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ITA 4001/DEL/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 3130 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-05-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 09-03-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 28-06-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; International transaction; Working capital adjustments; Initiation of penalty proceedings; Wholly owned subsidiary; Onus to prove
• Section: 92C; 244A; 92E; 10B; 10; 92

Judgement Text

E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 2 : NEW DELHI BEFORE SHRI I. C. SUDHIR , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 4001/DEL/2013 (ASSESSMENT YEAR: 2006 - 07 ) EVALUESERVE.COM PRIVATE LTD, 701, GURU APARTMENTS, SECTOR - 14, ROHNI, NEW DELHI PAN: AAACE8014F VS. ITO, WARD - 11(2), NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : I. SH. SALIL KAPOOR, ADV II. SH. SUMIT LAL CHANDANI, ADV III. MS. ANANYA KAPOOR, ADV REVENUE BY: SH. NEERAJ KUMAR, SR. DR DATE OF HEARING 09/03 / 2017 DATE OF PRONOUNCEMENT 11 / 0 5 / 2017 O R D E R PER PRASHANT MAHARISHI, A. M. 1. THIS IS AN APPEAL FILED BY THE ASSESSEE [ HEREINAFTER REFERRED TO AS APPELLANT ALSO] AGAINST THE ASSESSMENT ORDER [ HEREINAFTER REFERRED TO AS THE ORDER ALSO ] OF THE LD INCOME TAX OFFICER, WARD 11 (2), NEW DELHI [ HEREINAFTER REFERRED TO AS THE AO ] DATED 30/04/2013 U/S 143(3)(II) R.W.S 144C(5) OF THE INCOME TAX E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 2 ACT [ IN SHORT THE ACT] PASSED IN PURSUANCE OF DIRECTION DATED 28/07/2010 BY THE LEARNED DISPUTE RESOLUTION PANEL [ HEREINAFTER REFERRED TO AS THE DRP] AGAINST THE DRAFT ASSESSM ENT ORDER DATED 21/12/2009 INCORPORATING TRANSFER PRICING ADJUSTMENT DETERMINING THE ARMS LENGTH PRICE [ THE ALP] OF INTERNATIONAL TRANSACTIONS U/S 92CA MADE BY LD ADDITIONAL CIT (TRANSFER PRICING) - I (2), NEW DELHI [ HEREINAFTER REFERRED TO AS THE TPO] VIDE ORDER DATED 23/09/2009 FOR AY 2006 - 07. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ORDER PASSED BY THE LD. ASSESSING OFFICER ('AO') IS BAD IN LAW AND VOID AB - INITIO. 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE REFERENCE MADE BY THE LD . AO SUFFERS FROM JURISDICTIONAL ERROR AS THE LD. AO DID NOT RECORD ANY REASONS IN THE DRAFT ASSESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WAS 'EXPEDIENT AND NECESSARY' TO REFER THE MATTER TO THE LD. TRANSFER PRICING OFFICER {'TPO'} FOR COMPUTATION OF THE ARM'S LENGTH PRICE, AS IS REQUIRED UNDER SECTION 92CA(1) OF THE INCOME TAX ACT, 1961 ('ACT'). 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN MAKING AN ADDITION OF RS. 16,24,01,920/ - TO THE RETURNED INCOME OF THE APPELLANT BY RE - COMPUTING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDER SECTION 92 OF THE ACT. E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 3 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/ LD. TPO/ LD. DISPUTE RESOLUTION PAN EL ('DRP') ERRED ON FACTS AND IN LAW IN DETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE BY : (A) NOT ADOPTING THE SET OF COMPARABLES SELECTED BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY; (B) MAKING ERRONEOUS INCLUSI ON AND EXCLUSION IN THE SET OF COMPARABLE COMPANIES BY USING ERRONEOUS QUANTITATIVE FILERS IN THE SEARCH PROCESS; (C) USING THE DATA OF THE FINANCIAL YEAR 2005 - 06 FOR THE COMPARABLE COMPANIES DESPITE THE SAME BEING NOT AVAILABLE TO THE ASSESSEE AT THE TIM E OF PREPARATION OF THE DOCUMENTATION UNDER RULE 10D OF THE INCOME - TAX RULES, 1962; (D) BY NOT ACCEPTING THE ASSESSEE'S SELECTION OF COMPARABLES CARRIED OUT DURING THE ASSESSMENT PROCEEDINGS BASED ON DATA OF THE FINANCIAL YEAR 2005 - 06; (E) BY NOT ALLOWI NG ANY ECONOMIC ADJUSTMENT FOR DIFFERENCE IN CAPACITY UTILIZATION LEVEL OF THE ASSESSEE AND THE COMPARABLES; (F) BY NOT ALLOWING ANY ECONOMIC ADJUSTMENT FOR DIFFERENCE IN WORKING CAPITAL OF THE ASSESSEE AND THE COMPARABLES; AND (G) THE LD. DRP ERRED IN DISREGARDING THE COMMISSIONER OF INCOME TAX (APPEALS) ORDER FOR FINANCIAL YEAR 2004 - 05 WHEREIN THE E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 4 ARM'S LENGTH PRICING OF THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT WERE UPHELD ON SIMILAR ISSUES AND FACTS. 5. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/ LD. TPO/LD DRP ERRED IN DENYING THE BENEFIT OF 5% MARGIN ALLOWED UNDER THE PROVISO TO SECTION 92 C(2) OF THE ACT. 6.1 THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW , THE LD. A.O HAVE ERRED IN LIMITING THE DEDUCTION U /S 10A OF THE ACT ON THE GROSS TOTAL INCOME RATHER THAN PROFIT AND GAINS OF THE ELIGIBLE UNDERTAKING (WITHOUT ANY SET - OFF OF THE BROUGHT FORWARD LOSSES). 6.2 THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD. DRP ERRED TO ADJUDICATE ON THE SUBMIS SIONS FILED BY APPELLANT COMPANY ON GROUND NO. 7 OF DRP AND FAILED TO PASS THE SPEAKING ORDER. 7 THAT THE LD. AO ERRED IN FACTS AND IN LAW IN CHARGING AND COMPUTING INTEREST UNDER SECTION 234B, 234D AND 244A OF THE INCOME TAX ACT, 1961. 8 ON THE FAC TS AND CIRCUMSTANCES OF THE CASE, THE LD. DRP HAS ERRED IN NOT EXAMINING THE VALIDITY OF INITIATION OF PENALTY PROCEEDINGS U/S 271(L)(C). 3. APPELLANT IS A PRIVATE LIMITED COMPANY, BEING WHOLLY OWNED SUBSIDIARY COMPANY OF ESERVE VALUE LIMITED , BERMUDA, ENGA GED IN THE BUSINESS OF PROVISION OF SERVICES IN THE FIELD OF INFORMATION TECHNOLOGY ENABLED SERVICES TO E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 5 ITS ASSOCIATED ENTERPRISES. IT IS ALSO REGISTERED WITH SOFTWARE TECHNOLOGY PARK AS 100% EXPORT ORIENTED UNIT AND ELIGIBLE TO CLAIM DEDUCTION UNDER SECTI ON 10 A OF THE INCOME TAX ACT. IT IS DERIVING INCOME FROM ITS ASSOCIATED CONCERN AND HAS ENTERED INTO INTERNATIONAL TRANSACTIONS. 4. ASSESSEE FILED ITS RETURN OF INCOME ON 29 / 11 / 2006 SHOWING NIL INCOME AND CLAIMING DEDUCTION UNDER SECTION 10 A OF THE INCOME TAX OF RS. 6.76 CRORES LEAVING THE BALANCE INCOME FROM BUSINESS OF RS. 17.32 LAKHS AND INCOME FROM OTHER SOURCES OF RS. 1.33 LAKHS WHICH WERE SET - OFF AGAINST BROUGHT FORWARD LO SSES OF EARLIER YEARS. SUBSEQUENTLY THE RETURN OF THE ASSESSEE WAS PICKED UP FOR SCRUTINY AND NOTICE UNDER SECTION 143 (2) OF THE ACT WAS ISSUED ON 15/10/2007. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTED THAT ASSESSEE HAS ENTERED INTO INTERNA TIONAL TRANSACTION OF RS. 59.92 CRORES AND THEREFORE HE REFERRED THE MATTER TO THE ADDITIONAL COMMISSIONER OF INCOME TAX, TRANSFER PRICING I (2) ON 17/10/2008 FOR DETERMINATION OF THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION A S CONTEMPLATED UN DER SECTION 92C OF THE INCOME TAX ACT. 5. ON RECEIPT OF REFERENCE UNDER SECTION 92CA (1) OF THE ACT, THE LD. TRANSFER PRICING OFFICER NOTED THAT ASSESSEE HAS ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS: - A. INCOME FROM BACK - OFFICE OPERATIONS OF RS. 5842466 00/ B. REIMBURSEMENT AGAINST FOREIGN TRAVELLING EXPENSES OF RS. 15097718/ 6. ACCORDING TO THE FUNCTIONAL PROFILE OF THE ASSESSEE, IT IS A FULL - SERVICE BUSINESS RESEARCH, MARKET RESEARCH, AND INTELLECTUAL PROPERTY RESEARCH COMPANY. THE E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 6 HOLDING COMPANY OF THE A SSESSEE, EVS BERMUDA WAS FOUNDED BY THE FORMER EXECUTIVE FROM MCKINSEY & CO AND IBM IN NOVEMBER 2000 AND IS ENGAGED IN THE BUSINESS DEVELOPMENT AND PROCURING BUSINESS FOR THE E VALUE SERVE GROUP. THE APPELLANT CARRIED OUT THE RESEARCH ASSIGNMENT ON BEHALF OF THE GROUP. IT CONDUCTS MARKET RESEARCH, BUSINESS RESEARCH, INVESTMENT RESEARCH, AND INTELLECTUAL PROPERTY PROJECTS FOR CLIENTS LOCATED ACROSS NORTH AMERICA, EUROPE, AND ASIA. IT SPECIALIZES IN PROVIDING KNOWLEDGE SERVICES. AT THE CORE IS THE EXPERIENCE OF THE INDIA - BASED TEAM IN PROVIDING THESE SERVICES IN HIGH QUALITY AND LOW COST MANNER. IT OFFERS THE VARIOUS SERVICES TO ITS CLIENTS INCLUDING REPORTS BASED ON BUSINESS RESEARCH, DATA ANALYSIS, MARKET RESEARCH SERVICES, DRAFTING OF PATENTS, INTELLECTUAL PROPERTY ASSET MANAGEMENT, AND FINANCIAL DATA ANALYTICS. COMPANIES ALSO REGISTERED WITH THE SOFTWARE TECHNOLOGY PARKS OF INDIA AND CLAIMING DEDUCTION UNDER SECTION 10 A OF THE INCOME TAX ACT. BROADLY, IT PROVIDES SERVICES UNDER FOLLOWING SEGMENTS: - I. IN IT S BUSINESS INFORMATION SEGMENT ITS ANALYSTS COVER A RANGE OF INDUSTRIES INCLUDING BANKING, INSURANCE, TELECOMMUNICATION, PHARMA, AND BIOTECHNOLOGY, CHEMICALS, ENERGY, CONSUMER GOODS. IT USES PRIMARY AND SECONDARY SOURCES TO CONDUCT THIS RESEARCH AND ANALYS IS IN THIS SEGMENT. ITS RESEARCH CAPABILITIES INCLUDE INDUSTRY AND VALUE CHAIN ANALYSIS, IN - DEPTH ANALYSIS OF CUSTOMER SEGMENTS, PRODUCTS CHANNELS TECHNOLOGIES COMPETITIVE BENCHMARKING, MONITORING AND CUSTOMIZING E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 7 NEWSLETTERS FORECASTING MODELING AND FINANC IAL ANALYSIS, DATABASE CONTENT CREATION AND MANAGEMENT UPDATING OF EXISTING RESEARCH COMMERCIALIZATION ANALYSIS AND BUSINESS PLANS. BROADLY, IT PROVIDES SERVICES UNDER FOLLOWING SEGMENTS: - II. UNDER THE INTELLECTUAL PROPERTY SEGMENT, THE SERVICES ARE PROVIDED FOR PATENTS, DRAFTING, PRIOR ART SEARCH, AND INTELLECTUAL PROPERTY ASSET MANAGEMENT. THE ASSESSEE IS IN OLD IN CARRYING OUT PATENT ASSESSMENT, INTELLECTUAL PROPERTY RESEARCH, AND ANALYSIS, PATENT CONSULTING, AND PREPARING DRAFT PATENT APPLICATION TO BE FIL ED OVERSEAS. THIS RESEARCH IS DELIVERED OVERSEAS TO ASSOCIATED ENTERPRISES, WHICH IS AN ARRANGEMENT WITH THE TEAM OF LAWYERS FOR FILING OF THE PATENT APPLICATIONS IN THE APPROPRIATE JURISDICTION. IT ALSO OFFERS INTELLECTUAL PROPERTY ASSET MANAGEMENT AND HE LPS IN ANALYZING PORTFOLIO PATENTS. IT OFFERS ASSISTANCE ON PATENT OVERLAP INFRINGEMENT AND IN FINDING POTENTIAL COMPANIES, WHICH WOULD BE INTERESTED IN LICENSING A PARTICULAR INVENTION. III. IN ITS EQUITY RESEARCH AND FINANCIAL ANALYSTS SEGMENT. IT FOCUSES ON GLOBAL MUTUAL FUND AND EQUITIES. IT INVOLVES TRICKING THE PERFORMANCE OF SPECIFIC STOCKS AND MUTUAL FUNDS AND ANALYZING IT. THE BACKGROUND TIES COMPILED AND PROVIDED TO THE CLIENTS, WHICH INCLUDE MAINLY INVESTMENT BANKS ETC. THIS WORK IS E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 8 CUSTOMIZED ACCORDI NG TO THE REQUIREMENTS OF THE CLIENTS IN THE SPECIFIC REQUEST RECEIVED BY THEM. IV. IN ITS MARKET RESEARCH ACTIVITIES. IT PROVIDES MOIST BASED SUPPORT FOR CONDUCTING TELEPHONE CUSTOMER SERVICE IN DIFFERENT PARTS OF THE WORLD AND FORMULATION OF PRELIMINARY HYPO THESIS BASED ON THE SURVEYS. IT HAS EXTENSIVE PRIMARY RESEARCH CAPABILITIES , INCLUDING THE ABILITY TO CONDUCT RESEARCH IN MULTIPLE LANGUAGES. 7. ASSESSEE ADOPTED T RANSACTION N ET M ARGIN M ETHOD (TNMM) AS THE MOST APPROPRIATE METHOD CONSIDERING THE PROFIT LEVEL INDICATOR AS OPERATING PROFIT/TOTAL COST . IT SELECTED SIX COMPARABLES WHOSE ARITHMETIC MEAN MARGIN IS 8.70% AFTER WORKING CAPITAL ADJUSTMENT, WHEREAS THE ASSESSEE MARGIN IS 11.18% AND THEREFORE ASSESSEE SUBMITTED THAT THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS AE IS AT ARMS LENGTH. ASSESSEE ADOPTED THE MULTIPLE YEAR DATA. WITH RESPECT TO THE REIMBURSEMENT AGAINST FOREIGN TRAVELLING EXPENDITURE , IT DID NOT BENCH MARK STATING THAT IT IS A COST - TO - COST REIMBURSEMENT. 8. THE LD. TRANSFE R PRICING OFFICER OUT OF THE SIX COMPARABLES SELECTED BY THE ASSESSEE REJECTED (I) B2K CORPORATION PRIVATE LIMITED AND (II) NIIT SMART SERVICES LTD. FOR THE FIRST COMPANY HE GAVE THE REASON THAT THIS COMPANY IS A PERSISTENTLY LOSS - MAKING UNIT AND THERE FORE CANNOT BE SELECTED AS A COMPARABLE. WITH RESPECT TO THE SECOND COMPANY, IT WAS STATED THAT THE COMPANYS OPERATING PROFITS ARE STEADILY DECLINING AND THE SALE OF THE COMPANY IS OTHERWISE STATIC. THEREFORE, THE COMPANY HAS ENTERED INTO A PHASE OF A E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 9 NEG ATIVE GROWTH HENCE CANNOT BE USE D AS A COMPARABLE. FINALLY, LD TPO REMAINED WITH THE FO U R COMPARABLE S SELECTED BY THE ASSESSEE WHOSE PLI OF OP/TC IS 30.08 % . WITH RESPECT TO THE WORKING CAPITAL ADJUSTMENT, LD. TRANSFER PRICING OFFICER HELD THAT IT IS NOT REQUIRED IN VIEW OF THE FINANCIAL POSITION OF THE COMPARABLES. BASED ON THIS, THE LD. TRANSFER PRICING OFFICER PASSED AN ORDER UND ER SECTION 9 2CA (3) OF THE INCOME TAX ACT, 1961 ON 23/09/2009 PROPOSING AN A DJUSTMENT OF RS. 162401920/ . 9. THE LD. ASSESSING OFFICER ON RECEIPT OF THE ORDER OF THE LD. TRANSFER PRICING OFFICER PASSED ASSESSMENT ORDER UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE ACT ON 21/12/2009 WHEREIN THE ABOVE ADJUSTMENT WITH RESPECT TO T HE TRANSFER PRICING OF RS. 162401920/ WAS MADE. THE LD. ASSESSING OFFICER WAS FURTHER OF THE VIEW THAT ASSESSEE HAS CLAIMED DEDUCTION UNDER SECTION 10 A OF THE INCOME TAX ACT AND THEREAFTER CLAIMED THE SETUP OF THE BROUGHT FORWARD BUSINESS LOSS FOR ASSESS MENT YEAR 2002 03 AGAINST THE BALANCE PROFITS UNDER THE HEAD. ACCORDING TO HIM, THE MANNER OF THE COMPUTATION IS INCORRECT. ACCORDING TO HIM THE BROUGHT FORWARD LOSSES HAVE TO BE DEDUCTED FIRST FROM THE PROFITS AND GAINS OF BUSINESS AND DEDUCTION UNDER S ECTION 10 A SHALL BE GRANTED ONLY FROM THE BALANCE INCOME UNDER THIS HEAD. THEREFORE AGAINST THE RETURNED INCOME OF RS. NIL. THE TOTAL INCOME OF THE ASSESSEE WAS COMPUTED AT RS. 162535780/ . 10. THE ASSESSEE PREFERRED OBJECTIONS BEFORE THE LD. D ISPUTE R ESOLUT ION P ANEL WHO ISSUED DIRECTION DATED 28/07/2010 REJECTED ALL THE CONTENTION OF THE E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 10 ASSESSEE AND UPHELD THE FINDING OF THE LD. ASSESSING OFFICER/TRANSFER PRICING OFFICER. 11. CONSEQUENT TO THIS ON 31/08/2010 , THE LD. ASSESSING OFFICER PASSED AN ASSESSMENT ORDE R UNDER SECTION 143 (3 ) READ WITH SECTION 144C OF THE INCOME TAX ACT DETERMINING TOTAL INCOME OF THE ASSESSEE AT RS. 162535780/ AGAINST THE RETURNED INCOME OF RS. 69400370/ . THE LD. ASSESSING OFFICER MADE AN ADJUSTMENT ON ACCOUNT OF ORDER OF THE LD. TRAN SFER PRICING OFFICER OF RS. 162401920/ AND DIRECTED THE ASSESSEE TO FIRST SET OFF THE BROUGHT FORWARD LOSSES FROM ASSESSMENT YEAR 2002 03 AND THEN CLAIM DEDUCTION UNDER SECTION 10 A OF THE INCOME TAX ACT. DUE TO THIS, THE CLAIM OF THE DEDUCTION OF THE ASSESSEE UNDER SECTION 10 A OF THE ACT WAS RESTRICTED TO RS. 5 9891502/ AGAINST THE CLAIM OF RS. 6.76 CRORES. 12. ASSESSEE CHALLENGED THE ASSESSMENT ORDER BEFORE THE COORDINATE BENCH, WHO WIDE ORDER DATED 03/11/2011 IN ITA NO. 5149/DE/2010 RESTORED THE PROCEED INGS TO THE FILE OF THE LD. DISPUTE RESOLUTION PANEL TO EXAMINE THE OBJECTIONS AND PASS A SPEAKING ORDER. 13. THE LD. DISPUTE RESOLUTION PANEL VIDE ITS DIRECTION DATED 25/03/2013 PURSUANT TO THE ORDER OF THE COORDINATE BENCH HAS PASSED A SPEAKING ORDER WHEREIN ALL THE CONTENTIONS OF THE ASSESSEE WERE REJECTED. 14. CONSEQUENTLY ON 30/4/2013, LD AO FRAMED ASSESSMENT UNDER SECTION 143 (3) SECTION 144C (5) AND SECTION 254 OF THE INCOME TAX ACT, 1961 DETERMINING THE TOTAL INCOME OF THE ASSESSEE AT RS. 162535780/ AGAINS T A RETURNED INCOME OF RS. NIL . IN THE REFRAMED ASSESSMENT ORDER, THE LD. ASSESSING OFFICER FIRST SET E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 11 OF F THE BROUGHT FORWARD LOSSES FROM ASSESSMENT YEAR 2002 03 OF RS. 9508868/ BEFORE GRANTING DEDUCTION UNDER SECTION 10 A OF THE INCOME TAX ACT. CONS EQUENTLY HE REDUCED THE DEDUCTION UNDER SECTION 10 A OF THE INCOME TAX ACT BY RS. 9508868/ . THE TRANS FER PRICING ADJUSTMENT OF RS. 1 62 40 1920/ WAS ALSO RETAINED. THEREFORE, AGGRIEVED BY THE ORDER OF THE LD. ASSESSING OFFICER ASSESSEE IS IN APPEAL BEFORE U S. 15. GROUND NO. 1 OF THE APPEAL OF THE ASSESSEE IS GENERAL IN NATURE, NO ARGUMENTS ARE ADVANCED BEFORE US, AND THEREFORE THIS GROUND OF APPEAL IS DISMISSED. 16. GROUND NO. 2 OF THE APPEAL OF THE ASSESSEE IS WITH RESPECT TO THE JURISDICTIONAL ERROR THAT THE LD. ASSESSING OFFICER HAS NOT RECORDED ANY REASONS IN THE DRAFT ASSESSMENT ORDER FOR REFERENCE TO THE LD. TRANSFER PRICING OFFICER FOR COMPUTATION OF THE ARMS LENGTH PRICE UNDER SECTION 92CA (1) OF THE INCOME TAX ACT, 1961. THE LD. AUTHORIZED REPRESENTATIVE DID NOT PRESS ANY ARGUMENT FOR THIS GROUND AND THEREFORE WE DISMISS IT. 17. GROUND NO. 3 OF THE APPEAL OF THE ASSESSEE IS AGAINST THE ORDER OF THE LD. ASSESSING OFFICER AGAINST ADDITION OF RS. 162401920 / - TO THE RETURNED INCOME OF THE APPELLANT ON ACCOUNT OF THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDER SECTION 92 OF THE INCOME TAX ACT. GROUND NO. 4 OF THE APPEAL OF THE ASSESSEE IS CONTESTING VARIOUS ISSUES WITH RESPECT TO THE TRANSFER PR ICING ADJUSTMENT AND GROUND NO. 5 OF THE APPEAL OF THE ASSESSEE IS WITH RESPECT TO THE DENIAL OF THE BENEFIT OF 5% MARGIN UNDER THE PROVISO TO SECTION E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 12 92C (2) OF THE INCOME TAX ACT. THEREFORE, AS THE GROUND NO. 3, 4 AND 5 ARE RELATED TO THE TRANSFER PRICIN G ADJUSTMENT THEY ARE TAKEN TOGETHER. 18. ASSESSEE HAS ALSO MADE A REQUEST FOR ADMISSION OF ADDITIONAL GROUND OF APPEAL V IDE APPLICATION DATED 24/01/2017. ACCORDING TO THAT, THE ASSESSEE RAISE D A LEGAL GROUND BASED ON FACTS ALREADY ON RECORD FOR EXCLUSION OF TWO COMPARABLES NAMELY, VISHAL INFORMATION TECHNOLOGIES LTD AND ALPHA GEO ( INDIA ) P LTD. I T WAS SUBMITTED THAT THOUGH THE TRANSFER PRICING ADJUSTMENT HAS BEEN CONTESTED IN ITS TOTALITY ASSESSEE WOULD LIKE TO RAISE THIS SPECIFIC GROUND OF APPEAL. HE SUBMI TTED THAT THERE ARE NO FRESH FACTS REQUIRED TO BE AD DUCED AND IT GOES TO THE ROOT OF THE MATTER AND THEREFORE IT MAY KINDLY BE ADMITTED AND ADJUDICATED UPON. TO SUPPORT ITS ARGUMENT FOR ADMISSION OF THE GROUND , ASSESSEE RELIED ON THE DECISION OF THE H ONBLE SUPREME COURT IN THE CASE OF N ATIONAL T HERMAL P OWER CORPORATION 2 29 ITR 383 (SC). HE FURTHER SUBMITTED THAT THESE TWO COMPARABLES ARE NOT FUNCTIONALLY COMPARABLE AND THEREFORE CANNOT BE USED AS COMPARABLE FOR THE COMPARABILITY ANALYSIS OF THE INTER NATIONAL TRANSACTIONS OF THE ASSESSEE. HE FURTHER RELIED UPON THE DECISION OF TH E SPECIAL BENCH IN THE CASE OF D EPUTY COMMISSIONER OF I NCOME T AX VERSUS Q UARK SYSTEMS PRIVATE LIMITED ITA NO. 100/CHD/2009. THEREFORE, HE IMPRESSED THAT THE ABOVE GROUND OF APPEAL MAY KINDLY BE ADMITTED. 19. LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY OBJECTED TO THE ADMISSION OF THE ADDITIONAL GROUND STATING THAT THIS IS THE NEW CLAIM BEING MADE BY THE ASSESSEE. HE FURTHER SUBMITTED THAT THE ASS ESS EE HIMSELF HAS TAKEN THE ABOVE TWO FUNCTIONALLY COMPARABLE COMPANIES AND THEREFORE THE RE IS NO REASON THAT E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 13 WHY THESE TWO COMPANIES CAN BE EXCLUDED AS THEY ARE FUNCTIONALLY COMPARABLE. HE FURTHER SUBMITTED THAT ASSESSEE IS ALSO A KPO AND PROVIDING HIGH E ND IT ENABLED SERVICES AND THEREFORE IS FUNCTIONALLY COMPARABLE. HE FURTHER SUBMITTED THAT IF ASSESSEE NOW PLEADS THAT FUNCTIONAL PROFILE OF ASSESSEE IS DIFFERENT THAN THERE IS A FRESH INVESTIGATION OF FACT REQUIRED AND HENCE THE ADDITIONAL GROUND OF APPE AL RAISED BY THE ASSESSEE SHOULD NOT BE ADMITTED. 20. THE LD. AUTHORIZED REPRESENTATIVE CONTESTED THAT REGARDING THE TRANSFER PRICING MATTER (I) VISHAL INFORMATION TECHNOLOGIES LTD AND (II) ALPHA GEO INDIA LIMITED SHOULD BE EXCLUDED. FOR THIS, HE SUBMITTED T HAT VISHAL INFORMATION TECHNOLOGIES LTD IS A KNOWLEDGE PROCESS OUTSOURCING COMPANY AND CANNOT BE COMPARED WITH THE ASSESSEE. HE SUBMITTED THAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007 - 08 THAT CLEAR CUT FINDING IS GIVEN THAT ASSESSEE IS ENGAGED IN LOW E ND SERVICE/BACKOFFICE ENABLED ITES SUPPORT SERVICES AND HENCE CANNOT BE COMPARED TO A KNOWLEDGE PROCESS OUTSOURCING UNIT. HE FURTHER REFERRED TO THE DECISION OF THE HONBLE DELHI HIGH COURT IN CASE OF RAMPGREEN SOLUTIONS LTD 377 ITR 533 WHEREIN IT HAS BEEN STATED THAT VISHAL INFORMATION TECHNOLOGIES LTD IS A KPO AND HAS DISCUSSED THIS COMPARABLE IN DETAIL AND STATED THAT IT CANNOT BE COMPARED TO COMPANIES ENGAGED IN LOW AND SERVICES/BACKOFFICE ENABLED ITES SUPPORT SERVICES. HE FURTHER REFERRED TO T HE PL ETHORA OF DECISIONS WHEREIN THIS COMPARABLE COMPANY HAS HELD TO BE ENGAGED IN KPO BUSINESS. E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 14 21. WITH RESPECT TO ALPHA GEO INDIA LIMITED, HE SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE BECAUSE IT IS ENGAGED IN THE BUSINESS OF EXPLORATION AN D PRODUCTION OF OIL. HE FURTHER REFERRED TO FACTS MENTIONED ON THE WEBSITE OF THE COMPANY WHEREIN IT HAS BEEN STATED THAT IT IS ENGAGED IN PROVIDING SEISMIC SURVEY SERVICES TO THE OIL AND EXPLORATION, PRODUCTION, SECTOR. THE COMPANY PROVIDES VARIOUS SERVICES INCLUDING DESIGN AND PLANNING OF 2 - D AND 3 - D SURVEYS, SEISMIC DATA ACQUISITION IN 2 - D AND 3 - D, SEISMIC , DATA PROCESSING AND REPROCESSING/SPECIAL PROCESSI NG, SEISMIC DATA INTERPRETATION, SUCH AS GENERATION, EVALUATION AND RANKING OF PROSPECTS, RESERVOIR ANALYSIS. IT IS ALSO OFFERING TOPOGRAPHIC SURVEY WITH GPS AND ARTIE CAME, AIM TRANSCRIPTION, DIGITALIZATION OF ART COPY OF MAPS, SEISMIC SECTIONS AND WELL L OCKS INTO CGM/SEGY AND L A - S FORMATS. 22. WITH RESPECT TO INCLUSION OF TWO COMPARABLES, WHICH ARE LOSS MAKING IT WAS SUBMITTED BY THE LD. AUTHORIZED REPRESENTATIVE THAT MERELY BECAUSE THE COMPARABLE IS INCURRING LOSSES, IT CANNOT BE EXCLUDED. HE SUBMITTED THA T THE TPO HAS EXCLUDED TWO COMPARABLES ON THIS GROUND AND THEREFORE TWO COMPARABLES, WHICH ARE OTHERWISE COMPARABLE CANNOT BE INCLUDED ON THIS GROUND ALONE THEY SHOULD BE INCLUDED IN THE FINAL LIST OF COMPARABLES. FOR THIS PROPOSITION, HE RELIED UPON THE D ECISION OF THE HONBLE DELHI HIGH COURT IN CASE OF CHR Y S CAPITAL INVESTMENT ADVISERS INDIA PRIVATE LIMITED VERSUS DCIT 376 ITR 183. HE FURTHER SUBMITTED THAT IF ONE EXTREME IS EXCLUDED I.E. LOSS - MAKING COMPANIES ARE EXCLUDED THE N ON THE SAME BASE, ANOTHE R EXTREME PROFIT - MAKING COMPANY SHOULD ALSO BE EXCLUDED. E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 15 23. WITH RESPECT TO THE WORKING CAPITAL ADJUSTMENT, HE SUBMITTED THAT WORKING CAPITAL ADJUSTMENT SHOULD BE GRANTED TO THE ASSESSEE AND FOR THIS PROPOSITION, HE RELIED ON THE DECISION OF COORDINATE BENCH ES.HE FURTHER SUBMITTED THAT THE CAPACITY UNDERUTILIZATION ADJUSTMENT IN CASE OF THE COMPANY REFERRING SEVERAL DECISIONS OF THE COORDINATE BENCHES SHOULD BE GRANTED . 24. AGAINST THIS, THE LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY OBJECTED THAT THE PROFILE OF ASSESSEE COMPANY SUBMITTING THAT IT IS PROVIDING A HIGH - END IT ENABLED SERVICES. FOR THIS, HE REFERRED TO LETTER DATED 06/03/2017 FROM THE ASSESSING OFFICER TO THE SENIOR DEPARTMENTAL REPRESENTATIVE. ACCORDING TO THAT LATER. IT IS SUBMITTED THAT REVENUE IS UNDER PROCESS OF FILING OF MISCELLANEOUS APPLICATION IN THE ORDER OF THE COORDINATE BENCH IN ITA NO. 5 2 70/DEL/2012 AND CO 462/DEL/2012 PASSED BY THE COORDINATE BE NCH ON 13/12/2016. ACCORDING TO THAT LETTER, IT IS MENTIONED THAT THE COORDINATE BENCH HAS MISTAKENLY STATED THAT ASSESSEE IS NOT PROVIDING A HIGH - END IT ENABLED SERVICES, WHEREAS IN ASSESSEES OWN CASE FOR A Y 2005 06, THE TRIBUNAL HAS HELD THAT IT IS P ROVIDING A HIGH - END IT ENABLED SERVICES ON THE BASIS OF T P STUDY REPORT OF THE ASSESSEE FOR THAT YEAR. ON THAT BASIS, IT WAS SUBMITTED THAT THE ASSESSEE ITSELF HAS ADMITTED AND CLASSIFIED ITSELF IN THAT YEAR A S PROVIDING A HIGH - END IT ENABLED SERVICE S. THEREFORE, IT IS COMPARABLE WITH THE KPO AND THE DECISION CITED BY THE LD. AUTHORIZED REPRESENTATIVE OF DELHI HIGH COURT IN RAMPGREEN SOLUTIONS DO ES NOT APPLY TO THE FACTS OF THE CASE. FOR THE FUNCTIONAL PROFILE OF THE ASSESSEE, LD. DEPARTMENTAL REPRESE NTATIVE SUBMITTED THAT ASSESSEE IS THE CREATOR OF AN INDUSTRY WORTH BILLIONS OF RUPEES AND THE COMPANY OFFERS E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 16 INVESTMENT RESEARCH THAT ANALYTICS TECHNOLOGY RESEARCH AND BUSINESS RESEARCH SERVICES WORLDWIDE AND IS ONE OF THE HOTTEST DESTINATION FOR EMPLOYME NT SEEKERS. IT IS FURTHER SUBMITTED THAT IN THE WEBSITE ITSELF THAT EVALUE SERVE IS KNOWLEDGE PROCESS OUTSOURCING UNIT AND IT IS A HIGH - END KNOWLEDGE ORIENTED RESEA RCH AND ANALYTICS INDUSTRY AND ESERVE IS FRONTRUNNER. IT IS FURTHER MENTIONED THAT THAT THE COMPANY BELIEVES IN OFFERING ON CLINCHING FOCUS TOWARDS THE CORE SECTOR OF KNOWLEDGE PROCESS OUTSOURCING AND THIS FOCUS GIVES THAT THE TAG OF INDUSTRY LEADER AND AUTHORITY. HE REFERRED TO THE PRINT OUT WEBSITE. IN VIEW OF THIS, IT WAS SUBMITTED THAT T HERE IS NO REASON THAT ASSESSEES FUNCTIONAL PROFILE SHOULD BE LOOKED AT AS LOW E ND ITES PROVIDER. ACCORDING TO HIM IN FACT, IT IS A KPO AND BOTH THE COMPARABLES ARE CORRECTLY SELECTED BY THE TAXPAYER AS WELL AS TPO. 25. THE LD. DEPARTMENTAL REPRESENTATIV E ALSO PLACED ON RECORD WRITTEN SUBMISSION WITH RESPECT TO EXCLUSION OF PERSISTENT LOSS MAKING COMPANIES FILTER WITH RESPECT TO THE REJECTION OF 2 COMPARABLES OF THE ASSESSEE. HE SUBMITTED THAT THE FILTER IS A REASONABLE FILTER RELYING UPON THE DECISION O F THE COORDINATE BENCH IN CASE OF NAVISITE INDIA PRIVATE LIMITED 53 TAXMANN.COM 73 THAT DIMINISHING REVENUE/PERSISTENT LOSSES ARE NOT IN CONFORMITY WITH THE NORMAL OPERATIONAL RESULTS AND THUS THE COMPANIES INCURRING LOSSES CANNOT BE TAKEN AS A COMPARABLE. HE FURTHER REFERRED TO THE DECISION OF THE COORDINATE BENCH IN CASE OF AITHENT TECHNOLOGIES PRIVATE LIMITED VERSUS DCIT 74 TAXMANN.COM 214 WHEREIN THE IDENTICAL FILTER WAS APPROVED BY THE COORDINATE BENCH. E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 17 26. THE LD. DEPARTMENTAL REPRESENTATIVE FURTHER OBJEC TED TO THE CLAIM OF THE ASSESSEE THAT VISHAL INFORMATION TECHNOLOGIES P LTD AND ALPHA GEO SHOULD BE EXCLUDED. FOR THIS, HE SUBMITTED THAT IN THE ORIGINAL ACCEPT/ REJECT MATRIX OF THE ASSESSEE BOTH THESE COMPARABLES WERE SELECTED. HOWEVER, THERE IS NO SPECIFIC REASON HAS BEEN GIVEN FOR EXCLUSION OF THESE COMPARABLES BY ASSESSEE. THEREFORE IT IS APPARENT THAT ACCORDING TO THE ASSESSEE ALSO THESE ARE FUNCTIONALLY COMPARABLE BUT FOR THE REASON OF THEIR HIGHER MARGINS. THESE TWO COMPANIES HAVE BEEN EXCLUDED BY THE ASSESSEE. HE FURTHER SUBMITTED THAT BOTH COMPARABLES ARE IN KPO SERVICES LIKE ASSESSEE. 27. FURTHER, WITH RESPECT TO THE CLAIM OF ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZATION . IT WAS SUBMITTED THAT ASSESSEE HAS NOT CLAIMED IN ITS TP STUDY REPORT THE A BOVE UNDER CAPACITY UTILIZATION ADJUSTMENT. HE SUBMITTED THAT ACCORDING TO THE SECTIONS 92E OF THE INCOME TAX ACT THE ASSESSEE IS REQUIRED TO OBTAIN REPORT FROM AN INDEPENDENT ACCOUNTANT. THEREFORE THAT PARTICULAR REPORT, WHEREIN THE UNDER CAPACITY UTILIZA TION WAS NOT MADE ASSESSEE IS NOT ENTITLED TO CLAIM IT. FOR THIS PROPOSITION HE ALSO RELIED ON THE DECISION OF COORDINATE BENCH IN CASE OF A TENT TECHNOLOGIES PRIVATE LIMITED VERSUS DCIT 74 TAXMANN.COM 214 WHEREIN IT HAS BEEN HELD THAT ADJUSTMENT, IF ANY, COULD HAVE BEEN ALLOWED. IF THE ASSESSEE ARE DEMONSTRATED THAT THE COMPARABLE COMPANIES HAD MORE UNDER UTILIZATION OF THE LABOUR FORCE COMPARED TO ASSESSEE. THE ONUS TO PROVE SUCH UNDER UTILIZATION OF EMPLOYEES OF THE COMPARABLE FOR CLAIMING ADJUSTMENT SQU ARELY LIES ON THE ASSESSEE. HE FURTHER RELIED ON THE DECISION OF THE COORDINATE BENCH IN CASE OF I.E. ION TRADING INDIA PRIVATE LIMITED VERSUS ITO E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 18 ITA NO. 1035/PE L/2015 DATED 07/12/2015 WHEREIN IT IS BEEN HELD THAT NO CAPACITY UTILIZATION ADJUSTMENT CAN B E MADE IN CASE OF COMPARABLES IN CASE OF US ARE CAPTIVE SERVICE PROVIDER. AS THE ASSESSEE IS ALSO A CAPTIVE SERVICE PROVIDER IT CANNOT BE GRANTED ABOVE ADJUSTMENT. HE FURTHER RELIED UPON THE DECISION OF THE COURT IN IT BENCH IN CASE OF FCI ION CONNECTORS LTD VERSUS ACIT ITA NO. 70/COCH/2016 WHEREIN IT IS BEEN HELD THAT ADJUSTMENT FOR UNDER UTILIZATION OF CAPACITY CAN BE GIVEN ONLY WHEN THE REASONS FOR UNDER UTILIZATION ARE GIVEN BY THE ASSESSEE. THEREFORE, HE VEHEMENTLY OBJECTED TO THE CLAIM OF THE ASSESS EE FOR GRANTING ADJUSTMENT AND ON ACCOUNT OF CAPACITY UTILIZATION . 28. WITH RESPECT TO THE WORKING CAPITAL ADJUSTMENT. IT WAS SUBMITTED BY HIM THAT ASSESSEE IS NOT CLAIMED IN ITS TP STUDY REPORT. HE FURTHER SUBMITTED THAT ASSESSEE IS NOT ESTABLISHED THAT WHY W ORKING AT CAPITAL ADJUSTMENT SHOULD BE GRANTED TO THE ASSESSEE. HE FURTHER SUBMITTED THAT THERE IS NO WORKING ALSO GIVEN BY THE ASSESSEE AND ALSO JUSTIFICATION FOR THE CLAIM HAS ALSO NEITHER BEEN SUBMITTED BEFORE THE LD. TRANSFER PRICING OFFICER/LD. DRP AS WELL AS BEFORE THE COORDINATE BENCH. 29. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. WE HAVE ALSO PERUSED VARIOUS DECISIONS RELIED UP ON BY THE PARTIES. FIRSTLY , COMING TO THE ISSUE OF ADMISSION OF ADDITIONAL GROUND OF THE ASSESSEE , ASSESSEE HAS TAKEN TWO COMPARABLES IN ITS TRANSFER PRICING STUDY REPORT AND CONTINUED TO SUPPORT THEM BEFORE LD TPO AS WELL AS LD DRP AND ALSO DID NOT OBJECT IT BEFORE ITAT IN THE FIRST ROUND OF APPEAL , E VEN IN THE SECOND ROUND OF PROCEEDINGS BEFORE DRP ASSESS EE DID NOT OBJECT FOR EXCLUSION OF THESE TWO E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 19 COMPARABLES. SUDDENLY IN APPEAL BEFORE US IN SECOND ROUND IT HAS OBJECTED TO THE INCLUSION OF TWO COMPARABLES. IT IS DISGUSTING TO NOTE THAT ASSESSEE HAS FIELD ITS RETURN OF INCOME IN 2006 AND CONTI NUED TO CONTEST THE TRANSFER PRICING ADJUSTMENTS UP TO 2017 AND THEN ARGUING FOR EXCLUSION OF COMPARABLES IN 2017 . A SSESSEE HAS PLACED STRONG RELIANCE ON THE DECISION OF SPECIAL BENCH OF TRIBUNAL IN CASE OF DCIT V QUARK SYSTEMS PRIVATE LIMITED ( 201 0] 4 ITR(T) 606 (CHANDIGARH) (SB)/[2010] 38 SOT 307 (CHANDIGARH) (SB)/[2010] 132 TTJ 1 (CHANDIGARH) (SB) WHICH HAS ALLOWED THE ASSESSEE TO RESILE FORM THE COMPARABLE I.E. DATAMATICS LIMITED THOUGH INCLUDED IN THE TP STUDY REPORT BY ASSESSEE. THE SP ECIAL BENCH HELD AS UNDER : - 9. IN ADDITION TO THE ABOVE TWO ISSUES, ONE MORE ISSUE IS RAISED FOR OUR CONSIDERATION. THIS IS RAISED BY THE ASSESSEE AS AN ADDITIONAL GROUND OF APPEAL. IT IS ASSESSEES CONTENTION THAT ONE OF THE INDEPENDENT COMPARABLE WHIC H HAS BEEN INCLUDED BY THE ASSESSEE AS ALSO BY THE TPO HAS BEEN WRONGLY INCLUDED IN THE COMPARABLE FOR MORE REASONS THAN ONE. FIRSTLY, ACCORDING TO THE ASSESSEE, IN THE CASE OF DATA MATRIX TECHNOLOGIES LTD., OUT OF TOTAL SALES OF RS. 54.85 CRORES, ITS TRAN SACTIONS WITH THE ASSOCIATED CONCERN AMOUNT TO RS. 17.15 CRORES WHICH WORKS OUT TO 31.27 PER CENT OF THE TOTAL SALES MADE BY THE DATAMATICS TECHNOLOGIES LTD. THE ASSESSEE SUBMITS AS IS THE ACCEPTED TRANSFER PRICING PRACTICE IN TERMS OF O.E.C.D. GUIDELINES, AS ALSO SANCTION BY LAW IN INDIA, SUCH TRANSACTIONS WITH THE ASSOCIATED PARTIES CANNOT BE CONSIDERED AS UNCONTROLLED TRANSACTIONS. IT IS ALSO SUBMITTED THAT THERE IS AN ARITHMETICAL ERROR ON ACCOUNT OF WHICH OPERATING EXPENSES OF RS. 579 CRORES WERE NOT TAKEN INTO ACCOUNT WHILE AGGREGATING TOTAL EXPENDITURE AS A RESULT OF WHICH THE ORIGINAL PROFIT TO COST RATIO WORKED OUT TO 138.46 PER CENT . THE ASSESSEES CO NTENTION IS THAT THE INCLUSION OF THIS COMPARABLE, WHICH TAKES INTO ACCOUNT PROFIT ON COST AT 138.46 PER CENT HAS VITIATED THE TRANSFER PRICING ANALYSES. IT IS SUBMITTED THAT THIS MISTAKE IS AN INADVERTENT MISTAKE AND IN ANY EVENT SINCE THE CIT(A) HAD BALA NCE SHEET OF THE DATA MATRIX TECHNOLOGIES LTD. BEFORE WHOM HE OUGHT TO HAVE BEEN TAKEN INTO ACCOUNT THE CORRECT POSITION. WITHOUT PREJUDICE E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 20 TO THE ARGUMENT THAT DATAMATICS TECHNOLOGIES LTD., FOR THE ABOVE REASONS, SHOULD NOT BE INCLUDED AS A COMPARABLE AT ALL. THE ASSESSEE ALSO CONTENDS THAT IN ANY EVENT REVISED OPERATING MARGIN TO COST RATIO IS 93.06 PER CENT WHICH WOULD HAVE BEEN TAKEN INTO ACCOUNT IN THE COMPUTATION OF MEAN PROFIT AND COMPARABLE ENTITIES. IN EFFECT, THUS, WE ARE ALSO CALLED UPON TO ADJUD ICATE, SUBJECT TO ADMISSION OF THIS ADDITIONAL GROUND SO RAISED BY THE ASSESSEE, AS TO WHETHER OR NOT DATAMATICS TECHNOLOGIES LTD. SHOULD BE EXCLUDED FROM THE COMPARABLES. XXXXX 27. WE CAN NOW PROCEED TO CONSIDER THE QUESTION OF EXCLUSION OF DATAMATICS FR OM THE LIST OF COMPARABLE IN COMPUTATION OF ARMS LENGTH PRICE. THE RELEVANT FACTS HAVE BEEN STATED BY SHRI AGGARWAL AND IT IS AN ADMITTED POSITION THAT SOME FUNDAMENTAL MISTAKES HAVE BEEN COMMITTED IN COMPUTATION OF THE PROFIT RATIO AS WELL. IT WILL INDEE D BE GROSS MISCARRIAGE OF JUSTICE, IF WE ALLOW THESE MISTAKES TO BE PERPETUATED. WE FURTHER ADD THAT ALL THE DATA, TO WHICH REFERENCE HAS BEEN MADE BY SHRI AGGARWAL IS AVAILABLE IN THE BALANCE SHEET OF DATAMATICS AND IS PART OF RECORD AVAILABLE IN PUBLIC D OMAIN IT WILL NOT BE CORRECT TO HAVE LOPE - SIGHTED VIEW AND MAKE SELECTION OF SUCH FIGURE AS WOULD SERVE ONES PURPOSE. EVERY DETAIL IN THE PROCESS FOR DETERMINATION OF FAIR ARMS LENGTH PRICE, AS IS RELEVANT, HAS TO BE CONSIDERED SO THAT A FAIR VIEW IS ADO PTED. RELEVANT PROVISIONS OF TRANSFER PRICING 28. AT THIS STAGE, WE DEEM IT NECESSARY TO REFER TO THE RELEVANT INDIAN REGULATIONS ON TRANSFER PRICING AND TO SOME CASE LAWS. 29. UNDER RULE 10B OF INCOME - TAX RULES, PROVISION IS MADE FOR VARIOUS METHODS FOR DETERMINATION OF ARMS LENGTH PRICE. CLAUSE ( E ) OF THIS RULE RELATES TO THE STEP REQUIRED TO BE TAKEN WHERE TRANSACTIONAL NET MARGIN METHOD (TNMM) IS APPLIED. SUB - CLAUSE ( I ) OF THE SAID SUB - RULE IS AS UNDER: E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 21 '10B. DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 92C. ( E ) TRANSACTIONAL NET MARGIN METHOD, BY WHICH ( I )THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATE D ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE:' THE AFORESAID SUB - CLAUSE HAS BEEN REPRODUCED ONLY TO EMPHASIZE THAT EVEN UNDER TNM M INDIAN REGULATIONS ATTACH CONSIDERABLE SIGNIFICANCE TO 'ASSETS EMPLOYED OR TO BE EMPLOYED' AND MUST BE TAKEN INTO CONSIDERATION; THEN SUB - RULE (2) OF RULE 10B REQUIRES APPLICATION OF FAR TEST FOR JUDGING COMPARABILITY OF INTERNATIONAL TRANSACTION WITH UN CONTROLLED TRANSACTION AND IS AS UNDER : '10B(2) FOR THE PURPOSES OF SUB - RULE (1), THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY ( A )THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B )THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( C )THE CONTRACTUAL TERMS (WHET HER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 22 ( D )CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE TAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL.' 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. THEREFORE, 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 ABOV E CONTENTION. IN THE FIRST PLACE, THESE ARE INITIAL YEARS OF IMPLEMENTATION 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. BESIDES, REVENUE AUTHORITIES, INCLUDING TPO WERE REQUIRED TO APPLY STATUTORY PROVISIONS AND CONSIDER FOR PURPOSES OF COMPARISON FUNCTIONS, ASSETS AND RISKS (TURNOVER), PROFIT AND TECHNOLOGY EMPLOYED BY THE TESTED PARTY AND OTHER ENTERPRISE S TAKEN AS COMPARABLE STATUTORY DUTY IS CAST ON THEM TO UNDERTAKE ABOVE EXERCISE. THIS HAS NOT BEEN DONE IN THIS CASE. WE WOULD ONLY SAY THAT PRIMA FACIE , AS PER THE MATERIAL, TO WHICH REFERENCE HAS BEEN DRAWN BY SHRI AGGARWAL. DATAMATICS DOES NOT APPEAR T O BE COMPARABLE. EVEN IF THE TAXPAYER OR ITS COUNSEL HAD TAKEN DATAMATICS AS COMPARABLE IN ITS I P AUDIT, THE TAXPAYER IS ENTITLED TO POINT OUT TO THE TRIBUNAL THAT ABOVE ENTERPRISE HAS WRONGLY BEEN TAKEN AS COMPARABLE. IN FACT THERE ARE VAST DIFFERENCES B ETWEEN TESTED PARTY AND THE DATAMATICS. THE CASE OF DATAMATICS IS LIKE THAT OF 'IMERCIUS TECHNOLOGIES' REPRESENTING EXTREME POSITIONS. IF IMERCIUS TECHNOLOGIES HAS SUFFERED HEAVY LOSSES AND, THEREFORE, IT IS NOT TREATED AS COMPARABLE BY THE TAX AUTHORITIES , THEY ALSO HAVE TO CONSIDER THAT THE DATAMATICS HAS EARNED EXTRAORDINARY PROFIT AND HAS A HUGE TURNOVER. BESIDES DIFFERENCES IN ASSETS AND OTHER CHARACTERISTICS REFERRED TO BY SHRI AGGARWAL. THE INCOME - TAX APPELLATE TRIBUNAL IS A FACT - FINDING BODY AND, TH EREFORE, HAS TO TAKE INTO ACCOUNT ALL THE RELEVANT MATERIAL AND DETERMINE THE QUESTION AS PER THE STATUTORY REGULATIONS. E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 23 31. IN THE CASE OF CIT V. BHARAT GENERAL REINSURANCE CO. LTD. [1971] 81 ITR 303 , THE HONBLE DELHI HIGH COURT OBSERVED AS UNDER : 'IT IS TRUE THAT THE ASSESSEE ITSELF HAD INCLUDED THAT DIVIDEND INCOME IN IS RETURN FOR THE YEAR IN QUESTION BUT THERE IS NO ESTOPPEL IN THE INCOME - TAX ACT AND THE ASSESSEE HAVING ITSELF CHALLENGED THE VALIDITY OF TAXING THE DIVIDEND DURING THE YEAR OF ASSESSMENT IN QUESTION IT MUST BE TAKEN THAT IT HAD RESILED FROM THE POSITION WHICH IT HAD WRONGLY TAKEN WHILE FILIN G THE RETURN. QUIT APART FROM IT, IT IS INCUMBENT ON THE INCOME - TAX DEPARTMENT TO FIND OUT WHETHER A PARTICULAR INCOME WAS ASSESSABLE IN THE PARTICULAR YEAR OR NOT. MERELY BECAUSE THE ASSESSEE WRONGLY INCLUDED THE INCOME IN ITS RETURN FOR A PARTICULAR YEAR , IT CANNOT CONFER JURISDICTION ON THE DEPARTMENT TO TAX THAT INCOME IN THAT YEAR EVEN THOUGH LEGALLY SUCH INCOME DID NOT PERTAIN TO THAT YEAR.' 32. IN THE CASE OF R.B. JESSARAM FATEHCHAND V. CIT [1971] 81 ITR 409 (ALL.), IT HAS BEEN FOUND AND OBSERVED AS UNDER: 'MR. BRIJLAL GUPTA APPEARING FOR THE DEPARTMENT POINTED OUT THAT THE ASSESSEE ITSELF FILED SEPARATE RETURNS FOR THE TWO PARTS OF A SINGLE ACCOUNTING PERIOD. THE ASSE SSEE APPLIED FOR REGISTRATION FOR THE FIRST PERIOD ONLY. THE ASSESSMENT FOR THE SECOND PERIOD PROCEEDED AS AGAINST AN UNREGISTERED FIRM. IT WAS, THEREFORE, URGED BY MR. GUPTA THAT IT IS NOT OPEN TO THE ASSESSEE TO URGE NOW THAT A SINGLE ASSESSMENT UNDER SE CTION 26(1) OUGHT TO HAVE BEEN MADE. NOW, THERE CANNOT BE AN ESTOPPEL AGAINST STATUTE. IF IN FACT THE PROCEDURE ADOPTED BY THE INCOME - TAX OFFICER WAS INCORRECT, THE DEFECT IS NOT CURED BY THE ATTITUDE TAKEN UP BY THE ASSESSEE.' 33. IN THE CASE OF CIT V. C. PARAKH & CO. (INDIA) LTD. [1956] 29 ITR 661 , THEIR LORDSHIPS OF SUPREME COURT MADE THE FOLLOWING OBSERVATIONS: 'ON THE QUESTION OF THE ADMISSIBILITY OF THE DEDUCTION OF RS. 1,23,719, THE CONTENTION OF THE APPELLANT IS THAT AS THE RESPONDENT HAD ITSELF SPLIT UP THE COMMISSION OF RS. 3,12,699 PAID TO THE MANAGING AGENTS, E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 24 AND APPROPRIATED RS. 1,23,719 THEREOF TO THE P ROFITS EARNED AT KARACHI AND HAD DEBITED THE SAME WITH IT, IT WAS NOT ENTITLED TO GO BACK UPON IT, AND CLAIM THE AMOUNT AS A DEDUCTION AGAINST THE INDIAN PROFITS. WE DO NOT SEE ANY FORCE IN THIS CONTENTION. WHETHER THE RESPONDENT IS ENTITLED TO A PARTICULA R DEDUCTION OR NOT WILL DEPEND ON THE PROVISION OF LAW RELATING THERETO, AND NOT ON THE VIEW WHICH IT MIGHT TAKE OF ITS RIGHTS, AND CONSEQUENTLY, IF THE WHOLE OF THE COMMISSION IS UNDER THE LAW LIABLE TO BE DEDUCTED AGAINST THE INDIAN PROFITS, THE RESPONDE NT CANNOT BE ESTOPPED FROM CLAIMING THE BENEFIT OF SUCH DEDUCTION, BY REASON OF THE FACT THAT IT ERRONEOUSLY ALLOCATED A PART OF IT TOWARDS THE PROFITS EARNED IN KARACHI. WHAT HAS, THEREFORE, TO BE DETERMINED IS WHETHER, NOTWITHSTANDING THE APPORTIONMENT M ADE BY THE RESPONDENT IN THE PROFIT AND LOSS STATEMENTS, THE DEDUCTION IS ADMISSIBLE UNDER THE LAW.' 34. IN THE CASE OF CIT V. V.MR.P. FIRM, MUAR [1965] 56 ITR 67 , THE FOL LOWING OBSERVATIONS OF THEIR LORDSHIPS OF SUPREME COURT ARE AS UNDER : 'THE DECISION IN AMARENDRA NARAYAN ROY V. CIT AIR 1954 CAL. 271 HAS NO BEARING ON THE QUESTION RAISED BEFORE US. THERE THE CONCESSIONAL SCHEME TEMPTED THE ASSESSEE TO DISCLOSE VOLUNTARI LY ALL HIS CONCEALED INCOME AND HE AGREED TO PAY THE PROPER TAX UPON IT. THE AGREEMENT THERE RELATED TO THE QUANTIFICATION OF TAXABLE INCOME BUT IN THE PRESENT CASE WHAT IS SOUGHT TO BE TAXED IS NOT A TAXABLE INCOME. THE ASSESSEE IN SUCH A CASE CAN CERTAIN LY RAISE THE PLEA THAT HIS INCOME IS NOT TAXABLE UNDER THE ACT. WE, THEREFORE, REJECT THIS PLEA.' 35. IN PARA 4.16 OF LATEST REPORT, THE OECD PROVIDES THE FOLLOWING GUIDELINES : 'IN PRACTICE, NEITHER COUNTRIES NOR TAXPAYERS SHOULD MISUSE THE BURDEN OF PROO F IN THE MANNER DESCRIBED ABOVE. BECAUSE OF THE DIFFICULTIES WITH TRANSFER PRICING ANALYSIS, IT WOULD BE APPROPRIATE FOR BOTH TAXPAYERS AND TAX ADMINISTRATIONS TO TAKE SPECIAL CARE AND TO USE RESTRAINT IN RELYING ON THE BURDEN OF PROOF IN THE COURSE OF THE EXAMINATION OF A TRANSFER PRICING CASE. MORE PARTICULARLY, AS A MATTER E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 25 OF GOOD PRACTICE THE BURDEN OF PROOF SHOULD NOT BE MISUSED BY TAX ADMINISTRATIONS OR TAXPAYERS AS A JUSTIFICATION FOR MAKING GROUNDLESS OR UNVERIFIABLE ASSERTIONS ABOUT TRANSFER PRICIN G. A TAX ADMINISTRATION SHOULD BE PREPARED TO MAKE GOOD FAITH SHOWING THAT ITS DETERMINATION OF TRANSFER PRICING IS CONSISTENT WITH THE ARMS LENGTH PRINCIPLE EVEN WHERE THE BURDEN OF PROOF IS ON THE TAXPAYER, AND THE TAXPAYERS SIMILARLY SHOULD BE PREPARED TO MAKE GOOD FAITH SHOWING THAT THEIR TRANSFER PRICING IS CONSISTENT WITH THE ARMS LENGTH PRINCIPLE REGARDLESS OF WHERE THE BURDEN OF PROOF LIES.' 36. THE AFORESAID DECISIONS AND GUIDELINES MAY NOT BE EXACTLY ON IDENTICAL FACTS BEFORE US BUT THEY EMPHATI CALLY SHOW THAT TAXPAYER IS NOT ESTOPPED FROM POINTING OUT A MISTAKE IN THE ASSESSMENT THOUGH SUCH MISTAKE IS THE RESULT OF EVIDENCE ADDUCED BY THE TAXPAYER. 37. WHEN SUBSTANTIAL JUSTICE AND TECHNICAL CONSIDERATIONS ARE PITTED AGAINST EACH OTHER, THE CAUSE OF SUBSTANTIAL JUSTICE DESERVES TO BE PREFERRED. FOR THE OTHER SIDE CANNOT CLAIM TO HAVE A VESTED RIGHT IN INJUSTICE BEING DONE DUE TO SOME MISTAKES ON ITS PART. 38. ACCORDINGLY, ON FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD THAT TAXPAYER IS NOT ESTOPPE D 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 ME RIT EXCEPT OBSERVING THAT ASSESSEE FROM RECORD HAS SHOWN ITS PRIMA FACIE CASE. FURTHER CLAIM MAY BE EXAMINED BY THE ASSESSING OFFICER. THIS COURSE WE ADOPT AS OBJECTION TO THE INCLUSION OF DATAMATICS AS COMPARABLE HAS BEEN RAISED NOW AND NOT BEFORE REVENUE AUTHORITIES. THEREFORE, WE DEEM IT FIT AND PROPER TO REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR CONSIDERATION OF CLAIM OF THE TAXPAYER AND MAKE A DE NOVO ADJUDICATION OF THE ARMS LENGTH PRICE AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE ORDER ACCORDINGLY. 39. WE HAVE, HOWEVER, ALSO NOTED THAT THE VERY BASIS OF SELECTION OF COMPARABLES AND APPLICATION OF FILTERS LEAVES LOT TO BE DESIRED. AS WE HAVE NOTED EARLIER AS WELL, THE TRANSFER PRICING WAS IN THE INITIAL ST AGES IN THIS YEAR AND WE ARE INCLINED TO TAKE A RATHER LIBERAL APPROACH BY E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 26 GIVING ASSESSEE AN OPPORTUNITY TO MAKE OUT ITS CASE PROPERLY AND PLACE ALL THE RELEVANT FACTS BEFORE THE TAX AUTHORITIES SO THAT PROPER ARMS LENGTH PRICE CAN BE DETERMINED IN ACCOR DANCE WITH THE LAW THE PROCEEDINGS BEFORE THE TAX AUTHORITIES ARE NOT ADVERSARIAL PROCEEDINGS AND THE ASSESSEE SHOULD NOT, THEREFORE, BE PLACED AT UNDER ADVANTAGE BECAUSE OF HIS INADVERTENT AND BONA FIDE MISTAKES. WITH THIS OBJECTIVE IN SIGHT, AND HAVING NO LED INCONSISTENCIES IN SELECTION OF COMPATIBLES, WHILE WE UPHOLD THE EXCLUSION OF IMERCIUS FROM COMPARABLES, WE ALSO DEEM IT FIT AND PROPER TO REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATIO N DE NOVO IN THE LIGHT OF THE ABOVE OBSERVATIONS AND IN ACCORDANCE WITH THE LAW. WE DIRECT THE ASSESSEE TO PLACE ALL THE RELEVANT MATERIAL BEFORE THE ASSESSING OFFICER AND/OR TRANSFER PRICING OFFICER AND FULLY CO - OPERATE IN EXPEDITIOUS DISPOSAL OF THE MATT ER IN ACCORDANCE WITH THE LAW. THE MATTER STANDS RESTORED TO THE FILE OF THE ASSESSING OFFICER AS SUCH. [ EXTRACTED FROM TAXMANN.COM , UNDERLINE SUPPLIED BY US] 30. ON PERUSING THE ABOVE DECISION IT IS APPARENT THAT ASSESSEE WAS ALLOWED TO RESILE FROM THE C OMPARABLE SELECTED BY IT FOR THE REASON THAT A. THOSE WERE THE INITIAL YEARS OF T P ASSESSMENTS , B. THE ASSESSEE SHOWED THAT RELATED PARTY TRANSACTION IN THE COMPARABLES CASE WERE 31 % AND C. THERE WAS ERROR IN COMPUTATION OF MARGIN OF COMPARABLES. . D. FURTH ER IN THAT CASE ASSESSEE RESILED FROM THAT COMPARABLE BEFORE TRIBUNAL IN 2009 WHERE THE APPEAL FOR AY 2004 - 05 WAS BEING HEARD. 31. HOWEVER IN THE PRESENT CASE WE ARE DECIDING THE APPEAL OF THE ASSESSEE FOR AY 2006 - 07 IN 2017 I.E. AFTER 11 YEARS AND THE APPEAL OF THE ASSESSEE HAS ALREADY TRAVELLED ONCE BEFORE THE COORDINATE BENCH AND TWICE BEFORE LD DRP. FURTHER BEFORE US IT IS A LSO NOT STATED THAT FOR WHAT REASON ASSESSEE IS RESILING FROM THE EARLIER STAND . NO ERRORS OR MISREADING ORIGINALLY IS ALSO POINTED OUT BEFORE US WITH RESPECT TO BOTH THE COMPARABLES. ASSESSEE HAS ALSO NOT POINTED OUT THAT HOW THESE COMPARABLES WERE ORIGINALLY SELECTED AND E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 27 NOW IT IS SAID THAT THEY ARE FUNCTIONALLY DISSIMILAR. HENCE, MERELY MAKING A REFERENCE ABOUT THEIR FUNCTIONAL DISSIMILARITY WITHOUT POINTING OUT SPECIFIC FUNCTIONAL DISSIMILARITY IN THE FUNCTION OF ASSESSEE VIS A VIS COMPARABLE PRIMA FACIE, ASSESSEE CANNOT BE ALLOWED TO RESILE FROM COMPARABLES SELECTED BY IT. THIS SHOWS THAT ASSESSEE HAS TAKEN GOVERNMENT MACHINERY FOR A RIDE FOR 11 YEARS. THEREFORE THE CLAIM OF THE ASSESSEE FOR ADMISSION OF ADDITIONAL GROUND IS ON WEAK FOOTING EXCEPT THAT ASSESSMENT YEAR INVOLVED IS AY 2006 - 07 WHICH IS VERY NEAR TO THE ASSESSMENT YEAR ( AY 2004 - 05) FOR WHICH APPEAL IS DECIDED BY THE SPECIAL BENCH IN DCIT V QUARK SYSTEMS P LTD. (SUPRA) , HO LDING THAT THOSE WERE THE INITIAL YEARS OF T P ASSESSMENTS. COORDINATE BENCH HAS NOT LAID DOWN A LAW THAT ANYTIME AND EVERY TIME ASSESSEE CAN RESILE FROM A COMPARABLE. THEREFORE , AFTER POINTING OUT ABOVE FACTS, RESPECTFULLY FOLLOW ING WE ADMIT THE ADDITIO NAL GROUND OF APPEAL OF THE ASSESSEE IN INTEREST OF JUSTICE. 32. NOW, THERE ARE ISSUES WITH RESPECT TO THE DETERMINATION OF FUNCTIONAL PROFILE OF THE ASSESSEE WHETHER IT IS HIGH END SERVICE PROVIDER OR LOW - END SERVICE PROVIDER. THE LD AR HAS ARGUED ON THE PREMISES THAT ASSESSEE I S A LOW END I T ENABLED SERVICE PROVIDER BASED ON PARA NO 5 OF THE ORDER OF THE COORDINATE BENCH FOR AY 2007 - 08 WHERE AS THE REVENUE HAS SUBMITTED THAT ASSESSEE IS A HIGH END ITES SERVICES PROVID ER AND IS ENGAGED IN THE BUSINESS OF KNOWLEDGE MANAGEMENT SERVICES RELYING ON PARA NO 43 OF THE ORDER OF THE COORDINATE BENCH IN CASE OF THE ASSESSEE FOR AY 2005 - 06. IN ITA E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 28 NO 393/DEL/2010 AND CO NO 85/DEL/2010 DATED 30/9/2016 FOR AY 2007 - 08 IT HAS B EEN HELD THAT : - 38. LD. COUNSEL POINTED OUT THAT ASSESSEE IS ONLY IN DATA CALCULATION AND THERE IS NO VALUE ADDITION AT ASSESSEE'S END. ASSESSEE ACTUALLY ACTS AS SUPPORT SERVICE PROVIDER. LD. COUNSEL RELIED ON THE DECISION OF THE HON'BLE DELHI HIGH COUR T IN THE CASE OF RAMPGREEN SOLUTION PVT. LTD. VS. CIT (ITA NO. 102/2015 DATED 10.08.2015) 377 ITR 533, WHEREIN THE HON'BLE DELHI HIGH COURT HAS NOTED WITH REFERENCE TO THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN MAERSK GLOBAL CENTERS (INDIA ) PVT. LTD . (ITA 7466/MUM/2012), THAT THERE MIGHT BE A CASE WHERE AN ENTITY MAY BE RENDERING A MIX OF SERVICES, SOME OF WHICH MAY BE FUNCTIONALLY COMPARABLE TO KPO WHILE OTHER SERVICES MAY NOT. IN SUCH CASE, CLASSIFICATION OF BPO AND KPO MAY NOT BE FEASIBLE. ACCORDI NGLY, IT WAS HELD THAT NO STRAIT JACKET FORMULA CAN BE APPLIED. FURTHER, IT WAS HELD THAT IN CASE WHERE THE CATEGORIZATION OF SERVICES RENDERED CANNOT BE DEFINED WITH CERTAINTY, IT WOULD BE APPOSITE TO EMPLOY THE BROAD FUNCTIONALITY TEST AND THEN EXCLUDE U NCONTROLLED ENTITIES, WHICH WERE FOUND TO BE MATERIALLY DISSIMILAR IN ASPECTS AND FEATURES THAT HAVE A BEARING ON THE PROFITABILITY OF THOSE ENTITIES. 39. IT WAS FURTHER HELD THAT WHERE THE CONTROLLED TRANSACTIONS WERE CLEARLY IN THE NATURE OF LOW - END ITES SUCH AS CALL CENTRES ETC., FOR RENDERING DATA PROCESSING NOT INVOLVING DOMAIN KNOWLEDGE, INCLUSION OF ANY KPO SERVICE PROVIDER AS A COMPARABLE WOULD NOT BE WARRANTED. E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 29 XXXX 43. NOTHING HAS BEEN BROUGHT ON RECORD TO CONTROVERT THE FINDINGS RECORDED BY LD. CIT(A). IT IS NOT DISPUTED THAT ASSESSEE IS NOT IN SOFTWARE DEVELOPMENT SERVICES AND IS PRIMARILY PROVIDING IT ENABLED SERVICES TO ITS AES. IN THE TP STUDY IT HAS BEEN DESCRIBED AS HIGH END IT ENABLED SERVICE BECAUSE THE ASSESSEE CONDUCTS RESEARCH ACTIVIT Y AND PROVIDES KNOWLEDGE MANAGEMENT SERVICES TO ITS AES. BUT THIS COULD NOT BE COMPARED WITH A COMPANY WHICH WAS ENGAGED IN SOFTWARE DEVELOPMENT SERVICES. THE ASSESSEE'S ESSENTIAL SERVICE WERE IT ENABLED SERVICES ONLY. WE, ACCORDINGLY, CONFIRM THE ORDER OF LD. CIT(A) ON THIS COUNT. [ EMPHASIS SUPPLIED BY US] 33. IN ITA NO. 5270/DEL/2012 FOR ASSESSMENT YEAR 2007 08 COORDINATE BENCH IN ASSESSEES OWN CASE VIDE PARA NO. 5 HAS HELD AS UNDER: - 5. WE HAVE PERUSED THE SUBMISSIONS ADVANCED BY BOTH THE SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. ON PERUSAL OF THE ORDER OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2005 06 IN ITA NO. 393/DEL/2010, WE ALSO THAT ASSESSEE HAS BEEN TREATED AS A LOW AND ITES SERVICE PROVIDER, RENDERING DATA PROCESSI NG ERRED IN IT ENABLED SERVICES WHO IS NOT INVOLVED IN DOMAIN KNOWLEDGE SO AS TO INCLUDE ANY YEAR SERVICE PROVIDER AS A COMPARABLE (REFER PARAGRAPH 38 39 OF THE DECISION). 34. ON READING OF THE ABOVE DECISION IT IS APPARENT THAT COORDINATE BENCH IN ITS OR DER FOR AY 2007 - 08 WHILE READING THE ORDERS FOR AY 2005 - 06 OF THE E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 30 COORDINATE BENCH IN CASE OF THE ASSESSEE , HAS ENTERED IN TO AN ERROR BY NOT LOOKING AT THE PARA NO 43 OF THE ORDER , WHERE FINDINGS ARE CONTAINED, WHERE IN IT HAS BEEN HELD THAT ASSESSEE IS HIGH END ITES SERVICES PROVIDER IN ITS T P STUDY REPORT BECAUSE THE ASSESSEE CONDUCTS RESEARCH ACTIVITY AND PROVIDES KNOWLEDGE MANAGEMENT SERVICES TO ITS AES . THE COORDINATE BENCH HAS LOOKED AT THE REFERENCE A ND FINDING IN CASE OF MAERSK GLOBAL CENTERS (INDIA ) PVT. LTD. (ITA 7466/MUM/2012) IN PARA NO 38 AND 39 OF THAT JUDGMENT AND HAS HELD THAT ASSESSEE IS A LOW END ITES SERVICE PROVIDER. ACCORDING TO US THOSE PARAS OF ORDER FOR AY 2005 - 06 DO NOT CONTAIN THE FINDING ABOUT THE FUNCTIONAL PROFILE OF THE ASSESSEE. ASSESSEE HAS SUBMITTED AT PAGE NO 245 ONWARDS OF THE PAPER BOOK ORDER OF LD TPO FOR AY 2005 - 06 WHERE IN WHERE IN AT PARA NO 2 LD TPO HAS DESCRIBED THE BUSINESS DESCRIPTION OF THE ASSESSEE AND AT PARA NO 2.3 ASSESSEE HAS MENTIONED THE DESCRIPTION OF THE ASSESSEES BUSINESS AS UNDER : - THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING HIGH END IT ENABLES SERVICES TO ITS ASSOCIATED ENTERPRISES. THE COMPANY IS REGISTERED WITH SOFTWAR E TECHNOLOGY OF THE GOVERNMENT OF INDIA. THE ASSESSEE CONDUCTS RESEARCH ACTIVITIES AND PROVIDES KNOWLEDGE MANAGEMENT SERVICES TO ITS ASSOCIATED ENTERPRISES. THE ABOVE FUNCTIONAL PROFILE MATCHES WITH THE WEBSITE INFORMATION SUBMITTED BY THE LD D R (SO URCE: - WWW . FINANCEWALK.COM/WORK - EVALUESERVE - JOBS - REVIEW). LOOKING AT THE ORDER OF THE LD TPO FOR IMPUGNED AY 2006 - 07, WE COULD NOT E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 31 FIND , ON THE BASIS OF SERVICES MENTIONED , WHETHER ASSESSEE IS CLASSIFIED AS HIGH END ITES OR LOW END ITES SERVICE PROVIDER. EVEN ASSESSEE HAS ALSO NOT SUBMITTED ITS SEARCH CRITERIA ( PARA NO (IV) AT PAGE NO 15 OF TPO ORDER) AND IT IS ALSO MENTIONED THAT ASSESSEE HAS CONDUCTED FRESH SEARCH PR OCESS WITHOUT ASSIGNING ANY REASON FOR CONDUCTING FRESH SEARCH AND ALSO NOT PROVIDED DETAILS OF SEARCH PROCESS EMPLOYED AND ITS DISTINCTION WITH EARLIER SEARCH PROCESS FOR THE SAME YEAR. THIS HAS LEAD TO AN AMBIGUITY IN SELECTION OF COMPARABLES QUA TH E FUNCTIONAL PROFILE OF THE ASSESSEE. ON THE BASIS OF FACTS POINTED OUT BY THE LD DR AND EXAMINING THE SUBMISSION OF THE ASSESSEE BEFORE US COUPLED WITH THE DOCUMENTS RELIED UPON, WE CANNOT CLOSE OUR EYES TO THIS STARTLING FACTS STARING AT US. IN VIEW OF THE ABOVE CATEGORICAL FINDING OF THE COORDINATE BENCH FOR AY 2005 - 06 BASED ON THE T P STUDY REPORT OF THE ASSESSEE ITSELF NOW IT IS NOT POSSIBLE TO ASSUME THE FUNCTIONAL PROFILE OF THE ASSESSEE AS LOW END ITES PROVIDER. FURTHER IT IS ALSO NOT POSSIBLE TO IGNORE THE FINDINGS OF THE COORDINATE BENCH FOR AY 2007 - 08 FURTHER THE APPEAL BEFORE US IS AY 2006 - 07 WHICH IS IN BETWEEN YEAR OF BOTH THE ABOVE YEARS DECIDED BY THE COORDINATE BENCH. THE TWO COMPARABLES OBJECTED BY THE ASSESSEE ALSO CANNO T BE DIRECTED FOR ITS EXCLUSION WITHOUT REACHING AT THE CORRECT FUNCTIONAL PROFILE OF THE ASSESSEE. THEREFORE, IN THE INTEREST OF JUSTICE AND TO DIG OUT THE CORRECT FUNCTIONAL PROFILE OF THE ASSESSEE AMIDST HOST OF CONFUSION, WE SET ASIDE THE WHOLE IS SUE OF TRANSFER PRICING ADJUSTMENT BACK TO THE FILE OF LD AO/ TPO FOR ASCERTAINING THE CORRECT FUNCTIONAL PROFILE OF THE ASSESSEE FOR THIS YEAR WITHOUT BEING INFLUENCED BY THE ORDER OF THE E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 32 COORDINATE BENCH FOR AY 2007 - 08, THEN CARRY OUT EXAMINATION OF COM PARABILITY ANALYSIS AND THEN DETERMINE ALP OF THE INTERNATIONAL TRANSACTIONS. NEEDLESS TO SAY THAT ASSESSEE SHALL BE DUTY BOUND TO PROVIDE CORRECT FUNCTIONAL PROFILE OF THE ASSESSEE AND ITS COMPLETE SEARCH PROCESS AND ITS STEPWISE RESULTS TO THE LD TPO/ AO ALONG WITH ITS JUSTIFICATION FOR CLAIM OF WORKING CAPITAL ADJUSTMENTS OR CAPACITY UTILIZATION FOR EXAMINATION BY THE LD AO/ TP O. IN THE RESULT GROUND NO 3, 4, 5 AND ADDITIONAL GROUND ARE REMITTED BACK TO THE FILE OF LD AO/ TPO TO DECIDE THE WHOLE ISSUE AFRESH AND HENCE THESE GROUNDS OF APPEAL OF THE ASSESSEE ARE ALLOWED WITH ABOVE DIRECTIONS. 35. GROUND NO. 6 OF THE APPEAL OF THE ASSESSEE IS AGAINST THE ISSUE WHETHER DEDUCTION UNDER SECTION 10 A OF THE INCOME TAX IS ALLOWABLE AFTER SETTING OF BROUGHT FORWARD LOSSES OF THE PREVIOUS YEAR, OR BEFORE THAT. THE ASSESSEE HAS CLAIMED IT BEFORE SETTING OFF BROUGHT FORWARD LOSSES OF THE EARLIER YEARS. THE LD. ASSESSING OFFICER IS OF THE VIEW THAT FORCED ASSESSEE SHOULD HAVE SET OFF BROUGHT FORWARD LOSS ES FROM ASSESSMENT YEAR 2002 03 OF RS. 9 508868/ . ASSESSEE RELIED UPON THE DECISION OF THE COORDINATE BENCH WHICH IS PENDING FOR ADJUDICATION AT THAT PARTICULAR TIME BEFORE THE HONBLE DELHI HIGH COURT. IT WAS OBJECTED BY THE ASSESSEE BEFORE LD. DISPUTE RESOLUTION PANEL WIDE OBJECTION NO. 7 WHICH IS REJECTED, THEREFORE, IN THE FINAL ASSESSMENT ORDER. THE ABOUT TREATMENT WAS GIVEN. ASSESSEE AGGRIEVED WITH THIS HAS PREFERRED AN APPEAL BEFORE US AND IT IS STATED BY THE LD. AUTHORIZED REPRESENTATIVE THAT NOW THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE SUPREME COURT AND THEREFORE THE ISSUE NEEDS TO BE DECIDED IN FAVOUR E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 33 OF THE ASSESSEE. THE LD. DEPARTMENTAL REPRESENTATIVE IN HIS WRITTEN SUBMISSION HAS STATED THAT SECTI ON 10 A IS NOT AN EXEMPTION SECTION BUT DEDUCTION SECTION. THE ABOVE SECTION HAS BEEN CATEGORIZED AS DEDUCTION SECTION AFTER THE AMENDMENT MADE BY FINANCE ACT 2000, WHICH HAS FURTHER BEEN CLARIFIED BY THE CENTRAL BOARD OF DIRECT TAXES VIDE ITS CIRCULAR NO. 7 DATED 16/07/2013. 36. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTION AND ALSO PERUSED THE VARIOUS JUDICIAL PRECEDENTS CITED BEFORE US. ACCORDING TO US AFTER THE DECISION OF THE HONBLE SUPREME COURT IN CASE OF CIT V YOKOGAWA INDIA LIMITED [2017] 77 TAXMANN.COM 41 (SC)/[2017] 244 TAXMAN 273 (SC)/[2017] 391 ITR 274 (SC)/[2017] 291 CTR 1 (SC) ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE. IN VIEW OF THIS GROUND NO. 6 OF THE APPEAL OF THE ASSESSEE IS ALLOWED. 37. GROUND NO. 7 OF THE APPEAL OF THE ASSE SSEE IS AGAINST CHARGING AND COMPUTING INTEREST UNDER SECTION 234B, 234D AND 244A OF THE INCOME TAX ACT, 1961. NO SPECIFIC ARGUMENTS WERE RAISED BEFORE US AND IS CHARGING OF INTEREST IS CONSEQUENTIAL TO THE COMPUTATION OF TOTAL INCOME OF THE ASSESSEE WE DI SMISS GROUND NO. 7 OF THE APPEAL. 38. GROUND NO. 8 OF THE APPEAL OF THE ASSESSEE IS AGAINST THE INITIATION OF PENALTY PROCEEDINGS UNDER THE PROVISIONS OF SECTION 271 (1) OF THE INCOME TAX ACT. THE ABOVE, GROUND OF APPEAL OF THE ASSESSEE IS PREMATURE, AS LD. ASSESSING OFFICER HAS MERELY INITIATED THE PENALTY PROCEEDINGS TO WHICH THE ASSESSEE WILL GET A FAIR OPPORTUNITY TO REPRESENT ITS CASE. IN THE RESULT GROUND NO. 8 OF THE APPEAL OF THE ASSESSEE IS DISMISSED. E VALUESERVE.COM PVT LTD V ITO ITA 4001/DEL/2013 AY 2006 - 07 34 39. IN THE RESULT APPEAL FILED BY THE ASSESSEE IN ITA NO. 4001/DEL/2013 FOR ASSESSMENT YEAR 2006 07 IS PARTLY ALLOWED. 40. ORDER PRO NOUNCED IN THE OPEN COURT ON 1 1 / 0 5 / 2017 . - S D / - - S D / - ( I.C.SUDHIR ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 1 / 04 / 2017 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI