ACIT, Hyderabad v. M/s Deloitte Consultling India P Ltd, Hyderabad

ITA 1082/HYD/2010 | 2004-2005
Pronouncement Date: 22-07-2011 | Result: Dismissed

Appeal Details

RSA Number 108222514 RSA 2010
Assessee PAN AABCD0476H
Bench Hyderabad
Appeal Number ITA 1082/HYD/2010
Duration Of Justice 11 month(s) 9 day(s)
Appellant ACIT, Hyderabad
Respondent M/s Deloitte Consultling India P Ltd, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 22-07-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 22-07-2011
Date Of Final Hearing 08-04-2011
Next Hearing Date 08-04-2011
Assessment Year 2004-2005
Appeal Filed On 13-08-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A HYDERABAD BEFORE SHRI G.C. GUPTA VICE PRESIDENT AND SHRI AKBER BASHA ACCOUNTANT MEMBE R ITA NO.1082/HYD/2010 : ASST. YEAR: 2004-05 DCIT CIRCLE - 1(2) HYDERABAD. VS M/S DELOITTE CONSULTING INDIA PVT. LIMITED HYDERABAD. (PAN AABCD 0476 H) (APPELLANT) (RESPONDENT) ITA NO.1084/HYD/2010 ASSTT. YEAR 2004-05 M/S DELOITTE CONSULTING INDIA PVT. V- DCIT CI RCLE- 1(2) HYDERABAD. LIMITED HYDERABAD. (PAN AABCD 0476 H) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI V. SRINIVAS (DR - CIT) RESPONDENT BY : S/SHRI A.V. SO N D E MANISHA GUPTA MANISH MATHA & AYUSH RAJANI O R D E R PER AKBER BASHA ACCOUNTANT MEMBER: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDE R OF THE CIT (A)-III HYDERABAD DATED 31-5-2010 AND THEY PER TAIN TO THE ASSESSMENT YEAR 2004-05. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY WHICH DERIVES INCOME FROM SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES. FOR THE ASSESSMENT YEAR UNDER CONSIDERA TION IT HAS FILED THE ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 2 RETURN OF INCOME ON 20-10-2004 SHOWING INCOME OF RS .4 68 64 880/-. DURING THE PREVIOUS YEAR THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES. FOR DETERMINING THE ARMS LENGTH PRICE OF SUCH TRANSACTIONS THE ASSESSING OF FICER HAS MADE A REFERENCE UNDER SECTION 92CA (1) OF THE ACT TO THE ADDL. CIT (TRANSFER PRICING). IN RESPONSE TO THIS THE TPO VIDE HIS OR DER DATED 21-12-2006 PASSED UNDER SECTION 92CA (3) OF THE ACT WHILE ADO PTING TRANSACTIONAL NET MARGIN METHOD (TNMM IN SHORT) AS THE MOST APPRO PRIATE METHOD HAS DETERMINED THE ALP OF THE TRANSACTIONS IN RESPE CT OF IT ENABLED SERVICES (BPO SEGMENT) AT RS.25 66 92 632/- AS AGAI NST RS.20 96 64 974/- SHOWN BY THE ASSESSEE THEREBY SU GGESTING FOR ADJUSTMENT OF RS.4 70 27 658/- ON THAT ACCOUNT. FU RTHER HE DETERMINED THE ALP OF THE TRANSACTIONS RELATING TO SOFTWARE DEVELOPMENT SERVICES AT RS.33 40 15 302/- AS AGAINS T RS.31 61 40 091/- SHOWN BY THE ASSESSEE THEREBY SUG GESTING FOR ADJUSTMENT OF RS.1 78 75 211/- UNDER THAT HEAD. LA TER ON BASIS OF SUCH ORDER OF THE TPO THE ASSESSING OFFICER HAS MA DE ADDITIONS OF RS.6 49 02 869/- AND AFTER ALLOWING DEDUCTION OF RS .4 65 50 115/- UNDER SECTION 10A OF THE ACT COMPLETED THE ASSESSM ENT UNDER SECTION 143(3) OF THE ACT DETERMINING TOTAL INCOME AT RS.6 68 13 850/-. BEING AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER TH E ASSESSEE WENT IN APPEAL BEFORE THE CIT (A). ON APPEAL THE CIT (A) AFTER ELABORATELY DISCUSSING THE GROUNDS RAISED BY THE ASSESSEE BEFOR E HIM HELD THAT THE TPO WAS JUSTIFIED IN DIRECTING THE ASSESSEE TO COND UCT A FRESH SEARCH OF COMPARABLES DURING THE TRANSFER PRICING PROCEEDINGS AND ALSO JUSTIFIED IN ADHERING TO THE DATA OF THE CURRENT FINANCIAL YEAR 2003-04 FOR DETERMINING THE ALP. IT WAS ALSO HELD THAT THE AS SESSING OFFICER HAS TO ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 3 COMPUTE THE TOTAL INCOME OF AN ASSESSEE IN CONFORMI TY WITH THE ALP AS DETERMINED BY THE TPO. 3. WHILE ADJUDICATING THE ISSUE THE CIT (A) CONF IRMED THE ACTION OF THE TPO IN NOT CONSIDERING THE FOLLOWING COMPANIES AS COMPARABLE IN RESPECT OF BACK OFFICE SEGMENT FOR THE PURPOSE OF DETERMINING THE ALP. (A) ACE SOFTWARE EXPORT LIMIT ED (B) C.S. SOFTWARE EXPORT LIMITED (C) MAX HEALTH SCRIBE LIMITED (D) O NLINE MEDIA SOLUTIONS LIMITED (E) APOLLO HEALTH STREET LIMITED (F) IDEA- SPACE SOLUTIONS LIMITED (G) NETVISTA INFORMATION TECHNOLOGY LIMITED (H) SAFFRON GLOBAL LIMITED (I) VAKRANGEE SOFTWARE LIMITED (J) MCS LIMI TED (K) TATA SHARE REGISTRY LIMITED AND (L) BNK SOLUTIONS PRIVATE LI MITED . HOWEVER THE CIT (A) CONSIDERED THE FOLLOWING COMPANIES AS COMPA RABLE FOR THE PURPOSE OF DETERMINING THE ALP. (A) NORTH GATE BPO /NORTH GATE TECHNOLOGIES LIMITED (B) SPANCO TELE-SYSTEMS & SOL UTIONS LIMITED (C) VISHAL INFORMATION TECHNOLOGIES LIMITED (D) FORTUNE INFOTECH LIMITED (D) TRICOM INDIA LIMITED AND (E) WIPRO LIMITED. HE ALSO HELD THAT THE ASSESSEE IS NOT ENTITLED TO ANY ADJUSTMENT FOR THE ALLEGED ENTREPRENEURIAL RISK BORNE BY VARIOUS COMPARABLES. THE CIT (A) REJECTED THE CLAIM FOR ALLOWING AN ADJUSTMENT FOR THE DIFFER ENCE IN DEPRECIATION POLICY FOLLOWED BY THE COMPARABLES HOLDING THAT THE ASSESSEE HAS NOT RAISED ANY GROUND ON THAT ACCOUNT BEFORE HIM AND NO SUCH PLEA HAS BEEN TAKEN DURING THE TRANSFER PRICING PROCEEDINGS BEFORE THE TPO. HE ALSO HELD THAT IF THE DIFFERENCE BETWEEN THE ALP DE TERMINED BY THE TPO DOES NOT EXCEED 5% OF THE PRICE OF THE INTERNATIONA L TRANSACTIONS SHOWN BY THE ASSESSEE THEN SUCH PRICE AS SHOWN BY THE AS SESSEE SHALL BE DEEMED TO BE ALP. IN RESPECT OF SOFTWARE DEVELOPME NT SERVICES THE CIT (A) UPHELD THE ACTION OF THE TPO IN REJECTING T HE EIGHT COMPANIES AS ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 4 MENTIONED IN HIS ORDER AT PAGE-32 PARA-16 OF HIS O RDER AS COMPARABLES WHILE DETERMINING THE ALP. 4. HE ALSO HELD THAT THE ASSESSING OFFICER WAS JUS TIFIED IN REDUCING THE COMMUNICATION EXPENSES FROM THE EXPO RT TURNOVER FOR THE PURPOSE OF COMPUTING THE DEDUCTION UNDER SECTION 10 A OF THE ACT AND THE CIT [A] HELD THAT THE COMMUNICATION EXPENSES HA S TO BE EXCLUDED FROM THE TOTAL TURNOVER ALSO. THE CIT [A] ALLOWED THE GROUND RAISED BY THE ASSESSEE WITH REGARD TO THE EXCLUSION OF INTERE ST RECEIVED ON BANK DEPOSITS WHICH HAS ALREADY BEEN OFFERED BY THE ASSE SSEE FOR TAXATION AS INCOME UNDER THE HEAD OTHER SOURCE FROM THE FIGURE OF TOTAL TURNOVER FOR THE PURPOSE OF DETERMINING THE DEDUCTION UNDER SECT ION 10A OF THE ACT. AGGRIEVED BY THE FINDINGS OF THE CIT (A) BOTH THE ASSESSEE AS WELL AS THE REVENUE IS IN APPEAL BEFORE US. 5. THE LEARNED COUNSEL FOR THE ASSESSEE SHRI. A.V .SONDE SUBMITTED THAT DURING THE PREVIOUS YEAR RELEVANT T O ASSESSMENT YEAR 2004-05 THE ASSESSEE HAD THE FOLLOWING INTERNATION AL TRANSACTIONS [A] BACK OFFICE SERVICES-RS.20 96 64 974 AND [B] SAP PR OJECT WORK- RS.31 61 40 091 WITH ASSOCIATE ENTERPRISE [AE]. THE ASSESSEE COMPANY IS A CAPTIVE CONTRACT SERVICE PROVIDER RENDERING BU SINESS PROCESS OUTSOURCING (BPO) SERVICES TO D.C. OUTSOURCING BP O LP AND SOFTWARE DEVELOPMENT SERVICES TO D.C. OUTSOURCING ITO LP BAS ED ON THE INSTRUCTIONS RECEIVED FROM ITS AES. THE ASSESSEE C OMPANY PROVIDES SOFTWARE DEVELOPMENT SERVICES TO ITS AE IN THE AREA S OF SAP IMPLEMENTATION AND BACK OFFICE SUPPORT SERVICES IN THE NATURE OF ROUTINE FOLLOW-UP CALLS WITH INSURANCE COMPANIES REGARDING CLAIMS STATUS DOCUMENTING THE CALL MINUTES AND COMMUNICATING THE SUMMARY OF THE ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 5 CALLS TO ITS AE. DURING THE RELEVANT PREVIOUS YEAR THE ASSESSEE COMPANY WAS BILLED ON A COST PLUS 7 PER CENT MARK-UP BASIS FOR BACK OFFICE SERVICES AND SOFTWARE DEVELOPMENT SERVICES. FOR THE ABOVE PURPOSE COST HAS BEEN DEFINED AS TOTAL DIRECT COSTS AND E XPENSES INCURRED IN CONNECTION WITH THE PERFORMANCE OF SUCH SERVICES. 6. IN ITS TRANSFER PRICING STUDY UNDERTAKEN IN COM PLIANCE WITH THE PROVISIONS OF SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME TAX RULE 1962 THE ASSESSEE COMPANY SELECTE D TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR BACK OFFICE SERVICES AND SOFTWARE DEVELOPMENT SERVICES. ONCE HAVING SELECTED TNMM AS THE MOST APPROPRIATE METHOD THE APPELLANT CONDUCTED A METHODICAL SEARCH PROCESS TO SELECT POTENTIALLY COM PARABLE COMPANIES ON THE FOLLOWING PUBLICLY AVAILABLE DATABASES- PROW ESS AND CAPITALINE PLUS. WITH REGARD TO THE SOFTWARE DEVELOPMENT SERVI CES THE ASSESSEE COMPANY APPLIED VARIOUS QUANTITATIVE AND QUALITATIV E FILTERS AND ARRIVED AT A FINAL SET OF 13 COMPARABLE COMPANIES. THE SEAR CH PROCESS WAS CONDUCTED BY THE ASSESSEE COMPANY DURING OCTOBER 2 004 WHEREIN THE DATABASE AS UPDATED ON OCTOBER 22 2004 WAS USED. A CCORDINGLY THE DATA USED FOR COMPUTING THE PROFIT MARGINS OF THE C OMPARABLE COMPANIES WAS THE LATEST DATA WHICH WAS AVAILABLE A S ON OCTOBER 22 2004. THE DUE DATE FOR FILING THE INCOME TAX RETURN FOR ASSESSMENT YEAR 2004-05 WAS OCTOBER 31 2004. ACCORDINGLY THE DATA USED BY THE ASSESSEE COMPANY CLEARLY COMPLIED WITH THE REQUIREMENT OF R ULE 10D (4) WHICH REQUIRES THE DATA TO EXIST BY THE SPECIFIED D ATE. FOR APPLYING TNMM THE ASSESSEE COMPANY COMPUTED THE NET PROFIT MARGINS. ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 6 7. THE ASSESSEE COMPANY ARRIVED THE ARITHMETICAL M EAN OF 13 COMPARABLE COMPANIES AT 8.69% AGAINST THE 7% DECLAR ED BY THE ASSESSEE COMPANY. SINCE THE NET MARGIN OF THE ASSES SEE COMPANY WAS WITHIN THE 5% PRICE RANGE OF THE AVERAGE COST PLUS MARKUP OF COMPARABLE COMPANIES IT WAS CONCLUDED THAT THE TRA NSACTIONS FOR SALE OF SOFTWARE DEVELOPMENT SERVICES BY DCIPL TO ITS ASSOC IATE ENTERPRISES WERE AT ARMS LENGTH. SIMILARLY WITH REGARD TO THE BACK OFFICE SERVICES AFTER THE APPLICATION OF THE FILTERS A SET OF 6 CO MPARABLE COMPANIES WERE SELECTED ARRIVED THE ARITHMETICAL MEAN OF 6 COMPARA BLE COMPANIES AT 9.29 % AS AGAINST 7% DECLARED BY THE ASSESSEE COMPA NY. SINCE THE NET MARGIN OF THE ASSESSEE COMPANY WAS WITHIN THE 5 % PRICE RANGE OF THE AVERAGE COST PLUS MARKUP OF COMPARABLE COMPANIE S IT WAS CONCLUDED THAT THE TRANSACTIONS FOR SALE OF SOFTWAR E DEVELOPMENT SERVICES BY DCIPL TO ITS ASSOCIATE ENTERPRISES WERE AT ARMS LENGTH. THE TPO ISSUED NOTICE DATED JULY 4 2006 INSTRUCTING TH E ASSESSEE COMPANY TO UNDERTAKE A FRESH SEARCH OF INDEPENDENT COMPARAB LE COMPANIES TAKING THE SALES CRITERIA OF RS.10 CRORES TO 30 CRO RES IN RESPECT OF BACK OFFICE SERVICES AND SALES CRITERIA OF RS.15 CRORES TO 45 CRORES IN RESPECT OF ERP PROJECT WORK (SOFTWARE DEVELOPMENT SERVICES) AND PROVIDING DETAILS OF THE NET SALES TOTAL COST OPERATING PRO FIT AND OPERATING PROFIT MARGIN ON SALES AND ON TOTAL COST OF SUCH COM PARABLE COMPANIES. THE ASSESSEE COMPANY PROVIDED THE REQUISITE DETAILS ON 27 TH SEPTEMBER 2006. IN CASE OF SOFTWARE DEVELOPMENT SERVICES THE ASSESSEE COMPANY PROVIDED 9 COMPARABLE COMPANIES WITH AN AVERAGE OPE RATING MARGIN OF 4.72% AND IN CASE OF BACK OFFICE SERVICES IT PROVI DED 10 COMPARABLE COMPANIES WITH AN AVERAGE OPERATING MARGIN OF 4.93% . THE TPO ISSUED A SHOW CAUSE NOTICE ON 16 TH OCT 2006 STATING THAT IN RESPECT OF BACK OFFICE HE HAS REJECTED 5 COMPANIES OUT OF 6 COMPAN IES IDENTIFIED AS ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 7 COMPARABLE BY THE ASSESSEE COMPANY AND ACCEPTED ONL Y ONE COMPANY CALLED MERCURY AS COMPARABLE. THE TPO PROPOSED 6 AD DITIONAL COMPANIES AS COMPARABLE AFTER UNDERTAKING A FRESH ANALYSIS OF COMPARABLES FROM THE PUBLIC DATABASE AND ARRIVED NET PROFIT MARGIN O F THE 7 COMPARABLES AT 35.60% AND CONCLUDED THAT THE ALP WAS DIFFERENT FROM THAT OF COMPUTED BY THE ASSESSEE COMPANY. SIMILARLY OUT OF 13 COMPANIES SELECTED AS COMPARABLE BY THE ASSESSEE COMPANY IN I TS TP STUDY THE TPO REJECTED 9 COMPANIES AND ACCEPTED ONLY 4 COMPAN IES AS COMPARABLE. THE TPO COMPUTED A NET PROFIT MARGIN OF THE 4 COMPARABLE COMPANIES AT 16.78% AND CONCLUDED THAT THE ALP WAS DIFFERENT FROM THAT OF COMPUTED BY THE ASSESSEE COMPANY. THE ASSES SEE COMPANY REBUTTED TO THE COMPARABLES PROPOSED BY THE TPO BY MAKING A DETAILED SUBMISSIONS WHICH ARE PLACED AT PAGES 174 TO 215 OF THE PAPER BOOK FILED BY THE ASSESSEE COMPANY. 8. THE TPO PASSED HIS ORDER ON DECEMBER 21 2006. THE FINDINGS OF THE TPO ARE SUMMARIZED BELOW: FINDINGS OF TPO PARTICULARS SOFTWARE DEVELOPMENT SERVICES BACK OFFICE SERVICES MARK - UP PROPOSED IN THE SHOW CAUSE NOTI CE 16.78% 35.60% MARK UP AS PER TP ORDER 15.05% 33.00% LESS: WORKING CAPITAL ADJUSTMENT AS PER TP ORDER 2.00% 2.00% PROPOSED ADJUSTMENT 13.05% 31.00% ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 8 9. THE ALP ALLEGED BY THE TPO BASED ON THE SEVEN C OMPARABLE COMPANIES ACCEPTED BY HIM IS 31.00% AFTER PROVIDING WORKING CAPITAL ADJUSTMENT. ACCORDINGLY THE ALP AS PER THE TPO FOR BACK OFFICE SERVICES WAS RS.25 66 92 632/- BASED ON WHICH HE MADE AN ADJ USTMENT OF RS.4 70 27 658/-. 10. THE TPO ACCEPTED FIVE COMPARABLES OF THE 13 SE LECTED BY THE ASSESSEE COMPANY IN THE TRANSFER PRICING ORDER AND COMPUTED THE NET COST PLUS MARGIN TO BE 13.05 PER CENT AFTER PROVIDI NG WORKING CAPITAL ADJUSTMENT. ACCORDINGLY THE ALP PER THE TPO FOR SO FTWARE DEVELOPMENT SERVICES WAS RS.33 40 15 302/- BASED ON WHICH HE M ADE AN ADJUSTMENT OF RS.1 78 75 211/-. 11. IT IS CONTENDED THAT THE TPO FINDINGS ARE WRO NG ON FOLLOWING GROUNDS. (A) THE ASSESSEE COMPANY HAD FOLLOWED A METHODICAL SEAR CH PROCESS IN THE TP STUDY AND ARRIVED AT A SET OF COMPARABLE COMPANIES WHICH WERE FUNCTIONALLY COMPARABLE TO THE ASSESSEE COMPANY. HOWEVER WITHOUT HIGHLIGHTING ANY DEFICIENCY OR INS UFFICIENCY IN THE INDEPENDENT COMPARABLES FUNCTIONALLY OR OTHERW ISE SELECTED IN THE TP STUDY OR THE SEARCH PROCESS FOLLOWED FOR ARRIVING AT THOSE COMPARABLES THE TPO HAS REJECTED THE COMPARA BLES. IN CASE OF SHOW CAUSE NOTICE ISSUED IN FOR BACK OFF ICE SERVICES THE TPO HAS UNDERTAKEN A FRESH SEARCH AND SELECTED THE ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 9 COMPARABLE COMPANIES; THE SEARCH PROCESS WAS NOT BE EN SHARED WITH THE ASSESSEE COMPANY. HOWEVER FOR SOFTWARE SE RVICES THE TPO NOT UNDERTAKE A FRESH SEARCH PROCESS AND ACCEPT ED THE SEARCH PROCESS UNDERTAKEN BY THE ASSESSEE COMPANY W HICH CONSISTED OF 13 COMPARABLES OF WHICH HE REJECTED 8 COMPARABLE COMPANIES AND ACCEPTED 5 AS FINAL SET OF COMPARABLE S. (B) THE TPO ISSUED NOTICE DATED JULY 4 2006 INSTRUCTIN G THE ASSESSEE COMPANY TO UNDERTAKE A FRESH SEARCH OF IND EPENDENT COMPARABLE COMPANIES WHICH ARE IN THE SIMILAR LINE OF BUSINESS TAKING THE SALES CRITERIA OF RS.10 CRORES TO 30 CRO RES IN RESPECT OF BACK OFFICE SERVICES AND SALES CRITERIA OF RS.15 CRORES TO 45 CRORES IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. HOWEVER THE TPO DID NOT FOLLOW SUCH CRITERIA WHILE CARRYING OUT A FRESH SEARCH IN CASE OF BACK OFFICE SERVICES AND ACCEPTED THE SE ARCH PROCESS OF THE ASSESSEE COMPANY FOR SOFTWARE SERVICES. (C) RULE 10D(4) CLEARLY SPECIFIES THAT THE INFORMATIO N RELATING TO THE INTERNATIONAL TRANSACTIONS INCLUDING THE COMPARABI LITY ANALYSIS HAS TO BE KEPT AND MAINTAINED LATEST BY THE SPECIFI ED DATE I.E. THE DATE OF FILING OF THE RETURN. HOWEVER IN CASE OF BACK OFFICE SERVICES THE TPO CONDUCTED A FRESH COMPARABILITY A NALYSIS DURING OCTOBER 2006 USING THE DATA WHICH WAS AVAIL ABLE AFTER THE SPECIFIED DATE. (D) THE ASSESSEE COMPANY DOES NOT BEAR SIGNIFICANT BUSI NESS AND OPERATIONAL RISKS AND IS ONLY A CAPTIVE CONTRACT BA CK OFFICE SERVICES AND SOFTWARE DEVELOPMENT SERVICE PROVIDER RENDERING ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 10 SERVICES TO ITS AES. THE PROFILE OF THE ASSESSEE CO MPANY CLEARLY DISTINGUISHES IT FROM FULL-FLEDGED ENTREPRENEURIAL COMPANIES. THE TPO DID NOT GRANT THE ASSESSEE COMPANY AN ADJUSTME NT ON ACCOUNT OF RISK AS COMPUTED BY THE ASSESSEE COMPANY AS PER CAPITAL ASSET PRICING MODEL (CAPM) METHOD AT 5.13 PER CENT. (E) THE PROVISO TO SECTION 92C (2) OF THE ACT PRIOR TO THE AMENDMENT BY THE FINANCE (NO. 2) ACT 2009 WITH EFFECT FROM O CTOBER 1 2009 PROVIDED THAT WHILE ARRIVING AT THE ARMS LEN GTH PRICE (ALP) AT THE OPTION OF THE ASSESSEE A PRICE WHI CH MAY VARY FROM THE ARITHMETICAL MEAN BY 5% CAN BE CONSIDERED AS THE ARMS LENGTH PRICE. IN THE INSTANT CASE THE TPO / CIT(A) HAVE NOT APPL IED THE SECOND PROVISO TO SECTION 92C(2) PRIOR TO ITS AMEND MENT IN OCTOBER 2009 I.E. THEY HAVE NOT ALLOWED A STANDARD DEDUCTION OF 5% FROM THE ARITHMETICAL MEAN AND HAVE THUS IGNORED A SPECIFIC AND MANDATORY PROVISION OF LAW. 12. THE CIT [A] IN HIS ORDER AFTER ELABORATE DISC USSIONS HAS OBSERVED THAT IN THE CASE OF BACK OFFICE SERVICES S EGMENT ONE COMPARABLE COMPANY NORTHGATE TECHNOLOGIES LIMITED W AS REJECTED BY THE TPO ON ACCOUNT OF NON-AVAILABILITY OF SEGMENTAL INFORMATION. BASED ON THE SUBMISSIONS MADE BY THE ASSESSEE COMPANY TH E CIT (A) OBSERVED THAT NORTHGATE TECHNOLOGIES LIMITED HAD ON LY ONE SEGMENT BEING BPO SERVICES AND HENCE THE REASON GIVEN BY TH E TPO ON ACCOUNT OF NON-AVAILABILITY OF SEGMENTAL INFORMATION IS INC ORRECT AND NON- ACCEPTABLE. THE AVERAGE NET COST PLUS MARK-UPS OF T HE FINAL COMPARABLE ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 11 COMPANIES AS ACCEPTED BY THE CIT(A) ARE IN RESPECT OF SOFTWARE DEVELOPMENT 29.17% AS AGAINST 31% ARRIVED BY THE T PO AND IN RESPECT OF BACK OFFICE SERVICES HE CONFIRMED THE TPO WORKI NGS. AGGRIEVED BY THE FINDINGS OF THE CIT [A] BOTH ASSESSEE AND THE REVENUE IS APPEAL BEFORE US. 13. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY IS A CAPTIVE SERVICE PROVIDER AND DOES NOT INCUR ANY RESEARCH AND DEVELOPMENT EXPENSES WHEREAS THE VISUA LSOFT INCURRED AROUND 4% OF THE REVENUE TOWARDS THESE EXPENSES. T HE ASSESSEE COMPANY UNDERTAKES SAP PROJECTS WHICH IS THE SOFTWA RE DEVELOPMENT SERVICE SEGMENT FOR ITS ASSOCIATED ENTERPRISE OUTSI DE INDIA. FOR SUCH SERVICES THE ASSESSEE COMPANY IS REMUNERATED AT CO ST PLUS 7% BY ITS ASSOCIATED ENTERPRISE. THESE FACTS HAVE BEEN ACCEPT ED BY THE LEARNED TPO IN PARA 6.1.2 ON PAGE NO. 10 OF HIS ORDER AND H AVE NOT BEEN OBJECTED BY THE CIT (A). ACCORDINGLY THE COMPARABL E I.E. VISUALSOFT TECHNOLOGIES LIMITED OUGHT TO BE REJECTED BY THE TP O AS THE SAID COMPANY CANNOT BE TREATED AS COMPARABLE TO THE ASSE SSEE COMPANY. FOR THIS PROPOSITION HE RELIED ON THE DECISION OF K OLKATA BENCH OF THE TRIBUNAL IN THE CASE DEVELOPMENT CONSULTANTS VS. DC IT REPORTED IN 115 TTJ 577 AND THE DECISION OF THE BANGALORE TRIBUNAL IN THE CASE OF PHILIPS SOFTWARE REPORTED IN 119 TTJ 721. HE ALSO RELIED ON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE MENTOR GRAP HICS REPORTED IN 109 ITD 101. IT IS ALSO SUBMITTED THAT RELYING ON CATE NA OF DECISIONS ASSESSEE COMPANY ENTITLED TO POINT OUT TO THE TRIBU NAL THAT COMPARABLES SELECTED BY THE TPO WAS ERRONEOUSLY CONSIDERED AS A COMPARABLE. THE ASSESSEE FURTHER PLACES RELIANCE ON THE RECENT JUDG MENT GIVEN BY DELHI TRIBUNAL IN CASE OF SAPIENT CORPORATION PVT. LTD IN I.T.A. NO. ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 12 5263/DEL/2010 WHEREIN IT WAS HELD THAT THE FACT THA T THE COMPARABLE SELECTED INITIALLY BY THE ASSESSEE HIMSELF CANNOT A CT AS ESTOPPEL IN REJECTING THE COMPANY. HENCE IT IS SUBMITTED THAT THOUGH VISUALSOFT TECHNOLOGIES LIMITED WAS EARLIER ACCEPTED AS A COMP ARABLE COMPANY IN THE ASSESSEES TP STUDY IT IS NOT ESTOPPED FROM P OINTING OUT ANY FACTS WHICH HAVE A MATERIAL BEARING ON THE CASE ON HAND E VEN THOUGH SUCH FACTS ARE AS A RESULT OF THE EVIDENCE ADDUCED BY TH E TAXPAYER. 14. WITH REGARD TO BACK OFFICE SEGMENT IT IS SUBM ITTED THAT THE TPO HAD ACCEPTED THE INTERNATIONAL CALL CENTER SEGM ENT OF SPANCO TELE- SYSTEMS & SOLUTIONS LIMITED AS AN INDEPENDENT COMPA RABLE COMPANY. WHILE CONDUCTING THE COMPARABILITY ANALYSIS THE TP O REJECTED COMPANIES HAVING SUBSTANTIAL RELATED PARTY TRANSACT IONS. THE TPO IN HIS REMAND REPORT TO THE CIT (A) HAS COMMENTED THAT THE CRITERIA TO BE USED TO EXCLUDE COMPANIES HAVING RELATED PARTY TRAN SACTIONS SHOULD BE 25 PER CENT OVER ITS SALES BUT WHEREAS SPANCO HAS G OT ITS RELATED PARTY TRANSACTIONS WORKS OUT TO BE MORE THAN 25% OF ITS S ALES. THUS SPANCO TELE-SYSTEMS & SOLUTIONS LIMITED OUGHT TO BE REJECT ED. 15. IT IS SUBMITTED THAT THE TPO HAS SELECTED VISH AL INFORMATION LIMITED AS A COMPARABLE COMPANY ON THE BASIS THAT I T IS FUNCTIONALLY COMPARABLE GIVEN THAT IT WAS IN THE BUSINESS OF IT ENABLED. HOWEVER IT APPEARS THAT THE TPO DID NOT CONSIDER ANY OTHER FIL TERS WHILE CONSIDERING THE INCLUSION OF THE SAID COMPARABLE COMPANY IN THE FINAL SET OF COMPARABLES AND ASSUMED THAT INTANGIBLES HELD BY VI SHAL INFORMATION LIMITED WILL NOT MATERIALLY AFFECT THE PRICE OR PRO FIT ARISING FROM THE TRANSACTIONS IN OPEN MARKET. IT SUBMITS THAT DETERM INING AN ARM'S LENGTH MARKUP SHOULD BE GOVERNED BY THE STANDARDS O F COMPARABILITY. ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 13 HENCE IT IS IMPORTANT TO RECOGNIZE THAT SERVICE PR OVIDERS CATERING TO A NICHE MARKET SEGMENT OR OWNING VALUABLE INTANGIBLE S CANNOT BE AN APPROPRIATE COMPARABLES TO THE ASSESSEE WHICH PROVI DES ROUTINE LOW-END SERVICES WITHOUT OWNING ANY INTANGIBLES OR BEARING FINANCIAL RISK. INTEGRATED SERVICE PROVIDERS OPERATE ON A FUNDAMENT ALLY DIFFERENT BUSINESS MODEL THAN A CAPTIVE SERVICE PROVIDER. HEN CE IT IS INCORRECT TO CONSIDER LARGE INTEGRATED SERVICE PROVIDERS AS COMP ARABLES. THE ASSESSEE BEING A CAPTIVE SERVICE PROVIDER ITS PERSO NNEL/EMPLOYEE COST COMPRISES A MAJOR COMPONENT OF COST OF THE ASSESSEE . THE ASSESSEE COMPANY HAS WAGES TO TOTAL OPERATING REVENUE RATIO OF 52.12 PER CENT WHEREAS IN THE CASE OF VISHAL INFORMATION LIMITED T HE WAGES TO TOTAL OPERATING REVENUE RATIO IS ONLY 1.38 PER CENT. FOR THIS PROPOSITION HE RELIED ON THE DECISION OF DELHI BENCH IN THE CASE O F AVAYA INDIA IN ITA NO.5150/DEL/2010. WITHOUT PREJUDICE TO THE FACT THA T VISHAL INFORMATION LIMITED OWNS VALUABLE INTANGIBLES AND IT HAS A VERY LOW WAGES TO SALES RATIO OF 1.38 PER CENT AS COMPARED TO THAT OF THE A SSESSEE COMPANY WHICH IS 52.12 PERCENT. HENCE IN VIEW OF THE ABOVE IT CANNOT BE CONSIDERED AS A COMPARABLE AND ACCORDINGLY SHOULD B E EXCLUDED FROM THE FINAL LIST OF COMPARABLE COMPANIES. 16. IT IS SUBMITTED THAT TPO HAS SELECTED WIPRO B PO SOLUTIONS LIMITED AS A COMPARABLE COMPANY WITHOUT APPRECIATIN G THE FACT THAT THE COMPARABLE COMPANY HAS A HUGE VARIATION IN THE SIZE OF ITS BUSINESS OPERATIONS VIS--VIS THE ASSESSEE AND ENJOYS THE BE NEFITS OF ECONOMIES OF SCALE. IT IS SUBMITTED THAT WIPRO BPO SOLUTIONS LIMITED IS NOT COMPARABLE TO THE ASSESSEE AS IT IS EVIDENT FROM TH E FACT THAT ITS TURNOVER IS RS.4 30 30 70 635/- WHICH IS 20 TIMES T HAT OF THE ASSESSEES TURNOVER OF BACK OFFICE SERVICE SEGMENT OF RS.20 96 64 974/-. SIMILARLY ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 14 THE LEARNED COUNSEL FOR THE ASSESSEE COMPARED THE C APITAL BASE OF THE WIPRO WITH THE ASSESSEE COMPANY. IT IS SUBMITTED TH AT DELHI TRIBUNAL IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. [20 10] (ITA. NO. 3856/2010) HAS OBSERVED THAT WHERE THERE IS A HUGE VARIANCE IN THE TURNOVER OF COMPARABLE COMPANIES VIS--VIS THE TAXP AYER IT SHOULD NOT BE CONSIDERED AS A COMPARABLE COMPANY. 17. IT IS SUBMITTED THAT ACE SOFTWARE EXPORTS LIM ITED WAS SELECTED BY THE ASSESSEE DURING THE METHODICAL SEAR CH PROCESS CONDUCTED BY IT TO SELECT POTENTIALLY COMPARABLE CO MPANIES IN THE BACK OFFICE SERVICES SEGMENT FOR THE PURPOSE OF ITS TP S TUDY IN COMPLIANCE WITH THE PROVISIONS OF SECTION 92D OF THE ACT. HOWE VER THE TPO/CIT (A) HAS REJECTED THE SAID COMPARABLE COMPANY STATING TH AT ACE SOFTWARE EXPORTS LIMITED IS CATERING ONLY TO A SINGLE CUSTOM ER APEX DATA SERVICES INC. USA AND THAT THE COMPANY SOURCES ITS BUSINESS EXCLUSIVELY FROM APEX DATA SERVICES INC. USA. ON ACCOUNT OF THIS RE ASONING THE TPO/CIT(A) HAS CONCLUDED THAT THE TRANSACTIONS OF A CE SOFTWARE EXPORTS LIMITED ARE CONTROLLED TRANSACTIONS AS THE SERVICES WERE RENDERED TO A SINGLE CUSTOMER AND THAT THERE IS A DEEMED AE RELAT IONSHIP BETWEEN THE COMPANY AND APEX DATA SERVICES INC. USA UNDER SECT ION 92A(2)(I) OF THE ACT. IT IS SUBMITTED THAT ACE SOFTWARE EXPORTS LIMITED DOES NOT RENDER SERVICES TO APEX DATA SERVICES INC. USA BU T ONLY SOURCES BUSINESS FROM IT. THEREFORE ACE SOFTWARE EXPORTS L IMITED DIRECTLY RENDERS SERVICES TO THE THIRD PARTY CUSTOMERS. THE FACT THAT AS PER THE RELATED PARTY DISCLOSURE IN THE FINANCIALS OF ACE S OFTWARE EXPORTS LIMITED THE ONLY TRANSACTION WITH APEX DATA SERVIC ES INC. USA IS PURCHASE OF FIXED ASSET AMOUNTING TO RS.85 383/- CLEARLY DEMONSTRATES THAT THERE ARE NO CONTROLLED TRANSACTIONS BETWEEN A CE SOFTWARE EXPORTS ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 15 LIMITED AND APEX DATA SERVICES INC. ON FURTHER ON REFERENCE TO THE ANNUAL REPORT IN THE SCHEDULE TO RELATED PARTY IT IS CLEARLY DISCLOSED AS NO MATERIALLY SIGNIFICANT RELATED PARTY TRANSACTIO NS EXIST. HENCE IT IS CLEARLY EVIDENT THAT THERE ARE NO CONTROLLED TRANSA CTIONS BETWEEN ACE SOFTWARE EXPORTS LIMITED AND APEX DATA SERVICES INC . SECONDLY THE TPO HAS CONCLUDED THAT ACE SOFTWARE EXPORTS LIMITED AND APEX DATA SERVICES INC. ARE DEEMED ASSOCIATE ENTERPRISES UNDE R SECTION 92A (2)(I) OF THE ACT AND THE PRICES AND OTHER CONDITIONS MUST HAVE BEEN INFLUENCED BY THE OTHER ENTITY. SECTION 92A (2)(I) HAS TWO LIMBS. THE FIRST LIMB PROVIDES THAT THE SECTION IS APPLICABLE ONLY TO GOO DS OR ARTICLES MANUFACTURED OR PROCESSED BY ONE ENTERPRISE AND SOL D TO THE OTHER ENTERPRISE. IT IS IMPORTANT TO NOTE THAT THE SECTIO N DOES NOT SPECIFY REGARDING RENDERING OF SERVICES BY ONE ENTERPRISE T O THE OTHER ENTERPRISE. THE SECOND LIMB PROVIDES THAT IN ORDER FOR THE TWO ENTITIES TO BE DEEMED AS AN AE THE PRICES AND OTHER CONDITIONS MUST HAVE BEEN INFLUENCED BY THE OTHER ENTITY. IN THE PRESENT CASE THE TPO HAS WRONGLY CONCLUDED THAT ACE SOFTWARE EXPORTS LIMITED AND APE X DATA SERVICES INC. ARE DEEMED AE MERELY ON THE GROUND THAT ACE SO FTWARE EXPORTS LIMITED SOURCES BUSINESS EXCLUSIVELY FROM APEX DATA SERVICES INC. AS THE FIRST LIMB OF SECTION 92(A)(2)(I) IS APPLICABLE ONLY TO GOODS OR ARTICLES MANUFACTURED AND NOT TO SERVICES THE PROVISIONS OF SECTION 92A(2)(I) CANNOT BE APPLIED IN THE GIVEN CASE. FURTHER THE P RICES AND OTHER CONDITIONS BETWEEN ACE SOFTWARE EXPORTS LIMITED AND APEX DATA SERVICES INC. CANNOT BE CONSIDERED TO BE INFLUENCED AS IT IS CLEARLY EVIDENT THAT THERE ARE NO MATERIALLY SIGNIFICANT RE LATED PARTY TRANSACTIONS BETWEEN ACE SOFTWARE EXPORTS LIMITED AND APEX DATA SERVICES INC. HENCE IT IS A MERE ASSUMPTION OF THE TPO THAT THE PRICES AND OTHER CONDITIONS BETWEEN ACE DATA HAVE BEEN INFLUENCED BY APEX DATA ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 16 SERVICES INC. FURTHER IT IS CLEAR THAT IF THE INTE NTION OF THE LEGISLATURE WAS TO INCLUDE SERVICES IT WOULD HAVE CLEARLY SPECI FIED SERVICES IN THE PROVISIONS OF SECTION 92(A)(2)(I) OF THE ACT. THERE IS A CLEAR DISTINCTION BETWEEN ARTICLES/GOODS AND PROVISION OF SERVICES . SECTION 92A (2)(I) CLEARLY DEALS WITH MANUFACTURING OF THE GOODS/ARTIC LES AND NOT WITH PROVISION OF SERVICES. THUS THE TPO HAS ERRONEOUSL Y CONSIDERED APEX DATA SERVICES INC. TO BE ASSOCIATED TO ACE SOFTWARE EXPORTS LIMITED BY APPLYING THE PROVISIONS OF SECTION 92A(2)(I) OF THE ACT. 18. THE ASSESSEE COMPANY IN ITS TP STUDY BASED O N A METHODICAL SEARCH PROCESS ON THE PUBLICLY AVAILABLE DATA SOURCES HAS ARRIVED AT A FINAL SET OF FUNCTIONALLY COMPARABLE C OMPANIES FOR BOTH THE SOFTWARE DEVELOPMENT SERVICES & BACK OFFICE SERVICE S SEGMENT. HOWEVER DURING THE COURSE OF HEARING THE TPO HAD ASKED THE ASSESSEE TO CONDUCT FRESH SEARCH AND PROVIDE CONTEMPORANEOUS DATA FOR THE FINANCIAL YEAR 2003-04. CONSEQUENTLY ON THE REQUES T OF THE TPO THE ASSESSEE CONDUCTED A FRESH SEARCH BASED ON CONTEMPO RANEOUS DATA FOLLOWING THE SAME METHODICAL SEARCH PROCESS AND SU BMITTED THE SAME TO THE TPO. HOWEVER WITHOUT HIGHLIGHTING ANY DEFIC IENCY OR INSUFFICIENCY IN THE SEARCH PROCESS FOLLOWED OR ON THE BASIS OF F UNCTIONAL COMPARABILITY THE TPO IN CASE OF THE BACK OFFICE SERVICES SEGMENT HAS REJECTED CERTAIN COMPARABLES MERELY ON ACCOUNT OF T HE FACT THAT THESE COMPANIES DO NOT GENERATE FOREIGN EXCHANGE REVENUE. THE FIVE COMPANIES REJECTED BY THE TPO ARE LISTED BELOW: C S SOFTWARE ENTERPRISE LIMITED IDEASPACE SOLUTIONS LIMITED M C S LIMITED. TATA SHARE REGISTRY LIMITED ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 17 VAKRANGEE SOFTWARES LIMITED. IN THIS REGARD THE ASSESSEE SUBMITS THAT FOR THE P URPOSE OF COMPARABILITY IT IS ESSENTIAL TO CONSIDER THE ACTI VITY/ FUNCTIONS PERFORMED BY THE COMPANY (FUNCTIONAL COMPARABILITY) THE SPECIFIC CHARACTERISTICS OF THE SERVICES PROVIDED THE CONTR ACTUAL TERMS AND THE CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE R ESPECTIVE PARTIES TO THE TRANSACTION OPERATE FOR WHICH THE LEARNED COU NSEL FOR THE ASSESSEE RELIED ON RULE 10A[A] WHEREIN UNCONTROLLED TRANSA CTION HAS BEEN DEFINED TO MEAN A TRANSACTION BETWEEN ANY TWO ENTER PRISES SO LONG AS THEY ARE NOT RELATED. NOWHERE DOES THE PROVISION ME NTION THAT SUCH TRANSACTION SHOULD BE BETWEEN RESIDENT AND NON-RESI DENT. MORE SO THE PROVISION SPECIFICALLY MENTIONS THAT SUCH TRANSACTI ONS COULD BE BETWEEN ENTERPRISES WHETHER RESIDENT OR NON-RESIDENT. IN OTHER WORDS AN UNCONTROLLED TRANSACTION CAN BE BETWEEN A RESIDENT AND A NON-RESIDENT OR A RESIDENT AND A RESIDENT. IF THE INTENTION OF T HE LEGISLATURE WAS TO RESTRICT THE CHOICE OF UNCONTROLLED TRANSACTION TO BETWEEN A RESIDENT AND A NON-RESIDENT THE PROVISION SHOULD HAVE MENTIONED THAT ANY TRANSACTION BETWEEN TWO UNRELATED PARTIES WOULD BE CONSIDERED TO BE AN UNCONTROLLED TRANSACTION PROVIDED IT IS BETWEEN A R ESIDENT AND A NON- RESIDENT. CONTRARY TO THAT THE PROVISIONS IN FACT CLEARLY MENTIONS THAT ANY TRANSACTION BETWEEN TWO UNRELATED PARTIES WOULD BE CONSIDERED TO BE AN UNCONTROLLED TRANSACTION WHETHER IT IS BETWEE N A RESIDENT AND NON- RESIDENT OR A RESIDENT AND ANOTHER RESIDENT. IN THE CASE UNDER CONSIDERATION WHERE COMPARABLES DO NOT HAVE FOREIG N EXCHANGE REVENUE I.E. TRANSACTION BETWEEN TWO RESIDENTS IT WOULD STILL BE CONSIDERED AS AN UNCONTROLLED TRANSACTION. THEREFOR E THE ACTION OF THE TPO OF REJECTING COMPARABLE COMPANIES ON ACCOUNT OF NO FOREIGN ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 18 EXCHANGE REVENUE IS NOT SUSTAINABLE WITHIN THE PROV ISIONS OF THE LAW. FURTHER HE RELIED ON RULE 10B [2][D] AND SUBMITTED THAT THE MARKET CONDITIONS ARE IMPORTANT IN THE COMPARABILITY ANALY SIS. FOR INSTANCE ONE IS TO EVALUATE ONE OF THE MARKET CONDITIONS MENTION ED IN RULE 10B (2)(D) BEING GEOGRAPHICAL LOCATION AND SIZE IT M EANS THAT UNCONTROLLED COMPARABLES ORDINARILY DERIVE FROM THE GEOGRAPHIC M ARKET IN WHICH THE CONTROL TAX PAYER OPERATES BECAUSE THERE MAY BE SI GNIFICANT DIFFERENCES IN THE ECONOMIC CONDITIONS IN DIFFERENT MARKETS. FU RTHER TO ILLUSTRATE IF THE CONTROLLED TAX PAYER IS OPERATING IN INDIA AND HAS CONTROLLED TRANSACTIONS WITH ITS AE IN POLAND. IT WOULD BE APP ROPRIATE TO EVALUATE THE GEOGRAPHICAL LOCATIONS AND THE SIZE OF THE MARK ET IN INDIA AND NOT POLAND. SIMILARLY IN CASE OF OTHER MARKET CONDITIO NS SPECIFIED IN RULE 10B(2)(D) LIKE REGULATORY LAWS AND GOVERNMENT ORDER S COST OF LABOUR AND CAPITAL ETC. IT WOULD BE APPROPRIATE TO EVALUAT E THE GOVERNMENT LAWS THE LABOUR COST WHERE THE CONTROLLED TAX PAYE R OPERATES WHICH IS INDIA AND NOT THE GOVERNMENT LAWS COST OF LABOUR I N POLAND. IN THE CASE UNDER CONSIDERATION THE TPO HAS REJECTED UNCONTROL LED COMPARABLES OPERATING IN THE SAME GEOGRAPHICAL MARKET AS THE AS SESSEE MERELY ON THE ACCOUNT OF THE FACT THAT THESE COMPANIES DO NOT HAVE ANY FOREIGN EXCHANGE REVENUE. THE COMPANIES REJECTED BY THE TPO OPERATE IN SIMILAR MARKET CONDITIONS AS THE ASSESSEE AND THE F ACT THAT THESE COMPANIES DO NOT HAVE ANY FOREIGN EXCHANGE REVENUE CANNOT BE A VALID REASON FOR REJECTING THEM AS COMPARABLE COMPANIES. HENCE THE ACTION OF THE TPO OF REJECTING COMPARABLE COMPANIES ON ACC OUNT OF NO FOREIGN EXCHANGE REVENUE IS NOT SUSTAINABLE WITHIN THE PROV ISIONS OF THE LAW. 19. IT IS ALSO SUBMITTED THAT THE TPO WHILE SELECT ING HIS SET OF COMPARABLE COMPANIES HAS NOT DEMONSTRATED THAT THE COMPARABLE ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 19 COMPANIES SELECTED BY HIM SATISFY THE CRITERIA OF D IFFERENT MARKET CONDITIONS AS DISCUSSED. THE ASSESSEE COMPANY IS A CAPTIVE CONTRACT SERVICE PROVIDER RENDERING SERVICES TO ITS AE IN US A. FOR INSTANCE IF WE CONSIDER ONE OF THE CONDITIONS BEING GEOGRAPHICAL L OCATION AND SIZE THE TPO HAS NOT DEMONSTRATED THAT THE COMPARABLE COMPAN IES SELECTED BY HIM MAKE THEIR EXPORTS ONLY TO USA AS IN THE CASE O F THE ASSESSEE. THERE IS NO MENTION IN THE ENTIRE TP ORDER OF THE M ARKET CONDITION IN WHICH THE COMPARABLE COMPANIES SELECTED BY THE TPO HAVE CARRIED OUT THEIR OPERATIONS. ON VERIFYING THE ANNUAL REPORTS O F THE COMPARABLE COMPANIES SELECTED BY THE TPO THE ASSESSEE OBSERVE D THAT THE COMPARABLE COMPANIES HAVE EXPORTED THEIR SERVICES T O VARIED GEOGRAPHIES LIKE USA UK CANADA AND IRELAND ETC. HOWEVER WHILE REJECTING THE COMPARABLE COMPANIES SELECTED BY THE ASSESSEE THE TPO WITHOUT APPLYING ANY BASIS CONCLUDED THAT COMPANIES WITH NO FOREIGN EXCHANGE REVENUE SHOULD BE REJECTED AS THE ULTIMATE CUSTOMER OF THESE COMPANIES IS LOCATED IN INDIA. THE TPO HAS ADOPTED A CONTRADICTORY APPROACH WHEREIN HE EXPECTS THE ASSESSEE TO DEMONS TRATE THE MARKET CONDITIONS IN WHICH THE COMPARABLE COMPANIES SELECT ED BY THE ASSESSEE OPERATE WHEREAS IN CASE OF THE COMPANIES SELECTED B Y THE TPO THE MARKET CONDITIONS IN WHICH SUCH COMPANIES OPERATE I S NOT RELEVANT. HENCE IT IS PRAYED THAT THE FIVE COMPANIES AS LIST ED ABOVE SHOULD BE INCLUDED IN THE FINAL SET OF COMPARABLES. 20. ON THE ISSUE OF ADJUSTMENT ON ACCOUNT OF DIFFE RENCE IN ACCOUNTING POLICIES FOLLOWED BY THE ASSESSEE AND TH E COMPARABLE COMPANIES IT IS SUBMITTED THAT THE ASSESSEE FOLLOW S A DEPRECIATION POLICY WHEREBY THE RATES AT WHICH IT CHARGES DEPR ECIATION ON ITS ASSETS IS MUCH HIGHER THAN THE RATES AT WHICH THE COMPARAB LE COMPANIES ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 20 CHARGE DEPRECIATION. ACCORDINGLY DUE TO THE DIFFER ENCE IN THE RATES OF DEPRECIATION THE PROFIT MARGINS OF THE COMPARABLE COMPANIES ARE MUCH HIGHER THAN THAT OF THE ASSESSEE. IN ORDER TO CONDU CT A FAIR AND EQUITABLE COMPARISON OF THE PROFIT MARGINS IN TERMS WITH RULE 10B (1)(E)(III) THE ASSESSEE MADE ADJUSTMENTS TO THE D EPRECIATION RATES CHARGED BY THE COMPARABLE COMPANIES PLACED AT PAGE 511 OF PAPER BOOK FILED BY THE ASSESSEE. THE CIT (A) HAS OBSERVE D THAT NEITHER SUCH GROUND RELATING TO DEPRECIATION ADJUSTMENT WAS RAIS ED BY THE ASSESSEE IN THE APPEAL MEMO BEFORE HIM NOR ANY SUCH PLEA WAS PLACED BEFORE THE TPO AND HENCE THE SAID ADJUSTMENT WAS NOT ALLOWED. THE CIT (A) HAS NOT EXPRESSLY REJECTED THE NEED FOR MAKING DEPRECIA TION ADJUSTMENT IN THE INSTANT CASE. THE LEARNED COUNSEL FOR THE ASSES SEE RELIED ON THE DECISION OF CHANDIGARH BENCH IN THE CASE QUARK SYST EMS [SUPRA] IN SUPPORT OF HIS VIEW THAT THE TAXPAYER IS NOT ESTOPP ED FROM POINTING OUT ANY FACTS WHICH HAVE A MATERIAL BEARING ON THE CASE ON HAND EVEN THOUGH SUCH FACTS ARE AS A RESULT OF THE EVIDENCE A DDUCED BY THE TAXPAYER. HE ALSO SUBMITTED THE WORKINGS RELATING TO DEPRECIATION ISSUE IN THE PAPER BOOK FILED. 21. ON THE ISSUE OF ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN THE RISK PROFILE IT IS SUBMITTED THAT RULE 10B(1)(E) P ROVIDES THAT THE MARGINS OF THE COMPARABLE COMPANIES NEED TO BE ADJU STED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES WHICH COULD MATERIALLY EFFECT SUCH MARGINS IN THE OPEN MARKET. DURING THE COURSE OF THE PROCEEDINGS THE ASSESSEE HAD REQUESTED THE TPO/ CI T (A) TO GRANT AN ADJUSTMENT TO THE MARGIN OF THE COMPARABLE COMPANIE S ON ACCOUNT OF THE DIFFERENCE IN THE RISK PROFILE OF THE COMPARABL E COMPANIES. HOWEVER THE TPO HAS NOT APPROVED OF THE CLAIM OF THE ASSESS EE ON THE BASIS THAT ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 21 IN THE COMPETITIVE TIMES OF TODAY NO ENTITY CAN OP ERATE IN A RISK-FREE ENVIRONMENT EVEN IF IT IS A CAPTIVE SERVICE PROVIDE R. THE CLAIM OF THE ASSESSEE FOR AN ADJUSTMENT ON ACCOUNT OF DIFFERENCE S IN RISK PROFILE IS ALSO SUPPORTED BY THE DECISION OF THE DELHI BENCH I N THE CASE OF MENTOR GRAPHICS (NOIDA) PVT. LTD (SUPRA) AND ALSO DECISION OF PUNE BENCH IN THE CASE E-GAIN COMMUNICATIONS REPORTED IN 118 TTJ 354. THE OTHER CASE LAWS RELIED ON HIM FOR THIS PROPOSITIONS ARE A] DEL HI BENCH IN THE CASE OF SONY INDIA REPORTED IN 315 ITR 150 AT AND JURISDICT IONAL BENCH IN THE CASE OF CORDYS IN ITA NO.212/HYD/06. THUS THE ASSE SSEE SUBMITS THAT THERE IS ENOUGH IN THE LAW WHICH PROVIDES AND RECOG NIZES THE NEED TO PERFORM ADJUSTMENTS WHILE DETERMINING THE ALP WITH RESPECT TO THE RISKS ASSUMED BY THE COMPARABLE COMPANIES VIS--VIS THE T AXPAYER. THE ASSESSEE WORKS OUT 5.13% TOWARDS ENTREPRENEURIAL RI SK TO ADJUST THE AVERAGE COST PLUS MARK UPS FOR FINAL COMPARABLES. 22. ON THE ISSUE OF 5% DEDUCTION BEFORE COMPUTING THE ALP IT IS SUBMITTED THAT THE PROVISO TO SECTION 92C (2) OF TH E ACT PRIOR TO THE AMENDMENT BY THE FINANCE (NO. 2) ACT 2009 WITH EFF ECT FROM OCTOBER 1 2009 PROVIDED THAT WHILE ARRIVING AT THE ARMS LENGTH PRICE (ALP) AT THE OPTION OF THE ASSESSEE A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY 5% CAN BE CONSIDERED AS THE ARMS LENGTH P RICE. HE DREW OUR ATTENTION TO THE RELEVANT EXTRACTS FROM THE EXPLANA TORY MEMORANDUM AND NOTES TO CLAUSES OF THE FINANCE BILL 2002. THE CIRCULAR NO.12-2001 DATED 23-08-2001 ISSUED BY CBDT IS NOT RELEVANT IN THE CONTEXT OF THE ISSUE RAISED AS THE SAID CIRCULAR DOES NOT ADDRESS THE TREATMENT IN A CASE WHERE THE ARM'S LENGTH PRICE DETERMINED VARIES BY MORE THAN 5% AND THE CIRCULAR WAS ISSUED IN AUGUST 2001 WHEREAS THE PROVISO TO SECTION 92C OF THE ACT WAS AMENDED IN 2002. THE TPO DID NOT ALLOW ANY ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 22 BENEFIT TO THE ASSESSEE AS IN HIS VIEW THE ABOVE P ROVISION WAS NOT APPLICABLE IN THIS CASE. AS PER THE TPO THE MARGIN EARNED BY THE ASSESSEE FALLS SUBSTANTIALLY SHORT OF THE MARGIN EA RNED BY COMPARABLE COMPANIES OR THE ARMS LENGTH MARGIN. AS THE ASSESS EE WAS NOT FALLING IN THE +/-5 PER CENT RANGE IT WAS NOT ENTITLED TO ANY BENEFIT. AGGRIEVED BY THE STAND TAKEN BY THE TPO RAISED THIS GROUND B EFORE THE CIT (A). THE ASSESSEE SUBMITTED THAT UPWARD ADJUSTMENTS IF ANY MADE SHOULD BE ONLY AFTER GIVING EFFECT TO THE OPTION AVAILABLE FOR THE ASSESSEE AS PROVIDED IN THE PROVISO TO SECTION 92C (2). DURING THE COURSE OF THE APPELLATE PROCEEDINGS THE CIT (A) REMANDED THE MAT TER TO THE TPO. AFTER CONSIDERING THE REMAND REPORT AND SUBMISSIONS OF THE ASSESSEE THE CIT [A] FOUND NO FORCE IN THE SUBMISSIONS ADVAN CED BY THE ASSESSEE. HE WAS OF THE VIEW THAT THE REAL INTENTIO N OF THE LEGISLATURE BEHIND SUCH PROVISO HAS BEEN MADE CLEAR FOLLOWING T HE AMENDMENT MADE VIDE FINANCE (NO. 2) ACT 2009 WITH EFFECT FRO M 01/10/2009. THE ERSTWHILE PROVISO TO SECTION 92C(2) REGARDING THE M ARGINAL RELIEF OF 5 PER CENT CONTEMPLATED IN THE COMPUTATION OF THE ARMS L ENGTH PRICE HAS BEEN SUBSTITUTED BY THE FINANCE (NO. 2) ACT 2009 WITH E FFECT FROM OCTOBER 1 2009. HE HELD THAT SINCE THE APPELLATE PROCEEDINGS BEFORE HIM IN THIS CASE IS PRACTICALLY A CONTINUATION OF THE ASSESSMEN T PROCEEDINGS THE SAID AMENDED PROVISO IS FULLY APPLICABLE TO THIS CA SE. AS PER THE ABOVE PROVISO IF THE DIFFERENCE BETWEEN THE ARMS LENGTH PRICE DETERMINED BY THE TPO/AO DOES NOT EXCEED 5 PER CENT OF THE PRICE OF THE INTERNATIONAL TRANSACTION SHOWN BY THE ASSESSEE THEN SUCH PRICE AS SHOWN BY THE ASSESSEE SHALL BE DEEMED TO BE THE ARMS LENGTH PR ICE. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT PRESENT CAS E IS RELATING TO THE ASSESSMENT YEAR 2004-05. THEREFORE THE AMENDED PRO VISO AS EXPLAINED ABOVE IS NOT APPLICABLE TO THE PRESENT CASE IN HAND . FURTHER THE LEARNED ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 23 CIT(A) ERRED IN NOT ALLOWING THE BENEFIT OF +/-5% V ARIATION IN LIGHT OF THE FACT THAT THE SAID AMENDED PROVISO IS APPLICABLE FR OM OCTOBER 1 2009 ONWARDS AND NOT IN CASE WHERE THE APPELLATE PROCEED INGS ARE ONGOING AS ERRONEOUSLY INTERPRETED BY THE LEARNED CIT(A). THE CBDT IN ITS CIRCULAR NO. 5 OF 2010 DATED JUNE 3 2010 [324 ITR (ST.) 293 2010] HAS CLARIFIED ON DETERMINATION OF ARMS LENGTH PRICE IN CASE OF I NTERNATIONAL TRANSACTIONS. LATER A CORRIGENDUM (NO.142/13/2010- SO(TPL) IN PARTIAL MODIFICATION OF THE ORIGINAL CIRCULAR NO. 5/2010 WA S ISSUED BY CBDT WHEREIN IT WAS CLARIFIED THAT THE AMENDMENT SHALL A PPLY IN RELATION TO ALL CASES IN WHICH PROCEEDINGS WHICH ARE PENDING BEFORE THE TRANSFER PRICING OFFICER (TPO) ON OR AFTER 01 OCTOBER 2009. AS EVIDENT FROM THE ABOVE CIRCULAR CITED THESE NEW PROVISOS ARE EFFECT IVE FROM APRIL 1 2009 ONWARDS. IN FACT THESE PROVISOS HAVE BEEN BROUGHT I NTO THE ACT BY THE FINANCE (NO. 2) ACT 2009. SO IT WILL BE APPLICABL E TO THE ASSESSMENT YEAR 2009-10 AND SUBSEQUENT YEARS ONLY. IN THE CASE UNDER CONSIDERATION THE TPO / CIT(A) HAVE NOT APPLIED TH E SECOND PROVISO TO SECTION 92C(2) PRIOR TO ITS AMENDMENT IN OCTOBER 20 09 I.E. THEY HAVE NOT ALLOWED A STANDARD DEDUCTION OF 5% FROM THE ARI THMETICAL MEAN AND HAVE THUS IGNORED A SPECIFIC AND MANDATORY PROVISIO N OF LAW. THE CIT (A) DID NOT HAVE THE BENEFIT OF THE SAID CIRCULAR W HICH CLEARLY STATES THAT THE AMENDED PROVISO IS APPLICABLE FROM OCTOBER 1 2 009 ONWARDS AND NOT A CONTINUATION OF THE ASSESSMENT AS CONCLUDED B Y THE CIT (A) AS HE HAS PASSED THE ORDER ON MAY 31 2010 WHICH IS PRIOR TO THE ISSUANCE OF CIRCULAR AND CORRIGENDUM CITED ABOVE. HE RELIED ON THE DECISION OF DELHI BENCH IN THE UE TRADE CORPORATION IN ITA NO.4405/DE L/2009 WHEREIN IT HAS BEEN CATEGORICALLY HELD THAT THE PROVISO TO SEC TION 92C (2) WAS SUBSTITUTED WITH EFFECT FROM OCTOBER 01 2009 AND N OT RETROSPECTIVELY. THEREFORE IT COMES IN TO OPERATION FROM ASSESSMENT YEAR 2009-10 AND ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 24 APPLIES TO SUBSEQUENT YEARS. SIMILAR VIEW WAS TAKEN BY THE BANGALORE BENCH IN THE CASE SAP LABS INDIA IN ITA NO.418/BANG /2008. HE ALSO RELIED ON THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF TATA SONS & STEEL REPORTED IN 96 ITR 1 FOR THE PROPOSITI ON THAT A CIRCULAR WHICH PLACES A BURDEN ON AN ASSESSEE CANNOT BE RELI ED ON BY AN ASSESSING OFFICER. 23. IT IS ALSO SUBMITTED THAT AS PER THE DECISION OF DELHI BENCH IN THE CASE OF I POLICY NETWORK IN ITA NO.5504/DEL/ 2010 THE CORRIGENDUM IN PARTIAL MODIFICATION OF THE ORIGINA L CIRCULAR NO. 5/2010 WAS ISSUED BY CBDT WAS ISSUED ON 30 SEPTEMBER 2010 WHICH WAS AFTER THE DATE WHEN THE TPO PASSED HIS ORDER. HENCE THE SAME CAN NOT BE APPLIED. HE RELIED ON CATENA OF DECISIONS WHEREIN A STANDARD DEDUCTION OF 5% VARIATION WAS ALLOWED. TECNIMOUNT ICB PVT. LTD - ITA NO. 7098/MUM/2010) RECENT DECISION OF THE HONBLE BANGALORE TRIBUNAL I N THE CASE OF TNT INDIA PVT. LTD. (BANG ITAT) (ITA NO. 1442(BNG)/2008) PARA 15 OF THE SAID ORDER RELIE D ON SAP LABS AND SCHEFENACKER MOTHERSON. E-GAIN COMMUNICATION PVT. LTD. REPORTED IN (SUPRA) SKODA AUTO INDIA PVT. LTD REPORTED IN [2009] (30 SO T 319) SCHEFENACKER MOTHERSON LTD REPORTED IN [2009] ITA N O. 4459 AND 4460/DEL/07 (DELHI). MSS INDIA PRIVATE LIMITED REPORTED IN [2009] (32 SO T 132) CUMMINS INDIA LIMITED (ITA NO. 277 & 1412/PN/07) ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 25 24. RELYING ON THE ABOVE DECISIONS IT IS SUBMITTE D THAT IT IS WELL SETTLED FROM THE AFORESAID DECISIONS OF THE TRIBUNA L THAT AT THE OPTION OF THE ASSESSEE THE BENEFIT OF 5% STANDARD DEDUCTION IS AVAILABLE IRRESPECTIVE OF THE FACT THAT THE ARMS LENGTH PRIC E DETERMINED BY THE TPO EXCEEDS BY 5% OR MORE FROM THE TRANSFER PRICE. THUS THE ASSESSEE IS ELIGIBLE FOR THE SAID DEDUCTION WHILE COMPUTING THE ADJUSTMENT TO THE TRANSFER PRICE AS DETERMINED BY THE ASSESSEE IN ITS TP STUDY. THE LEARNED COUNSEL FOR THE ASSESSEE CONCLUDED THAT ITS CLAIM FOR ADJUSTMENTS RELATING TO RISK DIFFERENCE IN DEPRECI ATION POLICY ADOPTED BY THE ASSESSEE VIS--VIS THE COMPARABLE COMPANIES AND THE BENEFIT OF +/- 5% VARIATION THE TRANSACTIONS OF THE ASSESSEE COMP ANY WITH ITS ASSOCIATED ENTERPRISES IN CASE OF SOFTWARE DEVELOPM ENT AND BACK OFFICE SERVICES SATISFY THE ARMS LENGTH TEST AND THAT TH E ORDER OF THE TPO IS BAD IN LAW AND ON FACTS. 25. ON THE OTHER HAND THE LEARNED DEPARTMENTAL RE PRESENTATIVE SRI V. SRINIVAS SUBMITTED THAT JUST BECAUSE THE COM PANY CALLED WIPRO BPO HAS HIGH TURNOVER IT DOES NOT MEAN THAT IT IS EARNING SUPER NORMAL PROFITS. HENCE IT IS SUBMITTED THAT THE LOWER AUTH ORITIES ARE RIGHT IN INCLUDING THE WIPRO BPO AS COMPARABLE COMPANY. IT IS SUBMITTED THAT THE RANGE OF MARGINS BETWEEN 6% TO 40% IS REASONABL E AND THE SAME HAS TO BE ACCEPTED IN THE CASE UNDER CONSIDERATION ALSO. FOR THIS PROPOSITION HE RELIED ON THE DECISION OF THE BANGA LORE BENCH OF THE TRIBUNAL IN THE CASE OF SAP LABS INDIA PVT. LIMITED . IT IS SUBMITTED THAT UNDER THE MUTUAL AGREEMENT PROCEDURE (MAP) THE COMPETENT AUTHORITIES OF US AND INDIA HAVE AGREED FOR A MARK- UP FOR SOFTWARE SERVICES AT 19% FOR THE FINANCIAL YEAR UNDER CONSID ERATION WHEREAS THE MARK-UP OF THE ASSESSEE COMPANY IS ONLY 7%. IT IS S UBMITTED THAT ACE ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 26 SOFTWARE EXPORTS WAS ONE OF THE COMPARABLES ACCEPTE D BY THE ASSESSEE COMPANY DURING THE METHODICAL SEARCH PROCESS CONDUC TED BY IT TO SELECT POTENTIALLY COMPARABLE COMPANIES IN THE ITES SEGMEN T FOR THE PURPOSE OF ITS TRANSFER PRICING STUDY. IF THE OBJECTION HA VING LOW WAGES TO THE COST RATIO OF THE LEARNED COUNSEL FOR THE ASSESSEE IN SELECTING VISHAL INFORMATION AS COMPARABLE IS TO BE ACCEPTED THEN APPLYING THE SAME PRINCIPLE ACE SOFTWARE SHOULD ALSO BE REJECTED A S COMPARABLE SINCE THE SAID COMPANYS SALARY COST CONSTITUTES ONLY 9. 32% OF THE OPERATING REVENUE. IT IS ALSO SUBMITTED THAT THE ASSESSEE CAN NOT OBJECT TO THE EXCLUSION OF VISHAL INFORMATION LIMITED FROM THE FI NAL LIST OF COMPARABLE COMPANIES BEFORE THIS TRIBUNAL SINCE NO SUCH OBJEC TIONS WERE RAISED BEFORE THE CIT (A). IT IS ALSO SUBMITTED THAT TH E ASSESSING OFFICER IS CORRECT IN NOT EXCLUDING THE COMMUNICATION CHARGES FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTIO N UNDER SECTION 10A OF THE ACT. THE CASE-LAW ON WHICH THE LEARNED COUN SEL FOR THE ASSESSEE RELIED ON HAS NOT BECOME FINAL AND THE SAME IS PEND ING BEFORE THE HIGH COURT. THE CIT (A) SHOULD HAVE CONFIRMED THE ACTION OF THE TPO IN THE CASE OF NORTH-GATE TECHNOLOGIES LIMITED THAT IT FAI LED TO FULFILL THE RPT FILTER CONDITIONS. 26. THE LEARNED DEPARTMENTAL REPRESENTATIVE FURTHE R SUBMITTED THAT THE PROVISION OF SECTION 92C (2) OF THE ACT DO ES NOT OPERATE TO CONFER A BENEFIT IN THE NATURE OF A STANDARD DEDUCT ION. IT IS IN THE NATURE OF A TOLERANCE BAND TO PROVIDE FOR AN ACCEPT ABLE MARGIN OF ERROR WITHIN WHICH AN ADJUSTMENT WILL NOT BE MADE. ONCE THIS BAND IS BREACHED THE ENTIRE ADJUSTMENT IS TO BE MADE. THE CASE LAW RELIED UPON BY THE ASSESSEE DOES NOT PROVIDE AN ADEQUATE BASIS FOR DECIDING THE MATTER BECAUSE THESE CASES HAVE NOT HAD THE BENEFIT OF CONSIDERING THE ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 27 IMPORTANT ISSUE OF INTENDED RETROSPECTIVELY LAID DO WN BY THE SUPREME COURT IN THE CASE OF CIT VS. GOLD COIN LIMITED HEAL TH FOODS PVT. LIMITED REPORTED IN 304 ITR 308 WHICH IS RELEVANT IN THE FA CTS OF THE CASE. REFERENCE HAD BEEN MADE TO THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF SAP LABS INDIA PVT. LIMITED. IN PAR AGRAPHS 57-60 OF ITS ORDER DATED 30-8-2010 IT WAS HELD THAT AFTER THE A MENDMENT IN 2009 THE PROVISION DOES NOT OPERATE TO CONFER A STANDARD DEDUCTION. SINCE THE AMENDMENT APPARENTLY CAME INTO FORCE FROM 1-4-2 009 IT WAS FELT THAT THE AMENDED PROVISO HAD NO APPLICATION TO AN E ARLIER ASSESSMENT YEAR. THE DECISION THUS TURNED ON THE DATE OF COM ING INTO EFFECT OF THE AMENDED PROVISO. MOREOVER THIS DATE OF COMING INT O EFFECT NOTICED BY THE BENCH TURNED OUT TO BE A TYPOGRAPHIC MISTAKE IN THE CIRCULAR WHICH WAS CORRECTED BY A CORRIGENDUM SUBSEQUENTLY ISSUED ON 30-9-2010 CLARIFYING THAT THE PROVISO COME INTO EFFECT FROM 1 -10-2009 AND NOT 1- 4-2009 AND THAT IT WOULD APPLY TO ALL PENDING PROC EEDINGS BEFORE THE TP AUTHORITIES. IN SUPPORT OF HIS CONTENTIONS HE RE LIED ON THE DECISION IN THE CASE OF PODAR CEMENTS REPORTED IN 226 ITR 625 A ND DECISION OF THE VIZAG BENCH OF THE TRIBUNAL IN THE CASE OF SRI PADM AVATI SRINIVASA COTTON GINNING & PRESSING FACTORY REPORTED IN 318 ITR (AT) 156. IT IS FURTHER CONTENDED THAT THE SUCCESSIVE CHANGES IN TH E PROVISO TO SECTION 92C (2) OF THE ACT AND THE INTENTION OF THE LAWMAK ERS AS EXEMPLIFIED BY THE VARIOUS INSTRUCTIONS/CIRCULARS ISSUED FROM TIME TO TIME SEEN IN THE LIGHT OF THE ABOVE DECISIONS OF THE SUPREME COURT SHOULD OFFER GUIDANCE IN THE MATTER OF DECIDING THE ISSUE. FURTHER HE R ELIED ON THE CIRCULARS OF THE CBDT AND KEY OPERATIONAL WORDS. IN VIEW OF THE INSTRUCTIONS NOS. 12 AND 14/2001 8/2002 AND 5/2010 THE INTENTION OF THE LAWMAKERS AND THE STAND OF THE DEPARTMENT WOULD BE APPARENT F ROM THE ABOVE THAT THE 5% MARGIN IS NOT AND NEVER WAS A STANDARD DEDU CTION. FOR SIMILAR ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 28 REASONS MINUS RELIANCE ON CASE LAW CITED HEREIN AB OVE THE ITAT DELHI BENCH IN THE CASE OF ST MICROELECTRONICS PVT. LIMIT ED IN A DECISION DATED 3 RD JUNE 2011 RULED THAT THE ASSESSEE WAS NOT ENTITLE D TO SUCH AN INTERPRETATION OF THEN PROVISO TO SECTION 92C(2) OF THE ACT AS IS BEING CLAIMED IN THE PRESENT CASE. IT IS IMPORTANT TO NO TE THAT TRANSFER PRICING LEGISLATION CANNOT BE SEEN AS INCENTIVE PROVISIONS ADMITTING OF LIBERAL CONSTRUFCTION. IT SEEKS TO PROTECT A NATIONS TAX BASE BY CORRECTING AN ARTIFICIAL ASSUMPTION OF MARGIN MADE POSSIBLE IN TH E FIRST PLACE BY THE FACT THAT TRANSACTING PARTIES ARE BUT LIMBS OF THE SAME ENTERPRISE THOUGH LEGALLY DISTINCT ENTITIES ACROSS SEPARATE SO VEREIGN TAXING NATIONS. IT IS THEREFORE RESPECTFULLY URGED THAT APPLYING THE RATIO OF THE ABOVE REFERRED DECISIONS OF THE SUPREME COURT IN THE CASE OF GOLD COIN [SUPRA] AND IN THE CASE OF PEDAR CEMENT [SUPRA] AS FOLLOWED BY THE VIZAG BENCH OF THIS TRIBUNAL THE DEPARTMENT IS RIGHT IN DENYIN G THE ASSESSEES CLAIM OF 5% DEDUCTION. 27. WITH REGARD TO REJECTION OF MULTIPLE YEAR DATA IN GROUND NO.5 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMI TTED THAT THE MATTER STANDS COVERED IN FAVOR OF THE DEPARTMENT IN CATENA OF DECISIONS SUCH AS MENTOR GRAPHICS NOIDA PVT. LTD REPORTED IN 109 ITD 101 AZTEC SOFTWARE REPORTED IN 294 ITR (AT) 322 ( CUSTOMER SE RVICES INDIA PVT. LTD. REPORTED IN 009 TIOL 424 BESIDES THE RECENT DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ST MICROELECTR ONICS PVT. LIMITED IN A DECISION DATED 3 JUNE 2011 (ITA NOS. 1806 1807/ DEL/2008 FOR ASSESSMENT YEARS 2003-04 AND 2004-05). 28. AS REGARDS THE ISSUE OF SELECTION OF COMPARABL ES IT IS SUBMITTED BY THE LEARNED DEPARTMENTAL REPRESENTATIV E THAT WITH THE ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 29 EXCEPTION OF NORTHGATE BPO SERVICES PVT. LIMITED T HE CIT (A) UPHELD THE TPOS REJECTION OF ASSESSEES COMPARABLES AND C ONFIRMED THE TPOS SELECTION OF COMPARABLES. THE TPOS ARGUMENT RESTS ON APPLICATION OF FILTERS RELATING TO FOREX EARNINGS EXPORT TRANSACT IONS RELATED PARTY TRANSACTIONS FUNCTIONAL DIFFERENCES DATA INCOMPAT IBILITY AND PERSISTENT LOSSES AND WHICH IS FOUND TO BE CORRECT. IN RESPON SE TO THE LEARNED COUNSELS ARGUMENTS ON CERTAIN SPECIFIC COMPARABLE S RETAINED BY THE CIT (A) HE INVITED OUR ATTENTION TO THE RECENT DEC ISION OF THE DELHI BENCH OF THIS TRIBUNAL IN THE CASE OF ST MICROELECT RONICS PVT. LIMITED (SUPRA). IT IS FURTHER SUBMITTED THAT ON THE SUBJE CT OF SIZE OF COMPANIES MEASURED IN TERMS OF TURNOVER BEING RELEVANT OR NOT THE ASSESSEES CASE IS THAT WIPRO BPO SOLUTIONS LIMITED DESERVES T O BE EXCLUDED. IN THIS REGARD TWO SUBMISSIONS WERE PLACED BEFORE THE BENCH FOR THEIR CONSIDERATION. FIRSTLY IN A SITUATION OF TNMM WH ERE THE PLI ADOPTED IS THE MARGIN SIZE OF TURNOVER IS NOT A RELEVANT CRIT ERION AND SECONDLY INDUSTRY WATCHDOG NASSCOM ALSO DOES NOT RECOGNIZE A NY CLASSIFICATION BASED ON SIZE OF TURNOVER. REFERENCE WAS ALSO MAD E TO A STUDY OF M/S INFOSYS CARRIED OUT BY THE TPO FROM WHICH IT IS SEE N THAT OVER A TEN YEAR PERIOD MARGINS FLUCTUATED WITHIN A NARROW BAND OF A ROUND 5% IN SPITE OF THE FACT THAT TURNOVER WENT STEADILY UP 150 TIMES. IT IS AN ESTABLISHED FACT THAT IN THE SOFTWARE DEVELOPMENT SERVICES SECT OR THE PRINCIPAL ELEMENT OF COST BEING PERSONNEL COST IS VARIABLE IN PROPORTION TO THE TURNOVER. THE GROSS MARGINS THEREFORE TEND TO BE C ONSTANT UNLIKE SAY THE MANUFACTURING INDUSTRY WITH SIGNIFICANT FIXED C OSTS THAT RESULT IN MARGINS RESPONDING DIFFERENTLY TO TURNOVER. SECOND LY THE FIGURES IN WIPROS FINANCIALS SUPPLIED BY THE ASSESSEES COUNS EL DURING THE HEARING BY ITSELF BEARS OUT THIS POINT. IN THE CATEGORY OF SERVICES INCOME THOUGH THE TURNOVER INCREASES FROM RS.194.23 CR. TO RS.430 .3 CR. FROM FINANCIAL ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 30 YEAR 31-3-2003 TO 31-3-2004 PROFIT BEFORE TAX AS A PERCENTAGE OF TURNOVERS MOVED FROM 23.68% TO 23.91% WHICH IS AS GOOD AS STATIC. IT IS FURTHER CONTENDED THAT THE ASSESSEE HAS NOWHE RE SHOWN THAT WIPRO IS CHARGING MORE FROM ITS CLIENTS THAN THE PRESENT ASSESSEE FOR ANY GIVEN SERVICE. BESIDES IT IS IMPORTANT TO NOTICE T HAT TRANSFER PRICING RULES OR FOR THAT MATTER EVEN OECD GUIDELINES DO NOT PRESCRIBE ANY TURNOVER RANGE FOR COMPARABILITY ACROSS COMPANIES. IT IS FINALLY SUBMITTED THAT THE ADJUSTMENT MADE BY THE TPO AGAIN ST THE INDUSTRY BACKGROUND AND IN A BOOMING INDUSTRY WHERE EVEN A 40% MARKUP BY AN INDIAN COMPANY STILL MADE IT MORE PROFITABLE THA N ITS AMERICAN PRINCIPAL THE ASSESSEE WAS OPERATING ON A MEAGER M ARGIN OF 6.99% DETERMINED BY A CONTRACT DATED 15-6-2000 AND THE AS SESSEE NEVER FOUND IT NECESSARY TO ALIGN THE CONTRACT WITH PREVA LENT MARKET REALITIES. IT IS ALSO SUBMITTED THAT IN MANY CASES IN MAP PR OCEEDINGS BETWEEN THE TAX ADMINISTRATION OF INDIA AND USA A MARGIN O F 19-20% WAS CONSIDERED ACCEPTABLE FOR CERTAIN COMPANIES WHICH IN TURN WAS ACCEPTED BY THE COMPANIES. WITH REFERENCE TO THE DEPARTMENT S APPEAL AGAINST THE ORDER IF CIT (A) AGAINST DIRECTING REMOVAL OF N ORTHGATE AS A COMPARABLE IT IS SUBMITTED THAT THE CASE OF NORTH GATE PROPOSED BY THE ASSESSEE WAS FOUND BY THE TPO TO BE UN-REALIABLE B ECAUSE IT HAD TWO SEGMENTS-SOFTWARE SERVICES AND BPO BUT SEGMENTAL R ESULTS WERE NOT AVAILABLE TO TPO AND CIT (A) TOOK COGNIZANCE OF SOM E FIGURES FURNISHED BEFORE HIM WITHOUT AFFORDING ANY OPPORTUNITY FOR T HE TPO TO BE HEARD IN THE MATTER AND THE CONCLUSION OF THE CIT (A) TO THI S EXTENT IS VITIATED BY LACK OF OPPORTUNITY. IT IS FURTHER SUBMITTED THAT T HE ADJUSTMENT OF MARGINS PROPOSED BY THE TPO DESERVES TO BE CONSIDER ED FOR ACCEPTANCE. ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 31 29. IN THE REJOINDER THE LEARNED COUNSEL SUBMITTE D THAT IT WOULD BE APPRECIATED THAT SIMILARLY WIPRO BPO SOLUTIONS LIMITED IS ANOTHER GIANT IN THE INDUSTRY OF PROVIDING IYES SERVICES A SSUMING ALL THE RISKS AND THUS LEADING TO HIGHER PROFITS. BASED ON THE A BOVE THE ASSESSEE SUBMITS THAT WIPRO BPO SOLUTIONS LIMITED OUGHT TO B E EXCLUDED FROM THE LIST OF THE COMPARABLE COMPANIES. IN CONNECTION WIT H THE COMPARABLES DISCUSSED IN THE CASE OF SAP LABS INDIA PVT. LTD (S UPRA) WITH THE ALLEGED COMPARABLES PROPOSED BY THE TPO IN THE PRESENT CASE THE ASSESSEE DRAWN THE ATTENTION OF THE TRIBUNAL TO PAGE NOS. 64 OF THE DECISION WHEREIN THE BANGALORE TRIBUNAL HELD THAT THE EXTREM ES ARE TO BE EXCLUDED FROM THE SAMPLES TO AVOID ALL SORTS OF EXT REMITIES. IN THE CASE BEFORE THE BANGALORE TRIBUNAL THE TPO HAD SELECTED A LIST OF 8 COMPARABLES COMPANIES HAVING NET MARGINS WITHIN THE RANGE OF 16.33% TO 111.45% AND THUS AFTER EXCLUDING THE EXTREMES IT CAME TO 6% TO 40%. IT WOULD BE APPRECIATED THAT THE TPO HAD ARR IVED AT THE ARITHMETIC MEAN OF 22.24% BEFORE ALLOWING WORKING C APITAL ADJUSTMENT. FURTHER THE SAID DECISION WAS PERTAINING TO ASSESS MENT YEAR 2003-04 WHICH CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPA RABILITY OF OPERATING MARGINS OF COMPARABLES PROPOSED BY THE AS SESSEE AS FINAL SET OF COMPARABLE COMPANIES. IT IS SUBMITTED THAT THE M AP DOES NOT DEPRIVE THE TAX PAYER FROM TAKING RECOURSE TO ORDINARY LEGA L REMEDIES AVAILABLE I.E. DOMESTIC APPEAL PROCESS AND MAP ARE MUTUALLY E XCLUSIVE. IT HAS BEEN HELD BY THE A.P. HIGH COURT IN THE CASE OF VIS HAKHAPATNAM PORT TRUST (144 ITR 146) THAT MAP IS AVAILABLE IN ADDITI ON TO AND NOT IN SUBSTITUTION TO THE DOMESTIC REMEDIES. FINDINGS UN DER MAP ARE NOT EVEN BINDING ON THE ASSESSEE ITSELF AND IT CANNOT THEREF ORE BE BINDING ON ANY OTHER TAXPAYER AS WELL. FURTHER THE TAX PAYER HAS TO ACCEPT THE MAP RULING FOR RESOLUTION TO BE REACHED. A SETTLEMENT IF ACCEPTED IS ONLY ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 32 BINDING FOR THE FINANCIAL YEAR UNDER DISPUTE AND WO ULD NOT APPLY FOR EITHER PAST OR FUTURE YEARS. IT IS EVIDENT FROM TH E ABOVE THAT AN ASSESSEE HAS AN OPTION TO TAKE RECOURSE TO THE APPE AL PROCESS AND APPLY FOR A MAP SIMULTANEOUSLY. THE ASSESSEE HAS NOT APP LIED FOR MAP THIS YEAR AND THE ASSESSEE FURTHER SUBMITS THAT A MAP RU LING IS TAXPAYER SPECIFIC AND VARIES FROM COUNTRY TO COUNTRY. A MAP RULING DEPENDS UPON NEGOTIATIONS HELD BETWEEN THE COMPETENT AUTHORITIES OF TWO CONTRACTING STATES WHICH VARIES FROM CASE TO CASE. COUNTRIES N EGOTIATE MAP RULINGS ON CONSIDERATIONS WHICH ARE NON JUDICIAL FOR EXAMPL E COUNTRY A MAY CONCEDE AN ISSUE QUA COUNTRY B BECAUSE IT BENEFITS COUNTRY A IN A POSITION IT MAY TAKE VIS--VIS COUNTRY C OR COUNTRY A MAY AGREE TO A POSITION QUA COMPANY X BECAUSE COUNTRY B CONCEDES A POSITION QUA COMPANY Y. HENCE RELIANCE PLACED BY THE DEPARTMENT AL REPRESENTATIVE ON THE MAP RULING ISSUED IN CASE OF ANOTHER TAXPAYE R IS ERRONEOUS AND HIS APPLICATION THAT PRESENT CASE BE DECIDED HAVING REGARD TO THIS MAP RULING IS ILLEGAL AND UNWARRANTED BAD IN LAW VOID AND INADMISSIBLE AND WITHOUT PREJUDICE THE LEARNED COUNSEL FOR THE ASSE SSEE SUBMITS THAT THE DEPARTMENTAL REPRESENTATIVE HAS NOT SET OUT THE FAC TS AND THE BACK GROUND OF THE COMPANY IN RESPECT OF WHICH THE MAP R ULING WAS ADMINISTERED. IN VIEW OF THE FOREGOING THE RELIANC E PLACED BY THE DEPARTMENTAL REPRESENTATIVE ON MAP RULING IN CASE O F ANOTHER TAXPAYER IS ERRONEOUS. IT IS FURTHER SUBMITTED THAT ACE SOFT WARE EXPORTS LIMITED WAS ONE OF THE COMPARABLE ACCEPTED BY THE ASSESSEE DURING THE METHODICAL SEARCH PROCESS CONDUCTED BY IT TO SELECT POTENTIALLY COMPARABLE COMPANIES IN THE ITES SEGMENT OF THE PUR POSE OF ITS TP STUDY. THE DEPARTMENTAL REPRESENTATIVE HAS MADE AN ARGUMENT THAT THE ASSESSEE IS OBJECTING TO THE SELECTION OF VISHAL IN FORMATION LIMITED AS A COMPARABLE AS IT HAS A LOW WAGES TO COST RATIO OF 1 .38 PER CENT. ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 33 APPLYING SIMILAR PRINCIPLE ACE SOFTWARE EXPORTS LIM ITED SHOULD ALSO BE REJECTED AS A COMPARABLE AS AGAINST AN OPERATING RE VENUE OF RS.4 41 40 306/- IT HAS A SALARY COST OF RS.41 14 9 89/- WHICH CONSTITUTES ONLY 9.32 PER CENT OF OPERATING REVENUE . HOWEVER THE DEPARTMENTAL REPRESENTATIVE SEEMS TO HAVE EXCLUDED THE SOFTWARE SOURCING CHARGES FOR THE PURPOSE OF CALCULATION OF THE EMPLOYEE COST OF ACE SOFTWARE. THE ASSESSEE SUBMITS THAT IT IS COMM ON IN THE SERVICE INDUSTRY TO OUTSOURCE/SUBCONTRACT THE WORK TO THE V ENDORS. IN SUCH SCENARIO THE OUTSOURCING COST HAS TO BE INCLUDED F OR THE PURPOSE OF CALCULATING EMPLOYEE COST AS IT SUBSTITUTES THE EMP LOYEE COST. THEREFORE TO CARRY OUT AN ACCURATE COMPARISON THE SOFTWARE SO URCING CHARGES SHOULD BE INCLUDED FOR THE PURPOSE OF CALCULATION O F EMPLOYEE COST OF ACE SOFTWARE. THUS ACE SOFTWARE SHOULD BE ACCEPTE D AS A COMPARABLE AND THERE THE ASSESSEE IN THE COURSE OF PROCEEDINGS BEFORE THE TRIBUNAL HAD REQUESTED FOR THE REJECTION OF VISHAL INFORMATI ON LIMITED HAVING WAGES TO TOTAL OPERATING REVENUE RATIO AT 1.38 PER CENT WHICH WAS SELECTED AS A COMPARABLE BY THE TPO. AS THE DEPARTM ENTAL REPRESENTATIVE HAS ARGUED FOR REJECTION OF ACE SOFT WARE EXPORTS LIMITED BY COMP RARING IT TO VISHAL INFORMATION LIMITED IT WILL BE APPROPRIATE TO GO THROUGH THE WAGES TO OPERATING INCOME RATIO OF V ISHAL INFORMATION LIMITED. 30. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL AVAILABLE ON RECORD. FIRST WE WILL TAKE UP THE APPEAL OF THE ASSESSEE. FIRSTLY WE DEAL WITH THE ISSUE WITH RE GARD TO THE OBJECTION OF THE ASSESSEE COMPANY IN NOT ALLOWING THE USE OF MUL TIPLE YEARS DATA FOR THE PURPOSE OF DETERMINING THE ALP. WE FIND THAT FOR THE PURPOSE OF DETERMINING THE ALP THE TRANSACTIONS ENTERED INTO THE ASSOCIATE ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 34 ENTERPRISES ARE TO BE COMPARED WITH UNCONTROLLED TR ANSACTIONS CARRIED ON BY AN ENTITY DURING THE SAME PERIOD AS THAT OF THE ASSESSEE COMPANY AS PROVIDED UNDER RULE 10B [4] OF THE INCOME TAX RULES . IN VIEW OF THIS MATTER THE LOWER AUTHORITIES ARE RIGHT IN CONSIDER ING THE DATA OF ONLY ONE YEAR. THE EXPRESSION SHALL USED IN THE SAID RULE MAKES IT CLEAR THAT IT IS MANDATORY TO USE THE CURRENT YEAR DATA F IRST AND IF ANY CIRCUMSTANCES REVEAL AN INFLUENCE ON THE DETERMINAT ION OF ALP IN RELATION TO THE TRANSACTION BEING COMPARED THAN OTH ER DATAS FOR PERIOD NOT MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEA R MAY BE USED. THIS ISSUE IS COVERED IN FAVOUR OF THE REVENUE IN A CATE NA OF CASES INCLUDING THE RECENT DECISION OF DELHI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. ST MICROELECTRONICS PRIVATE LIMITED VS. CIT (A) XX NE W DELHI AND OTHERS (ITA NOS. 1806 1807/ DEL/2008 AND OTHERS) DATED 30 -6-2011. WITH REGARD TO THE CONTENTION OF THE ASSESSEE COMPANY RE GARDING NON AVAILABILITY OF CURRENT YEAR DATA IN RESPECT OF THE COMPARABLES AT THE TIME OF FILING THE RETURN OF INCOME IS CONCERNED WE FIND FORCE IN THE FINDING OF THE CIT (A) IN CONFIRMING THE ACTION OF THE TPO IN DIRECTING THE ASSESSEE COMPANY TO CONDUCT FRESH SEARCH OF THE COM PARABLES DURING THE TRANSFER PRICING PROCEEDINGS AS THE RULE 10B(4) OF THE IT RULES REQUIRE USE OF CURRENT YEAR DATA FOR THE PURPOSE OF COMPARABILITY ANALYSIS. IN VIEW OF THE ABOVE THE GROUND RAISED BY THE ASSESSEE ON THIS ISSUE IS REJECTED. 31. NEXT WE DEAL WITH THE ISSUE WITH REGARD TO THE ALLOWANCE OF 5% DEDUCTION BEFORE COMPUTING THE ALP. IT IS CONTE NTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ARITHMETICAL MEAN OF THE COMPARABLE PRICE SHOULD BE REDUCED BY 5% FOR DETERMINING THE A LP. WE HAVE GONE THROUGH THE SUBMISSIONS AND ALSO THE CASE LAW RELIE D UPON BY HIM. HE ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 35 POINTED OUT THAT THE AMENDMENT MADE UNDER SECTION 9 2C OF THE ACT WOULD BE APPLICABLE PROSPECTIVELY AND NOT RETROSPEC TIVELY. WHEREAS THE LEARNED DEPARTMENTAL REPRESENTATIVE OBJECTED TO THE ABOVE PROPOSITION AND SUBMITTED THAT UNDER THE PROVISO NO STANDARD D EDUCTION HAS BEEN PROVIDED TO THE ASSESSEE COMPANY. IN OUR CONSIDERE D VIEW THE TOLERANCE BAND PROVIDED IN THE AFORESAID PROVISION IS NOT TO BE TAKEN AS A STANDARD DEDUCTION. IF THE ARITHMETIC MEAN FALL S WITHIN THE TOLERANCE BAND THEN THERE SHOULD NOT BE ANY ALP ADJUSTMENT. IF IT EXCEEDS THE SAID TOLERANCE BAND THEN ALP ADJUSTMENT IS NOT REQ UIRED TO BE COMPUTED AFTER ALLOWING THE DEDUCTION AT 5%. THAT MEANS ACTUAL WORKING IS TO BE TAKEN FOR DETERMINING THE ALP WITH OUT GIVING DEDUCTION OF 5%. OUR VIEW IS SUPPORTED BY THE RECENT DECISIO N OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. ST MICROELECTRO NICS PRIVATE LIMITED VS. CIT (A) XX NEW DELHI AND OTHERS (SUPRA). WE ALSO F IND THAT THE ISSUE IS COVERED IN FAVOUR OF THE REVENUE BY THE DECISION OF CO-ORDINATE BENCH IN THE CASE OF ADP PRIVATE LIMITED HYDERABAD VS. DCIT HYDERABAD (ITA NO.106/HYD/2009 AND ITA NO.155/HYD/2009 DATED 25-2- 2011 TO WHICH ONE OF US WAS A PARTY OF THAT ORDER AND THE SAME IS BINDING ON US. SINCE THE DECISION OF CO-ORDINATE BENCH IS BINDING ON US WE ARE NOT INCLINED TO FOLLOW THE DECISIONS RENDERED BY OTHER BENCHES OF T HIS TRIBUNAL WHICH ARE RELIED ON BY THE LEARNED COUNSEL FOR THE ASSESS EE. WE ARE ALSO IN AGREEMENT WITH THE ELABORATE FINDINGS OF THE FIRST APPELLATE AUTHORITY IN DEALING WITH THIS ISSUE AND ACCORDINGLY WE DO NOT S EE ANY INFIRMITY IN HIS ORDER. HENCE THE GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE ARE REJECTED. 32. NEXT WE DEAL WITH THE ISSUE RELATING TO THE AS SESSEES CONTENTION THAT THE TPO HAD VIOLATED THE RULES OF N ATURAL JUSTICE BY NOT ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 36 PROVIDING/SHARING THE COMPLETE DETAILS OF THE BENCH MARKING ANALYSIS CARRIED OUT BY HIM. AT THE TIME OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE DID NOT PRESS THIS GROUND. ACCORDINGLY THE GROUND RAISED BY THE ASSESSEE IS DISMISSED AS NOT PRESSED. 33. NOW WE DEAL WITH THE ISSUE RELATING TO THE ASSESSEES CONTENTION THAT THE FIRST APPELLATE AUTHORITY FAI LING TO TAKE COGNIZANCE OF DIFFERENCES IN ACCOUNTING POLICIES FOLLOWED BY T HE ASSESSEE COMPANY AND THE ALLEGED COMPARABLE COMPANIES SELECTED BY HI M BY NOT ALLOWING THE DEPRECIATION ADJUSTMENT MADE BY THE ASSESSEE CO MPANY. IT IS THE CONTENTION OF THE ASSESSEE COMPANY THAT THE LOWER A UTHJORITIES NOT ALLOWED ANY ADJUSTMENT FOR THE DIFFERENCE IN DEPREC IATION POLICY FOLLOWED BY THE ASSESSEE COMPANY VIS--VIS THE COMPARABLE CO MPANIES. WE FIND THAT THE ASSESSEE COMPANY HAS NOT RAISED ANY GROUND ON THIS ISSUE BEFORE THE FIRST APPELLATE AUTHORITY. FURTHER NO SUCH PLEA HAS BEEN MADE DURING THE TRANSFER PRICING PROCEEDINGS BEFORE THE TPO. UNDER THESE CIRCUMSTANCES THE GROUND RAISED BY THE ASSES SEE COMPANY BEFORE US IS NOT ENTERTAINABLE AND THE SAME IS REJECTED. 34. NOW WE DEAL WITH THE ISSUE RELATING TO THE ACT ION OF THE TPO/CIT (A) IN CONSIDERING THE VISUALSOFT TECHNOLOG IES LIMITED AS COMPARABLE (SOFTWARE DEVELOPMENT SERVICES SEGMENT) EVEN THOUGH THE SAID COMPANY HAS INCURRED RESEARCH AND DEVELOPMENT EXPENSES IN EXCESS OF 3% OF ITS SALES. WE FIND THAT THE ASSES SEE HAS NOT RAISED ANY OBJECTION VIDE ITS LETTER DATED 28-11-2006 IN CONSI DERING THE SAID COMPANY AS COMPARABLE BEING UNRELATED PARTY HAVING SIMILAR FUNCTIONS AND RISKS AS THAT OF THE ASSESSEE COMPANY BY THE TPO. BEFORE THE TPO THE ASSESSEE COMPANY HAS AGREED THAT IT IS AN UNRELATED PARTY AND ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 37 CAN BE COMPARABLE WITH THAT OF THE ASSESSEE COMPANY . WE DO NOT SEE ANY MERIT IN THE CONTENTIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT EVEN THOUGH THE ASSESSEE COMPANY EARLIER ACCEPTED V ISUALSOFT AS COMPARABLE COMPANY IN THE ASSESSEES TP STUDY IT I S NOT ESTOPPED FROM POINTING OUT ANY FACTS BEFORE US WHICH HAVE MATERI AL BEARING IN THE CASE UNDER CONSIDERATION EVEN THOUGH SUCH FACTS ARE AS A RESULT OF THE EVIDENCE ADDUCED BY THE TAX PAYER. WE FIND THAT THE ASSESSEE COMPANY NOT ADDUCED ANY COGENT REASON AS TO WHY IT HAD SELE CTED VISUALSOFT AS COMPARABLE IN ITS TP STUDY ERRONEOUSLY. MOREOVER T HE ASSESSEE COMPANY AGREED BEFORE THE TPO THAT THE VISUALSOFT I S AN UNRELATED PARTY AND CAN BE COMPARABLE WITH THAT OF THE ASSESSEE COM PANY. SINCE THE TPO INCLUDED THE AFORESAID COMPANY ON AGREED BASIS THE TPO HAD NO OCCASION TO VERIFY THE VERACITY OF PRESENT CLAIM MA DE BY THE ASSESSEE COMPANY CONTENDING THAT THE TPO SHOULD HAVE EXCLUDE D THE VISUALSOFT FROM THE LIST OF COMPARABLE COMPANIES. HENCE THE GROUND RAISED BY THE ASSESSEE ON THIS ISSUE IS REJECTED. 35. NOW WE TURN TO THE ISSUE RELATING TO THE SELE CTION OF SPANCO TELE-SYSTEM AS COMPARABLE COMPANY IN THE BACK OFFIC E SERVICES SEGMENT BY THE TPO. WE FIND THAT THE TPO HAS APPLIED THE CR ITERIA OF EXCLUDING THE COMPANIES HAVING RELATED PARTY TRANSACTION OF M ORE THAN 25% OF THE TURNOVER FROM THE LIST OF COMPARABLE COMPANIES. H AVING DONE SO THE TPO SHOULD HAVE EXCLUDED THE SPANCO TELE-SYSTEM FRO M THE LIST OF COMPARABLE COMPANIES AS IT IS EVIDENT FROM THE PAPE R BOOK FILED BY THE ASSESSEE COMPANY THAT THE PERCENTAGE OF RELATED PAR TY TRANSACTION IN THE CASE OF SPANCO TELE-SYSTEM IS 28.73% AND IT FAI LS TO SATISFY THE TPOS OWN CRITERIA. IN VIEW OF THIS MATTER WE FI ND FORCE IN THE ARGUMENTS OF THE LEARNED COUNSEL FOR THE ASSESSEE T HAT SPANCO TELE- ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 38 SYSTEM SHOULD BE EXCLUDED FROM THE FINAL LIST OF CO MPARABLE COMPANIES. WE DIRECT ACCORDINGLY. 36. NOW WE DEAL WITH THE ISSUE RELATING TO INCLUS ION OF VISHAL INFORMATION TECHNOLOGY LIMITED (VITL IN SHORT) IN T HE FINAL LIST OF COMPARABLE COMPANIES BY THE TPO. IT IS CONTENTION O F THE ASSESSEE COMPANY THAT VITL HAS EMPLOYEE-COST AT 1.38% OF ITS REVENUE WHEN COMPARED TO THAT OF THE ASSESSEE COMPANY WHICH IS A T 52.12%. THUS THE VITL CANNOT BE CONSIDERED AS COMPARABLE COMPANY AND TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. IT IS ALSO AN ALTERNATE CONTENTION OF THE ASSESSEE THAT VITL OWNS VALUABLE INTANGIBLE WHEN COMPARED TO THE ASSESSEE COMPANY. HENCE THE SAID COMPANY HAS TO BE EXCLUDED. THE ASSESSEE COMPANY ITSELF AGREED BEFORE THE TPO THAT VITL IS A COMPARABLE COMPANY OFFERING IT ENABLED SERVICE S AND THIS COMPANY IS AN EXTENSION OF ONE INDIAN COMPANY AMEX IT LTD. HAVING AGREED SO IT IS NOT CORRECT ON THE PART OF THE ASSESSEE COMPANY TO RAISE A NEW PLEA THAT THE VITL HAS GOT LOW WAGES COMPARED TO THE ASS ESSEE COMPANY. IT APPEARS THAT THE VITL HAS OUTSOURCED THE MANPOWER A ND THE COST OF OUTSOURCING APPEARS TO HAVE BEEN INCLUDED IN THE OT HER HEADS OF THE EXPENDITURE INSTEAD OF WAGES-EMPLOYEE COST. MOREOV ER THE INTANGIBLES WILL NOT MATERIALLY AFFECT THE PRICE OR PROFIT EARN ING. BY OUTSOURCING THE MANPOWER THE VITL WOULD HAVE INCURRED MORE COST CO MPARED TO THE ASSESSEE COMPANY THUS RESULTING IN LESSER OPERATIN G PROFIT. BUT HAVING CONSIDERING THE FINDINGS OF THE TPO WE FIND THAT THE INTANGIBLES OR OUTSOURCING THE MANPOWER WILL NOT MATERIALLY AFF ECT THE PRICE OR PROFIT MARGIN. IN OUR CONSIDERED OPINION NO TWO COMPARABL E COMPANIES CAN BE REPLICAS OF EACH OTHER. THE APPLICATION OF RULE 10B SHOULD BE CARRIED OUT AND JUDGED NOT WITH TECHNICAL RIGOR BUT ON A BROAD ER PROSPECTIVE. IN ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 39 THIS VIEW OF THE MATTER WE FIND NO INFIRMITY IN TH E ORDER OF THE CIT (A) IN CONFIRMING THE ACTION OF THE TPO BY SELECTING THE V ITL AS COMPARABLE COMPANY. THE CASE-LAW RELIED ON BY THE LEARNED COU NSEL FOR THE ASSESSEE IS DISTINGUISHABLE ON FACTS. HENCE THE G ROUND RAISED BY THE ASSESSEE ON THIS ISSUE IS REJECTED. 37. NOW WE DEAL WITH THE ISSUE WHETHER THE TPO W AS CORRECT IN SELECTING WIPRO BPO HAVING TURNOVER OF 20 TIMES MO RE THAN THE ASSESSEE COMPANY AS COMPARABLE OR NOT. WE FIND TH AT THIS ISSUE IS COVERED IN FAVOR OF THE ASSESSEE BY THE DECISION OF DELHI ITAT IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LIMITED (201 0) ITA NO. 3856/DEL/2010. WE FIND THAT THE WIPRO BPO IS NOT A T ALL COMPARABLE AS THE ASSESSEE COMPANY IS PIGMY COMPARED TO GIANT WIP RO. WIPRO COMPANYS TURNOVER IS 20 TIMES MORE THAN THE ASSESS EE COMPANY. HENCE THE ASSESSEE COMPANY IS NOT COMPARABLE WITH WIPRO BPO THE REASONING BEING THAT THE LATTER IS A GIANT COMPANY HAVING 20 TIMES MORE TURNOVER THAN THE ASSESSEE COMPANY. IN VIEW OF THI S BASED ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND FOLLOWING TH E DECISION OF DELHI BENCH OF ITAT IN THE AFORESAID CASE WE ARE OF THE VIEW THAT WIPRO BPO SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMP ANIES. HENCE THE GROUND RAISED BY THE ASSESSEE ON THIS ISSUE IS ALLO WED. 38. THE NEXT ISSUE IS WITH REGARD TO THE REJECTION OF ACE SOFTWARE LIMITED (ASL IN SHORT) AS COMPARABLE COMPA NY IN BACK OFFICE SERVICES SEGMENT ON THE BASIS THAT THE COMPANY SOUR CES ITS EXCLUSIVELY FROM APEX DATA SERVICES INC. USA AND THUS HAS RELA TED PARTY TRANSACTIONS. WE FIND THAT ASL DOES NOT RENDER ANY SERVICES TO APEX DATA BUT ONLY SOURCES BUSINESS FROM THEM. THEREFOR E ASL RENDERS ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 40 SERVICES DIRECTLY TO THE THIRD PARTIES AND NOT TO T HE APEX DATA. THE LEARNED COUNSEL FOR THE ASSESSEE CLEARLY DEMONSTRAT ED THAT ASL HAD ONLY TRANSACTION WITH APEX DATA IN PURCHASING OF FIXED A SSETS. RELEVANT PAPERS ARE PLACED AT PAGE NO.250 OF THE PAPER BOOK FILED BY THE ASSESSEE. IN VIEW OF THIS MATTER WE FIND NO CONT ROLLED TRANSACTION BETWEEN THE ASL AND APEX DATA. THUS NO MATERIALLY SIGNIFICANT RELATED PARTY TRANSACTIONS EXIST. SECTION 92A(2) (I) CLEARL Y DEALS WITH MANUFACTURING OF GOODS AND ARTICLES AND NOT WITH PR OVISION OF SERVICES. THEREFORE THE TPO/CIT (A) IS NOT JUSTIFIED IN REJE CTING THE ASL AS COMPARABLE COMPANY FROM THE FINAL LIST OF COMPARABL E COMPANIES. HENCE ASL SHOULD BE ACCEPTED AS AN INDEPENDENT COM PARABLE COMPANY. THE GROUND RAISED BY THE ASSESSEE IS ACCE PTED. 39. THE NEXT GROUND IS WITH REGARD TO REJECTION OF INDEPENDENT COMPARABLE COMPANIES BY TPO/CIT (A) ON THE BASIS TH AT THEY DO NO HAVE ANY FOREIGN EXCHANGE REVENUE. WE FIND THAT THE TPO IN THE CASE OF BACK OFFICE SERVICES SEGMENT HAS REJECTED THE FOLL OWING FIVE COMPANIES ON ACCOUNT OF THE FACT THAT THESE COMPANIES DO NOT GENERATE FOREIGN EXCHANGE REVENUE. I) C.S. SOFTWARE ENTERPRISE LIMITED II) IDEASPACE SOLUTIONS LIMITED III) MCS LIMITED IV) TATA SHARE REGISTRY LIMITED V) VAKRANGEE SOFTWARES LIMITED WE FIND THAT THE DOMESTIC BPO IS MUCH SMALLER BUSIN ESS SEGMENT THAN THE EXPORT BPO. THE PRODUCTIVITY AND RETURN IN DOM ESTIC SEGMENT IS ALSO MUCH LESS THAN THE EXPORT SEGMENT. THE TPO CLEARLY DEMONSTRATED IN HIS ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 41 ORDER AT PAGE-9 THAT THE EARNINGS PER SEAT IN DOMES TIC SEGMENT IS 0.45 LAKHS AS AGAINST 2.37 LAKHS IN THE EXPORT SEGMENT W HICH WORKS OUT TO 5.27 TIMES MORE THAN THE DOMESTIC SEGMENT. IN TH E EXPORT SEGMENT THE EARNINGS WILL BE MORE DUE TO THE FACT THAT THEY HAVE ADVANTAGE OF TIME ZONE AND HIGHER PRODUCTIVITY ETC. IT APPEARS THAT THE ASSESSEE COMPANY AGREED THAT ONE CRITERION FOR SELECTION/REJ ECTION OF THE COMPARABLES IS FAR ANALYSIS. THE AFORESAID COMPANI ES DO NOT HAVE ANY EXPORT BUSINESS FOR THE YEAR UNDER CONSIDERATION WH EREAS THE ASSESSEE COMPANY HAS FULL-FLEDGED EXPORT BUSINESS. THE FUNC TIONS RISKS AND ASSETS ARE ENTIRELY DIFFERENT. HENCE THE AFORESAI D COMPANY CANNOT BE CONSIDERED AS A COMPARABLE COMPANY FOR DETERMINING THE ALP. IT IS THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THERE IS NOTHING MENTIONED IN THE INDIAN TPR THAT COMPARABLES MAY BE REJECTED MERELY ON THE GROUND THAT IT HAS NO FOREIGN EXCHANGE REVEN UE. HE REFERRED TO THE MEANING OF THE UNCONTROLLED TRANSACTION AS GI VEN IN RULE 10A OF THE INCOME-TAX RULES WHEREIN IT STATES THAT THE TRA NSACTION BETWEEN ENTERPRISE OTHER THAN THE ASSOCIATE ENTERPRISE WHET HER RESIDENT OR NON RESIDENT. IN OUR CONSIDERED VIEW THE REFERENCE TO RESIDENT AND NON- RESIDENT IN RULE 10A OF IT RULES IS RELATED TO THE RESIDENTIAL STATUS AND NOT RELATED TO THE DOMESTIC OR EXPORT. MOREOVER TH E DELHI BENCH OF THE TRIBUNAL IN THE CASE OF MENTOR GRAPHICS (SUPRA) HEL D THAT THE ALP SHOULD BE DETERMINED BY TAKING RESULTS OF A COMPARABLE TRA NSACTION IN COMPARABLE CIRCUMSTANCES. RULE 10B (2)(D) ALSO EM PHASIZES THAT THE COMPARABILITY OF THE TRANSACTION SHOULD BE INTERNA TIONAL TRANSACTION. WE DO NOT FIND ANY MERIT IN THE ARGUMENT OF THE LEA RNED COUNSEL FOR THE ASSESSEE THAT THE COMPANIES REJECTED BY THE TPO OPE RATE IN SIMILAR MARKET CONDITION AS THAT OF ASSESSEE COMPANY DUE TO THE FACT THAT THE AFORESAID COMPANIES DO NOT HAVE ANY INTERNATIONAL T RANSACTION. IN VIEW ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 42 OF THE ABOVE THE REASONING GIVEN BY THE CIT (A) IN CONFIRMING THE ACTION OF THE TPO IN REJECTING THE AFORESAID COMPANY AS NO T COMPARABLE IS JUSTIFIED. IN VIEW OF THE ABOVE FIVE COMPANIES LI STED ABOVE SHALL NOT BE INCLUDED IN THE FINAL LIST OF COMPARABLE COMPANIES. 40. THE NEXT GROUND IS WITH REGARD TO THE ISSUE TH AT THE TPO/CIT (A) NOT ALLOWING ANY ADJUSTMENT TOWARDS VALUABLE IN TANGIBLES OWNED BY AND IN RESPECT OF ENTREPRENEURIAL RISK BORNE BY THE COMPARABLES. WE FIND THAT THERE ARE SEVERAL FACTORS SUCH AS MARKET RISKS ENVIRONMENTAL RISK ENTREPRENEURIAL RISK AND FUNCTIONAL RISK ETC. WHICH AFFECT THIS MATTER AND WHICH ULTIMATELY AFFECT THE RESULTS OF T HE COMPANY. ALL THE AFORESAID FACTORS MAKE IT IMPRACTICABLE TO ANY AUTH ORITY TO FIND OUT EXACT DUPLICATE COMPANY OF THE ASSESSEE AS COMPARABLE. S OME VARIATION BOUND TO EXIST. WE FIND THAT THE TPO HAD MADE EFFO RTS TO IDENTIFY THE COMPARABLES WHOSE FUNCTIONS ARE SIMILAR TO THE ASSE SSEE COMPANY BY APPLYING FILTER QUANTITATIVELY AND QUALITATIVELY TO ELIMINATE THE DIFFERENCES BETWEEN THE ASSESSEE COMPANIES WITH THA T OF COMPARABLE COMPANIES TO NEUTRALIZE THE AFORESAID RISK FACTORS. THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE IN THE WRITTEN SUB MISSIONS AS WELL AS SUBMISSIONS MADE BEFORE US WERE ALL IN THE BACK GRO UND OF SHOWING THE ASSESSEE COMPANY AS LOW END PERFORMER. WE DO NOT FIND FORCE IN THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE IS A RISK FREE SERVICE PROVIDER AND SUFFICIENT ADJUSTMEN T NEEDS TO BE ALLOWED TO COMPARE WITH THE OTHER COMPARABLE COMPANIES. THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON SEVERAL DECISIO NS IN SUPPORT OF HIS CASE THAT THERE SHOULD BE SOME ADJUSTMENT FOR RISK TO BE GIVEN. HOWEVER WE FIND THAT THE FIRST APPELLATE AUTHORIT Y AFTER GOING THROUGH THE AGREEMENT ENTERED BY THE ASSESSEE COMPANY WITH THE AE ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 43 OBSERVED THAT THE ASSESSEE COMPANY IS AN INDEPENDEN T CONTRACTING ENTITY AND SHALL BE SOLELY RESPONSIBLE FOR DETERMIN ING THE MANNER MEANS AND METHODS BY WHICH IT PERFORMS ITS OBLIGATI ON UNDER THE SAID CONTRACT AS PER ARTICLE-5 THE ASSESSEE COMPANY HAS UNDERTAKEN THE WARRANTY THAT ALL ITS WORK AND DOCUMENTATION TO BE DELIVERED TO THE ASSOCIATE ENTERPRISE SHALL BE FREE OF ERROR. IN A NUTSHELL THE ASSESSEE COMPANY WAS CARRYING SEVERAL RISKS WHILE UNDERTAKIN G VARIOUS WORKS/ SERVICES FOR ITS ASSOCIATE ENTERPRISE. IN VIEW OF THIS MATTER AFTER CONSIDERING THE DETAILED REASONING GIVEN BY THE CIT (A)/TPO IN THEIR ORDERS IN OUR CONSIDERED OPINION IT CANNOT BE SAI D THAT THE ASSESSEE COMPANY WAS OPERATING IN A RISK FREE ENVIRONMENT AN D ACCORDINGLY THE ASSESSEE COMPANY IS NOT ENTITLED TO ANY ADJUSTMENT TOWARDS RISKS BORNE BY VARIOUS COMPARABLE COMPANIES. THEREFORE WE CON FIRM THEIR ORDERS ON THIS ISSUE. HENCE THE GROUND RAISED BY THE ASS ESSEE ON THIS ISSUE IS REJECTED. 41. THE NEXT GROUND RAISED BY THE ASSESSEE IS THAT THE TPO/AO NEEDS TO DEMONSTRATE THE MOTIVE OF THE ASSESSEE COM PANY TO SHIFT PROFITS OUTSIDE OF INDIA BY MANIPULATING THE PRICES CHARGES IN ITS INTERNATIONAL TRANSACTIONS AT THE TIME OF FRAMING T HE TRANSFER PRICING ASSESSMENT. WE FIND THAT TRANSFER PRICING RULES SH ALL APPLY WHEN ONE OF THE PARTIES TO THE TRANSACTION IS A NON-RESIDENT E VEN IF THE TRANSACTION TAKES PLACE WITHIN INDIA. THERE IS NO NEED TO FIND OUT THE LEGISLATIVE INTENT BEHIND THE TRANSFER PRICING PROVISION WHEN T HE PROVISIONS THEMSELVES WERE UNAMBIGUOUS. THEREFORE EXISTENCE O F ACTUAL CROSS BORDER TRANSACTIONS OR MOTIVE TO SHIFT PROFITS OUTS IDE INDIA OR TO EVADE TAXES IS NOT FREE CONDITIONS FOR TRANSFER PRICING P ROVISIONS TO APPLY. IN VIEW OF THIS THE LOWER AUTHORITIES DURING TRANS FER PRICING ASSESSMENT ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 44 ARE NOT REQUIRED TO DEMONSTRATE THE MOTIVE OF THE A SSESSEE COMPANY TO SHIFT THE PROFITS OUTSIDE INDIA BY MANIPULATING THE PRICES. 42. THE NEXT GROUND IS WITH REGARD TO CHARGING OF INTEREST UNDER SECTION 234B AND 234C OF THE ACT. WE FIND THAT CHAR GING OF INTEREST UNDER SECTIONS 234B AND 234C ARE MANDATORY AND MERE LY CONSEQUENTIAL IN NATURE TO THE ASSESSED INCOME. HENCE THE GROUN DS RAISED BY THE ASSESSEE ON THESE ISSUES ARE REJECTED AS SUCH. 43. THE LAST GROUND RAISED BY THE ASSESSEE IS WITH REGARD TO THE INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271 (1) (C) OF THE ACT. WE FIND THAT THERE IS NO PROVISION IN THE ACT FOR ALLO WING APPEAL AGAINST INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271 (1) (C) OF THE ACT. HENCE THE GROUND RAISED BY THE ASSESSEE ON THIS IS SUE IS NOT ENTERTAINABLE AND THE SAME IS ACCORDINGLY REJECTED. 44. NOW WE WILL TAKE UP THE APPEAL FILED BY THE R EVENUE. GROUND NOS. 1 4 AND 7 ARE GENERAL IN NATURE AND NO ADJUDICATION IS REQUIRED. GROUND NOS. 2 AND 3 ARE WITH REGARD TO T HE EXCLUSION OF COMMUNICATION CHARGES FROM THE TOTAL TURNOVER FOR T HE PURPOSE OF COMPUTATION OF BENEFIT UNDER SECTION 10A OF THE ACT . WE FIND THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF CHENNAI SPECIAL BENCH IN THE CASE OF SAK SOFT LIMIT ED REPORTED IN 313 ITR (AT) 353 AND ACCORDINGLY WE HELD THAT THE TELEC OMMUNICATION CHARGES INCURRED BY THE ASSESSEE COMPANY WHICH HAS BEEN EXCLUDED BY THE ASSESSING OFFICER FROM EXPORT TURNOVER HAS TO BE EXCLUDED FROM THE TOTAL TURNOVER ALSO IF SUCH AMOUNT STANDS INCLUDED THEREIN WHILE COMPUTING THE ADMISSIBLE DEDUCTION 10A OF THE ACT. WE DIRECT ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 45 ACCORDING. HENCE THE GROUNDS RAISED BY THE REVENU E ON THESE ISSUES ARE REJECTED. 45. THE GROUND NOS. 5 AND 6 RAISED BY THE REVENUE ARE WITH REGARD TO THE INCLUSION OF NORTHGATE TECHNOLOGIES L TD. (NTL IN SHORT) AS COMPARABLE COMPANY IN THE BPO SEGMENT. WE FIND THAT THE TPO IN HIS ORDER ACCEPTED THE CONTENTION OF THE ASSESSEE COMPA NY THAT NTL IS IN THE BUSINESS OF PROVIDING HIGH END BACK OFFICE SERV ICES AND ALSO OBSERVED THAT THIS COMPANY IS A COMPARABLE COMPANY WITH THAT OF ASSESSEE COMPANY HAVING SIMILAR FUNCTIONS. THE TPO SIMPLY REJECTED THE AFORESAID COMPANY ON THE GROUND THAT SEGMENTAL RESU LTS ARE NEITHER AVAILABLE IN THE PUBLIC DATA BASE NOR PROVIDED BY T HE ASSESSEE COMPANY. MOREOVER WE DO NOT FIND ANY OBSERVATION OF THE TPO IN HIS ORDER THAT NTL HAS FAILED TO FULFILL THE RPT FILTER CONDITIONS . IN VIEW OF THIS MATTER WE DO NOT FIND ANY INFIRMITY IN THE FINDINGS OF THE CIT (A) IN HOLDING THAT THE AFORESAID COMPANY SHOULD BE CONSIDERED AS COMPA RABLE FOR THE PURPOSE OF DETERMINING THE ALP AND ACCORDINGLY WE C ONFIRM HIS DIRECTIONS ON THIS ISSUE. HENCE THE GROUNDS RAISE D BY THE REVENUE ARE REJECTED. 46. IN THE RESULT APPEAL BY THE ASSESSEE IS ALLOW ED IN PART AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 22-7-2011. SD/- SD/- (G.C. GUPTA) (AKBER BASHA) VICE PRESIDENT. AC COUNTANT MEMBER. DT/-22 -07-2011. ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 46 COPY FORWARDED TO: 1. M/S. DELOITE CONSULTING INDIA PVT. LTD. RM2 FUTURA BLOCK A 4 TH FLOOR PLOT NO.14 AND 15 ROAD NO.2 HITECH CITY LAYOUT MADHAPUR HYDERABAD. 2. 3. 4 5. JMR* ACIT CIR - 1(2) 4 TH FL OOR AAYAKAR BHAVAN HYDERABAD. CIT (A)-III HYDERABAD. CIT AP HYDERABAD. THE DR ITAT HYDERABAD. ITA NOS.1082 & 108 4 OF 2010 M/S. DELOITTEE CONSULTIN G INDIA PVT. LTD. ========================= 47