Actis Global Services Pvt. Ltd., New Delhi V. ITO, New Delhi

ITA 30/DEL/2015

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 1839 (ITAT-DELHI)
• Duration Of Justice: 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 09-07-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 02-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN; PARVINDER KAUR
• Assessee Lawyers: AJIT TOLANI
• Keywords: Business income; Transfer pricing; Residential status; International transaction
• Section: 92C; 92D; 234B; 10B

Judgement Text

1 ITA 30/DEL/2015 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI C.M. GARG : JUDICIAL MEMBER ITA NO. 30/DEL/2015 ASSTT. YR: 2010-11 ACTIS GLOBAL SERVICES PVT. LTD., VS. INCOME-TAX OF FICER, MIRA, THE CORPORATE SUITES, COY. WARD 1(3), NEW D ELHI. BLOCK D, GROUND FLOOR, 1 & 2 ISHWAR NAGAR, NEW DELHI. PAN: AAMFA 2371 E ( APPLICANT ) ( RESPONDENT ) APPLICANT BY : SHRI AJIT TOLANI CA & SHRI ATUL JAIN CA RESPONDENT BY : SHRI PEEYUSH JAIN CIT(DR) & SMT. PARVINDER KAUR SR. DR DATE OF HEARING: 15-10-2015 DATE OF ORDER: 10-12-2015. OR D E R PER S.V. MEHROTRA, A.M. : THIS APPEAL, PREFERRED BY THE ASSESSEE, IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 26.11.2014 PASSED BY THE ASSESSING OFFI CER U/S 143(3)/R.W.S. 144C OF THE INCOME-TAX ACT, 1961, PERTAINING TO AY 2010-11. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HA D FILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 20,29,360/-. THE AO N OTICED THAT ASSESSEE HAD UNDERTAKEN INTERNATIONAL TRANSACTIONS WITH ITS AES TO THE TUNE OF MORE THAN RS. 15 CRORES. THEREFORE, IN ACCORDANCE WITH THE PROVISION S OF SECTION 92CA OF THE 2 ITA 30/DEL/2015 INCOME-TAX ACT, THE INTERNATIONAL TRANSACTIONS, ENT ERED INTO BY THE ASSESSEE WITH THE AES WERE REFERRED TO THE TPO FOR DETERMINATION OF A LP OF THE SAID TRANSACTIONS. 3. LD. TPO, AFTER CONSIDERING THE TP REPORT AND TAK ING INTO CONSIDERATION THE FUNCTIONAL PROFILE OF THE ASSESSEE, DETERMINED THE ALP OF SERVICES RENDERED AT RS. 22,24,02,990/- AND SINCE THE PRICE RECEIVED WAS RS. 18,03,75,500/-, DIRECTED FOR ADJUSTMENT OF RS. 4,20,27,490/-. THE OTHER ADJUSTME NT DIRECTED BY LD. TPO WAS ON ACCOUNT OF ACCRUAL OF INTEREST ON RECEIVABLES, AGGR EGATING TO RS. 79,98,190/-. THE ASSESSEE FILED OBJECTIONS BEFORE LD. DRP. LD. DRP I SSUED DIRECTIONS ON THE BASIS OF WHICH THE AO PASSED THE FINAL ASSESSMENT ORDER AND MADE TOTAL TP ADJUSTMENT OF RS. 2,67,22,563/-. BEING AGGRIEVED WITH THE ASSESSM ENT ORDER, THE ASSESSEE IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL: 1. THE ASSESSMENT ORDER PASSED BY THE INCOME TAX O FFICER, COY. WARD 1(3), NEW DELHI [LEARNED ASSESSING OFFICE R (LD. AO')] PURSUANT TO DIRECTIONS OF THE HON'BLE DISPUTE RESOLUTION PANEL (HON'BLE DRP') IS BAD IN LAW. 2. THE HON'BLE DRP ERRED BOTH ON THE FACTS AND IN L AW, IN CNFIRMING THE ADDITION TO THE EXTENT OF RS. 26,722, 563 TO THE INCOME OF THE APPELLANT BY HOLDING THAT ITS INTERNA TIONAL TRANSACTION PERTAINING TO PROVISION OF INFORMATION TECHNOLOGY ENABLED SERVICES DO NOT SATISFY THE ARM'S LENGTH PR INCIPLE PRESCRIBED UNDER THE INCOME TAX ACT, 1961 ('THE ACT '). 3 ON FACTS AND IN LAW, THE HON'BLE DRP, LD. AO AND THE LEARNED TRANSFER PRICING OFFICER-L (5) (HEREINAFTER REFERRED TO AS 'LD. TPO') ERRED IN DISREGARDING THE ASSESSEE'S USE OF MULTIPLE YEAR! PRIOR YEARS' DATA IN CONTRAVENTION OF THE PRO VISION OF SECTION 92C OF THE ACT READ WITH RULE 10B AND RULE 10D(4) OF THE INCOME TAX RULES, 1962 ('RULES'). 3 ITA 30/DEL/2015 4 ON FACTS AND IN LAW, THE HON'BLE DRP, LD. AO AND LD. TPO ERRED IN DISREGARDING THE DOCTRINE OF IMPOSSIBI LITY OF PERFORMANCE IN CONTRAVENING SECTION 92D OF THE ACT READ WITH RULE 10D(4) OF THE RULES, WHICH MANDATE THE USE OF CONTEMPORANEOUS DATA FOR THE DETERMINATION OF ALP O F INTERNATIONAL TRANSACTIONS. 5. ON FACTS AND IN LAW, THE HON'BLE DRP ERRED IN CO NFIRMING THE ACTION OF THE LD. TPO OF MODIFYING/ ADDING THE SELECTION FILTERS, CONSEQUENTLY REJECTING THE COMPARABLE COMP ANIES IDENTIFIED IN THE TP DOCUMENTATION AND IGNORING THE PROVISIONS OF RULE 10B(2). IN DOING SO, THE HON'BLE DRP ERRED IN :- 5.1 REJECTING AOK IN-HOUSE BPO SERVICES LIMITED; 5.2 REJECTING ADITYA BIRLA MINACS WORLDWIDE LTD; 5.3 REJECTING CAMEO CORPORATE SERVICES LTD; 5.4 REJECTING DELTA SERVICES (I) PVT LTD; 5.5 REJECTING KNM SERVICES PVT LTD; 5.6 REJ~NG SPARSH BPO SERVICES LTD; AND 5.7 REJECTING TIMEX GROUP INDIA LTD. 6 ON FACTS AND IN LAW, THE HON'BLE DRP, LD. AO AND LD. AO ERRED IN SELECTION OF INFOSYS BPO LIMITED, WHICH IS NOT COMPARABLE TO THE ASSESSEE IN TERMS OF FUNCTIONS PE RFORMED, ASSETS EMPLOYED AND RISK ASSUMED. 7 ON FACTS AND IN LAW, THE HON'BLE DRP, LD. AO AND LD. TPO ERRED IN SELECTION OF ECLERX SERVICES PRIVATE L IMITED WHICH IS NOT COMPARABLE TO THE ASSESSEE IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED. 8 ON FACTS AND ,IN LAW, THE HON'BLE DRP, LD. AO AN D LD. TPO ERRED IN NOT ALLOWING A RISK ADJUSTMENT UNDER RULE 10B(1)(E) FOR DETERMINATION OF THE ALP TO ACCO UNT FOR THE DIFFERENCE IN THE RISK PROFILE OF THE APPELLANT, A LOW-RISK SERVICE PROVIDER, AND OF THE COMPARABLE COMPANIES, THAT ARE FULL-FLEDGED RISK BEARING ENTREPRENEURS. 4 ITA 30/DEL/2015 9. ON FACTS AND IN LAW, THE HON'BLE DRP, LD. AO AN D LD. TPO ERRED IN TREATING THE OUTSTANDING RECEIVABLES F ROM AE AS 'UNSECURED LOANS' AND IMPUTING INTEREST AT THE RATE EQUAL TO PRIME LENDING RATE OF SBI PLUS 150 BASIS POINTS I.E 13.25%. 10. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SE CTION 271 (1)( C) OF THE ACT. 11. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. AO ERRED IN LEVYING INTEREST UNDER SECTION 234B AND 234D OF THE ACT. 12 ON FACTS AND IN LAW THE LD. AO MADE COMPUTATION AL ERRORS IN CALCULATING THE TAX PAYABLE AND INTEREST UNDER SECTION 234B AND 234D OF THE ACT. 4. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN INDIAN COMPANY AND SUBSIDIARY OF ACTIS LLP.UK. THE GROUP WAS ESTABLIS HED AS A PRIVATE EQUITY INVESTMENT FUND. 99.99% SHARES OF COMPANY WERE HEL D BY ACTIS INTERNATIONAL LTD. AND THE BALANCE ONE SHARE WAS HELD BY ACTIS AS SETS LTD. THE FUNCTION OF THE ASSESSEE IN THE TP DOCUMENT HAD BEEN SUMMARIZED AS A BACK OFFICE SERVICE PROVIDER TO THE AE ACTIS CAPITAL LLP. SERVICES PROV IDED WERE STATED TO BE FINANCIAL ACCOUNTING FUNCTION, FUND ACCOUNTING FUNC TION, HR SUPPORT FUNCTION, IT SUPPORT FUNCTION ETC. THUS, THE FUNCTIONS OF THE AS SESSEE PRIMARILY WERE OF PROVIDING IT ENABLED SERVICES SUCH AS BACK OFFICE O PERATIONS/ PROCESSING CENTRES, BILL PAYING CENTRES, WEB ENABLED SERVICES, EMAIL SU PPORT, IT HELP DESK ETC. TO THE GROUP ENTITY. 5. THE INTERNATIONAL TRANSACTIONS, ENTERED DURING T HE YEAR, WERE AS UNDER: I. PROVISION OF BACK OFFICE SUPPORT SERVICE RS. 16 ,38,25,500/- II. REIMBURSEMENT OF EXPENSES PAID RS. 3,06,755/- 5 ITA 30/DEL/2015 III. REIMBURSEMENT OF EXPENSES RECEIVED RS. 3,20,9 44/- 6. ASSESSEE HAD ADOPTED TNMM METHOD TO BE THE MOST APPROPRIATE METHOD FOR BENCH MARKING THE INTERNATIONAL TRANSACTION. THE PL I WAS OP/OC. IN THE PRESENT APPEAL THERE IS NO DISPUTE ON THESE TWO ASPECTS AND FURTHER THERE IS NO DISPUTE AS REGARDS THE ALP OF REIMBURSEMENT OF EXPENSES PAID A ND REIMBURSEMENT OF EXPENSES RECEIVED. THE ADJUSTMENT HAD PRIMARILY BEE N MADE ON ACCOUNT OF PRICE RECEIVED FOR SERVICES PROVIDED BY ASSESSEE. 7. IN ORDER TO JUSTIFY ALP, THE ASSESSEE HAD ADOPTE D A SET OF 14 COMPARABLES WITH AN AVERAGE OF 12.55% AS AGAINST ASSESSEES OWN MARGIN OF 10%. THE ASSESSEE HAD USED MULTIPLE YEAR DATA IN ITS TP DOCUMENTS. TH E AO, AFTER CONSIDERING THE ASSESSEES TP REPORT, ISSUED SHOW CAUSE NOTICE, WHI CH IS REPRODUCED AT PAGES 3 TO 11 OF LD. TPOS ORDER. 8. WHILE ISSUING SHOW CAUSE NOTICE, LD. TPO ACCEPTE D THE FILTER AS APPLIED BY THE ASSESSEE, BUT FURTHER PROPOSED TO APPLY FOLLOWI NG FILTERS: - COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 20 09-10 ARE EXCLUDED. - COMPANIES WHOSE ITES INCOME IS LESS THAN RS.5 CR. A RE EXCLUDED. - COMPANIES WHOSE REVENUE FROM ITES IS LESS THAN 75% OF THE TOTAL OPERATING REVENUES ARE EXCLUDED. - COMPANIES HAVING MORE THAN 25% RELATED PARTY TRANSA CTIONS (SALES AS WELL AS EXPENDITURE COMBINED) OF THE SALE S ARE EXCLUDED. - COMPANIES WHO HAVE EXPORT SALES LESS THAN 25% OF TH E SALES FROM ITES ARE EXCLUDED. - COMPANIES WHO HAVE DIMINISHING REVENUES/PERSISTENT LOSSES FOR THE LAST THREE YEARS UP TO AND INCLUDING FY 200 9-10 ARE EXCLUDED. 6 ITA 30/DEL/2015 - COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING (L E. NOT MARCH 31,2010) OR DATA OF THE COMPANY DOES NOT FALL WITHIN 12 MONTH PERIOD I.E. 01.04.2009 TO 31.03.2010, ARE REJECTED. - COMPANIES THAT ARE FUNCTIONALLY DIFFERENT FROM THE TAXPAYER ARE EXCLUDED. - COMPANIES THAT ARE HAVING PECULIAR ECONOMIC CIRCUMS TANCES ARE EXCLUDED. 9. ON THE BASIS OF THESE FILTERS, APPLIED BY LD. TP O, LD. TPO REJECTED 10 COMPARABLES SELECTED BY ASSESSEE. THIS REJECTION WA S MAINLY ON ACCOUNT OF EXCLUDING THOSE COMPANIES WHICH HAD EXPORT SALES LE SS THAN 25% OF THE SALES. THE COMPARABLES SELECTED BY ASSESSEE IN THE TP STUDY AN D THE REMARKS OF THE LD. TPO ON VARIOUS COMPARABLES, WERE AS UNDER: S. NO. NAME OF THE COMPANY AVERAGE (%) REMARKS 1 AOK INHOUSE BPO SERVICES LTD. 12.58% REJECTED, AS NOT FULFILLING THE FILTERS 2 ADITYA BIRLA MINACS WORLDWIDE LTD. 8.06% REJECTED , AS NOT FULFILLING THE FILTERS 3 CAMEO CORPORATE SERVICES LTD. 9.77% REJECTED, AS NOT FULFILLING THE FILTERS 4 COSMIC GLOBAL LTD. 34.14% ACCEPTED AS IT QUALIFIE S ALL THE FILTERS PROPOSED BY TPO 5 DELTA SERVICES (I) PVT. LTD. 6.67% REJECTED, AS NOT FULFILLING THE FILTERS 6 INFORMED TECHNOLOGIES LTD. 12.01% THE COMPANY AHS ITES INCOME LESS THAN 75%. HENCE REJECTED 7 INFOSYS BPO LTD. 24.29% 8. KNM SERVICES PVT. LTD. . 13.69% REJECTED, AS NOT FULFILLING THE FILTERS 9 OPTIMUS GLOBAL SERVICES LTD. -1.85% REJECTED, AS NOT FULFILLING THE FILTERS 10 SPARSH BPO SERVICES LTD. 5.97% REJECTED, AS NOT FULFILLING THE FILTERS 11 CROSDOMAIN SOLUTIONS PVT. LTD. 28.32% MODIFIED BY THE LATEST DATA AS PER AVAILABLE WITH TPO 12 OMEGA HEALTHCARE MANAGEMENT SERVICES PVT. LTD. 9.34% 13 INHOUSE PRODUCTIONS LTD. 4.32% MODIFIED BY THE LATEST DATA AS PER AVAILABLE WITH TPO 14 TIMES GROUP INDIA LTD. 12.55% REJECTED, AS NOT F ULFILLING THE FILTERS 10. BEFORE LD. TPO THE ASSESSEE HAD REQUESTED FOR EXCLUSION OF INFOSYS BPO LTD., WHICH WAS NOT ACCEPTED BY LD. TPO OBSERVING T HAT MERE LARGE TRANSACTIONS CANNOT BE AGROUND FOR REJECTION, WHEN THE COMPARABL E HAD PASSED ALL THE FILTERS. 7 ITA 30/DEL/2015 11. AS REGARDS ASSESSEES PLEA OF REJECTING CROSSD OMAIN PVT. LTD., LD. TPO POINTED OUT THAT SINCE THE DATA FOR FINANCIAL YEAR 2009-10 WAS AVAILABLE, THEREFORE, THE PLEA OF ASSESSEE COULD NOT BE ACCEPTED. 12. THE FINAL SET OF COMPARABLES, SELECTED BY LD. T PO WAS AS UNDER: SL. NO. COMPANY PBIT/COST (%) 1 CALIBER POINT BUSINESS SOLUTIONS LTD. 11.4 2 COSMIC GLOBAL LTD. 16.59 3 INHOUSE PRODUCTIONS LTD. 17.3 4 CROSSDOMAIN SOLUTIONS PVT. LTD. 19.66 5. INFOSYS BPO LTD. 31.61 6. ACROPETAL TECHNOLOGY LTD. (SEGMENT) 33.92 7 ECLERX SERVICES PVT. LTD. 42.14 8 GENESYS INTERNATIONAL 112.4 AVG 35.63 13. LD. TPO HAD, ACCORDINGLY, DETERMINED THE ALP OF PROVISION OF BACK OFFICE SUPPORT SERVICE AS UNDER: OPERATING COST 16,39,77,726 ARMS LENGTH MARGIN 35.53% OF THE OC ARMS LENGTH PRICE (ALP) 22,19,11,057 PRICE RECEIVED 18,03,75,500 SHORTFALL BEING ADJUSTMENT U/S 92CA 4,15,35,557 14. AS REGARDS THE CONSEQUENT ADJUSTMENT ON ACCOUNT OF NON-RECEIPT OF INTEREST ON AMOUNT RECEIVABLE FROM AE, LD. TPO OBSERVED THA T AN AMOUNT OF RS. 5,90,80,860/- WAS DUE FROM AE AT THE END OF THE FIN ANCIAL YEAR. LD. TPO, AFTER CONSIDERING THE ASSESSEES SUBMISSIONS, OBSERVED TH AT THE ARGUMENT THAT NONE OF THE INVOICES OUTSTANDING MORE THAN SIX MONTHS, WAS FOUND CONTRARY TO THE FACTS. HE OBSERVED THAT FROM BOOKS OF ACCOUNT IT IS EVIDEN T THAT EVERY SINGLE DAY OF THE YEAR THERE HAS BEEN SOME OUTSTANDING TOWARDS AE. HE BENCH MARKED THE TRANSACTIONS BY APPLYING PRIME LENDING RATE OF SBI PLUS 500 BPS AND, ACCORDINGLY, 8 ITA 30/DEL/2015 CALCULATED THE INTEREST OUTSTANDING BALANCE @ 16.75 % WHICH AMOUNTED TO RS. 98,96,044/- AND MADE THE ADDITION OF RS. 79,98,190/ -. 15. BEFORE LD. DRP THE ASSESSEE HAD FILED ITS OBJEC TIONS WHICH HAVE BEEN CONSIDERED FROM PAGES 24 TO 25 OF LD. DRPS ORDER I N WHICH LD. DRP PRIMARILY ACCEPTED THE LD. TPOS COMPARABLES ON THE GROUND TH AT MOST OF THE COMPARABLES FAILED THE EXPORT SALES FILTER. AS REGARDS THE ADJ USTMENT ON ACCOUNT OF NON-RECEIPT OF INTEREST IS CONCERNED, LD. DRP GAVE THE FOLLOWIN G DIRECTIONS: THE TPO/AO IS ACCORDINGLY DIRECTED TO VERIFY THE A MOUNT OF RECEIVABLES: I) IN CASE THE AGGREGATE AMOUNT OF REC EIVABLES FROM THE AES DOES NOT EXCEED RS. 50 CRORES, APPLY P RIME LENDING RATE OF SBI AS ON 30 TH JUNE OF RELEVANT PREVIOUS YEAR PLUS 150 BASIS POINTS (II) IN CASE THE AGGREGATE AM OUNT OF RECEIVABLES FROM THE AES EXCESS RS. 50 CRORES, APPL Y PRIME LENDING RATE OF SBI AS ON 30 TH JUNE OF RELEVANT PREVIOUS YEAR PLUS 500 BASIS POINTS. 16. GROUND NOS. 1 & 2 ARE GENERAL. LD. COUNSEL DID NOT PRESS GROUND NOS. 3 & 4 AND, ACCORDINGLY, THESE GROUNDS ARE DISMISSED AS NO T PRESSED. 17. APROPOS GROUND NO. 5, LD. COUNSEL FOR THE ASSES SEE REFERRED TO PAGE 14 OF DRPS ORDER WHEREIN THE FINDINGS AS REGARDS EXCLUS ION OF COMPANIES WITH EXPORT SALES LESS THAN 25% OF THE SALES IS CONTAINED. 18. LD. COUNSEL SUBMITTED THAT WHEN THE COMPARABLES SELECTED BY ASSESSEE WERE FUNCTIONALLY SIMILAR TO THAT OF THE TESTED PARTY (A SSESSEE), THEN THERE WAS NO RELEVANCE OF EXPORT FILTER AND THE SAME SHOULD NOT HAVE BEEN APPLIED. 19. LD. COUNSEL REFERRED TO RULE 10A(A), WHICH HAS NOW BEEN RENUMBERED AS CLAUSE (AB), WHEREIN THE DEFINITION OF UNCONTROLLED TRANSACTION IS GIVEN, WHICH MEANS A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIATED ENTERPRISES, WHETHER RESIDENT OR NON-RESIDENT. WITH REFERENCE TO THIS DE FINITION, LD. COUNSEL POINTED OUT 9 ITA 30/DEL/2015 THAT FILTER IS NOT PRESCRIBED IN LAW. HE POINTED OU T THAT LAW ITSELF SAYS THAT COMPARISON CAN BE WITH RESIDENT OR NON-RESIDENT AND , THEREFORE, EXPORT FILTER SHOULD NOT HAVE BEEN APPLIED. HE SUBMITTED THAT THE FILTE R IS REQUIRED TO BRING WHETHER BIGGER SUB SET TO SMALLER SUB SET AND ONLY THOSE FI LTERS ARE RELEVANT WHICH TARGET IN IDENTIFYING FUNCTIONALLY DISSIMILAR COMPANIES BECAU SE LAW PRESCRIBE SPECIFIC CRITERIA. HE SUBMITTED THAT THERE IS NO LOGIC OF AS SIGNING A CUT OF SUCH AS 25% OR 50% OR 75%. 20. LD. COUNSEL POINTED OUT THAT THE ACTIVITIES/ FU NCTIONS PERFORMED RATHER THAN THE GEOGRAPHICAL LOCATION ALLOCATION IS OF PRIMA RY IMPORTANCE AND TNMM METHOD IS LESS AFFECTED BY TRANSACTIONAL DIFFERENCE AT NET LEVEL. IN TNMM METHOD BROAD COMPARABILITY OF FUNCTIONAL PROFILE IS TO BE TAKEN INTO CONSIDERATION. HE SUBMITTED THAT RULE 10B(2)(D) DEALING WITH THE COND ITIONS PREVAILING IN THE MARKET IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTION OPERATE BEING A RELEVANT CONDITION FOR DECIDING THE COMPARABILITY IS RELEVANT ONLY IN CUP METHOD AND NOT IN TNMM METHOD, WHERE MARGINS ARE CONSIDERED AND NOT PRICE. HE SUBMITTED THAT REJECTING COMPANIES ON THE GROUND THAT THEY DO NOT HAVE ADEQU ATE FOREIGN EXCHANGE REVENUES IS NOT A COMPARABILITY FACTOR PRESCRIBED U NDER THE INDIAN TRANSFER PRICING LAW AND, HAS THUS, NO LEGAL BASIS FOR REMOVING OTHE RWISE GOOD COMPARABLES. 21. LD. DR HAS FILED WRITTEN SUBMISSIONS, WHICH ARE PLACED ON RECORD. 22. LD. DR SUBMITTED THAT AS PER RULE 10B(2), GEOGR APHICAL LOCATION HA SPECIFICALLY BEEN INCLUDED IN THE RULES AND IS, TH US, OF SPECIFIC CONSIDERATION. SHE SUBMITTED THAT IF EXACTLY SAME TRANSACTION IS NOT A VAILABLE, THEN TPO HAS TO ADOPT SOME REASONABLE BASIS. HE SUBMITTED THAT COMPARABLE S MAY BE FUNCTIONALLY SAME BUT THE SAME TAKES INTO CONSIDERATION ONLY COST PAR T AND SELLING PART CANNOT BE 10 ITA 30/DEL/2015 IGNORED. SHE SUBMITTED THAT MARKET DOES INFLUENCE T HE PRICE AND, THEREFORE, COMPLETE TRANSACTION HAS TO BE CONSIDERED OTHERWISE WE WILL GET DISTORTED PICTURE. 23. LD. DR HAS FILED DETAILED SUBMISSIONS IN THIS R EGARD, WHICH ARE REPRODUCED HEREUNDER: (1) PROVISIONS OF RULE 10B(2)( D)- 'CONDITIONS PREV AILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRAN SACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SI ZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, C OSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER TH E MARKETS ARE WHOLESALE OR RETAIL' (2) EXPORT FILTER ENSURES THAT COMPARABLE ENTITIES ARE OPERATING IN THE SAME GEOGRAPHICAL LOCATION. THOSE GEOGRAPHICAL MARKETS, IN WHICH PARTIES ENTERI NG INTO TRANSACTIONS OPERATE IS AN IMPORTANT FACTOR WHICH I NFLUENCES THE PRICE OF THE TRANSACTIONS. WITH THE GEOGRAPHICAL MA RKET, IN WHICH THE OTHER PARTY IS LOCATED, ALL THOSE FACTORS WHICH INFLUENCE THE TRANSACTION PRICE ALSO COME INTO PLAY . IF WE DO NOT FACTOR IN THIS INTO OUR IDENTIFICATION OF UNCONTROL LED COM PARABLES, WE WOULD BE MAKING AN INCORRECT IDENTIFIC ATION. THE MAIN REASON FOR APPLYING EXPORT EARNINGS FILTER IS THAT THE ASSESSEE IS PROVIDING ITS SERVICES FROM INDIA TO U. K. THE COMPARABLE COMPANIES COULD ALSO, AS FAR AS POSSIBLE , SHOULD BE PROVIDING SERVICES FROM INDIA TO SUCH COUNTRIES OR SIMILARLY DEVELOPED COUNTRIES LIKE UK, EUROPE ETC, SO THAT TH E PREVAILING MARKET CONDITIONS IN THE COUNTRIES IN WHICH THE BUY ER AND SELLER ARE LOCATED ARE SAME SIMILAR. OTHERWISE, ADJUSTMENT S NEED TO BE MADE FOR THE DIFFERENCES IN GEOGRAPHICAL MARKETS. 11 ITA 30/DEL/2015 (3) THE GEOGRAPHICAL LOCATION COSTS SAVING BENEFITS ARE AVAILABLE TO EXPORTS OF SERVICES. THE SAME ARE NOT AVAILABLE TO DOMESTIC PLAYERS:- IT IS COMMON BUSINESS SENSE THAT EVERY ENTREPRENEUR TRIES TO SOURCE ITS GOODS OR SERVICES FROM THE CHEAPEST POSS IBLE MARKET AND SELL THE SAME TO THE MARKETS WHERE THE GOODS OR THE SERVICES CAN BE SOLD AT THE HIGHEST PRICE. A BUSINESSMAN WHO CAN SOURCE HIS GOODS OR SERVICES FROM THE LOW COST COUNTRIES B UT CANNOT SELL THE SAME IN THE FULLY DEVELOPED AND EXPENSIVE MARKE TS OBVIOUSLY LOSES OUT TO THE BUSINESSMAN WHO HAS ACCE SS TO THE BOTH-SOURCING OF SERVICES FROM LOW COST COUNTRIES A ND SELLING THEM AT HIGHER RATES IN THE DEVELOPED COUNTRIES. TH E COMPANIES IN THE DEVELOPED COUNTRIES ARE OUTSOURCING WORK TO INDIA FOR THIS REASON ONLY. THE LOCATION COSTS SAVING BENEFIT S ARE AVAILABLE TO EXPORTS OF SERVICES. THE SAME ARE NOT AVAILABLE TO THE DOMESTIC PLAYERS. IN CASE THE FILTER ADOPTED BY THE TPO IS NOT TAKEN INTO ACCOUNT, IT WILL LEAD TO COMPARISON OF REVENUE AND CORRESPONDING MARGINS EARNED BY ENTITIES RENDER ING SERVICES WITHIN INDIA WITH THE ENTITIES RENDERING S ERVICES OUTSIDE INDIA. SINCE THE MARGINS EARNED BY EXPORTING SERVIC ES OUTSIDE INDIA IS BOUND TO BE MORE THAN THE MARGINS EARNED B Y RENDERING SERVICES WITHIN INDIA, DUE TO THE HIGHER PRICE OF S ERVICE IN THE EXPORT SECTOR BY USING THE SAME LOW COSTS, IT IS CL EAR THAT NON APPLICATION OF THIS FILTER WILL LEAD NOT ONLY TO IN ADEQUATE COMPARISON BUT ALSO AN INACCURATE. (4) WHILE EXAMINING THE OPERATIONAL COMPARABILITY, THE OPERATING MARKET I.E. WHEREIN THE SERVICES ARE BEIN G SOLD IS ALSO IMPORTANT:- WHILE ARGUING FOR OPERATIONAL COMPARABILITY, LD. CO UNSEL EMPHASIZED ON THE NATURE OF OPERATIONAL! SERVICE ON LY AND IGNORED THE MARKET IN WHICH SERVICES ARE SOLD. THE OPERATING MARKETS SHOULD BE SAME OR SIMILAR IN THE CASE OF TA XPAYER AND THE COMPARABLE. IN THE CASE OF TAX PAYER, THE OPERA TING MARKET IS 12 ITA 30/DEL/2015 ABROAD, WHEREAS, IN THE CASE OF A PREDOMINANTLY DOM ESTIC COMPANY, THE OPERATING MARKET IS INDIA, WHERE HERE ARE DIFFERENCES IN OVERALL ECONOMIC DEVELOPMENT, PURCHA SE POWER PARITY, BUSINESS MODEL, COST ARBITRAGE AND ALSO LEV EL OF COMPETITION (AS INDIA'S SHARE IN GLOBAL SOFTWARE SE RVICES MARKET IS STILL LOW). HENCE, IT IS FELT THAT COMPANIES WIT H AT LEAST 25% OF ITS REVENUE FROM EXPORT SECTOR WILL HAVE SIMILAR EC ONOMIC CIRCUMSTANCES AS THAT OF THE TAX PAYER. THEREFORE T HE COMPANIES THAT ARE PREDOMINANTLY INTO THE DOMESTIC MARKET CAN NOT BE COMPARED WITH THE ASSESSEE WHO IS A PREDOMINANTLY E XPORT ORIENTED SERVICE PROVIDER. (5) FOLLOWING CASES ARE RELIED IN THIS REGARD. (I) CHIRON BEHRING VACCINES PVT. LTD. 2011-TII-30-ITAT MUMBAI-TP. (II) DELOITTE CONSULTING INDIA PVT. LTD. ITA NO. 1082IHYD/2010 HYDERABAD-ITAT. (III) ITO VS CRM SERVICES INDIA PVT . LTD. 14 TAXMAN 96. (A) FURTHER THERE SHOULD BE NO COMPARABILITY OF TRANSACTIONS IN THE DOMESTIC AND EXPORT SEGMENT, A PROPOSITION HELD BY HON. ITA T IN THE CASE OF CHIRON BEHRING VA CCINES PVT. LTD. 2011-TII-30-ITAT-MUM-TP. (B) THIS ISSUE WAS ALSO INVOLVED THE RECENT JUDGM ENT DELIVERED BY HYDERABAD TRIBUNAL IN THE CASE OF DELO ITTE CONSULTING INDIA PVT. LTD. ITA NO. L082IHYD12010 HYDERABAD-ITAT .. WHEREIN THE USE OF THIS FILTER WA S APPROVED BY THE HON. TRIBUNAL IN PARA 39 OF THE JUDGMENT REP RODUCED BELOW: . '39. THE NEXT GROUND IS WITH REGARD TO REJECTION OF INDEPENDENT COMPARABLE COMPANIES BY TPO/CTT(A) ON THE BASIS THA T THEY DO NOT HAVE ANY FOREIGN EXCHANGE REVENUE. WE FIND T HAT THE TPO, IN THE CASE OF BACK OFFICE SERVICES SEGMENT, H AS REJECTED THE FOLLOWING FIVE COMPANIES ON ACCOUNT OF THE FACT THAT THESE COMPANIES DO NOT GENERATE FOREIGN EXCHANGE REVENUE. 13 ITA 30/DEL/2015 I) C.S. SOFTWARE ENTERPRISE LTD. II) IDEASPACE SOLUTIONS LTD. III) MCS LTD. IV) TATA SHARE REGISTRY LTD. V) VAKRANGEE SOFTWARE'S LTD. WE FIND THAT THE DOMESTIC BPO IS MUCH SMALLER BUSIN ESS SEGMENT THAN THE EXPORT BPO. THE PRODUCTIVITY AND R ETURN IN DOMESTIC SEGMENT IS ALSO MUCH LESS THAN THE EXPORT SEGMENT. THE TPO CLEARLY DEMONSTRATED IN HIS ORDER AT PAGE-9 THAT THE EARNINGS PER SEAT IN DOMESTIC SEGMENT IS 0.45 LAKHS AS AGAINST 2.37 LAKHS IN THE EXPORT SEGMENT WHICH WORKS OUT TO 5.27 TIMES MORE THAN THE DOMESTIC SEGMENT. IN THE EXPORT SEGME NT, THE EARNINGS WILL BE MORE DUE TO THE FACT THAT THEY HAV E ADVANTAGE OF TIME ZONE AND HIGHER PRODUCTIVITY ETC. IT APPEAR S THAT THE ASSESSEE COMPANY AGREED THAT ONE CRITERION FOR SELECTION/REJECTION OF THE COMPARABLES IS FAR ANALY SIS. THE AFORESAID COMPANIES DO NOT HAVE ANY EXPORT BUSINESS FOR THE YEAR UNDER CONSIDERATION WHEREAS THE ASSESSEE COMPA NY HAS FULL FLEDGED EXPORT BUSINESS. THE FUNCTIONS, RISKS AND A SSETS ARE ENTIRELY DIFFERENT. HENCE, THE AFORESAID COMPANY CA NNOT BE CONSIDERED AS A COMPARABLE COMPANY FOR DETERMINING THE ALP. IT IS THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THERE IS NOTHING MENTIONED IN THE INDIA TPR THAT CO MPARABLES MAY BE REJECTED MERELY ON THE GROUND THAT IT HAS NO FOREIGN EXCHANGE REVENUE. HE REFERRED TO THE MEANING OF THE 'UNCONTROLLED TRANSACTION' AS GIVEN IN RULE 10A OF THE INCOME- TAX RULES WHEREIN IT STATES THAT THE TRANSACTION BE TWEEN ENTERPRISE OTHER THAN THE ASSOCIATE ENTERPRISE WHET HER RESIDENT OR NON-RESIDENT. IN OUR CONSIDERED VIEW, THE REFERENC E TO RESIDENT AND NON-RESIDENT IN RULE 10A OF IT RULES, IS RELATE D TO THE RESIDENTIAL STATUS AND NOT RELATED TO THE DOMESTIC OR EXPORT. MOREOVER, THE DELHI BENCH OF THE TRIBUNAL IN THE CA SE OF 14 ITA 30/DEL/2015 MENTOR GRAPHICS (SUPRA) HELD THAT THE ALP SHOULD BE DETERMINED BY TAKING RESULTS OF A COMPARABLE TRANSA CTION IN COMPARABLE CIRCUMSTANCES. RULE 10B(2)(D) ALSO EMPHA SIZES THAT THE COMPARABILITY OF THE TRANSACTION SHOULD BE INTE RNATIONAL TRANSACTION. WE DO NOT FIND ANY MERIT IN THE ARGUME NT OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE COMPANIES REJECTED BY THE TPO OPERATE IN SIMILAR MARKET CONDITION DO NOT HAVE ANY INTERNATIONAL TRANSACTION. IN VIEW OF THE ABOVE, TH E REASONING GIVEN BY THE CIT(A) IN CONFIRMING THE ACTION OF THE TPO IN REJECTING THE AFORESAID COMPANY AS NOT COMPARABLE I S JUSTIFIED. IN VIEW OF THE ABOVE, FIVE COMPANIES LISTED ABOVE S HALL NOT BE INCLUDED IN THE FINAL LIST OF COMPARABLE COMPANIES. (C) ANOTHER JUDGMENT WHERE THIS ISSUE IS DISCUSSED IS ITO VS CRM SERVICES INDIA (P) LTD. 14 TAXMANN 96 AS BELOW: ' 15. GROUND NO. 4.5 IS AGAINST REJECTION OF SHREEJ AL INFO HUBS LTD. AS A COMPARABLE CASE. IN THIS CONNECTION, IT H AS BEEN MENTIONED IN THE TPO'S ORDER THAT THE ASSESSEE RAIS ED OBJECTION AND IT WAS SUBMITTED THAT THIS COMPANY IS CARRYING OUT BUSINESS OF VENDING INFORMATION, I.E. CUSTOMER SUPPORT OR A CONTRACT CENTRE. THIS BUSINESS IS SIMILAR TO THE BPO BUSINES S. THE TPO REJECTED THE SUBMISSION BY MENTIONING THAT VENDING OF INFORMATION AND RENDERING SERVICES TO CALL CENTRE A RE ACTIVITIES DIFFERENT FROM RUNNING A CALL CENTRE. THEREFORE, TH E FUNCTIONAL PROFILE OF THE TWO COMPANIES WERE DIFFERENT. 15.1 BEFORE US, THE ID. COUNSEL MENTIONED THAT THE INFORMATION VENDING IS NOTHING BUT CUSTOMER SUPPORT OR CONTRACT CENTRE. THUS, SHREEJAL INFO HUBS LTD. IS IMPORTING INFORMAT ION OF SUPPLIER OF GOODS AND SERVICES TO PROSPECTIVE CUSTO MERS. AS PER DIRECTOR'S REPORT, IT IS CARRYING OUT THE BUSINESS OF INFORMATION VENDING BY EMPLOYING CALLING AGENTS UNDER THE BRAND NAME 'ASK ME', WHICH IS ESSENTIALLY A CALL CENTRE/CONTRA CT SERVICE CENTRE. THEREFORE, FUNCTIONAL PROFILE IS SAME I.E., TO FURNISH INFORMATION ABOUT THE CLIENT- COMPANY. ON THE OTHER HAND, THE 15 ITA 30/DEL/2015 CASE OF THE ID. DR IS THAT SHREEJAL INFO HUBS LTD. IS WORKING FOR THE CLIENTS IN INDIA WHILE THE ASSESSEE IS PROVIDIN G SERVICES IN USA, THUS, BUSINESS TERRITORIES ARE TOTALLY DIFFERE NT. 15.2 WE HAVE CONSIDERED THE FACTS AND THE SUBMISSIO NS MADE IN THIS BEHALF. WE ARE OF THE VIEW THAT TERRITORY OF T HE BUSINESS IS A MATERIAL FACTOR IN DECIDING COMPARABILITY OF THE CA SES. THE ASSESSEE RENDERS SERVICES IN USA WHILE SHREEJAL INF O HUBS LTD. ENDERS SERVICES IN INDIA. THIS FACT ALONE IS SUFFIC IENT TO EXCLUDE THIS COMPARABLE. THUS, IT IS HELD THAT THE AO/TPO R IGHTLY REJECTED THIS CASE AS A COMPARABLE CASE.' (D) IN THE CASE OF MIS INDO AMERICAN JEWELLERY LT D. (2010-TII-24-ITAT- MUM- TP) ITA T HELD THAT DOMESTI C COMPANY CANNOT BE COMPARED WITH THE TAXPAYER WHO IS MAINLY AN EXPORTER. (E) IN THE CASE OF MIS RANBXY INDIA 299 ITR (AT) 175 (DEL) THE ITA T HELD THAT ECONOMIC CONDITIONS PREVA ILING IN THE MARKET INCLUDING GEOGRAPHICAL LOCATIONS, SIZE OF MA RKET, GOVERNMENT ORDER IN FORCE, ETC ARE REQUIRED TO BE C ONSIDERED. (F) IN THE CASE OF MIS VEDARIS TECHNOLOGY, ITA T, DELHI HELD THAT DOMESTIC COMPANY CANNOT BE TAKEN AS A COMPARABLE WHEN THE TAXPAYER IS MAINLY AN EXPORTER. (6) BY CONSIDERING THE EXPORT EARNINGS CRITERION, AN ATTEMPT HAS BEEN MADE BY TPO TO TAKEN INTO ACCOUNT THE FACTORS WHICH ARE SIMILAR TO THE FACTORS IN WHICH THE ASSESSEE OPERAT ES. THE RELIANCE IS AGAIN PLACED ON THE JUDGMENT IN THE CAS E OF MENTOR GRAPHICS (NOIDA) (P) LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE -6(1), NEW DELHI [2007] 109 ITD 101 (DE LHI). FURTHER IT WAS ALSO OBSERVED BY THE HON'BLE TRIBUNA L IN THE ~CASE OF SKODA AUTO INDIA PVT. LTD. 2009- TIOL-214- ITAT- PUNE THAT WHEN INFORMATION AVAILABLE IN PUBLIC DOMA IN IS NOT SUFFICIENT TO MAKE THE COMPARISON POSSIBLE SOME APP ROXIMATION AND REASONABLE ASSUMPTIONS ARE INEVITABLE. 16 ITA 30/DEL/2015 24. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. THE MAIN DISPUTE IS WHETHER THE FILTER OF EXPORT SALES TO TOTAL SALES OF 25% APPLIED BY LD. TPO AND ACCEPTED BY LD. DRP IS JUSTIFIED OR NOT. THIS HAS RESULTED IN EXCLUSION OF THOSE COMPARABLES SELECTED BY ASSESSEE WHERE EXPORT TO TOTAL SALES IS LESS THAN 25%. ADMITTEDLY, THE ASSESSEE IS MAINLY AN EXPORT ORIENTED IT ENABLED SERVICE PROVIDER, DERIVING 100% OF ITS REVENUES FROM EXPORTS IN THIS SEGMENT. THE CONTENTION OF LD. COUNSEL IS T HAT SINCE IT IS NOT DISPUTED THAT THE COMPARABLES SELECTED BY ASSESSEE WERE FUNCTIONALLY SIMILAR TO THAT OF ASSESSEE, THEREFORE, BY APPLYING THIS FILTER OF EXPORT SALES OF LESS THAN 25% FOR EXCLUDING THE COMPARABLES IS NOT JUSTIFIED BECAUSE THERE IS NOTHI NG IN LAW TO ADOPT THIS FILTER. ON THE CONTRARY, HE SUBMITTED, THAT LAW PRESCRIBES THA T THE COMPARABLES CAN BE RESIDENTS OR THE NON-RESIDENTS. IN OUR OPINION, THE SUBMISSION ADVANCED BY LD. COUNSEL CANNOT BE ACCEPTED, PARTICULARLY IN VIEW O F RULE 10B WHICH PRESCRIBES THE MODE OF DETERMINATION OF ALP U/S 92C. RULE 10B(1) P RESCRIBES VARIOUS METHODS WHICH CAN BE ADOPTED BY THE TESTED PARTY TO DETERMI NE THE ALP. ONE OF THE METHODS PRESCRIBED IS TRANSACTIONAL NET MARGIN METH OD, WHICH IS REPRODUCED HEREUNDER: DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 9 2C. 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SEC TION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHOD S, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, N AMELY:- (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH, - (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFER RED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; 17 ITA 30/DEL/2015 (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFEREN CES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRI SES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFE CT THE PRICE IN THE OPEN MARKET; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUS E (II) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION; (B) RESALE PRICE METHOD, BY WHICH,- (I) THE PRICE AT WHICH PROPERTY PURCHASED OR SERVIC ES OBTAINED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD OR ARE PROVIDED TO AN UNRELATED ENTERPRISE, IS IDENTIFIED; (II) SUCH RESALE PRICE IS REDUCED BY THE AMOUNT OF A NORMAL GROSS PROFIT MARGIN ACCRUING TO THE ENTERPRISE OR TO AN U NRELATED ENTERPRISE FROM THE PURCHASE AND RESALE OF THE SAM E OR SIMILAR PROPERTY OR FROM OBTAINING AND PROVIDING THE SAME O R SIMILAR SERVICES, IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS; (III) THE PRICE SO ARRIVED AT IS FURTHER REDUCED BY THE EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE P URCHASE OF PROPERTY OR OBTAINING OF SERVICES; (IV) THE PRICE SO ARRIVED AT IS ADJUSTED TO TAKE IN TO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, INCLUDING DIFFERE NCES IN ACCOUNTING PRACTICES, IF ANY, BETWEEN THE INTERNATI ONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF GROSS PROFIT MARGIN IN THE OPEN MARKET; (V) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE (IV) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PURCHASE OF THE 18 ITA 30/DEL/2015 PROPERTY OR OBTAINING OF THE SERVICES BY THE ENTERP RISE FROM THE ASSOCIATED ENTERPRISE; (C) COST PLUS METHOD, BY WHICH,- (I) THE DIRECT AND INDIRECT COSTS OF PRODUCTION INC URRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SE RVICES PROVIDED TO AN ASSOCIATED ENTERPRISE, ARE DETERMINED; (II) THE AMOUNT OF A NORMAL GROSS PROFIT MARK-UP TO SUCH COSTS (COMPUTED ACCORDING TO THE SAME ACCOUNTING NORMS) A RISING FROM THE TRANSFER OR PROVISION OF THE SAME OR SIMIL AR PROPERTY OR SERVICES BY THE ENTERPRISE, OR BY AN UNRELATED ENTE RPRISE, IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS DETERMINED; (III) THE NORMAL GROSS PROFIT MARK-UP REFERRED TO I N SUB-CLAUSE (II) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONA L AND OTHER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT SUCH PROFIT MARK- UP IN THE OPEN MARKET; (IV) THE COSTS REFERRED TO IN SUB-CLAUSE (L) ARE IN CREASED BY THE ADJUSTED PROFIT MARK-UP ARRIVED AT UNDER SUB-CLAUSE (III); (V) THE SUM SO ARRIVED AT IS TAKEN TO BE AN ARM'S L ENGTH PRICE IN RELATION TO THE SUPPLY OF THE PROPERTY OR PROVISION OF SERVICES BY THE ENTERPRISE; (D) PROFIT SPLIT METHOD, WHICH MAY BE APPLICABLE MA INLY IN INTERNATIONAL TRANSACTIONS INVOLVING TRANSFER OF UN IQUE INTANGIBLES OR IN MULTIPLE INTERNATIONAL TRANSACTIO NS WHICH ARE SO INTERRELATED THAT THEY CANNOT BE EVALUATED SEPAR ATELY FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE OF AN YONE TRANSACTION, BY WHICH- 19 ITA 30/DEL/2015 (I) THE COMBINED NET PROFIT OF THE ASSOCIATED ENTER PRISES ARISING FROM THE INTERNATIONAL TRANSACTION IN WHICH THEY AR E ENGAGED, IS DETERMINED; (II) THE RELATIVE CONTRIBUTION MADE BY EACH OF THE ASSOCIATED ENTERPRISES TO THE EARNING OF SUCH COMBINED NET PRO FIT, IS THEN EVALUATED ON THE BASIS OF THE FUNCTIONS PERFORMED, ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY EAC H ENTERPRISE AND ON THE BASIS OF RELIABLE EXTERNAL MA RKET DATA WHICH INDICATES HOW SUCH CONTRIBUTION WOULD BE EVAL UATED BY UNRELATED ENTERPRISES PERFORMING COMPARABLE FUNCTIO NS IN SIMILAR CIRCUMSTANCES; . (III) THE COMBINED NET PROFIT IS THEN SPLIT AMONGST THE ENTERPRISES IN PROPORTION TO THEIR RELATIVE CONTRIBUTIONS, AS E VALUATED UNDER SUB-CLAUSE (II); (IV) THE PROFIT THUS APPORTIONED TO THE ASSESSEE IS TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION: PROVIDED THAT THE COMBINED NET PROFIT REFERRED TO I N SUB-CLAUSE (I) MAY, IN THE FIRST INSTANCE, BE PARTIALLY ALLOCA TED TO EACH ENTERPRISE SO AS TO PROVIDE IT WITH A BASIC RETURN APPROPRIATE FOR THE TYPE OF INTERNATIONAL TRANSACTION IN WHICH IT I S ENGAGED, WITH REFERENCE TO MARKET RETURNS ACHIEVED FOR SIMILAR TY PES OF TRANSACTIONS BY INDEPENDENT ENTERPRISES, AND THEREA FTER, THE RESIDUAL NET PROFIT REMAINING AFTER SUCH ALLOCATION MAY BE SPLIT AMONGST THE ENTERPRISES IN PROPORTION TO THEIR RELA TIVE CONTRIBUTION IN THE MANNER SPECIFIED UNDER SUB-CLAU SES (IL) AND (III), AND IN SUCH A CASE THE AGGREGATE OF THE NET PROFIT ALLOCATED TO THE ENTERPRISE IN THE FIRST INSTANCE TOGETHER WI TH THE RESIDUAL NET PROFIT APPORTIONED TO THAT ENTERPRISE ON THE BA SIS OF ITS RELATIVE CONTRIBUTION SHALL BE TAKEN TO BE THE NET PROFIT ARISING TO THAT ENTERPRISE FROM THE INTERNATIONAL TRANSACTION; (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH,- 20 ITA 30/DEL/2015 (1) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MA RGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION. 25. RULE 10B(2) PRESCRIBES VARIOUS FACTORS WHICH HA VE TO BE TAKEN INTO CONSIDERATION FOR THE COMPARABILITY OF AN INTERNATI ONAL TRANSACTION, WHICH ARE AS UNDER: 10B(2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPA RABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLE D TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, N AMELY:- (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TR ANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; 21 ITA 30/DEL/2015 (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT AS SETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, B Y THE RESPECTIVE PARTIES TO THE TRANSACTIONS; (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERM S ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN E XPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENE FITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANS ACTIONS; (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH T HE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVE RNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF- (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TR ANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCRUING ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 26. ALL THESE FACTORS ARE RELEVANT FOR ALL THE METH ODS, WHICH HAVE BEEN SPELT OUT IN RULE 10B(1). THEREFORE, THE SUBMISSION OF LD. CO UNSEL THAT RULE 10B(2)(D) IS RELEVANT ONLY FOR CUP METHOD CANNOT BE ACCEPTED. AL L THESE FACTORS HAVE BEARING ON THE NET MARGIN TO BE DETERMINED IN ALL METHODS I NCLUDING TNM METHOD. WE ARE IN AGREEMENT WITH THE SUBMISSION OF LD. SR. DR, REP RODUCED EARLIER, THAT THOSE GEOGRAPHICAL MARKETS IN WHICH PARTIES ENTERING INTO TRANSACTIONS OPERATE IS AN IMPORTANT FACTOR WHICH INFLUENCE THE PRICE OF THE T RANSACTION AND THAT HAS TO BE FACTORED INTO FOR IDENTIFICATION OF UNCONTROLLED T RANSACTIONS. VARIOUS CASE LAWS 22 ITA 30/DEL/2015 RELIED UPON BY LD. DR ALSO FORTIFY THE VIEW TAKEN B Y US. FOR THE SAKE OF BREVITY, WE ARE NOT REFERRING TO THOSE DECISIONS WHICH HAVE BEE N ELABORATELY CONSIDERED IN THE SUBMI1SSIONS OF LD. DR, REPRODUCED EARLIER. WE, ACC ORDINGLY, REJECT THIS CONTENTION OF LD. COUNSEL FOR THE ASSESSEE. 27. IN THE GROUND, THE ASSESSEE HAS ASSAILED EXCLU SION OF VARIOUS COMPARABLES, WHICH ARE AS UNDER:- - AOK IN-HOUSE BPO SERVICES LIMITED; - ADITYA BIRLA MINACS WORLDWIDE LTD; - CAMEO CORPORATE SERVICES LTD; - DELTA SERVICES (I) PVT LTD; - KNM SERVICES PVT LTD; - SPARSH BPO SERVICES LTD; AND - TIMEX GROUP INDIA LTD. 28. ALL THESE COMPARABLES HAD BEEN EXCLUDED AS THEY DID NOT PASS THROUGH EXPORT FILTER APPLIED BY LD. TPO. AS WE HAVE ALREADY UPHEL D THE EXPORT FILTER APPLIED BY LD. TPO IN EARLIER PART OF OUR ORDER, WE REJECT THE ASS ESSEES CONTENTION. 29. HOWEVER, AS REGARDS ADITYA BIRLA MINACS WORLDWI DE LTD, LD. COUNSEL REFERRED TO THE ANNUAL REPORT CONTAINED AT PAGE 364 OF THE PAPER BOOK, WHEREIN IT IS MENTIONED IN SCHEDULE 17 NOTES TO ACCOUNTS THAT EA RNING IN FOREIGN CURRENCY (ACCRUAL BASIS) FOR IT ENABLED SERVICES WAS RS. 158 25.42 LACS. HE SUBMITTED THAT IT IS 71.57% OF THE TOTAL SALES AND, THEREFORE, COULD NOT BE REJECTED BY APPLYING THE FILTER OF EXPORT SALES OF BEING LESS THAN 25% OF TO TAL SALES. HE SUBMITTED THAT COMPUTATION HAS NOT CORRECTLY BEEN DONE BY LD. TP O. 30. HAVING HEARD BOTH THE PARTIES, WE RESTORE THIS ISSUE TO THE FILE OF LD. TPO TO EXAMINE THE COMPUTATION OF EXPORT EARNINGS TO TOTAL SALES AS CLAIMED BY LD. COUNSEL 23 ITA 30/DEL/2015 FOR THE ASSESSEE AND, IF, THE SAME IS FOUND TO BE C ORRECT, THEN THIS COMPARABLE HAS TO BE INCLUDED IN THE LIST OF COMPARABLES. 31. IN THE RESULT, GROUND NO. 5 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 32. THE NEXT GROUND NO. 6, RAISED BY LD. COUNSEL FO R THE ASSESSEE IS REGARDING INCLUSION OF INFOSYS BPO IN THE LIST OF COMPARABLES . LD. COUNSEL SUBMITTED THAT THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL, LAYS DOWN THAT SUPER NORMAL PROFIT IS ONLY AN INDICATOR OF FURTHER INQUIRY BUT DOES NOT LAY DOWN ANYTHING ABOUT FUNCTIONALITY TEST. HE SUBMITTED THA T INFOSYS HAS SEVERAL INTANGIBLES WHICH EXIST IN PRIVATE EQUITY BUT NOT IN BPO. 33. LD. COUNSEL REFERRED TO ANNUAL REPORT OF INFOSY S FOR FY 2009-10 AND POINTED OUT THAT IN THE PERFORMANCE OVER VIEW IT IS CLEARLY STATED THAT ASSESSEE ACQUIRED MCCAMISH, A PREMIER BUSINESS PROCESS SOLUTIONS PROV IDER BASED IN US, WHICH ENHANCED ITS CAPABILITY TO DELIVER END TO END BUSI NESS SOLUTION FOR ITS INSURANCE AND FINANCIAL SERVICES CLIENTS WITH A COMPELLING VA LUE PROPOSITION. THUS, LD. COUNSEL SUBMITTED THAT DURING THE YEAR UNDER CONSID ERATION THERE WAS AN EXTRAORDINARY EVENT OF MERGER AND, HENCE, THIS COUL D NOT BE TAKEN AS A COMPARABLE. FURTHER, HE REFERRED TO THE SIGNIFICANT ACCOUNTING POLICIES AND NOTES ON ACCOUNTS, WHEREIN IN THE COMPANYS OVER- VIEW, IT IS STATED A S UNDER: INFOSYS BPO LIMITED (INFOSYS BPO OR THE COMPANY ) WAS INCORPORATED AS PROGEON LIMITED ON APRIL 3,2002 TO PROVIDE BUSINESS PROCESS MANAGEMENT SERVICES TO ORGANIZATIO NS THAT OUTSOURCE THEIR BUSINESS PROCESSES. INFOSYS BPO IS A MAJORITY OWNED AND CONTROLLED SUBSIDIARY OF INFOSYS TECHNOLO GIES LIMITED (INFOSYS, NASDNM: INFY). THE COMPANY HELP S CLIENTS IMPROVE THEIR COMPETITIVE POSITIONING BY MA NAGING THEIR BUSINESS PROCESSES IN ADDITION TO PROVIDING INCREAS ED VALUE. THE NAME OF THE COMPANY WAS CHANGED FROM PROGEON LI MITED TO INFOSYS BPO LIMITED WITH EFFECT FROM AUGUST 29,2 006. 24 ITA 30/DEL/2015 34. LD. COUNSEL SUBMITTED THAT THIS COMPARABLE HAS BEEN EXCLUDED IN PLETHORA OF DECISIONS BY THE ITAT, PARTICULARLY ON THE GROUND O F ECONOMY OF SCALE. IN THE SYNOPSIS FILED BY ASSESSEE, A LIST OF ALL SUCH CASE S HAS BEEN ANNEXED. 35. LD. SR. DR REFERRED TO THE DECISION OF THE ITAT DELHI IN THE CASE OF AGILENT TECHNOLOGIES INTERNATIONAL PVT. LTD. VS. ACIT (ITA NO. 6047/DEL/2012 DATED 14- 6-2013), WHEREIN IT HAS BEEN HELD THAT COMPANIES WI TH EXTRAORDINARY EVENT SUCH AS MERGER OR AMALGAMATION SHOULD BE REJECTED, IF, BECA USE OF MERGER/ DEMERGER THE COMPANY BECOMES FUNCTIONALLY DIFFERENT. IT WAS FURT HER HELD THAT IF THE MERGER OF THE TWO FUNCTIONALLY SIMILARLY PLACED COMPANIES TAK E PLACE, THE EVENT OF MERGER ITSELF CANNOT BE TAKEN AS A FACTOR FOR EXCLUSION OF THE SAID COMPARABLE. 36. LD. SR. DR SUBMITTED THAT PARA 33 OF CHRYSCAPIT AL READ WITH PARA 44 MAKES IT CLEAR THAT ONLY ADJUSTMENT IS TO BE MADE BUT THE COMPARABLE CANNOT BE REJECTED. HE POINTED OUT THAT ACTIS IS A BRAND AND, THEREFORE , ASSESSEE WAS ALSO HAVING INTANGIBLES, THEREFORE, OUT RIGHT EXCLUSION OF THIS IS NOT WARRANTED. HE, THEREFORE, SUBMITTED THAT THE MATTER SHOULD BE RESTORED TO THE AO/ TPO SO THAT INQUIRY IS MADE IN THE LIGHT OF THE DECISION IN AGILENT TECHNO LOGIES & CHRYSCAPITAL. 37. LD. COUNSEL FOR THE ASSESSEE, IN THE REJOINDER, SUBMITTED THAT ADJUSTMENTS CAN BE MADE ONLY WHEN SPECIFIC DIFFERENCE CAN BE IDENT IFIED, WHICH HAS NOT BEEN DONE BY REVENUE. HE SUBMITTED THAT CONSIDERING THE OVER ALL BUSINESS PROFILE OF INFOSYS, THE SAME IS NOT AT ALL COMPARABLE TO ASSESSEE. 38. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. THERE IS NO DENYING OF THE FACT THAT INFOSYS BPO OPERATES ON A LARGE SCALE AND CATERS TO WIDE VARIETY OF CUSTOM ERS OPERATING IN DIFFERENT INDUSTRIES. LD. COUNSEL HAS FILED BEFORE US EXTRACT S FROM THE ANNUAL REPORTS AND 25 ITA 30/DEL/2015 WHITE PAPER ISSUED BY INFOSYS IN REGARD TO PROCES S PROGRESSION MODEL ( PPM), A HOLISTIC MODEL TO TRANSFORM BUSINESS PROCESSES. 39. A BIRDS EYE VIEW OF THE SAID MODEL MAKES IT CL EAR THAT IT INVOLVES VARIOUS PROCESSES WHICH ARE AIMED AT COPING WITH VARIOUS CHALLENGES WHICH IMPEDE THE BUSINESS STRATEGY. ON THE OTHER HAND, THE ASSESSEE S BUSINESS PROFILE IS QUITE LIMITED AND NOT AT ALL COMPARABLE TO THE OPTIMISTIC BUSINES S MODEL OF INFOSYS. THE TURNOVER OF INFOSYS WAS RS. 1127 CRORES DURING THE FY 2009-10 AS COMPARED TO THE ASSESSEES TURN OVER OF RS. 18.04 CRORES. THIS HUGE DIFFERENCE IN THE TURNOVER ITSELF MAKES IT CLEAR THAT THE MARGINS ACHIEVED BY INFOSYS BPO BEING A SERVICE SECTOR COMPANY, ARE MUCH HIGHER THAN THAT OF ASSESSEE. IN SERVICE SECTOR HIGHER TURNOVER REFLECTS HIGHER MARGIN BECAUSE IT IS PRIMARILY THE CUSTOMERS SATISFACTION WHICH IS RELEVANT IN SELECTING THE SERVICE PROVIDER EVEN AT THE PAYMENT OF HIGHER MARGINS. 40. IN MERKER EQUITABLE SERVICE CENTRE INDIA PVT. L TD. 133 ITD 543, IT WAS HELD THAT INFOSYS BPO CANNOT BE CONSIDERED AS A COMPARAB LE TO A CAPTIVE SERVICE PROVIDER, LIKE ASSESSEE. 41. LD. DR HAS SUBMITTED THAT ACTIS IS ALSO A BRAND AND, THEREFORE, ADJUSTMENT SHOULD BE MADE FOR THE DIFFERENCE. WE ARE UNABLE TO ACCEPT THIS CONTENTION PARTICULARLY BECAUSE THE DEPARTMENT HAS NOT BROUGHT ON RECORD ANY BRAND VALUE OF ACTIS ON RECORD. MOREOVER, THE WIDE DIFFERENCE IN T URNOVER MAKES IT CLEAR THAT THERE IS WIDE DIFFERENCE IN THE BRAND VALUE OF THE TWO COMPANIES AND, THEREFORE, WITHOUT QUANTIFICATION OF THE SAME, EFFECT ON TURN OVER CANNOT BE ASCERTAINED. WE FURTHER FIND THAT THE INFOSYS BPO HAS NOT BEEN TAKE N AS COMPARABLE IN DETAILED LIST ANNEXED TO SYNOPSIS FILED BY ASSESSEE INCLUDING THE FOLLOWING CASES: - ZAVATA INDIA PVT. LTD. VS. DCIT (ITA NO. 1781/HYD/2 011) - CAPITAL IQW INFORMATION SYSTEMS (INDIA) PVT. LTD. V S. DCIT (INT. TAXATION) (ITA NO. 1961/HYD/2011) 26 ITA 30/DEL/2015 - TRINITI ADVANCED SOFTWARE LABS (P) LTD. (2011-TII-9 2-ITAT-HYD-TP). AGNITY INDIA TECHNOLOGIES VS. ITO ITA 1204/2011 DE LHI HIGH COURT IN THIS CASE IT WAS EMPHASIZED THAT INFOSYS TECHNOLOGI ES LTD. COULD NOT BE CONSIDERED AS A COMPARABLE BEING A GIANT COMPANY. THE SAME PRINCIPLE IS APPLICABLE TO INFOSYS BPO ALSO. 42. IN VIEW OF ABOVE DISCUSSION, WE DIRECT LD. TPO TO EXCLUDE INFOSYS BPO. 43. IN THE RESULT, GROUND NO. 6 IS ALLOWED. 44. THE NEXT GROUND NO. 7, RAISED BY LD. COUNSEL FO R THE ASSESSEE IS REGARDING INCLUSION OF ECLERX SERVICES LIMITED. LD. COUNSEL POINTED OUT THAT THIS COMPANY IS A DATA ANALYTICAL KNOWLEDGE PROCESS OUTSOURCING SER VICE PROVIDER. IT PROVIDES DATA ANALYTICS, DATA MANAGEMENT AND PROCESS IMPROVEMENT SOLUTIONS TO GLOBAL ENTERPRISE CLIENTS, MAINLY IN CAPITAL MARKETS AND F INANCIAL SERVICES. LD. COUNSEL SUBMITTED THAT THE COMPANYS ENGAGEMENTS ARE CONCE RNED OF THE TWO SPECIALIZATIONS, NAMELY, CAPITAL MARKET AND FINANCI AL SERVICES, WHEREIN IT PROVIDES MODEL OFFICE AND BACK OFFICE SUPPORT TO THE CAPITAL MARKET BUSINESS AND SALES AND MARKETING SUPPORT. 45. LD. COUNSEL REFERRED TO THE ANNUAL REPORT OF TH IS COMPARABLE COMPANY, WHEREIN IT IS STATED AS UNDER: ECLERX SERVICES LIMITED (ECLERX) IS A KNOWLEDGE PR OCESS OUTSOURCING (KPO) COMPANY PROVIDING DATA ANALYTICS, DATA MANAGEMENT AND PROCESS IMPROVEMENT SOLUTIONS TO GLO BAL ENTERPRISE CLIENTS, ECLERX SUPPORTS ITS CLIENTS THR OUGH TWO BUSINESS UNITS FINANCIAL SERVICES AND SALES AND M ARKETING SUPPORT. X X X X X X X X X 27 ITA 30/DEL/2015 IN THE CAPITAL MARKETS DIVISION, THE COMPANY TODAY PROVIDES END-TO-END FINANCIAL TRANSACTION SUPPORT SERVICES SUCH AS TRADE BOOKING, TRADE CONFIRMATION, ASSET SERVICING, CASH SETTLEMENTS, CLIENT SERVICING, RISK MANAGEMENT AND REFERENCE DAT A INTEGRITY ACROSS ALL ASSET CLASSES, AND ITS SERVICES SPAN BOT H 'SELL-SIDE' (THE LARGE BANKS) AND 'BUY-SIDE' (THE FUNDS AND ASS ET MANAGERS). FURTHERMORE, THE COMPANY PROVIDES STRATE GIC AND PROCESS CONSULTING SERVICES, HELPING CLIENTS DEVISE SOLUTIONS TO IMPROVE EFFICIENCY, REDUCE RISK AND MEET REGULATORY AND MARKET DEMANDS. SIMILARLY IN THE SALES AND MARKETING SUPPORT DIVISI ON, THE COMPANY TODAY SUPPORTS CLIENTS IN ALL ELEMENTS OF P RODUCT AND SERVICES MARKETING AND SALES-WITH A FOCUS ON ONLINE SUPPORT TO INCLUDE CONTENT DEVELOPMENT AND MANAGEMENT, SEARCH ENGINE MANAGEMENT, WEB OPERATIONS, PRICING AND CUSTOMER AN ALYTICS, PRODUCT DATABASE MANAGEMENT AND CATALOG AUDITS. THE COMPANY IS ALSO PURSUING A STRATEGY OF CREATING A P ORTFOLIO OF PLATFORM ATTACHED SERVICES, BY CREATING A SUITE OF SERVICES THAT ARE COMPLEMENTARY TO INDUSTRY STANDARD IT PLATFORMS . 46. LD. COUNSEL FURTHER SUBMITTED THAT THIS COMPARA BLE HAS TO BE EXCLUDED IN VIEW OF THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF RAMPGREEN SOLUTION (ITA NO. 102/2015), WHEREIN IN PARA 31 IT HAS BEEN HELD AS UNDER: 31. IN THE PRESENT CASE, THE TRIBUNAL NOTED THAT VI SHAL AND ECLERX WERE BOTH ENGAGED IN RENDERING ITES. THE TRI BUNAL HELD THAT, ONCE A SERVICE FALLS UNDER THE CATEGORY OF I TES, THEN THERE IS NO SUB-CLASSIFICATION OF SEGMENT. THUS, A CCORDING TO THE TRIBUNAL, NO DIFFERENTIATION COULD BE MADE BETW EEN THE ENTITIES RENDERING ITES. WE FIND IT DIFFICULT TO AC CEPT THIS VIEW AS IT IS CONTRARY TO THE FUNDAMENTAL RATIONALE OF D ETERMINING ALP BY COMPARING CONTROLLED TRANSACTIONS/ENTITIES W ITH SIMILAR UNCONTROLLED TRANSACTIONS/ENTITIES. ITES ENCOMPASSE S A WIDE SPECTRUM OF SERVICES THAT USE INFORMATION TECHNOLOG Y BASED 28 ITA 30/DEL/2015 DELIVERY. SUCH SERVICES COULD INCLUDE RENDERING HIG HLY TECHNICAL SERVICES BY QUALIFIED TECHNICAL PERSONNEL, INVOLVIN G ADVANCED SKILLS AND KNOWLEDGE, SUCH AS ENGINEERING, DESIGN A ND SUPPORT. WHILE, ON THE OTHER END OF THE SPECTRUM ITES WOULD ALSO INCLUDE VOICE-BASED CALL CENTERS THAT RENDER ROUTINE CUSTOM ER SUPPORT FOR THEIR CLIENTS. CLEARLY, CHARACTERISTICS OF THE SERVICE RENDERED WOULD BE DISSIMILAR. FURTHER, BOTH SERVICE PROVIDER S CANNOT BE CONSIDERED TO BE FUNCTIONALLY SIMILAR. THEIR BUSINE SS ENVIRONMENT WOULD BE ENTIRELY DIFFERENT, THE DEMAND AND SUPPLY FOR THE SERVICES WOULD BE DIFFERENT, THE ASSETS AND CAPITAL EMPLOYED WOULD DIFFER, THE COMPETENCE REQUIRED TO O PERATE THE TWO SERVICES WOULD BE DIFFERENT. EACH OF THE AFORES AID FACTORS WOULD HAVE A MATERIAL BEARING ON THE PROFITABILITY OF THE TWO ENTITIES. TREATING THE SAID ENTITIES TO BE COMPARAB LES ONLY FOR THE REASON THAT THEY USE INFORMATION TECHNOLOGY FOR THE DELIVERY OF THEIR SERVICES, WOULD, IN OUR OPINION, BE ERRONEOUS. 47. AFTER HEARING BOTH THE PARTIES, WE DIRECT THE L D. TPO TO EXCLUDE THIS COMPARABLE FROM THE LIST OF COMPARABLES IN VIEW OF DECISION OF HONBLE DELHI HIGH COURT AS THIS COMPANY IS FUNCTIONALLY DIFFEREN T, WHICH IS EVIDENT FROM THE BUSINESS PROFILE OF ECLERIX, REPRODUCED EARLIER FRO M ANNUAL REPORT. 48. IN THE RESULT, GROUND NO. 7 IS ALLOWED. 49. APROPOS GROUND NO. 8 LD. COUNSEL FOR THE ASSESS EE SUBMITTED THAT ASSESSEE BEING A CAPTIVE OR LOW RISK SERVICE PROVIDER, OPER ATES IN A VIRTUALLY RISK FREE ENVIRONMENT , WHILE ENTREPRENEURIAL ENTERPRISES LIK E COMPARABLE COMPANIES SELECTED BY LD.TPO UNDERTAKE THE FULL RANGE OF ECON OMIC RISKS, SUCH AS, MARKET RISK, PRICE RISK, PRODUCT RISK, IDLE-TIME RISK, CRE DIT RISK, FOREIGN EXCHANGE FLUCTUATION RISK, TECHNOLOGY OBSOLESCENCE RISK ETC. HENCE, THE RETURN EARNED BY THE COMPARABLE COMPANIES SELECTED BY LD. TPO IS NOT COM PARABLE TO THE RATE OF RETURN EARNED BY ACTIS GLOBAL. HE POINTED OUT THAT ALL SI GNIFICANT BUSINESS AND 29 ITA 30/DEL/2015 ENTREPRENEURIAL RISKS ARE BORNE BY THE AES OF ASSES SEE WHO OWN ALL THE VALUABLE INTELLECTUAL PROPERTY RIGHTS AND OTHER COMMERCIAL O R MARKETING INTANGIBLES. LD. COUNSEL HAS FURNISHED A TABLE ELABORATING DIFFERENC E IN THE RISK PROFILE OF ASSESSEE VIS-A-VIS COMPARABLE COMPANIES, WHICH ARE REPRODUCE D HEREUNDER: RISKS ACTIS GLOBAL SERVICES PRIVATE LIMITED CALIBER POINT BUSINESS SOLUTIONS LTD. COSMIC CLOBAL LTD. INHOUSE PRODUCTIONS LTD. CROSS DOMAIN SOLUTIONS PVT. LTD. INFOSYS BPO LTD. ECLERX SERVICES PVT. LTD. MARKET RISK NO YES YES YES YES YES YES SERVICE LIABILITY RISK NO YES YES YES YES YES YES CREDIT RISK NO YES YES YES YES YES YES FOREIGN EXCHANGE RISK NO YES YES YES YES YES YES MANPOWER RISK LIMITED YES YES YES YES YES YES LEGAL AND STATUTORY RISK LIMITED YES YES YES YES YES YES CAPACITY UTILIZATION RISK NO YES YES YES YES YES YES 50. LD. COUNSEL SUBMITTED THAT FOLLOWING THE DECISI ON OF ITAT DELHI BENCH IN THE CASE OF MOTOROLA SOLUTIONS INDIA PVT. LTD. VS. ACIT (ITA NO. 5637/DEL/2011), THE MATTER MAY BE RESTORED BACK TO THE FILE OF LD. TPO FOR NECESSARY RISK ADJUSTMENT AFTER AVAILING THE SERVICES OF TECHNICAL EXPERTS TO BE APPOINTED BY BOTH THE PARTIES. 51. LD. DR REFERRED TO PARA 7.8 OF LD. DRPS ORDER AND POINTED OUT THAT WHEN CALLED UPON TO QUANTIFY THE RISK ADJUSTMENT, THE AS SESSEE FILED REPLY, WHICH WAS VERY VAGUE AND WITHOUT ANY BASIS BEING BACKED BY FA CTUAL INPUT, CORRELATING ITS FUNCTIONING, THE FUNCTIONING OF THE SERVICE SECTOR AND THE FUNCTIONING OF THE COMPARABLE COMPANIES. 30 ITA 30/DEL/2015 52. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. LD. TPO HAD DENIED THE RISK ADJUSTMENT CLAIMED BY ASSESSEE ON THE GROUND THAT ASSESSEE FAILED TO SHOW THAT THE COMPARABLES HAD ACTUALLY UNDERTAKEN SUCK RISK AND FAILED TO DEMONSTRATE HOW THE SAME MATERIAL AFFECTED FROM MARGINS. HE POINTED OUT THAT UNLESS IT WAS SHO WN THAT HOW THE RISK ADJUSTMENT TO FETCH THE RESULT OF EACH COMPARABLE AND HOW THE SAME WOULD IMPROVE THE COMPARABILITY AND UNLESS ADEQUATE REASONS ARE GIVEN FOR SUCH ADJUSTMENT, NO ADJUSTMENT CAN BE ALLOWED TO THE TAX PAYER. BEFORE LD. DRP ALSO THE ASSESSEE FAILED TO FURNISH ANY DATA FOR QUANTIFICATION OF RISK. UNL ESS THE DIFFERENCE CAN BE ASCERTAINED ACCURATELY AND THEIR IMPORT ON THE MARG IN CAN BE ASSESSED WITH REASONABLE ACCURACY, THE ADJUSTMENT CANNOT BE ALLOW ED. UNDER SUCH CIRCUMSTANCES, THE MATTER ALSO CANNOT BE RESTORED BACK TO THE FILE OF LD. TPO. IN THE RESULT, GROUND NO. 8 IS DISMISSED. 53. GROUND NO. 9: BRIEF FACTS, APROPOS GROUND NO. 9 , ARE THAT AO NOTICED THAT THE ASSESSEE HAD GOT OUTSTANDING RECEIVABLES OF RS. 5,9 0,80,860/-. HE FURTHER NOTICED THAT THE OPENING BALANCE OF SUCH RECEIVABLES WAS RS . 3,88,32,043/-. THESE RECEIVABLES WERE FROM THE AE OF THE ASSESSEE ITSELF , FOR WHOM SERVICES WERE RENDERED BY THE ASSESSEE. ACCORDINGLY, AO ISSUED SH OW CAUSE NOTICE, INTER ALIA, OBSERVING, AS UNDER: ACCORDINGLY, THE ABOVE DEFERRED PAYMENT/ RECEIV ABLE IS PROPOSED TO BE CONSIDERED AS AN INTERNATIONAL TRAN SACTION REQUIRING DETERMINATION OF ALP. IN ABSENCE OF ANY S UITABLE CUP DATA OR CREDIT RATING OF YOUR AE, INTEREST ON T HE OUTSTANDING BALANCE AT THE END OF THE YEAR IS PROPO SED TO BE BENCHMARKED AT THE PRIME LENDING RATE OF SBI PLUS 5 00 BPS. THE 500 OF BASIC POINT IS ADDED TO TAKE INTO ACCOUNT VA RIOUS FACTORS INCLUDING OPPORTUNITY COST. ACCORDINGLY, SHORTFALL ON ACCOUNT OF NON-CHARGING OF INTEREST IS PROPOSED TO BE CALCULAT ED @ 31 ITA 30/DEL/2015 16.75% WHICH COMES TO 98,96,044/- WHICH IS PROPOSED TO BE ADJUSTED. 54. THE ASSESSEES REPLY HAS BEEN SUMMARIZED AS UND ER, IN WHICH FOLLOWING POINTS WERE RAISED: (A) THE WORKING CAPITAL ADJUSTMENT WOULD CONTAIN THE EL EMENT OF INTEREST PART OF THE RECEIVABLES. (B) AMOUNT, WHICH IS MORE THAN SIX MONTHS OLD, SHOULD O NLY BE CONSIDERED FOR ACCRUAL OF INTEREST. 55. THE LD. TPO DID NOT ACCEPT BOTH THESE ARGUMENTS FOR THE REASONS MENTIONED IN HIS ORDER, FOR WHICH PRIMARILY BE OBSE RVED THAT THE WORKING CAPITAL ADJUSTMENT COULD NOT BE ALLOWED TO SERVICE INDUSTRY AND IN REGARD TO THE DETAILS SUBMITTED BY ASSESSEE REGARDING THE PER IOD FOR WHICH BALANCES WERE OUTSTANDING, HE OBSERVED THAT THE SAID DETAILS CONTAINED VARIOUS ERRORS. 56. LD. DRP PARTLY ALLOWED THE ASSESSEES APPEAL, T HE OBSERVATIONS FROM WHICH HAVE BEEN REPRODUCED EARLIER IN PARA 15 OF TH IS ORDER. 57. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ALL THE OUTSTANDINGS ARE FOR LESS THAN SIX MONTHS AND, THEREFORE, NO ADJUSTMENT IS CALLED FOR. HE RELIED ON THE DECISION OF ITAT BANGALORE IN THE CASE OF M/S LOGIX MICRO SYSTEMS LTD. (ITA NO. 423/BANG/2009). HE SUBMITTED THAT ONL Y IN SOME CASES 90 DAYS DELAY IS THERE IN REALIZATION OF PROCEEDS FROM AES. 32 ITA 30/DEL/2015 58. LD. COUNSEL FURTHER SUBMITTED IN AY 2009-10, LD . DRP HAS ACCEPTED THE ASSESSEES CONTENTION THAT THE ISSUE OF INTERES T ELEMENT PERTAINING TO THE RECEIVABLES WILL BE SUBSTITUTED IN THE SAME. 59. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. AS FAR AS LD. COUNS ELS PLEA BASED ON THE DIRECTIONS OF DRP FOR AY 2009-10 IS CONCERNED, WE F IND THAT IN THE SAID ASSESSMENT YEAR THE ASSESSEE HAD OBJECTED TO THE TP O NOT ALLOWING WORKING CAPITAL ADJUSTMENT AND SINCE THIS ADJUSTMENT WAS DI RECTED TO BE ALLOWED BY LD. DRP, THEREFORE, A SEPARATE ADDITION ON THIS GRO UND WAS NOT REQUIRED. HOWEVER, IN THE PRESENT ASSESSMENT YEAR, LD. TPO HA D DENIED THE WORKING CAPITAL ADJUSTMENT AND THE SAME HAS NOT BEEN ASSAIL ED BEFORE US. UNDER SUCH CIRCUMSTANCES, THE MATTER NEEDS TO BE RESTORED BACK TO THE LD. TPO TO VERIFY THE ASSESSEES CONTENTION REGARDING ALL THE INVOIC ES OUTSTANDING BEING FOR LESS THAN SIX MONTHS AND, IF, THE SAME IS FOUND TO BE CORRECT, THEN NO ADDITION IS CALLED FOR IN VIEW OF THE ITAT DECISION IN THE CASE OF M/S LOGIX MICRO SYSTEMS LTD. (SUPRA). ONE OF THE PLEA OF LD. COUNSEL FOR THE ASSESSEE WAS THAT THE ENTIRE FUNDS ARE RECEIVED FROM PARENT COMPANY. HOWEVER, THIS PLEA HAS BEEN TAKEN FOR THE FIRST TIME AND WAS NOT TAKEN BEFORE LOWER REVENUE AUTHORITIES. THEREFORE, THIS ASPECT ALSO NEEDS TO B E CONSIDERED BY LD. TPO WHILE DECIDING THIS ISSUE DE NOVO. IN THE RESULT, G ROUND NO. 9 IS ALLOWED FOR STATISTICAL PURPOSES. 60. GROUND NO. 10 RELATING TO INITIATION OF PENALT Y U/S 271(1)(C) IS PREMATURE. 33 ITA 30/DEL/2015 61. GROUND NOS. 11 & 12: THE CHARGING OF INTEREST U /S 234B & D, TAKEN IN GROUND NO. 11, IS CONSEQUENTIAL. THE AO SHALL RECAL CULATE THE CHARGING OF INTEREST UNDER THE AFORESAID SECTIONS, WHILE GIVING EFFECT TO THE APPELLATE ORDER. 62. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCED IN OPEN COURT ON 10/12/2015.. SD/- SD/- (C.M. GARG) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED:10/12/2015. *MP* COPY OF ORDER TO: 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI.