SNL Financial (I) Pvt. Ltd., Ahmedabad V. The Dy. CIT, Circle-8, Ahmedabad

ITA 770/AHD/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1597 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 09-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 14-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAGDISH
• Assessee Lawyers: S N SOPARKAR
• Keywords: Business income; Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3); 10B

Judgement Text

, B IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER ./ ITA.NO.770/AHD/2014 / ASSTT. YEAR: 2009-2010 SNL FINANCIAL (INDIA) PVT.LTD. SNL HOUSE, 5, SUNRISE PART SOCIETY NR.HNDA, ACTIVA SHOW ROOM DRIVE-IN-ROAD AHMEDABAD. VS DCIT, CIR.8 AHMEDABAD. ./ ITA.NO.1082/AHD/2014 / ASSTT. YEAR: 2009-2010 DCIT, CIR.8 AHMEDABAD. VS. SNL FINANCIAL (INDIA) PVT.LTD. SNL HOUSE, 5, SUNRISE PART SOCIETY NR.HNDA, ACTIVA SHOW ROOM DRIVE-IN-ROAD AHMEDABAD. ! / (APPELLANT) '# ! / (RESPONDENT) ASSESSEE BY : SHRI S.N. SOPARKAR, AND SHRI PARIN SHAH REVENUE BY : SHRI JAGDISH, CIT - DR / DATE OF HEARING : 09/03/2016 / DATE OF PRONOUNCEMENT: 18/05/2016 $%/ O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: THE ASSESSEE AND REVENUE ARE IN CROSS-APPEALS AGAIN ST THE ORDER PASSED BY THE AO UNDER SECTION 143(3) R.W.S. 144C(13) OF T HE INCOME TAX ACT, 1961 DATED 17.2.2014 FOR THE ASSTT.YEAR 2008-09. FIRST WE TAKE UP THE APPEAL OF THE ASSESSEE. ITA NO.770 AND 1082/AHD/2014 2 2. THOUGH THE ASSESSEE HAS TAKEN SIX GROUNDS ALONG WITH THEIR SUB- GROUNDS, BUT AT THE TIME OF HEARING, LD.REPRESENTAT IVE FOR THE ASSESSEE BASICALLY CONFINED THEIR ARGUMENTS TO ONE ISSUE FOR DETERMINA TION WHETHER THE ASSESSEE HAS TO BE CATEGORIZED AS A KNOWLEDGE PROCESS OUTSOU RCING SERVICES PROVIDER (KPO) OR BPO SERVICE PROVIDER. IF IT IS TREATED AS A BPO, THEN COMPARABLES CONSIDERED FOR DETERMINING THE ARMS LENGTH PRICE ( ALP) OF INTERNATIONAL TRANSACTION WOULD NOT BE RELEVANT COMPARABLE, AND T HEN EXERCISE HAS TO BE CARRIED OUT AFRESH AT THE LEVEL OF AO/TPO. THEREFO RE, FIRST WE TAKE UP THIS ISSUE. 3. BRIEF FACTS OF THE CASE ARE THAT THE SNL INDIA W AS INCORPORATED ON 24.9.2004. IT IS A WHOLLY OWNED SUBSIDIARY OF SNL US. THE COMPANY IS INVOLVED IN GATHERING, COLLATING, ORGANIZING, ARRAN GING, STORING AND TRANSMITTING ALL TYPES OF FINANCIAL INFORMATION IN WRITTEN, ELECTRONIC OR ANY OTHER MEDIUM THROUGH DATABASE, WEB APPLICATIONS AND ANALYTICAL MODELS AND TO ACT AS CONSULTANT, COUNSELORS ON ALL MATTERS REL ATING TO FINANCE, TRADE AND INDUSTRY. IT HAS FILED ITS RETURN OF INCOME ON 2.9 .2009 DECLARING TOTAL INCOME AT RS.26,252/-. THE LD.AO HAS NOTICED THAT THE ASS ESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATE ENTERP RISE, AND THEREFORE, ALP OF THAT TRANSACTION HAS TO BE DETERMINED. A REFERENCE UNDER SECTION 92CA(1) OF THE ACT WAS MADE BY THE AO TO THE TPO VIDE LETTER NO.ACIT(OSD)/CIR.8/TP/SNLFIPL/2011-12 DATED 16.8.20 11. THE DETAILS OF THE INTERNATIONAL TRANSACTION WITH THE AE ARE AS UN DER: NATURE OF SERVICES ASSOCIATE ENTERPRISE (AE) AMOUNT (RS.)` DATA ANALYSIS AND DATA ENTRY SNL FINANCIAL LC, ONE SNL PLAZA, CHARLOTTESVILLE VA 22902, USA 13,08,92,011 ITA NO.770 AND 1082/AHD/2014 3 THE LD.TPO HAS PASSED AN ORDER ON 28.1.2013. HE RE COMMENDED AN UPWARD ADJUSTMENT OF RS.3,36,21,812/- IN THE VALUE OF INTERNATIONAL TRANSACTION. THE OBJECTION FILED BY THE ASSESSEE W ITH DRP DID NOT BRING ANY RELIEF TO THE ASSESSEE. 4. THE LD.COUNSEL FOR THE ASSESSEE, WHILE IMPUGNING THE ORDER OF THE AO PASSED UNDER SECTION 143(3) R.W. 144C(13) OF THE IN COME TAX ACT CONTENDED THAT AGREEMENT FOR PROVIDING THE SERVICES TO AE WAS EXECUTED ON 1/10/2004 AND IT WAS VALID UPTO 30.12.2012. COPY OF THE INTE R-COMPANY AGREEMENT IS FILED AT PAGE NO.64 OF THE PAPER BOOK. HE TOOK THR OUGH THE CLAUSE (3) OF THE AGREEMENT ON PAGE NO.65. IT READS AS UNDER: 3. AGREEMENT TERM: CONTRACTOR SHALL PROVIDE SERV ICES TO THE COMPANY PURSUANT TO THIS AGREEMENT FOR A TERM BEGIN NING ON 1WST OCTOBER, 2004 AND ENDING ON DECEMBER 30 TH , 2012 (THE AGREEMENT TERM). THE TERM OF AGREEMENT MAY BE EXTENDED IF R EQUIRED IN FUTURE ON MUTUAL AGREEMENT BETWEEN THE PARTIES. 5. HE FURTHER CONTENDED THAT ONE NOTIFICATION NO.SO 2810(E) DATED 18.9.2012 ISSUED BY THE CBDT HAS NOTIFIED SAFE HARB OUR RULES. THE ASSESSEE HAD EXERCISED AN OPTION AS PER RULE 10TD(1)(2) OF T HE INCOME TAX RULES AND SUBMITTED FORM NO.3CEFA WHICH WAS REFERRED TO THE T PO BY THE AO UNDER SECTION 92CB(2) R.W.S. RULES 10TE(4) VIDE LETTER DA TED 30.12.2013. THE LD.TPO HAD ISSUED NOTICE TO THE ASSESSEE. BY VIRTU E OF THOSE OPTION ASSESSEE HAS EXERCISED ITS DISCRETION TO COVER ITSELF UNDER SAFE HARBOUR RULES. THE APPLICATION OF THE ASSESSEE REFERRED BY THE ITO TO THE TPO WAS EXAMINED BY THE TPO AND DECIDED VIDE ORDER DATED 26.2.2014. TH E LD.TPO HAS CONSIDERED THE ASSESSEE AS A LOW- END SERVICE PROVIDER I.E. BP O. COPY OF THIS ORDER HAS BEEN PLACED AT PAGE NO.228 OF THE PAPER BOOK. THE LD.COUNSEL FOR THE ASSESSEE ON THE STRENGTH OF THIS ORDER COUPLED WITH THE JUDG MENT OF HONBLE DELHI HIGH ITA NO.770 AND 1082/AHD/2014 4 COURT IN THE CASE OF RAMPGREEN SOLUTIONS P. LTD. CI T, IN ITA NO.102/2015 ORDER DATED 10.8.2015, COPY OF THIS ORDER IS PLACED ON RECORD, CONTENDED THAT IF ON EXAMINATION OF THE ASSESSEES ACTIVITY, IT IS HELD THAT THE ASSESSEE IS A BPO, THEN, THE COMPARABLE APPLICABLE ON KPO CANNOT BE RELEVANT COMPARABLES FOR DETERMINING THE PROFIT LEVEL INDICA TOR REQUIRED TO BE APPLIED ON THE INTERNATIONAL TRANSACTION OF THE ASSESSEE. HE SUBMITTED IN VIEW OF THE ABOVE DEVELOPMENT, THE IMPUGNED ORDER DESERVES TO B E SET ASIDE AND THE ISSUE DESERVES TO BE REMITTED BACK TO THE FILE OF THE AO FOR RE-ADJUDICATION. 6. ON OTHER HAND, THE LD.CIT-DR, FILED WRITTEN SUBM ISSIONS AND CONTENTED THAT THIS PLEA WAS RAISED BEFORE THE DRP, BUT THE D RP HAS REJECTED THIS PLEA ON THE GROUND THAT THE ASSESSEE HAS CATEGORISED ITSELF AS KPO. THEREFORE, IN THIS YEAR, IT CANNOT BE PLEADED THAT IT BE TREATED AS BP O. HE PLACED RELIANCE ON THE ORDERS OF THE TPO AS WELL AS DRP ON THIS ISSUE. 7. WE HAVE CONSIDERED RIVAL CONTENTIONS AND GONE TH ROUGH THE RECORD CAREFULLY. THE HONBLE DELHI HIGH COURT HAS PROPOU NDED THE DISTINCTION BETWEEN KPO AND BPO. THE HONBLE HIGH COURT HAS CO NSIDERED THE DEFINITION/ SCOPE OF MEANING OF KPO OR BPO PROVIDED IN SAFE HARBOUR RULES. THE KPO SERVICES ARE UNDERSTOOD AS THE HIGH-END IT SOLUTIONS IN TERMS OF VALUE ADDITION, WHEREAS, THE BPO IS A LOW-END SERVI CE PROVIDER. ANALYSIS MADE BY THE HONBLE HIGH COURT IS WORTH TO NOTE. I T READS AS UNDER: 34. WE HAVE RESERVATIONS AS TO THE TRIBUNALS AFOR ESAID VIEW IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA). AS INDICATED ABOVE, THE EXPRESSION BPO AND KPO ARE, PLAINLY, UNDERS TOOD IN THE SENSE THAT WHEREAS, BPO DOES NOT NECESSARILY INVOLVE ADVA NCED SKILLS AND KNOWLEDGE; KPO, ON THE OTHER HAND, WOULD INVOLVE EM PLOYMENT OF ADVANCED SKILLS AND KNOWLEDGE FOR PROVIDING SERVICE S. THUS, THE EXPRESSION KPO IN COMMON PARLANCE IS USED TO INDI CATE AN ITES PROVIDER PROVIDING A COMPLETELY DIFFERENT NATURE OF SERVICE THAN ANY OTHER BPO SERVICE PROVIDER. A KPO SERVICE PROVIDER WOULD ALSO BE FUNCTIONALLY DIFFERENT FROM OTHER BPO SERVICE PROVI DERS, INASMUCH AS ITA NO.770 AND 1082/AHD/2014 5 THE RESPONSIBILITIES UNDERTAKEN, THE ACTIVITIES PER FORMED, THE QUALITY OF RESOURCES EMPLOYED WOULD BE MATERIALLY DIFFERENT. I N THE CIRCUMSTANCES, WE ARE UNABLE TO AGREE THAT BROADLY ITES SECTOR CAN BE USED FOR SELECTING COMPARABLES WITHOUT MAKING A CON SCIOUS SELECTION AS TO THE QUALITY AND NATURE OF THE CONTENT OF SERVICE S. RULE 10B(2)(A) OF THE INCOME TAX RULES, 1962 MANDATES THAT THE COMPAR ABILITY OF CONTROLLED AND UNCONTROLLED TRANSACTIONS BE JUDGED WITH REFERENCE TO SERVICE/PRODUCT CHARACTERISTICS. THIS FACTOR CANNOT BE UNDERMINED BY USING A BROAD CLASSIFICATION OF ITES WHICH TAKES WI THIN ITS FOLD VARIOUS TYPES OF SERVICES WITH COMPLETELY DIFFERENT CONTENT AND VALUE. THUS, WHERE THE TESTED PARTY IS NOT A KPO SERVICE PROVIDE R, AN ENTITY RENDERING KPO SERVICES CANNOT BE CONSIDERED AS A CO MPARABLE FOR THE PURPOSES OF TRANSFER PRICING ANALYSIS. THE PERCEPTI ON THAT A BPO SERVICE PROVIDER MAY HAVE THE ABILITY TO MOVE UP TH E VALUE CHAIN BY OFFERING KPO SERVICES CANNOT BE A GROUND FOR ASSESS ING THE TRANSACTIONS RELATING TO SERVICES RENDERED BY THE B PO SERVICE PROVIDER BY BENCHMARKING IT WITH THE TRANSACTIONS OF KPO SER VICES PROVIDERS. THE OBJECT IS TO ASCERTAIN THE ALP OF THE SERVICE R ENDERED AND NOT OF A SERVICE (HIGHER IN VALUE CHAIN) THAT MAY POSSIBLY B E RENDERED SUBSEQUENTLY. 35. AS POINTED OUT BY THE SPECIAL BENCH OF THE TRIB UNAL IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA), THERE MAY BE CASES WHERE AN ENTITY MAY BE RENDERING A MIX OF SERVICES SOME OF W HICH MAY BE FUNCTIONALLY COMPARABLE TO A KPO WHILE OTHER SERVIC ES MAY NOT. IN SUCH CASES A CLASSIFICATION OF BPO AND KPO MAY NOT BE FEASIBLE. CLEARLY, NO STRAITJACKET FORMULA CAN BE APPLIED. IN CASES WHERE THE CATEGORIZATION OF SERVICES RENDERED CANNOT BE DEFIN ED WITH CERTAINTY, IT WOULD BE APPOSITE TO EMPLOY THE BROAD FUNCTIONALITY TEST AND THEN EXCLUDE UNCONTROLLED ENTITIES, WHICH ARE FOUND TO B E MATERIALLY DISSIMILAR IN ASPECTS AND FEATURES THAT HAVE A BEAR ING ON THE PROFITABILITY OF THOSE ENTITIES. HOWEVER, WHERE THE CONTROLLED TRANSACTIONS ARE CLEARLY IN THE NATURE OF LOWER-END ITES SUCH AS CALL CENTERS ETC. FOR RENDERING DATA PROCESSING NOT INVO LVING DOMAIN KNOWLEDGE, INCLUSION OF ANY KPO SERVICE PROVIDER AS A COMPARABLE WOULD NOT BE WARRANTED AND THE TRANSFER PRICING STU DY MUST TAKE THAT INTO ACCOUNT AT THE THRESHOLD. 36. AS POINTED OUT EARLIER, THE TRANSFER PRICING AN ALYSIS MUST SERVE THE BROAD OBJECT OF BENCHMARKING AN INTERNATIONAL TRANS ACTION FOR DETERMINING AN ALP. THE METHODOLOGY NECESSITATES TH AT THE COMPARABLES MUST BE SIMILAR IN MATERIAL ASPECTS. TH E COMPARABILITY MUST BE JUDGED ON FACTORS SUCH AS PRODUCT/SERVICE C HARACTERISTICS, ITA NO.770 AND 1082/AHD/2014 6 FUNCTIONS UNDERTAKEN, ASSETS USED, RISKS ASSUMED. T HIS IS ESSENTIAL TO ENSURE THE EFFICACY OF THE EXERCISE. THERE IS SUFFI CIENT FLEXIBILITY AVAILABLE WITHIN THE STATUTORY FRAMEWORK TO ENSURE A FAIR ALP. 37. APPLYING THE AFORESAID PRINCIPLES TO THE FACTS OF THE PRESENT CASE, IT IS ONCE AGAIN CLEAR THAT BOTH VISHAL AND ECLERX COU LD NOT BE TAKEN AS COMPARABLES FOR DETERMINING THE ALP. VISHAL AND ECL ERX, BOTH ARE INTO KPO SERVICES. IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA), THE SPECIAL BENCH OF THE TRIBUNAL HAD NOTED THAT ECLERX IS ENGAGED IN DATA ANALYTICS, DATA PROCESSING SERVICES, PRICING ANALYT ICS, BUNDLING OPTIMIZATION, CONTENT OPERATION, SALES AND MARKETIN G SUPPORT, PRODUCT DATA MANAGEMENT, REVENUE MANAGEMENT. IN ADDITION, E CLERX ALSO OFFERED FINANCIAL SERVICES SUCH AS REAL-TIME CAPITA L MARKETS, MIDDLE AND BACK-OFFICE SUPPORT, PORTFOLIO RISK MANAGEMENT SERV ICES AND VARIOUS CRITICAL DATA MANAGEMENT SERVICES. CLEARLY, THE AFO RESAID SERVICES ARE NOT COMPARABLE WITH THE SERVICES RENDERED BY THE AS SESSEE. FURTHER, THE FUNCTIONS UNDERTAKEN (I.E. THE ACTIVITIES PERFO RMED) ARE ALSO NOT COMPARABLE WITH THE ASSESSEE. IN OUR VIEW, THE TRIB UNAL ERRED IN HOLDING THAT THE FUNCTIONS PERFORMED BY THE ASSESSE E WERE BROADLY SIMILAR TO THAT OF ECLERX OR VISHAL. THE OPERATING MARGIN OF ECLERX, THUS, COULD NOT BE INCLUDED TO ARRIVE AT AN ALP OF CONTROLLED TRANSACTIONS, WHICH WERE MATERIALLY DIFFERENT IN IT S CONTENT AND VALUE. IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA), THE SPECIAL BENCH OF THE TRIBUNAL HAD NOTED THE SAME AND HAD, THUS, E XCLUDED ECLERX AS A COMPARABLE. IT IS FURTHER OBSERVED THAT THE COMPARA BILITY OF ECLERX HAD ALSO BEEN EXAMINED BY THE HYDERABAD BENCH OF THE TR IBUNAL IN M/S CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P.) LTD. V. ADDITIONAL COMMISSIONER OF INCOME-TAX (SUPRA), WHEREIN, THE TR IBUNAL DIRECTED THE EXCLUSION OF ECLERX AS A COMPARABLE FOR THE REA SON THAT IT WAS ENGAGED IN PROVIDING KPO SERVICES AND FURTHER THAT IT HAD ALSO RETURNED SUPERNORMAL PROFITS. 38. IN OUR VIEW, EVEN VISHAL COULD NOT BE CONSIDERE D AS A COMPARABLE, AS ADMITTEDLY, ITS BUSINESS MODEL WAS COMPLETELY DI FFERENT. ADMITTEDLY, VISHALS EXPENDITURE ON EMPLOYMENT COST DURING THE RELEVANT PERIOD WAS A SMALL FRACTION OF THE PROPORTIONATE COST INCU RRED BY THE ASSESSEE, APPARENTLY, FOR THE REASON THAT MOST OF ITS WORK WA S OUTSOURCED TO OTHER VENDORS/SERVICE PROVIDERS. THE DRP AND THE TRIBUNAL ERRED IN BRUSHING ASIDE THIS VITAL DIFFERENCE BY OBSERVING THAT OUTSO URCING WAS COMMON IN ITES INDUSTRY AND THE SAME WOULD NOT HAVE A BEARING ON PROFITABILITY. PLAINLY, A BUSINESS MODEL WHERE SERVICES ARE RENDER ED BY EMPLOYING OWN EMPLOYEES AND USING ONES OWN INFRASTRUCTURE WO ULD HAVE A DIFFERENT COST STRUCTURE AS COMPARED TO A BUSINESS MODEL WHERE SERVICES ITA NO.770 AND 1082/AHD/2014 7 ARE OUTSOURCED. THERE WAS NO MATERIAL FOR THE TRIBU NAL TO CONCLUDE THAT THE OUTSOURCING OF SERVICES BY VISHAL WOULD HA VE NO BEARING ON THE PROFITABILITY OF THE SAID ENTITY. 39. IT IS ALSO RELEVANT TO NOTE THAT IN THE CASE OF MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA), THE DRP ITSELF HAD ACCEP TED THE OBJECTION OF THE ASSESSEE AND HAD EXCLUDED VISHAL AS A COMPARABL E FOR THE REASON AS QUOTED BELOW:- THAT IT HAD A VERY LOW EMPLOYM ENT COST AND VERY HIGH COST ON ACCOUNT OF VENTURE PAYMENT, WHICH SUGG ESTED THAT ITS BUSINESS MODEL WAS THAT OF AN OUTSOURCING COMPANY A ND IN VIEW OF THIS FUNCTIONAL DIFFERENCE, VISHAL LTD. COULD NOT BE CON SIDERED AS A COMPARABLE. 40. THE ASSESSEE HAD ALSO SOUGHT THE E XCLUSION OF ECLERX AND VISHAL ON THE GROUND THAT BOTH THE COMPANIES HA D RETURNED SUPERNORMAL PROFITS. WHEREAS THE OPERATING MARGINS (OPERATING MARGIN OVER TOTAL COST) IN CASE OF VISHAL AND ECLERX WERE 50.68% AND 65.88% RESPECTIVELY, THE PLIS OF ALL OTHER COMPARABLES WER E IN THE RANGE OF 2.2% TO 24%. IN OUR VIEW, IT WOULD NOT BE APPOSITE TO EXCLUDE COMPARABLES ONLY FOR THE REASON THAT THEIR PROFITS ARE HIGH, AS THE SAME IS NOT PROVIDED FOR IN THE STATUTORY FRAMEWORK. THE OECD GUIDELINES SUGGEST THAT A QUARTILE METHOD BE ADOPTED WHICH EXC LUDES ENTITIES THAT FALL IN THE EXTREME QUARTILES FOR COMPARABILITY. HO WEVER, NEITHER CHAPTER X OF THE ACT NOR THE RULES MADE BY CBDT PRO VIDE FOR EXCLUSION FOR SUCH STATISTICAL REASON. 41. HAVING STATED THE SAME, IT MAY BE NECESSARY TO BEAR IN MIND THAT SUPERNORMAL PROFITS MAY IN CERTAIN CASES INDICATE A FUNCTIONAL DISSIMILARITY OR DISSIMILARITY WITH RESPECT TO A FE ATURE THAT HAS A MATERIAL BEARING ON THE PROFITABILITY. IN SUCH CIRC UMSTANCES, IT WOULD BE NECESSARY TO UNDERTAKE FURTHER ANALYSIS TO ELIMI NATE THE POSSIBILITY OF THE HIGH PROFITS RESULTING ON ACCOUNT OF ANY MAT ERIAL DISSIMILARITY BETWEEN THE TESTED PARTY AND THE CHOSEN COMPARABLE. A WIDE DEVIATION IN THE PLI AMONGST SELECTED COMPARABLES COULD BE IN DICATIVE THAT THE COMPARABLES SELECTED ARE EITHER MATERIALLY DISSIMIL AR OR THE DATA USED IS NOT RELIABLE. THE TRIBUNAL PROCEEDED ON THE BASI S THAT AN ADJUSTMENT COULD BE MADE ONLY IN CASES WHERE SUPERNORMAL PROFI TS RESULTED FROM THE FACTORS INDICATED IN RULE 10B OF THE INCOME TAX RULES, 1962. IN OUR VIEW, THE FACTORS MENTIONED IN RULE 10B ARE NOT EXH AUSTIVE. THE PRINCIPAL OBJECT OF BENCHMARKING INTERNATIONAL TRAN SACTIONS AGAINST UNCONTROLLED TRANSACTIONS IS TO IMPUTE AN ALP TO TH OSE TRANSACTIONS. THIS EXERCISE WOULD FAIL IF A FACTOR, WHICH HAS A M ATERIAL BEARING ON THE VALUE OR THE PROFITABILITY, AS THE CASE MAY BE, DEP ENDING ON THE METHOD USED, IS IGNORED. ITA NO.770 AND 1082/AHD/2014 8 42. BEFORE CONCLUDING, THERE IS YET ANOTHER ASPECT OF THE MATTER THAT NEEDS CONSIDERATION. THE TRIBUNAL PROCEEDED ON THE BASIS THAT WHILE APPLYING TNMM METHOD, BROAD FUNCTIONALITY IS SUFFIC IENT AND IT IS NOT NECESSARY THAT FURTHER EFFORT BE TAKEN TO FIND A CO MPARABLE ENTITY RENDERING SERVICES OF SIMILAR CHARACTERISTICS AS TH E TESTED ENTITY. THE DRP HELD THAT TNMM ALLOWS FLEXIBILITY AND TOLERANCE IN SELECTION OF COMPARABLES, AS FUNCTIONAL DISSIMILARITIES ARE SUBS UMED AT NET MARGIN LEVELS, AS COMPARED TO RESALE PRICE METHOD OR COMPA RABLE UNCONTROLLED PRICE METHOD AND, THEREFORE, THE FUNCT IONAL DISSIMILARITIES POINTED OUT BY THE ASSESSEE DID NOT WARRANT REJECTION OF ECLERX AND VISHAL AS COMPARABLES. 43. IN OUR VIEW, THE AFORESAID APPROACH WOULD NOT B E APPOSITE. INSOFAR AS IDENTIFYING COMPARABLE TRANSACTIONS/ENTITIES IS CONCERNED, THE SAME WOULD NOT DIFFER IRRESPECTIVE OF THE TRANSFER PRICI NG METHOD ADOPTED. IN OTHER WORDS, THE COMPARABLE TRANSACTIONS/ENTITIES M UST BE SELECTED ON THE BASIS OF SIMILARITY WITH THE CONTROLLED TRANSAC TION/ENTITY. COMPARABILITY OF CONTROLLED AND UNCONTROLLED TRANSA CTIONS HAS TO BE JUDGED, INTER ALIA, WITH REFERENCE TO COMPARABILITY FACTORS AS INDICATED UNDER RULE 10B(2) OF THE INCOME TAX RULES, 1962. CO MPARABILITY ANALYSIS BY TNMM METHOD MAY BE LESS SENSITIVE TO CE RTAIN DISSIMILARITIES BETWEEN THE TESTED PARTY AND THE CO MPARABLES. HOWEVER, THAT CANNOT BE THE CONSIDERATION FOR DILUTING THE S TANDARDS OF SELECTING COMPARABLE TRANSACTIONS/ENTITIES. A HIGHER PRODUCT AND FUNCTIONAL SIMILARITY WOULD STRENGTHEN THE EFFICACY OF THE MET HOD IN ASCERTAINING A RELIABLE ALP. THEREFORE, AS FAR AS POSSIBLE, THE CO MPARABLES MUST BE SELECTED KEEPING IN VIEW THE COMPARABILITY FACTORS AS SPECIFIED. WIDE DEVIATIONS IN PLI MUST TRIGGER FURTHER INVESTIGATIO NS/ANALYSIS. 44. CONSIDERATION FOR A TRANSACTION WOULD REFLECT T HE FUNCTIONS PERFORMED, THE SIGNIFICANT ACTIVITIES UNDERTAKEN, T HE ASSETS OR RESOURCES USED/CONSUMED, THE RISKS ASSUMED. THUS, COMPARISON OF ACTIVITIES UNDERTAKEN/FUNCTIONS PERFORMED IS IMPORTANT FOR DET ERMINING THE COMPARABILITY BETWEEN CONTROLLED AND UNCONTROLLED T RANSACTIONS/ENTITY. IT WOULD NOT BE APPOSITE TO IGNORE FUNCTIONAL DISSI MILARITY ONLY FOR THE REASON THAT ITS IMPACT MAY BE REDUCED ON ACCOUNT OF USING ARITHMETICAL MEAN OF THE PLI. THE DRP HAD NOTED THAT ECLERX WAS FUNCTIONALLY DISSIMILAR, BUT IGNORED THE SAME RELYING ON AN ASSU MPTION THAT THE FUNCTIONAL DISSIMILARITY WOULD BE SUBSUMED IN THE P ROFIT MARGIN. AS NOTED, THE CONTENT OF SERVICES PROVIDED BY THE ASSE SSEE AND THE ENTITIES IN QUESTION WERE NOT SIMILAR. IN ADDITION, THERE WE RE ALSO FUNCTIONAL DISSIMILARITIES BETWEEN THE ASSESSEE AND THE TWO EN TITIES IN QUESTION. IN OUR VIEW, THESE COMPARABILITY FACTORS COULD NOT BE IGNORED BY THE ITA NO.770 AND 1082/AHD/2014 9 TRIBUNAL. WHILE USING TNMM, THE SEARCH FOR COMPARAB LES MAY BE BROADENED BY INCLUDING COMPARABLES OFFERING SERVICE S/PRODUCTS WHICH ARE NOT ENTIRELY SIMILAR TO THE CONTROLLED TRANSACT ION/ENTITY. HOWEVER, THIS CAN BE DONE ONLY IF (A) THE FUNCTIONS PERFORME D BY THE TESTED PARTY AND THE SELECTED COMPARABLE ENTITY ARE SIMILAR INCL UDING THE ASSETS USED AND THE RISKS ASSUMED; AND (B) THE DIFFERENCE IN SERVICES/PRODUCTS OFFERED HAS NO MATERIAL BEARING ON THE PROFITABILIT Y. 45. IN VIEW OF THE AFORESAID, THE QUESTIONS OF LAW FRAMED BY AN ORDER DATED 27TH FEBRUARY, 2015 ARE ANSWERED IN THE AFFIR MATIVE AND AGAINST THE REVENUE. THE IMPUGNED ORDER DATED 22ND MARCH, 2 013 OF THE TRIBUNAL AND THE FINAL ASSESSMENT ORDER DATED 9TH O CTOBER, 2012 ARE HEREBY SET ASIDE. THE APPEAL IS ALLOWED. 8. AT THIS STAGE, IT IS PERTINENT TO NOTE TPOS ORD ER DATED 26.2.2014. IT READS AS UNDER: 3. IN ORDER TO EXAMINE THE VALID CLAIM OF EXERCISE OF SAFE HARBOUR PROVISIONS IN THE CASE OF THE ASSESSEE, IT NEEDS TO BE SEEN IF THE ASSESSEE IS COVERED UNDER THE DEFINITION OF 'ELIGIBLE ASSESS EE' AS PER THE PROVISIONS OF RULE 10TB(L)(I) AND (2) AND THE TRANS ACTION IS COVERED UNDER THE DEFINITION OF 'ELIGIBLE INTERNATIONAL TRA NSACTION', AS PER THE PROVISIONS OF RULE 10TC(II). 3.1 ON PERUSAL OF THE DETAILS SUBMITTED BY THE ASSE SSEE AND THE FIELD VISIT UNDERTAKEN, IT WAS FOUND THAT THE ASSESSEE WA S ENGAGED IN THE BUSINESS OF PROVIDING SERVICES RELATED TO THE PROVI SION OF DATA ENTRY AND VALIDATION SERVICES TO ITS ASSOCIATED ENTERPRISE. T HE ASSESSEE WAS ENGAGED IN COLLECTING, STANDARDISING, STORING THE R ELEVANT CORPORATE, FINANCIAL, MARKET AND OTHER DATA, NEWS AND ANALYSIS FOR VARIOUS INDUSTRIES SUCH AS BANKING, FINANCIAL SERVICES, INS URANCE, REAL ESTATE ET CETERA ON THE SERVERS MAINTAINED BY THE ASSOCIATED ENTERPRISE .THE PROVISION OF SERVICES BY THE ASSESSEE TO ITS ASSOCI ATED ENTERPRISE INCLUDED THE FOLLOWING STEPS: I. DATA COLLECTION- IN THIS STEP, THE DATA IS COLL ECTED FROM BASIC FINANCIAL AND NON-FINANCIAL INFORMATION AVAILABLE F ROM VARIOUS PUBLIC SOURCES, II. DATA ASSIMILATION AND SORTING: IN THIS STE P, THE INFORMATION SO COLLECTED IS SORTED INTO DIFFERENT CATEGO RIES USING COMPUTERIZED APPLICATIONS, ITA NO.770 AND 1082/AHD/2014 10 III DATA ENTRY AND VALIDATION: IN THIS STEP, THE SO RTED INFORMATION IS ENTERED INTO THE DATABASE USING THE SOFTWARE, DEVEL OPED AND PROVIDED BY THE ASSOCIATE ENTERPRISE. THE SAID DATA IS FED IN THE FORMAT AS SPECIFIED BY THE ASSOCIATE ENTERPRISE, IV. QUALITY REVIEWING: IN THIS STEP, THE DATA IS SO COLLECTED, SORTED AND ENTERED IS EXAMINED AND REVIEWED FOR ERRORS. V. DATA DELIVERY. IN THIS FINAL STEP, THE REVIEWED DATA IS UPLOADED ON SERVERS MAINTAINED BY THE ASSOCIATE ENTERPRISE I N US. 3.1.1 UPON ANALYSIS OF THE ABOVE FUNCTIONS BEING CA RRIED OUT BY THE ASSESSEE, IT CAN BE FOUND THAT THE SERVICES BEING R ENDERED BY THE ASSESSEE WERE MAINLY AND GENERALLY IN THE NATURE OF 'DATA PROCESSING', ''DATA MINING' AND 'DATA SEARCH INTEGRATION AND' AN ALYSIS' WHICH ARE COVERED UNDER THE DEFINITION OF 'INFORMATION TECHNO LOGY ENABLED SERVICES', AS DEFINED IN RULE 10TA(E) OF THE IT RUL ES, 1.962,CONSEQUENTLY THE TRANSACTIONS FOR WHICH THE C LAIM OF SAFE HARBOUR IS MADE ARE COVERED UNDER THE DEFINITION OF 'ELIGIBLE INTERNATIONAL TRANSACTIONS', AS DEFINED IN RULE 10T C(II). 3,2 IN ORDER TO EXAMINE IF THE ASSESSEE IS COVERED UNDER THE DEFINI TION OF 'ELIGIBLE ASSESSEE', IT IS SEEN THAT THE ASSESSEE IS. ENGAGED IN PROVIDING INFORMATION TECHNOLOGY ENABLED SERVICES TO A. NON-R ESIDENT ASSOCIATED ENTERPRISE. IN ORDER TO BE CONSIDERED AS 'ELIGIBLE ASSESSEE', IT NEEDS TO BE SEEN IF IT IS OPERATING WITH 'INSIGNIFICANT RISK S', THE FACTORS TO BE KEPT IN MIND IN RELATION TO SUCH DETERMINATION ARE PROVIDED IN RULE 10TB(2). THE ANALYSIS OF THE SAME IS MADE AS BELOW; FACTORS REMARKS THE FOREIGN PRINCIPAL PERFORMS THE MOST OF ECONOMICALLY SIGNIFICANT FUNCTIONS INVOLVED INCLUDING THE CRITICAL FUNCTIONS SUCH AS CONCEPTUALISATION AND DESIGN OF THE PRODUCT AND PROVIDING THE STRATEGIC DIRECTION AND FRAMEWORK, EITHER THROUGH ITS OWN EMPLOYEES OR THROUGH ITS OTHER ASSOCIATED ENTERPRISES, WHILE THE ELIGIBLE ASSESSEE CARRIES OUT THE WORK ASSIGNED TO IT BY THE FOREIGN PRINCIPAL IN THE INSTANT CASE, THE SOFTWARES INCLUDING SEARCH DATABASES REQUIRED FOR CARRYING OUT THE ACTIVITIES BY THE ASSESSEE ARE PROVIDED BY THE ASSOCIATE ENTERPRISE. FURTHER, TRAINING IS PROVIDED BY THE ASSOCIATE ENTERPRISE IN RESPECT OF ANY IMPROVEMENT IN THE SOFTWARE USED FOR DATA FEEING OR IN RESPECT OF ANY NEW ACTIVITY BE INTRODUCED. THE ASSESSEE CARRIES OUT THE WORK RELATED TO FEEDING OF DATA IN THE DATABASE, AS PER THE FIELDS AND SPECIFICATIONS PROVIDED BY THE ASSOCIATE ENTERPRISE ITA NO.770 AND 1082/AHD/2014 11 IN THE DATABASE SOFTWARE. THE CAPITAL AND FUNDS AND OTHER ECONOMICALLY SIGNIFICANT ASSETS INCLUDING THE INTANGIBLES REQUIRED, ARE PROVIDED BY THE FOREIGN PRINCIPAL OR ITS OTHER ASSOCIATED ENTERPRISES, AND THE ELIGIBLE ASSESSEE IS ONLY PROVIDED A REMUNERATION FOR THE WORK CARRIED OUT BY IT. FROM THE FINANCIAL STATEMENTS, IT IS SEEN THAT THE ENTIRE SHARE CAPITAL OF THE ASSESSEE IS HELD BY THE ASSOCIATE ENTERPRISE AND THERE ARE NO BORROWINGS FROM . .ANY ENTITY. THE ECONOMICALLY SIGNIFICANT ASSETS IN. TERMS OF THE SOFTWARES USED FOR CARRYING OUT THE WORK OF THE AS SESSEE ARE PROVIDED BY; THE ASSOCIATE ENTERPRISE. AS PER THE AGREEMENT BETWEEN THE ASSESSEE AND THE ASSOCIATE ENTERPRISE, THE ASSESSEE IS TO BE REMUNERATED ON COST PLUS MARKUP BASIS OF THE SERVICES BEING RENDERED BY IT TO THE ASSOCIATE ENTERPRISE. T HE ELIGIBLE ASSESSEE WORKS UNDER THE DIRECT SUPERVISION OF THE FOREIGN PRINCIPAL OR ITS ASSOCIATED ENTERPRISE WHICH NOT ONLY HAS THE CAPABILITY TO CONTROL OR SUPERVISE BUT ALSO ACTUALLY CONTROLS OR SUPERVISES THE ACTIVITIES CARRIED OUT THROUGH ITS STRATEGI C DECISIONS TO PERFORM CORE FUNCTIONS AS WELL AS BY MONITORING ACTIVITIES ON A REGULAR BASIS.________ THE ASSESSEE WORKS ON THE SPECIFICATIONS FOR THE DATA FEEDING, PROVIDED BY THE J ASSOCIATE ENTERPRISE AND IT IS SUBJECT TO ' MONITORING IN RESPECT OF THE WORKS CARRIED OUT. THE ASSOCIATE ENTERPRISE PROVIDES TRAINING TO THE EMPLOYEES OF THE ASSESSEE FOR THE NEW PROCESSES/SPECIFICATIONS INTRODUCED IN RESPECT OF THE DATA FEEDING ACTIVITIES. THE ELIGIBLE ASSESSEE DOES NOT ASSUME OR HAS NO ECONOMICALLY SIGNIFICANT REALISED RISKS, AND IF A CONTRACT SHOWS THAT THE FOREIGN PRINCIPAL IS OBLIGATED TO CONTROL THE RISK BUT THE CONDUCT SHOWS THAT THE ELIGIBLE ASSESSEE IS DOING SO, THE CONTRACTUAL TERMS SHALL NOT BE THE FINAL DETERMINANT THE ASSE SSEE DOES NOT BEAR THE RISK RELATED TO MARKETING, UTILIZATION, OF EMPLOYEES, SERVICE LIABILITY, CREDIT AND COLLECTION RISK ET CETERA. AS PER THE TERMS OF CDNTRACT AND THE CONDUCT ALSO, IT WAS NOT FOUND THAT THE ASSESSEE WAS BEARING ANY SUCH RISK, EVEN THOU GH, THE ASSESSEE IS BEARING SINGLE CUSTOMER RISK. ITA NO.770 AND 1082/AHD/2014 12 THE ELIGIBLE ASSESSEE HAS NO OWNERSHIP RIGHT, LEGAL OR ECONOMIC, ON ANY INTANGIBLE \ GENERATED OR ON THE OUTCOME OF ANY INTANGIBLE GENERATED OR ARISING DURING THE COURSE OF RENDERING OF SERVICES, WHICH VE STS WITH THE FOREIGN PRINCIPAL AS EVIDENT FROM THE CONTRACT AND THE CONDUCT OF THE PARTIES AS PER THE TERMS OF CONTRACT AND ON THE BASIS OF EXAMINATION OF SERVICES BEING CARRIED OUT BY THE ASSESSEE, IT WAS FOUND THAT THERE WAS A LOW POSSIBILITY FOR GENERAT ION OF ANY INTANGIBLE AND EVEN IF THE SAME COULD BE GENERATED, THE ASSESSEE DID NOT HAVE ANY OWNERSHIP RIGHT ON THE SAME. 3.2.1 FROM THE PERUSAL OF THE ABOVE ANALYSIS, IT CA N BE SEEN THAT THE ASSESSEE IS COVERED UNDER THE FACTORS IDENTIFIED IN THE SAFE HARBOUR PROVISIONS IN RELATION TO THE DETERMINATION OF 'INS IGNIFICANT RISK'. AS IDENTIFIED ABOVE, EVEN THOUGH THE ASSESSEE IS BEARI NG 'SINGLE CUSTOMER RISK', IN VIEW OF THE NATURE OF TRANSACTIONS AND TH E OVERALL REQUIREMENTS OF SAFE HARBOUR PROVISIONS, THE EXISTENCE OF SUCH R ISK IS NOT BEING CONSIDERED AS SIGNIFICANT SO AS TO TAKE THE ASSESSE E OUT OF THE PURVIEW- OF THE BEING 'ELIGIBLE ASSESSEE' WITH' INSIGNIFICAN T RISK'. 4. CONSEQUENTLY, IT IS SEEN THAT THE ASSESSEE IS CO VERED UNDER THE DEFINITION OF 'ELIGIBLE ASSESSEE' AND THE TRANSACTI ONS FOR WHICH SAFE HARBOUR PROVISIONS HAS BEEN APPLIED ARE COVERED UND ER THE DEFINITION OF 'INFORMATION TECHNOLOGY ENABLED SERVICES' UNDER 'ELIGIBLE INTERNATIONAL TRANSACTIONS'* AS PER VARIOUS PROVISI ONS OF RULES SPECIFIED FOR SAFE HARBOUR PROVISIONS IN IT RULES 1962. THE A SSESSEE HAS MADE A CLAIM FOR 5 ASSESSMENT YEARS STARTING FROM 2013-14 TO 2017-18,IN VIEW OF THE ABOVE, IT IS HELD THAT THE CLAIM MADE BY THE ASSESSEE HAS BEEN VALIDLY EXERCISED, SUBJECT TO THE PROVISIONS OF RUL E 10TE(10) IN RESPECT OF ASSESSMENT YEARS OTHER THAN AY 2013-14. 5. THE ATTENTION OF THE ASSESSING OFFICER IS DRAWN TO THE PROVISIONS OF RULE 10TE(10) AND SUBJECT TO THE SAME, THE CLAIM OF THE ASSESSEE IS BEING HELD TO BE VALIDLY EXERCISED. THE PROVISIONS OF THE RULE ARE REPRODUCED BELOW: '(10) WHERE THE FACTS AND CIRCUMSTANCES ON THE BASI S OF WHICH THE OPTION EXERCISED BY THE ASSESSEE WAS HELD TO BE VAL ID HAVE CHANGED AND THE ASSESSING OFFICER HAS REASON TO DOUBT THE ELIGI BILITY OF AN ASSESSEE OR THE INTERNATIONAL TRANSACTION FOR ANY ASSESSMENT YEAR OTHER THAN THE INITIAL ASSESSMENT YEAR FALLING WITHIN THE PERIOD F OR WHICH THE OPTION WAS EXERCISED BY THE ASSESSEE, HE SHALL MAKE A REFE RENCE TO THE TRANSFER PRICING OFFICER FOR DETERMINATION OF ELIGI BILITY OF THE ASSESSEE ITA NO.770 AND 1082/AHD/2014 13 OR THE INTERNATIONAL TRANSACTION OR BOTH FOR THE PU RPOSE OF SAFE HARBOUR. EXPLANATION.FOR PURPOSES OF THIS SUB-RULE THE FACT S AND CIRCUMSTANCES INCLUDE: (A) FUNCTIONAL PROFILE OF THE ASSESSEE IN RE SPECT OF THE INTERNATIONAL TRANSACTION; (B) THE RISKS BEING UNDERTAKEN BY THE ASSESSEE; (C) THE SUBSTANTIVE CONTRACTUAL CONDITIONS GOVERNI NG THE ROLE OF THE ASSESSEE IN RESPECT OF THE INTERNATIONAL TRANSACTIO N; (D) THE CONDUCT OF THE ASSESSEE AS REFERRED TO IN SUB-RULE (2) OR SUB- RULE (3) OF RULE 10TB; OR (E) THE SUBSTANTIVE NATURE OF THE INTERNATIONAL TR ANSACTION,' IN CASE THE 'FACTS AND CIRCUMSTANCES' AS PROVIDED I N RULE 10TE(10) CHANGE, THE EXERCISE OF VALID CLAIM BY THE ASSESSEE , AS ACCEPTED BY THIS OFFICE, WOULD NOT APPLY TO THE RELEVANT ASSESSMENT YEAR IN WHICH SUCH CHANGE IN 'FACTS AND CIRCUMSTANCES' TAKE PLACE, OTH ER THAN THE INITIAL ASSESSMENT YEAR AND FRESH DETERMINATION OF THE CLAI M WOULD BE REQUIRED TO BE UNDERTAKEN, AS PER THE PROVISIONS OF RULE 10TE(11),THIS IS PARTICULARLY IMPORTANT IN THIS CASE SINCE THE IN ITIAL AGREEMENT BETWEEN THE ASSESSEE AND THE AE WAS VALID FOR THE P ERIOD OF 9 MONTHS I.E. 01.04.2012 TO 31.12.2012 AND THE NEW AGREEMENT IS VALID FOR A PERIOD OF ONLY TWO YEARS COMMENCING FROM. 01.01.201 3.THEREFORE,IN RESPECT OF THE PERIOD FROM 01.01.2015 ONWARDS WHICH CORRESPONDS TO PART PERIOD OF AY 2015-16 AND SUBSEQUENT ASSESSMENT YEARS, UNLESS THE SAME AGREEMENT -IS CONTINUED AND THERE IS NO CHANGE IN THE 'FACTS AND CIRCUMSTANCES' AS PROVIDED IN RULE 10TE(10),THE ASS ESSING OFFICER HAS TO TAKE ACTION IN ACCORDANCE WITH THE PROVISIONS OF RULE 10TE(10). 9. AS OBSERVED EARLIER, AGREEMENT WITH THE AE FOR P ROVIDING SERVICE WAS EXECUTED ON 1.10.2004. IT WAS VALID UPTO 30.12.201 2. IN THE YEAR FOR WHICH AN ORDER UNDER SECTION 10TE(6) WAS PASSED BY THE TP O, THIS AGREEMENT WAS RELEVANT FOR THE PERIOD 1.4.2012 TO 30.12.2012 I.E. NINE MONTHS. IF AN AGREEMENT FOR A PERIOD OF NINE MONTHS INDICATES THA T THE ASSESSEES SERVICES WERE OF LOW-END SERVICES, AND THOSE SERVICES CAN BE CATEGORIZED AS BPO, THEN, HOW FOR THE EARLIER PERIOD, THE NATURE OF SERVICES WOULD BE DIFFERENT ? IN OTHER WORDS, SAME AGREEMENT CANNOT BE GIVE RISE TWO TYPES OF SERVICES, MERELY ON THE BASIS OF PROVIDING AT DIFFERENT TIMES . THE TPO IN THE ITA NO.770 AND 1082/AHD/2014 14 PROCEEDINGS FOR THE PURPOSE OF SAFE HARBOUR RULES P AID A VISIT IN THE OFFICE OF THE ASSESSEE, AND HIMSELF COLLECTED INFORMATION REG ARDING NATURE OF SERVICES. THUS, THERE IS A CONFLICT IN THE STAND OF THE REVEN UE IN DIFFERENT ASSESSMENT YEARS ON ONE AGREEMENT. CONSIDERING THIS ASPECT, W E ARE OF THE VIEW THAT IMPUGNED ORDERS ARE NOT SUSTAINABLE ON THIS ISSUE, THEREFORE, WE SET ASIDE THE ASSESSMENT ORDER INCLUDING THAT OF DRP AND RESTORE THIS ISSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION. THE LD.AO SHALL TAKE IN TO ACCOUNT, THE TPOS ORDER PASSED IN SUBSEQUENT PERIOD I.E. DATED 26.2.2 014 THOUGH PASSED FOR THE SUBSEQUENT PERIOD BUT DEALS WITH SAME AGREEMENT. I F THE ASSESSEE IS BEING ACCEPTED AS A BPO, THEN, ALL THE COMPARABLE SELECTE D BY THE TPO WOULD NOT BE RELEVANT, AND A FRESH INQUIRY HAS TO BE CONDUCTED. CONSIDERING ALL THESE ASPECTS, WE ALLOW THE APPEAL OF THE ASSESSEE FOR ST ATISTICAL PURPOSE. THE OBSERVATION MADE BY US WILL NEITHER IMPAIR THE CASE OF THE AO NOR WILL CAUSE ANY PREJUDICE TO THE DEFENCE/EXPLANATION OF THE ASS ESSEE. 10. NOW WE TAKE, THE APPEAL OF THE REVENUE. 10. FIRST GROUND OF THE REVENUES APPEAL READS AS U NDER: 1. THE DRP, AHMEDABAD HAS ERRED IN LAW AND ON FACT S IN AO/TPO IN ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY TH E ASSESSEE IS IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME TAX RULES FOR THE DETERMINATION OF THE ALP IN RELATION TO LOW END I.T. ENABLED SERVICES AND MAKING MODIFICATIONS TO THIS A NALYSIS IN A SUBJECTIVE, ARBITRARY AND INCONSISTENT MANNER. 11. IN OUR OPINION, IT DOES NOT SPELL OUT ANY SPECI FIC GRIEVANCE OF THE REVENUE, MORE SO, IT IS AN ARGUMENT, WHICH IS CONNE CTED WITH THE GROUNDS OF APPEAL TAKEN BY THE ASSESSEE. WE HAVE ALREADY TAKE N CARE OF THIS ISSUE, WHILE DISPOSING OF THE APPEAL OF THE ASSESSEE. HENCE, TH IS GROUND OF APPEAL IS REJECTED. ITA NO.770 AND 1082/AHD/2014 15 12. THE GROUND NOS.4 AND 5 ARE GENERAL GROUNDS OF W HICH DO NOT CALL FOR RECORDING ANY SPECIFIC FINDING, HENCE, THEY ARE REJ ECTED. 13. THE GROUND NO.2 READS AS UNDER: 2. THE DRP, AHMEDABAD HAS ERRED IN LAW AND ON FACT S TO HOLD THAT FOREIGN EXCHANGE FLUCTUATION GAIN OF RS.28,21,403/- IS DIRECTLY LINKED WITH EXPORT BUSINESS CARRIED ON BY THE UNDERTAKING, AND HENCE, DEEMED TO BE DERIVED FROM UNDERTAKINGS BUSINESS ELIGIBLE FOR DEDUCTION U/S.10A OF THE ACT. 14. LD.DRP HAS MADE THE FOLLOWING DISCUSSION ON THI S ISSUE: 10.1 THE ASSESSEE HAS SUBMITTED THAT IN RESPECT TO 10A CLAIM THE AO HAS AO HELD THAT GAIN FROM FOREIGN EXCHANGE FLUCTUA TION CLAIMED AS A DEDUCTION HAS NOT BEEN DERIVED FROM THE ACTUAL COND UCT OF THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. THE AO HAS ARGUED TH AT GAIN OR LOSS ON ACCOUNT OF CHANGE IN EXCHANGE RATE OF FOREIGN CURRE NCY NEED TO BE RECOGNIZED AND ACCOUNTED SEPARATELY AND THE SAME CA NNOT BE ADJUSTED AGAINST THE SALE/PURCHASE PRICE, AS THE CASE MAY BE . HENCE SUCH GAIN IN THE PRESENT CASE CANNOT BE TREATED AS PART OF EXPOR T/SALE PROCEEDS AS CLAIMED BY THE ASSESSEE, BUT THE SAME NEED TO BE TR EATED AS SEPARATE INCOME. FOR THE PURPOSE OF CLAIMING DEDUCTION UNDER SECTION 10A OF THE ACT, THE ASSESSEE IS NOT ONLY REQUIRED TO ESTAB LISH THAT IT WAS BUSINESS PROFIT OF AN UNDERTAKING, BUT ALSO TO ESTA BLISH THAT THIS WAS A PROFIT DERIVED FROM THE BUSINESS ACTIVITY OF AN UND ERTAKING. THE MERE FACT, THAT SUCH INCOME WAS, A BUSINESS INCOME WOULD NOT ENTITLE THE: ASSESSEE FOR DEDUCTION UNDER SECTION 10A. ON THE OT HER HAND THE ASSESSEE HAS SUBMITTED THAT FOREIGN EXCHANGE FLUCTU ATION GAIN OF INR 2,821,403 IS DIRECTLY LINKED WITH THE EXPORT BUSINE SS CARRIED ON THE BY THE UNDERTAKING OF THE ASSESSEE, HENCE DEEMED TO BE DERIVED BY AN- UNDERTAKING AS ENVISAGED IN SECTION 10A AND ACCORDI NGLY ELIGIBLE FOR- BENEFITS OF SECTION 10A. THE AO HAS NOT DISCUSSED O R DISTINGUISHED THE DECISIONS, RELIED ON BY THE ASSESSEE WHICH WERE DEA LING WITH IDENTICAL FACTS AND. PROVISIONS OF SECTION 10A. FURTHER, THE DECISIONS DISCUSSED AND RELIED BY AO DOES, NOT EVEN DEAL WITH FOREIGN E XCHANGE FLUCTUATION GAIN EARNED FROM SALES PROCEEDS AND HENCE CANNOT BE APPLIED IN THE CASE OF THE ASSESSEE. ITA NO.770 AND 1082/AHD/2014 16 10.2 THIS PANEL HAS CONSIDERED ALL THE CONNECTED FACTS BROUGHT ON RECORD AND THIS PANEL CONSIDERS THAT FOREIGN EXCHAN GE SHOULD BE CONSIDERED FOR THE PURPOSE OF SECTION 10A AND THIS PANEL DIRECTS THE AO ACCORDINGLY. 15. A PERUSAL OF THE ABOVE FINDING WOULD INDICATE T HAT LD.DRP HAS RECORDED A FINDING THAT FOREIGN EXCHANGE FLUCTUATION GAIN WA S DIRECTLY LINKED WITH THE EXPORT BUSINESS CARRIED OUT BY THE ASSESSEE, HENCE, IT IS TO BE TREATED AS INCOME DERIVED BY AN UNDERTAKING. THE LD.DR WAS UNABLE TO POINT OUT ANY SIGNIFICANT ERROR IN THE PROPOSITION CANVASSED BY THE LD.DRP FO R GRANTING THE DEDUCTION UNDER SECTION 10A OF THE INCOME TAX ACT. 16. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSE, WHEREAS THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 18 TH MAY, 2016 AT AHMEDABAD. SD/- SD/- ( MANISH BORAD ) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER