Global Logic India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 5110/DEL/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66083 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 21-11-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 19-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Keywords: Related party transaction; Capital asset; Depreciation; Transfer pricing; International transaction
• Section: 143(3); 80HHC; 10

Judgement Text

ITA NO. 5110/DEL/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I, NEW DELHI BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 5110/DEL/2010 A.Y. : 2006-07 GLOBAL LOGIC INDIA PVT. LTD., 207, GUPTA ARCADE, LSC PLOT NO. 5, MAYUR VIHAR, PHASE-I EXTN., DELHI 110 091 , (PAN : AABCI12526F) VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 12(1), NEW DELHI (APPELLANT ) (APPELLANT ) (APPELLANT ) (APPELLANT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) ASSESSEE BY : SH. NEERAJ JAIN, ADV., SH. ABHISHEK AGGARWAL & SH. RAMIT KATYAL, CA DEPARTMENT BY : SH. PEEYUSH JAIN, C.I.T. (D.R.) ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE ASSESSING OFFICER U/S. 143(3) READ WITH SECTION 14 4C OF THE I.T. ACT FOR THE ASSESSMENT YEAR 2006-07. 2. THE GROUNDS RAISED READ AS UNDER:- 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING ASSESSMENT UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 ('THE ACT') AT AN INCOME OFRS.8,20,86,272 AS AGAINST THE RETURNED INC OME OF RS. 14,78,675. ITA NO. 5110/DEL/2010 2 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN MAKING AN ADDITION OF RS.7,87,94,571 ON ACCOUNT OF T HE ALLEGED DIFFERENCE IN THE ARM'S LENGTH PRICE OF THE 'INTERNATIONAL TRANSACTIONS' OF PROVISION OF SOFTWA RE DESIGN AND DEVELOPMENT SERVICES ON THE BASIS OF THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT BY THE TRANSFER PR ICING OFFICER ('THE TPO'). 3. THAT THE ASSESSING OFFICER/THE TPO ERRED ON FACT S AND IN LAW IN CONSIDERING THE CURRENT YEAR DATA ONLY OF THE CO MPARABLE COMPANIES DISREGARDING THE MULTIPLE YEAR DATA USED BY THE APPELLANT. 3.1 THAT THE ASSESSING OFFICER /THE TPO ERRED ON FAC TS AND IN LAW IN NOT APPRECIATING THAT USE OF SINGLE YEAR DATA OF THE COMPARABLE COMPANIES MAY NOT ADEQUATELY CAPTURE THE MARKET AND BUSINESS CYCLE REFLECTED IN THE INDUSTRY. 4. THAT THE ASSESSING OFFICER/THE TPO ERRED ON FACTS AND IN LAW IN APPLYING ADDITIONAL FILTERS OF PERCENTAGE OF WAG ES TO SALE, DECLINING SALES, NFA/SALES RATIO, WITHOUT APPRECIATI NG THAT THE SELECTION' OR REJECTION' SHOULD BE BASED ON FAR A NALYSIS AND NOT MERELY ON FINANCIAL RESULTS. 4.1 THAT THE ASSESSING OFFICER / THE TPO ERRED ON FACTS AND IN LAW IN CONSIDERING (I) SAKSOFT LIMITED, (II) DATAMATIC S TECHNOLOGIES LTD. AND (III) 3D PLM SOFTWARE LTD. HAVI NG ABNORMALLY HIGH PROFIT MARGIN AS COMPARABLE COMPANIES FOR UNDERTAKING BENCHMARKING ANALYSIS APPLYING TNMM. ITA NO. 5110/DEL/2010 3 4.2 THAT THE ASSESSING OFFICER / TPO ERRED ON FACT S AND IN LAW IN NOT APPRECIATING THAT M/S. SAKSOFT LTD. CANNOT BE C ONSIDERED AS COMPARABLE COMPANY IN AS MUCH AS (I) THE SAID COMPA NY WAS NOT ENGAGED IN BUSINESS ACTIVITIES COMPARABLE TO THAT OF THE APPELLANT, (II) THE SAID COMPANY HAS SIGNIFIC ANT RELATED PARTY TRANSACTION IN EXCESS OF 25% OF TOTAL REVENUE AND (III) THE WAGES / SALES RATIO OF THE COMPANY IS 40.85% AND THE NF A / SALES RATIO IS 6.96% WHICH ARE NOT COMPARABLE TO THOSE OF THE APPELLANT AT 60.25% AND 19.42%. 4.3 THAT THE ASSESSING OFFICER / TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT DATAMATICS TECHNOLOGIES LTD. WA S ENGAGED IN RENDERING BPO SERVICES AND CANNOT BE CONSIDERED AS COMPARABLE COMPANY OF THE APPELLANT WHI CH IS ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVIC ES. 4.4 THAT THE ASSESSING OFFICER / TPO ERRED ON FACTS AND IN LAW IN CONSIDERING 3D PLM SOFTWARE SOLUTIONS LTD. AS COMPARAB LE COMPANY NOT APPRECIATING THAT THE SAID COMPANY HAS SIGNIFICANT RELATED PARTY TRANSACTIONS AND ALSO WAG ES / SALES RATIO OF THE SAID COMPANY IS 41.70% WHICH IS NOT COMPARABLE TO THAT OF THE APPELLANT AT 60.25%. 5. THAT THE ASSESSING OFFICER / THE TPO ERRED IN REJ ECTING GOLDSTONE TECHNOLOGIES LTD. AND BLUE STAR INFOTECH LIMITED AS COMPARABLES ALLEGEDLY ON THE GROUND THAT THERE HA S BEEN DECLINE IN THE SALES OF SUCH COMPANIES. 5.1 THAT THE ASSESSING OFFICER / THE TPO ERRED ON F ACTS AND IN LAW IN REJECTING PSI DATA SYSTEMS LTD. AS COMPARABLE ITA NO. 5110/DEL/2010 4 COMPANY ALLEGEDLY ON THE GROUND OF BEING FUNCTIONALL Y DIFFERENT WITHOUT APPRECIATING THAT THE COMPANY PROV IDES INFORMATION TECHNOLOGY SERVICES SIMILAR TO THAT OF T HE APPELLANT. 6. WITHOUT PREJUDICE THE LEARNED ASSESSING OFFICER / THE TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE APPELLANT IS A LOW-RISK-BEARING CONTRACT SERVICE PR OVIDER AND A RISK ADJUSTMENT TO THE EXTENT OF 5% OVER THE COST OUGHT TO BE PROVIDED, AS RISK AND REWARD TO THIS EXTENT VEST WITH THE OVERSEAS ASSOCIATED ENTERPRISES TO WHICH THE APPELL ANT RENDERS OFF-SHORE SOFTWARE SERVICES. 7. THAT THE ASSESSING OFFICER / THE TPO ERRED ON FA CTS AND IN LAW IN NOT APPRECIATING THAT THE INCOME OF THE APPEL LANT IS EXEMPT UNDER SECTION 1OA OF THE INCOME TAX ACT AND HENCE, THERE COULD NOT BE ANY MOTIVE FOR THE TRANSFE R OF PROFITS OUTSIDE INDIA. 8. WITHOUT PREJUDICE THAT THE ASSESSING OFFICER/THE TPO ERRED ON FACTS AND IN LAW IN NOT ALLOWING THE WORKING CA PITAL ADJUSTMENT IN RESPECT OF THE COMPANIES PROPOSED TO B E SELECTED AS COMPARABLE BY THE TPO. 9. WITHOUT PREJUDICE THE ASSESSING OFFICER / THE TPO ERRED ON FACTS IN CONSIDERING THE TOTAL OPERATING COST OF TH E APPELLANT AT RS. 49,40,57,000 AS AGAINST THE ACTUAL OPERATING COST OF RS.48,26,77,000. 10. WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER / THE TPO ERRED IN LAW IN NOT ALLOWING VARIATION TO THE EXTENT OF ( +/:-)5%, ITA NO. 5110/DEL/2010 5 WHILE DETERMINING THE ARM'S LENGTH PRICE OF THE 'INTERNATIONAL TRANSACTIONS', IN TERMS OF PROVISO T O SECTION 92CA(2) OF THE ACT. 11. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN REDUCING THE COMMUNICATION EXPENSES TO THE EXTENT OF RS. 1,79,10,869 FROM THE EXPORT TURNOVER FOR COMPUTA TION IN TERMS OF CLAUSE (IV) OF EXPLANATION 2 OF SECTION 10 A OF THE ACT WHILE COMPUTING DEDUCTION UNDER THAT SECTION. 11.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT ONLY 5% INTERNET CHARGES OF THE COMMUNICATION EXPENSES IS ATTRIBUTABLE TO THE EXPOR T OF SOFTWARE OUTSIDE INDIA. 11.2 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER E RRED ON FACTS AND IN LAW IN MAKING THE ADJUSTMENT OF COMMUNICATION EXPENSES, VIZ., LINK CHARGES OF RS. 1,79,10,869 ATT RIBUTABLE TO DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA FROM ' THE EXPORT TURNOVER' IN TERMS OF CLAUSE (IV) OF EXPLANAT ION 2 OF SECTION 10A OF THE ACT WITHOUT MAKING THE SIMILAR ADJUSTMENT FROM' THE TOTAL TURNOVER' RESULTING INTO A BSURD AND UNINTENDED RESULTS. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR VARY FROM THE AFORESAID GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING. 3. TRANSFER PRICING ISSUE THE ASSESSEE IS A PRIVATE LIMITED COMPANY, IS AFFIL IATED TO GLOBAL LOGIC USA AND IS ENGAGED IN THE BUSINESS OF PROVISI ON OF SOFTWARE DEVELOPMENT SERVICES. THE ASSESSEE IN THE RELEVAN T PREVIOUS YEAR ITA NO. 5110/DEL/2010 6 ENTERED INTO THE INTERNATIONAL TRANSACTION OF RENDE RING THE SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISE. 3.1 FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONA L TRANSACTIONS, THE ASSESSEE HAS CONSIDERED TNMM AS THE MOST APPROPRI ATE METHOD AND CONSIDERED ITSELF TO BE THE TESTED PARTY WITH O PERATING PROFIT/ OPERATING COST (OP/OC%) AS THE PROFIT LEVEL INDICATO R (PLI). IN THE SEARCH PROCESS, THE ASSESSEE HAS CONSIDERED FOLLOWI NG 8 COMPARABLE COMPANIES IN THE TRANSFER PRICING DOCUMENTATION WITH OP/OC OF 11.70% AS UNDER: S.NO. S.NO. S.NO. S.NO. NAME OF THE COMPANY NAME OF THE COMPANY NAME OF THE COMPANY NAME OF THE COMPANY OP/OC% OP/OC% OP/OC% OP/OC% 1 GOLDSTONE TECHNOLOGIES LTD. 0.79% 2 CALIFORNIA SOFTWARE CO. LTD. 22.36% 3 NEILSOFT LTD. 14.69% 4 N.S.E.I.T. LTD. 13.66% 5 APPLABS TECHNOLOGIES PVT. LTD. 18.17% 6 PSI DATA SYSTEMS LTD. 0.12% 7 KALE CONSULTANTS LTD. 13.15% 8 BLUE STAR INFOTECH LTD. 10.66% AVERAGE AVERAGE AVERAGE AVERAGE 11.70% 11.70% 11.70% 11.70% 3.2 SINCE THE OPERATING PROFIT MARGIN (OP/OC%) OF TH E APPELLANT AT 14.36% WAS HIGHER THAN 11.70% OF THE COMPARABLE COMP ANIES, THE INTERNATIONAL TRANSACTION WAS CONSIDERED TO BE AT A RM'S LENGTH AND NO ADJUSTMENT WAS REQUIRED TO BE MADE. 3.3 THE TPO, HOWEVER, REJECTED THE FILTER OF OP/OC(% ) LESS THAN (-)40% AND GREATER THAN 40% CONSIDERED IN THE SEARC H PROCESS AND INCLUDED 3 COMPANIES IN THE FINAL SET OF COMPARABLES, AS UNDER:- I) SAKSOFT LTD. (II) DATAMATICS TECHNOLOGIES LTD. ITA NO. 5110/DEL/2010 7 (III) 3D PLM SOFTWARE LTD. 3.4 THE TPO, FURTHER APPLIED ADDITIONAL FILTER OF DE CLINING SALES FOR REJECTION OF THE COMPARABLE COMPANIES AND REJECTED FOL LOWING COMPANIES ON VARIOUS GROUNDS, AS UNDER: S.NO. NAME REASONS FOR REJECTION 1 GOLDSTONE TECHNOLOGIES LTD. DECLINING SALES AND F UNCTIONALLY DIFFERENT 2 PSI DATA SYSTEMS LTD. NFA/SALES AND FUNCTIONALLY D IFFERENT 3 BLUE STAR INFOTECH LTD. DECLINING SALES AND FUNC TIONALLY DIFFERENT 3.5 THE TPO, ACCORDINGLY, BENCHMARKED THE OPERATING PROFIT MARGIN (OP/OC%) OF THE APPELLANT COMPANY WITH THE MARGIN OF T HE REMAINING COMPARABLE COMPANIES AS FOLLOWS: S.NO. NAME OF THE COMPANY FINANCIAL YEAR OP/TC 1 CALIFORNIA SOFTWARE CO. LTD. 2006-07 22.36% 2 NEILSOFT LTD. 2006-07 14.69% 3 NSEIT LTD. 2006-07 13.66% 4 APPLABS TECHNOLOGIES PVT. LTD. 2006-07 18.17% 5 KALE CONSULTANTS LTD. 2006-07 13.15% 6 SAKSOFT LTD. 2006-07 51.10% 7 DATAMATICS TECHNOLOGIES LTD. 2006-07 39.83% 8 3D PLM SOFTWARE LTD. 2006-07 48.46% AVERAGE MEAN AVERAGE MEAN AVERAGE MEAN AVERAGE MEAN 27.67% 27.67% 27.67% 27.67% 3.6 ACCORDINGLY, THE TPO IN THE ORDER PASSED UNDER S ECTION 92CA(3) OF THE ACT HAD COMPUTED AN ADJUSTMENT OF RS.78,794,571 /- ON ACCOUNT ITA NO. 5110/DEL/2010 8 OF THE DIFFERENCE IN THE MARGIN OF THE COMPARABLE COMP ANIES AND THE APPELLANT COMPANY, AS UNDER: TOTAL COST INCURRED BY ASSESSEE 494,058,000 IS A MARGIN@27.67% 630,762,571 REVENUE SHOWN 551,968,000 DIFFERENCE 78,794,571 3.7 THE DISPUTE RESOLUTION PANEL ('DRP') UPHELD THE OR DER OF THE TPO AND ACCORDINGLY, THE ASSESSING OFFICER ON THE BASIS THE ORDER OF THE DRP PASSED THE FINAL ORDER. 4. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE RECORDS. AT THE OUTSET, LD. COUNSEL OF THE ASSESSEE SUBMITTE D THAT IN THE TRANSFER PRICING ANALYSIS IN THIS CASE COMPANIES HAV ING SIGNIFICANT RELATED PARTY TRANSACTIONS SHOULD BE REJECTED. L D. COUNSEL OF THE ASSESSEE SUBMITTED IN THIS REGARD, THAT AN UNRELATED ENTERPRISE HAVING CONTROLLED TRANSACTIONS CANNOT BE CONSIDERED AS COMP ARABLE TO THE ASSESSEE, WHILE APPLYING TNM METHOD, AS A COMPANY HA VING SUBSTANTIAL RELATED PARTY TRANSACTIONS MAY INFLUENCE THE PROFITS OF THE COMPANY. 4.1 LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT RU LE 10B(1)(E) OF THE INCOME TAX RULES, 1962, TOO, PROVIDES THAT NET MA RGIN OF THE ASSESSEE REQUIRES TO BE COMPARED TO AN UNRELATED ENT ERPRISE FORM A COMPARABLE UNCONTROLLED TRANSACTIONS. 4.2 LD. COUNSEL OF THE ASSESSEE HAS FURTHER PLAC ED RELIANCE IN THIS REGARD ON THE DECISION OF DELHI BENCH OF TRIBUNAL I N THE CASE OF SONY INDIA PVT. LTD. VS. ACIT 114 ITD 448. ITA NO. 5110/DEL/2010 9 4.3 LD. COUNSEL OF THE ASSESSEE ALSO INVITED AT TENTION ON THE DECISION OF DELHI BENCH OF TRIBUNAL IN THE ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2005-06 [ITA NO. 6082/DEI/201O], WH EREIN THE TRIBUNAL EXCLUDED 3DPLM SOFTWARE CONSIDERED BY THE APP ELLANT, HAVING A VERY HIGH RATIO OF RELATED PARTY TRANSACTION. 4.4 IN VIEW OF THE AFORESAID PROVISIONS OF THE ACT AND DECISIONS, IT WAS SUBMITTED THAT FOLLOWING COMPANIES CONSIDERED BY T HE TPO IN HIS ORDER, HAVING SIGNIFICANT RELATED PARTY TRANSACTION S SHOULD BE REJECTED FROM THE FINAL SET OF COMPARABLE COMPANIES: S.NO. COMPANY NAME RELATED PARTY TRANSACTION / TOTAL INCOME 1 CALIFORNIA SOFTWARE CO. LTD. 71.53% 2 SAKSOFT LTD. 67.81% 3 DATAMATICS TECHNOLOGIES LTD. 44.86% 4 3D PLM SOFTWARE LTD. 118.04% 4.5 IT WAS FURTHER SUBMITTED THAT AFTER EXCLUDING T HE ABOVE COMPANIES, THE OPERATING PROFIT MARGIN (OP/OC) OF THE REMAINING COMPANIES WORKS OUT TO 14.92%, AS UNDER: S.NO. S.NO. S.NO. S.NO. NAME OF THE COMPANY NAME OF THE COMPANY NAME OF THE COMPANY NAME OF THE COMPANY OP/OC% OP/OC% OP/OC% OP/OC% 1 NEILSOFT LTD. 14.69% 2 N.S.E.I.T. LTD. 13.66% 3 APPLABS TECHNOLOGIES PVT. LTD. 18.17% 4 KALE CONSULTANTS LTD. 13.15% AVERAGE AVERAGE AVERAGE AVERAGE 14.92% 14.92% 14.92% 14.92% GLOBAL LOGIC INDIA PVT. LTD. GLOBAL LOGIC INDIA PVT. LTD. GLOBAL LOGIC INDIA PVT. LTD. GLOBAL LOGIC INDIA PVT. LTD. 14.36% 14.36% 14.36% 14.36% ITA NO. 5110/DEL/2010 10 4.6 LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT SI NCE, THE OPERATING PROFIT MARGIN (OP/OC%) OF THE APPELLANT AT 14.36% I S WITHIN SAFE HARBOR RANGE OF +/- 5% OF THE AVERAGE OF (OP/OC%) O F COMPARABLE COMPANIES AT 14.92%, THE INTERNATIONAL TRANSACTION U NDERTAKEN BY THE ASSESSEE SHOULD BE CONSIDERED AT ARMS LENGTH AND T HE ADJUSTMENT PROPOSED BY THE TPO SHOULD BE DELETED FOR THIS REASO N ALONE. 5. ON THE OTHER HAND LD. DEPARTMENTAL REPRESENTATIVE PRINCIPALLY DID NOT HAVE ANY SERIOUS OBJECTION TO THE PROPOSITI ON AS ABOVE. 5.1 LD. DEPARTMENTAL REPRESENTATIVE REFERRED TO THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S. AMERICAN EXPRESS INDIA (P) LT., ITA NO. 4240/D/2009, A.Y. 2003-04, DATED 18-05-2012. THE REL EVANT PARA OF THE TRIBUNALS ORDER IS AS UNDER:- 16. FROM THE ABOVE, IT IS EVIDENT THAT LEARNED CI T(A) HAS TOTALLED UP THE AMOUNT RECEIVED FROM THE RELATED PAR TIES FOR RENDERING OF SERVICES TOGETHER WITH THE PAYMENTS MA DE TO RELATED PARTIES WHICH BECAME RS. 323.23 LAKHS. HE COMPARED THE SAME WITH THE TOTAL OPERATING EXPENSES WHICH WERE RS. 4448.71 LAKHS. IF THE TOTAL OPERATIN G EXPENSES ARE BEING COMPARED, THEN THEY CAN BE COMPAR ED ONLY WITH THE TOTAL OPERATING EXPENSES PAID TO THE RELATED PARTIES. THE AMOUNT RECEIVED FROM RELATED PARTIES FO R RENDERING SERVICES CAN BE COMPARED ONLY WITH THE TOT AL RECEIPT OF HINDUJA TMT FROM RENDERING OF SERVICES. THEREFORE, APPARENTLY, THE WORKING OF LEARNED CIT(A ) IS INCORRECT. 5.2 REFERRING TO THE ABOVE ORDER, LD. DEPARTMENTAL RE PRESENTATIVE SUBMITTED THAT CAPITAL INFLOW AND CAPITAL OUTFLOW D O NOT ENTER INTO ITA NO. 5110/DEL/2010 11 WORKING OF RELATED PARTY TRANSACTIONS. REVENUE IT EMS (INCLUDES SALES) NEED TO BE COMPARED UPON A BASE OF REVENUE, AND EXPE NDITURE OR PURCHASE ITEMS NEED TO BE COMPARED UPON A BASE OF TOT AL EXPENDITURE. 5.3 LD. COUNSEL OF THE ASSESSEE IN HIS REJOINDER SU BMITTED THAT UNDER THE TRANSFER PRICING REGULATIONS, AN INTERNATIONAL T RANSACTION IS TO BE BENCHMARKED BY APPLYING ONE OF THE FIVE PRESCRIBED M ETHODS IN SECTION 92C(1) OF THE ACT BEING THE MOST APPROPRIATE METHOD. IN THE TRANSFER PRICING DOCUMENTATION, THE APPELLANT APPLIE D THE TRANSACTIONS NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHO D. THE TNMM WAS ALSO APPLIED BY THE TRANSFER PRICING OFFICE R IN HIS ORDER. 5.4 LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT IN TERMS OF RULE 10B(1)(E) OF THE RULES FOR APPLICATION OF TNMM THE N ET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TR ANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RE LATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT B ASE. FURTHER, THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN U NRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS TO BE COMPUTED HAVING REGARD TO THE SAME BASE. IN THE CONVERSE FOR APPLYING TNMM IN TERMS OF CLAUSE (II) OF RULE 10B(1)(E) OF THE RULES, THE NET PROFIT MARGIN REALIZED BY AN UNR ELATED ENTERPRISE FROM A CONTROLLED TRANSACTIONS IS NOT TO BE CONSIDER ED. IN OTHER WORDS, IN CASE THE NET PROFIT MARGIN OF THE COMPARABLE COMPAN IES IS DISTORTED BY CONTROLLED OR RELATED PARTY TRANSACTIONS THE SAM E IS TO BE EXCLUDED. THEREFORE IT IS NET PROFIT MARGIN, WHICH IS NOT INF LUENCED OR DISTORTED BY THE PRESENCE OF CONTROLLED TRANSACTIONS, ONLY IS TO BE TAKEN INTO ACCOUNT FOR THE PURPOSE OF APPLYING THE TNMM. ITA NO. 5110/DEL/2010 12 5.5 LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT TH E OECD GUIDELINES REGARDING ADOPTION OF ENTERPRISE LEVEL PROFITS IN T NMM AND TREATMENT OF PARTIAL CONTROLLED TRANSACTIONS ARE REPRODUCED B ELOW: '3.42 AN ANALYSIS UNDER THE TRANSACTIONAL NET MARGI N METHOD SHOULD CONSIDER ONLY THE PROFITS OF THE ASSOCIATED ENTERPRISE THAT ARE ATTRIBUTABLE TO PARTICULAR CONTROLLED TRANSACTI ONS. THEREFORE. IT WOULD BE INAPPROPRIATE TO APPLY THE TRANSACTIONAL N ET MARGIN METHOD ON A COMPANY-WIDE BASIS IF THE COMPANY ENGAGES IN A VARIETY OF DIFFERENT CONTROLLED TRANSACTIONS THAT C ANNOT BE APPROPRIATELY COMPARED ON AN AGGREGATE BASIS WITH T HOSE OF AN INDEPENDENT ENTERPRISE. SIMILARLY. WHEN ANALYSING TH E TRANSACTIONS BETWEEN THE INDEPENDENT ENTERPRISES TO THE EXTENT THEY ARE NEEDED. PROFITS ATTRIBUTABLE TO TRANSACTIO NS THAT ARE NOT SIMILAR TO THE CONTROLLED TRANSACTIONS UNDER EXAMINAT ION SHOULD BE EXCLUDED FROM THE COMPARISON. FINALLY. WHEN PROFIT MARGINS OF AN INDEPENDENT ENTERPRISE ARE USED. THE PROFITS ATT RIBUTABLE TO THE TRANSACTIONS OF THE INDEPENDENT ENTERPRISE MUST NOT BE DISTORTED BY CONTROLLED TRANSACTIONS OF THAT ENTERP RISE. ' 5.6 IT WAS FURTHER SUBMITTED THAT THE OECD TRANSFER PRICING GUIDELINES FURTHER IN PARA 2.79 PROVIDES IN THIS RE GARD AS UNDER: '2.79 SIMILARLY, WHEN ANALYSING THE TRANSACTIONS BET WEEN THE INDEPENDENT ENTERPRISES TO THE EXTENT THEY ARE NEED ED, PROFITS ATTRIBUTABLE TO TRANSACTIONS THAT ARE NOT SIMILAR TO THE CONTROLLED TRANSACTIONS UNDER EXAMINATION SHOULD BE EXCLUDED FROM THE COMPARISON. FINALLY. WHEN NET PROFIT INDICATO RS OF AN INDEPENDENT ENTERPRISE ARE USED. THE PROFITS ATTRIB UTABLE TO THE ITA NO. 5110/DEL/2010 13 TRANSACTIONS OF THE INDEPENDENT ENTERPRISE MUST NOT BE DISTORTED BY CONTROLLED TRANSACTIONS OF THAT ENTERP RISE. ' 5.7 LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT TH AT ANY CONTROLLED TRANSACTION WITH RELATED PARTIES (I.E. RELATED PART Y TRANSACTION OR RPT), WHETHER UNDERTAKEN BY WAY REVENUE OR EXPENSE (WHETH ER CAPITAL OR REVENUE EXPENSE) WHICH, HAVING A BEARING ON THE NET PROFIT OF SUCH ENTERPRISE, SHOULD NOT DISTORT THE NET PROFIT MARGIN OF THE COMPARABLE UNCONTROLLED ENTERPRISE WHICH MAY BE TAKEN INTO CONS IDERATION FOR THE PURPOSE OF APPLYING TNMM. IN OTHER WORDS, THE FOLLOW ING CONTROLLED TRANSACTIONS OR THE RELATED PARTY TRANSACTIONS (RPT ) WHICH MAY HAVE BEARING AND WOULD HAVE DISTORTED OR INFLUENCED THE NET PROFIT MARGIN OF THE COMPARABLE UNCONTROLLED ENTERPRISE IS TO BE CONS IDERED AS THE RELEVANT RELATED PARTY TRANSACTIONS FOR APPLYING TN MM: (I) TRANSACTIONS INVOLVING ISSUE OF SHARE CAPITAL N OT HAVING BEARING ON THE NET PROFIT MARGIN OF THE COMPARABLE UN CONTROLLED ENTERPRISE, IS NOT TO BE CONSIDERED AS THE RELEVANT RELATED PARTY TRANSACTIONS. (II) THE TRANSACTIONS OF PURCHASE OR SALE ON REVENU E ACCOUNT, HAVING BEARING ON THE NET PROFIT MARGIN OF THE COMPAR ABLE UNCONTROLLED ENTERPRISE, IS TO BE CONSIDERED AS THE RELEVANT RELATED PARTY TRANSACTIONS. (III) THE TRANSACTION OF PURCHASE OF FIXED/CAPITAL ASSET HAVING BEARING ON THE NET PROFIT MARGIN OF THE COMPARABLE UN CONTROLLED ENTERPRISE, BY WAY OF CHARGE OF DEPRECIATION OR AMOR TIZATION IS TO BE CONSIDERED AS THE RELEVANT RELATED PARTY TRANSAC TIONS. ITA NO. 5110/DEL/2010 14 5.8 LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT TH E DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SONY INDIA PVT LTD VS DCI T 114 ITD 448 HELD THAT COMPANIES HAVING RELATED PARTY TRANSACTIONS IN EXCESS OF 10-15% OF THE SALES HAVE TO BE REJECTED AND CANNOT BE CONS IDERED AS COMPARABLE FOR THE PURPOSE OF COMPARABILITY ANALYSIS. 5.9 LD. COUNSEL OF THE ASSESSEE REFERRED THE DEC ISION OF THE TRIBUNAL IN THE CASE OF PHILIPS SOFTWARE CENTRE PVT L TD VS ACIT (ITA NO 218/BANG/2008). 5.10 HE ALSO REFERRED THE DELHI BENCH TRIBUNAL DE CISION IN THE CASE OF ACTIS ADVISORS PVT LTD VS DCIT (ITA NO 5277/DE1/2011 ). 5.11 IT WAS FURTHER SUBMITTED THAT THE DECISION OF T HE HON,BLE TRIBUNAL IN THE CASE OF DCIT VS AMERICAN EXPRESS INDIA PVT. LTD. (ITA NO 1338/DEL/2009), IT WAS RENDERED ON ITS OWN FACTS WHE REIN THE AFORESAID CONTENTIONS WERE NOT CANVASSED AND THE RATIO OF THE AFORESAID DECISIONS WERE NOT BROUGHT TO THE NOTICE OF THE HON BLE TRIBUNAL. 5.12 LD. COUNSEL OF THE ASSESSEE ACCORDINGLY SUB MITTED THAT AN ENTERPRISE IS TO BE CONSIDERED AS UNCONTROLLED FOR THE PURPOSE OF BENCHMARKING ANALYSIS, IF THE RATIO OF RELATED PARTY TRANSACTIONS (I.E. TRANSACTIONS OF SALES AND PURCHASE ON REVENUE AS WE LL AS CAPITAL ACCOUNT HAVING A BEARING ON PROFITABILITY OF THE EN TERPRISE) TO RELEVANT BASE, I.E. SALES OR COST DOES NOT EXCEED THE LIMIT O F 25%. HENCE, HE SUBMITTED THAT SAKSOFT LIMITED, DATAMATICS TECHNOLOGI ES LIMITED, 3DPLM SOFTWARE SOLUTIONS LTD. AND CALIFORNIA SOFTWARE LIMITED, CONSIDERED AS THE COMPARABLE COMPANIES BY THE TPO IN THE ASSESSEE'S CASE HAVE RELATED PARTY TRANSACTIONS EXCEEDING 25% THE SAME ARE TO BE EXCLUDED FROM THE SET OF COMPARABLE COMPANIES FOR APPLYING TNMM. ITA NO. 5110/DEL/2010 15 5.13 WE HAVE CAREFULLY CONSIDERED THE SUBMISSION AND PERUSED THE RECORDS. IN THIS CASE FOR BENCHMARKING THE INTERN ATIONAL TRANSACTION THE ASSESSEE HAS CONSIDERED TNMM AS THE MOST APPROPRI ATE METHOD AND CONSIDERED ITSELF TO BE THE TESTED PARTY WITH O PERATING PROFIT / OPERATING COST (OP/OC%) AS THE PROFIT LEVEL INDICATE D. IN THE SEARCH PROCESS THE ASSESSEE HAS CONSIDERED 8 COMPARABLES CO MPANIES IN THE TRANSFER PRICING DOCUMENTATION WITH OP/OC OF 11.70%. SINCE THE OPERATING PROFIT MARGIN (OP/OC%) OF THE ASSESSEE AT 14.36% WAS HIGHER THAN 11.70% OF THE COMPARABLE COMPANIES, THE I NTERNATIONAL TRANSACTION WAS CONSIDERED TO BE AT ARMS LENGTH A ND NO ADJUSTMENT WAS REQUIRED TO BE MADE. 5.14 THE TPO ACCEPTED TNMM AS THE MOST APPROPRIATE MET HOD. HOWEVER, HE REJECTED THE FILTER OP/OC% LESS THAN (-) 40% AND GREATER THAT 40% CONSIDERED IN THE SEARCH PROCESS AND INCL UDED 3 COMPANIES IN THE FINAL SET OF COMPARABLES. THE TPO FURTHER AP PLIED ADDITIONAL FILTER OF DECLINING SALES FOR REJECTION OF 3 COMPAR ABLES AND REJECTED THREE MORE COMPANIES. TPO ACCORDINGLY BENCHMARKED TH E OPERATING PROFIT (OP/OC%) OF THE ASSESSEE COMPANY WITH THE MARG IN OF REMAINING 8 COMPARABLE COMPANIES. THE RESULTANT AVERAGE MEA N CAME TO 27.67%. ACCORDINGLY, THE TPO IN THE FINAL ORDER PAS SED UNDER SECTION 92CA(3) OF THE ACT COMPUTED AN ADJUSTMENT OF ` 78,794 ,571/- ON ACCOUNT OF THE DIFFERENCE IN MARGIN OF THE COMPARABL ES COMPANIES AND THE ASSESSEE COMPANY. 5.15 WE AGREE WITH THE CONTENTION OF THE ASSESSEE T HAT AN UNRELATED ENTERPRISE HAVING CONTROLLED TRANSACTION CAN NOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE WHILE APPLYING TNMM. AS A COMPANY HAVING SUBSTANTIATED RELATED PARTY TRANSACTION, MAY INFLUENCE THE ITA NO. 5110/DEL/2010 16 PROFITS OF THE COMPANY. IN THIS REGARD, WE CAN GAI NFULLY REFER TO THE 10B(1)(E) OF THE INCOME TAX RULES AS UNDER:- 'TRANSACTIONAL NET MARGIN METHOD, BY WHICH,- (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES E FFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVIN G REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGA RD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUS E (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO T AKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACT IONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MAR GIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E AND REFERRED TO IN SUBCLAUSE (I) IS ESTABLISHED TO BE THE SAME AS T HE NET PROFIT MARGIN REFERRED TO IN SUBCLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN T AKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO TH E INTERNATIONAL TRANSACTION.' ITA NO. 5110/DEL/2010 17 5.16 A READING OF THE ABOVE CLEARLY SHOWS THAT UNDE R THE SAID RULES THE NET MARGIN OF THE ASSESSEE REQUIRED TO BE COMPARE D TO AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION. THUS IT FOLLOWS THAT COMPARABLES HAVING HIGH RATIO O F RELATED PARTY TRANSACTION CANNOT BE TAKEN A COMPARABLE. THIS PR OPOSITION IS ALSO SUPPORTED BY THE FOLLOWING CASE LAWS:- I) SONY INDIA PVT. LTD. VS. DCIT 114 ITD WHEREIN THE TRIBUNAL HAS HELD AS UNDER:- 'WE ARE FURTHER OF VIEW THAT AN ENTITY CAN BE TAKEN AS UNCONTROLLED IF ITS RELATED PARTY TRANSACTION DU NO T EXCEED 10 TO 15% OF TOTAL REVENUE, WITHIN THE ABOVE LIMIT, TRA NSACTIONS CANNOT BE HELD TO BE SIGNIFICANT TO INFLUENCE THE P ROFITABILITY OF COMPARABLE. FOR THE PURPOSES OF COMPARISON, WHAT IS TO BE JUDGED IS THE IMPACT OF THE RELATED PARTY TRANSACTIO N VIS-A-VIS SALES AND NOT PROFIT SINCE PROFIT OF AN ENTERPRISE IS INFLUENCED BY LARGE NUMBER OF OTHER FACTORS. THE TPO AND ON APPEAL, THE LEARNED CIT (APPEALS) DID NOT SUBSTANTIATE THE ALLEGATION BY FURNISHING FIGURES O F CONTROLLED TRANSACTIONS TO SHOW THAT SUCH TRANSACTION HAD SIGN IFICANT IMPACT ON THE PROFITS OF THESE COMPANIES. THE TAXPAYE R, ON THE OTHER HAND, HAS GIVEN PERCENTAGE OF TRANSACTION WIT H RELATED PARTIES AND WE ARE OF VIEW THAT THEY ARE NOT SO HIG H AS TO EXCLUDE THEM FROM THE LIST OF COMPARABLES. WE ARE FU RTHER OF VIEW THAT AN ENTITY CAN BE TAKEN AS UNCONTROLLED IF ITS RELATED PARTY TRANSACTION DO NOT EXCEED 10 TO 15% OF TOTAL REVENUE. WITHIN THE ABOVE LIMIT, TRANSACTIONS CANNOT BE HELD TO BE SIGNIFICANT TO INFLUENCE THE PROFITABILITY OF COMPA RABLE. FOR THE ITA NO. 5110/DEL/2010 18 PURPOSES OF COMPARISON, WHAT IS TO BE JUDGED IS THE IMPACT OF THE RELATED PARTY TRANSACTION VIS-A-VIS SALES AND N OT PROFIT SINCE PROFIT OF AN ENTERPRISE IS INFLUENCED BY LARGE NUMBE R OF OTHER FACTORS. NO DISPUTE HAVING BEEN RAISED BY TPO OR TH E LD. CIT(A) THAT THE OTHER FILTERS OF FUNCTIONS, ECONOMIC ACTIVI TIES, PRODUCT PROFILES ETC ARE SATISFIED, WE ARE OF VIEW THAT THE SE THREE ENTITIES SHOULD ALSO BE TAKEN IN THE LIST OF COMPARA BLES FOR WORKING AVERAGE / MEAN OPERATING PROFIT. EVEN AS PE R OECD GUIDELINES, IT IS EMPHASIZED THAT LARGE NUMBER OF SIMI LAR ENTITIES SHOULD BE TAKEN TO MAKE COMPARISON BROAD BA SED.' II) ASSESSEES OWN CASE FOR A.Y. 2005-06 (I.T.A. NO . 6082/DEL/2010) WHEREIN IT WAS HELD AS UNDER:- 'STILL, IF IT IS FOUND THAT RPT IS 97% AS HAS BEEN CLAIMED BY THE APPELLANT BEFORE US, IT HAS TO BE ACCEPTED THAT THI S COMPARABLE IS NOT UN-CONTROLLED AND THEREFORE, THE SAME HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES ADOPTED BY THE TPO. EVEN IF THE PERCENTAGE OF RPT TO TOTAL REVENUE IS NOT 97% BUT I S MORE THAN 25%, EVEN THEN, THIS COMPARABLE CANNOT BE CONSIDERED AS UN- CONTROLLED COMPARABLE AND THE SAME HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES FINALLY SELECTED BY THE TPO. AS PER THE TRIBUNAL DECISION RENDERED IN THE CASE O F SONY INDIA LTD. (SUPRA), IT WAS HELD BY THE TRIBUNAL THAT COMPA RABLES HAVING RPT IN THE RANGE OF 1 0 TO 15% OF TOTAL REVENUE CAN NOT BE TAKEN OR CONSIDERED AS CONTROLLED. NO SPECIFIC PERCENTAGE OF RPT HAD BEEN POINTED OUT BY THE TRIBUNAL IN THIS CASE WHICH WILL RENDER THE COMPARABLE AS CONTROLLED COMPARABLE. STILL, IF IT IS FOUND THAT RPT IS 97% AS HAS BEEN CLAIMED BY THE ASSESSEE BEFOR E US, IT HAS ITA NO. 5110/DEL/2010 19 TO BE ACCEPTED THAT THIS COMPARABLE IS NOT UN-CONTRO LLED AND THEREFORE, THE SAME HAS TO BE EXCLUDED FROM THE LIST OF COM PARABLES ADOPTED BY THE TPO. EVEN IF THE PERCENTAGE OF RPT TO TOTAL REVENUE IS NOT 97% BUT IS MORE THAN 25%, EVEN THEN, THIS COMPARABLE CANNOT BE CONSIDERED AS UN-CONTROLLED COMP ARABLE AND THE SAME HAS TO BE EXCLUDED FROM THE LIST OF COMP ARABLES .FINALLY SELECTED BY THE TPO. BUT FOR THE SAME, THE FACTUAL ASPECT HAS TO BE EXAMINED AS TO HOW MUCH PERCENTAGE OF RPT T O TOTAL REVENUE IS THERE IN THE CASE OF THIS COMPARABLE I.E. 3D PLM SOFTWARE LTD. HENCE, WE SET ASIDE THE ASSESSMENT ORD ER AND RESTORE THE ENTIRE MATTER TO THE FILE OF THE ASSESSI NG OFFICER FOR A FRESH DECISION AFTER EXAMINING THE FACTUAL ASPECT OF THIS CLAIM OF THE ASSESSEE AND AFTER OBTAINING FRESH DIRECTIONS F ROM DRP. IF IT IS FOUND THAT THE PERCENTAGE OF RPT TO TOTAL REVENUE I N THE CASE OF THIS COMPARABLE I.E. 3 DPLM SOFTWARE IS MORE THAN 25% T HEN THIS COMPARABLE SHOULD BE EXCLUDED FROM THE LIST OF COMPAR ABLES SELECTED BY THE TPO AND THE AVERAGE MEAN SHOULD BE WORKED OUT AFTER EXCLUDING THIS COMPARABLE AND IF THE SAME IS WI THIN PLUS MINUS 5% OF THE PROFIT MARGIN DECLARED BY THE ASSESSE E THEN NO TRANSFER PRICING ADJUSTMENT IS REQUIRED TO HE MADE.' III) TRIBUNAL DECISION IN THE CASE OF PHILIPS SOFTW ARE PVT. LTD. VS. ACIT (I.T.A.NO. 218/BANG/2008) WHEREIN IT WAS HELD AS UN DER:- 'THE FILTER OF 25% RELATED PARTY TRANSACTIONS HAVE BEEN ADOPTED BECAUSE TRANSACTIONS WITH RELATED PARTIES EXCEEDING 25% OF TOTAL TURNOVER MAY DISTORT THE OVERALL PROFIT MARGINS OF T HAT COMPANY. WHILE CALCULATING THE 25%, THE TRANSACTIONS ON ACCO UNT OF SALES ITA NO. 5110/DEL/2010 20 AS WELL AS PURCHASES HAVE BEEN COMBINED AND PERCENT AGE ON THE OVERALL SALES OF THE COMPARABLE COMPANY WORKED OUT.' IV) TRIBUNAL DECISION IN THE CASE OF ACTIS ADVISORS PVT. LTD. VS. DCIT (I.T.A.NO. 5277/DEL/2011) WHEREIN IT WAS HELD AS UN DER:- 'ON THE BASIS OF THE SCHEME, ONE CAN SAFELY SAY THA T AN ENTITY CAN BE TAKEN AS UNCONTROLLED, IF ITS RELATED PARTY TRANSACTION DO NOT EXCEED 25% OF THE TOTAL REVENUE. THUS, WE DO NO T FIND ANY FAULT IN THE CONCLUSION OF THE LEARNED TPO FOR APPLY ING THIS FILTER TO THE EXTENT OF 25% TRANSACTION WITH RELATED PARTY OF THE TOTAL REVENUE. THE CONTENTIONS RAISED BY THE LEARNED COUN SEL FOR THE ASSESSEE IN THIS REGARD ARE REJECTED. ACCORDINGLY, T HE RATIO OF TOTAL RELATED PARTY TRANSACTIONS (I.E. SALES AND PURCHASE ) AS A PERCENTAGE OF SALES IS TO BE TAKEN INTO ACCOUNT WH ILE JUDGING AS TO WHETHER A COMPANY CAN BE CONSIDERED AS UNCONTROL LED FOR THE PURPOSE OF BENCHMARKING ANALYSIS.' 5.17 IN THE BACKGROUND OF THE AFORESAID DISCUSSION AND PRECEDENTS, WE HOLD THAT AN ENTERPRISE IS TO BE CONSIDERED AS UNCO NTROLLED FOR THE PURPOSE OF BENCHMARKING ANALYSIS OF THE RATIO OF RE LATED PARTY TRANSACTION TO THE RELEVANT BASE I.E. SALES OR COST DOES NOT EXCEED THE LIMIT OF 25%. THE RELATED PARTY TRANSACTION REFERRED HERE ARE THOSE WHICH HAVE A BEARING ON THE NET PROFIT OF THE ENTER PRISE. 5.18 THUS, WE AGREE WITH THE ASSESSEES SUBMISSION T HAT FOLLOWING COMPANIES CONSIDERED BY THE TPO IN HIS ORDER, HAVING SIGNIFICANT RELATED PARTY TRANSACTION SHOULD BE REJECTED FROM TH E FINAL SET OF COMPARABLES. ITA NO. 5110/DEL/2010 21 S.NO. COMPANY NAME RELATED PARTY TRANSACTION / TOTAL INCOME 1 CALIFORNIA SOFTWARE CO. LTD. 71.53% 2 SAKSOFT LTD. 67.81% 3 DATAMATICS TECHNOLOGIES LTD. 44.86% 4 3D PLM SOFTWARE LTD. 118.04% 5.19 AFTER EXCLUSION OF THE ABOVE COMPANIES THE OPE RATING PROFIT MARGIN (OP/OC) OF THE REMAINING COMPANIES WORKS OUT T O 14.92% AS UNDER:- S SS S.NO. .NO. .NO. .NO. NAME OF THE COMPANY NAME OF THE COMPANY NAME OF THE COMPANY NAME OF THE COMPANY OP/OC% OP/OC% OP/OC% OP/OC% 1 NEILSOFT LTD. 14.69% 2 N.S.E.I.T. LTD. 13.66% 3 APPLABS TECHNOLOGIES PVT. LTD. 18.17% 4 KALE CONSULTANTS LTD. 13.15% AVERAGE AVERAGE AVERAGE AVERAGE 14.92% 14.92% 14.92% 14.92% GLOBAL LOGIC INDIA PVT. LTD. GLOBAL LOGIC INDIA PVT. LTD. GLOBAL LOGIC INDIA PVT. LTD. GLOBAL LOGIC INDIA PVT. LTD. 14.36% 14.36% 14.36% 14.36% 5.20 FROM THE ABOVE, WE HOLD THAT SINCE THE OPERATING PROFIT MARGIN (OP/OC%) OF THE ASSESSEE AT 14.36% IS WITHIN THE SAF E HARBOR RANGE OF +/-5% OF THE AVERAGE OF (OP/OC) OF COMPARABLE COMPANI ES AT 14.92% THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASS ESSEE SHOULD BE CONSIDERED AT ARMS LENGTH, AND THE ADJUSTMENT PROPO SED BY THE TPO IS UNWARRANTED. 6. GROUND NO. 11 TO 11.2 ON THESE ISSUES ASSESSING OFFICER REFERRED TO THE DEFINITION OF EXPORT TURNOVER AS PER EXPLANATION 2(IV) OF SECTION 10A. EXPORT TURNOVER MEANS THAT THE' CONSIDERATION IN RESPECT O F EXPORT BY THE ITA NO. 5110/DEL/2010 22 UNDERTAKING OF ARTICLES OR THINGS -OR COMPUTER SOFTW ARE RECEIVED IN, OR BOUGHT INTO, INDIA BY THE ASSESSEE IN CONVERTIBLE F OREIGN EXCHANGE IN ACCORDANCE WITH SUB-SECTION(3), BUT DOES NOT INCLUD E FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABL E TO THE DELIVERY OF THE ARTICLE OR THING OR COMPUTER SOFTWARE OUTSIDE IN DIA OR EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA. 6.1 CONSIDERING THE ABOVE, DEFINITION THE ASSESSING OFFICER ASKED THE ASSESSEE TO GIVE THE DETAILS OF ANY FREIGHT, TELECO MMUNICATION CHARGES AND INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE G OODS AND DETAILS OF EXPENSES INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA. 6.2 ASSESSEE RESPONDED THAT IT HAD NOT INCURRED ANY FREIGHT EXPENSES IN THIS REGARD. IT WAS FURTHER STATED THAT THE PERS ONS EMPLOYED FOR A SOFTWARE PRODUCT ARE DIVIDED ON ONSHORE TEAM AND OF FSHORE TEAM. ONE OF THE TEAMS GETS IN TOUCH WITH THE CLIENTS TO UNDE RSTAND CUSTOMERS NEED THROUGH SITE VISIT, VIDEO /VOICE CONFERENCING AND EMAILS. THEY ALSO GET IN TOUCH WITH THE CLIENTS, WHEN THE SOFTWA RE IS DEVELOPED AND TRANSMITTED TO THE CUSTOMERS. IT WAS FURTHER STATED THAT ONLY 5% OF THE INTERNET CHARGES ARE ATTRIBUTABLE TO THE DELIVERY O F SOFTWARE TO CLIENT, HENCE FULL AMOUNT OF THE ABOVE EXPENSES SHOULD NOT B E TAKEN INTO CONSIDERATION FOR CALCULATING EXPORT TURNOVER AS PE R EXPLANATION 2(IV) TO THE SECTION 10A OF THE INCOME-TAX ACT. 6.3 HOWEVER, ASSESSING OFFICER WAS NOT SATISFIED W ITH THE ABOVE EXPLANATION. HE OBSERVED THAT USE OF TELEPHONE AND INTERNET CONTINUOUSLY IS NECESSARY IN THIS LINE OF BUSINESS AND IT CANNOT BE SAID THAT ONLY 5% OF INTERNET EXPENSES IS RELATED TO THE DELIVERY OF THE ITA NO. 5110/DEL/2010 23 SOFTWARE. THEREFORE, ASSESSING OFFICER HELD THAT THE COMMUNICATION EXPENSES OF ` 17910869/- SHOULD BE REDUCED FROM EXPO RT TURNOVER FOR CALCULATION OF DEDUCTION U/S. 10A. 6.4 THE DISPUTES RESOLUTION PANEL (DRP) ON THIS ISSUE H AS REJECTED THE ASSESSEES CONTENTION AND HELD THAT COMMUNICATIO N EXPENSES RELATED TO EXPORT OF SOFTWARE AND HENCE, THE ORDER OF THE ASSESSING OFFICER IS NOT INTERFERED. 7. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPEA L BEFORE US. 8. THE SUBMISSIONS OF THE LD. COUNSEL OF THE ASSESS EE IN THIS REGARD WAS AS UNDER:- DURING THE YEAR, THE ASSESSEE HAS INCURRED RS. 1,79 ,10,869 AS COMMUNICATION EXPENSES AND THE SAME WERE DEBITED TO THE P&L ACCOUNT AS PART OF OPERATING EXPENSES. THE BREAKUP OF THESE EXPENSES ARE AS FOLLOWS: DESCRIPTION DESCRIPTION DESCRIPTION DESCRIPTION AMOUNT AMOUNT AMOUNT AMOUNT TELEPHONE EXPENSE 1,31,48,431 INTERNET EXPENSES 43,97,525 POSTAGE AND COURIER CHARGES 3,64,913 TOTAL COMMUNICATION EXPENSES 1,79,10,869 IN RELATION TO SAID COMMUNICATION EXPENSES, IT IS SU BMITTED THAT 5% OF THE TOTAL LIFE CYCLE OF SOFTWARE IS USED FOR TRANSMISSION OF SOFTWARE TO CLIENTS ON ESTIMATED BASIS. FURTHER, IT IS ALSO SUBMITTED THAT THE PERSONS EMPLOYED FOR A SOFTWARE P RODUCT ARE DIVIDED AS ONSHORE TEAM AND OFFSHORE TEAM. ONE OF THE TEAM GETS IN TOUCH WITH THE CLIENT TO UNDERSTAND CUSTOMER 'S NEED THROUGH SITE VISIT, VIDEO/VOICE CONFERENCING AND EM AILS. THEY ALSO ITA NO. 5110/DEL/2010 24 GET IN TOUCH WITH THE CLIENTS, WHEN THE SOFTWARE IS DEVELOPED AND TRANSMITTED TO THE CUSTOMERS. THEREFORE, ADMITTEDLY, O NLY 5% OF THE INTERNET CHARGES I.E. RS. 2,19,867 (5% OF 43,97 ,525) IS ATTRIBUTABLE TO THE DELIVERY OF SOFTWARE OUTSIDE IN DIA. FURTHER, IT IS ALSO SUBMITTED THAT NO INSURANCE EXPENSE ARE ATTRIBU TABLE TO THE DELIVERY OF SOFTWARE AS SEEN FROM THE ABOVE TABLE. 8.1 LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT TH AT EVEN IF ANY FREIGHT, TELECOMMUNICATION OR INSURANCE EXPENSE DUR ING THE YEAR, ARE REDUCED FROM THE EXPORT TURNOVER, SUCH SUMS WILL ALS O HAVE TO BE REDUCED FROM THE TOTAL TURNOVER OF THE COMPANY FOR T HE PURPOSE OF COMPUTATION OF DEDUCTION U/S. 10A. 8.2 LD. COUNSEL OF THE ASSESSEE FURTHER PLACED REL IANCE ON THE DECISION OF SUPREME COURT IN THE CASE OF C.I.T. VS. LAKSHMI MACHINE WORKS : 290 ITR 667, RENDERED IN THE CONTEXT OF SEC TION 80HHC OF THE ACT, WHEREIN, THE FORMULA FOR CALCULATION OF DEDUCT ION IS SIMILAR TO THAT OF SECTION 10A OF THE ACT. THE APEX COURT, IN THAT CASE HELD THAT EXCISE DUTY AND SALES TAX ETC. WHICH ARE NOT INCLUDED IN EXPORT TURNOVER WOULD ALSO BE EXCLUDED FROM TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER SECTION 80HHC OF THE ACT. 8.3 HE FURTHER PLACED RELIANCE ON THE FOLLOWING DEC ISIONS OF THE TRIBUNAL, WHEREIN IT IS HELD THAT FOR COMPUTATION O F DEDUCTION UNDER SECTION 10A OF THE ACT, TOTAL TURNOVER IN THE DENO MINATOR AND EXPORT TURNOVER IN THE NUMERATOR HAVE TO BE READ IN THE SA ME MANNER AND ACCORDINGLY THAT THE EXPENSES INCURRED IN FOREIGN E XCHANGE ARE TO BE EXCLUDED FROM EXPORT TURNOVER IN THE NUMERATOR THEN THE SAME ARE EVEN EXCLUDED IN THE TOTAL TURNOVER IN THE DENOMINAT OR. ITA NO. 5110/DEL/2010 25 - M/S MICROCHIP TECHNOLOGY DESIGNS (INDIA) PVT. LTD. : I .T.A. NO. 1161/BANG/2007 (BANG.) - M/S ALTERNATIVE FOOD PROCESS P. LTD. VS. I.T.O. : I.T .A. NO. 52/BANG/2008 (BANG.) - M/S GOODRICH AEROSPACE SERVICES P LTD. VS. DCIT : I.T .A. NO. 58/BANG/2008 (BANG.) - M/S HEWLETT PACKARD GLOBAL SOFT LTD. : I.T.A. NO. 33/ BANG/208 (BANG). - ACIT VS. INFOSYS TECHNOLOGIES LTD. : 172 TAXMAN 134 (MAG.) (BANG.). - ITO VS. SERVION GLOBAL SOLUTIONS LTD. : 117 TTJ 380 (CHENNAI) - I-GATE GLOBAL SOLUTIONS LTD. VS. ACIT 12 TTJ 1002 ( BANG.) - TATA ELXSI LTD. : 115 TTJ 423 (BANG.) - NOUS INFOSYSTEMS (P) LTD. VS. ITO NO. 1042/BANG./07 ( BANG.) - MPHASIS LTD. VS. ACIT : I.T.A. NO. 884/BANG/07 (BANG .) - PATNI TELECOM (P) LTD. VS. ITO 22 SOT 26 (HYD.) - DCIT VS. SOFTSOL INDIA LTD. : 22 SOT 271 (HYD.) - DCIT VS. BINARY SEMANTICS LTD. : I.T.A. NO. 293/DEL/20 05 8.4 LD. COUNSEL OF THE ASSESSEE FURTHER INVITED ATTENTION TO THE RECENT DECISION FROM THE SPECIAL BENCH OF THE TRIBUN AL IN THE CASE OF ITO VS. SAKSOFT LIMITED (ITA NOS. 691 & 1953/MDS/2007 ) UPHOLDING THE AFORESAID POSITION. 8.5 IT WAS SUBMITTED THAT IT WOULD FURTHER BE APPR ECIATED THAT THE ASSESSING OFFICER HAS ACCEPTED THE CONTENTIONS OF T HE APPELLANT IN THE AY 2007-08 AND HAD ACCORDINGLY REDUCED FREIGHT, TEL ECOMMUNICATION OR INSURANCE EXPENSE FROM TOTAL TURNOVER OF THE ASSESSE E WHILE REDUCING SUCH SUM FROM EXPORT TURNOVER. ITA NO. 5110/DEL/2010 26 8.6 LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT DEL HI BENCH OF ITAT IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06, RELYING ON THE AFORESAID DECISION OF SPECIAL BENCH OF TRIBU NAL IN THE CASE OF SAKSOFT INDIA LIMITED, HAS ALLOWED THE APPEAL OF THE APPELLANT AND DIRECTED THE ASSESSING OFFICER TO RE-COMPUTE DEDUCTI ON UNDER SECTION 10A AFTER REDUCING COMMUNICATION EXPENSE FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. 9. LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDER OF THE ASSESSING OFFICER IN THIS REGARD. 10. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND PERUSED THE RECORDS. WE NOTE THAT IT IS THE CONTENTION OF THE ASSESSEE COMPANY THAT ONLY 5% OF THE INTERNET CHARGES ARE ATTRIBUTAB LE TO THE DELIVERY OF SOFTWARE TO CLIENT, HENCE, FULL AMOUNT OF THE ABOV E EXPENSES SHOULD NOT BE TAKEN INTO CONSIDERATION FOR CALCULATING THE EXPORT TURNOVER AS PER EXPLANATION 2(IV) OF SECTION 10A OF THE I.T. AC T. HOWEVER, WE NOTE THAT THERE IS NO COGENT BASIS IN THE ABOVE ASS ERTIONS MADE BY THE ASSESSEE. HOWEVER, WE AGREE WITH THE CONTENTION TH AT FREIGHT TELECOMMUNICATION OR INSURANCE EXPENSES DURING THE Y EAR ARE REDUCED FROM THE EXPORT TURNOVER, THEN SUCH SUM WILL ALSO HAV E TO BE REDUCED FROM THE TOTAL TURNOVER OF THE COMPANY FOR THE PURPOS E OF COMPUTATION OF DEDUCTION U/S. 10A. 10.1 ANALOGY IN THIS REGARD CAN BE DRAWN FROM HONB LE APEX COURT DECISION IN THE CASE OF C.I.T. VS. LAKSHMI MACHINE WO RKS 290 ITR 667. ITA NO. 5110/DEL/2010 27 THOUGH THIS DECISION WAS RENDERED IN THE CONTEXT OF SECTION 80HHC, THIS FORMULA FOR CALCULATION OF DEDUCTION IS SIMILAR TO THAT OF SECTION 10A OF THE ACT. THE APEX COURT IN THAT CASE HAS HELD THAT EXCISE DUTY AND SALES TAX ETC. WHICH ARE NOT INCLUDED IN THE EXPO RT TURNOVER WOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER FOR THE PU RPOSE OF COMPUTATION OF DEDUCTION U/S. 80HHC OF THE ACT. 10.2 FURTHERMORE, WE NOTE THAT IN A CATENA OF DECIS IONS OF THE TRIBUNAL, IT WAS HELD THAT FOR COMPUTATION OF DEDUCT ION U/S. 10A OF THE ACT TOTAL TURNOVER IN THE DENOMINATOR AND EXPORT TU RNOVER IN THE NUMERATOR HAVE TO BE READ IN THE SAME MANNER AND AC CORDINGLY WHEN THE EXPENSES INCURRED IN FOREIGN EXCHANGE ARE TO B E EXCLUDED FROM THE EXPORT TURNOVER IN THE NUMERATOR, THEN THE SAME TREATMENT HAVE TO BE GIVEN IN THE TOTAL TURNOVER IN THE DENOMINATOR. WE FURTHER NOTE THAT ITAT, DELHI BENCH IN ASSESSEES OWN CASE FOR A SSESSMENT YEAR 2005-06 RELYING UPON THE DECISION OF THE ITAT, SPEC IAL BENCH IN THE CASE OF ITO VS. SAKSOFT LIMITED HAS ALLOWED THE APPE AL OF THE ASSESSEE AND DIRECTED THE ASSESSING OFFICER TO RECOMPUTED TH E DEDUCTION U/S. 10A AFTER REDUCING COMMUNICATION EXPENSES FROM THE E XPORT TURNOVER AS WELL AS TOTAL TURNOVER. 10.3 ACCORDINGLY, IN THE BACKGROUND OF THE AFORESAI D DISCUSSIONS AND PRECEDENTS, WE HOLD THAT FREIGHT TELECOMMUNICATION OR INSURANCE ITA NO. 5110/DEL/2010 28 CHARGES DURING THE YEAR THAT ARE REDUCED FROM THE EX PORT TURNOVER, THEN SUCH SUM WILL ALSO HAVE TO BE REDUCED FROM THE TOTAL TURNOVER OF THE COMPANY FOR THE PURPOSE OF COMPUTATION OF DEDUCT ION U/S. 10A. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21/12/2012. SD/- SD/- [ [[ [I.C. SUDHIR I.C. SUDHIR I.C. SUDHIR I.C. SUDHIR] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 21/12/2012 SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES