Actis Advisers Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 5277/DEL/2011

• Counselvise Citation: 527720114 RSA 2011
• Duration Of Justice: 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-10-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 25-04-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 28-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHIKHA GUPTA ARS; RAHUL MITRA KM GUPTA
• Assessee Lawyers: PEEYUSH JAIN
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Principle of natural justice; International transaction; Working capital adjustments
• Section: 92C; 143(3); 92D; 92B; 142(1); 234B; 133(6); 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B NEW DELHI) BEFORE SHRI G.D. AGRAWAL, HONBLE VICE-PRESIDENT AND SHRI RAJPAL YADAV, HONBLE JUDICIAL MEMBER ITA NO. 5277/DEL/2011 ASSESSMENT YEAR: 2007-08 ACTIS ADVISERS PVT. LTD., VS. DEPUTY CIT, MIRA, THE CORPORATE SUITES, CIRCLE 1(1), BLOCK D, GROUND FLOOR, NEW DELHI. 1 & 2 ISHWAR NAGAR, NEW DELHI-1100 25 (PAN: AAACC5281G) (APPELLANT) (RESPONDENT) ITA NO. 958/DEL/2012 ASSESSMENT YEAR: 2006-07 ACTIS ADVISORS PVT. LTD., DEPUTY CIT, MIRA, THE CORPORATE SUITES, VS. CIRCLE- 1(1), BLOCK D, GROUND FLOOR, NEW DELHI, 1 & 2 ISHWAR NAGAR, NEW DELHI-1100 25 (PAN: AAACC5281G) (APPELLANT) (RESPONDENT) REVENUE BY: S/SHRI RAHUL MITRA , KM GUPTA & MS. SHIKHA GUPTA, ARS ASSESSEE BY: SHRI PEEYUSH J AIN, CIT(DR) ORDER PER RAJPAL YADAV: JUDICIAL MEMBER THE PRESENT TWO APPEALS ARE DIRECTED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ASSET. ORDERS DATED 30.12.2011 AND 27.1 0.2011 PASSED U/S. 143(3) READ WITH SECTION 144C OF THE I. T. ACT, 1961 IN ASSESSMENT YEARS 2006-07 2 AND 2007-08 RESPECTIVELY. THE GROUNDS OF APPEALS TA KEN BY THE ASSESSEE IN BOTH THE ASSESSMENT YEARS READ AS UNDER: GROUNDS IN ASSESSMENT YEAR 2006-07: 1. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSESSIN G OFFICER (LD. ASSESSING OFFICER) PURSUANT TO THE DIRECTION S OF LEARNED DISPUTE RESOLUTION (LD DRP) IS BAD IN LAW AND VOI D AB-INITIO. 2. THE LD. DRP ERRED BOTH ON FACTS AND IN LAW IN CONFI RMING THE ADDITION OF ` 3,00,41,990/- TO THE INCOME OF THE APPELLANT OUT O F THE TOTAL ADDITION OF ` 3,71,89,793/- PROPOSED BY THE LD. TPO BY HOLDING THAT ITS INTERNATIONAL TRANSACTIONS DO NOT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. IN DOING SO, THE LD. DRP AND THE LD. AO HAS GROSSLY ERRED IN AGREEING WI TH AND UPHOLDING THE LD. TPOS ACTION OF: 2.1 NOT APPRECIATING THAT NONE OF THE CONDITIONS SET OU T IN SECTION 92C(3) OF THE ACT ARE SATISFIED IN THE PRES ENT CASE. 2.2 DISREGARDING THE ALP, AS DETERMINED BY THE APPELLAN T IN THE TP DOCUMENTATION MAINTAINED BY IT IN TERMS OF S ECTION 92D OF THE ACT READ WITH RULE 10D OF THE RULES; 2.3 DISREGARDING MULTIPLE YEAR/PRIOR YEARS DATA AS USE D BY THE APPELLANT IN THE TP DOCUMENTATION AND HOLDING THAT CURRENT YEAR (I.E FY 2005-06) DATA FOR COMPARABLE COMPANIES SHOULD BE USED DESPITE THE FACT THAT THE SAME WAS N OT NECESSARILY AVAILABLE TO THE APPELLANT AT THE TIME OF PREPARING ITS TP DOCUMENTATION, AND IN DOING SO HAV E GROSSLY ERRED IN; 2.3.1 INTERPRETING THE REQUIREMENT OF CONTEMPORANEOUS DATA IN THE RULES TO NECESSARILY IMPLY CURRENT/SING LE YEAR (I.E FY 2005-06) DATE; AND 2.3.2 HOLDING THAT AT THE TIME OF CREATING/MAINTAINING TH E TP DOCUMENTATION, THE APPELLANT COULD HAVE PROCURED CURRENT/SINGLE YEAR DATA (I.E FY 2005- 06 DATA) FROM SOURCES OTHER THAN THE ELECTRONIC DATABASES, WHEN IN FACT PRACTICALLY NO SUCH OTHER SOURCES WERE AVAILABLE IN CASE OF MOST COMPANIES. 2.4 RESORTING TO ARBITRARY OF LOW-PROFIT/LOSS MAKIN G COMPANIES BASED ON ERRONEOUS AND INCONSISTENT REASONS; 3 2.5 INCLUDING HIGH-PROFIT MAKING COMPANIES IN THE F INAL COMPARABLES SET FOR BENCHMARKING A LOW RISK CAPTIV E UNIT SUCH AS THE APPELLANT (DISREGARDING JUDICIAL PRONOUNCEMENTS ON THE ISSUE), THUS DEMONSTRATING AN INTENTION TO ARRIVE AT A PRE-FORMULATED OPINION WIT HOUT COMPLETE AND ADEQUATE APPLICATION OF MIND WITH THE SINGLE- MINDED INTENTION OF MAKING AN ADDITION TO THE RETUR NED INCOME OF THE APPELLANT; 2.6 INCLUDING IN THE FINAL SET OF COMPARABLES, CERTAIN COMPANIES THAT ARE NOT COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND R ISKS ASSUMED; 2.7 NOT INCLUDING IN THE FINAL SET OF COMPARABLES CERTA IN COMPANIES WHICH ARE COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND THE RIS KS ASSUMED; 2.8 VIOLATING THE PRINCIPLES OF NATURAL JUSTICE BY NOT INCLUDING IN THE FINAL SET OF COMPARABLES, ADDITIONAL COMPANI ES IDENTIFIED BY THE APPELLANT (BASED ON LD. TPOS FRE SH SEARCH METHODOLOGY) WITHOUT PROVIDING THE APPELLANT A REASONABLE OPPORTUNITY OF BE HEARD; 2.9 DENYING A WORKING CAPITAL ADJUSTMENT TO THE OPERATI NG MARGINS OF THE COMPARABLES; 2.10 VIOLATING THE PRINCIPLES OF NATURAL JUSTICE BY NOT SHARING WITH THE APPELLANT (DESPITE HAVING ADEQUATE TIME AT THEIR DISPOSAL TO DO SO) THE CONCERNS/ISSUES IN REGARDS T O THE ALLEGED/PURPORTED SHORTCOMINGS/DEFICIENCIES IN THE APPELLANTS CLAIM FOR A WORKING CAPITAL ADJUSTMENT AND THEREBY DENYING THE APPELLANT A REASONABLE OPPORTUN ITY TO STUDY/EXAMINE THE SAME AND PROVIDE ITS COMMENTS/OBJECTIONS THERETO; 2.11 IGNORING THE BUSINESS/COMMERCIAL REALITY THAT SINCE THE APPELLANT IS REMUNERATED ON AN ARMS LENGTH COST PL US BASIS, I.E IT IS COMPENSATED FOR ALL ITS OPERATING COSTS PLUS A PRE-AGED MARK-UP, THE APPELLANT UNDERTAKES MINIMAL BUSINESS RISKS AS AGAINST COMPARABLE COMPANIES THAT ARE FULL FLEDGED RISK TAKING ENTREPRENEURS, AND BY NOT ALLOWING A RISK ADJUSTMENT TO THE APPELLANT ON ACCOUNT OF TH IS FACT; 2.12 VIOLATING THE PRINCIPLES OF NATURAL JUSTICE BY NOT SHARING WITH THE APPELLANT (DESPITE HAVING ADEQUATE TIME AT THEIR 4 DISPOSAL TO DO SO) THE CONCERNS/ISSUES IN REGARD TO THE ALLEGED/PURPORTED SHORTCOMINGS/DEFICIENCIES IN THE APPELLANTS CLAIM FOR A RISK ADJUSTMENT AND THEREBY DENYING THE APPELLANT A REASONABLE OPPORTUNITY TO STUDY/EXA MINE THE SAME AND PROVIDE ITS COMMENTS/OBJECTIONS THERET O; 2.13 DENYING THE BENEFIT OF (+/-) 5 PERCENT [AS PER PRO VISO TO SECTION 92C(2) OF THE ACT] AVAILABLE TO THE APPELLA NT; 2.14 DISREGARDING JUDICIAL PRONOUNCEMENTS IN INDIA IN UNDERTAKING THE TP ADJUSTMENT. 3. THE LD. AO HAS WHILE PASSING THE FINAL ASSESSMENT O RDER HAS GROSSLY ERRED IN NOT GRANTING THE RELIEF OF ` 71,47,803/- DIRECTED BY THE LD. DRP VIDE ITS DIRECTIONS/ORDER DATED DECE MBER 14, 2011 IN THE COMPUTATION OF THE ALP OF THE APPELLANT (BY DIRECTING EXCLUSION OF ONE OF THE COMPARABLE NAMELY, NECLEUS NETSOFT AND GIS (INDIA) LIMITED FROM THE COMPARABLE SET). 4. THE LD. A O ERRED ON FACTS AND IN LAW IN CHARGING I NTEREST UNDER SECTIONS 234A, 234B AND 234D OF THE ACT. 5. THE LD. A O ERRED ON FACTS AND IN LAW IN CHARGING I NTEREST UNDER SECTION 220 OF THE ACT; 6. THE LD. A O HAS GROSSLY ERRED IN INITIATING PENALTY UNDER SECTION 271(1)(C) OF THE ACT MECHANICALLY AND WITHOUT RECOR DING ANY SATISFACTION FOR ITS INITIATION. GROUNDS IN ASSESSMENT YEAR 2007-08 : 1. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSESSIN G OFFICER (LD. ASSESSING OFFICER) PURSUANT TO THE DIRECTION S OF LEARNED DISPUTE RESOLUTION PANEL (LD DRP) IS BAD IN LAW A ND VOID AB- INITIO. 2. THE LD. DRP AND THE LD. AO (FOLLOWING THE DIRECTION S OF THE LD. DRP), ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION OF ` 7,55,53,984/- TO THE INCOME OF THE APPELLANT PROPO SED BY THE LD. TPO BY HOLDING THAT ITS INTERNATIONAL TRANSACT IONS DO NOT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. IN DOING SO, THE LD. DRP AND THE LD. AO HAS GROSSLY ER RED IN AGREEING WITH AND UPHOLDING THE LD. TRANSFER PRICIN G OFFICERS (TPOS) ACTION OF: 2.1 NOT APPRECIATING THAT NONE OF THE CONDITIONS SET O UT IN SECTION 92C(3) OF THE ACT ARE SATISFIED IN THE PRES ENT CASE. 5 2.2 DISREGARDING THE ALP, AS DETERMINED BY THE APPELLA NT IN THE TRANSFER PRICING (TP) DOCUMENTATION MAINTAINE D BY IT IN TERMS OF SECTION 92D OF THE ACT READ WITH RULE 1 0D OF THE RULES AS WELL AS FRESH SEARCH; AND MODIFYING/RE JECTING THE FILTERS APPLIED BY THE APPELLANT; 2.3 DISREGARDING MULTIPLE YEAR/PRIOR YEARS DATA AS USE D BY THE APPELLANT IN THE TP DOCUMENTATION AND HOLDING THAT CURRENT YEAR (I.E. FY 200-07) DATA FOR COMPARABLE COMPANIES SHOULD BE USED DESPITE THE FACT THAT THE SAME WAS N OT NECESSARILY AVAILABLE TO THE APPELLANT AT THE TIME OF PREPARING ITS TP DOCUMENTATION, AND IN DOING SO HAV E GROSSLY ERRED IN; 2.3.1 INTERPRETING THE REQUIREMENT OF CONTEMPORANEOUS DATA IN THE RULES TO NECESSARILY IMPLY CURRENT/SING LE YEAR (I.E. FY 2006-07) DATA; AND 2.3.2 HOLDING THAT AT THE TIME OF CREATING/MAINTAINING TH E TP DOCUMENTATION, THE APPELLANT COULD HAVE PROCURED CURRENT/SINGLE YEAR DATE (I.E FY 2006- 07 DATA) FROM SOURCES OTHER THAN THE ELECTRONIC DATABASES, WHEN IN FACT PRACTICALLY NO SUCH OTHER SOURCES WERE AVAILABLE IN CASE OF MOST COMPANIES. 2.4 COLLECTING INFORMATION OF THE COMPANIES BY EXER CISING POWER GRANTED TO HIM UNDER SECTION 133(6) OF THE AC T THAT WAS NOT AVAILABLE TO THE APPELLANT IN THE PUBLIC DO MAIN AND RELYING ON SELECTIVE INFORMATION FOR COMPARABILITY PURPOSES (AND TO THE EXTENT OF COMPLETELY IGNORING RELIABLE DATA AVAILABLE IN PUBLIC DOMAIN/ANNUAL REPORTS IN N UMEROUS CASES); 2.4.1 AND IN DOING SO VIOLATING THE FUNDAMENTAL PRI NCIPLES OF NATURAL JUSTICE RELYING ON THE INFORMATION SOURC ED UNDER SECTION 133(6); AND ALSO BY 2.4.2 NOT SHARING WITH THE APPELLANT, IN CASE OF A NUMBER OF COMPARABLES, THE INFORMATION/REPLY RECEIVED BY THE TPO/ASSESSING OFFICER U/S 133(6). 2.5 REJECTING COMPARABILITY ANALYSIS IN THE APPELLA NTS FRESH SEARCH AND IN CONDUCTING A FRESH COMPARABILITY ANAL YSIS BASED ON APPLICATION OF THE FOLLOWING ADDITIONAL/RE VISED FILTERS IN DETERMINING THE COMPARABLE COMPANIES: 2.5.1 EXCLUSION OF COMPANIES HAVING DIFFERENT FINAN CIAL YEAR ENDING (I.E. NOT MARCH 31, 2007); 6 2.5.2 EXCLUSION OF COMPANIES WITH EXPORT SALES THAT ARE LESS THAN 25% OF THEIR TOTAL REVENUE; 2.5.3 EXCLUSION OF COMPANIES WITH DIMINISHING REVENUES/PERSISTENT LOSSES FOR LAST THREE YEARS UPT O AND INCLUDING FY 2006-07; 2.5.4 RETAINING COMPANIES WITH RELATED PARTY TRANSA CTION UP TO 25% OF THEIR SALES; AND REJECTING, IN PARTICU LAR, THE FOLLOWING FILTERS APPLIED BY THE APPELLANT IN I TS FRESH SEARCH; 2.5.5 COMPANIES HAVING OTHER OPERATING INCOME (I.E INCOME OTHER THAN MANUFACTURING AND TRADING INCOME) TO SALES GREATER THAN 50% WERE ACCEPTED; 2.5.6 COMPANIES WITH NET WORTH LESS THAN ZERO WERE REJECTED; 2.5.7 COMPANIES HAVING RESEARCH & DEVELOPMENT COSTS TO SALES LESS THAN 3% WERE ACCEPTED; AND 2.5.8 COMPANIES HAVING ADVERTISING, MARKETING AND DISTRIBUTION COSTS TO SALES LESS THAN 3% WERE ACCEPTED. 2.6 INCLUDING HIGH-PROFIT MAKING COMPANIES IN THE F INAL COMPARABLES SET FOR BENCHMARKING A LOW RISK CAPTIV E UNIT SUCH AS THE APPELLANT(DISREGARDING JUDICIAL PRONOUN CEMENTS ON THE ISSUE), THUS DEMONSTRATING AN INTENTION TO A RRIVE AT A PRE-FORMULATED OPINION WITHOUT COMPLETE AND ADEQUAT E APPLICATION OF MIND WITH THE SINGLE-MINDED INTENTIO N OF MAKING AN ADDITION TO THE RETURNED INCOME OF THE AP PELLANT; 2.7 INCLUDING CERTAIN COMPANIES THAT ARE NOT COMPAR ABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS E MPLOYED AND RISKS ASSUMED; 2.8 RESORTING TO ARBITRARY REJECTION OF LOW-PROFIT/ LOSS MAKING COMPANIES BASED ON ERRONEOUS AND INCONSISTENT REASO NS; 2.9 EXCLUDING CERTAIN COMPANIES ON ARBITRARY/FRIVOL OUS GROUNDS EVEN THOUGH THEY ARE COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED; 2.10 IGNORING THE BUSINESS/COMMERCIAL REALITY THAT SINCE THE APPELLANT IS REMUNERATED ON AN ARMS LENGTH COST PL US BASIS, I.E IT IS COMPENSATED FOR ALL ITS OPERATING COSTS PLUS A PRE-AGREED MARK-UP BASED ON A BENCHMARKING ANALYSIS , THE APPELLANT UNDERTAKES MINIMAL BUSINESS RISKS AS AGAI NST 7 COMPARABLE COMPANIES THAT ARE FULL FLEDGED RISK TAK ING ENTREPRENEURS, AND BY NOT ALLOWING A RISK ADJUSTMEN T TO THE APPELLANT ON ACCOUNT OF THIS FACT; 2.11 NOT ALLOWING THE APPELLANT THE BENEFIT OF THE (+/-) 5% RANGE AVAILABLE TO THE APPELLANT AS PER THE OLD PROVISO T O SECTION 92C(2) OF THE ACT; 2.12 DISREGARDING JUDICIAL PRONOUNCEMENTS IN INDIA IN UNDERTAKING THE TP ADJUSTMENT. 3. THE LD. AO ERRED IN NOT VERIFYING THE FACTUAL E RRORS IN COMPUTATION OF THE OPERATING MARGINS OF THE COMPARA BLES AND ACCORDINGLY RE-COMPUTING THE ARMS LENGTH PRICE (A LP) WHILE PASSING THE ORDER, PURSUANT TO THE DIRECTIONS OF TH E LD. DRP; 4. THE LD. DRP AND THE LD. ASSESSING OFFICER (FOLLO WING THE DIRECTIONS OF THE LD. DRP) HAS ERRED IN FACTS AND I N LAW IN REDUCING DEPRECIATION ALLOWANCE BY RS. 1,60,573/- D URING THE YEAR ON ITEMS SUCH AS UPS, DATE CARD, CARD WIRELESS , REDUNDANT POWER SUPPLY, PROCURVE SWITCH AND DIGITAL SENDER(SC ANNER) BY HOLDING THAT SUCH ITEMS FORM PART OF PLANT AND MA CHINERY DEPRECIABLE @ 15% AND NOT COMPUTERS DEPRECIABLE @ 60% AND THUS, NOT ENTITLED TO A HIGHER RATE OF DEPRECIATION ; 5. THE LD. DRP AND THE LD. ASSESSING OFFICER (FOLLO WING THE DIRECTIONS OF THE LD. DRP) HAS ERRED IN FACTS AND I N LAW BY ARBITRARILY DISALLOWING DEPRECIATION AMOUNTING TO R S. 2,28,821/- ON 45% OF THE OPENING WRITTEN DOWN VALUE OF THE BLO CK OF COMPUTERS WITHOUT ANY BASIS AND WITHOUT APPRECIATIO N THAT THE DEPRECIATION CLAIM OF THE APPELLANT ON COMPUTERS HA S BEEN DULY ACCEPTED AND ALLOWED BY HIS PREDECESSORS IN EARLIER YEARS; 6. THE LD. DRP AND THE LD. AO (FOLLOWING THE DIRECT IONS OF THE LD. DRP) ERRED IN LAW IN CONFIRMING THE DISALLOWANCE OF RS. 31,42,720/- ON ACCOUNT OF CLUB ENTRANCE FEES; 7. THE LD. DRP ERRED IN DISREGARDING THE DETAILED ARGUMENTS/SUBMISSIONS PUT FORTH BY THE APPELLANT DU RING THE COURSE OF THE DRP/ASSESSMENT PROCEEDINGS WHILE PASS ING ITS DIRECTION UNDER SECTION 144C OF THE ACT; 8. THAT THE LD. A O ERRED ON FACTS AND IN LAW IN CH ARGING INTEREST UNDER SECTIONS 234B AND 234D OF THE ACT; 9. THE LD. A O HAS GROSSLY ERRED IN INITIATING PENA LTY UNDER SECTION 271(1)(C) OF THE ACT MECHANICALLY AND WITHOUT RECOR DING ANY SATISFACTION FOR ITS INITIATION. 8 2. THERE ARE CERTAIN ISSUES AND FACTS WHICH ARE COM MON IN BOTH THE YEARS, THEREFORE, BEFORE TAKING UP THE MAIN DISPUTE INVOLVED IN THE APPEALS, WE WOULD DEEM IT APPROPRIATE TO TAKE THE COMMON ISS UES FIRST. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE ACTIS ADVISER PVT. LTD. HEREINAFTER REFERRED TO ACTIS INDIA WAS INCO RPORATED IN INDIA ON 26.3.1998. ITS NAME WAS CDC ADVISER PVT. LTD. WHICH WAS CHANGED TO ACTIS ADVISER PVT. LTD. W.E.F. 29 TH SEPTEMBER, 2004. THE ASSESSEE IS A SUBSIDIARY OF ACTIS HOLDING PVT. LTD. WHICH OWNS 95.08% SHARE CAP ITAL OF ACTIS INDIA. THE REMAINING 4.92% OF THE SHARE CAPITAL OF THE ASSESSE E IS OWNED BY ACTIS INTERNATIONAL LTD. THE ASSESSEE COMPANY IS ENGAGED IN PROVIDING FOLLOWING SERVICES TO ITS ASSOCIATE ENTERPRISES IN ASSESSMENT YEAR 2006-07; A) FINANCIAL ADVISER SERVICES; B) MANAGEMENT CONSULTANCY; & C) TO INVESTIGATE AND REPORT ON FEASIBILITY OF NEW PRODUCTS/DIAGNOSE OPERATIONAL DIFFICULTIES OF EXIST ING UNITS/ADVICE ON DISINVESTMENT. 4. IN ASSESSMENT YEAR 2006-07, THE ASSESSEE HAS FIL ED ITS RETURN OF INCOME ON 29.11.2006 DECLARING AN INCOME OF RS.283,90,680. SIMILARLY, IN ASSESSMENT YEAR 2007-08, IT HAS FILED ITS RETURN OF INCOME ON 31 ST OCTOBER 9 2007 DECLARING AN INCOME OF RS.396,41,247. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT IN BOTH THE ASSESS MENT YEARS AND NOTICE UNDER SEC. 143(2) AND 142(1) OF THE INCOME-TAX ACT, 1961 ALONG WITH DETAILED QUESTIONNAIRE WERE ISSUED TO THE ASSESSEE. ON SCRUTINY OF THE ACCOUNTS, IT REVEALED TO THE ASSESSING OFFICER THAT ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTER PRISES. THE VALUE OF INTERNATIONAL TRANSACTION WITH ITS AE, IN ASSESSMEN T YEAR 2006-07 HAS BEEN DISCLOSED AS UNDER: SR. NO. INTERNATIONAL TRANSACTION METHOD VALUE IN RS. 1. ADVISORY AND CONSULTANCY SERVICES. TNMM 27,01,40,583 2. SALE OF SHARES OF ACTIS GLOBAL SERVICES LTD. - 99,990 IN ASSESSMENT YEAR 2007-08, THE VALUE OF INTERNATIO NAL TRANSACTION FOR ADVISORY AND CONSULTANCY SERVICE IS SHOWN AT RS.35, 42,09,910. ON PERUSAL OF FORM NO. 3CAB, LEARNED ASSESSING OFFICER FOUND THA T THE ASSESSEE HAS REPORTED INTERNATIONAL TRANSACTION WITH ASSOCIATE E NTERPRISES WITHIN THE MEANING OF SEC. 92B OF THE ACT, THEREFORE, LEARNED ASSESSING OFFICER HAD MADE A REFERENCE TO THE LEARNED TPO AS PER SEC. 92 CA FOR DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION SHOWN BY THE ASSESSEE IN 10 BOTH THE ASSESSMENT YEARS. LEARNED TPO HAS MADE A NALYSIS OF THE TP STUDY REPORT SUBMITTED BY THE ASSESSEE IN BOTH THE ASSESS MENT YEARS AND RECOMMENDED ADJUSTMENT IN THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS DECLARED BY THE ASSESSEE. HE PASSED TH E ORDER UNDER SEC. 92CA(3) OF THE INCOME-TAX ACT, 1961 ON 14 TH SEPTEMBER, 2009 AND 26 TH OCTOBER 2010 IN ASSESSMENT YEARS 2006-07 AND 2007-0 8 RESPECTIVELY. LEARNED TPO HAS RECOMMENDED AN ADJUSTMENT OF RS.37 1,89,793 IN ASSESSMENT YEAR 2006-07 AND RS.755,53,984 IN ASSESS MENT YEAR 2007-08. THE ADJUSTMENTS RECOMMENDED BY THE LEARNED TPO WER E PROPOSED TO BE ADDED IN THE INCOME OF THE ASSESSEE BY THE LEARNED ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDERS. THE ASSESSEE HAS FILED OBJ ECTIONS BEFORE THE LEARNED DRP BUT FAILED TO CONVINCE THE LEARNED DRP HENCE T HE DRAFT ASSESSMENT ORDERS WERE CONFIRMED BY THE LEARNED DRP, ASSESSIN G OFFICER HAS PASSED THE ASSESSMENT ORDER AND ACCORDINGLY AN ADJUSTMENT OF RS.371,89,793 HAS BEEN MADE IN THE INCOME OF THE ASSESSEE IN ASSESSME NT YEAR 2006-07. DISSATISFIED WITH THE ORDER OF THE ASSESSING OFFICE R, ASSESSEE FILED AN APPEAL BEFORE THE ITAT. THE ITAT HAS SET ASIDE THE ASSESSM ENT ORDER OBSERVING THAT LEARNED DRP HAS NOT DISPOSED OF THE OBJECTIONS OF THE ASSESSEE BY PASSING A SPEAKING ORDER. THEREFORE, THE ITAT HAS SET ASIDE T HE ASSESSMENT ORDER VIDE ITS ORDER DATED 7.1.2011 AND REMITTED THE ISSUES BA CK TO THE FILE OF THE LEARNED 11 DRP. LEARNED DRP HAS GONE THROUGH THE CONTENTIONS OF THE ASSESSEE AND DISPOSED OF ALL THE OBJECTIONS. IN THE SECOND ROUND , LEARNED DRP HAS EXCLUDED ONE COMPARABLE, NAMELY, NECLEUS NETSOFT & GIS INDIA LTD. FROM THE FINAL SET OF COMPARABLE CONSIDERED BY THE LEARN ED TPO. LEARNED TPO IN HIS FINAL SET OF COMPARABLE WORKED OUT THE MARK UP AT 24.45%. BY EXCLUSION OF THIS ONE COMPARABLE, THE MARK UP HAS BEEN REDUCE D TO 21.66%. IN THIS WAY, THE ADJUSTMENT IN THE ARMS LENGTH PRICE HAS B EEN REDUCED TO RS.300,41,990 AS AGAINST THE ORIGINAL ADJUSTMENT RE COMMENDED BY THE LEARNED TPO AT RS.371,89,793. THUS, IN ASSESSMENT YEAR 2006-07, IT IS THE SECOND ROUND OF LITIGATION. IN ASSESSMENT YEAR 200 7-08 AN ADDITION OF RS.755,53,984 HAS BEEN CONFIRMED BY THE LEARNED DR AND ACCORDINGLY LEARNED ASSESSING OFFICER HAS PASSED THE FINAL ORD ER UNDER SEC. 143(3) READ WITH SECTION 144C OF THE ACT. 5. WITH THE ASSISTANCE OF LEARNED REPRESENTATIVE, W E HAVE GONE THROUGH THE RECORD CAREFULLY. IN THE GROUNDS OF APPEAL, ASS ESSEE HAS RAISED NUMBER OF ARGUMENTS. THEREFORE, IT IS DIFFICULT TO PROCEED WI TH THE ISSUES ON GROUND WISE. IN BRIEF, THE MAIN DISPUTE BETWEEN THE PARTIE S IN BOTH THE ASSESSMENT YEARS IS WHETHER ANY ADJUSTMENT IS REQUIRED IN THE VALUE OF INTERNATIONAL 12 TRANSACTION REPORTED BY THE ASSESSEE OR THE INTERNA TIONAL TRANSACTION REPORTED BY THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISES IS A T ARMS LENGTH PRICE OR NOT? 6. IN ORDER TO DETERMINE THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION, THE FIRST AREA OF DISPUTE WHICH COULD ARISE BETWEEN THE PARTIES IS IN RESPECT OF MOST APPROPRIATE METHOD REQUIRED TO B E ADOPTED FOR DETERMINATION OF ARMS LENGTH PRICE AS PROVIDED IN SEC. 92C OF THE ACT READ WITH RULE 10B OF THE INCOME-TAX RULES. THE SECTION 92C PROVIDES FIVE MAIN METHODS I.E. (A) COMPARABLE UNCONTROLLED PRICE METH OD; (B) RESALE PRICE METHOD;( C) COST PLUS METHOD; (D) PROFITS SPLIT MET HOD: AND (E) TRANSACTIONAL NET MARGIN METHOD (TNMM) AND (F) ONE RESIDUARY METH OD I.E. SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. WE FIND T HAT ON AN ANALYSIS OF AN INTERNATIONAL TRANSACTION WITH THE ASSOCIATE PARTIE S AND COMPARABLE DATA, ASSESSEE HAS SELECTED TNMM METHOD I.E. USING NET PR OFIT MARGIN BASED ON COST AS PLI. IT HAS ADOPTED OPERATING PROFIT OVER T OTAL COST. LEARNED TPO HAS NOT DISPUTED THE SELECTION OF TNMM METHOD BY THE AS SESSEE. THUS, THERE IS NO DISPUTE IN THIS AREA. 7. THE NEXT AREA OF DISPUTE BETWEEN THE PARTIES COU LD BE IN RESPECT OF SELECTION OF SINGLE YEAR DATA OR MULTIPLE YEAR DATA . THE ASSESSEE IN 13 ASSESSMENT YEAR 2006-07 HAS REPORTED THAT IT HAS US ED TNMM AS THE MOST APPROPRIATE METHOD WITH OP/TC AS PLI (PROFIT LEVEL INDICATOR). IT HAS SHOWN NET PROFIT MARGIN AT 10.10% ON ACCOUNT OF ITS CONSU LTANCY AND ADVISORY SERVICES. THE ASSESSEE HAS SELECTED 11 COMPARABLES IN ITS TRANSFER PRICING STUDY REPORT BY USING PROWESS CAPITAL LINES AND NAS SCOM DATA BASE. IT HAS USED MULTIPLE YEAR DATA OF 2004, 2005 AND 2006. IT HAS APPLIED FOLLOWING FILTERS FOR ELIMINATING THE INCOMPARABLE: COMPANIES HAVING FINANCIAL DATA AVAILABLE ONLY UP T O FINANCIAL YEAR ENDED MARCH 2004 HAVE BEEN REJECTED. COMPANIES HAVING SALES LESS THAN RS.1 CRORE HAVE BE EN REJECTED. COMPANIES HAVING A RATIO OF INCOME FROM TRADING ACTIVITIES EQUAL TO OR MORE THAN 25% OF TOTAL SALES HAVE BEEN REJECTED. COMPANIES HAVING A RATIO OF INCOME FROM MANUFACTURI NG ACTIVITIES EQUAL TO OR MORE THAN 25% OF TOTAL SALES HAVE BEEN REJECTED. COMPANIES WHICH ARE FUNCTIONALLY DISSIMILAR HAVE BE EN REJECTED. 8. ON THE BASIS OF ABOVE EXERCISE,ASSESSEE HAS S ELECTED ELEVEN COMPARABLES WHOSE WEIGHTED AVERAGE IS 11.45%. ACCORDING TO THE ASSESSEE, ITS NET 14 PROFIT MARGIN IS WITHIN RANGE OF +/_ 5% OF THE AVER AGE PROFIT MARGIN WORKED OUT BY IT, THEREFORE, ITS VALUE OF INTERNATIONAL TR ANSACTION WITH AE IS AT ARMS LENGTH PRICE WHICH DOES NOT REQUIRE ANY ADJUSTMENT. SIMILAR IS THE POSITION IN ASSESSMENT YEAR 2007-08 THOUGH THE COMPARABLES SELE CTED BY THE ASSESSEE ARE 22 IN NUMBER. THE MARK UP WORKED OUT BY THE ASS ESSEE IS 10.16% WHEREAS ARITHMETIC MEAN OF THE COMPARABLE SELECTED WAS 12.5% WHICH IS WITHIN TOLERANCE BAND OF +/_ 5% PROVIDED IN THE PRO VISO APPENDED TO SECTION 92C OF THE ACT. THE FILTERS PROVIDED IN ASSESSMENT YEAR 2007-08 ARE LITTLE DIFFERENT THEN ASSESSMENT YEAR 2006-07. THE ASSESSE E HAS APPLIED FOLLOWING FILTERS IN ASSESSMENT YEAR 2007-08 FOR SELECTING TH E COMPARABLES: 1. COMPANIES WITH RATIO OF OTHER OPERATING INCOME TO SALES GREATER THAN 50% WERE SELECTED. 2. COMPANIES WITH RATIO OF RESEARCH & DEVELOPMENT E XPENSES TO SALES GREATER THAN 3% WERE REJECTED. 3. COMPANIES WITH THE RATIO OF NET FIXED ASSETS TO SALES GREATER THAN 200% WERE REJECTED. 4. COMPANIES THAT HAD AVERAGE SALES OF LESS THAN RS . 1 CRORE DURING THE TIME PERIOD WERE REJECTED. 5. COMPANIES WITH NET WORTH LESS THAN ZERO WERE REJ ECTED. 6. COMPANIES WITH THE RATIO OF SUM OF ADVERTISING, MARKETING AND DISTRIBUTION EXPENSES TO SALES LESS THAN OR EQUAL T O 3% WERE SELECTED. 15 9. LEARNED TPO TOOK OBJECTION WITH REGARD TO THE U SE OF MULTIPLE YEAR DATA. HE IS OF THE OPINION THAT RULE 10B OF THE INC OME-TAX RULES 1962 PROVIDES USE OF SINGLE YEAR DATA. THE MULTIPLE YEAR DATA HAS BEEN PROVIDED IN THE PROVISO APPENDED TO THIS RULE BUT THAT CAN ONLY BE APPLIED IN A CASE WHERE IT IS DIFFICULT TO COLLECT THE DATA FOR THE R ELEVANT ACCOUNTING YEAR. 10. LEARNED REPRESENTATIVES DID NOT ADVANCE DETAIL ED ARGUMENTS ON THIS ISSUE, HOWEVER, FROM PERUSAL OF THE LEARNED TPOS ORDER IN ASSESSMENT YEAR 2006-07, WE FIND THAT LEARNED TPO HAS MADE A LUCID ANALYSIS OF THIS ISSUE. RULE 10B(4) OF THE INCOME TAX RULES HAS A DIRECT B EARING ON THE CONTROVERSY. THEREFORE, IT IS SALUTARY UPON US TO T AKE NOTE OF THIS RULE IT READ AS UNDER :- 10(4) THE DATA TO BE USED IN ANALYZING THE COMPARA BILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE IN TERNATIONAL TRANSACTION HAS BEEN ENTERED INTO: PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING M ORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEI NG COMPARED. 16 11. A BARE PERUSAL OF THIS RULE WOULD REVEAL THAT E XPRESSION SHALL HAS BEEN EMPLOYED IN THIS RULE WHICH MAKE IT ABUNDANTLY CLEAR THAT CURRENT YEAR DATA OF AN UNCONTROLLED TRANSACTION IS TO BE USED F OR THE PURPOSE OF COMPARABILITY, WHILE EXAMINING THE INTERNATIONAL TR ANSACTIONS WITH ASSOCIATE ENTERPRISES. THE PROVISO APPENDED TO THE SECTION CA RVES OUT AN EXCEPTION THAT THE DATA RELATING TO THE PERIOD OF BEING MORE THAN TWO YEAR PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED, IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE IN RELATION TO TRANSACTION OF COMPARISON. THUS THE MAIN SECTION U SED THE EXPRESSION SHALL WHICH MAKE IT MANDATORY TO FIRST USE THE CURRENT YEAR DATA. IF CERTAIN OTHER CIRCUMSTANCES REVEALS AN INFLUENCE ON THE DET ERMINATION OF TRANSFER PRICING IN RELATION TO THE TRANSACTION BEING COMPAR ED THAN OTHER DATAS FOR PERIOD NOT MORE THAN TWO YEARS PRIOR TO SUCH FINANC IAL YEAR MAY BE USED. LEARNED TPO HAS MADE REFERENCE TO THE OECD GUIDELI NES CONTAINED IN PARA 1.49 TO 1.51 AND ALSO OBSERVED THAT SECTION 92D(1) PROVIDES THAT EVERY PERSON ENTERING INTO AN INTERNATIONAL TRANSACTION I S REQUIRED TO KEEP AND MAINTAIN SUCH INFORMATION AND DOCUMENTS IN RESPECT THEREOF, AS BEING PRESCRIBED UNDER THE RULES. CORRESPONDING RULE 10D( 1) OF THE INCOME-TAX RULES, 1962 REQUIRES MAINTENANCE OF THE RECORD OF T HE ANALYSIS PERFORMED TO EVALUATE COMPARABILITY AS WELL AS A RECORD OF ACTUA L WORKING CARRIED OUT FOR 17 DETERMINING THE ALP. RULE 10D(4) OF THE RULES REQUI RES THAT THE INFORMATION AND DOCUMENTATION TO BE MAINTAINED UNDER RULE 10D(1 ) SHOULD BE CONTEMPORANEOUS AS FAR AS POSSIBLE AND SHOULD EXIST LATEST BY THE DUE DATE OF FILING OF THE ITR. THEREFORE, THE PROVISIONS OF THE INCOME-TAX ACT, 1961 AND THE RULES POSTULATE TO THE IMPORTANCE OF THE INITIA L DOCUMENTATION REQUIRED TO BE MAINTAINED BY THE ASSESSEE AT THE TIME OF SETTLI NG THE PRICE OF THE INTERNATIONAL TRANSACTION. THE SPECIAL BENCH OF THE ITAT IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. REPORTED IN 294 (AT) 32 AND ITAT, DELHI BENCH IN THE CASE OF MENTORGRAPHIC REPO RTED IN 109 ITD 101 HAS HELD THAT COMPARABILITY ANALYSIS IS TO BE CONDU CTED ON THE BASIS OF CURRENT YEAR DATA, THEREFORE, WE WOULD EXAMINE THE ANALYSIS MADE BY THE ASSESSEE, OF ITS ARMS LENGTH PRICE IN THE TRANSFER PRICING STUDY REPORT ON THE BASIS OF CURRENT YEARS DATA IN THE RESPECTIVE ASSE SSMENT YEAR. 12. WE FIRST TAKE ASSESSMENT YEAR 2006-07. IN THIS YEAR, ASSESSEE HAS SHOWN TWO INTERNATIONAL TRANSACTIONS WITH ITS AE B UT ONE OF THE TRANSACTIONS IS IN RESPECT OF SALES OF SHARES OF ACTIS GLOBAL SE RVICES FOR A CONSIDERATION OF RS.99,990. LEARNED TPO ACCEPTED THIS TRANSACTION A ND THE OTHER TRANSACTION IS ADVISORY AND CONSULTANCY SERVICES RENDERED BY TH E ASSESSEE TO ITS AE. IT HAS SHOWN THE VALUE OF THIS TRANSACTION AT RS.2701, 40,583. ACCORDING TO THE 18 ASSESSEE, IT HAS PROVIDED INFORMATION TECHNOLOGY EN ABLED OFFICE SUPPORT SERVICES IN THE NATURE OF INFORMATION BINDING OFFIC IAL ADVISORY SERVICES TO THE GROUP COMPANIES. IN LIEU OF SERVICES, THE ASSESSEE WAS REMUNERATED AT ARMS LENGTH PRICE COST PLUS BASIS. IT WAS COMPENSATED AL L ITS COSTS PLUS AN AGREED MARK UP THEREON. 13. IN ORDER TO DEMONSTRATE THAT REMUNERATION RECEI VED BY IT IN LIEU OF SERVICES ARE AT ARMS LENGTH PRICE, IT WAS SUBMITTE D BY THE ASSESSEE THAT IT HAS EARNED A NET MARGIN OF 10.10% WHICH HAS BEEN WORKED OUT BY OP/TC. THE WORKING HAS BEEN NOTICED BY THE LEARNED TPO AS UND ER: PARTICULARS AMOUNT SERVICE INCOME 281,643,203 MISCELLANEOUS INCOME 431,810 TOTAL 282,075,013 EXPENDITURE OPERATING AND OTHER EXPENSES 256,193,649 TOTAL 256,193,649 OPERATING PROFIT 25,881,364 OP/TC 10.10% 19 14. THE ASSESSEE HAS UNDERTAKEN TRANSFER PRICING ST UDY AND SELECTED 11 COMPARABLES WHOSE AVERAGE PROFIT MARGIN OF THE YEAR S 2004, 2005 AND 2006- 07 IS 11.45%, THEREFORE, ACCORDING TO THE ASSESSEE ITS VALUE OF INTERNATIONAL TRANSACTION IS AT ARMS LENGTH. THE ASSESSEE HAS SE LECTED FOLLOWING COMPARABLES: S.NO. NAME OF THE COMPANY DATABASE 2004 2005 2006 WEIGHTED AVERAGE 1. ASK ME INFO HUBS LTD. PROWESS 10.00 -13.98 4.67 -1.10 2. MCS LTD. PROWESS 15.43 3.41 -5.81 6.00 3. CMC LTD. SEGMENTAL PROWESS 13.67 1.44 2.33 6.37 4. CS SOFTWARE ENTERPRISE LTD. PROWESS 13.73 9.76 10.53 11.15 5. ACE SOFTWARE EXPORTS LTD. PROWESS -0.45 20.15 14.47 11.93 6. MPHASIS BFL LTD. CONSOL SEG NASSCOM 12.52 13.71 10.53 12.36 7. TATA SHARE REGISTRY LTD. SEGMENTAL. PROWESS 10.74 15.38 NA 13.02 8. HCL TECHNOLOGY- CONSOL SEG. NASSCOM 0.56 18.89 15.87 13.06 9. ALLSEC TECHNOLOGY CONSOL PROWESS -38.48 29.41 33.75 13.45 10. SPANCO TELESYSTEMS AND SOLUTIONS NASSCOM 28.14 14.78 20.32 19.73 20 LTD. CONSOL 11. DATAMATICS TECHNOLOGIES LTD CONSOL PROWESS 38.17 19.68 9.24 19.97 ARITHMETICAL MEAN 9.45 12.05 11.59 11.45 15. LEARNED TPO DID NOT ACCEPT ALL THE COMPARABLES SELECTED BY THE ASSESSEE. HE MADE AN ANALYSIS AND FOUND THAT 7 COMP ARABLES OUT OF THE 11 SELECTED BY THE ASSESSEE ARE NOT SIMILAR TO THAT OF THE ASSESSEE. HE EXCLUDED THE 7 COMPARABLES AND ULTIMATELY ACCEPTED THE FOUR COMPARABLES SHOWN BY THE ASSESSEE. LEARNED TPO THEREAFTER OBSERVED THAT THE SEARCH PROCESS APPLIED BY THE ASSESSEE SUFFERS FROM CERTAIN DEFICI ENCIES AND AS SUCH IT WAS FOUND LOGICAL TO FINE TUNE THE SAME. IN THE CAPITAL LINE DATA BASE, HE IDENTIFIED 103 COMPANIES AFTER APPLICATION OF FILTE RS APPLIED BY THE ASSESSEE. LEARNED TPO SHORT LISTED 24 COMPANIES. HE, THEREAF TER, APPLIED QUANTITATIVE FILTERS OF THESE COMPANIES AND FINALLY IDENTIFIED 9 COMPARABLES. SIMILARLY, IN PROWESS, HE IDENTIFIED TWO COMPANIES AND ULTIMATELY SELECTED 12 COMPARABLES. AFTER CONFRONTING THE ASSESSEE, HE FOU ND 8 COMPARABLES WHICH ARE AS UNDER: S.NO. NAME OF THE COMPANY USED BY/PROPOSED BY MARGIN 1 ALL SEC TECHNOLOGIES ASSESSEE 33.75 21 2 CS SOFTWARE ENTERPRISE LTD. ASSESSEE 10.53 3 ACE SOFTWARE EXPORTS LTD. ASSESSEE 14.47 4. SPANCO LIMITED ASSESSEE 20.32 5. GALAXY COMMERCIAL SELECTED BY TPO 19.74 6 MAPLE E SOLUTIONS SELECTED BY TPO 35.83 7 TRITON CORPN. SELECTED BY TPO 16.98 8 NUCLEUS NETSOFT AND GIS (INDIA)LTD. SELECTED BY TPO 44.00 MEAN 24.45% 16. OUT OF THESE 8 COMPARABLES, LEARNED DRP HAS EL IMINATED NUXLENS NET SOFT & GIS INDIA LTD. HENCE, ONLY 7 COMPARABLES ARE LEFT. THE AVERAGE PROFIT MARGIN OF THESE 7 COMPARABLES COMES OUT TO 21.66%. LEARNED DRP HAS UPHELD THE DETERMINATION OF ARMS LENGTH PRICE BY T AKING THE PROFIT MARGIN OF THE COMPARABLES AT 21.66% AS AGAINST 24.45% DETERMI NED BY THE LEARNED TPO. 17. THE LEARNED COUNSEL FOR THE ASSESSEE WHILE IMPU GNING THE ASSESSMENT ORDER HAS RAISED MAINLY THREE-FOLD SUBMISSIONS. IN HIS FIRST FOLD OF CONTENTIONS, HE POINTED OUT THAT LEARNED TPO DID N OT GRANT ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL. HE POINTED OUT THAT IF WORKING CAPITAL 22 ADJUSTMENT HAS BEEN GRANTED TO THE ASSESSEE THEN TH E MEAN PROFIT OF THE COMPARABLE WOULD BE 20.62%. POINTING OUT THE IMPORT ANCE OF WORKING CAPITAL, HE SUBMITTED THAT AN UNCONTROLLED ENTITY W ILL EXPECT TO EARN A MARKET RATE OF RETURN ON THAT CAPITAL, INDEPENDENT OF ITS OPERATION. THUS, IF AN UNCONTROLLED ENTITY DID NOT REQUIRE THE USE OF CAPI TAL FROM ITS OWN SOURCE THEN SUCH CAPITAL CAN BE PUT TO USE FOR EARNING SOM E OTHER INCOME, DIFFERENT FROM ITS OPERATION. THE ASSESSEE HAS NOT PUT TO USE THE CAPITAL OF ITS OWN RESOURCES BECAUSE ALL ITS COSTS ARE BEING BORN BY A SSOCIATE ENTERPRISES, THEREFORE, THE NON-UTILIZATION OF THE ESSENTIAL CAP ITAL FOR ITS DAY TO DAY WORKING, ITS PROFIT MARGIN IS TO BE ADJUSTED BY GIV ING BENEFIT OF THE WORKING CAPITAL COST. HE DREW OUR ATTENTION TOWARDS THE WOR KING CAPITAL ADJUSTMENT MADE FOR FINANCIAL YEARS 2004-05 AND 2005-06 IN HIS SYNOPSIS AND SUBMITTED THAT HAD THIS BENEFIT IS GIVEN THEN THE AVERAGE PRO FIT MARGIN OF THE COMPARABLE WOULD BE 20.62%. LEARNED DR SUBMITTED TH AT BEFORE THE LEARNED TPO, ASSESSEE DID NOT TAKE WORKING CAPITAL ADJUSTME NT AS A FILTER. SIMILARLY, HE DREW OUR ATTENTION TOWARDS INTERNAL PAGE 18 OF T HE TPOS ORDER AND POINTED OUT THAT LEARNED TPO HAS OBSERVED THAT NO COMPUTATION FOR THE WORKING CAPITAL ADJUSTMENT HAS BEEN FURNISHED BY TH E ASSESSEE. IN THE ABSENCE OF ANY COMPUTATION, HOW THE LEARNED TPO WO ULD BE IN A POSITION TO GRANT THE BENEFIT TO THE ASSESSEE. IN REBUTTAL, LEA RNED COUNSEL FOR THE ASSESSEE 23 POINTED OUT THAT THE ASSESSEE HAS GIVEN THE COMPUTA TION. HE DREW OUR ATTENTION TOWARDS PAGE NO. 74 OF THE APPEAL PAPERS WHEREIN SUCH COMPUTATION HAS BEEN PLACED ON RECORD. HE ALSO POIN TED OUT THAT VIDE LETTER DATED MAY 28, 2009, THE ASSESSEE HAS SUBMITTED ALL THESE DETAILS. THE COPY OF THIS LETTER IS AVAILABLE ON PAGE NOS. 51 TO 60 OF T HE PAPER BOOK. HE ALSO SUBMITTED THAT IN ASSESSMENT YEARS 2007-08 AND 2008 -09, LEARNED TPO HAS ALLOWED A WORKING CAPITAL ADJUSTMENT TO THE ASSESSE E. 18. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE RECORD CAREFULLY. FOR CARRYING OUT ANY BUSINESS, AN ASSESS EE WOULD ALWAYS REQUIRE THE CAPITAL. NOW, IT IS FOR THE ASSESSEE TO CONTRIB UTE THE CAPITAL FROM ITS OWN SOURCE OR BORROWED IT FROM THE FINANCIAL INSTITUTIO N. IF THE CAPITAL IS BORROWED FROM THE FINANCIAL INSTITUTION, IT WILL BE SERVICED BY INTEREST ETC. AND WHICH WILL ULTIMATELY EFFECT THE PROFIT RATIO. IN A GIVEN CASE, AN ASSESSEE HAS SURPLUS CAPITAL FROM RESERVE, SHARE CAPITAL ETC. BUT STILL IT OPERATES ITS ACTIVITY FROM THE BORROWED FUND, THEN ON THE SURPLUS CAPITAL, IT WOULD EARN INTEREST INCOME WHICH IS INDEPENDENT TO THE OPERATION OF THE COMPAN Y. SUCH INCOME WOULD BE ASSESSED AS INCOME FROM OTHER SOURCES, BUT THE P ROFIT MARGIN FROM THE OPERATIONS WOULD BE ON LOWER SIDE BECAUSE OF INTERE ST EXPENSES ETC. THUS, THE WORKING CAPITAL AS ENVISAGED BY THE ASSESSEE WO ULD ALWAYS EFFECTS ITS 24 PROFIT. IF THE ASSESSEE WAS NOT REQUIRE TO USE ITS OWN WORKING CAPITAL THEN IT WILL BE A RELEVANT FACTOR FOR DETERMINING THE PROFI T MARGIN AND AN ADJUSTMENT TO ELIMINATE THE DISPARITY WOULD ALWAYS REQUIRE. CO NSIDERING THE STAND OF THE LEARNED TPO IN ASSESSMENT YEARS 2007-08 AND 2008-0 9 WHERE BENEFIT OF WORKING CAPITAL ADJUSTMENT WAS GRANTED TO THE ASSES SEE, WE ALLOW THIS PLEA OF THE ASSESSEE AND SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION THAT LEARNED ASSESSING OFFICER SHALL GRA NT WORKING CAPITAL ADJUSTMENTS, AFTER CONSIDERING THE COMPUTATION FILE D BY THE ASSESSEE BEFORE THE DRP. IN CASE, IT IS FELT THAT FROM THAT COMPUTA TION, IT IS DIFFICULT TO DRAW CONCLUSION THEN, LEARNED ASSESSING OFFICER MAY ASK THE ASSESSEE TO FILE FRESH WORKING. 19. IN THE NEXT FOLD OF SUBMISSIONS, LEARNED COUNSE L FOR THE ASSESSEE SUBMITTED THAT OUT OF THESE SEVEN COMPARABLES, THE TWO COMPARABLES DESERVE TO BE EXCLUDED, NAMELY, ALLSEC TECHNOLOGY LTD. AND MAPLE E-SOLUTION. HE DID NOT RAISE DISPUTE WITH REGARD TO OTHER COMPARAB LES. FOR EXCLUDING THESE TWO COMPARABLES, HE POINTED OUT THAT THE COMPANIES WHO HAD INCURRED HIGH MARKETING AND ADVERTISING EXPENDITURE, THEY ARE SUP POSED TO EARN HIGHER INCOME. THEY ARE FUNCTIONALLY DIFFERENT. THEREFORE, THE RESULT CANNOT BE COMPARED WITH THE RESULT OF THE ASSESSEE. HE SUBMIT TED THAT THE ASSESSEE DID NOT INCUR ANY KIND OF ADVERTISEMENT AND MARKETING E XPENSES, WHEREAS ALLSEC 25 TECHNOLOGY LTD. INCURRED 6% OF SALES TOWARDS ADVERT ISEMENT AND MARKETING. IN ORDER TO DEMONSTRATE HOW THIS ISSUE CAN IMPACT T HE PROFITABILITY OF ANY ORGANIZATION, LEARNED COUNSEL FOR THE ASSESSEE PLAC ED ON RECORD A GRAPH INDICATING THAT HIGHER THE AMOUNT INCURRED ON ADVER TISEMENT AND MARKETING THEN HIGHER WILL BE THE PROFIT. ACCORDING TO THE LE ARNED COUNSEL, THE COMPANIES WHO HAVE INCURRED 3% OF ITS SALES ON ADVE RTISEMENT AND MARKETING, THEY REPORTED PROFITS IN BETWEEN 23% TO 27.18%. MORE THAN 3% AND UP TO 5% THE PROFIT MARGIN IS 33.12%. ON THE BA SIS OF THIS REPRESENTATION, HE SUBMITTED THAT ALLSEC TECHNOLOGY LTD. BE EXCLUDED FROM THE LIST OF COMPARABLES. ON THE OTHER HAND, LEARNED DR TOOK US THROUGH PAGE 155 OF THE PAPER BOOK WHERE T.P. STUDY REPORT OF TH E ASSESSEE IS AVAILABLE. HE DREW OUR ATTENTION TOWARDS THE FILTERS APPLIED B Y THE ASSESSEE. IN THESE FILTERS, ASSESSEE HAD NOT APPLIED THE FILTERS CANVA SSED BEFORE THE ITAT I.E. THE COMPANY WHO HAS INCURRED EXPENSES MORE THAN 6% OF I TS SALES TOWARDS ADVERTISEMENT AND MARKETING. THEREFORE, ACCORDING T O THE LEARNED DR, THERE IS NO SPECIFIC DETAILS AVAILABLE TO TEST THIS CLAIM . 20. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE RECORD CAREFULLY. RULE 10C(2) OF THE INCOME-TAX RULES, 196 2 READ WITH OTHER TP REGULATIONS CONTAINED IN CHAPTER X OF THE INCOME-TA X ACT, 1961 26 CONTEMPLATES THE VERY BASIC REQUIREMENT OF ANY TRAN SFER PRICING ANALYSIS AND THE BASIC REQUIREMENT IS TO SELECT COMPARABLE, UNC ONTROLLED TRANSACTIONS AFTER TAKING A DETAILED FUNCTION, ASSETS AND RISK ( FAR) ANALYSIS. A COMPANY CANNOT BE SELECTED AS A COMPARABLE IF THE FAR PROFI LE OF SUCH COMPANY IS NOT COMPARABLE WITH THAT OF THE TESTED PARTY. IT IS ALSO TO BE KEPT IN MIND THAT IF THERE ARE DIFFERENCES WHICH CAN BE ADJUSTED THEN ADJUSTMENTS ARE REQUIRED TO BE MADE. IF THE DIFFERENCE BETWEEN THE COMPANIES ARE SO MATERIAL THAT ADJUSTMENT IS NOT POSSIBLE THEN SUCH COMPARABLES AR E REQUIRED TO BE REJECTED. HOWEVER, IF WE HAVE AN OVERALL LOOK ON THE TP REGUL ATION THEN IT WOULD REVEAL THAT ALP OF AN INTERNATIONAL TRANSACTION CAN NOT BE DETERMINED ACCURATELY IN ACCORDANCE WITH A SCIENTIFIC FORMULA. IT IS QUITE DIFFICULT TO ARRIVE AT ANY FIRM CONCLUSION WITH A MATHEMATIC PRE CISION. THE SIMPLE REASON IS THAT CONCEPT OF BUSINESS WHICH GIVES RISE TO ALL NATIONAL AND INTERNATIONAL TRANSACTIONS IN ITSELF HAS A WIDE IMP ORT AND IT MEANS AN ACTIVITY CARRIED ON CONTINUOUSLY AND SYSTEMATICALLY BY A PER SON BY THE APPLICATION OF HIS LABOUR AND SKILL WITH A VIEW TO EARN AN INCOME. THERE ARE LARGE NUMBER OF FACTORS WHICH EFFECTS THE BUSINESS SUCH AS FUNCT ION PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED. THE CONCEPT OF RISK IN I TSELF PROVIDES VARIOUS TYPES OF RISKS. LEARNED TPO IN HIS ORDER ON PAGE N O. 24 HAS CONSIDERED 17 TYPES OF RISKS IN A TABULAR FORM, NAMELY, MARKET RI SK, CUSTOMERS CREDIT RISK 27 AND FOREIGN EXCHANGE RISK. THE ASSESSEE IN ITS TP S TUDY REPORT HAS ALSO ACCEPTED THAT THOUGH IT IS A CAPTIVE SERVICE PROVID ER AND NOT EXPOSED WITH VARIOUS RISKS, BUT, IT IS NOT A TOTALLY RISK FREE E NTERPRISES. THE NATURE OF RISK IN THE CASE OF ASSESSEE ARE DIFFERENT. WE HAVE MADE A ANALYSIS OF THE ASSESSEES TP STUDY REPORT AS WELL AS THE FINDINGS RECORDED BY THE LEARNED TPO AND THE DRP. WE HAVE EXTRACTED THE FILTERS APPLIED BY THE A SSESSEE FOR ELIMINATING THE NON-COMPARABLE COMPANIES OR ADJUSTING THEIR PRO FIT MARGIN, THE ASSESSEE HAS NOT APPLIED THE FILTER I.E. THE COMPANIES WHO H AVE INCURRED EXPENSES OF MORE THAN 5% OF ITS SALES ON ADVERTISEMENT AND MARK ETING WHICH REQUIRED TO BE EXCLUDED. AT THIS STAGE, IN THE ABSENCE OF ANY F INDING, AT THE LEVEL OF THE TPO OR OF THE LEARNED DRP, IT IS DIFFICULT TO VERI FY THE VERSION PUT FORTH BY THE LEARNED COUNSEL FOR THE ASSESSEE. APART FROM TH IS, AT THE COST OF REPETITION, WE WOULD LIKE TO OBSERVE THAT PROFIT MARGIN OF ANY COMPANY IS DEPENDENT UPON MANY FACTORS. BY TAKING INTO CONSIDERATION THE ONE ASPECT, IF WE KEPT ON EXCLUDING THE COMPARABLES THEN NOT A SINGLE COMP ARABLE WOULD BE IDENTIFIED. THE SIMPLE REASON IS WHENEVER ANY ADJUD ICATING AUTHORITY WOULD TRY TO CARRY OUT A STUDY OF THE RESULT OF ANY COMPA NY WITH A PARTICULAR ANGLE THEN THE RESULT WOULD BE DIFFERENT. THE ASSESSEE OU GHT TO HAVE PLACED SPECIFIC DETAILS BEFORE THE LEARNED TPO AND DEMONSTRATED HO W A PREJUDICE HAD CAUSED TO THE ASSESSEE, IF COMPARABLES WHO HAVE INC URRED MORE THAN 5% OF 28 SALES A EXPENSES TOWARDS ADVERTISEMENT AND MARKETIN G ARE SELECTED. THEREFORE, WE DO NOT FIND ANY MERIT IN THE CONTENTI ONS OF THE LEARNED COUNSEL FOR THE ASSESSEE FOR EXCLUDING OF ALLSEC TECHNOLOGY LTD. FROM THE LIST OF COMPARABLES. 21. IN THE NEXT FOLD OF SUBMISSIONS, IT WAS CONTEND ED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT MAPLE E-SOLUTION HAS REPORTED HIGH FLUCTUATION IN ITS MARGIN OVER A PERIOD OF SIX YEARS. IN FINANC IAL YEAR 2003-04, IT HAS SHOWN 100% LOSS AND IN FINANCIAL YEAR 2004-05, A PR OFIT AT 37.38% WAS SHOWN. IN FINANCIAL YEAR 2005-06, AND 2007-08, THE PROFITS SHOWN BY THIS CONCERN ARE AT 36.83%, 34.42% AND 22.94% RESPECTIVE LY. IN FINANCIAL YEAR 2008-09, IT HAS AGAIN SHOWN LOSSES AT 65.23%. HE SU BMITTED THAT THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE BECAUS E OF VAST FLUCTUATION IN ITS RESULT. LEARNED DR ON THE OTHER HAND SUBMITT ED THAT IN THE TP STUDY REPORT, ASSESSEE HAS INCLUDED MCS LTD. WHICH HAS SH OWN 15.43% AS A PROFIT IN THE YEAR 2004. IN 2005, THE PROFIT MARGIN GOES D OWN TO 3.4% AND IN THE YEAR 2006, IT HAS SHOWN LOSSES AT -5.81%. INSPITE O F THIS VAST FLUCTUATION FROM 15%, PROFIT TO LOSS OF -5.81%, ASSESSEE HAS C ONSIDERED IT AS A COMPARABLE. HE ALSO CONTENDED THAT THE PROFIT OF TH IS CONCERN IN THE LAST 3-4 YEARS, WAS STABLE I.E. 37.38% TO 20.94% WHICH DOES NOT SUGGEST ANY VAST FLUCTUATION. 29 22. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE RECORD CAREFULLY. PROFIT AND LOSS ARE TWO INCIDENCE OF BUS INESS AND MERELY ON ACCOUNT OF LOW PROFIT OR LOSS WOULD NOT MAKE A FUNC TIONAL COMPARABLES COMPANY AS UNCOMPARABLE, BUT IF THE ULTIMATE RESULT IS OF SUCH A NATURE WHICH DEMONSTRATES THAT SUCH COMPANY IS NOT COMPARA BLE THEN THAT COMPANY DESERVES TO BE EXCLUDED E.G. A COMPANY MAY BE FUNCT IONALLY COMPARABLE BUT IF IT IS SHOWING PERSISTENT LOSSES THEN IT IS ALWAY S ADVISEABLE TO EXCLUDE SUCH A COMPANY FROM THE LIST OF COMPARABLE. SIMILARLY, I F THE RESULT OF A COMPANY OVER A PERIOD SHOWS FLUCTUATION DISPROPORTIONATE TO OTHER CONCERN, THEN THAT WOULD NOT BE AN INDICATOR FOR THE PROFIT OR LOSS RE SULTING FROM THE OPERATION OF THE COMPANY RATHER SOME EXTRA REASONS WOULD BE R ESPONSIBLE FOR THE LOSSES OR THE PROFIT. THEREFORE, SUCH COMPARABLE DE SERVES TO BE EXCLUDED. MAPLE E SOLUTION HAS SHOWN 100% LOSS IN FINANCIAL Y EAR 2002-03 BUT ALL OF A SUDDEN SHOWN PROFIT AT 37.38% IN FINANCIAL YEAR 200 4-05. IN FINANCIAL YEAR 2008-09, IT AGAIN SHOWN LOSSES AND ITS PROFIT MARGI N IS -65.23%. CONSIDERING THIS ASPECT, WE ARE OF THE VIEW THAT THIS COMPARABL E DESERVES TO BE EXCLUDED FROM THE LIST OF COMPARABLES. WITH THE ABOVE OBSERV ATIONS, WE SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR READ JUDICATION. LEARNED ASSESSING OFFICER SHALL GIVE WORKING CAPITAL ADJUST MENTS TO THE ASSESSEE IN ASSESSMENT YEAR 2006-07. HE SHALL WORK OUT THE AVER AGE PROFIT MARGIN OF THE 30 COMPARABLES AFTER EXCLUDING MAPLE E SOLUTION. THE A PPEAL FOR ASSESSMENT YEAR 2006-07 IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 23. NOW, WE TAKE THE REMAINING ISSUES IN ASSESSMENT YEAR 2007-08. IN THIS ASSESSMENT YEAR, WE HAVE ALREADY NOTICED TH E BASIC FACTS AS WELL AS THE FILTERS APPLIED BY THE ASSESSEE IN ITS TP STUDY REPORT IN ORDER TO IDENTIFY THE COMPARABLE COMPANIES FOR JUSTIFYING ITS ARM'S L ENGTH PRICE IN RESPECT OF THE TRANSACTION ENTERED WITH THE A.E. IN THIS YEAR, THE ASSESSEE HAS SHOWN VALUE OF ITS INTERNATIONAL TRANSACTION FROM ADVISI NG AND CONSULTANCY SERVICES AT RS.35,42,09,910. A REFERENCE WAS MADE BY THE ASS ESSING OFFICER TO THE LEARNED TPO AS PER SECTION 92CA FOR DETERMINING TH E ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION SHOWN BY THE ASSESSEE . LEARNED TPO HAS PASSED THE ORDER UNDER SEC. 92C(3) OF THE ACT ON 26 TH OCTOBER, 2010 WHEREBY HE HAS RECOMMENDED AN ADJUSTMENT OF RS.7,55,53,984 IN THE VALUE OF THE INTERNATIONAL TRANSACTION CONDUCTED BY THE ASSESSEE WITH ITS AE. LEARNED TPO IN ORDER TO DETERMINE THE ARM'S LENGTH PRICE HA S IDENTIFIED 26 COMPARABLES AND WORKED OUT THE MEAN OPERATING PROFI T BY DIVIDING IT WITH TOTAL COST AT 29.38%. THE ASSESSEE HAS SHOWN MARGIN OF 10.16% IN THIS YEAR AND, THEREFORE, AN ADJUSTMENT HAS BEEN RECOMMENDED. 31 24. THE LEARNED COUNSEL FOR THE ASSESSEE WHILE IMPU GNING THE ORDERS OF THE ASSESSING OFFICER MAINLY RAISED FOUR FOLD SU BMISSIONS. IN HIS FIRST FOLD SUBMISSION, HE POINTED OUT THAT IN ASSESSMENT YEAR 2007-08, ASSESSEE HAS APPLIED A FILTER FOR ELIMINATING THE COMPANIES WHO HAVE INCURRED EXPENSES ON ADVERTISEMENT AND MARKETING MORE THAN 3% OF THE SAL ES. BEFORE THE LEARNED TPO, IT WAS CONTENDED BY THE ASSESSEE THAT IT IS EN GAGED IN PROVIDING CONTRACT SERVICES. IT DOES NOT UNDERTAKE ANY MARKET ING OR ADVERTISING ACTIVITY AS THE ASSOCIATE ENTERPRISES WHICH CONTRACTUALLY OB LIGED TO OBTAIN THE SERVICES FROM THE ASSESSEE IS RESPONSIBLE TO INCUR ALL THESE EXPENSES. THE ASSESSEE IS GUARANTEED OF A REGULAR WORK AND THUS I NSULATED FROM THE VAGARIES IN THE MARKET TO CERTAIN EXTENT. THE ENTERPRISES WH O CARRIED OUT MARKETING AND ADVERTISING ACTIVITIES DO CREATE A DEMAND FOR T HEIR SERVICES AND THEREBY AN INCREASE IN THE MARKET SHARES WOULD BE ACHIEVED BY THEM. THE COMPANIES WHO INCURRED MARKETING EXPENSES WOULD GENERATE INTA NGIBLE WHICH WOULD RESULT A RETURN ON SUCH INVESTMENT IN THE FUTURE. T HEREFORE, THEIR PROFIT MARGIN IS ON THE HIGHER SIDE AND THEY ARE NOT COMPA RABLES. BEFORE US, LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT T HE COMPARABLES IDENTIFIED BY THE LEARNED TPO WHO HAS INCURRED EXPENSES MORE THAN 3% OF THE SALES IN THE AREA OF MARKETING AND ADVERTISEMENT, THEY ARE N OT COMPARABLES BECAUSE THEY ARE FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. LEARNED COUNSEL FOR THE 32 ASSESSEE FURTHER POINTED OUT THAT PROFIT RATIO OF T HE COMPANIES WHO HAVE INCURRED EXPENSES LESS THAN 3% OF THE SALES IS 22.2 6%. THE COMPANIES WHICH HAVE INCURRED EXPENSES MORE THAN 3% BUT LESS THAN 5 % OF THE SALES IN THE AREA OF MARKETING AND ADVERTISEMENT, THEIR PROFIT R ATIO IS 45.52%. SIMILARLY, THE COMPANIES WHICH HAVE INCURRED EXPENSES ON ADVER TISEMENT AND MARKETING AT 5% TO 7% OF THE SALES, THE PROFIT RATI O IS BETWEEN 67.46%. THE LEARNED COUNSEL FOR THE ASSESSEE IN THIS WAY EMPHAS IZED THAT OUT OF THE TOTAL COMPARABLES IDENTIFIED BY THE TPO FOLLOWING COMPARA BLES DESERVE TOBE EXCLUDED. S.NO. NAME OF THE COMPANIES % OF MARKETING EXPENSES TO SALES F.Y. 2006-07 1. ACCENTIA TECHNOLOGIES LTD. (SEG) 28.36% 2. ALLSEC TECHNOLOGIES LTD. 5.22% 3. ASIT C MEHTA FINANCIAL SERVICES LTD. 5.42% 4. DATAMATICS FINANCIAL SERVICES LTD. (SEG) 4.45% 5. ECLERX SERVICES LTD. 9.72% 6. INFORMED TECHNOLOGIES INDIA LTD. 14.95% 7. INFOSYS BPO LTD. 6.39% 33 8 MOLD-TEK TECHNOLOGIES LTD. (SEG.) 7.46% 25. ON THE OTHER HAND, LEARNED DR CONTENDED THAT TH E LEARNED TPO HAS CONSIDERED THIS ASPECT IN THE IMPUGNED ORDER AND PO INTED OUT THAT ASSESSEE DID NOT GIVE THE BASIS ON WHICH IT CONCLUDED THAT S UCH COMPANIES HAVE CREATED MARKETING INTANGIBLES. THERE IS NO SPECIFIC CO-RELATION BETWEEN THE INCURRENCE OF EXPENSES VIS--VIS THE RETURN IN THE YEAR OF INCURRENCE. THE EXPENSES ONLY CONTRIBUTE FOR POINTING A BRAND-VALUE WHICH CAN GENERATE PROFIT IN THE FUTURE YEARS. DURING THE COURSE OF HE ARING, LEARNED DR POINTED OUT THAT THE ARGUMENT PUT FORTH BY THE ASSESSEE IS NOT SUCH A SIMPLE STEP THAT CAN PERSUADE THE TRIBUNAL TO EXCLUDE THE ABOVE COMP ARABLE. HE DREW OUR ATTENTION TO THE COMPARABLE I.E. HCL COMNET SYSTEM AND SERVICE AND SUBMITTED THAT THEIR CONCERN INCURRED 0.65% OF SALE S ON AMP BUT SHOWN PROFIT AT 45.91%. SIMILARLY HE SUFFERED MAPLE E-SOL UTION LTD., IT INCURRED EXPENSE ON AMP AT 0.16% AND SHOWN PROFIT AT 32.06%. HE ALSO REFERRED GENESYS INTERNATIONAL CORPORATION LTD., WHO INCURRE D 0.68% OF SALES ON AMP BUT SHOWN THE PROFIT AT 19.17%. 26. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE RECORD CAREFULLY. ON PAGES 24 TO 26, LEARNED TPO HAS CONS IDERED THIS ASPECT. 34 ACCORDING TO THE LEARNED TPO, THE FILTERS APPLIED BY THE ASSESSEE IN THE TP STUDY REPORT FOR ELIMINATING THE COMPANIES WHO HAD INCURRED EXPENSES OF MORE THAN 3% OF THE SALES ON ADVERTISEMENT AND MARK ETING IS NOT AN APPROPRIATE FILTER. ACCORDING TO THE LEARNED TPO , INDEPENDENT ENTERPRISES HAS TO INCUR MARKETING EXPENDITURE. IN A SERVICE IN DUSTRIES LIKE I.T. ENABLED SERVICES, THE ASSESSEE DID NOT PROVIDE THE BASIS ON WHICH SUCH EXPENSES RESULTED IN ANY INTANGIBLE UNLIKE IN MANUFACTURING INDUSTRIES WHERE SUBSTANTIAL MARKETING EXPENDITURE CREATE AN INTANGI BLE. LEARNED TPO INVITED THE EXPLANATION OF THE ASSESSEE AS TO WHY T HIS FILTER BE NOT IGNORED. THE ASSESSEE HAS FILED A REPLY TO THE QUERY OF THE TPO WHICH HAS DULY BEEN NOTED BY THE LEARNED TPO ON PAGES 24 & 25 OF THE I MPUGNED ORDER. ON DUE CONSIDERATION OF ASSESSEES OBJECTIONS, LEARNED TP O HAS OBSERVED THAT THE OPERATIVE FORCE OF THE ASSESSEES CONTENTION IS THA T MARKETING AND ADVERTISEMENT ACTIVITIES CARRIED OUT BY THE COMPARA BLE COMPANIES RESULT IN CREATION OF MARKETING INTANGIBLE, WHICH WOULD GIVE RETURN ON SUCH INVESTMENT. IN OTHER WORDS, THE EXPENSES INCURRED O N ADVERTISEMENT AND MARKETING CREATES A MARKETING INTANGIBLE. LEARNED TPO REJECTED THIS CONTENTIONS ON THE GROUND THAT SUCH AN ARGUMENT IS NOT BASED ON ANY SUBSTANTIAL ANALYSIS. THE ASSESSEE MADE REFERENCE T O WIPRO & FLEX TRONIC SOFTWARE SYSTEM AND SUBMITTED THAT THESE COMPANIES HAVE CREATED MARKETING 35 INTANGIBLE, THEREFORE, THEY ARE EARNING MORE PROFIT THEN ANY OTHER CAPTIVE ENTITY. LEARNED TPO REJECTED THE CONTENTION OF THE ASSESSEE ON THE GROUND THAT 95% OF THE REVENUE OF INFOSYS IS FROM REPEAT B USINESS. THE MARKETING INTANGIBLE DID NOT HELP INFOSYS TO GET ANY BETTER B USINESS ACCORDING TO THE LEARNED TPO. ON AN ANALYSIS OF THE LEARNED TPOS ORDER COUPLED WITH THE CONTENTIONS OF THE ASSESSEE, WE ARE OF THE VIEW THA T LEARNED TPO HAS RIGHTLY OBSERVED THAT IN THE CASE OF MANUFACTURING OR DISTR IBUTION COMPANIES MARKETING EXPENSES OVER A PERIOD OF TIME MAY CREATE MARKETING INTANGIBLE WHICH WILL HELPFUL TO THEM FOR GETTING BETTER BUSIN ESS BUT IT MAY NOT BE APPLICABLE WITH EQUAL FORCE ON SERVICE INDUSTRIES L IKE I.T. ENABLED SERVICES. THE INSTANCES OF INFOSYS REFERRED BY THE ASSESSEE H AS BEEN SPECIFICALLY DEALT WITH BY THE LEARNED TPO, HE HAS REPRODUCED RELEVAN T PORTION OF THE ANNUAL REPORT OF INFOSYS ON PAGE 25. FOR BUTTRESSING THIS PLEA, LEARNED COUNSEL FOR THE ASSESSEE MAINLY GAVE TWO EXPLANATION. IN HIS FI RST REASONING HE POINTED OUT THAT PROFIT RATIO OF THE COMPANIES WHO HAVE INC URRED EXPENSES LESS THAN 3% OF THE SALES IS 22.26%. THE COMPANIES WHO HAVE I NCURRED EXPENSE MORE THAN 3% BUT LESS THAN 5% OF THE SALES ON AMP, TH EIR PROFIT IS 45.52%. SIMILARLY, THE COMPANIES WHO HAVE INCURRED EXPENSE ON AMP AT 5% TO 7% OF SALES, THE PROFIT IS BETWEEN 67.46%. THESE FIGUR E HAVE BEEN PUT FROM THE RESULT OF COMPARABLE. WE HAVE EXTRACTED SUCH COMPAR ABLE IN PARA 24 ON PAGE 36 32 OF THIS ORDER. CONTRARY TO THIS, LEARNED DR ALSO POINTED OUT THAT HCL COMNET SYSTEM SERVICES INCURRED 0.65% OF SALES ON A MP BUT SHOWN PROFIT AT 45.91%. SIMILARLY, MAPLE E-SOLUTION INCURRED 0.1 6% AND SHOWN PROFIT AT 32.06%. VISUAL INFRA-TECH DID NOT INCUR ANY EXPENDI TURE BUT SHOWN PROFIT AT 44.15%. THUS, THE DETAILS REFERRED BY THE LEARNED C OUNSEL FOR THE ASSESSEE DO NOT ADVANCE THE CASE OF THE ASSESSEE. WHAT IS THE A CTUAL IMPACT ON THE EARNING OF INCOME COULD NOT BE DEMONSTRATED ON THE BASIS OF THESE COMPARATIVE DETAILS, GRAPH ETC. THE NEXT REASONING IS THAT SUCH COMPANIES ARE FUNCTIONALLY DIFFERENT. CREATION OF MARKETING I NTANGIBLE IS BRAND BY INCURRING SUCH EXPENSES MAY BE HELPFUL IN FUTURE. B UT HOW THEIR FAR IS SUBSTANTIALLY SO DIFFERENT COULD NOT BE EXPLAINED. LEARNED TPO HAS LOOKED INTO THIS ASPECT. HE OBSERVED THAT MATERIAL SHOWING IMPACT ON INFORMATION & TECHNOLOGY INDUSTRY BY SUCH EXPENSES HAD NOT BEEN P RODUCED BY THE ASSESSEE. AFTER TAKING INTO CONSIDERATION THE DISC USSION MADE BY THE LEARNED TPO AS WELL AS THE DRP ON THIS ISSUE, WE DO NOT FIN D ANY MERIT IN THE CONTENTIONS OF LEARNED COUNSEL FOR THE ASSESSEE FOR EXCLUSION OF EIGHT COMPANIES, EXTRACTED SUPRA FROM THE LIST OF COMPARA BLES. 27. IN THE NEXT FOLD OF SUBMISSIONS, LEARNED COUNSE L FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE DID NOT CONSIDER THE CO MPANIES WHICH HAVE MORE 37 THAN 15% OF THE TRANSACTIONS WITH RELATED PARTIES. LEARNED TPO HAS OBSERVED THAT THE COMPANIES WHO HAVE RELATED PARTIE S TRANSACTION IN EXCESS OF 25% OF OPERATING REVENUE WILL ONLY BE EXCLUDED. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FOLLOWING PARTIES H AVE TRANSACTIONS TO SELL MORE THAN 15% WITH RELATED PARTIES: SR.NO. NAME OF THE COMPANIES RPT PERCENTAGE TO SALES-F.Y. 2006-07 1. ASIT C MEHTA FINANCIAL SERVICES LTD. 15.13% 2. INFORMED TECHNOLOGIES INDIA LTD. 15.83% 3. APEX KNOWLEDGE SOLUTIONS LTD. 100% 4. HCL COMNET SYSTEMS & SERVICES LTD. 21.52% (BASED ON RPT% COMPUTED BY THE LEARNED TPO USING DATA SOURCED BY HIM U/S 133(6) OF THE ACT) REFER PG 124 OF THE MERIT APPEAL PB 28. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE CASE OF SONY INDIA PVT. LTD. RENDERED IN ITA NO. 1189/DEL/0 5 & ORS., ITAT HAS HELD THAT AN ENTITY CAN BE TAKEN AS UNCONTROLLED, I F ITS RELATED PARTY TRANSACTION DO NOT EXIST 10 TO 15% OF THE TOTAL REV ENUE. THUS, ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THE COMPARABL ES WHO HAVE TRANSACTIONS MORE THAN 15% WITH ITS RELATED PARTY THEN THEY DESE RVE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. ON THE OTHER HAND, LEARNED DR OPPOSED THE 38 CONTENTIONS OF ASSESSEE. HE POINTED OUT THAT IN THE CASE OF S.T. MICRO ELECTRONICS PVT. LTD. VS. CIT(A) RENDERED IN ITA NO . 1806 & 1807/DEL/08, THE ITAT HAS UPHELD THE RTP FILTER UP TO 25%. IN TH IS CASE, THE ITAT HAS ONLY EXCLUDED THOSE CONCERNS WHO HAVE RELATED PARTY TRANSACTIONS TO SALES MORE THAN 30%. IN REBUTTAL, LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE CASE OF S.T. MICRO ELECTRONICS, THIS WAS NOT THE DIRECT ISSUE BEFORE THE ITAT. IN THAT CASE, LEARNED TPO SELECTED COMPARABL ES TO THE EXTENT UP 25% FOR RELATED PARTY TRANSACTION. LEARNED FIRST APPELL ATE AUTHORITY HAS ELIMINATED ALL THOSE COMPARABLES. ITAT HAS OBSERVED THAT LEAR NED DR WAS UNABLE TO POINT OUT SPECIFIC COMPANIES WHICH WERE SELECTED BY THE LEARNED TPO AS COMPARABLES AND WHO HAS TRANSACTIONS LESS THAN 15% WITH RELATED PARTIES. IN THAT CASE, THE ARITHMETIC MEAN WOULD NOT BE UPGRADE D BY INCLUDING THOSE COMPANIES WHICH HAVE BEEN ELIMINATED BY THE LEARNED CIT(APPEALS), THEREFORE, DIRECTLY THERE WAS NO ADJUDICATION AT TH E END OF THE ITAT ON THIS ISSUE. 29. WE HAVE HEARD THE RIVAL CONTENTIONS. THE EXPRES SION RELATED PARTY TRANSACTION (RPT) HAS NOT BEEN DEFINED IN THE ACT. THE ITAT IN THE CASE OF SONY INDIA HAD EXAMINED THE FACTS OF THAT CASE FOR VERIFYING THE ARMS LENGTH PRICE OF THE ASSESSEE. THE ITAT HAS NOT INTERPRETED ANY PROVISIONS OF LAW 39 WHICH CAN BE PROPOUNDED AS LAYING DOWN THE RATIO OF LAW. THE ITAT HAS JUST MADE A REFERENCE TO A FIGURE WHICH MAY BE RELEVANT WHILE ADJUDICATING THE ISSUE IN THE FACTS OF THAT CASE. IT MAY BE A GUIDIN G FACTOR WHILE CONSIDERING THE CASES OF THE ASSESSEE IN OTHER APPEALS. BUT NEI THER IT IS A RATIO OF LAW NOR IT CAN BE GIVEN STATUS OF A STATUTE, WHICH HAS A BI NDING EFFECT ON ALL OTHER ADJUDICATING AUTHORITIES. THE ACT DOES NOT PROVIDE DIRECTLY AS TO WHAT PERCENTAGE OF A RELATED PARTY TRANSACTION HAS TO CO NSIDERED FOR EXCLUSION. HOWEVER, IF WE LOOK TO THE SCHEME OF INCOME-TAX ACT , THEN IT WOULD BE REVEAL THAT EXPRESSION ASSOCIATE ENTERPRISES WHIC H IS SOMEWHAT SIMILAR TO THAT OF RELATED PARTY, HAS BEEN DEFINED IN SECTIO N 91A(2)(A) OF THE ACT. ACCORDING TO THIS DEFINITION, IF AN ENTERPRISES HOL DS 26% SHARE IN THE OTHER ENTERPRISES THEN IT CAN BE CONSIDERED AS AN ASSOCIA TE ENTERPRISES. SIMILARLY, UNDER SEC. 40A(2)(B) OF THE ACT, INTERESTED PERSONS HAVE BEEN EXPLAINED, IF A PERSON IS HAVING NOT LESS THAN 20% OF VOTING POWER IN A COMPANY THEN SUCH PERSON WOULD BE CONSIDERED AS SUBSTANTIAL INTEREST IN THE COMPANY. THIS SECTION RELATES TO EXAMINATION OF THE CASES WHERE S OME UNDUE BENEFIT IS BEING EXTENDED BY A COMPANY. THESE TWO PROVISIONS G IVE AN INDICATOR THAT WHENEVER ANY ISSUE REGARDING AN INTEREST CREATED IN ANY COMPANY IS BEING EXAMINED WHICH HAS INFLUENCED OVER THE RESULTS OF T HE COMPANY THEN THESE ASPECTS CAN BE TAKEN AS GUIDANCE. ON THE BASIS OF T HE SCHEME, ONE CAN SAFELY 40 SAY THAT AN ENTITY CAN BE TAKEN AS UNCONTROLLED, IF ITS RELATED PARTY TRANSACTION DO NOT EXCEED 25% OF THE TOTAL REVENUE. THUS, WE DO NOT FIND ANY FAULT IN THE CONCLUSION OF THE LEARNED TPO FOR APPLYING THIS FI LTER TO THE EXTENT OF 25% TRANSACTION WITH RELATED PARTY OF THE TOTAL REVENUE . THE CONTENTIONS RAISED BY THE LEARNED COUNSEL FOR THE ASSESSEE IN THIS REGARD ARE REJECTED. 30. IN THE NEXT FOLD OF SUBMISSIONS, LEARNED COUNSE L FOR THE ASSESSEE SUBMITTED THAT THE LEARNED TPO HAS ERRED IN INCLUD ING CERTAIN COMPANIES WHICH ARE HAVING EXTRA-ORDINARY HIGH TURNOVER AS CO MPARED TO THE APPELLANT. THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT FO LLOWING COMPANIES; SR. NO. NAME OF THE COMPARABLE COMPANY TURNOVER (IN CRORES) 1 HCL COMNET SYSTEMS & SERVICES LTD. (SEG.) 260.19 2 INFOSYS BPO LIMITED 649.56 3 WIPRO LIMITED (SEG) 939.78 WHO HAVE HUGE TURNOVER IN COMPARISON TO THE OPERATI ONS OF THE ASSESSEE. THE TOTAL VALUE OF ASSESSEES INTERNATIONAL TRANSAC TION IS RS.35.42 CRORES, WHEREAS THESE COMPANIES HAVE MULTIFOLD TURNOVER THE N THE TURNOVER OF THE ASSESSEE. ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THESE COMPANIES ARE NOT COMPARABLE WITH THAT OF THE ASSESSEE. IN SU PPORT OF HIS CONTENTIONS, 41 HE RELIED UPON THE ORDER OF THE ITAT IN THE CASE OF GENISYS INTEGRATED SYSTEM INDIA PVT. LTD. ITA NO. 1231/BANG/2010, CENT ILLIUM INDIA PVT. LTD. VS. DCIT, ITA NO. 1354/BANG/2010. THE COPIES OF THE SE ORDERS HAVE BEEN PLACED ON THE RECORD. IN THESE CASES, THE TURNOVER FILTER IN BETWEEN 1 TO 200 CRORES WAS CONSIDERED AS A COMPARABLE. ON THE STREN GTH OF THESE ORDERS OF THE ITAT, IT WAS CONTENDED THAT THE COMPANIES WHO A RE HAVING TURNOVER OF MORE THAN 200 CRORES DESERVES TO BE EXCLUDED. LEARN ED DR ON THE OTHER HAND RELIED UPON THE ORDER OF THE DRP. 31. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE RECORD CAREFULLY. IN THE CASE OF CENTILLIUM INDIA, THE TU RNOVER OF THE COMPANY WAS IN THE RANGE OF RS. 30 CRORES. THE COMPARABLES WERE SELECTED HAVING TURNOVER OF RS. 1 TO 200 CRORES. HOWEVER, WE FIND T HAT THE THREE COMPANIES WHICH HAVE BEEN POINTED OUT BY THE ASSESSEE AND EXT RACTED SUPRA ARE VERY LARGE COMPANIES WHO HAVE A TURNOVER OF MORE THAN RS .260 CRORES. THEY CANNOT BE CONSIDERED AS A COMPARABLE COMPANIES, IN VIEW OF THEIR HUGE TURNOVER. THEREFORE, WE FIND FORCE IN THE CONTENTIO NS OF THE LEARNED COUNSEL FOR THE ASSESSEE AND DIRECT THE ASSESSING OFFICER T O EXCLUDE THESE THREE COMPARABLES AND THEREAFTER REWORKED OUT THE MEANS P ROFIT OF THE COMPARABLES. 42 32. IN THE NEXT FOLD OF SUBMISSIONS, IT WAS CONTEND ED BY THE ASSESSEE THAT LEARNED TPO HAS ERRED IN CONSIDERING THE COMPANIES WHO HAVE VOLATILE MARGIN OVER THE PERIOD OF SIX YEARS. THIS ASPECT WE HAVE CONSIDERED IN ASSESSMENT YEAR 2006-07 ALSO. LEARNED COUNSEL FOR T HE ASSESSEE HAS DREW OUR ATTENTION TOWARDS THE RESULT OF FOLLOWING COMPANIES FOR BUTTRESSING HIS CONTENTIONS THAT THEY ARE NOT COMPARABLES: NAME OF THE COMPARABLES 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 VISHAL INFORMATION TECHNOLOGIES LTD. (CORAL HUB LIMITED) 48.13% 62.61% 63.56% 51.26% 50.69% 35.51% MAPLE E SOLUTIONS LTD. -100% 37.38% 36.83% 34.32% 22.94% -65.23% I SERVICES INDIA PVT. LTD. NA* NA* NA* 50.43% 10.92% 59.34% HE POINTED OUT THAT THESE COMPANIES ARE NOT COMPARA BLES BECAUSE OF THEIR HIGH PROFIT RATIO. ON THE OTHER HAND, LEARNED DR SU BMITTED THAT EXCEPT MAPLE E SOLUTION, OTHER COMPANIES ARE CONSISTENT IN THEIR PROFIT RATIO. 33. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE RECORD CAREFULLY. AS FAR AS VISHAL INFORMATION TECHNOLOGY IS CONCERNED, IT IS CONSISTENT IN ITS RESULT. WE HAVE OBSERVED IN THE P RECEDING PARAGRAPH THAT 43 PROFIT AND LOSS ARE TWO INCIDENCE OF THE BUSINESS A ND MERELY ON ACCOUNT OF LOW PROFIT OR LOSS WOULD NOT MAKE A FUNCTIONAL COMP ARABLES COMPANIES AS UNCOMPARABLE, BUT IF THE ULTIMATE RESULT IS OF SUCH A NATURE WHICH DEMONSTRATES THAT SUCH COMPANIES ARE NOT COMPARABLE THEN THAT COMPANY DESERVES TO BE EXCLUDED. IF THE RESULT OF A COMPANY OVER A PERIOD SHOWS FLUCTUATION AND SUCH RESULT IS DISPROPORTIONATE TO OTHER CONCERN THEN THAT WOULD BE AN INDICATION THAT PROFIT OR LOSS MAY NOT BE RESULTING FROM THE OPERATION OF THE COMPANY ALONE, RATHER THERE MAY BE SOME EXTRA REASONS FOR SUCH LOSSES OR PROFIT. THEREFORE, VISHAL INFORMATIO N TECHNOLOGY IS CONSISTENT IN ITS RESULT AND IT CANNOT BE EXCLUDED FROM THE CO MPARABLES. IN ASSESSMENT YEAR 2006-07, WE HAVE EXCLUDED MAPLE E SOLUTION. TH IS YEAR ALSO, IT WILL BE EXCLUDED. AS FAR AS I SERVICE INDIA PVT. LTD. IS CO NCERNED, THERE IS NO INFORMATION WITH REGARD TO THE EARLIER YEARS AND FI NANCIAL YEAR 2006-07 IS THE FIRST YEAR. THEREFORE, IT CANNOT BE SAID THAT THIS COMPANY HAS SHOWN VAST FLUCTUATION. IN VIEW OF THE ABOVE DISCUSSION, WE PA RTLY ACCEPT THE CONTENTIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE IN THIS FOL D OF ARGUMENTS AND ONLY EXCLUDE MAPLE E SOLUTION FROM THE COMPARABLE. 34. IN THE NEXT FOLD OF SUBMISSIONS, LEARNED COUNSE L FOR THE ASSESSEE HAS SUBMITTED THAT LEARNED TPO HAS INCLUDED FUNCTIONAL LY DIFFERENT COMPANIES 44 IN THE COMPARABLES. THE FIRST OBJECTION RAISED BY H IM RELATES TO INCLUSION OF MOULD-TECH TECHNOLOGY LTD. HE POINTED OUT THAT THIS COMPANY DESERVES TO BE EXCLUDED FOR FOUR REASONS BECAUSE IT IS GIVING F UNCTIONALLY DIFFERENT SERVICES. IT HAS SUPER NORMAL GROWTH. IT HAS INCURR ED SIGNIFICANT EXPENSES ON ADVERTISEMENT AND MARKETING. IT HAS SHOWN ABNORMAL HIGH PROFIT. AS FAR AS THE ISSUES REGARDING INCURRENCE OF ADVERTISEMENT MA RKETING EXPENDITURE ARE CONCERNED, WE HAVE ALREADY DISCUSSED THIS ASPECT AN D DID NOT FIND MERIT IN THE CONTENTIONS OF THE LEARNED COUNSEL FOR THE ASSE SSEE. SIMILARLY, WE DO NOT FIND ANY MERIT WITH REGARD TO HIGH MARGIN OF PROFIT . THE ONLY ISSUE LEFT IS WHETHER THIS COMPARABLE IS FUNCTIONALLY DIFFERENT O R NOT. WE FIND THAT LEARNED TPO HAS EXAMINED THIS ASPECT ELABORATELY ON PAGES 9 3 TO 97 OF HIS ORDER. WE HAVE GONE THROUGH THE TPOS ORDER. THE BASIC ARGUME NT RAISED BY THE LEARNED COUNSEL FOR THE ASSESSEE IS THAT MOULD TEA TECHNOLOGY IS RENDERING ENGINEERING SERVICES WHICH ARE IN THE NATURE OF PRO DUCING DESIGN, DRAWINGS, DETAILED STRUCTURAL ENGINEERING DRAWINGS USING 3D & 2D SOFTWARE. ACCORDING TO THE ASSESSEE, THESE SERVICES ARE HIGH END IN THE NATURE AND CANNOT BE COMPARED WITH THE BACK OFFICE SERVICES OF FERED BY THE ASSESSEE. IT WAS ALSO POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THIS CONCERN IS PROVIDING A SEPARATE LINE OF SERVICE. ON DUE CON SIDERATION OF THE CONTENTIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE AS WELL AS AFTER GOING 45 THROUGH THE ORDER OF THE TPO, WE ARE OF THE VIEW TH AT BEFORE LEARNED TPO, ASSESSEE HAS MADE DETAILED SUBMISSIONS WHICH HAVE B EEN DULY REPRODUCED. LEARNED TPO THEREAFTER POINTED OUT THAT NEITHER HE , NOR THE ASSESSEE WENT IN TO HORIZONTAL OR FUNCTIONAL LINE WITHIN IT ENABLED SERVICES. THEY HAVE SELECTED THE COMPANIES WHO ARE IN I.T. SERVICES AND A COMPARABLE CANNOT BE REJECTED JUST BECAUSE IT IS OPERATING IN THAT VERY SECTOR IN DIFFERENT LINE. ON DUE CONSIDERATION OF THE FINDINGS RECORDED BY THE L EARNED TPO, WE DO NOT FIND ANY FORCE IN THE CONTENTIONS OF THE LEARNED CO UNSEL FOR THE ASSESSEE. 35. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SU BMITTED THAT THE TPO HAS INCLUDED ECLERT SERVICES LTD. WHICH IS A KNOWLE DGE PROCESS OUTSOURCING COMPANY ENGAGED IN THE PROVIDING DATA ANALYTICS AND DATA PROCESS SOLUTION TO THE CUSTOMERS. THE DATA ANALYTICS SERVICES PERFO RMED BY ECLERT SERVICES ARE FUNCTIONALLY DIFFERENT. IT IS MORE VAL UE ADDED AND HIGH END IN NATURE, COMPARABLE TO THE LOW END BACK OFFICE SERVI CES PROVIDED BY THE APPELLANT. LEARNED DR ON THE OTHER HAND RELIED UPON THE ORDER OF THE LEARNED TPO AND DREW OUR ATTENTION TOWARDS PAGE NOS. 81 AND 82 OF THE ORDER. ON DUE CONSIDERATION OF THE FACTS AND CIRCUMSTANCES, W E FIND THAT ASSESSEE HAS REITERATED ITS CONTENTIONS AS WERE RAISED BEFORE TH E LEARNED TPO. LEARNED TPO REJECTED THE CONTENTIONS ON THE GROUND THAT NEI THER THE ASSESSEE NOR HE 46 WENT IN TO FUNCTIONAL LINE HORIZONTAL TEST WITHIN I .T. ENABLES SERVICES, MEANING THEREBY, THE COMPARABLES WERE SELECTED WHO WERE IN THE I.T. ENABLED SERVICES, QUALITATIVE FILTER SPECIFICALLY W AS NOT APPLIED IN THE SELECTION OF THE COMPARABLES. THE DUTY OF THE LEAR NED TPO IS TO FIND OUT JUST AND REASONABLE COMPARABLES. IT IS QUITE DIFFIC ULT TO GET ACCURATE COMPARABLES. THE ASSESSEE WANTS THAT I.T. ENABLED S ERVICES BE FURTHER DISSECTED, BUT IN THAT WAY, THERE WILL NOT BE ANY E ND AND IT IS A VERY SUBJECTIVE EXERCISE. LEARNED TPO HAS CONSIDERED TH ESE ASPECTS AND ALSO THE CONTENTIONS OF THE ASSESSEE. HIS ORDER IS QUITE SPE AKING ONE. AFTER LOOKING INTO THE FINDINGS RECORDED BY HIM, WE DO NOT FIND A NY MERIT IN THE CONTENTIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE . 36. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SU BMITTED THAT LEARNED TPO HAS INCLUDED ASIT C. MEHTA FINANCIAL SERVICES L TD. WHICH IS ENGAGED IN PROVIDING HIGH-END SERVICES IN THE NATURE OF GEOGRA PHIC INFORMATION SERVICES. THE ACTIVITY PERFORMED BY THIS CONCERN AR E NOT COMPARABLE TO THE ACTIVITIES OF THE ASSESSEE. WE FIND THAT LEARNED T PO HAS REJECTED THIS CONTENTION OF THE ASSESSEE AND WHICH IS IDENTICAL T O THE OTHER CONCERN I.E. MOULD TEC, AELEX SERVICES ETC. LEARNED TPO WAS OF THE VIEW THAT HE HAS NOT COMPARED THE SERVICES OF THESE CONCERNS VERTICA LLY. THE COMPARABLES ARE 47 RENDERING I.T. ENABLED SERVICES. THEY ARE FUNCTIONA LLY SIMILAR, AS FAR AS I.T. ENABLED SERVICES ARE CONCERNED. WITH REGARD TO VISH AL INFORMATION TECHNOLOGIES LTD., LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS CONCERN HAS LOW PERSONAL COST AS A PERCENTAGE OF SA LES AS COMPARED TO THE ASSESSEES PERSONAL COST TO ITS SALES, THEREFORE, I T IS ALSO NOT COMPARABLES. WE FIND FROM THE FINDINGS OF THE LEARNED TPO AVAILABL E ON PAGES 101 TO 103 OF THE ORDER THAT THIS CONCERN QUALIFY ALL THE FILTERS . LEARNED TPO HAD CALLED FOR INFORMATION FROM THIS CONCERN UNDER SEC. 133(6) OF THE INCOME-TAX ACT, 1961 AND REPRODUCED THE LETTER SENT BY THIS CONCERN IN R ESPONSE TO HIS QUERY ON PAGE 104 OF THE ORDER. ON AN ANALYSIS OF THIS LETTE R, HE RECORDED A FINDING THAT IN THE ACTIVITY OF DATA CONVERSION SERVICES PROVIDE D BY THIS CONCERN, IT IS TAKING 9 TO 10 STEPS. UP TO THE STEPS 1 TO 5, THESE ARE PERFORMED BY MANPOWER OF VENDORS PERSONALLY IN THE OFFICE PREMIS ES OF THE COMPANY AND FROM STAGES 6 TO 9, THESE ARE PERFORMED BY THE EMPL OYEES OF THE COMPANIES. ON AN ANALYSIS OF ALL THESE DETAILS, LEARNED TPO C ONSIDERED IT AS A FUNCTIONALLY SIMILAR COMPANY AND WE DO NOT FIND ANY ERROR IN THIS FINDING OF THE LEARNED TPO. THE LEARNED COUNSEL FOR THE ASSES SEE FURTHER RAISED OBJECTION WITH REGARD TO INCLUSION OF MAPLE E-SOLUT ION LTD. WE HAVE ALREADY EXCLUDED THIS CONCERN ON ACCOUNT OF HIGH FLUCTUATIO N IN ITS RESULTS. 48 37. THE NEXT OBJECTION RAISED BY THE LEARNED COUNSE L FOR THE ASSESSEE IS WITH RESPECT TO INCLUSION OF I-SERVICES INDIA PVT. LTD. THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT NO INFORMATION WE RE AVAILABLE REGARDING THE FUNCTIONAL PROFILE OF THE COMPANY IN THE ANNUAL REP ORT, THE WEBSITE OF THE COMPANY OR THE DETAILED INFORMATION PROVIDED BY THE LEARNED TPO COLLECTED UNDER SEC. 133(6) OF THE INCOME-TAX ACT, 1961. THE ASSESSEE ALSO SUBMITTED THAT THIS CONCERN HAS SHOWN HIGH MARGIN AND, THEREF ORE, IT DESERVES TO BE EXCLUDED. ON THE OTHER HAND, LEARNED DR SUBMITTED THAT COMPLETE DETAILS OF THIS CONCERN WERE CALLED FOR BY THE LEARNED ASSESS ING OFFICER BY EXERCISING HIS POWERS UNDER SEC. 133(6) OF THE ACT. AS PER THE REPLY RECEIVED FROM THE COMPANY, IT REVEALED THAT IT IS INTO I.T. ENABLED S ERVICES. ON DUE CONSIDERATION OF THE OBJECTIONS OF THE LEARNED COUN SEL FOR THE ASSESSEE, WE ARE OF THE VIEW THAT INFORMATION COLLECTED BY THE L EARNED TPO WERE DULY CONFRONTED TO THE ASSESSEE. THE ASSESSEE RAISED OBJ ECTIONS WHICH HAVE DULY BEEN NOTICED ON PAGE 92 OF THE ORDER. LEARNED TPO THEREAFTER REJECTED THE OBJECTIONS OF THE ASSESSEE. WE ALSO DO NOT FIND ANY SUBSTANTIAL MERIT IN THE OBJECTIONS OF THE ASSESSEE. THE PLEA RAISED BY THE ASSESSEE IS THAT NO INFORMATION IS AVAILABLE REGARDING THE FUNCTIONAL P ROFILE OF THE COMPANY IN THE ANNUAL REPORT. WHATEVER LEARNED TPO GOT FROM T HIS COMPANY, THOSE WERE COMMUNICATED TO THE ASSESSEE AND AFTER PROVIDI NG DUE OPPORTUNITY, 49 LEARNED TPO FOUND IT AS A COMPARABLES AND ONLY THE REAFTER INCLUDED IT. WE DO NOT FIND ANY FORCE IN THE CONTENTIONS OF THE LEA RNED COUNSEL FOR THE ASSESSEE FOR EXCLUDING THIS CONCERN. LEARNED TPO H AS CONSIDERED THE DETAILS OF EACH COMPARABLES ELABORATELY IN PARAGRAPH NO. 14 OF THE ORDER. WE HAVE DULY GONE THROUGH HIS FINDINGS AND THEREAFTER UPHEL D THE INCLUSION OF THE COMPARABLES. IN VIEW OF OUR ABOVE DISCUSSION, WE EX CLUDE ONLY FOUR COMPARABLES, NAMELY, HCL COMNET SYSTEMS & SERVICES LTD. (SEGMENTAL), INFOSYS B.P.O. LTD., MAPLE ESOLUTIONS LTD. AND WIPR O LTD. (SEGMENTAL). OUT OF THE ABOVE FOUR, THREE ARE EXCLUDED ON ACCOUNT OF HUGER TURNOVER IN COMPARISON TO THE TURNOVER OF THE ASSESSEE AND ONE IS EXCLUDED ON ACCOUNT OF HUGE FLUCTUATIONS IN THE PROFIT/LOSS MARGIN IN DIFF ERENT ASSESSMENT YEARS. THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. LEARNED ASSESSING OFFICER IS DIRECTED TO RECOMPUTED THE MARGINS OF THE COMPARABL ES AFTER EXCLUDING THESE FOUR FROM THE LIST OF COMPARABLES AND THEREAFTER WO RKED OUT THE ADJUSTMENTS, IF ANY, REQUIRED IN THE A.L.P. OF THE INTERNATIONAL TRANSACTION. 38XC. IN THE RESULT, BOTH THE APPEALS ARE PARTLY AL LOWED. DECISION PRONOUNCED IN THE OPEN COURT ON 12.10.201 2 SD/- SD/- ( G.D. AGRAWAL ) ( RAJPAL YADAV ) VICE-PRESIDENT JUDICIAL MEMBER DATED: 12/10/2012 MOHAN LAL 50 COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR