Sigma Aldrich Chemicals Private Limited, Bangalore V. The Deputy Commissioner Of Income Tax, Circle- 12(3), Bangalore

ITTPA 203/BANG/2014

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 6417 (ITAT-BANGALORE)
• Duration Of Justice: 6 year(s) 5 month(s) 18 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 15-09-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 27-03-2014

Judgement Text

1 IT(TP)A NO.203 & 155/BANG/2014 1 IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI. B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO.203/BANG/2014 ASSESSMENT YEAR : 2009-10 M/S SIGMA ALDRICH CHEMICALS PVT. LTD., PLOT NO.12, BOMMASANADRA JIGANI LINK, ANEKUL TALUK, BENGALURU-560 100. PAN : AAHCS 1882L VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-12(3), BENGALURU. APPELLANT RESPONDENT IT(TP)A NO.155/BANG/2014 ASSESSMENT YEAR : 2009-10 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-12(3), BENGALURU. VS. M/S SIGMA ALDRICH CHEMICALS PVT. LTD., PLOT NO.12, BOMMASANADRA JIGANI LINK, ANEKUL TALUK, BENGALURU-560 100. PAN : AAHCS 1882L APPELLANT RESPONDENT 2 IT(TP)A NO.203 & 155/BANG/2014 2 APPELLANT BY : SHRI CHYTHANYA K.K, ADVOCATE RESPONDENT BY : SHRI MUZAFFAR HUSSAIN, CIT (DR) DATE OF HEARING : 30 - 06 - 2020 DATE OF PRONOUNCEMENT : 1 5 - 0 9 - 2020 ORDER PER BEENA PILLAI, JUDICIAL MEMBER PRESENT CROSS APPEALS HAS BEEN FILED BY ASSESSEE AS WELL AS REVENUE AGAINST FINAL ASSESSMENT ORDER DATED 21/01/ 2014 PASSED BY LD.DCIT CIRCLE 12 (3) UNDER SECTION 143 (3) READ WITH SECTION 144C(13) OF THE ACT FOR ASSESSMENT YEAR 2009-10 ON FOLLOWING GROUNDS OF APPEAL: IT(TP)A NO.203/BANG/2014(ASSESSEES APPEAL) THE HON'BLE DISPUTE RESOLUTION PANEL, BANGALORE ('D RP) / LEARNED ASSESSING OFFICER ('AO')/ LEARNED TRANSFER PRICING OFFICER ('TPO') ERRED IN NOT ACCEPTING THE TRANSFER PRICING ANALYSIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH PROVISIONS OF THE INCOME-TAX ACT, 1 961 ('THE ACT) READ WITH INCOME-TAX RULES, 1962 ('THE RULES'). 2. THE HON'BLE DRP/ LEARNED AO / LEARNED TPO ERRED IN MAKING AN ADDITION OF RS.67,437,268/ (CATALOGUE MANUFACTURING INCLUDING CUSTOM SYNTHESIS / RESEARCH SERVICES SEGMENT - RS. 64,497, 705/- AND INFORMATION TECHNOLOGY ('IT') ENABLED SERVICES - RS. 2,939,563/ -) TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF ADJUSTMENT IN THE ARM'S LEN GTH PRICE ('ALP') OF THE INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES ('AE'). 3. WITHOUT PREJUDICE TO THE ABOVE, THE ACTION OF TH E ASSESSING OFFICER IN PASSING DRAFT ASSESSMENT ORDER WHICH IN SUBSTANC E IS FINAL ASSESSMENT ORDER IS CONTRARY TO SECTION 144C(1) OF THE ACT AND HENCE, LIABLE TO BE QUASHED. 4. THE HON'BLE DRP / LEARNED AO/ LEARNED TPO ERRED IN NOT CONSIDERING THE MULTIPLE YEAR FINANCIAL DATA OF COM PARABLE COMPANIES WHILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO NS OF THE APPELLANT. 5. THE HON'BLE DRP/ LEARNED AO/ LEARNED TPO ERRED I N USING DATA AS AT THE TIME OF ASSESSMENT PROCEEDINGS, INSTEAD OF T HAT AVAILABLE AS ON THE 3 IT(TP)A NO.203 & 155/BANG/2014 3 DATE OF PREPARING THE TRANSFER PRICING ('TP') DOCUM ENTATION FOR COMPARABLE COMPANIES WHILE DETERMINING THE ALP OF THE INTERNAT IONAL TRANSACTIONS OF THE APPELLANT. 6. CATALOGUE MANUFACTURING OPERATIONS INCLUDING CUS TOM SYNTHESIS I RESEARCH SERVICES 6.1. THE HON'BLE DRP/ LEARNED AO/ LEARNED TPO ERRED IN NOT APPRECIATING THAT ITS CATALOGUE MANUFACTURING OPERA TIONS AND CUSTOM SYNTHESIS/ RESEARCH SERVICES ARE INTERTWINED AND IN TER-RELATED WARRANTING A COMBINED TRANSACTION APPROACH IN DETERMINATION OF A RM' LENGTH PRICE. 6.2. THE HON'BLE DRP/ LEARNED AO/ LEARNED TPO ERRED NOT GIVING COGNIZANCE TO THE COMMERCIAL AND BUSINESS REASONS F OR LOSSES IN ITS MANUFACTURING OPERATIONS (INCLUDING THE CUSTOM SYNT HESIS / RESEARCH SERVICES) BY ATTRIBUTING THE LOSSES INCURRED TO THE TRANSFER PRICING OF THE INTERNATIONAL TRANSACTIONS ENTERED BY THE APPELLANT WITH ITS AES AND THEREBY NOT APPRECIATING THE PRINCIPLES LAID DOWN IN THE OR GANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT GUIDELINES ('OECD GUIDE LINES'). 6.3. THE HON'BLE DRP/ LEARNED AO/ LEARNED TPO ERRED IN REJECTING THE ADJUSTMENTS MADE ON ACCOUNT OF UNDERUTILIZED CAPACI TY FOR MANUFACTURING OPERATIONS (INCLUDING THE CUSTOM SYNTHESIS / RESEAR CH SERVICES), DISREGARDING THE FACT THAT UNLIKE THE COMPARABLES, THE MANUFACTU RING BUSINESS OF THE APPELLANT WAS IN A START-UP STAGE, AND ALSO DISREGA RDING THE INFORMATION SUBMITTED BY THE APPELLANT TO ENABLE THE COMPUTATIO N OF SUCH AN ADJUSTMENT AND WHILE DOING SO GROSSLY ERRED IN: 6.3.1. STATING THAT EXCEPT THE HIGHER DEPRECIATION, THERE IS HARDLY ANY VARIATION IN THE COSTS INCURRED BY THE APPELLANT AN D THE COMPARABLE SELECTED; 6.3.2. STATING THAT THE APPELLANT HAS NOT DEMONSTRA TED THAT AN ACCURATE ADJUSTMENT HAS BEEN MADE IN THE INSTANT CA SE FOR THE IMPACT OF THE VARIATION IN THE CAPACITY UTILIZED. 6.4. THE HON'BLE DRP / LEARNED AO/ LEARNED TPO ERRE D IN NOT APPRECIATING THE FACT THAT THE APPELLANT OPERATES A S ENTREPRENEURIAL ENTITY EXPOSED TO NORMAL RISKS ASSOCIATED WITH CARRYING OU T ITS BUSINESS AND THEREBY ERRED IN; 6.4.1. CONCLUDING THAT THE APPELLANT IS WHOLLY DEPE NDENT ON ITS AES FOR ITS MARKET STRATEGY AND THEREFORE IT CANNOT INCUR L OSSES; AND 6.4.2. IN NOT APPRECIATING THE FACT THAT THE APPELL ANT IS NOT CONTRACTUALLY BOUND TO UNDERTAKE ITS MANUFACTURING OPERATIONS (INCLUDING THE CUSTOM SYNTHESIS / RESEARCH SERVICES) EXCLUSIVELY T O ITS AES. 6.5 WITHOUT PREJUDICE, THE HON'BLE DRP/ LEARNED. AO / LEARNED TPO ERRED IN. NOT CONSIDERING THE CASH PROFIT MARGIN AS AN APPROPRIATE PROFIT LEVEL INDICATOR ('PLI') FOR THE CUSTOM SYNTHESIS / RESEAR CH SERVICES HAVING ACCEPTED THE SAME IN CASE OF CATALOGUE MANUFACTURING OPERATI ONS TO ELIMINATE THE IMPACT OF HIGH DEPRECIATION COST IN CASE OF APPELLA NT. 6.6 WITHOUT PREJUDICE TO THE GROUND THAT APPELLANT IS ENTITLED FOR ADJUSTMENT OF UNDER-UTILISATION OF CAPACITY, THE LE ARNED AUTHORITIES BELOW 4 IT(TP)A NO.203 & 155/BANG/2014 4 OUGHT TO HAVE GRANTED ADJUSTMENT TOWARDS ABNORMAL C OSTS, IN RESPECT OF MANUFACTURING AND ALLEGED R & D SEGMENT. 6.7 THE LEARNED TPO / DRP HAVE ERRED IN LAW AND ON FACTS IN NOT APPLYING EXPORT FILTER IN MANUFACTURING SEGMENT ALT HOUGH SAID FILTER WAS APPLIED IN THE CASE OF ALLEGED R&D SEGMENT AND ITES SEGMENT. 6.8 THE HON'BLE DRP ERRED IN LAW AND ON FACTS IN UP HOLDING THE REJECTION OF CERTAIN COMPARABLES SELECTED BY THE AP PELLANT WHILE CARRYING OUT ITS TP STUDY IN RESPECT OF MANUFACTURING SEGMENT. 6.9 THE HON'BLE DRP ERRED IN LAW AND ON FACTS IN UP HOLDING THE SELECTION OF CERTAIN COMPARABLES FINALLY SELECTED B Y TPO IN RESPECT OF MANUFACTURING AND ALLEGED R & D SEGMENT. 6.10 THE LEARNED TPO ERRED IN LAW AND ON FACTS IN ADOPTING VIMTA LABS AS COMPARABLE THOUGH THE OUTPUT OF THE A CTIVITY IS GOODS IN CASE OF APPELLANT AND SERVICES IN CASE OF VIMTA LABS AND TURNOVER OF VIMTA LABS IS VERY HIGH AS COMPARED TO THE APPELLANT, IN RESPE CT OF ALLEGED R & D SEGMENT. 6.11. THE LEARNED DRP / TPO ERRED IN LAW AND ON FAC TS IN TREATING ABNORMAL FOREX LOSS / GAIN AS OPERATIONAL IN NATURE IN RESPECT OF MANUFACTURING SEGMENT ALTHOUGH THE SAME WAS TREATED AS NON OPERATING IN THE CASE OF ALLEGED R&D SEGMENT. 7. INFORMATION TECHNOLOGY ('IT') ENABLED SERVICES S EGMENT 7.1. THE HON'BLE DRP/ LEARNED AO/ LEARNED. TPO ERRE D IN REJECTING THE TP DOCUMENTATION MAINTAINED BY THE APPELLANT BY INV OKING PROVISIONS OF SUB- SECTION (3) OF 92C OF THE ACT CONTENDING THAT THE I NFORMATION OR DATA USED IN THE COMPUTATION OF THE ARM'S LENGTH PRICE IS NOT RE LIABLE OR CORRECT AND WHILE DOING SO ERRED IN: 7.1.1. REJECTING THE COMPARABILITY ANALYSIS CARRIED IN THE TP DOCUMENTATION AND IN CONDUCTING A FRESH COMPARABILI TY ANALYSIS BY INTRODUCING VARIOUS FILTERS IN DETERMINING THE ARM' S LENGTH PRICE. J7.1.2. REJECTING COMPANIES THAT COMPARABLE TO THE APPELLANT WHILE PERFORMING THE COMPARABILITY ANALYSIS. SPECIFICALLY , THE FOLLOWING COMPANIES SHOULD HAVE BEEN INCLUDED AS COMPARABLES: - LEE & NEE SOFTWARE (EXPORTS) LIMITED - CALIBER POINT BUSINESS SOLUTIONS LIMITED - R SYSTEMS INTERNATIONAL LIMITED 7.1.3. INCLUDING COMPANIES THAT DO NOT SATISFY THE TEST OF COMPARABILITY. SPECIFICALLY, THE FOLLOWING COMPANIES SELECTED COMP ARABLE SHOULD HAVE BEEN REJECTED; - INFOSYS BPO LIMITED; - ACCENTIA TECHNOLOGIES LIMITED; - COSMIC GLOBAL LIMITED. - ECLERX SERVICES LIMITED 7.1.4. COMPUTING THE OPERATING MARGIN FOR AILSEC TE CHNOLOGIES LIMITED WHEREIN THE PROVISION FOR BAD AND DOUBTFUL DEBTS HA S ERRONEOUSLY BEEN CONSIDERED AS NON-OPERATING EXPENDITURE. 5 IT(TP)A NO.203 & 155/BANG/2014 5 7.1.5. THE LEARNED TPO ERRED IN LAW AND ON FACTS IN TREATING PROVISION FOR DOUBTFUL DEBTS AS NON-OPERATIONAL IN NATURE WHI LE COMPUTING THE MARGIN OF ECLERX SERVICES LIMITED AND INFOSYS BPO LTD. 7.1.6. THE LEARNED TPO ERRED IN LAW AND ON FACTS IN CONSIDERING THE ENTERPRISE LEVEL MARGIN OF MICROLAND LIMITED INSTEA D OF CONSIDERING ITS MARGIN FROM ITES SEGMENT 7.1.7. THE LEARNED TPO ERRED IN LAW AND ON FACTS IN APPLYING RPT FILTER AT 25% INSTEAD OF 15%. 7.1.8. THE HON'BLE DRP/ LEARNED, AO/ LEARNED TPO ER RED IN NOT APPRECIATING THE DIFFERENCE IN THE RISK PROFILE OF THE APPELLANT VIS-A-VIS THE COMPARABLES AND THEREBY NOT ALLOWING THE BENEFIT OF APPROPRIATE ADJUSTMENT TOWARDS THE RISK DIFFERENTIAL, WHEN THE COMPARABLES SELECTED ARE FULL-FLEDGED ENTREPRENEURIAL COMPANIES. 8. THAT THE APPELLANT OUGHT TO HAVE BEEN ALLOWED TH E BENEFIT OF PROVISO TO SECTION 92C(2) IN RESPECT OF EACH SEGMEN T OF THE APPELLANT. 9. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED TPO ERRED IN LAW AND ON FACTS IN MAKING ADJUSTMENT U/S 92CA IN RESPECT O F NON-AE TRANSACTIONS ALSO INSTEAD OF RESTRICTING IT TO AE TRANSACTIONS A LONE IN RESPECT OF ALLEGED R&D SEGMENT OR MANUFACTURING, IF INTEGRATED WITH R& D. 10. THE HON'BLE DRP OUGHT TO HAVE HELD THAT THE OBS ERVATIONS OF THE LEARNED TPO THAT THE APPELLANT DIDN'T RAISE ANY OBJ ECTION TO THE COMPARABLES SELECTED BY THE TPO ARE PERVERSE AND HENCE, LIABLE TO BE QUASHED. 11. CORPORATE TAX - DISALLOWANCE OF STOCK WRITE-OFF ON ACCOUNT OF PHYSICAL DIFFERENCE AND ERRORS IN RECEIPT OF STOCK AMOUNTING TO RS. 689,875 11.1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP / LEARNED AO HAS ERRED IN DISA LLOWING THE AMOUNT OF STOCK WRITE-OFF ON ACCOUNT OF PHYSICAL DIFFERENCE A ND ERRORS IN RECEIPT OF STOCK. 11.2. THE HON'BLE DRP/ LEARNED AO OUGHT TO HAVE ALL OWED THE AMOUNTS WRITTEN OFF BY THE APPELLANT TOWARDS SHORTA GE IN THE INVENTORY, ARISING DUE TO CYCLE COUNT, WRONG RECEIPTING DIFFER ENCE OVER SHIPPING OF CERTAIN ITEMS, WHICH HAS BEEN DETERMINED DURING THE PHYSICAL INVENTORY VERIFICATION. 11.3. THE HON'BLE DRP/ LEARNED AO OUGHT TO HAVE APP RECIATED THE FACT THAT THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUS IVELY IN THE NORMAL COURSE OF BUSINESS OF THE APPELLANT. 12. NON-GRANTING OF MINIMUM ALTERNATE TAX ('MAT') C REDIT OF RS.1,310,861 12.1. THE HON'BLE DRP / LEARNED AO OUGHT TO HAVE AL LOWED THE CLAIM OF MINIMUM ALTERNATE TAX ('MAT') CREDIT AMOUNTING TO R S. 1,310,861 UNDER SECTION 11 5JAA IN COMPUTING TAX LIABILITY IN THE F INAL ASSESSMENT ORDER 12.2. THE HON'BLE DRP / LEARNED AO OUGHT TO HAVE AP PRECIATED THAT THE APPELLANT IS ENTITLED TO CLAIM THE CREDIT FOR TAXES PAID UNDER SECTION 1 15JB IN THE EARLIER YEARS AGAINST THE TAX LIABILITY FOR AY 2009-10 COMPUTED UNDER THE NORMAL PROVISIONS OF THE ACT. 6 IT(TP)A NO.203 & 155/BANG/2014 6 13. THE HON'BLE DRP/ LEARNED AO HAVE ERRED IN LEVYI NG INTEREST UNDER SECTION 234B OF THE ACT. 14. THE HON'BLE DRP / LEARNED AO) HAS ERRED IN LEVY ING INTEREST UNDER SECTION 234C OF THE ACT WITHOUT APPRECIATING THE FA CT THAT INTEREST UNDER SECTION 234C CAN BE LEVIED ONLY ON RETURNED INCOME. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, RESCIND A ND MODIFY THE GROUNDS HEREIN ABOVE OR PRODUCE FURTHER DOCUMENTS, FACTS AND EVIDENCE BEFORE OR AT THE TIME OF HEARING, OF THIS APPEAL. IT(TP)A NO.155/BANG/2014 (REVENUES APPEAL) 1. THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL A RE OPPOSED TO LAW AND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE DISPUTE RESOLUTION PANEL ERRED IN LAW IN DIRECTING THE AO TO ALLOW THE CLAIM OF THE ASSESSEE UNDER THE HEAD 'QUALITY REJECTS WITHOUT APPRECIATI NG THE FACT THAT THE ASSESSEE COMPANY IS MAKING HUGE CLAIM UNDER THE HEA D EVERY YEAR WITHOUT ANY SUBSTANTIATION. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE DISPUTE RESOLUTION PANEL ERRED IN DIRECTING THE AO TO ALLOW THE CLAIM OF THE ASSESSEE UNDER THE HEAD BREAKAGE LEAKAGE & DAMAGE WITHOUT APPRECIATI NG THE FACT THAT THE ASSESSEE COMPANY IS MAKING HUGE CLAIM UNDER THE HEAD EVERY YEAR WITHOUT ANY SUBSTANTIATION. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE DRP ERRED IN DIRECTING THE AO TO ALLOW THE CLAIM OF THE ASSESSEE UNDER THE HEAD 'EXPIRED INVENTORY' WITHOUT APPRECIATING THE FACT THAT THE A SSESSEE COMPANY IS MAKING HUGE CLAIM UNDER THE HEAD EVERY YEAR WITHOUT ANY SU BSTANTIATION. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE DRP ERRED IN DIRECTING THE TPO TO ADOPT PROFIT BEFORE DEPRECIATI ON INTEREST AND TAXES (PBDIT) ON COST INSTEAD OF PROFIT BEFORE INTEREST A ND TAXES (PBIT) ON COST WITHOUT APPRECIATING THAT DEPRECIATION IS NOT AN OP ERATING EXPENDITURE. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE DRP ERRED IN DELETING THE COMPARABLE CLINGINE INTERNATIONAL LTD, DESPITE IT BEING MAINLY FOCUSING ON CLINICAL TRIALS AND RESEARCH WORKS AND RIGHTLY SELECTED BY THE TPO AS A COMPARABLE TO THE ASSESSEE COMPANY. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE DRP ERRED IN DELETING THE COMPARABLE CYBER MEDIA RESEARCH LTD, D ESPITE IT BEING IN THE BUSINESS OF RESEARCH AND SURVEY SERVICES AND PRODUC TS AND RIGHTLY SELECTED BY THE TPO AS A COMPARABLE TO THE ASSESSEE COMPANY. 8. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE DIRECTIONS OF THE DISPUTE RESOLU TION PANEL IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED. 9. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 7 IT(TP)A NO.203 & 155/BANG/2014 7 BRIEF FACTS OF THE CASE ARE AS UNDER: 2. ASSESSEE IS ENGAGED IN MANUFACTURING AND TRADIN G OF BROAD RANGE OF BIOCHEMICALS FOR END-USERS LABORATORY AND RESEARCH ACTIVITY. THESE CHEMICAL PRODUCTS ARE USED IN SCIEN TIFIC AND GEOMETRIC RESEARCH, BIOTECHNOLOGY AND PHARMACEUTICA L DEVELOPMENT, DIAGNOSIS OF DISEASES AND AS KEY COMPO NENTS IN PHARMACEUTICAL AND OTHER HIGH-TECHNOLOGY MANUFACTUR ING. IT ALSO IMPORTS FINISHED PRODUCTS FROM ITS ASSOCIATED ENTER PRISES SITUATED ABROAD FOR DISTRIBUTION IN INDIA AND A GAME EXPORT. 3. FOR YEAR UNDER CONSIDERATION ASSESSEE FILED IT S RETURN OF INCOME ON 24/09/2009 DECLARING TOTAL INCOME OF RS.6,62,75, 366/-. BOOK PROFITS COMPUTED BY ASSESSEE WAS AT RS.4,56,82,699/ -. THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE ACT AND W AS SELECTED FOR SCRUTINY. NOTICE UNDER SECTION 143(2) WAS ISSUED TO ASSESSEE IN RESPONSE TO WHICH REPRESENTATIVE OF ASSESSEE APPEAR ED BEFORE LD.AO AND FILED REQUISITE DETAILS AS CALLED FOR. 4. LD.AO OBSERVED THAT, ASSESSEE ENTERED INTO INTER NATIONAL TRANSACTION EXCEEDING RS.15CRORES, WITH ITS ASSOCIA TED ENTERPRISES, AND ACCORDINGLY REFERENCE WAS MADE UNDER SECTION 92 CA OF THE ACT, TO TRANSFER PRICING OFFICER FOR COMPUTING ARMS LEN GTH PRICE OF THE INTERNATIONAL TRANSACTIONS. 5. ON RECEIPT OF REFERENCE UNDER SECTION 92CA, LD .TPO CALLED UPON ASSESSEE TO FILE ECONOMIC DETAILS OF INTERNATIONAL TRANSACTIONS IN FORM 3 CEB. 6. LD.TPO OBSERVED THAT, ASSESSEE HAD FOLLOWING IN TERNATIONAL TRANSACTION FOR YEAR UNDER CONSIDERATION: 8 IT(TP)A NO.203 & 155/BANG/2014 8 DESCRIPTION AMOUNT PAID (RS.) AMOUNT RECEIVED (RS.) SALES FROM THE EOU UNIT - 117484079 SALES FROM NON EOU UNIT - 60693 1 1,75,44,772 SALES FROM THE EOU UNIT 8,33,805 PURCHASE OF CHEMICALS 130,77,47,372 PURCHASE RETURNS OF CHEMICALS, NON - MOVING MATERIALS 5,08,26,238 Q/C TESTING CHARGES FROM CHEMICALS 27,191 MANAGEMENT FEES 9,87,760 CUSTOMER SUPPORT SERVICES (ITES) 2,45,50,074 PAYMENT OF INTEREST ON LOAN 1,65,68,520 REIMBURSEMENT OF SAP & IP COSTS 5,19,00,175 7. LD.TPO OBSERVED THAT, ASSESSEE HAD FOLLOWING S EGMENTAL DETAILS RECORDED IN TP DOCUMENTATION: SEGMENT DETAILS OPERATIVE REVENUE OP/OC MANUFACTURING (EOU UNIT) 11,03,57,902/ - ( - )52.2% TRADING 215,84,97,500/ - 7.93% R &D 1,22,10,111/ - ( - )79.49% ITES 2,45,50,073/ - 12.72% 8. LD.TPO DID NOT OBJECT TO MARGIN COMPUTED BY ASS ESSEE UNDER TRADING SEGMENT. SINCE TAXPAYERS MARGIN WAS NOT LES S THAN MARGIN COMPUTED BY LD.TPO, THE TRANSACTION WAS TREATED TO BE AT ARMS LENGTH. 9. IN RESPECT OF OTHER 3 SEGMENTS, LD.TPO RECOMPU TED THE MARGINS. ITES SEGMENT: 9 IT(TP)A NO.203 & 155/BANG/2014 9 10. LD.TPO NOTED THAT, ASSESSEE FOLLOWED TNMM AS M OST APPROPRIATE METHOD BY USING OP/OC AS PLI. LD.TPO NO TED THAT ASSESSEE USED 8 COMPARABLES WITH AVERAGE MARGIN OF 14.34%. NOT AGREEING WITH COMPARABLES SELECTED BY ASSESSEE, LD. TPO FINALISED FOLLOWING SET OF 8 COMPARABLES WITH AN AVERAGE MARG IN OF 25.03%. ITES FINAL COMPARABLES AY 09-10 SL.NO NAME OF THE COMPANY MARGIN 1NFOSYS B P 0 LTD. 24.41% 2 ADITYA BIRLA MINACS WORLDWIDE LTD. 23.86% 3 MICROLAND LTD.(BOTH SEGMENTS) 1.53 % 4 ALLSEC TECHNOLOGIES LTD. -16.63% 5 ACCENTIA TECHNOLOGIES LTD. 46.40% 6 INFORMED TECHNOLOGIES INDIA LTD. 22.61% 7 COSMIC GLOBAL LTD. 40.61% 8 ECLERX SERVICES LTD. 57.46% AVERAGE PLI 25.03% 11. LD.TPO GRANTED WORKING CAPITAL ADJUSTMENT HOWE VER REJECTED THE RISK ADJUSTMENT. HE THUS PROPOSED AN ADJUSTMENT OF RS.29,39,563/- BE ING SHORTFALL. MANUFACTURING SEGMENT-EOU UNIT: 12. LD.TPO NOTED THAT ASSESSEE HAS TREATED ITSELF AS ENGAGED IN DISTRIBUTION AND MANUFACTURE OF CHEMICALS IN INDIA. ASSESSEE USED TNMM AS MOST APPROPRIATE METHOD AND OP/TC AS PLI. A SSESSEE COMPUTED ITS MARGIN AT (-) 52.20% ON COST AND (-) 1 09.20% ON SALES. IT WAS NOTED THAT ASSESSEE USED 31 COMPARABLES TPO RETAINED 9 COMPARABLES FROM ASSESSEES FOLLOWING LIST AND INCL UDED 3 NEW 10 IT(TP)A NO.203 & 155/BANG/2014 10 COMPARABLES TOTALLING TO 12 COMPANIES HAVING AN AVE RAGE MARGIN OF 9.60%. SI N O COMPANY NAME OP / OC 1 LAFFANS PETROCHEMICALS LTD. 5.67% 2 CAPROLACTAM CHEMICALS LTD. 17.93% 3 KILBURN CHEMICALS LTD. 4.73% 4 ALUFLUORIDE LTD. 22.11% 5 TA N FAC INDUSTRIES LTD. 2.01% 6 GULSHAN POLYOLS LTD. 5.90% 7 ALKYL AMINES CHEMICALS LTD. 8.12% 8 NARMADA GELATINES LTD, 15.66% 9 VISHNU CHEMICALS LTD. 6.24% 10 MYSORE PETRO CHEMICALS LTD. 1.16% 11 AMINES & PLASTICIZERS LTD. 5.34% 12 VINATI ORGANICS LTD. 20.32% ARITHMETIC MEAN MARGIN 9.60% 13. UNDER THIS SEGMENT ASSESSEE DID NOT SEEK ANY R ISK ADJUSTMENT, HOWEVER SOUGHT ADJUSTMENT IN TERMS OF CAPACITY UNDE RUTILISATION, AS ASSESSEE OPERATED ONLY AT 20% OF THE INSTALLED C APACITY. LD.TPO REJECTED SUBMISSIONS OF ASSESSEE BY HOLDING THAT, I T IS WHOLLY DEPENDENT UPON ITS ASSOCIATED ENTERPRISES AND CANNO T BEAR ANY LOSSES FOR DEFICIENCY ON ACCOUNT OF AE. 14. LD.TPO THUS COMPUTED SHORTFALL BEING RS.15,84, 66,540/- AS PROPOSED ADJUSTMENT UNDER THIS SEGMENT. R&D SEGMENT: 15. LD.TPO NOTED THAT ASSESSEE HAD SHOWN PROFIT MAR GIN OF R&D ALONG WITH MANUFACTURING SEGMENT AND DID NOT FURNIS H ANY 11 IT(TP)A NO.203 & 155/BANG/2014 11 SEPARATE SEGMENTAL ANALYSIS. LD.TPO, ACCORDINGLY, C ALLED UPON ASSESSEE IN RESPECT OF 5 COMPARABLES SELECTED UNDER THIS SEGMENT. AFTER CONSIDERING THE OBJECTIONS RAISED BY ASSESSEE LD.TPO, FINALISED FOLLOWING COMPARABLES WITH AVERAGE MARGIN OF 10.45% WITH PLI OP/OC UNDER TNMM. SI NO COMPANY NAME OP / OC 1VIMTA LABS LTD. 10.98% 2 CLINI GENE INTERNATIONAL LTD. 18.97% 2 RESEARCH SUPPORT INTL. PVT. 5.85% 4 CYBER MEDIA RESEARCH LTD. 10.78% 5 MAX NEEMAN MEDICAL INTL. LTD. 5.67% ARITHMETIC MEAN MARGIN 10.45% HE THUS PROPOSED ADJUSTMENT OF RS.5,32,74,095/-. 16. LD.TPO THUS PROPOSED TOTAL ADJUSTMENT OF RS.2 1,46,80,201/- TO THE ARMS LENGTH PRICE. 17. LD.AO WHILE PASSING THE DRAFT ASSESSMENT ORDE R OBSERVED THAT ASSESSEE HAS DISCLOSED TOTAL TURNOVER OF RS.20236,0 0,99,176/- AND HAS SHOWN NET PROFIT OF RS.4,46,00,706/- AND GROSS PROFIT OF RS.68,37,07,135/-. LD.AO, THUS WORKED OUT GP RATE A T 28.97%. AND THE NET PROFIT AT 1.89%. LD.AO NOTED THAT, IN IMMED IATELY PRECEDING ASSESSMENT YEAR NET PROFIT DECLARED BY ASSESSEE WAS AT 8.97% AND THAT THERE WAS A FALL IN THE NET PROFIT RATE FOR TH E CURRENT YEAR. LD.AO, THEREAFTER ON EXAMINATION OF PROFIT AND LOSS ACCOUNT OBSERVED THAT, ASSESSEE DEBITED SUM OF RS.22,11,63, 722/-, AS STOCK WRITE-OFF THE BIFURCATIONS OF WHICH ARE AS UNDER: 12 IT(TP)A NO.203 & 155/BANG/2014 12 PARTICULARS AMOUNT IN RS. QUALITY REJECTS 8492223 B REAKAGE,LEAKAGE & DAMAGE 4110416 EXPIRED INVENTORY 8075287 G ENOSYS 739794 PHYSICAL DIFFERENCE D ERROR IN RECEIPT 689875 SALES PROMOTION SAMPLES 56127 T OTAL 22163722 LD.AO DISALLOWED CLAIMS MADE BY ASSESSEE, AND MADE ADDITION OF RS.1,80,69,951/-. 18. AGGRIEVED BY PROPOSED ADDITIONS, ASSESSEE PRE FERRED OBJECTIONS BEFORE DRP. 19. IN RESPECT OF TRANSFER PRICING ADJUSTMENT PRO POSED BY LD.TPO, DRP DIRECTED AS UNDER: MANUFACTURING SEGMENT: 20. DRP DIRECTED LD.TPO TO VERIFY APPLICABILITY OF VARIOUS FILTERS ADOPTED BY HIM IN RESPECT OF 2 COMPARABLES, NAMELY, INDIAN OXIDES AND CHEMICALS LTD AND INSILCO LTD. IN RESPECT OF RE MAINING 12 COMPARABLES DRP UPHELD THEIR INCLUSION. 21. DRP NOTED THAT ASSESSEE OPERATES IN 3 DIFFERE NT SEGMENT AND HAS INCURRED SIGNIFICANT LOSS IN ITS MANUFACTURING AND R&D SEGMENT WHILE IT HAS MADE PROFITS IN THE TRADING SE GMENT. DRP ALSO NOTED THAT IN MANUFACTURING SEGMENT ASSESSEE INCURR ED LOSS OF RS.13.38 CRORE ON TOTAL TURNOVER OF RS.12.25 CRORE, CLEARLY SIGNIFYING THE RISK FACED BY ASSESSEE, EVEN IN TRANSACTION WIT H ITS AES. DRP HAS THUS OBSERVED THAT THERE IS NO INSULATION OF AS SESSEE AS REGARDS 13 IT(TP)A NO.203 & 155/BANG/2014 13 MARKET RISK. HOWEVER DRP UPHELD LD.TPOS OBSERVATIO N THAT, ASSESSEE WAS NOT SUCCESSFUL IN EITHER DEMONSTRATING ANY CLEAR RISK DIFFERENTIAL WITH RESPECT TO VARIOUS COMPARABLES SE LECTED OR QUANTIFY SUCH RISK DIFFERENTIAL WITH RESPECT TO SUCH COMPARA BLES. 22. AS REGARDS WORKING CAPITAL ADJUSTMENT DRP OBSER VED THAT LD.TPO RESTRICTED ADJUSTMENT AT (-)1.19%. DRP NOTED THAT ON PRINCIPLE TPO HAS AGREED TO THE CLAIM OF ASSESSEE F OR GRANTING WORKING CAPITAL ADJUSTMENT HOWEVER THE SAME WAS RES TRICTED. IN REGARDS TO THIS DRP DIRECTED LD.AO TO CARRY OUT WOR KING CAPITAL ADJUSTMENT AS PER ACTUAL FIGURES WITHOUT PUTTING AN Y AND ALSO DIRECTED TO VERIFY PLR ADOPTED BY LD.TPO. 23. AS REGARDING DEPRECIATION ADJUSTMENT TO BE PR OVIDED TO ASSESSEE FOR ELIMINATING DIFFERENCE IN DEPRECIATION COST BETWEEN ASSESSEE AND THE COMPARABLE COMPANIES, DRP AGREED T O THE SUBMISSIONS OF ASSESSEE THAT BEING THE 2 ND YEAR OF OPERATION IN CONTRADISTINCTION TO THE COMPARABLES RESULTING IN H IGHER IMPACT OF DEPRECIATION ON PROFITABILITY. DRP ACKNOWLEDGED THA T IN ORDER TO OFFSET HIGHER COST ON ACCOUNT OF DEPRECIATION, IT W OULD BE IN THE INTEREST OF JUSTICE IF PLI IS CHARGED FROM PBIT ON COST, AS AGAINST, ADOPTED BY LD.TPO TO PBDT. DRP THUS DIRECTED LD.TPO TO COMPARE MARGINS BY ADOPTING THE PLI TO PBDT. 24. ASSESSEE HAD ALSO CHALLENGED EXCLUSION OF CE RTAIN COMPARALES, AMONGST WHICH DRP REJECTED. R&D SEGMENT: 25. DRP NOTED THAT, LD.TPO DID NOT PROVIDE ANY ADJ USTMENT FOR UNDERUTILISATION OF CAPACITY AND DEPRECIATION ADJUS TMENT. DRP 14 IT(TP)A NO.203 & 155/BANG/2014 14 OBSERVED THAT ASSESSEE TRANSFERS BOTH THE PROCESS A S WELL AS INTANGIBLE DEVELOPED BY IT TO THE PERSON FOR WHOM W ORK IS DONE. IT WAS THEREFORE OF THE OPINION THAT THE TRANSFER SHOU LD INCLUDE ALL COST INCURRED BY ASSESSEE. AND THAT, ASSESSEE DID NOT SE PARATELY BENCHMARK R&D FUNCTION, THOUGH ADMITTEDLY, IT COULD PERFORM INDEPENDENTLY OF MANUFACTURING ACTIVITY. FOR R&D SE GMENT DRP REJECTED CAPACITY UNDERUTILISATION AND DEPRECIATION ADJUSTMENT. ASSESSEE ALSO CHALLENGED EXCLUSION OF CERTAIN COMPA RALES, AMONGST WHICH DRP DIRECTED LD.AO TO VERIFY RPT OF CLINIGENE INTERNATIONAL LTD., AND OBSERVED THAT IN THE EVENT RPT IS MORE TH AN 25% THE COMPARABLE NEEDS TO BE REJECTED. AND IN RESPECT OF CYBER MEDIA RESEARCH LTD., DRP WAS UPHELD FOR EXCLUSION. ITES SEGMENT: 26. ASSESSEE CHALLENGED CERTAIN COMPARABLES FOR EX CLUSION AND PROPOSED CERTAIN COMPARABLES FOR INCLUSION. ASSESSE E SUBMITTED BEFORE DRP THAT PBDD SHOULD BE TREATED AS OPERATING , WHILE COMPUTING MARGINS. 27. ASSESSEE HAD ALSO CHALLENGED EXCLUSION OF CER TAIN COMPARALES, AMONGST WHICH DRP REJECTED. CORPORATE TAX ISSUES : 28. DRP DIRECTED LD.AO TO DELETE ADDITION MADE IN RESPECT OF DISALLOWANCE MADE UNDER STOCK RIGHT OFF AND ALSO DI RECTED LD.AO TO GRANT MAT CREDIT AVAILABLE TO ASSESSEE. 29. ON RECEIPT OF DRP DIRECTIONS, LD.AO PASSED OR DER BY MAKING ADDITION IN THE HANDS OF ASSESSEE AT RS.6,81,27,143 /- AGAINST THE 15 IT(TP)A NO.203 & 155/BANG/2014 15 ORDER PASSED BY LD. AO, ASSESSEE AS WELL AS REVENUE ARE IN APPEAL BEFORE US. 30. REVENUE IS AGGRIEVED BY ADDITION DELETED ON A CCOUNT OF STOCK WRITE-OFF. REVENUE IS ALSO AGGRIEVED FOR ADOPTING P BDDIT ON COST INSTEAD OF PBIT ON COST, THEREBY HOLDING DEPRECIATI ON TO BE OPERATING EXPENDITURE. REVENUE IS ALSO AGGRIEVED BY EXCLUSION OF 2 COMPARABLES, BEING CYBER MEDIA RESEARCH LTD., AND C LINGINE INTERNATIONAL LTD 31. ASSESSEE IN ITS APPEAL FOR NOT GRANTING CAPACI TY UNDERUTILISATION ADJUSTMENT TO ASSESSEE UNDER MANUFACTURING AS WELL AS R&D SEGMENT. IT HAS BEEN SUBMITTED THAT, UNDER MANUFACT URING SEGMENT DRP DIRECTED DEPRECIATION TO ASSESSEE AS OPERATING EXPENSES FOR COMPUTING MARGIN, WHEREAS SIMILAR DIRECTION WAS NOT GIVEN UNDER R&D SEGMENT. ASSESSEE HAS ALSO ALLEGED THAT ADJUSTM ENT SHOULD BE RESTRICTED TO INTERNATIONAL TRANSACTION, SINCE LD.T PO CONSIDERED ENTITY LEVEL, WHICH INCLUDES NON-AE TRANSACTION ALS O. ASSESSEE ALSO SEEKS EXCLUSION OF 3 COMPARABLES UNDER MANUFACTURIN G SEGMENT ON TURNOVER FILTER. UNDER ITES SEGMENT ASSESSEE SEEKS INCLUSION OF 3 COMPARABLES AND EXCLUSION OF 4 COMPARABLES. ASSESSE E ALSO SUBMITS THAT DEPRECIATION MUST BE GRANTED TO ASSESS EE AFTER COMPUTING THE MARGIN UNDER ITES SEGMENT. WE SHALL 1 ST TAKE UP APPEAL FILED BY REVENUE. 32. GROUND NO.1 RAISED BY REVENUE IS GENERAL IN NATURE AND THEREFORE DO NOT REQUIRE ADJUDICATION. 16 IT(TP)A NO.203 & 155/BANG/2014 16 33. GROUND NOS.2-4 IS IN RESPECT OF DISALLOWANCES MADE ON ACCOUNT OF QUALITY REJECTS, BREAKAGE LEAKAGE ETC, E XPIRED INVENTORY, STOCK OF GENOSYS, STOCK DIFFERENCE IN ERROR. LD.AR SUBMITTED THAT, ALL THESE DISALLOWANCES HAVE BEEN CONSIDERED BY COORDINATE BENCH THIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2005-06 TO 2008-09 BY ORDER DATED 2 7/07/2015. HE PLACED RELIANCE ON COPY OF ORDER PLACED AT PAGE 1421 OF PAPER BOOK VOLUME 3. 34. ON THE CONTRARY, LD.CIT DR PLACED RELIANCE ON OBSERVATIONS OF LD.TPO. 35. WE NOTE THAT LD. AO HAS REJECTED THE ENTIRE CL AIM OF ASSESSEE UNDER THE HEAD QUALITY REJECTS, BREAKAGE LEAKAGE AN D DAMAGE, STOCK TO GENOSYS PHYSICAL DIFFERENCES IN ERROR IN RECEIPT OF STOCK. 36. IN RESPECT OF EXPIRED INVENTORY LD. AO NOTED TH AT ASSESSEE DEBITED A SUM OF RS.80,75,287/- AS SHELFLIFE EXPIRY , DUE TO OXIDATION, CHEMICAL BREAK DOWN, DRYING OR MOISTENIN G, MICROBIAL GROWTH ETC. LD.AO WAS OF THE OPINION THAT, ASSESSEE MANUFACTURED CHEMICALS ON NEED BASIS AND ON DEMAND AND IT IS NOT POSSIBLE THAT COMPANY WILL MANUFACTURE MORE THAN THAT IS REQUIRED THEREBY LEADING TO TRANSPIRATION LOSS. LD.AO ACCORDINGLY, O N ASSUMPTION BASIS, DISALLOWED 50% OF THE CLAIM AND ADDED BACK T O THE INCOME OF ASSESSEE. 37. WE NOTE THAT ALL THESE DISALLOWANCES HAVE BEEN ADDRESSED BY COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE IN PRECEDING ASSESSMENT YEARS. THIS TRIBUNAL WHILE CON SIDERING THE 17 IT(TP)A NO.203 & 155/BANG/2014 17 DISALLOWANCES HAS REFERRED TO VARIOUS STATISTICS TO CONSIDER THE REASONABILITY OF SUCH CLAIM. BREAKAGE, LEAKAGE ETC; 38. ASSESSEE IN ORDER TO ESTABLISH BREAKAGE LEAKAG E ETC HAD FILED A CHART SHOWING THE RATIO OF THE LAW IS ON SUCH BREAK AGE TO SALES DURING THE RELEVANT YEARS WHICH IS NEGLIGIBLE AS CO MPARED TO HUGE TURNOVER OF ASSESSEE. WE THEREFORE DIRECT ASSESSEE TO FILE IDENTICAL DETAILS FOR YEAR UNDER CONSIDERATION TO ESTABLISH T HE CLAIM IN VIEW OF THE OBSERVATIONS MADE BY THIS TRIBUNAL IN IMMEDIATE LY PRECEDING YEARS. 39. LD.AO IS DIRECTED TO VERIFY THE SAME AND ALLOW THE CLAIM OF ASSESSEE IS SIGNED IN ACCORDANCE WITH THE OBSERVATI ONS OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR IMMEDIATELY PRE CEDING ASSESSMENT YEARS. EXPIRED INVENTORY: 40. IT IS NOTED THAT THIS TRIBUNAL DEALT WITH THIS DISALLOWANCE, BASED OBSERVATIONS IN FOLLOWING DECISIONS: ALPHA LEVEL INDIA LTD VS DCIT (2003) 133 TAXMANN 74 0 (BOM) CIT VS WOLKEM INDIA LTD (2009) 315 ITR 111 (RAJ.) 41. THIS TRIBUNAL , BASED ON RATIO LAID DOWN IN THESE DECISIONS, OBSERVED THAT, RATIO OF SUCH EXPIRED INVENTORY TO S ALE WAS ONLY 0.12% ON SALES AND 0.18% ON COST OF GOODS SOLD. FUR THER IT HAS NOT BEEN DISPUTED THAT, GOODS OF ASSESSEE NEARING EXPIR Y DATE HAVE TO BE WRITTEN OFF. WE THEREFORE, DIRECT ASSESSEE TO FI LE REQUISITE DETAILS IN ORDER TO ASCERTAIN PERCENTAGE OF EXPIRED INVENTO RY ON SALES AND ON COST OF GOODS SOLD. LD.AO IS DIRECTED TO VERIFY THE SAME AND ALLOW 18 IT(TP)A NO.203 & 155/BANG/2014 18 THE CLAIM OF ASSESSEE IS SIGNED IN ACCORDANCE WITH THE OBSERVATIONS OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR IMMEDIATELY PRECEDING ASSESSMENT YEARS. STOCK ISSUED FOR GENESIS PRODUCTION AS CONSUMABLES: 42. WE NOTE THAT THIS TRIBUNAL WHILE CONSIDERING THIS DISALLOWANCE OBSERVED AS UNDER: (IV) HAVING REGARD TO THE RIVAL CONTENTIONS AND TH E MATERIALS ON RECORD WE FIND THAT THOUGH THE ASSESSEE HAS CLAIMED THAT GENESIS PRODUCTION HAS MANUFACTURED THE PRODUCTS AND OFFERE D INCOME FROM SALE OF THESE PRODUCTS AS ASSESSEES INCOME, THE CI T HAS NOT VERIFIED THE SAME AND HAS ACCEPTED THE CONTENTIONS OF ASSESS EE AT THE FACE VALUE AND ALLOWED RELIEF TO ASSESSEE. IN VIEW OF TH E SAME, WE DEEM IT FIT AND PROPER TO REMIT THIS ISSUE TO THE FILE OF A O TO VERIFY THE ASSESSEES CONTENTIONS AND IF IT IS FOUND TO BE COR RECT, THEN NO DISALLOWANCE SHALL BE MADE. THIS GROUND OF APPEAL I S ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 43. WE NOTE THAT DRP WHILE ALLOWING CLAIM OF ASSES SEE, HELD THAT THE SUBSTANCE AND SPIRIT OF TRANSACTION IS MORE IMP ORTANT THAN THE FORM AND AS INCOME FROM PRODUCTION HAS BEEN BOOKED THE COST OF CONSUMABLES ALSO NEEDS TO BE ALLOWED TO ASSESSEE. IN THE PRESENT FACTS ALSO THE DRP ACCEPTED ASSESSEE S CONTENTIONS WITHOUT VERIFYING THE SAME. 44. ACCORDINGLY, RESPECTFULLY FOLLOWING THE VIEW T AKEN BY THIS TRIBUNAL IN ASSESSEES OWN CASE FOR PRECEDING ASSESSMENT YE ARS, WE DIRECT LD.AO TO VERIFY CONTENTIONS OF ASSESSEE AND IF FOUND CORRECT NO DISALLOWANCE SHALL BE MADE. 19 IT(TP)A NO.203 & 155/BANG/2014 19 QUALITY REJECTS: 45. WE NOTE THAT, LD.AO DENIED CLAIM ON ASSUMPTION THAT, AS ASSESSEE IS IN THE BUSINESS OF HIGH-QUALITY ORGANIC AND INORGANIC CHEMICALS FOR A LONG TIME IT SHOULD BE MEETING THE QUALITY STANDARDS WHICH ARE USUALLY KNOWN BEFOREHAND AND ALSO THE PRO CESS GOES THROUGH DIFFERENT LEVELS OF CHECKS BEFORE ENTERING THE MARKET. 46. WE NOTE THAT IN PRECEDING YEARS ASSESSEE HAD F ILED CHARGED HIGHLIGHTING THE RATIO OF ON SALES AND ON COST OF G OODS SOLD QUALITY REJECTION. ASSESSEE IS DIRECTED TO PROVIDE SUCH DET AILS FOR YEAR UNDER CONSIDERATION. LD.AO IS DIRECTED TO VERIFY THE SAME AND ALLOW THE CLAIM OF ASSESSEE IN ACCORDANCE WITH OBSERVATIONS O F THIS TRIBUNAL IN ASSESSEES OWN CASE FOR IMMEDIATELY PRECEDING AS SESSMENT YEARS. ACCORDINGLY THESE GROUNDS RAISED BY REVENUE STANDS ALLOWED FOR STATISTICAL PURPOSES. 47. GROUND NO. 5 IS IN RESPECT OF THE DIRECTION TO LD.AO TO ADOPT PROFIT BEFORE DEPRECIATION INTEREST AND TAXES ON CO ST AS AGAINST PROFIT BEFORE INTEREST AND TAXES. 48. LD.CIT.DR SUBMITTED THAT, DEPRECIATION IS NOT AN OPERATING EXPENDITURE AND DRP ERRED IN DIRECTING LD.AO TO CON SIDER IT AS OPERATING EXPENDITURE. IT HAS BEEN SUBMITTED THAT D RP HAS NOT GIVEN ANY BASIS FOR ADOPTING THE PLI TO PBDIT. 49. LEARNT CIT DR PLACED RELIANCE ON ORDERS PASSE D BY LEARNT TPO. ON THE CONTRARY, LD.AR SUBMITTED THAT, THIS BEING S ECOND YEAR OF FULL OPERATION, THERE HAS BEEN CAPITAL INFUSION AND INVESTMENT BY WAY OF CAPITAL ASSET CONSEQUENTIALLY HAS INCURRED H UGE INITIAL DEPRECIATION COST. IT WAS SUBMITTED THAT, COMPARABL E COMPANIES 20 IT(TP)A NO.203 & 155/BANG/2014 20 WERE EARLY ENTRANTS AND HENCE ARE IN THE OPERATION FOR SUBSTANTIALLY LONG PERIOD OF TIME WHEREAS ASSESSEE HAVE ATTAINED AN OPTIMAL LEVEL OF OPERATIONS AND IS STILL IN ITS NASCENT STAGES. I T HAS BEEN SUBMITTED THAT ASSESSEE THEREFORE REQUIRES SOME TIM E BEFORE IT CAN REACH TO SUCH LEVEL. THEREFORE, LD.AR SUBMITTED THA T, CONSIDERING THE FACT THAT, ASSESSEE HAS HIGH DEPRECIATION COST, COMPARING NET MARGINS OF ASSESSEE WITH NET MARGIN COMPARABLES, WI LL NOT BE JUSTIFIED. HE PLACED RELIANCE ON OBSERVATIONS OF DRP. 50. WE NOTE THAT, DRP CONSIDERED DEPRECIATION TO B E AN OPERATING EXPENSE FOR YEAR UNDER CONSIDERATION, FOR THE REASO N THAT, THIS YEAR IS SECOND FULL YEAR OF OPERATION. 51. ATTENTION WAS DRAWN TO DECISION OF HONBLE HYDRABAD TRIBUNAL IN CASE OF BA CONTINUUM INDIA (P.) LTD VS ACIT REPORTED IN (2013) 40 TAXMANN.COM 311, WHEREIN IDENTICAL ISSUE AROSE. RELYING UPON VARIOUS DECISIONS OF THIS TRIBUNAL, IT WAS HELD THEREIN THAT, ALL FACTS WHICH IMPACT THE FINAL RESULTS OF A COMPARABLE COMP ANY SHOULD BE TAKEN INTO ACCOUNT AND REASONABLE ACCURATE ADJUSTME NTS SHOULD BE MADE FOR THE SAME. 52. WE ALSO NOTE THAT, IN THE PRESENT CASE THE CL AIM THAT ASSESSEE IS HAVING A HIGH RATE OF DEPRECIATION HAS NOT BEEN CONSIDERED BY LD.TPO. THIS ASPECT HAS BEEN CONSIDERED BY DRP WHER EIN ASSESSEE HAS ESTABLISHED THE COMPARISON IN RESPECT OF DEPREC IATION TO SALES FOR YEAR UNDER CONSIDERATION BETWEEN ASSESSEE AND T HE COMPARABLES. IT WAS BASED UPON THESE TATA THAT DRP ALLOWED THE CLAIM OF ASSESSEE. 21 IT(TP)A NO.203 & 155/BANG/2014 21 53. FURTHER, LD.AR PLACED BEFORE US DECISION OF HONBLE HIGH COURT OF HYDRABAD , WHEREIN, VIEW TAKEN BY HONBLE HYDRABAD TRIBUNAL , IN CASE OF BA CONTINUUM INDIA (P.) LTD VS ACIT (SUPRA) STANDS UPHELD IN ITTA NO.440/2014 BY ORDER DATED 16/07/2014. FURTHER LD.AR SUBMITTED THAT, FOR ASSESSMENT YEAR 2011-12, ASSESS ING OFFICER ACCEPTED DEPRECIATION TO BE AND OPERATING EXPENSE F OR PURPOSE OF COMPUTING MARGIN. 54. WE DO NOT FIND ANY IN INFIRMITY IN SUCH OBSER VATIONS OF DRP AS IT IS IN CONSONANCE WITH THE TRANSFER PRICING REGUL ATIONS FOR COMPUTING ARMS LENGTH MARGIN OF INTERNATIONAL TRAN SACTION. ACCORDINGLY THESE GROUNDS RAISED BY REVENUE STANDS DISMISSED. 55. GROUND NO.6-7 ARE IN RESPECT OF EXCLUSION OF 2 COMPARABLES BY DRP. 56. THE OUTSET LD. CIT DR PLACED RELIANCE ON ORDER S PASSED BY LEARNT TPO. 57. LD.AR SUBMITTED THAT ASSESSEE CHALLENGED EXCLU SION OF CERTAIN COMPARABLES, UNDER R&D SEGMENT, AMONGST WHICH DRP D IRECTED LD.AO TO VERIFY RPT OF CLINIGENE INTERNATIONAL LTD. , AND OBSERVED THAT IN THE EVENT RPT IS MORE THAN 25% THE COMPARAB LE NEEDS TO BE REJECTED. HE SUBMITTED THAT RELATED PARTY TRANSACTI ON OF THIS COMPARABLE ADMITTEDLY IS 32% OF TRANSACTION WITH RE LATED PARTIES AS AGAINST GROSS REVENUE. 58. LD.AR SUBMITTED THAT, IT WAS ON VERIFICATION O F ALL THESE FACTS THAT THE DIRECTIONS BY DRP HAVE BEEN FOLLOWED BY LD .AO, THEREBY EXCLUDING THIS COMPARABLE. 22 IT(TP)A NO.203 & 155/BANG/2014 22 59. AND IN RESPECT OF CYBER MEDIA RESEARCH LTD., D RP UPHELD EXCLUSION SINCE THIS COMPANY WAS INTO MEDIA RESEARC H AND FUNCTIONALLY DIFFERENT FROM ASSESSEE. 60. HE THUS RELIED ON OBSERVATIONS AND DIRECTIONS OF DRP IN RESPECT OF THE 2 COMPARABLES. 61. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH S IDES IN LIGHT OF RECORDS PLACED BEFORE US. 62. WE NOTE THAT, NOTHING CONTRARY TO OBSERVATION S OF DRP HAS BEEN BROUGHT TO OUR NOTICE BY REVENUE. LD.AO EXCLUD ED CLINIGENE INTERNATIONAL LTD., AFTER VERIFYING RPT BEING MORE THAN 25% WHICH WAS IN CONSONANCE WITH THE DIRECTIONS OF DRP. AND I N RESPECT OF CYBER MEDIA RESEARCH LTD., HAS BEEN EXCLUDED FOR BE ING FUNCTIONALLY DIFFERENT WHICH HAS NOT BEEN OBJECTED BEFORE US. 63. UNDER SUCH CIRCUMSTANCES WE DO NOT FIND ANY IN FIRMITY IN REJECTION OF THESE 2 COMPARABLES BY LD.AO. ACCORDINGLY THESE GROUNDS RAISED BY REVENUE STANDS DISMISSED. IT(TP)A NO.203/BANG/2014(ASSESSEES APPEAL) 64. ASSESSEE HAS RAISED ADDITIONAL GROUNDS BEING 1 6-30 BY STATING THAT, THESE WERE INADVERTENTLY MISSED OUT IN THE OR IGINAL APPEAL OF MEMORANDUM. HOWEVER AT THE TIME OF ARGUMENTS NONE O F THESE GROUNDS HAVE BEEN PRESSED AND HENCE THESE ARE DISMI SSED. WE ARE THEREFORE ONLY ADJUDICATING THE GROUNDS ONLY GENERA LLY FILED BY ASSESSEE. 65. LD.AR SUBMITTED THAT, GROUND 1-5 & 6.1 ARE GENERAL IN NATURE AND THEREFORE DO NOT REQUIRE ADJUDICATION 23 IT(TP)A NO.203 & 155/BANG/2014 23 66. GROUND 6.2-6.6: LD.AR SUBMITTED THAT, MAIN GRIEVANCE RAISED BY ASSESSEE IS NON-GRANTING OF UNDER CAPACITY UTILI SATION FOR MANUFACTURING SEGMENT AND R&D. 67. IT WAS SUBMITTED THAT AS THE MANUFACTURING AND R&D SEGMENT WERE INTERLINKED WITH EACH EACH OTHER ASSESSEE HAD BENCHMARKED THESE TRANSACTIONS TOGETHER. LD.TPO DISSATISFIED WI TH SUCH APPROACH, SEGREGATED BOTH SEGMENTS, WHICH HAS NOT B EEN OBJECTED BY ASSESSEE. IT WAS SUBMITTED THAT, ASSESSEE CLAIME D ADJUSTMENT FOR EXCLUSION OF DEPRECIATION ON FIXED COSTS SINCE, CAP ACITY UTILISATION OF COMPANY DURING THE YEAR WAS ONLY 20%. IT WAS SUBMIT TED THAT DRP WHEN AGREED FOR EXCLUSION OF DEPRECIATION FOR COMPU TATION OF MARGIN, UNDER CAPACITY UTILISATION CANNOT BE DENIED TO ASSESSEE AS THEY ARE INTERLINKED WITH EACH OTHER. THIS BEING TH E INITIAL YEAR OF MANUFACTURING, ASSESSEE WAS NOT IN A POSITION TO FU LLY UTILISE THE EQUIPMENTS PURCHASED BECAUSE OF WHICH AN ADJUSTMENT IS WARRANTED. HE PLACED RELIANCE ON DECISION OF COORDI NATE BENCH OF THIS TRIBUNAL IN CASE OF M/S SKF TECHNOLOGIES INDIA PVT.LTD VS DCIT IN IT(TP)A NO.341/BANG/2014 FOR ASSESSMENT YEAR 2004-05 BY ORDER DATED 15/02/2019 IN SUPPORT OF HIS CONTENTION. 68. ON THE CONTRARY LD. CIT DR PLACED RELIANCE ON THE OBSERVATIONS OF DRP. SHE SUBMITTED THAT ASSESSEE TRANSFERS ENTIR E PROCESS AS WELL AS INTANGIBLE DEVELOPED BY IT UNDER R&D SEGMEN T, SHOWS THAT THE COST PRICE SHOULD INCLUDE PRICE OF SUCH FACILIT IES CREATED. AND THEREFORE THERE IS NO REQUIREMENT TO PROVIDE CAPACI TY UTILISATION TO ASSESSEE. 24 IT(TP)A NO.203 & 155/BANG/2014 24 69. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH S IDES IN LIGHT OF RECORDS PLACED BEFORE US 70. DURING THE YEAR UNDER CONSIDERATION, ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS AE IN MANUFACTUR ING SEGMENT AND R&D SEGMENT. UNDER MANUFACTURING SEGMENT ADMITTEDLY ASSESSEE HAS UTILISATION OF 28% AND UNDER R&D SEGMENT ASSESS EE HAS UTILISATION OF 20%. THIS POSITION HAS NOT BEEN DISP UTED BY LD.TPO. ASSESSEE WIDE SUBMISSION DATED 08/01/2013 AND 03/01 /2013 PLACED AT PAGE 540 AND 568 OF PAPER BOOK VOLUME 1 S UBMITTED BEFORE AUTHORITIES BELOW THAT IT HAS INSTALLED 220 PRODUCTS OUT OF WHICH ACTUAL CAPACITY UTILISED WAS ONLY IN RESPECT OF 62 PRODUCTS. FURTHER IT HAS BEEN SUBMITTED THAT ASSESSEE HIRED 5 2 CHEMISTS BUT UTILISED ONLY 9 OF THEM. 71. DRP ADMITTEDLY GRANTED DEPRECIATION AS AN OPER ATING EXPENSES FOR MANUFACTURING SEGMENT CONSIDERING THE FACT THAT THIS WAS THE 2 ND FULL YEAR OF OPERATIONS FOR ASSESSEE AND THAT ASSE SSEE HAD A HIGHER DEPRECIATION COST ON SALES AS AGAINST THE CO MPARABLES. IT HAS ALSO BEEN SUBMITTED THAT THE COMPARABLES CONSIDERED UNDER THESE SEGMENTS HAVE ACHIEVED A HIGHER CAPACITY UTILISATIO N AND THEREFORE WHILE COMPUTING MARGIN OF ASSESSEE BOTH DEPRECIATIO N AS WELL AS CAPACITY UTILISATION ADJUSTMENT HAS TO BE GRANTED. 72. IT IS AN ADMITTED FACT THAT, ADJUSTMENT ON AC COUNT OF DIFFERENCE IN CAPACITY UTILISATION IS ONE OF THE RECOGNISED AD JUSTMENT UNDER RULE 10B(1)(E)(III) OF INCOME TAX RULES, AS OBSERVE D BY HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS PETRO ARALDITA (P) LTD., REPORTED IN (2018) 93 TAXMANN.COM 438 . IT HAS BEEN HELD THAT, ADJUSTMENT 25 IT(TP)A NO.203 & 155/BANG/2014 25 SHOULD BE MADE IN THE HANDS OF COMPARABLE COMPANIES TO IRON OUT THE DIFFERENCES. 73. WE ALSO REFER TO AND RELY UPON THE DECISION OF HONBLE DELHI TRIBUNAL IN CASE OF DCIT VS CLAAS INDIA PVT LTD ., REPORTED IN (2015) 62 TAXMANN.COM 173, WHEREIN HONBLE TRIBUNAL OBSERVED AS UNDER: CAPACITY UTILIZATION ADJUSTMENT 6. THE SECOND SEGMENT OF GROUND NO. 1 OF THE REVENUE' S APPEAL IS AGAINST THE ALLOWING OF CAPACITY ADJUSTMENT IN RESPECT OF C ERTAIN ITEMS OF EXPENSES, WHICH WAS DENIED BY THE TPO. 7. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE CLAIMED TO HAVE WORKED AT A CAPACITY OF 29% DURING THE YEAR IN QUES TION. IT WAS FURTHER CLAIMED THAT THE THREE COMPARABLES CHOSEN BY IT WOR KED AT THE AVERAGE CAPACITY UTILIZATION OF 44%. THAT IS HOW, THE ASSES SEE CLAIMED CAPACITY UTILIZATION ADJUSTMENT BY REDUCING ITS OPERATING CO STS ACCORDINGLY. IN SUPPORT OF DEDUCTION, THE ASSESSEE FILED A REPORT O F MR. CHANDRA WADHVA, A COST ACCOUNTANT. AS PER THIS REPORT, THE CAPACITY UTILIZATION OF THE ASSESSEE AS WELL AS THE COMPARABLES WAS INITIALLY R AISED TO 100%. THE TPO PARTLY ACCEPTED THE CLAIM OF THE ASSESSEE. HE C ONSIDERED VST TRACTORS AND TILLERS AND PUNJAB TRACTORS LTD. (SEG. ) FOR THE PURPOSES OF ALLOWING CAPACITY ADJUSTMENT WITH AN AVERAGE CAPACI TY UTILIZATION TAKEN AT 54%. THEREAFTER, HE RESTRICTED THE REDUCTION IN OPERATING COSTS OF THE ASSESSEE DUE TO CAPACITY UTILIZATION, TO SOME ADMIN ISTRATIVE COSTS AND OTHER EXPENSES. AS AGAINST THE ASSESSEE'S ACTUAL DE DUCTION OF RS. 6,65,79,916 FOR SUCH SELECTIVE ITEMS OF ADMINISTRAT IVE AND OTHER EXPENSES, THE TPO ADJUSTED SUCH COSTS TO RS. 6,30,3 0,739 BY APPLYING THE FACTOR OF 29/54 (29%, BEING, THE ASSESSEE'S CAPACIT Y UTILIZATION AND 54%, BEING, THE AVERAGE CAPACITY UTILIZATION OF COMPARAB LES CHOSEN BY HIM). SIMILARLY, HE REDUCED THE AMOUNT OF DEPRECIATION CL AIMED BY THE ASSESSEE AT RS. 1,19,60,921 TO RS. 64,23,458 BY APPLYING THE SAME FACTOR OF 29/54. AFTER ALLOWING THIS CAPACITY UTILIZATION ADJ USTMENT, HE DETERMINED OP/TC OF THE ASSESSEE AT A LOSS OF (-) 7.78%. TOTAL COST OF THE ASSESSEE WAS TAKEN AT RS. 36.88 CRORE. BY APPLYING THE ARITH METIC MEAN OF THE PROFIT RATE OF COMPARABLE COMPANIES CHOSEN BY HIM A T 11.92%, HE PROPOSED A TRANSFER PRICING ADJUSTMENT OF RS. 7,26, 60,103/-, FOR WHICH ADDITION WAS MADE BY THE AO. THE LD. CIT(A) ACCEPTE D THE ASSESSEE'S CONTENTION ABOUT NOT MAKING ANY TP ADJUSTMENT IN RE LATION TO NON-AE TRANSACTIONS. THE REVENUE IS NOT AGGRIEVED TO THAT EXTENT. AS REGARDS ADJUSTMENT FOR CAPACITY UTILIZATION, THE LD. CIT(A) , BY CONSIDERING THE COMPANIES FINALLY HELD BY HIM AS COMPARABLE, APPLIE D THE FACTOR OF 29/46 FOR REDUCING THE OPERATING COSTS ACTUALLY INCURRED BY THE ASSESSEE. APART FROM THE ADJUSTMENTS ALLOWED BY THE TPO ON ADMINIST RATION EXPENSES 26 IT(TP)A NO.203 & 155/BANG/2014 26 AND DEPRECIATION, THE LD. CIT(A) ALSO REDUCED ADVER TISEMENT & MARKETING EXPENSES, EMPLOYEE COST (BY TAKING ENTIRE EMPLOYEE COST, OTHER THAN BONUS, AT RS. 35515709 AS FIXED). THE REVENUE IS AG GRIEVED AGAINST THE ALLOWING OF CAPACITY UTILIZATION ADJUSTMENT TO THIS EXTENT BY THE LD. CIT(A). 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E RELEVANT MATERIAL ON RECORD. BEFORE EMBARKING UPON THE QUEST ION OF ALLOWABILITY AND EXTENT OF CAPACITY ADJUSTMENT UNDER THE TNMM, W E WANT TO MAKE IT CLEAR THAT THE ASSESSEE REDUCED ITS OPERATING COSTS BY CONSIDERING ITS CAPACITY UTILIZATION VIS--VIS THAT OF COMPARABLES AND RESULTANTLY CLAIMED THAT ITS INCREASED PROFIT AS A RESULT OF SUCH REDUC ED OPERATING COSTS BE COMPARED WITH THAT OF THE COMPARABLES. THE TPO HAS ALSO AGREED IN PRINCIPLE WITH THE OTHERWISE AVAILABILITY OF THE CA PACITY ADJUSTMENT. THE ISSUE OF ALLOWING CAPACITY ADJUSTMENT BEFORE US CAN BE DIVIDED INTO TWO SUB-ISSUES FOR CONSIDERATION, VIZ., FIRST, WHETHER THE ADJUSTMENT SHOULD BE ALLOWED IN THE HANDS OF THE ASSESSEE AS HAS BEEN DO NE BY THE AUTHORITIES BELOW OR COMPARABLES AND SECOND, HOW TO COMPUTE CAP ACITY UTILIZATION ADJUSTMENT UNDER THE TNMM. WE WILL DEAL WITH THESE ASPECTS ONE BY ONE. I. CAPACITY ADJUSTMENT SHOULD BE ALLOWED IN WHOSE H ANDS ? 9.1 IT HAS BEEN NOTICED ABOVE THAT THE ASSESSEE CLAIME D IDLE CAPACITY ADJUSTMENT BY REDUCING ITS OWN OPERATING COSTS. IT IS FURTHER OBSERVED THAT THE AUTHORITIES BELOW HAVE REDUCED THE AMOUNT OF AD JUSTMENT BY EXCLUDING CERTAIN COSTS FROM THE AMBIT OF THE COSTS QUALIFYING FOR ADJUSTMENT. HOWEVER, THE ADJUSTMENT HAS BEEN ULTIMA TELY ALLOWED FROM THE OPERATING COSTS INCURRED BY THE ASSESSEE. IN SU CH CIRCUMSTANCES, THE QUESTION ARISES AS TO WHETHER THE ACTION OF THE AUT HORITIES IN ALLOWING THE REDUCTION OF THE OPERATING COSTS INCURRED BY THE AS SESSEE, IS IN ACCORDANCE WITH LAW? IN ORDER TO FIND ANSWER TO THIS QUESTION, WE NEED TO REFER TO THE MANNER OF COMPUTATION OF THE ARM'S LENGTH PRICE UND ER TNMM, WHICH HAS BEEN SET OUT IN RULE 10B(1)(E) AS UNDER: '(E) TRANSACTIONAL NET MARGIN METHOD, BY WH ICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FR OM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE ; (II) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUS E (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, FORM WHERE BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH 27 IT(TP)A NO.203 & 155/BANG/2014 27 TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMO UNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE A ND 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 TAKE N INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION.' 9.2 SUB-CLAUSE (I) IN THE PROCESS OF DETERMINATION OF THE ALP UNDER THE TNMM TALKS OF THE COMPUTATION OF NET OPERATING PROF IT MARGIN REALIZED BY THE ASSESSEE FROM AN INTERNATIONAL TRANSACTION. SUB -CLAUSE (II) IS THE COMPUTATION OF NET OPERATING PROFIT MARGIN REALIZED BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON. THIS REFERS TO DETERMINING THE OPERATING PROFIT MARGIN OF COMPARAB LES WITH THE SAME BASE AS THAT OF THE ASSESSEE. SUB-CLAUSE (III) PROV IDES THAT THE NET PROFIT MARGIN REALIZED BY A COMPARABLE COMPANY, DETERMINED AS PER SUB-CLAUSE (II) ABOVE, 'IS ADJUSTED TO TAKE INTO ACCOUNT THE D IFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UN CONTROLLED TRANSACTIONS,. . . . . . WHICH COULD MATERIALLY AFF ECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET.' IT IS THIS ADJUSTED NET PROFIT MARGIN OF THE UNRELATED TRANSACTIONS OR OF THE COMPARABLE COMPANI ES, AS DETERMINED UNDER SUB-CLAUSE (III), WHICH IS USED FOR THE PURPO SES OF MAKING COMPARISON WITH THE NET PROFIT MARGIN REALIZED BY T HE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION AS PER SUB-CLAUSE (I). 9.3 SUB-RULE (2) OF RULE 10B PROVIDES THAT THE COMPARA BILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO CERTAIN FACTORS WHICH HAVE BEEN E NUMERATED THEREIN. RULE 10B(3) STATES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION, IF EITHER THERE ARE N O DIFFERENCES BETWEEN THE TWO OR A 'REASONABLY ACCURATE ADJUSTMENT CAN BE MAD E TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES.' WHEN WE READ SUB-CLAUSES (II) & (III) OF RULE 10B(1)(E) IN JUXTAPOSITION TO SUB-RULES (2) & (3) OF RULE 10B, THE POSITION WHICH EMERGES IS THAT THE NET OPERATING PR OFIT MARGIN OF COMPARABLE COMPANIES CALLS FOR ADJUSTMENT IN SUCH A MANNER SO AS TO BRING BOTH THE INTERNATIONAL TRANSACTION AND COMPAR ABLE CASES AT THE SAME PEDESTAL. IN OTHER WORDS, IF THERE ARE NO DIFF ERENCES IN THESE TWO, THEN THE AVERAGE OF THE NET OPERATING PROFIT MARGIN OF THE COMPARABLE COMPANIES BECOMES A BENCHMARK. HOWEVER, IN CASE THE RE ARE SOME DIFFERENCES BETWEEN THE COMPARABLES AND THE ASSESSE E, THEN THE EFFECT OF SUCH DIFFERENCES SHOULD BE IRONED OUT BY MAKING SUI TABLE ADJUSTMENT TO THE OPERATING PROFIT MARGIN OF COMPARABLES. THAT IS THE WAY FOR BRINGING BOTH THE TRANSACTIONS, NAMELY, THE INTERNATIONAL TR ANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, ON THE SAME P LATFORM FOR MAKING A MEANINGFUL AND EFFECTIVE COMPARISON. THE ABOVE ANAL YSIS OVERTLY TRANSPIRES THAT THE LAW PROVIDES FOR ADJUSTING THE PROFIT MARGIN OF 28 IT(TP)A NO.203 & 155/BANG/2014 28 COMPARABLES ON ACCOUNT OF THE MATERIAL DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION OF THE ASSESSEE AND COMPA RABLE UNCONTROLLED TRANSACTIONS. IT IS NOT THE OTHER WAY AROUND TO ADJ UST THE PROFIT MARGIN OF THE ASSESSEE. IN OTHER WORDS, THE NET OPERATING PRO FIT MARGIN REALIZED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION IS TO BE COMPUTED AS SUCH, WITHOUT ADJUSTING IT ON ACCOUNT OF DIFFERENCES WITH THE COMPARABLE UNCONTROLLED TRANSACTIONS. THE ADJUSTMENT, IF ANY, IS REQUIRED TO BE MADE ONLY IN THE PROFIT MARGINS OF THE COMPARABLES. 9.4 REVERTING TO THE FACTS OF THE INSTANT CASE, WE FIN D THAT THE AUTHORITIES BELOW HAVE ADJUSTED THE OPERATING COSTS OF THE ASSE SSEE IN ALLOWING THE CAPACITY ADJUSTMENT. AS AGAINST THAT, THE CORRECT C OURSE OF ACTION PROVIDED UNDER THE LAW IS TO ADJUST THE OPERATING COSTS OF T HE COMPARABLE AND THEIR RESULTANT OPERATING PROFIT. THERE IS HARDLY NEED TO ACCENTUATE THAT THERE CAN BE NO ESTOPPEL AGAINST THE LAW. ONCE THE LAW EN JOINS FOR DOING A PARTICULAR THING IN A PARTICULAR MANNER ALONE, IT I S NOT OPEN TO ANYONE TO ADOPT A CONTRARY OR DIFFERENT APPROACH. AS THE AUTH ORITIES BELOW HAVE ADOPTED A COURSE OF ACTION IN ALLOWING ADJUSTMENT, WHICH IS NOT IN CONSONANCE WITH LAW, WE CANNOT APPROVE THE SAME. TH E IMPUGNED ORDER IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF THE TPO/AO FOR GIVING EFFECT TO THE AMOUNT OF IDLE CAPACITY ADJUSTMENT IN THE OPERATING PROFIT OF THE COMPARABLES AND NOT THE ASSESSEE. II. HOW TO COMPUTE CAPACITY UTILIZATION ADJUSTMENT UNDER TNMM : 10.1 UNDER THE TNMM, THE ALP OF AN INTERNATIONAL TRANSA CTION IS DETERMINED BY COMPUTING AND COMPARING THE PERCENTAG E OF OPERATING PROFIT MARGIN REALIZED BY THE ASSESSEE WITH THAT OF THE COMPARABLES. WE HAVE NOTICED ABOVE THAT THE DIFFERENCE IN THE CAPAC ITY UTILIZATIONS IS AN IMPORTANT FACTOR, WHICH NEEDS TO BE ADJUSTED. NO ME CHANISM HAS BEEN GIVEN UNDER THE ACT OR THE RULES FOR COMPUTING THE AMOUNT OF CAPACITY UTILIZATION ADJUSTMENT. 10.2 ON AN OVERALL UNDERSTANDING, WE FEEL THAT UNDER TH E TNMM, THE FIRST STEP IN GRANTING CAPACITY UTILIZATION ADJUSTMENT IS TO ASCERTAIN THE PERCENTAGE OF CAPACITY UTILIZATION BY THE ASSESSEE AND COMPARABLES. THERE CAN BE NO DIFFICULTY IN WORKING OUT THESE PER CENTAGES. THE SECOND STEP IS TO GIVE EFFECT (POSITIVE OR NEGATIVE) TO TH E DIFFERENCE IN THE PERCENTAGE OF CAPACITY UTILIZATIONS OF THE ASSESSEE VIS--VIS COMPARABLES, ONE BY ONE, IN THE OPERATING PROFIT OF COMPARABLES BY ADJUSTING THEIR RESPECTIVE OPERATING COSTS. OPERATING COSTS CAN BE EITHER FIXED OR VARIABLE OR SEMI-VARIABLE. ONE NEEDS TO SPLIT SEMI-VARIABLE COSTS INTO THE FIXED PART AND VARIABLE PART. IN SO FAR AS THE VARIABLE COSTS AND THE VARIABLE PART OF THE SEMI-VARIABLE COSTS ARE CONCERNED, THESE REMAIN UNAFFECTED DUE TO ANY UNDER OR OVER UTILIZATION OF CAPACITY. ACCORDINGLY, SUCH VARIABLE OPERATING COSTS REMAIN UNCHANGED. THE ADJUSTMENT IS CALLED FO R ONLY IN RESPECT OF THE FIXED OPERATING COSTS AND FIXED PART OF SEMI-VA RIABLE COSTS. SUCH COSTS ARE SCALED UP OR DOWN BY CONSIDERING THE PERCENTAGE OF CAPACITY UTILIZATION BY THE ASSESSEE AND SUCH COMPARABLE. IT CAN BE ILLUSTRATED 29 IT(TP)A NO.203 & 155/BANG/2014 29 WITH THE HELP OF A SIMPLE EXAMPLE. SUPPOSE THE FIXE D COSTS INCURRED BY A COMPARABLE (SAY, A) ARE RS. 100 AND IT HAS CAPACITY UTILIZATION OF 50% AS AGAINST THE CAPACITY UTILIZATION OF 25% BY THE ASSE SSEE. THE ABOVE PERCENTAGES SHOW THAT THE ASSESSEE HAS INCURRED FUL L FIXED COSTS WITH 25% OF THE UTILIZATION OF ITS CAPACITY, AS AGAINST A INCURRING FULL FIXED COSTS WITH 50% OF ITS CAPACITY UTILIZATION. THIS DIVULGES THAT THE ASSESSEE HAS INCURRED RELATIVELY MORE FIXED COSTS AND A HAS INCU RRED LOWER COSTS. IN ORDER TO MAKE AN EFFECTIVE COMPARISON, THERE ARISES A NEED TO OBLITERATE THE EFFECT OF THIS DIFFERENCE IN CAPACITY UTILIZATI ONS. IT CAN BE DONE BY PROPORTIONATELY SCALING UP THE FIXED COSTS INCURRED BY A SO AS TO MAKE IT FULLY COMPARABLE WITH THE ASSESSEE. THIS WE CAN DO BY INCREASING THE FIXED COSTS OF A TO RS. 200 (RS. 100 INTO 50/25) AS AGAINST THE ACTUALLY INCURRED FIXED COSTS BY IT AT RS. 100. WHEN WE COMP UTE OPERATING PROFIT OF A BY SUBSTITUTING THE FIXED COSTS AT RS. 200 WITH T HE ACTUALLY INCURRED AT RS. 100, IT WOULD MEAN THAT THE FIXED COSTS INCURRE D BY THE ASSESSEE AND A ARE AT THE SAME CAPACITY UTILIZATION. THERE CAN B E CONVERSE SITUATION AS WELL. SUPPOSE THE FIXED COSTS INCURRED BY A COMPARA BLE (SAY, B) ARE RS. 100 AND IT HAS CAPACITY UTILIZATION OF 25% AS AGAIN ST THE CAPACITY UTILIZATION OF 50% BY THE ASSESSEE. THE ABOVE PERCE NTAGES SHOW THAT THE ASSESSEE HAS INCURRED FULL FIXED COSTS AT 50% OF TH E UTILIZATION OF ITS CAPACITY, AS AGAINST B INCURRING FULL FIXED COSTS A T 25% OF THE CAPACITY UTILIZATION. THIS DECIPHERS THAT THE ASSESSEE HAS I NCURRED RELATIVELY LOWER FIXED COSTS AND B HAS INCURRED HIGHER COSTS. THIS D IFFERENCE IN CAPACITY UTILIZATIONS CAN BE ELIMINATED BY PROPORTIONATELY S CALING DOWN THE FIXED COSTS INCURRED BY B SO AS TO MAKE IT FULLY COMPARAB LE. THIS WE CAN DO BY REDUCING THE FIXED COSTS OF B TO RS. 50 (RS.100 INT O 25/50) AS AGAINST THE ACTUALLY INCURRED FIXED COST BY IT AT RS.100. WHEN WE COMPUTE OPERATING PROFIT OF B BY SUBSTITUTING THE FIXED COSTS AT RS. 50 WITH THE ACTUALLY INCURRED AT RS. 100, IT WOULD MEAN THAT THE FIXED C OSTS INCURRED BY THE ASSESSEE AND B ARE AT THE SAME CAPACITY UTILIZATION LEVEL. 74. WE NOTE THAT THIS TRIBUNAL IN CASE OF M/S SKF TECHNOLOGIES INDIA PVT.LTD VS DCIT (SUPRA) , RELYING ON ABOVE OBSERVATIONS, UPHELD ADJUSTMENT TOWARDS DIFFERENCES LEVEL OF CAPACITY UT ILISATION. THIS VIEW HAS ALSO BEEN AFFIRMED BY HONBLE KARNATAKA HIGH COURT BY ORDER DATED 26/06/2018 IN ITA NO.229/2017 . WE UNDERSTAND THAT ASSESSEE HAS NOT FILED DETAILS F OR EXAMINING IN ACCORDANCE WITH THE OBSERVATIONS MADE BY HONBLE DELHI TRIBUNAL IN ABOVE IN SUPPORT OF ITS CLAIM WHICH REQUIRES EXAMIN ATION BY LD. AO/TPO. ACCORDINGLY, WE REMAND THIS ISSUE BACK TO L D.AO/TPO FOR 30 IT(TP)A NO.203 & 155/BANG/2014 30 EXAMINING THE CLAIM OF ASSESSEE IN LIGHT OF OBSERVA TIONS MADE BY HONBLE DELHI TRIBUNAL (SUPRA). ACCORDINGLY THESE GROUNDS RAISED BY ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. 75. GROUND 6.7-6.10 ARE IN RESPECT OF COMPARABLES ALLEGED FOR EXCLUSION AND NOT CONSIDERING DEPRECIATION AS AN OP ERATING EXPENSE FOR COMPUTING MARGIN IN CASE OF COMPARABLES UNDER R &D SEGMENT. LD.AR SUBMITTED THAT, LD.TPO ADOPTED EXPORT EARNING FILTER OF 25% FOR ITES AND R&D SEGMENTS, HOWEVER THE SAME PRINCIP LE HAS NOT BEEN GRANTED A DEFECT APPLIED FOR MANUFACTURING SEG MENT. LD.AR ALLEGED FOR EXCLUSION OF FOLLOWING 3 COMPARAB LES FOR HAVING HIGH EXPORT FILTERS AS COMPARED TO ASSESSEE: TANFAC INDUSTRIES LTD AMINES & PLASTICIZERS LTD VINATI ORGANICS LTD IT IS SUBMITTED THAT, ABOVE COMPARABLES HAVE HIGH E XPORT EARNING AS COMPARED TO ASSESSEE. 76. LD.AR SUBMITTED THAT TANFAC INDUSTRIES LTD, AM INES & PLASTICIZERS LTD., AND VINATI ORGANICS LTD., HAVE B EEN SELECTED BY LEARNT TPO/DRP IN RESPECT OF MANUFACTURING SEGMENT WITHOUT APPLYING EXPORT EARNING FILTER OF LESS THAN 25% THA T WAS ADOPTED TO ITES AND R&D SEGMENT. THE LD.AR SUBMITTED THAT, THE SE COMPANIES DO NOT HAVE EXPORT SALES AS COMPARED TO A SSESSEE AND THAT THEY PRIMARILY CATER ONLY TO DOMESTIC MARKET. 31 IT(TP)A NO.203 & 155/BANG/2014 31 77. LD. CIT DR SUBMITTED THAT THIS ASPECT HAS NOT BEEN EXAMINED BY THE AUTHORITIES BELOW AS ASSESSEE PRIMARILY DID NOT ADOPT THIS FILTER. HE ALSO REFERRED TO THE ORDER PASSED UNDER 92CA FOR ASSESSMENT YEAR 2010-11, WHEREIN ASSESSEE IS NOT AD OPTING EXPORT FILTER FOR MANUFACTURING SEGMENT. 78. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH S IDES IN LIGHT OF RECORDS PLACED BEFORE US. 79. WE NOTE THAT, LD.TPO SELECTED 12 COMPARABLES F OR MANUFACTURING SEGMENT IS BY APPLYING THE SAME FILTE RS ADOPTED BY ASSESSEE WITH CERTAIN MODIFICATIONS. NOW AT THIS ST AGE BEFORE THIS TRIBUNAL IN ASSESSEE IS ALLEGING THAT COMPANIES WITH EXPORT INCOME LESS THAN 25% NEEDS TO BE EXCLUDED. FURTHER WE NOTE FROM THE RECORDS PLACED BEFORE US THAT ASSESSEE MANUFACTURES ITS PRODUCTS FOR ITS GROUP ENTITIES ON NEED BASIS. NO GROUND HAS BEEN RAISED BEFORE DRP IN RESPECT OF THIS ISSUE. ASSESSEE HAS R AISED ADDITIONAL GROUND IN RESPECT OF NOT APPLYING EXPORT FILTER IN MANUFACTURING SEGMENT. AS WE NOTE THAT THIS ISSUE HAS NOT BEEN DE ALT WITH BY AUTHORITIES BELOW, IN THE INTEREST OF JUSTICE WE RE MAND THIS ISSUE BACK TO LD. AO/TPO IN RESPECT OF COMPARABLES ALLEGE D BY ASSESSEE HERE IN. THE LD. AO/TPO SHALL VERIFY APPLICABILITY THIS FILTER AND THEN CONSIDER ALLEGED COMPARABLES ACCORDINGLY. ACCORDINGLY COMPARABLES RAISED BY ASSESSEE ARE REMA NDED TO LD.AO/TPO FOR VERIFICATION. 80. AS REGARDS CONSIDERING DEPRECIATION AS OPERATI NG EXPENSE, LD.AR SUBMITTED THAT, DRP GRANTED DEPRECIATION AS O PERATING 32 IT(TP)A NO.203 & 155/BANG/2014 32 EXPENSE UNDER MANUFACTURING SEGMENT, HOWEVER DID NO T GIVE IDENTICAL DIRECTIONS FOR R&D SEGMENT. IT HAS BEEN A RGUED THAT TNMM HAS NOT BEEN DISPUTED AS MOST APPROPRIATE METH OD AND THEREFORE THE NET PROFIT ONLY NEEDS TO BE COMPARED FOR COMPUTING THE MARGINS. LD.AR THUS SUBMITTED THAT, DEPRECIATIO N FOR YEAR UNDER CONSIDERATION HAS BEEN HIGH IN CASE OF ASSESS EE BEING INITIAL YEARS OF ACTIVITY BEING CARRIED OUT. IT HAS ALSO BE EN SUBMITTED THAT THERE HAS BEEN A LOT OF PRODUCTS AND CAPITAL INFUSE D INTO THE WORKING OF THE SEGMENT AND THEREFORE DEPRECIATION N EEDS TO BE ELIMINATED IN THE PRESENT CASE. 81. ON THE CONTRARY LD.CIT.DR PLACED RELIANCE ON OB SERVATIONS OF LEARNT TPO/DRP. 82. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN LIGHT OF RECORDS PLACED BEFORE US. 83. AT THE OUTSET WE NOTE THAT ASSESSEE HAD CONSIDE RED MANUFACTURING AND R&D SEGMENT AS COMPOSITE UNIT, WH ICH WAS SUBSEQUENTLY SEPARATED BY LD.TPO IN TRANSFER PRICIN G PROCEEDINGS. IT HAS NOT BEEN DISPUTED BY AUTHORITIES BELOW THAT BOTH SEGMENTS ARE INTERRELATED TO EACH OTHER AND THAT THERE WILL BE OVERLAPPING OF PRODUCTS/MACHINERIES/MANPOWER BEING USED UNDER 2 SE GMENTS. WHEN DRP DIRECTED DEPRECIATION AS AN OPERATING EXPE NSE TO MANUFACTURING SEGMENT, R&D SEGMENT CANNOT BE LOOKED CONTRARY. WE THEREFORE DIRECT LD.AO/TPO TO GRANT DEPRECIATION AS OPERATING EXPENSE WHILE COMPUTING MARGINS TO DETERMINED THE A RMS LENGTH PRICE UNDER R&D SEGMENT. 33 IT(TP)A NO.203 & 155/BANG/2014 33 ACCORDINGLY THESE GROUNDS RAISED BY ASSESSEE STANDS ALLOWED AS INDICATED HEREINABOVE. 84. ASSESSEE HAS ALLEGED IN GROUND 6.10 THAT COMPAR ABLE VIMTA LABS SHOULD BE EXCLUDED FROM R&D SEGMENT DUE TO HIG H TURNOVER AS COMPARED TO ASSESSEE. IT IS ALSO BEEN SUBMITTED THAT THIS COMPARABLE IS A CONTRACT RESEARCH SERVICE PROVIDER AND ITS RESEARCH ACTIVITIES NOT AS SAME AS THAT OF ASSESSEE. 85. ON PERUSAL OF ORDERS PASSED BY AUTHORITIES BELO W, WE NOTE THAT THIS ASPECT HAS NOT BEEN VERIFIED BY DRP/AO/TPO. 86. ACCORDINGLY WE REMAND THIS COMPARABLE TO LD. AO /TPO TO VERIFY CONTENTIONS ALLEGED BY ASSESSEE IN RESPECT O F THIS COMPARABLE. IN THE EVENT THE CLAIM ALLEGED BY ASSESSEE IS FOUND TO BE CORRECT, THIS COMPARABLE DESERVES TO BE EXCLUDED. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS A LLOWED FOR STATISTICAL PURPOSES. 87. GROUND 7 IS IN RESPECT OF ITES SEGMENT WHEREIN ASSESSEE SEEKS EXCLUSION OF CERTAIN COMPARABLES ALLEGED IN G ROUND 7.13. IT HAS BEEN SUBMITTED THAT, IN RESPECT OF OTHER GROUND S ASSESSEE DO NOT PRESS THE ISSUES RAISED. 88. GR.7.1.3: ASSESSEE SEEKING EXCLUSION OF FOLLOWING FOR COMPARABLES FOR HAVING FUNCTIONAL DISSIMILARITIES: INFOSYS BPO LTD ACCENTIA TECHNOLOGIES LTD COSMIC GLOBAL LTD 34 IT(TP)A NO.203 & 155/BANG/2014 34 E-ECLERX SERVICES LTD 89. IT HAS BEEN SUBMITTED BY THE LD.AR THAT, ALL TH ESE COMPARABLES HAVE BEEN CONSIDERED BY COORDINATE BENC H OF THIS TRIBUNAL IN CASE OF E-4-E BUSINESS SOLUTIONS INDIA LTD REPORTED IN (2015) 67 TAXMANN.COM 60 AS UNDER: ACCENTIA TECHNOLOGIES LTD. THE LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT T HOUGH THE TPO HAS RECORDED THE BUSINESS PROFILE OF THE ASSESSEE, HOWEVER, THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE ARE CARRIED OUT ONLY IN RESPECT OF SER VICE OF CONTACT CENTRE OUTSOURCING TO ITS AE AS PER THE SERVICE AGREEMENT. THE LEARNED AR OF THE ASSESSEE HAS REFERRED TO ANNUAL REPORT OF ACCENTIA TECHNOLOGIES LTD., AND SUBMITTED THAT THIS COMPANY HAS ACQUIRED M/S.OAK TE CHNOLOGIES INC, USA DURING THE YEAR UNDER CONSIDERATION AND THEREFORE, THERE IS AN EXTRAORDINARY EVENT OF ACQUISITION OF ANOTHER COMPANY. HE HAS THU S SUBMITTED THAT IN VIEW OF THE EXTRAORDINARY EVENT OF ACQUISITION, THIS COMPAN Y CANNOT BE CONSIDERED AS A GOOD COMPARABLE OF THE ASSESSEE. APART FROM THIS OB JECTION, LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT EVEN OTHERWISE THIS COM PANY IS NOT FUNCTIONALLY COMPARABLE WITH THE ASSESSEE SO FAR AS SERVICES PRO VIDED TO THE AE. HE HAS REFERRED TO VARIOUS BUSINESS TRANSACTIONS AND SERVI CES PROVIDED BY ACCENTIA TECHNOLOGIES LTD., AND SUBMITTED THAT THIS COMPANY IS IN THE VARIOUS SEGMENTS OF ACTIVITIES LIKE MEDICAL TRANSCRIPTION, MEDICAL CODI NG, MEDICAL BILLING, ETC. THE ACTIVITY OF MEDICAL TRANSCRIPTION AND MEDICAL CODIN G IS ENTIRELY DIFFERENT FROM THE SERVICE OF CONTACT CENTRE SERVICE PROVIDED BY THE A SSESSEE TO ITS AE AND THEREFORE, THIS COMPANY CANNOT BE CONSIDERED AS FUNCTIONALLY C OMPARABLE WITH THE ASSESSEE. THE LEARNED AR OF THE ASSESSEE HAS REFERR ED TO THE REVENUE EARNED BY THE SAID COMPANY AND SUBMITTED THAT SUBSTANTIAL REV ENUE HAS BEEN EARNED BY THE SAID COMPANY FROM THE BUSINESS ACTIVITY OF MEDI CAL TRANSCRIPTION APART FROM BILLING AND COLLECTION AS WELL AS MEDICAL CODING AC TIVITY. (I) ON THE OTHER HAND, LEARNED DEPARTMENTAL REPRESENTAT IVE HAS SUBMITTED THAT THIS COMPANY SATISFIES THE FILTER TEST APPLIED BY THE TPO FOR SELECTING COMPANIES IN THE CATEGORY OF INFORMATION TECHNOLOGY SERVICE (ITES) COMPANY. THE ASSESSEE IS ALSO ENGAGED IN THE ACTIVI TY OF PROVIDING ITES TO ITS AE AND THEREFORE, BOTH THE ASSESSEE AS WELL AS ACCENTIA TECHNOLOGIES LTD., ARE ENGAGED IN THE SIMILAR BUSINESS ACTIVITY. HE HAS REFERRED TO THE FINDINGS OF THE TPO AND THE DRP AND SUBMITTED THAT THE DRP HAS REJECTED THE OBJECTIONS RAISED BY THE ASSES SEE AGAINST THIS COMPANY. THEREFORE, THIS COMPANY IS A GOOD COMPARAB LE FOR DETERMINATION OF T HE ALP IN RESPECT OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. 35 IT(TP)A NO.203 & 155/BANG/2014 35 (II) WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. THE FIRST OBJECTION HAS BEEN RAISED BY THE LEARNED AR OF THE ASSESSEE ON ACCOUNT OF EXTRAORDINARY EVEN T OF ACQUISITION/PURCHASE OF BUSINESS BY ACCENTIA TECHNOLOGIES LTD., WHEREBY M/S . OAK TECHNOLOGIES INC, USA HAS BEEN ACQUIRED BY THIS COMPANY DURING T HE YEAR UNDER CONSIDERATION. THOUGH THE EXTRAORDINARY EVENT OF ME RGER OR ACQUISITION, IF INFLUENCED THE BU SINESS AS WELL AS THE REVENUE OF A COMPANY THEN SAI D COMPANY IS NOT CONSIDERED AS A GOOD COMPARABLE FOR THE PURPOSE OF DETERMINATION OF THE ALP HOWEVER, IN THIS CASE, IT IS NOT CLEAR FROM THE ANNUAL REPORT WHETHER THE BUSINESS OF M/S. OAK TECH NOLOGIES INC HAS BEEN ACQUIRED AND MERGED WITH THE SAID COMPANY DURI NG THE YEAR UNDER CONSIDERATION. IT APPEARS THAT ACCENTIA TECHNOLOGIE S LTD., HAS PURCHASED UP TO 96% OF THE SHARE HOLDING OF M/S. OAK TECHNOLO GIES. IF IT IS ONLY A TRANSACTION OF PURCHASE OF SHARES OF THE SAID COMPANY THEN IT MAY BE A CASE OF PURCHASE OF ONGOING BUSINESS AND MAY NOT BE A CASE OF MERGING THE SAME WITH THE BUSINESS OF ACCENTIA TECHNOLOGIES LTD. IN THE ABSENCE OF THE RELEVANT FACT THAT THE BUSINESS OF THE SAID COMPANY HAS BEEN MERGED WITH ACCENTIA TECHNOLOGIES LTD., IT MAY BE A CASE OF ACQ UIRING THE SHARES AND M/S. OAK TECHNOLOGIES STILL REMAINS AN I NDEPENDENT ENTITY AND BUSINESS ACTIVITY. THEREFORE, IN THE ABSENCE OF COMPLETE RELEVANT FACTS, IT CANNOT BE HELD THAT THE SO - CALLED ACQUISITIO N OF M/S. OAK TECHNOLOGIES CAN BE CONSIDERED AS AN EXTRAORDINARY EVENT HAVING IMPACT ON THE REVENUE AS WELL AS BUSINESS ACTIVITY OF ACCE NTIA TECHNOLOGIES LTD. ACCORDINGLY, THIS ARGUMENT OF THE LEARNED AR OF THE ASSESSEE IS REJECTED FOR WANT OF COMPLETE FAC TS. (III) AS REGARDS THE FUNCTIONAL DISSIMILARITY, WE NOTE TH AT ACCENTIA TECHNOLOGIES LTD IS ENGAGED IN DIVERSIFIED ACTIVITY OF MEDICAL TRANSCRIPTION, MEDICAL CODING, BILLING, RECEIVABLE MANAGEMENT. THUS IT IS CLEAR THAT THE SAID COMPANY IS ENGAGED IN THE HEALT HCARE ACTIVITY AND PROVIDING BPO SERVICE IN THE HEALTHCARE SECTOR, THA T TOO BY PROVIDING SPECIFIC SERVICES OF MEDICAL TRANSCRIPTION, MEDICAL CODING, MEDICAL BILLING ETC. WE NOTE THA T THESE ACTIVITIES ARE QUITE DIFFERENT FROM THE SER VICE OF CONTACT CENTRE PROVIDED BY THE ASSESSEE TO ITS AE W HICH IS PURELY IN THE NATURE OF CALL CENTRE. THEREFORE, WE ARE OF THE VIE W THAT THE COMPANY ACCENTIA TECHNOLOGIES LTD CANNOT BE CONSIDERED AS A FU NCTIONALLY COMPARABLE COMPANY WITH THE SERVICES PROVIDED BY TH E ASSESSEE TO ITS AE. THE TPO IS DIRECTED TO EXCLUDE THIS COMPANY FRO M THE SET OF COMPARABLES. 11.2 ECLERX SERVICES LTD. THE LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT T HIS COMPANY IS ENGAGED IN THE HIGH-END SERVICES AND THEREFORE, THIS COMPANY I S BASICALLY A KPO AND NOT A BPO. HE HAS REFERRED TO ANNUAL REPORT OF THIS COMPA NY AT PAGE 26 OF THE PAPER BOOK -II AND SUBMITTED THAT AS IT IS CLEAR FROM THE ANNUAL REPORT THAT THIS 36 IT(TP)A NO.203 & 155/BANG/2014 36 COMPANY IS A KNOWLEDGE PROCESS OUTSOURCING (K. P. O ) PROVIDING DATA ANALYTICS AND DATA PROCESS SOLUTIONS TO GLOBAL ENTERPRISE CLI ENTS. THIS COMPANY SUPPORTS CORE AND COMPLEX ACTIVITIES FOR ITS CLIENTS USING P ROPRIETARY PROCESSES AND A SCALABLE OFFSHORE DELIVERY MODEL. THIS COMPANY HAS ACCESS TO THE CAPITAL MARKET AND THEREFORE, THIS COMPANY IS A PUBLIC LISTED KPO COMPANY IN INDIA. THE COMPANY IS ALSO ENGAGED IN CONSULTING SERVICES AND PROCESS OUTSOURCING AS WELL AS IN THE ACTIVITY OF PROCESS RE- ENGINEERING AND A UTOMATION APART FROM MIDDLE OFFICE AND BACK OFFICE SUPPORT TO CAPITAL MARKET. T HEREFORE, KEEPING IN THE DIVERSIFIED HIGH-END SERVICES, THIS COMPANY CANNOT BE CONSIDERED AS FUNCTIONALLY COMPARABLE WITH THE ASSESSEE. IN SUPPORT OF HIS CON TENTION, HE HAS RELIED UPON THE DECISION OF THE SPECIAL BENCH OF THE MUMBAI TRI BUNAL IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) (P.) LTD. V. ASSTT. CIT [201 4] 43 TAXMANN.COM 100/147 ITD 83 . (I) ON T HE OTHER HAND, LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THIS COMPANY IS UNDISPUTEDLY IN THE BUSINESS O F ITES AND THEREFORE, THE NOMENCLATURE THAT OF KPO WILL NOT MAKE IT FUNCT IONALLY DIFFERENT FROM THE ASSESSEE. HE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. (II) WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. WE FIND THAT THE COMPANY ECLERX SERVICES LTD. IS ENGAGED IN DIVERSIFIED ACTIVITY OF PROVIDING SERVICES INCLUDIN G ANALYTIC SERVICES AND DATA PROCESS SOLUTIONS TO ITS GLOBAL CLIENTS. THE S ERVICE PROVIDED BY ECLERX SERVICES LTD., IS IN VARIOUS AREAS INCLUDING CAPITA L MARKET AND THEREFORE, THE SERVICES ARE IN THE NATURE OF CONSULTANCY AND E ND TO END SUPPORT THROUGH TRADE CENTRE INCLUDING TRADE CONFIRMATION, SETTLEMENT, TRANSACTION, MAINTENANCE AND ANALYTIC AND REPORTING . THUS IT IS APPARENT FROM THE NATURE OF THE ACTIVITY OF THIS COMPANY THA T IT IS NOT PROVIDING A SIMPLE SERVICE OF DATA PROCESSING BUT IT IS ENGAGED IN THE ACTIVITY OF PROVIDING HIGH- END SERVICES INVOLVING DECISION MAKING ANALYSIS WHI CH REQUIRES THOUGHT PROCESS AND EVALUATION OF VARIOUS FACTS AND FACTORS. FUNCTIONAL COMPARABILI TY OF THIS COMPANY WITH THAT OF SIMPLE BPO'S SERVICE PROVIDING COMPANY HAS BEEN EXAMINED BY THE SPECIAL BENCH IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) (P.) LTD. (SUPRA ) IN PARAS.82 & 83 AS UNDER : 82. IN SO FAR AS M/S ECLERX SERVICES LIMITED IS CONCERNED, THE RELEVANT INFORMATION IS AVAILABLE IN THE FORM OF ANNUAL REPO RT FOR FINANCIAL YEAR 2007- 08 PLACED AT PAGE 166 TO 183 OF THE PAPER BOOK. A P ERUSAL OF THE SAME SHOWS THAT THE SAID COMPANY PROVIDES DATA ANAL YTICS AND DATA PR OCESS SOLUTIONS TO SOME OF THE LARGEST BRANDS IN TH E WORLD AND IS RECOGNIZED AS EXPERTS IN CHOSEN MARKETS- FINANCIAL SERVICES AND RETAIL AND MANUFACTURING. IT IS CLAIMED TO BE PROVIDING COMPLE TE BUSINESS SOLUTIONS BY COMBINING PEOPLE, PROCESS IMPROVEMENT AN D AUTOMATION. IT IS CLAIMED TO HAVE EMPLOYED OVER 1500 DOMAIN SPECIALISTS WORKI NG FOR THE CLIENTS. IT IS CLAIMED THAT ECLERX IS A DIFFERENT COMPANY WITH INDUSTRY SPECIALIZED 37 IT(TP)A NO.203 & 155/BANG/2014 37 SERVICES FOR MEETING COMPLEX CLIENT NEEDS, DATA ANA LYTICS KPO SERVICE PROVIDER SPE CIALIZING IN TWO BUSINESS VERTICALS FINANCIAL SERVI CES AND RETAIL AND MANUFACTURING. IT IS CLAIMED TO BE ENGAG ED IN PROVIDING SOLUTIONS THAT DO NOT JUST REDUCE COST, BUT HELP TH E CLIENTS INCREASE SALES AND REDUCE RISK BY ENHANCING EFFICIENCIES AND BY PR OVI DING VALUABLE INSIGHTS THAT EMPOWER BETTER DECISIONS. M/S ECLERX SERVICES PVT. LTD. IS ALSO CLAIMED TO HAVE A SCALABLE DELIVERY MODEL AND SOLUTIONS OFFERED THAT INCLUDE DATA ANALYTICS, OPERATIONS MANAGEMENT, AUDI TS AND RECONCILIATION, METRICS MANAGEMENT AN D REPORTING SERVICES. IT ALSO PROVIDES TAILORED PROCESS OUTSOURCING AND MANAGEMEN T SERVICES ALONG WITH A MULTITUDE OF DATA AGGREGATION, MINING AND MA INTENANCE SERVICES. IT IS CLAIMED THAT THE COMPANY HAS A TEAM DEDICATED TO DEVELOPING AUTOMATION TOOLS TO S UPPORT SERVICE DELIVERY. THESE SOFTWARE AUTOMATION TOOLS INCREASE PRODUCTIVITY, ALLOWING CUSTOMERS TO BENEFIT FROM FURTHER COST SAVING AND OUTPUT GAINS WITH BETTER CONTROL OV ER QUALITY. KEEPING IN VIEW THE NATURE OF SERVICES RENDERED BY M/S ECLERX SERVICES PVT. LTD. AND ITS FUNCTIONAL PROFILE, WE ARE OF THE VIEW THAT THI S COMPANY IS ALSO MAINLY ENGAGED IN PROVIDING HIGH- END SERVICES INVOLVING SPECIALIZED KNOWLEDGE AND DOMAIN EXPERTISE IN THE FIELD AND THE SAME CANN OT BE COMPARED WITH THE ASSESSEE COMPANY WHICH IS MAINLY ENGAGED IN PRO VIDING LOW- END SERVICES TO THE GROUP CONCERNS. 83. FOR THE REASONS GIVEN ABOVE, WE ARE OF THE VIEW THAT IF THE FUNCTIONS ACTUALLY PERFORMED BY THE ASSESSEE COMPANY FOR ITS AES ARE COMPARED WITH THE FUNCTIONAL PROFILE OF M/S ECLERX SERVICES PVT. LTD. AND MOLD- TEC TECHNOLOGIES LTD., IT IS DIFFICULT TO FIND OUT ANY RELATIVELY EQUAL DEGREE OF COMPARABILITY AND THE SAID ENTITIES CANNOT BE TAKEN AS COMPARABLES FOR THE PURPOSE OF DETERMINING ALP OF THE TRANSACTIONS OF THE ASSESSEE C OMPANY WITH ITS AES. WE, THEREFORE, DIRECT THAT THE SE TWO ENTITIES BE EXCLUDED FROM THE LIST OF 10 COMPARABLES FINALLY TA KEN BY THE AO/TPO AS PER THE DIRECTION OF THE DRP. THUS IT IS CLEAR THAT THE SPECIAL BENCH FOUND THAT THIS COMPANY IS NOT COMPARABLE WITH BPO COMPANY WHICH ARE ENGAGED ONLY IN LOW END SERVICES OF DATA PROCESSING. ACCORDINGLY, WE DIRECT THE AO/TPO TO EX CLUDE ECLERX SERVICES LTD. FROM THE LIST OF COMPARABLES FOR THE PURPOSES OF DE TERMINING ALP. 11.3 INFOSYS BPO LTD. THE LEARNED AR OF THE ASSESSEE HAS REFERRED TO THE ANNUAL REPORT OF THIS COMPANY AT PAGE 57 OF THE PAPER BOOK AND SUBMITTED THAT THOUGH THIS COMPANY WAS INITIALLY SELECTED BY THE ASSESSEE, HOWEVER, TH E ASSESSEE HAS RAISED OBJECTIONS AGAINST THIS COMPANY EVEN BEFORE THE TPO AND FURTHER BEFORE THE DRP. THEREFORE, THIS COMPANY, IF FOUND FUNCTIONALLY DIFF ERENT, HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THE LEARNED AR OF THE ASSE SSEE HAS POINTED OUT THAT THIS COMPANY IS HAVING MORE THAN 17000 EMPLOYEES IN COMP ARISON TO ONLY 6 EMPLOYEES OF THE ASSESSEE. THEREFORE, EVEN ON THE P ARAMETER OF THE SCALE AND 38 IT(TP)A NO.203 & 155/BANG/2014 38 STRENGTH OF EMPLOYEES, THIS COMPANY CANNOT BE CONSI DERED AS FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE. FURTHER, HE H AS REFERRED TO THE ANNUAL REPORT OF THE COMPANY AND SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, THERE IS AMALGAMATION OF PAN FINANCIAL SERVICES IND IA PVT. LTD. W.E.F. 1/4/2008. THE SCHEME OF AMALGAMATION HAS BEEN APPROVED BY THE HON'BLE HIGH COURT ON 6/4/2009 AND 10/3/2009. THEREFORE, THERE IS AN EXTR AORDINARY EVENT OF AMALGAMATION DURING THE YEAR UNDER CONSIDERATION AN D HENCE THIS COMPANY CANNOT BE CONSIDERED AS A GOOD COMPARABLE FOR THE P URPOSE OF DETERMINING THE ALP. APART FROM THE ABOVE OBJECTIONS, LEARNED AR OF THE ASSESSEE HAS FURTHER SUBMITTED THAT THIS COMPANY IS ENGAGED IN PROVIDING BUSINESS PROCESS MANAGEMENT SERVICES TO ORGANIZATIONS WITH OUTSOURCI NG THEIR BUSINESS PROCESS. THEREFORE, THIS COMPANY IS IN A DIFFERENT KIND OF B USINESS ACTIVITY IN PROVIDING THE MANAGEMENT SERVICE OF BUSINESS PROCESSES AND IS NOT DIRECTLY PROVIDING ANY BUSINESS PROCESS OUTSOURCE SERVICES. THUS, THIS COM PANY CANNOT BE CONSIDERED AS A FUNCTIONALLY COMPARABLE. (I) ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THIS COMPANY IS IN THE BUSINESS ACTI VITY OF PROVIDING ITES AND THEREFORE, IT SATISFIES ALL THE TESTS AND FILTE RS APPLIED BY THE TPO. THE FUNCTIONAL COMPARABILITY HAS BEEN EXAMINED BY THE D RP AND IT WA S FOUND THAT THIS COMPANY IS IN THE SAME LINE OF ACTI VITY UNDER THE CATEGORY OF ITES. HE HAS RELIED UPON THE ORDER OF THE AUTHOR ITIES BELOW. (II) WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. WE NOTE THAT IN PARA 16.2. 15 OF THE ANNUAL REPORT OF THIS COMPANY, IT HAS BEEN REPORTED THAT THERE WAS AMALGA MATION W.E.F 1/4/2008. THE RELEVANT PART OF THE INFORMATION PROV IDED IN THE ANNUAL REPORT READS AS UNDER: 'AMALGAMATION OF PAN FINANCIAL SERVICES INDIA PRIVA TE LIMITED THE BOARD OF DIRECTORS IN THEIR MEETING HELD ON OCT OBER 6. 2008. APPROVED, SUBJECT TO THE APPROVAL OF THE HONORABLE HIGH COURTS OF KARNATAKA AND CHENNAI, A SCHEME OF AMALGAMATION ('T HE SCHEME') TO AMALGAMATE PAN FINANCIAL SERVICES INDIA PRIVATE LIM ITED ('PAN FINANCIAL'), A WHOLLY OWNED SUBSIDIARY OF THE COMPA NY ENGAGED IN PROVIDING BUSINESS PROCESS MANAGEMENT OF SERVICES, WITH THE COMPANY WITH EFFECT FROM APRIL 1. 2008 ('EFFECTIVE DATE'). THE APPROVAL OF THE HIGH COURT WAS RECEIVED ON APRIL 6, 2009 AND F ILED WITH THE RESPECTIVE REGISTRAR OF COMPANIES OF KARNATAKA AND TAMILNADU O N APRIL 6, 2009 AND MARCH 10, 2009 RESPECTIVELY. ACCORDINGLY ON THE SCHEME BECOMING EFFECTIVE, THE FINANCIAL STATEMENT OF PAN FINANCIAL HAS BEEN MERGED WITH THE COMPANY.' IT IS CLEAR THAT THERE WAS EXTRAORDINARY EVENT OF A MALGAMATION DURING THE YEAR UNDER CONSIDERATION. THEREFORE, IN VIEW OF THE EXTR AORDINARY DEVELOPMENT OF AMALGAMATION OF ANOTHER COMPANY, THIS COMPANY CANNO T BE CONSIDERED AS A 39 IT(TP)A NO.203 & 155/BANG/2014 39 GOOD COMPARABLE FOR THE ASSESSMENT YEAR UNDER CONSI DERATION. APART FROM THIS, WE FURTHER NOTE THAT AS PER THE SEGMENT REPORTING I N PARA.16.2.21 THIS COMPANY IS PROVIDING BUSINESS PROCESS MANAGEMENT SERVICES A S UNDER: 'SEGMENT REPORTING THE COMPANY'S OPERATIONS PRIMARILY RELATE TO PROVID ING BUSINESS PROCESS MANAGEMENT SERVICES TO ORGANIZATIONS THAT OUTSOURCE THEIR BUSINESS PROCESSES. ACCORDINGLY. REVENUES REPRESENTED ALONG INDUSTRY CLASSES COMPRISE THE PRIMARY BASIS OF SEGMENTAL INFORMATION SET OUT IN THESE FINANCIAL STATEMENTS. SECONDARY SEGMENTAL REPORTING IS PERFORMED ON THE BASIS OF THE GEOGRAPHICAL LOCATION OF CUSTOMERS. THE ACCOUNTING PRINCIPLES CONSISTENTLY USED IN THE PREPARATION OF THE FINANCIAL STATEMENTS ARE ALSO CONSISTENTLY APPLIED TO RECORD INCOME IN INDIVIDUAL SEGMENTS. THESE ARE SET OUT IN THE NOTE ON SIGNIFIC ANT ACCOUNTING POLICIES.' THUS IT IS CLEAR THAT THE REVENUE EARNED BY THIS CO MPANY IS FROM THE ACTIVITY INCLUSIVE OF OPERATION PRIMARILY RELATES TO PROVIDI NG BUSINESS PROCESS MANAGEMENT SERVICES TO OTHER ORGANIZATION ENGAGED I N OUTSOURCING BUSINESS PROCESS. THIS COMPANY IS NOT ENGAGED IN DIRECT ACTI VITY OF BPO BUT IT PROVIDES SERVICE TO BPOS AND THAT TOO MANAGEMENT SERVICE TO BPO. THEREFORE, IN OUR CONSIDERED VIEW, THIS COMPANY IS ENGAGED IN A DIFFE RENT NATURE OF ACTIVITY TO THAT OF THE ASSESSEE PROVIDED TO ITS AE. ACCORDINGLY, WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 11.4 COSMIC GLOBAL LTD. THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT THE A SSESSEE RAISED OBJECTION AGAINST INCLUSION OF THIS COMPANY IN THE LIST OF CO MPARABLES BEFORE THE TPO ON THE GROUND THAT THIS COMPANY HAS MAJOR REVENUE FROM TRA NSLATION SERVICES. THEREFORE, THIS COMPANY IS FUNCTIONALLY DIFFERENT F ROM THE SERVICES PROVIDED BY THE ASSESSEE TO ITS AE. THE LEARNED AR OF THE ASSES SEE HAS REFERRED TO THE ANNUAL REPORT OF THIS COMPANY AND SUBMITTED THAT TH AT OUT OF THE TOTAL REVENUE OF RS. 7,37,02,584/-, THIS COMPANY HAS EARNED REVENUE FROM TRANSLATION CHARGES TO THE TUNE OF RS. 6,99,35,756/-. THEREFORE, SUBSTANTI AL PART OF THE REVENUE HAS BEEN EARNED FROM THE ACTIVITY OF TRANSLATION. THE L EARNED AR OF THE ASSESSEE HAS FURTHER POINTED OUT THAT EVEN OTHERWISE THIS COMPAN Y IS OUTSOURCING THE WORK OF TRANSLATION AS IT IS EVIDENT FROM THE PROFIT AND LO SS ACCOUNT OF THIS COMPANY THAT AN AMOUNT OF RS. 3,00,25,326/- HAS BEEN PAID ON ACC OUNT OF TRANSLATION CHARGES. THUS, LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT THIS COMPANY CANNOT BE CONSIDERED AS FUNCTIONALLY COMPARABLE WITH THE ASSE SSEE FOR THE PURPOSE OF DETERMINING THE ALP. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CA SE OF LAM RESEARCH (INDIA) (P.) LTD. V. DY. CIT IN ITA NO. 1437/BANG/2014 DATED 30/ 4/2015. (I) ON THE OTHER HAND, LEARNED DEPARTMENTAL REPRESENTAT IVE HAS SUBMITTED 40 IT(TP)A NO.203 & 155/BANG/2014 40 THAT THE COMPARABILITY OF THIS COMPANY HAS BEEN EXA MINED BY THE TPO AS WELL AS BY THE DRP. THE TPO HAS REJECTED THE OBJECT IONS RAISED BY THE ASSESSEE IN RESPECT OF THIS COMPANY BY HOLDING THAT THE TRANSLATION SERVICE ARE IN THE NATURE OF ITES AND THEREFORE, IT QUALIFIES ALL THE FILTERS APPLIED BY THE TPO. HE HAS RELIED UPON THE ORDERS O F THE AUTHORITIES BELOW. (II) WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE THAT THIS C OMPANY IS IN THE BUSINESS OF PROVIDING SERVICE OF MEDICAL TRANSCRIPT ION AND CONSULTANCY SERVICES, TRANSLATIONS SERVICES AND ACCOUNTS BPO. T H E SEGMENTAL REVENUE FROM THE OPERATIONS ARE GIVEN IN SCHEDULE 8 TO THE PROFIT & LOSS ACCOUNT WHICH REVEALS THAT MAJOR REVENUE OF RS. 6,99,35,756 /- OUT OF TOTAL REVENUE OF RS. 7.37 CRORES HAS BEEN EARNED BY THIS COMPANY FROM THE ACTIVITY OF TRANSLATION SERV ICES. WE FURTHER NOTE THAT THE COMPANY HAS DEBITED AN EXPENDITURE OF MORE THAN RS. 3 CRORE ON ACCOUNT OF TRANSLATIONS CHARGES PAID. THUS IT IS CLEAR THAT TH IS COMPANY IS OUTSOURCING ITS SERVICES OF TRANSLATION WORK WHICH IS THE MAIN ACTIVITY OF THIS COMPAN Y YIELDING MAJOR REVENUE EARNED DURING THE YEAR. TH US IT IS MANIFEST FROM THE RECORD THAT THIS COMPANY IS IN TH E ENTIRELY DIFFERENT NATURE OF ACTIVITY AND CANNOT BE COMPARED WITH THE ACTIVITY OF PROVIDING CONTACT CENTRE OF THE ASSESSEE TO ITS AE. IN THE CA SE OF LAM RESEARCH (INDIA) (P.) LTD. (SUPRA) THE CO- ORDINATE BENCH OF THIS TRIBUNAL HAD OCCASION TO EXAMINE THE COMPARABILITY OF THIS COMPA NY IN PARA. 34 AS UNDER: '34. WITH RESPECT TO COSMIC GLOBAL LTD., HYDERABAD BENCH OF ITAT IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA) P. LTD., IN PARA 19 OF ITS ORDER, HAD HELD AS UNDER COSMIC GLOBAL LTD. 19. THE MAIN OBJECTION OF ASSESSEE WITH REFERENCE TO THE INCLUSION OF THIS COMPANY IS WITH REFERENCE TO OUTSOURCING OF ITS MAI N ACTIVITY. EVEN THOUGH THIS COMPANY IS IN ASSESSEE'S TP STUDY, IT H AS RAISED OBJECTION BEFORE THE TPO THAT THIS COMPANY'S EMPLOYEE COST IS LESS THAN 21.30% AND MOS T OF THE COST IS WITH REFERENCE TO THE OUTSOURCING CHARGES OR TRANSLATION CHARGES, AND AS SUCH THIS IS NOT A COMP ARABLE COMPANY. THE TPO, THOUGH CONSIDERED THESE SUBMISSIONS, REJECTED THE SAME, ON THE REASON THAT THIS DOES NOT IMPACT THE PROFIT MARGIN OF T HE COMPANY. OPPOSING THE VIEW TAKEN BY THE TPO, IT IS SUBMITTED THAT THIS COMPANY CANNOT BE SELECTED AS COMPARABLE, AS M/S. CAPITAL I Q INFORMATION SYSTEMS (INDIA) PVT. LTD., HYDERABAD SIMILAR ISSUE WAS DISCUSSED BY THE COORDINATE BENCH OF THE TRIBUNAL(DELHI) IN THE CASE OF MERCER CONSULTING (INDIA) P. LTD. (SUPRA), VIDE PARAS 13.2 TO 13.3 WH ICH READ AS UNDER- 41 IT(TP)A NO.203 & 155/BANG/2014 41 13.2. NOW COMING TO THE FACTUAL MATRIX OF THIS CASE , WE FIND FROM THE MATERIAL ON RECORD THAT OUTSOURCING CHARGES OF THIS CASE CONSTITUTE 57.31% O F THE TOTAL OPERATING COSTS. THIS DOES NOT APPEAR T O US TO BE A VALID REASON FOR ELIMINATING THIS CASE FROM THE LIS T OF COMPARABLES. ON GOING THROUGH THE ANNUAL ACCOUNTS OF COSMIC GLOBAL LIMITED, A COPY OF WHICH HAS BEEN PLACED ON RECORD, WE FIND THAT ITS TOTAL REVENUE FROM OPERATIONS ARE AT RS. 7.37 CRORE DIVIDED INTO THREE SEGMENTS, NAMELY, MEDICAL TRANSCRIPTION AND CONSULTANCY SERVICES AT R S. 9.90 LACS, TRANSLATION CHARGES AT RS. 6.99 CRORE AND ACCOUNTS BPO AT RS. 27.76 LAC. THE ID. AR HAS MADE OUT A CAS E THAT OUTSOURCING ACTIVITY CARRIED OUT BY THIS COMPANY CONSTITUTES 57% OF TOTAL EXPENSES. THE REASON FOR WHICH WE ARE NOT AGREEABLE WITH THE ID. AR IS THAT WE HAVE T O EXAMINE THE REVENUE OF THIS CASE ONLY FROM ACCOUNTS BPO SEGMENT AND NOT ON THE ENTITY LE VEL, BEING ALSO FROM MEDICAL TRANSCRIPTION AND TRANSLATI ON CHARGES. WHEN WE ARE EXAMINING THE RESULTS OF THIS COMPANY FROM THE ACCOUNTS BPO SEGMENT ALONE, THERE IS NO NEED TO EXAMINE THE POSI TION UNDER OTHER SEGMENTS. THE ENTIRE OUTSOURCING IS CONFINED TO TRANSLATION CHARGES PAID AT RS. 3.00 CRORE, WHICH IS STRICTLY IN THE REALM O F THE TRANSLATION SEGMENT, REVENUES FROM WHICH ARE TO THE TUNE OF RS. 6.99 CRORE. IF THIS SEGMENT OF TRANSLATION IS NOT UNDER CONSIDERATION F OR DECIDING AS TO WHETHER THIS CASE IS COMPARABLE OR NOT, WE CANNOT TAKE RECOURSE TO THE FIGURES WHICH ARE RELEVANT FOR SEGMENTS OTHER THAN ACCOUNTS BPO. THUS IT IS HELD THAT THIS CASE CANNOT BE EXCLUDED ON THE ST RENGTH OF OUTSOURCING ACTIVITY, WHICH IS ALIEN TO THE RELEVANT SEGMENT. 13.3 H OWEVER, WE FIND THIS CASE TO INCOMPARABLE ON THE AL TERNATIVE ARGUMENT ADVANCED BY THE ID. AR TO THE EFFECT THAT TOTAL REVENUE OF THE ACCOUNTS BPO SEGMENT OF COSMIC GLOBAL LIMITED IS VE RY LOW AT RS. 27. 76 LACS. WE HAVE DISCUSSED THIS ASPECT ABOVE IN THE CO NTEXT OF CG- VAK'S CASE AND HELD THAT A CAPTIVE UNIT CANNOT BE COMPARE D WITH A GIANT CASE AND THUS EXCLUDED CG- VAK WITH TURNOVER FROM ACCOUNTS BPO SEGMENT 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 MUCH LOWER SIDE, THE REASONS GIVEN ABOVE WOULD FULLY APPLY TO HOLD COSMIC GLOBAL LIMITED AS INCOMPARABLE. THIS CASE IS, THEREFORE, DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. IN VIEW OF THE DETAILED ANALYSIS OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE ABOVE REFERRED CASE, IN THIS CASE ALSO WE ACCEP T THE CONTENTIONS OF ASSESSEE AND DIRECT THE ASSESSING OFFICER/TPO TO EX CLUDE THIS COMPARABLE FOR THE SAME REASONS. 90. NOTHING HAS BEEN BROUGHT ON RECORD BY REVENUE T O ESTABLISH ANY FUNCTIONAL DIFFERENCE BETWEEN ASSESSEE AND E-4-E BUSINESS 42 IT(TP)A NO.203 & 155/BANG/2014 42 SOLUTIONS INDIA LTD. IN VIEW OF THE ABOVE DISCUSSION BY COORDINATE BENCH, WE HOLD THESE COMPARABLES AS NOT FUNCTIONALL Y SIMILAR TO ASSESSEE. ACCORDINGLY GROUND 7.1.3 STANDS ALLOWED. 91. LD. A.R. SUBMITTED THAT ASSESSEE HAD SOUGHT INC LUSION OF FOLLOWING COMPARABLES IN GROUND 7.1.2: LEE & NEE SOFTWARE (EXPORTS) LTD CALIBRE POINT BUSINESS SOLUTIONS LTD RS SYSTEMS INTERNATIONAL LTD. LD. A.R. SUBMITTED THAT TPO REJECTED THESE COMPARAB LES FOR HAVING DIFFERENT YEAR ENDING. 92. LD. CIT DR SUBMITTED THAT THESE COMPARABLES MAY BE REMANDED TO LEARNT AO/TPO FOR VERIFICATION IN RESPE CT OF OBJECTIONS RAISED FOR CONSIDERING ITS INCLUSION. 93. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN LIGHT OF RECORDS PLACED BEFORE US. 94. WE NOTE THAT IN RESPECT OF LEE & NEE SOFTWARE ( EXPORTS) PVT.LTD., THERE HAS BEEN NO FINDING IN RESPECT OF W HETHER THIS COMPANY IS HAVING FUNCTIONS THAT OF ITES A SOFTWARE DEVELOPER. INSOFAR AS 2 COMPARABLES ARE CONCERNED, REASON FOR ITS EXCLUSION BY LD.TPO IS ONLY BECAUSE, THEY HAVE A DIFFERENT YEAR ENDING. LD.TPO DO NOT OBJECT FUNCTIONAL DISSIMILARITIES WITH ASSES SEE. THEREFORE, IN OUR VIEW, IN THE EVENT RESULTS COULD BE EXTRAPOLATE D, THESE COMPARABLES NEEDS TO BE INCLUDED. 95. WE THEREFORE REMAND THESE COMPARABLES BACK TO L D.AO/TPO TO ASCERTAIN FINANCIAL RESULTS BY EXTRAPOLATING FROM T HE ANNUAL 43 IT(TP)A NO.203 & 155/BANG/2014 43 ACCOUNTS. ALSO IN RESPECT OF LEE& NEE SOFTWARE, LD. AO/TPO IS DIRECTED TO ASCERTAIN FUNCTIONS PERFORMED BEING WHE THER ITES OR SOFTWARE DEVELOPMENT COMPANY. IN THE EVENT IT IS FO UND TO BE HAVING ITES SEGMENT, THE SAME MAY BE CONSIDERED FOR PURPOS E OF COMPARABILITY WITH ASSESSEE. ACCORDINGLY THESE GROUNDS RAISED BY ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. 96. INSOFAR AS GROUND NO. 7.1.6 AND 7.1.7 IS CONCER NED LD. A.R. HAS NOT ADVANCED ANY ARGUMENTS AND ACCORDINGLY NO F INDING HAS BEEN RECORDED HEREIN. ACCORDINGLY THESE GROUNDS ARE DISMISSED. ACCORDINGLY GROUND NO.7 STANDS ALLOWED AS INDICATED HEREINABOVE. 97. GROUND NO.9 IS IN RESPECT OF ADJUSTMENT PROPOSED BY LD.TPO/AO ON ENTITY LEVEL U/S.92.CA OF THE ACT. 98. REFERRING TO FORM 3CEB, LD.AR SUBMITTED THAT LD .AO MADE ADDITION U/S.92CA WHICH INCLUDES NON AE TRANSACTION . HE SUBMITTED BIFURCATION OF REVENUE EARNED AS UNDER: PARTICULARS AMOUNT IN RS. % AE 62,92,374/ - 51.53% NON - AE 59,17,111/ - 48.47% 99. HE ALSO SUBMITTED THAT, ADJUSTMENT UNDER SECTIO N 92CA CANNOT EXCEED VALUE OF INTERNATIONAL TRANSACTION. WE NOTE THAT THIS ISSUE HAS NOT BEEN VERIFIED BY LD .AO/TPO. 44 IT(TP)A NO.203 & 155/BANG/2014 44 THEREFORE IN THE INTEREST OF JUSTICE, WE REMAND THI S ISSUE TO LD.AO/TPO TO CONSIDER DOCUMENTS FILED BY ASSESSE TO SUPPORT ITS CLAIM. ASSESSEE IS DIRECTED TO FILES REQUISITE EVID ENCES/DETAILS IN SUPPORT. LD.AO/TPO SHALL CONSIDER VARIOUS DECISIONS TO DECIDE THIS ISSUE IN ACCORDANCE WITH LAW. ACCORDINGLY THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 100. GROUND NO.11 IS IN RESPECT OF DISALLOWANCE OF STOCK WRITE OFF ON ACCOUNT OF PHYSICAL DIFFERENCE AND ERRORS IN REC EIPT OF STOCK AMOUNTING TO RS.6,89,875/-. WE HAVE REMANDED STOCK WRITE OFF ISSUE RAISED BY REVENUE TO LD.AO, HEREIN ABOVE. TH IS BEING RELATED ISSUES IS ALSO REMANDED TO LD.AO FOR VERIFICATION I N ACCORDANCE WITH LAW. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE ST ANDS ALLOWED FOR STATISTICAL PURPOSES. 101. GROUND NO.12 IS IN RESPECT OF NOT ALLOWING MAT CREDIT. LD.AR SUBMITTED THAT DETAILS OF MAT CREDIT HAS BEEN PLACED AT PAGES 121 &121 OF PAPER BOOK. HE SUBMITTED THAT, MA T CREDIT AMOUNTING TO RS.13,10,861/- IN COMPUTING TAX LIABI LITY WAS CLAIMED IN ITS RETURN DATED 29/09/2009, HOWEVER, LD .AO WHILE COMPUTING TAX LIABILITY FOR YEAR UNDER CONSIDERATIO N WAS NOT TAKEN INTO ACCOUNT. IT HAS BEEN SUBMITTED THAT MAT CREDIT PAID BY IT DURING EARLIER U/S.115JB IS ALLOWABLE TO ASSESSEE, AS IT WAS ASSESSED UNDER NORMAL PROVISIONS OF THE ACT FOR YEA R UNDER CONSIDERATION, 102. LD.AO IS DIRECTED TO VERIFY AND ALLOW THE CL AIM IN ACCORDANCE WITH LAW. ACCORDINGLY THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 45 IT(TP)A NO.203 & 155/BANG/2014 45 103. GROUND NO.13-14 ARE AGAINST LEVY OF INTEREST U/S.234B. &C THESE ARE CONSEQUENTIAL IN NATURE AND NEEDS TO BE L EVIED IN ACCORDANCE WITH LAW. ACCORDINGLY, THESE GROUNDS ARE REMANDED TO LD.AO. IN THE RESULT APPEAL FILED BY REVENUE AND ASSESSEE STANDS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH SEPTEMBER, 2020. SD/- SD/- (B. R. BASKARAN) ( BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL ME MBER BANGALORE, DATED, THE 15 TH AUGUST, 2020. /VMS/* COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, INCOME-TAX APPELLATE TRIBUNAL. BANGALORE. 46 IT(TP)A NO.203 & 155/BANG/2014 46 DATE INITIAL 1. DRAFT DICTATED ON ON DRAGON SR.PS 2. DRAFT PLACED BEFORE AUTHOR 10-03-2020 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 10-03-2020 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 10-03-2020 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 20-03-2020 SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON -03-2020 SR.PS 7. DATE OF UPLOADING THE ORDER ON WEBSITE -03-2020 SR.PS 8. IF NOT UPLOADED, FURNISH THE REASON -- SR.PS 9. FILE SENT TO THE BENCH CLERK -03-2020 SR.PS 10. DATE ON WHICH FILE GOES TO THE AR 11. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 12. DATE OF DISPATCH OF ORDER. 13. DRAFT DICTATION SHEETS ARE ATTACHED NO SR.PS