Konah Solutions Pvt.Ltd., Hyderabad V. ITO, Hyderabad

ITA 594/HYD/2009

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59223 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 8 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 18-07-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 30-04-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: N H NAYAK
• Assessee Lawyers: T S AJAY
• Keywords: Related party transaction; Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND CHANDRAPOOJARI, ACCOUNTANT MEMBER ITA NO.594/HYD/2009 ASSESSMENT YEARS: 2004-05 KNOAH SOLUTIONS PVT. LTD.,MADHAPUR,HYDERABAD. (PAN: AABCK 6861 B) (APPELLANT) VS THE INCOME-TAX OFFICER, WARD-2(1), HYDERABAD. (RESPONDENT) APPELLANT BY : SRI T.S. AJAY RESPONDENT BY : SHRI N.H. NAYAK DATE OF HEARING: 29-11-2011. DATE OF PRONOUNCE MENT: 25-01-2012. O R D E R PER BENCH: THIS APPEAL IS DIRECTED AGAINST THE ORDER OF THE CI T (A) DATED 19- 2-2009 AND PERTAINS TO THE ASSESSMENT YEAR 2004-05. THE ASSESSEE RAISED THE FOLLOWING GROUNDS BEFORE US:- 1. THE CIT (A) HAS ERRED IN LAW AND IS THE FACTS AND C IRCUMSTANCES OF THE CASE IN EXCLUDING THE RESULTS OF LOSS MAKING CO MPANIES FOR THE PURPOSE OF DETERMINING THE AVERAGE PROFIT MARGIN UN DER THE TNMM METHOD, THOUGH THEY HAVE BEEN ADMITTED AND INC LUDED AS COMPARABLES. ITA NO.594/HYD/09 KNOAH SOLUTIO NS PVT.LTD. HYD. L.L ========================== 2 2. THE CIT(A) OUGHT TO HAVE NOTED AND APPRECIATED THA T THESE COMPANIES WERE PART OF THE COMPARABLES ADMITTED BY THE CIT(A) HIMSELF AND HAS NOT BEEN OBJECTED TO, BY THE DEPART MENT ALSO AND HENCE HAVE BECOME FINAL AND OUGHT TO HAVE BEEN INCL UDED FOR ARRIVING AT THE AVERAGE PROFIT MARGIN. THE CIT(A) OUGHT TO HAVE NOTED THAT THE DETAILS PERTAINING TO THE LOSS MAKIN G COMPANIES AND THE EXPLANATION AS TO THEIR COMPARABILITY WAS P ROVIDED DURING THE APPELLATE PROCEEDINGS, WHICH WAS ALSO PU T TO THE DEPARTMENT DURING THE REMAND REPORT PROCEEDINGS, AN D HAVE BEEN ACCEPTED BY THE DEPARTMENT AFTER DUE EXAMINAT ION AND HENCE HAVE BECOME FINAL. 3. THE CIT(A) HAS ERRED IN EXCLUDING THE RESULTS OF T HE LOSS MAKING COMPANIES MERELY ON THE GROUND THAT THEY ARE LOSS M AKING, WITHOUT ASSIGNING ANY REASON. THE CIT(A) OUGHT TO HAVE NOTED THAT EXCLUSION OF ANY COMPANY FROM THE COMPARABLES CAN BE ON ACCOUNT OF LACK OF COMPARABILITY AND THE MERE FACT THAT THEY ARE LOSS MAKING COMPANIES BY ITSELF CANNOT BE A GROUND FOR EXCLUSION. THE CRUX OF THE ABOVE GROUNDS IS THAT THE LOWER AUT HORITIES NOT CONSIDERED ALL THE COMPARABLES WHICH INCLUDED CERTA IN LOSS MAKING COMPANIES FOR THE PURPOSE OF DETERMINING THE ALP. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY IS A 100% SUBSIDIARY OF M/S KNOHA SOLUTIONS INC., USA AN D IS ENGAGED IN THE BUSINESS OF BPO/ITES. IT IS A CAPTI VE CONTRACT SERVICE PROVIDER AND RENDERS BPO SERVICES TO ITS AE AT A COST PLUS MARK UP OF 15% AS PER SERVICE AGREEMENT DATED 29.8.2001. FOR THE PURPOSE OF ESTABLISHING THE ALP OF ITS INTE RNATIONAL TRANSACTIONS, ASSESSEE ADOPTED TNMM AS THE MOST APP ROPRIATE METHOD AND COMPUTED PLI (OP/TC) @ 15.76% ON THE OPE RATING COST OF RS.9,57,07,484/-. ON A REFERENCE MADE BY T HE ASSESSING OFFICER AND AFTER ANALYSING THE TP DOCUMENTS AND AN ALYSIS OF THE ASSESSEE, THE TPO DID NOT AGREE WITH THE ALP DE TERMINED BY ITA NO.594/HYD/09 KNOAH SOLUTIO NS PVT.LTD. HYD. L.L ========================== 3 THE ASSESSEE. TPO FOUND THAT OUT OF THE EIGHT COMP ARABLES SELECTED BY THE ASSESSEE, CONTEMPORANEOUS DATA WAS NOT AVAILABLE IN RESPECT OF FIVE COMPARABLES. HENCE TH E SAME WERE REJECTED. FIVE NEW COMPARABLES WITH CONTEMPORANEOU S DATA WERE INCLUDED BY THE ASSESSEE AND OUT OF THE UPDATE D LIST, SIX COMPARABLES WERE FOUND ACCEPTABLE BY BOTH THE ASSES SEE AND TPO. TWO MORE COMPARABLES SPANCO TELE SYSTEMS A ND SOLUTIONS LTD. WERE ALSO SELECTED BY THE TPO, THOU GH OBJECTED BY THE ASSESSEE. ON THE BASIS OF FINAL LIST OF EIG HT COMPARABLES, TPO DETERMINED THE AVERAGE PLI @ 27.78%. THE TPO A LSO CONSIDERED THE ASSESSEES CLAIM OF ADJUSTMENTS ON A CCOUNT OF WORKING CAPITAL AND ENTREPRENEURIAL RISK AND ALLOWE D 2% DEDUCTION FROM THE AVERAGE PLI. THE ADJUSTED AVERA GE PLI WAS THUS DETERMINED @ 25.78% RESULTING INTO ALP OF SERV ICES AT RS.12,03,80,873. SINCE THE ASSESSEE CHARGED ON RS.11,07,93,375/-, THE DIFFERENCE OF RS.95,87,498/- WAS ADJUSTED U/S 92CA OF THE ACT. AGAINST THIS, THE AS SESSEE WENT IN APPEAL BEFORE THE CIT (A). 4. DURING THE FIRST APPELLATE PROCEEDINGS, THE LEA RNED AUTHORIZED REPRESENTATIVE OF THE ASSESSEE FURNISHED EIGHT ADDITIONAL COMPARABLES VIDE ITS LETTER DATED 7-5-20 08 ON THE BASIS OF THE TOTAL SIXTEEN COMPARABLES (INCLUDING E IGHT COMPARABLES SELECTED BY THE TPO), THE AVERAGE PLI WAS COMPUTED AT 11.01% WHICH WAS LESS THAN THE PLI SHO WN BY THE ITA NO.594/HYD/09 KNOAH SOLUTIO NS PVT.LTD. HYD. L.L ========================== 4 ASSESSEE. THE CIT (A) FORWARDED THE ADDITIONAL COM PARABLES TO THE TPO AND THE TPO SUBMITTED HIS REPORTS VIDE HIS LETTERS DATED 5-3-2008, 19-11-2008 AND 22-1-2009. THE TPOS REPORTS WERE ALSO FORWARDED TO THE ASSESSEE WHO MADE ITS SU BMISSIONS VIDE LETTERS DATED 15-9-2008, 16-12-2008, 13-02-200 8 AND 17- 2-2008. THE CIT (A) LATER OBSERVED THAT THE DATA OF EARLIER YEARS WERE NOT REQUIRED TO BE CONSIDERED IF IT WAS NOT SHOWN BY THE ASSESSEE THAT IT HAD ANY BY THE ASSESSEE THAT I T HAD ANY INFLUENCE ON THE DETERMINATION OF THE ALP OF THE TR ANSACTIONS INVOLVED BY PLACING RELIANCE IN THE CASE OF AZTEC S OFTWARE & TECHNOLOGY SERVICES LIMITED (294 ITR (AT) 32 BANG ALORE. THE ASSESSEE ALSO OBJECTED TO THE EIGHT COMPARABLES FINALLY SELECTED BY THE TPO BEFORE THE CIT (A). IN RESPECT OF COMPUTATION OF PLI, SPECIALLY IN RESPECT OF M/S AL LSEC TECHNOLOGIES LIMITED, THE TPO HAD COMPUTED THE PLI IN RESPECT OF THIS COMPANY @3.44% WHILE THE ASSESSEE COMPUTED THE SAME @ (-)37.80%. THE TPO STATED IN HIS REPORT DATED 19 -11-2008 THAT THIS COMPANY I.E.. M/S. ALLSEC TECHNOLOGIES LI MITED FOR THE RELEVANT FINANCIAL YEAR 2003-04 WERE AFFECTED BY TWO ITEMS OF ABNORMAL EXPENSES I.E., CONNECTIVITY COST AND DATA BASE COST WHICH TOGETHER AMOUNTED TO MORE THAN 60% OF THE REV ENUE. THE DIRECTORS REPORT ALSO STATED THAT THE FULL CAPACIT Y OF THE COMPANY COULD NOT BE USED FOR A PERIOD OF TIME. TH E EXCESS COST INCURRED ON ACCOUNT OF THIS CANNOT BE QUANTIFI ED. THESE UNUSUAL ITEMS DISTORTED THE MARGINS MAKING THE DATA UNRELIABLE ITA NO.594/HYD/09 KNOAH SOLUTIO NS PVT.LTD. HYD. L.L ========================== 5 FOR COMPARABILITY ANALYSIS. THE TPO MADE A COST ANA LYSIS OF THE COMPANY DURING THE PREVIOUS TWO YEARS AND NEXT TWO YEARS WHICH CLEARLY INDICATED THAT THE EXTRA EXPENSES INC URRED IN THIS YEAR WERE NOT PERTAINING TO THE TRANSACTIONS OF THE YEAR WHICH HAD LEAD TO THE LOSSES OF THE COMPANY. SINCE THE E XTRA EXPENSES WERE INCURRED DURING THE COURSE OF EXPANSION OF BUS INESS AND WERE NOT THE ITEMS WHICH USED TO BE INCURRED YEAR T O YEAR, THE BENEFITS ACCRUED FROM THESE ITEMS WERE SPREAD OVER FOR MANY YEARS. HENCE, THESE EXTRA ITEMS CANNOT BE TREATED AS REGULAR OPERATING EXPENSES OF THE TRANSACTIONS MADE DURING THE YEAR. ACCORDINGLY, THE TPO AVERAGED OUT THE EXTRA EXPENSE S WHILE COMPUTING THE MARGIN. THIS AVERAGING WAS OBJECTED BY THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE FOR THE R EASON THAT THE FINANCIALS OF THE COMPANY WERE IN CONFORMITY WITH T HE ACCOUNTING PRINCIPLES AND THE ACCOUNTING STANDARDS AS REQUIRED BY THE COMPANIES ACT. 5. HOWEVER, THE CIT (A) OBSERVED THAT THE FINANCIA L RESULTS OF THE COMPANY ARE SHOWN FOR 15 MONTHS PERIOD. THE DI RECTORS REPORT OF THIS COMPANY CLEARLY STATED THAT DUE TO A BNORMAL CIRCUMSTANCES DURING THE YEAR, PROFITS WERE ADVERSE LY AFFECTED. THE EXPANDED FACILITY COULD NOT BE FULLY UTILIZED D UE TO REASONS OF POLICY CHANGE OF CLIENT. THE COMPANY SHOWED A L OSS OF RS.15.03 CRORES AGAINST THE PROFIT OF RS.2,72 CRORE S IN THE EARLIER YEAR AND RS.8.57 CRORES IN THE SUBSEQUENT YEAR. TH E EXTRA ITA NO.594/HYD/09 KNOAH SOLUTIO NS PVT.LTD. HYD. L.L ========================== 6 EXPENSES INCURRED ON ACCOUNT OF CONNECTIVITY COST, DATA BASE COST AND EMPLOYEE COST WERE NOT PERTAINING TO ONLY THE TRANSACTIONS OF THE CURRENT YEAR. THESE EXPENSES C ANNOT BE TREATED AS REGULAR OPERATING EXPENSES RELATABLE TO THE TRANSACTIONS OF THE CURRENT YEAR. THIS BEING SO, TH E CIT (A) PLACING RELIANCE ON THE DECISION OF DELHI ITAT IN T HE CASE OF M/S SONY INDIA PVT. LTD., (114 ITD 448) (DELHI) HELD TH AT THE RESULT OF M/S ALLSEC TECHNOLOGIES LIMITED CANNOT BE CONSI DERED AS COMPARABLE COMPANY FOR DETERMINING THE AVERAGE PLI. THE SAME VIEW WAS TAKEN IN THE CASE OF PROGEON LIMITED, FLEXTRONICS SOFTWARE SYSTEMS, TULSYAN TECHNOLOGIES LIMITED AND TRANSWORKS INFORMATION SERVICES LIMITED AND DATA OF THESE COMPANIES ARE NOT CONSIDERED FOR THE PURPOSE OF COM PARABILITY WHILE DETERMINING THE AVERAGE PLI. FURTHER, HE RE JECTED THE OTHER COMPARABLES VIZ., GENESIS INTERNATIONAL CORPO RATION LIMITED, KIRLOSKAR COMPUTER SER4VICES LIMITED AND PENTASOFT TECHNOLOGIES LIMITED ON THE REASON THAT THEY ARE PREDOMINANTLY FUNCTIONING IN A DIFFERENT WAY. GENE SYS INTERNATIONAL CORPORATION LIMITED IS A PROVIDER OF IT SOLUTIONS, GEOSPATIAL SERVICES AND ENGINEERING SERVICES AND 68 % OF THE OPERATING REVENUE WAS DERIVED FROM THE GIS BASED SE RVICES SEGMENT. KIRLOSKAR COMPUTER SERVICES LIMITED HAS T HREE SEGMENTS NAMELY (1) ITES- DOMESTIC, (2) US OPERATOR S AND (3) OTHERS. THE SEGMENTAL REPORTING INDICATES THAT ONL Y 23% OF THE OPERATING REVENUES WERE DERIVED FROM THE ITES SEGME NT. ITA NO.594/HYD/09 KNOAH SOLUTIO NS PVT.LTD. HYD. L.L ========================== 7 PENTASOFT TECHNOLOGIES LIMITED ALSO HAS THREE SEGME NTS (I) ENGINEERING SERVICES- CAD/CAM/CAE PROJECTS (2) ENTE RPRISE DIVISION AND (3) EDUCATION AND TRAINING. THE SEGME NTAL REPORTING INDICATES THAT ONLY 26% OF THE OPERATING REVENUES WERE DERIVED FROM THE ENGINEERING SERVICES SEGMENT AND RELATED PARTY TRANSACTIONS AND IT IS EVIDENT THAT THESE COM PANIES HAVE DIVERSIFIED OPERATIONS AND ARE DERIVING THEIR MAJOR REVENUES FROM FUNCTIONS DIFFERENT FROM THE ASSESSEE COMPANY WHICH IS RENDERING BPO SERVICES TO ITS ASSOCIATED ENTERPRISE S. HENCE, THESE COMPANIES ARE REJECTED BY THE CIT (A) AS COMP ARABLES FOR THE PURPOSE OF BENCH MARKING THE INTERNATIONAL TRAN SACTIONS OF THE ASSESSEE. HE HAS CONSIDERED C.S. SOFTWARE ENTE RPRISES AND MERCURY OUTSOURCING MANAGEMENT LIMITED AS COMPARABL ES FOR DETERMINING AVERAGE PLI. FURTHER, HE HAS GIVEN 2% FROM THE AVERAGE PROFIT MARGIN TOWARDS RISK ADJUSTMENT. HE HAS ALSO GIVEN DEDUCTION UNDER SECTION 92C(2) AT +/(-)5% PLA CING RELIANCE ON THE DECISION OF ITAT, KOLKATA IN THE CA SE OF DEVELOPMENT CONSULTANTS (P) LIMITED (115 TTJ 577). 6. THE CIT (A) ALSO GRANTED WORKING CAPITAL ADJUS TMENT AT 2%. FINALLY, HE DIRECTED TO CONSIDER THE FOLLOWING COMPARABLES FOR DETERMINING THE PLI. SL.NO. NAME OF THE COMPANY PROFIT MARGIN 1 FORTUNE INFO TECH LTD. 36.98 2 NUCLEUS NET SOFT & GIS 16.87% ITA NO.594/HYD/09 KNOAH SOLUTIO NS PVT.LTD. HYD. L.L ========================== 8 INDIA LTD 3 TRICOM INDIA LTD. 45.74% 4 VISHAL INFORMATION TECHNOLOGIES LTD. 48.13% 5 SPANCO TELESYSTEMS AND SOLUTIONS LTD. (SEGMENTAL) 41.81% 6 WIPRO BPO SOLUTIONS LTD. 33.51% 7 CS SOFTWARE ENTERPRISE LTD. 12.81% 8 MERCURY OUTSOURCING MANAGEMENT LTD. 5.70% AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 7. THE LEARNED AUTHORIZED REPRESENTATIVE DREW OUR ATTENTION TO PAGE-5 OF THE ASSESSEES PAPER BOOK WH ICH READS AS FOLLOWS:- REVISED MARGIN ANALYSIS-INCLUDING LOSS MAKING COMPA NIES:- S L.NO. PARTICULARS MARGIN 1. ALLSEC TECHNOLOGIES LIMITED -37.80% 2. FORTUNE INFOTECH LTD. 34.02% 3. NUCLEUS NET SOFT & GIS INDIA LTD. 16.53% 4. PROGEON LTD. -4.22% 5. TRICOM INDIA LTD. 45.87% 6. VISHAL INFORMATION TECH. LTD. 48.32% 7. SPANCO TELESYSTEMS & SOLUTIONS LTD. 39.05% 8. WIPRO BPO SOLUTIONS LTD. 30.63% 9. C.S. SOFTWARE ENTERPRISE LTD. 12.81% ITA NO.594/HYD/09 KNOAH SOLUTIO NS PVT.LTD. HYD. L.L ========================== 9 10. GENESYS INTERNATIONAL CORPN LTD. 14.87% 11. KIRLOSKAR COMPUTER SERVICES LTD. 12.49% 12. MERCURY OUTSOURCING MANAGAEMENT LTD. 5.70% 13. PENTASOFT TECHNOLOGIES LTD. 19.79% 14. FLEXTRONICS SOFTWARE SYSTEMS - 33.04% 15. TULSYAN TECHNOLOGIES LTD. - 16.7 1% 16. TRANSWORKS INFORMATION SERVICES LTD. -12.18% ARITHMETIC MEAN 11.01% LESS WORKING CAPITAL ADJUSTMENT 2.00% ADJUSTED ARITHMETIC MEAN 9.01% LOWER RANGE 3.56% UPPER RANGE 14.46% KNOAH INDRAS MARGIN AS PER TP ORDER 15.76% ADJUSTMENT NIL ACCORDING TO HIM, THE COMPANIES WHICH ARE SHOWING L OSS I.E. ALLSEC TECHNOLOGIES LIMITED, PROZEN LIMITED, FLEXTRONHICS SOFTWARE SYSTEMS (SEGMENTAL), TULSYAN TECHNOLOGIES LIMITED AND TRANS WORKS INFORMATION SERVICES LIMITED ARE TO BE CONSIDERED AS COMPARABLE S FOR DETERMINING ALP THOUGH THE RESULTS OF THEM SHOW LOSS. 8. FURTHER, IT IS SUBMITTED THAT MERELY BECAUSE A C OMPARABLE COMPANY IS MAKING LOSS, IT CANNOT BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE PURPOSE OF COMPUTATION OF ALP. FOR THIS PURPOSE, HE RELIED ON THE ORDER OF THE SPECIAL BENC H OF ITAT IN THE CASE OF DCIT VS. QUARK SYSTEMS (P) LTD. (38 SOT 30 7). IT IS FURTHER SUBMITTED THAT THE COMPANIES ARE SHOWING AB NORMAL PROFITS AND THAT PROFIT HAD COME FROM OTHER THAN BUSINESS O F SOFTWARE, ITA NO.594/HYD/09 KNOAH SOLUTIO NS PVT.LTD. HYD. L.L ========================== 10 THEN THE RESULT OF THAT COMPANY IS TO BE EXCLUDED F ROM COMPARABLES. FOR THIS PURPOSE, HE RELIED ON THE FO LLOWING DECISIONS:- I) PUNE BENCH IN THE CASE OF EGAIN COMMUNICATION PRIVATE LIMITED VS. INCOME-TAX OFFICER, WARD-1(4), PUNE (23 SOT 385) (PUNE). II) DELHI BENCH OF ITAT IN THE CASE OF SAPIENT CORP ORATION (P)LTD. VS. DCIT (11 TAXMANN. COM 69 (DEL). III) BANGALORE BENCH IN THE CASE OF PHILIPS SOFTWAR E CENTRE (P) LTD. VS. ACIT ( 26 SOT 226 (BANG.). IV) BANGALORE BENCH A IN THE CASE OF SAP LABS IND IA (P) LIMITED VS. ACIT ( 44 SOT 156) (BANG.) V) DELHI BENCH A IN THE CASE OF ADOBE SYSTEMS IND IA (P) LTD. VS. ADDL. CIT ( 44 SOT 49 (DELHI ) (URO). 9. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE SUBMITTED THAT FOR DETERMINING THE ALP IS DEPENDED OF FACTS OF EACH CASE AND AS SUCH THE CI T (A) HAS NOT CONSIDER ED SOME OF THE COMPANIES AS COMPARABLES IN HIS IMPUGNED ORDER. BE ING SO, HE RELIED ON THE ORDER OF THE CIT (A). 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE DETER MINATION OF THE ALP IS DEPENDED UPON THE FACTS OF A PARTICULAR CASE . IN CERTAIN CASES, WHERE IDENTICAL OR ALMOST SIMILAR UN-CONTROL LED TRANSACTION IS AVAILABLE FOR COMPARISON, DETERMINATION OF ALP I S THE EASY TASK. ITA NO.594/HYD/09 KNOAH SOLUTIO NS PVT.LTD. HYD. L.L ========================== 11 HOWEVER, IT IS NOT SO IN MOST OF THE TRANSACTIONS, AND RARELY, ONE IS ABLE TO LOCATE AN IDENTICAL TRANSACTION. IN SUCH C ASES, ALP IS DETERMINED BY TAKING RESULTS OF A COMPARABLE TRANSA CTION IN COMPARABLE CIRCUMSTANCES AND MAKE SUITABLE ADJUSTME NTS FOR THE DIFFERENCES. THE FUNDAMENTAL REQUIREMENT IN ANY OF THE METHODS SELECTED, IF THE SELECTION OF COMPARABLES, FOR BE NCH-MARKING INTERNATIONAL TRANSACTIONS. THIS SELECTION OF COMP ARABLES SHOULD BE BASED ON FUNCTIONAL, ASSET AND RISK ANALYSIS OF BOT H THE PARTIES AND THE TRANSACTIONS. THE PROVISIONS OF SECTION 92C A LSO PROVIDE SCOPE FOR CARRYING OUT ADJUSTMENTS IN CASES WHERE THERE A RE SOME DIFFERENCES OR VARIATIONS TO MAKE THE TRANSACTIONS, COMMERCIALLY COMPARABLES, FOR THE PURPOSE OF BENCH MARKING. IN OTHER WORDS, AN UNCONTROLLED TRANSACTION SELECTED FOR BENCH-MARK ING SHOULD BE ADJUSTED BY EMPLOYING CERTAIN TECHNIQUES LIKE FAR ANALYSIS, TO BE SELECTED ON ITS PECULIAR FACTUAL MATRIX, FOR THE PU RPOSE OF ENABLING COMPARISON OF THE SAME WITH THE CONTROLLED INTERNAT IONAL TRANSACTION SO THAT THE DIFFERENCES OR VARIATIONS A RE IRONED OUT OR MINIMISED. THE UNDERLYING PRINCIPLE BEING THAT ONL Y LIKES CAN BE COMPARED WITH THE LIKE. THE ADJUSTMENTS ARE SUGGES TED TO ACHIEVE THE OBJECT OF TESTING AND TRYING TO SEE IF BOTH THE PARTIES OR/AND THE TRANSACTION ARE SIMILAR OR MERELY SIMILAR. AT T IMES, EVEN AFTER ADJUSTMENTS THE TRANSACTION/S OR PARTIES SOUGHT TO BE COMPARED MAY NOT BE IDENTICAL OR THERE MIGHT NOT BE POSSIBIL ITY OF ADJUSTMENT. THIS IS A VERY SUBJECTIVE EXERCISE AND FACT BASED. IN THE PRESENT CASE, THOUGH TPO CONSIDERED THE DATA OF M/S ALLSEC TECHNOLOGIES LIMITED AND PROGEON LIMITED AS COMPARA BLES, ITA NO.594/HYD/09 KNOAH SOLUTIO NS PVT.LTD. HYD. L.L ========================== 12 THE SAME WERE NOT CONSIDERED BY THE CIT (A) ON THE REASON THAT THE DATA OF THESE COMPANIES ARE NOT COMPARABLE . THE FINANCIAL RESULT OF M/S ALLSEC TECHNOLOGIES LIMITED WAS SHOWN FOR 15 MONTHS PERIOD AND THE DIRECT REPORT OF THIS COMPANY CLEARLY STATED THAT DUE TO ABNORMAL CIRCUMS TANCES DURING THE YEAR, PROFITS WERE ADVERSELY AFFECTED. THE EXPANDED FACILITY COULD NOT FULLY BE UTILIZED DUE T O REASON OF POLICY CHANGE OF CLIENTS. THIS COMPANY SHOWED A LO SS OF 15.03 CRORES AGAINST THE PROFIT OF 2.72 CRORES IN T HE EARLIER YEAR AND RS.8.57 CRORES IN THE SUBSEQUENT YEAR. THE EXTRA EXPENSES INCURRED ON ACCOUNT OF CONNECTIVITY COST, DATA BASE COST AND EMPLOYEES COST WERE NOT PERTAINED TO ONLY THE TRANSACTION OF THE CURRENT YEAR. THESE EXPENSES CA NNOT BE RELATED TO THE TRANSACTIONS OF THE CURRENT YEAR. DU E TO THESE EXTRA EXPENSES, THE PROBABILITY OF THE COMPANY HAS BEEN ADVERSELY AFFECTED. AS SUCH, IT IS NOT POSSIBLE TO MAKE REASONABLE ACCURATE ADJUSTMENT TO ELIMINATE THE MAT ERIAL EFFECT OF THE DIFFERENCES BETWEEN THE TRANSACTIONS OF THIS COMPANY. AS SUCH THE DATA OF THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE TO DETERMINE THE ALP. THIS VIEW OF OURS IS SUPPORTED BY THE ORDER OF THE TRIBUNAL I N THE CASE OF DELHI BENCH OF TRIBUNAL IN THE CASE OF SONY INDI A PVT. LTD. (114 ITD 448) (DELHI) WHEREIN HELD THAT PARA ( 123.2) ITA NO.594/HYD/09 KNOAH SOLUTIO NS PVT.LTD. HYD. L.L ========================== 13 WHILE COMPARING CONTROLLED AND UNCONTROLLED TRANSAC TIONS OR ENTERPRISES, ONE HAS TO LOOK FOR THE DIFFERENCES AN D WHETHER SUCH DIFFERENCES ARE LIKELY TO AFFECT THE PRICE, CO ST CHARGED OR PAID OR PROFIT ARISING FROM THE TRANSACTION IN THE OPEN MARKET, IT HAS FURTHER TO BE EXAMINED WHETHER A REASONABLE ACCURATE ADJUSTMENT CAN BE MADE TO ELIMINATE THE MATERIAL EF FECT OF THE DIFFERENCES BETWEEN THE TRANSACTIONS OR ENTITIES. IF A REASONABLE ACCURATE ADJUSTMENT FOR THE DIFFERENCE T O ELIMINATE MATERIAL EFFECT OF THE DIFFERENCES CANNOT POSSIBLY BE MADE, THEN SUCH COMPARABLES (UNCONTROLLED) ARE TO BE REJECTED. SAME VIEW WAS TAKEN BY THE BANGALORE BENCH IN THE C ASE OF PHILIPS SOFTWARE CENTRE (P) LTD. VS. ACIT (26 SOT 2 26) (BANG.) 11. SIMILAR IS THE POSITION IN THE CASES OF PROGEON LIMITED, FLEXTRONICS SOFTWARE SYSTEMS, TULSYAN TECHNOLOGIES LIMITED AND TRANS-WORKS INFORMATION SERVICES LIMITED. FIN ALLY, WE WANT TO MAKE IT CLEAR THAT THE RESULT OF ABOVE COMP ANIES IS NOT CONSIDERED AS COMPARABLES WITH THE ASSESSEES COMPA NY TRANSACTIONS ON THE REASON THAT THE DATAS OF THESE COMPANIES ARE NOT COMPARABLE WITH THE ASSESSEES COMPANY. 12. THE LEARNED AUTHORIZED REPRESENTATIVE OF THE A SSESSEE ALSO PLEADED BEFORE US THAT THE COMPANIES WHICH ARE SHOW ING EX- ORDINARY PROFITS ARE ALSO TO BE EXCLUDED FROM THE C OMPARABLES IF ITA NO.594/HYD/09 KNOAH SOLUTIO NS PVT.LTD. HYD. L.L ========================== 14 THE RESULT OF THE LOSS MAKING COMPANIES ARE IGNORED . HOWEVER, HE HAS NOT POINTED OUT WHETHER ANY EX-ORDINARY INCO ME HAS BEEN TAKEN INTO ACCOUNT FOR DETERMINING THE PROFIT MARGIN IN CASES OF TRICOM INDIA LIMITED, VISHAL INFORMATION T ECHNOLOGIES LIMITED, SPANCO TELE-SYSTEMS AND SOLUTIONS LIMITED. BEING SO, WE ARE UNABLE TO APPRECIATE THE ARGUMENTS OF THE LE ARNED AUTHORIZED REPRESENTATIVE OF THE ASSESSEE. 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25-01-2012 . SD/- SD/- (CHANDRA P OOJARI) (H.S. SIDHU) ACCOUNTANT MEMBER. JUDICIAL MEMBER . DT/- 25-01-2012. COPY FORWARDED TO: 1. KNOAH SOLUTIONS PVT. LTD., 188 & 189, PHASE - II, KAVURI HILLS, MADHAPUR, HYDERABAD. 2. 3. 4. 5. JMR * ITO, WARD-2(1), HYDERABAD. CIT (A)-III, HYDERABAD. CIT , AP, HYDERABAD. THE DR., ITAT, HYDERABAD.