IBM Daksh Business Process Services Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 2666/DEL/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7119 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 2 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 05-04-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 01-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A M GOVIL
• Keywords: Related party transaction; Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Commercial expediency
• Section: 143(3); 244A; 133(6); 37(1); 10B

Judgement Text

1 ITA NO. 26 66/DEL/2014 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-2 NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER & SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO.-2666/DEL/2014 ( ASSESSMENT YEAR: 2009-10) DAKSH BUSINESS PROCESS SERVICES PVT. LTD. INFINITY TOWER, 4 TH FLOOR, TOWER-B, BUILDING NO. 8, CYBER CITY, DLF PHASE-III, GURGAON. AABCD4187D VS DCIT CIRCLE 11(1) NEW DELHI. ASSESSEE BY SH. PERCY PARDIWALA, ADV. REVENUE BY SH. A.M. GOVIL, CIT-DR ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER : THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGAI NST THE ASSESSMENT ORDER PASSED BY THE AO PURSUANT TO THE D IRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP) FOR AY 2009-1 0. 2. THE FACTS OF THE CASE ARE THAT THE TAXPAYER FILE D ITS RETURN OF INCOME ON 30.09.2009 DECLARING TOTAL INCOME OF DATE OF HEARING 05.04.2016 DATE OF PRONOUNCEMENT 05.07.2016 2 ITA NO. 26 66/DEL/2014 RS.73,15,61,449/-. SINCE THE TAXPAYER HAD UNDERTAKE N INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTER PRISES, A REFERENCE WAS MADE BY THE ASSESSING OFFICER (AO) TO THE TRANSFER PRICING OFFICER, NEW DELHI, UNDER SECTION 9 2CA(1). VIDE ORDER DATED 16.01.2013 THE TRANSFER PRICING OF FICER (TPO) PROPOSED AN ADDITION OF RS.83,47,73,540 AND AO VIDE HIS DRAFT ASSESSMENT ORDER DATED 18.03.2013 AFTER CONSIDERING THE INTERNATIONAL TRANSACTIONS, PROPOSED TO ASSESS THE TAXPAYER AT AN INCOME OF RS.2,04,97,83,446 BY MAKING FOLLOWING ADDITIONS/DISALLOWANCES:- PARTICULAR A MOUNT (I (IN RS.) ADJUS ADJUSTMENT ON ACCOUNT OF ARMS LENGTH PRICE OF: ITES RS ITES RS..55,11,71,637 ROYALTY RS.28,36,0 1,903 RS.8 RS. 83,47,73,540 DISALL DISALLOWANCE OF PRIOR PERIOD EXPENSES RS. 5 RS. 54,33,214 DISALL DISALLOWANCE OF DEDUCTION UNDER SECTION 10 A RS.8, RS. 8,40,63,585 3. THE BUSINESS ACTIVITIES OF THE ASSESSEE IS THAT IBM DAKSH IS THE LEADING PROVIDER OF BPO SERVICES TO FORTUNE 500 COMPANIES IN THE TRANSACTION PROCESSING AND CUSTOME R CARE SERVICES SEGMENTS. DAKSH OFFERS REMOTE SUPPORT SERV ICES INCLUDING CUSTOMER CARE AND TECHNICAL SUPPORT THROU GH MULTIPLE COMMUNICATION CHANNELS, BACK-END TRANSACTI ON 3 ITA NO. 26 66/DEL/2014 PROCESSING, OUTBOUND COLLECTIONS, TELEMARKETING AND WEB BASED SERVICES INCLUDING REAL-TIME CHAT. IBM DAKSH S UNIQUE CO-SOURCING MODEL AND 100 PERCENT BPO FOCUS THE E NABLED IT TO RE-ENGINEER PROCESSES AND ALSO PROVIDE VALUE- ADDED SERVICES. 4. THE TAXPAYER FURNISHED THE TP STUDY AND SELECTED TNMM AS THE MOST APPROPRIATE METHOD TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS. THE TAXPAYER HAD SELECT ED 10 COMPARABLES IN ITS TRANSFER PRICING STUDY. THE THRE E YEAR WEIGHTED AVERAGE COST PLUS MARGIN OF COMPARABLES WAS 12.29 PERCENT AND IBM DAKSH'S COST PLUS MARGIN WAS 1 0.32 PERCENT. THE TAXPAYER APPLIED THE 5% RANGE AND HEL D THAT THE TRANSACTION WAS AT ARM'S LENGTH. THE TPO, HOWEV ER, DID THE INTERNATIONAL TRANSACTIONS ENTERED INTO ARE TAB ULATED BELOW:- S. NO. TYPES OF INTERNATIONAL TRANSACTION TOTAL VALUE OF TRANSACTION (AMOUNT IN RS.) 1 IMPOR IMPORT OF CAPITAL EQUIPMENTS 18,444,842 2 PROVISI PROVISION OF BUSINESS PROCESS SERVICES 4,909,455,058 3 ROYALT ROYALTY CHARGES 283,601,903 4 REIM REIMBURSEMENT OF TRAVEL & CONVEYANCE, STAFF WELFARE & OTHER MISCELLANEOUS EXPENSES 378,179,023 5 RECOV RECOVE RY OF EXPENSES 246,424,841 6 SALES SALES OF EXPENSES 70,180,368 7 BUY B BUY BACK OF EQUITY SHARES 1,162,615,075 4 ITA NO. 26 66/DEL/2014 NOT AGREE WITH THE VARIOUS FILTERS USED BY THE TAXPA YER IN ITS TP STUDY AND BY USING, CERTAIN MORE FILTERS HE REJE CTED 7 COMPARABLES FROM TAXPAYERS SET (10 COMPANIES FROM T P STUDY AND 2 COMPANIES FROM FRESH SEARCH DIRECTED BY TPO DURING ASSESSMENT PROCEEDINGS) AND SELECTED 4 NEW COMPARABLES. HE, THUS, SELECTED A SET OF 9 COMPARAB LES (5 FROM TAXPAYER'S SET AND 4 NEW COMPANIES) WHOSE AVERAG E MARGIN WAS 22.70% AS AGAINST THAT OF TAXPAYER'S AT 1 0.32%. THUS, AO/TPO MADE AN ADDITION OF RS 55,11,71,637 IN THE ITES SEGMENT. FURTHER, THE TPO NOTICED THAT THE TAX PAYER HAD MADE A PAYMENT OF RS.28,36,01,903 TOWARDS ROYALT Y. THE TAXPAYER IN ITS TP STUDY HAD AGGREGATED THIS INTERNATIONAL TRANSACTION WITH OTHER TRANSACTION AN D BY USING TNMM ALONG WITH ITES SERVICES STATED THAT THIS PAYMENT OF ROYALTY WAS ALSO AT ARM'S LENGTH. THE TAX PAYER ALSO STATED THAT THE PAYMENT OF ROYALTY WAS WITHIN TH E PERMISSIBLE LIMIT SET BY FEMA, 1999 THEREFORE, NO S EPARATE ANALYSIS WAS UNDERTAKEN TO TEST THE ARMS LENGTH NAT URE OF THIS TRANSACTION. HOWEVER, IN TPOS VIEW, THE ROYALT Y SHOULD HAVE BEEN TREATED AS A SEPARATE TRANSACTION AND SHO ULD NOT 5 ITA NO. 26 66/DEL/2014 HAVE BEEN AGGREGATED WITH ITES. IN TPOS VIEW, THERE WERE INHERENT FLAWS TO USE TNMM AS THE MOST APPROPRIATE METHOD AND COMBINED TRANSACTION APPROACH FOLLOWED BY THE TAXPAYER WAS NOT PROPER. ACCORDINGLY TO HIM, TP REGULATIONS ALSO PROVIDE THAT EACH CLASS OF TRANSAC TION SHOULD BE EXAMINED HAVING REGARD TO THE ARMS LENGT H PRINCIPLE BY APPLYING MOST APPROPRIATE METHOD. FURT HER, RELYING ON THE PRINCIPLE OF BENEFIT TEST, TPO HEL D THE CUP TO BE THE MOST APPROPRIATE METHOD. HENCE, TPO DETER MINED THE ALP OF THE TRANSACTION RELATING TO ROYALTY TO B E AT NIL' AND THUS, PROPOSED AS AN ADJUSTMENT OF RS.28 , 36 , 01 , 903/- . 5. AGGRIEVED, THE ASSESSEE RAISED OBJECTIONS BEFORE TH E DRP. THE OBJECTIONS RAISED BY THE ASSESSEE AND THE SUBSE QUENT ADJUDICATION BY THE DRP THEREON ARE AS UNDER: I. THE ASSESSEES OBJECTION BEFORE THE DRP WAS WHETHER I N THE FACTS OF THE CASE, THE AO/TPO WAS RIGHT IN USING ASSESMENT YEAR DATA, AS AGAINST MULTIPLE YEAR DATA SELECTED BY THE TAX PAYER. THE DRP REJECTING THE ASSESSEES OBJECTION HELD THAT IT IS ALWAYS ADVISABL E TO 6 ITA NO. 26 66/DEL/2014 USE CURRENT YEAR DATA ONLY UNLESS THERE ARE COMPELL ING REASONS TO ADOPT PREVIOUS YEAR DATA FOR THE COMPARABILITY ANALYSIS. II. THE ASSESSEES SECOND OBJECTION BEFORE THE DRP WAS WHETHER THE AO/TPOS ACTION BY APPLYING THE VARIOUS FILTERS WAS RIGHT IN REJECTING FEW OF TAX PAYERS COMPARABLES AND INCLUDING NEW COMPARABLES, WHILE MAKING THE COMPARABILITY ANALYSIS. IN THIS REGARD, THE DRP - A) UPHELD THE TPOS ACTION OF REJECTING COMPANIES HAVI NG ITES INCOME OF LESS THAN 75% OF THE TOTAL INCOME AS SUCH COMPANIES WOULD NOT BE FUNCTIONALLY SIMILAR TO THAT OF THE ASSESSEE. B) UPHELD THE TPOS ACTION OF REJECTING COMPANIES WHOSE EXPORT REVENUES WERE LESS THAN 75% OF THE TOTAL REVENUE ON THE GROUND THAT SUCH FILTER ENSURES FURT HER REFINEMENT OF FUNCTIONAL PROXIMITY IN FAR ANALYSIS. C) UPHELD THE TPOS ACTION OF REJECTING THOSE COMPANIE S 7 ITA NO. 26 66/DEL/2014 WHO WERE MAINTAINING ACCOUNTS IN TERMS OF PERIOD OTHER THAN THE FINANCIAL YEAR FOR THE PURPOSE OF DETERMINATION OF ARMS LENGTH PRICE. D) UPHELD THE TPOS ACTION OF REJECTING COMPANIES HAVI NG DIMINISHING REVENUES/PERSISTENT LOSSES FOR THE PREVIOUS YEARS AND HAVING A NEGATIVE NET-WORTH ON T HE GROUND OF BEING OF AN EXCEPTION. E) UPHELD THE TPOS ACTION OF USING A RELATED PARTY TRANSACTION (RPT) FILTER OF 25% AS RPT WOULD HAVE SUBSTANTIAL IMPACT ON THE MARGINS OF SUCH COMPANIES . F) UPHELD THE INCLUSION/EXCLUSION OF THE FOLLOWING COMPARABLES BY THE TPO- A) CORAL HUB LTD. - INCLUSION BY TPO UPHELD B) ECLERX SERVICES LTD. - INCLUSION BY TPO UPHELD C) ACROPETAL TECHNOLOGIES LTD. - INCLUSION BY TPO UPHELD D) CALIBER POINT BUSINESS SOLUTION LTD. - EXCLUSION BY TPO UPHELD 8 ITA NO. 26 66/DEL/2014 E) R SYSTEM INTERNATIONAL - EXCLUSION BY TPO UPHELD F) DATAMATICS FINANCIAL SERVICES LTD. - EXCLUSION BY TPO UPHELD G) IN HOUSE PRODUCTION LTD. - EXCLUSION BY TPO UPHELD H) NIIT SMART SERVE LTD. - EXCLUSION BY TPO UPHELD III. THE ASSESSEES THIRD OBJECTION BEFORE THE DRP WAS WIT H REGARD TO THE DENIAL OF ADJUSTMENT ON ACCOUNT OF WO RKING CAPITAL, RISK ETC. BY THE TPO WHILE WORKING OUT THE AVERAGE MARGINS. THE DRP ACCEPTED THE ASSESSEDES CONTENTION REGARDING WORKING CAPITAL ADJUSTMENT AND DIRECTED THE TPO TO GIVE WORKING CAPITAL ADJUSTMENT . HOWEVER, THE ASSESSEES OBJECTION TO NOT ALLOWING TH E RISK ADJUSTMENT WAS REJECTED. IV. THE ASSESSEES FOURTH OBJECTION BEFORE THE DRP WAS REGARDING THE AO/TPOS ACTION IN DETERMINING THE VA LUE OF ROYALTY AT NIL. THIS OBJECTION OF THE ASSESSEE WAS REJECTED AND THE TPOS ACTION OF PROPOSING AN ADJUSTMENT OF RS. 28,36,01,903/- WAS UPHELD. 9 ITA NO. 26 66/DEL/2014 V. THE ASSESSEES FIFTH CLAIM BEFORE THE DRP WAS WHETHER THE BENEFIT OF +-5% COULD BE CLAIMED AS A STANDARD DEDUCTION FOR THE PURPOSE OF COMPUTING ALP. THIS C LAIM WAS ALSO REJECTED BY THE DRP. VI. ON THE CORPORATE TAX ISSUE, THE ASSESSEE OBJECTED T O THE AOS PROPOSAL TO REDUCE COMMUNICATION CHARGES OF RS . 25,12,78,420/- FROM THE EXPORT TURNOVER FOR THE PURPOSE OF CLAIMING DEDUCTION U/S 10A. THIS OBJECT ION OF THE ASSESSEE WAS OVERRULED BY THE DRP. VII. FURTHER, ON THE CORPORATE TAX ISSUE, THE ASSESSEE OBJECTED TO THE PROPOSAL DISALLOWANCE OF PRIOR PERIO D EXPENSES AMOUNTING TO RS. 54,33,214/-. THIS OBJECT ION OF THE ASSESSEE WAS ALSO REJECTED. 6. THE ASSESSMENT ORDER U/S 144C R.W.S. 143(3) WAS CONSEQUENTLY PASSED ON 25.02.2014 AT A TOTAL INCOME OF RS. 2,01,86,30,817/-. AGGRIEVED, THE ASSESSEE HAS RAIS ED THE FOLLOWING GROUNDS OF APPEAL BEFORE US: THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, A ND IN LAW: 10 ITA NO. 2 666/DEL/2014 1. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSESSIN G OFFICER (LD. AO) PURSUANT TO THE DIRECTIONS OF LE ARNED DISPUTE RESOLUTION PANEL (LD. DRP) IS BAD IN LAW AND VOID AB-INITIO. 2. THE LD. AO (FOLLOWING THE DIRECTIONS OF THE LD. DRP ), ERRED ON FACTS AND IN LAW IN ENHANCING THE INCOME O F THE APPELLANT BY RS. 52,00,18,918 HOLDING THAT THE INTERNATIONAL TRANSACTION PERTAINING TO PROVISION O F BUSINESS PROCESS OUTSOURCING (BPO) SERVICES DO NO T SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME-TAX ACT, 1961 ('THE ACT'), AND IN DOING SO H AVE GROSSLY ERRED IN: 2.1 REJECTING THE TRANSFER PRICING (TP) DOCUMENTA TION MAINTAINED BY THE APPELLANT AND IN INVOKING PROVISI ONS OF 92C(3) OF THE ACT CONTENDING THAT THE INFORMATIO N OR DATA USED IN THE COMPUTATION OF THE ARMS LENGTH PR ICE IS NOT RELIABLE OR CORRECT. 2.2 USING DATA AVAILABLE AT THE TIME OF ASSESSMENT PROCEEDINGS, INSTEAD OF USING DATA AVAILABLE AT THE TIME OF PREPARING THE TP DOCUMENTATION FOR COMPARABLE COMPANIES. IN DOING SO, THE LD. TPO HAS IGNORED THE FACT THAT THIS DATA WAS NOT AVAILABLE TO THE APPELLANT A T THE TIME OF COMPLYING WITH THE TP DOCUMENTATION REQUIREMENTS. 2.3 NOT APPLYING MULTIPLE YEAR/PRIOR YEAR DATA FOR COMPARABLE COMPANIES, WHILE DETERMINING THE ARMS LENGTH PRICE. 2.4 REJECTION OF COMPARABILITYANALYSIS UNDERTAKEN BY TH E APPELLANT IN THE TP DOCUMENTATION, IGNORING THAT SU CH ANALYSIS WAS IN ACCORDANCE WITH THE PROVISIONS OF T HE ACT READ WITH THE INCOME TAX RULES, 1962, ('THE RULES') . 2.5 REJECTING CERTAIN COMPANIES IDENTIFIED BY THE APPELLANT IN THE TP DOCUMENTATION, ALTHOUGH SUCH COMPANIES ARE COMPARABLE. 11 ITA NO. 2 666/DEL/2014 2.6 INCLUDING ADDITIONAL COMPANIES AS PART OF THE FINAL SET OF COMPANIES, ALTHOUGH SUCH COMPANIES DO NOT SATISFY THE TEST OF COMPARABILITY. 2.7 DIRECTING THE APPELLANT TOCONDUCT A FRESH BENCHMARK ING ANALYSIS USING NON CONTEMPORANEOUS DATA ANDSUBSTITU TING THE APPELLANTS ANALYSIS OF FILTERS AND COMPARABLES WITH FRESH BENCHMARKING ANALYSIS BASED ON HIS OWN CONJECTURES AND SURMISES. 2.8 APPLYING CERTAIN ARBITRARY FILTERS TO ARRIVE AT A F RESH SET OF COMPARABLES AND IN DETERMINING THE ARMS LEN GTH PRICE IN CONNECTION WITH THE INTERNATIONAL TRANSACT IONS PERTAINING TO THE BPO SERVICES SEGMENT AND HOLDING THAT THE APPELLANTS INTERNATIONAL TRANSACTION IS NOT AT ARMS LENGTH. 2.9 COMPUTING THE MARK-UPS OF CERTAIN COMPARABLE COMPANIES BASED ON ERRONEOUS COMPUTATION METHODOLOGY. 2.10 NOT PROVIDING APPROPRIATE ECONOMIC ADJUSTMENTS (RISK ADJUSTMENT) CLAIMED BY APPELLANT AND THUS CONSEQUENTLY ARRIVING AT AN ERRONEOUS MARK-UP ON COST FOJ COMPARABLE COMPANIES SELECTED IN THE TP ORDER. 3. THE LD. AO (FOLLOWING THE DIRECTIONS OF THE LD. DRP ), ERRED ON FACTS AND IN LAW IN ENHANCING THE INCOME OF THE APPELLANT BY 28,36,01,903 HOLDING THAT THE INTERNAT IONAL TRANSACTION PERTAINING TO PAYMENT OF ROYALTY DOES N OT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE ACT AND IN DOING SO HAVE GROSSLY ERRED IN: 3.1 HOLDING THAT THE APPELLANT DID NOT RECEIVE ANY TANGIBLE BENEFIT IN LIEU OF THE PAYMENT OF ROYALTY; THEREBY CHALLENGING THE COMMERCIAL WISDOM OF THE APPELLANT IN MAKING PAYMENT FOR ROYALTY AND PASSING THE ORDER IN CONTRAST WITH THE RECENT JUDICIAL PRONOUNCEMENTS IN THIS REGARD; AND 12 ITA NO. 2 666/DEL/2014 3.2 HOLDING THAT AS PER THE FACTS OF THE CASE OF THE APPELLANT, NO INDEPENDENT PARTY WOULD HAVE PAID MAD E A PAYMENT FOR ROYALTY. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. AO ERRED IN REDUCING TELECOMMUNICATION CHARGES OF RS. 251,278,420 FROM THE EXPORT TURNOVER IN RE- COMPUTING THE DEDUCTION ALLOWABLE UNDER SECTION 10A OF THE ACT. 4.1 THE LD. AO ERRED IN LAW IN REDUCING TELECOMMUNICATI ON CHARGES OF RS. 251,278,420 ONLY FROM THE EXPORT TUR NOVER AND NOT MAKING ANY CORRESPONDING REDUCTION IN THE T OTAL TURNOVER WHILE RE COMPUTING THE DEDUCTION UNDER SEC TION 10A OF THE ACT. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN DISALLOWING PRIOR PERIOD E XPENSES OF RS. 5,433,214, WITHOUT APPRECIATING THAT THE SAM E WERE CRYSTALLIZED DURING FINANCIAL YEAR 2008-09. 5.1 THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE , THE LD. AO OUGHT TO BE DIRECTED TO ENHANCE THE DEDUCTION UN DER SECTION 10A/10AA OF THE ACT BY INCREASING THE PROFI T OF THE 10 A/ 10 AA UNDERTAKING BY THE AMOUNT OF DISALLOWAN CE OF PRIOR PERIOD EXPENSES. 6. THE LD. AO HAS GROSSLY ERRED BY INITIATING PENALTY UNDER SECTION 27I(I)(C) OF THE ACT MECHANICALLY AND WITHO UT RECORDING ANY SATISFACTION FOR ITS INITIATION. 7. THE LD. AO ERRED ON FACTS AND IN LAW IN WITHDRAWING INTEREST UNDER SECTION 244A AND CHARGING INTEREST U NDER SECTION 234D AND 234 B OF THE ACT. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTH ER. THE APPELLANT CRAVES LEAVE TO ALTER, AMEND OR WITHD RAW ALL OR ANY OF THE GROUNDS HEREIN OR ADD ANY FURTHER GROUND S AS MAY BE CONSIDERED NECESSARY EITHER BEFORE OR DURING THE HEARING. 13 ITA NO. 2 666/DEL/2014 7. ON GROUND NO. 2 REGARDING COMPARABLE, THE LD. AR SUBMITTED THAT THE ASSESSEE IS CONTESTING FIVE OF T HE NINE COMPANIES SELECTED BY THE TPO AS COMPARABLE VIZ. AC ROPETAL TECHNOLOGIES LTD. (SEG.), CORAL HUB, COSMIC GLOBAL , ECLARX SERVICES AND INFOSYS BPO LTD. THE LD. AR DREW OUR A TTENTION TO THE DECISION OF THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF M/S CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD . VS. ACIT IN ITA NOS. 124/HYD./2014 & 170/HYD./2014 WHEREIN THE CO- ORDINATE BENCH HAS CONSIDERED INFOSYS BPO LTD., ECL ERX SERVICES LTD., COSMIC GLOBAL LTD. AND ACROPETAL TECHNOLOGIES LTD. (SEG.) AND HAS EXCLUDED THESE COMPANIES FROM THE LIST OF COMPA RABLES ON THE FOLLOWING GROUNDS: I) INFOSYS BPO LTD. ALTHOUGH THE TURNOVER FILTER AS ARGUED BY THE ASSESSEE WAS NOT ACCEPTED BY THE CO-ORDINATE BENCH, THE COMPANY WAS EXCLUDED ON THE GROUNDS OF BRAND VALUE, BRAND BUILDING EXERCISE, HUGE ASSETS BASE AND HENCE FUNCT IONAL DISSIMILARITY. II) ECLERX SERVICES LTD. WAS EXCLUDED RELYING ON TH E DECISION OF THE SPECIAL BENCH OF THE ITAT IN CASE OF MAERSK GLOBAL CENTRE 14 ITA NO. 2 666/DEL/2014 (INDIA) PVT. LTD. VS. ACIT IN ITA NO. 7466/MUM./201 2 AND HOLDING THAT THE COMPANY WAS A KPO. III) COSMIC GLOBAL LTD. WAS EXCLUDED RELYING ON THE DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL (DEL.) IN THE CAS E OF MERCER CONSULTING (INDIA) PVT. LTD. VS. DCIT IN ITA NO. 96 6/DEL/2014. IV) ACROPETAL TECHNOLOGIES LTD. (SEG.) WAS EXCLUDE D FROM THE LIST OF COMPARABLES ON THE GROUND THAT THE COMPANY PROVIDED HIGH-END ENGINEERING DESIGN SERVICES. 8. THE LD. AR FURTHER RELIED ON THE DECISION OF THE PU NE BENCH OF THE ITAT IN BNY MELLON INTERNATIONAL OPERATIONS VS. DCIT IN ITA NO. 23/PN/2014 FOR THE EXCLUSION OF E-CLERX SERVICE S LTD. AND COSMIC GLOBAL LTD. FROM THE LIST OF COMPARABLES. R ELIANCE WAS FURTHER PLACED ON THE DECISION OF THE HYDERABAD BEN CH OF THE ITAT IN EXCELLENCE DATA RESEARCH PVT. LTD. VS. ITO IN ITA NO. 159/HYD./2014 FOR THE EXCLUSION OF ACROPETAL TECHNO LOGIES LTD. (SEG.), COSMIC GLOBAL LTD., ECLERX SERVICES LTD. AN D INFOSYS BPO LTD. RELIANCE WAS FURTHER PLACED ON THE DECISION OF THE HYDERABAD BENCH IN HYUNDAI MOTORS INDIA ENGINEERING P. LTD. VS. DCIT IN ITA NO. 255/HYD/2014 FOR THE EXCLUSION OF ACROPETAL TECHNOLOGIES LTD. (SEG.), COSMIC GLOBAL LTD., ECLER X SERVICES LTD. 15 ITA NO. 2 666/DEL/2014 AND INFOSYS BPO LTD. FROM THE LIST OF COMPARABLES. THE LD. AR ALSO RELIED ON NUMEROUS OTHER DECISIONS OF THE CO-O RDINATE BENCHES OF THE TRIBUNAL FOR THE EXCLUSION OF THESE FOUR COMPANIES FROM THE LIST OF COMPARABLES. ON CORAL HUB (FORMER LY KNOWN AS VISHAL INFORMATION TECHNOLOGY), THE LD. AR SUBMITTE D THAT THE SAME OUGHT TO BE EXCLUDED AND RELIANCE WAS PLACED ON THE DECISIONS OF THE HONBLE DELHI HIGH COURT IN THE RA MPGREEN SOLUTIONS PVT. LTD. VS. CIT IN ITA NO. 102/2015. 9. ON THE ISSUE OF ROYALTY (GROUND NO. 3), THE LD. AR DREW OUR ATTENTION TO PAGES 702/707 OF THE PAPER BOOK CONTAI NING THE RELEVANT PORTIONS OF THE MARKETING ROYALTY AGREEMEN T EXECUTED BETWEEN IBM WORLD TRADE CORPORATION AND IBM DAKSH B USINESS PROCESS SERVICES PVT. LTD. THE LD. AR SUBMITTED TH AT THE ROYALTY HAS BEEN PAID AT THE RATES APPROVED BY THE RESERVE BANK OF INDIA AND AS SUCH THE SAME IS UNDOUBTEDLY AT ARMS LENGTH . HE ALSO DREW OUR ATTENTION TO PAGE 389 WHEREIN THE PAYMENT OF ROYALTY HAS BEEN DISCUSSED IN THE TRANSFER PRICING STUDY. OUR ATTENTION WAS ALSO DRAWN TO PAGES 679 TO 696 OF THE PAPER BOOK WHIC H CONTAIN SUBMISSIONS BEFORE THE TPO/DRP JUSTIFYING THE PAYME NT OF ROYALTY. IT WAS SUBMITTED THAT IBMS CORPORATE IMAGE IS MANAG ED BY IBM 16 ITA NO. 2 666/DEL/2014 U.S. WITH INPUT FROM WORLDWIDE SUBSIDIARIES. THE CONT ENT OF TELEVISION, NEWSPAPERS AND BILLBOARDS ADVERTISING IS DEVISED IN THE U.S. AND ADAPTED FOR LOCAL REQUIREMENTS IN CONJUNCT ION WITH AN EXTERNAL ADVERTISING AGENCY. ONGOING MANAGEMENT OF THE BRAND, PRODUCTION COSTS AND COSTS OF PLACEMENT ARE BORNE M OSTLY BY IBM U.S. PROMOTIONAL ACTIVITIES ARE MANAGED BY HEADQUAR TERS OPERATIONS IN THE U.S. THESE INCLUDE PROMOTIONAL EVENTS, TRADE SHOWS, EXHIBITIONS AND DIRECT MAILING ACTIVITIES. ALL PROM OTIONAL MATERIAL IS STANDARD AND IS PROVIDED FOR THESE TYPES OF ACTIVIT IES BUT MAY BE MARGINALLY CHANGED FOR LOCAL REQUIREMENTS. IN PERFO RMING OR DELIVERING GLOBAL SERVICES, STANDARD IBM SERVICE MO DELS ARE USED. THESE EMPLOY GLOBAL PROCESSES, BEST PRACTICE METHOD S AND RISK ASSESSMENT APPROACHES, AND USE VARIOUS TOOLS THAT H AVE BEEN DEVELOPED CENTRALLY FOR GLOBAL USE. IN DELIVERING T HEIR SERVICES, IBM DAKSH USES THESE GLOBAL PROCESSES, BEST PRACTICE ME THODS AND STANDARDIZED RISK ASSESSMENT APPROACHES, WHICH ARE D EVELOPED AND MAINTAINED BY THE U.S. EVEN IN THE CONSULTING BUSIN ESS WHERE THE PURE CONSULTING ACTIVITY MUST DEPEND FOR ITS EFFECT IVENESS LARGELY ON THE PERSONAL QUALITIES OF THE INDIVIDUALS CONCERNED , THERE IS A GLOBAL PROCESS FOR SYSTEMS IMPLEMENTATION AND INTEGRATION, THE PRINCIPAL 17 ITA NO. 2 666/DEL/2014 CONSULTING REVENUE GENERATING ACTIVITY. FOR THAT AC TIVITY THERE EXISTS AN IBM GLOBAL SERVICES 'METHOD', A PROCESS FROM BID THROUGH TO IMPLEMENTATION OR DELIVERY, WHICH IS APPLIED ON ALL SUCH ENGAGEMENTS BY CONSULTANTS. IBM DAKSH ALSO ADAPTS S TANDARD IBM U.S. CREATED MARKETING MATERIAL. IT WAS SUBMITTED TH AT IBM U.S. UNDERTAKES THE ABOVE HEADQUARTERS, MARKETING AND AD VERTISING ACTIVITIES IN SUPPORT OF THE IBM LOGO, TRADEMARKS, AND TRADE NAMES AND THEREFORE OWNS ALL OF THE IP ASSOCIATED WITH THEM . IBM WORLDWIDE SUBSIDIARIES DO NOT OWN THESE INTANGIBLES B UT LICENSES THE RIGHT TO USE THEM TO CONDUCT THEIR SALES, MARKE TING AND SERVICES ACTIVITIES. BEING PART OF THE GLOBAL IBM GROUP, IBM DAKSH HAS ACCESS TO STANDARD IBM POLICIES AND PROCEDURES, WHIC H ARE USED IN THE SELLING PROCESS AND SERVICE DELIVERY. THE USE O F STANDARD IBM GLOBAL POLICIES AND PROCEDURES ENSURE THAT THE QUAL ITY OF ITS SERVICES AND OFFERINGS ARE CONSISTENT ACROSS ALL IBM ENTITIE S GLOBALLY. THESE IBM POLICIES AND PROCEDURES ARE CREATED AND OWNED BY IBM U.S. AND ARE ACQUIRED BY IBM DAKSH FROM IBM U.S. IBM DAK SH TAILORS THESE TOOLS AND PROCEDURES TO SUIT THE LOCAL ENVIRO NMENT IN ORDER TO BETTER SERVICE THEIR CUSTOMERS. IT WAS SUBMITTED THA T IBM DAKSH IS CONTINUOUSLY DEPENDENT ON THE TECHNOLOGY AND INNOVA TION WHICH 18 ITA NO. 2 666/DEL/2014 IBM CORPORATION CONDUCTS AT THEIR END. THERE IS A C LEAR NEXUS BETWEEN THE TECHNOLOGIES, INTANGIBLES, TRADEMARKS, ETC. OWNED BY IBM AND THE SERVICES RENDERED BY IBM DAKSH. IBM DAK SH WOULD NOT BE IN A POSITION TO OPERATE IN THE INDIAN MARKE T, WITHOUT THE SUPPORT OF THE INTANGIBLES LICENSED TO IT. 10. ON THE ISSUE OF BENEFITS BEING REAPED FROM THE PAYMENT OF ROYALTY, IT WAS SUBMITTED THAT IBM DAKSH HAS BEEN RE APING THE BENEFITS OF THE CONTINUOUS R&D ACTIVITIES WHICH IBM CORPORATION ENGAGES IN. AS IBM'S INTANGIBLES ARE PROPRIETARY AN D INTEGRAL TO THE SOLUTIONS OFFERED TO CUSTOMERS, THERE ARE NO AVAILABLE SUBSTITUTES FOR THE PROPERTY TRANSFERRED TO OR UTILISED BY IBM DAKS H OR ANY OF ITS OTHER AFFILIATES. THE MRA NOT ONLY GRANTS IBM DAKSH RIGHTS TO INTANGIBLES IN EXISTENCE AT THE TIME OF THE SIGNING , BUT RIGHTS TO ALL FUTURE UPGRADES, ENHANCEMENTS, AND NEWLY DEVELOPED I NTANGIBLES AS WELL, FOR NO ADDITIONAL CHARGE.IBM DAKSH HAS PAID AN EFFECTIVE ROYALTY OF 2.92% TO IBM WORLD TRADE CORPORATION ON SALES MADE TO NON-AES DURING FY 2008-09 AND IT IS PERTINENT TO N OTE THAT THERE HAS BEEN A SUBSTANTIAL INCREASE IN PROFITS OF IBM D AKSH FROM 7.56% IN FY 2005-06 TO 22.61% IN FY 2008-09. IBM DAKSH WAS GRANTED ACCESS TO IBM'S IP (INCLUDING BRAND) EFFECTIVE FROM 1 APRIL 2005 AND 19 ITA NO. 2 666/DEL/2014 HAS PAID ROYALTY FOR THE USE OF THE SAME. THE USE O F THE SAID IP INCLUDING BRAND HAS RESULTED IN INCREASED REVENUE O F 83.87% DURING FY 2005-06 OVER-REVENUE OF FY 2004-05 (DURING FY 20 04-05, THERE WAS NO ROYALTY TRANSACTION BECAUSE DAKSH WAS NOT PART OF THE IBM GROUP). THUS, THERE IS A CLEAR NEXUS BETWEEN THE PA YMENT OF ROYALTY FOR THE USE OF IBM'S IP INCLUDING BRAND AND THE BEN EFITS DERIVED BY IBM DAKSH FROM THE USE OF THE SAME FOR THE PURPOSE OF ITS BUSINESS. FURTHER, IBM DAKSH HAS MAINTAINED AN AVERAGE PROFIT ABILITY OF 16.89% (DUE TO BENEFITS RECEIVED BY PAYING ROYALTY) DURING THE LAST 5 YEARS, VIS--VIS 7.56% DURING FY 2004-05 WHEN DAKSH WAS NOT PART OF THE IBM GROUP. THE ABOVE FACTS CLEARLY STATE THA T IBM DAKSH DERIVES SIGNIFICANT BENEFITS FROM THE IP INCLUDING BRAND LICENSED TO IT BY IBM. IT WAS SUBMITTED THAT BASED ON THE ABOVE ANA LYSIS, IT CAN BE REASONABLY ASSERTED THAT IBM DAKSH DERIVES SIGNIFIC ANT BENEFITS FROM THE USE OF IBM'S IP INCLUDING BRAND AND THEREF ORE IS JUSTIFIED IN THE PAYMENT OF ROYALTY FOR ACCESSING THE SAME. NO I NDEPENDENT THIRD PARTY INVESTING SUCH MAGNANIMOUS AMOUNT IN R&D ACTI VITIES FOR YEARS WOULD LET SOMEONE USE THE IP DEVELOPED BY IT F OR FREE. IT IS THIS IP WHICH DEVELOPED THROUGH YEARS OF R&D, WHETHER PATE NTED OR NOT GIVES THAT PARTY EDGE OVER ITS COMPETITORS AND DEFI NES ITS MARKET 20 ITA NO. 2 666/DEL/2014 SHARE AND PROFITABILITY. FROM LARGE INTERNATIONAL S OFTWARE COMPANIES TO FASHION BRANDS, CHARACTER BRANDS, PUBLISHING FIR MS, ARTISTS AND PERFORMERS, COMPANIES WORLDWIDE ENGAGE IN LICENSING TANGIBLES AND UNIQUE, VALUABLE INTANGIBLES INCLUDING INNOVATIVE T ECHNOLOGIES, BRANDS, KNOW-HOW, CUSTOMER LISTS OR SIMPLY A CERTAIN 'LOOK'. IF IT HAS VALUE, IT CAN GENERATE LICENSING REVENUE AND BOOST A COMPANY'S BOTTOM LINE. IT WAS SUBMITTED THAT APPROXIMATELY TH REE-QUARTERS OF THE TOTAL MARKET CAPITALIZATION OF FORTUNE 500 ENTE RPRISES IN THE LATE 1990'S IS ACCOUNTED FOR IN INTANGIBLES SUCH AS PATE NTS, TRADEMARKS, KNOW-HOW AND CUSTOMER RELATIONSHIPS. THE EXPORTATION OF INTANGIBLE ASSETS TO THE UNITED STATES HAS REACHED SUCH A MAGN ITUDE THAT THE LEVEL OF ROYALTY INCOME AND LICENSE FEES PAID TO US CORPORATIONS TRIPLED FROM 1990 TO 2004. TO SUBSTANTIATE THESE ST ATISTICS, IT IS SUFFICIENT TO MENTION THAT ROUND ISLAND ONE, MICROS OFT'S INTELLECTUAL PROPERTY HOLDING COMPANY LOCATED IN IRELAND, EARNED NEARLY USD 9 BILLION IN TAXABLE INCOME BY EXPLOITING INTANGIBLE ASSETS ACQUIRED VIA COST-SHARING AGREEMENTS ENTERED INTO WITH ITS US PAR ENT. 11. THE LD. AR SUBMITTED THAT THE ENTIRE ROYALTY P AYMENT WAS DISALLOWED BECAUSE AS PER THE TPO, THE BENEFIT TEST WAS NOT 21 ITA NO. 2 666/DEL/2014 SATISFIED. HE RELIED ON THE DECISION OF THE HONBL E DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES IN ITA NO. 1068/2011 & 1070/2011 FOR THE PROPOSITION THAT THE TAX DEPARTMENT CANNOT DICTATE TO THE TAX PAYER WHETHER TO INCUR A PARTICULAR EXPENDITURE OR NOT AND THAT THE ARMS LENGTH PRICE OF ROYALTY CANNOT BE LINKED WITH PROFIT/INCOME RESULTING THERE FROM. THE LD. AR ALS O SUBMITTED THAT THE OBSERVATION OF THE TPO IN PARA 12 THAT THE TAX PAYER HAD BENCH MARKED THE TRANSACTION RELATED TO THE PAYMENT OF RO YALTY UNDER TNMM AFTER AGGREGATING IT WITH OTHER TRANSACTION WAS FACTUALLY INCORRECT. IT WAS SUBMITTED THAT MOST OF THE REVENU E OF THE ASSESSEE IS DERIVED FROM NON-AE CONCERNS AND ROYALTY HAS BEE N PAID ONLY ON NON-AE TRANSACTIONS. IT WAS SUBMITTED THAT THE DEPA RTMENT CANNOT DENY THAT SUBSTANTIAL BENEFIT HAS ACCRUED TO THE AS SESSEE AND HENCE THE ALP CANNOT BE NIL. 12. GROUND NO. 4 WAS NOT PRESSED AND IT WAS SUBMITTED THAT SINCE THE TOTAL TURNOVER AS WELL AS THE EXPORT TURNOVER AR E THE SAME IN THE YEAR UNDER CONSIDERATION AND HENCE IT HAS BECOM E ACADEMIC IN NATURE. 22 ITA NO. 2 666/DEL/2014 13. ON GROUND NO. 5 ON THE ISSUE OF PRIOR PERIOD EX PENSES, IT WAS SUBMITTED THAT IN THESE CASES, THE BILLS FOR SERVIC ES RENDERED WERE RECEIVED AFTER THE CLOSE OF THE FINANCIAL YEAR AND HENCE THEY WERE ELIGIBLE DEDUCTIBLE EXPENSES AND NOT ESSENTIALLY PR IOR PERIOD ITEMS. 14. THE LD. DR, IN RESPONSE, SUBMITTED THAT CO SMIC GLOBAL LTD. WAS EARLIER SELECTED BY THE ASSESSEE ITSELF AND THEREFORE THE ASSESSEE CANNOT PLEAD FOR ITS EXCLUSION AT THIS STA GE. ON OTHER COMPARABLES, IT WAS THE LD. DRS SUBMISSION THAT IN TRANSFER PRICING CASES THERE COULD BE NO LEGAL BINDING PRECE DENT ON THE ISSUE OF SELECTION OF MOST APPROPRIATE METHOD, SELECTION OF COMPARABLE COMPANIES, SELECTION OF COMPARABLE TRANSACTIONS FOR BENCH MARKING ETC AS THE FACTS VARY FROM COMPANY TO COMPANY. IT WA S FURTHER SUBMITTED THAT NO TWO COMPARABLE COMPANIES CAN BE RE PLICAS OF EACH OTHER AND THE APPLICATION OF RULE 10B SHOULD B E CARRIED OUT AND JUDGED NOT WITH TECHNICAL RIGOR, BUT ON A BROADE R PERSPECTIVE. HE RELIED ON THE DECISIONS TECHBOOK INTERNATIONAL PVT. LTD. VS DCIT (2015-TII- 282- ITAT- DEL-TP) AND DCIT VS. DELOITTE CONSULTING INDIA PVT. LTD (2011 TII 88- ITAT- HYD- TP) FOR THESE PROPOSITIONS. IT WAS THE LD. DRS SUBMISSION THAT TH E FUNCTIONAL SIMILARITY CANNOT BE IGNORED AND HE RELIED ON THE A NNUAL REPORTS OF 23 ITA NO. 2 666/DEL/2014 THE DISPUTED COMPANIES IN SUPPORT OF HIS ARGUMENT. IT WAS SUBMITTED THAT THE FUNCTIONAL PROFILE OF ALL THESE COMPANIES WAS SIMILAR TO THAT OF THE ASSESSEE AND HENCE THE SAME WERE CORRECTLY SELECTED BY THE TPO. ON THE ISSUE OF ROYALTY, THE L D. DR SUBMITTED THAT THE ISSUE MAY BE SENT BACK TO THE TPO TO DETER MINE THE EXACT BENEFIT WHICH HAD ACCRUED TO THE ASSESSEE SO AS TO C OMPUTE THE ROYALTY WHICH COULD BE ALLOWED. ON THE ISSUE OF PRIO R PERIOD ITEMS/EXPENSES, THE LD. DR RELIED ON THE FINDINGS O F THE DRP. 15. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE MATERIAL ON RECORD. COMING TO THE ISSUE OF COMPARAB LES, IT IS SEEN FROM THE TRANSFER PRICING STUDY (PG 374 OF THE PAPE R BOOK) THAT THE BUSINESS UNITS (BU) AT IBM DAKSH ARE CATEGORIZED AS UNDER - TELECOM BU CATERING TO CLIENTS ENGAGED IN TELECOMMUNICATIONS - ECOM & TRAVEL BU CATERING TO CLIENTS ENGAGED IN ONL INE RETAIL SALES, TRAVEL AND HOSPITALITY - TECH SUPPORT BU CATERING TO CLIENTS ENGAGED IN TECH NICAL SUPPORT - BANKING, FINANCIAL AND INSURANCE BU CATERING TO CLI ENTS ENGAGED IN BANKING, FINANCE AND INSURANCE 24 ITA NO. 2 666/DEL/2014 - MUMBAI BU CATERING TO CLIENTS ENGAGED IN TELECOM, INSURANCE, INTERNET SERVICE PROVIDER, TRAVEL AND OVERSEEING PUNE CENTRE - BANGALORE BU CATERING TO CLIENTS ENGAGED IN FINANCE AND ACCOUNTING - TALENT AND TRANSFORMATION BU CONSTITUTED TO MEET TH E HEAD COUNT REQUIREMENTS OF OTHER BUS THE TP REPORT FURTHER SPECIFIES THAT IBM DAKSH PROV IDES SERVICES USING THE FOLLOWING CHANNELS VOICE INTERNET E MAIL CHAT DATA (BACK OFFICE AND TRANSACTION PROCESSING) AND BLENDED SERVICES THE TP REPORT FURTHER SPECIFIES THAT IBM DAKSH UNDE RTAKES THE FOLLOWING BROAD FUNCTIONS 25 ITA NO. 2 666/DEL/2014 RENDERING SERVICES TO CLIENTS OF GROUP ENTITIES IN ACCORDANCE WITH THE CONTRACTS ENTERED INTO BY THE GR OUP ENTITIES LIAISING WITH CLIENTS AT THE OPERATIONAL LEVEL TRAINING EMPLOYEES TO MAINTAIN THE QUALITY OF SERVI CES PROVIDED 16. THE TP REPORT ALSO SPECIFIES THAT THE ENTITY OPERATES AS A BPO SERVICES COMPANY WITHIN A GLOBALLY INTEGRATED ENTERPRISE FROM ITS CENTRES LOCATED IN GURGAON, MUM BAI, BANGALORE, KOLKATA AND PUNE. BPO SERVICES ARE PROV IDED TO THIRD- PARTY CLIENTS AS WELL AS THE AES IBM US AND IBM UK. THE COMPARABILITY OF THE DISPUTED COMPANIES IS DISC USSED AS UNDER: (I) INFOSYS BPO LTD. IT IS THE ASSESSEES CONTENTION THAT THE COMPANY SHOULD BE EXCLUDED ON THE GROUNDS OF LARGE SCALE OPERATIONS, PRESENCE OF SUBSTANTIAL AMOUNTS OF SELL ING AND MARKETING EXPENSES, PRESENCE OF INTANGIBLE ASSETS A ND DISSIMILARITY IN THE SCALE OF OPERATIONS. IT IS ALS O SEEN THAT THIS COMPANY WAS INITIALLY OBJECTED TO AS BEING INCO MPARABLE 26 ITA NO. 2 666/DEL/2014 BEFORE THE TPO ON THE GROUND OF TURNOVER FILTER AND ON OTHER GROUNDS AS WELL. HOWEVER, THE TPO DECLINED TO ACCEP T THE ASSESSEES CONTENTION. THE ISSUE WAS AGAIN RAISED B EFORE THE DRP BUT IT IS SEEN THAT SOMEHOW THE DRP HAS OMITTED TO RECORD A FINDING. THEREFORE, WE DEEM IT FIT TO RESTO RE THIS COMPANY TO THE FILE OF THE DRP TO RECORD ITS FINDIN G AFTER GIVING DUE OPPORTUNITY TO THE ASSESSEE TO PRESENT I TS CASE. (II) ECLERX SERVICES LTD - THE ASSESSEE IS OBJECTING TO THE INCLUSION OF THE COMPANY ON THE GROUND THAT THE COM PANY IS FUNCTIONALLY DISSIMILAR AS THE COMPANY IS ENGAGE D IN PROVIDING HIGH-LEVEL SERVICES INVOLVING SPECIALIZED KNOWLEDGE AND DOMAIN EXPERTISE AND IS A LEADING PROVIDER OF K PO SERVICES WHEREAS THE ASSESSEE PROVIDES AN ENTIRELY D IFFERENT SET OF SERVICES MORE ON THE LINES OF A BPO. THE DEL HI BENCH OF THE ITAT IN IQOR INDIA SERVICES P. LTD VS. ITO I N ITA NOS. 5934 AND 6034/DEL/2012 HAVE HELD AS UNDER:- ECLERX SERVICES LTD. ECLERX IS ENGAGED IN PROVIDING DATA ANALYTICS SERVICES WITH EXPERTISE IN FINANCIAL SERVICE AND RETAIL AND MANUFACTURING. THE 27 ITA NO. 2 666/DEL/2014 SERVICE PROVIDED BY THE COMPANY ARE HIGH END IN NATURE INVOLVING SPECIAL KNOWLEDGE AND DOMAIN EXPERTISE AND THEREFORE, NOT FUNCTIONALLY COMPARABLE WITH THE ASSESSEE COMPANY WHICH IS ENGAGED IN PROVIDING LOW END ITES ENABLED CALL CENTRE SERVICES TO ITS AE. THE FACT ECLERX SERVICES LTD. IS PROVIDING HIGH END SERVICES INVOLVING SPECIAL KNOWLEDGE AND DOMAIN EXPERTISE IS EVIDENT FROM THE COMPANY'S OWN REPLY TO THE NOTICE U/S 133(6) WHICH IS PLACED AT PAGES 976 TO 979 OF THE PAPER BOOK FILED BY THE ASSESSEE. THE HON'BLE SPECIAL BENCH OF THE TRIBUNAL IN CASE OF MAERSK GLOBAL CENTRE (INDIA) (P.) LTD. V. ASSTT. CIT [20141 147 ITD 83/43 TAXMANN.COM 100 (MUM.) HAD EXCLUDED ECLERX SERVICES PVT. LTD. FROM THE LIST OF COMPARABLES FOR THE REASON THAT IT IS PROVIDING HIGH END SERVICES INVOLVING SPECIALISED KNOWLEDGE AND DOMAIN EXPERTISE AND SAME CANNOT BE COMPARED WITH COMPANIES WHICH ARE MAINLY ENGAGED IN PROVIDING LOW END SERVICES TO GROUP COMPANIES. THE RELEVANT FINDING OF THE HON'BLE TRIBUNAL READ AS FOLLOWS: 'IN SO FAR AS M/S ECLERX SERVICES LIMITED IS 28 ITA NO. 2 666/DEL/2014 CONCERNED, THE RELEVANT INFORMATION IS AVAILABLE IN THE FORM OF ANNUAL REPORT FOR FINANCIAL YEAR 2007-08 PLACED AT PAGE 166 TO 183 OF THE PAPER BOOK. A PERUSAL OF THE SAME SHOWS THAT THE SAID COMPANY PROVIDES DATA ANALYTICS AND DATA PROCESS SOLUTIONS TO SOME OF THE LARGEST BRANDS IN THE WORLD AND IS RECOGNIZED AS EXPERTS IN CHOSEN MARKETS-FINANCIAL SERVICES AND RETAIL AND MANUFACTURING. IT IS CLAIMED TO BE PROVIDING COMPLETE BUSINESS SOLUTIONS BY COMBINING PEOPLE, PROCESS IMPROVEMENT AND AUTOMATION. IT IS CLAIMED TO HAVE EMPLOYED OVER 1500 DOMAIN SPECIALISTS WORKING FOR THE CLIENTS. IT IS CLAIMED THAT ECLERX IS A DIFFERENT COMPANY WITH INDUSTRY SPECIALIZED SERVICES FOR MEETING COMPLEX CLIENT NEEDS, DATA ANALYTICS KPO SERVICE PROVIDER SPECIALIZING IN TWO BUSINESS VERTICALS - FINANCIAL SERVICES AND RETAIL AND MANUFACTURING. IT IS CLAIMED TO BE ENGAGED IN PROVIDING SOLUTIONS THAT DO NOT JUST REDUCE COST, BUT HELP THE CLIENTS INCREASE SALES AND REDUCE RISK BY ENHANCING EFFICIENCIES AND BY PROVIDING VALUABLE INSIGHTS THAT EMPOWER BETTER DECISIONS. M/S ECLERX SERVICES PVT. LTD. IS ALSO CLAIMED TO HAVE A SCALABLE DELIVERY MODEL AND SOLUTIONS OFFERED THAT INCLUDE DATA 29 ITA NO. 2 666/DEL/2014 ANALYTICS, OPERATIONS MANAGEMENT, AUDITS AND RECONCILIATION, METRICS MANAGEMENT AND REPORTING SERVICES. IT ALSO PROVIDES TAILORED PROCESS OUTSOURCING AND MANAGEMENT SERVICES ALONG WITH A MULTITUDE OF DATA AGGREGATION, MINING AND MAINTENANCE SERVICES. IT IS CLAIMED THAT THE COMPANY HAS A TEAM DEDICATED TO DEVELOPING AUTOMATION TOOLS TO SUPPORT SERVICE DELIVERY. THESE SOFTWARE AUTOMATION TOOLS INCREASE PRODUCTIVITY, ALLOWING CUSTOMERS TO BENEFIT FROM FURTHER COST SAVING AND OUTPUT GAINS WITH BETTER CONTROL OVER QUALITY. KEEPING IN VIEW THE NATURE OF SERVICES RENDERED BY M/S ECLERX SERVICES PVT. LTD. AND ITS FUNCTIONAL PROFILE, WE ARE OF THE VIEW THAT THIS COMPANY IS ALSO MAINLY ENGAGED IN PROVIDING HIGH-END SERVICES INVOLVING SPECIALIZED KNOWLEDGE AND DOMAIN EXPERTISE IN THE FIELD AND THE SAME CANNOT BE COMPARED WITH THE ASSESSEE COMPANY WHICH IS MAINLY ENGAGED IN PROVIDING LOW-END SERVICES TO THE GROUP CONCERNS. FOR THE REASONS GIVEN ABOVE, WE ARE OF THE VIEW THAT IF THE FUNCTIONS ACTUALLY PERFORMED BY THE ASSESSEE COMPANY FOR ITS AES ARE COMPARED WITH THE FUNCTIONAL PROFILE OF M/S ECLERX 30 ITA NO. 2 666/DEL/2014 SERVICES PVT. LTD. AND MOLD-TEK TECHNOLOGIES LTD., IT IS DIFFICULT TO FIND OUT ANY RELATIVELY EQUAL DEGREE OF COMPARABILITY AND THE SAID ENTITIES CANNOT BE TAKEN AS COMPARABLES FOR THE PURPOSE OF DETERMINING ALP OF THE TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS AES. WE, THEREFORE, DIRECT THAT THESE TWO ENTITIES BE EXCLUDED FROM THE LIST OF 10 COMPARABLES FINALLY TAKEN BY THE AO/TPO AS PER THE DIRECTION OF THE DRP.' THE ABOVE RULING OF THE SPECIAL BENCH IS EQUALLY AP PLICABLE TO THE FACTS OF THE ASSESSEE CASE AS IS EVIDENT FROM T HE FUNCTIONAL PROFILE OF THE ASSESSEE COMPANY. FOR THE AFORESAID REASONS, WE DIRECT THAT ECLERX SERVICES LTD. BE EXCLUDED FROM T HE FINAL LIST OF COMPARABLES. (III) COSMIC GLOBAL LTD THE ASSESSEE HAS RELIED ON THE DECISION OF THE ITAT DELHI BENCH IN MERCER CONSULTI NG (INDIA) PVT. LTD. VS DCIT IN ITA 966/DEL/2014 FOR T HE EXCLUSION OF THIS COMPANY WHEREAS IT IS THE DEPARTMENTS PLEA THAT THIS COMPANY WAS ORIGINALLY INCLUDED IN THE LIST OF COMPARABLES BY THE ASSESSEE 31 ITA NO. 2 666/DEL/2014 ITSELF AND HENCE THE ASSESSEE IS PRECLUDED FROM RAI SING OBJECTION TO THE SAME. IN THIS REGARD, WE ARE OF TH E CONSIDERED OPINION THAT THE LAW DOES PERMIT EITHER OF THE PARTIES TO RAISE A GROUND NOT TAKEN EARLIER BUT FIRST TIME BEFORE THE TRIBUNAL AND ITS PAST CONDUCT WILL N OT HAVE ANY ADVERSE BEARING ON ITS RIGHTS IF THE ADJUDICATION OF THAT ISSUE GOES TO THE ROOT OF THE ENTIRE MATTER. WE THEREFORE PERMIT THE ASSESSEE TO RAISE OBJECTIONS AGAINST THIS COMPARABLE BUT IN THE INTER EST OF JUSTICE RESTORE THE ADJUDICATION ON THE INCLUSION/EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES TO THE FILE OF THE TPO. NEEDLESS TO SAY, THE TPO WILL AFFORD A REASONABLE OPPORTUNITY TO THE ASSESSEE OF BEING HEARD BEFORE SUCH ADJUDICATION. (IV) ACROPETAL TECHNOLOGIES LTD . (SEG.) THE OBJECTION OF THE ASSESSEE WITH REFERENCE TO THIS COMPANY IS THAT THE COMPANY IS INVOLVED IN ENGINEERING DESIGN SERVICES AND HIGH END SERVICES AND HAS PRODUCTS IN ITS INVENTORY . IT IS ALSO INVOLVED IN R&D ACTIVITIES AND IN DEVELOPIN G SOPHISTICATED DELIVERY SYSTEM. IT IS SEEN THAT THIS 32 ITA NO. 2 666/DEL/2014 COMPANY WAS EXCLUDED FROM THE COMPARABLES BY THE HYDERABAD BENCH OF ITAT IN CAPITAL IQ INFORMATION SYSTEMS (INDIA) VS ACIT IN ITA NOS. 124/HYD/2014 AN D 170/HYD/2014 ON THE GROUND OF BEING HIGH-END. IT IS SEEN THAT THE FUNCTIONAL PROFILE OF THE COMPANY IS ENTIRELY DIFFERENT FROM THAT OF THE ASSESSEE AND THEREFORE, DRAWING SUPPORT FROM THE CO-ORDINATE BENCHS DECISION IN CAPITAL IQ INFORMATIONS SYSTEMS (SUPRA) WE DIRECT THAT THIS COMPANY BE EXCLUDED FRO M THE LIST OF COMPARBLES. (V) CORAL HUB ( FORMERLY VISHAL INFORMATION TECHNOLOGIE S LTD .- THE ASSESSEES OBJECTIONS ARE THAT THE FUNCTION AL ASSET & RISK PROFILE IS DISSIMILAR. THE HONBLE DEL HI HIGH COURT IN RAMPGREEN SOLUTIONS (P) LTD. (SUPRA) HAD THE OCCASION TO CONSIDER VISHAL INFORMATION TECHNOLOGIES LTD. PARAS 37 & 38 ARE THE RELEVANT PARAGRAPHS AND THEY READ AS UNDER: 37.APPLYING THE AFORESAID PRINCIPLES TO THE FACTS OF THE PRESENT CASE, IT IS ONCE AGAIN CLEAR THAT BO TH VISHAL AND ECLERX COULD NOT BE TAKEN AS 33 ITA NO. 2 666/DEL/2014 COMPARABLES FOR DETERMINING THE ALP. VISHAL AND ECLERX, BOTH ARE INTO KPO SERVICES. IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. {SUPRA), THE SPECIAL BENCH OF THE TRIBUNAL HAD NOTED THAT ECLERX IS ENGAGED IN DATA ANALYTICS, DATA PROCESSING SERVICES, PRICING ANALYTICS, BUNDLING OPTIMIZATION, CONTENT OPERATION, SALES AND MARKETING SUPPORT, PRODUCT DATA MANAGEMENT, REVENUE MANAGEMENT. IN ADDITION, ECLERX ALSO OFFERED FINANCIAL SERVICES SUCH AS REAL-TIME CAPITAL MARKETS, MIDDLE AND BACK-OFFICE SUPPORT, PORTFOLIO RISK MANAGEMENT SERVICES AND VARIOUS CRITICAL DATA MANAGEMENT SERVICES. CLEARLY, THE AFORESAID SERVICES ARE NOT COMPARABLE WITH THE SERVICES RENDERED BY THE ASSESSEE. FURTHER, THE FUNCTIONS UNDERTAKEN (I.E. THE ACTIVITIES PERFORMED) ARE ALSO NOT COMPARABLE WITH THE ASSESSEE. IN OUR VIEW, THE TRIBUNAL ERRED IN HOLDING THAT THE FUNCTIONS PERFORMED BY THE ASSESSEE WERE BROADLY SIMILAR TO THAT OF ECLERX OR VISHAL. THE OPERATING MARGIN OF ECLERX, THUS, COULD NOT BE INCLUDED TO ARRIVE AT AN ALP OF CONTROLLED TRANSACTIONS, WHICH WERE MATERIALLY DIFFERENT IN IT S CONTENT AND VALUE. IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. {SUPRA), THE SPECIAL BENCH OF THE TRIBUNAL HAD NOTED THE SAME AND HAD, THUS, EXCLUDED ECLERX AS A COMPARABLE. IT IS FURTHER OBSERVED THAT 34 ITA NO. 2 666/DEL/2014 THE COMPARABILITY OF ECLERX HAD ALSO BEEN EXAMINED BY THE HYDERABAD BENCH OF THE TRIBUNAL IN M/S CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P.) LTD . V . ADDITIONAL COMMISSIONER OF INCOME-TAX (SUPRA), WHEREIN, THE TRIBUNAL DIRECTED THE EXCLUSION OF ECLERX AS A COMPARABLE FOR THE REASON THAT IT WAS ENGAGED IN PROVIDING KPO SERVICES AND FURTHER THAT IT HAD ALSO RETURNED SUPERNORMAL PROFITS. 38. IN OUR VIEW, EVEN VISHAL COULD NOT BE CONSIDERED AS A COMPARABLE, AS ADMITTEDLY, ITS BUSINESS MODEL WAS COMPLETELY DIFFERENT. ADMITTEDLY, VISHAL'S EXPENDITURE ON EMPLOYMENT COST DURING THE RELEVANT PERIOD WAS A SMALL FRACTION OF THE PROPORTIONATE COST INCURRED BY THE ASSESSEE, APPARENTLY, FOR THE REASON THAT MOST OF ITS WORK WAS OUTSOURCED TO OTHER VENDORS/SERVICE PROVIDERS. THE DRP AND THE TRIBUNAL ERRED IN BRUSHING ASIDE THIS VITAL DIFFERENCE BY OBSERVING THAT OUTSOURCING WAS COMMON IN ITES INDUSTRY AND THE SAME WOULD NOT HAVE A BEARING ON PROFITABILITY. PLAINLY, A BUSINESS MODEL WHERE SERVICES ARE RENDERED BY EMPLOYING OWN EMPLOYEES AND USING ONE'S OWN INFRASTRUCTURE WOULD HAVE A DIFFERENT COST STRUCTURE AS COMPARED TO A BUSINESS MODEL WHERE SERVICES ARE OUTSOURCED. THERE WAS NO 35 ITA NO. 2 666/DEL/2014 MATERIAL FOR THE TRIBUNAL TO CONCLUDE THAT THE OUTSOURCING OF SERVICES BY VISHAL WOULD HAVE NO BEARING ON THE PROFITABILITY OF THE SAID ENTITY. DRAWING STRENGTH FROM THE RATIO LAID DOWN BY THE HON BLE DELHI HIGH COURT, WE DIRECT THE EXCLUSION OF CORAL H UB FROM THE FINAL LIST OF COMPARABLES. 17. BEFORE PROCEEDING TO ADJUDICATE ON THE ISSUE OF ROYALTY, IT WILL BE WORTHWHILE TO REFER TO SOME PRECEDENTS LAID D OWN BY THE HONBLE DELHI HIGH COURT AS WELL AS THE CO-ORDINATE BENCHES OF THE ITAT. THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIANCES 345 ITR 241 (DEL) HAS OBSERVED AS UN DER: 16. THE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD , FOR SHORT) HAS LAID DOWN TRANSFER PRICING GUIDELINES FOR MULTI-NATIONAL ENTERPRISES AND TAX ADMINISTRATIONS. THESE GUIDELINES GIVE AN INTRODUCTION TO THE ARMS LENGTH PRICE PRINCIPLE AND EXPLAINS ARTICLE 9 OF THE OECD MODEL TAX CONVENTION. THIS ARTICLE PROVIDES THAT WHEN CONDITIONS ARE MADE OR IMPOSED BETWEEN TWO ASSOCIATED ENTERPRISES IN THEIR COMMERCIAL OR FINAN CIAL RELATIONS WHICH DIFFER FROM THOSE WHICH WOULD BE MADE BETWEEN INDEPENDENT ENTERPRISES THEN ANY PROFIT WHICH WOULD, BUT FOR THOSE CONDITIONS, HAVE ACCRUED TO ONE OF THE ENTERPRISES, BUT, BY REASON O F THOSE CONDITIONS, IF NOT SO ACCRUED, MAY BE INCLUDE D IN THE PROFITS OF THAT ENTERPRISE AND TAXED ACCORDI NGLY. BY SEEKING TO ADJUST THE PROFITS IN THE ABOVE MANNE R, THE ARMS LENGTH PRINCIPLE OF PRICING FOLLOWS THE 36 ITA NO. 2 666/DEL/2014 APPROACH OF TREATING THE MEMBERS OF A MULTI-NATIONA L ENTERPRISE GROUP AS OPERATING AS SEPARATE ENTITIES RATHER THAN AS INSEPARABLE PARTS OF A SINGLE UNIFIE D BUSINESS. AFTER REFERRING TO ARTICLE 9 OF THE MODEL CONVENTION AND STATING THE ARM S LENGTH PRINCIPLE, THE GUIDELINES PROVIDE FOR RECOGNITION OF THE ACTUAL TRANSACTIONS UNDERTAKEN IN PARAGRAPHS 1.36 TO 1.41 . PARAGRAPHS 1.36 TO 1.38 ARE IMPORTANT AND ARE RELEVANT TO OUR PURPOSE. THESE PARAGRAPHS ARE REPRODUCED BELOW: - 1.36 A TAX ADMINISTRATIONS EXAMINATION OF A CONTROLLED TRANSACTION ORDINARILY SHOULD BE BASED O N THE TRANSACTION ACTUALLY UNDERTAKEN BY THE ASSOCIAT ED ENTERPRISES AS IT HAS BEEN STRUCTURED BY THEM, USIN G THE METHODS APPLIED BY THE TAXPAYER INSOFAR AS THES E ARE CONSISTENT WITH THE METHODS DESCRIBED IN CHAPTERS II AND III. IN OTHER THAN EXCEPTIONAL CASE S, THE TAX ADMINISTRATION SHOULD NOT DISREGARD THE ACT UAL TRANSACTIONS OR SUBSTITUTE OTHER TRANSACTIONS FOR T HEM. RESTRUCTURING OF LEGITIMATE BUSINESS TRANSACTIONS WOULD BE A WHOLLY ARBITRARY EXERCISE THE INEQUITY O F WHICH COULD BE COMPOUNDED BY DOUBLE TAXATION CREATED WHERE THE OTHER TAX ADMINISTRATION DOES NOT SHARE THE SAME VIEWS AS TO HOW THE TRANSACTION SHOULD BE STRUCTURED. 1.37 HOWEVER, THERE ARE TWO PARTICULAR CIRCUMSTANCES IN WHICH IT MAY, EXCEPTIONALLY, BE BO TH APPROPRIATE AND LEGITIMATE FOR A TAX ADMINISTRATION TO CONSIDER DISREGARDING THE STRUCTURE ADOPTED BY A TAXPAYER IN ENTERING INTO A CONTROLLED TRANSACTION. THE FIRST CIRCUMSTANCE ARISES WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM ITS FORM. I N SUCH A CASE THE TAX ADMINISTRATION MAY DISREGARD TH E PARTIES CHARACTERIZATION OF THE TRANSACTION AND RECHARACTERISE IT IN ACCORDANCE WITH ITS SUBSTANCE. AN EXAMPLE OF THIS CIRCUMSTANCE WOULD BE AN INVESTMENT IN AN ASSOCIATED ENTERPRISE IN THE FORM OF INTEREST - 37 ITA NO. 2 666/DEL/2014 BEARING DEBT WHEN, AT ARMS LENGTH, HAVING REGARD T O THE ECONOMIC CIRCUMSTANCES OF THE BORROWING COMPANY, THE INVESTMENT WOULD NOT BE EXPECTED TO BE STRUCTURED IN THIS WAY. IN THIS CASE IT MIGHT BE APPROPRIATE FOR A TAX ADMINISTRATION TO CHARACTERIZ E THE INVESTMENT IN ACCORDANCE WITH ITS ECONOMIC SUBSTANCE WITH THE RESULT THAT THE LOAN MAY BE TREATED AS A SUBSCRIPTION OF CAPITAL. THE SECOND CIRCUMSTANCE ARISES WHERE, WHILE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME, THE ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH W OULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER AND THE ACTUAL STRUCTURE PRACTICALLY IMPEDES THE TAX ADMINISTRATION FROM DETERMINING AN APPROPRIATE TRANSFER PRICE. AN EXAMPLE OF THIS CIRCUMSTANCE WOU LD BE A SALE UNDER A LONG-TERM CONTRACT, FOR A LUMP SU M PAYMENT, OF UNLIMITED ENTITLEMENT TO THE INTELLECTU AL PROPERTY RIGHTS ARISING AS A RESULT OF FUTURE RESEA RCH FOR THE TERM OF THE CONTRACT (AS PREVIOUSLY INDICAT ED IN PARAGRAPH 1.10). WHILE IN THIS CASE IT MAY BE PROPE R TO RESPECT THE TRANSACTION AS A TRANSFER OF COMMERC IAL PROPERTY, IT WOULD NEVERTHELESS BE APPROPRIATE FOR A TAX ADMINISTRATION TO CONFORM THE TERMS OF THAT TRANSFER IN THEIR ENTIRETY (AND NOT SIMPLY BY REFER ENCE TO PRICING) TO THOSE THAT MIGHT REASONABLY HAVE BEE N EXPECTED HAD THE TRANSFER OF PROPERTY BEEN THE SUBJ ECT OF A TRANSACTION INVOLVING INDEPENDENT ENTERPRISES. THUS, IN THE CASE DESCRIBED ABOVE IT MIGHT BE APPROPRIATE FOR THE TAX ADMINISTRATION, FOR EXAMPLE , TO ADJUST THE CONDITIONS OF THE AGREEMENT IN A COMMERCIALLY RATIONAL MANNER AS A CONTINUING RESEARCH AGREEMENT. 1.38 IN BOTH SETS OF CIRCUMSTANCES DESCRIBED ABO VE, THE CHARACTER OF THE TRANSACTION MAY DERIVE FROM TH E RELATIONSHIP BETWEEN THE PARTIES RATHER THAN BE DETERMINED BY NORMAL COMMERCIAL CONDITIONS AS MAY 38 ITA NO. 2 666/DEL/2014 HAVE BEEN STRUCTURED BY THE TAXPAYER TO AVOID OR MINIMIZE TAX. IN SUCH CASES, THE TOTALITY OF ITS TE RMS WOULD BE THE RESULT OF A CONDITION THAT WOULD NOT H AVE BEEN MADE IF THE PARTIES HAD BEEN ENGAGED IN ARMS LENGTH DEALINGS. ARTICLE 9 WOULD THUS ALLOW AN ADJUSTMENT OF CONDITIONS TO REFLECT THOSE WHICH THE PARTIES WOULD HAVE ATTAINED HAD THE TRANSACTION BEE N STRUCTURED IN ACCORDANCE WITH THE ECONOMIC AND COMMERCIAL REALITY OF PARTIES DEALING AT ARMS LENG TH. 17. THE SIGNIFICANCE OF THE AFORESAID GUIDELINES L IES IN THE FACT THAT THEY RECOGNISE THAT BARRING EXCEPT IONAL CASES, THE TAX ADMINISTRATION SHOULD NOT DISREGARD THE ACTUAL TRANSACTION OR SUBSTITUTE OTHER TRANSACT IONS FOR THEM AND THE EXAMINATION OF A CONTROLLED TRANSACTION SHOULD ORDINARILY BE BASED ON THE TRANSACTION AS IT HAS BEEN ACTUALLY UNDERTAKEN AND STRUCTURED BY THE ASSOCIATED ENTERPRISES. IT IS OF FURTHER SIGNIFICANCE THAT THE GUIDELINES DISCOURAGE RE- STRUCTURING OF LEGITIMATE BUSINESS TRANSACTIONS. T HE REASON FOR CHARACTERISATION OF SUCH RE-STRUCTURING AS AN ARBITRARY EXERCISE, AS GIVEN IN THE GUIDELINES, IS THAT IT HAS THE POTENTIAL TO CREATE DOUBLE TAXATION IF THE OTHER TAX ADMINISTRATION DOES NOT SHARE THE SAM E VIEW AS TO HOW THE TRANSACTION SHOULD BE STRUCTURED . 18. TWO EXCEPTIONS HAVE BEEN ALLOWED TO THE AFORESAID PRINCIPLE AND THEY ARE (I) WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM IT S FORM AND (II) WHERE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME BUT ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN THEIR TOTALI TY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER. 19. THERE IS NO REASON WHY THE OECD GUIDELINES SHOULD NOT BE TAKEN AS A VALID INPUT IN THE PRESENT CASE IN JUDGING THE ACTION OF THE TPO. IN FACT, THE CIT 39 ITA NO. 2 666/DEL/2014 (APPEALS) HAS REFERRED TO AND APPLIED THEM AND HIS DECISION HAS BEEN AFFIRMED BY THE TRIBUNAL. THESE GUIDELINES, IN A DIFFERENT FORM, HAVE BEEN RECOGNIZ ED IN THE TAX JURISPRUDENCE OF OUR COUNTRY EARLIER. IT HAS BEEN HELD BY OUR COURTS THAT IT IS NOT FOR THE REVE NUE AUTHORITIES TO DICTATE TO THE ASSESSEE AS TO HOW HE SHOULD CONDUCT HIS BUSINESS AND IT IS NOT FOR THEM TO TELL THE ASSESSEE AS TO WHAT EXPENDITURE THE ASSESS EE CAN INCUR. WE MAY REFER TO A FEW OF THESE AUTHORIT IES TO ELUCIDATE THE POINT. IN EASTERN INVESTMENT LTD. V. CIT , (1951) 20 ITR 1, IT WAS HELD BY THE SUPREME COURT THAT THERE ARE USUALLY MANY WAYS IN WHICH A GIVEN THING CAN BE BROUGHT ABOUT IN BUSINESS CIRCLE S BUT IT IS NOT FOR THE COURT TO DECIDE WHICH OF THEM SHOULD HAVE BEEN EMPLOYED WHEN THE COURT IS DECIDING A QUESTION UNDER SECTION 12(2) OF THE INCO ME TAX ACT. IT WAS FURTHER HELD IN THIS CASE THAT IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE WAS A PROFITABLE ONE OR THAT IN FACT ANY PROFIT WAS EARNE D. IN CIT V. WALCHAND & CO. ETC., (1967) 65 ITR 381, I T WAS HELD BY THE SUPREME COURT THAT IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY FOR DETERMINING WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS, REASONABLENES S OF THE EXPENDITURE HAS TO BE JUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE REVENUE. IT WAS FURTHER OBSERVED THAT THE RULE THAT EXPENDITURE CAN ONLY BE JUSTIFIED IF THERE IS CORRESPONDING INC REASE IN THE PROFITS WAS ERRONEOUS. IT HAS BEEN CLASSICAL LY OBSERVED BY LORD THANKERTON IN HUGHES V. BANK OF NEW ZEALAND, (1938) 6 ITR 636 THAT EXPENDITURE IN THE COURSE OF THE TRADE WHICH IS UNREMUNERATIVE IS NONETHELESS A PROPER DEDUCTION IF WHOLLY AND EXCLUSIVELY MADE FOR THE PURPOSES OF TRADE. IT DOES NOT REQUIRE THE PRESENCE OF A RECEIPT ON THE CREDIT SID E TO JUSTIFY THE DEDUCTION OF AN EXPENSE. THE QUESTION WHETHER AN EXPENDITURE CAN BE ALLOWED AS A DEDUCTION ONLY IF IT HAS RESULTED IN ANY INCOME OR PROFITS CAME TO BE CONSIDERED BY THE SUPREME COURT 40 ITA NO. 2 666/DEL/2014 AGAIN IN CIT V. RAJENDRA PRASAD MOODY , (1978) 115 ITR 519, AND IT WAS OBSERVED AS UNDER: - WE FAIL TO APPRECIATE HOW EXPENDITURE WHICH IS OTHERWISE A PROPER EXPENDITURE CAN CEASE TO BE SUCH MERELY BECAUSE THERE IS NO RECEIPT OF INCOME. WHATEVER IS A PROPER OUTGOING BY WAY OF EXPENDITURE MUST BE DEBITED IRRESPECTIVE OF WHETHER THERE IS RECEIPT OF INCOME OR NOT. THAT IS THE PLAIN REQUIRE MENT OF PROPER ACCOUNTING AND THE INTERPRETATION OF SECT ION 57(III) CANNOT BE DIFFERENT. THE DEDUCTION OF THE EXPENDITURE CANNOT, IN THE CIRCUMSTANCES, BE HELD T O BE CONDITIONAL UPON THE MAKING OR EARNING OF THE INCOME. IT IS NOTEWORTHY THAT THE ABOVE OBSERVATI ONS WERE MADE IN THE CONTEXT OF SECTION 57(III) OF THE ACT WHERE THE LANGUAGE IS SOMEWHAT NARROWER THAN THE LANGUAGE EMPLOYED IN SECTION 37(1) OF THE ACT. THIS FACT IS RECOGNISED IN THE JUDGMENT ITSELF. THE FACT THAT THE LANGUAGE EMPLOYED IN SECTION 37(1) OF THE ACT I S BROADER THAN SECTION 57(III) OF THE ACT MAKES THE POSITION STRONGER. 20. IN THE CASE OF SASSOON J. DAVID & CO. PVT. LTD . V. CIT, (1979) 118 ITR 261 (SC), THE SUPREME COURT REFERRED TO THE LEGISLATIVE HISTORY AND NOTED THAT WHEN THE INCOME TAX BILL OF 1961 WAS INTRODUCED, SECTION 37(1) REQUIRED THAT THE EXPENDITURE SHOULD HAVE BEE N INCURRED WHOLLY, NECESSARILY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS IN ORDER TO MERIT DEDUCTION. PURSUANT TO PUBLIC PROTEST, THE WORD NECESSARILY WAS OMITTED FROM THE SECTION. 21. THE POSITION EMERGING FROM THE ABOVE DECISION S IS THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHO W THAT ANY LEGITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT OF NECESSITY. IT IS ALSO NOT NECE SSARY FOR THE ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE PURPOSE OF BUSINESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT OR INCOME EI THER 41 ITA NO. 2 666/DEL/2014 IN THE SAME YEAR OR IN ANY OF THE SUBSEQUENT YEARS. THE ONLY CONDITION IS THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NOTHING MORE. IT IS THIS PRINCIPLE THAT INTER ALIA FINDS EXPRESSION IN THE O ECD GUIDELINES, IN THE PARAGRAPHS WHICH WE HAVE QUOTED ABOVE. 22. EVEN RULE 10B (1)(A) DOES NOT AUTHORISE DISALLOWANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUNERATIVE OR THAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY THE ASSESSEE IN HIS BUSINESS, HE COULD HAVE FARED BETTE R HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE 1 0B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR THE ASSESSEE TO DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILITY THEREOF AS BUSINESS EXPENDITURE, HE HAS NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR A PART THEREOF ON THE GROUND THAT THE ASSESSEE HAS SUFFERED CONTINUOUS LOSSES. THE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERI ON TO JUDGE ALLOWABILITY OF AN EXPENSE; THERE IS CERTA INLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PRESENT CASE IS TO HOLD THAT THE ASSESSEE OUGHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/ BRAND FEE, BECAUSE IT HAS BEEN SUFFERING LOSSES CONTINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD GUIDELINES, HE I S EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION A S HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICULARLY ON THE GROUNDS WHICH HAVE 42 ITA NO. 2 666/DEL/2014 BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORISED. 23. APART FROM THE LEGAL POSITION STATED ABOVE, EV EN ON MERITS THE DISALLOWANCE OF THE ENTIRE BRAND FEE/ ROYALTY PAYMENT WAS NOT WARRANTED. THE ASSESSEE HAS FURNISHED COPIOUS MATERIAL AND VALID REASONS AS TO WHY IT WAS SUFFERING LOSSES CONTINUOUSLY AND THE SE HAVE BEEN REFERRED TO BY US EARLIER. FULL JUSTIFICA TION SUPPORTED BY FACTS AND FIGURES HAVE BEEN GIVEN TO DEMONSTRATE THAT THE INCREASE IN THE EMPLOYEES COST , FINANCE CHARGES, ADMINISTRATIVE EXPENSES, DEPRECIATION COST AND CAPACITY INCREASE HAVE CONTRIBUTED TO THE CONTINUOUS LOSSES. THE COMPARATI VE POSITION OVER A PERIOD OF 5 YEARS FROM 1998 TO 2003 WITH RELEVANT FIGURES HAVE BEEN GIVEN BEFORE THE CI T (APPEALS) AND THEY ARE REFERRED TO IN A TABULAR FOR M IN HIS ORDER IN PARAGRAPH 5.5.1. IN FACT THERE ARE FOU R TABULAR STATEMENTS FURNISHED BY THE ASSESSEE BEFORE THE CIT (APPEALS) IN SUPPORT OF THE REASONS FOR THE CONTINUOUS LOSSES. THERE IS NO MATERIAL BROUGHT BY THE REVENUE EITHER BEFORE THE CIT (APPEALS) OR BEFORE T HE TRIBUNAL OR EVEN BEFORE US TO SHOW THAT THESE ARE INCORRECT FIGURES OR THAT EVEN ON MERITS THE REASON S FOR THE LOSSES ARE NOT GENUINE. 18. SIMILARLY, THE HONBLE DELHI HIGH COURT HAS OPINED IN CIT VS. CUSHMAN AND WAKEFIELD (INDIA)(P) LTD 367 IT R 730 (DEL.): THIS IS THE DISTINCTION BETWEEN THE JURISDICTION O F THE AO AND THE TPO; THE TPO DETERMINES WHETHER THE STATED TRAN SACTION VALUE REPRESENTS THE ALP OR NOT (INCLUDING WHETHER THE ALP IS NIL), WHILE THE AO MAKES THE DECISION AS TO VALIDIT Y OF THE DEDUCTION UNDER SECTION 37. THIS MEANS THE DECISION AS TO 43 ITA NO. 2 666/DEL/2014 WHETHER THE EXPENDITURE WAS 'LAID OUT OR EXPENDED W HOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS' IS A FACT DETERMINATION OR VERIFICATION TO BE UNDERTAKEN BY T HE AO. THIS INCLUDES WHETHER THE REFERRALS ACTUALLY OCCURRED (A ND THUS TOOK PLACE FOR THE 'PURPOSE OF THE BUSINESS'), INDEPENDE NT OF THEIR VALUATION WHICH THE TPO DETERMINES. THAT DETERMINAT ION IS NOT AND CANNOT BE MADE BY THE TPO. NOR IS THE AUTHORITY OF THE AO UNDER SECTION 37 CURTAILED IN ANY MANNER BY A REFER ENCE UNDER SECTION 92C. 19. THE HYDERABAD BENCH OF THE ITAT IN ZUARI CEMENT LTD . VS. DCIT IN 57 TAXMANN.COM 206 (HYDERABAD TRIB.) HA S HELD AS UNDER: LEAVE ALONE THAT AMOUNT; EVEN THE SUB LICENSE FEE FOR THE USE OF TRADE MARK IS ALSO FAULTY. UNDER THE GUISE OF TPO PROVISIONS, THE TPO CANNOT DETERMINE THE ALP AT NIL AS HELD BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES LTD., {SUPRA). THEREFORE, REJECTING THE ENTIRE PAYMENT WITHOUT THE RE BEING ANY ANALYSIS ON THE CUP METHOD CANNOT BE ACCEPTED. IN THE GUISE OF ANALYZING THE TRANSACTION S IN THE CUP METHOD, THE TPO HAS NOT BROUGHT ANY EVIDENCE ON RECORD TO REJECT THE 1% PAYMENT MADE TO ITALCEMENTI GROUP. MOREOVER, WHILE DETERMINING THE PRICE AT NIL ON THE ISSUE, THE TPO SURPRISINGLY HOL DS THAT ASSESSEE HAS TRANSFERRED ITS 'ZUARI BRAND' TO 'ITALCEMENTI GROUP'. WE ARE UNABLE TO UNDERSTAND TH IS LOGIC. ITALCEMENTI GROUP NEVER OBTAINED, ACQUIRED O R USED ZUARI BRAND ANYWHERE IN THE WORLD, SO THAT THI S CANNOT BE CONSIDERED FOR TRANSFER PRICING ANALYSIS. IT IS THE ITALCEMENTI GROUP BRAND WHICH IS USED BY ASSESSEE-COMPANY. THE TPO'S ANALYSIS OF AMP EXPENSES ARE ALSO NOT CORRECT. EVEN THOUGH 44 ITA NO. 2 666/DEL/2014 ITALCEMENTI GROUP WAS BEING USED FROM EARLIER YEARS , AMP EXPENSES OF CURRENT YEAR ALSO INCLUDED IN THIS, WHICH IS NOT CORRECT. MOREOVER, ITALCEMENTI GROUP ITSELF IS A 50% SHAREHOLDER IN THE ASSESSEE-COMPANY FROM THE BEGINNING. THEREFORE, IT CANNOT BE STATED THAT 'ZUARI CEMENTS' IS EXCLUSIVE BRAND OWNER OF TH E BIRLA GROUP IN EXCLUSION OF ITALCEMENTI GROUP. THE ENTIRE APPROACH BY THE TPO IS BIASED AND CANNOT BE JUSTIFIED ON THE FACTS OF THE CASE. THEREFORE, WE A RE NOT IN A POSITION TO UPHOLD ANY OF THE CONTENTIONS RAISED BY TPO IN HIS ORDER. LIKEWISE, THE DISALLOWANCE OF VARIOUS SERVICE FEES INCLUDING REIMBURSEMENTS MADE BY ASSESSEE TO AE. SINCE WE DO NOT FIND ANY VALID REASON FOR TPO TO DISALLOW THESE EXPENDITURES, WE HAVE NO OTHER GO THAN TO SET ASIDE THE ENTIRE ORDER OF THE TPO WHICH IS BASED ON WRONG PRESUMPTIONS - AND PROPOSITIONS. DRP UNFORTUNATELY, EVEN THOUGH CONSISTED OF THREE SENIO R OFFICERS, DID NOT APPLY ITS MIND TO THE VALID OBJEC TIONS RAISED BY ASSESSEE. IN VIEW OF THIS, WITHOUT DECIDI NG THE MERITS OF VARIOUS ISSUES, WE SET ASIDE THE ORDE RS AND DIRECT THE TPO TO RE-CONSIDER THE ENTIRE ORDER AND ANALYSE THEM IN FRESH, FIRST BY DETERMINING THE MOS T APPROPRIATE METHOD AND THEN ANALYZING THE TRANSACTIONS UNDER THE PROVISIONS OF THE TP. THE ORDERS OF THE TPO/DRP ON THE TP ISSUES ARE THEREFOR E SET ASIDE AND THE ENTIRE ISSUE ON TP ANALYSIS IS RESTORED TO THE FILE OF AO FOR FRESH CONSIDERATION. THE GROUNDS RAISED ARE ACCORDINGLY ALLOWED FOR STATISTI CAL PURPOSES. 20. THE VISAKHAPATNAM BENCH OF THE ITAT HAS OPINED IN THE CASE OF LG POLYMERS INDIA (P) LTD. VS ACIT IN 1 6 ITR (T) 45 ITA NO. 2 666/DEL/2014 240 AS UNDER : HOWEVER, IN THE INSTANT CASE, THE TPO DID NOT EXAM INE THE ARMS LENGTH PRICE OF THE IMPUGNED ROYALTY PAYMENT I N ACCORDANCE WITH THE PROVISIONS OF SEC.92C OF THE AC T. IT IS ALSO THE CONTENTION OF THE ASSESSEE THAT THE TPO DID NOT INDICATE TO THE ASSESSEE THAT HE PROPOSES TO TREAT THE IMPUGNED TRANSACTION AS A SHAM ONE NOR DID HE CALL FOR ANY O BJECTION FROM THE ASSESSEE IN THAT REGARD. THE LEARNED A.R A LSO RELIED UP ON HOST OF CASE LAW IN CONNECTION WITH THIS ISSU E. FURTHER THE OBSERVATION OF DRP WITH REGARD TO THE TRADE MAR K REGISTRATION, THOUGH DEFENDED BEFORE US BY THE ASSE SSEE, REQUIRES EXAMINATION AT THE END OF THE ASSESSING OF FICER/TPO. ACCORDINGLY WE ARE OF THE VIEW THAT THE ALP OF THE IMPUGNED ROYALTY PAYMENT AND THE ISSUE RELATING TO THE TRADE MARK REGISTRATION NEED TO BE EXAMINED AFRESH. ACCORDINGL Y WE SET ASIDE THE ORDER OF ASSESSING OFFICER/TPO/DRP ON THI S ISSUE AND RESTORE THE SAME TO HIS FILE FOR EXAMINATION OF THE SAME AFRESH IN ACCORDANCE WITH THE LAW, AFTER AFFORDING NECESSARY OPPORTUNITY OF BEING HEARD. 21. IN THE INSTANT CASE, THE ASSESSEE HAD FILED IN THE COURSE OF THE TPO ASSESSMENT AS WELL AS BEFORE THE DRP, DE TAILED SUBMISSIONS, INCLUDING AGREEMENT BETWEEN AE AND THE ASSESSEE, JUSTIFYING HOW THE SUPPORT BY ITS AE WAS CR UCIAL TO THE RUNNING OF ITS BUSINESS. IN CIT VS EKL APPLIAN CES 341 ITR 241 (DEL), THE HON'BLE DELHI HIGH COURT HAD THE OCC ASION TO CONSIDER AN ISSUE OF DISALLOWANCE OF ROYALTY BY TPO BECAUSE 46 ITA NO. 2 666/DEL/2014 THE ASSESSEE IN THAT CASE HAD BEEN SUFFERING LOSSES , THE HON'BLE HIGH COURT WHILE HOLDING THAT SO LONG AS THE EXPENDITURE OR PAYMENT BY ASSESSEE HAS BEEN DEMONST RATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. FURTHERMORE, WE ARE OF THE O PINION THAT ONCE TNMM HAS BEEN APPLIED TO THE ASSESSEE COM PANYS TRANSACTION, IT COVERS WITHIN ITS AMBIT THE ROYALTY TRANSACTIONS IN QUESTION TOO AND HENCE THE DEPARTMENTS CONTENTI ON FOR APPLYING THE CUP METHOD IS ERRONEOUS. WE DRAW SUPPO RT FROM THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN CADBURY INDIA LTD. VS ACIT IN I.T.A. NO. 7408/MUM/2010 AND I.T.A. NO. 7641/MUM/2010 WHEREIN THE BENCH HAS UPHELD THE U SE OF TNMM FOR ROYALTY BY HOLDING: 33. THE TPO HAS MADE THE DISALLOWANCE IN QUESTION MAINLY ON THE BASIS OF THE BENEFIT TEST. IN THIS RE GARD, IT IS SEEN THAT THE PAYMENT OF ROYALTY CANNOT BE EXAMINED DIVORCED FROM THE PRODUCTION AND SALES. ROYALTY IS INEXTRICABLY LINKED WITH THESE ACTIVITIE S. IN THE ABSENCE OF PRODUCTION AND SALE OF PRODUCTS, THE RE WOULD BE NO QUESTION ARISING REGARDING PAYMENT OF ANY ROYALTY. RULE 10A (D) DEFINES 'TRANSACTION AS A 47 ITA NO. 2 666/DEL/2014 NUMBER OF CLOSELY LINKED TRANSACTIONS. ROYALTY, THE N, IS A TRANSACTION CLOSELY LINKED WITH PRODUCTION AND SALES. IT CANNOT BE SEGREGATED FROM THESE ACTIVITIE S OF AN ENTERPRISE, BEING EMBEDDED THEREIN. THAT BEING S O, ROYALTY CANNOT BE CONSIDERED, AND EXAMINED IN ISOLATION ON A STANDALONE BASIS. ROYALTY IS TO BE CALCULATED ON A SPECIFIED AGREED BASIS, ON DETERMINING THE NET SALES WHICH, IN THE PRESENT CAS E, ARE REQUIRED TO BE DETERMINED AFTER EXCLUDING THE AMOUNTS OF STANDARD BOUGHT OUT COMPONENTS, ETC., SINCE SUCH NET SALES DO NOT STAND RECORDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. THEREFORE, IT IS OUR CONSIDERED OPINION THAT THE ASSESSEE WAS CORRECT IN EMPLOYING AN OVERALL TNMM FOR EXAMINING THE ROYALTY.. 22. IN THE CASE OF DCIT LTU VS CLSA INDIA LTD. (2 013) 33 TAXMANN.COM 260 (MUMBAI TRIBUNAL), THE BENCH HELD T HAT CUP METHOD CANNOT BE APPLIED IF THE RELEVANT INFORM ATION IS NOT AVAILABLE. NO SUCH COMPARABLE TRANSACTION HAS BEEN BROUGHT ON RECORD BY THE ASSESSING OFFICER OR EVEN BY THE DRP. NO SUCH COMPARABLE CASE HAS BEEN PLACED BEFOR E US BY THE REVENUE EVEN NOW. 23. THEREFORE, ON AN OVERALL CONSIDERATION OF T HE FACTS OF THE CASE AND THE JUDICIAL PRECEDENTS AVAILABLE, IT IS O UR CONSIDERED OPINION THAT IT IS NOT NECESSARY FOR THE ASSESSEE T O SHOW THAT 48 ITA NO. 2 666/DEL/2014 ANY LEGITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT OF NECESSITY. IT IS ALSO NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE PU RPOSE OF BUSINESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEAR OR IN ANY OF THE SUB SEQUENT YEARS. THE ONLY CONDITION IS THAT THE EXPENDITURE S HOULD HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NOTHING MORE. THE TPO HAS NO ROLE TO P LAY IN EXAMINING THE DECISION OF COMMERCIAL NATURE. UNDER THE GUISE OF TPO PROVISIONS, THE TPO CANNOT DETERMINE THE ALP AT NIL AS HELD BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES LTD., {SUPRA}. THEREFORE, REJECTING THE ENTIRE PAYMENT WITHOUT THERE BEING ANY ANALYSIS CANNOT BE A CCEPTED. IN THE INSTANT CASE, THE TPO DID NOT EXAMINE THE AR MS LENGTH PRICE OF THE IMPUGNED ROYALTY PAYMENT IN ACCORDANCE WITH THE PROVISIONS OF SEC.92C OF THE ACT. ACCORDINGLY, WE ARE OF THE OPINION THAT THE ALP OF THE IMPUGNED PAYMENT FOR ROYALTY HAS BEEN WRONGLY DETERMINED AS NIL BY THE TPO AND THE IS SUE NEEDS TO BE EXAMINED AFRESH. ACCORDINGLY WE SET ASI DE THE ORDER OF ASSESSING OFFICER/TPO ON THIS ISSUE AND RE STORE THE 49 ITA NO. 2 666/DEL/2014 SAME TO THE FILE OF THE TPO FOR EXAMINATION OF THE SAME AFRESH IN ACCORDANCE WITH THE LAW, AFTER AFFORDING OPPORTUN ITY OF BEING HEARD TO THE ASSESSEE. IN THE RESULT, GROUND NO. 3 OF THE ASSESEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSE S. 24. GROUND NO. 4 IS DISMISSED AS NOT BEING PRESSED. 25. GROUND NO. 5 RELATING TO THE ISSUE OF ALLEGED P RIOR PERIOD EXPENSES IS RESTORED TO THE FILE OF THE AO FOR EXAMINING/VERIFYING THE CLAIM OF THE ASSESSEE AND A LLOWING THE SAME IF IT IS FOUND THAT THE PAYMENTS HAVE CRYSTAL LISED IN THE YEAR UNDER APPEAL. HENCE THE GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 26. GROUND NO. 6 IS DISMISSED AS BEING PREMATURE. G ROUND NO. 7 IS CONSEQUENTIAL AND IS NOT BEING ADJUDICATED UPO N. 27. IN THE FINAL RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER IS PRONOUNCED IN THE OPEN COURT ON 05.07.2016 SD/- SD/- (S.V. MEHROTRA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 05/07/2016 50 ITA NO. 2 666/DEL/2014 *KAVITA ARORA COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON (HANDWRITTEN) 04.07.16/05.07.1 6 2. DRAFT PLACED BEFORE AUTHOR 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 5. APPROVED DRAFT COMES TO THE SR.PS/PS 06.07.2016 6. KEPT FOR PRONOUNCEMENT ON 05.07.2016 7. FILE SENT TO THE BENCH CLERK 06.07.2016 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.