Effective Teleservices Pvt. Ltd., Gandhinagar V. The ACIT, Gandhinagar Circle, Gandhinagar

ITA 2411/AHD/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 6297 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 4 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 06-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 28-08-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V K SINGH
• Keywords: Business income; Transfer pricing; International transaction; Question of law
• Section: 92D

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH (BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMBER) ITA. NO: 2411/AHD/2014 (ASSESSMENT YEAR: 2009-10) EFFECTIVE TELESERVICES PVT. LTD. 1 ST FLOOR, IT TOWER IV, INFOCITY, NR. INDRODA CIRCLE GANDHINAGAR- 382009 V/S ASST. COMMISSIONER OF INCOME TAX, GANDHINAGAR CIRCLE, GANDHINAGAR (APPELLANT) (RESPONDENT) PAN: AAACE9318E APPELLANT BY : SHRI DHINAL SHAH, AR RESPONDENT BY : SHRI V.K. SINGH, SR. D.R. ( )/ ORDER DATE OF HEARING : 08 -01-201 8 DATE OF PRONOUNCEMENT : 16 -01-2018 PER N.K. BILLAIYA, ACCOUNTANT MEMBER: 1. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A), GANDHINAGAR, AHMEDABAD DATED 02.06.2014 PERTAINING TO A.Y. 2009-10. ITA NO. 2411 /AHD/2014 . A.Y. 2009-1 0 2 2. THE ASSESSEE IS AGGRIEVED BY THE TRANSFER PRICING A DJUSTMENT OF RS. 37,716,838/- MADE BY THE TPO AND CONFIRMED BY THE C IT(A). ALTERNATIVELY, THE ASSESSEE CLAIMS THAT INTERNAL TNMM SHOULD HAVE BEEN CONSIDERED AS THE MOST APPROPRIATE METHOD. 3. REPRESENTATIVES OF BOTH SIDES WERE HEARD AT LENGTH. HAVING HEARD THE RIVAL CONTENTIONS, WE HAVE CAREFULLY PERUSED THE ORDERS O F THE AUTHORITIES BELOW. 4. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE A PPELLANT COMPANY IS ENGAGED IN PROVIDING VARIOUS CALL CENTER SERVICES SUCH AS OPER ATIONS SUPPORT STAFF SERVICES. TQM VERIFICATION, DATA ENTRY ETC TO ITS ASSOCIATED ENTERPRISES IN USA AND OTHER UNRELATED PARTIES BOTH WITHIN AND OUTSIDE IND IA. 5. THE APPELLANT COMPANY HAD BENCHMARKED THE SAID TRAN SACTIONS IN ITS TRANSFER PRICING STUDY USING INTERNAL COMPARABLE UNCONTROLLE D PRICE (CUP) PRICE METHOD. AS THE AVERAGE HOURLY RATE FROM AE IN USA W AS HIGHER THAN THAT OF THE NON AES IN UK, THE TRANSACTIONS WERE CONSIDERED TO BE AT ARMS LENGTH. 6. DURING THE COURSE OF THE TRANSFER PRICING ASSESSMEN T PROCEEDINGS, THE APPELLANT COMPANY ALSO SUBMITTED ADDITIONAL ANALYSIS IN THE F ORM OF INTERNAL TRANSACTION NET MARGIN METHOD. THE NET MARGINS DERIVED FROM AE BUSINESS WAS HIGHER THAN THAT OF NON AE BUSINESS AND HENCE AGAIN THE TR ANSACTIONS WERE CONSIDERED TO BE AT ARMS LENGTH. 7. WHILE FRAMING THE TRANSFER PRICING ASSESSMENT ORDER , THE TPO REJECTED THE INTERNAL CUP AND ALSO REJECTED THE INTERNAL TNMM AS SUBMITTED DURING THE COURSE OF TRANSFER PRICING ASSESSMENT PROCEEDINGS. THE TPO CONCLUDED THE ITA NO. 2411 /AHD/2014 . A.Y. 2009-1 0 3 PROCEEDINGS BY APPLYING THE EXTERNAL TNMM BY ADOPTI NG FIVE COMPARABLES. THE TPO REJECTED THE SEARCH UNDERTAKEN BY THE APPEL LANT COMPANY AND THE EXTERNAL COMPARABLE COMPANIES GIVEN BY THE APPELLAN T. 8. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) B UT WITHOUT ANY SUCCESS. 9. THE LD. CIT(A) HELD THAT INTERNAL CUP AS WELL AS IN TERNAL TNMM WAS NOT APPLICABLE TO THE FACTS OF THE CASE IN HAND. THOUGH , THE LD. CIT(A) REJECTED 3 OUT OF THE 5 COMPARABLES SELECTED BY THE TPO BUT CO NFIRMED THE UPWARD ADJUSTMENT. REJECTING ALL THE COMPARABLES GIVEN BY THE ASSESSEE. THE LD. CIT(A) HELD ONLY 2 COMPARABLES COMPANIES COMPARABLE. 10. WE HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE ORDE RS OF THE AUTHORITIES BELOW. WE FIND THAT THE ASSESSEE IS ELIGIBLE FOR TAX HOLID AY U/S. 10A OF THE ACT, THEREFORE, WE DO NOT FIND ANY MERIT IN HOLDING THAT THE ASSESSEE MANIPULATED THE PRICES AND SHIFTED THE PROFITS TO THE OVERSEAS JURI SDICTION FOR AVOIDING TAXES IN INDIA. MOREOVER, THE TAXES RATES IN THE USA ARE HIG HER THAN THE TAX RATES PREVAILING IN INDIA. MOREOVER, THE AE OF THE APPELL ANT COMPANY HAS INCURRED LOSSES IN PROVIDING END TO END SERVICES TO THIRD PA RTIES. IF THE ASSESSEE HAD DIRECTLY UNDERTAKEN CONTRACTS WITH THE THIRD PARTIE S IN USA, IT WOULD ALSO HAVE INCURRED OPERATING LOSSES AS AGAINST OPERATING PROF ITS EARNED WHILE UNDERTAKING TRANSACTIONS WITH AES. 11. WE FIND THAT THE APPELLANT COMPANY HAS EARNED AVERA GE HOURLY RATE FROM ITS AE BUSINESS AT RS. 274.39 PER HOUR. AS AGAINST THE SAM E, THE AVERAGE HOURLY RATE FROM NON AE BUSINESS WAS RS. 108.82 PER HOUR. THUS, THE AVERAGE HOURLY RATE EARNED FROM AE BUSINESS WAS MORE THAN NON AE BUSINE SS. THE ONLY REASON ITA NO. 2411 /AHD/2014 . A.Y. 2009-1 0 4 FOR REJECTING THE ASSESSEES CONTENTION IS THAT THE PRICING MECHANISM IN CASE OF AE AS WELL AS NON AES WAS DIFFERENT; THEREFORE, CUP IS NOT APPLICABLE. IN OUR CONSIDERED OPINION, MERELY BECAUSE PRICING MECHANIS M IS DIFFERENT, INTERNAL CUP SHOULD NOT HAVE BEEN REJECTED. 12. WE FIND THAT THE TPO HAS MENTIONED IN THE ORDER THA T THE RISK PROFILE OF AE AND NON AE IS ENTIRELY DIFFERENT. IN OUR CONSIDERED OPINION, REASONABLE ACCURATE ADJUSTMENT CANNOT BE MADE FOR SUCH RISK DI FFERENCES AND IF THE RISK ADJUSTMENT IS MADE, THE SAME WOULD FURTHER REDUCE T HE AVERAGE HOURLY RATE CHARGED FROM AE WHICH IS, AS MENTIONED ELSEWHERE, L OWER THAN THE AVERAGE HOURLY RATE CHARGED FROM AE. THEREFORE, IN OUR UNDE RSTANDING OF THE FACTS, INTERNAL CUP SHOULD HAVE BEEN ACCEPTED AS MOST APPR OPRIATE METHOD. 13. FOR THE SAKE OF COMPLETENESS OF THE ADJUDICATION, R EJECTION OF INTERNAL TNMM ANALYSIS UNDERTAKEN BY THE APPELLANT DURING THE COU RSE OF TRANSFER PRICING ASSESSMENT SHOULD NOT HAVE BEEN REJECTED. WE FIND T HAT THE APPELLANT COMPANY HAS PROVIDED IDENTICAL SERVICES TO AE AS WELL AS NO N AES AND FUNCTIONS PERFORMED, ASSETS USED AND RISKS ASSUMED IN AE AS W ELL AS NON AE BUSINESS WERE SIMILAR. THEREFORE, IN OUR CONSIDERED OPINION, EVEN INTERNAL TNMM CAN BE CONSIDERED AS MOST APPROPRIATE METHOD. WE FIND T HAT THE OPERATING MARGIN OF THE APPELLANT FROM THE AE SEGMENT WAS DERIVED AT 30.90% AND THE OPERATING MARGINS IN THE NON AE SEGMENT WAS DERIVED AT RS. 74 .92%. 14. THE TPO REJECTED THE INTERNAL TNMM ANALYSIS ON THE BASIS THAT AS THE APPELLANT HAS MADE OPERATING LOSS IN NON AE BUSINES S, THE TRANSACTIONS WITH NON AES ARE NOT AT INDEPENDENT RATES AND THEY HAVE BEEN UNDERTAKEN ONLY TO INCREASE CAPACITY UTILIZATION. THE TOTAL TURNOVER O F NON AE SEGMENT OF RS. 5.67 ITA NO. 2411 /AHD/2014 . A.Y. 2009-1 0 5 LACS AS AGAINST THE TURNOVER OF RS. 1909.60 LACS IN THE CASE OF INTERNATIONAL TRANSACTIONS WITH AE. THE LD. CIT(A) CONFIRMED THE REJECTION BY HOLDING THAT THE TURNOVER OF THE THIRD PARTY SEGMENT IS VERY MUC H LESS COMPARED TO THAT WITH AE. THE LD. CIT(A) FURTHER HELD THAT THE APPELLANT HAS NOT PROVED THE ALLOCATION OF THE COMMON COST BETWEEN AE AND NON AE S AND WHETHER THEY ARE SCIENTIFIC AND AT ARMS LENGTH. WE FIND THAT THE TP O HAS NOWHERE DISPUTED THE COMMON COST ALLOCATION MADE BY THE APPELLANT. WE AL SO FIND THAT THE LD. CIT(A) HAS ALSO NEVER RAISED ANY DOUBT ON THE ALLOC ATION. INSOFAR AS THE DIFFERENCE IN THE TURNOVER, WE FIND THAT THE TRIBUN AL DELHI BENCH IN THE CASE OF LUMMUS TECHNOLOGY HEAT TRANSFER BV VS. DCIT 42 TAXM ANN.COM 342 HAS HELD AS UNDER:- 5. RULE 10B(L)(E) OF THE INCOME TAX RULES, WHICH D EALS WITH THE TRANSACTIONAL NET MARGIN METHOD, PROVIDES REQUIRES THAT 'THE NET PROF IT MARGIN REALISED BY THE ENTERPRISE (I.E. THE ASSESSEE) FROM AN INTERNATIONA L TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE' IS COMPARED WITH ' THE N ET PROFIT MARGIN REALISED BY THE ENTERPRISE ( I.E. THE ASSESSEE) OR BY AN UNRELA TED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE' - OF COURSE , SUBJECT TO COMPARABILITY ADJUSTMENTS WHICH COULD AFFECT THE AMOUNT OF NET PR OFIT MARGIN IN UNCONTROLLED CONDITIONS. IT IS NOT AT ALL NECESSARY, AS THE AUTH ORITIES BELOW SEEM TO SUGGEST, THAT SUCH NET PROFIT COMPUTATIONS, IN THE CASE OF I NTERNAL COMPARABLES (I.E. ASSESSEE'S TRANSACTIONS WITH INDEPENDENT ENTERPRISE ), ARE BASED ON THE AUDITED BOOKS OF ACCOUNTS OR THE BOOKS OF ACCOUNTS REGULARL Y MAINTAINED BY THE ASSESSEE. HI OUR CONSIDERED VIEW, ALL THAT IS NECESSARY FOR T HE PURPOSE OF COMPUTING ARM'S LENGTH PRICE, UNDER TNMM ON THE BASIS OF INTERNAL C OMPARABLES, IS COMPUTATION OF NET PROFIT MARGIN, SUBJECT TO COMPARABILITY ADJU STMENTS AFFECTING NET PROFIT MARGIN OF UNCONTROLLED TRANSACTIONS, ON THE SAME PA RAMETERS FOR THE TRANSACTIONS WITH AES AS WELL AS NON AES, I.E. INDE PENDENT ENTERPRISES, AND AS LONG AS THE NET PROFITS EARNED FROM THE CONTROLLED TRANSACTIONS ARE THE SAME OR HIGHER THAN THE NET PROFITS EARNED ON UNCONTROLLED TRANSACTIONS, NO ALP ADJUSTMENTS ARE WARRANTED. IT IS NOT AT ALL NECESSA RY THAT SUCH A COMPUTATION SHOULD BE BASED ON SEGMENTAL ACCOUNTS IN THE BOOKS OF ACCOUNTS REGULARLY ITA NO. 2411 /AHD/2014 . A.Y. 2009-1 0 6 MAINTAINED BY THE ASSESSEE AND SUBJECTED TO AUDIT. WE ARE, THEREFORE, OF THE VIEW THAT THE AUTHORITIES BELOW WERE IN ERROR IN REJECTI NG THE SEGMENTAL RESULTS ON THE GROUND THAT THE SEGMENTAL ACCOUNTS WERE NOT AUDITED AND THAT THESE SEGMENTAL ACCOUNTS WERE NOT MAINTAINED IN THE NORMAL COURSE O F BUSINESS. AS REGARDS VAGUE GENERALIZATIONS BY THE TPO TO THE EFFECT THAT THESE ACCOUNTS ARE MANIPULATED, THAT ALLOCATION BASIS OF EXPENSES IS UNFAIR AND THA T THESE ACCOUNTS CONCEAL TRUE PROFITABILITY, WE FIND THAT THESE OBSERVATIONS ARE TOO SWEEPING AND GENERALIZED THE OBSERVATIONS TO HAVE ANY MERITS. IN ANY EVENT, LEARNED COUNSEL FOR THE ASSESSEE HAS PAINSTAKINGLY TAKEN US THROUGH THE SEG MENTAL ACCOUNTS, POINTED OUT THE BASIS OF ALLOCATION OF THE EXPENSES. WE HAVE NO TED THAT THE ALLOCATION OF EXPENSE IS ON THE MAN HOUR BASIS, WHICH IS QUITE FA IR AND REASONABLE, AND THAT EVERY PERSON HAS TO PUNCH IN HOURS ON A SPECIFIC PR OJECT. WE HAVE ALSO NOTED THAT ALL THESE DETAILS AND EXPENSE ALLOCATION BASIS WERE ALSO BEFORE THE TPO AND EVEN THEN, NO SPECIFIC DEFECTS WERE POINTED OUT BY THE T PO. TAKING INTO ACCOUNT ALL THESE FACTORS, AS ALSO ENTIRETY OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT THE TPO INDEED ERRED IN REJECTING THE SEGMENTAL ACCOUNT S AND THUS DECLINING TO ACCEPT THE INTERNAL COMPARABLE. WE ARE ALSO OF THE VIEW THAT THE SIZE OF THE UNCONTROLLED TRANSACTION OR TRANSACTIONS BEING SMAL LER, BY ITSELF, DOES NOT MAKE THESE TRANSACTIONS INCOMPARABLE WITH THE TRANSACTIO NS IN CONTROLLED CONDITIONS. SIZE OF THE COMPARABLE DOES MATTER IN ENTITY LEVEL COMPARISON BECAUSE SCALE OF OPERATIONS SUBSTANTIALLY VARY AND SO DOES THE UNDER LYING PROFITABILITY FACTOR, BUT IN A TRANSACTION LEVEL COMPARISON WITHIN THE SAME E NTITY, MERE DIFFERENCE IN SIZE OF THE UNCONTROLLED TRANSACTIONS DOES NOT RENDER TH E TRANSACTION INCOMPARABLE. IF THE SIZE OF UNCONTROLLED TRANSACTION IS TOO BIG, IT MAY CALL FOR AN ADJUSTMENT FOR VOLUME BUSINESS. IF THE SIZE OF THE UNCONTROLLED TR ANSACTION IS TOO SMALL, IT MAY PROVOKE AN INQUIRY BY THE TPO TO ENSURE THAT IT IS NOT A CONTRIVED TRANSACTION OUTSIDE THE NORMAL COURSE OF BUSINESS OR WITH REGAR D TO OTHER SIGNIFICANT FACTORS SURROUNDING SMALLNESS OF SUCH TRANSACTION. HOWEVER, IN OUR CONSIDERED VIEW, IN NONE OF THESE CASES, A COMPARABLE CAN BE REJECTED O N THE BASIS OF ITS SIZE PER SE. IN THIS VIEW OF THE MATTER, THE AUTHORITIES BELOW W ERE CLEARLY IN ERROR IN REJECTING THE INTERNAL COMPARABLE, I.E. PROFITABILITY OF ASSE SSEE'S TRANSACTIONS WITH NON AES, ON THE GROUND THAT THE VOLUME OF BUSINESS WITH NON AES WAS TOO SMALL VIS-A-VIS BUSINESS WITH AES. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, THE ASSESSEE WAS QUITE JUSTIFIED IN ADOPT ING INTERNAL TNMM AND COMPARING THE PROFIT EARNED ON ITS TRANSACTIONS WIT H AES WITH PROFIT EARNED WITH NON-AES. ACCORDINGLY, THE ALP ADJUSTMENT OF RS. 2,7 2,42,940/- DESERVES TO BE DELETED. WE ORDER SO. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. ITA NO. 2411 /AHD/2014 . A.Y. 2009-1 0 7 15. THE TRIBUNAL HYDERABAD BENCH IN THE CASE OF NTT DAT A GLOBAL DELIVERY SERVICES LIMITED. 63 TAXMANN.COM 92 HAD TAKEN A SIM ILAR VIEW AND FOLLOWED THE FINDINGS GIVEN IN THE CASE OF LUMMUS TECHNOLOGY HE AT TRANSFER BV (SUPRA). 16. AT THIS STAGE, IT WOULD BE PERTINENT TO REFER TO TH E FINANCIAL ANALYSIS OF COMPARABLE COMPANIES WHICH IS AS UNDER:- MARGIN OF COMPARABLE COMPANIES SR. NO. NAME OF COMPANY UNADJUSTED OPERATING PROFIT ON OPERATING COST OP OC OP/OC 1 ALL SEC TECHNOLOGIES LTD. (10,59,19,000) 1,16,96,95,000 - 9.06% 2 CG - VAK SOFTWAR E AND EXPORTS LTD. (SEGMENT) 3,44,058 89,50,183 3.84% 3 COSMIC GLOBAL LIMITED 2,52,49,856 5,23,89,737 53.17% 4 INFORMED TECHNOLOGIES INDIA LTD. 40,75,587 1,77,59,572 22.95% 5 R SYSTEMS INDIA LIMITED (SEGMENT) 1,23,65,000 25,11,72,000 4.92% AVERAGE 15.1% ETPL (TESTED PARTY) 5,72,59,082 18,53,32,713 30.90% 17. THE LD. CIT(A) REJECTED ALLSEC TECHNOLOGIES LIMIT ED AS COMPARABLE BY OBSERVING AS UNDER:- 4.2.7.7 ALLSEC TECHNOLOGIES LIMITED IS PRIMARILY EN GAGED IN THE BUSINESS OF OPERATING A CALL CENTER, THE SERVICES PROVIDED BY T HE COMPANY INCLUDE DATA VERIFICATION, PROCESSING OF ORDERS RECEIVED THROUGH TELEPHONE CALLS, TELEMARKETING, MONITORING QUALITY OF CALLS OF OTHER CALL CENTERS, CUSTOMER SERVICES AND HR AND PAYROLL PROCESSING FOR DOMESTIC COMPANIES. FOR THE PERIOD ENDED 31 MARCH 2009, 31 MARCH 2008 AND 31 MARCH 2007, 90 PERCENT, 99 PER CENT AND 99 PERCENT OF THE OPERATING REVENUES RESPECTIVELY WERE DERIVED FROM T HE ABOVE MENTIONED SERVICES. THEREFORE, THIS COMPANY IS FUNCTIONALLY COMPARABLE, HOWEVER, BECAUSE I HAVE REJECTED ALL COMPANIES HAVING EXPORT TURNOVER LESS THAN 75%, THE COMPANY SHOULD NOT BE SELECTED AS COMPARABLE COMPANY. ACCORDINGLY, ALLSEC TECHNOLOGIES LTD CANNOT BE ACCEPTED AS COMPARABLE. ITA NO. 2411 /AHD/2014 . A.Y. 2009-1 0 8 HOWEVER WITHOUT PREJUDICE TO THE ABOVE, SINCE THE A PPELLANT HAS CARRIED OUT THE SEARCH DURING THE ASSESSMENT PROCEEDINGS AND NOT DO CUMENTED THE SAME WHILE MAINTAINING THE DOCUMENTS AS PRESCRIBED UNDER SECTI ON 92D R.W RULE 10D, I AM NOT INCLINED ACCEPTED SUCH EXERCISE AS POST FACTO A NALYSIS. THE DOCUMENTS REQUIRED TO BE PREPARED AND MAINTAINED BY THE APPEL LANT HAS TO BE CONTEMPORANEOUS I.E. SHOULD BE PREPARED AND MAINTAI NED AT THE TIME WHEN THE INTERNATIONAL TRANSACTIONS ARE ENTERED INTO BY THE APPELLANT AND NOT DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS. ACCORDINGLY I N LIGHT OF DECISION OF UCB INDIA (P) LTD (SUPRA) THE ENTIRE EXERCISE OF THE AP PELLANT SHOULD BE DISCARDED. 18. THE OTHER REASON GIVEN BY THE FIRST APPELLATE AUTHO RITY IS THAT THE ASSESSEE CARRIED OUT THE SEARCH DURING THE ASSESSMENT PROCEE DINGS AND THEREFORE SUCH EXERCISE WAS CONSIDERED AS POST FACTO ANALYSIS. WE DO NOT FIND ANY MERIT IN THE OBSERVATIONS/FINDINGS OF THE LD. CIT(A). THE TRIBUN AL DELHI BENCH IN THE CASE OF MERCER CONSULTING INDIA PRIVATE LIMITED 47 TAXMA NN.COM 84. WHILE CONSIDERING ALLSEC TECHNOLOGIES LTD. AS COMPARABLE HAS OBSERVED AS UNDER:- 9.1 THIS CASE WAS INCLUDED BY THE ASSESSEE IN THE LIST OF COMPARABLES WHICH WAS EXCLUDED BY THE TPO ON THE GROUND OF DIMINISHING SA LES FOR THE LAST THREE YEARS AND THE EXPORT REVENUES LESS THAN 75% OF THE TOTAL TURN OVER. HERE, IT IS RELEVANT TO MENTION THAT THE TPO ADOPTED CERTAIN FILTERS WHICH HAVE BEEN MENTIONED ON PAGES 13 AND 14 OF HIS ORDER. ONE OF SUCH FILTERS IS THE EXC LUSION OF COMPANIES WHOSE EXPORT SALES ARE LESS THAN 75% OF THE TOTAL SALES FROM ITE S. ANOTHER FILTER APPLIED BY THE TPO IS THE EXCLUSION OF CASES WITH DIMINISHING REVE NUES. THE TPO RECORDED THAT THIS COMPANY HAS SOME PECULIAR PROBLEMS AND HENCE THE SA ME IS NOT IN LINE WITH THE GROWTH IN SOFTWARE INDUSTRY. HOWEVER, HE DID NOT DE LVE INTO THE ACTUAL FIGURES OF DIMINISHING REVENUES OF THIS COMPANY. AS AGAINST TH IS, IT IS OBSERVED THAT ALLSEC'S OPERATING REVENUE HAS INCREASED IN THE FINANCIAL YE AR 2008-09 OVER THE PREVIOUS YEAR WHICH IS APPARENT FROM THE STATEMENT OF FACTS GIVEN BY THE ASSESSEE. ON A SPECIFIC QUERY, THE ID. DR COULD NOT POINT OUT ANY MATERIAL TO INDICATE OR SUPPORT THE TPO'S ASSERTION IN HIS ORDER ABOUT THE DIMINISHING OF ALL SEC TECHNOLOGIES LTD FOR THE LAST ITA NO. 2411 /AHD/2014 . A.Y. 2009-1 0 9 THREE YEARS. THE SECOND REASON GIVEN BY THE TPO FOR DISCARDING THIS CASE FROM THE LIST OF COMPARABLES IS EXPORT LESS THAN 75% OF THE TOTAL TURNOVER. WE OBSERVE THAT ALBEIT THIS CONTENTION OF THE TPO IS CORRECT THAT T HIS CASE DOES NOT PASS THE FILTER OR TEST LAID DOWN BY THE TPO, BUT THE FACT OF THE MATT ER IS THAT THE ACTUAL RATIO OF EXPORT REVENUE TO TOTAL TURNOVER OF ALLSEC TECHNOLOGIES ST ANDS AT 74.45% AS SHOWN ON PAGE 84 OF THE PAPER BOOK. IF WE LITERALLY CONSIDER THE FILTER APPLIED BY THE TPO, THIS CASE DOES NOT PASS THE TEST. HOWEVER, IT IS SEEN THAT TH E ASSESSEE INCLUDED THIS CASE IN THE LIST OF COMPARABLES BY APPLYING THE FILTER OF EXCLU DING THE CASES IN WHICH EXPORT REVENUE WAS LESS THAN 25% OF THE TOTAL REVENUE. THE RE CAN BE NO HARD AND FAST RULE FOR PUTTING A SPECIFIC CEILING IN A PARTICULAR FILT ER. THE FILTERS ARE NOT SACROSANCT AS NOT STATUTORILY PRESCRIBED. THESE ARE USED OR MODIF IED FOR SELECTION OR REJECTION OF COMPARABLES AS PER THE CONVENIENCE OF THE CONCERNED PARTY. IF AN ASSESSEE WANTS TO INCLUDE A CERTAIN CASE IN THE LIST OF COMPARABLES W HICH SUITS ITS REQUIREMENTS, THEN, IT WILL SUITABLY MODIFY THE FILTER ITSELF OR THE CEILI NG IN SUCH FILTER, SO AS TO FIT THE BILL. POSITION IS NO DIFFERENT WHEN IT COMES TO THE TURN OF THE REVENUE. IF IT WANTS TO INCLUDE A PARTICULAR CASE IN THE LIST OF COMPARABLES, IT WI LL ALSO MODIFY THE FILTER OR CEILING IN SUCH FILTER TO SUIT ITS INTEREST. EQUALLY, IF BOTH THE SIDES WANT TO EXCLUDE A CASE, THEY WILL MODIFY THE FILTER ACCORDINGLY. THE NUTSHELL IS THAT SOME SORT OF CHERRY-PICKING IS DONE BY BOTH THE SIDES. 9.2 THE EXCLUSION OF THIS CASE HAS BEEN DONE BY INCREAS ING THE LIMIT IN FILTER TO 75% AS AGAINST 25% APPLIED BY THE ASSESSEE BECAUSE THE PERCENTAGE WAS 74.45%. IF THE ACTUAL RATIO IN THIS CASE HAD BEEN MORE THAN 75%, A ND THE REVENUE HELL BENT ON EXCLUDING THIS CASE, THEN IT WOULD HAVE RESORTED TO INCREASING THE CEILING IN THE FILTER TO 80% OR STILL MORE SO AS TO ENSURE THAT IT REMAIN S OUTSIDE THE LIMIT SET BY IT. AS THE RATIO OF 75% IS NOT SOMETHING WHICH IS SCIENTIFICAL LY PROVEN AND THE EXPORT REVENUE OF ALLSEC TECHNOLOGIES IS 74.45% AS AGAINST THE TPO'S FILTER OF 75%, WE ARE OF THE CONSIDERED OPINION THAT THE SAME CANNOT BE EXCLUDED FOR SUCH A MINUSCULE DIFFERENCE IF IT IS OTHERWISE COMPARABLE. IT IS PATENT THAT TH E TPO HAS NOT DISPUTED THE OTHERWISE FUNCTIONAL COMPARABILITY OF THIS CASE WITH THAT OF THE ASSESSEE. IF WE CONSIDER THE CASE OF ALLSEC TECHNOLOGIES ON A CRITERIA OF PREPONDERAN CE OF COMPARABILITY, WE FIND THAT THE SAME MERITS INCLUSION IN THE LIST OF COMPARABLE S. NOT ONLY THE TPO'S REASONING ABOUT THE DECLINING REVENUE OF ALLSEC TECHNOLOGIES OVER A PERIOD OF THREE YEARS IS INCORRECT, THIS CASE IS ALSO PASSING THE TEST OF TH E RATIO OF EXPORT TURNOVER TO TOTAL ITA NO. 2411 /AHD/2014 . A.Y. 2009-1 0 10 TURNOVER ON A PRAGMATIC RATIONAL BASIS. WE, THEREFO RE, HOLD THAT THIS CASE SHOULD BE INCLUDED IN THE LIST OF COMPARABLES. 19. A SIMILAR VIEW WAS TAKEN BY THE TRIBUNAL IN HYDERAB AD BENCH IN THE CASE OF CAPITAL IQ INFORMTION SYSTEMS (INDIA) PVT. LTD. 49 TAXMANN.COM 313 WHEREIN THE CO-ORDINATE BENCH HAS FOLLOWED THE FINDINGS OF THE TRIBUNAL DELHI BENCH IN THE CASE OF MERCER CONSULTING INDIA PRIVATE LIMI TED (SUPRA). THE COMPARABLE CG-VAK SOFWARE &EXPORTS LIMITED WAS REJE CTED AS THE TURNOVER OF THE COMPANY IS LESS THAN 1 CRORE AND HENCE DOES NOT QUALIFY TURNOVER FILTER. THE TURNOVER OF THE RELEVANT SEGMENT OF THE COMPANY IS 86.10 LACS BUT JUST BECAUSE THIS COMPANY DOES NOT PASS THE TURNOVER FIL TER OF 1 CRORE SHOULD NOT HAVE BEEN REJECTED AS THE BUSINESS IS EXACTLY SIMIL AR TO THAT OF THE APPELLANT COMPANY. 20. IF THE AFOREMENTIONED TWO COMPANIES ARE ACCEPTED AS COMPARABLE, AS EXHIBITED ELSEWHERE, THE AVERAGE OF THE 5 COMPARABLES COMES T O 15.17% WHEREAS THAT OF THE APPELLANT COMPANY COMES TO 30.90%. 21. WE FURTHER FIND THAT THE APPELLANT COMPANY HAS EARN ED FOREIGN EXCHANGE GAIN ON REVALUATION OF ITS OUTSTANDING REVENUE RECEIVABL ES WHICH WERE NOT CONSIDERED AS PART OF OPERATING PROFIT BY THE TPO A S WELL AS CIT(A). WE FIND THAT THE FOREIGN EXCHANGE GAIN EARNED BY THE APPELL ANT PERTAINED TOWARDS REVALUATION OF ITS DEBTORS AS ON THE BALANCE SHEET DATE WHICH MEANS THAT EXCHANGE FLUCTUATION WAS TOWARDS REVENUE ITEM. FURT HER, SAFE HARBOUR RULES ARE ONLY APPLICABLE TO THOSE ASSESSEE WHO HAVE OPTE D FOR SAFE HARBOUR RULES AND THE SAME IS MADE EFFECTIVE FROM A.Y. 2013-14 ON WARDS. ITA NO. 2411 /AHD/2014 . A.Y. 2009-1 0 11 22. WE FIND SUPPORT FROM THE DECISION OF THE CO-ORDINAT E BENCH IN THE CASE OF RAJRATNA METAL INDUSTRIES LTD. TRIBUNAL AHMEDABAD B ENCH IN ITA NO. 1050/AHD/2015. THE RELEVANT FINDINGS READ AS UNDER: - 7. THE REVENUES THIRD AND LAST SUBSTANTIVE GROUND PLEADS THAT THE LOWER APPELLATE AUTHORITY HAS ERRED IN DELETING ARMS LEN GTH PRICE ADJUSTMENT OF RS. 16,84,60,644/-; AS PROPOSED IN TRANSFER PRICING OFF ICERS ORDER DATED 21.01.2014 U/S.92CA(3) OF THE ACT AND ACCEPTED IN THE ABOVESTA TED ASSESSMENT ORDER. MR. BIDARI STRONGLY ARGUES THAT THE CIT(A) OUGHT NOT TO HAVE REVERSED THE IMPUGNED ADJUSTMENT ARISING FROM EXCLUSION OF FOREIGN EXCHAN GE / LOSS; AS DONE BY THE ASSESSING OFFICER. MR. DHINAL SHAH QUOTES A CATINA OF CASE LAW THAT THE ISSUE OF EXCLUSION OF FOREIGN EXCHANGE GAIN/LOSS FOR THE PUR POSE OF COMPUTING ARM'S LENGTH PRICE IN TRANSFER PRICING PROCEEDINGS IS NO MORE RES INTEGRA IN VIEW OF THE FOLLOWING JUDICIAL PRECEDENTS: 1. FISERV INDIA PVT LTD [TS-437-HC-2016(DEL)-TP] 2. AMERIPRISE INDIA PVT LTD [TS-174-HC-20 16(DEL)-TP] 3. NEC TECHNOLOGIES INDIA LTD [TS-221-ITAT-2 016(DEL)-TP 4. SUBEX LTD [TS-181 -ITAT-201 6(BANG)-TP] 5. VISA CONSOLIDATED SUPPORT & SERVICES [TS -162-ITAT-2016(BANG)-TP] 6. SAP LABS INDIA PRIVATE LIMITED (145 TTJ 521) (BANGALORE ITAT) 7. FOUR SOFT LTD. (ITA NO. 1495/HYD/20 10) (HYDERABAD ITAT) 8. TRILOGY E BUSINESS SOFTWARE INDIA PRIVAT E LIMITED VS. DCIT (23 ITR(T) 464) (BANGALORE ITAT) 9. M/S CAPITAL IQ INFORMATION SYSTEMS (INDI A) PRIVATE LIMITED VS. DCIT (ITA NO.1961/HYD/2011) (HYDERABAD ITAT) 10. S. NARENDRA VS. ACIT ([2013] 32 TAXMANN.C OM 196) (MUMBAI ITAT) 11. CORDYS R & D (INDIA) (P.) LTD. VS. DCIT ( ITA NO. 1092/H YD/2010) (HYDERABAD ITAT) 12. TECHBOOKS INTERNATIONAL PVT LTD VS. ACIT (ITA NO. 722/DEL/2014) (DELHI ITAT)' THE ASSESSEE'S CASE THEREFORE IS THAT THE CIT(A) HA S RIGHTLY TREATED FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS AN OPERATING ITEM NOT TO BE EXCLUDED FOR THE PURPOSE OF COMPUTING ARM'S LENGTH PRICE. THE REVENU E FAILS TO REBUT APPLICATION ITA NO. 2411 /AHD/2014 . A.Y. 2009-1 0 12 OF THE ABOVE EXTRACTED JUDICIAL PRONOUNCEMENTS HOLD ING IDENTICAL FOREIGN EXCHANGE FLUCTUATION GAINS/LOSSES AS OPERATING ITEM UNDER THE TRANSFER PRICING PARLANCE. WE THUS AFFIRM CIT(A)'S FINDINGS ON THIS THIRD ISSUE AS WELL. THE REVENUE'S LAST SUBSTANTIVE GROUND AS WELL AS ITS AP PEAL ITANO.L050/AHD/2015 FAILS. 23. OUR VIEW IS FURTHER FORTIFIED BY THE JUDGMENT OF HO NBLE DELHI HIGH COURT IN THE CASE OF CASHEDGE INDIA PRIVATE LTD. IN TAX APPE AL NO. 279 OF 2016. THE RELEVANT FINDINGS OF THE HONBLE COURT READS AS UND ER:- 7. AS FAR AS THE QUESTION, I.E., FOREIGN EXCHANGE FLUCTUATION ELEMENT IS CONCERNED, THE RECORDS CLEARLY REVEAL THAT THE SAFE HARBOUR RULES CAME INTO FORCE LATER WHEREAS THE FACTS OF THIS CASE PERTAIN TO THE ASSESSMENT YEAR 2010-H (FINANCIAL YEAR 2009-10). AS A CONSEQUENCE, THE IMP UGNED ORDER CANNOT BE INTERFERED WITH. NO QUESTION OF LAW THUS ARISES. TH E APPEAL IS CONSEQUENTLY DISMISSED. 24. IN THE LIGHT OF THE ABOVE DISCUSSION, FOREIGN EXCHA NGE FLUCTUATION SHOULD BE CONSIDERED AS OPERATING IN NATURE FOR THE PURPOSES OF COMPUTING THE OPERATING PROFIT OF THE APPELLANT AS WELL AS COMPARABLE COMPA NIES. 25. CONSIDERING THE FACTS IN TOTALITY, THE UPWARD ADJUS TMENT OF RS. 37,716,838/- IS UNCALLED FOR AND WE DIRECT THE SAME TO BE DELETED. 26. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 27. BEFORE PARTING, WE FIND THAT THE REVENUE IN ITS WRI TTEN SUBMISSION HAS REFERRED TO THREE COMPARABLE COMPANIES PROVIDED BY THE TPO N AMELY ; (I) ACCENTIA TECHNOLOGIES LTD. ITA NO. 2411 /AHD/2014 . A.Y. 2009-1 0 13 (II) ACROPETAL TECHNOLOGIES LTD. (III) CORAL HUB LIMITED 28. THE FIRST APPELLATE AUTHORITY HAS HELD THAT THESE C OMPANIES ARE INCOMPARABLE TO THE BUSINESS OF THE APPELLANT AND THEREFORE THE LD. CIT(A) HAS RULED IN FAVOUR OF THE APPELLANT THE REVENUE IS NOT IN APPEAL BEFO RE US. THEREFORE, NO ADJUDICATION IS REQUIRED ON THESE THREE COMPANIES. ORDER PRONOUNCED IN OPEN COURT ON 16 - 01- 20 18 SD/- SD/- (MAHAVIR PRASAD) (N. K. BILLAIYA) JUDICIAL MEMBER TRUE COPY A CCOUNTANT MEMBER AHMEDABAD: DATED 16 /01/2018 RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD