GIL Shared Services Private Ltd., CHENNAI V. ACIT (OSD), CHENNAI

ITA 3485/CHNY/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9596 (ITAT-CHENNAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-04-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 20-02-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 29-12-2016
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYA
• Keywords: Depreciation; Transfer pricing; Principle of natural justice; International transaction; Question of law; Working capital adjustments; Initiation of penalty proceedings; Wholly owned subsidiary
• Section: 92C; 92

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH: CHENNAI . . . , '.. $ , ) BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NO.3485/MDS/2016 * * /ASSESSMENT YEAR: 2012-13 M/S.GIL SHARED SERVICES PVT. LTD., 184-187, II/III GROUND FLOOR, TEMPLE STEPS, LITTLE MOUNT SAIDAPET, CHENNAI-600 015. VS. THE ASST. COMMISSIONER OF INCOME TAX, (OSD), CORPORATE RANGE-2, 121, NUNGAMBAKKAM HIGH ROAD, CHENNAI-600 034. [PAN: AADCG 6176 D ] ( - /APPELLANT) ( ./- /RESPONDENT) - 0 / APPELLANT BY : MR.VIKRAM VIJAYARAGHAVAN, ADV. ./- 0 /RESPONDENT BY : MR.PATHLAVATH PEERYA, CIT 0 /DATE OF HEARING : 20.02.2017 0 /DATE OF PRONOUNCEMENT : 26.04.2017 / O R D E R PER D.S.SUNDER SINGH , ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER PASSED U/S.143(3) R.W.S.144C(13) DATED 24.11.2016 BY THE A SSTT. COMMISSIONER OF INCOME TAX (OSD),CORPORATE RANGE-2,CHENNEIA FOR THE AY 2012-13. ITA NO.3485/MDS/2016 :- 2 -: 2.0 THE ASSESSEE HAS RAISED TOTAL 13 GROUNDS IN THIS A PPEAL WHICH ARE VERY LENGTHY AND REPETITIVE. THE LD.AR SUBMITTED D URING THE APPEAL THAT EFFECTIVELY IF GROUND NOS.6, 8 & 9 ARE DISPOSED OFF THE REMAINING GROUNDS ARE NOT PRESSED AND STANDS DISPOSED OFF. THE GROUNDS OF APPEAL LISTED BELOW ARE WITHOUT PREJ UDICE TO EACH OTHER. ISSUE 1: UPWARD TP ADJUSTMENT OF RS.4,11,77,019/- GROUND OF OBJECTION 1 GENERAL GROUND THE ORDER PASSED BY THE LD. ASSISTANT COMMISSIONER OF INCOME TAX (OSD), CORPORATE RANGE 2, CHENNAI (ASSESSING OFFICER OR THE AO) PURSUA NT TO THE ORDER OF THE LD. DEPUTY COMMISSIONER OF INCOME-TAX (TRANSFER PRICING OFFICE R OR TPO) AND THE DIRECTIONS ISSUED BY THE HONBLE DISPUTE RESOLUTION PANEL, BANGALORE (DR P) TO THE EXTENT PREJUDICIAL TO THE APPELLANT, IS ERRONEOUS AND BAD IN LAW. ERRONEOUS ARMS LENGTH ANALYSIS: GROUND OF OBJECTION 2 REJECTION OF ECONOMIC ANALY SIS OF THE APPELLANT WITHOUT ANY COGENT REASONS THE LD. AO/ TPO AND THE HONBLE DRP HAVE ERRED, IN LA W AND IN FACTS BY NOT ACCEPTING THE ECONOMIC ANALYSIS CONDUCTED BY THE APPELLANT IN ACC ORDANCE WITH THE PROVISIONS OF THE INCOME TAX ACT, 1961 (THE ACT) READ WITH INCOME TAX RULES, 1962 (THE RULES) FOR DETERMINATION OF ARMS LENGTH PRICE OF THE INTERNAT IONAL TRANSACTION OF THE APPELLANT. THE TPO ALSO CONDUCTED A FRESH ECONOMIC ANALYSIS FOR SEL ECTION OF COMPARABLE COMPANIES WITHOUT PROVIDING ANY COGENT REASONS FOR UNDERTAKIN G THE SAME. GROUND OF OBJECTION 3 CHERRY PICKING OF COMPARABL E COMPANIES WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO/TPO AND T HE HONBLE DRP HAVE ERRED IN LAW AND FACTS, AND VIOLATED PRINCIPLES OF NATURAL JUSTICE B Y NOT PROVIDING THE DETAILED PROCESS (I.E. ACCEPT/REJECT MATRIX AND THE REASON OF REJECTIONS OF THE COMPANIES REJECTED QUALITATIVELY) OF THE FRESH ECONOMIC ANALYSIS CONDUCTED FOR IDENTIFIC ATION OF COMPARABLE COMPANIES, AND THUS HAVE RESORTED TO CHERRY PICKING OF THE COMPANIES UN DERTAKING NON-COMPARABLE ACTIVITIES. GROUND OF OBJECTION 4 ERRONEOUS CHARACTERIZATION O F THE APPELLANT THE LD. AO/TPO AND HONBLE DRP HAS ERRED BY CONSIDER ING THE APPELLANT AS HIGH-END INFORMATION TECHNOLOGY ENABLED SERVICE (ITES) PROVID ER ON THE BASIS OF HIS OWN SURMISES AND CONJECTURES, WITHOUT APPRECIATING ITS ACTUAL BU SINESS PROFILE (I.E. PROVIDER OF ROUTINE ITES) AND ALSO DISREGARDING THE FACT THAT THE APPELL ANT IS OPERATING AS A LOW RISK CAPTIVE SERVICE PROVIDER. ERRONEOUS COMPARABILITY ANALYSIS GROUND OF OBJECTION 5 APPLICATION OF INVALID FILTE RS THE LD. TPO/ AO AND THE HONBLE DRP HAVE ERRED IN LAW AND IN FACTS BY APPLYING CERTAIN ARBITRARY QUANTITATIVE AND QUALITATIVE FILTERS FOR THE PURPOSE OF SELECTION OF COMPARABLE COMPANIES AND ALSO ERRED IN ADDING/ REJECTING CERTAI N COMPANIES BASED ON INAPPROPRIATE CRITERIA/REASONS. GROUND OF OBJECTION 6 OBJECTION ON COMPARABLE COM PANIES ITA NO.3485/MDS/2016 :- 3 -: (I) THE LD. TPO/AO AND THE HONBLE DRP HAVE ERRED IN INCLUSION OF THE FOLLOWING FUNCTIONALLY DISSIMILAR COMPANIES FOR THE PURPOSE OF DETERMINATI ON OF ALP UNDER SECTION 92C OF THE ACT: LNFOSYS BPO LIMITED; COSMIC GLOBAL LIMITED; AND ACROPETAL TECHNOLOGIES LIMITED. (II) THE LD. TPO/ AO AND THE HONBLE DRP HAVE ERRED IN LAW AND FACTS BY NOT CONSIDERING (ON THE BASIS OF VARIOUS ARBITRARY COMPARABILITY FA CTORS/PARAMETERS) THE FOLLOWING COMPANIES AS COMPARABLE DESPITE BEING FUNCTIONAL CO MPARABLE TO THE APPELLANT ASSUMED B: JINDAL INTELLICOM LIMITED; INFORMED TECHNOLOGIES LIMITED; CALIBER POINT SYSTEMS LIMITED; R SYSTEMS INTERNATIONAL LIMITED; ACE BPC SERVICES PRIVATE LIMITED; AND DATAMATICS FINANCIAL SERVICES LIMITED. ERRORS IN COMPUTATION OF OPERATING MARGINS GROUND OF OBJECTION 7 INCORRECT COMPUTATION OF OP ERATING MARGINS THE TPO/AO HAS ERRED IN COMPUTING THE OPERATING MARG INS OF THE COMPARABLE COMPANIES BY NOT RELYING ON THE FIGURES AVAILABLE IN ANNUAL REPO RTS. FURTHER, THE TPO/AO HAS EXCLUDED CERTAIN ITEMS OF INCOME AND EXPENSE AS NON-OPERATIN G, WITHOUT PROVIDING ANY VALID BASIS AND REASONS FOR THE SAME. THE TPO AND AO HAVE FURTHER ERRED IN NOT FOLLOWING THE DIRECTIONS OF THE HONBLE DRP BY FAILING TO RECTIFY THE ERRORS IN COMPUTATION OF OPERATING MARGIN OF THE COMPARABLE COMPANIES. GROUND OF OBJECTION 8 REJECTION OF CLAIM FOR EXCE SS DEPRECIATION ADJUSTMENT WITHOUT PREJUDICE TO OTHER GROUNDS OF OBJECTIONS, T HE LD. TPO/AO AND THE HONBLE DRP HAVE ERRED IN LAW AND FACTS BY CONSIDERING EXCESS D EPRECIATION ON ACCOUNT OF CHANGE IN USEFUL LIFE OF ASSET AS AN OPERATING EXPENSE AND RE JECTING THE ADJUSTMENT CLAIMED BY THE APPELLANT TO TREAT THE SAME AS AN EXTRAORDINARY EXP ENSE AND NON-OPERATING IN NATURE, FOR THE PURPOSE OF COMPUTING THE OPERATING MARGIN OF TH E APPELLANT. OTHER GROUNDS OF OBJECTIONS GROUND OF OBJECTION 9 NON-GRANTING OF WORKING CAP ITAL ADJUSTMENT THE TPO/AO AND THE HONBLE DRP HAVE ERRED, IN LAW AN D FACTS, BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE WORKI NG CAPITAL OF THE ASSESSEE VIS--VIS THE COMPARABLE COMPANIES UNDER SUB-RULE (3) OF RULE 10B. GROUND OF OBJECTION 10 NON-GRANTING OF RISK ADJUS TMENT THE TPO/IAO AND THE HONBLE DRP HAVE ERRED, IN LAW A ND FACTS, BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE LEVEL OF RISK OF THE ASSESSEE VIS--VIS THE COMPARABLE COMPANIES UNDER SUB-RULE (3) OF RULE 10B. GROUND OF OBJECTION 11 USE OF SINGLE YEAR DATA (W HICH WAS NOT AVAILABLE AT THE TIME OF MAINTAINING TP DOCUMENTATION) THE LD. TPO/AO AND THE HONBLE DRP HAVE ERRED IN LAW AND IN FACTS, BY DETERMINING THE ARMS LENGTH MARGIN PRICE USING ONLY FINANCIAL YEAR 2011-12 DATA, AS AGAINST MULTIPLE YEAR DATA ADOPTED BY THE APPELLANT WITHOUT APPRECIATING THAT MULTIPLE YEAR DATA HAS AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE INTERNATIONAL TRANSACTIONS AND ALSO NOT GIVING DUE COGNIZANCE TO THE RULES NOTIFIED BY THE CBDT VIDE NOTIFICATION NO. 83/2015 [F. NO.142/25/2015-TPL]. GROUND OF OBJECTION 12 +1-5% TOLERABLE RANGE AS P ROVIDED IN PROVISO TO SEC 92 C (2) ITA NO.3485/MDS/2016 :- 4 -: THE LD. TPO/AO AND THE HONBLE DRP HAVE ERRED IN LAW AND IN FACTS, IN COMPUTING THE ARMS LENGTH PRICE WITHOUT GIVING BENEFIT OF +/- 5 PERCEN T UNDER THE PROVISO TO SECTION 92C OF THE ACT. ISSUE 2: INFUSION OF INTEREST GROUND OF OBJECTION 12 ERRONEOUS LEVY OF INTEREST UNDER SECTION234B, SECTION 234C AND SECTION 234D THE LD. AO HAS ERRED BY LEVYING INTEREST UNDER SECTI ON 234B, 234C AND 234D OF THE INCOME-TAX ACT, 1961 (ACT) DESPITE THE FACT THAT THE ADDITIONS TO THE INCOME WERE UN- ANTICIPATED AND THERE WOULD BE CONSEQUENTIAL REDUCT ION IN THE INTEREST ONCE THE APPEAL IS ALLOWED ON THE ISSUE. ISSUE 3: INITIATION OF PENALTY PROCEEDINGS GROUND OF OBJECTION 13 INITIATION OF PENALTY PROC EEDINGS THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDIN GS UNDER SECTION 271 (1) (C) OF THE ACT, WITHOUT APPRECIATING THE FACT THAT THE TRANSFER PRI CING ADJUSTMENTS ARISING ON ACCOUNT OF DIFFERENCE IN THE APPROACHES ADOPTED BY THE APPELLA NT VIS--VIS THE LD. TPO/ AO DOES NOT AMOUNT TO ANY CONCEALMENT OF PARTICULARS OF INCOME OR FURNISHING OF INACCURATE PARTICULARS BY THE APPELLANT. THE APPELLANT CRAVES LEAVE TO ADD TO/ALTER/AMEND/SUB STITUTE ANY OF THE ABOVE GROUNDS OF APPEAL, AT THE TIME, BEFORE OR AT THE TIME OF HEARI NG OF THE APPEAL, SO AS TO ENABLE THE APPELLATE AUTHORITY TO DECIDE THIS APPEAL ACCORDING TO LAW. 3.0 BACKGROUND OF THE COMPANY : M/S. GIL SHARED SERVICES PRIVATE LIMITED IS INCORPO RATED ON 18 DECEMBER 2009 AS A PRIVATE LIMITED COMPANY. THE COM PANY HAS BEEN SET UP TO BE ENGAGED IN THE BUSINESS OF PROVIDING TRANS ACTION PROCESSING SERVICES IN RELATION TO LOGISTICS, FINANCE AND CUST OMER SUPPORT. ON 28 JULY 2010, THE COMPANY BECAME A WHOLLY OWNED SUBSIDIARY OF AGILITY LOGISTICS HOLDINGS PTE LIMITED, SINGAPORE. THE ASSESSEE COMPA NY PROVIDES IT ENABLED SUPPORT SERVICES EXCLUSIVELY TO AGILITY GRO UP ENTITIES, SPECIFICALLY TRANSACTION PROCESSING IN RELATION TO LOGISTICS, FI NANCE AND CUSTOMER SUPPORT. 4.0 THE ASSESSEE HAS ENTERED IN TO INTERNATIONAL TRANS ACTIONS OF RS.19,12,16,984/- AS PER THE DETAILS GIVEN BELOW: ITA NO.3485/MDS/2016 :- 5 -: ASSOCIATED ENTERPRISES & DETAILS OF INTERNATIONAL T RANSACTIONS: SL. NO. DETAILS OF TRANSACTION AMOUNT OF TRANSACTIONS (IN RS.) METHOD ADOPTED BY THE ASSESSEE 1. PROVISION OF IT ENABLED SERVICES 17, 23,65,364 TNMM 2. REIMBURSEMENTS OF RECEIVED/RECEIVABLE BY GILSSPL 1,28,57,444 3. REIMBURSEMENTS PAID/PAYABLE BY GILSSPL 59,94,176 19,12,16,984 THE AO REFERRED THE INTERNATIONAL TRANSACTION TO T HE TPO FOR DETERMINING THE ALP. THE ASSESSE HAS ADOPTED THE T NMM AS MOST APPROPRIATE METHOD FOR THE PURPOSE OF DETERMINING O F ALP AND ADOPTED PLI OF OP/OC. THE OPERATING MARGINS CALCULATED BY THE ASSESSEE AFTER CLAIMING THE DEPRECIATION ADJUSTMENTS AND HAS ADOPT ED THE THREE YEARS WEIGHTED AVERAGE INSTEAD OF CURRENT YEAR DATA TO DE TERMINE THE ALP OF ITS TRANSACTION AS PER THE PROVISO OF RULE 10B(4) OF IN COME TAX RULES, HENCE THE AO REJECTED THE TP STUDY OF THE ASSESSEE AND MA DE INDEPENDENT SEARCH PROCESS ON THE CRITERIA OF ITES/BPO SEGMEN T AND SELECTED THE FOLLOWING COMPARABLES: SL.NO. NAME OF THE COMPANY OPIOC(%) 1 COSMIC GLOBAL LTD. 40.88 2 JINDAL INTELLI CORN LTD. -0.09 3 MICROGENETICS LIMITED 19.61 4 INFOSYS LIMITED 35.95 5 ICRA ONLINE LIMITED 14.93 6 ACEROPETAL INDIA LIMITED 26.3 7 ACCENTIA TECHNOLOGIES 11.84 AVERAGE 21.35 5.0 THE TPO ARRIVED THE ASSESSEES MARGIN AT 7.27% AGA INST THE AVERAGE MARGIN OF 21.35% OF COMPARABLES AND ISSUED SHOW CAUSE NOTICE TO THE ASSESSE. THE ASSESSE FILED OBJECTIONS STATI NG THAT THE TP STUDY ITA NO.3485/MDS/2016 :- 6 -: MADE BY THE ASSESSEE COMPANY HAS BEEN COMPLIED WITH ALL THE INDIAN TP REGULATIONS AS PER SEC.92C OF INCOME TAX ACT AND RE QUESTED TO ACCEPT THE TP STUDY OF THE ASSESSEE. FURTHER, THE ASSESSEE HAS REQUESTED FOR INCLUSION OF SOME MORE ADDITIONAL COMPARABLES AND F OR ADJUSTMENTS OF EXCESS DEPRECIATION CHARGED TO PLI ACCOUNT AS NON-O PERATING ITEM, WORKING CAPITAL ADJUSTMENT, RISK ADJUSTMENT AND EXC LUSION OF SOME OF THE COMPARABLES SELECTED BY THE TPO AND FOR ADOPTION OF MULTIPLE YEAR DATA. THE TPO REJECTED ALL THE OBJECTIONS RAISED BY THE A SSESSE AND SELECTED THE FINAL SET OF COMPARABLES AS UNDER: NAME OF THE COMPANY AVERAGE COSMOS GLOBAL LIMITED 40.73 JINDALL INTELLICOM LTD 1.4 MICROGENETICS LIMITED 20.41 INFOSYS BPO LIMITED 33.72 ICRA ONLINE LIMITED 16.63 ACCROPETAL INDIA LIMITED 35.74 ACCENTIA TECHNOLOGIES 11.05 AVERAGE 22.81 6.0 THE AO ARRIVED AT THE AVERAGE MARGIN OF 22.81% AS ABOVE AND PROCEEDED TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION AS UNDER: BASED ON THE ABOVE DISCUSSIONS, THE ALP IS CALCULAT ED AS UNDER: S.NO DESCRIPTION RS. 1 ASSESSEES MARGIN(A) 7.27% 2 COMPARABLE MARGIN(B) 22.8 1% 3 AE SALES(C) 17,4061,661 4 OPERATING COST (D) 16,22,60,596 5 OPERATING PROFIT PERTAINING TO AE SALES 11800065 6 EXPECTED PROFIT WITH PROFIT MARGIN OF 22.81% ON C OST =E 37011656 7 ALP OF AE SALES (D + E)=F 199272252 8 ACTUAL AE SALES(C) 17,40,61,661 9 DIFFERENCE PROPOSED TO BE ADJUSTED(F-C) 2,52,10,5 91 FROM THE FINAL SET OF COMPARABLES, AVERA GE MARGIN WORKED OUT TO 22.81% AGAINST THE TESTED PARTYS MARGIN OF 7.27%. THE ALP OF THE INTERNATIONAL TRANSACTION WAS WORKED OUT TO RS.19,9 2,72,752/- AGAINST THE ITA NO.3485/MDS/2016 :- 7 -: ACTUAL SALES OF RS. 17,40,61,661/- AND THE DIFFERENCE WAS WORKED OUT T O RS.2,52,10,591/- AS PER THE WORKINGS AND SUGGESTED FOR UPWARD ADJUSTMENT OF RS.2,52,10,591/-. THE AO ISSUED DRAFT ASSESSMENT ORDER PROPOSING ADJUSTMENTS AS SUGGESTED BY THE TPO AND I N RESPONSE TO THE DRAFT ASSESSMENT ORDER, THE ASSESSE FILED THE OBJEC TIONS BEFORE THE DRP. 7.0 THE DRP AFTER CONSIDERING THE OBJECTIONS RAISED BY THE ASSESSE, REJECTED FOR EXCLUSION OF THE FOLLOWING COMPARABLES FROM THE LIST OF COMPARABLES SELECTED BY THE TPO 1. COSMOS GLOBAL LTD. 2. INFOSYS BPO LTD. 3. ICRA ONLINE LTD. 4. ACCROPETAL INDIA LTD. SIMILARLY, THE ASSESSEE HAS REQUESTED FOR INCLUSIO N OF THE FOLLOWING COMPARABLES: 1. JINDALL INTELLICOM LTD. 2. R SYSTEMS LTD. WHICH WAS REJECTED BY THE DRP. 7.1 THE ASSESSEE HAS REQUESTED FOR INCLUSION OF SOME MORE COMPARABLES IN GROUND NO.6 BUT NOT AGITATED IN THIS APPEAL. THE DRP ALSO HAS REJECTED THE ASSESSEES REQUEST FOR ADJUSTMENTS IN RESPECT OF EXCESS DEPRECIATION FOR COMPUTING OPERATING MARGIN, WORKIN G CAPITAL ADJUSTMENT AND RISK ADJUSTMENT. ACCORDINGLY, THE DRP ISSUED T HE DIRECTIONS TO THE AO TO FRAME ASSESSMENT U/S.143(3) R.W.S. 144C. THE AO MADE THE ITA NO.3485/MDS/2016 :- 8 -: ASSESSMENT MAKING ADJUSTMENT OF RS.2,52,10,591/- AN D PASSED THE ASSESSMENT ORDER U/S.143(3) R.W.S. 144C OF THE ACT ON 02.03.2016 WHICH IS IN APPEAL BEFORE US. 8.0 IN GROUND NO.6, THE ASSESSE HAS ARGUED FOR EXCLUSI ON OF THE FOLLOWING COMPARABLES: 1. COSMIC GLOBAL LTD. 2. INFOSYS BPO LTD. 3. ICRA ONLINE LTD. 4. ACCROPETAL INDIA LTD. THE ASSESSEE HAS REQUESTED FOR INCLUSION OF THE FO LLOWING COMPARABLES: 1. JINDALL INTELLICOM LTD. 2. R SYSTEMS LTD. 3. INFORMED TECNOLOGIES LIMITED 9.0 COSMOS GLOBAL LTD: OBJECTING FOR INCLUSION OF COSMIC GLOBAL LTD., THE LD.AR ARGUED THAT THE SERVICES OF THE COSMIC GLOBAL LTD., ARE FUNCTIO NALLY NOT COMPARABLE. THE COMPANY ENGAGED IN THE MEDICAL TRANSCRIPTION AN D CONSULTANCY SERVICES, TRANSLATION SERVICES AND OUTSOURCING THE SERVICES. THE LD.AR SUBMITTED A COPY OF THE FINANCIAL STATEMENT OF THE COSMIC GLOBAL LTD. OUT OF THE TOTAL REVENUE OF RS.10.34 CR., A SUM OF RS. 9.92 CR. WAS RECEIVED FROM THE TRANSLATION SERVICE CHARGES AND THE AMOUNT PAID FOR OUTSOURCING THE TRANSLATION CHARGES WAS RS.4.19 CR. THEREBY THE ASSESSE CONTENDED THAT THE FUNCTIONS OF THE COMPANY ARE DISSIMILAR AN D THE MAJOR PORTION OF ITA NO.3485/MDS/2016 :- 9 -: THE REVENUE WAS FROM TRANSLATION CHARGES AND IT CAN NOT BE TAKEN AS COMPARABLE COMPANY. ON THE OTHER HAND, LD.DR RELIE D ON THE DRP ORDER AND THE TPO ORDER. 9.1 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. THE FUNCTIONS OF THE ASSESSE COMPANY ARE LOGISTICS , FINANCE AND CUSTOMERS SUPPORT AND PROVIDING TRANSACTION PROCESS ING SERVICES. WHEREAS THE MAJOR SOURCE OF REVENUE OF M/S.COSMIC G LOBAL LTD., WAS DERIVED FROM THE TRANSLATION SERVICES AND OUTSOURCE D FROM SUB- CONTRACTORS. AGAINST THE TOTAL REVENUE OF 10.34 CRO RES TRANSLATION CHARGES RECEIVED BY THE M/S.COSMIC GLOBAL LTD., WAS RS.9.92 CR. AND PAID WAS RS.4.19 CRORES AND THE EMPLOYEES COST WAS RS.2.45 C R. THE HONBLE CO- ORDINATE BENCH OF ITAT, BANGALORE, IN THE CASE OF M /S.E4E BUSINESS SOLUTIONS INDIA LTD., IN ITA NO.1845/BANG/2013 HELD THAT THE COMPANY IS ENTIRELY DIFFERENT IN NATURE OF ACTIVITY SINCE IT H AS RECEIVED MAJOR SHARE OF REVENUE FROM TRANSLATION CHARGES AND PAID THE SAME AND ACCORDINGLY EXCLUDED THIS COMPANY FROM THE LIST OF COMPARABLES. FROM THE ABOVE, THE ASSESSE HAS DEMONSTRATED THAT THE FUNCTIONS OF THE M/S.COSMIC GLOBAL LTD., ARE DISSIMILAR FROM THE ASSESSEES COMPANY AN D THE M/S.COSMIC GLOBAL LTD., IS NOT A GOOD COMPARABLE WITH THAT OF THE ASSESSE COMPANY. THE LD.AR ALSO RELIED ON THE FOLLOWING JUDICIAL PRO NOUNCEMENTS. I. HONBLE DELHI HC IN XCHANGING TECHNOLOGY SERVICES I NDIA P. LTD. ITA 813/2015 II. HONBLE AP & TELANGANA HC IN MARKET TOOLS RESEARCH PVT LT., I.T.A. NOS.471/ 2014 III. HONBLE DELHI HC IN RAMPGREEN SOLUTIONS PVT. LTD. ITA NO.3485/MDS/2016 :- 10 -: IV. ITA 102/2015HONBLE BANGALORE ITAT E4E BUSINESS SOLU TIONS INDIA PVT. LTD IT(TP)A NO.1845/BANG/2013 THE LD.DR DID NOT BRING ANY EVIDENCE TO S HOW THAT THE FUNCTIONS OF THE ASSESSEE COMPANY ARE SIMILAR TO THAT OF M/S.COS MIC GLOBAL LTD . THEREFORE, WE DIRECT THE AO TO EXCLUDE THE M/S.COSM IC GLOBAL LTD., FROM THE LIST OF COMPARABLES. 10.0 M/S.INFOSYS BPO LTD: THE ASSESSEE OBJECTED FOR INCLUSION OF M/S.INFOSYS BPO LTD., AS COMPARABLE MAINLY ON THE TURNOVER AND BRAND VALUE I N THE MARKET. THE LD COUNSEL OF THE ASSESSEE SUBMITTED THAT THE INFOS YS BPO, THE BUSINESS PROCESS OUTSOURCING SUBSIDIARY OF INFOSYS (NYSE: IN FY), IS AN END-TO-END OUTSOURCING SERVICES PROVIDER. INFOSYS BPO ADDRESSE S THE BUSINESS CHALLENGES AND UNLOCKS BUSINESS VALUE BY APPLYING P ROVEN PROCESS METHODOLOGIES WITH INTEGRATED IT AND BUSINESS PROCE SS OUTSOURCING SOLUTIONS. THE COMPANY APPLIES BUSINESS EXCELLENCE FRAMEWORKS TO SIGNIFICANTLY REDUCE COSTS, ENHANCE EFFECTIVENESS, AND OPTIMIZE BUSINESS PROCESSES. THE ASSESSEE COMPANY FOCUSES ON INTEGRAT ED END-TO-END OUTSOURCING AND DELIVERY OF RESULT-ORIENTED BENEFIT S TO ITS CLIENTS THROUGH REDUCED COSTS, ONGOING PRODUCTIVITY IMPROVEMENTS, A ND PROCESS REENGINEERING. THE ASSESSE CONTENDED THAT THE TURNOVER OF THE M/S .INFOSYS BPO LTD. WAS RS.1312 CR., THE BRAND VALUE AND THE ASSET WISE CANNOT BE COMPARED ITA NO.3485/MDS/2016 :- 11 -: WITH THAT OF THE ASSESSE. THE ASSESSEE ALSO RELIED ON THE FOLLOWING DECISIONS:- I. CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT.LTD., (HY D)ITAT,ITA NO.124/2014 II. BERKADIA SERVICES(INDIA)(P) LTD., (HYD)ITAT,ITA NO. 294/2014 III. UNISYS INDIA(P) LTD., (BANGALORE)ITAT,ITA NO.67/2015 IV. IGS IMAGING SERVICES (I) PVT LTD., (BANGALORE)ITAT, ITA NO.470/2013 ON THE OTHER HAND THE LD DR ARGUED THAT THE ASSESSEE HAS SELECTED TNMM AS MOST APPROPRIATE METHOD AND THE ASSESSEE CO MPANY IS A SUBSIDIARY COMPANY OF AGILITY A GLOBAL LOGISTIC LEA DER AND HAS LEADING BRAND VALUE FOR PROVIDING INTEGRATED LOGISTICS AND THE BRAND VALUE OF THE ASSESSEE COMPANY CANNOT BE UNDER ESTIMATED. THE AS SESSEE IS ENGAGED IN THE COMPLICATED AND DIVERSE FUNCTIONS WHICH REQU IRED HIGH LEVEL OF SKILLS. THE LD.DR ARGUED THAT THE SUBMISSIONS MADE BEFORE THE DRP HAVE BEEN REITERATED BY THE LD.AR AND THE LD.DRP HAS CONSIDER ED ABOVE SUBMISSIONS AND GIVEN FINDING IN PARA NO.4.3.2. THE DRP IN PARA NO.4.3.2 OBSERVED THAT THE ASSESSEE IS CREATING, IMPROVING AND MODIFY ING THE PRODUCTS AND IPS IN ITS DAY TO DAY FUNCTIONING. HOWEVER THROUGH AN INTERNAL ARRANGEMENT, OWNERSHIP OF ALL THESE INTANGIBLES/IPS /BRANDS ARE SHIFTED OUT OF INDIA AND THE ASSESSEE KEEPS CALLING ITSELF A CO ST PLUS ENTITY. THE LD DR FURTHER SUBMITTED THAT THE DRP HAS PLACED RELIANCE ON THE HONBLE ITAT BANGALORE BENCH DECISION IN THE CASE OF SOCIETY GEN ERAL GLOBAL SOLUTION CENTRE (P) LTD V. DCIT (2016)69 TAXMANN.COM336 WHIL E REJECTING ASSESSEES OBJECTION. 10.1 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. ITA NO.3485/MDS/2016 :- 12 -: THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE M/S.INFOSYS BPO LTD., IS COMPANY WITH HUGE TURNOVER AND DUE TO BRAND VALU E IN THE MARKET IT IS IN A BETTER POSITION TO BARGAIN A HIGHER PRICE FOR THE SERVICES RENDERED WHICH REFLECTS IN THE PROFIT & LOSS A/C. M/S.INFOSY S BPO LTD., IS ONE OF THE TOP RATED COMPANIES IN THE ITES DOMAIN. THE TURNOV ER OF M/S.INFOSYS BPO LTD., IS AS HIGH AS RS.1312 CR. AGAINST THE ASSESS ES TURNOVER OF RS.17.40 CR. AND HIGH TURNOVER EFFECTS THE MARGINS OF THE CO MPANY. HOWEVER THE ASSESSEE HAS NOT MADE OUT A CASE HOW THE HUGE TURNO VER HAS MATERIALLY IMPACTED THE MARGINS OF THE COMPANY. FUNCTIONS OF T HE ASSESSEE COMPANY ARE FAIRLY COMPLEX AND DIVERSE AND THESE JOBS REQUI RE HIGH LEVEL OF SKILLS. THE DRP HAS ANALYZED THE PROFILE OF THE COMPANY AND GIVEN A FINDING THAT FUNCTIONS OF THE COMPANY ARE SIMILAR TO THAT OF INF OSYS. AS PER RULE 10B(4) FOR SELECTION OF A COMPARABLE TURNOVER AND BRAND VA LUE ARE NOT THE CRITERIA. THE ASSESSEE IS IN THE SERVICE SECTOR WHE RE FIXED COSTS ARE NOMINAL AND COST OF SERVICE IS PROPORTIONATE TO THE SERVICES RENDERED BY THE ASSESSEE. THE ASSESSEE IS DOING THE CAPTIVE SER VICES TO ITS AE AND THE BRAND BUILDING AND TURNOVER CANNOT BE AN IMPEDIMENT TO BARGAIN THE PRICE FOR ITS SERVICES. THOUGH THERE ARE DECISIONS IN FAV OUR OF ASSESSEE TO EXCLUDE THE COMPARABLES BASED ON TURNOVER WE ARE UN ABLE TO ACCEPT THE ARGUMENT OF THE ASSESSEE UNLESS ASSESSEE MAKES OUT CASE THAT THE HIGH TURNOVER HAS MADE SUBSTANTIAL IMPACT ON THE MARGINS . THE ISSUE OF A PARTICULAR COMPANY IS A COMPARABLE OR NOT IS AN EXE RCISE WHICH HAS TO BE CARRIED OUT EVERY YEAR IN CASE OF AN ASSESSEE CONSI DERING THE FACTS OF THAT SPECIFIC YEAR AND NOT BLINDLY FOLLOWING ANY PRECEDE NTS. SIMILARLY IN THE ITA NO.3485/MDS/2016 :- 13 -: CASE CAPTIVE UNITS BRAND BUILDING IS NOT AN IMPEDIM ENT IN FIXATION OF PRICE. THE CO-ORDINATE BENCH OF BANGALORE IN THE CASE LAW RELIED UPON BY THE DRP HAS CONSIDERED THE ISSUE OF TURNOVER FILTER AND DECIDED AGAINST THE ASSESSEE FOR EXCLUSION OF THE COMPANY FROM THE LIST OF COMPARABLES. THEREFORE, WE HOLD THAT INFOSYS BPO CANNOT BE EXCLU DED FROM THE LIST OF COMPARABLES. THE ASSESSEES APPEAL ON THIS GROUND I S DISMISSED. 11.0 ACROPETAL TECHNOLOGIES INDIA LTD.: THE NEXT ISSUE IS EXCLUSION OF ACROPETAL TECHNOLOG IES INDIA LTD FROM THE LIST OF COMPARABLES. THE LD.AR SUBMITTED THAT T HE COMPANY IS INVOLVED IN THE FOLLOWING SEGMENTS ENGINEERING DESIGN SERVICE INFORMATION TECHNOLOGY SERVICE HEALTHCARE THE AR FURTHER SUBMITTED THAT THE COMPANY I S FUNCTIONALLY NON COMPARABLE SEGMENT IN RELATION TO THE HEALTHCARE SE GMENT, THE COMPANY PROVIDES THE FOLLOWING SERVICE: PATIENT LIFE CYCLE MANAGEMENT (INCLUDING EMR) PHYSICIAN & CLINICAL LIFE CYCLE MANAGEMENT HOSPITAL ADMINISTRATION MANAGEMENT DRUG DISCOVERY & ADMINISTRATION MANAGEMENT DISEASE LIFE CYCLE MANAGEMENT THESE SERVICES ARE EITHER IN THE NATURE OF KNOWLEDGE PROCESS OUTSOURCING OR MEDICAL PROCESS OUTSOURCING WHICH AR E MAINLY DONE BY THE HIGHLY TECHNICAL EMPLOYEES WHEREAS THE WORK DONE BY THE ASSESSEE ARE IN THE NATURE OF LOW END SERVICES. ON THE OTHER HAND, THE LD.DR RELIED ON THE ORDER OF LOWER AUTHORITIES. ITA NO.3485/MDS/2016 :- 14 -: 11.1 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. THE ASSESSEE IS ALSO ENGAGED IN THE FAIRLY COMPLEX AND DIVERSE FUNCTIONS WHICH REQUIRE HIGH DEGREE OF SKILLS. THE DRP IN ITS ORDER STATED THAT THE TPO CONSIDERED ONLY ITES SEGMENT FOR THE P URPOSE OF TP STUDY. HOWEVER, LD.AR IN HIS ARGUMENTS BROUGHT TO OUR NOTI CE THAT DURING THE YEAR THE COMPANY HAD ACQUIRED TWO US BASED COMPANIE S NAMELY LINE BEYOND INC. USA AND OPTECH CONSULTING INC., USA DUR ING THE FY 2011- 12.THIS APART THE COMPANY ALSO ACQUIRED TWO DOMESTI C COMPANIES NAMELY MIND RIVER INFORMATION TECHNOLOGIES LTD., AND 51% O F STAKE IN KINIFOTECH (P) LTD. SUCH EXTRAORDINARY EVENTS OF ACQUISITIONS AND AMALGAMATIONS EFFECTS THE PROFIT MARGINS OF THE COMPANY AND ON TH E SAME SET OF FACTS CO- ORDINATE BENCH OF HYDERABAD IN INTOTO SOFTWARE COM PANY LTD. IN ITA NO.1196/HYD/2010 HAS EXCLUDED THE COMPARABLES. TH IS ISSUE AMALGAMATIONS AND TAKE OVER HAS NOT BEEN CONSIDERED BY THE DRP OR THE TPO AT THE TIME OF ASSESSMENT OR BEFORE DRP PROCEED INGS. THEREFORE, THE MATTER IS REMITTED BACK TO THE FILE OF THE AO/TPO T O CONSIDER THE OBJECTIONS RAISED BY THE ASSESSE AND DECIDE THE MAT TER AFRESH. 12.0 M/S.JINDAL INTELLICOM PVT. LTD.: THE ASSESSE HAS ARGUED FOR INCLUSION OF M/S.JINDAL INTELLICOM PVT. LTD., THE DRP HAS DIRECTED THE TPO TO EXCLUDE THE JINDAL MAIN LY BECAUSE OF THE REVENUE FROM OUTSOURCING WORK. THE LD.AR SUBMITTED THAT THIS ITA NO.3485/MDS/2016 :- 15 -: COMPARABLE WAS NOT DISPUTED BY THE TPO AND THE ASSE SSEE ALSO DID NOT CONTEST IT BEFORE DRP. DRP ON ITS OWN ACCORD HAS RE JECTED THIS COMPARABLE STATING THAT IT DERIVES MAJOR INCOME FROM USA. REFE RRING TO PAPER BOOK PAGE NO.17, THE LD.AR STATED THAT THE ASSESSEE COMP ANY ALSO DERIVES @ 92.89% OF INCOME FROM USA AND THIS IS AN ERRONEOUS REJECTION BY DRP. 12.1 DURING THE APPEAL, LD. DR ARGUED THAT THE ASSESSEE HAS ARGUED FOR EXCLUSION OF M/S.COSMIC GLOBAL LTD., AS COMPARABLE MERELY BECAUSE OF THE TRANSLATION CHARGES RECEIVED AND OUTSOURCING WORK. JINDAL INTELLICOM LTDS MAJOR SHARE OF REVENUE IS FROM OUTSOURCING WORK AND ON THE SIMILAR LOGIC, JINDAL IS ALSO REQUIRED TO BE REJECTED. 12.2 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. THE DRP HAS EXAMINED THE CASE OF JINDAL AND EXTRACTED THE ANNUAL REPORT IN PARAGRAPH NO.4.8 WHICH READS AS UNDER: DURING THE FINANCIAL YEAR ENDED 31 ST MARCH, 2012 THERE IS A DECLINE IN REVENUE BY 21% A ND AS A RESULT THE PROFITABILITY HAS ALSO GONE DOWN BY 59%. YOUR COMPANY PROVIDES IT AND ITES SERVICES IN THE INTERNATIONAL AND DOMESTIC MAR KET, IN THE INTERNATIONAL MARKET, WHERE THE COMPANY ONLY CATERS TO THE USA MARKET, ADVERSE BUSINESS CLIMATE HAS BEEN WITNESSED FOR OUTSOURCING WORK OVER THE LAST YEAR. IT HAS IMP ACTED THE COMPANY ADVERSELY AND IMPACTED ITS PROFITABILITY TO AN EXTENT. THE COMPAN Y ADVERSELY AND IMPACTED ITS PROFITABILITY TO AN EXTENT. THE COMPANY STARTED ITS DOMESTIC OPER ATIONS 18, MONTHS BACK WHICH HAVE NOW STARTED SHOWING GOOD RESULTS AND BUSINESS IS NO W PICKING UP WELL IN THIS TERRITORY. YOUR COMPANY FORESEES A LARGE POTENTIAL IN DOMESTIC MARK ET AND IS NOW PURSUING OPPORTUNITIES MORE AGGRESSIVELY. FURTHER DRP OBSERVED THAT M/S.JINDAL WAS FACING PE CULIAR PROBLEM DUE TO ITS SERVICES BEING MEANT FOR ITS INTERNATION AL MARKET, IN USA. THE ASSESSEE COMPANY HAS NOT SUFFERED ANY SUCH MAJOR DI SADVANTAGE AS ITS ITA NO.3485/MDS/2016 :- 16 -: TRANSACTIONS ARE WITH ITS AE IN SINGAPORE/KUWAIT. F ROM THE ANNUAL REPORT AND THE OBSERVATION OF THE DRP WE FIND THAT THERE W ERE EXTRAORDINARY EVENTS WHICH HAS AFFECTED THE MARGINS OF JINDAL. IN ADDITION TO THE ABOVE FOR EXCLUSION OF M/S.COSMIC GLOBAL LTD., ONE OF THE REASONS ARGUED BY THE ASSESSEE WAS ITS MAJOR SHARE OF REVENUE DERIVED FR OM TRANSLATION CHARGES AND OUTSOURCING WORK AND THIS TRIBUNAL HAS DIRECTED THE AO TO EXCLUDE THE COSMIC GLOBAL AS COMPARABLE ON THE SAME REASON. FO LLOWING THE SAME REASONING, WE ARE UNABLE TO ACCEPT THE CONTENTION O F THE ASSESSE TO INCLUDE JINDAL AS COMPARABLE AND THE SAME IS REJECT ED. 13.0 R SYSTEMS INTERNATIONAL LTD: THE ASSESSEE SUBMITTED THAT THE COMPANY M/S.R SYSTE MS INTERNATIONAL LTD., IS ENGAGED IN TWO SEGMENTS NAME LY SOFTWARE DEVELOPMENT AND CUSTOMIZATION SERVICES AND BUSINES S PROCESS OUTSOURCING SERVICES. THE TPO REJECTED THE COMPANY AS COMPARABLE SINCE THE COMPANY IS FOLLOWING THE DIFFERENT FY. THE ASSE SSE IS FOLLOWING APRIL TO MARCH AS THE FINANCIAL YEAR, WHERE AS R SYSTEMS IS FOLLOWING JANUARY TO DECEMBER AS A FINANCIAL YEAR. THE DRP CONFIRMED THE ORDER OF THE TPO STATING THAT RULE 10B(4) MANDATES UTILIZATION OF CU RRENT YEAR DATA AND RULE 10D(4) PLACES RELIANCE ON CONTEMPORANEOUS DATA AND JUST AS EARLIER YEARS DATA COMPANIES HAVING DIFFERENT FINANCIAL YEA R ENDING WITH CHANGE IN ECONOMIC AND MARKET CONDITIONS WITH TIME CANNOT BE DENIED. ITA NO.3485/MDS/2016 :- 17 -: 13.1 LD.AR DURING THE APPEAL HEARING RELIED ON THE DECI SION OF THE DELHI ITAT IN THE CASE OF M/S.EXEVO INDIA PRIVATE LTD V I TO AND TECHBOOKS INTERNATIONAL PVT. LTD. IN ITA NO.240/DEL/2015 AND ARGUED THAT COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING OP ERATING DURING THE SAME PERIOD OF TIME AS THE ASSESSEE, WERE ALSO FACI NG SIMILAR BUSINESS CYCLES, MARKET AND ECONOMIC CONDITIONS THAT THE OTH ER COMPARABLES AND THE ASSESSEE (HAVING A FINANCIAL YEAR OF APRIL TO M ARCH) WERE FACING. THEREFORE IN THE ABSENCE OF EVIDENCE AVAILABLE TO T HE CONTRARY THAT THERE HAS BEEN A SIGNIFICANT IMPACT IN THE MARGINS DUE TO CHANGE IN DIFFERENT REPORTING/ACCOUNTING PERIOD, IT WOULD BE INCORRECT TO DISREGARD THE COMPANIES USING THIS FILTER. IN CASE OF R SYSTEMS QUARTER WISE FINANCIAL DATA IS AVAILABLE HENCE THE SAME SHOULD BE INCLUDED AS COMPARABLE. THE ASSESSEE FURTHER RELIED ON THE FOLLOWING DECISIONS: 1. MAERSK GLOBAL SERVICE CENTRES (INDIA) ITA NO.2594/MU M/2014 2. RR DONNELLEY INDIA OUTSOURCE IN THE CASE OF RR DONNELLY CO-ORDINATE BENCH OF IT AT HAS DIRECTED THE ASSESSEE TO FURNISH THE COMPLETE INFORMATION TO THE TPO FOR DUE VERIFICATION. 13.2 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED BEFORE US. BOTH THE COMPANIES ARE FUNCTIONALLY SIMILAR. HOWEV ER M/S R SYSTEMS IS ENGAGED IN TWO SEGMENTS NAMELY SOFTWARE DEVELOPM ENT AND CUSTOMIZATION SERVICES AND BUSINESS PROCESS OUTSOUR CING SERVICES. THOUGH ITA NO.3485/MDS/2016 :- 18 -: THE ASSESSEE CONTENDED THAT ONLY BPO SEGMENT IS TAK EN FOR COMPUTATION OF MARGIN IT IS NOT AUTHENTICATED INFORMATION SINCE IT IS NOT KNOWN WHETHER THE COMPARABLE COMPANY IS MAINTAINING SEPARATE BOO KS OF ACCOUNTS SEGMENT WISE. THE TPO HAS REJECTED THE COMPARABLE SINCE THE COMPANY WAS FOLLOWING DIFFERENT FINANCIAL YEARS. THERE ARE DECISIONS OF TRIBUNALS WHEREIN IT WAS HELD THAT THE COMPANIES FOLLOWING DI FFERENT FINANCIAL YEAR IS NOT A GOOD COMPARABLE. HOWEVER, THE LD.AR RELIED ON THE DECISIONS OF CO- ORDINATE BENCH IN THE CASE LAW CITED (SUPRA) WHEREI N IT WAS HELD THAT IF THE COMPLETE INFORMATION IS AVAILABLE THERE CAN BE NO OBJECTION FOR INCLUSION. THE CHENNAI CO-ORDINATE BENCH DIRECTED THE AO TO ADOPT THE COMPARABLE ON SUBMISSION OF THE INFORMATION FROM TH E AUDITED ACCOUNTS OF THE COMPANY. IN THE CASE OF R SYSTEMS IT IS ENGAGED IN TWO SEGMENTS AND FOLLOWING THE DIFFERENT F.Y. WE DIRECT THE ASSESSE E TO COLLECT AND RECONCILE THE DATA FROM AUDITED ACCOUNTS INCLUDING THE YEAR E NDING ADJUSTMENT ENTRIES TO THE COMPARABLE FINANCIAL YEAR AND SUBMIT THE SAME FOR FURTHER VERIFICATION OF THE TPO/DRP. WE DIRECT THE DRP/AO T O ADOPT R SYSTEMS AS COMPARABLE ON SUBMISSION OF COMPLETE RECONCILED DAT A RELATING TO THE FINANCIAL YEAR FOLLOWED BY THE R SYSTEMS WITH THE A SSESSEE COMPANY. ACCORDINGLY WE REMIT BACK TO THE FILE OF THE AO TO DECIDE THE ISSUE AS PER THE DISCUSSION MADE IN THIS ORDER. THIS GROUND OF THE APPEAL ALLOWED FOR STATISTICAL PURPOSES. ITA NO.3485/MDS/2016 :- 19 -: 14.0 M/S.INFORMED TECHNOLOGIES LTD.: THE TPO/DRP REJECTED THE COMPANY AS COMPAR ABLE AS IT WAS HAVING OTHER INCOME TO THE EXTENT OF 48% OF THE TOTAL TURN OVER AND NO SEGMENTAL DETAILS ARE AVAILABLE. THE ASSESSEE ARGUED THAT TH OUGH THERE WAS SUBSTANTIAL INCOME UNDER THE HEAD OTHER INCOME, THE OTHER INCOME DECLARED IN THE FINANCIAL STATEMENT WAS AFTER NETTI NG OF DIRECT EXPENSES RELATING TO OTHER INCOME. NO FINANCIAL STATEMENTS HAVE BEEN PLACED BEFORE US TO VERIFY THE SAME. AS PER THE ANNUAL REPORT OF THE COMPANY, THE COMPANY HAS ADVANCED A SUM OF RS.74,55,955/- TO MAG NACEM PHARMACEUTICALS UNDER THE SAME MANAGEMENT INTEREST FREE. IT WAS NOT CLEAR WHETHER THE INTEREST FREE LOAN GRANTED TO THE MAGNACEM OUT OF INTEREST BEARING FUNDS OR NON INTEREST BEARING FOUN DS AND OTHER RELATED EXPENSES. IF THE LOAN IS GRANTED OUT OF INTEREST B EARING FUNDS THERE WOULD BE A CHANGE IN THE INTEREST AND THE MARGINS. FURTH ER, OTHER NON OPERATING INCOME DECLARED WAS NET OF DIRECT EXPENSES BUT NOT THE ADMINISTRATIVE, MARKETING DISTRIBUTIONS EXPENSES WHICH REQUIRE CONS IDERATION. MERELY BY REDUCING THE DIRECT EXPENSES OF NON OPERATING INCOM E MARGINS OF OPERATING INCOME CANNOT BE DETERMINED. WHILE COMPUT ING THE MARGINS ALL OTHER RELEVANT EXPENSES REQUIRE CAREFUL CONSIDERATI ON. THE LD.AR HAS NOT SUBMITTED THE COMPLETE SEGMENTAL DATA TO ARRIVE AT THE MARGINS OF OPERATING INCOME. THE DRP HAS RIGHTLY OBSERVED TH AT THERE IS NO PROPER INTERNAL AUDIT SYSTEM. CONSIDERING THE NOTES ON AC COUNTS AND ANNUAL REPORT AND NON AVAILABILITY OF CORRESPONDING EXPEND ITURE RELATING TO OTHER OPERATING INCOME WE HOLD THAT THE DRP HAS RIGHTLY R EJECTED THE COMPANY ITA NO.3485/MDS/2016 :- 20 -: AS COMPARABLE. ACCORDINGLY, THE ASSESSEES GROUND O N INCLUSION OF M/S.INFORMED TECHNOLOGY LTD., IS DISMISSED. 15.0 IN GROUND NO.6 THE ASSESSEE HAS RAISED A GROUND FO R INCLUSION OF THE FOLLOWING COMPANIES ALSO AS COMPARABLES: CALIBRE POINTS SYSTEMS LTD. ACE BPO SERVICES DATA FINANCE SERVICES LTD. DURING THE APPEAL, THE LD.AR HAS NOT MADE ANY ARGU MENTS ON INCLUSION OF THE ABOVE COMPANIES. THEREFORE, THE AS SESSEES APPEAL ON INCLUSION THE ABOVE COMPARABLES IS DISMISSED AS NOT PRESSED. 16.0 THE NEXT GROUND ARGUED BY THE ASSESSEE WAS REJECTI ON OF CLAIM FOR EXCESS DEPRECIATION ADJUSTMENT IN GROUND NO.8 OF TH E APPEAL: THE ASSESSEE CLAIMED A SUM OF RS.1,09,85,120/- REL ATING TO EXCESS DEPRECIATION ON ACCOUNT OF CHANGE IN USEFUL LIFE OF ASSETS AS AN EXTRA ORDINARY ITEM AND REQUESTED ADJUSTMENT FOR COMPUTIN G THE MARGINS OF THE ASSESSEE. THE TPO HAS NOT CONSIDERED THE EXCESS DEP RECIATION SINCE THE ASSESSEE HAS NOT GIVEN DUE CREDIT IN THE SUBSEQUENT YEARS AND THE ASSESSEE WILL HAVE DOUBLE ADVANTAGE IF THE ADJUSTME NT IS GIVEN IN THIS YEAR AND GET BENEFIT IN THE SUBSEQUENT YEAR ALSO. THE D RP HAS CONFIRMED THE ORDER OF THE TPO STATING THAT THE ASSESSEE IS A COS T PLUS ENTITY, WHETHER THE COST IS MORE OR LESS THE ASSESSEE IS BOUND TO G ET FIXED MARGIN ON THE ITA NO.3485/MDS/2016 :- 21 -: SERVICE RENDERED. THE ASSESSEE ALSO COULD NOT DEMON STRATE THE EFFECT OF THIS ITEM ON THE PROFIT MARGIN AND SUBMIT APPROPRIA TE EVIDENCE. 16.1 DURING THE APPEAL, THE LD.AR ARGUED THAT THE COMPA NY HAS SHIFTED ITS OFFICE. DUE TO SHIFTING OF THE OFFICE, CERTAIN ITEMS OF FIXED ASSETS WHICH COULD NOT BE MOVED TO THE NEW PREMISES WERE WRITTEN OFF AS EXCESS AMOUNT OF DEPRECIATION AND CLAIMED AS ADJUSTMENT WH ICH WAS NOT CONSIDERED BY THE TPO FOR COMPUTING THE OPERATING M ARGINS. SINCE THE ITEMS CANNOT BE MOVED DUE TO THE NATURE OF ASSETS, IT WAS A LOSS INCURRED DURING THE YEAR AND IT SHOULD TAKE INTO ACCOUNT FOR COMPUTING THE OPERATING MARGIN AND REQUESTED FOR ADJUSTMENT. THE ASSESSEE ALSO RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. TRANSWITCH INDIA PVT. LTD. IN ITA NO.678/2012 & CM 20555/2012 (DELHI) ON 17.07.2013 WHEREIN THE HONBLE DELHI HIGH COURT UPHELD THE ORDER OF THE TRIBUNAL ALLOWING THE ADJUSTMENT IN COMPUTING T HE ALP IN PARA NO.7 AS UNDER: IT IS NOT DISPUTED THAT IF THE FIGURE OF RS.1,1 1,7 3,078/- IS DULY ACCOUNTED FOR AND TAKEN INTO CONSIDERATION, THEN THE OPERATING MARGIN OF THE RES PONDENT/ASSESSE COME TO 17.80%, WHICH IS HIGHER THAN THE COMPARABLE OPERATING MARGI N OF 17.09%, TAKEN AS A BENCHMARK BY THE TPO. SUBMISSION ON BEHALF OF THE APPELLANT T HAT THE PARENT COMPANY SHOULD HAVE SHARED THE BURDEN OR A PART THEREOF IS NOT LEGALLY TENABLE. THE SAID EXPENDITURE WAS INCURRED BY THE INDIAN COMPANY BECAUSE OF PECULIAR PROBLEMS FACED BY THEM AS A RESULT OF WHICH THEY HAD TO SHIFT THE PLACE FROM WHERE THEY W ERE OPERATING. THE ABNORMALITY AND DIFFICULTY RESULTING IN EXTRA EXPENDITURE WAS NOT C REATED OR CAUSED BY THE ASSOCIATED ENTERPRISE. THEY WERE NOT RESPONSIBLE OR LIABLE FOR THE SAID PAYMENTS/EXPENDITURE. THE ASSOCIATED ENTERPRISE DID NOT HAVE LEGAL OR CONTRAC TUAL OBLIGATION TO MAKE EXTRA OR ADDITIONAL PAYMENT BEYOND THE TRUE AND CORRECT VALU E OF THE TRANSACTION. 8. IN VIEW OF THE FACTUAL FINDINGS RECORDED BY THE TRIBUNAL, WE DO NOT FIND ANY SUBSTANTIAL QUESTION OF LAW ARISES IN THIS APPEAL AND THE SAME IS, ACCORDINGLY, DISMISSED. 16.2 IN THE ASSESSEES CASE ALSO THE FACTS ARE SIMILAR. THE ASSESSEE HAD DISCARDED THE ITEMS OF ASSETS WHICH COULD NOT BE RE -USED IN THE NEW ITA NO.3485/MDS/2016 :- 22 -: PREMISES. THE SHIFTING OF PREMISES WAS NOT AT THE I NSTANCE OF THE AE AND THE ASSESSEE SHIFTED ITS OFFICE FOR ITS OPERATIONAL ADVANTAGE. THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT THE ASSESSEES C ASE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE DELHI HIGH COURT (CI TED SUPRA) AND ACCORDINGLY, DIRECT THE AO TO ALLOW THE ADJUSTMENT OF EXCESS DEPRECIATION ON DISCARDED ITEMS WHILE COMPUTING THE ALP. THE AS SESSEES APPEAL ON THIS ISSUE IS ALLOWED. 17.0 GROUND NO.9 OF THE ASSESSEE IS RELATED TO NOT ALLO WING SUITABLE ADJUSTMENTS FOR WORKING CAPITAL OF THE ASSESSEE. DURING THE TP PROCEEDINGS, THE ASSESSEE HAS REQUESTED FOR WORKING CAPITAL ADJU STMENT TO WHICH THE TPO HAS REJECTED THE ADJUSTMENT STATING THAT THE CONTENTION WOULD BE RELEVANT ONLY IN THE EVENT OF ASSESSEES WORKING CA PITAL BEING NEGATIVE. IN THE INSTANT CASE, THERE CAN BE NO GRIEVANCE FOR THE ASSESSEE SINCE ITS MARGINS ARE NOT AFFECTED BY NEGATIVE WORKING CAPITA L. ALSO, BEING A CAPTIVE SERVICE PROVIDER, THE TRANSACTIONS OF THE ASSESEEE ARE MAINLY WITH THE AE. THE TPO PLACED RELIANCE ON THE DECISION OF THE HON BLE ITAT C BENCH, CHENNAI IN ITA NO. 2112/MDS/2011 (AY 2007-08) IN TH E CASE OF MOBIS INDIA LIMITED VS. DCIT, WHEREIN, THE HONBLE ITAT H AS HELD THAT THE ASSESSEE HAS NOT BEEN ABLE TO JUSTIFY THE ADJUSTMEN TS THAT WERE REQUIRED TO BE MADE ON ACCOUNT OF NEGATIVE WORKING CAPITAL. 17.1 THE ASSESSEE HAS REQUESTED FOR WORKING CAPITAL A DJUSTMENT AND THE TPO HAS REJECTED THE ASSESSEES REQUEST FOR WORKING CAPITAL ADJUSTMENT ITA NO.3485/MDS/2016 :- 23 -: SINCE THERE WAS NO NEGATIVE WORKING CAPITAL AND THE ASSESSEE IS CAPTIVE SERVICE PROVIDER AND THE TRANSACTIONS OF THE ASSESS EE ARE MAINLY WITH THE AE. THE LD.TPO ALSO RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF MOBIS INDIA LIMITED CITE (SUPRA). THE ASSESSEE FIL ED THE APPEAL BEFORE THE DRP AND THE DRP HAS REJECTED THE ASSESSEES REQUEST FOR ADJUSTMENT OF WORKING CAPITAL ADJUSTMENT. 17.2 WE HEARD BOTH THE PARTIES AND CONSIDERED THE SUBMI SSIONS MADE BY THE LD.AR AS WELL AS THE LD.DR. THE TPO HAS REJECTED THE CONTENTION FOR WORKING CA PITAL ADJUSTMENT SINCE THERE WAS NO NEGATIVE WORKING CAPITAL AND THE LD.AR SUBMITTED THE DETAILS OF WORKING CAPITAL ADJUSTMENT. HOWEVER, TH E PRICING MODEL OF THE ASSESSEE AND THE AE WERE NOT FURNISHED BY THE LD.AR . THE LD.AR RELIED ON THE DECISION OF M/S.FOXTEQ SERVICES INDIA PVT. L TD. VS. ACIT DATED 01.09.2016 IN ITA NO.174/MDS/2016, THE CO-ORDINATE BENCH IN THE DECISION RELIED UPON BY THE ASSESSEE IN PARA NO.7 H ELD AS UNDER: 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ASSESSEE OBJECTE D TO THE ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER. WITH REGARD TO WORKING CA PITAL ADJUSTMENT, THE ASSESSEE CLAIMS THAT THE DIFFERENCE IN WORKING CAPITAL BETWEEN THE ASSESSEE AND THE COMPARABLE COMPANIES WOULD MATERIALLY AFFECT THE PROFIT DETERMINED. THE REFORE, CERTAIN ADJUSTMENT NEEDS TO BE MADE TO BRING THEM ON EQUAL FOOTING. THE ASSESSEE ALSO BROUGHT TO THE NOTICE OF THE DRP THAT THE WORKING CAPITAL ADJUSTMENT, WHICH WAS TO E NSURE THE PROFIT DERIVED BY THE COMPARABLE COMPANIES, CAN BE COMPARED WITH THE PROF IT OF THE ASSESSEE. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE CAPITAL EMPLOYED ON THE ASSESSEE, INCLUDING WORKING CAPITAL, IS ONE OF THE RELEVANT FACTORS FOR THE PUR POSE OF DETERMINING THE ARMS LENGTH PRICE. THEREFORE, THE CAPITAL EMPLOYED BY THE ASSESSEE, IN CLUDING THE WORKING CAPITAL, AND THAT OF COMPARABLE COMPANIES NEEDS TO BE TAKEN INTO CONSIDE RATION. WITHOUT COMPARING THE WORKING CAPITAL EMPLOYED BY THE COMPARABLE COMPANIE S AND THAT OF THE ASSESSEE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THERE CA NNOT BE ANY TRANSFER PRICING ADJUSTMENT. ITA NO.3485/MDS/2016 :- 24 -: IN THE ABOVE CASE RELIED UP ON BY THE ASSESSE E THE ITAT REMITTED THE MATTER BACK TO THE FILE OF THE DRP TO RECONSIDER TH E ISSUE COMPARING THE WORKING CAPITAL EMPLOYED BY THE ASSESSEE AND COMPAR ABLE COMPANIES. IN THE INSTANT CASE, THE ASSESSEE IS A CAPTIVE SERVICE S PROVIDER, MOST OF THE TRANSACTIONS ARE ONLY WITH THE AE. UNLESS THE PRIC ING MODEL OF THE ASSESSEE AS WELL AS AE IS FURNISHED, IT IS NOT KNOW N WHAT WAS THE ACTUAL MARGIN FOR SALE OF THE PRODUCT BY THE ASSESSEE AND THE PURCHASE OF THE PRODUCT AND THE HIDDEN COSTS OF INTEREST ETC. FOR A QUERY FROM THE BENCH, THE LD.AR OF THE ASSESSEE HAS AGREED TO SUBMIT THE DETAILS OF THE PRICING MODEL. THE REASONS FOR WORKING CAPITAL GAP I.E. THE GAP BETWEEN THE REALIZATION OF DEBTORS AND PERIOD OF PAYMENT TO CRE DITORS NEED TO BE EXAMINED SINCE THE ASSESSEE IS SERVING ONLY TO THE AE BEING THE CREDITOR FOR SUPPLIES. THEREFORE, WE DIRECT THE ASSESSEE TO FURNISH THE PRICING MODEL OF THE ASSESSEE AS WELL AS AE AND OTHER DETAILS TO DEMONSTRATE WHY THE WORKING CAPITAL ADJUSTMENT IS REQUIRED AND HOW IT H AS MATERIALLY IMPACTED THE PROFIT MARGINS OF THE ASSESSEE COMPANY IN THE L IGHT OF THE FACT THAT THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER TO THE AE AN D THE REASONS FOR DELAY ON RECEIVABLES AND REASONS FOR WORKING CAPITAL GAP. THEREFORE, WE SET- ASIDE THE ISSUE TO THE FILE OF THE AO/TPO TO EXAMIN E THE ISSUE AFRESH ON MERITS. ACCORDINGLY, WE SET-ASIDE THE ORDERS OF THE LOWER AUTHORITIES ORDERS AND ALLOW THE APPEAL OF THE ASSESSEE FOR STA TISTICAL PURPOSES. 18.0 NO OTHER GROUND OR ISSUES RAISED IN THIS APPEAL IN RESPECT OF TRANSFER PRICING ADJUSTMENTS WHICH WERE ASSAILED BY THE ASSE SSEE IN THE GROUNDS OF ITA NO.3485/MDS/2016 :- 25 -: APPEAL HAVE BEEN ARGUED BY THE LD.AR. THEREFORE THE REMAINING GROUNDS ON TRANSFER PRICING ARE DISMISSED AS NOT PRESSED. 19.0 GROUND NO.12 IS RELATED TO CHARGING OF INTEREST U/ S.234A, 234B, 234C AND 234D WHICH CONSEQUENTIAL IN NATURE AND MAN DATORY. THE LD.AR DID NOT MAKE ANY ARGUMENTS ON THIS ISSUE. THEREFORE THIS GROUND IS DISMISSED. 20.0 GROUND NO.13 IS RELATED TO INITIATION OF PENALTY PROCEEDINGS WHICH CONSEQUENTIAL IN NATURE AND NO ARGUMENT HAS BEEN AD VANCED BY THE LD.AR THEREFORE THIS GROUND IS DISMISSED. 21.0 IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH APRIL, 2017, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( ' . . $ ) (D.S.SUNDER SINGH) /ACCOUNTANT MEMBER /CHENNAI, 5 /DATED: 26 TH APRIL, 2017. TLN 0 .$6 76 /COPY TO: 1. - /APPELLANT 4. 8 /CIT 2. ./- /RESPONDENT 5. 6 . /DR 3. 8 ( ) /CIT(A) 6. * /GF