Ciena India Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 783/DEL/2015

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6357 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2017
• Appeal Filed By: Assessee
• Bench Allotted: I2
• Next Hearing Date: 28-02-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 09-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: HIMANSHU SHEKHAR SINHA
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Fair market value; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 271(1)(c); 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 274; 251; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.783/DEL./2015 (ASSESSMENT YEAR : 2010-11) M/S. CIENA INDIA PVT. LTD., VS. DCIT, CIRCLE 6 (1) , FF, NAVJYOTI INSTITUTE, NEW DELHI. SECTOR B, POCKET 11, VASANT KUNJ, NEW DELHI 110 070. (PAN : AACCC6131B) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI HIMANSHU SHEKHAR SINHA, ADVOCAT E MOHD. FAHAD KHALID & MS. REETIKA GARG, CAS REVENUE BY : SHRI PEEYUSH JAIN, CIT DR DATE OF HEARING : 28.02.2017 DATE OF ORDER : 22.03.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. CIENA INDIA PRIVATE LIMITED (H EREINAFTER REFERRED TO AS THE ASSESSEE) BY FILING THE PRESEN T APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 29.12.2014, PASS ED BY THE AO UNDER SECTION 143(3)/144C OF THE INCOME-TAX ACT, 1 961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2010-11 IN CONSO NANCE WITH THE ORDERS PASSED BY THE LD. DRP/TPO ON THE GROUNDS INT ER ALIA THAT :- ITA NO.783/DEL./2015 2 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE ORDER PASSED BY THE LD. ASSESSING OFFICER ('AO') IS BAD IN LAW. 2. THE LD. AO/ LD. TRANSFER PRICING OFFICER ('TPO') ERRED ON FACTS AND IN LAW IN MAKING AN ADJUSTMENT TO THE ARM'S LENGTH PRICE OF THE APPELLANT'S INTERNATIONAL TRANSACTIONS WHICH RESULTED IN THE ENHANCEMENT OF RETURNED INCOME OF THE APPELLANT BY INR 57,85,27,473. 3. THAT THE REFERENCE MADE BY THE LD. AO SUFFERS FROM JURISDICTIONAL ERROR AS THE LD. AO HAS NOT RECORDED ANY REASONS IN THE ASSESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WAS EXPEDIENT AND NECESSARY' TO REFER THE MATTER TO THE LD. TPO FOR COMPUTATION OF THE ARM'S LENGTH PRICE, AS IS REQUIRED UNDER SECTION 92CA(1) OF THE INCOME-TAX ACT, 1961 ('THE ACT'). 4. THE LD. AO/LD. TPO/ LD. DISPUTE RESOLUTION PANEL ('DRP') ERRED ON FACTS AND IN LAW IN MAKING AN UPWARD ADJUSTMENT OF THE ARM'S LENGTH PRICE OF THE APPELLANT'S INTERNATIONAL TRANSACTION IN RELATION TO PROVISION OF CAPTIVE SOFTWARE DEVELOPMENT SERVICES BY: 4.1. NOT APPRECIATING THAT THE APPELLANT IS ENTITLE D TO DEDUCTION UNDER SECTION 10A OF THE ACT, WITH RESPECT TO THE PROVISION OF SERVICES AND THEREFORE, THERE IS NO INCENTIVE ON THE PART OF THE APPELLANT TO SHIFT PROFITS TO ANY OTHER JURISDICTION; 4.2 REJECTING THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT IN ITS TRANSFER PRICING DOCUMENTATION; 4.3. ACCEPTING COMPANIES, WHICH ARE NOT COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS, ASSETS AND RISKS; ITA NO.783/DEL./2015 3 4.4 NOT GRANTING AN ECONOMIC ADJUSTMENT FOR THE RIS K MITIGATED ENVIRONMENT IN WHICH THE APPELLANT OPERATES. 5. THE LD. AO/LD. TPO/ LD. DRP ERRED ON FACTS AND IN LAW IN MAKING AN UPWARD ADJUSTMENT OF THE ARM'S LENGTH PRICE OF THE APPELLANT'S INTERNATIONAL TRANSACTION IN RELATION TO PROVISION OF CAPTIVE MARKETING SUPPORT SERVICES BY: 5.1 REJECTING THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT IN ITS TRANSFER PRICING DOCUMENTATION; 5.2. ACCEPTING COMPANIES, WHICH ARE NOT COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS, ASSETS AND RISKS; 5.3. ERRONEOUSLY IGNORING COMPARABLE COMPANIES, OBTAINED BY WAY OF A FRESH SEARCH, PROVIDED BY THE APPELLANT AS A RESPONSE TO THE SHOW CAUSE NOTICE; AND 5.4 NOT GRANTING AN ECONOMIC ADJUSTMENT FOR THE RIS K MITIGATED ENVIRONMENT IN WHICH THE APPELLANT OPERATES. 6. THE LD. AO/LD. TPO/ LD. DRP ERRED ON FACTS AND IN LAW IN DETERMINING THE ARM'S LENGTH PRICE OF IMPORT OF CAPITAL EQUIPMENT BY THE APPELLANT FROM ITS ASSOCIATED ENTERPRISES ('AES') AT NIL BY: 6.1. NOT APPRECIATING THAT THE INTERNATIONAL TRANSACTION OF IMPORT OF CAPITAL EQUIPMENT BEING INEXTRICABLY LINKED WITH THE PRIMARY ACTIVITY OF CAPTIVE SOFTWARE DEVELOPMENT SERVICES SHOULD BE BENCHMARKED BY USING TRANSACTIONAL NET MARGIN METHOD ON AN AGGREGATE BASIS; 6.2. NOT APPRECIATING THAT THE APPELLANT IS A COST PLUS ENTITY AND THE DEPRECIATION OF INR 8,64,69,321 (AS PER THE COMPANIES ACT, 1956) ON SUCH CAPITAL ITA NO.783/DEL./2015 4 EQUIPMENT HAD ONLY INCREASED THE COST BASE RESULTING INTO MORE TAXABLE INCOME J TAX IN INDIA; 6.3. NOT APPRECIATING THAT SUCH ASSETS WILL BE DEPRECIATED OVER A PERIOD OF TIME, AND THE APPELLANT WOULD BE OFFERING MORE INCOME THAN THE COST OF SUCH/ASSETS OVER SUCH PERIOD IN TOTALIT Y 6.4. NOT APPRECIATING THE FACT THAT THE IMPORT PRI CE OF THESE CAPITAL EQUIPMENT HAVE BEEN REVIEWED BY THE CUSTOM AUTHORITIES AT THE TIME OF IMPORT AND NECESSARY CUSTOM DUTIES HAVE BEEN PAID WHEREVER REQUIRED; 6.5. NOT APPRECIATING THAT THE USED CAPITAL EQUIPM ENT WERE IMPORTED AT FAIR MARKET VALUES DETERMINED BY CHARTERED ENGINEERS (BEING THIRD PARTY EXPERTS); 6.6. DISREGARDING THE FRESH EVIDENCES SUBMITTED BY THE APPELLANT TO THE LD. DRP WHICH SUPPORTS THE WITHOUT PREJUDICE CONTENTION OF THE APPELLANT, FOR APPLICATION OF COMPARABLE UNCONTROLLED PRICE METHOD AS THE MOST APPROPRIATE METHOD (PURPORTED TO BE APPLIED BY THE LD. TPO). THESE FRESH EVIDENCES WERE IN THE FORM OF COPY OF INVOICES ON SAMPLE BASIS OF SIMILAR CAPITAL EQUIPMENT SOLD BY THE AES TO THIRD PARTIES. 7. WITHOUT PREJUDICE TO ABOVE, THE LD. AO ERRED ON THE FACTS AND IN LAW BY FOLLOWING THE ORDER OF LD. TPO AND ENHANCING THE INCOME OF THE APPELLANT BY THE AMOUNT CAPITALIZED IN RESPECT OF SUCH CAPITAL EQUIPMENT AMOUNTING TO INR 57,30,63,268, WITHOUT APPRECIATING THE FACT THAT THE APPELLANT HAS CLAIMED THE AMOUNT OF DEPRECIATION OF ONLY INR 25,57,43,681 (AS PER THE ACT READ WITH THE INCOME-TAX RULES, 1962) THEREON. 8. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 274 READ WITH ITA NO.783/DEL./2015 5 SECTION 271(1)(C) OF THE ACT FOR FURNISHING INACCURATE PARTICULARS WITHOUT RECORDING ANY ADEQUATE SATISFACTION FOR SUCH INITIATION. 9. THAT THE LD. AO ERRED IN FACTS AND IN LAW IN CHARGING AND COMPUTING INTEREST UNDER SECTION 234B, 234C AND 234D OF THE ACT. 2. BRIEFLY STATED THE FACTS OF THIS CASE ARE : THE ASSESSEE COMPANY IS A WHOLLY OWNED SUBSIDIARY OF CIENA CORPO RATION, USA, AND ENGAGED IN PROVISION OF SOFTWARE DEVELOPMENT AN D MARKETING SOFTWARE SERVICES TO ITS OVERSEAS GROUP COMPANY. A SSESSEE IS A 100% EOU UNDER THE SOFTWARE TECHNOLOGY PARK SCHEME INCORPORATED ON JUNE 27, 2005 AND COMMENCED ITS OPE RATION W.E.F. APRIL 10, 2006. ASSESSEE COMPANY IS REMUNERATED ON COST PLUS BASIS FOR PROVIDING SERVICES, NAMELY, CONTRACTUAL S OFTWARE DEVELOPMENT AND MARKETING SOFTWARE SERVICES. DURIN G THE YEAR UNDER ASSESSMENT, THE ASSESSEE ENTERED INTO THE INT ERNATIONAL TRANSACTIONS DETAILED IN FORM 3CEB AS UNDER :- SR.NO. NATURE OF TRANSACTION ARMS LENGTH PRICE AS PER TAXPAYER (I) SOFTWARE SERVICE RS.1,51,39,91,308 (II) MARKET SUPPORT SERVICE RS. 4,67,48,181 (III) PURCHASE OF CAPITAL GOODS RS. 57,30,63,268 3. ASSESSEE COMPANY BY USING TRANSACTIONAL NET MARG IN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH O P/OC AS PROFIT LEVEL INDICATOR (PLI) FOR BOTH OF ITS SEGMEN T, NAMELY, ITA NO.783/DEL./2015 6 SOFTWARE DEVELOPMENT SERVICES SEGMENT AND MARKET SU PPORT SERVICES SEGMENT. ASSESSEE CHOSEN 12 COMPANIES AS COMPARABLE HAVING AVERAGE OP/OC OF 14.08% FOR BENCHMARKING SOF TWARE DEVELOPMENT SEGMENT TRANSACTIONS AND CHOSEN 18 COMP ARABLES WITH THE AVERAGE OP/OC OF 6.98% FOR BENCHMARKING MARKET SUPPORT SERVICES TRANSACTION. 4. HOWEVER, TPO BY REJECTING THE FILTERS APPLIED BY ASSESSEE COMPANY FOR ITS TP STUDY REJECTED 7 COMPARABLE COMP ANIES OUT OF 12 CHOSEN BY ASSESSEE FOR SOFTWARE DEVELOPMENT SERV ICES SEGMENT. THEN, THE TPO MADE ADDITION OF 11 NEW COMPARABLE CO MPANIES ON THE BASIS OF EXAMINATION OF ACCEPT/REJECT MATRIX OF ASSESSEE COMPANY AND DETERMINED THE ARMS LENGTH MARGIN AT 3 0.52% VIS-- VIS OP/OC 13.01% EARNED BY THE ASSESSEE AND THEREBY MADE AN ADJUSTMENT OF RS.23,45,63,894/-. 5. IN CASE OF MARKET SUPPORT SERVICES SEGMENT, THE TPO REJECTED ALL THE COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE IN ITS TP STUDY REPORT. ASSESSEE FURTHER SUBMITTED 5 COMPARA BLES BY MAKING FRESH SEARCH IN REPLY TO SHOW-CAUSE NOTICE, OUT OF WHICH 3 WERE REJECTED AND 2 WERE ERRONEOUSLY IGNORED BY THE TPO AND THE TPO SELECTED 6 NEW COMPANIES AS TO THE MARKET SUPPORT S ERVICES SEGMENT AND THEREBY DETERMINED THE ARMS LENGTH MAR GIN AT ITA NO.783/DEL./2015 7 26.28% VIS--VIS OP/OC OF 13.01% EARNED BY THE ASSE SSEE AND THEREBY PROPOSED THE ADJUSTMENT OF RS.54,89,025/-. 6. ASSESSEE COMPANY CARRIED THE MATTER BEFORE DISPU TES RESOLUTION PANEL BY FILING OBJECTIONS. FOR SOFTWAR E DEVELOPMENT SERVICES SEGMENT, THE LD. DRP ORDERED TO EXCLUDE TW O COMPANIES AS COMPARABLES, NAMELY, INFINITE DATA SYSTEMS AND SONA TA SOFTWARE LIMITED AND DIRECTED TO CORRECT THE COMPUTATION MAR GIN OF COMPARABLE COMPANY FOR THE PURPOSE OF COMPUTATION O F ARMS LENGTH PRICE; AND GRANT OF WORKING CAPITAL ADJUSTME NT FOR DIFFERENCE IN THE WORKING CAPITAL POSITION OF ASSESSEE VIS--V IS COMPARABLE COMPANIES. IN ACCORDANCE WITH THE DIRECTIONS ISSUE D BY THE LD. DRP, THE REVISED ARMS LENGTH MARGIN OF COMPARABLE COMPANIES WAS DETERMINED AT 19.73% VIS--VIS OP/OC OF 20.81% EARNED BY THE ASSESSEE AND CONSEQUENTLY, ADJUSTMENT ON ACCOUN T OF PROVISIONS OF SOFTWARE DEVELOPMENT SERVICES CAME TO BE NIL. 7. LD. DRP GRANTED WORKING CAPITAL ADJUSTMENT IN WO RKING CAPITAL POSITION OF THE ASSESSEE VIS--VIS COMPARAB LE COMPANIES; CORRECT COMPUTATION OF MARGIN OF COMPARABLE COMPANI ES QUA MARKETING SUPPORT SERVICES SEGMENT AND CONSEQUENTLY , THE REVISED ARMS LENGTH MARGIN OF COMPARABLE COMPANIES WAS DET ERMINED AT 26.22% VIS--VIS OP/OC OF 13.01% EARNED BY THE ASSE SSEE AND REVISED ADJUSTMENT CAME TO BE RS.56,64,205/-. COMP LYING WITH THE ITA NO.783/DEL./2015 8 ORDER PASSED BY THE LD. TPO/DRP, THE AO MADE AN ADD ITION OF RS.54,64,205/- AND RS.25,57,43,861/- ON ACCOUNT OF PROVIDING OF MARKET SUPPORT SERVICES AND PURCHASE OF CAPITAL EQU IPMENT RESPECTIVELY. 8. FEELING AGGRIEVED, THE ASSESSEE HAS FILED THE AP PEAL AGAINST THE ORDER PASSED BY THE AO/TPO/DRP. 9. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUNDS NO.1 & 2 10. GROUNDS NOS.1 & 2 ARE GENERAL IN NATURE, HENCE NEED NO SPECIFIC ADJUDICATION. GROUNDS NO.3, 4.1, 4.2, 5.1 & 5.4 11. LD. AR FOR THE ASSESSEE HAS NOT PRESSED THE AFO RESAID GROUNDS, HENCE DETERMINED AGAINST THE ASSESSEE. GROUNDS NO.4 & 4.3 12. THE ASSESSEE COMPANY CHALLENGED THE UPWARD ADJU STMENT OF ARMS LENGTH PRICE OF ASSESSEES INTERNATIONAL TRAN SACTION QUA PROVISION OF SOFTWARE DEVELOPMENT SERVICES MADE BY THE AO/TPO/DRP BY ACCEPTING INCOMPARABLE COMPANIES. TH E FINAL ITA NO.783/DEL./2015 9 SET OF COMPARABLES CONSIDERED BY THE TPO FOR BENCHM ARKING THE INTERNATIONAL TRANSACTIONS ARE TABULATED AS UNDER : - SR.NO. NAME OF THE COMPANY OP/OC 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. -1.07% 2. E-INFOCHIPS BANGALORE LTD. 71.38% 3. INFINITE DATA SYSTEM PRIVATE LTD. 88.25% 4. INFOSYS LIMITED 45.47% 5. LARSEN & TOURBO INFOTECH LTD. 19.06% 6. LGS GLOBAL LIMITED 12.78% 7. MINDTREE LTD. (SEGMENT) 13.92% 8. PERSISTENT SYSTEMS LIMITED 29.02% 9. QUINTEGRA SOLUTIONS LTD. 1.46% 10. R S SOFTWARE (INDIA) LTD. 10.18% 11. SASKEN COMMUNICATION TECHNOLOGIES LTD. 17.54% 12. SONATA SOFTWARE 35.87% 13. THINKSOFT GLOBAL SERVICES LTD. 17.35% 14. THIRDWARE SOLUTIONS LTD. 33.43% 15. TATA ELXSI LTD. 20.29% 16. WIPRO LTD. 73.35% AVG. 30.52% 13. UNDISPUTEDLY, TNMM WITH OP/OC AS PLI FOR SOFTWA RE DEVELOPMENT SERVICES SEGMENT IS THE MOST APPROPRIAT E METHOD FOR DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATI ONAL TRANSACTIONS IN QUESTION. OUT OF THE AFORESAID FINAL SET OF COM PARABLES COMPANIES CONSIDERED BY THE TPO FOR BENCHMARKING TH E INTERNATIONAL TRANSACTION, THE ASSESSEE COMPANY CHA LLENGED INCLUSION OF : (I) E-INFOCHIPS BANGALORE LTD., (II) INFOSYS LIMITED, (III) PERSISTENT SYSTEMS LIMITED, (IV) THIRDWARE SO LUTIONS LTD. AND (V) WIPRO LIMITED ON THE GROUND OF FUNCTIONAL DISS IMILARITY, RISK ITA NO.783/DEL./2015 10 ASSUMED, EXTRA ORDINARY CIRCUMSTANCES, ETC.. WE WO ULD LIKE TO EXAMINE SUITABILITY OF EACH OF THE AFORESAID COMPAR ABLE COMPANIES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS AS UNDER :- COMPARABLE COMPANIES SOUGHT TO BE EXCLUDED BY THE ASSESSEE COMPANY FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS QUA SOFTWARE DEVELOPMENT SERVICES E-INFOCHIPS BANGALORE LIMITED 14. ASSESSEE COMPANY CHALLENGED THE INCLUSION OF TH IS COMPANY AS COMPARABLE ON GROUND OF FUNCTIONAL DISSIMILARITY ; SEGMENTAL INFORMATION NOT AVAILABLE; FLUCTUATING TREND; ABNOR MAL SUPER NORMAL PROFIT AND SIGNIFICANT INTANGIBLE AND RELIED UPON D ECISION RENDERED BY COORDINATE BENCH OF ITAT, DELHI IN CASE OF HEADSTRONG SERVICES (INDIA) PVT. LTD. IN ITA NO.714/DEL/2015 ORDER DATED 18.03.2016. 15. HOWEVER, LD. TPO BRUSHED ASIDE THE OBJECTIONS B Y REFERRING TO THE ANNUAL REPORT. TPO OBSERVED THAT MANY COMPA NIES TREAT IT AND ITES AS ONE INDUSTRY AND REPORT THEM AS ONE SEG MENT EVEN THOUGH THEY ARE NOT PERFORMING ANY ITE SERVICES. T PO ALSO REFERRED TO PAGE 54 OF THE ANNUAL REPORT, WHICH IS NOW AVAILABLE AT PAGES 3225 3242 OF THE PAPER BOOK VOL.III-A, SHOW ING THE INCOME FROM SOFTWARE SERVICES AT RS.7,43,04,66,481/ -. TPO FURTHER ITA NO.783/DEL./2015 11 HELD THAT CONSULTATION CHARGES CONSTITUTE A SUBSTAN TIAL 14% OF THE TOTAL REVENUE FOR THE FY 2009-10 WHICH IS PART OF T HE SOFTWARE DEVELOPMENT SERVICES ONLY AND IN THESE CIRCUMSTANCE S, SEGMENTAL FINANCIALS ARE NOT REQUIRED AND RETAINED THE SAME A S A VALID COMPARABLE. 16. FIRST OF ALL, LD. AR FOR THE ASSESSEE OPPOSED T HE INCLUSION OF THIS COMPANY AS COMPARABLE ON GROUND OF FUNCTIONAL DISSIMILARITY VIS--VIS ASSESSEE COMPANY THAT THIS COMPARABLE COM PANY IS ENGAGED IN SOFTWARE SERVICES AS WELL AS ITE SERVICE S; THAT THIS COMPANY IS GIVING DIVERSIFIED SERVICES INCLUDING SO FTWARE, FIRMWARE, HARDWARE, FIELD PROGRAMMABLE GATE ARRAY ( FPGA), APPLICATION SPECIFIC INTEGRATED CIRCUIT (ASIC) AND QA & TESTING IN HIGHLY SPECIALIZED AND CRITICAL INDUSTRY VERTICALS LIKE AERO SPACE, SECURITY AND SURVEILLANCE, MEDICAL DEVICES AND OTHE RS, HENCE THE REQUIREMENTS AND DYNAMICS OF THIS COMPANY ARE VERY COMPLEX AND ARE NOT COMPARABLE TO THE ASSESSEE COMPANY. LD. AR ALSO CONTENDED THAT E-INFOCHIPS BANGALORE LTD. ENGAGED I N PRODUCT DEVELOPMENT AND CANNOT BE CONSIDERED AS A COMPARABL E VIS--VIS ASSESSEE COMPANY AND RELIED UPON FISERV INDIA PRIVATE LIMITED IN ITA NO.6737/DEL/2014 ORDER DATED 26.06.2015 , AVAILABLE AT PAGES 29 TO 46 OF THE COMPILATION OF CASE LAWS. ITA NO.783/DEL./2015 12 17. NO DOUBT, AS PER SCHEDULE VII, PAGE 59 OF THE A NNUAL REPORT, INCOME FROM SOFTWARE SERVICES AND CONSULTANCY CHARG ES OF THIS COMPANY CONSIST OF ONLY 14% ALSO POINTED OUT BY THE TPO, BUT IN THE ABSENCE OF THE SEGMENTAL DETAILS, WE ARE UNABLE TO CORRELATE BOTH THE SEGMENTS, NAMELY, SOFTWARE SERVICES AND CO NSULTANCY SERVICES. 18. THIS COMPARABLE COMPANY WAS CONSIDERED BY THE C OORDINATE BENCH OF ITAT, DELHI IN THE CASE CITED AS HEADSTRONG SERVICES (INDIA) PVT. LTD. ( SUPRA) FOR THE ASSESSMENT YEAR 2010-11 AND THIS COMPANY WAS ORDERED TO BE EXCLUDED BY MAKING FOLLOW ING OBSERVATIONS :- 12.2. AFTER CONSIDERING THE RIVAL SUBMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD, WE FIND FR OM THE ANNUAL REPORT OF THIS COMPANY AVAILABLE ON PAGE 352 OF THE PAPER BOOK THAT ITS P & L ACCOUNT SHOWS `INCOME FROM SOFTWARE SERVICES AS ONE UNIT AT RS.43,04,66,481/-. SCHEDULES 7 GIVES BREAK UP OF TH IS INCOME WITH INCOME FROM SOFTWARE SERVICES AT RS. 37.13 CRORE AND CONSULTANCY CHARGES AT RS. 5.90 CRORE. SEGMENTAL INFORMATION OF THIS COMPANY IS AVAILABLE ON PAGE 66 OF ITS ANNUAL REPORT WHICH STA TES THAT : THE COMPANY IS PRIMARILY ENGAGED IN SOFTWAR E DEVELOPMENT AND I.T. ENABLED SERVICES WHICH IS CONSIDERED THE ONLY REPORTABLE BUSINESS SEGMENT. T HIS INDICATES THAT THE REVENUE FROM SOFTWARE DEVELOPMEN T AND ITES HAS BEEN CLUBBED BY THIS COMPANY WHICH ALS O INCLUDES CONSULTANCY CHARGES. NO DOUBT CONSULTANCY CHARGES IN RELATION TO SOFTWARE DEVELOPMENT ARE PAR T OF OVERALL SOFTWARE DEVELOPMENT, BUT THE INCLUSION OF ITES IN THE OVERALL SEGMENT FRUSTRATES THE COMPARABILITY. WE ARE CURRENTLY DEALING WITH THE ITA NO.783/DEL./2015 13 INTERNATIONAL TRANSACTION OF `PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND THE INTERNATIONAL TRANSAC TION OF ITES IS SEPARATE WHICH HAS ALSO BEEN BENCHMARKED DISTINCTLY. IN OUR CONSIDERED OPINION, E-INFOCHIPS BANGALORE LTD. HAVING A POOL OF BOTH SOFTWARE DEVELOPMENTS AND ITES SEGMENTS INTO THE OVERALL SEGMENT DESIGNATED AS `SOFTWARE DEVELOPMENT, CANNO T BE CONSIDERED AS COMPARABLE ON ENTITY LEVEL WITH TH E INTERNATIONAL TRANSACTION OF `SOFTWARE DEVELOPMENT OF THE ASSESSEE. WE, THEREFORE, ORDER FOR THE EXCLUSIO N OF THIS COMPANY FROM THE LIST OF COMPARABLES. 19. FOLLOWING THE DECISION RENDERED BY THE COORDINA TE BENCH IN HEADSTRONG SERVICES (INDIA) PVT. LTD. (SUPRA) AND THE FACT THAT SINCE E-INFOCHIPS BANGALORE LTD. IS HAVING POOL OF BOTH SOFTWARE DEVELOPMENT AND ITE SERVICES SEGMENT AND BOTH THE S EGMENTS ARE DESIGNATED AS SOFTWARE DEVELOPMENT SEGMENT, THE SAM E CANNOT BE TAKEN AS A VALID COMPARABLE ON ENTITY LEVEL VIS--V IS INTERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT SERVICES OF ASS ESSEE COMPANY. 20. IN FISERV INDIA PRIVATE LTD. (SUPRA), THE COORDINATE BENCH OF ITAT, DELHI ALSO ORDERED TO EXCLUDE THIS COMPANY AS A COMPARABLE FOR THE SAME AY 2010-11 ON THE GROUND THAT THIS COM PANY BEING ENGAGED IN PRODUCT DEVELOPMENT CANNOT BE A VALID CO MPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTION PERTAINI NG TO SOFTWARE DEVELOPMENT SERVICES. SO, IN THESE CIRCUMSTANCES, WE ORDER TO EXCLUDE THIS COMPANY FROM THE FINAL LIST OF COMPARA BLE. ITA NO.783/DEL./2015 14 INFOSYS LIMITED 21. ASSESSEE SOUGHT EXCLUSION OF THIS COMPANY AS A COMPARABLE BY RAISING OBJECTIONS INTER ALIA THAT THIS COMPANY HAS ITS OWN BRAND VALUE; THAT IT IS HAVING TURNOVER OF 135 TIMES OF T HE ASSESSEE; THAT THERE ARE EXTRA ORDINARY EVENTS AFFECTING ITS PROFI TABILITY AND INCORRECT MARGIN CALCULATIONS. THE LD. AR FOR THE ASSESSEE CONTENDED THAT IN ASSESSEES OWN CASE, THIS COMPARA BLE WAS EXCLUDED BY THE TRIBUNAL BY RELYING UPON THE JUDGME NT OF HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA 1204 / 2011 DECIDED ON 10.07.2013 , ORDER AVAILABLE AT PAGES 126 TO 131 OF THE COMPILATION OF CASE LAWS. 22. HOWEVER, TPO REJECTED THE ARGUMENT ADDRESSED BY ASSESSEE COMPANY THAT MARKETING AND ADVERTISING ACTIVITIES C ARRIED OUT BY THE COMPARABLE COMPANY CREATED MARKETING INTANGIBLE S ON THE GROUND THAT TAXPAYER HAS NOT GIVEN THE BASIS ON WHI CH IT CAN BE CONCLUDED THAT THE COMPANIES HAVE CREATED MARKETING INTANGIBLES. TPO ALSO REJECTED THE ARGUMENTS ADDRESSED BY THE AS SESSEE THAT THIS COMPARABLE COMPANY HAS SPENT RS.78,42,59,246/- ON S ELLING AND MARKETING EXPENSES ON THE GROUND THAT AS PER SCHEDU LE 12 OF THE P&L ACCOUNT, IT HAS SPENT ONLY RS.1,33,15,247/- ON MARKETING AND OTHER RELATED SERVICES. TPO ALSO REJECTED THE ASSE SSEES CONTENTION THAT THE COMPARABLE COMPANY IS POSSESSING HUGE BRAN D VALUE ITA NO.783/DEL./2015 15 SUFFICIENT TO INFLUENCE THE PRICING POLICY OF THE C OMPANY THEREBY DIRECTLY IMPACTING MARGINS OF THE COMPANY ON THE GR OUND THAT THE COMPANY HAS SPENT A MEAGER AMOUNT OF 0.06% OF THE R EVENUES AND COULD NOT HAVE GENERATED BRAND VALUE WITH THIS AMOU NT AND RETAINED THIS COMPANY AS A SUITABLE COMPARABLE. 23. HOWEVER, COORDINATE BENCH OF THE TRIBUNAL IN AS SESSEES OWN CASE QUA AYS 2008-09 AND 2009-10 ORDERED TO EXC LUDE THIS COMPANY FROM THE LIST OF COMPARABLES BY RELYING UPO N CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA). SINCE THE COMPARABLE COMPANY IS A GIANT COMPANY IN TERMS OF R ISK PROFILE, NATURE OF SERVICES, NUMBER OF EMPLOYEES, OWNERSHIP OF ITS BRANDED PRODUCTS AND BRAND RELATED PROFITS AND HAVING TURNO VER OF 135 TIMES OF THE ASSESSEE, IT CANNOT BE A SUITABLE COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF ASSES SEE COMPANY BECAUSE ASSESSEE COMPANY IS A CAPTIVE SERVICE PROVI DER RENDERING SERVICES OF ITS AE ALONE WITHOUT HAVING ANY INTANGI BLE IN THE DEVELOPMENT OF SOFTWARE HAVING LIMITED NUMBER OF EM PLOYEES AND NOT HAVING ANY BRANDED PRODUCT. 24. ASSESSEE COMPANY IS ALSO OPERATING AT MINIMUM R ISK AS THE SERVICES ARE BEING PROVIDED TO ITS AE AND THERE IS A HUGE DIFFERENCE IN THE REVENUE EARNED BY THE COMPARABLE COMPANY VIS --VIS ASSESSEE COMPANY. SO, BY FOLLOWING THE DECISION RE NDERED BY ITA NO.783/DEL./2015 16 COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AYS 2008-09 AND 2009-10, WE HEREBY ORDER TO EXCLUDE THI S COMPARABLE FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTION. PERSISTENT SYSTEMS LIMITED 25. ASSESSEE SOUGHT TO EXCLUDE THIS COMPANY AS A CO MPARABLE ON THE GROUNDS INTER ALIA THAT IT IS FUNCTIONALLY NOT COMPARABLE AND THAT THIS COMPANY IS HAVING DIFFERENT BUSINESS MODEL AS IT DRIVES ITS INCOME FROM SALE OF SOFTWARE SERVICES AND ITS PRODU CTS AND THAT THIS COMPARABLE COMPANY HAS BEEN EXCLUDED FROM THE FINAL LIST OF COMPARABLE IN ASSESSEES OWN CASE QUA AY 2008-09 IN ITA NO.3324/DEL/2013 DECIDED ON 23.04.2015 , ORDER AVAILABLE ON PAGES 251 TO 277 OF THE COMPILATION OF CASE LAWS. 26. COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2008-09 (SUPRA) EXAMINED THE COMPARABILITY OF TH IS COMPANY WITH ASSESSEE COMPANY AND BY RELYING UPON ORDER PAS SED BY THE DELHI BENCH OF THE TRIBUNAL IN CASE OF TOLUNA INDIA PVT. LTD. VS. ACIT IN ITA NO.5645/DEL/2011 ORDER DATED 26.08.2014 AND LEAR AUTOMOTIVE INDIA PVT. LTD. VS. ACIT IN ITA NO.5612/ DEL/2011 ORDER DATED 22.12.2014 , FOUND THIS COMPANY TO BE INCOMPARABLE VIS--VIS ASSESSEE COMPANY. ITA NO.783/DEL./2015 17 27. COORDINATE BENCH OF THE TRIBUNAL ON THE BASIS O F INFORMATION SUPPLIED BY PERSISTENT SYSTEMS LIMITED U/S 133 (6) OBSERVED THAT THIS COMPANY HAS, DEVELOPED A FEW OF ITS OWN PRODUCTS IN THE AREA OF IDENTITY MANAGEMENT CONTRACTORS AND REVENUE FROM PRODUCT LIAISON STANDS AT RS.288.93 MILLION AS AGAI NST THE REVENUE FROM THE SOFTWARE DEVELOPMENT SERVICES AT RS.4829.5 7 MILLIONS. NO DOUBT, THE COMPARABLE COMPANY IS ENGAGED IN SOFT WARE DEVELOPMENT SERVICES BUT IT IS ALSO A SOFTWARE PROD UCT COMPANY AND HAD ENTERED ON ENTITY LEVEL IT HAD IMPACTED THE TOT AL PROFIT OF THE COMPANY. 28. MOREOVER, SINCE THERE IS NO SEPARATE SEGMENTAL INFORMATION AVAILABLE IT HAS BEEN CONSIDERED AS A COMPARABLE ON ENTITY LEVEL AND MEANING THEREBY THAT TOTAL REVENUE CONSIDERED ALSO CONSTITUTE SOME PART OF THE PRODUCT LICENCE. SINCE, IN THE GIVEN C IRCUMSTANCES, IMPACT OF REVENUE FROM PRODUCT LICENCE ON THE TOTAL REVENUE OF THE COMPANY CANNOT BE ASCERTAINED, AS THIS INFORMATION IS NOT AVAILABLE IN THE ANNUAL REPORT, THIS COMPANY CANNOT BE RETAIN ED AS A SUITABLE COMPARABLE, HENCE WE ORDER TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. THIRDWARE SOLUTIONS 29. ASSESSEE SOUGHT THE EXCLUSION OF THIS COMPANY A S A COMPARABLE ON THE GROUNDS INTER ALIA THAT IT IS FUN CTIONALLY ITA NO.783/DEL./2015 18 DISSIMILAR BEING ENGAGED IN PRODUCT DEVELOPMENT QUA WHICH SEGMENTAL ACCOUNTS ARE NOT AVAILABLE; THAT IT HAS A BNORMAL/SUPER NORMAL PROFIT AND THAT IT IS INDICATED IN DIVERSIFI ED SERVICES LIKE SALE OF LICENCES, SOFTWARE SERVICES, EXPORT AND REVENUE FROM SUBSCRIPTION, DEVELOPMENT OF SOFTWARE PRODUCT QUA W HICH NO SEGMENTAL DISCLOSURE HAVE BEEN MADE BY THE COMPANY IN ITS AUDITED FINANCIAL STATEMENT AND RELIED UPON IN THE CASE OF FISERV INDIA PRIVATE LIMITED (SUPRA). 30. TPO REJECTED THE OBJECTIONS RAISED BY ASSESSEE BY OBSERVING THAT THE SOFTWARE DEVELOPMENT, IMPLEMENTATION AND S UPPORT SERVICES ARE VARIOUS SUB-SEGMENTS OF SOFTWARE DEVEL OPMENT SERVICES ONLY AND HAS ALSO BRUSHED ASIDE THE OBJECT ION OF ASSESSEE THAT IT IS ONLY SALE OF LICENCE BY OBSERVING THAT O UT OF TOTAL SALE OF RS.67.57 CRORES, THE SALE OF LICENCE IS OF RS.1.51 CRORES WHICH IS ONLY 2.2% OF THE TOTAL SALES. 31. KEEPING IN VIEW THE FACT THAT THIS COMPANY IS I NTO DIVERSIFIED SERVICES LIKE SALE OF LICENCES, SOFTWARE SERVICES, DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. QUA WHICH SEGMENTAL FINANCI ALS ARE NOT AVAILABLE AND THE FACT THAT THIS COMPANY IS HAVING RELATED PARTY TRANSACTIONS EXCEEDING 50% OF THE REVENUE, THIS COM PANY CANNOT BE A SUITABLE COMPARABLE FOR BENCHMARKING THE INTER NATIONAL TRANSACTION. MOREOVER, COORDINATE BENCH IN FISERV INDIA PRIVATE ITA NO.783/DEL./2015 19 LIMITED (SUPRA) WHILE EXAMINING THE COMPARABILITY OF THIS COMPANY WITH FISERV INDIA PRIVATE LIMITED (SUPRA) AND A SIMILARLY PLACED SOFTWARE DEVELOPMENT COMPANY ALSO ORDERED TO EXCLUDE THE SAME BY TAKING INTO CONSIDERATION ALL THE AFORESAID FACTS. WE ARE OF THE CONSIDERED VIEW THAT THIS COMPANY CANNOT BE A S UITABLE COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTIONS, HENCE THIS COMPANY IS ORDERED TO BE EXCLUDED FROM THE FIN AL LIST OF COMPARABLES. WIPRO TECHNOLOGY SERVICES LTD. 32. ASSESSEE COMPANY FURTHER SOUGHT TO EXCLUDE THIS COMPANY FROM THE FINAL LIST OF COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTION ON THE GROUNDS INTER ALIA THAT IT IS FUNCTIONALLY DISSIMILAR BEING ENGAGED IN ITES/BPO F UNCTIONS OF SECURITY ASSESSMENT, BUSINESS PROCESS MANAGEMENT SE RVICES; THAT ITS SEGMENTAL FINANCIALS ARE NOT AVAILABLE; THAT IT HAS 100% RELATED PARTY TRANSACTIONS AND RELIED UPON THE DECISION REN DERED BY SAXO INDIA PVT. LTD. VS. ACIT IN ITA NO.6148/DEL/2015 OR DER DATED 05.02.2016. THE LD. AR FOR THE ASSESSEE ALSO CONTENDED THAT T HIS COMPARABLE COMPANY WAS ALSO ORDERED TO BE EXCLUDED BY ITAT, DELHI IN ASSESSEES OWN CASE FOR AY 2008-09 ON ACCO UNT OF DISSIMILAR FUNCTIONAL PROFILE. ITA NO.783/DEL./2015 20 33. HOWEVER, TPO ORDERED TO RETAIN THIS COMPANY AS A COMPARABLE ON THE GROUND THAT THIS COMPANY IS CLASS IFIED AS SOFTWARE DEVELOPER IN PROWESS DATABASE AND MENTION S DELIVERY OF TECHNOLOGY INFRASTRUCTURE SERVICES; THAT THE SERVIC ES RENDERED BY THE COMPARABLE COMPANY ARE TO BE DEEMED ASSOCIATED ENTE RPRISES WHICH ARE DEEMED INTERNATIONAL TRANSACTIONS; THAT W IPRO TECHNOLOGY ARE UNRELATED ENTITIES AND IT IS NOT CLE AR THAT HOW THE TRANSACTIONS OF WIPRO LIMITED AND CITIGROUP INC. AR E PARTY RELATED TRANSACTIONS AND PREFERRED TO RETAIN THIS COMPANY A S A SUITABLE COMPARABLE. 34. COORDINATE BENCH OF ITAT, DELHI IN ASSESSEES O WN CASE ORDERED TO EXCLUDE THIS COMPANY FROM THE FINAL LIST OF COMPARABLES BY MAKING FOLLOWING OBSERVATIONS :- 10.2. WE HAVE HEARD THE RIVAL SUBMISSIONS THE PERU SED THE RELEVANT MATERIAL ON RECORD. IT CAN BE OBSERVED FROM THE TPOS ORDER ITSELF THAT THE FACTS AND CIRCUMSTA NCES OF WIPRO LTD., ARE SOMEWHAT SIMILAR TO INFOSYS TECHNOLOGIES LTD., INASMUCH AS HE HAS PROCEEDED TO REJECT THE ASSESSEES OBJECTIONS BY RELYING ON THE REASONING GIVEN BY HIM FOR THE INCLUSION OF INFOSYS LTD. IT IS FURTHER OBSERVED THAT WIPRO LIMITED (SEG.) WA S CONSIDERED AS COMPARABLE BY THE TPO IN THE CASE OF TOLUNA INDIA (SUPRA) AND LEAR AUTOMOTIVE (SUPRA). T HE TRIBUNAL, IN BOTH THE CASES, HAS HELD WIPRO LTD. (S EG.) AS NOT COMPARABLE. THIS COMPANY IS ALSO OPERATING A S A FULL-FLEDGED RISK TAKING ENTITY; ENGAGED IN PROVIDI NG TECHNOLOGY INFRASTRUCTURE SERVICES, TESTING SERVICE S, PACKAGE IMPLEMENTATION HAVING MORE THAN 82,000 EMPLOYEES. IT HAS ITS OWN R&D CENTRE. IT INCURRED AROUND 11% OF NET SALES AS EXPENDITURE ON RESEARCH AND ITA NO.783/DEL./2015 21 DEVELOPMENT. NONE OF THE ABOVE FACTORS MATCH WITH T HE ASSESSEE COMPANY. RESPECTFULLY FOLLOWING THE ABOVE PRECEDENTS, WE HOLD THAT THIS COMPANY IS NOT COMPARABLE. 10.3. THERE IS ANOTHER REASON FOR HOLDING THIS COMP ANY AS INCOMPARABLE. IT CAN BE SEEN THAT THERE WAS A ME RGER OF WIPRO INFRASTRUCTURE ENGINEERING LTD., WIPRO HEALTHCARE IT LTD., QUANTECH GLOBAL SERVICES LTD., WITH THIS COMPANY DURING THE YEAR IN QUESTION. THIS MERG ER WAS APPROVED BY THE HONBLE KARNATAKA HIGH COURT AND THE HONBLE AP HIGH COURT DURING THE FINANCIAL YEAR 2007-08. THE MUMBAI BENCH OF THE TRIBUNAL IN PETRO ARANDITE (P) LTD. VS. DCIT (2013) 154 TTJ (MUM) 176 HAS HELD THAT A COMPANY CANNOT BE CONSIDERED AS COMPARABLE BECAUSE OF FINANCIAL RESUL TS DISTORTED DUE TO MERGERS AND DEMERGERS, ETC. SIMILA R VIEW HAS BEEN TAKEN BY THE DELHI BENCH OF THE TRIBU NAL IN THE CASE OF TOLUNA INDIA PVT. LTD. (SUPRA). AS T HERE WERE AMALGAMATIONS IN WIPRO LTD. DURING THE FINANCI AL YEAR IN QUESTION, THIS FACT ALSO MAKES IT INCOMPARA BLE WITH THE ASSESSEE COMPANY. IN VIEW OF THE FOREGOING REASONS, WE DIRECT TO EXCLUDE WIPRO LIMITED (SEG.) FROM THE LIST OF COMPARABLES. 35. SO, FOLLOWING THE DECISION RENDERED BY THE COOR DINATE BENCH IN ASSESSEES OWN CASE FOR AY 2008-09 AND IN VIEW O F THE FACTS AND CIRCUMSTANCES OF THIS CASE, WE ARE OF THE CONSIDERE D VIEW THAT THIS COMPARABLE COMPANY BEING A RISK TAKING ENTITY HAVIN G HUGE POOL OF MORE THAN 82,000 EMPLOYEES, HAVING ITS OWN R&D CENT RE ON WHICH EXPENDITURE TO THE TUNE OF 11% IS MADE, CANNOT BE A SUITABLE COMPARABLE VIS--VIS THE ASSESSEE COMPANY WHICH IS A CAPTIVE ENTITIES PROVIDING SERVICES TO ITS AE ONLY. SO, WE ORDER TO EXCLUDE THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. ITA NO.783/DEL./2015 22 ADDITIONAL GROUND NO.4.5 36. THE ASSESSEE COMPANY BY RAISING ADDITIONAL GROU ND NO.4.5 SOUGHT TO CONSIDER THE CORRECT MARGIN OF COMPARABLE COMPANIES SPECIFICALLY QUINTEGRA SOLUTIONS LIMITED. SINCE TH E ADDITIONAL GROUND RAISED BY THE ASSESSEE COMPANY IS NECESSARY TO ADJUDICATE THE CONTROVERSY AT HAND, THE ADDITIONAL GROUND IS A LLOWED TO BE RAISED. 37. BARE PERUSAL OF THE TP ORDER PASSED BY THE TPO GOES TO PROVE THAT THE TPO HAS CONSIDERED THE OPERATING PRO FIT OF QUINTEGRA SOLUTIONS LIMITED (SUPRA) AS 1.46% WHER EAS WHILE MAKING SEPARATE COMPUTATION OF THE OPERATING MARGIN OF QUINTEGRA SOLUTIONS LIMITED (SUPRA) ITS PROFIT MARGIN IS RECO RDED AT -8.20%. FOR FACILITY OF REFERENCE, A MARGIN COMPUTATION OF THE FINAL COMPARABLE QUA QUINTEGRA SOLUTIONS LIMITED (SUPRA) IS REPRODUCED AS UNDER :- INCOME 373,847,298 ADD : MISC. INCOME 57,538 TOTAL OPERATING INCOME 373,904,836 PERSONNEL EXPENSES 274,051,686 ADMN. EXPENSES 62,973,949 SELLING & MARKETING EXPENSES 9,930,847 DEPRECIATION 63,206,615 TOTAL EXPENSES 410,163,097 LESS : NON-OPERATING EXPENSES FOREX LISS 2,636,924 TOTAL OPERATING EXPENSES 407,526,173 ITA NO.783/DEL./2015 23 38. ASSESSEE RAISED ITS OBJECTIONS BEFORE THE LD. D RP WHO HAS ISSUED THE DIRECTION TO THE TPO TO CONSIDER THE COM PUTATION SUBMITTED BY THE ASSESSEE TO WORK OUT THE MARGIN OF THE COMPARABLE COMPANY BUT THE TPO HAS FAILED TO DO SO. SINCE THE FACTUAL POSITION AS TO THE OPERATING PROFIT MARGIN OF QUINTEGRA SOLUTIONS LIMITED (SUPRA) IS NOT IN DISPUTE, THE TP O IS DIRECTED TO RECTIFY THE MARGIN QUA QUINTEGRA SOLUTIONS LIMITED (SUPRA) FOR BENCHMARKING THE INTERNATIONAL TRANSACTION. SO, AD DITIONAL GROUND NO.4.5 IS DETERMINED IN FAVOUR OF THE ASSESSEE. COMPANIES SOUGHT TO BE EXCLUDED AS COMPARABLES FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE ASSESSEES INTERNATIONAL TRANSACTION QUA MARKETING SUPPORT SERVICES APTICO LIMITED 39. ASSESSEE SOUGHT TO EXCLUDE THIS COMPANY AS A CO MPARABLE ON GROUND OF FUNCTIONAL DISSIMILARITY BEING ENGAGED IN COMPLEX AND DIVERSIFYING TECHNICAL CONSULTANCY SERVICES AND CON TENDED THAT THIS COMPANY IS ALREADY ORDERED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTIONS IN ASSESSEES OWN CASE IN ITA NO.3324/DEL/2013 (SUPRA) FOR AY ITA NO.783/DEL./2015 24 2008-09. HOWEVER, TPO PREFERRED TO RETAIN THIS COM PANY AS A COMPARABLE BY OVERRULING THE OBJECTIONS RAISED BY T HE ASSESSEE. 40. THIS COMPARABLE COMPANY WAS EXAMINED AS A COMPA RABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTION IN A SSESSEES OWN CASE FOR AY 2008-09 (SUPRA) AND HELD THE SAME TO BE INCOMPARABLE TO THE ASSESSEE COMPANY BY UPHOLDING THE ORDER PASS ED BY LD. CIT (A). FOLLOWING THE ORDER PASSED BY THE COORDINATE BENCH, WE ARE OF THE CONSIDERED VIEW THAT SINCE THIS COMPANY IS P ROVIDING DIVERSIFYING SERVICES LIKE MICRO ENTERPRISES DEVELO PMENT, SKILL DEVELOPMENT, ENTREPRENEURSHIP DEVELOPMENT, RESEARCH STUDIES, PROJECT RELATED SERVICES, INFRASTRUCTURE PLANNING & DEVELOPMENT ENVIRONMENT MANAGEMENT, ENERGY RELATED SERVICES, CL USTER DEVELOPMENT, TECHNOLOGY FACILITATION, ASSET RECONST RUCTION & MANAGEMENT SERVICES, EMERGING AREAS, WHICH ALSO INC LUDE INFRASTRUCTURE PLANNING AND DEVELOPMENT ALONG WITH ENERGY RELATED SERVICE AND CLUSTER DEVELOPMENT AND IT HAS ALSO COM E ON RECORD THAT THIS COMPANY HAS ONLY 12% OF THE TOTAL INCOME FROM RESEARCH STUDIES WHICH IS SAME AS TO THE SERVICES PROVIDED B Y THE ASSESSEE COMPANY. SO, IN VIEW OF THE FUNCTIONAL DISSIMILARI TY, THIS COMPANY CANNOT BE A SUITABLE COMPARABLE, HENCE ORDERED TO B E EXCLUDED FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. ITA NO.783/DEL./2015 25 HCCA BUSINESS SERVICES PVT. LTD. 41. ASSESSEE SOUGHT TO EXCLUDE THIS COMPANY FROM TH E LIST OF COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTION ON THE GROUNDS INTER ALIA THAT THIS IS FUNCTIONALLY DISSIM ILAR BEING ENGAGED IN PROVIDING HUMAN RESOURCES OPERATIONS AND ADMINIS TRATIVE SERVICES; IT IS PROVIDING PAY ROLL PROCESSING AND C OMPENSATION STRUCTURING; MANAGEMENT AND LABOUR HR RELATED SERVI CES AND REIMBURSEMENT PROCESSES AND ACCOUNTING SERVICES. 42. HOWEVER, TPO SOUGHT TO RETAIN THIS COMPANY AS A COMPARABLE COMPANY ON THE GROUND THAT THE OBJECTION S RAISED BY THE ASSESSEE ARE NOT ACCEPTABLE AS WHILE DOING TNMM ONLY THE BROAD FUNCTIONAL PROFILE OF THE COMPARABLE IS TO BE EXAMINED. 43. COMPARABILITY OF THIS COMPANY WAS EXAMINED BY THE COORDINATE BENCH OF DELHI IN LG CHEMICAL INDIA PVT. LTD. VS. ACIT IN ITA NO.1819/DEL/2015 ORDER DATED 03.05.2016 TO BENCHMARK THE INTERNATIONAL TRANSACTION PERTAINING TO PROVISIONS OF MARKING SUPPORTING SERVICES SAME AS IN THE CASE OF ASSESSEE COMPANY. COORDINATE BENCH AT PAGES 13 & 14 OF THE ORDER CAME TO THE CONCLUSION THAT THIS COMPANY IS FUNCTIONALLY NO T COMPARABLE AS WELL AS IT POSSESSES BUSINESS AND COMMERCIAL RIGHTS OF RS.3,75,33,159/-. WHEN WE GO THROUGH PAGES 3564 TO 3576 OF THE ANNUAL REPORT OF THIS COMPARABLE COMPANY, IT BECOME S APPARENTLY ITA NO.783/DEL./2015 26 CLEAR THAT THIS COMPANY IS ENGAGED IN PAY ROLL PROC ESSING SERVICES AND HAS CONSIDERED ITSELF AS AN OUTSOURCING SERVICE PROVIDER AND AS SUCH, IS NOT FUNCTIONALLY COMPARABLE. SO, IN THESE CIRCUMSTANCES, WE ORDER TO EXCLUDE THIS COMPARABLE FROM THE SET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTION. TSR DARASHAW LIMITED 44. ASSESSEE SOUGHT TO EXCLUDE THIS COMPANY FROM TH E FINAL SET OF COMPARABLES ON THE GROUNDS INTER ALIA THAT ON GR OUND OF FUNCTIONAL DISSIMILARITY THAT THIS COMPANY IS INTO SHARE REGISTRY, TRANSFER SERVICES, DEPOSITORY SERVICES, RECORD MANA GEMENT SHARE REGISTER SERVICES AND CORPORATE FIXED DEPOSIT MANAG EMENT, WHICH ARE NOT IDENTICAL TO THE MARKETING SUPPORT SERVICES BEING RENDERED BY THE ASSESSEE AND RELIED UPON TREND MICRO INDIA PRIVATE LTD. VS. DCIT IN ITA NO.1585/DEL/2015 ORDER DATED 20.11.2015 , AVAILABLE AT PAGES 35 TO 59 OF THE COMPILATION OF CASE LAWS, AND LG CHEMICAL INDIA PVT. LTD. (SUPRA), TPO AGAIN BY OVERRULING THE OBJECTIONS RAISED BY THE ASSESSEE COMPANY RETAINED THIS COMPANY AS A COMPARABLE. 45. COORDINATE BENCH OF THE TRIBUNAL EXAMINED THIS COMPANY AS A COMPARABLE WITH TREND MICRO INDIA PRIVATE LTD. (SUPRA) WHICH IS ALSO INTO MARKETING AND OTHER TECHNICAL SUPPORT SERVICES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. COORD INATE BENCH OF ITA NO.783/DEL./2015 27 THE TRIBUNAL IN TREND MICRO INDIA PRIVATE LTD. (SUPRA) ORDERED TO EXCLUDE THIS COMPANY AS AN UNSUITABLE COMPARABLE BY MAKING FOLLOWING OBSERVATIONS :- 9.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS COMPANY IS A BROKING AND INVESTMENT BANKING HOUSE WITH ITS THREE SEGMENTS, NAMELY, REGISTRAR AND TRAN SFER AGENT ACTIVITY (R&T); RECORDS MANAGEMENT ACTIVITY (RECORDS); AND PAYROLL AND TRUST FUND ACTIVITY (PAY ROLL). UNDER THE REGISTRAR AND TRANSFER AGENT ACTIVITY, TH IS COMPANY UNDERTAKES REGISTRAR AND TRANSFER AGENT ACTIVITY FUNCTIONS FOR EQUITY AND PREFERENCE SHARES , DEBENTURE INSTRUMENTS AND BONDS, COMMERCIAL PAPER AND PRIVATE PLACEMENTS. IT ALSO UNDERTAKES TRANSFER PROCESSING, CUSTOMER/QUERY HANDLING AND CORRESPONDENCE, SPLIT/CONSOLIDATION/RENEWAL OF CERTIFICATES, PROCESSING AND DISTRIBUTION OF INTEREST/DIVIDEND WARRANTS, PAYMENTS BY PHYSICAL WARRANTS/THROUGH ECS/DIRECT CREDIT. UNDER RECORDS MANAGEMENT ACTIVITY, THIS COMPANY UNDERTAKES STORAG E, RETENTION & RETRIEVAL OF PHYSICAL AND/OR ELECTRONIC RECORDS. UNDER PAYROLL AND TRUST FUND ACTIVITY, THI S COMPANY HANDLES THE ACTIVITIES NORMALLY HANDLED BY PAYROLL AND RETIREMENT FUNDS SECTION IN ANY ORGANIZATION, INCLUDING INTERFACE WITH REGULATORY AUTHORITIES. WHEN WE COMPARE ALL THE THREE BROADER ACTIVITIES UNDERTAKEN BY THIS COMPANY, NAMELY, R&T, RECORDS AND PAYROLL, WITH THE OVERALL PRE AND POST SALE SERVICES RENDERED BY THE ASSESSEE TO ITS AE, ON A C OST PLUS BASIS, WE FIND THAT THERE IS A HUGE FUNCTIONAL DISPARITY BETWEEN THE TWO. THAT APART, THE CONSIDER ATION OF THIS COMPANY ON AN ENTITY LEVEL BY THE TPO HAS RENDERED THE ENTIRE EXERCISE OF COMPARISON MEANINGLESS. FINDING STRIKING DISSIMILARITIES BETWE EN THIS COMPANY AND THE ASSESSEE, WE ORDER TO EXCLUDE THIS COMPANY FROM THE FINAL SET OF COMPARABLES. ITA NO.783/DEL./2015 28 46. KEEPING IN VIEW THE STARK FUNCTIONAL DISSIMILAR ITY BETWEEN THE ASSESSEE COMPANY VIS--VIS COMPARABLE COMPANY A ND BY FOLLOWING THE DECISIONS RENDERED BY COORDINATE BENC H, WE ARE OF THE CONSIDERED VIEW THAT SINCE THE COMPARABLE COMPA NY IS INTO UNDER RECORD MANAGEMENT ACTIVITY VIDE WHICH IT UNDE RTAKES STORAGE, RETENTION AND RETRIEVAL OF PHYSICAL OR ELE CTRONIC RECORDS AND ALSO INTO PAYROLL AND TRUST FUND ACTIVITY AND IS HA NDLING PAYROLL AND RETIREMENT FUNDS, IT HAS NO FUNCTIONAL COMPARAB ILITY WITH THE ASSESSEE COMPANY TO BE A SUITABLE COMPARABLE. SO, WE ORDER TO EXCLUDE THIS COMPANY AS A VALID COMPARABLE. CYBER MEDIA INDIA ONLINE LTD. 47. ASSESSEE SOUGHT TO EXCLUDE THIS COMPANY AS COMP ARABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS QUA MAR KETING SUPPORT SERVICES ON THE GROUNDS INTER ALIA THAT THIS COMPAN Y IS FUNCTIONALLY INCOMPARABLE; THIS COMPANY IS PROVIDING HIGH END SE RVICES ENTAILING HIGHER RISK AND IS HAVING SIGNIFICANT INT ANGIBLES I.E. TRADEMARK AND WEBSITES CONTRIBUTING UP TO 14.55% OF ITS TOTAL NET BLOCK. 48. HOWEVER, TPO RETAINED THIS COMPANY AS A COMPARA BLE ON THE GROUND THAT UNDER TNMM METHOD COMPARABILITY OF FINANCIALS IS REQUIRED TO BE SEEN RATHER THAN FIXING ON PRODUC T/SERVICE ITA NO.783/DEL./2015 29 COMPARABILITY AS IN OTHER METHODS FOR BENCHMARKING INTERNATIONAL TRANSACTIONS. 49. PERUSAL OF THE ANNUAL REPORT, AVAILABLE AT PAGE S 3540 TO 3559 OF PAPER BOOK VOL. IV OF THE PAPER BOOK, SHOWS THAT THE COMPANY IS OPERATING AS INFORMATION TECHNOLOGY INFORMATION WEBSITE GENERATING REVENUE BY SELLING OF ONLINE MEDIA SPACE AND HAS INCURRED AMOUNT OF RS.1.97 CRORES AS DIRECT EXPENSE S WHICH CAN BE IN THE NATURE OF MEDIA BUY COST. MOREOVER, OPERA TING ONLINE PRODUCTS FALLS WITHIN THE CATEGORY OF IT/BPO/ITES. APART FROM THIS, IT IS APPARENT FROM SCHEDULE IV, AVAILABLE AT PAGE 3548 OF THE PAPER BOOK VOL.IV, THE COMPARABLE COMPANY OWNS TRAD EMARK AND WEBSITE IN THE FORM OF INTANGIBLES OF THE SIGNIFICA NT VALUE WHICH ACCOUNTS FOR 14.55% OF ITS TOTAL END BLOCK. 50. LD. AR FOR THE ASSESSEE ALSO CONTENDED THAT IN FY 2009-10, DUE TO EXTRA ORDINARY EVENTS IN THE FORM OF AMALGAM ATION, PROFITABILITY HAS BEEN SIGNIFICANTLY IMPACTED BECAU SE IN FY 2008- 09 OP/OC IS 8.14% AND IN FY 2009-10 OP/OC IS 43.10% . HOWEVER, PERUSAL OF PAGE 3558 OF THE ANNUAL REPORT OF COMPARABLE COMPANY SHOWS THAT THE PROPOSED AMALGAMATION HAS NO T YET TAKEN EFFECT BUT, AT THE SAME TIME, WE ARE OF THE CONSIDE RED VIEW THAT EVEN PROPOSED AMALGAMATION HAS IMPACTED THE BUSINES S OF THE COMPANY DUE TO WHICH OP/OC OF THE COMPARABLE COMPAN Y HAS ITA NO.783/DEL./2015 30 SHOOT UP FROM 8.14% IN FY 2008-09 TO 43.10% IN FY 2 009-10 WHICH IS CERTAINLY AN EXTRA ORDINARY EVENT AND REAS ON OR EXTRA ORDINARY PROFITABILITY OF THE COMPARABLE COMPANY CA NNOT BE ATTRIBUTED TO THE NORMAL BUSINESS CIRCUMSTANCES. 51. SO, KEEPING IN VIEW THE FUNCTIONAL DISSIMILARIT Y AND EXTRA ORDINARY EVENTS IMPACTING PROFITABILITY OF THIS COM PARABLE COMPANY VIS--VIS ASSESSEE COMPANY, THE SAME CANNOT BE A SU ITABLE COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTION, HENCE WE ORDER TO EXCLUDE THE SAME FROM THE FINAL LIST OF COMPARABLES. COMPARABLE COMPANY SOUGHT TO BE INCLUDED BY THE ASSESSEE COMPANY FOR BENCHMARKING INTERNATIONAL TRANSACTNION QUA MARKETING SUPPORT SERVICES 52. LD. AR FOR THE ASSESSEE CONTENDED THAT TPO/DRP HAVE ERRONEOUSLY EXCLUDED CONCEPT COMMUNICATION LTD., GRADIENT INFORMATION LIMITED AND GOLDMINE ADVERTISING LIMITE D FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE I NTERNATIONAL TRANSACTIONS WHICH ARE SUITABLE COMPARABLES. HOWEV ER, DURING THE COURSE OF ARGUMENT, THE LD. AR FOR THE ASSESSEE FAI RLY CONCEDED NOT TO PRESS THE INCLUSION OF AFORESAID COMPANIES IN TH E FINAL LIST OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTIONS QUA THE MARKETING SUPPORT SERVICES. SO GROUNDS NO.5, 5 .2 AND 5.3 ARE PARTLY DETERMINED IN FAVOUR OF THE ASSESSEE. ITA NO.783/DEL./2015 31 GROUNDS NO.6, 6.1, 6.2, 6.3, 6.4, 6.5 & 6.6 53. ASSESSEE IMPORTED CAPITAL EQUIPMENT TO THE TUNE OF RS.57,30,63,268/- FROM ITS AE DURING THE YEAR UNDER ASSESSMENT, THE DETAIL OF WHICH IS TABULATED AS UNDER :- PARTICULARS TOTAL AMOUNT CAPITALIZED FOR IMPORT OF CAPITAL EQUIPMENT AS PER COMPANIES ACT AS PER INCOME TAX RULES NEW EQUIPMENT 32,23,16,507 5,09,04,398 14,57,25,592 USED EQUIPMENT 25,41,03,286 3,55,64,922 11,00,18,09 0 TOTAL 57,64,19,793 8,64,69,321 25,57,43,681 54. LD. AR FOR THE ASSESSEE CONTENDED THAT THESE EQ UIPMENTS WERE IMPORTED FROM ITS AE IN ORDER TO HELP ASSESSEE TO DEVELOP SOFTWARE. HOWEVER, THE TPO HELD THAT THE ARMS LEN GTH PRICE OF THE EQUIPMENT SHOULD BE NIL. 55. THE LD. AR FOR THE ASSESSEE FURTHER CONTENDED T HAT THE COORDINATE BENCH OF TRIBUNAL IN ASSESSEES OWN CASE FOR FY 2009- 10, COPY OF WHICH IS AVAILABLE AT PAGE 279 TO 311 O F THE PAPER BOOK, ON IDENTICAL FACTS HELD THE ISSUE IN FAVOUR O F THE ASSESSEE. FOR FACILITY OF REFERENCE, OPERATIVE PART OF THE OR DER RENDERED BY THE COORDINATE BENCH IN ASSESSEES OWN CASE FOR AY 2009 -10 IS REPRODUCED AS UNDER :- 15.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE ASSESSEE PURCHASED CERTAIN FIXED ASSETS FROM ITS AE WITH THE DECLARED VALUE OF RS.33.50 CRORE. IN OUR CONSID ERED OPINION THE ASSESSEE RIGHTLY REPORTED PURCHASE OF F IXED ASSETS WITH THE TRANSACTED VALUE AS AN INTERNATIONA L ITA NO.783/DEL./2015 32 TRANSACTION, SINCE THE SAME IS COVERED WITHIN THE DEFINITION GIVEN IN SUB-SECTION (1) OF SECTION 92B, WHICH PROVIDES THAT 'INTERNATIONAL TRANSACTION' MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NA TURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBL E PROPERTY, OR ............... SECTION 92(1) STIPULA TES THAT: ` ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTIO N SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE. THE MANNER OF COMPUTATION OF ARM'S LENGTH PRICE IS SET OUT IN SECTION 92C. SUB-SECTION (1) PR OVIDES THAT THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE METHODS GIVEN IN THE PROVISION, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION ETC. AMONGST OT HERS, THERE IS COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AND TNMM. THE PRIMARY ONUS OF PROVING THAT THE INTERNATIONAL TRANSACTION IS AT ALP, IS ALWAYS ON T HE ASSESSEE. 15.3. REVERTING TO THE FACTS OF THE INSTANT CASE, W E FIND THAT THE ASSESSEE APPLIED TNMM AS THE MOST APPROPRIATE METHOD FOR SHOWING THAT THIS INTERNATIO NAL TRANSACTION WAS AT ALP. THE TPO HELD THAT THE CORRE CT METHOD TO BE APPLIED WAS CUP AND AS SUCH THE ASSESS EE WAS CALLED UPON TO GIVE UNCONTROLLED COMPARABLE INSTANCES OF THE PURCHASE OF SIMILAR ASSETS, WHICH THE ASSESSEE FAILED TO DO. THIS LED THE TPO TO TREAT TH E ALP OF THIS INTERNATIONAL TRANSACTION AT NIL. NORMALLY, IF THE ASSESSEE FAILS TO GIVE ANY COMPARABLE INSTANCE, THE N IT BECOMES THE DUTY OF THE TPO TO SEARCH SOME COMPARABLE UNCONTROLLED INSTANCES AT HIS OWN AND ACCORDINGLY DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION. IN OUR VIEW, BOTH THE ASSESSEE AS WELL THE TPO WENT WRONG BY NOT DOING WHAT WAS REQUIRED TO BE DONE BY THEM. 15.4. ONCE THE ALP OF AN INTERNATIONAL TRANSACTION OF PURCHASE OF FIXED ASSETS IS DETERMINED, THEN THE DIFFERENCE BETWEEN THE TRANSACTED VALUE AND THE ALP DOES NOT DIRECTLY LEAD TO THE TRANSFER PRICING ADJU STMENT. AT THIS JUNCTURE, IT IS PERTINENT TO NOTE THE LANGU AGE OF ITA NO.783/DEL./2015 33 SECTION 92(1) WHICH PROVIDES THAT ANY INCOME ARISIN G FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE. IT DOES NO T SAY THAT THE TOTAL INCOME IS TO BE COMPUTED IN ACCORDAN CE WITH THE ALP. IT IS RIGHTLY SO BECAUSE THE INTERNAT IONAL TRANSACTIONS WHICH HAVE NO DIRECT BEARING ON THE TO TAL INCOME, CANNOT GIVE RISE TO ADDITION ON ACCOUNT OF DIFFERENCE BETWEEN THEIR TRANSACTED VALUE AND ALP. SINCE THE TRANSACTION OF PURCHASE OF FIXED ASSETS I S A CAPITAL TRANSACTION, THIS, IN ITSELF, DOES NOT AFFE CT THE TOTAL INCOME OF THE ASSESSEE. IT IS ONLY THE OFF-SH OOT OF SUCH TRANSACTION IN THE CAPITAL FIELD, BEING DEPREC IATION ALLOWANCE ON SUCH ALP OF THE TRANSACTION, WHICH AFFECTS THE TOTAL INCOME. TO ILLUSTRATE, IF A FIXED ASSET IS PURCHASED BY AN ENTERPRISE FROM ITS AE FOR A SUM OF RS.100 AND RATE OF DEPRECIATION ON SUCH ASSET IS 10 %, THEN THE ENTERPRISE WILL CHARGE DEPRECIATION AMOUNT ING TO RS.10 IN ITS PROFIT AND LOSS ACCOUNT. IF THE ALP OF SUCH TRANSACTION IS DETERMINED AT RS. 80, THEN THE DIFFERENCE OF RS.20 CANNOT BE CONSIDERED AS INCOME. RATHER, THE AMOUNT OF DEPRECIATION WILL BE RESTRICT ED TO RS.8 INSTEAD OF RS.10, THEREBY INCREASING THE TOTAL INCOME BY RS. 2. WHEN WE ADVERT TO THE FACTS OF THE EXTANT CASE, IT IS FOUND THAT THE TPO HAS RIGHTLY H ELD TO THE EFFECT THAT IT IS THE AMOUNT OF DEPRECIATION ON THE PURCHASE OF SUCH FIXED ASSETS, WHICH WILL BE CONSID ERED FOR MAKING ADDITION AND NOT THE DIFFERENCE BETWEEN THE TRANSACTED VALUE AND THE ALP DETERMINED AT NIL. 15.5. ORDINARILY AN INTERNATIONAL TRANSACTION OF PURCHASE OF FIXED ASSETS BY AN ASSESSEE ENGAGED IN A MANUFACTURING OR TRADING BUSINESS IS REQUIRED TO BE DETERMINED ON CUP METHOD, WHICH IS USUALLY THE MOST APPROPRIATE METHOD IN SUCH CIRCUMSTANCES. THE TNMM ON ENTITY LEVEL CANNOT BE APPLIED, BECAUSE THE TRANSACTION OF PURCHASE OF FIXED ASSETS CAN HAVE NO RELATION WITH THE TRANSACTION OF PURCHASE OF RAW MATERIAL FROM AE OR SALES OF GOODS TO AES. RULE 10A OF THE IT RULES, DEFINES `TRANSACTION AS INCLUDING `A NUMBER OF CLOSELY LINKED TRANSACTIONS. THE HONBLE DELHI HIGH COURT IN ITS JUDGMENT OF MARCH, 2015 IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. HAS HELD THAT THE RELATED TRANSACTIONS SHOULD BE ITA NO.783/DEL./2015 34 CONSIDERED JOINTLY FOR DETERMINING THEIR ALP. HOWEV ER, IN ORDER TO CONSIDER MORE THAN ONE INTERNATIONAL TRANSACTION AS ONE, IT IS SINE QUA NON THAT SUCH TRANSACTIONS MUST BE CLOSELY AND NOT REMOTELY LINKE D. EVERY TRANSACTION DONE BY AN ENTERPRISE IS SOMEHOW OR THE OTHER LINKED WITH THE CARRYING ON OF THE BUSINE SS. BUT IN ORDER TO BE ELIGIBLE FOR PROCESSING TWO OR MORE TRANSACTIONS JOINTLY FOR DETERMINING THEIR ALP, IT IS ESSENTIAL THAT THEY SHOULD BE CLOSELY LINKED. IF TW O TRANSACTIONS ARE NOT CLOSELY LINKED, THEN THEY CANN OT BE CONSIDERED JOINTLY. CONSIDERING THE ABOVE CASE OF A MANUFACTURER OR A TRADER, IT CANNOT BE HELD THAT TH E TRANSACTION OF PURCHASE OF FIXED ASSETS IS CLOSELY LINKED WITH THE PURCHASE OF RAW MATERIAL OR SALE OF FINISH ED GOODS ETC. IN SUCH A SCENARIO, IT BECOMES IMPORTANT TO EXAMINE THE TRANSACTION OF PURCHASE OF FIXED ASSETS INDEPENDENT OF OTHER TRANSACTIONS. 15.6. HOWEVER, THE ABOVE RULE OF SCRUTINIZING INTERNATIONAL TRANSACTION OF PURCHASE OF FIXED ASSE T AS INDEPENDENT OF ALL OTHER TRANSACTIONS IS NOT UNIVER SAL. IT HAS ITS OWN EXCEPTIONS AS WELL. THE INSTANT CASE IS A GLARING EXAMPLE OF EXCEPTION TO THE ABOVE RULE. IT IS SO FOR THE REASON THAT THE ASSESSEE IS GETTING REMUNER ATION FROM ITS AE AT COSTS INCURRED PLUS A PARTICULAR MAR K-UP. THE COST BASE INCLUDES NOT ONLY DIRECT BUT ALL THE INDIRECT COSTS. THE AMOUNT OF DEPRECIATION ALLOWANC E ON FIXED ASSETS, INCLUDING THOSE PURCHASED FROM AE, IS ALSO COMPENSATED WITH THE SAME MARK-UP. THUS WE CAN SAY THAT DEPRECIATION ALLOWANCE AND REMUNERATION TO THE ASSESSEE ON SUCH DEPRECIATION ARE INSEPARABLE TRANSACTIONS. THE INCOME IN THE SHAPE OF REMUNERATI ON TO THIS EXTENT DIRECTLY DEPENDS UPON THE AMOUNT OF DEPRECATION ALLOWANCE. WHEN THE ASSESSEE IS GETTING MARK-UP OF 13%, THE AMOUNT OF DEPRECATION AT RS.10 IN OUR ABOVE HYPOTHETICAL EXAMPLE WILL FETCH REMUNERAT ION OF RS.11.30. IF THE AMOUNT OF DEPRECIATION IS REDU CED TO NIL, THE AMOUNT OF INCOME TO THAT EXTENT WILL ALSO BE NIL, BECAUSE THE MARK-UP CAN BE APPLIED ONLY IF THERE IS DEPRECIATION COST TO THE ASSESSEE. IN OTHER WORDS, THE TRANSACTIONS OF DEPRECIATION ON ONE HAND AND THE RESULTANT REVENUE ON THE OTHER, GO HAND IN HAND. IN ITA NO.783/DEL./2015 35 SUCH A CASE, WHERE THE INCOME IS DIRECTLY BASED ON THE COSTS INCURRED INCLUDING DEPRECIATION, THEN THESE T WO TRANSACTIONS BECOME CLOSELY LINKED TRANSACTIONS, ELIGIBLE FOR PROCESSING UNDER THE TP PROVISIONS ON A COMBINED BASIS. IT IS ILLOGICAL TO COMPUTE THE ALP OF THE TRANSACTION OF PURCHASE OF FIXED ASSETS AND CONSEQUENTLY REDUCE OR NULLIFY THE AMOUNT OF DEPRECIATION ALLOWANCE DE HORS THE CONSIDERATION OF INTERNATIONAL TRANSACTION OF THE REVENUE FROM AE, WHICH IS EQUAL TO DEPRECIATION AS CLAIMED WITH MARK -UP. BOTH THE TRANSACTIONS OF CLAIM OF DEPRECIATION ALLOWANCE AND REVENUE OF DEPRECIATION WITH MARK-UP HAVE TO BE SEEN JOINTLY. THE TPO IN THE PRESENT CAS E HAS SIMPLY REDUCED THE AMOUNT OF DEPRECATION ALLOWANCE TO NIL WITHOUT SIMULTANEOUSLY CONSIDERING THE REVENUE SIDE OF THIS TRANSACTION. IF WE CONSIDER THESE CLOSELY L INKED TRANSACTIONS OF DEDUCTION FOR DEPRECIATION ALLOWANC E AND REVENUE DUE TO DEPRECIATION IN UNISON, THE POSI TION WHICH FOLLOWS IS THAT NO FURTHER ADDITION CAN BE MA DE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT DUE TO ON E- SIDED CONSIDERATION OF DEPRECIATION ALLOWANCE AT NI L. RATHER, THE DETERMINATION OF ALP OF THE INTERNATION AL TRANSACTION OF PURCHASE OF FIXED ASSETS, IN THE FAC TS AND CIRCUMSTANCES OF THE INSTANT CASE, IS TAX NEUTRAL. AS SUCH, WE ORDER FOR THE DELETION OF ADDITION MADE BY DISALLOWING OR REDUCING THE AMOUNT OF DEPRECIATION ON THE ASSETS PURCHASED FROM AE. THIS GROUND IS ALLOWE D. 16. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. 56. UNDISPUTEDLY, THE ASSESSEE IMPORTED CAPITAL EQU IPMENT AMOUNTING TO RS.57,30,63,268/- (NEW EQUIPMENT OF RS.32,23,16,507/- AND USED EQUIPMENT OF RS.25,45,41 ,03,286/- = RS.57,30,63,268/-) OF WHICH THE TPO HAS HELD THE AR MS LENGTH PRICE AT NIL. HOWEVER, COORDINATE BENCH DEALT WITH THE ISSUE IN DETAIL ON THE IDENTICAL FACTS FOR AY 2009-10, AND H ELD THAT IN CASE OF SERVICE PROVIDER, THE ALP OF IMPORT OF CAPITAL E QUIPMENT, THE ITA NO.783/DEL./2015 36 DEPRECIATION COST OF WHICH IS RECHARGED WITH A MARK UP CANNOT BE DETERMINED TO BE NIL BECAUSE IT IS A TAX NEUTRAL TR ANSACTION AND REVENUE IS DEPENDENT UPON THE COST INCURRED (WHICH INCLUDES DEPRECIATION). 57. SO, IN THESE CIRCUMSTANCES, THE VALUE AS RECORD ED IN THE BOOKS OF ACCOUNT IS TO BE UPHELD AND DELETION OF AD DITION MADE BY DISALLOWING OR REDUCING THE AMOUNT OF DEPRECIATION ON THE ASSETS PURCHASED FROM AE IS NOT SUSTAINABLE. NOT ONLY THI S, TPO FOR FY 2010-11 AND FY 2007-08 HAS UPHELD THAT THE PRICE CH ARGED FOR IMPORT OF CAPITAL EQUIPMENT COMPLIES WITH THE ARMS LENGTH STANDARD AND THE ASSESSEE HAS BROUGHT ON RECORD THE ORDER OF TPO FOR FY 2010-11 AND FY 2007-08 HOLDING THAT THE PRIC E CHARGED FOR IMPORT OF CAPITAL EQUIPMENT COMPLIES WITH THE ARMS LENGTH STANDARD WHICH IS AVAILABLE AS APPENDIX 2 AND APPEN DIX 3 ANNEXED WITH THE SYNOPSIS. SO, IN THESE CIRCUMSTAN CES, WE HEREBY DELETE THE ADDITION ON THIS ACCOUNT MADE BY DISALLO WING OR REDUCING THE AMOUNT OF DEPRECIATION ON THE ASSETS P URCHASED FROM THE AE BY DETERMINING THE GROUNDS NO.6, 6.1, 6.2, 6 .3, 6.4, 6.5 & 6.6 IN FAVOUR OF THE ASSESSEE. GROUND NO.7 58. GROUND NO.7 IS NOT PRESSED, HENCE NEEDS NO ADJU DICATION. ITA NO.783/DEL./2015 37 GROUND NO.8 59. GROUND NO.8 IS PREMATURE, HENCE NEEDS NO ADJUDI CATION. GROUND NO.9 60. GROUND NO.9 NEEDS NO ADJUDICATION AS THE SAME I S CONSEQUENTIAL IN NATURE. ORDER PRONOUNCED IN OPEN COURT ON THIS 22 ND DAY OF MARCH, 2017. SD/- SD/- (R.S. SYAL) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 22 ND DAY OF MARCH, 2017 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.