M/s Tata McGraw Hill Education Pvt. Ltd., Noida V. ACIT, New Delhi

ITA 6114/DEL/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7871 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 30-03-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 07-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: A M GOVIL
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 92C; 143(3); 92F

Judgement Text

\IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA : JUDICIAL MEMBER ITA NO. 6114/DEL/2012 ASSTT. YR: 2008-09 TATA MCGRAW HILL EDUCATION VS. ACIT CIRCLE 16(1) , PVT. LTD., B-4, SECTOR 63, NEW DELHI. DISTT. GAUTAM BUDH NAGAR, NOIDA, U.P. PAN: AAACT 0179 L ( APPELLANT ) (RESPONDENT) APPELLANT BY : SHRI G.C. SRIVASTAVA ADV. SHRI ANUBHAV JAIN ADV. ASSESSEE BY : SHRI A.M. GOVIL CIT(DR) DATE OF HEARING : 30/03/2016. DATE OF ORDER : 26/04/2016. O R D E R PER S.V. MEHROTRA, A.M: THIS IS ASSESSEES APPEAL AGAINST THE ASSESSMENT OR DER DATED 28.9.2012 PASSED BY THE ASSESSING OFFICER PURSUANT TO DRPS D IRECTIONS U/S 144C(5) OF THE INCOME-TAX ACT, 1961, RELATING TO AY 2008-09. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY IS A JOINT VENTURE BETWEEN MHUSA AND THE TATA GROUP OF INDIA. IN THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY WAS ENGAGED IN T HE BUSINESS OF PUBLISHING AND TRADING OF BOOKS AND EDUCATIONAL MAT ERIAL AND ALSO PROVIDING THE ASSOCIATED RELATED SERVICES. THE COMPANY ALSO D EALT IN SCHOOL, COLLEGE, 2 MEDICAL AND PROFESSIONAL BOOKS. THE COMPANY GOT THE SE BOOKS PUBLISHED FROM LOCAL PARTIES AND IMPORTED THEM. THE COMPANY A LSO PROVIDED CERTAIN ADMINISTRATION AND OTHER SIMILAR SERVICES TO ITS PA RENT COMPANY. THE ASSESSEE COMPANY ALSO PROVIDED VARIOUS BACK OFFICE SERVICES IN THE NATURE OF IT SUPPORT SERVICES, TRANSACTION PROCESSING AND DATA P ROCESSING SERVICES TO ITS ASSOCIATED ENTERPRISES. 3. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY HAD ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS: S. NO. NATURE OF TRANSACTION METHOD USED BY ASSESSEE AMOUNT 1. PAYMENT OF ROYALTY TNMM 7,20,41,545 2. IMPORT OF BOOKS TNMM 1,23,30,355 3. EXPORT OF BOOKS TNMM 61,42,016 4. RECEIPT OF ROYALTY TNMM 15,42,563 5. PROVISION OF IT SUPPORT SERVICES TNMM 6,31,97,593 6. REIMBURSEMENT OF EXPENSES TO & FROM AES AT COST AT COST 1,77,14,406 7. REIMBURSEMENT OF EXPENSES FROM AES 8. REIMBURSEMENT OF SERVER EXPENSES AT COST 9,68,339 TOTAL 17,48,01,359 4. THE ASSESSEE USED TNM METHOD WITH OPERATING PRO FIT OVER THE TOTAL COST AS THE PLI FOR TP ANALYSIS. 3 5. LD. TPO NOTICED THAT THE RESULTS AS SUBMITTED BY THE TAXPAYER IN THE SEGMENTS OF SOFTWARE AND SOFTWARE ACTIVITIES WERE A S UNDER: PARTICULARS IT SUPPORT SERVICES INCOME SERVICE INCOME 6,31,97,593 OPERATING INCOME 6,31,97,593 EXPENDITURE COST OF SERVICES 5,74,52,357 OPERATING COST 5,74,52,357 OPERATING PROFIT 57,45,236 OP/OC 10% 6. THE ASSESSEE IN ITS TP DOCUMENT COMPUTED THE AVE RAGE PLI OF THE COMPARABLES AT 12.38% AND, ACCORDINGLY, CLAIMED THA T THE INTERNATIONAL TRANSACTION IN REGARD TO PROVISION OF IT SUPPORT SE RVICES WAS AT ARMS LENGTH. THE COMPARABLES AS SELECTED BY ASSESSEE IN THE TP R EPORT IN REGARD TO IT SUPPORT SEGMENT WERE AS UNDER: S.NO. NAME OF THE COMPANY WEIGHTED AVERAGE (%) 1 GOLDSTONE TECHNOLOGIES LTD. 11.50 2. MINDTREE CONSULTING LTD. 16.98 3. QUINTEGRA SOLUTIONS LTD. 15.18 4. VJIL CONSULTING LTD. 5.85 MEAN 12.38 7. LD. TPO NOTICED THAT ASSESSEE HAD USED MULTIPLE YEAR DATA TO DETERMINE THE MARGIN OF THE COMPARABLES IN THE TP S TUDY AND, THEREFORE, ON THE BASIS OF CURRENT YEAR DATA, HE REQUIRED THE ASS ESSEE TO FURNISH UPDATE MARGINS OF THE COMPARABLES. THE ASSESSEE, ACCORDING LY, SUBMITTED THE 4 FOLLOWING UPDATE MARGINS OF COMPARABLE SIN REGARD T O IT SUPPORT SERVICE SEGMENT: S. NO. NAME OF THE COMPANY OP/TC(%) 2 ANCENT SOFTWARE INTERNATIONAL LTD. (16.18) 4 CG VAK SOFTWARE & EXPORTS LTD. (5.74) 5 GOLDSTONE TECHNOLOGIES LTD. 26.64 13 MINDTREE CONSULTING LTD. 17.51 15. QUINTEGRA SOLUTIONS LTD. 21.48 20 SOFTSOL INDIA LTD. 14.95 MEAN 7.14 8. FOLLOWING COMPARABLE WAS NOT FOUND COMPARABLE BY THE ASSESSEE WHILE PROVIDING THE UPDATED MARGINS: S. NO. NAME OF THE COMPANY ADJUSTED OP/TC(%) 3 VJIL CONSULTING LTD. NC 9. AFTER EXAMINING THE SEARCH PROCESS ADOPTED BY TH E ASSESSEE AND VARIOUS INFORMATION FURNISHED BY THE ASSESSEE RELAT ING TO THE FUNCTIONAL ANALYSIS OF COMPARABLES, THEIR MARGIN COMPUTATION A ND THEIR ANNUAL REPORTS, ALL THE COMPARABLES AND THE ACCEPT/ REJECT MATRIX O F THE ASSESSEE, LD. TPO ISSUED A DETAILED SHOW CAUSE NOTICE TO ASSESSEE WHI CH HAS BEEN REPRODUCED FROM PAGES 9 TO 15 OF HIS ORDER. THE REPLY OF ASSES SEE HAS BEEN CONSIDERED IN PARA 8 OF THE ORDER AND AFTER CONSIDERING THE VARIO US CASE LAWS AND THE COMPARABILITY CRITERIA AND AFTER DETAILED ANALYSIS OF VARIOUS RISK ADJUSTMENT ASKED FOR BY ASSESSEE, LD. TPO FINALLY SELECTED FOL LOWING COMPARABLES, THE AVERAGE MARGIN OF WHICH WAS 20.15%. 5 S. NO. NAME OF THE COMPANY OP/TC(%) 1. GOLDSTONE TECHNOLOGIES LTD. 26.64 2. MINDTREE LTD. (SEG) 17.51 3. QUINTEGRA SOLUTIONS LTD. 21.48 4. SOFTSOL INDIA LTD. 14.95 AVERAGE 20.15 10. HE, ACCORDINGLY, COMPUTED THE ALP AND CORRESPON DING ADJUSTMENTS AS UNDER: OPERATING COST 5,74,52,357 OP/TC 20.15% MARGIN 1,15,76,650 ARMS LENGTH PRICE 6,90,29,007 PRICE CHARGED BY THE ASSESSEE 6,31,97,593 DIFFERENCE 58,31,414 % OF DIFFERENCE WITH THE INTERNATIONAL TRANSACTION 9.23% 11. LD. TPO DENIED THE WORKING CAPITAL ADJUSTMENT S OUGHT FOR BY ASSESSEE. 12. BEFORE LD. DRP THE ASSESSEE HAD TAKEN VARIOUS O BJECTIONS, AFTER CONSIDERING WHICH, LD. DRP CONFIRMED THE FINDINGS O F LD. TPO AND FURTHER ENHANCED THE MARGIN IN RESPECT OF SOFTSOL INDIA LTD . TO 25.58% AS AGAINST 14.95% ADOPTED BY LD. TPO. BEING AGGRIEVED THE ASSE SSEE IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL : ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASSESSING OFFICER ('AO') HAS. ERRED IN PASS ING THE ASSESSMENT ORDER UNDER SECTION 143(3) READ WITH SEC TION 144C OF THE INCOME-TAX ACT, 1961 ('THE ACT') AFTER CONSI DERING THE ADJUSTMENTS PROPOSED BY THE LEARNED TRANSFER PRICIN G OFFICER ('TPO') IN HER ORDER PASSED UNDER SECTION 92CA(3) O F THE ACT 6 AND SUBSEQUENTLY CONFIRMED BY THE HON'BLE DISPUTE R ESOLUTION PANEL ('DRP'). EACH OF THE GROUND IS REFERRED TO SEPARATELY, WHICH MAY KINDLY BE CONSIDERED INDEPENDENT OF EACH OTHER. THAT, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, 1. THE LEARNED AO/TPO HAS ERRED IN MAKING AN ADDITI ON OF INR 7,353,901 TO TH~. TOTAL INCOME OF THE APPELLANT BY REJECTING THE TRANSFER PRICING ('TP') ANALYSIS UND RTAKEN BY THE APPELLANT AND MAKING AN ADJUSTMENT UNDER SECTION 92CA (3) OF T ~ ACT WITHOUT RETURNING A FINDING ABOUT EXISTENCE OF ANY OF THE C IRCUMSTANCES SPECIFIED IN CLAUSES (A) TO (D) OF SUB-SECTION (3) OF SECTION 92C OF THE ACT. 2. THE LEARNED AOITPO HAS ERRED BY NOT ACCEPTING TH E ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT IN AC CORDANCE WITH THE PROVISIONS OF THE ACT' READ WITH THE INCOM E- TAX RULES, 1962 ('THE RULES'), AND MODIFYING THE SAME FOR THE DETERMINATION OF THE ARM'S LENGTH PRICE ('ALP') OF THE APPELLANT'S INTERNATIONAL TRANSACTIONS TO HOLD THAT THE SAME ARE NOT AT ARM'S LENGTH. 3. THE LEARNED AOI TPO HAS ERRED IN: - (A) USING DATA FOR A SINGLE YEAR INSTEAD OF MULTIPL E YEAR DATA; AND (B) DETERMINING THE ARM'S LENGTH MARGINS I PRICES USING DATA PERTAINING ONLY TO FINANCIAL YEAR ('FY') 2007-08 WH ICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE INDIAN TP DOCUMENTATION REQUIREMENTS. 4. ' THE LEARNED AOITPO HAS ERRED, BY REJECTING CER TAIN COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT US ING TURNOVER LESS INR 1 CRORE' AS A COMPARABILITY CRITE RION. 7 5. THE LEARNED AO/TPO HAS ERRED BY REJECTING CERTA IN COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT US ING 'EMPLOYEE COST GREATER THAN 25 PERCENT OF TOTAL COS T' AS A COMPARABILITY CRITERION. 6. THE LEARNED AO/TPO HAS ERRED, BY WRONGLY REJECT ING CERTAIN COMPANIES FROM AND ADDING CERTAIN COMPANIES TO THE FINAL SET OF COM PARABLES FOR THE IMPUGNED TRANSACT ION ON AN AD-HOC BASIS, THEREBY RESORTING TO CHERRY PICKING O F COMPARABLES FOR BENCHMARKING THE IMPUGNED TRANSACTI ON. 7. THE LEARNED AO/TPO HAS ERRED BY PASSING AN ORDER UNDER SECTION 92CA(3) WHICH HAS COMPUTATIONAL ERROR IN TH E MARGIN OF CERTAIN COMPARABLE COMPANIES USED IN DETERMINATI ON OF ALP. 8. THE LEARNED AO/TPO HAS ERRED BY NOT MAKING APPROPRIATE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN WORKING CAPITAL EMPLOYED BY THE APPELLANT VIS-A-VIS THE COM PARABLES. 9. THE LEARNED AO/TPO HAS ERRED BY NOT MAKING SUITA BLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VIS-A-VIS THE COM PARABLES. 10. THE LEARNED AO/TPO HAS ERRED IN NOT PROVIDING THE BENEFIT OF THE ARM'S LENGTH RANGE AS PROVIDED UNDER PROVISO TO SECTION 92C OF ACT FOR THE PURPOSES OF COMPUTING TH E ALP UNDER SECTION 92F OF THE ACT. 11. THE LEARNED AO HAS ERRED WHILE GIVING CREDIT O F THE TAXES PAID AND COMPUTING THE INTEREST PAYABLE UNDER SECTI ON 2348 OF THE ACT. 13. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT PRI MARILY THERE ARE TWO ISSUES FIRST BEING WORKING CAPITAL ADJUSTMENT DEN IED TO ASSESSEE AND SECOND REGARDING EXCLUSION OF CERTAIN COMPARABLES AND INCL USION OF CERTAIN 8 COMPARABLES INCLUDING THE WRONG COMPUTATION OF MARG INS BY LD. DRP IN REGARD TO SOFTSOL INDIA LTD. 14. AS REGARDS THE WORKING CAPITAL ADJUSTMENT DENI ED TO ASSESSEE AND CONFIRMED BY LD. DRP, LD. COUNSEL REFERRED TO PAGE 36 OF TPOS ORDER WHERE LD. TPO HAS DISCUSSED THE ISSUE REGARDING WORKING C APITAL ADJUSTMENT. THE MAIN OBJECTION OF LD. TPO, WITH REFERENCE TO THE W ORKING CAPITAL ADJUSTMENT SUBMITTED VIDE LETTER DATED 28.9.2011 BY ASSESSEE, WAS THAT THE ASSESSEE HAD A CONSOLIDATED P&L A/C AND THE SEGMENTAL REPORTING OF SOFTWARE DEVELOPMENT AND BACK OFFICE SUPPORT SERVICES SEGMEN T HAD BEEN MADE ONLY FOR THE PURPOSES OF TP STUDY OF INTERNATIONAL TRANS ACTIONS. LD. TPO OBSERVED THAT SINCE FINANCIALS OF THE COMPANY SHOWED CONSOLI DATED INCOME FROM BOTH THE SEGMENTS, IT COULD NOT BE ASCERTAINED THAT THE CREDITORS AND DEBTORS PERTAINED TO WHICH SEGMENT. MOREOVER, SEGMENTAL FIN ANCIALS OF SOME OF THE COMPARABLES VIZ. MINDTREE CONSULTING LTD. ETC. HAD BEEN CONSIDERED FOR COMPUTATION OF THE OPERATING MARGIN AND IT COULD NO T BE ASCERTAINED AS TO WHICH SEGMENT THE CREDITORS AND DEBTORS PERTAINED . THEREFORE, WORKING CAPITAL ANALYSIS COULD NOT BE ACCEPTED. 15. LD. COUNSEL FURTHER REFERRED TO LD. DRPS DIREC TIONS WITH REFERENCE TO OBJECTION TAKEN BEFORE LD. DRP VIDE GROUND NO. 7 AN D POINTED OUT THAT LD. DRP OBSERVED THAT TO CARRY OUT THE ADJUSTMENT THE AVAILABILITY OF RELEVANT INFORMATION TO ACCURATELY IDENTIFY THE DIFFERENCE A ND THEN QUANTIFY IMPACT OF SUCH DIFFERENCE IS A PRE-REQUISITE. LD. DRP OBSERVE D THAT THE MARGINS OF TESTED PARTY COULD NOT BE ADJUSTED TO BRING AT PAR WITH EACH OF THE COMPARABLES BECAUSE DEGREE OF DIFFERENCE IN FUNCTIO NS, ASSETS AND RISK OF EACH OF THE COMPARABLES WITH THAT OF THE ASSESSEE D IFFERS IN CASE OF EACH COMPARABLES. LD. DRP POINTED OUT THAT IN THE PRESEN T CASE ONLY THE AMOUNT OF WORKING CAPITAL DEPLOYED BY THE COMPARABLES ON T HE FIRST AND LAST DAY OF 9 THE ACCOUNTING YEAR IS AVAILABLE AND THERE ARE NO M EANS TO ASCERTAIN THE WORKING CAPITAL DEPLOYED BY THE COMPARABLES THROUGH OUT THE YEAR. 16. THE MAIN REASON GIVEN BY LD. DRP FOR REJECTING THE ADJUSTMENT IN REGARD TO WORKING CAPITAL ADJUSTMENT, AS SOUGHT BY ASSESSEE, WAS THAT WORKING CAPITAL ADJUSTMENT SHOULD BE COMPUTED ON TH E BASIS OF DAILY AVERAGE OF WORKING CAPITAL DEPLOYED BY THE TESTED PARTY AND EACH OF COMPARABLES RESPECTIVELY, WHICH DETAILS WERE NOT AVAILABLE. 17. LD. COUNSEL REFERRED TO PAGE 117 OF THE PB AND POINTED OUT THAT SEPARATE DETAILS IN REGARD TO SUNDRY CREDITORS AND SUNDRY DEBTORS ARE AVAILABLE. LD. COUNSEL REFERRED TO PAGE 237 OF THE PB WHEREIN THE SEGMENTAL DETAILS IN REGARD TO IT SERVICES AND R&D SERVICES H AVE BEEN GIVEN. HE REFERRED TO PAGE 238 OF THE PB, WHEREIN THE WORKING SUBMITTED BEFORE LD. TPO IN REGARD TO WORKING CAPITAL ADJUSTMENT IS GIVE N TO DEMONSTRATE THAT ALL THE RELEVANT DETAILS WERE FURNISHED BEFORE TPO. HE REFERRED TO PAGE 165 OF THE PB, WHEREIN THE TPOS ORDER FOR AY 2007-08 IS C ONTAINED TO DEMONSTRATE THAT NECESSARY ADJUSTMENT HAD BEEN ALLO WED IN REGARD TO CAPITAL WORKING ADJUSTMENT. HE FURTHER POINTED OUT THAT IN AY 2009-10 THE LD. DRP IN PARA 9.4 OF ITS DIRECTIONS HAS, INTER ALIA, OBSE RVED THAT SINCE THE BALANCES OF INVENTORIES, TRADE DEBTORS/ RECEIVABLES AND TRADE C REDITORS/ PAYABLES WERE NOT AVAILABLE ON DAILY BASIS FOR THE COMPARABLES, THERE FORE TPO WAS DIRECTED TO TAKE FOLLOWING INTO CONSIDERATION: A) COMPUTE THE AVERAGE OF OPENING AND CLOSING BALA NCES OF LNVENTORIES, TRADE DEBTORS/RECEIVABLES, TRADE CREDI TORS/PAYABLES OF BOTH THE TESTED PARTY AND THE COM PARABLES B) WORK OUT THE NET WORKING CAPITAL RATIO (IN PERCE NTAGE) AFTER DIVIDING THE NET WORKING CAPITAL BY OPERATING COST/ SALES OR SUCH DENOMINATOR (AS IS USED IN THE PU) BOTH FOR THE TES TED PARTY AND THE COMPARABLES, 10 C) DETERMINE THE DIFFERENCE BETWEEN THE TESTED PART Y'S RATIO WITH THAT OF EACH COMPARABLES. D) THEREAFTER MULTIPLY THE ABOVE DIFFERENCE BY INTE REST RATE I.E. 581 PRIME LENDING RATE AS ON SO' JUNE OF THE RELEVA NT FINANCIAL YEAR. E) LASTLY, THESE ADJUSTMENTS ARE TO BE ADDED TO THE .PROFIT MARGIN OF COMPARABLE COMPANIES AS FINALLY DETERMINED IN AC CORDANCE WITH THE DIRECTIONS OF THIS PANEL. THE ABOVE WORKING IS PRIMARILY BASED ON THE GUIDELI NES PROVIDED BY OECD TRANSFER PRICING GUIDELINES, 2010 . 18. HE, THEREFORE, SUBMITTED THAT ASSESSEE BE ALLOW ED WORKING CAPITAL ADJUSTMENT. 19. LD. CIT(DR) SUBMITTED THAT LD. TPO HAD DULY CON SIDERED THE WORKABILITY OF WORKING CAPITAL ADJUSTMENT CLAIMED B Y ASSESSEE. HE SUBMITTED THAT MATTER CAN GO BACK TO LD. TPO TO IDE NTIFY THE TRADE CREDITORS AND TRADE DEBTORS RELATING TO THIS SEGMENT AND THEN COMPUTE THE WORKING CAPITAL ADJUSTMENT. 20. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES. LD. TPOS MAIN OBJECTION WAS THAT SINCE ASSESSEE WAS MAINTAIN ING CONSOLIDATED ACCOUNTS, THEREFORE, THE TRADE CREDITORS/ DEBTORS I N REGARD TO IT SUPPORT SERVICE SEGMENTS WERE NOT AVAILABLE SEPARATELY. LD. COUNSEL HAS POINTED OUT THAT AS NOTED EARLIER THAT SEGMENTAL DETAILS ARE AV AILABLE AND, THEREFORE, THIS OBJECTION DOES NOT SURVIVE. AS REGARDS THE OBJECTIO NS OF LD. DRP THAT AVERAGE DAY TO DAY WORKING CAPITAL DEPLOYMENT CANNO T BE COMPUTED, WE ARE OF THE OPINION THAT THIS OBJECTION CANNOT BE ACCEPT ED BECAUSE, AS RIGHTLY OBSERVED BY LD. DRP IN AY 2009-10 THAT IT IS THE AV ERAGE WORKING CAPITAL DEPLOYMENT WHICH IS TO BE CONSIDERED, WHICH CAN BE COMPUTED WITH REFERENE 11 TO OPENING AND CLOSING BALANCES OF WORKING CAPITAL DEPLOYED. CONSIDERING THE ENTIRETY OF FACTS AND CIRCUMSTANCES OF THE CASE WE DIRECT THE LD. TPO TO ALLOW WORKING CAPITAL ADJUSTMENT TO ASSESSEE AS PER THE DIRECTIONS GIVEN BY LD. DRP IN AY 2009-10, AS NOTED EARLIER. IN THE RES ULT GROUND NO. 8 IS ALLOWED FOR STATISTICAL PURPOSES. 21. NOW COMING TO THE ISSUE REGARDING COMPARABLES, THE MAIN DISPUTE RAISED BY ASSESSEE IS IN REGARD TO FOLLOWING THREE COMPARABLES: - CG VAK SOFTWARE & EXPORTS LTD. - ANCENT SOFTWARE INTERNATIONAL LTD. - SOFTSOL INDIA LTD. 22. AS REGARDS CG VAK SOFTWARE & EXPORTS LTD., THE OBJECTIONS OF LD. TPO WERE THAT THIS COMPARABLE WAS FUNCTIONALLY NOT COMPARABLE TO THE TESTED PARTY AS IT HAD EMPLOYEE COMPENSATION LESS THAN 25 % AND HENCE IT FAILED EMPLOYEE COST FILTER. 23. BEFORE LD. DRP THE ASSESSEE POINTED OUT THAT TH E EMPLOYEE COST (COST OF SERVICES) AS PERCENTAGE OF TOTAL REVENUE OF THE COMPANY WAS 75.55%. LD. DRP DID NOT ACCEPT THE ASSESSEES CONTENTION THAT C OST OF SERVICES SHOULD BE TAKEN AS REMUNERATION TO EMPLOYEES BY OBSERVING TH AT IN THE ANNUAL REPORT OF THE COMPANY THERE WAS NO EXPENSE SUCH AS SALARY COST OR REMUNERATION TO EMPLOYEES IN ITS P&L A/C. LD. DRP OBSERVED THA T ASSESSEE WAS DRAWING CONCLUSIONS ON THE BASIS OF UNSUBSTANTIATED PRESUMPTIONS AND WHENEVER THERE IS DOUBT ABOUT THE FUNCTIONAL COMPAR ABILITY, IT IS BETTER TO DROP SUCH COMPARABLE RATHER THAN INDULGING IN PRESU MPTIONS. LD. DRP DID NOT ACCEPT THE ASSESSEES CONTENTION THAT SOME COMP ANIES MAY INCLUDE EMPLOYEE COST AS A SEPARATE ITEM IN THEIR FINANCIAL STATEMENTS WHILE OTHERS MAY AGGREGATE IT UNDER THE EXPENSES SUCH AS ADMINIS TRATIVE EXPENSES, SALES 12 AND MARKETING EXPENSES ETC. LD. DRP OBSERVED THAT E MPLOYEE COST IS ALWAYS SHOWN AS A DIFFERENT LINE ITEM IN THE PROFIT AND LO SS ACCOUNT. 24. LD. COUNSEL SUBMITTED THAT THIS COMPARABLE HAS BEEN ACCEPTED IN THE CASE OF KENEXA TECHNOLOGIES PVT. LTD. (PAGE 254 OF THE PB). LD. COUNSEL SUBMITTED THAT THIS COMPARABLE PASSES THE EMPLOYEE COST FILTER OF MORE THAN 25% AS ADOPTED BY LD. TPO. HE SUBMITTED THAT THE EM PLOYEE COST IS 46% OF THE TOTAL COST. IN THIS REGARD LD. COUNSEL REFERRED TO PAGE 56 & 57 OF THE PB, WHEREIN THE OBJECTIONS RAISED BEFORE LD. DRP ARE CO NTAINED IN WHICH IT WAS POINTED OUT THAT LD. TPO NOWHERE CITED ANY INSTANCE S OF FUNCTIONAL DISSIMILARITY OF THIS COMPANY VIS A VIS THE ASSESSE E. FURTHER, AT PER PAGE 21 OF THE ANNUAL REPORT OF THIS COMPANY, SCHEDULE 15 T O ACCOUNTS, COST OF SERVICES HAS BEEN SHOWN AS UNDER: COST OF SERVICES AMOUNT (RS.) COST OF SERVICES- OVERSEAS 2,46,69,456 COST OF SERVICES- DOMESTIC 1,78,34,926 TRANSCRIPTION CHARGES 11,63,991 WEB DESIGNING CHARGES 97,333 STAFF WELFARE 8,29,092 STAFF TRAINING 3,74,302 CONTRIBUTION TO PF & ESI 12,04,280 GRATUITY 38,270 EX GRATIA 1,28,951 HRD EXPENSES 8,66,766 TOTAL 4,72,07,367 FURTHER, IN THE ANNUAL REPORT OF THE COMPANY, THERE WAS NO EXPENSE, SUCH AS SALARY COST OR REMUNERATION TO EMPLOYEES. 25. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES. WE ARE IN AGREEMENT WITH THE LD. COUNSEL FOR THE ASSESSEE TH AT SINCE THERE WAS NO SEPARATE EXPENDITURE SHOWN UNDER THE HEAD SALARY/ REMUNERATION, THE SUB- 13 HEAD COST OF SERVICE, PRIMARILY REFERS TO EMPLOYE ES COST. THE ITEMS UNDER THIS SUB-HEAD SUCH AS CONTRIBUTION TO PF, ESI, GRAT UITY AND EX GRATIA PAYMENT CLEARLY SHOWS THAT ALL THESE EXPENSES WERE TOWARD S EMPLOYEES REMUNERATION. WE, THEREFORE, RESTORE THIS MATTER T O THE FILE OF TPO TO APPLY THE EMPLOYEE FILTER CORRECTLY AND IF IT IS FOUND TH AT THE EMPLOYEE COST IS MORE THAN 25% THEN THIS COMPARABLE IS TO BE INCLUDED IN THE LIST OF COMPARABLES SELECTED BY TPO. 26. AS REGARDS ANCENT SOFTWARE INTERNATIONAL LTD., THE MAIN CONTENTION OF LD. TPO WAS THAT THIS COMPARABLE WAS NOT FUNCTIONAL LY COMPARABLE TO THE TESTED PARTY AS IT HAD TURN OVER LESS THAN RS. 1 CR ORES AND HENCE IT FAILED THE TURN OVER FILTER. 27. LD. COUNSEL SUBMITTED THAT IN THE CASE OF CHRYS CAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. (ITA NO. 417/2014), THE HONBLE DELHI HIGH COURT HAS HELD THAT TURN OVER FILTER IS NOT AN APPR OPRIATE FILTER. 28. LD. COUNSEL POINTED OUT THAT LD. TPO HAS NOWHER E CITED ANY INSTANCES OF FUNCTIONAL DISSIMILARITY OF THIS COMPANY. ON THE CONTRARY HE SUBMITTED THAT AS IS EVIDENT FROM THE P&L A/C OF THIS COMPARA BLE AS CONTAINED AT PAGE 275 OF THE PB, THE COMPANY HAS DERIVED INCOME FROM SOFTWARE SERVICES. HE FURTHER POINTED OUT THAT IN THE CASE OF AMERIPRISE INDIA PVT. LTD. ITA NO. 2010/DEL/2014, IT HAS BEEN HELD THAT THE TURNOVER F ILTER IS NOT AN APPROPRIATE FILTER. FURTHER, HE POINTED OUT THAT THIS COMPANY I S FUNCTIONALLY SIMILAR TO THE ASSESSEE. 29. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES. WE FIND THAT LD. DRP HAS CONFIRMED THE FINDINGS OF LD. TPO SOLEL Y ON THE GROUND THAT SALES WERE LESS THAN RS. 1 CRORE. NO ADVERSE COMMEN TS HAVE BEEN MADE ON THE FUNCTIONAL ANALYSIS BY BOTH THE LOWER REVENUE A UTHORITIES. UNDER SUCH CIRCUMSTANCES IN VIEW OF THE DECISION OF HONBLE DE LHI HIGH COURT IN THE 14 CASE OF CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) PV T. LTD. (SUPRA), THIS COMPARABLE HAS TO BE INCLUDED IN THE LIST OF COMPAR ABLES SELECTED BY LD. TPO. WE DIRECT ACCORDINGLY. 30. AS REGARDS SOFTSOL INDIA LTD. THE MAIN CONTENT ION OF LD. COUNSEL FOR THE ASSESSEE IS THAT SINCE NO OPPORTUNITY WAS PROVI DED BY LD. DRP WHILE INCREASING THE MARGIN FROM 14.95% TO 25.58%, THEREF ORE, THIS COMPARABLE SHOULD BE EXCLUDED. HE FURTHER SUBMITTED THAT COMPU TATION PROVIDED BY LD. DRP DOES NOT TALLY WITH THE FINANCIALS OF SOFTSOL INDIA LTD. 31. LD. COUNSEL REFERRED TO PAGE 316 OF THE PB, WHE REIN THE FINANCIAL STATEMENTS OF SOFTSOL INDIA LTD. ARE CONTAINED AND POINTED OUT THAT IN THE FIXED ASSET SCHEDULE THE FIGURES OF DEPRECIATION IN REGARD TO BUILDING IS RS. 68,30,762/-, WHEREAS LD. DRP HAS WRONGLY TAKEN THE FIGURES AT RS. 85,10,646/-. IN THIS REGARD LD. COUNSEL REFERRED T O PAGE 20 OF THE APPEAL SET WHEREIN THE COMPUTATION MADE BY JCIT (TRANSFER PRIC ING), HYDERABAD IN REGARD TO OPERATING MARGIN OF M/S SOFTSOL INDIA LTD . IS CONTAINED, WHICH IS AS UNDER: RENTAL INCOME : RS. 4,48,40,012/- (II) EXPENSES ATTRIBUTABLE TO LET OUT PROPERTY R S. 54,14,483/- (III) DEPRECIATION ON LET OUT PROPERTY RS. 85,1 0,646/- REVISED OPERATING MARGIN IS AS UNDER: TOTAL INCOME 234782563 LESS: RENTAL INCOME 44840042 TOTAL OPERATING INCOME 189942521 TOTAL COST 165168454 LESS: EXPENSES ATTRIBUTABLE TO THE LET OUT PROPERTY 5414483 LESS: DEPRECIATION ON LET OUT PORTION 8510646 OPERATING COST (OC) 151243325 OPERATING PROFIT (OP) 38699196 OP/OC 25.58 15 32. HE SUBMITTED THAT THERE IS NOTHING ON RECORD TO SUGGEST THAT DEPRECIATION ON BUILDING WAS IN RESPECT OF LET OUT BUILDING. LD. DRP HAS CONSIDERED THIS ON ASSUMPTION. HE SUBMITTED THAT IF DATA IS INSUFFICIENT TO MAKE NECESSARY ADJUSTMENT, THEN COMPARABLE IS TO BE REJECTED. IN THIS REGARD LD. COUNSEL REFERRED TO RULE 10B(3) WHICH MANDATES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE M ATERIAL EFFECTS OF SUCH DIFFERENCES. IN THE ALTERNATIVE LD. COUNSEL SUBMITT ED THAT ONLY DIRECT EXPENSES ATTRIBUTABLE TO EARNING OF RENTAL INCOME BEING RENT , RATES AND TAXES AGGREGATING TO RS. 23,37,991/- BEING AS PER P&L A/C AT PAGE 319 OF PB SHOULD BE REDUCED. 33. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. THE VERY BASIS FOR ENHANCING THE MARGIN FROM 14.95% TO 25.58% WAS THE COMPUTATION MADE BY JCIT ( TRANSFER PRICING), HYDERABAD, AS NOTED EARLIER. LD. COUNSEL HAS POINTE D OUT THAT FIGURES ADOPTED IN REGARD TO DEPRECIATION ARE NOT CORRECT. FURTHER, THERE IS NO BASIS POINTED OUT BY LD. JCIT IN REGARD TO EXPENSES BEING ATTRIBU TED TO LET OUT PROPERTY. 34. LD. DRP HAS ACCEPTED THE TPOS FINDINGS THAT RE NTAL INCOME HAD TO BE EXCLUDED FROM THE OPERATING INCOME. HOWEVER, LD. D RP WAS OF THE OPINION AND RIGHTLY SO THAT THE EXPENSES ATTRIBUTABLE TO TH E RENTAL INCOME SHOULD ALSO BE REDUCED FROM THE OPERATING EXPENDITURE TO COMPUT E CORRECT MARGIN FOR SOFTWARE DEVELOPMENT SEGMENT. LD. DRP HAD GIVEN DIR ECTION TO JCIT(TRANSFER PRICING), HYDERABAD TO IDENTIFY THE E XPENSES ATTRIBUTABLE TO THE RENTAL INCOME AND RECOMPTUE THE MARGINS OF THE SOFTWARE DEVELOPMENT SEGMENT. AS NOTED EARLIER, LD. JCIT HAS NOT GIVEN A NY BASIS FOR ATTRIBUTION OF 16 EXPENSES TO THE EARNING OF RENTAL INCOME AND THE FI GURE OF DEPRECIATION ALSO HAS NOT BEEN CORRECTLY ADOPTED. 35. UNDER SUCH CIRCUMSTANCES, IN OUR OPINION, ONLY THE DIRECT EXPENSES ATTRIBUTABLE TO THE EARNING OF RENTAL INCOME VIZ. 2 3,37,991/- IS TO BE EXCLUDED AND THE MARGINS TO BE RECOMPUTED. WE ARE NOT INCLIN ED TO ACCEPT THE SUBMISSION OF LD. COUNSEL FOR THE ASSESSEE THAT THI S COMPARABLE SHOULD BE EXCLUDED ENTIRELY FROM THE LIST OF COMPARABLES BECA USE IT IS NOT IN DISPUTE THAT THIS COMPARABLE IS FUNCTIONALLY COMPARABLE WIT H THE TESTED PARTY AND REASONABLY THE NECESSARY ADJUSTMENT AS CONTEMPLATED IN RULE 10B(3) CAN BE MADE. WE, ACCORDINGLY, DIRECT THE LD. TPO TO RECOMP TUE THE MARGIN OF THIS COMPARABLE AND DETERMINE THE AVERAGE MARGINS ACCORD INGLY. 36. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED FOR STATISTICAL PURPOSE. ORDER PRONOUNCEMENT IN OPEN COURT ON 26/04/2016. SD/- SD/- (SUDHANSHU SRIVASTAVA (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 26/04/2016. *MP* COPY OF ORDER TO: 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI.