MAERSK GLOBAL SERVICE CENTRES (I) P.LTD, MUMBAI V. ASST CIT CIR 6(3), MUMBAI

ITA 7466/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75714 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 13-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 17-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: MANISH KANTH; PORUS KAKA SHRI SUNIL M LALA
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; International transaction; Initiation of penalty proceedings
• Section: 92C; 143(3); 92; 92B; 92A; 234B; 133(6); 10B

Judgement Text

K (SPECIAL BENCH) IN THE INCOME TAX APPELLATE TRIBUNAL K (SPEC IAL BENCH), MUMBAI . , , . . , , . . , BEFORE SHRI D. MANMOHAN, V.P., SHRI B.R. MITTAL, JM AND SHRI P.M. JAGTAP, AM ./ I.T.A. NO.7466/MUM/2012 ( / ASSESSMENT YEAR : 2008-2009 MAERSK GLOBAL CENTRES (INDIA) PRIVATE LIMITED, 4 TH AND 5 TH FLOOR, PRUDENTIAL BUILDING, CENTRAL AVENUE ROAD, HIRANANDANI BUSINESS PARK, POWAI, MUMBAI 400 076. / VS. ASST. COMMISSIONER OF INCOME TAX- CIRCLE 6(3), AAYAKAR BHAVAN, MUMBAI. ./ PAN : AADCM7786M (APP ELLANT ) .. RESPONDENT ) A PPELLANT BY : SHRI PORUS KAKA SHRI SUNIL M. LALA & SHRI MANISH KANTH DEPARTMENT BY : SHRI AJEET KUMAR JAIN INTERVENERS M/S OMNIGLOBE INFORMATION TECHNOLOGIES INDIA PVT. LTD. AND M/S CRM SERVICES INDIA LTD. BY SHRI AJAY VORA ) * / DATE OF HEARING : 13-2-14 ) * / DATE OF PRONOUNCEMENT : 7-3-14 / O R D E R PER P.M. JAGTAP, A.M . : . . , THIS SPECIAL BENCH HAS BEEN CONSTITUTED BY THE HON BLE PRESIDENT TO DISPOSE OF THE APPEAL FILED BY THE ASSESSEE AGAI NST THE ORDER PASSED BY THE LD. ACIT- CIRCLE -6(3), MUMBAI (A.O.) U/S 143(3 ) OF THE INCOME TAX 2 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED ACT, 1961 IN PURSUANCE OF THE DIRECTIONS GIVEN BY T HE DISPUTE RESOLUTION PANEL I (DRP) U/S 144-C-(5) OF THE INCOME TAX ACT , 1961 AND SPECIFICALLY TO DECIDE THE FOLLOWING IMPORTANT QUESTIONS (AS REF RAMED) INVOLVED THEREIN:- 1) WHETHER FOR THE PURPOSE OF DETERMINING ARMS LE NGTH PRICE OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE-COMPANY, PROVIDING BACK OFFICE SUPPORT SERVICES TO THEIR OVERSEAS ASSO CIATED ENTERPRISES, COMPANIES PERFORMING KPO FUNCTIONS SHO ULD BE CONSIDERED AS COMPARABLE ? 2) WHETHER, IN THE FACTS OF THE ASSESSEES CASE, CO MPANIES EARNING ABNORMALLY HIGH PROFIT MARGIN SHOULD BE INCLUDED IN THE LIST OF COMPARABLE CASES FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTIONS? 2. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY IN CORPORATED IN INDIA ON 19-11-2003. IT IS A WHOLLY OWNED SUBSIDIAR Y OF MAERSK GSC HOLDINGS A/S, WHICH IN TURN IS A DOWNSTREAM SUBSIDI ARY OF APMM GROUP (MAERSK GROUP). IT IS ENGAGED, INTER ALIA, IN THE BUSINESS AS SHARED SERVICE CENTRE AND RENDERS TRANSACTION PROCESSING, DATA ENTRY, RECONCILIATION OF STATEMENTS, AUDIT OF SHIPPING DOC UMENTS AND OTHER SIMILAR SUPPORT SERVICES. IT ALSO RENDERS I.T. SERV ICES SUCH AS PROCESS SUPPORT, PROCESS OPTIMIZATION AND TECHNICAL SUPPORT SERVICES. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILE D BY IT ON 30-9-2008 DECLARING TOTAL INCOME OF RS. 34,14,980/- UNDER TH E NORMAL PROVISIONS OF THE ACT AND BOOK PROFIT OF RS. 12,29,06,881/- COMPU TED U/S 115 JB OF THE ACT. IN THE SAID YEAR, IT HAD CARRIED OUT, INT ER ALIA, THE INTERNATIONAL TRANSACTIONS OF PROVIDING I.T. ENABLED SERVICES TO ITS ASSOCIATED ENTERPRISES (AES) FOR THE AGGREGATE VALUE OF RS. 11 7,56,19,974/-. THE NATURE OF SUCH SERVICES WAS STATED TO BE TRANSACTIO N PROCESSING, DATA ENTRY, ACCOUNTING AND OTHER SUPPORT SERVICES. DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS, A REFERENCE WAS MADE BY THE A.O. TO THE TPO U/S 92CA(1) OF THE ACT TO DETERMINE THE ARMS LENGT H PRICE (ALP) OF THESE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES ALONG WITH OTHER INTERNATIONAL TRANSACTIONS. 3 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 3. IN THE TP STUDY REPORT SUBMITTED BY THE ASSESSEE , THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS REPRE SENTING I.T. ENABLED SERVICES PROVIDED TO THE AES WAS DETERMINED BY APPL YING TRANSACTIONAL NET MARGIN METHOD (TNMM) AND ADOPTING THE OPERATING PROFIT TO TOTAL COST (OP/TC) AS THE PROFIT LEVEL INDICATOR (PLI). THE OP/TC OF THE ASSESSEE COMPANY WAS WORKED OUT AT 12.82% WHILE THE AVERAGE OP/TC OF THE THIRTEEN COMPARABLES SELECTED BY THE ASSESSEE W AS ARRIVED AT 13.90%. SINCE THE PROFIT MARGIN OF THE ASSESSEE COMPANY AFT ER CLAIMING WORKING CAPITAL ADJUSTMENT AT 4.79% AND RISK ADJUSTMENT AT 7.46% WAS HIGHER THAN THE AVERAGE PROFIT MARGIN OF THE COMPARABLES, IT WAS CLAIMED IN THE TP STUDY REPORT THAT THE PRICE CHARGED BY THE ASSES SEE COMPANY TO ITS AES FOR THE INTERNATIONAL TRANSACTIONS INVOLVING PR OVISION OF I.T. ENABLED SERVICES WAS AT ARMS LENGTH. 4. AFTER A CAREFUL STUDY AND ANALYSIS OF THE T.P. S TUDY REPORT SUBMITTED BY THE ASSESSEE, THE TPO FOUND THE FOLLOW ING MATERIAL DEFECTS IN THE T.P. ANALYSIS DONE THEREIN:- 1. AS PER RULE 10B(4), IT IS MANDATORY TO THE USE THE CURRENT FINANCIAL YEAR DATA I.E. THE FINANCIAL YEAR IN WHIC H THE INTERNATIONAL TRANSACTIONS TOOK PLACE. (FY 2007-08) . BUT THE TAXPAYER DID NOT CONSIDER CURRENT YEAR DATA IN 3 OF 10 COMPARABLE COMPANIES. 2. THE TAXPAYER USED EARLIER TWO YEARS DATA WITHOUT JUSTIFYING HOW SUCH EARLIER DATA HAD AN INFLUENCE ON PRICING F OR THE TAXPAYER OR THE COMPARABLE COMPANIES. 3. THE TAXPAYER CONSIDERED FOLLOWING COMPANIES WITH SIGNIFICANT CONTROLLED OR RELATED PARTY TRANSACTION S. SL NO. NAME OF THE COMPANY 1 FORTUNE INFOTECH LTD. 2 ICRA ONLINE LTD. 3 KPIT CUMMINS GLOBAL BUSINESS SOLUTIONS LTD. 4 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 4. THE TAXPAYER CONSIDERED FOLLOWING COMPANIES WITH DOMESTIC OPERATIONS AS WELL WHEN THE TAXPAYERS ITES SEGMENT IS MAINLY AN EXPORT ORIENTED. SL NO. NAME OF THE COMPANY 1 INFORMED TECHNOLOGIES INDIA LTD. 2 SHREEJI INFO HUBS LTD. 5. AS DISCUSSED ABOVE, SOME OF THE TAXPAYERS COMPA RABLES DO NOT STAND SCRUTINY OF FAR ANALYSIS. 6. SOME COMPANIES LIKE ECLERX SERVICES LTD., THOUGH IS INTO KPO SERVICES AND QUALIFY ALL THE FILTERS APPLIED BY THE TAX PAYER BASED ON THE DATA PERTAINING TO THE FY 2007-08, HAV E NOT BEEN SELECTED. 5. KEEPING IN VIEW THE ABOVE MATERIAL DEFECTS POINT ED OUT BY HIM, THE TPO REJECTED THE TP REPORT SUBMITTED BY THE ASSESSE E TREATING THE SAME AS UN-RELIABLE AND IN-CORRECT AND PROCEEDED ON HIS OWN TO DETERMINE THE ALP OF THE RELEVANT INTERNATIONAL TRANSACTIONS ENTE RED INTO BY IT. IN THIS REGARD, HE NOTED THAT THE ASSESSEE COMPANY WAS OPER ATING WITH MORE THAN 2000 EMPLOYEES OUT OF THE STATE OF ART FACILIT Y AND WAS PROVIDING SUPPORT SERVICES TO ITS AES SUCH AS DOCUMENTATION, FINANCE, OPERATIONS, LOGISTICS, GLOBAL INFORMATION SYSTEMS ETC. ACCORDIN G TO HIM, THESE SERVICES WERE IN THE NATURE OF KNOWLEDGE BASED SERVICES AND THUS WERE LIABLE TO BE CHARACTERISED AS KNOWLEDGE PROCESS OUTSOURCING (KPO ) SERVICES. HE NOTED THAT THE ASSESSEE WAS RENDERING MAINLY LOGIST IC OUTSOURCING SERVICES AND BUSINESS ANALYTIC SERVICES TO ITS AES WHICH INVOLVED THE TRANSFER OF KNOWLEDGE INTENSIVE BUSINESS PROCESS TH AT REQUIRED SIGNIFICANT DOMAIN EXPERTISE. HE OBSERVED THAT FOR GLOBAL CORPORATIONS LOOKING TO MOVE THEIR HIGHER-END RESEARCH LIKE MARK ET RESEARCH AND EQUITY RESEARCH, ANALYTICAL BASED SERVICES, ENGINEE RING DESIGN, IPR, LEGAL SERVICES, REMOTE EDUCATION AND PUBLISHING, INDIA WA S CURRENTLY THE LOCATION OF CHOICE. 5 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 6. HAVING HELD THAT THE SERVICES RENDERED BY THE AS SESSEE COMPANY TO ITS AES WERE IN THE NATURE OF KNOWLEDGE PROCESS OUT SOURCING (KPO) SERVICES, THE TPO REJECTED TWELVE OF THE THIRTEEN C OMPARABLES SELECTED BY THE ASSESSEE ITS T.P. STUDY REPORT ON THE FOLLOWING GROUNDS:- SL. NO. NAME OF THE COMPARABLE REMARKS 1 ALLSEC TECHNOLOGIES LTD. THE ANNUAL REPORT OF THE COMPANY IS AVAILABLE FOR THE FY 2007-08. AS PER THE INFORMATION AVAILABLE IN THE ANNUAL REPORT, THE COMPANY MERGED ITS SUBSIDIARY B2K CORP. LTD. WAS CLOSED DOWN. DUE TO THIS PECULIAR CIRCUMSTANCE, THE SAME IS NOT CONSIDERED AS A COMPARABLE. 2. CALIBER POINT BUSINESS SOLUTIONS LTD. THE COMPANY IS NOT INTO KPO SERVICES AND THUS THE SAME IS NOT CONSIDERED AS A COMPARABLE. 3. COSMIC GLOBAL LTD. THE COMPANY IS NOT INTO KPO S ERVICES AND THUS THE SAME IS NOT CONSIDERED AS A COMPARABLE. 4. FORTUNE INFOTECH LTD. THE COMPANY HAS RELATED PA RTY TRANSACTIONS (RPTS) TO THE EXTENT OF 100.03% OF ITS REVENUE FOR THE FY 2007-08 (RPTS) ON INCOME AND EXPENSE SIDE COMBINED). THUS THE COMPANY FAILS 25% RPT FILTER APPLIED BY THE TPO AND IS NOT CONSIDERED AS A COMPARABLE. 5 ICRA ONLINE LTD. THE COMPANY IS A SUBSIDIARY OF I CRA LTD. AS PER THE INFORMATION SUBMITTED BY THE COMPANY, ITS ITES SEGMENT FAILS 25% RPT FILTER. IN THIS REGARD, THE ANNUAL REPORT OF THE COMPANY (CONTAINED IN AR FOR ICRA LTD.) AND REPLY RECEIVED FROM THE COMPANY ARE ENCLOSED HEREWITH AS A SOFT COPY. 6 ICRA TECHNO ANALYTICS LTD. THE ANNUAL REPORT DOES NOT CONTAIN SEGMENTAL RESULTS AS THE COMPANY IS INTO SOFTWARE PRODUCTS, SOFTWARE SERVICES AND IT ENABLED SERVICES. 133(6) NOTICE WAS ISSUED TO THE COMPANY. IN RESPONSE, THE COMPANY SUBMITTED SEGMENTAL RESULTS FOR SOFTWARE AND PROFESSIONAL SERVICES. BUT, IT WAS ALSO STATED THAT PROFESSIONAL SERVICES INCLUDE BOTH 6 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED SOFTWARE DEVELOPMENT SERVICES AND IT ENABLED SERVICES. SUB-SEGMENTAL RESULTS ARE NOT SUBMITTED. THUS THE SAME IS NOT CONSIDERED AS A COMPARABLE. 7 INFORMED TECHNOLOGIES INDIA LTD. THE COMPANY HAS EXPORTS TO THE EXTENT OF 66.52% OF ITS REVENUES FOR THE FY 2007-08 (RPTS ON INCOME AND EXPENSE SIDE COMBINED). THUS THE COMPANY FAILS 75% EXPORT FILTER APPLIED BY THE TPO AND IS NOT CONSIDERED AS A COMPARABLE. 8 KPIT COMMINS GLOBAL BUSINESS SOLUTION LTD. THE COMPANY IS A SUBSIDIARY OF KPIT CUMMINS INFOSYSTEMS LTD. AS PER THE INFORMATION AND ANNUAL REPORT SUBMITTED BY THE COMPANY FOR THE FY 2007-08, THE COMPANY FAILS 25% RPT FILTER. 9 MAPLE E- SOLUTIONS LTD. THE COMPANY IS NOT INTO K PO SERVICES AND THUS THE SAME IS NOT CONSIDERED AS A COMPARABLE. 10 R SYSTEM INTERNATIONAL (SEGMENTAL) THE COMPANY IS NOT INTO KPO SERVICES AND THUS THE SAME IS NOT CONSIDERED AS A COMPARABLE. 10 SHREEJAL INFO HUBS LTD. THE COMPANY WAS EARLIER KNOWN AS ASK ME INFO HUBS LTD. THE COMPANY FAILS 75% EXPORT EARNING FILTER AS IT DOES NOT HAVE ANY EXPORT FOR THE FY 2007-08. THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLE. 11 SPANCO TELESYSTEMS AND SOLUTIONS LTD. (SEGMENTAL) NOW THE COMPANY IS KNOWN AS SPANCO LTD. THE ANNUAL REPORT IS AVAILABLE FOR THE FY 2007-08. THIS BPO SEGMENT IS NOT INTO KPO SERVICES AND THUS THE SAME IS NOT CONSIDERED AS A COMPARABLE. 12 TRITON CORP LTD. THE COMPANY IS INTO KPO SERVICE S AND QUALIFIES ALL THE FILTERS APPLIED BY THE TPO. THUS THE SAME IS CONSIDERED AS A COMPARABLE. 7. THE TPO ALSO CONSIDERED THE VARIOUS FILTERS APPL IED BY THE ASSESSEE AND FOUND ONLY SOME OF THEM TO BE APPROPRIATE FOR T HE FOLLOWING REASONS:- 7 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED SL NO. PARTICULARS REMARK OF THE TPO 1 COMPANIES FOR WHICH FINANCIAL DATA WAS AVAILABLE ONLY UPTO MARCH, 2005 WERE EXCLUDED IT IS PERTINENT HERE THAT THE TPO USED ONLY THE DAT A FOR THE FY 2007-08. THUS THE TPO EXCLUDED THOSE COMPANIES WHOSE DATA WAS NOT AVAILABLE FOR THE FY 2007-08. 2 COMPANIES HAVING ZERO SALES OR SALES LESS THAN RS. 1 CRORE IN THE LATEST YEAR FOR WHICH THE FINANCIAL DATA AVAILABLE WERE REJECTED. THIS IS AN APPROPRIATE FILTER. BUT THE TPO APPLIED THIS FILTER BASED ON THE REVENUES FOR THE FY 2007-08 AS ONLY TH E CURRENT YEAR DATA HAS BEEN CONSIDERED. THE TPO APP LIED THIS FILTER MAINLY DUE TO THE UNRELIABILITY OF THE RESULTS OF THESE COMPANIES WITH LOW COST BASE. 3 COMPANIES HAVING SALES MORE THAN RS. 250 CRORES IN THE LATEST YEAR FOR WHICH THE FINANCIAL DATA IS AVAILABLE IN THE DATABASES WERE REJECTED. THE TAXPAYER APPLIED A TURNOVER RANGE OF RS. 1 CROR E TO RS. 250 CRORES. THE TAXPAYERS TURNOVER IN ITS ITES SE GMENT IS RS. 117.56 CRORES. THUS THE TAXPAYER CONSIDERED CO MPANIES VARYING FROM TWICE THE SIZE OF THE TAXPAYER TO ALMO ST 117 TH OF ITS SIZE, WHICH IS NOT RATIONAL. MOREOVER, SIZE DO ES NOT PLAY A MAJOR ROLE IN SERVICE INDUSTRY LIKE IT ENABLED SERV ICES. THUS THE UPPER TURNOVER FILTER APPLIED BY THE TAXPAYER I S REJECTED. 4 COMPANIES WHOSE MANUFACTURING SALES WERE EQUAL TO OR GREATER THAN 50% OF THEIR TOTAL SALES IN THE LATEST YEAR FOR WHICH FINANCIAL DATA WAS AVAILABLE WERE REJECTED. COMPANIES WHOSE TRADING SALES WERE EQUAL TO OR GREATER THAN 50% OF THEIR TOTAL SALES IN THE LATEST YEAR FOR WHICH THE FINANCIAL DATA WAS AVAILABLE WERE REJECTED. NOT AN APPROPRIATE FILTER. TPO HAS APPLIED A MORE APPROPRIATE FILTER IN THIS REGARD. THE COMPANIES W HOSE REVENUES FROM IT ENABLED AND RELATED SERVICES ARE M ORE THAN 75% OF THEIR OPERATING REVENUES FOR THE FY 2006-07 WERE SELECTED AS COMPANIES. THIS IS AN APPROPRIATE FILT ER AS THIS IS THE STAGE WHICH WILL DETERMINE THE CORRECT COMPARAB ILITY. 5 COMPANIES NOT DISCLOSING SEGMENTAL FINANCIALS, WHOSE SERVICES APPEARED DIFFERENT FROM THAT OF TAXPAYER THIS IS CONSIDERED AN APPROPRIATE FILTER SINCE THIS FILTER WILL HELP TO IDENTIFY COMPANIES WHICH ARE SIMILAR IN FUN CTION (IT ENABLES SERVICE) TO ARRIVE AT APPROPRIATE COMPARABL ES. WHEREVER SEGMENTAL INFORMATION IS AVAILABLE, THE SA ME IS CONSIDERED AS A COMPARABLE. 6 COMPANIES EXCLUDED FOR OTHER REASONS (BASED ON INFORMATION CONTAINED IN THE PRODUCT PROFILE, DIRECTORS REPORT AND OTHER INFORMATION AVAILABLE IN THE DATABASE) THIS IS TO BE SEEN CASE BY CASE. TPO TRIED TO OBTA IN MAXIMUM INFORMATION USING POWERS U/S 133(6). IF SU FFICIENT INFORMATION IS NOT OBTAINED, THE DECISION IS TAKEN BASED ON THE INFORMATION AVAILABLE IN THE PUBLIC DOMAIN. 8 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 8. IN ADDITION TO SOME OF THE FILTERS FOUND TO BE A PPROPRIATE BY HIM AS DISCUSSED ABOVE, THE TPO CONSIDERED SOME ADDITIONAL FILTERS OR CRITERIA WHICH, ACCORDING TO HIM, WOULD LEAD TOWARDS SELECTI NG PROPER COMPARABLES AND FINALLY APPLIED THE FOLLOWING FILTE RS OR CRITERIA IN SEARCHING FOR COMPARABLES:- - COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 20 07-08 WERE EXCLUDED AND THE DATA FOR THE FY 2007-08 HAS BEEN C ONSIDERED FOR THE PERIOD FROM 01-04-2007 TO 31-03-2008. - COMPANIES WITH IT ENABLED SERVICE INCOME OF LESS THAN RS. 10 CR AND MORE THAN 250 CRORES WERE EXCLUDED - COMPANIES WHOSE IT ENABLED SERVICE REVENUE IS LES S THAN 75% OF THE TOTAL OPERATING REVENUES WERE EXCLUDED - COMPANIES WHO HAVE MORE THAN 25% RELATED PARTY TR ANSACTIONS (SALES AS WELL AS EXPENDITURE COMBINED) OF THE OPER ATING REVENUES WERE EXCLUDED - COMPANIES WHO HAVE LESS THAN 75% OF THE REVENUES AS EXPORT SALES WERE EXCLUDED - COMPANIES WHO HAVE DIMINISHING REVENUES/PERSISTEN T LOSSES FOR THE PERIOD UNDER CONSIDERATION WERE EXCLUDED - COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING (I.E. NOT MARCH 31, 2008) OR DATA OF THE COMPANY DOES NOT FALL WITH IN 12 MONTH PERIOD IE. 01-03-2007 TO 31-03-2008, WERE REJECTED - COMPANIES THAT ARE FUNCTIONALLY DIFFERENT FROM TH AT OF TAXPAYER OR WORKING IN PECULIAR ECONOMIC CIRCUMSTANCES, AFTER G IVING VALID REASONS, WERE EXCLUDED - COMPANIES THAT ARE NOT MAINLY ENGAGED IN KPO SERV ICES WERE EXCLUDED. APPLYING THE ABOVE FILTERS/CRITERIA, THE TPO SELECT ED THE FOLLOWING SEVEN ENTITIES AS FINAL COMPARABLES:- 9 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED SL NO. NAME OF THE COMPARABLE FUNCTIONAL LINES 1 ACROPETAL TECHNOLOGIES (SEG.) THE ITES SEGMENT OF THE COMPANY IS ENGAGED IN ENGINEERING DESIGN SERVICES. 2 CORAL HUBS LTD. (FORMERLY VISHAL INFORMATION TECHNOLOGIES LTD) THE COMPANY IS MAINLY ENGAGED IN DATA PROCESSING SERVICES 3 CROSSDOMAIN SOLUTIONS LTD. THE COMPANY IS MAINLY ENGAGED IN DATA PROCESSING, INSURANCE CLAIMS PROCESSING AND PAYROLL PROCESSING SERVICES 4 DATAMATICS FINANCIAL SERVICES LTD. (SEG) THE COMPANY IS MAINLY ENGAGED IN FINANCIAL ACCOUNTING AND INTERNET BASED RESEARCH SERVICES. 5 ECLERX SERVICES LTD. THE COMPANY IS MAINLY ENGAGE D IN DATA ANALYTICS AND DATA PROCESS SERVICES. PRICING ANALYTICS, BUNDLING OPTIMIZATION, CONTENT OPERATIONS, SALES AND MARKETING SUPPORT, PRODUCT DATA MANAGEMENT, REVENUE MANAGEMENT AND DATA ANALYTICS ARE SOME OF THE OFFERINGS TO RETAIL AND MANUFACTURING CLIENTS. TO ITS FINANCIAL SERVICES CLIENTS, IT OFFERS REALTIME CAPITAL MARKETS, MIDDLE AND BACK OFFICE SUPPORT, PORTFOLIO RISK MANAGEMENT SERVICES AND VARIOUS CRITICAL DATA MANAGEMENT SERVICES. 6 MOLD-TEK TECHNOLOGIES LTD. THE COMPANY IS MAINLY ENGAGED IN ENGINEERING DESIGN SERVICES 7 TRITON CORP LTD. THE COMPANY IS MAINLY ENGAGED IN KNOWLEDGE PROCESS OUTSOURCING AND LEGAL PROCESS OUTSOURCING SERVICES. 9. THE TNMM ADOPTED BY THE ASSESSEE FOR BENCHMARKIN G THE RELEVANT INTERNATIONAL TRANSACTIONS WITH OP/TC AS PLI WAS AC CEPTED BY THE TPO. ACCORDINGLY, HE CONSIDERED THE PROFIT BEFORE INTERE ST AND TAX FOR COMPUTING THE OPERATING MARGINS BUT TREATED ONLY TH E INCOME AND EXPENSES RELATED TO THE OPERATIONS OF THE RELEVANT FINANCIAL YEAR FOR THE COMPUTATION OF OPERATING MARGINS OF THE COMPARABLES . ACCORDINGLY, CERTAIN INCOME AND EXPENSES OF NON-OPERATING NATURE HAVING NOTHING TO DO WITH THE OPERATIONS OF THE COMPARABLES WERE EXCL UDED BY HIM FOR THE PURPOSE OF CONSIDERING THE OPERATING REVENUE AND OP ERATING EXPENSES. SIMILARLY, EXTRA-ORDINARY EXPENSES/INCOME WHICH WER E NON-RECURRING IN 10 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED NATURE SUCH AS DONATIONS, PRELIMINARY EXPENSES ETC. WERE NOT CONSIDERED BY HIM AS OPERATING EXPENSES OR OPERATING INCOME. A CCORDINGLY, THE ARITHMETIC MEAN OF OP/TC OF SEVEN COMPARABLES SELEC TED BY HIM WAS WORKED OUT BY THE TPO AT 47.74% AND AFTER ALLOWING THE WORKING CAPITAL ADJUSTMENT AT 2%, HE WORKED OUT THE ADJUSTED ARMS LENGTH MEAN MARGIN AT 45.74%. APPLYING THIS ARMS LENGTH MARGIN AT 45 .74% TO THE OPERATING COST OF RS. 104,44,80,271/- SUBMITTED BY THE ASSESS EE IN ITS TP REPORT, THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSAC TIONS BETWEEN THE ASSESSEE AND ITS AE INVOLVING PROVISION OF IT ENABL ED SERVICES WAS DETERMINED BY THE TPO AT RS. 152,22,25,547/- AND SI NCE THE PRICE CHARGED BY THE ASSESSEE FOR THE SAID TRANSACTIONS W AS RS. 117,83,81,799/-, THE DIFFERENCE OF RS. 34,38,43,748 /- WAS TREATED BY THE TPO AS THE TRANSFER PRICING ADJUSTMENT REQUIRED TO BE MADE IN THE CASE OF THE ASSESSEE. 10. IN ADDITION TO THE I.T. ENABLED SERVICES, THE A SSESSEE COMPANY HAD ALSO PROVIDED I.T. SERVICES TO ITS AES FOR THE AGRE ED VALUE OF RS. 13,93,30,950/-. THE T.P STUDY REPORT SUBMITTED BY THE ASSESSEE IN RESPECT OF THESE TRANSACTIONS WAS ALSO NOT ACCEPTED BY THE TPO. ACCORDING TO HIM, THE NATURE OF THESE SERVICES WAS ALSO ITES AND ADOPTING THE SAME BASIS AND FOLLOWING THE SAME METH OD AS IN THE CASE OF PROVISION OF I.T. ENABLED SERVICES, HE SELECTED THE FOLLOWING 23 COMPARABLES AFTER ANALYSING THE DATABASE, THE ANNUA L REPORTS ETC. :- 11 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 11. THE ARITHMETIC MEAN OF THE OP/TC OF THE ABOVE C OMPARABLES SELECTED BY HIM WAS WORKED OUT BY THE TPO AT 24.99% AND AFTER APPLYING THE SAME AS AVERAGE PROFIT MARGIN OF THE COMPARABLE S, WITHOUT ALLOWING ANY WORKING CAPITAL ADJUSTMENT, TO THE OPERATING CO ST OF RS.12,05,35,098/- AS SUBMITTED BY THE ASSESSEE IN T HE TP STUDY REPORT, HE DETERMINED THE ALP OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS AES INVOLVING PROVISION OF I.T. SE RVICES AT RS. 15,06,56,819/-. SINCE THE PRICE CHARGED BY THE ASSE SSEE TO ITS AES FOR THESE INTERNATIONAL TRANSACTIONS WAS RS. 13,96,31,2 10/-, THE DIFFERENCE OF RS. 1,10,25,609/- WAS TREATED BY THE TPO AS TRAN SFER PRICING 12 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED ADJUSTMENT REQUIRED TO BE MADE IN THE CASE OF THE A SSESSEE IN RESPECT OF I.T. SERVICES RENDERED TO ITS AES. 12. IN THE DRAFT ASSESSMENT ORDER, THE A.O. PROPOSE D TO MAKE, INTER ALIA, THE T.P. ADJUSTMENTS OF RS. 34.38 CRORES AND 1.10 CRORES DETERMINED BY THE TPO IN RESPECT OF THE INTERNATIONAL TRANSACT IONS OF THE ASSESSEE COMPANY WITH ITS AES INVOLVING PROVISION OF I.T. EN ABLED SERVICES AND I.T. SERVICES RESPECTIVELY. ON RECEIPT OF THE SAID DRAF T ASSESSMENT ORDER FROM THE A.O., THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP. THE FIRST OBJECTION RAISED BY THE ASSESSEE BEFORE THE DRP WAS THAT THE LOW-END BACK OFFICE SUPPORT SERVICES RENDERED BY IT HAVE BE EN ERRONEOUSLY CATEGORIZED BY THE TPO AS HIGH-END KNOWLEDGE PROCES S OUTSOURCING SERVICES. IT WAS SUBMITTED THAT THE TP STUDY OF TH E ASSESSEE WOULD SHOW THAT THE FUNCTIONS DURING THE YEAR UNDER CONSIDERAT ION REMAINED THE SAME AS IN THE LAST YEAR AND THEREFORE ITS CATEGORI ZATION AS KPO INSTEAD OF BPO WAS IN-CORRECT. IT WAS CONTENDED THAT THE RE JECTION BY THE TPO OF ATLEAST FIVE COMPARABLES SELECTED BY THE ASSESSEE N AMELY (I) CALIBER POINT BUSINESS SOLUTIONS LTD., (II) COSMIC GLOBAL LTD., ( III) MAPLE E SOLUTIONS LTD., (IV) R SYSTEMS INTERNATIONAL (SEGMENT) & (V) SPANCO TELESYSTEMS AND SOLUTIONS LTD. ON THE GROUND THAT THE SAME ARE NOT KPO WAS NOT CORRECT AND THE SAME SHOULD BE INCLUDED FOR THE PUR POSE OF COMPARABILITY ANALYSIS. THIS OBJECTION OF THE ASSESSEE WAS CONSID ERED BY THE DRP IN THE LIGHT OF FUNCTIONS PERFORMED BY IT AS WELL AS QUALI FICATION AND PAY PROFILE OF THE WORK FORCE EMPLOYED BY IT. ON SUCH CONSIDER ATION, THE DRP HELD THAT THE ASSESSEE COULD NOT BE CONSIDERED ONLY AS A LOW-END SERVICE PROVIDER. IT WAS ALSO HELD BY THE DRP THAT THE ACT IVITIES OF THE ASSESSEE, AT THE SAME TIME, COULD NOT BE CONSIDERED AS THAT A T THE HIGH END OF THE SPECTRUM TO BE QUALIFIED AS KPO. IT WAS NOTED BY TH E DRP THAT THE ASSESSEE HAD BEEN CONSIDERED AS I.T. ENABLED SERVIC E PROVIDER GENERALLY IN EARLIER YEARS AND THERE BEING NO SEGMENTAL DIVIS ION BETWEEN THE 13 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED DIFFERENT SERVICES AND THEIR PROFITABILITY, THE DRP CONSIDERED IT PROPER IN THE FACTS OF THE CASE TO COMPARE THE ASSESSEE WITH THE MIX SELECTION OF COMPARABLES OF I.T. ENABLED SERVICE SECTOR IN ORDER TO PROVIDE REASONABLE AND APPROPRIATE COMPARABILITY. ACCORDINGLY, THE OBJ ECTION OF THE ASSESSEE REGARDING THE REJECTION BY THE TPO OF THE FIVE COMP ARABLES SELECTED BY IT MERELY ON THE GROUND THAT THEY ARE NOT KPO SERVICE PROVIDER WAS HELD TO BE SUSTAINABLE BY THE DRP. 13. AS REGARDS THE SEVEN COMPARABLES SELECTED BY TH E TPO, THE ASSESSEE APPARENTLY DID NOT RAISE ANY MATERIAL OBJE CTION IN RESPECT OF TWO COMPARABLES NAMELY CROSSDOMANI SOLUTIONS AND DATAMA TICS FINANCIAL SERVICES LIMITED WHILE ONE COMPARABLE NAMELY TRITON CORPN. AS TAKEN BY THE TPO WAS THERE IN THE LIST OF COMPARABLES SELECT ED BY THE ASSESSEE ITSELF. AS REGARDS THE REMAINING FOUR COMPARABLES S ELECTED BY THE TPO, WHICH WERE OBJECTED BY THE ASSESSEE, THE DRP ACCEPT ED THE OBJECTION OF THE ASSESSEE IN RESPECT OF TWO COMPARABLES NAMELY A CROPETAL TECHNOLOGIES LIMITED AND CORAL HUBS LIMITED AND DIR ECTED EXCLUSION OF THE SAME FROM THE COMPARABLES FOR THE FOLLOWING REA SONS :- ACROPETAL TECHNOLOGIES LTD. IT HAS BEEN POINTED O UT BY THE ASSESSEE IN ITS SUBMISSION WHEREIN THE ANNUAL REPOR TS OF THE COMPARABLES HAVE BEEN FILED, THAT THIS COMPARABLE F AILS THE EXPORT EARNING FILTER OF 75% IN RESPECT OF ITES. THIS HAS BEEN SEEN AND FOUND CORRECT. THEREFORE, THIS COMPARABLE FAILS THE TPOS OWN FILTER AND CANNOT BE HELD COMPARABLE. CORAL HUBS LIMITED - IT IS SEEN THAT THIS COMPARABL E HAS VERY LOW EMPLOYEE COSTS (2.93%) WHEREAS IT HAS VERY HIGH COS TS ON ACCOUNT OF VENDOR PAYMENTS AND DATA CHARGES, SUGGESTING OUT SOURCING AS ITS BUSINESS MODEL. IN VIEW OF THESE FUNCTIONAL DIF FERENCES, THE SAME IS REJECTED AS COMPARABLE: 14. THE OBJECTION OF THE ASSESSEE REGARDING OTHER T WO COMPARABLES SELECTED BY THE TPO NAMELY ECLERX SERVICES LIMITED AND MOLD-TEK 14 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED TECHNOLOGIES LTD. HOWEVER, WAS NOT FOUND SUSTAINABL E BY THE DRP FOR THE FOLLOWING REASONS:- ECLERX SERVICES LIMITED ASSESSEES ARGUMENT IS N OT ACCEPTABLE IN VIEW OF ABOVE DISCUSSION AND IT IS FOUND TO BE F UNCTIONALLY COMPARABLE AS AN ITES PROVIDER SINCE IT IS IN THE B USINESS OF CUSTOM DESIGNING OF PROCESSES AND OPERATIONS MANAGE MENT, LIKE THE ASSESSEE. MOLD-TEK TECHNOLOGIES LTD.- THE ASSESSEE HAS OBJECT ED TO THE FACT THAT THE COMPARABLE IS INTO STRUCTURAL ENGINEERING AND DESIGN SERVICES WHICH ARE FUNCTIONALLY THE SAME AS THE WOR K OF THE ASSESSEE. FURTHER, IT SAYS THAT SINCE ALLSEC WAS R EJECTED, MOLD-TEK SHOULD BE REJECTED ON THE SAME GROUNDS. IT ALSO STA TES THAT IT IS AN OUTLIER IN TERMS OF MARGIN AND THAT THE MARGIN CALC ULATION IS WRONG: WE FIND THAT THIS COMPARABLES SERVICES FALL WITHIN THE CATEGORY OF ITES AS PER THE CBDT CIRCULAR AND IN FUNCTIONALITY. FURTHER, ALLSEC WENT IN FOR A MERGER IN THIS YEAR WITH A LOS S MAKING SUBSIDIARY WHOSE BUSINESS WAS WOUND UP. IN THE CASE OF ALLSEC IT IS ALSO SEEN THAT ITS MARGINS HAVE SHOWN A PRECIPIT OUS DECLINE FROM 27.98% TO (13.95%) IN THE RELEVANT YEAR THIS I S CERTAINLY NOT NORMAL IN TERMS OF RESULTS. THIS IS VERY DIFFERENT FROM THE CASE OF MOLD-TEK, WHERE A RESTRUCTURING HAS TAKEN PLACE AND DEMERGER HAPPENED OF AN ENTIRELY DIFFERENT BUSINESS SEGMENT, THAT TOO IN OCTOBER, 2006 AND ACCOUNTS RESTRUCTURED AS ON 1-4-2 007 IE THE BEGINNING OF PREVIOUS YEAR RELEVANT TO THE ASSESSME NT YEAR UNDER CONSIDERATION. THIS HAS BROUGHT THE COMPARABLE CLOS ER TO THE SAME LINE OF ITES BUSINESS AS THE ASSESSEE. THAT THE CO MPANY IS COMPARABLE IS CLEAR FROM ITS FUNCTIONAL PROFILE. AS FAR AS NOT TAKING PROVISION FOR DERIVATIVE LOSSE S AS AN OPERATING EXPENSE IS CONCERNED, RELIANCE CAN BE PLACED UPON T HE DECISION OF ITAT, PUNE IN THE CASE OF HONEYWELL AUTOMATION INDI A LTD. VS. DCIT , (2009-TIOL-104-ITAT-PUNE IN ITA NO. 4/PN/08 DATED 10- 02-2009) WHEREIN IT WAS HELD THAT THE PROVISIONS MA DE FOR FUTURE LOSSES CANNOT BE CONSIDERED WHILE COMPUTING THE OPE RATING PROFIT OF THE RELEVANT YEAR. WE ALSO FIND THAT TPO/AO HAS TAKEN THIS VIEW CONSISTENTLY IE IN THE CASE OF OTHER COMPARABLES AN D ASSESSEE. FROM THE ANNUAL REPORT SUBMITTED BY THE ASSESSEE IT IS NOT CLEAR HOW THE ASSESSEE HAS STATED THAT IT HAS CONTROLLED TRANSACTIONS OR IF IT VIOLATES THE RPT LIMIT. IN CONCLUSION, THIS C OMPANY IS FOUND TO BE COMPARABLE. 15. THE THREE COMPARABLES SELECTED BY THE TPO NAMEL Y MOLD-TEK TECHNOLOGIES LTD., M/S CORAL HUBS LTD. AND M/S ECLE RX SERVICES LIMITED 15 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED WERE ALSO OBJECTED BY THE ASSESSEE BEFORE THE DRP O N THE BASIS OF THEIR HIGH PROFITABILITY. THIS OBJECTION OF THE ASSESSEE WAS NOT FOUND SUSTAINABLE BY THE DRP OBSERVING THAT HIGH AND LOW MARGINS BOTH REFLECT THE INDUSTRY PROFITABILITY ESPECIALLY WHEN THEY ARE ACCEPTABLE ON FUNCTIONAL SIMILARITY. IT WAS ALSO OBSERVED BY THE DRP THAT AS THE AVERAGE MEAN OF A FAIR NUMBER OF COMPANIES IS BEING CONSIDE RED FOR COMPARABILITY ANALYSIS TO ARRIVE AT THE ALP MARGIN, THE SUPER PROFIT OF AN INDIVIDUAL COMPANY CANNOT BE OBJECTED TO IF IT IS O THERWISE FUNCTIONALLY COMPARABLE. IT WAS ALSO NOTED BY THE DRP THAT OMISS ION ONLY OF HIGH PROFITABILITY COMPARABLES AS OUTLIERS WOULD BE ADDR ESSING ONLY ONE END OF THE SPECTRUM WHICH IS NOT CORRECT. IT WAS OBSERVED THAT THE INCOME TAX ACT IN ANY CASE PROVIDES FOR AN ARITHMETIC MEAN AND NOT MEDIAN RANGE OF PROFITABILITY. 16. THE DRP THEN PROCEEDED TO DEAL WITH THE OBJECTI ONS OF THE ASSESSEE IN RESPECT OF TP ADJUSTMENT OF RS. 1.10 CRORES PROP OSED IN RESPECT OF PROVISION OF I.T. SERVICES RENDERED BY THE ASSESSEE COMPANY TO ITS AES. IN THIS REGARD, DRP FOUND FROM THE FUNCTIONAL PROFILE OF THE SEGMENT GIVEN IN THE TP STUDY REPORT THAT THE SERVICES RENDERED BY T HE ASSESSEE IN RESPECT OF PROCESS SUPPORT, PROCESS OPTIMIZATION AND TECHNI CAL SUPPORT WERE ESSENTIALLY SUPPORT SERVICES RENDERED BY THE ASSESS EE WHEREBY THE SYSTEMS OF THE BUSINESS AS USED BY THE EMPLOYEES WE RE KEPT IN WORKING ORDER AND ALL GLITCHES WERE TAKEN CARE OF. THE DRP HELD THAT THESE SERVICES WERE SIMILAR TO I.T. ENABLED SERVICES AND NOT SOMETHING WHICH COULD BE CLASSIFIED SEPARATELY. RELYING ON THE CBD T CIRCULAR NO. SO 890 (E) DTD. 26-9-2000 GIVING A DETAILED LIST OF PRODUC TS OR SERVICES THAT COULD BE CLAIMED AS ITES FOR THE PURPOSE OF SECTION 10A/1 0B OF THE ACT, THE DRP HELD THAT THE SERVICES CLAIMED TO BE IT SERVICE S BY THE ASSESSEE WERE FALLING UNDER THE BROAD CATEGORY OF ITES BEING AKIN TO SUPPORT CENTERS BACK OFFICE OPERATIONS AND REMOTE MAINTENANCE. THE DRP, THEREFORE, 16 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED CONSIDERED BOTH THE I.T & ITES SERVICES CLAIMED TO BE RENDERED BY THE ASSESSEE COMPANY TO ITS AES AS ITES AND ACCORDINGLY DIRECTED THE A.O./TPO TO BENCH MARK THESE TRANSACTIONS BY TAKING THE FOLLOWING TEN ENTITIES AS FINAL COMPARABLES:- 1. CALIBER POINT BUSINESS SOLUTIONS LTD. 2. COSMIE GLOBAL LTD. 3. MAPLE E SOLUTIONS LTD. 4. R. SYSTEMS INTERNATIONAL (SEGMENTAL) 5. SPANCO TELESYSTEMS AND SOLUTIONS LTD. 6. TRITON CORP. LTD. 7. MOLD-TEK TECHNOLOGIES LTD., 8. CROSSDOMAIN SOLUTIONS LIMITED 9. DATAMATICS FINANCIAL SERVICES LIMITED (SEGMENT AL) 10. ECLERX SERVICES LTD. 17. AS REGARDS THE OBJECTION OF THE ASSESSEE THAT T HE TPO HAS NOT ALLOWED THE WORKING CAPITAL ADJUSTMENT TO THE MARGI NS OF THE COMPARABLES SELECTED BY HIM, THE DRP DIRECTED THE T PO TO ALLOW SUCH ADJUSTMENT BASED ON THE FINAL COMPARABLES SELECTED BY FOLLOWING THE SAME METHOD AND BASIS AS ADOPTED IN ASSESSEES OWN CASE IN THE EARLIER YEARS. 18. AS REGARDS THE OBJECTION OF THE ASSESSEE THAT T HE TPO HAS NOT ALLOWED APPROPRIATE RISK ADJUSTMENT TO THE MARGINS OF THE COMPARABLES SELECTED BY HIM AS REQUIRED U/R 10-B(1)(E)(III) OF THE INCOME TAX RULES, 1962, THE DRP DISCUSSED THE CLAIM OF THE ASSESSEE I N RESPECT OF VARIOUS RISKS AS UNDER:- MARKET RISK/BUSINESS RISK: THE TAXPAYERS CLAIM TH AT IT DOES NOT BEAR MARKET RISK AS IT RENDERS SERVICES EXCLUSIVELY TO ITS GROUP COMPANY IS NOT ACCEPTABLE. IN FACT, THE TAXPAYER BE ARS A MUCH BIGGER MARKET RISK VIZ, SINGLE CUSTOMER RISK. AS TH E TAXPAYER IS DEPENDENT ON ITS AE ITS ENTIRE EXISTENCE IS DEPENDE NT ON IT. IF THE AE RUNS OUT OF BUSINESS OR IF AES BUSINESS GETS RE DUCED SUBSTANTIALLY, THE TAXPAYERS BUSINESS WILL ALSO GE T ADVERSELY AFFECTED. THE TAXPAYER BEING A CAPTIVE SERVICE PROV IDER CANNOT EVEN LOOK FOR OTHER CUSTOMERS. THUS, IN FACT THE TAXPAYE R RUNS A GREATER RISK THAN AN AVERAGE INDEPENDENT ENTITY WHICH CAN A LWAYS LOOK FOR 17 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED OTHER CUSTOMERS OR OTHER MARKETS. THUS, THERE IS MO RE RISK IN THE CASE OF TAX PAYER WHO IS DEPENDENT ON A SINGLE CUST OMER WHEN COMPARED TO COMPARABLES WHO MAY NOT DEPEND ON SINGL E CUSTOMER. AT THE TIME OF ENTERING INTO CONTRACT WIT H ITS ASSOCIATED ENTERPRISE, THE TAX PAYER IS NOT ASSURED OF ANY BUS INESS AND ALSO IT IS NOT GUARANTEED ANY STEADY INCREASE IN THE BUSINE SS. THERE ARE TWO COMPONENTS OF A SINGLE CUSTOMER RISK WHICH HAV E TO BE KEPT IN VIEW: I. THE LOSS OF REALIZATION OF THE DEBT FOR THE SERVIC ES ALREADY RENDERED FROM THE SINGLE CUSTOMER IF THE CUSTOMER GOES INTO LIQUIDATION OR BANKRUPTCY. II. THE LOSS OF FUTURE REVENUES IF THE SINGLE CUSTO MER EITHER GOES INTO BANKRUPTCY OR LIQUIDATION OR TERMINATES THE CONTRACT. THIS HOLDS TRUE FOR CONTRACT RISK AND CREDIT RISK I N THE CASE OF THE ASSESSEE. WHAT IT SEES AS A RISK FREE BUSINESS IS IN FACT A VERY RISKY MODEL, WHERE IT IS TOTALLY DEPENDENT ON THE A E.. PRICE RISK: IT IS CLEAR THAT IT BEARS PRICE RISK AS THE TAXPAYER IS A CONTRACT SERVICE PROVIDER BASED ON A COST PLUS MODE L FOR ITS SERVICES. THUS, THE TAXPAYER IN A WAY IS AGREEING T HAT THE PRICE CHARGED FOR RENDERING THE SERVICES IS INDEPENDENT O F THE PREVAILING MARKET PRICE CHARGED FOR SUCH SERVICES. MANPOWER RISK: IN THIS CASE THE ASSESSEE ALSO FACES MANPOWER RISK. THAT IS THE MOST VITAL RISK IN THE LINE OF BU SINESS THAT THE ASSESSEE IS IN AND HAS BEEN MENTIONED EARLIER ALSO IN THE CONTEXT OF THE MANPOWER COSTS VIS A VIS TOTAL COSTS. IT HAS TO COLLECT AND NURTURE POOL OF TALENTED MANPOWER SO THAT IT CAN CA RRY OUT ITS FUNCTIONS EFFICIENTLY. IN THIS DAY OF HIGH ATTRITIO N RATES, ALL ENTERPRISES FACE THIS RISKS ESPECIALLY THESE LIKE T HE ASSESSEE. HENCE, IN THE EVENT OF THE ASSESSEE BEING UNABLE TO DO SO, ITS POSITION WILL BE COMPROMISED. IN THE 21 ST CENTURY, CORPORATIONS HAVE BECOME INCREASINGLY RELIANT ON HUMAN CAPITAL, AT A TIME WHEN THIS RESOURCE IS BECOMING MORE DIFFICULT TO RE TAIN. WITH THE GLOBALIZATION OF TRADE, MANY NEW OPPORTUNITIES ARE AVAILABLE TO SKILLED STAFF, CONTRIBUTING TO THE ALREADY PREVALEN T BREAKDOWN OF BONDS BETWEEN EMPLOYERS AND EMPLOYEES. A SOARING EM PLOYEE TURNOVER ACROSS MANY ECONOMIC SECTORS HAS RESULTED IN ENORMOUS LOSSES TO EMPLOYERS AND HAS IN TURN ENHANCED THE VA LUE OF SECURING AND RETAINING A STABLE, SKILLED WORKFORCE. MANY MNES ARE CURRENTLY INVESTING CONSIDERABLE RESOURCES IN EFFOR TS TO RETAIN THEIR EMPLOYEES, ALTHOUGH SUCH EXPENDITURES DO NOT CREATE ASSETS IN THE TRADITIONAL SENSE. CORPORATIONS ARE STILL COMIN G TO TERMS WITH THE FACT THAT THE MOST VALUABLE INFORMATION IN THE ORGANIZATION MAY BE LOST WHEN AN EMPLOYEE LEAVES THE ORGANIZATIO N. 18 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED THE ASSESSEE IS IN A BUSINESS WHICH REQUIRES SKILLE D MANPOWER TO RUN ITS BUSINESS. THERE ARE JUDICIAL PRONOUNCEMENTS WHICH CONFIRM THAT A TRAINED AND ASSEMBLED WORKFORCE HAS A MEASURABLE, IDENTIFIABLE VALUE. ONE EXAMPLE IS ITHI CA INDUSTRIES INC. V. CIT 97 TC 253 WHERE THE APPELLATE TAX COURT , USA HAS REACHED THE CONCLUSION THAT AN IN-PLACE WORK FORCE WAS AN INTANGIBLE ASSET WITH AN ASCERTAINABLE VALUE. 19. AFTER THE ABOVE DISCUSSION, THE DRP ALSO REFERR ED TO THE VARIOUS DECISIONS OF THE TRIBUNAL WHEREIN A SIMILAR CLAIM O F THE ASSESSEE FOR RISK ADJUSTMENT WAS CONSIDERED BY THE TRIBUNAL AND HELD FINALLY, FOR THE FOLLOWING REASONS GIVEN IN ITS ORDER, THAT NO RISK ADJUSTMENT COULD BE ALLOWED TO THE ASSESSEE:- - AS DISCUSSED ABOVE, THE TAXPAYER HAS ALSO UNDERT AKEN SEVERAL RISKS. THEREFORE, IT IS CORRECT TO SAY THAT IT IS A RISK MITIGATED ENTITY. - THE TAXPAYER IS TOTALLY DEPENDENT ON THE AE FOR BUSINESS. THUS THE TAXPAYER TAKES THE RISKS ASSOCIATED WITH H EAVY DEPENDENCE ON A SINGLE CUSTOMER, IN COMMON BUSINESS PARLANCE IT IS KNOWN AS SINGLE CUSTOMER RISK. - THE AE IS EXPOSED TO THE MARKET RISK AND ANY FLUC TUATION IN THE BUSINESS CONDITIONS OF THE AE AFFECT THE CONTRA CTUAL TERMS BETWEEN THE AE AND THE TAXPAYER. THUS EVEN IF INDEP ENDENT COMPARABLES UNDERTAKE SOME RISK, THE TAXPAYER ALSO HAD TO UNDERTAKE RISKS - DIFFERENT COMPARABLES CAN HAVE DIFFERENT RISK PRO FILES AND DIFFERENT PROFIT MARGINS. THE PROVISO TO SEC. 92C(2 ) OF THE ACT PROVIDES FOR ADOPTING ARITHMETICAL MEAN OF THE DIFF ERENT PRICES. THIS PROVISION NEUTRALIZES THE EFFECT OF DIFFERENCE IN THE RISK PROFILE, IF ANY BETWEEN THE TAX PAYER AND THE COMPARABLES AS REALIZED RISK MAY PULL DOWN THE PROFITABILITY BELOW THE RISK FREE RETURN. - IT IS NOT SUFFICIENT TO MERELY SPELL OUT RISKS. IT HAS TO BE SHOWN RISK WAS ACTUALLY UNDERTAKEN BY THE COMPARABL ES AND TO WHAT EXTENT IT AFFECTED THE PROFITABILITY. THE TAX PAYER HAS NOT DONE SO. - IN THE VARIOUS DECISIONS OF THE ITATS AS REFERRED TO ABOVE NO RISK ADJUSTMENTS HAS BEEN ALLOWED IN SUCH CASES. 20. AS REGARDS THE OBJECTION OF THE ASSESSEE THAT T HE A.O./TPO HAS RESORTED TO THE USE OF SINGLE YEAR DATA INSTEAD OF MULTIPLE YEAR DATA OF THE 19 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED COMPANIES SELECTED BY HIM U/R 10B(4) OF THE INCOME TAX RULES, 1962, THE DRP OVERRULED THE SAME BY OBSERVING THAT THE AS SESSEE HAS NOT GIVEN ANY DETAILS AS TO HOW EARLIER YEARS DATA HAVE THE I MPACT ON THE PROFIT OF THE CURRENT YEAR OF THE ASSESSEE OR OF THE COMPARAB LES. THE DRP IN THIS REGARD RELIED ON OECD TRANSFER PRICING GUIDELINES A S REVISED ON 22 ND JULY, 2010 WHEREIN IT WAS CAUTIONED THAT USE OF MUL TIPLE YEAR DATA DOES NOT NECESSARILY IMPLY THE USE OF MULTIPLE YEAR AVER AGE FOR THE PURPOSE OF BENCH MARKING. 21. THE DRP THUS ISSUED DIRECTIONS U/S 144-C(13) OF THE ACT ON THE OBJECTIONS RAISED BY THE ASSESSEE VIDE ITS ORDER DT D. 7-9-2012 AND DIRECTED THE A.O./TPO TO GIVE EFFECT TO THE SAID DI RECTIONS. ACCORDINGLY, THE MARGINS OF FINAL SET OF COMPARABLES AFTER GIVIN G WORKING CAPITAL ADJUSTMENT WERE WORKED OUT BY THE A.O./TPO AS UNDER :- SR. NO. COMPANY NAME ASSESSEE/ DEPARTMENT FY 2007-08 NCP ADJUSTMENT FY 2007-08 REVISED NCP 1 CALIBER POINT SOLUTIONS LIMITED ASSEASSEE 9.67 (2.50) 7.17 2 COSMIC GLOBAL LIMITED ASSESSEE 23.30 (2.43) 20.87 3 MAPLE ESOLUTIONS LIMITED ASSESSEE 20.41 (5.27) 15.14 4 R SYSTEMS INTERNATIONAL LIMITED- SEGMENTAL ASSESSEE 11.87 (9.27) 8.90 5 SPANCO TELESYSTEMS & SOLUTIONS LIMITED - SEGMENTAL ASSESSEE 7.22 (4.23) 2.99 6 TRITON CORP LIMITED COMMON 23.81 (4.46) 19.35 7 MOLD-TEK TECHNOLOGIES LIMITED DEPARTMENT 96.66 (13.35) 83.31 8 CROSSDOMAIN SOLUTIONS LIMITED DEPARTMENT 26.96 (1.25) 25.71 9 DATAMATICS FINANCIAL SERVICES LIMITED - SEGMENTAL DEPARTMENT 34.87 (0.97) 33.90 10 ECLERX SERVICES LIMITED DEPARTMENT 65.88 (2.82) 63.06 AVERAGE 32.07 (4.02) 28.04 20 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 22. THE ADJUSTED AVERAGE PROFIT MARGIN OF COMPARABL ES AT 28.04% WAS APPLIED BY THE A.O./TPO TO THE COMBINED TOTAL OPER ATING COST (ITES AND IT SEGMENT) OF THE ASSESSEE AMOUNTING TO RS. 116,50 ,15,369/- TO WORK OUT THE ALP OF THE INTERNATIONAL TRANSACTIONS OF TH E ASSESSEE WITH ITS AES AT RS. 149,16,85,678/-. SINCE THE PRICE CHARGED BY THE ASSESSEE TO ITS AES FOR SUCH SERVICES WAS RS. 131,80,13,009/-, THE DIFFERENCE OF RS. 17,36,72,669/- WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF TP ADJUSTMENT IN THE FINAL ASSESSMENT MADE BY TH E A.O. VIDE AN ORDER DATED 31-10-2012 PASSED U/S 143(3) R.W.S. 144-C(1) OF THE ACT. AGGRIEVED BY THE SAME, THE ASSESSEE HAS PREFERRED T HIS APPEAL BEFORE THE TRIBUNAL. 23. IN ITS APPEAL, THE ASSESSEE HAS RAISED AS MANY AS 11 GROUNDS OUT OF WHICH GROUND NO. 1 IS GENERAL IN NATURE SEEKING NO SPECIFIC DECISION. GROUND NO. 2 CHALLENGES THE SELECTION OF COMPARABLE S BY THE TPO AS APPROVED BY THE DRP. IN ITS TP STUDY REPORT, THE A SSESSEE HAD SELECTED THIRTEEN COMPARABLES OUT OF WHICH ONLY ONE COMPARAB LE WAS ACCEPTED BY THE TPO. AFTER REJECTING THE TP STUDY OF THE ASSES SEE, THE TPO PROCEEDED TO DO HIS OWN EXERCISE OF TP ANALYSIS AND KEEPING I N VIEW THE NATURE OF SERVICES RENDERED BY THE ASSESSEE AS UNDERSTOOD BY HIM AND AFTER ANALYZING THE DATABASE, ANNUAL REPORT ETC., HE SELE CTED SEVEN COMPARABLES INCLUDING THE ONE SELECTED BY THE ASSES SEE NAMELY TRITON CORPN. LTD. THE DRP EXCLUDED TWO OF THESE FINAL SEV EN COMPARABLES SELECTED BY THE TPO NAMELY ACROPETAL TECHNOLOGIES L TD. (SEGMENT) AND CORAL HUBS LTD. WHILE IT INCLUDED FIVE OF THE COMPA RABLES SELECTED BY THE ASSESSEE BUT EXCLUDED BY THE TPO. ACCORDINGLY, A S ET OF THE FOLLOWING TEN COMPARABLES WAS SELECTED BY THE DRP: 1. CALIBER POINT BUSINESS SOLUTIONS LTD. 2. COSMIC GLOBAL LTD. 21 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 3. MAPLE E-SOLUTIONS LTD. 4. R SYSTEMS INTERNATIONAL (SEGMENTAL) 5. SPANCO TELESYSTEMS AND SOLUTIONS LIMITED 6. TRITON CORPN. LTD. 7. MOLD-TEK TECHNOLOGIES LTD. 8. CROSSDOMAIN SOLUTIONS LIMITED 9. DATAMATICS FINANCIAL SERVICES LIMITED (SEGMENT AL) 10. ECLERX SERVICES LTD. 24. AS SUBMITTED BY SR. ADVOCATE SHRI PORUS KAKA, T HE LD. COUNSEL FOR THE ASSESSEE, THE ASSESSEE IS DISPUTING THE INCLUSI ON OF TWO ENTITIES OUT OF TEN COMPARABLES FINALLY SELECTED BY THE DRP NAMELY MOLD-TEK TECHNOLOGIES LTD. AND ECLERX SERVICES LTD. ON THE G ROUND THAT FIRSTLY THEY ARE KPO SERVICE PROVIDERS WHO CANNOT BE COMPARED WI TH THE ASSESSEE COMPANY, WHICH IS BASICALLY A BPO SERVICE PROVIDER AND SECONDLY BOTH THESE ENTITIES EARNING ABNORMALLY HIGH PROFIT MARGI NS SHOULD NOT BE INCLUDED IN THE LIST OF COMPARABLES. BOTH THESE ISS UES ARE RAISED IN THE QUESTIONS SPECIFICALLY REFERRED FOR THE CONSIDERATI ON OF THIS SPECIAL BENCH AND ANSWERS TO THESE QUESTIONS THUS WILL DECIDE THE ISSUE RAISED IN GROUND NO. 2 OF THE ASSESSEES APPEAL AS AGREED BY THE LD. REPRESENTATIVES OF BOTH THE SIDES. 25. WHILE OPENING HIS ARGUMENTS ON THE ISSUE INVOLV ED IN QUESTION NO. 1, THE LD. COUNSEL FOR THE ASSESSEE SHRI PORUS KAKA REFERRED TO THE RELEVANT PORTION OF THE TPOS ORDER FOR THE EARLIER YEAR AT PAGE 5 OF HIS PAPER BOOK WHEREIN THE NATURE OF WORK PERFORMED OR SERVICES RENDERED BY THE ASSESSEE COMPANY WAS DISCUSSED. HE THEN INVITE D OUR ATTENTION TO THE SPECIFIC FINDING RECORDED BY THE A.O. IN HIS FI NAL ORDER FOR THE YEAR UNDER CONSIDERATION CLEARLY ACCEPTING THAT THERE WA S NO MATERIAL CHANGE IN THE ACTIVITIES UNDERTAKEN BY THE ASSESSEE COMPAN Y DURING THE YEAR UNDER CONSIDERATION. HE SUBMITTED THAT GOING BY THE NATURE OF WORK PERFORMED BY THE ASSESSEE OR SERVICES RENDERED, IT IS BASICALLY A BACK OFFICE SERVICE PROVIDER OR LOW END SERVICE PROVIDER . HE CONTENDED THAT THE 22 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED ASSESSEE THUS IS BASICALLY A BPO SERVICE PROVIDER A ND IT WAS WRONGLY CATEGORIZED BY THE TPO AS KPO SERVICE PROVIDER. HE TOOK US THROUGH THE SUBMISSIONS MADE BY THE ASSESSEE COMPANY IN THIS RE GARD BEFORE THE TPO AT PAGE 211 & 212 OF HIS PAPER BOOK TO POINT OU T THAT THE BRIEF OVERVIEW OF THE ASSESSEES BACK OFFICE SUPPORT SERV ICES WAS GIVEN THEREIN AS UNDER:- BRIEF OVERVIEW OF ASSESSEES BACK OFFICE SUPPORT S ERVICES: THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER PRIMARIL Y ENGAGED IN PROVIDING BACK OFFICE SUPPORT SERVICES TO ITS AE I.E. APMM. THE ACTIVITIES PRIMARILY COMPRISES OF LOW END DATA ENTRY, TRANSCRIPTION, RECONCILIATION, CONSOLIDATION, CO-ORDINATION, PREPA RATION, PROCESSING AND REVIEW OF SHIPPING DOCUMENTS SUCH AS BILLS OF LADIN G, ETC. AND SIMILAR SUPPORT SERVICES. ASSESSEE ACTS AS A CONTRACT SERVICE PROVIDERS CARRY ING OUT LIMITED LOW END FUNCTIONS BASED ON INSTRUCTIONS, STANDARDIZED PROCE SSES, DATA, SPECIFICATIONS, PROCESS NOTES AND STATEMENT OF WORK ALL OF WHICH ARE HISTORICALLY PROVIDED BY ITS AE. THE ACTIVITIES PER FORMED BY THE ASSESSEE ARE THUS MERELY SUPPORTIVE AND AUXILIARY IN NATURE. FOR EASE OF UNDERSTANDING ATTACHED IS THE FLOW CHART EXPLAINING THE WORK PROCESS OF DOCUMENTATION ACTIVITY IN BRIEF (PLEASE REFER EXHIB IT 1). THE ACTIVITIES PRIMARILY INVOLVES THE INFORMATION C OLLATION FROM THE SHIPPERS/CUSTOMERS/AE AND POPULATING THE SAME IN VA RIOUS PROCESSES AND SYSTEMS PROVIDED BY THE AE. THE WORK REQUIRES L IMITED DOMAIN EXPERTISE AND NO ANALYTICAL SKILLS. THESE ACTIVITI ES ARE PERFORMED BY LOW SKILLED EMPLOYEES WHO ARE PRIMARILY GRADUATES BY QU ALIFICATION. FOR EASE OF REFERENCE, WE HAVE ATTACHED HEREWITH THE AVAILAB LE DATA OF EMPLOYEES DURING FY 2007-08 AND THEIR QUALIFICATION ALONG WIT H THEIR BIRTH DATE AND IN EXHIBIT 2. BROAD CLASSIFICATION OF EMPLOYEES, B ASED ON THEIR QUALIFICATION IS DIAGRAMMATICALLY PRESENTED AS UNDE R:- 23 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED ON PERUSAL OF ABOVE, YOUR GOODSELF WOULD APPRECIATE THAT SINCE MAJORITY OF EMPLOYEES ARE ONLY GRADUATES, ACTIVITIES OF THE ASSESSEE CANNOT BE QUALIFIED TO BE HIGH END IN NATURE. FOLLOWING ARE SOME OF THE KEY FEATURES OF THE ASSES SEES BUSINESS WHICH ARE WORTH NOTING: ASSESSEES BUSINESS ACTIVITIES ARE PERFORMED BY G RADUATES AND FRESHERS WITH LIMITED EXPERIENCE. AVERAGE AGE OF EMPLOYEES I S AROUND 26-27 YEARS; ACTIVITIES OF THE ASSESSEE ARC BASED ON INSTRUCTI ONS, STANDARDIZED PROCESSES, DATA, SPECIFICATIONS, PROCESS NOTES AND STATEMENT OF WORK PROVIDED BY ITS AE; TEAM SIZE GENERALLY VARY FROM 17-18 EMPLOYEES WIT H ONE TEAM LEADER; QUALITY OR OUTPUT IS GENERALLY MEASURED IN TERMS OF NUMBER OF DOCUMENTS / TRANSACTIONS PROCESSED, NUMBER OF PUNCH ING ERRORS, NUMBER OF QUERIES, ETC.; ASSESSEE NORMALLY OPERATES IN THREE SHIFTS (8 HOU RS EACH). IN CONTRAST, KPO SERVICES GENERALLY WOULD NOT HAVE THE ABOVE CHARACTERISTICS AND PRIMARILY COMPRISE HIGH END RES EARCH AND ANALYTICAL SERVICES SUCH AS SOFTWARE DEVELOPMENT, R ESEARCH AND DEVELOPMENT IN PHARMACEUTICALS, ENGINEERING DESIGN SERVICES AND OTHER SUCH HIGH END VALUE ADDING SERVICES. QUALIFIC ATIONS OF THE EMPLOYEES, TEAM SIZE AND QUALITY YARDSTICKS ARE SUB STANTIALLY DIFFERENT IN KPO BUSINESS. 26. MR. PORUS KAKA POINTED OUT THAT EVEN THE BRIEF OVERVIEW OF THE KPO SERVICES WAS ALSO GIVEN BY THE ASSESSEE IN ITS SUBM ISSIONS FILED BEFORE THE TPO ALONG WITH OBJECTIONS RAISED IN THE LIGHT OF TH E SAME FOR CHARACTERIZING IT AS KPO SERVICE PROVIDER AS UNDER: - BRIEF OVERVIEW OF KNOWLEDGE PROCESS OUTSOURCING SER VICES AND THE ASSESSEES OBJECTIONS IT IS PERTINENT TO NOTE THE FOLLOWING UNDERSTANDING OF THE KPO SERVICES AS PROVIDED IN THE CAPTIONED NOTICE AND RE LEVANT ANNEXURES AVAILABLE IN THE CD FORM: KPO INVOLVES THE TRANSFER OF KNOWLEDGE INTENSIVE B USINESS PROCESSES THAT REQUIRE SIGNIFICANT DOMAIN EXPERTISE , TO OTHER GEOGRAPHIC LOCATIONS. FOR GLOBAL CORPORATIONS LOOKI NG TO MOVE THEIR HIGHER-END RESEARCH LIKE MARKET RESEARCH AND EQUITY RESEARCH, ANALYTICAL BASED SERVICES, ENGINEE RING DESIGN, IPR, LEGAL SERVICES, REMOTE EDUCATION AND PUBLISHING, INDIA IS CURRENTLY THE LOCATION OF CHOI CE. 24 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED KPO- A NEW BREED OF HIGH END KNOWLEDGE BASED BPO CA LLED KNOWLEDGE PROCESS OUTSOURCING (KPO,) EMERGED. THIS COMPRISES OF VENDORS PROVIDING HIGHER END RESEARCH AND ANALYTIC BASED SERVICES IN TRADITIONAL SERVICE LINES AS WELL AS NEW BUSINES S AREAS. AREAS FOR KPO INCLUDE HEALTHCARE INTELLECTUAL PROPERTY RIGH TS RESEARCH, DESIGN AND DEVELOPMENT FOR AUTOMOTIVE AND AEROSPACE INDUSTRIES AND ANIMATION AND GRAPHICS IN THE ENTERTAINMENT SEC TOR. (PLEASE REFER IT ENABLED SERVICES DEFINITION AS PRO VIDED IN THE CD,) (PLEASE REFER EXHIBIT 3) WE RESPECTFULLY SUBMIT THAT WE OBJECT TO THE CHARA CTERIZATION OF THE ASSESSEE AS A KPO. MERELY BECAUSE THE SERVICES PERFORMED BY THE ASSESS EE PERTAIN TO THE LOGISTICS INDUSTRY WE REQUEST YOUR GOODSELF NOT TO CONCLUDE THAT THE SERVICES PERFORMED BY THE ASSESSEE CAN BE CATEGORIZED AS KPO. A KPO INDUSTRY IS SIGNIFICANTLY HIGHER ON THE VALUE CHAIN AND INVOLVES PROCESSES THAT DEMAND ADVANCED INFORMATION ANALYSIS AS WELL AS SOME JUDGMENT AND DECISION MAKING. FURTHER THE MAIN CONCERN OF THE KPO IS THE QUALITY OF THE SERVICE PR OVIDED AS THE SAME WOULD INVOLVE STRATEGIC DECISION MAKING. THUS A KPO INDUSTRY IS EXTREMELY SENSITIVE AND ABSORBS HIGHER RISKS INVOLVING; CONFIDENTIALITY, QUALITY, DECISION MAKING ETC. AS DISCUSSED IN ABOVE PARAGRAPHS, THE ASSESSEE IN T URN IS A CAPTIVE ENTITY ENGAGED IN THE PROVISION OF DATA PRO CESSING SERVICES MERELY TO ITS AE, WHICH INTER ALIA INVOLVES ACTIVIT IES SUCH DATA ENTRY, TRANSCRIPTION, RECONCILIATION, CONSOLIDATION , CO-ORDINATION, PREPARATION, PROCESSING AND REVIEW OF SHIPPING DOCU MENTS SUCH AS BILLS OF LADING, ETC AND SIMILAR SUPPORT SERVICES, FOLLOWING PRE- DEFINED PROCEDURES AND ADHERING TO THE SET STANDARD S AND CRITERIA AS LAID DOWN BY THE AE AND ROUTINELY SENDING THE SA ME TO THE AE AS REQUIRED BY THEM. THE ASSESSEE DOES NOT HAVE AUTHORITY TO MAKE ANY DE CISIONS (AS WOULD HE REQUIRED TO BE MADE BY AN INDEPENDENT KPO) AND OPERATES AS PER THE DIRECTIONS AND INSTRUCTIONS PRO VIDED BY ITS AE. THE ACTIVITIES PERFORMED BY THE ASSESSEE ARE MERELY PREPARATORY AND AUXILIARY IN NATURE. THUS THE ASSESSEES ROLE D OES NOT INVOLVE ANY JUDGMENT OR DECISION MAKING SKILLS AND THEREBY THE SERVICES PROVIDED DO NOT FACE THE RISKS ARISING THERE-FROM, AS IN THE CASE OF A KPO. BASED ON THE ABOVE, IT IS EVIDENT THAT THE ENVIRONM ENT WITHIN WHICH THE SERVICES ARE PROVIDED BY THE ASSESSEE ARE NOT AS 25 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED SENSITIVE, RISK ORIENTED AS THAT OF THE KPO AND THU S THE ASSESSEE SHOULD NOT BE COMPARED TO THE COMPANIES ENGAGED IN KPO SERVICES AND CANNOT BE POSSIBLY EXPECTED TO ATTAIN MARGINS AS DEMANDED BY THE KPO INDUSTRY DUE TO THE EXTREME SEN SITIVITY AND DECISION MAKING INVOLVED THEREIN. 27. SHRI PORUS KAKA CONTENDED THAT THE PROPOSED ACT ION OF THE TPO IN CHARACTERIZING THE ASSESSEE AS KPO SERVICE PROVIDER THUS WAS STRONGLY OBJECTED TO BY THE ASSESSEE BY MAKING A DETAILED SU BMISSION POINTING OUT THE DISTINCTION BETWEEN THE LOW-END SERVICES RENDER ED BY THE ASSESSEE AS BACK OFFICE SUPPORT SERVICES AND THE HIGH-END KNOWL EDGE PROCESS OUTSOURCING SERVICES. HE CONTENDED THAT THIS ELABO RATE SUBMISSION MADE BY THE ASSESSEE TO SHOW AS TO HOW AND WHY IT COULD NOT BE TREATED AS KPO SERVICE PROVIDER, HOWEVER, WAS COMPLETELY IGNOR ED BY THE TPO AND HE TREATED THE ASSESSEE AS KPO WITHOUT GIVING ANY C ONVINCING REASONS TO JUSTIFY THE SAME. HE SUBMITTED THAT SIMILARLY FOUR ADDITIONAL FILTERS WERE ARBITRARILY APPLIED BY THE TPO TO REMOVE THE COMPAR ABLES WHICH OTHERWISE MET FAR ANALYSIS JUST TO SUIT AND SUPPORT THE HUGE TP ADJUSTMENT SUGGESTED BY HIM. HE SUBMITTED THAT THE NATURE OF FUNCTIONS OF THE ASSESSEE OR THE FAR ANALYSIS MADE BY THE ASS ESSEE WAS NOT DISPUTED BY THE TPO AND THE FINDINGS GIVEN BY HIM A BOUT THE NATURE OF ACTIVITIES OF THE ASSESSEE ON PAGE 8 TO 9 OF HIS OR DER TO TREAT THE ASSESSEE AS KPO ARE CONTRARY TO THE NATURE OF ACTIVITIES OF THE ASSESSEE DISCUSSED BY THE TPO HIMSELF ON PAGE 2 OF HIS ORDER. 28. OUR ATTENTION WAS INVITED BY SHRI PORUS KAKA TO THE RELEVANT PORTION OF THE SUBMISSIONS MADE BY THE ASSESSEE BEF ORE THE DRP AT PAGE NO. 116 & 117 OF THE PAPER BOOK TO POINT OUT THAT T HE ERRONEOUS CATEGORIZATION OF THE ASSESSEE AS KPO WAS CHALLENGE D BY THE ASSESSEE BY MAKING THE FOLLOWING SUBMISSION: 26 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 27 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 29. SHRI PORUS KAKA ARGUED THAT VARIOUS PROCESSES A ND SYSTEMS REQUIRED FOR PROVIDING BACK OFFICE SUPPORT SERVICES WERE PROVIDED BY THE CONCERNED AE AND THERE WAS NEITHER ANY TRANSFER OF KNOWLEDGE BY THE ASSESSEE NOR ANY RESEARCH AND ANALYSIS INVOLVED IN PROVIDING THE SAID SERVICES. HE INVITED OUR ATTENTION TO PARA 2.1.3 OF THE DRPS ORDER TO SHOW THAT THE CASE OF THE ASSESSEE OF LOW END SERVI CE PROVIDER STILL WAS NOT FULLY ACCEPTED BY THE DRP WITHOUT GIVING ANY CO GENT OR CONVINCING REASONS. HE POINTED OUT THAT THE DRP, HOWEVER, HELD THAT THE ASSESSEE COULD NOT BE CONSIDERED AS KPO GOING BY THE QUALIFI CATION AND PROFILE OF ITS WORKFORCE. HE CONTENDED THAT THE OBJECTION OF T HE ASSESSEE FOR INCLUSION OF TWO COMPARABLES ON THE BASIS OF FUNCTI ONAL DIFFERENCE, HOWEVER, WAS NOT CONSIDERED BY THE DRP SPECIFICALLY . 30. SHRI PORUS KAKA SUBMITTED THAT NONE OF THE SERV ICES RENDERED BY THE ASSESSEE IS IN THE NATURE OF LOGISTICS OUTSOURC ING SERVICES AND BUSINESS ANALYTIC SERVICES AND THE FINDING GIVEN BY TPO TO THIS EFFECT IS CONTRARY TO THE BUSINESS PROFILE OF THE ASSESSEE CO MPANY GIVEN BY THE TPO HIMSELF ON PAGE NO. 2 OF HIS ORDER. HE CONTEND ED THAT EVEN THE QUALIFICATION AND PROFILE OF THE WORKFORCE EMPLOYED BY THE ASSESSEE ESTABLISHED THE FACT THAT THE ASSESSEE IS PROVIDING LOW END SERVICES WHICH CANNOT BE CHARACTERIZED AS KPO SERVICES. 31. SHRI PORUS KAKA CONTENDED THAT ITES SECTOR AS A WHOLE IS TAKEN AS FUNCTIONALLY SIMILAR BY THE TPO AS WELL AS BY THE D RP FOR THE PURPOSE OF COMPARABILITY ANALYSIS, WHICH IS NOT AS PER THE PRO CEDURE PRESCRIBED IN THE RELEVANT RULES. RELYING ON THE DECISION OF HON BLE DELHI HIGH COURT IN THE CASE OF LI AND FUNG (I) PVT. LTD. DTD. 16-12 -2013, HE CONTENDED THAT ARBITRARY EXERCISE OF TP ADJUSTMENT IS NOT PER MISSIBLE AND THIS EXERCISE HAS TO BE DONE FOLLOWING THE RULES PRESCRI BED. 28 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 32. SHRI PORUS KAKA THEN PROCEEDED TO EXPLAIN THE N ATURE OF FUNCTIONS PERFORMED BY TWO ENTITIES NAMELY MOLD-TEK TECHNOLOG IES LIMITED AND ECLERX SERVICES LTD., WITH THE HELP OF RELEVANT DOC UMENTS. HE INVITED OUR ATTENTION TO THE RELEVANT PORTION OF THE ANNUAL REP ORT OF MOLD-TEK TECHNOLOGICAL SERVICES FOR FINANCIAL YEAR 2007-08 A T PAGE 139 OF THE PAPER BOOK WHEREIN THE SAID ENTITY WAS DESCRIBED AS PIONEERS IN STRUCTURAL ENGINEERING SERVICES. HE ALSO INVITED O UR ATTENTION TO PAGE 140 AND 144 OF HIS PAPER BOOK TO POINT OUT THAT ALM OST THE ENTIRE SALES OF THE SAID ENTITY FOR THE FINANCIAL YEAR 2007-08 WAS ON ACCOUNT OF EXPORT OF KPO DIVISION. HE ALSO BROUGHT TO OUR NOTICE THE RE LEVANT PORTION AT PAGE 145 & 146 OF HIS PAPER BOOK WHEREIN IT WAS CLEARLY STATED THAT MOLD-TEK TECHNOLOGIES LTD. IS PROVIDING ONLY STRUCTURAL ENGI NEERING SERVICES AND IT HAS SUITABLY ENLARGED ITS HRD DEPTT. TO HANDLE THE INCREASING NUMBER OF MANPOWER IN THE KPO DIVISION. HE CONTENDED THAT M/S MOLD-TEK TECHNOLOGIES LTD. THUS IS CLEARLY A KPO SERVICE PRO VIDER AND THE FUNCTIONS PERFORMED BY IT OF PROVIDING ONLY STRUCTU RAL ENGINEERING SERVICES ARE NOT COMPARABLE WITH THAT OF THE ASSESS EE. 33. REFERRING TO THE RELEVANT EXTRACTS OF ANNUAL RE PORT AND WEB-SITE OF ANOTHER COMPARABLE CHOSEN BY THE TPO NAMELY ECLERX SERVICES LTD. PLACED AT PAGE 167 TO 177OF HIS PAPER BOOK, SHRI PO RUS KAKA POINTED OUT THAT THE SAID ENTITY HAD CLAIMED ITSELF, AT PAGE 16 7, TO BE A KNOWLEDGE PROCESS OUTSOURCING (KPO) COMPANY PROVIDING DATA AN ALYTICS AND DATA PROCESS SOLUTIONS TO SOME OF THE LARGEST BRANDS IN THE WORLD WITH EXPERTISE IN FINANCIAL SERVICES AND RETAIL AND MANU FACTURING. IN THE MESSAGE TO THE SHAREHOLDERS AT PAGE 171, THE CHAIRM AN OF THE COMPANY HAD CLEARLY STATED THAT IT IS A VERY DIFFERENT COMP ANY WITH INDUSTRY SPECIALIZED SERVICES FOR MEETING COMPLEX CLIENT NEE DS. IT WAS ALSO STATED THAT THE COMPANY PROVIDES SOLUTIONS THAT DO NOT JUS T REDUCE COST BUT HELPS THE CLIENTS TO INCREASE SALES AND REDUCE RISK BY ENHANCING 29 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED EFFICIENCIES AND BY PROVIDING VALUABLE INSIGHTS THA T EMPOWER BETTER DECISIONS. IT WAS ALSO CLARIFIED THAT THE COMPANY THEREFORE CANNOT BE COMPARED TO A BPO OR AN IT OFFSHORING COMPANY. SHRI PORUS KAKA ALSO TOOK US THROUGH THE NOTE GIVEN BY THE COMPANY ON KP O PLACED AT PAGE NO. 173 OF HIS PAPER BOOK AND SUBMITTED THAT THE CO NTENTS THEREOF CLEARLY MAKE OUT THE DISTINCTION BETWEEN BPO AND KPO. THE SAID CONTENTS ARE EXTRACTED BELOW:- KNOWLEDGE PROCESS OUTSOURCING (KPO) THE GLOBAL BUSINESS ENVIRONMENT IS BECOMING INCREAS INGLY INFORMATION AND KNOWLEDGE INTENSIVE. IN SUCH AN ENV IRONMENT, BUSINESS ENTITIES HAVE REALIZED THE IMPORTANCE OF A ND OPPORTUNITY IN ASSIMILATING DATA, ANALYZING TRENDS, CREATING KN OWLEDGE AND HARNESSING THIS KNOWLEDGE FOR RUNNING BUSINESS OPER ATIONS EFFICIENTLY THEREBY CONTRIBUTING TO GROWTH AND PROF ITS. THE EVOLUTION AND MATURITY OF THE INDIAN BPO SECTOR GAVE RISE TO KNOWLEDGE PROCESS OUTSOURCING (KPO). THE TERM KPO H AS GENERALLY COME TO REFER TO SUCH ACTIVITIES AND PROC ESS SOLUTIONS SUPPLIED BY THE SERVICE PROVIDER THAT ESSENTIALLY I NVOLVE INFORMATION SEARCHING, ANALYZING, INTERPRETING AND REQUIRE SIGNIFICANT DOMAIN EXPERTISE ON PART OF THE SERVICE PROVIDER. A KPO FIRM REQUIRES SUBSTANTIALLY MORE DOMAIN EXPER TISE THAN BPO FIRM. PROFESSIONALS CONTINUE TO LEARN: AND UNDE RGO CONTINUOUS TRAINING TO LEARN NEW PROCEDURES AND NEW ER INTERPRETATIONS. CONSEQUENTLY, A GOOD KPO FIRM IS L IKELY TO BE JUDGED MORE BY THE DEPTH OF KNOWLEDGE AND EXPERIENC E OF ITS PROFESSIONALS THAN JUST ITS SIZE. INDIA IS A PREFERRED DESTINATION FOR KPO BECAUSE OF ITS LARGE ENGLISH SPEAKING LABOUR POOL, INHERENT DOMAIN EXPER TISE DUE TO A LARGE AND DEVELOPED DOMESTIC SERVICES INDUSTRY AND KNOWLEDGE AND APPLICATION OF INTERNATIONALLY ACCEPTED QUALITY STANDARDS AND PROCESSES. THE COUNTRY ADDS MORE THAN THREE MILLION GRADUATES AND PROFESSIONAL DEGREE AND DIPLOMA HOLDERS ANNUALL Y. IT IS HOME TO THE WORLDS SECOND LARGEST RESERVOIR OF ENGINEER S AND SCIENTISTS, AND THE SECOND LARGEST POOL OF IT MANPOWER. THE KNOWLEDGE SERVICES PROVIDED BY THIS INDUSTRY IN CLUDE INVESTMENT RESEARCH, LEGAL RESEARCH, SOURCING MANAG EMENT, INFORMATION MANAGEMENT, MARKET RESEARCH AND ANALYTI C SERVICES. SOME OF THE KEY SECTORS IT SERVICES INCLUDE BANKING AND FINANCIAL INSTITUTIONS, LEGAL, PARALEGAL AND INTELLECTUAL PRO PERTY, CONTRACT RESEARCH ORGANIZATIONS AND THE BIO-PHARMA INDUSTRY. 30 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED ACCORDING TO A RESEARCH PAPER RELEASED BY KPMG, THE GLOBAL KPO INDUSTRY IS EXPECTED TO REACH USD 17 BILLION BY 201 0, OF WHICH USD 12 BILLION (ALMOST 70%) WOULD BE OUTSOURCED TO INDIA ALONE. IN ADDITION, THE INDIAN KPO SECTOR IS ALSO EXPECTED TO EMPLOY MORE THAN 250,000 KPO PROFESSIONALS BY 2010. AFTER ACHIEVING GREAT SUCCESS IN BPO, INDIA AUTOMAT ICALLY BECOMES A NATURAL CHOICE FOR KPO SERVICES. DUE TO A LARGE K NOWLEDGE POOI AND A SIGNIFICANT COST ARBITRAGE, COUNTRIES LIKE IN DIA ARE FRONT RUNNERS IN PROVIDING OUTSOURCED SERVICES. OVERALL, INDIAS POSITION IN THE IT-KPO-BPO FIELD IS VISIBLY STRONG AND IT MA Y, CONSIDERING THE TRENDS AND POSSIBILITIES, OCCUPY HIGHER GROUNDS IN THE FUTURE. 34. RELIANCE WAS PLACED BY SHRI PORUS KAKA ON THE N OTIFICATION NO. SO 2810 (E) DTD. 18 TH SEPTEMBER, 2013 ISSUED BY THE CBDT IN EXERCISE OF THE POWER CONFERRED BY SECTION 92CB R.W.S. 295 OF THE A CT MAKING THE SAFE HARBOUR RULES AND OUR ATTENTION WAS INVITED TO THE DEFINITION OF INFORMATION TECHNOLOGY ENABLED SERVICES GIVEN IN RULE 10 TA(E) AS THE VARIOUS BUSINESS PROCESS OUTSOURCING SERVICES SPECI FIED THEREIN WHICH ARE PROVIDED MAINLY WITH THE ASSISTANCE OR USE OF T HE INFORMATION TECHNOLOGY. HE POINTED OUT THAT THE SERVICES SO PRE SCRIBED BY THE CBDT INCLUDE BACK OFFICE OPERATIONS AND SUPPORT CENTRE, WHICH ARE THE SERVICES RENDERED BY THE ASSESSEE COMPANY IN THE PRESENT CAS E. HE THEN REFERRED TO THE DEFINITION OF KNOWLEDGE PROCESS OUTSOURCING SERVICES GIVEN IN CLAUSE (G) OF RULE 10TA TO MEAN CERTAIN SPECIFIED B USINESS PROCESS OUTSOURCING SERVICES WHICH ARE PROVIDED MAINLY WITH THE ASSISTANCE OR USE OF INFORMATION TECHNOLOGY REQUIRING APPLICATION OF KNOWLEDGE AND ADVANCED ANALYTICAL AND TECHNICAL SKILL. HE CONTEND ED THAT THE SERVICES SO SPECIFIED BY THE CBDT DO NOT INCLUDE BACK OFFICE SUPPORT SERVICES AS RENDERED BY THE ASSESSEE COMPANY IN THE PRESENT CAS E. HE CONTENDED THAT THE SERVICES RENDERED BY THE ASSESSEE ALSO DO NOT REQUIRE APPLICATION OF KNOWLEDGE AND/OR ADVANCE ANALYTICAL AND TECHNICA L SKILL. HE CONTENDED THAT THESE PROVISIONS GIVEN BY THE CBDT I N SAFE HARBOUR RULES THUS CLEARLY SHOW THAT THERE IS A CLEAR DISTINCTION BETWEEN KPO SERVICES AND BPO SERVICES AND THE BACK OFFICE SUPPORT SERVIC ES RENDERED BY THE ASSESSEE FALL WITHIN THE CATEGORY OF BPO SERVICES. 31 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 35. SHRI PORUS KAKA SUBMITTED THAT BEFORE THE DECIS ION OF THE MUMBAI BENCH OF TRIBUNAL IN THE CASE OF WILLIS PROCESSING SERVICES (I) PVT. LTD. VS. DCIT (SUPRA), SEVERAL BENCHES OF THE TRIBUNAL TOOK A VIEW IN FAVOUR OF THE ASSESSEE, ACCEPTING THE DISTINCTION BETWEEN BPO AND KPO AND HOLDING THAT THE BPO SERVICE PROVIDER CANNOT BE COMPARED WI TH THE KPO SERVICE PROVIDER. HE CITED TWO OF SUCH DECISIONS ONE RENDER ED BY HYDERABAD BENCH OF ITAT IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA)(P.) LTD. DCIT (I.T.A NO. 1961/HYD.2011 DTD. 23-11-2012 AND OTHER RENDERED BY MUMBAI BENCH OF ITAT IN THE CASE OF LLOYDS TSB G LOBAL SERVICES PVT. LTD VS. DCIT (ITA NO. 5928/MUM/2012 DTD. 21-11-2012 ). HE SUBMITTED THAT EVEN AFTER THE DECISION IN THE CASE OF WILLIS PROCESSING SERVICES (I) PVT. LTD. RENDERED ON 1-3-2013 TAKING A VIEW AGAINS T THE ASSESSEE, THE TRIBUNAL HAS DECIDED THIS ISSUE IN FAVOUR OF THE AS SESSEE IN THE VARIOUS DECISIONS RENDERED THEREAFTER. HE FILED THE COPIES OF SUCH ORDERS OF THE TRIBUNAL PASSED IN THE FOLLOWING CASES:- 1. ZAVATA INDIA PVT. LTD. VS. DCIT ITA 1781/HY D/2011 DTD. 2-7-2013 (2013) 35 TAXMANN.COM.423) 2. PTC SOFTWARE (I) PVT. LTD VS. ACIT ITA 1605/PN /2011 DTD. 30-4-2013 3. COGNIZANT TECHNOLOGY SERVICES PVT. LTD. VS. ACIT ITA 2106/1864/HYD/2011 DTD . DATED 22-5-2013 4. SYMPHONY MARKETING SOLUTIONS ITA 1316/BANG/20 12 DT. 14.8.2013 INDIA PVT. LTD. V. ITO 5. MARKET TOOLS RESEARCH ITA 1811/HYD/2012 DT. 2 4.10.2012 PVT. LTD. VS. DCIT 6. AVINEON (I) P. LTD. DCIT ITA 1989/HYD/2 011DTD. 31-10-2013 36. AS REGARDS THE DECISION OF DIVISION BENCH OF TH IS TRIBUNAL IN THE CASE OF WILLIS PROCESSING SERVICES (I) PVT. LTD. (S UPRA), SHRI PORUS KAKA SUBMITTED THAT A DIFFERENT VIEW HAS BEEN TAKEN THER EIN BY NOT ACCEPTING THE DISTINCTION BETWEEN BPO SERVICE AND KPO SERVICE AND CHARACTERISING SUCH SERVICES AS ITES, WITHOUT TAKING INTO CONSIDER ATION THE VIEW ALREADY TAKEN BY THE CO-ORDINATE BENCHES. HE TOOK US THROU GH THE ORDER PASSED 32 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED BY THE TRIBUNAL IN THE CASE OF WILLIS PROCESSING SE RVICES (I) PVT. LTD. (SUPRA) AND SUBMITTED THAT THE RELIANCE IN SUPPORT OF ITS VIEW ON THIS ISSUE WAS PLACED BY THE TRIBUNAL ON THE SO CALLED A CCEPTED RULE OF SAMPLING THAT LARGER SIZE OF SAMPLE WOULD BE BETTER AND ADEQUATELY REPRESENT THE LOT OR POPULATION TO WHICH THE SAMPLE BELONGS. HE CONTENDED THAT IN SO FAR AS TRANSFER PRICING EXERCI SE IS CONCERNED, THE COMPARABLES HAVE TO BE BETTER THAN LARGER AND WHAT MATTERS IS THE QUALITY OF SAMPLE/COMPARABLES AND NOT THE SIZE/QUAN TITY. HE CONTENDED THAT THE COMPARABILITY FOR THIS PURPOSE HAS TO BE S EEN ON THE BASIS OF FAR ANALYSIS AND THE RELEVANT RULE 10B(3)(II) ALLOW S ONLY REASONABLY ACCURATE ADJUSTMENT TO BE MADE TO ELIMINATE THE DIF FERENCES, IF ANY. HE CONTENDED THAT IN THE TRANSFER PRICING EXERCISE, AN ALYSIS HAS TO BE QUALITATIVE AND NOT QUANTITATIVE. HE ALSO CONTENDED THAT THE BROAD CHARACTERISATION OF BPO AND KPO SERVICES MADE BY TH E TRIBUNAL IN THE CASE OF WILLIS PROCESSING SERVICES (I) P. LTD. (SUP RA) AS ITES, BASED ON THE LARGER SIZE OF SAMPLE, IS NOT IN ACCORDANCE WITH TH E TP REGULATIONS PRESCRIBED IN THE RELEVANT RULE AND THUS THE VIEW T AKEN IN THE SAID CASE HAS NOT BEEN FOLLOWED EVEN BY THE OTHER CO-ORDINATE BENCHES OF THE TRIBUNAL. 37. REFERENCE WAS MADE BY SHRI PORUS KAKA TO SECTIO N B.3.1 OF THE OECD TRANSFER PRICING GUIDELINES ISSUED IN JULY, 20 10 AND OUR ATTENTION WAS DRAWN TO PARAGRAPH NOS. 2.68 TO 2.75 CONTAINED THEREIN EXPLAINING THE COMPARABILITY STANDARD TO BE APPLIED WHEN TNMM IS FOLLOWED. THE SAID PARAGRAPHS READ AS UNDER:- 2.68 A COMPARABILITY ANALYSIS MUST BE PERFORMED IN ALL CASES IN ORDER TO SELECT AND APPLY THE MOST APPROPRIATE TRAN SFER PRICING METHOD, AND THE PROCESS FOR SELECTING AND APPLYING A TRANSACTIONAL NET MARGIN METHOD SHOULD NOT BE LESS RELIABLE THAN FOR OTHER METHODS. AS A MATTER OF GOOD PRACTICE, THE TYPICAL PROCESS FOR IDENTIFYING COMPARABLE TRANSACTIONS AND USING DATA SO OBTAINED WHICH IS DESCRIBED AT PARAGRAPH 3.4 OR ANY EQUIVALE NT PROCESS DESIGNED TO ENSURE ROBUSTNESS OF THE ANALYSIS SHOUL D BE FOLLOWED 33 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED WHEN APPLYING A TRANSACTIONAL NET MARGIN METHOD, JU ST AS WITH ANY OTHER METHOD. THAT BEING SAID, IT IS RECOGNISED THAT IN PRACTICE THE LEVEL OF INFORMATION AVAILABLE ON THE FACTORS A FFECTING EXTERNAL COMPARABLE TRANSACTIONS IS OFTEN LIMITED. DETERMINI NG A RELIABLE ESTIMATE OF AN ARMS LENGTH OUTCOME REQUIRES FLEXIB ILITY AND THE EXERCISE OF GOOD JUDGMENT. SEE PARAGRAPH 1.13. 2.69 PRICES ARE LIKELY TO BE AFFECTED BY DIFFERENCE S IN PRODUCTS, AND GROSS MARGINS ARE LIKELY TO BE AFFECTED BY DIFF ERENCES IN FUNCTIONS, BUT NET PROFIT INDICATORS ARE LESS ADVER SELY AFFECTED BY SUCH DIFFERENCES. AS WITH THE NET MARGIN METHOD RES EMBLES, THIS, HOWEVER, DOES NOT MEAN THAT A MERE SIMILARITY OF FU NCTIONS BETWEEN TWO ENTERPRISES NECESSARILY LEAD TO RELIABL E COMPARISONS. ASSUMING SIMILAR FUNCTIONS CAN BE ISOLATED FROM AMO NG THE WIDE RANGE OF FUNCTIONS THAT ENTERPRISES MAY EXERCISE, I N ORDER TO APPLY THE METHOD, THE NET PROFIT INDICATORS RELATED TO SU CH FUNCTIONS MAY STILL NOT BE AUTOMATICALLY COMPARABLE WHERE, FOR IN STANCE, THE ENTERPRISES CONCERNED CARRY ON THOSE FUNCTIONS IN D IFFERENT ECONOMIC SECTORS OR MARKETS WITH DIFFERENT LEVELS O F PROFITABILITY. WHEN THE COMPARABLE UNCONTROLLED TRANSACTIONS BEING USED ARE THOSE OF AN INDEPENDENT ENTERPRISE, A HIGH DEGREE O F SIMILARITY IS REQUIRED IN A NUMBER OF ASPECTS OF THE ASSOCIATED E NTERPRISE AND THE INDEPENDENT ENTERPRISE INVOLVED IN THE TRANSACT IONS IN ORDER FOR THE CONTROLLED TRANSACTIONS TO BE COMPARABLE; T HERE ARE VARIOUS FACTORS OTHER THAN PRODUCTS AND FUNCTIONS THAT CAN SIGNIFICANTLY INFLUENCE NET PROFIT INDICATORS. 2.70 THE USE OF NET PROFIT INDICATORS CAN POTENTIAL LY INTRODUCE A GREATER ELEMENT OF VOLATILITY INTO THE DETERMINATIO N OF TRANSFER PRICES FOR TWO REASONS. FIRST, NET PROFIT INDICATOR S CAN BE INFLUENCED BY SOME FACTORS THAT DO NOT HAVE AN EFFE CT (OR HAVE A LESS SUBSTANTIAL OR DIRECT EFFECT) ON GROSS MARGINS AND PRICES, BECAUSE OF THE POTENTIAL FOR VARIATION OF OPERATING EXPENSES ACROSS ENTERPRISES. SECOND, NET PROFIT INDICATORS CAN BE I NFLUENCED BY SOME OF THE SAME FACTORS, SUCH AS COMPETITIVE POSIT ION, THAT CAN INFLUENCE PRICE AND GROSS MARGINS, BUT THE EFFECT O F THESE FACTORS MAY NOT BE AS READILY ELIMINATED. IN THE TRADITIONA L TRANSACTION METHODS, THE EFFECT OF THESE FACTORS MAY BE ELIMINA TED AS A NATURAL CONSEQUENCE OF INSISTING UPON GREATER PRODUCT AND F UNCTION SIMILARITY. DEPENDING ON THE FACTS AND CIRCUMSTANCE S OF THE CASE AND IN PARTICULAR ON THE EFFECT OF THE FUNCTIONAL D IFFERENCES ON THE COST STRUCTURE AND ON THE REVENUE OF THE POTENTIAL COMPARABLES, NET PROFIT INDICATORS CAN BE LESS SENSITIVE THAN GR OSS MARGINS TO DIFFERENCES IN THE EXTENT AND COMPLEXITY OF FUNCTIO NS AND TO DIFFERENCES IN THE LEVEL OF RISKS (ASSUMING THE CON TRACTUAL ALLOCATION OF RISKS IS ARMS LENGTH). ON THE OTHER HAND, DEPENDING ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN P ARTICULAR ON THE PROPORTION OF FIXED AND VARIABLE COSTS, THE TRA NSACTIONAL NET MARGIN METHOD MAY BE MORE SENSITIVE THAN THE COST P LUS OR RESALE PRICE METHODS TO DIFFERENCES IN CAPACITY UTILISATIO N, BECAUSE 34 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED DIFFERENCES IN THE LEVELS OF ABSORPTION OF INDIRECT FIXED COSTS (E.G. FIXED MANUFACTURING COSTS OR FIXED DISTRIBUTION COS TS) WOULD AFFECT THE NET PROFIT INDICATOR BUT MAY NOT AFFECT THE GRO SS MARGIN OR GROSS MARK-UP ON COSTS IF NOT REFLECTED IN PRICE DI FFERENCES. SEE ANNEX I TO CHAPTER II SENSITIVITY OF GROSS AND NET PROFIT INDICATORS. 2.71 NET PROFIT INDICATORS MAY BE DIRECTLY AFFECTED BY SUCH FORCES OPERATING IN THE INDUSTRY AS FOLLOWS: THREAT OF NEW ENTRANTS, COMPETITIVE POSITION, MANAGEMENT EFFICIENCY AND IND IVIDUAL STRATEGIES, THREAT OF SUBSTITUTE PRODUCTS, VARYING COST STRUCTURES (AS REFLECTED, FOR EXAMPLE, IN THE AGE OF PLANT AND EQUIPMENT), DIFFERENCES IN THE COST OF CAPITAL (E.G. SELF FINAN CING VERSUS BORROWING), AND THE DEGREE OF BUSINESS EXPERIENCE ( E.G. WHETHER THE BUSINESS IS IN A START-UP PHASE OR IS MATURE). EACH OF THESE FACTORS IN TURN CAN BE INFLUENCED BY NUMEROUS OTHER ELEMENTS. FOR EXAMPLE, THE LEVEL OF THE THREAT OF NEW ENTRANTS WI LL BE DETERMINED BY SUCH ELEMENTS AS PRODUCT DIFFERENTIATION, CAPITA L REQUIREMENTS, AND GOVERNMENT SUBSIDIES AND REGULATIONS. SOME OF T HESE ELEMENTS ALSO MAY IMPACT THE APPLICATION OF THE TRA DITIONAL TRANSACTION METHODS. 2.72 ASSUME, FOR EXAMPLE, THAT A TAXPAYER SELLS TOP QUALITY AUDIO PLAYERS TO AN ASSOCIATED ENTERPRISE, AND THE ONLY P ROFIT INFORMATION AVAILABLE ON COMPARABLE BUSINESS ACTIVITIES IS ON G ENERIC MEDIUM QUALITY AUDIO PLAYER SALES. ASSUME THAT THE TOP QUA LITY AUDIO PLAYER MARKET IS GROWING IN ITS SALES, HAS A HIGH E NTRY BARRIER, HAS A SMALL NUMBER OF COMPETITORS, AND IS WITH WIDE POS SIBILITIES FOR PRODUCT DIFFERENTIATION. ALL OF THE DIFFERENCES ARE LIKELY TO HAVE MATERIAL EFFECT ON THE PROFITABILITY OF THE EXAMINE D ACTIVITIES AND COMPARED ACTIVITIES, AND IN SUCH A CASE WOULD REQUI RE ADJUSTMENT. AS WITH OTHER METHODS, THE RELIABILITY OF THE NECES SARY ADJUSTMENTS WILL AFFECT THE RELIABILITY OF THE ANAL YSIS. IT SHOULD BE NOTED THAT EVEN IF TWO ENTERPRISES ARE IN EXACTLY T HE SAME INDUSTRY, THE PROFITABILITY MAY DIFFER DEPENDING ON THEIR MARKET SHARES, COMPETITIVE POSITIONS, ETC. 2.73 IT MIGHT BE ARGUED THAT THE POTENTIAL INACCURA CIES RESULTING FROM THE ABOVE TYPES OF FACTORS CAN BE REFLECTED IN THE SIZE OF THE ARMS LENGTH RANGE. THE USE OF A RANGE MAY TO SOME EXTENT MITIGATE THE LEVEL OF INACCURACY, BUT MAY NOT ACCOU NT FOR SITUATIONS WHERE A TAXPAYERS PROFITS ARE INCREASED OR REDUCED BY A FACTOR UNIQUE TO THAT TAXPAYER. IN SUCH A CASE, THE RANGE MAY NOT INCLUDE POINTS REPRESENTING THE PROFITS OF INDEPEND ENT ENTERPRISES THAT ARE AFFECTED IN A SIMILAR MANNER BY A UNIQUE F ACTOR. THE USE OF A RANGE, THEREFORE, MAY NOT ALWAYS SOLVE THE DIF FICULTIES DISCUSSED ABOVE. SEE DISCUSSION OF ARMS LENGTH RAN GES AT PARAGRAPHS 3.55-3.66. 2.74 THE TRANSACTIONAL NET MARGIN METHOD MAY AFFORD A PRACTICAL 35 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED SOLUTION TO OTHERWISE INSOLUBLE TRANSFER PRICING PR OBLEMS IF IT IS USED SENSIBLY AND WITH APPROPRIATE ADJUSTMENTS TO A CCOUNT FOR DIFFERENCES OF THE TYPE REFERRED TO ABOVE. THE TRAN SACTIONAL NET MARGIN METHOD SHOULD NOT BE USED UNLESS THE NET PRO FIT INDICATORS ARE DETERMINED FROM UNCONTROLLED TRANSACTIONS OF TH E SAME TAXPAYER IN COMPARABLE CIRCUMSTANCES OR, WHERE THE COMPARABLE UNCONTROLLED TRANSACTIONS ARE THOSE OF AN INDEPENDE NT ENTERPRISE, THE DIFFERENCES BETWEEN THE ASSOCIATED ENTERPRISES AND THE INDEPENDENT ENTERPRISES THAT HAVE A MATERIAL EFFECT ON THE NET PROFIT INDICATOR BEING USED ARE ADEQUATELY TAKEN IN TO ACCOUNT. MANY COUNTRIES ARE CONCERNED THAT THE SAFEGUARDS ES TABLISHED FOR THE TRADITIONAL TRANSACTION METHODS MAY BE OVERLOOK ED IN APPLYING THE TRANSACTIONAL NET MARGIN METHOD. THUS WHERE DIF FERENCES IN THE CHARACTERISTICS OF THE ENTERPRISES BEING COMPAR ED HAVE A MATERIAL EFFECT ON THE NET PROFIT INDICATORS BEING USED, IT WOULD NOT BE APPROPRIATE TO APPLY THE TRANSACTIONAL NET MARGI N METHOD WITHOUT MAKING ADJUSTMENTS FOR SUCH DIFFERENCES. TH E EXTENT AND RELIABILITY OF THOSE ADJUSTMENTS WILL AFFECT THE RE LATIVE RELIABILITY OF THE ANALYSIS UNDER THE TRANSACTIONAL NET MARGIN MET HOD. SEE DISCUSSION OF COMPARABILITY ADJUSTMENTS AT PARAGRAP HS 3.47-3.54. 2.75 ANOTHER IMPORTANT ASPECT OF COMPARABILITY IS M EASUREMENT CONSISTENCY. THE NET PROFIT INDICATORS MUST BE MEAS URED CONSISTENTLY BETWEEN THE ASSOCIATED ENTERPRISE AND THE INDEPENDENT ENTERPRISE. IN ADDITION, THERE MAY BE D IFFERENCES IN THE TREATMENT ACROSS ENTERPRISES OF OPERATING EXPEN SES AND NON- OPERATING EXPENSES AFFECTING THE NET PROFITS SUCH A S DEPRECIATION AND RESERVES OR PROVISIONS THAT WOULD NEED TO BE AC COUNTED FOR IN ORDER TO ACHIEVE RELIABLE COMPARABILITY. 38. REFERRING TO THE RELEVANT PORTION OF THE OECD G UIDELINES, SHRI PORUS KAKA SUBMITTED THAT DETERMINING A RELIABLE ES TIMATE OF ARMS LENGTH OUTCOME REQUIRES FLEXIBILITY AND EXERCISE OF GOOD JUDGMENT. HE CONTENDED THAT A REASONABLE, SENSIBLE AND PRACTICAL APPROACH IS EXPECTED TO BE ADOPTED IN ORDER TO ENSURE THAT THE TNMM CAN AFFORD A PRACTICAL SOLUTION TO OTHERWISE INSOLUBLE TRANSFER PRICING PR OBLEMS. REFERRING TO PARA 2.92 OF THE OECD GUIDELINES, HE ALSO CONTENDED THAT COST BASED INDICATORS SHOULD ONLY BE USED IN THOSE CASES WHERE COSTS ARE A RELEVANT INDICATOR OF THE VALUE OF THE FUNCTIONS PERFORMED, ASSETS USED AND RISKS ASSUMED BY THE TESTED PARTY. IN ADDITION, THE DETER MINATION OF WHAT COST SHOULD BE INCLUDED IN THE COST BASE SHOULD BE DERIV ED FROM A CAREFUL REVIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 36 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 39. SHRI PORUS KAKA ALSO REFERRED TO CHAPTER III OF THE OECD GUIDELINES AND SUBMITTED THAT PARA 3.2 OF THE SAID CHAPTER, DEALING WITH PERFORMING A COMPARABILITY ANALYSIS, RECOMMENDS T HAT WHERE IT IS POSSIBLE TO DETERMINE THAT SOME UNCONTROLLED TRANS ACTIONS HAVE A LESSER DEGREE OF COMPARABILITY THAN OTHERS, THEY SHOULD BE ELIMINATED. HE ALSO REFERRED TO THE TYPICAL PROCESS GIVEN IN PARA 3.4 O F THE GUIDELINES THAT IS COMMONLY FOLLOWED WHEN PERFORMING A COMPARABILITY A NALYSIS. HE ALSO REFERRED TO SECTION A-5 OF OECD GUIDELINES ON SELE CTING AND REJECTING POTENTIAL COMPARABLES AND POINTED OUT THAT AS PER PARA 3.56 OF THE GUIDELINES, WHERE IT IS POSSIBLE TO DETERMINE THAT SOME UNCONTROLLED TRANSACTIONS HAVE A LESSER DEGREE OF COMPARABILITY THAN OTHERS, THEY SHOULD BE ELIMINATED. HE ALSO REFERRED TO PARA 3.57 OF THE GUIDELINES WHEREIN IT IS STATED THAT IF THE RANGE OF COMPARABL ES INCLUDES A SIZEABLE NUMBER OF OBSERVATIONS, STATISTICAL TOOLS THAT TAKE ACCOUNT OF CENTRAL TENDENCY TO NARROW THE RANGE (E.G. THE INTERQUARTIL E RANGE OR OTHER PERCENTILES) MIGHT HELP TO ENHANCE THE RELIABILITY OF THE ANALYSIS. HE ALSO REFERRED TO PARA 3.59 OF THE OECD GUIDELINES WHEREI N IT IS SUGGESTED THAT WHERE THE APPLICATION OF THE MOST APPROPRIATE METHO D PRODUCES A RANGE OF FIGURES, A SUBSTANTIAL DEVIATION AMONG POINTS IN THAT RANGE MAY INDICATE THAT THE DATA USED IN ESTABLISHING SOME OF THE POINTS MAY NOT BE AS RELIABLE AS THE DATA USED TO ESTABLISH THE OTHER POINTS IN THE RANGE OR THAT THE DEVIATION MAY RESULT FROM FEATURES OF THE COMPARABLE DATA THAT REQUIRE ADJUSTMENTS. IT IS SUGGESTED THAT FURTHER A NALYSIS OF THOSE POINTS IN SUCH CASES MAY BE NECESSARY TO EVALUATE THEIR SU ITABILITY FOR INCLUSION IN ANY ARMS LENGTH PRICE. 40. REFERENCE WAS MADE BY SHRI PORUS KAKA TO SECTIO N A.7.3 OF THE OECD GUIDELINES DEALING WITH EXTREME RESULTS IN TH E CONTEXT OF COMPARABILITY CONSIDERATIONS TO POINT OUT THAT EXT REME RESULTS MIGHT 37 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED CONSIST OF LOSSES OR UNUSUALLY HIGH PROFITS. IT IS SUGGESTED THAT EXTREME RESULTS CAN AFFECT THE FINANCIAL INDICATORS THAT AR E LOOKED AT IN THE CHOSEN METHOD AND WHERE ONE OR MORE OF THE POTENTIAL COMPA RABLES HAVE EXTREME RESULTS, FURTHER EXAMINATION WOULD BE NEEDE D TO UNDERSTAND THE REASONS FOR SUCH EXTREME RESULTS. HE SUBMITTED THAT IF THE RELEVANT DATA IS SECURED, FURTHER ANALYSIS IS REQUIRED TO FIND OU T THE RELIABILITY OF SUCH DATA AS SUGGESTED IN THE OECD GUIDELINES. HE CONTEN DED THAT THIS VITAL ASPECT WAS NOT CONSIDERED BY THE TRIBUNAL IN THE CA SE OF WILLIS PROCESSING SERVICES (I) PVT. LTD. (SUPRA) AND THE D ECISION WAS RENDERED WITHOUT FURTHER ANALYSIS OR INVESTIGATION TO FIND O UT ANY ABNORMALITY AND TO NULLIFY THE EFFECT OF SUCH ABNORMALITY BY APPLYI NG SUITABLE STATISTICAL METHOD. HE SUBMITTED THAT EVEN THE COMPARISON OF FU NCTIONS MADE BY THE TRIBUNAL IN PARA 30.10 OF ITS ORDER PASSED IN T HE CASE OF WILLS PROCESSING SERVICES (I) PVT. LTD. IS VERY GENERIC WHICH IS DONE WITHOUT MAKING ANY FURTHER ANALYSIS OF THE FUNCTIONS PERFOR MED IN ORDER TO ASCERTAIN WHETHER IT WAS A CASE OF BPO SERVICE PROV IDER OR KPO SERVICE PROVIDER. 41. ADVOCATE SHRI AJAY VORA, THE LD. COUNSEL APPEAR ING FOR BOTH THE INTERVENERS M/S OMNIGLOBE INFORMATION TECHNOLOGIES INDIA PVT. LTD. AND M/S CRM SERVICES INDIA LTD. PUT FORTH HIS PROPOSITI ONS ON THE ISSUES INVOLVED IN TWO QUESTIONS RAISED BEFORE THE SPECIAL BENCH. AS REGARDS THE ISSUE INVOLVED IN QUESTION NO. 1, HE REFERRED TO SE CTION 92-C (1) OF THE ACT WHICH PROVIDES FOR COMPUTATION OF INCOME ARISING FR OM THE INTERNATIONAL TRANSACTION HAVING REGARD TO THE ARMS LENGTH PRICE . HE SUBMITTED THAT THE ALP OF AN INTERNATIONAL TRANSACTION IS REQUIRED TO BE DETERMINED BY APPLYING ONE OF THE METHODS PROVIDED IN SECTION 92- C (3) OF THE ACT, BEING THE MOST APPROPRIATE METHOD AND SUCH METHOD MUST TA KE INTO CONSIDERATION CERTAIN ASPECTS WHICH ARE CRITICAL. H E CONTENDED THAT THIS POSITION IS FURTHER AMPLIFIED IN RULE 10-B OF THE I NCOME TAX RULES, 1962 38 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED WHICH ENVISAGES ADJUSTMENT ON ACCOUNT OF FUNCTIONAL AND OTHER DIFFERENCES. HE CONTENDED THAT ADOPTING OF ANY METH OD ULTIMATELY ENVISAGES COMPARISON OF APPLE WITH APPLE AND RULE 1 0B(2)(A) PROVIDES THAT SPECIFIC CHARACTERISTIC OF SERVICES RENDERED B Y THE TWO ENTITIES SHOULD BE COMPARED IN ORDER TO TREAT THE SAME AS COMPARABL ES FOR THE PURPOSE OF TRANSFER PRICING ANALYSIS. HE RELIED ON THE DECI SION OF HONBLE SUPREME COURT IN THE CASE OF DIT (INTERNATIONAL TAXATION) V S. MORGAN STANLEY AND CO. INC. [2007] 292 ITR 416 WHEREIN THE HONBLE APE X COURT EMPHASIZED THE SIGNIFICANCE OF FUNCTIONS PERFORMED AND RISKS A SSUMED BY THE ENTERPRISE IN UNDERTAKING THE TRANSFER PRICING ANA LYSIS. HE CONTENDED THAT COMPARABILITY SHOULD BE BASED ON THE CONCLUSIO N DRAWN FROM THE FUNCTIONAL ANALYSIS OF THE ENTERPRISE AND IT SHOULD BE A BACKDROP OF BENCHMARKING AND DETERMINING THE ARMS LENGTH PRICE . HE ARGUED THAT THE PARAMETERS FOR TAKING AN UN-CONTROLLED TRANSACT ION AS COMPARABLE TO INTERNATIONAL TRANSACTION ARE PROVIDED IN RULE 10-B (2) AND AS HELD BY THE BANGALORE SPECIAL BENCH OF ITAT IN THE CASE OF AZTE C SOFTWARE AND TECHNOLOGY SERVICES LTD. VS. ACIT 107 ITD 141 (BANG .)[SB], THIS CRITERIA SHOULD FORM A BASIS FOR JUDGING THE COMPARABILITY, WHATEVER BE THE METHODOLOGY CHOSEN FOR THE PURPOSE OF DETERMINATION OF ALP. HE ALSO RELIED ON THE DECISION OF DELHI BENCH OF ITAT IN TH E CASE OF MENTOR GRAPHICS (NOIDA) PVT. LTD. VS. DCIT, 18 SOT 76 (DEL HI) WHEREIN IT WAS HELD THAT THE FIRST STEP IN THE DETERMINATION OF AL P IS TO ANALYSE THE SPECIFIC CHARACTERISTICS OF THE CONTROLLED TRANSACT ION SO AS TO MAKE MEANINGFUL COMPARISON WITH THE COMPARABLES POSSIBLE . 42. SHRI AJAY VORA CONTENDED THAT THERE ARE BASIC A ND FUNDAMENTAL DIFFERENCES IN THE CHARACTERISTICS OF BPO AS COMPAR ED TO KPO. IN SUPPORT OF THIS CONTENTION, HE RELIED ON THE REPORT PREPARE D BY THE NATIONAL SKILL DEVELOPMENT CORPORATION (NSDC) ON HUMAN RESOURCE AN D SKILL REQUIREMENTS IN THE IT AND ITES INDUSTRY SECTOR (20 22) PLACED AT PAGE 7 39 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED TO 45 OF HIS PAPER BOOK AND TOOK US THROUGH THE REL EVANT PORTION THEREOF. HE INVITED OUR ATTENTION TO PAGE 12 OF THE SAID REP ORT TO POINT OUT THAT THE EXPRESSION ITES AND BPO ARE USED INTERCHANG EABLY. HE INVITED OUR ATTENTION TO PAGE 19 OF THE REPORT WHEREIN IT I S STATED THAT CUSTOMER INTERACTION AND FINANCE AND ACCOUNTING SERVICES FOR M A SIGNIFICANT PORTION OF BPO SERVICES. HE CONTENDED THAT THE BPO THUS IS INVOLVED IN RENDERING MAINLY VOICE AND DATA PROCESSING SERVICES WHICH ARE IN THE NATURE OF LOW END SERVICES. HE CONTENDED THAT THE K PO SERVICES ON THE OTHER HAND, AS STATED IN THE REPORT, MOVE BEYOND SI MPLE VOICE AND DATA SERVICES AND INCLUDE DATA ANALYTICS, CONTENT MANAGE MENT, RESEARCH AND INFORMATION SERVICES, ANIMATION, BIOTECH AND PHARMA CEUTICAL RESEARCH, MEDICAL AND HEALTH SERVICES. HE SUBMITTED THAT THE KPO SERVICES ALSO INCLUDE LEGAL SERVICES, ENGINEERING SERVICES AND FI NANCIAL AND MARKETING RESEARCH SERVICES. HE CONTENDED THAT ALL THESE SERV ICES INCLUDED IN KPO SEGMENT ARE HIGH-END SERVICES FOR WHICH SKILL SET R EQUIRED IS ENTIRELY DIFFERENT FROM BPO AS STATED ON PAGE 32 OF THE REPO RT AND FURTHER EXPLAINED ON PAGE 34 TO 38 OF THE REPORT POINTING O UT SKILL REQUIREMENT AND SKILL GAP IN KPO. HE CONTENDED THAT NO DOMAIN KNOWLEDGE IS REQUIRED TO RENDER BPO SERVICES WHEREAS IT IS VERY MUCH REQUIRED TO RENDER KPO SERVICES. HE SUBMITTED THAT THE BPO SEC TOR AS STATED ON PAGE 27 OF THE REPORT CONTRIBUTES LARGE VOLUME WHIL E THE KPO SECTOR IS A VALUE PLAY. 43. SHRI AJAY VORA REFERRED TO AN ARTICLE KPO- AN EMERGING OPPORTUNITY FOR THE CHARTERED ACCOUNTANTS PUBLISHE D IN JULY, 2006 ISSUE OF JOURNAL THE CHARTERED ACCOUNTANTS WHEREI N AFTER EXPLAINING THE CONCEPT OF KPO, THE DIFFERENCE BETWEEN KPO AND BPO IS POINTED OUT BY THE AUTHOR AS UNDER:- 40 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 2. DIFFERENCE BETWEEN KPO & BPO 1. PROCESS: IT IS S NOT A SIMPLE CASE OF THE K R EPLACING THE B. KPO INVOLVES HIGH-END PROCESSES LIKE VALUATION AND, INVESTMENT, RESEARCH, PATENT FILING, LEGAL AND INSURANCE CLAIMS PROCESSING, AMONGST OTHERS. 2. FOCUS: UNLIKE CONVENTIONAL BPO WHERE THE FOCUS I S ON PROCESS EXPERTISE, IN KPO, THE FOCUS IS ON KNOWLEDG E EXPERTISE. 3. SPECIALISATION: THE DIFFERENCE LIES IN DOMAIN SP ECIALIZATION. BPO EMPLOYEES DO NOT GENERALLY REQUIRE SPECIALIZED KNOW LEDGE. CUSTOMER CARE EXECUTIVES AT A BPO REQUIRE GOOD KNOW LEDGE OF THE ENGLISH LANGUAGE, THE ABILITY TO BE ARTICULATE AND POSSESS BASIC COMPUTER KILLS. ON THE OTHER HAND, A KPO ORGANISATI ON SPECIALIZING IN EQUITY OR FINANCIAL ANALYSIS FOR EX AMPLE, CAN EMPLOY HIGHLY QUALIFIED PROFESSIONALS WHO POSSESS HIGH-END KNOWLEDGE OF ACCOUNTS AND FINANCE. S/HE SHOULD HOLD MBA OR A CA QUALIFICATION. 4. DRIVING FORCE: WHILE KPO ORGANIZATIONS ARE KNOWL EDGE-DRIVEN, BPOS ARE PROCESS-DRIVEN. 5. ACTIVITIES: KPO INVOLVES OFF SHORING OF KNOWLEDG E INTENSIVE BUSINESS PROCESSES THAT DEMAND SPECIALISED EXPERTIS E. THIS DELIVERS HIGH VALUE TO ORGANISATIONS BY PROVIDING M UCH REQUIRED BUSINESS EXPERTISE. A FEW EXAMPLES OF KPO BUSINESSE S ARE ONLINE TEACHING, PATENT FILING, LEGAL AND INSURANCE CLAIMS PROCESSING, VALUATION RESEARCH, INVESTMENT RESEARCH AND MEDIA C ONTENT SUPPLY. BPO ON THE OTHER HAND, INVOLVES A PREDEFINE D WAY OF HANDLING A BUSINESS PROCESS, WHICH IS TAUGHT TO AGE NTS OR EMPLOYEES. BPO SERVICES NORMALLY INCLUDE TRANSACTIO N PROCESSING, SETTING UP A BANK ACCOUNT, SELLING OF INSURANCE POL ICIES, TECHNICAL SUPPORT AND VOICE AND EMAIL-BASED SUPPORT. 6. CONTACT WITH CLIENTS: UNLIKE BPOS, KPO EMPLOYEES TEND TO HAVE GREATER DIRECT CONTACT BOTH WITH INTERNATIONAL CLIE NTS AND WITH THEIR TEAMS OVERSEAS, ONCE AGAIN UNDERSCORING THE N EED FOR SPECIALISED SKILLS. THIS COULD MEAN ESTABLISHING DI RECT CHANNELS OF COMMUNICATION WITH A TEAM MEMBER OVERSEAS TO SEEK CLARIFICATIONS IN THE MIDST OF COMPLETING WORK. IF THE WORK INVOLVED IS COMPLICATED, DIRECT COMMUNICATION WITH THE CLIEN T MAY ALSO BE NEEDED, AS SEEN IN SEVERAL CASES OF FILING TAX RETU RNS. 44. SHRI AJAY VORA CONTENDED THAT EVEN THE CBDT NOW HAS RECOGNIZED THE DIFFERENCE BETWEEN KPO AND BPO WHILE FRAMING TH E SAFE HARBOUR RULES. HE CONTENDED THAT THE FAR ANALYSIS WILL BE D IFFERENT IN CASE OF BPO AS COMPARED TO KPO AND POINTED OUT THAT IN THE CASE OF CRM SERVICES (I) 41 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED PVT. LTD. (ITA 4068/DEL/2009 AND ITA NO. 4796/DEL/2 010 DTD. 30 TH JUNE, 2011), DELHI BENCH OF ITAT IN PARA NO. 9.3 OF ITS ORDER HAS MADE A DISTINCTION BETWEEN VOICE BASED AND NON-VOICE BASED BPO SERVICES WHILE APPLYING THE FUNCTIONAL TEST IN COMPARABILITY ANALY SIS. 45. SHRI AJAY VORA SUBMITTED THAT RULE 10-B(2)(A) P ROVIDES THAT THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH UNCONTROLLED TRANSACTION IS TO BE JUDGED WITH REFERENCE TO THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION AND THIS INDIA SPECIFIC RULE IS NOT THERE IN THE OECD G UIDELINES. HE CONTENDED THAT THE TP REGULATIONS STIPULATED IN THE RELEVANT RULES HAVE A FORCE OF LAW AND AS HELD BY THE DELHI BENCH OF ITAT IN THE CASE OF MENTOR GRAPHICS (NOIDA) PVT. LTD., (SUPRA) THE TPO CANNOT REFUSE TO CONSIDER THE SPECIFIC CHARACTERISTICS OF THE TRANSACTIONS, NOTWI THSTANDING THE OECD GUIDELINES. 46. AS REGARDS THE NOTIFICATION NO. FO 890(E) DTD. 26-9-2000 ISSUED BY THE CBDT SPECIFYING THE VARIOUS BACK OFFICE SUPPORT SERVICES AS ITES, SHRI AJAY VORA SUBMITTED THAT THE SAID NOTIFICATION IS ISSUED IN THE CONTEXT OF SECTION 10A, 10B AND 80 HHE OF THE ACT T O EXPLAIN AND DEFINE THE TERM COMPUTER SOFTWARE FOR THE PURPOSE OF EXP LANATION 2(1)(B) OF SECTION 10A, EXPLANATION 2(1)(B) OF SECTION 10-B AN D EXPLANATION (B) OF SECTION 80HHE OF THE ACT AND THE SAME CANNOT BE EXT ENDED OR APPLIED TO TREAT THE BPO AS KPO. HE CONTENDED THAT THE SAID N OTIFICATION IS TO BE READ IN THE CONTEXT IN WHICH IT IS ISSUED AND THE S AME, ISSUED ON 26-9- 2000 BY THE CBDT, CANNOT BE APPLIED TO DECIDE THE I SSUE RELATING TO TRANSFER PRICING AS THE PROVISIONS RELATING TO TRAN SFER PRICING WERE NOT EVEN IN THE STATUTE WHEN THE SAID NOTIFICATION WAS ISSUED BY THE CBDT. 42 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 47. THE LD. CIT (DR) SHRI AJEET KUMAR JAIN SUBMITTE D IN HIS REPLY THAT THE CHARACTERISATION OF THE SERVICES RENDERED BY TH E ASSESSEE COMPANY IS REQUIRED TO BE DONE IN ORDER TO ASCERTAIN WHETHER I T IS A BPO OR KPO OR SOMETHING IN BETWEEN. IN THIS REGARD, HE INVITED OU R ATTENTION TO THE EXECUTIVE SUMMARY GIVEN IN THE TP STUDY REPORT SUBM ITTED BY THE ASSESSEE AT PAGE 62 OF THE PAPER BOOK AND POINTED O UT THAT THE SERVICES PROVIDED BY THE ASSESSEE WERE BROADLY CATEGORIZED T HEREIN AS INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) AND INFORMATION TECHNOLOGY SERVICES (ITS). HE SUBMITTED THAT THE ITES SERVICES PROVIDE D BY THE ASSESSEE WERE STATED TO BE THAT OF TRANSACTION PROCESSING, DATA E NTRIES, RECONCILIATION OF STATEMENTS, AUDIT OF SHIPPING DOCUMENTS AND OTHER S IMILAR SUPPORT SERVICES. HE SUBMITTED THAT THIS NATURE OF SERVICES RENDERED BY THE ASSESSEE AGAIN WAS REPEATED IN THE RELEVANT PORTION OF THE TP STUDY REPORT APPEARING ON PAGE 65 OF THE PAPER BOOK. HE ALSO INVITED OUR ATTENTION TO THE INFORMATION RELATING TO THE FUNCTI ONS PERFORMED BY THE ASSESSEE IN CONNECTION WITH PROVISION OF I.T. ENABL ED SERVICES TO ITS AE AS GIVEN IN THE RELEVANT PORTION OF THE TP STUDY REPOR T APPEARING AT PAGE 76 AND 78 OF THE PAPER BOOK AND POINTED OUT THAT THE S ERVICES PERFORMED BY THE ASSESSEE INCLUDED, INTER ALIA, TO RECONCILE THE DIFFERENCES BETWEEN EQUIPMENT MANAGEMENT SYSTEM AND THE TRANSPORT PLAN IN GLOBAL CUSTOMERS SERVICE SYSTEMS, TENDER HANDLING, CONTRAC T DRAFTING AND DATA QUALITY. HE CONTENDED THAT ALL THESE SERVICES RENDE RED BY THE ASSESSEE ARE CLEARLY IN THE NATURE OF KPO SERVICES AND NOT R OUTINE BPO FUNCTIONS AS IT IS NOT POSSIBLE TO RENDER THESE SERVICES WITH OUT A SPECIALIZED KNOWLEDGE. HE CONTENDED THAT THE ASSESSEE THUS CANN OT BE CONSIDERED EITHER AS BPO OR KPO BUT IT LIES SOMEWHERE IN BETWE EN AS THE SERVICES RENDERED BY IT ARE IN THE NATURE OF BPO AS WELL AS KPO. HE CONTENDED THAT KEEPING IN VIEW THESE CHARACTERISTICS OF THE S ERVICES RENDERED BY THE ASSESSEE COMPANY, BOTH BPO AND KPO CAN BROADLY BE T AKEN AS COMPARABLES AS HELD BY THE DRP. 43 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 48. SHRI AJEET KUMAR JAIN, THE LD. CIT(DR) INVITED OUR ATTENTION TO THE RELEVANT PORTION OF THE TPOS ORDER WHEREIN THE COM PARABLES SELECTED BY THE ASSESSEE AND THOSE FINALLY SELECTED BY THE TPO WERE DISCUSSED. HE FILED A COMPILATION OF RELEVANT PORTION OF THE ANNU AL REPORTS OF SOME OF SUCH COMPARABLES AND POINTED OUT THAT M/S ICRA ONLI NE LTD. SELECTED BY THE ASSESSEE COMPANY ITSELF AS COMPARABLE WAS INTO KPO SERVICES. SIMILARLY, HE POINTED OUT FROM THE RELEVANT PORTION OF THE ANNUAL REPORTS OF THE OTHER COMPANIES THAT M/S ICRA TECHNO ANALYTI CS LTD. AND KPIT CUMMINS GLOBAL BUSINESS SOLUTIONS LTD., SELECTED BY THE ASSESSEE ITSELF AS COMPARABLES, WERE INTO KPO SERVICES. HE ALSO POI NTED OUT THAT M/S COSMIC GLOBAL LTD., M/S MAPLE E-SOLUTIONS LTD. AND M/S SPANCO TELESYSTEMS AND SOLUTION LTD. (SEGMENTAL) SELECTED BY THE ASSESSEE COMPANY AS COMPARABLES, ON THE OTHER HAND, WERE PRO VIDING LOW END BPO SERVICES SUCH AS CALL CENTERS. HE CONTENDED THA T THE ASSESSEE COMPANY HAD RIGHTLY SELECTED BPO AS WELL AS KPO AS COMPARABLES IN ITS OWN TP STUDY SINCE THE DISTINCTION BETWEEN BPO AND KPO WOULD NOT HAVE MUCH IMPACT FOR COMPARABILITY WHERE TNMM IS FO LLOWED PARTICULARLY WHEN THE SERVICES RENDERED BY THE ASSESSEE HAVE ATT RIBUTES OF KPO ALSO. 49. REFERENCE WAS MADE BY SHRI AJEET KUMAR JAIN, LD . CIT (DR) TO THE ORDER OF THE TRIBUNAL PASSED IN ASSESSEES OWN CASE FOR A.Y. 2007-08 PLACED AT PAGE 28 TO 40 OF HIS PAPER BOOK (ITA NO. 8558/MUM/2011 DTD. 29-2-2012). IT WAS POINTED OUT FROM THE RELEVANT PO RTION OF THE SAID ORDER OF THE TRIBUNAL AT PAGE 33 OF THE PAPER BOOK THAT E CLERX SERVICES PVT. LTD. HAVING 90.43% OP/TC WAS TAKEN BY THE TPO AS COMPARA BLE AND THE SAME WAS NOT DISPUTED BY THE ASSESSEE. HE POINTED OUT THAT ONE OF THE THIRTY COMPARABLES TAKEN BY THE TPO WAS M/S MOD-TEK TECHNOGIES LTD. AND ALTHOUGH THE SAID ENTITY HAVING 113.49% OP/TC W AS DISPUTED BY THE ASSESSEE, INTER ALIA, ON THE GROUND OF ABNORMAL PRO FITS, THE TRIBUNAL 44 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED FINALLY RESTORED THE MATTER TO THE FILE OF THE A.O. WITH A DIRECTION TO RECOMPUTE THE ALP MARGIN ON THE BASIS OF PROFIT MAR GIN OF ALL THE THIRTY COMPARABLES. HE CONTENDED THAT BOTH THE ENTITIES H AVING HIGHER PROFIT MARGIN THUS WERE FINALLY INCLUDED AND TAKEN AS COMP ARABLES FOR TRANSFER PRICING ANALYSIS IN ASSESSEES OWN CASE FOR A.Y. 20 07-08. 50. AS REGARDS THE DISPUTE RAISED BY THE ASSESSEE I N RESPECT OF FILTERS APPLIED BY THE TPO FOR THE SELECTION OF COMPARABLES , SHRI AJEET KUMAR JAIN CONTENDED THAT DIFFERENT FILTERS ARE REQUIRED TO BE APPLIED IN ORDER TO FIND A SUITABLE COMPARABLE TRANSACTION. HE SUBMITTE D THAT THE OBJECTIVE OF SUCH SEARCH FOR COMPARABLE COMPANIES, AS STATED IN THE TP STUDY REPORT SUBMITTED BY THE ASSESSEE (RELEVANT PORTION OF THE PAPER BOOK PAGE 88), IS TO IDENTIFY A GROUP OF INDEPENDENT COMPANIE S WITH PUBLICLY AVAILABLE DATA THAT PERFORM BROADLY SIMILAR FUNCTIO NS, OPERATE IN BROADLY SIMILAR MARKET AND BEAR BROADLY SIMILAR RISK TO THA T OF TESTED PARTY. HE INVITED OUR ATTENTION TO THE REASONS GIVEN BY THE T PO ON PAGE 3 & 4 OF HIS ORDER FOR REJECTING THE FILTERS APPLIED BY THE ASSE SSEE AND CONTENDED THAT THE SAME ARE SUFFICIENT TO SHOW THAT THE FILTERS AP PLIED BY THE ASSESSEE WERE NOT APPROPRIATE. HE POINTED OUT THAT THE FILT ERS APPLIED BY THE TPO, ON THE OTHER HAND, WERE FULLY JUSTIFIED IN THE FACT S OF THE CASE AS THE SAME WERE FAIR AND LOGICAL AS EXPLAINED BY THE TPO GIVIN G COGENT AND CONVINCING REASONS. HE SUBMITTED THAT THE ASSESSEE, IN ANY CASE, HAS FINALLY DISPUTED ONLY TWO COMPARABLES AND CONTENDED THAT EVEN THOUGH BOTH THESE ENTITIES ARE KPO SERVICE PROVIDERS, IT I S TO BE NOTED THAT THE ASSESSEE COMPANY ITSELF HAS TAKEN SOME OTHER KPO SE RVICE PROVIDERS AS COMPARABLES AND THAT ATLEAST SOME OF THE FUNCTIONS/ SERVICES RENDERED BY IT ARE IN THE NATURE OF KPO SERVICES. 51. AS REGARDS THE RELIANCE PLACED BY THE LD. COUNS EL FOR THE ASSESSEE SHRI PORUS KAKA AND THE LD. COUNSEL FOR THE INTERVE NER SHRI AJAY VORA ON 45 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED THE SAFE HARBOUR RULES FRAMED BY THE CBDT, SHRI AJE ET KUMAR JAIN SUBMITTED THAT THESE RULES ARE FRAMED BY THE CBDT A S PER SECTION 92-CB OF THE ACT WHEREAS THE DETERMINATION OF ALP IS GOVE RNED BY SECTION 92-C READ WITH RULE 10B OF THE INCOME TAX RULES, 1962. H E POINTED OUT THAT THE DEFINITION GIVEN IN RULE 10-TA ARE FOR THE PURP OSES OF RULE 10TA TO RULE 10TC AND NOT FOR THE PURPOSE OF RULE 10B. HE S UBMITTED THAT AS PER RULE 10-TD, SAFE HARBOUR RULES ARE APPLICABLE TO TH E ASSESSEE WHO EXERCISES A VALID OPTION FOR APPLICATION OF SAFE HA RBOUR RULES. HE CONTENDED THAT THE ASSESSEE IN THE PRESENT CASE HAS NOT EXERCISED THIS OPTION AND THEREFORE IT CANNOT TAKE A SHELTER UNDER SAFE HARBOUR RULES BY RELYING ON THE DEFINITION GIVEN THEREIN IN SUPPORT OF ITS CASE THAT THE BPO AND KPO SERVICES ARE DIFFERENT AND THERE IS NO SIMI LARITY BETWEEN THEM. HE ALSO CONTENDED THAT THE SAFE HARBOUR RULES ARE F RAMED BY THE CBDT VIDE CIRCULAR DTD. 18-9-2013 AND THEY CANNOT BE APP LIED IN THE PRESENT CASE INVOLVING A.Y. 2008-09. A REFERENCE WAS MADE B Y HIM TO THE CIRCULAR DTD. 20-12-2013 ISSUED BY THE CBDT WHEREIN IT IS CL ARIFIED THAT IF THE SAFE HARBOUR RULES ARE NOT OPTED BY THE ASSESSEE, T HEY CANNOT BE RELIED UPON AND REFERRED TO BY HIM. RELYING ON THE DECISIO N OF HONBLE SUPREME COURT IN THE CASE OF ITO VS. M.C. PONNOOSE AND OTHE RS - ITO VS. EXCEL PRODUCTIONS AND OTHERS [1970] 75 ITR 174 AND IN THE CASE OF GOVINDDAS AND OTHERS VS. ITO [1976] 103 ITR 123, HE CONTENDED THAT THE SAFE HARBOUR RULES CANNOT BE APPLIED RETROSPECTIVELY TO SUPPORT THE CASE OF THE ASSESSEE THAT THERE IS A DIFFERENCE BETWEEN BPO AND KPO. 52. SHRI AJEET KUMAR JAIN INVITED OUR ATTENTION TO PARA 1.38 OF THE OECD TRANSFER PRICING GUIDELINES ISSUED IN JULY, 20 10 WHEREIN IT IS STATED THAT THE INFORMATION ON PRODUCT CHARACTERIST ICS MIGHT BE MORE IMPORTANT IF THE METHOD APPLIED IS A COMPARABLE UNC ONTROLLED PRICE METHOD THAN IF IT IS TNMM. HE ALSO RELIED ON PARA 1 .40 OF THE SAID GUIDELINES WHEREIN IT IS STATED THAT THE FACTOR OF CHARACTERISTIC OF PROPERTY OR SERVICES MUST BE GIVEN MORE OR LESS WEIGHT DEPEN DING ON THE TRANSFER 46 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED PRICING METHOD. IT IS EXPLAINED THAT UNDER CUP MET HOD, ANY MATERIAL DIFFERENCE IN THE CHARACTERISTICS OF PROPERTY OR SE RVICES CAN HAVE AN EFFECT ON THE PRICE WHEREAS SUCH DIFFERENCE IN THE CHARACT ERISTICS OF PROPERTY/SERVICES IS LESS SENSITIVE IN THE CASE OF TNMM. IT IS SUGGESTED IN PARA 1.41 THAT IN COMPARABILITY ANALYSIS FOR METHOD BASED ON GROSS OR NET PROFIT INDICATORS, IT MAY BE ACCEPTABLE DEPENDI NG ON THE FACTS AND CIRCUMSTANCES OF THE CASE TO BROADEN THE SCOPE OF C OMPARABILITY ANALYSIS TO INCLUDE UNCONTROLLED TRANSACTIONS INVOLVING PROD UCTS THAT ARE DIFFERENT BUT WHERE SIMILAR FUNCTIONS ARE UNDERTAKEN. HE SUBM ITTED THAT THE ASSESSEE HIMSELF TOOK CALL CENTERS AS WELL AS KPO A S COMPARABLES AND THE SAME APPROACH BEING ADOPTED BY THE TPO, NO FAULT CA N BE FOUND GOING BY THE OECD GUIDELINES SUGGESTING BROAD FUNCTIONAL SIM ILARITIES WHERE TNMM IS FOLLOWED. 53. AS REGARDS THE RELIANCE PLACED BY SHRI PORUS KA KA ON PARA 2.64 AND 2.65 OF THE OECD GUIDELINES, SHRI AJEET KUMAR J AIN SUBMITTED THAT THE WEAKNESSES OF THE TNMM ARE LISTED IN THESE PARA GRAPHS. HE SUBMITTED THAT THE STRENGTHS OF TNMM ARE DISCUSSED IN PARA 2.62 AND 2.63 OF THE OECD GUIDELINES AND AS SUGGESTED IN PAR A 2.62, ONE OF THE STRENGTHS OF TNMM IS THAT THE NET PROFIT INDICATORS ARE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES THAN IS THE CASE WITH PR ICE AS USED IN THE CUP METHOD. IT IS ALSO STATED THAT THE NET PROFIT INDI CATOR MAY BE MORE TOLERANT TO SOME FUNCTIONAL DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS THAN GROSS PROFIT MARGINS . IT IS SUGGESTED THAT THE DIFFERENCES IN THE FUNCTIONS PERFORMED BETWEEN ENTERPRISES ARE OFTEN REFLECTED IN VARIATIONS IN OPERATING EXPENSES WHICH MAY LEAD TOA WIDE RANGE OF GROSS PROFIT MARGINS BUT STILL BROADLY SIM ILAR LEVELS OF NET OPERATING PROFIT INDICATORS. HE ALSO RELIED ON PARA 3.7 OF THE OECD GUIDELINES WHEREIN IT IS SUGGESTED THAT THE BROAD B ASED ANALYSIS IS AN ESSENTIAL PART IN THE COMPARABILITY ANALYSIS. 47 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 54. SHRI AJEET KUMAR JAIN SUBMITTED THAT THERE ARE FIVE METHODS PRESCRIBED TO DETERMINE THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION AND THE REQUIREMENT FOR COMPARABILITY A NALYSIS ARE METHOD SPECIFIC AS GIVEN IN SUB RULE (1) OF RULE 10-B. HE REFERRED TO THE SAID RULE AND SUBMITTED THAT PRICE CHARGED OR PAID FOR THE PR OPERTY TRANSFERRED OR SERVICE RENDERED IN THE COMPARABLE TRANSACTION IS R ELEVANT IN CASE OF CUP AND RE-SALE PRICE METHOD WHILE THE COST OF PRODUCTI ON INCURRED IN RESPECT OF PROPERTY TRANSFERRED OR SERVICES PROVIDED IS REL EVANT FOR COST PLUS METHOD. HE SUBMITTED THAT THERE IS, HOWEVER, NO MEN TION OR REFERENCE TO ANY PROPERTY TRANSFERRED OR SERVICES PROVIDED IN CA SE OF TNMM WHICH IS SPECIFICALLY THERE IN CASE OF OTHER METHOD. HE CONT ENDED THAT THE RELEVANT RULE THUS MAKES IT CLEAR THAT SPECIFIC CHARACTERIZA TION OF THE PROPERTY TRANSFERRED OR SERVICES IS NOT RELEVANT FOR TNMM AN D THIS POSITION IS IN CONFORMITY WITH THE RELEVANT OECD GUIDELINES WHICH SUGGEST THAT BROAD COMPARABILITY OF FUNCTIONS TO BE DONE FOR TNMM. HE CONTENDED THAT THERE IS THUS NO NEED TO MAKE ANY DISTINCTION BETWEEN BPO AND KPO FOR TNMM AND THE BROAD CATEGORY OF ITES CAN BE TAKEN FO R THE PURPOSE OF COMPARABILITY ANALYSIS. IN SUPPORT OF THIS CONTENTI ON, HE RELIED ON THE DECISION OF DELHI BENCH OF ITAT IN THE CASE OF ACTI S ADVISORS PVT. LTD. (SUPRA) WHEREIN NEITHER THE ASSESSEE NOR THE TPO HA D GONE INTO FUNCTIONAL LINE HORIZONTAL TEST WITHIN ITES INASMUC H AS THE COMPARABLES WERE SELECTED FROM ITES WITHOUT APPLYING SPECIFICAL LY ANY QUALITATIVE FILTER AND THE CONTENTION OF THE ASSESSEE SEEKING F URTHER DISSECTION OF THESE COMPARABLES WAS NOT ACCEPTED BY THE TRIBUNAL OBSERVING THAT THERE WILL NOT BE ANY END IN THAT WAY AND IT IS A VERY SU BJECTIVE EXERCISE. SHRI AJEET KUMAR JAIN CONTENDED THAT THE ASSESSEE IN THE PRESENT CASE HAS ALSO NOT DONE ANY HORIZONTAL CLASSIFICATION SINCE I T HAS TAKEN CALL CENTERS AND KPO AS COMPARABLES AND SINCE THE BROAD COMPARAB ILITY AT ITES LEVEL IS QUITE FAIR AND PROPER IN THE FACTS AND CIRCUMSTA NCES OF THE CASE, THE 48 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED CLAIM OF THE ASSESSEE FOR FURTHER DISSECTION IN THE FORM OF BPO AND KPO SHOULD NOT BE ACCEPTED. 55. IN THE REJOINDER, SHRI PORUS KAKA SUBMITTED THA T RULE 10B(2) OF THE INCOME TAX RULES, 1962 IS APPLICABLE IN CASE OF ALL THE METHODS APPLIED FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSAC TION AND THERE IS NO MERIT IN THE CONTENTION RAISED BY SHRI AJEET KUMAR JAIN, THE LD. CIT (DR) THAT THE APPLICABILITY OF THE SAID RULE DEPENDS ON THE METHOD FOLLOWED. RELYING ON SECTION B.3.1 OF THE OECD GUIDELINES AND THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF LI AND FUNG INDIA PVT. LTD. (SUPRA), HE CONTENDED THAT THE STANDARD OF COMPARAB ILITY IS THE SAME TO TNMM. 56. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD TO WHICH OU R ATTENTION WAS DRAWN DURING THE COURSE OF HEARING. WE HAVE ALSO DE LIBERATED UPON VARIOUS ASPECTS OF THE ISSUES SPECIFICALLY REFERRED TO THIS SPECIAL BENCH FOR CONSIDERATION AND DECISION. QUESTION NO. 1 REFE RRED TO THIS SPECIAL BENCH INVOLVES THE ISSUE RELATING TO SELECTION OF C OMPARABLES IN THE PROCESS OF TRANSFER PRICING ANALYSIS FOR THE PURPOS E OF DETERMINING THE ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES. BEFORE WE REFER TO THE PROVI SION OF SECTION 92-C AND RULE 10-B, WHICH ARE RELEVANT IN THIS CONTEXT, IT WOULD BE RELEVANT TO TRACE, IN BRIEF, THE GENESIS OF T.P. REGULATIONS IN INDIA. THE INCREASING PARTICIPATION OF MULTINATIONAL GROUPS IN ECONOMIC A CTIVITIES IN THE COUNTRY GAVE RISE TO NEW AND COMPLEX ISSUES EMERGIN G FROM TRANSACTIONS ENTERED INTO BETWEEN TWO, OR MORE ENTERPRISES BELON GING TO THE SAME MULTINATIONAL GROUP. THE PROFITS DERIVED BY SUCH EN TERPRISES CARRYING ON BUSINESS IN INDIA COULD BE CONTROLLED BY THE MULTIN ATIONAL GROUP, BY MANIPULATING THE PRICES CHARGED AND PAID IN SUCH IN TRA-GROUP 49 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED TRANSACTIONS, THEREBY, LEADING TO EROSION OF TAX RE VENUES. WITH A VIEW TO PROVIDE A STATUTORY FRAMEWORK WHICH COULD LEAD TO C OMPUTATION OF REASONABLE, FAIR AND EQUITABLE PROFITS AND TAX IN I NDIA, IN THE CASE OF SUCH MULTINATIONAL ENTERPRISES, THE FINANCE ACT, 2001 SU BSTITUTED THE THEN EXISTING SECTION 92 OF THE INCOME-TAX ACT BY NEW SE CTIONS 92 AND 92A TO 92F. AS PROVIDED THEREIN, INCOME ARISING FROM AN IN TERNATIONAL TRANSACTION BETWEEN ASSOCIATED ENTERPRISES SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THE TERM ASSOCIA TED ENTERPRISE HAS BEEN DEFINED IN SECTION 92A. SECTION 92B DEFINES AN INTERNATIONAL TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPR ISES. THE PROVISIONS CONTAINED IN SECTION 92C PROVIDE FOR METHODS TO DET ERMINE THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSA CTION, AND THE MOST APPROPRIATE METHOD TO BE FOLLOWED OUT OF THE SPECIF IED METHODS. WHILE THE PRIMARY RESPONSIBILITY OF DETERMINING AND APPLY ING AN ARMS LENGTH PRICE IS ON THE ASSESSEE, SUB-SECTION (3) OF SECTIO N 92C EMPOWERS THE ASSESSING OFFICER TO DETERMINE THE ARMS LENGTH PRI CE AND COMPUTE THE TOTAL INCOME OF THE ASSESSEE ACCORDINGLY, SUBJECT T O THE CONDITIONS PROVIDED THEREIN. THE BOARD HAS PRESCRIBED RULES LO A TO 1OE IN THE INCOME-TAX RULES, 1962, GIVING THE MANNER AND THE C IRCUMSTANCES IN WHICH DIFFERENT METHODS WOULD BE APPLIED IN DETERMI NING ARMS LENGTH PRICE AND THE FACTORS GOVERNING THE SELECTION OF TH E MOST APPROPRIATE METHOD. THESE PROVISIONS HAVE BEEN ENACTED WITH A V IEW TO PROVIDE A STATUTORY FRAMEWORK WHICH CAN LEAD TO COMPUTATION O F REASONABLE, FAIR AND EQUITABLE PROFIT AND TAX IN INDIA SO THAT THE P ROFITS CHARGEABLE TO TAX IN INDIA DO NOT GET DIVERTED ELSEWHERE BY ALTERING THE PRICES CHARGED AND PAID IN INTRA-GROUP TRANSACTIONS LEADING TO EROSION OF TAX REVENUES. 57. DURING THE COURSE OF HEARING BEFORE US, THE LD. REPRESENTATIVES OF BOTH THE SIDES HAVE REFERRED TO AND RELIED ON THE O ECD TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX AD MINISTRATIONS ISSUED IN JULY, 2010 IN SUPPORT OF THEIR RESPECTIVE ARGUME NTS. THESE GUIDELINES 50 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED FOCUS ON THE MAIN ISSUES OF PRINCIPLE THAT ARISE IN THE TRANSFER PRICING AREA AND ARE INTENDED TO ADDRESS TRANSFER PRICING A ND OTHER RELATED TAX ISSUES WITH RESPECT TO MULTINATIONAL ENTERPRISES. T HEY PROVIDE PRACTICAL GUIDANCE ON THE APPLICATION OF ARMS LENGTH PRINCIP LE TO EVALUATE THE TRANSFER PRICING OF ASSOCIATED ENTERPRISES AND ANAL YSE THE METHOD FOR EVALUATING WHETHER THE CONDITIONS OF COMMERCIAL AND FINANCIAL RELATIONS WITHIN AN MULTINATIONAL ENTERPRISES SATISFY THE ARM S LENGTH PRINCIPLE. 58. IN SO FAR AS THE RELEVANT T.P. REGULATIONS IN I NDIA ARE CONCURRED, IT IS OBSERVED THAT SUB-SECTION (1) OF SECTION 92-C OF THE ACT PROVIDES THAT THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIO NAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE METHODS SPECIFIED THEREIN, BEING MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTIONS OR CLASS OF ASSOCIATED PERSONS OR F UNCTIONS PERFORMED BY SUCH PERSONS OR SUCH RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE. SUB- SECTION (2) OF SECTION 92-C PROVIDES THAT THE MOST APPROPRIATE METHOD REFERRED TO IN SUB SECTION (1) SHALL BE APPLIED FOR DETERMINATION OF ALP IN THE MANNER AS MAY BE PRESCRIBED. THE MANNER IN WHIC H THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION IS TO BE D ETERMINED BY ANY OF THE METHODS, BEING THE MOST APPROPRIATE METHOD, FOR THE PURPOSES OF SUB SECTION (2) OF THE SECTION 92-C OF THE ACT HAS SINC E BEEN PRESCRIBED IN RULE 10-B OF THE INCOME TAX RULES, 1962 WHICH READS AS UNDER:- DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 9 2C . 10B . (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSA CTION 55A [ OR A SPECIFIED DOMESTIC TRANSACTION ] SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : ( A ) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH, ( I ) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPAR ABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; ( II ) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE 51 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED INTERNATIONAL TRANSACTION 55A [ OR THE SPECIFIED DOMESTIC TRANSACTION ] AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE PRICE IN THE OPEN MARKET; ( III ) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE ( II ) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION 55A [ OR THE SPECIFIED DOMESTIC TRANSACTION ] ; ( B ) RESALE PRICE METHOD, BY WHICH, ( I ) THE PRICE AT WHICH PROPERTY PURCHASED OR SERVICES O BTAINED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD OR ARE PROVIDED TO AN UNRELATED ENTERPRISE, IS IDENTIFIED; ( II ) SUCH RESALE PRICE IS REDUCED BY THE AMOUNT OF A NOR MAL GROSS PROFIT MA RGIN ACCRUING TO THE ENTERPRISE OR TO AN UNRELATED ENTERPRISE FROM THE PURCHASE AND RESALE OF THE SAME OR SIMILAR PROPERTY OR FROM OBTAINING AND PROVIDING THE SAME OR SIMILAR SERVICES, IN A CO MPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANS ACTIONS; ( III ) THE PRICE SO ARRIVED AT IS FURTHER REDUCED BY THE E XPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE PURCHASE OF PROPE RTY OR OBTAINING OF SERVICES; ( IV ) THE PRICE SO ARRIVED AT IS ADJUSTED TO TAKE INTO AC COUNT THE FUNCTIONAL AND OT HER DIFFERENCES, INCLUDING DIFFERENCES IN ACCOUNTIN G PRACTICES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION 55A [ OR THE SPECIFIED DOMESTIC TRANSACTION ] AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR B ETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WH ICH COULD MATERIALLY AFFECT THE AMOUNT OF GROSS PROFIT MARGIN IN THE OPE N MARKET; ( V ) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE ( IV ) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PURCHASE OF THE PROPERTY OR OBTAINING OF THE SERVICES BY THE ENTERPRISE FROM THE ASSOCIATED ENTERPRISE; ( C ) COST PLUS METHOD, BY WHICH, ( I ) THE DIRECT AND INDIRECT COSTS OF PRODUCTION INCURRE D BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SERVIC ES PROVIDED TO AN ASSOCIATED ENTERPRISE, ARE DETERMINED; ( II ) THE AMOUNT OF A NORMAL GROSS PROFIT MARK- UP TO SUCH COSTS (COMPUTED ACCORDING TO THE SAME ACCOUNTING NORMS) A RISING FROM THE TRANSFER OR PROVISION OF THE SAME OR SIMILAR PR OPERTY OR SERVICES BY THE ENTERPRISE, OR BY AN UNRELATED ENTERPRISE, I N A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANS ACTIONS, IS DETERMINED; ( III ) THE NORMAL GROSS PROFIT MARK-UP REFERRED TO IN SUB- CLAUSE ( II ) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCT IONAL AND OTHER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION 55B [ OR THE SPECIFIED DOMESTIC TRANSACTION ] AND THE COMPARABLE UNCONTROLLED 52 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT SUCH PR OFIT MARK- UP IN THE OPEN MARKET; ( IV ) THE COSTS REFERRED TO IN SUB-CLAUSE ( I ) ARE INCREASED BY THE ADJUSTED PROFIT MARK-UP ARRIVED AT UNDER SUB-CLAUSE ( III ); ( V ) THE SUM SO ARRIVED AT IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RELATION TO THE SUPPLY OF THE PROPERTY OR PROVISION OF SERVI CES BY THE ENTERPRISE; ( D ) PROFIT SPLIT METHOD, WHICH MAY BE APPLICABLE MAINLY IN INTERNATIONAL TRANSACTIONS 55B [ OR SPECIFIED DOMESTIC TRANSACTIONS ] INVOLVING TRANSFER OF UNIQUE INTANGIBLES OR IN MULTIPLE INTERNATIONAL TRANSACTIO NS 55B [ OR SPECIFIED DOMESTIC TRANSACTIONS ] WHICH ARE SO INTERRELATED THAT THEY CANNOT BE EVALU ATED S EPARATELY FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRI CE OF ANY ONE TRANSACTION, BY WHICH ( I ) THE COMBINED NET PROFIT OF THE ASSOCIATED ENTERPRIS ES ARISING FROM THE INTERNATIONAL TRANSACTION 55B [ OR THE SPECIFIED DOMESTIC TRANSACTION ] IN WHICH THEY ARE ENGAGED, IS DETERMINED; ( II ) THE RELATIVE CONTRIBUTION MADE BY EACH OF THE ASSOC IATED ENTERPRISES TO THE EARNING OF SUCH COMBINED NET PROFIT, IS THEN EV ALUATED ON THE BASIS OF THE FUNCTIONS PERFORME D, ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY EACH ENTERPRISE AND ON THE BASIS O F RELIABLE EXTERNAL MARKET DATA WHICH INDICATES HOW SUCH CONTRIBUTION W OULD BE EVALUATED BY UNRELATED ENTERPRISES PERFORMING COMPARABLE FUNC TIONS IN SIMILAR CIRCUMSTANCES; ( III ) THE COMBINED NET PROFIT IS THEN SPLIT AMONGST THE E NTERPRISES IN PROPORTION TO THEIR RELATIVE CONTRIBUTIONS, AS EVAL UATED UNDER SUB- CLAUSE ( II ); ( IV ) THE PROFIT THUS APPORTIONED TO THE ASSESSEE IS TAKE N INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNA TIONAL TRANSACTION 55B [ OR THE SPECIFIED DOMESTIC TRANSACTION ] : PROVIDED THAT THE COMBINED NET PROFIT REFERRED TO IN SUB-CLA USE ( I ) MAY, IN THE FIRST INSTANCE, BE PARTIALLY ALLOCATED TO EACH ENTERPRISE SO AS TO PRO VIDE IT WITH A BASIC RETURN APPROPRIATE FOR THE TYPE OF INTERNATIO NAL TRANSACTION 55B [ OR SPECIFIED DOMESTIC TRANSACTION ] IN WHICH IT IS ENGAGED, WITH REFERENC E TO MARKET RETURNS ACHIEVED FOR SIMILAR TYPES OF TRANSACTIONS BY INDEP ENDENT ENTERPRISES, AND THEREAFTER, THE RESIDUAL NET PROFIT REMAINING AFTER SUCH ALLOCATION MAY BE SPLIT AMONGST THE ENTERPRISES IN PROPORTION TO THEIR RELA TIVE CONTRIBUTION IN THE MANN ER SPECIFIED UNDER SUB-CLAUSES ( II ) AND ( III ), AND IN SUCH A CASE THE AGGREGATE OF THE NET PROFIT ALLOCATED TO THE ENTERPRISE IN THE FIRST INSTANCE TOGETHER WITH THE RESIDUAL NET PROFIT APPORTIONED TO THAT ENTERPRISE ON THE BASIS OF ITS RELATIVE CONTRIBUTI ON SHALL BE TAKEN TO BE THE NET PROFIT ARISING TO T HAT ENTERPRISE FROM THE INTERNATIONAL TRANSACTION 55C [ OR THE SPECIFIED DOMESTIC TRANSACTION ] ; ( E ) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, 53 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM A N INTERNATIONAL TRANSACTION 55C [ OR A SPECIFIED DOMESTIC TRANSACTION ] ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO CO STS INCURRED OR S ALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; ( II ) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION 55C [ OR THE SPECIFIED DOMESTIC TRANSACTION ] AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF N ET PROFIT MARGIN IN THE OPEN MARKET; ( IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AN D REFERRED TO IN SUB- CLAUSE ( I ) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT M ARGIN REFERRED TO IN SUB-CLAUSE ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABL ISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION 55C [ OR THE SPECIFIED DOMESTIC TRANSACTION ] ; 56 [ ( F ) ANY OTHER METHOD AS PROVIDED IN RULE 10AB. ] (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION 55C [ OR A SPECIFIED DOMESTIC TRANSACTION ] WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NA MELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSF ERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYE D AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS AR E FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITL Y HOW THE RESPONSIBILITIES, RISKS AND BENEFI TS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE R ESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LO CATION AND SIZE OF THE MARKETS, THE LAWS AND GOVE RNMENT 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. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION 56A [ OR A SPECIFIED DOMESTIC TRANSACTION ] IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSA CTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH 54 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED TRANSACTIONS IN THE OPEN MARKET; OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. (4) THE DATA TO BE USED IN ANALYSING THE COMPARABIL ITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION 56A [ OR A SPECIFIED DOMESTIC TRANSACTION ] SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR I N WHICH THE INTERNATIONAL TRANSACTION 56A [ OR THE SPECIFIED DOMESTIC TRANSACTION ] HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES I N RELATION TO THE TRANSACTIONS BEING COMPARED. 59. THE MANNER IN WHICH THE ALP IN RELATION TO AN I NTERNATIONAL TRANSACTION IS TO BE DETERMINED IS PRESCRIBED IN RU LE 10B AND IT IS RELEVANT IN THIS CONTEXT TO TAKE INTO ACCOUNT THE S PECIFIC METHOD FOLLOWED FOR DETERMINING THE ALP IN RELATION TO AN INTERNATI ONAL TRANSACTION. IN THE PRESENT CASE, THE METHOD FOLLOWED FOR DETERMINING T HE ALP OF AN INTERNATIONAL TRANSACTION BY THE ASSESSEE AS WELL A S BY THE A.O./TPO IS TRANSACTIONAL NET MARGIN METHOD (TNMM) AND THE COMP ARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION HAS TO BE JUDGED WITH REFERENCE TO THE FUNCTIONS PERFORMED, T AKING INTO ACCOUNT THE ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASS UMED BY THE RESPECTIVE PARTIES TO THE TRANSACTION AS PER RULE 1 0B(2)(B). THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERV ICES PROVIDED AS ENVISAGED IN RULE 10-B(2)(A) IN EITHER TRANSACTIONS MAY NOT BE THAT RELEVANT TO JUDGE THE COMPARABILITY OF AN INTERNATI ONAL TRANSACTION IN TNMM AS THE PRICE CHARGED OR PAID FOR PROPERTY TRAN SFERRED OR SERVICES PROVIDED AND THE DIRECT AND INDIRECT COST OF PRODUC TION INCURRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SE RVICES PROVIDED ARE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS IN TH E TRANSACTION METHODS SUCH AS CUP, RESALE PRICE AND COST-PLUS WHEREAS THE PROFIT BASED METHOD SUCH AS TNMM TAKES INTO ACCOUNT, THE NET MARGIN REA LIZED. IN TNMM, THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION IS REQUIRED TO BE JUDGED WITH REFERENCE TO FUNCTIONS 55 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED PERFORMED AS PROVIDED IN SUB RULE (2)(B) OF RULE 10 -B READ WITH SUB RULE (1)(E) OF THAT RULE AFTER TAKING INTO ACCOUNT ASSET S EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED BY THE RESPECTIVE PA RTIES TO THE TRANSACTION. 60. THE OECD TRANSFER PRICING GUIDELINES, ISSUED IN JULY, 2010, ALSO EXPRESS A SIMILAR VIEW WHEN IT STATES IN PARA 1.38 THAT INFORMATION ON PRODUCT CHARACTERISTICS MIGHT BE MORE IMPORTANT IF THE METHOD APPLIED IS CUP THAN IF IT IS TNMM. IT FURTHER EXPLAINS IN PARA 1.40 THAT THE REQUIREMENT FOR COMPARABILITY OF PROPERTY OR SERVIC ES IS THE STRICTEST FOR THE CUP METHOD WHEREAS DIFFERENCES IN CHARACTERISTI CS OF PROPERTY OR SERVICES ARE LESS SENSITIVE IN CASE OF TRANSACTIONA L PROFIT METHODS THAN IN CASE OF TRADITIONAL TRANSACTION METHODS. IT FURTHER CLARIFIES, IN PARA 1.41, THAT THE COMPARABILITY ANALYSIS FOR METHOD BASED ON GROSS OR NET PROFIT INDICATOR OFTEN PUTS MORE EMPHASIS ON FUNCTIONAL SI MILARITY THAN ON PRODUCT SIMILARITY AND, DEPENDING ON THE FACTS AND CIRCUMSTANCES OF THE CASE, IT MAY BE ACCEPTABLE TO BROADEN THE SCOPE OF COMPARABILITY ANALYSIS TO INCLUDE UN-CONTROLLED TRANSACTIONS INVOLVING PRO DUCTS THAT ARE DIFFERENT, BUT WHERE SIMILAR FUNCTIONS ARE UNDERTAK EN. 61. CHAPTER II OF THE OECD TRANSFER PRICING GUIDELI NES (JULY, 2010) DEALS WITH SELECTION OF THE TRANSFER PRICING METHOD AND PART III THEREOF DEALS WITH TRANSACTIONAL PROFIT METHODS. SECTION B- 2 OF THIS PART DISCUSSES ABOUT STRENGTHS AND WEAKNESSES OF TRANSAC TIONAL NET MARGIN METHOD (TNMM) AND ONE OF THE STRENGTHS OF TNMM, AS EXPLAINED THEREIN, IS THAT THE NET PROFIT INDICATORS (E.G. OPERATING I NCOME) ARE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES THAN IS THE CASE WITH PRICE AS USED IN THE CUP METHOD. IT IS FURTHER EXPLAINED THAT THE NET P ROFIT INDICATORS MAY ALSO BE MORE TOLERANT TO SOME FUNCTIONAL DIFFERENCE S BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS THAN GROSS PROFIT MARGINS AS THE DIFFERENCES IN FUNCTIONS PERFORMED BETWEEN ENTE RPRISES ARE OFTEN 56 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED REFLECTED IN VARIATIONS IN OPERATING EXPENSES LEADI NG TO WIDE RANGE OF GROSS PROFIT MARGIN BUT BROADLY SIMILAR LEVELS OF N ET OPERATING PROFIT INDICATORS. 62. AT THE TIME OF HEARING BEFORE US, SHRI PORUS KA KA HAS RELIED ON THE GUIDELINES GIVEN BY THE OECD IN SECTION B-3.1 (PARA 2.68 TO 2.75) IN RESPECT OF THE COMPARABILITY STANDARD TO BE APPLIED TO THE TRANSACTIONAL NET MARGIN METHOD. HOWEVER, AS RIGHTLY POINTED OUT BY THE LD. D.R., THESE GUIDELINES ARE ISSUED BY THE OECD AS A CAUTION TO O VERCOME THE NUMBER OF WEAKNESSES OF THE TNMM, AS CLEARLY MENTIONED IN PARA 2.64. IN ANY CASE, WE WILL DEAL WITH THESE GUIDELINES, GIVEN BY THE OECD, SUBSEQUENTLY AT AN APPROPRIATE STAGE. SUFFICE IT T O SAY AT THIS STAGE THAT THE NET PROFIT INDICATORS SUCH AS OPERATING PROFIT TO OPERATING COST OR TOTAL COST OR TOTAL SALES ARE LESS AFFECTED BY TRANSACTIO NAL DIFFERENCES AND THE SAME BEING MORE TOLERANT TO SOME FUNCTIONAL DIFFERE NCES BETWEEN CONTROLLED AND UNCONTROLLED TRANSACTIONS, BROAD FUN CTIONALITY CAN BE TAKEN INTO CONSIDERATION FOR SELECTING THE POTENTIA L COMPARABLES IN CASE OF TNMM. IF SUCH BROAD FUNCTIONALITY IS TAKEN INTO CONSIDERATION IN THE PRESENT CONTEXT, WE ARE OF THE VIEW THAT THE POTENT IAL COMPARABLES AT ITES SECTOR LEVEL CAN BE SELECTED AT FIRST STAGE IN THE COMPARABILITY ANALYSIS AS THE FUNCTIONS PERFORMED BY IT ENABLED SERVICE PROVIDERS ARE BROADLY SIMILAR AND THERE IS A COMMON THREAD RUNNIN G THROUGH THEM AS RENDERING OF THESE SERVICES INVOLVE EXTENSIVE USE O F INFORMATION TECHNOLOGY. 63. AT THIS STAGE, IT MAY BE RELEVANT TO DEAL WITH THE CONTENTION RAISED BY SHRI PORUS KAKA THAT THE STANDARD OF COMPARABILI TY IS THE SAME EVEN TO TNMM. WE MAY CLARIFY HERE THAT IT IS NOT AT ALL OUR INTENTION TO DILUTE THE STANDARD OF COMPARABILITY JUST BECAUSE THE METH OD FOLLOWED IS TNMM. WE ARE FULLY AWARE OF THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF LI AND FUNG INDIA PVT. LTD. (SUPRA) WHEREIN IT WAS OBSERVED 57 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED IN PARA 34 THAT THE STANDARD OF COMPARABILITY FOR A PPLICATION OF TNMM IS NO LESS THAN THAT FOR THE APPLICATION OF ANY OTHER TRANSFER PRICING METHOD. WE ARE ALSO AWARE OF THE GUIDANCE PROVIDED IN OECD TRANSFER PRICING GUIDELINES IN SECTION B.3.1. OF CHAPTER II WHEREIN IT IS STATED THAT A COMPARABILITY ANALYSIS PERFORMED FOR SELECTING AND APPLYING A TRANSACTIONAL NET MARGIN METHOD SHOULD NOT BE LESS RELIABLE THAN FOR OTHER METHODS. AT THE SAME TIME, WE HAVE TO TAKE NO TE OF THE FACT THAT THE RELEVANT FINANCIAL DATA IS NOT AVAILABLE IN THE PUBLIC DOMAIN IN RESPECT OF MANY ITES SERVICE PROVIDERS AS THEY ARE PRIVATE LIMITED COMPANIES. MOREOVER, MANY OF THE ITES PROVIDERS, WH ICH ARE LISTED PUBLIC LIMITED COMPANIES AND WHOSE FINANCIAL DATA I S AVAILABLE IN PUBLIC DOMAIN, ARE CAPTIVE SERVICE PROVIDERS AND THEY, THE REFORE, CANNOT BE CONSIDERED AS COMPARABLES HAVING SUBSTANTIAL RELATE D PARTY TRANSACTION. KEEPING IN VIEW THESE PROBLEMS AS WELL AS OTHER PRO BLEMS DISCUSSED IN THE REMAINING PORTION OF THIS ORDER, WHICH ARE PECU LIAR TO THE ITES INDUSTRY, OUR ENDEAVOR IS TO FIND OUT A PRACTICAL S OLUTION WHICH CAN HELP TO PERFORM A COMPARABILITY ANALYSIS IN THE CASES BE LONGING TO ITES SECTOR. IN OUR OPINION, THIS PROBLEM CAN BE SOLVED BY SPLIT TING THE EXERCISE OF COMPARABILITY ANALYSIS IN TWO STEPS IN ORDER TO ATT AIN RELATIVELY EQUAL DEGREE OF COMPARABILITY, THE FIRST BEING TO SELECT THE POTENTIAL COMPARABLES AT ITES SECTOR LEVEL BY APPLYING THE BR OAD FUNCTIONALITY TEST. 64. HAVING HELD THAT ALL THE ENTITIES PROVIDING IT ENABLED SERVICES CAN BE TAKEN AS POTENTIAL COMPARABLES BY APPLYING A BRO AD FUNCTIONALITY TEST, THE NEXT ISSUE THAT ARISES IS WHETHER FURTHER DISSE CTION OR BIFURCATION OF ITES IS POSSIBLE FOR REJECTING OR SELECTING THE POT ENTIAL COMPARABLES. 65. A USEFUL REFERENCE IN THIS REGARD CAN BE MADE T O THE OECD TRANSFER PRICING GUIDELINES. SECTION A-1 OF CHAPTER III OF T HESE GUIDELINES NARRATES THE TYPICAL PROCESS THAT IS CONSIDERED AS AN ACCEPT ED GOOD PRACTICE WHICH 58 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED CAN BE FOLLOWED WHILE PERFORMING THE COMPARABILITY ANALYSIS. ONE OF THE STEPS INVOLVED IN THIS PROCESS STATED AS STEP 2 IS BROAD-BASED ANALYSIS OF THE TAX PAYERS CIRCUMSTANCES. IT IS EXPLAINED IN SECTION A-2 (PARA 3.7) THAT THE BROAD-BASED ANALYSIS IS AN ESSENTIAL STE P IN THE COMPARABILITY ANALYSIS WHICH CAN BE DEFINED AS AN ANALYSIS OF THE INDUSTRY, COMPETITION, ECONOMIC AND REGULATORY FACTS AND OTHE R ELEMENTS THAT AFFECT THE TAX PAYER AND ITS ENVIRONMENT, BUT NOT Y ET WITHIN THE CONTEXT OF LOOKING AT THE SPECIFIC TRANSACTIONS IN QUESTION. S ECTION A-5 OF CHAPTER III OF THE OECD GUIDELINES DEALS WITH SELECTING OR REJ ECTING POTENTIAL COMPARABLES AND SUGGESTS THAT THERE ARE BASICALLY TWO WAYS IN WHICH THE IDENTIFICATION OF POTENTIALLY COMPARABLE THIRD PARTY TRANSACTIONS CAN BE CONDUCTED. AS STATED IN PARA 3.41, THE FIRST ONE , WHICH CAN BE QUALIFIED AS THE ADDITIVE APPROACH CONSISTS OF TH E PERSON MAKING THE SEARCH DRAWING UP A LIST OF THIRD PARTIES THAT ARE BELIEVED TO CARRY OUT POTENTIALLY COMPARABLE TRANSACTIONS. IT IS STATED T HAT THIS APPROACH GIVES A WIDE SET OF COMPANIES THAT OPERATE IN THE SAME SE CTOR OF ACTIVITY, PERFORM SIMILAR BROAD FUNCTIONS AND DO NOT PRESENT ECONOMIC CHARACTERISTICS THAT ARE OBVIOUSLY DIFFERENT. 66. SECTION A.7 OF CHAPTER III OF THE OECD GUIDELIN ES DEALS WITH ARMS LENGTH RANGE AND STATES THAT AS THE TRANSFER PRICI NG IS NOT AN EXACT SCIENCE, THERE WILL ALSO BE MANY OCCASIONS WHEN THE APPLICATION OF THE MOST APPROPRIATE METHOD OR METHODS PRODUCES A RANGE OF FIGURES ALL OF WHICH ARE RELATIVELY EQUALLY RELIABLE. IT IS STATED IN PARA 3.56 THAT IN SOME CASES, ALL COMPARABLE TRANSACTIONS EXAMINED WILL NO T HAVE A RELATIVELY EQUAL DEGREE OF COMPARABILITY. IT IS SUGGESTED THA T WHERE IT IS POSSIBLE TO DETERMINE THAT SOME UNCONTROLLED TRANSACTIONS HAVE A LESSER DEGREE OF COMPARABILITY THAN OTHERS, THEY SHOULD BE ELIMINATE D. 59 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 67. AS ALREADY OBSERVED, THE COMPARABILITY OF AN IN TERNATIONAL TRANSACTION WITH UNCONTROLLED TRANSACTION FOR THE P URPOSE OF DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION BY FOLLOWIN G TNMM IS REQUIRED TO BE JUDGED WITH REFERENCE TO THE FUNCTIONS PERFORMED AS PER SUB RULE (2)(B) OF RULE 10B READ WITH RULE (1)(E) THEREOF AN D THERE IS NO BAR IN THE TP REGULATIONS IN INDIA TO EXCLUDE CERTAIN ENTITIES SELECTED AS POTENTIAL COMPARABLES ON BROAD FUNCTIONALITY TEST BY APPLYING THE FUNCTIONAL TEST AT NARROW OR MICRO LEVEL TO ATTAIN THE RELATIVELY E QUAL DEGREE OF COMPARABILITY. ON THE OTHER HAND, RULE 10-B(3) PROV IDES THAT THE UNCONTROLLED TRANSACTION SELECTED/JUDGED AS PER RUL E 10-B(2) SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION ONLY IF NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIK ELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR THE PROFIT ARI SING FROM SUCH TRANSACTION IN THE OPEN MARKET OR REASONABLY ACCURA TE ADJUSTMENT CAN BE MADE TO ELIMINATE THE EFFECTS OF SUCH DIFFERENCE . IN OUR OPINION, SUB RULE (3) OF RULE 10B THUS CLEARLY PROVIDES FOR FURT HER EXCLUSION OF THE COMPARABLES SELECTED BY APPLYING THE TEST/CRITERIA GIVEN IN SUB RULE (2) OF RULE 10-B IF THERE IS ANY DIFFERENCE FOUND BETWE EN THE ENTERPRISES ENTERING INTO THE TRANSACTIONS WHICH MATERIALLY AFF ECTS THE COST CHARGED OR THE PROFIT ARISING FROM SUCH TRANSACTION IN THE OPEN MARKET. 68. KEEPING IN VIEW THE RELEVANT PORTION OF THE OEC D T.P. GUIDELINES DISCUSSED ABOVE AND HAVING REGARD TO THE RELEVANT T P REGULATIONS AS CONTAINED IN RULE 10-B(3) OF INCOME TAX RULES, 1962 , WE ARE OF THE VIEW THAT FURTHER DISSECTION OR CLASSIFICATION OF ITES S ERVICES CAN BE DONE DEPENDING ON THE FACTS AND CIRCUMSTANCES OF EACH CA SE SO AS TO SELECT THE ENTITIES HAVING A RELATIVELY EQUAL DEGREE OF CO MPARABILITY. 60 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 69. HAVING HELD THAT FURTHER DISSECTION, BIFURCATIO N OR CLASSIFICATION OF IT ENABLED SERVICES MAY BE REQUIRED TO BE DONE TO B RING INTO RELATIVELY EQUAL DEGREE OF COMPARABILITY, THE NEXT QUESTION TH AT ARISES IS WHETHER SUCH CLASSIFICATION CAN BE DONE INTO BPO & KPO SERV ICES SO AS TO SAY THAT THE BPO & KPO SERVICES HAVE A LESSER DEGREE OF COMPARABILITY AND CANNOT BE COMPARED WITH EACH OTHER. DURING THE COU RSE OF HEARING BEFORE US, SHRI AJAY VORA HAS FILED A COPY OF REPOR T PREPARED BY NATIONAL SKILL DEVELOPMENT CORPORATION (NSDC) ON HUMAN RESOU RCE AND SKILL REQUIREMENTS IN THE IT AND ITES SECTOR (2022). THI S REPORT IS MAINLY FOCUSED ON MAPPING OF HUMAN RESOURCE SKILL IN INDIA TILL 2022 ESPECIALLY WITH REFERENCE TO THE REQUIREMENTS OF IT AND ITES S ECTOR. AS PER THIS STUDY REPORT, EVEN WITHIN THE ITES INDUSTRY, THE SK ILL SETS REQUIRED FOR BPO SERVICES ARE VERY DIFFERENT FROM KPO SERVICES A ND THIS ASPECT HAS BEEN EXAMINED BY NSDC IN GREAT DETAIL IN ITS REPORT . IT IS MENTIONED IN PARA 1.4.2. OF THE REPORT THAT THE GROWING AREA IN THIS SEGMENT IS WHAT IS CALLED AS KNOWLEDGE PROCESS OUTSOURCING (KPO) WHICH IS MOVING BEYOND SIMPLE VOICE AND DATA SERVICES AND INCLUDES DATA AN ALYTICS, CONTENT MANAGEMENT, RESEARCH AND INFORMATION SERVICES, ANIM ATION, BIOTECH AND PHARMACEUTICAL RESEARCH, MEDICAL AND HEALTH SERVICE S. IT IS ALSO STATED THAT THE GROWTH IN THIS SEGMENT IS EXPECTED TO BE I N THE AREAS OF LEGAL PROCESS OUTSOURCING, ENGINEERING SERVICES OUTSOURCI NG AND FINANCIAL AND MARKET RESEARCH. IN PARA 1.4.3 OF THE REPORT, ONE O F THE KEY SUCCESS FACTORS FOR INDIAN BPO INDUSTRY IS STATED TO BE ITS ABILITY TO MOVE UP THE VALUE CHAIN THROUGH KPO SERVICE OFFERINGS. IN PARA 4.3 OF THE REPORT, IT IS STATED THAT THE ITES INDUSTRY IS LIKELY TO SEE AN I NCREASING SHARE OF PENETRATION FROM KPOS. IT IS ALSO STATED THAT WHILE THE BPO SECTOR WOULD CONTRIBUTE LARGE VOLUMES, THE KPO SECTOR WOULD BE A VALUE PLAY. IT IS FURTHER STATED THAT A LOT MORE AREAS ARE LIKELY TO WITNESS KPO ACTIVITY SPANNING PATENT ADVISORY, HIGH END RESEARCH AND ANA LYTICS, ONLINE MARKET RESEARCH AND LEGAL ADVISORY. 61 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 70. SHRI AJAY VORA HAS ALSO PLACED ON RECORD A COPY OF ARTICLE KPO AN EMERGING OPPORTUNITY FOR CHARTERED ACCOUNTANTS PUBLISHED IN 2006 IN THE JOURNAL THE CHARTERED ACCOUNTANTS TO HIGHL IGHT THE DISTINCTION BETWEEN BPOS AND KPOS. AS STATED IN THE SAID ARTIC LE, KPO, SIMPLY PUT, IS THE UPWARD SHIFT OF THE BPO INDUSTRY IN THE VALU E CHAIN. IT IS EXPLAINED THAT THE KPO IS A NEW INDUSTRY WITH HIGH GROWTH RAT E IN INDIA AND OLDER BPO COMPANIES THAT PROVIDED BASIC BACK-END OR CUSTO MER CARE SUPPORT SERVICE ARE MOVING UP THIS VALUE CHAIN. IT IS STATE D THAT UNLIKE CONVENTIONAL BPO, WHERE THE FOCUS IS ON PROCESS EXP ERTISE, THE FOCUS IN KPO IS ON KNOWLEDGE EXPERTISE. IT IS EXPLAINED THAT KPO INVOLVES BUSINESS PROCESS REQUIRING DOMAIN EXPERTISE AND HIG H END QUALIFICATIONS SUCH AS MBA, ENGINEERING, MEDICAL, LAW, ACCOUNTANT DEGREE OR OTHER HIGHLY SKILLED PROFESSIONAL QUALIFICATIONS. IT IS F URTHER EXPLAINED THAT KPO REQUIRES MOVING AWAY FROM THE SIMPLE EXECUTION OF S TANDARDIZED PROCESSES TO THE IMPLEMENTATION OF PROCESSES THAT D EMAND ADVANCED ANALYTICAL AND TECHNICAL SKILLS TOGETHER WITH SOME DECISION MAKING. THE DIFFERENCE BETWEEN KPO AND BPO IS ALSO HIGHLIGHTED WITH PARTICULAR REFERENCE TO PROCESS, FOCUS, SPECIALIZATION, DRIVIN G FORCE, ACTIVITIES ETC. 71. SHRI PORUS KAKA AND SHRI AJAY VORA HAVE RELIED ON THE NOTIFICATION NO. SO 2810(E) ISSUED BY THE CBDT ON 18 TH SEPTEMBER, 2013 MAKING RULES 10-TA TO RULE 10-TG AS SAFE HARBOUR RULES. IN CLAUSE (E) OF RULE 10TA, THE TERM INFORMATION TECHNOLOGY ENABLED SERV ICES IS DEFINED AS UNDER:- (E) INFORMATION TECHNOLOGY ENABLED SERVICES MEA NS THE FOLLOWING BUSINESS PROCESS OUTSOURCING SERVICES PRO VIDED MAINLY WITH THE ASSISTANCE OR USE OF INFORMATION TE CHNOLOGY, NAMELY:- (I) BACK OFFICE OPERATIONS; (II) CALL CENTRES OR CONTACT CENTRE SERVICES; 62 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED (III) DATA PROCESSING AND DATA MINING; (IV) INSURANCE CLAIM PROCESSING (IV) LEGAL DATABASES; - (V) CREATION AND MAINTENANCE OF MEDICAL TRANSCRIPTION EXCLUDING MEDICAL ADVICE; (VI) TRANSLATION SERVICES; (VII) PAYROLL; (IX) REMOTE MAINTENANCE; (X) REVENUE ACCOUNTING; (XI) SUPPORT CENTRES; - (XII) WEBSITE SERVICES; (XIII) DATA SEARCH INTEGRATION AND ANALYSIS; (XIV) REMOTE EDUCATION EXCLUDING EDUCATION CONTENT DEVELOPMENT; OR (XV) CLINICAL DATABASE MANAGEMENT SERVICES EXCLUDIN G CLINICAL TRIALS, BUT DOES NOT INCLUDE ANY RESEARCH AND DEVELOPMENT S ERVICES WHETHER OR NOT IN THE NATURE OF CONTRACT RESEARCH A ND DEVELOPMENT SERVICES; 72. THE TERM KNOWLEDGE PROCESS OUTSOURCING SERVICE S IS DEFINED IN CLAUSE (G) OF 10-TA AS UNDER:- (9) KNOWLEDGE PROCESS OUTSOURCING SERVICES MEANS THE FOLLOWING BUSINESS PROCESS OUTSOURCING SERVICES PRO VIDED MAINLY WITH THE ASSISTANCE OR USE OF INFORMATION TECHNOLOG Y REQUIRING APPLICATION OF KNOWLEDGE AND ADVANCED ANALYTICAL AN D TECHNICAL SKILLS, NAMELY: (I) GEOGRAPHIC INFORMATION SYSTEM; (II) HUMAN RESOURCES SERVICES; (III) ENGINEERING AND DESIGN SERVICES; (IV) ANIMATION OR CONTENT DEVELOPMENT AND MANAGEMEN T; (IV) BUSINESS ANALYTICS; 63 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED (V) FINANCIAL ANALYTICS; OR (VI) MARKET RESEARCH, BUT DOES NOT INCLUDE ANY RESEARCH AND DEVELOPMENT S ERVICES WHETHER OR NOT IN THE NATURE OF CONTRACT RESEARCH A ND DEVELOPMENT SERVICES; 73. ON A CAREFUL STUDY OF THE MATERIAL PLACED BEFOR E US TO HIGHLIGHT THE DISTINCTION BETWEEN BPO SERVICES AND KPO SERVICES, WE ARE OF THE VIEW THAT EVEN THOUGH THERE APPEARS TO BE A DIFFERENCE B ETWEEN THE BPO AND KPO SERVICES, THE LINE OF DIFFERENCE IS VERY THIN. ALTHOUGH THE BPO SERVICES ARE GENERALLY REFERRED TO AS THE LOW END S ERVICES WHILE KPO SERVICES ARE REFERRED TO AS HIGH END SERVICES, THE RANGE OF SERVICES RENDERED BY THE ITES SECTOR IS SO WIDE THAT A CLASS IFICATION OF ALL THESE SERVICES EITHER AS LOW END OR HIGH END IS ALWAYS NO T POSSIBLE. ON THE ONE HAND, KPO SEGMENT IS REFERRED TO AS A GROWING AREA MOVING BEYOND SIMPLE VOICE SERVICES SUGGESTING THEREBY THAT ONLY THE SIMPLE VOICE AND DATA SERVICES ARE THE LOW END SERVICES OF BPO SECTO R WHILE ANYTHING BEYOND THAT ARE KPO SERVICES. THE DEFINITION OF ITE S GIVEN IN THE SAFE HARBOUR RULES, ON THE OTHER HAND, INCLUDES INTER AL IA DATA SEARCH INTEGRATION AND ANALYSIS SERVICES AND CLINICAL DATA -BASE MANAGEMENT SERVICES EXCLUDING CLINICAL TRIALS. THESE SERVICES WHICH ARE BEYOND THE SIMPLE VOICE AND DATA SERVICES ARE NOT INCLUDED IN THE DEFINITION OF KPO SERVICES GIVEN SEPARATELY IN THE SAFE HARBOUR RULES . EVEN WITHIN KPO SEGMENT, THE LEVEL OF EXPERTISE AND SPECIAL KNOWLED GE REQUIRED TO UNDERTAKE DIFFERENT SERVICES MAY BE DIFFERENT. 74. ONE OF THE KEY SUCCESS FACTORS OF THE BPO INDUS TRY IS STATED TO BE ITS ABILITY TO MOVE UP THE VALUE CHAIN THROUGH KPO SERVICE OFFERING. WHILE KPO IS TERMED AS AN UPWARD SHIFT OF THE BPO INDUSTR Y IN THE VALUE CHAIN, IT IS ALSO STATED THAT THE EVOLUTION OF MAJORITY OF INDIAN BPO SECTOR HAS GIVEN RISE TO KPO. THE KPO THUS IS AN EVOLUTION OF BPO AND UPWARD SHIFT 64 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED IN THE VALUE CHAIN. BPO TRYING TO UPGRADE IT AS KP O IS LIKELY TO RENDER BOTH BPO AS WELL AS KPO SERVICES IN THE PROCESS OF EVOLUTION AND SUCH ENTITY THEREFORE CANNOT BE CONSIDERED STRICTLY EITH ER AS A BPO OR KPO. GOING BY THE NATURE OF MIXED SERVICES RENDERED BY I T, IT MAY BE DIFFICULT TO CLASSIFY IT EITHER AS BPO OR KPO AND GOING BY IT S FUNCTIONAL PROFILE, IT MAY FALL SOMEWHERE IN BETWEEN. AGAIN, THE DETERMIN ATION OF EXACT PORTION OF BPO AND KPO SERVICES MAY ALSO NOT BE POS SIBLE IN THE ABSENCE OF RELEVANT DATA MAINTAINED BY THE ENTITY AND IN TH ESE CIRCUMSTANCES, IT MAY NOT BE POSSIBLE EVEN TO CREATE A THIRD CATEGORY WHICH IS SOMEWHERE IN BETWEEN BPO AND KPO. 75. KEEPING IN VIEW THE LARGE NUMBER OF SERVICES FA LLING UNDER ITES, THE DIFFICULTY IN CLASSIFYING THESE SERVICES EITHER AS LOW END BPO SERVICES OR HIGH END KPO SERVICES, THE DIFFICULTY IN CREATIN G A THIRD CATEGORY OF ENTITIES FALLING IN BETWEEN BPO AND KPO AND LESSER DEGREE OF COMPARABILITY EVEN WITHIN BPO AND KPO SECTOR, WE AR E OF THE VIEW THAT THE ITES SERVICES CANNOT BE FURTHER BIFURCATED OR C LASSIFIED AS BPO AND KPO SERVICES FOR THE PURPOSE OF COMPARABILITY ANALY SIS. IN OUR OPINION, THERE COULD EXIST SIGNIFICANT OVERLAP BETWEEN THE I TES ACTIVITIES OR FUNCTIONS WITH SOME ACTIVITIES/FUNCTIONS BEING VERY FACT-SENSITIVE AND INTRODUCING AN ARTIFICIAL SEGREGATION WITHIN ITES M AY LEAD TO CREATION OF MORE PROBLEMS IN THE COMPARABILITY ANALYSIS THAN SO LVING THE SAME. 76. HAVING HELD THAT ITES SERVICES CANNOT BE FURTHE R BIFURCATED AS BPO AND KPO SERVICES FOR THE PURPOSE OF COMPARABILI TY ANALYSIS, THE NEXT QUESTION THAT ARISES IS WHAT COULD BE THE BASIS OF SUCH DISSECTION, BIFURCATION OR CLASSIFICATION OF ITES SERVICES TO F ACILITATE RELATIVELY EQUAL DEGREE OF COMPARABILITY WHEN THE BROAD FUNCTIONAL A NALYSIS BASED ON ITES SECTOR IS TAKEN INTO ACCOUNT BY APPLYING TNMM. IN OUR OPINION, THIS PURPOSE OF ATTAINING A RELATIVELY EQUAL DEGREE OF C OMPARABILITY CAN BE 65 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED ACHIEVED BY TAKING INTO CONSIDERATION THE FUNCTIONA L PROFILE OF THE TESTED PARTY AND COMPARING THE SAME WITH THE ENTITIES SELE CTED AS POTENTIAL COMPARABLES ON BROAD FUNCTIONAL ANALYSIS TAKEN AT I TES LEVEL. THE PRINCIPAL FUNCTIONS PERFORMED BY THE TESTED PARTY S HOULD BE IDENTIFIED AND THE SAME CAN BE COMPARED WITH THE PRINCIPAL FUN CTIONS PERFORMED BY THE ENTITIES ALREADY SELECTED TO FIND OUT THE RELAT IVELY EQUAL DEGREE OF COMPARABILITY. IF IT IS POSSIBLE BY THIS EXERCISE T O DETERMINE THAT SOME UNCONTROLLED TRANSACTIONS HAVE A LESSER DEGREE OF C OMPARABILITY THAN OTHERS, THEY SHOULD BE ELIMINATED. THE EXAMINATION OF CONTROLLED TRANSACTIONS ORDINARILY SHOULD BE BASED ON THE TRAN SACTION ACTUALLY UNDERTAKEN BY THE AE AND THE ACTUAL TRANSACTION SHO ULD NOT BE DISREGARDED OR SUBSTITUTED BY OTHER TRANSACTION. 77. A USEFUL REFERENCE IN THIS REGARD CAN BE MADE T O THE OECD GUIDELINES ON TRANSFER PRICING (INCLUDING PARAGRAPH NO. 2.68 TO 2.75 THEREOF RELIED UPON BY SHRI PORUS KAKA) TO ESTABLIS H THE COMPARABILITY. AS SUGGESTED THEREIN, DETERMINING A RELIABLE ESTIMA TE OF ARMS LENGTH OUTCOME REQUIRES FLEXIBILITY AND THE EXERCISE OF GO OD JUDGMENT. IT IS TO BE KEPT IN MIND THAT THE TNMM MAY AFFORD A PRACTICAL S OLUTION TO OTHERWISE INSOLUBLE TRANSFER PRICING PROBLEMS IF IT IS USED S ENSIBLY AND WITH APPROPRIATE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES. WHEN THE COMPARABLE UNCONTROLLED TRANSACTIONS BEING USED ARE THOSE OF AN INDEPENDENT ENTERPRISE, A HIGH DEGREE OF SIMILARITY IS REQUIRED IN A NUMBER OF ASPECTS OF THE AE AND THE INDEPENDENT ENT ERPRISE INVOLVED IN THE TRANSACTIONS IN ORDER FOR THE CONTROLLED TRANSA CTIONS TO BE COMPARABLE. GIVEN THAT OFTEN THE ONLY DATA AVAILABL E FOR THE THIRD PARTIES ARE COMPANY-WIDE DATA, THE FUNCTIONS PERFORMED BY T HE THIRD PARTY IN ITS TOTAL OPERATIONS MUST BE CLOSELY ALIGNED TO THOSE F UNCTIONS PERFORMED BY THE TESTED PARTY WITH RESPECT TO ITS CONTROLLED TRA NSACTIONS IN ORDER TO ALLOW THE FORMER TO BE USED TO DETERMINE AN ARMS L ENGTH OUTCOME FOR THE 66 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED LATTER. THE OVERALL OBJECTIVE SHOULD BE TO DETERMIN E A LEVEL OF SEGMENTATION THAT PROVIDES RELIABLE COMPARABLES FOR THE CONTROLLED TRANSACTION, BASED ON THE FACTS AND CIRCUMSTANCES O F THE PARTICULAR CASE. THE PROCESS FOLLOWED TO IDENTIFY POTENTIAL COMPARAB LES IS ONE OF THE MOST CRITICAL ASPECTS OF THE COMPARABILITY ANALYSIS AND IT SHOULD BE TRANSPARENT, SYSTEMATIC AND VERIFIABLE. IN PARTICUL AR, THE CHOICE OF SELECTION CRITERIA HAS A SIGNIFICANT INFLUENCE ON T HE OUTCOME OF THE ANALYSIS AND SHOULD REFLECT THE MOST MEANINGFUL ECO NOMIC CHARACTERISTICS OF THE TRANSACTIONS COMPARED. COMPLETE ELIMINATION OF SUBJECTIVE JUDGMENTS FROM THE SELECTION OF COMPARABLES WOULD N OT BE FEASIBLE BUT MUCH CAN BE DONE TO INCREASE OBJECTIVITY AND ENSURE TRANSPARENCY IN THE APPLICATION OF SUBJECTIVE JUDGMENTS. KEEPING IN MIN D ALL THESE FACTORS, IT IS NECESSARY IN THE PRESENT CONTEXT THAT ALL THE RE LEVANT FACTS PECULIAR TO ITES SECTOR SHOULD BE TAKEN INTO ACCOUNT INCLUDING PARTICULARLY THE PROBLEMS DISCUSSED BY US IN PARA 73 TO 75 OF THIS O RDER AND ACCORDINGLY THE RELATIVELY EQUAL DEGREE OF COMPARABILITY SHOULD BE SOUGHT TO BE ACHIEVED BY TAKING INTO CONSIDERATION THE FUNCTIONA L PROFILE OF THE TESTED PARTY AND COMPARING THE SAME WITH FUNCTIONAL PROFIL E OF THE POTENTIAL COMPARABLES SELECTED AT ITES LEVEL. 78. TO SUM UP, WE HOLD THAT THE POTENTIAL COMPARABL ES OF ITES SECTOR LEVEL CAN BE SELECTED BY APPLYING BROAD FUNCTIONAL TEST AT FIRST STAGE AND ALTHOUGH THE COMPARABLES SO SELECTED CAN BE PUT TO FURTHER TEST, DEPENDING ON FACTS OF EACH CASE, BY COMPARING THE S PECIFIC FUNCTIONS PERFORMED IN THE INTERNATIONAL TRANSACTIONS WITH TH AT OF UNCONTROLLED TRANSACTIONS TO ATTAIN THE RELATIVELY EQUAL DEGREE OF COMPARABILITY AS DISCUSSED ABOVE, THE CLASSIFICATION OF ITES INTO LO W-END BPO SERVICES AND HIGH-END KPO SERVICES FOR COMPARABILITY ANALYSIS WO ULD NOT BE FAIR AND PROPER. THE FIRST QUESTION REFERRED TO THIS SPECIAL BENCH IS WHETHER FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE O F INTERNATIONAL 67 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED TRANSACTIONS OF THE ASSESSEE COMPANY PROVIDING BACK OFFICE SUPPORT SERVICES TO THEIR OVERSEAS ASSOCIATED ENTERPRISES, COMPANIES PERFORMING KPO FUNCTIONS SHOULD BE CONSIDERED AS COMPARABLE ?. IN OUR OPINION, THE ANSWER TO THIS QUESTION WILL DEPEND ON THE FACTS AN D CIRCUMSTANCES OF EACH CASE INASMUCH AS IF THE ASSESSEE COMPANY, ON T HE BASIS OF ITS OWN FUNCTIONAL PROFILE, IS FOUND TO HAVE PROVIDED TO IT S AE THE LOW-END BACK OFFICE SUPPORT SERVICES LIKE VOICE OR DATA PROCESSI NG SERVICES AS A WHOLE OR SUBSTANTIALLY THE WHOLE, THE COMPANIES PROVIDING MA INLY HIGH-END SERVICES BY USING THEIR SPECIALIZED KNOWLEDGE AND D OMAIN EXPERTISE CANNOT BE CONSIDERED AS COMPARABLES. 79. IN SO FAR AS THE PRESENT CASE IS CONCERNED, WE NOW PROCEED TO DO AN EXERCISE OF COMPARABILITY ANALYSIS KEEPING IN VI EW THE OBSERVATIONS MADE IN PARA 76 TO 78 IN ORDER TO ATTAIN RELATIVELY EQUAL DEGREE OF COMPARABLES BY TAKING INTO CONSIDERATION THE FUNCTI ONAL PROFILE OF THE ASSESSEE COMPANY AND COMPARING THE SAME WITH THAT O F THE ENTITIES SELECTED AS COMPARABLES BY TPO/DRP ON BROAD FUNCTIO NAL ANALYSIS TAKEN AT ITES LEVEL. THERE ARE TEN ENTITIES WHICH ARE FIN ALLY SELECTED AS COMPARABLES IN THE PRESENT CASE BY THE AO/TPO AS PE R THE DIRECTION OF THE DRP AND THE ASSESSEE HAS MAINLY DISPUTED THE IN CLUSION OF ONLY TWO COMPARABLES NAMELY MOLD-TEK TECHNOLOGIES LTD. AND E CLERX SERVICES PVT. LTD. ON THE GROUND THAT THEY ARE FUNCTIONALLY DIFFE RENT FROM THE ASSESSEE COMPANY. IN ORDER TO APPRECIATE THE STAND OF THE AS SESSEE ON THIS ISSUE, IT IS NECESSARY TO IDENTIFY THE PRINCIPLE FUNCTIONS PERFORMED BY THE ASSESSEE AND COMPARE THE SAME WITH THE PRINCIPLE FU NCTIONS PERFORMED BY THE ENTITIES SELECTED BY THE AO/TPO. THE CLAIM OF THE ASSESSEE RIGHT FROM THE BEGINNING WAS THAT THERE ARE TWO TYPES OF SERVICES MAINLY PROVIDED BY IT TO ITS AES AND THEY WERE CLASSIFIED UNDER TWO HEADS PROVISION OF IT ENABLED SERVICES AND PROVISION O F IT SERVICES. ALTHOUGH THIS CLAIM OF THE ASSESSEE HAS NOT BEEN ACCEPTED BY THE DRP WHICH TREATED BOTH THESE SERVICES UNDER ONE BROAD HEAD OF IT ENABLED 68 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED SERVICES, THE FUNCTIONS PERFORMED BY IT IN RELATIO N TO BOTH THESE TYPES OF SERVICES WERE SEPARATELY GIVEN BY THE ASSESSEE COMP ANY IN ITS TP STUDY REPORT AS UNDER:- 4.1.1 PROVISION OF I.T. ENABLED SERVICES. MGSCIPL IS ENGAGED IN PROVIDING BACK OFFICE SUPPORT SERVICES TO AE. ACTIVITIES UNDERTAKEN BY MGSCIPL ARE ESSENTIALL Y IT ENABLED SERVICES SUCH AS DATA ENTRY, TRANSCRIPTION, RECONCI LIATION. CONSOLIDATION, CO-ORDINATION, PREPARATION, PROCESSI NG AND REVIEW OF SHIPPING DOCUMENTS SUCH OF HILLS OF LADING. ETC. BROAD ACTIVITIES CARRIED ON BY MGSCIPL AS DIRECTED BY AL FROM TIME TO TIME ARE AS FOLLOWS: EXPORT/IMPORT DOCUMENTATION - LOG, REVIEW AND PROCESS SHIPPING INSTRUCTIONS TO PRODUCE DRAFT TRANSPORT DOCUMENTS; - RECEIVE, LOG AND PROCESS AMENDMENTS TO SHIPPING I NSTRUCTIONS: - PUBLISH TRANSPORT DOCUMENTS TO THE WEB; - PERFORM DATA QUALITY CHECKS AND UPDATES; RECONCILE DIFFERENCES BETWEEN EQUIPMENT MANAGEMENT SYSTEM (RKEM REDERIETS KONTAINER EQUIPMENT MANAGEMENT) A ND THE TRANSPORT PLAN IN GLOBAL CUSTOMER SERVICE SYSTEM (G CSS): - IDENTIFY AND CORRECT MANIFEST ERRORS INCLUDING CODI NG ERRORS IN GCSS; - OTHER SERVICES SUCH AS DAILY EXCHANGE RATE UPDATE IN MAERSK LINE INVOICING SYSTEM (MLIS), MANUAL ENTRY OF SURCH ARGES NOT COVERED BY MAERSK AUTOMATED RATING SYSTEM (MARS), R EPORTS REQUIRED BY LOCAL AUTHORITIES AND CUSTOMS, SUBMIT V ESSEL PORT OMISSION NOTIFICATIONS, ISSUE ARRIVAL NOTICES, MANU AL ENTRY OF SURCHARGES NOT COVERED BY MARS, CONFIRM AND COLLECT INVOICE DETAILS, ETC. AGENCY OPERATION: - PREPARE VESSEL LOAD AND DISCHARGE LISTS; - CLEARANCE OF ELECTRONIC DATA INTERCHANGE (EDI) ER RORS IN THE TRACKING SYSTEM; - UPDATE OF VARIOUS OPERATIONS SYSTEMS INCLUDING G LOBAL SCHEDULE INFORMATION SYSTEM (GSIS): - PREPARE HAZARDOUS AND SPECIAL CARGO MANIFESTS AND LISTS: - MAINTENANCE AND UPDATE OF THE TRANSPORT PLAN IN G CSS; - VERIFY AND INDEX DANGEROUS GOOD DECLARATIONS IN G LOBAL HAZARDOUS DECLARATION ELECTRONIC REPLACEMENT (GHDER ) SYSTEM: 69 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED - APPROVE HAZARDOUS CARGO ON MAERSK LINE VESSELS, E TC. LOGISTICS EXPORT/IMPORT HANDLING - UPDATE SHIPMENT DETAILS IN MAERSK LOGISTICS OPERA TIONS AND DOCUMENTS )MODS) SYSTEM; - CHECK MODS UPDATES TO ENSURE ALIGNMENT WITH APMM SOP : - PREPARE AIRFREIGHT SHIPMENT FILE, PAYMENT OF CARR IER BILL OF LADING, ETC.; AND - OTHER SERVICES SUCH AS DAILY OVERVIEW REPORT TO A REAS; PACKING LIST UPDATE; REPORT ON LATE SHIPPING INSTRU CTION SUBMISSION B VENDORS TO AREAS: UPDATE OF KPI MEASUR EMENT DATA. ETC. FINANCE AND ACCOUNTING - ACCOUNTING TO REPORTING: RECONCILIATIONS, PERIOD END CLOSE AND ROLLING BUDGET: - EXCEPTION HANDLING OF SCANNED INVOICES FOR MATCHI NG AGAINST OPEN PURCHASE ORDER; - TRAVEL EXPENSE MANAGEMENT; - FIRST TIME CREATION AND MAINTENANCE OF MASTER DAT A; AND - OTHER SERVICES SUCH AS PAYMENT APPLICATIONS, WRIT E-OFFS, INVOICING, EXCHANGE RATE UPDATE; BANK RECONCILIATIO NS; DEMURRAGE AND DETENTION WAIVERS AND AUDITS: ACCOUNT S PAYABLE AUDIT; INVOICE VERIFICATION: OWNERS EXPENS ES; MONTHLY DISBURSEMENTS; RKDS PAY-AT; PURCHASE ORDER CREATION: MAERSK LOGISTICS IMPORT PROCESSING SYSTEM (MIPS) WEB; HYPERION FINANCIAL MANAGEMENT (HFM) CONTROLLIN G TASKS. OTHER SERVICES - TENDER HANDLING: PREPARE TENDERS BY UPDATING MAER SK PRODUCT CATALOGUE (MEPC) DETAILS; - CONTRACT DRAFTING: DRAFT ALL LANES IN MARS AWARDE D TO MAERSK LINE; AND - DATA QUALITY: VARIOUS AUDIT FUNCTIONS BASED ON DI FFERENT BUSINESS UNITS STRATEGY (GLOBAL INVOICE AUDIT, (C ONTAINER BILLING COUNT, DSL AUDIT. GBR DISPUTE TEAM). L 4.1.2 PROVISION OF IT SERVICES MGSCIPL PROVIDES IT SERVICES SUCH AS PROCESS SUPPOR T. PROCESS OPTIMIZATION AND TECHNICAL SUPPORT TO ITS A IS. MGS CIPL PROVIDES TECHNICAL SUPPORT SERVICES TO USERS OF COR PORATE SYSTEMS. FUNCTIONS PERFORMED BY MGSCIPL UNDER IT SERVICES SEGMENT COULD BE CATEGORISED UNDER FOLLOWI NG HEADINGS: DL 70 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED PROCESS SUPPORT MGSCIPI, PROVIDES FIRST LINE PROCESS SUPPORT SERVIC ES OR PRELIMINARY SUPPORT SERVICES TO USERS O CORPORATE S YSTEMS. USERS ARE THE EMPLOYEES OF MAERSK GROUP ENTITIES WORLDWID E. IT PROFESSIONALS OF MGSCIPL ANALYZE THE PROBLEM FACED BY USERS AND OFFER PRELIMINARY SOLUTIONS ON USE OF SYSTEMS AND P ROVIDE SUPPORT TO SYSTEM IMPLEMENTATION. IF THE PROBLEM IS NOT RES OLVED, THEN THE SAME IS ESCALATED TO SECOND LEVEL SUPPORT. PROCESS OPTIMISATION SECOND LEVEL SUPPORT IS PROVIDED BY TECHNICAL PERSO NNEL WHO ARE EXPERT IN SPECIFIC MODULES WITHIN THE CORPORATE SYS TEMS AND PROVIDE SOLUTIONS THROUGH REMOTE ACCESS CONTROL. EM PLOYEES WHO ARE INVOLVED IN RENDERING THESE SERVICES REQUIRE IN DEPTH UNDERSTANDING OF THE SYSTEM FOR ANALYZING SYSTEM UT ILIZATION AND USER BEHAVIOR. MGSCIPL PROVIDES CONSULTANCY TO GLOB AL IS PORTFOLIOS AND AREA BUSINESS TEAMS IN AREAS OF DEPL OYMENT SUPPORT AND POST IMPLEMENTATION AUDITS. MGSCIPL ALS O CARRIES OUT SURVEYS, IDENTIFIES THE GAPS IN THE PROCESS AND BRIDGES THE SAME. TECHNICAL SUPPORT MGSCIPL PROVIDES FOLLOWING TECHNICAL SUPPORT SERVIC ES: SERVICE DESK SUPPORT WHICH INCLUDES DESKTOP AND T ELEPHONY SYSTEMS, MOBILITY SOLUTIONS AND SERVER SUPPORT (INC LUDING SETTING UP OF SERVER AND OPTIMIZING ITS UTILISATION): 71 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED RESOLUTION TO INCIDENTS RAISED BY USERS, INCLUDIN G TECHNICAL SET UP OF DEVICES (PC, LAPTOP, PDA, ETC): INTERFACE MONITORING, SECURITY SYSTEMS SUPPORT (F IREWALL, ANTIVIRUS/ANTISPAM SOLUTIONS ETC.) CONFIGURATION, T ESTING AND IMPLEMENTATION OF SOLUTIONS: REMOTE INFRASTRUCTURE SUPPORT TO ITS CORPORATE SY STEM USERS: AND ASSISTANCE IN IMPLEMENTATION AND MONITORING OF TH E GLOBAL SECURITY POLICY FOLLOWED BY THE GROUP. 80. A PERUSAL OF THE FUNCTIONAL PROFILE OF THE ASSE SSEE COMPANY SHOWS THAT ALTHOUGH THE SERVICES CLAIMED TO BE PROVIDED B Y IT TO THE AES AS IT SERVICES SUCH AS PROCESS SUPPORT, PROCESS OPTIMIZAT ION AND TECHNICAL SUPPORT ARE NOT IN THE NATURE OF LOW END SERVICES S UCH AS VOICE OR DATA PROCESSING AS THEY REQUIRE SOME DEGREE OF SPECIAL K NOWLEDGE AND DOMAIN EXPERTISE IN THE CONCERNED FIELD, THE REVENUE GENER ATED FROM THESE SERVICES WAS ONLY ABOUT 10% OF THE TOTAL REVENUE GE NERATED DURING THE YEAR UNDER CONSIDERATION. THERE WERE ALSO SOME OTH ER SERVICES RENDERED BY THE ASSESSEE COMPANY TO ITS AES AS IT ENABLED SE RVICES SUCH AS RECONCILING THE DIFFERENCE BETWEEN EQUIPMENT MANAGE MENT SYSTEM AND TRANSFER PLAN IN GLOBAL CUSTOM SERVICES STUDY, CONT RACT DRAFTING, VARIOUS AUDIT FUNCTIONS BASED ON DIFFERENT BUSINESS STRATEG Y, TENDER HANDLING ETC. WHICH, AS RIGHTLY SUBMITTED BY THE LD. D.R., CANNOT BE STRICTLY CONSIDERED AS LOW-END SERVICES AS THEY INVOLVED SOME DEGREE OF SPECIAL KNOWLEDGE AND EXPERTISE IN THE RELEVANT FIELD. HOWEVER, THESE SERVICES AGAIN WERE ONLY INCIDENTAL TO THE MAIN SERVICES RENDERED BY TH E ASSESSEE INVOLVING INFORMATION COLLATION FROM SHIPPER/CUSTOMER/AE AND POPULATING THE SAME INTO VARIOUS PROCESSES AND SYSTEMS PROVIDED BY THE AE. THESE MAIN SERVICES RENDERED BY THE ASSESSEE TO ITS AES T HUS INVOLVED PRIMARILY DATA ENTRY, TRANSCRIPTION, CONSOLIDATION, CO-ORDINA TION, PREPARATION, PROCESSING AND REVIEW OF SHIPPING DOCUMENTS AND SUC H OTHER SIMILAR SUPPORT SERVICES WHICH WERE MAINLY COMPRISING OF BA CK OFFICE SUPPORT SERVICES RENDERED BY THE ASSESSEE TO ITS AES IN THE NATURE OF LOW-END SERVICES. THE PROFILE OF WORK-FORCE EMPLOYED BY TH E ASSESSEE DURING THE 72 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED YEAR UNDER CONSIDERATION COMPRISED OF 96% OF GRADUA TES AND POST- GRADUATES WHEREAS ONLY 4% WORK-FORCE WAS PROFESSION AL SUCH AS CA, B.TECH ETC. WHICH AGAIN GOES TO SHOW THAT THE FUNC TIONS PERFORMED BY THE ASSESSEE COMPANY TO ITS AES WERE MAINLY IN THE NATURE OF PROVIDING BACK OFFICE SUPPORT SERVICES OF LOW-END NATURE. GOI NG BY THE FUNCTIONS PERFORMED BY THE ASSESSEE TO ITS AES DURING THE YEA R UNDER CONSIDERATION, WE ARE OF THE VIEW THE ASSESSEE WAS A CAPTIVE CONTRACT SERVICE PROVIDER MAINLY RENDERING BACK OFFICE SUPPO RT SERVICES AND SUCH SERVICES RENDERED BY IT TO ITS AES INVOLVING SOME D EGREE OF SPECIAL KNOWLEDGE AND EXPERTISE FORMED ONLY SMALL PORTION O F THE SERVICES RENDERED BY IT WHICH ESSENTIALLY WERE IN THE NATURE OF INCIDENTAL SERVICES. 81. IN SO FAR AS THE CASE OF MOLD-TEK TECHNOLOGIES LTD. IS CONCERNED, IT IS OBSERVED FROM THE ANNUAL REPORT OF THE SAID COMP ANY FOR THE FINANCIAL YEAR 2007-08 PLACED AT PAGE 139 TO 151 OF THE PAPER BOOK THAT THE SAID COMPANY WAS PIONEER IN STRUCTURAL ENGINEERING KPO S ERVICES AND ITS ENTIRE BUSINESS COMPRISED OF PROVIDING ONLY STRUCTU RAL ENGINEERING SERVICES TO VARIOUS CLIENTS. FURTHER INFORMATION O F MOLD-TEK TECHNOLOGIES LTD. AVAILABLE ON THEIR WEBSITE IS FURNISHED IN THE FORM OF PRINTOUT AT PAGE 158 TO 165 OF THE PAPER BOOK AND A PERUSAL OF THE SAME SHOWS THAT IT IS A LEADING PROVIDER OF ENGINEERING AND DESIGN SERVICES WITH SPECIALIZATION IN CIVIL, STRUCTURAL AND MECHANICAL ENGINEERING SERVICES. IT IS STATED TO HAVE A STRONG TEAM OF SKILLED RESOURCE S WITH WORLD CLASS RESOURCES AND SKILL SETS. IT IS ALSO STATED TO HAVE CONSISTENTLY HELPED THE CLIENTS TO CUT DOWN DESIGN AND DEVELOPMENT COSTS OF CIVIL, STRUCTURAL, MECHANICAL AND PLANT DESIGN BY 30-40% AND DELIVERED TECHNOLOGICALLY SUPERIOR OUTPUTS TO MATCH AND EXCEED EXPECTATIONS. IT IS CLAIMED TO HAVE IN-HOUSE SOFTWARE DEVELOPMENT TEAM, QUALITY CONTROL TRAINING AND TROUBLE SHOOTING FACILITIES. M/S MOLD-TEK IS ALSO RENDERING WEB DESIGN AND DEVELOPMENT SERVICES WITH EXPERIENCE IN TURNING THE M INTO AN EFFECTIVE 73 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED GRAPHIC DESIGN REPRESENTATION AND CREATING DYNAMIC AND GRAPHIC RICH WEB APPLICATIONS FROM IT SPECS, DESIGN PRINTS ETC. KEEPING IN VIEW THIS INFORMATION AVAILABLE IN THE ANNUAL REPORT OF MOLD- TEK AS WELL ON ITS WEBSITE, WE ARE OF THE VIEW THAT THE SAID COMPANY I S MAINLY INVOLVED IN PROVIDING HIGH-END SERVICES TO ITS CLIENTS INVOLVIN G HIGHER SPECIAL KNOWLEDGE AND DOMAIN EXPERTISE IN THE FIELD AND THE SAME CANNOT BE TAKEN AS COMPARABLE TO THE ASSESSEE COMPANY WHICH I S MAINLY INVOLVED IN PROVIDING LOW-END SERVICES. IT MAY BE PERTINENT TO NOTE HERE THAT THE FINANCIAL YEAR 2007-08 WAS A UNIQUE YEAR FOR MOLD-T EK TECHNOLOGIES LTD. AS THE SCHEME OF ARRANGEMENT INVOLVING AMALGAMATION BETWEEN TEKMEN TOOL PVT. LTD. AND MOLD-TEK TECHNOLOGIES LTD. AND D E-MERGER BETWEEN MOLD-TEK TECHNOLOGIES LTD. SIMULTANEOUSLY WAS SANCT IONED BY THE HONBLE AP HIGH COURT BY 15 TH JULY, 2008 WITH THE APPOINTED DATE FOR AMALGAMATION AND DE-MERGER BEING IST OCTOBER, 2007 AND IST APRIL, 2007 RESPECTIVELY. IT IS ALSO PERTINENT TO NOTE THAT WHI LE WORKING OUT THE OPERATING MARGIN OF THE SAID COMPANY, PROVISION FOR DERIVATIVE LOSS OF RS. 6.43 CRORES MADE BY MOLD-TEK TECHNOLOGIES LTD. WAS EXCLUDED BY THE A.O. TREATING THE SAME AS NON-OPERATING EXPENSES WH EREAS IN THE CASE OF RUSHABH DIAMONDS (SUPRA), IT WAS HELD BY THE DIVISI ON BENCH OF THIS TRIBUNAL THAT THE GAIN OR LOSS ARISING FROM THE FOR WARD CONTRACT ENTERED INTO FOR THE PURPOSE OF FOREIGN CURRENCY EXPOSURE O N THE EXPORT AND IMPORT HAS TO BE TAKEN INTO CONSIDERATION WHILE COM PUTING THE OPERATING PROFIT. 82. IN SO FAR AS M/S ECLERX SERVICES LIMITED IS CON CERNED, THE RELEVANT INFORMATION IS AVAILABLE IN THE FORM OF ANNUAL REPO RT FOR FINANCIAL YEAR 2007-08 PLACED AT PAGE 166 TO 183 OF THE PAPER BOOK . A PERUSAL OF THE SAME SHOWS THAT THE SAID COMPANY PROVIDES DATA ANAL YTICS AND DATA PROCESS SOLUTIONS TO SOME OF THE LARGEST BRANDS IN THE WORLD AND IS RECOGNIZED AS EXPERTS IN CHOSEN MARKETS-FINANCIAL S ERVICES AND RETAIL AND 74 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED MANUFACTURING. IT IS CLAIMED TO BE PROVIDING COMPLE TE BUSINESS SOLUTIONS BY COMBINING PEOPLE, PROCESS IMPROVEMENT AND AUTOMA TION. IT IS CLAIMED TO HAVE EMPLOYED OVER 1500 DOMAIN SPECIALISTS WORKI NG FOR THE CLIENTS. IT IS CLAIMED THAT ECLERX IS A DIFFERENT COMPANY WITH INDUSTRY SPECIALIZED SERVICES FOR MEETING COMPLEX CLIENT NEEDS, DATA ANA LYTICS KPO SERVICE PROVIDER SPECIALIZING IN TWO BUSINESS VERTICALS F INANCIAL SERVICES AND RETAIL AND MANUFACTURING. IT IS CLAIMED TO BE ENGAG ED IN PROVIDING SOLUTIONS THAT DO NOT JUST REDUCE COST, BUT HELP TH E CLIENTS INCREASE SALES AND REDUCE RISK BY ENHANCING EFFICIENCIES AND BY PR OVIDING VALUABLE INSIGHTS THAT EMPOWER BETTER DECISIONS. M/S ECLERX SERVICES PVT. LTD. IS ALSO CLAIMED TO HAVE A SCALABLE DELIVERY MODEL AND SOLUTIONS OFFERED THAT INCLUDE DATA ANALYTICS, OPERATIONS MANAGEMENT, AUDI TS AND RECONCILIATION, METRICS MANAGEMENT AND REPORTING SE RVICES. IT ALSO PROVIDES TAILORED PROCESS OUTSOURCING AND MANAGEMEN T SERVICES ALONG WITH A MULTITUDE OF DATA AGGREGATION, MINING AND MA INTENANCE SERVICES. IT IS CLAIMED THAT THE COMPANY HAS A TEAM DEDICATED TO DEVELOPING AUTOMATION TOOLS TO SUPPORT SERVICE DELIVERY. THES E SOFTWARE AUTOMATION TOOLS INCREASE PRODUCTIVITY, ALLOWING CUSTOMERS TO BENEFIT FROM FURTHER COST SAVING AND OUTPUT GAINS WITH BETTER CONTROL OV ER QUALITY. KEEPING IN VIEW THE NATURE OF SERVICES RENDERED BY M/S ECLERX SERVICES PVT. LTD. AND ITS FUNCTIONAL PROFILE, WE ARE OF THE VIEW THAT THI S COMPANY IS ALSO MAINLY ENGAGED IN PROVIDING HIGH-END SERVICES INVOLVING SP ECIALIZED KNOWLEDGE AND DOMAIN EXPERTISE IN THE FIELD AND THE SAME CANN OT BE COMPARED WITH THE ASSESSEE COMPANY WHICH IS MAINLY ENGAGED IN PRO VIDING LOW-END SERVICES TO THE GROUP CONCERNS. 83. FOR THE REASONS GIVEN ABOVE, WE ARE OF THE VIEW THAT IF THE FUNCTIONS ACTUALLY PERFORMED BY THE ASSESSEE COMPANY FOR ITS AES ARE COMPARED WITH THE FUNCTIONAL PROFILE OF M/S ECLERX SERVICES PVT. LTD. AND MOLD-TEC TECHNOLOGIES LTD., IT IS DIFFICULT TO FIND OUT ANY RELATIVELY EQUAL DEGREE OF COMPARABILITY AND THE SAID ENTITIES CANNOT BE TAKEN AS COMPARABLES FOR 75 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED THE PURPOSE OF DETERMINING ALP OF THE TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS AES. WE, THEREFORE, DIRECT THAT T HESE TWO ENTITIES BE EXCLUDED FROM THE LIST OF 10 COMPARABLES FINALLY TA KEN BY THE AO/TPO AS PER THE DIRECTION OF THE DRP. 84. AS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSE E, IF THESE TWO ENTITIES ARE EXCLUDED FROM THE COMPARABLES AND THE ALP OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS AES I S RECOMPUTED BY TAKING INTO CONSIDERATION THE ARITHMETIC MEAN OF TH E MARGINS OF THE REMAINING EIGHT COMPARABLES, THE DIFFERENCE BETWEEN SUCH ALP AND THE PRICE CHARGED BY THE ASSESSEE WOULD BE WITHIN THE S AFE HARBOUR LIMIT OF 5% REQUIRING NO TP ADJUSTMENT. WE ACCORDINGLY DIREC T THE A.O.TO RECOMPUTE THE ALP OF THE TRANSACTIONS OF THE ASSESS EE COMPANY WITH ITS AES APPLYING THE AVERAGE PROFIT MARGIN OF THE REMAI NING EIGHT COMPARABLES. IF THE DIFFERENCE BETWEEN THE ALP SO R ECOMPUTED AND THE PRICE ACTUALLY CHARGED BY THE ASSESSEE IS WITHIN TH E SAFE HARBOUR LIMIT OF (+) OR (-) 5%, THE A.O. IS DIRECTED NOT TO MAKE ANY TP ADJUSTMENT AS PER THE SECOND PROVISO TO SECTION 92C(2) OF THE ACT. 85. KEEPING IN VIEW OUR DECISION RENDERED ABOVE, TH E OTHER ISSUES INVOLVED IN GROUND NO. 2 TO 8 OF THE ASSESSEES APP EAL INCLUDING THE ISSUE INVOLVED IN Q NO. 2 REFERRED TO THIS SPECIAL BENCH HAVE BECOME INFRUCTUOUS/ACADEMIC REQUIRING NO ADJUDICATION ON M ERIT. THE SAME ARE ACCORDINGLY DISMISSED. HOWEVER, KEEPING IN VIEW THA T THE ISSUE INVOLVED IN Q NO. 2 HAS BEEN SPECIFICALLY REFERRED FOR THE A DJUDICATION BY THIS SPECIAL BENCH, WE NOW PROCEED TO CONSIDER AND DECID E THE SAME FOR THE SAKE OF COMPLETENESS. 86. AS REGARDS THE ISSUE INVOLVED IN QUESTION NO. 2 AS TO WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE COMPAN Y EARNING ABNORMAL HIGH PROFIT MARGIN SHOULD BE INCLUDED IN THE LIST O F COMPARABLE CASES FOR 76 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED THE PURPOSE OF DETERMINING ALP OF AN INTERNATIONAL TRANSACTION, SHRI PORUS KAKA REFERRED TO THE PROVISIONS OF SECTION 92 -C OF THE ACT TO POINT OUT THAT THE WORD USED THEREIN IS ARITHMETIC MEAN AND NOT MEAN OR AVERAGE. HE CONTENDED THAT THE ARITHMETIC MEAN E NVISAGES EXISTENCE OF ARITHMETIC PROGRESSION MEANING THEREBY THAT IT EXPE CTS THE COMPARABLE FIGURES IN A SPECIFIC RANGE. HE CONTENDED THAT ANYT HING BEYOND THAT RANGE THEREFORE SHOULD NOT BE TAKEN INTO CONSIDERAT ION. IN SUPPORT OF THIS CONTENTION, HE RELIED ON THE MEANING OF THE EXPRESS ION ARITHMETIC MEAN GIVEN IN THE CONCISE OXFORD DICTIONARY WHICH SAYS T HAT IT IS A MEAN NUMBER OF ARITHMETIC PROGRESSION. HE RELIED ON THE BOARD CIRCULAR NO. 14 OF 2001 (252 ITR (ST.) 103) EXPLAINING THE OBJECT O F PROVISION OF SECTION 92-A TO 92-F OF THE ACT TO CONTEND THAT THE OBJECT OF THESE PROVISIONS IS TO PROVIDE A DETAILED STATUTORY FRAME WORK WHICH CAN L EAD TO COMPUTATION OF REASONABLE, FAIR AND EQUITABLE PROFITS AND TAX IN I NDIA IN THE CASE OF SUCH MULTINATIONAL ENTERPRISES. HE ALSO REFERRED TO PARA 55.10 OF THE SAID CIRCULAR WHEREIN THE PURPOSE OF ARITHMETIC MEAN IS EXPLAINED. HE SUBMITTED THAT THE APPLICATION OF MOST APPROPRIATE METHOD TO DIFFERENT SETS OF COMPARABLE DATA CAN POSSIBLY RESULT IN COMP UTATION OF MORE THAN ONE ALP AND AS EXPLAINED BY THE CBDT, WITH A VIEW T O AVOID UNNECESSARY DISPUTES IN SUCH A SITUATION, THE PROVISO TO SECTIO N 92-C(2) OF THE ACT PROVIDES THAT THE ARITHMETIC MEAN OF THE PRICES SHA LL BE ADOPTED AS ALP. HE SUBMITTED THAT IF THE DIFFERENT SETS OF COMPARAB LE DATA ARE EQUALLY RELIABLE, THERE MAY NOT BE ANY SIGNIFICANT DIVERSIO N BETWEEN THE VARIOUS ALPS DETERMINED IN THE NORMAL COURSE AS MENTIONED B Y CBDT IN PARA 55.10 OF THE NOTIFICATION. HE CONTENDED THAT THIS C LEARLY INDICATES THE EXPECTATION OF THE LEGISLATURE THAT THERE WOULD NOT BE ANY SIGNIFICANT DIVERSION BETWEEN VARIOUS ALPS IF THE DIFFERENT SET S OF COMPARABLE DATA ARE EQUALLY RELIABLE. 87. SHRI PORUS KAKA SUBMITTED THAT THERE ARE SEVERA L CASES DECIDED BY THE DIFFERENT BENCHES OF THE TRIBUNAL WHEREIN IT IS HELD THAT THE 77 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED COMPARABLES EARNING SUPER NORMAL OR ABNORMAL PROFIT S SHOULD BE EXCLUDED. HE PLACED ON RECORD THE COPIES OF ORDERS PASSED BY THE TRIBUNAL IN THE FOLLOWING SUCH CASES:- 88. SHRI PORUS KAKA TOOK US THROUGH THE RELEVANT PO RTION OF SOME OF THE ABOVE ORDERS OF THE TRIBUNAL TO SUPPORT AND SUB STANTIATE HIS CONTENTION THAT THE ENTITY EARNING SUPER NORMAL OR ABNORMAL PROFITS OUGHT TO BE EXCLUDED FROM THE LIST OF FINAL COMPARA BLES. HE POINTED OUT THAT IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA), THE DELHI BENCH OF ITAT APPLIED THE TURNOVER FILTER TO EXCLUD E INFOSYS TECHNOLOGIES LTD. FROM THE FINAL LIST OF COMPARABLES AND THIS RE ASONABLE AND FAIR VIEW TAKEN BY THE TRIBUNAL HAS BEEN UPHELD BY THE HONBL E HIGH COURT. HE 78 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED SUBMITTED THAT THE BANGALORE BENCH OF ITAT IN THE C ASE OF SAP LABS INDIA PVT. LTD. (SUPRA) HAS HELD THAT IF THE DIFFER ENCE IN THE MARGIN EARNED BY THE ENTITY SELECTED AS COMPARABLE IS WIDE, THE O NUS IS ON THE A.O./TPO TO SHOW THE COMMON THREAD RUNNING THROUGH THESE ENTITIES SO AS TO INCLUDE THEM IN THE LIST OF FINAL COMPARABLES . OUR ATTENTION WAS DRAWN TO THE DECISION OF CHANDIGARH SPECIAL BENCH O F ITAT IN THE CASE OF QUARK SYSTEMS PVT. LTD. WHEREIN THE ISSUE OF SUPER NORMAL PROFIT WAS CONSIDERED BY THE TRIBUNAL AND IT WAS HELD THAT WHE N THE PROFIT MARGIN IS ABNORMALLY HIGH, THE MATTER MAY BE INVESTIGATED FUR THER. MR. PORUS KAKA ALSO RELIED ON THE DECISION OF MUMBAI BENCH OF ITAT IN THE CASE OF SYMANTEC SOFTWARE SOLUTIONS PRIVATE LIMITED (SUPRA) AND POINTED OUT THAT THE ENTITIES EARNING SUPER NORMAL PROFITS WERE EXCLUDED BY THE TRIBUNAL IN THIS CASE ON THE GROUND THAT THERE WAS FAILURE ON THE PART OF THE A.O./TPO TO PROVE THAT THE HIGHER PROFITS SHOWN BY THESE ENTITIES WERE NORMAL. HE CONTENDED THAT SUPER NORMAL PROFITS THUS CERTAINLY IS A TRIGGER WHICH ATLEAST SHOULD INVOKE FURTHER INVESTI GATION OR ENQUIRIES TO ASCERTAIN AND DECIDE WHETHER THE ENTITIES EARNING S UCH SUPER NORMAL PROFITS SHOULD BE INCLUDED IN THE LIST OF FINAL COM PARABLES OR NOT. 89. SHRI AJAY VORA, THE LD. COUNSEL FOR THE INTERVE NER ALSO PUT FORTH HIS ARGUMENT ON THE ISSUE RELATING TO THE EXCLUSION OF ENTITY EARNING SUPER NORMAL OR ABNORMAL PROFITS FROM THE LIST OF FINAL C OMPARABLES. HE CONTENDED THAT IF THE HIGH MARGIN EARNED BY THE CON CERNED ENTITIES IS DUE TO THEIR EFFICIENCY, THESE ENTITIES CANNOT BE EXCLU DED MERELY ON THE GROUND OF HIGH MARGIN. HE CONTENDED THAT IF SUCH H IGH MARGIN, HOWEVER, IS DUE TO ANY EXTERIOR FACTOR, THE CONCERNED ENTITI ES SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. HE SUBMITTED THAT SUC H EXTERIOR FACTOR COULD BE DIFFERENT SUCH AS LOWER DEPRECIATION, EARN INGS DUE TO FLUCTUATION IN FOREIGN CURRENCY RATES ETC. HE CONTENDED THAT TH E CONSISTENCY OF HIGH MARGIN IS ALSO REQUIRED TO BE SEEN TO FIND OUT AS T O WHETHER THE HIGH 79 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED MARGIN IS A NORMAL SITUATION OR ABNORMAL. HE SUBMIT TED THAT IN THE CASE OF SYMANTEC SOFTWARE SOLUTIONS PVT. LTD. (SUPRA), T HREE OUT OF THIRTEEN COMPARABLES SELECTED BY THE TPO WERE SHOWING HIGH M AGNITUDE OF MARGIN AS COMPARED TO THE REMAINING 10 ENTITIES AND THE TRIBUNAL HELD THAT THESE THREE ENTITIES SHOULD NOT BE TAKEN AS CO MPARABLES ON ACCOUNT OF THEIR SUPER NORMAL PROFIT SINCE THE TPO DID NOT ESTABLISH ON EVIDENCE THAT THESE SUPER NORMAL PROFITS EARNED BY THEM WAS IN ACCORDANCE WITH NORMAL ACTIVITIES OF THEIR BUSINESS. HE CONTENDED THAT WHETHER THE HIGH PROFIT IS NORMAL OR ABNORMAL PROFIT IS REQUIRED TO BE SEEN FROM THE RELEVANT FACTS OF EACH CASE. HE ALSO RELIED ON THE DECISION OF THE CHANDIGARH BENCH OF ITAT IN THE CASE OF QUARK SYSTE MS (INDIA) PVT. LTD. (SUPRA) WHEREIN IT WAS HELD BY THE TRIBUNAL IN PARA 13 THAT IF ONE ENTITY WAS NOT TREATED AS COMPARABLE BY THE TAX AUTHORITY ON THE GROUND OF HEAVY LOSSES SUFFERED BY IT, THEY ALSO HAVE TO CONS IDER THAT ANOTHER ENTITY TAKEN BY THEM AS COMPARABLE HAD EARNED EXTRA ORDINA RY PROFIT. HE ALSO CITED THE DECISION OF BANGALORE BENCH OF ITAT IN T HE CASE OF SAP LABS INDIA (P.) LTD.(SUPRA) WHEREIN IT WAS HELD IN PARA 54 OF THE ORDER THAT IN THE ABSENCE OF ANY COMMON THREAD EXPLAINED BY THE A .O./TPO RUNNING THROUGH THE FOUR ENTITIES EARNING SUPER PROFIT TO B RING OUT THE FUNCTIONAL SIMILARITY, THE SAME COULD NOT BE CONSIDERED AS COM PARABLE. 90. IN HIS REPLY ON THIS ISSUE, SHRI AJEET KUMAR JA IN AT THE OUTSET INVITED OUR ATTENTION TO PAGE 22 OF THE DECISION OF THE TRIBUNAL IN THE CASE OF WILLIS PROCESSING SERVICES INDIA PVT. LTD. (SUPRA) TO POINT OUT THAT THE EXTREME CASES OF LOSS AND PROFIT WERE CONSIDERE D BY THE TRIBUNAL IN THE SAID CASE TO WORK OUT THE AVERAGE PROFIT MARGIN OF THE COMPARABLES BY TAKING THE ARITHMETIC MEAN. HE SUBMITTED THAT AS PE R THE PRINCIPLES OF STATISTICAL ANALYSIS, THE SIZE OF SAMPLE IS IMPORTA NT INASMUCH AS HIGHER THE SAMPLE SIZE, BETTER OR CLOSURE IS THE ESTIMATE. HE REFERRED TO CHAPTER 5 MEASURES OF CENTRAL TENANCY GIVEN IN THE BOOK STATISTICS FOR ECONOMICS PRESCRIBED AS TEXT BOOK FOR CLASS XI AND SUBMITTED THAT 80 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED ARITHMETIC MEAN AS EXPLAINED THEREIN IS THE MOST CO MMONLY USED MEASURE OF CENTRAL TENDENCY. IT IS DEFINED AS A SUM OF THE VALUES OF ALL OBSERVATIONS DIVIDED BY NUMBER OF OBSERVATIONS. HE POINTED OUT FROM THE EXAMPLE GIVEN THEREIN THAT IN CASE OF EXTREME FIGUR ES ALSO, THE ARITHMETIC MEAN IS USED AS A MEASURE OF CENTRAL TENDENCY. HE C ONTENDED THAT BY ADOPTING THE ARITHMETIC MEAN TO WORK OUT THE AVERAG E PROFIT MARGIN OF THE COMPARABLES, INDIAN LAW HAS RECOGNIZED THE EXTR EME VALUES ALSO FOR COMPARABILITY. HE SUBMITTED THAT THE QUARTILE METHO D OF CENTRAL TENDENCY REMOVES THE EXTREME RESULTS BUT BY ADOPTING THE ARI THMETIC MEAN AND NOT QUARTILE, THE LAW MAKERS WANT EVEN THE EXTREME RESULTS TO BE CONSIDERED. 91. AS REGARDS THE CBDT CIRCULAR NO. 14 OF 2011, PA RA 55.10 REFERRED BY SHRI PORUS KAKA, SHRI AJEET KUMAR JAIN SUBMITTED THAT SECTION 92-C OF THE ACT WAS ORIGINALLY INTRODUCED W.E.F. 1-4-200 2 IN THE STATUTE PROVIDING FOR CALCULATING THE AVERAGE PROFIT MARGIN BY USING ARITHMETIC MEAN WITHOUT ANY SCOPE FOR FURTHER ADJUSTMENT. HE S UBMITTED THAT AN AMENDMENT, HOWEVER, WAS MADE SUBSEQUENTLY TO ALLOW SUCH +_ 5% ADJUSTMENT RIGHT FROM INCEPTION PROVIDING MORE FLEX IBILITY. IN THIS REGARD, HE RELIED ON PARA 50.4 OF THE CBDT CIRCULAR NO. 8/2 002 ISSUING CLARIFICATION REGARDING PROVISION FOR TRANSFER PRIC ING WHEREIN IT IS CLARIFIED THAT UNDER THE EXISTING PROVISIONS CONTAINED IN THE PROVISO TO THE SUB- SECTION (2) OF SECTION 92-C OF THE ACT, IF THE APPL ICATION OF THE MOST APPROPRIATE METHOD LEADS TO DETERMINATION OF MORE T HAN ONE PRICE, THE ARITHMETIC MEAN OF SUCH PRICES SHALL BE TAKEN TO BE THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION AND WITH A VIEW TO AL LOW A DEGREE OF FLEXIBILITY IN ADOPTING THE ALP, THE FINANCE ACT 20 02 HAS AMENDED THE SAID PROVISO TO PROVIDE THAT WHERE THE MOST APPROPR IATE METHOD RESULTS INTO MORE THAN ONE PRICE, THE PRICE WHICH DIFFERS F ROM THE ARITHMETIC MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH MEAN CAN BE TAKEN TO BE ALP, AT THE OPTION OF THE ASSESSEE. 81 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 92. AS REGARDS THE ORDERS OF THE TRIBUNAL CITED BY SHRI PORUS KAKA IN SUPPORT OF THE ASSESSEES CASE THAT THE ENTITIES EA RNING SUPER NORMAL OR ABNORMAL PROFITS SHOULD BE EXCLUDED FROM THE COMPAR ABLES, SHRI AJEET KUMAR JAIN FURNISHED A CHART GIVING FINDINGS RECORD ED BY THE TRIBUNAL IN THOSE CASES ALONG WITH THE REMARK OF THE REVENUE TH EREON. REFERRING TO THE SAID CHART, SHRI AJEET KUMAR JAIN CONTENDED THA T THE TRIBUNAL IN THE CASE OF ADOBE SYSTEMS INDIA (P) LTD. TOOK A VIEW ON THIS ISSUE WITHOUT MUCH DISCUSSION OR WITHOUT GIVING ANY REASON AND IT HAS BEEN FOLLOWED BY THE TRIBUNAL IN THE CASE OF TEVA INDIA (P.) LTD. HE POINTED OUT THAT THE DECISION IN THE CASE OF TEVA INDIA (P.) LTD. HAS BE EN FOLLOWED BY THE TRIBUNAL IN MOST OF THE OTHER CASES CITED BY SHRI P ORUS KAKA. HE CONTENDED THAT NONE OF THESE DECISIONS OF THE TRIBU NAL CONTAINS ANY MEANINGFUL DISCUSSION ON THIS ISSUE AND THIS SPECIA L BENCH, IN ANY CASE, NOW HAS TO DECIDE THIS ISSUE AFRESH IN THE LIGHT OF THE SUBMISSIONS MADE BY BOTH THE SIDES. SHRI AJEET KUMAR JAIN SUBMITTED THAT THERE ARE SEVERAL DECISIONS OF THE TRIBUNAL RENDERED BY DIFFERENT BEN CHES HOLDING THAT THE COMPARABLES CANNOT BE EXCLUDED MERELY ON THE BASIS OF ABNORMAL AND SUPER NORMAL PROFITS. SOME OF SUCH DECISIONS CITED BY HIM ARE AS UNDER:- AL NO. NAME OF THE CASE DATE OF DECISION BENCH 1 EXXON MOBIL COMPANY INDIA PVT. LTD. 10.06.11 MUMB AI 2 BP INDIA SERVICES PVT. LIMITED 23.09.11 MUMBAI 3 ACTIS ADVISORS PVT. LIMITED 12.10.13 MUMBAI 4 NEXTLINK INDIA PVT. LIMITED 10.12 BANGALORE 5 24/7 CUSTOMER.COM. PVT. LIMITED 09.11.12 BANGALO RE 6 TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LIMITED 23-11-12 BANGALORE 7 EXXON MOBIL COMPANY INDIA PVT. LIMITED 19.12.12 MUMBAI 8 STREAM INTERNATIONAL SERVICES PVT. LIMITED 11.01.13 MUMBAI 9 WILLIS PROCESSING SERVICES (I) P. LIMITED 01.03.1 3 MUMBAI 10 VODAFONE INDIA SERVICES P. LIMITED 26.04.13 MUMB AI 11 RUSHABH DIAMONDS 26.04.13 MUMBAI 12 SYSCOM CORPORATIONS 12.07.13 MUMBAI 13 CHRYSCAPITAL INVESTMENT ADVISORS INDIA PRIVATE LIMITED 20.12.13 NEW DELHI 82 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 93. SHRI AJEET KUMAR JAIN POINTED OUT THAT THERE WE RE ATLEAST EIGHT DECISIONS RENDERED BY THE TRIBUNAL PRIOR TO THE CAS E OF WILLIS PROCESSING SERVICES (I) P. LTD. (SUPRA) TAKING A VIEW IN FAVOU R OF THE ASSESSEE ON THIS ISSUE AND IT THEREFORE CANNOT BE SAID THAT THE TRIB UNAL IN THE CASE OF WILLIS PROCESSING SERVICES (I) PVT. LTD. DEVIATED F ROM THE CONSISTENT VIEW TAKEN EARLIER BY THE TRIBUNAL ON THIS ISSUE IN FAVO UR OF THE ASSESSEE. HE SUBMITTED THAT IN PARA 34.1 OF ITS ORDER PASSED IN THE CASE OF WILLIS PROCESSING SERVICES (I) PVT. LTD., THE TRIBUNAL IN FACT HAS TAKEN NOTE OF AT LEAST FIVE DECISIONS RENDERED BY THE CO-ORDINATE BE NCHES TAKING A VIEW IN FAVOUR OF THE REVENUE ON THIS ISSUE. HE SUBMITTED THAT IN MOST OF THESE THIRTEEN CASES DECIDED BY THE TRIBUNAL, ALL THE MAT ERIAL ASPECTS INCLUDING THE RELEVANT RULES AND EVEN THE OECD GUIDELINES HAV E BEEN TAKEN INTO CONSIDERATION BY THE TRIBUNAL WHILE PASSING THE ORD ERS. HE SUBMITTED THAT IN THE CASE OF BP INDIA SERVICES PRIVATE LIMIT ED (SUPRA), FOR INSTANCE, THE FACT OF COMPARABLES EARNING EXTREME PROFITS THA N THE PROFITS EARNED BY OTHER COMPARABLES WAS TAKEN NOTE OF BY THE TRIBU NAL AND IT WAS HELD THAT THE VERY RATIONALE OF HAVING AVERAGE IN CASE O F MORE THAN ONE COMPARABLES IS TO IRON OUT THE EFFECT OF EXTREME CA SES AND FIND OUT THE PROFIT MARGIN AS A REPRESENTATIVE OF THE WHOLE LOT. HE SUBMITTED THAT EVEN THE RELEVANT PROVISIONS OF RULE 10B(2) AND 10B(3) O F THE INCOME TAX RULES WERE TAKEN INTO CONSIDERATION BY THE TRIBUNAL AND IT WAS HELD THAT NOWHERE IN THE SAID RULES, THE HIGHER OR LOWER PROF IT RATE HAS BEEN PRESCRIBED AS THE DETERMINATIVE FACTOR TO MAKE A CA SE INCOMPARABLE. IT WAS ALSO HELD THAT THE PROFIT RATE IN ANY CASE CANN OT BE SUCH DETERMINATIVE FACTOR IN ITSELF AS IT IS A CONSEQUEN CE OF THE EFFECT OF THE VARIOUS FACTORS. 94. RELIANCE WAS PLACED BY SHRI AJEET KUMAR JAIN ON THE DECISION OF THE TRIBUNAL THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (S UPRA), WHEREIN IT 83 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED WAS HELD BY THE BANGALORE BENCH THAT THE EXCLUSION OF COMPANIES WITH ABNORMAL PROFITS FROM THE COMPARABLES MAY BE IN LIN E WITH THE PRINCIPLES ENUMERATED IN THE OECD GUIDELINES BUT THE SAME CANN OT BE SAID TO BE IN TUNE WITH THE INDIAN TP REGULATIONS. IT WAS NOTED B Y THE TRIBUNAL IN THIS CONTEXT THAT THE INDIAN TP RULES SPECIFICALLY DEVIA TE FROM OECD GUIDELINES IN THIS ASPECT AND SPECIFY THE ARITHMETI C MEAN FOR DETERMINING THE ALP AS AGAINST THE QUARTILE METHOD SUGGESTED IN THE OECD GUIDELINES WHICH EXCLUDES THE COMPANIES THAT FALL I N THE EXTREME QUARTILES FOR COMPARABILITY. HE SUBMITTED THAT IN T HE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA LTD. (SUPRA) A SIMILAR VIEW WAS REITERATED BY THE TRIBUNAL HOLDING THAT THERE IS NO BAR IN THE RELEVA NT RULE 10B(2) TO CONSIDER THE COMPANIES EARNING ABNORMAL PROFITS AS COMPARABLE TO TESTED PARTY AS LONG AS THEY ARE FUNCTIONALLY COMPA RABLE. IT WAS HELD THAT THIS QUESTION MAY NOT ARISE AT ALL IN THE CONT EXT OF OECD GUIDELINES AND US TP REGULATIONS AS THEY ADVOCATE A QUARTILE M ETHOD FOR DETERMINING ALP WHEREBY THE EXTREME RESULTS GET AUT OMATICALLY EXCLUDED. IT WAS ALSO HELD THAT THE INDIAN REGULATIONS, HOWEV ER, DEVIATE FROM OECD GUIDELINES AND PROVIDE ARITHMETIC MEAN METHOD FOR D ETERMINING ALP WHEREBY ALL COMPANIES THAT ARE IN THE SAMPLE ARE CO NSIDERED WITHOUT EXCEPTION AND THE AVERAGE OF ALL THE COMPANIES IS C ONSIDERED AS ALP. IT WAS HELD THAT THE ENTITY SHOWING EXTREME RESULTS, H OWEVER, CAN BE EXCLUDED FOR COMPARABILITY IF IT IS FOUND THERE ARE SPECIFIC OR SPECIAL REASON FOR SUCH EXTREME RESULTS. IN THE CASE OF ST REAM INTERNATIONAL SERVICES PVT. LTD., (SUPRA) IT WAS HELD BY THE MUMB AI BENCH OF ITAT THAT COMPARABILITY IS JUDGED PRIMARILY BY SEEING THE FUN CTIONAL SIMILARITY AND THEN THE CAPITAL EMPLOYED AND RISKS UNDERTAKEN. HIG HER OR LOWER PROFIT RATE IS NOT AND CAN NEVER BE A RELEVANT CRITERIA TO JUDGE THE COMPARABILITY. SHRI AJEET KUMAR JAIN CONTENDED THAT THE FILTERS ARE THE MEANS TO ACHIEVE THE END RESULTS OF COMPARABLES IN ORDER TO DETERMINE THE ALP ON THE BASIS OF MARGIN. HE CONTENDED THAT THE MARGIN THEREFORE 84 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED CANNOT BE CONSIDERED AS FILTER AS SOUGHT TO BE CONT ENDED BY SHRI PORUS KAKA OR OTHERWISE IT WOULD AMOUNT TO TAKING END RES ULT AS MEAN. HE CONTENDED THAT THE FACTORS AFFECTING END RESULT ONL Y CAN BE TAKEN AS FILTERS. 95. AS REGARDS THE RELIANCE PLACED BY SHRI PORUS KA KA ON PARA 3.63 TO 3.66 OF THE OECD GUIDELINES DEALING WITH EXTREME RE SULTS, SHRI AJEET KUMAR JAIN POINTED OUT THAT THESE PARAS ARE PART OF SECTION A-7 OF THE OECD COMMENTARY DEALING WITH ARMS LENGTH RANGE AND IT IS SUGGESTED THAT IF SUCH RANGE INCLUDES A SIZEABLE NUMBER OF OB SERVATIONS, STATISTICAL TOOLS THAT TAKE ACCOUNT OF CENTRAL TENDENCY TO NARR OW THE RANGE (E.G. THE INTER-QUARTILE RANGE OR OTHER PERCENTILE) MIGHT HEL P TO ENHANCE RELIABILITY OF THE ANALYSIS. HE CONTENDED THAT THERE IS NO SUCH ARMS LENGTH RANGE RECOGNIZED BY TRANSFER PRICING REGULATIONS IN INDIA AND THE STATISTICAL TOOL TO TAKE ACCOUNT OF CENTRAL TENDENCY TO NARROW THE RANGE IN ORDER TO ENHANCE RELIABILITY OF THE ANALYSIS IN TP REGULATIO NS IN INDIA IS ARITHMETIC MEAN AND NOT INTER QUARTILE RANGE OR OTHER PERCENTI LE AS SUGGESTED IN THE OECD GUIDELINES. HE CONTENDED THAT PARA 3.63 TO 3.6 6 OF THE OECD GUIDELINES DEALING WITH EXTREME RESULTS IN THE CONT EXT OF THE ARMS LENGTH RANGE THUS ARE NOT RELEVANT IN THE INDIAN CONTEXT A ND THE RELIANCE OF SHRI PORUS KAKA THEREON IS CLEARLY MISPLACED. 96. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON THE ISSUE INVOLVED IN QUESTION NO. 2 REFERRED TO THIS SPECIAL BENCH RELAT ING TO EXCLUSION OF HIGH MARGIN COMPARABLES AND ALSO PERUSED THE RELEVA NT MATERIAL AVAILABLE ON RECORD. AS PER THE FIRST PROVISO TO S ECTION 92C(2) OF THE ACT, WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES. THE MEANING OF THE TERM ARIT HMETIC MEAN IS GIVEN IN THE CONCISE OXFORD DICTIONARY, AS A MEAN NUMBER OF ARITHMETIC 85 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED PROGRESSION AND RELYING ON THE SAME, SHRI PORUS KAK A HAS ARGUED THAT BY USING THE EXPRESSION ARITHMETIC MEAN IN THE ST ATUTE, THE LEGISLATURE HAS EXPECTED THE COMPARABLE FIGURES TO BE WITHIN A SPECIFIC RANGE. HE HAS CONTENDED THAT ANYTHING BEYOND THAT RANGE SHOULD NO T BE TAKEN INTO CONSIDERATION AND ANY SIGNIFICANT DIVERSION SUCH AS ABNORMAL HIGH PROFIT MARGIN SHOULD NOT BE INCLUDED IN THE LIST OF COMPAR ABLE CASES FOR THE PURPOSE OF DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION. WE FIND IT DIFFICULT TO ACCEPT THIS CONTENTION OF SHRI PORU S KAKA. THE ARITHMETIC MEAN MAY BE A MEAN NUMBER IN THE CONTEXT OF ANY ARI THMETIC PROGRESSION AS GIVEN IN THE CONCISE OXFORD DICTIONA RY. HOWEVER, IN THE CONTEXT OF MEASURING CENTRAL TENDENCY OR AVERAGES L IKE THAT OF MORE THAN ONE PRICE AS CONTEMPLATED IN THE FIRST PROVISO TO S ECTION 92C(2) OF THE ACT, IT IS TO BE TAKEN AS THE SUM OF THE VALUES OF ALL O BSERVATIONS DIVIDED BY NUMBER OF OBSERVATIONS AS RIGHTLY SUBMITTED BY THE SHRI AJEET KUMAR JAIN, THE LD. CIT (DR) RELYING ON THE TEXT BOOK ST ATISTICS FOR ECONOMICS. IT, THEREFORE, CANNOT BE SAID THAT BY USING THE TER M ARITHMETIC MEAN IN THE SAID PROVISO, THE LEGISLATURE HAS ENVISAGED EXI STENCE OF THE COMPARABLE FIGURES IN A SPECIFIC RANGE AS SOUGHT TO BE CONTENDED BY SHRI PORUS KAKA. ON THE OTHER HAND, THE ARITHMETIC MEAN IS A COMMONLY USED MEASURE OF CENTRAL TENDENCY AFTER TAKING INTO CONSI DERATION THE SUM OF THE VALUES OF ALL OBSERVATIONS AND THEN DIVIDED BY THE NUMBER OF OBSERVATIONS. AT THE TIME OF HEARING BEFORE US, SHR I AJEET KUMAR JAIN HAS FURNISHED HYPOTHETICAL WORKING OF ARITHMETIC MEAN O F PROFIT MARGINS OF FIFTEEN COMPARABLES TO SHOW THAT EVEN THE EXTREME V ALUES DO NOT AFFECT THE ARITHMETIC MEAN MATERIALLY OR SUBSTANTIALLY. WE ALSO FIND FROM THE FINAL WORKING OF ARITHMETIC MEAN OF PROFIT MARGINS OF TEN COMPARABLES MADE BY THE A.O./TPO IN ASSESSEES OWN CASE THAT OU T OF THESE TEN CASES, THREE CASES WERE OF LOW PROFIT WITH 2.99%, 7.70% AN D 8.90% OF PROFIT MARGIN AND TWO WERE OF HIGH PROFIT MARGIN OF 83.31% & 63.06% WHILE THE REMAINING FIVE WERE IN THE RANGE OF 15 TO 35% AND T HEIR AVERAGE PROFIT 86 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED MARGIN BY CALCULATING THE ARITHMETIC MEAN WAS 28.04 %. THIS WORKING MADE IN ASSESSEES OWN CASE THUS CLEARLY SHOWS THAT THE EXTREME VALUES IN BOTH THE END OF SPECTRUM DO NOT MATERIALLY AFFEC T THE ARITHMETIC MEAN AND SUCH EXTREME VALUES ARE TAKEN CARE OF WHEN THE ARITHMETIC MEAN IS USED AS THE MEASURE OF CENTRAL TENDENCY. 97. AT THE TIME OF HEARING BEFORE US, BOTH THE SIDE S HAVE CITED SEVERAL DECISIONS OF THE TRIBUNAL IN SUPPORT OF THEIR CORRE SPONDING STAND TAKEN ON THIS ISSUE. AFTER GOING THROUGH ALL THESE DECISI ONS OF THE DIVISION BENCHES OF THIS TRIBUNAL, WE FIND THAT THE ISSUE RE LATING TO EXCLUSION OF HIGH PROFIT MARGIN ENTITIES FROM COMPARABLES HAS BE EN DECIDED IN FAVOUR OF THE ASSESSEE IN THE CASES CITED BY SHRI PORUS KA KA WITHOUT TAKING INTO CONSIDERATION SOME VITAL ASPECTS INCLUDING THE RELE VANT TP REGULATIONS IN INDIA. IT IS OBSERVED THAT THE DECISION INITIALLY T AKEN IN ONE CASE WITHOUT MUCH MEANINGFUL DISCUSSION HAS BEEN INVARIABLY FOLL OWED BY THE TRIBUNAL IN OTHER CASES DECIDED THEREAFTER. ON THE OTHER HAND, IT IS OBSERVED THAT THE TRIBUNAL, IN SOME OF THE CASES CI TED BY SHRI AJEET KUMAR JAIN, THE LD. CIT DR, HAS PASSED WELL DISCUSS ED AND WELL REASONED ORDERS AFTER TAKING INTO CONSIDERATION NOT ONLY THE RELEVANT TP REGULATIONS IN INDIA BUT EVEN THE RELEVANT OECD GUI DELINES. FOR INSTANCE, IN THE CASE OF BP INDIA SERVICES PRIVATE LIMITED (SUPRA), IT WAS HELD BY THE MUMBAI BENCH THAT THE VERY RATIONALE OF HAVING AVERAGE IN CASE OF MORE THAN ONE COMPARABLES IS TO IRON OUT TH E EFFECT OF EXTREME CASES AND FIND THE PROFIT MARGIN AS A REPRESENTATIV E OF THE WHOLE LOT. IT WAS ALSO HELD BY THE TRIBUNAL THAT THE HIGHER OR LO WER PROFIT RATE HAS NOT BEEN PRESCRIBED AS THE DETERMINATIVE FACTOR IN THE RELEVANT RULES I.E. RULE 10B(2) AND 10B(3) TO MAKE A CASE INCOMPARABLE. THE TRIBUNAL OBSERVED THAT THE PROFIT RATE IN ANY CASE CANNOT BE SUCH DET ERMINATIVE FACTOR IN ITSELF AS IT IS A CONSEQUENCE OF THE EFFECT OF THE VARIOUS FACTORS. IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (SUPRA), THE BANGALO RE BENCH OF THIS 87 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED TRIBUNAL CONSIDERED THE RELEVANT OECD GUIDELINES IN THIS RESPECT AND HELD THAT THE EXCLUSION OF COMPANIES WITH ABNORMAL PROFITS FROM THE COMPARABLES MAY BE IN LINE WITH THE PRINCIPLES ENUM ERATED IN THE OECD GUIDELINES, BUT THE SAME CANNOT BE SAID TO BE IN TU NE WITH THE INDIAN TP REGULATIONS. THE TRIBUNAL NOTED THAT THERE WAS A D EVIATION IN THE TP RULES SPECIFICALLY FROM OECD GUIDELINES BY SPECIFYI NG THE ARITHMETIC MEAN FOR DETERMINING THE ALP AS AGAINST THE QUARTIL E METHOD SUGGESTED IN THE OECD GUIDELINES WHICH EXCLUDES THE COMPANIES THAT FALL IN THE EXTREME QUARTILES FOR COMPARABILITY. TO THE SIMILAR EFFECT IS ANOTHER DECISION OF BANGALORE BENCH IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA LTD. (SUPRA) WHEREIN IT WAS HELD THAT THE TP REGULATIONS PROVIDE ARITHMETIC MEAN METHOD FOR DETERMINING THE ALP WHER EIN ALL COMPANIES THAT ARE IN THE SAMPLE ARE CONSIDERED WITHOUT EXCEP TION AND THE AVERAGE OF ALL THE COMPANIES IS CONSIDERED AS ALP. IN THE CASE OF STREAM INTERNATIONAL SERVICES PVT. LTD.(SUPRA), THE MUMBAI BENCH OF ITAT HELD THAT COMPARABILITY IS JUDGED PRIMARILY BY SEEING TH E FUNCTIONAL SIMILARITY AND THEN THE CAPITAL EMPLOYED AND RISKS UNDERTAKEN BUT THE HIGHER OR LOWER PROFIT RATE IS NOT AND CAN NEVER BE A RELEVAN T CRITERIA TO JUDGE THE COMPARABILITY. 98. AS NOTED BY THE DIVISION BENCHES OF THE TRIBUNA L IN THE CASES DISCUSSED ABOVE, THE OECD GUIDELINES SUGGEST QUARTI LE METHOD WHICH EXCLUDES THE COMPANIES THAT FALL IN THE EXTREME QUA RTILES FOR COMPARABILITY AND THERE IS DEVIATION IN THIS RESPEC T IN T.P. REGULATIONS IN INDIA WHICH SPECIFY THE ARITHMETIC MEAN FOR DETERMI NING THE ALP. NEVERTHLESS, THE OECD TP GUIDELINES HAVE CONSIDERED AND DEALT WITH THE SITUATION OF EXTREME RESULTS IN THE CONTEXT OF COMP ARABILITY CONSIDERATION IN SECTION A.7.3 OF CHAPTER III AND IT IS 88 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED ++++++ SUGGESTED IN PARA 2.63 THAT WHERE ONE OR MOR E OF POTENTIAL COMPARABLES HAVE EXTREME RESULTS CONSISTING LOSS OR UNUSUAL HIGH PROFITS, FURTHER EXAMINATION WOULD BE NEEDED TO UND ERSTAND THE REASONS FOR EXTREME RESULTS. AFTER TAKING INTO CONSIDERATIO N THIS GUIDANCE PROVIDED IN OECD TRANSFER PRICING GUIDELINES AND ON ANALYZING THE DECISIONS RENDERED BY THE DIVISION BENCHES OF THIS TRIBUNAL ON THIS ISSUE AFTER TAKING INTO CONSIDERATION INTER ALIA THE T.P. REGULATIONS IN INDIA AS DISCUSSED ABOVE, WE ARE OF THE VIEW THAT THE POTENT IAL COMPARABLES CANNOT BE EXCLUDED MERELY ON THE GROUND THAT THEIR PROFIT IS ABNORMALLY HIGH. IN OUR OPINION, THE MATTER IN SUCH CASE WOUL D REQUIRE FURTHER INVESTIGATION TO ASCERTAIN THE REASONS FOR UNUSUAL HIGH PROFIT AND IN ORDER TO ESTABLISH WHETHER THE ENTITIES WITH SUCH H IGH PROFIT CAN BE TAKEN AS COMPARABLES OR NOT. 99. THE QUESTION NO. 2 REFERRED TO THIS SPECIAL BEN CH IS AS TO WHETHER, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, COMPANI ES EARNING ABNORMALLY HIGH PROFIT MARGIN SHOULD BE INCLUDED IN THE LIST OF COMPARABLE CASES FOR THE PURPOSE OF DETERMINING ARM S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. AS ALREADY OBSERVED, THE ISSUE INVOLVED IN THIS QUESTION HAS BECOME INFRUCTUOUS IN SO FAR AS THE CA SE OF THE ASSESSEE BEFORE THE SPECIAL BENCH IS CONCERNED AND THE SAME THEREFORE NO MORE SURVIVES FOR CONSIDERATION IN THE PRESENT CASE. IN GENERALITY, WE ARE OF THE VIEW THAT THE ANSWER TO THIS QUESTION WILL DEPEND O N THE FACTS AND CIRCUMSTANCES OF EACH CASE INASMUCH AS POTENTIAL CO MPARABLE EARNING ABNORMALLY HIGH PROFIT MARGIN SHOULD TRIGGER FURTHE R INVESTIGATION IN ORDER TO ESTABLISH WHETHER IT CAN BE TAKEN AS COMPA RABLE OR NOT. SUCH INVESTIGATION SHOULD BE TO ASCERTAIN AS TO WHETHER EARNING OF HIGH PROFIT 89 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED REFLECTS A NORMAL BUSINESS CONDITION OR WHETHER IT IS THE RESULT OF SOME ABNORMAL CONDITIONS PREVAILING IN THE RELEVANT YEAR . THE PROFIT MARGIN EARNED BY SUCH ENTITY IN THE IMMEDIATELY PRECEDING YEAR/S MAY ALSO BE TAKEN INTO CONSIDERATION TO FIND OUT WHETHER THE HI GH PROFIT MARGIN REPRESENTS THE NORMAL BUSINESS TREND. THE FAR ANAL YSIS IN SUCH CASE MAY BE REVIEWED TO ENSURE THAT THE POTENTIAL COMPAR ABLE EARNING HIGH PROFIT SATISFIES THE COMPARABILITY CONDITIONS. IF I T IS FOUND ON SUCH INVESTIGATION THAT THE HIGH MARGIN PROFIT MAKING CO MPANY DOES NOT SATISFY THE COMPARABILITY ANALYSIS AND OR THE HIGH PROFIT MARGIN EARNED BY IT DOES NOT REFLECT THE NORMAL BUSINESS CONDITIO N, WE ARE OF THE VIEW THAT THE HIGH PROFIT MARGIN MAKING ENTITY SHOULD NO T BE INCLUDED IN THE LIST OF COMPARABLE FOR THE PURPOSE OF DETERMINING T HE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. OTHERWISE, THE ENT ITY SATISFYING THE COMPARABILITY ANALYSIS WITH ITS HIGH PROFIT MARGIN REFLECTING NORMAL BUSINESS CONDITION SHOULD NOT BE REJECTED SOLELY ON THE BASIS OF SUCH ABNORMAL HIGH PROFIT MARGIN. QUESTION NO. 2 REFERRE D TO THIS SPECIAL BENCH IS ANSWERED ACCORDINGLY 100. AS REGARDS THE ISSUE RAISED IN GROUND NO. 9 RE LATING TO THE ASSESSEES CLAIM FOR CREDIT OF RS. 6,12,400/- ON AC COUNT OF TDS CREDIT, SHRI PORUS KAKA HAS SOUGHT ONLY A DIRECTION TO THE A.O. TO VERIFY THE CLAIM OF THE ASSESSEE ON THIS ISSUE AND ALLOW THE C REDIT FOR TDS ON SUCH VERIFICATION. SINCE SHRI AJEET KUMAR JAIN, THE LD. CIT(DR) HAS ALSO NOT RAISED ANY OBJECTION IN THIS REGARD, WE RESTORE THI S ISSUE TO THE FILE OF THE A.O. WITH A DIRECTION TO ALLOW THE CLAIM OF THE ASS ESSEE FOR TDS CREDIT AFTER NECESSARY VERIFICATION. 101. THE ISSUE RAISED IN GROUND NO. 10 RELATING TO INITIATION OF PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT IS PRE-MATURED REQUIRING NO DECISION FROM US AT THIS STAGE. GROUND NO. 10 IS ACCORDINGLY DISMISSED. 90 ITA NO.7466/M/12(SPECIAL BENCH) MAERSK GLOBAL SERV ICE CENTRES (INDIA)PRIVATE LIMITED 102. THE ISSUE RAISED IN GROUND NO. 11 RELATING TO INTEREST CHARGED U/S 234B IS CONSEQUENTIAL IN NATURE AND THE A.O. IS ACC ORDINGLY DIRECTED TO ALLOW CONSEQUENTIAL RELIEF TO THE ASSESSEE ON THIS ISSUE. 103. BEFORE PARTING, WE MAY CLARIFY THAT THE VARIOU S DECISIONS OF THE TRIBUNAL REFERRED TO BY THE LD. REPRESENTATIVES OF BOTH THE SIDES DURING THE COURSE OF THEIR ARGUMENTS HAVE BEEN CONSIDERED AND DELIBERATED UPON BY US WHILE ARRIVING AT OUR CONCLUSIONS. ALL O F THEM, HOWEVER, ARE NOT SPECIFICALLY MENTIONED OR DISCUSSED IN THE ORDE R FOR THE REASON THAT THIS SPECIAL BENCH HAS BEEN CONSTITUTED TO RESOLVE THE CONTROVERSY ARISING FROM THE DIFFERENT/CONTRARY VIEWS EXPRESSED THEREIN ON THE ISSUES WHICH HAVE BEEN REFERRED TO THIS SPECIAL BENCH. WE TAKE THIS OPPORTUNITY TO PLACE ON RECORD OUR APPRECIATION FOR THE ASSISTA NCE PROVIDED BY THE LD. REPRESENTATIVES OF BOTH THE SIDES BY MAKING ELABORA TE SUBMISSIONS WHICH HELPED US TO ANALYSE THE LEGAL POSITION EMANA TING FROM THE INTERPRETATION OF THE RELEVANT PROVISIONS OF THE DO MESTIC LAW AS WELL AS THE RELEVANT OECD TRANSFER PRICING GUIDELINES AND A PPLY THE SAME TO DECIDE THE ISSUES REFERRED TO THIS SPECIAL BENCH. 104. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 07.03.2014. ) / 0 07.03.2014 ) SD/- SD/- SD/- (D. MANMOHAN) (B.R. MITAL) (P.M. JAGTAP) VICE PRESIDENT JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; 0 DATED . . ./ RK , SR. 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