M/s Labvantage Solutions Pvt. Ltd., Kolkata v. DCIT, CIR-2(1), KOLKATA, Kolkata

ITA 617/KOL/2015 | 2010-2011
Pronouncement Date: 19-10-2016

Appeal Details

RSA Number 61723514 RSA 2015
Assessee PAN AAACL5340H
Bench Kolkata
Appeal Number ITA 617/KOL/2015
Duration Of Justice 1 year(s) 5 month(s) 6 day(s)
Appellant M/s Labvantage Solutions Pvt. Ltd., Kolkata
Respondent DCIT, CIR-2(1), KOLKATA, Kolkata
Appeal Type Income Tax Appeal
Pronouncement Date 19-10-2016
Appeal Filed By Assessee
Bench Allotted C
Tribunal Order Date 19-10-2016
Date Of Final Hearing 22-08-2016
Next Hearing Date 22-08-2016
Assessment Year 2010-2011
Appeal Filed On 13-05-2015
Judgment Text
1 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: KOL KATA [BEFORE SHRI M. BALAGANESH AM & SHRI S.S. VISWANE THRA RAVI JM] I.T.A NO. 1051/KOL/2015 ASSESSMENT YEAR: 2009-10 M/S. LABVANTAGE SOLUTION PVT. LTD. VS. DEPUTY COMM ISSIONER OF INCOME-TAX (PAN: AAACL5340H) CIRCLE-2(1) KOLKATA. ( APPELLANT ) ( RESPONDENT ) & I.T.A NO. 599/KOL/2015 ASSESSMENT YEAR: 2010-11 DEPUTY COMMISSIONER OF INCOME-TAX VS. M/S. LABVA NTAGE SOLUTION PVT. LTD. CIRCLE-2(1) KOLKATA. (PAN: AAACL5340H) ( APPELLANT ) ( RESPONDENT ) & I.T.A NO. 617/KOL/2015 ASSESSMENT YEAR: 2010-11 M/S. LABVANTAGE SOLUTION PVT. LTD. VS. DEPUTY COMM ISSIONER OF INCOME-TAX (PAN: AAACL5340H) CIRCLE-2(1) KOLKATA. ( APPELLANT ) ( RESPONDENT ) DATE OF HEARING: 22.08.2016 DATE OF PRONOUNCEMENT: 19.10.2016 FOR THE ASSESSEE: SHRI MAWHEET DALAL ADVOCATE & S HRI GUNJAN KHANNA AR FOR THE REVENUE: SHRI G. MALLIKARJUNA CIT DR ORDER PER SHRI M. BALAGANESH AM: THESE APPEALS OF THE ASSESSEE ARISE OUT OF THE PROC EEDINGS FOR THE ASST YEARS 2009-10 AND 2010-11 OF THE LEARNED DISPUTE RESOLUTI ON PANEL (DRP) DATED 24.6.2015 AND 31.12.2014 RESPECTIVELY IN WHICH DIRECTIONS ARE GIVEN TO THE LEARNED AO U/S 144C(5) READ WITH SECTION 144C(8) OF THE INCOME TAX ACT 1961 (HEREINAFTER REFERRED TO AS THE ACT). AS THE ISSUES INVOLVED IN BOTH T HE APPEALS ARE IDENTICAL IN NATURE THEY ARE TAKEN UP TOGETHER AND DISPOSED OFF BY THIS COMM ON ORDER FOR THE SAKE OF CONVENIENCE. 2 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 ITA NO. 1051/KOL/2015 ASST YEAR 2009-10 2. THE ASSESSEE HAD RAISED A PRELIMINARY GROUND OB JECTING TO THE INITIATION OF REASSESSMENT PROCEEDINGS . HENCE THE FIRST QUESTION TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE REASSESSMENT PROCEEDINGS HAVE BEEN VALI DLY INITIATED AND FRAMED AS PER LAW IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 2.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSE SSEE COMPANY FILED ITS RETURN OF INCOME ON 29.9.2009 AND RECEIVED INTIMATION U/S 143(1) OF THE ACT ON 13.10.2010. NO NOTICE U/S 143(2) OF THE ACT WAS ISSUED ON THE ASSESSEE SELECT ING THE CASE FOR SCRUTINY. HOWEVER A REFERENCE WAS MADE BY THE LD AO TO LD TPO WHO PASSE D AN ORDER PROPOSING AN ADJUSTMENT OF RS. 2 43 53 752/- TO ARMS LENGTH PRI CE (ALP) DETERMINED BY THE ASSESSEE. SINCE NO ASSESSMENT PROCEEDING WAS PEN DING AT THAT TIME IN ORDER TO GIVE EFFECT TO THE ORDER OF THE LD TPO THE LD AO REOPEN ED THE ASSESSMENT BY ISSUING NOTICE U/S 148 OF THE ACT. IN THE REASSESSMENT PROCEEDING S NO FRESH REFERENCE WAS MADE TO LD TPO U/S 92CA(1) OF THE ACT FOR DETERMINATION OF ALP IN RESPECT OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. THE REASSESSMENT WAS COMPLETED BY MAKING AN ADDITION TOWARDS ALP TO THE TUNE OF RS. 2 43 53 752/- AS MAD E BY THE LD TPO AND DISALLOWANCE U/S 40(A)(IA) OF THE ACT TO THE TUNE OF RS. 27 575/ -. THE ASSESSEE FILED OBJECTIONS BEFORE THE LD DISPUTE RESOLUTION PANEL (DRP) OBJECTING TO THE VALIDITY OF REASSESSMENT AND ON MERITS. THE LD DRP DISPOSED OFF THE OBJECTIONS VID E ITS PROCEEDINGS U/S 144C(5) OF THE ACT DATED 24.6.2015 STATING THAT THE ASSESSEE IS NO T AN ELIGIBLE ASSESSEE AS DEFINED U/S 144C(15)(B) OF THE ACT AND ACCORDINGLY THE JURISDIC TION OF THE LD DRP COULD NOT BE INVOKED. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFO RE US ON VARIOUS GROUNDS. THE PRINCIPAL GROUND REVOLVES AROUND OBJECTING TO THE V ALIDITY OF THE REASSESSMENT FRAMED BY THE LD AO BY MAKING AN ADJUSTMENT TO ALP BASED ON O RDER OF THE LD TPO U/S 92CA(3) OF THE ACT WHICH WAS ADMITTEDLY MADE VIDE ILLEGAL REFE RENCE TO LD TPO BEFORE THE INITIATION OF REASSESSMENT PROCEEDINGS WHEN THE ASSESSMENT PRO CEEDINGS WERE NOT PENDING BY WAY OF SELECTING THE CASE FOR SCRUTINY. APART FROM THI S THE ASSESSEE ALSO PREFERRED APPEAL ON MERITS OF THE ADDITION MADE TOWARDS ADJUSTMENT TO A LP AMONG OTHERS. 3 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 2.2. THE LD AR FILED A CHART REFLECTING THE LIST OF DATES AND GISTS EXPLAINING THE CHRONOLOGY OF EVENTS FROM THE DATE OF FILING THE RE TURN TILL THE DATE OF PASSING OF FINAL ASSESSMENT ORDER BY THE LD AO PURSUANT TO THE ORDER OF THE LD DRP. THE VARIOUS ARGUMENTS OF LD AR ARE SUMMARIZED BELOW:- (I) THE RETURN FILED BY THE ASSESSEE WAS NOT SELECT ED FOR SCRUTINY BY ISSUANCE OF NOTICE U/S 143(2) OF THE ACT. HENCE IT COULD BE CONCLUDED THAT NO ASSESSMENT PROCEEDING WAS PENDING AT THAT TIME. (II) WITHOUT THE PENDENCY OF VALID ASSESSMENT PROCE EDING THE LD AO MADE REFERENCE TO LD TPO U/S 92CA(1) OF THE ACT FOR DETERMINATION OF ALP . THE ASSESSEE CO-OPERATED WITH THE PROCEEDINGS OF LD TPO. (III) THE LD TPO PASSED AN ORDER U/S 92CA(3) OF THE ACT ON 29.1.2013 SUGGESTING AN ADJUSTMENT TO ALP TO THE TUNE OF RS. 2 43 53 752/- . (IV) SINCE NO ASSESSMENT PROCEEDINGS WERE PENDING THE LD AO DID NOT FRAME ANY ASSESSMENT FOR GIVING EFFECT TO THE ORDER OF THE LD TPO. (V) LATER THE LD AO ISSUED NOTICE U/S 148 OF THE AC T BY REOPENING THE ASSESSMENT FOR GIVING EFFECT TO THE ORDER OF THE LD TPO. (VI) THE ASSESSEE COMPLIED WITH THE REASSESSMENT P ROCEEDINGS . (VII) NO FRESH REFERENCE WAS MADE TO LD TPO U/S 92C A(1) OF THE ACT IN THE REASSESSMENT PROCEEDINGS FOR DETERMINATION OF ALP. (VIII) THE LD AO JUST ADOPTED THE ADJUSTMENT TO ALP SUGGESTED BY THE LD TPO IN HIS ORDER DATED 29.1.2013 (WHICH WAS DONE VIDE ILLEGAL REFERENCE) AND MADE ADDITION TO THAT EXTENT IN THE REASSESSMENT PROCEEDINGS COMPLETED ON 15.9.2014. (IX) THE ASSESSEE PREFERRED OBJECTIONS BEFORE THE L D DRP AGAINST THE SAID DRAFT ORDER OF THE LD AO CONTENDING THE ILLEGAL REFERENCE MADE TO LD TPO WHEN NO VALID PROCEEDINGS WERE PENDING AND THE LD AO ADOPTING THE SAID ADJUST MENT TO ALP SUGGESTED IN THE OLD ORDER US/ 92CA(3) OF THE ACT AND ALSO OBJECTED THAT NO FRESH REFERENCE WAS MADE TO LD TPO IN THE REASSESSMENT PROCEEDINGS. ACCORDINGLY THE VALIDITY OF REASSESSMENT AND ADDITION MADE THEREON TO THIS EXTENT WAS OBJECTED T O BY THE ASSESSEE APART FROM THE CONTESTING THE ISSUE ON MERITS. 4 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 (X) THE LD DRP PASSED AN ORDER ON 24.6.2015 STATING THAT THE ASSESSEE IS NOT AN ELIGIBLE ASSESSEE AS DEFINED IN SECTION 144C(15)(B) OF THE A CT AND ACCORDINGLY THE LD DRP CANNOT ASSUME JURISDICTION AND DIRECTED THE LD AO TO PROCE ED AS PER LAW. (XI) THE LD AR ARGUED THAT THE ENTIRE ADDITION OF R S. 2 43 53 752/- MADE IN THE REASSESSMENT BASED ON LD TPOS ORDER WHICH WAS PA SSED VIDE ILLEGAL REFERENCE DESERVES TO BE DELETED FOR WHICH HE PLACED RELIAN CE ON THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF BUCYRUS INDIA PVT LTD VS DCIT IN ITA NO. 616/KOL/2015 DATED 15.10.2015. (XII) THE LD AR ALSO ARGUED THAT IN THE REASSESSMEN T PROCEEDINGS NO FRESH NOTICE U/S 143(2) OF THE ACT WAS ISSUED BY THE LD AO. HOWEVER THIS GROUND WAS WITHDRAWN BY THE LD AR DURING THE COURSE OF HEARING BEFORE THIS TRIB UNAL FOR WHICH NECESSARY ENDORSEMENT WAS ALSO MADE BY HIM IN THE PAPERS SUBMITTED BEFORE US. (XIII) THE LD AR ARGUED THAT SINCE NO REFERENCE WAS MADE TO LD TPO IN THE REASSESSMENT PROCEEDINGS FOR DETERMINATION OF ALP THE LD AO OUG HT NOT TO HAVE PASSED ANY DRAFT ASSESSMENT ORDER ON 15.9.2014 AND INSTEAD SHOULD HA VE PASSED THE FINAL REASSESSMENT ORDER AS IS DONE REGULARLY. HENCE THE REASSESSMEN T ORDER PASSED BY HIM IS VOID ABINITIO AND BAD IN LAW. (XIV) THE FINAL ORDER PASSED BY THE LD AO DATED 8.7 .2015 IS BAD IN LAW IN AS MUCH AS THE LD AO FAILED TO COMPREHEND THE FACTS AND CIRCUMSTAN CES OF THE CASE AND APPLY THE LD DRPS ORDER IN THE PROPER LEGAL PERSPECTIVE. (XV) THE LD AR ARGUED BY PLACING RELIANCE ON THE PR OVISIONS OF SECTION 153(2) OF THE ACT THAT REFERENCE U/S 92CA OF THE ACT COULD BE MADE ON LY DURING THE COURSE OF ASSESSMENT OR REASSESSMENT PROCEEDINGS. HE PLACED RELIANCE ON INSTRUCTION NO. 3 DATED 20.5.2003 IN THIS REGARD. BASED ON THE AFORESAID LEGAL ARGUMENTS HE PRAYED F OR DELETION OF THE ADDITION IN THE SUM OF RS. 2 43 53 752/- MADE IN THE REASSESSMENT. 2.3. IN RESPONSE TO THIS THE LD DR ARGUED THAT THE RE IS NO REQUIREMENT OF PENDENCY OF SCRUTINY OF ASSESSMENT PROCEEDINGS FOR MAKING REFER ENCE TO LD TPO . IT IS PURELY IN THE DISCRETION OF THE LD AO TO REFER THE CASE TO LD TPO FOR DETERMINATION OF ALP. THE 5 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 REFERENCE WAS MADE TO LD TPO AFTER OBTAINING PRIOR APPROVAL FROM THE LD CIT. IT IS AN ADMITTED FACT THAT ASSESSMENT COULD NOT BE FRAMED B Y THE ASSESSEE BY MAKING AN ADDITION SUGGESTED IN THE SUM OF RS. 2 43 53 752/- BY THE LD TPO IN HIS ORDER DATED 29.1.2013 AS NO SCRUTINY ASSESSMENT PROCEEDINGS WERE PENDING ON THAT DATE. IT IS AN ADMITTED FACT THAT NO NOTICE U/S 143(2) OF THE ACT WAS ISSUED AND SERV ED ON THE ASSESSEE IN THE ORIGINAL PROCEEDINGS. HOWEVER THAT DOES NOT DEBAR THE LD A O TO MAKE REFERENCE TO LD TPO FOR DETERMINATION OF ALP. HE ARGUED THAT ADMITTEDLY T HE ORDER PASSED U/S 92CA(3) OF THE ACT VIDE REFERENCE MADE TO HIM SUGGESTED AN ADJUST MENT TO ALP IN THE SUM OF RS. 2 43 53 752/- WHICH WOULD CONSTITUTE INFORMATION EN ABLING THE LD AO TO HAVE REASON TO BELIEVE THAT INCOME HAD ESCAPED ASSESSMENT. ACCORD INGLY THE LD AO REOPENED THE ASSESSMENT BY ISSUING NOTICE U/S 148 OF THE ACT. S INCE THE ORDER OF LD TPO IS ALREADY ON RECORD THE LD AO THOUGHT IT FIT NOT TO REFER THE C ASE AGAIN TO LD TPO FOR DOING THE SAME WORK IN ORDER TO AVOID MULTIPLICITY OF PROCEEDINGS AND TO REACH FINALITY IN THE SAME AT THE EARLIEST. THIS EARNEST INTENTION OF THE LD AO CANN OT BE DOUBTED WITH. WITH REGARD TO THE RELIANCE PLACED BY THE LD AR ON THE CBDT INSTRUCTIO N NO. 3 DATED 20.5.2003 HE ARGUED THAT THE SAID INSTRUCTION EXCLUSIVELY RELATES ONLY TO LD TPOS ORDER AND NOT RELATED TO SELECTION OF CASE FOR SCRUTINY. HE STATED THAT THE SAID CIRCULAR WAS REPLACED SUBSEQUENTLY IN THE YEAR 2016. THE ASSESSEE HAD NOT OBJECTED TO THE ILLEGAL REFERENCE TO LD TPO AS IT IS EVIDENT THAT THE ASSESSEE HAD DULY COOPERATED WITH THE LD TPO PROCEEDINGS. THE DECISION RENDERED BY THIS TRIBUNAL IN THE CASE OF BUCYRUS IN DIA PVT LTD SUPRA IN TURN RELIED ON DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CAS E OF CIT VS SAP LABS PVT LTD IN ITA NO. 842 OF 2008 AND ITA NO. 339 OF 2010 DATED 2 5.8.2014. IN THE CASE BEFORE THE HONBLE KARNATAKA HIGH COURT THERE WAS NO RETURN PENDING AND HENCE NO REFERENCE TO LD TPO COULD BE MADE. IT DID NOT DEAL WITH PENDENC Y OF SCRUTINY PROCEEDINGS. 2.4. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE FAC TS STATED HEREINABOVE REMAIN UNDISPUTED ARE NOT REITERATED HEREIN FOR THE SAKE O F BREVITY. WE FIND THAT THE ENTIRE ISSUE IS SQUARELY COVERED BY THE DECISION OF THIS TRIBUNA L IN THE CASE OF BUCYRUS INDIA PVT LTD VS ACIT IN ITA NO. 616/KOL/2015 DATED 15.10.2015 WHEREIN IT WAS HELD AS BELOW:- 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE WHOLE SCHEME OF ASSESSMEN T PROCEEDINGS HAVE TO BE LOOKED 6 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 INTO FOR DECIDING THE CASE BEFORE US. NORMALLY WHE N A RETURN IS FILED BY THE ASSESSEE IT WOULD EITHER GET COMPLETED U/S 143(1) OF THE ACT BY RECEIVING INTIMATION FROM THE ASSESSING OFFICER. IF THE CASE IS SELECTED FOR SCR UTINY BY ISSUANCE OF NOTICE U/S 143(2) OF THE ACT WITHIN THE PRESCRIBED TIME THEN THE ASSESSMENT WOULD GET COMPLETED U/S 143(3) OR 144 OF THE ACT. HENCE IT I S WELL SETTLED THAT WHEN NO SCRUTINY NOTICE U/S 143(2) IS SERVED ON THE ASSESSE E THE ASSESSMENT WOULD DEEMED TO BE COMPLETED BASED ON INTIMATION U/S 143(1) OF THE ACT IF SERVED ON THE ASSESSEE OR THE ACKNOWLEDGEMENT OF RETURN ITSELF WOULD BE DEEME D TO BE THE ASSESSMENT ORDER. HENCE PRACTICALLY THE ASSESSMENT GETS COMPLETED AT THIS STAGE ITSELF IN THE BELIEF OF THE ASSESSEE UNLESS OTHERWISE REOPENED BY ISSUING S EPARATE NOTICE U/S 148 OF THE ACT. THE REFERENCE TO LEARNED TPO FOR DETERMINATION OF A LP OF INTERNATIONAL TRANSACTIONS HAVE BEEN SPELT OUT IN THE STATUTE U/S 92CA OF THE ACT. FOR THE SAKE OF CONVENIENCE THE RELEVANT PROVISIONS OF SECTION 92CA(1) IS REPRO DUCED HEREUNDER:- 92CA REFERENCE TO TRANSFER PRICING OFFICER (1) WHERE ANY PERSON BEING THE ASSESSEE HAS ENTE RED INTO AN INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION IN AN Y PREVIOUS YEAR AND THE ASSESSING OFFICER CONSIDERS IT NECESSARY OR EXPEDIENT SO TO D O HE MAY WITH THE PREVIOUS APPROVAL OF THE PRINCIPAL COMMISSIONER OR COMMISSIO NER REFER THE COMPUTATION OF THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTE RNATIONAL TRANSACTION OF SPECIFIED DOMESTIC TRANSACTION UNDER SECTION 92C TO THE TRANS FER PRICING OFFICER. 4.1. IN THIS REGARD THE RELEVANT INSTRUCTION NO. 3 OF 2003 DATED 20.5.2003 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES REQUIRES CONSI DERATION. FOR THE SAKE OF CONVENIENCE THE SAID INSTRUCTION NO. 3 OF 2003 DAT ED 20.5.2003 PARA 2 IS REPRODUCED HEREUNDER;- IN ORDER TO MAKE A REFERENCE TO THE TPO THE ASSE SSING OFFICER HAS TO SATISFY HIMSELF THAT THE TAXPAYER HAS ENTERED INTO AN INTERNATIONAL TRAN SACTION WITH AN ASSOCIATED ENTERPRISE. ONE OF THE SOURCES FROM WHICH THE FACTUAL INFORMATI ON REGARDING INTERNATIONAL TRANSACTION CAN BE GATHERED IN FORM NO. 3CEB FILED WITH THE RET URN WHICH IS THE NATURE OF AN ACCOUNTANTS REPORT CONTAINING BASIC DETAILS OF AN INTERNATIONAL TRANSACTION ENTERED INTO BY THE TAXPAYER DURING THE YEAR AND THE ASSOCIATED ENT ERPRISE WITH WHICH SUCH TRANSACTION IS ENTERED INTO THE NATURE OF DOCUMENTS MAINTAINED AN D THE METHOD FOLLOWED. THUS THE PRIMARY DETAILS REGARDING SUCH INTERNATIONAL TRANSA CTIONS WOULD NORMALLY BE AVAILABLE IN THE ACCOUNTANTS REPORT. THE ASSESSING OFFICER CAN ARR IVE AT PRIMA FACIE BELIEF ON THE BASIS OF THESE DETAILS WHETHER A REFERENCE IS CONSIDERED NEC ESSARY. NO DETAILED ENQUIRIES ARE NEEDED AT THIS STAGE AND THE ASSESSING OFFICER SHOULD NOT EMBARK UPON SCRUTINIZING THE CORRECTNESS OR OTHERWISE OF THE PRICE OF THE INTERNATIONAL TRAN SACTION AT THIS STAGE. IN THE INITIAL YEARS OF IMPLEMENTATION OF THESE PROVISIONS AND PENDING DEVE LOPMENT OF ADEQUATE DATA BASE IT WOULD BE APPROPRIATE IF A SMALL NUMBER OF CASES ARE SELEC TED FOR SCRUTINY OF TRANSFER PRICE AND THESE ARE DEALT WITH EFFECTIVELY . THE CENTRAL BOARD OF DIRECT TAXES THEREFORE HAV E DECIDED THAT WHEREVER THE AGGREGATE VALUE OF INTERNATIONAL TRANSACTIONS EXCEEDS RS 5 CRORES THE CASE SHOULD BE PICKED UP FOR SCRUTINY AND REFERENCE UNDE R SECTION 92CA BE MADE TO THE TPO. IF THERE ARE MORE THAN ONE INTERNATIONAL TRANSACTION W ITH AN ASSOCIATED ENTERPRISE OR THERE ARE TRANSACTIONS WITH MORE THAN ONE ASSOCIATED ENTERPRI SES THE AGGREGATE VALUE OF WHICH EXCEEDS RS 5 CRORES THE TRANSACTIONS SHOULD BE REFERRED TO THE TPO. BEFORE MAKING REFERENCE TO THE TPO THE ASSESSING OFFICER HAS TO SEEK APPROVAL OF THE COMMISSIONER / DIRECTOR AS CONTEMPLATED UNDER THE ACT. UNDER THE PROVISIONS O F SECTION 92CA REFERENCE IS IN RELATION TO THE INTERNATIONAL TRANSACTION. HENCE ALL TRANSACTI ONS HAVE TO BE EXPLICITLY MENTIONED IN THE LETTER OF REFERENCE. SINCE THE CASE WILL BE SELECT ED FOR SCRUTINY BEFORE MAKING REFERENCE TO THE TPO THE ASSESSING OFFICER MAY PROCEED TO EXAMINE OTHER ASPECTS OF THE CASE DURING 7 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 PENDENCY OF ASSESSMENT PROCEEDINGS BUT AWAIT THE REPORT OF THE TPO ON THE VALUE OF INTERNATIONAL TRANSACTION BEFORE MAKING FINAL ASSES SMENT. THE THRESHOLD LIMIT OF RS 5 CRORES WILL BE REVIEWED DEPENDING UPON THE WORKLOAD OF THE TPOS. THE WORK RELATING TO SELECTION OF CASES FOR SCRUTIN Y AND REFERENCE TO TPO ON THE ABOVE BASIS IN RESPECT OF PENDING RETURNS FILED FOR THE ASSESSM ENT YEAR 2002-03 SHOULD BE COMPLETED BY JUNE 30 2003. FROM THE AFORESAID INSTRUCTION NO. 3 OF 2003 ISSUED BY CBDT WHICH IS BINDING ON THE OFFICERS OF THE INCOME TAX DEPARTMENT MAKES IT CRY STAL CLEAR THAT A REFERENCE U/S 92CA OF THE ACT COULD BE MADE TO THE TPO ONLY WHEN THE CASE IS SELECTED FOR SCRUTINY. IN THE INSTANT CASE THE CASE IS NOT SELECTED FOR SCRUTINY WHICH F ACT IS ALSO CONCEDED BY THE LEARNED DR AND HENCE THE SCRUTINY ASSESSMENT PROCEEDINGS PER SE HAD NOT COMMENCED. HENCE WE HOLD THAT NO CASE WAS PENDING BEFORE THE LEARNED AO WHILE MAK ING REFERENCE TO LEARNED TPO AND ACCORDINGLY THE ORDER PASSED BY THE LEARNED TPO ON 28.1.2014 MAKING AN ADJUSTMENT OF RS. 7 51 20 484/- TO ALP IS DECLARED VOID AB INITIO AND ILLEGAL AND HENCE CANNOT BE RELIED UPON BY THE LOWER AUTHORITIES. 4.2. WE PLACE RELIANCE ON THE CBDT CIRCULAR NO. 5 49 DATED 31.10.1989 WHICH STATES THAT IF AN ASSESSEE AFTER FURNISHING THE RETURN OF INCO ME DOES NOT RECEIVE A NOTICE U/S 143(2) FROM THE DEPARTMENT WITHIN THE PRESCRIBED TIME HE CAN T AKE IT THAT THE RETURN FILED BY HIM HAS BECOME FINAL AND NO SCRUTINY PROCEEDINGS ARE TO BE STARTED IN RESPECT OF THAT RETURN. IN THE INSTANT CASE AT THE TIME OF ISSUE OF NOTICE U/S 92 CA OF THE ACT (I.E REFERENCE TO TPO) NO RETURN WAS PENDING ON THE BASIS OF WHICH NOTICE U/S 92CA COULD HAVE BEEN ISSUED. WE PLACE RELIANCE ON THE DECISION OF THE COORDINATE BE NCH DECISION OF PUNE TRIBUNAL IN THE CASE OF MAXIMIZE LEARNING PRIVATE LIMITED VS ACIT IN ITA NO . 2234/PN/2012 DATED 2.2.2015 FOR ASST YEAR 2007-08 WHEREIN IT WAS HELD AN ASSESSING OFFICER COULD MAKE REFERENCE TO THE TPO U/S 92CA OF THE ACT ONLY AFTER SELECTING THE CA SE FOR SCRUTINY ASSESSMENT. 4.3. WE ALSO PLACE RELIANCE ON THE DECISION OF TH E HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS M/S SAP LABS PVT LTD IN ITA NO. 842 OF 2008 AND ITA NO. 339 OF 2010 VIDE ORDER DATED 25.8.2014. IN THIS CASE THE ASSESSEE FILED ITS RETURN OF IN COME FOR ASST YEAR 2002-03 ON 31.10.2002. THE SAME WAS PROCESSED U/S 143(1) OF THE ACT. THE ASSESSEE RECEIVED NOTICES DAED 1.4.2004 U/S 148 OF THE ACT AND 12.4.2004 U/S 92CA OF THE AC T FROM THE TPO SEEKING DETAILS ABOUT THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE WITH THE GROUP COMPANIES ON A REFERENCE MADE BY THE ASSESSING AUTHORITY. AT THE TIME OF ISSUE OF NOTICE U/S 92CA OF THE ACT NO VALID RETURN WAS PENDING ON THE BASIS OF WH ICH NOTICE U/S 92CA OF THE ACT COULD HAVE BEEN ISSUED. SINCE NO NOTICE U/S 143(2) OF THE ACT WAS ISSUED PURSUANT TO FILING OF THE ORIGINAL RETURN THE ASSESSMENT IS DEEMED TO HAVE B ECOME FINAL. IN REPLY TO THE NOTICE ISSUED U/S 148 OF THE ACT THE ASSESSEE FILED A LETTER DAT ED 21.4.2004 REQUESTING THE ASSESSING AUTHORITY TO TREAT THE RETURN FILED ON 31.10.2002 A S RETURN IN COMPLIANCE WITH THE NOTICE U/S 148 OF THE ACT. INFACT THE TPO ON 20.1.2005 PASSED AN ORDER U/S 92CA OF THE ACT ACCEPTING THE PRICING OF THE ASSESSING AUTHORITY. HOWEVER T HE CIT INVOKING HIS POWER U/S 263 OF THE ACT INITIATED PROCEEDINGS AND SET ASIDE THE ORDER O F THE ASSESSING AUTHORITY ON THE GROUND THAT IT IS ERRONEOUS AND PREJUDICIAL TO THE INTERES T OF THE REVENUE. IT IS AGAINST THAT ORDER THE ASSESSEE PREFERRED AN APPEAL TO THE TRIBUNAL. THE TRIBUNAL HAS HELD THAT WHEN TWO VIEWS ARE POSSI BLE AND WHEN THE TRP HAS ACCEPTED VALUATION BY THE ASSESSING AUTHORITY DETERMINING TH E ARMS LENGTH PRICE THE COMMISSIONER HAD NO JURISDICTION TO INTERFERE WITH THE SAID ORDE R U/S 263 OF THE ACT AND MOREOVER ON THE DAY THE REFERENCE WAS MADE BY THE ASSESSING AUTHORI TY THERE WAS NO RETURN PENDING FOR 8 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 CONSIDERATION AND THEREFORE THE TRIBUNAL HAS SET A SIDE THE ORDER OF THE COMMISSIONER. IT IS AGAINST THE SAID ORDER THE REVENUE IS BEFORE THIS COURT. FROM THE AFORESAID FACTS IT IS CLEAR THAT ON THE D AY THE REFERENCE WAS MADE BY THE ASSESSING AUTHORITY TO THE TRANSFER PRICING AUTHORITY THERE WAS NO RETURN PENDING FOR CONSIDERATION BY HIM AND THEREFORE THE VERY REFERENCE WAS BAD . EVEN OTHERWISE THE SAID TPO DID NOT FIND FAULT WITH THE ADJUDICATION OF DETERMINING ARMS LE NGTH PRICE BY THE ASSESSING AUTHORITY. IN THOSE CIRCUMSTANCES THE COMMISSIONER COMMITTED AN ERROR IN EXERCISING HIS POWER U/S 263 OF THE ACT AND THE TRIBUNAL WAS JUSTIFIED IN INTERF ERING WITH THE SAID ORDER. THEREFORE WE DO NOT SEE ANY MERIT IN APPEAL NO. 842 /2008. ACCORDI NGLY IT IS DISMISSED. CONSEQUENTLY THE IMPUGNED ORDER WHICH IS THE SUBJE CT MATTER OF ITA 339/2010 WHICH IS A CONSEQUENTIAL ORDER IS ALSO DISMISSED. 5. WE FIND THAT THE LEARNED AO HAVING REALIZED HI S MISTAKE OF NOT SELECTING THE CASE FOR SCRUTINY SOUGHT TO REMAIN SILENT AFTER RECEIVIN G THE LEARNED TPOS ORDER DATED 28.1.2014. WE FIND THAT NOTICE U/S 143(2) WAS ALSO ISSUED AND SERVED ON THE ASSESSEE IN THE REASSESSMENT PROCEEDINGS. WE FIND THAT IN THE REASSESSMENT PROC EEDINGS NO FRESH REFERENCE WAS MADE TO THE LEARNED TPO U/S 92CA(1) OF THE ACT BY THE LEARN ED AO. WE HOLD THAT THE ACTION OF USING THE OLD TPO ORDER PASSED U/S 92CA(3) AS AN IN FORMATION FOR FORMING HIS OPINION OF REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMEN T WITHIN THE MEANING OF SECTION 147 OF THE ACT ALSO CANNOT BE APPRECIATED FOR REOPENING TH E ASSESSMENT. IN THIS REGARD WE FIND THAT THE CASE LAW RELIED ON BY THE LEARNED AR IN THE CAS E OF CWT VS SONA PROPERTIES REPORTED IN 327 ITR 592 (BOM) RENDERED BY BOMBAY HIGH COURT IS WELL PLACED. IN THE SAID CASE THE ASSESSING OFFICER HAD MADE A REFERENCE TO THE DEPAR TMENTAL VALUATION OFFICER AFTER THE END OF THE ASSESSMENT PROCEEDINGS. THEIR LORDSHIPS HEL D THAT SUCH A REFERENCE COULD NOT HAVE BEEN MADE UNDER THE SCHEME OF THE ACT BECAUSE THE A SSESSMENT PROCEEDINGS HAD COME TO AN END BEFORE THE POINT OF TIME WHEN SUCH A REFERENCE WAS MADE AND AS SUCH THE REFERENCE ITSELF WAS LEGALLY INVALID. THE STAND OF THE REVENUE WAS THAT EVEN IF REFERENCE TO THE DVO IS TO BE HELD TO BE INVALID THE DVOS REPORT CONSTITUTED IN FORMATION AND AS SUCH IT COULD BE A GOOD BASIS FOR COMING TO THE CONCLUSION THAT WEALTH HAS ESCAPED ASSESSMENT. REJECTING THIS PLEA THEIR LORDSHIPS OBSERVED THAT . A REPORT CALLED BY AN AUTHORITY HAVING NO JURISDI CTION WOULD BE A NULLITY AT LAW AND CONSEQUENTLY PROCEEDI NGS BASED SOLELY ON SUCH REPORT CONSIDERING THE REQUIREMENT OF SECTION 17 WOULD BE ILLEGAL AND WILL HAVE TO BE QUASHED. IN EFFECT THUS IT IS HELD THAT WHEN REFERENCE ITSE LF IS INVALID THE REPORT RECEIVED AS A RESULT OF THE SAID REFERENCE CANNOT CONSTITUTE MATERIAL FOR F ORMING THE BELIEF THAT AN INCOME OR WEALTH TAX HAS ESCAPED ASSESSMENT. THE ORDER PASSED BY THE LEARNED TPO PASSED PURSUANT TO AN ILLEGAL REFERENCE CANNOT BE USED IN THE REASSESSMENT PROCEEDINGS BY THE LEARNED AO A S BOTH THE PROCEEDINGS ARE SEPARATE AND INDEPENDENT OF ONE ANOTHER. IN VIEW OF THE ABOVE WE HOLD THAT THE REASSESSMENT PROCEEDINGS INITIATED BASED ON THE TPOS ORDER DATED 28.1.2014 SUGGESTING AN ADJUS TMENT OF RS. 7 51 20 484/- TO ALP (WHICH WAS BASED ON AN ILLEGAL REFERENCE ) BY THE L EARNED AO IS VOID AB INITIO AND BAD IN LAW. IN VIEW OF THE AFORESAID FACTS AND CIRCUMSTANCES AN D RESPECTFULLY FOLLOWING THE AFORESAID DECISION WE HOLD THAT THE REASSESSMENT PROCEEDINGS INITIATED BASED ON THE LD TPOS ORDER DATED 29.1.2013 SUGGESTING AN ADJUSTMENT OF R S. 2 43 53 752/- TO ALP WAS BASED 9 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 ON ILLEGAL REFERENCE BY THE LD AO AND IS ACCORDINGL Y VOID AB INITIO AND BAD IN LAW. HENCE THE ENTIRE REASSESSMENT PROCEEDINGS INITIATED BASED ON SUCH ILLEGAL REFERENCE AND ILLEGAL ORDER OF LD TPO CANNOT BE CONSTRUED AS INFO RMATION WHICH WOULD HAVE LIVE LINK TO THE FORMATION OF BELIEF TO HAVE REASON TO BELIEVE O N THE PART OF THE LD AO THAT INCOME HAD ESCAPED ASSESSMENT WITHIN THE MEANING OF SECTION 14 7 OF THE ACT. HENCE WE HOLD THAT NO ADDITION IN THE SUM OF RS. 2 43 53 752/- TOWARDS ADJUSTMENT TO ALP COULD BE MADE IN THE REASSESSMENT. ONCE THIS ADDITION GOES THEN THE VERY ROOT OF THE REASSESSMENT PROCEEDINGS ALSO VANISHES AND NO OTHER ADDITION COU LD BE MADE THEREON. ACCORDINGLY THE ENTIRE REASSESSMENT PROCEEDINGS DESERVE TO BE Q UASHED IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 2.5 IN VIEW OF OUR ABOVE CONCLUSION WE ALLOW THE GROUND NO. 1 RAISED BY THE ASSESSEE BY DECLARING THAT THE REASSESSMENT ORDER OF THE LD AO IS BAD IN LAW AND VOID AB INITIO. IN VIEW OF THIS DECISION THE ADJUDICATION OF OTHER GR OUNDS BECOMES INFRUCTUOUS AND HENCE NO DECISION IS GIVEN ON THE MERITS OF THE ADDITIONS AND ON OTHER GROUNDS RAISED BY THE ASSESSEE. 2.6. IN THE RESULT THE APPEAL OF THE ASSESSEE IN I TA NO. 1051/KOL/2015 FOR THE ASST YEAR 2009-10 IS ALLOWED. ITA NO. 599/KOL/2015 ASST YEAR 2010-11 REVENUE APPEAL 3. AT THE OUTSET THERE WAS A DELAY OF 16 DAYS IN F ILING THE APPEAL BEFORE US BY THE REVENUE. IN VIEW OF THE CONCESSION GIVEN BY THE LD AR FOR CONDONING THE SAME THE APPEAL OF THE REVENUE IS HEREBY ADMITTED AND TAKEN UP FOR ADJUDICATION. 3.1. THE LD AR STATED THAT THE TAX EFFECT IN THE AP PEAL OF THE REVENUE IS LESS THAN RS 10 LACS AND ACCORDINGLY STATED THAT THE APPEAL OF THE REVENUE IS NOT MAINTAINABLE. IN THIS REGARD HE STATED THAT THE LD DRP GAVE RELIEF TO TH E ASSESSEE WITH REGARD TO THE WORKING CAPITAL ADJUSTMENTS TO BE CARRIED OUT WHILE DETERMI NING THE ALP AND ACCORDINGLY THE DIFFERENCE IN DISPUTED INCOME THEREON IS ONLY RS. 1 1 78 977/- FOR WHICH THE TAX EFFECT 10 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 WOULD BE LESS THAN RS 10 LACS. HE PROVIDED THE WOR KINGS FOR RS. 11 78 977/- BEING THE DIFFERENCE IN WORKING CAPITAL ADJUSTMENTS. PLACIN G RELIANCE ON CBDT CIRCULAR NO. 21/2015 DATED 10.12.2015 HE PRAYED THAT THE APPEAL OF THE REVENUE IS NOT MAINTAINABLE. IN RESPONSE TO THIS THE LD DR FAIRLY CONCEDED TO T HE FACT THAT THE TAX EFFECT OF DISPUTED ADDITION WAS LESS THAN RS 10 LACS AND IS SQUARELY C OVERED BY THE LATEST CBDT CIRCULAR. 3.2. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE FIND THAT THE FOLLOWING WORKINGS WERE PROVIDED BY THE LD AR BEFORE US TO PROVE THAT THE T AX EFFECT ON THE DISPUTED ADDITION IS LESS THAN RS. 10 LACS :- COMPUTATION OF TP ADJUSTMENT BASED ON ORIGINAL TPO ORDER DATED 30.1.2014 OPERATING COST RS. 10 81 62 982 ALP @ 40.34% RS. 15 17 95 929 LESS: SALES WITH NON AE RS. 2 61 49 487 SALES TO AE (EXCLUDING REIMBURSEMENT OF EXPENSES) RS. 11 54 80 823 TP ADJUSTMENT RS. 1 01 65 619 COMPUTATION OF TP ADJUSTMENT BASED ON REVISED TPO O RDER DATED 23.2.2015 OPERATING COST RS. 10 81 62 982 ALP @ 39.25% RS. 15 06 16 952 LESS: SALES WITH NON AE RS. 2 61 49 487 SALES TO AE (EXCLUDING REIMBURSEMENT OF EXPENSES) RS. 11 54 80 823 TP ADJUSTMENT RS. 89 86 642 DIFFERENCE IN ADJUSTMENT DUE TO WORKING CAPITAL RS. 11 78 977 3.3. IT WOULD BE PERTINENT TO REPRODUCE THE RELEVAN T PORTION OF THE SAID CIRCULAR NO. 21 / 2015 DATED 10.12.2015 :- 3. HENCEFORTH APPEALS / SLPS SHALL NOT BE FILED IN CASES WHERE THE TAX EFFECT DOES NOT EXCEED THE MONETARY LIMITS GIVEN HEREUNDER:- S.NO. APPEALS IN INCOME TAX MATTERS MONETARY LIMIT (IN RS) 1 BEFORE APPELLATE TRIBUNAL 10 00 000/- 2 BEFORE HIGH COURT 20 00 000/- 11 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 3 BEFORE SUPREME COURT 25 00 000/- 3.4. WE HAVE GONE THROUGH THE CIRCULAR NO. 21 / 201 5 DATED 10.12.2015 AND THE REVENUE WAS NOT ABLE TO INFORM THAT WHETHER THE SAID CASE FALLS UNDER ANY OF THE EXCEPTIONS CONTEMPLATED IN THE SAID CIRCULAR. WE ALSO FIND THAT THE CIRCULAR MAKES IT VERY CLEAR THAT THE REVISED MONETARY LIMITS SHALL APPLY RETROSPECTIVELY TO PENDING APPEA LS ALSO. WE FIND THAT THE CIRCULAR IS BINDING ON THE TAX AUTHORITIES. THIS POSITION HAS BEEN CONF IRMED BY THE HONBLE APEX COURT IN THE CASE OF COMMISSIONER OF CUSTOMS VS INDIAN OIL CORPORATIO N LTD REPORTED IN 267 ITR 272 (SC) WHEREIN THEIR LORDSHIPS EXAMINED THE EARLIER DECISI ONS OF THE APEX COURT WITH REGARD TO BINDING NATURE OF THE CIRCULARS AND LAID DOWN THAT WHEN A CIRCULAR ISSUED BY THE BOARD REMAINS IN OPERATION THEN THE REVENUE IS BOUND BY I T AND CANNOT BE ALLOWED TO PLEAD THAT IT IS NOT VALID OR THAT IT IS CONTRARY TO THE TERMS OF TH E STATUTE. HENCE WE HOLD THAT THE APPEAL(S) OF THE REVENUE DESERVE TO BE DISMISSED IN TERMS OF LOW TAX EFFECT VIDE CIRCULAR NO.21 / 2015 DATED 10.12.2015. ACCORDINGLY THIS BEING A LOW TA X EFFECT CASE WE DISMISS THE APPEAL OF THE REVENUE IN LIMINE AS UNADMITTED WITHOUT GOING IN TO THE MERITS OF THE CASE. 3.5. IN THE RESULT THE APPEAL OF THE REVENUE IN IT A NO. 599/KOL/2015 FOR THE ASST YEAR 2010-11 IS DISMISSED. ITA NO. 617/KOL/2015 ASST YEAR 2010-11 ASSESSEE APPEAL 4. THE GROUND NO.1 RAISED IN THE APPEAL OF THE ASS ESSEE IS STATED TO BE NOT PRESSED BY THE LD AR. THE SAME IS RECKONED AS A STATEMENT FROM TH E BAR AND ACCORDINGLY THE SAME IS DISMISSED AS NOT PRESSED. 5. THE FIRST ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD DRP IS JUSTIFIED IN PARTIALLY UPHOLDING THE ADJUSTMENT TO ALP MADE BY T HE LD TPO / LD AO IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 5.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE LABV ANTAGE SOLUTIONS PRIVATE LIMITED ( LVS INDIA ) AND LABVANTAGE SOLUTIONS INC. (LVS US / AE) ARE GROUP COMPANIES AS BOTH 12 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 ARE DIRECTLY OR INDIRECTLY HELD BY TCG LIFESCIENCES LTD. LVS US IS A GLOBAL SOLUTIONS PROVIDER THAT HELPS COMPANIES OPTIMIZE THEIR LABORA TORY PRODUCTIVITY AND LEVERAGE THE LATEST INFORMATION MANAGEMENT AND COMMUNICATION TEC HNOLOGIES IN ORDER TO EFFECTIVELY SHARE ANALYTICAL DATA THROUGHOUT THEIR WORLDWIDE OR GANIZATIONS. LVS US IS ENGAGED IN DEVELOPMENT MARKETING OF LABORATORY INFORMATION MA NAGEMENT SYSTEMS (LIMS) SOFTWARE TESTING AND CUSTOMER CONFIGURATION SERVI CES PROVISION OF LOCAL SALES AND CUSTOMERS SUPPORT SERVICES. THE PROPRIETARY SOFTWA RE IS CONCEPTUALIZED AND OWNED BY LVS US. LVS INDIA IS ENGAGED IN THE DEVELOPMENT AN D CUSTOMIZATION OF LIMS FOR ITS AE. THE SOFTWARE DEVELOPMENT AND CUSTOMIZATION WOR K IS SUB-CONTRACTED BY LVS US TO THE ASSESSEE. THE ASSESSEE VIS A VIS THE GROUP IS INVOLVED IN THE EXECUTION OF THE SOFTWARE DEVELOPMENT AND CODING OF SOFTWARE SERVICE (SOFTWARE SERVICES) OUTSOURCED TO IT BY LVS US. FURTHER LVS INDIA IN THE DOMESTIC SECTOR CATERS TO THE LABORATORY REQUIREMENTS OF PROCESS INDUSTRIES PHARMACEUTICAL COMPANIES AND CONTRACT LABORATORY ORGANIZATIONS. IT HAS LICENSED LIMS PRODUCT CALLED SAPPHIRE TO THE DOMESTIC CUSTOMERS AND HAS UNDERTAKEN CUSTOMIZATION OF THE SOFTWARE FO R THESE CUSTOMERS ACCORDING TO THEIR REQUIREMENTS. IT WAS SUBMITTED THAT LVS INDIA IS IN DEPENDENTLY RESPONSIBLE FOR RENDERING SERVICES TO THE DOMESTIC CUSTOMERS. LVS INC. IS NO T INVOLVED IN ANY MANNER FOR PROVISION OF SERVICES TO DOMESTIC CUSTOMERS. THUS LVS INDIA IS ALSO ENGAGED IN SELLING SOFTWARE LICENSES TO CUSTOMERS FOR WHICH IT PAYS A ROYALTY TO LVS US. 5.2. THE ASSESSEE HAD FOLLOWING INTERNATIONAL TRANS ACTIONS WITH ITS AE DURING THE FINANCIAL YEAR 2009-10 RELEVANT TO ASST YEAR 2010-1 1 :- (I) PROVISION OF SOFTWARE DESIGN & DEVELOPMENT SERV ICES RS. 11 54 80 823 (II) PAYMENT OF ROYALTY TO LVS US RS. 72 84 012 (III) PURCHASE OF SOFTWARE FROM LVS INC. RS. 3 10 709 (IV) RECOVERY OF EXPENSES FROM LVS INC. RS. 1 0 3 31 396 (V) RECOVERY OF EXPENSES FROM LVS SHANGHAI RS. 34 56 746 (VI) REIMBURSEMENT OF EXPENSES TO LVS INC. RS. 715 OUT OF THE ABOVE THE INTERNATIONAL TRANSACTIONS RE FERRED TO SERIAL (I) AND (II) ALONE ARE SUBJECT MATTER OF APPEAL BEFORE US. THE ASSESSEE U SED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) WITH A PROFIT LEVEL INDICATOR (PLI) OF NET COST PLUS (NCP) MARGIN . 13 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 5.3. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS BEFORE US IN THIS REGARD:- 2. DETERMINATION OF EFFECTIVE PROFITABILITY OF THE APPELLANT FROM THE INTERNATIONAL TRANSACTIONS. 2.1. THE LEARNED AO DRP AND TPO ERRED ON FACTS IS NOT TAKING COGNIZANCE OF THE DOMESTIC SEGMENT OF THE APPELLANT. 2.2. ACCORDINGLY THE LEARNED AO DRP AND TPO ERRED ON FACTS IN INCLUDING THE EXPENSES INCURRED TOWARDS DOMESTIC SEGMENT AS PART OF THE CO ST BASE WHILE CALCULATING THE EFFECTIVE NET COST PLUS MARK UP (NCP) EARNED BY THE APPELLA NT FROM THE INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES ) 2.3. THE LEARNED AO DRP AND TPO FAILED TO TAKE COG NIZANCE THAT THE 'DOMESTIC SEGMENT' OF THE APPELLANT IS DEEMED TO BE AT ARM'S LENGTH S INCE THE SAME INCLUDES REVENUE FROM THIRD-PARTY CUSTOMERS UNDER UNCONTROLLED CIRCUMSTAN CES. 3. ERRONEOUS DISALLOWANCE OF THE ROYALTY PAYMENT 3.1 THE LEARNED AO DRP AND TPO ERRED IN DETERMININ G THE ARM'S LENGTH PRICE OF THE ROYALTY PAID AT 'NIL' WHILE DETERMINING THE AMOUNT OF ADJUSTMENT. 3.2 THE LEARNED AO DRP AND TPO ALSO ERRED IN NOT A PPRECIATING THE SEPARATE BENCHMARKING ANALYSIS DONE BY APPELLANT BY VIRTUE OF WHICH SUCH PAYMENT OF ROYALTY BY THE APPELLANT TO ITS AES WAS DETERMINED AT ARM'S LE NGTH. 3.3 THE LEARNED AO DRP AND TPO ERRED IN NOT APPREC IATING THAT THE APPELLANT DID NOT PAY ANY PRICE TO ITS AE FOR PURCHASE OF SOFTWARE L ICENSED TO THIRD PARTY CUSTOMERS. FURTHER THE APPELLANT WAS ALSO ALLOWED A LICENSE F REE PERIOD WHEREIN THE ENTIRE REVENUES GENERATED FROM SUCH SALE WAS RETAINED BY THE APPELL ANT. ALSO THE UPDATES IN RELATION TO SUCH SOFTWARE IS PROVIDED FREE OF COST BY THE AE TO THE APPELLANT. 3.4 THE LEARNED AO DRP AND TPO ERRED IN NOT TAKING COGNIZANCE OF THE BENEFITS DERIVED BY THE APPELLANT ON ACCOUNT OF SUCH ROYALTY PAYMENT S. 3.5 THE LEARNED AO DRP AND TPO ERRED IN MAKING DOU BLE ADJUSTMENTS ON ACCOUNT OF ROYALTY PAYMENTS BY DETERMINING THE ARM'S LENGTH P RICE OF SUCH ROYALTY PAYMENTS AT 'NIL' AND ALSO INCLUDING SUCH ROYALTY PAYOUTS AS PART OF THE COST BASE WHILE DETERMINING THE ARM'S LENGTH PRICE FOR THE SOFTWARE DESIGN & DEVELO PMENT SERVICES TRANSACTION. 4. DETERMINATION OF ARM'S LENGTH PRICE BY THE AO T PO AND DRP ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEA RNED AO TPO AND DRP ERRED IN DETERMINING THE ARM'S LENGTH PRICE UNDERTAKEN BY TH E APPELLANT WITH RESPECT TO SOFTWARE DESIGN & DEVELOPMENT SERVICES WITHOUT APPRECIATING THE CONTENTIONS ARGUMENTS EVIDENCES AND DATA PUT FORWARD BY THE APPELLANT DURING THE CO URSE OF THE PROCEEDINGS BEFORE THEM AND IN DOING SO HAVE GROSSLY 4.1 ERRED ON THE FACTS AND IN LAW IN CONDUCTING A F RESH BENCHMARKING ANALYSIS USING NON CONTEMPORANEOUS DATA AND SUBSTITUTING THE APPELLANT 'S ANALYSIS WITH FRESH BENCHMARKING ANALYSIS ON HIS OWN CONJECTURES AND SURMISES. THUS THE APPELLANT PRAYS THAT THE FRESH BENCHMARKING ANALYSIS CONDUCTED IS LIABLE TO BE QUA SHED. 14 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 4.2 ERRED ON THE FACTS IN REJECTING THE COMPARABLE COMPANIES ARRIVED AT IN THE TRANSFER PRICING STUDY WITHOUT CONSIDERING THE FUNCTIONAL AN D RISK ANALYSIS OF THE APPELLANT AND THE COMPARABLE COMPANIES. 5. ERRONEOUS COMPUTATION OF ADJUSTMENT AMOUNT BY TH E TPO 5.1. THE LEARNED AO DRP AND TPO ERRED IN COMPUTING THE ADJUSTMENT AMOUNT AT 14 776 387 BY ERRONEOUSLY INCLUDING THE FOLLOWING: (A) COST OF DOMESTIC SEGMENT (B) PAYMENT OF ROYALTY. 6. INITIATION OF PENALTY PROCEEDINGS 6.1. THE APPELLANT SUBMITS THAT BASED ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE THERE WAS NO BASIS FOR THE AO TO PROPOSE TO INITIATE PENA LTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. DURING THE COURSE OF HEARING THE LD AR STATED THAT HE IS NOT PRESSING THE GROUNDS 4.3 TO 4.11 BEFORE US WHICH WAS ALSO MENTIONED IN HIS WRI TTEN SUBMISSIONS FILED BEFORE US. ACCORDINGLY THOSE GROUNDS (I.E 4.3 TO 4.11) ARE DI SMISSED AS NOT PRESSED. 5.4. THE ASSESSEE HAD USED TNMM AS THE MAM WITH PLI OF NCP MARGIN AND ARRIVED AT A SET OF 15 COMPARABLE COMPANIES WITH NCP MARGIN OF 14.79% VIS A VIS 44.94% OF THE ASSESSEE FROM ITS EXPORT SEGMENT. THE LIST OF COM PARABLES SELECTED BY THE ASSESSEE ARE AS FOLLOWS:- SL. NAME OF THE COMPANY WEIGHTED AVERAGE NCP NO. (%) (FY 2008-2010) 1 AKSHAY SOFTWARE TECHNOLOGIES LTD 10.38 2 CG-VAK SOFTWARE & EXPORTS LTD 4.59 3 EFORCE INDIA PRIVATE LIMITED 3.21 4 EVOKE TECHNOLOGIES PRIVATE LIMITED 20.82 5 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD 22.5 8 6 L G S GLOBAL LTD 17.70 7 MINDTREE LTD 14.48 8 PERSISTENT SYTEMS LTD 22.34 9 POWERSOFT GLOBAL SOLUTIONS LTD 17.60 10 R S SOFTWARE (INDIA) LTD 9.06 11 R SYSTEMS INTERNATIONAL LTD 15.16 12 SASKEN COMMUNICATION TECHNOLOGIES LTD 15.94 13 TATA ELXSI LTD 18.86 14 THIRDWARE SOLUTIONS LTD 22.05 15 VAMA INDUSTRIES LTD 7.07 ARITHMETICAL MEAN 14.79% 15 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 5.5. THE LD TPO IGNORED THE SEGMENTAL COMPUTATION F URNISHED BY THE ASSESSEE AND REVISED THE NCP MARGIN OF THE ASSESSEE FROM 44.94% TO 30.94% BY CONSIDERING THE OVERALL NCP MARGIN FOR LVS INDIA. HE DETERMINED TH E ALP OF COMPANIES AT 40.34% BY CONDUCTING A FRESH BENCHMARKING EXERCISE BY SELECTI NG 9 COMPARABLE COMPANIES. THE LIST OF COMPARABLES SELECTED BY THE TPO IS AS UNDER :- SL. NAME OF THE COMPANY NCP NO. (%) 1 SPRY RESOURCES INDIA PVT LTD 33.25 2 KULIZA TECHNOLOGIES PVT LTD 30.75 3 EVOKE TECHNOLOGIES PRIVATE LIMITED 18.75 4 C T I L LTD 19.56 5 INFINITE DATA SYSTEMS PVT LTD (MERGED) 88.25 6 E-INFOCHIPS BANGALORE LTD 71.92 7 THIRDWARE SOLUTIONS LTD 33.36 8 THINKSOFT GLOBAL SERVICES LTD 17.35 9 INTEQ SOFTWARE LTD 49.91 AVERAGE 40.34% 5.6. WHILE COMPUTING THE ADJUSTMENT OF SOFTWARE SER VICES FOR LVS INDIA THE LD TPO INTER ALIA INCLUDED THE FOLLOWING:- (A) DOMESTIC AS WELL AS THE AE COST FOR THE SOFTWARE SE GMENT AS TOTAL COST (B) ROYALTY EXPENSES PAID BY LVS INDIA (THOUGH SEPARATE ADJUSTMENT FOR THE SAME HAS BEEN DONE) (C) THE LD TPO CONSIDERED THE NCP MARGIN OF 40.34% AS A LP MARGIN AND (D) CONSEQUENTLY MADE TP ADJUSTMENT OF RS. 1 57 27 755/ -. APART FROM THE ABOVE THE LD TPL ALSO DETERMINED TH E ALP OF ROYALTY PAID AT RS NIL AND ACCORDINGLY MADE AN ADJUSTMENT OF RS. 72 84 012/- S EPARATELY FOR THIS TRANSACTION. 16 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 5.7. THE LD AO PASSED A DRAFT ASSESSMENT ORDER PUR SUANT TO THE ORDER OF THE LD TPO. THE ASSESSEE PREFERRED OBJECTIONS BEFORE THE LD DRP AGA INST THE ADJUSTMENTS MADE TO ALP BY THE LD AO / LD TPO WHO DISPOSED OFF THE OBJECTIONS BY GIVING THE FOLLOWING DIRECTIONS :- (A) SUSTAINED ADJUSTMENT MADE TOWARDS ROYALTY OF RS. 72 84 012/-. (B) ALLOWED EXCLUSION OF RECOVERY TRANSACTION AMOUNTING TO RS. 1 37 88 142/- FOR DETERMINING THE TP ADJUSTMENT AND THEREBY AN UPWARD ADJUSTMENT IN RESPECT OF SOFTWARE SERVICES PROVIDED TO AE WAS MADE AT RS. 74 92 375/-. (C) ALLOWED WORKING CAPITAL ADJUSTMENT AND THEREFORE RE CALCULATED THE ALP OF TPOS COMPARABLES AT 39.25%. 5.8. INCORPORATING THE LD DRPS DIRECTIONS THE LD AO MADE A REVISED ADJUSTMENT TO ALP OF RS. 1 47 76 387/- AS BELOW:- UPWARD ADJUSTMENT FOR SOFTWARE DEVELOPMENT SERVICE (SALES TO AE) 74 92 375 UPWARD ADJUSTMENT FOR ROYALTY 72 84 012 ------------------- 1 47 76 387 ------------------- 6. THE LD AR STATED THAT THE MAIN DISPUTE LIES HER E IS IN THE SELECTION OF COMPARABLES. HE PRAYED FOR EXCLUSION OF THE FOLLOWING COMPARABLE S CHOSEN BY THE LD TPO :- (I) E-INFOCHIPS BANGALORE LTD ; (II) INFINITE DATA SYSTEMS PVT LTD (MERGED) ; AND (III) SPRY RESOURCES INDIA PVT LTD E-INFOCHIPS BANGALORE LIMITED THE LD AR ARGUED THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE. HE ARGUED THAT AS PER THE ANNUAL REPORT OF THE SAID CO MPANY THE BUSINESS PROFILE OF THE COMPANY IS AMBIGUOUS AS TO THE EXACT NATURE OF THE SOFTWARE SERVICES. FURTHER AS PER THE SEGMENTAL REPORTING THE COMPANY IS ALSO ENGAGED IN PROVIDING IT ENABLED SERVICES AND NO SEGMENTAL INCOME BREAK UP IS AVAILABLE FOR THE S AME. THUS IT WOULD NOT BE CORRECT TO 17 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 CLASSIFY E-INFOCHIPS AS A SOFTWARE DEVELOPMENT COMP ANY. THE LD AR STATED THAT THE LD TPO HAD OBTAINED INFORMATION U/S 133(6) OF THE ACT WHEREIN THEY HAD STATED THAT THEY ARE ONLY IN IT SECTOR WHEREAS THEIR ANNUAL REPORT STAT ES THAT THEY ARE IN IT AND IT ENABLED SERVICES. IN CASE OF THIS CONTRADICTION THE INFOR MATION AVAILABLE IN PUBLIC DOMAIN (I.E THE ANNUAL REPORT) SHOULD BE CONSIDERED. HE ALSO ARGU ED THAT THE SECTION 133(6) OF THE ACT INFORMATION WAS NEVER CONFRONTED ON THE ASSESSEE IN THE SHOW CAUSE NOTICE. IT CAME DIRECTLY ONLY IN THE LD TPOS ORDER. HE ALSO STATED THAT IN THE FOLLOWING JUDGEMENTS TH IS COMPARABLE I.E E-INFOCHIPS HAS BEEN HELD TO BE FUNCTIONALLY NOT COMPARABLE :- (A) HYDERABAD TRIBUNAL IN THE CASE OF PEGASYSTEMS WORLD WIDE INDIA PVT LTD VS ACIT IN ITA NO. 1758/HYD/2014 DATED 16.10.2015 FOR ASST YEAR 2010-11. (B) AHMEDABAD TRIBUNAL IN THE CASE OF ALLSCRIPTS (INDIA ) PRIVATE LTD VS DCIT IN ITA NO. 771/AHD/2014 DATED 5.6.2015 FOR ASST YEAR 2009- 10 (C) DELHI TRIBUNAL IN THE CASE OF HEADSTRONG SERVICES ( INDIA) PVT LTD VS DCIT IN ITA NO. 714/DEL/2015 DATED 18.3.2016 FOR ASST YEAR 2010 -11 (D) HYDERABAD TRIBUNAL IN THE CASE OF AMD RESEARCH & DE VELOPMENT CENTRE INDIA PVT LTD VS DCIT IN ITA NO. 275/HYD/2015 DATED 20.1 1.2015 FOR ASST YEAR 2010- 11 (E) HYDERABAD TRIBUNAL IN THE CASE OF PAREXEL INTERNATI ONAL (INDIA) P LTD VS ACIT IN ITA NO. 1918/HYD/2014 DATED 8.1.2016 FOR ASST YEAR 2010-11 (F) HYDERABAD TRIBUNAL IN THE CASE OF CNO IT SERVICES ( INDIA) PRIVATE LIMITED VS DCIT IN ITA NO. 336/HYD/2015 DATED 19.2.2016 FOR AS ST YEAR 2010-11 INFINITE DATA SYSTEMS PVT LTD (MERGED) THE LD AR ARGUED THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE AND IT IS HAVING A DIFFERENT BUSINESS MODEL. THE COMPANY I S ENGAGED IN PROVIDING ENTIRE GAMUT OF SOLUTIONS COMPRISING OF TECHNICAL CONSULTING DE SIGN AND DEVELOPMENT OF SOFTWARE MAINTENANCE SYSTEM INTEGRATION IMPLEMENTATION TE STING AND INFRASTRUCTURE MANAGEMENT SERVICES. FURTHER IT IS STATED FROM THE RECORDS THA T THE REVENUE IS PRIMARILY DRIVEN FROM TECHNICAL SUPPORT AND INFRASTRUCTURE MANAGEMENT SER VICES. FURTHER AS PER THE ANNUAL REPORT OF 2009 AT PAGE 1 IT IS STATED THAT THE HO LDING COMPANY M/S INFINITE COMPUTER SOLUTIONS (INDIA) LIMITED SIGNED AN AGREEMENT (BUIL D OPERATE AND TRANSFER MODEL) WITH FUJITSU SERVICES LIMITED TO SET UP GLOBAL DELIVERY CENTERS IN INDIA TO PROVIDE OFFSHORE 18 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 DELIVERY CAPABILITIES TO FUJITSU & FUJITSUS ASSOCI ATED COMPANIES. INFINITE DATA SYSTEMS COMMENCED ITS OPERATIONS ON 1 ST JANUARY 2009 AND AS PER SEGMENT REPORTING DISCLOSU RE THE COMPANYS OPERATIONS PREDOMINANTLY RELATE TO PR OVIDING SOFTWARE TECHNICAL CONSULTANCY SERVICES TO ITS SOLE CUSTOMER FUJITSU S ERVICES LIMITED. THE LD AR ARGUED THAT THESE FACTS HAVE ALSO BEEN ACKNOWLEDGED BY THE LD TPO AT PAGE 77 OF HIS ORDER. ALSO IT WOULD BE WORTHWHILE TO NOTE THAT INFINITE DATA SYSTEMS PVT LTD COMPLETED ITS THREE YEARS CONTRACT WITH FUJITSU POST WHICH THE BUSINESS WAS TRANSFERRED TO FUJITSU AND THUS THE COMPANY HAS BEEN MERGED WITH ITS HOLDING C OMPANY INFINITE COMPUTER SOLUTIONS (INDIA) LTD DURING THE FINANCIAL YEAR 201 1-12. THE LD AR ARGUED THAT THE ASSESSEE COMPANY IS A SER VICE PROVIDER IN AREA OF SOFTWARE DEVELOPMENT WHEREAS THE COMPARABLE COMPANY INFINITE DATA SYSTEMS PVT LTD WAS CREATED FOR PURPOSES OF TRANSFER OF BUSINESS. THE SERVICES AND BUSINESS MODEL OF ASSESSEE COMPANY AND COMPARABLE COMPANY IS ENTIRELY DIFFEREN T. HE ALSO ARGUED THAT THERE EXIST ABNORMAL CIRCUMSTANCES IN THE SAID COMPARABLE. DURI NG THE LAST 3 YEARS VARIATIONS IN MARGINS EARNED SHOWS AN ABNORMAL CIRCUMSTANCES LEAD ING TO HUGE FLUCTUATIONS AND SUPERNORMAL PROFIT THE MARGIN EARNED BY INFINITE IS 88.25% WHICH IS ABNORMALLY HIGH. SUCH COMPANIES WHICH ARE MAKING MORE THAN TWICE THE ARITHMETICAL MEAN MARGIN AS COMPUTED BY THE LD TPO SHOULD NOT BE CONSIDERED AS COMPARABLE. THE LD AR REFERRED TO PAGE 591 OF THE PAPER BOOK WHERE THE DETAILS OF THE FLUCTUATION IN THE REVENUE PROFIT AND MARGINS HAS BEEN PROVIDED. ACCORDINGLY HE PRAYED FOR REJECTION OF THIS COMPARABLE. SPRY RESOURCES INDIA PVT LTD THE LD AR ARGUED THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE. HE ARGUED THAT THE SAID COMPANY IS ENGAGED IN SOFTWARE CONSULTANCY SERVICES WHICH IS NOT SIMILAR TO ASSESSEE BUSINESS. THE ASSESSEE IS ENGA GED PROVIDING SOFTWARE DEVELOPMENT SERVICES PAYROLL SERVICES AND CORPORATE TRAINING S ERVICES. THE COMPANY EXECUTES TURNKEY SOLUTION TO ITS CLIENTS INCLUDING ONSITE NE ED ASSESSMENT FEASIBILITY STUDY AND CONSULTING SERVICES AND OFF SITE DEVELOPMENT OF THE PROJECTS. FURTHER FROM THE PERUSAL OF THE ANNUAL REPORT FOR THE YEAR ENDED 31.3.2010 THAT THE SOFTWARE DEVELOPMENT EXPENDITURE AMOUNTING TO RS. 1 47 08 428/- ARE AT 5 4% OF TOTAL EXPENDITURE AMOUNTING TO 19 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 RS. 2 71 86 621/-. FURTHER THE LD TPO HAD ALSO ME NTIONED IN PAGE 64 OF HIS ORDER THAT EFORCE INDIA (P) LTD IS SELECTED BY THE ASSESSEE IS ENGAGED INTO SOFTWARE CONSULTANCY SERVICE AND ACCORDINGLY THE SAME IS FUNCTIONALLY NO T COMPARABLE. HE ARGUED THAT APPLYING THE SAME LOGIC SPRY RESOURCES ALSO IS ENG AGED INTO CONSULTANCY SERVICE AND HENCE THE SAME SHOULD NOT BE TREATED AS COMPARABLE. 6.1. HE PRAYED FOR INCLUSION OF ONE OF THE COMPARA BLE CHOSEN BY THE ASSESSEE VIZ AKSHAY SOFTWARE TECHNOLOGIES LTD. HE STATED THAT L D TPO REJECTED THIS COMPARABLE ON THE GROUND THAT IT IS FUNCTIONALLY NOT COMPARABLE A S IT PROVIDES TECHNICAL SUPPORT FOR INTEGRATION OF SWIFT SOFTWARE TO ITS CLIENTS OF THE USER OF SWIFT IN FINANCIAL INDUSTRY. THE LD AR STATED THAT AKSHAY SOFTWARE IS A COMPANY ENGAGED IN SOFTWARE DEVELOPMENT ACTIVITIES. THE INCOME SCHEDULE AS DISCLOSED IN TH E ANNUAL REPORT OF THE SAID COMPARABLE CLEARLY DEMONSTRATES THAT THE COMPANY IS ENGAGED IN SOFTWARE SERVICES. HOWEVER THE USA BASED SUBSIDIARY OF THE COMPANY I.E AKSHAY SOFT WARE INTERNATIONAL INC. (AKSHAY US) IS A REGISTERED PARTNER OF SWIFT SELLING SWIFT SOLUTIONS AND PRODUCTS AS AN EXTENDED ARM OF SWIFT IN NORTH AMERICA. THUS THE C ONTENTION OF THE LD TPO / LD AO IS ERRONEOUS SINCE IT IS CLEARLY EVIDENT FROM THE ANNU AL REPORT OF THE COMPARABLE COMPANY ITSELF THAT IT IS ENGAGED IN RENDERING SOFTWARE DEV ELOPMENT SERVICES ONLY. THE LD AR ALSO PLACED RELIANCE ON THE DECISION OF DELHI TRIBUNAL IN THE CASE OF QUALCOMM INDIA PVT LT D VS ACIT IN ITA NO. 5239/DEL/2010 DATED 10.6.2013 WHEREIN AKSHAY SOFTWARE HAD BEEN CLEARLY HELD TO BE FUNCTIONALLY COMPARABLE . 6.2. HE ARGUED THAT WITH THE AFORESAID EXCLUSIONS A ND INCLUSION OF COMPARABLES WITH THE LIST OF OTHER COMPARABLES CHOSEN BY THE LD TPO THE ASSESSEES MARGIN WOULD BE CLEARLY JUSTIFIED TO BE AT ALP AND HENCE NO ADJUSTMENT NEED TO BE MADE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 6.3. WITH REGARD TO DISALLOWANCE OF ROYALTY PAYMENT OF RS. 72 84 012/- IS CONCERNED HE ARGUED THAT DURING THE RELEVANT YEAR UNDER APPEAL THE ASSESSEE HAD PAID ROYALTY TO ITS AE ON THE LICENSE SALES MADE BY IT TO THE THIRD PARTY CUSTOMERS AS WELL AS ON THE MAINTENANCE REVENUE GENERATED FROM SUCH LICENSES EARLIER SOLD T O THIRD PARTY CUSTOMERS. HE ARGUED 20 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 THAT SINCE SUCH PAYMENT WAS INTEGRAL TO THE OPERATI ONS OF ASSESSEE AND IN THE NATURE OF OPERATING EXPENSES SUCH TRANSACTION WAS AGGREGATED WITH THE PROVISION OF SOFTWARE DESIGN AND DEVELOPMENT SERVICES TRANSACTION AND BEN CHMARKED USING TNMM AS THE MOST APPROPRIATE METHOD. THUS OWING TO CLOSELY L INKED AND INTEGRATED NATURE OF SAID TRANSACTION TNMM IS THE MAM FOR ITS EVALUATION. H E PLACED RELIANCE ON THE FOLLOWING DECISIONS IN SUPPORT OF HIS CONTENTIONS :- (A) HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS EKL APPLIANCES LTD REPORTED IN (2012) 24 TAXMANN.COM 199 (DELHI) (B) HONBLE DELHI HIGH COURT IN THE CASE OF SONY ER ICSSON MOBILE COMMUNICATIONS INDIA (P) LTD VS CIT REPORTED IN (20 15) 374 ITR 118 (DEL) (C ) DELHI TRIBUNAL IN THE CASE OF AWB INDIA (P) LT D VS DCIT REPORTED IN (2014) 50 TAXMANN.COM 323 (DELHI-TRIB.) 6.3.1. THE LD AR ARGUED THAT THE LD TPO TOOK ENTIT Y LEVEL MARGIN WHICH INCLUDES PAYMENT OF ROYALTY. HAVING DONE SO HE AGAIN DISAL LOWED COMPLETE ROYALTY THEREBY LEADING TO DOUBLE ADDITION. IN THIS REGARD HE PLA CED RELIANCE ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSS ON MOBILE COMMUNICATIONS INDIA (P) LTD VS CIT REPORTED SUPRA RELEVANT PAGE IS PA GE 1327 OF THE PAPER BOOK VIDE PARA 101 OF THE JUDGEMENT 6.3.2. HE ARGUED THAT THE LD TPO CANNOT USE SEGMENT AL ACTIVITY FOR ROYALTY ALONE BUT USE ENTITY LEVEL BENCHMARKING FOR SOFTWARE DEVELOPMENT ACTIVITY. 6.3.3. HE DREW THE ATTENTION TO THE RELEVANT PAGE O F THE LD TPOS ORDER WHERE THE ISSUE OF ROYALTY HAS BEEN DISCUSSED AND ARGUED THAT THE LD T PO HAD SIMPLY REPRODUCED THE GUIDELINES AND DETERMINED THE ALP OF ROYALTY AS RS NIL WITHOUT UNDERSTANDING THE NATURE OF ACTIVITIES OF THE ASSESSEE AND THE PURPOS E OF PAYMENT OF ROYALTY. 6.3.4. THE LD AR ARGUED THAT THE LD TPO HAS TO APP LY ANY ONE OF THE 5 METHODS PRESCRIBED IN THE STATUTE FOR DETERMINATION OF ALP. IN THIS REGARD HE PLACED RELIANCE ON THE DECISION OF THE DELHI TRIBUNAL IN THE CASE OF A WB INDIA (P) LTD VS DCIT REPORTED SUPRA. 21 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 6.3.5. THE LD AR DREW THE ATTENTION OF THE ORDER O F THE LD DRP WHEREIN THE ASSESSEE HAD EXPLAINED THE BENEFITS DERIVED BY IT THROUGH INCREA SED TURNOVER FROM THE FINANCIAL YEARS 2004-05 TO 2009-10 AS BELOW:- YEAR REVENUE DERIVED FROM THIRD PARTY CUSTOMERS (INCLUDING SOFTWARE SALES & MAINTENANCE REVENUE) ADDITIONAL BENEFIT DERIVED FROM THIRD PARTIES DUE TO SALE OF SOFTWARE ROYALTY PAYMENT TO US BENEFIT BENEFIT % (ON SALES) 2004-05 21 681 971 3 510 587 0 25 192 558 100% 2005-06 13 736 036 1 024 860 0 14 760 896 100% 2006-07 34 967 014 565 460 0 35 532 474 100% 2007-08 21 884 197 2 937 000 0 24 821 197 100% 2008-09 16 050 097 6 007 496 7 133 376 14 924 217 6 8% 2009-10 16 389 028 9173402 7 284 012 18 278 418 72% TOTAL 124 708 343 23 218 805 14 417 388 133 509 760 90% THE LD AR ARGUED THAT THE ABOVE TABLE WOULD PROVE T HAT THE ASSESSEE HAD DERIVED BENEFITS OF AROUND 90% IN TERMS OF ADDITIONAL REVENUE AND MI NIMAL / NO COST BY VIRTUE OF PAYING ROYALTY TO ITS AE. HE FURTHER ARGUED THAT IT WOUL D NOT HAVE DERIVED SUCH REVENUES FROM THIRD PARTY CUSTOMERS IF LVS INC. HAD NOT GRANTED S UCH LICENSE TO ASSESSEE. HE FURTHER ARGUED THAT UNDER COMPARABLE CIRCUMSTANCES NO THIR D PARTY WOULD HAVE GIVEN SUCH LICENSE FREE OF COST OR ALLOWED ASSESSEE TO RETAIN MAJORITY SHARE OF THE REVENUE. HE ARGUED THAT THERE HAS BEEN INCREASE IN THE REVENUES AND PROFITABILITY POST ADDITION OF THIS SOFTWARE SALES AND MAINTENANCE REVENUE. THE DETAIL S OF THE SAME ARE AS BELOW:- FINANCIAL YEAR REVENUES PROFIT BEFORE TAX 2006-07 10 68 45 669 (94 71 976) 2007-08 12 48 44 081 1 63 12 532 2008-09 13 03 45 542 2 21 06 636 2009-10 14 16 86 146 2 80 93 792 HE ARGUED THAT WHILE THIS IS SO THE OBSERVATION OF THE LD DRP THAT THE ASSESSEE HAD NOT BEEN ABLE TO ESTABLISH HOW THE PAYMENT OF ROYALTY T O ITS AE HAD IMPROVED ITS DOMESTIC SALES IS WITHOUT ANY BASIS. THE LONG TERM BENEFIT S DERIVED BY THE ASSESSEE OUT OF THE ROYALTY PAYMENTS HAS BEEN PROVED BEYOND DOUBT BY TH E INCREASE IN REVENUES AND PROFITABILITY OF THE ASSESSEE . 22 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 6.3.6. HE ARGUED THAT WHAT IS EFFECTIVELY CARRIED O UT BY THE ASSESSEE IS ONLY TRADING IN SOFTWARE AS FAR AS THIS TRANSACTION IS CONCERNED. THE ASSESSEE BOUGHT SOFTWARE FROM ITS AE AND SOLD IT LOCALLY TO THIRD PARTY CUSTOMERS AND 40% OF IT IS GIVEN TO THE AE AS ROYALTY. THE FACT THAT NO ROYALTY WAS PAID BY THE ASSESSEE FOR THE FIRST FOUR YEARS IS IN VIEW OF THE FACT THAT IT COULD GET WAIVER FROM ITS AE FOR NON PAYMENT OF ROYALTY. THIS ROYALTY ADMITTEDLY IS PAID PURSUANT TO THE ROYALTY AGREEMENT ENTERED INTO WITH AE AND WHICH WAS ALSO PLACED BEFORE THE LOWER AUTHORITIES. 6.3.7. THE LD AR ARGUED THAT WITHOUT PREJUDICE TO T HE AFORESAID ARGUMENTS ASSESSEE HAD ALSO CONDUCTED THE BENCHMARKING ANALYSIS FOR THE PA YMENT OF ROYALTY / LICENSE FEES PAID BY THIRD PARTIES (LICENSEE) TO THE LICENSOR FOR SUB LICENSING OF SOFTWARE. THE AVERAGE ROYALTY / LICENSE FEES DETAILS FROM THE BENCHMARKIN G ANALYSIS IS GIVEN BELOW:- SL. NO. LICENSOR LICENSEE ROYALTY RATE % 1 RAND IMAGINIT TECHNOLOGIES INC AUTODESK INC. 50 .00 2. BIT-ARTS LIMITED SMARTE SOLUTIONS INC. 30.00 3. JETFORM CORPORATION INDIGO PACIFIC PTY. LTD. 50. 00 4. INFOSPACE INC. MITSUI & CO. LTD. 40.00 5. OPEN SOLUTIONS INC. (OSL) BISYS INC. 30.00 6. ADAM SOFTWARE INC. (LICENSOR) MINDSCAPE INC. ( DISTRIBUTOR) 25.00 7. IMNET SYSTEMS INC. HEALTHVISION 75.00 8. APACHE MEDICAL SYSTEMS INC. CERNER CORPORATION 50.00 MEAN 43.75 ACCORDINGLY HE ARGUED THAT THE PAYMENT OF 40% ROYAL TY BY THE ASSESSEE TO ITS AE IS LOWER THAN THE ARITHMETIC MEAN OF THE ROYALTY PAY O UTS BY THE COMPARABLES. ACCORDINGLY IT WAS ARGUED THAT THE PAYMENT OF ROYALTY IS AT ARM S LENGTH. 7. THE LD DR FILED WRITTEN SUBMISSIONS WHEREIN HE H AD STATED THAT THE CBDT CIRCULAR NO. 12 & 14 DO NOT PUT ANY RESTRICTIONS ON THE LD T PO. ON THE CONTRARY BOTH THE CIRCULARS CLEARLY STATE THAT IF THE LD TPO FINDS TH AT THE DATA USED BY THE TAXPAYER WAS NOT RELIABLE OR CORRECT THEN HE CAN RE-DETERMINE THE A LP. HENCE THE LD TPO REJECTING THE TRANSFER PRICING REPORT OF THE ASSESSEE AND CONDUCT ING A FRESH SEARCH TO DETERMINE THE ALP CANNOT BE FAULTED WITH. 23 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 7.1. WITH REGARD TO COMPARABLE SOUGHT TO BE EXCLUDE D BY THE LD AR I.E E-INFOCHIPS BANGALORE LIMITED ON THE BASIS OF DISPUTE ON THE EXACT NATURE OF SER VICES IN WHICH SUCH COMPARABLE WAS ENGAGED THE LD DR ARGUED THAT THE LD TPO HAD OBTAINED INFORMATION U/S 133(6) OF THE ACT WHEREIN THE SAID PARTY HAD RE PLIED ABOUT THEIR NATURE OF SERVICES WHICH HAD TO BE CONSIDERED AS A DIRECT AND AUTHENTI C INFORMATION. WITH REGARD TO THE ARGUMENT OF THE LD AR THAT THIS INFORMATION SOUGHT U/S 133(6) OF THE ACT WAS NOT SHARED WITH THE ASSESSEE HE STATED THAT THIS ARGUMENT WA S NEVER ADVANCED BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES AND HENCE THE SAME IS TO BE REJECTED. HENCE IT HAS BEEN RIGHTLY CHOSEN BY THE LD TPO AS A COMPARABLE. 7.2. WITH REGARD TO SECOND AND COMPARABLES SOUGHT T O BE EXCLUDED I.E INFINITE DATA SYSTEMS PVT LTD (MERGED) AND SPRY RESOURCES INDIA P VT LTD AND INCLUSION OF ONE COMPARABLE I.E AKSHAY SOFTWARE TECHNOLOGIES LTD HE PLACED RELIANCE ON THE ORDER OF THE LD TPO AND ACCORDINGLY STATED THAT THE SAME HAD BEE N RIGHTLY CHOSEN AS COMPARABLES BY THE LD TPO AND RIGHTLY REJECTED BY THE LD TPO FROM THE COMPARABLES RESPECTIVELY. 7.3. WITH REGARD TO PAYMENT OF ROYALTY HE ARGUED T HAT THE FACT AS TO WHETHER THERE WAS DOUBLE ADDITION WAS MADE DUE TO ENTITY LEVEL BENCHM ARKING MAY BE DIRECTED TO BE VERIFIED TO THE FILE OF THE LD AO. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD INCLUDING THE PAPER BOOKS FILED BY THE ASSESSEE. T HERE IS NO DISPUTE ON THE APPLICATION OF TNMM AS THE MAM WITH PLI OF NET COST PLUS MARGIN. T HE CONTROVERSY THAT REVOLVES AROUND US IS ONLY ON THE SELECTION OF COMPARABLES. FIRST WE SHALL ADDRESS THE DISPUTE ON ACCOUNT OF UPWARD ADJUSTMENT IN RESPECT OF SALES TO AE IN THE SUM OF RS. 74 92 375/-. THE ASSESSEE CHOSE 15 COMPARABLES TO JUSTIFY ITS TR ANSACTIONS WITH AE TO BE AT ARMS LENGTH. THE LD TPO REJECTED 13 OUT OF 15 COMPARAB LES OF THE ASSESSEE AND INCLUDED SEVERAL NEW COMPARABLES AND MADE UPWARD ADJUSTMENTS TO ALP. THE LD DRP DID NOT GIVE ANY RELIEF TO THE ASSESSEE ON THE SELECTION OF COMPARABLES CHOSEN BY THE LD TPO. WE FIND THAT THE LD DRP HAD GIVEN RELIEF ONLY ON TH E EXCLUSION OF RECOVERY TRANSACTIONS OF RS. 1 37 88 142/- FOR DETERMINING THE TP ADJUSTM ENT AND GRANTED RELIEF ON WORKING 24 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 CAPITAL ADJUSTMENT AND THEREFORE RE-CALCULATED THE ARMS LENGTH MARGIN OF LD TPOS COMPARABLES AT 39.25%. WE FIND THAT THE LD AR BEF ORE US AGREED TO GO BY THE COMPARABLES CHOSEN BY THE LD TPO IN HIS ORDER WITH THE FOLLOWING EXCEPTIONS :- PRAYED FOR EXCLUSIONS OF (I) E-INFOCHIPS BANGALORE LTD ; (II) INFINITE DATA SYSTEMS PVT LTD (MERGED) ; AND (III) SPRY RESOURCES INDIA PVT LTD 8.1. WE FIND THAT APART FROM THIS THE LD AR HAD PR AYED FOR INCLUSION OF ONE COMPARABLE CHOSEN BY THE ASSESSEE I.E AKSHAY SOFTWARE TECHNOLO GIES LTD IN THE LIST OF COMPARABLES CHOSEN BY THE LD TPO. WE FIND THAT THE LD AR STAT ED THAT IF THE AFORESAID THREE EXCLUSIONS AND ONE INCLUSION IS CARRIED OUT TO THE LIST OF COMPARBLES CHOSEN BY THE LD TPO THEN THE MARGIN ARRIVED IN SUCH ARITHMETICAL M EAN WOULD BE LESSER THAN THE MARGINS DECLARED BY THE ASSESSEE AND HENCE THERE WOULD BE N O NECESSITY TO DISPUTE THE OTHER COMPARABLES OF THE LD TPO AND CONSEQUENTLY NO ADJUS TMENT TO ALP IN THIS REGARD IS REQUIRED TO BE MADE. HENCE THE QUESTIONS FOR OUR C ONSIDERATION WOULD BE AS FOLLOWS:- (A) WHETHER THE ASSESSEE IS JUSTIFIED IN SEEKING FOR EX CLUSIONS OF THREE COMPARABLES CHOSEN BY THE LD TPO VIZ (I) E-INFOCHIPS BANGALORE LTD ; (II) INFINITE DATA SYSTEMS PVT LTD (MERGED) ; AND (III) SPRY RESOURCES INDIA PVT LTD IN THE FACTS AND CIRCUMSTANCES OF THE CASE. (B) WHETHER THE ASSESSEE IS JUSTIFIED IN SEEKING FOR IN CLUSION OF ONE COMPARABLE I.E AKSHAY SOFTWARE TECHNOLOGIES LTD TO THE COMPARABLES CHOSEN BY THE LD TPO IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 8.2. EXCLUSION OF E-INFOCHIPS BANGALORE LTD WE FIND THAT THIS COMPANY HAD REPORTED NCP OF 71.92 % . IT IS NOT IN DISPUTE THAT THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT. HENCE COMPARABLE SHOULD ALSO BE IN THE COMPANIES ENGAGED IN THE SIMILAR SECTOR. WE FIND FR OM THE BUSINESS PROFILE OF THE SAID COMPARABLE AS EVIDENT FROM ITS ANNUAL REPORT THAT IT IS ENGAGED IN IT AND IT ENABLED SERVICES. EVEN AS PER SEGMENTAL REPORTING THE COM PANY IS ALSO ENGAGED IN PROVIDING IT ENABLED SERVICES AND NO SEGMENTAL INCOME BREAK UP I S AVAILABLE FOR THE SAME. THUS IT 25 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 WOULD NOT BE CORRECT TO CLASSIFY E-INFOCHIPS AS A S OFTWARE DEVELOPMENT COMPANY. WE FIND THAT THE LD TPO HAD OBTAINED INFORMATION FROM THIS COMPANY U/S 133(6) OF THE ACT WHEREIN THE PARTY HAD STATED THAT IT IS ENGAGED ONL Y IN IT SECTOR. ADMITTEDLY THE INFORMATION OBTAINED U/S 133(6) OF THE ACT BEHIND T HE BACK OF THE ASSESSEE AND NOT EVEN CONFRONTED WITH THE ASSESSEE AND CAME TO THE KNOWLE DGE OF THE ASSESSEE ONLY IN THE ORDER U/S 92CA(3) OF THE ACT. IN THESE CIRCUMSTANCES W E FIND LOT OF FORCE IN THE ARGUMENT OF THE LD AR THAT THE INFORMATION AVAILABLE IN THE PUB LIC DOMAIN I.E THE ANNUAL REPORT SHOULD BE TAKEN AS CORRECT. MOREOVER WE ALSO FIND THAT THE ANNUAL REPORT IS BEING CIRCULATED TO THE LARGER SECTIONS OF THE PUBLIC IN COMPLIANCE WITH THE PROVISIONS OF COMPANIES ACT 1956 AND LISTED COMPANY REGULATIONS PRESCRIBED BY SEBI. WE ALSO FIND THAT THE CO-ORDINATE BENCHES OF VARIOUS TRIBUN ALS HAD HELD THAT THIS COMPANY SHOULD NOT BE TREATED AS COMPARABLE. THE RECENT DECISION OF THE CO-ORDINATE BENCH OF HYDERABAD TRIBUNAL IN THE CASE OF CNO IT SERVICES (INDIA) PRIVATE LIMITED VS DCIT IN ITA NO. 336/HYD/2015 DATED 19.2.2016 FOR ASST YEAR 2010-11 HAD HELD AS UNDER:- 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE IMPUGNED ORDERS OF THE LOWER AUTHORITIES AND OTHER MATERIAL ON RECORD. AS NOTED HEREINABOVE THE ONLY GRIEVANCE OF THE ASSESSEE IN THIS APPEAL IS AGAINST THE INCLUSION OF THE FOLLOWI NG COMPANIES IN THE LIST OF COMPARABLES FOR THE PURPOSES OF DETERMINING THE ARMS LENGTH PRICE. (A) E-INFOCHIPS BANGALORE LTD (B) KALS INFORMATION SYSTEMS LTD (C) TATA ELXSI LTD (SEG) ADMITTEDLY COMPARABLE NATURE OF THE ABOVE THREE CO MPANIES IN SIMILAR CIRCUMSTANCES HAS COME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF PEGASYSTEMS WORLDWIDE INDIA PVT LTD. HYDERABAD (ITA NO. 1758/HYD/2014 OF THE ASSESSEE & ITA NO. 1936/HYD/2014 OF THE REVENUE FOR THE ASSESSMENT YEAR 2010-11 WHEREIN THE TRIBUNAL HAS ACCEPTED THE OBJECTIONS OF THE ASSESSEE IN THAT CASE AGAINST THE INCLUSION OF THE ABOVE THREE COMPANIES AFTER DISCUSSING THE SAME IN PARA 8 PARA 10 AND PARA 12 OF ITS ORDER DATED 16.10.2015 EXTRACTED BELOW- E-INFOCHIPS BANGALORE LTD 8.3. AFTER CONSIDERING THE RIVAL CONTENTIONS AND PE RUSING THE ANNUAL REPORTS PLACED ON RECORD WE ARE OF THE OPINION THAT THIS COMPANY CANNOT BE S ELECTED AS COMPARABLE COMPANY FOR TP ANALYSIS. FIRST OF ALL THIS COMPANY IS ENGAGED IN BOTH SOFTWARE DEVELOPMENT AS WELL AS ITES. ASSESSEE BEING ONLY CAPTIVE SERVICE PROVIDER THE A BOVE COMPANY CANNOT BE CONSIDERED AS COMPARABLE ON FUNCTIONAL BASIS. NOT ONLY THAT AS P OINTED OUT SEGMENTAL INFORMATION PERTAINING TO THE ABOVE COMPANY IS NOT AVAILABLE. AS SEEN FROM THE TP ORDERS DOCUMENTS PLACED ON RECORD TPO RELIED ON LATER YEARS ANNUAL REPORT IN EXTRACT ING THE INFORMATION. VARIATION IN PROFITABILITY OVER THE YEARS ALONE CANNOT BE A REASON TO EXCLUDE THE COMPANY FROM COMPARABILITY ANALYSIS BUT AS RIGHTLY POINTED THE ABSENCE OF SEGMENTAL INFORM ATION HOW MUCH PROFIT EARNED WAS ON THE SOFTWARE DEVELOPMENT OR ITES CANNOT BE EXAMINED. IN THE ABSENCE OF CLARITY ON OPERATIONAL 26 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 DETAILS AND COMPARABLE COMPANY HAVING DIVERSIFIED A CTIVITIES WE ARE OF THE OPINION THAT THIS COMPANY CANNOT BE CHOSEN AS A COMPARABLE COMPANY IN ASSESSEES CASE IN THIS ASSESSMENT YEAR. WE ARE ALSO AWARE OF THE DECISION OF THE CO-ORDINAT E BENCH GIVEN IN EARLIER ASSESSMENT YEAR ON THE REASON THAT SEGMENTAL REPORTING WAS NOT AVAILAB LE. BE THAT AS IT MAY SINCE THE SAID COMPANY IS FUNCTIONALLY DIFFERENT FROM ASSESSEES ACTIVITIE S AND IN THE ABSENCE OF SEGMENTAL INFORMATION WE DIRECT AO/TPO TO EXCLUDE THE ABOVE WHILE WORKING OUT THE COMPARABILITY ANALYSIS. WE UPHOLD THE PLEA OF ASSESSEE IN THIS REGARD. WE ALSO FIND THAT AS STATED EARLIER THE OTHER DECI SIONS RELIED UPON BY THE LD AR ALSO HAD HELD THAT THIS COMPARABLE IS FUNCTIONALLY NOT COMPA RABLE. WE DEEM IT FIT AND APPROPRIATE TO CONSIDER THE RECENT DECISION RENDERED IN THIS RE GARD. IN VIEW OF THE AFORESAID FINDING AND JUDICIAL PRECEDENT RELIED UPON WE HOLD THAT TH E COMPARABLE CHOSEN BY LD TPO I.E E- INFOCHIPS BANGALORE LTD IS FUNCTIONALLY NOT COMPARA BLE WITH THE ASSESSEE COMPANY. 8.3. EXCLUSION OF INFINITE DATA SYSTEMS PVT LTD (ME RGED) WE FIND THAT THIS COMPANY HAD REPORTED NCP OF 88.25 % . IT IS NOT IN DISPUTE THAT THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT. HENCE COMPARABLE SHOULD ALSO BE IN THE COMPANIES ENGAGED IN THE SIMILAR SECTOR. WE FIND TH AT THIS COMPANY IS HAVING A DIFFERENT BUSINESS MODEL AND ENGAGED IN PROVIDING ENTIRE GAMU T OF SOLUTIONS COMPRISING OF TECHNICAL CONSULTING DESIGN AND DEVELOPMENT OF SOF TWARE MAINTENANCE SYSTEM INTEGRATION IMPLEMENTATION TESTING AND INFRASTRUC TURE MANAGEMENT SERVICES. WE FIND FROM THE PAPER BOOK THAT THE REVENUE IS PRIMARILY DERIVED FROM TECHNICAL SUPPORT AND INFRASTRUCTURE MANAGEMENT SERVICES. WE FIND THAT I NFINITE DATA SYSTEMS PVT LTD COMMENCED ITS OPERATIONS ON 1 ST JANUARY 2009 AND AS PER SEGMENT REPORTING DISCLOSU RE THE COMPANYS OPERATIONS PREDOMINANTLY RELATE TO PR OVIDING SOFTWARE TECHNICAL CONSULTANCY SERVICES TO ITS SOLE CUSTOMER FUJITSU S ERVICES LIMITED. FURTHER AS PER THE ANNUAL REPORT OF 2009 AT PAGE 1 IT IS STATED THAT THE HOLDING COMPANY M/S INFINITE COMPUTER SOLUTIONS (INDIA) LIMITED SIGNED AN AGREEM ENT (BUILD OPERATE AND TRANSFER BOT MODEL) WITH FUJITSU SERVICES LIMITED TO SET UP GLOBAL DELIVERY CENTERS IN INDIA TO PROVIDE OFFSHORE DELIVERY CAPABILITIES TO FUJITSU & FUJITSUS ASSOCIATED COMPANIES. WE FIND THAT THESE FACTS HAVE ALSO BEEN ACKNOWLEDGED B Y THE LD TPO AT PAGE 77 OF HIS ORDER. THE LD AR STATED THAT IT WOULD BE WORTHWHILE TO NOT E THAT INFINITE DATA SYSTEMS PVT LTD COMPLETED ITS THREE YEARS CONTRACT WITH FUJITSU PO ST WHICH THE BUSINESS WAS TRANSFERRED TO FUJITSU AND THUS THE COMPANY HAS BEEN MERGED WIT H ITS HOLDING COMPANY INFINITE 27 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 COMPUTER SOLUTIONS (INDIA) LTD DURING THE FINANCIAL YEAR 2011-12. WE ARE INCLINED TO AGREE WITH THE SUBMISSIONS OF THE LD AR THAT THIS C OMPARABLE INFINITE DATA SYSTEMS PVT LTD WAS CREATED FOR PURPOSES OF TRANSFER OF BUSINES S. HENCE THE NATURE OF SERVICES AND BUSINESS MODEL OF ASSESSEE COMPANY AND COMPARABLE C OMPANY ARE ENTIRELY DIFFERENT. APART FROM THIS WE ALSO FIND THAT THERE EXIST ABNO RMAL CIRCUMSTANCES IN THE SAID COMPARABLE. DURING THE LAST 3 YEARS VARIATIONS IN MARGINS EARNED SHOW AN ABNORMAL CIRCUMSTANCES LEADING TO HUGE FLUCTUATIONS AND SUPE RNORMAL PROFIT THE MARGIN EARNED BY INFINITE IS 88.25% WHICH IS ABNORMALLY HIGH. IT WA S ARGUED THAT SUCH COMPANIES WHICH ARE MAKING MORE THAN TWICE THE ARITHMETICAL MEAN MA RGIN AS COMPUTED BY THE LD TPO SHOULD NOT BE CONSIDERED AS COMPARABLE. THE LD AR REFERRED TO PAGE 591 OF THE PAPER BOOK WHERE THE DETAILS OF THE FLUCTUATION IN THE RE VENUE PROFIT AND MARGINS HAS BEEN PROVIDED. IT IS TRUE THAT WHERE COMPANY IN WHIC H EXTRAORDINARY EVENTS HAD TAKEN PLACE DURING THE YEAR LIKE MAJOR ACQUISITIONS WHICH HAD I MPACT ON PROFITS OF COMPANY IT COULD NOT BE SELECTED AS COMPARABLE TO ASSESSEE ENGAGED I N SOFTWARE DEVELOPMENT. WE PLACE RELIANCE IN THIS REGARD ON THE DECISION OF HYDERABAD TRIBUNAL IN THE CASE OF EXCELLENCE DATA RESEARCH (P) LTD VS ACIT REPORTED IN ( 2016) 7 4 TAXMANN.COM 13 (HYD TRIB) DATED 12.9.2016 FOR ASST YEAR 2010-11 WHEREIN IT WAS HELD THAT :- 8. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD WE FIND THAT THE DRP HAS DIRECTED THE AO TO CONSIDER WHETHER THE EXTRA ORDIN ARY EVENT OF AMALGAMATION DURING THE YEAR IS FOUND TO HAVE AN IMPACT ON THE PROFITS OF THE COMPA NY. WE FIND THAT INSTEAD OF CARRYING OUT THE EXERCISE THE AO HAS SIMPLY FOLLOWED THE ORDER OF T HE TPO IN HOLDING THAT THE FACT OF AMALGAMATION ON THE MARGIN OF THE SAID COMPANY HAS NO EFFECT ON THE MARGIN OF THE SAID COMPANY. THIS IN OUR OPINION IS NOT A CORRECT APPROACH OF THE AO. WHERE A DIRECTION HAS BEEN GIVEN BY THE DRP TO FOLLOW A CERTAIN PROCEDURES THE AO HAS SIMPLY FOLL OWED THE TPO ORDER. THEREFORE ORDER OF THE AO ON THIS ISSUE NEEDS TO BE SET ASIDE. IN THE CASE OF HYUNDAI MOTORS INDIA ENGG. (P.) LTD. (2015) 64 TAXMANN.COM 442 (HYD.-TRIB.) WHICH IS ALSO ENGAGED IN RENDERING OF ITES TO ITS AES THE TRIBUNAL HAS TAKEN NOTE OF THE SAME AT PARA 9.1 AND 9.3 OF I TS ORDER. THEREFORE THE DECISION OF THE TRIBUNAL IN THE SAID CASE IS APPLICABLE TO THE CASE ON HAND MORE PARTICULARLY SINCE THE COMPARABLES ADOPTED BY THE TPO IN THE SAID CASE ARE THE SAME IN THE ASS ESSEE'S CASE ALSO. IN THE CASE OF HYUNDAI MOTORS INDIA ENGG. (P.) LTD. (SUPRA) AT PAGE 20 PARA 18 THE TRIBUNAL HAS HELD AS UNDER: '18. AS REGARDS M/S. ACCENTIA TECHNOLOGIES LTD. IS CONCERNED WE FIND THAT THE DRP HAS DIRECTED TO EXCLUDE THIS COMPANY BY PLACING RELIANC E UPON THE ORDER OF THE ITAT IN THE ASSESSEE'S OWN CASE FOR THE A.Y. 2009-10 BY HOLDING THAT THIS COMPANY OPERATES IN A DIFFERENT BUSINESS STRATEGY OF ACQUIRING COMPANIES FOR INORGANIC GROWT H AS ITS STRATEGY AND CONSIDERING THE PROFIT MARGINS OF THE COMPANY AND INSUFFICIENT SEGMENTAL D ATA HELD THAT THIS COMPANY CANNOT BE SELECTED AS A COMPARABLE. IT WAS ALSO HELD BY THE D RP THAT ON THE VERY SAME REASON OF ACQUISITION OF VARIOUS COMPANIES BEING AN EXTRAORD INARY EVENT IT HAD AN IMPACT ON THE PROFIT OF THE COMPANY AND THE SAID COMPANY WAS DIRECTED TO BE EXCLUDED. 28 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 18.1 FOR THE RELEVANT A.Y. 2010-11 THE LD. COUNSEL FOR THE ASSESSEE HAS DRAWN OUR ATTENTION TO THE INFORMATION AVAILABLE ON ACCENTIA TECHNOLOGIES LTD. TO DEMONSTRATE THAT THE SAID COMPANY IS INTO DIVERSIFIED KNOWLEDGE PROCESS OUTSOURCING A CTIVITIES. IT IS SEEN THERE FROM THAT THE SAID COMPANY IS INVOLVED IN HEALTHCARE DOCUMENTATION AS WELL AS RECEIVABLES MANAGEMENT SERVICES INCLUDING INSTALLATION AND MAINTENANCE OF ALL SOFTW ARE HARDWARE AND BAND WIDTH INFRASTRUCTURE REQUIRED FOR THE SAME DEPLOYMENT OF MAN POWER AND SERVICE DELIVERY IN ALL THESE AREAS. IT IS ALSO SEEN THAT IT IS ENGAGED IN LEGAL PROCESS OUTSOURCIN G. FROM SCHEDULE-IV SHOWING THE FIXED ASSETS OF THE ASSESSEE IT IS ALSO SEEN THAT THE SAID COMP ANY OWNS GOODWILL/BRAND/IPRS (INTELLECTUAL PROPERTY RIGHTS). FROM THE NOTES TO THE ACCOUNTS I T IS ALSO SEEN THAT A SUBSIDIARY OF THE COMPANY ASSCENT INFOSERVE PVT. LTD. HAS BEEN AMALGAMATED W ITH THE COMPANY CONSEQUENT TO WHICH ASSETS AND LIABILITIES OF THE ERSTWHILE COMPANY WER E TRANSFERRED AND VESTED IN THE COMPANY W.E.F. 1ST APRIL 2008 AND THE SCHEME HAS BEEN GIVEN EFFEC T TO IN THE ACCOUNTS OF THE YEAR. THEREFORE IT IS CLEAR THAT THERE IS AN EXTRAORDINARY EVENT IN TH E CASE OF ACCENTIA TECHNOLOGIES LTD. DURING THE RELEVANT FINANCIAL YEAR PARTICULARLY SINCE THE APPR OVAL FOR AMALGAMATION HAS BEEN GIVEN BY THE HON'BLE HIGH COURT OF MUMBAI VIDE ORDERS DATED 21 ST AUGUST 2009 AND BY THE HON'BLE KARNATAKA HIGH COURT VIDE ORDERS DATED 6TH FEBRUARY 2010. THIS EVENT WOULD DEFINITELY HAVE AN EFFECT ON THE PROFIT MARGINS OF THE SAID COMPANY AND THEREFORE HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES AS RIGHTLY DONE BY THE DRP. THE REFORE WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE DRP ON THIS COMPANY ALSO. ACC ORDINGLY GROUND NO. 3 OF THE REVENUE IS DISMISSED'. SINCE THE ORDER OF THE TRIBUNAL IN THE CASE OF HYUN DAI MOTORS INDIA ENGG. (P.) LTD. (SUPRA) FOR THE SAME A.Y WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. 11. TCS E-SERVE INTERNATIONAL LTD: AS REGARDS THE C OMPARABILITY OF THIS COMPANY WITH THE ASSESSEE THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TCS INTERNATIONAL ALSO PROVIDES SOFTWARE TESTING VERIFICATION AND VALIDATION WHICH ARE DIFF ERENT FROM ITES SERVICES PROVIDERS BY THE ASSESSEE. IT IS ALSO SUBMITTED THAT THE SEGMENTAL INFORMATION OF TCS INTERNATIONAL ARE NOT AVAILABLE IN THE ANNUAL REPORT. THE EXCEPTIONAL CIRCUMSTANCES OF THE COMPANY REPORTED IN ANNUAL REPORT SUCH AS ACQUISITION OF INDIA BASED CAPTIVE BUSINESS OUTSOUR CING ARM RESULTING IN ACQUISITION OF AN AGGREGATE AMOUNT OF $ 2.5 BILLION OVER A PERIOD OF 9.5 YEARS AND ITS IMPACT ON THE FINANCIAL IMPLICATIONS OF THE COMPANY ALSO BROUGHT TO OUR NOT ICE. IT IS SUBMITTED THAT THESE PECULIAR CIRCUMSTANCES HAVE BEEN CONSIDERED BY THE COORDINAT E BENCH OF THIS TRIBUNAL IN THE CASE OF HYUNDAI MOTORS INDIA ENGG. (P.) LTD. (SUPRA) FOR EX CLUSION OF THE LIST OF COMPARABLES. RESPECTFULLY FOLLOWING THE DECISION OF THE BENCH T HESE TWO COMPARABLES TCS E-SERVE INTERNATIONAL LTD AND TCS E-SERVE LTD DIRECTED TO BE EXCLUDED. IN VIEW OF THE AFORESAID FINDINGS AND JUDICIAL PREC EDENT RELIED UPON WE HOLD THAT THE COMPARABLE CHOSEN BY LD TPO I.E INFINITE DATA SYSTE MS PVT LTD (MERGED) IS FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE COMPANY. 8.4. EXCLUSION OF SPRY RESOURCES INDIA PVT LTD WE FIND THAT THIS COMPANY HAD REPORTED NCP OF 33.25 % . IT IS NOT IN DISPUTE THAT THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT. HENCE COMPARABLE SHOULD ALSO BE IN THE COMPANIES ENGAGED IN THE SIMILAR SECTOR. WE FIND TH AT THIS COMPANY IS ENGAGED IN SOFTWARE CONSULTANCY SERVICES WHICH IS NOT SIMILAR TO ASSESSEE BUSINESS. WE FIND THAT THE 29 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 LD TPO WHILE REJECTING THE COMPARABLE CHOSEN BY THE ASSESSEE I.E EFORCE INDIA (P) LTD HAD MENTIONED IN PAGE 64 OF HIS ORDER THAT THE SAI D COMPARABLE IS ENGAGED INTO SOFTWARE CONSULTANCY SERVICE AND ACCORDINGLY THE SAME IS FUN CTIONALLY NOT COMPARABLE WITH THE ASSESSE WHICH IS ENGAGED IN SOFTWARE DEVELOPMENT. HENCE THE LD TPO HAD CONSCIOUSLY DECIDED TO EXCLUDE COMPARABLES ENGAGED IN SOFTWARE CONSULTANCY SERVICES. HENCE ON THIS GROUND HE OUGHT TO HAVE ENGAGED THIS COMPARAB LE ALSO I.E SPRY RESOURCES PVT LTD ALSO WHICH IS ENGAGED IN SOFTWARE CONSULTANCY SERVI CES. IN VIEW OF THIS WE HOLD THAT THE COMPARABLE CHOSEN BY LD TPO I.E SPRY RESOURCES INDI A PVT LTD IS FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE COMPANY. 8.5. INCLUSION OF AKSHAY SOFTWARE TECHNOLOGIES LTD WE FIND THAT THIS COMPANY HAD REPORTED NCP OF 10.38 % . IT IS NOT IN DISPUTE THAT THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT. HENCE COMPARABLE SHOULD ALSO BE IN THE COMPANIES ENGAGED IN THE SIMILAR SECTOR. WE FIND T HAT THE LD TPO HAD REJECTED THIS COMPARABLE ON THE GROUND THAT IT PROVIDES TECHNICAL SUPPORT FOR INTEGRATION OF SWIFT SOFTWARE TO ITS CLIENTS OF THE USER OF SWIFT IN FIN ANCIAL INDUSTRY. WE FIND FROM THE ANNUAL REPORT OF THIS COMPARABLE ENCLOSED IN THE PA PER BOOK THAT IT IS ALSO ENGAGED IN SOFTWARE DEVELOPMENT ACTIVITY WHICH IS QUITE EVIDEN T FROM THE INCOME SCHEDULE OF THE SAID COMPARABLE. WE FIND THAT THE USA BASED SUBSID IARY OF THE COMPANY I.E AKSHAY SOFTWARE INTERNATIONAL INC. (AKSHAY US) IS A REGIS TERED PARTNER OF SWIFT SELLING SWIFT SOLUTIONS AND PRODUCTS AS AN EXTENDED ARM OF SWIFT IN NORTH AMERICA. THUS THE CONTENTION OF THE LD TPO / LD AO IS ERRONEOUS S INCE IT IS CLEARLY EVIDENT FROM THE ANNUAL REPORT OF THE COMPARABLE COMPANY ITSELF THAT IT IS ENGAGED IN RENDERING SOFTWARE DEVELOPMENT ACTIVITY ONLY. WE FIND THAT THIS COMPA RABLE I.E AKSHAY SOFTWARE TECHNOLOGIES LTD HAD BEEN ACCEPTED AS COMPARABLE IN IT SECTOR IN THE CO-ORDINATE BENCH DECISION OF DELHI TRIBUNAL IN THE CASE OF QUALCOMM INDIA PVT LT D VS ACIT IN ITA NO. 5239/DEL/2010 DATED 10.6.2013 WHEREIN IT WAS HELD THAT :- 26. ON PERUSAL OF THE ORDER OF THE LD. T.P.O. WE FIND THAT THE LD. T.P.O. HAS REJECTED AKSHAY SOFTWARE AS A COMPARABLE TO THE ASSESSEE FOR DETERMINING THE ASSESSEES ALP ON THE BASIS THAT THE AKSHAY SOFTWARE IS FUNCTIONALLY DIFF ERENT TO THE ASSESSEE. HE HAS OBSERVED THAT AKSHAY SOFTWARE IS ENGAGED IN SAP AND REMOTE INFRAS TRUCTURE MANAGEMENT SOFTWARE APPLICATIONS AS AGAINST DESIGN WORK ON EMBODIED SO FTWARE DSP AN INTEGRATED CIRCUIT 30 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 HARDWARE DESIGN AND SYSTEMS AND ALSO FOR THE REASON S THAT SALES OF AKSHAY SOFTWARE IS ONLY RS. 6.21 CRORES AGAINST SALES OF RS. 125 CRORES TO THE ASSESSEE. WE HOWEVER FIND THAT THE LD.T.P.O IN THE ASSESSMENT YEAR 2007-08 AS IT IS CL EAR FROM THE TPO ORDER FOR THE SAID ASSESSMENT YEAR MADE AVAILABLE AT PAGE NO-69 OF THE PAPER BOOK VOLUME 3 HAS ACCEPTED THAT AKSHAY SOFTWARE IS COMPARABLE IN THE LIGHT OF IDENTICAL FUNCTIONS. ON PERUSAL OF PROFIT AND LOSS ACCOUNT OF THE AKSHAY SOFTWARE WE FIND TH AT SCHEDULE -12 OF IT SHOWS BREAK UP OF THE SALES OF THE COMPANY AS RS. 4 97 88 191 TOWARDS EXPORTS OF SOFTWARE SERVICES RS. 1 17 29 263/- TOWARDS DOMESTIC SOFTWARE SERVICES AN D RS. 6 30 000/- TOWARDS SALE OF PRODUCT. UNDER THESE CIRCUMSTANCES WE FIND SUBSTA NCE IN THE CONTENTION OF THE LD. A.R. THAT AKSHAY SOFTWARE SHOULD HAVE BEEN ACCEPTED AS COMPAR ABLE TO BENCH MARK THE INTERNATIONAL TRANSACTION OF THE ASSESSEE ALSO BECAUSE IN THE ASS ESSMENT YEAR 2007-08 THE LD. T.P.O HIMSELF HAS ACCEPTED THE COMPANY AS COMPARABLE. WE ACCORDINGLY DIRECT THE LD. T.P.O TO ACCEPT AKSHAY SOFTWARE AS COMPARABLE TO DETERMINE T HE ARMS LENGTH PRICE OF THE ASSESSEE. IN VIEW OF THE AFORESAID FINDINGS AND JUDICIAL PREC EDENT RELIED UPON WE DIRECT THE LD TPO TO INCLUDE THE AFORESAID COMPARABLE I.E AKSHAY SOFT WARE TECHNOLOGIES LTD AS FUNCTIONALLY COMPARABLE WITH THE ASSESSEE COMPANY. 8.6. ACCORDINGLY WE DIRECT THE LD TPO TO EXCLUDE ABOVE THREE COMPARABLES I.E (I) E- INFOCHIPS BANGALORE LTD ; (II) INFINITE DATA SYSTEM S PVT LTD (MERGED) AND (III) SPRY RESOURCES INDIA PVT LTD AND ALSO DIRECT TO INCLUDE ONE COMPARABLE I.E AKSHAY SOFTWARE TECHNOLOGIES LTD WITH THE LIST OF OTHER COMPARABLES CHOSEN BY THE LD TPO AND DETERMINE THE ALP OF THE ASSESSEE AND ACCORDINGLY DECIDE WHET HER ANY ADJUSTMENT NEED TO BE MADE THEREON IN ACCORDANCE WITH LAW. ACCORDINGLY THE GROUNDS RAISED BY THE ASSESSEE IN THIS REGARD ARE ALLOWED FOR STATISTICAL PURPOSES. 9. DETERMINATION OF ALP FOR ROYALTY AT RS NIL WE FIND THAT THE ASSESSEE HAD PAID ROYALTY OF RS. 7 2 84 012/- TO ITS AE ON THE LICENSE SALES MADE BY IT TO THE THIRD PARTY CUSTOMERS AS WE LL AS ON THE MAINTENANCE REVENUE GENERATED FROM SUCH LICENSES EARLIER SOLD TO THIRD PARTY CUSTOMERS. WE FIND THAT THE ASSESSEE HAD CARRIED OUT TRADING IN SOFTWARE BY PUR CHASING THE SAME FROM ITS AE AND SELLING IT LOCALLY TO THIRD PARTY CUSTOMERS. WE FI ND IN THE INSTANT CASE THE ASSESSEE HAD PAID 40% OF ITS LOCAL SALES AS ROYALTY TO ITS AE. THIS IS DULY SUPPORTED BY A ROYALTY AGREEMENT WHICH IS PART OF THE RECORDS AND WAS FILE D BEFORE THE LOWER AUTHORITIES. WE FIND THAT THE ASSESSEE HAD NOT PAID ANY ROYALTY TO ITS AE FOR THE FIRST FOUR YEARS IN VIEW OF SPECIFIC WAIVER OBTAINED FROM ITS AE FOR THE SAME. WE FIND THAT THIS PAYMENT WAS 31 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 INTEGRAL TO THE OPERATIONS OF ASSESSEE AND IN THE NATURE OF OPERATING EXPENSES SUCH TRANSACTION WAS AGGREGATED WITH THE PROVISION OF SO FTWARE DESIGN AND DEVELOPMENT SERVICES TRANSACTION AND BENCHMARKED USING TNMM AS THE MOST APPROPRIATE METHOD. WE FIND THAT THE TABLE MENTIONED IN THE ARGUMENTS O F LD AR HEREINABOVE WOULD PROVE THAT THE ASSESSEE HAD DERIVED BENEFITS OF AROUND 90 % IN TERMS OF ADDITIONAL REVENUE AND MINIMAL / NO COST BY VIRTUE OF PAYING ROYALTY TO IT S AE. ADMITTEDLY LVS INC HAD GRANTED THE LICENSE TO THE ASSESSEE FOR WHICH ROYAL TY PAYMENT HAS BEEN MADE PURSUANT TO WHICH THE ASSESSEE WAS ABLE TO DERIVE SUCH REVENUES FROM THIRD PARTY CUSTOMERS. HENCE THE ARGUMENT OF THE LD AR THAT UNDER COMPARABLE CIR CUMSTANCES NO THIRD PARTY WOULD HAVE GIVEN SUCH LICENSE FREE OF COST OR ALLOWED ASS ESSEE TO RETAIN MAJORITY SHARE OF THE REVENUE IS WELL FOUNDED AND DESERVES TO BE ACCEPTE D. IT IS TRUE THAT THERE HAS BEEN INCREASE IN THE REVENUES AND PROFITABILITY POST ADD ITION OF THIS SOFTWARE SALES AND MAINTENANCE REVENUE AS DETAILED HEREINBELOW:- FINANCIAL YEAR REVENUES PROFIT BEFORE TAX 2006-07 10 68 45 669 (94 71 976) 2007-08 12 48 44 081 1 63 12 532 2008-09 13 03 45 542 2 21 06 636 2009-10 14 16 86 146 2 80 93 792 HENCE THE BENEFIT DERIVED BY THE ASSESSEE OUT OF PA YMENT OF ROYALTY HAS BEEN DULY ESTABLISHED BY THE ASSESSEE BEYOND DOUBT. WE ALSO FIND THAT THE REVENUES HAD ALSO INCREASED PERIODICALLY WITH CORRESPONDING INCREASE IN PROFIT BEFORE TAX YEAR AFTER YEAR JUSTIFYING THE PAYMENT OF ROYALTY. 9.1. WE FIND THAT THE LD TPO WITHOUT APPRECIATING THE FACT OF INCREASED REVENUES FOR THE ASSESSEE HAD DETERMINED THE ALP FOR ROYALTY PAYMEN T TO AE AT RS NIL. WE ARE NOT INCLINED TO APPRECIATE THE ACTION OF THE LD TPO IN DETERMINING THE ALP FOR ROYALTY PAYMENT AT RS NIL. WE PLACE RELIANCE ON THE DECISI ON OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS EKL APPLIANCES LTD REPORTED I N (2012) 24 TAXMANN.COM 199 (DELHI) WHEREIN IT WAS HELD THAT :- 22. EVEN RULE 10B(1)(A) DOES NOT AUTHORISE DISALLOW ANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUNERATIVE OR T HAT IN VIEW OF THE CONTINUED LOSSES SUFFERED 32 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 BY THE ASSESSEE IN HIS BUSINESS HE COULD HAVE FARE D BETTER HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE 10B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR THE ASSESSEE TO DECIDE. THE QUAN TUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILI TY THEREOF AS BUSINESS EXPENDITURE HE HAS NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR A P ART THEREOF ON THE GROUND THAT THE ASSESSEE HAS SUFFERED CONTINUOUS LOSSES. THE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERION TO JUDGE ALLOWABILITY OF AN EXPENSE; THERE IS CERTAINLY NO A UTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PRESENT CASE IS TO HOLD THAT THE ASSESSEE OUGHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/BRAND FEE BECAUSE IT HAS BEEN SUFFERING LO SSES CONTINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCUR RED OR LAID OUT FOR THE PURPOSES OF BUSINESS IT IS NO CONCERN OF THE TPO TO DISALLOW T HE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD GUIDELINES HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJU STMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPENDITURE PARTICULARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORISED. 9.2. WE ALSO FIND THAT THIS ISSUE HAS BEEN ADDRESSE D BY YET ANOTHER DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS CUSH MAN AND WAKEFIELD (INDIA) (P) LTD REPORTED IN (2014) 46 TAXMANN.COM 317 (DELHI) VIDE ORDER DATED 23.5.2014 WHEREIN IT WAS HELD THAT THE AUTHORITY OF LD TPO IS TO CONDUCT A TRANSFER PRICING ANALYSIS TO DETERMINE ALP AND NOT TO DETERMINE WHETHER THERE IS A SERVICE OR NOT FROM WHICH ASSESSEE BENEFITS AND THEREFORE THE LD TPO CANNOT DETERMINE ALP OF PAYMENTS MADE BY ASSESSEE TO ITS AE AT NIL TAKING A VIEW THAT ASSESS EE DID NOT DERIVE ANY BENEFIT FROM SERVICES RENDERED BY AE. 9.3. HENCE WE HOLD THAT THE ASSESSEE HAD DULY SATIS FIED THE BENEFIT TEST OUT OF PAYMENT OF ROYALTY TO ITS AE. ON THAT COUNT ITSELF THE DE DUCTION OF ROYALTY PAYMENT DOES NOT DESERVE TO GET DISTURBED. 9.4. WE ALSO FIND THAT THE ASSESSEE HAD ALSO CONDU CTED THE BENCHMARKING ANALYSIS FOR THE PAYMENT OF ROYALTY / LICENSE FEES PAID BY THIRD PAR TIES (LICENSEE) TO THE LICENSOR FOR SUB LICENSING OF SOFTWARE. THE SAME IS ALSO REPRODUC ED IN THE ORDER OF THE LD DRP WHEREIN THE ARITHMETICAL MEAN HAS BEEN ARRIVED AT 43.75% . WE FIND THAT THE REVENUE HAD NOT DISTURBED THE BENCHMARKING ANALYSIS AND THE COMPAR ABLES CHOSEN BY THE ASSESSEE IN THEIR ORDERS. IN THE INSTANT CASE IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD PAID ROYALTY @ 40%. HENCE ON THIS COUNT ALSO THE ROYALTY PAID BY THE ASSESSEE TO ITS AE IS AT ALP. 33 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 9.5. IN VIEW OF OUR AFORESAID FINDINGS WE HOLD THA T THE LD TPO HAD ERRED IN DETERMINING THE ALP OF ROYALTY PAYMENTS AT RS NIL AND ACCORDING LY DIRECT THE LD TPO TO ALLOW THE DEDUCTION FOR PAYMENT OF ROYALTY AS THE SAME IS ALS O DULY BENCHMARKED BY THE ASSESSEE WHICH WERE NOT DISPUTED BY THE REVENUE AND WE HOLD THAT ROYALTY @ 40% PAID BY THE ASSESSEE IS AT ALP. ACCORDINGLY THE GROUNDS RAISE D BY THE ASSESSEE IN THIS REGARD ARE ALLOWED. 10. IN VIEW OF OUR AFORESAID FINDINGS ON THE SPECI FIC GROUNDS RAISED ON THE UPWARD ADJUSTMENT MADE TO SOFTWARE DEVELOPMENT ACTIVITY FO R EXCLUSION OF THREE COMPARABLES AND INCLUSION OF ONE COMPARABLE AND OUR FINDING ON THE ALLOWABILITY OF ROYALTY PAYMENT WE ARE INCLINED TO ACCEPT THE ARGUMENTS OF THE LD A R THAT OTHER GROUNDS BECOME ACADEMIC IN NATURE. HENCE THEY ARE NOT TAKEN UP FO R ADJUDICATION AND ACCORDINGLY TREATED AS DISMISSED. 11. IN THE RESULT THE APPEAL OF THE ASSESSEE IN IT A NO. 617/KOL/2015 FOR ASST YEAR 2010- 11 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 12. TO SUM UP APPEAL OF THE ASSESSEE IN ITA NO. 1051/KOL/2015 FOR THE ASST YEAR 2009-10 IS ALLOWED. APPEAL OF THE ASSESSEE IN ITA NO. 617 / KOL / 2015 FOR ASST YEAR 2010-11 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES ; APPEAL OF THE REVENUE IN ITA NO. 599/KOL/2015 FOR T HE ASST YEAR 2010-11 IS DISMISSED. ORDER IS PRONOUNCED IN THE OPEN COURT ON 19.10.201 6 SD/- SD/- (S.S. VISWANETHRA RAVI) (M. BALAGANESH) JUDICIAL MEMBER ACCOUNTAN T MEMBER DATED : 19TH OCTOBER 2016 JD.(SR.P.S.) 34 ITA NO. 599 1051 & 617/KOL/2015 LABVANTAGE SOLUTION PVT. LTD. AY 2009-10 & 2010-11 COPY OF THE ORDER FORWARDED TO: 1 . APPELLANT M/S. LABVANTAGE SOLUTIONS PVT. LTD. BE NGAL INTELLIGENT PARK BLDG D 3 RD FLOOR BLOCK EP & GP SECTOR-V SALT LAKE ELECTRON ICS COMPLEX KOLKATA-700 091. 2 RESPONDENT DCIT CIRCLE-2(1) KOLKATA. 3 . THE CIT(A) KOLKATA 4. 5. CIT KOLKATA DR KOLKATA BENCHES KOLKATA / TRUE COPY BY ORDER ASSTT. REGISTRAR .