Cummins Turbo Technologies Ltd., Pune V. Deputy Commissioner of Income tax, Pune

ITA 388/PUN/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 6743 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 11 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-01-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 16-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NANDITA KANCHAN
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 115JB; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUN E BEFORE SHRI ANIL CHATURVEDI, AM AND SHRI PARTHA SARATHI CHAUDHURY, JM / ITA NO.388/PUN/2017 / ASSESSMENT YEAR : 2012-13 CUMMINS TURBO TECHNOLOGIES LIMITED, UNITED KINGDOM-INDIA BRANCH, C/O. CUMMINS INDIA OFFICE CAMPUS, TOWER A, SURVEY NO. 21, BALEWADI, PUNE-411 045 PAN : AABCH 2501H ....... / APPELLANT / V/S. THE DEPUTY COMMISSIONER OF INCOME TAX, (INTERNATIONAL TAXATION), CIRCLE-1, PUNE. / RESPONDENT ASSESSEE BY : SHRI KETAN VED REVENUE BY : SMT. NANDITA KANCHAN / DATE OF HEARING : 08.01.2019 / DATE OF PRONOUNCEMENT : 21 .01.2019 / ORDER PER PARTHA SARATHI CHAUDHURY, JM : THIS APPEAL PREFERRED BY ASSESSEE EMANATES FROM THE OR DER OF THE DY. CIT (IT)-1, PUNE PASSED U/S. 143(3) R.W.S.144 R.W.S.92CA OF T HE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) AS PER FO LLOWING GROUNDS OF APPEAL: 2 ITA NO. 388/PUN/2017 A.Y.2012-13 1. TRANSFER PRICING ADJUSTMENT OF RS. 2,38,36,922/- 1.1 THE LEARNED ASSESSING OFFICER PURSUANT TO THE D IRECTIONS OF HON'BLE DRP ERRED IN LAW AND ON THE FACTS AND IN CI RCUMSTANCES OF THE CASE IN MAKING AN ADJUSTMENT AMOUNTING TO RS.23,836,992/- TO THE VALUE OF INTERNATIONAL TRANS ACTIONS ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRIS ES IN RESPECT OF PROVISION OF IT ENABLED AND MARKETING SUPPORT SERVI CES. 2. NOT CONSIDERING WRITE BACK OF PROVISION FOR GRAT UITY, PROVISION FOR LEAVE ENTITLEMENT AND FOREIGN EXCHANG E GAIN TO BE AN 'OPERATING INCOME' WHILE CALCULATING THE P LI OF THE ASSESSEE 2.1 THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN NOT IMPLEMENTIN G THE DIRECTIONS OF HON'BLE DRP WHILE COMPUTING THE PLI O F THE ASSESSEE BY NOT CONSIDERING THE WRITE BACK OF EARLIER YEARS PROVISIONS OF GRATUITY AND LEAVE ENTITLEMENT AS OPERATING ITEMS. 2.2 THE LEARNED ASSESSING OFFICER AND HON'BLE DRP E RRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE I N CONSIDERING FOREIGN EXCHANGE GAIN AS NON-OPERATING INCOME WHILE COMPUTING THE PLI OF THE ASSESSEE. 3. ERRONEOUS CONSIDERATION OF OPERATING MARGIN OF EXCE L INFO WAYS LTD AND MICROGENETICS SYSTEMS LTD 3.1 THE LEARNED ASSESSING OFFICER PURSUANT TO THE D IRECTION OF LEARNED DRP ERRED IN LAW AND ON THE FACTS AND IN CI RCUMSTANCES OF THE CASE IN CONSIDERING INCORRECT PLI OF EXCEL I NFO WAYS LTD AND MICROGENETICS SYSTEMS LTD. 4. ERRONEOUS CALCULATION OF WORKING CAPITAL ADJUSTM ENT 4.1 THE LEARNED ASSESSING OFFICER, PURSUANT TO THE DIRECTIONS OF THE HON'BLE DRP HAS ERRED ON THE FACTS AND IN CIRCUMSTA NCES OF THE CASE IN INCORRECTLY COMPUTING OF WORKING CAPITAL AD JUSTMENT. 5. ERRONEOUS REJECTION OF A COMPARABLE COMPANIES 5.1 THE LEARNED ASSESSING OFFICER PURSUANT TO THE DIRECTION S OF LEARNED DRP ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN REJECTING THE FOLLOWING FUNCTIONALLY COMPARABLE COM PANIES SELECTED BY THE APPELLANT IN ITS TRANSFER PRICING STUDY REPO RT. CG-VAK SOFTWARE AND EXPORTS LIMITED JEEVAN SCIENTIFIC TECHNOLOGY LIMITED INFORMED TECHNOLOGIES LIMITED 6. INCLUSION OF FUNCTIONALLY NON-COMPARABLE COMPANI ES 6.1 THE LEARNED ASSESSING OFFICER PURSUANT TO THE D IRECTIONS OF LEARNED DRP ERRED IN LAW AND ON THE FACTS AND IN CI RCUMSTANCES OF THE CASE IN SELECTING/INCLUDING THE FOLLOWING FUNCT IONALLY NON- COMPARABLE COMPANIES AS COMPARABLE IN THE FINAL SET OF COMPARABLE COMPANIES. EXCEL INFO WAYS LIMITED NINESTAR INFORMATION TECHNOLOGIES LIMITED UNIVERSAL PRINT SYSTEMS LIMITED 3 ITA NO. 388/PUN/2017 A.Y.2012-13 7. ERRONEOUS REJECTION OF MULTIPLE YEAR DATA OF THE COMPARABLE COMPANIES, THOUGH THE ASSESSEE COMPLIES WITH THE PROVISO TO RULE 10B( 4) OF THE INCOME TAX RULES, 1962 7.1 THE LEARNED ASSESSING OFFICER PURSUANT TO THE D IRECTIONS OF LEARNED DRP ERRED IN LAW AND ON THE FACTS AND IN CI RCUMSTANCES OF THE CASE IN NOT CONSIDERING THE MULTIPLE YEAR DA TA I.E. DATA AVAILABLE AT THE TIME OF UNDERTAKING THE TRANSFER P RICING STUDY FOR DETERMINING THE ARM'S LENGTH PRICE OF INTERNATI ONAL TRANSACTION PERTAINING TO IT ENABLED AND MARKET SUP PORT SERVICES, THOUGH THE ASSESSEE COMPLIES WITH THE PRO VISO TO RULE 10B (4) OF THE INCOME TAX RULES, 1962. 8. NON-GRANTING OF RISK ADJUSTMENT 8.1 THE LEARNED ASSESSING OFFICER PURSUANT TO THE D IRECTIONS OF LEARNED DRP ERRED IN LAW AND ON THE FACTS AND IN CI RCUMSTANCES OF THE CASE IN NOT GRANTING AND REJECTING THE MARKE T RISK ADJUSTMENT SUBMITTED BY THE APPELLANT BY COMPARING FULL- FLEDGED RISK BEARING ENTITIES WITH THE APPELLANTS CAPTIVE OPERATIVES. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T, SUBSTANTIATE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME B EFORE OR AT, THE TIME OF HEARING OF THE APPEAL, SO AS TO ENABLE THE HON'BLE INCOME TAX APPELLATE TRIBUNAL TO DECIDE THIS APPEAL ACCORDING TO LAW. 2. THE BRIEF FACTS IN THIS CASE ARE THAT : M/S. CUMMINS TURBO TECHNOLOGIES LTD., THE ASSESSEE FILED ELECTRONICALLY ITS RETURN OF INCOME FO R ASSESSMENT YEAR 2012-13 ON 30.11.2012 DECLARING TOTAL INCOME OF RS.19,73,320/ - UNDER THE NORMAL PROVISION OF THE ACT AND RS.1,53,92,013/- UNDER TH E PROVISIONS OF SECTION 115JB OF THE ACT. THUS, THIS CASE WAS TAKEN FOR S CRUTINY AND NOTICE U/S. 143(2) AND U/S.142 (1) OF THE ACT WERE ISSUED AND SERVED TO THE AS SESSEE. THE ASSESSMENT WAS COMPLETED U/S. 143(3) R.W.S.144 R.W.S.92CA OF T HE ACT ON WHICH CERTAIN ADDITIONS/DISALLOWANCES WERE MADE AS APPEARIN G IN THE ASSESSMENT ORDER. 3. THE FIRST GROUND OF APPEAL OF THE ASSESSEE IS GENERA L IN NATURE AND HENCE, NO ADJUDICATION IS REQUIRED. 4 ITA NO. 388/PUN/2017 A.Y.2012-13 4. WITH REGARD TO THE GROUND NO. 2.1, THE ASSESSING OFFIC ER DID NOT IMPLEMENT THE DIRECTIONS OF DISPUTE RESOLUTION PANEL (DRP) WHILE COMPUTING THE PROFIT LEVEL INDICATOR (PLI) OF THE ASSESSEE BY NOT C ONSIDERING THE WRITE BACK OF EARLIER YEARS PROVISIONS OF GRATUITY AND LEAVE EN TITLEMENT AS OPERATING ITEMS. 5. AT THE TIME OF HEARING, THE LD. AR OF THE ASSESSEE INVITED OUR ATTENTION TO THE ASSESSMENT ORDER WHEREIN REFERENCE TO DRPS DIRECT IONS WAS MADE IN PAGE 19 AND IT WAS SUBMITTED BY THE LD. AR THAT IN PRINCIPLE, THE DRP HAD ALLOWED THIS GROUND SUBJECT TO VERIFICATION. HOWEVER, THIS DIRECTION OF DRP WAS NOT FOLLOWED BY THE TRANSFER PRICING OFFICER. IN THE COLUMN (B) TREA TMENT OF WRITE BACK PROVISIONS RELATED TO GRATUITY AND LEAVE ENCASHMENT AS NON OPERATING ITEM, THE TPO HAS HELD ANY PROVISION WHICH IS MADE ON A S CIENTIFIC BASIS HAS TO BE ALLOWED AS A DEDUCTION. THE ASSESSEE SUBMITTED THA T IN EARLIER YEAR(S), THE PROVISIONS MADE FOR GRATUITY AND LEAVE ENCASHMENT WE RE CLAIMED AND ALLOWED AS A DEDUCTION BY THE TPO, I.E, TREATED AS AN OPER ATING ITEM. THE ASSESSEE, THEREFORE, CONTENDED THAT THE WRITE BACK OF TH E SAID PROVISIONS DURING THE YEAR UNDER CONSIDERATION SHOULD ALSO BE TREAT ED AS AN OPERATING ITEM. IN PRINCIPLE, WE AGREE WITH THE CONTENTION OF THE ASSESS EE. THE FACT THAT THE SAID PROVISIONS MADE WERE ALLOWED AS A DEDUCTIO N SUGGESTED THAT THE AO HAD FOUND THEM TO HAVE BEEN MADE ON A SCIENTIFIC BASI S AND, THEREFORE, ALLOWED IT AS A DEDUCTION, I.E. TREATED IT AS AN OPERATING ITE M. NOW FOR THE YEAR UNDER CONSIDERATION, WHEN THE SAID PROVISIONS ARE WRITTEN BACK, AS A NATURAL COROLLARY, THE WRITE BACKS SHOULD ALSO BE TREATED AS AN O PERATING INCOME. THE AO/TPO IS DIRECTED TO VERIFY THE FACTS AS CLAIMED BY THE ASSESSEE AND TREAT THE WRITE BACK OF PROVISION FOR GRATUITY AND LEAVE ENTITLEME NT AS' OPERATING INCOME, IF THE FACTS CLAIMED BY THE ASSESSEE ARE FOUND TO BE CORRECT. 5 ITA NO. 388/PUN/2017 A.Y.2012-13 6. THE LD. AR FURTHER SUBMITTED THAT THESE DIRECTIONS O F THE DRP WERE NOT FOLLOWED BY THE TPO TILL DATE. 7. WE HAVE PERUSED THE CASE RECORD AND HEARD THE RIVAL CONTENTIONS AND GOING THROUGH THE PARA 2.2 OF THE ASSESSMENT ORDER WHE RE REFERENCE WAS MADE TO THE DRP, IT IS ABSOLUTELY CLEAR THAT DIRECTIONS HA VE BEEN GIVEN FOR VERIFICATION TO THE TPO. THE LD. AR STATED THAT SAID DIRECT IONS WERE NOT FOLLOWED TO WHICH LD. DR HAS ALSO CONCEDED. ACCORDINGLY, FOR THE INTEREST OF JUSTICE, WE DIRECT THE TPO ON THIS GROUND TO FOLLOW THE DIR ECTIONS GIVEN BY DRP AND PASS A SUITABLE ORDER AFTER VERIFICATION OF RELEVAN T FACTS. HENCE, THE GROUND NO. 2.1 IS, THUS, ALLOWED FOR STATISTICAL PU RPOSES . 8. WITH REGARD TO GROUND NO. 2.2, THE GRIEVANCE IS THAT THE ASSESSING OFFICER AND DRP CONSIDERED THE FOREIGN EXCHANGE GAIN AS NON-OPE RATING INCOME WHILE COMPUTING THE PLI OF THE ASSESSEE. 9. AT THE TIME OF HEARING, THE LD. AR APPRAISED THE BEN CH THAT THE ISSUE IS COVERED BY THE FOLLOWING THREE DECISIONS OF PUNE BENCH OF THE TRIBUNAL. I) IN THE CASE OF APPROVA SYSTEMS PVT. LTD. VS. CIT, ITA NO.1788/PN/2013. II) IN THE CASE OF WIKA INSTRUMENTS INDIA PVT. LTD. VS. DC IT, ITA NO.760/PN/2015 III) IN THE CASE OF DIGITAL GROUP INFOTECH PVT. LTD. VS. DCIT , ITA NO.475/PN/2017. 10. WE HAVE PERUSED THE CASE RECORD AND CONSIDERED THE SUBMISSIONS AS ADVANCED BEFORE US. WE HAVE ALSO PERUSED THE DECISIONS O F THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF APPROVA SYSTEMS PVT. LTD. VS. CIT (SUPR A.) WHEREIN AT PAGE 42 IN PARA 19.2, IT IS STATED THAT CORRECT CALCU LATION OF OP/TC BY 6 ITA NO. 388/PUN/2017 A.Y.2012-13 TREATING FOREIGN GAIN/LOSS AS OPERATING IN NATURE. THE RELEV ANT PARTS OF THE ORDER READ AS UNDER: 22. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES. AS REPRODUCED ABOVE IN PARA 20 IN THE ARGUMENTS ADV ANCED BY THE LD. COUNSEL FOR THE ASSESSEE, WE FIND THE DELHI BENCH O F THE TRIBUNAL IN THE CASE OF WESTFALIA SEPARTATOR INDIA PVT. LTD., (SUPR A) FOLLOWING VARIOUS DECISIONS HAS HELD THAT FOREIGN EXCHANGE LOSS/GAIN IS A PART OF THE OPERATING REVENUE/COST. IN THE FOLLOWING DECISIONS ALSO (FILED IN THE PAPER BOOK BY THE ASSESSEE), IT HAS BEEN HELD THAT FOREIG N EXCHANGE FLUCTUATION CANNOT BE EXCLUDED FROM THE COMPUTATION OF THE OPER ATING MARGIN OF THE ASSESSEE COMPANY : 1. SAP LABS INDIA P. LTD. VS. ACIT 44 SOT 156 (BA NG) 2. PRAKASH I SHAH REPORTED IN (2008) 115 ITD 167 (MUM) (SB) 3. SMT. SUJATA GROVER VS. DY.CIT (2002) 74 TTJ ( DEL) 347 4. M/S. S. NARENDRA VS. ADDL.CIT ITA NO.6839/MUM/ 2012 MUMBAI TRIBUNAL 5. M/S. MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. VS. DCIT (IT/TP A.NO.1222/BANG/2011 BANGALORE TRIBUNAL 6. M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PRIVATE L TD., VS. DCIT, ITA NO.1054/BANG/2011 BANGALORE TRIBUNAL 7. SUMIT DIAMOND (INDIA) PVT. LTD. VS. ACIT ITA N O.7148/MUM/2012 MUMBAI TRIBUNAL 8. M/S. FOURSOFT LTD. VS. THE DY.CIT ITA NO.1495/ HYD/2010 9. TECHBOOKS INTERNATIONAL PVT. LTD. VS. ACIT ITA NO.722 DELHI TRIBUNAL 10.M/S. CISCO SYSTEMS (INDIA) PRIVATE LTD. VS. THE DY.CIT-IT/TP A.NO.271/BANG/2014 BANGALORE TRIBUNAL 11. M/S. MIDTECK (INDIA) LTD. VS. THE DY.CIT-IT(TP) A.NO.70/BANG/2014 BANGALORE TRIBUNAL 12. M/S. PETRO ARALDITE PVT. LTD. THE DY.CIT ITA NO.1538/MUM/2014 MUMBAI TRIBUNAL 13. ACIT VS. NGC NETWORK INDIA PVT. LTD. ITA NO.5 307/M/2008 22.1 RESPECTFULLY FOLLOWING THE DECISIONS OF THE DI FFERENT BENCHES OF THE TRIBUNAL, WE SET ASIDE THE ORDER OF THE CIT(A) ON T HIS ISSUE AND DIRECT THE ASSESSING OFFICER TO CONSIDER FOREIGN EXCHANGE FLUC TUATION GAIN AS PART OF THE OPERATING INCOME OF THE ASSESSEE. THEREFORE, THOUGH THE TPO AND DRP HAVE STATED THAT FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS NON OPERATING INCOME, HOWEVER, FOLLOWIN G THE DECISION OF THE CO-ORDINATE BENCH IN THE AFORESAID CASES, W HERE IT IS CLEARLY HELD THAT THE ASSESSING OFFICER TO CONSIDER FOREIGN EXCHANG E FLUCTUATION GAIN AS PART OF THE OPERATING INCOME OF THE ASSESSEE. RESPECT FULLY, FOLLOWING THE DECISIONS, WE ALLOW THIS GROUND OF APPEAL. HENCE, GROUND NO. 2.2 RAISED BY ASSESSEE IN APPEAL IS ALLOWED . 7 ITA NO. 388/PUN/2017 A.Y.2012-13 11. THE LD. AR OF THE ASSESSEE FURTHER SUBMITTED THAT IF GROUND NO.6 OF APPEAL IS DECIDED IN FAVOUR OF THE ASSESSEE THEN OTHER RE MAINING GROUNDS BECOME ACADEMIC IN NATURE. IN VIEW OF THE MATTER, WE ARE GOING ON HEARING OF GROUND NO. 6 WHICH RELATES INCLUSION OF FUNCTIONALLY NON-COMP ARABLE COMPANIES. THE ASSESSING OFFICER IN PURSUANT TO THE DIRECT IONS OF DRP SELECTED FOLLOWING FUNCTIONALLY NON COMPARABLE COMPANIES AS C OMPARABLE IN THE FINAL SET OF COMPARABLE COMPANIES: I) EXCEL INFO WAYS LIMITED. II) NINESTAR INFORMATION TECHNOLOGIES LIMITED. III) UNIVERSAL PRINT SYSTEMS LIMITED. 12. THE LD. AR OF THE ASSESSEE APPRAISED THE BENCH TO PAGE NO. 130 OF THE PAPER BOOK IN THE ORDER OF PUNE BENCH OF THE TRIBUNAL IN ITA NO.2847/PUN/2016 FOR ASSESSMENT YEAR 2012-13 WHEREIN O N THE ISSUE, IT WAS OPINED THAT ITES SEGMENT, WHEREIN THE ASSESSEE WAS COST PLUS ENTITY PROVIDING SERVICES WITH MARK UP OF 10% ON COST. THE ASS ESSEE HAD BENCHMARKED THE TRANSACTIONS USING TNMM METHOD. HOWEVE R, THE TPO HAD APPLIED ADDITIONAL FILTERS FOR SELECTION OF COMPARABLE COMPANIES AND ACCEPTED ONLY TWO CONCERNS FROM ASSESSEES SET OF COMPARABLE SE LECTED. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT FOUR NEW COMPARABLES WERE PICKED UP BY THE TPO AND THE ISSUE WH ICH IS RAISED VIDE GROUND OF APPEAL NO.3 WAS AGAINST INCLUSION OF TWO CONCERNS EXCEL INFOWAYS LTD. AND UNIVERSAL PRINT SYSTEMS LTD. HE POINTED OUT THA T THE CONCERN EXCEL INFOWAYS LTD. COULD NOT BE SELECTED AS IT WAS SHOWING FLUC TUATING MARGINS IN PRECEDING YEARS. IT WAS FURTHER POINTED OUT BY THE ASS ESSEE THAT THE ANNUAL REPORT OF THE SAID COMPANY SHOWS THAT ITES AND BPO SE GMENTS WERE CLOSED IN FINANCIAL YEAR 2011-12 ON ACCOUNT OF GLOBAL RECESSION AND PLANNED TO DIVERSIFY INTO REAL ESTATE BUSINESS. ANOTHER DISTINGUISHING FEATURE WAS THE 8 ITA NO. 388/PUN/2017 A.Y.2012-13 LOW EMPLOYEE COST FILTER. THE LEARNED AUTHORIZED REPRESENT ATIVE FOR THE ASSESSEE POINTED OUT THAT EMPLOYEE COST OVER SALES RAT IO OF THE SAID CONCERN WAS LESS THAN 25% AS AGAINST EMPLOYEE COST OF 47.75% OF A SSESSEE. IN THIS REGARD, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE AS SESSEE PLACED RELIANCE ON THE RATIO LAID DOWN BY THE MUMBAI BENCH OF TRIBUNAL IN GOLDMAN SACHS SERVICES (P.) LTD. VS. ITO (2015) 69 SOT 28 (MUMBAI TRIB.). I N RESPECT OF SECOND CONCERN UNIVERSAL PRINT SYSTEMS LTD., THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE AGAIN POINTED OUT THAT THE SAID CONCERN WAS ALSO NOT COMPARABLE BECAUSE OF ITS LOW EMPLOYEE COST FILTE R. HE FURTHER POINTED OUT THAT THE ASSESSING OFFICER MAY VERIFY THE EMP LOYEE COST FILTER OF THE SAID CONCERNS AND IF IT WERE LESS THAN 25%, THEN THE SAME MERITS TO BE EXCLUDED FROM FINAL LIST OF COMPARABLES. ON THIS ISSUE, THE CO -ORDINATE BENCH OF THE TRIBUNAL HAS HELD AS UNDER: 14. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE HAD PROVIDED ORACLE SUPPORT SERVICES TO EM ERSON CLIMATE TECHNOLOGIES INCORPORATION, USA. THE ASSESSEE CLAI MED THAT IT WAS PROVIDING BACK OFFICE SUPPORT ACTIVITY IN THE NATUR E OF ITES SERVICES TO ITS ASSOCIATED ENTERPRISES, WHEREIN IT HAD EARNED MARK UP OF 10% ON COST. THE ASSESSEE HAD BENCHMARKED THE SAID TRANSACTION B Y USING TNMM METHOD AFTER SELECTING SEVEN EXTERNAL COMPARABLE CO MPANIES HAVING MEAN MARGIN OF 12.12%. THE TPO DURING TP PROCEEDIN GS, HOWEVER, APPLIED ADDITIONAL FILTERS FOR SELECTION OF COMPARA BLE COMPANIES AND RETAINED TWO CONCERNS WHICH WERE SELECTED BY THE AS SESSEE I.E. JINDAL INTELLICOM PVT. LTD. AND E4E HEALTHCARE SERVICES LT D. HOWEVER, THE TPO INTRODUCED ADDITIONAL FOUR MORE CONCERNS AND THE FI NAL SET OF COMPARABLES WERE DRAWN UP AS UNDER:- SR. NO. NAME OF COMPARABLE COMPANY OP/TC AS PER TPO 1 JINDAL INTELLICOM LTD. 2.80% 2 MICROGENETIC SYSTEMS LTD. 19.61% 3 E4E HEALTHCARE SERVICES LTD. 19.48% 4 NINESTARS INFORMATION TECHNOLOGIES LTD. 19.57% 5 EXCEL INFOWAYS LIMITED 41.48% 6 UNIVERSAL PRINT SYSTEMS LIMITED 59.40% 9 ITA NO. 388/PUN/2017 A.Y.2012-13 ARITHMETIC MEAN MARGIN (ALP) 27.05% 15. THE TPO THUS, MADE AN UPWARD ADJUSTMENT OF 43,30,700/- IN THE SEGMENT OF PROVISION OF ITES SERVICES. THE DRP REJECTED THE CONTENTION OF ASSESSEE ON INCLUSION / EXCLUSION OF CERTAIN COMPARABLES. HOWEVER, IT DIRECTED THE TPO TO ADOPT CORRECT OPERA TING MARGINS OF COMPARABLE COMPANIES. CONSEQUENTLY, THE MEAN MARGIN S OF COMPARABLE COMPANIES WAS RE-COMPUTED AT 23.13% RESULTING IN UP WARD ADJUSTMENT OF RS. 33,40,000/-. THE ASSESSEE IS IN APPEAL AGAINST TH E SAID ADJUSTMENT MADE IN ITES SEGMENT. THE PLEA OF ASSES SEE DURING THE COURSE OF HEARING WAS THAT IN CASE TWO CONCERNS I.E . EXCEL INFOWAYS LTD. AND UNIVERSAL PRINT SYSTEMS LTD. WERE EXCLUDED FROM THE FINAL LIST OF COMPARABLES, THEN THE MARGINS SHOWN BY THE ASSESSEE AND MEAN MARGINS OF COMPARABLES WERE WITHIN +/- 5% RANGE AND NO TP ADJUSTMENT HAD TO BE MADE IN THE HANDS OF ASSESSEE. 16. COMING TO THE FIRST CONCERN EXCEL INFOWAYS LTD. , WHEREIN THE ASSESSEE POINTS OUT THAT THE SAID CONCERN WAS NOT T O BE SELECTED AS COMPARABLE BECAUSE OF ITS FLUCTUATING MARGINS. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS FILED TABULATED DETAILS IN THIS REGARD, WHEREIN THE MARGINS OF SAID CONCERN BEING DRASTICAL LY DROPPED FROM 267.31% IN EARLIER YEARS TO 41.48% DURING THE YEAR UNDER CONSIDERATION. THE YEAR-WISE MARGINS OF SAID CONCERN ARE AS UNDER: - FINANCIAL YEAR OP/TC MARGIN 2008-09 247.74% 2009-10 267.31% 2010-11 238.71% 2011-12 41.48% 17. FURTHER, THE SAID CONCERN HAD CLOSED DOWN ITS I TES AND BPO SEGMENT IN FINANCIAL YEAR 2011-12 ON ACCOUNT OF GLO BAL RECESSION. WE HOLD THAT THE SAID CONCERN WHICH IS IN THE PROCESS OF CLOSING DOWN ITS ITES SEGMENT AND ALSO BECAUSE OF THE FACTUM OF FLUC TUATING MARGINS, COULD NOT BE SELECTED AS FUNCTIONALLY COMPARABLE TO THE ASSESSEE. IN THIS REGARD, WE FIND SUPPORT FROM THE RATIO LAID DOWN BY THE HONBLE HIGH COURT OF GUJARAT IN PR. CIT VS. ALLSCRIPTS INDIA PV T. LTD. IN INCOME TAX APPEAL NO.258 OF 2016 AND PUNE BENCH OF TRIBUNAL IN TIBCO SOFTWARE INDIA PVT. LTD. VS. DCIT IN ITA NOS.276/PUN/2015 & CROSS APPEAL IN ITA NO.334/PUN/2015, RELATING TO ASSESSMENT YEAR 2010-1 1, ORDER DATED 31.01.2017 AND QLOGIC INDIA PVT. LTD. VS. DCIT IN I TA NO.227/PUN/2014, RELATING TO ASSESSMENT YEAR 2009-1 0, ORDER DATED 21.10.2014. ANOTHER FACTOR WHICH HAS BEEN POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IS LOW E MPLOYEE COST RATIO OF THE CONCERN EXCEL INFOWAYS LTD. 10 ITA NO. 388/PUN/2017 A.Y.2012-13 18. IN THE ITES SEGMENT, IT IS AN ADMITTED POSITION THAT THE SAME IS ORIENTED INVOLVING HIGH EMPLOYEE COST. IN CASE FIL TER OF EMPLOYEE COST IS APPLIED AND CONCERN IS FOUND TO HAVE LOW EMPLOYEE C OST ON SALES RATIO, THEN SUCH A CONCERN FAILS THE FILTER AND CANNOT BE SELECTED AS COMPARABLE. SUCH IS THE PROPOSITION LAID DOWN BY THE MUMBAI BEN CH OF TRIBUNAL IN GOLDMAN SACHS SERVICES (P.) LTD. VS. ITO (SUPRA). APPLYING THE SAID PROPOSITION TO THE FACTS OF PRESENT CASE, WE FIND T HAT THE ASSESSEE HAD SHOWN EMPLOYEES COST OF 47.75%, WHEREAS THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTS OUT THAT THE EMPLOYEE COST RATIO OF EXCEL INFOWAYS LTD. AND ALSO OF UNIVERSAL PRINT SYS TEMS LTD. WAS LESS THAN 25% AND HENCE, SUCH CONCERN COULD NOT BE SELEC TED AS COMPARABLE. 19. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE A SSESSEE FAIRLY POINTED OUT THAT LOW EMPLOYEE COST TO SALES RATIO M AY BE VERIFIED BY THE ASSESSING OFFICER IN RESPECT OF BOTH THE CONCERNS. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE CLAIM OF ASSESS EE IN THIS REGARD AND IN CASE THE EMPLOYEE COST TO SALES RATIO WAS LESS THAN 25%, THEN BOTH THE CONCERNS HAVE TO BE EXCLUDED FROM FINAL SET OF COMP ARABLES. IN RESPECT OF EXCEL INFOWAYS LTD., WE HAVE ALREADY HELD THE SAME TO BE NOT COMPARABLE ON ACCOUNT OF ITS FLUCTUATING MARGINS. HOWEVER, IN CASE, IT FAILS THE LOW EMPLOYEE COST FILTER, THEN ALSO THE S AID CONCERN CANNOT BE PICKED UP AS COMPARABLE. SIMILARLY, THE EMPLOYEE C OST RATIO VIS--VIS SALES RATIO OF UNIVERSAL PRINT SYSTEMS LTD. NEEDS V ERIFICATION AND IN CASE IT IS LESS THAN 25%, THEN THE SAID CONCERN IS NOT T O BE INCLUDED IN THE FINAL LIST OF COMPARABLES. THE ASSESSING OFFICER SHALL A FFORD REASONABLE OPPORTUNITY TO THE ASSESSEE AND AFTER VERIFICATION, DETERMINE THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS. 13. WE HAVE PERUSED THE CASE RECORD AND JUDICIAL PRON OUNCEMENTS PLACED BEFORE US AND ON THE ISSUE, THE TRIBUNAL HAS DIRECTED TO VERIFY THE CLAIM OF THE ASSESSEE WHETHER IN CASE EMPLOYEES COST TO SALES RATIO WAS LESS THAN 25%, THEN BOTH THE CONCERNS HAVE TO BE EXCLUDED FROM FINAL SE T OF COMPARABLES. SO FAR AS EXCEL INFOWAYS LTD. IS CONCERNED, THE TRIBUNAL HAS HELD THAT SAME IS NOT COMPARABLE ON ACCOUNT OF ITS FLUCTUATION MARGINS. WITH REGARD TO UNIVERSAL PRINT SYSTEMS LTD., IT ALSO NEEDS VERIFICATION AND I N CASE IT IS LESS THAN 25% THEN THE SAID CONCERN IS NOT BE INCLUDED IN THE FINAL LIST OF COMPARABLES. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL, WE RESTORE THE MATTER FOR VERIFICATION TO THE ASS ESSING OFFICER TO ADJUDICATE THIS ISSUE AFRESH AFTER PROVIDING REASONABLE OP PORTUNITY OF HEARING TO THE ASSESSEE. THUS, GROUND NO. 6 RAISED IN APPEAL BY ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES. 11 ITA NO. 388/PUN/2017 A.Y.2012-13 14. THAT TAKING THE SUBMISSIONS OF THE LD. AR IN ACCOUNT, WHEREIN HE HAS SUBMITTED THAT ONCE THE GROUND NO.6 IS ADJUDICATED, OTHE R REMAINING GROUNDS BECOME ACADEMIC. THEREFORE, SINCE THE GROUND NO. 6 HAS BE EN ALLOWED FOR STATISTICAL PURPOSES, REMAINING GROUNDS BECOME ACADEMIC IN NATURE. 15. IN THE COMBINED RESULT, APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON 21 ST DAY OF JANUARY, 2019. SD/- SD/- ANIL CHATURVEDI PARTHA SA RATHI CHAUDHURY ACCOUNTANT MEMBER JUDICIAL MEMBER / PUNE; / DATED : 21 ST JANUARY, 2019. SB !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT (APPEALS)-13, PUNE. 4. THE PR. CIT-5, PUNE. 5. '#$ %%&' , ( &' , )*+ , / DR, ITAT, B BENCH, PUNE. 6. $,- ./ / GUARD FILE. // TRUE COPY // (0 / BY ORDER, %1 &+ / PRIVATE SECRETARY ( &' , / ITAT, PUNE. 12 ITA NO. 388/PUN/2017 A.Y.2012-13 DATE 1 DRAFT DICTATED ON 08 .01.2019 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 09 .01 .201 9 SR.PS/PS 3 DRAFT PROPOSED AND PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/JM 5 APPROVED DRAFT COMES TO THE SR. PS/PS SR.PS/PS 6 KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7 DATE OF UPLOADING OF ORDER SR.PS/PS 8 FILE SENT TO BENCH CLERK SR.PS/PS 9 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 10 DATE ON WHICH FILE GOES TO THE A.R 11 DATE OF DISPATCH OF ORDER