Seven N Consulting Pvt. Ltd., Gurgaon V. ITO, New Delhi

ITA 6192/DEL/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7584 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 10-03-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 23-11-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Additional evidence; Wholly owned subsidiary; Reasonable cause
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I, NEW DELHI BEFORE SH. N. K. SAINI, AM AND SMT. BEENA A. PILL AI, JM ITA NO. 6192/DEL./2015 : ASSTT. YEAR : 2011-12 SEVEN N CONSULTING PVT. LTD. 7N INDIA, 81, SEC-44, GURGAON VS ITO WARD 23(1) NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. AAJCS7695B APPELLANT BY : SH. DEEP AK CHOPRA, ADV. SH. HARPREET SINGH, ADV. SH. ROHAN KHARE, ADV. RESPONDENT BY : SH. AMRE NDRA KUMAR, C.I.T, DR DATE OF HEARING : 10.03.2016 DATE OF PRONOUNCEMEN T : 08.06.2016 ORDER PER N.K. SAINI, A.M. THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 26/10/2015 OF THE AO PASSED U/S 143(3) / 144C OF TH E INCOME 2 ITA NO. 61 92/DEL/2015 TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ). FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL : - 1. THAT ON FACTS AND IN LAW, THE IMPUGNED ORDER/D IRECTIONS PASSED BY THE INCOME TAX OFFICER, WARD - 23(1), NEW DELHI ('LEARN ED AO')I DEPUTY COMMISSIONER OF INCOME TAX - TRANSFER PRICING OFFIC ER - 111(1 )(1), NEW DELHI ('LEARNED TPO')I HON'BLE DISPUTE RESOLUTION PANEL ' HON'BLE DRP'), MAKING AN ADDITION OF INR 1,39,12,291/- TO THE TOTAL INCO ME OF THE APPELLANT ON ACCOUNT OF ADJUSTMENT IN THE ARM'S LENGTH PRICE IS BAD IN LAW . 2. THAT ON FACTS AND IN LAW, THE LD. DRP/TPO/AO HAVE ERRED IN COMPUTING THE TOTAL INCOME OF THE APPELLANT AT INR 1,39,12,291/- AS AGAINST THE RETURNED INCOME OF INR NIL BY MAKING AN UPWARD ADJUSTMENT OF INR 1,39,12,291/- WITH RESPECT TO ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. 3 THAT ON FACTS OF THE CASE AND IN LAW, THE LD. T PO/AO HAVE ERRED IN NOT COMPLYING WITH THE DIRECTIONS OF THE HON'BLE DRP W HILE PASSING THE IMPUGNED ORDER. 4 THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/T PO/AO HAVE ERRED IN ARBITRARILY REJECTING THE SEGMENTAL ACCOUNTS PREPAR ED BY THE APPELLANT FOR BENCHMARKING THE INTERNATIONAL TRANSACTION PERTAINI NG TO PROVISION OF SOFTWARE CONSULTING AND SUPPORT SERVICES . 5 THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/TP O/AO HAVE ERRED IN REJECTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE A PPELLANT WHEREIN THE APPELLANT HAD APPLIED COST PLUS METHOD ('CPM') TO C OMPARE THE GROSS MARGINS EARNED BY THE APPELLANT FROM PROVISION OF SOFTWARE CONSULTING AND SUPPORT SERVICES TO ASSOCIATED ENTERPRISES AND NON-ASSOCIAT ED ENTERPRISES. 6 THAT ON FACTS OF THE CASE AND IN LAW, THE LD. TP O HAS ERRED IN APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM') AS THE MOST APPROPRIATE METHOD ('MAM') FOR BENCHMARKING THE INTERNATIONAL TRANSAC TION INSTEAD OF CPM ADOPTED BY THE APPELLANT. 7. WITHOUT PREJUDICE, THAT ON FACTS OF THE CASE AND IN LAW, THE LD. DRP/TPO/AO HAVE ERRED IN SELECTING COMPARABLE COMPA NIES ON AN AD-HOC 3 ITA NO. 61 92/DEL/2015 BASIS WITHOUT CONDUCTING A DETAILED FAR ANALYSIS, F OR BENCHMARKING THE INTERNATIONAL TRANSACTION. 8 WITHOUT PREJUDICE, THAT ON FACTS OF THE CASE AND IN LAW, THE LD. DRP/TPO/AO HAVE ERRED IN SELECTING COMPANIES IN THE FINAL SET OF ALLEGED COMPARABLES WHICH HAVE DIFFERENT BUSINESS / OPERATI NG MODELS AS COMPARED TO THE APPELLANT. 9 WITHOUT PREJUDICE, THAT ON FACTS OF THE CASE AND IN LAW, THE LD. DRP/TPO/AO HAVE ERRED IN CONDUCTING A FRESH ECONOMI C ANALYSIS BY USING ARBITRARY FILTERS FOR IDENTIFYING COMPARABLE COMPAN IES TO THE APPELLANT. 10 WITHOUT PREJUDICE, THAT ON FACTS OF THE CASE AN D IN LAW, THE LD. DRP/ TPO/AO HAVE ERRED IN USING SINGLE YEAR DATA FOR FIN ANCIAL YEAR ('FY') 2010- 11 OF ALLEGED COMPARABLE COMPANIES WITHOUT CONSIDER ING THE FACT THAT THE SAME WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF C OMPLYING WITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENTS AND DISREGARDING THE APPELLANT'S CLAIM FOR USE OF MULTIPLE YEAR DATA FOR COMPUTING THE ARM 'S LENGTH PRICE. 11 WITHOUT PREJUDICE, THAT ON FACTS OF THE CASE AN D IN LAW, THE LD. DRP/TPO/AO HAVE FAILED TO MAKE SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE CAPACITY UTILIZATION IGNORING TH E FACT THAT THE APPELLANT IS IN THE INITIAL YEARS OF OPERATION AND AN ADJUSTMENT FO R CAPACITY UTILIZATION SHOULD HAVE BEEN ALLOWED. 12 WITHOUT PREJUDICE, THAT ON FACTS OF THE CASE AN D IN LAW, THE LD. DRP/TPO/AO HAVE FAILED TO MAKE APPROPRIATE ADJUSTME NTS TO ACCOUNT FOR DIFFERENCES IN WORKING CAPITAL EMPLOYED BY THE APPE LLANT VIS-A-VIS THE COMPARABLE COMPANIES. 13. WITHOUT PREJUDICE, THAT ON FACTS OF THE CA SE AND IN LAW, THE LD. DRP/TPO/AO HAVE FAILED TO MAKE APPROPRIATE ADJUSTME NTS TO ACCOUNT FOR VARYING RISK PROFILES OF THE APPELLANT VIS-A-VIS TH E ALLEGED COMPARABLES FOR THE INTERNATIONAL TRANSACTION AND IN THE PROCESS INTER- ALIA NEGLECTED THE INDIAN TRANSFER PRICING REGULATIONS, INTERNATIONAL GUIDELI NES ON TRANSFER PRICING AND JUDICIAL PRECEDENCE IN THIS REGARD. 4 ITA NO. 61 92/DEL/2015 14. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO HAS ERRED IN INITIATING PENALTY UNDER SECTION 271 (1 ) (C) OF THE ACT, AS A ONSEQUENCES OF THE ADDITION MADE IN THE IMPUGNED O RDER PASSED UNDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT. 15. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO HAS ERRED IN CHARGING INTEREST UNDER SECTION 234 OF THE ACT, AS A CONSEQUENCE OF THE ADDITION MADE IN THE IMPUGNED ORDER PASSED UNDER SE CTION 143(3) READ WITH SECTION 144C OF THE ACT. 2. IN THE PRESENT CASE, GROUND NOS. 1 AND 2 ARE G ENERAL IN NATURE. GROUND NOS. 3 AND 9 TO 15 WERE NOT PRESSED SO THESE GROUNDS DO NOT REQUIRE ANY COMMENTS ON OUR PART. 3. VIDE GROUND NO. 4 TO 7, THE GRIEVANCE OF THE ASSESSEE RELATES TO THE ARMS LENGTH PRICE ADJUSTMENT (ALP) BY APPLYING TRANSACTIONAL NET MARGINS METHOD (TNMM) AS MOST APPROPRIATE METHOD FOR BENCH MARKING THE INTERNATIO NAL TRANSACTION INSTEAD OF COST PLUS METHOD (CPM) ADOPT ED BY THE ASSESSEE AND SELECTING THE COMPANIES IN FINAL SET O FF ALLEGED COMPARABLES WHICH HAVE DIFFERENT BENEFIT / OPERATIV E MODELS THAN THE ASSESSEE AND REJECTING THE SEGMENTAL ACCOU NTS PREPARED BY THE ASSESSEE FOR BENCHMARKING THE INTER NATIONAL TRANSACTION PERTAINING TO PROVOSION OF SOFTWARE CON SULTING AND SUPPORT SERVICES. 5 ITA NO. 61 92/DEL/2015 4. FACTS OF THE CASE IN BRIEF ARE THAT THE ASS ESSEE DERIVED INCOME FROM SOFTWARE CONSULTING AND SUPPORT SERVICES, IT IS A 100% SUBSIDIARY OF SEVEN N A/S, D ENMARK. THE ASSESSEE FILED THE RETURN OF INCOME ON 30.9.201 1 DECLARING NIL INCOME WHICH WAS PROCESSED U/S 143(1) OF THE IN COME TAX ACT, 1961 (HEREINAFTER REFERRED AS ACT). SUBSEQUE NTLY, THE CASE WAS SELECTED FOR SCRUTINY, THE AO MADE A REFER ENCE U/S 92CA(3) OF THE ACT TO THE TPO TO DETERMINE THE ARM S LENGTH PRICE (ALP) IN RESPECT OF INTERNATIONAL TRANSACTION S ENTERED INTO BY THE ASSESSEE. THE TPO VIDE HIS ORDER DATED 12.01.2015 AND ORDER U/S 154/92CA (3) DATED 09.02.2015 WORKED OUT THE ADJUSTMENTS OF RS. 1,39,12,291/- AFTER TAKING INTO ACCOUNT THE COMPARABLES AS PROVIDED BY THE ASSESSEE AND HIS OWN COMPARABLES, AS WELL ASBY APPLYING TNMM METHOD INS TEAD OF ASSESSEES COST PLUS METHOD. THE CONTENTION OF THE ASSESSEE BEFORE THE TPO WAS THAT THE TNMM SHOULD NOT BE CONS IDERED AS THE MOST APPROPRIATE METHOD AS THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE, DURING THE RELEVANT ASS ESSEMENT YEAR WITH ITS ASSOCIATED ENTERPRISES (AES) HAD BEE N JUSTIFIED TO BE AT ARMS LENGTH PRICE (ALP) UNDER THE CPM MET HOD. THE ASSESSEE GAVE THE JUSTIFICATION IN THIS REGARD BY C OMPARING THE GROSS MARGIN EARNED THEREIN WITH THE GROSS MARGIN E ARNED BY 6 ITA NO. 61 92/DEL/2015 THE ASSESSEE ON TRANSACTIOSN UNDERTAKEN WITH THE NO N-AES. THE ASSESSEE HAD EARNED A GROSS MARGIN OF 38.65% UN DER AE SEGMENT SERVICE IN COMPARISON TO THE MARGIN OF 36. 63% EARNED UNDER THE NON-AE SEGMENT. THE TPO REJECTED T HE CONTENTION OF THE ASSESSEE BY OBSERVING AS UNDER :- THE OBJECTION OF THE ASSESSEE IS CONSIDERED BUT N OT ACCEPTABLE. AS A MATTER OF FACT, THE ASSESSEE HAS ACKNOWLEDGED THAT NO SEGMENTAL PROFIT AND LOSS ACCOUNT WAS PREPARED W.R.T SERVICES PROVIDED TO THE AES AND NO AES. IN SUCH A SCENARIO, THE APPLICATI ON OF COST PLUS METHOD IS EXTREMELY DIFFICULT AS THE GROSS PROFIT M ARGIN IS REQUIRED TO BE CHARGED ON THE DIRECT AND INDIRECT COSTS IDENTIF IED. FOR APPLICATION OF CPM, GROSS PROFIT MARGIN OF COMPARABLE ENTITITES CANNOT BE IDENTIFIED IN INDIA FROM THE DATA AVAILABLE IN PUBL IC DOMAIN AS THERE IS NO REQUIREMENT FOR DISCLOSURE OF GROSS PROFIT MARGI N. INSTEAD OF APPLYING COST PLUS METHOD WITH NUMEROUS ASSUMPTIONS IT IS MORE APPROPRIATE TO APPLY TNMM AND THEREFORE ASSESSEES CONTENTION TO APPLY CPM IS REJECTED. 5. THE TPO FINALLY SELECTED THE FOLLOWING COMPARA BLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS REL ATING TO SOFTWARE DEVELOPMENT SERVICES :- S. NO. COMPANY NAME OP/OC(5) (CORRECTED) 7 ITA NO. 61 92/DEL/2015 I AKSHAY SOFTWARE TECHNOLOGIES LTD. 0.86% II E-INFOCHIPS 56.44% III EVOKE TECHNOLOGIES PVT. LTD. 8.11% IV E-ZEST SOLUTIONS 39.98% V INFOSYS LTD. 43.39% VI LARSEN & TOUBRO INFOTECH LTD. 18.40% VII LGS GLOBAL LIMITED 14.11% VIII PERSISTENT SYSTEMS & SOLUTIONS LTD.(MERGED) 21.51% IX PERSISTENT SYSTEMS LTD. 23.08% X R S SOFTWARE (INDIA) LTD. 16.20% XI SASKEN COMMUNICATIONS TECHNOLOGIES LTD. 24.33% XII WIPRO TECHNOLOGY SERVICES LTD. (MERGED) 54.42% XIII CELSTREAM TECHNOLOGIES LTD. LTD. 13.20% XIV ACROPETAL TECHNOLOGIES LTD. (SEG.) 22.06% XV MINDTREE LTD. (SEG) 10.29% XVI SANKHYA INFOTECH LIMITED (SEG.) 26.20% XVII TATA ELXSI LTD. (SEG.) 26.20% XVIII THIRDWARE SOL (SEG) 18.30% XIX ZYLOG SYSTEMS LIMITED 28.74% AVERAGE 23.81% 8 ITA NO. 61 92/DEL/2015 6. THE TPO WORKED OUT THE ADJUSTMENT ON ACCOUNT O F ARMS LENGTH PRICE AS UNDER :- PARTICULARS AMOUNT (INR) OPERATING COST 7,11,10,000 ARMS LENGTH MARGIN (%) 23.81% ARMS LENGTH MARGIN RS. 1,69,31,291 ARMS LENGTH PRICE 8,80,41,291 PRICE CHARGED BY THE ASSESSEE 7,41,29,000 5% OF PRICE CHARGED IN INTERNATIONAL TRANSACTION 37,06,450 DIFFERENCE BETWEEN ALP AND PRICE CHARGED BY ASSESSEE 1,39,12,291 DIFFERENCE FOR WHICH ADJUSTMENT IS REQUIRED TO BE MADE 1,39,12,291 7. THE AO ACCORDINGLY PASSED THE DRAFT ASSESSMENT ORDER BY PROPOSING AN ADJUSTMENT OF RS. 1,39,12,291/-. BEING AGGRIEVED THE ASSESSEE FILED THE OBJECTION TO THE PROPOSED ADJUST MENT BEFORE THE DRP WHO DID NOT FIND ANY MERIT IN THE OBJECTIONS OF THE ASSESSEE BY OBSERVING THAT THE TPO HAD DEALT WITH THE ASSESSEES CONTENTI ONS IN RESPECT OF ALL THE POINTS RAISED BY THE ASSESSEE BY GIVING ELABORA TE REASONS AND THAT A CLEAR CUT FINDING HAS BEEN GIVEN BY THE TPO THAT RE LIABLE GP MARGIN COULD NOT BE IDENTIFIED IN INDIA FROM THE DATA AVAI LABLE IN PUBLIC DOMAIN HENCE TMNN WAS APPROPRIATE OVER CPM, THE DRP ALSO O BSERVED THAT 9 ITA NO. 61 92/DEL/2015 FULL OPPORTUNITY WAS GIVEN TO THE ASSESSEE TO PRESE NT ITS CASE. THE AO THEREAFTER, BY KEEPING IN VIEW THIS FACT THAT THE O BJECTIONS RAISED BY THE ASSESSEE WHERE REJECTED BY THE DRP VIDE ORDER DATED 31.8.2015 RETAINED THE ADJUSTMENTS AS HAS BEEN MADE BY THE TPO AND M ADE THE ADDITION OF RS. 1,39,12,291/- ON ACCOUNT OF ARMS LENGTH PRICE ADJUSTMENT. 8. BEING AGGRIEVED THE ASSESSEE IS IN APPEA L. THE ASSESSEE HAS FURNISHED AN APPLICATION DATED 3 RD MARCH, 2016 UNDER RULE 29, OF THE INCOME-TAX (APPELLATE TRIBUNAL), RULES 1963 FOR ADM ISSION OF ADDITIONAL EVIDENCES STATING THEREIN AS UNDER : 4. SEVEN N A/S (7N) IS A COPENHAGEN DENMARK BASED IT CONSULTING AND TRAINING COMPANY WITH 20 YEARS OF E XPERIENCE. 7N PROVIDES IT CONSULTING SERVICES IN-HOUSE REMOTE DEVELOPMENT AND RELATED SERVICES. 7N IS ALSO FUNCTIONAL IN IT EDUCATION & TRAINING. IT IS RESPE CTFULLY SUBMITTED THAT 7N HOLDS 99.99% EQUITY SHARES OF APPELLANT COMPANY. 5. DURING THE RELEVANT ASSESSMENT YEAR, APPELLAN T HAD ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTION WITH ITS ASSOCI ATED ENTERPRISES (AE) DESCRIPTION OF THE TRANSACTION VALUE OF TRANSACTION (RS.) TESTED PARTY METHOD USED ASSOCIATED ENTERPRISE PROVISION OF SOFTWARE CONSULTING AND SUPPORT SERVICES 7,41,29,154 7N INDIA COST PLUS METHOD 7N REIMBURSEMENT OF EXPENSES 95,002 NOT APPLICABLE COST-TO-COST 7N 10 ITA NO. 6 192/DEL/2015 6. THE LEARNED ASSESSING OFFICER (AO) REFER RED THE MATTER TO TRANSFER PRICING OFFICER (TPO) TO DETERMINE ARMS LENGTH P RICE OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE APPELLANT, VIDE ORD ER DATED 12 JANUARY, 2015, THE TPO ADDED RS. 1,39,12,291/- TO THE TOTAL INCOME OF THE APPELLANT AS ADJUSTMENT ON ACCOUNT OF THE ARMS LENGTH PRICE (ALP) OF THE IN TERNATIONAL TRANSACTION PERTAINING TO PROVISION OF SOFTWARE CONSULTING AND SUPPORT SERVICES BY THE APPELLANT TO ITS AE WHICH WAS UPHELD BY THE DISPUTE RESOLUTION PANEL (DRP) VIDE DIRECTIONS DATED 31 AUGUST, 2015. AO PASSED TH E FINAL ASSESSMENT ORDER DATED 26 OCTOBER, 2015 IN LINE WITH THE DIRECTIONS OF DRP . 7. THAT THE APPELLANT HAD BENCHMARKED ITS INTERNATIONAL TRANSACTION PERTAINING TO RENDERING OF SOFTWARE CONSULTING AND SUPPORT SERVICES BY USING COST PLUS METHOD. THE TPO HOWEVER REJECTED THE MOST APPR OPRIATE METHOD APPLIED BY THE APPELLANT FOR BENCHMARKING THE SUBJECT TRANSACT ION, BY ERRONEOUSLY CONCLUDING THAT SEGMENTAL DATA WAS NOT AVAILABLE WITH RESPECT TO THE SERVICES PROVIDED BY THE APPELLANT TO THE AE & NON-AES. IN THIS REGARD, WE R ESPECTFULLY SUBMIT THAT SEGMENTAL DATA WAS DULY AVAILABLE & PRODUCED BEFORE THE TPO (SEGMENTAL DETAILS ARE PRODUCED AT PARA 5 ON PAGE 3 OF TPOS ORDER). 8. WE RESPECTFULLY SUBMIT THAT DURING THE PROCE EDINGS BEFORE THE TPO, THE APPELLANT WAS ASKED TO FURNISH SEGMENTAL DATA. ACCO RDINGLY, THE APPELLANT FILED SEGMENTAL DATA BEFORE THE TPO, AND VIDE ITS SUBMISS IONS DATED 8 JANUARY, 2015 (PAGE 24 OF THE PAPER BOOK) AND 10 DECEMBER, 2014 ( PAGE 53 AND 54 OF THE PAPERBOOK) HAD REQUESTED THE TPO TO CONSIDER THE NE T OPERATING MARGINS OF INTERNAL COMPARABLE (INTERNAL TNMM) TO BENCHMARK T HE SUBJECT TRANSACTION. 9. THIS CONTENTION WAS PLACED BY THE APPELLAN T WITHOUT PREJUDICE TO ITS PRIMARY CONTENTION THAT GROSS MARGINS OF INTERNAL C OMPARABLE (INTERNAL CPM) SHOULD BE CONSIDERED BY THE TPO FOR BENCHMARKING TH E SUBJECT TRANSACTION. THE 11 ITA NO. 6 192/DEL/2015 TPO FAILED TO DISCUSS THE INTERNAL TNMM IN HIS ORDE R AND REJECTED THE BENCHMARKING ANALYSIS BASED ON INTERNAL COMPARABLE DATA WITHOUT GIVING THE APPELLANT A PROPER OPPORTUNITY OF BEING HEARD, THER EBY DEPRIVING OF ITS RIGHT TO NATURAL JUSTICE. 10. IT IS RESPECTFULLY SUBMITTED THAT UNAUDITED DATA WAS DULY AVAILABLE WITH TPO WHILE ANALYSING THE TRANSACTION; HOWEVER, HE HA D NOT GIVEN MUCH WIEGHTAGE TO THE SAME. FOR THE SAKE OF COMPLETENESS OF ARGUME NTS AND TO DEMONSTRATE RESULTS MORE EMPHATICALLY, VIDE THE PRESENT APPLICATION THE APPELLANT WISHES TO PLACE ON RECORD THE AUDITED RESULT. THE SEGMENTAL DATA REQUI RED DETAILED ANALYSIS OF DIRECT AND INDIRECT COSTS ASSOCIATED WITH ARRANGEMENTS ENT ERED INTO BY 7N INDIA WITH NON-ASSOCIATED ENTERPRISES LOCATED WITHIN INDIA AND OUTSIDE INDIA. THE SEGMENTAL DATA OF 7N INDIA (CONTAINING GEOGRAPHIC SEGMENTATIO N WITH REGARD TO COMPARABLE DATA) FOR AY 2011-12 HAS BEEN AUDITED BY AN INDEPEN DENT CHARTERED ACCOUNTANT. 11. THE PRESENT APPLICATION IS BEING FILED TO SE EK LIBERTY OF THE TRIBUNAL TO CONSIDER THE AFOREMENTIONED SEGMENTAL DATA OF 7N IN DIA FOR FY 2010-11 WHICH HAS BEEN DULY AUDITED BY AN INDEPENDENT CHARTERED ACCOU NTANT. THE AUDITED SEGMENTAL RESULTS OF 7N INDIA FOR AY 2011-12 IS ENCLOSED AS A NNEXURE 2. 12. WE RESPECTFULLY SUBMIT THAT EVEN THOUGH THE TPO HAS REJECTED THE INTERNAL COMPARABILITY ANALYSIS OF THE APPELLANT IN THE TP ORDER, THE TPO HAS CONSIDERED THE NET OPERATING MARGIN EARNED BY 7N IN DIA FROM ITS ARRANGEMENT WITH ASSOCIATED ENTERPRISE FOR THE PURPOSE OF BENCHMARKI NG THE SUBJECT TRANSACTION AND ACCORDINGLY, DETERMINED THE QUANTUM OF TRANSFER PRI CING ADJUSTMENT TO THE INCOME OF THE APPELLANT FOR AY 2011-12. 13. WHILE ADJUDICATING THE ISSUE OF REJECTIO N OF COST PLUS METHOD AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE APPELLANT, THE DRP REJECTED APP ELLANTS OBJECTIONS WITHOUT PASSING A SPEAKING ORDER AND UPHELD THE APPROACH OF TPO IN APPLYING TNM 12 ITA NO. 6 192/DEL/2015 METHOD. THE DRP MERELY OBSERVED THAT TNMM GIVES A V ERY POINTED AND STRAIGHT COMPARISON AS ULTIMATELY IT IS THE MARGINS FROM A T RANSACTION THAT HELP IN DETERMINATION OF IT BEING AT ARMS LENGTH OR NOT, T HEREFORE, THE APPELLANTS OBJECTIONS WERE DISMISSED BY THE DRP AS UNTENABLE. 14. BEING AGGRIEVED BY THE FINAL ASSESSMENT ORDE R DATED 26 OCTOBER, 2015, THE APPELLANT PREFERRED THE PRESENT APPEAL BEFORE T HIS HONBLE TRIBUNAL WHICH HAS BEEN REGISTERED AS ITA NO. 6192/DEL/2015. 15. WE WISH TO SUBMIT THAT ONCE PROFIT MARGIN OF AE & NON-AE SEGMENTS ARE AVAILABLE FOR THE PURPOSE OF BENCHMARKING THE S UBJECT INTERNATIONAL TRANSACTION, INTERNAL COMPARABLES OUGHT TO HAVE BEE N PREFERRED AS IT IS NOW A SETTLED POSITION IN LAW THAT INTERNAL COMPARABLES ARE PREFERRED OVER EXTERNAL COMPARABLES. 9. THE RELIANCES IS PLACED ON THE FOLLOWING C ASE : A) TECNIMONT ICB (P) LTD. V. ACIT, ITA NO. 4608 & 5085/MUM/2010, ITAT MUMBAI (THIRD MEMBER) B) BIRLASOFT INDIA LTD. V. DCIT, 44 SOT 664, ITAT DELHI C) SONY ERICSSON MOBILE COOMUNICATIONS INDIA PVT. LTD. VS. CIT-III [(2015) 374 ITR 118] (DEL HC) D) DIAGEO INDIA PRIVATE LIMITED VS. DCIT MUMBAI (I TA NOS. 7932/MUM/2011) E) CABLE & WIRELESS (INDIA) LTD. VS. ADIT MUMBAI ( ITA NO. 822/MUM/2013) F) GENISYS INTEGRATING SYSTEM (INDIA) PRIVATE LIMI TED VS. DCIT BANGALORE (ITA NO 908/BANG/2011) G) BIRLA SOFT (INDIA) LIMITED (FORMERLY BIRLASOFT LIMITED) VS. DCIT, NEW DELHI (ITA NO. 284/DEL/2013) H) EATON FLUID POWER LIMITED (ITA NO. 1623/PN/2011 ) I) VALTECH INDIA SYSTEMS PRIVATE LIMITED [IT(TP)A 22/BANG/2014] J) AGILA SPECIALITIES PVT. LTD. [IT(TP)A NO. 214/B ANG/2015] K) E4E BUSINESS SOLUTIONS INDIA PVT. LTD. [IT(TP)A NO. 324(BANG)/2015] 13 ITA NO. 6 192/DEL/2015 10. IT HAS ALSO BEEN STATED IN THE AFORESAID AP PLICATION AS UNDER :- 18, THUS, IT IS CLEAR FROM THE ABOVE PRECEDENTS T HAT INTERNAL TNMM IS TO BE PREFERRED OVER EXTERNAL TNMM. IN THE INSTANT CASE, THE NECESSARY AND RELIABLE DATA WHICH IS REQUIRED FOR BENCHMARKIN G THE SUBJECT INTERNATIONAL TRANSACTION OF 7N INDIA WITH ITS AE & NON-AE IS AVAILABLE, THUS, INTERNAL COMPARABLE IS TO BE PREFE RRED OVER EXTERNAL COMPARABLES. 19. IT IS FURTHER SUBMITTED THAT TO DO COMPLE TE JUSTICE AND FOR ADJUDICATION OF GROUND NO. 4 TO 8 OF THE PRESENT AP PEAL, IT IS NECESSARY TO TAKE THE PRESENT ADDITIONAL EVIDENCE ON RECORD. 11. A PRAYER HAD BEEN MADE TO ADMIT THE ADDITION AL EVIDENCES UNDER RULE 29 THE INCOME TAX APPELLATE TRIBUNAL RULES, 1 963. RELIANCE HAS BEEN PLACED ON THE DECISION OF THE ITAT, DELHI IN T HE CASE OF UOP LLC REPORTED AT 108 ITD186. THE ASSESSEE FURNISHED THE COPIES OF SEGMENTAL PROFIT AND LOSS ACCOUNTS IN RELATION TO T RANSACTIONS WITH THE AE AND NON-AES FOR THE REVENUE AND ASSOCIATED COS T FOR ARRIVING AT SEGMENTAL PROFIT AND LOSS WHICH HAS BEEN AUDITED B Y M/S. S.S.KOTHARI MEHTA & CO., THE DIRECTOR OF THE ASSESSEE HAS ALSO FURNISHED AN AFFIDAVIT DATED 9 TH MARCH, 2016 STATING THEREIN AS UNDER :- 1. THAT I AM DIRECTOR OF M/S. SEVEN N CONSULTIN G PRIVATE LIMITED, AND AM FULLY CONVERSANT WITH THE FACTS OF THE CASE RELATING TO THE ASSESSMENT YEAR (AY) 2011-12 AND I AM THUS FULLY COMPETENT TO SWEAR AND FILE THIS AFFIDAVIT. 14 ITA NO. 6 192/DEL/2015 2. THAT SEVEN N CONSULTING PRIVATE LIMITED HAVE R ECEIVED ON 3 MARCH, 2016, A CERTIFICATE OF AUDIT CARRIED OUT BY AN INDEPENDENT CHARTERED ACCOUNTANT OF ITS SEGMENTAL FINANCIAL RES ULTS FOR THE FINANCIAL YEAR ENDED ON 31 ST MARCH, 2011. 3. THAT SEVEN N CONSULTING PRIVATE LIMITED HAS D ULY FURNISHED THE SAME TO THE HONBLE I-1 BENCH OF THE INCOME TAX APPELLATE TRIBUNAL VIDE APPLICATION DATED 3 MARCH, 2016 UNDER RULE 29 OF THE INCOME-TAX (APPELLATE TRIBUNAL) RULES, 1963 (RULES) FOR ADMISSION OF AUDITED SEGMENTAL RESULTS AS ADDITIONAL EVIDENCE. 4. THAT AS PER THE GENERAL PRACTICE FOLLOWED BY SE VEN N CONSULTING PRIVATE LIMITED AND IN TERMS OF AS-17, THE COMPANY WAS NOT REQUIRED TO MAINTAIN SEPARATE SEGMENTAL ACCOUNTS IN-AS-MUCH AS THE NATURE OF SERVICES IN RESPECT OF TRANSACTIONS UNDERTAKEN WITH SEVEN N A/S, DENMARK (RELATED PARTY) AND THE UNRELATED PARTIES. HOWEVER DURING THE COURSE OF TRANSFER PRICING ASSESSMENT THE TRANS FER PRICING OFFICER HAD REJECTED THE MOST APPROPRIATE METHOD SE LECTED BY SEVEN N CONSULTING PRIVATE LIMITED ON THE GROUND THAT THE SEGMENTAL DATA WAS NOT AUDITED. HENCE, ON ADVICE IN THE APPEAL BEF ORE THE HONBLE TRIBUNAL THE AUDITED SEGMENTAL RESULTS HAVE NOW BEE N OBTAINED FROM AN INDEPENDENT CHARTERED ACCOUNTANT. 12. DURING THE COURSE OF HEARING THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE CONTENTS OF THE AFORESAID APPLICATIO N MOVE FOR ADMISSION OF THE ADDITIONAL EVIDENCES AND FURTHER SUBMITTED T HAT AT THE TIME OF PROCEEDINGS BEFORE THE TPO AUDITED SEGMENTAL ACCOUN TS WERE NOT 15 ITA NO. 6 192/DEL/2015 AVAILABLE, THEREFORE, THE ASSESSEE WAS PREVENTED B Y REASONABLE CAUSE FOR PRODUCING THE SAME BEFORE THE TPO. IT WAS FURTH ER STATED THAT THE ASSESSEE FURNISHED SEGMENTED DATA VIDE SUBMISSION D ATED 08.01.2015 BEFORE THE TPO FOR CONSIDERING THE INTERNAL COMPARA BLES BUT THE TPO REJECTED THOSE COMPARABLES AS THE SAME WERE NOT AU DITED. HOWEVER, THE ASSESSEE NOW GOT THE FINANCIAL STATEMENTS AUDIT ED FOR ARRIVING AT THE SEGMENTED DATA BY M/S S.S.KOTHARI MEHTA & CO. THER EFORE, THESE ARE TO BE CONSIDERED. IN HIS RIVAL SUBMISSIONS, THE LD. DR OBJECTED THE ADMISSION OF THE ADDITIONAL EVIDENCE AND STATED THA T THE ACCOUNTS WERE AUDITED IN RESPECT OF SEGMENTAL RESULTS AFTER A GAP OF 5 YEARS SO THESE ARE NOT TO BE ADMITTED, PARTICULARLY WHEN THE ASSE SSEE DID NOT FURNISH THE SAME BEFORE THE DRP/AO./T.P.O. 13. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH T HE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON TH E RECORD. IN THE PRESENT CASE IT IS NOTICED THAT THE ASSESSEE REQUES TED THE TPO TO CONSIDER THE SEGMENTAL P & L ACCOUNT IN RELATION TO TRANSACTION WITH ASSOCIATED ENTERPRISES (AE) AND NON-AES FOR THE RE VENUE OF ASSOCIATED COST FOR ARRIVING AT SEGMENTAL P & L VI DE LETTER DATED 08.01.2015. HOWEVER, THE TPO DID NOT ACCEPT THE REQ UEST OF THE ASSESSEE SINCE THE SEGMENTAL DATA RELATING TO INTER NAL COMPARABLES WERE NOT AUDITED. NOW THE ASSESSEE GOT THE SEGMENTAL PRO FIT AND LOSS ACCOUNT AUDITED BY M/S. S.S. KOTHARI MEHTA & CO. IN PURSUAN CE OF THE 16 ITA NO. 6 192/DEL/2015 PROVISIONS OF INCOME-TAX ACT, 1961 AND THE PROVISIO NS OF COMPANIES ACT, 1956 FOR THE YEAR ENDED ON 31 ST MARCH, 2011 AND FURNISHED THE COPIES OF THE SAME AS AN ADDITIONAL EVIDENCE. 14. IN OUR OPINION, TO RESOLVE THE PRESENT CONTRO VERSY, THE ADDITIONAL EVIDENCES FURNISHED BY THE ASSESSEE ARE RELEVANT AN D GO TO THE ROOT OF THE MATTER, SO THESE DESERVES TO BE ADMITTED. ACCO RDINGLY, THE ADDITIONAL EVIDENCES IS FURNISHED BY THE ASSESSEE A RE ADMITTED UNDER RULE 29 THE INCOM-TAX (APPELLATE TRIBUNAL) RULES, 1963. HOWEVER, THESE EVIDENCES FURNISHED BY THE ASSESSEE FIRST TIM E BEFORE THIS BENCH OF THE TRIBUNAL WERE NOT AVAILABLE TO THE AUTHORITIES BELOW. WE, THEREFORE, DEEM IT APPROPRIATE TO SET ASIDE THE ISSUE UNDER CO NSIDERATION TO THE FILE OF THE TPO TO BE ADJUDICATED AFRESH INACCORDANCE WI TH LAW, AFTER PROVIDING DUE AND REASONABLE OPPORTUNITY OF BEING H EARD TO THE ASSESSEE. WE ALSO DIRECT THE TPO TO CONSIDER THE AD DITIONAL EVIDENCES, FURNISHED BY THE ASSESSEE WHILE ADJUDICATING THE IS SUES UNDER CONSIDERATION. 15. AS REGARDS TO GROUND NO. 8, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS CONSEQUENTIAL IN NATURE AND DI RECTLY RELATES TO THE ISSUES INVOLVED IN GROUND NO. 4 TO 7. ACCORDINGLY, THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO. 8 IS ALSO REMANDED BACK TO THE FILE OF THE TPO TO BE ADJUDICATED ALONG WITH THE ISSUES RAISED IN GROUND NO. 4 TO 7. 17 ITA NO. 6 192/DEL/2015 15. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLO WED FOR STATISTICAL PURPOSES. (ORDER PRONOUNCED IN THE COURT ON 08/06/2016). SD/- SD/- (BEENA A PILLAI) (N. K. SAINI) JUDICIAL MEMBER ACCOUNTANT ME MBER DATED:08 / 06/2015 *BINITA* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT BY ORDE R ASSTT . REGISTER 18 ITA NO. 6 192/DEL/2015 DATE INITIAL 1. DRAFT DICTATED ON 03.06.2016 PS 2. DRAFT PLACED BEFORE AUTHOR 03.06.2016 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.