ACIT circle 16 (1), V. Techbooks Electronic Services (P)Ltd,

ITA 3250/DEL/2007

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3623 (ITAT-DELHI)
• Duration Of Justice: 10 year(s) 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 24-05-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 10-07-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: C S AGGARWAL RAVI PRATA P MALL
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction
• Section: 92C

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I NEW DLEHI BEFORE SHRI R.S.SYAL, VICE PRESIDENT AND SHRI K. NARSIMHA CHARY, JUDICIAL MEMBER I.T.A. NO. 3250/DEL/2007 ASSESSMENT YEAR: 2004-05 ASSTT. COMMISSIONER OF INCOME-TAX VS M/S TECHBOOKS ELECTRONICS SERVICES CIRCLE 16(1), NEW DELHI. (P) LTD., A-28, MOHAN C OOPERATIVE INDUSTRIAL ESTATE, MATHURA ROAD, NEW DELHI. APPELLANT BY: SHRI KUMAR PRANAV, SR. DR RESPONDENT BY: S/SHRI C.S. AGGARWAL& RAVI PRATA P MALL ORDER PER K. NARSIMHA CHARY, JM AGGRIEVED BY THE ORDER DATED 21/05/2007 PASSED BY T HE LD. COMMISSIONER OF INCOME TAX (FOR SHORT HEREINAFTER C ALLED AS LD. CIT(A)), REVENUE PREFERRED THIS APPEAL ON THE FOLL OWING GROUNDS:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ADDED IN DELETING THE ADDITION OF RS. 3, 49, 31, 45 3/-MADE BY THE AO ON ACCOUNT OF ADJUSTMENT OF ARMS-LENGTH PRICE WITH RESPECT TO THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE COMPANY WITH THE ASSOCIATED ENTERPRISE. 2. THE LD. CIT(A) HAS ALSO ADDED IGNORING THE APPLICAB LE MANDATORY PROVISIONS OF LAW RELATING TO THE USE OF CONTEMPORA NEOUS DUTTA AS CONTAINED IN RULE 10 B (4) OF THE INCOME TAX RULES, 1962 (FOR SHORT HEREINAFTER CALLED AS THE RULES) READ WITH SECTIO N 92C (2) OF THE INCOME TAX ACTS 1961. 2 2. RELEVANT FACTS IN BRIEF ARE THAT THE ASSESSEE BE ING A WHOLLY- OWNED SUBSIDIARY OF TECH ENTERPRISE INC, USA WAS IN CORPORATED IN SEPTEMBER 1997 FOR PROVIDING IT ENABLED DATA CONVER SION SERVICES IN FULFILLMENT OF THE CONTRACTS NEGOTIATED BY TECHB OOKSUS WITH ITS CLIENTS. ASSESSEE IS AN OFFSHORE UNIT THAT PERFORMS OUTSOURCED SERVICES FOR ITS ASSOCIATED ENTERPRISE IN THE AREA OF DATA CONVERSION AND CONTENT OUTSOURCING RELATED SERVICES. DURING TH E FINANCIAL YEAR 2003-04 THE ASSESSEE ENTERED INTO AN INTERNATIONAL TRANSACTION WORTH RS. 22,51,64,787/-FOR PROVISION OF IT ENABLED DATA CONVERSION SERVICES WITH ITS ASSOCIATED ENTERPRISE. IN ORDER T O ASCERTAIN THE ARMS-LENGTH THE NATURE OF ITS INTERNATIONAL TRANSA CTIONS, THE ASSESSEE CARRIED OUT A DETAILED TRANSFER PRICING ST UDY AND APPLIED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) IN ACCOR DANCE WITH THE INDIAN TRANSFER PRICING REGULATIONS. BASING ON THE OPERATING RESULTS OF 16 COMPANIES IN THE TRANSFER PRICING STU DY CARRIED OUT BY THE ASSESSEE FOR THE FINANCIAL YEAR 2003-04 RELEVAN T FOR THE ASSESSMENT YEAR 2004-05 THE ASSESSEE REACHED ITS OP ERATING PROFIT/TOTAL COST (OP/PC) AT 14%, WHEREAS FOR COMPA RABLES ALSO IT WAS AT 14%. ACCORDING TO THE ASSESSEE THE AVERAGE M ARGINS EARNED BY THE COMPARABLE COMPANIES WAS COMPUTED USING THE FINANCIAL DATA AVAILABLE AT THE TIME OF UNDERTAKING THE TRANS FER PRICING STUDY AND WAS CALCULATED TAKING INTO ACCOUNT ONLY THE OPE RATING COSTS, AND NON-OPERATING ITEMS LIKE FOREIGN EXCHANGE FLUCT UATION WERE EXCLUDED FROM THE TOTAL COST. 3. DURING SCRUTINY, LD. AO REFERRED THE MATTER TO T HE TRANSFER PRICING OFFICER (TPO) FOR A DETERMINATION OF ARMS- LENGTH PRICE (ALP) 3 IN RESPECT OF THE INTERNATIONAL TRANSACTION. BY ORD ER DATED 04/12/2006 LD. TPO PROPOSED TRANSFER PRICING ADJUST MENT OF RS. 3,49,31,453/- AND ACCORDINGLY LD. AO PASSED THE ASS ESSMENT ORDER MAKING SUCH AN ADDITION. ASSESSEE CARRIED THE MATTE R IN APPEAL BEFORE THE LD. CIT(A) CHALLENGING THE ASSESSMENT OR DER IN RESPECT OF TREATING THE FOREIGN EXCHANGE FLUCTUATION AS AN OPE RATING COST, NOT CONSIDERING SUPRAWIN TECHNOLOGIES LTD AND TUISIYAN LTD AS COMPARABLE ON THE GROUND OF DISMAL FINANCIALS WITH SALESOF LESS THAN ONE CRORE RUPEES: THAT THE DATA FOR THE YEAR 2 003-04 ONLY SHALL BE USED FOR THE PURPOSE OF CALCULATING OP/PC AND AC CORDINGLY REJECTING THE FOUR COMPANIES NAMELY MAX HEALTHSCRI BE LIMITED, WEAL INFOTECH LTD, CARBORUNDUM UNIVERSAL LTD AND TR ICOM INDIA LTD: AND CONSIDERING OTHER 3 COMPANIES WITH HUGE RP T TRANSACTIONS AS COMPARABLES. BY WAY OF IMPUGNED ORDER LD. CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE IN PART, AND DELETED THE ADD ITION MADE BY THE LD. AO. HENCE THE REVENUE IS IN THIS APPEAL BEFORE US. 4. HEARD THE LD. AR AND LD. DR AND PERUSED THE MATE RIAL PAPERS ON RECORD. IT IS EVIDENT FROM THEIR SUBMISSIONS TH AT THE ENTIRE DISPUTE IN THIS MATTER REVOLVES AROUND THREE POINTS , NAMELY, 1. WHETHER THE GAIN/LOSS ARISING OUT OF FOREIGN EXCHAN GE FLUCTUATION IS OPERATING PROFIT/LOSS? 2. WHETHER DEPRECIATION IS PART OF OPERATING COST? 3. WHETHER THE SIX COMPANIES, NAMELY, SUPRAWINTECHNOLO GIES LTD. AND TULSIYAN TECHNOLOGIES LTD, CARBORUNDUM UNI VERSAL LTD, WEAL INFOTECH LTD, TRICOM INDIA LTD, MAX HEALT HSCRIBE LTD, 4 HINDUJATMT LTD AND DATAMATICS TECHNOLOGIES LTD. ARE GOOD/BAD COMPARABLES? 5. COMING TO THE FIRST ASPECT OF CONTROVERSY, I.E. THE TREATMENT GIVEN TO THE LOSS ARISING OUT OF THE FOREIGN EXCHAN GE FLUCTUATIONS, IT IS THE ARGUMENT OF THE LD. DR THAT THE LD. CIT(A) C OMMITTED ERROR IN TREATING LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTU ATION AS NON- OPERATING. LEARNED DR SUBMITTED THAT THE FOREIGN E XCHANGE FLUCTUATIONS LOSS HAS TO BE INCLUDED FOR COMPUTING THE TOTAL COST FOR COMPUTING THE MARGINOF PROFIT EARNED BY THE ASSESSE E FROM THE INTERNATIONAL TRANSACTION, SINCE THOSE ARE INALIENA BLE PARTS OF CROSS BORDER TRANSACTIONS WOVEN INTO THE FABRIC OF INTERN ATIONAL TRANSACTIONS. HE SUBMITTED THAT WHILE APPLYING TNM M, WHAT NEEDS TO BE COMPARED IS THE OPERATIONAL PROFIT RATIO, INT ER ALIA, TO THE TOTAL COST, AS SUCH THE FOREIGN EXCHANGE FLUCTUATIONS HAS TO BE CONSIDERED AS AN OPERATIVE ONE INASMUCH AS IT IMPAC TS THE OPERATIONAL PROFITS. PER CONTRA, IT IS THE ARGUMEN T OF THE LD. AR THAT THE LD. TPO, ERRED WHILE COMPUTING THE MARGIN OF PR OFIT OF THE ASSESSEE BY INCLUDING THE LOSS INCURRED ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION AS THE OPERATING ONE. ACCORDI NG TO HIM, THE SAID LOSS IS ON REALISATION OF THE SALE PROCEEDS AN D COULD NOT HAVE BEEN INCLUDED IN THE OPERATING COSTS. LEARNED AR SU BMITTED THAT VARIATION IN THE FOREIGN CURRENCY IS NOT THE COST I NCURRED BY THE ASSESSEE AS THE RATE OF FOREIGN EXCHANGE KEEPS ON V ARYING ON DAY TO DAY BASIS AND IT DEPENDS UPON THE FLUCTUATION OF CU RRENCY RATE AND THUS REALLY IS NOT AN OPERATIONAL COST DESPITE THE FACT THAT IT MAY REPRESENT BUSINESS LOSS OR BUSINESS GAIN. HE PLACE D RELIANCE ON THE 5 DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F WOODWARDGOVERNOR INDIA, 312 ITR 254 AND ALSO ON DHL EXPRESS INDIA P. LTD. VS ACIT, ITA NO.7360/MUM/2010 ETC. 6. INSOFAR AS APPLICATION OF TNMM METHOD IS CONCERN ED, THE COMPARISON IS OF THE NET OPERATING MARGIN REALIZED BY AN ENTERPRISE IN RELATION TO THE TOTAL COSTS AND WHATEVER THAT AF FECTS THE OPERATING PROFITS IS RELEVANT IS REQUIRED TO BE TAKEN INTO CO NSIDERATION, UNLESS THE INCOME/LOSS IS EXTRAORDINARY IN NATURE. FOREIG N EXCHANGE FLUCTUATION IS ONE OF THE FACTORS THAT IMPACTS THE OPERATIONAL PROFITS AS SUCH IT CANNOT BE SAID THAT THE LOSS ARISING OUT OF THE FOREIGN EXCHANGE FLUCTUATION IS NON-OPERATIONAL IN NATURE. IN THIS RESPECT, WE WOULD LIKE TO PROFITABLY REFER TO THE DECISION O F THIS TRIBUNAL IN THE CASE OF SISTER CONCERN OF THE ASSESSEE, NAMELY, TECHBOOKS INTERNATIONAL PVT. LTD., VS DCIT ITANO.240/DEL/2015 FOR ASSESSMENT YEAR : 2010-11 (ORDER DATED 06.07.2015) WHEREIN IT WAS HELD,- I. FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS 4.1. THE FIRST ISSUE ARGUED BEFORE US IS AGAINST TH E EXCLUSION OF FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS FROM THE OPE RATING REVENUE/COST OF THE ASSESSEE AS WELL AS THE COMPARA BLES. WE FIND MERIT IN THE CONTENTION RAISED ON BEHALF OF THE ASS ESSEE ABOUT THE INCLUSION OF FOREIGN EXCHANGE GAIN/LOSS IN THE OPER ATING REVENUE/COSTS OF THE ASSESSEE AS WELL AS THAT OF TH E COMPARABLES. WHEN WE ADVERT TO THE NATURE OF SUCH FOREIGN EXCHAN GE GAIN EARNED BY THE ASSESSEE, IT PRIMA FACIE APPEARS THAT THE SA ME IS IN RELATION TO THE REVENUE EARNED FROM ITS AE IN CONNECTION WITH T HE PROVISION OF THE ITES. WHEN THE FOREIGN EXCHANGE GAIN DIRECTLY RESULTS FROM THE CONSIDERATION RECEIVED FOR RENDERING ITES TO AE, W E FAIL TO APPRECIATE AS TO HOW SUCH FOREIGN EXCHANGE FLUCTUATION GAIN CA N BE CONSIDERED AS NON-OPERATING. WHAT IS TRUE FOR FOREIGN EXCHANGE GAIN FROM THE 6 TRANSACTIONS OF THE REVENUE NATURE BEING CONSIDERED AS PART OF OPERATING REVENUE IS EQUALLY TRUE FOR THE FOREIGN E XCHANGE LOSS BEING CONSIDERED AS PART OF OPERATING COSTS FROM THE TRAN SACTIONS OF THE REVENUE NATURE. 4.2. THE SPECIAL BENCH OF THE TRIBUNAL IN ACIT V SPRAKASH I. SHAH (2008) 115 ITD 167 (MUM)(SB) HAS HELD THAT THE GAIN DUE TO FLUCTUATIONS IN THE FOREIGN EXCHANGE RATE EMANATING FROM EXPORT IS ITS INTEGRAL PART AND CANNOT BE DIFFERENTIATED FROM THE EXPORT PROCEEDS SIMPLY ON THE GROUND THAT THE FOREIGN CURRENCY RATE HAS INCREASED SUBSEQUENT TO SALE BUT PRIOR TO REALIZATION. IT WEN T ON TO ADD THAT WHEN GOODS ARE EXPORTED AND INVOICE IS RAISED IN CU RRENCY OF THE COUNTRY WHERE SUCH GOODS ARE SOLD AND SUBSEQUENTLY WHEN THE AMOUNT IS REALIZED IN THAT FOREIGN CURRENCY AND THE N CONVERTED INTO INDIAN RUPEES, THE ENTIRE AMOUNT IS RELATABLE TO TH E EXPORTS. IN FACT, IT IS ONLY THE TRANSLATION OF INVOICE VALUE FROM THE F OREIGN CURRENCY TO THE INDIAN RUPEES. THE SPECIAL BENCH HELD THAT THE EXCHANGE RATE GAIN OR LOSS CANNOT HAVE A DIFFERENT CHARACTER FROM THE TRANSACTION TO WHICH IT PERTAINS. THE BENCH FOUND FALLACY IN THE S UBMISSION MADE ON BEHALF OF THE REVENUE THAT THE EXCHANGE RATE DIF FERENCE SHOULD BE DETACHED FROM THE EXPORTS AND BE CONSIDERED AS AN I NDEPENDENT TRANSACTION. EVENTUALLY, THE SPECIAL BENCH HELD THA T SUCH EXCHANGE RATE GAIN ARISING FROM EXPORTS CANNOT BE VIEWED DIF FERENTLY FROM SALE PROCEEDS. 4.3. IN THE CONTEXT OF TRANSFER PRICING, THE BA NGALORE BENCH OF THE TRIBUNAL IN SAP LABS INDIA PVT. LTD. VS ACIT (2011) 44 SOT 156 (BANGALORE) HAS HELD THAT FOREIGN EXCHANGE FLUCTUAT ION GAIN IS PART OF OPERATING PROFIT OF THE COMPANY AND SHOULD BE INCLU DED IN THE OPERATING REVENUE. SIMILAR VIEW HAS BEEN TAKEN IN T RILOGY E BUSINESS SOFTWARE INDIA (P) LTD. VS DCIT (2011) 47 SOT 45 (URO) (BANGALORE). THE MUMBAI BENCH OF THE TRIBUNAL IN S. NARENDRAVSADDTL. CIT (2013) 32 TAXMAN.COM 196 HAS A LSO LAID DOWN TO THIS EXTENT. IN VIEW OF THE FOREGOING DISCU SSION, WE ARE OF THE CONSIDERED OPINION THAT THE AMOUNT OF FOREIGN EXCHA NGE GAIN/LOSS ARISING OUT OF REVENUE TRANSACTIONS IS REQUIRED TO BE CONSIDERED AS AN ITEM OF OPERATING REVENUE/COST. 4.4. SINCE, THE TPO HAS COMPUTED PLI OF THE ASSE SSEE AS WELL AS COMPARABLES BY IGNORING THE AMOUNT OF FOREX GAIN/LO SS, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF TPO/AO TO RECOMPUTE THE ASSESSEES MARGIN AS WELL AS THAT OF THE COMPARABLES BY CONSIDERING FOREIGN EXCHANGE GAIN/LOSS AS AN ITE M OF OPERATING REVENUE/COST. WE WANT TO MAKE IT CLEAR THAT OUR FI NDING IN THIS 7 REGARD IS RESTRICTED TO CONSIDERING FOREX GAIN/LOSS FROM THE TRANSACTIONS OF THE REVENUE NATURE AS PART OF OPERA TING REVENUE/COST. IF SOME PART OF FOREX GAIN/LOSS TURNS OUT TO BE REL ATABLE TO TRANSACTIONS ON CAPITAL ACCOUNTS, THEN THAT PART CA NNOT BE CONSIDERED AS PART OF OPERATING REVENUE/COST. SIMILAR VIEW HA S BEEN TAKEN BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE IMM EDIATELY PRECEDING ASSESSMENT YEAR, NAMELY, 2009-10, A COPY OF WHICH ORDER HAS BEEN PLACED ON PAGE 908 OF THE PAPER BOOK. 7. THIS DECISION IS RENDERED HOLDING THAT THE LOSS OR GAIN ARISING OUT OF THE FOREIGN EXCHANGE FLUCTUATION IS OPERATIO NAL IN NATURE. WE ARE CONVINCED THAT THE ABOVE REASONING HOLDS GOOD I N THE FACTUAL MATRIX OF THIS CASE ALSO. WHILE RESPECTFULLY FOLLOW ING THE SAME, WE HOLD THAT THE CONTENTION OF THE REVENUE HOLDS MERIT S AND DESERVES TO BE ACCEPTED. HOWEVER, SINCE THE PLI OF THE ASSES SEE AND COMPARABLES NEEDS RECOMPUTATION BY TAKING INTO ACCO UNT THE LOSS/PROFIT DUE TO FOREIGN EXCHANGE FLUCTUATION, WE DEEM IT JUST AND PROPER TO REMAND THE MATTER TO THE FILE OF TPO/AO T O RE-COMPUTE THE ASSESSEES MARGIN AS WELL AS THAT OF THE COMPAR ABLES BY CONSIDERING FOREIGN EXCHANGE GAIN/LOSS AS AN ITEM O F OPERATING REVENUE/COST. ACCORDINGLY, THE ISSUE IS REMANDED T O THE FILE OF TPO/AO FOR COMPLIANCE WITH THIS DIRECTION. 8. NEXT CONTENTION BETWEEN THE PARTIES IS IN RESPEC T OF THE CALCULATION OF THE MARGIN BY THE LEARNED AO EXCLUDI NG THE EFFECT OF DEPRECIATION. LD. AR CONTENDED THAT THE LD. TPO WRO NGLY PROCEEDED TO COMPUTE THE MARGIN OF PROFIT OF THE COMPARABLES BY EXCLUDING THE DEPRECIATION FROM THE OPERATING COST, WHEREAS WHILE COMPUTING THE MARGIN OF PROFIT ASSESSEE HAS INCLUDED THE DEPRECIA TION IN THE OPERATING COST AND SAME HAS ALSO BEEN ACCEPTED BY T HE LD. TPO. 8 ACCORDING TO THE LD. AR, DEPRECIATION IS OPERATING COST AND SHOULD NOT HAVE BEEN EXCLUDED FROM THE OPERATING COST. WHI LE PLACING RELIANCE ON A DECISION OF MUMBAI TRIBUNAL IN DCIT V S. PETRO ARALDITE (P) LTD. [2013] 145 ITD 182 (MUMBAI TRIB), IT IS THE SUBMISSION OF THE LEARNED AR THAT THE DEPRECIATION IS A VERY IMPORTANT AND INTEGRAL PART OF OPERATING COST AND N ON CONSIDERING THE SAME WHILE CALCULATING THE MARGIN IS AN ERROR O N THE PART OF THE AO. 9. AS HAS BEEN OBSERVED BY US IN THE PRECEDING PARA GRAPHS, IN TNMM METHOD FOR CALCULATION OF THE OPERATING PROFIT ALL THE FACTORS THAT IMPACT THE OPERATING PROFIT OR TOTAL COST ARE RELEVANT AND REQUIRE CONSIDERATION. DEPRECIATION, AS RIGHTLY PO INTED OUT BY THE LEARNED AR, IS AN IMPORTANT AND INTEGRAL PART OF TH E OPERATING COST. WE, THEREFORE, CONCUR WITH THE STATEMENT OF THE LEA RNED AR THAT THE DEPRECIATION HAS TO BE CONSIDERED AS PART OF OPERAT ING COST, AND DIRECT THE LD. TPO/AO TO TAKE DEPRECIATION ALSO INT O CONSIDERATION WHILE CALCULATING THE PLI OF THE ASSESSEE AND THE C OMPARABLE COMPANIES. 10. NOW COMING TO THE DISPUTE RELATING TO THE INCLU SION OR EXCLUSION OF CERTAIN COMPANIES FROM THE SET OF COMP ARABLES, AT THE OUTSET, ON A PERUSAL OF RECORD, WE FIND THAT THERE IS NO DISPUTE TO THE FUNCTIONAL SIMILARITIES OF ALL THESE COMPANIES TO THE ASSESSEE COMPANY. LD. DR SUBMITTED THAT THE SIX COMPANIES W HICH ARE EXCLUDED BY THE LD. TPO, NAMELY, SUPRAWIN TECHNOLO GIES LTD AND TULSIYA TECHNOLOGIES ON THE GROUND OF THE NET SALES BEING IN THE 9 REGION OF ONE CRORE WITH ALMOST DISMAL FINANCIALS, OTHER FOUR COMPANIES NAMELY, CARBORUNDUM UNIVERSAL LTD, WEAL I NFOTECH LTD, TRICORN INDIA LTD AND MAX HEALTHSCRIBE LIMITED ON T HE GROUND OF NON AVAILABILITY OF CURRENT YEAR DATA - WERE RIGHTL Y REJECTED BY THE LD. TPO BUT THE LD. CIT(A) ERRED IN FINDING THAT TH OSE ARE ALSO VALID COMPARABLES. HE FURTHER CONTENDED THAT, IN THE ABSE NCE OF ANY RELATED PARTY TRANSACTIONS, THERE IS NO REASON FOR THE LD. CIT(A) TO EXCLUDE THE COMPANIES NAMELY HINDUJA TMD LTD, AND T HE DATAMATICS TECHNOLOGIES LTD FROM THE LIST OF COMPAR ABLES WHICH DESERVE TO BE GOOD COMPARABLES. ON THE OTHER SIDE, CONTENTION OF THE LD. AR IS THAT MERELY ON THE GROUND OF TURNOVER OR LOSSES FOR A COUPLE OF YEARS, SUPRAWIN TECHNOLOGIES LTD AND TULS IYAN TECHNOLOGIES LTD SHALL NOT BE EXCLUDED. IN RESPECT OF THE EXCLUSION OF THE FOUR COMPANIES NAMELY, CARBORUNDUM UNIVERSAL LTD, WEAL INFOTECH LTD, TRICOM INDIA LTD, MAX HEALTHSCRIBE LT D, IT IS SUBMITTED ON BEHALF OF THE ASSESSEE THAT AS ON THE DATE OF TR ANSFER PRICING STUDY, THE CONTEMPORANEOUS DATA RELATING TO THESE F OUR COMPANIES WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AND THAT IS THE REASON WHY THE ASSESSEE HAD TO TAKE THE DATA OF THE EARLIER YE ARS AS REPRESENTATIVE OF THE DATA OF CURRENT YEAR, BUT WIT HOUT MAKING ANY ENQUIRIES ON THIS ASPECT LD. TPO STRAIGHTAWAY PROCE EDED TO EXCLUDE THEM, AND THAT TOO, WHEN HE HAD CONSIDERED TWO OF T HESE COMPANIES NAMELY CARBORUNDUM UNIVERSAL LTD AND TRICORN INDIA LTD FOR THE PURPOSE OF CALCULATING THE OP/TC. LASTLY HE SUBMITT ED THAT INASMUCH AS HINDUJA TMD LTD AND DATAMATICS TECHNOLO GIES LTD HAVE RELATED PARTY TRANSACTIONS OF A HIGH-VOLUME LD . CIT(A) HAS 10 RIGHTLY DELETED THEM AND THE SUBMISSION OF THE LD. DR THAT THERE ARE NO RELATED PARTY TRANSACTIONS IN RESPECT OF THE SE TWO COMPANIES IS FACTUALLY INCORRECT. 11. IN RESPECT OF THE EXCLUSION OF THE TWO COMPANIE S, VIZ., SUPRAWIN TECHNOLOGIES LTD. AND TULSIYAN TECHNOLOGIE S LTD., IT IS THE OBSERVATION OF THE LEARNED TPO THAT THE NET SALES A RE IN THE REGION OF RS.1 CRORE FOR THESE TWO COMPANIES, THAT THE FIN ANCIALS ARE ALMOST DISMISSAL, AND ON THAT GROUND THEY CANNOT BE USED A S GOOD COMPARABLES. THIS OBSERVATION OF THE LEARNED TPO WA S NOT FOUND FAVOUR WITH THE LEARNED CIT(A), WHO OBSERVED IN HIS ORDER THAT THE NET SALES ARE IN THE REGION OF RS.1 CRORE IS NOT CO NCLUSIVE AND CANNOT BE USED TO DRAW ANY SIGNIFICANT INFERENCE ON THE ACCEPTANCE OR REJECTION OF THE COMPANIES. LEARNED CIT(A) APPR AISED THE FINANCIALS OF THESE TWO COMPANIES AFRESH AND FOUND THAT ON AN ANALYSIS OF THE RESULTS OF THESE TWO COMPANIES FOR THE PREVIOUS TWO YEARS, THE YEAR UNDER CONSIDERATION AND THE IMMEDIA TELY SUBSEQUENT YEAR, IT WAS APPARENT THAT THESE COMPANI ES HAVE CONSISTENTLY BOOKED REVENUES EXCEEDING RS.1 CRORE A ND THE SALES OF TULSIAN TECHNOLOGIES FOR THE FINANCIAL YEARS 2003-0 4 WERE ALSO VERY CLOSE TO RS.1 CRORE. LEARNED CIT(A) ALSO COMMENTED THAT THE LEARNED TPO HAS NOT CLARIFIED AS TO WHAT PREMISES T HE DISMISSAL FINANCIALS AND OBSERVED THAT LOSSES IN A PARTICULAR YEAR ARE NOT INDICATIVE DISMISSAL FINANCIALS INASMUCH AS UN-CONT ROLLED ENTERPRISES WORK IN MARKET DRIVEN CONDITIONS AND WO ULD BE EXPOSED TO VARIOUS RISK AND CONSEQUENT MARGIN FLUCTUATIONS. 11 12. WE ARE IN AGREEMENT WITH THE OBSERVATIONS O F THE LEARNED CIT(A) THAT THE TP REGULATIONS CONTAINED IN INCOME- TAX ACT AND RULES MADE THEREUNDER DO NOT STIPULATE ANYWHERE THA T A COMPANY HAVING A TURNOVER OF LESS THAN OR AROUND RS.1 CRORE OR COMPANIES WITH DISMISSAL FINANCIALS ARE NOT VALID COMPARABLE S. INASMUCH AS THE EXPRESSION ALMOST DISMISSAL FINANCIALS IS A S UBJECTIVE ONE, WE FIND THAT THERE IS NO OBJECTIVE ANALYSIS OF THE COM PARABILITY OF THESE TWO COMPANIES BY THE LEARNED TPO. OBSERVATION OF T HE LD. TPO THAT THE SALES OF THESE TWO COMPANIES ARE IN THE REGION OF RS.1 CRORE, DOES NOT STAND THE TEST OF RATIONALITY IN VIEW OF T HE FINDINGS OF THE LD. CIT(A). WE FIND IT DIFFICULT TO SUBSCRIBE THE VIEWS EXPRESSED BY THE LEARNED TPO. WE UPHOLD THE OBSERVATIONS OF THE LEARNED CIT(A) THAT THESE TWO COMPANIES HAVE TO BE RETAINED AS CO MPARABLES. 13. TURNING TO THE ASPECT OF THE EXCLUSION OF FOUR COMPANIES, VIZ., CARBORUNDUM UNIVERSAL LTD, WEAL INFOTECH LTD, TRICO M INDIA LTD, AND MAX HEALTHSCRIBE LTD, THE ORDER OF THE LEARNED TPO VIDE PARA 6.3 SHOWS THAT BECAUSE OF NON-AVAILABILITY OF DATA IN RESPECT OF THESE COMPANIES FOR THE FINANCIAL YEAR 2003-04, THE SE FOUR COMPANIES WERE NOT USED FOR BENCHMARKING. BEFORE T HE LEARNED CIT(A), THE ASSESSEE SUBMITTED THAT THOUGH THE LEAR NED TPO REJECTED THESE FOUR COMPANIES FOR WANT OF CONTEMPOR ANEOUS DATA, BUT CURIOUSLY LEARNED TPO INCLUDED TWO COMPANIES, N AMELY, CARBORUNDUM UNIVERSAL LTD, AND TRICOM INDIA LTD, WH ILE CALCULATING OP/TC. 12 14. IT IS THE SUBMISSION OF THE LEARNED DR THAT THE SE FOUR COMPANIES ARE NOT COMPARABLES INASMUCH AS CONTEMPOR ANEOUS DATA OF THESE COMPANIES WAS NOT AVAILABLE IN THE PU BLIC DOMAIN AND MORE PARTICULARLY THE SALES OF M/S WEAL INFOTECH AR E LOW WITH PERSISTENT LOSSES. PER CONTRA, LEARNED AR SUBMITTE D THAT WHEN THE CONTEMPORANEOUS DATA WAS NOT AVAILABLE, THE ASSESSE E MADE USE OF THE DATA RELATING TO THE YEAR 2002, 2003 AND 2004 T O THE MAXIMUM EXTENT POSSIBLE FOR THE PURPOSE OF BENCHMARK ANALYS IS AND IF AT ALL THE LEARNED TPO WAS NOT SATISFIED WITH SUCH USE, IN ALL FAIRNESS, THE TPO SHOULD HAVE MADE ENQUIRIES FROM THE ASSESSEE AS TO THE REASONS FOR CONSIDERING THE DATA RELATING PREVIOUS YEARS AS THE REPRESENTATION OF THE CURRENT YEAR, BUT INSTEAD OF UNDERTAKING SUCH AN EXERCISE, EVEN WHILE HIMSELF OBSERVING THAT THE CONTEMPORANEOUS DATA WAS NOT AVAILABLE, HE ERRONEOUSLY REJECTED THE SE FOUR COMPARABLES. FURTHER, IT IS SUBMITTED BY THE LEARN ED AR THAT SUBSEQUENTLY THE CONTEMPORANEOUS DATA RELATING TO W HEEL INFOTECH, CARBORANDUM UNIVERSAL LTD., AND TRICOM INDIA COULD BE SECURED BY THE ASSESSE FROM VALID SOURCE AND ACCORDING TO THE LEARNED AR, EVEN AFTER INCLUDING THE CONTEMPORANEOUS DATA FOR THESE THREE COMPANIES, THE MARGINS OF THE ASSESSEE WERE WELL WI THIN THE ARMS LENGTH. IT IS SUBMITTED THAT THE DATA RELATING OF MAX HEALTHSCRIBE LTD., IS STILL NOT AVAILABLE IN DATA BASE. 15. ON A CAREFUL CONSIDERATION OF THESE FACTORS AND IN VIEW OF THE SUBMISSION ON BEHALF OF THE ASSESSEE, WE ARE OF THE CONSIDERED OPINION THAT SINCE THE CONTEMPORANEOUS DATA RELATIN G TO WHEEL INFOTECH, CARBORANDUM AND TRICOMIS AVAILABLE IN THE PUBLIC 13 DOMAIN, THERE IS NO REASON AS TO WHY IT CANNOT VALI DLY BE CONSIDERED BY THE TPO, AFTER GIVING AN OPPORTUNITY TO THE ASSE SSE OF BEING HEARD IN THIS RESPECT. WHEN FUNCTIONAL SIMILARITY IS NOT QUESTIONED, CONSIDERATION OF THE CURRENT YEAR WOULD LEAD TO COM PARATIVELY ACCURATE RESULTS. WE, THEREFORE, ARE OF THE CONSID ERED OPINION THAT THIS ASPECT NEEDS TO BE SET ASIDE TO THE TPO/AO FOR CONSIDERING THE CONTEMPORANEOUS DATA OF THESE THREE COMPANIES ALSO. 16. NOW COMING TO THE ASPECT OF THE RELATED PARTY T RANSACTIONS FILTER, LEARNED AR SUBMITTED THAT THERE ARE NO RELA TED PARTY TRANSACTIONS IN CASE OF THE COMPANIES HINDUJA TMT, DATAMATICS TECHNOLOGIES AND ULTRAMARINE & PIGMENTS LTD. PER CO NTRA, LEARNED AR SUBMITTED THAT HINDUJA TMT LTD. IS HAVING 35.3% RELATED PARTY TRANSACTIONS, DATAMATICS TECHNOLOGIES IS HAVING 44. 98% RELATED PARTY TRANSACTIONS WHEREAS ULTRAMARINE & PIGMENTS L TD. IS HAVING 5.84%. THIS IS FACTUAL ASPECT NEEDS VERIFICATION A T THE END OF TPO/AO. THOUGH THE LEARNED AR REQUESTED FOR APPLIC ATION OF RELATED PARTY TRANSACTION FILTER AT 15%, FACT REMAI NS THAT THIS TRIBUNAL HAS CONSISTENTLY BEEN TAKING THE VIEW THAT RPT FILTER AT 25% IS REASONABLE. IN VIEW OF THE SUBMISSIONS OF L EARNED AR, WHETHER THE RPT FILTER AT 15% OR 25%, IT MAKES LITT LE DIFFERENCE TO THE CAUSE OF THE ASSESSEE, INASMUCH AS THEIR CASE I S THAT THE HINDUJA IS HAVING RPT AT 31.38% AND DATAMATICS IS H AVING 45.98% AND IN ANY CASE BOTH WILL FAIL THE RPT FILTER OF NO T GREATER THAN 25%. WE, THEREFORE, DIRECT THE LEARNED TPO TO VERIFY THE FACT AND TO APPLY THE RPT FILTER OF NOT GREATER THAN 25%. 14 17. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALL OWED IN PART AND FOR STATISTICAL PURPOSES. PRONOUNCED IN OPEN COURT ON THIS THE 31 ST DAY OF JANUARY, 2018. SD/- SD/- (R.S. SYAL) (K. NARSIMHA CHARY) VICE PRESIDENT JUDICIAL MEMBER DATED: 31 ST JANUARY, 2018 VJ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT BY ORDER ASSTT. REGISTRAR