M/s. Techbooks International Pvt. Ltd., Noida V. ACIT, Noida

ITA 4990/DEL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77571 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-04-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 22-03-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 09-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: C S AGARWAL SENIOR
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 92C; 92E; 234B; 10B; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL DELHI DELHI DELHI DELHI BENCH BENCH BENCH BENCH F FF F : NEW DELHI : NEW DELHI : NEW DELHI : NEW DELHI BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND AND AND AND SHRI SHRI SHRI SHRI T.S. KAPOOR, ACCOUNTANT T.S. KAPOOR, ACCOUNTANT T.S. KAPOOR, ACCOUNTANT T.S. KAPOOR, ACCOUNTANT MEMBER MEMBER MEMBER MEMBER ITA NO ITA NO ITA NO ITA NO . .. . 4990/DEL/2011 4990/DEL/2011 4990/DEL/2011 4990/DEL/2011 ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR : : : : 2007 2007 2007 2007 - -- - 08 0808 08 M/S TECHBOOKS INTERNATIONAL M/S TECHBOOKS INTERNATIONAL M/S TECHBOOKS INTERNATIONAL M/S TECHBOOKS INTERNATIONAL PRIVATE LIMITED, PRIVATE LIMITED, PRIVATE LIMITED, PRIVATE LIMITED, O OO O- -- -100, 1 100, 1 100, 1 100, 1 ST STST ST FL FLFL FLOOR, OOR, OOR, OOR, SECTOR SECTOR SECTOR SECTOR- -- -12, 12, 12, 12, NOIDA NOIDA NOIDA NOIDA 201 301, 201 301, 201 301, 201 301, UTTAR PRADESH. UTTAR PRADESH. UTTAR PRADESH. UTTAR PRADESH. PAN : AABCT3774A. PAN : AABCT3774A. PAN : AABCT3774A. PAN : AABCT3774A. VS. VS. VS. VS. ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF INCOME TAX, INCOME TAX, INCOME TAX, INCOME TAX, CIRCLE CIRCLE CIRCLE CIRCLE- -- -1, 1,1, 1, NOIDA. NOIDA. NOIDA. NOIDA. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI C.S. AGARWAL, SENIOR ADVOCATE AND SHRI RAVI PRATAP MALL, ADVOCATE. RESPONDENT BY : SHRI PIYUSH JAIN, CIT - DR. ORDER ORDER ORDER ORDER PER A.D. JAIN, JM PER A.D. JAIN, JM PER A.D. JAIN, JM PER A.D. JAIN, JM : :: : THIS IS THE ASSESSEES APPEAL FOR A.Y. 2007-08, TAK ING THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL:- 1. THAT THE LEARNED ASSISTANT COMMISSIONER OF INCO ME TAX, CIRCLE 1, NOIDA HAS ERRED BOTH ON FACTS AND IN LAW IN COMPUTING THE INCOME OF THE ASSESSEE COMPANY AT RS . 5,97,19,420/- AS AGAINST DECLARED INCOME OF RS. 59,93,597/-. 1. THAT THE LEARNED ASSISTANT COMMISSIONER OF INCOME T AX HAS FURTHER ERRED BOTH IN LAW AND, ON FACTS IN MAKI NG AN ADDITION OF RS. 5,37,25,821/- ON ACCOUNT OF ALLEGED UNDERSTATEMENT OF ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS ENTERED BETWEEN THE ASSE SSEE COMPANY AND ITS ASSOCIATED ENTERPRISES (HEREIN AFT ER REFERRED TO AS AE) 3 THAT IN MAKING THE AFORESAID ADDITION THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX HAD ERRED IN REFERRING T HE MATTER TO THE LEARNED TPO U/S 92CA OF THE ACT ON TH E ITA-4990/DEL/2011 2 FOLLOWING AMONGST OTHER GROUNDS, RENDERING THE ORDE R OF THE TPO AS UNSUSTAINABLE BOTH IN LAW AND ON FACTS: A) AS NONE OF THE CONDITIONS PRECEDENT LAID DOWN UN DER SECTION 92C(3) OF THE ACT WERE SATISFIED, THERE WAS NO OCCASION FOR DETERMINATION OF ARMS LENGTH PRICE BY THE AO AND THE VALUE OF THE INTERNATIONAL TRANSACTIONS OUG HT TO HAVE BEEN ACCEPTED; B) AS THE REFERENCE MADE BY THE LEARNED AO TO THE L EARNED TPO IS NOT IN ACCORDANCE WITH THE PROVISIONS OF SEC TION 92CA(1) OF THE ACT; C) AS NO OPPORTUNITY OF BEING HEARD WAS GRANTED AT ANY STAGE OF THE PROCEEDINGS FOR THIS PURPOSE, EITHER AT THE STAGE OF PROPOSAL OR EVEN AT THE STAGE OF APPROVAL; D) AS NO INITIAL OPINION WAS FORMED U/S 92C(3) OF T HE ACT WHICH IS A JURISDICTIONAL PRECONDITION; E) BY NOT FURNISHING THE LETTER OF REFERENCE (LOR) T O APPELLANT. 4 THAT THE LEARNED DISPUTE RESOLUTION PANEL HAS FAI LED TO APPRECIATE THAT ADJUSTMENT PROPOSED BY THE LEARNED TRANSFER PRICING OFFICER AND, LEARNED ASSISTANT COMMISSIONER OF INCOME TAX IN HIS DRAFT ORDER OF RS . 7,68,20,717/- WAS WHOLLY ERRONEOUS AND, ARBITRARY. 5 THAT EVEN OTHER-WISE THE LEARNED ASSISTANT COMMIS SIONER OF INCOME TAX HAS FURTHER MECHANICALLY AND ON COMPL ETE MISCONSTRUCTION OF PROVISIONS CONTAINED IN SECTION 92CA(4) OF THE ACT MADE THE IMPUGNED ADDITION WITHOUT APPRECIATING THAT ARMS LENGTH PRICE DETERMINED BY THE LEARNED TRANSFER PRICING OFFICER IN AN ORDER UNDER SECTION 92CA(3) OF THE ACT IN PURSUANCE TO DIRECTIONS OF TH E LEARNED DRP WAS BASED ON COMPLETE DISREGARD OF THE FACTS O F THE CASE OF THE APPELLANT AND THE STATUTORY PROVISIONS OF LAW. 5.1 THAT THE LEARNED TRANSFER PRICING OFFICER HAS F AILED TO COMPREHEND THAT THE MARGIN OF PROFIT ENTERED BETWEE N THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES WAS AS PER THE STUDY OF THE ACCOUNTANT IN HIS REPORT SUBMITTED ALO NG-WITH THE RETURN AND WAS FURTHER SUBMITTED ON FRESH STUDY WAS WITHIN THE RANGE PROVIDED IN THE PROVISO UNDER SECT ION 92C(2) OF THE ACT. 5.2 THAT THE LEARNED AUTHORITIES HAVE FAILED TO APP RECIATE THAT INCLUSION OF M/S VISHAL INFORMATION TECHNOLOGY LTD AS A COMPARABLE TO DETERMINE THE ARMS LENGTH PRICE BY DISREGARDING THE SUBMISSION OF THE APPELLANT ACTIVI TIES OF SUCH COMPANY WERE FUNCTIONALLY DISSIMILAR TO THE AC TIVITIES OF THE APPELLANT COMPANY, DESPITE THE FACT THAT DUR ING THE ITA-4990/DEL/2011 3 COURSE OF PROCEEDINGS BEFORE THE TPO FRESH STUDY WA S UNDERTAKEN. 5.3 THAT THE LEARNED AUTHORITIES BELOW HAVE ALSO ER RED BOTH IN LAW AND, ON FACTS IN REJECTING FUNCTIONALLY COMPAR ABLE COMPANY NAMELY M/S ASK ME INFO HUBS LTD WITHOUT ASSIGNING ANY VALID BASIS AND, APPRECIATING THE SUB MISSION OF THE APPELLANT COMPANY. 5.4 THAT ON FACTS AND IN LAW, THE LEARNED TPO HAS E RRED IN NOT DISCHARGING HIS ONUS, WHICH LAY UPON HIS TO ESTABLI SH THAT THE APPELLANTS CASE IS COVERED UNDER ANY OF (A) TO (D) CLAUSE OF SECTION 92C (3) OF THE ACT, 1961 5.5 THAT ON FACTS AND IN LAW, THE AUTHORITIES BELOW HAVE ERRED IN REJECTING THE APPELLANT'S CLAIM FOR USE OF MULTI PLE YEAR DATA FOR COMPUTING THE ARM'S LENGTH PRICE AND, INST EAD USED SINGLE YEAR DATA OF COMPANIES TO CONCLUDE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. 5.6 THAT ON FACTS AND IN LAW, THE HONBLE DRP AND L EARNED TPO/AO HAVE CHERRY PICKED COMPARABLES TO ACCOMPLISH PRE-CONCEIVED CONCLUSIONS, WITH THE SOLE OBJECTIVE OF REJECTING COMPARABLES SELECTED BY THE APPELLANT AND ARRIVING AT SKEWED RESULTS. 5.7 THAT ON FACTS AND IN LAW, THE HONBLE DRP HAS E RRED IN REJECTING COMPARABLE COMPANY NAMELY CG VAK SOFTWARE & EXPORTS LIMITED ON ACCOUNT OF HAVING SIGNIFICANT RE LATED PARTY TRANSACTIONS WITHOUT APPRECIATING THE FACT TH AT THE APPELLANT HAS CONSIDERED CONSOLIDATED FINANCIAL STA TEMENT WHICH NULLIFY THE EFFECT OF RELATED PARTY TRANSACTI ONS AT THE STANDALONE LEVEL. 5.8 THAT ON FACTS AND IN LAW, THE HONBLE DRP HAS E RRED IN APPLYING THE FILTER OF REJECTION OF ACE SOFTWARE EX PORTS LIMITED SHOWING DECLINING REVENUE TRENDS. 5.9 THAT ON FACTS AND IN LAW, THE HONBLE DRP AND L EARNED TPO/AO HAVE FAILED TO MAKE APPROPRIATE ADJUSTMENTS TO ACCOUNT FOR VARYING RISK PROFILES OF THE APPELLANT VIS--VIS THE COMPARABLES AND IN THE PROCESS ALSO NEGLECTED T HE INDIAN TRANSFER PRICING REGULATIONS, OECD GUIDELINE S ON TRANSFER PRICING AND JUDICIAL PRECEDENCE. 5.10 THAT ON FACTS AND IN LAW, AND WITHOUT PREJUDIC E THE HONBLE DRP AND LEARNED TPO/AO HAVE ERRONEOUSLY INVOKED THE PROVISIONS OF CHAPTER X AND FAILED TO APPRECIATE TH E FACT ITA-4990/DEL/2011 4 THAT THERE WAS NO INTENTION WHATSOEVER ON THE PART OF THE APPELLANT TO SHIFT PROFITS OUTSIDE INDIA. 6. THAT WITHOUT PREJUDICE TO EACH OF THE AFORESAID GROUND, THE AUTHORITIES BELOW HAVE FAILED TO COMPREHEND THAT MA RGIN OF PROFIT WITH ITS ASSOCIATED ENTERPRISES WAS 15.58% A ND EVEN ON THE BASIS OF THE ORDER OF THE TPO IT AVERAGED AT 20.79%, (EVEN WHEN ONE OF THE COMPARABLE AS ADOPTED IN THE ACCOUNTANT REPORT IS EXCLUDED BEING FUNCTIONALLY DISSIMILAR AND THAT ANOTHER COMPARABLE IS INCLUDED BY THE TPO IN HIS ORDER) AND THUS IT WAS WITHIN THE RANGE AS PER THE STATUTORY PROVISIONS CONTAINED IN THE PROVISO T O SECTION 92C(2) OF THE ACT AS IT EXISTED AT THE RELEVANT TIM E. 7. THAT THE LEARNED AUTHORITIES BELOW HAVE FAILED T O APPRECIATE THAT ASSESSEE HAD BEEN ENTERING INTO SUC H TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE WHEREIN THE MARGIN OF PROFIT WITH ITS ASSOCIATED ENTERPRISE HAS BEEN ACCEPTED BY THE AUTHORITIES: ASSESSMENT YEAR MARGIN OF PROFIT 2005 - 2006 16% 2006 - 2007 14.92% 8. THAT ON FACTS AND IN LAW, THE HONBLE DRP AND LE ARNED TPO/AO HAVE ERRED BY NOT CONSIDERING THAT THE ADJUS TMENT TO THE ARMS LENGTH PRICE, IF ANY, SHOULD BE LIMITE D TO THE LOWER END OF THE 5 PERCENT RANGE AS THE APPELLANT H AS THE RIGHT TO EXERCISE THIS OPTION UNDER THE SECOND PROV ISO TO SECTION 92C(2) OF THE ACT. 9. WITHOUT PREJUDICE AND IN THE ALTERNATIVE, THE DI RECTIONS ISSUED BY THE HONBLE DRP VIOLATE THE RULES OF NATU RAL JUSTICE INTER-ALIA IN OBTAINING INFORMATION WHICH W AS NOT AVAILABLE IN THE PUBLIC DOMAIN AND RELYING ON THE INFORMATION NOT AVAILABLE/ACCESSIBLE TO THE APPELLA NT FOR THE PURPOSE OF DETERMINING COMPARABILITY OF COMPANI ES AND INCONSISTENTLY FOLLOWING THE ABOVE APPROACH. 10. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE HON BLE DRP HAS ERRED IN CONFIRMING THE CONCLUSIONS DRAWN BY LE ARNED AO IN LEVYING INTEREST UNDER SECTION 234B AND 234C OF THE ACT WHILE COMPLETELY DISREGARDING THE PROVISIONS OF THE ACT AND THE JUDICIAL PRECEDENTS. ITA-4990/DEL/2011 5 2. THE FACTS AS PER THE RELEVANT ORDERS AND OTHER D OCUMENTS ON RECORD ARE THAT: (I) THE ASSESSEE COMPANY, M/S TECH BOOKS INTERNATIONAL PVT. LTD. WAS INCORPORATED ON 12.6.2000 UNDER THE COMPANIES ACT, 1956. IT IS A WHOLLY OWNED SUBSIDIARY OF APTARA, IN C., USA., ENGAGED IN THE BUSINESS OF PROVISION OF DATA CONVERSION, DATA ENTRY OR KEYBOARDING, REFORMATTING AND TYPESETTING SERVICES, WHICH WAS EXPORTED ONLY TO APTARA INC, USA, I.E. ITS HOLDING COMPANY. APART FROM THE ABOVE, THE ASSESSEE COMPANY HAD NO OTHER BUSINE SS ACTIVITY DURING THE YEAR UNDER CONSIDERATION, I.E., A.Y. 200 7-08. TO CARRY OUT THE SAID ACTIVITY, THE ASSESSEE COMPANY HAD A 100% EXPO RT ORIENTED UNDERTAKING OR EOU (HEREINAFTER REFERRED TO AS THE UNDERTAKING) REGISTERED WITH THE SOFTWARE TECHNOLOGY PARK OF IND IA. THE INCOME DERIVED BY THE ASSESSEE FROM THE UNDERTAKING IS ELI GIBLE FOR DEDUCTION UNDER SECTION 10B OF THE INCOME TAX ACT, 1961 (HERE INAFTER REFERRED TO AS THE ACT). THE ASSESSMENT YEAR UNDER CONSIDERAT ION IS THE SIXTH YEAR OF THE CLAIM OF DEDUCTION UNDER SECTION 10B OF THE ACT; (II) ON 31.10.2007, , , , THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, DECLARING A TO TAL INCOME OF RS. 59,93,597/-. IN THE COMPUTATION OF TOTAL INCOME, IN COME FROM EXPORT OF THE IT ENABLED SERVICES AND CUSTOMIZED DATA HAD BEE N DECLARED AT RS. 15,44,86,701/- WHICH WAS CLAIMED AS ELIGIBLE FOR DE DUCTION UNDER SECTION 10B OF THE ACT. APART FROM THE ABOVE, INCOM E DERIVED FROM INTEREST AND SCRAP WAS DECLARED AT RS. 59,93,597/- , WHICH WAS OFFERED FOR TAXATION UNDER THE INCOME FROM OTHER SOURCES. A COPY OF THE ACKNOWLEDGEMENT OF RETURN OF INCOME, AUDITED FINANC IAL STATEMENTS ALONG-WITH TAX AUDIT REPORT ARE PLACED AT PAGES 1, 10 TO 37 AND 81 TO 98 OF THE ASSESSEES PAPER BOOK (APB, FOR SHORT), RESPECTIVELY; (III) DURING THE FINANCIAL 2006-07 RELEVANT TO AY 2007-08 , THE ASSESSEE COMPANY HAD ENTERED INTO THE FOLLOWING INTERNATIONA L TRANSACTION WITH ITS ASSOCIATED ENTERPRISE (AE): ITA-4990/DEL/2011 6 SR . N O NATURE OF INTERNATIONAL TRANSACTION VALUE (IN RS.) MARGIN OF PROFIT METHOD USED 1 PROVISION OF IT ENABLED DATA CONVERSION SERVICES 105,06,72, 355 15.58 % TNMM USING OPERATIN G PROFIT/OP ERATING COST AS PLI (IV) FOR THE PURPOSE OF ESTABLISHING ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE, THE ASSESSEE HAD UNDERTAKEN A TRANSFER PRIC ING STUDY (APB 38-80), CARRIED OUT BY THE ACCOUNTANT AS PROVIDED UNDER SECTION 92E OF THE ACT AND, HAD ALSO FURNISHED THE REQUISITE FORM 3CEB (APB 2-9), ),), ), AS PER RULE 10E OF THE INCOME TAX RULES, 1962 (HEREINAFTER REFERRED TO AS THE RULES); (V) FOR D ETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION ENTERED INTO B Y THE ASSESSEE WITH ITS AE, AND HAVING REGARD TO THE NATURE OF THE TRANSACTION, IT HAD APPLIED THE TRANSACTIONAL NET MARGIN METHOD (TN MM), USING OPERATING PROFIT/OPERATING COST (OP/TC) AS PROFIT L EVEL INDICATOR, THE SAID METHOD BEING THE MOST APPROPRIATE METHOD A S PER THE ASSESSEE AND AFTER A DETAILED ANALYSIS ON THE BASIS OF THE FUNCTIONS PERFORMED, THE RISKS ASSUMED AND THE ASSE TS UTILISED (FAR ANALYSIS) AND THE NATURE OF SERVICES RENDERED , THE ASSESSEE ARRIVED AT A SEPARATE SET OF 15 COMPARABLE COMPANIE S UNDERTAKING COMPARABLE ACTIVITIES, VIS-A-VIS THE PR OVISION OF IT ENABLED DATA CONVERSION SERVICES BY THE ASSESSEE TO ITS AE AND THE WEIGHTED AVERAGE MARGIN OF PROFIT FOR THE YEARS ENDING IN 2005, 2006 AND 2007 WAS CALCULATED AT 21.51% AND AL LOWING A VARIANCE OF +/-5% VARIANCE FROM THE MEAN ALP, THE R ANGE OF ALP OF THE COMPARABLES WOULD FALL BETWEEN 115.43% AND 1 27.58%, TRANSLATING TO A RANGE OF OPERATING MARGINS BETWEEN 15.43% AND ITA-4990/DEL/2011 7 27.58% ON OPERATING COST (APB 79), THE MARGIN OF PR OFIT DECLARED BY THE ASSESSEE AT 15.58% WAS AT ARMS LENGTH. THE COMPARABLES SELECTED BY THE ASSESSEE ARE AS FOLLOWS : S.NO. PARTICULARS 3 YEARS' DATA AS PER TRANSFER PRICING STUDY WITHOUT CAPITAL ADJUSTMENT 3 YEARS' LATEST DATA AVAILABLE IN THE PUBLIC DOMAIN WITHOUT WORKING CAPITAL ADJUSTMENT USING LATEST CONTEMPORANEOUS DATA(FY 2006-07) AVAILABLE IN THE PUBLIC DOMAIN WITHOUT WORKING CAPITAL ADJUSTMENT 1 ACE SOFTWARE EXPORTS LIMITED 11.88% 5.59% -7.04% 2 ALLSEC TECHNOLOGIES LTD 27.47% 27.47% 27.21% 3 APEX ADVANCED TECHNOLOGY PRIVATE LIMITED 17.44% 26.95% 39.73% 4 BNR UDYOG LTD. NC* NC* NC* 5 CG VAK SOFTWARE & EXPORTS LIMITED 4.48% 4.48% 4.97% 6 COSMIC GLOBAL LTD 17.49% 14.56% 11.31% 7 FLEXTRONICS SOFTWARE SYSTEMS LTD 3.61% 3.61% -0.89% 8 FORTUNE INFOTECH LTD. NC* NC* NC* 9 GENESYS INTERNATIONAL CORPORATION LTD -1.29% 3.59% 12.52% 10 MAPLE ESOLUTIONS LTD 36.64% 35.08% 33.96% 11 R SYSTEMS INTERNATIONAL LTD 11.94% 11.94% 13.54 % 12 SPANCO TELESYSTEMS AND SOLUTIONS LTD 21.52% 22.33% 24.82% 13 TRANSWORKS INFORMATION SERVICES LTD. 14.27% 14.05% 13.41% 14 TRICOM INDIA LTD. NC # NC # NC # 15 TRITON CORP LTD 19.94% 26.34% 34.49% 16 VISHAL INFORMATION TECHNOLOGIES LTD 46.94% 48.57% 51.11% ARITHMETIC MEAN 17.87% 18.81% 19.93% TIPL'S TRANSFER PRICING MARGIN 15.58% LOWER RANGE -5% 11.98% 12.87% 13.94% WITHIN RANGE WITHIN RANGE WITHIN RANGE NC * THE COMPANY HAS NOT BEEN CONSIDERED COMPARABLE ON ACCOUNT OF SIGNIFICANT RELATED PARTY TRANSACTIONS. NC # THE COMPANY HAS NOT BEEN CONSIDERED COMPARABLE ON ACCOUNT OF BEING FUNCTIONALLY DISSIMILAR. (VI) VIDE LETTER DATED 9.12.2009, , , , THE ASSESSING OFFICER REFERRED THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSES SEE COMPANY TO THE TRANSFER PRICING OFFICER (TPO) TO DETERMINE THE A RMS LENGTH PRICE ITA-4990/DEL/2011 8 THEREOF; (VII) BY VIRTUE OF ORDER DATED 29.10.2010 (APB 126 TO 139), PASSED UNDER SECTION 92CA(3) OF THE ACT, THE TPO DI D NOT AGREE WITH THE ANALYSIS UNDERTAKEN BY THE ASSESSEE COMPANY. HE MADE THE FOLLOWING OBSERVATIONS/ADJUSTMENTS IN RESPECT OF TH E TP ANALYSIS UNDERTAKEN BY THE ASSESSEE AS REGARDS ITS INTERNATI ONAL TRANSACTION: A) THE MARGIN EARNED BY THE ASSESSEE FROM THE IT EN ABLED DATA CONVERSION SERVICES WAS VERY LOW. B) IN DETERMINING THE ARMS LENGTH NATURE OF THE IN TERNATIONAL TRANSACTION OF THE ASSESSEE, THE FINANCIAL INFORMAT ION OF COMPARABLE COMPANIES PERTAINING TO ONLY FY 2006-07 OUGHT TO HAVE BEEN USED, SINCE IT WAS CONTEMPORANEO US AND, WAS IN ACCORDANCE WITH THE REQUIREMENTS UNDER RULE 10B(4) OF THE RULES. C) CONSIDERED A FUNCTIONALLY DIFFERENT COMPANY AS A COMPANY COMPARABLE TO THE ASSESSEE COMPANY. D) DID NOT AGREE WITH THE ASSESSEES CONTENTION THA T A FEW FUNCTIONALLY COMPARABLE COMPANIES, FOR WHICH DATA W AS NOW AVAILABLE, SHOULD BE CONSIDERED FOR THE PURPOSE OF CONDUCTING AN ECONOMIC ANALYSIS; (VIII) THUS, OUT OF THE 15 COMPARABLES USED BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY, THE TPO REJECTED ONE COMPAR ABLE, I.E., TRICOM INDIA LIMITED, STATING IT TO BE FUNCTI ONALLY DISSIMILAR TO THE ASSESSEE COMPANY. TWO, I.E., FLEX TRONICS SOFTWARE SYSTEMS LTD. AND TRANSWORKS INFORMATION SERVICES LTD. WERE DISREGARDED. TWO COMPANIES, I.E. , BNR UDYOG LTD. AND FORTUNE INFOTECH LTD. WERE REJECTED FOR HAVING RELATED PARTY TRANSACTIONS. FURTHER, THE TPO TOOK CG VAK SOFTWARE AND EXPORTS LTD. AS A COMPARABLE AND COMPUTED THE MARGIN AT 23.29% AND MADE AN ADJUSTMENT OF RS. 7,08,27,120/-; (IX) THE AO, VIDE HIS DRAFT O RDER DATED 22.12.2010, R RR RELYING ON THE TP ANALYSIS UNDERTAKEN BY THE TPO, DETERMINED THE ALP OF THE INTERNATIONAL TRANSA CTION OF ITA-4990/DEL/2011 9 THE ASSESSEE TO BE FAR GREATER THAN THE ALP DETERMI NED BY THE ASSESSEE. THIS RESULTED IN DETERMINATION OF INC OME OF THE ASSESSEE AT RS. 7,68,20,717/-; (X) AGGRIEVED A GAINST THE AFORESAID DRAFT ORDER OF THE AO, THE ASSESSEE F ILED ITS OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP ). A COPY THEREOF HAS BEEN PLACED AT APB 154 TO 251; (XI ) THE DRP, VIDE ORDER DATED 30.08.2011 (APB 252 TO 281), ALLOWED WORKING CAPITAL ADJUSTMENT. THE MARGIN WAS COMPUTED AT 21.41%, AS AGAINST THAT OF 21.51% COMPU TED IN THE TP STUDY OF THE ASSESSEE. . . . HOWEVER, THE DRP DID NOT ALLOW THE BENEFIT OF -5% TO THE ASSESSEE UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT. APROPOS THE COMPARABL ES, OUT OF THE 15 COMPARABLES USED BY THE ASSESSEE IN ITS T RANSFER PRICING STUDY, THE DRP REJECTED FOUR, NAMELY TRICOM INDIA LTD., BNR UDYOG LTD., FORTUNE INFOTECH LTD. AND M/S ACE SOFTWARE EXPORTS LTD. FURTHER, THE DRP ALSO EXCLUDED CG VAK SOFTWARE AND EXPORTS LTD., A COMPARABLE ADOPTED BY THE TPO IN HIS ORDER AND NOT BY THE ASSESSEE IN ITS STUDY. M/S VISHAL INFORMATION TECHNOLOGIES LTD. WAS SELECT ED AS A COMPARABLE, THOUGH THE ASSESSEE HAD REJECTED THE SA ME. M/S ASK ME INFO HUBS LTD. WAS NOT ACCEPTED AS A COMPARABLE; (XII) PURSUANT TO THE DIRECTIONS OF THE DRP, BY VIRTUE OF ASSESSMENT ORDER DATED 21.10.2011, THE AO MADE AN ADDITION OF RS. 5,37,25,821/- ON ACCOUNT OF ADJUSTMENT OF ALP IN RESPECT OF THE ASSESSEES TRAN SACTION WITH ITS AE. THE INCOME OF THE ASSESSEE WAS THUS DETERMINED BY THE AO AT RS. 5,97,19,420/-; (XIII) A GGRIEVED, THE ASSESSEE IS BEFORE US BY WAY OF THE PRESENT APP EAL. 3. THE PARTIES HAVE MADE ORAL SUBMISSIONS BEFORE US AND WRITTEN SUBMISSIONS HAVE ALSO BEEN FILED. THE LD. COUNSEL F OR THE ASSESSEE HAS ITA-4990/DEL/2011 10 CONTENDED THAT THE ADJUSTMENT MADE BY THE AO ON THE BASIS OF THE DIRECTIONS ISSUED BY THE DRP IS UNSUSTAINABLE; REGARDING CG VAK AND ACE SOFTWARE THAT THE DRP HAS ACTED WITHOUT JURISDICTION IN REJE CTING CG VAK AS A COMPARABLE, FOR THE REASON OF ITS HAVING RELATED PA RTY TRANSACTIONS OF MORE THAN 25%; THAT THERE WERE NO RELATED PARTY TRA NSACTIONS IN THE CONSOLIDATED FINANCIAL STATEMENTS CONSIDERED BY THE ASSESSEE FOR ANALYSIS; THAT THE ASSESSEE COMPANY HAD USED THE BP O SERVICES SEGMENT OF CG VAK TO COMPUTE THE COMPARABLE OPERATI NG MARGINS; THAT THE REVENUE EARNED BY CG VAK IN ITS BPO SERVIC ES SEGMENT WAS EXACTLY THE SAME AS THAT EARNED BY IT IN THE BPO SE RVICES SEGMENT, AS GIVEN IN THE CONSOLIDATED FINANCIALS; THAT THUS, TH E COMPARABLE OPERATING PROFIT COULD NOT BE INFLUENCED BY THE REL ATED PARTY TRANSACTIONS; THAT THE WORKING CAPITAL ADJUSTED MA RGIN OF CG VAK WAS 3.30%; THAT THE DRP WRONGLY REJECTED ACE SOFTWARE A S A COMPARABLE FOR THE ALLEGED REASON OF DECLINING REVENUES; THAT THIS IS AN ARBITRARY REASON FOR REJECTION; THAT THE ASSESSEE, IN ITS TRA NSFER PRICING REPORT, HAD ALREADY APPLIED THE FILTER OF EXCLUDING THE COM PANIES HAVING PERSISTENT OPERATING LOSSES; THAT REVENUES MIGHT FL UCTUATE DUE TO ANY, OR SOME, OR ALL OF VARIOUS FACTORS, LIKE VOLATILE M ARKET, ECONOMIC CONDITIONS, POLITICAL CONDITIONS, DEMAND/SUPPLY CON DITIONS, ETC.; THAT THEN, NEITHER THE ACT, NOR THE OECD GUIDELINES PROV IDE THE REVENUE TREND TO BE A DETERMINANT OF COMPARABILITY; THAT OT HERWISE TOO, IN THE ASSESSEES CASE, THE ASSESSEE HAD EXTRACTED DATA OF ACE SOFTWARE FOR THE EARLIER THREE YEARS FROM THE MONEYCONTROL WEB SITE, FROM WHICH DATA, IT WAS OBSERVED THAT THERE WAS AN AVERAGE ANN UAL DECREASE OF 11.67%, WHICH MIGHT HAVE BEEN DUE TO ADVERSE BUSINE SS CONDITIONS EXISTING AT THAT TIME; THAT ALSO, ACE SOFTWARE WAS FOUND NOT TO HAVE BEEN MAKING LOSSES IN ANY OF THESE THREE YEARS; TH AT BOTH THESE COMPANIES HAD BEEN ORIGINALLY CONSIDERED BY THE TPO IN HIS SET OF COMPARABLES; THAT THE DRP ILLEGALLY REJECTED THESE COMPARABLES ITA-4990/DEL/2011 11 WITHOUT GIVING ANY NOTICE; THAT THE DRP HAS FAILED TO CONSIDER THAT IF BOTH CG VAK AND ACE SOFTWARE ARE CONSIDERED AS COMP ARABLE, THE ASSESSEES TRANSFER PRICE WOULD BE WITHIN ARMS LEN GTH; REGARDING VISHAL INFORMATION THAT THE DRP HAS MADE AN ERRONEOUS SELECTION OF M/S VISHAL INFORMATION TECHNOLOGIES LTD., WHICH HAD BEEN RIGHT LY REJECTED BY THE ASSESSEE AS A COMPARABLE, ON THE ALLEGED BASIS THAT IT WAS A COMPANY WHICH WAS FUNCTIONALLY COMPARABLE TO THE ASSESSEE C OMPANY, WHEREAS IT WAS NOT; THAT THOUGH THIS COMPANY HAD BEEN SELEC TED BY THE ASSESSEE AS A COMPARABLE WHILE PREPARING ITS TP DOC UMENTATION, WHEN THE UPDATED MARGINS FOR FY 2006-07 WERE SUBMITTED B EFORE THE TPO, IT WAS NOT TAKEN BY THE ASSESSEE AS A COMPARABLE COMPA NY; THAT IF VISHAL IS NOT CONSIDERED AS A COMPARABLE COMPANY, T HE OPERATING MARGIN OF THE ASSESSEE COMPANY WOULD FALL WITHIN AR MS LENGTH RANGE, AS REQUIRED BY THE TRANSFER PRICING RULES; REGARDING ASK ME INFO THAT THE DRP HAS FURTHER ERRED IN NOT ACCEPTING M/S ASK ME INFO HUBS LTD. AS A COMPARABLE, FOR THE ALLEGED REASON THAT T HE SAID COMPANY DID NOT HAVE EXPORT REVENUES FOR FY 2006-07; THAT THIS IS AN ARBITRARY REASON FOR REJECTION; THAT DOMESTIC COMPANIES ARE E QUALLY GOOD COMPARABLES FOR ALP; THAT FOR THE PURPOSE OF COMPAR ABILITY, IT IS ESSENTIAL TO CONSIDER THE ACTIVITY/FUNCTIONS PERFOR MED, BY THE ENTITIES TO BE COMPARED, RATHER THAT THE CUSTOMER LOCATION; THAT THE MERE FACT THAT A COMPARABLE DOES NOT HAVE FOREIGN EXCHANGE IN COME AND CATERS ONLY TO CUSTOMERS BASED IN INDIA, IS NOT SUFFICIENT FOR DISCARDING THE COMPANY AS A COMPARABLE; AND THAT IF ASK ME IS CONS IDERED AS A COMPARABLE, THE OPERATING MARGIN OF THE ASSESSEE WO ULD BE WITHIN ARMS LENGTH RANGE. ITA-4990/DEL/2011 12 4. IT HAS FURTHER BEEN CONTENDED ON BEHALF OF THE A SSESSEE THAT THE AUTHORITIES BELOW HAVE FAILED TO APPRECIATE THAT AS SESSEE HAD ENTERED INTO SUCH TRANSACTIONS WITH ITS ASSOCIATED ENTERPRI SE IN THE EARLIER YEARS ALSO AND THE MARGIN OF PROFIT WITH ITS ASSOCIATED E NTERPRISE WAS ACCEPTED BY THE AUTHORITIES AT 16% FOR A.Y. 2005-06 AND AT 14.92% FOR A.Y. 2006-07. 5. IT HAS THEN BEEN SUBMITTED THAT THE LD. DRP HAS ERRED IN NOT ALLOWING THE BENEFIT OF -5% AVAILABLE UNDER THE PRO VISO TO SECTION 92C(2) OF THE ACT, CONSIDERING WHICH, THE TRANSACTI ON OF THE ASSESSEE WOULD BE AT ARMS LENGTH; AND THAT THE DRP HAS FAIL ED TO APPLY THE PROVISO TO SECTION 92C CORRECTLY AND HAS ERRONEOUSL Y FAILED TO ALLOW TO THE ASSESSEE AN OPTION FOR THE DOWNWARD VARIATION O F 5 PERCENT IN DETERMINING THE ARMS LENGTH PRICE. 6. THE ASSESSEE HAD NEXT AVERRED THAT THE DRP HAS E RRED IN REJECTING MULTIPLE YEAR DATA OF COMPARABLE COMPANIE S. 7. IT HAS ALSO BEEN SUBMITTED THAT THE LD. DRP HAS FAILED TO MAKE APPROPRIATE ADJUSTMENTS TO ACCOUNT FOR THE VARYING RISK PROFILES OF THE ASSESSEE VIS-A-VIS THE COMPARABLES AND HAS, WHILE D OING SO, ILLEGALLY IGNORED THE INDIAN TRANSFER PRICING REGULATIONS AND JUDICIAL PRONOUNCEMENTS; AND THAT THE DRP HAS FAILED TO CONS IDER THAT THE ASSESSEE DOES NOT UNDERTAKE RISKS LIKE MARKET RISK, CONTRACT RISK, CREDIT AND COLLECTION RISK AND RISK OF INFRINGEMENT OF INT ELLECTUAL PROPERTY ETC., DUE TO WHICH FACT, BENEFIT OF THE SAME VIS-A-VIS TH E COMPARABLES OUGHT TO HAVE BEEN ALLOWED TO THE ASSESSEE. 8. LASTLY, THE ASSESSEE HAS ARGUED THAT THE ADDITIO N MADE IS WHOLLY UNTENABLE, SINCE IT HAS BEEN MADE AND CONFIRMED, ER RONEOUSLY OVERLOOKING THE FACT THAT ENTIRE INCOME OF THE ASSE SSEE IS EXEMPT U/S ITA-4990/DEL/2011 13 10B OF THE ACT AND AS SUCH, THERE COULD HAVE BEEN N O JUSTIFICATION FOR THE ASSESSEE TO RETAIN PROFITS OUT OF THE COUNTRY. 9. ON THE OTHER HAND, ON BEHALF OF THE DEPARTMENT, STRONG RELIANCE HAS BEEN PLACED ON THE ORDERS OF THE AUTHORITIES BE LOW. IT HAS BEEN CONTENDED IN THE ARGUMENTS ADDRESSED AND IN THE WRI TTEN SUBMISSIONS FILED, THAT WITH REGARD TO SAFE HARBOUR, IT IS POIN TED OUT THAT LAW HAS BEEN AMENDED, AND THE ISSUE IS CONCLUSIVELY SETTLED IN FAVOUR OF REVENUE; THAT IN FACT, THE SAME HAS BEEN HELD SO BY THE ITAT, SPECIAL BENCH, DELHI IN THE CASE IHG IT SERVICES (INDIA) P VT. LTD. VS. ITO, VIDE ORDER DATED 30.04.2013, IN ITA NO. 5890/D/2010, THA T THE ASSESSEE'S OPERATING MARGIN AT 15.58% (OP/OC) IS, AS ADMITTED BY THE ASSESSEE ITSELF, LESS THAN ITS OWN BENCHMARKING MARGIN ARRIV ED AT (BY THE ASSESSEE ITSELF) AT 21.51%; THAT THE ASSESSEE'S STR ATEGY IS TO PULL DOWN THE BENCHMARKING MARGIN ANYHOW, BY SEEKING EXCLUSIO N OF CERTAIN COMPARABLES, AND BY INCLUSION OF CERTAIN COMPARABLE S; THAT THIS IS WITH A VIEW TO PROJECT THAT ITS INTERNATIONAL TRANSACTIO NS ARE AT ARM'S LENGTH; THAT USE OF MULTIPLE YEAR DATA IS NOT PERMITTED AND THE DRP HAS APPROPRIATELY DELIBERATED ON THIS ISSUE. (PARAS 29 TILL 31, PAGES 8 TILL 10 OF THE ORDER OF THE DRP; THAT THIS IS THE SETTLED P OSITION OF LAW; THAT WITH REGARD TO CONSISTENCY, EVEN THE BENCHMARKING MARGIN ARRIVED AT BY THE ASSESSEE ITSELF WAS VARYING EVERY YEAR; THAT BESIDE S, THE ITAT, HAS HELD THAT CONSISTENCY IS NOT A VALID ARGUMENT IN A TRANS FER PRICING SITUATION; THAT RELIANCE IN THIS REGARD IS PLACED ON ORDERS OF THE ITAT, DELHI IN THE CASE OF M/S. CARRARO INDIA LTD. VS. DCLT (2008) -TI OL -519-ITAT-DEL; THAT FURTHER, THE ASSESSEE ITSELF HAS RELIED ON THE ORDER OF ACIT, RANGE- 10(1), MUMBAI VS. HAPAG LLOYD GLOBAL SERVICES (P.) LTD., ORDER DATED 28/02/2013, A.Y. 2005-06, IN ITA NO. 8499/M/2010; T HAT IN THIS CASE, IT HAS BEEN HELD, AMONGST OTHER THINGS, THAT FILTERS A RE NECESSARY AND THAT COMPARABLES VARY FROM YEAR TO YEAR AND FROM CA SE TO CASE; THAT RELIANCE IS ALSO PLACED ON THE ORDER OF THE MUMBAI TRIBUNAL, IN ONWARD TECHNOLOGIES LTD., ITA NO. 7885/M/2010, ORDER DATE D 30/04/2013, ITA-4990/DEL/2011 14 WHEREIN THEY HAVE RELIED UPON ORDER OF THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S CWT VS. MEATTLES PVT. LTD., 156 I TR 569 DELHI; THAT IT HAS ALSO BEEN HELD IN THE CASE OF M/S ADVANCE POWER , ITAT MUMBAI, IN ITA NO. 6542/6732/M/2011, ORDER DATED 8.5.2013, THA T COMPARABILITY OF AN ENTITY IS TO BE TESTED IN EACH ASSESSMENT YEAR; THAT FURTHER, IT HAS BEEN HELD IN THE CASE OF M/S DHL EXPRESS INDIA PVT. LTD. VS. ACIT, 46 SOT 379 (MUM), THAT IF TWO COMPANIES WERE COMPARED AS COMPARABLE IN ONE YEAR, IT IS NOT NECESSARY THAT THEY SHOULD B E CONSIDERED AS COMPARABLE IN THE OTHER YEAR ALSO; THAT IT HAS ALS O BEEN HELD IN THE CASE OF DCIT VS. FIRMENICH AROMATICS INDIA PVT. LTD ., 53 SOT 269 URO, MUMBAI, THAT THERE IS NO MERIT IN THE ARGUMENT THAT THE OPERATING PROFIT SHOWN BY THE ASSESSEE SHOULD BE ACCEPTED SOL ELY ON THE GROUND THAT IN THE SUBSEQUENT YEAR, THE TPO HAS ACCEPTED T HE OPERATING MARGIN SHOWN BY THE ASSESSEE; THAT WITH REGARD TO R ISK ANALYSIS, RELIANCE IS PLACED ON THE ORDER OF THE DRP; THAT TH E ARGUMENT THAT THE ASSESSEE'S INCOME WAS EXEMPT FROM TAX, AND THAT IT HAD NO MOTIVE FOR TAX EVASION IS NOT RELEVANT IN A TRANSFER PRICING S ITUATION; THAT RELIANCE IS PLACED ON THE FOLLOWING ORDERS: - ITO VS. TIANJIN TIANSHI INDIA (P) LTD. - 2011 -64-D TR 98, 133 LTD 123 DELHI TRIBUNAL ESTABLISHMENT OF MOTIVE OF T AX EVASION, IS NOT REQUIRED BEFORE INVOKING TP PROVISIONS. AZTE CH SPECIAL BENCH ORDER, 107 ITO 141, BANGALORE SB, PARAS 127 T ILL 129. COCA COLA INDIA {P} LTD. 309 ITR 194{ HON'BLE P&H H IGH COURT ). HAWORTH INDIA (P) LTD. 131 ITO 215, DELHI DCIT VS. INDO AMERICAN JEWELLERY (2010) 41 SOT 1 (M UMBAI) ACIT VS. TARA ULTIMA (P) LTD. - 201163 DTR 333 - MU MBAI TRIBUNAL; THAT THE ASSESSEE HAS DESIRED THE EXCLUSION OF M/S. VISHAL INFOTECH LTD., AS IT FINDS THAT IT WILL BENEFIT BY EXCLUSION OF TH IS ENTITY AS A COMPARABLE; THAT THE ASSESSEE HAD ITSELF FOUND THIS ENTITY AS A COMPARABLE ENTITY IN ITS OWN BENCHMARKING ANALYSIS FOR A.Y. 2007-08; THAT BESIDES, THE DRP HAS GIVEN DETAILED REASONS IN THIS REGARD (PAGES ITA-4990/DEL/2011 15 3-6 OF THE DRPS ORDER, PARAS 9-15); THAT RELIANCE IS ALSO PLACED ON THE ORDER OF THE HYDERABAD TRIBUNAL IN THE CASE OF DCLT VS. M/S. DELOITTE CONSULTING INDIA (P) LTD., HYDERABAD, IN ITA NO. 10 82/1082- 1084/HYDERABAD/2010, ORDER DATED 22-07-2011; THAT T HE ASSESSEE HAS DESIRED INCLUSION OF M/S. ASK ME INFO HUBS (P) LTD. AS A COMPARABLE; THAT THE DRP HAS GIVEN DETAILED REASONING FOR EXCLU SION OF THIS ENTITY IN PARAS 18 & 19, ON PAGES 6 & 7 OF ITS ORDER; THAT EVEN THE ASSESSEE ITSELF, IN ITS OWN BENCHMARKING ANALYSIS, HAD FOUND THIS ENTITY TO BE NOT COMPARABLE (PAGE 64, ITEM NO. 49, APB); THAT THIS E NTITY FAILS THE EXPORT EARNINGS FILTER; THAT INCIDENTALLY, THE ASSE SSEE ITSELF IS IN THE SITUATION OF SUBSTANTIAL EXPORT EARNINGS; THAT THE EXPORT EARNINGS FILTER HAS BEEN APPROVED IN THE CASE OF M/S. VEDARIS INDIA (P) LTD., PARA 55, 131 TTJ DELHI 309; THAT IT HAS ALSO BEEN SO HELD IN THE CASE OF DCLT VS. INDO AMERICAN JEWELLERY INDIA (P) LTD., ITA NO. 619 4/MUMBAI/2008, ORDER DATED 31/05/2010; THAT THE ASSESSEE HAS DESIR ED INCLUSION OF M/S. ACE SOFTWARE (P) LTD.; THAT THE REASONS OF THE DRP FOR EXCLUSION THEREOF ARE EXPLICIT (PAGES 7 & 8, PARAS 20-25 OF THE DRPS ORDER); THAT RELYING ON MULTIPLE YEAR DATA FOR WORKING OUT THE TREND SUC H AS PERSISTENT LOSSES OR PERSISTENT DECLINE IN SALES IS NOT THE SA ME AS USE OF MULTIPLE YEAR DATA FOR ARRIVING AT BENCHMARK MARGIN; THAT TH E ASSESSEE HAS DESIRED EXCLUSION OF M/S. CG VAK SOFTWARE; THAT THE REASONS OF THE DRP FOR NOT EXCLUDING ARE COMPREHENSIVE; THAT THE ASSES SEE HAS CLEVERLY AND INAPPROPRIATELY WORKED OUT THE RPT QUANTUM IN T HIS CASE; THAT IT HAS BEEN HELD IN THE CASE OF M/S NEXTLINK INDIA P LTD, ITAT BANGALORE , ITA NO 454/BANG/2011, AY 2005-06 DATED 19-10-2012, THAT EVEN A 40% MARGIN IS NORMAL IN THE CASE OF ITES; THAT WHIL E CHOOSING COMPARABLES, ONLY A BROAD COMPARABILITY IS REQUIRED (PAGE 4, PARA 10 OF THE DRP'S ORDER); THAT IN FACT, THE ASSESSEE ITS ELF HAS CHOSEN BROADLY COMPARABLE ENTITIES; THAT THE FILTER OF DIMINISHING REVENUE AND PERSISTENT LOSSES HAS BEEN APPROVED BY ITAT DELHI I N CASE OF NAVISITE, VIDE ORDER DATED 31-05-2013; THAT POWERS OF THE DRP TO ENHANCE VARIATION HAS BEEN MANIFEST AS PER LAW AND THE INTE NT, IS AVAILABLE TO ITA-4990/DEL/2011 16 DRP FROM 1.4.09; THAT REFERENCE MAY BE MADE TO FUR THER CLARIFICATION TO FINANCE BILL, 2012; AND THAT CBDT CIRCULAR NO 3 /2012, DATED 12/06/2012 IS ALSO ELOQUENT IN THIS REGARD. 10. THE DEPARTMENTS GROUND-WISE COUNTER IS AS UNDE R: COUNTER TO GROUND NO.1 & 2 THESE ARE GENERAL IN NATURE. COUNTER TO GROUND NO.3 THIS IS A SETTLED ISSUE. THE HON'BLE DRP HAS CONSID ERED THIS IN PARAS 5 TILL 8, PAGES 2 & 3 OF THEIR ORDER. THIS ISSUE HAS BEEN CONSIDERED IN DETAIL IN THE SPECIAL BENCH ORDER OF M/S AZTEC SOFTWARE & TECHNOLOGY SERVICES VS. ACIT, 2007,107 LTD 14L. RELIANCE IS AL SO PLACED ON THE ORDER OF RANBAXY LABORATORIES LTD. VS. ADDL.CIT, 20 08, 110 ITO 428 DELHI. FURTHER, AS HELD IN THE CASE OF M/S AZTEC, THERE IS NO REQUIREMENT FOR THE AO TO HEAR THE ASSESSEE, OR RECORD REASONS BEFORE MAKING REFERENCE TO TPO. COUNTER TO GROUND NO.4 & 5 THE GENERAL DISCUSSION, AS DETAILED IN THIS LETTER IS RELEVANT. COUNTER TO GROUND NO.6 THIS GROUND RELATES TO FUNCTIONAL COMPARABILITY, AN D SELECTION OF COM PARABLES. THE GENERAL DISCUSSION IN THIS LETTER IS RELEVANT. FURTHER, THE PROVISIONS RELATING TO SAFE HARBOUR, HAVE BEEN CONC LUSIVELY SETTLED IN FAVOUR OF REVENUE, AS BEING RETROSPECTIVE AS DETAIL ED IN THIS LETTER. COUNTER TO GROUND NO.7 THE AFORESAID GROUND HAS BEEN COUNTERED EARLIER IN THIS LETTER. MERELY BECAUSE PROFITS OF THE ASSESSEE HAVE BEEN ACCEPTED IN EARLIER YEARS, OR IN A SUBSEQUENT YEAR, DOES NOT IN ITSELF, IMPLY THA T THE TRANSACTIONS IN THIS YEAR TOO ARE AT ARM'S LENGTH. IT HAS BEEN HELD IN THE CASE OF DCLT VS. FIRMENICH AROMATICS INDIA {P} LTD., 53 SOT 269 URO, MUMBAI, PARA ITA-4990/DEL/2011 17 9 & 10, THAT THERE IS NO MERIT IN THE ARGUMENT THAT THE OPERATING PROFIT SHOWN BY THE ASSESSEE SHOULD BE ACCEPTED, SOLELY ON THE GROUND THAT IN SUBSEQUENT YEAR THE TPO HAS ACCEPTED THE OPERATI NG MARGIN SHOWN. COUNTER TO GROUND NO.8 THIS ISSUE RELATES TO SAFE HARBOUR, AND HAS BEEN DE TAILED EARLIER IN THIS LETTER COUNTER TO GROUND NO.9 THE INFORMATION AS OBTAINED FROM VISHAL LNFORMATION , AS REPRODUCED IN DRP'S ORDER IN PARA LL, AND PAGES 4 & 5 IS ONLY SUP PORTIVE OF DEPARTMENTAL VIEW POINT. MOREOVER RELIANCE IS PLACE D EVEN BY THE DRP ON THE CASE OF DELOITTE CONSULTANT {P} LTD., HYDERA BAD, ( PARA 13 OF DRP, PAGE NO.5). COPY OF THIS ORDER IS BEING PLACED . 11. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE MATERIAL ON RECORD. ONE OF THE CONTENTIONS RAISED BEFORE US BY THE ASSESSEE IS THAT IF VISHAL IS NOT CONSIDERED AS A COMPARABLE COMPANY , THE OPERATING MARGIN OF THE ASSESSEE COMPANY WOULD FALL WITHIN AR MS LENGTH RANGE, AS REQUIRED BY THE TRANSFER PRICING RULES. THE DEPA RTMENTS RESPONSE TO THIS SUBMISSION IS THAT THE ASSESSEE HAD ITSELF FOUND THIS ENTITY AS A COMPARABLE ENTITY IN ITS OWN BENCHMARKING ANALYSIS FOR A.Y. 2007-08; THAT BESIDES, THE DRP HAS GIVEN DETAILED REASONS IN THIS REGARD (PAGES 3-6 OF THE DRPS ORDER, PARAS 9-15). IN THIS REGARD , RELIANCE HAS BEEN PLACED ON THE ORDER OF THE HYDERABAD TRIBUNAL IN TH E CASE OF DCLT VS. M/S. DELOITTE CONSULTING INDIA (P) LTD., HYDERABAD, IN ITA NO. 1082- 1084/HYDERABAD/2010, ORDER DATED 22-07-2011. 12. IN THIS REGARD, IT IS SEEN THAT THE TPO OBSERVE D THAT THE FUNCTIONS PERFORMED BY VISHAL ARE SIMILAR TO THE ASSESSEE; TH AT WAGES TO COST RATIO CANNOT BE ADOPTED TO ACCEPT/REJECT THE COMPAR ABLES; THAT THE ASSESSEE HAS ITSELF CHOSEN VISHAL IN ITS TP STUDY. THE ASSESSEE OBJECTED BEFORE THE DRP THAT EXECUTION OF CONTRACTS WAS OUTSOURCED BY ITA-4990/DEL/2011 18 THE ASSESSEE TO EXTERNAL VENDORS THE COMPANY DOES NOT PERFORM COMPARABLE FUNCTIONS; THAT WORK IN PROGRESS IS SIGN IFICANT PART OF OPERATING COST CLEARLY DEMONSTRATING THAT THE COMPA NY IS FOLLOWING A VERY DIFFERENT MODEL OF BUSINESS. THE DRPS FINDIN GS ARE THAT THE COMPANY IS RENDERING ITES SERVICES USING ITS OWN AS SETS AND HUMAN RESOURCES (MAY NOT BE ON THE ROLL OF THE COMPANY) A ND IS FUNCTIONALLY SIMILAR TO THE TAXPAYER; AND THAT RPT MORE THAN 25% AS CORPORATE GUARANTEE IS NOT ACCEPTABLE, AS THIS TRANSACTION DO ES NOT HAVE EFFECT ON PROFIT & LOSS. 13. WE FIND THAT M/S VISHAL INFORMATION TECHNOLOGIE S LIMITED HAS A DIFFERENT BUSINESS MODEL THAN THAT OF THE ASSESSEE, AS IT OUTSOURCES EXECUTION OF CONTRACTS TO EXTERNAL VENDORS TO SAVE COST ON EMPLOYEES WHICH IS ALSO EVIDENT FROM THE FACT THAT EMPLOYEE C OST FOR VISHAL IS 3% TO THE TOTAL COST, WHEREAS IN CASE OF ASSESSEE, IT IS 60% TO THE TOTAL COST. 14. IN THE FOLLOWING CASES, THE ASSESSEE WAS INVOLV ED IN THE BUSINESS OF INFORMATION TECHNOLOGY ENABLED SERVICES, AND REV ENUE SOUGHT TO INCLUDE M/S VISHAL INFORMATION TECHNOLOGIES AS COMP ARABLE TO COMPUTE THE MEAN MARGIN OF THE COMPARABLES, IT WAS HELD BY THE ITAT THAT SUCH COMPARABLE IS FUNCTIONALLY NOT COMPARABLE. THE AFO RESAID CONCLUSION HAS BEEN ARRIVED AT BY THE TRIBUNAL ON THE GROUND T HAT IT WAS OUTSOURCING A CONSIDERABLE PORTION OF ITS BUSINESS AND AS SUCH, IT WAS HELD THAT THE SAME WAS NOT COMPARABLE : (I) M/S MAERSK GLOBAL SERVICE CENTER (INDIA) P.LTD. 1 45 TTJ 64. (II) ITO VS. ZYDUS ALTANA HEALTHCARE (P) LTD. 44 SOT 1 32 (MUM). (III) ACIT VS. HAPAG LLOYD GLOBAL SERVICES (P) LTD. [20 13] 34 TAXMANN.COM 241 (MUM). ITA-4990/DEL/2011 19 (IV) CAPITAL IQ INFORMATION SYSTEM (INDIA) P.LTD. VS. DC IT (INTERNATIONAL TAXATION) [2013] 32 TAXMANN.COM 21 (HYD). 15. IN FIRST ADVANTAGE OFFSHORE SERVICES LTD. VS. C IT - ITA NO.1086/BANG/2011, DATED 30.3.2013, IT HAS BEEN HEL D THAT IN THE CASE OF AN ITES COMPANY, EMPLOYEE COST SHOULD DEFINITELY BE MORE THAN 25% OF THE TOTAL EXPENSES AS IN THE ITES SEGMENT, T HE ENTIRE WORK IS TO BE DONE BY THE EMPLOYEES AND COMPANIES WHOSE EMPLOY EE COST IS LESS THAN 25% MUST BE EXCLUDED. FOLLOWING THE AFORESAID ORDER OF THE TRIBUNAL, THE BANGALORE BENCH OF THE TRIBUNAL, IN T HE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA (P) LTD. VS. ITO [2013] 38 TAXMANN.COM 55, HAS AGAIN HELD THAT SINCE THE EMPLOYEE COST/OPERATI NG SALES OF M/S VISHAL INFORMATION TECHNOLOGIES LTD. IS A MERE 3%, WHEREAS THE THRESHOLD LIMIT FOR ACCEPTANCE AS A COMPARABLE ON T HE BASIS OF EMPLOYEE COST TO SALES SHOULD BE AT LEAST 25%, THE SAME IS LIABLE TO BE EXCLUDED. 16. FURTHER, AS HELD IN SAP LABS INDIA PVT.LTD. VS. ACIT (ITA NO.398/BANG/2008), VISHAL IS ALSO AN EXCEPTIONALLY HIGH PROFIT MAKING COMPANY AND SHOULD NOT BE CONSIDERED. 17. THEN, OVER 20% OF OPERATING COSTS OF M/S VISHAL INFORMATION TECHNOLOGIES LTD. CONSIST OF WORK IN PROGRESS AND SUCH A SIGNIFICANT PART OF OPERATING COSTS BEING WORK IN PROGRESS CL EARLY SIGNIFIES THAT THE COMPANY IS FOLLOWING A VERY DIFFERENT OPERATING MODEL FROM THAT OF THE ASSESSEE. FURTHER, IT HAS PROVIDED A CORPORATI ON GUARANTEE OF ` 10.85 CRORES (AMOUNT TO 35% OF ITS TURNOVER) ON BEH ALF OF ITS HOLDING COMPANY. 18. IT IS, FURTHER, NOTEWORTHY THAT AS OBSERVED IN DCIT VS. QUARK SYSTEMS PVT.LTD. 132 TTJ 1, WHILE PREPARING THE T P REPORT BY AN ITA-4990/DEL/2011 20 OVERSIGHT THE BUSINESS MODEL OF M/S VISHAL WAS NOT PROPERLY TAKEN INTO ACCOUNT AND HENCE, MERELY BECAUSE IT IS CHOSEN BY T HE ASSESSEE IN ITS TP STUDY, THE SAME CANNOT BE HELD TO BE COMPARABLE AND THE TAXPAYER IS ENTITLED TO POINT OUT THAT THE SAID ENTERPRISE H AS WRONGLY BEEN TAKEN AS A COMPARABLE. 19. THEN, MERELY BECAUSE M/S VISHAL INFORMATION TEC HNOLOGIES LTD. HAS BEEN SELECTED AS COMPARABLE IN THE TRANSFER PRI CING STUDY, THIS DOES NOT IPSO FACTO ESTABLISH THAT THE SAME IS AN I NAPPROPRIATE COMPARABLE. THE CHANDIGARH BENCH OF THE ITAT, IN T HE CASE OF DCIT VS. M/S QUARK SYSTEMS PRIVATE LIMITED REPORTED IN 32 TT J 1, HAS HELD THAT EVEN IF THE TAXPAYER OR ITS COUNSEL HAD TAKEN DATAM ATICS AS COMPARABLE IN ITS TP AUDIT, THE TAXPAYER IS ENTITLE D TO POINT OUT TO THE TRIBUNAL THAT THE ABOVE ENTERPRISE HAS WRONGLY BEEN TAKEN AS A COMPARABLE, AND AS SUCH, THE ASSESSEE IS ENTITLED T O CONTEND THAT THE AFORESAID COMPARABLE IS NOT COMPARABLE, AS BEING FU NCTIONALLY DISSIMILAR. 20. TOO, IN ESSENCE, IN THE CASE OF VISHAL, EXECUTI ON OF CONTRACTS HAS BEEN OUTSOURCED TO EXTERNAL VENDORS AND, AS SUCH, T HE COMPANY DOES NOT PERFORM FUNCTIONS COMPARABLE TO THE ASSESSEE. A MAJOR PORTION OF THE EXECUTION IS OUTSOURCED BY IT VIS-A-VIS THE EST ABLISHED IN-HOUSE CAPABILITY OF THE ASSESSEE TO PERFORM THE EXECUTION OF WORK. ALSO, AS VISHAL HAS BEEN MAKING HIGH MARGINS CONSISTENTLY, O N THIS SCORE ITSELF, THE SAME OUGHT TO BE EXCLUDED FROM THE SET OF COMPA RABLES. THEN, IN THE CASE OF VISHAL, OVER 20% OF ITS OPERATING COSTS IN ITS AUDITED FINANCIALS CONSIST OF WORK IN PROGRESS. SUCH A S IGNIFICANT PART OF OPERATING COSTS BEING WORK IN PROGRESS CLEARLY SI GNIFIES THAT THE COMPANY IS FOLLOWING A VERY DIFFERENT OPERATING MOD EL VIS-A-VIS THE TESTED PARTY AND IT SHOULD BE DEEMED TO BE FUNCTION ALLY INCOMPARABLE. ITA-4990/DEL/2011 21 21. IN M/S MAERSK GLOBAL SERVICE CENTER (INDIA) P.L TD. 145 TTJ 64, IT HAS BEEN HELD THAT INSOFAR AS THE CASES OF TULSYAN TECHNOLOGIES LIMITED AND VISHAL INFORMATION TECHNOLOGIES LIMITED ARE CONCERNED, IT IS NOTICED FROM THEIR ANNUAL ACCOUNTS THAT THESE CO MPANIES OUTSOURCED A CONSIDERABLE PORTION OF THEIR BUSINESS. AS THE A SSESSEE CARRIED OUT THE ENTIRE OPERATIONS ITSELF, IN OUR CONSIDERED OPI NION, THESE TWO CASES WERE RIGHTLY EXCLUDED. 22. THE DRP HAS REFERRED, AT PAGE 4 OF ITS ORDER, T O THE INFORMATION OBTAINED BY THE DEPARTMENT FROM M/S VISHAL INFORMAT ION TECHNOLOGIES LTD. THIS PURPORTED INFORMATION WAS PROVIDED BY VI SHAL INFORMATION LETTER DATED 23.3.2010, WHICH HAS NOT BEEN MADE AVA ILABLE TO THE ASSESSEE COMPANY AND, AS CONTENDED AND NOT DISPUTED , THEREFORE, PER- SE, THE SAME CANNOT BE RELIED ON. MOREOVER, SUCH I NFORMATION PERTAINS TO AY 2008-09 AND NOT AY 2007-08 AND IT HAS NO APPL ICABILITY FOR THE YEAR UNDER CONSIDERATION. THERE ARE DISCREPANCIES IN THE PROFIT AND LOSS ACCOUNT. THUS, ONCE IT IS ADMITTED THAT THERE IS DISCREPANCY IN RESPECT OF THE INFORMATION AVAILABLE IN THE PUBLIC DOMAIN, THE SAME CAN BE EXCLUDED. 23. LAST, BUT NOT THE LEAST, IF VISHAL, WHICH HAS A DIFFERENT BUSINESS MODEL THAN THAT OF THE ASSESSEE, AND IS ALSO AN EXC EPTIONALLY HIGH PROFIT MAKING COMPANY, IS EXCLUDED AS A COMPARABLE, THE ARITHMETIC MEAN WILL BECOME 19.54%. THIS WOULD FALL WITHIN TH E RANGE OF +/- 5% BOTH, ACCORDING TO THE OLD PROVISO, AS WELL AS THE AMENDED PROVISO TO SECTION 92C OF THE ACT AND THE MARGIN OF PROFIT DEC LARED WOULD BE AT ARMS LENGTH. CONSEQUENTIALLY, NO ADJUSTMENT WILL HAVE TO BE MADE. 24. THE DEPARTMENT HAS NOT BEEN ABLE TO REFUTE THE ABOVE POSITION BEFORE US. IN VIEW OF THE ABOVE, FINDING THE SAME TO BE PERFECTLY REASONABLE, WE DIRECT THE EXCLUSION OF M/S VISHAL I NFORMATION TECHNOLOGIES LTD. AS A COMPARABLE. SINCE THE EXCLU SION OF M/S VISHAL ITA-4990/DEL/2011 22 INFORMATION TECHNOLOGIES LTD. FROM THE SET OF COMPA RABLES, AS ABOVE, BRINGS THE ASSESSEE WITHIN THE PRESCRIBED RANGE OF +/- 5%, THE MERITS OF THE COMPARABILITY OF THE OTHER COMPARABLES NEED NOT BE GONE INTO AND WE ARE NOT DOING SO. AS A CONSEQUENCE THEREOF, THE GRIEVANCE OF THE ASSESSEE IN THIS REGARD IS FOUND TO BE JUSTIFIE D AND GROUND NOS.2 AND 4 TO 9 TAKEN BY THE ASSESSEE ARE ACCEPTED. GRO UND NO.1 IS GENERAL, WHEREAS GROUND NO.3 IS RENDERED ACADEMIC. GROUND NO.10 IS CONSEQUENTIAL. 25. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. DECISION PRONOUNCED IN THE OPEN COURT ON 02 ND APRIL, 2014. SD/- SD/- ( (( ( T.S. KAPOOR T.S. KAPOOR T.S. KAPOOR T.S. KAPOOR ) )) ) (A.D. JAIN (A.D. JAIN (A.D. JAIN (A.D. JAIN ) )) ) ACCOUNTANT ACCOUNTANT ACCOUNTANT ACCOUNTANT MEMBER MEMBER MEMBER MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER DATED : 02.04.2014 DK COPY FORWARDED TO: - 1. APPELLANT : M/S TECHBOOKS INTERNATIONAL PRIV ATE LIMITED, M/S TECHBOOKS INTERNATIONAL PRIVATE LIMITED, M/S TECHBOOKS INTERNATIONAL PRIVATE LIMITED, M/S TECHBOOKS INTERNATIONAL PRIVATE LIMITED, O OO O- -- -100, 1 100, 1 100, 1 100, 1 ST STST ST FLOOR, SECTOR FLOOR, SECTOR FLOOR, SECTOR FLOOR, SECTOR- -- -12, NOI 12, NOI 12, NOI 12, NOIDA DA DA DA 201 301, 201 301, 201 301, 201 301, UTTAR PRADESH. UTTAR PRADESH. UTTAR PRADESH. UTTAR PRADESH. 2. RESPONDENT : ASSISTANT COMMISSIONER OF INCOME TA X, ASSISTANT COMMISSIONER OF INCOME TAX, ASSISTANT COMMISSIONER OF INCOME TAX, ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE CIRCLE CIRCLE CIRCLE- -- -1, NOIDA. 1, NOIDA. 1, NOIDA. 1, NOIDA. 3. CIT 4. CIT(A) 5. DR, ITAT ASSISTANT REGISTRAR