M/s. Smart Cube India Pvt. Ltd., New Delhi V. ITO, New Delhi

ITA 631/DEL/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7393 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 6 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 31-05-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 04-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMIT MOHAN GOVIL
• Keywords: Related party transaction; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Additional evidence
• Section: 234B; 37(1)

Judgement Text

PAGE 1 OF 18 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-2 NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SH.PRASHANT MAHARISHI, ACCOUNTANT MEMBER I.T.A .NO.-6 31/DEL/2014 (ASSESSMENT YEAR -2009-10) SMART CUBE INDIA PVT. LTD., 37, HAUZ KHAS VILLAGE, NEW DELHI-110016. PAN-AAHCS8978H (APPELLANT) VS ITO, WARD-9(1), NEW DELHI. (RESPONDENT) APPELLANT BY SHRI AJAY VOHRA, SR.ADV. & SH. NEERAJ JAIN, ADV. RESPONDENT BY SHRI AMIT MOHAN GOVIL, CIT(DR) DATE OF HEARING 31.05.2016 DATE OF PRONOUNCEMENT 2 2 .0 8 .2016 O R D E R PER DIVA SINGH, JUDICIAL MEMBER BY THE PRESENT APPEAL THE ASSESSEE ASSAILS THE CORR ECTNESS OF THE ORDER DATED 31/12/2013 PASSED BY THE ASSESSING OFFICER U/S 143( 3) READ WITH SECTION 144C OF INCOME TAX ACT ON THE FOLLOWING GROUNDS:- 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING ASSESSMENT UNDER SECTION 144C/143(3) OF THE INCOME- TAX ACT, 1961 ('THE ACT') AT AN INCOME OF RS.3,45,88,630 AS AGAINST THE INCOME O F RS. 5,67,610 RETURNED BY THE APPELLANT. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING ADDITION OF RS.3,40,21,018 ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF PROVISION OF ITES SERVICES ON THE BASIS OF THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT BY TH E TPO. 2.1. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP/TPO ERRED IN NOT HOLDING THAT SINCE THE ASSOCIATED ENTERPRISE ('THE AE') HAS INCURRED A LOSS, I.T.A .NO.-631/DEL/2014 PAGE 2 OF 18 IN RELATION TO ITES SERVICES RENDERED BY THE APPELL ANT TO THE AE, WHICH, IN TURN, WERE RENDERED BY THE AE TO ULTIMATE THIRD PARTY CUS TOMER(S), NO TRANSFER PRICING ADJUSTMENT WAS WARRANTED. 2.2. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP/TPO ERRED IN NOT HOLDING THAT THE TRANSFER PRICING ADJUSTMENT , AT BEST, COULD NOT EXCEED THE TOTAL PROFIT EARNED BY THE GROUP, AS THE SAME WOULD RESULT IN TAXATION OF NOTIONAL INCOME. 2.3. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP/TPO ERRED IN NOT ALLOWING COMPARABILITY ADJUSTMENT ON A CCOUNT OF UNDERUTILIZATION OF CAPACITY, CONSIDERING THAT ONLY 72% OF THE CAPACITY OF THE APPELLANT WAS UTILIZED IN THE RELEVANT PREVIOUS YEAR AND THERE WAS IDLE CA PACITY IN THE VICINITY OF 22% TO 28%. 2.4. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT ALLOWING COMPARABILITY ADJUSTMENT TO THE EXTENT OF RS.10,978,227/- ON ACCO UNT OF EXTRAORDINARY EXPENSE (LOSS) INCURRED BY THE APPELLANT FOR RELOCA TION TO A NEW BUSINESS PREMISES DUE TO THE SEALING DRIVE UNDERTAKEN BY MUN ICIPAL CORPORATION OF DELHI (MCD). 2.5 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN TREATING THE EXTRAORDINARY EXPENDITURES INCURRED BY THE APPELLANT ON ACCOUNT O F SHIFTING OF PREMISES DUE TO SEALING AS OPERATING EXPENSES FOR COMPUTATION OF OP ERATING PROFIT MARGIN HOLDING THE SAME TO BE A CALCULATED BUSINESS RISK OF THE AP PELLANT. 2.6 THAT THE DRP/TPO ERRED IN FACTS AND IN LAW IN NOT APPRECIATING THAT SUCH EXTRAORDINARY EXPENSES ON SHIFTING OF OFFICE WERE I NCURRED ON ACCOUNT OF FORCE MAJEURE AND NOT AS ROUTINE BUSINESS EXPENDITURE AND VAS NOT INCURRED BY THE COMPARABLES. 2.7 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT ALLOWING APPROPRIATE RISK ADJUSTMENT TO ESTABLISH COMPARABILITY ON ACCOU NT OF THE APPELLANT BEING A LOW-RISK-BEARING CAPTIVE SERVICE PROVIDER AS OPPOSE D TO THE COMPARABLE COMPANIES WHO WERE INDEPENDENT ITES SERVICE PROVIDE R, EVEN WHILE HOLDING THAT 'THE ASSESSEE CANNOT BE COMPARED TO A RISK FREE ENT ITY'. 2.8 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP ERRED IN REJECTING THE CONTENTION OF THE APPELL ANT REGARDING RISK ADJUSTMENT, HOLDING THAT IN ABSENCE OF ROBUST AND RELIABLE DATA , BOTH FOR THE ASSESSEE AND FOR THE COMPARABLES, RISK ADJUSTMENT CANNOT BE CONSIDER ED FOR ENHANCING COMPARABILITY. 2.9 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT CONSIDERING ALLSEC TECHNOLOGIES LIMITED AND SAN-BLUE ENTERPRISES LTD A S COMPARABLE COMPANIES ALLEGEDLY ON THE BASIS THAT THEY ARE INCURRING PERS ISTENT LOSSES, AND THEREBY ASSUMING THAT THERE WAS SOME PECULIAR PROBLEM AND I T COULD NOT BE TAKEN AS A ROBUST AND RELIABLE COMPARABLE. 2.10. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN REJECTING SOLIX TECHNOLOGY LTD ALLEGEDLY ON THE BASIS THAT IT IS FUNCTIONALLY DISSIMILAR TO THE APPELLANT. 2.11. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN REJECTING ICRA ONLINE LTD. ON THE BASIS THAT IT IS HAVING EXPORT SALES LESS TH AN 25% OF THE TOTAL INCOME. 2.12. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN SELECTING THE FOLLOWING COMPANIES WHICH ARE FUNCTIONALLY DISSIMILAR TO THE APPELLANT AS COMPARABLE FOR THE PURPOSE OF BENCHMARKING ANALYSIS: A) ACCENTIA TECHNOLOGIES LTD I.T.A .NO.-631/DEL/2014 PAGE 3 OF 18 B) COSMIC GLOBAL LTD C) CROSS DOMAIN SOLUTIONS PVT LTD D) ECLERX SERVICES LTD E) INFOSYS BPO F) JEEVAN SOFTECH 2.13 THE DRP/TPO ERRED ON FACTS AND IN LAW IN SELEC TING, COSMIC GLOBAL LTD WITHOUT APPRECIATING THE FACT THAT IT HAS OUTSOURCE D SIGNIFICANT PART OF ITS ITES OPERATIONS TO OUTSIDE VENDORS MAKING IT TO BE FUNCT IONALLY DISSIMILAR TO THE ASSESSEE. 2.14 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW I N SELECTING COSMIC GLOBAL LTD. AND CROSSDOMAIN SOLUTIONS PVT. LTD. AS COMPARA BLE COMPANIES NOT APPRECIATING THAT THE COMPANIES ARE NOT SATISFYING THE FILTER OF RELATED PARTY TRANSACTIONS APPLIED BY THE TPO HIMSELF. 2.15 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW I N CONSIDERING ECLERX LTD AND INFOSYS BPO LTD HAVING SIGNIFICANTLY HIGHER TURNOVE R AS COMPARED TO THE APPELLANT AND ARE ALSO NOT FUNCTIONALLY COMPARABLE TO THE APPELLANT. 2.16 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW I N APPLYING INCONSISTENT APPROACH BY ELIMINATING LOSS MAKING COMPANIES OR CO MPANIES WITH DECLINING REVENUE WITHOUT ELIMINATING THE COMPANIES HAVING SI GNIFICANTLY HIGH MARGINS OR HIGH TURNOVER. 2 17 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN SELECTING FOLLOWING SUPER NORMAL PROFIT COMPANIES AS COMPARABLE TO THE APPELL ANT BEING A CAPTIVE SERVICE PROVIDER: S.NO. NAME OF THE COMPANY OP/OC(%) 1. ACCENTIA TECHNOLGOEIS LTD. 52.52 2. COSMIC GLOBAL LTD. 50.70 3. ECLERX LIMITED 66.01 4. JEEVAN SOFTECH 44.32 2.18 WITHOUT PREJUDICE TO THE GROUND THAT JEEVAN SOFTECH IS FUNCTIONALLY DIFFERENT, THE DRP/TPO ERRED IN FACTS AND IN LAW IN INCORRECTLY COMPUTING THE OPERATING PROFIT MARGIN OF THE COMPANY AT 44.32% AS AGAINST THE CORRECT PROFIT MARGIN OF 20.07%. 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 234B AND SECTION 234D OF THE ACT, 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR VARY FROM THE AFORESAID GROUND OF APPEAL BEFORE OR AT THE TIME OF HEARING. 1.1. HOWEVER, AT THE TIME OF ARGUMENT THE LD. AR SUBMITT ED THAT THE ASSESSEE WOULD LIKE TO FIRST ADDRESS ONLY GROUND NO. 2.3 AND 2.4 IN THE PRESENT PROCEEDINGS. 2. IT WAS HIS SUBMISSION THAT INCASE THESE ISSUES ARE ADDRESSED THEN THE OTHER GROUNDS WOULD BECOME ACADEMIC. INVITING ATTENTION TO GROUN D NOS.2.3 AND 2.4, IT WAS SUBMITTED I.T.A .NO.-631/DEL/2014 PAGE 4 OF 18 THAT THE SAID ISSUES HAVE BEEN TAKEN INTO CONSIDERA TION BY THE ITAT IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR IN THE CASE OF THE ASSESS EE ITSELF. RELYING ON THE JUDICIAL PRECEDENT AVAILABLE ON THE ISSUES ADDRESSED BY THES E TWO GROUNDS IT WAS SUBMITTED THE MATTER WILL NEED TO BE REMANDED BACK TO THE TPO. R ELYING ON THE DIRECTIONS GIVEN IN 2008- 09 BY THE ITAT IT WAS SUBMITTED THE OTHER ISSUES RA ISED BY THE ASSESSEE IN THE PRESENT APPEAL MAY BE LEFT OPEN FOR CONSIDERATION BEFORE T HE TPO/AO TO BE DECIDED ON FACTS AND LAW. THUS AS FAR AS THE PRESENT PROCEEDINGS BEFOR E THE ITAT ARE CONCERNED THE ISSUES WOULD BECOME ACADEMIC. 3. SUPPORTING THE PRAYER MADE, ATTENTION WAS INVITED TO THE ORDER DATED 09.09.2015 IN ITA NO.-6274/DEL/2012 IN ASSESSEES CASE PERTAINING TO 2008 09 ASSESSMENT YEAR. RELYING ON THE SAME IT WAS SUBMITTED THAT THE ISSUE WHICH HAS BEEN ADDRESSED IN THE PRESENT PROCEEDINGS VIDE GROUND NO.2.3 NAMELY UNDER UTILIZATION OF CAPACITY WAS REMANDED BY THE ITAT. IN THE SAID YEAR I.E. 2008-0 9AY THE ISSUE INADVERTENTLY HAD NOT BEEN RAISED BY THE ASSESSEE IN THE GROUNDS FILED OR IGINALLY, ACCORDINGLY AN ADDITIONAL GROUND WAS RAISED. ACCEPTING THE PRAYER OF THE ASS ESSEE IT WAS SUBMITTED THE ITAT ADMITTED THE ADDITIONAL GROUND. THE ONLY DIFFERENC E IN THE FACTS OF THE EARLIER YEAR AND THE PRESENT YEAR WAS THAT IN THE FACTS OF THAT YEAR T HE UNDER UTILIZATION OF CAPACITY WAS TO THE EXTENT OF 75% WHEREAS THE UNDER UTILIZATION OF CAPA CITY IN THE YEAR UNDER CONSIDERATION IS TO THE EXTENT OF 72%. 4. ADDRESSING GROUND NO.2.4 IN THE PRESENT APPEAL IT WAS SUBMITTED THAT IN THE EARLIER YEAR THE ITAT HAD CONSIDERED THE PRAYER FOR ADMITTI NG FRESH EVIDENCES IN PARAS 5 TO 8 OF ITS ORDER AND RELYING UPON CIT VS TEXT HUNDRED PVT. LTD. 239 CTR 263 (DELHI) A ND WAS PLEASED TO ADMIT THE EVIDENCES. ALLOWING THE PETIT ION UNDER RULE 29 THE ITAT ADMITTING I.T.A .NO.-631/DEL/2014 PAGE 5 OF 18 THE EVIDENCES HAD REMANDED THE MATTER TO THE TPO/AO . ACCORDINGLY IT WAS HIS SUBMISSION THAT IN THE FACTS OF THE PRESENT CASE ALSO SIMILAR PRAYER FOR ADMISSION OF FRESH EVIDENCES HAS BEEN MOVED AND CONSIDERING THE JUDICIAL PRECEDE NT IT MAY BE ALLOWED. 5. THE OTHER ISSUES IT WAS SUBMITTED HAVE BEEN KEPT A LIVE BY THE ITAT VIDE PARA 17 TO 19 OF THE ORDER ACCORDINGLY IT WAS HIS LIMITED PRAY ER THAT WHILE DECIDING THE ISSUES RAISED IN GROUND NO. 2.3 AND 2.4 FOLLOWING THE JUDICIAL PRECE DENT IDENTICAL DIRECTION MAY BE GIVEN IN THE YEAR UNDER CONSIDERATION QUA THE OTHER ISSUES A ND THEY MAY BE RESTORED TO THE FILE OF THE TPO. 6. THE LD. CIT DR, MR. AMIT MOHAN GOVIL SUBMITTED THA T IT IS NOT POSSIBLE TO SAY THAT THE ISSUES ARE COVERED BY THE ORDER OF THE ITAT AS THE MATTER IS ENTIRELY FACTUAL AND REQUIRES A RECONSIDERATION OF FACTS. CARRYING THE ARGUMENT, FURTHER IT WAS HIS SUBMISSION THAT HE FAILED TO UNDERSTAND HOW THE ASSESSEE CAN A RGUE THAT RELOCATION EXPENSES ON ACCOUNT OF SEALING BY THE MCD IN A PARTICULAR YEAR CAN BE STATED TO BE A CONTINUOUS EXPENDITURE IN THE SUBSEQUENT YEARS ALSO WHICH IS T HE PRAYER OF THE ASSESSEE IN TERMS OF GROUND NO. 2.4. ADDRESSING GROUND NO. 2.3, IT WAS A STAND THAT THE ISSUE MAY BE CONSIDERED BY THE TPO. 7. THE LD. AR ADDRESSING THE SPECIFIC GRIEVANCE OF T HE REVENUE SUBMITTED THAT THE EXPENSES PERTAIN TO SEALING AND DE-SEALING OF THE S PECIFIC PREMISES OF THE ASSESSEE AND HAVE BEEN SPECIFICALLY ADDRESSED BEFORE THE DRP. I N SUPPORT OF THE SAID SUBMISSION, RELIANCE WAS PLACED ON THE PETITION DATED 09.09.20 13 RULE 7(4) OF THE INCOME TAX (DISPUTE RESOLUTION PANEL) RULES 2009, COPY OF THE SAID PRAY ER IS MOVED BEFORE THE DRP IT WAS SUBMITTED IS PLACED AT PAGES 189 TO 195 WHERE THE SPECIFIC EVIDENCES HAVE BEEN DESCRIBED AS UNDER:- I.T.A .NO.-631/DEL/2014 PAGE 6 OF 18 BEFORE THE DISPTUE RESOLUTION PANEL II NEW DELHI IN THE MATTER OF : SMART CUBE INDIA PVT.LTD. ASSESSMENT YEAR : 2009-10 RE: REQUEST FOR ADMISSION OF ADDITIONAL EVIDENCE-RU LE 7(4) OF THE INCOME TAX (DISPUTE RESOLUTION PANEL) RULES 2009 THE ASSESSEE SEEKS TO PLACE ON RECORD THE FOLLOWING BY WAY OF ADDITIONAL EVIDENCE:- S.NO. PARTICULARS PAGE NO. ANNEXURE 1. COPY OF APPLICATION FILED BEFORE THE MUNICIPAL CORP ORATION OF DELHI 1 - 8 1 2. COPY OF LEASE AGREEMENT OF OFFICE PREMISES AT CHAND IWALA ESTATE DATED 28.12.2004 ENCLOSED AS ANNEXURE TO THE REPRESENTATION MADE BEFORE THE MCD FOR DE-SEALING O F PREMISE 9 - 19 1(A) 3. COPY OF LETTER ISSUED BY THE TRUST DATED 23.03.2004 GIVING DETAILS OF CHANDIWALA ESTATE PROPERTY 20 - 29 2 4. COPY OF CORRESPONDENCE MADE BY THE TRUST WITH REGAR D TO VISIT OF MONITORING COMMITTEE DATED 02.08.2007 30 3 5. COPY OF NOTICE FOR DE - SEALING OF CHANDIWALA ESTATE PROPERTY FOR 20 DAYS 31 - 32 4 6. COPY OF APPLICATION MADE BEFORE THE SUPREME COURT OF INDIA FOR A GRANT OF 24 WEEKS FOR RELOCATION FROM CHANDIW ALA ESTATE. 33 - 42 5 7. COPY OF LEASE AGREEMENT OF OFFICE PREMISES AT NOIDA DATED 24.02.2009 ENTERED BETWEEN THE ASSESSEE AND PLUTO S OFTWARE PVT.LTD. 43 - 64 6 8. DETAILS OF ADDITIONAL EXTRAORDINARY EXPENSES INCURR ED ON ACCOUNT OF SHIFTING OF OFFICE FROM CHANDIWALA OFFIC E 65 - 66 7 9. DETAILS OF EXTRA COST INCURRED BY THE ASSESSEE IN REGUS OFFICE AS COMPARED TO NOIDA OFFICE 67 8 10. COPY OF ORDER OF DELHI HIGH COURT IN THE CASE OF CIT VS TEXT HUNDRED INDIA PVT. LTD. 239 CTR 263 68 - 73 9 7.1. THE DRP IN ITS ORDER DATED 31.10.2013 DOES NOT REF ER TO IT AND MERELY OBSERVES THAT FOLLOWING THE PRECEDENT IN 2008-09 AY THE OBJECTION S ARE REJECTED. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. THE RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSE E IS A PRIVATE LIMITED COMPANY INCORPORATED ON 8 TH JANUARY 2004. THE ASSESSEE IS A SUBSIDIARY COMPANY OF SMART CUBE LTD. UK AND IS ENGAGED IN PROVIDING INFORMATION TEC HNOLOGY ENABLED SERVICES (ITES) IN I.T.A .NO.-631/DEL/2014 PAGE 7 OF 18 THE FIELD OF DATA PROCESSING IN THE DOMAIN OF RESEA RCH AND ANALYSIS RELATED SERVICES TO ITS GROUP COMPANIES. THE TPO HAS DESCRIBED THE ASSESSE E AS BEING ENGAGED IN PROVIDING RESEARCH AND ANALYST SERVICES. IT IS A PRIVATE LIM ITED COMPANY MANAGED BY TEAM OF PROFESSIONAL THAT ARE SPECIALIZED IN DELIVERING HIG H VALUE AND CUSTOMIZED RESEARCH AND ANALYSIS TO ITS ASSOCIATED ENTERPRISES, IT IS RESID ENT IN INDIA AND SUBJECT TO INDIA TAX LAWS. ITS ASSOCIATED ENTERPRISES ARE THE SMART CUBE LTD, UK ITS HOLDING COMPANY. THE SMART CUBE INC. USA A FELLOW SUBSIDIARY. THE TPO NOTICED THAT THE SMART CUBE LIMITED UK IS ENGAGED IN CONDUCTING BUSINESS DEVELOPMENT WORK TO GENERATE SALES OF RESEARCH & ANALYTICS SERVICES FROM CLIENTS IN THE UK AND EUROPE . THE COMPANY CONTRACTS WITH THE SMART CUBE INDIA PVT. LTD. FOR EXECUTION OF THIS WO RK. THE SMART CUBE INC. US IT HAS BEEN NOTICED BY THE TPO IS ENGAGED IN CONDUCTING BUSINESS DEVELOPMENT WORK TO GENERATE SALES OF RESEARCH AND ANALYTICS SERVICES F ROM CLIENTS IN THE NORTH AMERICA. THE COMPANY CONTRACTS WITH THE SMART CUBE INDIA PVT.LTD . FOR EXECUTION OF THIS WORK. THE ENTIRE SHARE CAPITAL OF COMPANY AS ON 31 ST MARCH 2009 WAS HELD BY THE HOLDING COMPANY- THE SMART CUBE UK. THE COMPANY IS REGISTERED WITH SOFTWARE TECHNOLOGY PARK OF INDIA (STPI). 8.1. THE FOLLOWING INTERNATIONAL TRANSACTION WAS DISCL OSED BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION:- NS.NO.. NATURE OF TRANSACTION VALUE OF TRANSACTIONS 1 RESEARCH AND ANALYST SERVICES 13,36,26,646/ - 8.2. ADDRESSING THE TRANSFER PRICING APPROACH OF THE ASS ESSEE THE TPO NOTICED THAT IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSACTIONS O F THE ASSESSEE FOR PROVISION OF RESEARCH AND ANALYST SERVICES, THE ASSESSEE HAS CHOSEN TNMM AS THE MOST APPROPRIATE METHOD. I.T.A .NO.-631/DEL/2014 PAGE 8 OF 18 THE MARGIN OF THE TESTED PARTY I.E. THE ASSESSEE HA S BEEN COMPUTED AT 5.01%. IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSACTIONS THE ASSESS EE HAS CHOSEN 5 COMPARABLES WHOSE MEAN MARGIN USING THREE YEARS DATA HAS BEEN COMPUTE D AT 3.94%. 9. THE TPO OBJECTED TO THE MULTIPLE YEAR DATA AND CON SIDERING THE TP DOCUMENTATION USING PLI OF OP/OC, THE TESTED PARTY MARGIN WAS COM PUTED AT 5.01%. IN LATER SUBMISSION, THE ASSESSEE HAS CLAIMED TO INCUR THE EXTRA ORDINAR Y EXPENDITURE RELATING TO SHIFTING OF OFFICE TO BE TREATED AS NON OPERATIVE AND ACCORDING LY CALCULATED PLI AT 13.88%. THIS ISSUE AROSE IN A.Y. 2008-09 ALSO AND THE TPO AS WELL AS T HE DRP BOTH HAVE ADDRESSED THE ISSUE BY TREATING THIS EXPENDITURE AS OPERATIVE, AS THE R ENT PAID ON ACCOUNT OF SHIFTING OF OFFICE HAS BEEN HELD INCURRED TO EARN THE OPERATIVE INCOM E AND THE EXPENSE HAS DIRECT NEXUS WITH THE REVENUE GENERATION. IT HAS BEEN HELD THAT THE EXPENDITURE RESULTING DUE TO SEALING WAS VERY MUCH ASSOCIATED WITH THE BUSINESS OF THE ASSESSEE AND IT WAS THE CALCULATED BUSINESS RISK OF THE ASSESSEE. 10. THE TPO FOUND THAT THE WORKING SHEET FILED BY THE ASSESSEE AS ANNEXURE VA OF THE REPLY DATED 27.04.2012 SHOWED THAT THE AMOUNT OF RS .95,49,027/- OUT OF EXTRA ORDINARY EXPENSES OF RS.109,78,227/- WAS ON ACCOUNT OF DIFFE RENCE IN THE RENT OF OLD PREMISES AT CHANDIWALA AND NEW PREMISES AT REGUS FROM SEPTEMBER TO FEBRUARY DURING THE YEAR. FROM THE CASE RECORDS OF A.Y. 2008-09 IT WAS NOTICE D THAT THE ASSESSEE WAS OPERATING FROM GROUND FLOOR BUILDING NO.3, CHANDIWALA ESTATE WHICH WAS SEALED ON 6 TH AUGUST 2007 BY MCD ON THE ORDERS OF MONITORING COMMITTEE AND THE A SSESSEE SHIFTED ITS PREMISE TO A 4-5, SECTOR 16, NOIDA, U.P. OWNED BY IT INFRASTRUCTURE P VT. LTD. (LOGIX GROUP) FOR THE PERIOD 13.08.2007 TO 14.09.2007 AND SHIFTED BACK TO ITS OL D PREMISE AT BUILDING NO.3, CHANDIWALA ESTATE ON 17.09.2007. AGAIN IN SEPTEMBER 2008 THE T PO NOTICED THAT THE ASSESSEE SHIFTED I.T.A .NO.-631/DEL/2014 PAGE 9 OF 18 ITS PREMISES TO REGUS THE SHIFT ACCORDINGLY TO THE TPO WAS NOT DUE TO SEALING. ACCORDINGLY HE WAS OF THE VIEW THAT ADDITIONAL COST INCURRED WA S DUE TO SHIFTING AND WAS NOT DUE TO SEALING. HE WAS OF THE VIEW THAT AN OFFICE COULD BE SHIFTED AT ANY TIME AND RENT COULD ALSO BE REVISED THUS HE WAS OF THE VIEW THAT IT COULD NO T BE SAID THAT THE INCREASE IN EXPENSES WAS DUE TO THE SEALING EFFECT. HE WAS FURTHER OF TH E VIEW THAT SUCH RISKS WERE NORMAL BUSINESS RISKS. THUS COSTS LIKE THIS, HE WAS OF TH E VIEW COULD BE EMBEDDED IN THE TOTAL COST OF THE COMPARABLES ALSO. FURTHER, HE WAS ALSO OF T HE VIEW THAT THIS FACT WAS NOT RELEVANT AS THE ASSESSEE WAS CHARGING ITS AES ON MAN AND MATERI AL BASIS RATHER THAN COST PLUS MODEL WHICH WAS GENERALLY THE PREFERRED BUSINESS MODEL FO R CAPTIVE SERVICE PROVIDERS. HE WAS OF THE VIEW THAT HAD THE ASSESSEE FOLLOWED COST PLUS MODEL, IT WOULD HAVE RECOVERED ITS ENTIRE COST INCLUDING THE ADDITIONAL RENT FOR NEW P REMISES FROM ITS AES ALONG WITH A MARK- UP. HE WAS OF THE VIEW THAT WHILE CHARGING ON MAN AND MATERIAL BASIS AN INDEPENDENT SERVICE PROVIDER WOULD FACTOR IN SUCH USUAL RISKS, VIZ., DISRUPTION OF WORK ETC. FOR FIXING THE PRICES I.E. KEEP SUFFICIENT MARGIN FOR SUCH SITUATI ONS. THE TPO FURTHER WAS OF THE VIEW THAT WHILE FURNISHING THE TP REPORT THE ASSESSEE HAD ALR EADY CONSIDERED THIS EXPENDITURE AS OPERATIVE AND CALCULATED THE PLI ACCORDINGLY AT 5.0 1%. THESE FINDINGS AND CONCLUSIONS, WE FIND ARE DISCUSSED IN PARAS 7 TO 7.3 OF THE TPO S ORDER. 11. ACCORDINGLY AFTER CONFRONTING THE SAME TO THE ASSES SEE AND CONSIDERING THE FOLLOWING 10 COMPARABLE ADJUSTMENT OF RS. 3,47,22,2 60/- WAS PROPOSED:- S.NO. COMPARABLES OP/OC 1. ACCENTILIA TECHNOLOGIES LTD. 52.52% 2. AXIS IT & T LTD. 8.16% 3. ADITYA BIRLA MINACS WORLDWIDE LTD. 11.95% 4. COSMIC GLOBAL LTD. 50.70% 5. CROSSDOMAIN SOLUTION PVT.LTD. 25.63% I.T.A .NO.-631/DEL/2014 PAGE 10 OF 18 6. CORAL HUB 37.03% 7. ECLERX SERVICES LTD. 66.01 8. INFOSYS BPO 24.28% 9. JEEVAN SOFTECH 44.32% 10. MICROGENETIC SYSTEMS LTD. ( - ) 0.18% AVERAGE 32.04% 12. AGGRIEVED THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP. FOLLOWING THE VIEW TAKEN IN 2008-09 AY THE OBJECTION WAS DISMISSED HOLDING A S UNDER:- 6. ASSESSEE HAS RAISED THE FOLLOWING OBJECTION ON THE BASIS EXTRAORDINARY EXPENDITURE INCURRED ON ACCOUNT OF SHIFTING OF PREM ISES AS OPERATING EXPENSES. (V) THAT THE ASSESSING OFFICER / TPO ERRED ON FACTS AND IN LAW IN TREATING THE EXTRAORDINARY EXPENDITURES INCURRED BY THE ASSESSES ON ACCOUNT OF SHIFTING OF PREMISES AS OPERATING EXPENSES FOR THE PURPOSE OF C OMPUTATION OF TESTED PONY MARGIN. (X) THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LOW IN REJECTING THE CLAIM OF THE ASSESSEE TOWARDS ADJUSTMENT ON ACCOUNT OF EXTRA-ORDINARY COSTS INCURRED BY THE APPELLANT ON ACCOUNT OF SHIFTING OF OFFICER PREMISES. DRP OBSERVATION 6.1. THE ASSESSEE HAS RAISED THE GROUNDS OF OBJECTI ONS ON INCURRED EXTRAORDINARY COST OF RS. 10,978,227/- ON ACCOUNT O F SHIFTING OF OFFICE DUE TO SEALING DRIVE BY THE MCD. FURTHER, EXTRAORDINARY EX PENDITURE WAS ON ACCOUNT OF FORCE MAJEURE AND NOT OPERATING EXPENDITURE INCURRE D IN RELATION TO INTERNATIONAL TRANSACTION FOR RENDERING SERVICES. 6.2. DURING THE COURSE OF TRANSFER PRICING PROCEEDI NGS THE OBSERVATION OF THE TPO ON THIS MATTER IS REPRODUCE AS UNDER:- '7.5. THE ASSESSES IS EMPHASIZING ON THE ISSUE THAT THE ABOVE MENTIONED EXPENSES ARE EXTRA ORDINARY IN NATURE AND THEREFORE DESERVE TO BE EXCLUDE WHILE COMPARING THE MARGINS WITH THAT OF COMPARABLES. THIS ARGUMENT DOES NOT HAVE FORCE IN IT/AS THESES E XPENSES MAINLY RELATE TO THE DIFFERENCE IN RENT OF OLD PREMISE AND NEW PREMISE AND THEREFORE, ARE NORMAL IN THE COURSE OF A BUSINESS A ND IT MAY HAPPEN IN CASE OF ANY BUSINESS CONCERN, FURTHER, THERE COULD BE SUCH COST EMBEDDED IN THE TOTAL COST OF THE COMPARABLES ALSO. ' 7.6. THE RENT PAID ON ACCOUNT OF SHIFTING OF OFFICE HAS BEEN INCURRED TO EARN THE OPERATIVE INCOME OF THE ASSESSEE. THE EXPE NSE HAS DIRECT NEXUS WITH THE REVENUE GENERATION. THE EXPENDITURE RESULTING DUE TO SEALING IS VERY MUCH ASSOCIATED WITH THE BUSINESS O F THE ASSESSES AS WITHOUT ACCESS TO PROPRIETARY SYSTEMS THE ASSESSEE COULD NOT WORK. NOR IS THE SEATING DRIVE OF THE MCD ILLEGAL. BY CONDUCT ING ITS BUSINESS IN AREA NOT AUTHORIZED FOR COMMERCIAL ACTIVITY THE ASSESSEE HAD TAKEN A CALCULATED BUSINESS RISK HENCE THIS EXPENDITURE IS NOT EXTRAORDINARY BUT RESULTING FROM BUSINESS ACTIVITIES AND RISK TAKEN B Y THE ASSESSEE. A I.T.A .NO.-631/DEL/2014 PAGE 11 OF 18 REFERENCE CAN BE MADE TO THE CASE OF M/S HAWORTH (I NDIA) PVT. LTD. AY 206-7 (ITA NO. 5341/DEL/2010), WHEREIN IT WAS DECID ED THAT OPERATIONAL EXPENSE IS THE EXPENSE WHICH IS INCURRED TO EARN OP ERATIONAL INCOME, THUS EXPENSE WHICH HAS NEXUS WITH THE REVENUE HAS T O BE CONSIDERED AS OPERATIONAL EXPENSE AND CANNOT BE EXCLUDED, 7.7. IN VIEW OF THESE FINDINGS I AM OF THE CONSIDER ED VIEW THAT THE RENT PAID BY THE ASSESSEE COMPANY I TO PROTECT ITS REVEN UE AND IS PAID TO EARN OPERATIONAL INCOME AND HENCE IT HAS TO BE TREA TED AS OPERATIVE EXPENDITURE. THEREFORE, IT IS HELD THAT THESE EXPEN SES OR RS.1,09,78,227/- ARE OPERATIVE IN NATURE AND CANNOT BE EXCLUDED WHILE COMPUTING THE OPERATING MARGINS OF THE ASSESSEE * 6.3. DRP HAS CONSIDERED SUBMISSION OF THE ASSESSEE AND VIEW OF THE TPO. THIS ISSUE WAS ALSO LITIGATED IN THE AY 2008-09. DRP HAS DECIDED THE ISSUE BY TREATING THIS EXPENDITURE AS OPERATIVE AS THE RENT PAID ON ACCOUNT OF SHIFTING OF OFFICE HAS BEEN INCURRED TO EARN THE OPERATIVE INCO ME AND THE EXPENSE HAS DIRECT NEXUS WITH THE REVENUE GENERATION. THE EXPEN DITURE RESULTING DUE TO SEALING IS VERY MUCH ASSOCIATED WITH THE BUSINESS O F THE ASSESSEE AND IT WAS THE CALCULATED BUSINESS RISK OF THE ASSESSEE. IN VIEW O F THIS, DRP HOLDS THAT THE SAME SHOULD BE TAKEN AS OPERATING EXPENDITURE IN TH IS CASE. 12.1. SINCE THE GRIEVANCE OF THE ASSESSEE STILL PERSISTS THE ASSESSEE HAS FILED THE PRESENT APPEAL BEFORE THE ITAT. 13. THE LD.AR RELYING UPON THE JUDICIAL PRECEDENT HAS R EQUESTED THAT THE ISSUE MAY BE REMANDED. WE FIND THAT THE ISSUE ADDRESSED IN THE SAID GROUND (NAMELY GROUND NO.2.4) HAS BEEN AGITATED BY THE ASSESSEE BEFORE THE CO-ORD INATE BENCH VIDE GROUND NO.2.2. THE SAME IS REPRODUCED HEREUNDER FOR READY-REFERENCE:- 2.2. THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT ALLOWING COMPARABILITY ADJUSTMENT TO THE EXTENT OF RS.29,46,865/- ON ACCOUNT OF EXTRAORDINARY EXPENSE (LOSS) INCURRED BY THE APPELLANT FOR RELOCATION TO A NEW BUSINESS PREMISES DUE TO THE SE ALING DRIVE UNDERTAKEN BY MUNICIPAL CORPORATION OF DELHI (MCD ). 14. THE SAID ISSUE IT IS SEEN HAS BEEN CONSIDERED AT I NTERNAL PAGE 12 TO 15 BY THE ITAT IN THE AFORESAID ORDER IN PARA 15. THE SAME IS EXT RACTED HEREUNDER FOR READY-REFERENCE:- 15. SO FAR AS GROUND NO.2.2 REGARDING NON-ALLOWABI LITY OF COMPARABILITY ADJUSTMENT TO THE EXTENT OF RS.29,46,865 ON ACCOUNT OF EXTRAORDINARY EXPENSES IS CONCERNED, WE FIND THAT THE ISSUE IS COVERED BY THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT OF DELHI IN THE CASE OF C IT VS. TRANSWITCH INDIA PVT. I.T.A .NO.-631/DEL/2014 PAGE 12 OF 18 LTD. (SUPRA). IN THAT CASE BEFORE THE HON'BLE HIGH COURT, THE ASSESSEE HAD CLAIMED THAT THEY HAD INCURRED RELOCATION EXPENSES OF RS.32,88,224 INCLUDING BROKERAGE FOR MOVING/SHIFTING TO A NEW PREMISES AND HAD PAID ADDITIONAL RENT OF RS.39,72,626 FOR TWO MONTHS AND HAD TO PAY SALARY F OR UNPRODUCTIVE/IDLE HOURS AMOUNTING TO RS.45,78,633. THE ASSESSEE HAD HAD TO SHIFT THEIR OFFICE TO SAFDARJUNG ENCLAVE ( A RESIDENTIAL AREA ) CO MOHAN CO-OP IND. ESTATES AT A VERY SHORT NOTICE IN VIEW OF THE SEALING DRIVE UNDERTAKE N BY THE MUNICIPAL CORPORATION ON ACCOUNT OF NON-CONFIRMING USAGES. IT WAS SUBMITTED THAT THE ASSESSEE HAD SUPPLIED SOFTWARE TO ITS PARENT COMPAN Y AND, THEREFORE, THE PARENT COMPANY SHOULD HAVE ALSO SHARES BURDEN OF RS .1,11,73,078. THE EXPENDITURE OF RS.1,11,73,078 WAS NOT DISPUTED OR D OUBTED NOR WAS THERE ANY DEBATE THAT THIS EXPENSE WAS INCURRED. IT WAS ALSO NOT DISPUTED THAT THE ASSESSEE HAS SHIFTED THEIR OPERATIONS FROM SAFDARJU NG ENCLAVE TO MOHAN CO-OP IND. ESTATES, IT WAS ALSO NOT DENIED THAT THE ASSES SEE HAD PAID TWO MONTHS EXTRA RENT AMOUNTING TO RS.39,72,626 BECAUSE OF SHI FTING. THE ITAT RECORDED THAT THERE WAS DIP IN TURNOVER/SUPPLY OF SOFTWARE D URING THE LAST QUARTER FROM 01.01.2006 TILL 31.3.2006. IN THE LAST QUARTER, THE CAPACITY UTILIZATION FAILED TO 72% FROM NORMAL CAPACITY UTILIZATION OF 87% TO 94% DURING THE FINANCIAL YEAR ENDING 31.12.2005. HON'BLE HIGH COURT AGREED WITH T HE SUBMISSIONS OF THE ASSESSEE THAT EVEN THOUGH THE ASSESSEE HAD LEASED T HE NEW PREMISES AND PAID RENT FOR THE MONTHS OF FEBRUARY AND MARCH, IT COULD NOT HAVE COMMENCED ITS COMMERCIAL OPERATIONS FROM SUCH PREMISES, TILL THE TIME NECESSARY INFRASTRUCTURE IN THE FORM OF FIXTURE, POWER SUPPLY ETC., WAS ESTA BLISHED. FURTHER, BEFORE THE OPERATIONS OF THE ASSESSEE COULD BE SHIFTED FROM ON E PREMISES OF ANOTHER, THE NECESSARY EQUIPMENT AND DEVICES HAD TO BE INSTALLED AT THE NEW PREMISES. THE ENTIRE PROCESS AND ACTIVITIES REQUIRE CONSIDERABLE TIME AND THE ASSESSEE THEREFORE, HAD TO PAY RENT FOR THE PERIOD DURING WH ICH THE AFORESAID INFRA- STRUCTURE WAS ESTABLISHED AT THE NEW PREMISES. THE HON'BLE HIGH CONN HELD THAT THE CLAIM OF ASSESSEE FIRM RELOCATION EXPENSES OF R S.32,88,224 OUGHT TO BE ALLOWED IN FULL UNDER THE PROVISIONS OF SEC. 37(1) OF THE ACT. THE HON'BLE COURT OBSERVED FURTHER THAT IF THE FIGURE OF RS.1,11,73,0 78 IS DULY ACCOUNTED FOR AND TAKEN INTO CONSIDERATION, THEN, THE OPERATING MARGI N OF THE ASSESSEE COMES TO 17.80% WHICH IS HIGHER THAN THE COMPARABLE OPERATIN G MARGIN OF 17.09% TAKEN AS A BENCHMARK BY THE TPO. THE HON'BLE HIGH COURT O BSERVED FURTHER THAT THE ABNORMALITY AND DIFFICULTY RESULTING IN AN EXTRA EX PENDITURE WAS NOT CREATED OR CALLED BY THE ASSOCIATED ENTERPRISES, HENCE, THEY W ERE NOT RESPONSIBLE OR LIABLE FOR THE SAID PAYMENT/EXPENDITURE. THE ASSOCIATED EN TERPRISE DID NOT HAVE LEGAL OR CONTRACTUAL OBLIGATION TO MAKE EXTRA OR ADDITION AL PAYMENT BEYOND THE TRUE AND CORRECT VALUE OF THE TRANSACTION. WE THUS FIND SUBSTANCE IN THE CLAIM OF THE ASSESSEE REGARDING COMPARABILITY ADJUSTMENT ON ACCO UNT OF ABNORMAL EXPENSES INCURRED BY THE ASSESSEE. WE THUS SET ASIDE THE MAT TER TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE AS TO WHETHER THE ADJU STED OPERATING MARGIN OF THE ASSESSEE IS HIGHER THAN THE OPERATING MARGIN EA RNED BY THE COMPARABLE COMPANIES SELECTED BY THE TPO AND IF IT IS FIND THA T THE ADJUSTED OPERATING MARGIN OF THE ASSESSEE IS HIGHER THEN HOLD THAT INT ERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE SATISFY THE ARM'S LENGTH CRITERIA. OF COURSE, WHILE DECIDING THE ISSUE, THE ASSESSING OFFICER WILL AFFO RD OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND NO.2.2 IS THUS ALLOWED FOR STATISTICAL PURPOSES. I.T.A .NO.-631/DEL/2014 PAGE 13 OF 18 15. WE FIND THAT IN THE FACTS OF THE PRESENT CASE APAR T FROM STATING THAT DE-SEALING CANNOT BE A COVERED ISSUE IN EVERY YEAR, NO FURTHER ARGUMENT HAS BEEN RAISED BY THE REVENUE. WE FIND THAT THE OBJECTION OF THE REVENUE TO TREAT IT AS A COVERED ISSUE MAY HAVE A POINT INASMUCH AS THE ISSUE IS TO BE DECIDED AFTER CONSIDERING THE EVIDENCES RELIED UPON. WE FIND THAT THE PRAYER FOR ADMISSION OF FRES H EVIDENCES HAS NOT BEEN OPPOSED BY THE REVENUE AND ONLY ARGUMENT HAS BEEN THAT FOLLOWI NG THE PRECEDENT THE SAME MAY BE REMANDED. WE FIND THAT THE GENERAL ARGUMENT THAT T HE EXTRAORDINARY EXPENSES ON ACCOUNT OF THE SEALING DRIVE UNDERTAKEN BY THE MUNICIPAL CO RPORATION OF DELHI CANNOT BE A RECURRING ISSUE FOR EVERY YEAR, CANNOT BE ADDRESSED WITHOUT F IRST CONSIDERING THE FACTS. GENERALLY SPEAKING IT CAN BE ARGUED THAT SEALING ACTIVITY WAS UNDERTAKEN AT A POINT OF TIME. HOWEVER, IF EVIDENCE SHOWS THAT A SEALING DRIVE WAS FOLLOWED BY A DE-SEALING ACTIVITY FOLLOWED AGAIN BY A SEALING DRIVE THEN THE ISSUE MA Y BECOME RECURRING IN NATURE FOR THE SAID DURATION. THUS THOUGH THE ARGUMENT CANNOT BE OUTRIGHTLY REJECTED BUT IT HAS TO BE CONSIDERED ON THE BASIS OF FACTS AND EVIDENCES. WE FIND THAT NOTHING HAS BEEN PLACED ON RECORD BY THE REVENUE SO AS TO REBUT THE EVIDENCE T HAT THE SEALING WAS FINAL AND CONTRARY TO ASSESSEES SUBMISSIONS THERE WAS NO DE-SEALING F OLLOWED BY SEALING ACTIVITY ONCE AGAIN. WE FURTHER FIND THAT ON RECORD, THE ASSESSEE SEEKS TO PLACE EVIDENCE IN SUPPORT OF ARGUMENTS ALREADY RECORDED IN THE TPOS ORDER NAMEL Y SHIFTING FROM ONE PREMISE TO THE OTHER AND THEN BACK TO CHANDIWALA ESTATE AND SHIFTIN G OUT AGAIN THEREFROM. THUS THE CLAIM OF EXPENSES INCURRED FOR DE-SEALING AND FOR FUNCTIONING IN THE INTERREGNUM PERIOD FROM A SPECIFIC ADDRESS TEMPORARILY FOLLOWED BY SHI FTING BACK TO THE ORIGINAL PREMISES WHICH AGAIN WERE SEALED RESULTING IN TEMPORARY FUNCTIONIN G FROM ANOTHER ADDRESS AND SETTING UP PREMISES PERMANENTLY AT SOME OTHER PREMISES ARE AL L FACTS WHICH HAVE BEEN ARGUED BEFORE I.T.A .NO.-631/DEL/2014 PAGE 14 OF 18 THE TPO. THE VERACITY OF THE CLAIMS CAN BE CONSIDE RED ONLY AFTER FOLLOWING THE PRECEDENT THE EVIDENCES ARE ADMITTED. THE EVIDENCES WE FIND, ARE NECESSARY AND CRUCIAL FOR DETERMINING THE ISSUE AND CONSIDERING THE JUDICIAL PRECEDENT AS CONSIDERED BY THE HONBLE DELHI HIGH COURT IN OF CIT VS TEXT HUNDERED INDIA P VT. LTD.(CITED SUPRA), WE HOLD THAT IT DESERVES TO BE ADMITTED. IT GOES WITHOUT SAYING TH AT ADMISSION OF FRESH EVIDENCES IS NOT A COMMENT EITHER WAY ON ITS VERACITY OR CORRECTNESS A S THESE CLAIMS AND ISSUES ARE TO BE EXAMINED BY THE TPO/AO. THE REMUNERATION MODEL OF THE ASSESSEE AS CONSIDERED BY THE TPO HAS BEEN ADDRESSED IN THE EARLIER PART OF THIS ORDER, ACCORDING TO WHICH THE REVENUES CASE IS THAT THE ASSESSEE WAS CHARGING ON THE BASIS OF MAN ON MATERIAL BASIS WHEREIN IT WAS CONCLUDED THAT COSTS WOULD BE NECESSARILY EMBED DED THEREIN. THE ISSUE AS OBSERVED HAS BEEN REMANDED BY THE CO-ORDINATE BENCH ON SIMIL AR FACTS AND CIRCUMSTANCES TO THE TPO/AO. ACCORDINGLY CONSIDERING THE JUDICIAL PRECED ENT WE SET ASIDE THIS ISSUE BACK TO THE FILE OF THE AO/TPO WITH A DIRECTION TO PASS A SPEAK ING ORDER IN ACCORDANCE WITH LAW AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEI NG HEARD. 16. ADDRESSING GROUND NO.2.4 IT IS SEEN THAT THE ISSUE HAD BEEN RAISED BEFORE THE CO- ORDINATE BENCH BY WAY OF AN ADDITIONAL GROUND SUPPO RTED BY A PRAYER FOR ADMISSION OF ADDITIONAL EVIDENCES. THE CO-ORDINATE BENCH IT IS SEEN HAS ADMITTED THE ADDITIONAL GROUND IN PARA 4.1 AND THE FRESH EVIDENCES IN PARA 5 AND R ESTORED THE ISSUE TO THE TPO/AO VIDE PARA NO. 16 HOLDING AS UNDER:- 16. SO FAR AS ADDITIONAL GROUND NO.1 RAISING THE I SSUE OF NON-ALLOWING COMPARABILITY ADJUSTMENT ON ACCOUNT OF UNDER-UTILIZ ATION OF CAPACITY, CONSIDERING THAT ONLY 75% OF THE CAPACITY OF THE AS SESSEE WAS UTILIZED IN THE RELEVANT PREVIOUS YEAR AND THERE WAS IDLE CAPACITY IN THE VICINITY OF 10%, IS CONCERNED, WE ALSO FIND SUBSTANCE IN THE CONTENTION OF THE LEARNED AR SUPPORTED WITH THE CITED DECISIONS OF THE HON'BLE H IGH COURT OF DELHI IN THE CASE OF CIT VS. TRANSWITCH INDIA PVT. LTD. THE HON'BLE H IGH COURT IN THAT CASE APPROVED THE RECORDING OF THE ITAT THAT THERE WAS D EEP IN TURNOVER/SUPPLY OF I.T.A .NO.-631/DEL/2014 PAGE 15 OF 18 SOFTWARE DURING THE LAST QUARTER FROM 01.01.2006 TI LL 31.3.2006. IN THE LAST QUARTER, THE CAPACITY UTILIZATION FAILED TO 72% FRO M NORMAL CAPACITY UTILIZATION OF 87% TO 94% DURING THE FINANCIAL YEAR ENDING 31.12.2 005. IN THAT CASE, THE ASSESSEE HAD CLAIMED THAT SEALING PRICE REDUCED ITS REVENUE AND IN SUPPORT THE ASSESSEE HAD PLACED ON RECORD ITS QUARTERLY CAPACIT Y UTILIZATION STATEMENT DEMONSTRATING THE FALL IN ITS CAPACITY UTILIZATION DURING THE QUARTER JANUARY TO MARCH 2006. THE ITAT NOTED THIS FACT AS WELL THAT A SSESSEE HAD TO SHIFT ITS OFFICE PREMISES AT A VERY SHORT NOTICE AND AGREED WITH THE CLAIM OF THE ASSESSEE REGARDING LOW CAPACITY UTILIZATION DURING THE LAST QUARTER OF FINANCIAL YEAR 2005- 06. RESPECTFULLY FOLLOWING THE CITED DECISIONS OF T HE HON'BLE HIGH COURT UPHOLDING THE ORDER OF THE ITAT, WE FIND SUBSTANCE ON THE ISSUE RAISED IN ADDITIONAL GROUND NO.1 AND THUS SET ASIDE THE MATTE R TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE ISSUE IN VIEW OF THE RATIOS L AID DOWN IN THE CITED DECISION IN THE CASE OF TRANSWITCH INDIA PVT. LTD. (SUPRA) AND ON THE BASIS OF EVIDENCE MADE AVAILABLE ON RECORD I.E. DETAILS OF CAPACITY U TILIZATION OF THE ASSESSEE DURING FINANCIAL YEAR 2007-08, 2008-09 AND 2009-10 AND THAT ON ACCOUNT OF CLOSURE OF OFFICE FROM 06TH AUGUST TO 13TH AUGUST, THE ASSESSEE HAD INCURRED ADDITIONAL COST OF RS.14,68,460. IT IS NEEDLESS TO MENTION OVER HERE THAT WHILE DECIDING THE ISSUE THE ASSESSING OFFICER WILL AFFOR D OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ADDITIONAL GROUND NO.1 IS ACCORD INGLY ALLOWED FOR STATISTICAL PURPOSES. 16.1. WE FIND THAT IN THE FACTS OF THE PRESENT CASE THE ASSESSEE HAS MOVED A PETITION DATED 18.03.2015 SEEKING ADMISSION OF ADDITIONAL EV IDENCE INVOKING RULE 29 ADDRESSING THE DETAILS OF CAPACITY UTILISATION OF THE ASSESSEE DUR ING 200708; 200809 AND 200910 FINANCIAL YEARS PRAYING AS UNDER:- 1. DETAILS OF CAPACITY UTILIZATION OF THE APPLICAN T DURING FINANCIAL YEARS 2007-08, 2008-09 AND 2009-10 MERITS OF THE MATTER IN RELATION TO THE AFORESAID A DDITIONAL EVIDENCE ARE EXPLAINED HEREUNDER: IT IS RESPECTFULLY SUBMITTED THAT DURING THE RELEVA NT PREVIOUS YEAR, THE APPELLANT OPERATED AT A CAPACITY UTILIZATION LEVEL OF 72% AS AGAINST THE CAPACITY UTILIZATION OF 85% IN IMMEDIATELY SUCCEEDING ASSESSMENT YEAR. O N A CONSERVATIVE BASIS, IT IS CONSIDERED THAT THE INDUSTRY IS ALSO OPERATING A T THE CAPACITY UTILIZATION LEVEL OF 85% AND ACCORDINGLY, COMPARABILITY ADJUSTMENT IS CLAIMED TO THE EXTENT OF 13%. ON A CONSERVATIVE BASIS, CONSIDERING THE OPTIMUM CA PACITY UTILIZATION AT 85% AS ACHIEVED IN THE SUBSEQUENT YEAR, THE APPELLANT HAS COMPUTED THE ADJUSTMENT FOR LOW CAPACITY UTILIZATION AT RS. 14,254,552. IN VIEW OF THE AFORESAID, IT IS RESPECTFULLY SUBMIT TED THAT AN ADJUSTMENT OF RS.14,254,552 WAS REQUIRED TO BE MADE ON ACCOUNT OF UNDERUTILIZATION OF I.T.A .NO.-631/DEL/2014 PAGE 16 OF 18 CAPACITY. AFTER CONSIDERING THE ABOVE ADJUSTMENT, T HE OPERATING MARGIN OF THE APPELLANT WORKS OUT TO 29.50%. DETAILS OF CAPACITY UTILIZATION OF THE APPLICANT DU RING FINANCIAL YEARS 2007-08, 2008-09 AND 2009-10 ARE ENCLOSED HEREWITH. THE APPLICANT COULD OBTAIN COMPLETE DETAILS OF CAPA CITY UTILIZATION ONLY NOW, WHICH IS BEING PLACED BY WAY OF ADDITIONAL EVIDENCE BEFORE YOUR HONOURS. 16.2. RELIANCE HAS BEEN PLACED UPON CIT(A) VS TEXT HUNDRED INDIA PRIVATE LIMITED 239 CTR 263 DECISION OF THE HONBLE DELHI HIGH COURT HIGHLIGHTI NG THE FOLLOWING OBSERVATION OF THE HONBLE COURT :- '13. THE AFORESAID CASE LAW CLEARLY LAYS DOWN A NEA T PRINCIPLE OF TAW THAT DISCRETION LIES WITH THE TRIBUNAL TO ADMIT ADDITION AL EVIDENCE IN THE INTEREST OF JUSTICE ONCE THE TRIBUNAL AFFIRMS THE OPINION THAT DOING SO WOULD BE NECESSARY FOR PROPER ADJUDICATION OF THE MATTER. THIS CAN BE DONE EVEN WHEN APPLICATION IS FILED BY ONE OF THE PARTIES TO THE APPEAL AND IT NE ED NOT TO BE A SUO MOTTO ACTION OF THE TRIBUNAL, THE AFORESAID RULE IS MADE ENABLING THE TRIBUNAL TO ADMIT THE ADDITIONAL EVIDENCE IN ITS DISCRETION IF THE TR IBUNAL HOLDS THE VIEW THAT SUCH ADDITIONAL EVIDENCE WOULD BE NECESSARY TO DO SUBSTA NTIAL JUSTICE IN THE MATTER. IT IS WELL SETTLED THAT THE PROCEDURE IS HANDMADE O F JUSTICE AND JUSTICE SHOULD NOT BE ALLOWED TO BE CHOKED ONLY BECAUSE OF SOME IN ADVERTENT ERROR OR OMISSION ON THE PART OF ONE OF THE PARTIES TO LEAD EVIDENCE AT THE APPROPRIATE STAGE. ONCE IT IS FOUND THAT THE PARTY INTENDING TO LEAD EVIDEN CE BEFORE THE TRIBUNAL FOR THE FIRST TIME WAS PREVENTED BY SUFFICIENT CAUSE TO LEA D SUCH AN EVIDENCE AND THAT THIS EVIDENCE WOULD HAVE MATERIAL BEARING ON THE IS SUE WHICH NEEDS TO BE DECIDED BY THE TRIBUNAL AND ENDS OF JUSTICE DEMAND ADMISSION OF SUCH AN EVIDENCE, THE TRIBUNAL CAN PASS AN ORDER TO THAT EF FECT.(EMPHASIS SUPPLIED) 16.3. RELIANCE IS ALSO BEEN PLACED UPON BENTLEY SYSTEMS INDIA PRIVATE LTD VS ACIT (ITA NO. 6160/DEL/2013) FOR THE PROPOSITION THAT THE ITAT ON CONSIDERING MORE OR LESS SIMILAR ISSUE INVOLVING TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF INTRA-GROUP SERVICES ADMITTED THE ADDITIONAL EVIDENCE RAISED ON RECORD B Y THE ASSESSEE FOR THE PURPOSE OF SUBSTANTIAL THE RECEIPT OF MANAGEMENT SERVICES HOLD ING THAT THE EVIDENCE PLACED ON RECORD GOES TO THE ROOT OF THE MATTER. IT WAS HIS SUBMISSI ON THAT THE MATTER OF ADDITIONAL EVIDENCE MAY BE ADMITTED. THE SAID PRAYER HAS NOT BEEN OBJE CTED TO BY THE REVENUE. THE JUDICIAL PRECEDENT AVAILABLE IN ASSESSEES OWN CASE SHOWS TH AT THE ADDITIONAL EVIDENCE FOR DECIDING I.T.A .NO.-631/DEL/2014 PAGE 17 OF 18 THE ISSUE HAS BEEN ADMITTED IN SIMILAR FACTS AND CI RCUMSTANCES. CONSIDERING THE OVERALL FACTUAL MATRIX ON THE ISSUE AND CONSIDERING THE JUD ICIAL PRECEDENT AVAILABLE THEREON, WE FIND NO GOOD REASON TO DEVIATE FROM THE VIEW TAKEN. THE FRESH EVIDENCE SOUGHT TO BE ADMITTED ARE NOT ONLY RELEVANT AND CRUCIAL TO DETER MINE THE ISSUE BUT ALSO SUPPORTED BY JUDICIAL PRECEDENT RESPECTFULLY FOLLOWING THE SAME IT IS ADMITTED. 16.4. THE ISSUES ARE ACCORDINGLY RESTORED BACK TO THE FI LE OF THE TPO WITH A DIRECTION TO PASS A SPEAKING ORDER IN ACCORDANCE WITH LAW AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. 17. THE REMAINING ISSUES AGITATED IN THE PRESENT PROCE EDINGS FOLLOWING THE JUDICIAL PRECEDENT ARE LEFT OPEN AND RESTORED TO THE TPO FO R CONSIDERATION AFRESH. THE RELEVANT EXTRACT FROM THE ORDER OF THE CO-ORDINATE BENCH IS REPRODUCED HEREUNDER:- 17. BEFORE PROCEEDING TO THE REMAINING GROUNDS, WE FIND IT APPROPRIATE TO NOTE HERE THAT THE CONTENTION OF THE ASSESSEE HAS REMAIN ED THAT THERE IS NO NEED TO GO ON COMPARABLES IF THE CLAIMED COST IS ALLOWED. T HE A.O/TPO IS THUS DIRECTED TO PROCEED ACCORDINGLY AFTER VERIFYING THE ABOVE CL AIM OF THE ASSESSEE AS DIRECTED ABOVE WHILE DEALING WITH GROUND NO.2.2 HER EINABOVE. 18. SO FAR AS GROUND NO. 2.3 IS CONCERNED, THE ISSU E RAISED THEREIN IS NON- ALIOWANCE OF APPROPRIATE RISK ADJUSTMENT TO ESTABLI SH COMPARABILITY ON ACCOUNT OF THE ASSESSEE BEING A LOW RISK BEARING CONTRACT S ERVICE PROVIDER AS OPPOSED TO THE COMPARABLE COMPANIES WHO WERE INDEPENDENT ITES SERVICE PROVIDER, IS CONCERNED, WE FIND THAT THIS ASPECT HAS NOT BEEN CO NSIDERED BY THE LEARNED DRP. WE THUS SET ASIDE THE ISSUE TO THE ASSESSING O FFICER/TPO TO CONSIDER IT AFRESH AFTER AFFORDING OPPORTUNITY OF BEING HEARD T O THE ASSESSEE. THE GROUND IS THUS ALLOWED FOR STATISTICAL PURPOSES. 18. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 22 ND OF AUGUST, 2016. SD/- SD/- (PRASHANT MAHARISHI) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER *AMIT KUMAR* I.T.A .NO.-631/DEL/2014 PAGE 18 OF 18 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI