TRIGENT SOFTWARE LTD, MUMBAI V. ASST CIT 5(3), MUMBAI

ITA 6863/MUM/2010

• Counselvise Citation: 686319914 RSA 2010
• Duration Of Justice: 1 year(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 30-06-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 01-10-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G P TRIVEDI
• Assessee Lawyers: D V LAKHANI
• Keywords: Gift; Business income; Transfer pricing; International transaction; Rule of consistency; Additional evidence
• Section: 143(3); 234B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A.M) ITA NO.6863/MUM/10(A.Y.2006-07) M/S. TRIGENT SOFTWARE LTD., 201, VASTUSHILP ANNEX, 11 TH FLOOR, ABOVE HDFC BANK, GAMADIA COLONY ROAD, TARDEO, MUMBAI 07. PAN:AABCT 2852P (APPELLANT) VS. THE ACIT 5(3), 5 TH FLOOR, AAYKAR BHAVAN, MUMBAI 400 020. (RESPONDENT) APPELLANT BY : SHRI D.V.LAKHANI RESPONDENT BY : SHRI G.P.TRIVEDI DATE OF HEARING : 08/09/2011 DATE OF PRONOUNCEMENT : 31/10/2011 ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 1/9/2010 OF THE ACIT 5(3), MUMBAI (HEREINAFTER REFERRED TO AS T HE AO) PASSED UNDER SECTION 143(3) OF THE ACT R.W.S. 144C(13) OF THE IN COME TAX ACT, 1961 (THE ACT). THE GROUNDS RAISED BY THE ASSESSEE IN ITS AP PEAL READ AS FOLLOWS: 1. ON THE FACTS & CIRCUMSTANCES OF THE CASE THE LE ARNED DISPUTE RESOLUTION PANEL (DRP) HAS ERRED IN DIRECTING THE A SSESSING OFFICER TO MAKE ADDITION OF RS. 1,71,28,081/- IN COMPLIANCE OF SECTION 92C(4) OF INCOME TAX ACT, 1961. THE APPELLANT PRAYS THAT THE ADDITION MADE OF RS. 1,71,28,081/- MAY BE DELETED. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE A PPELLANT PRAYS THAT THE DRP HAS NOT DEALT WITH ISSUES RAISED BEFORE THE M DURING THE COURSE OF HEARING AND HAS ARBITRARILY REJECTED THE CLAIM OF THE APPELLANT. THIS FACT IS EVIDENCE FROM THE DIRECTION S GIVEN BY DRP. THE APPELLANT PRAYS THAT THE DIRECTION GIVEN BY THE DRP AND FOLLOWED BY ITA NO.6863/MUM/2010(A.Y. 2006-07) 2 THE ASSESSING OFFICER IS CONTRARY TO PROVISIONS OF LAW AND THE ADDITIONS MADE MAY BE DELETED. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE A PPELLANT HAS ESTABLISHED BEYOND IOTA OF DOUBT THAT THE TRIGENT S OFTWARE INC. (AE) HAS NOT RETAINED ANY MARGIN IN RESPECT OF THE SOFTW ARE DEVELOPMENT WORK BY THE APPELLANT IN INDIA. AS REGARDS THE PAYM ENT MADE TO TRIGENT SOFTWARE INC. (AE) THE APPELLANT HAD ESTABL ISHED WITH PROOF AND EVIDENCES THAT THE AMOUNT PAID IS BASED ON THE ARMS LENGTH PRINCIPLE AND IS COMPARABLE TO THE OTHER SIMILAR TRANSACTION. THE DRP HAS NOT DEALT WITH THE ISSUES WHICH WAS RAISED BEFORE THEM. THE APPELLANT PRAYS THAT THE DIRECTION GIVEN BY THE DRP AND FOLLO WED BY THE ASSESSING OFFICER IS CONTRARY TO PROVISIONS OF LAW AND THE ADDITIONS MADE MAY BE DELETED. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE A PPELLANT PRAYS THAT ON THE SIMILAR FACTS IN EARLIER ASSESSMENT YEARS TH E INCOME TAX DEPARTMENT HAS ACCEPTED THE CLAIM OF THE APPELLANT IN NO ADJUSTMENTS ARE MADE. THIS ASPECT HAS ALSO NOT BE CONSIDERED OR DEALT WITH BY DRP WHILE GIVING DIRECTIONS TO THE ASSESSING OFFICER. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE A PPELLANT PRAYS THAT THE ESTIMATING OF THE OPERATING MARGIN AT RS. 3,78, 08,119/- IS CONTRARY TO THE FACTS AND CONSEQUENTLY THE ADDITION IS RS. 1 ,71,28,081/- MAY BE DELETED. 6. THE LEARNED ASSESSING OFFICER HAS ERRED IN LEVYI NG INTEREST U/S 234B AT RS.22,41,807/-. THE APPELLANT DENIES THE LI ABILITY OF PAYMENT OF INTEREST U/S 234B. ON THE FACTS & CIRCUMSTANCES OF THE CASE THE APPELLANT SUBMIT THAT LEVY OF INTEREST U/S 234B AT RS. 22,41,807/- IS NOT JUSTIFIED AND BE DELETED. 2. THE ASSESSEE HAS FILED AN APPLICATION FOR ADMISS ION OF ADDITIONAL GROUNDS OF APPEAL. THE ADDITIONAL GROUND READS AS FOLLOWS: WHETHER THE LEARNED ASSESSING OFFICER ERRED IN MA KING A REFERENCE TO THE LEARNED TRANSFER PRICING OFFICER WITHOUT FULFIL LING THE JURISDICTIONAL PRE-CONDITION STIPULATED U/S. 92A(1) OF INCOME TAX ACT, 1961. ITA NO.6863/MUM/2010(A.Y. 2006-07) 3 3. AT THE TIME OF HEARING THE ASSESSEE DID NOT PRES S FOR ADJUDICATION OF THE ADDITIONAL GROUNDS OF APPEAL, CONSEQUENTLY THE SAME IS DISMISSED AS UN- ADMITTED. 4. THE FACTS AND CIRCUMSTANCES GIVING RISE TO THIS APPEAL ARE AS UNDER: THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE B USINESS OF SOFTWARE ENGINEERING AND DEVELOPMENT. THE ASSESSEE IS A WHO LLY OWNED SUBSIDIARY COMPANY OF TRIGENT SOFTWARE INC.(TSI). THERE IS NO DISPUTE THAT TSI WAS AN ASSOCIATE ENTERPRISE AND, THEREFORE, ANY INCOME ARI SING OUT OF INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND TSI WILL HAVE TO BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE(ALP) AS LAID DOWN I N SECTION 92 OF THE ACT. AS ALREADY STATED THE ASSESSEE IS IN THE BUSINESS O F SOFTWARE ENGINEERING & DEVELOPMENT. TSI PROCURES WORK FOR THE ASSESSEE IN USA. THE ASSESSEE RAISES INVOICES ON TSI AND TSI IN TURN RAISES INVOI CES FOR THE SALE AMOUNT ON THE US CLIENTS. ACCORDING TO THE ASSESSEE IT WAS RECEIVING CONSIDERATION FOR THE WORK DONE FOR THE US CLIENTS THROUGH TSI. SINC E THERE WAS NO MARGIN IN THE TRANSACTIONS THERE WAS NO QUESTION OF DETERMINI NG ALP. THE SALES OF THE ASSESSEE DURING THE PREVIOUS YEAR TOTAL RS.20,35,04 ,602/-. IT COMPRISES OF EXPORT SALES OF RS. 15,44,99,316/- AND LOCAL SALES OF RS.4,90,05,286/-. IT IS NOT IN DISPUTE THAT ALL THE EXPORTS SALES WERE THRO UGH TSI. THE AO MADE REFERENCE FOR DETERMINING ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND TSI TO THE TRA NSFER PRICE OFFICER(TPO) VIZ., THE TRANSACTIONS OF PROVIDING SOFTWARE SERVIC ES TO THE US CLIENTS THROUGH TSI FOR WHICH THE ASSESSEE HAD RECEIVED A SUM OF RS . 15,44,99,316/-. THE ASSESSEE IN SUPPORT OF THE PRICE THAT IT HAD PAID T O TSI FILED A TRANSFER PRICING REPORT IN FORM 3CEB. THE ASSESSEE HAD ADOP TED THE COMPARABLE UNCONTROLLED PRICE METHOD (CUP). 4.1 THE TPO WAS OF THE VIEW THAT THE COMPARABLES RELIED UPON BY THE ASSESSEE WERE COMPANIES THAT WERE LOCATED IN DENMAR K AND SWITZERLAND, BESIDES TWO BANGALORE BASED INDIAN COMPANIES. THE OTHER COMPARABLE ITA NO.6863/MUM/2010(A.Y. 2006-07) 4 INSTANCE WAS OF A COMPANY IN MASSACHUSETTS (USA). ACCORDING TO THE TPO GEOGRAPHICAL LOCATION WOULD AFFECT THE PRICE AND, T HEREFORE, THE COMPARABLES ADOPTED BY THE ASSESSEE WERE NOT PROPER. THE TPO, THEREFORE, REJECTED THE CUP METHOD ADOPTED BY THE ASSESSEE. THE TPO ALSO W AS OF THE VIEW THAT THE CONTRACTUAL DIFFERENCES HAVE NOT BEEN BROUGHT OUT A ND NECESSARY FACTORING DONE BY THE ASSESSEE. THE AO WAS OF THE FURTHER VI EW THAT THE TRANSFER NET MARGIN METHOD(TNMM) WAS THE MOST APPROPRIATE METHOD THAT COULD BE ADOPTED. 4.2 THE TPO COMPUTED THE OPERATING MARGIN OF THE AS SESSEE AND FOUND THAT THE SAME WAS AROUND 10.16%. THE TPO DREW A SE T OF COMPARABLES FOR BENCH MARKING SOFTWARE COMPANIES. HE FOUND THAT TH E AVERAGE MARGIN OF THOSE COMPANIES WAS 20.68% ON COST. THE TPO, THERE FORE, WAS OF THE VIEW THAT THE ASSESSEES MARGIN WAS LESS THAN THIS MARGI N. THE COMPARABLE INSTANCES SO DRAWN BY THE TPO ARE AS FOLLOWS: S.NO. COMPANY NAME SALES(RS.CR.) OP TO TOTAL COST 1. AZTEC SOFTWARE LIMITED 128.61 18.09 2. GEOMETRIC SOFTWARE LIMITED(SEG.) 98.59 6.70 3. I GATE GLOBAL SOLUTIONS LTD. 9SEG) 527.91 15.61 4. INOSYS LIMITED 9028.00 40.38 5. KALS INFO SYSTEMS LIMITED 1.97 39 .75 6. MINDTREE CONSULTING LIMITED 448.79 14 .67 7. PERSISTENT SYSTEMS LIMITED 209.18 24. 67 8. R SYSTEMS INTERNATIONAL LTD. 79.42 22.20 9. SASKEN COMMUNICATION LTD.(SEG) 240.03 13.90 10. TATA ELXSI LTD.(SEG) 188.81 27.65 11. LUCID SOFTWARE LIMITED 1.02 8.9 2 12. MEDIASOFT SOLUTIONS P LTD. 1.76 6.29 13. R S SOFTWARE (INDIA) LTD. 91.57 15. 69 14. SIP TECHNOLOGIES & EXPORTS LTD. 6.53 3.06 15. BODHTREE CONSULTING LTD. 5.32 15.9 9 16. ACCEL TRANSMATICS LTD. (SEG) 8.02 44.07 17. SYNFOYS BUSINESS SOLUTIONS LTD. 4.49 10.61 18. MEGASOFT LTD. 56.15 52.74 19. LANCO GLOBAL SOLUTIONS LTD. 35.63 5.27 20. FLEXTRONICS SOFTWARE SYSTEMS LTD. 595.12 27.24 AVERAGE 20.68% ITA NO.6863/MUM/2010(A.Y. 2006-07) 5 THE TPO WAS OF THE VIEW THAT THE ASSESSEES MARGIN WAS LESS THAN THE AVERAGE MARGIN DERIVED IN THE ABOVE TABLE. AFTER G IVING MARGIN OF + 5% OR - 5% TO THE ABOVE AVERAGE (SECOND PROVISO TO SEC.92C (2) LAYS DOWN THAT THE ALP DETERMINED BY THE AO IS LESS OR MORE THAN 5% AS ADOPTED BY THE AO THEN TO THAT EXTENT THE DIFFERENCE CAN BE IGNORED) THE TPO WAS OF THE VIEW THAT THE FOLLOWING ADJUSTMENT HAS TO BE MADE TO THE PRICE DECLARED BY THE ASSESSEE. (AMT. IN RS.) SOFTWARE DEVELOPMENT CHARGES 20,35,04,602 TOTAL COST CREDITED TO P&L 18, 28,29,564 DONATION -5,000 TOTAL COST ---------------- 18,28,24,564 ------- --------- OPERATING PROFIT (PBIT) 2,06,80,038 ====== ==== OP/TC 10.16 % ALP OP/TC 20.68 ALP PROFIT 3,78,08,119.80 DIFFERENTIAL PROFIT 1,71,28,081.80 TOTAL SOFTWARE DEVELOPMENT CHARGES RECEIVED FROM TH E AE 15,44,99,316.00 ALP SALES VALUE 17,16,27,398 95% OF ALP VALUE 16,30,46,028 ADJUSTMENT OF RS.1,71,28,081.80 WAS PROPOSED TO BE MADE CONSIDERING THE AVERAGE MARGIN EARNED BY SOFTWARE COMPANIES AS CALC ULATED ABOVE. 4.3 IN REPLY TO THE QUERY OF THE TPO THE ASSESSEE P OINTED OUT THAT THERE WAS NO MARGIN TO TSI IN THE TRANSACTION AS THE INVO ICES RAISED BY THE ASSESSEE ON TSI AND THE INVOICES RAISED BY THE TSI ON THE US CLIENTS ARE FOR IDENTICAL CONSIDERATION. THE ASSESSEE ALSO POINTED OUT THAT THERE WAS NO ARRANGEMENT BETWEEN THE ASSESSEE AND TSI WHEREBY AN Y ELEMENT OF REVENUE ITA NO.6863/MUM/2010(A.Y. 2006-07) 6 IS DISTRIBUTED BETWEEN THE ASSESSEE AND TSI. THE A SSESSEE ALSO POINTED OUT THAT THIS BUSINESS MODEL WAS FOLLOWED FOR THE PAST 10 YEARS AND THE DEPARTMENT IN THE TRANSFER PRICING PROCEEDINGS AS W ELL AS IN THE REGULAR INCOME TAX PROCEEDINGS HAS ACCEPTED THE FACTUAL ASP ECT AND NO ADDITION HAS BEEN MADE. WITHOUT PREJUDICE THE ASSESSEE SUBMITTE D THAT TNMM METHOD WOULD NOT BE THE MOST APPROPRIATE METHOD BECAUSE TH E BACKGROUND OF THE COMPANIES COMPARED WITH THE ASSESSEE IS NOT SIMILAR . IN THIS REGARD THE ASSESSEE ALSO POINTED OUT THAT THE RESULTS OF INFOS YS TECHNOLOGY LTD., WHICH IS A LEADER IN THE INDUSTRY CANNOT BE COMPARED WITH THE ASSESSEE. THE ASSESSEE ALSO POINTED OUT THAT THE TOTAL SALES OF T HE ASSESSEE WERE RS.20.35 CRORES AND THE EXPORT SALES WERE ONLY RS. 15.45 CRO RES. THE ASSSESSEE SUBMITTED THAT IN RESPECT OF LOCAL SALES THE TRANSF ER PRICING PROVISIONS WOULD NOT BE APPLIED. THE ASSESSEE ALSO POINTED OUT THAT THE SAMPLES DRAWN BY THE TPO HAD REVENUES RANGING FROM ONE CRORES TO 9000 CR ORES. THE ASSESSEE POINTED OUT THAT THE LARGER THE COMPANY HIGHER WILL BE THE MARGIN DUE TO LESS OVER-HEADS. THE ASSESSEE ALSO POINTED OUT THAT ITS PRIMARY MARKET WAS IN THE USA AND THE COMPARABLE COMPANIES DID NOT HAVE T HE SAME MARKET. THE ASSESSEE ALSO POINTED OUT THAT THE GEOGRAPHY MIX OF THE PRODUCT AND SERVICE MIX WAS DIFFERENT IN THE CASE OF COMPARABLE COMPANI ES. THE ASSESSEE ALSO POINTED OUT THAT IT DOES NOT SELL THIRD PARTY PRODU CT OR THEIR OWN IP BASED PRODUCTS. WITHIN SERVICES THERE ARE MANY SEGMENTS L IKE PURE .NET AND JAVA BASED TECHNICAL SERVICES, SERVICES WITH VERTICAL DO MAIN KNOWLEDGE, THIRD PARTY PRODUCT IMPLEMENTATION. THE ASSESSSEE POINTED OUT THAT EACH OF THE ABOVE HAS DIFFERENT REVENUE RATES, DELIVERY COSTS A ND MARKETING COSTS. THE ASSESSEE SUBMITTED THAT SOME OF THE COMPARABLE COMP ANIES HAVE GOOD MARKET IN INDIA AND THEREFORE THEY HAVE BETTER REVE NUE AND MARGINS AS COMPARED TO SOME OF THE COMPANIES WHO DO NOT SERVE THESE KINDS OF MARKETS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE PR OVIDED PURE NET AND JAVA BASED SERVICES AND HAD HIGH DELIVERY COST MODEL BES IDES HIGH MARKETING COST. THE ASSESSEE SUBMITTED THAT IT DOES NOT HAVE SOFTWARE BASED PRODUCTS WHERE MARGINS ARE HIGH. IT WAS SUBMITTED THAT THE ASSESSEES SOFTWARE ITA NO.6863/MUM/2010(A.Y. 2006-07) 7 DEVELOPMENT TEAM WAS SMALL AND THE COMPARABLE COMPA NIES HAD LARGER DEVELOPMENT TEAMS GIVING THEM BETTER MARGIN. IT WAS HIGHLIGHTED THAT THE COMPARABLE COMPANIES HAD TEAM SIZES RANGING FROM 10 0 TO 1000+ PEOPLE SERVING THE SAME CLIENT WHILE THE ASSESSEES TEAM S IZE WAS AROUND 5 PEOPLE AND IN SOME TEAM THERE WAS ONLY ONE PERSON. 4.4. IT WAS ALSO SUBMITTED THAT SOME OF THE COMPAR ABLE COMPANIES COULD GET BETTER $ RATE PER HOUR THAN THE ASSESSEE. IT WAS ALSO SUBMITTED THAT THE MARGIN ALSO DEPENDS ON THE CAPACITY UTILIZATION OF SPACE BECAUSE OF HIGH RENTS AND PEOPLE BECAUSE OF WASTAGE OF SALARY. THE ASSESSEE ALSO SUBMITTED THAT THE COMPARABLE COMPANIES CONSIDERED BY THE TPO HAD DIFFERENT BUSINESS MODEL THAN THAT OF THE ASSESSEE AS LISTED BELOW: A. KALS INFO HAS IP BASED PRODUCTS FOR INSURANCE S ECTOR. SO THEIR MARGINS ARE HIGHER. B. FLEXTRONICS HAVE DESIGN ENGINEERING, MANUFACTURI NG ETC. ALSO THEY HAVE EMBEDDED SOFTWARE DIVISION. SO THEIR MARGINS ARE HIGHER. C. SASKEN HAS ITS OWN IP AND LICENSING IN MULT1MEDI A, 3G WIRELESS BESIDES THE SOFTWARE DEVELOPMENT. SO THEIR MARGIN IS BETTER THAN PURE PLAY SOFTWARE DEVELOPMENT. D. ACCEL TRANSMATICS IS EMBEDDED SOFTWARE FOR ELE CTRONICS. TRIGENT IS NOT IN THAT FIELD. E. MEGASOFT HAS IP BASED PRODUCTS. F. INFOSYS A 9000 CRORE COMPANY HAS DIFFERENT REV ENUE AND COST MODEL. IT WAS ARGUED BY THE ASSESSEE THAT THE SAMPLES TAKE N BY THE TPO FOR COMPARISON WERE NOT COMPARABLE WITH THE BUSINESS MO DEL AND OTHER FACTORS OF THE ASSESSEE AND IT WOULD NOT BE PROPER TO ADOP T TNMM MODEL. ITA NO.6863/MUM/2010(A.Y. 2006-07) 8 5. THE TPO HOWEVER WAS NOT SATISFIED WITH THE EXPL ANATION GIVEN BY THE ASSESSEE. HE HELD THAT MERELY FROM THE FACT THAT T HE BILLS RAISED BY THE ASSESSEE ON TSI AND THE BILLS RAISED BY THE TSI ON THE CLIENTS IN USA ARE FOR THE SAME AMOUNT, IT CANNOT BE ACCEPTED THAT THE TRA NSFER PRICING PROVISIONS ARE NOT APPLICABLE. IN THIS REGARD THE TPO POINTED OUT THAT THE ASSESSEE PAID TO TSI A SUM OF RS. 4,49,43,787/- ON ACCOUNT OF SOF TWARE MAINTENANCE CHARGES AND, THEREFORE, THE TPO WAS OF THE VIEW THA T THERE WAS A FLOW OF MONEY FROM THE ASSESSEE TO TSI AND, THEREFORE, THE TP PROVISIONS WILL HAVE TO BE APPLIED. THEREAFTER THE TPO ALSO HELD AS FOLLOW S: MERELY FOR THIS REASON THE OPERATING MARGIN OF THE ASSESSEE COMPANY IS TO BE JUDGED AT THE ENTITY LEVEL USING TRANSACT IONAL NET MARGIN METHOD. THE ASSESSEE COMPANY HAS STATED THAT ITS TRANSFER P RICING MODEL HAS BEEN ACCEPTED IN THE PREVIOUS YEARS, THEREFORE, IT SHOULD BE ACCEPTED FOR THE YEAR UNDER CONSIDERATION ALSO, IT IS PERTIN ENT TO MENTION HERE THAT EACH ASSESSMENT YEAR IS DIFFERENT TO THE OTHER , THE CASE LAWS C1UOTED IN THIS REGARD ARE DISTINGUISHABLE ON FACTS . PAT FROM THIS, THERE IS A FRESH FINDING OF FACTS HAVING REGARD TO THE APPLICABILITY OF CUP IN THE YEAR UNDER CONSIDERATION. VARIOUS OTHER OBJECTIONS TAKEN BY THE ASSESSEE ARE RULED OUT IN VIEW OF THE PRINCIPLES OF TNMM WHICH COMPARE THE TRANSACTIO NS NOT ON. PRODUCT TO PRODUCT BASIS BUT ON THE OPERATIONAL BAS IS. THE REFERENCE TO DIFFERENCES IN THE SIZE OF BUSINESS IN THE CASE OF CERTAIN COMPARABLES IS NOT TENABLE AS THE ASSESSEE COMPANYS RESULTS AR E NOT COMPARED WITH ONLY ONE COMPANY. THE COMPARISON IS BASED ON THE SET OF COMPANIES AND ONLY THE AVERAGE OF THEIR RESULTS IS TAKEN FOR THE ANALYSIS. IN VIEW OF THE PROVISIONS U/S.92C(3) OF T HE I.T.ACT, THE INTERNATIONAL TRANSACTIONS AS REPORTED BY THE ASSES SEE ARE NOT FOUND AT ARMS LENGTH. THEREFORE, THE TNMM IS SELECTED AS TH E MOST APPROPRIATE METHOD WITH OPERATING PROFIT ON TOTAL COST PROFIT L EVEL INDICATOR. AS DEMONSTRATED IN THE FOREGOING PARAS, THE COMPARISON OF THE OPERATING MARGIN OF THE ASSESSEE COMPANY WITH THOSE OF COMPAR ABLE COMPANIES CALLS FOR AN ADJUSTMENT OF RS.1,71,28,081/-. 8. THE ASSESSEE HAS PRODUCED VARIOUS DOCUMENTS FOR EXAMINATION AND THEY ARE PLACED ON RECORD. IN THE LIGHT OF ABOVE, A N ADJUSTMENT OF RS.1,71,28,081/- IS MADE AS STATED ABOVE. ITA NO.6863/MUM/2010(A.Y. 2006-07) 9 9. IT IS HEREBY CLARIFIED THAT THE FINDINGS AND DIS CUSSIONS MADE IN THIS ORDER ARE APPLICABLE ONLY IN RESPECT OF REFERENCE R ECEIVED FOR A.Y.2006- 07 AND NOT FOR SUBSEQUENT ASSESSMENT YEARS. 6. FOR THE REASONS GIVEN ABOVE THE TPO MADE AN ADJ USTMENT OF RS. 1,71,28,081/-. THE AO ADOPTED THE ADJUSTMENT MADE BY THE TPO AND MADE AN ADDITION OF THE SAID SUM TO THE INCOME DECLARED BY THE ASSESSEE IN THE DRAFT ORDER PASSED UNDER SECTION 144C(1) OF THE ACT DATED 27/11/09. THE ASSESSEE FILED OBJECTIONS IN FORM NO.35A BEFORE THE DISPUTE RESOLUTION PANEL II,(DRP) MUMBAI TO THE DRAFT ORDER OF THE AO. THE DRP VIDE ITS DIRECTION DATED 19/8/2010 WAS OF THE VIEW THAT THE ADDITIONS PROPOSED TO BE MADE IN THE DRAFT ASSESSMENT ORDER HAS TO BE UPHELD. CONSE QUENT TO THE SAME THE AO PASSED THE FINAL ORDER DATED 1/9/2010 MAKING AN ADDITION OF RS.1,71,28,081/-. 7. AGGRIEVED BY THE AFORESAID ORDER OF THE A.O THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 8. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED CO UNSEL FOR THE ASSESSEE AND THE LEARNED D.R. THE LEARNED COUNSEL FOR THE A SSESSEE AT THE OUTSET DREW OUR ATTENTION TO THE APPLICATION OF THE ASSESS EE FOR ADMISSION OF ADDITIONAL EVIDENCE. THE DOCUMENTS SOUGHT TO BE FI LED AS ADDITIONAL EVIDENCE BEFORE THE TRIBUNAL ARE COMPILATION OF INFORMATION AVAILABLE IN THE PUBLIC DOMAIN VIZ., THE TURNOVER OPERATING PROFIT TO TOTAL COST OF CERTAIN COMPANIES WHICH WERE CONSIDERED AS COMPARABLE UNCONTROLLED IN STANCES BY THE TPO FOR MAKING THE IMPUGNED ADJUSTMENT WHILE ARRIVING AT TH E ALP OF THE INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND TSI AND CONSEQUENTLY THE ADDITION MADE TO THE TOTAL INCOME OF THE ASSESS EE. WE HAVE ALREADY SEEN IN THE EARLIER PART OF THIS ORDER THAT THE TPO TOOK UP RESULTS OF 20 COMPANIES ITA NO.6863/MUM/2010(A.Y. 2006-07) 10 WHICH ACCORDING TO THE TPO WERE COMPARABLE WITH THE BUSINESS MODEL OF THE ASSESSEE. BASED ON THE OPERATING PROFIT (OP) TO TH E TOTAL COST(TC) OF THESE COMPANIES AND TAKING AVERAGE OF THE OP TO TC OF THE SE COMPANIES THE AO ARRIVED AT 20.68% AS OP TO TC AND COMPARED THE SAME WITH THE OP TO TC OF THE ASSESSEE WHICH WAS AT 10.16% AND MADE IMPUGNED ADDITION TO THE TOTAL INCOME BY APPLYING 20.68% AS OP TO TC OF THE ASSESS EE. ACCORDING TO THE ASSESSE THE ADDITIONAL EVIDENCE NOW SOUGHT TO BE FI LED BY THE ASSESSEE WOULD SHOW THAT OUT OF THE 20 COMPARABLE INSTANCES TAKEN BY THE AO, 13 COMPANIES ARE NOT COMPARABLE. THE REASONS FOR SUCH NON COMPARABILITY HAVE BEEN STATED AS FOLLOWS: REASONS FOR NOT COMPARING OP TO TC OF TRINGENT WITH AZTEC SOFTWARE LTD. AZTEC TRINGENT 1. REVENUE : RS. 128.61 CR. OP. PROFIT: RS. CR. OP TO TC : 18.09% 2. PROVIDE SERVICES IN DEVELOPING EDUCATIONAL SOFTWARE SOLUTIONS TO TEACH REAL LIFE ACADEMIC AND WORK FORCE SKILLS AND EMPHASIZED ON STUDENT LEARNING, EMPOWERMENT & ELEVATE. 3. AZTEC HAS VARIOUS PRODUCTS IN LEARNING, SKILL BUILDING, ADMINISTRATIVE SERVICES FOR STUDENTS DATA BASE. ALSO PROVIDES SOLUTION & SUPPORT TOWARDS ADULT EDUCATION, POST SECONDARY & DISTANCE EDUCATION. MARGINS WILL BE HIGH DUE TO LESS OVERHEAD EXPENSES. 4. REVENUE OF 128+ CR. IT IS 6 TIMES THE SIZE OF TRIGENT. REVENUE : RS. 20.35 CR. PROFIT : 2.07 CR. OP TO TC : 11.3% (IT SERVICES + STAFFING) IT SERVICES HAS PLAIN/VANILLA CODING SERVICES. TRINGENT HAS EXPERT CODERS/PROGRAMMER BUT DO NOT HAVE DOMAIN EXPERTS. TRINGENT GETS ITS DOMAIN KNOWLEDGE FROM THE CLIENT AND DEVELOPS THE APPLICATION BASED ON IT. TRINGENT DOES NOT PROVIDE EDUCATIONAL SOFTWARE SERVICES INSTEAD OFFERS VANILLA CODING SERVICE IN JAVA, NET, C++ ETC. THERE BY HEAVY COMPETITION AND AS A RESULT THE MARGINS ARE LOW. NOT COMPARABLE TO TRINGENT DUE TO ITS SIZE. ITA NO.6863/MUM/2010(A.Y. 2006-07) 11 REASONS FOR NOT COMPARING OP TO TC OF TRINGENT WITH IGATE GLOBAL SOLUTIONSLT D. IGATE TRINGENT 1. REVENUE : RS. 128.61 CR. OP. PROFIT: RS. CR. OP TO TC : 18.09% 2.IGATE EMPHASIZES ON ITS DOMAIN KNOWLEDGE IN THE AREAS OF BANKING, INSURANCE, FINANCIAL SERVICES, MORTGAGE, RETAIL, MANUFACTURING, HEALTH CARE, ETC. 3.SINCE IGATE HAS SPECIALIZED KNOWLEDGE IN VARIOUS INDUSTRIES, ITS RATES WILL BE HIGHER AND HA S BETTER MARGINS. 4. REVENUE OF 527+ CR. IT IS 25 TIMES THE SIZE OF TRIGENT. REVENUE : RS. 20.35 CR. PROFIT : 2.07 CR. OP TO TC : 11.3% (IT SERVICES + STAFFING) IT SERVICES HAS PLAIN/VANILLA CODING SERVICES. TRINGENT HAS EXPERT CODERS/PROGRAMMER BUT DO NOT HAVE DOMAIN EXPERTS. TRINGENT GETS ITS DOMAIN KNOWLEDGE FROM THE CLIENT AND DEVELOPS THE APPLICATION BASED ON IT. SINCE TRINGENT DOES NOT SPECIALIZE IN ANY DOMAIN, AND OFFERS VANILLA SERVICES, THERE IS HEAVY COMPETITION AND AS A RESULT THE MARGINS ARE LOW. NOT COMPARABLE TO TRINGENT DUE TO ITS SIZE. REASONS FOR NOT COMPARING OP TO TC OF TRINGENT WITH INFOSYS INFOSYS TRINGENT 1. REVENUE : RS. 9,028 CR. OP. PROFIT: RS. 2,989 CR. OP TO TC : 40.38% OP. PROFIT TO REVENUE : 33.1% 2. HAS LARGE ENTERPRISE MODEL WITH EXPERTISE IN A. EXPERTISE IN VARIOUS DOMAINS CAN FETCH HIGHER REVENUE : RS. 20.35 CR. PROFIT : 2.07 CR. OP TO TC : 11.3% (IT SERVICES + STAFFING) REVENUE TO OP PROFIT : 10.2% TRIGENT HAS IT SERVICES AND STAFFING DIVISION. A.. IT SERVICES HAS PLAIN/VANILLA CODING SERVICES. ITA NO.6863/MUM/2010(A.Y. 2006-07) 12 SALES RATE AND THUS BETTER MARGINS. B. HAS BANKING PRODUCT. SALE OF PRODUCTS FETCH BETTER MARGIN. C. CONSULTING SERVICES WILL GET HIGHER MARGIN THAN VANILLA CODING SERVICES. 3.INFOSY EXECUTE LARGE PROJECTS. OFTEN THE PROJECTS ARE PUBLICIZED AS MULTI MILLION $ PROJECT. THE LARGER THE PROJECT THE BETTER IS THE MARGIN DUE TO SIZE. 4. REVENUE OF 9000+ CR. IT IS 450 TIMES THE SIZE OF TRIGENT. TRINGENT HAS EXPERT CODERS/PROGRAMMER BUT DO NOT HAVE DOMAIN EXPERTS. TRINGENT GETS ITS DOMAIN KNOWLEDGE FROM THE CLIENT AND DEVELOPS THE APPOICATION BASED ON IT. B. TRINGENT STAFFING SERVICES HAS LOWER RISK COMPARED TO IT SERVICES. THUS IT HAS MUCH LOWER MARGIN COMPARED TO IT SERVICES. THIS BRINGS DOWN THE AVERAGE MARGIN. TRINGENT ON AN AVERAGE HAS PROJECT SIZE OF 1 TO 5 PEOPLE. SOME OF THE SMALLER PROJECTS DO NOT PAY FOR MANAGER COST. THIS HAS AN AFFECT ON THE MARGIN AS FREE MANAGERIAL SUPERVISION NEEDS TO BE PROVIDED IN SUCH CASE. TRINGENT HAS ONLY ONE PROJECT WHICH IS LARGE, HAVING $1.6M IN REVENUE. NOT COMPARABLE TO TRINGENT DUE TO ITS SIZE OF THE COMPANY. REASONS FOR NOT COMPARING OP TO TC OF TRINGENT WITH - KALS INFO SYSTEMS LTD. KALS INFO: TRINGENT 1. REVENUE : RS. 1.97 CR. OP. PROFIT: RS.0.55 CR. OP TO TC : 39.75% 2.SALES OF RS. 1.97 CRS. WITH PROFIT OF RS.0.56 CR. 3. KALS INFORMATION SYSTEMS IS SPECIALIST IN INSURANCE INDUSTRY BOTH GENERAL AND LIFE INSURANCE. BEING KNOWLEDGE SPECIALIST, THEY WILL REVENUE : RS. 20.35 CR. PROFIT : 2.07 CR. OP TO TC : 11.3% (IT SERVICES + STAFFING) A. SALES OF RS. 20 CR. WIT PROFITS OF RS.0.08 CR. B. IT SERVICES HAS PLAIN/VANILLA CODING SERVICES. TRINGENT HAS EXPERT CODERS/PROGRAMMER BUT DO NOT HAVE DOMAIN EXPERTS. TRINGENT GETS ITS ITA NO.6863/MUM/2010(A.Y. 2006-07) 13 CARRY PREMIUM RATES IN INSURANCE SECTOR. 4. REVENUE OF KALS IS VERY SMALL. IT IS MORE LIKE PROPRIETORSHIP FIRM. THIS CANNOT BE COMPARED WITH TRINGENT. DOMAIN KNOWLEDGE FROM THE CLIENT AND DEVELOPS THE APPLICATION BASED ON IT. NOT COMPARABLE TO TRINGENT DUE TO ITS SIZE. REASONS FOR NOT COMPARING OP TO TC OF TRINGENT WITH -MINDTREE CONSULTING LTD. MINDTREE TRINGENT 1. REVENUE : RS. 448.79 CR. OP. PROFIT: RS.. CR. OP TO TC : 14.67% 2. MINDTREE IS INTO IT SERVICES IN THE FIELD OF BUSINESS INTELLIGENCE, TECHNOLOGY CONSULTING, ENTERPRISE APPLICATION & SAP TECHNOLOGIES. THEY ARE ALSO INTO PRODUCT ENGINEERING SERVICES, DATA ANALYTICAL SOLUTION, IMTS AND INDEPENDENT TESTING. 3. THEIR SPECIALIZATION EXTENDS TO MEDIA PLANNING, IT INFRASTRUCTURE MANAGEMENT & TRADE PROMOTION ANALYTICS. 4. REVENUE OF 449 CR. IT IS 22 TIMES THE SIZE OF TRINGENT. REVENUE : RS. 20.35 CR. PROFIT : 2.07 CR. OP TO TC : 11.3% (IT SERVICES + STAFFING) IT SERVICES HAS PLAIN/VANILLA CODING SERVICES. TRINGENT HAS EXPERT CODERS/PROGRAMMER BUT DO NOT HAVE DOMAIN EXPERTS. TRINGENT GETS ITS DOMAIN KNOWLEDGE FROM THE CLIENT AND DEVELOPS THE APPLICATION BASED ON IT. TRINGENT HAS PLAIN VANILLA CODING SERVICES IN JAVA, NET C++ ETC. NOT COMPARABLE TO TRINGENT DUE TO ITS SIZE. REASONS FOR NOT COMPARING OP TO TC OF TRINGENT WITH - PERSISTENT SYSTEMS LTD. PERSISTENT TRINGENT 1. REVENUE : RS. 209.18 CR. OP. PROFIT: RS.60.71 CR. OP TO TC : 24.67% OP PROFIT TO REVENUE : 29.0% REVENUE : RS. 20.35 CR. PROFIT : 2.07 CR. OP TO TC : 11.3% (IT SERVICES + STAFFING) REVENUE TO OP.PROFIT: 10.2% ITA NO.6863/MUM/2010(A.Y. 2006-07) 14 2. PERSISTENT HAS ITS OWN PRODUCT PAXPRO BRAND ASSET LIFECYCLE MANAGEMENT SOLUTIONS. A PRODUCT SOLUTION CARRIES A PREMIUM MARGIN. SINCE PEOPLE KNOW THE DOMAIN, THE RATES ARE HIGH COMPARED TO VANILLA SERVICE AND PEOPLE REQUIREMENT IS LOW, REDUCING THE COST. 3.PERSISTENT DEALS IN THIRD PARTY PRODUCTS AND GIVES SPECIALIZED SERVICE FOR MICROSOFT AZURE, AMAZON WEB SERVICES, GOOGLE APPS AND SALESFORCE.COMS, FORCE.CO. 4. PERSISTENT HAS INVESTED IN VETERANS IN PRODUCT DEVELOPMENT CULTURE. THEIR TEAM OF INDUSTRY SPECIALIST HAVE UNDERSTANDINGS OF INDUSTRIES THEIR CUSTOMERS OPERATE IN. SINCE THE SPECIALIST ARE IN DEMAND, THEY CARRY HIGHER/PREMIUM RATES AND THUS BETTER MARGIN. 5. HAVING DEVELOPED DOZENS OF CARRIER-GRADE MOBILE APPLICATIONS ACROSS A BROAD ARRAY OF PLATFORMS AND HANDSETS, PERSISTENT IS UNIQUELY QUALIFIED AS A MOBILE APPLICATIONS DEVELOPMENT PARTNER. WHETHER IT IS BUILDING AN END-TO-END SOLUTION, OR PORTING AN APPLICATION FROM ONE PLATFORM TO ANOTHER- OR EVEN BUILDING CONNECTORS INTO ENTERPRISE APPLICATIONS AND SERVICES. PERSISTENT CAN HELP. 6. PERSISTENT IS DATA WAREHOUSING, BUSINESS INTELLIGENCE SPECIALIST WITH 400 PEOPLE AND 7 PHDS. PERSISTENT HAS EXPERTISE IN ALL FACETS OF ANALYTICS AND BUSINESS INTELLIGENCE SOLUTIONS. THIS GETS THEM BETTER RATES AND MARGINS. 7. REVENUE OF 200+ CR. IT IS 10 TIMES THE SIZE OF TRINGENT. TRINGENT IT SERVICES AND STAFFING DIVISION. 3. IT SERVICES HAS PLAIN/VANILLA CODING SERVICES. TRINGENT HAS EXPERT CODERS/PROGRAMMER BUT DO NOT HAVE DOMAIN EXPERTS. TRINGENT GETS ITS DOMAIN KNOWLEDGE FROM THE CLIENT AND DEVELOPS THE APPLICATION BASED ON IT. 4.TRINGENT STAFFING SERVICES HAS LOWER RISK COMPARED TO TRINGENT IT SERVICES. THUS IT HAS MUCH LOWER MARGIN COMPARED TO IT SERVICES. THIS BRINGS DOWN THE AVERAGE MARGIN. TRINGENT ON AN AVERAGE HAS PROJECT SIZE OF 1 TO 5 PEOPLE. SOME OF THE SMALLER PROJECTS DO NOT PAY FOR MANAGER COST. THIS HAS AN AFFECT ON THE MARGIN AS FREE MANAGERIAL SUPERVISION NEEDS TO BE PROVIDED IN SUCH CASE. TRINGENT HAS ONLY ONE PROJECT WHICH IS LARGE, HAVING $ 1.6M IN NOT COMPARABLE TO TRINGENT DUE TO ITS SIZE. ITA NO.6863/MUM/2010(A.Y. 2006-07) 15 REASONS FOR NOT COMPARING OP TO TC OF TRINGENT WITH - R.SYSTEMS INTERNATIONAL LTD. R. SYSTEMS TRINGENT 1. REVENUE : RS. 79.42 CR. OP. PROFIT: RS. CR. OP TO TC : 22.20% 2. R SYSTEMS IS IN DOMAIN SPACE AND SAP SERVICES. THEY HAVE DOMAIN KNOWLEDGE IN MOBILE VOICE, TV AND DATA MANAGEMENT. THEY ALSO HAVE DOMAIN IN FINANCIAL SERVICES INCLUDING CREDIT CARD SERVICES. SINCE THEY ARE IN DOMAIN SPACE AND ALSO SERVICE SAP ERP SYSTEMS, THEIR MARGINS ARE MUCH BETTER THAN TRINGENT. 3. REVENUE : 79.42 CR. THIS IS 3.9 TIMES TRINGENTS REVENUE. REVENUE : RS. 20.35 CR. PROFIT : 2.07 CR. OP TO TC : 11.3% (IT SERVICES + STAFFING) IT SERVICES HAS PLAIN/VANILLA CODING SERVICES. TRINGENT HAS EXPERT CODERS/PROGRAMMER BUT DO NOT HAVE DOMAIN EXPERTS. TRINGENT GETS ITS DOMAIN KNOWLEDGE FROM THE CLIENT AND DEVELOPS THE APPLICATION BASED ON IT. SINCE TRINGENT DOES NOT SPECIALIZE IN ANY DOMAIN, AND OFFERS VANILLA SERVICES, THERE IS HEAVY COMPETITION AND AS A RESULT THE MARGINS ARE LOW. NOT COMPARABLE TO TRINGENT DUE TO ITS SIZE. REASONS FOR NOT COMPARING OP TO TC OF TRINGENT WITH - SASKEN COMMUNICATIONS LTD. SASKEN TRINGENT 1. REVENUE : RS. 240.03 CR. OP. PROFIT: RS. CR. OP TO TC : 13.90% 2. SASKEN POWERS THE SEMICONDUCTOR INDUSTRY WITH SERVICES AND ALSO WORKS WITH THEM AS PARTNERS IN COMBINING THE WIDE RANGE OF SASKEN MOBILE PHONE SOFTWARE IP WITH THE SEMICONDUCTOR MANUFACTURES SILICON PLATFORMS REVENUE : RS. 20.35 CR. PROFIT : 2.07 CR. OP TO TC : 11.3% (IT SERVICES + STAFFING) IT SERVICES HAS PLAIN/VANILLA CODING SERVICES. TRINGENT HAS EXPERT CODERS/PROGRAMMER BUT DO NOT HAVE DOMAIN EXPERTS. TRINGENT GETS ITS DOMAIN KNOWLEDGE FROM THE CLIENT AND DEVELOPS ITA NO.6863/MUM/2010(A.Y. 2006-07) 16 TO DELIVER HANDSET MANUFACTURES TOTAL SOLUTIONS. THIS BEING SPECIALIZED KNOWLEDGE , CARRIES PREMIUM RATE. 3. SASKEN INC IS A LEADING PROVIDER OF EMBEDDED MULTIMEDIA SOFTWARE SOLUTIONS THAT ENABLE THE CREATION, DELIVERY, MANAGEMENT AND PRESENTATION OF RICH MULTIMEDIA CONTENT. THIS BEING SPECIALIZED KNOWLEDGE, CARRIES PREMIUM RATE. 4. REVENUE IS VERY HIGH. NOT COMPARABLE TO TRIGENT. 5. REVENUE OF 240 CR. IT IS 12 TIMES THE SIZE OF TRIGENT. THE APPLICATION BASED ON IT. TRIGENT HAS PLAIN VANILLA CODING SERVICE IN JAVA, NET, C++ ETC. NOT COMPARABLE TO TRINGENT DUE TO ITS SIZE. REASONS FOR NOT COMPARING OP TO TC OF TRINGENT WITH - TATA ELXSI LTD. TATA ELXSI TRINGENT 1. REVENUE : RS. 188.81 CR. OP. PROFIT: RS. CR. OP TO TC : 27.65% 2. HAS INTELLECTUAL PROPERTY (IP) RIGHTS IN COMMUNICATION AND NETWORKING, SEMI CONDUCTOR AREA, STORAGE AREA, AUTOMOTIVE, DIGITAL TV ETC. SINCE THEY HAVE IP RIGHTS, DOMAIN KNOWLEDGE AND PRODUCT, THE MARGINS ARE HIGHER THAN ROUTINE CODING SERVICES. 3. INDUSTRIES COVERED ARE AUTOMOTIVE, AVIONICS, INDUSTRIAL AUTOMATION, TELECOM, SEMICONDUCTORS ETC. THESE ARE HIGH DOMAIN AND TECHNOLOGY INDUSTRIES. THUS LESS COMPETITION AND BETTER MARGINS. REVENUE : RS. 20.35 CR. PROFIT : 2.07 CR. OP TO TC : 11.3% (IT SERVICES + STAFFING) IT SERVICES HAS PLAIN/VANILLA CODING SERVICES. TRINGENT HAS EXPERT CODERS/PROGRAMMER BUT DO NOT HAVE DOMAIN EXPERTS. TRINGENT GETS ITS DOMAIN KNOWLEDGE FROM THE CLIENT AND DEVELOPS THE APPLICATION BASED ON IT. SINCE TRINGENT DOES NOT SPECIALIZE IN ANY DOMAIN, AND OFFERS VANILLA SERVICES, THERE IS HEAVY COMPETITION AND AS A RESULT THE MARGINS ARE LOW. ITA NO.6863/MUM/2010(A.Y. 2006-07) 17 4. THEY SAY WE HAVE HISTORICALLY STAYED AWAY FROM PURSUING IT SERVICES OR OTHER BUSINESS APPLICATION SOFTWARE RELATED OUTSOURCING. 5. REVENUE : 188+ CR. IT IS 9 TIMES THE SIZE OF TRIGENT TRIGENT IS IN IT SERVICES AND OTHER BUSINESS APPLICATION SOFTWARE RELATED OUTSOURCING. NOT COMPARABLE TO TRINGENT DUE TO ITS SIZE. REASONS FOR NOT COMPARING OP TO TC OF TRINGENT WITH - R.S.SOFTWARE INDIA LTD. R.S.SOFTWARE TRINGENT 1. REVENUE : RS. 91.57 CR. OP. PROFIT: RS. CR. OP TO TC : 15.69 2. THE COMPANY SPECIALIZES IN VARIOUS DOMAINS LIKE *GIFT/LOYALTY / RISK MODELING *RESIDUAL MANAGEMENT / PAYMENT GATEWAY *MERCHANT BOARDING THE COMPANY OFFERS CUSTOMIZABLE PRODUCTS IN THESE AREA. 3. SINCE THE COMPANY HAS DOMAIN EXPERTISE AND PRODUCTS, THE MARGINS ARE BETTER. 5. REVENUE : 188+ CR. IT IS 9 TIMES THE SIZE OF TRIGENT REVENUE : RS. 20.35 CR. PROFIT : 2.07 CR. OP TO TC : 11.3% (IT SERVICES + STAFFING) IT SERVICES HAS PLAIN/VANILLA CODING SERVICES. TRINGENT HAS EXPERT CODERS/PROGRAMMER BUT DO NOT HAVE DOMAIN EXPERTS. TRINGENT GETS ITS DOMAIN KNOWLEDGE FROM THE CLIENT AND DEVELOPS THE APPLICATION BASED ON IT. SINCE TRINGENT DOES NOT SPECIALIZE IN ANY DOMAIN, AND OFFERS VANILLA SERVICES, THERE IS HEAVY COMPETITION AND AS A RESULT THE MARGINS ARE LOW. NOT COMPARABLE TO TRINGENT DUE TO ITS SIZE. ITA NO.6863/MUM/2010(A.Y. 2006-07) 18 REASONS FOR NOT COMPARING OP TO TC OF TRINGENT WITH - ACCEL TRANSMATIC LTD. ACCEL TRINGENT 1. AS PER TRIGENT CALCULATIONS 1A . REVENUE : RS. 35.04 CR. OP. PROFIT: RS.10.94 CR. OP TO TC : 45.04% OP PROFIT TO REVENUE : 31.22% 1B. AS PER TP OFFICER REVENUE : RS.8.02 CR. OP.PROFIT ; RS. OP TO TC : 44.07% OP. PROFIT TO REVENUE: 2. HAS THREE DIVISION. A. TECHNOLOGIES DIVISION: OPERATES IN HIGH EN D SOFTWARE DOMAINS LIKE EMBEDDED SOFTWARE, MULTIMEDIA COMMUNICATIONS, NETWORKS, IMAGE PROCESSING AND PROCESS AUTOMATION. HIGH END DOMAINS GENERALLY HAVE BETTER MARGINS. ALSO HAS IP RIGHTS FOR FEW APPLICATIONS. PRODUCT COMPANIES HAVE BETTER MARGINS DUE TO DOMAIN EXPERTISE AND REPEAT BUSINESS IN THE SAME DOMAIN. B. SYSTEMS DIVISION. THEY DESIGN, MANUFACTURE AND MARKET. C. TRAINING DIVISION. THIS INCLUDES HIGH AND TRAININGS LIKE EMBEDDED SOFTWARE, VLSI DESIGN ETC. AS PER TRIGENT CALCULATIONS REVENUE : RS. 20.35 CR. PROFIT : 2.07 CR. OP TO TC : 11.3% (IT SERVICES + STAFFING) REVENUE TO OP PROFIT: 10.2% AS PER TP OFFICER REVENUE : RS.20.35 PROFIT : RS.2.07 OP TO TC : 10.16%(IT SERVICE+STAFFING) OP PROFIT TO REVENUE: A. TRIGENT DOES NOT HAVE REPEAT BUSINESS IN THE SAME DOMAIN. SO PEOPLE HAVE TO SPEND TIME TO LEARN THE DOMAIN BEFORE EXECUTING THE PROJECT. SINCE EXTRA TIME NEEDS TO BE PUT IN TO LEARN THE DOMAIN, THIS PUTS PRESSURE ON THE MARGIN. B. TRIGENT DOES NOT HAVE MANUFACTURING FACILITY. C. TRIGENT DOES NOT HAVE TRAINING DIVISION. ITA NO.6863/MUM/2010(A.Y. 2006-07) 19 REASONS FOR NOT COMPARING OP TO TC OF TRINGENT WITH - MEGASOFT LTD. MEGASOFT TRINGENT 1. REVENUE : RS.56.15 CR.(RS.55.31 AS PER BS DEC.2005) OP. PROFIT: RS.18.40 CR. OP TO TC : 52.74% OP PROFIT TO REVENUE : 32.8% 2. MEGASOFT OFFERS DOMAIN BASED , HIGH VALUE BUSINESS SOLUTIONS TO THEIR CLIENTS IN NETWORK CORE INFRASTRUCTURE, MOBILE ROAMING, MOBILE PAYMENT, MOBILE COMMERCE ETC. 3.HAS STRONG PARTNERSHIP WITH GLOBAL LEADERS LIKE HP, TATA COMMUNICATIONS SERVICES, TNZI AND OTHERS. 4. MEGASOFT HAS MANY COMMERCIAL INSTALLATIONS TO ITS CREDIT. THEY DEMONSTRATE THEIR EXPERTISE IN THEIR DOMAIN SO CLIENTS MAY PAY THEM PREMIUM TO GET THEIR DOMAIN EXPERIENCE AND EXPERTISE. REVENUE : RS. 20.35 CR. PROFIT : 2.07 CR. OP TO TC : 11.3% (IT SERVICES + STAFFING) OP. PROFIT TO REVENUE : 10.2% IT SERVICES HAS PLAIN/VANILLA CODING SERVICES. TRINGENT HAS EXPERT CODERS/PROGRAMMER BUT DO NOT HAVE DOMAIN EXPERTS. TRINGENT GETS ITS DOMAIN KNOWLEDGE FROM THE CLIENT AND DEVELOPS THE APPLICATION BASED ON IT. B. TRIGENT DOES NOT HAVE SUCH GLOBAL PARTNERS WHO CAN BRING IN DOMAIN EXPERTISE OR OTHER VALUES. C. TRIGENT DOES NOT GET PAID FOR ITS DOMAIN KNOWLEDGE. RATHER THEY GET THEIR DOMAIN/ EXPERTISE KNOWLEDGE FROM THEIR CLIENTS, SO THEY NEED TO CHARGE LOWER PRICE TO GET THEIR BUSINESS. REASONS FOR NOT COMPARING OP TO TC OF TRINGENT WITH - FLEXTRONICS SOFTWARE SYSTEMS LTD. FLEXTRONICS TRINGENT 1. REVENUE : RS. 595.12 CR. (RS.812.38 AS PER BALANCE SHEET) OP. PROFIT: RS.246.11 CR. REVENUE : RS. 20.35 CR. PROFIT : 2.07 CR. ITA NO.6863/MUM/2010(A.Y. 2006-07) 20 OP TO TC : 27.24% 2. FLEXTRONICS DESIGNS, BUILDS AND SHIPS COMPLETE PACKAGED PRODUCTS FOR ITS OEM CUSTOMERS AND PROVIDES SERVICES TO SUPPORT CUSTOMER END TO- END SUPPLY CHAIN REQUIREMENTS. FLEXTRONICS ALSO PROVIDES SERVICES IN MANUFACTURING, LOGISTICS, PROCUREMENT, DESIGN, ENGINEERING AND ODM SERVICES ACROSS A WIDE RANGE OF PRODUCTS AND CUSTOMER SEGMENTS. 3. WORLDWIDE ELECTRONICS DESIGN, FABRICATION, ASSEMBLY, AND TEST COMPANY. SERVICES INCLUDE PRINTED CIRCUIT BOARD, METAL AND PLASTICS FABRICATION. 4. REVENUE OF 595 CR. IT IS 9 TIMES THE SIZE OF TRIGENT OP TO TC : 11.3% (IT SERVICES + STAFFING) IT SERVICES HAS PLAIN/VANILLA CODING SERVICES. TRINGENT HAS EXPERT CODERS/PROGRAMMER BUT DO NOT HAVE DOMAIN EXPERTS. TRINGENT GETS ITS DOMAIN KNOWLEDGE FROM THE CLIENT AND DEVELOPS THE APPLICATION BASED ON IT. NOT COMPARABLE AS TRIGENT DOES NOT MANUFACTURE OR SELL ELECTRONIC FABRICATIONS. NOT COMPARABLE TO TRINGENT DUE TO ITS SIZE. 9. ACCORDING TO THE ASSESSEE, IT IS A SMALL PUBLIC LIMITED COMPANY AND CANNOT BE COMPARED WITH THE ABOVE COMPANIES WHOSE T URNOVER IS LARGE. ACCORDING TO THE ASSESSEE THE ABOVE COMPANIES SHOUL D BE EXCLUDED FOR THE PURPOSE OF COMPARISON, DUE TO THE NATURE OF ACTIVIT Y AND BUSINESS MODEL ETC. IT WAS THE PRAYER OF THE LEARNED COUNSEL FOR THE AS SESSEE THAT SINCE THESE DETAILS ARE AVAILABLE IN PUBLIC DOMAIN AND ARE NECE SSARY FOR PROPER DECISION ON THE ISSUE INVOLVED IN THE APPEAL, THE SAME SHOUL D BE ADMITTED AS ADDITIONAL EVIDENCE. IF THE ABOVE COMPANIES ARE EXC LUDED AS COMPARABLE THEN THE OP TO TC OF THE ASSESSEE WOULD BE MUCH MORE THA N THE OTHER REMAINING COMPARABLE COMPANIES. CONSEQUENTLY THERE IS NO NEC ESSITY TO MAKE ANY ADJUSTMENT TO THE PRICE CHARGED BY THE ASSESSEE IN RESPECT OF THE INTERNATIONAL TRANSACTION WITH ITS AE. THE LEARNED D.R. HOWEVER OPPOSED THE ITA NO.6863/MUM/2010(A.Y. 2006-07) 21 ADMISSION OF ADDITIONAL EVIDENCE FOR THE REASON THA T THE ASSESSEE DID NOT PRODUCE THESE DETAILS EITHER BEFORE THE TPO OR THE DRP. 10. APART FROM THE ABOVE THE LEARNED COUNSEL FOR T HE ASSESSEE BROUGHT TO OUR NOTICE THAT FROM AY 02-03, 03-04, 05-06, SIMILA R PRICING WAS ACCEPTED BY THE REVENUE. IT WAS BROUGHT TO OUR NOTICE THAT IN AY 07-08, THE AO IN PROCEEDINGS U/S.143(3) OF THE ACT ACCEPTED THE PRIC E CHARGED BY THE ASSESSEE TO ITS AE AS AT ARMS LENGTH AND IT IS ONLY IN THE PRESENT AY THE TPO HAS TAKEN A DIFFERENT VIEW. THE LEARNED COUNSEL FOR TH E ASSESSEE SUBMITTED THAT RULE OF CONSISTENCY SHOULD BE FOLLOWED AND DIFFEREN T VIEW ON SAME SET OF FACTS CANNOT BE TAKEN IN THE CASE OF AN ASSESSEE IN DIFFE RENT ASSESSMENT YEARS. IT WAS FURTHER SUBMITTED THAT THE TPO MADE COMPARISON AT THE ENTERPRISE LEVEL AND OUGHT TO HAVE ANALYSED INDIVIDUAL TRANSACTIONS TO ARRIVE AT THE ALP. IN THIS REGARD OUR ATTENTION WAS DRAWN TO CERTAIN JUDI CIAL PRONOUNCEMENTS. THE LEARNED D.R. RELIED ON THE ORDER OF THE TPO/AO. ACCORDING TO HIM THE DATA AVAILABLE AT THE ENTERPRISE LEVEL COULD BE USE D BY THE TPO. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. BEF ORE US THERE IS NO DISPUTE THAT THE TNMM IS THE MOST APPROPRIATE METHOD FOR DE TERMINING THE ALP OF THE INTERNATIONAL TRANSACTION. THE MAIN DISPUTE IS WITH REGARD TO THE COMPARABILITY OF THE COMPARABLE RELIED UPON BY THE TPO. IN THIS REGARD THE RELEVANT PROVISIONS OF THE ACT HAVE TO BE NOTICED. DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 9 2C. 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSA CTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING T HE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (A). TO (D).. ( E )TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ITA NO.6863/MUM/2010(A.Y. 2006-07) 22 ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED 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 TRANSACTI ON OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGA RD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PRO FIT 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 ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TA KEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO T HE INTERNATIONAL TRANSACTION. (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRAN SFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSE TS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIV E PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICI TLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPH ICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT OR DERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER TH E MARKETS ARE WHOLESALE OR RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF ITA NO.6863/MUM/2010(A.Y. 2006-07) 23 ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRAN SACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUC H TRANSACTIONS IN THE OPEN MARKET; OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO EL IMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. (4) THE DATA TO BE USED IN ANALYSING THE COMPARABIL ITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANS ACTION HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMIN ATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPAR ED. 12. A READING OF THE PROVISIONS OF RULE 10B(2) OF THE RULES SHOWS THAT UNCONTROLLED TRANSACTION HAS TO BE COMPARED WITH IN TERNATIONAL TRANSACTION HAVING REGARD TO THE FACTORS SET OUT THEREIN. THE MAIN OBJECTION TAKEN BY THE ASSESSEE BEFORE US IS THAT THE TPO ERRED IN APPLYIN G THE OVERALL OPERATING PROFITS OF THE COMPARABLE COMPANIES. THE ITAT MUMB AI IN THE CASE OF UCB LTD. VS. ADIT 121 ITD 131 (MUM) HAD AN OCCASION TO DEAL WITH A CASE WHERE TNMM METHOD WAS ADOPTED BY TAKING THE OVERALL OPERA TING PROFITS OF AN ASSESSEE WITH THE OVERALL OPERATING PROFITS OF CERT AIN OTHER COMPANIES. THE TRIBUNAL ON SUCH APPROACH HELD AS FOLLOWS: 75. IN OUR UNDERSTANDING, THE INTERNATIONAL TRANSA CTION OR AN AGGREGATE OF SIMILAR INTERNATIONAL TRANSACTIONS, HA VE TO BE EVALUATED, ON A STAND-ALONE BASIS AND THEN COMPARED WITH SIMIL AR ANALYSIS UNDERTAKEN ON INDEPENDENT TRANSACTIONS. COMPARISON OF THE OPERATING PROFITS OF THE ASSESSEE-COMPANY AS A WHOLE, WITH TH E OVERALL OPERATING PROFITS OF CERTAIN OTHER COMPANIES, WITHOUT ANY ADJ USTMENTS, IN OUR CONSIDERED OPINION, WOULD NOT SATISFY THE REQUIREME NTS OF EVALUATING AN INTERNATIONAL TRANSACTION UNDER TNMM, FOR THE PU RPOSE OF ARRIVING AT THE ARM'S LENGTH PRICE. IN THIS CASE, THE ASSESS EE HAS TAKEN ALL THE ACTIVITIES OF THE COMPANY AS ONE UNIT AND ON AN ANA LYSIS OF ITS PROFIT & LOSS ACCOUNT, ARRIVED AT AN OVERALL OPERATING PROFI T MARGIN OF 27 PER CENT. THIS IS COMPARED WITH THE CHART OF OVERALL OP ERATING PROFIT MARGINS OF IDENTIFIED COMPARABLE COMPANIES, WHICH I S SUMMARIZED IN TABLE 5 OF THE REPORT. NO ADJUSTMENTS OR SEGREGATIO NS HAVE BEEN MADE ITA NO.6863/MUM/2010(A.Y. 2006-07) 24 BETWEEN TURNOVERS INVOLVING LICENSED MANUFACTURING, PATENTED DRUGS, TRADING AND OTHER REVENUES. NO EXERCISE HAS BEEN DO NE TO IRON OUT THE VARIATIONS BY MAKING SUITABLE ADJUSTMENTS. IN OTHER WORDS, WHAT THE ASSESSEE HAS TRIED TO DO IS TO COMPARE THE OVERALL OPERATING PROFIT OF ONE ENTITY, WITH THE OVERALL OPERATING MARGINS OF T HE ASSESSEE AND AS THE OPERATING MARGIN OF THE ASSESSEE IS HIGHER, IT ASSERTS THAT ALL ITS INTERNATIONAL TRANSACTIONS DONE WITH ITS AE ARE AT ARM'S LENGTH PRICE. THIS CANNOT BE ACCEPTED. THUS, AS ALREADY STATED WE AGREE WITH THE REVENUE THAT PROVISIONS OF SECTION 92C(3) ARE ATTRA CTED IN THE INSTANT CASE ON THIS GROUND. AS WE HAVE DECIDED THIS ISSUE IN FAVOUR OF THE REVENUE ON THIS GROUND, WE DO NOT FEEL IT NECESSARY TO GO INTO OTHER ARGUMENTS OF THE REVENUE. ONCE THE METHOD ADOPTED B Y THE ASSESSEE IS REJECTED, THE REVENUE IS DUTY BOUND TO COMPUTE THE ALP BY ADOPTING A MOST APPROPRIATE METHOD AND IT HAS ALSO TO SUBSTANT IATE AND JUSTIFY THE USE OF SUCH A METHOD. SIMILAR VIEW HAS BEEN EXPRESSED BY THE MUMBAI BENCH ES OF ITAT IN THE FOLLOWING CASES, CIT VS. STARLITE 45 DTR 65 (MUM) A ND ADIT VS. TEJ DIAM 39 DTR 185 (MUM). 13. IN THE PRESENT CASE AS WE HAVE ALREADY SEEN NE ITHER THE ASSESSEE IN ITS TP REPORT NOR THE TPO IN THE TP ORDER HAVE SPELT OU T THE FUNCTIONS PERFORMED, RISK BORNE AND ASSETS USED BY THE ASSESS EE AS WELL AS ASSOCIATED ENTERPRISES. FUNCTION AND RISK ASSESSMENT HAS NOT BEEN PERFORMED BETWEEN THE ASSESSEE AND THE COMPARABLE COMPANIES. ANY DIF FERENCE IN THE FUNCTION AND RISK WHICH WILL AFFECT PROFITABILITY OUGHT TO B E IDENTIFIED AND ADJUSTMENT MADE TO ARRIVE AT THE ALP. WITHOUT ANALYSIS OF THE ABOVE, WE ARE OF THE VIEW THAT THE CHOICE OF COMPARABLE COMPANIES ITSELF WOUL D BECOME QUESTIONABLE. BESIDES THE ABOVE, THE DIFFERENCE BETWEEN THE ASSES SEE AND THE COMPARABLE COMPANIES IN TERMS OF FUNCTION AND RISK AS SET OUT IN THE TABLE ABOVE NEEDS TO BE CONSIDERED. THE DATA PROVIDED BY THE ASSESSE E BEFORE US IN THIS REGARD RELATES TO THE PERIOD FOR WHICH TP STUDY IS TO BE U NDERTAKEN AND THEREFORE THERE CAN BE NO OBJECTION TO CONSIDERING THE SAME. WE ARE OF THE VIEW THAT SO LONG AS THE DATA AVAILABLE BEFORE THE TPO IN THE COURSE OF PROCEEDINGS PURSUANT TO THE ORDER OF THE TRIBUNAL IS CONTEMPORA NEOUS IN POINT OF TIME ITA NO.6863/MUM/2010(A.Y. 2006-07) 25 AND IS OTHERWISE COMPARABLE, WE DO NOT SEE WHY THE TPO SHOULD BE PRECLUDED FROM LOOKING INTO SUCH DATA. 14. THE QUESTION WHETHER THE OVERALL PROFITABILITY OF THE COMPARABLE COMPANIES CAN BE TAKEN AS THE YARDSTICK IS AGAIN A MATTER WHICH WILL DEPEND ON THE FUNCTIONS PERFORMED BY THE COMPARABLE COMPAN IES AND TO WHAT EXTENT THEY ARE SIMILAR TO THAT OF THE ASSESSEE. THOUGH A S LAID DOWN IN THE DECISIONS REFERRED TO ABOVE OVERALL PROFITABILITY C ANNOT BE TAKEN AS A YARDSTICK BUT IF TRANSACTIONS OR SET OF TRANSACTION S UNDERTAKEN BY THE ASSESSEE AND THE COMPARABLE COMPANIES ARE SUBSTANTI ALLY THE SAME, THERE CAN BE NO OBJECTION TO APPLYING THE OVERALL PROFITA BILITY. HOWEVER PROPER ADJUSTMENTS HAVE TO BE MADE TO THE MARGIN ARRIVED A T BY THE AO FOR ANY DIFFERENCES AT TRANSACTION LEVEL BETWEEN THE TRANSA CTION OF THE ASSESSEE AND THAT OF THE COMPARABLE COMPANIES. 15. WE ARE OF THE VIEW THAT THE DETERMINATION OF A LP HAS NOT BEEN DONE IN THE PRESENT CASE IN ACCORDANCE WITH THE LAW. THE D ATA FILED BY THE ASSESSEE BEFORE US ALSO REQUIRES CONSIDERATION BY THE TPO. WE ARE THEREFORE OF THE VIEW THAT IT WOULD BE APPROPRIATE TO SET ASIDE THE IMPUGNED ORDER AND DIRECT THE AO TO CONSIDER THE OBJECTIONS RAISED BY THE ASS ESSEE BEFORE US IN ACCORDANCE WITH LAW AND DETERMINE THE ALP AFTER OBT AINING THE REPORT OF THE TPO, WHO SHALL AFTER AFFORDING OPPORTUNITY TO THE A SSESSEE RE DETERMINE THE ALP AS PER THE DIRECTIONS SET OUT ABOVE. THE ASSES SEE AS WELL AS THE TPO WILL BE FREE TO USE SUCH DATA IN ACCORDANCE WITH LAW WHI CH WILL BE RELEVANT FOR PROPER DETERMINATION OF ALP. THE TPO HAS APPLIED T HE AVERAGE OF OP TO TC OF CERTAIN COMPARATIVE COMPANIES ARRIVED AT BY HIM ON THE LOCAL SALES ALSO. AS HELD BY THE HONBLE DELHI ITAT IN THE CASE OF AB HISHEK AUTO INDUSTRIES LTD. VS. DCIT 136 TTJ (DEL) 530 THE CALCULATION OF ALP HAS TO BE ONLY IN RESPECT OF INTERNATIONAL TRANSACTIONS. TO THE EXTE NT THE ALP HAS BEEN DETERMINED ON THE LOCAL SALES, THE ADDITION HAS TO BE DELETED. WE HOLD ITA NO.6863/MUM/2010(A.Y. 2006-07) 26 ACCORDINGLY. IN THE RESULT, THE APPEAL OF THE ASS ESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 16. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS T REATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE 31 ST DAY OF OCT. 2011. SD/- SD/- (R.K.PANDA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 31 ST OCT..2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RE BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.6863/MUM/2010(A.Y. 2006-07) 27 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 18/10/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 20/10/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER