ITO, New Delhi V. M/s. Heartland Delhi Transcription & Services Pvt. Ltd., New Delhi

ITA 6043/DEL/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81819 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 30-07-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 05-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: YOGESH KUMAR VERMA
• Assessee Lawyers: ARUN CHABRA
• Keywords: Transfer pricing; International transaction; Working capital adjustments

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SHRI T.S.KAPOOR , ACCOUNTANT MEMBER I.T.A .NO. - 6043/DEL/2012 ( ASSESSMENT YEAR - 2005 - 06 ) CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) ( ASSESSMENT YEAR - 2005 - 06 ) HEARTLAND DELHI TRANSCRIPTION & SERVICES PVT. LTD., PLOT NO.14, SAGAR TOWER, DISTRICT CENTRE, JANAKPURI, NEW DELHI. PAN - AAACH8666L (APPELLANT) VS. ITO, WARD - 12(3), NEW DELHI (RESPONDENT) APPELLANT BY: SH. YOGESH KUMAR VERMA RESPONDENT BY: SH. ARUN CHABRA, CA ORDER PER DIVA SINGH, JM I.T.A .NO. - 6043/DEL/2012 THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER DATED 28.09.2012 OF CIT - XX, NEW DELHI PERTAINING TO 2005 - 06 ASSESSMENT YEAR ON THE FOLLOWING GROUNDS: - ITO, WARD - 12(3), NEW DELHI (APPELLANT) VS HEARTLAND DELHI TRANSCRIPTION & SERVICES PVT. LTD., PLOT NO.14, SAGAR TOWER, DISTRICT CENTRE, JANAKPURI, NEW DELHI. PAN - AAACH8666L (RESPONDENT) 2 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) 1. WHETHER ON THE FACTS AND IN LAW, THE LD. CIT(A ERRED IN DIRECTING TO DELETE ADDITION ON A/C OF ADJUSTMENT OF ARM S LENGTH PRICE SINCE: (I) THE ASSESSEE HAS ITSELF INCLUDED VISHAL TECHNOLOGIES LTD. IN ITS TP STUDY REPORT AND THIS BUSINESS MODEL DOES NOT IMPACT THE FINANCIAL PROFILE HENCE IT SHOULD NOT BE EXCLUDED AS A COMPANY. MOREOVER, IT IS NOT DEMONSTRATED THAT THE MARKETING UNIT HAS MATERIAL IMPACT ON THE PERFORMANCE OF A COMP ANY. (II) THE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE THAT THE DIFFERENCE IN THE WORKING CAPITAL DEPLOYED IS MAKING A DIFFERENCE IN MARGIN EARNED BY THE ASSESSEE AND THE COMPARABLES. 2. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIGHT TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUND(S) OF APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEAL. 2. THE RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSEE FILED ITS RETURN ON 27.10.2005 DECLARING AN INCOME OF RS.24,710/ - . THE SAID RETURN WAS PROCESSED U/S 1 43(1) AND THEREAFTER PICKED UP FOR SCRUTINY BY ISSUANCE OF NOTICE U/S 143(2) ALONGWITH NOTICE U/S 143(1) ACCOMPANIED BY QUESTIONNAIRES ETC. THE ASSESSEE COMPANY AT THE RELEVANT POINT OF TIME WAS INVOLVED IN THE BUSINESS OF PROVIDING IT ENABLE SERVICES IN THE AREA OF MEDICAL TRANSCRIPTION TO ITS GROUP COMPANIES. THE ASSESSEE IS A 100% EOU UNDER THE STP SCHEMES OF THE DEPARTMENT OF ELECTRONICS, GOVERNMENT OF INDIA. THE ASSESSEE IS A SUBSIDIARY OF HEARTLAND ASIA (MAURITIUS) LIMITED WITH 99.99 PERCENT OF SHA REHOLDING HELD BY IT AND 0.01 PERCENT HELD BY HEARTLAND MEDICAL INFORMATION SERVICES INC., USA. 2.1. THE ASSESSEE COMPANY SELECTED TRANSACTIONAL NET MARGIN METHOD (HEREINAFTER REFERRED AS TO TNMM ) WITH OPERATION PROFIT/TOTAL COST (HEREINAFTER REFERRED AS TO OP/TC ) AS THE PROFIT LEVEL INDICATOR (HEREINAFTER REFERRED AS TO PLI ). THE ASSESSEE SELECTED 22 COMPARABLES WHICH HAD AN AVERAGE PLI OF 12%. RELYING ON THE SAME IT WAS STATED IN THE TP DOCUMENTATION THAT THE INTERNATIONAL TRANSACTION WAS AT ARM S LENGTH. HOWEVER THE TPO REJECTED 12 COMPANIES FROM THE SET OF 3 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) COMPARABLES SUBMITTED BY THE ASSESSEE AND ARRIVED AT THE AVERAGE MARGIN OF THE ACCEPTED COMPARABLES AT 21.17%. THIS RESULTED IN THE ADDITION BEING MADE . 2.2. THE SAID APPROACH OF THE TPO WAS CHALLENGED BEFORE THE CIT(A). SPECIFIC CHALLENGE WAS POSED TO 2 COMPARABLES NAMELY NUCLEUS NETSOFT & GIS (INDIA) LTD. AND VISHAL INFORMATION TECHNOLOGIES LTD. THE A SSESSEE OBJECTED TO THE INTERPRETATION OF THE PROVISO TO SECTION 92C(2) OF THE IT ACT AND ON THE USE OF SINGLE YEAR DATA BY THE TPO. IT WAS ALSO CONTENDED THAT THE ASSESSEE HAD ASKED FOR WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT BEFORE THE TPO WHICH WAS NOT GIVEN. THE SPECIFIC OBJECTIONS OF THE ASSESSEE FOR THESE COMPARABLES ARE EXTRA CTED FROM THE IMPUGNED ORDER HEREUNDER: - 5. GROUND NO.3, 4, 5, 6, 7, 8 AND 9 ARE ON THE ISSUE OF DETERMINATION OF ARM S LENGTH PRICE. THESE GROUND ARE INTERRELATED AND THEREFORE THEY ARE TAKEN UP TOGETHER FOR ADJUDICATION. 5.1. BRIEF FACTS OF THE CASE ARE AS FOLLOWS: - HEARTLAND DELHI IS A SUBSIDIARY OF HEARTLAND ASIA (MAURITIUS) LIMITED WITH 99.99 PER CENT OF SHAREHOLDING HELD BY IT AND 0.01 PERCENT HELD BY HEARTLAND MEDICAL INFORMATION SERVICES INC., USA. HEARTLAND DELHI IS PRIMARILY ENGAGED IN THE PROVISION OF IT ENABLED SERVICES IN THE AREA OF MEDICAL TRANSCRIPTION TO HEARTLAND MEDICAL INFORMATION SERVICES IN C. THE COMPANY UNDERTAKES THE MEDICAL TRANSCRIPTION SERVICES EXCLUSIVELY FOR HEARTLAND MEDICAL INFORMATION SERVICES INC., USA. THE MEDICAL TRA NSCRIPTION BUSINESS WAS CARRIED OUT BY AN UNDERTAKING OWNED BY THE APPELLANT WHICH IS A 100 PERCENT EXPORT ORIENTED UNIT ('EOU') REGISTERED UNDER THE 'SOFTWARE TECHNOLOGY PARK SCHEME' ('STPI') OF THE DEPARTMENT OF ELECTRONICS, GOVERNMENT OF INDIA (HEREINA FTER REFERRED TO AS 'ELIGIBLE UNDERTAKING'). THE ELIGIBLE UNDERTAKING WAS SET UP DURING THE FINANCIAL YEAR ('FY') 1998 - 99 RELEVANT TO T HE ASSESSMENT YEAR ('AY') 1999 - 2000. HEARTLAND DELHI, IS AN IT ENABLED BACK - OFFICE MEDICAL TRANSCRIPTION SERVICE PROVIDER TO ITS ASSOCIATED ENTERPRISES AND IS REMUNERATED ON A TOTAL COST PLUS BASIS FOR THE SERVICES PERFORMED. DURING THE FINANCIAL YEAR ('FY ) 2004 - 05 HEARTLAND DELHI PROVIDED BACK OFFICE MEDICAL TRANSCRIPTION SERVICES TO ITS ASSOCIATED ENTERPRISES ('AE ) AMOUNTING TO INR 133,726,989 AT THE MARKUP OF 10% ON TOTAL OPERATING COST. 5.2. TRANSACTIONAL NET MARGIN METHOD (TNMM) WAS THE MOST 4 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) APPROPRIATE METHOD. OPERATING PROFIT/ TOTAL COST (OP /TC) WAS THE PROFIT LEVEL INDICATOR (PLI). THE APPELLANT HAS SELECTE D 22 COMPARABLES WHICH HAD AN AVERAGE PLI OF 12%. THEREFORE, THE TP DOCUMENTATION JUSTIFIED THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE APPELLANT. 5.3. THE TPO HAS REJECTED 12 COMPA NI ES FROM THE SET OF COMPARABLES AND ARRIVED AT THE AVERAGE MARGIN OF THE COMPARABLES AT 21.17% AND THEREFORE THE DIFFERENCE OF ARM'S LENGTH MARGIN WAS ADDED TO INTERNATIONAL TRANSACTION OF THE APPELLANT. 5.4. THE APPELLANT HAS OBJECTED TO INCLUSION OF TWO COMPARABLES, NAMELY, NUCLEUS NETSOFT & GIS (INDIA) LTD. AND VISHAL INFORMATION TECHNOLOGIES LTD. THE APPELLANT HAS OBJECTED TO THE INTERPRETATION OF PROVISO TO SECTION 92C(2) OF THE IT ACT AND ON THE USE OF SINGLE YEAR DATA BY THE TPO. THE APPELLANT HAD ALSO ASKED FOR WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT BEFORE THE TPO WHICH WAS NOT GIVEN. THESE ISSUES ARE DISCUSSED AND DECIDED IN THE FOLLOWING PARAGRAPHS . 6. NUCLEUS NETSOFT & GIS INDIA LTD: 'NUCLEUS NETSOFT & GIS INDIA LTD IS A PART OF NUCLEUS GROUP. THE COMPANY IS FOCUSED IN ENABLING SPATIAL FULFILLMENT OF VALUE TO BUSINESSES AND INDIVIDUAL USERS WORLDWIDE. THE OFFERINGS OF THE COMPANY COMPRISING OF PRODUCT AS WELL AS SOLUTIONS INCLUDE LOCATION - BASED SERVICES, WEB M APP I NG, SUP PLY CHAIN MANAGEMENT, REMOTE SENSING, DIGITAL PHOTOGRAMMETRY, ETC. THE COMPANY IS ALSO ENGAGED IN THE DEVELOPMENT OF CERTAIN SOFTWARE PRODUCTS. PER THE WEBSITE OF THE COMPANY, THE PRODUCT OFFERINGS INCLUDE NUCLEUS A VL AND DATALOGGER. THE RELEVANT EXTRACTS FROM THE WEBSITE OF THE COMPANY ARE ANNEXED VIDE ANNEXURE A FOR YOUR KIND PERUSAL. ALSO, PER THE SEGMENTED INFORMATION AS DISCLOSED IN THE ANNUAL REPORT OF THE COMPANY FOR FY 2005 - 06, WE NOTE THE COMPANY HAS CATEGORIZED ITS OPERATIONS INTO THREE SEPARATE LINES OF BUSINESS VIZ; A) INFORMATION TECHNOLOGY ENABLED SERVICES AND SOFTWARE DEVELOPMENT; B) PORTFOLIO MANAGEMENT SERVICE; AND C) INVESTMENT ACTIVITIES. PER THE DISCLOSURES IN TERMS OF THE ANNUAL REPORT, NUCLEUS SECURITIES LIMITED, OPERATES ONLY WITH CATEGORY (B) AND (C) SERVICES. ALSO, THE SERVICES CARRIED ON BY THE AMALGAMATED COMPANY (I. E NUCLEUS NETSOFT & GIS INDIA LTD) ARE NEITHER SEGMENTED INTO IT ENABLED SERVICE NOR INTO SOFTWARE DE VELOPMENT SERVICE. FURTHER, THOUGH THE NOTES TO ACCOUNTS OF THE COMPANY HAS PROVIDED FOR A POLICY OF RECOGNIZING REVENUE FROM IT ENABLED SERVICES AND SOFTWARE DEVELOPMENT S ERVICE BUT THERE ARE NIL REVENUES FROM THE SAID STREAMS. THE RELEVANT EXTRACTS OF TH E ANNUAL REPORT ARE PROVIDED VIDE ANNEXURE B FOR YOUR KIND PERUSAL. 5 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) BEARING IN MIND THE AFORESAID, YOUR ASSESSEE WOULD LIKE TO SUBMIT THAT IT ACTS AS CAPTIVE SERVICE PROVIDER ENGAGED IN PROVIDING IT ENABLED SERVICE (MEDICAL TRANSCRIPTION), THE SAME HAS B EEN ELUCIDATED IN TERMS OF TRANSFER PRICING : DOCUMEN TATIO N FOR THE RELEVANT YEAR UNDER CONSIDERATION. ACCORDINGLY, NUCLEUS NETSOF T & GIS INDIA LTD., (ENGAGED IN PROVIDING IT ENABLED SERVICES AS WELL AS DEVELOPMENT OF SOFTWARE PRODUCT) SHOULD NOT BE TAKEN A S A COMPARABLE FOR DETERMINING THE ARM'S LENGTH P RI CE. FURTHER, AS EVIDENT IN TERMS OF FINANCIAL DISCLOSURES MADE BY NUCLEUS NETSOFT & GIS INDIA LID., THAT THE REVENUES FOR THE PERIOD UNDER CONSIDERATION ARE NOT GENERATED BY PERFORMING THE FUNCTIONS AKIN TO THOSE PERFORMED BY YOUR ASSESSEE. SOFTWARE DEVELOPMENT CANNOT BE EQUATED WITH PROVISION OF IT - ENABLED SERVICES, DUE TO THE DIFFERING SKILL SETS, CUST OMER REQUIREMENTS AND DELIVERABLES, LEADING TO VARYING PROFIT MARGINS. THIS MAKES IT ESSENTIAL TO BIFURCATE SOFTWARE DEVELOPMENT AND ITES REVENUES, FOR PURPOSES OF COMPARING THE ITES SEGMENT WITH YOUR APPELLANT. IN VIEW OF THE ABOVE, WE HUMBLY SUBMIT THAT THE COMPANY SHOULD BE REJECTED AS A COMPARABLE WHILE DETERMINING THE ARM'S LENGTH PRICES OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY YOUR APPELLANT. FURTHER, DURING THE FY 2004 - 05, THE COMPANY WAS IN THE PROCESS OF BEING AMALGAMATED WITH NUCLEUS SECUR ITIES LTD., WHICH FINALLY BECAME EFFECTIVE FROM APRIL 1, 2005. YOUR APPELLANT WOULD LIKE TO SUBMIT THAT DUE TO THE AMALGAMATION, THERE MAY BE ABNORMAL VARIATIONS IN THE FINANCIALS OF THE COMPANY. IT SHOULD ALSO BE NOTED THAT THE COMPANY HAS BEEN WITNESSING ABNORMAL VARIATIONS IN THEIR OPERATING MARGIN WHEN ANALYZED OVER A PERIOD OF THREE YEARS. FOR YOUR GOOD SELF'S PERUSAL WE HAVE TABULATED THE MARGIN OF THE COMPANY AS BELOW: COMPANY NAME UNADJUSTED OP/TC MAR - 03 MAR - 04 MAR - 05 NUCLEUS NETSOFT & GIS INDIA LTD. - 17% 16% 40% IN RESPONSE TO ABOVE THE LD. TPO REPLIED AS UNDER 'IT MAY ALSO BE POINTED OUT THAT THE AMALGAMATION IN THE COMPANY HAS TAKEN PLACE AFTER 31.03.2005, AND HENCE THE ARGUMENT THAT THE SERVICES HAVE BEEN CARRIED ON BY THE AMALGAMATED COMPANY IS NOT TENABLE. AS IS CLEAR FROM THE ABOVE, THE APPELLANT HAD ITSELF INCLUDED THE ABOVE COMPANY IN THE COMPARABLE FOR THE REASON THAT IT IS ENGAGED IN ITES. THE CONTENTION OF APPELLANT TO EXCLUDE THE SAME NO W FROM THE LIST OF COMPARABLES IS WITHOUT CONCRETE BASIS AS REASONS GIVEN FOR IT S EX CLUSION DO NOT CARRY ANY WEIGHT. ' ON THE ABOVE ARGUMENTS BY LD. TPO, WE HUMBLY SUBMIT THAT IT WAS ONLY PROPOSED MERGER AND ACQUISITION ACT IV ITY DUE TO WHICH NUCLEUS NETSOFT AND GIS INDIA LIMITED EARNED ABNORMAL MARGINS IN FY 2004 - 05. D URING THE FY 2004 - 05, NUCLEUS NETSOFT AND GIS INDIA LIMITED EARNED 6 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) AN OP/TC MARGIN OF 40% WHICH IS NOT A TRUE REFLECTION OF THE ITES INDUSTRY. REASONS FOR DECISION: 6.1. I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT AS WELL AS THE ORDER OF THE TPO. FROM THE PERUSAL OF THE AUDITED ACCOUNTS OF NUCLEUS NETSOFT & GIS (INDIA) LTD., IT IS CLEAR THAT THERE WAS AN AMALGAMATION PROCESS DURING THIS YEAR. THE AMALGAMATION CAME IN TO EFFECT FROM 01.04.2005. THE ABNORMAL INCREASE IN THE PROFIT MARGIN OF THE COMPANY AS COMPARED TO THE EARLIER YEAR MAY OR MAY NOT DUE TO THE IMPACT OF THE PROCESS. HOWEVER, AS THE AMALGAMATION CAME INTO EFFECT FROM THE NEXT YEAR, THE INDEPENDENT EXISTENC E OF THE COMPANY STANDS CLEAR FOR THE FY 2004 - 05. IN VIEW OF THIS, I DO NOT FIND ANY MERIT IN THE SUBMISSION OF THE APPELLANT. THEREFORE, THIS COMPANY STAYS IN THE SET OF COMPARABLES. 7. VISHAL INFORMATION TECHNOLOGIES LTD.: THE SUBMISSION OF THE APPELLANT IN THIS REGARD IS REPRODUCED BELOW: (THE APPELLANT VIDE HIS SUBMISSION DATED JUNE 17, 2008 AND AUGUST 25, 2008 (PLEASE REFER APPENDIX - A, PAGE NO. 770 AND 793 OF PAPER BOOK) BEFORE LD. TPO HAS SUBMITTED THE REASONING FOR REJECTING THE COMPANY. IN ADDITION TO THE SUBMISSIONS MADE BEFORE LD. TPO THE APPELLANT HUMBLY SUBMITS THAT, PER WEBSITE, THE COMPANY IS ENGAGED IN IT ENABLED SER V ICE PARTICULARLY IN THE AREA OF PRINT PRODUCTION INDUSTRY. THE SERVICES INCLUDE DATA CONV ERSION, MICROFILMING AND MICROFILM SCANNING , DATA AND DOCUMENT MANAGEMENT, DATA PROCESSING, DIGITAL LIBRARY MANAGEMENT ETC. HOWEVER, AS PER THE ANNUAL REPORT OF THE COMPANY (PLEASE REFER APPENDIX - 7, PAGE NO.958 OF PAPER BOOK) IT IS EVIDENT THAT THE COMPANY OUTSOURCES ITS WORK TO THE THIRD PARTY VENDORS (PERCENTAGES OF DATA ENTRY CHARGES AND VENDOR PAYMENTS TO SALES ARE IN THE RANGE OF 50% ) . A BRIEF SNAPSHOT OF THESE PAYMENT AS A PERCENTAGE OF SALES HAVE BEEN PROVIDED BELOW FOR YOUR EASE OF REFERENCE. PARTICULARS 2003 - 04 2004 - 05 2005 - 06 DATA ENTRY AND VENDOR PAYMENTS 76,928,836 113,511,647 114,914,563 SALES 138,822,227 208,233,200 256,4428,476 DATA ENTRY CHARGES AS A % OF SALES 55.42% 54.51% 44.81% THE ABOVE TABLE DEPICTS THE PERCENTAGE OF DATA ENTRY CHARGES ARE IN THE RANGE OF 45% - 55% OF THE SALES OF THE COMPANY. FROM THE AFORESAID ANALYSIS IT MAY BE CONCLUDED THAT THE OPERATING MODEL OF THE COMPANY IS DIFFERENT FROM THAT OF YOUR APPELLANT AND CONSEQUENTLY THE MARGINS EARNED BY VISHAL INFORMATION TECHNOLOGIES LIMITED, ARE REFLECTIVE OF THE FUNCTIONS PERFORMED BY IT WHICH ARE NOT AKIN TO THE FUNCTIONAL PROFILE OF YOUR APPELLANT. HON'BLE ITAT IN THE CASE OF M/ S MAERSK GLOBAL SERVICE CENTER (INDIA) 7 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) PVT LTD [ITA NO. 3774/MUM/2011 AND CO NO. 111/MU M/2011] (PLEASE REFER APPENDIX - 2, PAGE NO. 443 OF PAPER BOOK) HELD AS UNDER: 48. INSOFAR AS THE CASES OF TULSYAN TECHNOLOGIES LIMITED AND VISHAL INFORMATION TECHNOLOGIES LIMITED ARE CONCERNED, IT IS NOTICED FROM THEIR ANNUAL ACCOUNTS THAT THESE COMPANIES OUTSOURCED A CONSIDERABLE PORTION OF THEIR BUSINESS. AS THE ASSESSEE CARRIED OUT ENTIRE OPERATIONS BY ITSELF, IN OUR CONSIDERED OPINION, THESE TWO CASES WERE RIGHTLY EXCLUDED . ' FURTHER, WHEREIN THESE PAYMENTS ARE EFFECTED BY THE COMPANY ON A YEARLY BASIS IT MAY BE CONSTRUED THAT VISHAL INFORMATION TECHNOLOGIES LIMITED OPERATES ON A THIRD PARTY BASIS. ACCORDINGLY, THE COMPANY MERELY ACTS AS A LIAISON FOR THE CONTRACTED WORKS BETWEEN THE CONTRACTOR AND THE THIRD PARTY VENDORS THEREBY MERELY FUNCTIONING AS A DISTRIBUTOR FOR SUCH SERVICES. W HEREIN, THE COMPANY IS A DISTRIBUTOR FOR SERVICES, IT DOES NOT PERFORM THE FUNCTION WHICH IS NORMALLY ASSOCIATED IN PERFORMING IT ENABLED SERVICES. FURTHER THE WAGES/TOTAL COST OF VISHAL INFORMATION TECHNOLOGIES LIMITED FOR THE FY 2004 - 05 IS 1.38% AS AGAINST 78.28% OF THE APPELLANT, WHICH CLARIFIES THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE APPELLANT. THE RELEVANT EXTRACTS OF THE ANNUAL REPORT ARE PROVIDED VIDE ANNEXURE FOR YOUR KIND PERUSAL. ALSO, PER THE INFORMATION AVAILABLE ON THE WEBS ITE, THE COMPANY HAS A MARKETING UNIT, VSOFT TECHNOLOGIES UK, WHICH UNDERTAKES TO PERFORM MARKETING ACTIVITIES FOR V I SHAL INFORMATION TECHNOLOGIES. IN THE PROCESS, VISHAL INFORMATION TECHNOLOGIES WOULD STAND TO DIRECTLY BENEFIT FROM THE MARKETING EFFORTS AND CUSTOMER CONTRACTS THAT WOULD BE OBTAINED BY VSOFT TECHNOLOGIES. IN CONTRAST, YOUR APPELLANT DOES NOT HAVE ANY MARKETING A RM AND HENCE DOES NOT BENEFIT FROM ANY SALES PROMOTION ACT IVITY. IT OPERATES STRICTLY OFFSHORE, AS A CAPTIVE MEDICAL TRANSCRIPTION SERVICE PROVIDER. THE RELEVANT EXTRACTS ARE PROVIDED VIDE ANNEXURE FOR YOUR KIND PERUSAL. ACCORDINGLY, YOUR APPELLANT SUBMITS THAT, VISHAL INFORMATION. TECHNOLOGIES LTD., AS A COMPAN Y ACTS AS A DISTRIBUTOR OF SERVICES (OUTSOURCING THE CONTRACTED WORK TO THIRD PARTY VENDORS) AND THEREBY RENDERING THE COMPANY AS ONE NOT BEING FUNCTIONALLY COMPARABLE TO YOUR APPELLANT. AS INDICATED, FACTORS SUCH AS THE CONTROLLING STAKE IN THE COMPANY AN D SYNERGIES ACCRUING FROM ONSITE MARKETING ARE ADDITIONAL FACTORS THAT RENDER THE COMPANY LIABLE FOR REJECTION WHILE DETE RM INING THE A RM 'S LENGTH MARGIN.' REASONS FOR DECISION: - 7.1. THE APPELLANT IS A CAPTIVE UNIT OF ITS AE. THE ENTIRE ACTIVITY OF THE APPELLANT IS CONDUCTED IN HOUSE WHEREAS VISHAL INFORMATION TECHNOLOGIES LTD. OUTSOURCES ITS ACTIVITY. THE BUSINESS MODEL OF THE APPELLANT IS DIFFERENT FROM THIS COMPANY. FOR THE AY 2005 - 06, THE HON'BLE ITAT IN CASE OF MAERSK GLOBAL SERVICE CENTER (I NDIA) PVT LTD 8 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) (SUPRA) HAS HELD THAT VISHAL INFORMATION TECHNOLOGIES LTD. IS NOT A COMPARABLE COMPANY FOR THE REASON THAT IT OUTSOURCED ITS WORK. AS THE FACT AND CIRCUMSTANCES OF THESE TWO CASES ARE SIMILAR, RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BL E ITAT, I HOLD THAT VISHAL INFORMATION TECHNOLOGIES LTD. SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. 3. THE FINDING OF THE CIT(A) THEREON IN PARA 6.1 AND 7.1 IS EXTRACTED FOR READY - REFERENCE . T HE FINDING IN PARA 6.1 IS CHALLENGED BY WAY OF A SPECIFIC GROUND BY THE ASSESSEE IN ITS CO HOWEVER IT WAS NOT PRESSED AT THE TIME OF HEARING AND ONLY THE FINDING ARRIVED AT IN PARA 7.1 IS CHALLENGED BY THE REVENUE I N THE AFORE - MENTIONED FACTS. THE TWO PARAS ARE REPRODUCED HEREUNDER: - 6.1. I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT AS WELL AS THE ORDER OF THE TPO. FROM THE PERUSAL OF THE AUDITED ACCOUNTS OF NUCLEUS NETSOFT & GIS (INDIA) LTD., IT IS CLEAR THAT THERE WAS AN AMALGAMATION PROCESS DURING THIS YEAR. THE AMALGAMATION CAME INTO EFFECT FROM 01.04.2005. THE ABNORMAL INCREASE IN THE PROFIT MARGIN OF THE COMPANY AS COMPARED TO THE EARLIER YEAR MAY OR MAY NOT DUE TO THE IMPACT OF THE PROCESS. HOWEVER, AS THE AMALGAMATION CAME INTO EFFECT FORM THE NEXT YEAR, TH E INDEPENDENT EXISTENCE OF THE COMPANY STANDS CLEAR FOR THE FY 2004 - 05. IN VIEW OF THIS, I DO NOT FIND ANY MERIT IN THE SUBMISSION OF THE APPELLANT. THEREFORE, THIS COMPANY STAYS IN THE SET OF COMPARABLES. 7.1. THE APPELLANT IS A CAPTIVE UNIT OF ITS AE. THE ENTIRE ACTIVITY OF THE APPELLANT IS CONDUCTED IN HOUSE WHEREAS VISHAL INFORMATION TECHNOLOGIES LTD. OUTSOURCES ITS ACTIVITY. THE BUSINESS MODEL OF THE APPELLANT IS DIFFERENT FROM THIS COMPANY. FOR THE AY 2005 - 06, THE HON BLE ITAT IN CASE OF MAERSK GLOBAL SERVICE CENTER (INDIA) PVT. LTD. (SUPRA) HAS HELD THAT VISHAL INFORMATION TECHNOLOGIES LTD. IS NOT A COMPARABLE COMPANY FOR THE REASON THAT IT OUTSOURCED ITS WORK. AS THE FACT AND CIRCUMSTANCES OF THESE TWO CASES ARE SIMILAR, RESPECTFULLY FOLLOWING THE DECISION OF THE HON BLE ITAT, I HOLD THAT VISHAL INFORMATION TECHNOLOGIES LTD. SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. 4. THE LD. CIT DR ADDRESSING THE DEPARTMENT S GRIEVANCE TO THE FINDING IN PARA 7.1 MERELY PLACES RELIANCE UPON THE TPO S ORDER. HOWEVER THE SPECIFIC REASONING TAKEN BY THE CIT(A) ON QUERY WAS NOT OPPOSED BY HIM BY MAKING REFERENCE TO ANY CONTRARY FACT, CIRCUMSTANCE OR POSITION OF LAW . 9 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) 5 . LD. AR ON THE OTHER HAND RELYING UPON THE IMPUGNED ORDE R CONTENDED THAT THE ASSESSEE HAS OBJECTED TO THE SAID COMPARABLE I.E VISHAL INFORMATION TECHNOLOGY LTD. DURING THE ASSESSMENT PROCEEDINGS AS WELL AS BEFORE THE CIT(A). IT WAS ARGUED THAT THE M ERE FACT THAT IT WAS WRONGLY SELECTED I N THE TP DOCUMENTATION BY THE ASSESSEE ITSELF DUE TO WRONG FACTS DOES NOT PRECLUDE THE ASSESSEE FROM MAKING A CLAIM FOR ITS REJECTION BASED ON CURRENT YEAR INFORMATION AND BACKED BY R EAL AND COGENT REASONS. IT WAS HIS SUBMISSION THAT VISHAL INFORMATION TECHNOLOGY AS PER VARIOUS ORDERS OF THE TRIBUN AL RENDERED BY MUMBAI AND DELHI BENCHES HAVE CONSISTENTLY FOR THIS VERY ASSESSMENT YEAR HAS BEEN REJECTED AS A COMPARABLE ON THE REASONING THAT IT HAS OUT SOURCED ITS WORK . RELIANCE WAS PLACED ON ORDER DATED 09.09.2011 FOR 2005 - 06 IN ITA NO. - 7466/MUM/2012 IN THE CASE OF MAERSK GLOBAL SE RVICE CENTER (INDIA) PVT. LTD. AND FOLLOWING THIS DECISION THE DELHI BENCHES IN ORDERS DATED 2.4.2014 AND 28.4.2014 AT PAGES 715 AND 72 5 OF THE PAPER BOOK IN THE CAS E TECHBOOK INTERNATIONAL PVT. LTD. VS ACIT IN ITA NO - 4990/DEL/2011AND ITA NO. 722/DEL/2014 HAS ALSO DIRECTED THE EXCLUSION OF THIS COMPARABLE DESPITE THE FACT THAT IT WAS OFFERED AS A COMPARABLE BY THE ASSESSEE. IT WAS SUBMITTED THAT EVEN THOUGH THE SAID DECISIONS IN THE CASE OF TECHBOOK INTERNATIONAL PVT. LTD. PERTAINS TO 2007 - 08 AND 2009 - 10 ASSESSMENT YEAR HOWEVER T HE FACTS REMAINS THAT IN THE FACTS OF THE PRESENT CASE, THE MATERIAL FACTS ARE SIMILAR INASMUCH IT WAS ARGUED REFERRING TO THE CHART OF ISSUES FILED WHICH CAP TURES THE ASSESSEE S RELIANCE AND CASE LAW SO AS TO ARGUE THAT AS THE EMPLOYEE COST TO SALES RATIO OF 1.38% AS AGAINST 78.28% OF THE ASSESSEE WHOSE VENDOR PAYMENT AND DUTY CHARGES WERE 54% AS WAS ARGUED BEFORE THE CIT(A) AND REPRODUCE D BY HIM AT PAGE 9 OF HIS ORDER. RELIANCE WAS PLACED UPON THE FOLLOWING DECISIONS WHEREIN THE ASSESSEE S WHO WERE ITES SERVICE PROVIDER IN THE FACTS OF 10 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) THE CASE WHERE CONSISTENTLY THE TRIBUNAL WAS PLEASED TO EXCLUDE VISHAL TECHNOLOGIES AS A COMPARABLE: - - TECHBOOKS INTERNATIONAL PVT. LTD. VS ACIT CIR - 1, ITA NO.722/DEL/2014, NOIDA, PARA 5.5, PAGE NO.729 - M/S STREAM INTERNATIONAL SERVICES PVT. LTD. VS ADIT [23 ITR (TRIB) 70; 152 TTJ 553; (2013) 141 ITD 492 (MUMBAI - TRIB)] PARA 19 & 21, PAGE NO.735 - 738 - SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD. VS ITO [IT(TP)A NO.1316/BANG/2012] PARA 15 - 17, PAGE NO.795 - 798 - ACIT VS M/S HAPAG LLOYD GLOBAL SERVICES PVT. LTD. [ITA NO. - 8499/MUM/2010] PARA 5.3, PAGE NO.742 - ITO VS M/S NEXTLINX INDIA PVT. LTD. [(TS - 722 - ITAT - 2012(BANG) - TP)] PARA 9, PAGE NO.749 - COGNIZANT TECHNOLOGY SERVICES PVT. LTD. VS ACIT [28 ITR (TRIB) 125] PARA 19 - 20, PAGE NO. - 755 - 756 - CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P.) ITA NO.1961/HYD/2011, PARA 17, PAGE NO.790 - M/S BRIGADE GLOBAL SERVICES PVT. LTD. VS ITO [ITA NO. - 1494/HYD/2010], PARA 46, PAGE NO. - 994 - BA CONTINUUM INDIA PVT. LTD. VS DCIT, CIR - 1(3), ITA NO.1154/HYD/2011, HYDERABAD, PARA 24 - 27, PAGE NO.772 - 773 - PTC SOFTWARE (INDIA) PVT. LTD. VS ACIT, CIRCLE - 4, ITA NO. - 1605/PN/2011, PUNE, PARA 31, PAGE NO . - 777 - AVINEON INDIA PRIVATE LIMITED VS. DCIT, CIR - 1(1), ITA NO.1606/HYD/2010 HYDERABAD PARA 16, PAGE NO.766 - 24/7 CUSTOMER .COM PVT. LTD. VS DCIT, CIR11(2) I.T.A.NO.227/BANG/2010 PARA 17.3 PAGE NO.801 - M/S GOOGLE INDIA PVT. LTD. VS DICT, CIRCLE - 4, ITA NO.136 8/BANG/2010 PARA 15, PAGE NO.780 6 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND TAKEN OURSELVES THROUGH THE CASE LAW FILED. ON A CONSIDERATION OF THE SAME WE ARE OF THE VIEW CONSIDERING THE JUDICIAL PRECEDENT THAT THE FINDING ARRIVED AT I N THE I M P U G N E D O R D E R DESERVES TO BE UPHELD. THE FACT REMAINS THAT VISHAL HAS A DIFFERENT BUSINESS MODEL IS A CONSISTENT FACT ON RECORD QUA THE SAID COMPARABLE WHICH FINDING HAS NOT BEEN REJECTED BY THE REVENUE. FOLLOWING THE JUDICIAL PRECEDENT THE DEPARTMENTAL GROUND FAILS. 7 . THE FACTS RELATABLE TO GROUND NO - 2 RAISED BY THE REVENUE SHOW THAT DURING THE PROCEEDINGS BEFORE THE TPO, THE ASSESSEE ASK ED FOR WORKING CAPITAL ADJUSTMENT 11 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) IN ORDER TO BRING THE COMPARABLE S TO THE LEVEL OF THE ASSESSEE. THE TPO WHOSE ORDER IS PLACED AT PAGE 254 - 273 (SPECIFIC PAGE 269) PARA 6.4 REJECTED THE SAME HOLDING THAT THE WORKING CAPITAL ADJUSTMENT BASED ON YEAR E ND FIGURES MAY NOT HAVE SUFFICIENT DETAILS . RELYING UPON THE OECD GUIDELINES HE HELD THAT THE RELIANCE PLACED ON YEAR E ND FIGURES IS NO T APPROPRIATE. 8 . AGGRIEVED BY THIS THE ASSESSEE CAME IN APPEAL BEFORE THE CIT(A) WHO CONSIDERING THE ARGUMENTS ADVANCED AND RELYING UPON THE DECISION OF M ENTOR G RAPHICS (NOIDA) PVT. LTD VS. DCIT (2007) 109 ITD 1 (DEL) SPECIFIC PARA 27 AND OECD GUIDELINE S INCLUDING THE DECISION OF THE BAN GLORE BENCH IN PHILIPS SOFTWARE; THE DECISION OF THE DELHI BENCH IN THE CASE OF GAIN COMMUNICATION PVT. LTD. (ITA NO. - 1685(PUNE) OF 2007) ; VEDARIS TECHNOLOGY (PVT.) LTD. 131 TTJ 309 SPECIFIC PARA 6.2 ; AND ALSO THE DECISION IN THE BANGLORE BENCH IN ITA NO1442(BNG)/08 IN TNT INDIA PVT. LTD. VS ACIT CAME TO THE CONCLUSION THAT IN COMPARING THE MARGINS EARNED BY COMPARABLE COMPANIES VIS - - VIS THE ASSESSEE, DIFFERENCE ON ACCOUNT OF WORKING CAPITAL EMPLOYED SHOULD ALSO BE FACTORED INTO. FOR READY - REFERENCE, WE REPRODUCE THE RELEVANT FINDING: - I HAVE EXAMINED THE SUBMISSIONS MADE BY THE ASSESSEE AS WELL AS THE ORDER OF THE TPO. MOST IMPORTANT FACT TO BE KEPT IN MIND IN THIS IS THAT ASSESSEE IS A CAPTIVE ENT ITY PROVIDING DIFFERENT SERVICES TO ITS AE. THE MAJOR CUSTO M ER IS AE. THEREFORE, ASSESSEE HAS NO CREDIT RISK. AS PART OF A MAJOR MNC, ASSESSEE HAS A LOW RISK IN TERMS OF ITS REALIZABLES. THIS REFLECTS IN ITS WORKING CAPITAL REQUIREMENTS. WORKING CAPITAL I S MEASURED BY ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, AND INVENTORIES. INTEREST COST WILL BE HIGH IF THE ACCOUNTS RECEIVABLE TIME CYCLE IS LARGE. INTEREST COST WILL BE LOW IF THE COMPANY CAN PAY ITS LIABILITIES AFTER A LARGER PERIOD OF GAP THEN PAY IT IN A SHORTER PERIOD. HOLDING OF INVENTORY HAS INTEREST COSTS. IF INVENTORY TURNOVER IS FAR A SHORTER PERIOD, INTEREST COST IS LOWER. THESE PARAMETERS AFFECT THE OVERALL RESULTS OF THE COMPANY. BUT IN REALITY, THE IMPACT IS FINANCIAL IN NATURE DUE TO THE REQUIR EMENT OF WORKING CAPITAL (WC). FINANCIAL RESULTS OR INTEREST BURDEN DEPENDS ON (I) HOW THE WC IS FINANCED; EITHER THROUGH OWN SOURCE OR THROUGH BORROWED FUNDS. (II) TERMS AND CONDITIONS OF 12 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) RECEIPTS AND PAYMENTS I.E. TERMS OF PAYMENTS OF DEBTORS AND CREDITO RS (III) INVENTORY MANAGEMENT THROUGH BACKWARD & FORWARD LINKAGES, THE EFFICIENCY OF HOLDING INVENTORY. INTEREST COST IS A FINANCIAL COST. IN ORDER TO COVER THE INTEREST COST, THE MARGIN MAY SEEM TO BE HIGH IN ABSOLUTE TERM, BUT WHEN INTEREST COST IS ACCOUNTED FOR, THE MARGIN CHANGES ITS LUSTER. THEREFORE, WORKING CAPITAL REQUIREMENTS MATERIALLY AFFECT THE M ARGINS OR PRICES, COSTS OR PROFITS. THESE MATERIAL EFFECTS ARE CLEARLY IDENTIFIABLE FROM THE PROFIT & LOSS ACCOUNT AND BALANCE SHEET OF THE TESTED PARTY AS WELL AS OF COMPARABLES. THEREFORE, A REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE M ATERIAL EFFECTS OF SUCH DIFFERENCES AS CONTEMPLATED U/S 10B(3) OF IT RULES. RULE L 0 B(3) OF THE RULES PROVIDES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF: NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTI ONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICES, COSTS OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. SIGNIFICANT DIFFERENCES EXIST IN ECONOMIC CIRCUMSTANCES IN WHICH THE ASSESSEE OPERATES VIS - A - VIS THE COMPARABLES. HENCE, TO IMPROVE THE COMPARABILITY OF IND EPENDENT COMPANIES BY ELIMINATING SUCH DIFFERENCES, WORKING CAPITAL ADJUSTMENTS CAN BE ALLOWED. THE ADJUSTMENT ENSURES THAT THE ABSOLUTE LEVELS OF THE RELEVANT BALANCE SHEET ITEMS ARE NORMALIZED. THE ADJUSTMENT RESULTING FROM THE DIFFERENT LEVELS OF AC COUNTS RECEIVABLE AND ACCOUNTS PAYABLE BETWEEN THE TESTED PARTY AND THE COMPARABLE COMPANIES CAN BE CALCULATED, AS DESCRIBED BELOW. FIRST, DETERMINING THE DIFFERENCE BETWEEN THE TESTED PARTY'S RATIO OF ACCOUNTS RECEIVABLE TO OPERATING COSTS AND THE CORR ESPONDING RATIO OF ACCOUNTS RECEIVABLE TO OPERATING COSTS OF EACH COMPARABLE. THIS DIFFERENCE REPRESENTS THE 'EXCESS' OR 'SHORTAGE' OF ACCOUNTS RECEIVABLE, HELD BY THE TESTED PARTY RELATIVE TO THE COMPARABLE COMPANIES. NEXT, MULTIPLYING THE ABOVE DIFFEREN CE BY AN INTEREST RATE BENCHMARKED IN ORDER TO ARRIVE AT A FIGURE REPRESENTING THE IMPLICIT INTEREST EXPENSE OR BENEFIT TO THE COMPARABLE DUE TO ITS DIFFERENT ACCOUNTS RECEIVABLE CARRYING COSTS. THE PRIME LENDING RATE ( PLR ) (COMPUTED BY TAKING 12 MONTH AVERAGE OF PLR RATES FOR 13 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) RELEVANT FINANCIAL YEAR), CAN BE CONSIDERED FOR ARRIVING AT THE BENCHMARK RATE. SIMILAR ADJUSTMENTS CAN BE MADE TO DETERMINE THE INTEREST CARRYING COSTS ASSOCIATED WITH DIFFERENT LEVELS OF ACCOUNTS PAYABLE BETWEEN THE TESTED PARTY AND EACH OF THE COMPARABLE COMPANIES. LASTLY, THESE ADJUSTMENTS ARE TO BE ADDED TO THE UNADJUSTED OPERA TING MARG IN OF THE COMPARABLE COMPANIES, TO IDENTIFY THE MARG IN THE COMPARABLE WOULD HAVE EARNED, IF IT HAD BEEN OPERATING WITH SIMILAR WORKING CAPITAL POSITION AS THE TESTED PARTY. THE EXACT FORMULA USED TO CALCULATE THE ADJUSTED OPERATING MARG IN CAN BE PRESENTED AS ('C' DENOTES COMPARABLE COMPANY AND 'TP' DENOTES TESTED PARTY). THE FUNCTIONAL AND RISK PROFILE OF A CA PTIVE COMPANY (THE ASSESSEE) IS VASTLY DIFFERENT FROM THE FUNCTIONAL AND RISK PROFILE OF A FULL FLEDGED RISK BEARING SERVICE PROVIDER (POTENTIAL COMPARABLES) IN THE PUBLIC DOMAIN. APPELLANT IS A RISK INSULATED CAPTIVE OFFSHORE SERVICE PROVIDER AND THEREFORE IS OPERATING UNDER ECONOMIC CIRCUMSTANCES THAT WARRANT FURTHER ADJUSTMENTS TO THE MARGINS EAR NED BY THE COMPARABLE COMPANIES IN ORDER TO MAKE THE COMPARISON APPROPRIATE. THEREFORE I HOLD THAT THE CLAIM OF THE APPELLANT FOR WORKING CAPITAL ADJUSTMENT IS REASONABLE AND JUSTIFIED. THIS GROUND OF THE APPELLANT IS SUSTAINED. 9 . AGGRIEVED BY THI S THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. THE LD. CIT DR PLACES RELIANCE UPON THE TPO S ORDER AND SUBMITTED THAT THE ASSESSEE HAS NOT BEEN ABLE TO SHOW THE IMPACT OF WORKING CAPITAL DEPLOYMENT ON COMPARABLES . 10 . THE LD. AR ON THE OTHER HAND RELYIN G UPON THE IMPUGNED ORDER SUBMITTED THAT ADJUSTMENT ON ACCOUNT OF DEPLOYMENT IN WORKING CAPITAL IS REQUIRED TO BE MADE FOR COMPARABILITY ANALYSIS. IT WAS CONTENDED THAT IT IS AN ACCEPTED PRINCIPLE IN TERMS OF RULE 10B(3) OF THE INCOME TAX RULES, 1962 WHI CH PROVIDES FOR ADJUSTMENT TO ELIMINATE THE MATERIAL DIFFERENCES . THE POSITION IT WAS SUBMITTED IS 14 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) ALSO SUBSTANTIATED BY THE OECD GUIDELINES 2010 AND JUDICIAL PRECEDENT IT WAS SUBMITTED ON THE ISSUE IS CONSISTENTLY IN ASSESSEE S FAVOUR .RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS : - - MERCER CONSULTING (INDIA) VS. DCIT - ITA NO.966/DEL/2014, PARA 16.2 PAGE NO - 816 - M/S VERIFONE SALES INDIA PRIVATE VS. ITO - ITA NOS. 5829/DEL/2010 & 607/DEL/2014 PARA 7, PAGE NO - 823 - NORTEL NETWORKS INDIA P. LTD. VS. ACIT - ITA NOS.4765/DEL/2011 & 427/DEL/2013 PARA 11.8 PAGE NO.829 - NAVISITE INDIA PVT. LTD. VS ITO [ITA NO - 5329/DEL/2012] PARA 73, PAGE NO - 837 - QUALCOMM INDIA PVT. LTD. VS. ACIT [ITA NO.5239/DEL/2012] PARA 41, PAGE NO.845 - COWI INDIA PVT. LTD. - ITA NO.5052/DEL/2010 PARA 12, PAGE NO.861 - WESTFALIA SEPARATOR INDIA VS. ACIT [ITA NO.4445/DEL/2007] PARA 14, PAGE NO.865 - MENTOR GRAPHICS (NOIDA) PVT. LTD. - ITA NO.1969/DEL/2006 PARA 27, PAGE NO.874 - VEDARIS TECHNOLOGY (P.) LTD. VS ACIT [(201 0) 1131 TTJ (DEL) 309] PARA 6.2, PAGE NO.883 - DEMAG CRANES & COMPONENTS (INDIA) PVT. LTD. VS DCIT [ITA NO. - 120/PN/2011] PARA 30, PAGE NO. - 900 - CAPGEMINI INDIA PVT. LTD. VS ACIT [ITA NO.7861/MUM/2011] PARA 6, PAGE NO.914 - ITO VS M/S NEXTLINX INDIA PVT. LTD. [I TA NO.454/BANG/2011] PARA 15, PAGE NO.752 - BRIGADE GLOBAL SERVICES PVT. LTD. VS ITO [ITA NO.1494/HYD/2010] PARA 56, PAGE NO.997 - AVINEON INDIA PVT. LTD. VS DCIT [ITA NO.1606/HYD/2010] PARA 9, PAGE NO.762 10 .1. IN THE ABOVE BACKGROUND IT WAS SUBMITTED THAT THE ARGUMENTS OF LD. CIT DR THAT THE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE THE IMPA C T OF THE DIFFERENCE ON THE PROFIT MARGIN OF THE COMPARABLE COMPANIES BY DEPLOYING WORKING CAPITAL IT WAS SUBMITTED IS MISPLACED AS THE ASSESSEE HAS DURING THE AS SESSMENT PROCEEDINGS AND BEFORE THE CIT(A) DDRESSED THE MECHANISM OF UNDERTAKING THE WORKING CAPITAL ADJUSTMENT AND HAS ALSO QUANTIFIED THE EFFECT O F DIFFERENCE IN WORKING CAPITAL ON THE MARGINS EARNED BY THE ASSESSEE AND THE COMPARABLES . FOR THE SAID PURPOSE 15 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) ATTENTION WAS INVITED TO THE FOLLOWING SUBMISSIONS MADE AS PER THE CHART OF ISSUES FILED : - - WORKING CAPITAL ADJUSTMENT AS PER THE METHODOLOGY PRESCRIBED BY THE OECD WAS SUBMITTED BEFORE THE CIT(A) VIDE SUBMISSION DATED SEPTEMBER 24, 2014 (PAGE NO - 366 - 389 PAPER BOOK VOL - II). AS PER THE SAID WORKINGS, THE UNADJUSTED MARGINS OF COMPARABLE COMPANIES WORKED OUT TO 17% AND WORKED OUT TO 14% AFTER ADJUSTING FOR DIFFERING LEVELS OF WORKING CAPITAL. - THEREFORE, THE APPELLANT ADEQUATELY DEMONS TRATED THAT THE DIFFERENCE IN WORKING CAPITAL DEPLOYED MAKES A DIFFERENCE IN MARGIN EARNED BY THE APPELLANT AND THE COMPARABLES AND THERE IS NO VALID REASON WHY SUCH A N ADJUSTMENT SHOULD NOT BE GRANTED IN APPELLANT S CASE. - ALSO WHILE ADJUDICATING APPELLANT S CASE THE LD. CIT(A) HAD GRANTED WORKING CAPITAL ADJUSTMENT TO THE APPELLANT AFTER TAKING INTO ACCOUNT THE WORKINGS SUBMITTED BY THE APPELLANT DURING THE APPELLATE PROCEEDINGS AND AFTER A DETAILED REASONING FOR SUCH ACTIONS. ACCORDINGLY THERE IS NO INFI RMITY IN THE ORDER OF LD. CIT(A AND THEREFORE THE APPELLANT HUMBLY REQUESTS YOUR HONOURS BEEN UPHELD IN THE FOLLOWING CASES: - - M/S TOYOTA KIRLOSKAR MOTOR (P.) LTD. VS. ACIT [IT(TP)A NO.1315/BANG/2011] PARA 50, PAGE NO.920 - ACIT VS. NGC NETWORK (INDIA) PVT. L TD. [ITA NO.5307/M/2008] PARA 15, PAGE NO. - 932. 11 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON A CONSIDERATION OF THE SAME WE FIND THAT THE FINDING ARRIVED AT IN THE FACTS AS THE Y STAND CANNOT BE FAULTED WITH . THE ASSESSEE CONSISTENTLY HAS SOUGHT RIGHT FROM THE ASSESSMENT STAGE THE ADJUSTMENTS FOR WORKING CAPITAL DEPLOYMENT IN ITS COMPARABLE S , THE WORKING HAS BEEN PLACED BEFORE THE AO AND AGAIN BEFORE THE CIT(A). WHEREAS LD. AO ON PRINCIPLE H E LD IT TO BE NOT ALLOWABL E , THE CIT(A) CONSIDERING THE SAME HAS COME TO THE FINDING UNDER CHALLENGE BY THE REVENUE. APART FROM THE GENERAL ARGUMENT WHICH ON FACTS IS FOUND TO BE NOT CORRECT NO INFIRMITY IN THE WORKING ACCEPTED BY THE CIT(A) HAS BEEN BROUGHT TO OUR NOTICE. IN THE AFOREMENTIONED PECULIAR FACTS AND CIRCUMSTANCES BEING SATISFIED BY THE FINDING ARRIVED AT WHICH HAS BEEN REPRODUCED IN THE EARLIER PART OF THIS ORDER, WE DISMISS THE DEPARTMENTAL GROUND. 12 . IN THE RESULT THE DEPARTMENTAL APPEAL IS DISMISSED. 16 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) C O - 7/DEL/2013 13 . THE ASSESSEE HAS ALSO FILED ITS C.O ON THE FOLLOWING GROUNDS BEFORE US: - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) {CIT(A), WHILE DISPOSING THE APPEAL U/S 250 OF THE INCOME TAX ACT 1961 ( THE ACT )} HAS ERRED IN: - 1. USING FINANCIAL INFORMATION OF THE COMPARABLE COMPANIES RELATING TO THE FINANCIAL YEAR ( FY ) 2004 - 05 ALTHOUGH SUCH INFORMATION WAS NOT AVAILABLE TO THE ASSESSEE AT THE TIME OF PREPARATION OF DOCUMENTATION AS PER THE REQUIREMENT OF THE ACT. 2. ACCEPTING NEUCLEUS NETSOFT AND GIS INDIA LIMITED AS A COMPARABLE COMPANY. 3. NOT GRANTING COMPARABILITY ADJUSTMENTS ON ACCOUNT OF DIFFERENCE IN RISK ASSUMED BY THE ASSESSEE VIS - - VIS THE COMPARABLE COMPANIES AND IN IGNORING THE QUA NTIFICATION OF THE SAME: AND 4. REJECTING THE PLEA THAT THE ASSESSEE IS A STPI UNIT WHICH IS ENTITLED TO TAX HOLIDAY AND CONSEQUENTLY THERE IS NO MOTIVATION FOR SHIFTING PROFITS THROUGH TRANSFER PRICING MECHANISM. 14 . AS REFERRED TO RIGHT AT THE OUTSET IT W AS SUBMITTED BY THE LD. AR THAT GROUND NO - 2 & 4 WOULD NOT BE PRESSED BY THE ASSESSEE, THE SAME ACCORDINGLY ARE DISMISSED AS WITHDRAWN. 15 . GROUND NO - 1 ALSO WAS NOT SERIOUSLY ARGUED AS THE SAME IT IS SEEN IS CONTRARY TO THE STATUTORY RULES AND ON QUERY WAS STATED TO HAVE BEEN RAISED SOLELY TO KEEP THE ISSUES ALIVE. THE LD. CIT DR PLACES RELIANCE UPON THE ORDERS OF THE AUTHORITIES BELOW. 16 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON A CONSIDERATION OF THE SAM E WE ARE OF THE VIEW THAT CONSIDERING THE STATUTORY MANDATE GROUND NO.1 RAISE D IN THE CO HAS TO BE DISMISSED. 17 . GROUND NO - 3 RAISED BY THE ASSESSEE IN THE CO WAS NOT ALSO SERIOUSLY PRESSED AS THE SAME ALSO IT WAS STATED W AS FILED ONLY TO KEEP THE ISSUE A LIVE. THE LD. CIT DR PLACES RELIANCE UPON THE ORDERS OF THE AUTHORITIES BELOW. 17 CO - 7/DEL/2013 (IN I.T.A .NO. - 6043/DEL/2012) 1 8 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IT IS SEEN THAT THE SAID ISSUE WAS DECIDED BY THE CIT(A) IN THE FOLLOWING MANNER: - 11. THE APPELLANT HAD CLAIMED THAT THE TPO HAS NOT GIVEN ANY RISK ADJUSTMENT. FROM THE PERUSAL OF THE TP DOCUMENTATION, IT IS CLEAR THAT THE APPELLANT HAS NOT MADE ANY EFFORT TO JUSTIFY SUCH ADJUSTMENT. THE ONUS OF WORKING OF RISK ADJUSTMENT IS ON THE APPEL LANT. AS IT IS, QUANTIFYING RISK IS A DIFFICULT RISK. THE ADJUSTMENT IF AT ALL, IT SHOULD BE MADE TO THE COMPARABLES. IN THE ABSENCE OF REQUISITE INFORMATION ABOUT THE COMPARABLES, THE CLAIM OF THE RISK ADJUSTMENT WAS RIGHTLY NOT GRANTED BY THE TPO. TH EREFORE, THIS GROUND OF THE APPELLANT IS DISMISSED. 19 . IT IS SEEN THAT EVEN BEFORE US THE POSITION REMAINS THE SAME AS NO WORKING OF RISK ADJUSTMENT HAS BEEN PROVIDED BY THE ASSESSEE . IN VIEW OF THE PECULIAR FACTUAL POSITION THE CONSISTENT FINDING ON RECORD QUA THE ISSUE IS UPHELD AS THE ONUS FOR PROVIDING THE RISK ADJUSTMENT SOUGHT TO BE CLAIMED HAS NOT BEEN DISCHARGED BY THE ASSESSEE. ACCORDINGLY GROUND NO 3 OF THE CO IS ALSO DISMISSED. 20 . IN THE RESULT THE APPEAL OF THE REVENUE AND THE CO FILED BY THE ASSESSEE ARE DISMISSED. THE ORDER IS PRONOUNC ED IN THE OPEN COURT ON 1 7 T H OF OCTOBER 2014. S D / - S D / - ( T.S.KAPOOR ) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 1 7 /10 /2014 *AMIT KUMAR/SUBODH KUMAR COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI