Pentair Water (I) P. Ltd, Goa v. Addl. Comm. Of Income Tax., Goa

ITA 2/PAN/2013 | 2006-2007
Pronouncement Date: 17-04-2014 | Result: Allowed

Appeal Details

RSA Number 224114 RSA 2013
Assessee PAN AABCS8856L
Bench Panaji
Appeal Number ITA 2/PAN/2013
Duration Of Justice 1 year(s) 3 month(s) 9 day(s)
Appellant Pentair Water (I) P. Ltd, Goa
Respondent Addl. Comm. Of Income Tax., Goa
Appeal Type Income Tax Appeal
Pronouncement Date 17-04-2014
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted DB
Tribunal Order Date 17-04-2014
Date Of Final Hearing 20-03-2014
Next Hearing Date 20-03-2014
Assessment Year 2006-2007
Appeal Filed On 08-01-2013
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH PANAJI BEFORE SHRI P.K. BANSAL HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA HONBLE JUDICIAL MEMBER ITA NO. 02/PNJ/2013 : (ASST. YEAR : 2006 - 07) M/S. PENTAIR WATER INDIA PVT. LTD. L - 55 VERNA INDUSTRIAL ESTATE VERNA SALCETTE GOA 403 722. PAN : AABCS8856L (APPELLANT) VS. ADDL. COMMISSIONER OF INCOME TAX MARGAO RANGE MARGAO GOA (RESPONDENT) ITA NO. 05 /PNJ/2013 : (ASST. YEAR : 2006 - 07) ASST. COMMISSIONER OF INCOME TAX CIRCLE - 1 MARGAO (APPELLANT) VS. M/S. PENTAIR WATER INDIA PVT. LTD. L - 52/55 VERNA INDUSTRIAL ESTATE VERNA SALCETTE GOA 403 722. PAN : AABCS8856L (RESPONDENT) ASSESSEE BY : RAKESH AGRAWAL CA REVENUE BY : ASHA DESAI LD. DR DATE OF HEARING : 20/03/2014 DATE OF PRONOUNCEMENT : 17 /04/2014 O R D E R PER P.K. BANSAL 1. THESE CROSS - APPEALS HAVE BEEN FILED AGAINST THE ORDERS OF CIT(A) - IV BENGALURU DT. 30.11.2012 FOR A.Y 2006 - 07. 2. THE ASSESSEE IN HIS APPEAL FOR A.Y 2006 - 07 HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL : 1. THE LD. CIT(APPEALS) IV BANGALORE ERRED IN LAW AND ON FACTS WHILE CONFIRMING THE FOLLOWING DISALLOWANCE : S.N. DISALLOWANCE/ADDITION AMOUNT 1. TP ADJUSTMENT ON I T ENABLED ENGINEERING SERVICES RENDERED BY APPELLANT TO ITS AES 65 01 783/ - 2 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) 2. THE LD. CIT(A) ERRED IN OVERLOOKING/SUMMARILY REJECTING THE DETAILED SUBMISSIONS MADE BY THE APPELLANT ON THE ISSUE OF PROFITABILITY OF ITS CDR UNIT AND ON THE ISSUE OF THE WRONG COMPARISON MADE BY TPO IN HIS ASSESSMENT ORDER. 3. THE LD. CIT(A) ERRED IN NOT CONSIDERING THE ADJUSTMENT IN THE OPERATING MARGIN OF CDR UNIT AS HAS BEEN ASKED FOR BY APPELLANT IN RELATION TO I N - HOUSE WORK PERFORMED BY CDR UNIT OF THE COMPANY FOR ITS MANUFACTURING PLANT AT GOA AND THEREBY DISREGARDING REVENUE TO THE EXTENT OF RS.24 11 233/ - . WHILE THE REVENUE HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL : 1. IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN ALLOWING MARKETING COST ADJUSTMENT OF 10.96% TO THE COMPARABLE UNCONTROLLED PRICE IGNORING THE FACT THAT VOLUME DISCOUNT ADJUSTMENT MADE BY THE TPO HAS ALREADY FACTORED IN THIS ADJUSTMENT. 3 . THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN MANUFACTURE OF FIBRE GLASS PRESSURE VESSEL USED FOR WATER TREATMENT. RETURN SHOWING INCOME OF RS.4 37 44 500/ - WAS FILED ON 29.11.2006. THE AO MADE REFERENCE TO JOINT DIRECTO R OF INCOME TAX (TRANSFER PRICING) BENGALURU FOR DETERMINATION OF THE ARMS PRICE LENGTH IN RESPECT OF THE ASSESSEES TRANSACTION WITH ASSOCIATED ENTERPRISES. TPO PASSED ORDER U/S 92CA ON 30.10.2009 SUGGESTING TRANSFER PRICE ADJUSTMENT OF RS.4 05 98 402/ - . THE AO ADDED THE SAID AMOUNT IN THE ORDER PASSED U/S 143(3). BESIDES THIS THE AO ALSO DISALLOWED DEPRECIATION ON THE GOODWILL AMOUNTING TO RS.23 22 748/ - . THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A) AND CIT(A) CONFIRMED THE ADDITION. BOTH THE PAR TIES HAVE COME IN APPEAL BEFORE US. 4 . THE ONLY ISSUE INVOLVED IN THE GROUND NOS. 1 TO 3 TAKEN BY THE ASSESSEE IN A.Y 2006 - 07 RELATE TO THE COMMON ISSUE RELATING TO ADJUSTMENT IN THE OPERATING MARGIN OF CDR UNIT AND THEREBY MAKING ADDITION THEREIN TO THE EXTENT OF RS.65 01 783/ - BY THE AO WHICH WAS BY TAKING AVERAGE OPERATING MARGIN @ 3 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) 23.72% WHILE THE CIT(A) DIRECTED THE AO TO TAKE THIS MARGIN @ 20.72 % AND CONFIRMED THE ADDITION. 4 .1 THE LD. AR BEFORE US CONTENDED THAT THE ASSESSEE IS AN INDUSTRIAL PRODUC T MANUFACTURER AND DERIVES 98% OF ITS REVENUE FROM MANUFACTURING OPERATIONS. IT HAS SET UP A DIVISION IN THE YEAR 1998 - 99 FOR PROVIDING IN - HOUSE SUPPORT ENGINEERING SERVICES IN THE FIELD OF PRODUCT QUALITY ASSURANCE DESIGNING AND PRODUCT DEVELOPMENT. TH E SAID DIVISION IS INTERNALLY NAMED AS CDR DIVISION. FROM THIS DIVISION THE ASSESSEE HAS GENERATED REVENUE FROM EXPORT SERVICES AMOUNTING TO RS. 4 96 68 848 / - . THIS DIVISION WAS ALSO RENDERING SERVICES TO THE OTHER DIVISIONS OF THE ASSESSEE IN INDIA. TH E TOTAL OPERATING COSTS INCURRED BY THE ASSESSEE WAS TO THE EXTENT OF RS. 4 57 71 374 / - WHICH HAS NOT BEEN DISPUTED BY THE TPO. FOR THIS OUR ATTENTION WAS DRAWN TOWARDS THE ORDER THE TPO AND IT WAS CONTENDED THAT WHILE COMPUTING THE OPERATING MARGIN THE AO HAS COMPUTED THE OPERATING PROFIT ONLY IN RESPECT OF THE SAID ACTIVITIES BY REDUCING FROM THE REVENUE RECEIVED FROM SUPPORT SERVICES THE OPERATING MARGIN @ 8. 51 % WHILE IN FACT IF THE NOTIONAL REVENUE WAS WORKED OUT IN RESPECT OF THE SERVICES RENDERED T O THE ASSESSEES GOA PLANT AT THE SAME RATE AT WHICH SERVICES WERE RENDERED TO THE AE ABROAD THE OPERATING PROFIT WOULD HAVE COME @ 14.12 %. IT WAS CONTENDED THAT ON AN AVERAGE THE REVENUE HAS BEEN RECEIVED FROM THE AE ABROAD @ RS. 52 7 / - AS THE CDR UNIT HAS SPENT 94 249 HRS. WHILE TO THE GOA UNIT THE SERVICES WERE RENDERED FOR 4 870 HRS. IF THE SAID 4 870 HRS. ARE TAKEN INTO CONSIDERATION THE REVENUE FROM THE ENTIRE DIVISION WOULD HAVE BEEN RS. 25 66 471 / - . IT WAS CONTENDED THAT T HE TPO HAS CALCULATED THE MARGIN @ 23.72% WHILE THE CIT(A) HAS CALCULATED THE MARGIN @ 20.72%. IT WAS CONTENDED THAT THE ASSESSEE HAS APPLIED T N MM METHOD FOR DETERMINING THE ALP AND SELECTED 6 COMPARABLE COMPANIES OF WHICH THE AVERAGE OPERATING 4 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) PROFIT T O OPERATING EXPENSES RATIO WAS 9.08%. THE LIST OF THE COMPARABLE COMPANIES IS GIVEN AS UNDER : S.NO. NAME OF THE COMPANY TURNOVER (RS.) PROFIT FROM OPERATIONS (RS) OPERATING MARGIN TO SALES (%) 1 ACF SOFTWARE EXPORTS LTD. 54 982 366 3 393 105 6.17 2 APEX ADVANCED TECHNOLOGY P. LTD. 48 963 534 7 906 382 16.15 3 APEX KNOWLEDGE SOLUTIONS P. LTD. 49 216 221 7 149 832 14.53 4 CS SOFTWARE 115 678 198 15 690 366 13.56 5 VAMA INDUSTRIES LTD. 70 968 208 8 035 310 11.32 6 VJIL CONSULTING LTD. 153 813 632 2 638 204 1.72 ARITHMETIC MEAN 9.08 TPO REJECTED THE SELECTION OF THE ASSESSEE BUT HE HAS SELECTED A DIFFERENT SET OF COMPARABLES OF 14 COMPANIES AND WORKED OUT THE OPERATING MARGIN @ 23.72% THE DETAILS OF WHICH ARE AS UNDER : S.NO. NAME OF THE COMPANY TURNOVER (INR IN CRS) OPERATING MARGIN ON COST 1 MAPLE ESOLUTIONS LTD. 7.43 32.66% 2 ALLSEC TECHNOLOGIES LIMITED 92.25 28.51% 3 DATAMATICS FINANCIAL SERVICES LTD (SEG.) 2.31 24.99% 4 TRANSWORKS INFORMATION SERVICES LTD 163.30 19.56% 5 COSMIC GLOBAL LTD (SEG.) 3.11 16.03% 6 VISHAL INFORMATION TECHNOLOGIES LIMITED 25.64 48.03% 7 ASIT C MEHTA FINANCIAL SERVICES LIMITED 5.68 34.52% 8 GOLDSTONE INFRATECH LIMITED (SEG.) 5.03 29.01% 9 SPANCO LIMITED (SEG.) 82.32 20.86% 10 ACE SOFTWARE EXPORTS LIMITED 4.97 7.72% 11 APEX KNOWLEDGE SOLUTIONS PRIVATE LIMITED 4.92 20.48% 12 R SYSTEMS INTERNATIONAL LIMITED (SEG.) 9.17 15.11% 13 FLEXTRONICS SOFTWARE SYSTEMS LIMITED (SEG.) 21.41 14.54% 14 APEX ADVANCED TECHNOLOGY PRIVATE LIMITED 4.89 20.09% ARITHMETIC MEAN 23.72% THE ASSESSEE OBJECTED TO THE SELECTION OF THE COMPARABLE COMPANIES BY THE TPO AND THE CALCULATION OF THE REVENUE FOR CDR UNIT. THE ASSESSEE HAS PLEADED FOR EXCLUSION OF 5 COMPANIES OUT OF THE LIST OF 14 COMPANIES SELECTED BY THE TPO 5 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) BUT CIT(A) DID NOT DEAL WITH THE SAME. THE LD. AR HAS GIVEN THE FOLLOWING GIST OF ASSESSEES OBJECTIONS AND DECISION OF CIT(A) IN HIS WRITTEN SUBMISSION : SL. NO. COMPANY NAME REASONS FOR EXCLUSION 1 MAPLE ESOLUTIONS LTD. THE MANAGEMENT OF THIS COMPANY IS TAINTED. HELD BY HON'BLE DELHI ITAT IN THE CASE OF ACIT VS M/S. CRM SERVICES INDIA P. LTD. 14 TAXMANN.COM 96. THE RATIO OF OPERATING MARGIN TO COST IS 33.66 %. THE CIT(A) HAS AGREED TO EXCLUDE THIS COMPANY IN THE CASE OF APPELLANT FOR AY 2005 - 06. 2 VISHAL INFORMATION TECHNOLOGIES LIMITED THE BUSINESS EXECUTION MODEL OF VISHAL INFORMATION IS DIFFERENT FROM THAT OF THE APPELLANT COMPANY. THE FORMER GETS THE WORK DONE BY OUTSOURCING TO OTHERS WHILE THE APPELLANT DOES IT ITSELF. HELD BY HON'BLE MUMBAI ITAT IN THE CASE OF ACIT VS. M/S. MAERSK GLOBAL SERVICE CENTRE INDIA PVT. LTD. 16 TAXMANN.COM 47. IT IS IMPORTANT TO NOTE THAT THE TPO HAS REJECTED A SELECTION OF ASSESSEE ON THE GROUND THAT THE SELECTED COMPANY DOES ONSITE SERVICE WHEREAS THE ASSESSEE DOES OFFSITE SERVICES. ON THE ANALOGY OF ONSITE REVENUE FILTER THE TPO SHOULD HAVE APPLIED OUTSOURCING EXECUTION FILTER. THE SELECTED COMPANY REPORTED AN OPERATING MARGIN OF 48.03% WHICH IS VERY HIGH FROM THE INDUSTRY AVERAGE OF 23% (AS DETERMINED BY TPO). WHILE DISPOSING THE APPEAL FOR AY 2007 - 08 IN THE CASE OF THE APPELLANT ITSELF THE LD. CIT(A) AGREED TO ALLOW RELIED BY DELETING VISHAL INFO ON THE GR OUND OF SUPER PROFIT EARNING COMPANY. THAT YEAR THE OPERATING MARGIN OF VISHAL INFO WAS 51.19% AND IN AY 2006 - 07 THE MARGIN WAS 48.03%. HENCE FOLLOWING THE SAME ANALOGY IT SHOULD BE EXCLUDED. 6 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) 3 ASIT C MEHTA FINANCIAL SERVICES LIMITED THIS COMPANY BELO NGS TO A GROUP CALLED ASIT C. MEHTA WHO IS A SHARE BROKER AND ITS PRIMARY BUSINESS IS STOCK MARKET RELATED ACTIVITIES LIKE RENDERING SERVICES OF REGISTRAR TO SHARE ISSUE ETC. THIS COMPANY OF THE GROUP DOES NOT EVEN HAVE A STANDALONE WEBSITE. IN THIS BACK DROP WHETHER THE COMPARISON HAS BEEN RIGHTLY DONE BY TPO? THE RATIO OF OPERATING MARGIN TO COST IS 34.52%. 4 GOLDSTONE INFRATECH LIMITED (SEG.) IT IS PRIMARILY A POLYMER INSULATION MANUFACTURING COMPANY. IT BPO SEGMENT WORKED ONLY TILL 2007 AS SUCH NOT A CONSISTENT PLAYER IN ITES/BPO SEGMENT. DURING THE YEAR 2006 ITS REVENUE FROM BPO SEGMENT WAS RS.5.03 CRORE OUT OF THAT RS.30.89 LACS WAS FRO M EXPORTS. AS SUCH IT DOES NOT SATISFY THE EXPORT TURNOVER FILTER OF 25% APPLIED BY TPO IN HIS SELECTION. THE RATIO OF OPERATING MARGIN TO COST IS 29.01%. IT DOESNT FULFIL THE EXPORT TURNOVER FILTER AS ITS EXPORT TURNOVER WAS 13.75% OF ITS TOTAL REVENUE (4.25 CRORE (EXPORTS)/30.89 CRORE (TURNOVER) 5 FLEXTRONICS SOFTWARE SYSTEMS LIMITED (SEG.) THE ANNUAL ACCOUNTS OF THE COMPANY WERE FOR 15 MONTHS 01.04.20 05 TO 30.06.2006. AS SUCH DIFFERENCE IN THE PERIOD OF REPORTING AND ON APPLICATION OF FINANCIAL YEAR FILTER THIS COMPANY SHOULD BE EXCLUDED. THE SCHEDULE I TO P&L A/C DOES NOT STATE ANY RECEIPT FROM BPO SERVICES. RATHER IT TALKS ABOUT MAJORLY INCOME FR OM SOFTWARE BUT THE SEGMENT REPORTING STATEMENT ATTACHED WITH ANNUAL ACCOUNTS SHOW INCOME FROM BPO SERVICES. THERE IS AN APPARENT CONTRADICTION IN THE REPORTING OF ANNUAL ACCOUNTS HENCE THIS COMPANY SHOULD BE IGNORED. THE RATIO OF OPERATING MARGIN TO CO ST IS 14.54%. THE DAT A OF THE COMPANY WAS PROCURED BY TPO THROUGH NOTICE U/S. 133(6) OF THE ACT AND ASSESSEE WAS NOT GIVEN A COPY OF THE FINANCIALS. 7 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) IN RESPECT OF GOLDSTONE INFRATECH LTD. (SEZ) IT WAS CONTENDED THAT THIS COMPANY DOES NOT SATISFY ITES SEGMENT FILTER OF 75% AND OF EXPORT TURNOVER FILTER OF 25% APPLIED BY THE TPO IN HIS SELECTION. THIS COMPANY SHOULD BE DELETED AS IT HAS BEEN SELECTED ON THE BASIS OF THE SEGMENT AS PROF ITABILITY OF THE SEGMENT CANNOT BE CALCULATED ACCURATELY IN VIEW OF THE ELEMENT OF THE UNALLOCATED EXPENSES. RELIANCE WAS PLACED IN THIS REGARD ON THE DECISION OF ITAT IN THE CASE OF DHL EXPRESS VS. ACIT (2011) 46 - SOT - 379 (BOM) WHEREIN IT WAS HELD THAT WH EN DIRECT COMPARABLES ARE AVAILABLE THERE IS NO NEED TO CONSIDER SEGMENT RESULTS OF ANY OTHER COMPANY. SIMILARLY IN RESPECT OF FLEXTRONICS SOFTWARE SYSTEMS LTD. IT WAS FURTHER SUBMITTED THAT THIS COMPANY ALSO DOES NOT QUALIFY ITES FILTER OF 75%. THIS FILTER IS NOT MENTIONED IN THE BODY OF THE TP ORDER BUT HE MADE MENTION OF APPLICATION OF THIS FILTER AT PG. 29 OF THE ORDER. THE TPO HAD ALSO MENTIONED APPLICATION OF THIS FILTER IN THE NOTICE ISSUED T O THE ASSESSEE AT PG. 7 DT. 10.8.2009. AGAIN FOR TH IS RELIANCE WAS PLACED ON THE DECISION OF DHL EXPRESS VS. ACIT 46 - SOT - 379 ( SUPRA ). FURTHER IT WAS SUBMITTED THAT THE ADJUSTMENT SHOULD BE GIVEN FOR THE DEPRECIATION ANOMALY ARISING OUT OF THE DIFFERENCE IN THE DEPRECIATION RATES ON COMPUTER HARDWARE AND SOFTWARE CHARGED BY THE RESPECTIVE COMPARABLE COMPANIES (AS WAS SELECTED BY THE TPO/CIT(A) FOR MAKING COMPARISON TO DETERMINE THE ALP ) VIS - - VIS THE RATES CHARGED BY THE ASSESSEE FOR ITS CDR UNIT. IT WAS CONTENDED THAT THE CASH PLI BE CONSIDERED FOR DETE RMINING THE CORRECT AND FAIR CALCULATION OF ALP. THE FUNDAMENTAL PRINCIPLES OF COMPARABILITY ANALYSIS IS TO COMPARE LIKE WITH LIKE. SINCE DIFFERENT COMPANIES ARE CHARGING DIFFERENT POLICIES FOR DEPRECIATION ACCOUNTING THIS LEADS TO LARGER DIFFERENCES IN THE YEAR TO YEAR OPERATING MARGIN OF THE COMPANIES. THE ICAI GUIDANCE NOTE ON TP ALSO RECOGNISES THAT THE ACCOUNTING TREATMENT OF EXPENSES AND DEPRECIATION IS A CRITICAL FACTOR IN COMPUTING ALP. THE RELIABILITY OF THE OPERATING MARGIN OF COMPARABLE COMP ANIES IS SEVERELY AFFECTED IF THERE ARE PROBLEMS IN THE APPLICATION OF UNIFORM DEPRECIATION POLICY. RELIANCE WAS 8 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) PLACED ON FOLLOWING CASE LAWS FOR ADOPTING CASH PLI/ADJUSTING OF THE RATE OF DEPRE CIATION FOR DETERMINING THE ALP. 1. DCIT VS. REUTERS INDIA (2013) 24 ITR (T) 231 (MUMBAI) 2. BA CONTINUUM INDIA VS. ACIT (2013) 40 TAXMANN.COM 311 (HYDERABAD) 3. SCHEFENACKER MOTHERSON LTD. VS. ITO [2009] 123 TTJ 509 (DELHI) 4. AMDOCS BUSINESS SERVICES VS. DCIT (2012) 54 SOT 46 (PUNE) OUR ATTENTION WAS DRAWN TOWA RDS THE CHART TABULATING THE ACCOUNTING POLICY RELATING TO THE DEPRECIATION AS ADOPTED BY THE VARIOUS COMPANIES TO PROVE THAT THERE ARE DIVERGENT/MIX POLICY OF CHARGING DEPRECIATION FOLLOWED BY VARIOUS COMPANIES. IT WAS ALSO CONTENDED THAT IF THESE 5 COMP ANIES ARE EXCLUDED FROM THE COMPARABLES AND ONLY THE CASH PLI IS CONSIDERED THE ARITHMETIC MEAN OF THE MARGIN IN RESPECT OF CASH PLI FOR THE BALANCE 9 COMPANIES WILL BE 26.78% AND THE OPERATING MARGIN OF THE CDR UNIT EXCLUDING THE DEPRECIATION WILL COME T O 22.45%. IN THIS REGARD FOLLOWING CHARTS WERE FILED BEFORE US : SL. NO. COMPANY NAME TURNOVER (INR IN CRS) CASH PLI: OP/OC (NET OF DEPRECIATION) CASH PLI: AFTER REMOVING SUPER PROFIT COMPANIES 1 MAPLE ESOLUTIONS LTD. 7.43 54.15% 2 ALLSEC TECHNOLOGIES LIMITED 92.25 43.04% 43.04% 3 DATAMATICS FINANCIAL SERVICES LTD (SEG.) 2.31 24.99% 24.99% 4 TRANSWORKS INFORMATION SERVICES LTD 163.3 32.56% 32.56% 5 COSMIC GLOBAL LTD (SEG.) 3.11 21.48% 21.48% 6 VISHAL INFORMATION TECHNOLOGIES LTD 25.64 53.62% 7 ASIT C MEHTA FINANCIAL SERVICES L T D (EARLIER KNOWN AS NUCLEUS NETSOFT & GIS (INDIA) LTD) 5.68 128.11% 8 GOLDSTONE INFRATECH LIMITED (SEG.) (EARLIER KNOWN AS GOLDSTONE TELESERVICES LTD) 5.03 28.97% 9 SPANCO LTD (SEG.) (EARLIER KNOWN AS SPANCO TELESYSTEMS & SOLUTIONS LTD.) 82.32 20.86% 20.86% 10 ACE SOFTWARE EXPORTS LTD. 4.97 24.87% 24.87% 11 APEX KNOWLEDGE SOLUTIONS PVT. LTD. 4.92 29.82% 29.82% 12 R SYSTEMS INTERNATIONAL LTD. (SEG.) 9.17 15.11% 15.11% 13 FLEXTRONICS SOFTWARE SYSTEMS LTD. ( SEG.) 21.41 14.54% 14 APEX ADVANCED TECHNOLOGY PVT. L TD 4.89 28.27% 28.27% ARITHMETIC MEAN 37.17% 26.78% 9 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) PARTICULARS TOTAL REVENUE FROM CDR OPERATIONS 49 668 848 NOTIONAL REVENUE 2 566 471 TOTAL 52 235 319 TOTAL OPERATING COST 45 771 374 LESS : DEPRECIATION PROVIDED 3 114 059 ADJUSTED OPERATING COST 42 657 315 OPERATING PROFITS 9 578 003 NET OPERATING PROFIT/OPERATING COST 22.45% 4 .2 THE LD. DR RELIED ON THE ORDER OF THE TPO. 4 .3 WE HAVE HEARD THE RIVAL SUBMISSIONS PERUSED THE MATERIAL ON RECORD ALONGWITH THE ORDER OF THE TAX AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE VARIOUS CASE LAWS AS HAS BEEN RELIED ON. WE NOTED THAT IN THIS CASE THE TPO HAS COMPUTED THE PROFIT MARGIN OF THE CDR UNIT WHICH WAS RENDERING THE SERVICES NOT ONLY TO THE ASSOCIATED CONCERNS OUTSIDE INDIA BUT ALSO TO THE OTHER UNITS OF THE ASSESSEE COMPANY BY TAKING THE REVENUE RECEIVED FROM THE EXPORT OF SERVICES TO THE ASSOCIATED CONCERNS AND WITHOUT TAKI NG ANY REVENUE INTO CONSIDERATION IN RESPECT OF THE SERVICES RENDERED BY THE CDR UNIT OF THE ASSESSEE TO THE OTHER UNIT IN GOA. WE ALSO NOTED THAT THE TPO HAS CONSIDERED THE TOTAL OPERATING COSTS OF THE CDR UNIT WHICH HAS BEEN INCURRED BY THE UNIT NOT ONL Y IN RESPECT OF SERVICES RENDERED TO THE ASSOCIATED CONCERNS OUTSIDE INDIA BUT ALSO IN RESPECT OF SERVICES RENDERED TO THE UNIT IN INDIA AND ON THAT BASIS THE OPERATING PROFIT WAS WORKED OUT IN THE FOLLOWING MANNER : S.NO. PARTICULARS AMOUNT IN INR 1. REVENUE FROM EXPORT OF SERVICES 4 96 68 847 2. OPERATING COST 4 57 71 374 3. OPERATING PROFIT 38 97 473 4. OPERATING MARGIN (OP/OC) 8.51% IT IS NOT DENIED IN THIS CASE THAT THE CDR UNIT WAS RENDERING SERVICES NOT ONLY TO THE ASSOCIATED ENTERPRISES OUTSIDE INDIA BUT ALSO WAS RENDERING SERVICES TO THE OTHER DIVISIONS OF THE ASSESSEE COMPANY. NO NOMINAL VALUE HAS BEEN ASSIGNED IN RESPECT OF TH E SERVICES RENDERED BY THE CDR UNIT TO THE INDIAN DIVISION. THE CDR UNIT HAS RENDERED SERVICES TO THE AE UNITS ABROAD FOR 94249 HRS. WHILE IN 10 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) RESPECT OF GOA PLANT SERVICES WAS RENDERED FOR 4870 HRS. THE AVERAGE REVENUE RECEIVED BY THE CDR UNIT FROM THE ASSOCIATED ENTERPRISES ABROAD COMES TO RS.527/HOUR. WHEN THE TOTAL REVENUE RECEIVED FROM THE ASSOCIATED ENTERPRISES ABROAD IS RS.4 96 68 848/ - IF WE APPLY THE SAME RATE IN RESPECT OF THE SERVICES RENDERED TO GOA PLANT THE NOMINAL REVENUE WHICH SHOULD HA VE BEEN CREDITED TO CDR UNIT AND DEBITED TO THE GOA PLANT COMES TO RS.25 66 471/ - . IN OUR OPINION WHILE COMPUTING THE TRUE PROFIT OF A PARTICULAR DIVISION IT IS NECESSARY THAT THE VALUE SHOULD BE ASSIGNED IN RESPECT OF SERVICES RECEIVED BY THE OTHER UNI T AND IT SHOULD BE TAKEN AS PART OF THE REVENUE OF THAT PARTICULAR UNIT. IN THIS CASE WE NOTED THAT THE TPO HAS TAKEN THE TOTAL OPERATING COST OF THE CDR UNIT WHICH CONSISTS OF THE COST NOT ONLY IN RESPECT OF THE SERVICES RENDERED TO THE ASSOCIATED ENTER PRISES BUT ALSO IN RESPECT OF THE SERVICES RENDERED TO THE GOA PLANT BY THE CDR UNIT. SINCE THE TOTAL COST OF THE CDR UNIT HAS BEEN TAKEN THEREFORE THE NOTIONAL REVENUE IN RESPECT OF GOA PLANT SHOULD ALSO BE CONSIDERED WHILE COMPUTING THE NET OPERATING PROFIT. IF THE NOTIONAL REVENUE FOR RENDERING SERVICES TO THE GOA PLANT IS TAKEN INTO ACCOUNT WE NOTED THAT THE OPERATING PROFIT ON THE BASIS OF THE FORMULA ADOPTED BY THE TPO FROM THE CDR UNIT WILL WORK OUT AS UNDER : BEFORE CONSIDERING IN HOUSE SERVIC E TO GOA PLANT AFTER CONSIDERING IN HOUSE SERVICE TO GOA PLANT PARTICULARS HOURS AVERAGE PER HOUR RATE INR ASSESSEE ASSESSEE REVENUE FROM RENDERING OF ENGINEERING SUPPORT SERVICES TO AES ABROAD 94 249 527 49 668 848 49 668 848 NOTIONAL REVENUE FOR RENDERING SERVICES TO GOA PLANT 4 870 527 2 566 471 TOTAL 99 119 49 668 848 52 235 319 TOTAL OPERATING COST 45 771 374 45 771 374 OPERATING PROFITS 3 897 474 6 463 945 NET OPERATING PROFIT/ TURNOVER 7 . 85 % 12 . 37 % 11 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) THUS THE CORRECT OPERATING PROFIT IN THE CASE OF THE ASSESSEE FROM CDR UNIT IN OUR OPINION WILL BE 12.37%. THIS OPERATING PROFIT RATIO IS BASED ON THE PROFIT WHICH HAS BEEN COMPUTED AFTER CHARGING DEPRECIATION. WE NOTED THAT THERE IS NO DISPUTE SO FAR METHOD OF DETERMINING THE ALP IS CONCERNED. THE ASSESSEE AS WELL AS THE TPO BOTH APPLIED THE TNMM METHOD TO BE THE MOST APPROPRIATE METHOD. THE ASSESSEE IN THIS CASE HAS SELECTED 6 COMPARABLE COMPANIES AND HAS CALCULATED THE OPERATING PROFIT OF THESE CO MPANIES @ 9.08% BUT THE TPO DID NOT AGREE WITH THE ASSESSEE AND HAS TAKEN 14 COMPARABLE INSTANCES ON THE BASIS OF WHICH THE ARITHMETIC MEAN OF THE OPERATING PROFIT HAS BEEN CALCULATED AT THE RATE OF 23.72%. SO FAR THE SELECTION OF THE 9 COMPARABLE COMPANI ES BY THE TPO IS CONCERNED THE ASSESSEE DID NOT HAVE ANY OBJECTION. THE ASSESSEE HAS OBJECTION IN RESPECT OF THE SELECTION OF 5 COMPANIES VIZ. MAPLE ESOLUTIONS LTD. VISHAL INFORMATION TECHNOLOGIES LTD. ASIT C. MEHTA FINANCIAL SERVICES LTD. GOLDSTONE I NFRATECH LTD. AND FLEXTRONICS SOFTWARE SYSTEMS LTD. SELECTION OF EACH COMPARABLE WILL BE DISCUSSED BY US SEPARATELY. THE COMMON CONTENTION IN RESPECT OF COMPUTATION OF TNMM I.E. OPERATING PROFIT TAKEN BY THE LD. AR IN RESPECT OF THE COMPARABLES IS THAT WHILE COMPUTING THE PROFIT RATIO PROFIT PRIOR TO DEPRECIATION SHOULD BE COMPUTED AS IT WILL GIVE TRUE AND FAIR PROFIT RATIO WITHOUT BEING AFFECTED BY THE DEPRECIATION CHARGED BY EACH OF THE COMPANIES. WE NOTED THAT DIFFERENT COMPANIES HAVE ADOPTED DIFFE RENT METHOD OF DEPRECIATION. IN FACT FOR CHARGING DEPRECIATION TO THE PROFIT & LOSS ACCOUNT THERE ARE DIFFERENT PREVALENT RECOGNIZED METHODS OF DEPRECIATION. SOME ASSESSEE OPT FOR STRAIGHT LINE METHOD SOME OPT FOR WRITTEN DOWN METHOD AND SOME OPT FOR S U M OF DIGIT METHOD OR EVEN REPLACEMENT COST METHOD. SELECTION OF EACH METHOD WILL AFFECT THE RATE AND QUANTUM OF DEPRECIATION EVEN IF THE NATURE OF THE ASSET IS THE SAME AND ULTIMATELY THE NET PROFIT DERIVED BY THE COMPANY WILL VARY. FOR DETERMINING THE 12 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) FAIR AND TRUE PROFIT IN OUR OPINION IT IS APPROPRIATE THAT THE EFFECT OF THE DEPRECIATION MUST BE EXCLUDED OUT OF THE OPERATING PROFIT FOR DETERMINING THE OPERATING PROFIT RATIO. THEREFORE THE BEST WAY OF COMPUTING THE OPERATING PROFIT IN OUR OPINION WILL BE TO COMPUTE THE PROFIT BEFORE DEPRECIATION IN RESPECT OF EACH OF THE COMPANY. THIS WILL TAKE OUT THE INCONFORMITY OR THE VARIATION IN THE PROFIT LEVEL OF THE COMPARABLES ARISING DUE TO ADOPTION OF DIFFERENT METHOD OF CHARGING DEPRECIATION. WE HA VE GONE THROUGH THE ORDER OF THE BOMBAY BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. REUTERS INDIA 24 ITR (TRIB ) 231 (MUM) AS HAS BEEN RELIED ON BY THE LD. AR. WE NOTED THAT THE TRIBUNAL IN THIS CASE HAS ADOPTED THE CASH PROFIT/OPERATING COST AS THE CORRECT PROFIT LEVEL INDICATOR UNDER THE TNMM METHOD. IF THE NET OPERATING PROFIT RATIO IS COMPUTED IN RESPECT OF T HE CDR UNIT BEFORE DEPRECIATION IT WILL BE AS UNDER : PARTICULARS TOTAL REVENUE FROM CDR OPERATIONS 49 668 848 NOTIONAL REVENUE 2 566 471 TOTAL 52 235 319 TOTAL OPERATING COST 45 771 374 LESS : DEPRECIATION PROVIDED 3 114 059 ADJUSTED OPERATING COST 42 657 315 OPERATING PROFITS 9 578 003 NET OPERATING PROFIT/OPERATING COST 22.45% 4 .3.1 NOW WE WILL DEAL WITH EACH OF THE COMPANIES WHICH THE ASSESSEE CLAIMS TO BE EXCLUDED FROM THE COMPARABLES : I) MAPLE ESOLUTIONS LTD. : - TPO HAS CONSIDERED MAPLE ESOLUTIONS LTD. AS A COMPARABLE AND COMPUTED THE MARGIN IN RESPECT OF THIS COMPANY @ 33.66%. WE NOTED THAT THE HON'BLE DELHI TRIBUNAL IN THE CASE OF ACIT VS. CRM SERVICES INDIA PVT. LTD. 14 TAXMANN.COM 96 HAS HELD THAT THIS COM PANY COULD NOT BE SELECTED AS COMPARABLE FOR ITES COMPANIES AS THE MANAGEMENT OF THIS COMPANY WAS TAINTED ONE AS THE DIRECTORS OF THE COMPANY WERE INVOLVED IN A FRAUD. THE BUSINESS REPUTATION OF THE 13 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) RASTOGI GROUP WHICH OWNS MAPLE ESOLUTIONS WAS IN SERIOUS INDICTMENT. IN VIEW OF THE QUESTION MARK O N THE REPUTATION OF ITS OWNERS ALBEIT FOR EARLIER YEARS IT WOULD BE UNSAFE TO TAKE THEIR RESULTS FOR COMPARISON OF PROFITABILITY OF THE ASSESSEE. IN A.Y 2006 - 07 WE NOTED THAT THE PROFIT MARGIN HAS BEEN TAKEN B Y THE TPO AT 28.75%. WHEN THE ASSESSEE WENT IN APPEAL BEFORE CIT(A) CIT(A) HAS EXCLUDED THIS COMPANY FOR THE PURPOSE OF COMPARISON. NO COGENT MATERIAL OR EVIDENCE WAS BROUGHT TO OUR KNOWLEDGE BY THE LD. DR HOW THIS COMPANY IS NOT TAINTED ONE. THE DECISION OF THE CO - ORDINATE BENCH IS BINDING ON US. WE THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH EXCLUDE THIS COMPANY FROM THE COMPARABLES. II) VISHAL INFORMATION TECHNOLOGIES LTD. : - WE NOTED THAT THE APPELLATE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. MAERSK GLOBAL SERVICE CENTER (INDIA) P. LTD. 12 TAXMANN.COM 33 (BOM) HAS OBSERVED THAT VISHAL INFORMATION TECHNOLOGIES LTD. HAD OUTSOURCED A CONSIDERABLE PORTION OF THEIR BUSINESS AND THE ASSESSEE HAD CARRIED OUT THE ENTIRE OPERATIONS BY ITSELF AND THEREFORE TH IS CASE IS RIGHTLY EXCLUDED. FOR THE PURPOSE OF COMPARISON IN OUR OPINION NOT ONLY THE BUSINESS MODEL OF THE COMPANIES SHOULD BE SIMILAR BUT THE BUSINESS EXECUTION MODEL S HOULD ALSO HAVE SIMILARITY. THE ASSESSEE IS GETTING THE WORK DONE ITSELF WHILE IN THE CASE OF VISHAL INFORMATION TECHNOLOGIES LTD. THE WORK IS BEING DONE THROUGH OUTSOURCING. ON - SITE SERVICE IS DIFFERENT FROM OFF - SITE SERVICES. IF THE BUSINESS EXECUTIO N MODEL IS DIFFERENT NATURALLY THE COST OF EXECUTING THE WORK WILL ALSO VARY WHICH WILL ULTIMATELY AFFECT THE PROFIT. EVEN THE NATURE OF THE EXPENSES WILL ALSO VARY. IN CASE THE WORK IS OUTSOURCED THE COST INCURRED REMAINS VARIABLE WHILE IN CASE THE WO RK IS DONE THROUGH INNER SOURCES THE ASSESSEE COMPANY IS BOUND TO INCUR A PART OF THE EXPENSES TOWARDS THE FIXED COST WHICH MAY ULTIMATELY AFFECT 14 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) NOT ONLY THE PERSONNEL COST BUT OTHER ANCILLARY AND INCIDENTAL COSTS. IT IS NOT DENIED BY THE REVENUE THAT T HE BUSINESS EXECUTION MODEL IN THE CASE OF VISHAL INFORMATION TECHNOLOGIES LTD. IS DIFFERENT FROM THE ASSESSEE. NOT ONLY THIS EVEN WE NOTED THAT THIS COMPANY IS EARNING MAXIMUM OPERATING PROFIT @ 48.03% AS COMPARED TO THE OTHER 13 COMPARABLES SELECTED BY THE TPO AND THE PROFIT RATIO IF WE COMPARE IT WITH THE ARITHMETIC MEAN OF ALL THE 14 COMPARABLES INCLUDING THIS COMPANY IS MUCH MORE THAN TWICE THE ARITHMETIC MEAN I.E. DOUBLE OF 23.72%. THE NEXT HIGHEST MARGIN COMPANY WHICH HAS BEEN SELECTED BY THE TPO HAS EARNED 34.52%. THUS THIS COMPANY IN OUR OPINION EVEN OTHERWISE APPEARS TO HAVE EARNED SUPER PROFIT AND THEREFORE IT CANNOT BE REGARDED TO BE FAIR COMPARABLE COMPANY. WE ACCORDINGLY EXCLUDE THE SAID COMPANY FROM THE COMPARABLES. III) ASIT C. M EHTA FINANCIAL SERVICE LTD. : - THE ASSESSEE IS PRIMARILY ENGAGED IN WATER FILTRATION INDUSTRY. IT HAS A DIVISION WHICH IS ENGAGED IN IT RELATED ACTIVITIES AND THIS CDR DIVISION IS FUNCTIONALLY CONFINED TO PROVIDING ENGINEERING SERVICES IN WATER TREATMENT RELATED LINE OF ACTIVITY. THE PRIME FUNCTION OF ASIT C. MEHTA FINANCIAL SERVICE LTD. IS SHARE BROKING AND IT IS RENDERING THE SERVICES OF REGISTRAR TO SHARE ISSUE. THIS COMPANY CANNOT BE REGARDED TO BE AN ITES RELATED SERVICES COMPANY FOR SELECTION OF C OMPARABLES. WE DO AGREE THAT THE NATURE OF THE BUSINESS AND THE NATURE OF THE SERVICES RENDERED BY THE TWO COMPANIES SHOULD BE SIMILAR. SHARE BROKING ACTIVITIES CANNOT BE COMPARED WITH A COMPANY WHICH IS RENDERING IT RELATED SERVICES FOR WATER TREATMENT LINE OF ACTIVITY. THIS COMPANY IN OUR OPINION CANNOT BE REGARDED TO BE A COMPANY WHICH IS RENDERING SIMILAR SERVICES AS IS BEING RENDERED BY THE ASSESSEE. WE ACCORDINGLY EXCLUDE IT FROM THE COMPARABLES. 15 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) IV) GOLDSTONE INFRATECH LTD. : - IT IS NOT DEN IED BY THE LD. D R THAT THE TPO HAS APPLIED EXPORT TURNOVER FILTER OF 25% AND IN THE CASE OF THIS COMPANY THE EXPORT TURNOVER FILTER WAS ONLY 13.75% BECAUSE THE EXPORT REVENUE IS ONLY RS. 4.25 CRORES AS COMPARED TO TOTAL TURNOVER OF RS. 30.89 CRORES . THIS COMPANY THEREFORE CANNOT BE REGARDED TO BE A COMPARABLE COMPANY AND ON THIS BASIS ITSELF WE EXCLUDE THIS COMPANY FROM THE COMPARABLES. V) FLEXTRONICS SOFTWARE SYSTEMS LTD. : - WE DO NOT AGREE WITH THE LD. AR THAT SINCE THE ANNUAL ACCOUNTS OF THE COMPANY IS FOR 15 MONTHS THEREFORE IN VIEW OF THE DIFFERENCE IN THE PERIOD OF REPORTING AND BY APPLY ING THE FINANCIAL YEAR FILTER THIS COMPANY SHOULD BE EXCLUDED. THE PROFIT MAY BE FOR 15 MONTHS MORE THAN ONE YEAR BUT IT IS ONLY THE OPERATING MARGIN ( WHICH IS ALWAYS ON PERCENTAGE BASIS ) WHICH IS CONSIDERED FOR WORKING THE OPERATING PROFIT. THIS IN OUR OPINION CANNOT AFFECT THE PERCENTAGE OF THE OPERATING PROFIT. WHILE CALCULATING THE PROFIT THE EFFECT OF PERIOD IS IN - BUILT THEREIN AS THE PERCENT AGE IS ALWAYS COMPUTED ON THE BASIS OF THE OPERATING PROFIT DIVIDED BY THE TURNOVER FOR THE REVENUE RECEIVED. IT IS NOT THE CASE OF THE ASSESSEE THAT DURING THE LAST 3 MONTHS THIS COMPANY HAS DERIVED EXORBITANTLY HIGH PROFITS. FOR SELECTING COMPARABLES IT IS NECESSARY THAT THE FUNCTION AS HAS BEEN HELD BY US IN THE EARLIER PARAGRAPHS OF BOTH THE COMPANIES MUST BE SIMILAR. IF THEY ARE ENGAGED IN DIFFERENT ACTIVITIES OR PERFORMING DIFFERENT FUNCTIONS THEY CANNOT BE REGARDED TO BE COMPARABLES. THE PROF IT & LOSS ACCOUNT OF THIS COMPANY DOES NOT STATE ANY RECEIPT FROM BPO SERVICES AND MAJORITY OF ITS INCOME IS FROM SOFTWARE AND THERE SEEMS TO BE A CONTRADICTION IN THE REPORTING OF THE ANNUAL ACCOUNTS AS THE SEGMENT REPORTING STATEMENT ATTACHED TO THE ANNU AL ACCOUNTS SHOWS INCOME FROM BPO SERVICES. IF THERE IS CONTRADICTION IN THE REPORTING IN OUR OPINION THE ASSESSEE SHOULD GET THE BENEFIT. EVEN OTHERWISE ALSO THE OPERATING MARGIN PRIOR TO DEPRECIATION 16 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) AS SUBMITTED BY THE ASSESSEE IS 14.54% WHICH IS M UCH LESS THAN THE ARITHMETIC MEAN COMPUTED BY THE ASSESSEE IN RESPECT OF OTHER 9 COMPARABLES IF THE 5 COMPANIES AS CLAIMED ARE EXCLUDED. EVEN TH E OPERATING PROFIT IS MUCH LESS THAN THE AVERAGE ARITHMETIC MEAN OF 23.72% AS HAS BEEN COMPUTED BY THE REVENU E AND THIS PERCENTAGE IN ANY CASE WILL REDUCE THE ARITHMETIC MEAN. WE THEREFORE DO NOT FIND ANY HESITATION IN ACCEPTING THE CONTENTION OF THE ASSESSEE FOR EXCLUDING THIS COMPANY OUT OF THE COMPARABLES. WE ACCORDINGLY ACCEPT THE CONTENTION OF THE AS SESSEE FOR EXCLUDING THIS COMPANY OUT OF THE COMPARABLES. 4 .3.2 WE NOTED THAT AFTER EXCLUDING THE 5 COMPARABLES THE CASH PLI OF 9 COMPANIES AS COMPUTED BY THE LD. AR AND SUBMITTED BEFORE US COPY OF WHICH IS GIVEN TO THE LD. DR COMES TO 26.78%. IN THE ASSESSEES CASE THE CASH OPERATING PROFIT HAS BEEN COMPUTED @ 22.45%. THEREFORE THE DIFFERENCE COMES ONLY 4.3 3% WHICH IS LESS THAN 5%. WE NOTED THAT AS PER THE PROVISO TO SEC. 92C WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD THE ARMS LENGTH PRICE HAS TO BE TAKEN TO BE THE ARITHMETIC MEAN OF SUCH PRICES. WE ALSO NOTED THAT THE SAID PR OVISO DURING THE IMPUGNED ASSESSMENT YEAR ALSO PROVIDES THAT AT THE OPTION OF THE ASSESSEE THE PRICE WHICH MAY VARY FROM THE ARITHMETIC MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETIC MEAN BE TAKEN TO BE THE ARMS LENGTH PRICE. SINCE THE DIFFERENCE IN THE CASE OF THE ASSESSEE IS ONLY 4.33% WHICH IS LESS THAN 5% THEREFORE IN OUR OPINION NO ADDITION ON THIS ACCOUNT CAN BE SUSTAINED IN THE CASE OF THE ASSESSEE. WE ACCORDINGLY SET ASIDE THE ORDER OF CIT(A) AND DELETE THE ADDITION SUSTAINED BY CIT(A ) AMOUNTING TO RS. 65 01 783/ - . THUS GROUND NOS. 1 - 3 TAKEN BY THE ASSESSEE IS ALLOWED. 5 . NOW COMING TO THE APPEAL OF THE REVENUE WE NOTED THAT IN THE APPEAL FILED INITIALLY THE REVENUE HAS TAKEN AS MANY AS 3 GROUNDS OF APPEAL BUT 17 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) SUBSEQUENTLY THE REV ENUE HAS FILED MODIFIED GROUNDS OF APPEAL VIDE LETTER DT. 7.2.2013 IN WHICH THE REVENUE HAS TAKEN ONLY ONE GROUND WHICH WAS INITIALLY TAKEN AS GROUND NO. 1. 5 .1 THIS GROUND RELATES TO THE RELIEF GIVEN BY CIT(A) IN RESPECT OF MARKET COST ADJUSTMENT OF 10 .96% TO THE COMPARABLE UNCONTROLLED PRICE. THE FACTS RELATING TO THIS GROUND ARE THAT THE TPO MADE TP ADJUSTMENT IN RESPECT OF EXPORT OF FINISHED GOODS TO THE AE. THE ASSESSEE CONTENDED BEFORE THE CIT(A) THAT THE ASSESSEE HAS INCURRED A SUM OF RS. 11 89 39 839/ - FOR SOLICITING BUSINESS AND PROCURING SALE ORDER. THESE EXPENSES RELATE TO SALES (BOTH DOMESTIC AND EXPORTS) TO UNRELATED PARTIES. ALTHOUGH THE RATIO OF THE MARKETING EXPENSES TO NON - AE SALES WORKS OUT TO 26% THE ASSESSEE MADE A CONSERVATIVE DO WNWARD ADJUSTMENT OF 15% TO THE SALE PRICE OF UNRELATED PARTIES FOR APPLYING THE COMPARABLE UNCONTROLLED PRICE METHOD. THE TPO HAS CONSIDERED ONLY THE NET MARKETING EXPENSES OF RS.3 47 79 102/ - RELATING TO THE DUBAI OFFICE AS A LIKE AMOUNT HAD BEEN DEBITE D UNDER THE HEAD ADVERTISEMENT PUBLICITY AND OTHER SELLING EXPENSES IN THE PROFIT & LOSS ACCOUNT AND ALLOWED AN ADJUSTMENT IN ALP OF ONLY 4.06%. BEFORE CIT(A) IT WAS CONTENDED THAT THE ASSESSEE HAD MARKETING OFFICE AT DUBAI WHICH ALSO RENDERED SERVICES TO OTHER AES WORLDWIDE TO MARKET THEIR PRODUCT IN MIDDLE EAST REGION. THE ASSESSEE HAD CHARGED COMMISSION FROM SUCH AES @ 10% AND EARNED INCOME OF RS. 5.21 CRORE THEREFROM. EVEN IF SALES TO EXPENSE RATIO OF EXCLUSIVELY DUBAI MARKETING OFFICE WERE CONSIDE RED MARKETING EXPENSES WOULD HAVE COME TO 20.89%. THE COMPANY HAD ONLY ONE MARKETING OFFICE ABROAD IN DUBAI FOR INTERNATIONAL SALES AND IT LOOKED AFTER SALES IN THE MIDDLE EAST REGION ONLY. A S THERE WAS NO FULL - FLEDGED MARKETING OFFICE FOR SALES TO OTHE R PARTS OF THE WOR L D EXCEPT FOR A SOLE EMPLOYEE R EPRESENTATIVE POSTED IN BELGIUM A HOST OF ACTIVITIES/EFFORTS FOR INTERNATIONAL MARKETING IN EUROPE AMERICA AND OTHER PARTS OF THE WORLD WERE DONE FROM THE INDIAN OFFICE WHICH RESULTED IN AN EXPORT OF GOODS WORTH 18 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) RS.11.43 CRORES. RELIANCE WAS PLACED ON T HE ORDER OF CIT(A) FOR A.Y 2004 - 05 WHICH WAS CONFIRMED BY THE TRIBUNAL. IT WAS CONTENDED THAT THE FACTS AND SITUATION ARE SIMILAR AS COMPARED TO THE EARLIER YEAR AND ON THAT BASIS ALSO THE MARKETING COST ADJUSTMENT OF 16.36% IN THE FOLLOWING MANNER SHOULD HAVE BEEN ALLOWED. 1. NON - AE EXPORT SALES (RS.) 24 79 85 385 2. NON - AE DOMESTIC SALES (RS.) 21 38 54 506 3. COMMISSION INCOME FROM AES (RS.) 5 21 97 007 5. EXPENSES OF MARKETING OFFICE IN DUBAI (RS.) 3 47 79 102 6. EXPENSES OF MARKETING REPRESENTATIVE IN EUROPE (RS.) 99 47 498 7. EXPENSES OF INTERNATIONAL MARKETING FROM INDIA OFFICE (RS.) 43 90 104 8. TOTAL EXPENSES ON INTERNATIONAL MARKETING [(4+5+6)] (RS.) 4 91 16 704 9. RATIO OF INTERNATIONAL MARKETING EXPENSES TO INTERNATIONAL [7/(1+3)] 16.36 CIT(A) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND ALSO THE ORDER FOR A.Y 2004 - 05 AND 2005 - 06 DIRECTED THE AO TO ALLOW ADJUSTMENT OF 10.96% FOR MARKETING COST IN COMPUTING ALP FOR THE FINISHED GOODS EXPORT SEGMENT AFTER VERIFYING ACCURACY OF THE RELEVANT FIGURES AS UNDER : 17. I HAVE CAREFULLY CONSIDERED THE APPELLANTS SUBMISSIONS. IN HIS REMAND REPORT DATED 24.05.2012 FOR AY 2005 - 06 THE TPO HAS STATED THAT THE DIFFERENCE BETWEEN THE ADJUSTMENT ALLOWED BY THE TPO AND THE ADJUSTMENT SOUGHT BY THE APPELLANT WAS DUE TO THE EXCLUS ION BY THE TPO OF INTERNATIONAL MARKETING EXPENSES INCURRED IN EUROPE AND INDIA AND TO THE NETTING OFF OF THE COMMISSION INCOME FROM DUBAI OFFICE AGAINST EXPENSES INCURRED IN THAT OFFICE. HE FURTHER STATED THAT IF THE COMPUTATION WERE MADE BY THE TPO IN AY 2004 - 05 IN PURSUANCE OF THE CIT(A)S ORDER WERE ADOPTED FOR AY 2005 - 06 THE ADJUSTMENT FOR MARKETING EXPENSES WOULD WORK OUT TO 12.31%. 18. ON THE BASIS OF THE TPOS REPORT I HAVE VIDE MY APPELLATE ORDER IN ITA NO. 130/MRG/2008 - 09 DATED 19.11.2012 FOR AY 2005 - 06 HELD THAT IN ALLOWING ADJUSTMENT FOR MARKETING EXPENSES THE TPO HAD WRONGLY CONSIDERED THE EXPENSES INCURRED BY THE APPELLANT ONLY IN DUBAI OFFICE WHILE THE CIT(A)S DIRECTION WAS TO ADOPT TOTAL MARKETING EXPENSES INCLUDING THOSE INCURRED I N THE COMPANYS EUROPEAN AND INDIAN OFFICES. SECONDLY THE TPO HAD NETTED OFF THE DUBAI OFFICE EXPENDITURE AGAINST THE DUBAI OFFICE INCOME WITHOUT CONSIDERING THE RATIO OF TOTAL MARKETING EXPENSES TO TOTAL NON - AE EXPORT SALES AS DIRECTED BY THE CIT(A). SI NCE THE APPELLANTS CONTENTION SEEKING A HIGHER RATE OF ADJUSTMENT WAS ACCEPTED BY CIT(A) AND CONFIRMED BY THE HONBLE ITAT IN AY 2004 - 05 AND AN UPWARD ADJUSTMENT WAS 19 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) ALLOWED IN THAT YEAR FROM 4.39% TO 14.80% I HAD DIRECTED THE AO TO FOLLOW THE SAME PRINC IPLE AND ALLOW A HIGHER RATE OF ADJUSTMENT FOR MARKETING EXPENSES IN AY 2005 - 06 AS WELL. 19. THE FACTS AND CIRCUMSTANCES OF THE CASE ARE SIMILAR IN THE CURRENT YEAR EXCEPT FOR A MINOR DIFFERENCE. IN EARLIER YEARS SINCE MARKETING EXPENSES OF DUBAI OFFICE HAD EXCEEDED THE INCOME THEREFROM THE EXCESS OF EXPENDITURE OVER INCOME WAS INCLUDED IN TOTAL MARKETING EXPENSES THAT ALSO CONSISTED OF EXPENSES INCURRED IN THE APPELLANTS EUROPEAN AND INDIAN OFFICES. HOWEVER IN THE CURRENT YEAR INCOME EARNED FROM THE DUBAI OFFICE AT RS. 5 21 97 007 EXCEEDS THE EXPENDITURE OF DUBAI OFFICE AT RS. 3 47 79 102 RESULTING IN A NET INCOME OF RS. 1 74 17 905. THUS THERE IS NO EXCESS OF MARKETING EXPENDITURE OVER INCOME IN DUBAI OFFICE THAT REMAINS TO BE ADJUSTED. 20. THERE FORE IN THE CURRENT YEAR ADJUSTMENT FOR MARKETING COST NEEDS TO BE RESTRICTED TO MARKETING EXPENSES OF THE EUROPEAN AND INDIAN OFFICES ONLY. ACCORDINGLY THE RATIO TO BE COMPUTED WOULD BE THAT OF MARKETING EXPENSES OF THE EUROPEAN AND INDIAN OFFICES (RS. 1 42 97 602) TO NON - AE SALES FROM THESE TWO OFFICES (RS. 13 04 91 190) UNLIKE THE RATIO OF TOTAL MARKETING EXPENSES TO TOTAL NON - AE SALES THAT WAS COMPUTED IN EARLIER YEARS. ALTHOUGH THE PRINCIPLE TO BE FOLLOWED IN THE CURRENT YEAR WOULD BE THE SAME AS T HAT FOLLOWED IN EARLIER YEARS COMPUTATION OF THE RATIO WOULD HAVE TO BE MODIFIED TO THIS EXTENT AS EXPLAINED ABOVE. THIS RATIO WORKS OUT TO 10.96% [(1 42 97 602/13 04 91 190)* 1 00] AS AGAINST 16.36% CLAIMED BY THE APPELLANT. I THEREFORE DIRECT THE AO TO ALLOW AN ADJUSTMENT OF 10.96% FOR MARKETING COST IN COMPUTING THE ALP IN THE FINISHED GOODS EXPORTS SEGMENT AFTER VERIFYING THE ACCURACY OF THE RELEVANT FIGURES. 5 .2 THE LD. DR RELIED ON THE ORDER OF THE AO WHILE THE ASSESSEE RELIED ON THE ORDER OF CIT( A). 5 .3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. IN OUR OPINION NO INTERFERENCE IS CALLED FOR IN THE ORDER OF CIT(A). CIT(A) HAS RIGHTLY DIRECTED THE AO TO ALLOW THE ADJUSTMENT @ 10.96% FOR MARKETING EXPENSES AFTER VERIFYI NG THE CORRECTNESS OF THE DATA SUBMITTED BY THE ASSESSEE FOR ALLOWING THE RELIEF. SIMILAR DIRECTION WE NOTED HAS BEEN GIVEN BY CIT(A) IN A.Y 2004 - 05 AND 2005 - 06 AND HAS BEEN CONFIRMED BY THIS TRIBUNAL. THE LD. D R COULD NOT BRING ANY COGENT MATERIAL OR EVIDENCE BEFORE US WHICH MAY 20 ITA NOS. 2 & 5/PNJ/2013 (ASST. YEAR : 2006 - 07) COMPEL US TO TAKE A DIFFERENT VIEW THAN WHAT HAS BEEN TAKEN BY THE CIT(A). THUS THIS GROUND STANDS DISMISSED. 6 . IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS ALLOWED WHILE THE A PPEAL FILED BY THE REVENUE STANDS DISMISSED. 7 . ORDER PRONOUNCED IN THE OPEN COURT ON 1 7 .04.2014. S D / - (D.T.GARASIA) JUDICIAL MEMBER S D / - (P.K. BANSAL) ACCOUNTANT MEMBER PLACE : PANAJI / GOA DATED : 1 7 .04. 201 4 *SSL* COPY TO : (1) APPELLANT (2) RESPONDENT (3) CIT CONCERNED (4) CIT(A) (5) D.R (6) GUARD FILE TRUE COPY BY ORDER