AS TO WHY THESE EXPENSES CANNOT BE TAKEN AS REGULAR OPERATING EXPENSES FOR COMPARABILITY OR THE BASIS FOR MAKING THE ADJUSTMEN TS WORKED OUT BY AVERAGING THE COSTS ON THE BASIS OF THE PREVIOUS TWO YEARS. WE, THEREFORE, DI RECT THE ASSESSING OFFICER / TPO TO EXAMINE 30 ITA NO.227/BANG/2010 THE ISSUE, BASED ON THE ASSESSEE'S SUBMISSIONS AND THEN DECIDE ON THE ADJUSTMENT, IF ANY, THAT WOULD BE REQUIRED TO BE MADE FOR COMPARABILITY. 19.1 ADDITIONAL GROUND OF APPEAL THE ASSESSEE VIDE LETTER DT.10.9.2012 FILED AN APP LICATION SEEKING LEAVE TO URGE ADDITIONAL GROUNDS UNDER RULE 11 OF THE INCOME TAX (APPELLATE TRIBUNAL) RULES, 1963 WHICH ARE AS UNDER : GROUND 1 : TRANSFER PRICING IT IS MOST HUMBLY PRAYED THAT THIS HON'BLE TRIBUNAL TO PERMIT THE APPELLANT TO RAISE THE FOLLOWING ADDITIONAL GROUND IN CONTINUATION OF THE EXISTING GROUNDS OF APPEAL AND BE READ AS GROUND NO.1.7 AFTER GROUND NO.1.6 GROUND NO.1.7 DEPRECIATION ADJUSTMENT - THE DEPRECIATION COST AS A PERCENTAGE OF THE GROS S BLOCK OF THE APPELLANT DURING THE FINANCIAL YEAR 2004 WAS 25% AND THE COMPARABLES REP ORTED AN AVERAGE DEPRECIATION COST AS A PERCENTAGE OF THE GROSS BLOCK OF 10%. - THE DIFFERENCE IN THE DEPRECIATION COST ARISES DU E TO DIFFERENCES IN THE ACCOUNTING TREATMENT ACROSS THE COMPARABLES AND THE APPELLANT. - CONSIDERING THE ABOVE FACT, TO ACHIEVE RELIABLE C OMPARABILITY, THE MARGINS OF THE COMPARABLE COMPANIES POST THE ADJUSTMENT OF THE DEP RECIATION SHOULD BE CONSIDERED. 19.2 THE ASSESSEE IN THE GROUNDS RAISED SOUGHT ADJU STMENT TOWARDS DEPRECIATION ON THE GROUND THAT THE DEPRECIATION COST AS A PERCENTAGE O F THE GROSS BLOCK OF THE ASSESSEE WAS 25% AS AGAINST 10% FOR THE COMPARABLE AND HENCE THIS DI FFERENCE NEEDS TO BE ADJUSTED FOR COMPARABILITY. DURING THE PROCEEDINGS, ON BEING SP ECIFICALLY ASKED, THE LEARNED COUNSEL FOR THE ASSESSEE STATED THAT THIS GROUND WAS NOT RAISED BE FORE THE TPO AND CIT (APPEALS) BUT PRAYED THAT THE SAME BE ADMITTED FOR ADJUDICATION AS IT WA S A LEGAL ISSUE. 19.3 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT HE HAS, PRIMA FACIE, NO OBJECTION TO ADMISSION OF THIS ADDITIONAL GROUND. HE, HOWEVER, POINTED OUT THAT THE ADDITIONAL GROUND RAISED WAS VERY GENERAL, PUT IN A BLAND MAN NER, WAS NOT CLEAR OR SPECIFIC AND APPEARED TO BE AN AFTERTHOUGHT AFTER THE CIT (APPEALS) HAS CONF IRMED THE ADJUSTMENTS MADE BY THE TPO. 31 ITA NO.227/BANG/2010 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED T HAT THE ASSESSEE HAS NOT EXPLAINED AS TO WHY THIS CLAIM OF DEPRECIATION IS BEING SUBMITTED N OW; WHY IT IS NECESSARY TO ACCEPT THE SAME; WHY THIS CLAIM WAS NOT RAISED EARLIER; COMPUTATION OF QUANTUM, ETC. IN THE ABSENCE OF THESE DETAILS, SUCH AN ADDITIONAL GROUND WOULD HAVE NO ME ANING AND NOT BEING MAINTAINABLE OUGHT TO BE DISMISSED SUMMARILY. 19.4 WE HAVE HEARD BOTH PARTIES AND CONSIDERED THE RIVAL SUBMISSIONS. WE FIND FORCE IN THE SUBMISSIONS OF THE LEARNED DEPARTMENTAL REPRESENTAT IVE. WHETHER AN ADJUSTMENT TOWARDS DEPRECIATION IS WARRANTED OR NOT MAY BE, ISSUE OF P RINCIPLE. BUT WHETHER THE PRINCIPLE NEEDS TO BE APPLIED TO A PARTICULAR CASE OR NOT WOULD DEPEND ON THE PECULIAR FACTS OF THAT CASE. IT CANNOT BE ANYBODYS CASE THAT AN ADJUSTMENT HAS TO BE NEC ESSARILY GRANTED WHENEVER AND WHEREVER THERE IS DIFFERENCE IN DEPRECIATION BETWEEN THE TES TED PARTY AND THE COMPARABLES. AN ADJUSTMENT FOR DIFFERENCE IN DEPRECIATION IS A VALI D PRINCIPLE FOR COMPARABILITY, BUT WHETHER THIS CASE ENTAILS SUCH AN ADJUSTMENT HAS TO BE EXAMINED IN THE LIGHT OF THE PARTICULAR FACTS OF THE CASE. HENCE, THE ADDITIONAL GROUND RAISED BY THE A SSESSEE IS AS MUCH AS ISSUE OF FACT AS IT IS OF PRINCIPLE. 19.5 BEFORE US, THE ASSESSEE HAS NOT BEEN ABLE TO A DDUCE ANY REASON AS TO WHY THIS ISSUE WAS NOT RAISED BEFORE THE AUTHORITIES BELOW. IT GIVES CREDENCE TO THE VIEW OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THIS CLAIM IS ONLY AN AFTERTHOUGHT, PURSUANT TO THE LEARNED CIT (APPEALS) CONFIRMING THE ADJUSTMENTS PROPOSED B Y THE TPO. 19.6 BESIDES THIS, THE ADJUSTMENT FOR DEPRECIATION, SOUGHT FOR BY THE ASSESSEE, DOES NOT APPEAR TO BE TENABLE EVEN ON MERITS. IT HAS BEEN S TATED IN THE ADDITIONAL GROUNDS RAISED THAT WHILE THE DEPRECIATION OF THE ASSESSEE IS 25% OF I TS GROSS BLOCK, IT IS 10% OF THE GROSS BLOCK 32 ITA NO.227/BANG/2010 FOR THE COMPARABLES. IT IS INTERESTING TO NOTE THA T THE ASSESSEE HAS COMPARED THE DEPRECIATION AS A PERCENTAGE OF THE GROSS BLOCK OF THE INDIVIDU AL CASES AND NOT AS A PERCENTAGE TO OPERATING COST. 19.7 NO CASE HAS BEEN MADE OUT BY THE ASSESSEE THAT THE DIFFERENCE IN DEPRECIATION IS DUE TO ANY REASON LIKE CAPACITY UTILIZATION, ETC. THE DIF FERENCE IN DEPRECIATION COULD BE DUE TO MANY REASONS AS DIFFERENT COMPANIES HAVE THEIR OWN ACCOU NTING PROBLEMS IN THE MATTER OF FIXED ASSETS AND DEPRECIATION ON THE BASIS OF TECHNICAL E STIMATES MADE OF USEFUL LIFE OF THE ASSETS. DEPRECIATION PROVIDED UNDER THE INCOME TAX RULES OR THE MINIMUM DEPRECIATION PROVIDED UNDER THE COMPANIES ACT MAY NOT BE REALLY EXHIBITING THE ACTUAL POSITION. OVER A PERIOD OF TIME, THE DIFFERENCE OF DEPRECIATION PROVIDED UNDER DIFFERENT METHODS WOULD ALMOST BE THE SAME EXCEPT FOR MARGINAL DIFFERENCE. IN THE WRITTEN DOWN VALUE (WDV) METHOD, THE DEPRECIATION FOR THE INITIAL YEAR WOULD BE MORE, WHEREAS IN STRAIGHT LIN E METHOD, DEPRECIATION IN THE INITIAL YEARS WOULD BE LESS. HOWEVER, AT THE END OF THE DAY, THE DEPRE CIATION OFF SETS EACH BY ITSELF. 19.8 IN THE INTEREST OF EQUITY AND NATURAL JUSTICE, WE FEEL CONSTRAINED TO ADMIT THE ADDITIONAL GROUND RAISED BY THE ASSESSEE ON THE ISSUE OF DEPRE CIATION. HOWEVER, MERE CLAIM FOR AN ADJUSTMENT WILL SERVE NO PURPOSE UNLESS IT IS BACKE D BY PROPER DETAILS. THE ADDITIONAL GROUND STATES THAT THE DEPRECIATION OF THE ASSESSEE IS A R ATIO OF ITS GROSS BLOCK OF 25% AS AGAINST 10% OF THE COMPARABLE COMPANIES. THE ASSESSEE HAS NOT STATED THE DEPRECIATION AS A PERCENTAGE OF OPERATIONAL COST NOR HAS ANY EVIDENCE BEEN PLACED O N RECORD TO SHOW THAT THE DIFFERENCE IN DEPRECIATION IS DUE TO ANY OPERATIONAL REASONS. AS DISCUSSED (SUPRA), THERE COULD BE SEVERAL REASONS FOR DIFFERENCE IN DEPRECIATION BETWEEN COMP ANIES LIKE, RATES OF DEPRECIATION, AGE OF THE ASSETS, ETC. AND THEREFORE ADJUSTMENT TOWARDS DEPRE CIATION CAN BE GRANTED ONLY IF THERE ARE 33 ITA NO.227/BANG/2010 OPERATIONAL DIFFERENCES THAT AFFECT COMPARABILITY. WE REMIT THE ISSUE OF DEPRECIATION AS RAISED BY THE ASSESSEE IN THE ADDITIONAL GROUNDS (SUPRA) T O THE FILE OF THE ASSESSING OFFICER / TPO WITH DIRECTION TO EXAMINE AND CONSIDER THE CLAIM FOR ADJ USTMENT TOWARDS DEPRECIATION IN THE LIGHT OF OUR OBSERVATIONS FROM PARAS 19.3 TO 19.8 OF THIS OR DER AND TO DISPOSE THE MATTER EXPEDITIOUSLY AFTER AFFORDING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IT IS ORDERED ACCORDINGLY. 20. IN THE RESULT, THE ASSESSEE'S APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH NOV., 2012. SD/- SD/- (P. MADHAVI DEVI) (JASON P BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, - A BENCH. 6. GUARD FILE. (TRUE COPY ) BY ORDE R SR. PRIVATE SECRETARY, ITAT, BANGALORE .