Convergys India Services Pvt. Ltd., Gurgaon V. ACIT, New Delhi

ITA 5451/DEL/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97199 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 09-06-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 05-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIJARY CHAUDHARY SR D; SHRIA A DDL
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Retrospective amendment; Reasonable cause; Bad and doubtful debts; Scheme of amalgamation
• Section: 143(3); 92D; 10AA; 234B; 133(6); 10B; 201(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 NEW DELHI) BEFORE SHRI I.C. SUDHIR AND SHRI INTURI RAMA RAO ITA NO. 5451/DEL/2011 ASSESSME NT YEAR: 2006-07 ITA NO.5745/DEL/2011 ASSESSMENT YEAR: 2007 -08 CONVERGYS INDIA SERVICES PVT. LTD., VS. ACIT DLF ATRIA, JACARANDA MARG, CIRCLE 3(1), DLF CITY, PHASE-II, NEW DELHI. GURGAON. (PAN: AABCC5056G) (APPELLANT) (RESPONDENT) APPELLANT BY: S/SHRI PAWAN KUMAR, ADV. & ROHIT TIWARI, CA RESPONDENT BY: SHRI R.K. JHA, A DDL. CIT(DR) AND SHRI VIJARY CHAUDHARY, SR.DR DATE OF HEARING : 09 .06.2015 DATE OF PRONOUNCEMENT: 07:09.2015 ORDER PER I.C. SUDHIR: JUDICIAL MEMBER ITA NO. 5451/DEL/2011 (ASSESSMENT YEAR: 2006-07) : THE ASSESSEE HAS QUESTIONED ORDERS OF THE AUTHORITI ES BELOW ON THE FOLLOWING GROUNDS: THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW:- 1. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSES SING OFFICER (LD. AO) PURSUANT TO THE DIRECTIONS OF LEARNED DI SPUTE RESOLUTION PANEL (LD. DRP) IS BAD IN LAW AND VOID AB-INITIO. 2. THE LD. DRP AND THE LD. AO (FOLLOWING THE DIRECT ION OF THE LD. DRP) ERRED BOTH ON FACTS AND IN THE LAW IN CONF IRMING THE ADDITION OF RS. 31,21,61,763 TO INCOME OF THE APPELLANT PROP OSED BY THE TRANSFER PRICING OFFICER (LD. TPO) BY HOLDING THA T ITS INTERNATIONAL TRANSACTIONS TO ITS INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) AND E-LEARNING BACK OFFICE SUPPORT SERVICES (E-LEA RNING) BUSINESS 2 SEGMENTS DO NOT SATISFY THE ARMS LENGTH PRINCIPLE ( ALP) ENVISAGED UNDER THE INCOME-TAX ACT, 1961 ('THE ACT') AND IN D OING SO, THE LD. AO HAS GROSSLY ERRED IN AGREEING WITH AND UPHOLDING TH E LD. TPOS ACTION OF: 2.1 NOT APPRECIATING THAT NONE OF THE CONDITIONS SE T OUT IN SECTION 92C(3) OF THE ACT ARE SATISFIED IN THE PRESENT CASE ; 2.2 IGNORING THE FACT THAT THE APPELLANT IS ENTITLE D TO TAX HOLIDAY UNDER SECTION 10A OF THE ACT ON ITS PROFITS AND THE REFORE WOULD NOT HAVE ANY UNTOWARD MOTIVE OF DERIVING A TAX ADVANTAG E BY MANIPULATING TRANSFER PRICES OF ITS INTERNATIONAL TRANSACTIONS; 2.3 DISREGARDING THE ALP AS DETERMINED BY THE APPEL LANT IN THE TRANSFER PRICING ('TP') DOCUMENTATION MAINTAINED BY IT IN TERMS OF SECTION 92D OF THE ACT READ WITH RULE 10D OF THE IN COME-TAX RULES, 1962 (THE RULES) AS WELL AS FRESH SEARCH; AND IN PARTICULAR MODIFYING/ REJECTING THE FILTERS APPLIED BY THE APPELLANT; 2.3.1 INTERPRETING THE REQUIREMENT OF CONTEMPORANEOUS D ATA IN THE RULES TO NECESSARILY IMPLY CURRENT/ SINGLE YEAR (I. E. FY 2005- 06) DATA; AND 2.3.2 HOLDING THAT AT THE TIME OF CREATING/ MAINTAINING T HE TP DOCUMENTATION, THE APPELLANT COULD HAVE PROCURED CU RRENT/ SINGLE YEAR DATA (I.E. FY 2005-06 DATA) FROM SOURCE S OTHER THAN THE ELECTRONIC DATABASES, WHEN IN FACT PRACTICALLY NO SUCH OTHER SOURCES WERE AVAILABLE IN CASE OF MOST COMPANIES; 2.4 DISREGARDING MULTIPLE YEAR/ PRIOR YEARS DATA A S USED 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 NOT NECESSARILY AVAILABL E TO THE APPELLANT AT THE TIME OF PREPARING ITS TP DOCUMENTATION; 2.5 COLLECTING INFORMATION OF THE COMPANIES BY EXER CISING POWER GRANTED TO HIM UNDER SECTION 133(6) OF THE ACT THAT WAS NOT AVAILABLE TO THE APPELLANT IN THE PUBLIC DOMAIN AND RELYING ON S ELECTIVE INFORMATION FOR COMPARABILITY PURPOSES (AND TO THE EXTENT OF CO MPLETELY IGNORING RELIABLE DATA AVAILABLE IN PUBLIC DOMAIN/ ANNUAL RE PORTS IN NUMEROUS CASES); 3 2.5.1 AND IN DOING SO VIOLATING THE FUNDAMENTAL PRI NCIPLES OF NATURAL JUSTICE BY RELYING ON THE INFORMATION SOURCED UNDER SECTION 133(6); 2.6 AGGREGATING THE APPELLANTS TWO BUSINESS SEGMEN TS NAMELY ITES AND E-LEARNING BACK OFFICE SUPPORT SERVICES SE GMENT WITHOUT ANY JUSTIFIABLE BASIS; 2.7 REJECTING COMPARABILITY ANALYSIS IN THE APPELLA NT'S TP DOCUMENTATION/ FRESH SEARCH AND IN CONDUCTING A FRE SH COMPARABILITY ANALYSIS BASED ON APPLICATION OF THE FOLLOWING ADDI TIONAL/ REVISED FILTERS IN DETERMINING THE COMPARABLE COMPANIES: 2.7.1 EXCLUSION OF COMPANIES HAVING DIFFERENT FINAN CIAL YEAR ENDING (I.E. NOT MARCH 31, 2006); 2.7.2 EXCLUSION OF COMPANIES WITH EXPORT SALES THAT ARE LESS THAN 25% OF THEIR TOTAL REVENUE; 2.7.3 EXCLUSION OF COMPANIES WITH DIMINISHING REVEN UES/ PERSISTENT LOSSES FOR LAST THREE YEARS UPTO AND INCLUDING FY 2 005-06; 2.7.4 RETAINING COMPANIES WITH RELATED PARTY TRANSA CTIONS UPTO 25% OF THEIR SALES; AND REJECTING, IN PARTICULAR, THE FOLLOWING FILTERS APPLIED BY THE APPELLANT IN ITS TP DOCUMENTATION/ FRESH SEARCH: 2.7.5 COMPANIES HAVING OTHER OPERATING INCOME (I.E. INCOME OTHER THAN MANUFACTURING AND TRADING INCOME) TO SALES GRE ATER THAN 50% WERE ACCEPTED; 2.7.6 COMPANIES WITH NET WORTH LESS THAN ZERO WERE REJECTED; 2.7.7 COMPANIES HAVING RESEARCH & DEVELOPMENT COSTS TO SALES LESS THAN 3% WERE ACCEPTED; AND 2.7.8 COMPANIES HAVING ADVERTISING, MARKETING AND D ISTRIBUTION COSTS TO SALES LESS THAN 3% WERE ACCEPTED. 2.8 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 4 DEMONSTRATING AN INTENTION TO ARRIVE AT A PRE-FORMU LATED OPINION WITHOUT COMPLETE AND ADEQUATE APPLICATION OF MIND W ITH THE SINGLE- MINDED INTENTION OF MAKING AN ADDITION TO THE RETUR NED INCOME OF THE APPELLANT; 2.9 INCLUDING CERTAIN COMPANIES THAT ARE NOT COMPAR ABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS E MPLOYED AND RISKS ASSUMED; 2.10 RESORTING TO ARBITRARY REJECTION OF LOW-PROFIT / LOSS MAKING COMPANIES BASED ON ERRONEOUS AND INCONSISTENT REASO NS; 2.11 EXCLUDING CERTAIN COMPANIES ON ARBITRARY/ FRIV OLOUS GROUNDS EVEN THOUGH THEY ARE COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED; 2.12 IGNORING THE BUSINESS/ COMMERCIAL REALITY THAT SINCE THE APPELLANT (VIS--VIS BOTH ITS ITES / E-LEARNING BUS INESS SEGMENTS) IS REMUNERATED ON AN ARMS LENGTH COST PLUS 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 MIN IMAL BUSINESS RISKS AS AGAINST COMPARABLE COMPANIES THAT ARE FULL FLEDGED RISK TAKING ENTREPRENEURS, AND BY NOT ALLOWING A RISK ADJUSTMEN T TO THE APPELLANT ON ACCOUNT OF THIS FACT; AND 2.13 NOT ALLOWING THE APPELLANT THE BENEFIT OF THE (+/-) 5% RANGE AVAILABLE TO THE APPELLANT AS PER THE OLD PROVISO TO SECTION 92C(2) OF THE ACT; 2.14 DISREGARDING JUDICIAL PRONOUNCEMENTS IN INDIA IN UNDERTAKING THE TP ADJUSTMENT. 3. THE LD. DRP ERRED IN DISREGARDING THE DETAILED A RGUMENTS/ SUBMISSIONS PUT FORTH BY THE APPELLANT DURING THE C OURSE OF THE DRP/ ASSESSMENT PROCEEDINGS WHILE PASSING ITS DIRECTION UNDER SECTION 144C OF THE ACT. 4. THE LD. AO ERRED ON FACTS AND IN LAW IN CHARGIN G INTEREST UNDER SECTION 234B OF THE ACT. 5 5. THE LD. AO HAS GROSSLY ERRED IN INITIATING PENAL TY UNDER SECTION 271(1)(C) OF THE ACT MECHANICALLY AND WITHOUT RECOR DING ANY SATISFACTION FOR ITS INITIATION. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTH ER. THE APPELLANT CRAVES LEAVE TO ALTER, AMEND OR WITHD RAW ALL OR ANY OF THE GROUNDS HEREIN OR ADD ANY FURTHER GROUNDS AS MAY BE CONSIDERED NECESSARY EITHER BEFORE OR DURING THE HEARING. GROUND NOS. 2 TO 2.14 AND 3 TO 5 : 2. THE LEARNED AR SUBMITTED THAT THE MAIN GRIEVANC E OF THE ASSESSEE IS REGARDING THE SELECTION OF WRONG COMPARABLES FOR BE NCHMARKING THE INTERNATIONAL TRANSACTION. HE SUBMITTED THAT DURING THE FINANCIAL YEAR (FY) 2005-06, THE APPELLANT , OPERATED AS A LOW RISK CAP TIVE UNIT PROVIDING ITES AND E-LEARNING BACK OFFICE SUPPORT SERVICES TO ITS ASSOCIATED ENTERPRISES (AES) (REFER PARA 4.6.1 OF TP STUDY ON PGS 329 OF THE PAP ER BOOK). 2.1 IN RETURN FOR RENDERING THESE SERVICES, THE APPELLANT WAS REMUNERATED ON AN ARMS LENGTH COST PLUS BASIS I.E. IT WAS COMP ENSATED FOR ALL ITS OPERATING COSTS, PLUS A PRE-AGREED MARK-UP THEREON. (PLEASE REFER THE ITES AGREEMENT PROVIDED SEPARATELY) 2.2 DURING THE RELEVANT YEAR, THE APPELLANT UNDER TOOK THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES (FORM 3CEB ON PG. 373 OF THE PAPER BOOK). SL. NO. DESCRIPTION OF INTERNATIONAL TRANSACTION AMOUNT (RS.) TP ORDER 1. PROVISION OF SERVICES 4,986,834,267 ADJUSTMENT OF RS 31,21,61,763 2. SALARY REIMBURSEMENT 16,953,607 ACCEPTED 3. PAYMENT OF SERVICE FEE 20,777,272 ACCEPTED 4. REIMBURSEMENT OF IPLC COST (PAID) 53,282,192 ACC EPTED 5. PAYMENT FOR SOFTWARE AND MAINTENANCE COST 6,817,878 ACCEPTED 6. PURCHASE OF CAPITAL GOODS 330,901 ACCEPTED 7. SALE OF CAPITAL GOODS 11,144,260 ACCEPTED 8. INTEREST ON LOAN (PAID) 1,92,29,077 ACCEPTED 6 2.3 THE TRANSACTIONS RELATING TO POINT NO. (2) TO (6) WAS AGGREGATED AND ANALYZED APPROPRIATELY WITH THE INTERNATIONAL TRANS ACTIONS RELATING THE IT ENABLED SERVICES AND E-LEARNING BACK-OFFICE SUPPORT SERVICES AND BENCHMARKED USING TRANSACTIONAL NET MARGIN METHOD ( TNMM) WITH OPERATING PROFIT/ TOTAL COST (OP/TC) AS THE RELEV ANT PROFIT LEVEL INDICATOR (PLI). ALSO, THE TRANSACTIONS PERTAINING TO POINT NO. (7) AND (8) WAS EVALUATED SEPARATELY USING COMPARABLE UNCONTROLLED PRICE (CUP) METHOD (REFER TP STUDY ON 311 OF THE PAPER BOOK) . 2.4 THE FOLLOWING TABLE SUMMARIZES THE RESULTS FOR THE TNMM ANALYSIS UNDERTAKEN IN THE TP STUDY FOR THE ITES AND THE E-L EARNING SEGMENTS BASED ON MULTIPLE YEAR DATA (I.E. FYS 2003-04, 2004-05 AN D 2005-06 TO THE EXTENT AVAILABLE). (REFER TP STUDY ON 311 OF THE PAPER BOOK) . PARTICULARS ITES E LEARNING NO OF COMPARABLES 14 4 MEAN OP/TC 9% 12% APPELLANTS OP/TC 15% 14% 2.5 THE LEARNED AR REFERRED SNAPSHOT OF TP ST UDY ANALYSIS AS BELOW: - PARTICULARS PROVISION OF ITES MOST APPROPRIATE METHOD TRANSACTIONAL NET MARGIN METHOD (TNMM) (HE REFERRED TO PAGE 311 & 336OF THE PAPER BOOK FOR THE TP STUDY) PLI USED OPERATING PROFIT (OP)/ TOTAL COST (TC) (HE REFERRED TO PAGE 311 & 344OF THE PAPER BOOK FOR THE TP STUDY) SEGMENT ITES E LEARNING NO. OF COMPARABLES 14 (HE REFERRED TO PAGE 346OF THE PAPER BOOK FOR THE TP STUDY) 4 (PLEASE REFER TO PAGE 347OF THE PAPER BOOK FOR THE TP STUDY) COMPARABLES MEAN MARGIN 9% (HE REFERRED TO PAGE 346OF THE PAPER BOOK FOR THE TP STUDY) 12% (HE REFERRED TO PAGE 347OF THE PAPER BOOK FOR THE TP STUDY) DATA USED MULTIPLE YEARS FYS 2004-05, 2005-06 AND 2006-07 (HE REFERRED TO PAGE 337 OF THE PAPER BOOK FOR THE TP STUDY) MULTIPLE YEARS FYS 2004-05, 2005-06 AND 2006-07 (HE REFERRED TO PAGE 337 OF THE PAPER BOOK FOR THE TP STUDY) 7 APPELLANTS MARGIN 15% (HE REFERRED TO PAGE 363OF THE PAPER BOOK FOR THE TP STUDY) 14% (HE REFERRED TO PAGE 363OF THE PAPER BOOK FOR THE TP STUDY) CONCLUSION AT ARMS LENGTH AT ARMS LENGTH 2.6 ACCORDINGLY, THE INTERNATIONAL TRANSACTIONS O F THE APPELLANT WITH ITS AES DURING THE AY 2006-07 WAS CONSIDERED TO BE AT A RMS LENGTH. PROCEEDINGS BEFORE THE LEARNED TRANSFER PRICING OFF ICER (LD. TPO) 2.7 HOWEVER, THE LD. TPO REJECTED THE SEGMENTA L BIFURCATION UNDERTAKEN BY THE APPELLANT AND CLUBBED THE GARMENTS UNDER ITE S. (PLEASE REFER TP ORDER AT PAGE 174& 175OF THE PAPER BOOK) FINALLY, HE RELIED UPON THE SET OF FOLLOWING 14 COMPANIESWITH A MEAN OPERATING PROFIT MARGIN OF 23. 64%. PARTICULARS PROVISION OF ITES MOST APPROPRIATE METHOD TNMM (HE REFERRED PARA 17.2 OFTP ORDER AT PAGE 293OF THE PAPER BOOK) PLI USED OP/ TC (HE REFERRED PARA 17.3 OFTP ORDER AT PAGE 293 OF TH E PAPER BOOK) NO. OF COMPARABLES 14 (HE REFERRED TP ORDER AT PAGE 261 OF THE PAPER BOOK ) COMPARABLES MEAN MARGIN 23.64% (HE REFERRED TP ORDER AT PAGE 261 OF THE PAPER BOO K) COMPARABLES MEAN MARGIN AFTER WORKING CAPITAL ADJUTMENT 22.61% (HE REFERRED TP ORDER AT PAGE 304 OF THE PAPER BOOK ) (WORKING CAPITAL ADJUSTMENT PROVIDED BY THE TPO) DATA USED CURRENT YEAR (HE REFERRED PARA 5 OFTP ORDER AT PAGE 191 OF THE PAPER BOOK) TPO SEARCH STRATEGY (HE REFERRED PARA 13.1 OFTP OR DER AT PAGE 231OF THE PAPER BOOK) APPELLANTS MARGIN 15.38% (HE REFERRED PARA 2.2 OFTP ORDER AT PAGE 173 OF THE PAPER BOOK) CONCLUSION TP ADJUSTMENT OF RS. 31,21,61,763 (HE REFERRED PARA 17.6 OFTP ORDER AT PAGE 295 OF TH E PAPER BOOK) 8 2.8 HOWEVER, THE LD. TPO REJECTED THE APPELLAN TS CONTENTIONS AND HE RELIED UPON THE SET OF FOLLOWING 14 COMPANIES (INCLUDING 4 COMPANIES WHICH WERE COMMON WITH THE APPELLANTS FRESH SEARCH , 1 C OMPANY FROM TP STUDY AND 9 NEW COMPARABLES INTRODUCED AS PART OF FRESH S EARCH CONDUCTED BY THE LD. TPO) WITH A MEAN OPERATING PROFIT MARGIN OF 22.61% . (REFER TP ORDER ON PG295 OF PAPER BOOK) . S. NO. COMPANY NAME WORKING CAPITAL ADJUSTED OP/ TC MARGIN AS PER THE TPO ORDER (USING DATA FOR FY 2005- 06) STATUS 1 MAPLE ESOLUTIONS LTD 30.20% NEW COMPARABLE INTRODUCED BY THE TPO 2 ALLSEC TECHNOLOGIES LTD 28.62% NEW COMPARABLE INTRODUCED BY THE TPO 3 DATAMATICS FINANCIAL SERVICES LTD (SEG.) 24.89% CONSIDERED BY THE TPO OUT OF THE 13 COMPARABLES SELECTED BY THE APPELLANT IN ITS FRESH SEARCH 4 TRANSWORKS INFORMATION SERVICES LTD 19.97% CONSIDERED BY THE TPO OUT OF THE 13 COMPARABLES SELECTED BY THE APPELLANT IN ITS FRESH SEARCH 5 COSMIC GLOBAL LTD (SEG.) 15.34% CONSIDERED BY THE TPO OUT OF THE 13 COMPARABLES SELECTED BY THE APPELLANT IN ITS FRESH SEARCH 6 VISHAL INFORMATION TECHNOLOGIES LTD 41.84% NEW COMPARABLE INTRODUCED BY THE TPO 7 ASIT C MEHTA FINANCIAL SERVICES LTD (EARLIER KNOWN AS NUCLEUS NETSOFT & GIS (INDIA) LTD) 34.99% NEW COMPARABLE INTRODUCED BY THE TPO 8 GOLDSTONE INFRATCH LTD (SEG.) (EARLIER KNOWN AS GOLDSTONE TELESERVICES LTD) 23.89% NEW COMPARABLE INTRODUCED BY THE TPO 9 SPANCO LTD (SEG.) (EARLIER KNOWN AS SPANCO TELESYSTEMS & SOLUTIONS LTD) 18.91% CONSIDERED BY THE TPO OUT OF THE 13 COMPARABLES SELECTED BY THE APPELLANT IN ITS FRESH SEARCH 10 ACE SOFTWARE EXPORTS LTD 8.06% CONSIDERED BY THE TPO FROM THE TP STUDY 11 APEX KNOWLEDGE SOLUTIONS PVT LTD 21.74% NEW COMPARABLE INTRODUCED BY THE TPO 12 R SYSTEMS INTERNATIONAL LTD (SEG.) 14.29% NEW COMPARABLE INTRODUCED BY THE TPO 9 S. NO. COMPANY NAME WORKING CAPITAL ADJUSTED OP/ TC MARGIN AS PER THE TPO ORDER (USING DATA FOR FY 2005- 06) STATUS 13 FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG.) 14.67% NEW COMPARABLE INTRODUCED BY THE TPO 14 APEX ADVANCED TECHNOLOGIES LIMITED 19.15% NEW COMPARABLE INTRODUCED BY THE TPO MEAN OP/ TC 22.61% 2.9 CONSEQUENTLY, THE ADJUSTMENT OF RS. 31,21, 61,763/- WAS MADE BY THE LD. TPO WHICH WAS UPHELD BY THE LD. ASSESSING OFFIC ER (LD. AO) IN HIS DRAFT ASSESSMENT ORDER. THE APPELLANT FILED DETAILE D OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) AGAINST THE ADJUSTME NT PROPOSED BY THE LD. AO. (REFER DRP OBJECTIONS ON PGS 18 TO 155 OF THE PAPER BOOK AND FINAL ASSESSMENT ORDER ON PGS 9 TO 17 OF THE PAPERBOOK) . 2.10 THE DRP UPHELD THE ENTIRE ADDITION MADE BY THE LD. TPO AND THUS THE COMPANY FILED AN APPEAL BEFORE THE TRIBUNAL. 2.11 RESPONSES OF TPO AND DRP TO APPELLANTS CON TENTIONS AGAINST THE COMPARABLES S. NO. COMPANY NAME WORKING CAPITAL ADJUSTED OP/TC RESPONSES OF TPO AND DRP TO APPELLANTS CONTENTIONS 1 ALLSEC TECHNOLOGIES LTD. 28.62% APPELLA NT: ALLSEC HAS BEEN CONTESTED BY THE APPELLANT AS THE SAME IS FULL FLEDGED RISK BEARING ENTREPRENEUR COMP ANY AND ALSO HAS HIGH AMP EXPENSES , ABNORMAL MARGIN AND HA S UNDERGONE BUSINESS RESTRUCTURING DURING THE YEAR. F URTHER THE COMPANY ALSO FAILS RPT CRITERIA (REFER DRP OBJECTIONS ON PG 67 OF THE PAPER BOOK). TPO: (REFER TPO ORDER ON PGS 240 TO 243 OF THE PAPER BOOK) THE LD. TPO HAS STATED THAT ALL THE COMPARABLES ARE RISK BEARING ENTITIES. 10 S. NO. COMPANY NAME WORKING CAPITAL ADJUSTED OP/TC RESPONSES OF TPO AND DRP TO APPELLANTS CONTENTIONS THE TPO HAS ALSO COMMENTED THAT THE ASSESSEE HAS NOT SHOWN HOW THE BUSINESS RESTRUCTURING HAS AFFECTED THE COMPANYS OPERATIONS OR RESULTS, THUS, ARGUMENT OF THE ASSESSEE IS NOT ACCEPTABLE. DRP: THE LD. DRP CONFIRMED THE ACTION OF THE TPO (REFER DRP DIRECTIONS ON PGS 165 OF THE PAPERBOOK). 2 ASIT C. MEHTA FINANCIAL SERVICES LTD. (SEGMENTAL) (NUCLEUS NETSOFT AND GIS INDIA LTD) (ASIT) 34.99% APPELLANT: ASIT HAS BEEN CONTESTED BY THE APPELLANT ON ACCOUNT OF DIVERSIFIED OPERATIONS OF THE SEGMENT (E NGAGED IN ITES AND SOFTWARE DEVELOPMENT), IMPACT OF AMALGAMAT ION ON FINANCIALS, RELATED PARTY TRANSACTIONS AND ABNORMAL MARGINS. (REFER DRP OBJECTIONS ON PG 74 OF THE PAPERBOOK) TPO: (REFER TPO ORDER ON PG 219-221 OF THE PAPERBOOK) THE TPO HAS STATED THAT THE ARGUMENTS OF THE ASSESS EE ON FUNCTIONAL COMPARABILITY AND BUSINESS RESTRUCTURING ARE NOT ACCEPTABLE AS THE COMPANY WAS SELECTED BY THE ASSESSEE HIMSELF IN ITS TP STUDY. ALSO, THE LD. TPO IN THE ORDER HAS STATED THAT THE ASSESSEE WAS NOT ABLE TO DEMONSTRATE THE EFFECT OF RESTRUCTURING IN THE BUSINESS OPERATIONS OR RESULTS IN INDIA. THE TPO REJECTED THE CLAIM REGARDING ABNORMAL MARGIN BY RELYING ON THE CASE OF SAP LABS (SUPRA). THE TPO WAS SILENT ON RELATED PARTY TRANSACTIONS CARRIE D OUT BY THIS COMPANY. DRP: THE LD. DRP CONFIRMED THE ACTION OF THE TPO. (REFER DRP DIRECTIONS ON PGS 165 OF THE PAPERBOOK). 3 30.20% APPELLANT : MAPLE HAS BEEN CONTESTED BY THE APPELLANT FOR NON AVAILABILITY OF THE ANNUAL REPORT FOR THE FY 20 05-06 AT THE TIME OF PREPARATION OF THE TP STUDY AND DURING THE COURSE OF TRANSFER PRICING ASSESSMENT PROCEEDINGS. THE ANNUAL REPORT WAS AVAILABLE AT THE TIME OF DRP ASSE SSMENT 11 S. NO. COMPANY NAME WORKING CAPITAL ADJUSTED OP/TC RESPONSES OF TPO AND DRP TO APPELLANTS CONTENTIONS MAPLE ESOLUTIONS LTD. (MAPLE) PROCEEDINGS. THE APPELLANT HAS ALSO STATED THAT THE COMPANY HAS ABNORMAL MARGIN DURING THE FY 2005-06 (REFER DRP OBJECTIONS ON PGS 65 OF THE PAPER BOOK). TPO: THE LD. TPO REJECTED THE APPELLANT'S CONTENTION ST ATING THAT FINANCIAL ARE AVAILABLE IN THE PUBLIC DOMAIN. ALSO, THE TPO REJECTED THE CLAIM REGARDING ABNORMAL MARGIN BY RELYING ON THE CASE OF SAP LABS (SUPRA). (REFER TPO ORDER ON PG 239-240OF THE PAPER BOOK) DRP: THE LD. DRP CONFIRMED THE ACTION OF THE TPO (REFER DRP DIRECTIONS ON PGS 165 OF THE PAPERBOOK). 4 VISHAL INFORMATION TECHNOLOGIES LTD. (VISHAL) 41.84% APPELLANT: VISHAL HAS BEEN CONTESTED BY TH E APPELLANT AS THE SAME IS ENGAGED IN PROVIDING AGENCY SERVICES, BUSIN ESS RESTRUCTURING AND ABNORMAL MARGIN (REFER DRP OBJECTIONS ON PGS 71-73 OF THE PAPER BOOK). TPO: (REFER TPO ORDER ON PGS 245-248 OF THE PAPER BOOK) AGENCY SERVICES : THE LD. TPO HAS STATED THAT THE EXPENSES APPEARING UNDER THE HEAD DATA ENTRY AND VENDOR PAYMENT INCLUDES THE PAYMENTS MADE TO THE EMPLOYEES FOR DATA ENTRY IN THE PREMISES OF THE COMPANYS BUSINESS CENTRES. BUSINESS RESTRUCTURING: THE TPO HAS ALSO COMMENTED THAT THE ASSESSEE HAS NOT SHOWN HOW THE BUSINESS RESTRUCTURING HAS AFFECTED THE COMPANYS OPERATIONS OR RESULTS, THUS, ARGUMENT OF THE ASSESS EE IS NOT ACCEPTABLE. DRP: THE LD. DRP CONFIRMED THE ACTION OF THE TPO (REFER DRP DIRECTIONS ON PGS 165 OF THE PAPERBOOK). 12 2.12 WITHOUT PREJUDICE TO THE OTHER CONTENTIONS AGAINST THE APPROACH FOLLOWED BY THE LD. TPO, THE FUNDAMENTAL CONTENTION S OF THE APPELLANT AGAINST THE LD. TPO/LD. DRPS APPROACH ARE DISCUSSE D IN DETAIL BELOW: RE: GROUND NO. 2.9: INCLUSION OF FUNCTIONALLY DISSI MILAR COMPANIES ALLSEC TECHNOLOGIES LTD. (ALLSEC) TPO/DRP SUBMISSION]S AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO 456 TO 458 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO 243 OF PAPERBOOK DRP SUBMISSION : PLEASE REFER PAGE NO 67 OF PAPERBOOK DRP DIRECTIONS: PLEASE REFER PAGE NO 156 -167 OF PAPERBOOK ACTIVITIES CARRIED OUT BY ALLSEC: ALLSEC IS ENGAGED IN THE PROVISION OF VOICE AND DAT A SERVICES TO ITS INTERNATIONAL AND DOMESTIC CLIENTS IN THE INFORMATI ON TECHNOLOGY ENABLED SERVICES SEGMENT. ( REFER PAGE 31 OF COMPENDIUM OF ANNUAL REPORTS) THE APPELLANT WOULD LIKE TO STATE THAT EVEN IF ALLS EC PERFORMS FUNCTIONS WHICH ARE BROADLY COMPARABLE TO THE FUNCT IONS BEING PERFORMED BY CONVERGYS INDIA, IT CANNOT BE CONSIDER ED AS COMPARABLE DUE TO THE EXTRAORDINARY EVENTS THAT HAV E TAKEN PLACE DURING THE YEAR WHICH NEITHER CAN BE QUANTIFIED NOR SUITABLE ADJUSTMENTS CAN BE MADE FOR THE SAME. THE APPELLANT WOULD LIKE TO BRING YOUR HONORS ATTENTION TO THE ACQUISITIONS MA DE BY ALLSEC DURING THE SAID YEAR. IN THIS REGARD, RELIANCE IS ALSO PLACED ON THE RECE NT JUDGEMENT OF DELHI HIGH COURT IN CASE OF CHRYSCAPITAL INVESTMENT INVESTMENT ADVISORS (INDIA) PRIVATE LIMITED VS DCIT (ITA 417/2014) QUOTE 32..NOW , THE SEQUITUR OF RULE 10B(2) AND (3) IS THAT IF THE COMPARABLE ENTITY OR ENTITYS TRANSACTIONS BROADLY CONFORM TO THE ASSESSEES FUNCTIONING, IT HAS TO BE ENTER INTO TH E MATRIX AND BE APPROPRIATELY CONSIDERED THE OTHER EXERCISE WHICH THE TPO HAS TO NECESSARILY PERFORM IS THAT IF THERE ARE SOME DIFFERENCES , AN ATTEMPT TO ADJUS T THEM TO ELIMINATE MATERIAL DIFFERENCES SHOULD BE MADE UNQUOTE FULL FLEDGED RISK BEARING ENTREPRENEURIAL COMPANY : ALLSEC IS A FULL FLEDGED ENTREPRENEUR THAT OPERATES IN THE OPEN MARKET UNDER COMPETITIVE CONDITIONS AND A HISH RISK ENVIRO NMENT. ( REFER PAGE 30-31 OF COMPENDIUM OF ANNUAL REPORTS ) EXTRAORDINARY EVENTS ( BUSINESS RESTRUCTURING) 13 DURING THE FINANCIAL YEAR 2005 - 06, EXTRA ORDINARY EVENTS LIKE AMALGAMATION HAS TAKEN PLACE WHICH HAVE IMPACTED TH E FINANCIAL RESULTS OF THE COMPANY WHICH RESULTED IN HIGHER PRO FIT FOR THE COMPANY - THE COMPANY HAS ACQUIRED B2K CORP PRIVATE LIMITED SERVICES, A COMPANY LOCATED IN HANDLING HIGH END TE CHNICAL SUPPORT SERVICES AND HAS GOT CLIENTS IN THIS VERTICAL. B2K WAS ACQUIRED IN JANUARY 2006. INDIA, HAVING A LARGER MARKET SHARE I N THE GLOBAL TECHNICAL SUPPORT OUTSOURCING BUSINESS, THIS ACQUIS ITION WOULD ENABLE THE COMPANYS CONSOLIDATION IN THIS VERTICAL HAS PAVED THE WAY TO APPROACH A FEW LARGE PLAYERS IN THE US WHO A RE PROPOSING TO OUTSOURCE THEIR TECHNICAL SUPPORT REQUIREMENT TO AN OFFSHORE LOCATION. ( REFER PAGE 20 OF COMPENDIUM OF ANNUAL REPORTS) RELIANCE IS PLACED ON THE FOLLOWING CASE WHICH SUPP ORT THE EXCLUSION OF A COMPARABLE IN THE EVENT OF AMALGAMATION/ MERGE R: PETRO ARALDITE PRIVATE LIMITED VS DCIT (ITA 6217/ MUM/ 2012 ) (PLEASE REFER TO PARA 18 ON PAGE NO 127 OF THE CASE LAW COMPENDIUM) QUOTE 18. THAT A COMPANY CANNOT BE CONSIDERED AS A COMPARABLE BECAUSE OF EXCEPTIONAL FINAL RESULTS DUE TO MERGERS/ DE-MERGERS.. UN QUOTE TOLUNA INDIA PVT. LTD. V ACIT (ITA NO.5645/DEL/2011 ) (PLEASE REFER TO PARA 31.2 ON PAGE 167 OF THE CASE LAW COMP ENDIUM) QUOTE 31.2 . THE MUMBAI BENCH OF THE TRIBUNAL IN PETRO A RALDITE (P) LIMITED VS DCIT [(2013) 154 TTJ (MUM) 176] HAS HELD THAT A COMPANY CANNOT BE CONSIDERED AS COMPARABLE BECAUSE OF EXCEPTIONAL FINANCIAL RESULTS DUE TO MERGERS/ DEMER GERS UNQUOTE ABNORMAL GROWTH DURING THE YEAR : THE COMPANY HAS RECORDED 59.94% GROWTH IN TERMS OF EXPORT REVENUE A ND 74.85% IN DOMESTIC REVENUE. THE GROWTH IS MAINLY DUE TO INCRE ASED BUSINESS FROM OUR EXISTING CLIENTS AND ACQUISITION OF NEW CL IENTS/ PROCESSES CONSTITUTES 29% OF TOTAL REVENUE. ( REFER PAGE 33 & 34 OF COMPENDIUM OF ANNUAL REPOR TS) 14 MAPLE E SOLUTIONS LTD. (MAPLE) TPO /DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO 454-455 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO 239-240 OF PAPERBOOK DRP SUBMISSION : PLEASE REFER TO PAGE NO65 OF THE PAPERBOOK DRP DIRECTIONS: PLEASE REFER TO PAGE NO 156-167 OF PAPERBOOK THE APPELLANT WOULD LIKE TO STATE THAT EVEN IF MAPL E E SOLUTIONS LTD. PERFORMS FUNCTIONS WHICH ARE BROADLY COMPARABLE TO THE FUNCTIONS BEING PERFORMED BY CONVERGYS INDIA, IT CANNOT BE CO NSIDERED AS COMPARABLE DUE TO THE BUSINESS REPUTATION OF RASTOG I GROUP, OWNING MAPLE E SOLUTIONS IS UNDER SERIOUS INDICTMENT. IN V IEW OF THE QUESTION MARK ON THE REPUTATION OF OWNER, IT WOULD BE UNSAFE TO TAKE THE RESULTS FOR THE COMPARISON OF THE PROFITABILITY OF THE ASSESSEE. IN THIS REGARD, RELIANCE IS ALSO PLACED ON THE RECE NT JUDGEMENT OF DELHI HIGH COURT IN CASE OF CHRYSCAPITAL INVESTMENT INVESTMENT ADVISORS (INDIA) PRIVATE LIMITED VS DCIT (ITA 417/2014) RULING OF HONBLE DELHI TRIBUNAL IN THE CASE OF CRM SERVICES [2011] 14 TAXMANN.COM 96 (DELHI) ( REF ER PARA 17.5 PAGE 73 TO 73 OF COMPENDIUM OF CASE LAWS ) WHEREIN THE TRIBUNAL REJECTED MAPLE ON ACCOUNT OF D OUBTS REGARDING THE REPUTATION OF THE OWNER OF THIS GROUP (INVOLVED IN FRAUDULENT ACTIVITIES) AND HENCE FINANCIAL RESULTS CANNOT BE TAKEN FOR COMPARABILITY PURPOSES. THE RELEVANT EXTRACT OF THE RULING IS AS FOLLOWS (REFER NEWS ARTICLE FROM ZEE NEWS) : QUOTE .FURTHER, THE BUSINESS REPUTATION OF RASTOGI GROU P, OWNING MAPLE E SOLUTIONS AND TRITON CORPORATION, IS UNDER SERIOUS INDICTMENT. THEY ARE ALSO CARRYING ON THE BUSINESSE S OF DATA PROCESSING SERVICES AND ITES SERVICES APART FROM BP O SERVICES. IN VIEW OF A QUESTION MARK ON THE REPUTATION OF THE OWN ER, ALBEIT FOR EARLIER YEARS, IT WOULD BE UNSAFE TO TAK E THEIR RESULTS FOR COMPARISON OF THE PROFITABILITY OF THE ASSESSEE UNQUOTE (EMPHASIS SUPPLIED) FURTHER, MAPLE HAS BEEN REJECTED BY THE HONBLE TRI BUNAL IN THE RECENT RULINGS OF STREAM INTERNATIONAL SERVICES PVT. LTD. (STREAM INTERNATIONAL) (ITA NO. 8997/M/2010, ITAT MUMBAI) ( REFER PARA 17 & 18 ON PAGE 29-30 OF COMPENDIUM OF CASE LAWS ) AS THE DIRECTORS OF THIS COMPANY WERE INVOLVED IN FRAUD AND HENCE THE FINANCIALS WERE UNRELIABLE. OWNERSHIP OF INTANGIBLES ACCORDING TO THE ANNUAL REPORT, THE COMPANYOWNS INT ANGIBLES WORTH RS 10,577,931 I.E. 27% OF ITS TOTAL FIXED ASSETS WHICH ULTIMATELY RESULTS IN GROWTH OF REVENUE AND PROFIT. ON THE OTH ER HAND, THE APPELLANT HARDLY OWNS ANY INTANGIBLES, THEREFORE IT CANNOT BE 15 MAPLE E SOLUTIONS LTD. (MAPLE) TPO /DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION COMPARED WITH A COMPANY LIKE MAPLE. ( R EFER 144 OF COMPENDIUM OF ANNUAL REPORTS) VOLATILE MARGINS MAPLE SHOWING SIGNIFICANT VARIATION IN ITS PROFIT T RENDS OVER THE YEARS (AS SHOWN IN THE TABLE BELOW) REFLECTS THE FACT THA T IT ASSUMES SIGNIFICANT ENTREPRENEURIAL RISKS (WHICH MAY INCLUDE MARKET RISK, PRICE RISK, CAPACITY UTILISATION RISK, ETC.), WHICH MAY BE BECAUSE OF MANAGEMENT INEFFICIENCIES AND/OR FACING EXTRA ORDIN ARY CIRCUMSTANCES. ACCORDINGLY, TYPICALLY THE RETURNS E ARNED BY MAPLE WOULD ALSO INCLUDE RETURN TOWARDS ASSUMING SUCH ENT REPRENEURIAL RISKS. ON THE CONTRARY, THE APPELLANT DOES NOT ASSU ME ANY ENTREPRENEURIAL RISKS. OPERATING PROFIT MARGIN (%) OF MAPLE FROM FY 2003-0 4 TO 2008-09 2003-04 2004-05 2005-06 2006-07 2007-08 2008 - -100% 37.38% 36.83% 34.32% 22.94% - 65.26% ACCORDINGLY, SINCE THE FAR PROFILE OF THIS COMPANY IS DIFFERENT FROM THE FAR PROFILE OF THE APPELLANT (WHICH IS CLEARLY REFLECTED IN THE VOLATILE MARGINS OF MAPLE), IT CAN NOT BE CONSIDERED FOR THE PURPOSE OF COMPARABILITY WITH THE APPELLANT WHICH EARNS A STEADY RETURN FOR ITS ACTIVITIES. IN THIS REGARD, RELIANCE IS ALSO PLACED ON THE RECE NT JUDGEMENT OF DELHI HIGH COURT IN CASE OF CHRYSCAPITAL INVESTMENT INVESTMENT ADVISORS (INDIA) PRIVATE LIMITED VS DCIT (ITA 417/2014) QUOTE 36..IN ANY CASE, IN THE EVENT THAT VOLATILITY IS ON ACCOUNT OF A MATERIALLY DIFFERENT ASPECT INCAPABLE OF BEING ACCO UNTED FOR, THE ANALYSIS UNDER RULE 10(B)(3) WOULD EXCLUDE SUCH AN ENTITY FROM BEING CONSIDERED AS A COMPARABLE UNQUOTE THE ABOVE ARGUMENT OF THE APPELLANT ALSO FINDS SUPP ORT IN THE TRIBUNAL RULING OF ACTIS ADVISERS PRIVATE LIMITED ITA NO. 5277/DEL/2011 AND ITA NO. 958/DEL/2012)( REFER PARA 30 & 31 PAGE 214, 215 OF COMPENDIUM OF CASE LAWS ) ASIT C MEHTA ( ASIT) 16 MAPLE E SOLUTIONS LTD. (MAPLE) TPO /DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO 463 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE 219-221 OF THE PAPERBOOK DRP SUBMISSION : PLEASE REFER TO PAGE NO 74 OF OF THE PAPERBOOK DRP DIRECTIONS: PLEASE REFER TO PAGE NO 156-167 OF THE PAPERBOOK FUNCTIONALLY INCOMPARABLE THE COMPANY IS ENGAGED IN PROVISION OFBOTH IT ENABL ED SERVICES AND SOFTWARE DEVELOPMENT SERVICES ALONG WITH OTHER DIVE RSIFIED SERVICES IN THE NATURE OF PORTFOLIO MANAGEMENT SERVICES AND INVESTMENT ACTIVITIES. ( REFER PAGE 183, 185AND 191 OF COMPENDIUM OF ANNUA L REPORTS) DIVERSIFIED OPERATIONS OF THE SEGMENT THE APPELLANT REITERATES ITS CONTENTIONS REGARDING DIVERSIFIED OPERATIONS OF ASIT C. MEHTA PUT FORTH BEFORE THE LD . DRP WHICH ARE REPRODUCED BELOW FOR YOUR HONOURS READY REFERENCE QUOTE FACTS SUBMITTED BEFORE THE TPO: IN THE NOTICE, THE TPO HAD PROPOSED TO INCLUDE ASIT AS A COMPARABLE TO THE IT ENABLED SERVICES PROVIDED BY THE ASSESSEE . THE ARGUMENTS OF THE ASSESSEE VIDE SUBMISSION DATED DECEMBER 29, 2009 AND OCTOBER 8, 2010 IN THIS CONNECTION ARE DISCUSSED BE LOW: FUNCTIONALLY NOT COMPARABLE: ON A PERUSAL OF THE FY 2005-06 ANNUAL REPORT OF NUCLEUS NETSOFT & GIS INDIA LIMITE D AS WELL AS REPLY SUBMITTED BY COMPANY IN RESPONSE TO NOTICE U/ S 133(6), IT IS OBSERVED THAT THE INCOME FROM OPERATIONS I.E., TH E REVENUE EARNED BY THIS COMPANY COMPRISES REVENUES NOT ONLY FROM PR OVISION OF IT ENABLED SERVICES BUT ALSO FROM THE SOFTWARE DEVELOP MENT SERVICES. IN VIEW OF THE DIVERSIFIED NATURE OF THE COMPANYS OPERATIONS THAT ARE MORE THAN JUST PROVISION OF IT ENABLED SERVICES , BASED ON DIFFERENCES IN FUNCTIONAL PROFILE, THIS COMPANY SHO ULD NOT INCLUDED AS A COMPARABLE COMPANY. ( REFER PAGE 183 OF COMPENDIUM OF ANNUAL REPORTS ) . BUSINESS RESTRUCTURING/ AMALGAMATION THE APPELLANT WOULD LIKE TO STATE THAT EVEN IF ASIT C MEHTA PERFORMS FUNCTIONS WHICH ARE BROADLY COMPARABLE TO THE FUNCT IONS BEING 17 MAPLE E SOLUTIONS LTD. (MAPLE) TPO /DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION PERFORMED BY CONVERGYS INDIA, IT CANNO T BE CONSIDERED AS COMPARABLE DUE TO THE EXTRAORDINARY EVENTS THAT HAV E TAKEN PLACE DURING THE YEAR WHICH NEITHER CAN BE QUANTIFIED NOR SUITABLE ADJUSTMENTS CAN BE MADE FOR THE SAME. THE APPELLANT WOULD LIKE TO BRING YOUR HONORS ATTENTION TO THE ACQUISITIONS MA DE BY THIS COMPANY DURING THE SAID YEAR WHICH HAS IMPACTED TH E FINANCIAL STATEMENTS / PROFITABILITY OF THE COMPANY. THE RELE VANT EXTRACTS FROM THE ANNUAL REPORT IN RELATION TO AMALGAMATION ARE G IVEN BELOW FOR YOUR HONOURS READY REFERENCE. ( REFER PAGE 159 OF COMPENDIUM OF ANNUAL REPORTS ) THE SCHEME OF AMALGAMATION (THE SCHEME) OF ERSTW HILE NUCLEUS NETSOFT AND GIS (INDIA) LTD, THE TRANSFEROR COMPANY , WITH YOUR COMPANY WAS SANCTIONED BY THE HONBLE HIGH COURT OF JUDICATURE OF BOMBAY ON FEBRUARY 22, 2006. ON COMPLYING WITH T HE REQUISITE FORMALITIES, THE SCHEME BECAME EFFECTIVE AND OPERAT IVE RETROSPECTIVELY FROM THE APPOINTED DATE OF 1 APRIL, 2005 AS PER THE SCHEME . IN THE ACCOMPANYING FINANCIAL STATEMENTS, RESULTS OF THE TRANSFEROR COMPANY HAVE BEEN INCORPORATED AN D THE FIGURES GIVEN HEREIN AND ELSEWHERE IN THIS ANNU AL REPORT ARE NOT STRICTLY COMPARABLE WITH THOSE OF PR EVIOUS YEAR. THE FINANCIAL YEAR UNDER REVIEW OF 2005-06 WAS YEA R OF GROWTH AND CONSOLIDATION FOR YOUR COMPANY. THE COMPANY POS TED A STRONG TOP-LINE PERFORMANCE (POST AMALGAMATION) WITH TOTAL SALES AND SERVICES REVENUES OF RS 56.77 MILLI ON . (EMPHASIS SUPPLIED) THE ABOVE EXTRACTS FROM THE ANNUAL REPORT OF THE CO MPANY AMPLY DEMONSTRATE THAT THE FINANCIAL STATEMENTS OF THE CO MPANY FOR FY 2005-06 HAVE BEEN IMPACTED BY THE BUSINESS RESTRUCT URING EXERCISE UNDERTAKEN BY THE COMPANY DURING THE RELEVANT FY AN D HENCE, CANNOT BE RELIED UPON FOR JUDGING APPELLANTS PROFI TABILITY FROM RENDERING OF IT ENABLED BACK OFFICE SUPPORT SERVIC ES. THE APPELLANT WOULD LIKE TO RELY ON THE QUARK RULING 2010- TIOL-31-ITAT-CHD-SB WHEREIN THE HONBLE SPECIAL BENCH OF CHANDIGARH TRIBUNAL HELD THATMERELY BECAUSE A COMPA NY HAS BEEN SELECTED AS COMPARABLE BY THE ASSESSEE HIMSELF IN T HE TP DOCUMENTATION, THE ASSESSEE CANNOT BE ESTOPPED FROM SEEKING ITS EXCLUSION LATER DURING THE COURSE OF AUDIT/ APPELLA TE PROCEEDINGS. THE RELEVANT EXTRACT FROM THE RULING IS GIVEN BELOW FOR YOUR HONOURS 18 MAPLE E SOLUTIONS LTD. (MAPLE) TPO /DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION READY REFERENCE: QUOTE 36. THE AFORESAID DECISIONS AND GUIDELINES MAY NOT BE EXACTLY ON IDENTICAL FACTS BEFORE US BUT THEY EMPHATICALLY SHOW THAT TAXPAYER IS NOT ESTOPPED FROM POINTING OUT A MISTAKE IN THE ASSESSMENT THOUGH SUCH MISTAKE IS THE RESULT OF EVIDENCE ADDUCED BY THE TAXPAYER .. 38. ACCORDINGLY ON FACTS AND CIRCUMSTANCES OF THE C ASE, WE HOLD THAT TAXPAYER IS NOT ESTOPPED FROM POINTING OUT THA T DATAMATICS HAS WRONGLY BEEN TAKEN AS COMPARABLE .. UNQUOTE (EMPHASIS SUPPLIED) FURTHER, RELIANCE IS ALSO PLACED ON THE SAPIENT RULING PASSED BY THE JURISDICTIONAL HONBLE DELHI TRIBUNAL , WHEREIN THE HONBLE TRIBUNAL HELD THAT THE ASSESSEE CANNOT BE ESTOPPED FROM REJE CTING A COMPARABLE COMPANY MERELY ON THE GROUND THAT THE SA ME HAS BEEN INITIALLY INCLUDED IN ITS TP DOCUMENTATION REPORT. THE RELEVANT EXTRACT FROM THE RULING IS GIVEN BELOW FOR YOUR HON OURS READY REFERENCE: QUOTE THE FACT THAT ASSESSEE HAS HIMSELF INCLUDED IN THE L IST OF COMPARABLES, INITIALLY CANNOT ACT OF ESTOPPEL PARTICULARLY IN LIGHT OF THE FACT THAT ASSESSING OF FICER HAS ONLY CHOSEN THE COMPANIES WHICH ARE SHOWING PROFITS AND HAS REJECTED THE OTHER COMPANIES WHICH SHOWED LOSS. IN THIS REGARD RELIANCE CAN BE PLACED UPON ITAT SPECIAL BENCH DECISION IN THE CASE OF QUARK SYSTEM VS. DCIT (2010) 38 SOT 307, WHICH SUPPORTS ASSESSEE CONTENTI ON OF REMOVAL OF ZENITH INFOTECH FROM COMPARABLES, AS IT SHOWED SUPER PROFITS. UNQUOTE (EMPHASIS SUPPLIED) IN VIEW OF THE ABOVE PERTINENT JUDICIAL PRECEDENTS, THE APPELLANT CANNOT BE ESTOPPED FROM REJECTING A COMPARABLE COMP ANY I.E. ASIT C MEHTA, MERELY ON THE GROUND THAT THE SAME HAS BEEN INITIALLY INCLUDED IN ITS TP STUDY. VISHAL INFORMATION TECHNOLOGIES LTD. (CORAL HUB LIM ITED) (VISHAL) 19 TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO 459 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO245-248OF THE PAPERBOOK DRP SUBMISSION : PLEASE REFER TO PAGE NO 71-73OF PAPERBOOK DRP DIRECTIONS: PLEASE REFER TO PAGE NO 156-167OF THE PAPERBOOK (A) FUNCTIONALLY DIFFERENT (SIGNIFICANT PAYMENT TOWARDS VENDORS) DURING THE FY 2005-06, THE COMPANY HAS MADE SIGNIFI CANT PAYMENT TOWARDS VENDORS (APPROX. 45% OF SALES) ( REFER PAGE 238 OF COMPENDIUM OF ANNUAL REPORTS ) . ON THE OTHER HAND, IT HAS LOW PERSONNEL COST (1.2 5%) AS A PERCENTAGE OF SALES AS COMPARED TO THE APPELLANT WH OSE PERSONNEL COST CONSTITUTE A MAJOR PROPORTION (MORE THAN 50%) OF IT S SALES. IT IS EVIDENT FROM THE FACTS THAT THE COMPANY PROVIDES AGENCY SER VICES BY WAY OF OUTSOURCING SERVICES TO THIRD PARTIES AND ACTING AS AN INTERMEDIARY BETWEEN THE FINAL CUSTOMER AND VENDOR. THE INTERMEDIARY FU NCTIONS OF VISHAL CAN ONLY BE COMPARED TO THAT OF A DISTRIBUTOR WHICH TAK ES TITLE TO SERVICE/ PRODUCT FOR RESALE TO THE CUSTOMER WHEREAS THE APPE LLANT IS A PROVIDER OF BACK OFFICE SERVICES ON ITS OWN. THUS, APPELLANT'S ITES SERVICES CANNOT BE COMPARED WITH THE AGENCY /DISTRIBUTION FUNCTION OF VISHAL. FURTHER, VISHAL HAS BEEN REJECTED BY THE HONBLE TRIBUNAL IN THE RULINGS OF GOOGLE INDIA PVT. LTD. VS DCIT (ITA NO. 1368/ BANG/2010, TS-771-ITAT-2012(BANG)-TP, ITAT BANGALOR E) (PLEASE REFER TO PARA 15 PAGE 10, 11 OF THE CASE LA W COMPENDIUM), M/S TNS INDIA PVT. LTD., V ACIT (ITA NO. 108/HYD/20 11) (PLEASE REFER TO PARA 4 (1) PAGE 82,83 OF THE CASE LAW COM PENDIUM) AS VISHAL WAS OUTSOURCING MOST OF ITS WORK WHEREAS THE TAXPAYER WAS CARRYING OUT THE WORK BY ITSELF AND HENCE IT IS FUNCTIONALLY DIFFERENT TO THE APPELLANT. THE RELEVANT EXTRACT OF GOOGLE RULING IS PRODUCED B ELOW: QUOTE 15..WHEN COMPANY HAS OUTSOURCED ITS ITES SERVICES , IT CANNOT BE SAID THAT ITS BUSINESS RESULTS WOULD BE COMPARABLE TO AN Y OTHER ITES SERVICE PROVIDER RENDERING THE SERVICES ENTIRELY ON ITS OWN . IN SUCH CIRCUMSTANCES NET MARGINS OF THE TWO COMPARABLES CANNOT BE ON SAM E BASIS THE TRIBUNAL AT MUMBAI HAS HELD THAT VISHAL INFORMATION TECHNOLOGIES LTD HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES OF ITES COMPANY AS IT HAS OUTSOURCED IT S SERVICES UNQUOTE 20 SECONDARY CONTENTION GROUND NO. 2,12 : RISK ADJUSTMENT NOT ALLOWED TO T HE APPELLANT TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TP O SUBMISSION: PLEASE REFER TO PAGE NO 478-487 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO263-292 OF THE PAPERBOOK DRP SUBMISSION : PLEASE REFER TO PAGE NO 7118-122 OF PAPERBOOK DRP DIRECTIONS: PLEASE REFER TO PAGE NO 165-166OF THE PAPERBOOK THE LD. TPO DISALLOWED THE APPELLANTS CLAIM FOR A RISK ADJUSTMENT BASED ON THE TWELVE REASONS ( REFER PAGE 284-285 OF PAPERBOOK) WHICH HAVE BEEN SPECIFICALLY DEALT WITH BY THE HON BLE DELHI TRIBUNAL IN THE CASE OF MOTOROLA SOLUTIONS INDIA PRIVATE LIMITED VS DCIT (ITA NO.5637/DEL/2011) . THE RELEVANT PARAGRAPHSARE REPRODUCED BELOW: PARA 116.1 LD. TPO, AFTER DETAILED DISCUSSION, IN RESPECT OF VARIOUS RISKS CLAIMED BY ASSESSEE, REJECTED THE ASSESSEES CLAIM FOR FOLLOWING REASONS: 1. THE TAX PAYER HAS NOT GIVEN ANY DETAILS REGARDING T HE AUTHORITY OF THE ABOVE METHOD DESCRIBING CAPM MODEL FOR ADJUSTMENT TOWARDS RISK. IT IS NOT CLEAR WHETHER TH IS TYPE OF CALCULATION IS ACCEPTABLE IN ANY TAX JURISDICTION F OR THE PURPOSE OF RISK PREMIUM ADJUSTMENTS. ITS ACCEPTABILITY BY A NY RENOWNED AND RECOGNIZED RESEARCH INSTITUTION ACROSS THE WORLD HAS ALSO NOT BEEN SHOWN. THE MANNER IN WHICH THE RI SK ADJUSTMENT IS COMPUTED BY THE TAXPAYER IS NOT FOLLO WED BY ANY COUNTRY OR ORGANIZATION OF INTERNATIONAL REPUTE LIK E OECD. IN FACT, EVEN THE OECD IS RELUCTANT TO TAKE THE RISK A DJUSTMENT AS PART OF THE GUIDELINES AS THERE ARE DIVERGENT VIEWS ON THIS ISSUE AMONG THE MEMBER COUNTRIES OF OECD AND MANY COUNTRI ES FEEL THAT THERE IS NO STRAIGHT JACKET FORMULA FOR RISK A DJUSTMENT AS IT DEPENDS ENTIRELY ON THE FACTS AND CIRCUMSTANCES OF THE CASE. THUS RISK ADJUSTMENT IS CASE SPECIFIC, FUNCTION SPE CIFIC AND ALSO DEPENDS ON THE NATURE OF FUNCTIONS (INCLUDING RISKS ) CARRIED OUT BY THE COMPARABLE COMPANIES. 2. THE TAX PAYER HAD NOT GIVEN ANY EVIDENCE OR ARGUMEN T REGARDING HOW THE ASSUMPTIONS OF CAPM MODEL ARE TRU E IN THE CASE OF THE AE WHEN IT IS DOING BUSINESS WITH THE T AXPAYER. 3. THE CAPM MODEL HAS SOME WEAKNESS, THE MAIN BEING TH AT THE MODEL DOES NOT RECOGNIZE THE PRESENCE OF HUMAN CAPI TAL, WHICH IS THE MAIN DRIVING SOURCE FOR REVENUES IN THE SOFT WARE SERVICE INDUSTRY. 4. THE TAXPAYER CONSIDERED ONLY LISTED COMPANIES. BUT, THERE IS A METHOD OF COMPUTATION OF SIMILAR NATURE IN THE INDE X. THERE IS A MANNER IN WHICH UNLISTED COMPANIES BETA WOULD BE CALCULATED. 5. WHEREVER MARKET DATA WAS NOT AVAILABLE, THE BETA IS COMPUTED 21 TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION BASED ON GUIDELINE COMPANIES FROM THE SMALL CAP AND MADCAP INDICES OF BSE AND NSE. BUT, THE RISK ADJUSTMENT SH OULD ALWAYS BE BASED ON THE COMPARABLES SELECTED BY THE TAXPAYER OR THE TPO AND NOT ON THE OTHER COMPANIES, WHICH AR E NOT EXAMINED AND OTHERWISE, NOT COMPARABLE FUNCTIONALLY . THUS, THE BETA OF UNLISTED COMPANIES OR COMPANIES WHERE D ATA WAS NOT AVAILABLE SHOULD BE THE AVERAGE OF THE BETA OF THE REMAINING COMPARABLE COMPANIES. 6. THE TAXPAYER IGNORED NEGATIVE RISK ADJUSTMENT IN SO ME OF THE COMPARABLE COMPANIES. THIS LOOKS ABSURD AS ANY RISK UNDERTAKING ENTERPRISE MAY GET A NEGATIVE RETURN FO R THE RISK UNDERTAKEN AND IS POSSIBLE DUE TO THE ACTUAL REALIZ ATION OF RISK BRINGING DOWN THE PROFITABILITY BELOW THE RISK FREE RATE OF RETURN. THUS, ITS PROFITABILITY WOULD HAVE BEEN MOR E BUT FOR THE RISK UNDERTAKEN. THUS, NEGATIVE RISK ADJUSTMENT HAS TO BE CONSIDERED AND CANNOT BE IGNORED. FOR EXAMPLE, WHEN THE INDIAN STOCK MARKETS TUMBLED IN 2007 AND 2008, THE EQUITY INVESTMENTS GIVEN A NEGATIVE RETURN EVEN THOUGH THE RISK FREE RETURN IS DECENT. SO, IT IS TO IGNORE NEGATIVE RISK ADJUSTMENT. 7. THE RISK ADJUSTMENT HAS TO BE COMPUTED BASED ON THE RISK DIFFERENTIAL IF ANY, BETWEEN THE TAXPAYER AND THE C OMPARABLE COMPANIES. HOWEVER, THE TAXPAYER IGNORED WEIGHTED C OST OF CAPITAL IN THE CASE OF TAXPAYER AND RISK OF THE TAX PAYER IN TERMS OF BETA. EFFECTIVELY, THE RISK FREE RETURN WO ULD BE NULLIFIED AS THERE IS NO DIFFERENCE BETWEEN THE TAX PAYER AND THE COMPARABLE COMPANIES AND ALSO THE TAX PAYER ASSUMED THAT ITS BETA IS ZERO, WHEREAS WHEN THE RETURN IS GUARANTEED ON SALES OR COST, THE BETA IS NOT ZERO AS THE RETURN ON CAPITAL FLUCTUATES WITH REVENUE. 8. THE TAXPAYER DID NOT CONSIDER THE DIFFERENTIAL RISK ADJUSTMENT I.E. IT DID NOT CONSIDERED THE WEIGHTED COST OF CAP ITAL OF COMPARABLES TO BRING IT IN LINE WITH THE TAXPAYER. 9. THE BETA OF A CAPTIVE SOFTWARE SERVICE PROVIDER IS NOT ZERO AS THE RETURN ON CAPITAL FLUCTUATES WITH REVENUES AS T HE TAXPAYER IS FOLLOWING COST PLUS METHOD ON EXPENSES. 10. AS DISCUSSED ABOVE, THE TAXPAYER BEARS SIGNIFICANT SINGLE CUSTOMER RISK AND POLITICAL/COUNTRY RISK, WHICH MAY NOT BE COMPENSATED ADEQUATELY BY PASSING ON OTHER RISKS LI KE MARKETING RISKS ETC. TO THE PARENT. FURTHER THESE R ISKS ARE NOT CONSIDERED IN THE CASE OF TAXPAYER WHILE COMPUTING THE RISK ADJUSTMENT. 22 TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION 11. THE TAXPAYER CONSIDERED TOTAL ASSETS INCLUDING CURR ENT ASSETS AND CURRENT LIABILITIES, BUT THE CAPM HINGES UPON R ETURN ON EQUITY OR CAPITAL EMPLOYED. THE OPERATING ASSETS AR E THE MAJOR INDICTOR OF CAPITAL EMPLOYED RATHER THAN TOTAL ASSE TS. OPERATING ASSETS INCLUDES FIXED ASSETS, TRADE RECEI VABLES NET OF TRADE PAYABLES. 12. THE TAX PAYER HAS ASSUMED THAT OPERATING EXPENSES O F THE COMPARABLES WOULD NOT CHANGE AFTER RISK ADJUSTMENT. BUT, AFTER GIVING EFFECT TO RISK ADJUSTMENT, THE FINANCI AL STATEMENTS OF THE COMPARABLES SHOULD LOOK LIKE THAT OF THE TAX PAYER I.E., STRIPPING THE RISK COMPONENT. SO, THE EXPENSES PERT AINING TO THE RISK LIKE SALES AND MARKETING EXPENSES, BAD DE BTS ETC. SHOULD BE REMOVED FROM OPERATING EXPENSES AND CORRESPONDING RISK PREMIUM ADJUSTED AMOUNT HAS TO B E REDUCED FROM THE OPERATING REVENUES. HENCE, AS PER THE ABOVE DETAILED DISCUSSION, THE CO MPUTATION OF RISK ADJUSTMENT BY THE TAXPAYER IS NOT ACCEPTABLE. THERE IS NO SCIENTIFIC BASIS FOR WORKING OUT THE TAXPAYER COMPANYS BETA O R BETA OF THE UNLISTED COMPARABLE COMPANIES. THE TAXPAYER ALTOGET HER FORGOTTEN THAT THE RISK ADJUSTMENT, IF AT ALL TO BE COMPUTED, IS TO BE COMPUTED BASED ON THE DIFFERENCE BETWEEN THE ACTUAL WEIGHTED COST OF CAPITAL OF THE COMPARABLES AND WEIGHTED COST OF CAPITAL OF THE COMPARABLE COMPANIES ASSUMING SAME LEVEL OF EQUITY IN THE TOTA L FINANCES AND RISK LEVEL AS EVIDENCED BY BETA OF THE TAXPAYER. TH IS DIFFERENTIAL IS ALTOGETHER IS IGNORED MAKING THE ENTIRE EXERCISE RE DUNDANT. ............. 118.1 WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH TH E PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. WE HAVE PERUSE D THE RECORD OF THE CASE. WE HAVE ALSO GONE THROUGH THE DETAILED WR ITTEN SUBMISSIONS FILED BY ASSESSEE FROM PAGES 92 TO 104 OF THE WRITTEN SUBMISSIONS THE MAIN CONTENTION OF ASSESSEE IS IN R EGARD TO ADJUSTMENT ON ACCOUNT OF MARKET RISK BY APPLYING CA PM MODEL. IN THIS REGARD LD. TPO HAS OBSERVED THAT THE SERVICES RENDERED BY THE ASSESSE FORMS A COMPONENT WITHIN THE PRODUCTS DEVEL OPED BY THE ASSESSEE. THUS, THE ASSOCIATED ENTERPRISE INCURS MA RKETING FOR ITS PRODUCTS AND NOT ON THE SERVICES RENDERED BY THE AS SESSEE AS THEY ARE CONSIDERED IN THE PRODUCT SOLD BY THE ASSOCIATE D ENTERPRISE. THE RELATIONSHIP BETWEEN THE TAX PAYER AND ITS PARENT C OMPANY IS EXACTLY THE SAME AS THAT OF THE INDEPENDENT COMPANY AND ITS CLIENT IN THE CASE OF SOFTWARE DESIGN AND DEVELOPMENT SERV ICES. LD. TPO 23 TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION HAS OBSERVED THAT IT IS A FACT THAT THE INDEPENDENT ENTERPRISES HAVE TO BEAR THE VAGARIES OF MARKET CONDITIONS. BUT SINC E THE SOFTWARE SECTOR IS GROWING AT MORE THAN 30% CAGR (COMPOUNDED ANNUAL GROWTH RATE) FOR THE LAST 10 YEARS, IT IS NOT SHOWI NG OR AFFECTED BY ANY ADVERSE MARKET CONDITIONS. IN THE ABSENCE OF AD VERSE MARKET CONDITIONS, THE ASSESSEE HAS NOT SHOWN HOW THESE MA RKET RISKS BORNE BY THE INDEPENDENT ENTERPRISES HAD AN EFFECT ON THE PRICE AND, THUS, ON THE PROFITS DURING THE F.Y. 2005-06. FROM THESE FINDINGS OF LD. TPO, IT IS EVIDENT THAT HE HIMSELF IS AGREEABLE THAT MARKET CONDITIONS DO INFLUENCE THE INDEPENDENT ENTERPRISES . LD. TPO HAS DENIED THIS ADJUSTMENT MAINLY ON THE GROUND THAT AS SOCIATED ENTERPRISE AND OTHER INDEPENDENT COMPARABLES ARE OP ERATING ON A SIMILAR MODEL I.E. ONE BY ESTABLISHING ITS SUBSIDIA RY IN LOW EMPLOYEE COST ZONE VIZ. INDIA AND THE OTHERS BY OUTSOURCING THEIR ACTIVITIES TO OTHER ENTITIES OPERATING IN INDIA. LD. TPO HAS DRAW N PARITY BETWEEN INDEPENDENT COMPARABLES AND THE ASSESSEE ON THIS BASIS. IN OUR OPINION, THIS REASONING CANNOT BE FULLY ACCE PTED PARTICULARLY BECAUSE IT IS NOT THAT ALL THE INDEPEN DENT COMPARABLES ARE DOING ONLY THE WORK OUTSOURCED TO T HEM BY VARIOUS AES. THIS IS ONLY A CONJECTURE ON THE PA RT OF LD. TPO. WE, THEREFORE, ARE OF THE OPINION THAT MARKET RISK, IF QUANTIFIABLE, HAS TO BE ADJUSTED IN VIEW OF RULE 10B(1)(E)(III) .. WE, THEREFORE, IN THE INTEREST OF JUSTICE, RESTORE THIS MATTER TO THE FILE OF ASSESSING OFFICER/TPO TO CONSIDER THE COMPU TATION OF RISK ADJUSTMENT AS PER CAPM MODEL BY AVAILING THE SERVICES OF TECHNICAL EXPERTS . THE EXPERTS OF THE FIELD ARE TO BE APPOINTED BY BOTH THE SIDES TO COME TO AN ACCEPTABL E CONCLUSION. IT IS THE HUMBLE SUBMISSION OF THE APPELLANT THAT S INCE THE TWELVE REASONS FOR REJECTION OF CAPM AS GIVEN IN THE APPEL LANTS CASE HAVE BEEN VERBATIM REPRODUCED IN THE CASE OF MOTOROLASOLUTIONS INDIA PRIVATE LIMITED (SUPRA) JUDGEMENT, THE APPELLANTS WOULD REQUEST YOUR HONOUR TO ADJUDICATE ITS GROUND ON RIS K ADJUSTMENT ON THE SAME LINES AS IS DONE IN CASE OF MOTOROLA. WITHOUT PREJUDICE TO THE APPELLANTS CONTENTIONS AG AINST DENIAL OF RISK ADJUSTMENT BY THE LD. TPO, LEARNED AR SUBMITTED THA T EVEN IF WE EXCLUDE THE COMPARABLE COMPANIES FOR THE REASONS MENTIONED ABOVE, THE WORKING 24 CAPITAL ADJUSTED ARMS LENGTH MARGIN WORKS OUT TO 18.09% WHICH IS WITHIN 5% RANGE OF THE OP/TC MARGIN OF 15.38% ( HE REFERRED PAGE 173 OF PAPER BOOK ) EARNED BY THE APPELLANT DURING FY 2005-06. THIS PR OVIDES EVIDENCE THAT THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT DURING THE FY 2005-06 ARE AT ARMS LENGTH. THE RESULTS OF THE ANA LYSIS ARE GIVEN IN THE TABLE BELOW: S. NO. COMPANY NAME WORKING CAPITAL ADJUSTED OP/ TC MARGIN WORKING CAPITAL ADJUSTED OP/ TC MARGIN (EXCLUDING COMPANIES ON ACCOUNT OF REASONS GIVEN IN FINAL DISPOSITION COLUMN) FINAL DISPOSITION 1 MAPLE ESOLUTIONS LTD. 30.20% X (A) FUNCTIONALLY INCOMPARABLE (B) REJECTED IN CRM SERVICES RULING ON ACCOUNT OF BAD REPUTATION OF GROUP OWNER (C) VOLATILE MARGINS 2 ALLSEC TECHNOLOGIES LTD. 28.62% X (A) FULL FLEDGED RISK BEARING ENTREPRENEUR COMPANY (C) ABNORMALLY HIGH MARGIN (D) BUSINESS RESTRUCTURING 3 DATAMATICS FINANCIAL SERVICES LTD (SEG.) 24.89% 24.89% ACCEPTED 4 TRANSWORKS INFORMATION SERVICES LTD 19.97% 19.97% ACCEPTED 5 COSMIC GLOBAL LTD (SEG.) 15.34% 15.34% ACCEPTED 6 VISHAL INFORMATION TECHNOLOGIES LTD. 41.84% X (A) FUNCTIONALLY DIFFERENT (SIGNIFICANT PAYMENT TOWARDS VENDORS (B) REJECTED IN RULING OF GOOGLE & TNS (C) ABNORMALLY HIGH MARGIN 7 ASIT C. MEHTA FINANCIAL SERVICES LTD. (SEGMENTAL) (NUCLEUS NETSOFT AND GIS INDIA LTD) (AFTER MARGIN CORRECTION) 34.99% X (A) FUNCT IONALLY INCOMPARABLE (ENGAGED IN DIVERSIFIED OPERATIONS OF THE SEGMENT (ENGAGED IN ITES AND SOFTWARE DEVELOPMENT) (B) IMPACT OF AMALGAMATION ON THE FINANCIALS AND MARGINS OF THE COMPANY (C) ABNORMALLY HIGH MARGIN 8 GOLDSTONE INFRATECH LTD 23.89% 23.89% ACCEPTED 25 S. NO. COMPANY NAME WORKING CAPITAL ADJUSTED OP/ TC MARGIN WORKING CAPITAL ADJUSTED OP/ TC MARGIN (EXCLUDING COMPANIES ON ACCOUNT OF REASONS GIVEN IN FINAL DISPOSITION COLUMN) FINAL DISPOSITION (SEG.) (EARLIER KNOWN AS GOLDSTONE TELESERVICES LTD) 9 SPANCO LTD. (SEGMENTAL) 18.91% 20.80% ACCEPTED 10 ACE SOFTWARE EXPORTS LTD 8.06% 8.06% ACCEPTED 11 APEX KNOWLEDGE SOLUTIONS PVT LTD 21.74% 21.74% ACCEPTED 12 R SYSTEMS INTERNATIONAL LTD (SEG.) 14.29% 14.29% ACCEPTED 13 FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG.) 14.67% 14.67% ACCEPTED 14 APEX ADVANCED TECHNOLOGIES LIMITED 19.15% 19.15% ACCEPTED ARITHMETIC MEAN 22.61% 18.09% 2.14 W ITHOUT PREJUDICE TO THE APPELLANTS CONTENTIONS AGA INST THE APPROACH USED BY THE LD. TPO, THE LEARNED AR SUBMITTED THAT EVEN IF THE ASSESSEE EXCLUDE FOUR COMPARABLE COMPANIES FOR THE REASONS M ENTIONED IN THE TABLE ABOVE, THE WORKING CAPITAL ADJUSTED ARMS LENGTH MA RGIN WORKS OUT TO 18.09% WHICH FALLS WITH THE +/-5% RANGE OF THE OP/TC MARGI N OF 15.38% EARNED BY THE APPELLANT DURING FY 2005-06. THIS PRO VIDES EVIDENCE THAT THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPE LLANT DURING THE FY 2005- 06 ARE AT ARMS LENGTH. 3. THE LEARNED CIT(DR) ON THE OTHER HAND PLACED REL IANCE ON THE OTHERS OF THE AUTHORITIES BELOW. HE SUBMITTED THAT IT IS V ERY DIFFICULT TO GET EXACTLY SAME CONCERN AS COMPARABLE TO THE ASSESSEE. THE LEA RNED AR HAS FAILED TO 26 ESTABLISH IN HIS SUBMISSION AS TO HOW ACQUISITION I N THE CASE OF ALLSEC TECHNOLOGIES LTD. (ALLSEC) HAS IMPACTED IS YET TO B E EXAMINED. SIMILARLY, IN THE CASE OF THE COMPARABLE MAPLE ESOLUTION LTD. (MAPLE), THE REPUTATION OF OWNER IS NOT GOING TO AFFECT ITS FUNCTIONALITY. REGARDING THE COMPARABLE, VISHAL INFORMATION TECHNOLOGIES LTD. (CORAL) HUB LT D.) (VISHAL), HE SUBMITTED THAT IT IS NOT A FUNCTIONALLY DIFFERENT C ONCERN. REGARDING THE COMPARABLE ASIT C MEHTA (ASIT), THE LEARNED CIT(DR) SUBMITTED THAT AS PER DECISION OF THE HON'BLE BOMBAY HIGH COURT, THE SCHE ME OF AMALGAMATION OF ITS ERSTWHILE NUCLEAR NET SOFT & GIS (INDIA) LTD. W ITH ASIT WAS SANCTIONED. 4. HAVING GONE THROUGH THE SUBMISSIONS OF THE PARTI ES, WE FIND THAT THE MAIN GRIEVANCE OF THE ASSESSEE IS REGARDING ADOPTIO N OF FOUR COMPARABLES BY THE LEARNED TPO AND UPHOLDING THE SAME BY THE LEARN ED DRP FOR BENCHMARKING THE ASSESSEES INTERNATIONAL TRANSACTI ONS. THESE FOUR COMPARABLES REMAINED (I) ALLSEC TECHNOLOGIES LTD., (II) MAPLE E-SOLUTIONS LTD.; (III) ASIT C. MEHTA AND (IV) VISHAL INFORMATI ON TECHNOLOGIES LTD. (CORAL HUB LTD.). THE LEARNED AR IN HIS ABOVE SUBMI SSIONS HAS TRIED TO DISTINGUISH THESE FOUR COMPARABLES WITH THE ASSESSE E ON DIFFERENT ASPECTS AND CITED SEVERAL DECISIONS IN SUPPORT THAT THOSE ASPEC TS MUST BE CONSIDERED AND TAKEN CARE OF WHILE CHOOSING COMPARABLES FOR BENCHM ARKING THE ASSESSEES 27 INTERNATIONAL TRANSACTIONS. THOUGH LEARNED CIT(DR) HAS PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW IN THIS REGARD, HOWEVER, IN VIEW OF THE CITED DECISIONS BY THE LEARNED AR THAT THOSE ASPECT S ARE MATERIAL FOR CONSIDERATION WHILE SELECTING COMPARABLES FOR BENCH MARKING THE ASSESSEES INTERNATIONAL TRANSACTION, WE FIND SUBSTANCE IN THE GRIEVANCE OF THE ASSESSEE THAT THE AUTHORITIES BELOW WHILE SELECTING THE ABOV E STATED FOUR COMPARABLES HAVE NOT CONSIDERED THOSE ASPECTS. THESE MATERIAL A SPECTS ARE ACTIVITIES CARRIED OUT, FULL-FLEDGED RISK BEARING ENTREPRENEUR IAL COMPANY, EXTRAORDINARY EVENTS, ABNORMAL GROWTH DURING THE YEAR IN THE CASE OF ALLSEC TECHNOLOGIES LTD. FUNCTIONALLY INCOMPARABLE, INVOLVEMENT OF OWNE RS FRAUDULENT ACTIVITIES, OWNERSHIP OF INTANGIBLE, VOLATILE MARGI NS, OPERATING PROFIT MARGIN FROM FINANCIAL YEAR 2003-04 TO 2008-09 IN THE CASE OF MAPLE ESOLUTION LTD. FUNCTIONALLY INCOMPARABLE, DIVERSIFIED OPERATION OF THE SEGMENT, BUSINESS RESTRICTING/AMALGAMATION IN THE CASE OF ASIT C. MEH TA AND IN THE CASE OF VISHAL INFORMATION TECHNOLOGIES LTD., THESE MATERIA L ASPECTS WERE ITS ACTIVITIES SHOWING IT FUNCTIONALLY DIFFERENT. THE L EARNED AR HAS DISCUSSED IN DETAIL AS TO HOW THE ABOVE NAMED COMPARABLES ARE NO T APPLICABLE IN THE CASE OF THE ASSESSEE AND AS TO HOW THE APPROACH OF THE A UTHORITIES BELOW ON THE CONTENTIONS OF THE ASSESSEE IN THIS REGARD ARE CON TRARY TO THE CITED DECISIONS HEREINABOVE IN PARA NOS. 2.12 & 2.13. WE FIND SUBST ANCE THEREIN AND 28 ACCORDINGLY IN THE INTEREST OF JUSTICE SET ASIDE TH E MATTER TO THE FILE OF THE ASSESSING OFFICER/TPO TO EXAMINE THE VALIDITY OF GR IEVANCES SHOWN BY THE ASSESSEE BEFORE THE ITAT ON THE ISSUE OF CHOOSING O F THE ABOVE FOUR COMPARABLES FOR BENCHMARKING THE ASSESSEES INTERNA TIONAL TRANSACTIONS AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSE E. THE ISSUE RAISED IN THE GROUND NOS. 2.9 TO 2.12 IN THIS REGARD ARE THUS SET ASIDE FOR STATISTICAL PURPOSES. THE OTHER GROUNDS CONSEQUENTIAL AND CONNE CTED TO GROUND NOS. 2.9 TO 2.12 ARE THUS REQUIRED TO BE ADJUDICATED UPON AF RESH. IT IS THUS SET ASIDE TO THE FILE OF THE ASSESSING OFFICER TO ADJUDICATE UPO N THESE GROUNDS AFRESH AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE A SSESSEE. THE GROUNDS ARE THUS ALLOWED FOR STATISTICAL PURPOSES. 5. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES. ITA NO. 5745/DEL/2011 : A.Y. 2007-08) : 6. THE ASSESSEE HAS QUESTIONED ORDERS OF THE AUTHOR ITIES BELOW ON THE FOLLOWING GROUNDS: THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW; 1. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSESSIN G OFFICER (LD. AO) PURSUANT TO THE DIRECTIONS OF LEARNED DISPUTE RESOLUTION PANEL (LD. DRP) IS BAD IN LAW AND 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 RS. 29 75,35,72,993 TO THE INCOME OF THE APPELLANT PROPOSE D BY THE LD. TRANSFER PRICING OFFICER (TPO) BY HOLDING THAT IT S INTERNATIONAL TRANSACTIONS PERTAINING TO ITS INFORMATION TECHNOLO GY ENABLED SERVICES (ITES) AND E-LEARNING BACK OFFICE SUPPORT (E-LEA RNING) BUSINESS SEGMENTS, DO NOT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME-TAX ACT, 1961 (THE ACT) AND IN DOING S O, THE LD. DRP AND THE LD. AO HAS GROSSLY ERRED IN AGREEING WITH A ND UPHOLDING THE LD. TRANSFER PRICING OFFICERS (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 PRESENT CASE ; 2.2 IGNORING THE FACT THAT THE APPELLANT IS ENTITLED TO TAX HOLIDAY UNDER SECTION 10A OF THE ACT ON ITS PROFITS AND THE REFORE WOULD NOT HAVE ANY UNTOWARD MOTIVE OF DERIVING A TAX ADVA NTAGE BY MANIPULATING TRANSFER PRICES OF ITS INTERNATIONAL T RANSACTIONS; 2.3 DISREGARDING THE ARMS LENGTH PRICE (ALP), AS DETE RMINED BY THE APPELLANT IN THE TRANSFER PRICING (TP) DOCUME NTATION MAINTAINED BY IT IN TERMS OF SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 (THE RULES ) AS WELL AS FRESH SEARCH; AND MODIFYING/ REJECTING THE FILTERS APPLIED BY THE APPELLANT; 2.4 DISREGARDING MULTIPLE YEAR/ PRIOR YEARS DATA AS US ED BY THE APPELLANT IN THE TP DOCUMENTATION AND HOLDING THAT CURRENT YEAR (I.E. FY 2006-07) DATA FOR COMPARABLE COMPANIES SHO ULD BE USED DESPITE THE FACT THAT THE SAME WAS NOT NECESSARILY AVAILABLE TO THE APPELLANT AT THE TIME OF PREPARING ITS TP DOCUMENTA TION, AND IN DOING SO HAVE GROSSLY ERRED IN; 2.4.1 INTERPRETING THE REQUIREMENT OF CONTEMPORANEOUS D ATA IN THE RULES TO NECESSARILY IMPLY CURRENT/ SINGLE YEAR (I.E. FY 2006-07) DATA; AND 2.4.2 HOLDING THAT AT THE TIME OF CREATING/ MAINTAINING T HE TP DOCUMENTATION, THE APPELLANT COULD HAVE PROCURED CU RRENT/ SINGLE YEAR DATA (I.E. FY 2006-07 DATA) FROM SOURCE S OTHER THAN THE ELECTRONIC DATABASES, WHEN IN FACT PRACTIC ALLY NO SUCH OTHER SOURCES WERE AVAILABLE IN CASE OF MOST COMPANIES; 30 2.5 COLLECTING INFORMATION OF THE COMPANIES BY EXERCISI NG POWER GRANTED TO HIM UNDER SECTION 133(6) OF THE ACT THAT WAS NOT AVAILABLE TO THE APPELLANT IN THE PUBLIC DOMAIN AND RELYING ON SELECTIVE INFORMATION FOR COMPARABILITY PURPOSES (A ND TO THE EXTENT OF COMPLETELY IGNORING RELIABLE DATA AVAILAB LE IN PUBLIC DOMAIN/ ANNUAL REPORTS IN NUMEROUS CASES); 2.5.1 AND IN DOING SO VIOLATING THE FUNDAMENTAL PRINCIPLE S OF NATURAL JUSTICE RELYING ON THE INFORMATION SOURCED UNDER SECTION 133(6); AND ALSO BY 2.5.2 NOT SHARING WITH THE APPELLANT, IN CASE OF A NUMBER OF COMPARABLES, THE INFORMATION/ REPLY RECEIVED BY THE LD. TPO/ LD. AO U/S 133(6). 2.6 AGGREGATING THE APPELLANTS TWO BUSINESS SEGMENTS N AMELY ITES AND E-LEARNING BACK OFFICE SUPPORT SERVICES SEGMENT WITHOUT ANY JUSTIFIABLE BASIS; 2.7 REJECTING COMPARABILITY ANALYSIS IN THE APPELLANT'S TP DOCUMENTATION/ FRESH SEARCH AND IN CONDUCTING A FRE SH COMPARABILITY ANALYSIS BASED ON APPLICATION OF THE FOLLOWING ADDITIONAL/ REVISED FILTERS IN DETERMINING THE COMP ARABLE COMPANIES: 2.7.1 EXCLUSION OF COMPANIES HAVING DIFFERENT FINANCIAL Y EAR ENDING (I.E. NOT MARCH 31, 2007); 2.7.2 EXCLUSION OF COMPANIES WITH EXPORT SALES THAT ARE L ESS THAN 25% OF THEIR TOTAL REVENUE; 2.7.3 EXCLUSION OF COMPANIES WITH DIMINISHING REVENUES/ PERSISTENT LOSSES FOR LAST THREE YEARS UP TO AND IN CLUDING FY 2006-07; 2.7.4 RETAINING COMPANIES WITH RELATE D PARTY TRANSACTIONS UP TO 25% OF THEIR SALES; AND REJECTING, IN PARTICULAR, THE FOLLOWING FILTERS APPLIED BY THE APPELLANT IN ITS TP DOCUMENTATION/ F RESH SEARCH: 2.7.5 COMPANIES HAVING OTHER OPERATING INCOME (I.E. INCOM E OTHER THAN MANUFACTURING AND TRADING INCOME) TO SAL ES GREATER THAN 50% WERE ACCEPTED; 31 2.7.6 COMPANIES WITH NET WORTH LESS THAN ZERO WERE REJECT ED; 2.7.7 COMPANIES HAVING RESEARCH & DEVELOPMENT COSTS TO SA LES LESS THAN 3% WERE ACCEPTED; AND 2.7.8 COMPANIES HAVING ADVERTISING, MARKETING AND DISTRIB UTION COSTS TO SALES LESS THAN 3% WERE ACCEPTED. 2.8 INCLUDING HIGH-PROFIT MAKING COMPANIES IN THE FINAL COMPARABLES SET FOR BENCHMARKING A LOW RISK CAPTIV E UNIT SUCH AS THE APPELLANT (DISREGARDING JUDICIAL PRONOUNCEME NTS ON THE ISSUE), THUS DEMONSTRATING AN INTENTION TO ARRIVE A T A PRE- FORMULATED OPINION WITHOUT COMPLETE AND ADEQUATE AP PLICATION OF MIND WITH THE SINGLE-MINDED INTENTION OF MAKING AN ADDITION TO THE RETURNED INCOME OF THE APPELLANT; 2.9 INCLUDING CERTAIN COMPANIES THAT ARE NOT COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS E MPLOYED AND RISKS ASSUMED; 2.10 RESORTING TO ARBITRARY REJECTION OF LOW-PROFIT/ LOS S MAKING COMPANIES BASED ON ERRONEOUS AND INCONSISTENT REASO NS; 2.11 EXCLUDING CERTAIN COMPANIES ON ARBITRARY/ FRIVOLOUS GROUNDS EVEN THOUGH THEY ARE COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSU MED; 2.12 IGNORING THE BUSINESS/ COMMERCIAL REALITY THAT SINC E THE APPELLANT (VIS--VIS BOTH ITS ITES AND E-LEARNING BUSINESS SE GMENTS) IS REMUNERATED ON AN ARMS LENGTH COST PLUS 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 AGAINST COMPARABLE COMPAN IES THAT ARE FULL FLEDGED RISK TAKING ENTREPRENEURS, AND BY NOT ALLOWING A RISK ADJUSTMENT TO THE APPELLANT ON ACCOUNT OF THIS FACT ; 2.13 NOT ALLOWING THE APPELLANT THE BENEFIT OF THE (+/-) 5% RANGE AVAILABLE TO THE APPELLANT AS PER THE OLD PROVISO TO SECTION 92C(2) OF THE ACT; 2.14 DISREGARDING JUDICIAL PRONOUNCEMENTS IN INDIA IN UN DERTAKING THE TP ADJUSTMENT. 32 3. THE LD. AO ERRED IN NOT VERIFYING THE FACTUAL ERROR S IN ACCEPT/ REJECT OF COMPARABLES AND IN COMPUTATION OF THE OPERATING MARGINS OF THE COMPARABLES AND ACCORDINGLY RE-COMPUTING THE ALP WH ILE PASSING THE ORDER, PURSUANT TO THE DIRECTIONS OF THE LD. DRP. 4. THE LD. AO ERRED IN DENYING THE DEDUCTION AMOUNTING TO RS 93,36,864 UNDER SECTION 10A OF THE ACT IN RESPECT O F THE APPELLANTS UNDERTAKING AT HYDERABAD ACQUIRED BY WAY OF SLUMP S ALE FROM DIGITAL THINK (INDIA) PVT. LTD. 4.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. AO/LD. DRP ERRED IN HOLDING/CONFIRMING THAT THE CONDITIONS STIPULATED IN SUB SECTION 2 OF SECTION 1 0A OF THE ACT (VIZ. NOT FORMED BY SPLITTING UP OR RECONSTRUCTION OF BUSINESS ALREADY IN EXISTENCE AND NOT FORMED BY TRANSFER OF PLANT AND MACHINERY PREVIOUSLY USED FOR ANY PURPOSE) ARE NOT SATISFIED. 4.2 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. AO/LD. DRP ERRED IN HOLDING/CONFIRMING THAT THE APPELLANT IS NOT REGISTERED WITH THE SOFTWARE TECHN OLOGY PARK OF INDIA (STPI) INSPITE OF A LETTER DATED 1 DECEMBER 2005 FROM STPI ALREADY ON RECORD. 5. THE LD. AO/LD. DRP HAS GROSSLY ERRED IN FACTS AND I N LAW IN DISALLOWING THE INTEREST OF RS 5,75,706 PAID TO KOT AK MAHINDRA PRIMUS LTD. (KMPL) UNDER SECTION 40(A)(IA) OF THE ACT FOR NOT WITHHOLDING TAXES WITHOUT APPRECIATING THAT KMPL BE ING A SUBSIDIARY OF KOTAK MAHINDRA BANK LIMITED ENJOYS EXEMPTION UND ER SECTION 194A(3) OF THE ACT. 6. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. AO WHILE PASSING THE FINAL ORDER UNDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT HAS GROSSLY ERRED IN ADDING RS 1,51,14,384 OUT OF RS 6,33,13,953 TO THE APPELLANTS TAXABLE IN COME WHICH MERELY REPRESENTS REVERSAL OF PROVISIONS MADE THAT WAS ADD ED BACK IN THE COMPUTATION OF INCOME BY THE APPELLANT IN THE ASSES SMENT OF ASSESSMENT YEAR 2006-07. 7. THE LD. DRP ERRED IN DISREGARDING THE DETAILED ARGU MENTS/ SUBMISSIONS PUT FORTH BY THE APPELLANT DURING THE C OURSE OF THE DRP/ 33 ASSESSMENT PROCEEDINGS WHILE PASSING ITS DIRECTION UNDER SECTION 144C OF THE ACT. 8. THE LD. AO ERRED ON FACTS AND IN LAW IN CHARGING IN TEREST UNDER SECTIONS 234B OF THE ACT. 9. THE LD AO HAS GROSSLY ERRED IN INITIATING PENALTY U NDER SECTION 271(1)(C) OF THE ACT MECHANICALLY AND WITHOUT RECOR DING ANY SATISFACTION FOR ITS INITIATION. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTH ER. THE APPELLANT CRAVES LEAVE TO ALTER, AMEND OR WITHD RAW ALL OR ANY OF THE GROUNDS HEREIN OR ADD ANY FURTHER GROUNDS AS MA Y BE CONSIDERED NECESSARY EITHER BEFORE OR DURING THE HEARING. 7. GROUND NOS. 1 TO 3 : 7.1 THE LEARNED AR SUBMITTED THAT CONVERGYS INDIA SERVI CES INDIA PRIVATE LIMITED (CIS OR THE APPELLANT) IS A WHOLLY OWNE D SUBSIDIARY OF CONVERGYS CUSTOMER MANAGEMENT GROUP INC. USA (CMG ).THE APPELLANT IS ENGAGED IN PROVIDING IT ENABLED SERVIC ES TO ITS AES. CIS PROVIDES CUSTOMER CARE SUPPORT SERVICES TO CMG IN T HE FORM OF VOICE AND WEB-BASED SERVICES. IN RETURN FOR RENDERING THESE S ERVICES, THE APPELLANT WAS REMUNERATED ON AN ARMS LENGTH COST PLUS BASIS I.E. IT WAS COMPENSATED FOR ALL ITS OPERATING COSTS, PLUS A PRE -AGREED MARK-UP THEREON. (HE REFERRED TO PARA 2.1 ON PG 286 OF THE APPEAL SE T FOR THE TRANSFER PRICING (TP) ORDER FOR THE APPELLANTS P ROFILE AND TP STUDY ON PARA 1.2 OF PG 9OF THE PAPER BOOK FOR THE BRIEF ON THE BUSINESS OF THE APPELLANT, PARA 4.3.9 OF TP STUDY A T PG 25OF THE 34 PAPER BOOK WHICH CLEARLY STATES THAT THE APPELLANT IS A CUSTOMER SUPPORT SERVICE PROVIDER). 7.2 HE SUBMITTED THAT DURING THE FINANCIAL YEAR (FY) 2006-07, THE APPELLANT, OPERATED AS A LOW RISK CAPTIVE UNIT PROV IDING ITES AND E- LEARNING BACK OFFICE SUPPORT SERVICES TO ITS ASSOCI ATED ENTERPRISES (AES) . (HE REFERRED TO THE PAPER BOOK FOR THE TP STUDY ON PARA 1.2.6 ON PG 9 FOR THE RISK UNDERTAKEN BY THE APPELLANT AND PG 3 0-31 FOR THE RISK PROFILE OF THE APPELLANT). 7.3 THE LEARNED AR SUBMITTED FURTHER THAT DURING THE RE LEVANT YEAR, THE APPELLANT UNDERTOOK THE FOLLOWING INTERNATIONAL TRA NSACTIONS WITH ITS AES. (HE REFERRED TO FORM 3CEB ON PGS 77-7 8 OF THE PAPER BOOK) : SL. NO. DESCRIPTION OF INTERNATIONAL TRANSACTION AMOUNT (RS.) TP ORDER 1. PROVISION FOR IT ENABLED SERVICES 6,215,256,812 ADJUSTMENT OF RS. 7,53,572,993 2. REIMBURSEMENT OF SALARY EXPENSES OF EXPATRIATES 23,151,957 ACCEPTED 3. PAYMENT FOR IPLC COST 54,389,123 ACCEPTED 4. PAYMENT OF EMPLOYEE SKILLS DEVELOPMENT COST 1,290,655 ACCEPTED 5. PAYMENT OF SERVICE FEE 22,916,265 ACCEPTED 6. PAYMENT OF INTEREST ON WORKING CAPITAL LOAN 20,717,429 ACCEPTED 7.4 THE LEARNED AR SUBMITTED THAT THE TRANSACTIONS RELA TING TO POINT NO. (1) TO (5) WAS AGGREGATED AND ANALYZED APPROPRIATELY WI TH THE INTERNATIONAL TRANSACTIONS RELATING THE IT ENABLED SERVICES AND E -LEARNING BACK-OFFICE SUPPORT SERVICES AND BENCHMARKED USING TRANSACTIONA L NET MARGIN METHOD (TNMM) WITH OPERATING PROFIT/ TOTAL COST ( OP/TC) AS THE 35 RELEVANT PROFIT LEVEL INDICATOR (PLI). THE TRANSA CTION PERTAINING TO POINT NO. (6)WAS EVALUATED SEPARATELY USING COMPARABLE UN CONTROLLED PRICE (CUP) METHOD. (HE REFERRED TO THE TP STUDY ON PARA 1.3.2 ON PG 10 OF THE PAPER BOOK FOR THE SUMMARY OF THE ECONOMIC A NALYSIS OF THE APPELLANTS BUSINESS). 7.5 WITH THE ASSISTANCE OF THE FOLLOWING TABLE, THE LE ARNED AR SUMMARIZED THE RESULTS FOR THE TNMM ANALYSIS UNDERTAKEN IN THE TP STUDY FOR THE ITES AND THE E-LEARNING SEGMENTS BASED ON MULTIPLE YEAR DATA (I.E. FYS 2004-05, 2005-06 AND 2006-07 TO THE EXTENT AVAILABL E). BENCHMARKING ANALYSIS PARTICULARS PROVISION OF ITES MOST APPROPRIATE METHOD TRANSACTIONAL NET MARGIN METHOD (TNMM) (PLEASE REFER TO PAGE 39 OF THE PAPER BOOK FOR THE TP STUDY) PLI USED OPERATING PROFIT (OP)/ TOTAL COST (TC) (PLEASE REFER TO PAGE 10 OF THE PAPER BOOK FOR THE TP STUDY) SEGMENT ITES E LEARNING NO. OF COMPARABLES 12 (PLEASE REFER TO PAGE 50 OF THE PAPER BOOK FOR THE TP STUDY) 5 (PLEASE REFER TO PAGE 51 OF THE PAPER BOOK FOR THE TP STUDY) COMPARABLES MEAN MARGIN 12% (PLEASE REFER TO PAGE 50 OF THE PAPER BOOK FOR THE TP STUDY) 9% (PLEASE REFER TO PAGE 51 OF THE PAPER BOOK FOR THE TP STUDY) DATA USED MULTIPLE YEARS FYS 2004-05, 2005-06 AND 2006-07 MULTIPLE YEARS FYS 2004-05, 2005-06 AND 2006-07 APPELLANTS MARGIN 15% (PLEASE REFER TO PAGE 67 OF THE PAPER BOOK FOR THE TP STUDY) 14% (PLEASE REFER TO PAGE 67 OF THE PAPER BOOK FOR THE TP STUDY) CONCLUSION AT ARMS LENGTH AT ARMS LENGTH 7.8 THE LEARNED AR ALSO SUMMARIZED THE PROCEEDINGS BEFO RE THE LEARNED TPO WITH THE SUBMISSIONS THAT DURING THE COURSE OF THE TP AUDIT PROCEEDINGS, THE LD. TPO DIRECTED THE APPELLANT TO SUBMIT UPDATED CURRENT YEAR DATA FOR THE COMPARABLE COMPANIES CONS IDERED IN ITS TP 36 STUDY. IN RESPONSE TO THE SAME, WITHOUT PREJUDICE T O ITS ARGUMENT IN FAVOUR OF MULTIPLE YEAR DATA, THE APPELLANT SUBMITT ED UNDER THE COVER OF THE LETTER DATED DECEMBER 1, 2009 THAT A FRESH SEAR CH OUGHT TO BE CONDUCTED TO INCLUDE ADDITIONAL COMPANIES FOR WHICH DATA FOR FY 2006- 07 WAS AVAILABLE AT THE TIME OF ASSESSMENT PROCEEDI NGS BUT WHICH WAS NOT AVAILABLE AT THE TIME OF PREPARING TP DOCUMENTATION . THE FRESH SEARCH COMPARABLES WERE SUBMITTED UNDER THE COVER OF THE S UBMISSIONS DATED FEBRUARY 22, 2010. (HE REFERRED TO PARA 1.1 AND 1.2 ON PAGE NO 253 AND ANNEXURE 1 AND ANNEXURE 2 OF THE SUBMISSIONS DA TED FEBRUARY 22, 2010 FOR THE FRESH SEARCH COMPARABLES) 7.9 HE SUBMITTED THAT IN LINE WITH THE SEARCH PROCESS FOLLOWED BY THE APPELLANT AT THE TIME OF PREPARING ITS TP DOCUMENTA TION, THE APPELLANT APPLIED THE FOLLOWING NECESSARY AND APPROPRIATE QUA NTITATIVE FILTERS FOR CONDUCTING THE COMPARABILITY ANALYSIS IN THE BENCHM ARKING PROCESS AT THE TIME OF FRESH SEARCH: COMPANIES HAVING OTHER OPERATING INCOME (OTHER THAN MANUFACTURING AND TRADING INCOME) TO SALES GREA TER THAN 50% WERE ACCEPTED; COMPANIES HAVING RESEARCH & DEVELOPMENT COSTS TO SA LES LESS THAN 3% WERE ACCEPTED; COMPANIES HAVING NET FIXED ASSETS TO SALES LESS THA N 200% WERE ACCEPTED; COMPANIES HAVING AVERAGE SALES LESS THAN INR 1 CROR E WERE REJECTED; COMPANIES WITH NET WORTH LESS THAN ZERO WERE REJECT ED; AND COMPANIES HAVING ADVERTISING, MARKETING AND DISTRIB UTION COSTS TO SALES LESS THAN 3% WERE ACCEPTED. 7.10 THE LEARNED AR POINTED OUT THAT FINALLY, THE COMPAN IES PASSING THROUGH THE ABOVE QUANTITATIVE FILTERS WERE ANALYZE D QUALITATIVELY [INCLUDING EXAMINATION OF RELATED PARTY TRANSACTION S (RPT) TO EXCLUDE 37 COMPANIES WITH RPT GREATER THAN 25 PERCENT] TO SELE CT A SET OF COMPARABLE COMPANIES AT THE TIME OF FRESH SEARCH. 7.11 HE PROVIDED A SNAPSHOT OF THE FRESH SEARCH RESULTS AS BELOW. PARTICULARS ITES E-LEARNING NO OF COMPARABLES 13 4 MEAN OP/TC 8% 5% ASSESSEES OP/TC 15% 14% (HE REFERRED TO PAGE 39 OF THE APPEAL SET FOR FORM 35A) 7.11 THE LEARNED AR CONTENDED THAT THE LD. TPO ARBITRARI LY REJECTED THE FOLLOWING FILTERS ADOPTED BY THE APPELLANT IN THE T P DOCUMENTATION AND IMPOSED ADDITIONAL FILTERS FOR THE SELECTION OF COM PARABLES AS BELOW: (HE REFERRED TP ORDER ON PAGE 331 OF APPEAL SET FOR THE LIST OF THE FINAL FILTERS SELECTED BY THE LD. TPO) SELECTION OF COMPANIES WITH RATIO OF OTHER OPERATIN G INCOME (OTHER THAN MANUFACTURING AND TRADING INCOME) TO SALES GREATER THAN 50%; REJECTION OF COMPANIES WITH RESEARCH AND DEVELOPMEN T EXPENSES TO SALES MORE THAN 3%; REJECTION OF COMPANIES WITH NET WORTH LESS THAN ZER O; AND REJECTION OF COMPANIES WITH ADVERTISING, MARKETING AND DISTRIBUTION EXPENSES TO SALES MORE THAN 3%. REJECTION OF COMPANIES WITH THE RATIO OF NET FIXED ASSETS TO SALES GREATER THAN 200% ADOPTION OF FOLLOWING ADDITIONAL FILTERS FOR SCREEN ING OF COMPARABLE COMPANIES REJECTION OF COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE CURRENT YEAR (I.E. FY 2006-07); 38 REJECTION OF COMPANIES WHOSE SERVICE INCOME LESS TH AN 75% OF TOTAL OPERATING REVENUES; REJECTION OF COMPANIES WITH RELATED PARTY TRANSACTI ONS (INCOME AS WELL AS EXPENDITURE COMBINED) MORE THAN 25% OF OPER ATING REVENUE; REJECTION OF COMPANIES WITH EXPORTS THAT ARE LESS T HAN 25% OF SALES REVENUE; REJECTION OF COMPANIES WITH DIMINISHING REVENUES/ P ERSISTENT LOSSES FOR THE YEAR UNDER CONSIDERATION; REJECTION OF COMPANIES WITH DIFFERENT FINANCIAL YEA R ENDS (I.E. NOT MARCH 31, 2007) OR WHOSE DATA IS NOT AVAILABLE FOR THE 12 MONTH PERIOD. I.E. APRIL 1, 2006 TO MARCH 31, 2007; 7.12 HOWEVER, THE LD. TPO REJECTED THE SEGMENTAL BIFURC ATION UNDERTAKEN BY THE APPELLANT AND CLUBBED THE GARMENTS UNDER ITES. FINALLY, HE RELIED UPON THE SET OF FOLLOWING 26 COMPANIESWITH A MEAN OPERATING PROFIT MARGIN OF 28.72% . PARTICULARS PROVISION OF ITES MOST APPROPRIATE METHOD TNMM PLI USED OP/ TC NO. OF COMPARABLES 26 (LEARNED AR REFERRED TO PAGE NO 438-439OF THE APPEA L SET FOR THE FOR THE TP ORDER ) COMPARABLES MEAN MARGIN 28.72% (HE REFERRED TO PAGE NO 429AND 439 OF THE APPEAL SE T FOR THE FOR THE TP ORDER ) (WORKING CAPITAL ADJUSTMENT PROVIDED BY THE TPO) DATA USED CURRENT YEAR APPELLANTS MARGIN 14.80% (HE REFERRED TO PAGE NO 286 OF THEAPPEAL SET FOR TH E FOR THE TP ORDER) CONCLUSION TP ADJUSTMENT OF RS. 7,53,572,993 (HE REFERRED TO PG 429 OF THE APPEAL SET FOR THE FO R THE TP ORDER) 39 7.13 CONSEQUENTLY, THE ADJUSTMENT OF RS. 7,53,572,993/- WAS MADE BY THE LD. TPO WHICH WAS UPHELD BY THE LD. ASSESSING OFFIC ER (LD. AO) IN HIS DRAFT ASSESSMENT ORDER. THE APPELLANT FILED DET AILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) AGAINST THE ADJU STMENT PROPOSED BY THE LD. AO. (THE LEARNED AR REFERRED TO THE DRP OBJECTIONS ON PG 28 TO 275 OF THE APPEAL SET AND FINAL ASSESSMENT OR DER ON PGS 1 TO 12 OF THE APPEAL SET) . 7.14 THE DRP UPHELD THE ENTIRE ADDITION MADE BY THE LD. TPO AND THUS THE COMPANY FILED AN APPEAL BEFORE THE TRIBUNAL. 7.15 A SNAPSHOT OF THE RESULTS OF THE FINAL COMPARABLE COMPANIES SELECTED BY THE LD. TPO IS PROVIDED BELOW: (HE REFERRED TO THE TP ORDER ON PAGE 355-356, 438-439 OF APPEAL SET FOR THE FINAL COMPAR ABLES SELECTED BY THE LD. TPO) . S. NO. COMPANY NAME WORKING CAPITAL ADJUSTED OP/ TC MARGIN AS PER THE TPO ORDER (USING DATA FOR FY 2006-07) 1 ACCENTIA TECHNOLOGIES LTD. (SEG.) 27.47% 2 ADITYA BIRLA MINACS WORLDWIDE LTD.(EARLIER TRANSWORKS INFORMATION SERVICES LTD) 12.30% 3 ALLSEC TECHNOLOGIES LTD. 27.03% 4 APEX KNOWLEDGE SOLUTION PVT LTD. 14.33% 5 APPOLLO HEALTHSTREET LTD. -13.46% 6 ASIT C MEHTA FINANCIAL SERVICES LTD 24.09% 7 BODHTREE CONSULTING LTD (SEG.) 30.93% 8 CALIBER POINT BUSINESS SOLUTIONS LTD 21.50% 9 COSMIC GLOBAL LTD. 12.64% 10 DATAMATICS FINANCIAL SERVICES LTD (SEG.) 5.53% 11 ECLREX SERVICES LTD. 87.72% 12 FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG.) 7.33% 13 GENESYS INTERNATIONAL CORPORATION LTD. 9.82% 14 H C L COM NET SYSTEMS & SERVICES LTD. (SEG.) 45.48 % 15 I C R A TECHNO ANALYTICS LTD. (SEG.) 12.70% 16 INFORMED TECHNOLOGIES INDIA LTD. 36.19% 17 INFOSYS BPO LTD. 29.98% 40 S. NO. COMPANY NAME WORKING CAPITAL ADJUSTED OP/ TC MARGIN AS PER THE TPO ORDER (USING DATA FOR FY 2006-07) 18 I SERVICES INDIA PVT LTD. 50.02% 19 MAPLE E SOLUTIONS LTD. 31.59% 20 MOD-TEK TECHNOLOGIES LTD. 117.03% 21 R SYSTEMS INTERNATIONAL LTD. (SEG.) 19.61% 22 SPANCO LTD. (SEG.) 20.96% 23 TRITON CORP LTD. 28.98% 24 VISHAL INFORMATION TECHNOLOGIES LTD. 43.73% 25 WIPRO LTD. (SEG.) 31.53% 26 NITTANY OUTSOURCING SERVICES PVT LTD. 11.79% MEAN OP/ TC 28.72% 7.16 WITHOUT PREJUDICE TO THE OTHER CONTENTIONS AGAINST THE APPROACH FOLLOWED BY THE LD. TPO, THE LEARNED AR POINTED OUT THAT FUNDAMENTAL CONTENTIONS OF THE APPELLANT AGAINST THE LD. TPO/LD . DRPS APPROACH ARE DISCUSSED IN DETAIL BELOW: (I) RULE 10 B (2) OF THE INCOME TAX RULES, 1962 LAYS DO WN THE CRITERION FOR THE APPLICATION OF FUNCTIONS, ASSET, RISK (FAR) TEST FOR JUDGING COMPARABILITY OF INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION. IT PROVIDES: '10B (2). FOR THE PURPOSES OF SUB-RULE (1), THE COM PARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY : (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TR ANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION ; (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT AS SETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE P ARTIES TO THE TRANSACTIONS ; 41 (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERM S ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICI TLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS ; (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH T HE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICA L LOCATION AND SIZE OF THE MARKETS, THE LAWS AND THE GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELO PMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE O R RETAIL. (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUS TMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION AND THE COMPARAB LE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INT O SUCH TRANSACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIO NS REQUIRED TO BE MADE IN APPLICATION OF A METHOD.' KEEPING WITH THE TENANTS OF RULE 10B(2), THE APPELL ANT SUBMITS AS UNDER: RE: GROUND NO. 2.9: ABOUT INCLUSION OF FUNCTIONALLY DISSIMILAR COMPANIES, THE LEARNED AR SUBMITTED AS UNDER: ACCENTIA TECHNOLOGIES PVT. LIMITED. (ACCE NTIA) TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: NOT CONTESTED TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO356-357 OF APPEAL SET DRP SUBMISSION :PLEASE REFER TO PAGE NO156- 157 OF THE APPEAL SET DRP DIRECTIONS: WITHOUT PREJUDICE TO THE APPELLANTS CONTENTIONS AG AINST THE USE OF THE DATA PROVIDED UNDER SECTION 133(6), IT IS SUBMITTED THAT ACCENTIA IS ENGAGED IN MEDICAL TRANSCRIPTION SERVICES WHICH ARE CLEARLY DIFFERENT FROM THE CUSTO MER SUPPORT SERVICES RENDERED BY THE APPELLANT. THE LD. TPO HAS HIMSELF ADMITTED THAT THE ANNUAL RE PORT FOR THE RELEVANT FINANCIAL YEAR (I.E. FY 2006-07) IS UNAVAILABLE AND THAT HE HAS RE LIED UPON THE CONTENTS ON THE REPLY RECEIVED FROM THE COMPARABLE UNDER SECTION 133(6). THE RELEVANT EXTRACT OF THE TPOS ORDER IS REPRODUCED BELOW: 42 PLEASE REFER TO PAGE NO23 OF APPEAL SET (HE REFERRED TO PARA 1 ON PAGE 356 OF THE APPEAL SE T FOR THE TPO ORDER WHERE THE NATURE OF SERVICES OF ACCENTIA HAVE BEEN DISCUSSED BY THE LD. TPO) WE PLACE RELIANCE ON THE JUDGMENTS OF AVINEON INDIA PVT LTD VS DCIT [ITA NO. 1989/HYD/2011, (TS-308-ITAT-2013(HYD)-TP)], ITAT HY DERABAD) (PLEASE REFER TO PARA D-1 ON PAGE NO 14 OF THE CASE LAW COMPENDIUM) WHERE ACCENTIA HAS BEEN EXCLUDED FOR THE FOLLOWING REASON: EXTRA ORDINARY EVENTS LIKE MERGER AND DEMERGER HAD TAKEN PLACE DURING THE RELEVANT FINANCIAL YEAR WHICH MUST HAVE IMPACTED THE FINANCI AL RESULTS OF THE COMPANY - TWO COMPANIES IRIDIUM TECHNOLOGIES AND GEOSOFT TECHNOLO GIES AMALGAMATED WITH ACCENTIA TECHNOLOGIES LTD WHICH RESULTED IN A HIGHER PROFIT FOR THE COMPANY DURING THE YEAR. ALLSEC TECHNOLOGIES LTD. (ALLSEC) TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO552-553 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO357-358 OF APPEAL SET DRP SUBMISSION : PLEASE REFER TO PAGE NO117- 119 OF THE APPEAL SET DRP DIRECTIONS: PLEASE REFER TO PAGE NO23 OF THE APPEAL SET DIFFERENT RISK PROFILE ALLSEC IS A FULL-FLEDGED ENTREPRENEUR THAT OPERATES IN THE OPEN MARKET UNDER COMPETITIVE CONDITIONS AND A HIGH RISK ENVIRONMENT. A PERUSAL OF THE ANNUAL REPORT OF ALLSEC CLEARLY INDICATES THAT THE COMPARA BLE FACES HIGH RISKS IN CONTRAST WITH THE APPELLANT. THUS, ENTREPRENEURIAL COMPANIES CANNOT BE COMPARED TO THE CAPTIVE SERVICE PROVIDER. A SNAPSHOT OF THE RISKS C OMPARISON BETWEEN ALLSEC AND THE APPELLANT IS GIVEN BELOW: RISK PROFILE COMPARISON NATURE OF RISK ALLSEC APPELLANT BUSINESS RISK BORNE BY ALLSEC BORNE BY THE AE FINANCIAL RISK BO RNE BY ALLSEC BORNE BY THE AE EXCHANGE FLUCTUATION RISK BORNE BY ALLSEC BORNE BY THE AE COST ARBITRAGE BORNE BY ALLSEC BORNE BY THE APPELLANT INDIAN TAXATION RISK BORNE BY ALLSEC BORNE BY THE AE TECHNOLOGY RISK BORNE BY ALLSEC BORNE BY THE AE INFRAST RUCTURE RISK BORNE BY THE ALLSEC BORNE BY THE AE HUMAN RESOURCE RISK BORNE BY THE ALLSEC BORNE BY THE AE CREDIT RISK BORNE BY ALLSEC BORNE BY THE AE CAPACITY UTILIZATION RISK BORNE BY ALLSEC BORNE BY THE AE REWORK RISK BORNE BY ALLSEC BORNE BY THE AE (HE REFERRED TO PAGE 730OF THE ANNUAL REPORT COMPEN DIUM FOR THE RISK PROFILE OF ALLSEC AND PG 30-31 OF THE PAPER BOOK FOR THE TP ST UDY TO UNDERSTAND THE RISK PROFILE OF THE APPELLANT) 43 IN THIS REGARD, RELIANCE IS ALSO PLACED ON THE RECE NT JUDGEMENT OF DELHI HIGH COURT IN CASE OF CHRYSCAPITAL INVESTMENT INVESTMENT ADVISORS (INDIA) PR IVATE LIMITED VS DCIT (ITA 417/2014) QUOTE 32..NOW , THE SEQUITUR OF RULE 10B(2) AND (3) IS THAT IF THE COMPARABLE ENTITY OR ENTITYS TRANSACTIONS BROADLY CONFORM TO THE ASS ESSEES FUNCTIONING, IT HAS TO BE ENTER INTO THE MATRIX AND BE APPROPRIATELY CONSIDE RED THE OTHER EXERCISE WHICH THE TPO HAS TO NECESSARILY PERFORM IS THAT IF THERE ARE SOME DIFFERENCES , AN ATTEMPT TO ADJUST THEM TO ELI MINATE MATERIAL DIFFERENCES SHOULD BE MADE UNQUOTE (LEARNED AR REFERRED TO PARA 32ON PAGE 96OF THE CAS E LAW COMPENDIUM ) HIGH ADVERTISING AND MARKETING SPEND - 5.23% ALLSEC FAILS THE ADVERTISING AND MARKETING (A&M) EXPENSE FILTER APPLIED BY THE APPELLANT. (PLEASE REFER TO PAGE 738OF THE ANNUAL REPORT COMPE NDIUM FOR THE PROFIT AND LOSS ACCOUNT) RELATED PARTY TRANSACTION 12% ALLSEC FAILS THE RPT FILTER APPLIED BY THE APPELLANT (HE REFERRED TO PAGE 754-755 OF THE ANNUAL REPORT C OMPENDIUM FOR THE DETAILS OF THE RELATED PARTY TRANSACTIONS) BODHTREE CONSULTING LIMITED (SEG.) (BODHTREE) TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO539-543 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO361- 366 OF THE APPEAL SET DRP SUBMISSION : PLEASE REFER TO PAGE NO122-127 OF THE APPEAL SET DRP DIRECTIONS: PLEASE REFER TO PAGE FUNCTIONALLY DIFFERENT: THE COMPANY OPERATES IN NICHE AREAS LIKE DATA CLEAN SING AND SOFTWARE DEVELOPMENT WHICH IS DIFFERENT FROM THE APPELLANT PROVIDING ITE S SERVICES. BODHTREE ALSO OWNS SOFTWARE PRODUCTS LIKE MIDAS AND THEREFORE CANNOT BE COMPARED WITH THE APPELLANT. THE RELEVANT EXTRACTS FROM THE ANNUAL RE PORT OF BODHTREE ARE REPRODUCED BELOW: (HE REFERRED TO PAGE 16 OF THE ANNUAL REPORT COMPEN DIUM FOR THE DETAILS OF THE SEGMENTAL PERFORMANCE OF BODHTREE) 44 NO23 OF APPEAL SET (HE REFERRED TO PAGE 29OF THE ANNUAL REPORT COMPEND IUM FOR THE SIGNIFICANT ACCOUNTING POLICIES IN RESPECT OF REVENUE RECOGNITI ON OF THE APPELLANT) EXTRAORDINARY PROFIT DUE TO BUSINESS RESTRUCTURING: A PERUSAL OF THE ANNUAL REPORT OF BODHTREE FOR FY 2 006-07 AND THE PREVIOUS YEARS ANNUAL REPORT, INDICATES THAT BODHTREE HAD EARNED A N EXTRAORDINARY PROFIT THE PROFITS ARE TABULATED BELOW: PARTICULARS 2004 2005 2006 2007 2008 OPERATING REVENUE 42,647,090 38,685,845 53,189,165 103,528,905 103,665,824 LESS: OPERATING COST 36,998,127 31,203,235 47,169,155 58,049,032 88,052,353 OPERATING PROFIT 5,648,963 7,482,610 6,020,010 45,479,873 15,613,471 OPERATING MARK UP ON COST 15.27% 23.98% 12.76% 78.35% 17.73% (HE REFERRED TO PAGE NO 17 OF THE ANNUAL REPORT COM PENDIUM FOR ANALYSIS OF THE FINANCIAL AND OPERATIONAL PERFORMANCE OF BODHTREE A ND PAGE NO 23 OF THE ANNUAL REPORT COMPENDIUM FOR THE PROFIT AND LOSS ACCOUNT O F BODHTREE) RELATED PARTY TRANSACTIONS 38.54% BODHTREE FAILS THE RPT FILTER OF THE APPELLANT. (HE REFERRED TO PAGE 31 OF THE ANNUAL REPORT COMPEN DIUM FOR THE DETAILS OF THE RELATED PARTY TRANSACTIONS) WITHOUT PREJUDICE TO THE ARGUMENTS OF THE APPELLANT AGAINST THE USE OF THE INFORMATION UNDER SECTION 133(6), IT IS SUBMITTED THAT A COPY OF THE REPLY RECEIVED FROM BODHTREE WAS NOT PROVIDED THE APPELLANT. CALIBER POINT BUSINESS SOLUTIONS LTD (CALIBER POIN T) TPO/D RP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO 544-546 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO366- 369OF APPEAL SET DRP SUBMISSION : PLEASE REFER TO PAGE NO 127-130OF THE APPEAL SET DIFFERENT FINANCIAL YEAR ENDING: IT IS SUBMITTED THAT THE LD. TPO HIMSELF HAS APPLIED THE DIFFERENT FINANCIAL YEAR ENDING FILTER CLEARLY INDICATING THAT COMPARABLES WITH FINANCIAL YEAR ENDING WITH MARCH 31 SHALL BE SELECT ED. THE RELEVANT EXTRACT FROM THE TPO ORDER IS REPRODUCED BELOW: (HE REFERRED TO PARA 9.5 ON PAGE NO 327 OF THE APPE AL SET FOR THE LD. TPOS 45 DRP DIRECTIONS: PLEASE REFER TO PAGE NO23 OF APPEAL SET OBSERVATIONS ON THE APPLICATION OF DIFFERENT FINANCI AL YEAR ENDING FILTER) WITHOUT PREJUDICE TO THE CONTENTION OF THE APPELLAN T THAT THE DIFFERENT FINANCIAL YEAR END FILTER SHOULD NOT BE APPLIED, IT IS SUBMITTED THAT SHOULD THE SAID FILTER BE APPLIED, THEN CALIBER SHOULD NOT BE CONSIDERED IN THE FINAL SET OF COMPARABLES AS ITS FINANCIAL YEAR ENDS IN DECEMBER WHEREAS APPELLANTS FINANCIAL YEAR ENDS IN MARCH. THE RELEVANT EXTRACT FROM THE ANNUAL REPORT IS REPRODUCED BELOW: (HE REFERRED PAGE 803 OF ANNUAL REPORT COMPENDIUM FOR THE PROFIT AND LOSS ACCOUNT OF CALIBER POINT) E - C LERX SERVICES LTD. (E - CLERX) TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO 547-548 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO369- 371 OF APPEAL SET DRP SUBMISSION : PLEASE REFER TO PAGE NO130-132 OF THE APPEAL SET DRP DIRECTIONS: PLEASE REFER TO PAGE NO23 OF APPEAL SET AT THE OUTSET, IT IS SUBMITTED THAT E-CLERX OUGHT T O BE EXCLUDED ON ACCOUNT OF THE UNUSUAL/PECULIAR FEATURES WHICH ARE APPARENT FROM T HE MATERIAL ON RECORD WHICH HAS BEEN CONFIRMED BY THE SPECIAL BENCH IN THE CASE OF MAERSK GLOBAL CENTRE INDIA PVT. LTD. VS. DCIT AND THE HONBLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT INVESTMENT ADVISORS (INDIA) P RIVATE LIMITED VS DCIT. DIFFICULT TO FIND A RELATIVELY DEGREE OF COMPARABIL ITY SINCE SERVICES RENDERED ARE FUNCTIONALLY DIFFERENT : ECLERX IS A KNOWLEDGE PROCESS OUTSOURCING (KPO) COMPANY ENGAGED IN PROVIDING DA TA ANALYTICS AND DATA PROCESS SOLUTIONS TO THE CUSTOMERS. THE DATA ANALYTICS SERV ICES PERFORMED BY ECLERX IS FUNCTIONALLY DIFFERENT, MORE VALUE ADDED AND HIGH E ND IN NATURE COMPARED TO THE LOW END BACK OFFICE SERVICES PROVIDED BY THE APPELL ANT. IN TERMS OF FUNCTIONS, THE OPERATIONS OF THE COMPAN Y INCLUDE HIGH END ACTIVITY IN THE NATURE OF DATA ANALYTICS, COMPETITIVE PRICING AND C ATALOG ANALYTICS, DATA INTEGRATION AND REPORTING, CUSTOM RESEARCH ANALYSIS AND MODELIN G, WEB ANALYTICS ETC. ECLERXS KNOWLEDGE PROCESS OUTSOURCING TEAMS DO MORE THAN OP ERATE PROCESSES COST EFFECTIVELY, THEY TRANSFORM AND IMPROVE PROCESSES T HAT MAKE A DIFFERENCE TO COMPANY'S TOP AND BOTTOM LINE. THEIR EXPERT PROJECT TEAMS AND PROPRIETARY TECHNOLOGIES SOLVE COMPLEX PROBLEMS AND MAKE BUSINE SS OPPORTUNITIES POSSIBLE FOR MAJOR GLOBAL CORPORATIONS EVERY DAY. (THE LEARNED AR REFERRED TO PAGE 35, 36,37 OF THE A NNUAL REPORT COMPENDIUM FOR THE INFORMATION FURNISHED BY THE COM PANY U/S 133(6) IN RESPECT OF THE BUSINESS DESCRIPTION OF E-CLERX) 46 IN THIS REGARD, RELIANCE IS ALSO PLACED ON THE RECE NT JUDGEMENT OF HONBLE DELHI HIGH COURT IN CASE OF CHRYSCAPITAL INVESTMENT INVESTMENT ADVISORS (INDIA) PRIVATE LIMITED VS DCIT (ITA 417/2014) QUOTE 32..NOW , THE SEQUITUR OF RULE 10B(2) AND (3) IS THAT IF THE COMPARABLE ENTITY OR ENTITYS TRANSACTIONS BROADLY CONFORM TO THE ASSESS EES FUNCTIONING, IT HAS TO BE ENTER INTO THE MATRIX AND BE APPROPRIATELY CONSIDE RED THE OTHER EXERCISE WHICH THE TPO HAS TO NECESSARILY PERFORM IS THAT IF THERE ARE SOME DIFFERENCES , AN ATTEMPT TO ADJUST THEM TO ELI MINATE MATERIAL DIFFERENCES SHOULD BE MADE UNQUOTE (HE REFERRED TO PARA 32ON PAGE 96OF THE CASE LAW CO MPENDIUM ) EXTRAORDINARY MARGIN @ 89.33% (HE REFERRED TO PAGE 40 OF THE ANNUAL REPORT COMPEN DIUM FOR THE FINANCIAL RESULTS OF E-CLERX AND PG 49 OF THE ANNUA L REPORT COMPENDIUM FOR THE PROFIT AND LOSS ACCOUNT OF E-CLE RX) RELIANCE HAS BEEN PLACED ON THE FOLLOWING DECISIONS IN WHICH E-CLERX HAS BEEN REJECTED AS A COMPARABLE TO THOSE COMPANIES PROVIDI NG BPO/LOW END SERVICES AND HAVING SUPERNORMAL PROFITS: - MAERSK GLOBAL CENTRE INDIA PVT. LTD. VS. DCIT (2009 -TIOL-322-ITAT- MUMBAI) (HE REFERRED TO PARA 82-83ON PAGE NO 249-251 OF THE CASE LAW COMPENDIUM) - CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. (I TA NO. 1961/HYD/2011, ITAT HYDERABAD) (HE REFERRED TO PARA 14-15 ON PAGE NO 47-49 OF THE CASE LAW COMPENDIUM) **THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE FOR THE REASONS THAT IT HAS EARNED SUPERNORMAL PROFIT AND IT IS ENGAGED IN PROV IDING KPO SERVICES, WHICH ARE DISTINCT FROM THE NATURE OF SERVICES PROV IDED BY THE TAXPAYER. - MARKET TOOLS RESEARCH PVT. LTD. (ITA NO. 2066/HYD/2 011, TS-35-ITAT- 2013(HYD)-TP, ITAT HYDERABAD)HE REFERRED TO PARA 8 ON PAGE NO 295-296 OF THE CASE LAW COMPENDIUM) - AVINEON INDIA PVT LTD [ITA NO. 1989/HYD/2011, (TS-3 08-ITAT-2013(HYD)- TP)], ITAT HYDERABAD) PLEASE REFER TO PARA D-2 ON PAGE NO 15 OF THE CASE LAW COMPENDIUM) - CIT (I) V CAPITAL IQ INFORMATION SYSTEMS PVT LTD ( I.T.T.A. NO.305 OF 47 2014, HIGH COURT OF HYDERABAD) ( HE REFER RED TO PAGE NO 27 OF THE CASE LAW COMPENDIUM) HCL COMNET SYSTEMS AND SERVICES LTD. (SEG.) ( HCL COMNET) TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO546 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO374-367 OF THE APPEAL SET DRP SUBMISSION : PLEASE REFER TO PAGE NO137-138 OF THE APPEAL SET DRP DIRECTIONS: PLEASE REFER TO PAGE NO23 OF APPEAL SET AT THE OUTSET, IT IS SUBMITTED THAT THE TPOS REPLY IN THE TP ORDER IS A BUNDLE OF CONTRADICTIONS. FOR EXAMPLE, REFERENCE MAY BE MADE TO THE EXTRACT FROM THE TP ORDER AS RE-PRODUCED BELOW. THE TAXPAYERS MAIN ARGUMENT IS THAT THE TPO DID N OT PROVIDE ANY INFORMATION OR ANNUAL REPORT OF THE COMPANY FOR FY 2006-07. THE AB OVE FACT MENTIONED BY THE TAXPAYER IS CORRECT. BUT, THIS IS AN INADVERTENT MISTAKE. BU T, IT IS A FACT THAT THIS COMPANY FINDS ITS PLACE IN THE ACCEPT-REJECT MATRIX OF THE TPO SENT A LONG WITH THE NOTICE ISSUED BY THE TPO AND IS FUNCTIONALLY SIMILAR AS GIVEN BELOW. THUS, THE TPO HIMSELF ADMITS THAT THE RELEVANT INFO RMATION WAS NOT SHARED WITH THE APPELLANT. THE ABOVE EXTRACTS HIGHLIGHT THE CALLOUS MANNER IN WHICH THE ENTIRE ASSESSMENT EXERCISE HAS BEEN CONDUCTED WITH A PRE-DETERMINED MINDSET TO REACH A TP ADJUSTMENT OUTCOME. THIS COMPARABLE SHOULD BE EXCLUDED IN THE ABSENCE O F ANY RELIABLE INFORMATION. WITHOUT PREJUDICE TO THE SAME, THE APPELLANT REQUESTS THE H ONBLE ITAT TO DIRECT THE TPO/AO TO PROVIDE A COPY OF THE ANNUAL REPORT OF THE COMPANY SO AS TO ENABLE THE APPELLANT TO ANALYSE THE COMPARABILITY OF THE COMPANY WITH THAT OF THE APPELLANT. FURTHER, THE TPO HIMSELF HAS ADMITTED THAT THE RPT OF THE COMPANY IS 21.52% AND HENCE, THIS COMPANY DESERVES TO BE EXCLUDED BASED ON THE S ONY RULING THAT PERMITS ONLY COMPANIES WITH RPT LESS THAN 10 -15% OF THEIR REVEN UES. DIFFERENT FINANCIAL YEAR ENDING: IT IS SUBMITTED THAT THE LD. TPO HIMSELF HAS APPLIE D THE DIFFERENT FINANCIAL YEAR ENDING FILTER CLEARLY INDICATING THAT COMPARABLES WITH FINANCIAL YEAR ENDING WITH MARCH 31 SHALL BE SELECTED. THE RE LEVANT EXTRACT FROM THE TPO ORDER IS REPRODUCED BELOW: (HE REFERRED TO PARA 9.5 ON PAGE NO 327 OF THE APPE AL SET FOR THE LD. TPOS OBSERVATIONS ON THE APPLICATION OF DIFFERENT FINANCI AL YEAR ENDING FILTER) IT IS PERTINENT TO NOTE THAT THE LD. TPO HAS RESORT ED TO CHERRY PICKING IN CASE OF HCL COMNET AS THE FINANCIAL YEAR ENDING FOR THE COMPARA BLE IS JUNE 30. THE RELEVANT EXTRACT FROM THE ANNUAL REPORT IS REPRODUCED BELOW: 48 (HE REFERRED PAGE 86 OF ANNUAL REPORT COMPENDIUM FOR THE PROFIT AND LOSS ACCOUNT OF HCL COMNET) FUNCTIONALLY DIFFERENT: THE IT ENABLED SERVICES SEGMENT COMPRISES OF DATA C ENTRE MANAGEMENT SERVICES, END USER COMPUTING SERVICES, M ANAGED SECURITY SERVICES, NETWORKING SERVICES AND TOOLS AND PROCESS CONSULTIN G SERVICES.THE RELEVANT EXTRACT OF THE ANNUAL REPORT IS REPRODUCED BELOW: (HE REFERRED TO PARA 4 ON PAGE 68 OF ANNUAL REPORT COMPENDIUM FOR THE BUSINESS DESCRIPTION OF HCL COMNET) RELATED PARTY TRANSACTIONS 21.52% HCL COMNET FAILS THE RPT FILTER OF THE APPELLANT. (HE REFERRED PAGE 106-107 OF ANNUAL REPORT COMPENDI UM FOR THE DETAILS OF THE RELATED PARTY TRANSACTIONS) INFORMED TECHNOLOGIES INDIA LIMITED (INFORMED TECH NOLOGIES) TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO546-547 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO 377-378OF THE APPEAL SET FUNCTIONALLY DIFFERENT INFORMED TECHNOLOGIES PROVIDES HIGH END IT ENABLED SERVICES AND KNOWLEDGE BASED BACK OFFICE PROCESSING (KPO). THIS IS IN CONTRAST WITH T HE LOW END BPO SERVICES PROVIDED BY THE APPELLANT. A PERUSAL OF THE WEBSITE OF INFORME D TECHNOLOGIES CLEARLY INDICATES THAT IT IS IN FACT A HIGH END SERVICE PROVIDER. A SNAPSHOT FROM THE WEBSITE IS REPRODUCED BELOW. 49 DRP SUBMISSION : PLEASE REFER TO PAGE NO138-140 OF THE APPEAL SET DRP DIRECTIONS: PLEASE REFER TO PAGE NO23 OF THE APPEAL SET (HE REFERRED TO ANNEXURE A FOR THE COPY OF THE WEB EXTRACTS FOR THE BUSINESS DESCRIPTION AS AVAILABLE ON THE COMPANY WEBSITE) REPRODUCED BELOW IS AN EXTRACT FROM THE ANNUAL REPO RT OF INFORMED TECHNOLOGIES: (HE REFERRED PAGE 150 OF ANNUAL REPORT COMPENDIUM F OR THE BUSINESS DESCRIPTION OF INFORMED TECHNOLOGIES) LOW EMPLOYEE COST/ SALES RATIO- 19% THE COMPANY DURING THE FY 2006-07 HAS A LOW WAGES/ SALES RATIO OF 19% AS COMPARED TO THE WAGES /SALES RATIO OF 57% OF THEAPPELLANT. (HE REFERRED PAGE 162 AND 163 OF ANNUAL REPORT COMP ENDIUM FOR THE PROFIT AND LOSS ACCOUNT OF INFORMED TECHNOLOGIES) HE PLACED RELIANCE ON THE JUDGEMENT OF GOOGLE INDIA PVT. LTD VS DCIT (ITA NO.1368/BANG/2010), WHEREIN THE HONBLE TRIBUNAL OBSERVED: AS REGARDS THE ISSUE OF (8) VISHAL INFORMATION TEC HNOLOGIES LTD., WE FIND THAT, IT IS ADOPTED BY THE TPO. THE DRP HELD THAT VISHAL INFORM ATION TECHNOLOGIES HAS OUTSOURCED ITS CALL CENTRE WORK AND, THEREFORE, THE EMPLOYEE COST IS LESS THAN 25% AS IS THE COMMON PRACTICE AMONG OTHER ITES SERVICES. THE TPO AS WELL AS THE DRP HAVE RECORDED THAT IN THE ITES SECTOR, EMPLOYEES FILTER OF LESS THAN 25% ALONE IS NOT APPLICABLE FOR THE REASON THAT IN ADDITION TO THE A MPLE COSTS, THE COMMISSION COSTS ARE ALSO IMPORTANT. WHEN COMPANY HAS OUTSOURCED ITS ITES SERVICES, IT C ANNOT BE SAID THAT ITSBUSINESS RESULTS WOULD BE COMPARABLE T O ANY OTHER ITES SERVICE PROVIDER RENDERING THE SERVICES ENTIRELY ON ITS OWN . IN SUCH CIRCUMSTANCES, THE NET MARGINS OF THE TWO COMPARABLES CANNOT BE ON THE SAME BASIS. THE DECISIONS RELIED UPON BY THE LEARNED COUNSEL FOR TH E ASSESSEE ALSO HELD THAT THE EMPLOYEE COST FILTER IS IMPORTANT FILTER TO BE ADOPTED FOR T HE PURPOSE OF COMPUTING ALP. IN THE CASE OF MAERSK GLOBAL SERVICES CENTRE (INDIA) PVT. LTD., IN ITA NO.3774/M/2011, THE TRIBUNAL AT MUMBAI HAS HELD THAT VISHALINFORMATION TECHNOLOGIES LTD. HAS TO BE EXCLUDED FROM THE LIST OFCOMPARABLES OF ITES COMPAN Y AS IT HAS OUTSOURCED ITS SERVICES. INVIEW OF THE SAME, WE DIRECT THE AO TO EXCLUDE THI S COMPANY ALSOFROM THE LIST OF COMPARABLES. (HE REFERRED TO PARA 19 AND 20ON PAGE NO 164-168 OF THE CASE LAW COMPENDIUM) RELATED PARTY TRANSACTIONS 15.83% INFORMED TECHNOLOGIES FAILS THE RPT FILTER OF THE A PPELLANT. 50 ( HE REFER RED TO PAGE 165 OF T HE ANNUAL REPORT COMPENDIUM FOR THE DETAILS OF THE RELATED PARTY TRANSACTIONS WE PLACE RELIANCE ON THE JUDGEMENT OF MOTOROLA SOLUTIONSINDIA PRIVATE LIMITEDVS DCIT (ITA NO.5637/DEL/2011), WHEREIN THE HONBLE TRIBUNAL OBSERVED: HOWEVER, THERE IS CONSENSUS ON THE EFFECT OF RPT I .E. IT SHOULD NOT MATERIALLY AFFECT THE INTERNATIONAL TRANSACTION. THEREFORE, CONSIDERING T HE SUBMISSIONS OF BOTH THE SIDES, WE ARE OF THE OPINION THAT IF BY APPLYING THE THRESHOL D LIMIT OF 15% OF RELATED PARTY TRANSACTION , SUFFICIENT COMPARABLES ARE AVAILABLE THEN THERE I S NO REASON TO FURTHER EXTEND THE LIMIT TO 25%. (HE REFERRED TO PARA 56ON PAGE NO 397 -398 OF THE CASE LAW COMPENDIUM) SUPER NORMAL GROWTH DURING THE FY 2006-07, INFORMED TECHNOLOGIES HAD A SUPERNORMAL GROWTH OF MORE THAN 130%. THE RELEVANT EXTRACT FROM THE ANNUAL REPORT I S REPRODUCED BELOW: (HE REFERRED PAGE 150OF ANNUAL REPORT COMPENDIUM FO R A BRIEF ON THE FINANCIAL PERFORMANCE OF INFORMED TECHNOLOGIES) RELIANCE HAS BEEN PLACED ON THE FOLLOWING DECISION IN WHICH INFORMED TECHNOLOGIES HAS BEEN REJECTED AS A COMPARABLE ON ACCOUNT OF ITS ABN ORMALLY HIGH MARGINS: - CHRYSCAPITAL INVESTMENT INVESTMENT ADVISORS (INDIA) PRIVATE LIMITED VS DCIT (ITA 417/2014) (HE REFERRED TO PARA 6-10 ON PAGE NO 61-66 OF THE CASE LAW COMPENDIUM) - CUMMINS TURBO TECHNOLOGIES LTD, UK - INDIA BRANCH ( ITA NO. 161 & 269/PN/2013, [TS-304-ITAT-2014(PUN)-TP], ITAT PUNE) (HE REFERRED TO PARA 6-10ON PAGE NO 136-139 OF THE CASE LAW COMPENDIUM) MAPLE E SOLUTIONS LTD. (MAPLE) TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO553 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: FUNCTIONALLY DIFFERENT (BUSINESS RESTRUCTURING) DURING THE FINANCIAL YEAR 2006-07, MAPLE HAS BECOME A SUBSIDIARY OF TRITON CORP LIMITED. TRITON CORP LIMITED HAS ACQUIRED 100% SHARES OF THE COMPANY FROM HARYANA FIBERS LIMITED W.E.F 1 ST JANUARY 2007. THE RELEVANT EXTRACT FROM THE ANNUAL REPORT IS REPRODUCED BELOW: 51 PLEASE REFER TO PAGE NO336-337 OF THE APPEAL SET DRP SUBMISSION : PLEASE REFER TO PAGE NO141-142OF THE APPEAL SET DRP DIRECTIONS: PLEASE REFER TO PAGE NO23 OF APPEAL SET (HE REFERRED PAGE 200OF ANNUAL REPORT COMPENDIUM FO R THE RELATED PARTY DISCLOSURES) RELATED PARTY TRANSACTIONS 14% AMPLE FAILS THE RPT FILTER OF THE APPELLANT (HE REFERRED PAGE 199-200OF ANNUAL REPORT COMPENDIU M FOR THE DETAILS OF RELATED PARTY TRANSACTIONS OF MAPLE) UNRELIABLE FINANCIAL INFORMATION: IN CASE OF CRM SERVICES INDIA (P)LTD. (ITA NO.4068/DEL/2009) IT WAS HELD THAT SINCE THE REPUTATION OF THE GROUP WAS UNDER SERIOUS INDICTMENT, IT WOULD BE UNSAFE TO TAK E THEIR RESULTS FOR BENCHMARKING PURPOSES.(HE REFERRED TO PARA 17.2 ON PAGE NO 36-37OF ANNEXURE B ) FOLLOWING DECISIONS OF VARIOUS TRIBUNALS WHICH SUPP ORT THE ABOVE VIEW ARE AS UNDER: - MARKET TOOLS RESEARCH PVT. LTD. (ITA NO. 2066/HYD/2 011, TS-35-ITAT- 2013(HYD)-TP, ITAT HYDERABAD)HE REFERRED TO PARA 10 ON PAGE NO 296 OF THE CASE LAW COMPENDIUM) - CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. (I TA NO. 1961/HYD/2011, ITAT HYDERABAD)(PLEASE REFER TO PARA 18-19 ON PAGE NO 49 -50 OF THE CASE LAW COMPENDIUM) - CIT (I) V CAPITAL IQ INFORMATION SYSTEMS PVT LTD ( I.T.T.A. NO.305 OF 2014, HIGH COURT OF HYDERABAD) (HE REFERRED TO PAGE NO 27 OF T HE CASE LAW COMPENDIUM) - CUMMINS TURBO TECHNOLOGIES LTD, UK - INDIA BRANCH ( ITA NO. 161 & 269/PN/2013, [TS-304-ITAT-2014(PUN)-TP], ITAT PUNE) (HE REFERRED TO PARA 11- 15 ON PAGE NO 139-142 OF THE CASE LAW COMPENDIUM) MOLD TEK TECHNOLOGIES LIMITED (SEGMENTAL) (MOLD TE K) TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO548-550 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO381- 384 OF THE APPEAL SET DRP SUBMISSION : PLEASE REFER TO PAGE NO142 OF THE APPEAL SET DRP DIRECTIONS: PLEASE REFER TO PAGE AT THE OUTSET, IT IS SUBMITTED THAT MOLD-TEK OUGHT TO BE EXCLUDED ON ACCOUNT OF THE UNUSUAL/PECULIAR FEATURES WHICH ARE APPARENT FROM T HE MATERIAL ON RECORD WHICH HAS BEEN CONFIRMED BY THE SPECIAL BENCH IN THE CASE OF MAERSK GLOBAL CENTRE INDIA PVT. LTD. VS. DCIT AND THE HONBLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT INVESTMENT ADVISORS (INDIA) PRIVATE LIMIT ED VS DCIT. FUNCTIONALLY DIFFERENT: THE COMPANY IS ENGAGED IN THE BUSINESS OF RENDERING STRUCTURAL ENGINEERING KPO SERVICES IN THE NATURE OF PRODUCING DESIGNS, DRAWINGS, DETAILED STRUCTURAL ENGINEERING DRAWINGS ETC. WHICH ARE HIGHER-UP ON THE VALUE CHAIN WHICH CANNOT BE COMPARED WITH THE APPELLANT LOW EN D BACK OFFICE SERVICES. THE RELEVANT EXTRACT FROM THE ANNUAL REPORT IS REPRODUCED BELOW: 52 NO236 - 249 OF APPEAL SET (HE REFERRED PAGE 213 AND 217OF THE ANNUAL REPORT C OMPENDIUM FOR THE DETAILS OF THE KPO DIVISION OF MOLD-TEK) EXTRA-ORDINARY EVENT- ACQUISITION MOLD TEK ACQUIRED CROSS ROAD DETAILING INC . DURING THE RELEVANT ASSESSMENT YEAR. THE RELEVANT EXTRACT FROM THE ANNUAL REPORT IS REPR ODUCED BELOW: (HE REFERRED PAGE 213, 214OF ANNUAL REPORT COMPENDI UM FOR THE ACQUISITION DETAILS BY MOLD-TEK) EVEN AS PER INFORMATION PROVIDED BY COMPANY IN ITS RESPONSE TO NOTICE UNDER SECTION 133(6) THE CO HAS MENTIONED THAT IT IS ENGAGED IN E NGINEERING CONSULTING SERVICES. HIGH ADVERTISING & MARKETING EXPENDITURE -4.86% (HE REFERRED PAGE NO243OF ANNUAL REPORTS COMPENDIUM FOR THE PROFIT AND LOSS ACCOUNT SCHEDULE DETAILING THE ADVERTISEMENT EXPENSES UNDER TAKEN BY MOLD-TEK) LOW EMPLOYEE COST/ SALES RATIO - 10% 53 THE COMPANY DURING THE FY 2006-07 HAS A LOW WAGES/ SALES RATIO OF 10% AS COMPARED TO THE WAGES /SALES RATIO OF 57% OF THEAPPELLANT. (HE REFERRED PAGE NO 243 OF ANNUAL REPORTS COMPENDI UM FOR THE PROFIT AND LOSS ACCOUNT SCHEDULE DETAILING THE EMPLOYEE COST INCURR ED BY THE MOLD-TEK) EXTRAORDINARY MARGIN @ 117% (HE REFERRED PAGE NO 234 OF ANNUAL REPORTS COMPENDI UM FOR THE PROFIT AND LOSS ACCOUNT OF MOLD - TEK) SUPERNORMAL GROWTH OF MORE THAN 200%. THE RELEVANT EXTRACT FROM THE ANNUAL REPORT IS REPRODUCED BELOW: (PLEASE REFER PAGE NO 213 OF ANNUAL REPORTS COMPEND IUM FOR DISCUSSION ON THE REVIEW OF OPERATIONS OF MOLD-TEK) RELIANCE MAY BE PLACED ON THE FOLLOWING DECISIONS O F VARIOUS TRIBUNALS WHICH SUPPORT THE ABOVE VIEW ARE AS UNDER: - MAERSK GLOBAL CENTRE INDIA PVT. LTD. VS. DCIT (2009 -TIOL-322-ITAT-MUMBAI) (HE REFERRED TO PARA 81 AND 83 ON PAGE NO 248-251 O F THE CASE LAW COMPENDIUM) - CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. (ITA NO. 1961/HYD/2011)(HE REFERRED TO PARA 12-13 ON PAGE NO 45-46 OF THE CASE LAW COMPENDIUM) - CIT (I) V CAPITAL IQ INFORMATION SYSTEMS PVT LTD ( I.T.T.A. NO.305 OF 2014, HIGH COURT OF HYDERABAD) (HE REFERRED TO PAGE NO 27 OF THE CASE LAW COMPENDIUM) TRITON CORP. LIMITED (TRITON) TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO553-554 TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO387 OF THE APPEAL SET FUNCTIONALLY DIFFERENT (BUSINESS RESTRUCTURING) : DURING THE FINANCIAL YEAR 2006-07, THE COMPANY HAS ACQUIRED 100% SHARES OF TH E COMPANY FROM HARYANA FIBERS LIMITED W.E.F 1 ST JANUARY 2007. THE ACQUISITION ALSO LED TO SUPERNORMAL PROFITS . ( HE REFER PARA 10 ON PAGE NO 291 OF ANNUAL REPORTS C OMPENDIUM FOR DISCUSSION ON THE 54 DRP SUBMISSION : PLEASE REFER TO PAGE NO150-152 OF THE APPEAL SET DRP DIRECTIONS: PLEASE REFER TO PAGE NO23 OF APPEAL SET ACQUISITIONS BY TRITON) LOW EMPLOYEE COST/ SALES RATIO - 18% THE COMPANY DURING THE FY 2006-07 HAS A LOW WAGES/ SALES RATIO OF 18% AS COMPARED TO THE WAGES /SALES RATIO OF 57% OF THEAPPELLANT. ( HE REFERRED PAGE NO 304 OF ANNUAL REPORTS COMPENDIU M FOR THE PROFIT AND LOSS ACCOUNT SCHEDULE DETAILING THE EMPLOYEE COST INCURR ED BY THE MOLD-TEK) UNRELIABLE FINANCIAL INFORMATION: IN CASE OF CRM SERVICES INDIA (P)LTD. (ITA NO.4068/DEL/2009) IT WAS HELD THAT SINCE THE REPUTATION OF THE GROUP WAS UNDER SERIOUS INDICTMENT, IT WOULD BE UNSAFE TO TAK E THEIR RESULTS FOR BENCHMARKING PURPOSES. ( PLEASE REFER TO PARA 17.2 ON PAGE NO __OF ANNEXURE B) RELIANCE MAY BE ALSO BE PLACED ON THE FOLLOWING DEC ISIONS OF VARIOUS TRIBUNALS WHICH SUPPORT THE ABOVE VIEW ARE AS UNDER: - CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. (I TA NO. 1961/HYD/2011, ITAT HYDERABAD))(HE REFERRED TO PARA 18-19 ON PAGE NO 49-50 OF THE CASE LAW COMPENDIUM) - CIT (I) V CAPITAL IQ INFORMATION SYSTEMS PVT LTD ( I.T.T.A. NO.305 OF 2014, HIGH COURT OF HYDERABAD) (HE REFERRED TO PAGE NO 27 OF THE CASE LAW COMPENDIUM) - MARKET TOOLS RESEARCH PVT. LTD. (ITA NO. 2066/HYD/2 011, TS-35-ITAT- 2013(HYD)-TP, ITAT HYDERABAD))(PLEASE REFER TO PARA 10ON PAGE NO 296 OF THE CASE LAW COMPENDIUM ) VISHAL INFORMATION TECHNOLOGIES LTD. (CORAL HUB LIM ITED) (VISHAL) TPO/DRP SUBMISSIONS AND OBSERVATIONS APPE LLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO543-546 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO387-390 OF THE APPEAL SET DRP SUBMISSION : PLEASE REFER TO PAGE NO 147OF APPEAL SET DRP DIRECTIONS: PLEASE REFER TO PAGE NO23 OF THE APPEAL SET FUNCTIONALLY DIFFERENT (SIGNIFICANT PAYMENT TOWARDS VENDORS) : DURING THE FY 2006-07, THE COMPANY HAS MADE SIGNIFI CANT PAYMENT TOWARDS VENDORS (APPROX. 43% OF SALES). ON THE OTHE R HAND, IT HAS LOW PERSONNEL COST AS COMPARED TO THE APPELLANT WHOSE P ERSONNEL COST CONSTITUTE A MAJOR PROPORTION (MORE THAN 50%) OF IT S SALES. IT IS EVIDENT FROM THE FACTS THAT THE COMPANY PROVIDES AGENCY SER VICES BY WAY OF OUTSOURCING SERVICES TO THIRD PARTIES AND ACTING AS AN INTERMEDIARY BETWEEN THE FINAL CUSTOMER AND VENDOR. THE INTERME DIARY FUNCTIONS OF VISHAL CAN ONLY BE COMPARED TO THAT OF A DISTRIBUTO R WHICH TAKES TITLE TO SERVICE/ PRODUCT FOR RESALE TO THE CUSTOMER WHEREAS THE APPELLANT IS A PROVIDER OF BACK OFFICE SERVICES ON ITS OWN. THUS, APPELLANT'S ITES SERVICES CANNOT BE COMPARED WITH THE AGENCY /DISTRI BUTION FUNCTION OF VISHAL. (HE REFERRED PAGE NO 478OF ANNUAL REPORTS COMPENDIU M FOR THE PROFIT AND LOSS ACCOUNT SCHEDULE DETAILING THE VENDOR EXPENSES INCURRED BY THE VISHAL) 55 THE APPELLANT WOULD LIKE TO DRAW YOUR HONOURS ATTE NTION TO THE JUDGEMENT OF MUMBAI TRIBUNAL IN THE CASE OF MAERSK GLOBAL CENTRE INDIA PVT. LTD. VS. DCIT (2009-TIOL-322-ITAT-MUMBAI) QUOTE '....INSOFAR AS THE CASES OF TULSYAN TECHNOLOGIES L IMITED AND VISHAL INFORMATION TECHNOLOGIES LIMITED ARE CONCERNED, IT IS NOTICED FROM THEIR ANNUAL ACCOUNTS THAT THESE COMPANIES OUTSOURC ED A CONSIDERABLE PORTION OF THEIR BUSINESS. AS THE ASSESSEE CARRIED OUT ENTIRE OPERATIONS BY ITSELF, IN OUR CONSIDERED OPINION, THESE TWO CAS ES WERE RIGHTLY EXCLUDED...' UNQUOTE (HE REFERRED TO PARA 48 ON PAGE NO 289 OF THE CASE LAW COMPENDIUM) THIS COMPARABLE HAS BEEN EXCLUDED IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. (ITA NO. 1961/HYD /2011) ) THE SAME REASONING AS GIVEN ABOVE. (HE REFERRED TO PARA 16-17 ON PAGE NO 100-102 OF TH E CASE LAW COMPENDIUM) ABNORMALLY HIGH MARGIN @ 51% (HE REFERRED PAGE NO 474ANNUAL REPORTS COMPENDIUM F OR THE PROFIT AND LOSS ACCOUNT AND478OF ANNUAL REPORTS COMPENDIUM FOR THE PROFIT AND LOSS ACCOUNT SCHEDULE DETAILING THE INCOME FROM SAL ES) RELIANCE MAY ALSO BE PLACED ON THE FOLLOWING RULING S WHERE VISHAL WAS EXCLUDED FROM THE FINAL COMPARABLE SET: - COGNIZANT TECHNOLOGY SERVICES PVT. LTD. [ITA NOS. 2 106/HYD/2011 (AY 2007-08) AND 1864/HYD/2012 (AY 2008-09), TS-140 -ITAT- 2013(HYD)-TP] ( PLEASE REFER TO PARA 17-20 ON PAGE NO 116-118 OF THE CASE LAW COMPENDIUM ) - AVINEON INDIA PVT LTD [ITA NO. 1989/HYD/2011, (TS-3 08-ITAT- 2013(HYD)-TP)], ITAT HYDERABAD) (HE REFERRED TO PARA D-4 ON PAGE NO 16 OF THE CASE LAW COMPENDIUM) WIPRO LIMITED (SEG) (WIPRO) TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO550-551 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO390-394 OF THE APPEAL SET SUBSTANTIAL RESEARCH & DEVELOPMENT (R &D) WIPRO HAS INVESTED IN R&D ACTIVITIES FOR DEVELOPMEN T OF IP AND PRODUCTS DURING THE RELEVANT YEAR WHICH CONTRIBUTED TO 8.5% OF THE REVE NUE. WIPRO THEREFORE FAILS THE R&D FILTER OF 3% APPLIED BY THE APPELLANT. THE RELEVANT EXTRACTS FROM THE ANNUAL REPORT ARE REPRODUCED BELOW: 56 DRP SUBMISSION : PLEASE REFER TO PAGE NO152-154 OF THE APPEAL SET DRP DIRECTIONS: PLEASE REFER TO PAGE NO23 OF APPEAL SET (HE REFERRED TO PAGE 495 AND 496 OF ANNUAL REPORTS COMPENDIUM FOR THE BUSINESS DESCRIPTION OF WIPRO) NON AVAILABILITY OF STANDALONE FINANCIAL DATA FOR F Y 2006-07 THE STAND ALONE FINANCIAL DATA OF WIPRO FOR FY 2006 -07 IS NOT AVAILABLE IN THE PUBLIC DOMAIN. THE ANNUAL REPORT OF THE COMPANY FOR FY 200 6-07 PROVIDE THE ABRIDGED FINANCIAL DATA WHICH WOULD NOT PROVIDE THE DETAILED FINANCIAL INFORMATION THAT WOULD BE REQUIRED TO DETERMINE THE COMPARABILITY OF THE COMPANY WITH THE APPELLANT. AS SUCH, IN THE ABSENCE OF DETAILED FINANCIAL INFORMATION IT IS SUBMITTED THAT WIPRO NOT BE CONSIDERED AS A COMPARABLE. THE RELEVANT EXTRACTS FROM THE ANNUAL R EPORT IS REPRODUCED BELOW: (PLEASE REFER TO PAGE 506OF ANNUAL REPORTS COMPENDI UM FOR THE CONSOLIDATED FINANCIALS OF WIPRO) ACCORDINGLY, AS THERE EXISTS SIGNIFICANT DIFFERENCE IN THE OPERATION OF THE APPELLANT AND WIPRO, IT IS SUBMITTED THAT THE COMPANY SHOULD NOT BE CONSIDERED AS A COMPARABLE. RELIANCE IN THIS REGARD CAN BE PLACED ON THE FOLLOW ING RULINGS IN WHICH WIPRO LTD (SEG.) HAS BEEN CONSIDERED INCOMPARABLE TO PYGMY COMPANIES PROVIDING ITES SERVICES - CIT (I) V CAPITAL IQ INFORMATION SYSTEMS PVT LTD (I .T.T.A. NO.305 OF 2014, HIGH COURT OF HYDERABAD) (HE REFERRED TO PAGE NO 27 OF THE CASE LAW COMPENDIUM) - CAPITAL IQ INFORMATION SYSTEMS PVT LTD (ITA NO.1961 /HYD/2011, AY 2007-08, 57 ITAT H YDERABAD) ( HE REFER RED TO PARA 20 - 23 ON PAGE NO 22 - 54 OF THE CASE LAW COMPENDIUM) - MARKET TOOLS PVT LTD (ITA NO.2066/HYD/2011, AY 2007 -08, ITAT HYDERABAD))(HE REFERRED TO PARA 7 ON PAGE NO 295 OF THE CASE LAW COMPENDIUM) SECONDARY CONTENTION GROUND NO. 2.12: ABOUT RISK ADJUSTMENT NOT ALLOWED TO THE APPELLANT, THE LEARNED AR SUBMITTED AS UNDER: TPO/DRP SUBMISSIONS AND OBSERVATIONS APPELLANTS SUBMISSION TPO SUBMISSION: PLEASE REFER TO PAGE NO 527-532 OF THE PAPERBOOK TPO OBSERVATION IN THE ORDER: PLEASE REFER TO PAGE NO 400-427 OF THE APPEAL SET DRP SUBMISSION: PLEASE REFER TO PAGE 232- 241 OF THE APPEAL SET DRP DIRECTIONS: PLEASE REFER TO PAGE NO 23 OF APPEAL SET THE LD. TPO DISALLOWED THE APPELLANTS CLAIM FOR A RISK ADJUSTMENT BASED ON THE TWELVE REASONS (HE REFERRED PAGE 420-421 OF THE APPEAL SET) WHICH HAVE BEEN SPECIFICALLY DEALT WITH BY THE HON BLE DELHI TRIBUNAL IN THE CASE OF MOTOROLA SOLUTIONS INDIA PRIVATE LIMITED VS DCIT (ITA NO.5637/DEL/2011) . THE RELEVANT PARAGRAPHSARE REPRODUCED BELOW: PARA 116.1 LD. TPO, AFTER DETAILED DISCUSSION, IN RESPECT OF VARIOUS RISKS CLAIMED BY ASSESSEE, REJECTED THE ASSESSEES CLAIM FOR FOLLOWING REASONS: 13. THE TAX PAYER HAS NOT GIVEN ANY DETAILS REGARDING T HE AUTHORITY OF THE ABOVE METHOD DESCRIBING CAPM MODEL FOR ADJUS TMENT TOWARDS RISK. IT IS NOT CLEAR WHETHER THIS TYPE OF CALCULATION IS ACCEPTABLE IN ANY TAX JURISDICTION FOR THE PURPOSE OF RISK PREMIUM ADJUSTMENTS. ITS ACCEPTABILITY BY ANY RENOW NED AND RECOGNIZED RESEARCH INSTITUTION ACROSS THE WORLD HA S ALSO NOT BEEN SHOWN. THE MANNER IN WHICH THE RISK ADJUSTMENT IS COMPUTED BY THE TAXPAYER IS NOT FOLLOWED BY ANY COU NTRY OR ORGANIZATION OF INTERNATIONAL REPUTE LIKE OECD. IN FACT, EVEN THE OECD IS RELUCTANT TO TAKE THE RISK ADJUSTMENT A S PART OF THE GUIDELINES AS THERE ARE DIVERGENT VIEWS ON THIS ISS UE AMONG THE MEMBER COUNTRIES OF OECD AND MANY COUNTRIES FEEL TH AT THERE IS NO STRAIGHT JACKET FORMULA FOR RISK ADJUSTMENT A S IT DEPENDS ENTIRELY ON THE FACTS AND CIRCUMSTANCES OF THE CASE . THUS RISK ADJUSTMENT IS CASE SPECIFIC, FUNCTION SPECIFIC AND ALSO DEPENDS ON THE NATURE OF FUNCTIONS (INCLUDING RISKS) CARRIE D OUT BY THE COMPARABLE COMPANIES. 14. THE TAX PAYER HAD NOT GIVEN ANY EVIDENCE OR ARGUMEN T REGARDING HOW THE ASSUMPTIONS OF CAPM MODEL ARE TRU E IN THE CASE OF THE AE WHEN IT IS DOING BUSINESS WITH THE T AXPAYER. 15. THE CAPM MODEL HAS SOME WEAKNESS, THE MAIN BEING TH AT THE MODEL DOES NOT RECOGNIZE THE PRESENCE OF HUMAN CAPI TAL, WHICH IS THE MAIN DRIVING SOURCE FOR REVENUES IN THE SOFT WARE SERVICE INDUSTRY. 58 16. THE TAXPAYER CONSIDERED ONLY LISTED COMPANIES. BUT, THERE IS A METHOD OF COMPUTATION OF SIMILAR NATURE IN THE INDE X. THERE IS A MANNER IN WHICH UNLISTED COMPANIES BETA WOULD BE CALCULATED. 17. WHEREVER MARKET DATA WAS NOT AVAILABLE, THE BETA IS COMPUTED BASED ON GUIDELINE COMPANIES FROM THE SMALL CAP AND MADCAP INDICES OF BSE AND NSE. BUT, THE RISK ADJUSTMENT SH OULD ALWAYS BE BASED ON THE COMPARABLES SELECTED BY THE TAXPAYE R OR THE TPO AND NOT ON THE OTHER COMPANIES, WHICH ARE NOT E XAMINED AND OTHERWISE, NOT COMPARABLE FUNCTIONALLY. THUS, T HE BETA OF UNLISTED COMPANIES OR COMPANIES WHERE DATA WAS NOT AVAILABLE SHOULD BE THE AVERAGE OF THE BETA OF THE REMAINING COMPARABLE COMPANIES. 18. THE TAXPAYER IGNORED NEGATIVE RISK ADJUSTMENT IN SO ME OF THE COMPARABLE COMPANIES. THIS LOOKS ABSURD AS ANY RISK UNDERTAKING ENTERPRISE MAY GET A NEGATIVE RETURN FO R THE RISK UNDERTAKEN AND IS POSSIBLE DUE TO THE ACTUAL REALIZ ATION OF RISK BRINGING DOWN THE PROFITABILITY BELOW THE RISK FREE RATE OF RETURN. THUS, ITS PROFITABILITY WOULD HAVE BEEN MOR E BUT FOR THE RISK UNDERTAKEN. THUS, NEGATIVE RISK ADJUSTMENT HAS TO BE CONSIDERED AND CANNOT BE IGNORED. FOR EXAMPLE, WHEN THE INDIAN STOCK MARKETS TUMBLED IN 2007 AND 2008, THE EQUITY INVESTMENTS GIVEN A NEGATIVE RETURN EVEN THOUGH THE RISK FREE RETURN IS DECENT. SO, IT IS TO IGNORE NEGATIVE RISK ADJUSTMENT. 19. THE RISK ADJUSTMENT HAS TO BE COMPUTED BASED ON THE RISK DIFFERENTIAL IF ANY, BETWEEN THE TAXPAYER AND THE C OMPARABLE COMPANIES. HOWEVER, THE TAXPAYER IGNORED WEIGHTED C OST OF CAPITAL IN THE CASE OF TAXPAYER AND RISK OF THE TAX PAYER IN TERMS OF BETA. EFFECTIVELY, THE RISK FREE RETURN WOULD BE NULLIFIED AS THERE IS NO DIFFERENCE BETWEEN THE TAXPAYER AND THE COMPARABLE COMPANIES AND ALSO THE TAX PAYER ASSUMED THAT ITS B ETA IS ZERO, WHEREAS WHEN THE RETURN IS GUARANTEED ON SALES OR C OST, THE BETA IS NOT ZERO AS THE RETURN ON CAPITAL FLUCTUATE S WITH REVENUE. 20. THE TAXPAYER DID NOT CONSIDER THE DIFFERENTIAL RISK ADJUSTMENT I.E. IT DID NOT CONSIDERED THE WEIGHTED COST OF CAP ITAL OF COMPARABLES TO BRING IT IN LINE WITH THE TAXPAYER. 21. THE BETA OF A CAPTIVE SOFTWARE SERVICE PROVIDER IS NOT ZERO AS THE RETURN ON CAPITAL FLUCTUATES WITH REVENUES AS T HE TAXPAYER IS FOLLOWING COST PLUS METHOD ON EXPENSES. 22. AS DISCUSSED ABOVE, THE TAXPAYER BEARS SIGNIFICANT SINGLE CUSTOMER RISK AND POLITICAL/COUNTRY RISK, WHICH MAY NOT BE COMPENSATED ADEQUATELY BY PASSING ON OTHER RISKS LI KE MARKETING RISKS ETC. TO THE PARENT. FURTHER THESE R ISKS ARE NOT 59 CONSIDERED IN THE CASE OF TAXPAYER WHILE COMPUTING THE RISK ADJUSTMENT. 23. THE TAXPAYER CONSIDERED TOTAL ASSETS INCLUDING CURR ENT ASSETS AND CURRENT LIABILITIES, BUT THE CAPM HINGES UPON R ETURN ON EQUITY OR CAPITAL EMPLOYED. THE OPERATING ASSETS AR E THE MAJOR INDICTOR OF CAPITAL EMPLOYED RATHER THAN TOTAL ASSE TS. OPERATING ASSETS INCLUDES FIXED ASSETS, TRADE RECEIVABLES NET OF TRADE PAYABLES. 24. THE TAX PAYER HAS ASSUMED THAT OPERATING EXPENSES O F THE COMPARABLES WOULD NOT CHANGE AFTER RISK ADJUSTMENT. BUT, AFTER GIVING EFFECT TO RISK ADJUSTMENT, THE FINANCIAL STA TEMENTS OF THE COMPARABLES SHOULD LOOK LIKE THAT OF THE TAX PAYER I.E., STRIPPING THE RISK COMPONENT. SO, THE EXPENSES PERTAINING TO THE RISK LIKE SALES AND MARKETING EXPENSES, BAD DEBTS ETC. SHOUL D BE REMOVED FROM OPERATING EXPENSES AND CORRESPONDING R ISK PREMIUM ADJUSTED AMOUNT HAS TO BE REDUCED FROM THE OPERATING REVENUES. HENCE, AS PER THE ABOVE DETAILED DISCUSSION, THE CO MPUTATION OF RISK ADJUSTMENT BY THE TAXPAYER IS NOT ACCEPTABLE. THERE IS NO SCIENTIFIC BASIS FOR WORKING OUT THE TAXPAYER COMPANYS BETA O R BETA OF THE UNLISTED COMPARABLE COMPANIES. THE TAXPAYER ALTOGET HER FORGOTTEN THAT THE RISK ADJUSTMENT, IF AT ALL TO BE COMPUTED, IS TO BE COMPUTED BASED ON THE DIFFERENCE BETWEEN THE ACTUAL WEIGHTED COST OF CAPITAL OF THE COMPARABLES AND WEIGHTED COST OF CAPITAL OF THE COMPARABLE COMPANIES ASSUMING SAME LEVEL OF EQUITY IN THE TOTA L FINANCES AND RISK LEVEL AS EVIDENCED BY BETA OF THE TAXPAYER. TH IS DIFFERENTIAL IS ALTOGETHER IS IGNORED MAKING THE ENTIRE EXERCISE RE DUNDANT. ............. 118.1 WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH TH E PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. WE HAVE PERUSE D THE RECORD OF THE CASE. WE HAVE ALSO GONE THROUGH THE DETAILED WR ITTEN SUBMISSIONS FILED BY ASSESSEE FROM PAGES 92 TO 104 OF THE WRITTEN SUBMISSIONS THE MAIN CONTENTION OF ASSESSEE IS IN R EGARD TO ADJUSTMENT ON ACCOUNT OF MARKET RISK BY APPLYING CA PM MODEL. IN THIS REGARD LD. TPO HAS OBSERVED THAT THE SERVICES RENDERED BY THE ASSESSE FORMS A COMPONENT WITHIN THE PRODUCTS DEVEL OPED BY THE ASSESSEE. THUS, THE ASSOCIATED ENTERPRISE INCURS MA RKETING FOR ITS PRODUCTS AND NOT ON THE SERVICES RENDERED BY THE AS SESSEE AS THEY ARE CONSIDERED IN THE PRODUCT SOLD BY THE ASSOCIATE D ENTERPRISE. THE RELATIONSHIP BETWEEN THE TAX PAYER AND ITS PARENT C OMPANY IS EXACTLY THE SAME AS THAT OF THE INDEPENDENT COMPANY AND ITS CLIENT IN THE CASE OF SOFTWARE DESIGN AND DEVELOPMENT SERV ICES. LD. TPO 60 HAS OBSERVED THAT IT IS A FACT THAT THE INDEPENDENT ENTERPRISES HAVE TO BEAR THE VAGARIES OF MARKET CONDITIONS. BUT SINC E THE SOFTWARE SECTOR IS GROWING AT MORE THAN 30% CAGR (COMPOUNDED ANNUAL GROWTH RATE) FOR THE LAST 10 YEARS, IT IS NOT SHOWI NG OR AFFECTED BY ANY ADVERSE MARKET CONDITIONS. IN THE ABSENCE OF AD VERSE MARKET CONDITIONS, THE ASSESSEE HAS NOT SHOWN HOW THESE MA RKET RISKS BORNE BY THE INDEPENDENT ENTERPRISES HAD AN EFFECT ON THE PRICE AND, THUS, ON THE PROFITS DURING THE F.Y. 2005-06. FROM THESE FINDINGS OF LD. TPO, IT IS EVIDENT THAT HE HIMSELF IS AGREEABLE THA T MARKET CONDITIONS DO INFLUENCE THE INDEPENDENT ENTERPRISES. LD. TPO H AS DENIED THIS ADJUSTMENT MAINLY ON THE GROUND THAT ASSOCIATED ENT ERPRISE AND OTHER INDEPENDENT COMPARABLES ARE OPERATING ON A SI MILAR MODEL I.E. ONE BY ESTABLISHING ITS SUBSIDIARY IN LOW EMPL OYEE COST ZONE VIZ. INDIA AND THE OTHERS BY OUTSOURCING THEIR ACTIVITIE S TO OTHER ENTITIES OPERATING IN INDIA. LD. TPO HAS DRAWN PARITY BETWEE N INDEPENDENT COMPARABLES AND THE ASSESSEE ON THIS BASIS. IN OUR OPINION, THIS REASONING CANNOT BE FULLY ACCEPTED PARTICULARLY BEC AUSE IT IS NOT THAT ALL THE INDEPENDENT COMPARABLES ARE DOI NG ONLY THE WORK OUTSOURCED TO THEM BY VARIOUS AES. THIS IS ONLY A CONJECTURE ON THE PART OF LD. TPO. WE, THEREFORE, A RE OF THE OPINION THAT MARKET RISK, IF QUANTIFIABLE, HAS TO BE ADJUSTED IN VIEW OF RULE 10B(1)(E)(III) WE, THEREFORE, IN THE INTEREST OF JUSTICE, RESTORE THIS MATTER TO THE FILE OF ASSESSING OFFICER/TPO TO CONSIDER THE COMPU TATION OF RISK ADJUSTMENT AS PER CAPM MODEL BY AVAILING THE SERVICES OF TECHNICAL EXPERTS . THE EXPERTS OF THE FIELD ARE TO BE APPOINTED BY BOTH THE SIDES TO COME TO AN ACCEPTABL E CONCLUSION. (HE REFERRED TO PARA 116-118 ON PAGE NO 467- 476 OF THE CASE LAW COMPENDIUM) IT IS THE HUMBLE SUBMISSION OF THE APPELLANT THAT I N LIGHT OF THE MOTOROLA SOLUTIONS INDIA PRIVATE LIMITED (SUPRA) JU DGMENT, THE APPELLANTS MAY ALSO RESTORED BACK FOR FRESH ANALYS IS ON RISK ADJUSTMENT 7.17 WITHOUT PREJUDICE TO THE APPELLANTS CONTENTIONS AG AINST THE APPROACH USED BY THE LD. TPO, THE LEARNED AR SUBMITTED THAT EVEN IF WE EXCLUDE THE COMPARABLE COMPANIES FOR THE REASONS MENTIONED ABOVE, THE WORKING CAPITAL ADJUSTED ARMS LENGTH MARGIN WORKS OUT TO 11.79% WHICH IS WITHIN 5% RANGE OF THE OP/TC MARGIN OF 14.80% EARNED BY THE APPELLANT 61 DURING FY 2006-07. THIS PROVIDES EVIDENCE THAT THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT DURING T HE FY 2006-07 ARE AT ARMS LENGTH. THE RESULTS OF THE ANALYSIS ARE GIVEN IN THE TABLE BELOW: S.NO. NAME OF COMPANY WORKING CAPITAL ADJUSTED OP/TC MARGIN WORKING CAPITAL ADJUSTED OP/ TC MARGIN (EXCLUDING COMPANIES ON ACCOUNT OF REASONS GIVEN IN FINAL DISPOSITION COLUMN) FINAL DISPOSITION 1 ACCENTIA TECHNOLOGIES LTD. (SEG.) 27.47% XX A) FUNCTIONALLY DISSIMILAR - ENGAGED IN MEDICAL TRANSCRIPTION SERVICES B) TWO COMPANIES IRIDIUM TECHNOLOGIES AND GEOSOFT TECHNOLOGIES AMALGAMATED WITH ACCENTIA TECHNOLOGIES LTD IN FY 2006-07 2 ADITYA BIRLA MINACS WORLDWIDE LTD.(EARLIER TRANSWORKS INFORMATION SERVICES LTD) 12.30% 12.30% ACCEPTED 3 ALLSEC TECHNOLOGIES LTD. 27.03% XX A) DIFFERENCE IN RISK PROFILE B) HIGH ADVERTISING AND MARKETING SPEND - 5.23% C) RELATED PARTY TRANSACTION 12% 4 APEX KNOWLEDGE SOLUTION 14.33% 14.33% ACCEPTED 62 S.NO. NAME OF COMPANY WORKING CAPITAL ADJUSTED OP/TC MARGIN WORKING CAPITAL ADJUSTED OP/ TC MARGIN (EXCLUDING COMPANIES ON ACCOUNT OF REASONS GIVEN IN FINAL DISPOSITION COLUMN) FINAL DISPOSITION PVT LTD. 5 APPOLLO HEALTHSTREET LTD. -13.46% -13.46% ACCEPTED 6 ASIT C MEHTA FINANCIAL SERVICES LTD 24.09% 24.09% ACCEPTED 7 BODHTREE CONSULTING LTD (SEG.) 30.93% XX A) FUNCTIONALLY DISSIMILAR - DEVELOPS SOFTWARE PRODUCTS. BODHTREE IS A SOFTWARE SOLUTIONS COMPANY. IT IS ENGAGED IN OPEN AND END-TO-END WEB SOLUTIONS, SOFTWARE CONSULTANCY, DESIGN AND DEVELOPMENT OF SOLUTIONS. B) EXTRAORDINARY PROFIT DUE TO BUSINESS RESTRUCTURING C) RELATED PARTY TRANSACTION 38.54% 8 CALIBER POINT BUSINESS SOLUTIONS LTD 21.50% 21.50% A) DIFFERENT FINANCIAL YEAR ENDING - DECEMBER 31 WHEREAS THE APPELLANT'S ACCOUNTS HAVE BEEN FINALISED ON MARCH 31 9 COSMIC GLOBAL LTD. 12.64% 12.64% ACCEPTED 10 DATAMATICS FINANCIAL SERVICES LTD (SEG.) 5.53% 5.53% ACCEPTED 63 S.NO. NAME OF COMPANY WORKING CAPITAL ADJUSTED OP/TC MARGIN WORKING CAPITAL ADJUSTED OP/ TC MARGIN (EXCLUDING COMPANIES ON ACCOUNT OF REASONS GIVEN IN FINAL DISPOSITION COLUMN) FINAL DISPOSITION 11 ECLREX SERVICES LTD. 87.72% XX (A) FUNCTIONALLY DIFFERENT : KPO COMPANY (B) ABNORMALLY HIGH MARGIN (C) REJECTED IN IN RULING OF MAERSK GLOBAL CENTRES (INDIA) PRIVATE LIMITED (2014 43TAXMANN.COM) 12 FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG.) 7.33% 7.33% ACCEPTED 13 GENESYS INTERNATIONAL CORPORATION LTD. 9.82% 9.82% ACCEPTED 14 H C L. CONNECT SYSTEMS & SERVICES LTD. (SEG.) 45.48% XX A) RELEVANT FINANCIAL INFORMATION UNAVAILABLE B) DIFFERENT FINANCIAL YEAR ENDING - JUNE 30 WHEREAS THE APPELLANT'S ACCOUNTS HAVE BEEN FINALISED ON MARCH 31 C) FUNCTIONALLY DISSIMILAR - ENGAGED IN DATA CENTRE MANAGEMENT SERVICES, END USER COMPUTING SERVICES, MANAGED SECURITY SERVICES, NETWORKING SERVICES AND TOOLS AND PROCESS CONSULTING SERVICES D) RELATED PARTY TRANSACTION 21.52% 64 S.NO. NAME OF COMPANY WORKING CAPITAL ADJUSTED OP/TC MARGIN WORKING CAPITAL ADJUSTED OP/ TC MARGIN (EXCLUDING COMPANIES ON ACCOUNT OF REASONS GIVEN IN FINAL DISPOSITION COLUMN) FINAL DISPOSITION 15 I C R A TECHNO ANALYTICS LTD. (SEG.) 12.70% 12.70% ACCEPTED 16 INFORMED TECHNOLOGIES INDIA LTD. 36.19% XX A) SUPERNORMAL GROWTH DURING FY 2006-07 17 INFOSYS BPO LTD. 29.98% 29.98% ACCEPTED 18 I SERVICES INDIA PVT LTD. 50.02% XX REJECTED 19 MAPLE E SOLUTIONS LTD. 31.59% XX (A) FUNCTIONALLY INCOMPARABLE (B) REJECTED IN CRM SERVICES RULING ON ACCOUNT OF BAD REPUTATION OF GROUP OWNER (C) VOLATILE MARGINS (REFER THE RULING OF ACTIS ADVISERS PRIVATE LIMITED) 20 MOD-TEK TECHNOLOGIES LTD. 117.03% XX (A) FUNCTIONALLY DIFFERENT : KPO COMPANY (B) ABNORMALLY HIGH MARGIN (C) REJECTED IN IN RULING OF MAERSK GLOBAL CENTRES (INDIA) PRIVATE LIMITED (2014 43TAXMANN.COM) 21 R SYSTEMS INTERNATIONAL LTD. (SEG.) 19.61% 19.61% ACCEPTED 22 SPANCO LTD. (SEG.) 20.96% 20.96% ACCEPTED 23 TRITON CORP LTD. 28.98% XX A) FUNCTIONAL DISSIMILAR - (BUSINESS RESTRUCTURING) - 65 S.NO. NAME OF COMPANY WORKING CAPITAL ADJUSTED OP/TC MARGIN WORKING CAPITAL ADJUSTED OP/ TC MARGIN (EXCLUDING COMPANIES ON ACCOUNT OF REASONS GIVEN IN FINAL DISPOSITION COLUMN) FINAL DISPOSITION ACQUIRED MAPLE E- SOLUTIONS DURING FY 2006-07 B) UNRELIABLE FINANCIAL INFORMATION - ON ACCOUNT OF A MANAGEMENT FRAUD C) LOW EMPLOYEE COST/ SALES RATIO - 18% 24 VISHAL INFORMATION TECHNOLOGIES LTD. 43.73% XX (A) FUNCTIONALLY DIFFERENT (SIGNIFICANT PAYMENT TOWARDS VENDORS). (B) REJECTED IN MAERSK INDIA PVT. LTD. VS. DCIT [2011] 16 TAXMANN.COM 47 (MUM.) (C) ABNORMALLY HIGH MARGIN 25 WIPRO LTD. (SEG.) 31.53% XX A) SUBSTANTIAL RESEARCH & DEVELOPMENT (R &D) NON AVAILABILITY OF STANDALONE FINANCIAL DATA FOR FY 2006- 07 26 NITTANY OUTSOURCING SERVICES PVT LTD. 11.79% 11.79% ACCEPTED AVERAGE 28.72% 13.51% 66 7.18 WITHOUT PREJUDICE TO THE APPELLANTS CONTENTIONS AGAINST THE APPROACH USED BY THE LD. TPO, THE LEARNED AR SUBMIT TED FURTHER THAT EVEN IF WE EXCLUDE THREE COMPARABLE COMPANIES FOR T HE REASONS MENTIONED IN THE TABLE ABOVE, THE WORKING CAPITAL A DJUSTED ARMS LENGTH MARGIN WORKS OUT TO 11.79% WHICH FALLS WITH THE +/-5% RANGE OF THE OP/TC MARGIN OF 14.80% EARNED BY THE APPELLANT DURI NG FY 2006-07. THIS PROVIDES EVIDENCE THAT THE INTERNATIONAL TRANS ACTIONS ENTERED INTO BY THE APPELLANT DURING THE FY 2006-07 ARE AT ARMS LE NGTH. 8. THE LEARNED CIT(DR) ON THE OTHER HAND TRIED TO J USTIFY THE ORDERS OF THE AUTHORITIES BELOW. HE SUBMITTED THAT IT IS VERY DIFFICULT TO FIND EXACTLY SIMILAR COMPARABLE WITH THE ASSESSEE TO BENCHMARK I TS INTERNATIONAL TRANSACTION. IN THIS REGARD, HE ADOPTED THE ARGUMEN TS ADVANCED BY HIM IN SUPPORT OF IDENTICAL ISSUE IN THIS APPEAL FOR THE A SSESSMENT YEAR 2006-07 HEREINABOVE. 9. WE FIND THAT I N THESE GROUNDS, THE MAIN GRIEVANCE OF THE ASSESSEE IS AGAINST INCLUSION OF FUNCTIONALLY DISSIMILAR COMPAN IES AS COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTION DURING T HE YEAR. IN SUPPORT OF GROUND NO.2.9 IN THIS REGARD, THE LEARNED AR HAS MA DE ABOVE SUBMISSIONS COMPANY-WISE WHICH ARE TWELVE IN NUMBER SELECTED BY THE AUTHORITIES BELOW AS TO HOW THEY ARE FUNCTIONALLY DISSIMILAR TO THE A SSESSEE FOR THE 67 BENCHMARKING. THESE COMPANIES ARE ACCENTIA TECHNOLO GIES PVT. LTD., ALLSEC TECHNOLOGIES LTD., BODH TREE CONSULTING LTD. (SEG), CABLIBER POINT BUSINESS SOLUTIONS LTD., E-CLERX SERVICES LTD., HC L COMNET SYSTEM & SERVICES LTD., INFORMED TECHNOLOGIES INDIA LTD., MA PLE E-SOLUTIONS LTD., MOLDTEK TECHNOLOGIES LTD. (SEGMENTAL), TRITON CORPO RATION LTD., VISHAL INFORMATION TECHNOLOGIES LTD. (CORAL HUB LTD.) AND WIPRO LTD. (SEG). IN SUPPORT, THE LEARNED AR HAS CITED SEVERAL DECISIONS AS TO HOW THESE COMPANIES ARE NOT COMPARABLE FOR THEIR SOME SPECIFI C REASON. LIKE IN THE CASE OF ACCENTIA TECHNOLOGIES PVT. LTD., THE RELIAN CE HAS BEEN PLACED ON THE DECISION OF HYDERABAD BENCH OF THE ITAT IN THE CASE OF AVINEON INDIA PVT. LTD. VS. DCIT (SUPRA) WHEREIN THE ACCENTIA TEHNOLOG IES PVT. LTD. HAS BEEN EXCLUDED FOR THE REASON THAT THERE WERE EXTRAORDINA RY EVENTS LIKE MERGER AND DEMERGER DURING THE RELEVANT FINANCIAL YEAR WHICH M UST HAVE IMPACTED THE FINANCIAL RESULTS OF THE COMPANY. IN THE CASE OF AL LSEC TECHNOLOGIES LTD., IT WAS SUBMITTED THAT ITS ANNUAL REPORT CLEARLY INDICA TES THAT THE COMPARABLE CASES HIGH RISK IN CONTRAST WITH THE ASSESSEE. REGA RDING BODH TREE CONSULTING LTD., IT HAS BEEN SUBMITTED THAT ITS ANN UAL REPORT FOR FINANCIAL YEAR 2006-07 AND ITS PREVIOUS YEARS ANNUAL REPORT INDICATES THAT IT HAD EARNED AN EXTRA-ORDINARY PROFIT. LIKEWISE, THE ASSE SSEE HAS TRIED TO DISCUSSED IN DETAIL AS TO HOW ALL THE SELECTED TWELVE COMPARA BLES BY THE AUTHORITIES 68 BELOW ARE FUNCTIONALLY DISSIMILAR WITH THE ASSESSEE , WHICH WE ARE NOT REITERATING HERE FOR THE SAKE OF BREVITY AND REPETI TION. WE FIND SUBSTANCE THEREIN AS IN SOME COMPARABLES, THE REASONS FOR THE DISSIMILARITY HAS ALSO BEEN SUPPORTED BY THE CITED DECISIONS. IN SUPPORT O F GROUND NO.2.12, THE ASSESSEE HAS ALSO CONTENDED THAT THE LEARNED TPO HA S DISALLOWED THE ASSESSEES CLAIM FOR A RISK ADJUSTMENT BASED ON THE TWELVE REASONS WHICH HAVE BEEN SPECIFICALLY DEALT WITH BY THE DELHI BENC H OF THE ITAT IN THE CASE OF MOTOROLA SOLUTION INDIA PVT. LTD. VS. DCIT ITA NO. 5637/DEL/2011. LASTLY, IT HAS BEEN CONTENDED BY THE LEARNED AR AS AN ALTERNATIVE ARGUMENT THAT EVEN IF THE COMPARABLE COMPANIES FOR THE REASO NS MENTIONED ABOVE ARE EXCLUDED, THE WORKING CAPITAL ADJUSTED ARMS LENGTH MARGIN WORKS OUT TO 11.79% WHICH IS WITHIN HIGH PERCENT RAGE OF THE OP/ TC MARGIN OF 14.8% EARNED BY THE ASSESSEE DURING FINANCIAL YEAR 2006-0 7. THIS PROVIDES EVIDENCE THAT INTERNATIONAL TRANSACTION ENTERED INT O BY THE ASSESSEE DURING THE YEAR ARE AT ARMS LENGTH. IN SUPPORT, THE RESUL TS OF THE ANALYSIS HAVE BEEN GIVEN. 9.1 CONSIDERING THE ABOVE DISCUSSED MATERIAL ASPECT S, IN ITS TOTALITY, WE ARE OF THE VIEW THAT THE ISSUE REQUIRES FRESH CONSI DERATION OF THE ABOVE SUBMISSIONS OF THE ASSESSEE TO MEET THE ENDS OF JUS TICE. WE THUS SET ASIDE THE 69 MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECI DE THE ISSUE OF APPLICATION OF THE ABOVE STATED TWELVE COMPARABLES WITH THE ASS ESSEE FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION AND TO DECIDE AS TO W HETHER THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE DURING THE YEAR ARE AT ARMS LENGTH. WHILE DECIDING THE ISSUE AFRESH, WE DIRECT THE ASSE SSING OFFICER TO AFFORD OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. THE GR OUND NOS. 2 TO 2.14 AND 3 ARE THUS ALLOWED FOR STATISTICAL PURPOSES. THE GROU ND NO.1 BEING GENERAL IN NATURE DOES NOT NEED INDEPENDENT ADJUDICATION. 10. IN GROUND NO.4, THE ASSESSEE HAS QUESTIONED TH E DISALLOWANCE OF DEDUCTION AMOUNTING TO RS.93,36,864 UNDER SEC. 10A OF THE ACT IN RESPECT OF ASSESSEES UNDERTAKING AT HYDERABAD ACQUIRED BY WAY OF SLUMP SALE FROM DIGITAL THINK (INDIA) PVT. IN SUPPORT OF THE GROUND , THE LEARNED AR SUBMITTED THAT THE UNDERTAKING AT HYDERABAD WAS ACQ UIRED BY THE ASSESSEE FROM DIGITAL THINK (INDIA) PVT. LTD. (DT INDIA) UND ER A SLUMP SALES ARRANGEMENTS, WHEREIN ALL THE ASSETS AND LIABILITY OF THE AFORESAID UNDERTAKING WERE TAKEN OVER BY THE ASSESSEE VIDE BU SINESS TRANSFER AGREEMENT DATED 14.11.2005. GIVEN THIS, THE SOFTWAR E TECHNOLOGY PARKS OF INDIA (STPI), ISSUED A LETTER DATED 01.12.2005, WHE REIN IT ALLOWS THE ASSESSEE TO TAKE OVER THE ACTIVITIES OF DT INDIA AND APPROVE D THE AFORESAID TRANSFER OF THE ACTIVITIES OF THE HYDERABAD UNDERTAKING. THE UN DERTAKING WAS TAKEN OVER 70 AND CONTINUED BY THE ASSESSEE ON A GOING CONCERN BA SIS AND THE CHANGE WHICH TOOK PLACE WAS THE CHANGE IN THE OWNERSHIP OF THE UNDERTAKING. 10.1 THE LEARNED AR SUBMITTED FURTHER THAT DURING T HE ASSESSMENT YEAR 2006-07, THE ASSESSEE HAD DULY CLAIMED THE DEDUCTIO N UNDER SEC. 10A IN RESPECT OF THE HYDERABAD UNDERTAKING AND ASSESSING OFFICER HAD NOT DISPUTED THE CLAIMED DEDUCTION OF THE ASSESSEE IN T HE SAID ASSESSMENT YEAR AND HAD DULY ALLOWED THE DEDUCTION. THE ASSESSMENT ORDER OF DT INDIA FOR ASSESSMENT YEAR 2006-07 WHICH CLEARLY DEMONSTRATED THAT DT INDIA WAS ELIGIBLE AND THE CLAIM FOR DEDUCTION UNDER SEC. 10A OF THE ACT IS ALLOWED TO IT WAS ALSO SUBMITTED TO THE ASSESSING OFFICER. THE LEARNED AR DREW OUR ATTENTION TO PAGE NOS. 1151 TO 1196 OF THE PAPER BO OK I.E. COPIES OF ITR, COMPUTATION OF INCOME AND BALANCE SHEET OF DT INDIA FOR THE ASSESSMENT YEARS 2006-07 AND 2007-08. 10.2 THE LEARNED AR FURTHER SUBMITTED THAT THE ASSE SSING OFFICER HAS ERRED IN ASSUMING THAT THE CHANGE IN OWNERSHIP OF T HE HYDERABAD UNDERTAKING WOULD DISQUALIFY THE ASSESSEE FROM CLAI MING DEDUCTION UNDER SEC. 10A OF THE ACT ON THE PROFITS OF HYDERABAD UND ERTAKING. HE CONTENDED THAT SEC. 10A OF THE ACT PERMITS DEDUCTION FROM THE PROFIT AND GAINS AS ARE 71 DERIVED BY AN UNDERTAKING FROM THE EXPORTS. A PERUS AL OF SEC. 10A REVEALS THAT IT IS AN UNDERTAKING WHICH IS SUPPOSED TO FULF ILL THE CONDITIONS, RECEIVED SALE PROCEEDS IN FOREIGN EXCHANGE, AUDIT REPORT NEE DS TO BE SUBMITTED IN RESPECT OF EACH UNDERTAKING ETC. THUS, THE DEDUCTIO N IS QUA THE UNDERTAKING AND AS SUCH ONE IS NOT CONCERNED AS TO WHO IS THE O WNER, THOUGH IT IS THE ASSESSEE WHO WILL GET THE DEDUCTION. THE LEARNED AR REFERRED CBDT CIRCULAR NO. F. NO. 15/5/63-IT(A-I) DATED 13.12.196 3, WHEREIN WITH REGARD TO A SIMILARLY WORDED SEC. 84 OF THE ACT (NOW OMITT ED), THE BOARD HAS CLARIFIED THAT THE BENEFIT ATTACHES TO THE UNDERTAK ING AND NOT TO THE OWNER THEREOF AND THE SUCCESSOR WILL BE ENTITLED TO THE B ENEFIT FOR THE UNEXPIRED PERIOD PROVIDED THE UNDERTAKING IS TAKEN OVER AS A RUNNING CONCERN. HE FURTHER PLACED RELIANCE ON ANOTHER CBDT CIRCULAR NO . F. NO. 178/84/2012- ITA NO. 1 DATED 17.1.2013, WHERE THE ISSUE RELATED TO THE AVAILABILITY OF TAX BENEFIT UNDER SEC. 10A, 10AA AND 10B OF THE ACT IN CASE OF SLUMP SALES OF AN UNDERTAKING HAS BEEN ADDRESSED TO BY THE BOARD. IN THE SAID CIRCULAR, IT HAS BEEN CLEARLY HELD THAT ON THE SOLE GROUND OF CH ANGE IN OWNERSHIP OF AN UNDERTAKING, THE CLAIM OF EXEMPTION CANNOT BE DENIE D TO AN OTHERWISE ELIGIBLE UNDERTAKING AND THE TAX HOLIDAYS CAN BE AV AILABLE OF OR THE UNEXPIRED PERIOD AT THE RATE AS APPLICABLE FOR THE REMAINING YEARS, SUBJECT TO 72 FULFILLMENT OF PRESCRIBED CONDITION. IN SUPPORT HE PLACED RELIANCE ON THE FOLLOWING DECISIONS: * HEARTLAND KG INFORMATION LTD. [359 ITR 1 (2013) MADRAS H.C; * HEARTLAND DELHI TRANSCRIPTION SERVICES PT. LTD. [ITA NO. 300/2011(2014) DELHI HON'BLE HIGH COURT; * WOCO MOTHERSON ELASTOMER LTD. [TS-200-ITAT-2013( DELHI); * SONATA SOFTWARE LTD. [TS-164-H.C-2012(BOM); * THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. P .K. ENGG. & FORGING (P) LTD. [1996] 87 TAXMAN. 101. 10.3 THE LEARNED CIT(DR) ON THE OTHER HAND TRIED TO JUSTIFY THE ORDERS OF THE AUTHORITIES BELOW. HE SUBMITTED THAT THE CONDIT IONS OF SECTION 10A(2) OF THE ACT ARE NOT FULFILLED BECAUSE IT WAS FORMED BY THE SPLITTING UP, OR THE RECONSTRUCTION, OF A BUSINESS ALREADY IN EXISTENCE AND IT WAS FORMED BY THE TRANSFER TO A NEW BUSINESS OF MACHINERY OR PLANT PR EVIOUSLY USED FOR ANY PURPOSE. 10.4 CONSIDERING THE ABOVE SUBMISSION, WE FIND THAT THERE IS SUBSTANCE IN THE CONTENTION OF THE LEARNED AR THAT MERE CHANGE I N OWNERSHIP DOES NOT RESULT IN DENIAL OF THE DEDUCTION UNDER SEC. 10A OF THE ACT. THE ONLY DISPUTE RAISED IN THE GROUND IS AS TO WHETHER SEC. 10A(2) O F THE ACT APPLIES OR NOT. THE CBDT CIRCULAR F. NO. 178/84/2012 ITA-1 DATED 17.1.2013 HAS MADE IT CLEAR IN RELATION TO AVAILABILITY OF TAX BENEFIT UNDER SEC. 10A, 10AA AND 73 10B OF THE INCOME-TAX ACT, 1961 IN CASE OF SLUMP SA LES OF AN UNDERTAKING THAT ON THE SOLE GROUND OF CHANGE IN OWNERSHIP OF A N UNDERTAKING, THE CLAIM OF ASSUMPTION CANNOT BE DENIED TO AN OTHERWISE ELIG IBLE UNDERTAKING AND THE TAX HOLIDAY CAN BE AVAILABLE OF FOR THE UNEXPIRED P ERIOD AT THE RATE AS APPLICATION FOR THE REMAINING YEARS, SUBJECT TO FUL FILLMENT OF PRESCRIBED CONDITION. WE THUS SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH IN VIEW OF THE ABOVE SUBMIS SIONS OF THE ASSESSEE SUPPORTED BY THE CBDT CIRCULAR AND THE DECISIONS RE LIED UPON AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSE E. GROUND N0.4 IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 11. IN GROUND NO.5, THE DISALLOWANCE OF INTEREST OF RS.5,35,706 PAID TO KOTAK MOHINDRA PRIMUS LTD. (KMPL) UNDER SEC. 40(A)( IA) OF THE ACT FOR NOT WITHHOLDING TAXES HAS BEEN QUESTIONED. 11.1 IN SUPPORT OF THE GROUND, THE LEARNED AR SUBMI TTED THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER HAS ASKED THE ASSESSEE TO FURNISH THE DETAILS WITH REGARD TO TAX DEDUCTED ON INTEREST PAID TO KMPL. THE ASSESSEE SUBMITTED THAT IT HAD NOT DEDUCT ED ANY TAX AT SOURCE ON THE INTEREST PAID TO KMPL BECAUSE THE ASSESSEE WAS UNDER THE BONA FIDE 74 BELIEF THAT NO TAX WAS REQUIRED TO BE DEDUCTED AT S OURCE FROM THE PAYMENT MADE TO KMPL IN TERMS OF EXCEPTION CARVED OUT IN SE C. 194A OF THE ACT. HE SUBMITTED THAT ORDINARILY TAX IS REQUIRED TO BE DED UCTED ON INTEREST (OTHER THAN INTEREST ON SECURITIES) UNDER SEC. 194A OF THE ACT. HOWEVER, AS PER CLAUSE (III) OF SUB-SECTION (3) OF SECTION 194A OF THE ACT, THE PROVISIONS OF SEC. 194A SHALL NOT APPLY WHERE INCOME IS CREDITED OR PAID TO ANY BANKING COMPANY TO WHICH THE BANKING REGULATION ACT, 1949 ( 10 OF 1949) APPLIES. 11.2 THE LEARNED AR SUBMITTED THAT THE KOTAK MOHEND RA PRIMUS LTD. (NOW KNOWN AS KOTAK MOHINDRA PRIMA LTD. ) (KMPL) IS A SUBSIDIARY OF KOTAK MOHINDRA BANK LTD. IT BECAME A SUBSIDIARY OF KOTAK MOHINDRA BANK LTD. W.E.F. 01.12.2005. THE KMPL IS IN THE BUSINES S OF FINANCING PASSENGERS VEHICLE AND OFFERS FINANCING IN THE FOR M OF LOANS FOR THE ENTIRE RANGE OF PASSENGER CARS, MULTI UTILITY VEHICLES AND PRE-OWNED CARS. HE SUBMITTED THAT SEC. 19 OF BANKING REGULATION ACT, 1 949 PROVIDES THAT A BANKING COMPANY SHALL NOT OR ANY SUBSIDIARY COMPANY EXCEPT A SUBSIDIARY COMPANY FORMED FOR UNDERTAKING OF ANY BUSINESS WHIC H IS PERMISSIBLE FOR A BANKING COMPANY TO UNDERTAKE. 75 11.3 THE LEARNED AR SUBMITTED THAT THE ASSESSING OF FICER IGNORED THE SUBMISSIONS FILED BY THE ASSESSEE THAT THE ASSESSEE WAS UNDER A BONA FIDE BELIEF AND HAS A REASONABLE CAUSE BY WHICH THE ASSE SSEE CONSTRUED THAT NO TAX WAS REQUIRED TO BE DEDUCTED ON THE INTEREST PAID TO KMPL AND MISCONCEIVED THE SUBMISSIONS OF THE ASSESSEE BY STATING THAT THE ASSESSEE HIMSELF ACCEPTED IN HIS SUBMISSIONS THAT NO TAX WAS DEDUCTED AT SOUR CE ON THE INTEREST OF RS.5,75,706 PAID TO KMPL EVEN THOUGH IT WAS REQUIRE D TO BE DEDUCTED. THE ASSESSING OFFICER ALSO FAILED TO APPRECIATE THE SET TLED LAW THAT WHEREIN TWO INTERPRETATION OF LAW ARE POSSIBLE, THE ONE WHICH I S BENEFICIAL TO THE ASSESSEE SHOULD BE GIVEN EFFECT. THE ASSESSING OFFICER DISAL LOWED RS.5,75,706 UNDER SEC. 40(A)(IA) OF THE ACT DUE TO NON-DEDUCTION OF T AX AT SOURCE. 11.4 WITHOUT PREJUDICE TO THE ABOVE SUBMISSION, THE LEARNED AR REITERATED THAT FINANCE ACT, 2012 INTRODUCED SECOND PROVISO TO SECTION 40(A)(IA) OF THE ACT W.E.F. 01.04.2013 WHICH PROVIDES THAT WHERE AN ASSESSEE FAILS TO DEDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER-XVII-B ON ANY SUCH SUM BUT IS NOT DEEMED TO BE AN ASSESSEE IN DEFAULT UNDER THE FIRST PROVISO TO SUB-SECTION (1) OF SEC. 201 OF THE ACT, THEN, FOR THE PURPOSE OF THIS SUB-CLAUSE, IT SHALL BE DEE MED THAT THE ASSESSEE HAS DEDUCTED AND PAID THE TAX ON SUCH SUM ON THE DATE O F FURNISHING OF RETURN OF 76 INCOME BY THE RESIDENTS PAYEE REFERRED TO IN THE SA ID PROVISO. HE SUBMITTED THAT TO UNDERSTAND THE EFFECT OF THIS PROVISO, IT I S USEFUL TO REFER TO FIRST PROVISO TO SEC. 201(1) INTRODUCED W.E.F. 01.07.2012 , WHICH PROVIDES THAT ANY PERSON, INCLUDING THE PRINCIPAL OFFICER OF A C OMPANY, WHO FAILS TO DEDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDAN CE WITH THE PROVISIONS OF THIS CHAPTER ON THE SUM PAID TO A RESIDENT OR ON TH E SUM CREDITED TO THE ACCOUNT OF A RESIDENT SHALL NOT BE DEEMED TO AN ASS ESSEE IN DEFAULT IN RESPECT OF SUCH TAX IF SUCH RESIDENCE (I) HAS FURNISHED HIS RETURN OF INCOME UNDER SEC. 139; (II) HAS TAKEN INTO ACCOUNT SUCH SUM FOR COMPU TING INCOME IN SUCH RETURN OF INCOME; AND (II) HAS PAID THE TAX DUE ON THE INCOME DECLARED BY HIM IN SUCH RETURN OF INCOME,. AND THE PERSON FURNI SHES A CERTIFICATE TO THIS EFFECT FROM AN ACCOUNTANT IN SUCH FORM AS MAY BE PR ESCRIBED. 11.5 THE LEARNED AR SUBMITTED THAT THE AMENDMENT MA DE BY THE FINANCE ACT, 2012 TO SECTION 201 AND SECTION 40(A)(IA) OF T HE ACT OUGHT TO BE APPLIED TO CASES PRIOR TO 01.07.2012, SINCE THE AMENDMENTS PROCEDURAL IN NATURE AND ARE INTENDED TO REMOVE THE HARDSHIP BEING FACED BY THE ASSESSEE, THE OBJECTIVE SOUGHT TO BE ACHIEVED BY THE LEGISLATURE IS THE AUGMENTATION OF WITHHOLDING THAT PROVISIONS AND THEREFORE, THESE AM ENDMENTS SHOULD BE 77 INTERPRETED IN A FAIR, JUST AND EQUITABLE MANNER. H E PLACED RELIANCE ON THE FOLLOWING DECISIONS : I) RAJIV KUMAR AGGARWAL 45 TAXMAN.COM 555 (2014) (AGRA); II) DR. JAIDEEP KUMAR SHARMA (2014) 52 TAXMAN. COM 420 (DELHI); III) RAJA CHAKRAVARTY (2015) 57 TAXMAN.COM 88 (L UCKNOW); 11.6 LEARNED AR POINTED OUT THAT KMPL, BEING A RESI DENT, HAS DULY FURNISHED A RETURN OF INCOME AND HAS CONSIDERED THE INTEREST INCOME AMOUNTING TO RS.5,75,760 RECEIVED FROM THE ASSESSEE WHILE COMPUTING ITS TOTAL INCOME FOR THE YEAR UNDER CONSIDERATION. FURT HER, TAXES HAVE ALSO BEEN PAID BY KMPL ON SUCH INTEREST INCOME FOR THE YEAR U NDER CONSIDERATION. IN VIEW OF THE AMENDED PROVISIONS, THE ASSESSEE CANNOT BE TERMED AS ASSESSEE IN DEFAULT AND THEREFORE, THE AMOUNT OF RS.5,75,70 6 SOUGHT TO BE DISALLOWED UNDER SEC. 40(A)(IA) OF THE ACT IN THE HANDS OF THE ASSESSEE. 11.7 THE LEARNED CIT(DR) ON THE OTHER HAND PLACED R ELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 11.8 CONSIDERING THE ABOVE SUBMISSION, WE, PRIMA FA CIE, FIND SUBSTANCE IN THE CONTENTION OF THE LEARNED AR THAT THE ASSESSEE WAS UNDER THE BONA FIDE 78 BELIEF THAT NO TAX WAS REQUIRED TO BE DEDUCTED AT S OURCE FROM THE PAYMENT MADE TO KMPL IN TERMS OF THE EXCEPTIONS CARRIED OUT IN SEC. 194A OF THE ACT AS THE PROVISIONS OF SEC.194A SHALL NOT APPLY W HERE INCOME IS CREDITED OR PAID TO ANY BANKING COMPANY TO WHICH THE BANKING REGULATION ACT, 1949 APPLIED, ESPECIALLY WHEN THERE IS NO DISPUTE THAT KOTAK MOHINDRA BANK LTD. IS A BANKING COMPANY TO WHICH THE BANKING REGULATIO N ACT, 1949 APPLIES AND FURTHER THAT SECTION 19 OF BANKING REGULATION A CT, 1949 PROVIDES THAT A BANKING COMPANY SHALL NOT FORM ANY SUBSIDIARY COMPA NY EXCEPT A SUBSIDIARY COMPANY FORMED FOR UNDER TAKING OF ANY B USINESS WHICH IS PERMISSIBLE FOR A BANKING COMPANY TO UNDERTAKE. AGA IN THERE IS SUBSTANCE IN THE ALTERNATIVE SUBMISSION OF THE ASSESSEE WHICH IS SUPPORTED BY THE ABOVE CITED DECISIONS IN THE CASE OF RAJIV KUMAR AGGARWAL (SUPRA), DR. JAI DEEP KUMAR SHARMA (SUPRA) AND RAJA CHAKRAVORTY (SUPRA) T HAT THE AMENDMENTS MADE BY THE FINANCE ACT, 2012 TO SECTION 201 AND SE CTION 40(A)(IA) OF THE ACT SOUGHT TO BE APPLIED TO CASES PRIOR TO 01.07.20 12 SINCE THE AMENDMENTS ARE PROCEDURAL IN NATURE AND ARE INTENDED TO REMOVE THE HARDSHIP BEING FACED BY THE ASSESSEE, THE AMENDMENTS ARE DECLARATORY AND CURATIVE IN NATURE AND SHALL HAVE RETROSPECTIVE EFFECT. WE THUS SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE SUBMISSION OF THE ASSESSEE THAT KMPL HAD DULY FURNISHED THE RETURN OF INCOME AND HAD CONSIDE RED THE INTEREST INCOME 79 AMOUNTING TO RS.5,75,706 RECEIVED FROM THE ASSESSEE WHILE COMPUTING ITS TOTAL INCOME FOR THE YEAR UNDER CONSIDERATION AND F URTHER THAT THE TAXES HAD ALSO BEEN PAID BY KMPL ON SUCH INTEREST INCOME FOR THE YEAR UNDER CONSIDERATION AND DECIDE THE ISSUE AFRESH IN VIEW O F ABOVE SUBMISSIONS AND CITED DECISIONS BY THE LEARNED AR AFTER AFFORDING O PPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GROUND NO. 5 IS ACCORDINGLY AL LOWED FOR STATISTICAL PURPOSES. 12 IN GROUND NO.6, THE ASSESSEE HAS QUESTIONED THE ADDITION OF RS.1,51,14,384 OUT OF RS.6,33,13,953 TO THE TAXABLE INCOME OF THE ASSESSEE WHICH MERELY REPRESENTS REVERSAL OF PROVISIONS MADE THAT WAS ADDED BACK IN THE COMPUTATION OF INCOME BY THE ASSESSEE IN THE AS SESSMENT FOR THE ASSESSMENT YEAR 2006-07. 12.1 IN SUPPORT OF THE GROUND, THE LEARNED AR SUBMI TTED THAT DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE HAS FILED FOLL OWING DETAILS OF RS.6,82,55,576 WHICH WAS DISALLOWED UNDER SEC. 40( A)(IA) OF THE ACT IN THE ASSESSMENT YEAR 2006-07: S.NO. EXPENSE HEAD CATEGORY AMOUNT (RS.) 1 ADVERTISEMENT CONTRACTOR 2,205,600 80 2 ELECTRICITY CONTRACTOR 203,679 3 LEGAL & PROFESSIONAL PROFESSIONAL 16,447,712 4 MISCELLANEOUS CONTRACTOR 2,674,576 5 RECRUITMENT PROFESSIONAL 12,417,457 6 RENT RENT 2,001,036 7 REPAIRS & MAINTENANCE CONTRACTOR 1,550,26 6 8 STAFF WELFARE CONTRACTOR 6,594,285 9 TRANSPORT CONTRACTOR 24,160,965 GRAND TOTAL 68,255,576 12.2 THE LEARNED AR SUBMITTED FURTHER THAT THE AMOU NT OF RS.6,82,55,576 WAS DISALLOWED WITH INCLUDED PROVISIONS AMOUNTING T O RS.6,33,13,953 MADE BY THE ASSESSEE AT THE YEAR END. AS PER THE ACCOUNT ING POLICY FOLLOWED BY THE ASSESSEE, SUCH PROVISIONS HAVE BEEN REVERSED IN THE SUBSEQUENT YEARS AND ACTUAL EXPENSES HAVE BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT. HOWEVER, OUT OF AN ABUNDANT CAUTION, THE ASSESSEE WHILE CALC ULATING THE TAXABLE INCOME FOR THE FINANCIAL YEAR 2005-06 DISALLOWED TH E PROVISIONS CREATED UNDER SEC. 40(A)(IA) OF THE ACT. AS THESE PROVISION S WERE REVERSED DURING THE YEAR UNDER CONSIDERATION, A DEDUCTION HAS BEEN CLAI MED IN THE COMPUTATION OF THE CURRENT YEAR I.E. ASSESSMENT YEAR 2007-08. H E SUBMITTED FURTHER THAT THE ASSESSEE HAS DEDUCTED AND DEPOSITED THE TAX WHE N EXPENSES WERE ACTUALLY BOOKED DURING THE YEAR. HE SUBMITTED THAT NO TAX WAS REQUIRED TO BE DEDUCTED ON THESE PROVISIONS AS THESE WERE MERELY B OOK ENTRIES IN RESPECT OF EXPENSES ON A BEST ESTIMATE BASIS, WHERE THE FINAL AMOUNT IS NOT ASCERTAINED AND IN MANY CASES WHERE EVEN THE PAYEE IS NOT KNOWN . THE SECTIONS 194C, 81 194I AND 194 OF THE INCOME-TAX ACT, 1961 REQUIRE TH E DEDUCTION TO BE MADE EITHER AT THE TIME OF CREDIT OF THE SUM TO THE ACCO UNT OF THE PAYEE OR AT THE TIME OF PAYMENT THEREOF IN CASH OR ISSUE OF A CHEQU E OR DRAFT OR BY ANY OTHER MODE WHICHEVER IS EARLIER. HE POINTED OUT THAT EACH OF THE SECTION HAS AN EXPLANATION WHICH CLARIFIES THAT WHERE THE SUM IS CREDITED TO ANY ACCOUNT, WHETHER CALLED SUSPENSE ACCOUNT OR BY ANY OTHER N AME, IN THE BOOKS OF ACCOUNT OF THE PERSON LIABLE TO PAY SUCH INCOME, SU CH CREDITING SHALL BE DEEMED TO BE CREDIT OF SUCH INCOME TO THE ACCOUNT O F THE PAYEE AND THE PROVISIONS OF THE SECTION SHALL APPLY ACCORDINGLY. HE PLACED RELIANCE ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF GU RSAHAI SAIGAL VS. CIT (1962) 48 ITR 1 (S.C). THE LEARNED AR SUBMITTED T HAT WHERE IN THE CASE OF ASSESSEE, IT IS NOT CERTAIN ON THE DATE ON WHICH THE CREDIT IS MADE, WHETHER A LIABILITY TO PAY WILL ARISE AND IF SO IN WHAT QUA NTUM AND THE PERSON TO WHOM THE PAYMENT WILL HAVE TO BE MADE IS UNKNOWN, T HE LIBERAL MEANING OF THE SECTION AND EXPLANATION SHOULD BE ADOPTED. 12.3 WITHOUT PREJUDICE TO THE ABOVE CLAIM OF THE AS SESSEE THAT NO TAX WAS REQUIRED TO BE DEDUCTED ON THE PROVISIONS OF SECTIO N, THE LEARNED AR SUBMITTED THAT RECONCILIATION OF THE PROVISIONS MAD E, ACTUAL EXPENSES BOOKED/INCURRED AGAINST THEM IN FINANCIAL YEAR 2006 -07 ON WHICH TAX WAS 82 DEDUCTED AND DEPOSITED AND THE AMOUNT OF PROVISIONS REVERSED WAS SUBMITTED SEPARATELY IN THE FORM OF ADDITIONAL EVID ENCE BEFORE THE LEARNED DRP VIDE APPLICATION DATED 27.1.2011. BASED ON RECO NCILIATION, IT IS EVIDENT THAT THE ASSESSEE HAD DEDUCTED AND DEPOSITED TDS ON EXPENSES AGGREGATING TO RS.4,70,68,930 DURING FINANCIAL YEAR 2006-07, NO TAX WAS REQUIRED TO BE DEDUCTED ON EXPENSES AGGREGATING TO RS.11.30,639 AN D THERE WAS NET REVERSAL OF THE BALANCE AMOUNT OF RS.1,51,14,384. T HE LEARNED DRP IN THEIR DIRECTIONS DATED 08.08.2011 HAS ACCORDINGLY DIRECTE D THE ASSESSING OFFICER TO VERIFY THE ABOVE CLAIM OF THE ASSESSEE. THE ASSE SSING OFFICER ON VERIFICATION, DID NOT ALLOW THE CLAIM OF THE ASSESS EE OF THE REVERSAL OF PROVISIONS ON THE BALANCE AMOUNT OF RS.1,51,14,384 AND ADDED BACK THE SAME TO THE RETURNED INCOME OF THE ASSESSEE. GIVEN THAT THE ABOVE AMOUNT REPRESENTS MERELY REVERSAL OF PROVISIONS MADE THAT WAS ADDED BACK IN THE COMPUTATION OF INCOME OF THE ASSESSEE IN THE ASSESS MENT YEAR 2006-07, IT IS REQUESTED THAT THE SAME IS ALLOWED TO THE ASSESSEE. HE PLACED RELIANCE ON THE FOLLOWING DECISIONS TO SUPPORT ITS ABOVE CLAIM: I) PFIZER LTD. [MUMBAI ITAT (2012), 28 TAXMAN.COM 1 7]; II) BANK OF MAHARASHTRA [AHMEDABAD ITAT (2010), 38 SOT 432]; III) IDBI [MUMBAI ITAT (2007), 10 SOT 497]; IV ) TELCO CONSTRUCTION EQUIPMENT LTD. [BANGALORE ITAT 2014, ITA NO. 478/BANG/2012]; & 83 V ) ACIT VS. MOTOR INDUSTRIES [KARNATAKA H.C], 24 9 ITR 141]; & VI ) CALCUTTA CO. LTD. [(S.C), 37 ITR 1] 12.4 THE LEARNED CIT(DR) ON THE OTHER HAND PLACED R ELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 12.5 AFTER CONSIDERING THE ABOVE SUBMISSIONS, WE FI ND THAT THERE IS A NEED TO DECIDE THE ISSUE AFRESH IN VIEW OF THE RATIOS LA ID DOWN IN THE ABOVE CITED DECISIONS AFTER EXAMINING THE CLAIMED FACTS. WE THU S SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE ISS UE AFRESH IN VIEW OF ABOVE SUBMISSIONS OF THE ASSESSEE AFTER AFFORDING OPPORTU NITY OF BEING HEARD TO THE ASSESSEE. THE GROUND NO. 6 IS ACCORDINGLY ALLOWED F OR STATISTICAL PURPOSES. 13. IN RESULT, THE APPEAL IS ALLOWED FOR STATISTICA L PURPOSES. 14. IN SUMMARY, BOTH THE APPEALS ARE ALLOWED FOR ST ATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 07 .09.2015 SD/- SD/- ( INTURI RAMA RAO ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 07 /09/2015 MOHAN LAL 84 COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR DATE DRAFT DICTATED ON COMPUTER 07.09.2015 DRAFT PLACED BEFORE AUTHOR 07.09.2015 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. APPROVED DRAFT COMES TO THE SR.PS/PS 07.09.2015 KEPT FOR PRONOUNCEMENT ON 07.09.2015 FILE SENT TO THE BENCH CLERK 07.09.2015 DATE ON WHICH FILE GOES TO THE AR DATE ON WHICH FILE GOES TO THE HEAD CLERK. DATE OF DISPATCH OF ORDER.