Colt Technology Services India Pvt. Ltd., New Delhi v. ITO, New Delhi

ITA 4370/DEL/2010 | 2006-2007
Pronouncement Date: 21-01-2010 | Result: Allowed

Appeal Details

RSA Number 437020114 RSA 2010
Assessee PAN AACCC3512G
Bench Delhi
Appeal Number ITA 4370/DEL/2010
Appellant Colt Technology Services India Pvt. Ltd., New Delhi
Respondent ITO, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 21-01-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 21-01-2010
Assessment Year 2006-2007
Appeal Filed On 27-09-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH : B NEW DELHI) BEFORE SHRI A.D. JAIN J UDICIAL MEMBER AND SHRI K.D. RANJAN ACCOUNTANT MEMBER I.T.A. NO.4370/DEL./2010 (ASSESSMENT YEAR : 2006-07) COLT TECHNOLOGY SERVICES INDIA PVT. LTD. VS. ITO W ARD 3(4) 103 ASHOKA ESTATE NEW DELHI. BARAKHAMBA ROAD NEW DELHI. (PAN/GIR NO.AACCC3512G) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAHUL KUMAR MITRA CA SH. ASHUTOSH M. RASTOGI ADV. & SH. A.K. JUNEJA CA REVENUE BY : SHRI STEPHEN GEORGE CIT(DR) ORDER PER A.D. JAIN JM THIS IS ASSESSEES APPEAL FOR ASSESSMENT YEAR 200-07 AGAINST THE ORDER DATED 25.08.2010 PASSED BY AO. THE FOLLOW ING EFFECTIVE OF GROUNDS OF APPEAL HAVE BEEN RAISED: 1. THE DRAFT ASSESSMENT ORDER PASSED BY THE LD.AO IS BAD IN LAW AND VOID AB-INITIO. 2. THE LD.DISPUTE RESOLUTION PANEL (LD.DRP) AND THE LD.AO (LD.AO) (FOLLOWING THE DIRECTIONS OF THE LD.DRP) ER RED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION OF RS.59 411 421 TO THE INCOME OF THE APPELLANT PROPOSED BY THE LD.TRANSFER PRICING OFFICER (LD.TPO) BY HOLDING THAT ITS INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF INFORMATION TECHNOLOGY IT) ENABLED SERVICES (ITES ) AND CONTRACT SOFTWARE DEVELOPMENT (CSD) BUSINESS SEGMENT DO NOT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UN DER THE ACT IN DOING SO THE LD.DRP AND THE LD.AO HAS GRO SSLY ERRED IN AGREEING WITH AND UPHOLDING THE LD.TPOS AC TION. ITA NO.4370/DEL./2010 (AY : 2006-07) 2 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW THE LD.AO ERRED IN INITIATING PENALTY PROCEEDINGS UN DER SECTION 271(1)(C) READ WITH SECTION 274 OF THE ACT. 2. GROUND NO.1 IS GENERAL AND REQUIRES NO ADJUDICATIO N. 3. AS PER GROUND NO.2 THE LD.DISPUTE RESOLUTION PANEL (THE DRP FOR SHORT) HAS ERRED IN CONFIRMING THE ADDITION OF RS. 5911421 TO THE INCOME OF THE ASSESSEE AS PROPOSED BY THE TRANSFER PRICIN G OFFICER (TPO FOR SHORT) BY HOLDING THAT THE INTERNATIONA L TRANSACTIONS OF THE ASSESSEE PERTAINING TO PROFESSION OF INFORMATION TECHNOLO GY ENABLED SERVICES (ITES) AND CONTRACT SOFTWARE DEVELOPMENT( CSD FOR SHORT) BUSINESS SEGMENTS DO NOT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME-TAX ACT. 4. THE FACTS ARE THAT THE ASSESSEE COLT TECHNOLOGY SERV ICES INDIA PVT. LTD. WAS INCORPORATED IN INDIA ON 1.4.2004. IT IS THE FIRST YEAR OF OPERATION WAS 2004-05. AS ON 31.3.2006 99.99% SHARES OF THE ASSESSEE WERE HELD BY COLT TELECOM BV NETHERLANDS. THE BALANCE SHARES WERE HELD BY COLT TELECOM EUROPE LTD. UK. DURING FY 2005- 06 THE ASSESSEE WAS ALSO ENTITLED TO AVAIL BENEFIT U/S 10 A OF THE I.T. ACT. DURING THE SAID YEAR THE ASSESSEE WAS ENGAGED IN P ROVIDING INFORMATION TECHNOLOGY ENABLED BACK OFFICE SERVICES ( ITES SEGMENT) AND CONTRACT SOFTWARE DEVELOPMENT SERVICES THROUGH I TS CSD SEGMENT TO THE COLT GROUP OF COMPANIES. THE ASSESSEE RECEIVED R EMUNERATION FOR THESE SERVICES CLAIMING THAT IT WAS REMUNERATED ON AN ARMS LENGTH COST PLUS BASIS I.E. IT WAS COMPENSATED FOR ALL ITS COSTS PLUS A PRE-AGREED MARK-UP BASED ON A BENCHMARKING ANALYSIS. THE ASSESSEE CLAIMED THAT SO DURING THE YEAR HAD OPERATED A LOW -RISK CAPTIVE UNIT IN INDIA. 5. IN ITS TRANSFER PRICING (TP) STUDY THE ASSESSEE APPL IED THE TRANSACTIONAL NET MARGIN METHOD (TNM) METHOD USING OPERATING ITA NO.4370/DEL./2010 (AY : 2006-07) 3 PROFIT/TOTAL COST (OP/TC) AS THE PROFIT LEVEL INDIC ATOR PLI) IN ORDER TO BENCH MARK ITS INTERNATIONAL TRANSACTIONS PERTAININ G TO ITS ITES AND CSD SEGMENTS. SO AS TO DEMONSTRATE THE INTERNATIONAL T RANSACTIONS OF ITS ITES AND CSD SEGMENTS BEING AT ARMS LENGTH THE A SSESSEE UNDERTOOK ALL ECONOMIC ANALYSIS BASED ON MULTIPLE YEAR DATA FOR FYS 2003-04 TO 05-06 TO THE EXTENT AVAILABLE. 6. IN THE TP ASSESSMENT PROCEEDINGS THE TPO ASKED THE A SSESSEE TO FURNISH THE CURRENT YEAR DATA I.E. DATA FOR FY 20 05-06. THIS WAS DULY SUBMITTED BY THE ASSESSEE WHILE AT THE SAME TIME MAINTAIN ING IS STAND THAT MULTIPLE YEAR DATA SHOULD BE RELIED ON. A SUMMA RY OF SUCH DATA HAS BEEN TABULATED AS FOLLOWS: PARTICULARS ITES CSD SEGMENT NO. OF COMPANIES 13 20 MEAN (AVERAGE) OP/TC 7% 7% APPELLANTS OP/TC VALUE OF TRANSACTION 14.48% 80.32 13.27% 14.14 THE TPO MADE A TOTAL ADJUSTMENT OF `59411421 (`17 17 3470 (FROM CSD SEGMENT) + `42237951 (FROM ITES SEGMENT). 7. FOR THE ASSESSEES CSD SEGMENT THE TPO TOOK FOUR COMP ARABLES FOR BENCHMARKING THE ASSESSEES INTERNATIONAL TRANSACTIO NS AS FOLLOWS: S.NO. COMPANY DP/TC 1. BODHTREE CONSULTING LTD. 14% 2. SIP TECHNOLOGIES LTD. 21% 3. INFOSYS LTD. 38.74% 4. WIPRO LTD. 34.38% MEAN 27.03% 8. THE TPO REJECTED A NUMBER OF COMPANIES BY APPLYIN G THE WAGES TO SALES FILTER OF 30-60% ON THE BASIS THAT THE ASSESSEE WA GES/SALES RATIO WAS 46.37%. ONE COMPANY WAS REJECTED ON THE GR OUND OF ITA NO.4370/DEL./2010 (AY : 2006-07) 4 DIFFERENT FUNCTIONAL PROFILE. THE ASSESSEE WHILE UNDE RTAKING THE FRESH SEARCH ON THE ASKING OF THE TPO HAD SPECIFICALLY REJE CTED INFOSYS TECHNOLOGY LTD. AND WIPRO LTD. THE TPO HOWEVER T OOK THESE TWO COMPANIES AS COMPARABLES FOR BENCHMARKING THE INTERNAT IONAL TRANSACTIONS OF THE CSD SEGMENT OF THE ASSESSEE. AS SUCH T HE TPO ARRIVED AT AN ARMS LENGTH DP/TC MARGIN OF 27.03% A ND RECOMMENDED AN ADJUSTMENT OF `17173470 TO THE INCOME OF THE ASSESSEE FORM ITS CSD SEGMENT. 9. IN HIS DRAFT ASSESSMENT ORDER THE AO UPHELD THE SAID ADJUSTMENT OF `17173470 TO THE INCOME OF THE ASSESSEE FORM ITS CSD SEGMENT. 10. THE ASSESSEE HAD FILED DETAILED OBJECTIONS IN THIS RE GARD BEFORE THE TPO. A COPY OF THESE SUBMISSIONS AND OBJECTIONS DATE D 29.9.09 IS AT PAGES 198-217 OF THE ASSESSEES PAPER BOOK 1 (APB 1 FOR SHORT). THE RELEVANT PORTION THEREOF IS AT PAGES 202-210 OF A PB 1. FOR READY REFERENCE THIS RELEVANT PORTION OF THE ASSESSEES SUBMISSIONS/OBJECTIONS IS BEING REPRODUCED HEREUNDER: 5. INFOSYS TECHNOLOGIES LTD. (INFOSYS) AND WIPRO LTD. (WIPRO) AS PER THE CAPTIONED NOTICE. YOUR GOODSELF HAS INCLUD ED TWO ADDITIONAL COMPARABLE IN THE FINAL COMPARABLES SE T WHICH WERE NOT INCLUDED BY THE ASSESSEE IN THE RESULTS OF THE FRESH SEARCH FURNISHED VIDE SUBMISSION DATED FEBRUARY 5 2009. THESE COMPANIES ARE (I) INFOSYS AND (II) WIPR O. IT IS PERTINENT TO NOTE THAT THE ASSESSEE HAD REJECTED BOTH COMPANIES ON QUALITATIVE GROUNDS (REFER THE DETAILED ACCEPT-REJECT MATRIX FILED BEFORE YOUR GOODSELF VIDE SUBMISSIONS DATED DECEMBER 7 2009 AND SEPTEMBER 14 2009). IN THIS REGARD THE FOLLOWING SUBMISSIONS ARE MA DE: (I) INFOSYS INFOSYS SHOULD NOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE FOR THE FOLLOWING REASONS: ITA NO.4370/DEL./2010 (AY : 2006-07) 5 (A) DIVERSIFIED NATURE OF OPERATIONS THE COMPANY WEBSITE PROVIDES INFORMATION O THE DIVERSE NATURE OF SERVICES PROVIDED BY INFOSYS IN THIS REGARD TH E RELEVANT EXTRACTS FROM THE WEBSITE ARE PRODUCED BELOW . IT SERVICES WE CREATE IT-ENABLED BUSINESS SOLUTIONS FOR OUR CLIENTS B Y LEVERAGING OUR DOMAIN AND BUSINESS EXPERTISE ALONG WITH A COMPLETE RANGE OF SERVICES. . APPLICATION SERVICES . ARCHITECTURE SERVICES . ENTERPRISE QUALITY SERVICES . INDEPENDENT VALIDATION SERVICES . INFORMATION MANAGEMENT SERVICES . INFRASTRUCTURE SERVICES . PACKAGED APPLICATION SERVICES . SOA SERVICES . SYSTEMS INTEGRATION SERVICES WE PROVIDE CONCEPT-TO-MARKET R&D AND ENGINEERING SERVICES TO IMPROVE YOUR PRODUCT OPERATIONS. OUR SERVI CES ADDRESS THE COMPLETE ENGINEERING VALUE CHAIN SPANNING VARIOUS INDUSTRY VERTICALS. . PRODUCT ENGINEERING . MANUFACTURING PROCESS AND PLANT SOLUTIONS . LIFECYCLE MANAGEMENT BPO SERVICES INFOSYS BPO COMBINES DOMAIN EXPERTISE PROCESS SKILLS AND TECHNOLOGY TO DELIVER WORLD-CLASS PROCESS OUTSOURCING OFFERING BY FUNCTION . BUSINESS PLATFORMS . CUSTOMER SERVICE OUTSOURCING . FINANCE AND ACCOUNTING . HUMAN RESOURCE OUTSOURCING . KNOWLEDGE SERVICES . LEGAL SERVICES . ORDER MANAGEMENT ITA NO.4370/DEL./2010 (AY : 2006-07) 6 . SOURCING AND PROCUREMENT OUTSOURCING HENCE UNLIKE THE ASSESSEE THE COMPANY IS EXTREMELY DIVERSIFIED AND UNDERTAKES A WIDE RANGE OF SERVICES APA RT FORM SOFTWARE DEVELOPMENT. SINCE THE REVENUES AND PROFITABILITY FOR SOFTWARE DEVELOPMENT CANNOT BE ASCERTAINED FROM THE DATA IN THE ANNUAL REPORT; THIS COMPANY SHOULD NOT BE INCLUDED IN THE FINAL SET OF COMPARABLES. (B) OWNERSHIP OF BRANDED/PROPRIETARY PRODUCTS FURTHER BASED ON A DETAILED EXAMINATION OF THE ANNU AL REPORT OF THE COMPANY FOR FY 2005-06 IT IS FOUND TH AT THE COMPANY ALSO DERIVES ITS REVENUE FROM SALE OF PROPRIETA RY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE). THIS IS EVIDENT FROM THE FOLLOWING EXTRA CT FORM THE ANNUAL REPORT/WEBSITE FOR FY 2005-06. WE SPENT `42 CRORE ON R&D IN THE FISCAL YEAR 2006 O N ENHANCING AND DEVELOPING NEW FUNCTIONALITIES IN THE BANKING PRODUCT SUITE FINACLE AND ON METHODOLOGIES AN D NEW TECHNOLOGIES WHICH ALLOW US TO IMPROVE OUR SERVICE CAPABILITIES. WE ALSO DEVELOP MARKET AND LICENSE PROPRIETARY BANK ING SOLUTIONS FOR THE BANKING INDUSTRY. OUR PRINCIPAL BAN KING PRODUCTS AND SOLUTIONS ARE THE FINACLE SUITE OF UNIVERSA L BANKING SOLUTION PRODUCTS AND PROFESSIONAL SERVICES. OUR SUITE OF SOFTWARE PRODUCTS INCLUDE FINACLE CORE BANKING FINACLE ECHANNELS FINACLE ECORPORATE FINA CLE CRM AND FINACLE TREASURY. THE FINACLE I SUITE IS A COMPREHENSIVE FLEXIBLE SCALABLE AND FULLY WEB-ENABL ED SOLUTION THAT ADDRESSES BANKS CORE BAKING TREASURY WEALTH MANAGEMENT CONSUMER AND CORPORATE E-BANKING MOBILE BANKING AND WEB-BASED CASH MANAGEMENT REQUIREMENTS. PRODUCTS AND PLATFORMS OUR PRODUCTS AND PLATFORMS PROVIDE A HOLISTIC AND INTEGRATED TRANSFORMATION APPROACH COMPLETE WITH SOLUTIONS AND SERVICES ITA NO.4370/DEL./2010 (AY : 2006-07) 7 . COLLABORATIVE ANALYSIS . FINACLE . INFOSYS ACTIVEDESK . INFOSYS IPROWER . INFOSYS MCONNECT . INFOSYS UNIFIED COMMUNICATIONS AND COLLABORATION (UC) THUS UNLIKE THE ASSESSEE WHICH UNDERTAKES ONLY CONTRACT SOFTWARE DEVELOPMENT. INFOSYS IS ENGAGED IN FULL FLEDG ED PRODUCT DEVELOPMENT BEARING ALL ASSOCIATED RISKS AND REWARDS. (C) ONSITE VERSUS OFFSHORE SERVICES THE ASSESSEE PROVIDES ONLY OFFSHORE SERVICES(I.E. REMOTELY FROM INDIA). ON THE OTHER HAND BASED ON THE ANNUAL REPORT FOR FY 2005-06 AS MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E . SERVICES PERFORMED AT THE CUSTOMERS LOCATION OVERSEAS) (REFER TABLE BELOW): COMPANY REVENUE SPLIT (ONSITE VS. OFFSHORE) INFOSYS ONSITE 49.8% OFFSHORE 50.2% TYPICALLY ONSITE COMMAND HIGHER BILLABLE RATES AND CONSEQUENTLY IT WOULD NOT BE APPROPRIATE TO COMPARE THE ASSESSEE WHICH EARNS ITS ENTIRE INCOME FROM OFFSHORE SER ICES WITH INFOSYS WHICH EARNS MORE THAN HALF OF IS SERVIC ES INCOME FROM ONSITE SERVICES. (D) COMPARISON OF TURNOVER THE IMPORTANCE OF TURNOVER/SIZE AS A QUANTITATIVE FIL TER FOR COMPARABILITY ANALYSIS CANNOT BE UNDERESTIMATED GREATE R SIZE IMPLIES ECONOMIES OF SCALE AND MORE BARGAINING POW ER THAT MAY IMPACT PROFITABILITY OF A COMPANY. SIZE O F A COMPANY ALSO MATTERS WHILE RAISING FINANCIAL RESOURCES F OR INVESTMENT/EXPANSION PURPOSES. IN THIS REGARD THE ASSESSEE WOULD LIKE TO PLACE RELIANC E ON THE DECISION OF THE HONBLE PUNE BENCH OF THE INCOME -TAX APPELLATE TRIBUNAL (ITAT) IN THE MATTER OF M/S E-G AIN COMMUNICATION PVT. LTD. ITA NO.1685/PN/2007 WHICH STATES THE FOLLOWING IN RESPECT OF A SIMILAR ISSUE:- ITA NO.4370/DEL./2010 (AY : 2006-07) 8 WE SEE NO JUSTIFICATION FOR CONSIDERING OVERSIZED COMPANIES AS TAKEN BY THE TPO (EMPHASIS SUPPLIED) ONE MAY ALSO USEFULLY REFER TO THE FOLLOWING EXTRACT FORM THE OECD COMPARABILITY DRAFT NOTES RELEASED ON MAY 10 2006. THE QUESTION ARISES AS TO HOW TO DETERMINE IF ECONOMIC CIRCUMSTANCES ARE INDEED COMPARABLE IN PRACTICE BOTH QUANTITATIVE CRITERIA CAN BE USED TO INCLUDE OR REJ ECT (THIRD PARTY TRANSACTIONS DEPENDING ON WHETHER OR NOT THEY A RE CARRIED OUT UNDER COMPARABLE ECONOMIC CIRCUMSTANCES. THE MOST COMMON QUALITATIVE CRITERIA ARE. SIZE CRITERIA IN TERMS OF SALES ASSETS OR NUMBER OF EMPLOYEES THEY ARE USED TO TEST WHETHER OR NOT COMPANI ES DUE TO THEIR SIZE ARE IN SIGNIFICANTLY DIFFERENT ECO NOMIC SITUATIONS; (EMPHASIS SUPPLIED) SIMILARLY THE HONBLE DELHI BENCH OF ITAT IN MENTO R RULING HAS EMPHASIZED ON THE IMPORTANCE OF TURNOVER AS A QUANTITATIVE FILTER. IN THIS REGARD USEFUL REFERENC E MAY BE MADE TO THE FOLLOWING EXTRACT: ALL SIZES OF COMPANIES HAVE BEEN SELECTED ONLY COMMONALITY BEING THEIR DEALINGS IN SOFTWARE. WE ARE UNABLE TO HOLD AND APPROVE THE APPROACH OF TPO AS CORRECT. (EMPHASIS SUPPLIED) THE IMPORTANCE OF THE TURNOVER FILTER HAS ALSO BEEN REITERATED IN SONY INDIA (P) LTD. VS. DEPUTY COMMISSIO NER OF INCOME-TAX ((114 ITD 448)) (SONY RULING) THE RELEVANT EXTRACT OF WHICH HAS BEEN REPRODUCED BELOW FOR YOUR KIND PERUSAL. IT IS THEREFORE SEEN THAT APART FORM EXTRAORDINARY SIZE. VIDEOCON INTERNATIONAL (VIL) HAD SEVERAL OTHER DISTINCTIVE FEATURES OF DIFFERENCES WHICH MATERIALLY AFFECT PERFORMANCE/PRICE OF THE PRODUCTS (EMPHASIS SUPPLIED) ITA NO.4370/DEL./2010 (AY : 2006-07) 9 THE SALES/TURNOVER OF INFOSYS FOR FY 2005-06 IS INR 9.02 8 CRORES AS AGAINST THE ASSESSEES SALES/TURNOVER OF INR 14.13 CRORES PERTAINING TO THE SOFTWARE DEVELOPMENT SERVICES BUSINESS SEGMENT. IT WOULD BE ABSURD TO COMPARE THE ASSESSEE WITH COMPANIES HAVING TURNOVER THAT IS 639 TIMES THE SIZE OF THE ASSESSEE. IN THIS REGARD IT IS WORTHWHILE TO NOTE THAT THE MED IAN SALES OF THE 4 COMPARABLES (AS PROPOSED TO BE CONSIDERED BY YOUR GOODSELF) IS INR 4 525 CRORES (ALMOST 320 TIMES GREATER THAN THE SALES OF THE ASSESSEE) WHEREAS THE MEDIAN SALES FOR THE 20 COMPARABLES IDENTIFIED BY THE ASSESSEE IN THE FRESH SEARCH IS INR 13.85 CRORES (COMPARABLES TO SALES OF THE ASSESSEE AT RS.14.13 CRORES). THESE STATISTICS MAKE IT CLEAR THAT THE BROADER SET OF 2 0 COMPANIES RELIED UPON BY THE ASSESSEE IS MORE REPRESENTATIVE OF ASSESSEES ECONOMIC CONDITIONS THAN THE SET OF FOUR COMPARABLES PROPOSED BY YOUR GOODSELF. (II) WIPRO LTD. (WIPRO) WIPRO SHOULD NOT BE INCLUDED IN THE FINAL SET OF COMPARABLES FOR THE FOLLOWING REASONS: (A) DIVERSIFIED NATURE OF OPERATIONS THE ANNUAL REPORT OF THE COMPANY FOR FY 2005-06 PRO VIDES DETAILS ON THE MANUFACTURING ACTIVITY UNDERTAKEN BY THE COMPANY. THE ANNUAL REPORT PROVIDES INFORMATION ON THE LICENSED/-REGISTERED/-INSTALLED CAPACITIES FOR VARIOUS PRODUCT LINES WHICH INCLUDE VANASPATI/HYDROGENATED OI LS. TOILET SOAPS LEATHER SHOE UPPERS LEATHER SHOES AND ALLIE D ARTICLES. FATTY ACIDS GLYCERINE GLS LAMPS. TL SHELL S FLOURESCENT TUBE LIGHTS. CFL AND MINI COMPUTERS/MICRO PROCESSOR BASED SYSTEMS. MOREOVER THE BREAK-UP OF COST OF SALES AND SERVICES ( INR 68 634.87 MILLION) PROVIDED IN SCHEDULE 14 OF THE FINANCIAL STATEMENTS DEMONSTRATES THAT RAW MATERIAL FINISHED AND PROCESS STOCKS (INR 13 264.79 MILLION) AS WELL AS STORES AND SPARES (INR 387.89 MILLION) TOGETHER CONSTITUTE C LOSE TO 20 PERCENT OF THE TOTAL COST OF SALES AND SERVICES. THE FACT THAT MANUFACTURING ACTIVITY IS UNDERTAKEN B Y THE COMPANY IS ALSO BORNE OUT FROM SCHEDULE 7 OF THE FINA NCIAL STATEMENTS PROVIDING INFORMATION ON THE INVENTORIES HE LD ITA NO.4370/DEL./2010 (AY : 2006-07) 10 BY THE COMPANY AS ON MARCH 31 2006. THE RELEVANT EXTRACT IS REPRODUCED BELOW: SCHEDULE 7 INVENTORIES AS ON MARCH 31 2006 (` IN MILLION) RAW MATERIAL 435.77 STOCK IN PROCESS 47.15 FINISHED GOODS 829.11 STORES AND SPARES 174.48 TOTAL 1486.51 HENCE AS YOUR GOODSELF WOULD OBSERVE FROM THE TABLE (REPRODUCED ABOVE AS ON MARCH 31 2006 WIPRO HAD A N INVENTORY OF AS MUCH AS `1486.51 MILLION OUT OF WHICH MORE THAN HALF OF THE INVENTORY IS ACCOUNTED FOR BY FINISHED PRODUCTS. THIS FACT CLEARLY INDICATES THAT WIPRO IS NO T MERELY A SERVICE PROVIDER BUT TRADES IN FINISHED PRODU CTS AS WELL AND THEREFORE CANNOT BE TAKEN AS A COMPARABLE FOR ASSESSEES SOFTWARE DEVELOPMENT SERVICES BUSINESS SEGMENT. WITHOUT PREJUDICE TO THE ARGUMENTS MADE ABOVE SHOULD YOUR GOODSELF INSIST ON RETAINING WIPRO (DESPITE IT HOLDING SUBSTANTIAL INVENTORY AND BEING ENGAGED IN TRADING IN FINISHED GOODS) THEN SURELY VJI L DESERVES TO BE RETAINED ON THE SAME GROUND. FURTHER WITHIN THE DOMAIN OF IT SERVICES THE COMPAN Y WEBSITE PROVIDES INFORMATION ON THE DIVERSE NATURE OF SERVICES PROVIDED BY WIPRO. IN THIS REGARD THE RELEV ANT EXTRACTS FROM THE WEBSITE ARE PRODUCED BELOW: BUSINESS TECHNOLOGY SERVICES . BUSINESS INTELLIGENCE & INFORMATION MANAGEMENT . PORTALS & CONTENT MANAGEMENT . ENTERPRISE BUSINESS INTEGRATION . ENTERPRISE SECURITY SERVICE . BUSINESS PROCESS MANAGEMENT . SERVICE ORIENTED ARCHITECTURE . LEGACY MIGRATION . ENTERPRISE MOBILITY CONSULTING . BUSINESS TRANSFORMATION . PROCESS EXCELLENCE ITA NO.4370/DEL./2010 (AY : 2006-07) 11 . ENTERPRISE ARCHITECTURE CONSULTING . FUNCTIONAL EXCELLENCE . GOVERNMENT RISK AND COMPLIANCE . GOVERNMENT CONSULTING ENTERPRISE APPLICATION SERVICES . ENTERPRISE RESOURCE PLANNING . SUPPLY CHAIN MANAGEMENT . CUSTOMER RELATIONSHIP MANAGEMENT . APPLICATION MANAGEMENT SERVICES TESTING SERVICES . TEST CONSULTANCY . SPECIALIZED TESTING SERVICES . CLARIFICATIONS . TESTING AS MANAGED SERVICES . LAB ON HIRE INFRASTRUCTURE MANAGEMENT SERVICES . TRANSFORMATION CONSULTING AND GLOBAL SI . BUSINESS SERVICE MANAGEMENT . IT SERVICE DESK . END-USER COMPUTING . NETWORK SERVICES . DATACENTER SERVICES . ENTERPRISE SECURITY BUSINESS PROCESS OUTSOURCING . CUSTOMER SERVICE . TECHNICAL HELP DESK . FINANCE AND ACCOUNTS OUTSOURCING . HUMAN RESOURCE OUTSOURCING . PROCUREMENT OUTSOURCING . SPECIALIZED SERVICES . BASE PRODUCT ENGINEERING SERVICES . PRODUCT STRATEGY AND CONSULTING . APPLICATION AND EMBEDDED SOFTWARE . ELECTRONIC HARDWARE AND VLSI DESIGN . MECHANICAL ENGINEERING DESIGN ITA NO.4370/DEL./2010 (AY : 2006-07) 12 . TECHNICAL PUBLICATIONS . INDUSTRIAL AUTOMATION AND ENGINEERING . DSP & MULTIMEDIA . HIGH PERFORMANCE COMPUTING HENCE CLEARLY EVEN WITHIN THE DOMAIN OF IT SERVICES THE COMPANY IS DIVERSIFIED AND NOT UNDERTAKING JUST SOFTWAR E DEVELOPMENT BUT A FAR BROADER RANGE OF SERVICES WHICH RENDERS THE COMPANY INCOMPARABLE TO THE ASSESSEE. (B) BUSINESS RE-STRUCTURING DURING FY 2005-06 MOREOVER DURING FY 2005-06 THE COMPANY AMALGAMATED WITH THREE OTHER FIRMS AND ALSO MADE OVERSEAS ACQUISITIONS. IN THIS REGARD THE RELEVANT EXTRACTS FR OM THE ANNUAL REPORT ARE REPRODUCED BELOW: THE SCHEME OF AMALGAMATION OF WIPRO BPO SOLUTIONS LIMITED (FORMERLY WIPRO SPECTRAMIND SERVICES LIMITED ). SPECTRAMIND LIMITED BERMUDA SPECTRAMIND LIMITED MAURITIUS WITH WIPRO LIMITED HAVE BEEN APPROVED BY T HE HONBLE HIGH COURT OF KARNATAKA ON APRIL 5 2006. THE ERSTWHILE WIPRO BPO SOLUTIONS LIMITED. SPECTRAMIND LIMITED BERMUDA AND SPECTRAMIND LIMITED MAURITIUS STANDS MERGED WITH WIPRO LIMITED WITH EFFECT FROM APR IL 1 2005 BEING THE APPOINTED DATE. THE ANNUAL REPORT OF WIPRO LIMITED FOR THE YEAR 2005-06 HAS BEEN PREPARE D AFTER GIVING EFFECT TO THE AMALGAMATIONS. DURING THE YEAR 2005-06 YOUR COMPANY IN LINE WITH ITS STRATEGY TO INVEST IN NICHE AREAS WHERE IT CAN ESTABLISH LEADERSHIP THROUGH SUPERIOR DOMAIN KNOWLEDGE AND OPERATIONAL EXCELLENCE HAS ACQUIRED THE FOLLOWING COMPANIES: A. MPOWER SOFTWARE SERVICES INC. A PRINCETON NEW JERSY US HEADQUARTERED COMPANY WITH A DEVELOPMENT CENTER IN CHENNAI AND MPACT TECHNOLOGY SERVICES PVT. LTD. BASED IN CHENNAI FOR AN ALL CASH CONSIDERATION OF $ 28 MILLION. B. NEW LOGIC TECHNOLOGIES AG AN AUSTRAIN FIRM WHICH IS MAINLY ENGAGED IN THE SEMICONDUCTOR IP BUSINESS AND THE ENGINEERING DESIGN SERVICES BUSINESS INCLUDING THE ANALOG MIXED SIGNAL BUSINESS FOR AN ALL CASH CONSIDERATION OF EURO 26 MILLION. ITA NO.4370/DEL./2010 (AY : 2006-07) 13 (EMPHASIS SUPPLIED) HENCE FROM A PERUSAL OF THE ABOVE EXTRACTS FORM THE ANNUAL REPORT OF THE COMPANY FOR FY 2005-06 IT CAN BE OBSERVED THAT THE COMPANY HAS UNDERGONE SIGNIFICANT BUSINESS RE-STRUCTURING DURING THE YEAR AND THEREFORE THE YEAR UNDER CONSIDERATION CANNOT BE CONSIDERED AS A NOR MAL YEAR OF OPERATIONS OF THE COMPANY. ACCORDINGLY THE COMPANY SHOULD NOT BE INCLUDED IN THE FINAL SET OF COMPARABLES FOR BENCHMARKING ASSESSEES INTERNATIONAL TRANSACTIONS. (C) RESEARCH & DEVELOPMENT (R&D) AND OWNERSHIP OF INLANOIBLES THE ANNUAL REPORT OF THE COMPANY FOR FY 2005-06 ALSO PROVIDES INFORMATION ON THE EXTENT OF R&D UNDERTAKEN BY THE COMPANY. THE EXTRACTS ARE PRESENTED BELOW: WIPRO R&D FOCUS DURING THE YEAR HAS BEEN IN STRENGTHENING THE PORTFOLIO OF CENTERS OF EXCELLENCE (COE) AND INNOVATION PROJECTS WIPROS INNOVATION INITIATIVE HAS A FULL TIME TEAM OF 275 AND COES HAVE A FULL TIME TEAM OF 128 AND ABOUT 100 LEVERAGED RESOURCES. WE FUN 40 COE S AND 50 INNOVATION PROJECTS REVENUES FROM INNOVATION F OR THE YEAR 2005-06 ARE $53 MILLION. OUR TECHNOLOGY & IP INNOVATIONS CONTRIBUTED $84. BUSINESS INNOVATIVE SOLUTI ONS CONTRIBUTED ABOUT $41 MILLION AND BUSINESS & PRODUCTIV ITY TOOLS INNOVATIVE SOLUTIONS CONTRIBUTED $36 MILLION. T HE ENABLED OPPORTUNITIES FROM COES ACCOUNT FOR $48.2 MIL LION. GENERATION INCUBATION AND SUCCESSFUL EXECUTION FURTHER THE FIXED ASSETS SCHEDULE (SCHEDULE 5) IN THE COMPANY A FINANCIAL STATEMENTS INCLUDES PATENTS TRADEMARKS & RIGHTS AT A VALUE OF INR 7 31 CRORES AND TECHNICAL KNOW-HOW AT 1 03 CRORES. THEREFORE UNL IKE THE ASSESSE WHICH IS A ROUTINE CAPTIVE SERVICE PROVIDER (NOT INDULGING IN ANY R&D EFFORTS RESULTING IN VIOLATION O F NON- ROUTINE VALUABLE INTANGIBLES). WIPRO UNDERTAKES R&D AND ALSO OWNS INTANGIBLE ASSETS. ON THIS GROUND ALONE THE SAI D COMPANY WARRANTS EXCLUSION FROM THE FINAL SET OF COMPARABLES CHOSEN FOR BENCHMARKING ASSESSEES INTERNATIONAL TRANSACTIONS. ITA NO.4370/DEL./2010 (AY : 2006-07) 14 (D) COMPARISON OF TURNOVER THE SALES/TURNOVER OF WIPRO FOR FY 2005-06 IS INR 10 2 64 CRORES AS AGAINST ASSESSEES SALES/TURNOVER OF INR 14 13 CRORES FOR THE SOFTWARE DEVELOPMENT SERVICES BUSINESS SEGMENT. FOR THE REASONS DISCUSSED IN DETAIL ABOVE IT WOULD BE ABSURD TO COMPARE THE ASSESSEE WITH A COMPANY THAT HAS A TURNOVER THAT IS 726 TIMES THE TURNOVER OF THE ASSESSEE. (E) ERROR IN COMPUTATION OF OP/TC WITHOUT PREJUDICE TO THE ARGUMENTS MADE ABOVE IT IS SUBMITTED THAT THE CORRECT COMPUTATION OF THE OP/TC FOR WIPRO LTD. IS 27 26 PERCENT (REFER ANNEXURE 1 FOR DE TAILS) AS AGAINST 34 38 PERCENT COMPUTED BY YOUR GOODSELF IN TH E CAPTIONED NOTICE. 11. THE TPO HAVING NOT MADE THE ADJUSTMENT TO THE I NCOME OF THE ASSESSEE FROM THE CSD SEGMENT OF THE ASSESSEE AFTER CONSIDERING THE ABOVE OBJECTIONS THE ASSESSEE RAISED THESE OBJECTIONS BEFORE THE AO. 12. THE AO HOWEVER UPHELD THE ADJUSTMENTS MADE BY T HE TPO HOLDING AS FOLLOWS: THE ASSESSEE FILED ELECTRONIC RETURN DECLARING NIL INCOME/LOSS ON 30.11.2006. THE RETURN WAS PROCESSED U/S 143(1) AND SUBSEQUENTLY SELECTED FOR SCRUTINY. IN RESPO NSE TO STATUTORY NOTICES MS. PARUL SARIN CA AND MS. GEETA GUPTA CA AND AUTHORIZED REPRESENTATIVE OF THE ASSESSEE ATTENDED THE PROCEEDINGS AND FILED DETAILS AND DOCUME NTS CALLED FOR FROM TIME TO TIME. THE CASE WAS DISCUSSED WI TH HIM. THE ASSESSEE IS A COMPANY AND IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. BANK STATEMENTS WERE PRODUCE D AND EXAMINED. NECESSARY DETAILS AND INFORMATION AS CAL LED FOR HAVE BEEN FILED AND PLACED ON RECORD. BOOKS OF ACCOUNTS CONSISTING OF CASH BOOK BANK BOOK LEDGER AND JOURNAL WERE CALLED FOR AND EXAMINED ON TEST CHECK B ASIS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS SEEN THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION FOR AN AGGREGATE VALUE OF `141357964 DUR ING ITA NO.4370/DEL./2010 (AY : 2006-07) 15 THE YEAR. THE CASE WAS REFERRED TO TRANSFER PRICING O FFICER FOR COMPUTATION OF ARMS LENGTH PRICE OF THE SAID INTERNATIONAL TRANSACTION ON 17.03.2008. THE ORDER U/S 92CA(3) OF THE ACT FOR COMPUTATION OF ARMS LENGTH P RICE FOR VARIOUS TRANSACTION WAS PASSED ON 01.10.2009. ON TH E BASIS OF THE DETAILS FILED BY THE ASSESSEE AND THE COMPUTATION OF THE ARMS LENGTH PRICE VIDE ORDER U/S 92CA(3) OF THE ACT THE INCOME OF THE ASSESSEE IS COMPUTED AS PER THE PROVISIONS OF SECTION 92CA(4) READ WITH SECTION 92CA(4) OF THE ACT AT `59411421. THE BASIS OF ADDITION TO THE RETURNED INCOME OF THE ASSESSEE IS ON ACCOUNT OF DIFFERENCE IN THE ARMS LENGTH PRICE OF TRANSACTIONS AS DECLARED BY THE ASSESSEE AND AS COMPUTED IN ORDER U/S 92CA(4) OF THE ACT. THE ALP ( ARMS LENGTH PRICE) DECLARED BY THE ASSESSEE FOR INTERNATIONA L RECEIPTS FOR SOFTWARE DEVELOPMENT IS AT `141357964 WHEREAS AS PER THE ORDER U/S 92CA(3) OF THE ACT IT IS COMPUTED AT `158531434 WHEREBY MAKING AN ADDITION O F THE DIFFERENCE OF `17173470. ALSO THE ALP (ARMS LEN GTH PRICE) DECLARED BY THE ASSESSEE FOR INTERNATIONAL RECEI PTS FOR THE IT-ENABLED SERVICES IS AT `803214141 WHEREAS AS PER THE ORDER U/S 92CA(3) OF THE ACT IT IS COMPUTED A T `845452092 WHEREBY MAKING AN ADDITION OF TH3 DIFFER ENCE OF `42237951. HENCE THE INCOME DECLARED BY THE ASSESSEE IS ENHANCED FROM THE RETURNED INCOME OF NIL AND COMPUTED AT `59411421. THE INCOME COMPUTED AS PER T HE PROVISIONS OF SECTION 92CA OF THE ACT IS STRONGLY BASED O N THE PROVISIONS OF THE ACT AND ON SETTLED PRINCIPLES OF LAW BY VARIOUS JUDICIAL RULINGS. AS SUCH IT BRINGS OUT THE INT ENTION OF THE ASSESSEE TO CONCEAL ITS INCOME AND BY THIS FURNISH INACCURATE PARTICULARS OF ITS INCOME. HENCE IN MY OP INION IT IS A FIT CASE FOR INITIATION OF PENALTY U/S 271(1)(C) OF THE ACT. THE DRAFT ASSESSMENT ORDER WAS PASSED UNDER SECTION 144C OF THE I.T. ACT IN THIS CASE ON 30.11.2009. THE ASSESSEE WENT IN APPEAL BEFORE THE DISPUTE RESOLUTION PENAL AGAINST THIS ORDER UNDER THE PROVISIONS OF THIS SECTION. THE HONBLE DISPUTE RESOLUTION PANEL-I NEW DELHI PASSED ORDER UNDER SECTION 144C OF THE I.T. ACT 1961 IN OBJECTION NO.28/29.12.2009 IN WHICH IT ORDERED THAT NO INTERVENTION IS CALLED FOR IN THE DRAFT ORDER ON ANY ISSUE. THEREFORE THIS ORDER HAS BEEN PASSED AS PER THE DRAFT ASSESSMENT ORDER DATED 30.11.2009. THE ORDER OF THE HONBLE DISPUTE RESOLUTION PANEL-1 NEW DELHI DATED 02.07.2010 WAS RECEIVED IN THIS OFFICE ON 12.08.2010. ITA NO.4370/DEL./2010 (AY : 2006-07) 16 AFTER DISCUSSION ASSESSED AT AN INCOME OF `59411421. ISSUE DEMAND NOTICE AND CHALLAN. GAVE CREDIT FOR PRE PAID TAXES AS PER SECTION 143(1). PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT IS INITIATED SEPARATELY. 13. THE ASSESSEE REITERATED ITS AFORESAID OBJECTIONS BEFOR E THE DRP. HOWEVER THE DRP CONFIRMED THE ADJUSTMENTS MADE WITHOUT DISPOSING OF THE AFORESAID OBJECTIONS RAISED BY THE ASSESSEE. IT WAS HELD AS FOLLOWS: (III) THE ASSESSEE HAS SELECTED 20 COMPARABLES IN THE SOFTWARE DEVELOPMENT SEGMENT. THESE COMPARABLES WERE EXAMINED BY THE TPO AND IT WAS FOUND THAT ONLY TWO COMPARABLES ARE ELIGIBLE FOR COMPARABLES IN THIS LIST. APART FROM THESE TWO ANOTHER TWO COMPARABLES WERE ALSO SELECTED BY THE TPO. DETAILED REASONS FOR THE SAME HAVE BEEN DISCLOSED IN THE BODY OF THE TRANSFER PRICING ORDER. FINALLY ONLY 4 COMPARABLES HAVE BEEN USED TO BENCHMARK THE INTERNATIONAL TRANSACTIONS IN THE SOFTWARE DEVELOPMENT SEGMENT. NO FRESH SEARCH WAS CARRIED OUT. (IV) THE ASSESSEE HAD SELECTED 13 COMPARABLES IN THE ITES SEGMENT. THESE COMPARABLES WERE EXAMINED AND IT WAS FOUND THAT 9 COMPANIES USED WERE NOT COMPARABLES. HENCE FINALLY ONLY 4 COMPARABLES HAVE BEEN USED TO BENCHMARK THE INTERNATIONAL TRANSACTIONS IN THE ITES SEGMENT. THE RESULTS OF FRESH SEARCH HAVE NOT BEEN USED. THE COMPARABLES HAVE BEEN SELECTED OUT OF THE COMPANIES IDENTIFIED BY THE ASSESSEE IN THE TRANSFER PRICING STUDY REPORT. (V) AN ADJUSTMENT OF `5 94 11 421 HAS BEEN MADE TO THE INCOME OF THE ASSESSEE. (VI) THE CLAIM OF ASSESSEE FOR RISK ADJUSTMENT HAS BEEN EXAMINED AND HAS NOT BEEN ACCEPTED. 2.2 THE ASSESSEE HAS OBJECTED THE TRANSFER PRICING ORDER AND HAS CLAIMED THAT THE TPO HAS IGNORED THE FACT THA T THE ASSESSEE IS ENTITLED TO TAX HOLIDAY U/S 10A OF I.T. ACT A ND ITA NO.4370/DEL./2010 (AY : 2006-07) 17 WOULD NOT HAVE ANY UNTOWARD MOTIVE OF DERIVING A TA X ADVANTAGE BY MANIPULATING TRANSFER PRICES OF INTERNAT IONAL TRANSACTIONS. THE TPO HAS DISREGARDED MULTIPLE YEARS/PR IOR Y4ARS DATA. IN ITES SEGMENT THE TPO HAS RESORTED ARBITRARY REJECTION OF NO PROFIT/LOSS MAKING COMPANIE S AND RETAINED ONLY HIGH PROFIT MAKING COMPANIES AS COMPARABLES. HE HAS ARBITRARY SUBSTITUTED TURNOVER FIL TER OF `5 CRORES AGAINST `1 CRORE AS TAKEN BY THE ASSESSEE. I T HAS BEEN STATED THAT CERTAIN COMPANY HAVE BEEN EXCLUD ED ON THE GROUND THAT THEY ARE FUNCTIONALLY INCOMPARAB LE AND THAT THE TPO HAS FAILED TO APPLY THE WAGS/SALES RATIO F ILTER IN ITES SEGMENT. 2.3 THE SUBMISSIONS MADE BY THE ASSESSEE HAVE BEEN CONSIDERED BUT THE SAME ARE NOT CORRECT. THE TPO HAS NOT SELECTED NEW COMPARABLES BUT HAVE SHORT LISTED SOME COMPANIES OUT OF GIVEN SET OF COMPARABLES BY ASSESSEE ITSELF. THIS SHORT LISTING HAS BEEN DONE BY APPLYING SCIENTIFIC AND LOGICAL FILTERS. THE ASSESSEES SUBMISSION IN THE MATTER OF LAST YEAR/PRIOR YEARS DATA FOR COMPARA BLES HAS ALSO NOT BEEN FOUND CORRECT. IN THE MATTER OF RI SK ADJUSTMENT ALSO THE ISSUES POINTED OUT BY THE TPO ARE CORRECT AND THERE IS NO SUBSTANTIAL FORCE IN THE ARGUM ENT OF THE ASSESSEE TO INTERFERE WITH THE FINDINGS OF THE TPO. THUS WE FIND NO COMPELLING REASONS TO INTERFERE WITH THE ORDER OF TPO AND THE AO AND HENCE THE SAME ARE CONFIRMED. 14. APROPOS THE ADJUSTMENT MADE TO THE INCOME OF THE ASSESSEE FROM ITS ITES SEGMENT THE TPO REJECTED OUT OF 1 3 COMPANIES SUBMITTED BY THE ASSESSEE AND ARRIVED AT THE FOLLOWING: PARTICULARS MARGINS CONSIDERED BY THE TPO IN THE TO ORDER (AFTER ROUNDING OFF) ACTUAL OP/TC CS SOFTWARE 20% 19.87% SPANCO LTD. 21% 21.00% TRANSWORK 20% 19.62% TRITON CORP 21% 20.58% MEAN OP/TC MEAN OP/TC MEAN OP/TC MEAN OP/TC 20.50% 20.50% 20.50% 20.50% 20.27% 20.27% 20.27% 20.27% 15. THE ASSESSEE HAD SUBMITTED THE ACTUAL MARGIN OF THE AFORESAID COMPANIES ALONG WITH THEIR COMPUTATIONS IN T HE ITA NO.4370/DEL./2010 (AY : 2006-07) 18 PROCEEDINGS BEFORE THE TPO VIDE SUBMISSIONS DATED 20.8. 2009 (COPY AT APB 1 PAGES 181-200). THE TPO HOWEVER C ONSIDERED THE MARGIN AFTER ROUNDING OFF. THE ASSESSEE OBJECTED T HAT THIS ROUNDING OFF INCREASED THE ARMS LENGTH MARGIN. THE ACTUAL MARGIN BASED ON ANNUAL REPORTS HAS BEEN FILED BEFORE U S. ON THIS BASIS THE ASSESSEE CLAIMS THAT ITS TRANSACTIONS IN ITS IT ES SEGMENT WERE AT ARMS LENGTH ON APPLYING THE WAGES/SALE S FILTER OR EVEN WITHOUT SUCH APPLICATION. 16. THE AO THUS ARRIVED AT AN ARMS LENGTH OP/TC MARG IN OF 20.50%. AN ADJUSTMENT OF `42237951 TO THE INCOME FRO M THE ITES WAS THUS RECOMMENDED BY THE TPO. 17. THE ASSESSEE OBJECTED BEFORE THE TPO THAT THE ACTUA L MARGINS HAD NOT BEEN CONSIDERED AND NO WAGES/SALES FILTE R HAD BEEN APPLIED FOR ITS ITES SEGMENT WHEREAS IT HAD BEEN SO DONE FOR ITS CSD SEGMENT. THE ASSESSEES OBJECTIONS BEFORE THE TPO (RELEVANT PORTION OF ITS SUBMISSIONS DATED 29.9.09 BEFOR E THE TPO IS AT APB-1 PAGES 200-201 ARE AS FOLLOWS: 4. INCONSISTENT APPLICATION OF WAGES/SALES RATIO FILTER WITHOUT PREJUDICE TO THE SUBMISSIONS MADE ABOVE IT IS SUBMITTED THAT SHOULD YOUR GOODSELF INSIST ON APPLYING T HE WAGES/SALES RATIO FILTER FOR IDENTIFYING COMPANIES COMPARABLE TO THE SOFTWARE DEVELOPMENT SERVICES BUSINESS SEGMENT THEN CONSISTENCY REQUIRES THAT THE SAME FILTER RANGE SHOULD ALSO BE APPLIED FOR IDENTIFYING COMPARABLES FOR THE IT ENABLED SERVICES BUSINESS SEGMENT OF THE ASSESSEE CONSIDERING THAT THE WAGES/SALES RATIO OF THE ASSESSEE (AS COMPUTED BY YOUR GOODSELF) IS I N ANY CASE BASED ON THE COMPANY-WIDE NUMBERS AND COULD THUS BE EQUALLY APPLIED TO THE IT ENABLED SERVICES BU SINESS SEGMENT. IF THE WAGES/SALES RATIO FILTER IN THE RANGE OF 30- 60 PER CENT IS APPLIED TO THE SET OF COMPARABLES PROPO SED BY YOUR GOODSELF VIDE NOTICE DATED JULY 14 2009 (WIT HOUT PREJUDICE TO ALL OTHER OBJECTIONS RAISED BY THE ASSESSEE AGAINST USE OF SUCH SET OF COMPARABLES REFER THE ASSESSEES REPLY TO THE SAID NOTICE VIDE SUBMISSION DATED AUGUST 3 2009) FOR BENCHMARKING ASSESSEES IT ENABLED ITA NO.4370/DEL./2010 (AY : 2006-07) 19 SERVICES BUSINESS SEGMENT THEN THE FOLLOWING RESULT IS ACHIEVED (REFER TABLE BELOW) S.NO. COMPANY WAGES/SALES APPLICATION OFWAGES/SALES RATIO FILTER 30- 60 PER CENT OP/TC 1. ALLSEC TECHNOLOGIES LTD. 38.72% ACCEPTED 28.73% 2. NUCLEUS NELSON AND GIS(INDIA) LTD. 23.24% REJECTED 35.89% 3. GALAXY COMMERCIAL LTD. 51.70% ACCEPTED 19.77% 4. MAPLE ESOLUTIONS LTD. 30.96% ACCEPTED 36.83% 5. VISHAL INFORMATION TECHNOLOGIES LTD. 1 49% REJECTED 48.05% 6. REV IT SYSTEMS PVT. LTD. 25.67% REJECTED 18.58% 7. CSS TECHNERGY LTD. 19.70% REJECTED 19.87% 8. SPANCO LTD. 20.66% REJECTED 21.00% 9. TRANSWORKS INFORMATION SERVICES LTD. 50.55% ACCEPTED 19.52% 10. TRILLION CORP. LTD. 34.17% ACCEPTED 20.58% MEAN OF ALL COMPANIES 26.89% MEAN OF ACCEPTED COMPANIES 25.10% THUS AS YOUR GOODSELF WOULD OBSERVE FROM THE ABOVE TABL E A CONSISTENT (ALBEIT INCORRECT IN THE ASSESSEES HUMBLE VIEW) APPLICATION OF THE WAGES/SALES RATIO FILTER RESUL TS IN THE MEAN OP/TC MARGIN OF THE COMPARABLES REDUCING F ROM 26.89 PERCENT TO 25.10 PERCENT. ITA NO.4370/DEL./2010 (AY : 2006-07) 20 18. THE TPO HOWEVER DID NOT CONSIDER THESE OBJECTIO NS RAISED BY THE ASSESSEE. 19. THE ASSESSEE TOOK THESE OBJECTIONS BEFORE THE DRP ALSO BUT THE DRP ALSO IGNORED THE SAME. 20. THE LD.COUNSEL FOR THE ASSESSEE HAS STATED BEFORE US TH AT THUS WITH REGARD TO BOTH THE ADJUSTMENTS OF INCOME I .E. CONCERNING INCOME FROM ITS CSD AS WELL AS LTES SEGMENTS THE VALID OBJECTIONS RAISED BY THE ASSESSEE HAVE NOT BEEN CON SIDERED RIGHT FORM THE TPO STAGE THROUGH TO THE DRP LEVEL. 21. WE FIND THE GRIEVANCE OF THE ASSESSEE TO BE CORRECT . THE DETAILED OBJECTIONS RAISED BY THE ASSESSEE WITH REGARD TO THE ADJUSTMENT MADE TO ITS INCOME FROM BOTH ITS CSD AS WELL AS ITES SEGMENTS HAVE NOT BEEN CONSIDERED RIGHT FROM THE VERY BEGINNING I.E. FROM THE TPO TO THE DRP. THIS REND ERS THE ORDERS OF THE TPO AND THE AO TO BE NON-SPEAKING SO FAR AS TH E OBJECTIONS RAISED BY THE ASSESSEE. SHORN OF DECISION ON SU CH OBJECTIONS THE ADJUSTMENT MADE TO THE INCOME OF THE ASSESSEE AS ITS STAND IS UNSUSTAINABLE. 22. SECTION 144C OF THE I.T. ACT ENVISAGES FOLLOWING ON THE PART OF THE DRP:- (5) THE DISPUTES RESOLUTION PANEL SHALL IN A CASE WHE RE ANY OBJECTION IS RECEIVED UNDER SUB-SECTION (2) ISSUE SUCH DIRECTIONS AS IT THINKS FIT FOR THE GUIDANCE OF THE ASSESSING OFFICER TO ENABLE HIM TO COMPLETE THE ASSESSMENT. (6) THE DISPUTE RESOLUTION PANEL SHALL ISSUE THE DIRECTIONS REFERRED TO IN SUB-SECTION (5) AFTER CONSIDERING THE FOLLOWING NAMELY :- (A) DRAFT ORDER; (B) OBJECTIONS FILED BY THE ASSESSEE; (C) EVIDENCE FURNISHED BY THE ASSESSEE; (D) REPORT IF ANY OF THE ASSESSING OFFICER VALUATION OFFICER OR TRANSFER PRICING OFFICER OR ANY OTHER AUTHORITY; (E) RECORDS RELATING TO THE DRAFT ORDER; ITA NO.4370/DEL./2010 (AY : 2006-07) 21 (F) EVIDENCE COLLECTED BY OR CAUSED TO BE COLLECTED BY IT; AND (G) RESULT OF ANY ENQUIRY MADE BY OR CAUSED TO BE MADE BY IT. (7) THE DISPUTE RESOLUTION PANEL MAY BEFORE ISSUING ANY DIRECTIONS REFERRED TO IN SUB-SECTION (5) - (A) MAKE SUCH FURTHER ENQUIRY AS IT THINKS FIT; OR (B) CAUSE ANY FURTHER ENQUIRY TO BE MADE BY ANY INCOME TAX AUTHORITY AND REPORT THE RESULT OF THE SAME TO IT. (8) THE DISPUTE RESOLUTION PANEL MAY CONFIRM REDUCE OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER SO HOWEVER THAT IT SHALL NOT SET ASIDE ANY PROPOSED VARIA TION OR ISSUE ANY DIRECTION UNDER SUB-SECTION (5) FUR FURTHE R ENQUIRY AND PASSING OF THE ASSESSMENT ORDER. (9) IF THE MEMBERS OF THE DISPUTE RESOLUTION PANEL DIF FER IN OPINION ON ANY POINT THE POINT SHALL BE DECIDED ACCORDING TO THE OPINION OF THE MAJORITY OF THE MEM BERS. (10) EVERY DIRECTION ISSUED BY THE DISPUTE RESOLUTION PANEL SHALL BE BINDING ON THE ASSESSING OFFICER. (11) NO DIRECTION UNDER SUB-SECTION (5) SHALL BE ISSUED UNLESS AN OPPORTUNITY OF BEING HEARD IS GIVEN TO THE ASSESSEE AND THE ASSESSING OFFICER ON SUCH DIRECTIONS WHICH ARE PREJUDICIAL TO THE INTEREST OF THE ASSESSEE OR THE INTEREST OF THE REVENUE RESPECTIVELY. (12) NO DIRECTION UNDER SUB-SECTION (5) SHALL BE ISSUED AFTER NINE MONTHS FROM THE END OF THE MONTH IN WHICH THE DRAFT ORDER IS FORWARDED TO THE ELIGIBLE ASSESSEE. (13) UPON RECEIPT OF THE DIRECTIONS ISSUED UNDER SUB- SECTION (5) THE ASSESSING OFFICER SHALL IN CONFORMITY WITH THE DIRECTIONS COMPLETE NOTWITHSTANDING ANYTHING T O THE CONTRARY CONTAINED IN SECTION 153 THE ASSESSMENT WITHOU T PROVIDING ANY FURTHER OPPORTUNITY OF BEING HEARD TO THE ASSESSEE WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH SUCH DIRECTION IS RECEIVED. 23. IN THE PRESENT CASE THE ORDER PASSED BY THE LD.DRP AS SEEN ABOVE IS NON-SPEAKING. THE OBJECTIONS TAKEN BY T HE ASSESSEE HAVE NOT BEEN CONSIDERED. NOW IN M/S SAHARA I NDIA (FARMS) VS. CIT AND ANOTHER 300 ITR 403 (SC) IT HA S BEEN HELD THAT EVEN AN ADMINISTRATIVE ORDER HAS TO BE CONSISTENT WITH THE RULES OF NATURAL JUSTICE. VERY RECENTLY IN VODAFON E ESSAR LTD. ITA NO.4370/DEL./2010 (AY : 2006-07) 22 VS. THE DISPUTE RESOLUTION PENAL-II & OTHERS 2010-TII -22-HC- DEL-INTL THE JURISDICTIONAL HIGH COURT HAS HELD THAT IT IS OBLIGATORY FOR A JUDICIAL BODY LIKE THE DISPUTE RESOL UTION PANEL TO PASS A REASONED ORDER. 24. THEREFORE THE MATTER IS HEREBY REMITTED TO THE DRP TO BE DECIDED AFRESH IN ACCORDANCE WITH LAW ON CONSIDERING AND DECIDING THE AFORESAID OBJECTIONS RAISED BY THE ASSESSEE B EFORE THE TPO THE AO AND THE DRP CONCERNING THE ADJUSTME NT SOUGHT TO BE MADE TO ITS INCOME FROM BOTH ITS CSD AND ITES SE GMENTS. THE ASSESSEE IT CANNOT BE GAINSAID SHALL BE PROVIDED PR OPER OPPORTUNITY OF HEARING TO SUPPORT ITS CASE. 25. GROUND NO.3 RAISED BY THE ASSESSEE STATES THAT THE AO ERRED IN INITIATING PENALTY PROCEEDINGS U/S 271(1)(C) READ WITH SECTION 274 OF THE I.T. ACT. IN VIEW OF THE REMAND OF THE MATTER CONCERNING GROUND NO.2 TO THE DRP THIS ISSUE IS ALSO RE MITTED TO THE DRP TO BE DECIDED AFRESH IN ACCORDANCE WITH LAW IN THE LIGHT OF THE DECISION TO BE ARRIVED AT CONCERNING GROUND N O.2. 26. IN THE RESULT FOR STATISTICAL PURPOSES THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 21.01.2011. SD/- SD/- (K.D. RANJAN) (A.D. JAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED JAN. 21 2011. SKB COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.DRP NEW DELHI. 5.CIT(ITAT) NEW DELHI. AR/ITAT ITA NO.4370/DEL./2010 (AY : 2006-07) 23