Exevo India Pvt. Ltd., New Delhi V. ITO, New Delhi

ITA 907/DEL/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6775 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 27-04-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 22-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Rule of consistency; Initiation of penalty proceedings; Wholly owned subsidiary; Unabsorbed depreciation
• Section: 234B; 32; 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I, NEW DELHI BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER I.T.A. NO.907/DEL/2016 (ASSESSMENT YEAR: 2011-12) EXEVO INDIA PVT. LTD., VS. ITO, WARD 8(4), UNIT NO.216, SECOND FLOOR, NEW DELHI SQUARE ONE, C-2, DISTRICT CENTRE, SAKET, NEW DELHI. GIR / PAN :AABCE0738K (APPELLANT) (RESPONDENT) APPELLANT BY :SHRI DEEPAK CHOPRA, ADV. SHRI HARPREET SINGH, ADV. SHRI ROHAN KHARE, ADV. RESPONDENT BY :SHRI AMRENDRA KUMAR, CIT DR DATE OF HEARING: 27.04.2016 DATE OF PRONOUNCEMENT: 25.07.2016 ORDER PER BEENA A. PILLAI, JM: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE FINAL ASSESSMENT ORDER DATED 21/01/2016 , PASSED BY ITO, WARD 8(4), U/S.143(3), READ WITH SEC TION 144C OF THE ACT. 2. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION ON 28/11/2011, DECLARING TOTAL INCOME OF RS. 75,30,750/-. SUBSEQUENTLY THE ASSESSE E REVISED ITS RETURN ON 20 TO NOVEMBER 2012 DECLARING AN INCOME OF RS.19,97,189/-. THE RETURN WAS SELECTED U NDER 2 I.T.A.NO. 907/DEL/2016. SCRUTINY AND NOTICES UNDER SECTION 143(2) OF THE AC T WAS ISSUED. THE LD.AO OBSERVED THAT ASSESSEE HAS ENTERE D INTO INTERNATIONAL TRANSACTION DURING THE FINANCIAL YEAR 2010- 11. A REFERENCE WAS THUS MADE UNDER SECTION 90 2C ( 1) BY THE LD. AO TO THE TRANSFER PRICING OFFICER-1 (3) (T PO) TO DETERMINE THE ARMS LENGTH PRICE (ALP) OF THE INTER NATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE. 2.1 THE LD. TPO ISSUED NOTICE CALLING FOR VARIOUS D ETAILS FROM THE ASSESSEE. THE ASSESSEE ACCORDINGLY FILED DOCUMENTATION PRESCRIBED UNDER RULE 10 D OF THE INC OME TAX RULES AND OTHER DETAILS SOUGHT BY THE LD.TPO. T HE LD.TPO OBSERVED THAT ASSESSEE HAD PROVIDED INFORMAT ION TECHNOLOGY ENABLED SERVICES TO ITS AE, WHICH IS AS UNDER: S. N . NATURE OF TRANSACTION METHO D AMOUNT (INR) NO.OF COMP ARABL ES ARMS LENGTH RESULT RESULT OF ASSESSE E 1 PROVISION OF INFORMATION TECHNOLOGY ENABLED SERVICES TNMM 202,507,139 12 12.68 % 17.00% 2.2 THE ASSESSEE HAD USED THE TRANSACTIONAL NET MAR GIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) TO BENCHMARK THE INTERNATIONAL TRANSACTION. THE ASSESS EE USED OPERATING PROFITS TO OPERATING COST (OP/OC) AS THE PROFIT LEVEL INDICATOR (PLI) TO DETERMINE THE MARGI N OF THE COMPARABLES. 3 I.T.A.NO. 907/DEL/2016. 2.3 THE LD.TPO HAS NOT OBJECTED THE MAM AND THE PLI CALCULATED BY THE ASSESSEE. THE ONLY ISSUE THAT HAS BEEN DISPUTED BY THE LD.TPO IS IN RESPECT OF THE SELECTI ON OF COMPARABLES. FOLLOWING ARE THE SET OF COMPARABLES SELECTED BY THE ASSESSEE FOR ITES SEGMENT. S.NO. NAME OF THE COMPANY REMARKS 1 CALIBER POINT BUSINESS SOLUTIONS LTD. THIS COMPANY IS HAVING DIFFERENT FINANCIAL YEAR ENDING I.E. DECEMBER. HENCE, CANT BE CONSIDERED AS SUITABLE COMPARABLE. 2 CG-VAK SOFTWARE & EXPORTS LTD. INCOME FROM BPO BUSINESS IS LESS THAN RS.1 CRORE. HENCE, NOT A SUITABLE COMPARABLE. 3 COSMIC GLOBAL LTD. THIS COMPANY FAILS EXPORT FILTER (52.96%). HENCE, NOT A SUITABLE COMPARABLE. 4 INFORMED TECHNOLOGIES LTD. THIS COMPANY IS HAVING SALE BELOW S.5 CRORES. HENCE, NOT A SUITABLE COMPARABLE. 5 INFOSYS BPO LTD. THIS IS A SUITABLE COMPARABLE 6 JINDAL INTELLICOM PVT. LTD. THIS IS A SUITABLE COMPARABLE. 7 MICROGENETICS SYSTEMS LTD. THIS COMPANY IS HAVING SALES BELOW RS.5 CRORES. HENCE, NOT A SUITABLE COMPARABLE. 8 R SYSTEMS INTERNATIONAL LTD THIS COMPANY IS HAVING DIFFERENT FINANCIAL YEAR ENDING I.E. DECEMBER. HENCE, CANT BE CONSIDERED AS SUITABLE COMPARABLE. 2.4 THE LD.TPO REJECTED THE COMPARABLES SELECTED BY THE ASSESSEE BY APPLYING CERTAIN COMPARABLES A CRITERIA SUCH AS TURNOVER FILTER, THERE COMPANIES LESS THAN 5 CRO RES WERE REJECTED, THE COMPANIES WHERE MULTIPLE YEAR DATA HA S 4 I.T.A.NO. 907/DEL/2016. BEEN USED, COMPARABLES WHERE EMPLOYEE COSTS WAS LES S THAN 25% OF THE TOTAL COST, COMPARABLES WHERE THE R ELATED PARTY TRANSACTIONS EXCEEDED 25% OF SALES AND COMPARABLES WITH DIFFERENT FINANCIAL YEAR DATA. THE LD.TPO IN TURN SELECTED ADDITIONAL COMPARABLES WHERE THE R ATIO OF SERVICE INCOME TO TOTAL INCOME WAS 75%, WHERE THE I NCOME FROM EXPORT WAS 75%. THE LD.TPO THUS ARRIVED AT A N EW SET OF COMPARABLES WHICH INCLUDED SOME OF THE COMPARABLES SELECTED BY THE ASSESSEE. THE COMPARABL ES SHORTLISTED BY THE TPO ARE AS UNDER: S.NO. NAME OF THE COMPANY OP/OC % 1 ACCENTIA TECHNOLOGIES LTD. 29.18 2 E4E HEALTHCARE BUSINESS SERVICES PVT. LTD. 9.77 3 ECLERX SERVICES LTD. 56.82 4 ICRA TECHNO ANALYTICS LTD. (SEGMENT) 25.54 5 INFOSYS BPO LTD. 17.86 6 JINAL INTELLICOM LTD., 13.70 7 TCS E-SERVE LIMITED 69.31 AVERAGE 31.74 2.5 THIS LED TO THE PROPOSAL FOR A TRANSFER PRICING ADJUSTMENT IN RESPECT OF ITES SEGMENT SERVICE AMOUN TING TO RS.2,55,12,456/-. 2.6 THEREAFTER THE ASSESSEE CARRIED THE MATTER BEFO RE THE DISPUTE RESOLUTION PANEL (DRP)-I, NEW DELHI. THE DR P UNDER SECTION 144C (5) OF THE IT ACT, 1961, GAVE DI RECTIONS 5 I.T.A.NO. 907/DEL/2016. ON 7/12/2015, DETERMINING THE TOTAL INCOME AT RS.2,55,12,456. THE DRP HOWEVER UPHELD OBJECTIONS O F THE ASSESSEE IN RESPECT OF ECLERX SERVICES LTD, ICR A TECHNO ANALYTICS LTD., AND EXCLUDED THESE COMPANIES FROM THE LIST OF COMPARABLES. THE DRP CONFIRMED THE ADDITION MADE BY THE LD.TPO IN RESPECT OF FOREIGN EXCHANGE FLUCTUATION WHILE COMPUTING THE OPERATING MARGINS OF THE COMPARABLE COMPANIES AS WELL AS THE ASSESSEE. ON RECEIPT OF THE DIRECTIONS PASSED BY TH E DRP, THE LD. AO PASSED THE ASSESSMENT ORDER ON 21/01/201 6, MAKING THE IMPUGNED ADDITIONS. 3. AGGRIEVED BY THE ORDER OF THE LD.AO THE ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS: 1. THAT ON FACTS AND IN LAW, THE IMPUGNED ORDER/DIRECTIONS PASSED BY THE INCOME TAX OFFICER, WARD - 8(4), NEW DELHI ('LEARNED AO')/ DEPUTY COMMISSIONER OF INCOME TAX - TRANSFER PRICING OFFIC ER - 1 (2)(1) {ERSTWHILE TPO 1 (3)}, NEW DELHI ('LEARN ED TPO')/ HON'BLE DISPUTE RESOLUTION PANEL ('HON'BLE DRP'), MAKING AN ADDITION OF INR 21,057,956 TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF ADJUSTM ENT IN THE ARM'S LENGTH PRICE IS BAD IN LAW. 2 THAT ON FACTS AND IN LAW, THE LD. DRP/TPO/AO HAVE ERRED IN COMPUTING THE TOTAL INCOME OF THE APPELLANT AT INR 26,456,900/- AS AGAINST THE RETURNED INCOME OF INR 1,997,189 BY MAKING AN UPWARD ADJUSTMENT OF INR 24,459,711/- WITH RESPECT TO ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACT ION. 3 THAT ON FACTS OF THE CASE AND IN LAW, THE LD. DRP/ TPO /AO HAVE ERRED IN LAW AND IN FACTS, BY NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES AND CONDUCTING A FRESH ECONOMIC 6 I.T.A.NO. 907/DEL/2016. ANALYSIS FOR THE DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTIONS PERTAINING TO IT ENABLED SERVICES PROVIDED TO ASSOCIATED ENTERPRISES AND HOLDING THAT THE APPELLANT'S INTERNATIONAL TRANSACT IONS ARE NOT AT ARM'S LENGTH. 4 THAT ON FACTS OF THE CASE AND IN LAW, THE LD. DRPITPO/AO HAVE ERRED, BY: A) NOT ACCEPTING THE USE OF MULTIPLE YEAR DATA, AS ADOPTED BY THE APPELLANT IN TRANSFER PRICING DOCUMENTATION; AND B) DETERMINING THE ARM'S LENGTH PRICE USING DATA PERTAINING ONLY TO FY 2010-11 WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TP DOCUMENTATION REQUIREMENTS 5. THAT ON FACTS OF THE CASE AND IN LAW, THE LD. DRP/TPO/AO HAVE ERRED, BY REJECTING CERTAIN COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT ONLY ON THE BASIS OF TURNOVER LESS THAN INR 5 CRORE AS A COMPARABILITY CRITERION AND NOT REJECTING COMPANI ES WITH HIGH TURNOVER. 6 THAT ON FACTS OF THE CASE AND IN LAW, THE LD. DRP/TPO/AO HAVE ERRED, BY REJECTING CERTAIN COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT FO R HAVING DIFFERENT ACCOUNTING YEAR (I.E. COMPANIES HAVING ACCOUNTING YEAR OTHER THAN 1 APRIL TO MARCH 31). 7 THAT ON FACTS OF THE CASE AND IN LAW, THE LD. DRPI TPO/AO HAVE ERRED, IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE, BY REJECTING CERTAIN COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT USING 'EXPORT EARNINGS LESS THAN 75 PERCENT OF OPERATING REVENUES' AS A COMPARABILITY CRITERION. 8 THAT ON FACTS OF THE CASE AND IN LAW, THE LD. DRPITPO/AO HAVE ERRED, IN LAW AND ON FACTS AND 7 I.T.A.NO. 907/DEL/2016. CIRCUMSTANCES OF THE CASE, BY WRONGFULLY REJECTING CERTAIN COMPARABLE COMPANIES AND ADDING CERTAIN NON-COMPARABLE COMPANIES TO THE FINAL SET OF COMPARABLES FOR THE PURPOSE OF DETERMINING THE ALP OF THE IMPUGNED TRANSACTION ON AN AD-HOC BASIS, THEREB Y RESORTING TO CHERRY PICKING OF COM PARABLES. 9 THAT ON FACTS OF THE CASE AND IN LAW, THE LD. DRP/TPO/AO HAVE ERRED, BY SELECTING CERTAIN COMPANIES WHICH ARE EARNING SUPER NORMAL PROFITS AS COMPARABLE TO THE APPELLANT. 10. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. DRP/TPO/AO HAVE ERRED, BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VIS-A-VIS THE COMPARA BLE COMPANIES. 11. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. DRP/AO HAVE ERRED, BY SETTING OFF UNABSORBED DEPRECIATION FROM CURRENT YEAR BUSINESS PROFITS PRIOR TO SETTING OFF BROUGHT FORWARD BUSINE SS LOSSES. 12 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. DRP/AO HAVE ERRED, BY INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF ACT WITHOUT RECORDING ANY ADEQUATE REASONS FOR SUCH INITIATION. 13 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. AO HAVE ERRED, IN CHARGING INTEREST UNDER SECTION 234 B OF THE ACT. THE ABOVE GROUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE & WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, VARY, OMI T OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEA L AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 8 I.T.A.NO. 907/DEL/2016. THE APPELLANT PRAYS FOR APPROPRIATE RELIEF BASED ON THE SAID GROUNDS OF APPEAL AND THE FACTS AND CIRCUMSTANCES OF THE CASE. 4. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE SIDES, PERUSED THE ORDERS PASSED BY THE AUTHORITIES BELOW, THE PAPER BOOKS FILED BY THE ASSESSEE AND THE CASE LAWS RELIED UPON BY BOTH THE SIDES. THE ONLY DISPUTE THA T ARISES IS WITH RESPECT TO SELECTION OF THE COMPARABLES. TO BE PRECISE THE CONTROVERSY ROTATES AROUND THE EXCLUSIO N OF THE FOLLOWING COMPARABLE IN THE LIST OF COMPARABLES IN RESPECT OF:- 1. ACCENTIA TECHNOLOGIES LTD 2. INFOSYS BPO LTD 3. TCS E-SERVE LTD 4.1 APART FROM THAT THE ASSESSEE IS INSISTING ON IN CLUSION OF THE FOLLOWING COMPARABLES WHICH WERE NOT INCLUDE D BY THE DRP AS WELL AS THE TPO IN THEIR LIST OF COMPARA BLES:- 1. CG-VA K SOFTWARE AND EXPORTS LTD 2. R SYSTEMS INTERNATIONAL LTD 4.2 WE SHALL TAKE UP THESE COMPANIES ONE BY ONE TO ASCERTAIN THEIR COMPATIBILITY OR OTHERWISE WITH THE ASSESSEE. BEFORE EMBARKING UPON THIS EXERCISE IT IS SINE QUA NON TO PRECISELY CONSIDER THE FUNCTIONAL PROFILE OF TH E ASSESSEE. A. FUNCTIONAL ANALYSIS OF THE ASSESSEE FROM THE TP STUDY: 5. ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF EXEVO U S AND HAS BEEN INCORPORATED ON 22/03/2002. THE ASSESS EE 9 I.T.A.NO. 907/DEL/2016. IS ENGAGED IN RENDERING THE FOLLOWING SERVICES TO I TS ASSOCIATED ENTERPRISES: 1) DATA COLLECTION SERVICE FOR PRIMARY RESEARCH, USING ONE OF THE COMBINATION OF THE FOLLOWING SERVICES BEING: A) TELEPHONIC INTERVIEWS (CATI); B) WEB INTERVIEWS (CAWI); AND C) PRINT OR PHYSICAL INTERVIEWS. 2) SURVEY PROGRAMMING; 3) DATA PROCESSING AND DATA ANALYSIS SERVICES WHICH INCLUDES: A) CODING SERVICES; B) PROVIDES QUALITY AUDITS; AND C) DATA QUALITY SERVICES. 5.1 THE ASSESSEE IS THUS ENGAGED IN PROVISION OF INFORMATION TECHNOLOGY (IT) ENABLED SERVICES IN THE NATURE OF SURVEY PROGRAMMING, DATA COLLECTION, DATA ANALYS IS AND BUSINESS RESEARCH. IT IS A CAPTIVE CONTRACT SERVICE PROVIDER RENDERING IT ENABLED SERVICES TO ITS ASSOCIATED ENT ERPRISE. THE ASSESSEE HAS AN APPROXIMATELY 80% OF ITS WORKFO RCE AS GRADUATES FOR UNDERTAKING DATA COLLECTION ACTIVI TIES. FURTHER, IT ALSO EMPLOYS MCAS, BCAS AND DIPLOMA HOLDERS FOR UNDERTAKING DATA PROCESSING AND SURVEY PROGRAMS. ITS DATA PROCESSING STAFF COMPRISES ONLY 15% OF THE PERSONNEL OF EXEVO INDIA. 5.2 DURING THE FINANCIAL YEAR 2010-11 ASSESSEE HAS RENDERED IT ENABLED SERVICES TO COPAL MARKET RESEAR CH LTD. THE ASSESSEE IS REIMBURSED ON ALL ITS COSTS IN CURRED 10 I.T.A.NO. 907/DEL/2016. ALONG WITH A MARKUP OF 17% AS PER THE AGREEMENT BETWEEN ASSESSEE AND THE AE. COSTS YEAR AND REFERS TO ALL THE OPERATING DIRECT AND INDIRECT EXPENSES INCURRED BY THE ASSESSEE IN RENDERING THE SPECIFIED IT ENABLED SERV ICE TO THE E AS PER THE AGREEMENT ENTERED INTO BETWEEN THE M. 5.3 ASSESSEE IS NOT EXPOSED TO MARKET RISK AS IT RE NDERS IT ENABLED SERVICES TO ITS AE AND IS ASSURED OF A S PECIFIED RETURN ON ITS COST. IT DOES NOT BEAR ANY CREDIT AND COLLECTION RISK. AS THE ASSESSEE RECEIVES ITS REMUN ERATION IN FOREIGN CURRENCY AND ANY FOREIGN EXCHANGE FLUCTU ATION LOSS IS RECOVERED ALONG WITH THE MARKUP. THUS THE ASSESSEE DOES NOT IMPAIR EVEN THE FOREIGN EXCHANGE RISK. ASSESSEE DOES NOT EMPLOY ANY INTANGIBLE ASSETS WITH REFERENCE TO THE SERVICES RENDERED TO THE ASSOCIATE D ENTERPRISE. THUS ON THE BASIS OF THE ABOVE FUNCTION AL ANALYSIS THE ASSESSEE CAN BE CHARACTERISED AS A ROU TINE SERVICE PROVIDER OPERATING IN A LOW RISK OR ALMOST RISK MITIGATED ENVIRONMENT. 5.4 WITH THE ABOVE UNDERSTANDING OF THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE TO ITS AES, WE W ILL NOW PROCEED TO EXAMINE THE COMPATIBILITY OR OTHERWISE O F THE COMPANIES DISPUTED BY THE ASSESSEE TO THE EXTENT. GROUNDS 1 AND 2 ARE GENERAL IN NATURE. GROUND NO. 3 TO 9 11 I.T.A.NO. 907/DEL/2016. 4. WE SHALL 1 ST TAKE UP THE COMPARABLES WHERE THE ASSESSEE CONTENDS FOR EXCLUSION. ACCENTIA TECHNOLOGIES LTD. 4.1. LD.TPO CONSIDERED THIS AS A COMPARABLE. ASSESSEE OBJECTS TO THE COMPATIBILITY OF THIS COMPANY IS DUE TO FUNCTIONAL INCOMPATIBILITY. LD.AR SUBMITTED THAT TH IS COMPANY WAS HAVING SUPERNORMAL PROFIT AND IS ENGAGE D IN PROVIDING KPO SERVICES WHICH IS DISTINCT FROM THE N ATURE OF SERVICES PROVIDED BY THE ASSESSEE BEFORE US. HE HAS PLACED RELIANCE UPON THE DECISION OF COORDINATE BEN CHES OF THIS TRIBUNAL IN THE CASE OF M/S.CAPITAL IQ INFORMA TION SYSTEMS (INDIA) PVT. LTD. VS. DCIT IN ITA NO. 1961/H/2011 AND SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD., IN ITA NO. 1316/BANG/2012, WHEREIN THE DISSIMILARITIES BETWEEN KPO SERVICES AND BPO SERVIC E HAS BEEN DRAWN UP. HE FURTHER CONTENDED SIMILAR VIEW HA S BEEN UPHELD BY THE HONBLE JURISDICTIONAL HIGH COUR T IN THE CASE OF RAMPGREEN SOLUTIONS PVT. LTD., VS. CIT IN ITA 102/2015. 6.2. LD.DR, HOWEVER, REFERRED TO EXTRACTS FROM THE LD.TPOS ORDER TO SUBMIT THAT ACCENTIA TECHNOLOGIES LTD. IS COMPARABLE WITH ASSESSEE. THE LD. DR RELIED UPON OR DER DATED 27.04.2015 PASSED BY HONBLE DELHI HIGH COURT IN THE CASE OF CHRIS CAPITAL INVESTMENT VERSUS DCIT RE PORTED IN I.T.A.NO. NO.417/2014, WHEREIN HONBLE DELHI HIG H COURT HAS HELD THAT: 12 I.T.A.NO. 907/DEL/2016. . THE MERE FACT THAT AN ENTITY MAKES HIGH / EXTRE MELY HIGH PROFITS / LOSSES DOES NOT IPSO FACTO, LEAD TO ITS EXCLUSION FROM THE LIST OF COMPARABLES FOR THE PURP OSE OF DETERMINATION OF ALP. IN SUCH CIRCUMSTANCES ENQUIR Y UNDER RULE 10B(3) OUGHT TO BE CARRIED OUT, TO DETERMINE A S TO WHETHER THE MATERIAL DIFFERENCES BETWEEN THE ASSESS EE AND THE SAID ENTITY CAN BE ELIMINATED. UNLESS SUCH DIF FERENCES CANNOT BE ELIMINATED, THE ENTITY SHOULD BE INCLUDED AS A COMPARABLE. 6.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PU RSUING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT FUNCT IONALLY, THIS COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUC TS FOR HEALTHCARE. IT IS SUBMITTED BY THE LD.AR THAT ACCE NTIA TECHNOLOGIES LTD IS ENGAGED INTO DIVERSIFIED ACTIVI TIES SUCH AS KNOWLEDGE PROCESS OUTSOURCING(KPO), LEGAL PROCES S OUTSOURCING(LPO), DATA PROCESS OUTSOURCING(DPO), HI GH END SOFTWARE SERVICES. IT IS SUBMITTED BY THE LD.AR THAT SEGMENTAL INFORMATION IN RESPECT OF THIS COMPANY IS NOT AVAILABLE. WE FIND THAT THE LD. TPO HAD ADOPTED THI S COMPANY AS A COMPARABLE AS THE LD. TPO IS OF THE VI EW THAT THE SERVICES RENDERED BY THIS COMPARABLE ARE I N THE NATURE OF BPO OR BACK OFFICE SERVICES AND THAT NOTH ING HE IS EARNED FROM SALE OF PRODUCTS. WE HAVE PERUSED THE ANNUAL REPORTS OF THIS COMPANY AND HAVE OBSERVED THAT ACCENTIA OWNED A BRAND AND GOODW ILL ON ACCOUNT OF ACQUISITION/AMALGAMATION OF A DEFENDA NT IN FORCE. FURTHER IT IS OBSERVED THAT THIS COMPANY IS 13 I.T.A.NO. 907/DEL/2016. PROVIDING SERVICES IN THE FIELD OF MEDICAL TRANSCRI PTION BILLING AND COLLECTIONS INCOME FROM CODING ETC FOR WHICH COMPLETE SEGMENTAL INFORMATION ARE NOT AVAILABLE. IN OUR CONSIDERED OPINION THIS COMPANY IS FUNCTIONA LLY DISSIMILAR TO THAT OF THE ASSESSEE. ACCORDINGLY WE DIRECT THE LD. TPO TO EXCLUDE THIS COMPANY FROM THE LIST O F COMPARABLES. INFOSYS BPO LTD 6.4. THE TPO INCLUDED THIS COMPANY DESPITE ASSESSEE S OBJECTIONS. ASSESSEE HAD OBJECTED FOR INCLUSION OF THIS COMPANY AS IT PROVIDES HIGH-END INTEGRATED SERVICES IN THE NATURE OF BUSINESS PLATFORMS, CUSTOMER SERVICE OUTSOURCING, FINANCE AND ACCOUNTING LPO, HR OUTSOURCING, SOURCING AND PROCUREMENT OUTSOURCING E TC. THE COMPANY ALSO HAS A HIGH BRAND VALUE OF GOODWILL AND HAS ACQUIRED A COMPANY OR BY THE NAME MCCSMISH SYSTEMS LLC TO PROVIDE END-TO-END SOLUTIONS. 6.5. LD.DR, HOWEVER, REFER TO THE EXTRACTS MADE BY THE LD.TPO IN THE ORDER TO SUBMIT THAT INFOSYS BPO LTD. IS A COMPARABLE COMPANY WITH THAT OF ASSESSEE. THE LD.DR RELIED UPON THE EXTRACT OF THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHRIS CAPITAL INVESTMENT VS. DCIT (SUPRA), WHICH HAS BEEN REPRODUCED HEREINABOVE . 6.6. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PU RSUING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT FOR T HE YEAR UNDER CONSIDERATION, THIS COMPANY HAS HAD EXTRAORDI NARY 14 I.T.A.NO. 907/DEL/2016. FINANCIAL EVENTS. IT IS NOTED THAT THE COMPANY IS P ROVIDING HIGH END INTEGRATED SERVICE BY ASSISTING ITS CLIENT S IN IMPROVING THEIR COMPETITIVE POSITIONING BY MANAGING THEIR BUSINESS PROCESS IN ADDITION TO PROVIDING INCREASED VALUE. ON THE OTHER HAND, ASSESSEE IS ENGAGED IN PROVIDING ROUTINE SUPPORT SERVICES IN THE NATURE OF DATA COLL ECTION AND ANALYSIS WHICH IS LOW END IN NATURE BEARING MIN IMAL RISKS. 6.6. LD. A.R. HAS RIGHTLY PLACED HIS RELIANCE UPON THE DECISION OF AGNITY INDIA TECHNOLOGIES PVT. LTD. PAS SED BY HON'BLE DELHI HIGH COURT IN I.T.A.NO. 3856/2010 WHE REIN, IT HAS BEEN HELD THAT THIS COMPARABLE MUST BE REJEC TED ON ACCOUNT OF DIFFERENCE IN RISK LEVELS ASSUMED, HUGE REVENUES DERIVED AND THE FACT THAT THEY ARE MARKET LEADERS. HONBLE COURT HELD AS UNDER: IT IS ARGUED THAT THE CASE OF ASSESSEE IS NOT COMPARABLE WITH INFOSYS TECHNOLOGIES LTD., THE REAS ON BEING THAT THE LATTER IS GIANTS IN THE AREA OF DEVELOPMENT OF SOFTWARE AND IT ASSUMES ALL RISKS, LEADING TO HIGHER PROFIT. ON THE OTHER HAND, THE ASSESSEE IS A CAPTIVE UNIT OF ITS PARENT COMPANY IN THE USA AND IT ASSUMES ONLY LIMITED CURRENCY RISK. HAVING CONSIDERED THESE POINTS, WE ARE OF THE VIEW THAT THE CASE OF AFORESAID INFOSYS AND THE ASSESSEE ARE NOT COMPARABLE AT ALL AS SEEN FROM THE FINANCIA L DATA ETC. OF THE TWO COMPANIES MENTIONED EARLIER I N THIS ORDER. THEREFORE, WE ARE OF THE VIEW THAT THI S CASE IS REQUIRED TO BE EXCLUDED. 6.7. SINCE THERE IS NO SIMILARITY IN THE FUNCTIONAL PROFILE OF THIS COMPANY AND ASSESSEE RESPECTFULLY FOLLOWING TH E RATIO LAID DOWN IN AGNITY INDIA TECHNOLOGIES (SUPRA), WE DIRECT 15 I.T.A.NO. 907/DEL/2016. THE TPO/AO FOR REMOVAL OF THIS COMPANY FROM THE LIS T OF COMPARABLES. TCS E-SERVE LTD 6.8. THE LD.TPO HAD INCLUDED THIS COMPANY AS A COMPARABLE DESPITE OBJECTIONS BY THE ASSESSEE. THE ASSESSEE OBJECTED THE INCLUSION OF THIS COMPANY AS IT PROVIDED FINANCIAL INFORMATION PROCESSING AND CUSTO MER CONTACT SERVICES WITH HIGH-LEVEL OF FOREIGN EXPENDI TURE AND ABNORMAL PROFITS. 6.9. LD.DR, HOWEVER, REFER TO THE EXTRACTS MADE BY THE LD.TPO IN THE ORDER TO SUBMIT THAT TCS E SERVE LTD. IS A COMPARABLE COMPANY WITH THAT OF ASSESSEE. THE LD.DR RELIED UPON THE EXTRACT OF THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHRIS CAPITAL INVESTMENT VS DCIT (SUPRA), WHICH HAS BEEN REPRODUCED HEREINABOVE . 6.10. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PURSUING THE RELEVANT MATERIAL ON RECORD, WE FIND T HAT THE FINANCIAL RESULTS OF THIS COMPANY SHOWS THAT THIS C OMPANY IS INTO FINANCIAL SERVICES TO HELP ITS CUSTOMERS AC HIEVE THEIR BUSINESS OBJECTIVES BY PROVIDING INNOVATIVE B EST IN CLASS SERVICES. DURING THE YEAR UNDER CONSIDERATION , THIS COMPANY HAS MADE PAYMENTS TOWARDS USE OF TATA BRAND . CONSEQUENTIALLY USE OF THE TCS BRAND HAS SUBSTANTIA LLY INCREASED THE OPERATING PROFITS POST ACQUISITION. T HE LD. AR SUBMITTED THAT THE DRP HAD EXCLUDED THIS COMPANY IN THE IMMEDIATELY PRECEDING PREVIOUS YEAR. WITHOUT AN Y 16 I.T.A.NO. 907/DEL/2016. PROPER REASON OR CHANGE IN THE FUNCTIONALITY AND FI NANCIAL DATA FOR THE YEAR UNDER CONSIDERATION, IT CANNOT BE HELD THAT THIS COMPANY CAN BE CONSIDERED AS A COMPARABLE . THE LD. TPO HAS TO BRING SOME MATERIAL ON RECORD TO SHOW THAT WHY THIS COMPARABLE WAS EXCLUDED, IN THE PREVI OUS YEAR AND IN THE YEAR UNDER CONSIDERATION IT SHOULD BE INCLUDED. ADMITTEDLY NEITHER THE TPO NOR THE LD. D R HAS BEEN ABLE TO DEMONSTRATE THE DIFFERENCE IN THE FUNCTIONALITY AND/OR FINANCIAL DATA OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION VIZ-A-VIZ PREVIOUS ASSESSMENT YEAR. HENCE FOLLOWING THE RULE OF CONSISTENCY, WE ARE OF THE OPINION THAT THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE FOR THE YEAR UNDER CONSIDERATION. WE THE REFORE DIRECT TO EXCLUDE THIS COMPARABLE. 6.11. FURTHER IT WAS SUBMITTED BY THE LD. A.R. THAT IN RESPECT OF THE COMPARABLES SELECTED BY THE LD. TPO BEING E 4 E HEALTH CARE BUSINESS SERVICES PVT. LTD. AND J INDAL INTELLICOM LTD., SUFFERED FROM COMPUTATIONAL ERRORS AND INCONSISTENCIES. THE LD. DRP HAD DIRECTED THE ASSES SEE TO FURNISH MARGIN IN RESPECT OF ALL THE COMPARABLES UP HELD BY THE PANEL, FOR IT TO BE APPLIED BY THE LD. TPO. IT HAS BEEN SUBMITTED THAT THE LD. TPO HAS NOT GIVEN EFFEC T TO THE DIRECTIONS OF THE DRP PURSUANT TO THE MARGINS B EING PROVIDED BY THE ASSESSEE IN RESPECT OF THE COMPARAB LES FINALLY SELECTED BY THE PANEL. FROM THE FINAL ORDER OF THE LD. AO IT IS OBSERVED T HAT THE DRPS DIRECTIONS HAVE NOT BEEN FOLLOWED. WE ACCORDI NGLY 17 I.T.A.NO. 907/DEL/2016. DIRECT THE LD. AO TO GIVE EFFECT TO THE DIRECTIONS OF THE DRP IN RESPECT OF E 4 E HEALTH CARE BUSINESS SERVICES P VT. LTD. AND JINDAL INTELLICOM LTD., BY CONSIDERING THE CORR ECTED MARGINS, SUBMITTED BY THE ASSESSEE. 5. WE SHALL NOW TAKE UP THE COMPARABLES WHERE THE ASSESSEE CONTENDS FOR INCLUSION. CG-VAK SOFTWARE AND EXPORTS LTD 7.1. THE LD.TPO EXCLUDED THIS COMPANY FROM THE LIST OF COMPARABLES AS THE REVENUE GENERATED UNDER ITES SEGMENT OF THIS COMPARABLE IS JUST RS. 82.78 LACS W AS START HENCE THE LD. TPO HELD THAT THIS COMPANY FAIL S THE TURNOVER FILTER 7.2. THE LD. A.O. HAS NOT BROUGHT ON RECORD ANY MAT ERIAL / DOCUMENTS CONTRARY TO THE ABOVE SUBMISSIONS OF TH E ASSESSEE. THE LD. TPO HAS ALSO NOT BEEN ABLE TO BR ING OUT ANY INSTANCE OF FUNCTIONAL DISSIMILARITY OF THIS CO MPARABLE WITH THAT OF ASSESSEE. THE LD. D.R. PLACED HIS REL IANCE ON THE FINDINGS OF THE AUTHORITIES BELOW. 7.3. WE HAVE PERUSED THE ORDERS PASSED BY AUTHORITI ES BELOW, AND ARGUMENTS ADVANCED BY BOTH THE PARTIES. IT HAS BEEN OBSERVED THAT THE ASSESSEE IN ITS TP STUDY HAS OBJECTED TO THE ADOPTION OF THE TURNOVER FILTER APP LIED BY THE TPO. IT HAS BEEN SUBMITTED THAT TURNOVER FILTE R COULD BE DEPLOYED IF THE TESTED PARTY IS A RISK BEARING ENTREPRENEUR. HOWEVER, TO THE FACTS OF THE PRESENT CASE, THE ASSESSEE DOES NOT ASSUME ANY RISK AND IS 18 I.T.A.NO. 907/DEL/2016. REMUNERATED AT COST PLUS BASIS. LD. A.R. HAS PLACE D RELIANCE IN THE CASE OF WILLIS PROCESSING SERVICES PVT. LTD. IN I.T.A.NO. 4547/MUM/2012 WHEREIN THE CO-ORDINATE BENCH OF THIS TRIBUNAL HAS HELD AS UNDER: THE TURNOVER IS NOT A CRITERIA AS PRESCRIBED UNDER THE RULE 10B(2) FOR SELECTING THE COMPARABLES. IT IS S ETTLED PROPOSITION THAT THE DECISIVE FACTOR FOR DETERMININ G INCLUSION OR EXCLUSION OF ANY CASE AS A COMPARABLE ARE PRESCRIBED UNDER RULE 10B(2) WHICH DOES NOT SPECIFY ANY SUCH FACTOR OF TURNOVER ON THE BASIS OF WHICH A PARTICULAR CASE CAN BE INCLUDED OR EXCLUDED IN THE LIST OF COMPARABLES. IN SERVICE INDUSTRY, TURNOVER DOES NOT PLAY ANY SIGNIFICANT ROLE AS FAR AS THE MARGINS ARE CONCERNE D. THIS REINFORCES THE VIEW THAT TURNOVER DOES NOT PLA Y A SIGNIFICANT ROLE IN SERVICE INDUSTRY AND THERE IS N O LINK BETWEEN TURNOVER AND MARGINS. THE TURNOVER IS NOT A RELEVANT FACTOR FOR CHOICE OF COMPARABLES HAS BEE N CONFIRMED IN MANY DECISION, AS LISTED BELOW. 7.4. APPLYING THE RATIO LAID DOWN BY THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF WILLIS PROCESSING S ERVICES PRIVATE LIMITED (SUPRA) WE DIRECT THE LD. TPO/AO TO INCLUDE THIS COMPANY TO THE LIST OF COMPARABLES. R SYSTEMS INTERNATIONAL LTD 7.5. THE LD.TPO HAS REJECTED THE COMPANY ON ACCOUNT OF DIFFERENT FINANCIAL YEAR ENDING VIS-A-VIS THE ASSESSEE. THE LD.AR SUBMITTED THAT COMPANIES WHOSE FINANCIAL DATA WAS AVAILABLE FOR THE RELEVANT PERIOD, WERE CONSIDERED IN VIEW OF RULE 10 D (4), WHICH PROVIDES THAT INFORMATION T O BE USED MUST BE CONTEMPORANEOUS. THE LD. AR SUBMITTED THAT, THOUGH THE COMPANY HAS DIFFERENT FINANCIAL YE AR 19 I.T.A.NO. 907/DEL/2016. ENDING, WERE OPERATING DURING THE SAME PERIOD OF TI ME AS THE ASSESSEE, AND WERE ALSO FACING SIMILAR BUSINESS CYCLES, MARKET AND ECONOMIC CONDITIONS AS FACED BY ASSESSEE HAVING FINANCIAL YEAR FROM APRIL TO MARCH. HE THUS SUBMITTED THAT IN ABSENCE OF EVIDENCE AVAILABLE TO THE CONTRARY THAT THERE HAS BEEN A SIGNIFICANT IMPACT O N THE MARGINS DUE TO CHANGE IN DIFFERENT REPORTING/ACCOUN TING PERIOD, IT IS INCORRECT TO DISREGARD THE COMPARABLE USING THIS FILTER. LD.DR, HOWEVER, REFERRED TO THE EXTR ACTS MADE BY THE LD.TPO IN HIS ORDER TO SUBMIT THAT R SYSTEMS INTERNATIONAL LTD., SHOULD NOT BE CONSIDERED COMPAR ABLE WITH ASSESSEE. 7.6. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PU RSUING THE RELEVANT MATERIAL ON RECORD WE FIND THAT THE LD . TPO HAS NOT POINTED OUT EXACT DIFFERENCE, THE CHANGE OF ACCOUNTING YEAR HAS MADE TO THE FINANCIAL RESULTS O F THE COMPARABLE. THE LD.TPO HAS FURTHER NOT POINTED OUT WHETHER IT WOULD NOT BE POSSIBLE TO RESTATE THOSE F INANCIAL RESULTS FOR A DIFFERENT ACCOUNTING PERIOD WITHOUT SIGNIFICANT CHANGE IN NET PROFIT MARGINS OR ANY OTH ER PARAMETERS CONSIDERED RELEVANT. MULTINATIONAL COMPA NIES GENERALLY OPERATE IN DIFFERENT GEOGRAPHICAL REGIONS AND DIFFERENT COUNTRIES FOLLOW DIFFERENT ACCOUNTING OR FINANCIAL YEARS, FUNCTIONALLY SIMILAR OR EVEN IDENTICAL COMPA NIES, CANNOT BE HELD TO BE INCOMPARABLE, ONLY OWING TO DIFFERENCES IN THE DATE OF ENDING OF THE FINANCIAL YEAR. AS MOST OF THE BUSINESS ENTERPRISES OPERATE ON THE GOI NG 20 I.T.A.NO. 907/DEL/2016. CONCERN CONCEPT, WHICH IS SO FUNDAMENTAL TO PRESENT THE ACCOUNTS. THE CONCEPT USED IN ACCOUNTING IS JUST AN ARTIFICIAL MEANS TO RECKON THE OPERATING RESULTS OF BUSINESS OPERATION AT A GIVEN POINT IN TIME AND NOT HING WOULD TURN UP ON CHANGING THE END OF ACCOUNTING PER IOD FROM 31 ST MARCH TO ANY OTHER DATE WITHIN A SHORT SPAN OF TIME. ASSUMING A SITUATION WHERE THE TESTED PARTY I S FOLLOWING A DIFFERENT FINANCIAL YEAR ENDING (SAY 01/01/2010 TO 31/12/2010), FOLLOWING THE FILTER ADO PTED BY THE LD.TPO, ONE WOULD REJECT ALL THE COMPANY WIT H THE FINANCIAL YEAR ENDING 31 ST OF MARCH 2010 AND ONLY CONSIDER COMPANIES WITH FINANCIAL YEAR ENDING 31/12/2010. THE NUMBER OF COMPARABLE COMPANIES AVAILABLE AFTER USING SUCH A FILTER WOULD BE VERY L IMITED AND THEREFORE, IN SUCH A CASE THE NET MARGIN EARNED BY THE COMPARABLE COMPANIES WOULD BE DIFFERENT FROM TH E ONE THAT WOULD BE COMPUTED WITHOUT USING THIS FILTE R. THIS VIEW IS SUPPORTED BY THE COORDINATE BENCH OF THIS T RIBUNAL IN THE CASE OF DCIT VS. MCKINSEY KNOWLEDGE CENTRE I NDIA PRIVATE LIMITED IN ITA NO. 2195/DEL/2011 WHEREIN IT HAS BEEN HELD THAT IF A COMPANY IS FUNCTIONALLY COMPARA BLE, IT CANNOT BE REJECTED MERELY ON THE GROUND THAT DATA F OR THE ENTIRE FINANCIAL YEAR WAS UNAVAILABLE, IF THE DATA CAN BE REASONABLY EXTRAPOLATED. HONBLE TRIBUNAL FURTHER O BSERVED THAT RULE 10 B (4) CANNOT BE INTERPRETED IN SUCH A RIGID MANNER SO AS TO DEFEAT THE BASIC OBJECTIVE OF THE R ULE. THE RELEVANT EXTRACT OF THE RULING ARE REPRODUCED BELOW : 21 I.T.A.NO. 907/DEL/2016. 23. .. HOWEVER, IN OUR CONSIDERED OPINION, IF A COMPARABLE IS FUNCTIONALLY SAME AS THAT OF THE TEST ED PARTY THEN THE SAME CANNOT BE REJECTED MERELY ON TH E GROUND THAT DATA FOR ENTIRE FINANCIAL YEAR IS NOT AVAILABLE. IF FROM THE AVAILABLE DATA ON RECORD THE RESULTS WERE FINANCIAL YEAR CAN BE REASONABLY EXTRAPOLATED, THEN THE COMPARABLE CANNOT BE EXCLUDE D SOLELY ON THIS GROUND. THE LEARN ADR AS REFERRED TO RULE 10 B (4) WHICH ONLY MANDATES THAT THE DATA WHICH IS TO BE UTILISED FOR ANALYSING THE COMPARABI LITY OF UNCONTROLLED TRANSACTIONS WITH AN INTERNATIONAL TRANSACTION, HAS TO BE FINANCIAL YEAR ONLY IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. TH IS RULE IS BASED ON MATCHING PRINCIPLE BUT THIS ROLE CANNOT BE INTERPRETED IN SUCH A RIGID MANNER SO AS TO DEFEAT THE BASIC OBJECT OF RULE VIZ., SELECTION OF THE COMPARABLE FOR DETERMINATION OF ARMS LENGTH PRICE O F AN INTERNATIONAL TRANSACTION (EMPHASIS SUPPLIED) 7.7. IN ANY CASE THE LD.TPO HAS NOT CITED ANY INSTA NCES OF FUNCTIONAL DISSIMILARITY OF THIS COMPARABLE COMPANY WITH THAT OF ASSESSEE. WE THEREFORE DIRECT THE LD. AO/TP O TO CONSIDER THIS COMPANY IN THE FINAL LIST OF COMPARAB LE. ACCORDINGLY GROUND NO. 3 TO 9 STANDS DISPOSED ACCORDINGLY. GROUND NO. 10 6. THE LD.AR SUBMITTED THAT LD. AO HAS NOT FOLLOWED THE DIRECTIONS OF THE DRP IN GRANTING THE WORKING C APITAL ADJUSTMENT. IT IS SUBMITTED BY THE LD. AR THAT THE ASSESSEE BEFORE US IS NOT SUBJECTED TO MUCH RISK AN D ALLOWABILITY OF WORKING CAPITAL ADJUSTMENT HAS TO B E MADE IN THE CASE OF THE COMPARABLES, WHICH HAS BEEN UPHE LD IN 22 I.T.A.NO. 907/DEL/2016. VARIOUS JUDICIAL RULINGS BY COORDINATE BENCHES OF T HIS TRIBUNAL, WHICH ARE AS UNDER: MENTOR GRAPHICS NOIDA PVT. LTD., REPORTED IN 109 IT D 101, SONY INDIA REPORTED IN 288 ITR 52, PHILIPS SOFTWARE REPORTED IN 25 SOT 226 AND MERCER CONSULTING INDIA PVT. LTD. REPORTED IN 150 ITD 1. 6.1. RESPECTFULLY FOLLOWING THE RATIO IS LAID DOWN IN TH E ABOVE JUDGMENTS WE ARE IN AGREEMENT WITH THE LD.AR, THAT WHILE COMPARING THE MARGINS EARNED BY THE COMPARABL E COMPANIES THERE IS ALWAYS THE ASSESSEE, THE DIFFERE NCE ON ACCOUNT OF WORKING CAPITAL EMPLOYED SHOULD ALSO BE FACTORED INTO. IN ORDER TO IMPROVE THE RELIABILITY OF RESULTS, THE FINANCIAL DATA OF COMPARABLE COMPANIES ARE REQU IRED TO BE ADJUSTED. THE EFFORTS STATED DECISIONS OF THI S TRIBUNAL HAS HELD THAT IN PRACTICE SUCH ADJUSTMENTS USUALLY INCLUDE ADJUSTMENTS FOR ACCOUNTS PAYABLE, ACCOUNTS RECEIVABLE AND INVENTORY. 6.2. WE ACCORDINGLY ALLOW THIS GROUND OF APPEAL RAISED B Y THE ASSESSEE GROUND NO. 11 7. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS THE LD.AO HAD ADJUSTED THE AMOUNT OF UNABSORBED DEPRECIATION WITH THE PROFITS AND GAINS FROM BUSINE SS PERTAINING TO THE YEAR UNDER CONSIDERATION AND HAS USED THE RESIDUAL PROFIT, POST ADJUSTMENT OF THE UNOBSER VED 23 I.T.A.NO. 907/DEL/2016. DEPRECIATION, TO ADJUST THE AMOUNT OF BROUGHT FORWA RD LOSSES. THE LD.AO COMPUTED THE ADJUSTMENT AS UNDER: PARTICULARS AMOUNT (IN RS.) BUSINESS PROFITS BEFORE ADJUSTMENT OF BROUGHT FORWARD LOSS AND UNABSORBED DEPRECIATION 3,401,754 STEP-1- LESS: BROUGHT FORWARD DEPRECIATION 2,131,805 BUSINESS PROFITS AFTER ADJUSTMENT OF UNABSORBED DEPRECIATION BUT BEFORE ADJUSTMENT OF BROUGHT FORWARD LOSS (A) 1,269,949 STEP 1- LESS: BROUGHT FORWARD LOSS 1,269,949 INCOME TAXABLE UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS AND PROFESSION (B) NIL INCOME FROM OTHER SOURCES 4,128,994 TOTAL TAXABLE INCOME (A+C) 5,398,994 THE DRP UPHELD ADJUSTMENT MADE BY THE LD. AO. 7.1. THE LD. AR SUBMITS THAT THE PROPOSED ADJUSTMENT IS BASED ON INCORRECT INTERPRETATIONS OF PROVISIONS OF SECTION 32 (2) OF THE ACT. SECTION 32 (2) LAYS DOWN THE PRO VISIONS FOR CARRY FORWARD OF UNABSORBED DEPRECIATION AND SE T OFF OF THE SAME SUBJECT TO APPLICABILITY OF SECTION 72 (2) WHICH LAYS DOWN THE MANNERS OF SETTING OFF OF UNABSORBED DEPRECIATION, WHEN THE ASSESSEE HAS BROUGHT FORWARD LOSSES AS WELL. 24 I.T.A.NO. 907/DEL/2016. 7.2. ON THE CONTRARY THE LD.DR RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND CBDT CIRCULAR NO. 7/2013 DATED 18/07/2013. 7.3. WE HAVE PERUSED THEIR RIVAL SUBMISSIONS OF BOTH THE PARTIES. WHEN THE ASSESSEE HAS BROUGHT FORWARD BUSI NESS LOSSES AS WELL AS UNABSORBED DEPRECIATION, THE ACT SPECIFIES A SEQUENCE IN WHICH THESE ALLOWANCES SHAL L BE SET OFF. THE RELEVANT PROVISIONS OF THE ACT ARE AS UNDER: SECTION 32 (2): WHERE IN THE ASSESSMENT OF THE ASSESSEE, FULL EFFEC T CANNOT BE GIVEN TO ANY ELEMENTS UNDER SUBSECTION (1) IN AN Y PREVIOUS YEAR, OWING TO THERE BEING NO PROFITS OR G AINS CHARGEABLE FOR THE PREVIOUS YEAR, OR OWING TO THE P ROFITS OR GAINS CHARGEABLE BEING LESS THAN THE ELEMENTS, THEN , SUBJECT TO THE PROVISIONS OF SUBSECTION (2) OF SECT ION 72 AND SECTION (3) OF SECTION 73, THE ALLOWANCE OR THE PAR T OF THE ELEMENTS TO WHICH EFFECT HAS NOT BEEN GIVEN, AS THE CASE MAY BE, SHALL BE ADDED TO THE AMOUNT OF THE ALLOWAN CE OF DEPRECIATION FOR THE FOLLOWING PREVIOUS YEAR AND DE EMED TO BE PART OF THAT ELEMENTS, OR IF THERE IS NO SUCH RE LEVANCE FOR THAT PREVIOUS YEAR, OR DEEMED TO BE THE ALLOWANCE F OR THAT PREVIOUS YEAR, AND SO ON FOR THE SUCCEEDING PREVIOU S YEARS. SECTION 72 (2) : WHERE ANY ALLOWANCE OR PART THEREOF, UNDER SUBSECTI ON OF SUBSECTION (2) OF SECTION 32 OR SUBSECTION (4) OF S ECTION 35, 25 I.T.A.NO. 907/DEL/2016. TO BE CARRIED FORWARD, EFFECT SHALL FIRST BE GIVEN TO THE PROVISIONS OF THIS SECTION. 7.4. A COMBINED READING OF THE ABOVE SECTIONS IT IS CLEA R THAT WHILE COMPUTING TOTAL INCOME OF AN ASSESSEE, C ARRY FORWARD UNABSORBED DEPRECIATION CAN BE SET OFF IN F UTURE YEARS ONLY AFTER SETTING OFF THE BROUGHT FORWARD BU SINESS LOSSES. FURTHER THE PROVISION IS CLEAR THAT CARRY F ORWARD UNABSORBED DEPRECIATION CAN BE SET OFF NOT ONLY AGA INST INCOME FROM PROFITS AND GAINS FROM BUSINESS AND PROFESSION, BUT ALSO AGAINST INCOME FROM ANY OTHER HEAD INCLUDING INCOME FROM OTHER SOURCES. 7.5. IN THE PRESENT CASE BEFORE US THE ASSESSEE HAS BROUGHT FORWARD BUSINESS LOSSES AS WELL AS UNOBSERV ED DEPRECIATION. THE ACT SPECIFIES THE SEQUENCE IN WHI CH THESE ALLOWANCES CAN BE SET OFF. SECTION 72 (3) IMP LIES THAT, THE SET OFF OF UNOBSERVED DEPRECIATION AS PER SECTION 32 (2) AGAINST BUSINESS INCOME SHALL BE GIVEN EFFEC T TO ONLY AFTER SETTING OFF THE BROUGHT FORWARD BUSINESS LOSS ES. FROM THE CALCULATION MADE BY THE LD.AO, IT IS OBSERVED T HAT THE LD.AO HAS ADJUSTED THE AMOUNT OF UNOBSERVED DEPRECIATION FROM THE BUSINESS INCOME BEFORE MAKING ADJUSTMENT FOR BROUGHT FORWARD BUSINESS LOSSES. THE CIRCULAR RELIED UPON BY THE LD.AR IS NOT APPLICABLE TO THE PRESENT CASE UNDER CONSIDERATION AS IT IS APPLICABL E WHERE THE SET OFF EACH TO BE MADE AGAINST THE PROFITS OF A STP/EOU/SEZ UNIT, BEFORE THE DEDUCTION UNDER SECTIO N 10 A/10 B OF THE INCOME TAX ACT IS ALLOWED. 26 I.T.A.NO. 907/DEL/2016. 7.6. WE ACCORDINGLY DIRECT THE LD.AO TO ALLOW THE SET OF F AS PER LAW. ACCORDINGLY THIS GROUND RAISED BY THE A SSESSEE STANDS ALLOWED. 8. GROUND NO. 12 DEALS WITH THE INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271 (1)(C ) OF THE ACT. A S THIS IS PREMATURE WE ARE NOT INCLINED TO ANSWER THIS QUESTI ON. 9. GROUND NO. 13 DEALS WITH CHARGING OF INTEREST UNDER SECTION 234B OF THE ACT. THIS GROUND RAISED BY THE ASSESSEE IS CONSEQUENTIAL IN NATURE AND AREA NOT IN CLINED TO ANSWER THIS QUESTION. 10. IN THE RESULT APPEAL FILED BY THE ASSESSEE STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25.07.2016. SD./- SD./- (PRAMOD KUMAR) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 25.07.2016 SP. COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DELHI. TRUE COPY. BY ORDER (ITAT, NEW DELHI) 27 I.T.A.NO. 907/DEL/2016. S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS 25/7/16 SR. PS/PS 6 KEPT FOR PRONOUNCEMENT 25/7 SR. PS/PS 7 FILE SENT TO BENCH CLERK 26/7 SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER