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ITA 240/DEL/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91305 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-07-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 02-07-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 12-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHRIA; VIJAY CHOUDHARY
• Assessee Lawyers: C S AGGARWAL; R P MALL
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Retrospective amendment; Question of law; Wholly owned subsidiary; Bad and doubtful debts; Capital receipt
• Section: 143(3); 92B; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM ITA NO.240/DEL/2015 ASSESSMENT YEAR : 2010-11 TECHBOOKS INTERNATIONAL PVT. LTD., A-37, SECTOR 60, NOIDA. PAN: AAACT6050A VS. DCIT, CIRCLE-3, NOIDA. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI C.S. AGGARWAL, SR. ADVOCATE & SHRI R.P. MALL, ADVOCATE DEPARTMENT BY : SHRI R.K. JHA, SR. DR & SHRI VIJAY CHOUDHARY, SR. DR DATE OF HEARING : 02.07.2015 DATE OF PRONOUNCEMENT : 06.07.2015 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE EMANATES FROM THE FINA L ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (AO) ON 22.12 .2014 UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME -TAX ACT, 1961 ITA NO.240/DEL/2015 2 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2010-11. 2. THE FIRST MAJOR ISSUE RAISED IN THIS APPEAL IS A GAINST THE ADDITION MADE BY THE AO ON ACCOUNT OF TRANSFER PRICING ADJUS TMENT TO THE TUNE OF RS.20,48,76,996/- IN THE INTERNATIONAL TRANSACTION OF PROVISION OF IT ENABLED DATA CONVERSION SERVICES (HEREINAFTER ALS O REFERRED TO AS `THE ITES FOR BREVITY). SUCCINCTLY, THE ASSESSEE WAS I NCORPORATED AS A WHOLLY OWNED SUBSIDIARY OF APTARAUSA. IT IS ENGAGED IN THE DEVELOPMENT OF CUSTOMIZED ELECTRONIC DATA. IT CONVERTS DATA FR OM HARD COPY OR FILES INTO XML/SGML/HTML, CREATING ELECTRONIC STYLE FILES AND MODIFYING THE USER INTERFACE FOR CD-ROM DELIVERY. IN THE PRO CESS, RAW DATA RECEIVED FROM THE CUSTOMERS IN HARD COPY/ELECTRONIC ALLY, IS CONVERTED INTO ELECTRONIC FORM. THEREAFTER, THE DATA IS ARRA NGED AND FORMATTED. THUS, IT CAN BE SAID THAT THE ASSESSEE IS PRIMARILY ENGAGED IN PROVIDING ITES TO ITS ASSOCIATED ENTERPRISE (AE). APART FROM CERTAIN REIMBURSEMENT OF EXPENSES, THE ASSESSEE REPORTED AN INTERNATIONAL TRANSACTION OF PROVISION OF IT ENABLED DATA CONVER SION SERVICES WITH ITA NO.240/DEL/2015 3 THE TRANSACTED VALUE OF RS.129,58,11,907/-. THE AS SESSEE ADOPTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DEMONSTRATING THAT THIS INTERNATIONAL TR ANSACTION WAS AT ARMS LENGTH PRICE (ALP). ON A REFERENCE MADE BY THE AO TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ALP OF TH E ASSESSEES INTERNATIONAL TRANSACTIONS, THE LATTER ACCEPTED THE TNMM AS THE MOST APPROPRIATE METHOD. HOWEVER, THE USE OF MULTIPLE-Y EAR DATA WAS DISCARDED. AFTER CONSIDERING THE TRANSFER PRICING STUDY REPORT ALONG WITH VARIOUS OBJECTIONS RAISED BY THE ASSESSEE DURI NG THE COURSE OF PROCEEDINGS BEFORE HIM, THE TPO SHORTLISTED NINE CO MPARABLE COMPANIES WITH THEIR ARITHMETIC MEAN OF THE PROFIT LEVEL INDI CATOR (PLI) OF OPERATING PROFIT/OPERATING COSTS (OP/OC) AT 33.71%. BY APPLYING THIS PROFIT MARGIN TO THE OPERATING COSTS INCURRED BY T HE ASSESSEE IN RENDERING THE ITES, THE TPO WORKED OUT A TRANSFER P RICING ADJUSTMENT OF RS.20,48,76,996/-. THE ASSESSEE LARGELY REMAINED U NSUCCESSFUL BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THAT IS HOW, T HE AO MADE ADDITION OF RS.20.48 CRORE ON ACCOUNT OF TRANSFER P RICING ADJUSTMENT IN ITA NO.240/DEL/2015 4 THE INTERNATIONAL TRANSACTION OF PROVISION OF IT E NABLED DATA CONVERSION SERVICES. THE ASSESSEE IS IN APPEAL AGAINST THIS A DDITION. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS AGITATED CERT AIN ISSUES ABOUT DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANS ACTION OF THE PROVISION OF ITES BEFORE US, WHICH WE WILL CONSID ER HEREIN BELOW. I. FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS 4.1. THE FIRST ISSUE ARGUED BEFORE US IS AGAINST TH E EXCLUSION OF FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS FROM THE OPERATING R EVENUE/COST OF THE ASSESSEE AS WELL AS THE COMPARABLES. WE FIND MERIT IN THE CONTENTION RAISED ON BEHALF OF THE ASSESSEE ABOUT THE INCLUSIO N OF FOREIGN EXCHANGE GAIN/LOSS IN THE OPERATING REVENUE/COSTS OF THE ASS ESSEE AS WELL AS THAT OF THE COMPARABLES. WHEN WE ADVERT TO THE NATURE OF SU CH FOREIGN EXCHANGE GAIN EARNED BY THE ASSESSEE, IT PRIMA FACIE APPEARS THAT THE SAME IS IN RELATION TO THE REVENUE EARNED FROM ITS AE IN CONNE CTION WITH THE PROVISION OF THE ITES. WHEN THE FOREIGN EXCHANGE G AIN DIRECTLY RESULTS FROM THE CONSIDERATION RECEIVED FOR RENDERING ITES TO AE, WE FAIL TO ITA NO.240/DEL/2015 5 APPRECIATE AS TO HOW SUCH FOREIGN EXCHANGE FLUCTUAT ION GAIN CAN BE CONSIDERED AS NON-OPERATING. WHAT IS TRUE FOR FOREI GN EXCHANGE GAIN FROM THE TRANSACTIONS OF THE REVENUE NATURE BEING C ONSIDERED AS PART OF OPERATING REVENUE IS EQUALLY TRUE FOR THE FOREIGN E XCHANGE LOSS BEING CONSIDERED AS PART OF OPERATING COSTS FROM THE TRAN SACTIONS OF THE REVENUE NATURE. 4.2. THE SPECIAL BENCH OF THE TRIBUNAL IN ACIT VS PRAKASH I. SHAH (2008) 115 ITD 167 (MUM)(SB) HAS HELD THAT THE GAIN DUE TO FLUCTUATIONS IN THE FOREIGN EXCHANGE RATE EMANATING FROM EXPORT IS ITS INTEGRAL PART AND CANNOT BE DIFFERENTIATED FROM THE EXPORT PROCEEDS SIMPLY ON THE GROUND THAT THE FOREIGN CURRENCY RATE HAS INCREASED SUBSEQUENT TO SALE BUT PRIOR TO REALIZATION. IT WEN T ON TO ADD THAT WHEN GOODS ARE EXPORTED AND INVOICE IS RAISED IN CURRENC Y OF THE COUNTRY WHERE SUCH GOODS ARE SOLD AND SUBSEQUENTLY WHEN THE AMOUNT IS REALIZED IN THAT FOREIGN CURRENCY AND THEN CONVERTED INTO IN DIAN RUPEES, THE ENTIRE AMOUNT IS RELATABLE TO THE EXPORTS. IN FACT, IT IS ONLY THE TRANSLATION OF INVOICE VALUE FROM THE FOREIGN CURRENCY TO THE INDI AN RUPEES. THE ITA NO.240/DEL/2015 6 SPECIAL BENCH HELD THAT THE EXCHANGE RATE GAIN OR L OSS CANNOT HAVE A DIFFERENT CHARACTER FROM THE TRANSACTION TO WHICH I T PERTAINS. THE BENCH FOUND FALLACY IN THE SUBMISSION MADE ON BEHALF OF T HE REVENUE THAT THE EXCHANGE RATE DIFFERENCE SHOULD BE DETACHED FROM TH E EXPORTS AND BE CONSIDERED AS AN INDEPENDENT TRANSACTION. EVENTUALL Y, THE SPECIAL BENCH HELD THAT SUCH EXCHANGE RATE GAIN ARISING FROM EXPO RTS CANNOT BE VIEWED DIFFERENTLY FROM SALE PROCEEDS. 4.3. IN THE CONTEXT OF TRANSFER PRICING, THE BA NGALORE BENCH OF THE TRIBUNAL IN SAP LABS INDIA PVT. LTD. VS ACIT (2011) 44 SOT 156 (BANGALORE) HAS HELD THAT FOREIGN EXCHANGE FLUCTUATION GAIN IS PART OF OPERATING PROFIT OF THE COMPANY AND SHOULD BE INCLU DED IN THE OPERATING REVENUE. SIMILAR VIEW HAS BEEN TAKEN IN TRILOGY E BUSINESS SOFTWARE INDIA (P) LTD. VS DCIT (2011) 47 SOT 45 (URO) (BANG ALORE) . THE MUMBAI BENCH OF THE TRIBUNAL IN S. NARENDRA VS ADDTL. CIT (2013) 32 TAXMAN.COM 196 HAS ALSO LAID DOWN TO THIS EXTENT. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPIN ION THAT THE AMOUNT ITA NO.240/DEL/2015 7 OF FOREIGN EXCHANGE GAIN/LOSS ARISING OUT OF REVENU E TRANSACTIONS IS REQUIRED TO BE CONSIDERED AS AN ITEM OF OPERATING R EVENUE/COST. 4.4. SINCE, THE TPO HAS COMPUTED PLI OF THE ASSE SSEE AS WELL AS COMPARABLES BY IGNORING THE AMOUNT OF FOREX GAIN/LO SS, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF TPO/AO TO RECOMPUTE THE ASSESSEES MARGIN AS WELL AS THAT OF THE COMPAR ABLES BY CONSIDERING FOREIGN EXCHANGE GAIN/LOSS AS AN ITEM OF OPERATING REVENUE/COST. WE WANT TO MAKE IT CLEAR THAT OUR FINDING IN THIS REGA RD IS RESTRICTED TO CONSIDERING FOREX GAIN/LOSS FROM THE TRANSACTIONS O F THE REVENUE NATURE AS PART OF OPERATING REVENUE/COST. IF SOME PART OF FOREX GAIN/LOSS TURNS OUT TO BE RELATABLE TO TRANSACTIONS ON CAPITAL ACCO UNTS, THEN THAT PART CANNOT BE CONSIDERED AS PART OF OPERATING REVENUE/C OST. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE ASSESSEES OWN CA SE FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, NAMELY, 2009 -10, A COPY OF WHICH ORDER HAS BEEN PLACED ON PAGE 908 OF THE PAPE R BOOK. ITA NO.240/DEL/2015 8 II. BANK CHARGES 5.1. THE LD. AR SUBMITTED THAT THE BANK CHARGES IN CURRED BY IT SHOULD HAVE BEEN CONSIDERED AS NON-OPERATING EXPENSES WHIC H HAVE BEEN TAKEN BY THE TPO AS OPERATING EXPENSES. IT WAS FURTHER S UBMITTED THAT THE TPO ERRED IN MAKING AN EFFECTIVE COMPARISON OF THE OPERATING COSTS BY CONSIDERING SUCH BANK CHARGES AS NON-OPERATING IN T HE CASE OF COMPARABLES. 5.2. HAVING HEARD BOTH THE SIDES AND PERUSED THE RE LEVANT MATERIAL ON RECORD, IT IS OBVIOUS THAT THE ASSESSEE INCURRED BA NK INTEREST WHICH HAS BEEN TREATED AS NON-OPERATING. THERE IS, AS SUCH, NO BIFURCATION AVAILABLE OF THE BANK INTEREST AND BANK CHARGES IN THE ANNUAL ACCOUNTS OF THE ASSESSEE. IT IS NOTICED THAT THE ASSESSEE IS NOT A GGRIEVED AGAINST THE TREATMENT OF BANK INTEREST AS NON-OPERATING. WE DO NOT SEE MUCH DIFFERENCE BETWEEN THE NATURE OF BANK CHARGES AND B ANK INTEREST. AS THE AMOUNT OF BANK INTEREST HAS BEEN ADMITTED AS AN ITE M OF NON-OPERATING EXPENSE, THE AMOUNT OF BANK CHARGES ALSO ASSUMES TH E SAME CHARACTER AS THAT OF BANK INTEREST. IN OUR CONSIDERED OPINION, BOTH THE BANK CHARGES ITA NO.240/DEL/2015 9 AS WELL AS BANK INTEREST SHOULD HAVE BEEN CONSIDERE D AS NON-OPERATING IN THE CASE OF THE ASSESSEE AS WELL AS COMPARABLES. T HE TPO IS DIRECTED TO VERIFY WHETHER THE TREATMENT OF BANK INTEREST AND B ANK CHARGES IN THE CASE OF THE ASSESSEES COMPUTATION OF ALP AND THAT OF THE COMPARABLES IS IN ACCORDANCE WITH OUR ABOVE OBSERVATIONS. NEED LESS TO SAY, THE ASSESSEE WILL BE AFFORDED A REASONABLE OPPORTUNITY OF BEING HEARD. III. PROVISION FOR DOUBTFUL ADVANCES 6.1. THE LD. AR CONTENDED THAT THE TPO ERRED IN TA KING PROVISION FOR DOUBTFUL ADVANCES AMOUNTING TO RS.17,11,167/- AS OP ERATING IN ITS CASE AND PROVISION FOR DOUBTFUL DEBTS AS NON-OPERATING I N THE CASE OF THE COMPARABLES. IN THE OPPUGNATION, THE LD. DR SUBMI TTED THAT THERE IS NO AMOUNT OF PROVISION FOR `DOUBTFUL DEBTS IN THE CAS E OF THE ASSESSEE FOR THE YEAR IN QUESTION AND THE ONLY PROVISION APPEARI NG IN ITS BOOKS IS THAT OF `DOUBTFUL ADVANCES. 6.2. HAVING HEARD BOTH THE SIDES AND PERUSED THE RE LEVANT MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE HAS NOT CREATED A NY PROVISION FOR `DOUBTFUL DEBTS. THE ONLY PROVISION MADE BY IT IS OF `DOUBTFUL ITA NO.240/DEL/2015 10 ADVANCES. BOTH THE PROVISION FOR BAD DEBTS AS WEL L AS DOUBTFUL ADVANCES ARE IN THE REALM OF THE OPERATIONS OF THE BUSINESS. IT IS NOT THE CASE OF THE EITHER SIDE THAT THE ASSESSEE MADE ANY EXCESS PROVISION. IN OUR CONSIDERED OPINION, THE SAME HAS BEEN RIGHTLY T AKEN AS AN ITEM OF OPERATING EXPENSE OF THE ASSESSEE. THE TPO IS DIRE CTED TO TREAT THE AMOUNT OF PROVISIONS FOR DOUBTFUL DEBTS/ADVANCES AS OPERATING IN THE CASE OF THE COMPARABLES AS WELL. IV. RISK ADJUSTMENT 7.1. THE LD. AR VEHEMENTLY ARGUED THAT THE TPO ERRE D IN NOT ALLOWING ANY RISK ADJUSTMENT. IT WAS SUBMITTED THAT THE ASS ESSEE IS A CAPTIVE UNIT PROVIDING ITES TO ITS AE ALONE, THEREBY RUNNING NO RISK OF ANY BAD DEBTS ETC. PER CONTRA, THE LD. DR OPPOSED THE GRANT OF R ISK ADJUSTMENT BY RELYING ON THE RELEVANT PARTS OF THE ORDER OF THE T PO. 7.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. THE TPO HAS REFERRED TO SEVERAL TRIBUNAL DECISIONS IN WHICH RISK ADJUSTMENT HAS BEEN DENIED TO THE ASSESS EE. AT THE SAME TIME, THE LD. AR HAS ALSO DRAWN OUR ATTENTION TOWAR DS SOME OF THE ITA NO.240/DEL/2015 11 TRIBUNAL DECISIONS, IN WHICH SUCH AN ADJUSTMENT HAS BEEN ALLOWED. IN FACT, THERE CANNOT BE A GENERAL RULE OF ALLOWING OR NOT ALLOWING RISK ADJUSTMENT. RISK IS NOTHING BUT A POSSIBLE ADVERSE PERCEPTION IN THE GIVEN CIRCUMSTANCES, WHICH MAY OR MAY NOT FINALLY F RUCTIFY. GENERALLY, RISKS AND REWARDS GO SIDE BY SIDE. HIGHER THE RISK , MORE THE PROFIT; AND VICE VERSA . LEVEL OF RISK DEPENDS ON THE FACTS AND CIRCUMSTA NCES OF EACH CASE. WHERE THE ASSESSEE SUCCEEDS IN ABLY DEMONSTR ATING THAT THE COMPARABLES FINALLY SELECTED BORE RELATIVELY MORE R ISKS THAN IT, THEN THERE SHOULD BE NO DENIAL OF THE RISK ADJUSTMENT. IF, HO WEVER, THE ASSESSEE FAILS IN SPECIFICALLY POINTING OUT THE EXTRA RISKS UNDERTAKEN BY THE COMPARABLES, THEN, OF COURSE, THERE CANNOT BE ANY Q UESTION OF GRANTING RISK ADJUSTMENT. UNDER THE TRANSFER PRICING REGIME , INITIAL ONUS IS ALWAYS ON THE ASSESSEE TO SHOW THE REASONS FOR CLAIMING AN Y SPECIFIC ADJUSTMENT BY POINTING OUT DIFFERENCES BETWEEN IT AND THE COMP ARABLES. RISK ADJUSTMENT CAN BE ALLOWED PROVIDED THE ASSESSEE PLA CES ON RECORD SOME APPROPRIATE MATERIAL TO DEMONSTRATE THAT THE RISKS UNDERTAKEN BY THE COMPARABLE COMPANIES WERE RELATIVELY MORE THAN IT, WARRANTING DOWNWARD ADJUSTMENT IN THEIR PROFIT RATES. FURTHER , THE VARIATION IN SUCH ITA NO.240/DEL/2015 12 RISKS, IF ANY, SHOULD BE CAPABLE OF QUANTIFICATION ON SOME REASONABLE AND LOGICAL BASIS. 7.3. THE LD. AR STATED BEFORE US THAT THE ASSESSEE WAS NOT HAVING ANY RISK AT ALL INASMUCH AS ITS SERVICES WERE TO BE COM PENSATED BY THE AE WITH AN APPROPRIATE MARK-UP IN COMPARISON WITH THE FULL-FLEDGED RISK BEARING COMPARABLE COMPANIES. WE ARE NOT INCLINED T O ACCEPT SUCH A GENERALIZED AND BALD STATEMENT. THE MERE FACT THAT THE ASSESSEE IS A CAPTIVE UNIT RENDERING ITES TO ITS AE ALONE, DOES N OT PER SE MAKE IT A NO-RISK ENTITY. THERE ARE SEVERAL RISKS ATTACHED TO SUCH ENTITIES DEALING WITH A SINGLE CUSTOMER. IF SUCH LONE CUSTOMER, ON WHOM THE ENTERPRISES ENTIRE SURVIVAL DEPENDS, CLOSES DOWN ITS BUSINESS E ITHER VOLUNTARILY OR DUE TO REASONS BEYOND HIS CONTROL, THE POSSIBILITY OF REALIZATION OF DEBTS FOR THE SERVICES ALREADY RENDERED, BECOMES A POTENT IAL RISK. FURTHER, THE FEAR OF TERMINATION OF AGREEMENT BETWEEN SUCH AN EN TERPRISE AND THE SOLITARY CUSTOMER ALSO POSES A GRAVE THREAT TO THE EXISTENCE OF SUCH AN ENTERPRISE. IN THAT SENSE OF THE MATTER, AN ENTERP RISE SERVING A SINGLE CUSTOMER, ALSO ASSUMES MARKED RISKS. AS THE ASSESS EE IS WHOLLY DEPENDENT ON ITS AE FOR SECURING BUSINESS, ITS ENTI RE EXISTENCE ALSO ITA NO.240/DEL/2015 13 DEPENDS ON THE SAME AE. IF SUCH AE RUNS OUT OF BUS INESS OR ITS BUSINESS IS REDUCED, THE ASSESSEE IS BOUND TO BEAR SEVERE JO LTS. THE CONTENTION OF THE LD. AR THAT THE ASSESSEE DID NOT HAVE ANY RISK IS PRIMA FACIE NOT ACCEPTABLE IN VIEW OF SCHEDULE 13 OF ITS PROFIT & L OSS ACCOUNT CONTAINING DETAILS OF OPERATING AND OTHER EXPENSES. IT TRANSPIRES FROM SUCH SCHEDULE THAT THE ASSESSEE HAS CLAIMED DEDUCTI ON FOR PROVISION FOR DOUBTFUL ADVANCES AMOUNTING TO RS.17,11,167/-. ON A POINTED QUERY, THE LD. AR SUBMITTED THAT THIS PROVISION WAS CREATE D IN RESPECT OF EXPENSES INCURRED BY THE ASSESSEE IN RENDERING THE SERVICES TO THE AE AND NOT ON THE REALIZATION OF SALE PROCEEDS. WE FA IL TO APPRECIATE THE RATIONALE OF THIS CONTENTION THAT THE ASSESSEE ASSU MES NO RISK OF REALIZATION OF INVOICES FROM ITS AE, BUT THERE MAY BE A RISK OF ADVANCES GIVEN FOR EXPENSES INCURRED DURING THE COURSE OF RE NDERING SERVICES. ULTIMATELY RISK IS RISK, WHETHER IT IS OF REALIZATI ON OF INVOICES OR OF ADVANCES GIVEN FOR CONDUCTING OPERATIONS. SINCE THE ASPECTS OF INCURRING EXPENSES AND EARNING REVENUE ARE TWO SIDES OF THE S AME COIN, WE FIND THAT THE EXISTENCE OF RISK TO THE ASSESSEE CANNOT B E DENIED. BE THAT AS IT MAY, IT IS FURTHER FOUND THAT THOUGH THERE IS NO PR OVISION FOR DOUBTFUL ITA NO.240/DEL/2015 14 DEBTS (ARISING FROM REALIZATION OF INVOICES) DURING THE YEAR, BUT, THE ASSESSEE DID CREATE PROVISION FOR DOUBTFUL DEBTS IN THE PRECEDING YEAR AMOUNTING TO RS.10,79,665/-. THIS PROVISION FOR BA D DEBTS IS FROM THE REVENUE SIDE. TO CONTEND THAT THE ASSESSEE WAS NOT RUNNING ANY RISK IN PROVIDING THE SERVICES IS, THEREFORE, PATENTLY INCA PABLE OF ACCEPTANCE. SINCE THE LD. AR HAS FAILED TO OBJECTIVELY DEMONSTR ATE THE RELATIVELY HIGHER RISKS UNDERTAKEN BY THE COMPARABLES ON AN OV ERALL BASIS VIS--VIS THE ASSESSEE, WE ARE DISINCLINED TO GRANT ANY RISK ADJUSTMENT. V. SELECTION OF COMPARABLES 8. THE ASSESSEE IS AGGRIEVED AGAINST THE INCLUSION OF FIVE COMPANIES IN THE LIST OF COMPARABLES AND THE EXCLUSION OF SIX COMPANIES SELECTED BY IT. IN ORDER TO ANALYZE WHETHER THE DISPUTED COMPA NIES ARE COMPARABLE OR NOT, WE NEED TO CONCENTRATE ON THE NATURE OF WOR K PERFORMED BY THE ASSESSEE. IT IS HAS BEEN NOTED ABOVE THAT THE ASSE SSEE IS ENGAGED IN RENDERING ITES BY CONVERTING DATA FROM HARD COPY OR FILES INTO XML/SGML/HTML, THEREBY PROCESSING RAW DATA RECEIVED FROM THE ITA NO.240/DEL/2015 15 CUSTOMERS IN HARD COPY/ELECTRONICALLY INTO ELECTRO NIC FORM, WHICH IS THEN ARRANGED AND FORMATTED. A. CHALLENGE TO THE INCLUSION OF SOME COMPANIES . 9.1. FIRSTLY, WE WILL DEAL WITH THE COMPANIES WHICH HAVE BEEN INCLUDED BY THE TPO IN THE FINAL SET OF COMPARABLES AND THE ASSESSEE CLAIMS THEM TO BE INCOMPARABLE. A SUBMISSION COMMON TO SOME OF SUCH COMPANIES WAS MADE BY THE LD. AR THAT CERTAIN BENCHES OF THE TRIBUNAL IN OTHER CASES HAVE HELD THEM TO BE NOT COMPARABLE. IN THAT VIEW OF THE MATTER, IT WAS URGED THAT THOSE COMPANIES, BEING EX FACIE INCOMPARABLE, BE AUTOMATICALLY EXCLUDED FROM THE LIST OF COMPARABLES DRAWN BY THE TPO. 9.2. WE EXPRESS OUR RESERVATIONS IN ACCEPTING SUCH A BROAD PROPOSITION. IT IS AXIOMATIC THAT IF COMPANY A IS FUNCTIONALLY DIFFERENT FROM COMPANY B, THEN, SUCH COMPANY CANNOT BE CONSIDERE D AS COMPARABLE. TWO COMPANIES CAN BE CONSIDERED AS COMPARABLE WHEN BOTH ARE DISCHARGING THE OVERALL SIMILAR FUNCTIONS, THOUGH T HERE MAY BE SOME MINOR DIFFERENCES IN SUCH FUNCTIONS, NOT MARRING TH E OTHERWISE COMPARABILITY. NOTWITHSTANDING THE FUNCTIONAL SIMIL ARITY, MANY A TIMES A ITA NO.240/DEL/2015 16 COMPANY CEASES TO BE COMPARABLE BECAUSE OF OTHER RE ASONS AS WELL. TO CITE AN EXAMPLE, IF COMPANY A, THOUGH FUNCTIONALL Y SIMILAR TO COMPANY B, BUT HAS RELATED PARTY TRANSACTIONS (RP TS) BREACHING A PARTICULAR LEVEL, THEN, SUCH COMPANY CANNOT BE CONS IDERED AS COMPARABLE TO COMPANY A IN THE YEAR IN WHICH THE RPTS BREACH SUCH A LEVEL. IF, HOWEVER, IN THE SUBSEQUENT YEAR, THE RELATED PARTY TRANSACTIONS FALL BELOW THAT BARRIER, THEN SUCH COMPANY WOULD AGAIN BECOME COMPARABLE. TO PUT IT SIMPLY, IF COMPANY A HAS BEEN HELD TO BE INCOM PARABLE VIS-A-VIS COMPANY B, THEN IT IS NOT ESSENTIAL THAT COMPANY A WOULD BE INCOMPARABLE TO COMPANY C ALSO. WHAT IS RELEVANT TO CONSIDER IS, FIRSTLY, THE FUNCTIONAL PROFILE OF COMPANY A VIS-A-VIS COMPANY C. IF BOTH ARE FUNCTIONALLY SIMILAR, THEN NOTWITHSTANDING THE FACT THAT COMPANY A WAS HELD TO BE INCOMPARABLE TO COMPANY B, IT MAY STILL BE COMPARABLE TO COMPANY C. DESPITE THE FACT THAT CO MPANY A IS FUNCTIONALLY SIMILAR TO COMPANY B, IT MAY STILL H AVE BEEN DECLARED AS INCOMPARABLE TO COMPANY B BECAUSE OF OTHER RELEVA NT REASONS. IF COMPANY A PASSES THE SAME REASONS VIS-A-VIS COMPANY C, THEN COMPANY A WILL FIND ITS PLACE IN THE LIST OF COMP ARABLES OF COMPANY ITA NO.240/DEL/2015 17 C, NOTWITHSTANDING THE FACT THAT IT WAS HELD TO BE INCOMPARABLE TO COMPANY B. THE CRUX OF THE MATTER IS THAT THE MER E FACT THAT COMPANY A HAS BEEN HELD TO BE NOT COMPARABLE IN A JUDICIA L ORDER PASSED IN THE CASE OF COMPANY B, DOES NOT PER SE MAKE IT INCOMPARABLE IN ALL THE SUBSEQUENT CASES TO FOLLOW. NOT ONLY COMPANY A HE LD TO BE INCOMPARABLE TO COMPANY B CAN BE COMPARABLE TO CO MPANY C, BUT COMPANY X HELD TO BE COMPARABLE TO COMPANY Y CA N ALSO BE INCOMPARABLE TO COMPANY Z, DEPENDING UPON THE FUN CTIONAL PROFILE AND THE APPLICABILITY OR OTHERWISE OF THE RELATED FACTO RS. THERE CAN BE NO HARD AND FAST RULE THAT IF A PARTICULAR COMPANY HAS BEEN HELD TO BE NOT COMPARABLE IN THE CASE OF ANOTHER COMPANY, THEN SUC H FORMER COMPANY WOULD ALSO CEASE TO BE COMPARABLE TO THE ASSESSEE C OMPANY ALSO. THE COMPARABILITY OF EACH COMPANY NEEDS TO BE ASCERTAIN ED ONLY AFTER MATCHING THE FUNCTIONAL PROFILE AND THE RELEVANT RE ASONS OF THE OTHER COMPANY. ERGO, THIS CONTENTION RAISED ON BEHALF OF THE ASSESSEE CANNOT BE ACCEPTED. WITH THE ABOVE PARAMETERS AND THE FACT UAL MATRIX, WE WILL DISTINCTLY EXAMINE THE COMPANIES CHOSEN BY THE TPO TO ASCERTAIN IF THEY ARE REALLY COMPARABLE. ITA NO.240/DEL/2015 18 I) ACCENTIA TECHNOLOGIES LTD. 10.1.1. THE ASSESSEE OBJECTED TO THE INCLUSION OF T HIS COMPANY IN THE LIST OF COMPARABLES ON SEVERAL REASONS INCLUDING PE CULIAR ECONOMIC CIRCUMSTANCES OWING TO ACQUISITION OF ASSCENT INFOS ERVE PVT. LTD. DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. THE TPO DISCUSSED THE FUNCTIONAL COMPARABILITY OF T HIS COMPANY AND, IN THE ULTIMATE ANALYSIS, CAME TO HOLD THAT IT WAS FUN CTIONALLY COMPARABLE WITH THE ASSESSEE COMPANY AND HENCE INCLUDIBLE. 10.1.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. WE HAVE ALSO GONE THROUGH THE ANNUAL REPORT OF THIS COMPANY, A COPY OF WHICH HAS BEEN PLACED ON PAGE 43 5 ONWARDS OF THE PAPER BOOK. NOTES TO ACCOUNTS OF THIS COMPANY, WHI CH HAVE BEEN PLACED ON PAGE 443 OF THE PAPER BOOK, INDICATE ABOU T THE AMALGAMATION OF ASSCENT INFOSERVE PVT. LTD. WITH IT AS APPROVED BY THE SHAREHOLDERS IN THE COURT CONVENED MEETING HELD ON 25.4.2009 AND, S UBSEQUENTLY, SANCTIONED BY THE HONBLE HIGH COURT ON 21.8.2009. THE MUMBAI BENCH OF THE TRIBUNAL IN PETRO ARALDITE (P) LTD. VS. DCIT (2013) 154 ITA NO.240/DEL/2015 19 TTJ (MUM) 176, HAS HELD THAT A COMPANY CANNOT BE CONSIDERED AS COMPARABLE BECAUSE OF EXCEPTIONAL FINANCIAL RESULTS DUE TO MERGERS/DEMERGERS. SIMILAR VIEW HAS BEEN BOLSTERED BY THE DELHI BENCH OF THE TRIBUNAL IN SEVERAL CASES INCLUDING CIENA INDIA PVT. LTD. VS. DCIT (ITA NO.3324/DEL/2013) VIDE ITS ORDER DATED 23.4.20 15. IN VIEW OF THE FACT THAT THERE WAS MERGER OF ASSCENT INFOSERVE PVT . LTD. WITH ACCENTIA TECHNOLOGIES LTD. BY WAY OF AMALGAMATION DURING THE YEAR ITSELF, WE HOLD THAT THIS COMPANY CANNOT BE CONSIDERED AS COMP ARABLE DUE TO THIS EXTRA-ORDINARY FINANCIAL EVENT. ACCORDINGLY, THE S AME IS DIRECTED TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. II) TCS E-SERVE INTERNATIONAL LTD . 10.2.1. THE ASSESSEE OBJECTED TO THE INCLUSION OF T HIS COMPANY ON THE GROUND THAT IT PROVIDED FINANCIAL INFORMATION PROCE SSING AND CUSTOMER CONTACT SERVICES WITH HIGH LEVEL OF FOREIGN EXPENDI TURE AND ABNORMAL PROFITS. THE TPO NOTICED THAT THIS COMPANY WAS ALS O OFFERING ITES. HE DID NOT TREAT HIGH TURNOVER OF THIS COMPANY AS A RE LEVANT FACTOR IN ITA NO.240/DEL/2015 20 CONSIDERING THE COMPARABILITY. EVENTUALLY, THIS COM PANY WAS INCLUDED IN THE FINAL SET OF COMPARABLES. 10.2.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. RELEVANT PARTS OF THE ANNUAL R EPORT OF THIS COMPANY ARE AVAILABLE ON PAGES 458 ONWARDS OF THE PAPER BOO K. NOTES TO ACCOUNTS INDICATE THAT THIS COMPANY IS ENGAGED IN T HE BUSINESS OF PROVIDING IT ENABLED SERVICES/BPO SERVICES PRIMARIL Y TO CITIGROUP ENTITIES GLOBALLY. THE OPERATIONS OF THIS COMPANY : BROADLY COMPRISE OF TRANSACTION PROCESSING AND TECHNICAL SERVICES. TRA NSACTION PROCESSING INCLUDES THE BROAD SPECTRUM OF ACTIVITIES INVOLVING PROCESSING, COLLECTIONS, CUSTOMER CARE AND PAYMENTS IN RELATION TO THE SERVICES OFFERED BY CITIGROUP TO ITS CORPORATE AND RETAIL CL IENTS. TECHNICAL SERVICES INVOLVE SOFTWARE TESTING, VERIFICATION AND VALIDATION OF SOFTWARE AT THE TIME OF IMPLEMENTATION AND DATA CENTRE MANA GEMENT ACTIVITIES. IT IS MANIFEST THAT THIS COMPANY IS ENGAGED IN REND ERING BPO SERVICES TO THE BANKING AND FINANCIAL SERVICES INDUSTRY (BFSI) AND TRAVEL, TOURISM AND HOSPITALITY (TTH). IT IS PROVIDING SERVICES TO BFSI AND TTH AND ITA NO.240/DEL/2015 21 SUCH SERVICES INCLUDE `TRANSACTION PROCESSING AND `TECHNICAL SERVICES. IN OTHER WORDS, THE REMUNERATION OF THIS COMPANY FR OM THE ABOVE REFERRED TWO SEGMENTS INCLUDES COMPENSATION FOR REN DERING `TECHNICAL SERVICES AND `TRANSACTION PROCESSING. INSOFAR AS THE `TRANSACTION PROCESSING SERVICES ARE CONCERNED, THESE ARE ITES, WHICH ARE BROADLY SIMILAR TO THOSE RENDERED BY THE ASSESSEE, THOUGH N OT SPECIFICALLY SIMILAR. HOWEVER, THE `TECHNICAL SERVICES INVOLVE SOFTWARE TESTING, VERIFICATION AND VALIDATION OF SOFTWARE ITEM, IMPLEMENTATION AND DATA CENTRE MANAGEMENT ACTIVITIES. THE `TECHNICAL SERVICES RE NDERED BY THIS COMPANY ARE IN THE NATURE OF SERVICING AND MAINTENA NCE OF SOFTWARE. AT THIS STAGE, IT IS RELEVANT TO NOTE THAT A COMPANY P ROVIDING SOFTWARE SERVICES MAY BE OF TWO TYPES, VIZ., A COMPANY PROV IDING SOFTWARE DEVELOPMENT SERVICES AND A COMPANY PROVIDING SOFTWA RE SERVICES OTHER THAN SOFTWARE DEVELOPMENT SERVICES (HEREINAFTER ALS O CALLED A COMPANY PROVIDING NON-DEVELOPMENT SOFTWARE SERVICES). IN ORDER TO PROPERLY APPRECIATE THE VITAL DIFFERENCE BETWEEN THESE TWO T YPES OF COMPANIES, IT IS SIGNIFICANT TO NOTE THAT A COMPANY WHICH DEVELOP S SOFTWARE IS CALLED A COMPANY RENDERING SOFTWARE DEVELOPMENT SERVICES. SO FTWARE ITA NO.240/DEL/2015 22 DEVELOPMENT SERVICES ALSO INCLUDE MAINTENANCE OF SO FTWARE AND UPDATION OF THE SOFTWARE SO AS TO SUIT THE EVER CHANGING REQ UIREMENTS OF THE USERS. A COMPANY USING, INTER ALIA, A SOFTWARE FOR OBTAINING THE DESIRED RESULTS, IS CALLED A COMPANY PROVIDING NON-DEVELOPMENT SOFTW ARE SERVICES. THUS, IT IS CRYSTAL CLEAR THAT THERE IS A PHENOMENAL DIFF ERENCE BETWEEN A COMPANY PROVIDING SOFTWARE DEVELOPMENT SERVICES AND A COMPANY PROVIDING SOFTWARE NON-DEVELOPMENT SERVICES IN TERM S OF EXPERTISE, PROFESSIONAL QUALIFICATION AND EXPERIENCE REQUIRED FOR RENDERING SUCH SERVICES. A COMPANY PROVIDING SOFTWARE NON-DEVELOPM ENT SERVICES PERFORMS A RELATIVELY LOW-END SERVICE. THUS THE LIN E OF DISTINCTION IS THAT WHEREAS A COMPANY PROVIDING SOFTWARE DEVELOPMENT SE RVICES HELPS IN THE CREATION, MAINTENANCE OR UPDATION OF A SOFTWARE , ON THE OTHER HAND, A COMPANY PROVIDING NON-DEVELOPMENT SOFTWARE SERVICES OBTAINS THE DESIRED RESULT WITH THE USE OF AN EXISTING SOFTWARE . FURTHER, WHEREAS THE OUTPUT OF THE FORMER IS A SOFTWARE IN ITSELF OR A S TAGE IN THE ULTIMATE CREATION OF A SOFTWARE, THE OUTPUT OF THE LATER IS THE PROCESSED INFORMATION FROM THE RAW DATA OBTAINED WITH THE HEL P, INTER ALIA, OF A SOFTWARE. FROM THE ABOVE DISCUSSION, IT IS OVERT TH AT A COMPANY ITA NO.240/DEL/2015 23 PROVIDING SOFTWARE DEVELOPMENT SERVICES IS DISTINCT FROM AND INCOMPARABLE WITH A COMPANY PROVIDING NON-DEVELOPME NT SOFTWARE SERVICES. 10.2.3. WE FIND THAT THE ASSESSEE IS A COMPANY PRO VIDING NON- DEVELOPMENT SOFTWARE SERVICES, IN THE NATURE OF CO NVERSION OF DATA FROM HARD COPY OR FILES INTO ELECTRONIC FORMAT. THE ASS ESSEE IS NOT PROVIDING ANY SOFTWARE DEVELOPMENT SERVICES TO ITS AE. ON TH E OTHER HAND, THIS COMPANY IS ALSO PROVIDING `TECHNICAL SERVICES TO ITS AE INVOLVING SOFTWARE TESTING, VERIFICATION AND VALIDATION OF SO FTWARE, WHICH ARE AKIN TO SOFTWARE MAINTENANCE SERVICES FALLING, WITHIN TH E OVERALL CATEGORY OF SOFTWARE DEVELOPMENT SERVICES. THE TPO HAS TAKEN ENTITY LEVEL FIGURES OF TCS E-SERVE INTERNATIONAL LTD. FOR COMPARISON. THERE IS NO BIFURCATION AVAILABLE IN RESPECT OF THE REVENUES OF THIS COMPANY FROM TRANSACTION PROCESSING (WHICH ARE IN THE NATURE OF ITES, THE SAME AS PROVIDED BY THE ASSESSEE) AND TECHNICAL SERVICES ( WHICH ARE IN THE NATURE OF SOFTWARE DEVELOPMENT, ABSENT IN THE ASSES SEES CASE). IN THE ABSENCE OF THE AVAILABILITY OF ANY SUCH SEGREGATION OF THE TOTAL REVENUE ITA NO.240/DEL/2015 24 OF THIS COMPANY, IT IS NOT POSSIBLE TO SEPARATELY C ONSIDER ITS PROFITABILITY FROM RENDERING OF `TRANSACTION PROCESSING SERVICES . AS SUCH, THE ENTITY LEVEL FIGURES RENDER THIS COMPANY AS UNFIT FOR COMP ARISON. ERGO, WE ORDER FOR THE REMOVAL OF THIS COMPANY FROM THE FINA L SET OF COMPARABLES. III) TCS E-SERVE LTD . 10.3.1. THE TPO PROPOSED TO TREAT THIS COMPANY AS COMPARABLE. THE ASSESSEE OBJECTED TO ITS INCLUSION BY CONTENDING TH AT IT WAS PROVIDING FINANCIAL INFORMATION PROCESSING AND CUSTOMER CONTA CT SERVICES WITH HIGH OPERATING REVENUE AND PECULIAR ECONOMIC CIRCUM STANCES LEADING TO ABNORMAL PROFITS. THE TPO REPELLED THE ASSESSEES OBJECTIONS AND INCLUDED IT IN THE FINAL SET OF COMPARABLES. 10.3.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND P ERUSED THE RELEVANT MATERIAL ON RECORD. A COPY OF THE ANNUAL REPORT OF THIS COMPANY IS AVAILABLE ON PAGE 466 OF THE PAPER BOOK. THE COMPA NYS OVERVIEW HAS BEEN DISCUSSED ON PAGE 467 OF THE PAPER BOOK, WHICH DIVULGES THAT THIS COMPANY : IS IN THE BUSINESS OF PROVIDING BUSINESS PROCESS MANAGEMENT SERVICES IN THE BANKING AND FINANCIAL SERVICES (BFS I), VERTICAL ( I.E. ITA NO.240/DEL/2015 25 INDUSTRY VERTICAL) TO HELP ITS CUSTOMERS ACHIEVE TH EIR BUSINESS OBJECTIVES BY PROVIDING INNOVATIVE BEST-IN-CLASS SERVICES. WE FIND THAT THIS COMPANY IS ALSO PROVIDING ITES. UNLIKE TCS E-SERVE INTERNATIONAL LTD., THIS COMPANY IS NOT PROVIDING ANY TECHNICAL S ERVICES INVOLVING SOFTWARE TESTING, VERIFICATION AND VALIDATION OF SO FTWARE ETC. SINCE THE FUNCTIONAL PROFILE OF THIS COMPANY ON A BROADER BAS IS IS NO DIFFERENT FROM THAT OF THE ASSESSEE, BOTH BEING INVOLVED IN RENDER ING ITES, WE ARE NOT INCLINED TO TREAT THIS COMPANY AS INCOMPARABLE. THE LD. AR ARGUED THAT THE NATURE OF THE ITES PROVIDED BY THIS COMPANY IS DIFFERENT FROM THAT OF THE ASSESSEE AND HENCE THE SAME BE EXCLUDED. WE ARE DISINCLINED TO SUSTAIN THIS OBJECTION. MATCHING OF THE EXACT FUNCT IONAL SIMILARITY IS DISPENSED WITH UNDER THE TNMM, WHICH IS NOT SO UNDE R THE COMPARABLE UNCONTROLLED PRICE METHOD. THE TNMM APPROVES COMPAR ABILITY ON THE BASIS OF BROADER OVERALL SIMILARITY. WHEN WE CONS IDER THE NATURE OF SERVICES PROVIDED BY THIS COMPANY, BEING THE ITES, WHICH IS SIMILAR TO THAT OF THOSE RENDERED BY THE ASSESSEE, AGAIN THE I TES, WE CANNOT ORDER ITS EXCLUSION SIMPLY FOR THE REASON THAT THE VERTIC ALS OF ITES ARE SOMEWHAT DIFFERENT. IF ONE GOES TO MAKE A COMPARIS ON IN THE WAY ITA NO.240/DEL/2015 26 SUGGESTED BY THE LD. AR UNDER THE TNMM, THEN IT WI LL BE VERY DIFFICULT, IF NOT IMPOSSIBLE, TO FIND OUT A DITTO COMPARABLE. A COMPANY WHICH SATISFIES THE BROADER PARAMETERS OF COMPARABILITY I N THE OVERALL SAME SEGMENT, CANNOT BE EXCLUDED DUE TO SOMEWHAT DIFFERE NT NATURE OF SUCH OVERALL ACTIVITY. AN EXAMINATION OF THE COMPARABLE S CHOSEN BY THE ASSESSEE, WHICH HAVE BEEN ACCEPTED BY THE TPO, ALSO SATISFY ONLY THE TEST OF OVERALL SIMILARITY AND NOT THE PECULIAR SIM ILARITY, AS HAS BEEN NOW CONTRASTLY CONTENDED FOR THE EXCLUSION OF THIS COM PANY. THIS ARGUMENT, THEREFORE, FAILS. 10.3.3. IN SO FAR AS THE OBJECTION OF THE LD. AR ABOUT THE HIGH PROFIT/HIGH TURNOVER OF THIS COMPANY IS CONCERNED, WE FIND THAT THE HONBLE DELHI HIGH COURT IN CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) P. LTD. VS. DCIT HAS HELD , VIDE ITS JUDGMENT DATED 27.4.2015, THAT HIGH PROFIT OR HIGH TURNOVER IS NOT A CRITERIA TO EXCLUD E AN OTHERWISE COMPARABLE COMPANY. IT IS FURTHER NOTICED THAT THE HONBLE DELHI HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES (P.) LTD. (2013 ) 219 TAXMAN 26 (DEL) EXAMINED THE COMPARABILITY OF INFOSYS TECHNOLOGIES ITA NO.240/DEL/2015 27 FROM THE ANGLE OF ITS INCLUSION OR OTHERWISE IN THE LIST OF COMPARABLE OF AGNITY INDIA TECHNOLOGIES, A CAPTIVE UNIT PROVIDING ITES TO ITS AE ALONE. IN THAT CASE, THE TPO TREATED THREE COMPANIE S AS COMPARABLE, NAMELY, SATYAM COMPUTER SERVICE LTD., L&T INFOTECH LTD. AND INFOSYS TECHNOLOGIES. THE DRP EXCLUDED SATYAM COMPUTER ONLY . THE TRIBUNAL EXCLUDED ONLY INFOSYS TECHNOLOGIES LTD., BY IMPLIED LY RETAINING L&T INFOTECH LTD. AS A GOOD COMPARABLE. ON APPEAL BY TH E REVENUE, THE HONOURABLE HIGH COURT UPHELD THE TRIBUNAL ORDER EXC LUDING INFOSYS ON THE STRENGTH OF CERTAIN RELEVANT DISTINGUISHING FEA TURES INCLUDING ITS GIANTNESS IN TERMS OF SALES, NATURE OF WORK AND OTH ER FACTORS. THUS IT FOLLOWS THAT L&T INFOTECH LTD., WHICH IS OTHERWISE A VAST COMPANY WITH MUCH HIGHER TURNOVER, FINALLY FOUND THE STATUS OF A COMPARABLE WITH A CAPTIVE COMPANY PROVIDING ITES TO ITS AE ALONE. 10.3.4. COMING BACK TO THE FACTS OF OUR CASE, WE FIND THAT SINCE TCS E- SERVE LTD. IS FUNCTIONALLY COMPARABLE WITH THE ASSE SSEE COMPANY ON AN OVERALL BASIS AND NO SPECIAL REASONS FOR ITS HIGHER PROFIT/TURNOVER HAVE BEEN BROUGHT TO OUR NOTICE. CONSEQUENTLY, WE HOLD THAT THE AUTHORITIES ITA NO.240/DEL/2015 28 BELOW WERE JUSTIFIED IN INCLUDING THIS COMPANY IN T HE LIST OF COMPARABLES. IV) I-GATE GLOBAL SOLUTIONS SDN. BHD. 10.4.1. THE TPO INCLUDED THIS COMPANY IN THE LIST O F COMPARABLES DESPITE THE ASSESSEES OBJECTIONS ABOUT SUCH COMPAN Y OFFERING BOTH IT AND ITES SERVICES AND THE PECULIAR CIRCUMSTANCE OF AMALGAMATION OF I- GATE GLOBAL SOLUTIONS SDN. BHD., WITH THIS COMPANY DURING THE FINANCIAL YEAR 2009-10. 10.4.2. WE HAVE GONE THROUGH THE ANNUAL REPORT OF T HIS COMPANY WHICH IS AVAILABLE ON PAGE 446 ONWARDS OF THE PAPER BOOK. NOTES TO ACCOUNTS OF THIS COMPANY INDICATE AMALGAMATION OF I -GATE GLOBAL SOLUTIONS SDN. BHD. THIS AMALGAMATION TOOK PLACE W ITH THE APPROVAL OF THE MEMBERS OF THE COMPANY ON 12.8.2009 AND SUBSEQU ENTLY SANCTIONED BY THE HONBLE HIGH COURT BY ITS ORDER DATED 24.2.2 010. AS THE FINANCIAL RESULTS OF THIS COMPANY ALSO INCLUDE THE RESULTS OF AMALGAMATING COMPANY, IN OUR CONSIDERED OPINION, TH IS IS AN EXTRAORDINARY FINANCIAL EVENT, WHICH RENDERS IT UNF IT FOR COMPARISON WITH ITA NO.240/DEL/2015 29 THE ASSESSEE COMPANY. WHILE DISCUSSING THE COMPARAB ILITY OF ACCENTIA TECHNOLOGIES LTD. (SUPRA), WE HAVE REFERRED TO CERT AIN DECISIONS IN WHICH IT HAS BEEN HELD THAT A COMPANY LOSES THE TAG OF COMPARABILITY DUE TO AMALGAMATIONS, MERGERS, ETC., TAKING PLACE DURIN G THE YEAR IN QUESTION. ADOPTING THE SAME REASONING, WE ORDER FO R THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. V) INFOSYS BPO 10.5.1. THE TPO INCLUDED THIS COMPANY IN THE LIST O F COMPARABLES. THE ASSESSEES OBJECTIONS AGAINST ITS INCLUSION WER E OVERTURNED. 10.5.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUA L REPORT OF THIS COMPANY, WHICH IS AVAILABLE ON PAGE 449 ONWARDS OF THE PAPER BOOK, THAT THERE WAS ACQUISITION BY THIS COMPANY OF MCCAM ISH SYSTEMS LLC. SUCH INFORMATION IS AVAILABLE ON PAGE 456 OF THE PA PER BOOK. ACQUISITION OF MCCAMISH SYSTEMS LLC DURING THE YEAR , BEING AN EXTRAORDINARY FINANCIAL EVENT, RENDERS IT INCOMPARA BLE. FOLLOWING THE ITA NO.240/DEL/2015 30 REASONS TAKEN NOTE OF ABOVE, WE ORDER FOR THE ELIM INATION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. B. CHALLENGE TO THE EXCLUSION OF SOME COMPANIES . 11. THE ASSESSEE IS AGGRIEVED AGAINST THE EXCLUSION OF SIX COMPANIES FROM THE FINAL SET OF COMPARABLES BY THE TPO. WE W ILL DEAL WITH THESE COMPANIES HEREINAFTER. I) R. SYSTEMS INTERNATIONAL LTD. (SEG.); JINDAL INTELI COM PVT. LTD.; AND CALIBER POINT BUSINESS SOLUTIONS LTD. 12.1.1. THE ASSESSEE INCLUDED THESE THREE COMPANIE S IN ITS LIST OF COMPARABLES. HOWEVER, THE TPO ELIMINATED R. SYSTEM S (SEG.) ON THE GROUND THAT IT WAS FOLLOWING DIFFERENT YEAR ENDING, NAMELY, 31 ST DECEMBER AND, HENCE, WAS NOT COMPARABLE. JINDAL IN TELICOM PVT. LTD., WAS EXCLUDED ON THE GROUND THAT MARCH, 2010 ENDING FINANCIALS OF THE COMPANY WERE FOR 15 MONTHS. SINCE THE ANNUAL FIGUR ES FOR THE FINANCIAL YEAR ENDING 31.3.2010 WERE NOT AVAILABLE, THIS COMP ANY WAS ALSO REJECTED. CALIBER POINT BUSINESS SOLUTIONS LTD. WAS ALSO REJECTED BECAUSE OF DIFFERENT YEAR ENDING. THE LD. AR FAIRLY ACCEPTE D THAT THE ABOVE ITA NO.240/DEL/2015 31 REFERRED THREE COMPANIES WERE EITHER FOLLOWING CALE NDAR YEAR FOR MAINTAINING THEIR ACCOUNTS OR THEIR FIGURES WERE FO R MORE THAN 12 MONTHS IN CONTRAST TO THE ASSESSEE FOLLOWING FINANCIAL YEA R ENDING 31 ST MARCH. IT WAS, HOWEVER, SUBMITTED THAT THESE THREE COMPANIES SHOULD NOT HAVE BEEN EXCLUDED FOR THIS REASON ALONE WHEN THEY WERE OTHERWISE FUNCTIONALLY SIMILAR, A FACT WHICH HAS NOT BEEN DIS PUTED BY THE TPO. THE LD. DR OPPOSED THIS CONTENTION BY SUBMITTING TH AT THE DATA FOR THE YEAR ENDING OF THESE COMPANIES WAS NOT SIMILAR TO T HAT OF ASSESSEE COMPANY AND HENCE SUCH COMPANIES WERE RIGHTLY EXCLU DED. 12.1.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL, IT IS NOTICED THAT THE ASSESSEE COMPANY IS HAVING FINANCIAL YEAR ENDING COVERING THE PERIOD 1.4.2009 TO 31.3.2010. IN THAT VIEW OF THE MATTER, A VALID COMPARISON CAN BE MADE ONLY IF THE COMPARABLE COMPANIES TOO HAVE THE SAME FINANCIAL YE AR. IN THIS REGARD, WE CONSIDER IT APPROPRIATE TO NOTE THE RELEVANT PAR T OF SUB-RULE (4) OF RULE 10B WHICH PROVIDES THAT: THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH A N INTERNATIONAL ITA NO.240/DEL/2015 32 TRANSACTION SHALL BE THE DATA RELATING TO THE FINAN CIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAD BEEN ENTERED INTO. I T IS OBVIOUS FROM THE LANGUAGE OF SUB-RULE (4) THAT THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION CAN BE ANALYZED ONLY WITH THE DATA REL ATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BE EN ENTERED INTO. IN OTHER WORDS, IF THE TESTED PARTY HAS MARCH YEAR END ING, THEN, THE COMPARABLES MUST ALSO HAVE THE DATA RELATING TO THE FINANCIAL YEAR ENDING 31 ST MARCH ITSELF. IF SUCH A DATA IS NOT AVAILABLE, TH EN, A COMPANY ALBEIT COMPARABLE, ALSO DISQUALIFIES. ESPOUSING THE FACTS OF THE EXTANT CASE, WE FIND THAT INSOFAR AS THE FUNCTIONAL COMPARABILITY O F THESE THREE COMPANIES IS CONCERNED, THE TPO HAS NOT DISPUTED THE SAME. TH E ONLY REASON GIVEN FOR THEIR EXCLUSION IS THE NON-AVAILABILITY OF DATA FOR THE RELEVANT FINANCIAL YEAR. THE LD. AR CONTENDED THAT THOUGH TH E YEAR ENDING OF THE ABOVE REFERRED THREE COMPANIES WAS EITHER DIFFERENT OR FINANCIAL YEAR INCLUDED RESULTS FOR 15 MONTHS, YET, THE ASSESSEE W AS IN A POSITION TO PUT FORWARD THE DATA OF THESE THREE COMPANIES FOR THE F INANCIAL YEAR 1.4.2009 TO 31.3.2010 FROM THEIR ANNUAL REPORTS ONLY. IT WA S SO STATED ON THE BASIS OF THE AVAILABILITY OF THE QUARTERLY DATA FRO M THE ANNUAL REPORTS OF ITA NO.240/DEL/2015 33 THESE COMPANIES, WHICH COULD BE ADJUSTED FOR THE FI NANCIAL YEAR ENDING 31.3.2010. IF THE CONTENTION OF THE ASSESSEE IS CO RRECT, THAT THE RELEVANT DATA FOR THE CONCERNED FINANCIAL YEAR CAN BE DEDUCE D FROM THE INFORMATION AVAILABLE FROM THEIR ANNUAL REPORTS, TH EN, THERE CAN BE NO OBJECTION TO THE INCLUSION OF THESE COMPANIES IN TH E LIST OF COMPARABLES WITH THE ADJUSTED DATA FOR THE RELEVANT FINANCIAL Y EAR ITSELF. UNDER SUCH CIRCUMSTANCES, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF TPO/AO FOR EXAMINING THIS ASPECT OF THE MATTER. IT IS CLARIFIED THAT ONLY IF THE ASSESSEE SUCCEEDS IN PRO VIDING THE RELEVANT DATA OF THESE COMPANIES FOR THE CONCERNED FINANCIAL YEAR ON THE BASIS OF THE INFORMATION AVAILABLE FROM THEIR ANNUAL REPORTS ON LY, THE TPO SHOULD INCLUDE THESE COMPANIES IN THE LIST OF COMPARABLES BY CONSIDERING THEIR OP/OC ON THE BASIS OF THE FINANCIAL YEAR ENDING 31. 3.2010. IF HOWEVER, EVEN THOUGH THEIR QUARTERLY DATA IS AVAILABLE AND C AN BE COMPILED FOR THE RELEVANT FINANCIAL YEAR, BUT THE AMOUNTS OF OPERATI NG PROFIT OR OPERATING COST ETC. FOR THE RELEVANT FINANCIAL YEAR ARE NOT D IRECTLY AVAILABLE WITHOUT ANY APPORTIONMENT OR TRUNCATION, THEN THESE COMPANI ES SHOULD NOT BE CONSIDERED AS COMPARABLE. ITA NO.240/DEL/2015 34 II) CG-VAK SOFTWARE AND EXPORTS LTD. (SEG.) 12.2.1. THE ASSESSEE INCLUDED THE SEGMENTAL FIGURES OF THIS COMPANY IN THE LIST OF COMPARABLES. THE TPO ELIMINATED THI S COMPANY ON THE GROUND THAT IT WAS PROVIDING SOFTWARE SERVICES AND ITES AND ITS TURNOVER FROM ITES WAS ONLY 0.83 CRORE, WHICH WAS LESS THAN THE REQUISITE TURNOVER. 12.2.2. HAVING HEARD BOTH THE SIDES ON THIS ISSUE, WE FIND THAT THE TPO HAS ACCEPTED THE FUNCTIONAL COMPARABILITY OF TH IS COMPANY ON SEGMENTAL LEVEL. THE LD. DR WAS ALSO FAIR ENOUGH T O CANDIDLY ACCEPT THE FUNCTIONAL SIMILARITY OF THE RELEVANT SEGMENT OF TH IS COMPANY. IN SUCH CIRCUMSTANCES, THE QUESTION ARISES AS TO WHETHER TH E RELEVANT SEGMENT OF THIS COMPANY CAN BE EXCLUDED FROM THE LIST OF COMPA RABLES MERELY ON THE GROUND THAT THE REVENUE FROM THIS SEGMENT IS O NLY RS.83 LACS? IN OUR CONSIDERED OPINION, THE QUANTUM OF TURNOVER CAN BE NO REASON FOR THE EXCLUSION OF A COMPANY WHICH IS OTHERWISE COMPARABL E. WE HAVE NOTICED ABOVE THE JUDGMENT OF THE HONBLE JURISDICT IONAL HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) P. LTD (SU PRA) IN ITA NO.240/DEL/2015 35 WHICH IT HAS BEEN HELD THAT HIGH TURNOVER OR HIGH PROFIT CAN BE NO REASON TO ELIMINATE AN OTHERWISE COMPARABLE COMPANY. THE SAME APPLIES WITH FULL FORCE IN THE CONVERSE MANNER AS WELL TO A LOW TURNOVER/LOW PROFIT COMPANY. WE, THEREFORE, HOLD THAT A COMPANY CANNOT BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE GROUND OF ITS LOW TU RNOVER. IN PRINCIPLE, WE DIRECT THE INCLUSION OF THE RELEVANT SEGMENT OF THIS COMPANY IN THE LIST OF COMPARABLES. THE TPO IS DIRECTED TO INCLUD E THE OPERATING PROFIT/OPERATING COSTS OF THE ITES SEGMENT OF THIS COMPANY IN THE LIST OF COMPARABLES, AFTER DUE VERIFICATION OF THE NECESSAR Y FIGURES FOR DETERMINATION OF THE OPERATING PROFIT MARGIN ETC. III) MICRO GENETICS SYSTEMS LTD . 12.3.1. THE TPO EXCLUDED THIS COMPANY FROM THE LIS T OF COMPARABLES BY OBSERVING THAT ITS TURNOVER WAS ONLY RS.2.44 CRO RE AND, HENCE, IT FAILED THE TURNOVER FILTER. 12.3.2. WE DO NOT FIND ANY REASON TO EXCLUDE THIS C OMPANY FROM THE LIST OF COMPARABLES MERELY ON THE GROUND THAT ITS T URNOVER IS LESS. THE REASONS GIVEN ABOVE WHILE CONSIDERING THE COMPARABI LITY OF CG-VAK ITA NO.240/DEL/2015 36 SOFTWARE AND EXPORTS APPLY TO THIS COMPANY AS WELL. WE, THEREFORE, ORDER FOR THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES. HOWEVER, THE TPO IS DIRECTED TO VERIFY THE CORRECTN ESS OF OP/OC OF THIS COMPANY BEFORE ITS INCLUSION IN THE SET OF COMPARAB LES. IV) AXIS IT & T LTD . 12.4.1. THE TPO EXCLUDED THIS COMPANY BY MENTIONING THAT IT FAILED EXPORT FILTER AS THE TOTAL EXPORTS OF THIS COMPANY WERE ONLY 43.16% OF THE TOTAL OPERATING REVENUE. HERE AGAIN, WE FIND T HAT THE ONLY REASON GIVEN BY THE TPO FOR THE EXCLUSION OF THIS COMPANY IS ITS FAILING EXPORT FILTER. RELEVANT DETAILS OF THE FIGURES OF THIS CO MPANY HAVE NOT BEEN MADE AVAILABLE. WE, THEREFORE, SET ASIDE THE IMPUG NED ORDER ON THIS SCORE AND REMIT THE MATTER TO THE FILE OF TPO/AO FO R EXAMINING THE FUNCTIONAL COMPARABILITY OF THIS COMPANY. IF THIS COMPANY IS FOUND TO BE SIMILAR ON ENTITY OR SEGMENT LEVEL, THEN, THE EN TITY OR THE RELEVANT SEGMENT SHOULD BE INCLUDED IN THE FINAL SET OF COMP ARABLES AFTER DUE VERIFICATION OF THE RATE OF OPERATING PROFIT MARGIN ETC. ITA NO.240/DEL/2015 37 12.5. IN VIEW OF THE FOREGOING DISCUSSION, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER OF DETERMINATIO N OF ALP OF THE INTERNATIONAL TRANSACTION OF `PROVISION OF IT ENABL ED DATA CONVERSION SERVICES TO THE FILE OF TPO/AO FOR A FRESH DECISIO N IN ACCORDANCE WITH OUR ABOVE OBSERVATIONS/DIRECTIONS AND ALSO THE INTE REST ASPECT AS DISCUSSED INFRA . APART FROM THE ISSUES DISCUSSED IN THIS ORDER, T HE DECISION OF THE TPO ON ALL OTHER ASPECTS OF THE DET ERMINATION OF THE ALP OF THIS INTERNATIONAL TRANSACTION SHOULD BE CONSIDE RED AS FINAL, AS NO OTHER ISSUE HAS BEEN AGITATED BEFORE US. VI. INTEREST ON DELAYED/NON-REALIZATION OF EXPORT PROCEEDS 13.1. ON GOING THROUGH THE MASTER SERVICE AGREEMEN T BETWEEN THE ASSESSEE COMPANY AND ITS AE, IT WAS OBSERVED BY THE TPO THAT THE AE WAS ALLOWED MUCH LONGER PERIOD FOR PAYMENT THAN WAS ALLOWED NORMALLY IN AN UNCONTROLLED SITUATION. THE TPO CONSIDERED THE PRESCRIPTION OF CLAUSE 8.4 OF THE AGREEMENT WHICH PROVIDES THAT ALL AMOUNTS UNDER THIS AGREEMENT SHOULD BE PAID WITHIN 150 DAYS FROM THE D ATE OF INVOICE. IN ITA NO.240/DEL/2015 38 HIS OPINION, 60 DAYS CREDIT FACILITY IS ORDINARILY GIVEN WITHOUT ANY INTEREST PAYMENT AND ANY DELAY IN PAYMENT THEREAFTE R WAS LIABLE TO BE COMPENSATED WITH INTEREST @ 1.5% TO 2% PER MONTH ON THE OUTSTANDING AMOUNT. THE ASSESSEE WAS REQUIRED TO GIVE WORKING OF INTEREST ON LATE REALIZATION OR NON-REALIZATION OF EXPORT PROCEEDS D URING THE FINANCIAL YEAR 2009-10. SUCH WORKING GIVEN BY THE ASSESSEE H AS BEEN MADE ANNEXURE-1 TO THE ORDER OF THE TPO. ON A PERUSAL OF THE STATEMENT OF NON/LATE REALIZATION OF EXPORT INVOICES FURNISHED B Y THE ASSESSEE, THE TPO HELD THAT THE ASSESSEE OUGHT TO HAVE CHARGED @ 15% P.A. ON RECEIVABLES AS ON 1.4.2009 WHICH WERE OUTSTANDING F OR MORE THAN 60 DAYS; AND EXPORT PROCEEDS NOT REALIZED WITHIN 60 D AYS FROM THE DATE OF INVOICE DURING THE YEAR. THESE TWO AMOUNTS WERE CA LCULATED AT RS.3.16 CRORE AND RS.2.69 CRORE, MAKING TOTAL TP ADJUSTMENT FOR INTEREST AT RS.5.86 CRORE. THAT IS HOW, THE TP ADJUSTMENT ON ACCOUNT OF INTEREST TO BE CHARGED ON NON-REALISATION OF EXPORT PROCEEDS TO THE TUNE OF RS.5.86 CRORE AND ODD WAS PROPOSED AND ADDED BY THE AO IN THE FINAL ASSESSMENT ORDER. THE ASSESSEE IS AGGRIEVED AGAINST THIS ADDITION. ITA NO.240/DEL/2015 39 13.2. THE LD. AR CONTENDED THAT THE AGREEMENT BE TWEEN THE ASSESSEE AND ITS AE DOES NOT PROVIDE FOR ANY CHARGING OF INT EREST AND, HENCE, THERE CAN BE NO QUESTION OF ANY NOTIONAL/HYPOTHETIC AL INTEREST INCOME AS HAS BEEN DETERMINED BY THE TPO. TO SUPPORT THE NON -CHARGING OF INTEREST, HE RELIED ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES PVT. LTD. VS. UNION OF INDI A AND OTHERS (2014) 368 ITR 1 (BOM.). HE BUTTRESSED THE SAME ARGUMENT BY RELYING ON THE JUDGMENT OF THE HONBLE JURISDICTIO NAL HIGH COURT DATED 27.3.2015 IN CIT VS. COTTON NATURALS (I) PVT. LTD. (DEL.). THE VIEW CANVASSED BY THE LD. AR AGAINST THE NOT MAKING ADDI TION ON ACCOUNT OF INTEREST WAS STRONGLY COUNTERED BY THE LD. DR. 13.3. WE ARE NOT PERSUADED TO ACCEPT THIS ARGUMENT . THE ARGUMENT THAT THE AGREEMENT DOES NOT PROVIDE FOR CHARGING AN Y INTEREST ON LATE REALIZATION OF INVOICE VALUE AND HENCE NO INTEREST CAN BE CHARGED, DESERVES THE FATE OF DISMISSAL UNDER THE TRANSFER P RICING PROVISIONS. CHAPTER X OF THE ACT HAS BEEN ENSHRINED TO DETERMIN E THE INCOME FROM AN INTERNATIONAL TRANSACTION AT ALP, BEING IN THE S AME MANNER AS IS ITA NO.240/DEL/2015 40 DETERMINED BETWEEN TWO INDEPENDENT PARTIES. IT MEAN S THAT IF AN INCOME IS NOT CHARGED OR UNDER CHARGED BY AN INDIAN ENTITY FROM ITS FOREIGN AE, WHICH OUGHT TO HAVE BEEN PROPERLY CHARGED IF THE TR ANSACTION HAD BEEN BETWEEN TWO INDEPENDENT PARTIES, THEN SUCH UNDER CH ARGED OR UNCHARGED INCOME NEEDS TO BE BROUGHT TO TAX BY DETERMINING TH E ALP OF THE INTERNATIONAL TRANSACTION GIVING RISE TO SUCH INCOM E. 13.4. COMING TO OTHER ARGUMENT THAT NO INTEREST IS CHARGEABLE UNDER THE PRESENT CIRCUMSTANCES ON THE STRENGTH OF THE JU DGMENT IN THE CASE OF VODAFONE INDIA SERVICES PVT. LTD. (SUPRA), WE FIND THAT THE POINT OF CONTROVERSY IN THAT CASE WAS QUITE DISTINCT. ADDIT ION ON ACCOUNT OF THE EXCESS SHARE PREMIUM WAS MADE WHICH, IN THE OPINION OF THE TPO, SHOULD HAVE BEEN RECEIVED BY THAT ASSESSEE FROM THE ISSUANCE OF SHARES. IT IS ON THIS EXCESS SHARE PREMIUM SHORT RECEIVED, THAT THE AMOUNT OF INTEREST WAS ALSO CHARGED. THE HONBLE BOMBAY HIGH COURT OVERTURNED THE OPINION OF THE TPO BY HOLDING THAT THE AMOUNT O F LESS SHARE PREMIUM RECEIVED OVER AND ABOVE THE ACTUAL PREMIUM RECEIVED CANNOT BE ADDED AS TP ADJUSTMENT BECAUSE THE RECEIPT OF PR EMIUM ITSELF, BEING A ITA NO.240/DEL/2015 41 CAPITAL RECEIPT, IS NOT CHARGEABLE TO TAX. WHEN TH E AMOUNT OF PREMIUM IS A CAPITAL RECEIPT, THE HONBLE HIGH COURT HELD THAT THE SO CALLED SHORT PREMIUM CHARGED ALSO CANNOT ASSUME THE CHARACTER OF REVENUE. APART FROM THE DELETION OF ADDITION ON ACCOUNT OF SHARE P REMIUM, THE HONBLE BOMBAY HIGH COURT IN VODAFONE INDIA SERVICES PVT. LTD. VS. UNION OF INDIA AND OTHERS (2014) 369 ITR 511 (BOM.) AND SHELL INDIA MARKETS P. LTD. VS. ACIT (2014) 369 ITR 516 (BOM) HAS HELD THAT INTEREST ON SUCH SHORT REALIZED PREMIUM ALSO CANNOT BE CONSTRUE D AS AN ITEM OF TRANSFER PRICING ADJUSTMENT. IT IS OBVIOUS THAT THE FACTS OF THE INSTANT CASE ARE ABSOLUTELY DIFFERENT FROM THOSE CONSIDERED IN T HE CASE OF VODAFONE INDIA SERVICES PVT. LTD. (SUPRA) . THE BASE AMOUNT ON WHICH INTEREST WAS CALCULATED BY THE TPO IN THE CASE OF VODAFONE INDIA (SUPRA) WAS ITSELF A CAPITAL RECEIPT NOT CHARGEABLE TO TAX AND NOT A TRA DING DEBT ARISING DURING THE COURSE OF BUSINESS, WHICH ISSUE HAS BEEN DISCUS SED IN THE IMMEDIATELY SUCCEEDING PARAS. INSTANTLY, WE ARE CO NCERNED WITH THE LATE REALIZATION BY THE ASSESSEE OF TRADING DEBT FROM IT S AE WHICH IS OTHERWISE A REVENUE RECEIPT AND HAS ALSO BEEN OFFER ED FOR TAXATION. ITA NO.240/DEL/2015 42 13.5. AT THIS JUNCTURE, IT IS APPOSITE TO NOTE TH AT THE FINANCE ACT, 2012 HAS INSERTED EXPLANATION TO SECTION 92B WITH RETROS PECTIVE EFFECT FROM 1.4.2002. CLAUSE (I) OF THIS EXPLANATION, WHICH IS OTHERWISE ALSO FOR REMOVAL OF DOUBTS, GIVES MEANING TO THE EXPRESSION INTERNATIONAL TRANSACTION IN AN INCLUSIVE MANNER. SUB-CLAUSE (C ) OF CLAUSE (I) OF THIS EXPLANATION, WHICH IS RELEVANT FOR OUR PURPOSE, PRO VIDES AS UNDER:- ` EXPLANATION. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY CLARIFIED T HAT (I) THE EXPRESSION 'INTERNATIONAL TRANSACTION' SH ALL INCLUDE (A) (B) .. (C) CAPITAL FINANCING, INCLUDING ANY TYPE OF LONG-TERM OR SHORT-TERM BORROWING, LENDING OR GUARANTEE, PURCHASE OR SALE O F MARKETABLE SECURITIES OR ANY TYPE OF ADVANCE, PAYMENTS OR DEFE RRED PAYMENT OR RECEIVABLE OR ANY OTHER DEBT ARISING DURING THE COURSE OF BUSINES S; . 13.6. ON CIRCUMSPECTION OF THE RELEVANT PART OF THE EXPLANATION INSERTED WITH RETROSPECTIVE EFFECT FROM 1.4.2002, T HEREBY ALSO COVERING THE ASSESSMENT YEAR UNDER CONSIDERATION, THERE REMA INS NO DOUBT THAT APART FROM ANY LONG-TERM OR SHORT-TERM LENDING OR B ORROWING, ETC., OR ANY TYPE OF ADVANCE PAYMENTS OR DEFERRED PAYMENTS, ANY OTHER DEBT ARISING DURING THE COURSE OF BUSINESS HAS ALSO BEEN EXPRESSLY ITA NO.240/DEL/2015 43 RECOGNIZED AS AN INTERNATIONAL TRANSACTION. THAT B EING SO, THE PAYMENT OF INTEREST OR RECEIPT OF INTEREST ON THE LOANS ACC EPTED OR ALLOWED IN THE CIRCUMSTANCES AS MENTIONED IN THIS CLAUSE OF THE EXPLANATION , ALSO BECOME INTERNATIONAL TRANSACTIONS, REQUIRING THE DE TERMINATION OF THEIR ALP. IF THE PAYMENT OF INTEREST IS EXCESSIVE OR THE RE IS NO OR LOW RECEIPT OF INTEREST, THEN SUCH INTEREST EXPENSE/INCOME NEED S TO BE BROUGHT TO ALP. THE EXPRESSION DEBT ARISING DURING THE COURSE OF BUSINESS IN COMMON PARLANCE ENCOMPASSES, INTER ALIA, ANY TRADING DEBT ARISING FROM THE SALE OF GOODS OR SERVICES RENDERED IN THE COURS E OF CARRYING ON THE BUSINESS. ONCE ANY DEBT ARISING DURING THE COURSE O F BUSINESS HAS BEEN ORDAINED BY THE LEGISLATURE AS AN INTERNATIONAL TRA NSACTION, IT IS, BUT, NATURAL THAT IF THERE IS ANY DELAY IN THE REALIZATI ON OF SUCH DEBT ARISING DURING THE COURSE OF BUSINESS, IT IS LIABLE TO BE V ISITED WITH THE TP ADJUSTMENT ON ACCOUNT OF INTEREST INCOME SHORT CHAR GED OR UNCHARGED. 13.7. THE HONBLE BOMBAY HIGH COURT IN THE CASE O F CIT VS. PATNI COMPUTER SYSTEMS LTD., (2013) 215 TAXMANN 108 (BOM. ) DEALT, INTER ALIA , WITH THE FOLLOWING QUESTION OF LAW:- ITA NO.240/DEL/2015 44 (C) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL DID NOT ERR IN HOLDING THAT THE LOSS SUFFERED BY THE ASSESSEE BY ALLOWING EXCESS PERIOD OF CREDIT TO THE ASSOCIATED ENTERPRISES WITHOUT CHARGING AN INTEREST DURING SUCH CREDIT PERIOD WOULD NOT AMOUNT TO INTERNATIONAL TRA NSACTION WHEREAS SECTION 92B(1) OF THE INCOME-TAX ACT, 1961 REFERS TO ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFI TS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES? 13.8. WHILE ANSWERING THE ABOVE QUESTION, THE HON BLE HIGH COURT NOTICED THAT AN AMENDMENT TO SECTION 92B HAS BEEN C ARRIED OUT BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 1. 4.2002. SETTING ASIDE THE VIEW TAKEN BY THE TRIBUNAL, THE HONBLE HIGH CO URT RESTORED THIS ISSUE TO THE FILE OF THE TRIBUNAL FOR FRESH DECISIO N IN THE LIGHT OF THE LEGISLATIVE AMENDMENT. 13.9. THE FOREGOING DISCUSSION DIVULGES THAT NON -CHARGING OR UNDER- CHARGING OF INTEREST ON THE EXCESS PERIOD OF CREDIT ALLOWED TO THE AE FOR THE REALIZATION OF INVOICES AMOUNTS TO AN INTERNATI ONAL TRANSACTION AND THE ALP OF SUCH AN INTERNATIONAL TRANSACTION IS REQ UIRED TO BE DETERMINED. ITA NO.240/DEL/2015 45 13.10. IN SO FAR AS THE RELIANCE OF THE LD. AR ON THE JUDGMENT IN COTTON NATURALS (I) PVT. LTD. (SUPRA) IS CONCERNED, WE FIND THE FACTS OF THAT CASE TO BE DISTINGUISHABLE. IN THAT CASE, A L OAN WAS ADVANCED BY THAT ASSESSEE TO A WHOLLY OWNED SUBSIDIARY IN THE USA. THE ASSESSEE SELECTED THE COMPARABLE UNCONTROLLED PRICE (CUP) ME THOD TO BENCHMARK THE INTEREST RECEIVED ON THE LOAN AND CLA IMED THAT THE INTEREST RECEIVED @ 4% WAS COMPARABLE. THE TPO HELD THAT TH E ARMS LENGTH INTEREST RATE SHOULD BE TAKEN AT 14% PER ANNUM. TH IS WAS REDUCED TO 12.20% BY THE DRP BY ADOPTING THE PRIME LENDING RAT E FIXED BY THE RBI. THE TRIBUNAL RELYING ON CERTAIN DECISIONS UPHELD TH E ASSESSEES CLAIM. WHEN THE MATTER FINALLY CAME UP BEFORE THE HONBLE HIGH COURT, IT HELD THAT THE AMOUNT IN QUESTION WAS GIVEN IN FOREIGN CU RRENCY, I.E., IN US DOLLARS AND WAS ALSO TO BE REPAID IN THE SAME CURRE NCY, I.E., US DOLLARS. IN THAT VIEW OF THE MATTER, IT WAS HELD THAT THE CU RRENCY IN WHICH THE LOAN IS TO BE REPAID NORMALLY DETERMINES THE RATE OF RET URN ON THE MONEY LENT AND THE INTEREST RATE APPLICABLE TO LOANS GRANTED A ND TO BE RETURNED IN INDIAN RUPEE WOULD NOT BE A RELEVANT COMPARABLE. T HE PRIME LENDING RATE WAS, THEREFORE, HELD TO BE NOT APPLICABLE. FR OM THE ABOVE NARRATION ITA NO.240/DEL/2015 46 OF FACTS, IT IS CLEAR THAT, FIRSTLY, IN THE CASE OF COTTON NATURALS (I) PVT. LTD. (SUPRA) , THAT ASSESSEE CHARGED INTEREST ON LOANS GIVEN TO ITS AE. THE CONTROVERSY WAS ONLY ABOUT THE RATE OF INTEREST, WH ICH OUGHT TO HAVE BEEN CHARGED. IN THE CASE UNDER CONSIDERATION, THE ASSESSEE DID NOT CHARGE ANY INTEREST ON THE AMOUNTS REMAINING PARKED WITH ITS FOREIGN AE DUE TO LATE OR NON-REALIZATION OF INVOICES IN TIME. AS THE ASSESSEE BEFORE US DID NOT CHARGE ANY INTEREST, THE JUDGMENT IN COTTON NATURALS (I) PVT. LTD.(SUPRA) RATHER SUPPORTS THE VIEW CANVASSED BY THE REVENUE ON THE BASIC ISSUE OF CHARGEABILITY OF INTEREST. BE THAT AS IT MAY, THE AMENDMENT TO SECTION 92B MADE WITH RETROSPECTIVE EFFECT FROM 1.4.2002 SETS THE CONTROVERSY TO REST INASMUCH AS IT PROVIDES IN UNAM BIGUOUS TERMS THAT ANY OTHER DEBT ARISING DURING THE COURSE OF BUSINES S IS AN INTERNATIONAL TRANSACTION. EX CONSEQUENTI , TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF INTEREST INCOME IS MANDATED IN CASE OF LATE/NON REA LIZATION OF INVOICE VALUE FROM AE. THE VIEW CANVASSED BY THE LD. AR ON THIS ISSUE IS, THEREFORE, FOUND TO BE DEVOID OF MERIT AND HENCE JE TTISONED. ITA NO.240/DEL/2015 47 13.11. NOW, WE COME TO THE COMPUTATION OF THE ALP OF THE INTERNATIONAL TRANSACTION OF DEBT ARISING DURING T HE COURSE OF BUSINESS. THIS HAS TWO INGREDIENTS, VIZ., THE AMOUNT ON WHICH INTEREST SHOULD BE CHARGED AND THE ARMS LENGTH RATE AT WHICH THE INTE REST SHOULD BE CHARGED. 13.12. IN SO FAR AS THE FIRST ASPECT IS CONCERNED , WE FIND THAT THE TPO HAS TAKEN NORMAL CREDIT PERIOD OF 60 DAYS AND ACCOR DINGLY MADE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT FOR THE P ERIOD IN EXCESS OF 60 DAYS. IN OUR CONSIDERED OPINION, TRANSFER PRICING A DJUSTMENT ON ACCOUNT OF INTEREST FOR THE ENTIRE PERIOD OF DELAY BEYOND 6 0 DAYS CANNOT BE TREATED AS A SEPARATE INTERNATIONAL TRANSACTION OF TRADING DEBT ARISING DURING THE COURSE OF BUSINESS. IT IS NOTICED THAT T HE ASSESSEE ENTERED INTO AN AGREEMENT WITH ITS AE FOR REALIZATION OF INVOICE S WITHIN A PERIOD OF 150 DAYS. THIS IMPLIES THAT THE INTEREST AMOUNT ON NON-REALIZATION OF INVOICES UP TO 150 DAYS WAS FACTORED IN THE PRICE C HARGED FOR THE SERVICES RENDERED. ANNEXURE-1 TO THE TPOS ORDER GIVES DETAILS OF THE INSTANCES OF LATE REALIZATION OR NON-REALIZATION OF ADVANCES UP TO THE YEAR ITA NO.240/DEL/2015 48 ENDING. FIRST THREE AND A HALF PAGES OF THIS ANNEX URE INDICATE NUMBER OF DAYS FOR WHICH THERE WAS DELAYED REALIZATION. SUCH DELAY RANGES FROM 175 DAYS TO 217 DAYS. THE REMAINING PAGES DISCLOSE NO REALIZATION OF INVOICES UP TO 31 ST MARCH, 2010. WHEN WE CONSIDER THE DATES OF INVOICES IN THE REMAINING PAGES, IT IS MANIFESTED T HAT IN CERTAIN CASES THESE INVOICES HAVE BEEN RAISED ON 31 ST AUGUST, 30 TH OR SEPTEMBER OR 31 ST OCTOBER, 2009. IN ALL SUCH CASES, THE PERIOD OF 1 50 DAYS ALREADY STOOD EXPIRED AS ON 31 ST MARCH, 2010 AND THE ASSESSEE OUGHT TO HAVE CHARGED INTEREST ON THE DELAY IN REALIZING SUCH INV OICES ALONG WITH THE FIRST THREE AND A HALF PAGES IN WHICH THERE IS AN A BSOLUTE AND IDENTIFIED DELAY IN REALIZATION OF INVOICES BEYOND THE STIPULA TED PERIOD. WHEN THE INTEREST FOR REALIZATION OF TRADE ADVANCES UP TO 15 0 DAYS IS PART AND PARCEL OF THE PRICE CHARGED FROM THE AE, THEN THE D ELAY UP TO THIS EXTENT CANNOT GIVE RISE TO A SEPARATE INTERNATIONAL TRANSA CTION OF INTEREST UNCHARGED. RATHER INTEREST FOR THE PERIOD IN EXCESS OF NORMALLY REALIZABLE PERIOD IN AN UNCONTROLLED SITUATION UPTO 150 DAYS N EEDS TO BE CONSIDERED IN THE DETERMINING THE ALP OF THE INTERNATIONAL TRA NSACTION OF THE `PROVISION OF IT ENABLED DATA CONVERSION SERVICES. THIS CAN BE DONE BY ITA NO.240/DEL/2015 49 INCREASING THE REVENUE CHARGED BY THE COMPARABLE CO MPANIES WITH THE AMOUNT OF INTEREST FOR THE PERIOD BETWEEN THAT ALLO WED BY THEM IN REALIZATION OF INVOICES AND 150 DAYS AS ALLOWED BY THE ASSESSEE, SO AS TO BRING SUCH COMPARABLES AT PAR WITH THE ASSESSEES I NTERNATIONAL TRANSACTION OF PROVISION OF THE ITES. TO ILLUSTRA TE, IF THE COMPARABLES HAVE ALLOWED CREDIT PERIOD OF, SAY, 60 DAYS AND T HE ASSESSEE HAS REALIZED ITS INVOICES IN 180 DAYS, THEN INTEREST FO R 90 DAYS (150 DAYS MINUS 60 DAYS) SHOULD BE ADDED TO THE PRICE CHARGED BY THE COMPARABLES AND THE AMOUNT OF THEIR RESULTANT ADJUSTED OPERATIN G PROFIT BE COMPUTED. RULE 10B PERMITS MAKING SUCH AN ADJUSTMENT. SUB-RUL E (2) TO RULE 10B STIPULATES THAT FOR THE PURPOSES OF SUB-RULE (1), T HE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED, INTER ALIA, WITH REFERENCE TO THE : `(C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING ) OF THE TRANSACTIONS . THEN SUB-RULE (3) MANDATES THAT AN UNCONTROLL ED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF ` REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL E FFECTS OF SUCH DIFFERENCES. APPLYING THE PRESCRIPTION OF RULE 10 , IT BECOMES VIVID THAT ITA NO.240/DEL/2015 50 DIFFERENCE ON ACCOUNT OF THE `CONTRACTUAL TERMS OF THE TRANSACTIONS, WHICH ALSO INCLUDE THE CREDIT PERIOD ALLOWED, NEED S TO BE ADJUSTED IN THE PROFIT OF COMPARABLES. AS THE TPO HAS TAKEN THE E NTIRE DELAY BEYOND THAT NORMALLY ALLOWED AS A SEPARATE INTERNATIONAL T RANSACTION, WHICH POSITION IS NOT CORRECT, WE HOLD THAT THE EFFECT O F DELAY ON INTEREST UP TO 150 DAYS OVER AND ABOVE THE NORMAL PERIOD OF REALIZ ATION IN AN UNCONTROLLED SITUATION, SHOULD BE CONSIDERED IN T HE DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION OF PROVISION OF IT ENABLED DATA CONVERSION SERVICES AND THE PERIOD OF DELAY ABOVE 150 DAYS, NAMELY, 30 DAYS IN OUR ABOVE ILLUSTRATION (180 DAYS MINUS 1 50 DAYS) SHOULD BE CONSIDERED AS A SEPARATE INTERNATIONAL TRANSACTION IN TERMS OF CLAUSE (C) OF EXPLANATION TO SECTION 92B. 13.13. IN SO FAR AS THE QUESTION OF RATE OF INT EREST IS CONCERNED, WE FIND THAT THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF COTTON NATURALS (I) PVT. LTD. (SUPRA), IN WHICH IT HAS BEEN HELD THAT IT IS THE CURRENCY IN WHICH THE LOAN IS TO BE REPAID WHICH DETERMINES THE RATE OF INTEREST AND HENCE ITA NO.240/DEL/2015 51 THE PRIME LENDING RATE SHOULD NOT BE CONSIDERED FOR DETERMINING THE INTEREST RATE. UNDER SUCH CIRCUMSTANCES, WE SET AS IDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF TPO/AO FO R A FRESH DETERMINATION OF ADDITION ON ACCOUNT OF TRANSFER PR ICING ADJUSTMENT TOWARDS INTEREST NOT REALIZED FROM ITS AE ON THE DE BTS ARISING DURING THE COURSE OF BUSINESS IN LINE WITH OUR ABOVE OBSERVATI ONS. 14. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 06.07.201 5. SD/- SD/- [A.T. VARKEY] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 06 TH JULY, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.