INTEGRATED DECISIONS & SYSTEMS, Jaipur V. ACIT, Jaipur

ITA 27/JPR/2011

• Counselvise Citation: 2723114 RSA 2011
• Duration Of Justice: 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 07-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VINOD JOHRI
• Keywords: Related party transaction; Transfer pricing; Rectification of order; Opportunity of being heard; International transaction; Arm length price
• Section: 92C; 92D; 92F; 234B; 10B; 92

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH A JAIPUR (BEFORE SHRI R.K.GUPTA AND SHRI N.L.KALRA) ITA NO. 27/ JP/2011 ASSESSMENT YEAR 2006-07 PAN: AAACI 7132 C M/S. INTEGRATED DECISIONS & SYSTEMS INDIA (P) LTD. VS DCIT E-16, GOKHLE MARG, C SCHEME CIRCLE- 6 JAIPUR JAIPUR (APPELLANT ) (RESPONDENT) ASSESSEE BY: SHRI M.P. LOHIA, SHRI MAHESH MANDLE CHA & SHRI ANIL GOYAL DEPARTMENT BY : SHRI VINOD JOHRI DATE OF HEARING: 5-09-2011 DATE OF PRONOUNCEMENT: 31-10-2011 ORDER PER N.L. KALRA, AM:- THE ASSESSEE HAS FILED AN APPEAL AGAINST THE ORDE R OF THE AO JAIPUR DATED 18- 11-2010 FOR THE ASSESSMENT YEAR 2006-07. 2.0 THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE A RE AS UNDER:- GROUND NO. 1: ERRED IN MAKING TRANSFER PRICING ADJUSTMENTS BY REJ ECTING THE ANALYSIS UNDERTAKEN BY THE APPELLANT TO DETERMINE ARMS LENG TH PRICE FOR ITS INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISIONS OF SOFTWARE DEVELOPMENT SERVICES TO THE AE GROUND NO. 2: ERRED IN APPLYING TRANSFER PRICING PROVISIONS TO TH E APPELLANT WHICH ENJOYS TAX HOLIDAY U/S 10B OF THE ACT. 2 GROUND NO.31: ERRED IN REJECTION OF SEARCH ANALYSIS CONDUCTED BY THE APPELLANT (USING DATABASE UPDATED AS ON 11 JAN. 2006) AND DOCUMENTAT ION MAINTAINED BY THE APPELLANT. WITHOUT PREJDUDICE TO ABOVE, THE LD AO HAS ERRED IN NOT CONSIDERING THE SEARCH ANALYSIS USED BY THE APPELLA NT (USING DATABASE UPDATED ON 25 AUG. 2006) GROUND NO. 4: ERRED IN IGNORING, WITHOUT PREJUDICE TO ABOVE GROUN DS, THE FACT THAT 5 COMPANIES (SUBMITTED BY THE APPELLANT AND ALSO CONS IDERED COMPARABLE COMPANIES BY THE LD. TPO ) CAN ALSO BE CONSIDERED A S FINAL SET OF COMPARABLES FOR DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. GROUND NO. 5: ERRED IN INITIATING PENALTY PROCEEDINGS U/S 271AA O F THE ACT GROUND NO. 7: ERRED IN REJECTING OF ALL LOSS MAKING COMPANIES WHI LE CARRYING OUT FRESH SEARCH. GROUND NO. 8: ERRED IN CONSIDERING INAPPROPRIATE COMPANIES AS COM PARABLE BY CARRYING OUT FRESH SEARCH CONSIDERING NON-CONTEMPORANEOUS DA TA GROUND NO. 9: ERRED IN NOT CONSIDERING MULTIPLE YEAR DATA FOR DET ERMINING THE ARMS LENGTH PRICE GROUND NO. 10: WITHOUT PREJUDICE TO OTHER GROUNDS, ERRED IN CONSID ERING THE INCORRECT MARGINS OF COMPANIES SELECTED BY THE LD TPO GROUND NO. 11: ERRED IN REJECTING APPROPRIATE ADJUSTMENTS TO ACCOU NT FOR DIFFERENT IN THE LEVEL OF WORKING CAPITAL EMPLOYED BY THE APPELLANT VIS A VIS THE COMPARABLE COMPANIES. 3 GROUND NO. 12: ERRED IN COMPARING FULL-FLEDGED RANK BEARING ENTITI ES WITH THE APPELLANTS CAPTIVE OPERATIONS WITHOUT MAKING ANY RISK ADJUSTME NT FOR DIFFERENCE BETWEEN THE FUNCTIONAL AND RISK PROFILE OF COMPARAB LE COMPANIES VIS A VIS THE RISK PROFILE OF THE APPELLANT. GROUND NO. 13: ERRED IN COMPUTING THE ARMS LENGTH PRICE OF SOFTWA RE DEVELOPMENT SERVICES AS THE MEAN ARMS LENGTH PRICE DETERMINED, WITHOUT TAKING INTO ACCOUNT THE LOWER 5% VARIATION FROM THE MEAN ARMS LENGTH PRICE DETERMINED. GROUND NO. 14: ERRED IN INITIATING PENALTY PROCEEDINGS U/S 271(1)( C) OF THE ACT. GROUND NO. 15: ERRED IN LEVYING INTEREST U/S 234B AND 234C OF THE ACT. 3.0 THE GROUND OF APPEAL NO.S 2, 3, , 7 AND 9 WERE NOT PRESSED. THEREFORE, THESE ARE DISMISSED BEING NOT PRESSED. 4.0 GROUND NO. NO 5 AND 14 ARE AGAINST INITIATION O F PENALTY PROCEEDINGS. SUCH GROUNDS OF APPEAL ARE NOT MAINTAINABLE AS NO APPEAL IS PROVIDED AGAINST INITIATION OF PENALTY. 5.0 GROUND OF APPEAL NO 15 IS AGAINST CHARGING OF I NTEREST U/S 234B AND 234C OF THE ACT. THE INTEREST IS MANDATORY AND THE ASSESSEE WIL L GET CONSEQUENTIAL RELIEF. 6.1 THE ASSESSEE IS A SUBSIDIARY OF INTEGRATED DECI SIONS & SYSTEMS INC. USA. THE HOLDING COMPANY IS ENGAGED IN THE DEVELOPMENT AND O NLINE SUPPORT OF SOFTWARE. THE SOFTWARE DEVELOPED BY THE M/S. ASSOCIATED ENTERPRIS E IS USED IN THE HOSPITALITY INDUSTRY. ITS REVENUE MANAGEMENT SOLUTIONS E-YIELD ENABLES HOTELS AND CHAINS TO MAXIMIZE TOTAL REVENUE PER AVAILABLE ROOM. IT HAS CLIENTS BASED AL L OVER THE WORLD. 4 6.2 THE ASSESSEE PROVIDED SOFTWARE DEVELOPMENT AND SUPPORT SERVICE TO THE PARENT COMPANY/ CLIENTS OF THE PARENT COMPANY. THE SERVICE S PROVIDED RELATE TO SOFTWARE DEVELOPMENT, PRODUCT CUSTOMIZATION AND ONELINE 24X 7PRODUCT TECHNICAL SUPPORT. THE COMPANY HAS STARTED FUNCTIONING IN THE YEAR 1998-99 . THE CLIENTS ARE MAJOR GLOBAL HOTEL CHINS SUCH AS HILTON, HYATT ETC. THE ASSESSEE HAS C LAIMED DEDUCTION U/S 10B OF THE ACT ON ITS PROFIT. DURING THE YEAR, THE ASSESSEE HAS UN DERTAKEN THE FOLLOWING INTERNATIONAL TRANSACTIONS: S.N. DESCRIPTION OF TRANSACTION METHOD VALUE (IN RS. ) 1. DEVELOPMENT AND SUPPORT OF SOFTWARE COST PLUS 7,13,49,096/- 6.3 THE AO REFERRED THE DOCUMENTATION OF ALP (ARMS LENGTH PRICE) TO THE TRANSFER PRICING OFFICER (TPO). THE TPO REQUIRED THE ASSESSE E TO FURNISH THE COPIES OF THE INFORMATION AND DOCUMENTS MAINTAINED U/S 92D(1) OF THE ACT READ WITH I.T. RULES 10D(1) AND (3). THE TPO IN HIS ORDER HAS MENTIONED THAT ANNEXURE V OF THE TRANSFER PRICE DOCUMENTATION WAS FILED BY THE ASSESSEE ALONG WITH LETTER DATED 23-03-09. AS PER BILLING AGREEMENT, THE ASSESSEE COMPANY UNDERTOOK T HE FUNCTIONS AS MENTIONED IN EARLIER PARAGRAPH AND THE ASSOCIATED ENTERPRISE WAS TO PAY TOTAL REVENUE COST WITH 10% MARK UP. THE ASSESSEE UNDERTOOK T.P. ANALYSIS IN F.Y. 20 04-05, ACCORDING TO WHICH, MARGIN OF 3 YEARS AVERAGE NCP OF 8 COMPARABLES IDENTIFIED IN PROWESS WAS 10.27%. THE ASSESSEES MARGIN AS PER RECALCULATED FIGURE WAS 11 .08%. NO FRESH SEARCH FOR COMPARABLES OR ANALYSIS USING CONTEMPORANEOUS DATA HAD BEEN MADE BY THE ASSESSEE. THE ASSESSEE CHARGED COST PLUS MARK UP OF 10% FROM THE PARENT COMPANY. 6.4 THE TPO REJECTED THE ANALYSIS UNDERTAKEN BY THE ASSESSEE TO DETERMINE THE ALP FOR ITS INTERNATIONAL TRANSACTIONS PERTAINING TO PR OVISIONS OF SOFTWARE DEVELOPMENT 5 SERVICES TO ASSOCIATED ENTERPRISE. THE ASSESSEE HAS RELIED UPON THE PROVISO TO RULE 10D(4). AS PER THIS RULE, IT IS NOT MANDATORY TO MA INTAIN FRESH DOCUMENTATION IN RESPECT OF EACH PREVIOUS YEAR UNLESS THERE IS ANY SIGNIFICA NT CHANGE IN THE NATURE OF TERMS OF THE INTERNATIONAL TRANSACTION. THIS CONTENTION OF THE A SSESSEE WAS REJECTED BY THE TPO AND THE FINDING OF THE TPO HAS BEEN APPROVED BY THE DIS PUTE RESOLUTION PENAL. THE TPO HAS MENTIONED THAT 10B(4) MAKES IT MANDATORY TO USE CON TEMPORANEOUS DATA FOR ANALYZING THE INTERNATIONAL TRANSACTION. THE DATA OF COMPARAB LES USED SHOULD BE THE DATA FOR THE YEAR IN WHICH INTERNATIONAL TRANSACTION TOOK PLACE AND MORE COMMONLY KNOWN AS CONTEMPORANEOUS DATA. REFERENCE HAS BEEN MADE TO TH E WORD SHALL AS CONTAINED IN RULE 10B MEANS THAT USE OF THE CURRENT F.Y. DATA IS MANDATORY REQUIREMENT OF LAW IN THE COMPARABILITY ANALYSIS UNDER THE INDIAN TRANSFER PR ICING REGULATIONS. THE REQUIREMENT OF THE EXISTENCE OF INFORMATION AND DOCUMENTATION B Y THE DUE DATE OF FILING OF RETURN DOES NOT OVERRIDE THE PROVISIONS OF RULE 10B(4). AC CORDINGLY THE TPO MADE SEARCH ON THE PROWESS TO ASCERTAIN THE COMPARABLES. 6.5 WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. B EFORE FURTHER, IT WILL BE USEFUL TO REPRODUCE RULE 10D(4). (4) THE INFORMATION AND DOCUMENTS SPECIFIED UNDER S UB- RULES (1) AND (2), SHOULD, AS FAR AS POSSIBLE, BE CONTEMPORANEOUS AND SHOULD EXIST LATEST BY THE SPEC IFIED DATE REFERRED TO IN CLAUSE (IV) OF SECTION 92F : PROVIDED THAT WHERE AN INTERNATIONAL TRANSACTION CONTINUES TO HAVE EFFECT OVER MORE THAN ONE PREVIOU S YEAR, FRESH DOCUMENTATION NEED NOT BE MAINTAINED SEPARATE LY IN RESPECT OF EACH PREVIOUS YEAR, UNLESS THERE IS ANY SIGNIFICANT CHANGE IN THE NATURE OR TERMS OF THE INTERNATIONAL TRANSACTION, IN THE ASSUMPTIONS MADE, OR IN ANY OTHER FACTOR WHICH COULD INFLUENCE THE TRANSFER PRICE, AND IN THE CASE OF SU CH SIGNIFICANT 6 CHANGE, FRESH DOCUMENTATION AS MAY BE NECESSARY UND ER SUB- RULES (1) AND (2) SHALL BE MAINTAINED BRINGING OUT THE IMPACT OF THE CHANGE ON THE PRICING OF THE INTERNATIONAL TRAN SACTION. 6.6 THE RULE THEREFORE, SAYS THAT AS FAR AS POSSIBL E CONTEMPORANEOUS DATA IS TO BE KEPT AND MAINTAINED U/S 92D OF THE ACT. THUS THIS RULE I S FOR THE PURPOSE OF INFORMATION AND DOCUMENTS TO BE KEPT AND MAINTAINED U/S 92D. WHEN O NE HAS TO CONSIDER THE ALP THEN ONE HAS TO USE DATA IN ANALYZING THE COMPARABILITY OF UNCONTROLLED TRANSACTION WITH INTERNATIONAL TRANSACTION RELATING TO F.Y. IN WHICH INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. THIS IS MENTIONED IN RULE10D(4). THE PROVISO TO RULE 10D(4) IS AN EXCEPTION AND IT WAS ON THE ASSESSEE TO HAVE THE MA TERIAL ON RECORD THAT EXCEPTION IS AVAILABLE. AS ALREADY POINTED OUT, THIS IS WITH REF ERENCE TO INFORMATION AND DOCUMENTS TO BE MAINTAINED BY THE ASSESSEE. THESE ARE USEFUL FOR THE PURPOSE OF ASCERTAINING THE ALP. IT IS NOWHERE MENTIONED IN THE ACT THAT INFORMATION AND DOCUMENTS MAINTAINED BY THE ASSESSEE ARE ONLY CONCLUSIVE INFORMATION AND DOCUME NTS FOR THE PURPOSE OF ASCERTAINING THE ALP. WE THEREFORE, HOLD THAT THE REVENUE AUTHOR ITIES ARE JUSTIFIED IN REJECTING THE ANALYSIS UNDERTAKEN BY THE ASSESSEE TO DETERMINE TH E ALP. SUCH ANALYSIS CAN BE CONSIDERED BUT IT CANNOT BE A BINDING ON THE REVENU E AUTHORITIES. 6.7 THE ASSESSEE HAS NOT UNDERTAKEN SEARCH PROCESS FOR THE F.Y. 2005-06 AND THEREFORE, SEARCH PROCESS WAS MADE BY THE TPO FOR I DENTIFYING ALL THE COMPARABLES. THE ASSESSEE VIDE SHOW CAUSE LETTER DATED 20 TH OCT. 09 WAS INFORMED OF THE FRESH SEARCH HAVING BEEN UNDERTAKEN BY THE TPO. THE RELEVANT EXT RACTS OF THE SHOW CAUSE NOTICE ARE AS UNDER:- A FRESH SEARCH WAS UNDERTAKEN ON PROWESS DATABA SE BY THIS OFFICE. THE INITIAL SEARCH ITSELF REVEALED 793 COM PANIES IN THE SOFTWARE AND SOFTWARE SERVICE & CONSULTANCY SECTOR/ ECONOMIC ACTIVITY AS OPPOSED 7 TO THE INITIAL SET OF 366 COMPANIES IDENTIFIED BY T HE ASSESSEE IN THE SEARCH FOR F.Y 2004-05.THIS SHOWS THE MAGNITUDE OF DIFFERE NCE DUE TO USE OF CONTEMPORANEOUS DATA. COMPANIES HAVING DATA FOR F.Y. 2005-06 WERE SHORT L ISTED, COMPANIES WITH TURNOVER ABOVE 2 CRORE BUT BELOW 50 CRORE WERE RETAINED, LOSS-MAKING COMPANIES REMOVED AND FURTHER FILTERS F OR COMPANIES REMOVED AND FURTHER FILTERS FOR COMPANIES OF OPERAT ING SERVICES INCOME TO SALES RATION BELOW 60% REMOVED, COMPANIES WITH R&D EXPENDITURE ABOVE 10% REMOVED. AS THE ASSESSEE COMPANYS WAGES TO COST RATIO IS 74.15%, COMPANIES WITHIN +/-15 WAGES/COST RATIO (I. E. BETWEEN 59.15% TO 89.15% WERE SHORT LISTED. AFTER QUALITATIVE ANALYSIS AS WELL AS EXCLUSION OF COMPANIES WITH SUBSTANTIAL RELATED PARTY TRANSACTION, THE FOLLOWI NG 8 COMPANIES HAVE BEEN IDENTIFIED AS COMPARABLES: COMPANY NAME OPM/OC AVANI CIRCON TECHNOLOGIES LTD. 32.12 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD. 26.46 EXENSYS SOFTWARE SOLUTION LTD. 25.8 FORTUNE INFOTECH LTD. 17.79 GOLDSTONE TECHNOLOGIES LTD. 2.47 INDIUM SOFTWARE (INDIA) LTD. 27.09 MAVERICK SYSTEM LTD. 42.76 SANKHYA INFOTECH LTD. 25.58 MEAN;25.01% IT IS PROPOSED THAT THE MEAN COST PLUS MARGINS OF T HE ABOVE 08 COMPANIES, IDENTIFIED TO BE ENGAGED IN SIMILAR ACTI VITY, AND CONSIDERED TO BE COMPARABLES OF THE ASSESSEE COMPANY, BE APPLIED FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS OF THE COMPAN Y FOR ASSESSMENT YEAR 2006-07. 6.8 THE ASSESSEE FILED THE DETAILED REPLY VIDE LETT ER DATED 26 TH OCT. 09. THE MAIN POINTS RAISED BY THE ASSESSEE AND AS CONSIDERED BY THE TPO IN HIS ORDER ARE AS UNDER:- 1. IDENTIFICATION OF FRESH COMPARABLES BY THE A SSESSEE: (I) IN THE REPLY DATED 26.10.09, THE ASSESSEE HAS E NCLOSED THE RESULTS OF SEARCH PROCESS CARRIED OUT USING PROWESS AND CAP ITALINE PLUS DATABASE, BOTH UPDATED TILL 25.8.06, FOR COMPARABLES ENGAGED IN PR OVIDING SOFTWARE DEVELOPMENT SERVICE FOR F.Y. 2005-06. 8 THE ASSESSEE CLAIMED THAT THIS SEARCH WAS CONTEMPOR ANEOUS IN NATURE AS THE SAME HAD BEEN CARRIED OUT FOR THE TIME WHICH WO ULD COMPLY WITH THE T.P. REGULATIONS. A TOTAL OF 9 COMPARABLE COMPANIES WERE IDENTIFIED BY THE ASSESSE. THE MEAN WEIGHTED AVERAGE MARGINS OF THESE COMPANIE S WERE ARRIVED AT 1.6%. (II) THE ASSESSEE COMPARED ITS MARGIN WITH THIS MEA N MARGIN TO CLAIM THAT THE SAME WAS AT ARMS LENGTH. (III) UPDATED MARGINS OF THE COMPARABLES FOR F.Y. 2 005-06: THE ASSESSEE OBJECTED TO USE OF SINGLE YEAR DATA, A ND FURTHER OPPOSED TO USING OF UPDATED DATA OF COMPARABLES FOR THE RELEVANT YEAR. IT WAS CLAIMED THAT THE DATA WHICH WAS NOT AVAILABLE AT THE TIME OF MAKING THE STUDY SHOULD NOT BE USED AS IT MAY LEAD TO ANOMALY. THE SELECTED BY WAY OF THE ABO VE SEARCH PROCESS, FOR F.Y. 2005-06. THIS CONTAINED DATA OF 5 COMPANIES, AS THE SAME WAS NOT AVAILABLE IN THE CASE OF TWO COMPANIES, AND TWO COMPANIES HAD MO RE THAN 50 CRORE TURNOVER DURING F.Y. 2005-06. 2. OBJECTIONS WITH REGARD TO THE COMPARABLES IDENTIFIE D BY THE TPO: THE ASSESSEE RAISED SEVERAL OBJECTIONS IN RESPECT O F THE SELECTION PROCESS UNDERTAKEN BY THE TPO. (I) THE FIRST OBJECTION OF THE ASSESSEE WAS THAT SE ARCH PROCESS UNDERTAKEN BY THE TPO WAS NON-CONTEMPORANEOUS. FURT HER, IT HAS OBJECTED TO RUNNING OF SEARCH ON A SINGLE DATABASE. IN THIS REGARD, IT MAY BE CLARIFIED THAT THE FRESH SEARCH HAD TO BE UNDERTAKEN BY THE TPO BECAUSE THE ASSESSEE DID NOT UNDERTAKE A FRESH SEARCH FOR THE RELEVANT FINANCIAL YEAR. AS PER THE PROVISIONS OF THE LAW, FOR ANALYZING THE INTERNATIONAL TRANSACTION, THE ASSESSWEE SHOULD HAV E UNDERTAKEN A SEARCH FOR COMPARABLES RELEVANT FOR F.Y. 2005-06, BY TAKING DA TA FOR THIS YEAR, AND COMPARED THE MARGINS OF THESE COMPARABLES (UNCONTRO LLED PRICES) WITH ITS MARGIN FOR THE RELEVANT YEAR. BUT, AS HAS BEEN POINTED OUT EARLIER, THE ASSESSEE HAD UTILIZED THE RESULTS OF THE SAME PROCESS AS HAD BEEN UNDERTAKEN BY IT IN THE PRECEDING YEAR I.E. F.Y. 2004-05. THE SEARCH UNDERTAKEN IN AN EARLIER YEAR W OULD NOT BE PROPER, AS IT WOULD NEITHER IDENTIFY PROPER COMPARABLES, NOR GIVE THE CONTEMPORARY MARGINS. FILTERS BASED ON FINANCIAL DATA SUCH AS TURNOVER OR OTHER IMPORTANT RATIOS MAY NOT CONTINUE TO REMAIN VALID IN A DIFFERENT YEAR. EVEN SUBSEQUENTLY, THE ASSESSEE HAD ONLY PROVIDED THE UPDATED MARGINS FOR THE SAME COMP ARABLES. AS THE ASSESSEE DID NOT UNDERTAKE THE SEARCH PROCESS, THE T.P.O. HAD TO DO SO. SECTION 92 C, THE OPERATIVE SECTION RELEVANT FOR CO MPUTATION OF THE ALP STIPULATES IN SUBSECTION (3) THAT: 9 WHERE DURING THE COURSE OF ANY PROCEEDING FOR ASSE SSMENT OF INCOME, THE AO (TPO) IS, ON THE BASIS OF MATERIAL OR INFORMATIO N OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT: (A) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL T RANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUBSECTION (1) A ND (2); OR (B) ANY INFORMATION AND DOCUMENT RELATING TO AN INT ERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY TH E ASSESSEE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUBSECTION (1) OF SECTI ON 92 DB AND THE RULES MADE IN THIS BEHALF; OR (C) THE INFORMATION OR DATA USED IN COMPUTATION OF THE ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT, OR (D) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FU RNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D. THE AO [TPO] MAY PROCEED TO DETERMINE THE ALP. ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM. THE ASSESSEE HAD NOT UNDERTAKEN THE SEARCH PROCESS IN THE RELEVANT YEAR AND IT WAS DULY INFORMED TO IT THAT THE COMPARABLES IDENTIFIED FOR THE T.P. ANALYSIS OF THE PRECEDING YEAR AND THEIR MARGINS AR E NOT PROPER FOR BENCHMARKING WITH THE MARGINS OF THE ASSESSEE, FOR THE RELEVANT YEAR. ONCE THE TPO IS OF THE OPINION THAT THE INFORMATION OR DATA USED IN THE COMPUTATION OF ALP IS NOT RELIABLE OR CORRECT, THE TPO IS DUTY BOUND TO DETERMINE THE ALP IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92C(1) AND (2). HENCE, THE FRESH SEARCH UNDERTAKEN BY THE TPO IS IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. HOWEVER, THE SCOPE OF THIS IS NOT AVAILABLE TO THE ASSESSEE. IT HAS TO UNDERTAKE THE SEARCH PROCESS AT THE TIME OF MAKING T.P.STUDY ONLY. (II) THE ASSESSEE HAS OBJECTED TO REMOVAL OF LOSS-M AKING COMPANIES : IN THIS REGARD IT IS CLARIFIED THAT THE ASSESSEE IT SELF HAD TAKEN OUT LOSS-MAKING COMPANIES. THE MARGIN OF LOSS-MAKING COMPANIES SHOW S THAT THE COMPANY IS NOT IN ITS NORMAL BUSINESS CYCLE, AND HENCE, THESE ARE NOT REPRESENTATIVES OF NORMAL BUSINESS CONCERNS. (III) WITH REGARD TO THE 8 COMPARABLES IDENTIFIED I N THE SEARCH PROCESS, THE ASSESSEE RAISED VARIOUS OBJECTIONS. THE SAME AR E EXAMINED IN DETAIL AS BELOW :- I. AVANI CIMCON TECHNOLOGIES LTD: THE ASSESSEE HAS CLAIMED THAT THIS COMPARABLE WAS N OT THROWN UP IN THE SEARCH PROCESS UNDERTAKEN BY IT. HOWEVER, THE OBJECTION OF THE ASSESSEE IS NOT VALID, AS 10 THIS HAS BEEN SELECTED BY THE TPO BY USING THE SAME SEARCH PROCESS AS THAT OF THE ASSESSEE. THE ASSESSEE ALSO CLAIMED THAT THIS COMPANY IS ENGA GED IN SOFTWARE DEVELOPMENT WHICH IS DIFFERENT FROM THE ASSESSEE WH ICH IS IN SOFTWARE SERVICE. THIS OBJECTION IS NOT VALID AS THE ASSESSEE IS ALSO IN THE SAME FIELD OF SOFTWARE DEVELOPMENT AND SERVICE. II. CAMBRIDGE TECHNOLOGY ENTERPRISES LTD: THIS COMPANY IS IN SOFTWARE SERVICE. THE ASSESSEE S ONLY OBJECTION THAT THE REVENUE BREAK-UP AND SEGMENT ARE NOT AVAILABLE, IS NOT ACCEPTABLE. III. EXENSYS SOFTWARE SOLUTIONS LTD: THE ASSESSEE CLAIMED THAT THIS COMPANY IS ENGAGED I N DEVELOPING AND MARKETING SOFTWARE AND ALSO HAS BPO SERVICES. ON TH IS BASIS IT WAS CLAIMED TO BE FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. THIS OBJE CTION IS NOT RELEVANT. IV. FORTUNE INFOTECH LTD. : THE ASSESSEE CLAIMED THAT THIS COMPARABLE HAS 95.70 % RELATED PARTY TRANSACTION DURING 2005-06 AND SHOULD THEREFORE NOT BE CONSIDERED. HOWEVER, EXAMINATION OF THE DATABASE REVEALED THAT WHILE IN THE NEXT YEAR IT HAD SUBSEQUENT RELATED PARTY TRANSACTION, IN THE RELEVANT YEAR (F. Y. 2005-06) THERE WAS ABSOLUTELY MINIMAL RELATED PARTY TRANSACTIONS. MOREOVER, THE ASSESSEE HAD ITSELF IDENTIFIED IT AS A COMPARABLE IN THE SEARCH CONDUCTED BY IT IN THE PRECEDING YEAR, WHICH IT HAD INITIALLY USED TO COMPARE THE MARGIN FOR THIS YEAR. V. INDIUM SOFTWARE (INDIA) LTD.: THE ASSESSEE HAS CLAIMED THAT THIS COMPARABLE WAS N OT THROWN UP IN THE SEARCH PROCESS UNDERTAKEN BY IT. HOWEVER, THE OBJEC TION OF THE ASSESSEE IS NOT VALID, AS HAS ALREADY BEEN MENTIONED ABOVE. VI. MAVERIC SYSTEMS LTD.: THE ASSESSEE HAS CLAIMED THAT THIS COMPARABLE WAS N OT THROWN UP IN THE SEARCH PROCESS UNDERTAKEN BY IT. IT HAS ALSO CLAIME D THAT THE WAGES TO COST RATIO FOR THIS CASE WAS 48%. HOWEVER, IT WAS EXAMINED AND FOUND THAT WAGES TO COST RATIO WAS 59.98%. THE OBJECTIONS OF THE ASSESSEE AR E THEREFORE NOT ACCEPTABLE. VII. SANKHYA INFOTECH LTD.: THE ASSESSEE CONSIDERED THIS COMPANY TO BE FUNCTION ALLY DIFFERENT. IT GENERATES REVENUE FROM PRODUCT SALES AND TRAINING A PART FROM SERVICES. IT IS CLARIFIED THAT THE TRAINING COMPONENT IS NOT RELATE D TO COMPUTER EDUCATION, BUT IS RELATED TO SOFTWARE BASED SIMULATION PRODUCTS FOR P ILOTS. HENCE, THE OBJECTION OF THE ASSESSEE IS NOT VALID. IN LIGHT OF THE ABOVE OBSERVATIONS THE OBJECTIONS R AISED BY THE ASSESSEE ARE REJECTED. VIII. GOLDSTONE TECHNOLOGIES HAS BEEN IDENTIFIED BY THE ASSESSEE AS WELL. 6.9 IN RESPECT OF OTHER COMPARABLES IDENTIFIED BY T HE ASSESSEE, THE TPO IN HIS ORDER HAS RECORDED THE FOLLOWING FINDINGS. 11 IN ITS REPLY DATED 26.10.09, THE ASSESSEE HAS INF ORMED THAT IT HAS IDENTIFIED 9 COMPARABLES ON THE BASIS OF SEARCH PRO CESS. THE PROCESS OF SEARCH, FILTERS APPLIED AND FUNCTIONAL ANALYSIS WAS ANNEXED WITH THIS LETTER. IT WAS SEEN THAT OUT OF 9 COMPARABLES, 2 DID NOT SA TISFY THE FILTER APPLIED BY THE ASSESSEE ITSELF (ACCORDING TO THE AS SESSEE THESE HAD MORE THAN 50 CRORE TURNOVER IN 2005-06) AND 2 DID NOT HA VE DATA AVAILABLE FOR 2005-06. THE BALANCE 5 COMPANIES WERE ANALYZED. IT WAS SEEN THAT M/S.GOLDSTONE TECHNOLOGIES HAD BEEN SELECTED BY THE TPO AS WELL AS THE ASSESSEE. THE OTHER 4 COMPANIES WERE EVALUATED AND IT WAS FOU ND THAT THERE IS SIMILARITY OF FUNCTIONS. THESE COMPANIES LARGELY SATISFIED THE FILTERS APPLIED BY THE TPO (EXCEPT SIP TECHNOLOGIES & EXPOR TS LTD. WHICH HAD WAGES/COST OF 52.36%, BUT CONSIDERING THAT IT IS GR EATER THAN 50%, THE SAME WAS ACCEPTED.) ACCORDINGLY, THESE 4 COMPANIES ARE ALSO CONSIDERED TO BE INCLUDED IN THE FINAL SET OF COMPARABLES IDENTIFIED BY THE A SSESSEE. 6.10 BEFORE US, THE LD.AR HAS FILED THE DETAILED SU BMISSIONS AND THESE SUBMISSIONS ARE SUMMARIZED AS UNDER: OUR DETAILED SUBMISSION WITH RESPECT TO KEY GROUN DS IS AS FOLLOWS: 1. 5 COMPANIES CAN ALSO BE CONSIDERED AS FINAL SET OF COMPARABLES FOR DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION (GROUND NO 4 OF GROUNDS OF APPEAL) THE APPELLANT HIGHLIGHTS BEFORE YOUR HONORS THAT TH E LEARNED TPO HAS ACCEPTED 5 COMPANIES OUT OF THE 9 COMPANIES IDENTIFIED BY THE APPELLANT USING THE DATABASE UPDATED AS ON 25 AUGUST 2006, AS COMPARABLES TO THE APPELLA NT. THE REJECTION OF BALANCE 4 COMPANIES WAS ON ACCOUNT OF THE FACTS KNOWN AS A RE SULT OF UPDATION OF THE DATABASE AFTER THE SEARCH ANALYSIS CARRIED OUT BY THE APPELL ANT . WITHOUT PREJUDICE TO THE CONTENTION THAT THE COMPAN IES REJECTED BY THE LEARNED TPO FROM THE SET OF 9 COMPANIES IDENTIFIED BY THE APPELLANT SHOULD BE CONSIDERED AS COMPARABLE TO THE APPELLANT FOR THE PURPOSE OF DETERMINING THE AR MS LENGTH PRICE, THE APPELLANT SUBMITS THAT THE COMPANIES ACCEPTED BY THE LEARNED TPO (5 C OMPANIES) SHOULD BE CONSIDERED FOR CALCULATING ARMS LENGTH MARGINS AND THE FRESH SEAR CH CONDUCTED BY THE LEARNED TPO (BY USING NON CONTEMPORANEOUS DATA) IS UNJUSTIFIED ON T HE BASIS OF THIS ASPECT. IN RESPECT OF THE ABOVE, THE APPELLANT SUBMITS BEFO RE YOUR HONORS THE FOLLOWING: THE INDIAN TRANSFER PRICING REGULATION DOES NOT STA TE THAT THERE IS A NEED TO HAVE A PARTICULAR NUMBER OF COMPARABLES TO DETERMINE THE A RMS LENGTH PRICE. SECTION 92C OF THE ACT ON COMPUTATION OF ARMS LENGTH PRICE PRO VIDES THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD , THE ARMS LENGTH PRICE 12 SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES. THUS, IT IS EVIDENT THAT EVEN A SINGLE PRICE CAN LEAD TO APPROPRIATE CONCLUS ION FOR ARRIVING AT ARMS LENGTH PRICE. IN THIS REGARD, WE BRING YOUR HONORS KIND ATTENTIO N TO THE RULING OF THE HONBLE MUMBAI TRIBUNAL IN CASE OF HAWORTH INDIA PRIVATE LIMITED VS DCIT , WHEREIN, THE HONBLE TRIBUNAL HAS HELD THAT, 77. NOW COMING TO THE CASE LAW RELIED UPON BY LD. DR WHICH CONVEY THAT ONLY ONE COMPARABLE IS SUFFICIENT AND IT HAS BEEN HELD BY TH E TRIBUNAL IN OTHER CASES THAT ARM LENGTH PRICE CAN BE WORKED OUT EVEN ON THE BASIS OF ONE COMPARABLE. IN THE CASE OF VEDARIS TECHNOLOGY PVT. LTD. VS. ACIT (SUPRA) 20 CO MPARABLES WERE SHORT LISTED AND MEAN MARGIN WAS WORKED OUT AT 16.585% AND OUT OF TH OSE ONLY ONE COMPARABLE WAS LEFT NAMELY SOPHIA SOFTWARE LTD. ON THE BASIS OF WHICH T HE ARM LENGTH PRICE WAS DETERMINED. HERE, IT IS THE CASE OF LD. AR THAT THE SAID CASE I S NOT APPLICABLE TO ASSESSEES CASE AS IN THAT CASE BOTH THE PARTIES HAD ACCEPTED ONE COMPARA BLE ONLY. BUT THAT IS NOT THE ONLY BASIS ON WHICH THE TRIBUNAL HAS RESTED ITS DECISION. THE OTHER CASE OF SIMILAR NATURE IS PARROT SYSTEMS TSI INDIA LTD. VS. DCIT (SUPRA). MOREOVER, THE COMPARABLE WHICH HAS BEEN LEFT WAS SELECTED BY THE ASSESSEE ITSELF IN ITS TP STUDY AND NO REASON WHATSOEVER IS GIVEN THAT HOW THE SAID COMPARABLE COULD NOT BE TAKEN TO COMPU TE ARM LENGTH PRICE OF THE ASSESSEE. THEREFORE, WE REJECT THE SUBMISSION OF THE ASSESSEE THAT ON THE BASIS OF ONE COMPARABLE, THE ARM LENGTH PRICE COULD NOT BE DETERMINED AND FR ESH SEARCH WAS REQUIRED TO BE TAKEN AS PER SUBMISSIONS MADE BEFORE DRP. THE FACTS OF TH E PRESENT CASE DO NOT WARRANT THE FRESH SEARCH TO BE TAKEN INTO CONSIDERATION AS THER E IS NO VALID REASON TO DO SO. BASED ON THE ABOVE, THE APPELLANT SUBMITS THAT THE SEARCH PROCESS CARRIED OUT BY THE APPELLANT TO IDENTIFY THE COMPARABLE COMPANIES WAS BONAFIDE AND CARRIED OUT IN ACCORDANCE WITH THE PROVISIONS OF THE LAW AND THE C OMPANIES REMAINING AFTER THE REJECTION OF COMPANIES BY THE LEARNED TPO (5 COMPANIES) SHOUL D BE USED FOR DETERMINING THE ARMS LENGTH PRICE INSTEAD OF CONSIDERING THE RESULTS OF FRESH SEARCH WHICH IS UNJUSTIFIED AND INAPPROPRIATE IN LAW . THE APPELLANT PLACES RELIANCE ON THE FOLLOWING JUDI CIAL PRECEDENT, WHEREIN EVEN ONE COMPARABLE HAS BEEN CONSIDERED TO DETERMINE THE ARM S LENGTH PRICE. CASE LAWS HAWORTH INDIA PRIVATE LIMITED VS DCIT (ITA NO. 5341 /DEL/2010) VEDARIS TECHNOLOGY (P) LTD VS ACIT (ITA NO. 4372 (D EL)/2009) 2. CONSIDERING INAPPROPRIATE COMPANIES AS COMPARABLES (GROUND NO 8 OF THE GROUNDS OF APPEAL) THE LEARNED TPO AND THE LEARNED AO HAVE ERRED ON FA CTS, CIRCUMSTANCES OF THE CASE AND IN LAW BY SELECTING INAPPROPRIATE COMPANIES AS COMPARA BLES BY CARRYING OUT FRESH SEARCH CONSIDERING NON CONTEMPORANEOUS DATA. THE LEARNED TPO HAS CONSIDERED A SET OF 12 COMPANIE S FOR COMPUTING THE ARMS LENGTH PRICE. OUT OF WHICH 7 COMPANIES WERE CONSIDERED AS COMPARABLES BY CARRYING OUT A FRESH SEARCH ON PROWESS DATABASE. BALANCE 5 COMPANIES WER E CONSIDERED OUT OF THE COMPARABLES SELECTED BY THE APPELLANT USING THE DATABASE AS ON 25 AUGUST 2006. IN THIS REGARD, WITHOUT PREJUDICE TO OUR CONTENTIONS MENTIONED IN RESPECT O F UNJUSTIFIED FRESH SEARCH PROCESS CARRIED OUT BY THE LEARNED TPO, BASED ON THE DETAIL ED ANALYSIS, THE APPELLANT HAS MENTIONED THE REASONS FOR REJECTION FOR EACH OF THE ADDITIONAL 7 COMPANIES IN RESPONSE TO SHOW CAUSE NOTICE WHICH IS SUMMARISED IN THE TABLE BELOW: 13 SR NO NAME OF THE COMPANY REASON FOR NOT COMPARABLE 1 AVANI CIMCON TECHNOLOGIES LIMITED SIGNIFICANTLY DIFFERENT FUNCTIONS COMPANY ADDED TO THE DATABASE AFTER THE CONTEMPORANEOUS SEARCH PROCESS INSUFFICIENT FINANCIAL INFORMATION AS ANNUAL REPORT NOT AVAILABLE 2 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD 3 EXENSYS SOFTWARE SOLUTIONS LTD SIGNIFICANTLY DIFFERENT FUNCTIONS 4 FORTUNE INFOTECH LTD SIGNIFICANTLY RELATED PARTY TRANSACTIONS 5 INDIUM SOFTWARE (INDIA) LTD 6 MAVERIC SYSTEMS LTD WAGES / COST FILTER REJECTION CRITERIA 7 SANKHYA INFOTECH LTD SIGNIFICANTLY DIFFERENT FUNCTIONS THE APPELLANT STRONGLY CONTENDS NOT TO CONSIDER THE INAPPROPRIATE COMPANIES AS COMPARABLES FOR THE REASONS AS DETAILED IN ANNEXURE A TO THIS SUBMISSION. 3. CONSIDERING THE INCORRECT MARGINS OF COMPANIES SELE CTED BY THE LEARNED TPO (GROUND NO 10 OF THE GROUNDS OF APPEAL) THE LEARNED TPO/ AO HAVE CONSIDERED INAPPROPRIATE M ARGINS OF THE COMPANIES SELECTED AS COMPARABLES BY THE LEARNED TPO. THE CORRECT OPERATI NG MARGINS OF ALL THE 12 COMPANIES SELECTED AS COMPARABLE BY THE LEARNED TPO AS COMPAR ED TO THE MARGINS CONSIDERED BY THE LEARNED TPO ARE SUMMARIZED AS BELOW: SR NO NAME OF THE COMPANY MARGIN AS GIVEN BY LEARNED TPO AND LEARNED AO IN THE DRAFT ORDER (%) CORRECT MARGINS (%) 1 AVANI CIMCON TECHNOLOGIES LIMITED 32.12 32.55 2 CAMBRIDGE TECHNOLOGY ENTERP RISES LTD. 26.46 25.93 3 EXENSYS SOFTWARE SOLUTIONS LTD. 25.8 25.88 4 FORTUNE INFOTECH LTD. 17.79 16.94 5 GOLDSTONE TECHNOLOGIES LTD. 2.47 3.08 6 INDIUM SOFTWARE (INDIA) LTD. 27.09 26.51 7 MAVERIC SYSTEMS LTD. 42.76 19.06 8 SANKHYA INFOTECH LTD. 25.58 25.94 9 AKSHAY SOFTWARE TECHNOLOGIES LIMITED 7.07 7.40 10 LANCO GLOBAL SYSTEMS LIMITED 5.38 5.94 11 QUINTEGRA SOLUTIONS LIMITED 15.21 10.73 12 SIP TECHNOLOGIES LIMITED 21.75 21.09 ARMS LENGTH PRICE 20.79 18.42 THE HONBLE DRP HAS INAPPROPRIATELY REJECTED TO CON SIDER THE CORRECT MARGINS OF THE COMPARABLE COMPANIES STATING THAT THE DETAILED WORK ING WAS NOT PROVIDED BY THE APPELLANT WHICH WAS A MISTAKE APPARENT FROM RECORD, SINCE THE APPELLANT HAD FILED DETAILED WORKING OF THE COMPUTATION AS EXHIBIT 41 O F THE DRP SUBMISSION (PAGE NO 307 AND PAGE 308 OF THE FACTUAL PAPERBOOK -I) 14 ON RECEIPT OF DIRECTIONS OF THE HONBLE DRP ON 25 O CTOBER 2010, THE APPELLANT FILED AN APPLICATION WITH THE HONBLE DRP FOR RECTIFICATION OF MISTAKES APPARENT FROM RECORDS IN NOT CONSIDERING THE CORRECT OPERATING MARGINS OF TH E COMPARABLE COMPANIES IDENTIFIED BY THE LEARNED TPO/ AO FURTHER, THE HONBLE DRP FORWARDED THE DETAILS FILE D BY THE APPELLANT IN CONNECTION WITH THE RECTIFICATION TO THE LEARNED TPO FOR HIS COMMEN TS. CONSEQUENT TO THE RECEIPT OF THE LEARNED TPOS REPORT, THE HONBLE DRP FORWARDED THE LEARNED TPO'S REPORT TO THE APPELLANT PROVIDING AN OPPORTUNITY OF BEING HEARD O N THE RECTIFICATION APPLICATION FILED BY THE APPELLANT. IN THIS REGARD, THE APPELLANT FILED AN ADDITIONAL SUBMISSION DATED 8 APRIL 2011 (PAGE NO 324 TO 341 OF FACTUAL PAPERBOOK I) AND ALSO ATTENDED THE HEARING BEFORE THE HONBLE DRP ON 20 JULY 2011. ANNEXURE A- CHART GIVING THE COMPARATIVE ANALYSIS O F THE COMPANIES NOT ACCEPTED BY THE APPELLANT AS COMPARABLES IN RESPECT OF INTERNATIONAL TRANSACTIONS OF PROVISIONS OF SOFTWARE DEVELOPMENT SERVICES SR NO NAME OF THE COMPANY FACTS SUBMITTED BY THE APPELLANT AS REASON FOR REJECTION FACTS MODIFIED / ARGUMENTS GIVEN BY THE LEARNED TPO IN THE TP ORDER ARGUMENTS AGAINST COMMENTS OF THE LEARNED TPO IN TP ORDER. REFERENCE 1 AVANI CIMCON TECHNOLOGIES LTD. (AVANI) A) OPERATING IN SOFTWARE PRODUCTS AND NOT SOFTWARE DEVELOPMENT SERVICES. IN RESPECT OF COMPARING FUNCTIONAL PROFILE OF AVANI, SINCE ANNUAL REPORT OF AVANI FOR FY 2005-06 IS NOT AVAILABLE IN ANY OF THE PUBLICLY AVAILABLE SOURCES, THE APPELLANT HAS INFERRED GUIDANCE FROM THE WEBSITE OF THE COMPANY. THE WEBSITE OF AVANI MAKES IT CLEAR THAT IT IS ENGAGED IN PROVIDING THE OBJECTION OF THE ASSESSEE IS NOT VALID NO BASIS / EVIDENCE / COMPARABILITY ANALYSIS HAS BEEN PROVIDED BY THE LEARNED TPO IN REJECTING THE CLAIM OF THE APPELLANT AND THE LEARNED TPO HAS MERELY REJECTED THE OBSERVATIONS SUBMITTED BY THE APPELLANT BY MAKING A GENERALIZED STATEMENT. 15 SOFTWARE PRODUCTS (BASED ON THE FOLLOWING CONTENTS MENTIONED IN WEBSITE OF THE COMPANY): DXCHANGE IS AN INNOVATIVE PRODUCT OF THE COMPANY. IT IS AN XML WEB SERVICES BASED, FULLY SCALABLE, EASILY CONFIGURABLE DATA EXCHANGE MIDDLEWARE SERVER. IT CLEARLY SHOWS THAT THE COMPANY IS ALSO ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS. MOREOVER, FOR FY 2005-06, NO SEGMENTAL INFORMATION IS AVAILABLE FOR THE COMPANY. B) THIS COMPANY WAS NOT THROWN UP IN THE SEARCH ANALYSIS CARRIED OUT AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING REGULATIONS BY THE APPELLANT. ADDITIONAL ARGUMENT OF THE SEARCH PROCESS APPLIED BY THE LEARNED TPO IS SAME AS THAT OF ASSESSEE, THEREFORE CLAIM OF THE ASSESSEE IS NOT TENABLE. THE SEARCH PROCESS CONDUCTED BY THE LEARNED TPO IS BASED ON DATA AVAILABLE DURING THE YEAR 2009, HOWEVER THE SAME WAS NOT AVAILABLE, AT TIME WHEN ASSESSEE CONDUCTED THE INITIAL SEARCH BY USING DATABASE UPDATED AS ON 11 JANUARY 2006, NOR THE SAME WAS AVAILABLE AT THE TIME OF SEARCH PROCESS (SUBMITTED TO THE LEARNED TPO VIDE SUBMISSION DATED 26 OCTOBER 2009) WHICH WAS BASED ON DATABASE UPDATED AS ON 25 AUGUST 2006. THE DATABASE KEEPS ADDING COMPANIES AS AND WHEN DATA ARE AVAILABLE RELATING TO THE COMPANIES. ACCORDINGLY, IT IS UNFAIR TO CONSIDER THE SEARCH ANALYSIS 16 APPELLANT THE ANNUAL REPORT OF THE COMPANY FOR FY 2005-06 IS NOT AVAILABLE IN ANY OF THE PUBLICLY AVAILABLE SOURCES AND THEREFORE THE SAME CANNOT BE CONSIDERED AS COMPARABLE BASED ON INSUFFICIENT FINANCIAL INFORMATION. UNDERTAKEN DURING THE ASSESSMENT PROCEEDINGS USING NON- CONTEMPORANEOUS DATA. THEREFORE, ON ACCOUNT OF THE ABOVE REASONS, THE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE TO THE APPELLANT. 2 EXENSYS SOFTWARE SOLUTIONS LTD. (EXENSYS) A) AS PER THE DIRECTORS REPORT FOR FY 2005-06, IT IS MENTIONED THAT THE COMPANY HAS ACHIEVED GREATER SUCCESS THROUGH IT SERVICES AND BPO WINGS. THE COMPANY HAS FORAYED INTO HEALTHCARE AND INSURANCE SERVICES AND ADDED FOUR NEW CLIENTS TO ITS CREDIT; B) IT IS ALSO MENTIONED IN THE MANAGEMENT S DISCUSSION & ANALYSIS REPORT FOR FY 2005-06 THAT THE COMPANY HAS PRODUCTS OF ITS OWN NAMED EXENSYS SUITE. EXENSYS SUITE, THE THE OBJECTION OF THE ASSESSEE IS NOT RELEVANT. THE LEARNED TPO HAS NOT DISPUTED ANY OF THE FACTS SUBMITTED BY THE APPELLANT. NO BASIS / EVIDENCE / COMPARABILITY ANALYSIS HAS BEEN PROVIDED BY THE LEARNED TPO IN REJECTING THE CLAIM OF THE APPELLANT. ACCORDINGLY, THE COMPANY SHOULD BE REJECTED AS FUNCTIONALLY DIFFERENT . PLEASE REFER PAGE NOS 8, 12 AND 33 OF THE ANNUAL REPORT OF THE COMPANY FOR FY 2005-06. PLEASE REFER EXHIBIT 30 OF THE DRP SUBMISSION FOR THE RELEVANT EXTRACT FROM THE WEBSITE OF EXENSYS. ( PAGE NOS 299 AND 300 OF FACTUAL PAPERBOOK-I ) 17 PRODUCT OF THE COMPANY IS 100 PERCENT CUSTOMISED TO MEET THE GROWING DEMANDS OF THE DOMESTIC INDIAN MARKET. THE COMPANY HAS ALSO ACHIEVED PHENOMENAL SUCCESS IN IMPLEMENTING ITS ERP PRODUCTS FOR ACALMAR OIL AND FATS LTD; C) AS PER THE WEBSITE OF EXENSYS, IT IS ENGAGED INTO PROVIDING VARIOUS SOFTWARE PRODUCTS AND SERVICES. D) THE COMPANY IS ENGAGED IN DEVELOPING AND MARKETING SOFTWARE PRODUCTS AND BPO SERVICES. FURTHER, SEGMENTAL INFORMATION IS NOT AVAILABLE TO COMPUTE THE MARGIN FROM SOFTWARE DEVELOPMENT/ SERVICES ACTIVITY ONLY. 3 FORTUNE INFOTECH LTD (FORTUNE) RELATED PARTY TRANSACTIONS FOR THE NINE MONTHS ENDED 31 DECEMBER 2005 ARE 95.70% OF THE TOTAL REVENUE IN FY 2005- 06, THERE WERE MINIMAL RELATED PARTY TRANSACTION. THE ACCOUNTING PERIOD USED BY FORTUNE AND WHICH IS RELEVANT FOR COMPARING FY 2005-06 IS NINE MONTHS ENDED 31 DECEMBER 2005. PLEASE REFER PAGE NO13 OF THE ANNUAL REPORT OF THE COMPANY (DISCLOSING RELATED PARTY TRANSACTIONS) 18 WHICH IS VERY SIGNIFICANT. DURING THIS PERIOD, FORTUNE HAS ENTERED INTO SUBSTANTIAL RELATED PARTY TRANSACTIONS TO THE TUNE OF 95.70%. THE LEARNED TPO WHILE CLAIMING THAT IN FY 2005- 06, THERE WERE MINIMAL RELATED PARTY TRANSACTION, HAS NOT PROVIDED ANY BASIS / EVIDENCE / COMPUTATION. COMPUTATION OF PERCENTAGE OF RELATED PARTY TRANSACTIONS IS ENCLOSED IN EXHIBIT 32 OF THE DRP SUBMISSION ( PAGE NO. 302 OF FACTUAL PAPERBOOK-I 4 MAVERIC SYSTEMS LTD. (MAVERIC) A) WAGES / COST RATIO OF MAVERIC SYSTEMS LIMITED FOR FY 2005-06 IS APPROXIMATELY 48% WHICH DOES NOT FIT IN THE FILTER ADOPTED BY IDEAS INDIA (IE BELOW 50% SHOULD BE REJECTED) AS WELL AS THAT ADOPTED BY THE LEARNED TPO ( IE ONLY BETWEEN 59.15 TO 89.15 SHOULD BE ACCEPTED). CONSIDERING THE WAGES / COST FILTER, THE ABOVE MENTIONED COMPANY OUGHT TO BE REJECTED. B) THIS COMPANY WAS NOT THROWN UP WAGE / COST RATIO OF THE AFORESAID COMPANY IS MORE THAN 59.95%, THEREFORE THE COMPANY IS ACCEPTABLE. SEARCH PROCESS APPLIED BY THE LEARNED TPO IS SAME AS THAT OF ASSESSEE, THEREFORE CLAIM OF THE ASSESSEE IS NOT TENABLE. NO BASIS / EVIDENCE / COMPUTATION HAVE BEEN PROVIDED BY THE LEARNED TPO IN REJECTING THE OBSERVATION ABOUT WAGES / COST RATIO PROVIDED BY THE APPELLANT. THE COMPUTATION OF WAGE / COST RATIO OF MARVERIC FOR FY 2005-06 IS LESS THAN THE FILTERS AS APPLIED BY BOTH, THE LEARNED TPO AND THE APPELLANT. THE SEARCH PROCESS CONDUCTED BY THE LEARNED TPO IS BASED ON DATA AVAILABLE DURING THE YEAR 2009, HOWEVER THE SAME WAS NOT AVAILABLE, AT TIME WHEN ASSESSEE CONDUCTED THE INITIAL SEARCH BY USING DATABASE PLEASE REFER PAGE NOS.12AND 16 OF THE MANUAL REPORT OF THE COMPANY THE COMPUTATION OF WAGES/ COST RATIO OF MAVERIC IS ENCLOSED IN EXHIBIT 33 OF THE DRP SUBMISSION ( PAGE NO.303 OF FACTUAL 19 IN THE SEARCH ANALYSIS CARRIED OUT AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING REGULATIONS BY THE APPELLANT. HOWEVER, THE SAME WAS THROWN UP AT THE TIME OF SEARCH CONDUCTED BY THE LEARNED TPO. THUS, IT IS CLEAR THAT THE SAID COMPANY WAS ADDED TO THE DATABASE AFTER THE SEARCH RUN AND SO KEEPING THE IMPOSSIBILITY OF PERFORMANCE IN MIND, THIS COMPANY SHOULD NOT BE ACCEPTED AS A COMPARABLE COMPANY. UPDATED AS ON 11 JANUARY 2006, NOR THE SAME WAS AVAILABLE AT THE TIME OF SEARCH PROCESS (SUBMITTED TO THE LEARNED TPO VIDE SUBMISSION DATED 26 OCTOBER 2009) WHICH WAS BASED ON DATABASE UPDATED AS ON 25 AUGUST 2006. THE DATABASE KEEPS ADDING COMPANIES AS AND WHEN DATA ARE AVAILABLE RELATING TO THE COMPANIES. ACCORDINGLY, IT IS UNFAIR TO CONSIDER THE SEARCH ANALYSIS UNDERTAKEN DURING THE ASSESSMENT PROCEEDINGS USING NON- CONTEMPORANEOUS DATA. THEREFORE, BASED ON THE ABOVE REASONS, THE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE TO THE APPELLANT. 5 SANKHYA INFOTECH LTD. (SANKHYA) A) PAGE 10 OF THE ANNUAL REPORT- PARA 1 OF THE MANAGEMENT DISCUSSION AND ANALYSIS: SANKHYAS STRATEGY TO REMAIN FOCUSED AND SERVE KNOWLEDGE MARKET SEGMENTS WITH SPECIFIC PRODUCTS AND SERVICES HAS BEGUN TO YIELD EXCELLENT RESULTS. THE GROWTH IN FUTURE IS EXPECTED TO BE ROBUST AND RAPID AS PRODUCTS AND SERVICES OF SANKHYA ARE FULLY TRAINING COMPONENT PERTAINS TO SOFTWARE BASED SIMULATION SERVICES FOR PILOTS. NO BASIS / EVIDENCE / COMPARABILIT Y ANALYSIS HAVE BEEN PROVIDED BY THE LEARNED TPO IN REJECTING THE OBSERVATIONS SUBMITTED BY THE APPELLANT WITH THE HELP OF ROBUST PLEASE REFER NOS. 10,24, & 28 OF THE ANNUAL REPORT OF THE COMPANY THE RELEVANT EXTRACTS OF THE ARTICLE ISSUED BY THE MINISTRY OF EXTERNAL AFFAIRS ON INDIA 20 STABILIZED AND ARE IMPLEMENTED AT VARIOUS CUSTOMER LOCATIONS. * WE HAVE FOCUSED ON IMPLEMENTATION OF SOME OF OUR PRODUCTS DURING THIS CURRENT YEAR. * WE HAVE WON SEVERAL REPEAT CONTRACTS FROM EXISTING CUSTOMERS. * SILICON SUITE OF TRAINING AND SIMULATION PRODUCTS HAVE NOW BEGUN FULLY OPERATIONAL IN INDIAN NAVY, EMIRATES AIRLINES AND WOULD BECOME AN EXCELLENT EXAMPLES FOR REPEAT BUSINESS. B) THE FIXED ASSET SCHEDULE ON PAGE 24 OF THE ANNUAL REPORT CLEARLY PROVIDES DETAILS OF COMPANYS SOFTWARE PRODUCTS - SILICON LMS/QT, FLIGHT DISPATCHER AND SILICON ATHENA. C) FURTHER, SEGMENTAL INFORMATION IS ALSO NOT AVAILABLE IN THE ANNUAL REPORT FOR SOFTWARE PRODUCTS AND SERVICE INCOME. THE COMPANY HAS DISCLOSED INDUSTRY VERTICALS AS SEGMENTS WHICH DO NOT GIVE INFORMATION ON THE REVENUE CONTRIBUTION FOR DIFFERENT PRODUCT/SERVICE LINES. D) AS PER AN ARTICLE ISSUED BY THE MINISTRY OF EXTERNAL AFFAIRS ON INDIA PERSPECTIVE IN OCT 2004 ( WWW.MEA.GOV.IN/INDIAPERSP ECTIVE/2004/102004.PDF ), IT IS CLEARLY MENTIONED THAT SANKHYA DEVELOPS SOFTWARE PRODUCTS FOR THE AVIATION INDUSTRY. THE RELEVANT EXTRACT OF THE ARTICLE IS AS FOLLOWS: .SANKHYA INFOTECH IN HYDERABAD IS ONE OF THREE COMPANIES IN THE WORLD TO DEVELOP A COMPLETE PACKAGE OF EVIDENCES OBTAINED FROM VARIOUS SOURCES. THE LEARNED TPO MERELY CLAIMED THAT TRAINING COMPONENT PERTAINS TO SOFTWARE BASED SIMULATION SERVICES FOR PILOTS EVEN THOUGH TRAINING COMPONENT PERTAINS TO THE SOFTWARE BASED SIMULATION SERVICES, SAME CANNOT BE COMPARED AS A PART OF SOFTWARE DEVELOPMENT SERVICES SINCE THE FUNCTIONS PERFORMED UNDER TRAINING ACTIVITIES DOES NOT PERTAIN TO THE CORE ACTIVITY OF DEVELOPMENT OF SOFTWARE BUT PERTAINS TO PROVIDING TRAINING TO USERS OF THE SOFTWARE. THE EVIDENCES SUBMITTED BY THE APPELLANT CLEARLY SUBSTANTIATES PERSPECTIVE IN OCT.2004 (WWW.MEA.GO V.IN/INDIAPERSP ECTIVE/2004/10 2004. PDF) IS ENCLOSED AS EXHIBIT 35 (PAGE NO. 305 AND 306 OF FACTUAL PAPER BOOK-1 21 SOFTWARE THAT DELIVERS 3-D ANIMATION FOR FLIGHT SIMULATORS TO TEACH PILOTS AIRCRAFT TECHNOLOGIES. (PAGE 17 OF THE ARTICLE) E) BASED ON ALL OF THE ABOVE, IT IS APPARENT THAT THE COMPANY GENERATES ITS REVENUES FROM PRODUCT SALES AND TRAINING APART FROM SERVICES. AS THE REVENUE BREAK UP IS NOT AVAILABLE FOR PRODUCT, TRAINING AND SERVICES INCOME, THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE AND SHOULD BE REJECTED AS FUNCTIONALLY DIFFERENT. THAT IT IS MAINLY ENGAGED INTO DEVELOPMENT OF SOFTWARE PRODUCTS. THE LEARNED TPO HAS IGNORED THE FACT THAT THE COMPANY IS OPERATING IN A VERY NICHE SEGMENT, WHICH IS NOT COMPARABLE TO A COMPETITIVE SEGMENT OF SOFTWARE DEVELOPMENT . THE LEARNED TPO HAS COMPLETELY DISREGARDED THE IMPORTANCE OF SEGMENTAL INFORMATION WHICH WOULD BE REQUIRED FOR COMPUTING THE MARGINS FROM COMPARABLE ACTIVITY. AS CAN BE OBSERVED THE FIXED ASSETS SCHEDULE OF THE COMPANY, THE COMPANYS SOFTWARE PRODUCTS ARE - SILICON LMS/QT, FLIGHT DISPATCHER AND SILICON 22 ATHENA. SUCH SOFTWARE ARE NOTHING BUT INTANGIBLES DEVELOPED BY THE COMPANY ITSELF. THEREFORE, BASED ON THE ABOVE REASONS, THE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE TO THE APPELLANT. 6.11 ON THE OTHER HAND, THE LD DR DREW OUR ATTENTIO N TO THE FINDINGS RECORDED BY THE TPO. THE LD DR STATED THAT BASIC OBJECTIVE IS TO DE TERMINE ALP SO THAT TRANSACTIONS BETWEEN ASSOCIATED ENTERPRISE IS WITHOUT CONSIDERAT ION THAT THE OTHER PARTY IS RELATED PARTY. TO ASCERTAIN THE ALP, THE TPO CAN ASCERTAIN THE DATA AS IS AVAILABLE AT THE TIME OF MAKING TRANSFER PRICING ADJUSTMENT. IT IS NOT THE C ASE OF THE ASSESSEE THAT THE DATA USED BY THE TPO IS WRONG. WHEN DATA IS AVAILABLE IN RESPECT OF A PARTICULAR FINANCIAL YEAR THEN THERE IS NO NEED OF CONSIDERING THE DATA OF PRECEDI NG TWO YEARS. ONE IS NOT REQUIRED TO CONSIDER THE DATA OF NUMBER OF YEARS. WITHOUT UNDER STANDING THE COMPARABLE CASE OF COMPANY, ONE HAS TO APPLY FILTER FOR CASES HAVING A BNORMAL PROFIT OR ABNORMAL LOSSES FOR EXCLUSION. IT WAS THEREFORE, SUBMITTED BY THE LD. C IT LD DR THAT TRANSFER PRICING ADJUSTMENT IS MADE BY THE AO ON THE BASIS OF THE DI RECTION OF THE DRP AND THE SAME SHOULD BE CONFIRMED. 23 6.12 WE HAVE HEARD BOTH THE PARTIES. THE OBJECTIONS OF THE ASSESSEE FOR NOT ALLOWING USE OF MULTIPLE YEARS OF DATA FOR THE PURPOSE OF DE TERMINATION OF ALP STANDS DECIDED AGAINST THE ASSESSEE IN THE CASE OF MENTOR GRAPHICS NOIDA (P) LTD. 109 ITD 101, AZTEC SOFTWARE, 294 ITR 322 AND THE RECENT DECISION OF IT AT DELHI BENCH IN THE CASE OF ST MICROELECTRONCIS (P) LTD. VIDE ORDER DATED 3-06-201 1 IN ITA NO.1806,1807/DEL/2008. THE EXPRESSION SHALL USED IN THE RULE MAKES IT CLEAR THAT IT IS MANDATORY TO USE CURRENT YEAR DATA FIRST AND IF ANY CIRCUMSTANCES RE VEAL AN INFLUENCE ON THE DETERMINATION OF ALP IN RELATION TO THE TRANSACTION BEING COMPARE D THAN OTHER DATAS FOR PERIOD NOT MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MA Y BE USED. HENCE, THE TPO WAS JUSTIFIED IN DIRECTING THE ASSESSEE COMPANY TO COND UCT FIRST SEARCH OF THE COMPARABLES DURING THE TRANSFER PRICING PROCEEDINGS AS THE RULE 0B(4) OF THE IT RULES REQUIRE USED OF CURRENT YEAR DATA FOR THE PURPOSE OF COMPARABILITY ANALYSIS. 6.13 WE HAVE NOTICED THAT TPO HAS REJECTED TWO COMP ARABLES SHOWN BY THE ASSESSEE ON THE GROUND THAT THESE DID NOT SPECIFY THE FILTER APPLIED BY THE ASSESSEE ITSELF. THESE TWO COMPANIES WERE NOT HAVING THE DATA AVAILABLE FO R THE ASSESSMENT YEAR 2005-06. THE TPO CANNOT BLOW HOT AND BLOW COLD. THE ASSESSEE HAS GIVEN REASONS AS TO WHY 05 COMPANIES TAKEN BY THE TPO ARE NOT TO BE CONSIDERED FOR THE COMPARABLES. IF THE INFORMATION IS NOT AVAILABLE OR IF THE COMPARABLE O F THE COMPANY DOES NOT FIT INTO THE FILTER TO BE APPLIED THEN SUCH COMPANY CANNOT BE CO NSIDERED TO DETERMINE ALP OF INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SE AND THEN AO SHOULD WORKOUT THE PROFIT DISCLOSED BY THE ASSESSEE AND COMPARE THE RE SULT WITH COMPARABLE OF INDEPENDENT CASES WHO HAVE CARRIED OUT SIMILAR INTERNATIONAL TR ANSACTIONS WITH INDEPENDENT PARTIES. REFERENCE IS MADE IN THE CASE OF DCIT VS STRATEX NE TWORKS (INDIA) (P) LTD. 133 TTJ 24 365 AND IN THE CASE OF FORTUNE INFOTEC LTD., THE TR ANSACTIONS ARE WITH RELATED PARTIES AND THEREFORE, THE SAME CANNOT BE CONSIDERED AS A COMPA RABLE CASE WE HAVE CONSIDERED THE EXPLANATION FURNISHED BY THE ASSESSEE BEFORE US AND BEFORE LOWER AUTHORITIES AND THAT FOLLOWING COMPANIES CANNOT BE CONSIDERED AS INAPPRO PRIATE COMPANIES AS COMPARABLES 1. AVANI CIMCON TECHNOLOGIES LTD. 2. EXENSYS SFOTWARE SOLUTIONS LTD. 3. FORTUNE INFOTECH LTD. 4. MAVERIC SYSTEMS LTD. 5. SANKHYA INFOTECH LTD. 6.14 THE TPO HAS CONSIDERED THE MAIN OPERATING PROF ITS/ OTHER COSTS AT 20.79% BY CONSIDERING 12 COMPANIES. THE CHART AS MADE BY THE TPO IN HIS ORDER IS AS UNDER:- COMPANY NAME OPM/OIL CAKE AVANI CIMCON TECHNOLOGIES LTD. 32.12 CAMBRIDGE TECHNOLOGY ENTERPRISE LTD. 26.46 EXENSYS SFOTWARE SOLUTIONS LTD. 25.8 FORTUNE INFOTECH LTD. 17.79 GOLDSTONE TECHNOLOGIES LTD. 2.47 INDIUM SOFTWARE (INDIA) LTD. 27.09 MAVERIC SYSTEMS LTD. 42.76 SANKHYA INFOTECH LTD. 25.58 AKSHAY SOFTWARE TECHNOLOGIES LTD. 7.07 LANCO GLOBAL SYSTEMS LTD. (LGS) 5.38 QUINTEGRA SOLUTIONS LTD. 15.21 SIP TECHNOLOGIES & EXPORTS LTD. 21.75 6.15 IF THE 05 COMPANIES ARE EXCLUDED THEN ARITHMET IC MEAN WILL COME TO 11.85% AND IF DISCOUNTING OF 5% MARGIN IS ALLOWED THEN MARGIN WILL COME TO 6.26% AS AGAINST 11.08% SHOWN BY THE ASSESSEE. THE CHART IS REPRODUC ED AS UNDER:- INTEGRATED DECISIONS AND SYSTEMS (INDIA) (P) LTD. ASSESSMENT YEAR 2006-07 SENSITIVITY ANALYSIS AFTER EXCLUSION OF INAPPROPRIA TE COMPANIES OF THE TPO S.N. NAME OF THE COMPANY TPOS SET OF COMPARABLES 25 UNADJUSTED MARGIN AS PER TRANSFER PRICING ORDER CORRECT MARGINS CORRECT MARGINS WITH WORKING CAPITAL ADJUSTMENT 1. CMABRIDGE TECHNOLOGY ENTERPRISES LTD. 26.46% 25.93% 24.23% 2. INDIUM SOFTWARE (INDIA) LTD. 27.09% 26.51% 24.92% 3. GOLDSTONE SOFTWARE TECHNOLOGIES LTD. 2.47% 3.08% 0.11% 4. AKSHAY SOFTWARE TECHNOLOGIES LTD. 7.07% 7.40% 6.42% 5. LANCO GLOBAL SYSTEMS LTD. 5.38% 5.94% 4.59% 6. QUINTEGRA SOLUTIONS LTD. 15.21% 10.73% 2.57% 7. SIP TECHNOLOGIES AND EXPORTS LTD. 21.75% 21.09% 20.12% ARITHMATIC MEAN 15.06% 14.38% 11.85% LOWER 5% MARGIN 9.31% 8.66% 6.26% APPELLANTS MARGIN 11.08% 6.16 IN RESPECT OF APPLICABILITY OF THE PRICE TRANS FERRED BY THE ASSESSEE AND IF THE ALP DEBITED BY THE AO IS LESS THAN 5% THEN NO ADJUSTMEN T COULD BE MADE TO ALP. THIS HAS BEEN HELD BY THE JAIPUR BENCH IN THE CASE OF SHANKA R EXPORTS VS ADDL. CIT, 132 TTJ 107 AND IN THE CASE OF RAVI KUMAR RAWAT VS ITO 134 TTJ 634. IT WILL BE USEFUL TO REPRODUCE PARA 15 FROM THE ORDER OF THE TRIBUNAL IN THE CASE OF SHANKAR EXPORTS (SUPRA) AS UNDER: . 15. THE LD. D/R HAS VEHEMENTLY ARGUED THERE W AS AN AMENDMENT TO THE PROVISIONS OF SUB-SECTION (2) OF S ECTION 92C BY WHICH IT WAS PROVIDED THAT WHERE MORE THAN ONE PRIC E IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARM S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VA RY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE P ERCENT OF SUCH ARITHMETICAL MEAN. AS PER AMENDED PROVISION T O SECTION (2) OF SECTION 92C, IT DOES NOT SAY THAT BOARDS CIRCUL AR HAS BEEN WITHDRAWN. THE BOARDS CIRCULAR ISSUED IN 2001 IS S TILL APPLICABLE 26 AS THE SAME HAS NOT BEEN WITHDRAWN. EVEN THE AMEND ED PROVISION DOES NOT SAY THAT THE ARITHMETICAL PRICE ADOPTED BY THE AO AS PER ARMS LENGTH PRICE DOES EXCEED 5%, THEN THE PRICE A DOPTED BY ASSESSEE SHOULD BE DISTURBED. THEREFORE, ADOPTING A RMS LENGTH PRICE AT THE END OF THE AO ON THE FACT OF THE PRESE NT CASE, IN OUR CONSIDERED VIEW, WAS NOT JUSTIFIED. THERE SHOULD B E SOME MATERIAL TO SUGGEST THAT THE PRICE SHOWN BY THE ASS ESSEE ARE NOT JUSTIFIED. MERELY ON THE BASIS THAT MATERIAL HAS B EEN SOLD TO ONE OF THE ASSOCIATE, DOES NOT PROVE THAT THE PRICE SHOWN BY ASSESSEE ARE ON LOWER SIDE. IN VIEW OF THESE FACTS AND CIRCUMS TANCES, WE ARE OF THE VIEW THAT ADDITION MADE ON THE BASIS OF ARM S LENGTH PRICE AT THE END OF THE AO WAS NOT JUSTIFIED AND THE LD. CIT (A) WAS ALSO NOT JUSTIFIED IN CONFIRMING THE ADDITION MADE BY AO . ACCORDINGLY, THE ADDITION OF RS. 13,15,210/- IS DELETED. 6.17 FROM THE ABOVE DISCUSSION, WE DISMISS THE GRO UND OF APPEAL NO. 4 AND 8 AND GROUND OF APPEAL NO 10 AND 13 ARE ALLOWED. THE RESU LT IS THAT THERE WILL BE NO ADJUSTMENT IN ALP AND GROUND NO. 11 AND 12 BECOME ACADEMIC AND THEREFORE, IT IS NOT NECESSARY TO ADJUDICATE UPON THESE GROUNDS OF APPEAL. THUS THE A DJUSTMENT DIRECTED BY THE DRP AS PER ORDER U/S 144C IS DELETED AND THE AO WILL NOT MAKE ANY TRANSFER PRICING ADJUSTMENT. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 31-10 -2011 SD/- SD/- (R.K. GUPTA) (N.L. KALRA) JUDICIAL MEMBER ACCOUNTANT MEMBER JAIPUR DATED; 31 /10/2011 *MISHRA COPY FORWARDED TO :- 1. M/S. INTEGRATED DECISIONS & SYSTEMS (INDIA) (P) LTD . , JAIPUR 2. THE DCIT, CIRCLE- 6, JAIPUR 3. THE LD. CIT BY ORDER 4. THE LD. CIT(A) 5. THE LD.DR 6. THE GUARD FILE (ITA NO.27/JP /11) A.R, ITAT, JAIPUR 27