Interra Information Technologies (India) Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 5680/DEL/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65838 (ITAT-DELHI)
• Duration Of Justice: 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 20-09-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 19-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: SSH AJAY VOHRA; NEERAJ JAIN S
• Keywords: Related party transaction; Transfer pricing; International transaction; Rule of consistency; Additional evidence; Question of law; Wholly owned subsidiary; Onus to prove
• Section: 92C; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `I: NEW DELHI BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI CHANDRAMOHAN GARG, JUDICIAL MEMBER I.T. A. NOS.5568/DEL/2010 & 5680/DEL/2011 ASSESSMENT YEARS : 2006-07 & 2007-08 INTERRA INFORMATION TECHNOLOGIES DY. COMMISSIONER OF I.TAX, (INDIA) PVT. LTD., VS. CIRCLE 11(1), NEW DELHI. 5/207, GUPTA ARCADE, LSC SHRESTHA VIHAR, DELHI. PAN: AABCI1895H. (APPELLANT) (RESPONDENT) APPELLANT BY : S/SH. AJAY VOHRA & NEERAJ JAIN, ADVOCATES. RESPONDENT BY : SHRI PEEYUSH JAIN, CIT-DR. O R D E R PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER THESE APPEALS FILED BY THE ASSESSEE ARE DIRECTED AG AINST THE ORDER OF THE ASSESSING OFFICER PASSED UNDER SEC. 143(3) READ WITH SEC. 144C OF THE INCOME-TAX ACT, 1961 (THE ACT). 2. FACTS IN BRIEF INTERRA INFORMATION TECHNOLOGIE S (INDIA) PRIVATE LIMITED, A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956, IS A 100% SUBSIDIARY OF INTERRA IT INC., A US BASED COMPANY. INTERRA IT INC. ENTERS INTO CONTRACT WITH CUSTOMERS AND SUBCONTRACTS A PART/WHO LE OF THE WORK TO INTERRA INDIA. INTERRA INFORMATION TECHNOLOGIES (INDIA) PR IVATE LIMITED IS REGISTERED ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 2 UNDER THE SOFTWARE TECHNOLOGY PARK (STP) SCHEME OF THE GOVERNMENT OF INDIA AND IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPM ENT FOR ITS PARENT COMPANY. BESIDES THESE, INTERRA INDIA ALSO ENTERS INTO DIRECT CONTRACTS WITH END CUSTOMERS. 3. THE TRANSFER PRICING OFFICER AT PAGE 2 BROUGHT O UT THE PORTFOLIO OF THE ASSESSEE IN THE FOLLOWING WORDS:- INTERRA IT INDIA HAS SIGNIFICANT EXPERTISE IN DEVE LOPING DISTRIBUTED ENTERPRISES SOFTWARE. IT DELIVERS HIGH -QUALITY, ROBUST AND SCALABLE SOFTWARE SERVICES AND SOLUTIONS USING MULTI-TIERED CLIENT-SERVER ARCHITECTURE. THE SOFTWARE SOLUTIONS CAN BE DISTRIBUTED BETWEEN IBM MAINFRAMES, UNIX PLATFORMS AND MICROSOFT WINDOWS 2000 AND XP. IN MANY PROJECTS, T HE ENGINEERS IN INTERRA HAVE SUCCESSFULLY APPLIED THEI R INGENUITY IN MARRYING LEGACY APPLICATIONS ON THE IMB MAINFRAME T O TODAYS WEB-BASED CLIENT-SERVER TECHNIQUES TO PROVIDE COST- EFFECTIVE SOLUTIONS TO COMPLEX PROBLEMS. THE ENTIRE EFFORT IS BACKED BY CONSIDERABLE EXPERIE NCE IN THE STATE-OF-THE-ART TECHNOLOGIES LIKE MICROSOFT DN A (DISTRIBUTED INTERNET ARCHITECTURE). UNIVERSAL DAT A ACCESS (UDA), MTS, IIS, COM/DCOM/COM+, OLAP AND COMTI. THE TEAM USES A HOST OF DEVELOPMENT TOOLS LIKE VISU AL C++, VISUAL BASIC AND VISUAL INTERDEV, SQL SERVER 7.0, E SSBASE. INTERRA INDIA HAS RECENTLY STARTED DEVELOPING INTRA NETS AND MICROSOFT EXCHANGE BASED WORK FLOWS. INTERRA KIT INDIA IS ALSO ENGAGED IN DEVELOPING SOF TWARE APPLICATIONS ON THE IBM MAINFRAME. FOCUSSED ON FIN ANCIAL AND REVENUE MANAGEMENT, THESE APPLICATIONS ARE HOST ED ON THE MVS AND OS/390 PLATFORMS ON IBMS NEWSIEST S/390 SE RIES MAINFRAME WITH PARALLEL SYSPLEX. THE SOFTWARE IS D EVELOPED ON COBOL AND ASSEMBLY LANGUAGE, AND USES DB2/5.X AS TH E RDBMS AND CICS 4.X AS THE TRANSACTION PROCESSOR. T HE R&D CENTER IS CONNECTED ONLINE TO THE MICROSOFT DEVELOP ER NETWORK ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 3 AS WELL AS IBM DEVELOPER CONNECTION TO HAVE ACCESS TO TECHNOLOGY AS IT EMERGES IN THE MARKET. THE MAJORI TY OF CONSULTANTS HAVE AN ADVANCED DEGREE IN ENGINEERING FROM REPUTED INSTITUTIONS AND CONSIDERABLE YEARS OF SOFT WARE DEVELOPMENT EXPERIENCE IN TOP BRANDED INTERNATIONAL SOFTWARE COMPANIES. THE TEAM HAS SIGNIFICANT EXPERIENCE OF EXECUTING COMPLEX SOFTWARE PROJECTS FOR HIGH-PROFILE GLOBAL C USTOMERS. TO MAINTAIN CONSISTENCY IN QUALITY, THE COMPANY HAS ADOPTED THE BEST OF PRACTICES IN DEVELOPING SOFTWARE WITH S TRICT COMPLIANCE TO OBJECT-ORIENTED MODELING TECHNIQUES, USE OF CASE TOOLS AND ADHERING TO COMPONENT-BASED DEVELOPM ENT. TO ENSURE THAT THE ENGINEERS ARE IN TUNE WITH THE LATE ST TECHNOLOGY, THEY ARE ENCOURAGED TO ATTEND REGULAR PROFESSIONAL DEVELOPERS CONFERENCE TO UPGRADE THEIR KNOWLEDGE AND SKILLS. INTERRA IT INDIA HAS OBTAINED ISO 9001 CERTIFICATIO N AND CMM LEVEL 5 CERTIFICATION IN QUALITY. THE PRIMARY MOTIVATION FOR ISO 9001 & CMM 5 CERTIFICATION ARE TO USE THE O PPORTUNITY TO REVIEW EXISTING PRACTICES, WHICH HAS BEEN ACCLAI MED BY CUSTOMERS WORLDWIDE. SOFTWARE SERVICES THE PRIMARY SOFTWARE SERVICES THAT THE COMPANY PROV IDES ARE MULTI-TIER CLIENT-SERVER APPLICATION INTEGRATING MICROSOFT AND IBM PLATFORMS. INTERNET TECHNOLOGIES. IBM MAINFRAME S/390. IBM AS/400 ENTERPRISE-WIDE BUSINESS SOLUTIONS USING OLAP AND DATA WAREHOUSING APPLICATION. ERP (ENTERPRISE RESOURCE PLANNING) EURO CONVERSION ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 4 CONVERSION, MIGRATION AND PORTING E-COMMERCE AND SUPPLY CHAIN MANAGEMENT ON-SITE CONSULTANCY PRODUCT DEVELOPMENT. 4. DURING THE YEAR THE ASSESSEE ENTERED INTO THE FO LLOWING INTERNATIONAL TRANSACTIONS:- NATURE OF TRANSACTION METHOD SELECTED TOTAL VALUE OF TRANSACTION (RS.) PROVISION OF SOFTWARE DESIGN AND DEVELOPMENT SERVICES TNMM 216,272,595 REIMBURSEMENT OF EXPENDITURE CUP 3,792,438 5. IN THE TRANSFER PRICING ANALYSIS THE ASSESSEE ST ATED THAT IT HAS ENTERED INTO DIRECT CONTRACTS WITH VOXIVA INC. AND ALSO WIT H DOMESTIC CUSTOMERS. IT HAD USED TNMM AS A METHOD AND FOR THIS PURPOSE TOOK THE OPERATIVE PROFITS DIVIDED BY TOTAL COST AS THE PROFIT LEVEL INDICATOR . THE ASSESSEE RELIED UPON THE INTERNAL COMPARABLES BY USING TNMM ANALYSIS AND FOUND THAT PLI 7.63% OF INTERNAL UNCONTROLLED TRANSACTION WAS LE SSER THAN THE PLI OF THE INTERNATIONAL CONTROLLED TRANSACTION ENTERED BY T HE ASSESSEE WITH INTERRA INDIA, WHICH WAS FOUND TO BE 8.98%. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 5 6. ALTERNATIVELY, THE ASSESSEE BENCHMARKED THE INTE RNATIONAL TRANSACTIONS ENTERED INTO WITH ITS ASSOCIATED ENTERPRISE (AE), U SING TNMM METHOD, WITH EXTERNAL COMPARABLE COMPANIES. 7. 52 EXTERNAL COMPARABLE COMPANIES WERE IDENTIFIED BY THE ASSESSEE AND PLI WAS FOUND AT (-) .33% AND IT WAS CONCLUDED THAT THE ASSESSEES CONTROLLED TRANSACTIONS WITH ITS AE, WHICH WAS 8.9 8% PLI, WAS HIGHER AND HENCE AT ARMS LENGTH. THE ASSESSEE USED MULTIPLE YEAR DATA. 8. THE TRANSFER PRICING OFFICER REJECTED THE USE OF MULTIPLE YEAR DATA BY THE ASSESSEE. HE RELIED ON THE SPECIAL BENCH DECIS ION IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD., 294 ITR (AT) 3 2 AND OTHER DECISIONS AND ONLY DATA FOR THE YEAR 2006, WHICH WOULD BE THE CURRENT YEAR DATA, WAS TAKEN FOR THE PURPOSE OF BENCHMARKING. A SHOW CASE NOTICE WAS ISSUED TO THE ASSESSEE BY THE TRANSFER PRICING OFFICER, PROPO SING AN ADDITIONAL FILTER OF WAGES TO SALES RATIO, TO THE COMPARABLES USED BY TH E ASSESSEE, ON THE GROUND THAT WAGES AND SALARY CONSTITUTE A MAJOR PART OF TH E COST INCURRED BY IT/ITES COMPANIES IN INDIA. HE PROPOSED TO TREAT ONLY THOS E COMPANIES WHICH HAVE WAGES/SALES RATIO BETWEEN 45% TO 65% AS COMPARABLE COMPANIES. APPLYING THIS HE ARRIVED AT ONLY EIGHT COMPARABLE COMPANIES. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 6 9. THEREAFTER THE TPO PROPOSED TWO MORE ADDITIONAL FILTERS (I) NEGATIVE ROGSALES; & (II) DECLINING OPERATING PROF IT. BY THIS, HE FURTHER REDUCED THE COMPARABLES TO FIVE. 10. THE ASSESSEE OBJECTED BY STATING THAT INTERNAL COMPARABLES SHOULD BE USED FOR BENCHMARKING. CERTAIN OTHER OBJECTIONS WE RE ALSO RAISED BY THE ASSESSEE AGAINST THE SHOW CAUSE NOTICE, WHICH WE WI LL DEAL IN DUE COURSE. THE TPO REJECTED THIS CONTENTION OF THE ASSESSEE ON THE GROUND THAT UNRELATED TRANSACTIONS ARE JUST 1.4% OF THE TOTAL R EVENUE EARNED BY THE ASSESSEE AND HENCE, COMPARISON WITH SUCH TRANSACTIO NS WILL NOT PROVIDE MEANINGFUL BENCHMARKING. HE HELD THAT UNCONTROLLED TRANSACTIONS SHOULD BE OF SUFFICIENT ECONOMIC SIGNIFICANCE TO QUALIFY AS A BENCHMARK. 11. HE REJECTED THE SUBMISSIONS OF THE ASSESSEE THA T FILTER OF WAGES/SALES SHOULD BE PRUNED BETWEEN 42% TO 62% INSTEAD OF 45% - 65% ON THE GROUND THAT THE BAND OF 45% TO 65% IS FAIR ENOUGH AND THE CONTENTION OF THE ASSESSEE IS MADE ONLY WITH THE OBJECTIVE OF ACHIEVI NG BIASED RESULTS. 12. IN THE CASE OF RAM INFORMATICS LTD., HE REJECTE D THE CONTENTION OF THE ASSESSEE ON THE GROUND THAT IT HAS DECLINING OPERAT ING PROFIT AND HENCE NOT A COMPARABLE COMPANY. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 7 13. IN THE CASE OF SOFT PRO SYSTEMS LTD., HE HELD T HAT THE COMPANY SHALL BE COMPARED AT ENTITY LEVEL AS IN THE CASE OF OTHER CO MPANIES, INSTEAD OF USING SEGMENTED FINANCIAL DATA. 14. IN THE CASE OF SANKHYA INFOTECH HE REJECTED THE OBJECTION OF THE ASSESSEE THAT THIS COMPANY IS IN THE AVIATION SECTO R AND HELD THAT THE COMPANY IS VERY MUCH SOFTWARE DEVELOPER. 15. HE REJECTED THE ASSESSEES SUBMISSION THAT THE PARENT COMPANY HAS LOW PROFITABILITY AND HENCE RISK ADJUSTMENT SHOULD BE CONNECTED. THE ARGUMENT OF THE ASSESSEE ASKING FOR LOW RESOURCE UT ILIZATION ADJUSTMENT WAS REJECTED, ON THE GROUND THAT AGAINST TOTAL EXPENDIT URE OF RS.21 CRORES (APPROXIMATE), EXPENDITURE ON PERSONNEL WAS RS.12.8 7 CRORES, WHICH AMOUNTS TO 61% AND SUCH PERCENTAGE IS COMPARABLE TO THE RESULTS OF THE NASSCOM-CRISIL SURVEY ON THE MATTER. THE ASSESSEE S FRESH SEARCH WHICH THREW UP NINE COMPARABLES AND WHICH WERE SOUG HT TO BE INCLUDED AS ADDITIONAL EVIDENCE WAS REJECTED ON THE GROUND THAT THE FRESH SEARCH WAS EMBARKED UPON TO ACHIEVE BIASED RESULTS. 16. THE ASSESSEES ARGUMENT ON RES JUDICATA WAS REJ ECTED BY RELYING ON THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S. CARRAR O INDIA LTD. VS. DCIT (2008-TIOL-519-ITAT-DEL). ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 8 17. THE ARGUMENT FOR GRANT OF ADJUSTMENT FOR RISK A T 5%, ON THE GROUND THAT THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER IS REJECTED ON THE GROUND THAT, THE ASSESSEE IS EXPOSED TO ALL KINDS OF RISKS LIKE, TECHNOLOGICAL RISK, GOVERNMENT POLICIES RISK, ENVIRONMENTAL RISKS, SECU RITY RISKS ETC. THE TRANSFER PRICING OFFICER ALSO HELD THAT, BEING A CA PTIVE SERVICE PROVIDER IS ITSELF A BIG RISK AS THE ASSESSEE IS DEPENDENT ON O NLY THE AE. HE ALSO REFERRED TO OTHER RISKS LIKE HUMAN CAPITAL RISK, IN TANGIBLE ETC. FURTHER THE TPO HELD THAT REASONABLE ACCURATE ADJUSTMENT FOR RI SK CANNOT BE DONE. HE ANALYZED VARIOUS RISKS AND CAME TO A CONCLUSION THA T NO RISK ANALYSIS WAS CONDUCTED BY THE ASSESSEE AND THAT THE ASSESSEE HAS NOT DISCHARGED ITS INITIAL ONUS AND HENCE ITS CLAIM FOR RISK ADJUSTMENT CANNOT BE GRANTED. 18. THE OTHER ARGUMENT OF THE ASSESSEE SUCH AS, IT HAS NO INTENTION TO SHIFT PROFITS ETC. WAS REJECTED BASED ON THE VARIOUS JUDI CIAL PRONOUNCEMENTS. THEREAFTER THE TPO HAS COMPUTED THE ARMS LENGTH PR ICE AT A MARGIN OF 16.3%, BEING ARITHMETIC MEAN OF THE FINAL SET OF FO UR COMPARABLES. THE ASSESSEE HAS CARRIED THE MATTER BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THE OBJECTIONS WERE FILED. THE DRP REJECTED THE OB JECTIONS RAISED BY THE ASSESSEE BY APPROVING THE REASONING AND FINDING GIV EN BY THE TRANSFER PRICING OFFICER. 19. AGGRIEVED THE ASSESSEE IS BEFORE US ON THE FOLL OWING GROUNDS:- ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 9 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN COMPLETING ASSESSMENT UNDER SECTION 144C/143(3) OF THE INCOME-TAX ACT, 1961 (THE ACT) AT AN INCOME OF RS .4,76,19,822 AS AGAINST THE INCOME OF RS.45,48,258 RETURNED BY T HE APPELLANT. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING ADDITION OF RS.2,37,40,619 OF THE ALLEGED DIFFERENC E IN THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF PROVISION OF SOFTWARE DESIGN AND DEVELOPMENT SERVICES ON THE BAS IS OF THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT BY TH E TPO. 2.1 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN REJECTING THE BENCHMARKING ANALYSIS CONSIDERING INT ERNAL COMPARISON ON THE GROUND THAT QUANTUM OF REVENUE F ROM TRANSACTIONS WITH UNRELATED PARTIES IS ECONOMICALLY INSUFFICIENT. 2.2 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT THE INTERNAL COMPARABILITY DOES NOT PR OVIDE MEANINGFUL BENCHMARKING, WITHOUT POINTING OUT ANY E RROR OR MISTAKE IN THE PROFITABILITY SUMMARY IN RELATION TO REVENUE EARNED FROM AE AND NON AES TRANSACTION WORKED OUT B Y THE APPELLANT. 2.3 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THE INTERNAL BENCHMARKING ANALYSIS PROVIDES AN IDEAL BENCHMARK FOR DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS APPLYING TNMM. 2.4 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN APPLYING ADDITIONAL FILTERS OF PERCENTAGE OF WAGES TO SALE, PERSISTENT LOSSES, DECLINING OPERATING PROFIT AND N EGATIVE ROG- SALES, ROG, RELATED PARTY TRANSACTIONS WITHOUT APPR ECIATING THE SELECTION OR REJECTION SHOULD BE BASED ON FAR ANALY SIS AND NOT ON FINANCIAL RESULTS. 2.5 THAT THE ASSESSING OFFICER / TPO ERRED IN APPL YING THE ABOVEMENTIONED ADDITIONAL FILTERS WITHOUT RAISING A NY OBJECTION TO THE SEARCH PROCESS AS ADOPTED BY THE APPELLANT I N THE TRANSFER PRICING DOCUMENTATION. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 10 2.6 THAT THE ASSESSING OFFICER / TPO ERRED ON FACT S AND IN LAW IN APPLYING INCONSISTENT APPROACH BY ELIMINATING LO SS MAKING COMPANIES OR COMPANIES WITH DECLINING PROFIT WITHOU T ELIMINATING THE COMPANIES HAVING SIGNIFICANTLY HIGH MARGINS. 2.7 THAT THE ASSESSING OFFICER / TPO ERRED ON FACT S AND IN LAW IN APPLYING THE FILTER OF WAGES TO SALES OF 45-65% AFTER RELYING ON NASSCOM-CRISIL SURVEY, WITHOUT APPRECIATING THE FACT THE WAGES CONSTITUTE 52.78% OF APPELLANT'S TOTAL TURNOV ER. 2.8 THAT THE ASSESSING OFFICER / TPO ERRED ON FACT S IN REJECTING THE CLAIM OF THE ASSESSEE THAT THE COMPAN IES HAVING WAGES TO SALES RATIO WITHIN THE BAND OF 42%-62%, (I .E. +/- 10%) SHOULD BE SELECTED SO AS TO BENCHMARK THE INTE RNATIONAL TRANSACTIONS UNDERTAKEN BY THE APPELLANT. 2.9 THAT THE ASSESSING OFFICER / TPO ERRED IN REJE CTING GENESYS INTERNATIONAL CORP. LTD., COMPULINK SYSTEMS LTD. AS COMPARABLES ALLEGEDLY HOLDING THAT THERE HAS BEEN D ECLINE IN THE SALES WITHOUT CONSIDERING THE FINANCIAL RESULTS OF SUBSEQUENT YEARS. 2.10 THAT THE ASSESSING OFFICER / TPO ERRED IN REJ ECTING RAM INFORMATICS LTD AS PART OF COMPARABLE COMPANIES ON THE REASONING OF DECLINING OPERATING PROFITABILITY AND CONTINUALLY LOSS MAKING COMPANY. 2.11 THAT THE ASSESSING OFFICER / TPO ERRED IN NOT CONSIDERING THE ACTUAL COMPUTATION OF OPERATING PROFITABILITY O F RAM INFORMATICS LTD. FURNISHED BY THE APPELLANT WITHOUT APPRECIATING THAT THE OPERATING PROFIT OF THE COMPA NY HAS INCREASED AS COMPARED TO THE PRECEDING YEAR. 2.12 THAT THE ASSESSING OFFICER / TPO ERRED IN REJ ECTING THE CLAIM OF THE APPELLANT THAT THE PROFITABILITY OF ON LY SOFTWARE DEVELOPMENT SEGMENT OF SOFTPRO SYSTEMS LIMITED SHOU LD BE CONSIDERED. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 11 2.13 THAT THE ASSESSING OFFICER / TPO ERRED ON FA CTS AND IN LAW IN NOT APPRECIATING THAT THE ANNUAL RESULT OF S OFTPRO SYSTEMS LIMITED SHOWS THAT THE LEASE/ RENTAL INCOME SEGMENT IS THE PRIMARY PROFIT GENERATING DEPARTMENT OF THE COM PANY WHEREAS THE SOFTWARE DEVELOPMENT DIVISION HAS SHOWN A LOSS OF (-) 32% DURING THE RELEVANT PREVIOUS YEAR. 2.14 THAT THE ASSESSING OFFICER / TPO ERRED IN CON SIDERING SANKHYA INFOTECH AS A COMPARABLE EVEN THOUGH THE CO MPANY IS RENDERING SERVICES TO THE AVIATION SECTOR. 2.15 THAT THE ASSESSING OFFICER / TPO ERRED IN NOT CONSIDERING THE FRESH DATABASE SEARCH CONDUCTED BY THE APPELLAN T BASED ON THE FILTERS TAKEN BY TPO IN THE ASSESSMENT FOR THE PRECEDING YEAR. 2.16 THAT THE ASSESSING OFFICER / TPO ERRED ON FA CTS AND IN LAW IN NOT ALLOWING ADJUSTMENT TO THE EXTENT OF 5% OVER THE COST ON ACCOUNT OF LOW RISK ASSUMED BY THE APPELLANT AS A CONTRACT SERVICE PROVIDER. 2.17 THAT THE ASSESSING OFFICER. / TPO ERRED ON F ACTS AND IN LAW IN NOT APPRECIATING THAT, CONSIDERING THAT SUBS TANTIAL PORTION OF THE COMBINED PROFIT MARGIN HAS BEEN RECE IVED BY THE APPELLANT AND NO ADJUSTMENT ON ACCOUNT OF ALLEGED T RANSFER PRICING ADJUSTMENT WARRANTED. 2.18 THAT THE ASSESSING OFFICER / TPO ERRED ON FA CTS AND IN LAW IN NOT APPRECIATING THAT THE ASSOCIATED ENTERPR ISE HAS, IN FACT, INCURRED A LOSS FROM THE INTERNATIONAL TRANSA CTIONS AND, THEREFORE, NO ADJUSTMENT ON ACCOUNT OF THE ALLEGED DIFFERENCE IN ARM'S LENGTH PRICE WAS EVEN OTHERWISE WARRANTED. 2.19 THAT THE ASSESSING OFFICER / TPO ERRED ON FA CTS AND IN LAW IN NOT APPRECIATING THAT THE INCOME OF THE APPE LLANT IS EXEMPT UNDER SECTION 10A OF THE INCOME TAX ACT AND HENCE, THERE COULD NOT BE ANY MOTIVE FOR THE TRANSFER OF P ROFITS OUTSIDE INDIA. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 12 2.20 THAT THE ASSESSING OFFICER / TPO ERRED ON FA CTS AND IN LAW IN NOT FOLLOWING THE TRANSFER PRICING ORDER PAS SED IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR EVEN WHEN THE RE IS NO CHANGE IN THE FACTS OF THE APPELLANT'S CASE. 2.21 THAT THE ASSESSING OFFICER / TPO ERRED ON F ACTS AND IN LAW IN APPLYING OPERATING RESULTS FOR THE RELEVANT PREVIOUS YEAR AS OPPOSED TO THE CONTEMPORANEOUS DATA AVAILABLE AT THE TIME OF MAKING TRANSFER PRICING DOCUMENTATION WHICH IS I N COMPLETE DISREGARD OF THE CONTENTIONS OF THE ASSESSEE. 2.22 WITHOUT PREJUDICE, THAT THE ASSESSING OFFIC ER / TPO ERRED IN LAW IN NOT ALLOWING VARIATION TO THE EXTEN T OF (+/-)5%, WHILE DETERMINING THE ARM'S LENGTH PRICE OF THE 'IN TERNATIONAL TRANSACTIONS' 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DENYING DEDUCTION AMOUNTING RS.I,93,30,9451- UNDER SECTION 10A OF THE INCOME-TAX ACT, 1961 ('THE ACT') IN RESP ECT OF PROFITS OF NOIDA UNIT, I.E. THE UNDERTAKING SET UP IN NOIDA EXPORT PROCESSING ZONE ('NEPZ'). 3.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN HOLDING THAT THE APPELLANT IS NOT ENTITLED TO CLAIM DEDUCTION UNDER SECTION 10A OF THE ACT BY MERELY FOLLOWING TH E ASSESSMENT ORDERS FOR THE ASSESSMENT YEARS 2002-03 AND 2003- 04 EVEN THOUGH THE SAID ORDERS HAVE BEEN REVERSED B Y THE TRIBUNAL. 20. THE LEARNED COUNSEL FOR THE ASSESSEE SHRI AJAY VOHRA SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF RENDERIN G LOW END SOFTWARE MAINTENANCE SERVICES. HIS SUBMISSIONS ARE AS FOLLO WS (A) INTERNAL COMPARISONS ARE AVAILABLE FOR THE PURPOSE OF BENCHMARKING AND THIS SHOULD BE REFERRED. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 13 (B) REJECTION OF INTERNAL COMPARABLES ON THE GROUND ST ATED BY THE TPO IS UNLAWFUL AND UNSUSTAINABLE IN VIEW OF RULE 10B(1)(E ) WHEREIN THE PROFIT MARGIN FROM TRANSACTION IS REQUIRED TO BE CO MPARED. (C) THE THIRD MEMBER BENCH OF THE MUMBAI TRIBUNAL IN TH E CASE OF TECHNIMOUNT ICB PVT. LTD. VS. ACIT IN ITA NOS. 4608 & 5085/MUM/2010, HAVE LAID DOWN THAT INTERNAL COMPARA BLES HAVE A HIGHER DEGREE OF COMPARABILITY FOR THE REASON THAT VARIOUS FACTORS HAVING BEARING ON THE QUALITY OF OUTPUT, ASSETS EMP LOYED, INPUT COST ETC. CONTINUE TO REMAIN BY AND LARGE SAME IN CASE O F AN INTERNAL COMPARABLE. 21. HE RELIED ON NUMBER OF OTHER DECISIONS FOR THE PROPOSITION THAT ONLY MARGINS OF A SINGLE TRANSACTION OR THE SAME CLASS O F TRANSACTIONS SHOULD FORM THE BASIS OF COMPARISON UNDER TNMM INSTEAD OF RELYI NG ON EXTERNAL COMPARABLES AS PROVIDED IN PARAGRAPH 3.26 OF THE OE CD GUIDELINES. 22. HE DISPUTED THE FINDINGS OF THE TPO THAT THE QU ANTUM OF REVENUE DERIVED FROM UNRELATED PARTIES BEING ECONOMICALLY I NSUFFICIENT TO QUALIFY AS A SUITABLE BENCHMARK FOR THE REASON THAT, THE ASSES SEE IN THE COURSE OF ITS BUSINESS ENTERS INTO SEVERAL SOFTWARE DEVELOPMENT C ONTRACTS OF SMALL VOLUMES. THE AGGREGATE TURNOVER OF THE ASSESSEE CO MPRISES OF SEVERAL SMALL ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 14 TRANSACTIONS AND HENCE COMPARABILITY OF SINGLE TRAN SACTIONS IS PERMISSIBLE. HE DISPUTED THE TEST LAID DOWN BY THE REVENUE. 23. ON EXTERNAL COMPARABLES HE DISPUTED THE ADDITIO NAL FILTERS APPLIED BY THE TPO ON THE GROUND THAT THESE FILTERS HAVE BEEN USED BY THE TPO TO SUIT HIS REQUIREMENT AND TO ARRIVE AT PREDETERMINED RESU LTS. 24. THAT COMPARABLES SHOULD BE PLACED ON FUNCTIONAL OR ASSET PROFILE AND NOT ON PROFIT MARGIN. HE PLACED RELIANCE ON THE FO LLOWING CASE LAWS:- (I) MENTOR GRAPHICS (NOIDA) PVT. LTD., 109 ITD 101. (II) E-GAIN COMMUNICATION PVT. LTD., 118 ITD 234 (III) AZTEC SOFTWARE INDIA PVT. LTD., 107 ITD 141 (IV) SONY INDIA PVT. LTD., 114 ITD 448. (V) PHILIPS SOFTWARE, 26 SOT 226 (VI) QUARK SYSTEMS PVT. LTD. VS. DCIT (ITA NOS. 100 & 115/CHD/2009). 25. THE TPO HAS SELECTED THE COMPANIES WITH VERY HI GH OPERATIVE PROFIT MARGIN AND IGNORED OR REJECTED OTHER COMPANIES HAVI NG LOW MARGIN OR LOSS. IT WAS ARGUED THAT SELECTION OF ONLY HIGH PROFIT MA RGIN COMPANY AND REJECTING THE LOSS MAKING/LOW PROFIT COMPANIES AS C OMPARABLE COMPANIES HAS DISTORTED THE RESULTS. 26. ON APPLICATION OF FILTER OF WAGES/SALES RATIO, HE SUBMITTED THAT THE SURVEY REFERRED TO BY THE TPO WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AND ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 15 THAT THE RANGE OF 42% TO 62% MAY BE CONSIDERED AS I T WOULD BE (+)/(-) 10% RANGE. HE FURTHER SUBMITTED THAT WITHOUT PREJUDICE THE ASSESSEE COMPANY WAS ESSENTIALLY A SOFTWARE DEVELOPMENT COMPANY AND NOT AN ITES/BPO COMPANY AND HENCE, THIS FILTER CANNOT BE APPLIED. 27. ON EXCLUDING COMPARABLE COMPANIES WITH NEGATIVE ROG-SALES I.E. (A) GENESYS INTERNATIONAL CORPN. LTD. (OP/OC 3.49%); & (B) COMPULINK SYSTEMS LTD. (OP/OC (-) 4.65%), HE REFERRED TO THE OBJECTIONS FILED BEFORE THE DRP WHICH IS AT PAGES 47 AND 29 OF THE PAPER BO OK AND ARGUED THAT THERE HAS BEEN INCREASE IN SALES OF ALL THE AFORESA ID COMPANIES IN THE SUBSEQUENT YEARS AND HENCE, ELIMINATION OF THESE CO MPARABLES ON THE GROUND OF TREND OF HAVING NEGATIVE ROG-SALES IS FACTUALLY NOT CORRECT. 28. ON EXCLUSION OF OTHER COMPARABLES, HE SUBMITTED AS FOLLOWS A) ON RAM INFORMATICS LTD. FIVE YEARS DATA WAS PRO DUCED TO DEMONSTRATE THAT THE OPERATIVE MARGIN WAS ACTUALLY INCREASING AND HENCE THE FACTS ARE WRONGLY STATED BY THE TPO AND THE COMPARA BLE HAS BEEN WRONGLY REJECTED. B) ON COMPARABLE ACCEPTED BY THE TPO, HE SUBMITTED THAT IN THE CASE OF SOFT PRO SYSTEMS, IT IS NOT FUNCTIONALLY COMPARABLE AS IT IS RECEIVING LEASE RENTAL INCOME WHICH HAS RESULTED IN THE ASSESSEE DE CLARING PROFITS AND THAT IF ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 16 THIS IS ELIMINATED, IT CAN BE SEEN THAT A LOSS OF ( -) 32% AROSE OUT OF SOFTWARE OPERATION OF THIS COMPANY. C) ON SANKHYA INFOTECH IT WAS SUBMITTED THAT IT HAS ENTERED INTO BUSINESS ACTIVITIES OF AVIATION SERVICE WHICH ARE NOT SIMILA R TO THAT OF THE ASSESSEE COMPANY. HE TRIED TO DEMONSTRATE THAT THE FUNCTION S OF SANKHYA INFOTECH ARE DIFFERENT WHEN COMPARED WITH THE FUNCTIONS OF THE A SSESSEE COMPANY. HE RELIED ON CERTAIN CASE LAWS WHICH WE WOULD REFER LA TTER AND PLEADED THAT SIGNIFICANT DIFFERENCES APPEAR IN THE ANALYSIS OF T HOSE COMPANIES FUNCTIONS AND OTHER FACTORS SHOULD LEAD TO A CONCLUSION THAT THESE COMPANIES ARE NOT TO BE INCLUDED AS COMPARABLES. HE ARGUED THAT WHEN THE COMPARABLE COMPANIES FINALL Y ADOPTED BY THE TPO ARE CONSIDERED AND WHEN ELIMINATION OF THESE TW O COMPARABLES IS DONE, THEN THE PROFIT MARGIN OF THE APPELLANT COMPANY WOU LD BE HIGHER THAN THE PLI DECLARED AND HENCE NO ADDITION WAS CALLED FOR. 29. HE POINTED OUT THAT THE ASSESSEE HAS CONDUCTED A FRESH SEARCH TO IDENTIFY THE COMPARABLE COMPANIES AND BASED ON FRES H DATA OBTAINED, NINE COMPANIES WERE SELECTED AS COMPARABLES AND THAT THE REVENUE WAS WRONG TO DISREGARD THE COMPARABLES FOUND CONSEQUENT TO A FRE SH SEARCH. HE ARGUED THAT THE TPO HAD SOUGHT TO APPLY CERTAIN NEW SELECT ION/REJECTION FILTERS, AND IN SUCH A SCENARIO THE ASSESSEE HAD SEARCHED FOR FR ESH COMPARABLE BASED ON ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 17 THIS NEW CRITERIA ADOPTED BY THE T.P.O. FROM THE PU BLIC DOMAIN AND THIS SHOULD HAVE BEEN ACCEPTED. RELIANCE WAS PLACED ON THE DECISION IN THE CASE OF USB INDIA PVT. LTD., 30 SOT 95 (MUM.). 30. HE ARGUED THAT THE ASSESSEE IS ENGAGED IN LOW E ND SOFTWARE SERVICE MAINTENANCE FUNCTION AND THAT IT IS A CONTRACT SERV ICE PROVIDER AND HENCE IT WOULD HAVE LESSER MARGINS WHEN COMPARED TO OTHER SO FTWARE COMPANIES. HE VEHEMENTLY CONTENDED THAT THE ASSESSEE CANNOT BE EX PECTED TO EARN MORE PROFIT THAN WHAT HAS BEEN EARNED FROM THE COMBINED OPERATIONS OF THE TWO ENTITIES I.E. THE ASSESSEE AND ITS AE WHILE DEALING WITH UNRELATED PARTIES. 31. THAT THE ASSESSEE HAS LOW CAPACITY UTILIZATION AND SOUGHT ADJUSTMENT FOR THE SAME BY RELYING ON RULE 10B(3) AS WELL CERT AIN DECISIONS OF THE TRIBUNAL WHICH UNDER CERTAIN CIRCUMSTANCES HAVE ACC EPTED SUCH CLAIMS FOR ADJUSTMENT. 32. ONE OF THE MAIN CONTENTIONS OF MR. AJAY VOHRA I S THAT THE T.P. ADJUSTMENT CANNOT EXCEED THE AMOUNT OF MARGIN RETAI NED BY THE AE. HE FURNISHED A CHART WHICH GIVES THE TOTAL REVENUES OF THE A.E., COST INCURRED AND PROFIT DECLARED AND IT WAS ARGUED THAT THE ADJU STMENTS IF ANY, CANNOT EXCEED THE PROFITS COMBINEDLY DERIVED, FOR THE REAS ON THAT NOTIONAL INCOME CANNOT BE BROUGHT TO TAX. 33. HE RELIED ON THE FOLLOWING CASE LAWS:- ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 18 (I) SONY INDIA P. LTD. VS. CBDT, 288 ITR 52 (DELHI). (II) PHILIP SOFTWARE CENTRE PVT. LTD. VS. ACIT (ITA NO.2 18 (BANG.)/2008). (III) KYUNGSHIN INDUSTRIAL MOTHERSON LTD. (ITA NO.1396/DE L/2009). (IV) DCIT VS. GLOBAL VENTEDGE P. LTD. (V) LI & FUN (INDIA) PVT. LTD. VS. DCIT (ITA NO.5156/DE L/2010). 34. HE SUBMITTED THAT THE ASSOCIATED ENTERPRISE HAS INCURRED A LOSS AND HENCE THE QUESTION OF SHIFTING PROFITS FROM INDIA T O AE DOES NOT ARISE. HE FURTHER SUBMITTED THAT THERE IS NO MOTIVE TO DIVERT PROFITS AND HENCE THERE CAN BE NO ADJUSTMENT IN THE PROVISIONS AS THE INCOME IN INDIA IS EXEMPT U/S 10 AND NO SUCH EXEMPTION IS AVAILABLE TO THE AE. 35. HE ARGUED THAT THE ASSESSEE IS A CAPTIVE SERVIC E PROVIDER, RENDERING SOFTWARE DEVELOPMENT SERVICES TO ITS OVERSEAS AFFIL IATES. WHILE RENDERING SERVICES THE ASSESSEE DOES NOT BEAR SIGNIFICANT BUS INESS AND OPERATIONAL RISKS. THEREFORE, ADJUSTMENT OF 5% SHOULD BE GIVEN IN THE OPERATIVE PROFIT MARGINS OF THE INDEPENDENT COMPARABLE COMPANIES. IT IS ARG UED THAT THE OVERSEAS A.E. BEAR SIGNIFICANT BUSINESS ON OPERATIONAL RISKS AND THE ASSESSEE IS A PROTECTED ENTITY BEARING MUCH SERVICE THAN THE COMP ANY WHICH OPERATES IN OPEN MARKET CONDITIONS. 36. RELIANCE WAS PLACED ON THE DECISION IN THE CASE OF INTELLINET TECHNOLOGIES INDIA PVT. LTD. VS. ITO (ITA NO.1237/B ANG./2010) FOR THE ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 19 PROPOSITION THAT THE PRINCIPLE OF CONSISTENCY HAS T O BE ADHERED TO BY THE TPO. IT WAS POINTED OUT THAT NO ADJUSTMENT WAS MAD E BY THE TPO IN THE EARLIER YEARS ON THE SIMILAR FACTS. RELIANCE WAS A LSO PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF RADHASOAMI SATSANG VS. CIT, 193 ITR 321. 37. ON GROUND NO.3.1 WHICH IS DISALLOWANCE OF DEDUC TION U/S 10A OF THE ACT, HE SUBMITTED THAT THE ISSUE HAS BEEN CONSIDERE D BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2002-0 3 AND 2003-04 AND RESOLVED IN FAVOUR OF THE ASSESSEE. HE FURTHER SUB MITTED THAT THE HONBLE DELHI HIGH COURT HAS UPHELD THIS DECISION. 38. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT HE IS NOT PRESSING GROUND NO.2.21 AND 2.22. 39. THE LEARNED DR MR. PEEYUSH JAIN ON THE OTHER HA ND, VEHEMENTLY CONTROVERTED THE SUBMISSIONS OF THE ASSESSEES COUN SEL. HE ARGUED THAT THE TPO HAS RIGHTLY REJECTED THE INTERNAL COMPARABLES F OR THE REASON THAT IT IS ECONOMICALLY MINISCULE AND HENCE NOT COMPARABLE. H E EMPHASIZED THAT THE SALE TO THE A.E. WAS 21.62 CRORES WHEREAS SALE TO T HE THIRD PARTY, WHICH IS UNCONTROLLED PARTY, IS ONLY 8.76 LAKHS, WHICH, IF A NALYZED, WOULD NOT BE A CORRECT COMPARABLE. TO DEMONSTRATE HIS POINT HE AR GUED THAT WHEN AN ORGANIZATION IS SELLING 1 LAKH TONS OF TEA TO AN AE AND TON OF TEA IS SOLD ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 20 TO A THIRD PARTY, THEN THERE CANNOT BE A COMPARISON AS THE TRANSACTION WITH THE THIRD PARTY IS ECONOMICALLY INSIGNIFICANT. HE FURT HER SUBMITS THAT IF SUCH COMPARABLES ARE ALLOWED, IT WOULD GIVE SCOPE FOR TA X AVOIDANCE AND EVASION BY ASSESSEES, BY INDULGING IN SMALL SAMPLE SALES TO THIRD PARTY, SO AS TO DEMONSTRATE THAT THE TRANSACTIONS WITH THE AE ARE A T ARMS LENGTH. HE PLEADED THAT INSIGNIFICANT TRANSACTION CANNOT BE TA KEN INTO ACCOUNT. 40. HE RELIED ON RULE 10B(2)(D) FOR THE PROPOSITION THAT SIZE OF MARKET IS TO BE CONSIDERED. HE RELIED ON THE DECISION OF ITA T, PUNE BENCH `A IN ITA NO.1296/PN/10 IN THE CASE OF BRINTON CARPETS ASIA P VT. LTD. VS. DCIT, FOR THE PROPOSITION THAT SMALL VALUE TRANSACTIONS CANNO T BE TAKEN AS COMPARABLES. SIGNIFICANT VOLUME DIFFERENCE BETWEEN THE TWO SEGME NTS HAS TO BE CONSIDERED AS A FACTOR FOR SELECTION OF COMPARABLES . HE ARGUED THAT DOMESTIC TRANSACTIONS CANNOT BE COMPARED WITH EXPORT TRANSAC TIONS AND HENCE BENCHMARKING SHOULD NOT BE DONE OF PLI OF EXPORT TR ANSACTIONS WITH THE PLI OF DOMESTIC TRANSACTIONS. HE FURTHER RELIED ON THE FOLLOWING CASE LAWS:- (I) SONY INDIA PVT. LTD., 315 ITR 150; (II) SONY INDIA PVT. LTD. 114 ITD 448 (DEL)(TRIB.) 41. HE FURTHER POINTED OUT THAT THE NATURE OF TRANS ACTIONS ARE DIFFERENT FOR THE REASON THAT IN THE CASE OF THIRD PARTY TRANSACT IONS THE ASSESSEE DIRECTLY DEALS WITH THE CUSTOMERS AND WHEREAS IN CASE OF INT ERNATIONAL TRANSACTIONS ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 21 THE ASSESSEE ROUTED THE SAME THROUGH THE AE AND THA T IN THIS INDIRECT TRANSACTION WITH THE ULTIMATE CUSTOMER, THE AE IS A DDING SOME VALUE TO THE TRANSACTION. HE RELIED ON THE FOLLOWING CASE LAWS: - (A) DESTINATION OF THE WORLD (SUBCONTINENT) PVT. LTD. V S. ACIT (ITA NO.5534(DEL)/2010). (B) BIRLASOFT (INDIA) LTD. (ITA NO.3839/DEL/2010). HE EMPHASIZED THAT CONCEPT OF MATERIALITY HAS TO BE CONSIDERED IN CASES WHERE COMPARABLES TRANSACTIONS ARE SOUGHT TO BE PIC KED UP FOR BEING BENCHMARKED. 42. HE FURTHER SUBMITTED THAT DOMESTIC TRANSACTIONS CANNOT BE CONSIDERED FOR THE PURPOSE OF BENCHMARKING AS COMPARABLES TRAN SACTION WITH EXPORT TRANSACTIONS AND FOR THIS PROPOSITION HE RELIED ON THE DECISION IN THE CASE OF SONY INDIA PVT. LTD., 114 ITD 448 (DEL). HE ARGUE D THAT THERE IS SIGNIFICANT DIFFERENCE IN THE NATURE OF DOMESTIC TRANSACTIONS A ND EXPORT TRANSACTIONS. 43. ON THE ISSUE OF FILTERS THE LEARNED DR SUBMITTE D THAT THE INFORMATION TECHNOLOGY INDUSTRY IS BASED ON WAGES, WHICH FORM A SIGNIFICANT PART OF EXPENDITURE OF THAT INDUSTRY, AS IT IS MANPOWER ORI ENTED. THE TPO RELIED ON DATA FROM PUBLIC DOMAIN AND ON THE FACTS THIS FILTE R IS A REALISTIC FILTER AND HAS BEEN RIGHTLY APPLIED. HE RELIED ON THE DECISION OF DELHI BENCH OF TRIBUNAL IN THE CASE OF VEDARIS TECHNOLOGY, 133 TTJ 309 IN S UPPORT OF THE PROPOSITION THAT FILTER BASED ON WAGES TO SALES WAS CORRECTLY APPLIED. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 22 44. ON THE ISSUE OF ROG-SALES THE LEARNED DR SUBMIT TED THAT THE ASSESSEE IS BILLING ON A FORMULA OF COST + 7%. HENCE, IN CO ST + SITUATION, A LOSS MAKING UNIT CANNOT BE TAKEN AS A COMPARABLE. HE WO NDERED HOW COULD LOSS MAKING COMPANY BE COMPARED WHEN THE ASSESSEE IS IN A COST PLUS SITUATION AND WHEN THE QUESTION OF LAW DOES NOT ARISE. IN SU PPORT OF HIS PROPOSITION HE RELIED ON THE FOLLOWING CASE LAWS:- (I) SAP LABS (INDIA) PVT. LTD. IN ITA NO.398/BANG./2008 , DATED 30 TH AUGUST, 2010. (II) DCIT VS. QUARK SYSTEMS PVT. LTD., 131 ITD 315. 45. ON THE RANGE OF 45% TO 65% OF WAGES TO SALES RA TIO, SELECTED BY THE TPO, AS AGAINST 42% TO 62% RANGE OF WAGES TO SALES SOUGHT BY THE ASSESSEE, THE LEARNED DR SUBMITTED THAT THE TPO HAS GONE BY T HE FAR ANALYSIS, NASSCOM SURVEY AND THIS IS A REASONABLE RANGE. ON A QUERY FROM THE BENCH AS TO WHY RANGE OF 50% TO 55% SHOULD NOT TAKE N WHEN THE ASSESSEE HAS SHOWN WAGES TO SALES RATIO OF 52%, BOTH THE PAR TIES DID NOT RESPOND WITH A COHESIVE ANSWER. 46. IN THE CASE OF GENESYS INTERNATIONAL CORPN. LTD ., BEING A COMPARABLE, HE SUBMITTED THAT THE DATA OF SUBSEQUENT YEARS CANN OT BE RELIED UPON AND ONLY CURRENT YEAR DATA HAS TO BE TAKEN FOR WHICH PR OPOSITION HE RELIED ON THE DECISION OF DELHI BENCH IN THE CASE OF MENTOR GRAPH ICS, 109 ITD 101 (DEL). ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 23 HE ALSO RELIED ON THE DECISION OF PUNE BENCH IN THE CASE OF HONEYWELL AUTOMATION (INDIA) LTD. VS. DCIT, (ITA NO.18/PN/20 11). 47. ON SOFT PRO SYSTEMS HE RELIED ON THE FINDINGS O F THE AO AND ARGUED THAT THE SAME SHOULD BE TAKEN AS A COMPARABLE. ON FRESH COMPARABLES HE SUBMITTED THAT THE AO HAS RIGHTLY NOT ALLOWED THE S AME FOR THE REASON THAT THE ASSESSEE IS PICKING UP COMPARABLES WITH THE OBJ ECTIVE TO ACHIEVE SUCH RESULTS WHICH WOULD LEAD TO A CONCLUSION THAT THE T RANSACTION IN QUESTION IS AT ARMS LENGTH. SUCH BIASED SELECTION CANNOT BE ALLO WED AT A LATTER STAGE. HE SUBMITTED THAT THE ASSESSEE HAS NOT GIVEN ANY REASO N AS TO WHY THESE COMPARABLES WERE NOT TAKEN AT AN EARLIER POINT OF T IME AND WHAT IS THE REASON FOR ADMITTING ADDITIONAL EVIDENCE. 48. ON THE ISSUE OF ADJUSTMENT, HE SUBMITTED THAT T HE ASSESSEE, BEING DEPENDENT FOR ITS ENTIRE WORK ON THE AE WAS AT GREA TER RISK AND HENCE IT SHOULD RECEIVE MORE MARGIN AS COMPARED TO OTHERS. RELYING ON THE FINDINGS OF THE AO HE ALSO SUBMITTED THAT THERE IS NO DATA B ASED ON WHICH THE RISK COULD BE ANALYZED AND QUANTIFIED SO AS TO GIVE A PR OPER ADJUSTMENT. THAT FOR QUANTIFICATION OF RISK, ROBUST DATA IS REQUIRED AND NO SUCH EXERCISE WAS DONE BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY AND O NLY WHEN CONFRONTED WITH AN ADJUSTMENT, THE ASSESSEE INVENTED THE THEORY OF RISK ADJUSTMENT. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 24 49. ON THE ISSUE OF ALLOCATION OF PROFITS, AND THE CLAIM OF THE ASSESSEE THAT THE TRANSFER PRICING ADJUSTMENT SHOULD NOT RESULT I N THE TOTAL PROFITS ASSESSED BEING MORE THAN THE TOTAL PROFITS EARNED BY THE ASS ESSEE AND THE AE PUT TOGETHER, HE SUBMITTED THAT THIS CONCEPT IS FOREIGN TO TRANSFER PRICING LEGISLATION. HE POINTED OUT THAT OVERALL PROFITS O F THE GROUP IS NEVER SUBJECT TO VERIFICATION BY THE A.O. AND THERE WOULD BE SO M ANY ASPECTS WHICH HAVE TO BE EXAMINED AND VERIFIED TO COME TO A CONCLUSION THAT THE PROFIT DISCLOSED BY THE GROUP IS CORRECT AND PERTAINS ONLY TO THESE TRANSACTIONS. HE RELIED ON THE DECISION OF ITAT, MUMBAI IN THE CASE OF GHARDA CHEMICALS LTD. VS. DCIT IN REPORTED IN 2009-TIOL-790-ITAT-MUM, FOR THE PROPOSITION THAT SUCH A CAP OR RESTRICTION CANNOT BE PLACED UNDER TH E LAW. 50. IN THE ISSUE OF RES JUDICATA THE LEARNED DR SUB MITTED THAT A MISTAKE DONE EARLIER BY THE TPO CANNOT BE PERPETUATED ON TH E PLEA OF CONSISTENCY. HE RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF KRISHAK BHARATI COOPERATIVE LTD., 155 ITR 120 AND SUBMITTED THAT WHEN FRESH INFORMATION HAS COME INTO THE POSSESSION OF THE REV ENUE OR IF A MORE INTELLIGENT AND CORRECT EXERCISE HAS BEEN DONE, THE N THE REVENUE CANNOT BE TIED DOWN ON THE GROUND THAT THE EARLIER TPO HAS NO T EXERCISED HIS MIND ON THIS ISSUE AND THE REVENUE CANNOT DO THE SAME NOW. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 25 51. ON GROUND NO.2.21 & 2.22 HE POINTED OUT THAT TH E ASSESSEE HAS NOT PRESSED THE SAME. 52. ON GROUND NO.3 & 3.1 HE RELIED ON THE ORDER OF THE ASSESSING OFFICER. 53. THE LEARNED DR STRONGLY DISPUTED THE CONTENTION OF THE ASSESSEE THAT IT IS IN LOW END SOFTWARE MAINTENANCE SERVICES. HE RE FERRED TO THE ASSESSEES TRANSFER PRICING STUDY TO DEMONSTRATE THAT THE CONT ENTION OF THE ASSESSEE IS NOT CORRECT. 54. THE LEARNED DR DISTINGUISHED THE CASE LAWS RELI ED UPON BY THE ASSESSEE BY SUBMITTING THAT WHAT WAS STATED WAS THA T THE ADJUSTMENT CANNOT EXCEED THE COMBINED TURNOVER OF THE ASSESSEE AS WEL L AS THE A.E. AND THAT NO REFERENCE WAS MADE TO THE COMBINED PROFITS. ON THE ISSUE OF TAXING NOTIONAL PROFIT, HE SUBMITTED THAT SUCH AN EVENTUALITY WOULD NOT ARISE IF THE ASSESSEE USES TO DETERMINE ALP AND DISCLOSES PROPER PROFITS. 55. THE LEARNED COUNSEL FOR THE ASSESSEE IN REPLY S UBMITTED THAT INTERNAL COMPARABLES ARE THE MOST PREFERRED COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. HE ARGUED THAT EACH SO FTWARE SERVICE ASSIGNMENT IS NOT OF SIGNIFICANT VALUE, WHETHER IT RELATES TO THE AE OR TO THE UNRELATED PARTY AND HENCE ARE COMPARABLE TRANSACTIONS. SIMIL AR SOFTWARE SERVICES WERE RENDERED TO DOMESTIC CUSTOMERS AND COULD BE TAKEN A S A COMPARABLE. REFERRING TO THE RULES HE SUBMITTED THAT SIZE OF TH E MARKET DOES NOT REFER TO ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 26 VOLUME OR VALUE OF TRANSACTION BUT IS REFERS TO NAT URE OR CHARACTERISTICS OF THE MARKET IN WHICH THE TRANSACTION ARE UNDERTAKEN. HE ARGUED THAT THERE IS NO INCONSISTENCY WITH RULE 10B(2)(D) AND RULE 10B(1)(E ). HE SUBMITTED THAT INTERNAL COMPARABLE CANNOT BE DISREGARDED ON THE BA SIS OF VOLUME AND AT BEST ADJUSTMENT MAY BE MADE TO ELIMINATE THE DIFFERENCES ON ACCOUNT OF VOLUMES. HE SUBMITTED THAT RULE 10B(2)(D) IS MORE RELEVANT T O IDENTIFY THE EXTERNAL COMPARABLE COMPANIES. HE VEHEMENTLY CONTENDED THAT THE COMPUTATION PROVISIONS ARE PROVIDED IN THE ACT AND THAT WHEN TR ANSACTION SHOULD BE COMPARED ON STAND ALONE BASIS, THE MECHANISM PROVID ED CANNOT BE IGNORED AND THAT THE RULE HAS TO BE FOLLOWED. 56. ON THE CONTENTION OF THE LEARNED DR THAT THE TR ANSACTION ENTERED INTO WITH THE ASSOCIATED ENTERPRISE IS DIFFERENT FROM TH E TRANSACTION ENTERED INTO BY THE ASSESSEE WITH THIRD PARTIES, THE LEARNED COU NSEL FOR THE ASSESSEE SUBMITTED THAT, NO SUCH EXERCISE HAS BEEN DONE OR A FINDING WAS GIVEN BY THE TPO OR THE AO. HE SUBMITTED THAT INTERNATIONAL TRA NSACTIONS ARE RENDERED TO THE AE WHICH IN TURN BILLS THE ULTIMATE CUSTOMERS A ND SIMILAR TRANSACTIONS ARE ENTERED INTO WITH THE THIRD PARTY AND HENCE THE RE IS NO FUNCTIONAL DIFFERENCE. THE SERVICES IN BOTH THE CASES ARE PER FORMED BY SIMILAR EMPLOYEES POSSESSING SIMILAR SET OF SKILLS. IT HAS ALSO BEEN CONTENDED THAT DESPITE SMALLER VOLUME THE ASSESSEE HAS EARNED LOWE R MARGIN IN THE ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 27 UNRELATED PARTY TRANSACTION WHICH DEMONSTRATES THAT THE TRANSACTIONS WITH AE WERE AT ARMS LENGTH. 57. ON COMPARISON OF DOMESTIC TRANSACTIONS HE SUBMI TTED THAT IN THE CASE OF SONY INDIA LTD. (SUPRA) THE TRIBUNAL AT PARA 113 HAS UPHELD THE USE OF INTERNAL DOMESTIC COMPARABLES FOR THE PURPOSE OF BE NCHMARKING THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESS EE. RELIANCE WAS PLACED ON THE DECISION OF DELHI BENCH OF THE TRIBUNAL IN T HE CASE OF WRIGLY (INDIA) PVT. LTD. (ITA NO.5224/DEL/2010) FOR THE PROPOSITIO N THAT DOMESTIC TRANSACTION INVOLVING SIMILAR PRODUCTS CAN BE CONSI DERED FOR BENCHMARKING AS VALID COMPARABLES. ON THE RELIANCE PLACED BY TH E LEARNED DR ON THE SAME CASE LAW I.E. WRIGLY (INDIA) PVT. LTD., THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FILTER OF WAGES TO SALES WAS NOT APPLIED EITHER BY THE TPO OR BY THE ASSESSEE IN THAT CASE. IT WAS ON THE EMP LOYEE COST OF SOME OF THE COMPARABLE COMPANIES THAT WAS CONSIDERED ON CASE TO CASE BASIS TO DIFFERENTIATE COMPANIES ENGAGED IN SOFTWARE DEVELOP MENT FROM THE COMPANIES ENGAGED IN TRADING OF SOFTWARE. ON RELIA NCE PLACED ON SONY (INDIA) LTD. HE SUBMITTED THAT THE TRIBUNAL OBSERVE D THAT LOSSES ARE NORMAL BUSINESS INSTANCES AND THAT COMPARABLE COMPANIES CA NNOT BE REJECTED MERELY ON THE BASIS THAT IT HAS INCURRED LOSS. ON SAP LAB S (INDIA) PVT. LTD. AND QUARK SYSTEMS LTD., HE SUBMITTED THAT THE TRIBUNAL HELD THAT EXTREME CASES ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 28 CANNOT BE CONSIDERED. ON RELIANCE PLACED ON THE DE CISION OF MENTOR GRAPHICS (SUPRA) IT WAS SUBMITTED THAT THE TRIBUNAL OBJECTED TO THE USE OF FUTURE DATA ONLY BECAUSE THE TPO WAS DRAWING INFERE NCES MERELY ON THE BASIS OF ASSUMPTIONS AND SURMISES. IN THE CASE OF ADP PVT. LTD. (SUPRA) HE SUBMITTED THAT THE CASE IS DISTINGUISHABLE FOR THE REASON THAT THE ASSESSEE IS USING DATA OF SUBSEQUENT YEARS ONLY FOR THE PURPOSE OF ANALYZING THE TREND OF TURNOVER AND PROFITABILITY OF THE COMPARABLE COMPAN IES JUST TO DEMONSTRATE THAT SUCH COMPANIES ARE NOT SUFFERING FROM ANY EXTR A-ORDINARY CIRCUMSTANCES. ON HONEYWELL (SUPRA) THE PROVISION S FOR FUTURE LOSS MADE, WAS HELD AS THAT WHICH CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPUTING THE OPERATING MARGIN. ON INTELLINET TECHNOLOGIES I NDIA PVT. LTD. VS. ITO (ITA NO.1267/BANG/2010) THE TRIBUNAL HELD THAT SING LE CUSTOMER RISK IS A HYPOTHETICAL RISK AND THE RISK FACED BY THE COMPARA BLE COMPANIES IS ACTUAL RISK AND THEREFORE, ADJUSTMENT TO ACCOUNT FOR DIFFE RENCES IN RISK IS MORE THAN THAT. IN THE CASE OF GHARDA CHEMICALS (SUPRA) HE S UBMITTED THAT THE ARGUMENT OF THE ASSESSEE IS THAT TRANSFER PRICING P ROVISIONS ARE MEANT ONLY TO ALLOCATE THE PROFIT EARNED BY THE MULTINATIONAL GROUPS FROM TRANSACTIONS WITH THEIR ASSOCIATED ENTERPRISES WHEREAS THE CONTE NTION OF THE ASSESSEE IN GHARDA CHEMICALS WAS ON DIFFERENT FOOTING I.E. EVEN IF THE HIGHER PRICE ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 29 CHARGED FROM THE AE, THERE WAS NO CHANGE IN THE OVE RALL TAX INCIDENCE OF THE GROUP. 58. IN THE CASE OF GLOBAL VANTAGE (SUPRA) IT ONLY S HOWS THAT ADJUSTMENTS CANNOT EXCEED TOTAL REVENUES AND THERE IS NO CONCEP T OF SHARING REVENUE AND ONLY PROFIT SPLIT IS POSSIBLE. HE POINTED OUT THAT THE TRIBUNAL UPHELD THE FINDINGS OF THE CIT(A) THAT WHILE MAKING SUCH ANALY SIS APPROPRIATE COMPENSATION SHOULD BE APPORTIONED TO THE AE FOR TH E FUNCTIONS PERFORMED BY THEM. 59. WE NOW TAKE UP ITA NO.5680/DEL/2011 FOR THE A.Y . 2007-08. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT GRO UNDS NO. 1 & 2 ARE GENERAL IN NATURE. GROUNDS NO. 2.4 TO 2.19 ARE ISS UES RELATING TO SELECTION OF COMPARABLES WHICH COMPANY COMPARABLE VIZ. AND ARGUM ENTS WOULD BE THE SAME. GROUNDS NO.2.20 TO 2.25 ARE SIMILAR TO THE G ROUNDS RAISED IN EARLIER ASSESSMENT YEAR AND BOTH THE PARTIES ADMITTED THAT ARGUMENTS REMAINING THE SAME, NO SEPARATE SUBMISSIONS ARE REQUIRED. GROUND S NO.2.1 TO 2.3 ARE AGAINST REJECTION OF INTERNAL COMPARISON FOR BENCHM ARKING. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT DURING THIS YEAR 15% OF THE TURNOVER RELATED TO UNCONTROLLED TRANSACTIONS WITH THE THIRD PARTIES WHICH ARE EXPORT SALES. IT WAS POINTED OUT THAT THE EXPORT TURNOVER TO AE WAS 15.51 CRORES WHEREAS EXPORT TO UNRELATED PARTIES WAS 2.45 CRORES . IT WAS FURTHER POINTED ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 30 OUT THAT DOMESTIC TURNOVER WITH UNRELATED PARTIES W AS 1.47 CRORES. THE LEARNED COUNSEL ARGUED THAT 25% OF THE TURNOVER BEI NG UNCONTROLLED TRANSACTIONS WITH THIRD PARTIES WAS, UNDER THE GIVE N CIRCUMSTANCES, THE BEST COMPARABLES. HE POINTED OUT THAT THE TPO AS WELL A S THE DRP FOLLOWED THEIR RESPECTIVE ORDERS OF THE EARLIER YEARS AND HAVE NOT EXAMINED THE COMPARABILITY OF THE TRANSACTIONS. HE PLEADED THAT IN THE CURRENT YEAR THE ARGUMENT THAT THE TRANSACTIONS ARE MINISCULE AND EC ONOMICALLY INSIGNIFICANT CANNOT STAND. 60. THE ARGUMENTS ON COMPARABLES ARE AS FOLLOWS RE: COMPANIES INAPPROPRIATELY SELECTED BY THE TPO A S COMPARABLE (GROUND NO.2.4 2.18) SL. NO. COMPANY NAME OP TO TOTAL COST % REASONS FOR REJECTION REF. PG. NO 1. AVANI CIMCON TECHNOLOGIES LTD. 50.29 EARNING EXTRAORDINARY PROFITS. 2. CELESTIAL LABS LTD 58.35 EMPLOYEE COST ONLY 23 .36% OF SALES. DOES NOT SATISFY THE FILTERS APPLIED BY THE TPO. REJECTED BY THE DRP IN ASSESSMENT YEAR 2008-09 IN THE CASE OF INTERRA INFOTECH, A SISTER CONCERN OF THE APPELLANT AND ENGAGED IN PROVISION OF IDENTICAL SERVICES. FUNCTIONALLY NOT COMPARABLE, ENGAGED IN IT & ITES, BIOTECHNOLOGY AND PG 244, 248, 251 250 ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 31 MANUFACTURING BUSINESS. SEGMENTAL RESULTS OF IT DIVISION ARE NOT AVAILABLE. EVEN WITHIN THE SOFTWARE DOMAIN, THE COMPANY IS PRIMARILY A SOFTWARE PRODUCT COMPANY. IT OWNS PROPRIETARY PRODUCTS SUCH AS CELL VISION, CLL TOX ETC. SUPER NORMAL PROFIT. 3. FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) 25.31 VERY HIGH TURNOVER OF RS.665 CR. WHICH IS 33 TIMES THE TURNOVER OF THE ASSESSEE. ALSO DEALS IN SOFTWARE PRODUCTS. PG 253 & 265 4. INFOSYS TECHNOLOGIES LTD. 40.30 VERY HIGH TURNOVER OF RS.13,655 CR WHICH IS 680 TIMES THE REVENUE OF THE APPELLANT. ALSO DEALS IN SOFTWARE PRODUCTS. PG 289 5. KALS INFORMATION SYSTEMS LTD. (SEG.) 30.55 DEALS IN SOFTWARE PRODUCTS PG 317 6. MINDTREE LTD. 16.90 VERY HIGH TURNOVER OF RS.590 CR WHICH IS 30 TIMES THE TURNOVER OF THE APPELLANT PG 322 7. PERSISTENT SYSTEMS LTD. 24.52 VERY HIGH TURNOVER OF RS.286.96 CR WHICH IS 14 TIMES THE TURNOVER OF THE APPELLANT. DEALS IN SOFTWARE PRODUCTS. PG 343, 351 8. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 22.16 HIGH TURNOVER OF RS.366.31 CR WHICH IS 18 TIMES THE TURNOVER OF THE APPELLANT. PG 372 9. TATA ELXSI LTD. 26.51 TURNOVER IS 262.58 CRORE S, PG ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 32 (SEG.) WHICH IS 13 TIMES THE TURNOVER OF THE APPELLANT. 411 10. WIPRO LTD. 33.65 VERY HIGH TURNOVER OF RS.10,898 CR WHICH IS 545 TIMES THE TURNOVER OF THE APPELLANT. UNDERTAKE SIGNIFICANT RESEARCH DEVELOPMENT. PG 424 11. MEGASOFT LTD. 60.23 SUPER NORMAL PROFIT 12. E-ZEST SOLUTIONS LTD. 36.12 DATA FOR THE COMPANY NOT AVAILABLE IN PUBLIC DOMAIN. 13. ISHIR INFOTECH LTD. 30.12 DATA NOT AVAILABLE IN PUBLIC DOMAIN. 14. THIRDWARE SOLUTIONS LTD. 25.12 DATA NOT AVAILABLE IN PUBLIC DOMAIN. 15. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. 36.63 REVENUE OF RS.183.50 CR WHICH IS 12 TIMES THE TURNOVER OF THE APPELLANT. PG 436 AFTER REJECTING THE AFORESAID COMPANIES FROM THE FI NAL LIST OF COMPARABLES, THE FOLLOWING COMPANIES ARE LEFT AS COMPARABLE. SL.NO. COMPANY NAME OP TO TOTAL COST% 1. ACCEL TRANSMATIC LTD. (SEG.) 20.9 2. DATAMATICS LTD. 1.38 3. IGATE GLOBAL SOLUTIONS LTD. 7.49 4. LSG GLOBAL LTD. (LANCO GLOBAL SOLUTIONS LTD.) 1 5.75 5. LUCID SOFTWARE LTD. 19.37 6. MEDIASOFT SOLUTIONS LTD. 3.66 7. QUINTEGRA SOLUTIONS LTD. 12.56 8. R.S. SOFTWARE (INDIA) LTD. 13.47 9. R. SYSTEMS INTERNATIONAL LTD. (SEG.) 15.07 10. GEOMETRIC LTD. 10.71 11. SIP TECHNOLOGIES & EXPORTS LTD. 13.9 AVERAGE 12.20% APPELLANT 8.18% ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 33 RE: EXCLUSION OF COMPANIES IDENTIFIED AS COMPARABLE BY THE ASSESSEE (GROUND 2.15 & 2.16): IT WAS SUBMITTED THAT THE TPO HAS WRONGLY EXCLUDED THE FOLLOWING COMPANIES FROM THE LIST OF THE COMPARABLE COMPANIES IDENTIFIED IN THE FRESH SEARCH BY THE ASSESSEE COMPANY: S. NO. COMPANIES REMARKS PAGE NUMBER 1. VMF SOFT TECH LIMITED THE TPO HAS REJECTED THIS COMPANY ON THE BASIS THAT THE COMPANY IS PREDOMINANTLY OUTSOURCING ITS WORK AND IT FAILS THE EMPLOYEE COST FILTER. HOWEVER, THE RATIO OF EMPLOYEE COST TO REVENUE OF THIS COMPANY IS 54% WHICH DEMONSTRATES THE FACT THAT IT IS PERFORMING SIGNIFICANT FUNCTIONS IN-HOUSE THROUGH ITS OWN EMPLOYEES. PG 453 2. VISION COMPUTECH INTEGRATORS LIMITED RELATED PARTY TRANSACTION IS IN EXCESS OF 25% - HOWEVER, ACTUAL RPT IS 23.15% PG 461 & 474 IN VIEW OF THE AFORESAID, IT WAS SUBMITTED THAT VMF SOFTECH AND VISION COMPUTECH SATISFIES ALL THE FILTERS OF TPO AND SHOU LD BE CONSIDERED AS COMPARABLE FOR THE PURPOSE OF BENCHMARKING THE INTE RNATIONAL TRANSACTIONS OF THE ASSESSEE. IN RESPECT OF CASES OF CELESTIAL LABS LTD. AND MEGASOFT LTD. IT WAS CONTENDED THAT THESE COMPANIES ARE MAKING SU PER NORMAL PROFITS AND HENCE, CANNOT BE TAKEN AS COMPARABLES FOR THE PURPO SE OF BENCHMARKING. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 34 THE ASSESSEE ALSO DISPUTED REJECTION OF COMPARABLES BY THE TPO ON THE BASIS THAT THEY RENDERED ON SIGHT SERVICE WHICH IS INAPPR OPRIATE. 61. THE LEARNED DR ON THE OTHER HAND, CONTROVERTED THESE SUBMISSIONS BY ARGUING THAT IN THE CASE OF INTERNAL COMPARABLES TH E SUBMISSIONS MADE FOR THE ASSESSMENT YEAR 2006-07 HAVE TO BE CONSIDERED. HE SUBMITS THAT THOUGH THE VOLUMES ARE NOT AS MINISCULE AS IN THE PREVIOUS YEAR, THE FACT REMAINS THAT THE NATURE OF TRANSACTIONS IS NOT THE SAME. H E AGAIN REPEATED HIS ARGUMENT THAT THE AE EX-VALUE TO THE PRODUCT GIVEN BY THE ASSESSEE AND THEREAFTER DELIVERS THE SAME TO THE ULTIMATE CUSTOM ERS AND WHEREAS IN THE CASE OF DIRECT SALES TO THIRD PARTIES NO VALUE ADDI TION IS DONE. ON THE ISSUE OF INCLUSION AND EXCLUSION OF COMPARABLES THE LEARNED DR RELIED ON THE ORDER OF THE TPO AS WELL AS DRP AND DISPUTED THE SUBMISSIONS OF THE ASSESSEE. 62. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDER ATION OF CONTENTIONS OF BOTH THE PARTIES AND ON PERUSAL OF PAPERS ON RECORD AS WELL AS CASE LAWS CITED, WE HOLD AS FOLLOWS AT PAGE 1 OF THIS ORDER WE HAVE EXTRACTED THE NATUR E OF BUSINESS OF THE ASSESSEE COMPANY, AS GIVEN IN THE TRANSFER PRICING REPORT AND AS UNDERSTOOD BY THE REVENUE AUTHORITIES. THE CLAIM OF THE ASSES SEE THAT IT IS ENGAGED IN THE BUSINESS OF RENDERING LOW END SOFTWARE MAINTENA NCE SERVICES, IN ITS ARGUMENTS BEFORE US, IS CONTRARY TO THE FACTS. NO DOUBT THE ASSESSEE STATED ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 35 THAT IT HAD MADE CLAIM BEFORE THE TPO IN ONE OF ITS LETTERS THAT IT IS A LOW END SOFTWARE MAINTENANCE SERVICE COMPANY. BUT THE CLAI M IS CONTRARY TO THE T.P. REPORT FILED BY THE ASSESSEE. THE NATURE OF BUSINE SS AND THE TYPE OF TRANSACTIONS ARE OF GREAT IMPORTANCE IN ADJUDICATIN G THE TRANSFER PRICING MATTERS. SUCH CONTRARY CLAIM MADE LOOSELY CANNOT B E COUNTENANCED. 63. NOW WE CONSIDER CERTAIN PROPOSITIONS RELIED ON BY THE ASSESSEE. THE ASSESSEE IN THIS CASE RELIED ON MORE THAN 15 CA SE LAWS FOR EMPHASIZING ITS CLAIM. CASE LAWS ARE CITED AND IT IS CLAIMED THAT THE RATIO LAID DOWN BY COORDINATE BENCHES HAVE TO BE FOLLOWED . THE REVENUE ALSO RELIED UPON MORE THAN 20 DECISIONS EITHER FOR CONTR ADICTING THE CLAIMS OF THE ASSESSEE ON CERTAIN PROPOSITIONS OR FOR SUPPORTING THE LINE OF ARGUMENT ADOPTED BY THE TPO AS APPROVED BY THE DRP. 64. WHILE ARGUING THE CASE NONE OF THE PARTIES HAVE SPOKEN ABOUT THE NATURE OF BUSINESS AND THE NATURE OF TRANSACTIONS I N EACH OF THESE CASE LAWS CITED BY THEM. THE DECISION GIVEN IN THOSE CASES O R THE OBSERVATION MADE HAVE BEEN REFERRED TO AND IT IS CLAIMED THAT THEY H AVE PRECEDENCIARY VALUE. IN TRANSFER PRICING OUR UNDERSTANDING IS THAT THE L AW AND THE RULES HAVE BEEN PRESCRIBED AND ALL THE DECISIONS CITED BY THE PARTI ES WERE ADJUDICATED BASED ON THE FACTS OF EACH CASE. IT IS WELL SETTLED THAT RELIANCE SHOULD NOT BE PLACED ON ANY DECISION, WITHOUT DISCUSSING THE FACTUAL SIT UATION AND AS TO HOW IT WILL ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 36 FIT IN. THESE ARE NOT LEGAL PRINCIPLES, IN THE SEN SE THAT IT DOES NOT INVOLVE INTERPRETATION OF LAW. PICKING UP SAMPLES OR COMPA RABLES, STATING THAT IN A GIVEN SITUATION A PARTICULAR METHODOLOGY SHOULD BE ADOPTED FOR BENCHMARKING A TRANSACTION OR COMING TO A CONCLUSIO N THAT PARTICULAR METHOD IS MOST APPROPRIATE METHOD ETC. ARE NOT LEGAL INTER PRETATIONS BUT ONLY SOLUTION FOUND BY THE BENCH, IN ITS OWN WISDOM, GIVEN A CERT AIN FACT SITUATION. IT IS DIFFICULT TO HAVE A CASE WHERE THE FUNCTIONS, ASSET S AND RISK OF AN ASSESSEE, ARE SAME AS THE CASE DECIDED SUBSEQUENTLY. SELDOM TWO BUSINESS MODELS ARE THE SAME. QUOTING THESE CASE LAWS AND RELYING UPON THEM AS IF THEY HAVE LAID DOWN BINDING LEGAL PRECEDENCE WITHOUT REFERENC E TO THE FACTS, TO OUR MIND IS NOT ONLY WRONG BUT EVEN MISLEADING. EVEN I N FOLLOWING A BINDING LEGAL PRECEDENCE, THE COURTS HAVE CAUTIONED THAT WH AT HAS TO BE SEEN IS WHETHER THE FACTS AND CIRCUMSTANCES ARE SAME. THOU GH IT IS WELL SETTLED, FOR SAKE OF READY REFERENCE WE QUOTE FOLLOWING CASE LAW S:- (I) GVK GAUTAMI POWER LTD. VS. ACIT, 336 ITR 451 (A.P.) FOR THE PROPOSITION THAT OBSERVATIONS OF COURT ARE NEITHER TO BE READ AS EUCLIDS THEOREMS NOR AS PROVISIONS OF A STATUTE AN D THAT TOO TAKEN OUT OF THEIR CONTEXT. THE DECISION OF THE COURT IS ONLY AN AUTHORITY FOR WHAT IS ACTUALLY DECIDES. WHAT IS THE ESSENCE IN A DECISION IS ITS RATIO AND NOT EVERY OBSERVATION FOUND THEREIN NOR W HAT LOGICALLY FOLLOWS FROM THE VARIOUS OBSERVATIONS MADE IN IT. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 37 (II) CIT VS. V.K. FERRO ALLOYS INDUSTRIES P. LTD., 299 I TR 191 (A.P.) FOR THE PROPOSITION THAT OBSERVATIONS IN A JUDGEMEN T CANNOT BE READ OUT OF CONTEXT AS LAYING DOWN THE LAW AND MUST BE E XAMINED IN THE LIGHT OF THE FACTS. (III) CIT VS. BARODA PEOPLES CO-OPERATIVE BANK LTD., 280 ITR 282 (GUJ.) FOR THE PROPOSITION THAT A DECISION TAKES IT S COLOUR FROM THE QUESTION INVOLVED. THE SCOPE AND AUTHORITY OF A PR ECEDENT SHOULD NOT BE EXPANDED BEYOND THE NEEDS OF A GIVEN SITUATI ON, MERE CASUAL EXPRESSION CARRY NO WEIGHT AT ALL, NOR EVERY PASSIN G EXPRESSION OF A JUDGE CAN BE TREATED AS AN EXCATHEDRA HAVING THE WE IGHT OF AUTHORITY (P. 298) 2003 7SCC 197); A DECISION NOT E XPRESSED, NOT ACCOMPANIED BY REASONS CANNOT BE DEEMED TO BE A LAW SO AS TO HAVE BINDING EFFECT. (IV) VINAY EXTRACTION P. LTD. VS. VIJAY KHANNA, 271 ITR 450 (GUJ.) FOR THE PROPOSITION THAT COURT SHOULD NOT PLACE RELIANC E ON THE DECISIONS WITHOUT DISCUSSING HOW FACTUAL SITUATION FITS IN, THEY ARE NOT TO BE READ AS EUCLIDS THEOREMS NOR THE OBSERVA TIONS THEREIN AS PROVISIONS OF STATUTE, OBSERVATIONS MUST BE READ IN THE CONTEXT IN WHICH THEY APPEAR, ONE SHOULD AVOID THE TEMPTATION TO DECIDE CASES BY MATCHING THE COLOUR. (V) AJANTA PHARMA LTD. VS. ACIT, 267 ITR 200 (BOM.) FOR THE PROPOSITION THAT NO JUDGEMENT CAN BE READ AS STATUT E, EVERY DECISION IS AN AUTHORITY FOR WHAT IT DECIDES. (VI) S. SHANMUGAVEL NADAR VS. STATE OF TAMIL NADU & ANOT HER, 263 ITR 658 (SC) FOR THE PROPOSITION THAT FOR A DECLARA TION OF LAW THERE ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 38 SHOULD BE A SPEAKING ORDER, A DECISION WHICH IS NOT EXPRESSED & IS NOT FOUNDED ON REASONS NOR ON CONSIDERATION OF THE ISSUES CANNOT BE DEEMED TO BE A LAW DECLARED, TO HAVE A BINDING E FFECT UNDER ARTICLE 141; A SUMMARY DISPOSAL BY THE SC, WITHOUT LAYING DOWN ANY LAW, IS NOT A DECLARATION; WHEN NO REASONS ARE GIVEN, DISMISSAL SIMPLICITER IS NOT A DECLARATION OF LAW BY SC. (VII) DR. NALINI MAHAJAN VS. DIRECTOR OF INCOME-TAX (INV. ), 257 ITR 123 (DELHI) FOR THE PROPOSITION THAT A DECISION IS ONLY AN AUTHORITY FOR WHAT IT DECIDES AND NOT WHAT CAN LOGICALLY BE DEDUC ED THEREFROM; EVEN A SLIGHT DISTINCTION IN FACTS MAY MAKE LOT OF DIFFERENCE IN DECISION MAKING PROCESS; A POINT NEVER CONSIDERED I N A DECISION SHALL NOT BE AN AUTHORITY THEREFOR. (VIII) GUJARAT CO-OPERATIVE BANK LTD. VS. CIT, 250 ITR 229 (GUJ.) FOR THE PROPOSITION THAT FOR SCS DECISION TO BE LAW HA S TO BE DECLARED OR STATED VOCALLY TO SUPPORT CONCLUSION, NOT MERE C ONCLUSION BY WHICH CASE IS DISPOSED OF. (IX) CIT VS. SUN ENGINEERING WORKS P. LTD., 198 ITR 297 FOR THE PROPOSITION THAT IT IS NEITHER DESIRABLE NOR PERMI SSIBLE TO PICK OUT A WORD OR A SENTENCE FROM THE JUDGMENT OF THIS COURT, DIVORCED FROM THE CONTEXT OF THE QUESTION UNDER CONSIDERATION AND TREAT IT TO BE THE ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 39 COMPLETE LAW DECLARED BY THIS COURT. THE JUDGMEN T MUST BE READ AS A WHOLE AND THE OBSERVATIONS FROM THE JUDGMENT H AVE TO BE CONSIDERED IN THE LIGHT OF THE QUESTIONS WHICH WERE BEFORE THIS COURT. A DECISION OF THIS COURT TAKES ITS COLOUR F ROM THE QUESTION INVOLVED IN THE CASE IN WHICH IT IS RENDERED AND, W HILE APPLYING THE DECISION TO A LATER CASE, THE COURTS MUST CAREFULLY TRY TO ASCERTAIN THE TRUE PRINCIPLE LAID DOWN BY THE DECISION OF THI S COURT AND NOT TO PICK OUT WORDS OR SENTENCES FROM THE JUDGMENT, DIVO RCED FROM THE CONTEXT OF THE QUESTIONS UNDER CONSIDERATION BY THI S COURT TO SUPPORT THEIR REASONINGS. (X) JAGANMOHAN RAO (V.) VS. CIT, 75 ITR 373 (SC) FOR TH E PROPOSITION THAT PICKING UP WORD/SENTENCE FROM JUDGMENT DIVORCE D FROM CONTEXT NOT PERMISSIBLE. JUDGEMENTS ARE TO BE READ AS A WHOLE. 65. HENCE, WHILE ADJUDICATING TRANSFER PRICING CASE S, WE ARE OF THE OPINION THAT THERE IS NO LEGAL BINDING PRECEDENCE ON THE IS SUE OF SELECTION OF MOST APPROPRIATE METHOD, SELECTION OF COMPARABLE COMPANI ES, SELECTION OF COMPARABLES TRANSACTIONS FOR BENCHMARKING ETC. AS T HESE ARE FACT BASED AND VARY FROM COMPANY TO COMPANY. RELYING ON PRECEDENC E FOR EACH AND EVERY FACTUAL ARGUMENT TO DRIVE HOME THE POINT OF THE COU NSELS, WHEN FACTS ARE NOT AT ALL SIMILAR IS CAUSING UNNECESSARY CLOGGING OF T HE SYSTEM RESULTING IN ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 40 SLOWER DELIVERY. WE SUGGEST THAT THE LAW AND THE R ULES BE APPLIED FIRST, ARGUMENTS BE BASED ON THEM AND BROAD PROPOSITION RE LIED UPON WHEN SITUATIONS WARRANT. 66. HENCE, IN TRANSFER PRICING CASES THE PARTIES SH OULD DEVOTE MUCH TIME TO THE NATURE OF THE COMPANIES BUSINESS OPERATIONS , NATURE OF TRANSACTIONS, FAR ANALYSIS, STUDY AND METHOD OF CHOOSING COMPARAB LES ETC. THE LOGIC OR REASONS BEHIND SELECTION OF COMPARABLES FOR BENCHMA RKING AND SUPPORTING THE T.P. STUDY SHOULD BE BASED ON THE ACT AND RULES RATHER THAN PICKING UP ORDERS OF DIFFERENT BENCHES ON THE GROUND THAT THEY ARE PRECEDENT, THAT TOO WITHOUT REFERENCE TO THE FACTS AND NATURE OF TRANSA CTIONS. IT SHOULD BE UNDERSTOOD THAT BUSINESSES ARE SO VARIED AND NO TWO TRANSACTIONS ARE SIMILAR. BUSINESS MODELS FOLLOWED BY THE AES AND ASSESSEES A RE DIFFERENT. GEOGRAPHICAL LOCATIONS ARE DIFFERENT. WE HAD TO SA Y THIS BECAUSE IN RECENT TIMES, IN THE MATTER OF TRANSFER PRICING ADJUDICATI ON, HUGE PAPER BOOKS RUNNING INTO THOUSANDS OF PAPERS ARE BEING FILED AN D WHEREAS THE REFERENCES ARE MADE TO ONLY TO A FEW PAGES DURING ARGUMENTS. NUMEROUS CASE LAWS ARE BEING RELIED UPON THOUGH IT IS COMMON KNOWLEDGE THA T IN TRANSFER PRICING THEY CANNOT BE A PRECEDENT ON FACTS AND THAT THOSE DECISIONS ARE BASED ON THOSE PARTICULAR FACTS. AT BEST THESE CASE LAWS CA N BE REFERRED TO FOR BROAD PROPOSITION ON A GIVEN FACT SITUATION. VERY FEW CA SE LAWS ARE ON THE ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 41 INTERPRETATION OF LAW. IN SUCH CASES WE ARE BOUND BY THE LEGAL PROPOSITIONS LAID DOWN THEREIN. 67. NOW WE CONSIDER SOME OTHER CONTENTIONS OF THE A SSESSEE BEFORE WE COME TO THE ASPECT OF REJECTION OF INTERNAL COMPARA BLES. MR. AJAY VOHRA ARGUED THAT THE TRANSFER PRICING ADJUSTMENT AT BEST CANNOT EXCEED THE AMOUNT OF MARGINS RETAINED BY THE ASSESSEE, AS WELL AS THE A.E. IN OTHER WORDS, HE STATES THAT THE TRANSFER PRICING ADJUSTMENT CANNOT EXCEED THE TOTAL PROFITS EARNED BY THE GROUP, AS IT WOULD RESULT IN TAXATION OF NOTIONAL INCOME. RELIANCE WAS PLACED ON THE JUDGMENT OF THE DELHI HI GH COURT IN THE CASE OF SONY INDIA PVT. LTD. AND OTHER CASE LAWS. HE URGED THE BENCH TO LAY DOWN THIS PROPOSITION WITH AS MANY CAVEATS OR CONDITIONA LITIES AS THE BENCH MAY DEEM PROPER. 68. IN OUR CONSIDERED VIEW NO SUCH PROPOSITION CAN BE LAID DOWN, AS IT WOULD BE AGAINST LAW. NEITHER THE ACT NOR THE RULE S PROVIDE FOR SUCH CAPPING OF AN ADJUSTMENT. SUCH AN EXERCISE IS NOT PERMISSIBLE UNDER THE TRANSFER PRICING PROVISIONS BUT ALSO, IT IS NOT PRA CTICAL AS THE PROFITS OF THE ENTIRE GROUP ARE NOT SUBJECT TO SCRUTINY OF THE IND IAN AUTHORITIES. MULTINATIONALS HAVE INNUMEROUS TYPES OF BUSINESS AN D HAVE MULTIPLE LOCATIONS WITH MULTIPLE AES AND TO LAY DOWN SUCH A PROPOSITION WOULD MAKE THE TRANSFER PRICING PROVISIONS UNWORKABLE. UNDER THE INDIAN LAW, THE T.P.O. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 42 IS GIVEN A MECHANISM TO DETERMINE ALP AND MAKE AN A DJUSTMENT. SUCH POWER IS NOT SUBJECT TO THE ACTS OF THE ASSESSEE OR ITS A.E. IN DIFFERENT JURISDICTION. TRANSFER PRICING ADJUSTMENT BY THE R EVENUE OFFICER OF OTHER JURISDICTION HAVE NO BEARING ON THE DECISIONS THAT INDIAN AUTHORITIES HAVE TO TAKE UNDER THE INDIAN LAW. 69. EVEN OTHERWISE, IF THE CASE OF THE ASSESSEE IS THAT THE PROFIT OF A TRANSACTION SHOULD BE ALLOCATED TO DIFFERENT JURISD ICTIONS, THEN PROFIT-SPLIT METHOD HAS BEEN PRESCRIBED UNDER THE RULES AND IT I S OPEN TO THE ASSESSEE TO FOLLOW IT AS THE MOST APPROPRIATE METHOD. WHEN THE RULES GIVES THE ASSESSEE A METHOD WHEREBY IT CAN ADDRESS ITS CONCERNS, THEN IT IS NOT CORRECT TO ASK FOR LAYING DOWN OF SUCH A PROPOSITION. COMING TO THE D ECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF SONY INDIA PVT. LTD . (SUPRA) THE PHILOSOPHY OR CONCEPT BEHIND THE TRANSFER PRICING AS STATED BY THE HONBLE FINANCE MINISTER IN THE BUDGET SPEECH WAS CULLED OUT BY THE COURT. THE HONBLE HIGH COURT HAS NOWHERE STATED THAT THE TRANSFER PRI CING ADJUSTMENT SHOULD BE RESTRICTED TO THE COMBINED PROFITS EARNED BY THE EN TIRE GROUP MINUS THE PROFITS ALREADY OFFERED TO TAX IN DIFFERENT JURISDI CTIONS. HENCE THIS ARGUMENT OF MR. VOHRA IS HEREBY REJECTED AS DEVOID OF MERIT. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 43 70. THE DECISION OF BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF PHILIPS SOFTWARE CENTRE (P) LTD., 26 SOT 226 CANNOT BE FOLL OWED IN VIEW OF THE LAW LAID DOWN BY LARGER BENCH OF THE TRIBUNAL IN THE CA SE OF AZTEC SOFTWARE. 71. COMING TO THE DECISION OF DELHI BENCH OF TRIBUN AL IN THE CASE OF KYUNGSHIN INDUSTRIAL MOTHERSON LTD. VS. DCIT (ITA N O.1396/DEL/2009), IT IS PECULIAR TO ITS FACTS AND IS NOT APPLICABLE TO T HE FACTS OF THE CASE. 72. IN THE CASE OF GLOBAL VANTEDGE P. LTD. (SUPRA) THE PROPOSITION WAS THAT THE ADJUSTMENT CANNOT EXCEED THE GROSS AMOUNT THAT THE A.E. RECEIVES ON SUCH TRANSACTIONS. IN OTHER WORDS THE COMBINE PROF ITS CANNOT EXCEED THE COMBINED GROSS RECEIPTS. SIMILARLY IN THE CASE OF LI & FUNG (INDIA) PVT. LTD. VS. DCIT (ITA NO.5156/DEL/2010), ON THOSE SET OF FACTS THE TRIBUNAL HELD THAT ADJUSTMENT CANNOT EXCEED THE AMOUNT RECEI VED BY THE ASSOCIATED ENTERPRISES. THIS IS NOT THE CASE HERE. IT IS NOT THE CASE OF THE ASSESSEE THAT COMBINED PROFITS OF THE ASSESSEE AS WELL AS THE A.E . EXCEED THE GROSS RECEIPTS FROM THE TRANSACTIONS BY THE A.E. HENCE T HESE CASE LAWS ARE NOT APPLICABLE. 73. IN BOTH THESE CASES, IT IS NOWHERE STATED THAT THE ADJUSTMENT SHOULD NOT EXCEED THE COMBINED PROFITS OF THE GROUP ENTITY. W HEN TRANSFER PRICING STUDY IS DONE WITH APPROPRIATE COMPARABLES BY ADOPT ING THE MOST APPROPRIATE METHOD, THE QUESTION OF TRANSFER PRICIN G ADJUSTMENT BEING MORE ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 44 THAN GROSS RECEIPTS FROM A TRANSACTION SIMPLY DOES NOT ARISE. THE ASSESSEE AS WELL AS THE REVENUE AUTHORITIES ARE BOUND TO DETERM INED THE ALP BY APPLYING THE LAW AND RULES LAID DOWN AND CANNOT BE GUIDED BY EXTRANEOUS PARAMETERS. 74. IF THE PROPOSITION OF THE ASSESSEE IS ACCEPTED, THEN IT WOULD RESULT IN A SITUATION WHERE, WHEN AN INDIAN AUTHORITY DECIDES O N THE TRANSFER PRICING ADJUSTMENT BY FIXING THE ARMS LENGTH PRICE AND BEC AUSE THE REVENUE AUTHORITIES OF THE OTHER COUNTRY IN WHICH THE A.E. IS SITUATED DECIDE TO TAX THAT ENTITY ON A PARTICULAR ALP, THEN THE ARMS LEN GTH PRICE ARRIVED AT BY THE INDIAN AUTHORITIES BY APPLYING THE LAW WOULD REQUIR E TO BE DISTURBED, WHICH IN OUR OPINION IS NOT CORRECT AS IT IS NOT PERMITTE D BY THE LAW. FOR ALL THESE REASONS, THIS PLEA OF THE ASSESSEE IS DISMISSED AS DEVOID OF MERIT. 75. THE OTHER CONTENTION OF THE ASSESSEE THAT THE T RANSFER PRICING ADJUSTMENT SHOULD NOT BE MADE FOR THE REASON THAT T HE INCOME OF THE ASSESSEE COMPANY IS EXEMPT UNDER SEC. 10A OF THE ACT AND HEN CE THERE IS NO MOTIVE TO DIVERT PROFIT, HAS TO BE REJECTED BY APPLYING TH E JUDGMENT OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AZTEC SOFTWARE (SUPRA). 76. COMING TO THE CLAIM FOR RISK ADJUSTMENT ON THE GROUND THAT THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER, WE FIND THA T NO SUCH ADJUSTMENT WAS CLAIMED BY THE ASSESSEE IN THE TRANSFER PRICING STU DY. ONLY WHEN THE TPO ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 45 SOUGHT TO MAKE A TRANSFER PRICING ADJUSTMENT, THE A SSESSEE HAS COME OUT WITH THIS CLAIM OF BEING A CAPTIVE SERVICE PROVIDER AND HENCE AN ADJUSTMENT HAS TO BE GIVEN. THE CONTRA ARGUMENT OF THE REVENUE THAT BEING A DEPENDENT ENTERPRISE RESULTS IN GREATER RISK CANNOT BE BRUSHE D ASIDE. BEING DEPENDENT ON ONLY ONE SOURCE FOR WORK IS A RISK FACTOR TO BE CONSIDERED. HIGHER RISK MEANS HIGHER PRICE. BEFORE WE GO INTO THE ISSUE AS TO WHETHER SUCH AN ADJUSTMENT CAN BE PROVIDED, WE ARE OF THE OPINION T HAT ANY CLAIM FOR ADJUSTMENT, ON THE BASIS OF RISK OR ANY OTHER FACTO RS, HAS TO BE BASED ON PROPER DATA AND SOUND CALCULATION. AD HOC ADJUSTME NTS SHOULD NOT BE GRANTED AS IT BECOMES DISCRETIONARY. THE ADJUSTMEN T CANNOT BE USED TO LEVERAGE THE DESIRED RESULTS, SO AS TO PROVE OR DIS PROVE THE ASSESSEES CLAIM THAT ITS TRANSACTIONS WITH THE AE ARE AT ARMS LENG TH. IN MOST OF THESE CASES THE OBJECT SOUGHT TO BE ACHIEVED, IS DETERMINING, T HE MEANS BY WAY OF CLAIMS FOR VARIOUS ADJUSTMENTS. RARELY SUCH ADJUSTMENT CL AIMS ARE BASED ON ROBUST DATA. THE ARGUMENTS OF BOTH THE PARTIES ON THIS IS SUE HAVE ALREADY BEEN RECORDED BY US AND BOTH THESE CONTRADICTORY ARGUMEN TS HAVE GOOD WEIGHTAGE. THE DEBATE AS TO WHETHER A CAPTIVE SERV ICE PROVIDER HAS LESSER RISK OR A HIGHER RISK CANNOT BE ADJUDICATED BY US I N THE ABSENCE OF SUFFICIENT MATERIAL. THESE ARE ALL SUBJECTIVE MATTERS, IN WHI CH ONE VIEW CANNOT ONLY BE SAID TO BE CORRECT. MUCH DEPENDS ON THE FACTS OF T HE CASE AND THE MATERIAL ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 46 EVIDENCE FURNISHED. HENCE, WE REJECT THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE SAME IS NOT SUPPORTED BY PROPER DAT A AND MATERIAL, WITHOUT GOING INTO THE ISSUE AS TO WHICH ARGUMENT ON RISK A DJUSTMENT MADE BY EACH OF THE PARTY IS CORRECT. 77. ON THE ARGUMENT THAT THE TPO HAS NOT MADE ANY A DJUSTMENT IN THE EARLIER YEARS AND ON THE PRINCIPLE OF CONSISTENCY N O ADJUSTMENT SHOULD BE MADE, WE FIND THAT THE TRANSFER PRICING OFFICER IN THE A.Y.2005-06 HAS NOT EXERCISED HIS MIND IN THE LINES AND IN THE MANNER I N WHICH THE TPO HAS DONE IN THIS YEAR. THE MATERIAL AVAILABLE WITH THE TPO IN THE CURRENT YEAR IS VASTLY DIFFERENT TO THE MATERIAL AVAILABLE WITH THE TPO IN THE EARLIER YEAR. IN SUCH CIRCUMSTANCES, THE PRINCIPLE OF CONSISTENCY DO ES NOT HOLD WATER. NO DOUBT IT IS DESIRABLE THAT THE REVENUE AUTHORITIES BE CONSISTENT BUT IN CASES WHERE THE SUBSEQUENT OFFICER IS ABLE TO GATHER FURT HER MATERIAL, WHICH WOULD REQUIRE HIM TO DECIDE IN A WAY DIFFERENT FROM THE D ECISION TAKEN BY THE AO IN THE EARLIER YEAR, WHO DID NOT HAVE THE BENEFIT O F SUCH MATERIAL, AND WHEN THE ANALYSIS OF THE MATERIAL IS DIFFERENT, THEN IN OUR VIEW HE IS PERMITTED TO DO SO. THERE IS NO RES JUDICATA IN THE INCOME-TAX PROCEEDINGS. THE PRINCIPLE OF CONSISTENCY ALSO HAS ITS LIMITATIONS AND CANNOT BE APPLIED ACROSS THE BOARD. THE FACT SITUATION HAS TO BE SEEN. THE LD. COUNSEL FOR THE ASSESSEE HAS NOT DEMONSTRATED AS TO WHICH PARTICULAR CONCLUS ION OF THE PREVIOUS TPO ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 47 OR AO WAS VIEWED IN AN OPPOSITE MANNER BY THE CURRE NT T.P.O. IT IS A CASE OF NON APPLICATION OF MIND BY THE PREVIOUS T.P.O. O N SOME ISSUES. HENCE THIS ARGUMENT IS REJECTED. 78. COMING TO THE ARGUMENT THAT THE SERVICE IS A LO W END SOFTWARE MAINTENANCE SERVICE AND COMBINED PROFITABILITY IS L OW AND HENCE THE ALP IS CORRECT, WE HAVE ALREADY POINTED OUT THAT THERE ARE FACTUAL CONTRADICTIONS IN THE ASSESSEES SUBMISSIONS AND ITS OWN TRANSFER PRI CING REPORT. HENCE, THIS ARGUMENT IS REJECTED. 79. ON THE CLAIM OF ADJUSTMENT OF LOW CAPACITY UTIL IZATION OR IN OTHER WORDS, FOR IDLE CAPACITY, WE FIND THAT IN THE TRAN SFER PRICING STUDY THE ASSESSEE HAS NOT MADE ANY SUCH ADJUSTMENT. THE ASS ESSEE FOLLOWS COST PLUS METHOD OF BILLING ITS AE. IT IS NOT KNOWN AS TO H OW THE COSTS ARE ARRIVED AT. ON THE UTILIZATION OF MAN POWER, THE FACT WHETHER T HERE WAS ASSURED VOLUMES AND THE DECISION AS TO WHO BEARS THE COST OF IDLE C APACITY ETC. ARE NOT STATED. IN THE ABSENCE OF SUCH DETAILS AND DATA, THE QUESTI ON OF GRANTING ADJUSTMENT ON THE GROUND OF IDLE UTILIZATION OF CAPACITY DOES NOT ARISE. THE FINDINGS OF THE T.P.O. ON THIS ISSUE ARE BASED ON BROAD PARAMET ER AND HENCE ARE UPHELD. THE ASSESSEE IS REQUIRED TO SUPPORT ITS CLAIM FOR A NY ADJUSTMENT WITH ROBUST DATA AND FULL DETAILS AND EVIDENCES SO AS TO ENABLE THE TPO TO EXAMINE THE CLAIM. THE BURDEN IS ON THE ASSESSEE WHENEVER IT M AKES A CLAIM AND IN THIS ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 48 CASE, IT HAS NOT DISCHARGED THE BURDEN OF PROOF. T HESE ADJUSTMENTS ARE BEING CLAIMED BY THE ASSESSEE, ONLY WHEN ADJUSTMENTS ARE PROPOSED BY THE T.P.O. THAT TOO IN A AD-HOC MANNER. IF THE CLAIM WAS CORR ECT, THEN IT SHOULD HAVE BEEN MADE IN THE T.P. STUDY ITSELF AND NOT, ONLY TO MEET THE GOAL OF A.L.P. 80. WE NOW CONSIDER THE ISSUE WHETHER INTERNAL COMP ARABLES HAS TO BE TAKEN AND IF NOT AS TO WHETHER THE SELECTION OF COM PARABLES, WHEN EXTERNAL COMPARABLES ARE TAKEN, IS CORRECT OR NOT. BEFORE W E GO INTO THE ISSUE, WE FIRST DEAL WITH SOME OF THE GENERAL PROPOSITIONS RE LIED UPON BY BOTH THE PARTIES. COMING TO THE INTERNAL COMPARABLES, THE A SSESSEE ARGUED THAT UNDER THE RULES THE MARGIN OF THE SINGLE TRANSACTION HAS TO BE COMPARED TO THE MARGIN OF ANOTHER TRANSACTION, OR AT BEST THE GROUP OF SIMILAR TRANSACTIONS AND UNDER THOSE CIRCUMSTANCES, THE VOLUME IS NOT CRITER IA FOR REJECTING THE INTERNAL COMPARABLES. RELIANCE WAS PLACED ON RULE 10B(1)(E) AND ON THE DECISIONS OF MUMBAI BENCH OF THE TRIBUNAL IN THE CA SE OF TECHNIMOUNT ICB PVT. LTD. VS. ACIT (ITA NO.4608 & 5085/MUM/2010) AS WELL AS UCB INDIA (P) LTD. VS. ACIT, 30 SOT 95 (MUM.). THE REVENUE R ELIES ON RULE 10B(2)(D). THE LEARNED DR ALSO GAVE AN EXTREME EXA MPLE OF ONE LAC TON OF TEA SOLD BEING COMPARED WITH 1 KG. OF SAMPLE TEA GI VEN AS A SAMPLE. 81. IN OUR CONSIDERED OPINION THE REQUIREMENT OF TR ANSACTION MARGINS BEING COMPARED AT A TRANSACTION LEVEL OR AT THE LEV EL OF A CLASS OF SIMILAR ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 49 TRANSACTIONS, DOES NOT WARRANT COMPARING MINISCULE TRANSACTIONS WITH LARGE TRANSACTION FOR THE PURPOSE OF BENCHMARKING. BENCH MARKING OF TRANSACTIONS AT THE TRANSACTION LEVEL DOES NOT WARRANT IGNORING THE PRINCIPLE OR CONCEPT OF MATERIALITY. THE FACTS AND CIRCUMSTANCES OF EACH C ASE HAS TO BE SEEN. AT THE SAME TIME RELIANCE PLACED BY THE LEARNED DR ON RULE 10B(2)(D) IS NOT CORRECT AS THE SAME DOES NOT APPLY TO THE FACTUAL S ITUATION. THIS RULE REFERS TO EXTERNAL CONDITIONS AND NOT TO THE MINISCULE NATURE OF THE COMPARABLE UNCONTROLLED TRANSACTIONS. RULE 10B(1)(E) RELIED U PON BY THE ASSESSEE ALSO DOES NOT COME TO ITS RESCUE AS THE RULE DOES NOT LA Y DOWN AS TO WHICH TRANSACTION CAN BE TAKEN AS A COMPARABLE UNCONTROLL ED TRANSACTION FOR THE PURPOSE OF BENCHMARKING THE NET PROFIT MARGIN WITH THE CONTROLLED TRANSACTION. THUS THE REASONING OF BOTH THE PARTIE S ON THE ISSUE DOES NOT FIT INTO THE FACTS OF THIS CASE AND HAS TO BE REJECTED. 82. HAVING SAID SO WE FIND IN THE ASSESSMENT YEAR 2 007-08, THE ASSESSEE HAS UNCONTROLLED COMPARABLE TRANSACTIONS WITH THIRD PARTIES IN EXPORT SEGMENT TO THE TUNE OF 15% OF TOTAL TURNOVER. FURT HER, IT HAS UNCONTROLLED TRANSACTIONS WITH THE THIRD PARTIES IN THE DOMESTIC SECTOR TO THE TUNE OF 10% OF THE TOTAL TURNOVER. THUS THE UNCONTROLLED TRANS ACTIONS ARE SIGNIFICANT PART OF TOTAL TURNOVER OF THE ASSESSEE. THE ARGUMENT OF THE TPO FOR BOTH THE YEARS IS THAT THE COMPARABLE IS MINISCULE IN NATURE AND FAILS ON THE ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 50 COMPARABILITY OF VOLUMES OR SCALE OF OPERATION. TH IS ARGUMENT AND FINDING OF THE TPO IS FACTUALLY INCORRECT FOR THE A.Y. 2007 -08. 15% OF THE TOTAL TURNOVER, IN OUR OPINION IS SUFFICIENT SAMPLE WHICH CAN BE USED FOR THE PURPOSE OF BENCHMARKING, PROVIDED THE TRANSACTIONS ARE FUNCTIONALLY COMPARABLE. EVEN DOMESTIC UNCONTROLLED TRANSACTION S ARE ABOUT 10%. IN CASE THE TRANSACTIONS ARE FUNCTIONALLY COMPARABLE T HESE TRANSACTIONS CAN BE USED FOR BENCHMARKING. THOUGH THE LEARNED DR ARGUE D THAT THE TRANSACTIONS ARE NOT COMPARABLE, WE FIND THAT THE TPO HAS NOT EX AMINED THIS ASPECT AND HAS REJECTED THE INTERNAL COMPARABLES ON THE GROUND OF LESS VOLUMES AND ECONOMICS OF SCALE. FUNCTIONAL ANALYSIS HAS NOT BE EN DONE AT THE TRANSACTION LEVEL. HENCE FOR THE A.Y. 2007-08, INTERNAL COMPAR ABLES HAVE TO BE EXAMINED IN THE LIGHT OF OUR ABOVE OBSERVATION AND CONSIDERED FOR BENCHMARKING. 83. IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT ENDS OF JUSTICE WOULD BE MET IF THE ISSUE IS SET AS IDE TO THE AO/TPO, TO CONSIDER THE INTERNAL COMPARABLES GIVEN BY THE ASSE SSEE AND ARRIVE AT A FRESH DECISION ON THE MATTER FOR THE ASST. YEAR 2007-08. THE NATURE OF TRANSACTIONS AND THE FUNCTIONS IN THESE TRANSACTION S HAVE TO BE EXAMINED. IN CASE THERE ARE VARIATIONS, WE DIRECT THE TRANSFER P RICING OFFICER TO MAKE SUITABLE ADJUSTMENT AND ARRIVE AT AN APPROPRIATE AR MS LENGTH PRICE. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 51 84. AS WE HAVE TAKEN THIS DECISION FOR THE ASSESSME NT YEAR 2007-08 AND THOUGH THE INTERNAL COMPARABLES CITED BY THE ASSESS EE FOR THE ASSESSMENT YEAR 2006-07 CANNOT BE CONSIDERED SIGNIFICANT ON VO LUMES, AS THE INTERNAL UNCONTROLLED TRANSACTIONS FOR BOTH THE YEARS ARE WI TH THE SAME PARTIES AND AS THE VOLUMES FOR SUBSEQUENT YEARS ARE SIGNIFICANT AN D AS THE NATURE OF TRANSACTIONS WITH RESPECT TO THE UNCONTROLLED INTER NAL TRANSACTIONS FOR BOTH THE YEARS ARE SAME, FOR THE PURPOSE OF CONSISTENCY, WE ARE OF THE OPINION THAT FOR THE A.Y. 2006-07 ALSO SIMILAR EXERCISE NEED TO BE DONE BY THE AO/TPO. OUR VIEW IS GUIDED BY OUR DECISION TAKEN FOR THE SU BSEQUENT YEAR. 85. IN VIEW OF OUR DECISION, WE DO NOT CONSIDER IT NECESSARY TO ADJUDICATE THE NUMEROUS OTHER ARGUMENTS RAISED BY BOTH PARTIES AS IT WOULD BE AN ACADEMIC EXERCISE. 86. THUS, WE SET ASIDE THESE ADDITIONS FOR BOTH THE ASSESSMENT YEARS UNDER CONSIDERATION TO THE AO/TPO FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. AS WE HAVE UPHELD THE CONTENTION OF THE ASSESSEE ON THE ISSUE OF INTERNAL COMPARABLES BEING TAKEN FOR THE PURPOSE OF BENCHMAR KING, AS CLEARLY STATED WE DO NOT ADJUDICATE THE ISSUE OF SELECTION OF EXTE RNAL COMPARABLES AS THIS WOULD BE AN ACADEMIC EXERCISE. THEREFORE, THESE GR OUNDS ARE ALLOWED FOR STATISTICAL PURPOSES. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 52 87. GROUND NO.3 IS AGAINST THE DISALLOWANCE OF DEDU CTION UNDER SEC. 10A OF THE ACT. THE ASSESSEE HAD SET UP THE NOIDA UNI T/UNDERTAKING AND HAD STARTED ITS COMMERCIAL OPERATIONS IN THE PREVIOUS Y EAR RELEVANT TO THE ASSESSMENT YEAR 1997-98. IN THAT YEAR THE NOIDA UN IT/UNDERTAKING OF THE ASSESSEE HAD SUFFERED LOSSES OF RS.37,34,740/- AND NO EXEMPTION WAS CLAIMED IN THAT YEAR. IN THE PREVIOUS YEAR RELEVAN T TO THE ASSESSMENT YEAR 1998-99 (I.E. 2 ND YEAR OF OPERATION) THE APPELLANT CLAIMED DEDUCTION OF RS.45,64,528/- UNDER SECTION 80HHE OF THE ACT. ON AND FROM PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1999-2000, THE ASSE SSEE HAD CONSISTENTLY BEEN CLAIMING AND HAD BEEN ALLOWED EXEMPTION UNDER SECTION 10A OF THE ACT IN RESPECT OF PROFITS DERIVED FROM MANUFACTURE AND EXPORT OF COMPUTER SOFTWARE IN THE NEPZ UNIT/UNDERTAKING AS UNDER: ASSESSMENT YEAR 1999-00 2000-01 2001-2002 PROFITS OF THE UNDERTAKING RS.1,32,72,653/- ENTIRE PROFITS OF NEPZ WERE CLAIMED EXCLUDIBLE U/S 10A. RS.102,35,648/- EXEMPTION CLAIMED UNDER SECTION 10A RS.1,32,72,653/- -DO- RS.102,350,648/- EXEMPTION/DEDUCTION ALLOWED. UNDER SECTION 143(3) VIDE ORDER DATED 22.3.2002. UNDER SECTION 143(1) VIDE ORDER DATED 30.03.2001. UNDER SECTION 143(3) VIDE ORDER DATED 19.02.2003. ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 53 88. IN THE ASSESSMENT YEAR 2002-03, THE ASSESSEE WA S, FOR THE FIRST TIME, DENIED EXEMPTION UNDER SECTION 10A OF THE ACT. IN THE ASSESSMENT ORDER FOR THAT YEAR IT WAS HELD THAT SINCE IN THE PREVIOUS YE AR RELEVANT TO THE ASSESSMENT YEAR 1998-99 THE ASSESSEE HAD CLAIMED AN D WAS ALLOWED DEDUCTION UNDER SECTION 80HHE, THE ASSESSEE WAS NOT ENTITLED TO CLAIM EXEMPTION UNDER SECTION 10A OF THE ACT. IN DOING S O, THE AO HAD PLACED RELIANCE ON THE PROVISIONS OF SUB-SEC. (5) OF SECTI ON 80HHE OF THE ACT. IN AN APPEAL PREFERRED BEFORE THE CIT(A) BY THE ASSESSEE, THE LEARNED CIT(A) REVERSED THE AFORESAID DISALLOWANCE FOR THE ASSESSM ENT YEAR 2002-03 AND UPHELD THE CLAIM OF THE ASSESSEE FOR DEDUCTION UNDE R SECTION 10A OF THE ACT. 89. DURING THE YEAR UNDER CONSIDERATION, THE ASSESS EE HAS CLAIMED DEDUCTION UNDER SEC. 10A OF THE ACT, INTER ALIA, IN RESPECT OF THE AFORESAID NOIDA UNIT/UNDERTAKING. THE AO DENIED DEDUCTION OF RS.1,93,30,945/- UNDER SEC. 10A OF THE ACT IN RESPECT OF PROFITS OF THE NOIDA UNIT FOLLOWING THE ASSESSMENT ORDERS FOR THE ASSESSMENT YEARS 2002 -03 TO 2005-06, EVEN THOUGH THE CLAIM HAS BEEN ALLOWED BY THE APPELLATE AUTHORITIES. 90. THE DELHI BENCH OF TRIBUNAL IN ASSESSEES OWN C ASE FOR ASSESSMENT YEARS 2002-03 AND 2003-04 UPHELD THE AFORESAID CLAI M OF THE ASSESSEE FOR EXEMPTION U/S 10A. THE SAID ORDER OF THE TRIBUNAL HAS RECENTLY BEEN UPHELD BY THE HONBLE DELHI HIGH COURT. BOTH THE PARTIES AGREE THAT THE ISSUE IS ITA NO.5568/DEL/2010 & ITA NO.5680/DEL/2011 54 COVERED IN FAVOUR OF THE ASSESSEE. HENCE WE RESPEC TFULLY FOLLOW THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT AND ALLOW THE CLAIM OF THE ASSESSEE FOR EXEMPTION UNDER SEC. 10A OF THE ACT. 91. THE GROUND REQUESTING FOR (+)/(-) 5% ADJUSTMEN T IN TERMS OF PROVISO TO SEC. 92C OF THE ACT IS DISMISSED AS NOT PRESSED. 92. IN THE RESULT, BOTH THE APPEALS FILED BY THE AS SESSEE ARE ALLOWED IN PART. 93. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 31 ST OCTOBER, 2012. SD/- SD/- (CHANDRAMOHAN GARG) (J. SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 31 ST OCTOBER, 2012. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR, ITAT.