EXXON MOBIL COMPANY INDIA P. LTD, MUMBAI V. DCIT CIR 3(1), MUMBAI

ITA 8311/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49149 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 11-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 01-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SONGATE
• Assessee Lawyers: SAURABH SOPARKAR
• Keywords: Related party transaction; Capital asset; Depreciation; Transfer pricing; International transaction; Right to appeal
• Section: 143(3); 92D; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI, J. SUDHAKAR REDDY, ACCOUNTANT MEMBER A ND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 8311/MUM./2010 (ASSESSMENT YEAR : 2006-07 ) DATE OF HEARING: 11.4.2011 EXXON MOBIL COMPANY INDIA P. LTD. KALPATARU POINT, PLOT NO.107 ROAD NO.8, SION (EAST) MUMBAI 400 092 AAACE3157H .. APPELLANT V/S DY. COMMISSIONER OF INCOME TAX CIRCLE-3(1), MUMBAI .... RESPONDENT ASSESSEE BY : MR. SAURABH SOPARKAR REVENUE BY : MR. D. SONGATE O R D E R PER J. SUDHAKAR REDDY, A.M. THIS APPEAL PREFERRED BY THE ASSESSEE, IS DIRECTED AGAINST THE IMPUGNED ORDER DATED 20 TH SEPTEMBER 2010, PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) R/W SECTION 144C(13) OF THE IN COME TAX ACT, 1961 (FOR SHORT 'THE ACT' ). 2. THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 30 TH NOVEMBER 2006, DECLARING TOTAL INCOME OF ` 22,17,44,830. THE ASSESSEE COMPANY IS STATED TO BE ENGAGED IN THE BUSINESS OF MARKET DEVE LOPMENT, DISSEMINATION OF PRODUCT INFORMATION OF SPECIALITY CHEMICAL AND P OLYMERS. IT ALSO CARRIES OUT RESEARCH AND DEVELOPMENT ACTIVITIES AND ALSO PROVID ES ON-SITE AND BACK EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 2 OFFICE SUPPORT SERVICES. THE ASSESSING OFFICER MADE A REFERENCE TO THE ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICING), MUMB AI, UNDER SECTION 92CA(1) FOR COMPUTATION OF ARMS LENGTH PRICE (HERE IN AFTER FOR SHORT ALP ) IN RELATION TO INTERNATIONAL TRANSACTION. THE TPO, VIDE ORDER DATED 29 TH OCTOBER 2009, ARRIVED AT A TRANSFER PRICING ADJUSTM ENT OF ` 1,94,44,068. THE ASSESSEE MADE SUBMISSIONS BEFORE THE ASSESSING OFFI CER AGAINST THE PROPOSED ADJUSTMENT. THE ASSESSING OFFICER REJECTED THE SAME AND ISSUED A DRAFT ASSESSMENT ORDER. THE ASSESSEE FILED OBJECTIO NS AGAINST THE PROPOSED VARIATION TO THE INCOME BEFORE THE DISPUTE RESOLUTI ON PANEL-1, MUMBAI ON 22 ND DECEMBER 2009. THE PANEL, VIDE ITS ORDER DATED 6 TH AUGUST 2010, HAS ISSUED CERTAIN DIRECTION UNDER SECTION 144C(4) OF T HE ACT. THE ASSESSING OFFICER PASSED THE ORDER UNDER SECTION 143(3) R/W S ECTION 144C(13) OF THE ACT ON 20 TH SEPTEMBER 2010. AGGRIEVED THE ASSESSEE IS IN APPEA L BEFORE US. 3. THE FACTS, AS FAR AS THE COMPANY AND THE ISSUES ARE CONCERNED, HAVE BEEN BROUGHT OUT IN THE ORDER DATED 29 TH OCTOBER 2009, PASSED BY THE TRANSFER PRICING OFFICER (HEREIN AFTER FOR SHORT TPO ) UNDER SECTION 92CA(3) OF THE ACT, WHICH IS EXTRACTED FOR READY REFERENCE: - 3. THE ASSESSEE IS A COMPANY OF THE EXXON MOBILE C ORP. GROUP OF US AND IS RESPONSIBLE FOR INFORMATION DISSEMINATION, MAINT AINING CUSTOMER RELATIONSHIP AND MARKET DEVELOPMENT FOR ITS AE EXXO N MOBILE CHEMICAL CO. USA. IT IS ALSO PROVIDING APPLICATION RESEARCH AND TECHNICAL SERVICES AND BACK OFFICE SUPPORT SERVICES TO THE AE. 4. THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE A RE AS UNDER: S.NO. DETAILS OF TRANSACTION AMOUNT ( ` ) 2006-07 1 TECHNICAL SERVICES 62871933 2 BACK OFFICE SUPPORT SERVICES 44866645 3 MARKETING SERVICES 282980046 4 GLOBAL SUPPORT SERVICES FEES 20663082 5 REIMBURSEMENT OF EXPENSES (RECD) 2590571 6 REIMBURSEMENT OF EXPENSES (PAID) 960283 EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 3 5. FOR THE PURPOSE OF BENCHMARKING SEGMENTAL FINANC IAL RESULTS HAVE BEEN PREPARED BY THE ASSESSEE WORKING OUT PROF ITABILITY SEPARATELY IN RESPECT OF: 1. MARKETING SERVICES 2. PROVISION OF APPLICATION RESEARCH AND TECHNICAL SERVICES 3. PROVISION OF BACK OFFICE SERVICES. THE ASSESSEE HAS ADOPTED TNMM METHOD TO SUPPORT ITS BENCHMARKING AND HAS FILED A TRANSFER PRICING REPORT IN SUPPORT THEREOF. 6. TO ASCERTAIN THE NATURE OF THE SERVICES AND THE PRICE SETTING MECHANISM, THE ASSESSEE WAS ASKED TO FURNISH THE CO PY OF AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ITS AES. THE SAME HAS BEEN FURNISHED BY THE ASSESSEE VIDE ITS SUBMISSION DATED 25 TH FEB, 2009. THE SALIENT FEATURES OF SOME OF THE AGREEMENTS ARE DISCUSSED AS UNDER: 1. MARKETING SERVICES: THE AGREEMENT IS ENTERED INT O BETWEEN THE ASSESSEE AND EXXON MOBIL CHEMICALS ASIA PACIFIC. TH E AGREEMENT IS ENTERED INTO W.E.F. 1/5/2003 FOR PERFORMING CERTAIN MARKET SERVICES FOR THE AE AND FOR THE BENEFIT OF CUSTOMERS IN INDIA. T HE SERVICES TO BE RENDERED INCLUDE DISSEMINATING INFORMATION, DEVELOP THE MARKET AND SOLICIT BUSINESS IN INDIA. FOR THESE SERVICES THE A SSESSEE GETS A COMPENSATION RANGING FROM 2 TO 4% OF THE NET INVOIC E VALUE. 2. TECHNICAL SERVICES: THE ASSESSEE HAS TWO AGREEME NTS WITH ITS AES FOR THE PROVISIONS OF TECHNICAL SERVICES. I) THIS AGREEMENT IS WITH EXXON MOBIL CHEMICAL ASIA PACIFIC (EMCAP). UNDER THIS AGREEMENT, THE ASSESSEE PROVIDES THE FOL LOWING SERVICES. 1. APPLICATION TECHNICAL DEVELOPMENT SERVICES TO BU TYL AND ETHYLENE ELASTOMERS CUSTOMERS OF EMCAP IN ASIA PACI FIC AND OTHER REGIONS. 2. DEVELOP PRODUCT APPLICATIONS AND UNDERTAKE NEW A PPLICATIONS DEVELOPMENT. 3. SUCH OTHER TECHNICAL SERVICES AS AND WHEN REQUIR E BY EMCAP: ALL THESE ACTIVITIES ARE TO BE CARRIED OUT AT THE B ANGALORE RESEARCH AND DEVELOPMENT TECHNOLOGY CENTRE (BRDTC), WHICH HAS BE EN SET UP FOR THIS PURPOSE. FOR THE SERVICES RENDERED THE AE UNDE RTAKES TO REIMBURSE THE ENTIRE COSTS FOR RUNNING BRDTC. THIS INCLUDES THE DIRECT COST REPRESENTED BY COMPENSATION FOR EMPLOYEES FOR MATERIALS AND SUPPLIES AND OTHER COSTS INCLUDING TRAVEL, BONUS ET C. OF EMPLOYEES. THE INDIRECT COSTS COMPRISING OF UTILITIES, RENTALS, SU PERVISORY AND ADMINISTRATIVE COSTS PLUS GENERAL OVERHEADS INCLUDI NG APPORTIONMENT EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 4 OF THE SUPPORTING DEPARTMENTS ETC. THE AE ALSO COMP ENSATES DIRECT EXPENSES OF APPLICATION TECHNICAL DEVELOPMENTS MANA GERS AND EXPENSES ON SEMINARS AND CONFERENCES ETC. HOWEVER, THE ASSESSEE DOES NOT GET ANY COMPENSATION IN RESPECT OF THE SER VICES RENDERED TO THE AES. II) THE SECOND AGREEMENT IS CALLED TECHNICAL REPRES ENTATION AGREEMENT ENTERED INTO BY THE ASSESSEE WITH EXXON M OBIL RESEARCH & ENGG. COMPANY. UNDER THIS AGREEMENT THE ASSESSEE HA S TO ASSIST ITS AE IN PROMOTION OF ITS VARIOUS PETROLEUM PROCESSES AND OTHER TECHNOLOGIES LISTED OUT IN PARA 3 OF THE AGREEMENT. IN CONSIDERATION OF THE SERVICES RENDERED THE ASSESSEE IS PAID $40000 P ER ANNUM + 5% OF THE ROYALTY PAYMENTS RECEIVED BY THE AE IN RESPECT OF EXECUTION OF PROCESS LICENSE AGREEMENT EXCEEDING USD 800000 PER CALENDAR YEAR. THE TRAVELING EXPENSES ARE ALSO REIMBURSED ON ACTUA L BASIS. 3. BANK OFFICE SUPPORT SERVICES: THE ASSESSEE HAS B ACK OFFICE SUPPORT SERVICES AGREEMENT WITH EXXON MOBIL INTERNA TIONAL SERVICES LTD., EXXON MOBIL CHEMICAL INTERNATIONAL SERVICES L TD., EXXON MOBIL CHEMICAL MIDDLE EAST AND AFRICA AND EXXON MOBIL CHE MICAL ASIA PACIFIC FOR RENDERING VARIOUS BACK SUPPORT SERVICES. ALL TH E AES HAVE DECIDED TO PROVIDE A MARK UP 10% ON THE VARIOUS DIRECT AND INDIRECT COSTS INCURRED BY THE AES FOR RENDERING SUCH SERVICES. 7. ASSESSEE HAS PREFERRED A TRANSFER PRICING REPORT TO JUSTIFYING THE BENCH MARKING OF ITS VARIOUS TRANSACTIONS. AS PER T HE TP REPORT, THE BENCHMARKING HAS BEEN CARRIED OUT UNDER TNMM METHOD AS TABULATED BELOW: NATURE OF INTERNATIONAL TRANSACTIONS MOST APPROPRIATE METHOD PROFIT LEVEL INDICATOR EMCIPLS MARGIN COMPARABLES MARGIN PROVISION OF MARKETING SERVICES IN INDIA AND DESIGNATED TERRITORIES TNMM OPERATING PROFIT/ TOTAL COSTS (OP/TC) 142.93% 3.15% PROVISION OF BACK OFFICE SUPPORT SERVICES TNMM OP/TC 13.13% 18.82% PROVISION OF BACK OFFICE SUPPORT SERVICES TNMM OP/TC 21.30% 10.80% REIMBURSEMENT OF EXPENSES (RECEIPTS AND PAYMENTS AS APPLICABLE) CUP NA NA NA EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 5 8. THE ASSESSEE WAS ASKED TO FURNISH SEGMENTAL ACCO UNTS DULY RECONCILED WITH ITS ANNUAL REPORT TO SUBSTANTIATE T HE MARGINS WORKED OUT BY HIM. IN RESPONSE TO THE SAME, THE ASSESSEE H AS GIVEN THE DETAILED INFORMATION VIDE ITS SUBMISSION DATED 4 TH MARCH, 2009. THE MARKS UP AS WORKED OUT ON THE BASIS OF ARE GIVEN AS UNDER : 1. MARKETING SERVICES 142.93% 2. APPLICATION RESEARCH & TECHNICAL SERVICES 13.13% 3. BACK OFFICE SUPPORT SERVICES 21.30% A COPY OF THE SEGMENTAL ANALYSIS SO FURNISHED IS EN CLOSED AS ANNEXURE A TO THIS ORDER. SINCE THE MARGINS MENTIONED IN THE AGREEMENTS AND THE ONES WORKED OUT AS PER THE ACCOUNTS WERE AT A L ARGE VARIANCE, THE ASSESSEE WAS ASKED TO RECONCILE THE SAME AND FOR TH IS PURPOSE A DETAILED QUESTIONNAIRE WAS ISSUED TO HIM 23.3.2009, THE SALIENT ISSUES ARE REPRODUCED BELOW :- 3. PROVISION OF TECHNICAL SERVICES 3.1 AS PER YOUR TP REPORT THE BANGALORE RESEARCH & DEVELOPMENT TECHNOLOGY CENTRE (BRDTC), DIVISION OF EMCIPL (THE ASSESSEE) IS ONE OF THE EXXON MOBIL CHEMICAL US RESEARCH CENTERS, O THERS BEING IN US AND IN BELGIUM. THIS CENTRE OFFERS TECHNICAL SERVIC ES TO ITS ASSOCIATED ENTERPRISES AND IT CONCENTRATES PRIMARILY ON DEVELO PING NEW CUSTOMER CENTRIC APPLICATIONS FOR THE BUTYL POLYMERS AND ETH YLENE ELASTOMERS LINE OF PRODUCTS. 3.2 3.3 3.4 THE CENTRE OF BANGALORE IS BEING RUN PURSUANT T O AN AGREEMENT BETWEEN EXXON MOBIL CO. INDIA PVT. LTD. AND EXXON M OBIL ASIA PACIFIC P. LTD. A PERUSAL OF THE AGREEMENT, DATED. 17.5.2004 S HOWS THAT AS PER ARTICLE 2 TH EASSESSEE (BRDTC) SHALL PROVIDE THE FO LLOWING SERVICES : 2.1 APPLICATION TECHNICAL DEVELOPMENT SERVICES TO B UTYL AND ETHYLENE ELASTOMERS CUSTOMERS OF EMCAP IN ASIA PACI FIC AND OTHER REGIONS. 2.2 DEVELOP PRODUCT APPLICATIONS AND UNDERTAKE NEW APPLICATIONS DEVELOPMENT. 2.3 SUCH OTHER TECHNICAL SERVICES AS AND WHEN REQUI RED BY EMCAP BRDTC ILL UNDERTAKE THE ABOVE PROJECTS AS PER REQUE STS RECEIVED FROM EMCAP OR ITS NOMINEES AND PROVIDE A REPORT OF ITS F INDINGS/ANALYSIS. 3.5 FURTHER IN CONSIDERATION OF THESE SERVICES THE ASSESSEE RECEIVES ONLY A REIMBURSEMENT OF THE DIRECT AND INDIRECT COS T INCURRED ON THE EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 6 BANGALORE RESEARCH CENTRE. PLUS COMPENSATION AND TR AVELING EXPENSES OF MANGERS/ENGINEERS WITH A MARK UP OF 10% AND ALSO EXPENSES INCURRED ON SCENARIO AND CONFERENCE. 3.6 THE AGREEMENT CLEARLY SHOWS THAT IN RESPECT OF RENDERING SPECIALIZE SERVICES IN THE FILED OF APPLICATION RES ERVES THE ASSESSEE IS NOT CHARGES ANYTHING ON ACCOUNT OF TECHNICAL SERVIC E CHARGES. 3.7 IN YOUR EXPLANATION DATED 4.3.2009, WHILE PRESE NTING THE SEGMENTAL ACCOUNTS YOU HAVE STATED THAT THE APPLICA TION RESERVES AND TECHNICAL SERVICES SEGMENT RESULTED INTO AND OPERAT ING MARGIN IN RELATION TO TOTAL COST OF 13.13%. FOR THIS PURPOSE YOU HAVE ALLOCATED THE EXPENSES ON THE BASIS OF HEAD COUNT. IT WAS OBS ERVED THAT THE TOTAL EXPENSES INCURRED HAD BEEN REDUCED UNDER THE FOLLOWING FOUR ACCOUNT HEADS. 1. FOREIGN EXCHANGE GAIN/LOSS- 2. 1% R &D LAB TESTING INDIA TO MARKETING- 3. % BUTILE ATD INDIA COST TRANSFER TO MARKETING 4. 25% EEB ATD COST TRANSFERS TO MARKETING. 3.7.1 THE EXCHANGE GAIN/LOSS IS A RESULT OF ALLOCA TION OF THE EXCHANGE GAIN TO THE COMPANY AS A WHOLE OVER THE YEAR, ON TH E BASIS OF SALES. THE EXCHANGE FLUCTUATION WAS A RESULT OF VARIATION IN DOLLAR VIS--VIS OVER THE YEAR AND IS ALSO NOT ALLOCATED ON THE BASI S OF ACTUAL RECEIPT OF MONEY TIME TO TIME. MOREOVER ANY EXCHANGE FLUCTUATI ON MAY RESULT IN BETTER MARGIN AT THE END OF THE YEAR. BUT IT CANNOT JUSTIFY THE PRICE FIXATION MARGINS AT THE INITIAL PRICE FIXATION ITSE LF. 3.7.2 ITEMS AT SL. NO. 2, 3 & 4 HAVE BEEN EXPLAINED TO BE ALLOCATION OF COSTS OF THE PERSONNEL EMPLOYED AT BRTDC FOR THE PU RPOSE OF MARKETING ACTIVITIES. IT HAS BEEN STATED THAT TECHN ICAL PEOPLE HAVE TO BE TAKEN BY THE MARKETING TEAM TO INFORM THE CUSTOM ERS ABOUT THE VARIOUS CHEMICAL PROPERTIES ETC. YOU HAVE NOT BEEN ABLE TO PROVIDE THE BASIS OF ALLOCATION OF THE COST AND IDENTIFICATION OF THE COST WHILE COMPUTING THE PERCENTAGES OF 1% 10% & 25% RESPECTIV ELY. ACTUALLY IT APPEARS THAT YOU HAVE ARTIFICIALLY SHIFTED EXPENSES OF ` 22,86,447 FROM THE APPLICATION RESEARCH HEAD TO THE MARKETING SERV ICES. 3.7.2 IT IS A MATTER OF FACT THAT THE PERSONNEL AT BRTDC HAD BEEN EMPLOYED FOR THE PURPOSE OF RESEARCH ONLY AND THEIR COST IS BEING ENTIRELY REIMBURSEMENT BY YOUR ASSOCIATED ENTITY. J UST BECAUSE THEY PROVIDED SOME ASSISTANCE IN MARKETING (IF ANY), CAN NOT LEAD TO ALLOCATION OF THEIR COST FOR MARKETING. THEY WERE F ULL TIME EMPLOYEES OF BRTDC AND ANY SUCH ACTIVITY WOULD HAVE BEEN POSSIBL E ONLY IN THEIR SPARE TIME. THIS CANNOT RESULT IN ALLOCATION OF THE IR COSTS BETWEEN THE MARKETING & THE APPLICATION RESEARCH SEGMENTS. FURT HER THERE IS NO EVIDENCE TO SUBSTANTIATE CLAIM THE ASSESSEE, NOR HA VE YOU MAINTAINED ANY LOG BOOK OR CARRIED OUT ANY TIME AND MOTION STU DY TO EXPLAIN THE PERCENTAGE OF 1, 10 & 25%. MOREOVER AS A MATTER OF FACT OUT OF TOTAL EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 7 STUDY 36 PERSONS EMPLOYED ONLY 9 PERSONS ARE STATED TO BE EMPLOYED IN APPLICATION RESEARCH AND THEY WERE STATIONED AT BANGALORE. JUST BECAUSE THEY HAPPENED TO BE WITH THE MARKETING TEAM FOR SOME CLARIFICATIONS CANNOT BE ANY BASIS OF ALLOCATED THE IR COST TOWARDS MARKETING. IT IS ALSO A FACT THAT THE ASSESSEE WHIL E CLAIMING THE REIMBURSEMENTS HAS CLAIMED THE ENTIRE ESTABLISHMENT COST. 3.7.3 THE ALLOCATION OF EXPENSES THEREFORE, CANNOT BE ACCEPTED AS A PROPER ALLOCATION OF COST IN SEGMENTAL ANALYSIS. 3.7.4 AS ALREADY STATED THE ASSESSEE HAS NOT CHARGE D ANY PRICE FOR THE SERVICES BEING RENDERED BY IT TO ITS ASSOCIATED ENT ERPRISE. ONLY AMOUNT IT HAS RECEIVED FROM ITS AE I.E. ` 4,98,14,572/- REPRESENTS THE REIMBURSEMENT OF COSTS. SAME IS ALSO RELECTED IN BA LANCE SHEET, P & L A/C. OF THE COMPANY. 3.7.5 FURTHER IT ALSO APPEARS FROM YOUR SEGMENTAL A NALYSIS THAT THE COMMON ADMINISTRATIVE EXPENSES IN RELATION TO THE M ANAGING DIRECTORS OFFICE, HIS STAFF AND FINANCE OFFICE EXPENSES ETC. HAVE NOT BEEN ALLOCATED TO THE 3 SEGMENTS WHICH WOULD HAVE FURTHE R INCREASED THE RECOVERY OF EXPENSES. 3.7.6 IN SUCH A SCENARIO YOU ARE REQUIRED TO SHOW C AUSE AS TO WHY YOUR SEGMENTAL STUDY BE NOT REJECTED AND THE COMPAR ABLE PLI RATIO TO BE WORKED OUT FOR APPLICATION RESEARCH BE NOT APPL IED TO THE ENTIRE REIMBURSEMENT RECEIPT WITHOUT ANY CREDIT FOR OP/TC RATIO 13.13% WORKED OUT BY YOU. 8.2 THE ASSESSEE HAS FILED DETAIL EXPLANATION OF TH E SAME IN ITS LETTER DATED APRIL 28, 2009, WHICH IS BEING DISCUSSED AS U NDER: THE ASSESSEE HAS AGGREGATED THE VARIOUS TECHNICAL S ERVICES RENDERED UNDER ONE CATEGORY (TOTAL AMOUNT ` 6,28,71,933). IT IS MENTIONED THAT A MARK UP OF 10% HAS BEEN CHARGED ON ATD ACTIVITIES ( ` 1,13,04,961) AND IN RELATION TO TECHNICAL REPRESENTATION ( ` 17,52,400) THE MARK UP HAS BEEN AROUND 80%. IT HAS HOWEVER NOT DENIED THE FACT THAT IT HAS NOT BEEN SEPARATELY COMPENSATED FOR SERVICES RENDER ED AT BRDTC ( ` 4,98,14,572). THE ASSESSEE HAD ALLOCATED A PART OF COST OF THE APPLICATION AND RESEARCH TECHNICAL SEGMENTS TOWARD MARKETING SERVICES. THEY ARE AS UNDER : A) 1% R & D LAB TESTING ` 4,45,507 B) 10% BUTILE ATD INDIA COST ON ` 8,47,107 C) 25% AEB ATD COSTS ` 9,93,833 THE ASSESSEE HAD EXPLAINED THAT SINCE THE PERSONNEL INVOLVED IN SCIENTIFIC RESEARCH AND ATD MANGERS ASSISTS THE MAR KETING TEAM IN MARKETING THE PRODUCTS, A PROPORTIONATE COST HAS BE EN ALLOCATED OUT OF THE COSTS INCURRED ON THEM TOWARDS THE MARKETING SE GMENT. AS FAR AS EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 8 ALLOCATION OF COSTS INCURRED UNDER THE HEAD MARKETI NG TO TECHNICAL SERVICES IS CONCERNED, THE ASSESSEE HAS FURNISHED C ERTAIN CORRESPONDENCE AND CONFIRMATIONS FROM ITS MANAGER E MPLOYEES RELATING TO THE TIME SPENT BY THEIR RESEARCH PERSON NEL FOR MARKETING. ASSESSEE HAS FURNISHED SOME CORRESPONDENCE FROM ITS OWN EMPLOYEES. ONE SUCH LETTER FURNISHED IS BY SHRI B. B. SHARMA, WHO ESTIMATES THAT THE TIME SPENT ON BUTILE ATD AND R & D LAB WOULD BE 10% AND 1% RESPECTIVELY. SIMILARLY, THERE IS ANOTHER LETTER FR OM PRADEEP PATKI, WHO HAS ENUMERATED THE ACTIVITIES WHICH HE HAS UNDERTAK EN. 8.3 I HAVE GONE THROUGH THE VARIOUS CORRESPONDENCES WHICH ARE ADDRESSED TO THE TAXATION DEPARTMENT. THE EMAIL COR RESPONDENCE WHICH HAS INITIATED FROM THE HEAD OFFICE ITSELF MEN TIONS THE PERCENTAGE OF ALLOCATION CARRIED OUT AND SEEKS INSTANCES OF WO RK BEING DONE FOR JUSTIFYING THIS ALLOCATION. NONE OF THE EXECUTIVES HAVE ANY BASIS TO JUSTIFY THE PERCENTAGES OF 1, 10 & 25 AS MENTIONED ABOVE. THE CORRESPONDENCES ARE SELF SERVING DOCUMENTS WITHOUT ANY SUPPORTING LOG BOOKS OR TIME AND MOTION STUDIES. SUCH SELF SER VING DOCUMENTS DO NOT CARRY ANY EVIDENTIAL VALUE. THE TOTAL STAFF STRENGTH OF THE EMPLOYEES IS ONLY A BOUT 36 PERSONS AS STATED BY THE ASSESSEE. OUT OF THESE 9 PERSONS ARE IN THE APPLICATION RESEARCH AND TECHNICAL TEAM STATIONED AT BANGALORE. THERE ARE 14 PERSOS UNDER THE MARKETING SEGMENTS AND 13 ANOTHER IN BACK OFFICE SERVICES. THESE ALSO INCLUDE THE PERSONS IN THE HEA D OFFICE ADMINISTRATING THE OVERALL AFFAIRS. THE TECHNICAL A GREEMENT WITH EXXON MOBIL CHEMICAL ASIA PACIFIC CLEARLY SHOWS THAT BRTD C HAS BEEN CARRYING OUT ANALYTICAL RESEARCH TO THE AE. IT IS P RECISELY FOR THIS REASONS THAT THE AE HAS AGREED TO REIMBURSE THE ENT IRE COST WHETHER DIRECT OR INDIRECT IN RESPECT OF THE EXPENSES INCUR RED FOR BRTDC. THE ATD MANAGERS AND THE TECHNICAL PERSONS EMPLOYED UND ER BRTDC ARE DEDICATED EMPLOYEES OF THE BRTDC, KEPT FOR THE PURP OSES OF RESEARCH AS DESIRED BY THE AE. BEING THE EMPLOYEES OF THE AS SESSEE, THEY CAN ASSIST OTHER DIVISIONS BUT NOT AT THE COST OF THEIR PRIMARY DUTY. IF SOME ASSISTANCE IS PROVIDED TO MARKETING DIVISION IN THE IR SPARE TIME, THE SAME CANNOT WARRANT ALLOCATION OF A PROPORTIONATE C OST TO THE MARKETING DIVISION. THIS IS SUPPORTED BY THE FACT T HAT THE ASSESSEE IN FACT HAS CLAIMED REIMBURSEMENT IN RESPECT OF THE EN TIRE COST RELATING TO SUCH PERSONNEL AND NOT AFTER DEDUCTING THE ALLOCATE D COSTS. IT THE CIRCUMSTANCES OF THE CASE IT APPEARS THAT TH E ALLOCATION OF EXPENSES IS ONLY A FINANCIAL JUGGLERY TO IMPROVE TH E MARGINS FOR THE TECHNICAL SEGMENT AT THE COST OF MARKETING DIVISION S WHICH HAS SUFFICIENT MARGINS OTHERWISE. THIS IS SUBSTANTIATED BY THE FACT THAT THE RECEIPTS ON ACCOUNT OF RESEARCH SERVICES FROM EXXON MOBIL CHEMICAL ASIA PACIFIC ARE SHOWN AT ` 4,98,14,572 AND THIS IS THE EXACT AMOUNT WHICH IS SHOWN AS RECOVERY OF EXPENSES FROM AES IN PROFIT AND LOSS ACCOUNT (I.E. 100% OF REVENUE EXPENSES OF BRTDC AND 38.1% OF ADMINISTRATIVE EXPENSES IN RESPECT OF KALPARU POINT OFFICE AT MUMBAI). EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 9 8.4 THE ARBITRARY AND UNWARRANTED ALLOCATION OF THE SE EXPENSES FROM TECHNICAL SERVICES SEGMENT TO MARKETING SEGMEN T IS THEREFORE, REJECTED. THE FACT OF THE MATTER REMAINS THAT THE A SSESSEE HAS NOT RECEIVED ANY COMPENSATION FOR SERVICES RENDERED TO EXXON MOBIL CHEMICAL ASIA PACIFIC. THEREFORE, THE TRANSACTIONS OF THE ASSESSEE WITH THIS, AE ARE NOT AT ARMS LENGTH. THE ASSESSEE WOUL D NOT HAVE RENDERED SIMILAR SERVICES TO ANY THIRD PARTY WITHOU T CHARGING ANY MARK UP. IT WOULD HAVE CHARGED REASONABLY INDUSTRY MARK UP FOR RENDERING ITS SERVICES, WHICH HAS BEEN FORGONE. 8.5 THE TOTAL COSTS ALLOCATED TO THE TECHNICAL SERV ICES SEGMENT OF THE ASSESSEE IS ` 5,78,63,688 OUT OF THIS THE EXPENSES TOWARDS BANAG LORE RESEARCH CENTRE ARE ` 4,98,14,572. THIS LEAVES THE REMAINING AMOUNT OF ` 80,49,116 AGAINST THE REPRESENTATION AND ATD SERVI CES OF ` 1,30,57,361 GIVING A MARK UP OF 62.22% ON COSTS. TH E ADJUSTMENT IN RESPECT OF THE COMPENSATION FOR BRTDC IS BEING WORK ED OUT AS UNDER. 8.6 SELECTION OF COMPARABLES AND THEIR OPERATING MA RGINS: THE ASSESSEE HAD UNDERTAKEN A DETAILED SEARCH IN ITS TR ANSFER PRICING REPORT AND SELECTED FOLLOWING 7 COMPARABLE COMPANIES FOR W ORKING OUT ARITHMETIC MEAN OF 18.47%. SR. NO. NAME OF THE COMPANY AVERAGE ADJUSTED OP/TC 1 ALPHAGEO (INDIA) LTD. 24.74% 2 DOLPHIN MEDICAL SERVICES LTD. 11.46% 3 N. G. INDUSTRIES LTD. 29.60% 4 VIMTA LABS LTD. 69.49% 5 NEEMAN MEDICAL INTERNATIONAL (ASIA) LTD. -0.89% 6 ADS DIAGNOSTIC LTD. SEG. -9.20% 7 PFIZER LTD.- SERVICE SEG. 4.07% ARITHMETIC MEAN 18.47% AS DISCUSSED ABOVE, ON HIS OWN SEGMENTAL ANALYSIS I T HAS WORKED OUT ITS PLI OF 13.13% AND CONSIDERED ITS PRICING TO BE AT ARMS LENGTH. A PERUSAL OF THE COMPARABLE SHOWN THAT THE ASSESSEE H AD ADOPTED MULTIPLE YEAR DATA FOR WORKING OUT THE PLI OF THE C OMPARABLES AND FURTHER SOME OF THE COMPANIES SO SELECTED COULD NOT BE CONSIDERED AS COMPARABLE COMPANIES. ACCORDINGLY, THE ASSESSEE WAS ISSUED A SHOW CAUSE NOTICE DATED 17 TH JULY, 2009 CONFRONTING THE ABOVE FACTS AND ALSO THE REASONS FOR REJECTION OF A FEW OFFICE COMPARABL E COMPANIES. THE CORRECT OPERATING MARGIN WAS ALSO WORKED OUT. EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 10 8.6.1 IN REPLY TO THE SHOW CAUSE THE ASSESSEE HAS F URNISHED ITS SUBMISSION ON 28 TH JULY, 2009. HIS MAIN ARGUMENT IS REGARDING THE REJECTION OF LOSS MAKING COMPANIES, HE HAS ANALYSED THE COMPANIES AND REASONS FOR LOSSES AS UNDER : (I) AVS DIAGNOSTIC LTD. IT IS STATED THAT THE INC OME OF DIAGNOSTICS SERVICES HAS REDUCED DUE TO STIFF COMPETITION AROUN D DELHI AND THEREFORE, LOSSES HAVE BEEN INCURRED. (II) NEEMAN MEDICAL INTERNATIONAL (ASIA)-IT IS STA TED THAT A CLINICAL TIER INCOME IS REDUCED AND, THEREFORE, THERE IS LOS S. THE COMPANY HAS INVOLVED UPON A LONG TERM STRATEGY TO MOVE UP THE V ALUE CHANGE. KEEPING THE FUTURE PERSPECTIVE THE COMPANY SHOULD B E ACCEPTED. THE ASSESSEE HAS NOT MENTIONED ANYTHING SPECIFIC ABOUT ANY COMPANY WHICH MAY SUGGEST THAT THE LOSS IN THE CURRENT YEAR WAS ONLY AN ANOMALY. THE CIRCUMSTANCES SUGGESTED ARE FACED BY A LL OTHER COMPANIES IN THE PUBLIC DOMAIN. IF THE OTHER COMPAN IES CAN MAKE ADEQUATE PROFITS IN SIMILAR CIRCUMSTANCES THERE IS NO REASON WHY THESE TWO COMPANIES SHOULD INCUR LOSSES IN A YEAR TO YEAR BASIS. THIS SHOWS THAT EITHER THEY OPERATE IN ABNORMAL CIRCUMSTANCES OR THERE ARE CERTAIN ISSUES OF MANAGEMENT AND CONDUCT O AFFAIRS WHICH IS NOT NORMAL IN THE INDUSTRY. THEREFORE, THESE TWO COMPAN IES DESERVED TO BE REJECTED. 8.6.2 ANOTHER COMPANY NAMELY PFIZER LTD. IS ALSO RE JECTED. THIS IS A MULTINATIONAL PHARMACEUTICAL COMPANY WITH A TURNOVE R OF NEARLY 700 CRORES. IN ITS FINANCIAL RESULTS, IT HAS REPORTED A SEGMENT CALLED SERVICES. THE TURNOVER OF THIS DIVISION IS ONLY ` 25.66 CRORES. I.E. ONLY 3.7% OF THE TOTAL TURNOVER. THE PROFITS IN THIS SEG MENT ARE RS.2.62 CRORES, BEFORE ALLOCATION OF COMMON EXPENSES. THE A LLOCABLE EXPENSES ARE TO THE TUNE OF ` 28.51 CRORES I.E. MORE THAN THE TOTAL TURNOVER OF THIS SEGMENT. THEREFORE, IT SHOWS THAT THE SEGMENTA L ANALYSIS ABOUT THE PROFITABILITY OF THE DIAGNOSTIC SEGMENT CANNOT BE WORKED OUT ACCURATELY. ALTERNATIVELY, THIS ACTIVITY IS ONLY SU BSERVIENT AND DEDICATED TO THE MAIN ACTIVITY IN THE FIELD OF PHARMACEUTICAL S. THIS COMPANY IS THEREFORE, ALSO REJECTED. THE OPERATING MARGINS WER E REWORKED ON THE BASIS OF ANNUAL REPORTS AND FINAL COMPARABLE AFTER CONSIDERING THE SUBMISSIONS ARE GIVEN BELOW: SR. NO. NAME OF THE COMPANY RETURN ON TOTAL COSTS 1 ALPHAGEO (INDIA) LTD. 47.79 2 DOLPHIN MEDICAL SERVICES LTD. 14.52 3 N. G. INDUSTRIES LTD. 31.26 4 VIMTA LABS LTD. 57.68 5 CHOKSI LABORATORY LTD. 32.22 EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 11 6 TRANSGENE BIOTECH LT. - SEGMENTAL 8.16 7 MEDINOVA DIAGNOSTICS SERVICES LTD. 7.26 ARITHMETIC MEAN 28.41% THE ASSESSEE HAS FURTHER SOUGHT WORKING CAPITAL ADJ USTMENTS OF 0.47% IN RESPECT OF THE WORKING CAPITAL BEING EMPLOYED BY THE COMPARABLES AND THE ASSESSEE. THE ASSESSEE HAS FURTHER SOUGHT R ISK ADJUSTMENTS BY FOLLOWING THE CAPITAL ASSET PRICING MODEL. THE I SSUE OF RISK ADJUSTMENTS AND THE SHORT COMINGS OF CAPM MODEL ADO PTED BY THE ASSESSEE ARE DISCUSSED IN DETAIL LATER IN THE ORDER AND THEREFORE, I DO NOT ALLOW ANY RISK ADJUSTMENTS IN THIS CASE. THE ASSESSEE WILL, THEREFORE, SUFFER AN ADJUSTMENT IN RESPECT OF SERVICES RENDERED FROM BRDTC TO ITS AE VIZ, EXXON M OBIL CHEMICAL ASIA PACIFIC AS UNDER :- COST OF SERVICES RENDERED ` 4,98,14,572 MARK UP AS PER THE COMPARABLES (28.41 0.47) = 27.94% = ` 1,39,18,191 9. BACK OFFICE SUPPORT SERVICES: AS ALREADY MENTIONED ABOVE, THE AES HAS ENTERED INT O AN AGREEMENT WITH THE ASSESSEE TO PROVIDE A MARK UP 10% ON TOTAL COSTS. THE SEGMENTAL RESULTS OF THE ASSESSEE HOWEVER, SHOW A M ARK UP OF 21.3% AS MENTIONED ABOVE A DETAILED QUESTIONNAIRE WAS ISS UED TO ASSESSEE ON 23.3.2009, THE SALIENT ISSUES ARE REPRODUCED BEL OW: 4.1 AS PER YOUR SEGMENTAL STUDY YOU HAVE SHOWN A MA RGIN OF 21.30% UNDER THE SEGMENT BACK OFFICE SUPPORT SERVIC ES. THE PERUSAL OF THE VARIOUS AGREEMENTS FURNISHED BY YOU VIDE SUB MISSION DATED 25.2.2009 AT ANNEXURE F TO J SHOW THAT YOU HAVE AGR EED TO BE REIMBURSED AT THE MARGIN OF 10% TO THE DIRECT OR IN DIRECT COST AS SPECIFIED IN THE AGREEMENTS. 4.2 DURING THE COURSE OF DISCUSSION I HAD ASKED YOU TO SUBSTANTIATE AS TO HOW YOUR SEGMENTAL RESULTS WERE SHOWING A MAR GIN OF 21.3% AS AGAINST THE AGREED COMPENSATION OF 10% YOU HAVE STA TED. YOU HAD STATED THAT THIS OFFICE SHOULD NOT HAVE ANY PROBLEM IF THE ASSESSEE WAS GETTING OF HIGHER MARGIN AS COMPARE TO THE AGREED C OMPENSATION. THE FACT HOWEVER REMAINS THAT WHY SHOULD THE AE GIVE A HIGHER MARGIN. IN FACT AS SUBMITTED BY YOU MARKUP HAS BEEN INCREASE T O 15% IN THE NEXT YEAR. IF THE AE KNOWING WELL THAT, YOU ARE SHOWING 21.3% INCREASES THE MARGIN FURTHER FROM 10 TO 15% THERE HAS TO SOME ANOMALY IN THE ACCOUNTS OR THEIR PRESENTATION. THE ASSESSEE HAS BE EN BILLING THE AE ON BUDGETED BASIS AND ANY SHORTAGES OR EXCESS IN THE P REVIOUS BILLS HAVE TO BE MADE UP IN THE NEXT BILL. IN ANY CASE AT THE END OF THE YEAR OF THE AE I.E. 31.12.2005 ALL ADJUSTMENTS REGARDING TH E SHORTAGES AND EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 12 EXCESSES REIMBURSEMENT WOULD HAVE BEEN MADE TO ARRI VE AT THE CORRECT FIGURE OF COMPENSATION. IN SUCH A SCENARIO YOU WERE ASKED TO MATCH YOUR BAC K OFFICE SERVICE RECEIPTS AND EXPENSES WITH THE BUDGETED ESTIMATES T O BRING OUT THE REASONS FOR VARIATIONS FROM THE AGREED 10% RETURN T O 21.3%. IN YOUR REPLY YOU HAVE STATED THAT THE PERSONS CONCERNED DE ALING WITH THE MATTER HAD LEFT THE COMPANY, BUT THIS CANNOT BE ACC EPTED AS A BASIS FOR NON EXPLANATION OF THE VARIATION WHICH IS APPAR ENT. 4.3 THE NON EXPLANATION OF THE PRECISE REASONS FOR VARIATION WILL LEAD TO A CONCLUSION THAT THE SEGMENTAL FINANCIAL INFORM ATION FURNISHED BY YOU IS NOT RELIABLE. THIS COULD BE ON ACCOUNT OF IN CORRECT ALLOCATION OF HEADCOUNT OR SOME DIFFERENT BASIS OF ALLOCATION AT THE TIME OF BUDGETING. 4.4 THE ESSENCE REMAINS THAT YOU HAVE AGREED FOR TH E BEING REMUNERATED AT ONLY 10% MARKUP TO COST. YOU HAVE RE QUESTED TO SHOW CAUSE WHY THE SEGMENTAL RESULTS NOT TO REJECTED AND YOUR TOTAL RECEIPTS ON ACCOUNT OF BPO BE BENCH MARKED AT THE C OMPARABLE PLI CONSIDERING YOUR PLI TO BE 10% INSTEAD OF 21.3% AS SHOWN BY YOU IN YOUR TP REPORT. 9.1 IN HIS EXPLANATION THE ASSESSEE HAS STATED THAT THE BILLINGS ARE MADE ON BUDGETED COSTS WHILE THE BOOKS OF ACCOUNTS SHOW THE ACTUAL COST INCURRED AND THERE IS LIKELY TO BE VARIATION. FURTHER, THE ACCOUNTS OF THE AES ARE MAINTAINED ON CALENDAR YEAR BASIS WH ILE THE ACCOUNTS OF THE ASSESSEE ARE ON FINANCIAL YEAR BASIS. THIS GENE RALLY RESULTS IN VARIATIONS. THE ASSESSEE HAS AGAIN FAILED TO PROVID E HIS BUDGETARY FIGURES. IT HAS FILED CERTAIN RECONCILIATIONS. IN I TS WORKING IT HAS SHOWN THAT THE BUDGETED COST WAS USD 437,000 ( ` 1,93,18,000) AFTER ADJUSTING THE DIFFERENCES IN RESPECT OF JAN TO MAR. 2005 (USD 115,000) AND JAN 06 TO MARCH, 2006 (USD 115,000). SINCE THE ACTUAL COST ( ` 1,58,27,000) WAS LOWER THAN THE BILLED COSTS, THEY COULD ACHIEVE A HIGHER MARK UP. THE EXPLANATION OF THE ASSESSEE DOES NOT SEEM TO BE ACCEPTABLE. THE AES HAVE AGREED TO PROVIDE A MARK UP OF 10% ON COST S. THE ACCOUNTS OF THE AES CLOSED ON 31 ST DEC. OF EACH YEAR. THEREFORE, WHILE FINALIZING THEIR ACCOUNTS THERE WILL TAKE INTO ACCOUNT THE ACT UAL COSTS INCURRED BY THE ASSESSEE DULY ADJUSTED FOR THE COST FOR JANUARY AND DECEMBER 2005. THEY WILL TAKE INTO ACCOUNT THE ACTUAL COSTS INCURRED BY THE ASSESSEE FROM JANUARY, 05 TO DECEMBER, 05 FOR PROVI DING THE EXPENSES IN RESPECT OF THE SERVICES RENDERED BY THE AES. IN CASE, THE BUDGETED BILLINGS WERE LOWER THAN THE ACTUAL COST T HEY WOULD PAY A HIGHER AMOUNT IN THE NEXT QUARTER. HOWEVER, IF THE BUDGETED BILLINGS WERE HIGHER, THEN THE AMOUNT PAYABLE IN THE NEXT QU ARTER WOULD BE LOWER. WHATEVER VARIATIONS WOULD HAVE ARISEN BETWEE N THE BUDGETED AND ACTUAL COST WOULD HAVE BEEN ADJUSTED IN THE LAS T QUARTER. AS PER THE ASSESSEE THE BUDGETED FIGURES FOR THE FIRST QUA RTERS OF CALENDAR EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 13 YEARS 2005 AND 2006 WERE THE SAME AND THE DIFFERENC E WAS IN THE ACTUAL FIGURES FOR JAN TO DEC. 2005. SUCH DIFFERENC E IF ANY WOULD DEFINITELY HAVE BEEN TAKEN INTO ACCOUNT BY THE AES WHILE FINALIZING THEIR ACCOUNTS. EVERY AE IS AN INDEPENDENT COMPANY AND A SEPARATE PROFIT CENTRE. NONE WOULD LIKE TO PROVIDE A HIGHER EXPENDITURE THAN WARRANTED. THE AES HAVE ALLOWED A MARK UP OF 10% ON LY AND IF THEY WERE FINDING THAT THE AE IS ACTUALLY MAKING PROFIT OF 21% THEY WOULD HAVE REDUCED THEIR MARK UP IN THE FIRST QUARTERS OF 2006 SO AS TO MAKE AN OVERALL MARK UP OF 10% FOR THE YEAR. THE ASSESSE E IS NOT AN INDEPENDENT COMPANY WHICH CAN BEFOOL THE VARIOUS GR OUP COMPANIES BY CHARGING A MARK UP OF 21.3% AGAINST AGREED MARGI NS OF 10%. IN FACT, THE ASSESSEE HAS REPORTED THAT IN THE NEXT YE ARS THE MARK UP HAS BEEN INCREASED FOR 10 TO 15%. IF THE ASSESSEE WAS A CTUALLY MAKING A MARGIN OF 21.3% NO AES WOULD HAVE INCREASED THE MAR GIN FROM 10 TO 15%. WHILE FILING THE EXPLANATION THE ASSESSEE HAS NOT B EEN ABLE TO EXPLAIN THE HEAD-WISE VARIATION AND THE SPECIFIC REASONS ON ACCOUNT OF WHICH THOSE VARIATIONS HAVE ARISEN. IT THEREFORE APPEARS THAT THE ALLOCATION OF EXPENSE BY THE ASSESSEE IS NOT AS PER THE ACTUAL BU DGET EXERCISE BUT ONLY WITH A BASIS TO WORK OUT BETTER MARGINS FOR TH E LOWER PRICED SEGMENTS. THE EXPLANATION/THE SEGMENTAL ALLOCATION OF THE ASSESSEE THEREFORE, IS REJECTED. 4. THE TPO OBSERVED THAT THE ASSESSEE HAS AGGREGATED V ARIOUS TECHNICAL SERVICES RENDERED INTO ONE CATEGORY (TOTAL AMOUNT O F ` 6,28,71,633). HE OBSERVED THAT THE ASSESSEE MENTIONED THAT A MARK UP OF 10% HAS BEEN CHARGED ON ATD ACTIVITIES OF ` 1,13,04,961 AND IN RELATION TO TECHNICAL REPRESENTATION ` 17,52,400, THE MARK-UP IS AROUND 80%. HE ALSO OBSE RVED THAT THE ASSESSEE HAS NOT DENIED THE FACT THAT, IT HAS NOT BEEN SEPARATELY COMPENSATED FOR SERVICES RENDERED AT BANGALORE RESE ARCH AND DEVELOPMENT TECHNOLOGY CENTRE (FOR SHORT BRDTC ) ( ` 4,98,14,572). THE ASSESSEE ALLOCATED A PART OF COST OF THE APPLICATION AND RES EARCH TECHNICAL SEGMENT, TOWARDS MARKETING SERVICES AS FOLLOWS:- A) 1% R&D TESTING ` 4,45,507; B) 10% BUTILE ATD INDIA COST ON ` 8,47,107; C) 25% EEB ATD COSTS ` 9,93,833. EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 14 5. THE ALLOCATION HAS BEEN JUSTIFIED ON THE GROUND THA T THE PERSONNEL INVOLVED IN SCIENTIFIC RESEARCH AND ATD MANGERS, DO ASSIST MARKETING TEAM IN MARKETING THE PRODUCT. ON THE COST INCURRED UNDER T HE MARKET HEAD, WHICH IS TO BE ALLOTTED TO TECHNICAL SERVICE, THE ASSESSEE F URNISHED CORRESPONDENCE FROM ITS EMPLOYEES WHEREIN SOME EMPLOYEES HAVE ESTI MATED THAT THE TIME SPENT BY THEM ON BOTILE ATD AND R&D LABORATORY WOUL D BE 10% AND 1% RESPECTIVELY. SIMILAR CORRESPONDENCE FROM OTHER EMP LOYEES WAS FURNISHED. THE CORRESPONDENCE WAS REJECTED BY THE TPO AS SELF- SERVING DOCUMENTS WHICH ARE NOT SUPPORTED BY ANY LOG BOOKS AND MOTION STUDIES AND FOR THE REASONS GIVEN IN PARA-8.3 OF THE ORDER. HE CAME TO A CONCLUSION THAT ALLOCATION OF EXPENSES IS ONLY A FINANCIAL JUGGLERY , DONE BY THE ASSESSEE, TO IMPROVE MARGINS FOR THE TECHNICAL SEGMENT, AT THE C OST OF MARKETING DIVISION WHICH HAS SUFFICIENT MARGIN OTHERWISE. HE SUBSTANTI ATED THIS FINDING BY THE FACT THAT, RECEIPTS ON ACCOUNT OF RESEARCH SERVICES FROM EXXON MOBIL CHEMICAL (ASIA) PACIFIC (FOR SHORT EMCAP ) WHICH SHOWS ` 4,98,14,572, IS THE EXACT AMOUNT REFLECTED AS AMOUNT RECOVERABLE FR OM A.ES IN THE PROFIT & LOSS ACCOUNT. HE REJECTED THE ALLOCATION OF EXPENDI TURE AS UNWARRANTED AND CAME TO A CONCLUSION THAT THE FACT OF THE MATTER IS THAT THE ASSESSEE HAS NOT RECEIVED ANY COMPENSATION FOR SERVICE RENDERED TO E MCAP, HENCE, HE HELD THAT TRANSACTION OF THE ASSESSEE AND WITH THE A.ES ARE NOT AT ARMS LENGTH. HE COMMENTED THAT THE ASSESSEE WOULD NOT HAVE RENDE RED SIMILAR SERVICES TO ANY OTHER THIRD PARTY WITHOUT CHARGING A MARK-UP . HE HELD THAT THE ASSESSEE SHOULD HAVE CHARGED REASONABLE INDUSTRY MA RK-UP, FOR RENDERING ITS SERVICE AND THAT THIS HAS BEEN FORGONE. AT PARA-8.5 /PAGE-6, THE TPO OBSERVED AS FOLLOWS:- 8.5 THE TOTAL COSTS ALLOCATED TO THE TECHNICAL SERV ICES SEGMENT OF THE ASSESSEE IS ` 5,78,63,688, OUT OF THIS THE EXPENSES TOWARDS BANG ALORE RESEARCH CENTRE ARE ` 4,98,14,572. THIS LEAVES THE REMAINING AMOUNT OF ` 80,49,116 AGAINST THE REPRESENTATION AND ATD SERVI CES OF ` 1,30,57,361, GIVING A MARK-UP OF 62.22% ON COSTS. EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 15 8.6 SELECTION OF COMPARABLES AND THEIR OPERATING MA RGINS: THE ASSESSEE HAD UNDERTAKEN A DETAILED SEARCH IN ITS TR ANSFER PRICING REPORT AND SELECTED FOLLOWING 7 COMPARABLE COMPANIES FOR W ORKING OUT ARITHMETIC MEAN OF 18.47%. SR. NO. NAME OF THE COMPANY AVERAGE ADJUSTED OP/TC 1 ALPHAGEO (INDIA) LTD. 24.74% 2 DOLPHIN MEDICAL SERVICES LTD. 11.46% 3 N. G. INDUSTRIES LTD. 29.60% 4 VIMTA LABS LTD. 69.49% 5 NEEMAN MEDICAL INTERNATIONAL (ASIA) LTD. -0.89% 6 ADS DIAGNOSTIC LTD. SEG. -9.20% 7 PFIZER LTD.- SERVICE SEG. 4.07% ARITHMETIC MEAN 18.47% AS DISCUSSED ABOVE, ON HIS OWN SEGMENTAL ANALYSIS I T HAS WORKED OUT ITS PLI OF 13.13% AND CONSIDERED ITS PRICING TO BE AT ARMS LENGTH. A PERUSAL OF THE COMPARABLE SHOWN THAT THE ASSESSEE H AD ADOPTED MULTIPLE YEAR DATA FOR WORKING OUT THE PLI OF THE C OMPARABLES AND FURTHER SOME OF THE COMPANIES SO SELECTED COULD NOT BE CONSIDERED AS COMPARABLE COMPANIES. ACCORDINGLY, THE ASSESSEE WAS ISSUED A SHOW CAUSE NOTICE DATED 17 TH JULY, 2009 CONFRONTING THE ABOVE FACTS AND ALSO THE REASONS FOR REJECTION OF A FEW OFFICE COMPARABL E COMPANIES. THE CORRECT OPERATING MARGIN WAS ALSO WORKED OUT. 6. THEREAFTER, THE TPO OBSERVED THAT THE ASSESSEE HAD UNDERTAKING RESEARCH IN ITS TRANSFER PRICING REPORT AND SELECTE D SEVEN COMPARABLE COMPANIES FOR WORKING OUT THE ARITHMETIC MEANS OF 1 8.47%. HE ALSO OBSERVED THAT THE PROFIT LEVEL INDICATOR (PLI) OF 1 3.13% WAS WORKED OUT BY THE ASSESSEE ON ITS OWN SEGMENT ANALYSIS AND THIS W AS TAKEN BY THE ASSESSEE TO BE THE ALP. THE ASSESSEE ADOPTED MULTIP LE DATA FOR WORKING OUT THE PLI OF COMPARABLES. THE TPO, ON THE GROUND THAT CERTAIN COMPARABLES SELECTED BY THE ASSESSEE HAVE TO BE REJECTED, ISSUE D A SHOW CAUSE NOTICE TO THE ASSESSEE ON 27 TH JULY 2009. THE ASSESSEE GAVE A DETAILED REPLY. ADDITIONALLY, IT SOUGHT WORKING CAPITAL ADJUSTMENT OF 0.47% IT ALSO SOUGHT EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 16 RISK ADJUSTMENT BY FOLLOWING THE CAPITAL ASSET PRIC ING MODEL. THE ASSESSING OFFICER REJECTED THESE SUBMISSIONS, EXCEPT THE REQU EST FOR WORKING CAPITAL ADJUSTMENT. 7. FROM OUT OF THE SEVEN COMPARABLES SELECTED BY THE A SSESSEE COMPANY, THE ASSESSING OFFICER ELIMINATED ADS DIAGNOSTIC LTD , NEEMAN MEDICAL INTERNATIONAL (ASIA) LTD. AND PFIZER LTD., AND INST EAD INCLUDING CHOKSI LABORATORIES LTD., TRANSGENE BIOTEK LTD. AND MEDINO VA DIAGNOSTIC SERVICES LTD. HE ARRIVED AT AN ARITHMETIC MEANS OF 28.41%. A FTER GRANTING WORKING CAPITAL ADJUSTMENT @ 0.47%, THE MARK-UP AS PER COMP ARABLES WERE ARRIVED @ 27.94%. THUS, HE PROPOSED AN ADDITION OF ` 1,39,18,191, ON PROVISIONS OF TECHNICAL SERVICES. 8. THE TPO THEN CONSIDERED THE ALP OF BACK OFFICE SUPP ORT SERVICES. THE ASSESSING OFFICER NOTED THAT AS PER THE AGREEMENT E NTERED INTO WITH THE A.E., 10% MARK-UP WAS PROVIDED ON TOTAL COST. HE OBSERVES THAT IN THE SEGMENTAL RESULTS SHOWN BY THE ASSESSEE, THE MARK-UP WAS 21.3 %. HENCE, A DETAILED QUESTIONNAIRE WAS ISSUED TO THE ASSESSEE. THE ASSES SING OFFICER EXPLAINED THAT THE BILLINGS ARE MADE ON BUDGETED COSTS, WHILE THE BOOKS OF ACCOUNT SHOW THE ACTUAL COST INCURRED, HENCE, THE VARIATION . HE FURTHER EXPLAINED THAT THE ACCOUNTS OF THE A.E. ARE MAINTAINED ON CALENDAR YEAR BASIS WHILE THE ACCOUNTS OF THE ASSESSEE ARE MAINTAINED ON FINANCIA L YEAR BASIS. THESE REASONS WERE REJECTED BY THE TPO. THE ASSESSEE TRIE D TO FURNISH RECONCILIATION BUT THE SAME WERE REJECTED BY THE TP O AFTER VERIFICATION. HE OBSERVED THAT THE ACTUAL COST OF ` 1,58,27,000, WAS LOWER THAN THE BILLED COSTS AND, HENCE, THEY COULD ACHIEVE A HIGHER MARK. HE OBSERVED THAT IF THE A.E CLOSED ITS ACCOUNTS ON 31 ST DECEMBER EACH YEAR, THE ACTUAL COSTS INCURRED BY THE ASSESSEE FROM JANUARY TO DECEMBER E ACH YEAR AFTER DUE ADJUSTMENT WOULD HAVE BEEN CONSIDERED. HE ALSO OBSE RVED THAT IF BUDGETED BILLING WAS LOWER THAN THE ACTUAL COST IN A PARTICU LAR QUARTER, THE SAME WOULD BE ADJUSTED IN NEXT QUARTER. HE HELD THAT SUCH DIFF ERENCES, IF ANY, WOULD EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 17 HAVE DEFINITELY BEEN TAKEN INTO ACCOUNT BY THE A.ES WHILE FINALIZING THE ACCOUNTS. AT PAGE-8, THE TPO OBSERVED AS FOLLOWS:- EVERY AE IS AN INDEPENDENT COMPANY AND A SEPARATE P ROFIT CENTRE. NONE WOULD LIKE TO PROVIDE A HIGHER EXPENDITURE THA N WARRANTED. THE AES HAVE ALLOWED A MARK UP OF 10% ONLY AND IF THEY WERE FINDING THAT THE AE IS ACTUALLY MAKING PROFIT OF 21% THEY WOULD HAVE REDUCED THEIR MARK UP IN THE FIRST QUARTERS OF 2006 SO AS TO MAKE AN OVERALL MARK UP OF 10% FOR THE YEAR. THE ASSESSEE IS NOT AN INDEPEN DENT COMPANY WHICH CAN BEFOOL THE VARIOUS GROUP COMPANIES BY CHA RGING A MARK UP OF 21.3% AGAINST AGREED MARGINS OF 10%. IN FACT, TH E ASSESSEE HAS REPORTED THAT IN THE NEXT YEARS THE MARK UP HAS BEE N INCREASED FOR 10 TO 15%. IF THE ASSESSEE WAS ACTUALLY MAKING A MARGI N OF 21.3% NO AES WOULD HAVE INCREASED THE MARGIN FROM 10 TO 15%. WHILE FILING THE EXPLANATION THE ASSESSEE HAS NOT B EEN ABLE TO EXPLAIN THE HEAD-WISE VARIATION AND THE SPECIFIC REASONS ON ACCOUNT OF WHICH THOSE VARIATIONS HAVE ARISEN. IT THEREFORE APPEARS THAT THE ALLOCATION OF EXPENSE BY THE ASSESSEE IS NOT AS PER THE ACTUAL BU DGET EXERCISE BUT ONLY WITH A BASIS TO WORK OUT BETTER MARGINS FOR TH E LOWER PRICED SEGMENTS. THE EXPLANATION/THE SEGMENTAL ALLOCATION OF THE ASSESSEE THEREFORE, IS REJECTED. 9. THEREAFTER, THE TPO MADE HIS OWN TRANSFER PRICE STU DY TO ASCERTAIN THE MARK-UP ON BACK OFFICE SUPPORT SERVICE THE METHODOL OGY OF WHICH IS EXPLAINED IN PARAS-9.3 TO 9.3.5 AT PAGE-9 TO 11 OF HIS ORDER. THE FINAL LIST OF COMPARABLES WERE TAKEN AS FOLLOWS:- 9.3 IN THE TP REPORT, THE ASSESSEE HAS SELECTED COM PARABLES FROM THE ITES INDUSTRIES TO BENCHMARK IT BACK OFFICE SER VICES. AGAIN IT WAS FOUND THAT THE ASSESSEE HAS CALCULATED THE PLIS AS AN AVERAGE OF THE PRECEDING THREE YEARS AND FURTHER MANY OF THE COMPA NIES COULD NOT BE CONSIDERED TO BE PROPER COMPARABLES. THE REASONS FO R REJECTION OF THESE COMPANIES WERE CONFRONTED TO THE ASSESSEE AND ALSO REPRODUCED BELOW:- S.NO. NAME OF COMPANY ACCEPTED / REJECTED REASONS FOR REJECTION 1. AIRLINE FINANCIAL SUPPORT SERVICES (I) LTD. REJECTED FINANCIAL DATA IS NOT AVAILABLE. 2. ALLSEC TECHNOLOGIES LTD. ACCEPTED - - EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 18 3. ASK ME INFO HUBS LTD. (NOW KNOWN AS CSS TECHNOLOGY LTD.) REJECTED EXPORTS < 25% 4. C.S. SOFTWARE ENTERPRISE LTD. (NOW KNOWN AS CSS TECHNOLOGY LTD.) REJECTED THE COMPANY IS ENGA- GED IN DEVELOPMENT OF SOFTWARE. NO SEGMEN- TAL DATA IS AVAILABLE 5. FORTUNE INFOTECH LIMITED REJECTED 100% RELATED PART Y 6. NIIT SMART SERVE LTD. REJECTED CONSISTENT LOSS 7. NUCLEAUS NETSOFT & GIS INDIA LTD. ACCEPTED NOW ASIT C. MEHTA & CO. 8. TATA SERVICES LTD. REJECTED REGISTRAR 9. TRANSWORK INFORMATION SERVICE LTD. ACCEPTED - - 10. TRICOM INDIA LTD. REJECTED FINANCIAL DATA NOT AVAILABLE 11. VISHAL INFORMATION TECHNOLOGIES LTD. ACCEPTED - - 12. WIPRO BPO SOLUTIONS LTD. REJECTED NO FINANCIAL DATA AVAILABLE 13. ACE SOFTWARE EXPORTS LTD. ACCEPTED - - 14. BT TECH NET LTD. REJECTED NO FINANCIAL DATA AVAILABLE 15. TULSYAN TECHNOLOGIES LTD. (FORMERLY KNOWN AS COSMIC GLOBAL LTD.) ACCEPTED - - 16. GOLDSTONE TELESERVICES LTD. BPO SEGMENT ACCEPTED - - 17. HYPERSOFT TECHNOLOGIES LTD. BPO SEGMENT REJECTED CONSISTENT LOSS 18. CMC LTD. ITES SEGMENT REJECTED IT FAILED IN EXPOR T FILTER. ITS EXPORT IS ONLY 9% 19. INDUS NETWORKS LTD. REJECTED CONSISTENT LOSS 20. MAPRO INDUSTRIES LTD. REJECTED CONSISTENT LOSS 9.3.1 THE DEPARTMENT HAS CONDUCTED THE SPEARATE SEA RCH FOR SELECTION OF COMPARABLES IN THE IT INDUSTRY. THE SEARCH STRAT EGY AND THE COMPARABLES ARE REPRODUCED BELOW. THIS WAS CONFRONT ED TO THE ASSESSEE VIDE QUESTIONNAIRE DATED 17 TH JULY 2009. THE SEARCH FOR SUITABLE COMPARABLES IS CONDUCTED BASED ON THE DATA AVAILABLE IN EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 19 PROWESS AND CAPITALINEDATABASES. THESE TWO DATABASE S WERE SEARCHED AND THE FILTERS ARE APPLIED ON THESE DATA. THE INFO RMATION ON RELATED PARTY TRANSACTIONS IS TAKEN FROM THESE DATABASES AN D ANNUAL REPORTS. IN SOME OF THE CASES, EITHER THE ANNUAL REPORTS OR THE INFORMATION IN RESPECT OF EXPORT TURNOVER, RELATED PARTY TRANSACTI ONS, ETC. ARE NOT AVAILABLE. SUCH INFORMATION IS ASKED FROM THE COMPA NIES UNDER THE EXPRESS PROVISIONS OF SECTION 92CA(7) READ WITH SEC . 133(6) OF THE ACT. BASED ON THE INFORMATION RECEIVED AS ON DATE, THE S EARCH PROCESS AND RESULTS THEREON ARE GIVEN BELOW:- 9.3.2 PROWESS DATABASE KEY WORD SEARCH THE SEARCH PROCESS IN POWESS DATABASE WAS CARRIED U NDER THE HEAD COMPANY CLASSIFICATIONS AND UNDER THE SUBHEADING NON-FINANCIAL SERVICES SERVICES (OTHER THAN FINANCIAL) INF ORMATION TECHNOLOGY ITES. THUS, THE SEARCH FOR SUITABLE C OMPARABLES IS BASED ON THE KEY WORD ITES. THE SEARCH WAS CARRIE D ON 29.1.2009. IT HAS THROWN UP 97 COMPANIES. THE SEARCH PROCESS I S ELABORATED AS UNDER:- STEP DESCRIPTION NO. OF COMPANIES RESULTED NO. OF COMPANIES ELIMINATED 1. NUMBER OF COMPANIES RESULTED BY THE KEY WORD ITES 97 2. THE COMPANIES FOR WHICH THE DATA IS AVAILABLE FOR THE F.Y. 2005-06 50 47 3. THE COMPANIES WHICH HAVE SERVICE INCOME. 42 8 4. THE COMPANIES WHOSE TURNOVER IS MORE THAN ` .1 CRORE. 32 10 5. THE COMPANIES WHOSE SERVICE INCOME IS MORE THAN 75% OF THE REVENUES. 32 0 EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 20 6. THE COMPANIES WHOSE EXPORT REVENUES ARE MORE THAN 25% OF THE REVENUES. 24 8 7. RELATED PARTY TRANSACTIONS < 25% OF THE REVENUES (BASED ON THE DATA AVAILABLE IN THE DATABASES) 17 7 BALANCE COMPANIES FOR FURTHER EXAMINATION. 17 THE BALANCE 17 COMPANIES WERE EXAMINED FURTHER AS F OLLOWS. IN SOME OF THE COMPANIES, THE RPT INFORMATION, SEGMENTAL IN FORMATION, EXPORT EARNINGS AND OTHER INFORMATION RELATING TO FUNCTION ALITY IS NOT AVAILABLE. THE SAME WERE ASKED U/S 133(6) FROM THE COMPANIES. BASED ON THE INFORMATION RECEIVED 7 COMPANIES HAVE BEEN SELECTED AS COMPARABLES. 9.3.4 SEGMENT SEARCH THE SEGMENTAL SEARCH IS ALSO CARRIED TO SEARCH FOR COMPANIES WHO HAVE SEGMENT RELATING TO IT ENABLED SERVICES. UNDER THE MAIN HEAD QUERY BY PRODUCT / SEGMENT IN PROWESS DATABASE, AND SUB- HEAD SEGMENT- WISE INFORMATION, THE KEYWORD IT ENABLED SERVICES / BPO WAS SEARCHED. THIS SEARCH HAS THROWN 41 COMPANIES. IN S OME OF THESE 41 COMPANIES, THE ANNUAL REPORTS, RELATED PARTY TRANSA CTIONS INFORMATION, SEGMENTAL INFORMATION ETC. IS NOT AVAILABLE. THUS, THESE COMPANIES WERE ISSUED NOTICES U/S 133(6) TO SUBMIT THIS INFOR MATION. 3 COMPANIES HAVE BEEN SELECTED AS COMPARABLES FROM TH E PROWESS SEGMENT SEARCH. STEP DESCRIPTION NO. OF COMPANIES RESULTED NO. OF COMPANIES ELIMINATED 1. NUMBER OF COMPANIES RESULTED BY THE SEGMENT SEARCH 41 2. NUMBER OF COMPANIES NOT ALREADY COVERED UNDER THE KEY WORD SEARCH AS ABOVE 36 5 EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 21 3. ITES REVENUE / SEGMENT AVAILABLE FOR THE F.Y. 2005-06 29 7 4. REPLIES U/S 133(6) IN RESPECT OF SEGMENTAL DATA 22 7 5. NUMBER OF COMPANIES WITH LESS THAN 25% RPT 14 8 6. NUMBER OF COMPANIES WITH TURNOVER MORE THAN ` 1 CR. 12 2 7. NUMBER OF COMPANIES WITH EXPORT REVENUE MORE THAN 25% OF THE REVENUES 4 8 8. RELIABILITY OF DATA (SATYAM COMPUTER SERVICES ELIMINATED) 3 1 BALANCE 3 9.3.5 CAPITALINE PLUS DATABASE KEY WORD SEARCH THE SEARCH PROCESS IN CAPITALINE PLUS DATABASE WAS CARRIED UNDER THE HEAD INDUSTRY BASED ON THE KEY WORD IT ENABL ED SERVICES / BUSINESS PROCESS OUTSOURCING. THE SEARCH WAS CARRI ED ON 03.02.2009. IT HAS THROWN UP 73 COMPANIES. THE SEAR CH PROCESS IS ELABORATED AS UNDER:- STEP DESCRIPTION NO. OF COMPANIES RESULTED NO. OF COMPANIES ELIMINATED 1. NUMBER OF COMPANIES RESULTED BY THE KEY WORD IT ENABLED SERVICES / BUSINESS PROCESS OUTSOURCING 73 2. THE COMPANIES FOR WHICH THE DATA IS AVAILABLE FOR THE F.Y. 2005-06 26 47 3. COMPANIES EXCLUSIVELY IN CAPITALINE (AND NOT IN PROWESS) 14 12 4. THE COMPANIES WHOSE TURNOVER IS MORE THAN ` 1 CR. 12 2 EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 22 5. THE COMPANIES WHOSE EXPORT REVENUES ARE MORE THAN 25% OF THE REVENUES. 10 2 6. RELATED PARTY TRANSACTIONS < 25% OF THE REVENUES (BASED ON THE DATA AVAILABLE IN THE DATABASES) 8 2 BALANCE COMPANIES FOR FURTHER EXAMINATION 8 THE BALANCE 8 COMPANIES WERE EXAMINED FURTHER AS FO LLOWS. IN SOME OF THE COMPANIES, THE RPT INFORMATION, SEGMENTAL IN FORMATION, ONSITE REVENUES INFORMATION AND OTHER INFORMATION R ELATING TO FUNCTIONALITY IS NOT AVAILABLE. THE SAME WERE ASKED UNDER SECTION 133(6) FROM THE COMPANIES. OUT OF THESE, NONE OF TH E COMPANIES HAS BEEN SELECTED AS COMPARABLES BASED ON THE INFOR MATION RECEIVED FROM THE COMPANIES. 9.3.6 SEGMENT SEARCH THE SEGMENTAL SEARCH IS ALSO CARRIED TO SEARCH FOR COMPANIES WHO HAVE SEGMENT RELATING TO IT ENABLED SERVICES. THE S EARCH CRITERIA ARE AS UNDER:- DOMAIN COMPANIES SELECT ALL COMPANIES (17435) FILTERS SEGMENT FINANCE KEYWORDS USED (FOR COMPANY SEGMENT NAME) BPO BPO SERVICES BACK OFFICE TRANSACTIONS PROCESSING ITES ITES / BPO IT ENABLED SERVICES IT ENABLED SERVICES IT & ITES MEDICAL TRANSCRIPTION CALL CENTRE OPERATION CONTENT MANAGEMENT BPO GIS BASED SERVICES OFFICE BACK UP OPERATIONS SOFTWARE & BPO THE ABOVE KEY WORDS ARE USED FOR SEGMENTAL SEARCH F OR THE F.Y. 2005-06. THIS SEARCH WAS CARRIED ON 3.2.2009 AND HA S THROWN 23 COMPANIES. IN SOME OF THESE 23 COMPANIES, THE ANNUA L REPORTS, RELATED PARTY TRANSACTIONS INFORMATION, SEGMENTAL I NFORMATION ETC. IS NOT AVAILABLE. THUS THESE COMPANIES WERE ISSUED NOT ICES U/S 133(6) TO SUBMIT THIS INFORMATION. OUT OF THESE, NONE OF T HE COMPANIES HAS EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 23 BEEN SELECTED AS A COMPARABLE BASED ON THE INFORMAT ION RECEIVED FROM THE COMPANIES U/S 133(6). ADDITIONAL COMPARABLES :- WHILE DOING THE SEARCH PROCESS FOR SUITABLE COMPARA BLES IN THE SOFTWARE SECTOR, SOME OF THE COMPANIES THOUGH CATEG ORIZED AS SOFTWARE SERVICE PROVIDER ARE IN FACT EITHER IN THE IT ENABLED SERVICES SECTOR OR HAVE IT ENABLED SERVICES AS ONE OF THE BU SINESS SEGMENT. THE SEARCH CRITERIA FOR THE SOFTWARE SECTOR ARE SUM MARIZED AS UNDER:- DATABASE DESCRIPTION OF THE SEARCH KEYWORDS USED PROWESS KEYWORD SEARCH COMPUTER SOFTWARE PROWESS SEGMENT SEARCH COMPUTER SOFTWARE, SOFTWARE SERVICES & CONSULTANCY CAPITALINE KEYWORD SEARCH COMPUTER SOFTWARE CON VERTS, COMPUTER SOFTWARE LARGE AND COMPUTER SOFTWARE MEDIUM / SMALL. CAPITALINE SEGMENT SEARCH 1. SOFTWARE 2. SOFTWARE & BPO 3. SOFTWARE & PROCESSING CHARGES 4. SOFTWARE ACTIVITIES 5. SOFTWARE DEVELOPMENT 6. SOFTWARE DEVELOPMENT & RELATED 7. SOFTWARE DEVELOPMENT & SAL 8. SOFTWARE DEVELOPMENT & SER 9. SOFTWARE DEVELOPMENT & SER 10. SOFTWARE DEVELOPMENT INDIA 11. SOFTWARE DIVISION 12. SOFTWARE MAINTENANCE 13. SOFTWARE PRODUCTION 14. SOFTWARE PRODUCTS & SERVICES 15. SOFTWARE SERVICES 16. SOFTWARE SOLUTIONS & SERVICES 17. SOFTWARE TRAINING & DEVELOP AS A RESULT OF ABOVE SEARCH, THE PROBABLE COMPARABL ES WERE ALSO EXAMINED TO SEE WHETHER THOSE COMPANIES ARE INTO IT ENABLED SERVICES BASED ON THEIR ANNUAL REPORTS AND / OR INF ORMATION SUBMITTED IN RESPONSE TO 133(6) NOTICES. THESE COMP ANIES ARE DISCUSSED AS UNDER:- EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 24 S.NO. NAME OF COMPANY REASON FOR ACCEPTANCE / REJECTION 1. APEX KNOWLEDGE SOLUTIONS LTD. IN RESPONSE TO NOTICE U/S 133(6), THE COMPANY CATEGORICALLY STATED THAT THEY ARE INTO IT ENABLED SERVICES. IT ALSO QUALIFIES ALL THE FILTERS APPLIED BY THE TPO. THE SAME IS CONSIDERED AS A COMPARABLE. 2. CEPHA IMAGING PVT. LTD. THOUGH THE COMPANY IS NOT IT ENABLED SERVICES, 100% OF ITS SERVICES ARE RENDERED TO ITS RELATED PARTIES AND THUS FAILS 25% RELATED PARTY TRANSACTIONS FILTER. 3. ICRA TECHNO ANALYTICS LTD. THE COMPANY WAS ASKED U/S 133(6) TO SUBMIT SEGMENTAL FINANCIAL PERTAINING TO ITES SEGMENT. THE COMPANY IS YET TO SUBMIT INFORMATION. AT THIS STAGE, THE COMPANY IS NOT CONSIDERED AS A COMPARABLE DUE TO LACK OF SEGMENTAL DATA FOR THE FY 2005-06 & FAILING THE EXPORT FILTER. 4. IT PEOPLE (INDIA) LTD. THE FUNCTIONALITY OF THE COM PANY IS NOT CLEAR FROM THE ANNUAL REPORT AS IT RUNS A JOB PORTAL WHICH IS NOT AKIN TO RENDERING IT ENABLED SERVICES. THE COMPANY WAS ASKED U/S 133(6) TO SUBMIT THE INFORMATION. THUS, AT THIS STAGE, THE COMPANY IS NOT CONSIDERED AS A COMPARABLE DUE TO LACK OF INFORMATION ON FUNCTIONALITY FOR THE FY 2005-06. 5. R. SYSTEMS INTERNATIONAL LTD. BASED ON THE SEGMENTAL INFORMATION SUBMITTED BY THE COMPANY IN RESPONSE TO NOTICE U/S 133(6), THE COMPANY HAS AN ITES SEGMENT AND THIS SEGMENT QUALIFIES ALL THE FILTERS APPLIED BY THE TPO. 6. WIPRO LTD. THE COMPANYS ANNUAL REPORT FOR THE FY 2005-06 DID NOT HAVE SEGMENTAL RESULTS FOR BPO SEGMENT ON STAND ALONE BASIS. THE COMPANY WAS ASKED UNDER SECTION 133(6) TO SUBMIT SEGMENTAL INFORMATION PERTAINING TO BPO SEGMENT. BUT THE COMPANY SAID THAT IT IS NOT ABLE TO SUBMIT SEGMENTAL INFORMATION ON STAND ALONE BASIS. THEREFORE REJECTED. EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 25 7. SYNTLE (INDIA) LTD. ANNUAL REPORT IS NOT AVAILABLE FOR THE FY 2005-06. AS PER THE INFORMATION AND ANNUAL REPORT SUBMITTED BY THE COMPANY, IN RESPONSE TO 133(6) NOTICE, THE COMPANY HAS STATED THAT IT IS INTO SOFTWARE SERVICES AND ITES SEGMENT. 92% OF IT ENABLED SER VICES ARE RENDERED TO ITS AES. THUS IT FAILS RPT FILTER AND IS NOT CONSIDERED AS A COMPARABLE. 8. MOLD TEK TECHNOLOGIES LTD. AS PER THE INFORMATION SUBMITTED BY THE COMPANY, THE COMPANY IS INTO IT ENABLED SERVICES SEGMENT. THE COMPANY EARNED A PROFIT OF ` 1,60,28,000 ON AN OPERATING COST OF ` 2,14,77,839. AS THE COMPANYS OPERATING PROFIT IS 74.63% ON COST, THE SAME IS NOT CONSIDERED AS A COMPARABLE AS IT HAS VERY HIGH MARGIN BY ANY STANDARD. THUS, IT IS NOT CONSIDERED AS A COMPARABLE. 9. SITEL INDIA LTD. THE COMPANY IS AN IT ENABLED SERVI CE PROVIDER. BUT, BASED ON THE INFORMATION AND THE ANNUAL REPORT SUBMITTED BY THE COMPANY IN RESPONSE TO 133(6) NOTICE, ALMOST 100% OF ITS REVENUE ARE GENERATED FROM ITS AES FOR THE FY 2005- 06. THUS, IT FAILS RPT FILTER AND IS NOT CONSIDERED AS A COMPARABLE. 10. AUTOLINE DIMENSIONS SOFTWARE P. LTD. AS PER THE INFORMATION SUBMITTED BY THE COMPANY, IN RESPONSE TO NOTICE U/S 133(6), THE ITES SEGMENT OF THE COMPANY FAILS 25% EXPORT EARNING FILTER. ITS ITES SEGMENT HAS ONLY 19.55% OF ITS REVENUES AS EXPORTS. THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLE. 11. FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) BASED ON THE SEGMENTAL INFORMATION SUBMITTED BY THE COMPANY IN RESPONSE TO NOTICE U/S 133(6), THE COMPANY HAS AN ITES SEGMENT AND THIS SEGMENT QUALIFIES ALL THE FILTERS APPLIED BY THE TPO. 12. ACE SOFTWARE EXPORTS LTD. AS THE COMPANY IS INTO IT ENABLED SERVICES AND QUALIFIES ALL THE FILTERS APPLIED BY THE TPO, THE SAME IS CONSIDERED AS A COMPARABLES. EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 26 9.3.6 FINAL SET OF COMPARABLES STEP NAME OF COMPANY SALES ` IN CRORE OP TO TOTAL COST % 1. ACE SOFTWARE EXPORTS LTD. 4.97 7.72 2. ALLSEC TECHNOLOGIES LTD. 92.25 28.51 3. APEX KNOWLEDGE SOLUTIONS P. LTD. 4.92 20.48 4. ASIT C. MEHTA FINANCIAL SERVICES LTD. (EARLIER KNOWN AS NUCLEUS NETSOFT & GIS (I) LTD.) 5.68 34.52 5. COSMIC GLOBAL LTD. (SEG.) 3.11 16.03 6. DATAMATICS FINANCIAL SERVICES (SEG.) 2.31 24.99 7. FLEXTRONICS SERVICES SYSTEMS (SEG.) 21.41 14.54 8. GOLDSTONE INFRATCH LTD. (SEG.) (EARLIER KNOWN AS GOLDSTONE TELESERVICES LTD. 5.03 29.01 9. MAPLE ESOLUTIONS LTD. 7.43 32.66 10. R SYSTEMS INTERNATIONAL LTD. (SEG.) 9.17 15.11 11. SPANCO LTD. (SEG.) (EARLIER KNOWN AS SPANCO TELESYSTEMS & SOLUTIONS LTD.) 82.32 20.86 12. TRENSWORKS INFORMATION SERVICES LTD. 163.3 19.56 13. VISHAL INFORMATION TECHNOLOGIES LTD. 25.64 48.03 ARITHMETIC MEAN 24.00% NOTE : 1. ALL THE FIGURES ARE TAKEN FROM THE ANNUAL REPORTS; 2. COSTS TAKEN FOR THE COMPUTATION OF MARGINS ARE THE COSTS BEFORE INTEREST CHARGES; 3. FOREX GAIN/LOSS IS NOT TAKEN AS PART OF THE OPERATI NG EXPENSES AS FOREX GAIN IS CATEGORIZED AS OTHER INCOME; AND 4. LOSS OF SALE OF ASSETS, ETC., ARE NOT TAKEN AS EXPE NDITURE. 21. THE ASSESSEE GAVE ITS OBJECTIONS. THE ASSESSING OFF ICER, AFTER CONSIDERING VARIOUS CONTENTIONS, HELD THAT THE ASSE SSEE HAD WORKED OUT THE ADJUSTED AVERAGE PLI OF THE COMPARABLES @ 24.43% AN D THIS WOULD BE USED FOR BENCH MARKING THE BACK OFFICE SUPPORT SERVICES. THEREAFTER, THE TPO CONSIDERED THE SUBMISSIONS OF THE ASSESSEE, IN RESP ECT OF ADJUSTMENTS OF RISK BEING A CAPTIVE UNIT. HE CAME TO A CONCLUSION THAT THERE IS NO DIFFERENCE EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 27 BETWEEN THE ASSESSEE AND THE COMPARABLE COMPANIES. HE COMPUTED ALP OF SERVICE WOULD BE ` 4,76,49,682, AS AGAINST THE ACTUAL RECEIPT OF ` 4,21,23,805, AND ARRIVED AT AN ADJUSTMENT OF ` 55,25,877. ON THE REQUEST OF THE ASSESSEE FOR BENEFIT OF +/- 5% IN RESPECT OF TH E ADJUSTMENT IN TERMS OF THE PROVISIONS OF SECTION 92C(4), THE ASSESSING OFF ICER HELD THAT THE VARIATION IN PRICE IS MORE THAN 5% AND, HENCE NO RELIEF CAN B E GIVEN AND CONCLUDED THAT THE TOTAL ADJUSTMENT SHOULD BE ` 1,94,44,068. THE DRAFT OF THE PROPOSED ASSESSMENT ORDER WAS FORWARDED TO THE ASSESSEE ON 2 6 TH NOVEMBER 2009. THE ASSESSEE CARRIED THE MATTER BEFORE THE DISPUTES RESOLUTION PANEL (DRP). BEFORE THE DRP, THE ASSESSEE IS RECORDED AS HAVING RAISED TWO MAIN OBJECTIONS I.E., WITH RESPECT TO TRANSFER PRICING A DJUSTMENT OF ` 1,39,18,191, ON ACCOUNT OF TECHNICAL SERVICE AND (II) ADJUSTMENT OF ` 55,25,877, ON ACCOUNT OF BACK OFFICE SUPPORT SERVICE. THE DRP REJ ECTED THE OBJECTIONS OF THE ASSESSEE ON EXCLUSION OF THREE LOSS MAKING COMP ANIES ON THE GROUND THAT THEY ARE NOT COMPARABLE COMPANIES. AS REGARDS ELIMINATION OF PFIZER LTD., FROM THE LIST OF COMPARABLES THE DRP DIRECTED THE ASSESSING OFFICER TO INCLUDE PFIZER LTD. ON THE ISSUE OF BACK OFFICE SUP PORT SERVICE, IT OBSERVED THAT THE ASSESSEE HAS ARGUED THAT THE ACTUAL PROFIT SHOWN BY IT IS 21% AS AGAINST 24% MARGIN WORKED OUT BY THE ASSESSING OFFI CER. IT HELD THAT THIS FALLS WITHIN +/-5% RANGE. IT OBSERVED THAT THE ASSE SSING OFFICER CANNOT IGNORE THE ACTUAL MARK-UP EARNED BY THE ASSESSEE WH ILE COMPARING THE AVERAGE MEAN WORKED OUT BY HIM WITH THE MEAN SHOWN IN THE AGREEMENT. IT HELD THAT THE ASSESSING OFFICERS ACTION CANNOT BE SUSTAINED. THE DRP DIRECTED THE ASSESSING OFFICER TO COMPARE THE AVERA GE MEAN WORKED OUT BY HIM WITH 21% ACTUAL PROFIT SHOWN BY THE ASSESSEE AN D THEN TO APPLY THE RANGE +/-5% AND IN CASE THE ADJUSTMENT FALLS WITHIN THE RANGE, IT DIRECTED THAT THE ASSESSING OFFICER SHOULD NOT MAKE ANY ADJU STMENT. THE ASSESSING OFFICER, IN HIS ORDER DATED 20 TH SEPTEMBER 2010, MADE AN ADJUSTMENT OF ` 1,24,03,828, ON ACCOUNT OF TECHNICAL SERVICES AND A LSO RETAINED THE TRANSFER PRICING ADJUSTMENT OF ` 55,25,877 WITH REGARD TO BACK OFFICE SUPPORT SERVI CE. EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 28 HE HELD THAT THE ASSESSEE DOES NOT GET THE BENEFIT OF +/-5% RANGE AS THE AMOUNT OF ` 4,21,23,805, SHOWN BY THE ASSESSEE FOR BACK OFFICE SUPPORT SERVICE IS BEYOND THE LIMIT OF THE ALP OF SUCH SERV ICE DETERMINING AT ` 4,76,49,682. AGGRIEVED, THE ASSESSEE FILED THIS APP EAL BEFORE THE TRIBUNAL ON THE FOLLOWING GROUNDS:- 1. THE ASSESSING OFFICER PASSED IN PURSUANCE OF THE DIRECTIONS ISSUED BY THE DRP IS A VITIATED ORDER, AS THE DRP E RRED BOTH ON FACTS AND IN LAW IN PARTIALLY CONFIRMING THE ADDITION MAD E BY THE DY. CIT, TO THE APPELLANTS INCOME. 2. THE ASSESSING OFFICER ERRED IN FACTS AND IN LAW IN CONCLUDING THE ASSESSMENT UNDER SECTION 143(3) R/W SECTION 144C(13 ) OF THE ACT IN - 2.1 MAKING AN ADJUSTMENT TO YOUR APPELLANTS INTERN A- TIONAL TRANSACTIONS OF PROVISIONS OF TECHNICAL SERV ICES AND BACK OFFICE SUPPORT SERVICES AT ` 1,24,03,828 AND ` 55,25,877 RESPECTIVELY. 2.2 DISREGARDING THE ARMS LENGTH PRICE (ALP) AND T HE METHODICAL BENCHMARKING PROCESS CARRIED OUT BY THE APPELLANT IN THE TRANSFER PRICING (TP) DOCUMENTATIO N MAINTAINED BY IT IN TERMS OF SECTION 92D R/W RULE 1 0D OF THE I.T. RULES, 1962. 2.3 NOT ALLOWING THE USE OF MULTIPLE YEAR DATA AS PRESCRIBED UNDER RULE 10B(4) OF THE RULES R/W THE O ECD TP GUIDELINES, AND DETERMINING THE ARMS LENGTH PRI CE ON THE BASIS OF FINANCIAL INFORMATION OF THE COMPARABL ES FOR THE YEAR ENDED MARCH 31, 2006 IDENTIFIED PURSUANT T O A FRESH SEARCH FOR COMPARABLES PERFORMED DURING THE ASSESSMENT PROCEEDINGS. THE A.O./TPO/DRP ERRED IN REJECTING THE CONTEMPORANEOUS DOCUMENTATION MAINTAI NED BY THE APPELLANT AS REQUIRED UNDER THE INDIAN TP REGULATIONS; 2.4 NOT GRANTING RISK ADJUSTMENT TO THE APPELLANT T O ACCOUNT FOR THE DIFFERENCES IN THE RISK PROFILE OF THE COMPARABLES VIS--VIS THE TECHNICAL SERVICES AND BA CK OFFICE SUPPORT SERVICES CARRIED OUT BY APPELLANT. 2.5 NOT CORRECTLY GRANTING THE BENEFIT OF WORKING C APITAL ADJUSTMENT IN RELATION TO TECHNICAL SERVICES; AND EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 29 2.6 DENYING THE BENEFIT OF (+/-) 5% RANGE MENTIONED IN PROVISO TO SECTION 92C(2) OF THE ACT WHILE COMPU TING THE ALP. THE APPELLANT PRAYS THAT THE BOOK VALUE OF THE INTE RNATIO- NAL TRANSACTIONS OF TECHNICAL SERVICES AND BACK OFF ICE SUPPORT SERVICES, SHOULD BE HELD TO BE THE ARMS LE NGTH PRICE OF THE SAID TRANSACTIONS AS PER THE APPELLANT S TRANSFER PRICING DOCUMENTATION, AND THE A.O. BE DIR ECTED TO DELETE THE ADDITION MADE KEEPING THE AFORESAID GROUNDS IN PERSPECTIVE. WITHOUT PREJUDICE TO THE ABOVE, THE A.O. ERRED IN N OT FOLLOWING THE DIRECTIONS OF THE DRP, IN RELATION TO BACK OFFICE SERVICES, WHEREBY THE DRP DIRECTED TO DELETE THE ADJUSTMENTS IN RELATION TO BACK OFFICE SERVICES, IF THE APPELLANTS MARGIN IS WITHIN +/- 5% OF THE MARGIN PROPOSED BY THE TPO AND YOUR APPELLANTS MARGIN IS WITHIN THE SAID 5% RANGE. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTH ER. 3. THE A.O. ERRED IN FACTS AND IN LAW IN DISALLOWIN G A SUM OF ` 2,61,761 BEING 25% OF THE TOTAL ENTERTAINMENT EXPEN SES OF ` 40,47,046 INCURRED BY THE APPELLANT DURING THE YEAR UNDER CONSIDERA- TION. 22. LEARNED COUNSEL, MR. SOURABH SOPARKAR, APPEARING ON BEHALF OF THE ASSESSEE, LISTED OUT THE ISSUES THAT ARISE FOR ADJU DICATION IN THIS APPEAL ON THE ISSUE OF TRANSFER PRICING ADJUSTMENT ON TECHNIC AL SERVICE SEGMENT, AS FOLLOWS:- I) WHETHER IT IS PROPER FOR THE TPO TO EXCLUDE THE LOS S MAKING UNIT FROM COMPARABLES AND IF SO, WHETHER HIGHLY PROFIT E ARNING COMPARABLES SHOULD ALSO BE EXCLUDED FOR THE SAME RE ASON. II) WHETHER WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTM ENT HAS TO BE TAKEN INTO ACCOUNT WHILE ARRIVING AT ALP. 23. THOUGH A NUMBER OF GROUNDS WERE RAISED AND PAPERS W ERE FILED, THE LEARNED COUNSEL RESTRICTED HIS SUBMISSION TO ONLY T HE ABOVE ISSUES AND STATED THAT OTHER ISSUES WERE NOT PRESSED. HE SUBMI TS THAT IN THE TRANSFER PRICING STUDY, THE ASSESSEE HAS TAKEN AVERAGE OF TW O YEARS DATA FOR EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 30 COMPARISON BUT THE TPO HAS TAKEN ONLY ONE YEAR. HE SUBMITS THAT FOR VARIOUS REASONS, THE ASSESSEE DOES NOT WANT TO PRESS THIS I SSUE. IN VIEW OF THE ABOVE SUBMISSIONS, WE DISMISS THIS ARGUMENT OF THE ASSESS EE. 24. ON THE SECOND ISSUE OF REJECTION OF LOSS MAKING COM PARABLES, THE LEARNED COUNSEL DREW THE ATTENTION OF THE BENCH TO PAGE-226 OF THE PAPER BOOK AND SUBMITS THAT IT IS CLEAR FROM THE DIRECTOR S REPORT OF THE COMPARABLE COMPANY, ADS DIAGNOSTIC LTD. THAT THE DECREASE IN S CANNING INCOME IS DUE TO STIFF COMPETITION FROM THE EXISTING AND NEW DIAG NOSTIC CENTRES THAT ARE COMING UP IN AND AROUND DELHI. HE POINTED OUT THAT THE LOSS AFTER DEPRECIATION HAS, IN FACT, DECREASED FROM ` 21,76,000 TO ` 14,32,000. HIS CASE IS THAT, THE COMPANY SHOULD BE ACCEPTED AS FUN CTIONALLY COMPARABLE. 25. ON THE REJECTION OF COMPARABLE NEEMAN MEDICAL INTER NATIONAL (ASIA) LTD., HE POINTS OUT THAT GROSS REVENUE HAS INCREASE D DURING THE YEAR. HE POINTS OUT THAT COMPANYS CLINICAL TRIAL INCOME HAS REDUCED AS COMPARED TO LAST YEAR. HE SUBMITS THAT THIS COMPANY WAS WRONGLY TREATED AS A CONSISTENT LOSS MAKER AS IT HAD A LOSS OF ` 28,00,000 IN FINANCIAL YEAR 2003-04 AND, WHEREAS A PROFIT OF ` 15,00,000 TO THE FINANCIAL YEAR 2004-05. FOR THE PROPOSITION THAT LOSS MAKING ENTITIES CANNOT BE EXC LUDED, HE RELIED ON THE FOLLOWING CASE LAWS:- MENTOR GRAPHICS (NOIDA) P. LTD. V/S DCIT, (2007) 11 2 TTJ 408 (DEL.); AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. V/S ACIT, ITA NO.584 AND 585/BANGL./2006; E-GAIN COMMUNICATION PVT. LTD. V/S ITO, 118 TTJ 354 ; SONY INDIA PVT. LTD. V/S DCIT, 1189/DEL./2005 & ORS ; AND. SAP LABS INDIA P. LTD. V/S ACIT, ITA NO.398/BANG./2 008. EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 31 26. ON THE ISSUE OF ADJUSTMENT FOR WORKING CAPITAL AND ADJUSTMENT FOR RISK, THE LEARNED COUNSEL SUBMITS THAT HE IS NOT PRESSING FOR THE SAME. THUS, THESE ISSUES ARE DISMISSED AS NOT PRESSED . 27. COMING TO THE ORDER OF THE DISPUTE RESOLUTION PANEL (FOR SHORT DRP ), THE LEARNED COUNSEL SUBMITS THAT DETAILED SUBMISSIO NS WERE MADE AND DETAILED OBJECTIONS WERE RAISED BUT THE DRP, WITHOU T CONSIDERING ANY OF THE SUBMISSIONS OR THE MATERIAL, HAS DISPOSED OFF THE C ASE UNJUSTLY IN A SUMMARY MANNER. HE CONTENDS THAT NO DISCUSSION WAS MADE ON THE 5% MARGIN. 28. COMING TO THE SECOND ISSUE OF BACK OFFICE SERVICES, HE SUBMITS THAT THE SERVICES INCLUD CUSTOMERS SUPPORT SERVICE, CUSTOME R SATISFACTION ADVISORY SERVICES AND PRODUCT STEWARDSHIP ADVISORY SERVICES. HE SUBMITS THAT UNDER THE SCHEME OF THE ACT, THE ASSESSING OFFICER IS BOU ND TO FOLLOW THE DIRECTIONS OF DRP. WHILE SUBMITTING THAT THE DETAILS SUBMISSIO NS WERE MADE BEFORE THE DRP AND THAT THE DRP HAS NOT TAKING INTO ACCOUNT AN Y OF THE OBJECTIONS AND SUBMISSIONS, HE POINTS OUT THAT THE DIRECTION OF TH E DRP, IF IMPLEMENTED, CALLS FOR NO ADDITION IN THIS CASE. HE GAVE THE FOL LOWING CALCULATIONS IN SUPPORT OF HIS SUBMISSIONS THAT NO ADJUSTMENT IS CA LLED FOR AFTER APPLYING 5% RANGE. PARTICULARS PROFIT & LOSS ACCOUNT COMPUTATION OF AR MS LENGTH PRICE OPERATING INCOME 4,21,23,805 4,32,11,194 LESS: OPERATING EXPENSES (TC) 3,47,27,312 3,47,27,312 OPERATING PROFIT (OP) 73,96,493 84,83,882 OP/TC 21.30% 24.43% ARMS LENGTH PRICE OF SERVICES (ALP) 4,32,11,194 APPLICATION F THE RANGE-ALP X 0.95 4,10,50,635 EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 32 THE REVISED ALP (AFTER APPLYING 5% MARGIN) IS ` 4,10,50,635. AS THE ACTUAL INCOME IS ` 4,21,23,805, NO ADJUSTMENT WOULD BE REQUIRED. 29. ON THE ISSUE OF GROUND NO.3, THE LEARNED COUNSEL SU BMITS THAT HE IS NOT PRESSING THE SAME. THUS, THIS GROUND IS DISMISS ED AS NOT PRESSED . 30. LEARNED DEPARTMENTAL REPRESENTATIVE, MR. D. SONGATE , ON THE OTHER HAND, CONTROVERTED THE SUBMISSIONS MADE BY THE ASSE SSEES COUNSEL. ON THE FIRST ISSUE OF ADOPTING MULTIPLE YEAR DATA OR SINGL E YEAR DATA, THE LEARNED DEPARTMENTAL REPRESENTATIVE NOTED THAT ASSESSEES C OUNSEL HAS NOT PRESSED THE SAME AND, HENCE, MADE NO SUBMISSIONS. 31. ON THE ISSUE OF ELIMINATION OF LOSS MAKING UNITS FR OM THE LIST OF COMPARABLES, THE LEARNED DEPARTMENTAL REPRESENTATIV E RELIED ON THE ORDER OF THE DRP AS WELL AS THAT OF THE TPO AND SUBMITS THAT CONSISTENT LOSS MAKING COMPANIES CANNOT BE TREATED AS PROPER COMPARABLES. HE BASICALLY RELIED ON THE ORDER OF THE TPO AND SUBMITS THAT THE ASSESSEE HAS NOT BEEN RECEIVING ANY MARK-UP ON TECHNICAL SERVICES PROVIDED TO ITS A.ES IN THE FORM OF RESEARCH AND DEVELOPMENT AT BRDTC HE POINTS OUT THA T THE RESULT OF RESEARCH WOULD BE ENJOYED BY THE A.E. WITH ALL THE INTELLECTUAL PROPERTY RIGHTS AND, AT THE SAME TIME, THE ASSESSEE HAS NOT BEEN COMPENSATED AT ARMS LENGTH. HE RELIED ON THE ORDER OF THE TPO AND SUBMITTED THAT THE UNITS ELIMINATED WERE NOT COMPARABLE AS THEY DO NOT GIVE PLI IN AN IDEAL SITUATION. COMING TO THE DIRECTIONS OF DRP, THE LEARNED DEPART MENTAL REPRESENTATIVE RELIED ON SECTION 144C(11) AND SUBMITS THAT THE ACT REQUIRES THE DRP TO GIVE AN OPPORTUNITY TO THE ASSESSING OFFICER, IF THE DIR ECTION IS PREJUDICIAL TO THE INTERESTS OF REVENUE. THUS, HE ARGUES THAT ONCE OPP ORTUNITY HAS NOT BEEN GIVEN TO THE ASSESSING OFFICER, THE DIRECTIONS ISSU ED BY THE DRP WOULD NOT BE BINDING ON THE ASSESSING OFFICER. HE SUBMITS THAT S UB-SECTION (11) IS MANDATORY AND NON-OBSERVANCE OF THE SAME BY DRP VIT IATES THE PROCEEDINGS. EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 33 32. IN REPLY, LEARNED COUNSEL SUBMITS THAT ALL THE ISSU ES WERE BEFORE THE ASSESSING OFFICER AND TPO AND THAT THE LEARNED DEPA RTMENTAL REPRESENTATIVE CANNOT RAISE AN OBJECTION AT THIS STAGE ON THE DIRE CTION OF THE DRP. HE VEHEMENTLY CONTENDED THAT THE ASSESSING OFFICER HAS NOT BEEN GIVEN A STATUTORY RIGHT TO APPEAL AGAINST THE ORDER OF THE DRP AND, HENCE, WHAT HE CANNOT DO DIRECTLY, CANNOT ALSO BE DONE INDIRECTLY. HE SUBMITS THAT THE LEARNED DEPARTMENTAL REPRESENTATIVE IS CHALLENGING THE DRP THROUGH A BACK DOOR AND THIS SHOULD NOT BE PERMITTED. HE FURTHER S UBMITS THAT IT IS NEVER THE CASE OF THE ASSESSING OFFICER THAT HE HAS NOT BEEN HEARD. 33. RIVAL CONTENTIONS WERE HEARD. ON A CAREFUL CONSIDER ATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON PERUSAL OF THE PAPERS ON RECORD, AS WELL AS THE CASE LAWS CITED BEFORE US, WE HOLD AS F OLLOWS:- I) THE ISSUES THAT ARISE FOR OUR ADJUDICATION IS THE T RANSFER PRICING ADJUSTMENT MADE ON PROVISION OF TECHNICAL SERVICE A ND TRANSFER PRICING ADJUSTMENT MADE ON PROVISIONS OF BACK OFFICE SUPPOR T SERVICES BY THE ASSESSEE TO ITS A.ES. THE OTHER ISSUES ARE NOT PRE SSES BY THE LEARNED COUNSEL AND, HENCE, THE SAME ARE NOT ADJUDICATED. II) THE FIRST ISSUE THAT WE WOULD ADDRESS IS THE CLAIM OF THE ASSESSEE ON AGGREGATION OF SERVICES UNDER THE HEAD TECHNICAL SERVICES . THE ASSESSEES BUSINESS IS DIVIDED INTO (I) MARKETING SERVICE SEGM ENT; (II) TECHNICAL SERVICE SEGMENT AND (III) BACK OFFICE SUPPORT SERVICES. THE RE IS NO DISPUTE ON THE MARKETING SERVICE SEGMENT. THE DISPUTES PERTAINS TO TECHNICAL SERVICE SEGMENT AND BACK OFFICE SUPPORT SERVICE. III) IN THE TECHNICAL SERVICE SEGMENT, THERE ARE THREE A CTIVITIES I.E., (A) APPLICATION RESEARCH AT BRDTC; (B) APPLICATION OF T ECHNICAL DEVELOPMENT SERVICES AND (C) PROMOTING THE LICENSING OF TECHNOL OGY. IV) FOR APPLICATION RESEARCH CARRIED OUT AT BRDTC, NO M ARK-UP IS PAID BY THE A.E. AS FAR AS THE APPLICATION RESEARCH IS CONC ERNED, THE A.E. REIMBURSED EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 34 COST PLUS 10%. FOR THE ACTIVITY OF PROMOTION OF LIC ENSING OF TECHNOLOGY, US$ 40,000 IS ANNUALLY REIMBURSED BY THE A.E. THE ASSES SEE SEEKS TO CLUB ALL THESE THREE ACTIVITIES AND, THEREAFTER, DETERMINED THE ALP. IT IS A CASE OF THE ASSESSEE THAT ALL THESE OPERATIONS PUT TOGETHER GEN ERATED 13.13% THE TPO REJECTED THE AGGREGATION APPROACH ON THE GROUND ALR EADY STATED IN THE PRECEDING PARAGRAPH. WE FULLY AGREE WITH THE FINDIN GS OF THE TPO. WE DO NOT UNDERSTAND AS TO HOW CARRYING ON APPLICATION RESEAR CH AT BRDTC CAN BE CLUBBED WITH, THE ACTIVITY OF PROMOTING THE LICENSI NG OF TECHNOLOGY OWNED BY THE OVERSEAS GROUP ENTITY. WE NOTE THAT THE A.E. RE IMBURSED ONLY THE COST INCURRED BY BRDTC ON RESEARCH. NO MARK-UP IS GIVEN. NOT CHARGING MARK-UP ON APPLICATION RESEARCH AT BRDTC, IN OUR OPINION, J USTIFIES TRANSFER PRICING ADJUSTMENT IN THIS CASE. NO PART OF THE INCOME DERI VED BY THE A.E. FROM THE ACTIVITY OF APPLICATION RESEARCH AT BRDTC IS GIVEN TO THE ASSESSEE. THE ENTIRE BENEFIT OF THE ACTIVITY ARE TAKEN BY THE A.ES ONLY. V) THE OTHER ASPECT WHICH IS IN DISPUTE IS, WHETHER TH E DATA OF ONE YEAR HAS TO BE TAKEN OR MULTIPLE YEAR DATA HAS TO BE TAK EN. RULE-10B(4) OF THE I.T. RULES, 1962, READS AS FOLLOWS:- 4. THE DATA TO BE USED IN ANALYZING THE COMPARABILI TY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE IN TERNATIONAL TRANSACTION HAS BEEN ENTERED INTO: PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING M ORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMIN ATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPAR ED. VI) A PLAIN READING OF THIS RULE MAKES IT CLEAR THAT TH E DATA RELATING TO THE FINANCIAL YEAR ONLY HAS TO BE TAKEN. AS AN EXCEPTIO N, THE RULE ALSO PROVIDES THAT THE DATA OF TWO YEARS PRIOR TO THE FINANCIAL Y EAR MAY BE TAKEN, ONLY IF, SUCH DATA REVEALS THE FACTS WHICH COULD HAVE INFLUE NCED THE DETERMINATION OF TRANSFER PRICING. WHEN THE ASSESSEE WANTS TO CONSID ER PREVIOUS YEARS DATA, EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 35 THEN THE BURDEN IS ON THE ASSESSEE TO DEMONSTRATE T HAT THE PREVIOUS YEARS DATA CONTAINED CERTAIN FACTS WHICH WOULD INFLUENCE THE DETERMINATION OF TRANSFER PRICING. IN THE CASE ON HAND, NO SUCH EVID ENCE IS LAID BY THE ASSESSEE. A GENERAL ARGUMENT IS MADE THAT, TAKING M ORE THAN ONE YEAR DATA, WOULD GIVE A BETTER COMPARABLE. THE RULE DOES NOT P ROVIDE FOR GENERAL SUBMISSIONS. IN THE ABSENCE OF THE ASSESSEE SPECIFI CALLY DEMONSTRATING THAT THE DATA OF THE PRIOR FINANCIAL YEAR REVEALS FACT W HICH INFLUENCE THE DETERMINATION OF THE TRANSFER PRICE OF THE TRANSACT IONS BEING COMPARED, THE QUESTION OF TAKING INTO CONSIDERATION DATA OTHER TH AN THE CURRENT YEARS DATA DOES NOT ARISE. THIS BRINGS US TO THE ISSUE OF REJE CTION OF LOSS MAKING COMPARABLES. THE ASSESSING OFFICER REJECTED THE FOL LOWING COMPARABLES:- ADS DIAGNOSTIC LTD, NEEMAN MEDICAL INTERNATIONAL (ASIA) LTD. VII) THE ASSESSEE ARGUES THAT ON A PERUSAL OF THE COMPAN YS ACCOUNTS OF ADS DIAGNOSTICS LTD. FOR ASSESSMENT YEAR 2005-06, T HE INCOME FROM SCANNING SERVICES HAS REDUCED DUE TO STIFF COMPETIT ION FROM EXISTING AND NEW DIAGNOSTIC CENTRES THAT WERE COMING UP IN AND AROUN D DELHI AND THE LOSS IS ATTRIBUTABLE TO STIFF COMPETITION. THE ASSESSEE ALS O POINTS OUT THAT THE STATUTORY AUDITOR HAS NOT MENTIONED THAT THE COMPAN Y HAS BEEN FACING ANY GOING CONCERN ISSUES. IN OUR OPINION, THE TPO HAS R IGHTLY REJECTED THIS COMPARABLE FOR THE FOLLOWING REASONS:- THE DIRECTORS REPORT OF ADS DIAGNOSTIC LTD., READS AS FOLLOWS:- THE OPERATIONAL INCOME OF THE COMPANY HAS INCREASED FROM ` 248.44 LACS TO ` 271.69 LACS IN THE CURRENT YEAR REGISTERING A GROW TH OF 9.36% FOR THE YEAR UNDER REVIEW. HOWEVER, INCOME FROM SCA NNING BUSINESS HAS DECREASED FROM ` 174.34 LACS TO ` 165.02 LACS DURING THE YEAR UNDER REVIEW. THE INCOME FROM TRADING AND SERVICING HAS BEEN INCREASED FROM ` 61.51 LACS TO ` 82.26 LACS AND ` 7.24 LACS TO ` 23.24 LACS RESPECTIVELY. OVERALL INCOME INCREASED BY ` 23.25 LACS. THE DECREASE IN SCANNING INCOME IS DUE TO STIFF COMPETI TION FROM THE EXISTING AND NEW DIAGNOSTIC CENTRES THAT ARE COMING UP EVERY YEAR IN EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 36 AND AROUND DELHI. LOSS AFTER DEPRECIATION HAS DECRE ASED FROM ` 21.76 TO ` 14.32 LACS DURING THE YEAR UNDER REVIEW. VIII) A PERUSAL OF THE SAME DEMONSTRATES THAT THE DECREAS E IS OF SCANNING INCOME AND THAT OPERATIONAL INCOME HAS, IN FACT, IN CREASED AT ` 2,48,44,000 FROM ` 2,71,61,000. INCOME FROM TRADING AND SERVICING BAL ANCE HAS BEEN INCREASED AT ` 65,51,000 TO ` 82,26,000 AND ` 7,24,000 TO ` 23,24,000 RESPECTIVELY. OVER ALL INCOME INCREASED BY ` 23,25,000. THE LOSS AFTER DEPRECIATION, DURING THE YEAR UNDER REVIEW, HAS DEC REASED FROM ` 21,76,000 TO ` 14,32,000. THUS, THE INCOME FROM SCANNING BUSINESS HAS DECREASED, INCOME FROM TRADING HAS INCREASED AND INCOME FROM S ERVICES HAS INCREASED. FUNDAMENTALLY, IN THIS CASE, THE COMPARISON ITSELF IS FLAWED FOR THE REASON THAT ENTERPRISE LEVEL PROFITS ARE TAKEN FOR COMPARI SON. THE ACTUAL MARGIN OF SERVICING SEGMENT HAS NOT BEEN IDENTIFIED. THE MAIN INCOME IS FROM SCANNING. THE FUNCTION OF THE ASSESSEE IS NOT AKIN TO SCANNING. BEING A DIAGNOSTIC LABORATORY IT IS COMMON KNOWLEDGE THAT O NE OF THE MAIN EXPENDITURES IS IN THE FORM OF REFERRAL FEES TO DOC TORS. THE ASSETS BASE AND THE MACHINERY REQUIRED FOR DIAGNOSTIC LABORATORY IS DIFFERENT FROM THE REQUIREMENTS OF THE ASSESSEE COMPANY, WHOSE MAIN FU NCTION IS RELATED TO EMCC PRODUCTS. THE ASSESSEE IS A CAPTIVE UNIT AND H AS NO RISK IN THE FORM OF STIFF COMPETITION. IF ADS DIAGNOSTIC LABORATORY LTD . HAS MADE A LOSS DUE TO STIFF COMPETITION NOT ONLY FROM EXISTING UNITS, BUT ALSO FROM NEW DIAGNOSTIC CENTERS THAT WERE COMING UP IN AND AROUND DELHI, TH EN, THE LOSS MADE BY SUCH A UNIT CANNOT BE TAKEN INTO ACCOUNT BENCH MARK ING, AS NO SUCH CIRCUMSTANCE EXISTS IN THE ASSESSEES CASE. THUS, I N OUR OPINION, THIS COMPARABLE IS RIGHTLY REJECTED BY THE TPO. IX) COMING TO THE CASE OF NEEMAN MEDICAL INTERNATIONAL (ASIA) LTD., THE STATEMENT OF ACCOUNTS ARE AT PAGES-248 TO 252 OF TH E PAPER BOOK. THE LEARNED COUNSEL ARGUES THAT THE CLINICAL TRIAL INCO ME OF NEEMAN MEDICAL INTERNATIONAL (ASIA) LTD., HAS REDUCED DURING THE Y EAR AS COMPARED TO THE LAST YEAR AND, HENCE, THERE IS A LOSS. IT IS SUBMIT TED THAT THIS COMPANY IS NOT EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 37 A CONSISTENT LOSS MAKER AS IT HAS PROFIT OF ` 15,00,000 FOR THE FINANCIAL YEAR 2004-05. IT FURTHER SUBMITS THAT THE COMPANY HAS EM BARKED UPON A LONG TERM STRATEGY TO MOVE UP THE VALUE CHAIN AND ENHANC E ITS SERVICES OFFERING TO ENABLE THE COMPANY TO ACCESS A LARGER SEGMENT OF CUSTOMERS AND OFFER THEM A BOUQUET OF CLINICAL TRIAL SERVICE UNDER ONE ROOF. HERE ALSO, THEY RELY ON THE STATUTORY AUDITORS REPORT AND POINTED OUT T HAT NO GOING CONCERN ISSUES ARE NOT RAISED BY THE STATUTORY AUDIT. X) IN OUR OPINION, STATUTORY AUDIT NOT MENTIONING THAT THEY ARE GOING CONCERN ISSUE, DOES NOT HELP THE CASE OF THE ASSESS EE. IT CANNOT BE SAID THAT THE LOSS MAKING UNITS, WHICH ARE ONLY HAVING GOING CONCERN ISSUES, ARE TO BE ELIMINATED. IN THE CASE ON HAND, THE GROSS REVENUE OF THE COMPANY HAS REDUCED FROM ` 4,45,60,000 TO ` 2,85,68,000. IN THE PREVIOUS YEAR, THE COMPANY EARNED NET PROFIT OF ` 18,36,000, WHEREAS IN THE CURRENT YEAR, THE LOSS IS ` 1,28,53,000. THE ABOVE FIGURES DEMONSTRATE THAT TH ERE IS MORE THAN A NORMAL CHANGE IN THE PROFITABILITY OF THE CO MPANY. THERE IS A FALL IN THE PROFIT BY ` 1.47 CRORES (APPROX.), WHEN THERE IS A FALL IN TUR NOVER OF ABOUT ` 1.60 CRORES (APPROX.). THESE FIGURES ARE ABNORMAL AND WITHOUT EXPLAINING A HUGE FALL IN PROFITS AS COMPARED TO TH E FALL IN TURNOVER, THE ASSESSEE CANNOT, IN OUR OPINION, ARGUE FOR INCLUSIO N OF THIS COMPARABLE. THUS, WE UPHOLD THE FINDINGS OF THE TPO THAT THESE TWO LOSS MAKING UNITS ARE NOT TO BE TAKEN AS COMPARABLES. XI) NOW, COMING TO THE ALTERNATIVE ARGUMENTS OF THE ASS ESSEE THAT ABNORMAL PROFIT MAKING UNIT IS ALSO TO BE ELIMINATE D ON THE SAME ANALOGY ON WHICH LOSS MAKING UNITS ARE EXCLUDED, WE, IN PRINCI PLE, DO NOT DISPUTE THIS PROPOSITION. THE VARIOUS CASE LAWS RELIED UPON BY T HE ASSESSEE LAY DOWN THAT A COMPARABLE CANNOT BE ELIMINATED JUST BECAUSE IT I S A LOSS MAKING UNIT. SIMILARLY, A HIGHER PROFIT MAKING UNIT CANNOT ALSO BE AUTOMATICALLY ELIMINATED JUST BECAUSE THE COMPARABLE COMPANY EARNED HIGHER P ROFITS THAN THE AVERAGE. THE REASON FOR REJECTING THE TWO LOSS MAKI NG UNITS IS NOT JUST EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 38 BECAUSE THEY WERE LOSS MAKING UNITS BUT FOR THE REA SONS WHICH ARE ALREADY STATED IN THE PRECEDING PARAGRAPHS. IF SIMILAR REAS ONS EXISTED IN THE HIGHER PROFIT MAKING UNIT, THEN, IT IS FOR THE ASSESSEE TO BRING OUT THOSE REASONS AND SEEK EXCLUSION OF THE SAME. A GENERAL ARGUMENT THAT , YOU HAVE TO EXCLUDE UNITS WHICH HAVE HIGH PROFIT RANGE, IN CASE YOU EXC LUDE UNITS WHICH HAVE MADE LOSS IS A GENERAL SUBMISSION WHICH CANNOT BE ACCEPTED. IN OTHER WORDS, AS A GENERAL PRINCIPLE, BOTH LOSS MAKING UNI T AND HIGH PROFIT MAKING UNIT CANNOT BE ELIMINATED FROM THE COMPARABLES UNLE SS, THERE ARE SPECIFIC REASONS FOR ELIMINATING THE SAME WHICH IS OTHER THA N THE GENERAL REASON THAT A COMPARABLE HAS INCURRED LOSS OR HAS MADE ABNORMAL PROFITS. THUS, THIS GROUND IS DISMISSED. XII) THE OTHER ISSUE IS GRANT OF ADJUSTMENTS I.E., WORKI NG CAPITAL ADJUSTMENT AND RISK ADJUSTMENT WHILE ARRIVING AT AL P. IN THIS CASE, THE ASSESSEE IN HIS TRANSFER PRICING STUDY, HAS NOT MAD E ANY WORKING CAPITAL ADJUSTMENT OR RISK ADJUSTMENT. THE ASSESSING OFFICE R HAS, IN FACT, GRANTED WORKING CAPITAL ADJUSTMENT. WHEN THE ASSESSEE IS CO NFRONTED WITH THE POSSIBLE TRANSFER PRICING ADJUSTMENT DUE TO CHANGE OF SOME COMPARABLES AND ADDITION OF CERTAIN OTHER COMPARABLES BY THE TPO, T HIS CLAIM OF RISK ADJUSTMENT IS MADE BY THE ASSESSEE. THOUGH, IN PRIN CIPLE, THESE ADJUSTMENTS HAVE TO BE MADE WHILE ARRIVING AT THE A LP, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AS THE ASSESSEE HAS NOT WORKED OUT THE RISK ADJUSTMENT AND AS THE ASSESSING OFFICER HAS ALREADY ALLOWED 0.47% AS WORKING CAPITAL ADJUSTMENT, WE ARE OF THE OPINION T HAT NO FURTHER ADJUSTMENT IS NECESSARY. IN ANY EVENT, AS ALREADY S TATED, THE LEARNED COUNSEL HAS NOT PRESSED FOR THE SAME AND, HENCE, WE DISMISS THE ARGUMENT. XIII) THE NEXT CONTENTION IS THAT THE ASSESSING OFFICER H AS WRONGLY TAKEN THE MARGIN OF PFIZER LTD. AS 4.07%, AS PER TRANSFER PRICING STUDY INSTEAD OF ONE YEAR UP / MARGIN OF 7.41%. IT IS ALSO SUBMITTED THAT THE REVISED ALP IS EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 39 WITHIN THE RANGE OF +/- 5% IF THE FIGURES ARE CORRE CTLY TAKEN AND CALCULATIONS MADE. DETAILED TABLE AND WORKING ARE SUBMITTED BEFO RE US. THE LEARNED DEPARTMENTAL REPRESENTATIVE WAS NOT ABLE TO CONTROV ERT THESE SUBMISSIONS OF THE ASSESSEE. UNDER THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE ISSUE OF COMPUTATION HAS TO BE SET ASIDE TO THE FIL E OF ASSESSING OFFICER, FOR LIMITED PURPOSE OF QUANTIFICATION OF THE TRANSFER P RICING ADJUSTMENT. IN CASE THE ALP DETERMINED BY THE ASSESSING OFFICER IS WITH IN THE RANGE OF 5% OF THE ACTUAL INCOME, THEN NO ADJUSTMENT NEED TO BE MADE. WITH THESE OBSERVATIONS, WE SET ASIDE THE MATTER TO THE FILE O F ASSESSING OFFICER. XIV) THIS BRINGS US TO THE SECOND ISSUE WHICH RELATES TO DETERMINATION OF ALP OF BACK OFFICE SUPPORT SERVICES WHETHER THE A SSESSING OFFICER IS BOUND BY THE DIRECTIONS OF THE DRP. THE DRP DIRECTED AS F OLLOWS:- THE NEXT TP GROUND RELATES TO BACK OFFICE SERVICES SUPPORT. THE FACTS ARE THAT AS PER AGREEMENT WITH THE AES, THE ASSESSE E WAS TO RECEIVE 10% MARKET ON THE ACTUAL EXPENSES BUT THE FACTUAL P OSITION IS THAT THE ASSESSEE HAS EARNED 21% PROFIT AS A RESULT OF FINAL ACCOUNTING AND HENCE THE ACTUAL PROFIT SHOWN BY THE ASSESSEE FROM THE SERVICE IS 11% HIGHER THAN THE AGREEMENT AMOUNT. THE A.O. CONDUCTE D ITS TP SEARCH AND CHOSE 13 COMPANIES WHICH RESULTED INTO AVERAGE MARGIN OF 24% AND THE A.O. MADE TP ADJUSTMENT BY HOLDING THAT THE ASSESSEE HAS CHARGED ONLY 10% MARK WHILE IT SHOULD BE 24% MARK. AT THE FIRST INSTANCE, THE ASSESSEE ARGUED THAT ACTUAL PROFIT SH OWN BY THE ASSESSEE IS 21% AND IN CASE IT IS COMPARED WITH THE 24% MARG IN WORKED OUT BY THE A.O. THEN IT FALLS WITHIN THE PLUS MINUS RANGE OF 5% ADJUSTMENT, AND ULTIMATELY NO TP ADJUSTMENT IS CALLED FOR. THE DRP HAS CAREFULLY CONSIDERED THE MATTER AND IS OF THE VIEW THAT THE A .O. CANNOT IGNORE THE ACTUAL MARK UP EARNED BY THE ASSESSEE WHILE COM PARING THE AVERAGE MEAN WORKED OUT BY HIM WITH THE MEAN SHOWN IN THE AGREEMENT. THEREFORE, THE A.OS ACTION CANNOT BE SU STAINED. ACCORDINGLY, THE A.O. IS DIRECTED TO COMPARE THE AV ERAGE MEAN WORKED OUT BY HIM WITH THE 21% ACTUAL PROFIT SHOWN BY THE ASSESSEE AND THEN APPLY THE RANGE OF PLUS MINUS 5% AND IN CASE OF ADJ USTMENT FALLS WITHIN THE RANGE, THEN HE SHOULD NOT MAKE ANY ADJUS TMENT. XV) THE ARGUMENT OF THE LEARNED DEPARTMENTAL REPRESENTA TIVE THAT THE ASSESSING OFFICER HAS NOT BEEN GIVEN AN OPPORTUNITY BY THE DRP IN TERMS OF SUB-SECTION (11) TO SECTION 144C AND, HENCE, SUB-SE CTION (10) IS NOT APPLICABLE, IS DEVOID OF MERIT FOR THE REASON THAT THE ASSESSING OFFICER, WHILE EXXON MOBIL COMPANY INDIA PRIVATE LIMITED ITA NO.8311/MUM./2010 40 PASSING THE ASSESSMENT ORDER UNDER SECTION 143(3) R /W SECTION 144C(13) ON 20 TH SEPTEMBER 2010, HAS NOT TAKEN THAT PLEA. LEARNED D EPARTMENTAL REPRESENTATIVE CANNOT CHANGE THE BASIS ON WHICH THE ASSESSING OFFICER BASED HIS DECISION AND TAKE A TOTALLY NOVEL AND NEW PLEA IN THE APPELLATE PROCEEDINGS. WITHOUT GOING INTO CORRECTNESS OR OTHE RWISE, THE DECISION OF DRP, WE ARE OF THE OPINION THAT THE DIRECTIONS OF T HE DRP HAVE TO BE FOLLOWED BY THE ASSESSING OFFICER. XVI) ENCPLS MARGIN IS 21.30% AND THE ARITHMETIC MEAN OF COMPARABLE COMPANIES IS 24.43%. THE ALP WORKS OUT TO ` 4,32,11,194 AND IF 5% RANGE IS GIVEN TO ALP, THIS WORKS OUT TO ` 4,10,50,635. THIS IS BELOW THE OPERATING INCOME OF ` 4,21,23,805 ACTUALLY EARNED BY THE ASSESSEE. IN VI EW OF THE ABOVE FIGURES, NO ADJUSTMENT IS REQUIRED. THUS, THE ADJUSTMENT MADE BY THE ASSESSING OFFICER IS HEREBY DELETED AS THE SAME IS NOT IN CONSONANCE WITH THE DIRECTION OF THE DRP. THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. XVII) THE OTHER ISSUES BEING NOT PRESSED, THE SAME ARE DI SMISSED AS SUCH. 34. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED IN PART . ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH JUNE 2011. SD/- VIJAY PAL RAO JUDICIAL MEMBER SD/- J. SUDHAKAR REDDY ACCOUNTANT MEMBER MUMBAI, DATED: 10 TH JUNE 2011 COPY TO : (1) THE ASSESSEE; (2) THE RESPONDENT; (3) THE CIT(A), M UMBAI, CONCERNED; (5) THE CIT, MUMBAI CITY CONCERNED; (6) THE DR, E BENCH, ITAT, MUMBAI. TRUE COPY BY ORDER PRADEEP J. CHOWDHURY ASSISTANT REGISTRAR SR. PRIVATE SECRETARY ITAT, MUMBAI BENCHES, MUMBAI