M/s. Mercer Consulting (India) Pvt. Ltd., Gurgaon V. DCIT, Gurgaon

ITA 966/DEL/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77733 (ITAT-DELHI)
• Duration Of Justice: 44 year(s) 5 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-06-2014
• Appeal Filed By: Assessee
• Assessment Year: misc
• Appeal Filed On: 01-01-1970
• Court: TRIBUNAL
• Assessee Lawyers: PIYUSH SINGH
• Keywords: Business income; Transfer pricing; International transaction; Wholly owned subsidiary; Onus to prove
• Section: 92C; 10AA; 10B; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM ITA NO.966/DEL/2014 ASSESSMENT YEAR : 2009-10 MERCER CONSULTING (INDIA) PVT. LTD., 6 TH FLOOR, BUILDING NO.14, DLF CYBERCITY, SECTOR 24 & 25, GURGAON. PAN : AAFCM3951J VS. DCIT, CIRCLE-2, GURGAON. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI DEEPAK CHOPRA, ADVOCATE, SHRI NITIN NARANG, CA & SHRI PIYUSH SINGH, ADVOCATE DEPARTMENT BY : S HRI YOGESH KUMAR VERMA, CIT, DR& SHRI PEEYUSH JAIN, CIT, DR ORDER ORDER ORDER ORDER PER PER PER PER R.S. SYAL, A R.S. SYAL, A R.S. SYAL, A R.S. SYAL, AM MM M : :: : THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE ORDER PASSED BY THE ASSESSING OFFICER (AO) ON 07.01.2014 U/S 144 C(13) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2009-10. ITA NO.966/DEL/2014 2 2. THE FIRST ISSUE AGITATED IN THIS APPEAL IS A GAINST THE TRANSFER PRICING ADJUSTMENT OF RS.6,16,24,726/- MADE BY THE AO ON THE SAME BEING PROPOSED BY THE TRANSFER PRICING OFFICER (TPO) AND AS APPROVED BY THE DISPUTE RESOLUTION PANEL (DRP). 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF MERCER MAURITIUS LTD., M AURITIUS. THE ASSESSEE, INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956, IS ENGAGED IN RENDERING IT AND IT ENABLE D SERVICES TO ITS ASSOCIATED ENTERPRISES (AES). THE ASSESSEE IS P ROVIDING SERVICES IN THE NATURE OF APPLICANT DEVELOPMENT, QU ALITY ASSURANCE, APPLICATION MAINTENANCE, IMPLEMENTATION SERVICES, HELPDESK SERVICES, ADMINISTRATIVE PROCESSING, CONTR IBUTION PROCESSING, HEALTH AND BENEFITS PROCESSING AND PEN SION PLAN VALUATION SERVICES TO THE CLIENTS OF ITS AES FOR AN D ON THEIR BEHALF FOR WHICH IT IS COMPENSATED ON COST PLUS BASIS. TH E ASSESSEE REPORTED THREE TYPES OF INTERNATIONAL TRANSACTIONS IN AUDIT REPORT IN FORM 3CEB. WHEREAS TWO INTERNATIONAL TRANSACTIO NS WERE ACCEPTED BY THE TPO AT ARMS LENGTH PRICE (ALP), TH E DISPUTE IN THE PRESENT APPEAL IS ON THE DETERMINATION OF ALP O F THE SET OF INTERNATIONAL TRANSACTIONS OF RENDERING OF IT ENABL ED SERVICES TO M/S MERCER (US) INC., FOR WHICH THE ASSESSEE WAS C OMPENSATED WITH A SUM OF RS.59,19,89,199/-. IN SO FAR AS THE INTERNATIONAL TRANSACTIONS UNDER THIS CATEGORY ARE CONCERNED, THE FACTUAL MATRIX IS THAT THE ASSESSEES AES UNDERTOOK CONTRAC TS AND PRICING NEGOTIATIONS WITH THE END-CUSTOMERS. THE PROSPECTIV E CLIENTS WERE MADE AWARE THAT THE SERVICES WILL BE PROVIDED THROUGH AN ITA NO.966/DEL/2014 3 OFFSHORE DELIVERY CENTRE IN INDIA, I.E., THE ASSESS EE. THE ASSESSEE USED TRANSACTIONAL NET MARGIN METHOD (TNMM) TO BENC HMARK THIS CATEGORY OF INTERNATIONAL TRANSACTIONS. IN THE TP S TUDY, THE ASSESSEE ARRIVED AT A SET OF SEVEN COMPARABLES WITH THEIR WEIGHTED AVERAGE PROFIT RATE OF 19.14% ON THE BASIS OF MULTIPLE- YEAR DATA. AS AGAINST THIS, THE ASSESSEES PROFIT M ARGIN WAS DECLARED AT 21.54%. IN THIS BACKDROP OF FACTS, THE ASSESSEE CLAIMED THAT ITS SUCH INTERNATIONAL TRANSACTIONS WE RE AT ALP. THE TPO CALLED UPON THE ASSESSEE TO SUBMIT THE UPDATED MARGINS USING ONLY THE CURRENT YEARS DATA. IN RESPONSE TO THE TPOS LETTER, THE ASSESSEE FILED A FRESH LIST OF NINE COM PARABLES (SEVEN ORIGINAL + TWO NEW IN THE FORM OF ADITYA BIRLA MINA CS AND CEPHA IMAGING PVT. LTD.) AND ALSO STATED THAT THREE OF TH E COMPARABLES ORIGINALLY SELECTED BY IT (CORAL HUB LTD., COSMIC G LOBAL LTD. AND GENESYS INTERNATIONAL LTD.) WERE FUNCTIONALLY DIFF ERENT AND HENCE SHOULD BE ELIMINATED FROM THE LIST OF COMPARABLES. THE MEAN MARGIN OF THE REMAINING SIX COMPARABLES WAS CALCULA TED AT 5.57% TO CLAIM ONCE AGAIN THAT ITS INTERNATIONAL TRANSACT IONS UNDER THIS SEGMENT WERE AT ALP. THE TRANSFER PRICING OFFICER F OUND CERTAIN DEFECTS IN THE TP ANALYSIS CARRIED OUT BY THE ASSES SEE. AFTER APPLYING CERTAIN QUANTITATIVE AND QUALITATIVE TESTS BASED ON CERTAIN FILTERS, THE TPO FINALLY CHOSE THE FOLLOWIN G FIVE COMPARABLES:- SR. NO. NAME OP/OC% 1. ADITYA BIRLA MINACS WORLDWIDE LTD. 1.71% 2. CORAL HUB LIMITED (EARLIER KNOWN AS VISHAL ITA NO.966/DEL/2014 4 INFORMATION TECHNOLOGY LIMITED), 36.93% 3. COSMIC GLOBAL LTD., 50.7% 4. GENESYS INTERNATIONAL LTD. 58.45% 5. INFORMED TECHNOLOGIES INDIA LTD. 23.16% AVERAGE 34.19% 4. THAT IS HOW THE TPO DETERMINED ARMS LENGTH PRIC E (ALP) OF THIS SET OF INTERNATIONAL TRANSACTIONS AT A MARGIN OF 34.19% AND PROPOSED ADJUSTMENT U/S 92CA FOR A SUM OF RS.6,16,2 4,726/-. THE ASSESSEE WAS UNSUCCESSFUL BEFORE THE DRP WHO UPHELD THE DRAFT ORDER PASSED BY THE AO ON THE STRENGTH OF THE ORDER PASSED BY THE TPO. THE ASSESSEE IS AGGRIEVED AGAINST THIS TP ADDITION MADE BY THE AO IN HIS FINAL ORDER. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. CERTAIN ISSUES ON WHI CH THERE IS NO DISPUTE ARE ALP OF THE OTHER TWO INTERNATIONAL TRAN SACTIONS IN THE NATURE OF WAN CHARGES AND REIMBURSEMENT OF EXPENSE; THE APPLICATION OF TNMM ON THE THIRD SET OF INTERNATION AL TRANSACTIONS WHICH ARE DISPUTED IN THE PRESENT APPEAL; AND DETE RMINATION OF THE ASSESSEES PROFIT FROM SUCH TRANSACTIONS. BY AN D LARGE, THE ASSESSEE IS MAINLY AGGRIEVED AGAINST THE EXCLUSION OF, INTER ALIA , THE FOLLOWING THREE COMPARABLES WHICH THE ASSESSEE INSISTS FOR INCLUSION IN THE LIST OF COMPARABLES, AS WERE INCLU DED BY THE ASSESSEE IN ITS LIST OF COMPARABLES :- 1. ALLSEC TECHNOLOGIES LTD.; 2. CG.-VAK SOFTWARE AND EXPORTS LTD; AND ITA NO.966/DEL/2014 5 3. R SYSTEMS INTERNATIONAL LTD. 6. THE ASSESSEE IS ALSO AGGRIEVED AGAINST THE INCLU SION OF THREE CASES, WHICH WERE ORIGINALLY INCLUDED BY THE ASSES SEE IN ITS TP STUDY ON THE BASIS OF MULTIPLE-YEAR DATA, BUT SPECI FICALLY WITHDRAWN BY CLAIMING SUCH CASES TO BE NOT COMPARAB LE. THESE CASES ARE: I) CORAL HUB LTD. (EARLIER KNOWN AS VISHAL INFORMATION TECHNOLOGY LTD.); II) COSMIC GLOBAL LTD.; AND III) GENESYS INTERNATIONAL LTD. 7. THE ASSESSEE HAS ALSO OBJECTION TO NOT BEING A LLOWED WORKING CAPITAL ADJUSTMENT. 8. FIRSTLY, WE WILL TAKE UP SUCH CASES ONE BY ONE T O FIND OUT IF THESE WERE RIGHTLY EXCLUDED/ INCLUDED BY THE TPO. ALLSEC TECHNOLOGIES LIMITED 9.1. THIS CASE WAS INCLUDED BY THE ASSESSEE IN TH E LIST OF COMPARABLES WHICH WAS EXCLUDED BY THE TPO ON THE GR OUND OF DIMINISHING SALES FOR THE LAST THREE YEARS AND THE EXPORT REVENUES LESS THAN 75% OF THE TOTAL TURNOVER. HERE, IT IS RE LEVANT TO MENTION THAT THE TPO ADOPTED CERTAIN FILTERS WHICH HAVE BEE N MENTIONED ON PAGES 13 AND 14 OF HIS ORDER. ONE OF SUCH FILTER S IS THE EXCLUSION OF COMPANIES WHOSE EXPORT SALES ARE LESS THAN 75% OF THE TOTAL SALES FROM ITES. ANOTHER FILTER APPLIED B Y THE TPO IS THE EXCLUSION OF CASES WITH DIMINISHING REVENUES. THE T PO RECORDED ITA NO.966/DEL/2014 6 THAT THIS COMPANY HAS SOME PECULIAR PROBLEMS AND HE NCE THE SAME IS NOT IN LINE WITH THE GROWTH IN SOFTWARE IND USTRY. HOWEVER, HE DID NOT DELVE INTO THE ACTUAL FIGURES OF DIMINIS HING REVENUES OF THIS COMPANY. AS AGAINST THIS, IT IS OBSERVED THAT ALLSECS OPERATING REVENUE HAS INCREASED IN THE FINANCIAL YE AR 2008-09 OVER THE PREVIOUS YEAR WHICH IS APPARENT FROM THE S TATEMENT OF FACTS GIVEN BY THE ASSESSEE. ON A SPECIFIC QUERY, T HE LD. DR COULD NOT POINT OUT ANY MATERIAL TO INDICATE OR SUPPORT T HE TPOS ASSERTION IN HIS ORDER ABOUT THE DIMINISHING REVENU E OF ALLSEC TECHNOLOGIES LTD FOR THE LAST THREE YEARS. THE SECO ND REASON GIVEN BY THE TPO FOR DISCARDING THIS CASE FROM THE LIST OF COMPARABLES IS EXPORT LESS THAN 75% OF THE TOTAL T URNOVER. WE OBSERVE THAT ALBEIT THIS CONTENTION OF THE TPO IS C ORRECT THAT THIS CASE DOES NOT PASS THE FILTER OR TEST LAID DOWN BY THE TPO, BUT THE FACT OF THE MATTER IS THAT THE ACTUAL RATIO OF EXPO RT REVENUE TO TOTAL TURNOVER OF ALLSEC TECHNOLOGIES STANDS AT 74. 45% AS SHOWN ON PAGE 84 OF THE PAPER BOOK. IF WE LITERALLY CONS IDER THE FILTER APPLIED BY THE TPO, THIS CASE DOES NOT PASS THE TES T. HOWEVER, IT IS SEEN THAT THE ASSESSEE INCLUDED THIS CASE IN THE LIST OF COMPARABLES BY APPLYING THE FILTER OF EXCLUDING THE CASES IN WHICH EXPORT REVENUE WAS LESS THAN 25% OF THE TOTAL REVEN UE. THERE CAN BE NO HARD AND FAST RULE FOR PUTTING A SPECIFIC CEI LING IN A PARTICULAR FILTER. THE FILTERS ARE NOT SACROSANCT A S NOT STATUTORILY PRESCRIBED. THESE ARE USED OR MODIFIED FOR SELECTIO N OR REJECTION OF COMPARABLES AS PER THE CONVENIENCE OF THE CONCER NED PARTY. IF AN ASSESSEE WANTS TO INCLUDE A CERTAIN CASE IN THE LIST OF ITA NO.966/DEL/2014 7 COMPARABLES WHICH SUITS ITS REQUIREMENTS, THEN, IT WILL SUITABLY MODIFY THE FILTER ITSELF OR THE CEILING IN SUCH FIL TER, SO AS TO FIT THE BILL. POSITION IS NO DIFFERENT WHEN IT COMES TO TH E TURN OF THE REVENUE. IF IT WANTS TO INCLUDE A PARTICULAR CASE I N THE LIST OF COMPARABLES, IT WILL ALSO MODIFY THE FILTER OR CEIL ING IN SUCH FILTER TO SUIT ITS INTEREST. EQUALLY, IF BOTH THE SIDES WANT TO EXCLUDE A CASE, THEY WILL MODIFY THE FILTER ACCORDINGLY. THE NUTSH ELL IS THAT SOME SORT OF CHERRY-PICKING IS DONE BY BOTH THE SIDES. 9.2. THE EXCLUSION OF THIS CASE HAS BEEN DONE BY INCREASING THE LIMIT IN FILTER TO 75% AS AGAINST 25% APPLIED B Y THE ASSESSEE BECAUSE THE PERCENTAGE WAS 74.45%. IF THE ACTUAL RA TIO IN THIS CASE HAD BEEN MORE THAN 75%, AND THE REVENUE HELL B ENT ON EXCLUDING THIS CASE, THEN IT WOULD HAVE RESORTED TO INCREASING THE CEILING IN THE FILTER TO 80% OR STILL MORE SO AS TO ENSURE THAT IT REMAINS OUTSIDE THE LIMIT SET BY IT. AS THE RATIO OF 75% IS NOT SOMETHING WHICH IS SCIENTIFICALLY PROVEN AND THE EX PORT REVENUE OF ALLSEC TECHNOLOGIES IS 74.45% AS AGAINST THE TPO S FILTER OF 75%, WE ARE OF THE CONSIDERED OPINION THAT THE SAME CANNOT BE EXCLUDED FOR SUCH A MINUSCULE DIFFERENCE IF IT IS O THERWISE COMPARABLE. IT IS PATENT THAT THE TPO HAS NOT DISP UTED THE OTHERWISE FUNCTIONAL COMPARABILITY OF THIS CASE WIT H THAT OF THE ASSESSEE. IF WE CONSIDER THE CASE OF ALLSEC TECHNO LOGIES ON A CRITERIA OF PREPONDERANCE OF COMPARABILITY, WE FIN D THAT THE SAME MERITS INCLUSION IN THE LIST OF COMPARABLES. NOT ON LY THE TPOS REASONING ABOUT THE DECLINING REVENUE OF ALLSEC TEC HNOLOGIES OVER A PERIOD OF THREE YEARS IS INCORRECT, THIS CASE IS ALSO PASSING THE ITA NO.966/DEL/2014 8 TEST OF THE RATIO OF EXPORT TURNOVER TO TOTAL TURNO VER ON A PRAGMATIC RATIONAL BASIS. WE, THEREFORE, HOLD THAT THIS CASE SHOULD BE INCLUDED IN THE LIST OF COMPARABLES. CG-VAK SOFTWARE & EXPORTS LTD. 10.1. THE ASSESSEE INCLUDED THIS CASE IN THE LIS T OF COMPARABLES NOTICING THAT ITS RATIO OF OPERATING PROFIT TO OPER ATING COST WAS AT 3.84% AND THIS CASE WAS ENGAGED IN THE SIMILAR ACTI VITY AS WAS BEING DONE BY IT. THE TPO DISQUALIFIED THIS CASE FR OM THE LIST OF COMPARABLES ON THE BASIS OF TURNOVER FILTER OF LESS THAN RS.1 CRORE. 10.2. THE LD. AR ARGUED THAT THE TURNOVER FILTER O F RS.1 CRORE AND ABOVE HAS NO MEANING AND EVEN THE CASES WITH LOW TU RNOVER SHOULD ALSO BE INCLUDED. THIS WAS OPPOSED BY THE LD . DR BY RELYING ON CERTAIN DECISIONS OF THE TRIBUNAL BOLSTE RING HIS POINT OF VIEW. HE SUBMITTED THAT THE TURNOVER FILTER IS A RE COGNIZED METHOD TO FIND OUT THE COMPARABILITY OR OTHERWISE OF A CAS E. IT WAS STATED THAT A CASE WITH A VERY LOW TURNOVER CANNOT BE COMP ARED WITH A HIGH TURNOVER CASE BECAUSE SUCH COMPANY MAY BE OPER ATING WITH ALTOGETHER DIFFERENT MANAGEMENT MODEL INCLUDING LAC K OF HUMAN RESOURCES AND ITS MARGINS WERE LIKELY TO FLUCTUATE . 10.3. WE FIND THAT CG-VAK SOFTWARE & EXPORTS LT D. HAS TOTAL REVENUE OF RS.7.23 CRORE, OUT OF WHICH REVENUE FRO M SOFTWARE SERVICES IS TO THE TUNE OF RS.6.37 CRORE. IT DIVULG ES THAT REVENUE UNDER THE BPO SERVICES SEGMENT, WHICH HAS BEEN CLA IMED BY THE LD. AR TO BE RELEVANT FOR OUR PURPOSE, IS ONLY TO T HE TUNE OF RS.86.10 LAC. THE ASSESSEE HAS COMPUTED OPERATING P ROFIT RATIO TO ITA NO.966/DEL/2014 9 TOTAL OPERATING COST AT 4.01% OF THE BPO SERVICES SEGMENT OF CG- VAK SOFTWARE AND EXPORTS LTD. WHILE MAKING THIS CAL CULATION, THE ASSESSEE BIFURCATED OPERATING INCOME OF CG-VAK SOFT WARE & EXPORTS LTD. BETWEEN SOFTWARE SERVICES AND BPO SERV ICES SEGMENT ON THE BASIS OF REVENUE RATIO OF 637: 86. I N THE LIKE MANNER, OPERATING EXPENSES WERE ALSO BIFURCATED BET WEEN THESE TWO SEGMENTS AGAIN ON THE BASIS OF REVENUE RATIO. T HAT IS HOW, THE ASSESSEE WORKED OUT OP/TC OF BPO SERVICES SEGME NT OF THIS COMPANY AT 4.01%. 10.4. WE ARE SATISFIED WITH THE REJECTION OF TH IS CASE FROM THE LIST OF COMPARABLES. THERE ARE TWO REASONS IN SUPPO RT OF OUR DECISION, VIZ., FIRST BEING THE INCORRECT APPLICATI ON OF TNMM AND SECOND, THIS BEING A CAPTIVE UNIT VIS-A-VIS THE ASS ESSEE. 10.5. SECTION 92C OF THE ACT DEALS WITH COMPUTA TION OF ALP WITH THE HELP OF FIVE SPECIFIED AND ONE GENERAL METHOD. ONE OF SUCH METHODS IS TNMM. THE MODUS OPERANDI FOR THE COMPUTA TION OF ALP UNDER THESE FIVE DISTINCT METHODS HAS BEEN ENSH RINED IN RULE 10B (1). CLAUSE (E) OF RULE 10B (1) DEALS WITH THE DETERMINATION OF ALP UNDER TNMM, THE PRESCRIPTION OF WHOSE RELEVANT PART IS AS UNDER:- (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIAT ED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENT ERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE ; ITA NO.966/DEL/2014 10 (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED T RANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REG ARD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAK E INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNA TIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION S, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTI ONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III) ; (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN T AKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. 10.6. SUB-CLAUSE (I) OF RULE 10B (1) (E) DEALS WIT H THE COMPUTATION OF NET PROFIT MARGINS REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH ITS AE IN RELATION TO A PARTICULAR BASE SUCH AS COST INCURRED OR SALES EFFECTED, ETC. SUB-CLAUSE (II), WHICH IS CURRENTLY RELEVANT, PROVIDES IN UNEQUIVOCAL TERMS THAT THE NET PROFIT MARGINS R EALISED OF COMPARABLE UNCONTROLLED CASES SHALL BE COMPUTED HAV ING REGARD TO THE SAME BASE. THE WORD REALISED ASSUMES SIGNI FICANCE BOTH UNDER SUB-CLAUSE (I) AND SUB-CLAUSE (II). AS IT I S THE ACTUAL NET PROFIT MARGIN FOR THE CURRENT YEAR REALISED BY TH E ASSESSEE FROM ITS INTERNATIONAL TRANSACTIONS WHICH IS COVERED UND ER SUB-CLAUSE ITA NO.966/DEL/2014 11 (I), IT IS THE NET PROFIT MARGIN ACTUALLY REALISED BY THE COMPARABLE CASES WHICH IS SET OUT IN SUB-CLAUSE (II). WHAT IS RELEVANT FOR CONSIDERATION UNDER THE TNMM IN RESPECT OF COMPARAB LE CASES IS THAT THE AMOUNT OF NET PROFIT REALISED FROM UNCON TROLLED TRANSACTIONS SHOULD BE AVAILABLE SO AS TO ENABLE TH E ACTIVATION OF SUB-CLAUSE (II) OF RULE 10B(E). WE FIND THAT EVERY BUSINESS HAS ITS OWN UNIQUE FEATURES. KEY FUNCTIONS OF A BUSINESS VA RY FROM CASE TO CASE. EVEN IF THE KEY FUNCTIONS ARE SIMILAR, STI LL SOME PECULIARITIES MAKE ONE DIFFERENT FROM ANOTHER. ONLY THE CONCERNED BUSINESSMAN KNOWS ITS SALIENT FEATURES. IN THE ABSE NCE OF ANY SEPARATELY IDENTIFIABLE FIGURES OF EACH SEGMENT, ME CHANISM FOR ALLOCATION OF REVENUE AND EXPENSES DEPENDS UPON THE CRITICAL FEATURES OF EACH BUSINESS. IN ONE BUSINESS, SUCH AL LOCATION MAY BE JUSTIFIED ON ONE YARDSTICK, WHILE IN ANOTHER, I T MAY BE JUSTIFIED ON ANOTHER. THE CRUX IS THAT IT IS NOT POSSIBLE FOR AN OUTSIDER TO PRECISELY CALCULATE THE PROFIT REALISED OF A PARTI CULAR SEGMENT WHEN THE RESULTS ARE REPORTED ON ENTITY LEVEL. THAT IS REASON FOR WHICH THE ENTIRE MACHINERY FOR COMPUTATION OF ALP U NDER TNMM COMES TO A STANDSTILL FOR THE LACK OF THE AVAILABIL ITY OF THE FIGURE OF NET PROFIT REALISED IF THE RESULTS OF A PARTICULAR SEGMENT ARE NOT AVAILABLE OF AN OTHERWISE COMPARABLE CASE TO THAT P ARTICULAR EXTENT. WHEN THE DELEGATED LEGISLATURE HAS EMPLOYE D THE WORD REALISED IN THE CONTEXT OF NET PROFIT MARGIN OF C OMPARABLES, IT MUST BE THE AMOUNT OF NET PROFIT REPORTED AS REALI SED BY SUCH CASE. NOTHING MORE OR LESS THAN THAT CAN BE ACCEPTE D. THE SPECIAL BENCH OF THE TRIBUNAL IN LG ELECTRONICS INDIA PVT. LTD. VS. ITA NO.966/DEL/2014 12 ACIT (2013) 140 ITD 41 (DEL) (SB) HAS HELD THAT THE PROCEDURE PRESCRIBED UNDER THE RELEVANT RULE MUST BE SCRUPULO USLY ADHERED TO AND IT IS NOT PERMISSIBLE TO DEVIATE FROM THE SA ME IN ANY CIRCUMSTANCE. THIS MANIFESTS THAT THE AMOUNT OF `NE T PROFIT REALISED CANNOT BE SUBSTITUTED WITH CERTAIN OTHER HYPOTHETICAL ARITHMETICAL EXERCISE. 10.7. COMING BACK TO CG-VAK SOFTWARE & EXPORTS L TD., IT IS SEEN THAT NET PROFIT MARGIN REALIZED FROM THE BPO SERVIC ES SEGMENT IS NOT SEPARATELY REPORTED BY SUCH COMPANY. THUS THIS CASE NEEDS TO BE EXCLUDED AT THE VERY OUTSET FOR LACK OF THE A VAILABILITY OF THE DATA OF THE BPO SEGMENT. PROCEEDING FURTHER, IT IS SEEN THAT THE ASSESSEE PROCEEDED TO CALCULATE THE SO CALLED AMOUN T OF NET PROFIT REALISED AT 4.01% OF THE BPO SEGMENT BY BIF URCATING OPERATING INCOME AND OPERATING EXPENSES IN THE RATI O OF REVENUE FROM THESE SEGMENTS. IF SUCH RATIO OF REVENUE OF T WO SEGMENTS IS TO BE APPLIED BOTH TO THE OPERATING INCOME AND OPER ATING EXPENSES, THAT IT WOULD LEAD TO THE SUPPOSITION THA T THE NET OPERATING PROFIT OF BOTH THE SEGMENTS ARE EQUAL. I F THIS PRESUMPTION IS BROUGHT TO A LOGICAL CONCLUSION THEN THE VERY NEED TO CALCULATE THE NET PROFIT REALISED FROM BPO SEGME NT COMES TO A NAUGHT. IF SUCH CALCULATION IS ALLOWED TO PREVAIL, THEN IT WOULD MEAN THAT THE RESULT OF THE ENTITY LEVEL HAVE BEEN TAKEN INTO CONSIDERATION IN THE GARB OF THE NET PROFIT REALISE D FROM THE BPO SEGMENT. PATENTLY, SUCH A PROPOSITION IS NOT CAPAB LE OF ACCEPTANCE. AS WE HAVE TO COMPARE THE RESULT OF A S IMILAR SEGMENT AND NOT THE ENTITY, THE EXERCISE DONE BY T HE ASSESSEE IN ITA NO.966/DEL/2014 13 CONSIDERING THIS CASE AS A COMPARABLE HAS FRUSTRATE D THE CALCULATIONS. 10.8. THE SECOND REASON FOR WHICH THIS CASE IS H ELD TO BE RIGHTLY EXCLUDED FROM THE LIST OF COMPARABLES IS THE TOTAL REVENUES UNDER BPO SEGMENT AT RS.86.10 LAC, AS AGAINST THE ASSESSE ES REVENUE AT RS.59 CRORE AND ODD. WHEREAS, THE CASE OF THE AS SESSEE IS THAT THE TURNOVER FILTER OF RS.1 CRORE AND ABOVE SHOULD NOT BE APPLIED TO EXCLUDE THE CASE OF CG-VAK, THE LD. DR HAS RELIE D ON CERTAIN DECISIONS TO BRING HOME THE POINT THAT THE APPLICAT ION OF SUCH A FILTER IS IN ORDER. AT THIS JUNCTURE, WE DEEM IT EX PEDIENT TO CONSIDER THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (2013) 219 TAXMAN 26 (DEL) IN WHICH THAT ASSESSEE WAS A WHOLLY OWNED SUBSIDIA RY OF FOREIGN COMPANY ENGAGED IN THE BUSINESS OF DEVELOPM ENT OF SOFTWARE OF PARENT COMPANY. THE TPO INCLUDED THE CA SES OF SATYAM COMPUTER SERVICES LTD., L&T INFOTECH LTD. AN D INFOSYS TECHNOLOGIES LTD. IN THE LIST OF COMPARABLES FOR WO RKING OUT ALP OF THE ASSESSEES INTERNATIONAL TRANSACTIONS. THE DRP EXCLUDED SATYAM COMPUTER SERVICES ONLY. THE TRIBUNAL, INTER ALIA , HELD THAT THE INFOSYS ALSO SHOULD BE EXCLUDED FROM THE LIST O F COMPARABLES AS IT WAS A GIANT COMPANY IN THE AREA OF DEVELOPMEN T OF SOFTWARE, WHEREAS THE ASSESSEE WAS A CAPTIVE UNIT OF PARENT C OMPANY ASSUMING ONLY LIMITED RISKS. THE REVENUE CHALLENGE D THE DECISION OF THE TRIBUNAL BEFORE THE HONBLE HIGH COURT AGAI NST THE EXCLUSION OF INFOSYS FROM THE LIST OF COMPARABLES. THE HONBLE HIGH COURT APPROVED THE VIEW TAKEN BY THE TRIBUNAL BY OBSERVING ITA NO.966/DEL/2014 14 THAT A GIANT COMPANY CANNOT BE COMPARED WITH A CAPT IVE UNIT. REVERTING TO THE FACTS UNDER CONSIDERATION, WE FIND THAT THE TURNOVER OF CG-VAK FROM BPO SERVICES SEGMENT IS ONL Y TO THE EXTENT OF RS.86 LAC AGAINST THE ASSESSEES WHOPPING TURNOVER OF RS.59 CRORE. BY NO STANDARD, THE TURNOVER OF RS. 86 LAC CAN BE COMPARED WITH THAT OF RS.59 CRORE. THE SAME ANALOG Y AS APPROVED BY THE HONBLE HIGH COURT IN AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA) THAT A GIANT COMPANY CANNOT BE COMPARED WITH A CAPTIVE UNIT, APPLIES WITH FULL FORCE TO THE INSTAN T CASE AS WELL. THE ONLY DIFFERENCE BEING, THAT, WHEREAS IN THE CASE OF AGNITY INDIA, THE ASSESSEE WAS A CAPTIVE UNIT AND THE COMPARABLE CHOSEN BY THE TPO WAS A GIANT COMPANY, THE POSITION IS CONVER SE IN THE PRESENT CASE INASMUCH AS THE ASSESSEE IS A GIANT C OMPANY AND BPO SEGMENT OF CG-VAK IS ONLY A CAPTIVE ONE. IF A G IANT COMPANY CANNOT BE CONSIDERED AS COMPARABLE TO A SMALL COMPA NY, IN THE LIKE MANNER, A SMALL COMPANY CANNOT BE EQUALLY COMP ARED WITH A GIANT COMPANY. IN OUR CONSIDERED OPINION, THE CASE OF CG-VAK CANNOT BE HELD TO BE COMPARABLE ON THE STRENGTH OF ITS VOLUME OF BUSINESS. WE WANT TO MAKE IT CLEAR THAT WE HAVE DES ISTED FROM EXPRESSING ANY OPINION ON THE APPLICABILITY OR OTHE RWISE OF A TURNOVER FILTER, BUT, SIMPLY HELD THAT A GIANT COMP ANY CANNOT BE COMPARED WITH A CAPTIVE UNIT. 10.9. SEEN FROM BOTH THE ANGLES THE COMPUTATION OF NET PROFIT MARGIN REALISED BY THE BPO UNIT OF CG-VAK IS NOT ADEQUATELY WORKABLE; AND THE SAME BEING A CAPTIVE U NIT VIS-A-VIS ITA NO.966/DEL/2014 15 THE ASSESSEE, WE HOLD THAT THIS CASE HAS BEEN RIGHT LY HELD TO BE NOT INCLUDIBLE IN THE LIST OF COMPARABLES. R. SYSTEMS INTERNATIONAL LIMITED 11.1. THE ASSESSEE INCLUDED THIS CASE IN A LIST OF COMPARABLES. THE TPO APPLIED A FILTER OF EXCLUDING COMPANIES WHOSE DATA FOR THE FINANCIAL YEAR 2008-09 WAS NOT A VAILABLE. AS THE DATA CONSIDERED BY R. SYSTEMS INTERNATIONAL LTD . WAS FOR THE YEAR ENDING OTHER THAN MARCH, THE TPO HELD THAT THI S CASE WAS NOT COMPARABLE. THE ASSESSEE IS CONTESTING THE EXCLUSIO N OF THIS CASE. 11.2. THE LD. AR FAIRLY CONCEDED THAT R. SYSTEMS WAS FOLLOWING CALENDAR YEAR FOR MAINTAINING ITS ANNUAL ACCOUNTS A ND, AS SUCH, THE ASSESSEE ADOPTED DATA FOR 31.12.08 FOR INCLUDIN G IT IN THE LIST OF COMPARABLES. IT WAS, HOWEVER, STRESSED THAT THI S CASE OUGHT NOT TO HAVE BEEN EXCLUDED ON THIS COUNT ALONE, WHE N IT WAS OTHERWISE COMPARABLE. THE LD. DR OPPOSED THIS CONTE NTION BY PLACING RELIANCE ON CERTAIN DECISIONS IN WHICH IT H AS BEEN HELD THAT IF THE DATA FOR THE FINANCIAL YEAR OF THE COMP ARABLE CASE SIMILAR TO THAT OF THE TESTED PARTY IS NOT AVAILABL E, THEN, SUCH CASE SHOULD BE EXPUNGED FROM THE LIST OF COMPARABLES. 11.3. IN ORDER TO APPRECIATE THE RIVAL SUBMISSION S ON THIS ISSUE, IT WOULD BE APT TO NOTE THE RELEVANT PART OF SUB-RULE (4) OF RULE 10B WHICH IS AS UNDER:- `(4) THE DATA TO BE USED IN ANALYSING THE COMPARABILI TY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACT ION SHALL BE ITA NO.966/DEL/2014 16 THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO 11.4. ON CIRCUMSPECTION OF THE ABOVE PART OF THIS SUB-RULE, IT COMES TO FORE THAT THE COMPARABILITY OF AN UNCONTRO LLED TRANSACTION CAN BE ANALYSED WITH THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE TRANSACTION HAS BEEN E NTERED INTO. AS PER THIS MANDATE, IT IS CLEAR THAT IF THE TESTED P ARTY HAS MARCH ENDING, THEN THE COMPARABLES MUST ALSO HAVE THE DAT A RELATING TO THE FINANCIAL YEAR ENDING ON 31 ST MARCH ITSELF. IF SUCH A DATA IS NOT AVAILABLE, THEN THE CASE SHOULD BE DISQUALIFIED FRO M THE LIST OF COMPARABLES. 11.5. TURNING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSEE HAS ADOPTED THE FIGURES OF THIS COMPANY FO R THE CALENDAR YEAR ENDING 31.12.2008. SINCE THE ASSESSEE IS CLOSING ITS ACCOUNTS AS ON 31.3.2009, NATURALLY, THE DATA OF R. SYSTEMS DOES NOT PASS THE TEST LAID DOWN IN SUB-RULE (4) OF RULE 10B. THE LD. AR INVITED OUR ATTENTION TOWARDS THE ANNUAL ACCOUNTS O F R. SYSTEMS AVAILABLE AT PAGE 144 OF THE ASSESSEES PAPER BOOK. IT CAN BE SEEN FROM THE AUDITED ACCOUNTS OF R. SYSTEMS THAT T HE DATA FOR YEAR ENDING 31.12.08 HAS BEEN GIVEN UNDER ONE COLUM N AND THE DATA FOR QUARTER ENDING 31.3.09 AND 31.3.08 (BOTH A UDITED) HAS BEEN GIVEN IN THE OTHER TWO COLUMNS. THIS SHOWS THA T IF WE TAKE UP THE YEARLY DATA ENDING 31.12.08 AND EXCLUDE THE RESULTS OF QUARTER ENDING 31.3.08 AND INCLUDE THE RESULTS OF Q UARTER ENDING 31.3.09, WHAT WE GET IS THE DATA FOR THE FINANCIAL YEAR ENDING ITA NO.966/DEL/2014 17 31.3.09, BEING THE SAME FINANCIAL YEAR IN WHICH THE INSTANT INTERNATIONAL TRANSACTIONS WERE ENTERED INTO BY THE ASSESSEE. 11.6. THE LD. DR RELIED ON AN ORDER PASSED BY TH E MUMBAI BENCH OF THE TRIBUNAL IN ACIT VS. HAPAG LLOYD GLOBAL SERVICES LTD. 2013- TII-68-ITAT-MUM-TP (AUTHORED BY ONE OF US, NAMELY, THE AM) IN WHICH IT HAS BEEN HELD THAT A COMPANY WITH A DIFFER ENT FINANCIAL YEAR ENDING CANNOT BE COMPARED AND IS LIKELY TO BE EXCLUDED. THERE IS NOT AND CANNOT BE ANY DISPUTE OVER THIS PR OPOSITION THAT AN OTHERWISE COMPARABLE COMPANY HAVING A DIFFERENT FINANCIAL YEAR CANNOT BE CONSIDERED AS COMPARABLE. BUT IF THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO IS DIRECTLY AVAILABLE FROM THE ANNUAL AC COUNTS OF THAT COMPARABLE, THEN IT CANNOT BE HELD AS NOT PASSING TH E TEST GIVEN UNDER SUB-RULE (4) OF RULE 10B. IN THE CASE UNDER CONSIDERATION BEFORE THE MUMBAI BENCH, THERE IS NO MENTION OF THE AUDITED QU ARTERLY DATA OF SUCH COMPARABLE BEING AVAILABLE FOR CONSIDERATIO N. IT IS QUITE NATURAL THAT IF THE DATA OF THE FINANCIAL YEAR IS N OT AVAILABLE OR NOT CAPABLE OF BEING DIRECTLY DEDUCED FROM THE ANNUAL A CCOUNTS OF SUCH COMPANY, THEN SUCH CASE DESERVES TO BE EXCLUDE D. IF, HOWEVER, THE AUDITED ACCOUNTS OF SUCH COMPARABLE DI RECTLY GIVE THE FIGURES IN SUCH A MANNER THAT THE DATA OF THE F INANCIAL YEAR IN WHICH THE ASSESSEE HAS ENTERED INTO AN INTERNATIONA L TRANSACTION CAN BE EASILY DEDUCED, THEN THERE IS NO REASON FOR EXCLUDING SUCH AN OTHERWISE COMPARABLE CASE. ITA NO.966/DEL/2014 18 11.7. WE FIND THAT R. SYSTEMS INTERNATIONAL LTD. HAS BEEN EXCLUDED BY THE TPO SOLELY FOR THE REASON THAT ITS FINANCIAL YEAR IS DIFFERENT WITHOUT CONSIDERING THAT THE DATA FOR THE FINANCIAL YEAR ADOPTED BY THE ASSESSEE CAN BE EASILY COMPILED FROM THE AUDITED STATEMENTS OF SUCH COMPANY. WE, THEREFORE, SET ASID E THE IMPUGNED ORDER ON THIS ISSUE AND REMIT THE MATTER T O THE TPO/AO FOR INCLUDING THE CASE OF R. SYSTEMS INTERNATIONAL LTD. IN THE LIST OF COMPARABLES BY WORKING OUT THE FIGURES RELEVANT TO THE FINANCIAL YEAR ENDING 31.3.09 FROM THE AUDITED ACCOUNTS OF R. SYSTEMS INTERNATIONAL LTD. CORAL HUB LTD . 12.1. THIS CASE WAS EARLIER INCLUDED BY THE ASSESS EE IN THE LIST OF COMPARABLES IN THE TRANSFER PRICING STUDY B Y CONSIDERING MULTIPLE-YEAR DATA. HOWEVER, WHEN THE TPO REQUIRED THE ASSESSEE TO FURNISH DATA OF COMPARABLES FOR THE CUR RENT YEAR ALONE, THE ASSESSEE REQUESTED FOR THE EXCLUSION OF THIS CASE FROM THE LIST OF COMPARABLES. THE LD. DR OPPOSED THIS CO NTENTION BY URGING THAT THE ASSESSEE CANNOT BE ALLOWED TO RESI LE FROM ITS ORIGINAL STAND. 12.2. WE ARE DISINCLINED TO SUSTAIN THE LEGAL OBJE CTION TAKEN BY THE LD. DR THAT THE ASSESSEE SHOULD BE PROHIBITE D FROM TAKING A STAND CONTRARY TO THE ONE WHICH WAS TAKEN AT THE ST AGE OF THE TP STUDY OR DURING THE COURSE OF PROCEEDINGS BEFORE TH E AUTHORITIES BELOW. IT GOES WITHOUT SAYING THAT THE OBJECT OF AS SESSMENT IS TO DETERMINE THE INCOME IN RESPECT OF WHICH THE ASSESS EE IS RIGHTLY ITA NO.966/DEL/2014 19 CHARGEABLE TO TAX. AS THE INCOME NOT ORIGINALLY OFF ERED FOR TAXATION, IF OTHERWISE CHARGEABLE, IS REQUIRED TO B E INCLUDED IN THE TOTAL INCOME, IN THE SAME BREATH, ANY INCOME WRONGL Y INCLUDED IN THE TOTAL INCOME, WHICH IS NOT OTHERWISE CHARGEABLE , SHOULD BE EXCLUDED. THERE CAN BE NO ESTOPPEL AGAINST THE PROV ISIONS OF THE ACT. EXTENDING THIS PROPOSITION FURTHER TO THE CONT EXT OF THE TRANSFER PRICING, IF THE ASSESSEE FAILS TO REPORT A N OTHERWISE COMPARABLE CASE, THEN THE TPO IS OBLIGED TO INCLUDE IT IN THE LIST OF COMPARABLES, AND IN THE SAME MANNER, IF THE ASSESSE E WRONGLY REPORTED AN INCOMPARABLE CASE AS COMPARABLE IN ITS TP STUDY AND THEN LATER ON CLAIMS THAT IT SHOULD BE EXCLUDED THE N, THERE SHOULD BE NOTHING TO FORBID THE ASSESSEE FROM CLAIMING SO , PROVIDED THE TPO IS SATISFIED THAT THE CASE SO ORIGINALLY REPORT ED AS COMPARABLE IS, IN FACT, NOT COMPARABLE. THE SPECIAL BENCH OF THE TRIBUNAL IN DCIT VS. QUARK SYSTEMS PVT. LTD. (2010) 132 TTJ (CH D) (SB) 1 HAS ALSO HELD THAT A CASE WHICH WAS INCLUDED BY THE ASS ESSEE AND ALSO BY THE TPO IN THE LIST OF COMPARABLES AT THE TIME O F COMPUTING ALP, CAN BE EXCLUDED BY THE TRIBUNAL IF THE ASSESS EE PROVES THAT THE SAME WAS WRONGLY INCLUDED. 12.3. REVERTING TO THE FACTS OF THE EXTANT CASE, WE FIND THAT THE POSITION AS OBTAINING IN THE PRESENT CASE IS RATHER SIMPLE INASMUCH AS THE ASSESSEE, HAVING ORIGINALLY INCLUDE D THIS CASE IN THE LIST OF COMPARABLES, MADE A CATEGORICAL CLAIM B EFORE THE TPO FOR EXCLUDING IT BECAUSE OF NON-COMPARABILITY. AS NO REASON HAS BEEN GIVEN BY THE TPO FOR ACCEPTING OR REJECTING TH E ASSESSEES REQUEST, IT WOULD BE WORTHWHILE TO TAKE UP THE REAS ONS NOW GIVEN ITA NO.966/DEL/2014 20 BY THE ASSESSEE FOR CONSIDERATION AND DECISION. THE LD. AR HAS POINTED OUT THAT VISHAL INFORMATION TECHNOLOGIES LT D., NOW KNOWN AS CORAL HUB LTD., OUTSOURCES SIGNIFICANT PORTION O F ITS WORK FROM OUTSIDE VENDORS. WE FIND FROM THE MATERIAL ON RECOR D SUGGESTS THAT OUTSOURCING CHARGES CONSTITUTE 90% OF THE TOTA L OPERATING COST IN THIS CASE. ON A SPECIFIC QUERY, THE LD. DR ADMITTED THAT OUR ASSESSEE IS ENGAGED IN THE BUSINESS OF DOING AC TIVITIES AT ITS OWN WITHOUT ANY OUTSOURCING. THIS CRUCIAL FACTOR, H AVING A GREATER BEARING ON THE PROFITABILITY, MAKES IT DISTINGUISH ABLE FROM THE ASSESSEE. THE MUMBAI BENCH OF THE TRIBUNAL IN THE C ASE OF HAPAG LLOYD GLOBAL SERVICES (SUPRA) HAS HELD THAT VISHAL INFORMATION TECHNOLOGIES LTD. CANNOT BE CONSIDERED AS COMPARABL E BECAUSE OF THE OVERWHELMING OUTSOURCING ACTIVITY CARRIED OU T BY IT. THIS VIEW WAS TAKEN BY RELYING ON ANOTHER ORDER PASSED B Y THE MUMBAI BENCH OF THE TRIBUNAL IN ACIT VS. MAERSK GLO BAL SERVICE CENTRE (INDIA) PVT. LTD. (ITA NO.3774/M/2011). IN T HE LATER CASE ALSO, THE TRIBUNAL HELD THAT THE CASE OF VISHAL INF ORMATION TECHNOLOGIES LTD. OR CORAL HUB LTD. WAS NOT INCLUDI BLE IN THE LIST OF COMPARABLES BECAUSE OF MAJOR OUTSOURCING. SINCE THE FACTS OF THE INSTANT CASE ARE ON ALL FOURS WITH THESE TWO CASES, WE ARE OF THE CONSIDERED OPINION THAT THIS CASE IS REQUIRED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. WE ORDER ACCORDINGLY. COSMIC GLOBAL LIMITED 13.1. THIS CASE WAS ALSO ORIGINALLY INCLUDED BY TH E ASSESSEE IN THE LIST OF COMPARABLES IN ITS TP STUDY. HOWEVER , THE SAME WAS ITA NO.966/DEL/2014 21 REQUESTED FOR EXCLUSION BECAUSE OF SEVERAL REASONS. UNIMPRESSED, THE TPO INCLUDED THIS CASE IN THE LIST OF COMPARABL ES WHICH ACTION CAME TO BE UPHELD BY THE DRP. IN VIEW OF THE FOREGO ING DISCUSSION, WE HOLD THAT THE ASSESSEE CANNOT BE PRO HIBITED FROM DEMONSTRATING THAT THIS CASE IS INCOMPARABLE. 13.2. NOW COMING TO THE FACTUAL MATRIX OF THIS C ASE, WE FIND FROM THE MATERIAL ON RECORD THAT OUTSOURCING CHARGE S OF THIS CASE CONSTITUTE 57.31% OF THE TOTAL OPERATING COSTS. THI S DOES NOT APPEAR TO US TO BE A VALID REASON FOR ELIMINATING T HIS CASE FROM THE LIST OF COMPARABLES. ON GOING THROUGH THE ANNUA L ACCOUNTS OF COSMIC GLOBAL LIMITED, A COPY OF WHICH HAS BEEN PLA CED ON RECORD, WE FIND THAT ITS TOTAL REVENUE FROM OPERATI ONS ARE AT RS.7.37 CRORE DIVIDED INTO THREE SEGMENTS, NAMELY, MEDICAL TRANSCRIPTION AND CONSULTANCY SERVICES AT RS.9.90 L ACS, TRANSLATION CHARGES AT RS.6.99 CRORE AND ACCOUNTS BPO AT RS.27. 76 LAC. THE LD. AR HAS MADE OUT A CASE THAT OUTSOURCING ACTIVIT Y CARRIED OUT BY THIS COMPANY CONSTITUTES 57% OF TOTAL EXPENSES. THE REASON FOR WHICH WE ARE NOT AGREEABLE WITH THE LD. AR IS T HAT WE HAVE TO EXAMINE THE REVENUE OF THIS CASE ONLY FROM ACCOUNTS BPO SEGMENT AND NOT ON THE ENTITY LEVEL, BEING ALSO FR OM MEDICAL TRANSCRIPTION AND TRANSLATION CHARGES. WHEN WE ARE EXAMINING THE RESULTS OF THIS COMPANY FROM THE ACCOUNTS BPO S EGMENT ALONE, THERE IS NO NEED TO EXAMINE THE POSITION UND ER OTHER SEGMENTS. THE ENTIRE OUTSOURCING IS CONFINED TO TRA NSLATION CHARGES PAID AT RS.3.00 CRORE, WHICH IS STRICTLY IN THE REALM OF THE TRANSLATION SEGMENT, REVENUES FROM WHICH ARE TO THE TUNE OF ITA NO.966/DEL/2014 22 RS.6.99 CRORE. IF THIS SEGMENT OF TRANSLATION IS N OT UNDER CONSIDERATION FOR DECIDING AS TO WHETHER THIS CASE IS COMPARABLE OR NOT, WE CANNOT TAKE RECOURSE TO THE FIGURES WHIC H ARE RELEVANT FOR SEGMENTS OTHER THAN ACCOUNTS BPO. THUS IT IS HE LD THAT THIS CASE CANNOT BE EXCLUDED ON THE STRENGTH OF OUTSOURC ING ACTIVITY, WHICH IS ALIEN TO THE RELEVANT SEGMENT. 13.3. HOWEVER, WE FIND THIS CASE TO INCOMPARABLE ON THE ALTERNATIVE ARGUMENT ADVANCED BY THE LD. AR TO THE EFFECT THAT TOTAL REVENUE OF THE ACCOUNTS BPO SEGMENT OF COSMIC GLOBAL LIMITED IS VERY LOW AT RS.27.76 LACS. WE HAVE DISCU SSED THIS ASPECT ABOVE IN THE CONTEXT OF CG-VAKS CASE AND HE LD THAT A CAPTIVE UNIT CANNOT BE COMPARED WITH A GIANT CASE A ND THUS EXCLUDED CG-VAK WITH TURNOVER FROM ACCOUNTS BPO SEG MENT AT RS.86.10 LACS. AS THE SEGMENTAL REVENUE OF BPO SEG MENT OF COSMIC GLOBAL LIMITED AT RS.27.76 LAC IS STILL ON M UCH LOWER SIDE, THE REASONS GIVEN ABOVE WOULD FULLY APPLY TO HOLD C OSMIC GLOBAL LIMITED AS INCOMPARABLE. THIS CASE IS, THEREFORE, D IRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. GENESYS INTERNATIONAL CORPORATION LTD. 14.1. NOW WE ESPOUSE THE CASE OF GENESYS INTERNATI ONAL CORPORATION LTD. WHICH WAS ORIGINALLY TAKEN BY THE ASSESSEE AS COMPARABLE IN ITS TP STUDY. HOWEVER, DURING THE COU RSE OF PROCEEDINGS WHEN THE ASSESSEE WAS CALLED UPON TO FU RNISH THE LIST OF COMPARABLES WITH THE CURRENT YEAR DATA, THE ASSE SSEE CLAIMED THAT THIS CASE SHOULD BE EXCLUDED AS THE SAME IS FU NCTIONALLY ITA NO.966/DEL/2014 23 INCOMPARABLE. IT WAS STATED THAT THIS COMPANY WAS E NGAGED IN THE BUSINESS OF GEOGRAPHICAL INFORMATION SERVICES C OMPRISING OF PHOTOGRAMMETRY, REMOTE SENSING, ETC., WHICH WAS QUI TE DIFFERENT FROM THAT OF THE ASSESSEE. NOT CONVINCED, THE TPO I NCLUDED THIS CASE. THE ASSESSEE IS AGGRIEVED AGAINST SUCH INCLUS ION. 14.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RIVAL MATERIALS ON RECORD. IT HAS BEEN NOTICED SUPR A THAT THE ASSESSEE IS BASICALLY PROVIDING VARIOUS SERVICES TO THE CUSTOMERS OF ITS AES IN RELATION TO HUMAN RESOURCES WHICH ARE MORE OR LESS CENTERED AROUND THE EMPLOYEES OF THE PROSPECTIVE CL IENTS. WHEN WE CONSIDER THE NATURE OF SERVICES PROVIDED BY GENE SYS INTERNATIONAL CORPORATION LTD., IT COMES TO THE FOR EFRONT THAT THEY ARE PROVIDING FULL RANGE OF GEOSPATIAL SERVICES TO ITS CUSTOMERS. IN SIMPLE TERMS, GEOSPATIAL SERVICES MEANS THE SERVICE S RELATING TO THE RELATIVE POSITION OF THINGS ON THE EARTHS SURF ACE. THESE BASICALLY INCLUDE 3D MAPPING, NAVIGATION MAPS, IMAG E PROCESSING, CADASTRAL MAPPING, ETC. IF WE TAKE INT O ACCOUNT THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE, BEING FINANCIAL AND RETIREMENT SECURITY, HEALTH, PRODUCTIVITY OF EMPLOY EES AND EMPLOYMENT RELATIONSHIPS AND THEN TRY TO COMPARE TH EM WITH THOSE RENDERED BY GENESYS, IT IS MANIFESTED THAT BO TH ARE TOTALLY INCOMPARABLE. 14.3. THE TPO ON PAGE 48 OF HIS ORDER HAS EXAM INED CBDT CIRCULAR SO 890 (E) DATED 26.9.2000 WHICH PROVIDES A DETAILED LIST OF PRODUCTS OR SERVICES THAT CAN BE COVERED UNDER T HE ITES FOR THE PURPOSES OF SECTION 10A AND 10B OF THE ACT. IN THIS CIRCULAR, THE ITA NO.966/DEL/2014 24 INFORMATION TECHNOLOGY ENABLED PRODUCTS/SERVICES HA VE BEEN DIVIDED INTO FIFTEEN CATEGORIES, STARTING WITH BAN K OFFICE OPERATIONS, CALL CENTRES ETC. AND ENDING WITH WEBSI TE SERVICES. FROM THE VERY DESCRIPTION OF SUCH SERVICES, IT IS P ALPABLE THAT EVEN THOUGH THESE FALL UNDER THE OVERALL ITES CATEG ORY, BUT SOME OF THEM ARE QUITE DIFFERENT FROM EACH OTHER. TO CIT E, SERVICE AT SL.NO. (VI) OF THIS CIRCULAR IS GEOGRAPHIC INFORMA TION SYSTEM SERVICES AND AT SL. NO. (VII) IS HUMAN RESOURCES S ERVICES. NO DOUBT, ALL THESE FIFTEEN CATEGORIES OF PRODUCTS/SER VICES HAVE BEEN INCLUDED UNDER THE MAJOR HEAD OF INFORMATION TECHN OLOGY ENABLED SERVICES (ITES), BUT MOST OF THEM ARE QUIT E DISTINGUISHABLE FROM OTHERS. IN OUR CONSIDERED OPIN ION, THE FIFTEEN BROAD CATEGORIES SET OUT IN THIS CIRCULAR CANNOT PER SE BE CLAIMED AS SIMILAR TO EACH OTHER. A CURSORY LOOK AT THESE P RODUCTS/SERVICES TRANSPIRES THAT SOME OF THEM ARE FUNCTIONALLY QUITE DIFFERENT FROM EACH OTHER. FURTHER THE LEVEL OF INVESTMENT REQUIRE D FOR PROVIDING SUCH SERVICES IS ALSO NOT CONSISTENT. IN OUR CONSI DERED OPINION, THE MERE FACT THAT TWO SERVICES ARE PLACED UNDER TH IS CATEGORY DO NOT BECOME AUTOMATICALLY COMPARABLE. IF A CASE PROV IDING ONE CATEGORY OF SERVICES UNDER ITES IS CLAIMED AS COMPA RABLE WITH ANOTHER IN THE CATEGORY OF SERVICE UNDER ITES AS PE R THIS CIRCULAR, THEN IT MUST BE SHOWN EX FACIE THAT IT IS BROADLY SIMILAR. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE SERVICES RENDERED BY GENESYS FALL UNDER CLAUSE (VI) WITH THE HEADING GEOGRAPHICAL INFORMATION SYSTEMS SERVICES , WHEREAS THOSE RENDERED BY THE ASSESSEE FALL PARTLY UNDER CL AUSE (VII) WITH ITA NO.966/DEL/2014 25 THE HEADING HUMAN RESOURCES SERVICES AND PARTLY U NDER CLAUSE (XI) WITH THE HEADING PAYROLL. ON JUXTAPOSITION EXAMINATION OF THESE TWO SETS OF SERVICES, WE FIND THAT THERE IS A VAST DIFFERENCE WHICH MAKE ONE QUITE DISTINCT FROM THE OTHER. IN VI EW OF SUCH FUNCTIONAL INCOMPARABILITY BETWEEN THE ASSESSEE AND GENESYS, WE HOLD THAT THIS COMPANY CANNOT BE TREATED AS COMPARA BLE. WE, THEREFORE, DIRECT TO EXCLUDE THIS CASE FROM THE LIS T OF COMPARABLES. 15.1. APART FROM THE INCLUSION AND EXCLUSION OF T HE ABOVE DISCUSSED SIX CASES, THE LD. AR ALSO CHALLENGED THE NON-INCLUSION OF CEPHA IMAGING PVT. LTD., MICRO GENETIC SYSTEMS A ND FORTUNE INFOTECH IN THE LIST OF COMPARABLES, WHICH WERE ARG UED TO BE INCLUDED BY THE ASSESSEE DURING THE COURSE OF PROCE EDINGS BEFORE THE AUTHORITIES BELOW. FIRSTLY, WE TAKE UP THE CAS E OF CEPHA IMAGES WHICH IS ENGAGED IN THE BUSINESS OF E-PUBLIS HING SERVICES. E-PUBLISHING SERVICES INCLUDE TYPESETTING, COMPOSIT ION, ART WORK, PROOF READING, PROJECT MANAGEMENT, XML CONVERSIONS A ND MULTIMEDIA SERVICES PROVIDED TO PUBLISHERS OF BOOKS AND JOURNALS. WHEN WE CONSIDER THE NATURE OF SERVICES PROVIDED BY CEPHA IMAGING VIS-A-VIS THOSE RENDERED BY THE ASSESSEE, WHICH ARE BASICALLY IN THE NATURE OF HUMAN RESOURCES OR PAYRO LL, WE FIND THAT THE SAME ARE NOT COMPARABLE. THE VIEW TAKEN BY THE TPO IN EXCLUDING THIS CASE FROM THE LIST OF COMPARABLES IS UPHELD. 15.2. IN SO FAR AS THE CASE OF MICRO GENETICS SYSTE MS LTD. IS CONCERNED, WE FIND FROM A PERUSAL OF THEIR ANNUAL A CCOUNTS OF, A COPY OF WHICH IS AVAILABLE ON PAGES 719 ONWARDS OF THE PAPER BOOK, THAT THIS COMPANY IS BASICALLY ENGAGED IN REN DERING MEDICAL ITA NO.966/DEL/2014 26 TRANSCRIPTION SERVICES. WE ARE AT LOSS TO APPRECIAT E AS TO HOW MEDICAL TRANSCRIPTION SERVICES CAN BE COMPARED WITH THE HUMAN RESOURCES AND PAYROLL SERVICES PROVIDED BY THE ASSE SSEE TO THE CLIENTS OF ITS AES. THE REASONS WHICH LED TO THE E XCLUSION OF THE CASE OF GENESYS INTERNATIONAL CORPORATION LTD. FROM THE LIST OF COMPARABLES DRAWN BY THE TPO, FULLY APPLY AGAINST T HE NON- INCLUSION OF THE CASE OF MICRO GENETICS SYSTEMS LTD ., WHICH IS OPERATING IN AN ALTOGETHER DIFFERENT LINE OF ACTIVI TY MAKING IT TOTALLY INCOMPARABLE WITH THAT OF THE ASSESSEE. WE , THEREFORE, APPROVE THE ACTION OF THE TPO IN NOT TREATING THIS CASE AS COMPARABLE. 15.3. A FEEBLE ATTEMPT WAS MADE BY THE LD. AR TO PRESS FOR THE INCLUSION OF THE CASE OF FORTUNE INFOTECH IN THE LI ST OF COMPARABLES. EVEN THOUGH THIS COMPANY IS ENGAGED I N IT ENABLED SERVICES, BUT IT WAS NOT SHOWN BY THE LD. A R AS TO HOW THE SERVICES RENDERED BY IT WERE COMPARABLE WITH TH AT OF THE ASSESSEE. IT IS TRITE THAT THE ONUS TO PROVE THAT A CASE IS COMPARABLE IS ON THE ONE WHO CLAIMS SO. IN THE ABSE NCE OF ANY FUNCTIONAL COMPARABILITY HAVING BEEN BROUGHT TO OUR NOTICE, WE UPHOLD THE VIEW OF THE AUTHORITIES BELOW IN NOT TRE ATING THIS CASE AS COMPARABLE. 16.1. THE NEXT ISSUE RAISED BY THE LD. AR IS AGAIN ST NON- GRANTING OF WORKING CAPITAL ADJUSTMENT CLAIMED BY T HE ASSESSEE FOR THE FIRST TIME BEFORE THE TPO. THE ASSESSEE RE QUESTED THE TPO TO GRANT WORKING CAPITAL ADJUSTMENT. THE ASSESSEES CLAIM WAS ITA NO.966/DEL/2014 27 JETTISONED ON THE GROUND THAT THE ASSESSEE FAILED T O DEMONSTRATE THAT THERE WAS A DIFFERENCE IN THE LEVELS OF WORKIN G CAPITAL EMPLOYED BY IT VIS-A-VIS THE COMPARABLES. THE TPO FURTHER OBSERVED THAT : THE CLAIM OF WORKING CAPITAL ADJUS TMENT IS NOT A MATTER OF RIGHT. HE FURTHER WENT ON TO ADD THAT T HE ISSUE OF WORKING CAPITAL CAN BE RELEVANT WHEN THERE IS A SIT UATION OF INVENTORY REMAINING TIED UP OR RECEIVABLES BEING HE LD UP AND SUCH SITUATION WILL NOT BE RELEVANT TO THE SERVICE INDUS TRY. THAT IS HOW THE ASSESSEES CONTENTION ON THIS ISSUE WAS REPELLE D. THE DRP ALSO FOLLOWED THE SUIT BY NOTICING THAT THE WORKING CAPITAL ADJUSTMENT IS DIFFICULT TO APPLY DUE TO THE LACK OF ACCURATE AND RELIABLE DATA. IT ALSO HELD THAT THE ISSUE OF WORKI NG CAPITAL WOULD BE RELEVANT ONLY WHEN THERE IS A SITUATION OF INVEN TORY REMAINING TIED UP OR RECEIVABLES BEING HELD UP. THE ASSESSEE CONTESTS THE NON-GRANTING OF THE WORKING CAPITAL ADJUSTMENT. 16.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE VIEWP OINT CANVASSED BY THE AUTHORITIES BELOW IS SANS MERIT. WORKING CA PITAL ADJUSTMENT IS ORDINARILY CONFINED TO INVENTORY, TRA DE RECEIVABLES AND TRADE PAYABLES. IF A COMPANY CARRIES ON HIGH T RADE RECEIVABLES, IT WOULD MEAN THAT IT IS ALLOWING ITS CUSTOMERS A RELATIVELY LONGER PERIOD TO PAY THEIR AMOUNT WHICH WILL RESULT INTO HIGHER INTEREST COST AND THE RESULTANT LESS PROFIT. SIMILARLY, BY CARRYING HIGH TRADE PAYABLES, A COMPANY BENEFITS FR OM A RELATIVELY LONGER PERIOD AVAILABLE TO IT TO PAY BAC K ITS SUPPLIERS ITA NO.966/DEL/2014 28 WHICH LOWERS THE INTEREST COST AND ACCELERATES PROF ITS. TO HAVE A LEVEL PLAYING FIELD, IT IS SINE QUA NON THAT THE WORKING CAPITAL ADJUSTMENT SHOULD BE CARRIED OUT TO BRING TWO OTHER WISE COMPARABLE CASES AT PAR WITH EACH OTHER. WE ARE UNA BLE TO COMPREHEND ANY REASON OR RHYME TO RESTRICT THE GRAN T OF WORKING CAPITAL ADJUSTMENT ONLY IN THE CASE OF MANUFACTURER S OR TRADERS. WHAT IS TRUE FOR THESE CATEGORIES OF BUSINESSES, I S FULLY TRUE FOR A SERVICE PROVIDER AS WELL. IT IS A DIFFERENT MATTER THAT IN THE CASE OF SERVICE PROVIDER, NO WORKING CAPITAL ADJUSTMENT WOU LD BE REQUIRED TOWARDS HIGHER OR LOWER INVENTORY, BUT THE SAME MAY BE WARRANTED IN RESPECT OF HIGHER OR LOWER TRADE RECEIVABLES/PAYABLES. SINCE THE AUTHORITIES BELOW H AVE REJECTED THE ASSESSEES CONTENTION FOR GRANT OF WORKING CAPI TAL ADJUSTMENT AT THE THRESHOLD, WHICH IN OUR CONSIDERED OPINION I S NOT CORRECT, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTE R TO THE FILE OF THE TPO/AO FOR EXAMINING THE ASSESSEES CLAIM FO R GRANT OF WORKING CAPITAL ADJUSTMENT ON MERITS AND THEREAFTER , ALLOW THE SAME, IF IT IS AVAILABLE. NEEDLESS TO SAY, THE ASS ESSEE WILL BE ALLOWED AN ADEQUATE OPPORTUNITY OF HEARING. 17.1. THE NEXT ISSUE RAISED IN THE PRESENT APPEAL IS AGAINST THE REDUCTION IN THE AMOUNT OF DEDUCTION U/S 10AA O F THE ACT. THIS ISSUE HAS TWO COMPONENTS, VIZ., DENIAL OF DEDU CTION ON INTEREST INCOME OF RS.8,84,313/- AND REDUCTION OF C OMMUNICATION EXPENSES INCURRED IN FOREIGN CURRENCY FOR THE PURPO SES OF COMPUTING EXPORT TURNOVER. ITA NO.966/DEL/2014 29 17.2.1. IN SO FAR AS THE FIRST ISSUE IS CONCERNED, WE FIND THAT THE ASSESSEES NET PROFIT AMOUNTING TO RS.10.57 CRORE I NCLUDED INTEREST INCOME AMOUNTING TO RS.8,84,313/- ON WHICH DEDUCTION WAS CLAIMED U/S 10AA OF THE ACT. THE AO HELD THAT T HIS INTEREST INCOME COULD NOT BE CONSTRUED AS PROFITS DERIVED FR OM THE BUSINESS OF THE UNDERTAKING. HE, THEREFORE, REDUCE D SUCH INTEREST INCOME FROM THE TOTAL NET PROFIT FOR THE PURPOSES O F COMPUTING DEDUCTION U/S 10AA. 17.2.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT SECTI ON 10AA(1)(I) OF THE ACT PROVIDES THAT IN COMPUTING THE TOTAL INCOME OF AN ASSESSEE, A DEDUCTION OF HUNDRED PERCENT OF PROFITS AND GAINS `DERIVED FROM THE EXPORT OF THE ELIGIBLE ARTICLES OR THINGS SHALL BE GRANTED FOR A PERIOD OF FIVE CONSECUTIVE ASSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNIT BEGINS TO MANUFACTURE, ETC. WHEN WE EXAMINE THE PRESCRIPTION OF SUB-SECTION (7) OF SECTION 10AA , IT COMES TO LIGHT THAT THE EXPRESSION PROFITS DERIVED FROM THE EXPORT OF ARTICLES, ETC., HAS BEEN SPECIFICALLY DEFINED AS THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTA KING THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT O F SUCH ARTICLES OR THINGS OR SERVICES BEARS TO THE TOTAL TURNOVER O F THE BUSINESS CARRIED ON. A CONJOINT READING OF SUB-SECTIONS (1 ) AND (7) OF SECTION 10AA MAKES IT MANIFEST THAT THE EXPRESSION PROFIT AND GAINS DERIVED FROM.. HAS BEEN GIVEN A SPECIFIC ME ANING IN ITA NO.966/DEL/2014 30 SECTION 10AA AS THE PROPORTIONATE PART OF THE PROF ITS OF THE BUSINESS IN THE RATIO OF EXPORT TURNOVER TO TOTAL TURNOVER. THE TERM PROFITS OF THE BUSINESS HAS NOT BEEN SPECIFI CALLY DEFINED IN THIS SECTION. THIS DIVULGES THAT THE EXPRESSION PR OFITS OF THE BUSINESS WOULD MEAN THE SAME AS IT IS UNDERSTOOD I N COMMON PARLANCE, BEING THE PROFIT OF ANY NATURE RELATED TO THE BUSINESS. THE AMBIT OF SUCH PROFIT CANNOT BE RESTRICTED TO TH AT DIRECTLY AND IMMEDIATELY ARISING THERE FROM. EVEN IF THE RELATIO N BETWEEN THE INCOME AND BUSINESS IS INDIRECT, THAT WOULD ALSO QU ALIFY AS BUSINESS PROFIT. BUT THERE MUST BE RELATION BETWEE N THE INCOME AND BUSINESS. SUCH INCOME TO BE ELIGIBLE FOR INCLUS ION MUST HAVE SOME DIRECT OR INDIRECT RELATION WITH THE BUSINESS. ONCE THE POSITION IS SO, WE FAIL TO UNDERSTAND AS TO HOW INT EREST INCOME WHICH IS IF OTHERWISE IN THE NATURE OF BUSINESS INC OME, CAN BE EXCLUDED FROM THE ELIGIBLE QUALIFYING INCOME FOR TH E PURPOSES OF DEDUCTION U/S 10AA. THE POSITION WOULD HAVE BEEN D IFFERENT IF THE LEGISLATURE HAD NOT INCORPORATED SUB-SECTION (7) TO GIVE MEANING TO THE EXPRESSION PROFITS DERIVED FROM THE EXPORT OF ARTICLES, ETC., AS GIVEN IN SUB-SECTION (1). IN THAT CASE, A NARRO W INTERPRETATION OF THE PHRASE DERIVED FROM WOULD HAVE BEEN APPLIC ABLE. THE RELIANCE OF THE LD. DR ON THE CASE OF PANDIAN CHEMICALS VS. CIT (2003) 262 ITR 278 (SC) URGING US TO EXCLUDE THE AMOUNT OF INTEREST INCOME FROM THE ELIGIBLE PROFITS, IS MISPL ACED. IN THAT CASE, THE QUESTION UNDER CONSIDERATION WAS WHETHER INTEREST EARNED BY INDUSTRIAL UNDERTAKING ON DEPOSITS WITH E LECTRICITY BOARD QUALIFIES FOR RELIEF UNDER SECTION 80HH. THE HONBLE APEX ITA NO.966/DEL/2014 31 COURT ANSWERED THIS QUESTION IN NEGATIVE BY HOLDING THAT SUCH INTEREST INCOME CANNOT BE CHARACTERIZED AS DERIVED FROM THE ELIGIBLE INDUSTRIAL UNDERTAKINGS. AT THIS STAGE, IT WILL BE RELEVANT TO NOTE THE LANGUAGE OF SUB-SECTION (1) OF SECTION 80H H WHICH PROVIDES THAT : WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE INCLUDES ANY PROFITS AND GAINS DERIVED FROM AN INDU STRIAL UNDERTAKING.. THERE SHALL, IN ACCORDANCE WITH AND S UBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOWED, IN COMPUTIN G THE TOTAL INCOME OF THE ASSESSEE, A DEDUCTION FROM SUCH PROFI TS AND GAINS OF AN AMOUNT EQUAL TO TWENTY PER CENT THEREOF. IT IS PERTINENT TO NOTE THAT THE LANGUAGE OF SUB-SECTION (1) OF SECTIO N 80HH AND THAT OF SECTION 10AA IS SIMILAR INSOFAR AS THE USE OF THE EXPRESSION `PROFITS AND GAINS DERIVED FROM THE ELIGIBLE UNITS IS CONCERNED. THE REASON WHICH MAKES THE INTEREST INCOME ELIGIBLE FOR DEDUCTION U/S 10AA AND INELIGIBLE U/S 80HH IS THE S EPARATE DEFINITION OF THE EXPRESSION IN SUB-SECTION (7) OF SECTION 10AA AND ABSENCE OF ANY ANALOGOUS PROVISION U/S 80HH. BECAUS E OF SUB- SECTION (7), THE OTHERWISE RESTRICTED MEANING OF TH E EXPRESSION `PROFITS AND GAINS DERIVED FROM U/S 10AA HAS BECOM E MORE LIBERAL BY ENCOMPASSING NOT ONLY THE ITEMS OF INCO ME DIRECTLY DERIVED FROM THE ELIGIBLE UNIT, BUT ALSO OTHER ITEM S OF INCOME, WHICH ARE IN THE NATURE OF BUSINESS PROFITS, THOUGH NOT DERIVED FROM THE ELIGIBLE UNIT. IN THE ABSENCE OF ANY SUCH PROVISION U/S 80HH, THE SCOPE OF THE EXPRESSION DERIVED FROM HA S BEEN HELD BY THE HONBLE SUMMIT COURT TO BE A RESTRICTED ONE CONFINED ONLY TO THOSE ITEMS WHICH HAVE FIRST DEGREE OF RELATION WITH THE ELIGIBLE ITA NO.966/DEL/2014 32 INDUSTRIAL UNDERTAKING. THAT IS WHY, THIS JUDGMENT RELIED BY THE LD. DR IS NOT APPLICABLE TO THE FACTS OF THE INSTANT CA SE. HOWEVER, WE FIND THAT THE MUMBAI BENCH OF THE TRIBUNAL IN LIVING STONE JEWELLERY (P) LTD. VS. DCIT (2009) 31 SOT 323 (MUM) HAS ALSO TAKEN VIEW SIMILAR TO THAT WE ARE TAKING IN THE PRE SENT APPEAL IN THE CONTEXT OF SECTION 10A, WHICH, IN TURN, ALSO US ES THE EXPRESSION PROFITS AND GAINS AS DERIVED BY AN UNDE RTAKING IN SUB-SECTION (1) AND HAS BEEN SPECIFICALLY DEFINED I N SUB-SECTION (4). IN VIEW OF THE FOREGOING DISCUSSION, WE ARE O F THE CONSIDERED OPINION THAT THE INTEREST INCOME WHICH FALLS UNDER CHAPTER IV-D OF THE ACT, VIZ., PROFITS AND GAINS OF BUSINESS OR PR OFESSION IS ELIGIBLE FOR DEDUCTION U/S 10AA OF THE ACT. AS THE NECESSAR Y DETAILS ABOUT THE NATURE OF INTEREST INCOME ARE NOT AVAILABLE ON RECORD, WE DEEM IT EXPEDIENT TO SET ASIDE THE IMPUGNED ORDER A ND REMIT THE MATTER TO THE FILE OF THE AO FOR FIRSTLY, DECIDING AS TO WHETHER THE ITEMS OF INTEREST INCOME FALL UNDER THE HEAD PROFI TS AND GAINS OF BUSINESS OR PROFESSION. IF THE ANSWER IS IN AFFIR MATIVE, THEN, DEDUCTION SHOULD BE ALLOWED ON SUCH INTEREST INCOME U/S 10AA. 17.3.1. THE ONLY OTHER ASPECT IS THE REDUCTION OF COMMUNICATION EXPENSES INCURRED IN FOREIGN CURRENCY FROM THE COMP UTATION OF EXPORT TURNOVER U/S 10AA OF THE ACT. THE AO OBSERV ED THAT COMMUNICATION EXPENSES AMOUNTING TO RS.57,02,875/- WERE IN THE NATURE OF TELECOMMUNICATION CHARGES INCURRED IN FOREIGN CURRENCY ATTRIBUTABLE TO DELIVERY OF COMPUTER SOFTW ARE OUTSIDE INDIA. RELYING ON SUB-SECTION 1(I) OF SECTION 10AA , THE AO HELD THAT SUCH EXPENDITURE IN FOREIGN CURRENCY WAS REQUI RED TO BE ITA NO.966/DEL/2014 33 REDUCED FROM THE AMOUNT OF EXPORT TURNOVER. THAT I S HOW, HE BROUGHT DOWN THE AMOUNT OF EXPORT TURNOVER TO RS.58 .61 CRORE FROM THE ORIGINAL AMOUNT OF RS.59.18 CRORE, WHILE K EEPING THE FIGURE OF EXPORT TURNOVER AT RS.59.18 CRORE. 17.3.2. WE HAVE HEARD BOTH THE SIDES ON THE ISS UE AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS SEEN THAT TH E ASSESSEE IS A 100% EXPORTER INASMUCH AS ITS EXPORT TURNOVER AS WE LL AS THE TOTAL TURNOVER BEFORE THE REDUCTION OF TELECOMMUNIC ATION CHARGES STOOD AT RS.59.18 CRORE. THE LD. AR HAS NOT ASSAIL ED THE ACTION OF THE AO IN REDUCING THE AMOUNT OF TELECOMMUNICATION CHARGES FROM EXPORT TURNOVER, BUT LIMITED HIS ARGUMENTS FOR SIMULTANEOUS REDUCTION FROM THE AMOUNT OF TOTAL TURNOVER. 17.3.3. IN OUR CONSIDERED OPINION, THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE JUDGEMENT OF THE HONBLE JURISDICTIO NAL HIGH COURT IN CIT VS. GENPACT INDIA (2011) 203 TAXMAN 632 (DEL) RENDERED IN THE CONTEXT OF SECTION 10A OF THE ACT. IN THIS CASE, THE HONBLE HIGH COURT HAS HELD THAT COMMUNICATION EXPE NSES SHOULD ALSO BE EXCLUDED FROM TOTAL TURNOVER FOR THE PURP OSES OF COMPUTATION OF DEDUCTION UNDER THIS SECTION. AS TH E FACTS AND CIRCUMSTANCES PREVAILING IN OUR CASE ARE MUTATIS MUTANDIS SIMILAR TO THOSE CONSIDERED AND DECIDED BY THEIR LORDSHIPS OF THE HONBLE JURISDICTIONAL HIGH COURT, WE CANNOT COUNTENANCE TH E VIEW TAKEN BY THE AUTHORITIES BELOW ON THIS ISSUE. THE SAME IS ERGO OVERTURNED AND IT IS DIRECTED TO REDUCE THE AMOUNT OF ITA NO.966/DEL/2014 34 COMMUNICATION CHARGES FROM THE AMOUNT OF TOTAL TURN OVER AS WELL. TO THIS EXTENT, THE ASSESSEES CONTENTION IS ACCEPT ED. 18. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 06.06.201 4. SD/- SD/- [A.T. VARKEY] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 06 TH JUNE, 2014. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.