ITO, WD-2(2), KOLKATA, Kolkata V. M/s Data Core India Pvt. Ltd., Kolkata

ITA 40/KOL/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 0883 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 10 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-12-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 30-05-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 07-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; International transaction; Bad and doubtful debts; Capital expenditure
• Section: 143(3); 92E; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : KOLKATA [BEFORE HONBLE SHRI ABY. T. VARKEY, JM & SHRI M. BALAGANESH, AM ] I.T.A NO. 387/KOL/201 5 ASSESSMENT YEAR : 2010-1 1 M/S DATA CORE (INDIA) PVT. LTD. -VS- I.T.O., WARD-2(2), KOLKATA [PAN: AABCD 1188 Q] (APPELLANT) (RESPONDENT) I.T.A NO. 40/KOL/2016 ASSESSMENT YEAR : 2011-1 2 I.T.O., WARD-2(2), KOLKATA -VS- M/S DATA CORE (IN DIA) PVT. LTD. [PAN: AABCD 1188 Q] (APPELLANT) (RESPONDENT) C.O. NO. 10/KOL/2016 (ARISING OUT OF I.T.A NO. 387/KOL/2015) ASSESSMENT YEAR : 2011-1 2 M/S DATA CORE (INDIA) PVT. LTD. -VS- I.T.O., WARD-2(2), KOLKATA [PAN: AABCD 1188 Q] (CROSS OBJECTOR) (RESPONDENT) FOR THE DEPARTMENT : SHRI G. MALLIKARJU NE, CIT DR FOR THE ASSESSEE : SHRI KAMAL SAWHNEY, AR DATE OF HEARING : 01.11.2017 DATE OF PRONOUNCEMENT : 06.12.2017 ORDER PER M.BALAGANESH, AM 1. THIS APPEAL IS DIRECTED AGAINST THE FINAL ORDER PASSED BY THE LEARNED INCOME TAX OFFICER, WARD -2(2), KOLKATA [ IN SHORT THE LD AO] UNDER SE CTION 143(3) /144C OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) DATED 2 0.2.2015, PURSUANT TO THE DIRECTIONS OF THE 2 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 2 LEARNED DISPUTE RESOLUTION PANEL [ IN SHORT THE LD DRP] UNDER SECTION 144C(5) OF THE ACT DATED 31.12.2014 FOR THE ASST YEAR 2010-11. 2. THE ASSESSEE HAD RAISED THE FOLLOWING GROUNDS O F APPEAL BEFORE US :- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ORDER OF THE TRANSFER PRICING OFFICER-III (HEREINAFTER REFERRED TO AS LD. TPO) PASSED U/S 92CA(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ), SUBSEQUENTLY CONFIRMED IN PART BY THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS LD. PANEL) AND CONSEQUENTLY INCORPORATED BY THE I.T.O, WARD-2(2), (HEREINAFTER REFERRED TO AS LD. AO) IN THE ASSESSMENT ORDER U/S 143(3) R/W.S. 144C(5) OF THE A CT, IS ERRONEOUS ON FACTS AND BAD IN LAW. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. PANEL AND CONSEQUENTLY THE LD. AO HAVE ERRED IN REJECTING THE ECONOMIC ANALYSI S UNDERTAKEN BY THE ASSESSEE, WITH RESPECT TO INTERNATIONAL TRANSACTION PERTAINING TO RENDERING OF SERVICES, IN ACCORDANCE WITH PROVISIONS OF THE ACT READ WITH THE INCOME TAX RULES, 1962 (THE RULES) FOR THE DETERMINATION OF ARMS LENGTH PRICE (ALP), THEREBY CONFIRMING THE ADJUSTMENT OF RS. 17,388,973/-. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. PANEL AND CONSEQUENTLY THE LD. AO HAVE ERRED IN APPRECIATING THE FOLLOWING FAC TS: (A) THAT THE ASSESSEE HAS ENTERED INTO A COMPOSITE CONTRACT VIS A SINGLE SERVICE AGREEMENT WITH ITS AE FOR RENDERING BUNDLED SET O F INFORMATION TECHNOLOGY BASED SERVICES (INCLUDING BUT NOT LIMITED TO SOFTWARE DEV ELOPMENT (SD) SERVICES, BUSINESS PROCESS OUTSOURCING (BPO) SERVICES ETC.); (B) THAT THE COMPENSATION RECEIVED FOR SD SERVICES (OF 72% MARGIN) AND BPO SERVICES (OF 8% MARGIN) ARE PART OF SINGLE COMPOSITE CONTRAC T ENTERED INTO BY ASSESSEE WITH ITS AE AND NOT FOR A PIECE-MEAL-SERVICE BASIS; ( C) THAT THE CERTIFIED COPY OF SEGMENTAL FINANCIAL S RESULTS AS SUBMITTED BY THE ASSESSEE SHOULD BE CONSIDERED FOR DETERMINING THE LEVEL OF O PERATING PROFITS EARNED BY THE ASSESSEE FROM RENDERING OF SERVICES TO AE UNDER THE COMPOSITE CONTRACT. 4. WITHOUT PREJUDICE TO GROUND 2 & 3 AND ON THE FAC TS AND CIRCUMSTANCES OF THE CASE THE LD. PANEL HAVE ERRED IN APPLICATION OF QUANTITATIVE FILTER IN AN INCONSISTENT MANNER AS UNDER: 3 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 3 (A) ACCEPTING ICRA ONLINE LIMITED (SEGMENT) AS A COMPAR ABLE COMPANY IN SPITE OF HAVING EXPORT SALES TO TOTAL SALES RATIO OF 60.68% VIS--VIS 75% AS APPLIED BY THE LD. TPO. (B) ACCEPTING JEEVAN SOFTECH LIMITED (SEGMENT) AS A COM PARABLE COMPANY IN SPITE OF HAVING RELEVANT SEGMENT TURNOVER OF INR 1.41 CRORES VIS--VIS THE TURNOVER RANGE OF 5 CRORES TO 200 CRORES AS APPLIED BY THE LD. TPO. (C) REJECTING AKSHAY SOFTWARE TECHNOLOGIES LTD. AS A CO MPARABLE COMPANY IN SPITE OF HAVING RELATED PARTY TRANSACTION OF 4.10% OF SALES VIS--VIS 25% AS APPLIED BY THE LD. TPO. (D) REJECTING GOLDSTONE TECHNOLOGIES LTD. AS A COMPARAB LE COMPANY IN SPITE OF HAVING INCOME FOR IT DIVISION OF 92.92% OF TOTAL INCOME VI S--VIS 75% AS APPLIED BY THE LD. TPO. 5. WITHOUT PREJUDICE TO GROUND 2 & 3 AND ON THE FAC TS AND CIRCUMSTANCES OF THE CASE THE LD. PANEL HAVE ERRED IN REJECTING A COMPARABLE COMP ANY BEING INDUS FACE CONSULTING (P) LTD. ENGAGED IN RENDERING OF SD SERVICES, THERE BY NOT RECOGNIZING THE FACT THAT ASSESSEE IS ITSELF ENGAGED IN RENDERING OF SD SERVI CES ALONG WITH BPO SERVICES. 6. WITHOUT PREJUDICE TO GROUND 2 & 3 AND ON THE FAC TS AND CIRCUMSTANCES OF THE CASE THE LD. PANEL HAVE ERRED IN ACCEPTING COMPANIES WHICH A RE FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE. THE COMPANIES ARE: A) ACCENTIA TECHONLOGIES LTD.- THE COMPANY IS ENGAG ED IN DEVELOPMENT OF SOFTWARE PRODUCES ON ITS OWN ACCOUNT. (B) ACROPETAL TECHNOLOGIES LTD.- (SEGMENT)- THE SEG MENT OF THE COMPANY IS ENGAGED IN RENDERING OF ENGINEERING DESIGN SERVICES. (C ) TCSE-SERVE INTERNATIONAL LIMITED THE COMPANY IS ENGAGED IN RENDERING OF SERVICES TO ITS SOLE CUSTOMER, CITIGROUP ENTITIES G LOBALLY, THUS A CONTROLLED TRANSACTION. (D)JINDAL INTELLICON LIMITED-THE COMPANY IS ENGAGED IN RENDERING OF VOICE BASED CALL CENTRE CENTRE SERVICES. 7. WITHOUT PREJUDICE TO GROUND 2 & 3 AND ON THE FAC TS AND CIRCUMSTANCES OF THE CASE THE LD. PANEL HAVE ERRED AND CONTRADICTED IN REJECTING A COMPARABLE COMPANY, E2E INFOTECH INDIA PVT. LTD. ON ACCOUNT OF DIMINISHING RETURN WHEREAS SELECTING COSMIC GLOBAL LTD. HAVING DIMINISHING RETURN OVER THE SAME PERIOD. FURTHER, DIMINISHING RETURN IS NOT ON THE BASIS OF A BUSINESS TREND. 8. WITHOUT PREJUDICE TO GROUND 2 & 3 AND ON THE FAC TS AND CIRCUMSTANCES OF THE CASE THE LD. PANEL HAVE ERRED IN CALCULATING THE PROFIT LEVE L INDICATOR OF A COMPARABLE COMPANY ACROPETAL TECHNOLOGIES LTD. (ENGINEERING DESIGN SEG MENT) SELECTED BY THE LD. TPO. 4 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 4 9. WITHOUT PREJUDICE TO GROUND 2 & 3 AND ON THE FAC TS AND CIRCUMSTANCES OF THE CASE THE LD. TPO AND ACCORDINGLY THE LD. AO HAVE ERRED IN IN CLUDING COMPANIES BEING ACCENTIA TECHNOLOGIES LTD. AND TCS E-SERVE INTERNATIONAL LTD . REFLECTING FLUCTUATING MARGINS DUE TO ABNORMAL BUSINESS TREND. 10. WITHOUT PREJUDICE TO GROUND 2 & 3 AND ON THE FA CTS AND CIRCUMSTANCES OF THE CASE THE ASSESSEE HUMBLY SUBMITS THAT IF THE EARLIER GR OUNDS ARE CONSIDERED EITHER SEVERALLY OR INDIVIDUALLY THE INTERNATIONAL TRANSACTIONS OF T HE ASSESSEE ARE DETERMINED TO BE AT ARMS LENGTH. 11. THAT THE APPELLANT CRAVES LEAVE TO ADD TO AND/O R AMEND, ALTER, MODIFY OR RESCIND THE GROUNDS HEREINABOVE BEFORE OR AT THE TIME OF HEARIN G OF THE APPEAL. 3. THE BRIEF FACTS OF THIS CASE IS THAT DATA CORE ( INDIA) PRIVATE LIMITED (ASSESSEE HEREIN) IS A SUBSIDIARY OF DEVELOPMENT CONSULTANTS PRIVATE LIMIT ED. THE ASSESSEE IS ENGAGED IN PROVIDING ROUTINE SOFTWARE DEVELOPMENT (SD) AND BACK OFFICE P ROCESSING SERVICES (BPO), PURSUANT TO A SINGLE COMPOSITE CONTRACT, TO DATA CORE SYSTEMS IN C. USA FOR ENABLING IT TO SERVICE THE SAME TO END CUSTOMERS. IN ADDITION, THE ASSESSEE ALSO PROVIDES SIMILAR SERVICES TO THIRD PARTIES IN ITS INDEPENDENT CAPACITY. THE ASSESSEE HAD ENTERED IN TO FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AE) DATA CORE SYSTEMES INC. USA:- RENDERING OF SERVICES (SD AND BPO SERVICES) - RS 15 ,85,26,409/- RECOVERY OF EXPENSES - RS 5,20,47 8/- (NOT IN DISPUTE) THE ASSESSEE SUBMITTED THE TRANSFER PRICING STUDY R EPORT BEFORE THE LD TPO WHEREIN IT HAD DESCRIBED ITS INTERNATIONAL TRANSACTIONS WITH ITS A ES, UNDERTAKEN FUNCTIONAL, ASSET AND RISK ANALYSIS WITH RESPECT TO EACH INTERNATIONAL TRANSAC TION AND ABSED ON THE SAME HAD UNDERTAKEN TRANSACTIONAL LEVEL ECONOMIC ANALYSIS TO DETERMINE THE ARMS LENGTH PRICE FOR THE SAME. FOR THE TRANSACTION PERTAINING TO RENDERING OF SERVICES , THE ASSESSEE HAS ENTERED INTO A SINGLE COMPOSITE AGREEMENT / CONTRACT WITH ITS AE TO PROVIDE INFORMATION TECHNOLOGY BASE D SEVICES ( I.E SOFTWARE DEVELOPMENT & SUPPORT SERVICES (SD I N SHORT) AND BACK OFFICE PROCESS 5 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 5 OUTSOURCING (BPO IN SHORT) SERVICES) ON A BUNDLED PRICE BASIS . ACCORDINGLY, THE ASSESSEE HAD BENCHMARKED THE TRANSACTION PERTAINING TO RENDERIN G OF SERVICES USING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) WHEREIN THE MARGIN EARNED BY THE ASSESSEE FROM RENDERING OF SERVICES TO AES WAS DETERMINED TO BE AT 27.50% VIS A VIS 11.44% EARNED BY THE COMPARABLE COMPANIES. BASED O N THE SAID ANALYSIS, THE TRANSACTION WAS DETERMINED TO BE AT ARMS LENGTH. 3.1. THE LD TPO ACKNOWLEDGED THAT THE TNMM SHOULD B E CONSIDERED AS MAM TO DETERMINE THE ALP. THE PROFIT LEVEL INDICATOR (PLI) ADOPTED BY THE ASSESSEE IS OPEARTING PROFIT / OPERATING COST [ OP / OC]. THE ASSESSEE SUBMITTED THE CERTIFIED COPY OF SEGMENTAL DETAILS BEFORE THE LD TPO AS UNDER:- DESCRIPTION REF PROVISION OF PROVISION OF TOTAL SERVICES TO RELATED SERVICES TO PARTIES UNRELATED PARTIES OPERATING REVENUE (OR) A 158526409 25645456 184171865 EXPENDITURE SALARY & BENEFITS 88356330 17557967 105914297 PURCHASES 0 2392221 2392221 RATES & TAXES 905 8670 9575 TRAVELLING & CONVEYANCE 4667627 1119705 5787332 OTHER EXPENSES 25295834 4611005 29906839 DEPRECIATION 5576986 1423807 7000793 BANK CHARGES 433172 105982 539154 EXCHANGE FLUCTUATION 0 1908393 1908393 OPERATING EXPENDITURE (OE) B 124330854 29127750 153458604 OPERATING PROFIT(+) / LOSS(-) [OP] C= A-B 34195 555 -3482294 30713261 OP / OE (%) D=C/B*100 27.50% THIS PLI OF 27.5% WAS COMPARED WITH THE COMPARABLES PLI WHICH WAS 11.44% AND ACCORDINGLY THE ASSESSEE JUSTIFIED THE ALP OF THE I NTERNATIONAL TRANSACTIONS CARRIED OUT BY IT WITH ITS AES. THE ASSESSEE STATED IT HAD RENDERED B OTH IT (SD SERVICES) AND ITES (BPO 6 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 6 SERVICES) TO BOTH ITS AES AS WELL AS TO ITS NON-AES AND THE REVENUES DISCLOSED IN THE AFORESAID SEGMENTAL DETAILS WERE IN RESPECT OF BOTH IT AND IT ES. 3.2. THE LD TPO UNDERTOOK SOME COMPARABLES KEEPING IN MIND THAT THE ASSESSEE UNDERTAKES TO PROVIDE ONLY ITES AND NOT SD SERVICES. THE LD TPO A PPLIED THE FOLLOWING FILTERS OR CRITERIA IN SEARCHING FOR THE COMPARABLES :- A) COMPANIES WHOSE DATA IS NOT AVAIALBEL FOR THE FY 2009-10 WERE EXCLUDED AND THE DATA FOR THE FY 2009-10 HAS BEEN CONSIDERED FOR THE PERIOD F ROM 1.4.2009 TO 31.3.2010. B) COMPANIES WHOSE IT ENABLED SERVICE REVENUE IS LE SS THAN 75% OF THE TOTAL OPERATING REVENUES WERE EXCLUDED. C) COMPANIES WHO HAVE MORE THAN 25% RELATED PARTY T RANSACTIONS (SALES AS WELL AS EXPENDITURE COMBINED) OF THE OPERATING REVENUES WERE EXCLUDED. D) COMPANIES WHO HAVE LESS THAN 75% OF THE REVENUES AS EXPORT SALES WERE EXCLUDED. E) COMPANIES WHO HAVE DIMINISHING REVENUES / PERSIS TENT LOSSES FOR THE PERIOD UNDER CONSIDERATION WERE EXCLUDED. F) COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING (I.E NOT MARCH 31, 2010) OR DATE OF THE COMPANY DOES NOT FALL WITHIN 12 MONTHS PERIOD I.E 1 .4.2009 TO 31.3.2010, WERE REJECTED. G) COMPANIES THAT ARE FUNCTIONALLY DIFFERENT FROM T HAT OF TAX PAYER OR WORKING IN PECULIAR ECONOMIC CIRCUMSTANCES, AFTER GIVING VALID REASONS, WERE EXCLUDED. H) COMPANIES HAVING TURNOVER LESS THAN RS 5 CR AND MORE THAN RS 200 CR WERE REJECTED. 3.3. THE LD TPO OBSERVED THAT THE ASSESSEE HAD WORK ED OUT THE PLI BY CHOSING THE OPERATING PROFIT TO TOTAL COST AS PLI. OPERATING PROFIT IS D EFINED AS PROFIT BEFORE FINANCIAL AND NON- OPERATING EXPENSES. THE LD TPO CONSIDERED THE OPER ATING PROFIT TO OPERATING EXPENSES / COST AS THE APPROPRIATE PLI. THE PROFIT BEFORE INTEREST AN D TAX IS CONSIDERED FOR COMPUTING THE OPERATING MARGINS. HOWEVER, THE INCOMES AND EXPENS ES RELATED TO THE OPERATIONS OF THE RELEVANT FINANCIAL YEAR ALONE IS CONSIDERED FOR THE COMPUTATION OF OPERATING MARGINS OF THE 7 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 7 COMPARABLES. FOR EXAMPLE, THE FOLLOWING INCOMES, W HICH ARE NON-OPERATING IN NATURE AND NOTHING TO DO WITH THE OPERATIONS OF THE COMPANY AR E EXCLUDED FROM THE OPERATING REVENUES :- (I) INTEREST (II) DIVIDENDS (III) PROVISIONS NO LONGER REQUIRED WRITTEN BACK (IV) GAIN ON SALE OF ASSETS / INVESTMENTS (V) INCOME FROM INVESTMENTS (VI) GAIN ON REVALUATION OF ASSETS (VII) OTHER INCOMES NOT PERTAINING TO THE OPERATIO NS SIMILARLY, THE FOLLOWING EXPENSES WHICH ARE NON-OPE RATING AND PROVISIONS ARE EXCLUDED FROM OPERATING EXPENSES :- (I) PROVISIONS OTHER THAN PROVISIONS FOR BAD DEBTS (II) LOSS ON SALE OF ASSETS / INVESTMENTS (III) LOSS ON REVALUATION OF ASSETS (IV) FOREIGN EXCHANGE FLUCTUATION LOSS / GAIN (V) OTHER EXPENSES NOT PERTAINING TO THE OPERATION S SIMILARLY, EXTRAORDINARY EXPENSES OR INCOME WHICH D O NOT RECUR EVERY YEAR LIKE DONATIONS, PRELIMINARY EXPENSES WRITTEN OFF ARE NOT CONSIDERED AS OPERATING EXPENSES AS THE COMPARISON OF THE PROFITS SHOULD BE OF SAME LEVEL FOR THE COMPARA BLE WITH THAT OF THE TAXPAYER. NO DETAILS WERE FILED TO PROVE THAT THE FOREIGN EXCHANGE FLUCT UATION ARISES FROM OPERATIONS OF THE ASSESSEE COMPANY AND ACCORDINGLY THE SAME IS TREATED AS NON- OPERATING ITEM FOR CALCULATION OF PLI. AS PER THE ABOVE BASIS, THE LD TPO WORKED OUT THE P LI OF THE ASSESSEE AS UNDER:- REVENUE FROM SERVICES 17,93,92,521/- ADD: SALES 34,30,440/- OPERATING REVENUE 18,28,22,961/- EXPENSES DEBITED TO P&L A/C 15,34,58,604/- LESS: EXCHANGE FLUCTUATION 19,08,393/- OPERATING EXPENSES 15,15,50,211/- 8 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 8 OPERATING PROFIT 3,12,72,750/- OP / OE OR TC (PLI) 20.63% OP / OR 17.10% 3.4. THE LD TPO OBSERVED FROM THE AUDITED ACCOUNTS OF THE ASSESSEE COMPANY THAT IT HAS THREE SEGMENTS VIZ BPO, SOFTWARE DEVELOPMENT AND SUPPORT SALES. THE SEGMENT RESULT RELATING TO BPO AND SD SEGMENT ARE AS UNDER:- DESCRIPTION BPO SD SEGMENT REVENUE 10,10,04,780/- 7,83,87,741/- SEGMENT RESULT 57,74,968/- 2,65,03,431/- OP / OC 5.71% 33.81% BASED ON THE AFORESAID WORKINGS, THE LD TPO FOUND T HAT THE PROFITABILITY FROM THE SOFTWARE SEGMENET IS AT ALP. HOWEVER, HE OBSERVED THAT THE PROFITABILITY OF BPO SEGMENT IS QUITE LOW AND THE COMPARABLES FOR THE SAME NEEDS TO BE DETERM INED. 3.5. COMPARABLES CONSIDERED BY THE TAXPAYER (I) AOK IN-HOUSE BPO SERVICES LTD (II) ADITYA BIRLA MINACS WORLDWIDE LIMITED (III) AKSHAY SOFTWARE TECHNOLOGIES LTD (IV) COMPULINK SYSTEMS LIMITED (V) GOLDSTONE TECHNOLOGIES LTD (VI) LGS GLOBAL LIMITED (VII) SYNETAIROS TECHNOLOGIES LTD (VIII) THINKSOFT GLOBAL SERVICES LTD (IX) ZENSAR OBT TECHNOLOGIES LTD (X) OMEGA HEALTHCARE MANAGEMENT SERVICES (P) LTD (XI) IN HOUSE PRODUCTIONS LTD (HEALTHCARE DIVISION ) (XII) TIMEX GROUP INDIA LTD (TIMEX GLOBAL SERVICES ) 9 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 9 3.6. THE LD TPO REJECTED THE TP DOCUMENTATION DONE BY THE ASSESSEE BY POINTING OUT THE FOLLOWING DEFECTS FOUND IN TP ANALYSIS CARRIED ON B Y THE ASSESSEE:- (A) AS PER RULE 10B(4), IT IS MANDATORY TO USE THE CURRENT FINANCIAL YEAR DATE I.E THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTI ONS TOOK PLACE (FY 2009-10). BUT THE TAXPAYER DID NTO CONSIDER CURRENT YEAR DATA IN MANY OF THE COMPARABLE COMPANIES (7 OUT OF 10 FINALLY SELECTED COMPANIES). (B) THE TAXPAYER USED EARLIER TWO YEARS DATA WITHOU T JUSTIFYING HOW SUCH EARLIER YEAR DATA HAD AN INFLUENCE ON PRICING FOR THE TAXPAYER O R THE COMPARABLE COMPANIES. (C ) AS DISCUSSED ABOVE, SOME OF THE TAXPAYERS COM PARABLES DO NOT STAND SCRUTINY OF FAR ANALYSIS. (D) THE TAXPAYER SELECTED COMPANIES WHOSE TURNOVER IS VERY LOW OR VERY HIGH AS COMPARED TO ITS TURNOVER. (E) MANY OF THE OTHERWISE COMPARABLE COMPANIES WERE REJECTED BY THE TAXPAYER IN ITS ACCEPT REJECT MATRIX ON VARIOUS GROUNDS AS DISCUSSE D. IN VIEW OF THE ABOVE DEFECTS AND OTHERS, THE INFOR MATION AS WELL AS THE DATA USED IN COMPUTATION OF THE ALP IS NOT RELIABLE AND CORRECT. THE PROVISIONS OF SECTION 92C(3)(C ) ARE INVOKED AND THE TP DOCUMENT IS PROPOSED TO BE REJEC TED. THE LD TPO PROCEEDED TO DETERMINE THE ALP BY SEARCHING ON THE PROWESS DATABASE BY MEN TIONING THE KEYWORD ITES I.E SEARCHING FOR THE COMPARABLES ONLY IN ITES SEGMENT AND FINALLY ARRIVED AT THE FOLLOWING COMPARABLES IN ITES SEGMENT :- 10 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 10 (A) ACCENTIA TECHNOLOGIES LTD (B) ACROPETAL TECHNOLOGIES LTD (SEG.) (C ) CALIBER POINT BUSINESS SOLUTIONS LTD (D) COSMIC GLOBAL LTD (E) CROSSDOMAIN SOLUTIONS PVT LTD (F) E4E HEALTHCARE BUSINESS SERVICES PVT LTD (G) FORTUNE INFOTECH LTD (H) ICRA ONLINE LTD (SEG.) (I) JEEVANSOFTECH LIMITED (J) JINDAL INTELLICOM LTD (K) T C S E-SERVE INTERNATIONAL LTD 3.7. HENCE THE LD TPO DETERMINED THE ALP OF THE IN TERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE AS UNDER:- (A) METHODOLOGY TNMM AS SELECTED BY THE ASSESSEE (B) PLI OP / OC AS WORKED OUT ABOVE (C) COMPARABLES AS DISCUSSED ABOVE (D) DATA USED DATA PERTAINING TO FY 2009-10 AS MANDAT ED UNDER RULE 10B(4) THE LD TPO ARRIVED AT THE ARITHMETIC MEAN OF THE CO MPARABLES MARGIN AT 30.18% . THE ASSESSEE WAS SHOWCAUSED TO THE AFORESAID EFFECT AS TO WHY THE SAME SHOULD NOT BE ADOPTED FOR DETERMINING THE ALP. 3.8. THE ASSESSEE SUBMITTED THAT THE ARRANGEMENT OF SERVICES TO BE RENDERED BY THE ASSESSEE TO ITS AE IS SO INTER-RELATED THAT THE SEPARATE ANALYS IS OF MARGIN EARNED BY EACH DIFFERENT CATEGORY OF SERVICE (I.E IT AND ITES) COULD NOT BE ASCERTAIN ED AS THE CONSIDERATION HAS BEEN RECEIVED PURSUANT TO A SINGLE COMPOSITE CONTRACT. THE ASSES SEE SUBMITTED THAT THE SEGMENTAL DATE OF RELATED AND UNRELATED PARTIES SHOULD BE CONSIDERED FOR DETERMINING THE ALP. THE ASSESSEE ALSO SUBMITTED THE CERTIFIED COPY OF THE SAID SEGMENTED WORKINGS BEFORE THE LD TPO. 11 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 11 3.9. THE LD TPO REJECTED THE CONTENTION OF THE ASSE SSEE THAT THE SEGMENTAL OF RELATED AND UNRELATED PARTY SHOULD BE USED TO DETERMINE THE ALP DUE TO THE FOLLOWING REASONS :- (A) SEGMENTAL PRODUCED IS NOT PART OF THE AUDITED FINAN CIAL STATEMENTS ADOPTED BY THE MEMBERS. (B) SIMPLY PRODUCING THE CERTIFICATE FOR MAKING SEGMENT AL FROM AUDITOR WITHOUT ANY BACKING OF WORKINGS NOTES OF AUDITOR CANNOT BE RELI ED UPON. (C) UNDER WHICH PROVISION OF WHICH ACT THE AUDITOR HAS GIVEN A CERTIFICATE OF SEGMENT REPORTING IS NOT CLEAR. THE DIFFERENT PROVISIONS OF DIFFERENT ACT HAS CAST A RESPONSIBILITY ON CHARTERED ACCOUNTANT. THUS UNDER THE COMPANIES (AUDITORS REPORT ORDER, 2003, AS AUDITED BY THE COMPANIES AUDITORS REPORT AMENDMENT ORDER, 2004 (TOGETHER THE ORDER) ISSUED BY THE GOVERNMENT OF INDIA IN TERMS OF SECTION 227(4A) OF THE COMPANIES ACT, 1956 , THE AUDITOR HA S AUDITED THE FINANCIAL ACCOUNTS OF COMPANY AND GIVEN HIS REPORT TOGETHER WITH SCHED ULES. THE AUDITOR HAS REPORTED ONLY THE BUSINESS SEGMENT AND HAS CLEARLY DEMARCATE D THREE SEGMENTS VIZ. BPO. SOFTWARE DEVELOPMENT & SUPPORT ACTIVITY AND SALES O F COMPUTER, ACCESSORIES, COMPONENTS AND SPARE PARTS ETC. NOW THE SAME HAS B EEN PRODUCED BY THE A/R OF THE ASSESSEE WITHOUT THE AUTHENTICATION OF THE DIRECTOR S OR BEING ADOPTED IN THE MEETING. HENCE, THE VERACITY OF THE SAME CANNOT BE RELIED UP ON. (D) THE ASSESSEE HAS NOT PRODUCED THE DETAILS OF PROJEC T VALUE, TOTAL MAN HOUR WORKED BY THE EMPLOYEE IN EACH PROJECT AND THE TOTAL RESOURCE UTILIZED, THE STAGES OF PROJECT DEVELOPMENT AND THE EMPLOYEE UTILIZED. (E) THE ASSESSEE HAS NOT PRODUCED THE BASIS OF THE ALLO CATION OF THE COST. MOREOVER, WHEN WE CALCULATE THE PERCENTAGE OF DIFFERENT COST ALLOCATED IT IS FOUND COST ALLOCATED TO UNRELATED PARTY IS ABNORMALLY HIGH. SOME OF COS T ALLOCATION ARE GIVEN AS UNDER:- 12 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 12 PARTICULARS RELATED PERCENTAG E UNRELATED PERCENTAG E TOTAL TOTAL EXPENDITURE 15852640 9 86.07% 25645456 13.92% 184171865 SALARY & BENEFITS 88356330 55.73% 17557967 68.46% 105914297 OTHER EXPENSES 25295834 15.95% 4611005 17.97% 29906839 DEPRECIATION 5576986 3.51% 1423807 5.55% 7000793 EXCHANGE FLUCTUATION 0 0 1908393 100% 1908393 (F) THE PURCHASE OF MATERIAL AND FOREIGN EXCHANGE L OSS HAS ENTIRELY BEEN ALLOCATED TO UNRELATED PARTY. HENCE IN VIEW OF THE ABOVE, THE S EGMENTAL PROVIDED OF RELATED AND UNRELATED PARTY IS REJECTED AND THE SEGMENTAL OF AU DITED ACCOUNTS IS RELIED UPON FOR CALCULATION OF PLI. 3.10. THE LD TPO OBSERVED THAT THE CONTENTION OF TH E ASSESSEE THAT THE SERVICES RENDERED BY THE ASSESSEE TO ITS AE IS SO INTERRELATED THAT THE SEPA RATE ANALYSIS OF MARGIN EAREND BY EACH DIFFERENT CATEGORY OF SERVICE COULD NOT BE ASCERTAI NED , IS NOT BORNE BY FACTS. 3.11. THE LD TPO OBSERVED THAT ONLY THE CURRENT YEA R DATA I.E FY 2009-10 SHOULD BE CONSIDERED FOR THE FINAL COMPARABLES CHOSEN FOR ARRIVING AT TH E ARITHMETIC MEAN OF THE MARGINS DERIVED BY THE COMPARABLES. 3.12. THE ASSESSEE FILED ITS OBJECTIONS TO EACH AND EVERY POINT RAISED BY THE LD TPO IN HIS SHOW CAUSE NOTICE BY WAY OF DETAILED PARA WISE SUBMISSIO NS WITH SUPPORTING CASE LAWS ON EACH OF THE ISSUES RAISED THEREON AND EXPLAINING THE CIRCUM STANCES IN WHICH THE ASSESSEE HAD RESORTED TO USAGE OF SUCH DATE FOR THE COMPARABLES MARGIN. 13 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 13 4. THE LD TPO FINALLY ARRIVED AT THE ALP AS UNDER:- A. FINAL COMPARABLES CHOSEN BY THE LD TPO AND ITS RELATED PLI ARE AS UNDER:- SL.NO. NAME OF THE COMPANY OP / TC 1 ACCENTIA TECHNOLOGIES LTD 36.78% 2 ACROPETAL TECHNOLOGIES LTD (SEG.) 34.25% 3 COSMIC GLOBAL LTD 16.64% 4 CROSSDOMAIN SOLUTIONS PVT LTD 18.05% 5 E4E HEALTHCARE BUSINESS SERVICES PVT LTD 30.97% 6 FORTUNE INFOTECH LTD 22.77% 7 JEEVANSOFTECH LIMITED (SEG) 40.62% 8 JINDAL INTELLICOM LTD 20.95% 9 ICRA ONLINE LTD (SEG.) 43.39% 10 T C S E-SERVE INTERNATIONAL LTD 53.80% AVERAGE 28.38% B. THE COST IS ALLOCATED ON THE BASIS OF TURNOVER I N EACH SEGMENT . THE COST IN THE BPO SEGMENT IS ALSO ALLOCATED AS UNDER:- BPO 55.24% OF TOTAL REVENUE SD 42.87% OF TOTAL REVENUE SALES 1.87% OF TOTAL REVENUE CALCULATION OF COST FOR BPO SEGMENT PARTICULARS AMOUNT SEGMENT REVENUE 101004780 14 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 14 SEGMENT RESULT 5774968 SEGMENT COST 95229812 LESS: FOREX LOSS ALLOCATED IN 1054196 THE RATIO OF TURNOVER LESS: BANK CHARGES ALLOCATED 297828 ADD: UNALLOCABLE EXPENSES IN THE RATIO OF TURNOVER 1361131 OPERATING COST OF THE SEGMENT 95238919 OPERATING REVENUE OF THE SEGMENT 101004780 OPERATING PROFIT 5765861 OP / OC 5.70% C. AS THE ASSESSEE HAS NOT PROVIDED THE BREAK UP OF THE REVENUE FOR BPO SERVICES AND SOFTWARE SERVICES FROM ITS AES, THE REVENUE FROM BPO AND SOF TWARE IS PROPORTIONED IN THE RATIO OF TOTAL REVENUE FROM SERVICES. THUS OUT OF TOTAL REVENUE O F RS 17,93,92,251/- FROM SERVICES, THE REVENUE FROM ITS AE IS RS 15,90,46,887/- WHICH IS 8 8.65% OF THE REVENUE FROM ITES AND SOFTWARE SERVICES. THUS 88.65% OF RS 10,10,04,780/- FROM SERVICES IS TAKEN AS THE REVENUE FROM BPO SERVICES WHICH WAS PROVIDED TO THE AE. TH US TOTAL REVENUE FROM BPO SERVICES TO ITS AE IS CALCULATED AT RS 8,95,40,737/- (10,10,04, 780 * 88.65%). D. AVERAGE PLI OF COMPARABLES AS WORKED OUT IN A AB OVE IS 28.38% OPERATING COST - RS 9,52,38,919/- ALP @ 128.38% OF OPERATING SEGMENT - RS 12,22,67,7 24/- PRICE CHARGED BY THE ASSESSEE IN THE INTERNATIONAL TRANSACTIONS - RS 8,95,40,737/- UPWARD ADJUSTMENT U/S 92CA - RS 3,27,26,987/- 15 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 15 5. THOUGH THE LD TPO CONSIDERED THE ASSESSEE SEGME NT TO BE ONLY ITES, THE LD DRP AGREED TO THE CONTENTIONS OF THE ASSESSEE THAT THE ASSESSEE H AD RENDERED BOTH SD AND ITES SERVICES TO ITS AE. THE ASSESSEE HAD ALSO CHOSEN MIXED SET OF COM PARABLES FROM BOTH SD AND ITES SEGMENTS. THE LD TPO CHOSE THE COMPARABLES OF HIS CHOICE ONLY FROM ITES SEGMENT. THE LD DRP DIRECTED THE LD TPO TO CONSIDER THE COMPARABLES FROM IT OR SD SEGMENT ALSO FOR ARRIVING AT THE ALP MARGIN. THE LD DR ARGUED THAT THE ORDER OF THE LD DRP IS SILENT ON THE AUDITED SEGMENTAL DATA FURNISHED BY THE ASSESSEE WITH REGAR D TO SERVICES RENDERED TO AE AND NON-AE FOR BOTH SD AND ITES. HE ALSO ARGUED THAT THE ORDE R OF THE LD DRP IS ALSO SILENT ON THE ACCEPTANCE OF THE COMPOSITE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ITS AE FOR BOTH IT AND ITES SEGMENTS. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD INCLUDING THE PAPER BOOK OF THE ASSESSEE. THE POINTS OF DIS PUTE BETWEEN ASSESSEES ANALYSIS AND ANALYSIS OF LD TPO ARE AS UNDER:- B) DISREGARDING THE COMPOSITE CONTRACT AND BUNDLED PRICING BASIS OF THE ASSESSEE WITH ITS AE FOR RENDERING OF INFORMATION T ECHNOLOGY BASED SERVICES I.E SD AND BPO SERVICES. C) REJECTING CERTIFIED PROFITABILITY STATEMENT FROM R ENDERING OF SERVICES TO AES AND CONSIDERED SEGMENT FINANCIAL AS PER AS -17 TO DETER MINE THE ADJUSTMENT ON BPO SERVICE SEGMENT (TO BOTH AES AND NON-AES_ WITHOUT C ONSIDERING INTENTIONAL SET OFF INTERNALLY. D) REJECTING THE BENCHMARKING STUDY COMPILED IN THE T P STUDY REPORT AND UNDERTOOK A FRESH BENCHMARKING STUDY FOR DETERMINAT ION OF ALP. IN THE INSTANT CASE, THERE IS NO DISPUTE WITH REGAR D TO THE TNMM BEING ADOPTED AS THE MAM. THERE IS NO DISPUTE WITH REGARD TO OP / OC BEING AD OPTED AS THE PLI. WE AGREE WITH THE ACTION 16 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 16 OF THE LD TPO IN ADOPTING THE CONTEMPORANEOUS DATA OF FY 2009-10 AND DO NOT ENDORSE THE USAGE OF MULTIPLE YEAR DATA AS WAS DONE BY THE ASSE SSEE IN THE INSTANT CASE. THE CRUCIAL DISPUTE WHICH NEEDS TO BE ADDRESSED IN THIS CASE IS WITH REGARD TO THE ASSESSEE RENDERING SD AND BPO SERVICES TO ITS AE PURSUANT TO A SINGLE COM POSITE CONTRACT AND CONSIDERATION NOT BEING ABLE TO BE BIFURCATED BETWEEN SD AND BPO SERVICES T HEREON. CONSEQUENTIALLY THE ASSESSEE WAS ALSO NOT ABLE TO IDENTIFY THE MARGINS DERIVED FROM AE TRANSACTIONS IN ITS SD AND BPO SEGMENTS INDEPENDENTLY. IN THIS REGARD, IT WOULD BE CRUCI AL TO UNDERSTAND WHETHER THE ASSESSEE IN THE INSTANT CASE HAD RECEIVED THE CONSIDERATION BASED O N THE SINGLE COMPOSITE CONTRACT. FOR THIS PURPOSE, THE RELEVANT CLAUSES IN THE AGREEMENT ENTE RED INTO WITH THE AE ARE RELEVANT AND THE SAME ARE REPRODUCED BELOW:- DATA CORE SYSTEMS INC. USA CONTRACTOR DATA CORE (INDIA) PRIVATE LIMITED SERVICE PROVIDE R ARTICLE 1 SCOPE OF SERVICES SECTION 1.1. SCOPE OF SERVICES : THE CONTRACTOR HEREBY APPOINTS AND THE SERVICE P ROVIDER HEREBY ACCEPTS TO CARRY OUT CERTAIN ASSIGNMENTS AS MAY BE MUTUALLY AGREED BETWEEN THE PARTIES AND DETAILED IN THE RESPECTIVE WORK ORDERS FORMAT A S SPECIFIED IN APPENDIX A ATTACHED HERETO (COLLECTIVELY REFERRED TO AS SERVICES IN THIS AGR EEMENT). IN ORDER TO CARRY OUT THE ASSIGNMENTS, THE SERVICE PROVIDER MAY APPOINT SUB-C ONTRACTORS FROM TIME TO TIME SUBJECT TO THE APPROVAL OF THE CONTRACTOR. APPENDIX A : SCOPE OF SERVICES (REFER SUB-SECTION 1.1. OF ARTICLE 1 OF SERVICES AG REEMENT) THE SERVICES TO BE PROVIDED BY THE SERVICE PROVIDER / SUB-CONTRACTOR TO THE CONTRACTOR ARE AS UNDER:- ROUTINE BUSINESS PROCESS OUTSOURCING (BPO) SERVICES AND KNOWLEDGE PROCESS OUTSOURCING (KPO) SERVICES AS PER THE GUIDELINES OF THE CONTRAC TOR. SOFTWARE DEVELOPMENT SUPPORT SERVICES AND TESTING S ERVICES, FOR CLIENTS OPERATING IN VARIOUS SECTORS, INCLUDING BOTH ON-SITE AS WELL AS OFFSHORE WORK. OTHER RELATED SERVICES, AS DETERMINED BY THE CONTRA CTOR. . 17 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 17 WORK ORDER FORMAT THE CONTRACTOR AND THE SERVICE PROVIDER SHALL ENTER INTO WORK ORDERS IN RELATION TO INDIVIDUAL ASSIGNMENTS OUTSOURCED TO THE SERVICE PROVIDER . A WORK ORDER FORMAT SHALL INCLUDE THE FOLLOWING ITEMS : -------------------------------------------------- ----------------------------------------- WORK ORDER NO.: WORK ORDER DATE : -------------------------------------------------- ----------------------------------------- WE ARE PLEASED TO PROVIDE THIS WORD ORDER FOR THE FOLLOWING SERVICES : NAME OF CUSTOMER : DESCRIPTION OF SERVICES : DURATION OF WORK : VOLUME : DELIVERY SCHEDULE : RATE : OTHERS (IF ANY) : -------------------------------------------------- ----------------------------------------- AUTHORISED BY : SIGNATURE : ----------------------- DATE : ----- ----------------- SECTION 1.3. DEPLOYMENT OF ASSETS UNLESS OTHERWISE STATED IN THIS AGREEMENT, THE MACH INERY, COMPONENTS, SERVICE SOFTWARE AS WELL AS HARDWARE ARCHITECTURE USED BY SERVICE PROVIDER W ILL BE UNDER MUTUALLY AGREED TERMS WITH CONTRACTOR. SECTION 1.4 MANPOWER TRAINING CONTRACTOR MAY, UNDER MUTUALLY AGREEABLE TERMS, ARR ANGE FOR TRAINING OF PERSONNEL ENGAGED BY SERVICE PROVIDER FOR DELIVERING SERVICES TO THE CON TRACTOR. THE SAID TRAINING WOULD BE PROVIDED TO THE SERVICE PROVIDER WITHOUT ANY CONSID ERATION BEING PAYABLE BY THE SERVICE PROVIDER TO THE CONTRACTOR, OTHER THAN REIMBURSEMEN T OF ACTUAL THIRD PARTY COSTS INCURRED BY THE CONTRACTOR, IF ANY. HOWEVER, THE SERVICE PROVI DER ACKNOWLEDGES THAT THE MANPOWER RECRUITMENT AND DEVELOPMENT PROCESS WOULD SOLELY BE ITS RESPONSIBILITY. SECTION 1.6. PRODUCT LIABILITY THE SERVICE PROVIDER WILL BE RESPONSIBLE FOR THE QU ALITY AND STANDARD OF THE SERVICES PROVIDED BY IT. THE CONTRACTOR WILL NOT BE RESPONSIBLE FOR ANY OR ALL CLAIMS, LIABILILTIES, LAWSUITS, LOSSES, DEMANDS, COSTS AND EXPENSES ARISING SOLELY FROM THE GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT OF THE SERVICE PROVIDER AND SERVICE PROV IDERS SUB-CONTRACTORS. FURTHER, THE SERVICE PROVIDER WOULD BE LIABLE AGAINST ALL OR ANY ACTIONS, PROCEEDINGS, CLAIMS, DEMANDS AND 18 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 18 LIABILITIES ARISING FROM THE PERFORMANCE OF SERVICE PROVIDERS DUTIES UNDER THIS AGREEMENT, WHICH MAY BE BROUGHT OR MADE AGAINST OR INCURRED BY THE SERVICE PROVIDER OR SERVICE PROVIDERS SUB-CONTRACTORS. ARTICLE 3 INFORMATION DEVELOPED BY SERVICE PROVID ER SECTION 3.1. DEVELOPED INFORMATION DEVELOPED INFORMATION IN CONNECTION WITH A SPECIF IED SUBJECT MATTER SHALL MEAN ANY AND ALL TECHNICAL INFORMATION, COMPUTER OR OTHER APPARATUS PROGRAMS, DESIGNS, SPECIFICATIONS , DRAWINGS, RECORDS, DOCUMENTATION, WORKS OF AUTHORSH IP OR OTHER CREATIVE WORKS, IDEAS, KNOWLEDGE OR DATA, WRITTEN, ORAL OR OTHERWISE EXPRE SSED, ORIGINATED OR DEVELOPED BY THE SERVICE PROVIDER OR BY ANY OF THE SERVICE PROVIDERS SUB-CO NTRACTORS AS A RESULT OF WORK PERFORMED UNDER , OR IN ANTICIPATION OF, THIS AGREEMENT. SECTION 3.3. OWNERSHIP THE SERVICE PROVIDER AGREES THAT ALL SUCH DEVELOPED INFORMATION SHALL BE AND ALWAYS BE THE PROPERTY OF THE CONTRACTOR, SHALL BE KEPT IN CONFID ENCE BY THE SERVICE PROVIDER AND THE SERVICE PROVIDERS SUB-CONTRACTORS , SHALL BE EXCLUSIVELY U SED ONLY IN THE PERFORMANCE OF SERVICES UNDER THIS AGREEMENT, AND MAY NOT BE USED FOR OTHER PURPOSES EXCEPT UPON SUCH TERMS AS MAY BE AGREED UPON TO WRITING BY THE CONTRACTOR. SECTION 3.5. FUNCTIONAL SPECIFICATIONS IN PERFORMING ITS FUNCTIONS, THE SERVICE PROVIDER A CKNOWLEDGES THE USE OF HARDWARE AND SOFTWARE ARCHITECTURE AS AGREED TO BY THE CONTRACTO R. ARTICLE 4 CONSIDERATION SECTION 4.1. CONSIDERATION IN CONSIDERATION OF THE SERVICE PROVIDERS PERFORMA NCE OF SERVICES UNDER THIS AGREEMENT, THE CONTRACTOR AGREES TO PAY THE SERVICE PROVIDER AT TH E AGREED RATES AS SPECIFIED IN THE WORK ORDER. THE CONSIDERATION SHALL AIM TO LEAVE AN ARM S LENTH RETURN ON TOTAL COSTS, OVER A FINANCIAL PERIOD ADEQUATE TO COMPENSATE FOR THE FUN CTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED BY THE SERVICE PROVIDER AND WILL BE D ETERMINED MUTUALLY BY THE CONTRACTOR AND THE SERVICE PROVIDER IN ACCORDANCE WITH INTERNATION ALLY ACCEPTED ARMS LENGTH STANDARDS. SECTION 4.2. PRINCING ADJUSTMENT THE CONTRACTOR AND THE SERVICE PROVIDER SHALL ANNUA LLY OR MORE FREQUENTLY IF WARRANTED, REVIEW THE SERVICE PROVIDERS CONSIDERATION TO ENSU RE THAT ALL PAYMENTS IN TOTO ARE AT THE ARMS LENGTH PRICE. IF IT IS DETERMINED THAT SUCH PAYMEN TS ARE NOT AT THE ARMS LENGTH PRICE, A COMPENSATING PAYMENT MAY BE MADE TO THE SERVICE PRO VIDER. ANY ADJUSTMENT REQUIRED PURSUANT TO THIS SECTION SHALL BE REFLECTED IN THE CONTRACTORS AND THE SERVICE PROVIDERS OFFICIAL BOOKS AND RECORDS AND THE RESULTING UNDERP AYMENT SHALL CREATE A RECEIVABLE OF THE SERVICE PROVIDER FROM THE CONTRACTOR. SECTION 4.3. ARMS LENGTH PRICE 19 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 19 ARMS LENGTH PRICE MEANS THE CONSIDERATION WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN REMUNERATING FOR SAME OR SIMILAR SERVICES AS CONTEM PLATED IN THIS AGREEMENT UNDER CONDITIONS THAT ARE MADE OR IMPOSED BETWEEN THE PARTIES IN THE IR COMMERCIAL OR FINANCIAL RELATIONS WHICH DO NOT DIFFER FROM THOSE WHICH WOULD BE MADE BETWEE N INDEPENDENT ENTERPRISES UNDER SIMILAR CIRCUMSTANCES. SECTION 4.4. INVOICES INVOICES WILL BE RAISED BY THE SERVICE PROVIDER ON A PERIODIC BASIS AND THE CONTRACTOR SHALL PAY THE SERVICE PROVIDER PROMPTLY. ANY FLUCTUATIONS ON ACCOUNT OF FOREIGN EXCHANGE VARIATION, IN RELATION TO THE REMUNERATION RECEIVED BY THE SERVIC E PROVIDER WOULD BE BORNE BY THE SERVICE PROVIDER. 6.1. AT THE OUTSET, WE FIND THAT THE ASSESSEE INDEE D HAD RENDERED SOFTWARE DEVELOPMENT SERVICES (SD) AND BUSINESS PROCESS OUTSOURCING SERVICES (BPO ) TO ITS AE AMONG OTHER SUPPORT SERVICES. WE ALSO FIND THAT THE AE HAD INDEED REMUN ERATED THE ASSESSEE FOR BOTH SD AND BPO SERVICES BASED ON THE COMPOSITE AGREEMENT ENTERED W ITH AE BY THE ASSESSEE. IT IS WELL SETTLED THAT THE AGREEMENT BETWEEN THE PARTIES SHOULD OBVIO USLY BECOME THE STARTING POINT OF UNDERSTANDING THE INTERNATIONAL TRANSACTIONS CARRIE D OUT BY THE ASSESSEE WITH ITS AE AND BENCHMARKING DONE BY THE ASSESSEE THEREON, AS LONG AS THE SAID AGREEMENT IS NOT CONSIDERED AS A SHAM TO EVADE TAXATION. IN THE INSTANT CASE, TH E LD TPO HAD NOT DISPUTED THE FACT THAT THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ITS AE IS A GENUINE AGREEMENT. WE FIND THAT THE OECD TRANSFER PRICING GUIDELINES FOR MNES AND TAX A DMINISTRATION UPDATED VIA BEPS ACTION PLAN 8-10, 2015 ALSO PROVIDES THAT DUE RECOGNITION SHOULD BE GIVEN TO CONTRACTUAL TERMS OF THE AGREEMENT FOR UNDERTAKING TRANSFER PRICING ANALYSIS . THE RELEVANT OECD GUIDELINES ARE REPRODUCED BELOW FOR THE SAKE OF CONVENIENCE :- D.1.1. THE CONTRACTUAL TERMS OF THE TRANSACTION 1.42 A TRANSACTION IS THE CONSEQUENCE OR EXPRESSIO N OF THE COMMERCIAL OR FINANCIAL RELATIONS BETWEEN THE PARTIES. THE CONTROLLED TRANSACTIONS MA Y HAVE BEEN FORMALIZED IN WRITTEN CONTRACTS WHICH MAY REFLECT THE INTENTION OF THE PARTIES AT T HE TIME THE CONTRACT WAS CONCLUDED IN RELATION TO ASPECTS OF THE TRANSACTION COVERED BY THE CONTRA CT, INCLUDING IN TYPICAL CASES THE DIVISION OF RESPONSIBILITIES, OBLIGATIONS AND RIGHTS, ASSUMPTIO N OF IDENTIFIED RISKS, AND PRICING ARRANGEMENTS. WHERE A TRANSACTION HAS BEEN FORMALIZ ED BY THE ASSOCIATED ENTERPRISES THROUGH WRITTEN CONTRACTUAL AGREEMENTS, THOSE AGREEMENTS PR OVIDE THE STARTING POINT FOR DELINEATING THE 20 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 20 TRANSACTION BETWEEN THEM AND HOW THE RESPONSIBILITI ES RISKS, AND ANTICIPATED OUTCOMES ARISING FROM THEIR INTERACTION WERE INTENDED TO BE DIVIDED AT THE TIME OF ENTERING INTO THE CONTRACT. A.3.1. EVALUATION OF A TAXPAYERS SEPARATE AND COMB INED TRANSACTIONS 3.9 IDEALLY IN ORDER TO ARRIVE AT THE MOST PRECISE APPROXIMATION OF ARMS LENGTH CONDITIONS, THE ARMS LENGTH PRINCIPLE SHOULD BE APPLIED ON A T RANSACTION BY TRANSACTION BASIS. HOWEVER, THERE ARE OFTEN SITUATIONS WHERE SEPARATE TRANSACTI ONS ARE SO CLOSELY LINKED OR CONTINUOUS THAT THEY CANNOT BE EVALUATED ADEQUATELY ON A SEPARATEL Y BASIS. EXAMPLES MAY INCLUDE 1. SOME LONG-TERM CONTRACTS FOR THE SUPPLY OF COMMODITIES O R SERVICES. 3.10 ANOTHER EXAMPLE WHERE A TAXPAYERS TRANSACTIO NS MAY BE COMBINED IS RELATED TO PORTFOLIO APPROACHES. A PORTFOLIO APPROACH IS A BUSINESS STRA TEGY CONSISTING OF A TAXPAYER BUNDLING CERTAIN TRANSACTIONS FOR THE PURPOSE OF EARNING AN APPROPRIATING RETURN ACROSS THE PORTFOLIO RATHER THAN NECESSARILY ON ANY SINGLE PRODUCT WITHI N THE PORTFOLIO. FOR INSTANCE, SOME PRODUCTS MAY BE MARKETED BY A TAXPAYER WITH A LOW PROFIT OR EVEN AT A LOSS, BECAUSE THEY CREATE A DEMAND FOR OTHER PRODUCTS AND/OR RELATED SERVICES O F THE SAME TAXPAYER THAT ARE THEN SOLD OR PROVIDED WITH HIGH PROFITS (E.G. EQUIPMENT AND CAPT IVE AFTER MARKET CONSUMABLES, SUCH AS VENDING COFFEE MACHINES AND COFFEE CAPSULES, OR PRI NTERS AND CARTRIDGES) FROM THE ABOVE, IT COULD BE SEEN THAT THE OECD TP G UIDELINES ALSO PROVIDE FOR AGGREGATE ANALYSIS OF TRANSACTIONS ENCAPSULATED UNDER A SINGL E PORTFOLIO. THE OECD HAS ALSO HIGHLIGHTED THAT UNDER A PORTFOLIO APPROACH, THE TAXPAYERS OBJ ECTIVE IS TO EARN AN APPROPRIATE RETURN ACROSS THE PRODUCT / SERVICE OFFERING IN THE PORTFOLIO RAT HER ON ANY SINGLE PRODUCT / SERVICE OFFERING OF THE PORTFOLIO. 6.2. SIMILARLY GUIDANCE IS ALSO PROVIDED BY UNITED NATIONS IN 2017 IN UN TP MANUAL WHICH PROVIDES AS UNDER:- IDENTIFY THE ACCURATELY DELINEATED TRANSACTION B.2.3.1.4 THE ARMS LENGTH PRICE MUST BE ESTABLISH ED IN RELATION TO TRANSACTIONS ACTUALLY UNDERTAKEN. THUS, THE CRITICAL FIRST STEP IN ANY COMPARABILITY ANALYSIS IS TO ACCURATELY DEFINE THOSE TRANSACTIONS BY ANALYZING T HEIR ECONOMICALLY RELEVANT CHARACTERISTICS, AS REFLECTED NOT ONLY IN THE CONTR ACTS BETWEEN THE PARTIES, BUT ALSO THEIR CONDUCT AND ANY OTHER FACTS. IN THIS REGARD, THE CO NTRACTUAL TERMS WILL GENERALLY BE THE STARTING POINT FOR THE ANALYSIS (AS CLARIFIED OR SU PPLEMENTED BY THE PARTIES CONDUCT); AND TO THE EXTENT THAT THE CONDUCT OR OTHER FACTS A RE INCONSISTENT WITH THE WRITTEN 21 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 21 CONTRACT, THE FORMER SHOULD BE TAKEN AS THE BEST EV IDENCE OF THE TRANSACTION(S) ACTUALLY UNDERTAKEN. EVALUATION OF SEPARATE AND COMBINED TRANSACTIONS B.2.3.1.10. AN IMPORTANT ASPECT OF TRANSFER PRICING ANALYSIS IS WHETHER THIS ANALYSIS HAS TO BE CARRIED OUT WITH RESPECT TO A TAXPAYERS INDI VIDUAL INTERNATIONAL CONTROLLED TRANSACTIONS OR TO A GROUP OF INTERNATIONAL CONTRO LLED TRANSACTIONS HAVING A CLOSE ECONOMIC NEXUS. B.2.3.1.11. THE TRANSFER PRICING ANALYSIS SHOULD ID EALLY BE MADE ON A TRANSACTION BY TRANSACTION BASIS. HOWEVER, THERE ARE CASES WHERE S EPARATE TRANSACTIONS ARE SO CLOSELY LINKED THAT SUCH AN APPROACH WOULD NOT LEAD TO A RE LIABLE RESULT. WHERE TRANSACTION ARE SO CLOSELY INTERRELATED OR CONTINUOUS THAT APPLICAT ION OF THE ARMS LENGTH PRINCIPLE ON A TRANSACTION BY TRANSACTION BASIS THE ANALYSIS. B.2.3.1.12. B.2.3.13. ANOTHER IMPORTANT ASPECT OF COMBINED TRA NSACTIONS IS THE INCREASING PRESENCE OF COMPOSITE CONTRACTS AND PACKAGE DEALS IN AN MN E GROUP. A COMPOSITE CONTRACT AND/OR PACKAGE DEAL MAY CONTAIN A NUMBER OF ELEMENT S INCLUDING LEASES, SALES AND LICENSES ALL PACKAGED INTO ONE DEAL. GENERALLY, IT WILL BE APPROPRIATE TO CONSIDER THE DEAL IN ITS TOTALITY TO UNDERSTAND HOW THE VARIOUS ELEMENTS RELATE TO EACH OTHER, BUT THE COMPONENTS OF THE COMPOSITE CONTRACT AND/OR PACKAGE DEAL MAY OR MAY NOT, DEPENDING ON THE FACTS AND CIRCUMSTANCES OF THE CASE, NEED TO BE EVALUATED SEPARATELY TO ARRIVE AT THE APPROPRIATE TRANSFER PRICE THUS ON PERUSAL OF THE ABOVE, THE UN TP MANUAL ALSO ACKNOWLEDGES EXISTENCE OF COMPOSITE CONTRACTS AND WARRANTS ANALYZING THE INDIVIDUAL ELE MENT OF SUCH CONTRACTS ON AN AGGREGATE BASIS. 6.3. THE LD AR ALSO PLACED RELIANCE ON THE GUIDELIN ES PROVIDED IN UK TRANSFER PRICING GUIDELINES ISSUED BY HMRC IN THE FORM OF INTERNATIO NAL TAX MANUALS (INTM) WHICH CONFORMS THE OECD APPROACH ON COMPOSITE PRICING. T HE RELEVANT EXTRACT OF THE SAME IS REPRODUCED BELOW:- 22 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 22 INTM484060 TRANSFER PRICING: OPERATIONAL GUIDANCE: EXAMINING T RANSFER PRICING REPORTS: OECD METHODOLOGIES LOOKING AT GROUPS OF SIMILAR TRANSACTIONS TR ANSACTIONS IN AGGREGATE IS APPROPRIATE IF AT ARMS LENGTH A TRADER WOULD DO TH E SAME. AS THE OECD GUIDELINES RECOGNIZE AT PARAGRAPH 3.9, THERE ARE OFTEN SITUATI ONS WHERE SEPARATE TRANSACTIONS ARE SO CLOSELY LINKED OR CONTINUOUS THAT THEY CANNOT BE EV ALUATED ADEQUATELY ON A SEPARATE BASIS. THE OECD CITED EXAMPLES, INCLUDING SOME LONG TERM C ONTRACTS FOR THE SUPPLY OF COMMODITIES OR SERVICES, AND THE PRICING OF A RANGE OF CLOSELY- LINKED PRODUCTS (E.G. IN A PRODUCT LINE) WHERE IT IS IMPRACTICAL TO DETERMINE PRICING FOR EACH IND IVIDUAL PRODUCT OR TRANSACTION. BUSINESS TEND TO NEGOTIATE A PRICE AND THEN USE TH AT PRICE UNTIL SOMETHING HAPPENS WHICH MEANS IT HAS TO BE CHANGED. THEY MAY ALSO ACCEPT SOME FORM OF BASKET PRICING, WHICH ESSENTIALLY REFLECTS THE PRAGMATIC PROPOSITION THA T IF A RANGE OF PRODUCTS IS BEING SOURCED FROM A SINGLE SUPPLIER, ONLY THE OVERALL PRICE MATT ERS, NOT THE PRICE FOR INDIVIDUAL PRODUCTS. HENCE, A BUSINESS MAY NEGOTIATE ONE COMPOSITE PRICE FOR A NUMBER OF GOODS. WE FIND THAT FURTHER INTM421100 EXEMPLIFIES THE BAS IS OF COMPOSITE / BUNDLED PRICING AS EXTRACTED BELOW:- INTM 421100 TRANSFER PRICING: METHODOLOGIES: OECD GUIDELINES: WHICH TRANSACTIONS TO REVIEW A SINGLE COMPANY MAY HAVE MANY DIFFERENT TYPES OF T RANSACTIONS WITH A SINGLE AFFILIATE OR A NUMBER OF AFFILIATES. . ESSENTIALLY THIS RECOGNIZES THE FACT THAT UNDER COMMERCIAL ARRANGEMENTS, PARTIES MIGHT ACCEPT UNDER OR OVER PRICING FOR CERTAIN TYPES OF T RANSACTIONS IF THEY WERE HAPPY WITH THE OVERALL RECEIPTS. IF A COMPANY NEEDS 100 UNITS EA CH OF TWO PRODUCTS FROM THE SAME SUPPLIER AND THE MARKET PRICE IS 1,000 IN TOTAL, THEN THE COMPANY MAY BE INDIFFERENT IF THE PRICE OF EACH PRODUCT IS 5 OR THE PRICE OF PRODUCT 1 IS 1 AND THE PRICE OF PRODUCT 2 IS 9, ASSUMING THE MARKET PRICE CAN BE ESTABLISHED . ALTERNATIVELY, TWO COMPANIES MIGHT BOTH BUY FROM AND SELL TO EACH OTHER AT THE SAME TIME. IN SUCH CIRCUMSTANC ES THEY MIGHT AGREE A PACKAGE DEAL COVERING THE PRICING OF ALL THE TRANSACTIONS. THIS EXAMPLE ILLUSTRATES THE NEED TO CONSIDER ALL R ELEVANT TRANSACTIONS BETWEEN THE PARTIES. A COMPANY MAY ULTIMATELY ACCEPT THAT THE PRICE OF ITS PURCHASES FROM ITS PARENT COMPANY IS TOO HIGH BUT ARGUE THAT THIS IS CANCELLED OUT BY THE FA CT THAT OTHER PURCHASES WERE MADE AT LESS THAN MARKET PRICE. IN SUCH A CASE THE PROFITS MIGHT BE AT ARMS LENGTH OVERALL. 23 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 23 6.4. WE FIND THAT THE ASSESSEES CONDUCT HAD BEEN P ROVED PURSUANT TO THE AFORESAID CONDITIONS STIPULATED IN THE AGREEMENT AND UNDERSTANDING WITH THE AE AND IT IS EVIDENT FROM THE MARGINS DERIVED AND DECLARED BY THE ASSESSEE FOR VARIOUS YE ARS AS UNDER:- FINANCIAL YEARS PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13 ARM'S LENGTH RETURN AS PER TP STUDY 11.71% 13.71% 10.25% 13.21% ACTUAL RETURN MAINTAINED BY THE ASSESSEE 27.50% 18.76% 16.09% 22.60% 6.5. WE FIND THAT ON PERUSAL OF THE TERMS OF THE CO MPOSITE AGREEMENT ENTERED INTO WITH ITS AE FOR TOTALITY OF SERVICES ON THE BASIS OF BUNDLED P RICING APPROACH WHICH HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE AND THE PRICING HAS BEEN M ADE IN SUCH A MANNER SO AS TO ENSURE THAT THE SAME IS ALWAYS AT ARMS LENGTH. THE ASSESSE E HAD DEFINED THE ROLES AND RESPONSIBILITIES FOR BOTH SD AND BPO SERVICES INDEPENDENTLY BY APPOI NTING INDEPENDENT STAFF FOR RENDERING BOTH THE SERVICES AND FURTHER THE ASSETS EMPLOYED A ND RISKS ASSUMED ARE THE SAME FOR BOTH SD AND BPO SERVICES. IN THESE CIRCUMSTANCES, THERE IS NOTHING WRONG IN WORKING OUT THE COMPOSITE REMUNERATION FOR BOTH SD AND BPO SERVICES BASED ON A COMPOSITE AGREEMENT. WE HOLD THAT THERE IS NO GOOD REASON TO DISBELIEVE THIS PATTERN OF UNDERTAKING TRANSACTIONS BY THE ASSESSEE WITH ITS AE. IN FACT THE ASSESSEE HAD ALSO TRIED T O JUSTIFY ITS TRANSACTIONS WITH ITS AE BY PRESENTING THE SEGMENTAL PROFITABILITY STATEMENT DU LY CERTIFIED BY A CHARTERED ACCOUNTANT DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS BY TAKING I NTO ACCOUNT RENDERING OF BOTH SD AND BPO SERVICES TO BOTH AE AND NON-AE SEPARATELY. WE FIND THAT THE RELIANCE PLACED BY THE LD AR ON THE GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) ON ACCOUNTANTS REPORT U/S 92E OF THE ACT ALSO SUPPORT S THE CASE OF THE ASSESSEE , WHEREIN IT WAS STATED AS UNDER:- 5.7. THE FACTORS REFERRED TO ABOVE ARE TO BE APPLIE D CUMULATIVELY IN SELECTING THE MOST APPROPRIATE METHOD. THE REFERENCE THEREIN TO THE T ERMS BEST SUITED AND MOST RELIABLE 24 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 24 MEASURE INDICATES THAT THE MOST APPROPRIATE METHOD WILL HAVE TO BE SELECTED AFTER A METICULOUS APPRAISAL OF THE FACTS AND CIRCUMSTANCES OF THE INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION. FURTHER, THE SELEC TION OF THE MOST APPROPRIATE METHOD SHALL BE FOR EACH PARTICULAR INTERNATIONAL TRANSACT ION OR SPECIFIED DOMESTIC TRANSACTION. THE TERM TRANSACTION ITSELF IS DEFINED IN RULE 10 A(D) TO INCLUDE A NUMBER OF CLOSELY LINKED TRANSACTIONS. THEREFORE, THOUGH THE REFERENC E IS TO APPLY THE MOST APPROPRIATE METHOD TO EACH PARTICULAR TRANSACTION, KEEPING IN V IEW , THE DEFINITION OF THE TERM TRANSACTION, THE MOST APPROPRIATE METHOD MAY BE C HOSEN FOR A GROUP OF CLOSELY LINKED TRANSACTIONS. TWO OR MORE TRANSACTIONS COULD BE SAI D TO BE LINKED WHEN THESE TRANSACTIONS EMANATE FROM A COMMON SOURCE BEING AN ORDER OR A CONTRACT OR AN AGREEMENT OR AN ARRANGEMENT AND THE NATURE , CHARAC TERISTICS AND TERMS OF THESE TRANSACTIONS ARE SUBSTANTIALLY FLOWING FROM THE SAI D COMMON SOURCE. FOR EXAMPLE, A MASTER PURCHASE ORDER IS ISSUED STATING THE VARIOUS TERMS AND CONDITIONS AND SUBSEQUENTLY, INDIVIDUAL ORDERS ARE RELEASED FOR SP ECIFIC QUANTITIES. THE VARIOUS PURCHASE TRANSACTIONS ARE CLOSELY LINKED TRANSACTIO NS. 5.8. IT MAY BE NOTED THAT IN ORDER TO BE CLOSELY L INKED TRANSACTIONS, IT IS NOT NECESSARY THAT THESE TRANSACTIONS NEED BE IDENTICAL OR EVEN S IMILAR. FOR EXAMPLE,A COLLABORATION AGREEMENT MAY PROVIDE FOR IMPORT OF RAW MATERIALS, SALE OF FINISHED GOODS, PROVISION OF TECHNICAL SERVICES AND PAYMENT OF ROYALTY. DIFFERE NT METHODS MAY BE CHOSEN AS THE MOST APPROPRIATE METHODS FOR EACH OF THE ABOVE TRAN SACTIONS WHEN CONSIDERED ON A STANDALONE BASIS. HOWEVER, UNDER PARTICULAR CIRCUM STANCES, ONE SINGLE METHOD MAY BE CHOSEN AS THE MOST APPROPRIATE METHOD COVERING ALL THE ABOVE TRANSACTIONS AS THE SAME ARE CLOSELY LINKED. 6.6. WE FIND THAT THE CO-ORDINATE BENCH OF PUNE TRIBUNAL IN THE CASE OF CUMMINS INDIA LTD VS ADDL CIT REPORTED IN (2015) 53 TAXMANN.COM 53 (PUNE TRIB) DATED 31.12.2014 HAD HELD AS UNDER:- 24 . THE FIRST ISSUE ARISING IN THE PRESENT APPEAL IS WHETHER IN VIEW OF THE OECD GUIDELINES AND THE INDIAN TRANSFER PRICING PROVISIONS, AGGREGA TION OF TRANSACTIONS COULD BE MADE OR NOT. 31. IN THIS BACKGROUND, CONSIDERING THE LEGISLATIVE INTENT MANIFESTED BY WAY OF RULE 10A(D) READ WITH RULE 10B OF THE RULES, IT CLEARLY EMERGES THAT IN APPROPRIATE CIRCUMSTANCES WHERE CLOSELY LINKED TRANSACTIONS EXI ST, THE SAME SHOULD BE TREATED AS ONE COMPOSITE TRANSACTION AND A COMMON TRANSFER PRI CING ANALYSIS BE PERFORMED FOR SUCH TRANSACTIONS BY ADOPTING THE MOST APPROPRIATE METHOD. IN OTHER WORDS, IN A GIVEN CASE WHERE A NUMBER OF CLOSELY LINKED TRANSAC TIONS ARE SOUGHT TO BE AGGREGATED FOR THE PURPOSES OF BENCH MARKING WITH COMPARABLE U NCONTROLLED TRANSACTIONS, SUCH AN APPROACH CAN BE SAID TO BE WELL ESTABLISHED IN T HE TRANSFER PRICING REGULATION HAVING REGARD TO RULE 10A(D) OF THE RULES. THOUGH I T IS NOT FEASIBLE TO DEFINE THE 25 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 25 PARAMETERS IN A WATER TIGHT COMPARTMENT AS TO WHAT TRANSACTIONS CAN BE CONSIDERED AS 'CLOSELY LINKED', SINCE THE SAME WOULD DEPEND ON FACTS AND CIRCUMSTANCES OF EACH CASE. SO HOWEVER, AS PER AN EXAMPLE NOTED BY THE IN STITUTE OF CHARTERED ACCOUNTANTS OF INDIA (IN SHORT THE 'ICAI') IN ITS GUIDANCE NOTE S ON TRANSFER PRICING IN PARA 13.7, IT IS STATED THAT TWO OR MORE TRANSACTIONS CAN BE SAID TO BE 'CLOSELY LINKED', IF THEY EMANATE FROM A COMMON SOURCE, BEING AN ORDER OR CON TRACT OR AN AGREEMENT OR AN ARRANGEMENT, AND THE NATURE, CHARACTERISTIC AND TER MS OF SUCH TRANSACTIONS SUBSTANTIALLY FLOW FROM THE SAID COMMON SOURCE. THE FOLLOWING EXTRACT FROM THE SAID GUIDANCE NOTES IS WORTHY OF NOTICE:- '13.7. . 13.8. 26 . IN VIEW OF THE RATIO LAID DOWN BY PUNE BENCH OF T HE TRIBUNAL IN DEMAG CRANES & COMPONENTS (INDIA) (P.) LTD. (SUPRA), IT IS HELD TH AT WHERE NUMBER OF TRANSACTIONS ARE CLOSELY LINKED TRANSACTIONS, THEN THE SAME CAN BE A GGREGATED AND CONSTRUED AS A SINGLE TRANSACTION FOR THE PURPOSE OF DETERMINING THE ARM' S LENGTH PRICE. IN CASE, THERE IS CLOSE LINK EXISTS BETWEEN THE DIFFERENT TRANSACTIONS, THE SAME SHOULD BE TREATED AS COMPOSITE TRANSACTION AND APPROPRIATE METHOD SHOULD BE APPLIE D TO WORK OUT THE TRANSFER PRICING ANALYSIS. WHERE TWO OR MORE TRANSACTIONS EMANATE FR OM COMMON SOURCE BEING AN ORDER OR CONTRACT OR AN AGREEMENT OR AN ARRANGEMENT, THEN SU CH TRANSACTIONS COULD BE SAID TO BE CLOSELY LINKED AS THE NATURE, CHARACTERISTIC AND TE RMS OF SUCH TRANSACTION SUBSTANTIALLY FLOW FROM THE SAID COMMON SOURCE. (UNDERLINING PROVIDED BY US) 6.7. WE FIND THAT THE CO-ORDINATE BENCH OF MUMBAI T RIBUNAL IN THE CASE OF BOSKALIS INTERNATIONAL DREDGING INTERNATIONAL CV REPORTED IN TS-215-ITAT-2014 (MUM) TP HAD HELD AS UNDER:- 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WE LL AS RELEVANT MATERIAL ON RECORD. THE LIMITED ISSUE BEFORE US IS WHETHER THE LEASE RENTAL PAID BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES IN RESPECT OF VARIOUS DREDGING EQUIPMEN TS TAKEN ON LEASE CAN BE RECORDED AS CLOSELY LINKED OR CONTINUOUS TRANSACTIONS WHICH CAN NOT BE EVALUATED SEPARATELY ON INDIVIDUAL BASIS. IF A NUMBER OF TRANSACTIONS ARE CLOSELY LIN KED OR CONTINUOUS IN NATURE AND ARISING FROM A CONTINUOUS TRANSACTIONS OF SUPPLY OF AMENITY OR SER VICES THE TRANSACTIONS CAN BE PERMITTED AS CLOSELY LINKED TRANSACTIONS FOR THE PURPOSE OF TRA NSFER PRICING AND IN TERMS OF RULE 10A(D). AGGREGATION AND CLUBBING OF THE CLOSELY LINKED TRA NSACTION ARE PERMITTED UNDER THE RULES AND IT IS ALSO SUPPORTED BY OECD TRANSFER PRICING GUIDE LINES. IN ORDER TO EXAMINE WHETHER THE NUMBER OF TRANSACTIONS ARE CLOSELY LINKED OR CONTIN UOUS SO AS TO AGGREGATE FOR THE PURPOSE OF EVALUATION IT IS TO BE CONSIDERED THAT ONE TRANSACT ION IS FOLLOW-ON OF THE EARLIER TRANSACTION AND THEN THE SUBSEQUENT TRANSACTION IS CARRIED OUT AND DEPENDENT WHOLLY OR SUBSTANTIALLY ON THE EARLIER TRANSACTION. IT CAN BE VICE-VERSA WHEN THE EARLIER TRANSACTION HAS BEEN ENTERED INTO BETWEEN PARTIES BY KEEPING IN MIND THAT A CONTINUOU S TRANSACTION OF SIMILAR NATURE WILL BE 26 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 26 ENTERED INTO BETWEEN THE PARTIES THEREAFTER. THEREF ORE, WHEN THE TRANSACTIONS ARE INFLUENCED BY EACH OTHER AND PARTICULARLY IN DETERMINING THE PRIC E AND PROFIT INVOLVED IN THE TRANSACTIONS THEN THOSE TRANSACTIONS CAN SAFELY BE REGARDED AS C LOSELY LINKED CONSISTING OF TAX PAYERS BUNDLING CERTAIN TRANSACTION FOR THE PURPOSE OF EAR NING AN APPROPRIATE RETURN ACROSS PORTFOLIO RATHER THAN SINGLE PRODUCT. FOR INSTANCE SOME PRODU CTS MAY BE MARKETED BY THE TAX PAYER WITH A LOW PROFIT OR EVEN AT LOSS BECAUSE THEY CREATE A DEMAND FOR OTHER PRODUCTS OR RELATED SERVICES OF THE SAME TAX PAYER THAT ARE THEN SOLD O R PROVIDE HIGH PROFIT. SOME OF THE EXAMPLES GIVEN IN THE OECD GUIDELINES FOR TRANSFER PRICING A RE THE EQUIPMENT AND CAPTIVE AFTER MARKET CONSUMABLES SUCH AS VENDING COFFEE MACHINES AND COF FEE CAPSULES, OR PRINTERS AND CARTRIDGES. THUS, PORTFOLIO APPROACH IS BUSINESS STRATEGY THAT MAY NEED TO BE TAKEN INTO ACCOUNT IN COMPARABILITY ANALYSIS. THEREFORE, IF TWO OR MORE T RANSACTIONS BETWEEN THE SAME PARTIES I.E. THE ASSESSEE AND ITS ASSOCIATE ENTERPRISE CAN BE SAID T O BE CLOSELY LINKED IF THE TRANSACTIONS ARE INTERLINKED AND TERMS AND CONDITIONS AS WELL AS PRI CES BETWEEN THE PARTIES ARE DETERMINED BASED ON THE TOTALITY OF THE TRANSACTIONS AND NOT O N INDIVIDUAL AND SEPARATE TRANSACTIONS. 6.8. WE ALSO FIND THAT THE CO-ORDINATE BENCH OF DE LHI TRIBUNAL IN THE CASE OF BIRLA SOFT LIMITED REPORTED IN TS-285-ITAT-2011 (DEL), HAD HELD THAT W HILE THERE EXISTS ONE SINGLE AGREEMENT FOR PROVISION OF VARIED IT RELATED SERVICES FROM DISTIN CT UNITS OF THE ASSESSEE, THEN IT IS ADVISABLE TO CONSIDER PROFITABILITY FROM ALL SUCH UNITS BY RENDE RING ALL NATURE OF SERVICES IN AGGREGATE FOR TRANSFER PRICING PURPOSES. THE RELEVANT EXTRACTS A RE REPRODUCED BELOW:- 11. LEARNED FIRST APPELLATE AUTHORITY DID NOT ACC EPT THE APPROACH OF TPO OR SEGREGATING THE MARGIN EARNED BY THE ASSESSEE IN ITS VARIOUS STP U NITS. THE REASONS FOR NOT CONCURRING WITH THE TPO ARE THAT THE ASSESSEE HAD PROVIDED SOFTWARE DEVELOPMENT SERVICES, SUCH AS, SOFTWARE DEVELOPMENT SERVICES, SOFTWARE MAINTENANCE AND REPA IR SERVICES, QUALITY TESTING SERVICES FROM ITS THREE UNITS. IT IS AN IDENTICAL SERVICES. 12. THERE IS NO SIGNIFICANT FUNCTIONAL DIFFERENCE I N THE SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES TO RELATED AND UNRELATED VALUES. THE SERVI CES RENDERED BY THE STP UNIT WERE RENDERED TO THE SAME AES OF THE ASSESSEE, NAMELY, BIRLA SOFT INC. US AND BIRLA SOFT UK ON CONTINUING BASIS. 13. THE TERMS AND CONDITIONS FOR RENDERING SUCH SER VICES BY EACH OF STP UNIT WAS GOVERNED BY ONE SINGLE AGREEMENT ENTERED INTO BETWEEN BIRLA SO FT INDIA AND BIRLA SOFT INC. US. THE LEARNED TPO HAS ASSUMED THAT FUNCTIONS, ASSETS AND RISK UNDERTAKEN BY EACH OF THE STP UNIT ARE DISTINCT FROM EACH OTHER AND IS COMPARABLE WITH THE FUNCTION, ASSETS AND RISK UNDERTAKEN BY EXISTING COMPARABLES. IN OTHER WORDS, LEARNED TPO H AS TOTALLY IGNORED THE UNITY OF THE BUSINESS, ADMINISTRATIVE CONTROL AND UNITY OF FUNDS ETC. THE INDEPENDENT FAR ANALYSIS OF EACH 27 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 27 UNIT WITH EXISTING COMPARABLES IS PRACTICALLY NOT P OSSIBLE BECAUSE THERE IS A COMMON MANAGEMENT, INTERLACING OF THE FUNDS ETC . 14. THUS, ON DUE CONSIDERATION OF THE ORDER OF THE LEARNED CIT(APPEALS), WE ARE SATISFIED THAT LEARNED FIRST APPELLATE AUTHORITY RIGHTLY DID NOT C ONCUR WITH THE CONCLUSION OF THE TPO FOR SEGREGATING THE EACH STP UNIT AND CONSIDERING THE R ESULT OF EACH STP UNIT AS A STANDALONE FOR PURPOSE OF DETERMINING THE ALP RELATING TO INTERNAT IONAL TRANSACTION. 6.9. HENCE WE HOLD THAT THE ASSESSEES ACTION OF E NTERING INTO COMPOSITE AGREEMENT WITH ITS AE FOR RENDERING BUNDLED SERVICES OF IT AND ITES THERE ON CANNOT BE DOUBTED WITH AND THE COMPARISONS SHOULD BE DONE ONLY WITH THE TOTAL SERV ICES (I.E IT AND ITES) RENDERED BY THE ASSESSEE TO ITS AE AND NON-AES. IT IS NOT IN DISPU TE THAT THE ASSESSEE HAD ALSO RENDERED SIMILAR SERVICES TO ITS NON-AES ALSO. WE HOLD THAT THE TOTA L REMUNERATION RECEIVED BY THE ASSESSEE FROM ITS AE FOR RENDERING BOTH IT AND ITES ARE TO BE CON SIDERED ONLY ON TOTALITY BASIS AND NO BIFURCATION OF SUCH REMUNERATION SHOULD BE DONE. W E FIND THAT THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH ITS AE COULD BE APTLY EXPLAINED B Y WAY OF A FOLLOWING EXAMPLE :- A PERSON IS PROVIDING BUFFET LUNCH TO ITS AE FOR RS 1,000/-. THE BUFFET LUNCH COMPRISES OF VARIOUS ITEMS PROVIDED AS A PACKAGE DE AL COMPRISING OF SOUP, VARIETIES OF BREADS, DHAL, DIFFERENT SABJIS, FRIED RICE, PAPADS, SALADS, DIFFERENT FRUITS PLATTER, VARIETIES OF SWEETS AND DESSERTS. THE CO MPOSITE FOOD IS PROVIDED BASED ON SINGLE AGREEMENT AT CONSIDERATION OF RS 1000/-. IT WOULD BE DIFFICULT TO BIFURCATE AS TO WHAT IS THE PRICE ATTRIBUTABLE TO DESSERTS , SAB JIS, FRIED RICE ETC ALONE. IN SUCH A CASE, WE HOLD THAT IN ORDER TO UNDERSTAND WHETHER T HE PRICE CHARGED AT RS 1000 TO AE BY A PERSON IS AT ARMS LENTH OR NOT IS TO BE CO MPARED WITH THE COMPOSITE PRICE CHARGED BY THE VERY SAME PERSON TO NON AES OR BY TH E PRICE CHARGED BY THE OTHERS FOR PROVIDING BUFFET LUNCH. BASED ON THIS COMPARIS ON, DECISION NEEDS TO BE TAKEN WHETHER THE PRICE CHARGED BY THE PERSON TO ITS AE I S AT ALP SUBJECT TO AVAILABLE TOLERANCE LIMITS AS PER LAW. 28 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 28 WE HOLD THAT THE BUNDLING APPROACH BASED ON COMPOSI TE AGREEMENT HAS BEEN DULY ACKNOWLEDGED BY VARIOUS DECISIONS AS STATED SUPRA , OECD GUIDELINES, UN TP MANUAL AND UK TP GUIDELINES AS EXTRACTED HEREINABOVE. 6.10. WE FIND THAT THE ASSESSEE HAD DONE THE SEGMEN TAL REPORTING IN ACCORDANCE WITH ACCOUNTING STANDARD (AS) 17 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) AND HAD REFLECTED THE SAME IN ITS ANNUAL REPORT AS UNDER:- SEGMENTAL REPORTING (BY BUSINESS SEGMENTS) DESCRIPTION BPO SD SALES TOTAL ENTERPRISE SEGMENT REVENUE 119453039 74318020 1343705 195114764 ADD INTER SEGMENT REVENUE 0 0 0 0 TOTAL SEGMENT REVENUE 119453039 74318020 1343705 195114764 SEGMENT RESULT 8908726 21020208 -851877 29077057 ADD: UNALLOCABLE INCOME 0 0 0 2629900 LESS: UNALLOCABLE EXPENSES 0 0 0 5925722 LESS: INTEREST 0 0 0 0 PROFIT BEFORE TAXATION 25781235 LESS: CURRENT TAX 5280000 DEFERRED TAX 0 FRINGE BENEFIT TAX 0 PROFIT AFTER TAXATION 20501235 SEGMENT ASSETS 25438016 13293261 0 38731277 UNALLOCABLE ASSETS 85058472 TOTAL ASSETS 123789749 SEGMENT LIABILITIES 0 UNALLOCATED LIABILITIES 47737754 29 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 29 TOTAL LIABILITIES 47737754 CAPITAL EXPENDITURE 0 UNALLOCATED CAPITAL EXPENDITURE 6043671 TOTAL CAPITAL EXPENDITURE 6043671 DEPRECIATION 0 UNALLOCATED DEPRECIATION 7068517 TOTAL DEPRECIATION 7068517 SD STANDS FOR SOFTWARE DEVELOPMENT & SUPPORT SERVIC ES BPO STANDS FOR BUSINESS PROCESS OUTSOURCING SERVICE S NOTES : 1. THE BUSINESS SEGMENTS ARE BASED ON INTERNAL REPO RTING STRUCTURE OF THE COMPANY AND COMPRISED OF BPO ACTIVITY. SOFTWARE DEVELOPMENT & S UPPORT ACTIVITY AND SALES OF COMPUTER, ACCESSORIES, COMPONENTS AND SPARE PARTS E TC. 2. THE SEGMENT WISE REVENUE RESULTS, ASSETS & LIA BILITIES FIGURES RELATE TO THE RESPECTIVE AMOUNTS DIRECTLY IDENTIFIABLE TO EACH OF THE SEGMEN TS. ITEMS APPEARING UNDER UNALLOCATED ASSETS / LIABILITIES, INCOME AND EXPENSES PERTAIN M AINLY TO CORPORATE OFFICE AND RELATE TO THE COMPANY AS A WHOLE. 6.11. WE FIND THAT THIS SEGMENTAL REPORTING DONE IN ACCORDANCE WITH THE REQUIREMENTS OF AS-17 OF ICAI HAS BEEN HEAVILY RELIED UPON BY THE LD TPO. WE FIND THAT THE SEGMENTAL DATA GIVEN BY THE ASSESSEE WITH REGARD TO PROFITABILITY OUT OF RE NDERING OF SERVICES TO RELATED PARTY AND UNRELATED PARTY HAS BEEN REJECTED BY THE LD TPO ON THE GROUND THAT THE ASSESSEE HAD ALLOCATED MORE COST TO UNRELATED PARTY SEGMENT. THE REPORTI NG MANDATED AS PER AS-17 ISSUED BY ICAI IS TOTALLY FOR A DIFFERENT PURPOSE AND CANNOT BE USED AT ANY STRETCH OF IMAGINATION BY THE LD TPO TO DETERMINE THE SEGMENTAL PROFITABILITY OF AE AND NON-AE TRANSACTIONS. INFACT THE SEGMENT REPORTING DONE IN AS-17 DOES NOT BIFURCATE BETWEEN AE AND NON-AE TRANSACTIONS. IT IS DONE IN 30 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 30 THE INSTANT CASE ONLY BASED ON VARIOUS BUSINESS SEG MENTS OF THE ASSESSEE AND WHEREAS THE TP ASSESSMENT IS BASED ON MARGINS DERIVED ON AE AND NO N-AE TRANSACTIONS. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD FURNISHED THE SEGMENTAL WORKI NGS OF PROFITABILITY OF TRANSACTIONS WITH AE AND NON-AE DULY CERTIFIED BY A CHARTERED ACCOUNTANT . THIS WE FIND HAD BEEN SUMMARILY REJECTED BY THE LD TPO ON THE GROUND THAT IT IS NOT FORMING PART OF AUDITED FINANCIAL STATEMENTS OF THE ASSESSEE COMPANY. IN THIS REGARD, WE HOLD T HAT THE LD TPO HAD NOT UNDERSTOOD THE FACT THAT THE AUDITED FINANCIAL STATEMENTS ARE PREPARED IN THE FORMAT AND AS PER THE REQUIREMENTS OF THE COMPANIES ACT, 1956 AND HAS NOTHING TO DO WITH THE REQUIREMENTS OF TRANSFER PRICING ASSESSMENTS AND DOCUMENTATION THEREON. HENCE THE ACTION OF THE LD TPO IN PLACING RELIANCE ON AS-17 SEGMENT REPORTING IN THE INSTANT CASE FOR COMPARISON OF THE MARGINS OF AE AND NON-AE TRANSACTIONS IS NOT TENABLE IN LAW AND IS HI GHLY UNWARRANTED. WE FIND THAT THE LD TPO HAD CONSIDERED THE PLI BY WORKING OUT THE OP / TURN OVER INSTEAD OF WORKING OUT THE SAME ON TOTAL COSTS. WE HOLD THAT THE ASSESSEE HAD DERIVED PLI OF 27.50% MARGIN IN RESPECT OF TRANSACTIONS RENDERED TO ITS AES (FOR BOTH SD AND B PO TOGETHER) WHICH IS ABOVE THE 20% SAFE HARBOUR RULES SPECIFIED BY THE CBDT. THE COMPARAB LES AVERAGE PLI EVEN ACCORDING TO LD TPO WAS ONLY 28.38%. HENCE THE SAME FALLS WITHIN THE 5% (+) / (-) TOLERANCE LIMIT AND NO ADJUSTMENT TO ALP IS CALLED FOR. 6.12. IT IS ALSO RELEVANT TO NOTE THAT NO ADJUSTMEN TS TO ALP HAD BEEN MADE BY THE LD TPO IN THE EARLIER YEARS IN ASSESSEES OWN CASE PURSUANT TO TH E SAME COMPOSITE CONTRACT ENTERED INTO WITH EFFECT FROM 1.4.2008 RELEVANT TO ASST YEAR 2009-10. 6.13. WE FIND THAT THE LD DRP HAD DIRECTED THE LD T PO TO ADOPT THE COMPARABLES FROM THE SD SEGMENT ALSO WHILE ARRIVING AT THE ALP MARGIN. TH IS GOES TO PROVE THAT THE LD DRP HAD ACCEPTED THE STAND THAT THE ASSESSEE IS RENDERING B OTH IT AND ITES SERVICES TO ITS AE EMANATING FROM A COMMON SOURCE OF A COMPOSITE AGREEMENT. AGA INST THIS DIRECTION, THE REVENUE IS NOT IN APPEAL BEFORE US. HENCE IT COULD BE SAFELY CONCLU DED THAT THE FACT OF ASSESSEE RENDERING BOTH IT AND ITES SERVICES TO ITS AE PURSUANT TO A COMPOS ITE AGREEMENT HAS BEEN ACCEPTED BY THE 31 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 31 REVENUE AND THE LD AO HAD PASSED THE GIVING EFFECT ORDER U/S 92CA(3) R.WS. 144C(5) OF THE ACT DATED 20.2.2015 WHEREIN THE REVISED ALP OF THE COMP ARABLES BY TAKING BOTH IT AND ITES SEGMENTS WAS ARRIVED AT 26.65% AND WHEREAS THE ASSE SSEES MARGIN IN RESPECT OF ITS TRANSACTIONS WITH ITS AE WAS 27.50%. HENCE EVEN ON THIS COUNT, THE TRANSACTIONS MADE BY THE ASSESSEE WITH ITS AE IN RESPECT OF BOTH IT AND ITES SEGMENTS ARE AT ARMS LENGTH PURSUANT TO A COMPOSITE CONTRACT. WE FIND THAT THE LD TPO VIDE HIS ORDER DATED 17.2.2015 (GIVING EFFECT TO DRP DIRECTIONS) COMPARED THE REVISED ALP MARGIN OF 26.65% WITH THE BPO MARGIN OF 5.8% AS ALREADY ARRIVED BY HIM EARLIER. THE LD TPO VIDE OR DER DATED 17.2.2015 HAD SUGGESTED AN UPWARD ADJUSTMENT TO ALP AT RS 1,73,88,973/-. THIS BPO MARGIN WAS WORKED OUT BY NOTIONALLY BIFURCATING THE REVENUE DERIVED BY THE A SSESSEE FROM ITS AE INTO IT AND ITES SEGMENTS BY THE LD TPO. IN OUR CONSIDERED OPINION , THE NECESSITY TO GET INTO THIS WORKINGS AND THE MARGINS ARRIVED BY THE LD TPO FOR BPO SEGME NT AND IN RESPECT OF THE COMPARABLES NEED NOT BE LOOKED INTO AT ALL, AS WE HAVE GIVEN A FINDING EARLIER THAT THE SEGMENTED PROFITABILITY STATEMENT IN RESPECT OF BOTH IT AND I TES SERVICES RENDERED TO AE AND NON-AE WHICH IS ALREADY ON RECORD BEFORE THE LD TPO , BUT IGNORED BY THE LD TPO EARLIER, HAS TO BE CONSIDERED BY THE LD TPO. IF THE SAME IS CONSIDERED , THE ASSESSEES MARGIN IS VERY MUCH AT ALP AND HENCE THERE IS NO QUESTION OF MAKING ANY AD JUSTMENT TO ALP. 6.14. IN VIEW OF THE AFORESAID FACTS AND FINDINGS I N THE FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD THAT THERE IS ABSOLUTELY NO CASE MADE OUT BY T HE REVENUE FOR MAKING ANY ADJUSTMENT TO ALP DETERMINED BY THE ASSESSEE. HENCE THE GROUNDS RAISED BY THE ASSESSEE FOR THE ASST YEAR 2010-11 ARE ALLOWED. IN VIEW OF THIS FINDING, T HE OTHER ARGUMENTS ADVANCED BY THE LD AR ON THE PRINCIPLES OF INTENTIONAL SET OFF FROM ONE SE GMENT TO ANOTHER SEGMENT UNDER TNMM WHICH HAS BEEN RELIED UPON BY THE HONBLE DELHI HIG H COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P) LTD VS CIT REPORTED IN (2015) 55 TAXMANN.COM 240 (DELHI) NEED NOT BE GONE INTO. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR TH E ASST YEAR 2010-11 IS ALLOWED. 32 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 32 ASST YEAR 2011-12 8. THIS APPEAL OF THE REVENUE AND CROSS OBJECTION OF THE ASSESSEE FOR THE ASST YEAR 2011-12 IS DIRECTED AGAINST THE FINAL ORDER PASSED BY THE LEAR NED INCOME TAX OFFICER, WARD -2(2), KOLKATA [ IN SHORT THE LD AO] UNDER SECTION 143(3) /144C OF THE ACT DATED 24.9.2015, PURSUANT TO THE DIRECTIONS OF THE LEARNED DISPUTE RESOLUTION PANEL [ IN SHORT THE LD DRP] UNDER SECTION 144C(5) OF THE ACT DATED 14.8.2015. 9. WE FIND THAT THE REVENUE HAD RAISED THE GROUNDS ONLY IN RESPECT OF EXCLUSION OF COMPARABLE ICRA ONLINE LTD AND INCLUSION OF COMPARABLES AKSHAY SOFTWARE TECHNOLOGIES LTD AND THINKSOFT GLOBAL SERVICES LTD, WHILE DETERMINING TH E COMPARABLES MARGIN AND COMPARING THE SAME WITH ASSESSEES MARGIN TO ARRIVE AT THE ALP. THE LD DR BEFORE US FILED HIS SUBMISSIONS IN WRITING WHEREIN HE HAD STATED THAT THE GROUND NO . 1 RAISED BY THE REVENUE IS WRONG AND ACCORDINGLY NOT PRESSED BEFORE US. ACCORDINGLY, TH E GROUND NO.1 RAISED BY THE REVENUE IS DISMISSED AS NOT PRESSED. 9.1. WE FIND THAT THE FACTS OF ASST YEAR 2011-12 AR E ALMOST SIMILAR TO THAT IN ASST YEAR 2010- 11. THE ASSESSEE EARNED RS 17,29,47,372/- FROM ITS AE FROM RENDERING BOTH IT AND ITES SERVICES. THE ASSESSEE AS IN ASST YEAR 2010-11 PLE ADED THAT THIS CONSIDEREATION FROM AE WAS RECEIVED PURSUANT TO A COMPOSITE CONTRACT AND THE R EVENUE RECEIVED THEREON COULD NOT BE BIFURCATED. BUT THE LD TPO HELD THAT THE ASSESSEE IS ENGAGED ONLY IN RENDERING BPO SERVICES AND ACCORDINGLY ATTRIBUTED THE ENTIRE CONSIDERATION RECEIVED FROM AE TOWARDS BPO SERVICES. THERE IS NO DISPUTE WITH REGARD TO THE TNMM BEING A DOPTED AS THE MAM. THERE IS NO DISPUTE WITH REGARD TO OP / OC BEING ADOPTED AS THE PLI. T HE ASSESSEE JUSTIFIED ITS TRANSACTIONS TO BE AT ALP BY DECLARING MARGIN FROM ITS AE AT 18.76% AS AGAINST THE COMPARABLE COMPANIESS MARGIN OF 10.25%. THE LD TPO UNDERTOOK A FRESH BENCHMARKING STUDY TO ARRIVE HIS OWN SET OF COMPANIES FOR COMPARABLES AND DETERMINED THE ALP MARGIN AT 25.16%. THE LD TPO MADE 33 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 33 AN UPWARD ADJUSTMENT OF RS 1,47,69,642/- TO THE ALP DETERMINED BY THE ASSESSEE VIDE HIS ORDER DATED 27.1.2015. 9.2. FOR ASST YEAR 2011-12, WE FIND THAT THE LD DR P ACCEPTED THE AUDITED SEGMENTAL REPORTS OF THE ASSESSEE WHICH ARE ENCLOSED IN PAGE 145 OF THE PAPER BOOK. THE LD DRP HELD THAT THE ASSESSEE HAD RENDERED BOTH IT AND ITES SERVICES TO ITS AE IN ASST YEAR 2011-12 ALSO AND HENCE THE FINDING OF THE LD TPO IN THIS REGARD THAT CONSIDERATION RECEIVED IS ATTRIBUTABLE ONLY TO BPO SEGMENT IS NOT TENABLE. WE FIND THAT THERE IS NO DISPUTE WITH REGARD TO AGGREGATION OF IT AND ITES SEGEMENS TOGETHER WITH AE VIS A VIS NON A E. WE FIND THAT WITH REGARD TO THE COMPARABLES CHOSEN BY THE ASSESSEE, THE FINDINGS OF THE LD DRP FOR GROUND NO. 8 RAISED BEFORE IT ARE AS UNDER:- GROUND 8 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD TPO AND ACCORDINGLY THE LD AO HAVE ERRED IN REJECTING THE COMPARABLE COMPANIES TH AT WERE ACCEPTED AS COMPARABLE TO THE ASSESSEE BY THE LD DRP DURING THE ASSESSMENT PR OCEEDINGS OF AY 2010-11. ASSESSEES SUBMISSIONS: WITH REGARD TO THE ABOVE, THE ASSESSEE WOULD HUMBLY LIKE TO SUBMIT HEREIN THAT THE LD TPO HAS ERRED IN REJECTING THE FOLLOWING COMPANIES THAT WERE CONSIDERED AS COMPARABLE COMPANIES BY THE LD DRP IN THE COURSE OF HEARING PROCEEDINGS FOR AY 2010-11. WITH RESPECT TO AY 2011-12, IT HAS BEEN O BSERVED THAT THESE COMPANIES CLEAR THE FILTER CRITERIA ADOPTED BY THE LD TPO. HOWEVER , THE SAME HAS NOT BEEN CONSIDERED AS COMPARABLE COMPANY IN DETERMINATION OF ARMS LENGTH PRICE. THE COMPANIES ARE AKSHAY SOFTWARE TECHNOLOGIES LTD AND THINKSOFT GLOB AL SERVICES LTD. FURTHER, THE ANNUAL REPORTS / WEB INFORMATION OF THE ABOVE COMPA NIES WERE PURSUED AND OBSERVED THAT THE SAME ARE COMPARABLE TO THE FUNCTIONS UNDER TAKEN BY THE ASSESSEE. DRP FINDINGS: THE SUBMISSIONS HAVE BEEN CONSIDERED IN THIS REGARD AND IT IS SEEN THAT THE FUNCTIONAL PROFILE HAS NOT UNDERGONE CHANGES TO WARRANT EXCLUS ION OF THESE COMPARABLES THAT WERE DIRECTED TO BE INCLUDED BY THE DRP DIRECTIONS FOR T HE PRIOR PERIOD. THE TPO / AO ARE THEREFORE DIRECTED TO RECOMPUTED ALP UPON INCLUDING THESE COMPARABLES ALSO. 34 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 34 IT WAS ALSO SUBMITTED THAT THE OPERATING MARGIN OF THE ASSESSEE WORKS OUT TO BE 18.76% AND THAT OF COMPARABLE COMPANIES IS 20.41%. HENCE, PRICES OF INTERNATIONAL TRANSACTIONS THAT ACHIEVE OP / TC OF 20.41% OR MORE , OR IS WITHIN (+/-) 5% RANGE AVAILABLE AS PER PROVISO TO SECTION 92C(2) OF THE A CT WOULD MEET THE ARMS LENGTH STANDARD REQUIRED UNDER THE INDIAN REGULATIONS. BA SIS THE SUBMISSIONS, THE AO / TPO SHALL RECOMPUTED THE ALP AND SEE IF THE OP/TC FALLS WITHIN THE REQUISITE BAND OF (+/-) 5%. 9.3. WE HOLD THAT IT IS ALREADY WELL SETTLED BY SEV ERAL DECISIONS OF THIS TRIBUNAL AND OTHER TRIBUNALS WHEREIN AKSHAY SOFTWARE TECHNOLOGIES LTD AND THINKSOFT GLOBAL SERVICES LTD ARE TO BE INCLUDED AS COMPARABLES IN SOFTWARE DEVELOPMENT SEGMENT. FOR THE ASST YEAR 2011-12, THE REVENUE HAD NOT PREFERRED ANY APPEAL WITH REGARD TO THE AGGREGATION APPROACH OF IT AND ITES SEGMENTS BASED ON COMPOSITE AGREEMENT. THE ONLY GR OUND RAISED IS WITH REGARD TO INCLUSION OF COMPARABLES OF AKSHAY SOFTWARE TECHNOLOGIES LTD AND THINKSOFT GLOBAL SERVICES LTD FOR DETERMINATION OF ALP. WE HOLD THAT THE ASSESSEE H AD ALREADY GIVEN THE SEGMENTAL PROFITABILITY STATEMENT OF RENDERING BOTH IT AND ITES SERVICES TO AE AND NON-AE AND THE ASSESSEE HAD DULY JUSTIFIED THE PRICING WITH AE TO BE AT ALP. THIS I SSUE IS NOT IN DISPUTE BEFORE US FOR THE ASST YEAR 2011-12. EVEN IF THERE IS A NECESSITY TO GET INTO THE COMPARABLES CHOSEN, THEN WE HOLD THAT AKSHAY AND THINKSOFT SHOULD BOTH BE INCLUDED A S COMPARABLES BY RESPECTFULLY FOLLOWING THE VARIOUS DECISIONS OF THIS TRIBUNAL AND OTHER TR IBUNAL DECISIONS IN SOFTWARE DEVELOPMENT SEGMENT. THERE IS NO DISPUTE FOR THIS ASST YEAR 20 11-12 THAT THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT AND BPO SERVICES AND COMPOSITE CONSIDERATION HAS BEEN RECEIVED FROM ITS AE FOR THE SAME. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD CHOSEN THE MIXED SET OF COMPARABLES FROM BOTH IT AND ITES SEGMENTS. 9.4. IN VIEW OF THE AFORESAID FINDINGS , WE HOLD TH AT THERE IS NO ADJUSTMENT TO ALP THAT NEED TO BE MADE IN THE INSTANT CASE AND WE DIRECT THE LD AO TO DELETE THE ADJUSTMENT MADE TO ALP. ACCORDINGLY, THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 35 ITA NOS.387/KOL/2015, I.T.A. NO.40/KOL/2016 C.O.-10/KOL/2016 DATA CORE INDIA PVT. LTD. A.YRS.2010-11 & 2 011-12 35 9.5. THE LD AR STATED THAT THE CROSS OBJECTION OF T HE ASSESSEE FOR THE ASST YEAR 2011-12 ARE ONLY SUPPORTIVE OF THE ORDER OF THE LD CITA . 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR T HE ASST YEAR 2010-11 IS ALLOWED, APPEAL OF THE REVENUE FOR ASST YEAR 2011-12 IS DISMISSED AND CROS S OBJECTION OF THE ASSESSEE FOR THE ASST YEAR 2011-12 IS ALLOWED. ORDER PRONOUNCED IN THE COURT ON 06.12.2017 SD/- SD/- [A.T. VARKEY] [ M.BALAGANESH ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 06.12.2017 SB, SR. PS COPY OF THE ORDER FORWARDED TO: 1. I.T.O.WARD-2(2), AAYAKAR BHAWAN, P-7, CHOWRINGHE E SQUARE, KOLKATA-700069 2. M/S DATA CORE INDIA PVT. LTD., DG-4, PLOT-IV, SE CTOR-II, SALT LAKE CITY, KOLKATA- 700091. 3. C.I.T(A)- , KOLKATA 4. C.I. T.- KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER SENIOR PRIVAT E SECRETARY HEAD OF OFFICE/D.D.O., ITAT, KOLKATA BENCHE S