Appeal details
Counselvise Citation
[2015] 140 COUNSELVISE.COM (IT) 92019 (ITAT-KOLKATA)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 1 month(s) 5 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
11-06-2015
Appeal Filed By
Assessee
Bench Allotted
C
Assessment Year
2007-2008
Appeal Filed On
06-05-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: KOLKATA [BEFORE HON BLE SHRI MAHAVIR SINGH, JM & HON BLE SHRI B.P.JAIN, AM ] I.T.A NO.695/KOL/2011 ASSESSMENT YEAR: 2007 - 08 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. VS. I.T.O., WARD - 2(2), KOLKATA KOLKATA (APPELLANT) ( RESPONDENT) (PAN: AAECA 2366 E) FOR THE APPELLANT : SHRI R.N.BAJORIA, SR.ADVOCATE SHRI PARAS SHAH & SHRI AKHILESH GUPTA, ADVOCATE FOR THE RESPONDENT : SHRI VIJAY KUMAR, CIT DATE OF HEARING : 23 .04 .2015. DATE OF PRONOUNCEMENT: 11.06.2015. ORDER PER : B.P.JAIN, AM THIS APPEAL OF THE ASSESSEE ARISES FROM THE ORDER PASSED U/S 143(3) OF THE ACT READ WITH SECTION 144C (5) OF THE ACT PASSED BY THE DISPUTE RESOLUTION PANEL (DRP) DATED 17 TH MARCH, 2011. THE DRP W HILE DISMISSING THE OBJECTION S OF THE ASSESSEE , INTER - ALIA , HELD THAT NO INTERFERENCE WAS CALLED FOR IN RESPECT OF ADJUSTMENT MADE BY THE TPO IN THE SALES PRICE OF BPO SERVICES CHARGED BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE (AE). 2. THE ASSE SSEE HAS RAISED THE FOLLOWING 15 GROUNDS OF APPEAL : - 1 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRANSFER PRICING OFFICER III, KOLKATA (HEREINAFTER REFERRED TO AS LD TPO ), DISPUTE RESOLUTION PANEL, KOLKATA (HEREINAFTER REFERRED TO AS L D. PANEL ) AND CONSEQUENTLY THE INCOME TAX OFFICER, WARD 2(2), KOLKATA (HEREINAFTER REFERRED TO LD AO ) HAS ERRED IN MAKING AN ADJUSTMENT OF RS.13,157,697 TO THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE (HEREINAFTER REFERR ED TO AS AE ). 2 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. TPO, LD.PANEL AND CONSEQUENTLY THE LD. AO HAS ERRED BY NOT CONSIDERING THE IMPORTANCE OF FUNCTIONAL COMPARABILI TY WHILE SELECTING THE COMPARAB LES. 3 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE,, THE LD. TPO, LD.PANEL AND CONSEQUENTLY THE LD. AO HAS ERRED BY ADOPTING A FAULTY AND NON - STATISTICAL APPROACH FOR REJECTING THE ABNORMALLY HIGH PROFIT MAKING COMPANIES AND BY APPLYING A BAND OF PROFIT LEVEL INDICATOR (PLI) IN TH E RANGE OF 10% TO 50%. 4 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. TPO, LD.PANEL AND CONSEQUENTLY THE LD. AO ERRED IN UNDERTAKING FRESH SEARCH FOR COMPARABILITY ANALYSIS (FY 2006 - 07) AS PER THE SHOW CAUSE NOTICE DATED 04 - 10 - 2010. BY FOL LOWING THE SAID APPROACH THE LD. TPO HIMSELF TRAVELLED BEYOND THE DATE OF COMPLIANCE I.E. ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 2 OCTOBER 31, 2007 RESULTING INTO IMPOSSIBILITY OF PERFORMANCE AND AGAINST THE PREMISE OF MAINTENANCE OF CONTEMPORANEOUS DOCUMENTATION . ACCORDINGLY, THE LD.TPO HAS WR ONGLY PENALIZED THE ASSESSEE WITH THE USE OF SUCH ADDITIONAL INFORMATION AND CONSEQUENTLY CLAIMED THAT THE TP STUDY SUFFERS FROM VARIOUS INFIRMITIES. 5 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. TPO, LD.PANEL AND CONSEQUENTLY THE LD. AO HAS ERRED IN APPLYING THE TURNOVER FILTER WITH A VERY SMALL RANGE OF TURNOVER THEREBY RENDERING THE COMPARATIVE STUDY DEFECTIVE. 6 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE , THE LD. TPO, LD.PANEL AND CONSEQUENTLY THE LD. AO HAS ERRED IN REJECTI NG THE TRANSFER PRICING ANALYSIS OF THE ASSESSEE TO JUSTIFY THE ARM S LENGTH NATURE OF ITS INTERNATIONAL TRANSACTIONS ON THE GROUND THAT THE ASSESSEE HAD USED MULTIPLE YEAR DATA WHILE PERFORMING ITS BENCHMARKING ANALYSIS AND DID NOT GIVE CONSIDERATION TO T HE VOLUME OF SALE. 7 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE,, THE LD. TPO, LD.PANEL AND CONSEQUENTLY THE LD. AO HAS ERRED BY DETERMINING THE ARM S LENGTH MARK - UP BASED ON THE DATA FOR FINANCIAL YEAR 2006 - 2007 TO THE EXCLUSION OF PRIOR YEAR DA TE [AS CONTEMPLATED UNDER RULE 10B (4) OF THE RULES]. 8 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. TPO, LD.PANEL AND CONSEQUENTLY THE LD. AO HELD THAT PROVISO TO SECTION 92C(2) OF THE ACT (AS PER FINANCE ACT 2001) IS NOT APPLICABLE TO THE ASSESSEE, INSTEAD PROVISO TO SECTION 92C (2) OF THE ACT (AS PER FINANCE ACT 2009) IS APPLICABLE TO THE CASE OF THE ASSESSEE AND FURTHER, ERRED IN NOT PROVIDING BENEFIT OF 5% TOLERANCE IN DETERMINING THE ARM S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH THE AE. 9 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. TPO, LD.PANEL FAILED TO ADHERE TO THE PRINCIPLES OF NATURAL JUSTICE BY NOT ADDRESSING TO THE SUBMISSION OF THE ASSESSEE AND HAD CONDUCTED THE PROCEEDINGS ON A COMPLE TE MISUNDERSTANDING AND WRONG INTERPRETATION OF THE FACTS. 10 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO HAS ERRED IN DEDUCTING RS.39,451/ - FROM THE EXPORT TURNOVER AS EXPENSES IN FOREIGN CURRENCY, ALTHOUGH, THE EXPENSES HAD NOT BEEN I NCURRED IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA. 11 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO HAS ERRED IN DEDUCTING RS.14839/ - AS OVERSEAS INSURANCE EXPENSES, ALTHOUGH, NOT ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR TH INGS OR COMPUTER SOFTWARE OUTSIDE INDIA. 12 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO HAS ERRED IN DISALLOWING THE EXEMPTION UNDER S ECTION 10A AND 10B TOTALING TO R S.4,54,183/ - , BY DEDUCTING EXPENSES AMOUNTING TO RS.48,84,548/ - , FROM THE EXPORT TURNOVER WHICH WERE INCURRED ON ACCOUNT OF EXPENSES IN FOREIGN CURRENCY, BANDWIDTH AND CONNECTIVITY CHARGES, OVERSEAS INSURANCE AND WORLD INTERNER CHARGES (VONNAGE)ISD LEASE LINE. 13 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO HAS ERRED BY DEDUCTING THE RELEVANT EXPENSES FROM THE EXPORT TURNOVER ONLY AND NOT FROM THE TOTAL TURNOVER OF THE ASSESSEE. 14 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO HAS ERRED IN DISREGARDING THE PRINCIPLE OF ERSTWHILE SECTION 80HHC IN SECTION 10A AND 10B CASE. 15 . THAT THE ASSESSEE CRAVES LEAVE TO ADD TO AND TO ALTER, AMEND, RESCIND OR MODIFY THE GROUNDS RAISED HEREINABOVE BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 3 3. THE ASSESSEE IS A 99.99% SUBSIDIARY OF ACCLARIS INC. AND WAS INCORPORATED ON 6 TH JUNE, 2003. THE ASSESSEE PROVI DES BACK OFFICE P ROCESSING SERVICES (BPO) TO ACCLARIS INC., AS A CAPTIVE SERVICE PROVIDER IN RELATION TO SOME OF ACCLARIS INC S CLIENTS. THE BPO SERVICES INCLUDE VARIOUS TYPES OF SERVICES INCL UDING RECRUITMENT SERVICES, FINANCIAL SERVICES AND ROUTINE BACK OFFICE SERVICES LIKE INDEXING AND ENROLLMENT FOR CLIENTS. THE ASSESSEE WORKS AS AN IT ENABLED BACK OFFICE SERVICES PROVIDER WHICH PROVIDES BACK OFFICE SERVICES TO THE CLIENT. THE ASSESSEE DOES NOT OWN ANY INTANGIBLE S INTEREST IN THE IN TANGIBLES OWNED BY ACCLARIS INC. AND IS ONLY A SERVICE PROVIDER. ACCLARIS INC., ON THE OTHER HAND, PROVIDES A RANGE OF BPO SERVICES TO ITS CLIENTS WITH SIGNIFICANT EXPERIENCE IN MANAGING PEOPLE, PROCESS AND TECHNO LOGY, ACCLARIS INC. OWNS THE INTELLECTUAL PROPERTY RIGHTS (KNOW - HOW COPYRIGH TS ETC.) AND OTHER COMMERCIAL AND MARKETING INTANGIBLES (BRAND NAMES, TRADE MARKS ETC.) AND IS INVOLVED IN COMPLEX OPERATIONS OF DEVELOPING PROPRIETARY TECHNOLOGIES AND MARKETING O F THE SAME. ACCLARIS INC. ALSO BEARS ALL THE SIGNIFICANT BUSINESS AND ENTREPRENEURIAL RISKS OF PRODUCT ACCEPTABILITY AND PERFORMANCE IN THE MARKET. THE ASSESSEE IS ENTITLED TO SEEK COMPENSATION APPROPRIATE TO THE FUNCTIONAL PERFORMANCE AND CAPITAL EMPLOYED IN THE BUSINESS. 3.1. DURING THE ASSESSMENT YR. 2007 - 08 , THE ASSESSEE FILED ITS RETURN OF INCOME , DECLARING A TAXABLE INCOME OF RS.1,08,583/ - , ON 16.01.2007. THE RETURN WAS DULY PROCESSED U/S 143(1) OF THE ACT AND THE CASE WAS SELECTED FOR SCRUTINY FOR A SSESSMENT BY ISSUING NOTICE U/S 143(2) OF THE ACT AND SECTION 142(1) OF THE ACT. AS THE ASSESSE HAD MADE INTERNATIONAL TRANSACTIONS DURING THE YEAR WITH ITS AE, REFERENCE U/S 92CA OF THE ACT WAS MADE BY THE AO TO THE TPO ON 7 TH OCTO BER, 2009. THE ASSESSEE IN ITS F ORM NO .3CEB DECLARED THE FOLLOWING INTERNATIONAL TRANSACTIONS PARTICULARS AMOUNT (INR) RECEIPTS FOR BPO SERVICES 10.73 CRORES RECOVERY OF EXPENSES INCURRED ON BEHALF OF THE AES 0.12 CRORE RECEIPT OF INTEREST FREE LOAN 0.34 CRORE 3.2. IN THE TP STUDY THE ASSESSEE SELECTED ITSELF AS A TESTED PARTY AND ITS PROFITABILITY (OPERATI NG PROFIT/TOTAL COST) WAS BENCH MARKED BY TRANSACTIONAL NET MARGIN METHOD. ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 4 (TNMM). ACCORDING TO THE ASSESSEE, IT HAD EARNED A PROFIT OF 15.02% FOR THE RELEVANT ASSESSMENT YEAR AND AS PER THE 14 COMPARABLES SELECTED BY THE ASSESSEE WITH TP STUDY , THE AVERAGE MARGIN DETERMINED WAS 11.28%. THEREFORE , IT WAS THE CASE OF THE ASSESSEE THAT INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE WERE AT ARMS LENGTH. THE TPO VIDE ITS ORDER DATED 29 TH OCTOBER, 2010 U/S 92CA(3) OF THE ACT , MADE AN UPWARD ADJUSTMENT OF RS.1,31,57,697/ - T O THE INTERNATIONAL TRANSACTION OF THE ASSES S EE WITH RESPECT TO RENDERING OF SERVICES TO AE. THE TPO ACCEPTED ALL OTHER INTERNATIONAL TRA NSACTIONS OF THE ASSESSEE WITH ITS AE , TO BE AT ARMS LENGTH. 3.3. THE TPO HAD REJECTED THE COMPARABLES CHOSEN BY THE ASSESSEE AND SELECTED THE COMPARABLES BY APPLYING THE FOLLOWING FILTERS : ( I ) ALL COMPANIES HAVING ACCOUNT OF THE YEAR 2006 - 07 ( II ) COMPANY ENGAGE D IN IT ENABLED SERVICES ( III ) SALES BETWEEN RS.5.0 CRORES TO RS.15 CRORES. ( IV ) OPERATING PROFIT MORE THAN ZERO, SO AS TO EXCLUDE THE LOSS MAKING COMPANIES. 3.4. SOME OF THE COMPARABLES HAVING RELATED PARTY TRANSACTIONS AS A PERCENTAGE OF SALES OF MORE THAN 10% WER E REJECTED. THEREAFTER THE TPO CHOSE A BAND OF PROFIT LEVEL I NDICATOR (P LI) WITH THE RANGE OF 10 - 50% TO BE APPLICABLE TO THE BUSINESS OF THE ASSESSEE AND FINALLY PROCEEDED TO BENCH MARK THE INTERNATIONAL TRANSACTION BY SELECTING THE FOLLOWING FIVE COMPARAB LES : SL.NO. NAME OF THE COMPANY OP/TC FINAL OP/TC 1 . GALAXY COMMERCIALS LTD. 23.53% 23.53 2 . ICRA ONLINE LTD. 30.35% 30.35% 3 . MAPLE ESOLUTIONS LTD. 34.92% 3 4.92% 4 . PROFESSIONAL MANAGEMENT CONSULTANTS PVT. LTD. 13.59% 13.59% 5 . INDUSIND INFORMATION TECHNOL OGY LTD. 43.22 % 43.22 % AVERAGE 29.12% 3.5. THE TPO ON THE BASIS OF THE AFORESAID COMPARISON CALCULATED THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE FOR RENDERING SERVICES TO ITS AE FOR ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 5 BPO SERVICES TO BE AT RS.12,04,93,962 INSTEA D OF RS.10,73,26 ,265 DECLARED BY THE ASSESSEE. THUS T HE UPWARD ADJUSTMENT MADE WAS RS.1,31,57,697. 3.6. AO RELIED UPON THE TPO S ORDER AND PASSE D A D RAF T ASSESSMENT ORDER BY MAKING TRANSFER PRICE ADJUSTMENT OF R S.1,31,57,697/ - . THE SECOND ADDITION MADE BY AO WAS WITH RESPECT TO DISALLOWANCE OF EXEMPTION U/S 1 0A AND 10B OF THE ACT TOTALING TO R S.4,54,183/ - BY D EDUCTING EXPENSES AMOUNTING TO R S.48,84,548/ - WHICH WAS INCURRED ON ACCOUNT OF EXPENSES IN FOREIGN CURRENCY AND CONNECTIVITY CHARGES, OVERSEAS INS URANCE AND WORLD INTERNET CHARGES (VONNAGE) ISD LEASE LINE. WITH RESPECT TO THE TRANSFER PRICING ADDITION MADE, THE ASSESSEE HAD RAISED GROUNDS NO.1 TO 9 . HOWEVER DURING THE COURSE OF HEARING, THE LD. SR.COUNSEL APPEARING ON BEHALF OF THE ASSESSEE LIMIT ED HIS SUBMISSIONS TO ONLY FOLLOWING TWO ARGUMENTS. FIRST, OUT OF THE FIVE COMPARABLES SELECTED BY THE TPO , TWO COMPARABLES NAMELY MAPLE ESOLUTIONS LTD. AND INDUSIND INFORMATION TECHNOLOGY LTD. WERE H AVING DIFFERENT FUNCTIONAL PROFILE AND CANNOT BE COMPAR ED WITH THE ASSESSEE. THE OBJECTION REGARDING THE SAME IS TAKEN IN GROUND NO.2. S ECONDLY, THE TWO OTHER COMPARABLES NAMELY GALAXY COMMERCIALS LTD. AND ICRA ONLINE LTD. WERE OF A VERY HIGH PROFIT MARGIN OF 23.53% AND 30.35% AND SHOULD BE EXCLUDED. THE AFORE SAID OBJECTIONS ARE REFERRED TO IN GROUNDS 2 AND 3. THE LD. SR. COUNSEL SUBMITS IF THESE COMPARABLES ARE EXCLUDED, THE ASSESSEE S INTERNATIONAL TRANSACTIONS WOULD BE AT ARM LENGTH AND NO UPWARD REVISIONS WOULD BE REQUIRED. 4. THE LD. DR, ON THE OTHER HAND , SUBMITS THAT FUNCTIONAL ANALYSIS AND PROFITABILITY OF THE COMPARABLES , OBJECTED TO BY THE ASSESSEE , ARE HIGHLY TECHNICAL IN NATURE AND THE MATTER SHOULD BE REMANDED TO THE FILE OF THE AO. 5. AS REGARDS THE FUNCTIONAL C OMPARABILITY OF ONE OF THE COMPARABLES I.E. MAPLE E - SOLUTIONS LTD ., THE LD. AR HAS SUBMITTED THAT THE TPO DID NOT DIFFERENTIATE BETWEEN VOICE - BASED AND NON - VOICE BASED BPO UNITS. THE CASE OF THE ASSESSEE IS THAT THE ASSESSEE BEING A NON VOICE D BASED BPO COMPANY CANNOT BE COMPAR ED TO VOICE BASED COMPANIES WHILE APPLYING THE TNMM METHOD. ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 6 6. WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. WE ARE IN AGREEMENT WITH THE SUBMISSIONS MADE BY THE ASSESSEE THAT THE AFORESAID COMPARABLES I.E. MAPLE ESOL UTIONS LTD. CANNOT BE SELECTED FOR THE PURPOSE OF BENCHMARKING IN THE CASE OF THE ASSESSEE WHILE APPLYING TNMM METHOD. . THE TPO FAILED TO APPRECIATE THAT THE AFORESAID COMPARABLE COMPANY AND THE ASSESSEE ARE ENGAGED IN DIFFERENT BUSINESS ES ALTOGETHER . AS T HE BUSINESS MODEL OF VOICE BASED COMPANIE S IS OF TOTALLY DIFFERENT NATURE THAN THAT OF NON VOICE BASED COMPANIES, WE HAVE NO OPTION BUT TO EXCLUDE THE COMPARAB LE MAPLE E - SOLUTION S LTD. FOR THE PURPOSE OF BENCH MARKING . . IT IS PERTINENT TO MENTION HERE THAT THE AFORESAID COMPARABLE COMPANY WAS ALSO INVOLVED IN FRAUD AND THE BUSINESS REPUTATION CAME UNDER SERIOUS INDICTMENT . FOR THIS REASON ALSO THE COMPARABLE MUST BE EXCLUDED. 6.1. IT SHALL BE APPOSITE TO REFER TO JUDICIAL PRECEDENTS ON THE AFORESAID IS SUE TO FORTIFY OUR REASON S TO EXCLUDE THE COMPARABLE STATED ABOVE. IN THE CASE OF PENTAIR WAT ER INDIA (P) LTD VS ACIT (2014) 47 TAXMANN.COM 132 (PANAJI) , THE ITAT PANAJI BENCH HAS HELD AS UNDER : - MAPLE SOLUTIONS LTD : - WHILE DECIDING THE APPEAL OF THE A SSESSEE FOR A.Y.2006 - 07 IN ITA NOS.2&5/PNJ/2013, THIS TRIBUNAL HAS EXCLUDED THIS COMPANY OUT OF THE COMPARABLES BY HOLDING AS UNDER VIDE ITS ORDER DT.17.4.2014 : MAPLE ESOLUTIONS LTD. : TPO HAS CONSIDERED MAPLE ESOLUTIONS LTD. AS A COMPAR ABLE AND COMPUTED THE MARGIN IN RESPECT OF THIS COMPANY @33.66%. WE NOTED THAT THE HON BLE DELHI TRIBUNAL IN THE CASE OF ACIT VS CRM SERVICES INDIA PVT. LTD., 14 TAXMANN. COM 96 HAS HELD THAT THIS COMPANY COULD NOT BE SELECTED AS COMPARABLE FOR ITES COMPANIES AS THE MANAGEM ENT OF THIS COMPANY WAS TAINTED ONE AS THE DIRECTORS OF THE COMPANY WERE INVOLVED IN A FRAUD. THE BUSINESS REPUTATION OF THE RASTOGI GROUP WHICH OWNS MAPLE ESOLUTIONS WAS IN SERIOUS INDICTMENT. IN VIEW OF THE QUESTION MARK ON THE REPUTATION OF ITS OWNERS, ALBEIT FOR EARLIER YEARS, IT WOULD BE UNSAFE TO TAKE THEIR RESULTS FOR COMPARISON OF PROFITABILITY OF THE ASSESSEE. IN A.Y. 2006 - 07 WE NOTED THAT THE PROFIT MARGIN HAS BEEN TAKEN BY THE TPO AT 28.75%. WHEN THE ASSESSEE WENT IN APPEAL BEFORE CIT(A), CIT(A) HAS EXCLUDED THIS COMPANY FOR THE PURPOSE OF COMPARISON. NO CO GENT MATERIAL OR EVIDENCE WAS BROUGHT TO OUR KNOWLEDGE BY THE LD.DRHOW THIS COMPANY IS NOT TAINTED ONE. THE DECISION OF THE CO - ORDINATE BENCH IS BINDING ON US. WE, THEREFORE, RESPECTFULLY FOLL OWING THE DECISION OF THE CO - ORDINATE BENCH EXCLUDE THIS COMPANY FROM THE COMPARABLES. ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 7 6.2. THE ITAT DELHI BENCH HAD THE OCCASION TO APPRECIATE THE DIFFERENCE BETWEEN BUSINESS MODEL OF VOICE BASED AND NON VOICE BASED COMPANIES IN ITO VS CRM SERVICES INDI A (P) LTD IN ITA NO.4069/DEL/2009. THE TRIBUNAL HELD AS UNDER : - COMING TO THE INCLUSION OF SIX MORE COMPARABLE CASES, IT WAS SUBMITTED THAT THESE CASES, NAMELY, C.S.SOFTWARE ENTERPRISES LTD., CARBORUNDUM UNIVERSAL LTD., MUKAND ENGINEERS LTD., TRICOM INDI A LTD., ULTRAMARINE AND PIGMENT LTD AND TATA SERVICES WERE INCLUDED AS COMPARABLES AS THESE COMPANIES WERE ENGAGED IN ITES ACTIVITIES. WHILE DOING SO, THE TPO DID NOT DIFFERENTIATE BETWEEN VOICE BASED AND NON - VOICE BASED BPO UNITS ON THE GROUND, INTER - ALIA THAT SUCH A CLASSIFICATION HAS NOT BEEN DEMONSTRATED AND IN ANY CASE TNMM IRONS OUT DIFFERENCE IN FUNCTIONS. IT WAS FURTHER SUBMITTED THAT THE FUNCTIONS PERFORMED WERE CRUCIALLY DIFFERENT. IT WAS ALSO SUBMITTED THAT THE FINDING TO THE FACT THAT THE ASSESS EE WAS ALSO PERFORMING NON - VOICE BASED SERVICES IS NOT CORRECT AS IT IS BASED ON THE FUNCTIONS PERFORMED BY TP USA. IT WAS ALSO SUBMITTED THAT THE ASSESSEE WAS A START - UP COMPANY WITH THIS YEAR BEING THE FIRST YEAR OF FULL OPERATIONS WHILE THE COMPANIES ID ENTIFIED WERE OLD AND ESTABLISHED COMPANIES. THEY WERE PERFORMING DIFFERENT FUNCTIONS. THE POINTS OF DIVERGENCE HAVE BEEN TABULATED BY THE LD.CIT(APPEALS) ON PAGE NOS. 40 AND 41. COMING TO THE REJECTION OF SIX COMPARABLES CHOSEN BY THE TPO, OUR ATTENTI ON HAS BEEN DRAWN TOWARDS THE FINDINGS OF THE LD. CIT(A) THAT FOR THE PURPOSE OF COMPARABILITY BETWEEN THE TESTED PARTY AND THE UNCONTROLLED PARTY, THE NATURE AND LINE OF BUSINESS, PRODUCT OR SERVICE MARKET, THE SIZE AND SCOPE OF OPERATION AND THE STAGE OF BUSINESS ARE REQUIRED TO BE SEEN. FROM THE SUBMISSIONS MADE BY THE ASSESSEE AND THE PERUSAL OF ANNUAL REPORT, IT IS FOUND THAT THE COMPARABLES TAKEN BY THE TPO ARE ENGAGED IN TOTALLY DIFFERENT BUSINESSES. THE DETAILS HAVE BEEN MENTIONED IN A TABULAR FORM ON PAGE NOS.47 AND 48 OF THE IMPUGNED ORDER. THE TABLE IS REPRODUCED BELOW : - SL.NO. NAME NATURE OF BUSINESS REMARKS 1. C.S.SOFTWARE ENT ERPRISES LTD. SOFTWARE DEVELOPMENT NOT ENGAGED IN VOICE BASED CALL CENTRE SERVICE, HENCE REJECTED 2. CARBORUNDUM UNIVE RSAL LTD. MANUFACTURER OF COATED AND BONDED ABRASIVE - DO - 3. MUKAND ENGINEERS MAINLY INTO STEEL - DO - 4. TRICOM INDIA LTD. NON - VOICE BASED BPO AS PART OF THE BUSINESS - DO - 5. ULTRAMARINE & PIGMENTS LTD. NON - VOICE BASED BPO AS PART OF THE BUSINESS - DO - 6 . TATA SERVICES TATA MANAGEMENT TRAINING CENTER AND OTHER SERVICES TO TATA GROUP COMPANIES - DO - 9.3. WHEN WE EXAMINE THE FACTS OF THE CASE IN THE LIGHT OF AFORESAID CONCLUSION, IT IS SEEN THAT NONE OF THE COMPARABLES SELECTED BY THE TPO IS SHOWN TO HAVE THE SAME ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 8 BUSINESS OF VOICE BASED BPO AS IN THE CASE OF THE ASSESSEE. C.S.SOFTWARE ENTERPRISES LTD. IS CONDUCTING THE BUSINESS OF SOFTWARE. CARBORUNDUM UNIVERSAL LTD., IS MAINLY IN THE LINE OF MANUFACTURE OF COATED AND BONDED ABRASIVE. THE MAIN BUSINESS OF MUKAND ENGINEERS LTD. IS PRODUCTION OF STEEL. TRICOM INDIA, APART FROM OTHER BUSINESSES IS ALSO CARRYING ON THE BUSINESS OF NON - VOICE BASED BPO. SUCH IS ALSO THE CASE OF ULTRAMARINE & PIGMENTS LTD. WE HAVE ALREADY MENTIONED ABOUT THE BUSINESS OF TATA SERV ICES LTD. ALL THESE COMPANIES HAVE BEEN CARRYING ON THEIR MAIN BUSINESSES FOR A LONG PERIOD. THE BUSINESS MODELS ARE NOT COMPARABLE. THEREFORE, WE DO NOT FIND ANY REASON TO DISTURB THE ORDER OF THE LD. CIT(A)IN THIS MATTER. IN VIEW OF THE REASONS STATED ABOVE AND JUDGMENTS REFERRED TO ABOVE, WE HAVE NO HESITATION TO EXCLUDE THE COMPARABL E I.E. MAPLE E - SOLUTIONS FROM THE LIST OF COMPARABLES CHOSEN BY THE TPO. 6.3. AS REGARDS INDUSIND INFORMATION TECHNOLOGICAL LIMITED , IT IS THE CASE OF THE ASSESSEE THAT T HE BUSINESS MODEL OF THE COMPARABLE CHOSEN BY THE TPO IS THAT OF SOFTWARE DEVELOPMENT UNLIKE THAT OF THE ASSESSEE COMPANY WHICH IS ENGAGED IN THE BUSINESS OF BPO SERVICES . 6.4. AFTER CONSIDERING THE SU BMISSIONS MADE BY THE PARTIES AND THE JUDGMENTS R ELIED UP ON, WE ARE IN AGREEMENT WITH THE AVERMENTS MADE BY THE LD SR. C OUNSEL FOR THE ASSESSEE THAT THE AFORES AID COMPARABLE MAY BE EXCLUDED FOR THE PUR POSE OF BENCHMARKING THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSES SEE. THE SOFTWARE DEVELOPMENT COMPANY HAS A C OMPLETELY DIFFERENT FUNCTIONAL PROFILE AS COMPARED TO A COMPANY ENGAGED IN BPO SERVICES. THE RISK UNDERTAKEN AND THE ASSET S EMPLOYED BY A SOFTWARE DEVELOPMENT COMPANY CANNOT BE COMPARED TO A BPO COMPANY. 6.5. A S IMILAR ISSUE AROSE FOR CONSIDERATION BEFORE THE ITAT CHENNAI BENCH IN THE CASE OF S.R.A.SYSTEMS LTD. VS ACIT (2014) 147 ITD 353 WHEREIN THE TRIBUNAL HAS HELD AS UNDER : - 7. WE CONSIDERED THIS ISSUE IN DETAIL. IT IS THE CASE OF THE ASSESSEE BEFORE T HE LOWER AUTHORITIES THAT THE TURNOVER OF THE ASSESSEE FOR THE PAST FIVE YEARS AVERAGED TO RS.25 CRORES AND THEREFORE ITS TURNOVER BASE FOR THE PURPOSE OF ARRIVING AT COMPARABLES SHOULD BE TAKEN IN THE RANGE OF RS.15 TO 25 CRORES AFTER ELIMINATING RELATED PARTY TRANSACTIONS. ON THE ABOVE BASIS, THE ASSESSEE STAGTED THAT THE PLI CAME TO 2.53% AS AGAINST THE PLI REPORTED BY THE ASSESSEE AT 3.33%. EVEN WHEN THE TURNOVER CRITERION IS ADOPTED AT RS.50 ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 9 CRORES, THE PLI CAME TO 3.18%, WHICH IS MUCH HIGHER THAN THE PLI CRITERION OF 2.53%. IT WAS THE CONTENTION OF THE ASSESSEE THAT THE BUSINESS MODEL OF THE ASSESSEE IS BASED MORE ON TURNKEY PROJECTS, WHERE COST OVERRUNS WERE BORNE BY THE ASSESSEE THAT ACTUAL BENCH COSTS WERE MUCH MORE THAN THAT ESTIMATED BY THE ASSESS EE, THAT THE ASSESSEE HAD TO INCUR CONSIDERABLE EXPENDITURE ON RESEARCH AND DEVELOPMENT AND THAT THE ASSESSEE S FINANCIALS SHOULD BE COMPARED TO SOFTWARE DEVELOPMENT COMPANIES AND NOT WITH COMPANIES IN THE AREA OF BPO, KPO ETC. 8. IT IS SEEN THAT IT IS AGA INST THE ABOVE OBJECTIONS RAISED BY THE ASSESSEE THAT THE TPO HAS WORKED OUT THE PLI AT 25.44% AS AGAINST THE PLI AT 3.5%, RESULTING AN UPWARD ADJUSTMENT OF RS.4,33,80,146/ - . THERE IS NO JUSTIFICATION ON THE PART OF THE TPO TO COMPARE THE FINANCIALS OF THE ASSESSEE - COMPANY TO THOSE3 OF BPO AND KPO COMPANIES. THE FINANCIALS OF THE ASSESSEE SHOULD BE COMPARED ONLY WITH SOFTWARE DEVELOPMENT COMPANIES. WHEN A GENERAL COMPARISON IS MADE, HUGE EXPENDITURE INCURRED ON RESEARCH AND DEVELOPMENT SHOULD BE CONSIDERED . IT IS ALSO TO BE SEEN THAT THE BUSINESS MODEL OF THE ASSESSEE WAS BASED MORE ON TURNKEY PROJECTS, IN WHICH CASE COST OVERRUNS WOULD HAVE TO BE BORNE BY THE ASSESSEE - COMPANY. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE NOT IN A POSITION TO ACCEPT THE PLI AT 25.44% DETERMINED BY THE TPO ON THE RATIO OF OPERATING PROFIT TO OPERATING COST. THIS AGAINST THE PLI RETURNED BY THE ASSESSEE COMPANY AT 3.5%. THEREFORE, WE DO NOT APPROVE THE UPWARD ADJUSTMENT OF RS.4,33,80,146/ - MADE BY THE ASSESSING OFFICER TO ITS FULL EXTENT. ON SAME SET OF FACTS, THE ISSUE OF ALP DETERMINATION WAS CONSIDERED BY DISPUTE RESOLUTION PANEL AT CHENNAI IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2008 - 09. IN THEIR DIRECTION DATED 4 - 6 - 2012 ISSUED UNDER SECTION 144C(5), THE PANEL HAS DIRECTED THE ASSESSING OFFICER TO ADOPT THE PLI AT 13.35% AS AGAINST THE PLI OF 21.86% ADOPTED IN THE ASSESSMENT. THIS SHOWS THAT THE UPWARD ADJUSTMENT MADE IN THE IMPUGNED ASSESSMENT IS QUITE ARBITRARY. 6.6. IN THE CASE OF ACIT VS M/S.MAE RSK G LOBAL SERVICE CENTERS (INDIA)PVT.LTD. IN ITA NO.3774/MUM/2011 VIDE ORDER DATED 09.11.2011 THE ITAT MUMBAI BENCH HAS HELD AS UNDER : - 30. THE ASSESSEE IN ITS TRANSFER PRICING STUDY CONSIDERED TRANSACTIONAL NET MARGIN METHOD (HEREINAFTER CALLED TNMM ) AS T HE MOST APPROPRIATE METHOD WITH NCP MARGIN AS THE PROFIT LEVEL INDICATOR TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS WITH AES. THE ASSESSEE CONDUCTED ANALYSIS FOR DETERMINING THE ALP OF INTERNATIONAL TRANSACTIONS PERTAINING TO THE PROVISIONS OF BACK OFFICE SUPPORT SERVICES. BASED ON DATA AVAILABLE, THE WEIGHTED AVERAGE ARITHMETICAL MEAN OF NCP MARGINS EARNED BY THE COMPARABLE INDEPENDENT COMPANIES PERFORMING SIMILAR FUNCTIONS, WAS DETERMINED AT 7.62%. AS THE ASSESSEE EARNED NCP OF 7.90% FROM ITS INTERNATION AL TRANSACTIONS, IT WAS CONCLUDED THAT SUCH TRANSACTIONS WITH AES WERE AT ALP. THE ASSESSING OFFICER MADE REFERENCE TO TPO FOR COMPUTATION OF ALP IN RESPECT OF INTERNATIONAL T RANSACTIONS. THE TPO, VIDE HIS ORDER DATED 31.10.2008, COMPUTED THE A DJUSTMENTS T O THE ALP AMOUNTING TO RS.10,49,07,225. IN SUCH COMPUTATION THE TPO NOTED IN PARA 4 OF HIS ORDER THAT NO COMPANIES WERE IDENTIFIED AS COMPARABLES . HE SELECTED TWELVE COMPANIES AS COMPARABLE WITH THE ASSESSEE S INTERNATIONAL TRANSACTIONS, DEPICTING THE NC PS AS UNDER: - TABLE B SR.NO. COMPARABLE COMPANIES OP/T % 1. ALLSEC TECHNOLOGIES LIMITED 30.49 2. TULSYAN TECHNOLOGIES LTD. (COSMIC GLOBAL) 19.08 ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 10 3. SAFFRON GLOBAL 24.89 4. WIPRO BPO SOLUTIONS LTD. 27.60 5. VISHAL INFORMATION TEC HNOLOGIES LTD. 45.65 6. ACE SOFTWARE EXPORTS LTD. 15.46 7. NUCLEUS NETSOFT & GIS INDIA LTD. 40.60 8. ASIAN CERC INFORMATION TECHNOLOGY LTD. 37.40 9. AIRLINE FINANCIAL SUPPORT SERVICES (I) LTD. (SEG) 26.54 10. GOLDSTONE TELESERVICES LTD . (SEG) 15.95 11 TRANSWORKS INFORMATION SERVICES LTD. 2.87 12 CEPHA IMAGING PVT. LTD. 47.70 MEAN 27.80 48. INSOFAR AS THE CASES OF TULSYAN TECHNOLOGIES LIMITED AND VISHAL INFORMATION TECHNOLOGIES LIMITED ARE CONCERNED, IT IS NOTICE D FROM THEIR ANNUAL ACCOUNTS THAT THESE COMPANIES OUTSOURCED A CONSIDERABLE PORTION OF THEIR BUSINESS. AS THE ASSESSEE CARRIED OUT ENTIRE OPERATIONS BY ITSELF, IN OUR CONSIDERED OPINION, THESE TWO CASES WERE RIGHTLY EXCLUDED. COMING TO THE CASES OF CEPHA I MAGING PRIVATE LIMITED AND ASIAN CERC INFORMATION TECHNOLOGY LTD. (SEG.), WE FIND THAT THESE COMPANIES ARE ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES AS IS EVIDENT FROM THEIR ANNUAL REPORTS AVAILABLE ON PAGES 52 ONWARDS AND 64 ONWARDS OF THE PAPER BOOK. THUS THESE COMPANIES BECOME FUNCTIONALLY DIFFERENT. INSOFAR AS WIPRO BPO SOLUTIONS LIMITED IS CONCERNED, WE FIND THAT THEIR TURNOVER IS ELEVEN TIMES GREATER THAN THAT OF THE ASSESSEE. THIS COMPANY HAVING SUCH A HIGH BRAND VALUE ALONG WITH MUCH HIGHER TURNOVER, IN OUR CONSIDERED OPINION, HAS BEEN RIGHTLY EXCLUDED BY THE LD. CIT(A). THE LAST CASE BEING THAT OF AIRLINE FINANCIAL SUPPORT SERVICES (I) LTD. HAS 31.76% OF THE TOTAL SERVICE FEES RECEIVED FROM THE CONTROLLED TRANSACTIONS WITH THE RELATED PARTI ES. THIS FACT IS EVIDENT FROM PAGES 62 OF THE PAPER BOOK, WHICH MAKES IT INCOMPARABLE WITH THE ASSESSEE. 6.7. IN ACIT VS M/S. HAPAG LLOYD GLOBAL SERVICES PRIVATE LIMITED IN ITA NO.8499/MUM/2010 VIDE ORDER DATED 28.02.2013 SIMILAR ISSUE AROSE WHEREIN ITAT , MUMBAI BENCH HAS HELD AS UNDER : - 4.1. THE TPO OBSERVED THAT THIS COMPANY WAS IN ITES BOTH AS PER BOARD S NOTIFICATION AND ALSO D&B WEBSITES. AS THE ASSESSEE HAD NOT CONSIDERED THIS CASE, THE TPO HELD IT AS COMPARABLE AND INCLUDED IT IN THE LIST OF COMP ARABLES. THE ASSESSEE CONTENDED BEFORE THE LEARNED CIT(A) THAT THE SAID COMPANY WAS FUNCTIONALLY INCOMPARABLE AS IT WAS MAINLY ENGAGED IN SOFTWARE AND APPLICATION DEVELOPMENT. THE LEARNED CIT(A) CONSIDERED THE ANNUAL REPORT OF THIS COMPANY AND OBSERVED THA T IT REFERRED MAINLY TO THE INCOME FROM EXPORT SALES OF SOFTWARE AS AGAINST THE ASSESSEE S BUSINESS OF ITES. ACCORDINGLY THIS CASE WAS EXCLUDED FROM THE LIST OF COMPARABLES. 4.2. THE LD. AR MAINLY RELIED ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V.MEARSK GLOBAL SERVICE CENTRES (INDIA) PRIVATE LIMITED [(2011) 133 ITD 543 (MUM)] TO BRING HOME THE POINT THAT THE CASE OF CEPHA IMAGING PRIVATE LIMITED SHOULD BE EXCLUDED AS THE SAME HAS BEEN HELD BY THE TRIBUNAL IN THAT CASE AS INCOM PARABLE. 4.4. ADVERTING TO THE FACTS OF THE INSTANT CASE WE FIND THAT THE ASSESSEE IN MEARSK GLOBAL SERVICE CENTRES (INDIA)PRIVATE LIMITED (SUPRA) WAS A SERVICE PROVIDER RENDERING BACK OFFICE SUPPORT SERVICE TO ITS ASSOCIATED ENTERPRISES (AES). IN PARA 2 9 OF THIS ORDER, IT HAS BEEN RECORDED BY THE TRIBUN AL THAT THE ACTIVITIES UNDERTAK EN BY THE ASSESSEE WERE ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 11 ESSENTIALLY ITES, SUCH AS, DATA ENTRY, TRANSCRIPTION AND DATA OF SHIPPING DOCUMENTS SUCH AS BILL OF LEADING ETC. THE INSTANT ASSESSEE BEFORE US IS ALS O IN THE SAME LINE OF BUSINESS PROVIDING SIMILAR SERVICES AS WERE RENDERED IN THE CASE OF MEARSK GLOBAL SERVICE CENTRES (INDIA)PRIVATE LIMITED (SUPRA). FURTHER THE A.Y. IN BOTH THE CASES IS ALSO SIMILAR, THAT IS, 2005 - 2006. IN THAT CASE ALSO, THE TPO INTRO DUCED CEPHA IMAGING PRIVATE LIMITED AS COMPARABLE. HOWEVER, THE TRIBUNAL VIDE PARA 48 OF ITS ORDER OBSERVED THAT THIS COMPANY IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICE AS ITS EVIDENT FROM THEIR ANNUAL REPORT AVAILABLE ON PAGES 52 ONWARDS AND 64 ONWARDS OF THE PAPER BOOK. WE FIND THAT THE FINDING RECORDED BY THE LEARNED CIT(A) IN THE IMPUGNED ORDER THAT CEPHA IMAGING PRIVATE LIMITED WAS MAINLY ENGAGED IN EXPORT OF SOFTWARE TALLIES WITH THAT RECORDED BY THE TRIBUNAL IN THE CASE OF MAERSK. AS THE ASSESSEE IS ENGAGED IN ITES, ANY COMPANY ENGAGED IN EXPORTING SOFTWARE, CANNOT BE CONSIDERED AS COMPARABLE. WE, THEREFORE, HOLD THAT THIS CASE WAS RIGHTLY EXCLUDED BY THE LEARNED CIT(A). 6.8. IN VIEW THEREOF, THE AFORESAID COMPA RABLE I.E. INDUSIND INFOR MATION TECHNOLOGY IS EXCLUDED FOR THE PURPOSE OF BENCH MARKING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. ACCORDINGLY GROUND NO.2 RAISED BY THE ASSESSEE IS ALLOWED. 7. AS FAR AS THE SECOND LIMB OF THE ARGUMENTS OF THE LD. SR.COUNSEL FOR THE ASSESSEE IS CONCERNED, IT IS CONTENDED THAT THE TWO COMPARABLES OUT OF THE FIVE COMPARABLES CHOSEN NAMELY GALAXY COMMERCIAL LTD. AND ICRA ONLINE LIMITED ARE O F HIGH PROFIT MARGIN (OP/TC) AND THEREFORE SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. THE PROFIT MARGIN DECLARED BY THE ASSESSEE IN ITS TP STUDY IS 15.2% AND THESE TWO COMPARABLES OBJECTED TO BY THE ASSESSEE HAVE A PROFITABILITY OF 23.53% AND 30.35% RESPECTIVELY . 8. BEFORE ADVERTING TO DECIDE THE AFORESAID ISSUE RAISED BY THE ASSESSEE , IT IS PERTINENT TO REFER TO RULE 10B(2) OF IT RULES, 1962 WHICH PROVIDES FOR PARAMETER FOR COMPARING INTERNATIONAL TRANSACTION S WITH UNCONTROLLED TRANSACTION S. R ULE 10B(2) IS EXTRACTED HEREIN BELOW : - 10B (2) : FOR THE PURPOSES OF SUB - RULE (1), THE COM PARABILITY OF AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION] WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EI THER TRANSACTION ; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 12 ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSA CTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND B ENEFITS 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 OPERA TE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. 8 .1. A BARE PERUSAL OF THE AFORESAID RULE GOES TO SHOW THAT THERE IS NO PROHIBITION IN CONSIDERING COMPANIES WITH HIGH PROFIT OR HIGH LOSS ES AS COMPARABLES FOR BENCH MARKING INTERNATIONAL TRANSACTIONS TO THE ARM LENGTH PRICE . HOWEVER, IF THERE ARE SPECIFIC AND PARTICULAR REASONS EVIDENCING ABNORMAL PROFIT S OR LOSS ES MARGIN OF THE COMPARABLE, ONLY THEN THE COMPARABLE CAN BE EXCLUDED. THE BURDEN TO DEMONSTRATE THE SAME IS ON THE ASSESSEE. IN THE PRESENT CASE, NO SUCH PARTICULAR FACTS HAVE BEEN BROUGH T ON RECORD TO SUBSTANTIATE THE REASONS FOR HIGH PROFITABILITY OF THESE COMPARABLES. IN ANY CASE, COMPARABLES CANNOT BE EXCLUDED FOR THE SOLE REASON THAT THEY ARE OF HIGH PROFITABILITY MARGIN. SUCH CASES OF HIGH PROFITABILITY OR LOSSES ONLY INVITE FURTHER SCRUTINY AS TO THE SPECIFIC AND PARTICULAR REASONS DEMONSTRATING ABNORMAL PROFITS/LOSSES. 8.2. EVEN OTHERWISE , THE INDIAN TRANSFER PRICING REGULATIONS DIFFER FROM OECD GUIDELINES AND US TRANSFER PRICING R EGULATIO NS IN THIS RESPECT. THE IND IAN TRANSFER PRICING R EGULATIONS PROVIDE FOR ARITHMETIC MEAN OF THE COMPARABLES FOR DETERMINING ALP OF INTERNATIONAL TRANSACTION S . THE OECD GUIDELINES, ON THE OTHER HAND, HAVE ENUNCIATE D THE PRINCIPLE OF QUARTILE METHOD FOR CALCULATION OF ALP , WHEREIN THE COMPARABLES THAT FALL IN THE EXTREME QUARTILES GET EXCLUDED AND THE MIDDLE QUARTILES ARE CONSIDERED FOR BENCHMARKING THE TRANSACTIONS. THE APPROAC H OF THE TPO BY SELECTING THE B AND OF PLI BETWEEN 10% AND 50% IS COMPLETELY ARBITRARY AND HAS NO BASIS FOR REASONS STATED ABOVE. THE SELECTION OF COMPARABLES BY THE TPO HAS LED TO ARBITRARINESS WHEREIN THE LOSS MAKING COMPANIES ARE EXCLUDED AND COMPARABLES ONLY IN THE RANGE OF 10 % TO 50% ARE SELECTED. THE BENCH MARKING MADE BY THE TPO IS NOT AS PER THE PRINCIPL ES GOVERNING INDIAN TRANSFER PRICING GUIDELINES REGULATIONS OR EVEN THE OECD GUIDELINES . ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 13 8.3. SIMILAR ISSUE AROSE FOR CONSIDERATION BEFORE THE ITAT BANGALORE BENCH IN THE CASE OF TRILOGY E BUSINESS SOFTWARE INDIA PVT. LTD. VS DCIT (2013) 140 ITD 5 40 WHER EIN THE ITAT BANGALORE BENCH HELD AS UNDER : - 30. ALTERNATIVELY IT WAS SUBMITTED THAT THE PROFIT MARGIN OF 60.23 PERCENT WAS ABNORMALLY H IGH AND DESERVES TO BE REJECTED ON TH I S GROUND, AS NOT WITHIN THE PARAMETERS OF COMPARABILITY. IN THIS REGARD , REFERENCE WAS MADE TO THE DECISION OF SPECIAL BENCH OF I TAT CHANDIGARH IN THE CASE OF QUARK SYSTEMS PVT. LTD. (SUPRA) BESIDES SEVERAL OTHER TRIBUNAL DECISIONS LAYING DOWN IDENTICAL PROPOSITION. FURTHER IT WAS SUBMITTED THAT VISUAL SOFT TECHNOLOGIES LTD. MERGED WITH MEGASOFT LTD. W.E.F. 01 . 10.2006. THEREFORE THE BOOK RESULTS IN THE YEAR IN WHICH THE MERGER HAS TAKEN PLACE CANNOT BE TAKEN AS A COMPARABLE. IN THIS REGARD, RELIANCE WAS PLACED ON THE DECISION OF THE MUMBAI BENCH OF THE ITAT IN THE CASE OF EME RSONS & PROCESS MANAGEMENT INDIA PVT. LTD. V. ADDL . CIT 13 TAXMANN.COM 149. 31. THE LEARNED DR RELIED ON THE ORDER OF THE TPO AND THE DRP ON THIS ASPECT. ~ 32. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FIRST WE WILL CONSIDER THE SUBMISSION OF THE A SSESSEE THAT COMPANIES WITH ABNORMAL MARGINS SHOULD NOT BE REGARDED AS COMPARABLE. IN THE CASE OF QUARK SYSTEMS PVT. LTD. (SUPRA), THE SPECIAL BENCH HAD TO DEAL WITH CASES WHERE THE RESULTS WERE ABNORMAL . THE SPECIAL BENCH OBSERVED AS FOLLOWS: 'EVEN IF TH E TAXPAYER OR ITS COUNSEL HAD TAKEN DATAMATICS AS COMPARABLE IN ITS T.P. AUDIT, THE TAXPAYER IS ENTITLED TO POINT OUT TO THE TRIBUNAL THAT ABOVE ENTERPRISE HAS WRONGLY BEEN TAKEN AS COMPARABLE. IN FACT THERE ARE VAST DIFFERENCES BETWEEN TESTED PARTY AND TH E DATAMATICS. THE CASE OF DATAMATICS I S LIKE THAT OF 'IMERCIUS TECHNOLOGIES' REPRESENTING EXTREME POSITIONS. IF IMERCIUS TECHNOLOGIES HAS SUFFERED HEAVY LOSSES AND, THEREFORE, IT IS NOT TREATED AS COMPARABLE BY THE TAX AUTHORITIES, THEY ALSO HAVE TO CONSID ER THAT THE DATAMATICS HAS EARNED EXTRAORDINARY PROFIT AND HAS A HUGE TURNOVER, BESIDES DIFFERENCES IN ASSETS AND OTHER CHARACTERISTICS REFERRED TO BY SHRI AGGARWAL . ' THE ABOVE OBSERVATIONS OF THE SPECIAL BENCH IS A POINTER TO THE FACT THAT WHERE THERE AR E EXTRAORDINARY PROFITS AND THOSE COMPANIES ARE CONSIDERED BY THE TPO FOR COMPARABILITY BUT LOSS MAKING COMPANIES ARE NOT CONSIDERED AS COMPARABLE, THAT WOULD IMPROPER. THE TRIBUNAL FOUND THAT SUCH CONTRADICTION IN APPROACH SHOULD NOT BE PERMITTED. SIMILAR LY IN THE CASE OF M/S. SAP LABS INDIA PVT. LTD. 2010 - TII - 44 - ITAT BANG - TP HAD OBSERVED AS FOLLOWS : '86. AT THE THAN 10 OR 5, EVEN BELOW THAT. WE HAVE ALREADY CONSIDERED THAT THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ITS GERMAN ASSOCIATE CONCERN HAS C ONTEMPLATED A COMPENSATION OF COST PLUS 6 PER CENT, OR 1 . 5 TIMES OF THE TOTAL WAGES BILL, WHICHEVER IS HIGHER. THIS POINT WE HAVE TO CONSIDER IN THE LIGHT OF THE FACT THAT THE ASSESSEE IS WORKING IN A RISK MITIGATED ENVIRONMENT. THAT IS WHY WE HAVE AGREE D WITH THE ARGUMENT OF THE ASSESSEE - COMPANY THAT THERE MAY NOT BE EXTREME PROFITS IN THE CASE OF THE ASSESSEE. WHEN EXTREMES ARE EXCLUDED FROM THE SAMPLES, ALL SORTS OF EXTREMES SHOULD BE AVOIDED. O THERWISE, SAMPLES SELECTED FOR COMPARATIVE STUDY MAY NOT B E REPRESENTATIVE.' 33. EVEN IN THE AFORESAID DECISION THE POINT THAT HAS BEEN EMPHASIZED IS THAT WHEN THE MARGINS OF COMPARABLE COMPANIES ARE EITHER EXTREMELY LOW OR HIGH, THE APPROACH SHOULD BE TO ELIMINATE BOTH AND NOT CONSIDER ONLY THE HIGH OR LOW MARG IN COMPARABLES AS IT SUITS EITHER THE TPO OR THE ASSESSEE. ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 14 34. AS FAR AS THE PROVISI ONS OF THE ACT ARE CONCERNED, THEY LAY DOWN THAT THE COMPARABLE COMPANIES SHOULD BE FUNCTIONALLY COMPARABLE TO THE TESTED PARTY. THERE ARE NO SPECIFIC STANDARDS OF COMPARA BILITY ON THE BASIS OF ABNORMAL PROFITS OR LOSS. RULE 10B(2) PROVIDES THAT THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: - (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE T RANSACTIONS; (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; (D) CONDITIONS PREVAILING IN THE MAR KETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL O F CO MPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL . 35. T HERE IS THEREFORE NO BAR TO CONSIDERING COMPANIES WITH EITHER ABNORMAL PROFITS OR ABNORMAL LOSSES AS COMPARABLE TO THE TESTED PARTY, AS LONG AS THEY ARE F UNCTIONALLY COMPARABLE. THE OEC D GUID ELINES AND IN US TP REGULATIONS, THIS QUESTION MAY NOT ARISE AT ALL BECAUSE THOSE REGULATIONS ADVOCATE THE QUARTILE METHOD FOR DETERMINING ALP. INDIAN REGULATIONS SPECIFICALLY DEVIATE FROM OECD GUIDELINES AND PRO VIDE ARITHMETIC MEAN METHOD FOR DETERMINING ALP. IN T HE QUARTILE METHOD, COMPANIES THAT FALL IN THE EXTREME QUARTILES GET EXCLUDED AND ONLY THOSE THAT FALL IN THE MIDDLE QUARTILES ARE RECKONED FOR COMPARABIL I TY. HENCE, CASES OF EITHER ABNORMAL PROFITS OR LOSSES (WHICH ARE REFERRED TO AS OUTLINE RS) GET AUTOMATICALLY EXCLUDED. IN THE ARITHMETIC MEAN METHOD, ALL COMPANIES THAT ARE IN THE SAMPLE ARE CONSIDERED, WITHOUT EXCEPTION AND THE AVERAGE OF A L L THE COMPANIES ARE CONSIDERED AS THE ALP. HENCE , A GENERAL RULE THAT COMPANIES WITH ABNORMAL PROFITS SH OULD BE EXCLUDED MAY . BE IN TUNE WITH THE PRINCIPLES ENUNC I ATED I N OECD GUIDE L INES BUT CANNOT BE SAID TO BE IN TUNE WITH INDIAN TP REGULATIONS . HOWEVER, IF THERE ARE SPEC I FIC REASONS FO R ABNORMAL PROFITS OR LOSSES OR OTHER GENERAL REASONS AS TO WHY THEY S HOULD NOT B E REGARDED AS COMPARABLES, THEN THEY CAN BE EXCLUDED FOR COMPARABILITY. IT IS FOR THE ASSESSEE TO DEMONSTRATE EXISTENCE OF ABNORMAL FACTORS. 36. IN THE PRESENT CASE FACTORS FOR ABNORMAL PROFITS HAVE NOT BEEN H I GHLIGHTED BY THE ASSESSEE. IN SUCH CIRCUMSTANCES IT IS NOT POSSIBLE TO ACCEPT THE SUBMISSION OF THE ASSESSEE TO EXCLUDE THIS COMPANY FOR THE PURPOSE OF COMPAR ISON. - 8.4. IN VIEW THEREOF THE MATTER I S RESTORED TO THE FILE OF THE AO FOR MAKING FRESH SEARCH OF COMPARABLES IN VIEW OF THE PO SITION OF LAW ENUNCIATED IN THE PRESENT DECISION. ACCORDINGLY GROUND 1 AND 3 ARE ALLOWED FOR STATISTICAL PURPOSES. 8.5. NO SUBMISSIONS IN SUPPORT OF GROUND NO.4 TO 9 WERE MADE BY THE LD. SR. COUNS EL FOR THE ASSESSEE . T HE SAME ARE DEEMED TO BE NOT PRE SSED . EVEN OTHER WISE AS ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 15 WE HAVE REMANDED THE ISSUE OF DET ERMINING THE ARM S LENGTH PRICE TO THE FILE OF AO. G ROUND NOS. 4 TO 9 OF THE ASSESSEE DO NOT REQUIRE ANY ADJUDICATION AT THIS STAGE. 9. WITH REFERENCE TO GROUND NOS. 10 TO 14 , BOTH THE PARTIES HAVE AGRE ED THAT THE ISSUE TO BE RESTORED TO THE FILE OF AO FOR FRESH ADJUDICATION. WE HAVE CONSIDERED THE ARGUMENTS PUT FORTH BY BOTH THE PARTIES AND PERUSED THE RECORDS. WE FEEL IT APPROPRIATE TO RESTORE THE ISSUES TO THE FILE OF AO FOR DENOVO CONSIDERATION. ACCO RDINGLY GROUND NOS. 10 TO 14 ARE ALLOWED FOR STATISTICAL PURPOSES. 10. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 1 1.06.2015. SD/ - SD/ - [ MAHAVIR SINGH ] [B.P. JAIN] JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 11.06.2015. R.G.(.P.S.) COPY OF THE ORDER FORWARDED TO: 1 . M/S. ACCLARIS BUSINESS SOLUTIONS PVT. LTD., 201, ECOSPACE, 2 ND FLOOR, TOWER 2B, NEW TOWN RAJARHAT, KOLKATA - 700156. 2 I.T.O., WARD - 2(2), KOLKATA. 3. C.I.T. - (A) - KOLKATA. 4. CIT KOLKATA 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY, BY ORDER, ASST. REGISTRAR , ITAT, KOLKATA BENCHES ITA NO. 695/KOL/2011 ACCLARIS BUSINESS SOLUTIONS PVT.LTD. A.YR. 2007 - 08 16
