NESS TECHNOLOGIES (INDIA) P. LTD, MUMBAI V. DCIT CEN CIR 6(1), MUMBAI

ITA 696/MUM/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2075 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-11-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2011-2012
• Appeal Filed On: 11-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DEBASHISH CHAND
• Assessee Lawyers: M P LOHIA NIKHIL TIWARI
• Keywords: Related party transaction; Transfer pricing; International transaction; Initiation of penalty proceedings
• Section: 92C; 143(3); 92B; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K, MUMBAI BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI RAVISH SOOD, JUDICIAL MEMBER ITA NO. 696/MUM/2016 (ASSESSMENT YEAR 2011-12) NESS TECHNOLOGIES (INDIA) PRIVATE LTD., UNIT 501, INTERFACE, NEW LINK ROAD, MALAD (WEST) MUMBAI 400 064. PAN:AAACA 9649L ...... APPELLANT VS. THE DCIT, CENTRAL CIRCLE -6(1), AIR INDIA BUILDING, 19 TH FLOOR, NARIMAN POINT, MUMBAI 400 020 .... RESPONDENT IT(TP)A NO. 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) THE DCIT, CENTRAL CIRCLE -6(1), MUMBAI 400 020 ... APPELLANT VS. NESS TECHNOLOGIES (INDIA) PRIVATE LTD., MUMBAI. ASSESSEE BY : S/SHRI M.P.LOHIA /NIKHI L TIWARI REVENUE BY : SHRI DEBASHISH CHAND DATE OF HEARING : 23/08 /2016 DATE OF PRONOUNCEMENT : 11/11/2016 ORDER PER G.S.PANNU,A.M: THE CAPTIONED CROSS-APPEALS FILED BY THE REVEN UE AND ASSESSEE PERTAINING TO A.Y. 2011-12 ARE DIRECTED AGAINST TH E ORDER OF THE DCIT, 2 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) CEN. CIR.6(1), (IN SHORT THE ASSESSING OFFICER ) PA SSED UNDER SECTION 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 ( IN SHORT THE ACT) DATED 29/12/2015 , WHICH IS IN CONFORMITY WITH THE DIRECTION OF THE DISPUTE RESOLUTION PANNEL-2, MUMBAI DATED 27/11/20 15. 2. GROUNDS OF APPEAL RAISED BY THE ASSESSEE AS WELL AS REVENUE ARE AS UNDER:- ASSESSEES GROUNDS OF APPEAL BASED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE APPELLANT RESPECTFULLY CRAVES LEAVE TO PREFER AN AP PEAL AGAINST THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME-TAX, CE NTRAL CIRCLE - 6 (I), MUMBAI ['LEARNED AO'], UNDER SECTION 143(3) R.W.S 1 44C(13) OF THE INCOME- TAX ACT, 1961 ('ACT') (' ASSESSMENT ORDER'), IN PUR SUANCE OF THE DIRECTIONS ISSUED BY DISPUTE RESOLUTION PANEL - 2 ('HON'BLE DR P'), MUMBAI, ON THE FOLLOWING GROUNDS: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED AO, BASED ON THE DIRECTIONS OF THE HON'BLE DRP HAS: GENERAL GROUND I. ERRED IN ASSESSING THE TOTAL INCOME OF THE APPE LLANT AT RS 65,05,53,290 AGAINST RS 38,75,66,510 AS COMPUTED BY THE APPELLANT IN ITS RETURN OF INCOME; TRANSFER PRICING GROUNDS 2. ERRED IN MAKING A TRANSFER PRICING ADJUSTMENT O F RS. 26,29,86,783 TO THE TOTAL INCOME OF THE APPELLANT O N THE PREMISE THAT THE INTERNATIONAL TRANSACTIONS ENTERED BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISES (' AE') WERE NOT AT ARM'S LENGTH; REFERENCE MADE TO THE TRANSFER PRICING OFFICER 3. ERRED IN REFERRING THE APPELLANT'S CASE TO THE LEARNED TRANSFER PRICING OFFICER ('TPO') UNDER SECTION 92CA(1) OF TH E ACT, WITHOUT SATISFYING THE CONDITIONS SPECIFIED THEREIN; REJECTION OF ECONOMIC ANALYSIS UNDERTAKEN BY THE AP PELLANT AND USING SINGLE YEAR DATA 4. ERRED IN REJECTING THE TRANSFER PRICING ANALYSI S UNDERTAKEN BY THE APPELLANT UNDER SECTION 92C OF THE ACT USING 3 YEAR WEIGHTED AVERAGE DATA OF COMPARABLES AND DETERMINING THE ARM'S LENGT H MARGIN/ PRICE USING 3 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) DATA ONLY FOR FINANCIAL YEAR ('FY') 2010-11, WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TRANSFE R PRICING DOCUMENTATION REQUIREMENTS; SELECTION/REJECTION OF COMPARABLES 5. ERRED IN APPLYING CERTAIN REJECTION CRITERIA/ F ILTERS, IN AN ARBITRARY, SUBJECTIVE AND ERRONEOUS MANNER FOR THE PURPOSE OF SELECTION OF COMPARABLE COMPANIES; 6. ERRED IN REJECTING CERTAIN COMPARABLES SELECTED BY THE APPELLANT DISREGARDING THE FACT THAT THE SAID COMPA RABLES SATISFY ALL THE FILTERS APPLIED BY THE LEARNED TPO; 7. ERRED IN INTRODUCING CERTAIN ADDITIONAL COMPARA BLES, WITHOUT APPRECIATING THE FACT THAT THESE COMPARABLES FAIL T O MEET ALL THE COMPARABILITY CRITERIA; APPELLANT'S COMPARABLE COMPANY REJECTED BY THE LEAR NED TPO/HON'BLE DRP 8. ERRED IN REJECTING MAVERIC SYSTEMS LIMITED AND THINKSOFT GLOBAL SERVICES LIMITED AS COMPARABLE COMPANIES GROUNDS THAT THE COMPANIES ARE ENGAGED IN SOFTWARE TESTING SERVICES, AND UNDERTAKE RESEARCH AND DEVELOPMENT ACTIVITIES, DISREGARDING THE FACT T HAT SOFTWARE TESTING FORMS A PART OF THE OVERALL SOFTWARE DEVELOPMENT LIFE CYC LE AND THAT NO FILTER WITH RESPECT TO RESEARCH AND DEVELOPMENT EXPENSES WAS AP PLIED BY THE LEARNED TPO/THE APPELLANT; 9. ERRED IN REJECTING CALIBER POINT BUSINESS SOLUTIONS LIMITED , HELIOS AND MATHESON INFORMATION TECHNOLOGY LIMITED AND R SYSTEMS INTERNATIONAL LIMITED AS COMPARABLE COMPANIES ON THE BASIS THAT THE COMPANIES FOLLOW A FINANCIAL YEAR OTHER THAN APRIL- MARCH, DISREGARDING THE FACT THAT THE APPELLANT HAS SUBMITTED MARGINS FOR T HE PERIOD OF APRIL-MARCH BASED ON QUARTERLY RESULTS; 10. ERRED IN REJECTING LGS GLOBAL LIMITED AS A COMPARABLE COMPANY ON THE BASIS THAT THE COMPANY FAILS THE EXP ORT TURNOVER FILTER, DISREGARDING THE FACT THAT THE COMPANY MEETS THE AF ORESAID FILTER APPLIED BY THE TPO FOR SELECTION OF COMPARABLES; 11. ERRED IN REJECTING GOLDSTONE TECHNOLOGIES LIMITED AS A COMPARABLE COMPANY ON THE BASIS THAT THE SAID COMPA NY FAILS THE EXPORT TURNOVER FILTER AND RELATED PARTY TRANSACTION FILTE R AND NO SEGMENTAL BREAKUP OF ITS ACTIVITIES ARE AVAILABLE, DISREGARDING THE F ACT THAT THE COMPANY MEETS BOTH THE AFORESAID FILTERS AND SEGMENTAL DETAILS AR E AVAILABLE IN PUBLIC DOMAIN; 12. ERRED IN REJECTING QUINTEGRA SOLUTIONS LIMITED AS A COMPARABLE COMPANY ON THE BASIS THAT THE COMPANY IS FUNCTIONALLY DIFFERENT AND HAS SUBSTANTIAL RELATED PARTY TRANSACTIONS, DIS REGARDING THE FACT THAT THE 4 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) COMPANY IS ENGAGED IN PROVIDING SOFTWARE SERVICES S IMILAR TO THE APPELLANT AND HAS RELATED PARTY TRANSACTIONS WELL WITHIN THE PRESCRIBED LIMITS. 13. ERRED IN REJECTING SAVEN TECHNOLOGIES LIMITED AS A COMPARABLE COMPANY ON THE BASIS THAT IT HAS SUBSTAN TIAL RELATED PARTY TRANSACTIONS WITHOUT APPRECIATING THAT THE CONSOLID ATED FINANCIAL STATEMENTS OF THE COMPANY WAS USED BY THE APPELLANT WHEREIN TH E IMPACT OF RELATED PARTY TRANSACTIONS IS ELIMINATED; ADDITIONAL COMPARABLES INTRODUCED BY THE LEARNED TP O 14. ERRED IN CONSIDERING ACROPETAL TECHNOLOGIES LIMITED AS A COMPARABLE WITHOUT APPRECIATING THAT THE COMPANY IS FUNCTIONALLY DIFFERENT, OWNS SIGNIFICANT INTANGIBLES AND HAS EARNED SUPERNO RMAL PROFITS AND/ OR HAVING EXCEPTIONAL YEAR OF PERFORMANCE DURING FY 20 I 0-11; 15. ERRED IN CONSIDERING E-INFOCHIPS LIMITED AS A COMPARABLE WITHOUT APPRECIATING THAT THE COMPANY IS FUNCTIONAL LY DIFFERENT AND HAS EARNED SUPERNORMAL PROFITS AND! OR HAVING EXCEPTION AL YEAR OF PERFORMANCE DURING FY 2010-11; 16. ERRED IN CONSIDERING IGATE GLOBAL SOLUTIONS LIMITED AS A COMPARABLE WITHOUT APPRECIATING THAT THE COMPANY IS FUNCTIONALLY DIFFERENT AND OPERATES UNDER PECULIAR CIRCUMSTANCES DURING TH E YEAR; 17. ERRED IN CONSIDERING PERSISTENT SYSTEMS & SOLUTIONS LIMITED AS A COMPARABLE WITHOUT APPRECIATING THAT THE COMPA NY IS FUNCTIONALLY DIFFERENT; 18. ERRED IN CONSIDERING INFOSYS LIMITED AS COMPARABLE TO THE APPELLANT WITHOUT APPRECIATING THAT THE SAID COMPAN Y IS FUNCTIONALLY DIFFERENT, EARNED SUPER NORMAL PROFITS, OWNS SIGNIF ICANT INTANGIBLES, BRAND/ PROPRIETARY PRODUCTS VIS-A-VIS THE APPELLANT WHICH DOES NOT OWN ANY INTANGIBLES AND IS NOT COMPARABLE FROM A FUNCTION, ASSET AND RISKS STAND POINT; 19. ERRED IN CONSIDERING WIPRO TECHNOLOGIES LIMITED AS COMPARABLE TO THE APPELLANT WITHOUT APPRECIATING TH AT THE SAID COMPANY IS FUNCTIONALLY DIFFERENT AND OPERATES UNDER PECULIAR ECONOMIC CIRCUMSTANCES. RISK ADJUSTMENT 20. ERRED IN NOT GRANTING THE APPELLANT THE BENEFI T OF RISK ADJUSTMENTS WHICH IS REQUIRED TO BE UNDERTAKEN TO A CCOUNT FOR THE DIFFERENCES IN LEVEL OF RISKS ASSUMED BETWEEN THE C OMPARABLE COMPANIES AND THE APPELLANT IN TERMS OF RULE 10C(2)(E) OF THE RUL ES; 5 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) BENEFIT OF +/- 5% 21. BENEFIT OF +/-5% UNDER PROVISO TO SECTION 92C( 2) OF THE ACT BE GRANTED TO THE APPELLANT IF THE ADJUSTMENT UNDER TR ANSFER PRICING FALLS WITHIN THE RANGE SPECIFIED THEREIN. ADJUSTMENT MADE TO INTERNATIONAL TRANSACTION OF REI MBURSEMENT OF EXPENSES GIVEN BY AE TO APPELLANT 22. ERRED IN MAKING A TRANSFER PRICING ADJUSTMENT OF RS 3,19,51,284 IN RELATION TO THE INTERNATIONAL TRANSA CTION OF REIMBURSEMENT OF EXPENSES RECEIVED BY THE APPELLANT FROM THE AE DISR EGARDING THE FACT THAT THESE EXPENSES ARE PRIMARILY THE LIABILITY OF THE A E AND ARE INCURRED INITIALLY BY THE APPELLANT ONLY FOR ADMINISTRATIVE CONVENIENC E WITHOUT THERE BEING ANY SERVICE! INCOME ELEMENT INVOLVED THEREIN [AS THESE EXPENSES ARE NOT EVEN ROUTED THROUGH PROFIT AND LOSS ACCOUNT]; 23. ERRED IN ARBITRARILY LEVYING A MARK-UP OF 10% ON THE EXPENSES RECOVERED BY THE APPELLANT WITHOUT PROVIDING ANY RA TIONALE/ BASIS FOR ARRIVING AT THE SAID MARK-UP; INTEREST UNDER SECTION 234B OF THE ACT OF RS. 6,05, 83,706 24. ERRED IN LEVYING INTEREST OF RS 6,05,83,706 UND ER SECTION 234B OF THE ACT; 25. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN COMPU TING INTEREST UNDER SECTION 234B AT RS 6,05,83,706 INSTEAD OF RS 5,14,69,706; INTEREST UNDER SECTION 234C OF THE ACT OF RS 53,67, 503 26. ERRED IN LEVYING INTEREST UNDER SECTION 234C O F THE ACT ON ASSESSED INCOME WITHOUT APPRECIATING THAT THE INTER EST UNDER SECTION 234C IS APPLICABLE ON RETURNED INCOME; PENALTY PROCEEDINGS 27. ERRED IN INITIATING PENALTY PROCEEDINGS UNDER S ECTION 271 (1)(C) OF THE ACT. EACH OF THE ABOVE GROUND OF APPEAL IS WITHOUT PREJU DICE TO AND INDEPENDENT OF ONE ANOTHER. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR DELETE THE ABOVE GROUND OF APPEAL AT OR BEFORE THE TIME OF HEARING OF THE A PPEAL, SO AS TO ENABLE THE HON'BLE INCOME TAX APPELLATE TRIBUNAL TO DECIDE THI S APPEAL ACCORDING TO LAW. REVENUES GROUNDS OF APPEAL:- 1. WHETHER, ON FACTS AND CIRCUMSTANCES OF THE CASE , THE DRP IS JUSTIFIED IN DIRECTING THE ASSESSING OFFICER TO INCLUDE M/S C AT TECHNOLOGY LTD AND M/S CG-VAK SOFTWARE & EXPORTS LTD AS COMPARABLES DESPIT E THE FACT THAT SAID 6 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) COMPARABLES WERE ALSO ENGAGED IN THE BUSINESS OF 'M EDICAL TRANSCRIPTION' AND 'IT CONSULTANCY' ACTIVITIES WHEREIN, THE ASSESSEE I S ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS GROUP ENTITIES . 2. WHETHER, ON FACTS AND CIRCUMSTANCES OF THE CASE , THE DRP IS JUSTIFIED IN DIRECTING IN DIRECTING THE A0 TO INCLUDE M/S CAT TECHNOLOGIES LTD AND M/S CG-VAK SOFTWARE & EXPORTS LTD AS COM PARABLES DESPI TE THE FACT THAT SAID COM PARABLES HAVING LESSER TURNOVER VIS-A-VIS WITH THE TURNOVER OF THE ASSESSEE IGNORING THE RECENT DECISION OF THE JURISD ICTIONAL HIGH COURT IN THE CASE OF M/S PENTAIR WATER INDIA P LTD IN TAX APPEAL NO. 18 OF 2015 DATED 16/09/2015, WHEREIN THE HONORABLE HIGH COURT HAS HE LD THAT THE TURNOVER WOULD BE THE RELEVANT CRITERIA FOR THE SELECTION OF THE COM PARABLES. 3. WHETHER, ON FACTS AND CIRCUMSTANCES OF THE CASE , THE DRP IS JUSTIFIED IN DIRECTING THE AO TO EXCLUDE M/S SANKHYA INFO TEC H LTD AS COMPARABLES DESPITE THE FACT THAT THE SAID COMPARABLE WAS ENGAG ED IN PROVIDING IT SOLUTIONS TO THE VARIOUS SECTORS LIKE AVIATION, DEF ENCE, MANUFACTURING AND FINANCIAL SERVICE, WHICH IS SIMILAR TO THE ACTIVITY OF THE ASSESSEE COMPANY. 4. WHETHER, ON FACTS A AND CIRCUMSTANCES OF THE CA SE, THE DRP IS JUSTIFIED IN DIRECTING THE AO TO EXCLUDE M/S E-ZEST SOLUTION AS COM PARABLES DESPITE THE FACT THAT THE SAID COMPARABLE WAS ENGAG ED IN SOFTWARE DEVELOPMENT SERVICES WHICH IS SIMILAR TO THE ACTIVI TY OF THE ASSESSEE COMPANY. 3. AS THE AFORESAID CROSS- GROUNDS SHOW, THE SUBSTA NTIVE DISPUTE IN THE CROSS-APPEALS RELATE TO THE TRANSFER PRICING AD JUSTMENT MADE TO THE STATED VALUE OF THE INTERNATIONAL TRANSACTIONS ENTE RED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AES). BE FORE WE PROCEED TO CONSIDER THE RESPECTIVE GROUNDS OF APPEAL, A BRIEF BACKGROUND CAN BE SUMMARIZED AS FOLLOWS. 4. THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS A WHOLLY OWNED SUBS IDIARY OF NESS TECHNOLOGY INC., USA. THE ASSESSEE COMPANY IS ENGA GED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES ONLY TO ITS ASSOCIATE D ENTERPRISES WHO ARE PRIMARILY BASED IN UNITED STATES. THE ASSESSEE COMPANY IS BEING 7 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) COMPENSATED ON COST PLUS MARK-UP BASIS. THUS, TH E ROLE OF THE ASSESSEE COMPANY IS OF A RISK MITIGATED CAPTIVE SER VICE PROVIDER FOR ITS ASSOCIATED ENTERPRISES. FOR THE YEAR UNDER CONSID ERATION, IT FILED A RETURN OF INCOME DECLARING A TOTAL INCOME OF RS.38, 75,66,510/-, WHICH WAS SUBJECT TO SCRUTINY ASSESSMENT. THE ASSESSING OFFICER NOTED THAT ASSESSEE HAD UNDERTAKEN INTERNATIONAL TRANSACTIONS WITHIN THE MEANING OF SECTION 92B OF THE ACT ON ACCOUNT OF PROVISIONS OF SOFTWARE DEVELOPMENT SERVICES AND RECOVERY OF EXPENSES (SERV ICE CHARGES) AND AS A CONSEQUENCE THE MATTER WAS REFERRED TO THE TRA NSFER PRICING OFFICER UNDER SECTION 92CA(1) OF THE ACT FOR DETERM INATION OF THE ARM'S LENGTH PRICE OF SUCH INTERNATIONAL TRANSACTIONS. T HE TRANSFER PRICING OFFICER PASSED AN ORDER UNDER SECTION 92CA(3) OF TH E ACT DATED 29/01/2015, WHEREIN HE WORKED OUT AN ADJUSTMENT OF RS.36,49,98,330/- TO THE STATED VALUE OF INTERNATIO NAL TRANSACTIONS AS UNDER:- (I) PROVISION FOR SOFTWARE DEVELOPMENT SERVICES R S.33,30,47,046/- (II)RECOVERY OF EXPENSES (SERVICE CHARGES) - RS. 3,19,51,284/- TOTAL : RS. 36,48,98,332/- 4.1 THE ASSESSING OFFICER PASSED A DRAFT ASSESSMENT ORDER DATED 11/2/2015 UNDER SECTION 143(3) R.W.S. 144C OF THE A CT PROPOSING AN ADJUSTMENT OF RS.36,48,98,332/- TO THE RETURNED INC OME AGAINST WHICH ASSESSEE RAISED OBJECTIONS BY APPROACHING THE DISP UTE RESOLUTION PANEL (DRP) ON VARIOUS GROUNDS. THE DRP ACCEPTED SOME OF THE OBJECTIONS RAISED BY THE ASSESSEE AND VIDE ITS ORDER DATED 27/ 11/2015 DIRECTED THE ASSESSING OFFICER TO REWORK THE ADJUSTMENT IN ORDER TO WORK-OUT THE 8 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION S. ACCORDINGLY, IN COMPLIANCE WITH THE DIRECTIONS OF THE DRP, THE ASSE SSING OFFICER HAS RECOMPUTED THE ADJUSTMENT TO THE INTERNATIONAL TRAN SACTIONS FOR PROVISION TO SOFTWARE DEVELOPMENT SERVICES AT RS.23 ,10,35,499/- INSTEAD OF RS.33,30,47,046/- WORKED OUT BY THE TRAN SFER PRICING OFFICER. IN SO FAR AS THE ADJUSTMENT OF RS.3,19,51,284/- PRO POSED BY THE TRANSFER PRICING OFFICER ON ACCOUNT OF INTERNATIONAL TRANSAC TIONS OF RECOVERY OF EXPENSES IS CONCERNED, THE SAME HAS BEEN CONFIRMED BY THE DRP. ACCORDINGLY, THE ASSESSING OFFICER HAS PASSED A FIN AL ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT DAT ED 29/12/2015, WHEREBY AN ADDITION OF RS.26,29,86,783/- HAS BEEN M ADE TO THE RETURNED INCOME ON ACCOUNT OF DETERMINATION OF ARM 'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE AS SESSEE WITH ITS ASSOCIATED ENTERPRISES. AGAINST SUCH ADDITIONS, AS SESSEE IS IN APPEAL BEFORE US ON THE ABOVE STATED GROUNDS OF APPEAL, WH EREAS IN THE CROSS- APPEAL, THE REVENUE HAS CHALLENGED THE ACTION OF TH E DRP IN DIRECTING THE ASSESSING OFFICER TO INCLUDE TWO CONCERNS IN TH E LIST OF COMPARABLES WHICH WERE REJECTED BY THE TRANSFER PRICING OFFICER AS WELL AS IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE TWO CONC ERNS IN THE LIST OF COMPARABLES WHICH WERE INCLUDED BY THE TRANSFER PRI CING OFFICER, WHICH HAD RESULTED IN THE SCALING DOWN OF ADJUSTMENT PROP OSED BY THE TRANSFER PRICING OFFICER. IN THIS BACKGROUND, WE M AY NOW PROCEED TO CONSIDER THE SPECIFIC GROUNDS WHICH HAVE BEEN ARGUE D BEFORE US AT THE TIME OF HEARING. 5. AS NOTED EARLIER, ASSESSEE IS A CAPTIVE SERVICE PROVIDER FOR ITS ASSOCIATED ENTERPRISES ABROAD, PRIMARILY USA-BASED ENTITIES. THE 9 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) ASSESSEE IS A PART OF NESS TECHNOLOGY INC. USA GROU P, WHICH IS A LEADING GLOBAL INFORMATION TECHNOLOGY SERVICES CONCERN. TH E ASSESSEE COMPANY HAS FOUR UNITS IN INDIA, LOCATED AT BANGALORE, HYDE RABAD, MUMBAI AND PUNE AND IS PROVIDING SOFTWARE DEVELOPMENT SERVICE S TO ITS GROUP ENTERPRISES. THE STATED VALUE OF THE INTERNATIONAL TRANSACTIONS OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE DURING THE YEAR IS RS.359,61,45,404/-, WHICH HAS B EEN BENCH-MARKED BY ADOPTING THE TRANSACTIONAL NET MARGIN METHOD (TNM M) AS MOST APPROPRIATE METHOD; AND, THE SELECTION OF THE TNM M ETHOD HAS NOT BEEN DISTURBED BY THE TRANSFER PRICING OFFICER. TH E ASSESSEES OPERATING PROFIT MARGIN TO TOTAL COST RATIO IS 13.1 6% WHICH IS ALSO NOT IN DISPUTE. IN ITS TRANSFER PRICING STUDY, ASSESS EE HAD SELECTED A SET OF COMPARABLES, WHOSE AVERAGE PROFIT MARGIN WAS WITHIN THE +/-5% RANGE VIS-A-VIS ASSESSEES MARGIN AND, THEREFORE, THE PLE A OF THE ASSESSEE WAS THAT NO ADJUSTMENT IS REQUIRED TO BE MADE TO THE ST ATED VALUE OF THE INTERNATIONAL TRANSACTIONS IN ORDER TO DETERMINE IT S ARM'S LENGTH PRICE. THE ASSESSING OFFICER, HOWEVER, HAS DETERMINED AN A MOUNT OF RS.23,10,35,499/-, WHICH WAS REQUIRED TO BE ADDED S O AS TO BRING THE STATED VALUE OF THE TRANSACTIONS TO ITS ARM'S LENGT H PRICE RELATING TO THE INTERNATIONAL TRANSACTIONS FOR PROVISION OF SOFTWAR E DEVELOPMENT SERVICES. ON THIS ASPECT ASSESSEE HAS RAISED MUL TIPLE GROUNDS OF APPEAL BUT IN THE COURSE OF HEARING, ARGUMENTS HAV E BEEN CONFINED TO THREE GROUNDS OF APPEAL WHICH WE DEAL HEREINAFTER. 6. BY WAY OF GROUND OF APPEAL NO.15, THE PLEA OF TH E ASSESSEE IS THAT M/S. M/S.E-INFOCHIPS LIMITED HAS BEEN WRONGLY INCLUDED IN THE LIST OF COMPARABLES BECAUSE THE SAID CONCERN IS FUNCTION ALLY DISSIMILAR. IT IS 10 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) POINTED OUT THAT THE SAID CONCERN IS ENGAGED IN REN DERING VARIETY OF SERVICES, I.E. SOFTWARE DEVELOPMENT SERVICES, SALE OF SOFTWARE PRODUCTS AND I.T ENABLED SERVICES; AND, FURTHER THAT NO SEGM ENTAL DATA IS AVAILABLE IN RESPECT OF DIFFERENT SEGMENTS, WHEREAS THE ASSESSEE IS RENDERING PURE SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES. ON THIS ASPECT, LD. REPRESENTATIVE FO R THE ASSESSEE REFERRED TO PARA 11.2.2 OF THE ORDER OF DRP AND POI NTED OUT THAT THE SAID CONCERN WAS PRIMARILY ENGAGED IN PROVIDING IT ENABLED SERVICES AND PRODUCTS AND, THEREFORE, IT IS WRONGLY DIRECTED BY THE DRP THAT THE SAID CONCERN IS INCLUDIBLE AS A COMPARABLE. IT IS ALSO POINTED OUT THAT THE SAID CONCERN FAILS THE SERVICE INCOME FILTER OF 75% ADOPTED BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY, AND SUCH FI LTER HAS BEEN OTHERWISE ACCEPTED BY THE TRANSFER PRICING OFFICER. IN SUPPO RT, REFERENCE HAS BEEN MADE TO PARA 11.2.2 OF THE ORDER OF THE DRP WHEREIN , IT IS NOTED THAT THE REVENUES EARNED BY THE SAID CONCERN FROM SOFTWA RE DEVELOPMENT SERVICES CONSTITUTE 73.27% OF THE TOTAL REVENUE, TH US, IT IS CANVASSED THAT THE SAID CONCERN IS EXCLUDIBLE FROM FINAL SET OF COMPARABLES DUE TO THE AFORESAID DIFFERENCES. 7. ON THE OTHER HAND, LD. DEPARTMENTAL REPRESENTATI VE POINTED OUT THAT THE TRANSFER PRICING OFFICER HAS NOTED IN PARA 4.1.6 OF HIS ORDER THAT THE SAID CONCERN WAS MAINLY ENGAGED IN SOFTWAR E DEVELOPMENT SERVICES AND, THEREFORE, IT IS INCLUDIBLE AS A GOOD COMPARABLE FOR THE PURPOSE OF BENCH MARKING THE INTERNATIONAL TRANSACT IONS UNDERTAKEN BY THE ASSESSEE BY WAY OF PROVISION OF SOFTWARE DEVELO PMENT SERVICES. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. IN THE CONTEXT OF THE OBJECTIONS RAISED BY THE ASSESSEE, W E HAVE PERUSED THE 11 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) ANNUAL REPORT OF THE SAID CONCERN, A COPY OF WHICH HAS BEEN PLACED IN THE PAPER BOOK AT PAGES 418 TO 429. A PERUSAL OF T HE SAME REVEALS THAT APART FROM PROVIDING SOFTWARE DEVELOPMENT SERVICES, THE SAID CONCERN IS ALSO ENGAGED IN SELLING SOFTWARE PRODUCTS. THE ANNUAL REPORT ALSO REVEALS THAT THE SAID CONCERN IS ALSO ENGAGED IN MA NUFACTURING EVM AND VDB ELECTRONIC BOARDS, WHICH IS A HARDWARE RELATED ACTIVITY. NOTABLY, THE ANNUAL REPORT REVEALS THAT ALL THE ACTIVITIES H AVE BEEN CLUBBED AND CONSIDERED AS SINGLE REPORTABLE BUSINESS SEGMENT, A ND SEGMENTAL DATA FOR SOFTWARE SERVICES IS NOT AVAILABLE SO AS TO BE USED FOR BENCHMARKING THE TRANSACTIONS WHICH ARE BEING TESTED. ON THE CO NTRARY, IN SO FAR AS THE ACTIVITY OF THE ASSESSEE, WHICH IS UNDER BENCHM ARKING IS CONCERNED, IT RELATES TO PURE SOFTWARE DEVELOPMENT SERVICES AN D IT DOES NOT INVOLVE SALE OR DEVELOPMENT OF SOFTWARE PRODUCTS OR HARDWAR E. IT IS ALSO QUITE EVIDENT THAT M/S.E-INFOCHIPS LIMITED IS UNDERTAKING I.T ENABLED SERVICES, WHICH ALSO IS DISTINCT FROM THE SOFTWARE DEVELOPMEN T ACTIVITIES UNDERTAKEN BY THE ASSESSEE. IN FACT, AT THE TIME O F HEARING, LD. REPRESENTATIVE FOR THE ASSESSEE HAD RELIED UPON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SAXO IN DIA PVT. LTD. VS. ACIT, ITA NO.6148/DEL/2015 DATED 5 TH FEBRUARY, 2016, WHEREIN UNDER AN IDENTICAL SITUATION, M/S.E-INFOCHIPS LIMITED HAS BE EN FOUND TO BE INCOMPARABLE TO A CONCERN ENGAGED IN RENDERING PURE SOFTWARE DEVELOPMENT SERVICES. NOTABLY, THE TRIBUNAL HAS RE FERRED TO THE ANNUAL REPORT OF THE SAID CONCERN AND MADE THE FOLLOWING O BSERVATIONS:- 10.2 AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ANNUA L REPORT OF THIS COMPANY IS AVAILABLE IN THE PAPER BOOK WITH ITS PRO FIT AND LOSS ACCOUNT AT PAGE 1025, SCHEDULE OF INCOME INDICATES ITS OPERATING REVENUE FROM SOFTWARE DEVELOPMENT, HARDWARE MAINTEN ANCE, 12 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) INFORMATION TECHNOLOGY, CONSULTANCY ETC. REVENUE F ROM HARDWARE MAINTENANCE STANDS AT RS.3.92 CRORE, WHICH HAS BEEN CONSIDERED BY THE TRANSFER PRICING OFFICER HIMSELF AS SALE OF PRODUCTS. SUCH SALE OF PRODUCTS CONSTITUTES 15% OF TOTAL REVENUE. THERE IS NO SEGMENTAL INFORMATION AVAILABLE AS REGARDS THE REVE NUE FROM SALE OF PRODUCTS AND REVENUE FROM SOFTWARE DEVELOPMENT S EGMENT. AS THE ASSESSEE IS SIMPLY ENGAGED IN RENDERING SOFTWAR E DEVELOPMENT SERVICES AND THERE IS NO SALE OF ANY SO FTWARE PRODUCTS, THIS COMPANY, IN OUR CONSIDERED OPI8NION, CEASES TO BE COMPARABLE. IT IS OBVIOUS THAT FROM THE COMMON POO L OF INCOME FROM BOTH THE STREAMS OF SOFTWARE PRODUCTS AND SOFT WARE SERVICES, ONE CANNOT DEDUCE THE REVENUE FROM SOFTWA RE SERVICES AND NO ONE KNOWS THE IMPACT OF REVENUE FROM PRODUCT S ON THE OVERALL KITTY OF PROFIT, WHICH MAY BE SIGNIFICANT. SINCE NO SEGMENTAL DATA OF THIS COMPANY IS AVAILABLE INDICAT ING OPERATING PROFIT FROM SOFTWARE DEVELOPMENT SERVICES, WE ORDER TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 8.1 IT IS ALSO PERTINENT TO NOTE THAT THE AFORESAID OBSERVATIONS OF OUR CO-ORDINATE BENCH ARE IN RELATION TO THE ASSESSMENT YEAR 2011-12, WHICH IS ALSO THE ASSESSMENT YEAR UNDER CONSIDERATI ON BEFORE US. 8.2 ON THE BASIS OF THE AFORESAID DISCUSSION, IN OU R VIEW, THE SAID CONCERN CANNOT BE CONSIDERED AS A GOOD COMPARABLE AND DESERVES TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES FOR B ENCHMARKING THE INTERNATIONAL TRANSACTIONS OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES UNDERTAKEN BY THE ASSESSEE. THUS, ON THIS ASPECT WE UPHOLD THE STAND OF ASSESSEE AND GROUND OF APPEAL NO. 15 I S ALLOWED. 9. THE NEXT ISSUE ARGUED BEFORE US IS BY WAY OF GRO UND OF APPEAL NO.18, WHEREBY THE ASSESSEE HAS CONTENDED THAT M/S. INFOSYS LIMITED IS LIABLE TO BE EXCLUDED FROM THE LIST OF COMPARABLES . ON THIS ASPECT, ASSESSEE HAS MADE VARIED SUBMISSIONS BY POINTING OU T THAT THE SAID CONCERN IS FUNCTIONALLY DIFFERENT AS IT UNDERTAKES MULTIPLE ACTIVITIES; 13 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) OWNS SIGNIFICANT INTANGIBLES, BRAND/PROPRIETARY PRO DUCTS IN CONTRAST TO THE ASSESSEE WHICH DOES NOT OWN ANY INTANGIBLES; F URTHER, THAT THE SAID CONCERN HAS EARNED SUPER-NORMAL PROFITS; AND, THER EFORE, THE SAID CONCERN IS QUITE DISTINCT IN TERMS OF THE FUNCTION S, ASSETS AND RISKS (FAR) PROFILE. 9.1 IN THIS CONTEXT, LD. DEPARTMENTAL REPRESENTATIV E HAS DEFENDED THE STAND OF THE REVENUE BY REFERRING TO THE DISCUS SION IN THE ORDER OF THE TRANSFER PRICING OFFICER, WHEREIN IT IS STATED THAT THE SAID CONCERN IS MAINLY ENGAGED IN SOFTWARE PRODUCTS AND BROADLY COM PARABLE TO THAT OF THE ASSESSEE . IT IS FURTHER POINTED OUT THAT THE DRP HAS ALSO REJECTED THE PLEA OF THE ASSESSEE FOR EXCLUSION OF THE SAID CONCERN BECAUSE THE ACTIVITIES WERE FOUND TO BE SIMILAR TO THAT OF THE ASSESSEE I.E. PROVIDING SOFTWARE DEVELOPMENT SERVICES. 9.2 ON THIS ASPECT, WE HAVE CAREFULLY CONSIDERED TH E RIVAL SUBMISSIONS. A PERTINENT POINT RAISED BY THE ASSES SEE IS TO THE EFFECT THAT ON THE BASIS OF LEVEL OF RESPECTIVE TURNOVERS, THE SAID CONCERN IS INCOMPARABLE. IT HAS BEEN POINTED OUT THAT THE TUR NOVER OF THE ASSESSEE IS TO THE TUNE OF RS.359,61,45,000/-, WHER EAS M/S. INFOSYS LIMITED HAS A TURNOVER OF ABOUT RS.25,385.00 CRORES FOR THE YEAR UNDER CONSIDERATION. IN THIS CONTEXT, IT WAS PUT TO THE PARTIES IN THE COURSE OF HEARING AS TO WHETHER ANY TURNOVER FILTER WAS APPLI ED EITHER BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY OR BY THE TR ANSFER PRICING OFFICER IN THE COURSE OF THE TRANSFER PRICING PROCEEDINGS. IN RESPONSE, IT HAS BEEN STATED BEFORE US THAT NO TURNOVER FILTER WAS U SED EITHER BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY OR BY THE TR ANSFER PRICING OFFICER WHILE SELECTING THE COMPARABLES FOR THE PURPOSE OF BENCHMARKING THE 14 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) INTERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT S ERVICES. THEREFORE, IN THIS BACKGROUND, IT WOULD BE INAPPROPRIATE AT TH IS STAGE TO DEVICE A NEW FILTER AND REJECT/ACCEPT A CONCERN AS COMPARABL E BECAUSE IT WOULD NOT BE FEASIBLE TO SEE AS TO WHETHER THE OTHER CONC ERNS WHICH WERE A PART OF THE ACCEPT-REJECT MATRIX QUALIFY SUCH N EW FILTER OR NOT?. WE MAY HASTEN TO ADD HERE THAT WE ARE NOT PROPOSING TO SAY THAT THE TURNOVER FILTER IS NOT A RELEVANT FILTER. THE ONLY POINT WE ARE TRYING TO MAKE IS THAT IT WOULD BE INAPPROPRIATE TO APPLY A PARTICULAR FILTER WITH RESPECT TO A PARTICULAR CONCERN WITHOUT APPLYING IT ACROSS THE ENTIRE SPECTRUM OF THE CONCERNS WHICH HAVE BEEN CONSIDERE D AS COMPARABLE. THEREFORE, ON THIS ASPECT OF THE MATTER, WE DO NOT DEAL ANY FURTHER. 9.3 SO, HOWEVER, THE OTHER PLEAS OF THE ASSESSEE TO SUPPORT EXCLUSION OF THE SAID CONCERN FROM THE FINAL SET OF COMPARABL ES ARE QUITE JUSTIFIED. NOTABLY, THE SAID CONCERN IS ALSO ENGAGED IN THE P RODUCTION OF SOFTWARE PRODUCTS SUCH AS FINACLE, FLYPPAND INFOSYS IS MART AS IS EVIDENT FROM THE COPY OF THE ANNUAL REPORT OF SUCH CONCERN, WHIC H HAS BEEN PLACED IN THE PAPER BOOK AT PAGES 483 TO 500. IN FACT, WE FIND THAT THE TRANSFER PRICING OFFICER HAS HIMSELF ACCEPTED THE FACT THAT THE SAID CONCERN IS ENGAGED IN SOFTWARE PRODUCTS. APART THEREFROM, IT IS QUITE WELL UNDERSTOOD THAT INFOSYS HAS A BRAND IMAGE WHICH IS QUITE INCOMPARABLE TO THE ASSESSEE BEFORE US, WHICH IS WHOLLY ACTING A S A CAPTIVE SERVICE PROVIDER FOR ITS ASSOCIATED ENTERPRISES. IN THIS V IEW OF THE MATTER, IT IS QUITE EVIDENT THAT THE SAID CONCERN CANNOT BE COMPA RED TO AN ASSESSEE WHO IS UNDERTAKING PURE SOFTWARE DEVELOPMENT SERVIC ES AS A CAPTIVE SERVICE PROVIDER. 15 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) 9.4 AT THE TIME OF HEARING, LD. REPRESENTATIVE FOR THE ASSESSEE HAD ALSO POINTED OUT THAT THE SAID CONCERN WAS EXCLUDED BY THE DRP ITSELF IN THE CASE OF THE ASSESSEE FOR THE EARLIER ASSESSMENT YEAR OF 2010-11 ON ACCOUNT OF ITS FUNCTIONAL PROFILE BEING DIFFERENT, AGAINST WHICH THE DEPARTMENT HAS NOT PREFERRED ANY APPEAL TO THE TRI BUNAL. IT IS THEREFORE, CONTENDED THAT IN THE ABSENCE OF ANY CHA NGE IN FACTS, THE DRP OUGHT TO HAVE REJECTED THE SAID CONCERN IN THIS YEAR TOO. 9.5 IN OUR CONSIDERED OPINION, QUALITATIVELY SPEAKI NG, THE ACTIVITIES UNDERTAKEN BY M/S.E-INFOCHIPS LIMITED ARE NOT COMPA RABLE TO THE PURE SOFTWARE DEVELOPMENT SERVICES UNDERTAKEN BY THE ASS ESSEE AS A CAPTIVE SERVICE PROVIDER TO ITS ASSOCIATED ENTERPRISES. FA CTUALLY, IT IS ALSO EMERGING THAT THERE IS NO SEGMENTAL BREAK-UP AVAILA BLE WITH RESPECT TO THE PRODUCTION AND SALE OF SOFTWARE PRODUCTS UNDERT AKEN BY THE SAID CONCERN, WHICH IS AN ASPECT INCOMPARABLE TO THE ACT IVITIES OF THE ASSESSEE. FOR THE SAID REASONS, WE DO NOT FIND ANY JUSTIFICATION FOR INCLUSION OF THE SAID CONCERN AND THE SAME IS HEREB Y DIRECTED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. THUS, ON THIS ASPECT ALSO ASSESSEE SUCCEEDS. 10. THE NEXT POINT ARGUED BY THE ASSESSEE IS WAY OF GROUND OF APPEAL NO.19, WHEREBY IT IS POINTED OUT THAT WIPRO TECHNOL OGY SERVICES LTD., HAS BEEN WRONGLY INCLUDED AS A COMPARABLE WITHOUT APPRECIATING THAT THE SAID CONCERN IS FUNCTIONALLY DISSIMILAR AND IS OPERATING UNDER PECULIAR ECONOMIC CIRCUMSTANCES. IN THIS CONTEXT, IT IS SEEN THAT THE TRANSFER PRICING OFFICER IN PARA 4.1.6 HAS DISCUSSE D THE ISSUE, AND ACCORDINGLY TO HIM, THE SAID CONCERN IS COMPARABLE TO THE ASSESSEE BECAUSE IT HAS REPORTED REVENUES FROM SOFTWARE DEVE LOPMENT AND 16 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) TECHNOLOGY INFRA-SERVICES. SIMILARLY, WHILE DEALIN G WITH THE OBJECTION OF THE ASSESSEE, THE DRP HAS AFFIRMED THE STAND OF THE TRANSFER PRICING OFFICER ON THE GROUND THAT THE ACTIVITIES OF THE SAID CONCERN ARE BROADLY COMPARABLE TO THAT OF THE ASSESSEE. 10.1 AGAINST THE AFORESAID STAND OF THE REVENUE, THE LD. REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT TH E SAID CONCERN WAS EARLIER OWNED BY THE CITI GROUP (I.E. UPTO FINANCIA L YEAR 2008-09) AND WAS ENGAGED IN PROVIDING I.T SERVICES ONLY TO THE C ITI GROUP ENTITIES. SUBSEQUENTLY, FROM JANUARY, 2009 ONWARDS THE SAID C ONCERN WAS TAKEN OVER BY WIPRO GROUP AND EVEN AFTER SUCH TAKE-OVER T HE SAID CONCERN CONTINUED TO PROVIDE SERVICES PRIMARILY TO THE CITI GROUP ENTITIES GLOBALLY. IN SUPPORT, REFERENCE HAS BEEN MADE TO THE NOTES TO ACCOUNT ANNEXED TO THE ANNUAL REPORT OF THE SAID CONCERN F OR THE INSTANT YEAR, COPY OF WHICH HAS BEEN PLACED IN THE PAPER BOOK A T PAGES 501 TO 517 BEFORE US. IN THIS BACKGROUND, IT IS SOUGHT TO BE POINTED OUT THAT THE AGREEMENT UNDER WHICH THE SAID CONCERN CONTINUES TO PROVIDE SERVICES TO THE CITI GROUP ENTITIES WAS PART OF THE TAKE OV ER ARRANGEMENT AND SUCH SERVICES ARE BEING PROVIDED AT THE PRE-DETERMI NED CONSIDERATION. IT IS POINTED OUT THAT SUCH PRE-DETERMINED CONSIDER ATION WAS BETWEEN THE TWO ASSOCIATED ENTERPRISES, NAMELY, THE SAID CO NCERN AND THE OTHER CITI GROUP ENTERPRISES. THE LD. REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE FACT THAT PRICE AT WHICH THE SAID CON CERN AGREED TO CONTINUE PROVIDING SERVICES TO CITI GROUP EVEN AFT ER TAKE-OVER BY WIPRO GROUP AND IN THE ABSENCE OF ANY SPECIFIC DETA ILS AVAILABLE ON THIS ASPECT (IN PUBLIC DOMAIN), SUCH A TRANSACTION CANN OT BE CONSIDERED AS AN UNCONTROLLED TRANSACTION, AND, THUS IT IS NOT A VALID BENCHMARK. IN 17 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) THIS CONTEXT, LD. REPRESENTATIVE FOR THE ASSESSEE A LSO POINTED OUT THAT THE DRP HAS NOTED THE AFORESAID ASPECT BUT HAS NOT GIVEN ANY WEIGHTAGE TO THE SAME, WHICH IS QUITE UNJUSTIFIED. IN THIS REGARD, THE LD. REPRESENTATIVE FOR THE ASSESSEE PLACED STRONG RELIA NCE ON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF S AXO INDIA PVT. LTD.(SUPRA), WHEREIN THE SAID CONCERN HAS BEEN DIRE CTED TO BE EXCLUDED FROM THE SET OF COMPARABLES BY NOTICING THE AFORESA ID PECULIAR FACTS. OUR ATTENTION HAS DRAWN TO THE FOLLOWING DISCUSSION IN THE ORDER OF THE TRIBUNAL IN THE CASE OF SAXO INDIA PVT. LTD.(SUPRA) :- VII) WIPRO TECHNOLOGY SERVICES LTD. 16.1. THE ASSESSEE OBJECTED TO THE INCLUSION OF T HIS COMPANY IN THE LIST OF COMPARABLES BY ARGUING THAT APART FROM THIS COMPANY BEING FUNCTIONALLY DIFFERENT AND THE AVAILABILITY OF INSUFFICIENT SEGM ENTAL INFORMATION, THERE WERE ALSO SIGNIFICANT RELATED PARTY TRANSACTIONS. T HE TPO DID NOT ACCEPT THE ASSESSEES CONTENTION OF THE RELATED PARTY TRANSACT IONS AND PROCEEDED TO INCLUDE IT IN THE FINAL SET OF COMPARABLES. 16.2. WE HAVE HEARD THE RIVAL SUBMISSIONS. PAGE 57 OF THE TPOS ORDER IS REPRODUCTION OF THE ASSESSEES CONTENTION ABOUT THE RELATED PARTY TRANSACTIONS AS UNDER :- WIPRO TECHNOLOGY SERVICES LIMITED (FORMERLY CITI T ECHNOLOGY SERVICES LIMITED) (THE COMPANY) WAS INCORPORATED ON 15 SEPTEMBER, 2004. THE ENTIRE SHARE CAPITAL OF THE COMPANY WAS H ELD BY CITICORP BANKING CORPORATION, A COMPANY INCORPORATED UNDER L AWS OF DELAWARE, USA, UPTO 20 JANUARY, 2009. WIPRO LIMITED (WIPRO) EXECUTED AN AGREEMENT WITH CITIGROUP INC. FOR ACQUI RING ALL OF CITIGROUP INTEREST IN THE COMPANY W.E.F. 21 JANUARY 2009. ON 21 JANUARY 2009, WIPRO SIGNED A MASTER SERVICE AGREEME NT (MSA) WITH CITIGROUP INC. FOR THE DELIVERY OF TECHNOLOGY INFRA STRUCTURE SERVICES AND APPLICATION DEVELOPMENT AND MAINTENANCE SERVICE S FOR THE PERIOD OF SIX YEARS. THE MSA PROVIDES FOR THE DELIV ERY OF AT LEAST $500 MILLION IN SERVICE REVENUES OVER THE PERIOD OF THE CONTRACT. AFTER THE ACQUISITION BY WIPRO, THE NAME OF THE COMPANY WAS C HANGED TO WIPRO TECHNOLOGY SERVICES LIMITED (WTS OR THE CO MPANY) ON 16 MARCH 2009. 16.3. IT IS OBSERVED FROM THE ABOVE CONTENTION REPR ODUCED IN THE TPOS ORDER THAT WIPRO TECHNOLOGY SERVICES LTD., WHICH WAS EARL IER CITI TECHNOLOGY 18 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) SERVICES LTD., WAS HELD BY CITI CORP. BANKING CORPO RATION, USA UPTO 20TH JANUARY, 2009. WIPRO LTD., PARENT COMPANY OF THE AS SESSEE, EXECUTED AN AGREEMENT WITH CITI GROUP INC., FOR ACQUIRING CITI TECHNOLOGY SERVICES LTD., NOW CALLED WIPRO TECHNOLOGY SERVICES LTD. ON 21.1.2 009, WIPRO LTD. SIGNED A MASTER AGREEMENT WITH CITI GROUP INC., FOR THE DELI VERY OF TECHNOLOGY INFRASTRUCTURE SERVICES AND APPLICATION DEVELOPMENT AND MAINTENANCE SERVICES FOR THE PERIOD OF SIX YEARS, WHICH ALSO IN CLUDES THE YEAR UNDER CONSIDERATION. THIS SHOWS THAT INCOME FROM SOFTWARE DEVELOPMENT SUPPORT AND MAINTENANCE SERVICES WAS EARNED BY WIPRO TECHNO LOGY SERVICES LTD., FROM CITI GROUP INC., BY MEANS OF MASTER SERVICE AG REEMENT ENTERED INTO BETWEEN WIPRO LTD., ITS PARENT COMPANY AND CITI GRO UP INC., A THIRD PERSON. 16.4. WE HAVE NOTICED ABOVE FROM THE LANGUAGE OF R ULE 10B(1)(E)(II) THAT IT IS THE NET PROFIT MARGIN REALIZED FROM A COMPARABLE UNCONTROLLED TRANSACTION, WHICH IS CONSIDERED FOR THE PURPOSES OF BENCHMARKIN G. THE EPITOME OF `COMPARABLE UNCONTROLLED TRANSACTION IS THAT THE C OMPANIES OR TRANSACTIONS IN ORDER TO FALL WITHIN THE AMBIT OF SUB-CLAUSE (II ) OF RULE 10B(1)(E), SHOULD BE BOTH COMPARABLE AS WELL AS UNCONTROLLED. `UNCONTROL LED TRANSACTION HAS BEEN DEFINED IN RULE 10A(A) TO MEAN: A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIATED ENTERPRISES, WHETHER RESIDENT OR NON-RESIDENT. THIS SHOWS THAT IN ORDER TO BE CALLED AS AN UNCONTROLLED TRANSACTION, IT IS SINE QUA NON THAT THE SAME SHOULD BE BETWEEN THE ENTERPRISES OTHER THAN THE ASSOCIATED ENTERPRISES. SECTION 92B(2) PROVIDES THA T: `A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN A SSOCIATED ENTERPRISE SHALL, FOR THE PURPOSES OF SUB-SECTION (1), BE DEEMED TO B E A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE E XISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN SUCH O THER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON A ND THE ASSOCIATED ENTERPRISE. ON GOING THROUGH THE PRESCRIPTION OF S UB-SECTION (2) OF SECTION 92B, IT IS CLEARLY BORNE OUT THAT A TRANSACTION WIT H A NON-AE SHALL BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO AES IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION B ETWEEN THE THIRD PERSON AND THE AE OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN THE THIRD PERSON AND THE AE. WHEN WE CONSIDER SECTION 92B(2) IN COMBINATION WITH RULE 10A(A), IT FOLLOWS THAT THE TRANSACTION BETWEEN NON-AES SHALL BE CONSTRUED AS A TRANSACTION BETWEEN TWO AES, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE R ELEVANT TRANSACTION BETWEEN THIRD PERSON AND THE AE. IF SUCH AN AGREEME NT EXISTS, THE THIRD PERSON IS ALSO CONSIDERED AS AN AE AND THE TRANSACT ION WITH SUCH THIRD PERSON BECOMES INTERNATIONAL TRANSACTION WITHIN THE MEANIN G OF SECTION 92B. ONCE THERE IS A TRANSACTION BETWEEN TWO ASSOCIATED ENTER PRISES, IT CEASES TO BE AN UNCONTROLLED TRANSACTION AND, THEREBY, GOES OUT OF RECKONING UNDER RULE 10B(1)(E)(II). 16.5. ADVERTING TO THE FACTS OF THE INSTANT CASE, W E FIND THAT WIPRO TECHNOLOGY SERVICES LTD. EARNED A REVENUE FROM MAST ER SERVICES AGREEMENT 19 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) WITH CITIGROUP INC. FOR THE DELIVERY OF TECHNOLOGY INFRASTRUCTURE SERVICES. THIS AGREEMENT WAS, IN FACT, EXECUTED BETWEEN THE ASSESS EES AE, WIPRO LTD., AND CITIGROUP INC., A THIRD PERSON. THIS UNFOLDS THAT T HE TRANSACTION OF EARNING REVENUE FROM SOFTWARE DEVELOPMENT SUPPORT AND MAINT ENANCE SERVICES BY WIPRO TECHNOLOGY SERVICES LTD., IS AN INTERNATIONAL TRANSACTION BECAUSE OF THE APPLICATION OF SECTION 92B(2) I.E., THERE EXIST S A PRIOR AGREEMENT IN RELATION TO SUCH TRANSACTION BETWEEN CITIGROUP INC. (THIRD PERSON) AND WIPRO LTD. (ASSOCIATED ENTERPRISE). IN THE LIGHT OF THIS STRUCTURE OF TRANSACTION, IT CEASES TO BE UNCONTROLLED TRANSACTION AND, HENCE, W IPRO TECHNOLOGY SERVICES LTD., DISQUALIFIES TO BECOME A COMPARABLE UNCONTROL LED TRANSACTION FOR THE PURPOSES OF INCLUSION IN THE FINAL LIST OF COMPARAB LES UNDER RULE 10B(1)(E)(II). WE, THEREFORE, DIRECT REMOVAL OF THIS COMPANY FROM THE LIST OF COMPARABLES. 10.2 BASED ON THE ABOVE DECISION OF OUR CO-ORDINAT E BENCH AND ALSO RELYING UPON THE FOLLOWING DECISIONS, IT IS CANVASS ED THAT THE SAID CONCERN IS INCOMPARABLE FOR THE REASON THAT THE TRA NSACTIONS SOUGHT TO BE COMPARED ARE NOT UNCONTROLLED TRANSACTIONS, THUS IT CANNOT BE USED AS A BENCHMARK TO ARRIVE AT AN ARMS LENGTH PRICE O F THE TESTED TRANSACTIONS:- 1. FIL INDIA BUSINESS SERVICES PVT. LTD. VS. DCIT, ITA NO.6867/DEL/2014 DATED 12 TH MAY, 2016. 2. EQUANT SOLUTIONS INDIA PRIVATE LIMITED, VS. DCI T, ITA NO. 1202/DEL/2015 DATED 21 ST JANUARY, 2016-09-12 3. M/S. ION TRADING INDIA PRIVATE LIMITED VS. ITO, ITA NO. 1035/MUM/2015 DATED 21 ST JANUARY, 2016. 4. XCHANGING TECHNOLOGY SERVICES INDIA PRIVATE LIM ITED VS. DCIT, ITA NO.1222/DEL/2015 DATED 8 TH SEPTEMBER,2015 10.3 APART FROM THE AFORESAID, LD. REPRESENTATIVE F OR THE ASSESSEE HAS POINTED OUT THAT THE SAID CONCERN ENJOYS THE BENEFI TS OF AN ESTABLISHED BRAND NAME, AND IT HAS EARNED SUPER-NORMAL PROFIT @ 52.09% ON TOTAL COST AND SUCH FEATURES ALSO MAKE IT INCOMPARABLE T O THE ASSESSEE COMPANY. 20 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) 11. THE LD. DEPARTMENTAL REPRESENTATIVE APPEARING FOR THE REVENUE HAS NOT DISPUTED THE FACTUAL MATRIX BROUGHT OUT BY THE ASSESSEE BUT REFERRED TO THE DISCUSSION BY THE TRANSFER PRICING OFFICER TO INCLUDE THE SAID CONCERN IN THE FINAL SET OF COMPARABLES. ACCO RDING TO THE TRANSFER PRICING OFFICER, THE SAID CONCERN HAS DERIVED INCO ME FROM SOFTWARE DEVELOPMENT AND TECHNOLOGY INFRA SERVICES AND, THER EFORE, IT IS A GOOD COMPARABLE. 11.1 HAVING CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS, IN OUR CONSIDERED OPINION, THE SAID CONCERN DESERVES TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. IT IS QUITE CLEAR THAT T HE COMPARABLE TRANSACTIONS EXECUTED BY WIPRO TECHNOLOGY SERVICES LTD. ARE IN TERMS OF AN ARRANGEMENT WITH RELATED PARTIES AT THE TIME OF INITIATION OF THE ARRANGEMENT, THOUGH IN THE RELEVANT PERIOD, THE REL ATIONSHIP HAD UNDERGONE A CHANGE. THE DELHI TRIBUNAL IN THE CASE OF SAXO INDIA PVT. LTD.(SUPRA) HAS CLEARLY BROUGHT OUT THAT IN THE LIG HT OF THE STRUCTURING OF THE TRANSACTION, THE TRANSACTIONS EXECUTED BY WIPR O TECHNOLOGY SERVICES LTD. DO NOT QUALIFY TO BE UNCONTROLLED T RANSACTIONS AND, THEREFORE, THE SAME CANNOT BE CONSIDERED FOR THE PU RPOSES OF COMPARABILITY ANALYSIS HAVING REGARD TO THE PROVISI ONS OF RULE 10B(1)(E)(II) OF THE RULES. IN VIEW FO THE AFORESA ID DISCUSSION, WE, THEREFORE, DIRECT THE ASSESSING OFFICER/TPO TO EXCL UDE THE SAID CONCERN FROM THE FINAL SET OF COMPARABLES. 12. AT THE TIME OF HEARING, IT WAS POINTED OUT BY T HE LD. REPRESENTATIVE FOR THE ASSESSEE THAT IF ASSESSEE SU CCEEDS ON THE EXCLUSION OF THE AFORESAID THREE CONCERNS FROM THE FINAL SET OF COMPARABLES, THE MARGIN OF THE ASSESSEE WOULD FALL WITHIN +/-5% RANGE 21 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) VIS-A-VIS MARGIN OF THE RESIDUAL COMPARABLES AND TH US, IN VIEW OF THE PROVISO TO SECTION 92C(2) OF THE ACT NO ADDITION WO ULD SURVIVE. IT HAS ALSO BEEN POINTED OUT THAT EVEN THE GROUNDS RAISED IN THE APPEAL OF THE REVENUE ON THE ASPECT OF TRANSFER PRICING ADJUSTME NT WOULD ALSO BE RENDERED IN FRUCTUOUS INASMUCH AS , EVEN IF THE GRO UND OF APPEAL OF THE REVENUE IS ALLOWED, STILL THE MARGIN OF THE ASSESS EE WOULD FALL WITHIN +/- 5% RANGE VIS-A-VIS THE MARGIN OF THE COMPARABLE S CONCERNED. IN VIEW OF THE AFORESAID SUBMISSION AND NOTICING THAT THE THREE CONCERNS NAMELY, E-INFOCHIPS LIMITED, INFOSYS LIMITED AND WI PRO TECHNOLOGIES SERVICES LTD. HAVE BEEN DIRECTED TO BE EXCLUDED FR OM THE FINAL SET OF COMPARABLES BY US, THE OTHER GROUNDS RELATING TO TH E TRANSFER PRICING ADJUSTMENT IN THE SEGMENT OF SOFTWARE DEVELOPMENT S ERVICES ARE RENDERED ACADEMIC AND DO NOT CALL FOR ANY ADJUDICAT ION FOR THE PRESENT. AS A CONSEQUENCE, GROUND OF APPEAL NOS. 1 TO 21 (EX CEPT GROUND NOS. 15,18 & 19 WHICH ARE ALLOWED) IN THE APPEAL OF THE ASSESSEE AND GROUND NOS. 1 TO 4 OF THE REVENUE ARE RENDERED ACADEMIC IN NATURE AND ARE ACCORDINGLY TREATED AS INFRUCTUOUS. 13. NOW WE MAY CONSIDER GROUNDS OF APPEAL NO. 22 & 23 IN THE APPEAL OF THE ASSESSEE, WHICH RELATE TO AN ADDITION OF RS.2,19,51,284/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF TRANSF ER PRICING ADJUSTMENT IN RELATION TO THE INTERNATIONAL TRANSAC TIONS OF REIMBURSEMENT OF EXPENSES RECEIVED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISES. IN BRIEF, THE RELEVANT FAC TS IN ORDER TO APPRECIATE THE SAID CONTROVERSY CAN BE SUMMARIZED A S FOLLOWS. DURING THE YEAR UNDER CONSIDERATION, ASSESSEE HAD INCURRED CERTAIN EXPENSES ON BEHALF OF ITS ASSOCIATED ENTERPRISES, WHICH WAS SUBSEQUENTLY 22 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) RECOVERED FROM THE ASSOCIATED ENTERPRISES ON COST T O COST BASIS WITHOUT ANY MARK-UP. SUCH REIMBURSEMENTS, WHICH TOTALLED TO RS.31,95,12,842/- , WERE IN THE NATURE OF COST OF TRAVEL, ACCOMMODAT ION, VISA EXPENSES, PER DIEM AND OTHER DAY TO DAY EXPENSES. ON BEING S HOW CAUSED BY THE TRANSFER PRICING OFFICER AS TO WHY SUCH RECOVERIES BE NOT SUBJECT TO SERVICE CHARGE OF 10%, ASSESSEE EXPLAINED THAT IT W AS A STANDARD PRACTICE TO RECOVER CERTAIN OUT OF POCKET EXPENSES INCURRED DURING THE COURSE OF RENDERING SERVICES TO THE CLIENTS ON A C OST TO COST BASIS AND THAT IT WAS ONLY FOR ADMINISTRATIVE CONVENIENCE TH AT THE PAYMENTS TOWARDS SUCH EXPENSES WERE INITIALLY MADE BY THE AS SESSEE AND LATER ON RECOVERED. THE TRANSFER PRICING OFFICER WAS NOT S ATISFIED WITH THE EXPLANATION FURNISHED BY THE ASSESSEE. THE TRANSFE R PRICING OFFICER OBSERVED THAT THERE WAS AN ELEMENT OF SERVICE IN SU CH AN ARRANGEMENT AND FURTHER NOTED THAT SUCH EXPENSES WERE RECOVERED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISES AFTER A CERTAIN TIM E LAG, DURING WHICH PERIOD IT HAD TO BEAR THE FINANCIAL COSTS. FOR THE AFORESAID REASONS, THE TRANSFER PRICING OFFICER ADDED 10% MARK-UP AS MEA NS TO COMPENSATE THE ASSESSEE WHICH CAME TO RS.3,19,51,284/- AND SUC H AMOUNT WAS DETERMINED AS INCOME IN THE HANDS OF THE ASSESSEE. 13.1 BEFORE US, THE LD. REPRESENTATIVE FOR THE ASSE SSEE VEHEMENTLY POINTED OUT THAT THE LOWER AUTHORITIES HAVE NOT APP RECIATED THE FACTS IN THEIR PROPER PERSPECTIVE. IT HAS BEEN EXPLAINED TH AT THE IMPUGNED EXPENSES RELATE TO COST OF TRAVEL, ACCOMMODATION, V ISA EXPENSES, PER DIEM AND OTHER DAY TO DAY EXPENSES, WHICH WERE INCU RRED BY THE ASSESSEES EMPLOYEES IN THE COURSE OF RENDERING SER VICES OR OTHER SUCH EXPENSES INCURRED ON THE SPECIFIC REQUEST OF THE AS SOCIATED ENTERPRISES. 23 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) SINCE THE ASSOCIATED ENTERPRISES WERE RESPONSIBLE F OR SUCH COSTS, ASSESSEE INITIALLY INCURRED THE EXPENDITURE BUT LAT ER ON RECOVERED IT FROM THE ASSOCIATED ENTERPRISE AND THAT THERE WAS N O SERVICE ELEMENT INVOLVED SO AS TO JUSTIFY EARNING OF ANY SERVICE CH ARGE. BEFORE US, LD. REPRESENTATIVE FOR THE ASSESSEE ALSO REFERRED TO V OLUMINOUS MATERIAL PLACED IN THE PAPER BOOK, WHICH WAS ALSO AVAILABLE TO THE LOWER AUTHORITIES, TO POINT OUT THAT THERE WAS NO PROFIT- ELEMENT IN SUCH ARRANGEMENT OF RECOVERY OF OUT OF POCKET EXPENSES.. 13.2 ON THE OTHER HAND, LD. DEPARTMENTAL REPRESENT ATIVE APPEARING FOR THE REVENUE EMPHASISED THAT THERE WAS A CONSIDE RABLE TIME LAG BETWEEN THE INCURRING OF SUCH EXPENDITURE BY THE AS SESSEE COMPANY AND ITS ULTIMATE RECOVERY FROM THE ASSOCIATED ENTE RPRISES AND, THEREFORE, IT REFLECTED INCURRENCE OF FINANCIAL CO ST BY THE ASSESSEE, WHICH OUGHT TO HAVE BEEN COMPENSATED BY THE ASSOCIA TED ENTERPRISES, AND, THEREFORE, THE TRANSFER PRICING ADJUSTMENT IN THIS REGARD MADE BY THE TPO/ASSESSING OFFICER IS JUSTIFIED. 13.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AT THE OUTSET, IN OUR CONSIDERED OPINION, IT WOULD BE APPROPRIATE TO CULL OUT APPROPRIATE FACTS WHICH ARE RELEVANT TO DECIDE THE CONTROVERSY. NOTABLY, ASSESSEE IS RENDERING SERVICES TO ITS ASSOCIATED ENTERPRISES AB ROAD FOR WHICH IT IS TO BE COMPENSATED ON A COST PLUS MARK-UP BASIS AND SUC H TRANSACTIONS HAVE BEEN SEPARATELY BENCH-MARKED. IN THE COURSE O F RENDERING SUCH SERVICES, ASSESSEE ALSO INCURRED CERTAIN COSTS RELA TING TO TRAVEL, ACCOMMODATION, VISA, PER DIEM AND OTHER DAY-TO-DAY EXPENSES, WHICH WERE EXPENDED BY ITS PERSONNEL. FURTHER, ASSESSEE ALSO INCURRED CERTAIN OUT OF POCKET EXPENSES ON THE SPECIFIC REQUEST OF I TS ASSOCIATED 24 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) ENTERPRISES. THE RESPONSIBILITY FOR THE AFORESAID TYPE OF EXPENSES WAS OF THE ASSOCIATED ENTERPRISES BUT THE PAYMENT TOWAR DS THESE COSTS WERE INITIALLY MADE BY THE ASSESSEE AND THEREAFTER, RECOVERIES WERE MADE FROM THE ASSOCIATED ENTERPRISES. BEFORE THE D RP, ASSESSEE ALSO POINTED OUT THAT SUCH EXPENSES, WHICH ARE RECOVERED BY IT FROM ITS ASSOCIATED ENTERPRISES, ARE IN-TURN RECOVERED BY TH E ASSOCIATED ENTERPRISES FROM THE ULTIMATE CLIENTS ON A COST TO COST BASIS. IN THIS CONTEXT, ASSESSEE FURNISHED SAMPLE COPIES OF DEBIT NOTES RAISED BY IT ON ITS ASSOCIATED ENTERPRISES ALONGWITH COPIES OF THE CORRESPONDING DEBIT NOTES RAISED BY THE ASSOCIATED ENTERPRISES ON THE U LTIMATE CLIENTS. THE AFORESAID WAS CANVASSED BY THE ASSESSEE TO SUBSTANT IATE THAT THERE WAS ONE TO ONE CO-RELATION AND THAT THE ENTIRE EXERCISE DID NOT INVOLVE ANY ELEMENT OF PROFIT OR MARK-UP IN THE HANDS OF THE AS SOCIATED ENTERPRISES. THE AFORESAID MATERIAL IS PLACED AT PAGES 518 TO 61 2 OF THE PAPER BOOK AND WHICH WAS ALSO BEFORE THE LOWER AUTHORITIES. A T THE TIME OF HEARING, THE LD. REPRESENTATIVE FOR THE ASSESSEE HA D ALSO REFERRED TO PAGE 613 TO 645 OF THE PAPER BOOK, WHEREIN ARE PLAC ED COPIES OF ASSESSEES ARRANGEMENT WITH THE ASSOCIATED ENTERPRI SES AND ALSO THE SAMPLE AGREEMENTS BETWEEN THE ASSOCIATED ENTERPRISE S AND THE ULTIMATE CLIENTS, WHICH PRESCRIBE THAT ALL IMPUGNED TRAVEL AND RELATED EXPENSES ARE SEPARATELY CHARGEABLE ON A COST TO COS T BASIS. ALL THIS MATERIAL CLEARLY BRINGS OUT A PERTINENT FEATURE THA T IN THE ENTIRE TRANSACTION INVOLVING PAYMENT OF EXPENDITURE BY THE ASSESSEE, ITS RECOVERY FROM THE ASSOCIATED ENTERPRISES, WHICH-IN TURN RECOVERS IT FROM THE END CLIENTS, THERE IS NO INVOLVEMENT OF ANY P ROFIT-ELEMENT IN THE HANDS OF THE ASSOCIATED ENTERPRISES. THEREFORE, IT WOULD BE WRONG ON THE PART OF THE INCOME TAX AUTHORITIES TO TAKE A PO SITION AND INFER 25 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) NOTIONALLY ABOUT RECOVERY OF MARK-UP OR PROFIT ELEM ENT IN THE HANDS OF ASSESSEE. IT HAS ALSO BEEN BROUGHT OUT THAT IT IS A STANDARD PRACTICE IN THE I.T. INDUSTRY TO RECOVER OUT OF POCKET EXPENSES INCURRED DURING THE COURSE OF PROVIDING SERVICES FOR THE CLIENTS ON A C OST TO COST BASIS. UNDER THESE CIRCUMSTANCES, IN OUR VIEW, THE TRANSFE R PRICING OFFICER ERRED IN PROCEEDING TO INFER A NON-EXISTENT UNDERST ANDING BETWEEN ASSESSEE AND ITS ASSOCIATED ENTERPRISES SO AS TO IM PUTE INCOME QUA THE INSTANT TRANSACTION IN TERMS OF SECTION 92(1) OF THE ACT. ANOTHER PERTINENT FACT WHICH HAS NOT BEEN REBUTTED BY THE R EVENUE BEFORE US IS TO THE EFFECT THAT IN SIMILAR SITUATION, FROM ASSES SMENT YEAR 2004-05 TO 2010-11, NO TRANSFER PRICING ADJUSTMENT HAS BEEN MA DE BY THE ASSESSING OFFICER IN RELATION TO THE INTERNATIONAL TRANSACTIONS ON RECOVERY OF EXPENSES. 13.4 ANOTHER ASPECT WHICH EMERGES FROM THE ORDER OF THE TPO IS AS FOLLOWS. AFTER CONSIDERING THE FACTUAL MATRIX, THE TPO HAS PROCEEDED TO DETERMINE THE ARMS LENGTH PRICE FOR THE SERVICE C HARGES AT 10% OF THE EXPENSES RECOVERED. OSTENSIBLY, THE INCOME ARISING FROM AN INTERNATIONAL TRANSACTION IS LIABLE TO BE COMPUTED, HAVING REGARD TO THE ARMS LENGTH PRICE AS MANDATED IN SECTION 92(1) OF THE ACT. SECTION 92C PRESCRIBES THE MANNER OF DETERMINATION OF THE ARMS LENGTH PRICE AND SUB-SECTION (1) THEREOF SPECIFICALLY LAYS DOWN VARI OUS METHODS BY WHICH THE DETERMINATION OF ARMS LENGTH PRICE HAS TO BE M ADE. IT IS QUITE CLEAR THAT THERE IS NO ADHOCISM PERMISSIBLE IN THE MANNER OF COMPUTATION OF ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION, WHEREAS THE ACTION OF THE TRANSFER PRICING OFFICER IN CONSIDERING THE ARM S LENGTH PRICE @10% OF THE EXPENSES RECOVERED IS NOT ONLY ADHOC BUT IT ALSO DOES NOT 26 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) CONFORM TO ANY OF THE METHODS PRESCRIBED IN SECTION 92C(1) OF THE ACT. ON THIS COUNT ITSELF, THE ACTION OF THE TPO IS SUSP ECT, EVEN IF, IT IS TO BE UNDERSTOOD THAT THE IMPUGNED TRANSACTION WAS AN INT ERNATIONAL TRANSACTION REQUIRING COMPUTATION OF INCOME HAVING REGARD TO ITS ARMS LENGTH PRICE. 13.5 CONSIDERED IN THE AFORESAID LIGHT, IN OUR CON SIDERED OPINION, THE ACTION OF THE TRANSFER PRICING OFFICER/ASSESSING OF FICER IN MAKING AN ADDITION OF RS.3,19,51,284/- DESERVES TO BE SET-ASI DE. WE HOLD SO. THUS, IN SO FAR AS GROUND OF APPEAL NO.22& 23 ARE C ONCERNED, THE SAME ARE ALLOWED. 14. IN SO FAR AS GROUNDS OF APPEAL NO. 24,25 & 26 A RE CONCERNED, THE SAME RELATE TO CHARGING OF INTEREST UNDER SECTION 2 34B & 234C OF THE ACT, WHICH ARE CONSEQUENTIAL IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 15. GROUND OF APPEAL NO.27 RELATES TO INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT, WHI CH IS PREMATURE AND IS DISMISSED. 16. IN THE RESULT, WHEREAS THE APPEAL OF THE ASSESS EE IS PARTLY ALLOWED, THAT OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 11/11/2016 SD/- SD/- (RAVISH SOOD) (G.S. PANNU) JUDICIAL MEMBER ACCOCUNTANT MEMBER MUMBAI, DATED 11/11/2016 VM , SR. PS 27 ITA NO. 696& 1006/MUM/2016 (ASSESSMENT YEAR 2011-12) COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT , 2. THE RESPONDENT. 3. THE CIT(A)- 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI