Pentair Water (I) P. Ltd, Goa V. Addl. Comm. Of Income Tax., Goa

ITA 3/PAN/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79638 (ITAT-PANAJI)
• Duration Of Justice: 1 year(s) 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-05-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 20-03-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 08-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHA DESAI LD
• Keywords: Depreciation; Transfer pricing; International transaction; Services rendered outside India; Bad and doubtful debts
• Section: 92C; 27

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P.K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO. 03/PNJ/2013 : (ASST. YEAR : 2007 - 08) M/S. PENTAIR WATER INDIA PVT. LTD., L - 55, VERNA INDUSTRIAL ESTATE, VERNA, SALCETTE, GOA 403 722. PAN : AABCS8856L (APPELLANT) VS. ADDL. COMMISSIONER OF INCOME TAX, MARGAO RANGE, MARGAO, GOA (RESPONDENT) ITA NO. 06 /PNJ/2013 : (ASST. YEAR : 2007 - 08) ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 1, MARGAO (APPELLANT) VS. M/S. PENTAIR WATER INDIA PVT. LTD., L - 52/55, VERNA INDUSTRIAL ESTATE, VERNA, SALCETTE, GOA 403 722. PAN : AABCS8856L (RESPONDENT) ASSESSEE BY : RAKESH AGRAWAL, CA REVENUE BY : ASHA DESAI, LD. DR DATE OF HEARING : 20/03/2014 DATE OF PRONOUNCEMENT : 23 /05/2014 O R D E R PER P.K. BANSAL 1. THESE CROSS - APPEALS HAVE BEEN FILED AGAINST THE ORDERS OF CIT(A) - IV, BENGALURU DT. 16.11.2012 FOR A.Y 2007 - 08. 2. THE ASSESSEE IN HIS APPEAL FOR A.Y 2007 - 08 HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL : 2. THE LD. CIT(A) ERRED IN DENYING APPELLANTS CLAIM OF DEPRECIATION ON UPS AT THE RATE OF 60% AS IS APPLICABLE FOR COMPUTER S (VIDE PARA 20 ON PAGE 7 OF THE APPEAL ORDER). 2 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) 3. THE LD. CIT(A) ERRED IN CALCULATING THE OPERATING MARGIN OF COMPARABLE COMPANIES ENGAGED IN ITES SECTOR @ 22.92% AS AGAINST THE MARGIN CALCULATED BY APPELLANT COMPANY @ 16.56% FOR THE PURPOSES OF COMPUTIN G ARMS LENGTH PRICE (ALP) FOR TRANSFER PRICE ADJUSTMENT IN RELATION TO CDR DIVISION OF THE APPELLANT (VIDE PARA 68 ON PAGE 21 OF THE APPEAL ORDER). 4. THE LD. CIT(A) ERRED IN NOT ALLOWING AN ADJUSTMENT OF 1.10% IN THE OPERATING MARGIN OF CDR UNIT IN COMP UTATION OF ALP FOR TRANSFER PRICE ADJUSTMENT, AS ASKED FOR BY APPELLANT, IN RELATION TO WORK PERFORMED BY CDR UNIT OF THE COMPANY FOR ITS MANUFACTURING PLANT AT GOA AND DISREGARDING REVENUE OF RS.12,08,000/ - (VIDE PARA 69 ON PAGE 21 OF THE APPEAL ORDER). 5. THE LD. CIT(A) ERRED IN NOT ALLOWING THE ADJUSTMENT FOR DIFFERENTIAL RATE OF DEPRECIATION FOR CALCULATING MARGIN OF CDR UNIT AND OF COMPARABLE COMPANIES (VIDE PARA 73 ON PAGE 22 OF THE APPEAL ORDER). 6. THE LD. CIT(A) ERRED IN NOT CONSIDERING THE FUNCT IONAL DIFFERENCES BETWEEN THE APPELLANTS CDR UNIT AND COMPARABLE COMPANIES SELECTED BY TPO. WHILE THE REVENUE HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL : 1. THE LD CIT(A) HAS ERRED IN HOLDING THAT THE TPO WAS NOT CORRECT IN APPLYING DIMINISHING REVENUE/PERSISTENT LOSS FILTER AND DIFFERENT FINANCIAL YEAR FILTER. 2. THE LD CIT(A) HAS ERRED IN HOLDING THAT THE SIZE & TURNOVER OF THE COMPANY ARE DECIDING FACTORS FOR TR EATING A COMPANY AS A COMPARABLE AND ACCORDINGLY ERRED IN EXCLUDING M/S WIPRO LTD. AND M/S WIPRO BPO SOLUTIONS LTD. IN ITES SEGMENT AS COMPARABLE COMPANIES. 3. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DECISION OF THE LD. CIT(A) TO EXCLUDE M/S. APOLLO HEALTHSTREET LTD. ,ACCURATE DATE CONVERTERS LTD., ECLERX LTD., MOLD - TEK TECHNOLOGIES LTD. AND VISHAL INFORMATION TECHNOLOGIES LTD. AS COMPARABLE ON GROUND OF PECULIAR ECONOMIC CIRCUMSTANCES IS ARBITRARY AND UNREASONABLE. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN MANUFACTURE OF FIBRE GLASS PRESSURE VESSEL USED FOR WATER TREATMENT. RETURN SHOWING INCOME OF RS. 5,28,09,975 / - WAS FILED ON 31 .1 0 .200 7 . THE AO MADE REFERENCE TO ADDITIONAL COMMISSIONER OF INCOME TAX (TRANSFER PRICING OFFICER ) - II , BENGALURU FOR DETERMINATION OF THE ARMS PRICE LENGTH IN RESPECT OF 3 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) THE ASSESSEES TRANSACTION WITH ASSOCIATED ENTERPRISES. TPO PASSED ORDER U/S 92C A ON 27 .10.20 1 0 SUGGESTING TRANSFER PRICE ADJUSTMENT OF RS. 1,68,60,877 / - . THE AO ADDED THE SAID AMOUNT IN THE ORDER PASSED U/S 143(3). BESIDES THIS, THE AO ALSO DISALLOWED DEPRECIATION ON THE GOODWILL AMOUNTING TO RS. 17,42,061 / - AND UPS USED WITH COMPUTE RS AMOUNTING TO RS.4,11,640/ - . THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A) AND CIT(A) CONFIRMED THE ADDITION. BOTH THE PARTIES HAVE COME IN APPEAL BEFORE US. 4. GROUND NOS. 1 AND 7 IN ASSESSEES APPEAL ARE GENERAL IN NATURE AND DOES NOT REQUIRE ANY ADJUDICATION. THEREFORE, THE SAME STANDS DISMISSED AS SUCH. 5. GROUND NO. 2 IN ASSESSEES APPEAL RELATED TO THE CLAIM OF DEPRECIATION ON THE UPS @ 60% AS ARE APPLICABLE TO THE COMPUTERS. AFTER HEA RING THE RIVAL SUBMISSIONS WE FOUND THAT THIS ISSUE IS DULY COVERED BY THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. BSES YAMUNA POWERS LTD. (ITA NO. 1267/2010). RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE DELHI HIGH COURT, WE DELETE THE DISALLOWANCE SUSTAINED BY THE CIT(A). GROUND NO. 2 IN ASSESSEES APPEAL STANDS ALLOWED. 6. GROUND NOS. 3, 4, 5 AND 6 IN ASSESSEES APPEAL RELATES TO THE COMMON ISSUE RELATING TO THE ADJUSTMENT IN THE OPERATING MARGIN OF CDR UNIT AND SUSTAININ G PART ADDITION THEREIN BY THE CIT(A). THE REVENUE HAS ALSO COME IN APPEAL BY TAKING GROUND NOS. 1 TO 3. 6.1 THE BRIEF FACTS RELATING TO THIS ISSUE ARE THAT THE AO MADE ADDITION OF RS.1,68,60,877/ - UNDER THE TP PROVISION ON INFORMATION TECHNOLOGY BASED ENGINEERING DESIGN SERVICES TRANSACTION TO THE ASSESSEES AES. THE ASSESSEE IS HAVING TWO OPERATIONAL SEGMENT; MANUFACTURING OF WATER TREATMENT COMPONENT AND IT - BASED ENGINEERING DESIGN SERVICES. MAJOR REVENUE WAS DERIVED BY THE 4 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) ASSESSEE (92.65%) FROM M ANUFACTURING DIVISION AND BALANCE (7.35%) FROM CDR DIVISION. THE TPO HAS SUGGESTED VIDE HIS ORDER DT. 27.10.2010 U/S 92CA(3) AN ADDITION OF RS.1.68 CRORE ON THE INTERNATIONAL TRANSACTION OF THE CDR DIVISION CONSISTING OF ENGINEERING SUPPORT SERVICES OF RS . 10,94,49,682/ - RENDERED TO THE ASSESSEES AES ABROAD. THE ASSESSEE HAS SHOWN OPERATING MARGIN @ 12.49% (OPERATING PROFIT/OPERATING COST) BUT THE TPO HAD INCREASED THE SAME TO 29.83% ON THE GROUND THAT THE TRANSACTION WITH THE AE WAS NOT AT ALP. THE ASSE SSEE WENT IN APPEAL BEFORE CIT(A). CIT(A) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND THE VARIOUS DECISIONS IN RESPECT OF THE COMPARABLES DIRECTED THE AO TO COMPUTE THE TP ADJUSTMENT BY TAKING THE OPERATING MARGIN OF THE COMPARABLES @ 22.92%. 6. 2 THE LD. AR BEFORE US CONTENDED THAT THE ASSESSEE IS AN INDUSTRIAL PRODUCT MANUFACTURER AND DERIVES 92.65% OF ITS REVENU E FROM MANUFACTURING OPERATION. IT HAS SET UP A DIVISION IN THE YEAR 1998 - 99 FOR PROVIDING IN - HOUSE SUPPORT ENGINEERING SERVICES IN TH E FIELD OF PRODUCT QUALITY ASSURANCE, DESIGNING AND PRODUCT DEVELOPMENT. THE SAID DIVISION IS INTERNALLY NAMED AS CDR DIVISION. FROM THIS DIVISION, THE ASSESSEE HAS GENERATED REVENUE FROM EXPORT SERVICES AMOUNTING TO RS.10,94,49,682/ - . THIS DIVISION WAS ALSO RENDERING SERVICES TO THE OTHER DIVISIONS OF THE ASSESSEE IN INDIA. THE TOTAL OPERATING COSTS INCURRED BY THE ASSESSEE WAS TO THE EXTENT OF RS.9,72, 8 9, 1 9 3 / - WHICH HAS NOT BEEN DISPUTED BY THE TPO. FOR THIS, OUR ATTENTION WAS DRAWN TOWARDS THE ORDER THE TPO AND IT WAS CONTENDED THAT WHILE COMPUTING THE OPERATING MARGIN, THE AO HAS COMPUTED THE OPERATING PROFIT ONLY IN RESPECT OF THE SAID ACTIVITIES BY REDUCING FROM THE REVENUE RECEIVED FROM SUPPORT SERVICES, THE OPERATING MARGIN @ 12 .5 0 % WHILE IN FAC T IF THE NOTIONAL REVENUE WAS WORKED OUT IN RESPECT OF THE SERVICES RENDERED TO THE ASSESSEES GOA PLANT AT THE SAME RATE AT WHICH SERVICES WERE RENDERED TO THE AE ABROAD, THE OPERATING PROFIT WOULD HAVE COME @ 14.1 6 %. IT WAS CONTENDED THAT ON AN AVERAGE THE REVENUE HAS BEEN RECEIVED 5 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) FROM THE AE ABROAD @ RS. 608 / - AS THE CDR UNIT HAS SPENT 1,80,064 HRS. WHILE TO THE GOA UNIT, THE SERVICES WERE RENDERED FOR 2,680 HRS. IF THE SAID 2,680 HRS. ARE TAKEN INTO CONSIDERATI ON, THE REVENUE FROM THE ENTIRE DIVISION IN INDIA WOULD HAVE BEEN RS. 16,29,003 / - . 6.2.1 IT WAS CONTENDED THAT THE TPO HAS CALCULATED THE MARGIN @ 2 9 . 83 % WHILE THE CIT(A) HAS CALCULATED THE MARGIN @ 2 2 . 92 %. FOR THIS, A CHART WAS GIVEN TO US. IT WAS CO NTENDED THAT THE ASSESSEE HAS APPLIED T N MM METHOD FOR DETERMINING THE ALP AND SELECTED 8 COMPARABLE COMPANIES OF WHICH THE AVERAGE OPERATING PROFIT TO OPERATING EXPENSES RATIO WAS 11.31 %. THE LIST OF THE COMPARABLE COMPANIES IS GIVEN AS UNDER : S.NO. COMPANY NAME SALES OP/OE 1 AUTOLINE DIMENSIONS SOFTWARE PVT. LTD. 3.4 4.62% 2 L&T CHIYODA LTD. 48.19 31.34% 3 MOTHERSON SUMI INFOTECH & DESIGNS LTD. 34.84 0.72% 4 CHAKKILAM INFOTECH LTD. 6.07 6.68% 5 HI - TECH GEARS LTD. 299.87 4.69% 6 NEILSOFT LTD. 59.4 5.51% 7 VISION COMPUTECH INTEGRATORS LTD. 20.27 23.22% 8 IDS INFOTECH LTD. 29.17 13.69% AVERAGE 11.31% TPO REJECTED THE SELECTION OF THE ASSESSEE BUT HE HAS SELECTED A DIFFERENT SET OF COMPARABLES OF 27 COMPANIES AND WORKED OUT THE OPERATING MARGIN @ 2 9 . 83 %, THE DETAILS OF WHICH ARE AS UNDER : SL. NO. COMPANY NAME SALES (RS.CR.) OP TO TOTAL COST % 1 ACCENTIA TECHNOLOGIES LTD. (SEG.) 16.57 30.61% 2 ADITYA BIRLA MINACS WORLDWIDE LTD (EARLIER TRANSWORKS INFORMATION SERVICES LTD.) 197.06 11.98% 3 ALLSEC TECHNOLOGIES LTD. 113.28 27.31% 4 APEX KNOWLEDGE SOLUTIONS PVT. LTD. 6.64 12.83% 5 APPOLLO HEALTHSTREET LTD. 47.84 - 13.55% 6 ASIT C. MEHTA FINANCIAL SERVICES LTD. 6.09 24.21% 7 BODHTREE CONSULTING LTD (SEG.) 2.94 29.58% 6 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) 8 CALIBER POINT BUSINESS SOLUTIONS LTD. 39.3 21.26% 9 COSMIC GLOBAL LTD. 4.28 12.40% 10 DATAMATICS FINANCIAL SERVICES LTD (SEG.) 2.92 5.07% 11 ECLERX SERVICES LTD 86.12 89.33% 12 FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG .) 12.93 8.62% 13 GENESYS INTERNATIONAL CORPORATION LTD 19.17 13.35% 14 H C L COMNET SYSTEMS & SERVICES LTD (SEG.) 260.18 44.99% 15 I C R A TECHNO ANALYTICS LTD (SEG.) 7.23 12.24% 16 INFORMED TECHNOLOGIES INDIA LTD. 4.08 35.56% 17 INFOSYS BPO LTD 649.56 28.78% 18 ISERVICES INDIA PVT. LTD. 16.29 49.47% 19 MAPLE ESOLUTIONS LTD 12.21 34.05% 20 MOLD - TEK TECHNOLOGIES LTD (SEG.) 11.4 113.49% 21 R SYSTEMS INTERNATIONAL LTD (SEG.) 17.34 20.18% 22 SPANCO LTD (SEG.) 35 25.81% 23 TRITON CORP LTD 53.37 34.93% 24 VISHAL INFORMATION TECHNOLOGIES LTD 30.6 51.19% 25 WIPRO LTD (SEG.) 939.78 29.70% 26 NITTANY OUTSOURCING SERVICES PVT. LTD. 23.23 11.50% 27 ACCURATE DATA CONVERTERS LTD. 4.33 50.68% ARITHMETIC MEAN 30.21% THE ASSESSEE OBJECTED TO THE SELECTION OF THE COMPARABLE COMPANIES BY THE TPO AND THE CALCULATION OF THE REVENUE FOR CDR UNIT. THE ASSESSEE HAS PLEADED FOR EXCLUSION OF 11 COMPANIES OUT OF THE LIST OF 27 COMPANIES SELECTED BY THE TPO BUT CIT(A) DID NOT DEAL WITH THE SAME AND DELETED 6 COMPANIES ONLY AND ONE MORE COMPANY, APPOLLO HEALTHSTREET LTD., WHICH WAS LOSS MAKING WAS ALSO DELETED . THUS, CIT(A) CONSIDERED 20 COMPANIES FOR PLI. THE RELIEF ALLOWED BY CIT(A) RESULTS IN BRINGING DOWN THE PLI TO 22.92% FROM 29.83%. 6.2.2 THE LD. AR HAS GIVEN THE FOLLOWING GIST OF ASSESSEES OBJECTIONS ON THE DECISION OF CIT(A) ON THE SELECTION OF COMPARABLES IN HIS WRITTEN SUBMISSION : THE COMPARABLES SELECTED BY THE TPO AND THEIR OPERATING MARGINS REMARKS OBJECTION OF ASSESSEE SL. NO. COMPANY NAME TURNOVER ( INR - C R S ) OP /OE PER TPO 1 ACCENTIA TECHNOLOGIES LTD. (SEG.) 16.57 30.61% OBJECTION OF ASSESSEE : NIL 2 ADITYA BIRLA MINACS WORLDWIDE LTD 197.06 11.98% OBJECTION OF ASSESSEE : NIL 3 ALLSEC TECHNOLOGIES L IMITED 113.28 27.31% OBJECTION OF ASSESSEE : NIL 4 APEX KNOWLEDGE SOLUTIONS P RIVATE L IMITE D 6.64 12.83% OBJECTION OF ASSESSEE : NIL 7 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) 5 APPOLLO HEALTHSTREET LTD. 47.84 - 13.55% OBJECTION OF ASSESSEE : NIL THE APPELLANT DID NOT RAISE ANY OBJECTION ON THE SELECTION OF THIS COMPANY. BUT CIT(A) HAS EXCLUDED THIS COMPANY ON THE GROUND THAT IT HAS NEGATIVE MARGIN. THE ACTION OF CIT(A) IS WRONG. 6 ASIT C. MEHTA FINANCIAL SERVICES L IMITE D 6.09 24.21% OBJECTION OF ASSESSEE : NIL 7 BODHTREE CONSULTING L IMITE D 2.94 29.58% OBJECTION OF ASSESSEE : NIL 8 CALIBER POINT BUSINESS SOLUTIONS L IMITE D 39.3 21.26% OBJECTION OF ASSESSEE : NIL 9 COSMIC GLOBAL L IMITE D 4.28 12.40% OBJECTION OF ASSESSEE : NIL 10 DATAMATICS FINANCIAL SERVICES L IMITE D (SEG.) 2.92 5.07% OBJECTION OF ASSESSEE : NIL 11 ECLERX SERVICES L IMITE D 86.12 89.33% OBJECTION OF ASSESSEE : ABNORMAL PROFIT: TPO HAS SELECTED THE COMPANY WHICH HAS VERY HIGH MARGIN RATIO. IT INDICATES EXTRA ORDINAR Y BUSINESS CIRCUMSTANCES. RELIEF WAS GRANTED BY CIT(A). 12 FLEXTRONICS SOFTWARE SYSTEMS L IMITE D (SEG.) 12.93 8.62% OBJECTION OF ASSESSEE : NIL 13 GENESYS INTERNATIONAL CORPORATION L IMITE D 19.17 13.35% OBJECTION OF ASSESSEE : NIL 14 H C L COMNET SYSTEMS & SERVICES L IMITE D (SEG.) 260.18 44.99% OBJECTION OF ASSESSEE : HIGH TURNOVER : THE TPO HAS SELECTED THIS AS COMPARABLE IGNORING THE FACT THAT IT IS 20 TIMES BIGGER THAN THE APPELLANTS SEGMENT. THOUGH THE CIT(A) AGREED TO ON THE APPLICATION OF LOWER & UPPER TURNOVER FILTER, BUT DID NOT EXCLUDE THIS COMPANY. NEITHER ANY REASON WAS MENTIONED IN THE APPEAL ORDER FOR DOING SO. THE ACTION OF CIT(A) IS WRONG. 15 I C R A TECHNO ANALYTICS L IMITE D (SEG.) 7.23 12.24% OBJECTION OF ASSESSEE : NIL 16 INFORMED TECHNOLOGIES INDIA L IMITE D 4.08 35.56% OBJECTION OF ASSESSEE : NIL 17 INFOSYS BPO L IMITE D 649.56 28.78% OBJECTION OF ASSESSEE : HIGH TURNOVER : THE TPO HAS SELECTED THIS AS COMPARABLE IGNORING THE FACT THAT IT IS 59 TIMES BIGGER THAN THE APPELLAN TS SEGMENT. RELIEF WAS GRANTED BY CIT(A). 18 ISERVICES INDIA P RIVATE L IMITE D 16.29 49.47% OBJECTION OF ASSESSEE : ABNORMAL PROFIT : TPO HAS SELECTED THE COMPANY WHICH HAS VERY HIGH MARGIN RATIO. IT INDICATES EXTRA ORDINARY BUSINESS CIRCUMSTANCES. CIT(A) DID NOT ALLOW RELIEF. 8 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) THE ACTION OF CIT(A) IS WRONG. 19 MAPLE ESOLUTIONS L IMITE D 12.21 34.05% OBJECTION OF ASSESSEE : TAINTED MANAGEMENT AS SUCH DATA OF COMPANY CANT BE RELIED. CIT(A) DID NOT ALLOW RELIEF THOUGH THIS COMPANY WAS DIRECTED TO BE EXCLUDED IN THE APPEAL ORDER FOR AY 2005 - 06 IN THE CASE OF APPELLANT ITSELF BY CIT(A). THE ACTION OF CIT(A) IS WRONG. 20 MOLD - TEK TECHNOLOGIES L IMITE D (SEG.) 11.4 113.49% OBJECTION OF ASSESSEE : ABNORMAL PROFIT & FUNCTIONAL DIFFERENCES : TPO HAS SELECTED THE COMPANY WHICH PROVIDES SERVICES IN STRUCTURAL ENGINEERING SEGMENT, HENCE FUNCTIONALLY DIFFERENT COMPANY. THIS COMPANY HAS VERY HIGH MARGIN RATIO IN THE REPORTED YEAR. IT INDICATES EXTRA ORDINARY BUSINESS CIRCUMSTANCES. RELIEF WAS GRANTED BY CIT(A). 21 R SYSTEMS INTERNATIONAL L IMITE D (SEG.) 17.34 20.18% OBJECTION OF ASSESSEE : COMPUTATION OF OPERATING MARGIN WAS WRONG AS AO EXCLUDED PROVISION FOR DOUBTFUL DEBTS FROM EXPENSES. CIT(A) DID NOT ALLOW RELIEF. 22 SPANCO LTD (SEG.) 35 25.81% OBJECTION OF ASSESSEE : NIL 23 TRITON CORP LTD 53.37 34.93% OBJECTION OF ASSESSEE : TAINTED MANAGEMENT : THE COMPANY HAS A TAINTED MANAGEMENT FROM THE AVAILABLE RECORDS. SECONDLY, OPERATES IN DATA PROCESS ACTIVITIES AND BACK OFFICE JOBS. CIT(A) DID NOT ALLOW RELIEF WITHOUT ADDUCING ANY REASONS. 24 VISHAL INFORMATION TECHNOLOGIES 30.6 51.19% OBJECTION OF ASSESSEE : ABNORMAL PROFIT : THE COMPANY IS OPERATING UNDER OUTSOURCING BUSINESS MODEL. ITS SALARY COST IS TOO LESS AS COMPARED TO DATA ENTRY CHARGES APPEARING IN FINANCIALS. RELIEF WAS GRANTED BY CIT(A). 25 WIPRO LTD (SEG.) 939.78 29.70% OBJECTION OF ASSESSEE : HIGH TURNOVER : THE TPO HAS SELECTED THIS AS COMPARABLE IGNORING THE FACT THAT IT IS 86 TIMES BIGGER THAN THE APPELLANTS SEGMENT. RELIEF WAS GRANTED BY CIT(A). 26 NITTANY OUTSOURCING SERVICES P RIVA T E L IMITE D 23.23 11.50% OBJECTION OF ASSESSEE : NIL 27 ACCURATE DATA CONVERTERS LTD. 4.33 50.68% OBJECTION OF ASSESSEE : ABNORMAL PROFIT : TPO HAS SELECTED THE COMPANY WHICH HAS VERY HIGH MARGIN RATIO. IT INDICATES EXTRA ORDINARY BUSINESS CIRCUMSTANCES. SECONDLY, THE COMPANY IS ENGAGED IN SOFTWARE DEVELOP MENT ACTIVITY. RELIEF WAS GRANTED BY CIT(A). ARITHMETIC MEAN 30.21% 9 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) 6.2.3 IN RESPECT OF 4 COMPANIES WHICH WERE NOT CONSIDERED BY CIT(A), IT WAS SUBMITTED THAT I) T URNOVER OF HCL COMNET SYSTEMS & SERVICES LTD. IS RS.260.18 CRORES WHICH IS IN EXCESS OF THE UPPER FILTER OF THE TURNOVER OF RS. 200 CRORES. CIT(A) HAS ALREADY ACCEPTED TO APPLY LOWER AND UPPER TURNOVER FILTER AND ALSO EXCLUDED HIGH TURNOVER COMPANIES LIKE INFOSYS AND WIPRO. THIS COMPANY SHOULD ALSO HAVE BEEN EXCLUDED. II) IN RESPECT OF ISERVICES INDIA PVT. LTD. IT WAS STATED THAT THE OPERATING MARGIN OF THE COMPANY IS 49.4%. THIS IS A HIGH PROFIT MARGIN COMPANY. THE AVERAGE PROFIT OF THE INDUSTRY HAS BEEN CALCULATED BY THE TPO @ 30.21% AND THEREFORE, ALL COMPANIES EARN ING HIGH ER BE CATEGORISED AS EXCEPTIONALLY SUPER PROFIT MAKING COMPANIES AND BE EXCLUDED ON THE BASIS OF THE SUPER HIGH PROFITS. CIT(A) HAS EXCLUDED THREE COMPANIES VIZ. ELDREX (OPERATING MARGIN 89.33%), MOLD - TEK TECHNOLOGIES LTD. (OPERATING MARGIN 113.49 %) AND VISHAL INFORMATION TECHNOLOGIES (OPERATING MARGIN 51.19%). THEREFORE, ISERVICES INDIA PVT. LTD. SHOULD ALSO BE EXCLUDED. III) M/S. MAPLE E - SOLUTIONS LTD. THE MANAGEMENT OF THIS COMPANY WAS HELD TO BE TAINTED. THE ASSESSEE RELIED ON THE DECISION OF DELHI ITAT IN ACIT VS. CRM SERVICES INDIA PVT. LTD., 14 TAXMANN.COM 96 AND IT WAS HELD THAT IT SHOULD BE EXCLUDED FROM THE COMPARABLES. IT WAS POINTED OUT THAT THE CIT(A) IN A.Y 2005 - 06 HAS DIRECTED THE AO TO EXCLUDE THIS COMPANY FROM THE COMPARABLES. IV) M /S. TRITON CORP. LTD. : IT WAS STATED THAT THE MANAGEMENT OF THIS COMPANY WAS ALSO HELD TO BE TAINTED AND IN THIS REGARD RELIANCE WAS PLACED ON THE DECISION OF ACIT VS. CRM SERVICES INDIA PVT. LTD., 14 TAXMANN.COM 96 WHEREIN IT WAS HELD THAT M/S. MAPLE E - SOLUTIONS LTD. 10 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) AND M/S. TRITON CORP. LTD. SHOULD BE REJECTED AS COMPARABLE ON THE GROUND OF TAINTED MANAGEMENT. M/S. R SYSTEMS INTERNATIONAL LTD. : THE OBJECTION RELATED TO THE CALCULATION OF THE OPERATING MARGIN OF THIS COMPANY. THE TPO INCREASED THE OPERATING PROFIT OF THE COMPANY BY DELETING THE PROVISION FOR DOUBTFUL DEBT AND WRITE OFF OF MISCELLANEOUS EXPENSES . THE EFFECT OF THIS EXCLUSION WAS INCREASE IN THE OPERATING PROFIT OF R SYSTEMS INTERNATIONAL LTD. TO 20.18% FROM 11.4 0 %. THE ASSESSEE OBJECTED TO THIS IN ITS SUBMISSION BEFORE THE CIT(A). CIT(A) HAS NOT GIVEN ANY FINDING IN THIS REGARD ON THE OBJECTION OF THE ASSESSEE. HE FURTHER SUBMITTED THAT TPO USED THE FOLLOWING FILTER IN HIS SELECTION (PG. 27 OF PAPER BOOK PARA 14 ON PG. 25 OF TPO ORDER ) COMPANIES WHOSE IT ENABLED SERVICE REVENUE IS LESS THAN 75% OF THE TOTAL OPERATING REVENUES WERE EXCLUDED. THE CORE BUSINESS OF THIS COMPANY IS SOFTWARE DEVELOPMENT WHICH IS NOT ITES SECTOR. THOUGH COMPANY HAS REPORTE D REVENUE FROM BPO SEGMENT BUT THIS IS IN THE RANGE OF 10 - 15% OF THE TOTAL REVENUE. THUS, THIS COMPANY DOES NOT MEET THE CRITERIA OF TPO. HENCE, IT SHOULD BE EXCLUDED. IT WAS STATED THAT EVEN IF WE ACCE PT THIS COMPANY AS ITES COMPANY, THE FINANCIAL INFO RMATION REPRODUCED BY THE TPO ON SEGMENT INFORMATION OF THIS COMPANY IS NOT VERIFIABLE AN AMOUNT OF RS.14,95,56,412/ - FOR SEGMENT EXPENSES (ALLOC ABLE) HAS BEEN TAKEN BY THE TPO. BUT THERE IS NO PROVISION IN AS - 17 ON THE REPORTING OF SEGMENT EXPENSES. A S SUCH, NONE OF THE COMPANIES REPORT THIS SEGMENT EXPENSE IN THEIR PUBLISHED ACCOUNTS. IN SUCH A SITUATION, HOW THIS FIGURE HAS BEEN DERIVED BY TPO REMAINS UNANSWERED. THERE IS ABSENCE OF UNIFORMITY IN THE FINANCIAL YEAR. THE COMPANY FOLLOWS CALENDAR YE AR. BESIDES THIS, THE TPO HAS PROPORTIONATELY ADDED 11 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) UNALLOCATED EXPENSE OF RS.60,88,787/ - IN THE OPERATING EXPENSES OF THE ITES SEGMENT WHICH IS NOT FREE FROM CORRECTNESS. THE TPO HAS REDUCED SELF - CALCULATED OPERATING EXPENSE OF RS.14,95,56,412/ - BY AN AMOUNT OF RS.1,13,60,949/ - BEING PROVISION FOR DOUBTFUL DEBT. THIS INCREASED THE OPERATING PROFIT OF THE SEGMENT BY 3%. WITHOUT GOING INTO THE BASIC QUESTION OF WHETHER THE PROVISION FOR DOUBTFUL DEBT IS AN OPERATING EXPENSE OR NOT, THE ASSESSEE C ONTENDS ON THE METHOD OF DERIVING THE FIGURE OF THIS PROVISION - IS IT IN RESPECT OF ONLY THOSE DEBTORS THAT BELONG TO THE ITES SEGMENT OF THE COMPANY? THUS, IT WAS CONTENDED THAT THIS COMPANY BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES AS SELECTED BY TPO FOR DERIVING ALP. 6.2.4 THE LD. AR ALSO OBJECTED SUO MOTO ACTION OF CIT(A) OF EXCLU SION OF APPOLLO HEALTHSTREET LTD. THIS COMPANY WAS CONSIDERED BY TPO IN HIS CALCULATION OF ALP BUT DELETED BY CIT(A). IT WAS CONTENDED THAT IF ONLY 16 COMPANIES LISTED HEREIN OUT OF THE SELECTION OF 27 COMPANIES MADE BY THE TPO ARE CONSIDERED, THE OPERATING MARGIN WILL BE 16.48%. SL. NO. COMPANY NAME TURNOVER ( INR - C R S ) OP /OC BY TPO OP /OC BY CIT(A) OP /OC AS PER OUR PRAYER TO ITAT 1 ACCENTIA TECHNOLOGIES L IMITED (SEG.) 16.57 30.61% 30.61% 30.61% 2 ADITYA BIRLA MINACS WORLDWIDE LTD 197.06 11.98% 11.98% 11.98% 3 ALLSEC TECHNOLOGIES L IMITED 113.28 27.31% 27.31% 27.31% 4 APEX KNOWLEDGE SOLUTIONS P RIVATE L IMITE D 6.64 12.83% 12.83% 12.83% 5 APPOLLO HEALTHSTREET LTD. 47.84 - 13.55% 0.00% - 13.55% 6 ASIT C. MEHTA FINANCIAL SERVICES L IMITE D 6.09 24.21% 24.21% 24.21% 7 BODHTREE CONSULTING L IMITE D 2.94 29.58% 29.58% 29.58% 8 CALIBER POINT BUSINESS SOLUTIONS L IMITE D 39.3 21.26% 21.26% 21.26% 9 COSMIC GLOBAL L IMITE D 4.28 12.40% 12.40% 12.40% 10 DATAMATICS FINANCIAL SERVICES L IMITE D (SEG.) 2.92 5.07% 5.07% 5.07% 11 ECLERX SERVICES L IMITE D 86.12 89.33% 12 FLEXTRONICS SOFTWARE SYSTEMS L IMITE D (SEG.) 12.93 8.62% 8.62% 8.62% 13 GENESYS INTERNATIONAL CORPORATION L IMITE D 19.17 13.35% 13.35% 13.35% 14 H C L COMNET SYSTEMS & SERVICES L IMITE D (SEG.) 260.18 44.99% 44.99% 15 I C R A TECHNO ANALYTICS L IMITE D (SEG.) 7.23 12.24% 12.24% 12.24% 16 INFORMED TECHNOLOGIES INDIA L IMITE D 4.08 35.56% 35.56% 35.56% 17 INFOSYS BPO L IMITE D 649.56 28.78% 12 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) 18 ISERVICES INDIA P RIVATE L IMITE D 16.29 49.47% 49.47% 19 MAPLE ESOLUTIONS L IMITE D 12.21 34.05% 34.05% 20 MOLD - TEK TECHNOLOGIES L IMITE D (SEG.) 11.4 113.49% 21 R SYSTEMS INTERNATIONAL L IMITE D (SEG.) 17.34 20.18% 20.18% 11.40% 22 SPANCO LTD (SEG.) 35 25.81% 25.81% 25.81% 23 TRITON CORP LTD 53.37 34.93% 34.93% 24 VISHAL INFORMATION TECHNOLOGIES 30.6 51.19% 25 WIPRO LTD (SEG.) 939.78 29.70% 26 NITTANY OUTSOURCING SERVICES P RIVA T E L IMITE D 23.23 11.50% 11.50% 11.50% 27 ACCURATE DATA CONVERTERS LTD. 4.33 50.68% ARITHMETIC MEAN 30.21% 22.19% 16.48% FURTHER, IT WAS SUBMITTED THAT THE ADJUSTMENT SHOULD BE GIVEN FOR THE DEPRECIATION ANOMALY ARISING OUT OF THE DIFFERENCE IN THE DEPRECIATION RATES ON COMPUTER HARDWARE AND SOFTWARE CHARGED BY THE RESPECTIVE COMPARABLE COMPANIES (AS WAS SELECTED BY THE TPO/CIT(A) FOR MAKING COMPARISON TO DETERMINE THE ALP ) VIS - - VIS THE RATES CHARGED BY THE ASSESSEE FOR ITS CDR UNIT. IT WAS CONTENDED THAT THE CASH PLI BE CONSIDE RED FOR DETERMINING THE CORRECT AND FAIR CALCULATION OF ALP. THE FUNDAMENTAL PRINCIPLES OF COMPARABILITY ANALYSIS IS TO COMPARE LIKE WITH LIKE. SINCE DIFFERENT COMPANIES ARE CHARGING DIFFERENT POLICIES FOR DEPRECIATION ACCOUNTING, THIS LEADS TO LARGER DI FFERENCES IN THE YEAR TO YEAR OPERATING MARGIN OF THE COMPANIES. THE ICAI GUIDANCE NOTE ON TP ALSO RECOGNISES THAT THE ACCOUNTING TREATMENT OF EXPENSES AND DEPRECIATION IS A CRITICAL FACTOR IN COMPUTING ALP. THE RELIABILITY OF THE OPERATING MARGIN OF COM PARABLE COMPANIES IS SEVERELY AFFECTED IF THERE ARE PROBLEMS IN THE APPLICATION OF UNIFORM DEPRECIATION POLICY. RELIANCE WAS PLACED ON FOLLOWING CASE LAWS FOR ADOPTING CASH PLI/ADJUSTING OF THE RATE OF DEPRE CIATION FOR DETERMINING THE ALP. 1. DCIT VS. RE UTERS INDIA (2013) 24 ITR (T) 231 (MUMBAI) 2. BA CONTINUUM INDIA VS. ACIT (2013) 40 TAXMANN.COM 311 (HYDERABAD) 3. SCHEFENACKER MOTHERSON LTD. VS. ITO [2009] 123 TTJ 509 (DELHI) 4. AMDOCS BUSINESS SERVICES VS. DCIT (2012) 54 SOT 46 (PUNE) 13 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) OUR ATTENTION WAS DRAWN TOWARDS THE CHART TABULATING THE ACCOUNTING POLICY RELATING TO THE DEPRECIATION AS ADOPTED BY THE VARIOUS COMPANIES TO PROVE THAT THERE ARE DIVERGENT/MIX POLICY OF CHARGING DEPRECIATION FOLLOWED BY VARIOUS COMPANIES. IT WAS ALSO CO NTENDED THAT IF THESE COMPANIES ARE EXCLUDED FROM THE COMPARABLES AND ONLY THE CASH PLI IS CONSIDERED, THE ARITHMETIC MEAN OF THE MARGIN IN RESPECT OF CASH PLI FOR THE BALANCE COMPANIES WILL BE 24.97% AND THE OPERATING MARGIN OF THE CDR UNIT EXCLUDING THE DEPRECIATION WILL COME TO 3 2 . 6 7%. IN THIS REGARD, FOLLOWING CHARTS WERE FILED BEFORE US : SL. NO. COMPANY NAME TURNOVER ( INR IN C R S ) CASH PLI OP/OC OF TPO SELECTED COMPANIES CASH PLI : OP/OC COMPANIES AS PER OUR PRAYER TO ITAT 1 ACCENTIA TECHNOLOGIES L IMITED (SEG.) 16.57 38.2% 38.23% 2 ADITYA BIRLA MINACS WORLDWIDE LTD 197.06 20.7% 20.71% 3 ALLSEC TECHNOLOGIES L IMITED 113.28 39.8% 39.79% 4 APEX KNOWLEDGE SOLUTIONS P RIVATE L IMITE D 6.64 19.6% 19.60% 5 APPOLLO HEALTHSTREET LTD. 47.84 - 4.7% - 4.71% 6 ASIT C. MEHTA FINANCIAL SERVICES L IMITE D 6.09 34.3% 34.30% 7 BODHTREE CONSULTING L IMITE D 2.94 45.2% 45.16% 8 CALIBER POINT BUSINESS SOLUTIONS L IMITE D 39.3 32.1% 32.10% 9 COSMIC GLOBAL L IMITE D 4.28 14.9% 14.93% 10 DATAMATICS FINANCIAL SERVICES L IMITE D (SEG.) 2.92 8.8% 8.84% 11 ECLERX SERVICES L IMITE D 86.12 103.7% 12 FLEXTRONICS SOFTWARE SYSTEMS L IMITE D (SEG.) 12.93 13.6% 13.64% 13 GENESYS INTERNATIONAL CORPORATION L IMITE D 19.17 25.7% 25.69% 14 H C L COMNET SYSTEMS & SERVICES L IMITE D (SEG.) 260.18 45.0% 15 I C R A TECHNO ANALYTICS L IMITE D (SEG.) 7.23 22.9% 22.87% 16 INFORMED TECHNOLOGIES INDIA L IMITE D 4.08 41.2% 41.24% 17 INFOSYS BPO L IMITE D 649.56 35.5% 18 ISERVICES INDIA P RIVATE L IMITE D 16.29 54.7% 19 MAPLE ESOLUTIONS L IMITE D 12.21 44.6% 20 MOLD - TEK TECHNOLOGIES L IMITE D (SEG.) 11.4 126.5% 21 R SYSTEMS INTERNATIONAL L IMITE D (SEG.) 17.34 26.1% 22 SPANCO LTD (SEG.) 35 29.2% 29.18% 23 TRITON CORP LTD 53.37 49.1% 24 VISHAL INFORMATION TECHNOLOGIES 30.6 56.2% 25 WIPRO LTD (SEG.) 939.78 35.7% 26 NITTANY OUTSOURCING SERVICES P RIVA T E L IMITE D 23.23 18.0% 17.98% 27 ACCURATE DATA CONVERTERS LTD. 4.33 58.9% ARITHMETIC MEAN 38.35% 24.97% 14 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) PLI (CASH PROFIT FOR CDR UNIT) PARTICULARS TOTAL REVENUE FROM CDR OPERATIONS 109,449,682 NOTIONAL REVENUE 1,629,003 TOTAL 111,078,685 TOTAL OPERATING COST 97,289,193 LESS : ADJUSTMENT FOR EXCESS DEPRECIATION PROVIDED 13,565,825 ADJUSTED OPERATING COST 83,723,368 OPERATING PROFITS 27,355,317 NET OPERATING PROFIT/OPERATING COST 32.67% 6.3 THE LD. DR RELIED ON THE ORDER OF THE TPO. 6 . 4 WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD ALONGWITH THE ORDER OF THE TAX AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE VARIOUS CASE LAWS AS HAS BEEN RELIED ON. WE NOTED THAT IN THIS CASE THE TPO HAS COMPUTED THE PROFIT MARGIN OF THE CDR UNIT, WHICH WAS RENDERING THE SERVICES NOT ONLY TO THE ASSOCIATED CONCERNS OUTSIDE INDIA BUT ALSO TO THE OTHER UNITS OF THE ASSESSEE COMPANY, BY TAKING THE REVENUE RECEIVED FROM THE EXPORT OF SERVICES TO THE ASSOCIATED CONCERNS AND WITHOUT TAKING ANY REVENUE INTO CONSIDERATION IN RESPECT OF THE SERVICES RENDERED BY THE CDR UNIT OF THE ASSESSEE TO THE OTHER UNIT IN GOA. WE ALSO NOTED THAT THE TPO HAS CONSIDERED THE TOTAL OPERATING COSTS OF THE CDR UNIT WHICH HAS BEEN INCURRED BY THE UNIT NOT ONLY IN RESPECT OF SERVICES RENDERED TO THE ASSOCIATED CONCERNS OUTSIDE INDIA BU T ALSO IN RESPECT OF SERVICES RENDERED TO THE UNIT IN INDIA AND ON THAT BASIS THE OPERATING PROFIT WAS WORKED OUT IN THE FOLLOWING MANNER : DESCRIPTION AMOUNT (RS.) OPERATING REVENUE S RS.10,94,49,682/ - OPERATING EXPENSES RS.9,72,89,193/ - OPERATING PROFIT (PBIT) RS.1,21,60,489/ - PBIT ON COST 12.50% 15 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) IT IS NOT DENIED IN THIS CASE THAT THE CDR UNIT WAS RENDERING SERVICES NOT ONLY TO THE ASSOCIATED ENTERPRISES OUTSIDE INDIA BUT ALSO WAS RENDERING SERVICES TO THE OTHER DIVISIONS OF THE ASSESSEE COMPANY. NO NOMINAL VALUE HAS BEEN ASSIGNED IN RESPECT OF THE SERVICES RENDERED BY THE CDR UNIT TO THE INDIAN DIVISION. THE CDR UNIT HAS RENDERED SERVICES TO THE AE UNITS ABROAD FOR 1,80,064 HRS. WHILE IN RESPECT OF GOA PLANT, SERVICES WAS RENDERED FOR 2 680 HRS. THE AVERAGE REVENUE RECEIVED BY THE CDR UNIT FROM THE ASSOCIATED ENTERPRISES ABROAD COMES TO RS. 608 /HOUR. WHEN THE TOTAL REVENUE RECEIVED FROM THE ASSOCIATED ENTERPRISES ABROAD IS RS. 10,94,49,682 / - , IF WE APPLY THE SAME RATE IN RESPECT OF THE SE RVICES RENDERED TO GOA PLANT, THE NOMINAL REVENUE WHICH SHOULD HAVE BEEN CREDITED TO CDR UNIT AND DEBITED TO THE GOA PLANT COMES TO RS. 16,29,003 / - . IN OUR OPINION, WHILE COMPUTING THE TRUE PROFIT OF A PARTICULAR DIVISION, IT IS NECESSARY THAT THE VALUE SH OULD BE ASSIGNED IN RESPECT OF SERVICES RECEIVED BY THE OTHER UNIT AND IT SHOULD BE TAKEN AS PART OF THE REVENUE OF THAT PARTICULAR UNIT. IN THIS CASE, WE NOTED THAT THE TPO HAS TAKEN THE TOTAL OPERATING COST OF THE CDR UNIT WHICH CONSISTS OF THE COST NOT ONLY IN RESPECT OF THE SERVICES RENDERED TO THE ASSOCIATED ENTERPRISES BUT ALSO IN RESPECT OF THE SERVICES RENDERED TO THE GOA PLANT BY THE CDR UNIT. SINCE THE TOTAL COST OF THE CDR UNIT HAS BEEN TAKEN, THEREFORE, THE NOTIONAL REVENUE IN RESPECT OF GOA P LANT SHOULD ALSO BE CONSIDERED WHILE COMPUTING THE NET OPERATING PROFIT. IF THE NOTIONAL REVENUE FOR RENDERING SERVICES TO THE GOA PLANT IS TAKEN INTO ACCOUNT, WE NOTED THAT THE OPERATING PROFIT ON THE BASIS OF THE FORMULA ADOPTED BY THE TPO FROM THE CDR UNIT WILL WORK OUT AS FOLLOWS : 16 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) BEFORE CONSIDERING IN HOUSE SERVICE TO GOA PLANT AFTER CONSIDERING IN HOUSE SERVICE TO GOA PLANT PARTICULARS HOURS AVERAGE PER HOUR RATE INR ASSESSEE ASSESSEE REVENUE FROM RENDERING OF ENGINEERING SUPPORT SERVICES TO AES ABROAD 180,064 608 109,449,682 109,449,682 NOTIONAL REVENUE FOR RENDERING SERVICES TO GOA PLANT 2,680 608 1,629,003 TOTAL 182,744 109,449,682 111,078,685 TOTAL OPERATING COST 97,297,948 97,297,948 OPERATING PROFITS 12,151,734 13,780,738 NET OPERATING PROFIT/ OPERATING COST 12.50% 14.16% THUS, THE CORRECT OPERATING PROFIT IN THE CASE OF THE ASSESSEE FROM CDR UNIT, IN OUR OPINION, WILL BE 1 4.16 %. THIS OPERATING PROFIT RATIO IS BASED ON THE PROFIT WHICH HAS BEEN COMPUTED AFTER CHARGING DEPRECIATION. WE NOTED THAT THERE IS NO DISPUTE SO FAR METHOD OF DETERMINING THE ALP IS CONCERNED. THE ASSESSEE AS WELL AS THE TPO BOTH APPLIED THE TNMM METHOD TO BE THE MOST APPROPRIATE METHOD. THE ASSESSEE IN THIS CASE HAS SELECTED 8 COMPARABLE COMPANIES AND HAS CALCULATED THE OPERATING PROFIT OF THESE COMPANIES @ 11.31 % BUT THE TPO DID NOT AGREE WITH THE ASSESSEE AND HAS TAKEN 27 COMPARABLE INSTANCES ON THE B ASIS OF WHICH THE ARITHMETIC MEAN OF THE OPERATING PROFIT HAS BEEN CALCULATED AT THE RATE OF 29.83 %. SO FAR THE SELECTION OF THE 16 COMPARABLE COMPANIES BY THE TPO IS CONCERNED, THE ASSESSEE DID NOT HAVE ANY OBJECTION. THE ASSESSEE HAS OBJECTION IN RESPE CT OF THE SELECTION OF 11 COMPANIES VIZ. ECLERX SERVICES LTD., HCL COMNET SYSTEMS & SERVICES LTD., INFOSYS BPO LTD., ISERVICES INDIA PVT. LTD., MAPLE ES OLUTIONS LTD., MOLD - TEK TECHNOLOGIES LTD., R SYSTEMS INTERNATIONAL LTD., TRITON CORP. LTD., VISHAL INFOR MATION TECHNOLOGIES, WIPRO LTD. AND ACCURATE DATA CONVERTERS LTD. SELECTION OF EACH COMPARABLE WILL BE DISCUSSED BY US SEPARATELY. 17 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) THE COMMON CONTENTION IN RESPECT OF COMPUTATION OF TNMM I.E. OPERATING PROFIT TAKEN BY THE LD. AR IN RESPECT OF THE COMPA RABLES IS THAT WHILE COMPUTING THE PROFIT RATIO, PROFIT PRIOR TO DEPRECIATION SHOULD BE COMPUTED AS IT WILL GIVE TRUE AND FAIR PROFIT RATIO WITHOUT BEING AFFECTED BY THE DEPRECIATION CHARGED BY EACH OF THE COMPANIES. WE NOTED THAT DIFFERENT COMPANIES HAVE ADOPTED DIFFERENT METHOD OF DEPRECIATION. IN FACT, FOR CHARGING DEPRECIATION TO THE PROFIT & LOSS ACCOUNT THERE ARE DIFFERENT PREVALENT RECOGNIZED METHODS OF DEPRECIATION. SOME ASSESSEE OPT FOR STRAIGHT LINE METHOD, SOME OPT FOR WRITTEN DOWN METHOD AND SOME OPT FOR SUM OF DIGIT METHOD OR EVEN REPLACEMENT COST METHOD. SELECTION OF EACH METHOD WILL AFFECT THE RATE AND QUANTUM OF DEPRECIATION EVEN IF THE NATURE OF THE ASSET IS THE SAME AND ULTIMATELY, THE NET PROFIT DERIVED BY THE COMPANY WILL VARY. FOR D ETERMINING THE FAIR AND TRUE PROFIT, IN OUR OPINION, IT IS APPROPRIATE THAT THE EFFECT OF THE DEPRECIATION MUST BE EXCLUDED OUT OF THE OPERATING PROFIT FOR DETERMINING THE OPERATING PROFIT RATIO. THEREFORE, THE BEST WAY OF COMPUTING THE OPERATING PROFIT, IN OUR OPINION, WILL BE TO COMPUTE THE PROFIT BEFORE DEPRECIATION IN RESPECT OF EACH OF THE COMPANY. THIS WILL TAKE OUT THE INCONFORMITY OR THE VARIATION IN THE PROFIT LEVEL OF THE COMPARABLES ARISING DUE TO ADOPTION OF DIFFERENT METHOD OF CHARGING DEPREC IATION. WE HAVE GONE THROUGH THE ORDER OF THE BOMBAY BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. REUTERS INDIA 24 ITR (TRIB) 231 (MUM) AS HAS BEEN RELIED ON BY THE LD. AR. WE NOTED THAT THE TRIBUNAL IN THIS CASE HAS ADOPTED THE CASH PROFIT/OPERATING C OST AS THE CORRECT PROFIT LEVEL INDICATOR UNDER THE TNMM METHOD. IF THE NET OPERATING PROFIT RATIO IS COMPUTED IN RESPECT OF THE CDR UNIT BEFORE DEPRECIATION, IT WILL BE AS UNDER : PARTICULARS TOTAL REVENUE FROM CDR OPERATIONS 109,449,682 NOTIONAL REVENUE 1,629,003 TOTAL 111,078,685 TOTAL OPERATING COST 97,289,193 LESS : ADJUSTMENT FOR EXCESS DEPRECIATION PROVIDED 13,565,825 ADJUSTED OPERATING COST 83,723,368 OPERATING PROFITS 27,355,317 NET OPERATING PROFIT/OPERATING COST 32.67% 18 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) 6.4.1 NOW, WE WILL DEAL WITH EACH OF THE COMPANIES WHICH THE ASSESSEE CLAIMS TO BE EXCLUDED FROM THE COMPARABLES : I) ECLERX SERVICES LTD. : - THE MAIN OBJECTION OF THE ASSESSEE IS THAT THIS COMPANY DERIVES ABNORMAL PROFIT. THE OPERATING PROFIT OF THIS COMPANY COMES TO 89.33% ON A TURNOVER OF RS.86.12 CRORES. AFTER HEARING THE RIVAL SUBMISSIONS, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) GIVING THE RELIEF TO THE ASSESS EE AS WE NOTED THAT THE AVERAGE OPERATING PROFIT IN RESPECT OF THE 27 COMPANIES SELECTED BY THE TPO IS ONLY RS.30.21% BUT THIS COMPANY HAS DERIVED AROUND 3 TIMES THE AVERAGE PROFIT OF THE 27 COMPANIES. THIS CLEARLY DENOTES THAT THE COMPANY HAS DERIVED ABN ORMAL PROFIT. WE, THEREFORE, CONFIRM THE ORDER OF CIT(A) DELETING THIS COMPANY OUT OF THE COMPARABLES. II) HCL COMNET SYSTEMS & SERVICES LTD. : - WE FIND FORCE IN THE SUBMISSION OF THE LD. AR THAT THIS COMPANY CANNOT BE A COMPARABLE AS THE TURNOVER OF THIS COMPANY IS RS.260.18 CRORES WHILE IN THE CASE OF THE ASSESSEE, THE TURNOVER IS AROUND RS.11 CRORES ONLY. WHILE MAKING THE SELE CTION OF COMPARABLES, THE TURNOVER FILTER, IN OUR OPINION, HAS TO BE THE BASIS FOR SELECTION. A COMPANY HAVING TURNOVER OF RS.11 CRORES CANNOT BE COMPARED WITH A COMPANY WHICH IS HAVING TURNOVER OF RS. 260 CRORES WHICH IS MORE THAN 23 TIMES THE TURNOVER O F THE ASSESSEE. THIS COMPANY CANNOT BE REGARDED TO BE IN EQUAL SIZE TO THE ASSESSEE. WE, ACCORDINGLY, DIRECT THE AO TO EXCLUDE THIS COMPANY OUT OF THE COMPARABLES. III) INFOSYS BPO LTD. : - IN THIS CASE ALSO WE NOTED THE TURNOVER IN RESPECT OF THIS COM PANY IS RS.649.56 CRORES WHILE THE TURNOVER OF THE ASSESSEE COMPANY IS AROUND RS. 11 CRORES WHICH IS MUCH MORE THAN 65 TIMES OF THE ASSESSEES TURNOVER. WE, THEREFORE, DO NOT FIND ANY ILLEGALITY OR INFIRMITY IN THE ORDER OF CIT(A) IN EXCLUDING THIS COMPAN Y OUT OF THE COMPARABLES. ACCORDINGLY, WE CONFIRM THE ORDER OF THE CIT(A). 19 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) IV) ISERVICES INDIA PVT. LTD. : - WE NOTED THAT THE TURNOVER OF THIS COMPANY IS AROUND RS.16.29 CRORES WHICH IS NEARBY THE TURNOVER OF THE ASSESSEE BUT THE OPERATING MARGIN OF THIS COMPANY IS 49.4% WHILE THE TPO HAS CALCULATED THE INDUSTRY AVERAGE @ 30.21% WHICH IS 160% HIGHER THAN THE INDUSTRY AVERAGE. IN THE CASE OF VISHAL INFORMATION TECHNOLOGIES THE CIT(A) EXCLUDED THE COMPANY FROM THE COMPARABLES ON THE BASIS OF SUPER PROFIT. IN THE CASE OF VISHAL INFORMATION TECHNOLOGIES THE PROFIT IS 51.19%. IN THE A.Y 2006 - 07 WHILE DISPOSING OFF THE APPEAL OF THE ASSESSEE IN ITA NOS. 2&5/PNJ/2013, THIS TRIBUNAL VIDE ITS ORDER DT. 17.4.2014 HAS TAKEN THE VIEW THAT COMPANIES EARNING SUPER PR OFIT CANNOT BE PART OF THE COMPARABLES. SINCE THE PROFIT EARNED IS MORE THAN 160% OF THE INDUSTRY AVERAGE, THIS COMPANY CANNOT, IN OUR OPINION, BE TAKEN AS A COMPARABLE, ESPECIALLY WHEN THE INDUSTRY AVERAGE IS ALSO BASED ON THE BASIS OF CALCULATION MADE B Y THE TPO BY TAKING INTO ACCOUNT THOSE COMPANIES WHICH ARE HAVING MANIFOLD TURNOVER THAN THE ASSESSEE AND HAS ALSO DERIVED PROFIT UPTO 113%. WE, ACCORDINGLY, DELETE THIS COMPANY OUT OF THE COMPARABLES. V) MAPLE ESOLUTIONS LTD. : - WHILE DECIDING THE APPE AL OF THE ASSESSEE FOR A.Y 2006 - 07 IN ITA NOS. 2 & 5/PNJ/2013, THIS TRIBUNAL HAS EXCLUDED THIS COMPANY OUT OF THE COMPARABLES BY HOLDING AS UNDER VIDE ITS ORDER DT. 17.4.2014 : I) MAPLE ESOLUTIONS LTD. : - TPO HAS CONSIDERED MAPLE ESOLUTIONS LTD. AS A COMPARABLE AND COMPUTED THE MARGIN IN RESPECT OF THIS COMPANY @ 33.66%. WE NOTED THAT THE HON'BLE DELHI TRIBUNAL IN THE CASE OF ACIT VS. CRM SERVICES INDIA PVT. LTD., 14 TAXMANN.COM 96 HAS HELD THAT THIS COMPANY COULD NOT BE SELECTED AS COMPARA BLE FOR ITES COMPANIES AS THE MANAGEMENT OF THIS COMPANY WAS TAINTED ONE AS THE DIRECTORS OF THE COMPANY WERE INVOLVED IN A FRAUD. THE BUSINESS REPUTATION OF THE RASTOGI GROUP WHICH OWNS MAPLE ESOLUTIONS WAS IN SERIOUS INDICTMENT. IN VIEW OF THE QUESTION MARK ON THE REPUTATION OF ITS OWNERS, ALBEIT FOR EARLIER YEARS, IT WOULD BE UNSAFE TO TAKE THEIR RESULTS FOR COMPARISON OF PROFITABILITY OF THE ASSESSEE. IN A.Y 2006 - 07 WE NOTED THAT THE PROFIT MARGIN HAS BEEN TAKEN BY THE TPO AT 28.75%. WHEN THE ASSESS EE WENT IN APPEAL BEFORE CIT(A), CIT(A) HAS EXCLUDED THIS COMPANY FOR THE PURPOSE OF COMPARISON. NO COGENT MATERIAL OR EVIDENCE WAS 20 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) BROUGHT TO OUR KNOWLEDGE BY THE LD. DR HOW THIS COMPANY IS NOT TAINTED ONE. THE DECISION OF THE CO - ORDINATE BENCH IS BIND ING ON US. WE, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH EXCLUDE THIS COMPANY FROM THE COMPARABLES. RESPECTFULLY FOLLOWING THE DECISION OF THIS TRIBUNAL IN A.Y 2006 - 07, WE EXCLUDE THIS COMPANY FROM THE COMPARABLES. VI) MOL D - TEK TECHNOLOGIES LTD. : - AFTER HEARING THE RIVAL SUBMISSIONS, WE NOTED THAT EVEN THOUGH THE TURNOVER OF THIS COMPANY IS RS.11.4 CRORES BUT THE PROFIT DERIVED IS TOO HIGH I.E. 113.49% I.E. AROUND 3.7 TIMES THE AVERAGE PROFIT AS HAS BEEN WORKED OUT. A CO MPANY WHICH IS EARNING SUPER PROFIT, IN OUR OPINION, CANNOT BE REGARDED TO BE A COMPARABLE. EVEN WE NOTED THAT THIS COMPANY IS PROVIDING SERVICES IN RESEARCH AND ENGINEERING SEGMENT WHICH IS FUNCTIONALLY DIFFERENT FROM THE SERVICES BEING RENDERED BY THE A SSESSEE COMPANY. WE, ACCORDINGLY, CONFIRM THE ACTION OF CIT(A) EXCLUDING THIS COMPANY OUT OF THE COMPARABLES. VII) R SYSTEMS INTERNATIONAL LTD. : - AFTER HEARING THE RIVAL SUBMISSIONS, WE NOTED THAT THE TURNOVER OF THIS COMPANY IS RS.17.34 CRORES AND THE REFORE ON THE BASIS OF TURNOVER FILTER IT CAN BE REGARDED TO BE A COMPARABLE COMPANY. THE NATURE OF THE BUSINESS OF THIS COMPANY WAS ALSO NOT DISPUTED. THE ONLY OBJECTION WHICH HAS BEEN RAISED BY THE ASSESSEE FOR EXCLUDING THIS COMPANY OUT OF THE COMPARA BLES IS THAT THE AO WHILE WORKING OUT THE OPERATING PROFIT RATIO EXCLUDED THE PROVISION FOR DOUBTFUL DEBT OUT OF THE EXPENSES. CIT(A) DID NOT ALLOW THE RELIEF TO THE ASSESSEE. WE HAVE PERUSED THE ORDER OF THE CIT(A). WE DO NOT FIND ANY ILLEGALITY OR INF IRMITY IN THE FINDING OF CIT(A) AS NO SUCH PLEA HAS BEEN ADVANCED BY THE ASSESSEE BEFORE THE CIT(A) POINTING OUT THE MISTAKE IN THE COMPUTATION OF THE OPERATING PROFIT OF THIS COMPANY. EVEN OTHERWISE ALSO, TAKING OF THIS COMPANY AS A COMPARABLE, IN OUR OP INION, WILL NOT MAKE ANY DIFFERENCE AS THE PROFIT SHOWN IN RESPECT OF THIS COMPANY IS 20.18% WHICH IS 21 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) MUCH BELOW THE ARITHMETIC MEAN COMPUTED BY THE CIT(A) I.E. 23.3%. WE, THEREFORE, REJECT THE SUBMISSION OF THE LD. AR. VIII) TRITON CORPORATION LTD. : - WE FIND FORCE IN THE SUBMISSION OF THE LD. AR ON THE BASIS OF THE DECISION OF THE DELHI ITAT IN THE CASE OF ACIT VS. CRM SERVICES INDIA PVT. LTD., 14 TAXMANN.COM 96 WHEREIN IT WAS HELD THAT M/S. TRITON CORPORATION SHOULD BE DELETED AS COMPARABLE AS IT HAS TAINTED MANAGEMENT. BOTH THE COMPANIES, M/S. MAPLE ESOLUTIONS LTD. AND THIS COMPANY, BELONG TO THE SAME GROUP. WE HAVE ALREADY EXCLUDED M/S. MAPLE E - SOLUTIONS LTD. NOT ONLY IN THIS ASSESSMENT YEAR BUT IN THE PRECEDING A.Y OUT OF THE COMPARABLES. RESPEC TFULLY FOLLOWING OUR DECISION IN THE EARLIER YEAR, AS HAS BEEN REPRODUCED IN THE PRECEDING PARAGRAPH, WE EXCLUDE THIS COMPANY OUT OF THE COMPARABLES ACCEPTING THE PLEA OF THE LD. AR. IX) VISHAL INFORMATION TECHNOLOGIES : - THE OBJECTION OF THE ASSESSEE IS THAT THIS COMPANY IS OPERATING UNDER OUTSOURCING BUSINESS MODEL. ITS SALARY COST IS TOO LESS AS COMPARED TO THE DATA ENTRY CHARGES APPEARING IN THE FINANCIALS. WE NOTED THAT THE CIT(A) HAS DIRECTED TO EXCLUDE THIS COMPANY OUT OF THE COMPARABLES AS THE O PERATING PROFIT RATIO OF THIS COMPANY IS 51.19%. EVEN THOUGH THIS COMPANY FULFILS THE TURNOVER FILTER, THE LD. DR THOUGH VEHEMENTLY RELIED ON THE ORDER OF THE TPO, BUT COULD NOT BRING TO OUR KNOWLEDGE ANY ILLEGALITY IN THE FINDING OF THE CIT(A) WHEN UNDER PARA 67 HE EXCLUDES THIS COMPANY FROM THE COMPARABLES TREATING THAT THIS COMPANY HAS DERIVED ABNORMALLY HIGH MARGIN AS COMPARED TO THE TPOS AVERAGE OF 30.21%. WE, THEREFORE, CONFIRM THE FINDING OF CIT(A) EXCLUDING THIS COMPANY OUT OF THE COMPARABLES. X) WIPRO LTD. : - AFTER HEARING THE RIVAL SUBMISSIONS, WE NOTED THAT THE CIT(A) APPLYING THE TURNOVER FILTER HAS EXCLUDED THIS COMPANY OUT OF THE COMPARABLES. THE TURNOVER REPORTED IN THE CASE OF WIPRO LTD. IS RS. 939.78 22 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) CRORES WHILE IN THE CASE OF THE ASSESSE E THE TURNOVER IS AROUND RS. 11 CRORES. THEREFORE, ON THE BASIS OF THE TURNOVER FILTER ITSELF THIS COMPANY CANNOT BE REGARDED TO BE COMPARABLE TO THE ASSESSEE COMPANY AND ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE FINDING OF CIT(A) WHILE HE EXCLUDED THIS COMPANY ON THE TURNOVER CRITERIA FOLLOWING THE DECISION OF THIS TRIBUNAL IN : - SONY INDIA (P) LTD. VS. DCIT, 114 ITD 448 DELHI, E - GAIN COMMUNICATION, 2008 TIOL 282 ITAT (PUNE) DELOITTE CONSULTING INDIA PVT. LTD. VS. DCIT, ITA NO. 1082/HYD/2010 GENISYS INTEGRATING SYSTEM (INDIA) (P.) LTD. VS DCIT, 53 SOT 159 (BANG) XI) ACCURATE DATA CONVERTERS LTD. : - AFTER HEARING THE RIVAL SUBMISSIONS, WE NOTED THAT THIS COMPANY HAS BEEN EXCLUDED OUT OF THE COMPARABLES BY THE CIT(A). IN OUR OPINION, NO INTER FERENCE IS CALLED FOR IN THE ORDER OF CIT(A) AS WE NOTED THAT THE OPERATING PROFIT IN THE CASE OF THIS COMPANY IS 50.68% WHICH IS MUCH HIGHER THAN THE TPOS AVERAGE OF 3 0.21%. THEREFORE, THIS COMPANY, IN OUR OPINION, CAN BE REGARDED TO BE A SUPER PROFIT MA KING COMPANY AND WE, THEREFORE, CONFIRM THE ACTION OF CIT(A) EXCLUDING THIS COMPANY OUT OF THE COMPARABLES. 6.4.2 IN VIEW OF THE AFORESAID DISCUSSION, WE CONFIRM THE ORDER OF CIT(A) FOR EXCLUSION OF 6 COMPANIES OUT OF THE COMPARABLES. OUT OF THE 5 COMPAN IES FOR WHICH THE ASSESSEE HAS ASKED FOR RELIEF BEFORE US AND REQUESTED TO EXCLUDE THESE COMPANIES ALSO FROM THE COMPARABLES, WE FURTHER EXCLUDE 3 COMPANIES OUT OF THE COMPARABLES AND SUSTAIN THE ACTION OF CIT(A) TO TREAT R SYSTEMS INTERNATIONAL LTD. TO BE A COMPARABLE COMPANY. WE NOTED THAT EXCLUSION OR NON - EXCLUSION OF R SYSTEMS INTERNATIONAL LTD. WILL NOT HAVE MUCH IMPACT ON THE CASH PLI BECAUSE IN THE CASE OF THIS COMPANY, THE CASH PLI COMES TO 26.1% AS COMPUTED BY THE ASSESSEE AND FILED BEFORE US WHIL E THE AVERAGE CASH PLI IN THE 23 ITA NOS. 3 & 6/PNJ/2013 (ASST. YEAR : 2007 - 08) CASE OF THE ASSESSEE COMES TO 32.67%. THE ASSESSEE HAS GIVEN AVERAGE CASH PLI OF ALL THE COMPARABLES AT 24.97% WHICH IS MUCH BELOW THE CASH PLI WORKED OUT IN THE CASE OF THE ASSESSEE AT 32.67%. THE CASH PLI EARNED BY THE ASE SSEE IS MUCH MORE THAN THE AVERAGE OF THE CASH PLI IN THE CASE OF THE OTHER COMPARABLES. THEREFORE, IN OUR OPINION, NO ADDITION ON THIS ACCOUNT CAN BE SUSTAINED IN THE CASE OF THE ASSESSEE. WE, ACCORDINGLY, SET ASIDE THE ORDER OF CIT(A) AND DELETE THE AD DITION SUSTAINED BY CIT(A). THUS, GROUND NOS. 3 TO 6 IN ASSESSEES APPEAL IS ALLOWED WHILE GROUND NOS. 1 - 3 IN REVENUES APPEAL STANDS DISMISSED. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED WHILE THE APPEAL FILED BY THE REVENUE STANDS DISMISSED. 8. ORDER PRONOUNCED IN THE OPEN COURT ON 23 .05.2014. SD/ - (D.T.GARASIA) JUDICIAL MEMBER SD/ - (P.K. BANSAL) ACCOUNTANT MEMBER PLACE : PANAJI / GOA DATED : 23 .05. 201 4 *SSL* COPY TO : (1) APPELLANT (2) RESPONDENT (3) CIT CONCERNED (4) CIT(A) (5) D.R (6) GUARD FILE TRUE COPY, BY ORDER