IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : B E NGAL U R U BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI LALIET KUMAR , JUDICIAL MEMBER IT (TP) A NO. 502 / BANG/20 1 5 (ASSESSMENT YEAR: 2010 - 11 ) AND CROSS OBJN.NO.139/BANG/2015 (IN IT(TP)A NO.502/B ANG/2015) (ASSESSMENT YEAR: 2010 - 11) M/S.SCANCAFE DIGITAL SOLUTIONS PVT. LTD. GROUND FLOOR, NEIL RAO TOWERS, PLOT NO.118, ROAD NO.03, EPIP PHASE - 1, WHITEFIELD MAIN ROAD, BENGALURU - 560066 PAN: AAKCS 5398 E VS. APPELLANT INCOME - T AX OFFICER, WARD 6(1)(1), BENGALURU. RESPONDENT AND IT (TP) A NO. 450 / BANG/20 15 (ASSESSMENT YEAR: 2010 - 11 ) (BY THE REVENUE) A SSESSEE BY : SHRI CHAVALI NARAYAN, CA. REVENUE BY : SHRI G.KAMALADHAR, STANDING COUNSEL . DATE OF HEARING : 15/03/2017 DATE OF PRONOUNCEMENT : 12 /04/2017 O R D E R PER I NTURI RAMA RAO, AM : THESE CROSS APPEALS FILED BY THE ASSESSEE - COMPANY AS WELL AS THE REVENUE AND CROSS OBJECTIONS BY THE ASSESSEE ARE D IRECTED IT(TP)A NOS.5 02 & 450 /BANG/201 5 PAGE 2 OF 26 AGAINST THE ORDER OF ASSESSMENT PASSE D U/S 143(3) R.W.S. 144C OF THE OF THE INCOME - TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT' FOR SHORT] DATED 30/01/2015 FOR THE ASSESSMENT YEAR 2010 - 11. THE ASSESSEE ALSO FILED CROSS OBJECTIONS AGAINST THE ASSESSMENT ORDER DATED 30/01/2015 FOR THE ASSESSMENT YEAR 2010 - 11. 2. BRIEFLY, FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IT IS A WHOLLY OWNED SUBSIDIARY OF SCANCAFE INC., USA. IT IS ENGAGED IN THE BUSINESS OF PROVIDI NG DIGITAL IMAGING SERVICES FALLING WITHIN THE CATEGORY OF IT ENABLED SERVICES (ITES) TO ITS AES. THE ASSESSEE - COMPANY IS COMPENSATED BY THE AE AT COST +17% MARK0UP BASIS. IT HAS FILED RETURN OF INCOME FOR THE ASSESSMENT YEAR 2010 - 11 ON 27/09/2010 DECLARIN G TOTAL INCOME OF RS.52,010/ - . THE ASSESSEE - COMPANY ALSO REPORTED INTERNATIONAL TRANSACTION OF PROVISION OF DIGITAL IMAGING SERVICES (ITES) OF RS.17,58,08,037/ - IN ITS FORM 3CEB. THE ASSESSEE - COMPANY SOUGHT TO JUSTIFY THE CONSIDERATION RECEIVED FOR THE IN TERNATIONAL TRANSACTION ENTERED WITH ITS AE TO BE AT ARM S LENGTH. THE ASSESSEE - COMPANY HAD ALSO SUBMITTED TRANSFER PRICING STUDY REPORT ADOPTING THE OPERATING PROFIT TO THE TOTAL COST AS PROFIT LEVEL INDICATOR (PLI) FOR THE TRANSFER PRICING STUDY. THE ASS ESSEE - COMPANY ALSO ADOPTED TNMM WHICH WAS CONSIDERED TO BE THE MOST APPROPRIATE METHOD FOR THE PURPOSE OF BENCH MARKING ITS INTERNATIONAL TRANSACTION. THE ASSESSEE - COMPANY S PROFIT MARGIN IT(TP)A NOS.5 02 & 450 /BANG/201 5 PAGE 3 OF 26 WAS COMPUTED AT 17.1% AND THE ASSESSEE - COMPANY CLAIMED THAT THE INT ERNATIONAL TRANSACTIONS IN THE IT ENABLED SERVICES (ITES) SEGMENT ARE AT ARM S LENGTH . FOR THE PURPOSE OF TP STUDY ASSESSEE - COMPANY HAD CHOSEN 9 COMPARABLE ENTITIES AND AND ARITHMETIC AVERAGE OF OPERATING PROFIT MARGINS OF SAID COMPARABLES WAS COMPUTED AT 18.53%. ACCORDING TO THE ASSESSEE - COMPANY, ITS PLI WAS WITHIN +/ - OF THE RANGE OF ARITHMETIC MEAN OF THE COMPARABLE ENTITIES. HENCE, IT WAS CLAIMED THAT THE TRANSACTIONS WITH ITS AE ARE AT ARM S LENGTH. THE ASSESSEE - COMPANY HAD CHOSEN THE FOLLOWING 9 E NTITIES AS COMPARABLES WHOSE AVERAGE PROFIT MARGIN WAS COMPUTED AT 18.53%: SL. NO. PARTICULARS MARGIN (%) 1 ACCENTIA TECHNOLOGIES LTD. 42.42% 2 ADITYA BIRLA MINACS WORLDWIDE LTD. 1.00% 3 CG - VAK SOFTWARE & EXPORTS LTD. - 3.23% 4 CEPHA IMAGING PVT.LTD. 2. 87% 5 COSMIC GLOBAL LTD. 36.35% 6 INFORMED TECHNOLOGIES INDIA LTD. 11.05% 7 INFOSYS BPO LTD. 23.02% 8 R SYSTEMS INTERNATIONAL PVT. LTD. 9.95% 9 VISHAL INFORMATION TECHNOLOGIES LTD. 43.33% 3. THE AO REFERRED THE MATTER TO THE TPO FOR BENCH MARKING ABOVE INTERNATIONAL TRANSACTIONS. THE TPO, BY ORDER DATED 03/01/2014 PASSED U/S 92CA(3) OF THE ACT, COMPUTED TP ADJUSTMENT AT RS.1,17,43,778/ - . THE TPO ACCEPTED TNMM METHOD ADOPTED BY THE ASSESSEE - COMPANY AS THE MOST APPROPRIATE METHOD AND ALSO OPERATING PROFIT TO THE OPERATING COST (OP/OC) AS IT(TP)A NOS.5 02 & 450 /BANG/201 5 PAGE 4 OF 26 PLI, HOWEVER, REJECTED THE TP STUDY REPORT SUBMITTED BY THE ASSESSEE - COMPANY. THE TPO THEN PROCEEDED TO IDENTIFY DIFFERENT SET OF COMPARABLE ENTITIES FOR THE PURPOSE OF DETERMINING ALP. WHILE DOING SO, TPO APPLIED THE FOLLOWING FILTERS: COMPANIES FOR WHICH CURRENT YEAR DATA WAS AVAILABLE COMPANIES WHOSE ITE SERVICE INCOME