Headstrong Services India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 6200/DEL/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6990 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 1 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-02-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 10-02-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 14-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SHAILESH KUMAR S
• Keywords: Related party transaction; Depreciation; Transfer pricing; Search and seizure; International transaction; Wholly owned subsidiary; Avoidance of tax
• Section: 92C; 143(3); 244A; 10AA; 133(6); 10B; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM ITA NO.6200/DEL/2012 ASSESSMENT YEAR : 2008-09 HEADSTRONG SERVICES INDIA PVT. LTD., 103, ASHOKA ESTATE, BARAKHAMBA ROAD, NEW DELHI. PAN: AABCT7650D VS. DCIT, CIRCLE-12(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESWAR RAO & SHRI SHAILESH KUMAR, ADVOCATES DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT,DR SHRI DEEPAK TIWARI, SR. DR DATE OF HEARING : 10.02.2016 DATE OF PRONOUNCEMENT : 11.02.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E FINAL ASSESSMENT ORDER PASSED ON 17.10.2012 BY THE ASSESSING OFFICER (AO) U/S 143(3) ITA NO.6200/DEL/2012 2 READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEA R 2008-09. 2. FIRST ISSUE RAISED IN THIS APPEAL IS AGAINST THE MAKING OF ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS .15,41,06,180/-. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A 100% SUBSIDIARY OF HEADSTRONG SERVICES LLC. THE ASSESSE E IS A 100% EXPORT ORIENTED UNIT (EOU) FOR MANUFACTURE AND EXPORT OF C OMPUTER SOFTWARE. IT IS ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPM ENT SERVICES AND IT ENABLED SERVICES (ITES) TO ITS AES. THE ASSESSEE R EPORTED TWO INTERNATIONAL TRANSACTIONS, NAMELY, PROVISION OF SO FTWARE SERVICES AND PROVISION OF IT ENABLED SERVICES. THE AO MADE REFE RENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINATION OF THE ALP OF THESE INTERNATIONAL TRANSACTIONS. THE TPO MADE TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.60,39,585/- FOR THE INTERNATIONAL T RANSACTION OF ITES. HE ALSO TOOK UP THE INTERNATIONAL TRANSACTION OF S OFTWARE SERVICES WITH TRANSACTED VALUE OF RS.128,96,15,682/-. IT WAS NOT ICED THAT THE ASSESSEE SELECTED ITSELF AS A TESTED PARTY BY CHOOSING THE T RANSACTIONAL NET ITA NO.6200/DEL/2012 3 MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD . THE ASSESSEE USED OPERATING PROFIT/TOTAL COST (OP/TC) AS ITS PRO FIT LEVEL INDICATOR (PLI) WHICH WAS SHOWN AT 16.53%, CALCULATED BY TAKI NG WEIGHTED AVERAGE MARGIN OF FOUR YEARS, BEING THE ACTUAL FIGU RES FOR THE FINANCIAL YEAR 2007-08 PLUS PROJECTED FIGURES FOR THE COMING THREE YEARS. THE ASSESSEE CHOSE 23 COMPANIES AS COMPARABLE, WITH THE IR AVERAGE PLI AT 14.43%. THUS IT WAS DEMONSTRATED THAT THIS INTERNAT IONAL TRANSACTION WAS AT ARMS LENGTH PRICE (ALP). THE TPO ACCEPTED THE ASSESSEE AS A TESTED PARTY AND ALSO THE TNMM AS THE MOST APPROPRIATE MET HOD. HOWEVER, THE ASSESSEES PLI, COMPUTED ON THE BASIS OF PROFIT OF FOUR YEARS INCLUDING PROJECTED PROFIT OF THREE YEARS, WAS REJE CTED. THE TPO CONSIDERED THE OPERATING PROFIT MARGIN OF THE ASSES SEE FOR THE CURRENT YEAR ALONE, CALCULATED ON THE BASIS OF ACTUAL FIGUR ES. HE MADE CERTAIN AMENDMENTS IN THE LIST OF COMPARABLES IN THE SENSE THAT SOME OF THE COMPARABLES CHOSEN BY THE ASSESSEE WERE REMOVED WHI LE A FEW NEW WERE INTRODUCED. AVERAGE PLI OF COMPARABLES, BEING OP/OC COMPUTED AT 23.82%, WAS APPLIED AS A BENCHMARK FOR WORKING O UT THE TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.20,18,08,602/- F OR THIS INTERNATIONAL ITA NO.6200/DEL/2012 4 TRANSACTION. THE ASSESSEE CHALLENGED THE DRAFT ORDE R BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THE TPO IN HIS ORDER GIVIN G EFFECT TO DIRECTIONS GIVEN BY THE DRP, DID NOT MAKE ANY ADJUS TMENT IN RELATION TO THE INTERNATIONAL TRANSACTION OF ITES. AS REGARDS THE OTHER INTERNATIONAL TRANSACTION OF `SOFTWARE DEVELOPMENT SERVICES, HE RECOMPUTED THE PROFIT MARGIN OF COMPARABLES AT 19.73%. BY APPLYIN G THE SAME TO THE TOTAL OPERATING COST INCURRED BY THE ASSESSEE, THE TPO DOWNSCALED TRANSFER PRICING ADJUSTMENT TO RS.15,41,06,180/-. IT IS THIS AMOUNT WHICH WAS ADDED BY THE AO IN THE FINAL ASSESSMENT ORDER, WHICH IS SUBJECT MATTER OF THE INSTANT APPEAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD. THE LD. AR CHALLENGED THE ADDI TION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT FROM THE INTERNATIONAL TRANSACTION OF `SOFTWARE DEVELOPMENT SERVICES BROADLY ON THREE C OUNTS, NAMELY, CALCULATION OF THE ASSESSEES PLI; SELECTION OF CO MPARABLES; AND THAT WHEN THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 10A, THEN NO TRANSFER PRICING ADJUSTMENT CAN BE MADE. WE WILL DEAL WITH T HESE IN SERIATIM. ITA NO.6200/DEL/2012 5 A. CALCULATION OF ASSESSEES PLI 5. THE LD. AR CHALLENGED THE CALCULATION OF THE ASS ESSEES PLI BY THE TPO ON DIFFERENT SCORES, WHICH WE WILL DEAL WITH H EREINAFTER SEPARATELY. A. WHETHER PROJECTED PROFIT RATE OF SUBSEQUENT YEAR S CAN ALSO BE CONSIDERED ? 6.1. THE ASSESSEE ADOPTED PLI OF OP/OC AND COMPUTED ITS WEIGHTED AVERAGE PROFIT RATE OF 16.53%, BY TAKING PROFIT MA RGINS FOR A PERIOD OF FOUR YEARS, BEING ACTUAL FIGURE FOR THE CURRENT YE AR AT 6.52% AND PROJECTED FIGURES FOR COMING THREE YEARS AT 17.23%, 19.05% AND 19.05%. THE TPO REJECTED THIS APPROACH AND HELD THAT ONLY P ROFIT FOR THE CURRENT YEAR COULD BE CONSIDERED AS THE ASSESSEES PLI. 6.2. THE LD. AR VEHEMENTLY OPPOSED THE ACTION OF THE AUTHORITIES BELOW IN REJECTING THE ASSESSEES PLI COMPUTED BY C ONSIDERING, INTER ALIA , THE PROJECTED FIGURES FOR COMING THREE YEARS. IT WAS SUBMITTED THAT THE ASSESSEE TOOK CONTRACTS FROM ITS AES IN EARLIER YEARS, WHICH WERE RUNNING BEYOND A PARTICULAR YEAR AND, HENCE, THE PR OFITABILITY FOR ONE YEAR CANNOT BE DECISIVE TO CALCULATE THE REAL PROFI TS. ON BEING CALLED ITA NO.6200/DEL/2012 6 UPON TO POINT OUT AGREEMENTS ENTERED INTO WITH ITS AES, THE LD. AR TOOK US THROUGH PAGES 213 ONWARDS OF THE PAPER BOOK, WHI CH IS COPY OF AN AGREEMENT BETWEEN THE ASSESSEE AND ITS AE FOR PROVI DING SOFTWARE DEVELOPMENT SERVICES. THIS AGREEMENT HAS BEEN ENTE RED INTO ON 25.2.2008 W.E.F. 1.4.2007. THE LD. AR CANDIDLY ADM ITTED THAT ALL OTHER AGREEMENTS WHICH GENERATED REVENUE FOR THE ASSESSEE DURING THE YEAR WERE EFFECTIVE FROM 1 ST APRIL, 2007. AS THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION ALSO BEGINS FRO M 1.4.2007, WE CANNOT ACCEPT THE ASSESSEES CONTENTION THAT THE AG REEMENTS WERE ENTERED IN EARLIER YEARS AND WOULD SPILL OVER IN TH E SUBSEQUENT YEARS AS WELL. ON GOING THROUGH THE ASSESSEES ANNUAL ACCOU NTS, IT EMERGES THAT UNDER THE HEADING OTHER CURRENT ASSETS AS APPEARI NG IN THE BALANCE SHEET, THERE IS AN ITEM OF UNBILLED REVENUE AMOUNT ING TO RS.3,24,77,983/-. ON FURTHER INQUIRY, IT TRANSPIR ED THAT THIS AMOUNT REPRESENTS WORK-IN-PROGRESS OF THE ASSESSEE ACCOUNT ING FOR EXPENSES INCURRED DURING THE YEAR FOR WHICH THE WORK IS STIL L INCOMPLETE AND NO REVENUE IS RECEIVED. THE LD. AR ACCEPTED THAT ALL THE EXPENSES BOOKED IN THE PROFIT & LOSS ACCOUNT MATCH WITH THE CORRESPOND ING REVENUE ITA NO.6200/DEL/2012 7 ACTUALLY REALIZED AND THIS PROVISION OF WORK-IN-PRO GRESS IS A STANDARD ACCOUNTING PROCEDURE ADOPTED FOR EXCLUDING EXPENSES INCURRED ON WORK DONE FOR WHICH REVENUE IS YET TO BE ACCOUNTED FOR. THIS DIVULGES THAT THE ASSESSEE DEBITS EXPENSES TO ITS PROFIT & LOSS ACCOU NT ONLY TO THE EXTENT FOR WHICH CORRESPONDING REVENUE IS RECOGNIZED IN AC COUNTS AND AS SUCH, THERE IS NO POSSIBILITY OF SHIFTING REVENUE OR EXPE NSES FROM ONE YEAR TO ANOTHER, SO AS TO DISTORT THE FIGURE OF PROFIT FOR EACH YEAR INDEPENDENTLY. WE ARE, ERGO, UNABLE TO APPROVE THIS ARGUMENT RAIS ED ON BEHALF OF THE ASSESSEE. 6.3. FURTHER, SECTION 92(1) PROVIDES THAT: ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SECTION 92C DEALING WITH THE COMPUT ATION OF ARMS LENGTH PRICE PROVIDES THROUGH SUB-SECTION (1) THAT THE ARM S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE D ETERMINED BY ANY OF THE METHODS GIVEN IN THIS PROVISION. WHEN WE CONSIDER T HE LANGUAGE OF SECTION 92(1) IN JUXTAPOSITION TO THAT OF SECTION 92C(1), IT EMERGES THAT IT IS THE INCOME ARISING FROM AN INTERNATIONAL TRANSAC TION WHICH IS TO BE ITA NO.6200/DEL/2012 8 COMPUTED HAVING REGARD TO ITS ALP. SUB-SECTION (3) (A) OF SECTION 92C PROVIDES THAT WHERE THE AO, DURING THE COURSE OF AN Y PROCEEDINGS FOR ASSESSMENT IS OF THE OPINION THAT THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED AS PER ALP, THEN, HE MAY PROCEED TO DETERMINE THE ALP IN RELATION TO THE SAID INTERNATIONAL TRANSACTION. THIS PROVISION, AGAIN, BRINGS OUT THA T IT IS THE PRICE CHARGED OR PAID IN INTERNATIONAL TRANSACTION WHICH IS TAKEN UP FOR CONSIDERATION BY THE AO FOR EXAMINING WHETHER OR NOT THE SAME IS AT ALP. THE ABOVE PROVISIONS PLENTIFULLY SHOW THAT IT IS THE ACTUAL I NCOME FROM AN INTERNATIONAL TRANSACTION EARNED DURING THE YEAR, W HICH IS TAXED AT ITS ALP. THE BASE FOR COMPARISON, BEING THE ACTUAL INCO ME OF THE ASSESSEE FROM AN INTERNATIONAL TRANSACTION, CANNOT BE SUBSTI TUTED WITH ANY HYPOTHETICAL FIGURE BY CONSIDERING, INTER ALIA, PROJECTED PROFITS FOR THE SUBSEQUENT YEARS. ESSENCE OF THE ENTIRE TRANSFER P RICING PROVISIONS IS TO COMPARE THE ACTUAL PRICE/PROFIT REALIZED/EARNED BY THE ASSESSEE FROM AN INTERNATIONAL TRANSACTION WITH THE PRICE/PROFIT REA LIZED/EARNED FROM COMPARABLE UNCONTROLLED TRANSACTIONS. IT IS TOTALL Y IMPERMISSIBLE TO SUBSTITUTE ACTUAL PROFIT EARNED BY THE ASSESSEE FROM AN INTERN ATIONAL ITA NO.6200/DEL/2012 9 TRANSACTION WITH ANY OTHER PROFIT BASE, EITHER BY CONSIDERING THE ACTUAL PROFITS FOR THE EARLIER YEARS AS WELL OR BY TAKING INTO ACCOUNT THE PROJECTED PROFITS OF THE SUBSEQUENT YEARS, FOR THE PURPOSES OF DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION . MOREOVER, THE FIGURES TAKEN FOR SUBSEQUENT THREE YEARS ARE MERE P ROJECTIONS. THE CORRECTNESS OF THESE PROJECTIONS IS MYSTERY FOR US. WE, THEREFORE, JETTISON THE VIEW POINT OF THE ASSESSEE IN CALCULAT ING ITS PLI BY CONSIDERING FIGURES FOR THE CURRENT YEAR AND ALSO P ROJECTED FIGURES FOR SUBSEQUENT THREE YEARS. THE IMPUGNED ORDER IS, THER EFORE, UPHELD ON THIS SCORE. (B) FOREIGN EXCHANGE FLUCTUATION 7.1. THE LD. AR CONTENDED THAT THE ADJUSTMENT ON AC COUNT OF DIFFERENCE IN FOREIGN EXCHANGE RATES FOR THE YEAR UNDER CONSI DERATION VIS--VIS THE EARLIER YEAR WAS CLAIMED BY THE ASSESSEE BY MEANS O F ADJUSTMENT TO ITS OPERATING PROFIT, WHICH WAS WRONGLY REFUSED BY TH E TPO. HE SUBMITTED THAT THE VALUE OF INDIAN RUPEES APPRECIATED IN COM PARISON WITH ALL THE MAJOR FOREIGN CURRENCIES, ESPECIALLY THE US DOLLARS . IT WAS ARGUED THAT ITA NO.6200/DEL/2012 10 THE AVERAGE EXCHANGE RATE FOR USD IN THE FINANCIAL YEAR 2006-07 WAS RS.45.25 IN COMPARISON WITH RS.40.29 FOR THE FINANC IAL YEAR 2007-08, RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION . THE EFFECT OF SUCH FLUCTUATION IN THE FOREIGN EXCHANGE RATE, AS EXPLAI NED BY THE LD. AR WAS, THAT DECLINE OF 10.96% WAS REGISTERED IN THE ASSESS EES REVENUE, WHICH WAS REQUIRED TO BE ADJUSTED AGAINST ITS PROFIT MAR GIN FOR THE CURRENT YEAR. HE SUBMITTED THAT THE AUTHORITIES BELOW ERRED IN NO T ALLOWING SUCH ADJUSTMENT TO THE ASSESSEES PLI. THE LD. DR OPPOSE D GRANTING OF ANY ADJUSTMENT IN THE PLI OF THE ASSESSEE IN PRINCIPLE AND ALSO ON MERITS. HE SUBMITTED THAT ADJUSTMENT, IF ANY, CAN BE ALLOWED O NLY IN THE PROFIT RATE OF COMPARABLES AND NOT THAT OF THE ASSESSEE. AS SU CH, WE NEED TO FIRST DETERMINE, IF ANY ADJUSTMENT TO THE ACTUAL PROFIT M ARGIN OF THE ASSESSEE IS AT ALL POSSIBLE FOR THE PURPOSES OF DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION? 7.2. CHAPTER-X OF THE ACT CONTAINS SPECIAL PROVI SIONS RELATING TO AVOIDANCE OF TAX. SECTION 92, WHICH IS THE FIRST SE CTION OF THIS CHAPTER, PROVIDES FOR COMPUTATION OF INCOME FROM AN INTERNAT IONAL TRANSACTION ITA NO.6200/DEL/2012 11 HAVING REGARD TO ARMS LENGTH PRICE. SUB-SECTION (1 ) OF THE SECTION PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIO NAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE . SECTION 92C OF THE ACT ENSHRINES PROVISIONS RELATING TO COMPUTATION OF ARMS LENGTH PRICE. SUB-SECTION (1) OF THE SECTION STATES THAT THE ARM S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE D ETERMINED BY ANY OF THE METHODS LISTED HEREIN WHICH INCLUDE, INTER ALIA, THE TRANSACTIONAL NET MARGIN METHOD. SUB-SECTION (2) OF SECTION 92C PROVI DES THAT THE MOST APPROPRIATE METHOD REFERRED IN SUB-SECTION (1) SHAL L BE APPLIED FOR DETERMINATION OF THE ALP IN THE MANNER AS MAY BE PR ESCRIBED. CALCULATION OF ALP UNDER THE TNMM, WHICH METHOD HAS BEEN ACCEPTED BY THE ASSESSEE AS THE MOST APPROPRIATE METHOD IN T HE INSTANT CASE, HAS BEEN PRESCRIBED UNDER RULE 10B(1)(E) OF THE INCOME- TAX RULES, 1962, WHICH STATES THAT FOR THE PURPOSES OF SECTION 92C(2 ), THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION SHALL BE DETERMINE D AS UNDER : - `(E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ITA NO.6200/DEL/2012 12 ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT B ASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COM PUTED HAVING REGARD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWE EN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMO UNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (II I) ; (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION. 7.3. A BARE PERUSAL OF SUB-CLAUSE (I) OF RULE 10B (1)(E) BRINGS OUT THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION IS TO BE COMPUTED IN RELATION TO A PART ICULAR BASE. SUB-CLAUSE (II) PROVIDES THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM THE COMPARABLE UNCONTROLLED TRANSACTION IS COMPUTED HAV ING REGARD TO THE ITA NO.6200/DEL/2012 13 SAME BASE. SUB-CLAUSE (III) PROVIDES THAT THE NET P ROFIT MARGIN REALIZED BY A COMPARABLE COMPANY, DETERMINED AS PER SUB-CLAUSE (II) ABOVE, IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF A NY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS, ..... WHICH COULD MATERIALLY AFFECT THE AMOUNT OF N ET PROFIT MARGIN IN THE OPEN MARKET. IT IS THIS ADJUSTED NET PROFIT MARGI N OF THE UNRELATED TRANSACTIONS OR OF THE COMPARABLE COMPANIES, AS DET ERMINED UNDER SUB- CLAUSE (III), WHICH IS USED AS BENCHMARK FOR THE PU RPOSES OF MAKING COMPARISON WITH THE NET PROFIT MARGIN REALIZED BY T HE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION AS PER SUB-CLAUSE (I). SU B-CLAUSE (IV) STATES THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE, AS REFERRED IN SUB CLAUSE (I), IS ESTABLISHED TO BE THE SAME AS A NET PROFIT MARGIN REFERRED IN SUB- CLAUSE (III) OF THE COMPARABLES. SUB-CLAUSE (V) STA TES THAT THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTI ON. ON GOING THROUGH THE ABOVE SUB-CLAUSES OF RULE 10B(1)(E), IT BECOMES PAT ENT THAT AS PER THE FIRST STEP, THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION IS TO BE COMPUTED. USE OF THE WORD REALIZED IN ITA NO.6200/DEL/2012 14 THE PROVISION RICHLY INDICATES THAT IT IS THE CALCU LATION OF ACTUAL OPERATING PROFIT MARGIN OF THE ASSESSEE EARNED FROM INTERNATI ONAL TRANSACTION, WHICH IS NOT ANY ADJUSTED FIGURE. SIMILAR POSITION CAN BE TRACED FROM THE LANGUAGE OF SUB-CLAUSE (IV), WHERE AGAIN REFERENCE HAS BEEN MADE TO PROFIT MARGIN `REALIZED BY THE ASSESSEE FROM THE I NTERNATIONAL TRANSACTION. WHEN WE CONSIDER SUB-CLAUSES (II) AND (III), IT TURNS OUT THAT, FIRSTLY, THE NET OPERATING MARGIN ACTUALLY RE ALIZED FROM THE COMPARABLE UNCONTROLLED TRANSACTION IS COMPUTED, WH ICH IS DETERMINED IN THE SAME WAY AS THAT OF THE ASSESSEE AS PER CLAU SE (I), THAT IS, ACTUAL FIGURES WITHOUT MAKING ANY ADJUSTMENT. THEN SUB-CLA USE (III) TALKS OF ADJUSTING THE ACTUALLY REALIZED MARGIN OF COMPARABL ES TO BRING THE SAME AT PAR WITH THE INTERNATIONAL TRANSACTION UNDERTAKE N BY THE ASSESSEE, SO AS TO IRON OUT THE EFFECTS OF DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLLED TRANSACTION S. ON GOING THROUGH ALL THE SUB-CLAUSES OF RULE 10B(1)(E), THE POSITION WHICH FOLLOWS IS THAT THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION IS TAKEN AS SUCH AND THE ADJUSTMENTS, I F ANY, DUE TO DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION A ND COMPARABLE ITA NO.6200/DEL/2012 15 UNCONTROLLED TRANSACTIONS, ARE GIVEN EFFECT TO IN T HE PROFIT MARGIN OF COMPARABLES. THE VIEWPOINT CANVASSED BY THE LEARNED AUTHORIZED REPRESENTATIVE THAT THE ADJUSTMENT SHOULD BE CARRI ED OUT IN THE PROFIT MARGIN OF THE ASSESSEE IS, ERGO, DEVOID OF MERIT AN D CONTRARY TO THE LEGAL PROVISIONS, WHICH IS HEREBY REPELLED. OUR VIEW IS S UPPORTED BY SEVERAL ORDERS PASSED BY THE DELHI BENCHES OF THE TRIBUNAL ON THIS ISSUE INCLUDING DCIT VS. CLAAS INDIA PVT. LTD . (ITA NO.1783/DEL/2011) DT. 12.08.2015 AND SAXO INDIA PVT. LTD. VS. ACIT (ITA NO. 6148/DEL/2015) DT. FEBRUARY, 2016. RESULTANTLY, IT IS HELD THAT FOREIG N EXCHANGE FLUCTUATION ADJUSTMENT, OR FOR THAT MATTER ANY OTHER ADJUSTMENT , CAN BE LEGALLY MADE ONLY IN THE PROFIT MARGIN OF THE COMPARABLES, IF IT IS OTHERWISE FACTUALLY WARRANTED AND NOT IN THE PROFIT MARGIN OF THE ASSES SEE. 7.4. ON GOING THROUGH ALL THE AGREEMENTS ENTERED I NTO BY THE ASSESSEE WITH ITS AES, TO WHICH OUR ATTENTION WAS DRAWN BY T HE LD. AR, IT IS MANIFEST THAT THESE HAVE BEEN MADE EFFECTIVE FROM 1 .4.2007, BEING THE CURRENT YEAR ALONE. UNDER SUCH CIRCUMSTANCES, THER E CAN BE NO GROUND FOR ARGUING THAT THE AGREEMENTS WERE ENTERED IN THE PRECEDING YEAR AND ITA NO.6200/DEL/2012 16 THE REMUNERATION AS REALIZED IN THE CURRENT YEAR ON THE BASIS OF THE FOREIGN EXCHANGE RATES AS APPLICABLE, ADVERSELY AFF ECTED ITS PROFIT MARGIN FOR THE CURRENT YEAR, THEREBY REQUIRING AN UPWARD R EVISION IN PLI OF THE ASSESSEE. ONCE THE AGREEMENTS HAVE BEEN ENTERED INT O WITH EFFECT FROM THE FIRST DAY OF THE PREVIOUS YEAR, THERE CAN BE NO SCOPE FOR COMPARING THE RATE OF FOREIGN EXCHANGE DURING THE YEAR WITH T HAT OF THE PRECEDING YEAR OR ANY OTHER EARLIER YEAR, SO AS TO CLAIM AN Y ADJUSTMENT. 7.5. THE NEXT LEG OF THE ARGUMENT OF THE LD. AR ABO UT THE FOREIGN EXCHANGE FLUCTUATION HAVING ADVERSELY AFFECTED ITS PROFITS FOR THE CURRENT YEAR ON STANDALONE BASIS, IS ALSO UNSUSTAINABLE. I T IS SO FOR THE REASON THAT THIS IS A FACTOR, WHOSE IMPACT IS COMMON BOTH TO THE ASSESSEE AND COMPARABLES. ANY NORTHWARDS OR SOUTHWARDS SOJOURN I N THE FOREIGN CURRENCY RATE LEAVES ITS IMPACT ON THE OPERATING PR OFIT OF THE ASSESSEE IN THE SAME MANNER AS ON THAT OF THE COMPARABLES. IF THE ASSESSEES PROFIT MARGIN GOT SHRINKED DUE TO ADVERSE FLUCTUATION IN T HE FOREIGN EXCHANGE RATE, THE SAME RATE WHEN APPLIED TO THE COMPARABLES , WOULD HAVE AFFECTED THEIR PROFIT MARGINS AS WELL. SINCE ADJUS TMENT IS PERMISSIBLE IN ITA NO.6200/DEL/2012 17 THE PROFIT MARGIN OF COMPARABLES ONLY DUE TO DIFFER ENCES BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTION, AND NOT DUE TO A FACTOR AFFECTING PROFIT OF BOTH TH E ASSESSEE AND COMPARABLES IN THE SAME MANNER, WE REFUSE TO ALLO W ANY ADJUSTMENT IN THE PROFIT RATE OF COMPARABLES BECAUSE OF FLUCTUATI ON IN THE FOREIGN CURRENCY RATE. 7.6. IT IS, THEREFORE, HELD THAT NEITHER THE AS SESSEE CAN CLAIM ANY ADJUSTMENT ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATI ON RATE IN ITS PROFIT NOR SUCH AN ADJUSTMENT, ON THE FACTS AND CIRCUMSTAN CES OF THE INSTANT CASE, IS WARRANTED IN THE PROFIT MARGIN OF COMPARAB LES. (C) REVENUE SHARING FORMULA 8.1. THE LD. AR SUBMITTED THAT THE ASSESSEES AE SH ARED 80% OF TOTAL REVENUE FROM ITS CLIENTS WITH THE ASSESSEE AND FOR SIMILAR SERVICES OBTAINED FROM UNRELATED PARTIES, THE AE SHARED 78.5 % OF THE REVENUE WITH SUCH THIRD PARTIES. IN THE LIGHT OF THIS ARRA NGEMENT WITH THE ASSESSEE FOR SHARING HIGHER PROFIT PERCENTAGE BY ITS AE WITH IT VIS--VIS THE THIRD PARTIES, THE LD. AR CONTENDED THAT ITS INTERNATIONA L TRANSACTION SHOULD BE ITA NO.6200/DEL/2012 18 CONSIDERED AT ALP WITHIN THE MEANING OF COMPARABLE UNCONTROLLED PRICE (CUP) METHOD. THE LD. AR STATED THAT SUCH SUBMISSI ON WAS MADE BEFORE THE DRP ALSO WHICH HAS BEEN REJECTED WITHOUT ANY PLAUSIBLE REASON. THIS WAS COUNTERED BY THE LD. DR, WHO STAT ED THAT SUCH A REVENUE SHARING FORMULA HAS NO SIGNIFICANCE IN SO F AR AS THE ASSESSEES OPERATING PROFIT MARGIN IS CONCERNED. 8.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ASSESSE E ADOPTED TNMM AS THE MOST APPROPRIATE METHOD IN ITS TP STUDY REPORT. THE TPO ACCEPTED THE SAME. IT WAS ONLY FOR THE FIRST TIME THAT THE ASSESSEE RAISED THIS ALTERNATIVE SUBMISSION BEFORE THE DRP FOR APPLYING THE ALLEGED INTERNAL CUP METHOD, WHICH CAME TO BE TURNED DOWN BY THE DRP . 8.3. IT IS NOTICED THAT THE ASSESSEE HAS TREATED ITSELF AS A TESTED PARTY IN ITS TRANSFER PRICING STUDY REPORT, WHICH HAS BEEN A CCEPTED BY THE TPO. UNDER THE CUP METHOD AS PRESCRIBED UNDER RULE 10B(1 )(A), PRICE CHARGED FOR SERVICES RENDERED IN A COMPARABLE UNCON TROLLED TRANSACTION IS IDENTIFIED WHICH IS THEN ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, ITA NO.6200/DEL/2012 19 BETWEEN THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE AND COMPARABLE UNCONTROLLED TRANSACTIONS. SUCH ADJUSTED PRICE IS TAKEN AS ALP IN RESPECT OF THE SERVICES PROVIDED BY THE ASSE SSEE IN THE INTERNATIONAL TRANSACTION. FROM THE MACHINERY PROV ISION CONTAINED IN RULE 10B(1)(A) IN THIS REGARD, IT IS CLEAR THAT THE INTERNAL CUP PROVIDES FOR COMPARING THE ASSESSEES INTERNATIONAL TRANSACT ION WITH ANOTHER COMPARABLE UNCONTROLLED TRANSACTION UNDERTAKEN BY I T. WE FAIL TO APPRECIATE THE LOGIC BEHIND THE LD. ARS SUBMISSION IN COMPARING THE REVENUE SHARING FORMULA BETWEEN THE ASSESSEE AND IT S AE ON THE ONE HAND AND ITS AE AND THIRD PARTIES ON THE OTHER. AS THE ASSESSEE IS A TESTED PARTY, UNDER THE CUP METHOD, IT IS ONLY THE PRICE CHARGED BY IT WHICH CAN BE COMPARED WITH THE PRICE CHARGED BY SOM E COMPARABLE(S) IN UNCONTROLLED TRANSACTIONS. THE ARGUMENT PUT FORTH ON BEHALF OF THE ASSESSEE CAN BE SUCCESSFULLY APPLIED ONLY IN DETERM INING THE ALP OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY ITS AE SO AS TO MAKE A VALID COMPARISON BETWEEN REMUNERATION PAID BY SUCH AE TO THE ASSESSEE WITH THAT PAID TO UNRELATED PARTIES, PROVIDED OTHER TERM S AND CONDITIONS OF THE PROVISION OF SERVICES ARE SIMILAR. PRESENTLY, WE A RE DEALING WITH THE ITA NO.6200/DEL/2012 20 DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTI ON UNDERTAKEN BY THE ASSESSEE AND NOT ITS FOREIGN AE. THE ASSESSEE CAN RESORT TO THE CUP METHOD ONLY BY SHOWING THAT THE PRICE CHARGED BY IT FROM ITS AE WAS FAVOURABLY COMPARABLE TO THE PRICE CHARGED BY SOME OTHER COMPARABLE COMPANY(IES) IN UNCONTROLLED TRANSACTION(S). THE L D. AR HAS BROUGHT NO MATERIAL ON RECORD TO SHOW THE PRICE CHARGED IN A C OMPARABLE UNCONTROLLED SITUATION. WE, THEREFORE, HOLD THAT TH E VIEW CANVASSED BEFORE THE DRP FOR THE FIRST TIME IN RESORTING TO T HE CUP METHOD IS DEVOID OF MERITS AND AS SUCH, THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE IS TNMM, WHIC H WAS ORIGINALLY ADOPTED BY THE ASSESSEE AND ALSO APPROVED BY THE TP O. 9. TO SUM UP THE ABOVE DISCUSSION, WE HOLD THAT TH E ASSESSEE WAS NOT RIGHT IN WORKING OUT ITS PLI BY ALSO CONSIDERING PR OJECTED PROFITS FOR THE THREE SUBSEQUENT YEARS; NO DEDUCTION ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIONS CAN BE ALLOWED IN THE FACTS AND CIRCUM STANCES OF THE INSTANT CASE; AND THE REVENUE SHARING FORMULA AS PUT FORTH BY THE ASSESSEE AS RELEVANT UNDER THE CUP METHOD FOR DETERMINING THE A LP, IS NOT CORRECT. ITA NO.6200/DEL/2012 21 CONSEQUENTLY, IT IS HELD THAT THE CALCULATION OF PL I OF THE ASSESSEE DONE BY THE TPO UNDER TNMM IS CORRECT, WHICH DOES NOT WA RRANT ANY INTERFERENCE. WE, THEREFORE, COUNTENANCE THE SAME. THE ASSESSEE FAILS ON THIS ISSUE. B. SELECTION OF COMPARABLES. 10. THE ASSESSEE AGITATED INCLUSION OF CERTAIN COMP ANIES BY THE TPO IN THE FINAL LIST OF COMPARABLES AND ALSO EXCLUSION OF CERTAIN COMPANIES WHICH, IN ITS OPINION, OUGHT TO HAVE BEEN INCLUDED IN SUCH LIST. 11. BEFORE GOING INTO THE QUESTION OF COMPARABILITY OF THE COMPANIES ASSAILED BEFORE US, IT IS RELEVANT TO UNDERSTAND TH E NATURE OF BUSINESS CARRIED OUT BY THE ASSESSEE. WE HAVE BRIEFLY NOTIC ED ABOVE THAT THE ASSESSEE IS ENGAGED IN PROVIDING SOFTWARE DEVELOPME NT SERVICES TO ITS AES. THE ASSESSEE IS PROVIDING END-TO-END SYSTEMS I NTEGRATION AND CONSULTING SERVICES IN FOCUSED VERTICAL MARKET SEGM ENTS INCLUDING SECURITIES AND INVESTMENT BANKING, AIRLINES & TRANS PORT AND TECHNOLOGY. THE ASSESSEES TP STUDY REPORT DISCLOS ES THAT IT IS PROVIDING CUSTOMIZED SOFTWARE APPLICATION DEVELOPME NT FOR ITS AE ITA NO.6200/DEL/2012 22 WITHIN WHICH IT FOCUSES ON THE SERVICES OF APPLICAT ION DEVELOPMENT, RE- ENGINEERING AND LEGACY APPLICATIONS, MAINTENANCE OF EXISTING APPLICATIONS, ENTERPRISE APPLICATION INTEGRATION AN D SPECIALIZED QUALITY ASSURANCE AND TESTING SERVICES. THE ASSESSEE IS PR OVIDING SERVICES IN TWO KINDS OF PROJECTS, NAMELY, INTEGRATED PROJECTS (IN WHICH WORK IS DONE BOTH BY THE ASSESSEE AND ITS US BASED AE TO BE FINA LLY DELIVERED TO THE CLIENT) AND NON-INTEGRATED PROJECTS (IN WHICH WORK IS DONE BY THE ASSESSEE ALONE AND THIS WORK IS END PRODUCT IN ITSE LF). THE ABOVE NARRATION OF FACTS INDICATES THAT THE ASSESSEE IS A CAPTIVE UNIT ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS AES ONLY UNDER THIS INTERNATIONAL TRANSACTION AND IS NOT SELLING SOFTWA RE PRODUCTS UNDER ITS OWN OWNERSHIP. WITH THE ABOVE BACKGROUND IN MIND, WE WILL EXAMINE THE COMPARABILITY OR OTHERWISE OF THE COMPANIES ASS AILED IN THE INSTANT APPEAL. 12. FIRSTLY, WE WILL DEAL WITH THE COMPANIES WHICH HAVE BEEN INCLUDED BY THE TPO IN THE FINAL SET OF COMPARABLES AND THE ASSESSEE CLAIMS THEM TO BE INCOMPARABLE. A SUBMISSION COMMON TO SOME OF SUCH COMPANIES ITA NO.6200/DEL/2012 23 WAS MADE BY THE LD. AR THAT CERTAIN BENCHES OF THE TRIBUNAL IN OTHER CASES HAVE HELD THEM TO BE NOT COMPARABLE. IN THAT VIEW OF THE MATTER, IT WAS URGED THAT THOSE COMPANIES, BEING EX FACIE INCOMPARABLE, BE AUTOMATICALLY EXCLUDED FROM THE LIST OF COMPARABLES DRAWN BY THE TPO. 13. WE EXPRESS OUR RESERVATIONS IN ACCEPTING SUCH A BROAD PROPOSITION. IT IS AXIOMATIC THAT IF COMPANY A IS FUNCTIONALLY DIFFERENT FROM COMPANY B, THEN, SUCH COMPANY CANNOT BE CONSIDERE D AS COMPARABLE. TWO COMPANIES CAN BE CONSIDERED AS COMPARABLE WHEN BOTH ARE DISCHARGING THE OVERALL SIMILAR FUNCTIONS, THOUGH T HERE MAY BE SOME MINOR DIFFERENCES IN SUCH FUNCTIONS, NOT MARRING TH E OTHERWISE COMPARABILITY. NOTWITHSTANDING THE FUNCTIONAL SIMI LARITY, MANY A TIMES A COMPANY CEASES TO BE COMPARABLE BECAUSE OF OTHER REASONS AS WELL. TO CITE AN EXAMPLE, IF COMPANY A, THOUGH FUNCTIONALL Y SIMILAR TO COMPANY B, BUT HAS RELATED PARTY TRANSACTIONS (RP TS) BREACHING A PARTICULAR LEVEL, THEN, SUCH COMPANY CANNOT BE CONS IDERED AS COMPARABLE TO COMPANY A IN THE YEAR IN WHICH THE RPTS BREACH SUCH A LEVEL. IF, HOWEVER, IN THE SUBSEQUENT YEAR, THE RELATED PARTY TRANSACTIONS FALL BELOW ITA NO.6200/DEL/2012 24 THAT LIMIT, THEN SUCH COMPANY WOULD AGAIN BECOME CO MPARABLE. TO PUT IT SIMPLY, IF COMPANY A HAS BEEN HELD TO BE INCOMPAR ABLE VIS-A-VIS COMPANY B, THEN IT IS NOT ESSENTIAL THAT COMPANY A WOULD BE INCOMPARABLE TO COMPANY C ALSO. WHAT IS RELEVANT TO CONSIDER IS, FIRSTLY, THE FUNCTIONAL PROFILE OF COMPANY A VIS-A-VIS COMPANY C. IF BOTH ARE FUNCTIONALLY SIMILAR, THEN NOTWITHSTANDING THE FACT THAT COMPANY A WAS HELD TO BE INCOMPARABLE TO COMPANY B, IT MAY STILL BE COMPARABLE TO COMPANY C. DESPITE THE FACT THAT CO MPANY A IS FUNCTIONALLY SIMILAR TO COMPANY B, IT MAY STILL H AVE BEEN DECLARED AS INCOMPARABLE TO COMPANY B BECAUSE OF OTHER RELEVA NT REASONS. IF COMPANY A PASSES THE SAME REASONS VIS-A-VIS COMPANY C, THEN COMPANY A WILL FIND ITS PLACE IN THE LIST OF COMP ARABLES OF COMPANY C, NOTWITHSTANDING THE FACT THAT IT WAS HELD TO BE INCOMPARABLE TO COMPANY B. THE CRUX OF THE MATTER IS THAT THE MER E FACT THAT COMPANY A HAS BEEN HELD TO BE NOT COMPARABLE IN A JUDICIA L ORDER PASSED IN THE CASE OF COMPANY B, DOES NOT PER SE MAKE IT INCOMPARABLE IN ALL THE SUBSEQUENT CASES TO FOLLOW. NOT ONLY COMPANY A HE LD TO BE INCOMPARABLE TO COMPANY B CAN BE COMPARABLE TO CO MPANY C, BUT ITA NO.6200/DEL/2012 25 COMPANY X HELD TO BE COMPARABLE TO COMPANY Y CA N ALSO BE INCOMPARABLE TO COMPANY Z, DEPENDING UPON THE FUN CTIONAL PROFILE AND THE APPLICABILITY OR OTHERWISE OF THE RELATED FACTO RS. THERE CAN BE NO HARD AND FAST RULE THAT IF A PARTICULAR COMPANY HAS BEEN HELD TO BE NOT COMPARABLE IN THE CASE OF ANOTHER COMPANY, THEN SUC H FORMER COMPANY WOULD CEASE TO BE COMPARABLE TO THE ASSESSEE COMPAN Y ALSO. COMPARABILITY OF EACH COMPANY NEEDS TO BE ASCERTAIN ED ONLY AFTER MATCHING THE FUNCTIONAL PROFILE AND THE RELEVANT FA CTORS OF THE OTHER COMPANY. ERGO, THIS CONTENTION RAISED ON BEHALF OF THE ASSESSEE CANNOT BE ACCEPTED. WITH THE ABOVE PARAMETERS AND THE FACT UAL MATRIX, WE WILL DISTINCTLY EXAMINE THE COMPANIES CHOSEN BY THE TPO TO ASCERTAIN IF THEY ARE REALLY COMPARABLE. (I) AVANI CIMCON LTD . 14.1. THIS COMPANY WAS NOT CHOSEN BY THE ASSESSE E AS A COMPARABLE FOR THE INTERNATIONAL TRANSACTION OF SOFTWARE DEVEL OPMENT SERVICES. THE TPO INCLUDED IT BY OBSERVING THAT IT WAS ALSO ENGAG ED INTO SOFTWARE DEVELOPMENT CONSULTING COMPANY WITH CLIENT BASE IN AUSTRALIA, US, UK, ITA NO.6200/DEL/2012 26 AFRICA AND THE EUROPEAN UNION WITH MAJOR FOCUS ON T HE TRAVEL AND INSURANCE INDUSTRY. THE DRP ALSO REJECTED THE ASSE SSEES CONTENTION AGAINST THE INCLUSION OF THIS COMPANY. 14.2. WE HAVE PERUSED THE ANNUAL ACCOUNTS OF THIS COMPANY AVAILABLE IN THE ASSESSEES PAPER BOOK. APART FROM ITS BALAN CE SHEET, PROFIT & LOSS ACCOUNT AND SOME SCHEDULES, THE DIRECTORS REPORT A ND AUDITORS REPORT, ETC. OF THIS COMPANY ARE NOT AVAILABLE. TH E LD. AR CONTENDED THAT THE INFORMATION OF THIS COMPANY AVAILABLE IN T HE PUBLIC DOMAIN FOR THE YEAR UNDER CONSIDERATION HAS BEEN DOWNLOADED AN D PLACED BEFORE US AND EXCEPT FOR THESE DOCUMENTS, NO OTHER REPORTS ET C., CONSTITUTING PART OF ANNUAL REPORT FOR THE YEAR ENDING 31.3.2008, ARE AVAILABLE. HOWEVER, OUR ATTENTION WAS DRAWN TOWARDS CERTAIN TRIBUNAL OR DERS WHICH HAVE CONSIDERED THE FUNCTIONAL PROFILE OF THIS COMPANY O N THE BASIS OF INFORMATION AVAILABLE ON ITS WEBSITE. FIRST IS TRI BUNAL ORDER IN AGNITY INDIA TECHNOLOGIES PVT. LTD. VS. DCIT (ITA NO.6485/ DEL/2012). VIDE ITS ORDER DATED 20.9.2013, THE TRIBUNAL CONSIDERED THE FUNCTIONAL PROFILE OF THIS COMPANY BY NOTICING IT TO BE A PRODUCT COMPAN Y OWNING SOFTWARE ITA NO.6200/DEL/2012 27 PRODUCTS LIKE DXCHANGE, TRAVEL SOLUTIONS, INSURANCE SOLUTIONS, CUSTOMER APPRECIATION, ETC. SIMILAR VIEW HAS BEEN TAKEN BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS INDIA PVT. LTD. VS. ITO (ITA NO.7633/N/2012). VIDE ITS OR DER DATED 6.11.2013, THE TRIBUNAL FOR THE ASSESSMENT YEAR 200 8-09 HAS NOTICED AVANI CIMCON LTD. TO BE A PRODUCT COMPANY. NO CONT RARY MATERIAL HAS BEEN PLACED BEFORE US BY THE LD. DR TO SHOW THE FUN CTIONAL PROFILE OF THIS COMPANY MATCHING WITH THE ASSESSEE. WHEN CONTRASTE D WITH THE ASSESSEE COMPANY, WHICH IS ENGAGED IN PROVIDING SO FTWARE DEVELOPMENT SERVICES TO ITS GROUP CONCERNS, WE FAIL TO SEE AS T O HOW A SOFTWARE PRODUCT COMPANY LIKE AVANI CIMCON LTD., HAVING INTE LLECTUAL PROPERTY RIGHTS OVER SOME OF THE PRODUCTS DEVELOPED BY IT, CAN BE COMPARED WITH THE ASSESSEE ON AN ENTITY LEVEL. WE, THEREFORE, OR DER FOR THE ELIMINATION OF THIS COMPANY FROM THE LIST OF COMPARABLES. (II) BODHTREE CONSULTING, PERSISTENT SYSTEMS LTD., QUINTEGRA SOLUTIONS LTD., TATA ELXSI, THIRDWARE SOLUTIONS LTD. 15.1. THE ASSESSEE ACCEPTED THESE COMPANIES AS CO MPARABLE BEFORE THE TPO WHICH IS APPARENT FROM HIS ORDER. NO ISSUE WAS RAISED BEFORE ITA NO.6200/DEL/2012 28 THE DRP CONTESTING THE COMPARABILITY OF THESE COMPA NIES. IT IS ONLY FOR THE FIRST TIME THAT THE ASSESSEE HAS CHALLENGED BEF ORE US THAT THESE COMPANIES ARE NOT COMPARABLE. IT WAS, THEREFORE, P RAYED THAT THESE COMPANIES BE EXCLUDED FROM THE LIST OF COMPARABLES. THIS WAS OPPOSED BY THE LD. DR, WHO ARGUED THAT ONCE THE ASSESSEE HA S ACCEPTED A PARTICULAR COMPANY AS COMPARABLE BEFORE THE TPO AND /OR DRP, IT CANNOT BE ALLOWED TO RESILE FROM ITS STAND IN CONTESTING B EFORE THE TRIBUNAL THAT THE SAME IS NOT COMPARABLE. 15.2. THE SPECIAL BENCH OF THE TRIBUNAL IN DCIT VS. QUARK SYSTEMS PVT. LTD., (2010) 132 TTJ (CHD) (SB) 1, HAS HELD THAT A COMPANY WHICH WAS INCLUDED BY THE ASSESSEE AND ALSO BY THE TPO IN THE LIST OF COMPARABLES AT THE TIME OF COMPUTING THE ALP, CAN B E EXCLUDED BY THE TRIBUNAL IF THE ASSESSEE PROVES THAT THE SAME WAS W RONGLY INCLUDED. THE LD. DR ARGUED THAT THIS SPECIAL BENCH DECISION SHOU LD NOT BE APPLIED BECAUSE MUCH WATER HAS FLOWN SINCE THEN AND THE TRA NSFER PRICING PROVISIONS HAVE COME OUT FROM ITS NASCENT STAGE. WE ARE UNABLE TO ACCEPT THIS CONTENTION RAISED ON BEHALF OF THE REVE NUE FOR THE OBVIOUS ITA NO.6200/DEL/2012 29 REASON THAT THE HANDS OF THE ASSESSEE CANNOT BE TIE D TO CHALLENGE THE COMPARABILITY OF A COMPANY BEFORE THE TRIBUNAL FOR THE FIRST TIME IF IT IS REALLY INCOMPARABLE. A MERE CHALLENGE TO THE COMPA RABILITY OF A COMPANY BEFORE THE TRIBUNAL DOES NOT ITSELF LEAD TO THE ACCEPTANCE OF COMPARABILITY. RATHER, THE FACTS ARE REQUIRED TO B E PROBED AND EXAMINED FOR ASCERTAINING WHETHER SUCH A COMPANY IS, IN FAC T, COMPARABLE OR NOT. THERE CAN BE NO ESTOPPEL AGAINST THE EXCLUSION OF C ERTAIN COMPARABLES FROM THE LIST OF COMPARABLES WHICH ARE, IN FACT, NO T COMPARABLE. SEVERAL ORDERS HAVE BEEN PASSED BY THE DELHI BENCHES OF THE TRIBUNAL EVEN IN THE RECENT PAST FOLLOWING THE RATIO OF THE SPECIAL BENCH DECISION REFERRED TO HEREINABOVE. IN VIEW OF THE FACT THAT THE COMPARABI LITY OR OTHERWISE OF THESE COMPANIES WAS NOT EXAMINED BY THE TPO, IN OUR CONSIDERED OPINION, THE ENDS OF JUSTICE WOULD MEET ADEQUATELY IF THE IMPUGNED ORDER ON THIS ISSUE IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF AO/TPO FOR EXAMINING THE ASSESSEES CONTENTION AFRE SH AS REGARDS THE COMPARABILITY OF THESE COMPANIES. WE ORDER ACCORDIN GLY. ITA NO.6200/DEL/2012 30 (III) E-ZEST SOLUTIONS 16.1. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES AFTER COLLECTING INFORMATION U/S 133(6) WHICH DISCLOSED T HAT IT WAS ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES ONLY. THE A SSESSEES OBJECTIONS ABOUT THE UNRELIABLE INFORMATION AND NON-AVAILABILI TY OF INFORMATION IN PUBLIC DOMAIN, WERE REJECTED BY THE TPO. 16.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE ANNUAL REPORT OF THIS COMPANY, WHICH IS AVAILABLE ON PAGE 1 ONWARDS OF THE PAPER BOOK. PAGE 6 OF THE ANNUAL REPORT, BEING AN A NNEXURE TO THE AUDITORS REPORT, CLEARLY INDICATES UNDER (II) THA T: THERE IS NO INVENTORY WITH THE COMPANY SINCE IT IS ENGAGED IN SOFTWARE DE VELOPMENT. FROM THE BALANCE SHEET OF THIS COMPANY, IT IS NOTICEABLE THAT THERE IS NO CLOSING STOCK OF ANY SOFTWARE PRODUCTS. SINCE THE ASSESSEE IS ALSO ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES AND THIS CO MPANY IS ALSO DOING THE SAME BUSINESS, WE ARE OF THE CONSIDERED OPINION THAT THIS COMPANY WAS RIGHTLY INCLUDED IN THE LIST OF COMPARABLES. ITA NO.6200/DEL/2012 31 16.3. THE LD. ARS CONTENTION THIS COMPANY, BEIN G IN KPO BUSINESS AS AGAINST THE ASSESSEES BPO BUSINESS, IS UNSUBSTANT IATED. NEITHER IT HAS BEEN SHOWN THAT THE ASSESSEE IS RENDERING BPO SERVI CES NOR THAT E-ZEST IS PROVIDING KPO SERVICES. WE, THEREFORE, APPROVE THE VIEW TAKEN BY THE AUTHORITIES BELOW ON THIS ISSUE. (IV) INFOSYS TECHNOLOGIES LTD . 17.1. THE TPO NOTICED THAT THIS COMPANY WAS FIND ING PLACE IN THE ACCEPT/REJECT MATRIX BUT WAS REJECTED IN THE TP DOC UMENTATION BY CLAIMING THAT IT FAILED FUNCTIONAL COMPARABILITY. THE TPO FOUND THIS COMPANY TO BE INTO SOFTWARE DEVELOPMENT SERVICES QU ALIFYING ALL THE FILTERS APPLIED BY HIM. THE ASSESSEE RAISED CERTAI N OBJECTIONS AGAINST THE INCLUSION OF THIS COMPANY, BUT WITHOUT ANY SUCCESS. THE TPO INCLUDED THE SAME IN THE FINAL LIST OF COMPARABLES. THE ASS ESSEE IS AGGRIEVED AGAINST ITS INCLUSION IN THE ULTIMATE SET OF COMPAR ABLES. 17.2. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT CAN BE SEEN THAT T HE TPO HAS INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES BY REJECTIN G THE ASSESSEES ITA NO.6200/DEL/2012 32 CONTENTION ABOUT THE BRAND OF THIS COMPANY HELPING IN EARNING HUGE PROFITS AND ALSO THE BRAND-RELATED PRODUCTS SWELLIN G THE ULTIMATE PROFIT RATE OF THIS COMPANY. WE FIND THAT THE ASSESSEE IS A CAPTIVE UNIT RENDERING SERVICES TO ITS AE ALONE WITHOUT ACQUIRIN G ANY INTELLECTUAL PROPERTY RIGHTS IN THE WORK DONE BY IT IN THE DEVEL OPMENT OF SOFTWARE. THE HONBLE DELHI HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES (P) LTD. (2013) 219 TAXMANN 26 (DEL) CONSIDERED THE GIANTNESS OF INFOSYS LTD., IN TERMS OF RISK PROFILE, NATURE OF SERVICES, NUMBER OF EMPLOYEES, OWNERSHIP OF BRANDED PRODUCTS AND BRAND RELATED PRO FITS, ETC. IN COMPARISON WITH SUCH FACTORS PREVAILING IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD., BEING, A CAPTIVE UNIT PROVI DING SOFTWARE DEVELOPMENT SERVICES WITHOUT HAVING ANY IP RIGHTS I N THE WORK DONE BY IT. AFTER MAKING COMPARISON OF VARIOUS FACTORS AS ENUMERATED ABOVE, THE HONBLE DELHI HIGH COURT HELD INFOSYS LTD. TO BE IN COMPARABLE TO AGNITY INDIA TECHNOLOGIES PVT. LTD. THE FACTS OF TH E INSTANT CASE ARE MORE OR LESS SIMILAR INASMUCH AS THE EXTANT ASSESSE E IS ALSO A CAPTIVE SERVICE PROVIDER WITH A LIMITED NUMBER OF EMPLOYEES AT ITS DISPOSAL AND ALSO NOT OWNING ANY BRANDED PRODUCTS WITH NO EXPEND ITURE ON R&D ETC. ITA NO.6200/DEL/2012 33 WHEN WE CONSIDER ALL THE ABOVE FACTORS IN A HOLISTI C MANNER, THERE REMAINS ABSOLUTELY NO DOUBT THAT INFOSYS TECHNOLOGI ES LTD. IS INCOMPARABLE TO THE ASSESSEE COMPANY. RESPECTFULLY FOLLOWING THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT I N AGNITY INDIA (SUPRA) , WE HOLD THAT INFOSYS TECHNOLOGIES LTD. CANNOT BE TREATED AS COMPARABLE TO THE ASSESSEE COMPANY. THIS COMPANY I S, THEREFORE, DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE S. (V) KALS INFORMATION SYSTEMS LTD. (SEG.) 18.1. THIS COMPANY WAS NOT CHOSEN BY THE ASSESS EE AS A COMPARABLE. HOWEVER, THE TPO INCLUDED IT IN THE FINAL LIST. THE SUM AND SUBSTANCE OF THE REASONING ADOPTED BY THE TPO FOR CONSIDERING TH IS COMPANY AS COMPARABLE IS THAT IT IS ALSO A SOFTWARE DEVELOPMEN T AND CONSULTING COMPANY, MEETING THE FILTERS ADOPTED BY HIM. 18.2. WE HAVE GONE THROUGH THE ANNUAL ACCOUNTS OF THIS COMPANY, A COPY OF WHICH IS AVAILABLE IN THE PAPER BOOK. SCHE DULE NO. 16 COMPRISING NOTES TO THE FINANCIAL STATEMENTS GIVES BACKGROUND OF THIS COMPANY TO BE ENGAGED IN DEVELOPMENT OF SOFTWARE A ND SOFTWARE ITA NO.6200/DEL/2012 34 PRODUCTS SINCE ITS INCEPTION. THIS COMPANY CONSIST S OF STPI UNIT ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRO DUCTS. SEGMENTAL INFORMATION OF THIS COMPANY IS AVAILABLE IN THE PAP ER BOOK WHICH HAS BEEN DIVIDED INTO TWO PARTS, NAMELY, `APPLICATION SOFTWARE SEGMENT AND `TRAINING SEGMENT. IT IS THE `APPLICATION SOF TWARE SEGMENT OF THIS COMPANY, WHICH HAS BEEN ADOPTED BY THE TPO. THE DEV ELOPMENT OF SOFTWARE AND ALL SOFTWARE PRODUCTS HAVE BEEN CLUBBE D UNDER THE APPLICATION SOFTWARE SEGMENT. SINCE THE FIGURES OF THIS COMPANY TAKEN BY THE TPO FOR MAKING COMPARISON WITH THE ASSESSEE INCLUDE THE EFFECT OF SOFTWARE PRODUCTS AS WELL, APART FROM SOFTWARE D EVELOPMENT SERVICES, THE SAME CANNOT BE CONSIDERED AS COMPARABLE. IT IS OBVIOUS THAT A PRODUCT COMPANY CANNOT BE COMPARED WITH A COMPANY E NGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES BECAUSE OF DIFFERENCE IN THE INHERENT CHARACTERISTICS OF BOTH. WE, THEREFORE, OR DER FOR THE REMOVAL OF THIS COMPANY FROM THE SET OF COMPARABLES. ITA NO.6200/DEL/2012 35 (VI) WIPRO LTD. (SEG.) 19.1. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES BY OVERRULING THE ASSESSEES OBJECTIONS ABOUT THE SUPE R NORMAL PROFITS EARNED BY THIS COMPANY; VERY HIGH TURNOVER; OWNING SIGNIFICANT IPRS IN THE FORM OF PATENTS; AND ENGAGED IN R& D ACTIVITY. THE ASSESSEE FAILED TO PERSUADE THE DRP TO FALL IN LINE WITH ITS REASON ING FOR THE EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. THA T IS HOW, THE ASSESSEE IS BEFORE US. 19.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE TPO HAS TAKEN SOFTWARE DEVELOPMENT SEGMENT OF THIS COMPANY ON STANDALONE BASIS. WE AGREE WITH THE TPO THAT SUPER NORMAL PROFITS OR VERY HIGH TURNOVER CANNOT BE CRITERION FOR TREATING AN OTHERWISE FUNCTIONALLY CO MPARABLE COMPANY AS INCOMPARABLE. HOWEVER, THE FACT REMAINS THAT THIS COMPANY OWN SIGNIFICANT IPRS IN THE FORM OF PATENTS WHICH ARE O BVIOUSLY USED IN THE RENDERING SOFTWARE DEVELOPMENT SERVICES. APART FRO M THAT, THIS COMPANY IS ENGAGED IN R&D ACTIVITY. PER CONTRA, THE ASSESS EE IN QUESTION IS ONLY ITA NO.6200/DEL/2012 36 A CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER NOT OWNING ANY IPRS. OWNING OR NOT OWNING IPRS IN THE FORM OF PATENTS IN SOFTWARE DEVELOPED BY A COMPANY, HAS AN IMPORTANT BEARING ON THE PROFITS EARNED BY IT FROM THE SOFTWARE DEVELOPMENT SERVICES SEGM ENT. A COMPANY WHICH DOES NOT OWN ANY IPRS AND CARRIES ON THE ACTI VITY OF RENDERING SOFTWARE DEVELOPMENT SERVICES AT ITS OWN, CANNOT BE COMPARED WITH A COMPANY WHICH PROVIDES SOFTWARE DEVELOPMENT SERVICE S BY USING ITS OWN IPRS IN THE FORM OF PATENTS OF SOFTWARE. UNDER SUCH CIRCUMSTANCES, WE HOLD THAT THIS COMPANY CANNOT BE CONSIDERED AS C OMPARABLE AT SEGMENTAL LEVEL. THE SAME IS EX CONSEQUENTI DIRECTED TO EXPELLED FROM THE SET OF COMPARABLES. (VII) SOFTSOL INDIA LTD . 20.1. THIS COMPANY WAS INCLUDED BY THE TPO IN THE LIST OF COMPARABLES. THOUGH THE LD. AR INITIALLY CHALLENGED ITS INCLUSION, HOWEVER, LATER ON, THE COMPARABILITY OF THIS COMPAN Y WAS ACCEPTED. WE, THEREFORE, APPROVE THE IMPUGNED ORDER IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. ITA NO.6200/DEL/2012 37 21. NOW, WE WILL TAKE UP CERTAIN COMPARABLES WHIC H HAVE BEEN EXCLUDED BY THE TPO AND THE ASSESSEE INTENDS THEIR INCLUSION. (I) ADITYA BIRLA MINACS IT SERVICES LTD. (FORMERLY KNOW N AS PSI DATA SYSTEMS); AND ADITYA BIRLA MINACS TECH. LTD. ( BIRLA TECHNOLOGIES LTD.) 22.1. THESE TWO COMPANIES WERE INITIALLY PROPOSED AS COMPARABLE BY THE TPO. HOWEVER, SUBSEQUENTLY, IT WAS REALIZED THAT THE SAME WERE NOT COMPARABLE. THE TPO NOTICED THAT THE RATIO OF RELATED PARTY TRANSACTIONS (RPT) TO SALES OF THESE COMPANIES WAS 33.65% AND 94.09%, RESPECTIVELY, WHICH MADE THEM CONTROLLED TRANSACTIO NS AND HENCE INCOMPARABLE. THE ASSESSEE IS AGGRIEVED AGAINST TH E NON-INCLUSION OF THESE COMPANIES IN THE FINAL LIST OF COMPARABLES. 22.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PE RUSED THE RELEVANT MATERIAL ON RECORD. IT IS FOUND THAT THE PREDOMINA NT VIEW OF THE TRIBUNAL IN SEVERAL CASES IS THAT THE TRANSACTIONS OF A COMP ANY HAVING MORE THAN 25% OF RELATED PARTY TRANSACTIONS (RPTS) ARE CONSID ERED AS CONTROLLED, THEREBY FAILING THE TEST OF COMPARABILITY. THIS VI EW HAS BEEN TAKEN IN SEVERAL DECISIONS INCLUDING THE DELHI BENCH IN TOLUNA INDIA PVT. LTD. ITA NO.6200/DEL/2012 38 (SUPRA) AND ACTIS ADVISERS PVT. LTD. VS. DCIT, (2012) 20 ITR 13 8 (DEL.)(TRIB.). AND MUMBAI BENCH IN STREAM INTERNATIONAL SERVICES PVT. LTD. VS. ACIT (IT) (2013) 141 ITD 492 (MUM.) . 22.3. ADVERTING TO THE FACTS OF THE INSTANT CASE , IT IS NOTICED THAT THE TPO RECORDED RPT AS A PERCENTAGE OF SALES AT A LEVEL HIGHER THAN 25% FOR BOTH THE COMPANIES SO AS TO EXCLUDE THEM. T HE LD. AR CONTENDED THAT WHILE COMPUTING THE RELATED PARTY TR ANSACTIONS, THE TPO ALSO CONSIDERED REIMBURSEMENT OF EXPENSES (NET), WHICH OUGHT NOT TO HAVE BEEN INCLUDED. 22.4. WE DO NOT FIND ANY SUBSTANCE IN THIS ARGU MENT FOR THE REASON THAT THE REIMBURSEMENT OF EXPENSES DEBITED BY THE A SSESSEE TO ITS PROFIT & LOSS ACCOUNT ARE, IN FACT, PART OF THE TOTAL COST S INCURRED BY THE ASSESSEE. THE MERE FACT THAT SUCH COSTS WERE INITI ALLY INCURRED BY THE AE AND THEN REIMBURSED, WOULD NOT ALTER THE POSITION. FURTHER, NO MATERIAL HAS BEEN PLACED ON RECORD TO SHOW THAT THESE RE-IMB URSEMENTS WERE WITHOUT ANY MARK-UP. THE HONBLE JURISDICTIONAL HIG H COURT IN CIT VS. CUSHMAN AND WAKEFIELD (INDIA) PVT. LTD. (2014) 367 ITR 730 (DEL) HAS ITA NO.6200/DEL/2012 39 HELD THAT REIMBURSEMENT OF EXPENSES EVEN WITHOUT AN Y MARK-UP ARE ALSO REQUIRED TO BE PROCESSED UNDER TP PROVISIONS BY BEN CHMARKING UNDER ONE OF THE METHODS. 22.5. BE THAT AS IT MAY, WE FIND THAT BOTH THESE COMPANIES ARE ALSO INTO SALE OF SOFTWARE PRODUCTS. IT IS APPARENT FROM THE IR ANNUAL ACCOUNTS, COPIES OF WHICH HAVE BEEN PLACED ON RECORD. WHILE ANALYZING THE EXCLUSION OF CERTAIN COMPANIES CHALLENGED BY THE AS SESSEE ABOVE, WE HAVE HELD THAT A COMPANY WITH SOFTWARE PRODUCT CANN OT BE COMPARED WITH THE ASSESSEE COMPANY, WHICH IS ENGAGED IN PROV IDING SOFTWARE DEVELOPMENT SERVICES. APPLYING THE SAME ANALOGY, W E HOLD THAT THESE TWO COMPANIES WERE ALSO RIGHTLY EXCLUDED BY THE TPO AS THESE ARE ALSO FUNCTIONALLY DIFFERENT, ENGAGED IN SALE OF SOFTWARE PRODUCTS AS WELL. WE, THEREFORE, APPROVE THE VIEW TAKEN BY THE TPO ON THI S ISSUE. (II) INDIUM SOFTWARE (I) LTD . 23.1. WE HAVE PERUSED THE RELEVANT PART OF THE ANN UAL ACCOUNTS OF THIS COMPANY, WHICH HAS BEEN REPRODUCED ON PAGE 41 OF THE TPOS ORDER. IT CAN BE SEEN THAT THIS COMPANY, APART FRO M RENDERING SOFTWARE ITA NO.6200/DEL/2012 40 SERVICES, IS ALSO ENGAGED IN SALE OF SOFTWARE. IN ADDITION TO THAT, THIS COMPANY HAS ALSO INCOME FROM `TRAINING SERVICES. EVEN THOUGH THE AMOUNT OF REVENUE FROM TRAINING SERVICES IS LESS, S TILL ONE CANNOT ANTICIPATE THE IMPACT OF REVENUE FROM `TRAINING IN THE OVERALL PROFITABILITY OF THIS COMPANY. WE, THEREFORE, HOLD THIS COMPANY TO BE INCOMPARABLE AND APPROVE THE VIEW TAKEN BY THE AUTH ORITIES IN ITS EXCLUSION. (III) SIP TECHNOLOGIES AND EXPORTS LTD . 24.1. THIS COMPANY WAS ORIGINALLY THE ASSESSEES C OMPARABLE WHICH WAS EXCLUDED BY THE TPO. THE ASSESSEE WANTS INCLUSION OF THIS COMPANY IN THE FINAL TALLY OF COMPARABLES. 24.2. WE HAVE GONE THROUGH THE ANNUAL ACCOUNTS OF THIS COMPANY, A COPY OF WHICH HAS BEEN PLACED ON RECORD. THE TPO EXCLUDED THIS COMPANY FROM THE LIST OF COMPARABLES BY HOLDING THA T IT MADE AN INVESTMENT OF RS.5 CRORE IN SIP SOLUTIONS LTD., WHI CH WAS MORE THAN TWICE OF THE TOTAL REVENUE, THEREBY AFFECTING THE W ORKING CAPITAL AND CAUSING ABNORMAL MARGIN/LOSS. WHEN WE GO THROUGH T HE SCHEDULE OF ITA NO.6200/DEL/2012 41 INVESTMENTS OF THIS COMPANY, WHICH IS AVAILABLE AT PAGE 608 OF THE PAPER BOOK, IT TRANSPIRES THAT INVESTMENT OF RS.5 CRORE I N SIPTECH SOLUTIONS LTD., WAS MADE IN SOME EARLIER YEAR INASMUCH AS THE SAME FIGURE IS APPEARING IN THE BALANCE SHEET OF THE PRECEDING YEA R AS WELL. THUS, IT IS CLEAR THAT THERE IS NO ABNORMAL ACTIVITY OF THIS CO MPANY. SINCE THIS COMPANY IS ALSO EXCLUSIVELY ENGAGED IN PROVIDING SO FTWARE DEVELOPMENT SERVICES, WE HOLD IT TO BE COMPARABLE. (IV) VMF SOFT TECH LTD. 25.1. THIS WAS ORIGINALLY THE ASSESSEES COMPAR ABLE, WHICH WAS EXCLUDED BY THE TPO BY OBSERVING THAT IT WAS OUTSOU RCING A MAJOR PART OF ITS WORK. 25.2. WE HAVE PERUSED THE ANNUAL ACCOUNTS OF THIS COMPANY, WHICH ARE AVAILABLE IN THE PAPER BOOK. IT CAN BE SEEN THAT O UT OF TOTAL SOFTWARE EXPENSES AMOUNTING TO RS.55.11 LAC, THIS COMPANY O UTSOURCED THIS ACTIVITY BY MEANS OF SUB-CONTRACT BY INCURRING EXPE NSES OF RS.53.95 LAC. THUS, IT IS PALPABLE THAT THIS COMPANY HAS OUTSOURC ED ITS MAJOR ACTIVITY AND, HENCE, CANNOT BE COMPARED WITH A COMPANY LIKE THE ASSESSEE ITA NO.6200/DEL/2012 42 RENDERING IN-HOUSE SERVICES. WE, THEREFORE, HOLD T HAT THIS COMPANY WAS RIGHTLY EXCLUDED FROM THE LIST OF COMPARABLES. C. DEDUCTION U/S 10A- WHETHER ANY TP ADDITION IS PERMISSIBLE? 26.1. THE LD. AR VEHEMENTLY ARGUED THAT ITS PRO FIT IS DEDUCTIBLE U/S 10A OF THE ACT. HE SUBMITTED THAT ONCE THE PROFIT FROM RENDERING OF SOFTWARE DEVELOPMENT SERVICES IS DEDUCTIBLE U/S 10 A, THEN, NO MOTIVE CAN BE ATTRIBUTED FOR ARTIFICIALLY REDUCING THE PRO FIT BY MANIPULATING THE PRICE WITH ITS AE. IT WAS ELABORATED THAT THE PROF IT OF AN ASSESSEE, ELIGIBLE FOR DEDUCTION UNDER SECTION 10A, BECOMES T AX NEUTRAL IRRESPECTIVE OF ITS QUANTUM. HE, THEREFORE, URGED THAT EITHER THE INTERNATIONAL TRANSACTION SHOULD NOT BE PROCESSED I N TERMS OF CHAPTER-X OF THE ACT OR HIGHER AMOUNT OF DEDUCTION SHOULD BE ALLOWED CORRESPONDING TO THE AMOUNT OF ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. THIS WAS FORCEFULLY CONTESTED BY THE L D. DR. 26.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL, WE FIND OURSELVES UNABLE TO ACCEPT BOTH T HE SUBMISSIONS ADVANCED BY THE LD. AR ON THIS ASPECT OF THE MATTER . IN SO FAR AS THE FIRST ITA NO.6200/DEL/2012 43 SUBMISSION FOR NOT CARRYING OUT ANY TRANSFER PRICIN G ADJUSTMENT IN VIEW OF THE BENEFIT ENJOYED BY IT U/S 10A OF THE ACT IS CONCERNED, WE FIND THAT NO EXCEPTION HAS CARVED OUT BY THE STATUTE FOR NON- DETERMINATION OF THE ALP OF AN INTERNATIONAL TRANSACTION OF AN ASSESSEE WHO IS ELIGIBLE FOR THE BENEFIT OF DEDUCTION SECTION 10A/10B OR ANY OTHER S ECTION OF CHAPTER- VIA OF THE ACT. SECTION 92(1) CLEARLY PROVIDES THA T ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION IS REQUIRED TO BE COMPUTED HAVING REGARD TO ITS ARMS LENGTH PRICE. THERE IS NO PROV ISION EXEMPTING THE COMPUTATION OF TOTAL INCOME ARISING FROM AN INTERNA TIONAL TRANSACTION HAVING REGARD TO ITS ALP, IN THE CASE OF AN ASSESSE E ENTITLED TO DEDUCTION U/S 10A OR 10B OR ANY OTHER RELEVANT PROVISION. SE CTION 92C DEALING WITH COMPUTATION OF ALP CLEARLY PROVIDES THAT THE A LP IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ON E OF THE METHODS GIVEN IN THIS PROVISION. THIS SECTION ALSO DOES NOT IMMUNE AN INTERNATIONAL TRANSACTION FROM THE COMPUTATION OF I TS ALP WHEN INCOME IS OTHERWISE ELIGIBLE FOR DEDUCTION. ON THE CONTRA RY, WE FIND THAT SUB- SECTION (4) OF SECTION 92C PLAINLY STIPULATES THAT WHERE AN ALP IS DETERMINED, THE AO MAY COMPUTE THE TOTAL INCOME OF THE ASSESSEE ITA NO.6200/DEL/2012 44 HAVING REGARD TO THE ALP SO DETERMINED. THIS SHOWS THAT THE TOTAL INCOME OF AN ASSESSEE ENTERING INTO AN INTERNATIONA L TRANSACTION, IS REQUIRED TO BE NECESSARILY COMPUTED HAVING REGARD T O ITS ALP WITHOUT ANY EXCEPTION. THUS, THE LD. ARS ARGUMENT THAT S INCE ITS INCOME IS SUBJECT TO DEDUCTION U/S 10A, THE PROVISIONS OF THE CHAPTER-X OF THE ACT SHOULD NOT BE APPLIED, IN OUR CONSIDERED OPINION, H AS NO FORCE IN VIEW OF THE CLEAR STATUTORY MANDATE CONTAINED IN PROVISO TO SECTION 92C(4), WHICH READS AS UNDER:- ` PROVIDED THAT NO DEDUCTION UNDER SECTION 10A OR SEC TION 10AA OR SECTION 10B OR UNDER CHAPTER VI-A SHALL BE ALLOWED IN RESPE CT OF THE AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF THE ASSESSEE IS ENHANCED AFTER COMPUTATION OF INCOME UNDER THIS SUB-SECTION:. 26.3. A CIRCUMSPECT PERUSAL OF THIS PROVISO READ ALONG WITH SUB- SECTION (4) OF SECTION 92C DIVULGES THAT WHEN THE T OTAL INCOME OF AN ASSESSEE FROM AN INTERNATIONAL TRANSACTION IS COMPU TED HAVING REGARD TO ITS ALP, THEN, NO DEDUCTION U/S 10A OR ANY OTHER SE CTION INCLUDING THOSE COVERED UNDER CHAPTER VIA OF THE ACT SHALL BE ALLOW ED IN RESPECT OF THE ITA NO.6200/DEL/2012 45 AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF THE A SSESSEE HAS BEEN ENHANCED AFTER COMPUTATION OF INCOME DETERMINED ON THE BASIS OF THE ALP OF AN INTERNATIONAL TRANSACTION. THE LEGISLATU RE HAS UNCONDITIONALLY PROVIDED FOR NOT ALLOWING THE BENEFIT OF DEDUCTION UNDER ANY SECTION IN RESPECT OF THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. NOT ALLOWING OF ANY BENEFIT U/S 10A IN RESPECT OF A N ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT PRE-SUPPOSES THE EXI STENCE OF TRANSFER PRICING ADDITION IN THE FIRST INSTANCE TO AN ASSESS EE WHO IS OTHERWISE ELIGIBLE TO THE BENEFIT OF DEDUCTION UNDER THIS SEC TION. IF ONE WAS TO PRESUME THAT NO ADDITION TOWARDS TRANSFER PRICING A DJUSTMENT IS COMPREHENSIBLE IN THE CASE OF AN ASSESSEE ENJOYING THE BENEFIT OF DEDUCTION U/S 10A, THEN THERE WAS NO NEED TO ENSHRI NE AN EXPRESS PROVISION FORBIDDING THE GRANT OF DEDUCTION UNDER T HIS SECTION IN RESPECT OF ENHANCEMENT OF INCOME DUE TO TRANSFER PRICING AD JUSTMENT. ONCE THE LEGISLATURE HAS ENGRAFTED AN UNAMBIGUOUS PROVISION EXPLICITLY SPELLING OUT THE NON-GRANTING OF DEDUCTION U/S 10A ON THE EN HANCED INCOME DUE TO TRANSFER PRICING ADDITION, WE ARE AFRAID TO ACCE PT THE ASSESSEES CONTENTION, WHICH RUNS DIAGONALLY OPPOSITE TO THE U NEQUIVOCAL LANGUAGE ITA NO.6200/DEL/2012 46 OF PROVISO TO SECTION 92C(4). THIS CONTENTION, IF TAKEN TO A LOGICAL CONCLUSION, WOULD AMOUNT TO OBLITERATING THE PROVIS IO ITSELF, WHICH IS PATENTLY INCORRECT. 26.4. OUR VIEW IS FORTIFIED BY THE SPECIAL BENC H ORDER IN THE CASE OF AZTECH SOFTWARE AND TECHNOLOGY SERVICES LTD. VS. AC IT (2007) 107 ITD 141 (SB) (BANGALORE) IN WHICH SIMILAR ISSUE HAS BEEN DECIDED BY THE SPECIAL BENCH BY HOLDING THAT AVAILABILITY OF EXEMP TION U/S 10A TO THE ASSESSEE IS NO BAR TO APPLICABILITY OF SECTIONS 92C AND 92CA. SIMILAR VIEW HAS BEEN TAKEN BY PUNE BENCH OF THE TRIBUNAL I N THE CASE OF ACIT VS. MSS INDIA (P) LTD. (2009) 123 TTJ 657 (PUNE) AND SEVERAL OTHER ORDERS REFERRED TO ON PAGE 5 OF THE TPOS ORDER. T HE RELIANCE OF THE LD. AR ON THE ORDER OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. TATA CONSULTANTS SERVICES LTD. (ITA NO. 7513/M/2010) DATED 4.11.2015, IN OUR CONSIDERED OPINION IS MISCONCEIVE D, BECAUSE, IN THAT CASE, THE TRIBUNAL PRIMARILY FOUND THAT THE AO ERRE D IN NOT HIMSELF EXAMINING THE ISSUE OF TP AND FAILED TO APPLY HIS M IND TO THE TP REPORT FILED BY THE ASSESSEE. THE LAST SENTENCE IN PARA 54 OF THE ORDER ITA NO.6200/DEL/2012 47 UPHOLDING THE ASSESSEES CONTENTION THAT NO TP ADJU STMENT CAN BE MADE WHERE THE ASSESSEE ENJOYS BENEFIT OF DEDUCTION U/S 10A OR 80HHE, ETC., IS ONLY OBITER DICTA INASMUCH AS THE ADDITION WAS FOUND TO BE NOT SUSTAINABLE ON THE OTHER MAIN GROUNDS AS DISCUSSED IN THE BODY OF THE ORDER. ON THE CONTRARY, WE FIND THAT THE DECISION OF THE SPECIAL BENCH IN AZTECH SOFTWARE (SUPRA) PERMITTING THE APPLICABILITY OF SECTIONS 92C AND 92CA TO AN ASSESSEE AVAILING THE BENEFIT OF SECTION 10A OF THE ACT IS ITS RATIO DECIDENDI. ON A SPECIFIC QUERY, THE LD. AR COULD NOT POINT OUT ANY JUDGMENT OF SOME HONBLE HIGH COURT DECIDING THIS P OINT EITHER WAY. IN VIEW OF THE FACT THAT THERE IS ALREADY A SPECIAL BE NCH DECISION IN THE CASE OF AZTECH SOFTWARE (SUPRA) WHICH SUPPORTS THE MAKING OF TRANSFER PRICING ADJUSTMENT NOTWITHSTANDING THE ELIGIBILITY OF DEDUCTION U/S 10A TO THE ASSESSEE, APART FROM CLEAR STATUTORY MANDATE CONTAINED IN PROVISO TO SECTION 92C(4), WE ARE MORE INCLINED TO GO WITH THE VIEW OF THE SPECIAL BENCH. 26.5. IT IS, THEREFORE, HELD THAT THE ELIGIBILI TY OF THE ASSESSEE TO DEDUCTION U/S 10A OF THE ACT DOES NOT OPERATE AS A BAR FOR DETERMINING ITA NO.6200/DEL/2012 48 THE ALP OF INTERNATIONAL TRANSACTION UNDERTAKEN BY IT AND FURTHER THE ENHANCEMENT OF INCOME DUE TO SUCH TRANSFER PRICING ADDITION CANNOT BE CONSIDERED FOR ALLOWING THE BENEFIT OF DEDUCTION UN DER THIS SECTION. 27. IN VIEW OF THE FOREGOING DISCUSSION, WE SET A SIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FO R A FRESH DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANS ACTION OF `SOFTWARE DEVELOPMENT SERVICES IN CONSONANCE WITH OUR DECISI ON ON VARIOUS ASPECTS GIVEN ABOVE. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH PRO CEEDINGS. 28.1. GROUND NO. 8 OF THE APPEAL IS AGAINST ALL OWING SHORT DEDUCTION U/S 10A TO THE EXTENT OF RS.1,22,342/- IN RESPECT O F NOIDA UNIT, WHICH IS ELIGIBLE FOR TAX HOLIDAY U/S 10A OF THE ACT. 28.2. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSESSEE COMPUTED ITS ELIGIBLE PROFIT U/S 10A AT RS.13.61 CRORE. THE ASS ESSEE CREDITED ITS PROFIT AND LOSS ACCOUNT WITH LIABILITY NO LONGER REQUIRED - WRITTEN BACK AMOUNTING TO RS.1,48,180/- AND MISCELLANEOUS INCOM E AMOUNTING TO RS.1,93,018/-. DEDUCTION U/S 10A WAS ALSO CLAIMED IN RESPECT OF THESE ITA NO.6200/DEL/2012 49 TWO ITEMS. IT WAS ARGUED THAT THESE EXPENSES WERE CLAIMED IN EARLIER YEARS, WHICH LED TO REDUCTION OF ELIGIBLE INCOME OF SUCH YEARS. BUT, IN THIS YEAR, THESE WERE REVERSED TO THE ABOVE EXTENT AS THERE WAS EXCESS DEDUCTION IN EARLIER YEARS AND ACCORDINGLY, THE ASS ESSEE WAS ENTITLED TO BENEFIT OF SECTION 10A ON THESE AMOUNTS. THE AO BI FURCATED SUM OF THESE TWO AMOUNTS IN THREE PARTS AND APPORTIONED A SUM OF RS.1,22,342/- IN RESPECT OF ELIGIBLE UNIT AND REDUCED THIS AMOUNT FROM THE ELIGIBLE PROFIT OF UNIT D-4 (NOIDA). THE ASSESSEE IS AGGRIE VED AGAINST THIS DECISION OF THE AO. 28.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT A SUM OF RS. 1,22,342/- HAS BEEN APPORTIONED BY THE AO HIMSELF AS RELATABLE TO THE ELIGIBLE UNIT D-4, NOIDA. THIS APPORTIONMENT HAS BEEN DONE OF SUM OF TWO ITEMS, NAMELY, RS.1,48,180/- WHICH WAS CLAIMED AS DEDUCTION BY THE ASSESSEE IN EARLIER YEARS AND A SUM OF RS.1,93,018/- WHICH IS THE AMOUN T OF BANK CHARGES REFUNDED DURING THE YEAR. THESE TWO ITEMS WERE CLA IMED AS DEDUCTION IN THE EARLIER YEARS FROM THE ELIGIBLE INCOME AND THES E HAVE TURNED OUT TO BE ITA NO.6200/DEL/2012 50 EXCESSIVE TO THIS EXTENT, EITHER BECAUSE OF THE EXC ESS PROVISION CREATED IN THE EARLIER YEAR WHICH HAS BEEN NOW REVERSED OR THE EXCESS BANK CHARGES CLAIMED WHICH HAVE BEEN REFUNDED IN THE INSTANT YEA R. SINCE THESE EXPENSES AT THE TIME OF THEIR INCURRING IN THE EARL IER YEARS WENT ON TO REDUCE THE ELIGIBLE INCOME OF THE NOIDA UNIT, IN OU R CONSIDERED OPINION, WHEN THE EXCESS AMOUNT IS REVERSED IN THE CURRENT Y EAR, THE SAME SHOULD ALSO BE MADE ELIGIBLE FOR THE BENEFIT OF DEDUCTION U/S 10A OF THE ACT. WE, THEREFORE, OVERTURN THE ASSESSMENT ORDER ON THI S POINT, AND DIRECT THE INCLUSION OF A SUM OF RS. 1,22,342/- IN THE ELIGIBL E PROFIT FOR THE PURPOSES OF DEDUCTION. 29.1. GROUND NO. 9 IS AGAINST NOT ALLOWING DED UCTION U/S 10A ON A SUM OF RS.1,53,300/-, BEING THE AMOUNT OF DEPRECIAT ION DISALLOWED. THE ASSESSEE CLAIMED DEPRECIATION DURING THE ASSESSMENT YEAR 2007-08 ON `PROVISION OF COMPUTER SOFTWARE AMOUNTING TO RS.3, 65,000/-, WHICH WAS DISALLOWED. SINCE THE CLOSING WDV OF LAST YEAR I.E., 2,55,500/- (RS.3,65,000 1,09,500/-) WOULD BE INCLUDED IN THE OPENING WRITTEN DOWN VALUE OF CURRENT YEAR, THE AO OPINED THAT THE DEPRECIATION CLAIMED ITA NO.6200/DEL/2012 51 IN THE CURRENT YEAR ON THIS AMOUNT SHOULD ALSO BE D ISALLOWED. ACCORDINGLY, DEPRECIATION AMOUNT OF RS.1,53,300/- ( RS.2,55,500X60%) WAS DISALLOWED. 29.2. HAVING HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD, WE FIND IT AS AN UNDISPUTED POSITION THAT T HE `PROVISION OF COMPUTER SOFTWARE AMOUNTING TO RS.3,65,000/- DISA LLOWED IN THE PRECEDING YEAR, NAMELY, AY 2007-08, HAS NOT BEEN FURTHER ASSAILED BY THE ASSESSEE. THE LD. AR SUBMITTED THAT SUCH DISAL LOWANCE WAS ACCEPTED AND NO FURTHER APPEAL WAS FILED ON THIS ISSUE. THE LD. DR DID NOT CONTROVERT THIS POSITION. IN THAT VIEW OF THE MATT ER, IT BECOMES EXPLICIT THAT THE OPENING WRITTEN DOWN VALUE TO THE EXTENT O F RS.2,55,500/- WAS EXCESSIVE AND OUGHT TO HAVE BEEN REDUCED. ONCE THIS AMOUNT IS REDUCED, THE ASSESSEES CLAIM FOR DEPRECIATION ON SUCH AMOUN T TO THE TUNE OF RS.1,53,300/- ALSO BECOMES DISALLOWABLE. WE, THERE FORE, APPROVE THE ACTION OF THE AO IN MAKING ADDITION FOR A SUM OF RS .1,53,300/-. 29.3. HOWEVER, THE DISALLOWANCE OF DEPRECIATION T O THIS EXTENT WILL CORRESPONDINGLY ENHANCE THE ELIGIBLE PROFITS OF NOI DA UNIT AND THE ITA NO.6200/DEL/2012 52 RESULTANT AMOUNT OF DEDUCTION U/S 10A TO THIS EXTEN T. THUS, THE DISALLOWANCE SO MADE WOULD BE SET OFF WITH THE INCR EASED CLAIM OF DEDUCTION U/S 10A RESULTING INTO NO ULTIMATE ADDIT ION ON THIS SCORE. AS THE AO HAS SIMPLY MADE DISALLOWANCE ON ACCOUNT OF D EPRECIATION WITHOUT ALLOWING BENEFIT OF SECTION 10A ON THIS DIS ALLOWANCE, WE HOLD THAT THE ASSESSEE SHOULD ALSO BE ALLOWED BENEFIT U/ S 10A OF THE ACT TO THIS EXTENT. THIS GROUND IS ALLOWED. 30. OTHER GROUND ABOUT CHARGING OF INTEREST U/S 234 B, 234D AND 244A IS CONSEQUENTIAL AND, ACCORDINGLY, DISPOSED OF. 31. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 11.02.201 6. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 11 TH FEBRUARY, 2016. DK ITA NO.6200/DEL/2012 53 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.