WILLS PROCESSING SERVICES (I) P.LTD, MUMBAI V. DCIT RG 2(3), MUMBAI

ITA 8772/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9162 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 01-11-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 15-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Assessee Lawyers: F V IRANI
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Initiation of penalty proceedings; Valuation report
• Section: 92C; 143(3); 92D; 80HHC; 133A; 133(6); 10B; 201(1); 131; 92

Judgement Text

ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 1 OF 45 IN THE INCOME TAX APPELLATE TRIBUNAL 'K' BENCH, MUMBAI BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER & SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO.8772/MUM/2010 (ASSESSMENT YEAR: 2006-07) WILLS PROCESSING SERVICES (INDIA) PVT. LTD., PLANT NO.6, GODREJ & BOYCE MFG. CO. COMPOUND, PIROJSHNAGAR, LBS MARG, VIKHROLI (WEST) MUMBAI 400079 PAN: AAACT 1796 R VS. DCIT, RANGE 2(3), ROOM NO. 555, 5 TH FLOOR, AAYAKAR BHAVAN, MUMBAI 400020 (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI F.V. IRANI DEPARTMENT BY: SHRI AJEET KUMAR JAIN, DR DATE OF HEARING: 07/11/2012 DATE OF PRONOUNCEMENT: 07/12/2012 O R D E R PER BENCH. THIS IS AN ASSESSEES APPEAL FOR ASSESSMENT YEAR 20 06-07 AGAINST THE ORDER OF AO U/S 143(3) IN PURSUANCE TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL-II (DRP) DATED 22.09.2 010 UNDER SECTION 144C(5) OF THE I.T. ACT ON VARIOUS ISSUES. ASSESSEE HAS RAISED DETAILED GROUNDS ON THE FOLLOWING ISSUES: 1. DEDUCTION UNDER SECTION 10A OF THE ACT. 2. REDUCTION OF TECHNICAL FEES AND SATELLITE LINK CHAR GES FROM EXPORT TURNOVER ( ` .17,359,069 & ` .20,210,502). 3. DISALLOWANCES UNDER SECTION 40(A)(IA) OF ` .30,55,074. ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 2 OF 45 4. TRANSFER PRICING ADJUSTMENT OF ` .4,97,24,79 IN RESPECT OF ITES SERVICES RENDERED BY ASSESSEE UNDER SECTION 92 CA(3) R.W. 92C(3) OF THE IT ACT, 1961. 5. INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1) (C) OF THE ACT. 2. WE HAVE HEARD THE LEARNED COUNSEL AND THE LEARNED D R AND PERUSED THE PAPER BOOK FILED IN TWO VOLUMES RUNNING FROM PAGE 1 TO 764. THE LEARNED COUNSEL ALSO PLACED A CHART SUMMAR IZING THE OBJECTIONS WITH REFERENCE TO VARIOUS ISSUES AND REL EVANT PAGES IN THE PAPER BOOK. LEARNED DR ALSO PLACED HIS WRITTEN SUBM ISSIONS ISSUE WISE WHICH ARE CONSIDERED IN THIS ORDER WHEREVER NE CESSARY AND APPLICABLE. 3. AFTER CONSIDERING THE ARGUMENTS AND EXAMINING THE R ECORD, THE GROUNDS ARE DECIDED AS UNDER: 4. GROUND NO.1 PERTAINS TO REJECTION OF CLAIM UNDER SE CTION 10A OF THE INCOME TAX ACT TO AN EXTENT OF ` .4,75,07,401. ASSESSEE WAS ORIGINALLY INCORPORATED ON 12.5.1992 AS TRINITY COM PUTER PROCESSING (P) LTD WHICH IS 99.99% OWNED SUBSIDIARY OF WILLS EUROPE BV, A COMPANY INCORPORATED IN NETHERLAND. AS SESSEE IS AN INDIAN PROVIDER OF IT ENABLED SERVICES (ITES), WITH ITS CORPORATE HEAD QUARTERS LOCATED AT MUMBAI. ASSESSEE HAS RENDERED I T ENABLED SERVICES TO TRINITY PROCESSING SERVICES LIMITED (T PSL) A COMPANY INCORPORATED IN ENGLAND AND WALES. ASSESSEE RENDERS SERVICES EXCLUSIVELY AS A CAPTIVE SERVICE PROVIDER TO TPSL V IDE ITS AGREEMENT DATED 21 DECEMBER 2001. ITES INCLUDE: PROCESSING OF INSURANCE CLAIMS, PREMIUMS AND TREATI ES ACCOUNTING FOR INSURANCE UNDERWRITERS AND CLIENTS INSURANCE ACCOUNTING SUPPORT SERVICES DATA PROCESSING. ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 3 OF 45 5. ASSESSEE HAS TWO UNITS ONE AT SEEPZ AND ANOTHER AT VIKROLI IN MUMBAI. THE UNIT AT VIKROLI QUALIFIES FOR DEDUCT ION UNDER SECTION 10A OF THE ACT. NO SEPARATE BOOKS WERE MAINTAINED F OR THE UNITS. SINCE THE ASSESSEE RENDERED SERVICES ONLY TO THE TS PL, UK AND ALL ITS BUSINESS INCOME IS EXPORT ORIENTED, CLAIM IS TH AT ITS ENTIRE INCOME QUALIFIES FOR DEDUCTION UNDER SECTION 10A OF THE ACT EXCEPT THOSE THAT PERTAINS TO SEEPZ UNIT. ASSESSEE ALLOCAT ES EXPENDITURE AND INCOME BETWEEN UNITS IN THE PROPORTION TO THE N UMBER OF EMPLOYEES WORKING IN EACH OF THE UNIT (HEAD COUNT). THIS METHOD IS BEING FOLLOWED CONSISTENTLY BY ASSESSEE EVERY YEAR. THE DEDUCTION UNDER SECTION 10A WAS CLAIMED IN RESPECT TO THE NET PROFIT EARNED BY THE UNIT AT VIKROLI. AO PROPOSED IN THE DRAFT ASSES SMENT ORDER DISALLOWANCE OF ENTIRE CLAIM UNDER SECTION 10A INVO KING THE SUB SECTION-4 AND STATING THAT THE CLAIM IS NOT IN ACCO RDANCE WITH THE PROVISIONS OF SECTION 10A(4). WITHOUT PREJUDICE, IT WAS ALSO CONSIDERED THAT THE SATELLITE LINK CHARGES AND TECH NICAL SERVICE FEES SHOULD BE EXCLUDED FROM THE EXPORT TURNOVER WHILE C ONSIDERING THE CLAIM OF ASSESSEE UNDER SECTION 10A. THE ISSUE OF E XCLUSION OF SATELLITE LINK CHARGES AND TECHNICAL SERVICE FEES A RE BEING AGITATED IN EARLIER YEARS. HOWEVER, ENTIRE DISALLOWANCE UNDER S ECTION 10A CLAIM WAS TAKEN UP FOR THE FIRST TIME BY AO IN THIS YEAR ONLY. ASSESSEE WAS CLAIMING DEDUCTION IN THE PAST SIX YEARS CONSIS TENTLY ON THE METHOD BEING FOLLOWED. ASSESSEE MADE OBJECTION BEFO RE THE DRP AND THE DRP HAS NOTED THE FOLLOWING VIDE PARA 3.3: WE HAVE CAREFULLY EXAMINED THE ISSUE AND FIND THAT IN THE EARLIER YEARS I.E. ASSESSMENT YEAR 2004-05, THE CIT (A) HAS DECIDED THE ISSUE IN FAVOUR OF ASSESSEE. HOWEVER, THE DEPARTMENT HAS NOT ACCEPTED THIS DECIS ION AND IS BEFORE THE HON'BLE MUMBAI ITAT. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT IT W ILL BE AGAINST THE JUDICIAL PROPRIETY AND JUDICIAL DISCIPL INE TO INTERVENE IN THE MATTER. WE THEREFORE, DIRECT AO TO FINALIZE THE DRAFT ASSESSMENT ORDER AS HAS BEEN PROPOSED. ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 4 OF 45 6. AO FOLLOWED THE ABOVE DIRECTION OF THE DRP AND DISA LLOWED THE ENTIRE DEDUCTION UNDER SECTION 10A. 7. IT WAS THE SUBMISSION THAT DISALLOWANCE OF ENTIRE 1 0A CLAIM WAS NOT MADE IN EARLIER YEARS AND THE DIRECTION OF THE DRP WAS NOT CORRECT. THE LEARNED COUNSEL PLACED ON RECORD THE O RDERS OF THE AYS 2004-05 & 2005-06 ON THE ISSUE OF REWORKING UNDER S ECTION 10A WHILE EXCLUDING FROM THE EXPORT TURNOVER OF SATELLI TE LINK CHARGES AND TECHNICAL SERVICE FEES (WHICH WERE AGITATED IN THE LATER GROUNDS) TO SUBSTANTIATE THAT THE ISSUE OF ENTIRE DISALLOWAN CE IS NOT A MATTER PENDING BEFORE THE ITAT. IN VIEW OF THIS IT WAS SUB MITTED THAT THE DIRECTION OF THE DRP WAS NOT CORRECT. FURTHER, IT W AS SUBMITTED THAT THE ISSUE OF ALLOCATION OF COMMON EXPENSES BETWEEN STP AND DOMESTIC UNITS AND METHOD OF HEAD COUNT FOLLOWED BY ASSESSEE CANNOT BE DISCARDED EVEN THOUGH IT WAS NOT QUESTION ED AT ANY TIME IN THE PAST, AS WAS HELD BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. EHPT INDIA (P) LTD 16 TAXMANN.COM 305(DE LHI). RELYING ON THE DECISION IT WAS THE SUBMISSION THAT AO COULD NOT HAVE DISALLOWED THE ENTIRE DEDUCTION REJECTING THE APPOR TIONMENT ON HEAD COUNT. HOWEVER, IT WAS FAIRLY ADMITTED THAT ASSESSE E WAS NOT CLAIMING THE DEDUCTION ON THE ENTIRE 700 EMPLOYEES IN THE VIKROLI DIVISION AND FOR CERTAIN REASONS WAS EXCLUDING CLAI M ON EMPLOYEES TRANSFERRED EARLIER FROM SEEPZ TO VIKROLI. THEREFOR E, IT WOULD BE FAIR IF THE DEDUCTION IS RESTRICTED TO BALANCE EMPLOYEES OUT OF THE CLAIM MADE. 8. THE LEARNED DR HOWEVER, SUPPORTED THE ORDERS OF AO AND THE DRP. 9. WE HAVE CONSIDERED THE ISSUE.AO RELIED ON THE PROVI SIONS OF SECTION 10A(4) FOR DISALLOWING THE ENTIRE CLAIM UND ER SECTION 10A, WHICH WAS BEING ALLOWED IN EARLIER YEARS WITHOUT AN Y DISPUTE. PROVISIONS OF SECTION 10A(4) ARE AS UNDER: ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 5 OF 45 10A(4): FOR THE PURPOSES OF [SUB-SECTIONS (1) AND ( 1A)], THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THIN GS OR COMPUTER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS T O THE PROFITS OF THE BUSINESS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUC H ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO TH E TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAK ING. 9.1 AS CAN BE SEEN, IT IS ONLY A METHOD PROVID ED FOR ARRIVING AT THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THIN GS OF COMPUTER SOFTWARE AND ASSESSEE HAS FOLLOWED HEAD COUNT METHO D FOR ARRIVING AT THE EXPORT TURNOVER AND EXPENDITURE FOR THE VIKR OLI UNIT IN THE ABSENCE OF SEPARATE BOOKS OF ACCOUNT. THIS IS ONE O F THE METHODOLOGIES ADOPTED IN ARRIVING AT THE EXPORT TUR NOVER AND THE PROFITS SO AS TO WORK OUT THE PROFITS OF THE UNITS. 9.2 SIMILAR ISSUE WAS CONSIDERED BY THE HON'B LE DELHI HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. EHPT INDIA (P.) LTD. 16 TAXMANN.COM, 305 (DEL.) WHEREIN THE FA CTS ARE THAT THE ASSESSEE WAS OPERATING TWO UNITS, ONE SOFTWARE TECH NOLOGICAL PARK UNIT (STP), WHICH WAS ENGAGED IN THE DEVELOPMENT OF SOFTWARE AND ITS EXPORT, AND THE OTHER DOMESTIC UNIT (NON-STP UN IT), WHICH WAS ENGAGED IN THE IMPLEMENTATION OF THE TELECOM SOFTWA RE FOR VENDORS AND CUSTOMERS IN INDIA. IN THE RETURNS FILED FOR TH E YEARS UNDER APPEAL THE ASSESSEE COMPUTED THE PROFITS FROM THE S TP UNIT BY APPORTIONING THE INDIRECT OR COMMON EXPENSES ON THE BASIS OF THE HEAD-COUNT OF THE EMPLOYEES WORKING IN THE SAID UNI T AND THE DOMESTIC UNIT AND CLAIMED DEDUCTION UNDER SECTION 1 0A IN RESPECT OF STP UNIT ACCORDINGLY. THE ASSESSING OFFICER, HOW EVER, TOOK THE VIEW THAT THE HEAD COUNT BASIS OF APPORTIONMENT OF COMMON EXPENSES WAS NOT APPROPRIATE AND IT RESULTED IN MOR E PROFITS BEING SHOWN FROM THE STP UNITS. HE ADOPTED THE BASIS OF T URNOVER OF RESPECTIVE UNITS FOR APPORTIONING THE COMMON EXPENS ES. AS A CONSEQUENCE OF RE-APPORTIONMENT, COMMON EXPENSES AT TRIBUTABLE TO THE DOMESTIC UNIT CAME DOWN BY ` 40 LAKHS. THE ASSESSING OFFICER, ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 6 OF 45 THEREFORE, DISALLOWED ` 40 LAKHS FROM DOMESTIC UNIT AND ALLOCATED TO STP UNIT. ON APPEAL, THE COMMISSIONER (APPEALS) CON FIRMED THE ORDER OF THE ASSESSING OFFICER. ON SECOND APPEAL, T HE TRIBUNAL UPHELD METHODOLOGY ADOPTED BY THE ASSESSEE AND DELE TED THE ADDITION MADE BY THE ASSESSING OFFICER. ON FURTHER APPEAL, THE HON'BLE DELHI HIGH COURT HELD: THE FATE OF THE APPEALS MUST DEPEND UPON THE ANSWER TO THE QUESTION WHETHER THE METHOD ADOPTED BY THE ASSESSEE, NAMELY, THAT OF APPORTIONING THE INDIRECT EXPENSES BETWEEN THE STP UNIT AND THE NON- STP DOMESTIC UNIT ON THE BASIS OF THE 'HEAD-COUNT' IS AN UNREASONABLE METHOD AND IF IT HAS BEEN FOLLOWED CONSISTENTLY BY THE ASSESSEE IN THE PAST AND HAS ALSO BEEN ACCEPTED BY THE DEPARTME NT, SHOULD THE REVENUE AUTHORITIES BE PERMITTED TO DISTURB THE SAM E IN THE YEARS UNDER APPEAL. THE SETTLED POSITION IN SUCH MATTERS IS TO EXAMINE WHETHER THE METHOD WHICH IS CANVASSED FOR ACCEPTANC E IS THE ONE (A) WHICH HAS BEEN CONSISTENTLY ACCEPTED BY BOTH THE PA RTIES, NAMELY, THE ASSESSEE AND THE REVENUE IN THE PAST; (B) WHICH IS A REASONABLE METHOD HAVING REGARD TO THE NATURE OF THE BUSINESS AND OTHER RELEVANT FACTORS AND (C) WHICH DOES NOT DISTORT THE PROFITS. THERE IS NO DISPUTE THAT THE HEAD-COUNT METHOD HAS BEEN CONSIST ENTLY FOLLOWED AND ACCEPTED WITHOUT DEMUR IN THE PAST. A DEPARTURE THEREFROM IS SOUGHT TO BE MADE ONLY IN THE YEARS UNDER CONSIDERA TION BY THE DEPARTMENTAL AUTHORITIES. THAT IT IS A REASONABLE M ETHOD AND FAIR TO BOTH SIDES IS INDICATED BY THE CONDUCT OF THE REVEN UE AUTHORITIES IN ACCEPTING IT IN THE PAST. THE REASONABLENESS OR FAI RNESS OF THE METHOD OF HEAD-COUNT ADOPTED BY THE ASSESSEE CAN BE SAID T O BE INDICATED BY THE FACT THAT IN THE ASSESSMENT YEAR 2002-03 THE AS SESSEE APPORTIONED MORE COMMON EXPENSES TO THE STP UNIT, T HEREBY REDUCING ITS PROFITS AND CONSEQUENTLY REDUCING THE CLAIM FOR DEDUCTION UNDER SECTION 10A AND AT THE SAME TIME OFFERING A HIGHER INCOME IN THE DOMESTIC UNIT THAN WHAT WOULD HAVE BEEN OFFERED HAD THE TURNOVER ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 7 OF 45 METHOD OF APPORTIONMENT ADOPTED BY THE ASSESSING OF FICER BEEN FOLLOWED. IT WAS ONLY AS A MATTER OF PRINCIPLE THAT THE COMMI SSIONER ( APPEALS ) UPHELD THE METHOD ADOPTED BY THE ASSESSING OFFICER EVEN THOUGH THE RESULT WAS IN FAVOUR OF THE ASSESSEE. NEITHER THE A SSESSING OFFICER NOR THE COMMISSIONER ( APPEALS ) HAS RAISED ANY SERIOUS QUESTIONS ABOUT THE VALIDITY OF THE HEAD-COUNT METHOD ADOPTED BY THE ASSESSEE NOR HAVE THEY POINTED OUT ANY COMMERCIAL ACCOUNTING PRINCIPLE OR ACCOUNTING STANDARD THAT REPUDIATES THE METHOD. [PA RA 8] SECTION 10A PROVIDES FOR DEDUCTION FOR PROFITS DERI VED FROM THE EXPORT OF SOFTWARE FOR A PERIOD OF TEN YEARS. DURING THE P ERIOD OF TAX-HOLIDAY, IT IS DESIRABLE THAT THE SAME METHOD OF COMPUTING T HE PROFITS OF THE STP UNIT IS ADOPTED SO THAT ANY DISTORTION IS AVOID ED. IT IS NOT TO BE UNDERSTOOD AS LAYING DOWN A PROPOSITION THAT IN ALL CASES ARISING UNDER SECTION 10A, WHERE THE QUESTION OF APPORTIONM ENT OF COMMON/INDIRECT EXPENSES BETWEEN THE TAXABLE AND TH E EXEMPT UNITS ARISES, THE HEAD-COUNT METHOD IS THE MOST APPROPRIA TE METHOD. THE QUESTION WILL HAVE TO DEPEND, IN THE VERY NATURE OF THINGS, ON THE NATURE OF THE BUSINESS AND THE FACTS OF THE PARTICU LAR CASE. INSTANT DECISION IS CONFINED TO THE FACTS OF THE PRESENT CA SE. IN THE INSTANT CASE, THERE IS NO FINDING BY THE REVENUE AUTHORITIE S THAT BY ADOPTING THE HEAD-COUNT METHOD WHICH WAS HITHERTO BEING ACCE PTED BY THEM THERE WAS A DISTORTION OF THE PROFITS NOR HAVE THEY SAID THAT THE HEAD- COUNT METHOD OF ACCOUNTING IS NOT THE CORRECT METHO D OF ACCOUNTING. ALL THAT THEY HAVE SAID IS THAT IN THEIR OPINION TH E TURNOVER BASIS OF APPORTIONMENT OF THE EXPENSES IS MORE LOGICAL AND N EEDS TO BE APPLIED. IN THE INSTANT CASE, THE ASSESSING OFFICER HAS ACCEPTED THE HEAD-COUNT METHOD ADOPTED BY THE ASSESSEE IN THE PA ST BUT HAS REJECTED IT ONLY FOR THE YEARS UNDER APPEAL. THIS W OULD DISTURB OR DISTORT THE PROFITS. THE QUESTION WHETHER THE HEAD- COUNT METHOD IS THE MOST APPROPRIATE METHOD HAS BEEN RAISED BY THE ASSE SSING OFFICER IN ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 8 OF 45 THE COURSE OF THE ASSESSMENT PROCEEDINGS AND IT HAS BEEN STATED BY THE ASSESSEE THAT THOUGH THE TURNOVER BASIS PREFERR ED BY THE ASSESSING OFFICER MAY BE MORE SUITED TO MANUFACTURI NG BUSINESSES, IN THE CASE OF SERVICE INDUSTRY SUCH AS THE ASSESSE E'S CASE THE HEAD- COUNT METHOD WOULD BE MORE APPROPRIATE TO BE FOLLOW ED FOR THE PURPOSE OF APPORTIONING THE INDIRECT EXPENSES. IT A PPEARS TO BE A PLAUSIBLE VIEW, THOUGH IT CAN POSSIBLY ALSO BE A DE BATABLE VIEW. BUT MERELY BECAUSE THERE CAN BE MORE THAN ONE METHOD OF APPORTIONING THE COMMON EXPENSES BETWEEN THE STP AND DOMESTIC UN ITS IT CANNOT BE SAID THAT THE METHOD OF HEAD-COUNT FOLLOWED BY T HE ASSESSEE SHOULD BE DISCARDED, THAT TOO MID-WAY, EVEN THOUGH IT WAS NOT QUESTIONED AT ANY TIME IN THE PAST. THE PROVISIONS OF SUB-SECTION ( 4 ) OF SECTION 10A, RELIED UPON BY THE ASSESSING OFFICER, APPLY FOR THE PURPOSE OF SEGREGA TING THE PROFITS OF THE BUSINESS INTO EXPORT PROFITS AND DOMESTIC PROFI TS. IT IS A STATUTORY FORMULA FOR ASCERTAINING WHAT ARE PROFITS DERIVED F ROM THE EXPORT OF THE ELIGIBLE ITEMS. IT HAS TO BE READ WITH SUB-SECT ION ( 1 ) . IT SAYS THAT THE EXPORT PROFITS HAVE TO BE APPORTIONED ON THE BA SIS OF THE RATIO WHICH THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOV ER OF ALL THE BUSINESSES OF THE ELIGIBLE UNDERTAKING. THE INSTANT CASE IS NOT CONCERNED WITH SUB-SECTION ( 4 ) . THAT SUB-SECTION WILL APPLY WHEN THE COMBINED PROFITS - PROFITS OF THE EXEMPT UNIT AND T HOSE OF THE NON- EXEMPT UNIT - HAVE BEEN ASCERTAINED; THE NEXT STEP WILL BE TO APPORTION THEM ON THE BASIS OF THE RATIO WHICH THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOVER. INSTANT CASE IS CONCER NED WITH THE STAGE BEFORE THAT. INSTANT CASE IS CONCERNED WITH THE MET HOD BY WHICH THE INDIRECT OR COMMON EXPENSES - EXPENSES WHICH ARE IN CURRED FOR BOTH THE EXEMPT AND TAXABLE UNITS - ARE TO BE APPORTIONE D BETWEEN THE TWO UNITS. TO APPLY THE FORMULA PRESCRIBED IN SUB-SECTI ON ( 4 ) MAY BE APPROPRIATE IN A GIVEN CASE CONSIDERING ITS PECULIA R FACTS. BUT APPLYING THE SAME FORMULA TO ALL CASES OF APPORTION MENT WITHOUT ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 9 OF 45 HAVING REGARD TO THE HISTORY OF ASSESSMENTS AND OTH ER RELEVANT FACTORS MAY NOT BE JUSTIFIED. IN A CASE WHERE ALTERNATIVE METHODS OF APPORTIONMEN T OF THE EXPENSES ARE RECOGNIZED AND THERE IS NO STATUTORY O R FIXED FORMULA, THE ENDEAVOUR CAN ONLY BE TOWARDS APPROXIMATION WIT HOUT ANY GREAT PRECISION OR EXACTNESS. IF SUCH IS THE ENDEAVOUR, I T CAN HARDLY BE SAID THAT THERE IS AN ATTEMPT TO DISTORT THE PROFITS. ON THE CONTRARY, DISTORTION OF PROFITS MAY ARISE IF THE CONSISTENTLY ADOPTED AND ACCEPTED METHOD OF APPORTIONMENT IS SOUGHT TO BE DI STURBED IN A FEW YEARS, ESPECIALLY IN A CASE SUCH AS THE INSTANT ONE WHERE THE DEDUCTION UNDER SECTION 10A IS AVAILABLE OVER A PER IOD OF TEN YEARS AND ONLY IN SOME YEARS THE METHOD OF APPORTIONMENT OF INCOME IS DISTURBED. IN OTHER WORDS, THERE IS NO 'JUST CAUSE' MADE OUT FOR ABANDONING THE PAST METHOD. THE APPEAL FILED BY THE REVENUE IS ACCORDINGLY DISM ISSED. 9.3 RESPECTFULLY FOLLOWING THE ABOVE PRINCIPLE S LAID DOWN, WE ARE OF THE OPINION THAT THERE IS NO NEED TO DISTURB THE METHOD OF APPORTIONMENT OF EXPENDITURE AND TURNOVER WHICH WER E ACCEPTED BY AO IN EARLIER YEARS. ASSESSEE IS ELIGIBLE FOR DEDU CTION UNDER SECTION 10A AND THE REASON FOR DISALLOWING ENTIRE CLAIM CAN NOT BE ACCEPTED. EVEN THE DRP WAS NOT CORRECT IN REJECTING THE ASSES SEE OBJECTION STATING THAT THE ISSUE IS PENDING BEFORE THE ITAT, THE FACT OF WHICH IS NOT CORRECT. HOWEVER, IN THE ANXIETY OF DISALLOW ING THE ENTIRE CLAIM, AO HAS NOT EXAMINED THE APPORTIONMENT OF EXP ORT TURNOVER AND EXPENSES OF UNITS. THEREFORE, AS THIS ASPECT WA S NOT EXAMINED BY AO, FOR EXAMINATION OF THE ACTUAL APPORTIONMENT AND ARRIVING AT THE PROFITS OF THE UNITS THE MATTER IS RESTORED TO THE FILE OF AO. AO IS FREE TO EXAMINE THE ISSUE OF DERIVING AT THE PROFIT S OF ELIGIBLE UNIT. WHILE CONSIDERING, THE SUBMISSIONS WITH REFERENCE T O THE NON- CLAIMING OF DEDUCTION ON EMPLOYEES TRANSFERRED FROM SEEPZ TO VIKROLI SHOULD ALSO BE EXAMINED. ASSESSEE SHOULD BE GIVEN DUE ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 10 OF 45 OPPORTUNITY. WE MAKE IT CLEAR THAT THE DEDUCTION OF CLAIM UNDER SECTION 10A IS ELIGIBLE ON VIKROLI UNIT AND AO IS O NLY DIRECTED TO EXAMINE THE QUANTUM OF DEDUCTION. THIS QUANTUM OF D EDUCTION MAY ALSO DEPEND ON THE ISSUES IN OTHER GROUNDS WHIC H ARE DEALT WITH LATER. THE GROUND NO.1 IS CONSIDERED ALLOWED. 10. GROUND NO.2 IS ON THE ISSUE OF REDUCTION OF TECHNIC AL FEES AND SATELLITE LINK CHARGES FROM EXPORT TURNOVER. AO WHILE REJECTING THE ENTIRE CLAIM OF SECTION 10A HOWEVER ALTERNATELY ALSO REDUCED THE TECHNICAL FEES AND SATELLITE LINK CHARGES OF ` .1,73,59,069 AND ` .2,02,10,562 RESPECTIVELY FROM EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING THE DEDUCTION UNDER SECTION 10A THEREBY R ESTRICTING THE COMPUTATION UNDER SECTION 10A. AS STATED IN GROUND NO.1, THE DRP DECLINED TO INTERFERE AS THE MATTER WAS PENDING BEF ORE THE ITAT ON THIS ISSUE. 11. THE DRP WAS NOT CORRECT FULLY AS THE ISSUE ON TECH NICAL FEES WAS NOT PENDING BEFORE THE ITAT AS THE REVENUE SEEM S TO HAVE ACCEPTED THE DECISION OF THE CIT (A) IN AY 2004-05 AND 2005-06. THERE IS ONLY AN APPEAL ON THE ISSUE OF SATELLITE CHARGES. BE THAT AS IT MAY, THE ISSUE ARISES AS UNDER. ASSESSEE PROCESS ES RAW DATA RECEIVED FROM TPSL UK AND SENDS THEM BACK TO UK VIA COMPUTERS. TO ENSURE CONSISTENT DELIVERY OF THE ABOVE MENTIONE D SERVICES, TPSL IS PROVIDING TRAINING OF EMPLOYEES TO ASSESSEE IN I NDIA FOR IMPLEMENTATION OF NEW PROCESS AND CHANGES TO THE EX ISTING PROCESS. IN VIEW OF THE SERVICES RENDERED BY TPSL UK ASSESSE E MADE PAYMENT OF TECHNICAL FEES TO TPSL, UK. AT THE TIME OF MAKING PAYMENT, IT WAS THE SUBMISSION OF ASSESSEE THAT THE REDUCTION OF EXPENDITURE INCURRED IN RESPECT OF TECHNICAL FEES I N FOREIGN EXCHANGE FROM EXPORT TURNOVER ARISES ONLY WHEN ASSESSEE PROV IDES TECHNICAL SERVICES OUTSIDE INDIA. RELYING ON THE EXPLANATION TO CLAUSE-4 OF SECTION 10A, IT WAS THE SUBMISSION THAT THE ENTIRE PROCESSING OF DATA TAKES PLACE IN INDIA AND THEREFORE, THERE IS N O NEED TO EXCLUDE ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 11 OF 45 THE TECHNICAL SERVICE FEES. THE LEARNED CIT (A) IN ASSESSMENT YEAR 2004-05 EXAMINED THIS ISSUE ELABORATELY AND GAVE AN OPPORTUNITY TO AO. AFTER CONSIDERING THE REPORT OF AO AND THE FACT S OF THE CASE, THE CIT (A) DELETED THE SAID ADJUSTMENT MADE TO THE EXP ORT TURNOVER HOLDING AS UNDER: 6.2 HOWEVER, THE SUBMISSIONS RELATING TO TECHNICAL FEES ARE FOUND TO BE HAVING SOME FORCE AND MERIT IN VIEW OF THE FACT THAT FOR EXCLUDING THE EXPENSES RE LATING TO TECHNICAL SERVICES FROM THE EXPORT TURNOVER AS P ER ABOVE DEFINITION THE CONDITIONS REQUIRED TO BE FULF ILLED ARE THAT THE EXPENSES, IF ANY, HAS BEEN INCURRED IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OU TSIDE INDIA. AS THE CLAIM OF THE APPELLANT THAT THE TECHN ICAL SERVICES WERE NOT PROVIDED OUTSIDE INDIA IS FOUND T O BE FACTUALLY CORRECT, THEREFORE, THE EXPENSES RELATING TO TECHNICAL SERVICES IS NOT REQUIRED TO BE DEDUCTED. ACCORDINGLY AO IS DIRECTED NOT TO DEDUCT THIS AMOUN T FROM THE EXPORT TURNOVER. TO THIS EXTENT THE APPELL ANT GETS RELIEF. THEREFORE, GROUND NO.1 IS PARTLY ALLOW ED IN FAVOUR OF THE APPELLANT. FOLLOWING THE ABOVE FINDINGS IN ASSESSMENT YEAR 200 4-05 WHICH THE REVENUE ACCEPTED, THE CIT (A) IN ASSESSMENT YEAR 20 05-06 ALSO DELETED THE SAME. EVEN IN AY 2005-06 THERE IS NO AP PEAL BY THE REVENUE TO ITAT. THEREFORE, SINCE THE ISSUE WAS ALR EADY HELD IN FAVOUR OF ASSESSEE ON FACTS, WE ARE OF THE OPINION THAT THE PRINCIPLES OF JUDICIAL CONSISTENCY REQUIRE THAT AO SHOULD NOT HAVE EXCLUDED THE AMOUNT FROM THE EXPORT TURNOVER. THE DRP ALSO WAS N OT CORRECT IN REJECTING THE ISSUE. IN VIEW OF THIS, WE ALLOW THE GROUND RAISED BY ASSESSEE ON THIS ISSUE OF EXPENSES FOR TECHNICAL S ERVICES. 11.1 THE OTHER AMOUNT INVOLVED IN GROUND NO.2 IS WI TH REFERENCE TO THE SATELLITE EXPENSES. AO EXCLUDED THIS AMOUNT A LSO TO ARRIVE AT THE EXPORT TURNOVER AS DEFINED UNDER SECTION 10A(4) . AFTER CONSIDERING THE SUBMISSIONS IN ASSESSMENT YEAR 2004 -05, THE ITAT IN ITA NO.4329/MUM/08 HELD IN FAVOUR OF ASSESSEE AS UNDER: ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 12 OF 45 7. HOWEVER, WHILE COMPLETING THE ASSESSMENT THE A. O. TREATED THE ABOVE SATELLITE LINK CHARGES AS PART OF TELECOMMUNICATION CHARGES. THIS ISSUE WAS DISCUSSED ELABORATELY BY THE COORDINATE BENCH IN THE CASE OF PATNI TELECOM (P.) LTD. VS. ITO (WHEREIN ONE OF US, THE J .M. WAS A MEMBER) 22 SOT 26 (HYD) WHEREIN ON SIMILAR FACTS THE ISSUE WAS CONSIDERED WITH REFERENCE TO EXPORT TURNO VER AS DEFINED IN CLAUSE (IV) OF SECTION 10A AND HELD A S UNDER: - EXPORT TURNOVER HAS BEEN DEFINED IN CLAUSE (IV) OF THE EXPLANATION 2 TO SECTION 10A. THE MEANING OF EXPOR T TURNOVER IS ALSO PROVIDED IN OTHER SECTIONS OF THE ACT, SAY CLAUSE (C) OF SECTION 80HHE AND EXPLANATION (B) TO SECTION 80HHC. ACCORDING TO EXPLANATION (B) TO SECT ION 80HHC, EXPORT TURNOVER MEANS THE SALE PROCEEDS RECEIVABLE IN FOREIGN EXCHANGE AS PER SUB-SECTION 2 (A) OF SECTION 80HHC OF ALL GOODS WHICH ARE EXPORTED OUT O F INDIA, BUT WHICH DOES NOT INCLUDE FREIGHT AND INSUR ANCE. SIMILARLY, TOTAL TURNOVER FOR THE PURPOSE OF DEDUCT ION UNDER SECTION 80HHC, WHICH IS DEFINED IN EXPLANATIO N (BA) AT THE END OF SECTION 80HHC IN THE NEGATIVE TE RM, MEANS AS NOT INCLUDING FREIGHT AND INSURANCE ATTRIBUTABLE TO TRANSPORT OF GOODS OR MERCHANDISE B EYOND THE CUSTOM STATION AND PROFIT ON SALE OF LICENCE, C ASH ASSISTANCE, DUTY DRAWBACK, ETC. THUS, THE TERM EXP ORT TURNOVER DOES NOT INCLUDE FREIGHT AND INSURANCE ATTRIBUTABLE TO TRANSPORT. EXPLANATION (C) TO SECTI ON 80HHE IS SIMILAR TO CLAUSE (IV) OF EXPLANATION 2 TO SECTION 10A. ON AN ANALYSIS OF DEFINITION OF EXPORT TURNOVER A S PROVIDED IN CLAUSE (IV) OF THE EXPLANATION 2 TO SEC TION 10A, IT IS CLEAR THAT FOR THE PURPOSE OF NOT INCLUD ING IN THE CONSIDERATION RECEIVED IN OR BROUGHT INTO INDIA IN CONVERTIBLE FOREIGN EXCHANGE THERE ARE TWO TYPES OF EXPENDITURES. THE FIRST TYPE OF EXPENDITURE IS FREI GHT, TELECOMMUNICATION CHARGES, OR INSURANCE ATTRIBUTABL E TO THE DELIVERY OF ARTICLE OR THING OR COMPUTER SOFTWA RE OUT OF INDIA. THE SECOND TYPE OF EXPENDITURE IS EXPENDI TURE, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. THE BASIC IDEA OR INTENTION FOR DEDUCTING THE FIRST TYPE OF EXPENDITU RE, I.E. FREIGHT, TELECOMMUNICATION CHARGES, OR INSURANCE CH ARGES IS THAT DELIVERY OF GOODS SHOULD BE FREE ON BOARD ( FOB). THE CBDT VIDE ITS CIRCULAR NO. 564, DATED 5-7-1990 CLARIFIED THIS ASPECT IN RESPECT OF DEDUCTION UNDER SECTION ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 13 OF 45 80HHC. ON THE BASIS OF THE ABOVE DISCUSSION, IT CAN BE SAID THAT ONLY THOSE FREIGHT, COMMUNICATION CHARGES OF INSURANCE ATTRIBUTABLE TO DELIVERY OF GOODS OUT OF INDIA ARE TO BE CONSIDERED WHILE REDUCING FROM CONSIDERAT ION RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE. THUS, IF SUCH EXPENSES ARE NOT ATTRIBUTABLE TO DELIVERY OF GOODS OUTSIDE INDIA, SUCH EXPENSES ARE NOT REQUIRED TO BE DEDUCTED FROM THE CONSIDERATION. NORMALLY, IN A TRANSACTION OF PURCHASE AND SALE, THERE ARE TWO TYP ES OF CONDITIONS BETWEEN THE PARTIES. ONE IS WHERE PRICE QUOTED OF GOODS IS INCLUSIVE OF ALL EXPENSES OR IN OTHER WORDS PRICE QUOTED IS ONLY IN RESPECT OF GOODS. ANO THER CONDITION IS WHERE PRICE OF GOODS AND CHARGES OF EXPENSES ARE SEPARATELY STATED. IN A CASE WHERE SUC H EXPENSES ARE TO BE SEPARATELY CHARGED, INVOICES ARE PREPARED SHOWING VALUE OF THE GOODS AND SUCH EXPENSES. IF THE QUOTED PRICE IS INCLUSIVE OF SUCH EXPENSES, THEN CONSOLIDATED VALUE OF THE GOODS IS O NLY MENTIONED IN THE INVOICE. IN A CASE WHERE ONLY VALU E OF GOODS IS QUOTED, EXPENSE IS BORNE BY THE SUPPLIER. IN CASES WHERE EXPENSES HAVE NOT BEEN SEPARATELY CHARGED, THE CONVERTIBLE FOREIGN EXCHANGE RECEIVED IS CONSIDERATION OF THE GOODS ONLY. WHERE SUCH EXPENSE S ARE SEPARATELY CHARGED IN THE INVOICES, THE CONSIDE RATION RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE INCLUDES T HE VALUE OF THE GOODS AND SUCH EXPENSES. IF THE CONSIDERATION RECEIVED IS ONLY AGAINST THE GOODS, T HEN THERE IS NO NEED TO DEDUCT SUCH EXPENSES FROM THE CONSIDERATION RECEIVED IN CONVERTIBLE FOREIGN EXCHA NGE. IN CASE WHERE SUCH EXPENSES ARE SEPARATELY CHARGED, TH E EXPENSES ARE REQUIRED TO BE REDUCED FROM THE CONSIDERATION RECEIVED FOR THE PURPOSE OF ARRIVING AT THE EXPORT TURNOVER. THE LOGIC AND REASON BEHIND THIS H AVE BEEN EXPLAINED BY THE CBDT VIDE ITS CIRCULAR NO. 56 4, DATED 5-7-1990, THAT THE DELIVERY OF THE GOODS SHOU LD BE FREE ON BOARD (FOB). THE GOODS EXPORTED AT FOB IS IMPORTANT IN THE SENSE THAT DEDUCTION UNDER SECTION 10A IS PERMISSIBLE ONLY IN RESPECT OF CONSIDERATION REC EIVED AGAINST GOODS AND NOT FOR THE CONSIDERATION RECEIVE D AGAINST FREIGHT, ETC. ALL THE ASSESSEES SHOULD GET DEDUCTION UNDER SECTION 10A ON CONSIDERATION RECEIV ED AGAINST SUPPLY OF GOODS AT FOB. THEREFORE, THE COND ITION OF DELIVERY OF GOODS AT FOB HAS BEEN PUT AND THE DEFINITION OF EXPORT TURNOVER AS PROVIDED IN CLAU SE (IV) OF THE EXPLANATION 2 TO SECTION 10A IS REQUIRED TO BE INTERPRETED ACCORDINGLY. ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 14 OF 45 IN THE INSTANT CASE, THE ASSESSING OFFICER HAD DEDU CTED THE ISP EXPENSES FROM FOREIGN EXCHANGE CONSIDERATIO N TREATING IT AS COMMUNICATION CHARGES. THE SAID EXPENDITURE ON INTERNET SERVICE PROVIDER (ISP) DO ES NOT COME WITHIN THE SCOPE OF TELECOMMUNICATION CHARGES AS PROVIDED IN CLAUSE (IV) OF EXPLANATION 2 TO SECTION 10A, BECAUSE ISP IS FOR TRANSMITTING THE DATA, I.E., SOF TWARE DEVELOPED BY THE ASSESSEE. THE ISP EXPENSES INCURRE D WERE IN RESPECT OF DEVELOPMENT OF SOFTWARE, I.E., G OODS. THE ISP EXPENSES WERE NOT ATTRIBUTABLE TO THE DELIV ERY OF COMPUTER SOFTWARE, OUTSIDE INDIA AND, THEREFORE, SU CH EXPENSES NEED NOT BE EXCLUDED FROM CONSIDERATION IN FOREIGN EXCHANGE. HOWEVER, IF FOR THE SAKE OF ARGUM ENTS IT WAS PRESUMED THAT THE EXPENDITURE INCURRED WAS ATTRIBUTABLE TO DELIVERY OF GOODS OUTSIDE INDIA EVE N THOUGH SAME WAS NOT TO BE EXCLUDED. THE WORDS RECEIVED AND BUT NOT INCLUDE USED IN CLAUSE (IV ) OF EXPLANATION 2 TO SECTION 10A ARE SIGNIFICANT. WHAT IS TO BE EXCLUDED IS OUT OF WHAT IS RECEIVED. IN THE INST ANT CASE, THE ASSESSEE RECEIVED CONSIDERATION AGAINST SOFTWARE, I.E., GOODS. FOR THIS PURPOSE, THE ASSESS EE HAD DEMONSTRATED BY REFERRING TO INVOICES AND AGREEMENT . THE AGREEMENT, INVOICES AND THE TURNOVER CLEARLY SH OWED THAT THE ASSESSEE DID NOT RECOVER ANY SUCH EXPENDIT URE. THEREFORE, THERE WAS NO SCOPE FOR ANY EXCLUSION FRO M THE EXPORT TURNOVER ON ACCOUNT OF SUCH EXPENSES. IF AT ALL ON PRESUMPTION, IT WAS TO BE EXCLUDED FOR THE PURPOSE OF EXPORT TURNOVER, THEN ON THE SAME ASSUMPTION, REA SON AND ANALOGY IT SHOULD BE EXCLUDED FROM TOTAL TURNO VER. THEREFORE, THE ASSESSING OFFICER WAS NOT CORRECT IN EXCLUDING ISP EXPENSES FROM CONSIDERATION RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE WHILE CALCULATING EXPO RT TURNOVER FOR THE PURPOSE OF SECTION 10A. 8. THE ISP EXPENSES CONSIDERED IN THE ABOVE SAID DECISION ARE SIMILAR TO THE SATELLITE LINK CHARGES PAID BY THE ASSESSEE. AS SEEN FROM THE BILLS PLACED ON RECO RD BEFORE THE AUTHORITIES THE ASSESSEE HAS PAID SATELL ITE LINK CHARGES TO VSNL, MTNL AND ALSO TO SOFTWARE TECHNOLO GY PARK INDIA (STPI) TOWARDS BI-MONTHLY HALF CIRCUIT CHARGES/INTERNATIONAL HALF CIRCUIT CHARGES AND RENT FOR TMI FRAME RELAY CCT CHARGES INCLUDING PORT CHARGE S. THE PORT CHARGES, HOWEVER, WERE CALCULATED ON THE B ASIS OF USD PER ANNUM BASIS WHERE AS REST OF THE CHARGES WERE PAID ON ANNUAL LEASE AGREEMENT PERIODICALLY AN D THESE ARE FIXED CHARGES NOT CONNECTED WITH THE DELI VERY ATTRIBUTABLE TO THE EXPORT OF GOODS. EVEN THOUGH TH E ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 15 OF 45 ASSESSEE HAS UTILIZED THE SATELLITE LINK FOR RECEIV ING DATA AND ALSO FOR TRANSFERRING DATA THIS CANNOT BE CONSI DERED AS TELECOMMUNICATION CHARGES FOR DELIVERY OF GOODS ON FOB BASIS. NOT ONLY THAT WHAT THE ASSESSEE WAS GETT ING WAS A FIXED SERVICE CHARGE FOR PROCESSING DATA FROM THE FOREIGN COMPANY, TRINITY PROCESSING SERVICES LTD. O N A MONTHLY BASIS IN TERMS OF THE AGREEMENT DATED 16TH OCTOBER 2001. THERE ARE NO SEPARATE CHARGES RECOVER ED FROM THE FOREIGN COMPANY TOWARDS TELECOMMUNICATION CHARGES WHICH CAN BE CONSIDERED AS AMOUNT RECOVERED IN FOREIGN EXCHANGE FROM THE FOREIGN PARTY. SINCE N O SUCH AMOUNT IS RECOVERED OR INCLUDED IN THE TURNOVER, QU ESTION OF EXCLUSION FROM THE EXPORT TURNOVER ALSO DOES NOT ARISE ON THE FACTS OF THE CASE. 9. ASSESSEE HAS MADE AN ALTERNATE CONTENTION THAT T HE SATELLITE LINK CHARGES, IN CASE THEY ARE CONSIDERED AS TELECOMMUNICATION CHARGES THIS SHOULD ALSO BE EXCLU DED FROM THE TOTAL TURNOVER AS CONSIDERED BY THE SPECIA L BENCH IN THE CASE OF ITO VS. SAK SOFT LTD. 313 ITR 353 (AT)(SB) WHEREIN IT WAS HELD THAT PARITY TO BE MAIN TAINED WITH EXPORT TURNOVER TO THAT OF TOTAL TURNOVER AND WHERE EXPENSES ON TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO DELIVERY OF ARTICLES OR THINGS OR C OMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES INCURRED IN FORE IGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE IN DIA REQUIRED TO BE EXCLUDED FROM EXPORT TURNOVER, THEY ARE ALSO TO BE EXCLUDED FROM TOTAL TURNOVER. SINCE WE H AVE CONSIDERED THAT THE SATELLITE LINK CHARGES CANNOT B E CONSIDERED AS TELECOMMUNICATION CHARGES TO BE EXCLU DED AS PER THE DEFINITION OF EXPORT TURNOVER THERE IS N O NEED TO CONSIDER THE ALTERNATE CONTENTION. ACCORDINGLY, THIS ALTERNATE GROUND RAISED IS NOT CONSIDERED AS IT BEC OMES ACADEMIC IN NATURE. 10. AFTER CONSIDERING THE FACTS OF THE CASE AND THE PRINCIPLES ESTABLISHED BY THE COORDINATE BENCH IN T HE CASE OF PATNI TELECOMMUNICATION (P) LTD. VS. ITO 22 SOT 26 (HYD), IT IS HELD THAT THE EXPENSES ON SATELLITE LINK CHARGES DOES NOT COME WITHIN THE SCOPE OF TELECOMMUNICATION CHARGES AS PROVIDED IN CLAUSE ( IV) OF EXPLANATION 2 TO SECTION 10A AND ACCORDINGLY, THE A .O. IS DIRECTED NOT TO EXCLUDE THE SAME FROM EXPORT TURNOV ER. A.O. IS DIRECTED TO RECALCULATE THE DEDUCTION UNDER SECTION 10A. ASSESSEES GROUNDS ARE CONSIDERED ALLOWED . ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 16 OF 45 11.2 AS SEEN FROM THE ORDER OF THE CIT (A) IN A SSESSMENT YEAR 2005-06, IT IS NOTICED THAT THE CIT (A) HAS FOLLOWE D THE ABOVE ORDER OF THE ITAT WHILE GIVING RELIEF ON SATELLITE CHARG ES. IN VIEW OF THE ORDER OF THE ITAT IN ASSESSMENT YEAR 2004-05, WE HO LD THAT THE SATELLITE CHARGES CANNOT BE CONSIDERED AS TELECOMM UNICATION CHARGES SO AS TO EXCLUDE FROM THE EXPORT TURNOVER. WE ACCORDINGLY UPHOLD ASSESSEES GRIEVANCE ON THIS ISSUE. GROUND NO.2 IS ALLOWED. 12. ASSESSEE HOWEVER, RAISED AN ALTERNATE GROUND WITHOU T PREJUDICE TO THE ABOVE GROUND NO.2 THAT THE TECHNIC AL FEES AND SATELLITE LINK CHARGES SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER IN CASE THEY WERE TO BE EXCLUDED FROM THE EXPORT TURNOVER. THERE IS MERIT IN THE ARGUMENT AND IS ALSO COVERED IN FAVOUR OF ASSESSEE BY VARIOUS JUDICIAL PRONOUNCEMENTS. HOWEVE R, IN VIEW OF THE REASONING GIVEN ABOVE FOR NOT EXCLUDING THE ABO VE AMOUNTS FROM THE EXPORT TURNOVER, THERE IS NO NEED TO CONSIDER T HIS ALTERNATE CONTENTION AS IT BECOMES AN ACADEMIC ISSUE. ACCORDI NGLY THE ALTERNATE CONTENTION IS REJECTED. 13. GROUND NO.3 IS ON THE ISSUE OF DISALLOWANCE UNDER S ECTION 40(A)(IA) ON THE PAYMENTS MADE TO EQUANT NETWORK SE RVICES LTD WHICH IN THE OPINION OF AO IS IN THE NATURE OF FEE S FOR TECHNICAL SERVICES AND THEREFORE, LIABLE FOR TAX TO BE DEDUC TED AT SOURCE. SINCE ASSESSEE WAS NOT DEDUCTING TAX, THE SAME WAS DISALL OWED UNDER SECTION 40(A)(IA). WHEN THIS DISALLOWANCE WAS PROPO SED ASSESSEE SUBMITTED THAT THE CIT (A) HAS ALREADY ADJUDICATED THE ISSUE IN HIS ORDER PASSED UNDER SECTION 250 R.W. RULE 201 & 20(1 )A OF THE ACT THAT THE PAYMENT MADE TO EQUANT IS NEITHER ROYALTY NOR FEES FOR TECHNICAL SERVICES. ON THE REASON THAT THE DEPARTME NT HAS NOT ACCEPTED THE DECISION AND IS PENDING BEFORE THE ITA T, THE DRP DID NOT INTERFERE AND DIRECTED AO TO FINALISE THE DRAFT ASSESSMENT ORDER AS PROPOSED. IT WAS SUBMITTED THAT THIS ISSUE WAS A LREADY DECIDED BY THE ITAT IN ITA NO.5129/MUM/09 DATED 31.5.2011 W HEREIN AFTER ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 17 OF 45 ELABORATE DISCUSSION RUNNING TO PAGES 13, THE ITAT HELD THAT THE PAYMENTS ARE NOT LIABLE FOR DEDUCTION OF TAX AT SOU RCE. THE CONCLUSION BY THE ITAT VIDE PARA NO.11 IS AS UNDER: 11. AS ALREADY NOTED BY US, THE PAYMENTS MADE BY T HE ASSESSEE IN THE PRESENT CASE TO EQUANT IN CONNECTIO N WITH THE SATELLITE LINK CHARGES WERE FOR THE USE OF STAN DARD FACILITY WHICH DID NOT INVOLVE USE OR RIGHT TO USE THE CHANNEL OF COMMUNICATION. EQUANT WAS PROVIDING MULTIPOINT DATA CONNECTIVITY SERVICES TO THE ASSESS EE TO FACILITATE DATA COMMUNICATION WITH ITS CLIENTS BELO NGING TO WILLIS GROUP HAVING THEIR OFFICES AT IPSWICH, UK AN D NASHVILLE, USA. THE INTENTION OF THE ASSESSEE COMPA NY WAS TO AVAIL CONNECTIVITY SERVICES AND IT WAS NOT CONCERNED AS TO WHICH EQUIPMENTS WERE USED TO PROVI DE SUCH CONNECTIVITY SERVICES. THE ASSESSEE HAD NO RIG HT TO ACCESS THE EQUIPMENTS FORMING PART OF COMMUNICATION CHANNEL EXCEPT FOR DATA COMMUNICATION AND TRANSMISS ION. THE ASSESSEE HAD NO CONTROL OVER THE SAID EQUIPMENT S OR PHYSICAL ACCESS TO IT. THERE IS NOTHING TO SHOW PO SITIVE ACT OF UTILIZATION, APPLICATION OR EMPLOYMENT OF EQUIPM ENT FOR THE DESIRED PURPOSE. THE ASSESSEE COULD NOT COME FA CE TO FACE WITH THE EQUIPMENTS, OPERATE IT OR CONTROL ITS FUNCTIONS IN SOME MANNER. IT HAD NO POSSESSORY RIGHTS IN RELA TION TO THE SAID EQUIPMENTS. IT ONLY TOOK ADVANTAGE OF A FA CILITY OF USE OF SOPHISTICATED EQUIPMENT INSTALLED AND PROVID ED BY THE SERVICE PROVIDER. HAVING REGARD TO ALL THESE FA CTS OF THE CASE AND KEEPING IN VIEW THE DECISIONS OF AUTHORITY FOR ADVANCED RULING (AAR) IN THE CASES OF ISRO SATELLIT E CENTRE(SUPRA) AND DELL INTERNATIONAL SERVICES (INDI A) P.LTD.(SUPRA), WE ARE OF THE VIEW THAT THE PAYMENT MADE BY THE ASSESSEE TO EQUANT IN CONNECTION WITH STANDA RD COMMUNICATION SERVICES MADE AVAILABLE TO ANYONE WHO IS WILLING TO PAY WAS NOT IN THE NATURE OF ROYALTY BUT THE SAME WAS IN THE NATURE OF BUSINESS PROFIT AND IN TH E ABSENCE OF ANY P.E. OF EQUANT IN INDIA, IT WAS NOT CHARGEABLE TO TAX IN INDIA. THE ASSESSEE THUS WAS NOT LIABLE TO DEDUCT TAX AT SOURCE FROM THE PAYMENT MAD E TO EQUANT FOR SUCH SERVICES AND IT, THEREFORE, COULD N OT BE TREATED AS ASSESSEE IN DEFAULT U/S 201(1) AND INTER EST U/S 201(1A) ALSO COULD NOT BE CHARGED AS RIGHTLY HELD B Y THE LEARNED CIT(APPEALS). WE, THEREFORE, UPHOLD THE IMP UGNED ORDER OF THE LEARNED CIT(A) ON THIS ISSUE AND DISMI SS THIS APPEAL FILED BY THE REVENUE . ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 18 OF 45 SINCE THIS ISSUE WAS CRYSTALLIZED BY THE ORDER OF T HE ITAT IN THE SAME ASSESSMENT YEAR, WE ARE OF THE OPINION THAT TH E DISALLOWANCE UNDER SECTION 40(A)(IA) DOES NOT ARISE, AS THERE IS NO NEED TO DEDUCT TAX ON THE ABOVE AMOUNT PAID TO EQUANT NETWORK SERV ICES LTD. ACCORDINGLY THE DISALLOWANCE MADE BY AO STANDS DELE TED. GROUND NO.3 IS ALLOWED. 14. GROUND NO.4 PERTAINS TO THE ISSUE OF TRANSFER PRICI NG ADJUSTMENT MADE BY AO. AS ASSESSEE HAS TRANSACTIONS WITH AE BEING 100% SERVICE PROVIDER TO THE PRINCIPAL COMPAN Y, THE MATTER WAS REFERRED TO THE TPO FOR DETERMINATION OF ARMS L ENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. IT WAS SUBMITTED THAT ASSESSEE IS GETTING REIMBURSED AT COST PLUS 10% BASIS. IN THE T P STUDY, ASSESSEE HAS CONDUCTED A SEARCH TO IDENTIFY A GROUP OF INDEPENDENT COMPARABLE COMPANIES WITH PUBLICLY AVAILABLE DATA T HAT ARE BROADLY COMPARABLE TO THE FUNCTIONS PERFORMED BY ASSESSEE. BASED ON THIS METHODOLOGY FEW COMPANIES WERE CONSIDERED AS COMPAR ABLES IN THE TRANSFER PRICING STUDY. 15. THE SEARCH WAS CONDUCTED BY ASSESSEE USING ON THE FOLLOWING SPECTRUM OF SERVICES: PROWESS O COMPUTER SOFTWARE O SOFTWARE SERVICES AND CONSULTANCY AND O IT ENABLED/BPO CAPITALINE * COMPUTER (MEDIUM AND SMALL); * COMPUTER (LARGE) AND * IT ENABLED/BPO BELOW ARE THE COMPARABLES SELECTED BY ASSESSEE IN I TS TRANSFER PRICING REPORT AND ITS COST PLUS MARGIN CONSIDERING THE FINANCIAL DATA FOR YEAR ENDED 31 MARCH, 2006. ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 19 OF 45 S.NO NAME OF THE COMPARABLE COMPANY COST PLUS (%) 1 ALLSEC TECHNOLOGIES LTD 28.73 2 CRISIL MARKETWIRE LTD -18.34 3 NEWGEN SOFTWARE TECHNOLOGIES LTD NA 4 TRANSWORKS INFORMATION SERVICES LTD 19.62 5 TRIGENT SOFTWARE LTD NA 6 VJIL CONSULTING LTD 6.36 7 VISUALSOFT TECHNOLOGIES LTD 12.70 8 ICRA ONLINE LTD 10.49 9 MAARS SOFTWARE INTERNATIONAL LIMITED 10.83 10 MYM TECHNOLOGIES LIMITED 33.72 AVERAGE 13.01 16. ASSESSEE AND THE TPO ARE IN AGREEMENT AS TO THE MET HOD APPLIED AND THE PLI USED TO BENCHMARK THE TRANSACTI ONS. HOWEVER, THE TPO HAS REJECTED MOST OF THE COMPARABLES SELECT ED BY ASSESSEE IN ITS TRANSFER PRICING STUDY ON VARIOUS REASONS. O UT OF THE TEN COMPANIES TAKEN BY ASSESSEE AS COMPARABLE, THE TPO REJECTED EIGHT COMPARABLES. FURTHER THE TPO HAS APPLIED CERTAIN QU ANTITATIVE FILTERS WHICH ARE NOT ACCEPTABLE TO ASSESSEE. SOME OF THE FILTERS ADOPTED BY THE TPO ARE THE REJECTION OF COMPANIES H AVING FINANCIAL YEAR DATA OTHER THAN PERTAINING TO YEAR ENDING 31.3 .2006, THE REJECTION OF COMPANIES THAT HAVE EXPORT EARNINGS LE SSER THAN 25% OF THE OPERATING SALES AND REJECTION OF COMPANIES WITH RELATED PARTY TRANSACTIONS GREATER THAN 25% OF THE OPERATING SALE S. THE TPO SELECTED NEW COMPARABLES AFTER OBTAINING INFORMATIO N UNDER SECTION 133(6) AND HAS TAKEN 11 COMPANIES AS COMPARABLES WH ICH WERE OBJECTED BY ASSESSEE. AFTER MAKING ADJUSTMENTS FOR WORKING CAPITAL AND REJECTING THE RISK ADJUSTMENT CLAIMS, THE TPO V IDE HIS ORDER DETERMINED THE ALP AFTER ARRIVING AT THE MARK UP AS PER COMPARABLES AT 22.50%. ON A TOTAL COST INCURRED BY ASSESSEE ON BACK OFFICE SERVICES AT ` .41,79,98,644, THE ALP WAS DETERMINED AT ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 20 OF 45 ` .9,40,49,695 AND AS ASSESSEE HAS RECEIVED LESS THAN THIS THERE WAS AN ADDITION OF ` .497,24,794 AS AN ADJUSTMENT. SINCE THIS AMOUNT WAS MORE THAN +/- 5% IN TERMS OF PROVISO TO SECTION 92C(4), ASSESSEES CONTENTION ON DEDUCTION OF STANDARD AMOU NT WAS ALSO REJECTED. 17. FURTHER, FOR WORKING CAPITAL ADJUSTMENT ASSESSEE H AS WORKED AT 2.05% WHEREAS THE TPO ARRIVED AT 1.50%. A SSESSEE ALSO ASKED FOR RISK ADJUSTMENT WHICH AO HAS REJECTED. TH E REVISED MARGIN OF COMPARABLE CONSIDERED BY THE TPO WAS CONT ESTED TO BE AT 17.45% AND ASSESSEE SUBMITTED THAT IT SATISFY THE P ROVISO TO SECTION 92C AND IS WITHIN +/- 5% RANGE. THE DRP AGREED WITH TPO ON REJECTION OF COMPARABLE SELECTED BY ASSESSEE AND TH E ADOPTION OF NEW COMPARABLE WHICH ASSESSEE OBJECTED, AS VALID. FURTHER CONSIDERING THE ADDITIONS MADE, THE DRP ALSO DID NO T ACCEPT ASSESSEES CONTENTION ABOUT +/- 5% RANGE. WITH REFE RENCE TO THE WORKING CAPITAL AND RISK ADJUSTMENT THE DRP AGREED WITH THE TPOS OBSERVATION. THEREFORE, ASSESSEE IS AGGRIEVED ON TH E ADDITION SO MADE AT ` .4.97 CRORES. 18. THE LEARNED COUNSEL PLACED HIS ARGUMENTS ON FOUR MAIN PROPOSITIONS UNDER THE FOLLOWING HEADS: I) WRONG COMPARABLE COMPANIES SELECTED BY THE TPO AND CONFIRMED BY THE DRP. II) ERRONEOUS REJECTION OF ASSESSEES COMPARABLE COMPANIES. III) NO ADJUSTMENT ON RISK PROVIDED BY THE TPO IV) ADJUSTMENT ON WORKING CAPITAL WRONGLY COMPUTED BY THE TPO. 19. ON THE ISSUE OF WRONG COMPARABLES SELECTED BY THE TPO, THE LEARNED COUNSEL MADE DETAILED SUBMISSIONS WITH REFE RENCE TO ABNORMAL HIGH PERCENTAGE OF INCOME, FUNCTIONAL PROF ILES BEING ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 21 OF 45 DIFFERENT, INFORMATION OBTAINED UNDER SECTION 133(6 ) NOT BEING PROVIDED TO ASSESSEE AND SOME OF THE DATA NOT AVAIL ABLE IN PUBLIC DOMAIN AND REFERRED TO THE DETAILED SUBMISSIONS MAD E TO THE DRP ON VARIOUS OBJECTIONS AND ALSO BEFORE THE TPO. IT W AS HIS SUBMISSION THAT THE TPO HAS MADE WRONG SELECTION OF COMPARABLES WITHOUT CONSIDERING ASSESSEES OBJECTIONS AND NEITH ER THE TPO NOR THE DRP HAS COMMENTED UPON VARIOUS OBJECTIONS RAISE D BY ASSESSEE. IN SOME OF THE CASES, IT WAS HIS SUBMISSI ON THAT THE TPOS OWN FILTERS WERE NOT BEING FOLLOWED. THE DETAILED S UBMISSIONS ARE AS UNDER: (OBJECTIONS RAISED BEFORE TPO & DRP). 1. VISHAL INFORMATION TECHNOLOGIES LTD . OP/TC AS CALCULATED BY TPO IS 48.03%. A) DIFFERENCE IN FUNCTIONAL PROFILE. THE COMPANY IS EN GAGED IN PROVIDING SOLUTIONS TO THE PRINT PRODUCTION INDUSTR Y WITH SERVICES LIKE E-PUBLISHING, E-BOOK, PRINT ON DEMAND , DATA AND DOCUMENT MANAGEMENT, DATA CONVERSION, DIGITAL LIBRA RY MANAGEMENT ETC. HENCE IT IS FUNCTIONALLY NOT COMPAR ABLE TO ASSESSEE. B) ABNORMAL PROFITS: AS PER THE MARGINS COMPUTED BY TH E TRANSFER PRICING OFFICER IN THE NOTICE DATED 15-09-2009, THE MARGIN EARNED BY THE COMPANY IS 48.03% WHICH IS ABNORMALLY HIGH. HENCE THE COMPANY OUGHT TO BE REJECTED AS A COMPARA BLE FROM THE AMBIT OF COMPARABLE COMPANIES. C) EMPLOYEES COST CRITERIA: THE EMPLOYEE COST AS A PER CENTAGE OF REVENUE STANDS AT 1.49% WHEREAS THE THRESHOLD LIMIT FIXED FOR THE ACCEPTANCE OF A COMPANY AS A COMPARABLE UNDER T HIS CRITERION IS FOR THE EMPLOYEE COSTS TO BE AT LEAST 25% OF THE REVENUE. D) DIFFERENCE IN QUANTITATIVE SCREENING: FOLLOWING CRI TERIA CAN BE CONSIDERED FOR REJECTING THIS COMPANY: ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 22 OF 45 I) WAGES/TOTAL COST % - 2.35% ASSESSEE HAS A WAGES TO TOTAL COST RATIO OF 2.35%. HENCE THE ABOVE COMPANY CANNOT BE SELECTED AS COMPARABLE. 2. ASIT C MEHTA FINANCIAL SERVICES LTD (FORMERLY NUCLEUS NET SOFT & GIS INDIA LTD) (OP/TC CALCULATED BY TPO 34.52%) : A) DIFFERENCE IN FUNCTIONAL PROFILE: THE COMPANY IS PR IMARILY ENGAGED IN PROVIDING SERVICES SUCH AS GIS (GEOLOGIC AL INFORMATION SYSTEM); DATA CONVERSION FROM ANY FORMA T TO A GIS/SPATIAL FORMAT; PROCESSING OF AERIAL AND SATELL ITE IMAGERY; NAVIGATION AND FLEET MANAGEMENT SOLUTIONS. B) RESTRUCTURING EXERCISE: NUCLEUS SECURITIES LTD, A C OMPANY PROVIDING PORTFOLIO MANAGEMENT SERVICES AMALGAMATED WITH NUCLEUS NET SOFT & GIS INDIA LTD DURING THE YEAR AN D HENCE THE RESULTS OF THE COMPANY MAY HAVE BEEN INFLUENCED ON ACCOUNT OF SUCH RESTRUCTURING. C) NON AVAILABILITY OF DATA: THE TPO HIMSELF WHILST FO RMULATING THE SEARCH CRITERIA HAS REJECTED THE COMPANY ON ACCOUNT OF PAUCITY OF DATA. THE SEARCH CRITERIA MATRIX CLEARLY EVIDENC ES THIS FACT. HENCE IT IS SUBMITTED THAT ON THE BASIS OF NON AVAI LABILITY OF SEGMENTAL INFORMATION, THE COMPANY OUGHT NOT TO BE CONSIDERED AS A COMPARABLE COMPANY. D) PRESENCE OF INTANGIBLES: AN ANALYSIS OF THE FIXED A SSETS SCHEDULE OF THE COMPANY FOR THE FINANCIAL YEAR ENDED 31 ST MARCH, 2006 REVEALS THE EXISTENCE OF AN INTANGIBLE ASSET DESIGN ATED AS PMS INTANGIBLES. E) NON AVAILABILITY OF SEGMENTAL DATA: THE COMPANY OPE RATES IN THE FOLLOWING SEGMENTS: 1) INFORMATION TECHNOLOGY SERVICE 2) INFORMATION TECHNOLOGY ENABLED SERVICES; ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 23 OF 45 3) PORTFOLIO MANAGEMENT SERVICES AND SEGMENTAL DATA WA S NOT AVAILABLE. 3. GOLDSTONE INFRATECH LTD ( OP/TC CALCULATED BY TPO 29.01%): A) FUNCTIONALLY DIFFERENT: THE COMPANY IS PRIMARILY IN VOLVED IN THE PROVISION OF SOFTWARE DEVELOPMENT AND RELATED S ERVICES COMPRISING BOTH ONSITE AND OFFSHORE OPERATIONS. THE COMPANY IS ALSO INVOLVED IN THE BUSINESS OF MEDIA AND IPTV. B) USE OF SECRET INFORMATION: RECOURSE TO ISSUANCE OF NOTICE UNDER SECTION 133(6) OF THE ACT. C) FOREX EARNINGS > 25% OF SALES TO BE ACCEPTED. THE C OMPANY FURTHER HAS FOREX EARNINGS OF 0.12% WHICH IS LESS T HAN THE CRITERIA ADOPTED BY THE TRANSFER PRICING OFFICER, H ENCE THE COMPANY DOES NOT SATISFY THE FILTER AND CANNOT BE C ONSIDERED FOR FURTHER ANALYSIS. D) DIMINISHING REVENUES: THE REVENUE OF THE COMPANY PE RTAINS TO THE BPO SEGMENT ARE DECLINING YEAR-ON-YEAR. THE REVENUE FOR THE FINANCIAL YEAR 2006 HAS DECLINED BY 16% AS COMPARED TO THE FINANCIAL YEAR 2005. E) EMPLOYEE COST CRITERIA: THE EMPLOYEE COST AS A PERC ENTAGE OF REVENUE STANDS AT 8.93% WHEREAS THE THRESHOLD LIMIT FIXED FOR THE ACCEPTANCE OF A COMPANY AS A COMPARABLE UNDER T HIS CRITERION IS FOR THE EMPLOYEE COSTS TO BE AT LEAST 25% OF THE REVENUES. 4. DATAMATICS FINANCIALS SERVICES LTD (OP/TC CALCULATED BY TPO = 24.99%): A) SEGMENTAL INFORMATION: THE REVENUES DERIVED FROM TH E ITES ACTIVITIES COMPRISE 28.04% OF THE TOTAL REVENUES. B) USE OF SECRET INFORMATION: RECOURSE TO ISSUANCE OF NOTICE UNDER SECTION 133(6) OF THE ACT. ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 24 OF 45 5. MAPLE ESOLUTIONS LTD (OP/TC CALCULATED BY TPO = 32.66%) : A) ABNORMAL PROFITS: AS PER THE MARGINS COMPUTED BY TH E TPO IN THE NOTICE, THE MARGIN EARNED BY MAPLE ESOLUTIONS I S 32.66% WHICH IS ABNORMALLY HIGH. IN VIEW OF THE DECISION O F THE DELHI TRIBUNAL IN CASE OF MENTOR GRAPHICS (SUPRA), THE PU NE TRIBUNAL IN CASE OF E-GAIN COMMUNICATIONS (SUPRA) A ND THE OECD GUIDELINES, ASSESSEE REQUESTED THE TPO TO EXCL UDE THE COMPANY AS A COMPARABLE TO ASSESSEE. HENCE THE ABOV E COMPANY CANNOT BE SELECTED AS COMPARABLE. 6. APEX KNOWLEDGE SOLUTIONS PVT. LTD (OP/TC CALCULATED BY TPO = 20.48%) A) BUSINESS IN DIVERSIFIED SEGMENTS: THE COMPANYS BUS INESS IS INTO DIVERSIFIED SEGMENTS SUCH AS ENGINEERING SOLUT ION, TECHNOLOGY PRODUCTS, CONTENT SOLUTION. HENCE THE SA ME IS NOT FUNCTIONALLY COMPARABLE TO THE ACTIVITY UNDERTAKEN BY ASSESSEE, AS ASSESSEE DOES NOT PERFORM ENGINEERING OR TECHNOLOGY ACTIVITIES. B) FOREX EARNINGS TO REVENUE CRITERIA: THE COMPANY, IT IS SUBMITTED BY ASSESSEE DOES NOT PASS THE EXPORT EARN INGS AS A % OF REVENUE CRITERIA. THE EXPORT EARNINGS AS A PER CENTAGE OF REVENUE IS LESS THAN 25% WHEREAS THE THRESHOLD LIMI T FIXED FOR THE ACCEPTANCE OF A COMPANY AS A COMPARABLE UNDER T HIS CRITERION IS FOR THE EARNINGS TO BE AT LEAST 25% OF THE REVENUES. C) USE OF SECRET INFORMATION: RECOURSE TO ISSUANCE OF NOTICE UNDER SECTION 133(6) OF THE ACT. 7. SPANCO LTD (EARLIER KNOWN AS SPANCO TELESYSTEMS & SOLUTIONS LTD) (OP/TC CALCULATED BY TPO = 20.86%): A) USE OF SECRET INFORMATION: RECOURSE TO ISSUANCE OF NOTICE UNDER SECTION 133(6) OF THE ACT. ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 25 OF 45 B) DIFFERENCE IN QUANTITATIVE FILTERS: A) ITES REVENUE < 75% OF TOTAL OPERATING REVENUES TO B E REJECTED. B) FOREX EARNINGS > 25% OF SALES TO BE ACCEPTED. THE COMPANY FURTHER HAS FOREX EARNINGS OF 23% WHICH IS LESS THAN THE CRITERIA ADOPTED BY THE TPO, HENCE THE COM PANY DOES NOT SATISFY THE FILTER AND CANNOT BE CONSIDERE D FOR FURTHER ANALYSIS. C) FLUCTUATION IN REVENUES: THE COMPANY HAS WILDLY FLUCTUATING YEAR-ON-YEAR REVENUES. FURTHER, THE COM PANY HAS A CAGR OF 80.77% FOR 2 YEAR PERIOD OF 2004-06. THE EXTRAORDINARY VARIATIONS IN PROFITABILITY ARE INDIC ATORS OF SEVERAL ABNORMAL BUSINESS FACTORS WHICH ARE NOT APP ARENT FROM THE ANNUAL REPORT OR EVEN FROM THE RESPONSES R ECEIVED IN PURSUANCE OF THE NOTICES ISSUED UNDER SECTION 13 3(6) OF THE ACT. THEREFORE, THE SAID COMPANIES OUGHT TO BE REJECTED. BALANCE COMPANIES ARE OBJECTED ON THE BASIS OF SECR ET INFORMATION SO ASSESSEE COULD NOT MAKE DETAILED SUB MISSIONS. 20. ON THE ISSUE OF REJECTING THE COMPARABLES SELECTED BY ASSESSEE , EVEN THOUGH ASSESSEE IS ABLE TO DEMONSTRATE THAT THE SELECTION OF COMPARABLES BY IT ARE AS PER THE PARAM ETERS, AO REJECTED ON SOME REASONS WHICH ARE NOT ACCEPTABLE T O ASSESSEE. THE DETAILED SUBMISSIONS ON THIS ARE AS UNDER CASE-WISE : A. CRISIL MARKETWIRE LTD: IT OFFERS NEWS ITEMS DAILY, INCLUDING BREAKING NEWS, ANALYSIS, STATISTICS, FORECASTS, CAL ENDARS AND SUMMARIZES DATA AND ANALYTICS ON THE INDIAN FINANCI AL MARKET. THE COMPANY IS ENGAGED IN THE BUSINESS OF REAL-TIME FINANCIAL NEWS MARKET. ASSESSEE CONTENDS THAT THE SAID COMPAN Y IS ENGAGED IN THE ACTIVITY OF DATA PROCESSING WHICH IS IDENTICAL TO ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 26 OF 45 THE ACTIVITY UNDERTAKEN BY ASSESSEE. SINCE THE COMP ARABLES ACTIVITY IS IDENTICAL TO THOSE CARRIED OUT BY ASSES SEE, IT IS THE SUBSTANCE WHICH NEEDS TO BE CONSIDERED AND NOT THE FORM. THUS, THE TRANSFER PRICING OFFICER ERRED IN REJECTI NG THE SAID COMPARABLE COMPANY AND THE SAME NEEDS TO BE ACCEPTE D. B. NEWGEN SOFTWARE TECHNOLOGIES LTD: A SOFTWARE COMPANY, DATA FOR THE YEAR ENDED MARCH 2006 NOT AVAILABLE. ASSESS EE WOULD LIKE TO STATE THAT THE COMPANY HAS ITS OWN WEBSITE I.E. WWW.NEWGENSOFT.COM WHEREIN COMPLETE DETAILS RELATING TO THE FUNCTIONS PERFORMED BY THE COMPANY HAS BEEN MENTION ED WHICH INCLUDES WORKFLOW AUTOMATION, DOCUMENT MANAGE MENT, IMAGING, REPORT ARCHIVAL AND DISTRIBUTION. CONSEQUE NTLY, THE SAID COMPANY IS FUNCTIONALLY SIMILAR TO THE ACTIVIT Y UNDERTAKEN BY ASSESSEE VIA,, DATA PROCESSING AS IS ALREADY MEN TIONED ABOVE AND HENCE OUGHT TO BE CONSIDERED AS A COMPARABLE CO MPANY. FURTHER, ASSESSEE ALSO CONTENDS THAT THE TRANSFER P RICING OFFICER OUGHT TO CONSIDER THAT THE ACT AND THE RULE S, WHICH PROVIDE THAT WHILE CONDUCTING THE COMPARABILITY ANA LYSIS, THE DATA TO BE USED SHOULD BE CONTEMPORANEOUS. RULE 10B (4) CASTS AN OBLIGATION ON THE TAXPAYER TO CONDUCT THE COMPAR ABILITY ANALYSIS USING DATA FOR THE RELEVANT FINANCIAL YEAR . HOWEVER, RULE 10D(4) MAKES IT MANDATORY FOR THE TAXPAYER TO ENSURE DATA THAT EXISTS BY THE TIME SPECIFIED UNDER THE AC T, I.E. 31 ST OCTOBER OF THE RELEVANT ASSESSMENT YEAR. FURTHER, R ULE 10C(2)(C) ALSO CLARIFIES THAT AVAILABILITY OF DATA IS A SIGNIFICANT FACTOR IN CONDUCTING A COMPARABILITY ANALYSIS, WHET HER IT RELATES TO SELECTION OF THE MOST APPROPRIATE METHOD OR ARRIVING AT A SET OF COMPARABLES OR COMPUTING THE MARGINS OF SUCH COMPARABLES. IN OTHER WORDS, IF DATA FOR A PARTICUL AR COMPARABLE COMPANY FOR FINANCIAL YEAR 2005-06 WAS N OT AVAILABLE AS ON 31 OCTOBER 2006 (I.E. THE SPECIFIED DATE) THE ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 27 OF 45 SAME CANNOT BE USED FOR CONDUCTING THE COMPARABILIT Y ANALYSIS. IN VIEW OF THE ABOVE, THE STAND OF REJECT ING THE COMPANY ON ACCOUNT OF UNAVAILABILITY OF DATA FOR TH E YEAR ENDED MARCH 2006 IS BASELESS SINCE THE LAW PROVIDES FOR CONSIDERING ANY INFORMATION WHICH IS PUBLICALLY AVA ILABLE. C. TRIGENT SOFTWARE LTD. A SOFTWARE COMPANY. ASSESSEE WOULD LIKE TO STATE THAT THE COMPANY HAS ITS OWN WEBSITE I.E. WWW.TRIGENT.COM WHEREIN COMPLETE DETAILS RELATING TO THE FUNCTIONS PERFORMED BY THE COMPANY HAS BEEN MENTION ED. THE COMPANY IS ENGAGED IN OFFSHORE DEVELOPMENT, MAINTEN ANCE, SUPPORT AND OUTSOURCING. ITS SERVICES INCLUDE BUSIN ESS ANALYSIS, REQUIREMENT GATHERING, DESIGN, DEVELOPMEN T, MAINTENANCE AND SUPPORT SERVICES. ASSESSEE CONTENDS THAT THE SAID COMPANY IS ENGAGED IN THE ACTIVITY OF SUPPORT SERVICES WHICH IS IDENTICAL TO THE ACTIVITY UNDERTAKEN BY AS SESSEE. SINCE THE COMPARABLES ACTIVITY IS IDENTICAL TO THOSE CAR RIED OUT BY ASSESSEE, IT IS THE SUBSTANCE WHICH NEEDS TO BE CON SIDERED AND NOT THE FORM. THUS, THE TPO ERRED IN REJECTING THE SAID COMPARABLE COMPANY AND THE SAME NEEDS TO BE ACCEPTE D. D. VJIL CONSULTING LTD. COMPANY IS ENGAGED IN THE BUSINESS OF SYSTEMS SOFTWARE, STUDENT TRAINING. ASSESSEE WOU LD LIKE TO STATE THAT THE COMPANY HAS ITS OWN WEBSITE I.E. WW W.VJIL.COM WHEREIN COMPLETE DETAILS RELATING TO THE FUNCTIONS PERFORMED BY THE COMPANY HAS BEEN MENTIONED. THE COMPANY IS ENGA GED IN PROVIDING ENTERPRISE INFORMATION MANAGEMENT, ENTERP RISES INTEGRATION SERVICES AND DATA WAREHOUSING SERVICES. IT DELIVERS A RANGE OF CONTRACT CENTRE AND DATA PROCESSING SOLU TIONS TO THE MARKET RESEARCH, E LEARNING, DEBT MANAGEMENT, INSUR ANCE AND OTHER SECTORS. ASSESSEE CONTENDS THAT THE SAID COMP ANY IS ENGAGED IN THE ACTIVITY OF DATA PROCESSING WHICH IS IDENTICAL TO THE ACTIVITY UNDERTAKEN BY ASSESSEE. SINCE THE COMP ARABLES ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 28 OF 45 ACTIVITY IS IDENTICAL TO THOSE CARRIED OUT BY ASSES SEE, THE TPO ERRED IN REJECTING THE SAID COMPARABLE COMPANY AND THE SAME NEEDS TO BE ACCEPTED. E. VISUALSOFT TECHNOLOGIES LTD. LOSS MAKING COMPANY. THE COMPANY SHOULD BE ACCEPTED AS IT SATISFIES ALL OTHE R FILTERS. FURTHER, THE TPO IS NOT CORRECT IN REJECTING THE CO MPANY DUE TO LOSSES AS THE COMPANY IS SHOWING PROFITS FOR ALL TH E THREE YEARS THAT IS FY 2003-04, 2004-05 AND 2005-06. F. ICRA ONLINE LTD. COMPANY IS ENGAGED IN INFORMATION PRODUCTS AND SERVICES AND SERVICES BPO SERVICES CAT ERING TO MUTUAL FUND HOUSES IN INDIA HAS RELATED PARTY TRANS ACTION (RPT). THE RPT FOR THE COMPANY IS 0.07 CRORES AND THE TURNOVER IS 10.75 CRORES WHICH CONSTITUTES ONLY 0.6 5% OF THE TURNOVER. CONSEQUENTLY, ASSESSEE CONTENDS THAT THE STAND TAKEN BY THE TPO IN STATING THAT THE COMPANY HAS SI GNIFICANT RELATED PARTY TRANSACTIONS IS INCORRECT. UNDER THE CIRCUMSTANCES, THE SAID COMPANY OUGHT TO BE ACCEPTE D. G. MAARS SOFTWARE INTERNATIONAL LTD. SOFTWARE COMPANY. ASSESSEE WOULD LIKE TO STATE THAT THE COMPANY HAS ITS OWN WE BSITE I.E. WWW.MAARS-SOFT.COM WHERE COMPLETE DETAILS RELATIN G TO THE FUNCTIONS PERFORMED BY THE COMPANY HAS BEEN MENTION ED. THE COMPANY IS ENGAGED IN SOFTWARE CONSULTANCY WITH CAP ABILITIES IN APPLICATION INTEGRATION AND ENTERPRISE SYSTEMS. ASSESSEE CONTENDS THAT THE SAID COMPANY IS ENGAGED IN THE AC TIVITY WHICH IS IDENTICAL TO THE ACTIVITY UNDERTAKEN BY AS SESSEE. FURTHER THE TPO HIMSELF HAS SELECTED R SYSTEMS INTE RNATIONAL LTD WHICH HAS SOFTWARE CONSULTANCY REVENUE. THUS TH E TPO ERRED IN REJECTING THE SAID COMPARABLE COMPANY AND THE SAME NEEDS TO BE ACCEPTED. ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 29 OF 45 H. MYM TECHNOLOGIES LTD . SOFTWARE COMPANY: ASSESSEE WOULD LIKE TO STATE THAT THE COMPANY HAS ITS OWN WEBSITE I.E. WWW.MYMTECHNOLOGIES.COM WHERE COMPLETE DETAILS RE LATING TO THE FUNCTIONS PERFORMED BY THE COMPANY HAS BEEN MEN TIONED. THE COMPANY IS ENGAGED IN PROVIDING BUSINESS SOLUTI ONS INCLUDING BUSINESS/SYSTEM ANALYSIS REQUIREMENT GATH ERING AND DOCUMENTATION, EVALUATION AND SELECTION OF TECHNOLO GIES TO HOST, DEVELOP AND MAINTAIN APPLICATIONS, PRESCRIPTI VE CONSULTANCY THROUGH PROVEN DESIGN PATTERNS AND FRAM EWORKS. SINCE THE COMPARABLES ACTIVITY IS IDENTICAL TO THO SE CARRIED OUT BY ASSESSEE, IT IS THE SUBSTANCE WHICH NEEDS TO BE CONSIDERED AND NOT THE FORM. THUS, THE TPO ERRED IN REJECTING THE SAID COMPARABLE COMPANY AND THE SAME NEEDS TO BE ACCEPTE D. 20. WITH REFERENCE TO THE WORKING CAPITAL ADJUSTME NT IT WAS SUBMISSION THAT THE TPO HAS WRONGLY CONSIDERED THE WORKING CAPITAL ADJUSTMENT AT 1.5% WHEREAS ASSESSEES WORKI NG IT WAS 2.05%. THERE IS NO EXPLANATION FOR ARRIVING AT THAT AMOUNT. 21. WITH REFERENCE TO THE COMPLETE DENIAL OF RI SK ADJUSTMENT, THE LEARNED COUNSEL COUNTERED ALL THE ARGUMENTS RAISED BY THE TPO IN THE ORDER WITH REFERENCE TO MARKET RISK, SINGLE CUS TOMER RISK, CAPITAL RISK ETC., TO SUBMIT THAT AOS OBSERVATIONS PER SE ARE NOT CORRECT ACCORDING TO HIS OWN ORDER AND MADE DETAILED SUBMIS SIONS ON CLAIM OF RISK ADJUSTMENT. IT WAS HIS CONTENTION THAT AO S HOULD HAVE CONSIDERED THE RISK ADJUSTMENT. HE REFERRED TO THE SUBMISSIONS MADE BEFORE THE DRP IN THE OBJECTIONS PLACED IN THE PAPER BOOK FROM PAGE NOS. 549 TO 552 REBUTTING EACH OF THE ITE MS CONSIDERED BY THE TPO IN THE ORDER. IT WAS THE LEARNED COUNSELS SUBMISSIONS THAT EVEN THOUGH ASSESSEE HAS FILED DETAILED OBJECTIONS BEFORE THE TPO WITH REFERENCE TO SELECTION OF COMPARABLES AND ALSO ELABORATELY ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 30 OF 45 CONTESTING EACH OF THE CASE BEFORE THE DRP, NEITHER OF THE AUTHORITIES DISCUSSED ISSUE-WISE OBJECTIONS RAISED BY ASSESSEE. 22. FURTHER IT WAS SUBMITTED THAT THE INFORMATION O BTAINED UNDER SECTION 133(6) HAS NEVER BEEN FURNISHED TO ASSESSEE , WHICH MAKE IT SECRET INFORMATION. THEREFORE, ASSESSEE IS NOT IN A POSITION TO EITHER GIVE CONSENT OR REJECT THE COMPARABLES SELECTED BY TPO. SINCE MOST OF THE INFORMATION OBTAINED WAS NOT IN PUBLIC DOMAI N AND THE INFORMATION WAS NOT PROVIDED TO ASSESSEE, ASSESSEE IS OBJECTING TO THE SELECTION OF COMPARABLES PER SE. 23. THE LEARNED CIT DR IN HIS REPLY SUBMITTED THAT THE TPO HAS MADE ELABORATE STUDY AND ARRIVED AT ADJUSTMENT AND SUPPORTED THE ACTION OF THE TPO BY GIVING THE FOLLOWING SUBMISSIO NS ISSUE-WISE. A) WHY THE COMPARABLES SELECTED BY THE TPO SHOU LD NOT BE REJECTED. S.NO NAME OF THE COMPANY OBJECTION 1 ACE SOFTWARE EXPORTS LTD NO ORAL OBJECTIONS WERE RAISED 2 ALLSEC TECHNOLOGY LTD THIS WAS USED BY ASSESSEE A LSO. 3 APEX KNOWLEDGE SOLUTIONS PVT. LTD ORAL OBJECTIONS AS TO: (I) EXPORT EARNINGS (II) ISSUE OF 133(6) 4 ASIT C. MEHTA (NUCLEUS NETSOFT) ORAL OBJECTIONS AS TO; (I) ABNORMALLY HIGH MARGIN (II) FUNCTIONAL PROFILE (III)RESTRUCTURING (IV) RELATED PARTY TRANSACTION (V) FLUCTUATING MARGINS (VI) DEVELOPMENT OF SOFTWARE 5 COSMIC GLOBAL (SEG) NO ORAL OBJECTIONS WERE RAISE D 6 DATAMATICS FINANCIAL (SEG) ORAL OBJECTION AS TO T HE USE OF SEGMENTAL DATA WHICH WAS OBTAINED UNDER SECTION 133(6) OF THE ACT. ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 31 OF 45 7 FLEXTRONICS SOFTWARE (SEG.) ORAL OBJECTIONS ON TH E ISSUE OF 133(6) OF THE ACT. 8 GOLDSTONE INFRATECH (SEG) ORAL OBJECTIONS AS TO (I) ISSUE OF 133(6) (II) DIFFERENCE IN FUNCTIONAL PROFILE (III)EXPORT EARNING (IV) ABNORMAL PROFITS 9 MAPLE E-SOLUTION LTD ORAL OBJECTION OF ABNORMALLY HIGH MARGIN WAS TAKEN. HOWEVER, BEFORE THE DRP NO SUCH SPECIFIC OR GENERAL OBJECTION WAS TAKEN BY ASSESSEE. REFERENCE MAY BE MADE TO THE PAPER BOOK VOL. II PAGE 447. 10 R SYSTEMS INTERNATIONAL (SEG) ORAL OBJECTIONS ON THE ISSUE OF 133(6) OF THE ACT. 11 SPANCO LIMITED (SEG.) ORAL OBJECTIONS ON THE ISS UE OF 133(6) OF THE ACT. 12 TRANSWORKS INFORMATION SERVICES LTD THIS WAS USED BY ASSESSEE ALSO. 13 VISHAL INFORMATION TECHNOLOGIES LTD ORAL OBJECTIONS AS TO: I) ABNORMALLY HIGH MARGIN II) FUNCTIONAL PROFILE III) WAGE TO COST RATIO B) THE LEARNED CIT DR HAS FURNISHED DETAILED A RGUMENTS ON VARIOUS OBJECTIONS UNDER THE FOLLOWING HEADS: 1. USE OF COMPARABLES WITH 'ABNORMALLY HIGH MARGI N.' 2 DIFFERENCE IN FUNCTIONAL PROFILE. 3 EXPORT EARNINGS LESS THAN 25% IN THE CASE OF APEX KNOWLEDGE SOLUTIONS P. LTD. AND GOLDSTONE INFRATECH (SEG). 4 RELATED PARTY TRANSACTIONS 5 WAGES TO COST RATIO IN THE CASE OF VISHAL INFOR MATION TECHNOLOGIES LIMITED 6 A MAJOR OBJECTION OF THE ASSESSEE WHICH IS APPLICABLE TO SOME OF THE ABOVE COMPARABLES IS' ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 32 OF 45 COLLECTION OF INFORMATION BY ISSUE OF 133(6) OF TH E ACT'. 1. COMPARABLES EARNING SUPER NORMAL PROFIT THE TAXPAYER'S MAIN ARGUMENT IS THAT THE COMPARABLE S SHOULD BE REJECTED ON THE GROUND THAT IT IS EARNING SUPER- PROFITS. FIRSTLY, THE ASSESSEE DID NOT GIVE THE BASIS ON WHI CH IT CAME TO THE CONCLUSION THAT THE COMPANY EARNED SUPE R PROFITS. SECONDLY, THE ASSESSEE DID NOT POINT OUT ANY PECULI AR ECONOMIC CIRCUMSTANCES THAT LED TO ITS SO-CALLED HI GH PROFITABILITY. THIRDLY, THE TPO HAS ALSO NOT FOUND ANY PECULIAR ECONOMIC CIRCUMSTANCES THAT OCCURRED DURING THE CURRENT FINANCIAL YEAR BASED ON THE INFORMATION AVAILABLE WITH HIM. THUS THE COMPANY CANNOT BE EXCLUDED ONLY BASED ON THE PROFITABILITY. IN THE SAME ANALOGY, THE TAXPAYER SHOULD ALSO HAVE ARGUED FOR LOW MARGIN COMPANIES, WHICH EARNED MARGINS MUCH BELOW THE INDUSTRY AVERAGE. BUT, IT DI D NOT ARGUE ON SUCH LINES FOR REJECTING LOW MARGIN COMPANIES ON THE SAME ANALOGY. THE TPO HAS SELECTED THE COMPANIES ON THE BASIS OF FAR AND NOT ON THE BASIS OF MARGINS OF ANY OF THE COMPANIES. THE ASSESSEE HAS NOT POINTED OUT ANY DEFECT IN THE COMPARABILITY OF SUCH COMPANIES ACCEP T THAT THESE COMPANIES HAVE SUPER NORMAL PROFIT. THE ITA T IN THE CASE OF M/S. EXXON MOBILE COMPANY INDIA PVT LTD IN ITA NO.83111MUM.L2010 AS REPORTED IN (2011-TII-68-MUM-TP) HAS HELD AS UNDER: PARA 33(XI) 'IN OTHER WORDS, AS A GENERAL PRINCIPLE , BOTH LOSS MAKING UNIT AND HIGH PROFIT MAKING UNIT CANNOT BE ELIMINATED FROM THE COMPARABLES UNLESS, THERE ARE (SPECIFIC REASONS FOR ELIMINATING THE SAME WHICH IS OTHER THAN THE GENERAL REASON THAT A COMPARABLE HAS INCUR RED LOSS OR HAS MADE ABNORMAL PROFITS.' ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 33 OF 45 A COPY OF THE RELEVANT PAGES OF THE OECD GUIDELINES ON THIS ISSUE IS ALSO ENCLOSED HEREWITH. 2. DIFFERENCE IN FUNCTIONAL PROFILE IN THE ACCEPT/REJECT MATRIX, IT IS SEEN THAT VERTIC ALS OF IT ENABLED INDUSTRY WAS NOT A CRITERIA FOR REJECTION/A CCEPTANCE OF A COMPANY AS A COMPARABLE. THE COMPANIES ENGAGED IN IT ENABLED SERVICES WERE TREATED AS COMPARABLES IRRESP ECTIVE OF THE VERTICALS (INDUSTRIES TO WHICH IT CATERS) /HORI ZONTALS (FUNCTIONAL LINES LIKE BACK OFFICE OPERATIONS, MEDI CAL TRANSCRIPTION ETC). IT IS CLEAR FROM THE SEARCH STRATEGY DEPICTED IN TH E TP REPORT THAT THE TAXPAYER SEARCHED FOR COMPARABLES WHICH AR E ENGAGED IN IT ENABLED SERVICES IMMATERIAL OF THE VE RTICAL /FUNCTIONAL OR SERVICE LINE IN WHICH THE COMPANY IS ENGAGED. VERTICAL IS THE INDUSTRY SEGMENT LIKE BANKING, FINANCE, INSURANCE, HEALTH CARE, RETAIL, INSURANCE ETC TO WHICH THE SERVICES OF THE COMPANY CATER TO. THE FUNCTIONAL OR SERVICE LINES MAY INCLUDE BUT NOT LIMITED TO BACK OFFICE OPERATIONS, CALL CENTERS, CO NTENT DEVELOPMENT OR ANIMATION; DATA PROCESSING; ENGINEERING AND DESIGN; GEOGRAPHIC INFORMATION SYSTEM SERVICES, HUMAN RESOURCES SERVICES; INSURANCE CLAIM PROCESSING; LEGAL DATABASES; MEDICA L TRANSCRIPTION; PAYROLL; REMOTE MAINTENANCE; REVENUE ACCOUNTING; SUPPORT CENTERS, AND WEB SITE SERVICES. THUS THE TPO ALSO DID NOT GO INTO VERTICALS /FUNCTI ONAL OR SERVICE LINES OF THE COMPARABLE COMPANIES. THE MAIN SEARCH STRATEGY IS TO IDENTIFY THE COMPANIES WHICH ARE ENGAGED IN THE IT ENABLED SERVICES OR ACTIVITY. PLACE RELIANCE ON THE DECISION OF ITA T DELHI IN TH E CASE OF ACT IS ADVISORS PVT. LIMITED IN ITA NO. 5277/DE1L2011 AND ITA NO. 958/DE1L2012. KIND REFERENCE MAY BE MADE TO PAGE 44-46 OF THIS ORDER. 3. EXPORT EARNINGS LESS THAN 25% IN THE CASE OF APEX KNOWLEDGE SOLUTIONS P. LTD. AND GOLDSTONE INFRATECH (SEG). ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 34 OF 45 * COPY OF THE RELEVANT PAGES OF THE APEX KNOWLEDGE SOLUTIONS P. LIMITED IS ATTACHED HEREWITH. IT CAN B E SEEN FROM THE SCHEDULE NO. 13 THAT 100% OF THE REVENUE I S DERIVED FROM THE EXPORTS. * IN THE CASE OF GOLDSTONE INFRATECH (SEG), I RELY ON THE TPO'S ORDER. 4. RELATED PARTY TRANSACTIONS * PLACE RELIANCE ON THE DECISION OF IT A T DELHI IN THE CASE OF ACTIS ADVISORS PVT. LIMITED IN ITA NO. 5277/DE1L 2011 AND ITA NO. 958/DE1L2012. KIND REFERENCE MAY BE MAD E TO PAGE 36-40 OF THIS ORDER. 5. WAGES TO COST RATIO IT HAS BEEN ARGUED THAT IN THE CASE OF VISHAL INFOR MATION TECHNOLOGIES LIMITED, THE WAGES TO COST RATIO IS ONLY 2.35%. THE TPO HAS NOT APPLIED FILTER OF WAGES TO SALES WHILE SELECTING THE COMPARABLES. HENCE THE LOW WAGES TO SALES DOES NOT MAKE ANY DIFFERENCE. 6. OBJECTIONS ON THE ISSUE OF 133(6) OF THE ACT 1. THE TRANSFER PRICING OFFICER COLLECTED INFORMATI ON ABOUT THE COMPARABLE CASES USING THE POWERS U/S 133(6) OF THE IT ACT. SUCH INFORMATION WHICH WAS TO BE USED IN TH E CASE OF THE ASSESSEE WAS PROVIDED TO THE ASSESSEE DURING THE COURSE OF THE PROCEEDINGS U/S 92 OF THE IT ACT (BEF ORE THE PASSING THE ORDER U/S 92CA(3) OF THE IT ACT). THE ASSESSEE HAS RECEIVED THE INFORMATION EITHER THROUGH A SHOW CAUSE NOTICE OR DURING THE COURSE OF THE PROCEEDINGS BEFO RE THE TPO. VARIOUS OBJECTIONS HAVE BEEN RAISED BY THE ASS ESSEE BEFORE THE TPO AND THE DRP ON THIS ISSUE. THE ISSUE S TO BE DECIDED BY THE HONORABLE ITAT UNDER THE FACTS AND CIRCUMSTANCES OF THIS CASE IS AS TO WHETHER THE TPO WAS RIGHT IN USING THE POWERS U/S 133(6) OF THE IT ACT AND WHILE DOING SO HAS HE VIOLATED THE PRINCIPLES OF NA TURAL JUSTICE? 2. WHETHER THE TPO WAS RIGHT IN USING THE POWERS U NDER SECTION 133(6) OF THE IT ACT AND WHILE DOING SO HAS HE VIOLATED THE PRINCIPLES OF NATURAL JUSTICE? ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 35 OF 45 2.1. SECTION 92 OF THE IT ACT ALLOWS AO/ TRANSFER P RICING OFFICER TO PROCEED TO DETERMINE THE ARM'S LENGTH PR ICE (ALP) OF THE INTERNATIONAL TRANSACTION BASED ON THE MATER IAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION/AVAILABLE WITH HIM. SECTION 92C( 1) PRESCRIBES THE METHODS BEING T HE MOST APPROPRIATE METHODS IN DETERMINATION OF ARM'S LENGT H PRICE OF THE INTERNATIONAL TRANSACTION. SECTION 92C (2) PRESCRIBES THE MANNER IN WHICH THE MOST APPROPRIATE METHOD SHALL BE APPLIED. SECTION 92C(3) PRESCRIBES THE CIRCUMSTANCES IN WHICH THE AO CAN DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION AS AGAINST WHAT IS PR ESENTED BY THE ASSESSEE. THE RELEVANT PORTION OF SECTION 92 C(3) IS QUOTED BELOW: '92C(3) WHERE DURING THE COURSE OF ANY PROCEEDING F OR THE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT- (A) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB- SECTIONS (1) AND (2); OR (B) ANY INFORMATION AND DOCUMENT RELATING TO AN INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR (C) THE INFORMATION OR DATA USED IN COMPUTATION OF THE ARM'S LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR (D) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FURNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D , THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARM'S LENGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM: PROVIDED THAT AN OPPORTUNITY SHALL BE GIVEN BY THE ASSESSING OFFICER BY SERVING A NOTICE CALLING ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 36 OF 45 UPON THE ASSESSEE TO SHOW CAUSE, ON A DATE AND TIME TO BE SPECIFIED IN THE NOTICE, WHY THE ARM'S LENGTH PRICE SHOULD NOT BE SO DETERMINED ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN THE POSSESSION OF THE ASSESSING OFFICER.' 2.2. UNDER SECTION 92CA(1), THE AO MAY MAKE A REFERENCE TO TPO, IF HE CONSIDERS IT NECESSARY OR EXPEDIENT SO TO DO, WITH THE PREVIOUS APPROVAL OF T HE COMMISSIONER, FOR COMPUTATION OF ALP OF THE INTERNATIONAL TRANSACTION U/S 92C OF THE IT ACT. SE CTION 92CA(2), (2A), (2B) AND (2C) PRESCRIBES THE PROCEDU RE TO BE ADOPTED BY THE TPO ON RECEIPT OF SUCH REFERENCE. THE TPO PASSES THE ORDER OF COMPUTATION OF ALP U/S 92CA(3) OF THE IT ACT WHICH IS REPRODUCED BELOW: '92CA(3) ON THE DATE SPECIFIED IN THE NOTICE UNDER SUB- SECTION (2), OR AS SOON THEREAFTER AS MAY BE, AFTER HEARING SUCH EVIDENCE AS THE ASSESSEE MAY PRODUCE, INCLUDING ANY INFORMATION OR DOCUMENTS REFERRED TO IN SUB-SECTION (3) OF SECTION 92D AND AFTER CONSIDERIN G SUCH EVIDENCE AS THE TRANSFER PRICING OFFICER MAY REQUIRE ON ANY SPECIFIED POINTS AND AFTER TAKING IN TO ACCOUNT ALL RELEVANT MATERIALS WHICH HE HAS GATHERE D, THE TRANSFER PRICING OFFICER SHALL, BY ORDER IN WRI TING, DETERMINE THE ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION} IN ACCORDANCE WITH SUB-SECTION (3) OF SECTION 92C AND SEND A COPY OF HIS ORDER TO THE ASSESSING OFFICER AND TO THE ASSESSEE. ' 2.3 THE ABOVE SECTIONS MAKE IT ABUNDANTLY CLEAR THA T THE AO OR THE TPO ARE EXPECTED TO GATHER MATERIAL O R INFORMATION OR DOCUMENT OTHER THAN WHAT IS PRODUCED / MAINTAINED BY THE ASSESSEE. SINCE THIS IS THE INTEN TION OF THE LEGISLATION- VERY EXPLICITLY MENTIONED IN SE CTION 92C(3) AND 92CA(3) OF THE IT ACT- THE ACT ITSELF PR OVIDES THE MACHINERY TO GATHER THIS MATERIAL/INFORMATION/ DOCUMENTS. SECTION 92CA(7) GIVES THE POWERS TO THE TPO (IN CASE OF THE AO THESE POWERS NEED NOT BE SPECIFI ED AGAIN UNDER SECTION 92 SINCE AO CAN EXERCISE THESE POWERS NATURALLY UNDER SECTION 131, 133 AND 133A OF THE IT ACT). THIS SUB SECTION IS REPRODUCED BELOW: '92CA(7) THE TRANSFER PRICING OFFICER MAY, FOR THE PURPOSES OF DETERMINING THE ARM'S LENGTH PRICE UNDE R THIS SECTION, EXERCISE ALL OR ANY OF THE POWERS SPE CIFIED ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 37 OF 45 IN CLAUSES (A) TO (D) OF SUB-SECTION (1) OF SECTION 131 OR SUB-SECTION (6) OF SECTION 133 OR SECTION 133A. EXPLANATION.-FOR THE PURPOSES OF THIS SECTION, 'TRA NSFER PRICING OFFICER' MEANS A JOINT COMMISSIONER OR DEPU TY COMMISSIONER OR ASSISTANT COMMISSIONER AUTHORISED B Y THE BOARD TO PERFORM ALL OR ANY OF THE FUNCTIONS OF AN ASSESSING OFFICER SPECIFIED IN SECTIONS 92C AND 92D IN RESPECT OF ANY PERSON OR CLASS OF PERSONS. ' 2.4 NOW, THE POWER U/S 133(6) READS AS FOLLOWS: SECTION 133- THE ASSESSING OFFICER, THE DEPUTY COMMISSIONER (APPEALS), THE JOINT COMMISSIONER OR T HE COMMISSIONER (APPEALS)] MAY, FOR THE PURPOSES OF TH IS ACT,- (6) REQUIRE ANY PERSON, INCLUDING A BANKING COMPANY OR ANY OFFICER THEREOF, TO FURNISH INFORMAT ION IN RELATION TO SUCH POINTS OR MATTERS, OR TO FURNISH STATEMENTS OF ACCOUNTS AND AFFAIRS VERIFIED IN THE MANNER SPECIFIED BY THE ASSESSING OFFICER, THE DEPU TY COMMISSIONER (APPEALS), THE JOINT COMMISSIONER OR T HE COMMISSIONER (APPEALS)], GIVING INFORMATION IN RELA TION TO SUCH POINTS OR MATTERS AS, IN THE OPINION OF THE ASSESSING OFFICER, THE DEPUTY COMMISSIONER (APPEALS ), THE JOINT COMMISSIONER OR THE COMMISSIONER (APPEALS )], WILL BE USEFUL FOR, OR RELEVANT TO, ANY ENQUIRY OR PROCEEDING UNDER THIS ACT. 2.5 UNDER THE ABOVE SCHEME OF THINGS, THE TPO HAS USED THE POWERS UNDER SECTION 92CA(7) R.W. SECTION 133(6) TO GATHER THE INFORMATION. IT IS IMPORTANT T O NOTE THAT THE TPO HAS SUPPLIED THE INFORMATION SO GATHER ED TO THE ASSESSEE AND ONLY AFTER GIVING AN OPPORTUNIT Y OF BEING HEARD THE TP ORDER IS PASSED. THE TPO HAS ISS UED A SHOW CAUSE NOTICE WHICH CONTAINS ALL THE INFORMAT ION! DOCUMENT WHICH HE INTENDS TO USE IN THE CASE OF THE ASSESSEE. ASSESSEE HAS ALSO REPLIED TO THIS SHOW CA USE NOTICE AND ONLY AFTER CONSIDERATION OF SUCH REPLY T HE TPO HAS PASSED THE ORDER. IT IS NOT THE CASE OF THE ASSESSEE THAT THE INFORMATION COLLECTED IS USED WIT HOUT PUTTING IT ACROSS TO THE ASSESSEE BEFORE PASSING TH E ORDER. 2.6 THE NATURE OF THE POWERS UNDER CHAPTER XIIIC IS SUBJECT MATTER OF MANY JUDGMENTS OF THE COURTS IN T HIS ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 38 OF 45 COUNTRY. THE RELEVANT DECISIONS ARE DISCUSSED BELOW : A. THE DECISION OF THE HON'BLE HIGH COURT OF GUWAHA TI IN THE CASE OF COMMISSIONER OF INCOME-TAX V. SMT. AMIY A BALA PAUL (1999) 240 ITR 0378 CAN BE RELIED UPON TO UNDERSTAND THE NATURE OF THIS POWER UNDER SECTION 133(6). THE JUDGMENT WAS DELIVERED IN THE CONTEXT O F CALLING FOR THE VALUATION REPORT UNDER SECTION 133( 6) OF THE IT ACT BY THE AO. THE RELEVANT PORTION OF THE JUDGMENT IS QUOTED BELOW: IN VIEW OF THE DECISIONS REFERRED TO IN THIS JUDGME NT AND IN THE DISCUSSION HELD ABOVE, WE ARE OF THE VIEW TH AT THE ASSESSING AUTHORITY WOULD BE QUITE COMPETENT TO CALL FOR THE REPORT ON THE VALUATION OF THE COST OF CONS TRUCTION FROM THE VALUATION OFFICER IN VIEW OF THE PROVISION S UNDER SECTIONS 131, 133(6) AND 142(2) OF THE INCOME -TAX ACT. THESE ARE THE ENABLING MACHINERY PROVISIONS WH ICH VEST AMPLE POWERS IN THE ASSESSING AUTHORITY, ANY WRONG MENTION OF PROVISION ON THE REQUISITION MEMO WILL NOT BE MATERIAL. ' AS DECIDED IN THE CASE OF COMMISSIONER OF INCOME-TA X V. SMT. AMIYA BALA PAUL (SUPRA) THE INCOME TAX ACT HAS VARIOUS MACHINERY PROVISIONS FOR IMPLEMENTATION OF THE ACT. SOME OF THE POWERS ARE CLEARLY ADMINISTRATIVE POWERS. B. IN THE CASE OF C. VASANTLAL & CO. VS. CIT (1962) 45 ITR 206 THE HON'BLE SUPREME COURT HAS MADE THE FOLLOWING OBSERVATION: '7 ..... THE INCOME TAX OFFICER IS NOT BOUND BY ANY TECHNICAL RULES OF THE LAW OF EVIDENCE. IT IS OPEN TO HIM TO COLLECT MATERIALS TO FACILITATE ASSESSMENT EVEN BY PRIVATE ENQUIRY. BUT IF HE DESIRES TO USE THE MATERIAL SO COLLECTED, THE ASSESSEE MUST BE INFORMED OF THE MAT ERIAL AND MUST BE GIVEN AN ADEQUATE OPPORTUNITY OF EXPLAINING IT. ' 2.8 THEREFORE, IT CAN BE SAFELY SAID THAT THE INCOM E TAX ACT DOES NOT EXPECT THE AO OR THE TPO TO TAKE THE V IEWS OF THE ASSESSEE AT THE TIME OF COLLECTION OF THE INFORMATION. IF THIS WERE NOT SO, THEN, THE ACT WOU LD HAVE SPECIFIED AS SUCH. THIS WILL BECOME CLEARER BY READING THE PROVISO TO SECTION 92C(3) OF THE ACT WH ICH ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 39 OF 45 CLEARLY MANDATES THE AO TO PROVIDE AN OPPORTUNITY TO THE ASSESSEE BY SERVING A NOTICE CALLING UPON THE ASSESSEE TO SHOW CAUSE, ON A DATE AND TIME TO BE SPECIFIED IN THE NOTICE, WHY THE ALP SHOULD NOT BE SO DETERMINE ON THE BASIS OF MATERIAL OR INFORMATION O R DOCUMENT IN THE POSSESSION OF THE AO. IN THE SAME W AY, THE ACT PROVIDES UNDER SECTION 92CA(3) THAT THE TPO TO DETERMINE THE ALP UNDER SUB SECTION 3 OF SECTION 92 C. 2.9 WHEN THE VERY SECTION ITSELF PROVIDES THE MECHA NISM OF PROVIDING OPPORTUNITY OF BEING HEARD, THERE IS NO NEED NOT GO FOR ANY OTHER MEASURES OR IDEAS, ONCE T HE ACTION OF THE TPO IS IN CONFORMITY WITH THE LETTER S AND SPIRIT OF THE SECTION. 2.10 THE INCOME TAX ACT UNDER SECTION 92C(1) AND (2 ) PROVIDES SIX METHODS TO DETERMINE THE ALP OF AN INTERNATIONAL TRANSACTION. THE CENTRAL BOARD OF DIR ECT TAXES HAS PRESCRIBED RULE 1OB FOR THIS PURPOSE. THE RELEVANT FACTORS FOR COMPARABILITY OF THE INTERNATI ONAL TRANSACTION AND A COMPARABLE TRANSACTION ARE GIVEN IN SECTION 92C AS WELL AS RULE 1OB. IN THE PRESENT CAS E, TNMM IS USED AS THE MOST APPROPRIATE METHOD. THE CHARACTERISTICS OF THE APPELLANT, ITS FUNCTIONS, AS SETS EMPLOYED AND RISK UNDERTAKEN ARE IDENTIFIED TO FIND OUT SIMILAR CASES OF UNCONTROLLED TRANSACTION IN THE MA RKET. RULE 1OB(2)( D) ALSO MANDATES THE FOLLOWING: 'CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INC LUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOU R AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER TH E MARKETS ARE WHOLESALE OR RETAIL. ' 2.11 RULE 10B(2) MANDATES THE AO OR TPO TO GATHER INFORMATION ABOUT THE CONDITIONS PREVAILING IN THE MARKET INCLUDING THE SIZE OF THE MARKET, COSTS OF L ABOUR AND CAPITAL IN THE MARKET, THE LAWS OF GOVERNMENT ORDERS IN FORCE, WHOLESALE MARKET OR RETAIL MARKET, LEVEL OF COMPETITION IN THE MARKET. APART FROM THE ABOVE, THE TPO SHOULD JUDGE HAVING REGARD TO THE OVERALL ECONO MIC DEVELOPMENT OF THE MARKET. ALL THESE ENVISAGE GATHE RING OF INFORMATION ABOUT THE MACRO ECONOMIC FACTORS PREVAILING IN THE MARKET. IF A REVENUE OFFICER IS E XPECTED TO ACCEPT BLINDLY WHATEVER WAS PRODUCED BY THE ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 40 OF 45 TAXPAYER AS CORRECT, THEN, THE MACHINERY PROVISIONS LIKE SECTION 133(6) OR EVEN THE WORDINGS OF SECTIONS LIK E MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSI ON BECOMES REDUNDANT. 2.12. IN THE PRESENT CASE, THROUGH USE OF NOTICES U /S 133(6) THE TPO HAS COLLECTED INFORMATION ABOUT THE THIRD PARTIES WITHOUT ANY REFERENCE TO THE ASSESSEE IN QUESTION. SUCH THIRD PARTIES ARE ASKED SPECIFIC QUE STIONS REGARDING THEIR OWN ACTIVITIES. THE INFORMATION SOU GHT IS SUCH THAT WAS EASILY AVAILABLE WITH THOSE COMPANIES . THIS INFORMATION IS FOR FILLING THE GAPS IN UNDERST ANDING THE NATURE OF ACTIVITIES OF THESE COMPARABLE CASES AND FOR FURTHER CLASSIFICATION FOR COMPARABILITY. 2.13 FURTHER, THE INFORMATION SO COLLECTED IS GENER AL IN NATURE. THEY ARE EASILY AVAILABLE WITH THE COMPANIE S. FOR WHATSOEVER REASON, THIS INFORMATION WAS NOT REA DILY AVAILABLE IN THE PUBLIC DOMAIN AND THEREFORE THE TP O OBTAINED THIS INFORMATION FROM THESE COMPANIES DIRE CTLY. 2.14. THE RELEVANT MATERIAL SO GATHERED IS GIVEN TO THE ASSESSEE FOR THEIR REBUTTAL, OBSERVING THE PRINCIPL E OF NATURAL JUSTICE. THEREFORE, EVEN UNDER THE STRICT PARAMETERS OF THE ABOVE JUDGMENTS THE ACTION OF THE TPO CANNOT BE FAULTED. 2.15 NO CONFIDENTIAL INFORMATION WAS CONSIDERED/USE D BY THE TPO AS ALL THE COMPANIES CONSIDERED IN ACCEP T REJECT MATRIX OF THE TPO ARE SEARCHED FROM THE TWO WIDELY KNOWN PUBLIC DATABASES I.E. PROWESS AND CAPITALINE. THE TPO HAD ISSUED THE NOTICES U/S 133(6) TO GATHER THE INFORMATION TO ARRIVE AT FAR OF THOSE COMPANIES. IN MANY CASES REPLIES WERE RECEIVED FOR THE NOTICES U/S 133(6). THE TPO HAS SUPPLIED THE REPLIES TO THE NOTICES RECEIVED ALONG WITH THE COPIES OF THE N OTICES TO THE ASSESSEE IN ALL THE CASES WHICH WERE USED AS COMPARABLES IN THE APPELLANTS OWN CASE. FROM THE READING OF THE ORDER OF THE TPO THAT ONLY AFTER APP LYING THE FILTERS, THE TPO HAS RESORTED TO ISSUE OF NOTIC ES UNDER SECTION 133(6) TO OBTAIN CERTAIN MISSING INFORMATION. THE TPO HAS SHARED ALL THE INFORMATION WHICH HE HAD GATHERED INFORMATION UNDER SECTION 133 (6) WITH ASSESSEE IN RESPECT OF THE ACCEPTED/REJECTED COMPANIES. BASED ON THE ABOVE DISCUSSION, IT CAN BE STATED THA T THE TPO IS MANDATED BY LAW TO COLLECT SUCH INFORMATION AND THE DOCUMENTS. ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 41 OF 45 C) THE LEARNED DR ALSO SUBMITTED THAT THE TPO HAS P OWER TO COLLECT INFORMATION UNDER SECTION 133(6) BY VIRTUE OF THE STATUTE AND ASSESSEE CANNOT QUESTION THE OBTAINING OF INFORMATI ON IN THE COURSE OF PROCEEDINGS. HE RELIED ON VARIOUS PROVISIONS TO SUPPORT THAT THE TPO HAS POWERS TO OBTAIN INFORMATION. HE ALSO RELIE D ON THE JUDGMENT IN THE CASE OF ACTIS ADVISERS PVT LTD VS. DY. CIT IN ITA NO.5277/DEL/2011 AND ITA NO.958/KOL/2012 FOR THE PR OPOSITION THAT DISSECTION ON FUNCTIONAL LINE TEST OR VERTICAL CANNOT BE PERMITTED AS THERE WILL BE NO END TO THE PROCESS AN D IT IS VERY SUBJECTIVE EXERCISE. D) WITH REFERENCE TO THE WORKING CAPITAL ADJUST MENT, SINCE IT IS A COMPUTATIONAL ERROR BEING POINTED OUT BY THE LEARNE D COUNSEL, HE HAS NO OBJECTION IF THE MATTER IS RESTORED FOR VERI FICATION OF THE CALCULATION/COMPUTATION. E) WITH REFERENCE TO THE RISK ADJUSTMENT IT WAS S UBMITTED THAT THE PURPOSE OF RISK ADJUSTMENT WAS TO CONSIDER WHETHER ASSESSEE IS BEARING MORE/ LESS RISK THAN THE COMPARABLE COMPANI ES. EVEN THOUGH ASSESSEE HAS RAISED OBJECTION BEFORE THE TPO , IT WAS SUBMITTED THAT NO DATA ON THE DIFFERENCES IN THE RI SK PROFILE HAS BEEN MADE BY ASSESSEE IN TP STUDY NOR QUANTIFIED TH E RISK. ASSESSEE USED THE ARBITRAGE BETWEEN THE PRIME LENDING RATE F OR 2006 AND BANK RATE FOR 2006 AT 4.50% AS ADJUSTMENT ON ACCOUN T OF DIFFERENCES. HE OBJECTED TO THE WORKING OF THE RIS K ADJUSTMENT ON THE BASIS OF THE EARNING RATES AS IT HAS NO CONNECT ION WITH THE RISK BEARING CAPACITY OF ENTITIES AND SINCE ASSESSEE HAS NOT DISCHARGED THE INITIAL ONUS TO FILE THE REQUISITE INFORMATION PERTAINING TO THE CLAIM, THE RISK ADJUSTMENT CANNOT BE ALLOWED TO ASS ESSEE. 24. WE HAVE CONSIDERED THE DETAILED SUBMISSIONS MAD E BY THE LEARNED COUNSEL AND THE LEARNED DR. AT THE OUTSET W E HAVE NOTED ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 42 OF 45 THAT THE INFORMATION OBTAINED BY AO BY WRITING TO V ARIOUS COMPANIES WHILE SELECTING THE COMPARABLES HAS NOT B EEN PROVIDED TO ASSESSEE AT ALL. ASSESSEE HAS RAISED THESE OBJECTIO NS NOT ONLY BEFORE THE TPO BUT ALSO BEFORE THE DRP. SINCE INFORMATION RELIED UPON BY THE TPO IS NOT AVAILABLE IN PUBLIC DOMAIN, IT IS IN CUMBENT ON THE TPO TO FURNISH THE RELEVANT INFORMATION TO ASSESSEE . IN A CASE WHERE THE INFORMATION IS NOT FURNISHED TO ASSESSEE IT BEC OMES SECRET INFORMATION WHICH CAN NOT BE USED AGAINST ASSESSEE. MOST OF THE OBJECTIONS RAISED BY ASSESSEE WITH REFERENCE TO THE SELECTION OF COMPARABLES BY THE TPO ARE WITH REFERENCE TO THE IN FORMATION NOT AVAILABLE IN THE PUBLIC DOMAIN, BUT OBTAINED BY TPO AND ALSO WITH THE VARIOUS FILTERS CONSIDERED BY THE TPO IN REJECT ING ASSESSEES COMPARABLES. WE ALSO NOTICE THAT THERE IS NO UNIFOR MITY IN REJECTION OF ASSESSEES COMPARABLES AND SELECTION OF COMPARAB LES BY THE TPO (A) ON THE REASON THAT VARIOUS FILTERS CONSIDERED B Y THE TPO HIMSELF HAS NOT BEEN FOLLOWED AND (B) THAT SOME OF THE COMP ANIES SELECTED BY ASSESSEE WERE REJECTED ON UNREASONABLE GROUNDS ( LOSS MAKING COMPANY ETC). IN ORDER TO COMPARE A COMPANY WITH A SSESSEE, AND TO BENCHMARK THE SAME, PROPER AND APPROPRIATE FAR ANAL YSIS IS REQUIRED TO BE DONE AND WHEN ASSESSEE HAS GIVEN DET AILED OBJECTIONS BOTH TO THE TPO AS WELL AS TO THE DRP, I T IS INCUMBENT ON THEM TO REBUT THE OBJECTIONS. IT IS NOT PROPER TO R EJECT ALL THE OBJECTIONS WITHOUT DISCUSSING THEM IN THE ORDER. WE ALSO NOTICE THAT ASSESSEE HAS GIVEN DETAILED OBJECTIONS. THERE WAS N O DISCUSSION AT ALL BY THE DRP ON THESE OBJECTIONS. AS FAR AS THE W ORKING CAPITAL ADJUSTMENT IS CONCERNED, HOW THE SAME WAS ARRIVED A T COULD NOT BE ANALYZED BY US. EVEN THE LEARNED CIT (DR) HAS ALSO ACCEPTED THAT THIS ISSUE MAY BE REMITTED TO THE TPO FOR FRESH EXA MINATION. 25. WITH REFERENCE TO THE RISK ADJUSTMENT SO SOUGH T BY ASSESSEE, THERE IS MERIT IN THE CIT DRS ARGUMENT THAT ASSESS EE HAS NOT PROVIDED ANY RISK ADJUSTMENT IN TP STUDY SUBMITTED BY THEM. IN ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 43 OF 45 OUR VIEW, THE CLAIM FOR RISK ADJUSTMENT IS ONLY TO MAKE ADJUSTMENTS TO THE ALP SO AS TO LEVERAGE THE PROFIT MARGIN/PROF IT ON COST MARGIN. THE ACTION OF AO IN CHERRY PICKING THE COMPARABLES WHICH HAS HIGH PROFIT MARGIN AND IGNORING THE LOW PROFIT MARGIN CO MPANIES AND ALSO ASSESSEES CONTENTION ABOUT THE RISK ADJUSTMENT SO AS TO LEVERAGE THE MARGIN CANNOT BE ACCEPTED. IN FACT, ALL COMPANI ES CONDUCTING BUSINESS WILL HAVE THE SAME RISK I.E MARKET RISK, C USTOMER RISK, GOVERNMENT POLICY RISK ETC. AND THERE MAY BE VARIAT IONS IN THE EXTENT OF RISK, BUT RISK IS ASSOCIATED WITH CONDUCT ING BUSINESS. UNLESS THE RISK IS QUANTIFIED IN CERTAIN OBJECTIVE MANNER AND CAN BE REPRESENTED BY WAY OF NUMBERS, IT IS VERY DIFFICULT TO MAKE ADJUSTMENT ON PRESUMPTIONS AND SURMISES. UNLESS THE RISK ADJUSTMENT IS QUANTIFIED IN A SCIENTIFIC MANNER, TH IS ASPECT CAN ONLY BE EXAMINED IN THE FAR ANALYSIS. IN FACT IT IS THE DUTY OF ASSESSEE AS WELL AS THE TPO TO CONDUCT A PROPER FAR ANALYSIS SO THAT THE RIGHT COMPARABLES ARE SELECTED. ONCE THE COMPARABLES ARE ACCEPTED AND SELECTED, EXCEPT FOR THE WORKING CAPITAL ADJUSTMENT AND SOME OTHER ADJUSTMENTS AS MAY BE REQUIRED, WE ARE OF THE OPINI ON THAT NO FURTHER RISK ADJUSTMENT NEED TO BE MADE. IN VIEW OF THIS, WE ARE NOT FULLY AGREEING WITH ASSESSEES CONTENTIONS AS FAR A S RISK ADJUSTMENT IS CONCERNED. FURTHER, THERE IS NO CORRELATION WITH BANK LENDING RATES AND RISKS INVOLVED AS CLAIMED BY ASSESSEE. 26. THE LD.CIT DR MADE EFFORTS TO SUPPORT THE ORDE R OF TPO ON OBTAINING INFORMATION. WHILE AGREEING WITH HIS ARGU MENTS ON POWER OF AO/TPO IN OBTAINING INFORMATION U/S 133(6), ON W HICH THERE IS NO DISPUTE, WHAT IS OBJECTED TO BY ASSESSEE IS NOT PROVIDING SUCH INFORMATION TO IT. THERE IS NOTHING ON RECORD TO SU GGEST THAT INFORMATION SO OBTAINED BY TPO WAS MADE AVAILABLE T O ASSESSEE SO AS TO ANALYZE AND ACCEPT OR REJECT A COMPANY AS COM PARABLE. ASSESSEE COUNSEL SPECIFICALLY REFERRED TO THE SUBMI SSIONS MADE TO TPO AND DRP ON THIS ISSUE. WE ARE OF THE OPINION TH AT PRINCIPLES OF ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 44 OF 45 NATURAL JUSTICE HAVE NOT BEEN COMPLIED WITH BY AUTH ORITIES IN SELECTION OF COMPARABLES AND DETERMINING THE ALP. 27. SINCE ASSESSEE WAS NOT BEEN GIVEN PROPER OPP ORTUNITY TO EXAMINE THE COMPARABLES SELECTED BY THE TPO AND AS THE OBJECTIONS RAISED BY ASSESSEE ARE NOT EXAMINED OR REBUTTED EIT HER BY THE TPO OR BY DRP AND CONSIDERING THE FACT THAT THE INFORMA TION OBTAINED BY THE TPO WITH REFERENCE TO CERTAIN COMPARABLES AND S EGMENTAL DATA WAS NOT EVEN MADE AVAILABLE TO ASSESSEE, WE ARE OF THE OPINION THAT THE ISSUE HAS TO BE SET ASIDE TO THE FILE OF THE TP O FOR DETERMINING THE ALP AFRESH AFTER PROVIDING THE INFORMATION TO A SSESSEE WHICH WAS COLLECTED BY TPO. WE DO NOT INTEND TO GO INTO M ERITS OF ARGUMENTS RAISED BY RIVAL PARTIES IN SELECTION OF C OMPARABLES AS THE INFORMATION COLLECTED BY TPO WAS NOT PLACED ON RECO RD AND THE OBJECTIONS OF ASSESSEE ARE BASED ON PUBLICLY AVAILA BLE DATA. THE ANALYSIS OF ACCEPTANCE OR REJECTION OF COMPARABLES ON INCOMPLETE DATA MAY RESULT IN SKEWED RESULTS. THEREFORE, WE L EAVE THE MATTER TO THE DOMAIN OF TPO TO GIVE OPPORTUNITY TO ASSESSE E AND ANALYZE THE OBJECTIONS IN AN OBJECTIVE MANNER. THE TPO WILL BE FREE TO MAKE FAR ANALYSIS AGAIN OF THE COMPARABLES SELECTED BY T HE ASSESSEE AND TPO AND CAN CONSIDER THE ISSUE OF DETERMINING THE A LP AFRESH. FOR THIS PURPOSE, WE SET ASIDE THE ORDER OF THE DRP-II AND THE ORDER OF THE TPO AND RESTORE THE ISSUE TO THE FILE OF THE TP O TO MAKE SELECTION OF COMPARABLES AFRESH AND DETERMINING THE ALP AFTER GIVING DUE OPPORTUNITY TO ASSESSEE. THEREAFTER, AO CAN PROPOSE THE DRAFT ASSESSMENT ORDER AND IF ANY OBJECTIONS ARE ST ILL RAISED BY ASSESSEE, THESE CAN BE CONSIDERED BY THE DRP IN THE LIGHT OF THE PROVISIONS OF THE ACT. WITH REFERENCE TO THE WORKIN G CAPITAL AND RISK ADJUSTMENTS ALSO, THE ISSUE IS RESTORED TO THE FILE OF THE TPO AFRESH WHO SHOULD CONSIDER ASSESSEES CONTENTIONS, WITHOUT BEING INFLUENCED BY THE OBSERVATIONS MADE ABOVE. WITH THE SE REMARKS THE ORDER OF AO, THE DRP-II AND TPO ARE SET ASIDE. THE MATTER WAS ITA NO.8772 OF 2010 WILLS PROCESSING SERVICES (I) L TD. MUMBAI PAGE 45 OF 45 RESTORED TO THE FILE OF THE TPO TO DO IT AFRESH. AC CORDINGLY GROUND NO.4 IS CONSIDERED ALLOWED FOR STATISTICAL PURPOSES . 28. GROUND NO.5 IS WITH REFERENCE TO THE INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) WHICH DOES NOT ARISE FOR CONSIDERATION AT THIS MOMENT. THEREFORE, THE GROUND IS REJECTED. 29. IN THE RESULT APPEAL FILED BY ASSESSEE IS CONSI DERED PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH DECEMBER, 2012. SD/- SD/- (AMIT SHUKLA) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 7 TH DECEMBER, 2012. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, K BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI