CSAV Group India Pvt. Ltd., Haryana V. ACIT, New Delhi

ITA 3954/DEL/2010

• Counselvise Citation: 395420114 RSA 2010
• Duration Of Justice: 4 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-05-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 14-05-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 23-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANURADHA MISHRA
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction
• Section: 92C; 143(3); 92A; 92

Judgement Text

ITA NO. 3954/ DEL/ 2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I , NEW DELHI BEFORE SHRI S. V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI H.S. SIDHU, JUDICIAL MEMBER I.T.A. NO. 3954 /DEL/201 0 A.Y. : 200 6 - 0 7 CSAV GROUP (INDIA) PVT. LTD., 11 TH FLOOR, BUILDING NO. 9A, DLF CYBERCITY, GURGAON, HARYANA - 122002 (PAN: AACCC3324L) VS. ACIT, WARD 3(1), NEW DELHI 110 001 (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. ROHIT TIWARI, CA DEPARTMENT BY : S MT. ANURADHA MISHRA, CIT(DR) DATE OF HEARING : 14 - 5 - 201 5 DATE OF ORDER : 2 9 - 5 - 201 5 ORDER PER H.S. SIDHU : J M TH IS APPEAL BY THE ASSESSEE IS D IRECTED AGAINST THE ASSESSMENT ORDER DATED 8 . 7 .2010 OF THE ASSESSING OFFICER PASSED U/S. 143(3) OF THE I.T. ACT, 1961 P ERTAINING TO ASSESSMENT YEAR 200 6 - 0 7 . THE GROUNDS RAISED BY THE ASSESSEE READ AS UNDER: - THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW; 1. THAT THE ASSESSMENT ORDER PASSED IN PURSUANCE TO THE DIRECTIONS ISSUED BY THE LEARNED DISPUTE RESOLUTION PANEL ('LD DRP') IS A VITIATED ORDER AS THE LD. DRP ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION MADE BY THE LD. ASSESSING ITA NO. 3954/ DEL/ 2010 2 OFFICER ('AO')/ LD. TRANSFER PRICING OFFICER ('TPO') TO THE APPELLANT'S INCOME BY ISSUING A NON - SPEAKING ORDER WITHOUT APPROPRIATE APPLICATION OF MIND AND IN UNDUE HASTE; 2. THE LD. DRP ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE LD. AO/ TPO'S ACTION OF MAKING AN A DJUSTMENT OF RS. 17,324,009 TO THE INCOME OF THE APPELLANT HOLDING THAT ITS INTERNATIONAL TRANSACTIONS OF PROVISION OF BACK OFFICE AND AND VESSEL PLANNING SUPPORT SERVICES DO NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. IN DOING SO THE L D. DRP HAS GROSSLY ERRED IN AGREEING WITH THE LD. TPO'S ACTION OF: 2.1. AGGREGATING THE ACTIVITIES OF VESSEL PLANNING SUPPORT SERVICES AND BACK OFFICE SUPPORT SERVICES CARRIED OUT BY THE APPELLANT FOR THE PURPOSE OF ECONOMIC ANALYSIS, BASED ON INCORRECT PRESUMPTIONS AND SURMISES, THEREBY IGNORING THE FACT THAT THESE TWO ACTIVITIES HAVE DISTINCT FUNCTIONAL PROFILE AND HENCE SHOULD BE ANALYSED SEPARATELY; 2.2. RESORTING TO ARBITRARY REJECTION OF LOW - PROFIT! LOSS MAKING COMPANIES INCLUDED IN THE COMPARABLE SET, BASED ON ERRONEOUS AND INCONSISTENTLY APPLIED FILTRATION CRITERIA/ REASONS, THEREBY RETAINING ONLY HIGH - PROFIT MAKING COMPANIES (IN THE FINAL COMPARABLE SET) FOR BENCHMARKING THE APPELLANT'S INTERNATIONAL TRANSACTIONS; NOT APPRECIATING THE FUNCTIONAL PROFILE OF THE ITA NO. 3954/ DEL/ 2010 3 APPELLANT AND IN APPLYING INCONSISTENT BASIS WHILE ADJUDICATING ON THE FUNCTIONAL COMPARABILITY OF THE COMPARABLES, THEREBY ERRONEOUSLY INCLUDING IN THE FINAL COMPARABLE SET CERTAIN COMPANIES WITH DIFFERENTIAL FUNCTIONAL PROFILE; 2.4. NOT A PPRECIATING THE FACT THAT IN THE RELEVANT ASSESSMENT YEAR THE APPELLANT WAS ENTITLED TO A TAX HOLIDAY ON ITS PROFITS FROM PROVISION OF VESSEL PLANNING SUPPORT SERVICES AND BACK OFFICE SUPPORT SERVICES AND THEREFORE DID NOT HAVE ANY UNTOWARD MOTIVE OF DERIV ING ANY TAX ADVANTAGE BY MANIPULATING THE TRANSFER PRICES OF ITS INTERNATIONAL RELATED PARTY TRANSACTIONS; 2.5. HOLDING THAT ONLY CURRENT YEAR (I.E, FY 2005 - 06) DATA FOR COMPARABLE COMPANIES SHOULD BE USED FOR COMPARABILITY ANALYSIS DESPITE THE FACT THAT THE SAME WAS NOT NECESSARILY AVAILABLE TO THE APPELLANT AT THE TIME OF PREPARING ITS TP DOCUMENTATION; 2.5.1. WITHOUT PREJUDICE, IN CONSIDERING ONLY THE COMPARABLES' ANALYSIS PRESENTED BY THE APPELLANT IN RESPECT OF ITS BACK OFFICE SUPPORT SERVICES SEGME NT, CARRIED OUT USING CURRENT YEAR DATA, SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS WHILE AT THE SAME TIME ERRONEOUSLY IGNORING/ DISREGARDING THE COMPARABLES ANALYSIS PRESENTED BY THE ITA NO. 3954/ DEL/ 2010 4 APPELLANT IN RESPECT OF VESSEL PLANNING SUPPORT SERVICES CARR IED OUT ON THE SAME BASIS; 2.6. DENYING THE BENEFIT OF A WORKING CAPITAL ADJUSTMENT TO THE APPELLANT; 2.7. E RRONEOUSLY RETAINING IN THE FINAL COMPARABLE SET CERTAIN COMPANIES WHICH HAVE EARNED EXTRAORDINARILY HIGH OPERATING MARGINS, THUS SIGNIFYING A HI GH ELEMENT OF ENTREPRENEURIAL RISK AS OPPOSED TO THE LIMITED RISK BEARING CAPTIVE SERVICES PROVIDED BY THE APPELLANT; 2.8. NOT APPRECIATING THE RISK PROFILE OF THE FUNCTIONS CARRIED .OUT BY THE APPELLANT AND INCORRECTLY AGREEING WITH THE LD. TPO THAT THE APPELLANT IS A RISK BEARING ENTITY; 2.8.1. REJECTING THE DETAILED COMPUTATION OF RISK ADJUSTMENT SUBMITTED BY THE APPELLANT DURING THE ASSESSMENT PROCEEDING, BASED ON VARIOUS SUBJECTIVE PREMISES/ PRESUMPTION, WHILE AT THE SAME TIME FAILING TO PROVIDE AN ALTERNATIVE BASIS FOR COMPUTATION; 2.9. DENYING THE BENEFIT OF (+! - ) 5 PERCENT [AS PER PROVISO TO SECTION 92C(2) OF THE ACT] AVAILABLE TO THE APPELLANT. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTHER ITA NO. 3954/ DEL/ 2010 5 THE APPELLANT CRAVES LEAVE TO ALTER, AMEND O R WITHDRAW ALL OR ANY OF THE GROUNDS HEREIN OR ADD ANY FURTHER GROUNDS AS MAY BE CONSIDERED NECESSARY EITHER BEFORE OR DURING THE HEARING. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED ITS RETURN OF INCOME DECLARING INCOME OF RS. 11 ,68,763 / - ON 21.11.2006. NOTICE UNDER SECTION 143(2) OF THE INCOME - TAX ACT, 1961 W AS ISSUED ON 10.10.2007 AND DULY SERVED. IN RESPONSE TO THIS NOTICE, MS NEELU BAHL AND SHRI ANUJ MAHAJAN, CAS, APPEARED FROM TIME TO TIME AND FILED DETAILS. BOOKS OF ACCOUNTS WERE PROD UCED AND EXAMINED ON TEST CHECK BASIS. THE CASE WAS DISCUSSED WITH THE AUTHORISED REPRESENTATIVES. DURING THE RELEVANT PREVIOUS YEAR THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF PROVIDING VESSEL PLANNING SUPPORT SERVICES AND OTHER BACK OFFICE SUPPORT SERVIC ES TO CSAV GROUP COMPANIES. THE ASSESSEE ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES, AS DEFINED IN SECTION 92A OF THE I T ACT: NAME OF THE AE DESCRIPTION OF TRANSACTION AMOUNT RECEIVED ALP DECLARED BY THE ASSESSEE NCLL PROVISIONS OF SERVICES 76223478 76223478 CSAVSA PROVISION OF SERVICES 62898208 62898208 CNP PROVISION OF SERVICES 14717006 14717006 CSVSA REIMBURSEMENT OF EXPENSES RECEIVED 24640 24640 CSAV REIMBURSEMENT 336630 336630 ITA NO. 3954/ DEL/ 2010 6 GMBH OF EXPENSES RECEIVED CSAV HK REIMBURSEMENT OF EXPENSES RECEIVED 65630 65630 CSAV GMBH COST RECHARGES PAID NA NA TOTAL 154265592 154265592 2.1 THE CASE OF THE ASSESSEE WAS REFERRED TO THE TRANSFER PRICING OFFICER - I, NEW DELHI ON 13.3.2008 ULS 92CA OF THE IT ACT. THE TRANSFER PRICING OFFICER - I(4), NEW DELHI PASSED ORDER ULS 92CA(3) OF THE IT ACT ON 15.09.2009. IN THE REPORT , THE TPO DETERMINED THE ARM'S LENGTH PRICE OF DIFFERENT SERVICES PROVIDED BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES ASSESSEE AT RS.17,11,62,701/ - AS AGAINST RS.15,38,38,692/ - CHARGED BY THE ASSESSEE FOR THESE SERVICES RESULTING IN DIFFERENCE OF RS. 1, 73,24,009/ - . 2.2 KEEPING IN VIEW THE ABOVE, THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY ADDITION OF RS. 1 ,73,2 4,009/ - NOT BE MADE TO ITS INCOME U/S 92CA READ WITH SECTION 92C(4) OF THE IT ACT, VIDE ORDER SHEET ENTRY DATED 07.10.2009. IN RESPONSE THERETO, THE ASSESSEE STATED VIDE ITS LETTER DATED 22.10.2009 THAT ITS REPLY IS AS PER ITS LETTER DATED 3.8.2009 AND 17. 8.2009 ADDRESSED TO THE TPO. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE AO WAS AGREED WITH THE FINDING OF THE TPO BY HOLDING THAT THE SAME IS AS PER THE LAW ON THE SUBJECT. AS REGARDS TO THE PLEADINGS OF THE ASSESSEE REGARDING EXERCISING THE ITA NO. 3954/ DEL/ 2010 7 OPTION OF TAKING THE ALP AT 5% LESS OR 5% MORE THAN THE MEAN OF COMPARABLE PRICES. THE AO IS OF THE VIEW THAT FIRSTLY, THIS OPTION COULD ONLY BE EXERCISED IF THE ASSESSEE HAD SUO - MOTTO DECLARED THE ALP AS THE PRICE OF SERVICES CHARGED BY IT TO ITS ASSOCIAT ED ENTERPRISE AS PER SECTION 92 OF THE IT ACT. THE ASSESSEE HAD THIS OPTION AT THE TIME OF FILING OF RETURN WHICH IT FAILED TO EXERCISE. SECONDLY, EVEN AT THE STAGE OF ASSESSMENT, THE ASSESSEE HAS ONLY STATED THAT IT WANTS TO EXERCISE THE OPTION OF TAKING THE ALP AT 5% MORE OR 5% LESS THAN THE MEAN OF COMPARABLE PRICES. THE ASSESSEE HAS NOT SPECIFIED WHICH VALUE (I.E., VALUE MORE THAN OR THE VALUE LESS THAN THE MEAN OF COMPARABLE PRICES) IT WANTS TO ADOPT. THIRDLY, AS PER SECTION 92CA(4) OF THE IT ACT, THE ASSESSING OFFICER HAS TO COMPUTE THE INCOME OF THE ASSESSEE IN CONFORMITY WITH THE ARM'S LENGTH PRICE AS SO DETERMINED BY THE TPO AFTER AMENDMENT IN THIS SUB - SECTION BY THE FINANCE ACT, 2007 W.E.F. 1.6.2007. AFTER CONSIDERING ALL REPLIES AND SUBMISSIONS O F ASSESSEE, AO HELD THAT THE TOTAL INCOME OF THE ASSESSEE HAS TO BE DETERMINED ON THE BASIS OF ALP DETERMINED BY THE TPO. THE ASSESSEE DID NOT EXERCISE THE OPTION OF TAKING THE ALP AT PLUS/MINUS 5% OF THE ARITHMETIC MEAN OF ALPS BASED UPON DIFFERENT COMPAR ABLES. THE AO HAS TO COMPUTE THE TOTAL INCOME OF THE ASSESSEE AS PER THE ALP DETERMINED BY THE TP O . AO REFERRED THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF MOSER BAER VS. ADDITIONAL COMMISSIONER OF INCOME - TAX IN WRIT ITA NO. 3954/ DEL/ 2010 8 PETITION (CI VIL) NO. 6974/2008 WHEREIN IT HAS BEEN HELD THAT 'THE ASSESSING OFFICER, AFTER THE AMENDMENT BROUGHT ABOUT BY VIRTUE OF FINANCE ACT, 2007, HAS NO CHOICE BUT TO PROCEED TO COMPUTE TOTAL INCOME OF THE ASSESSEE UNDER SUB - SECTION (4) OF SECTION 92C IN CONFORM ITY WITH THE ALP DETERMINED BY THE TP O .' THE AO REJECTED THIS SUBMISSION OF THE ASSESSEE AND THE TOTAL INCOME OF THE ASSESSEE WAS ASSESSED ON THE BASIS OF ALP OF RS.15,38,38,692/ - AS DETERMINED BY THE TPO. 2.3 AO MADE THE ADDITION OF RS. 1, 73,24,009/ - , BE ING THE DIFFERENCE BETWEEN THE ARM'S LENGTH PRICE AND THE PRICE CHARGED BY THE ASSESSEE AND ADDED TO THE INCOME OF THE ASSESSEE U/S 92C(4) OF THE IT ACT. 2.4 THE DRAFT ASSESSMENT ORDER WAS PASSED UNDER SECTION 144C OF THE I.T. ACT IN THIS CASE ON 29.12.2 0 09. THE ASSESSEE PREFERRED APPEAL BEFORE THE DISPUTE RESOLUTION PANEL AGAINST THIS ORDER UNDER THE PROVISIONS OF THIS SECTION. THE DRP - I, NEW DELHI PASSED ORDER UNDER THIS SECTION IN APPEAL NO. 218/27.1.2010 ON 30.6.2010 IN WHICH THE DRP OBSERVED THAT SH. KEDAR KULKARNI ARGUED ABOUT EXCLUSION OF VARIOUS COMPANIES FROM HIS LIST OF COMPARABLE COMPANIES OFFERED BY ASSESSEE IN THE TP DOCUMENTATION STUDY. OUT OF 13 COMPARABLES 8 HAS BEEN REJECTED ON THE GROUNDS OF THEM BEING FUNCTIONALLY DISSIMILAR. 5 CO MPANY WHICH HAVE BEEN SELECTED ITA NO. 3954/ DEL/ 2010 9 FOR COMPARABILITY ARE FROM ASSESSEE S LIST ONLY. THE AR OF THE ASSESSEE ARGUED FOR VISHAL INFORMATION TECHNOLOGIES TO BE REJECTED IN THE LIST OF COMPARABLE. IT IS FOUND SURPRISING THAT ASSESSEE WANTS TO REJECT HIS OWN COMP ARABLES OFFERED INITIALLY IN HIS TP REPORT. SUCH CHERRY PICKING HAS NOT BEEN ARGUED OUT. THE TPO S ORDER NEEDS NO FURTHER INTERVENTION . THE AO HAS PASSED THIS ORDER AS PER THE DRAFT ASSESSMENT ORDER DATED 29.12.2009 AND FINALLY THE INCOME OF THE ASS ESSEE WAS ASSESSED AS UNDER : - INCOME FROM BUSINESS AS DECLARED BY THE ASSESSEE: RS. 11,68,763 ADD: ADDITION U/S 92C(4) AS DISCUSSED ABOVE: RS. 1,73,24,009 BUSINESS INCOME: RS. 1,8 4 ,92,772 TOTAL INCOME : RS. 1,84,92,772 TOTAL INCOME (ROUNDED OFF): RS. 1,82,92,770 3. THE AO A SSESSED THE INCOME AT RS . 1 ,84,92,770/ - VIDE HIS ORDER DATED 8.7.2010 PASSED UNDER SECTION 143(3) OF THE I.T. ACT, 1961. 4. AGAINST THE ABOVE ORDER OF AO, ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 5. LD. COUNSEL OF THE ASSESSEE, SHRI ROHIT TIWARI, REITERATED THE CONTENTIONS RAISED IN THE GROUNDS OF APPEAL AND IN ORDER T O SUBSTANTIATE HIS CLAIM HE FILED THE SYNOPSIS . 6 . ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER OF THE AO. ITA NO. 3954/ DEL/ 2010 10 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RELEVANT RECORDS AVAILABLE WITH US, ESPECIALLY THE ORDER OF THE REVENUE AUTHORITIES AND THE SYNOPSIS FILED BY THE ASSESSEE . WE FIND THAT DURING THE FINANCIAL YEAR ('FY') 2005 - 06, THE ASSESSEE UNDERTOOK THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES: A) PROVISION OF SERVICES B) COST RECHARGES (PAID) C) REIMBURSEMENT OF EXPENSES (RECEIVED) 7.1 THE ABOVE MENTIONED TRANSACTIONS WERE DULY REPORTED IN THE ACCOUNTANT' S REPORT (FORM NO 3CEB) FILED ALONG WITH THE APPELLANT'S RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR. 7.2 FOR THE PURPOSE OF ESTABLISHING COMPLIANCE WITH THE ARM'S LENGTH STANDARD, THE APPELLANT SEGREGATED ITS INCOME FROM PROVISION OF SERVICES INTO: A) PROVISION OF VESSEL PLANNING SUPPORT SERVICES HEREINAFTER REFERRED TO AS 'VESSEL PLANNING SEGMENT', AND B) IT ENABLED BACK - OFFICE SUPPORT SERVICES HEREINAFTER REFERRED TO AS 'BACK - OFFICE SEGMENT'. 7.3 THE ASSESSEE'S INTERNATIONAL TRANSACTIONS OF REI MBURSEMENT OF EXPENSES HAVE BEEN ACCEPTED BY THE TRANSFER PRICING OFFICER (LD. TPO') TO BE - AT ARM'S LENGTH. ITA NO. 3954/ DEL/ 2010 11 7.4 FOR ESTABLISHING THE ARM'S LENGTH NATURE OF ITS OPERATIONS IN THE VESSEL PLANNING SEGMENT AND BACK - OFFICE SEGMENT, IN ITS TRANSFER PRICING (TP) REPORT FOR THE RELEVANT FY, THE ASSESSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD ('TNMM') AS THE MOST APPROPRIATE METHOD ( MAM') USING THE RETURN ON TOTAL COST (OP/TC MARGIN) AS THE PROFIT LEVEL INDICATOR ('PU'). 7.5 USING MULTIPLE YEAR DATA (FOR FY 2003 - 04, FY 2004 - 05 AND FY 2005 - 06, TO THE EXTENT AVAILABLE AT THE TIME OF THE DOCUMENTATION), THE APPELLANT, IN ITS TP DOCUMENTATION, CARRIED OUT THE BENCHMARKING ANALYSIS THE RESULTS OF WHICH ARE PROVIDED IN TABLE 1 BELOW: TABLE 1: SUMMARY OF BENCHMARKING A NALYSIS (TP DOCUMENTATION) (REFER TP STUDY AT PAGE 34 & 45 OF PAPERBOOK AND REFER TPO ORDER AT PAGE 14 OF APPEAL SET) PARTICULARS VESSEL PLANNING SERVICES BACK OFFICE SERVICES PLI USED OP/TC OP/TC NO OF COMPARABLES 7 20 COMPARABLES' MAR GIN 11.01% 9.93% APPELLANT'S MARGIN 18% 13% CONCLUSION AT ARM S LENGTH AT ARM S LENGTH ITA NO. 3954/ DEL/ 2010 12 7.6 DURING THE COURSE OF THE TP ASSESSMENT PROCEEDINGS, THE LD. TPO DIRECTED THE ASSESSEE TO SUBMIT THE CURRENT YEAR (I.E., FY 2005 - 06) DATA FOR COMPARA BLE COMPANIES CONSIDERED IN ITS TP STUDY. FURTHER, THE LD. TPO PROPOSED TO AGGREGATE THE 'VESSEL PLANNING SEGMENT' AND 'BACK - OFFICE SEGMENT' OF THE APPELLANT AND ANALYSE IT ON AN ENTITY - WIDE BASIS. THE FOLLOWING TABLE SUMMARIZES THE RESULTS OF THE FRESH SE ARCH UNDERTAKEN BY THE APPELLANT: TABLE 2: SUMMARY OF FRESH SEARCH FOR COMPARABLES PARTICULARS VESSEL PLANNING SERVICES BACK OFFICE SERVICES PLI USED OP/TC OP/TC NO OF COMPARABLES 7 13 COMPARABLES' MARGIN 11.16% 10.56% APPELLANT'S MARGIN 18% 13% CONCLUSION AT ARM S LENGTH AT ARM S LENGTH 7.7 HOWEVER, THE LD. TPO REJECTED THE SEGMENTED TP ANALYSIS CARRIED OUT BY THE ASSESSEE AND ANALYZED THE APPELLANT AS AN ITES/ BACK - OFFICE SERVICE COMPANY ON AN ENTITY WIDE BASIS, COMPUTING THE APPELLANT'S ENTITY - WIDE OPITC MARGIN AT 15.06%. 7.8 FURTHER, THE LD TPO DISREGARDED THE FRESH SEARCH UNDERTAKEN BY THE APPELLANT FOR BENCHMARKING ITS 'VESSEL PLANNING SEGMENT' AND ITA NO. 3954/ DEL/ 2010 13 INSTEAD PROCEEDED TO BENCHMARK THE ASSESSEE ON AN ENTI TY WIDE BASIS ON THE BASIS OF THE FRESH SEARCH ANALYSIS (REFERRED ABOVE) UNDERTAKEN BY THE ASSESSEE FOR BENCHMARKING ITS 'BACK - OFFICE' SEGMENT. THE PURPORTED ACTION OF THE LD. TPO IS SUMMARISED IN TABLE 3 BELOW: NO OF COMPARABLES BACK OFFICE SERVICES (AS CONSIDERED IN THE FRESH SEARCH BASED ON 13 UPDATED CURRENT EAR DATA - REFER TABLE ABOVE LESS: COMPANIES REJECTED ON THE GROUNDS OF THEM 8 THEM FUNCTIONALLY DISSIMILAR COMPARABLE COMPANIES FINALLY SELECTED 5 COMPARABLE S MEAN MARGIN 28.02% APPELLANT'S MARGIN 15.06% APPELLANT'S OPI TC MARGIN OUTSIDE THE +/ - 5 PERCENT RANGE 7.9 THE LD. TPO RELIED UPON THE SET OF TOP 5 HIGH PROFIT MAKING COMPARABLE COMPANIES WITH A MEAN OPITC MARGIN OF 28.02 PERCENT, THEREBY ARRIVING AT A TP ADJUSTMENT OF RS 17,324,009. ITA NO. 3954/ DEL/ 2010 14 7.10 PURSUANT TO THE ORDER PASSED BY THE LD. TPO, THE LD.AO ISSUED A DRAFT ORDER COMPUTING THE TOTAL INCOME, OF THE ASSSESSEE AT RS. 18,492,770 AFTER CONSIDERING THE TP ADJUSTMENT OF RS. 17,324,009. 7.11 AGGRIEVED WITH THE D RAFT ASSESSMENT ORDER, THE ASSESSEE FILED ITS DETAILED SUBMISSIONS IN THE FORM OF OBJECTIONS BEFORE THE LEARNED DISPUTE RESOLUTION PANEL CDRP') AS PROVIDED IN SECTION 144C OF THE ACT. HOWEVER, THE LD. DRP UPHELD THE ADJUSTMENT MADE BY THE LD. TPO. (REFER PAGE NO. 4 OF THE ORDER OF THE DRP DT. JUNE 3, 2010) 8 . NOW, WITH REGARD TO THE CAPTIONED APPEAL, THE APPELLANT WISHES 'TO SUBMIT THE FOLLOWING AGAINST THE ORDER OF THE LD. DRP/LD. TPO: A. 'CHERRY PICKING' IN SELECTION OF FINAL COMPARABLES BY THE LD. TPO INCLUSION OF HIGH MARGIN COMPANIES 9 . THE LD. TPO HAS UNDERTAKEN A DETAILED ANALYSIS OF THE 13 COMPARABLE COMPANIES RELIED UPON BY THE APPELLANT, THE LD. TPO HAS ERRED IN REJECTING CERTAIN COMPANIES CONSIDERED COMPARABLES BY THE APPELLANT AND ULTIMATELY RESORTED TO A SET OF HIGH PROFIT MAKING COMPARABLES TO ARRIVE AT THE ALP. IN DOING THIS THE LD. TPO, HAS ERRONEOUSLY REJECTED ONLY THOSE 8 COMPANIES WHICH WERE LOSS - MAKING/ LOW PROFIT MAKING COMPANIES ON THE ALLEGED/ PURPORTED GROUNDS OF FUNCTIONAL DISSIMI LARITY AND RETAINED THE TOP 5 COMPARABLE COMPANIES WITH VERY HIGH PROFIT MARGINS OUT OF THE 13 ITA NO. 3954/ DEL/ 2010 15 COMPARABLE COMPANIES SELECTED BY THE APPELLANT VIDE ITS FRESH SEARCH. THIS CAN BE CLEARLY OBSERVED FROM TABLE B ELOW: . 1 VISHAL LNFORMATION TECHNOLOGIES LTD. 63.56% ACCEPTED 2 TRITON CORP LTD. 20.58%' ACCEPTED 3 C S SOFTWARE ENTERPRISE LTD. 19.87% ACCEPTED 4 TRANSWORKS INFORMATION SERVICES LTD. 19.62% ACCEPTED 5 COSMIC GLOBAL LTD. 16.48% ACCEPTED 6 TSR D ARASHAW LTD 1.4.38% REJECTED 7 TUTIS TECHNOLOGIES 9.47% REJECTED 8 NATIONAL SECURITIES DEPOSITORY LTD 6.21% REJECTED 9 ASK ME INFO HUBS LTD. 4.67% REJECTED 10 INDUS NETWORKS LTD. (ITES SEGMENT) 4.20% REJECTED 11 TATA SERVICES LT D. 2.07% REJECTED 12 DATAMATICS FINANCIAL SERVICES - 14.24% REJECTED 13 TWINSTAR SOFTWARE EXPORTS LTD - 29.55% REJECTED MEAN 10.56% FINAL SET OF COMPARABLES BY THE LD. TPO: TABLE 4: FRESH SEARCH COMPARABLES FOR BACK - OFFICE SERVICES ITA NO. 3954/ DEL/ 2010 16 S.NO. COMPANY NAME OP/TC TPO S DISPOSITION 1 VISHAL INFORMATION TECHNOLOGIES LTD. 63.56% ACCEPTED 2 TRITON CORP LTD. 20.58% ACCEPTED 3 C S SOFTWARE ENTERPRISE LTD. 19.87% ACCEPTED 4 TRANSWORKS INFORMATION SERVICES LTD. 19.62% ACCEPTED 5 COSMIC GLOBAL LTD. 16.48% ACCEPTED MEAN 28.02% . - 1 0 . FURTHER, THE LD. TPO HAS HELD CERTAIN COMPANIES (AS MENTIONED IN TABLE 5 BELOW) TO BE FUNCTIONALLY NOT COMPARABLE ON THE PREMISE THAT THE SAID COMPANIES ARE ENG AGED IN THE ACTIVITY OF MEDICAL TRANSCRIPTIONS. IN THIS REGARD, THE LD. TPO HAS RESORTED TO INCONSISTENT APPLICATION OF CRITERIA. 1 1 . THIS IS EVIDENT FROM THE FACT THAT THE ANNUAL REPORT OF ONE OF THE COMPARABLE COMPANIES I.E., COSMIC GLOBAL SERVICES, ACC EPTED BY THE LD. TPO IN THE FINAL COMPARABLE COMPANIES SET CLEARLY AND UNAMBIGUOUSLY SPECIFIES THAT THE COMPANY'S ACTIVITIES BEING IT SERVICES INCLUDE MEDICAL TRANSCRIPTION, TRANSLATION AND SOFTWARE DEVELOPMENT. (FOR RELEVANT EXTRACTS PLEASE REFER ANNEXUR E 1 OF THIS SUBMISSION). ITA NO. 3954/ DEL/ 2010 17 12 . THE FUNCTIONS CARRIED OUT BY TWO OF THE COMPARABLE COMPANIES, I.E., INDUS NETWORKS AND TWINSTAR SOFTWARE EXPORTS, REJECTED BY THE LD. TPO ON ACCOUNT OF FUNCTIONAL DISSIMILARITY VIS - A - VIS COSMIC GLOBAL SERVICES ARE GIVEN IN T ABLE 5 BELOW FOR READY REFERENCE: TABLE 5: FUNCTIONS PERFORMED BY INDUS NETWORKS (ITES SEGMENT) AND COMPANY NAME COSMIC GLOBAL SERVICES INDUS NETWORKS LTD. (ITES SEGMENT) TWINSTAR SOFTWARE EXPORTS FUNCTIONS PERFORMED THE COMPANY S ACTIVITIES BEING IT ENABLED SERVICES INCLUDE MEDICAL TRANSCRIPTION, TRANSLATION AND SOFTWARE DEVELOPMENT. (FOR RELEVANT EXTRACTS PLEASE REFER ANNEXURE 1 OF THIS SUBMISSION) COMPANY S OPERATIONS PRIMARILY COMPRISE OF PROVIDING SOFTWARE SERVICES, IT ENABLED SERVICES, MANU FACTURING AND OTHERS. (FOR RELEVANT EXTRACTS PLEASE REFER ANNEXURE 2 OF THIS SUBMISSION) FOR THE PURPOSES OF THE BENCHMARKING ANALYSIS THE PROFITABILITY OF THE COMPANY S ITES BUSINESS SEGMENT HAS BEEN CONSIDERED. (PLEASE REFER PAGE NO. 139 OF THE PAPER BO OK) ITES IN THE NATURE OF BACK OFFICE OPERATION AND MEDICAL TRANSCRIPTIONS (DOMESTIC SALES AND EXPORTS) CONSTITUTE THE COMPANY S ENTIRE OPERATIONS. (FOR RELEVANT EXTRACTS PLEASE REFER ANNEXURE 3 OF THIS SUBMISSION) PLEASE REFER PAGE NO. 138 TPO S ACCEPTED REJECTED REJECTED ITA NO. 3954/ DEL/ 2010 18 DIS POSITION 13 . CONSIDERING THE ABOVE, IN THE INSTANT CASE, ASSESEE S COUNSEL REQUESTED THAT IF COSMIC GLOBAL SERVICES IS ACCEPTED AS A FINAL COMPARABLE COMPANY THEN THE ITES SEGMENT OF INDUS NETWORKS AND TWINSTAR SOFTWARE EXPORTS SHOULD ALSO BE INCLUDED IN THE FINAL COMPARABLE COMPANIES SET ON THE SAME PREMISE. 14 . WE FIND THAT RETENTION OF VISHAI INFORMATION TECHNOLOGIES IN THE FINAL COMPARABLE SET , I T IS PERTINENT TO NOTE THAT ON ACCEPTING THE TOP 5 HIGH PROFIT MARGIN COMPANIES THE LD. TPO FAILED TO CONSIDER THE FOLLOWING FACTS PERTAINING TO VISHAL INFORMATION TECHNOLOGIES WHIC H CLEARLY EVIDENCE THAT IT IS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE 15. DURING THE RELEVANT YEAR, THE COMPANY IS PROVIDING AGENCY SERVICES BY WAY OF OUTSOURCING THE SERVICES TO THIRD PARTY VENDORS AND ACTING AS AN INTERMEDIARY BETWEEN THE FINAL CUS TOMER AND THE VENDOR. THIS IS EVIDENT FROM THE FACT THAT DURING THE LAST THREE YEARS, THE COMPANY HAS INCURRED RELATIVELY HIGH EXPENSES TOWARDS PAYMENTS TO VENDORS IN COMPARISON TO PAY OUTS TO ITS PERSONNEL. TABLE 6 BELOW PROVIDES DETAILS OF VENDOR PAYMENT CHARGES AS A PERCENTAGE OF SALES AND ALSO THE PERSONNEL COST AS A PERCENTAGE OF SALES OF THE COMPANY FOR THE LAST THREE YEARS FOR PERUSAL: ITA NO. 3954/ DEL/ 2010 19 TABLE 6: TREND OF PAYMENTS TO PERSONNEL AND VENDORS PARTICULARS 2003 - 04 2004 - 05 2005 - 06 DATE ENTRY AND VENDOR P AYMENT 76,928,836 113,511,647 114,914,563 PERSONNEL COSTS 1,915,371 1,970,458 3,201,756 SALES 138,822,227 208,233,000 256,428,476 VENDOR PAYMENT AS A PERCENTAGE OF SALE 55.42% 54.51% 44.81% PERSONNEL COST AS A PERCENTAGE OF SALE 1.38% 0.94% 1.25% APPELLANT S PERSONNEL COST AS A PERCENTAGE OF SALE NA 51.01% 55.07% 16. W E FIND THAT THE INTERMEDIARY FUNCTIONS OF VISHAL CAN ONLY BE COMPARED TO THAT OF A DISTRIBUTOR WHICH TAKES TITLE TO SERVICE PRODUCT FOR RESALE TO THE CUSTOMER. ON THE CONTRARY THE A SESSEE IS A PROVIDER OF BACK OFFICE SERVICES ON ITS OWN (APPELLANT HAS A WAGES/ SALES RATIO OF 55 PERCENT AS COMPARED TO A WAGES/SALES RATIO OF 1.25 PERCENT OF VISHAL). 17. IT IS AN ESTABLISHED FACT THAT THE DISTRIBUTOR OF SERVICES IS FUNCT IONALLY DIFFERENT FROM A CONTRACT SERVICE PROVIDER. (FOR DETAILED SUBMISSION PLEASE REFER PAGE NO. 141 TO 142 OF THE PAPER BOOK). ITA NO. 3954/ DEL/ 2010 20 GIVEN SUCH A LOW WAGES/ SALES RATIO, VISHAL DOES NOT APPEAR TO BE A SERVICE PROVIDER AT ALL BUT IS MORE OF DISTRIBUTOR. 18. FURTHER, DURING THE RELEVANT YEAR, THE COMPANY'S PARENT COMPANY AMEX INFORMATION TECHNOLOGIES LIMITED ('AMEX') UNDERTOOK CERTAIN RESTRUCTURING EXERCISE RESULTING IN ITS ENTIRE ITES OPERATIONS BEING CONDUCTED THROUGH VISHAL INFORMATION TECHNOLOGIES. 19. AS A RESULT OF THE RESTRUCTURING EXERCISE, AMEX SOLD ITS 100% STAKE IN BASIZ FUND ACCOUNTING SERVICES LIMITED (A SEPARATE ENTITY FORMED BY CONVERSION OF THE FUND ACCOUNTING KPO & E ACCOUNTING DIVISION OF AMEX) TO VISHAL AT MARKET VALUE. FURTHER, AMEX'S E PUB LISHING & DIGITAL LIBRARY DIVISIONS WERE ALSO SHIFTED TO VISHAL DURING THE SAID YEAR. 20. W ITH REGARD TO THE BUSINESS OPERATIONS OF VISHAL INFORMATION TECHNOLOGIES, THE COMPANY BESIDES PROVIDING IT. ENABLED SERVICES ALSO PROVIDES TECHNICAL SERVICES AND SO LUTIONS. FOR EG IN RESPECT OF E - PUBLISHING SERVICES BEING PROVIDED, THE COMPANY HAS DEVELOPED AUTOMATED TOOLS TO MAKE SUCH CONVERSION FAST AND ACCURATE. IN RESPECT OF DIGITAL LIBRARY SERVICES, THE COMPANY IS WORKING ON TEXT TO SPEECH SOLUTION WITH C - DAC FO R VISUALLY CHALLENGED. (FOR RELEVANT EXTRACTS PLEASE REFER ANNEXURE 4.1 OF THIS SUBMISSION) ITA NO. 3954/ DEL/ 2010 21 21. HOWEVER, IN COMPLETE DISREGARD OF THE SUBMISSIONS/CONTENTIONS OF THE A SSESSEE , THE LD. DRP/LD. TPO STATED THAT THE A SSESSEE CANNOT CLAIM THAT VISHAL IS FUNCTIO NALLY NOT COMPARABLE JUST BECAUSE THE TPO HAS ALLEGED THAT SOME OTHER COMPANIES (ALSO CONSIDERED BY THE A SSESSEE ) ARE FUNCTIONALLY NOT COMPARABLE. 22. IN THIS REGARD, THE ASSESSEE S COUNSEL STATED THAT MERELY BECAUSE THE SAID COMPANY WAS CONSIDERED IN THE TP DOCUMENTATION/FRESH SEARCH BY THE APPELLANT, THE SAID FACT DOES NOT PRECLUDE THE APPELLANT FROM MAKING A CLAIM FOR ITS REJECTION BASED ON CURRENT YEAR INFORMATION AND BACKED BY REAL AND COGENT REASONS BASED ON FUNCTIONAL PROFILE. IN THIS REGARD, USEFUL REFERENCE WAS DRAWN BY THE LD. COUNSEL OF THE ASSESSEE TO THE JUDGMENT OF THE HON'BLE JURISDICTIONAL DELHI BENCH OF THE ITAT IN THE CASE OF SONY INDIA (P) LIMITED [114 ITD 448] IN ITA NOS 11891 DEL/200S, 8191 DEL/2007 & 8201 2007] ('SONY RULING') (FOR RE LEVANT EXTRACTS PLEASE REFER PAGE NO. 55.. TO 56 OF THE COMPENDIUM OF CASE LAWS): 'WE ARE ALSO NOT IMPRESSED BY THE ARGUMENTS OF LEARNED DEPARTMENTAL REPRESENTATIVE THAT VIDEOCON INTERNATIONAL WAS INCLUDED IN THE LIST OF COMPARABLES FURNISHED BY THE TAXPA YER. IN OUR CONSIDERED OPINION, THERE IS SUFFICIENT MATERIAL ON RECORD TO SHOW THAT TAXPAYER IN PROCEEDINGS BEFORE THE TPO AS WELL AS BEFORE THE LEARNED CIT(APPEALS) HAD ARGUED THAT THERE WERE ITA NO. 3954/ DEL/ 2010 22 HUGE DIFFERENCES BETWEEN THE TAXPAYER AND THE VIDEOCON INTERNAT IONAL LTD AND THEREFORE, VIDEOCON INTERNATIONAL SHOULD BE EXCLUDED FROM COMPARISON. 2 3 . IT IS PERTINENT TO NOTE THAT FOR NON - INCLUSION OF VISHAL AS A COMPARABLE, THE A SSESSEE HAD MADE DETAILED SUBMISSIONS TO THE LD. TPO (REFER PAGE NO. 306 TO 307 OF THE P APER BOOK) AS WELL AS THE LD. DRP(REFER PAGE NO. 139.TO 142 OF THE PAPER BOOK). 2 4 . THE ASSESSEE ALSO PLACES RELIANCE ON THE JUDGMENT OF HON'BLE CHANDIGARH BENCH IN THE CASE OF DCIT VS M/S QUARK SYSTEMS PVT. LTD. LTAS NO. 115/CHD/2009 AND 100/CHD/2009] (' QUARK RULING') (FOR RELEVANT EXTRACTS PLEASE REFER PAGE 110. 87 AND 89 OF THE COMPENDIUM OF CASE LAWS), WHEREIN THE HON'BLE TRIBUNAL HAS OPINED IN THE FOLLOWING MANNER: 30. LEARNED SPECIAL COUNSEL FOR THE REVENUE SHRI KAPILA HAS VEHEMENTLY ARGUED THAT 'DATAMATICS' WAS TAKEN AS ONE OF THE COMPARABLES BY THE TAXPAYER AND NO OBJECTION TO ITS INCLUSION WAS RAISED BEFORE THE TPO OR BEFORE THE LEARNED CIT (APPEALS) IN APPEAL. T HEREFORE, THE TAXPAYER SHOULD NOT BE PERMITTED TO RAISE ADDITIONAL GROUND AND ASK FOR EXCLUSION OF THE ABOVE ENTERPRISE IN THE DETERMINATION OF THE AVERAGE MARGINS. WE ARE UNABLE TO ACCEPT ABOVE CONTENTION. IN THE FIRST PLACE, THESE ARE ITA NO. 3954/ DEL/ 2010 23 INITIAL YEARS OF IM PLEMENTATION OF TRANSFER PRICING LEGISLATION IN INDIA AND TAXPAYERS AS WELL AS TAX CONSULTANTS WERE NOT FULLY CONVERSANT, WITH THIS NEW BRANCH OF LAW WHEN PROCEEDINGS WERE INITIATED OR EVEN AT APPELLATE STAGE .. 38. ACCORDINGLY ON FACTS AND CIRCUMSTA NCES OF THE CASE, WE HOLD THAT TAXPAYER IS NOT STOPPED FROM POINTING OUT THAT DATAMATICS HAS WRONGLY BEEN TAKEN AS COMPARABLE. WHILE ADMITTING ADDITIONAL GROUND OF APPEAL RAISED BY THE ASSESSEE TO REQUIRE US TO CONSIDER WHETHER OR NOT DATAMATICS SHOULD BE INCLUDED IN THE COMPARABLE, WE MAKE NO COMMENTS ON MERIT EXCEPT OBSERVING THAT ASSESSEE FROM RECORD HAS SHOWN IT'S PRIMA - FACIE CASE. 25. LD. COUNSEL OF THE ASSESSEE ALSO STATED THAT THE ISSUE IN DISPUTE IS SQUARELY COVERED BY THE DECISION OF THE TRIBUN AL IN THE CASE OF M/S TNS INDIA PVT. LTD. VS. ADDL. CIT PASSED ON 27.6.2014 IN ITA NO. 108/HYD/2011 ASSESSMENT YEAR 2006 - 07 VIDE ORDER DATED WHEREIN THE VISHAL INFORMATION TECHNOLOGIES LTD. HAS BEEN EXCLUDED FROM THE LIST OF COMPARABLES. THE RELEVANT FINDING OF THE TRIBUNAL IN THIS REGARD AS UNDER: - WE HAVE CONSIDERED SUBMISSION OF THE PARTIES AND PERUSED THE MATERIALS ON RECORDS. AS CAN BE SEEN FROM ITA NO. 3954/ DEL/ 2010 24 THE FACTS ON RECORD, ASSESSEE AS WELL AS TPO HAS NOT GONE INTO VERTICALS / HORIZONTALS OF THE ITES S ECTOR WHILE SELECTING COMPARABLES. HOWEVER, AS CAN BE SEEN FROM THE MATERIALS PLACED ON RECORD, THE EMPLOYEE COST OF THIS COMPANY IS ABNORMALLY LOW COMPARED TO THE ASSESSEE, WHICH PRESUPPOSES THAT IT HAS OUTSOURCED MAJOR PORTION OF ITS WORK TO THIRD PART IES. ITAT MUMBAI BENCH IN CASE OF MAERSHK GLOBAL SERVICES CENTRE (INDIA) PVT. LTD. (14 ITR [TRIB] 541) AFTER CONSIDERING THIS ASPECT REJECTED IT AS A COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE ITAT MUMBAI BENCH, THE COORDINATE BENCH OF THIS TRIBU NAL IN CASE OF M/S HSBC ELECTRONIC DATA PROCESSING INDIA LTD., VS. ADDL. CIT IN ITA NO. 1624/HYD/2014 DATED 28.6.2013 HAS DIRECTED THE AO TO EXCLUDE THIS FROM THE LIST OF COMPARABLES. THE FINDING OF THE COORDINATE BENCH IS EXTRACTED HEREUNDER FOR CONVENIE NCE: 9.2 AFTER CONSIDERING THE RIVAL CONTENTIONS, WE FIND CONSIDERABLE FORCE IN THE CONTENTIONS ADVANCED BY THE LEARNED COUNSEL. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT MOST OF THE COST INCURRED BY THE COMPANY TAKEN AS COMPARABLE IS OUTSOURC ING COST, AS CAN BE SEEN FROM THE ANNUAL REPORT PLACED IN THE PAPER BOOK AND ITAT, MUMBAI IN THE CASE OF MAERSK GLOBAL SERVICE CENTRE ITA NO. 3954/ DEL/ 2010 25 (SUPRA) HAS ANALYSED AND REJECTED THIS COMPANY AS COMPARABLE, DUE TO THE REASON THAT IT HAS OUTSOURCED A CONSIDERABLE POR TION OF ITS BUSINESS AND IT IS FUNCTIONALLY DIFFERENT. THIS FACTOR WAS ALSO APPROVED BY THE DRP IN ASSESSEE S OWN CASE IN THE LATER YEAR, AS CAN BE SEEN FROM THE COPY OF THE ORDER PLACED ON RECORD, FOR ASSESSMENT YEAR 2008 - 09. IN VIEW OF THIS, WE DIREC T THE AO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. SINCE THE AFORESAID DECISIONS OF THE COORDINATE BENCHES PERTAIN TO THE SAME ASSESSMENT YEAR, FOLLOWING THE VIEW EXPRESSED THEREIN, WE ALSO DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMPANY FRO M THE LIST OF COMPARABLES. 26. LD. COUNSEL OF THE ASSESSEE ALSO STATED THAT THE ISSUE IN DISPUTE IS SQUARELY COVERED BY THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S GOOGLE INDIA PVT. LTD. VS. DCIT PASSED ON 19.10.2012 IN ITA NO. 1368/BANG/2010 ASSESSM ENT YEAR 2006 - 07 VIDE ORDER DATED WHEREIN THE VISHAL INFORMATION TECHNOLOGIES LTD. HAS BEEN EXCLUDED FROM THE LIST OF COMPARABLES. THE RELEVANT FINDING OF THE TRIBUNAL IN THIS REGARD AS UNDER: - 15. AS REGARDS IS ISSUE OF (8) VISHAL INFORMATION TECHNOLOGIES LTD., WE FIND THAT, IT IS ADOPTED BY THE TPO. THE DRP HELD THAT VISHAL INFORMATION TECHNOLOGIES HAS ITA NO. 3954/ DEL/ 2010 26 OUTSOURCED ITS CALL CENTRE WORK AND, THEREFORE, THE EMPLOYEE COST IS LESS THAN 25% AS IS THE COMMON PRACTICE AMONG OTHER ITES SERVICES. THE TPO AS WELL AS THE DRP HAVE RECORDED THAT IN THE ITES SECTOR, EMPLOYEES FILTER OF LESS THAN 25% ALONE IS NOT APPLICABLE FOR THE REASON THAT IN ADDITION TO THE AMPLE COSTS, THE COMMISSION COSTS ARE ALS O IMPORTANT. WHEN COMPANY HAS OUTSOURCED ITS ITES SERVICES, IT CANNOT BE SAID THAT ITS BUSINESS RESULTS WOULD BE COMPARABLE TO ANY OTHER ITES SERVICE PROVIDER RENDERING THE SERVICES ENTIRELY ON ITS OWN. IN SUCH CIRCUMSTANCES, THE NET MARGINS OF THE TWO COMPARABLES CANNOT BE ON THE SAME BASIS. THE DECISIONS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE ALSO HELD THAT THE EMPLOYEE COST FILTER IS IMPORTANT FILTER TO BE ADOPTED FOR THE PURPOSE OF COMPUTING ALP. IN THE CASE OF MAERSK GLOBAL SERVICES CENTRE (INDIA) PVT. LTD., IN ITA NO. 3774/M/2011, THE TRIBUNAL AT MUMBAI HAS HELD THAT VISHAL INFORMATION TECHNOLOGIES LTD., HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES OF ITES COMPANY AS IT HAS OUTSOURCED ITS SERVICES. IN VIEW OF THE SAME, WE DIRECT THE AO EXCLUDE THIS COMPANY ALSO FROM THE LIST OF COMPARABLES. ITA NO. 3954/ DEL/ 2010 27 2 7 . THUS, TAKING THE ABOVE INTO CONSIDERATION, IT CAN REASONABLY BE CONSTRUED THAT MERELY BECAUSE THE A SSESSEE HAD INCLUDED A COMPARABLE IN ITS TP DOCUMENTATION, IT COULD NOT BE DEBARRED FROM SEEKING REJECTION OF THAT COMPANY AT A LATER STAGE OF ASSESSMENT! APPELLATE PROCEEDINGS. APPLYING THE SAME PRINCIPLE, THE A SSESSEE PLEADS TO CONSIDER THE AFOREMENTIONED REASONS FOR EXCLUDING VISHAL AS A COMPARABLE. FURTHER, UNDER TNMM, MINOR DIFFERENCES I N THE BUSINESS PROFILE OF THE APPELLANT AND THE COMPARABLES WOULD BE EVENED OUT. HOWEVER, SELECTING ONLY FEW COMPARABLES FROM THE ENTIRE COMPARABLE SET WOULD DEFEAT THE MEANING OF APPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD. 2 8 . FURTHER, WITHOUT PR EJUDICE TO THE A SSESSEE 'S CONTENTIONS OF INCLUDING OTHER LOW PROFIT/LOSS MAKING COMPANIES, THE FOLLOWING TABLE SUMMARISES THE AVERAGE OPERATING MARGIN RESULTS AFTER EXCLUDING VISHAL INFORMATION TECHNOLOGIES FROM THE FINAL COMPARABLE COMPANIES SET: ARM'S L ENGTH MARGIN EXCLUDING VISHAL COMPANY NAME OP/TC CS SOFTWARE ENTERPRISE LTD. 19.87% COSMIC GLOBAL LTD. 16.48% TRANSWORKS INFORMATION SERVICES LTD. 19.62% ITA NO. 3954/ DEL/ 2010 28 TRITON CORP LTD. 20.58% MEAN 19.14% 2 9 . AS MENTIONED ABOVE, THE A SSESSEE S OP / TC MARGIN AS COMPUTED BY THE LD. TPO AT ENTITY LEVEL IS 15.06 PERCENT. ON APPLICATION OF THE +/ - 5% RANGE PRESCRIBED IN THE PROVISO TO SECTION 92C(2) OF THE INCOME TAX ACT, 1961, THE APPELLANT MEETS THE ARM'S LENGTH STANDARD. TABLE 7.1: COMPUTATION O F ARM'S LENGTH PRICE AS PER THE PROVISO TO SECTION 92C(2) OF THE INCOME TAX ACT, 1961 PARTICULARS AMOUNT (INR) TOTAL REVENUE BOOKED BY APPELLANT (A) 153,838,692 TOTAL COST BOOKED BY APPELLANT (B) 133,697,881 OPERATING PROFIT AT 19.14% (C) 25,589,774 OPERATING PROFIT BOOKED (D) 20,140,811 DIFFERENCE (E) = (C) - (D) 5,448,963 ARM S LENGTH PRICE (ALP) (F) = (A) & (E) 159,287,655 105% OF THE ALP 167,252,038 95% OF THE ALP 151,323,272 30 . IN THE BACKGROUND OF THE AFORESAID DISCUSSIONS AND RESPECTFULLY FOLLOWING THE PRECEDENTS OF THE TRIBUNAL IN THE CASE OF M/S TNS INDIA PVT. LTD. VS. ADDL. CIT PASSED ON 27.6.2014 IN ITA NO. 108/HYD/2011 ASSESSMENT YEAR 2006 - 07 (SUPRA) AND M/S GOOGLE IN DIA PVT. LTD. VS. DCIT PASSED ON 19.10.2012 IN ITA NO. ITA NO. 3954/ DEL/ 2010 29 1368/BANG/2010 (SUPRA) ASSESSMENT YEAR 2006 - 07 , WE DIRECT THE AO TO EXCLUDE M/S VISHAL INFORMATION TECHNOLOGIES LTD. F ROM THE LIST OF COMPARABLES. 31. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE O PEN C OURT ON 2 9 / 5 /20 1 5 . S D / - S D / - [ S.V. MEHROTRA] [ H.S. SIDHU ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATE 2 9 / 5 /201 5 SRBHATNAGAR COPY FORWARDED TO: - 1. APPELLANT - 2. RESPONDENT - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES