United Health Group Information Service Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 5200/DEL/2011

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3954 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 30-05-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 22-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Rectification of order; Opportunity of being heard; International transaction; Retrospective amendment
• Section: 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.5200/DEL/2011 & ITA NO.1144/DEL/2017 ASSESSMENT YEAR : 2007-08 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD., 7 TH FLOOR, TOWER A, UNITECH CYBER PARK, SECTOR-39, GURGAON. PAN: AADCA6769Q VS. DCIT, CIRCLE-18(1), CR BUILDING, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESHWAR RAO, ADVOCATE DEPARTMENT BY : SHRI KUMAR PRANAV, SR. DR DATE OF HEARING : 10.01.2018 DATE OF PRONOUNCEMENT : 11.01.2018 ORDER PER R.S. SYAL, VP: THESE TWO APPEALS FILED BY THE ASSESSEE ONE AGAI NST THE QUANTUM AND THE OTHER AGAINST THE PENALTY IMPOSED U/S 271(1 )(C) OF THE INCOME-TAX ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 2 ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) ARE I N RELATION TO THE ASSESSMENT YEAR 2007-08. QUANTUM APPEAL (ITA NO.5200/DEL/2011) 2. THE ONLY ISSUE RAISED IN THE QUANTUM APPEAL IS A GAINST THE TRANSFER PRICING ADDITION OF RS.53,27,302/- MADE IN RESPECT OF SOFTWARE DEVELOPMENT SEGMENT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE WAS INCORPORATED IN JANUARY, 2007 AND IS ENGAGED IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES, HEALTHCARE CLAIM ADJ UDICATION AND BIO PHARMACEUTICAL SERVICES. FIVE INTERNATIONAL TRANSA CTIONS, INCLUDING PROVISION OF I.T. SERVICES WITH THE REPORTED VALUE OF SUCH TRANSACTION AT RS.10,24,95,795/-, WERE REPORTED. THE ASSESSEE AP PLIED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) FOR SHOWING THAT SOFTWARE DEVELOPMENT SERVICES SEGMENT, DESIGNATED IN TRANSFER PRICING DO CUMENTATION AS IT SERVICES, WAS AT ARMS LENGTH PRICE (ALP). SIMILAR METHOD WAS ADOPTED FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF CLAIM PROCESSING SERVICE TRANSACTION (ITES). THE ASSESSING OFFICER (AO) MAD E REFERENCE TO THE ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 3 TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE . THE TPO VIDE HIS ORDER DATED 11.10.2010, PROPOSED TRANSFER PRICING ADJUSTM ENTS IN THE SOFTWARE DEVELOPMENT SERVICE AND ITES SEGMENT AMOUNTING TO R S.2.68 CRORE IN TOTAL. PURSUANT TO THE DIRECTIONS GIVEN BY THE DIS PUTE RESOLUTION PANEL (DRP) AND CERTAIN RECTIFICATION ORDERS PASSED, THE TPO, VIDE HIS ORDER DATED 25.10.2011, RECALCULATED THE TRANSFER PRICING ADJUSTMENT IN SOFTWARE DEVELOPMENT SEGMENT AT RS.53,27,302/-. NO TRANSFER PRICING ADJUSTMENT WAS PROPOSED IN ITES SEGMENT IN SUCH RECTIFICATION ORDER. AS SUCH, WE ARE CONCERNED IN THE INSTANT APPEAL ONLY WITH THE TRANS FER PRICING ADDITION OF RS.53,27,302/- MADE IN THE SOFTWARE DEVELOPMENT SEG MENT. 4. BEFORE PROCEEDING FURTHER, WE WANT TO MAKE IT CL EAR THAT ALBEIT THE ASSESSEE RAISED AN ADDITIONAL GROUND DURING THE COU RSE OF EARLIER HEARING, BUT THE SAME WAS NOT PRESSED BEFORE US. SIMILARLY, THE ASSESSEE HAD SOUGHT INCLUSION OF A COMPANY IN THE LIST OF COMPARABLES, WHICH WAS ALSO GIVEN UP BY THE LD. AR DURING THE COURSE OF HEARING. ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 4 5. THE ASSESSEE IS, THUS, AGGRIEVED ONLY AGAINST TH E INCLUSION OF THREE COMPANIES IN THE FINAL TALLY OF COMPARABLES, NAMELY , KALS INFORMATION SYSTEMS LTD., SASKEN COMMUNICATIONS TECHNOLOGIES LT D. AND TATA ELXSI LTD. THERE IS NO DISPUTE ON ANY OTHER ASPECT OF THE DETERMINATION OF THE ALP OF THE SOFTWARE DEVELOPMENT SEGMENT. IN ORDER TO PROPERLY EVALUATE THE CONTENTION OF THE ASSESSEE QUA THE EXCLUSION OF THE ABOVE REFERRED THREE COMPANIES, IT IS PARAMOUNT TO UNDERSTAND THE FUNCTI ONAL PROFILE OF THE ASSESSEE UNDER SOFTWARE DEVELOPMENT SEGMENT. 6. THE TRANSFER PRICING STUDY REPORT DISCLOSES T HAT THE ASSESSEE HAS CERTAIN SELF-DEVELOPED DATA PROCESSING AND DATA ANA LYTICS SOFTWARE WHICH ARE USED FOR SEVERAL INTERNAL PURPOSES, INCLUDING B ENEFIT DESIGN, BENCHMARKING, CLAIM PROCESSING, COST TRADING, MARKE TING, MANAGING RELATIONS AND INCREASING EFFICIENCY AND PROFITABILI TY. WHEN WE PERUSE THE TERMS OF THE SERVICE AGREEMENT BETWEEN THE ASSESSEE AND ITS A.E, PURSUANT TO WHICH SUCH SERVICES WERE RENDERED, IT TURNS OUT THAT THE ASSESSEE DID :- 1. DEVELOPMENT, TESTING AND MAINTENANCE OF INTERNA L COMPANY SOFTWARE PURSUANT TO COMPANY SOFTWARE DEVELOPMENT LIFE CYCLE (SDLS) PROCESS. A) PROVIDE LARGE SCALE SHARED SERVICES TESTING INFR ASTRUCTURE CAPABILITY. ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 5 B) PROVIDE DEVELOPMENT, TESTING AND OPERATIONS FOR SPECIFIED DATA MAPS USING BEST METHODS FOR EXTRACT, TRANSFORM AND LOAD (EDL) DATA WAREHOUSE PROCESSES. 7. FROM THE ABOVE SERVICES RENDERED BY THE ASSESS EE WHICH HAVE BEEN SET OUT IN EXHIBIT TO THE SERVICES AGREEMENT, IT IS CLE AR THAT THE ASSESSEE IS ENGAGED IN DEVELOPMENT, TESTING AND MAINTENANCE OF INTERNAL COMPANY SOFTWARE IN RESPECT OF TESTING INFRASTRUCTURE CAPAB ILITY AND OF SPECIFIED DATA TO BE USED BY ITS A.E. AS THESE SOFTWARE DEVELOPMEN T SERVICES HAVE BEEN RENDERED TO ITS AE IN RESPECT OF THE BUSINESS CARRI ED ON BY THE LATER, IT ASSUMES SIGNIFICANCE TO SEE TO THE NATURE OF THE BU SINESS OF SUCH AE TO FIND OUT THE CORRECT NATURE OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE ASSESSEE. 8. THE FOREIGN A.E. HAS BROADLY FOUR FUNCTIONS, N AMELY, HEALTH CARE SERVICES, OPTUM HEALTH, INGENIX AND PRESCRIPTION SO LUTIONS. IN SO FAR AS FIRST TWO FUNCTIONS ARE CONCERNED, THESE ARE QUA THE PROVISION OF HEALTH CARE SOLUTIONS BY MEANS OF HEALTH INSURANCE POLICIES ETC . CATERING TO DIFFERENT AGE-GROUPS. THE THIRD FUNCTION, NAMELY, INGENIX IS AN ALTOGETHER DIFFERENT WORK TOTALLY UNRELATED TO THE HEALTH SERVICES. THE TP STUDY REPORT INDICATES ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 6 THAT INGENIX OFFERS DATABASE AND DATA MANAGEMENT SE RVICES, SOFTWARE PRODUCTS, PUBLICATIONS, CONSULTING AND ACTUARIAL SE RVICES, BUSINESS PROCESS OUTSOURCING SERVICES AND PHARMACEUTICAL DATA CONSUL TING AND RESEARCH SERVICES. THE FOURTH FUNCTION, NAMELY, PRESCRIPTION SOLUTIONS INCLUDES RETAIL NETWORK, PHARMACY MANAGEMENT, MAIL ORDER PHARMACY S ERVICES, SPECIALTY PHARMACY SERVICES, BENEFIT DESIGN CONSULTATION, DRU G UTILIZATION REVIEW AND DISEASE THERAPY MANAGEMENT ETC. FROM THE ABOVE FOUR BROADER FUNCTIONS CARRIED OUT BY THE ASSESSEES A.E, IN WHICH THE ASS ESSEE IS PROVIDING SOFTWARE DEVELOPMENT SERVICES, IT CAN BE SEEN THAT THE NATURE OF SOFTWARE DEVELOPMENT BY THE ASSESSEE IS OF A WIDER RANGE. WE WANT TO MAKE IT MANIFEST FROM THE SERVICES AGREEMENT THAT THE INTEL LECTUAL PROPERTY RIGHTS IN RESPECT OF THE SOFTWARE DEVELOPED BY THE ASSESSEE D O NOT VEST IN IT BUT WITH ITS A.E. FURTHER, THE OWNERSHIP AND COPYRIGHT OF TH E SOFTWARE DEVELOPED BY THE ASSESSEE ALSO LIE WITH ITS A.E AND THE ASSES SEE HAS NO RIGHT IN THEM. 9. WITH THE ABOVE OVERVIEW OF THE NATURE OF WORK DONE BY THE ASSESSEE UNDER THE SOFTWARE DEVELOPMENT SEGMENT, LET US EX AMINE THE COMPARABILITY OR OTHERWISE OF THE THREE DISPUTED CO MPANIES. ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 7 (I) KALS INFORMATION SYSTEMS LTD. 10. THE ASSESSEE INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES WHICH WAS NOT DISPUTED BY THE TPO NOR BY THE DRP. THE LD . AR CONTENDED BEFORE THE TRIBUNAL THAT THIS COMPANY WAS WRONGLY I NCLUDED IN THE LIST OF COMPARABLES AS THE SAME WAS FUNCTIONALLY DIFFERENT. IT WAS SUBMITTED THAT THIS COMPANY IS ALSO ENGAGED IN SOFTWARE PRODUCTS A ND, HENCE, THE SAME SHOULD BE EXCLUDED. 11. THE LD. DR RAISED A PRELIMINARY OBJECTION TO ARGUE THAT ONCE A COMPANY HAS BEEN CONSIDERED BY THE ASSESSEE AS COMP ARABLE IN ITS TP DOCUMENTATION, THE SAME CANNOT BE CHALLENGED IN THE FURTHER APPELLATE PROCEEDINGS. HE RELIED ON THE IMPUGNED ORDER TO CON TEND THAT THIS COMPANY WAS RIGHTLY OFFERED BY THE ASSESSEE IN THE LIST OF COMPARABLES AND, HENCE, THE SAME SHOULD NOT BE EXCLUDED. 12. WE ARE DISINCLINED TO SUSTAIN THE PRELIMINARY OBJECTION TAKEN BY THE LD. DR THAT THE ASSESSEE SHOULD BE STOPPED FROM TAK ING A STAND CONTRARY TO THE ONE WHICH WAS TAKEN AT THE STAGE OF THE TP STUD Y OR DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO. IT GOES WITHOUT SAYI NG THAT THE OBJECT OF ASSESSMENT IS TO DETERMINE THE INCOME IN RESPECT OF WHICH THE ASSESSEE IS ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 8 RIGHTLY CHARGEABLE TO TAX. AS AN INCOME NOT ORIGINA LLY OFFERED FOR TAXATION, IF OTHERWISE CHARGEABLE, IS REQUIRED TO BE INCLUDED IN THE TOTAL INCOME, IN THE SAME BREATH, ANY INCOME WRONGLY INCLUDED IN THE TOTAL INCOME, WHICH IS OTHERWISE NOT CHARGEABLE, SHOULD BE EXCLUDED. THERE CAN BE NO ESTOPPEL AGAINST THE PROVISIONS OF THE ACT. EXTENDING THIS P ROPOSITION FURTHER IN THE CONTEXT OF THE TRANSFER PRICING, IT TRANSPIRES THAT IF THE ASSESSEE FAILS TO REPORT AN OTHERWISE COMPARABLE COMPANY, THEN THE TP O IS OBLIGED TO INCLUDE IT IN THE LIST OF COMPARABLES, AND IN THE S AME MANNER, IF THE ASSESSEE WRONGLY REPORTED AN INCOMPARABLE CASE AS COMPARABLE IN ITS TP STUDY AND THEN LATER ON REALIZES AND CLAIMS THAT IT SHOULD BE EXCLUDED THEN, THERE SHOULD BE NOTHING TO FORBID IT FROM CLAIMING SO, P ROVIDED THE COMPANY SO ORIGINALLY REPORTED AS COMPARABLE IS, IN FACT, NOT COMPARABLE. SIMPLY BECAUSE A COMPANY WAS WRONGLY CHOSEN BY THE ASSESSE E AS COMPARABLE, CANNOT TIE ITS HANDS TO CONTEND BEFORE THE TRIBUNAL THAT SUCH A COMPANY WAS WRONGLY CONSIDERED AS COMPARABLE WHICH IS, IN F ACT, NOT. THERE IS NO DIFFERENCE IN THE SITUATION WHERE THE ASSESSEE CLAI MS THAT A WRONG COMPANY INADVERTENTLY INCLUDED FOR THE PURPOSE OF COMPARISO N SHOULD BE EXCLUDED AND THE SITUATION IN WHICH THE REVENUE DOES NOT ACC EPT A PARTICULAR ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 9 COMPANY CHOSEN BY THE ASSESSEE AS COMPARABLE. THE UNDERLYING OBJECT OF THE ENTIRE EXERCISE IS TO DETERMINE THE ARMS LENGT H PRICE OF AN INTERNATIONAL TRANSACTION. SIMPLY BECAUSE A COMPANY WAS WRONGLY CONSIDERED BY THE ASSESSEE AS COMPARABLE, CANNOT, ACT AS A DETERRENT FROM CHALLENGING THE FACT THAT THIS COMPANY IS, IN FACT, NOT COMPARABLE. THE SPECIAL BENCH OF THE TRIBUNAL IN DCIT VS. QUARK SYSTEMS PVT. LTD. (2010) 132 TTJ (CH D) (SB) 1 HAS HELD THAT A COMPANY WHICH WAS INCLUDED BY THE A SSESSEE AND ALSO BY THE TPO IN THE LIST OF COMPARABLES AT THE TIME OF C OMPUTING ALP, CAN BE EXCLUDED BY THE TRIBUNAL, IF THE ASSESSEE PROVES TH AT THE SAME WAS WRONGLY INCLUDED. SIMILAR VIEW HAS BEEN UPHELD BY THE HON'B LE DELHI HIGH COURT IN XCHANGING TECHNOLOGY SERVICES INDIA PVT LTD [TS-446 -HC-2016(DEL)- TP]. THE HONBLE BOMBAY HIGH COURT IN TATA POWER SOLAR SYSTEMS LTD [TS-1007-HC-2016(BOM)-TP] AND THE HONBLE PUNJAB & HARYANA HIGH COURT IN CIT VS. MERCER CONSULTING (INDIA) P. LTD. (2017) 39 0 ITR 615 (P&H) HAVE ALSO APPROVED SIMILAR VIEW. IN VIEW OF THE F OREGOING DISCUSSION, WE DO NOT FIND ANY SUBSTANCE IN THE PRE LIMINARY OBJECTION TAKEN BY THE LD. DR. ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 10 13. COMING TO THE COMPARABILITY OR OTHERWISE OF THI S COMPANY, WE FIND THAT IT IS ALSO ENGAGED IN IMPARTING TRAINING AND L ICENSING ITS SOFTWARE. THE ASSESSEE IS NOT ENGAGED IN IMPARTING ANY TRAINING O N COMMERCIAL BASIS OR SELLING ITS SOFTWARE PRODUCTS. THE IMPACT OF REVEN UES FROM SUCH TWO ACTIVITIES CANNOT BE DISLODGED FROM THE OVERALL PRO FITABILITY OF THIS COMPANY, CONSIDERED AT ENTITY LEVEL. AS SUCH, WE H OLD THAT THE CONSOLIDATED FINANCIALS OF THIS COMPANY CANNOT BE C OMPARED WITH THE ASSESSEE. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBU NAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008-09. A COPY O F SUCH ORDER DATED 28.08.2014 HAS BEEN PLACED ON RECORD. THIS COMPANY IS, THEREFORE, DIRECTED TO BE EXCLUDED. (II) SASKEN COMMUNICATIONS TECHNOLOGIES LTD . 14. THIS WAS ALSO THE ASSESSEES COMPARABLE WHICH W AS NOT CHALLENGED BEFORE THE TPO OR THE DRP. THE LD. AR SUBMITTED TH AT THIS COMPANY WAS WRONGLY INCLUDED IN THE LIST OF COMPARABLES AND HEN CE THE SAME BE EXCLUDED BECAUSE OF CERTAIN ACQUISITIONS DONE BY IT DURING THE YEAR. 15. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE FINANCIAL RESU LTS OF THIS COMPANY STAND ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 11 DISTORTED DUE TO CERTAIN ACQUISITIONS MADE BY IT DU RING THE RELEVANT YEAR. IT IS EVIDENT FROM THE ANNUAL REPORT OF THIS COMPANY W HICH IS AVAILABLE IN THE PAPER BOOK. IT HAS BEEN CATEGORICALLY MENTIONED IN ITS ANNUAL REPORT THAT DURING THE YEAR THIS COMPANY ACQUIRED BOTNIA HITECH OY, FINLAND AND ITS TWO WHOLLY OWNED SUBSIDIARIES. IT HAS ALSO BEEN ST ATED IN THE SAME PARA THAT DURING THE YEAR THE COMPANY ALSO SUCCESSFULLY COMPLETED THREE MERGERS, NAMELY, SASKEN NETWORK SYSTEMS LTD., AND I NTEGRATED SOFTTECH SOLUTIONS PVT. LTD., THE TWO INDIAN BASED WHOLLY OW NED SUBSIDIARIES WHICH MERGED WITH THE ASSESSEE. THUS, IT IS ABUNDANTLY P ATENT THAT THE FINANCIAL RESULTS OF THIS COMPANY CONSIDERED IN THE PROCESS O F DETERMINING THE ALP OF THE ASSESSEE, HAVE BEEN INFLUENCED BY THE MERGER S AND ACQUISITIONS TAKING PLACE DURING THE YEAR, THEREBY MAKING SUCH F INANCIAL RESULTS INCOMPARABLE. 16. THE MUMBAI BENCH OF THE TRIBUNAL IN PETRO ARALDITE (P) LTD. VS. DCIT (2013) 154 TTJ (MUM) 176, HAS HELD THAT A COMPANY CANNOT BE CONSIDERED AS COMPARABLE BECAUSE OF EXCEPTIONAL FIN ANCIAL RESULTS DUE TO MERGERS/DEMERGERS. SIMILAR VIEW HAS BEEN BOLSTERED BY THE DELHI BENCH OF THE TRIBUNAL IN SEVERAL CASES INCLUDING CIENA INDIA PVT. LTD. VS. DCIT ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 12 (ITA NO.3324/DEL/2013) VIDE ITS ORDER DATED 23.4.20 15. IN VIEW OF THE FACT THAT THERE WERE MERGERS DURING THE YEAR, WE HO LD THAT THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE DUE TO SUCH EXTR A-ORDINARY FINANCIAL EVENTS. ACCORDINGLY, THIS COMPANY IS DIRECTED TO B E EXCLUDED FROM THE FINAL LIST OF COMPARABLES. (III) TATA ELXSI LTD . 17. THE ASSESSEE INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES WHICH WAS NOT OBJECTED TO BY THE TPO. HOWEVER, THE ASSES SEE RAISED OBJECTION BEFORE THE DRP THAT THIS COMPANY WAS INADVERTENTLY INCLUDED. THE LD. DRP DID NOT INTERFERE WITH THE ORDER PASSED BY THE TPO ON THIS SCORE. 18. THE LD. AR CONTENDED THAT THE NATURE OF ACTI VITY DONE BY THIS COMPANY IS DIFFERENT INASMUCH AS IT WAS ENGAGED IN R&D ACTIVITIES ALSO WHICH RESULTED IN CREATION OF INTELLECTUAL PROPERTY . THIS SUBMISSION WAS MADE WITH REFERENCE TO THE ANNUAL REPORT OF THE COM PANY FOR THE YEAR UNDER CONSIDERATION. THE LD. DR SUPPORTED THE IMPU GNED ORDER. 19. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE MATERIAL ON RECORD, WE FIND FROM THE ANNEXURE TO THE DIRECTORS REPORT OF THIS ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 13 COMPANY, THAT THE NATURE OF ITS ACTIVITY IS QUITE D ISTINCT FROM THAT OF THE ASSESSEE. IT CAN BE SEEN THAT THIS COMPANY IS INTO DEVELOPMENT OF HARDWARE AND SOFTWARE FOR EMBEDDED PRODUCTS, SUCH AS, MULTIM EDIA AND SOME OTHER ELECTRONICS ETC. APART FROM THAT, THIS COMPANY IS A LSO ENGAGED IN MAKING SOME PROGRAMME DEVELOPING TECHNOLOGY INTELLECTUAL P ROPERTY. AS THE NATURE OF ACTIVITY CARRIED OUT BY THE ASSESSEE IN Q UESTION IS NOWHERE CLOSE TO THAT OF TATA ELXSI LTD., WE HOLD THAT THIS COMPA NY CANNOT BE INCLUDED IN THE LIST OF COMPARABLES. ACCORDINGLY, THIS COMPANY IS DIRECTED TO BE EXCLUDED. 20. TO SUM UP, WE SET ASIDE THE IMPUGNED ORDER ON T HE ISSUE OF TRANSFER PRICING ADDITION IN SOFTWARE DEVELOPMENT SEGMENT AN D REMIT THE MATTER TO THE FILE OF AO/TPO FOR FRESH DETERMINATION OF ITS ALP IN CONSONANCE WITH OUR ABOVE DIRECTIONS. NEEDLESS TO SAY, THE ASSESSE E WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDINGS ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 14 PENALTY APPEAL (ITA NO.1144/DEL/2017) 21. THE ASSESSEE IN THIS APPEAL IS AGGRIEVED AGAINS T THE SUSTENANCE OF PENALTY AMOUNTING TO RS.17,93,169/- BY THE LD.CIT(A ) U/S 271(1)(C) OF THE ACT. 22. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT CAN BE SEEN FROM THE FINALL Y RECTIFIED ORDER PASSED BY THE ASSESSING OFFICER THAT THE ONLY ADDITION WHICH HAS BEEN MADE IS ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT UNDER SOFTW ARE DEVELOPMENT SEGMENT AMOUNTING TO RS.53,27,302/-, WHICH WE HAV E DEALT WITH ABOVE WHILE DISPOSING OF THE QUANTUM APPEAL OF THE ASSESS EE. WHILE ARGUING THE QUANTUM APPEAL, THE LD. AR SUBMITTED THAT IF THE TH REE COMPANIES AS CONTESTED ARE EXCLUDED, THE MEAN PLI OF THE COMPARA BLES WOULD BE WITHIN THE PERMISSIBLE RANGE OF THE ASSESSEES PLI, WARRAN TING NO ADDITION ON ACCOUNT OF TRANSFER PRICING. IN THAT VIEW OF THE M ATTER THERE WOULD REMAIN NO ADDITION CALLING FOR ANY PENALTY. IN THE OPPOSI TION, THE LD. DR RELIED ON THE IMPUGNED ORDER. ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 15 23. WE FIND THAT THE ONLY BASIS FOR THE IMPOSITION OF PENALTY U/S 271(1)(C) IS THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO. EXPLANATION 7 TO SECTION 271, WHICH IS RELEVANT FOR OUR PURPOSE, REA DS AS UNDER:- EXPLANATION 7. WHERE IN THE CASE OF AN ASSESSEE WHO HAS ENTERED I NTO AN INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION DEFINED IN SECTION 92B, ANY AMOUNT IS ADDED OR DISALLOWED IN C OMPUTING THE TOTAL INCOME UNDER SUB-SECTION (4) OF SECTION 92C, THEN, THE AMOUNT SO ADDED OR DISALLOWED SHALL, FOR THE PURPOSES OF CLAUSE (C) OF THIS SUB-SECTION, BE DEEMED TO REPRESENT THE INCOME IN RESPECT OF WHICH PARTICULARS HAVE BEEN CONCEALED OR INACCURATE PARTICULARS HAVE BEEN FURNI SHED, UNLESS THE ASSESSEE PROVES TO THE SATISFACTION OF THE ASSESSIN G OFFICER OR THE COMMISSIONER (APPEALS) OR THE PRINCIPAL COMMISSIONE R OR COMMISSIONER THAT THE PRICE CHARGED OR PAID IN SUCH TRANSACTION WAS COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 92C AND IN THE MANNER PRESCRIBED UNDER THAT SECTION, IN GOOD FAITH AND WITH DUE DILIGENCE. 24. A PERUSAL OF THIS EXPLANATION TRANSPIRES THAT A NY ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT SHALL BE DEEMED TO R EPRESENT INCOME IN RESPECT OF WHICH PARTICULARS HAVE BEEN CONCEALED OR INACCURATE PARTICULARS HAVE BEEN FURNISHED IN TERMS OF SECTION 271(1)(C), THEREBY INVITING PENALTY UNDER THIS PROVISION. HOWEVER, THE EXCEPTION ENSHR INED IN THIS PROVISION ITSELF STATES THAT NO PENALTY WILL BE IMPOSED PURSU ANT TO THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT, IF THE ASSE SSEE PROVES TO THE SATISFACTION OF THE AUTHORITY THAT THE PRICE CHARGE D OR PAID IN SUCH A ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 16 TRANSACTION WAS IN ACCORDANCE WITH THE PROVISIONS O F SECTION 92C AND SUCH PRICE WAS COMPUTED AS PER THE MANNER PRESCRIBED UND ER THAT SECTION IN GOOD FAITH AND DUE DILIGENCE. THIS DIVULGES THAT PE NALTY U/S 271(1)(C) IN RESPECT OF ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IS NOT IMPOSABLE ONLY WHEN THE ASSESSEE PROVES TO THE AUTH ORITY THAT THE PRICE PAID BY IT WAS COMPUTED IN TERMS OF SECTION 92C AND IN A MANNER PRESCRIBED UNDER THE SECTION AND THIS EXERCISE WAS DONE IN GOOD FAITH AND DUE DILIGENCE. 25. SECTION 92C OF THE ACT DEALS WITH THE COMPUTAT ION OF ARMS LENGTH PRICE. SUB-SECTION (1) PROVIDES THAT THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION ETC., NAMELY : (A) COMPARABLE UNCONTROLLED PRICE METHOD; (B) RESALE PRICE METHOD; (C) COST PLUS METHOD; (D) PROFIT SPLIT METHOD; (E) TRANSACTIONAL NET MA RGIN METHOD; (F) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. SU B-SECTION (2) PROVIDES THAT THE MOST APPROPRIATE METHOD REFERRED TO IN SUB -SECTION (1) SHALL BE APPLIED FOR DETERMINING ALP IN THE MANNER AS MAY BE PRESCRIBED. THUS, IT ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 17 CAN BE NOTICED THAT THERE ARE FIVE METHODS SPECIFIC ALLY MENTIONED, IN ADDITION TO CLAUSE (F) OF SECTION 92C(1) WHICH REFE RS TO SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. THE OTHER METH OD HAS BEEN PRESCRIBED BY THE BOARD IN TERMS OF RULE 10AB WITH RETROSPECTIVE EFFECT FROM 1.4.2012 APPLICABLE TO ASSESSMENT YEAR 2012-13 AND SUBSEQUENT YEARS. WE ARE DEALING WITH ASSESSMENT YEAR 2007-08 . AS SUCH, THE ALP FOR THE YEAR UNDER CONSIDERATION COULD HAVE BEEN DE TERMINED ONLY BY APPLYING ANY OF THE FIVE SPECIFIED METHODS. THE AS SESSEE APPLIED THE TNMM AS PER CLAUSE (E) OF SECTION 92C(1), WHICH HAS NOT BEEN DISPUTED BY THE TPO AS THE MOST APPROPRIATE METHOD. THUS, IT I S CLEAR THAT THE ASSESSEES APPLICATION OF THE TNMM IN RESPECT OF TH E SOFTWARE DEVELOPMENT SEGMENT UNDER CONSIDERATION IS IN ACC ORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 92C. FURTHER, SUCH DETERMINATION IS `IN THE MANNER PRESCRIBED UNDER THAT SECTION BECAUSE THE T PO HAS NOWHERE HELD THAT THE ASSESSEE CALCULATED ALP OF THESE TRANSACTI ONS IN A MANNER DIFFERENT FROM THE ONE PRESCRIBED UNDER RULE 10B(1)(E), WHICH CONTAINS MECHANISM FOR CALCULATING THE ALP UNDER THE TNMM. ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 18 26. THE NEXT INGREDIENT WHICH IS CRUCIAL FOR EVADIN G PENALTY U/S 271(1)(C) IS THAT THE APPLICATION BY THE ASSESSEE OF MOST APP ROPRIATE METHOD FOR DETERMINING ALP SHOULD BE IN GOOD FAITH AND WITH D UE DILIGENCE. NOW, THE MOOT QUESTION IS WHETHER THE ASSESSEES APPLICA TION OF THE TNMM IN THE GIVEN CIRCUMSTANCES, CAN BE CONSIDERED AS DONE IN GOOD FAITH AND WITH DUE DILIGENCE 27. THERE IS ABSOLUTELY NO DOUBT THAT THE ASSESSEE APPLIED THE TNMM ON THE INTERNATIONAL TRANSACTIONS OF SOFTWARE DEVELOP MENT IN THE MANNER PRESCRIBED AND COMPUTED THE ALP IN GOOD FAITH AND W ITH DUE DILIGENCE. SIMPLY BECAUSE CERTAIN COMPARABLES CHOSEN BY THE AS SESSEE WERE FOUND TO BE NOT COMPARABLE BY THE TPO, THE GOOD FAITH AND DU E DILIGENCE CANNOT BE SAID TO BE LACKING. IT IS SIMPLY A DIFFERENCE OF OP INION BETWEEN THE ASSESSEE AND THE AUTHORITIES ON THE COMPARABILITY OR OTHERWI SE OF SOME COMPANIES. WHILE DISPOSING OF THE QUANTUM APPEAL, WE HAVE HELD THAT THE THREE COMPARABLES INCLUDED IN THE FINAL TALLY OF COMPARAB LES, ARE ACTUALLY NOT COMPARABLE AND LIABLE TO BE EXCLUDED. AS SUCH, BY T REATING THE THREE COMPANIES AS COMPARABLE, THE ASSESSEE CANNOT BE SAI D TO HAVE ACTED IN A MALA FIDE MANNER OR NOT IN GOOD FAITH. ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 19 28. COMING BACK TO THE EXPLANATION 7 TO SECTION 271 (1), WE FIND THAT NO DOUBT THE ADDITION OF RS.53.27 LAC HAS BEEN MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF THE INTERNATIONAL TRANSACTION OF PROVISION OF `SOFTWARE DEVELOPMENT SERVICES, BUT, THE SAME CANN OT BE DEEMED TO REPRESENT THE INCOME IN RESPECT OF WHICH PARTICULAR S HAVE BEEN CONCEALED OR FURNISHED WRONGLY BY THE ASSESSEE. THE RAISON DETRE IS THAT THE ALP OF THIS TRANSACTION WAS DETERMINED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92C AND IN THE MANNER PRESCRI BED UNDER THE TNMM IN GOOD FAITH AND WITH DUE DILIGENCE. 29. THE HON'BLE DELHI HIGH COURT IN PRINCIPAL CIT VS. MITSUI PRIME ADVANCED COMPOSITES INDIA (P) LTD. (2017) 79 TAXMAN N.COM 283 (DEL), HAS CONFIRMED THE DELETION OF PENALTY U/S 271(1)(C) WHICH WAS IMPOSED PURSUANT TO THE TRANSFER PRICING ADDITION IN SOMEWH AT SIMILAR CIRCUMSTANCES. UNDER THESE CIRCUMSTANCES, WE ARE S ATISFIED THAT THE PENALTY IMPOSED AND CONFIRMED IN THE INSTANT CASE DOES NOT MERIT COUNTENANCE AND THE SAME IS HEREBY DIRECTED TO BE DELETED. ITA NO.5200/DEL/2011 & ITA NO.1141/DEL/2017 20 30. IN THE RESULT, THE QUANTUM APPEAL IS ALLOWED FO R STATISTICAL PURPOSES AND THE PENALTY APPEAL IS ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 11.01.201 8. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 11 TH JANUARY, 2018. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.