VODAFONE INDIA SERVICE P. LTD ( FORMERLY KNOWN AS 3 GOLBAL SERVICES P. LTD), MUMBAI v. DCIT 3(3), MUMBAI

ITA 7125/MUM/2010 | 2006-2007
Pronouncement Date: 22-07-2011 | Result: Partly Allowed

Appeal Details

RSA Number 712519914 RSA 2010
Assessee PAN AAACZ1849D
Bench Mumbai
Appeal Number ITA 7125/MUM/2010
Duration Of Justice 9 month(s) 7 day(s)
Appellant VODAFONE INDIA SERVICE P. LTD ( FORMERLY KNOWN AS 3 GOLBAL SERVICES P. LTD), MUMBAI
Respondent DCIT 3(3), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 22-07-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted F
Tribunal Order Date 22-07-2011
Date Of Final Hearing 13-07-2011
Next Hearing Date 13-07-2011
Assessment Year 2006-2007
Appeal Filed On 15-10-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI B. RAMAKOTAI AH (A.M) ITA NO.5887/MUM/2010(A.Y.2005-06) THE DCIT CIR. 3(3) ROOM NO.609 6 TH FLOOR AAYKAR BHAVAN MK MARG MUMBAI 20. (APPELLANT) VS. M/S. VODAFONE INDIA SERVICES P. LTD. (FORMERLY KNOWN AS M/S. 3 GLOBAL SERVICES P. LTD.) SPECTRUM TOWERS MINDSPACE COMPLEX OFF. LINK ROAD MALAD (W) MUMBAI 400 064. PAN:AAACZ 1849D (RESPONDENT) ITA NO.7125/MUM/2010(A.Y. 2006-07) M/S. VODAFONE INDIA SERVICES P. LTD. (FORMERLY KNOWN AS M/S. 3 GLOBAL SERVICES P. LTD.) SPECTRUM TOWERS MINDSPACE COMPLEX OFF. LINK ROAD MALAD (W) MUMBAI 400 064. PAN:AAACZ 1849D (APPELLANT) VS. THE DCIT CIR. 3(3) ROOM NO.609 6 TH FLOOR AAYKAR BHAVAN MK MARG MUMBAI 20. (RESPONDENT) ASSESSEE BY : SHRI YOGESH THAR REVENUE BY : SHRI SUBACHAN RAM ORDER PER N.V.VASUDEVAN J.M ITA NO.5887/M/10 IS AN APPEAL BY THE REVENUE AGAIN ST THE ORDER DATED 10/5/2010 OF CIT(A) 15 MUMBAI RELATING TO ASS ESSMENT YEAR 2005-06. ITA NO.7125/M/10 IS AN APPEAL BY THE ASSESSEE AGAIN ST THE ORDER PASSED UNDER SECTION 253(1)(D) OF THE INCOME TAX ACT 1961 (THE ACT) DATED ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 2 27/9/2010 OF THE DCIT CIRCLE (3)(3) MUMBAI RELATI NG TO ASSESSMENT YEAR 2006-07. 2. FIRST WE SHALL TAKE UP FOR CONSIDERATION ITA NO .5887/M/10. GROUND NO.1 RAISED BY THE REVENUE READS AS FOLLOWS. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 24 .79 CRORES ON ACCOUNT OF THE ORDER OF TRANSFER PRICING OFFICER U/S. 92CA( 3) CONSIDERING ASSESSEE COMPANYS TRANSACTION WITH ITS AE IS AT AR MS LENGTH PRICE AND BY HOLDING THAT THERE IS NO SCOPE FOR CALLING A NY ADJUSTMENT. 3. THE ASSESSEE IS A COMPANY ENGAGED IN PROVIDING I NFORMATION TECHNOLOGY SERVICES SUCH AS CALL CENTER BACK OFFIC E OPERATION ETC. THE ASSESSEE WAS INCORPORATED IN MARCH 1999 AND COMMEN CED ITS BUSINESS IN APRIL 2003. THE ASSESSEE IS SUBSIDIARY OF HTS MAU RITIUS WHICH IN TURN IS SUBSIDIARY OF M/S. HUTCHINSON WHAMPOA LTD. HONGKON G (HWL). IT IS A BPO CENTER PROVIDING SERVICES TO TWO OTHER FELLOW SUBSI DIARIES OF ITS PARENT COMPANY I.E. M/S. HUTCHISON 3 G AUSTRALIA PVT. LTD. (H3GA) AUSTRALIA AND HUTCHISON 3G UK LTD. UK (H3GUK). THE ASSESSEE PROV IDED IT SERVICES TO HUTCHISON AUSTRALIA PVT. LTD. AND HUTCHSON 3G UK LT D. UK. THE AFORESAID TWO COMPANIES WERE ASSOCIATED ENTERPRISES AND IN TE RMS OF THE PROVISIONS OF SECTION 92 CA OF THE ACT THE ARMS LENGTH PRICE (ALP ) OF THE INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISE HAD TO BE DETERMINED. THE ASSESSING OFFICER REFERRED TO THE TPO UNDER SECTION 92 CA(1) OF THE ACT THE COMPUTATION OF ALP IN RELATION TO INTERNATIONAL TRANSACTION REFERRED TO ABOVE. 4. DURING THE RELEVANT YEAR THE ASSESSEE HAS PROVI DED I.T. ENABLED SERVICES (ITES) TO ITS AES- H3GA AUSTRALIA AT RS. 50 59 00 694/- AND H3GUK UK AT RS. 83 16 10 735/-. AS PER THE 3CEB REPORT THE ME THOD USED FOR ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 3 BENCHMARKING THIS TRANSACTION BY THE ASSESSEE WAS C OST PLUS METHOD. 3GS HAD CHARGED H3G AES ON THE BASIS OF THE FOLLOWING F ORMULA- A) OPERATING COST DEPRECIATION AND AMORTIZATION FOR THE PERIOD. B) 7% MARK UP ON (A) ABOVE. 5. DURING THE F.Y 2003-04 (AY 04-05) THE ASSESSEE HAD CHARGED A MARK UP OF 4% ON THE OPERATING COST DEPRECIATION AND AMORT IZATION. THIS WAS INCREASED TO 7% FOR THE PREVIOUS YEAR. IN A.Y. 200 4-05 THE ASSESSEE HAD SELECTED CUP METHOD AS THE MOST APPROPRIATE METHOD FOR BENCH MARKING THIS TRANSACTION. IN THIS METHOD THE ASSESSEE HAD RELIED FOR THE PURPOSE OF BENCHMARKING ITS TRANSFER PRICE ON THE RATES PUBLIS HED BY NASSCOM. THE THEN TPO HAD OBSERVED IN ITS ORDER FOR THE A.Y 2004 -05 THAT THE RATES RELIED UPON BY THE ASSESSEE ARE GENERAL INDUSTRY RATES AND THEREFORE CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEES TRANSACT ION. HE CONSIDERED IN THE FACTS OF THE CASE AND CONSIDERING THE DATA AVAI LABLE TNMM AS THE MOST APPROPRIATE METHOD. 6. DURING THE RELEVANT YEAR THE ASSESSEE HAS ITSELF CONSIDERED TNMM AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THIS T RANSACTION. DURING THE COURSE OF TP PROCEEDINGS FOR THE RELEVANT YEAR THE ASSESSEE WAS ASKED TO WHY IT HAS CHANGED THE MOST APPROPRIATE METHOD FROM CUP BEING FOLLOWED BY IT IN A.Y 2004-05 TO TNMM METHOD THIS YEAR. T HE ASSESSEE SUBMITTED VIDE LETTER DT. 5.2.2008 THAT IN THE ABSENCE OF INF ORMATION ABOUT COMPARABLE RATES FOR VOICE BASED SERVICES FOR THE RELEVANT YEA R AND PARTICULARLY FOR THE COMPARABLES IN THE PUBLIC DOMAIN CUP WAS NOT CONSI DERED FOR BENCHMARKING. THEREFORE IT CHANGED THE MOST APPRO PRIATE METHOD FROM CUP TO TNMM DURING THE RELEVANT YEAR. IT USED OPER ATING PROFIT/ OPERATING COST AS PROFIT LEVEL INDICATOR. ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 4 7. UNDER THE TNMM METHOD THE ASSESSEE SELECTED 13 COMPARABLES. THE NET MARGIN ON OPERATING COST EARNED BY THE COMPARABLES WAS BETWEEN 41.87% TO 62.25% WITH AN ARITHMETIC MEAN OF 6.95% AS UN DER: SR. NO. COMPARABLE COMPANIES OP/TC (%) 1 ALLSEC TECHNOLOGIES LTD. 28.07 2 WIPRO BPO SOLUTIONS LTD. 28.43 3 TRANSWORKS INFORMATION SERVICES LTD. 5.69 4 CITIGROUP GLOBAL SERVICES LTD. 15.91 5 FIRSTSOURCE SOLUTIONS LTD. 4.84 6 GODREJ UPSTREAM LTD - 17.57 7 NIIT SMARTSERVE LTD. -15.21 8 NIPUNA SERVICES LTD. - 7.33 9 REV IT SYSTEMS PVT. LTD. - 7.33 10 TRANSWORK INFORMATION SERVICES LTD. 5.69 11 WIPRO BPO SOLUTIONS LTD. 28.43 12 HINDUJA TMT LTD. (SEGMENT) 62.25 13 MPPHASIS LTD. (SEGMENT) 38.26 ARITHMETIC MEAN 6.93 THE NET MARGIN OF ASSESSEE WORKED OUT TO 11.63% AND THUS THE ASSESSEE JUSTIFIED THE PRICE IT CHARGED THE AES AS PROPER AN D CALLING FOR NO ADJUSTMENT BY THE TP. 8. THE TPO (ON A REFERENCE MADE BY THE AO TO DETER MINE THE ALP) WAS OF THE VIEW THAT THE COMPARABLES SELECTED BY THE ASSESSEE CANNOT BE ACCEPTED AS BEING COMPARABLE TO ASSESSEE DUE TO FOLLOWING REASO NS: SR.NO. NAME OF THE COMPANY REASONS FOR REJECTION 1 M/S. ASK ME INFO HUBS LTD. CHRONICALLY LOSS MAKIN G 2 B2K CORPN PVT. LTD. CHRONICALLY LOSS MAKING 3 CITIGROUP GLOBAL SERVICES LTD. RELATED PARTY TRAN SACTIONS WITH FOREIGN PARENT HENCE NOT UNCONTROLLED TRANSACTION 4 GODREJ UPSTREAM LTD. CHRONICALLY LOSS MAKING 5 NIPUNA SERVICES LTD. CHRONICALLY LOSS MAKING & NE GATIVE NET WORTH 6 NIIT SMARTSERVE LTD. CHRONICALLY LOSS MAKING & NE GATIVE NET WORTH 7 REV IT SYSTEMS PVT. LTD CHRONICALLY LOSS MAKING. ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 5 9. THE TPO ON HIS OWN OBTAINED DATA AVAILABLE IN PU BLIC DOMAIN AND WAS OF THE VIEW THAT THE FOLLOWING COMPANIES WERE OPERA TING AT BETTER MARGIN THAN THE ASSESSEE: SR.NO. COMPARABLE COMPANIES OP/TC (%) 1 ALLSEC TECHNOLOGIES LTD 28.07 2 WIPRO BOPO SOLUTIONS LTD. 28.43 3 TRANSWORKS INFORMATION SERVICES LTD. 5.69 4 HINDUJA TMT LTD. 62.25 5 MPHASIS LTD. 38.26 6 FIRSTSOURCE SOLUTIONS LTD 4.84 7 TULSYAN TECHNOLOGIES LTD. (COSMIC GLOBAL) 19.08 8 SAFFRON GLOBAL 24.89 9 VISHAL INFORMATION TECHNOLOGIES LTD. 45.65 10 ACE SOFTWARE EXPORTS LTD. 15.46 11 NUCLEUS NETSOF& GIS INDIA LTD. 40.6 12 ASIAN CERC INFORMATION TECHNOLOGY LTD.(SEG) 37 .4 13. AIRLINE FINANCIAL SUPPORT SERVICES (I) LTD. 2 6.54 14 GOLDSTONE TELESERVICES LTD. (SEG) 15.95 15 CEPHA IMAGING PVT. LTD. 47.7 TOTAL 440.81 AVERAGE 29.38 10. IN ITS REPLY THE ASSESSEE SUBMITTED THAT THE REJECTION OF SOME OF ITS COMPARABLES ON THE GROUND THAT THEY WERE CHRONICALL Y LOSS MAKING / NEGATIVE NET WORTH IS NOT PROPER. THE ASSESSEE AL SO POINTED THAT EIGHT OF THE NINE COMPARABLES ADDITIONALLY SELECTED BY THE TPO ( OTHER THEN M/S. SAFFRON GLOBAL LTD.) SHOULD NOT BE CONSIDERED AS THESE COMP ANIES FUNCTION IN ENTIRELY DIFFERENT SEGMENTS AND NOT IN VOICE BASED CALL SERVICES. THE ASSESSEE POINTED OUT THAT IT WAS A CALL CENTER CATE RING TO CERTAIN QUERIES OF SUBSCRIBERS / PROSPECTIVE SUBSCRIBERS OF ITS AES RE LATING TO THE FOLLOWING: A) SERVICE RELATED QUERIES: SALES QUERIES: ENQUIRY ABOUT THE CONTRACTUAL PLANS HANDSETS NETWORK OR ALL SERVICES IN GENERAL ; ADD EXISTING SERVICES; CHANGE EXISTING SERVICES PROBLEMS WITH EXISTING S ERVICES PROBLEMS WITH ANY OF THE SERVICES PROVIDED; B) BILLING RELATED QUERIES C) MOBILE NUMBER PORTABILITY (MNP) RELATED QUERIES ; ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 6 D) HANDSET RELATED QUERIES E) NETWORK RELATED QUERIES F) PRICE PLAN RELATED QUERIES G) DEALER SUPPORT/DEMO & STAFF PROVISIONING SUPPOR T. 11. THE TPO HOWEVER EXAMINED THE AGREEMENT BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES AND DREW CONCLUSION TO THE E FFECT THAT THE ASSESSEE IS PERFORMING IMPORTANT FUNCTIONS ASSUMING RISKS ETC. AND THEREFORE ANY PRICE DETERMINED AS ALP HAS TO GIVE DUE WEIGHTAGE TO THES E FACTORS: A) THE AES OPERATE MOBILE TELECOMMUNICATION NETWORK IN AUSTRALIA AND U.K RESPECTIVELY. THE ASSESSEE OPERATES CONTACT CE NTRE SERVICES IN INDIA AND IS TO PROVIDE A CONTACT CENTRE AND SERVIC ES THE ASSESSEE IS BEING PAID CERTAIN CHARGES IN ACCORDANCE WITH THE A GREEMENT. B) THE TPO REFERRED TO CLAUSE 8.2 OF THE AGREEMENT BET WEEN THE ASSESSEE AND DELIVERABLES WHICH READS AS UNDER: 8.2 AS BETWEEN GSPL AND HUTCHISON ALL INTELLECTU AL PROPERTY RIGHTS IN ANY DELIVERABLE AND IN ANY SOFTWARE OR A NYTHING CREATED OR DEVELOPED BY GSPL OR ANY THIRD PARTY ACT ING ON ITS BEHALF IN COMPLIANCE OR PURPORTED COMPLIANCE WITH ITS OBLIGATIONS UNDER THIS AGREEMENT ( INCLUDING GSPL M ATERIALS) SOLELY FOR THE BENEFIT OF HUTCHISON UNDER THIS AGRE EMENT ( THE WORKS) SHALL VEST LEGALLY AND BENEFICIALLY IN HU TCHISON. THE PARTIES FURTHER AGREE THAT ALL INTELLECTUAL PROPERT Y RIGHTS IN ANY DELIVERABLE AND IN ANT SOFTWARE OR ANYTHING CREATE D OR DEVELOPED BY GSPL OR ANY THIRD PARTY ACTING ON ITS BEHALF IN COMPLIANCE OR PURPORTED COMPLIANCE WITH ITS OBLIGAT ION UNDER THIS AGREEMENT AND THE RELATED AGREEMENT (INCLUDIN G THE GSPL MATERIALS) FOR THE JOINT BENEFIT OF HUTCHISON AND H UTCHISON 3G UK LIMITED (JOINT MATERIAL) SHALL WEST LEGALLY AN D BENEFICIALLY IN HUTCHISON AND HUTCHISON 3G UK LIMITED. BASED ON THE ABOVE CLAUSE THE TPO CONCLUDED THAT I N THE COURSE OF RENDERING SERVICES THE ASSESSEE DELIVERS PROJECT SO FTWARE DESIGN REPORT DOCUMENT SPECIFICATIONS OR OTHER ITEM OR I N COMBINATION ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 7 THEREOF WHICH MAY BE DEVELOPED OR CREATED OR PROVI DED BY THE ASSESSEE ARISING OUT OF THE SUPPLY OF SERVICES TO T HESE COMPANIES. C) REFERRING TO THE DEFINITION OF MANAGEMENT PERSONNEL OPERATING PROCEDURE SERVICES AND GSPL INFRASTRUCTURE AS CONT AINED IN THE AGREEMENT BETWEEN THE ASSESSEE AND AES FOR RENDERIN G SERVICES THE ATPO HELD THAT THE AES COULD UTILIZE THE INFRASTRUC TURE CONSISTING OF ITS DEDICATED PERSONNEL COMPUTER NETWORK AND ELEC TRONIC HARDWARE AND EQUIPMENT WHICH WILL INCLUDE HARDWARE NETWORK COMMUNICATION AND ANCILLARY EQUIPMENTS ALONGWITH EMBEDDED PROGRAM MES AND THE CONTACT CENTRE OF THE ASSESSEE. IT WILL UTILIZE MA NAGEMENT PERSONNEL INCLUDING CONTACT CENTRE MANAGER DIRECTOR OF CUSTO MER SERVICES HEAD OF OPERATIONS HEAD OF OPERATIONS SUPPORT HEA D OF HR OF FINANCE HEAD OF IT AND OPERATIONS AND PLANNING MAN AGER EACH OF WHOM SHALL REPORT TO THE STEERING COMMITTEE FOR SUP ERVISION OF THE SERVICES. D) THE SERVICES WILL BE PROVIDED ENSURING QUALITY CUST OMER SERVICES AS SET OUT IN THE SERVICES SCHEDULE INCLUDING ESTABLISHMEN T OF THE CONTACT CENTRE HIRING TRAINING RECRUITMENT AND SUPERVISIO N OF THE PERSONNEL. IT HAS ALSO UNDERTAKEN NOT TO PROVIDE SIMILAR SERVI CES TO ANY OTHER PERSON OTHER THAN THE H3G COMPANIES WITHOUT THEIR W RITTEN CONSENT. E) THE ASSESSEE HAS TO TAKE NECESSARY STEPS TO PROVID E THE SERVICES LEVELS AS PER THE STATED SERVICES LEVELS. THE ASSESSEE N EED TO HAVE DISASTER RECOVERY PLAN AND APPROPRIATELY TEST THE OPERATIONA BILITY OF THESE PLANS. IN CASE OF ANY DEFAULT OR NON-PERFORMANCE B Y THE ASSESSEE WHICH SUBSTANTIALLY DEGRADE OR DELAY THE PERFORMAN CE OF THE SERVICES IN ACCORDANCE WITH THE SERVICES LEVELS H3G COMPAN IES MAY TAKE CONTROL OF THAT PART OF THE SERVICES THAT IMPACTS O N THE SERVICE LEVELS. THIS SHOWS THAT SERVICES BEING RENDERED BY THE ASSE SSEE ARE OF PARAMOUNT IMPORTANCE FOR THE CORE FUNCTIONS BEING P ERFORMED BY H3G COMPANIES AND ARE NOT ROUTINE SERVICES. ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 8 F) THE AGREEMENT ALSO PROVIDES THAT THE ASSESSEE HAS T O PROVIDE A PROFESSIONAL INDEMNITY INSURANCE TO H3G COMPANIES F OR AN AMOUNT OF US$ 10 000 000 PER OCCURRENCE AND ALSO GAVE THIRD P ARTY INSURANCE COVERING THE LEGAL LIABILITY OF THE ASSESSEE TO ANY INJURY TO PERSONS OR LOSS OR DAMAGE TO PROPERTY ARISING OUT OF THE PERFO RMANCE OF THIS AGREEMENT. THIS SHOWS THAT THE ASSESSEE IS BEARING THE RISKS TO A LARGE EXTENT ARISING FROM THE PERFORMANCE OF THE CO NTRACTS. 12. THE TPO THEREAFTER REFERRED TO THE WEBSITE OF T HE ASSESSEE WWW.3GLOBALSERVICES.COM AND FOUND THAT THE ASSESS EE HAS DESCRIBED ITSELF AS PROVIDING THE FOLLOWING SERVICES: A) POST SALES-MOBILE NUMBER PORTING (MNP) /ACTIVAT ION / PROVISIONING. B) SALES-DIRECT SELLING/CAMPAIGN MANAGEMENT C) COLLECTIONS- CONSUMER / COMMERCIAL. D) VALUE ADDED SERVICE-CONTENT SELLING. E) CUSTOMER CARE-QUERIES / COMPLAINTS / BILLING RE QUESTS/ TECHNICAL ISSUES / DELIVERY ENQUIRIES SERVICES CHANGE REQUEST . F) CUSTOMER RETENTION-INBOUND /HANDSET UPGRADE G) CHANNEL SUPPORT RETAIL SUPPORT. THE TPO ALSO HELD THAT THE ASSESSEE COMPANY HAS OVE R FOUR MILLION CUSTOMERS IN AUSTRALIA & U.K. THAT THE ASSESSEE PR OVIDES END-TO-END CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS TO CUSTO MERS AND THE THIRD GENERATION MOBILE TELEPHONY 3 WHICH HAS PIONEERED REVOLUTIONARY 3 G MOBILE TECHNOLOGY. THAT THE ASSESSEES OPERATIONS ASSUMES IMPORTANCE SINCE IT IS FORMS THE BACK SUPPORT SYSTEM FOR THE C ORE FUNCTIONS PERFORMANCE BY THE H3G COMPANIES. THE TPO WAS ALSO OF THE VIEW THAT 3G TECHNOLOGY FACILITATES THE CONVERGENCE OF COMMUNICATION INFOR MATION AND ENTERTAINMENT. CUSTOMERS CAN MAKE A VIDEO CALL D OWNLOAD AND WACH MUSIC VIDEOS WATCH LIVE SPORTS ACTION AND LIVE VID EO MESSAGES. ACCORDING TO ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 9 THE TPO THE TERMS OF THE AGREEMENT BETWEEN THE ASSE SSEE AND THE AES CLEARLY SHOW THAT THE QUALITY OF SERVICES ASSUMES L OT OF IMPORTANCE AND THE AGREEMENT ALSO SHOWED THE WIDE RANGE OF SERVICES BE ING PERFORMED BY THE ASSESSEE FOR THE H3G COMPANIES. THE TPO WAS ALSO O F THE VIEW THAT CERTAIN SERVICE LEVELS ARE TO BE MAINTAINED AND ACHIEVED AN D THE ASSESSEE IS ALSO TO HAVE TO HAVE A DISASTER RECOVERY PLAN IN PLACE. AC CORDING TO THE TPO IN CASE THE H3G COMPANIES FIND THAT THE SERVICES ARE NOT UP TO MARK THEY CAN TAKE CONTROL OF THE ACTIVITIES THEMSELVES. THE TPO ALSO CONCLUDED THAT THE SERVICES BEING PROVIDED BY THE ASSESSEE INCLUDE THE DIRECT SELLING CAMPAIGN MANAGEMENT CONTENT SELLING CUSTOMER RETENTION AND RETAIL SUPPORT AND THAT THESE SERVICES ARE IMPORTANT FOR THEH3G COMPANIES S INCE THE MOBILE PHONE OPERATIONS ARE BASICALLY CUSTOMER DRIVEN. THE TPO WAS ALSO OF THE VIEW THAT THE IMPORTANCE OF THE FUNCTIONS BEING PERFORMED BY THE ASSESSEE WAS ALSO VISIBLE FROM THE EXPERIENCED MANAGEMENT TEAM WHICH WAS OVERLOOKING THE OPERATIONS. 13. FOR ALL THE ABOVE REASONS THE TPO WAS OF THE VI EW THAT THE ASSESSEE WAS PERFORMING SIGNIFICANT FUNCTIONS AND ASSUMING S IGNIFICANT RISKS. THE ASSESSEE SUBMITTED BEFORE THE TPO THAT DUE CONSIDER ATION SHOULD BE GIVEN WHILE FIXING THE ALP FOR THE MONEY RECEIVED IN ADVA NCE FROM THE AE FOR PERFORMING THE SERVICES. DUE CONSIDERATION SHOULD ALSO BE GIVEN FOR THE FACT THAT THE LINK CHARGES AND EQUIPMENT CHARGES INSTALL ED AT AES PREMISES HAVE NOT BEEN CLAIMED BY THE ASSESSEE. THE TPO HOWEVER HELD THAT THE SAID PLEA CANNOT BE ACCEPTED BECAUSE THE ASSESSEE WAS UNDERTA KING SUBSTANTIAL RISK IN ITS BUSINESS WITH THE AES. THE TPO HELD THAT TH E INTEREST COST WOULD THEREFORE NOT AFFECT THE PROFIT MARGIN. THE TPO A LSO HELD THAT THE ASSESSEE WAS NOT ABLE TO DEMONSTRATE THAT LINK CHARGES AND C OST OF ASSETS INSTALLED AT PREMISES OF THE AES WERE ALSO NOT CHARGED IN COMPAR ABLE CASES SET OUT IN THE T.P REPORT FILED BY THE ASSESSEE. ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 10 14. THEREAFTER THE TPO TOOK UP NINE COMPARABLE CASE S AND ALSO 6 COMPARABLE CASES GIVEN BY THE ASSESSEE. THUS THE 15 COMPARABLES INCLUDING 6 SELECTED BY THE ASSESSEE AND NINE SELEC TED BY THE TPO ARE AS UNDER:- SR.NO. COMPARABLE COMPANIES OP/TC (%) 1 ALLSEC TECHNOLOGIES LTD 28.07 2 WIPRO BOPO SOLUTIONS LTD. 28.43 3 TRANSWORKS INFORMATION SERVICES LTD. 5.69 4 HINDUJA TMT LTD. 62.25 5 MPHASIS LTD. 38.26 6 FIRSTSOURCE SOLUTIONS LTD 4.84 7 TULSYAN TECHNOLOGIES LTD. (COSMIC GLOBAL) 19.08 8 SAFFRON GLOBAL 24.89 9 VISHAL INFORMATION TECHNOLOGIES LTD. 45.65 10 ACE SOFTWARE EXPORTS LTD. 15.46 11 NUCLEUS NETSOF& GIS INDIA LTD. 40.6 12 ASIAN CERC INFORMATION TECHNOLOGY LTD.(SEG) 37 .4 13. AIRLINE FINANCIAL SUPPORT SERVICES (I) LTD. 2 6.54 14 GOLDSTONE TELESERVICES LTD. (SEG) 15.95 15 CEPHA IMAGING PVT. LTD. 47.7 TOTAL 440.81 AVERAGE 29.38 THE ARITHMETIC MEAN OF THE NET MARGIN (PBIT) ON TOT AL COSTS FOR THESE 15 COMPARABLES WAS 29.38%. 15. THE NET MARGIN OF THE ASSESSEE WAS CALCULATED AS UNDER: TOTAL EXPENDITURE AS PER P/L ACCOUNT 125 00 96 000/ - LESS 1. LOSS ON SALE OF FIXED ASSETS 2. MISC EXP. W/O. 7000/- 2000/- TOTAL COST 125 00 87 000/- PBT AS PER P/L ACCOUNT 12 10 96 000/- LESS BANK INTEREST 17 49 000/- ADD 1. LOSS ON SALE OF FIXED ASSETS 2. MISC. EXP W/O. 7000/- 2000/- PBIT 11 93 56 000/- OP/TC 9.55% THE TPO HELD THAT THE NET MARGIN ON COST EARNED BY THE ASSESSEE WAS LESS THEN THE NET MARGIN ON COST EARNED BY THE COMPARABL ES. THE NET MARGIN ON COSTS EARNED BY THE COMPARABLES AT 29.38% WAS HELD TO BE THE ARMS LENGTH ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 11 MARGIN. THE AMOUNT OF ADJUSTMENT TO THE INCOME OF THE ASSESSEE ON ACCOUNT OF PROVISION OF SERVICES TO ITS AES WAS CALCULATED BY THE TPO AS UNDER: TOTAL COST 125 00 87 000/- PBIT(AS PER THE ASSESSEE @ 9.55%) 11 93 56 000/- PBIT @ 29.38% 36 72 75 560/- SHORTFALL 24 79 19 550/- AMOUNT RECEIVED FROM AES FOR ITES SERVICES BY THE A SSESSEE 133 75 11 429/- 5% OF 133 75 11 429/- 6 68 75 571/- ARMS LENGTH VALUE OF THESE SERVICES WHICH SHOULD HA VE BEEN RECEIVED BY THE ASSESSEE FROM ITS AES 158 54 30 979/- AMOUNT OF ADJUSTMENT TO THE INCOME OF THE ASSESSEE 24 79 19 550/- IN VIEW OF THE ABOVE THE ARMS LENGTH VALUE OF THE TRANSACTION FOR PROVISION OF IT ENABLED SERVICES BY THE ASSESSEE TO ITS AES WAS CALCULATED AT RS. 158 54 30 979/- IS BEING MADE TO THE INCOME OF THE ASSESSEE. CONSEQUENTLY AN ADDITION OF RS.24 79 19 550/- WAS MADE TO THE TO TAL INCOME OF THE ASSESSEE ON ACCOUNT OF ADJUSTMENT OF ALP BY THE AO. 16. AS CAN BE SEEN FROM THE CONCLUSIONS OF THE TPO IN HIS ORDER IT HAS BEEN THE STAND OF THE TPO THAT THE ASSESSEE WAS NOT PEFO RMING MERELY THE SERVICES OF A CALL CENTER AND WAS PROVIDING SERVICES WHICH W ERE MUCH MORE THAN AN ORDINARY CALL CENTER. IN THIS REGARD THE TPO HAS R EFERRED TO CERTAIN FACTS WHICH EMERGE FROM THE AGREEMENT BETWEEN THE ASSESSE E AND THE AE. ACCORDING TO THE ASSESSEE THESE FACTS WERE NOT CONF RONTED TO THE ASSESSEE BY THE TPO AND THE ASSESSEE CAME TO KNOW ABOUT THE OBS ERVATION OF THE TPO ONLY AFTER RECEIPT OF THE ORDER OF THE TPO. THE AS SESSEE FILED AN APPLICATION UNDER SECTION 154 OF THE ACT BEFORE THE TPO. IN TH IS APPLICATION THE ASSESSEE HAD SPECIFICALLY POINTED OUT THAT THE CONCLUSIONS O F THE TPO THAT THE ASSESSEE ALSO PROVIDED AND DELIVERED PROJECT SOFTWA RE DESIGN REPORTS IS NOT FACTUALLY CORRECT. IN THIS REGARD THE ASSESSEE SU BMITTED DELIVERABLES MEANS ANY PRODUCT SOFTWARE INTERFACE DESIGN REPORT D OCUMENT SPECIFICATION OR OTHER ITEM OR ANY COMBINATION THEREOF TO BE DEVELOP ED CREATED OR PROVIDED BY GSPL IN THE COURSE OF OR ARISING OUT OF THE SUPP LY OF SERVICES UNDER THE ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 12 THIS AGREEMENT. IT WAS SUBMITTED THAT THE TERM DE LIVERABLES IS USED ONLY IN RELATION TO ANY SOFTWARE ETC. THAT MAY GET DEVELOPE D IN THE COURSE OF RENDERING THE SERVICES BEING THE SERVICES OF A C ALL CENTER AS EXPLAINED ABOVE. THE ASSESSEE IS NOT ENGAGED IN THE BUSINESS OF SUPPLYING DELIVERABLES AS PRESUMED BY A.O. THE WORK DELIV ERABLES IS USED ONLY IN CLAUSE 8.2 WHICH READS AS UNDER: 8.2 AS BETWEEN GSPL AND HUTCHISON ALL INTELLECTU AL PROPERTY RIGHTS IN ANY DELIVERABLE AND IN ANY SOFTWARE OR ANYTHING CREATED OR DEVELOPED BY GSPL OR ANY THIRD PARTY ACTING ON ITS BEHALF IN COMPLIANCE OR PURPORTED COMPLIANCE WITH ITS OBLIGAT IONS UNDER THIS AGREEMENT ( INCLUDING GSPL MATERIALS) SOLELY FOR TH E BENEFIT OF HUTCHISON UNDER THIS AGREEMENT ( THEWORKS) SHALL VEST LEGALLY AND BENEFICIALLY IN HUTCHISON. THE PARTIES FURTHER AGR EE THAT ALL INTELLECTUAL PROPERTY RIGHTS IN ANY DELIVERABLE AN D IN ANT SOFTWARE OR ANYTHING CREATED OR DEVELOPED BY GSPL OR ANY THIRD PARTY ACTING ON ITS BEHALF IN COMPLIANCE OR PURPORTED COMPLIANCE WITH ITS OBLIGATION UNDER THIS AGREEMENT AND THE RELATED AGREEMENT (IN CLUDING THE GSPL MATERIALS) FOR THE JOINT BENEFIT OF HUTCHISON AND H UTCHISON 3G UK LIMITED (JOINT MATERIAL) SHALL WEST LEGALLY AND B ENEFICIALLY IN HUTCHISON AND HUTCHISON 3G UK LIMITED. THE ASSESSEE SUBMITTED THAT THE TERM DELIVERABLES DOES NOT MEAN THE SERVICES TO BE RENDERED BY 3GS. 3GS IS ENGAGED I N PROVIDING CALL CENTRE RELATED SERVICES. AS PER THE AGREEMENT 3GS OPERAT ES AN INTERNATIONAL CONTACT CENTRE IN INDIA TO PROVIDE CONTRACT CENTRE SERVICES AND HAS AGREED TO PROVIDE A CONTACT CENTRE AND SERVICES FOR HUTCHISON . THE TERM CONTACT CENTRE MEANS THE CONTACT CENTRE THAT 3GS SHALL PROV IDE PURSUANT TO THIS AGREEMENT. THE TERMS SERVICE MEANS THE ESTABLISHME NT OF THE CONTACT CENTRE HIRING AND TRAINING OF THE CONTACT CENTRE P ERSONNEL RECRUITMENT AND SUPERVISION OF 3GS PERSONNEL ENSURING QUALITY CUST OMER SERVICES AND PROVIDING THE SERVICES SET OUT IN THE SERVICE SCHED ULE IN ACCORDANCE IN PARTICULAR WITH THE FORECASTS PROVIDED TO 3GS FROM TIME TO TIME WHICH ARE TO BE AGREED BETWEEN THE PARTIES. THE ASSESSEE THERE FORE SUBMITTED THAT 3GS IS NOT ENGAGED IN DELIVERING PROJECT SOFTWARE DES IGN REPORTS DOCUMENTS SPECIFICATIONS OR OTHER ITEMS OR IN COMBINATION THE REOF. IT WAS SUBMITTED ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 13 THAT THE EDIFICE ON WHICH THE ORDER RESTS IS MISCON CEIVED AND IS BASED ON COMPLETELY ERRONEOUS ASSUMPTION OF FACTS. IT WAS S UBMITTED THAT THE ORDER OF TPO SUFFERS FROM SERIOUS GLARING MISTAKE OF FACT AN D OUGHT TO BE RECTIFIED. 17. THE ASSESSEE ALSO POINTED OUT THAT DISASTER REC OVERY PLAN IS NOTHING BUT A PLAN OF ACTION THAT HAS TO BE ADOPTED IN THE COURSE OF PERFORMING SERVICES BY THE ASSESSEE. THUS DISASTER RECOVERY D OES NOT INVOLVE PROVIDING ANY SERVICES WHICH WERE BEYOND THE SCOPE OF SERVICE RENDERED BY A CALL CENTER. THE ASSESSEE ALSO POINTED OUT THAT BY LOOK ING INTO THE WEB SITE OF THE ASSESSEE THE TPO HAD DRAWN SOME CONCLUSIONS. THE A SSESSEE POINTED OUT THAT ALL THESE SERVICES WERE ORDINARILY PERFORMED B Y A CALL CENTER. THE ASSESSEE ALSO POINTED OUT THAT THE ASSESSEE HAS NO PRIVITY OF CONTRACT WITH THE CUSTOMERS OF THE AES AND ONLY PROVIDES CALL CEN TER SERVICES ANSWERING QUERIES OF SUBSCRIBERS OR PROSPECTING SUBSCRIBERS OF THE AES. THE ASSESSEE ALSO INVITED THE TPO TO VISIT ITS OFFICE TO FIND OU T THE NATURE OF SERVICES THE ASSESSEE RENDERS. 18. THE TPO PASSED AN ORDER UNDER SECTION 154 WHERE IN HE EXPRESSED THE OPINION THAT THE COMPARABLE SELECTED BY HIM ARE BRO ADLY SIMILAR TO THE FUNCTIONS PERFORMED BY THE ASSESSEE. THUS THE TPO IN HIS ORIGINAL ORDER TOOK THE VIEW THAT THE SERVICES RENDERED BY THE ASS ESSEE WERE MUCH SOPHISTICATED AND TECHNICAL THAN A MERE CALL CENTRE . IN THE ORDER U/S.154 OF THE ACT HE DID NOT DENY THE PLEA OF THE ASSESSEE A S SET OUT IN THE APPLICATION U/S.154 OF THE ACT BUT TOOK A STAND THAT THE COMPAR ABLE CASES RELIED BY TPO SIMILAR SERVICES WERE BEING RENDERED AS THE ONE CLA IMED BY THE ASSESSEE. 19. ON APPEAL BY THE ASSESSEE THE CIT(A) DELETED T HE ADDITION MADE BY THE AO FOR THE FOLLOWING REASONS: ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 14 A) THE TPO HAS PROCEEDED ON AN INCORRECT UNDERSTA NDING OF THE ASSESSEES BUSINESS AND THAT SUCH MISCONCEPTION HAS RESULTED FROM AN ERRONEOUS READING OF THE VARIOUS CLAUSES OF THE RELEVANT AGREEMENT WITH THE A.E. B) THE ASSESSEE WAS A MERE CALL CENTRE AND NOT ENG AGED IN OTHER HIGH END ITES LIKE SOFTWARE DEVELOPMENT ETC. COPIES OF THE APPROVAL FROM THE DEPARTMENT OF TELECOMMUNICATIONS AS ALSO THE AP PROVAL FROM THE SHOP AND ESTABLISHMENT AUTHORITY BOTH MENTION THE NATURE OF ACTIVITIES APPROVED AS CALL CENTRE ACTIVITY. C) AS PER THE AGREEMENT BETWEEN THE ASSESSEE AND T HE SERVICES TO BE PROVIDED BY THE ASSESSEE WAS TO ACT AS CONTACT CEN TRE AND THE ALLIED ACTIVITY IN RELATION THERETO. D) THE TPO HAS RELIED ON THE WORD DELIVERABLES T O BUTTRESS HIS ARGUMENT THAT THE ASSESSEE IS NOT A MERE CALL CENTR E. ACCORDING TO THE CIT(A) THE TERM WAS USED ONLY IN PARA 8.2 OF THE A GREEMENT AS PER WHICH ALL INTELLECTUAL PROPERTY RIGHTS IN ANY DELI VERABLE SHALL VEST WITH HUTCHISON (I.E. THE A.E) AND NOT THE APPELLANT . APART FROM THIS CLAUSE THIS TERM HAS NOT BEEN REFERRED IN THIS AGR EEMENT AND CERTAINLY NOT WHILE DEALING WITH THE SCOPE OF SERVICES TO BE RENDERED BY THE APPELLANT. THE INFERENCE OF THE TPO THAT THE TERM DELIVERABLE REFERRED TO DELIVERING OF SOFTWARE DESIGN REPORTS ETC. IS CLEARLY AN ERRONEOUS AND LOP SIDED READING OF THE AGREEMENT. E) THE CIT(A) HELD THAT THE STATUS OF THE ASSESSEE HAS IN ALL ASSESSMENT ORDERS BEEN DESCRIBED AS CALL CENTRE. F) THE CIT(A) HELD THAT THE TRUE IMPORT OF DISAST ER RECOVERY PLAN REFERS TO THE COMMITMENT ON THE PART OF THE ASSESSE E TO PROVIDE SERVICE TO ITS AE AND TO TAKE CARE OF ANY EMERGENCY SITUATI ON WHILE PROVIDING ITS CALL CENTRE SERVICES. IT IS A COMMON BUSINESS PRACTICE OF SERVICE PROVIDERS TO PROVIDE ITS CLIENTS WITH A DRP HOWEVER SMALL OR BIG IT MIGHT BE. G) THE CIT(A) HELD THAT THE TPO ERRED IN CONSTRUING TH E CUSTOMERS OF ITS AES AS CUSTOMERS OF THE ASSESSEE. HE HELD THAT THE AES WERE TELECOM SERVICE PROVIDER AND WERE PROVIDING 3G TECHNOLOGY T O ITS CUSTOMERS. HE ALSO HELD THAT THE TPO HAS USED THE DATA FROM TH E WEBSITE OF THE ASSESSEEES CLIENTS TO CONTENT THAT THE ASSESSEE IS ENGAGED IN PROVIDING SUCH 3G TECHNOLOGY SERVICES TO ITS 4 MILLION CUSTOM ERS. H) ON REJECTION OF THE LOSS MAKING COMPANIES INCLUDED IN THE LIST OF COMPANIES SELECTED BY THE ASSESSEE THE CIT(A) FOUN D THAT 5 OUT OF 6 ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 15 COMPANIES WERE ALL ESTABLISHED IN THE YEAR 2001/200 2 WHICH IS AROUND THE SAME TIME AS THE INCORPORATION OF THE AS SESSEE. HE ALSO HELD THAT THE 9 NEW COMPANIES ADDED BY THE TPO IN H IS LIST ARE THE COMPANIES ESTABLISHED DURING THE PERIOD 1992 TO 200 0 I.E. PERIOD MUCH PRIOR TO THE INCORPORATION OF THE APPELLANT CO MPANY. HE WAS OF THE VIEW THAT THE COMPANIES WHICH WERE AT THE START -UP STAGE MAY MAKE LOSSES AND THEREFORE CANNOT BE BRUSHED ASIDE FROM THE SAMPLE OF COMPARABLE COMPANIES. HE HELD THAT THESE CANNOT BE REGARDED AS CHRONICALLY LOSS MAKING SINCE THEY ARE JUST AT TH E START-UP STAGE. BALANCE ONE COMPANY NAMELY ASK ME INFO HUB LTD. B EING A LOSS MAKING COMPANY INCLUDED IN THE LIST OF COMPARABLE O F THE ASSESSEE BUT REJECTED BY THE TPO IS NO DOUBT ESTABLISHED IN TH E YEAR 1962. HOWEVER ON A PERUSAL OF ITS PROFIT AND LOSS ACCOUN T IT CANNOT BE LABLED AS CHRONICALLY LOSS MAKING SINCE IN THE FI NANCIAL YEAR 2005-06 AND 2006-07 THIS COMPANY HAS TURNED AROUND AND HAS EARNED SMALL PROFITS. THE COMPANIES SELECTED BY THE ASSESSEE T HOUGH LOSS MAKING DURING THE RELEVANT YEAR CANNOT BE REMOVED FROM TH E LIST OF COMPARABLES IN VIEW OF THE FACT THAT THESE ARE LIK E THE ASSESSEE ITSELF START-UP COMPANIES AND THESE COMPANIES ARE UNDOUBTE DLY ENGAGED IN VOICE BASED CALL CENTRE SERVICES. I) WITH REGARD TO THE 9 NEW ADDITIONAL COMPANIES SEL ECTED BY THE TPO (EXCEPT SAFFRON GLOBAL) THE CIT(A) HELD THAT THESE COMPANIES ARE NOT ENGAGED IN PLAIN VANILA VOICE BASED CALL CENTRE AND ENGAGED IN HIGHER END ITES. ALSO SINCE THESE ARE NOT START UP COMPAN IES HE HELD THAT THE NEW 9 COMPANIES INTRODUCED BY THE TPO DESERVE T O BE REJECTED. EVEN IF M/S. SAFFRON GLOBAL (BEING ONE OF THE 9 COM PANIES SELECTED BY THE TPO BUT NOT INCLUDED IN THE LIST OF THE ASSESSE E) IS INCLUDED THE ARITHMETIC MEAN WOULD WORK OUT TO 7.64% WHICH IS LO WER THAN THE 9.55% MARGIN CHARGED IN THE CASE OF THE ASSESSEE. J) WITH REGARD TO THE OTHER ADJUSTMENTS (5 DIFFERENT A DJUSTMENTS) SO AS TO BRING ABOUT THE COMPARABILITY BETWEEN THE DATA SELE CTED AND THE ASSESSEEE HAVING REGARD TO THE BROAD FACTS IN THE A SSESSEES CASE THE CIT(A) HELD AS FOLLOWS: (PARA 3.10 OF CIT(A)S ORDE R) THESE ARE ADJUSTMENTS ON ACCOUNT OF WORKING CAPITA L I.E. SAVING IN INTEREST COST SAVING IN IPLC LINK COST SAVING IN ASSET INSTALLATION COST RESULTING IN LOWER DEPRECIATION SAVING IN MAINTENANCE COST AND SAVING IN BUSINESS DEVELOPMENT AND AD SPEND. WHILE MOST OF THE ABOVE ADJUSTMENTS ARE DEB ATABLE I AM OF THE VIEW THAT THE ADJUSTMENTS IN TERMS OF SAVING IN INTEREST COST ON ACCOUNT OF THE APPELLANT HAVING RECEIVED TR ADE ADVANCES FROM ITS CUSTOMERS IS A JUSTIFIABLE CLAIM MADE BY T HE APPELLANT AND OUGHT TO HAVE BEEN ENTERTAINED BY THE TPO. IT IS SEEN FROM THE DATA OF THE COMPANIES SELECTED NOT ONLY BY THE APPELLANT BUT ALSO THE COMPANIES SELECTED BY THE TPO THAT THE AVE RAGE ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 16 COLLECTION PERIOD APPEARING IN THE BALANCE SHEET OF ALL THESE COMPANIES FOR FINANCIAL YEAR 2004-05 WORKS OUT AROU ND 3 MONTHS. AS AGAINST THIS THE APPELLANT HAS RECEIVE D TRADE ADVANCES FROM ITS CUSTOMERS AND ITS BALANCE SHEET D OES NOT REFLECT ANY SUNDRY DEBTORS OUTSTANDING ON ACCOUNT O F ITS BILLING. THE APPELLANT HAS FURNISHED A DETAILED WORKING OF T HE SAVINGS IN INTEREST COST ACCRUING AS A RESULT OF THESE ADVANCE S. THE INTEREST HAS BEEN CALCULATED ON CONSERVATIVE BASIS AT PRIME LENDING RATE OF THE STATE BANK OF INDIA. IF THIS A DJUSTMENT IS TO BE FACTORED THE RATIO OF OPERATING PROFIT TO THE T OTAL OPERATING COST WORKS OUT TO 29.87% AND THIS IS EVEN HIGHER TH AN THE RATIO OF 29.38 IF ALL THE COMPARABLES OF THE TPO ARE ACCE PTED BLINDLY. IT HAS TO BE BORNE IN MIND THAT TRANSFER PRICING CA SES TYPICALLY REQUIRE A MORE IN DEPTH ANALYSIS OF THE FACTS AND U NDERLYING ECONOMIC OF A PARTICULAR RELATED PARTY TRANSACTIONS . FROM THE POINT OF VIEW OF A TRADER HIS PRICING WOULD DIFFER IF THE CUSTOMER PAYS HIM ADVANCE OR CASH PAYMENT AS COMPARED TO THE CUSTOMER WHO PAYS HIM AFTER A CREDIT PERIOD. THERE CAN BE NO TWO VIEWS ON THE PROPOSITION THAT THE PRICING OF TH E TRADER WOULD DIFFER IN THESE SITUATIONS EVERYTHING ELSE REMAINI NG THE SAME. IT IS ALSO QUITE COMMON TO HEAR ABOUT CASH DISCOUNT BE ING OFFERED BY TRADERS TO INDUCE THE CUSTOMER TO MAKE EARLY PAY MENTS. IN VIEW OF THIS COMMON BUSINESS UNDERSTANDING AND PRAC TICE IT WILL BE FAIR AND REASONABLE IN ACCEPTING THE CLAIM OF TH E APPELLANT SINCE THE COMPANIES SELECTED BY HIM OR BY THE TPO P ROVIDE AN AVERAGE CREDIT PERIOD OF 3 MONTHS AS AGAINST THE AP PELLANT OBTAINING ADVANCES FROM ITS CUSTOMERS WHICH ARE PER IODICALLY ADJUSTED AGAINST THE BILLING. K) THE CIT(A) ALSO HELD THAT IN ASSESSEES CASE IN TH E EARLIER YEAR BEING THE FIRST YEAR OF OPERATIONS THE ASSESSEE CHARGED COST PLUS 4% MARK UP PLUS DEPRECIATION ON ACTUAL BASIS TO THE AES. T HAT YEARS APPEAL WAS DECIDED IN FAVOUR OF THE ASSESSEE VIDE ORDER DA TED 6 TH JANUARY 2009 AND THE REVENUES APPEAL THERE AGAINST HAS SIN CE BEEN DISMISSED BY THE L BENCH OF THE ITAT IN ITA NO.1812/MUM/200 9 DATED 18 TH FEBRUARY 2010. IN THE CURRENT YEAR THE ASSESSEE H AS CHARGED 7% MARK UP NOT ONLY ON ALL COSTS BUT ALSO ON DEPRECIAT ION WHICH ACCORDING TO CIT(A) MEANS THAT THE MARK UP CHARGED BY THE ASSESSEE IN CURRENT YEAR HAS DOUBLED THAN THE MARK UP OF THE PRECEDING YEAR. 20. FOR THE ABOVE REASONS AND TAKING ON OVERALL VI EW OF THE MATTER THE CIT(A) HELD THAT ASSESSEES TRANSACTION WITH ITS AE IS AT ARMS LENGTH PRICE ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 17 CALLING FOR NO ADJUSTMENTS. THE CONSEQUENT ADDITIO N OF RS.24.79 CRORES MADE BY THE AO WAS DELETED BY THE CIT(A). 21. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVEN UE HAS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. 22. WE HAVE HEARD RIVAL SUBMISSIONS WHICH WAS A REI TERATION BY THE LEARNED D.R.OF THE STAND OF THE AO AS REFLECTED IN THE ORDER OF AO/TPO AND THE ORDER OF CIT(A) AND SUBMISSIONS BEFORE CIT(A) B Y THE LEARNED COUNSEL FOR THE ASSESSEE. 23. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT WILL BE USEFUL TO RECAPITULATE THE SEQUENCE OF EVENTS. THE ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTION WITH HUTCHISON 3 G UK LTD. AND HUTCHISO N 3 G AUSTRALIA LTD. WHO WERE THE AES OF THE ASSESSEE. THE ASSESSEE CLA IMED THAT IT WAS PERFORMING SERVICES OF A CALL CENTER CATERING TO CE RTAIN QUERIES OF SUBSCRIBERS/ PROSPECTIVE SUBSCRIBERS OF THE AES. T HE AES WERE IN THE BUSINESS OF PROVIDING 3G MOBILE TELEPHONE FACILITIE S TO ITS SUBSCRIBERS. THE AES SUBSCRIBERS AS AND WHEN THEY HAVE QUERIES RELAT ING TO SERVICES BILLING MOBILE NUMBER PORTABILITY HAND SET RELATED QUERIES NET WORK RELATED QUERIES PRICE PLAN RELATED QUERIES AND DEALER SUPP ORT DEMO AND STAFF PROVISIONING SUPPORT CONTACT THE ASSESSEE WHO PROV IDES ALL THE RELATED INFORMATION. THUS THE CLAIM OF THE ASSESSEE WAS TH AT IT WAS PURELY PROVIDING VOICE BASED CALL CENTER SERVICE. 24. THERE IS NO DISPUTE BETWEEN THE ASSESSEE AND TH E AO THAT FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO N BETWEEN THE ASSESSEE AND ITS AE THE MOST APPROPRIATE METHOD IS TNMM. WE HAVE ALREADY SEEN THE MANNER IN WHICH THE ASSESSEE SUBSTANTIATED THE PRIC E WHICH IT CHARGED ITS AE. THE ASSESSEE WHILE DOING SO HAD SELECTED 13 CO MPARABLE CASES. THE NET ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 18 MARGIN ON OPERATING COST EARNED BY THIS COMPARABLES WAS BETWEEN -41.87% TO 62.25% WITH ARITHMETICAL MEAN OF 6.95%. THE AS SESSEE HAD CLAIMED THAT THE PRICE IT HAD CHARGED GAVE A NET MARGIN ON OPERA TING COST WHICH AT 11.63% AND THEREFORE JUSTIFIED THE PRICE THAT IT CHARGED TO THE AE. THE TPO REJECTED 7 OF THE 13 COMPARABLES SELECTED BY TH E ASSESSEE IN ITS TP STUDY. THE AO HAD ON HIS OWN COLLECTED THE DATA OF 9 COMPANIES AND CONSIDERED THE 6 COMPANIES SELECTED BY THE ASSESSEE AND ARRIVED AT A DATA BASE OF 15 COMPARABLE CASES. THE ASSESSEE HAD OBJE CTED BEFORE THE AO THAT 8 OUT OF THE 9 COMPARABLE CASES CITED BY THE AO CAN NOT BE CONSIDERED AT ALL BECAUSE THEY WERE IN A TOTALLY DIFFERENT BUSINESS. THE OBJECTIONS WITH REGARD TO THE 8 PARTIES OUT OF THE 9 CONSIDERED BY THE AO WAS AS FOLLOWS: SR. NO. NAME OF THE COMPANY REASON FOR NON-COMPARISON WITH APPELLANTS BUSINESS AS DESCRIBED IN COMPANYS OWN WEB-SITE REMARKS IF ANY. 1. CEPHA IMAGING PRIVATE LIMITED CEPHA IS A COMPLETE SERVICE PROVIDER FOR ALL PUBLIS HING NEEDS IN THE CONTEMPORARY ELECTRONIC ERA. OUR PRIM ARY MARKETS ARE SCIENTIFIC TECHNICAL MEDICAL SCHOLAR LY REFERENCE AND COLLEGE PUBLISHING. THE CORE OF BUS INESS IS TYPESETTING/ COMPOSITION AND ALSO PROVIDES PROJECT MANAGEMENT SERVICE AND EXTENDED VALUE ADDED PRODUCT S- MULTIMEDIA SOLUTIONS. REFER PROFILE FROM WEB SITE AT PG.223 OF PB 2. VISHAL INFORMATION TECHNOLOGIES LTD. VISHAL IS IN THE BUSINESS FOR THE LAST 8 YEARS AND IS WELL ESTABLISHED IN ITS FOUR AREAS OF OPERATIONS NAMELY DATA DIGITIZATION & CONVERSION E-PUBLISHING DIGITAL LI BRARY SOLUTIONS AND PRINT AND DEMAND CONVERSION. 3. ACE SOFTWARE EXPORTS LIMITED. ACE PROVIDES DOCUMENT MANAGEMENT E-PUBLISHING AND DATA CONVERSION SOLUTIONS USING OPTIMAL PROCESS ENGINEER ING COST EFFECTIVE AND FLEXIBLE CONVERSION SYSTEMS. REFER PROFILE FROM WEB SITE AT PG.220 OF PB 4. NUCLEUS NETSOF & GIS INDIA LIMITED THE COMPANY CONTINUE TO DELIGHT ITS CUSTOMERS WITH ITS PRODUCTS & SERVICE OFFERINGS IN LOCATION BASED SERV ICES WEB MAPPING SUPPLY CHAIN MANAGEMENT REMOTE SENSING D IGITAL PHOTOGRAMMETRY AM/FM FOR UTILITIES & TELCOS GIS I N LOCAL GOVERNMENT BUSINESS GEOGRAPHICS & GPS SEGMENTS OF THE SPATIAL TECHNOLOGIES MARKET PLACE. REFER PROFILE FROM WEB SITE AT PG.226 OF PB 5. ASIAN CERC INFORMATION TECHNOLOGY LIMITED(SEG.) ASIAN CERC INFORMATION TECHNOLOGY LTD. IS A LEADING PROVIDER OF IT SERVICES TO CLIENTS GLOBALLY. DURIN G TWO DECADES LONG PERIOD OF ITS EXISTENCE ASIAN CERC HA S PROVIDED SOLUTIONS FOR DYNAMIC ENVIRONMENTS WHERE BUSINESS AND TECHNOLOGY STRATEGIES CONVERGE. IN OR DER TO SERVICE ITS CLIENTS MORE EFFICIENTLY IT HAS SPLIT IS STRATEGIC BUSINESS UNITS INTO 3 DISTINCT FOCUS AREA: 1) KNOWL EDGE MANAGEMENT SERVICES 2) FINANCIAL TECHNOLOGY SOLUTIO NS AND 3) OFFSHORE SERVICES & SUPPORT. REFER PROFILE FROM WEB SITE AT PG.222 OF PB 6 AIRLINE FINANCIAL SUPPORT SERVICES (I) LIMITED. AFS OFFERS A RANGE OF SERVICES EXTENDING FROM AIRLI NE REVENUE ACCOUNTING SERVICES TRAFFIC ACCOUNTING AND CARGO R EVENUE ACCOUNTING TO PASSENGER INTERLINE BILLING NAVIGATI ON SUPPORT REFER PROFILE FROM WEB ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 19 LEVEL 1 H/W SUPPORT AND FREQUENT FIYER PROGRAMME ADMINISTRATION SITE AT PG.221 OF PB 7 GOLDSTONE TELESERVICES LIMITED (SEG) GIL IS PIONEER IN DESIGN AND MANUFACTURING COMPOSIT E INSULATORS IN THE COUNTRY FOR USE IN TRANSMISSION A ND DISTRIBUTION RAILWAY TRACTION NET WORKS. THE COMP ANY IS ALSO SETTING UP PLANT TO MANUFACTURE CORROSION PROT ECTIVE SLEEVES FOR OIL AND GAS PIPELINES. THE COMPANY IS HAVING ITS OWN R&D CENTER AND MANUFACTURING FACILITY AT CHERLA PALLY. REFER PROFILE FROM WEB SITE AT PG.225 OF PB 8 TULSYAN TECHNOLOGIES LIMITED (COSMIC GLOBAL) CGL PROVIDES BUSINESS PROCESS OUTSOURCING (BPO) AND IT ENABLED SERVICES (ITES) TO A GLOBAL CLIENTELE. WE CONCEPTUALIZE AND REALIZE TECHNOLOGY DRIVEN BUSINES S TRANSFORMATION INITIATES. WITH A VAST WORLDWIDE NE TWORK WE USE A LOW-RISK GLOBAL DELIVERY MODEL (GDM) TO ACC ELERATE SCHEDULES WITH A HIGH DEGREE OF TIME AND COST PRED ICTABILITY. HIGH-END TECHNICAL SERVICES REFER PROFILE FOR DESCRIPTION OF NATURE OF BUSINESS AT PAGE NO.224 OF PB 25. IT WAS THE PLEA OF THE ASSESSEE BEFORE THE TPO THAT THE SERVICES RENDERED BY IT INDUSTRY (ITES-BPO) ARE CLASSIFIED INTO VARIO US SEGMENTS ARE AS UNDER: - CUSTOMER CARE (VOICE AND NON-VOICE) INCLUDES INBOUN D AND OUTBOUND CALLS TELEMARKETING EMAIL SUPPORT MARKET SURVEYS WEB SALES ADVERTISING & PR; - HR INCLUDES BENEFITS ADMINISTRATION RECRUITING ED UCATION AND TRAINING PAYROLL AND RECORDS MANAGEMENT; - FINANCE AND ACCOUNTING INCLUDES ACCOUNTING TRANSACT IONS TAX CONSULTING AND MANAGEMENT RISK MANAGEMENT FINANCI AL ANALYSIS AND REPORTING; - PAYMENT SERVICES INCLUDES PROCESSING AND COLLECTION OF CLAIMS CREDIT/DEBIT CARDS LOANS AND CHEQUES AND ELECTRONI C DATA INTERCHANGE; - CONTENT DEVELOPMENT INCLUDES ANIMATION GAMING BUS INESS AND CORP RESEARCH (INCLUDES DATA PROCESSING DECISION S UPPORT DATA MINING ASSET MANAGEMENT AND MARKET RESEARCH) DOCUM ENT MANAGEMENT GEOGRAPHIC INFORMATION SERVICES MEDIC AL TRANSCRIPTION LEGAL/LITIGATION SUPPORT ETC. ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 20 IT CAN BE OBSERVED THAT THERE ARE VARIOUS SEGMENTS IN ITES BPO SECTION WITH THE BILLING RATES VARYING FOR EACH SERVICE LIN E HAVING DIFFERENT FUNCTIONALITY. 26. IN THIS REGARD THE ASSESSEE ALSO FURNISHED A C OPY OF THE NASSCOM THE APEX NATIONAL LEVEL BODY OF ALL IT ENABLED ENTITIES PROVIDING BILLING RATES BY ITES BPO FOR VARIOUS SERVICES: SR.NO. TYPE OF SERVICE BILLING RATE PER HOUR 1 CUSTOMER CARE 10-14$ 2 PAYMENT SERVICES 12-15$ 3 FINANCE 12-15$ 4 ADMN 12-15$ 5 HUMAN RESOURCE (HR) 15-17$ 6 CONTENT DEVELOPMENT 18-24$ 7 KNOWLEDGE PROCESS OUTSOURCING (KPO) 30-45$ SOURCE :NASSCOM STRATEGIC REVIEW 2005 THE ASSESSEE POINTED OUT THAT AS PER THE ABOVE TABL E OF NASSCOM THE ASSESSEE WOULD BE CLASSIFIED UNDER CUSTOMER CARE. THE ASSESSEE HAS ALL ALONG BEEN CONTENDING THAT IT WAS A CALL CENTRE HAN DLING VARIOUS CUSTOMER QUERIES. THE ASSESSEE SUBMITTED THAT IT EMPLOYS CA NDIDATES WHO ARE GRADUATES / UNDER GRADUATES WITH ENGLISH SPEAKING SKILLS. THE NATURE OF WORK HANDLED DOES NOT REQUIRE A PERSON TO HOLD ANY SPECIFIC SKILL SET LIKE THOSE HELD BY ACCOUNTANTS LEGAL PROFESSIONALS SOF TWARE PROFESSIONALS EXECUTIVES TECHNICAL CONSULTANTS CREATIVE AGENTS. THE ASSESSEE GETS CLASSIFIED UNDER THE LOWEST STRATA OF ITES AS PER T HE NASSCOM LIST GIVEN ABOVE. THE ASSESSEE HAD REITERATED THAT THE ITES HOWEVER IS A VERY WIDE NETWORK OF SERVICES WHEREIN AT HIGHER STRATA ONE CA N GET HIGHER END SERVICES LIKE PAYMENT SERVICES HR PAYROLL FINANCE AND AC COUNTS WHICH REQUIRE PERSONNEL WITH SPECIFIC SKILL SETS LIKE ACCOUNTANTS HR PROFESSIONALS HAVING POST DEGREE QUALIFICATION IN HR ETC. THE HIGHER O NE GO IN THE LIST OF NASSCO TABLE GIVEN ABOVE THE MORE COMPLEX THE JOBS ARE AN D ACCORDINGLY THE MORE ARE THEIR BILLING RATE PER HOUR AND THE RESULTANT M ARGINS CHARGED FOR THE SERVICES. ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 21 27. THE TPO HAS NOT CONSIDERED THE ABOVE OBJECTIONS OF THE ASSESSEE AT ALL. IN PARA 16 OF THE TPOS ORDER THE TPO HAS MERELY OBS ERVED THAT THE 9 COMPARABLES SELECTED BY THE TPO ARE BROADLY SIMILAR FUNCTIONING TO THE FUNCTIONS AND RISK PROFILE OF THE ASSESSEE COMPANY. IN OUR VIEW THE TPO WAS NOT JUSTIFIED IN IGNORING THE DISTINCTION POINTED O UT BY THE ASSESSEE WITH REGARD TO THE CHARACTERISTICS OF THE SERVICES PROVI DED BY IT AND THE 8 COMPARABLE CASES CONSIDERED BY THE TPO. 28. IT HAS BEEN THE STAND OF THE TPO THAT THE ASSES SEE WAS NOT PERFORMING MERELY THE SERVICES OF A CALL CENTER AND WAS PROVID ING SERVICES WHICH WERE MUCH MORE THAN AN ORDINARY CALL CENTER. IN THIS RE GARD THE AO HAS POINTED OUT CERTAIN FACTS WHICH EMERGES FROM THE AGREEMENT BETWEEN THE ASSESSEE AND THE AE. ACCORDING TO THE ASSESSEE THESE FACTS WERE NOT CONFRONTED TO THE ASSESSEE BY THE TPO AND THE ASSESSEE CAME TO KNOW ABOUT THE OBSERVATION OF THE TPO ONLY AFTER RECEIPT OF THE ORDER OF THE T PO. THE ASSESSEE FILED AN APPLICATION UNDER SECTION 154 OF THE ACT BEFORE THE TPO. IN THIS APPLICATION THE ASSESSEE HAD SPECIFICALLY POINTED OUT THAT THE CONCLUSIONS OF THE TPO THAT THE ASSESSEE ALSO PROVIDED AND DELIVERED PROJE CT SOFTWARE DESIGN REPORTS IS NOT FACTUALLY CORRECT. IN THIS REGARD THE ASSE SSEE SUBMITTED DELIVERABLES MEANS ANY PRODUCT SOFTWARE INTERFACE DESIGN REP ORT DOCUMENT SPECIFICATION OR OTHER ITEM OR ANY COMBINATION THER EOF TO BE DEVELOPED CREATED OR PROVIDED BY GSPL IN THE COURSE OF OR ARI SING OUT OF THE SUPPLY OF SERVICES UNDER THE THIS AGREEMENT. IT WAS SUBMITTE D THAT THE TERM DELIVERABLES IS USED ONLY IN RELATION TO ANY SOFT WARE ETC. THAT MAY GET DEVELOPED IN THE COURSE OF RENDERING THE SERVICES BEING THE SERVICES OF A CALL CENTER AS EXPLAINED ABOVE. THE ASSESSEE WAS N OT ENGAGED IN THE BUSINESS OF SUPPLYING DELIVERABLES AS PRESUMED BY THE TPO. IT WAS SUBMITTED THAT THE ASSESSEE WAS ENGAGED IN PROVIDIN G CALL CENTRE RELATED SERVICES. AS PER THE AGREEMENT 3GS OPERATES AN IN TERNATIONAL CONTACT ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 22 CENTRE IN INDIA TO PROVIDE CONTRACT CENTRE SERVICE S AND HAS AGREED TO PROVIDE A CONTACT CENTRE AND SERVICES FOR HUTCHISON. THE A SSESSEE ALSO POINTED OUT THAT DISASTER RECOVERY PLAN IS NOTHING BUT A PLAN O F ACTION THAT HAS TO BE ADOPTED IN THE COURSE OF PERFORMING SERVICES BY THE ASSESSEE. THUS DISASTER RECOVERY DOES NOT INVOLVE PROVIDING ANY SERVICES WH ICH WERE BEYOND THE SCOPE OF SERVICE RENDERED BY A CALL CENTER. THE AS SESSEE ALSO POINTED OUT THAT BY LOOKING INTO THE WEB SITE OF THE ASSESSEE T HE TPO HAD DRAWN SOME CONCLUSIONS. THE ASSESSEE POINTED OUT THAT ALL THE SE SERVICES WERE ORDINARILY PERFORMED BY A CALL CENTER. THE ASSESSEE ALSO POIN TED OUT THAT THE ASSESSEE HAS NO PRIVITY OF CONTRACT WITH THE CUSTOMERS OF T HE AES AND ONLY PROVIDES CALL CENTER SERVICES ANSWERING QUERIES OF SUBSCRIB ERS OR PROSPECTING SUBSCRIBERS OF THE AES. THE ASSESSEE ALSO INVITED THE TPO TO VISIT ITS OFFICE TO FIND OUT THE NATURE OF SERVICES THE ASSESSEE RENDER S. 29. THE TPO PASSED AN ORDER UNDER SECTION 154 WHERE IN HE EXPRESSED THE OPINION THAT THE COMPARABLE SELECTED BY HIM ARE BRO ADLY SIMILAR TO THE FUNCTIONS PERFORMED BY THE ASSESSEE. 30. IT CAN BE SEEN FROM ABOVE DISCUSSIONS THAT ON E OF THE AREAS OF DISPUTE IS REGARDING THE EXACT NATURE OF SERVICES RENDERED BY THE ASSESSEE. IN THIS REGARD WE HAVE EXAMINED THE AGREEMENT BETWEEN THE A SSESSEE AND ITS AES. IN THIS AGREEMENT (A COPY OF WHICH IS AT PAGE NO.32 TO 94 OF THE PB) THE ASSESSEE HAS AGREED TO OPERATE INTERNATIONAL CONTAC T CENTER IN INDIA TO PROVIDE CONTACT CENTRE SERVICES. SERVICES HAS BEEN DEFINED IN THIS AGREEMENT AS FOLLOWS: SERVICES MEANS THE ESTABLISHMENT OF THE CONTACT C ENTRE HIRING AND TRAINING OF THE CONTACT CENTRE PERSONNEL RECRUITME NT AND SUPERVISION OF GSPL PERSONNEL ENSURING QUALITY CUSTOMER SERVIC E AND PROVIDING THE SERVICES SET OUT IN THE SERVICE SCHEDULE IN ACC ORDANCE IN PARTICULAR WITH THE FORECASTS PROVIDED TO GSPL FRO M TIME TO TIME WHICH ARE TO BE AGREED BETWEEN THE PARTIES. ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 23 THE SERVICE SCHEDULE HAS BEEN DEFINED AS FOLLOWS: SERVICE SCHEDULE MEANS THE SCHEDULE TO BE AGREED BETWEEN THE PARTIES SETTING OUT THE SERVICES TO BE PROVIDED BY GSPL AS AMENDED OR REPLACED BY HUTCHISON FROM TIME TO TIME AND NOTIFIE D TO GSPL. ON A CAREFUL PERUSAL OF THE AGREEMENT WE FIND THAT THERE IS NO EXACT DESCRIPTION OF THE NATURE OF SERVICES TO BE RENDERE D. THAT CAN BE VERIFIED ONLY FROM THE SCHEDULE AGREED BETWEEN THE PARTIES S ETTING OUT THE SERVICES TO BE PROVIDED. THE LD. COUNSEL FOR THE ASSESSEE SUBM ITTED BEFORE US THAT IN THE EARLIER ASSESSMENT YEAR THE ASSESSEE HAS BEEN ACCEP TED TO BE PERFORMING THE SERVICES OF A CALL CENTRE. IT WAS ALSO POINTED OUT THAT THE REGISTRATION CERTIFICATE OF THE ASSESSEE UNDER BOMBAY SHOP AND ESTABLISHMENT ACT 1948 THE ASSESSEE HAS BEEN DESCRIBED AS A CALL CENTRE. IT HAS ALSO BEEN POINTED OUT THAT THE APPROVAL FROM DEPARTMENT OF TELECOMMUN ICATION ALSO SUPPORTS THE CLAIM OF THE ASSESSEE THAT IT IS CALL CENTRE. 31. WE HAVE ON A CAREFULLY CONSIDERATION OF THE RI VAL SUBMISSIONS COME TO THE CONCLUSION THAT IT IS NECESSARY TO FIND OUT THE EXACT NATURE OF SERVICES RENDERED BY THE ASSESSEE. IT IS ONLY AFTER FINDING OUT EXACT NATURE OF SERVICES RENDERED BY THE ASSESSEE CAN A COMPARATI VE UNCONTROLLED TRANSACTION CAN BE BROUGHT TO THE PICTURE. WE THE REFORE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE ISSUE TO THE TPO/AO F OR A FRESH CONSIDERATION. THE STEPS INVOLVED IN DETERMINATION OF THE ALP WOUL D BE TO FIRST IDENTIFY THE INTERNATIONAL TRANSACTION I.E. THE TRANSACTION BE TWEEN THE ASSESSEE AND ITS AE WHICH IS A NON-RESIDENT. THE NEXT STEP IS TO ID ENTIFY COMPARABLE UNCONTROLLED TRANSACTION I.E. TRANSACTION BETWEEN PARTIES WHO ARE NOT RELATED. RULE10A(A) OF THE IT RULES 1962 (RULES )DEFINES UNCONTROLLED TRANSACTION. IT LAYS DOWN THAT UNCONTROLLED TRAN SACTION MEANS A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIAT ED ENTERPRISES WHETHER RESIDENT OR NON-RESIDENT. RULE 10B LAYS DOWN THE M ANNER OF DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 92C. IT SAYS T HAT FOR THE PURPOSES OF ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 24 SUB-SECTION (2) OF SECTION 92C THE ARMS LENGTH PR ICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FIVE METHODS VIZ. ( A )COMPARABLE UNCONTROLLED PRICE METHOD; ( B )RESALE PRICE METHOD; ( C )COST PLUS METHOD; ( D )PROFIT SPLIT METHOD; ( E )TRANSACTIONAL NET MARGIN METHOD; RULE 10-B (2) LAYS DOWN THAT THE MANNER IN WHICH CO MPARISON HAS TO BE MADE. IT LAYS DOWN THAT THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WI TH REFERENCE TO THE FOLLOWING NAMELY : (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TR ANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION ; (B) THE FUNCTIONS PERFORMED TAKING INTO ACCOUNT AS SETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED BY THE RESPECTIV E PARTIES TO THE TRANSACTIONS ; (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERM S ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICI TLY OR IMPLICITLY HOW THE RESPONSIBILITIES RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS ; (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH T HE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE INCLUDING THE GEOGRAPH ICAL LOCATION AND SIZE OF THE MARKETS THE LAWS AND GOVERNMENT ORDERS IN FORCE COSTS OF LABOUR AND CAPITAL IN THE MARKETS OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WH OLESALE OR RETAIL. RULE 10-B(3) LAYS DOWN THAT AN UNCONTROLLED TRANSA CTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES IF ANY BETWEEN THE TR ANSACTIONS BEING COMPARED OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST C HARGED OR PAID IN OR TH+PROFIT ARISING FROM SUCH TRANSACTIONS IN THE OP EN MARKET ; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. IN THE SET ASIDE PROCEEDINGS THE AO WILL CONSIDER THE ISSUE IN THE LIGHT OF THE RULES SET OUT ABOVE. THE ASSESSEE HAS SET OUT IN P AGES 337 TO 340 OF HIS PAPER BOOK AS TO HOW WORKING CAPITAL ADJUSTMENTS HA VE TO BE MADE. IN PAGES 183 TO 186 AND 191 TO 202 OF THE PAPER BOOK T HE ASSESSEE HAS ALSO HIGHLIGHTED THE OTHER ADJUSTMENTS THAT ARE REQUIRED TO BE MADE TO ELIMINATE ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 25 MATERIAL EFFECTS OF THE DIFFERENCES BETWEEN THE INT ERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. THESE AS PECTS WILL ALSO BE CONSIDERED BY THE AO IN THE SET ASIDE PROCEEDINGS. IT WAS ALSO SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT IN TERMS OF RULE 10-B(1)( E)(I) OF THE RULES UNDER THE TNMM NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS TO BE COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGAR D TO ANY OTHER RELEVANT PASE. IN ANNEXURE 1 TO THE WRITTEN NOTE FILED BEFO RE US THE ASSESSEE HAS POINTED OUT THAT THE ASSESSEES RETURN ON ASSETS EM PLOYED IS HIGHER THAN THE COMPARABLE UNCONTROLLED TRANSACTIONS CONSIDERED BY THE AO. THIS REQUIRES VERIFICATION AND THE AO WILL ALSO CONSIDER THIS ASP ECT IN THE SET ASIDE PROCEEDINGS. REGARDING REJECTION OF THE COMPARABLE S GIVEN BY THE ASSESSEE IN ITS TP REPORT ON THE GROUND THAT SOME OF THE COM PANIES WERE LOSS MAKING COMPANIES THE ASSESSEE HAS EXPLAINED AS TO HOW IN SOME CASES THERE IS ACTUALLY PROFIT AND AS TO HOW DESPITE LOSSES THOSE ARE COMPARABLE TRANSACTIONS. THIS ASPECT HAS HOWEVER NOT BEEN CON SIDERED BY THE AO AT ALL. IN THE SET ASIDE PROCEEDINGS BEFORE THE AO THE AO SHALL CONSIDER THIS ASPECT ALSO. 32. IT WAS THE SUBMISSION OF THE ASSESSEE THAT ITE S-BPO SECTOR CONSISTS OF VARIOUS SEGMENTS AND EACH SEGMENT IS FUNCTIONALLY D IFFERENT FROM THE OTHER. IT WAS THE CLAIM OF THE ASSESSEE THAT IT FALLS UNDE R THE CATEGORY OF CUSTOMER CARE WHICH IS AT THE LOWEST STRATA OF ITES-BPO SECT OR. THE ASSESSEE IS A CALL CENTRE ANSWERING VARIOUS CUSTOMER QUERIES. THE ASS ESSEE FOR CARRYING OUT ITS WORK HAS TO EMPLOY CANDIDATES WHO ARE GRADATES/ UNDERGRADUATES WITH ENGLISH SPEAKING SKILLS AND NEED NOT HOLD ANY SPEC IFIC SKILL LIKE ACCOUNTANTS LEGAL PROFESSIONALS SOFTWARE PROFESSI ONALS EXECUTIVES TECHNICAL CONSULTANTS CREATIVE AGENTS. THE ITES-B PO SECTOR PROVIDES HIGHER END SERVICES LIKE PAYMENT SERVICES HR PAYROLL FI NANCE AND ACCOUNTS WHICH ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 26 REQUIRE PERSONNEL WITH SPECIFIC SKILLS SETS LIKE AC COUNTANT HR PROFESSIONALS HAVING POST DEGREE QUALIFICATION IN HR ETC. IT HA S BEEN THE CLAIM OF THE ASSESSEE THAT AS ONE GOES HIGHER IN THE ITES-BPO SE CTOR LADDER THE JOB IS MORE COMPLEX AND THEREFORE BILLING RATE PER HOUR AN D RESULTANT MARGIN CHARGED FOR SERVICES IS BOUND TO BE HIGHER. THUS T HE ASSESSEE CLAIMED THAT THE BPO SECTOR SELECTED BY THE TPO ( 9 COMPANIES) W ERE NOT MERE CALL CENTRE BUT PERFORMING MUCH MORE SKILLED JOBS THAN THAT OF A CALL CENTRE. WE HAVE ALREADY EXTRACTED THE EXPLANATION OF THE ASSESSEE B EFORE THE TPO IN THIS REGARD. THE TPO HAS IGNORED THE PLEA OF THE ASSESS EE AND HAS NOT GIVEN ANY REASONS FOR DOING SO. THE TPO HAS MERELY SAID THE COMPARABLE INSTANCES WERE PERFORMING IDENTICAL JOB AS PERFORMED BY THE A SSESSEE. IN OUR VIEW SUCH REJECTION OF THE ASSESSEE WITHOUT ASSIGNING AN Y REASON IS ARBITRARY. 33. ANOTHER ASPECT WHICH WE NOTICE IN THE TPOS OR DER IS THAT HE HAD CARRIED OUT FAR ANALYSIS AND HAS ALLEGED THAT THE ASSESSEE WAS PERFORMING SERVICES THAT ARE MUCH MORE TECHNICAL THAN WHAT AN ORDINARY CALL CENTRE PERFORMS. THE TPO HAS NOT SPELT OUT AS TO HOW IN THE COMPARAT IVE UNCONTROLLED TRANSACTION CONSIDERED BY THE TPO THE NATURE OF SE RVICES RENDERED IS SIMILAR TO THE ONE RENDERED BY THE ASSESSEE. 34. ONE OF THE SUBMISSION MADE BY THE LEARNED COUNS EL FOR THE ASSESSEE WAS THAT IF FOR ANY REASON THE TRIBUNAL REMANDS T HE ISSUE OF DETERMINATION OF ALP TO THE AO THEN A DIRECTION SHOULD BE GIVE N THAT THE TPO WILL NOT LOOK AFRESH INTO DATA THAT IS AVAILABLE IN THE PUBL IC DOMAIN. ACCORDING TO HIM THE TP STUDY IS REQUIRED TO BE DONE ON THE BAS IS OF DATA AVAILABLE IN THE PUBLIC DOMAIN AT THE POINT OF TIME WHEN THE TP STUD Y IS UNDERTAKEN BY THE ASSESSEE AND ANY NEW DATA AVAILABLE SHOULD NOT BE C ONSIDERED SINCE THE ASSSESSEE CANNOT FORESEE DATA WHICH IS NOT AVAILABL E IN PUBLIC DOMAIN WHEN IT DETERMINED ALP. ACCORDING TO HIM IF THE TPO IS PERMITTED TO DO SO THEN IT ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 27 WILL BE AN ENDLESS EXERCISE WHICH WILL PUT THE ASS ESSEE IN A DISADVANTAGEOUS POSITION. 35. WE HAVE CONSIDERED THIS SUBMISSION AND ARE OF THE VIEW THAT THE SAME CANNOT BE FULLY ACCEPTED. WE ARE OF THE VIEW THAT SO LONG AS THE DATA AVAILABLE BEFORE THE TPO IN THE COURSE OF PROCEEDIN GS PURSUANT TO THE ORDER OF THE TRIBUNAL IS CONTEMPORANEOUS IN POINT OF TIME AND IS OTHERWISE COMPARABLE WE DO NOT SEE WHY THE TPO SHOULD BE PRE CLUDED FROM LOOKING INTO SUCH DATA. AFTER ALL THE EXERCISE OF DETERMIN ING THE ALP INVOLVES APPROXIMATION AND IS TO SOME EXTENT NOTIONAL. THE IDEA IS TO FIX THE ALP. ANY UNCONTROLLED COMPARABLE TRANSACTION WHICH IS AV AILABLE IN PUBLIC DOMAIN CANNOT THEREFORE BE IGNORED. WE ARE OF THE VIEW THAT THE ASSESSEE WILL NOT BE PREJUDICED IN ANY MANNER IF SUCH DATA IS LOOKED INTO BY THE TPO. THE ASSESSEE CAN ALWAYS HAVE OBJECTIONS TO SUCH DAT A BEING USED. WE WOULD HOWEVER EMPHASIS THAT THE DATA SO USED SHOULD BE CO NTEMPORANEOUS IN POINT OF TIME AND SHOULD BE COMPARABLE. EVEN RULE 10-B (4) OF THE RULES CONTEMPLATE THIS AND IT LAYS DOWN THAT THE DATA TO BE USED IN ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH A N INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINAN CIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. T HUS THERE ARE ADEQUATE SAFEGUARDS IN THE RULES AND THE ASSESSEES APPREHEN SION IS NOT WELL FOUNDED. 36. FOR STATISTICAL PURPOSES THE GROUND OF APPEAL IS TREATED AS ALLOWED. 37. CONNECTED ISSUE IN ITA NO.7125/M/2010: (GROUND NO .1 IN ASSESSEES APPEAL FOR AY 06-07: GROUND NO.1: ADDITION U/S.92CA(3)- RS.32 56 85 9 11/- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE DEPUTY COMMISSIONER OF INCOME TAX RANGE 3(3) MUMB AI (THE AO) ERRED IN MAKING AN ADDITION UNDER SECTION 92 AMOUNT ING TO ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 28 RS.32 56 85 911/- IN RESPECT OF THE APPELLANTS INT ERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES OF REND ERING VOICE BASED CALL CENTRE SERVICES. IN DOING SO THE AO HAS INT ER ALIA ERRED IN COMPLETELY OVERLOOKING/IGNORING THE EARLIER YEARS ORDER OF THE APPELLATE AUTHORITIES AND ALL OTHER SUBMISSIONS/ARG UMENTS OF THE APPELLANT. 2. THE APPELLANT THEREFORE HUMBLY PRAYS THAT THE ADD ITION U/S.92 BE DELETED. 38. IN THIS ASSESSMENT YEAR THE ASSESSEE HAS CHALLE NGED THE ADJUSTMENT MADE BY THE TPO TO THE ALP. IN THIS ASSESSMENT YE AR THE FACTS ARE ALMOST IDENTICAL. THE TPO IN HIS ORDER UNDER SECTION 92C HAS DETERMINED THE ALP IN THE FOLLOWING MANNER. THE ASSESSEE HAD GIVEN 11 COMPARABLE INSTANCES. THE ASSESSEE ON HIS OWN ONLY PRESSED FOR 7 OF THE C OMPARABLES SELECTED BY IT. THE TPO REJECTED THESE COMPARABLES FOR THE FOLLOWIN G REASONS: SR.NO. NAME OF THE COMPARABLE REASONS FOR REJECTIO N. 1. ASK ME INFO HUBS LTD. THE COMPANY IS CHRONICALLY LOSS MAKING HENCE REJECTED. 2. B 2K CORP. PVT. LTD. COMPANY OPERATES IN THE ARE A OF RENDERING BUSINESS PROCESS OUTSOURCING SERVICES. THE COMPANY IS CHRONICALLY LOSS MAKING WITH LOSS IN FY 2005-06 HENCE REJECTED. 3 GODREJ UPSTREAM LTD. COMPANY IS ENGAGED IN BUSINESS OF ITES SERVICES. MAIN INCOME FROM CALL CENTRE OPERATION. CHRONICALL Y LOSS MAKING COMPANY. APPROX. 28% OF TOTAL SERVICES TO RELATED PARTIES. 4 OPTIMUS GLOBAL SERVICES LTD. COMPANY IS ENGAGED IN BUSINESS OF CALL CENTERS PROVIDING CUSTOMER CARE SERVICES. THE COMPANY IS CHRONICALLY LOSS MAKING. HENCE REJECTED. 5 NIPUNA SERVICES LTD. THE COMPANY OFFERS SERVICES LIKE CONTACT CENTRES FOR CUSTOMER SERVICES PRODUCT SUPPORT AND HELP DESK SERVICES. ADDITIONALLY IT ALSO OFFERS BACK OFFICE PROCESSES IN AREA SUCH AS ACCOUNTING AND HR. HENCE REJECTED. 6 TRANSWORKS INFORMATION SERVICES LTD. THE COMPANY PROVIDES CRM SERVICES AND ALSO OPERATES IN THE AREA OF RENDERING BUSINESS PROCESS OUTSOURCING SERVICES. HENCE REJECTED. 7 WIPRO LTD. (SEGMENT) COMPANY IS ENGAGED IN THE BU SINESS OF PROVIDING IT AND BPO SERVICES. HIGHLY DIVERSIFIED COMPANY WITH MAIN INCOME BEING FROM SOFTWARE SERVICES. COMPANY BUSINESS ALSO INCLUDES CONSUMER CARE AND LIGHTING ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 29 PRODUCTS AND SALE OF HYDRAULIC CYLINDERS AND SALE MINI COMPUTER / MICRO COMPUTER BASED SYSTEMS. 39. THE AO ON HIS OWN CONDUCTED A SEARCH AND SELEC TED 13 COMPARABLE INSTANCES AS FOLLOWS: SR.NO. COMPANY NAME SALES (RS.CR.) OP TO TOTAL COST % 1 ACE SOFTWARE EXPORTS LTD. 4.97 7.72 2 ALLSEC TECHNOLOGIES LTD. 92.25 28.51 3 APEX KNOWLEDGE SOLUTIONS PVT. LTD. 4.92 20.48 4 ASIT C MEHTA FINANCIAL SERVICES LTD. (EARLIER KNO WN AS NUCLEUS NETSOFT & GIS (INDIA) LTD.) 5.68 34.52 5 COSMIC GLOBAL LTD (SEG) 3.11 16.03 6 DATAMATICS FINANCIAL SERVICES LTD. (SEG) 2.31 24.99 7 FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG) 21.41 1 4.54 8 GOLDSTONE INFRATCH LTD. (SEG) (EARLIER KNOWN AS GOLDSTONE TELESERVICES LTD.) 5.03 29.01 9 MAPLE E SOLUTIONS LTD. 7.43 32.66 10. R SYSTEMS INTERNATION LTD. (SEG) 9.17 15.11 11 SPANCO LTD. (SEG) (EARLIER KNOWN AS SPANCO TELESYSTEMS & SOLUTIONS LTD.) 82.32 20.86 12 TRANSWORKS INFORMATION SERVICES LTD. 163.3 19.5 6 13 VISHAL INFORMATION TECHNOLOGIES LTD. 25.64 48. 03 ARITHMETIC MEAN 24.00% 40. THE TPO HELD THAT THE ARMS LENGTH MARGINS OF COMPARABLE COMPANIES ENGAGED IN SOFTWARE DEVELOPMENT ACTIVITIES IS 24% O N COST. ACCORDINGLY THE ALP WAS DETERMINED BY ADOPTING THE ABOVE ARITHMETIC MEAN OF 24% AND ALP DETERMINED. CONSEQUENTLY THE IMPUGNED ADDITION TO THE TOTAL INCOME WAS MADE BY THE AO BASED ON TPOS REPORT. 41. IT WAS THE CLAIM OF THE ASSESSEE THAT OUT OF THE 13 COMPANIES SELECTED BY THE TPO 11 COMPANIES ARE GROSSLY NON-COMPARABLE WITH THE ASSESSEE. THE ASSESSEE POINTED OUT THAT THE 10 OUT OF THE 11 COMPANIES WERE FUNCTIONALLY NOT COMPARABLE AT ALL AND THE OTHER C OMPANY VIZ. SPANCO LTD. EARNED EXPORT REVENUES OF LESS THAN 25% OF ITS TOTA L REVENUE. THE ASSESSEE POINTED OUT THAT THE 10 COMPANIES FELL UNDER THE HI GHER STRATA OF SERVICES ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 30 WITH SOME GETTING CALSSIFIED UNDER CONTENT DEVELOPM ENT AND KPO. THUS THEY WERE FUNCTIONALLY NOT COMPARABLE AT ALL. THE DETAIL S IN THIS REGARD ARE CONTAINED AT PAGE-204 OF THE ASSESSEE PAPER BOOK IN THE FORM OF ANNEXURE-1 TO THE REPLY FILED BY THE ASSESSEE BEFORE THE TPO V IDE ITS LETTER DATED 21.10.2009 FILED BEFORE THE TPO. APART FROM THE A BOVE THE ASSESSEE ALSO SUBMITTED RECONCILIATION OF MARGIN WORKING SUBMIS SION AS TO WHY THE COMPARABLE TRANSACTIONS RELIED UPON BY THE ASSESSEE CANNOT BE REJECTED REASONS AS TO WHY SAVING ON ACCOUNT OF LINK COST R ECOVERY OF REIMBURSEMENT OF EXPENSES SHOULD BE CONSIDERED WHILE WORKING ALP. NO VALID REASONS HAVE BEEN ASSIGNED BY THE TPO WHILE IGNORING THESE SUBMI SSIONS. THE TPO HAS MERELY OBSERVED AT PAGE-3 LAST TWO PARAS OF HIS ORD ER THAT THE COMPARABLES SELECTED BY THE TPO ARE COMPARABLE. AS REGARDS THE LINK COST THE TPO HAS MERELY OBSERVED THAT THE SAVING OF LINK COST BECAUS E OF ITS BEING BORNE BY THE AE CANNOT BE CONSIDERED FOR ADJUSTMENT BECAUSE HAD THE ASSESSEE INCURRED THESE COSTS THE ASSESSEE WOULD HAVE GOT A MARK-UP ON THIS COST ALSO. IN OUR VIEW THIS REASON ASSIGNED BY THE TPO CANNOT BE SUST AINED. THE TPO HAS TO GIVE DUE ADJUSTMENT ON THIS ACCOUNT. SAVING OF COS T IS CERTAINLY A MATTER WHICH WOULD AFFECT THE PRICE CHARGED BY THE ASSESSE E AND IT CANNOT BE IGNORED. IT IS NOT THE CASE OF THE TPO THAT IN THE COMPARABLE CASES ALSO THERE HAS BEEN SUCH SAVING OF COST. THE SAME REASONS WOU LD ALSO HOLD GOOD FOR CLAIM OF THE ASSESSEE REGARDING SAVING ON ACCOUNT O F DEPRECIATION ON EQUIPMENT CAPITALIZATION COST. SIMILARLY WITH REGA RD TO SAVING ON ADVERTISEMENT COST THE TPO HAS REJECTED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAS INCURRED EXPENDITURE O N ACCOUNT OF ADVERTISEMENT TO THE TUNE OF RS.1.27 CRORES. THE P OINT THAT OUGHT TO HAVE BEEN ADDRESSED IS ONLY WITH REGARD TO THE SAVING OF COST AND ITS IMPACT ON THE ALP. THE TPO IN OUR VIEW IS NOT JUSTIFIED IN H IS APPROACH IN THIS REGARD. IT IS ALSO NOTICED THAT THE ASSESSEE POINTED OUT BE FORE THE AO THAT ITS MARGIN WAS AT 7.29% AS AGAINST 6.64% MENTIONED BY THE TPO IN HIS SHOW CAUSE NOTICE. ON THIS THE TPO HAS NO ANSWER AND PROCEEDS TO OBSERVE THAT THE ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 31 DETAILS REGARDING THE SAME ARE KEPT ON RECORD. IN OUR VIEW THE TPO HAS PROCEEDED IN AN ARBITRARY MANNER WHILE REJECTING TH E CLAIM OF THE ASSESSEE. IN THE SET ASIDE PROCEEDINGS HE SHALL ADDRESS ALL T HE ABOVE ISSUES IN THE LIGHT OF THE OBSERVATIONS MADE BY US ABOVE AND THE EARLIE R PART OF THIS ORDER ON IDENTICAL ISSUE FOR AY 05-06. IN OUR VIEW THE DRP HAS ALSO NOT CONSIDERED ALL THESE OBJECTIONS WHICH ARE CLEARLY SET OUT IN THE STATEMENT OF FACTS FILED BY THE ASSESSEE BEFORE THE DRP. WE THEREFORE SET ASID E THE ORDER OF THE AO AND REMAND THE QUESTION OF DETERMINATION OF ALP BY THE AO AFRESH IN THE LIGHT OF THE DIRECTIONS GIVEN ABOVE. FOR STATISTICAL PURPOS ES THE GROUND OF APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED. 42. GROUND NO.2 RAISED BY THE REVENUE IN ITA NO.58 87/MUM/10 READS AS FOLLOWS: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LD. CIT(A) ERRED IN ALLOWING THE CLAIM OF THE ASSES SEE U/S. 10A BEFORE SETTING OFF OF UNABSORBED DEPRECIATION. 43. THE ASSESSEE HAD FILED A RETURN OF INCOME FOR AY 05-06 ON 28.10.2005 DECLARING TOTAL INCOME OF RS.15 71 120 AFTER CLAIMI NG DEDUCTION U/S.10-A OF THE ACT OF RS.11 29 06 385. THE SUM OF RS.15 71 12 0 WAS INTEREST INCOME WHICH WAS OFFERED TO TAX. ON 9.2.2007 THE ASSESSE E FILED A REVISED RETURN OF INCOME OF RS. NIL. THE ASSESSEE HAD BROUGHT FORWAR D DEPRECIATION LOSS OF RS.3 85 20 781/-. IN THIS REVISED RETURN OF INCOME THE ASSESSEE SET OFF AGAINST THE INTEREST INCOME BROUGHT FORWARD DEPRECI ATION LOSS AND CLAIMED CARRY FORWARD OF THE REMAINING DEPRECIATION LOSS OF RS.3 69 49 662/-. THE AO HOWEVER HELD THAT U/S.32 OF THE ACT AS APPLICAB LE TO THE ASSESSMENT YEAR IN QUESTION UNABSORBED BROUGHT FORWARD DEPREC IATION HAS TO BE ADDED TO THE CURRENT YEARS DEPRECIATION AND SHALL BE DEEM ED TO BE PART OF DEPRECIATION ALLOWANCE AND SO ON FOR SUCCEEDING PRE VIOUS YEARS. THUS THE ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 32 BROUGHT FORWARD UNABSORBED DEPRECIATION WAS ADDED T O THE CURRENT YEARS DEPRECIATION AND THE AO HELD THAT THE SAME CAN BE A LLOWED AS DEDUCTION WHILE COMPUTING BUSINESS INCOME I.E. UNDER THE HEA D PROFITS AND GAINS OF BUSINESS/PROFESSION. THE AO HELD THAT SINCE THERE WAS NO UNABSORBED DEPRECIATION OR BROUGHT FORWARD LOSSES NO AMOUNT O F BUSINESS OR DEPRECIATION COULD BE CARRIED FORWARD 44. BEFORE CIT(A) THE ASSESSEE SUBMITTED THAT U NABSORBED BROUGHT FORWARD DEPRECIATION SHOULD NOT BE ADDED TO THE CUR RENT YEARS DEPRECIATION AND THAT SUCH UNABSORBED BROUGHT FORWARD DEPRECIATI ON IS ELIGIBLE FOR SET OFF AGAINST PROFITS UNDER ANY HEAD OF INCOME. IT WAS A RGUED THAT DEDUCTION U/S.10-A OF THE ACT SHOULD BE COMPUTED ON PROFITS F OR THE YEAR BEFORE SETTING OF UNABSORBED DEPRECIATION AND THAT UNABSORBED DEPR ECIATION SHOULD BE ALLOWED TO BE SET OFF AGAINST INCOME UNDER OTHER HE ADS AND DEDUCTION U/S.10-A OF THE ACT HAS TO BE ALLOWED ON PROFITS BE FORE SETTING OF UNABSORBED DEPRECIATION. 45. THE CIT(A) HELD AS FOLLOWS: 4.1 ACCORDING TO THE AO THE UNABSORBED BROUGHT FORWARD DEPRECIATION IS REQUIRED TO BE ADDED TO THE AMOUNT OF DEPRECIATION FOR THE NEXT YEAR AND THEREFORE HE HAS TAKEN A VIEW T HAT THE ENTIRE DEPRECIATION OF EARLIER YEARS SHOULD BE FIRST ADJUS TED AGAINST THE PROFIT OF THE UNDERTAKING BEFORE COMPUTING DEDUCTION U/S. 10A. THIS ISSUE STAND SQUARELY COVERED BY THE DECISION OF THE CHENN AI TRIBUNAL (22 SOT 220) WHEREIN THE TRIBUNAL HAS HELD THAT THE DED UCTION SHOULD BE COMPUTED WITHOUT SETTING OFF BROUGHT FORWARD LOSSES . SECTION 72(2) CLEARLY PROVIDES THAT WHERE ANY ALLOWANCE OR PART T HEREOF UNDER SUB- SECTION (2) OF SECTION 32 IS TO BE CARRIED FORWARD EFFECT SHOULD FIRST BE GIVEN TO THE PROVISIONS OF SECTION 72(2). NOW SIN CE IN VIEW OF THE TRIBUNAL SEC. 10A IS TO BE COMPUTED BEFORE SETTING OFF BROUGHT FORWARD LOSSES AND SINCE EFFECT SHOULD BE GIVEN FI RST TO BROUGHT FORWARD LOSSES AND THEN UNABSORBED LOSSES IT IS ON LY LOGICAL THAT THE DEDUCTION U/S. 10A SHOULD BE ALLOWED NOT ONLY BEFOR E SETTING OFF BROUGHT FORWARD LOSSES BUT ALSO BEFORE SETTING OFF UNABSORBED DEPRECIATION. THE APPELLANTS STAND IS ALSO COVERE D BY THE DECISION OF ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 33 THE SPECIAL BENCH IN THE CASE OF SCIENTIFIC ATLANTA INDIA TECHNOLOGY PVT. LTD. THUS GROUND NO.2 IS ALLOWED. 46. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVE NUE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. WE HAVE HEARD THE RIVAL SUBMI SSIONS. UNDER THE PROVISIONS OF SEC.10-A OF THE ACT DEDUCTION OF SUC H PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF COMPUT ER SOFTWARE OR OTHER NOTIFIED BUSINESS SHALL BE ALLOWED FROM THE TOTAL I NCOME OF SUCH UNDERTAKING. SECTION 72(2) CLEARLY AND SPECIFICALLY PROVIDES THA T WHERE ANY ALLOWANCE OR PART THEREOF UNDER SUB-SECTION (2) OF SECTION 32 IS TO BE CARRIED FORWARD EFFECT SHALL FIRST BE GIVEN TO THE PROVISIONS OF SE CTION 72(2). THUS THERE IS NO REFERENCE TO THE SET-OFF OF BUSINESS LOSSES AND UNA BSORBED DEPRECIATION. THE VIEW IS ALSO SUPPORTED BY DECISION OF CHENNAI TRIBU NAL IN THE CASE OF CHANGEPOND TECHNOLOGIES (P) LTD. VS. ACIT (22 SOT 2 20) WHEREIN IT WAS HELD AS UNDER: THE COMMISSIONER (APPEALS) WAS NOT CORRECT IN SETT ING OFF OF CARRIED FORWARD LOSSES BEFORE GIVING THE EXEMPTION UNDER S ECTION 10A. THERE IS NO PROVISION IN THE ACT BY WHICH THE DEDUCTION S HOULD BE RESTRICTED TO THE TOTAL INCOME OF THE ASSESSEE COMPUTED UNDER THE PROVISIONS OF THE ACT BEFORE ALLOWING SUCH DEDUCTION. WHEREVER T HE LEGISLATURE INTENDS SO TO RESTRICT THE DEDUCTION THE SAME IS P ROVIDED IN THE ACT ITSELF. THEREFORE THERE IS NO SCOPE FOR ANY INTER PRETATION THAT THE PROFITS AND GAINS OF THE SPECIFIED UNDERTAKING SHOU LD BE COMPUTED UNDER THE NORMAL COURSE AS PER THE PROVISIONS OF TH E ACT AND NOT UNDER THE SPECIAL PROVISIONS OF SECTION 10A. ACCOR DINGLY THE DEDUCTION UNDER SECTION 10A IS NOT TO BE RESTRICTED TO THE T OTAL INCOME OF THE ASSESSEE COMPUTED BEFORE ALLOWING THE DEDUCTION UND ER SECTION 10A SINCE THE DEDUCTION IS GIVEN ON THE PROFIT AND GAIN DERIVED FROM THE EXPORT ACTIVITY AND NOT ON THE TOTAL INCOME AS COMP UTED UNDER THE PROVISIONS OF THE ACT. THEREFORE THE ONLY INTERPR ETATION WHICH IS APPLICABLE IN RESPECT OF SECTION 10A IS THAT THE DE DUCTION OF THE UNIT QUALIFYING FOR EXEMPTION IS TO BE GIVEN TO THE EXTE NT OF INCOME COMPUTED IN RESPECT OF THE SAID UNIT. THEREFORE T HE COMMISSIONER (APPEALS) WAS NOT JUSTIFIED IN HOLDING THAT THE TOT AL INCOME OF THE ASSESSEE FOR ANY RELEVANT ASSESSMENT YEAR IS REQUIR ED TO BE COMPUTED AFTER TAKING INTO CONSIDERATION THE CARRIED FORWARD LOSSES INCURRED AFTER 1.4.2001 AND AFTER SETTING OFF THE LOSS IF THERE IS ANY POSITIVE INCOME IS ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 34 LEFT THE SAME IS EXEMPTED UNDER SECTION 10A. THER EFORE THE ASSESSEE WAS ENTITLED TO DEDUCTION UNDER SECTION 10A WITHOUT SETTING OFF THE BROUGHT FORWARD LOSSES. AS PER AFORESAID DECISION IF UNABSORBED BUSINESS L OSSES CANNOT BE SET OFF AGAINST PROFITS OF THE UNDERTAKING BEFORE GRANTING DEDUCTION U/S. 10A THEN INDEED UNABSORBED DEPRECIATION ALSO CANNOT BE SET O FF IN VIEW OF SECTION 72(2) OF THE ACT. THE SPECIAL BENCH OF CHENNAI TRI BUNAL IN THE CASE OF M/S. SCIENTIFIC ATLANTA INDIA TECHNOLOGY PVT. LTD. VS. A CIT (ITA NO.229/MDS/2007) HAS ALSO HELD THAT PROFITS OF 10A UNIT CANT BE ADJUSTED AGAINST LOSSES OF A NON-10A UNIT. IN OTHER WORDS DEDUCTION U/S. 10A OUGHT TO BE GRANTED SOLELY ON THE PROFITS OF THE BUSINESS OF THE 10A UNDERTAKING AND NOT ON TOTAL INCOME COMPUTED AFTER GIVING EFFEC T TO SECTION 72 / SECTION 32(2) ETC. WE ARE THEREFORE OF THE VIEW THAT DEDU CTION U/S. 10A HAS TO BE ALLOWED ON PROFITS OF THE UNDERTAKING BEFORE SET OF F OF UNABSORBED DEPRECIATION. UNABSORBED DEPRECIATION HAS THEREFOR E TO BE ALLOWED TO BE ADJUSTED AGAINST INTEREST INCOME. FOR THE REASONS G IVEN ABOVE WE CONFIRM THE ORDER OF CIT(A) AND DISMISS GROUND NO.2 RAISED BY THE REVENUE. 47. GROUND NO.3 RAISED BY THE REVENUE IN ITA NO.58 87/MUM/10 READS AS FOLLOWS: 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LD. CIT(A) ERRED IN HOLDING THAT EXCHANGE RATE GAI N IS INTEGRAL PART OF THE EXPORTS AND HENCE PART OF BUSINESS INCOME AND CANNOT BE TREATED AS INCOME FROM OTHER SOURCES 48. THE ASSESSEE HAD EARNED FOREIGN EXCHANGE GAIN OF RS.3 19 32 434/- . THE FOREIGN EXCHANGE GAIN EARNED BY THE ASSESSEE AN D ITS ACCOUNTING WAS EXPLAINED BY THE ASSESSEE AS FOLLOWS: THE ASSESSEE SAY RECEIVES AN ADVANCE OF 1000 US $ O N 15.3.2004 FROM AE (EXCHANGE RATE DIFFERENCE ON THE DATE OF RECEIPT 1 US $ = RS.44.00). THIS ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 35 ADVANCE WILL GET ADJUSTED AGAINST SUBSEQUENT BILLIN G ON AE. ENTRY PASSED AT THE TIME OF RECEIPT ON 15.3.2004 WILL BE: BANK A/C. DR. RS.44 000 TO AE CR. RS.44 000 ON 31.3.2004 (1 US $ = RS.47.00) REVALUATION OF FOREIGN CURRENCY LIABILITY THE ENTRY PASSED WILL BE: FOREIGN EXCHANGE LOSS A/C. DR. RS.3 000 TO AE CR. RS.3 000 ON 31.3.2004 THE EFFECT OF THE ABOVE TRANSACTION I N THE BOOKS OF ACCOUNT WILL BE: BANK BALANCE (ASSET SIDE) RS.44 000 AE BALANCE (LIABILITY) RS.47 000 FOREIGN EXCHANGE LOSS RS. 3 000 IN THE NEXT YEAR I.E. FY 04-05 RELEVANT TO AY 05- 06 THE ADVANCE RECEIVED WILL BE ADJUSTED AGAINST BILL OF US $ 1000. THE EX CHANGE RATE ON THE DATE OF BILLING IS 1 US $= RS.41/-. THE ENTRY PASSED WILL BE: AE A/C. DR. RS.47 000 TO SALES CR. RS.41 000 TO FOREIGN EXCHANGE GAIN CR. RS.6 000 AS ON 31.3.2005 WILL BE: SALES INCOME RS.41 000 FOREIGN EXCHANGE INCOME RS. 6 000 AE BALANCE RS. NIL THE ASSESSEE THUS SUBMITTED THAT THE FOREIGN EXCHAN GE GAIN IS PART OF THE BUSINESS INCOME OF THE ASSESSEE AND OUGHT TO BE CON SIDERED AS INCOME FROM BUSINESS WHILE WORKING DEDUCTION U/S.10A OF THE ACT . THE ASSESSEE ALSO RELIED ON THE DECISION IN THE CASE OF CIT VS. WOODW ARD GOVERNOR INDIA PVT.LTD. 179 TAXMAN 326 (SC)WHEREIN IT WAS HELD THA T THE LOSS SUFFERED BY AN ASSESSEE ON ACCOUNT OF EXCHANGE DIFFERENCE AS ON THE DATE OF THE BALANCE SHEET IS AN ITEM OF EXPENDITURE U/S.37(1) OF THE AC T. 49. THE AO HOWEVER HELD THAT THE GAIN ON FOREIGN E XCHANGE RATE DIFFERENCE RECEIVED BY THE ASSESSEE PERTAINS TO THE SALES MAIN LY OF PRECEDING YEAR AND ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 36 PARTLY OF THE CURRENT YEAR. ACCORDING TO THE AO TH E SALES ARE RECORDED IN THE BOOKS AS ON THE DATE OF SALES (IN THE EARLIER YEAR) AND THE GAIN ON EXCHANGE RATE DIFFERENCE IS BOOKED ON THE DATE OF REALISATIO N OF THE SALES ( IN THE PREVIOUS YEAR) ALREADY BOOKED IN THE BOOKS OF ACCOU NT AND THEREFORE THEY CANNOT BE REGARDED AS INCOME OF THE PREVIOUS YEAR. HE ALSO HELD THAT THE GAIN IN QUESTION CAN BE SAID TO BE ATTRIBUTABLE TO INCOME FROM BUSINESS OF ELIGIBLE UNDERTAKING BUT CANNOT BE SAID TO BE DERI VED FROM THE ELIGIBLE UNDERTAKING. THE AO THEREFORE EXCLUDED THE FOREIGN EXCHANGE GAIN FROM THE PROFITS OF THE BUSINESS WHILE WORKING OUT DEDUCTION U/S.10-A OF THE ACT. 50. ON APPEAL BY THE ASSESSEE THE CIT(A) HELD AS FOLLOWS: 5.2. I HAVE CONSIDERED THE SUBMISSIONS AND I FIND THAT THE ISSUE IS COVERED BY THE DECISION OF THE TRIBUNAL IN CHANGEPO ND TECHNOLOGIES (P) LTD. AND IT HAS BEEN CATEGORICALLY HELD THAT WH ERE THE GAIN FROM FLUCTUATION OF FOREIGN EXCHANGE IS DIRECTLY RELATED TO THE EXPORT ACTIVITIES IT SHOULD BE CONSIDERED AS INCOME DERI VED FROM EXPORT ACTIVITY AND THEREFORE SUCH FOREIGN EXCHANGE GAIN WOULD BE INCLUDED IN THE PROFITS FOR COMPUTATION OF DEDUCTION U/S. 10 A. MOREOVER THE SPECIAL BENCH IN ACIT V/S. PRAKASH L. SHAH (301 ITR ) HAS ALSO HELD THAT EXCHANGE RATE GAIN DIFFERENCE PERTAINING TO EX PORTS IS AN INTEGRAL PART OF THE EXPORTS AND EXPORT TURNOVER CANNOT BE T REATED AS INCOME FROM OTHER SOURCES. THUS GROUND NO.3 & 4 ARE ALLOW ED. 51. BEFORE US THE LEARNED D.R. RELIED ON THE ORDER OF THE AO. WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) ON THIS ISSUE HAS TO BE UPHELD. IN THE CASE OF CHANGEPOND TECHNOLOGIES (I) PVT. LTD.(2008) 22 S OT 220(CHENNAI) THE CHENNAI BENCH OF ITAT DEALT WITH IDENTICAL ISSUE AN D HELD AS FOLLOWS: THE GAIN FROM THE FLUCTUATION OF FOREIGN EXCHANGE WAS DIRECTLY RELATED TO THE EXPORT ACTIVITIES AND SHOULD BE CONSIDERED A S INCOME DERIVED FROM EXPORT ACTIVITIES. SUCH GAIN DUE TO FLUCTUATI ON OF FOREIGN EXCHANGE AROSE ONLY DUE TO THE EXPORT AND NOT DUE T O OTHER ACTIVITIES OF THE ASSESSEE. IF THE ASSESSEE HAS NOT EXPORTED ANY ARTICLE THEN THE QUESTION OF ANY GAIN OR LOSS DUE TO FOREIGN EXCHANG E DID NOT ARISE. ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 37 THEREFORE THE GAIN ON FOREIGN EXCHANGE WOULD BE IN CLUDED IN THE TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION U/S.10A. WE ARE OF THE VIEW THAT THE CIT(A) HAS RIGHTLY DECI DED THE ISSUE IN LINE WITH THE LAW ON THE ISSUE. WE THEREFORE UPHOLD THE ORDE R OF CIT(A) AND DISMISS GROUND NO.3 RAISED BY THE REVENUE. 52. IN THE RESULT ITA NO.5887/MUM/10 IS PARTLY AL LOWED FOR STATISTICAL PURPOSES. 53. ITA NO.7125/MUM/10 (FOR AY 06-07): THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER OF THE DCIT CIRCLE-3(3) MUMBAI PASSED U/S/143(3) OF THE ACT READ WITH SEC .144C OF THE ACT. 54. GROUND NO.1 HAS ALREADY BEEN DECIDED WHILE DEC IDING IDENTICAL ISSUE IN THE APPEAL BY THE REVENUE FOR AY 05-06. 55. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FO LLOWS: GROUND II : DISALLOWANCE OF SET OFF OF UNABSORBED DEPRECIATION AGAINST OTHER INCOME: 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE DRP AND THE AO ERRED IN NOT ALLOWING SET OFF OF UNA BSORBED DEPRECIATION AGAINST INCOME FROM OTHER SOURCE. 2) THE DRP/AO FAILED TO APPRECIATE AND OUGHT TO HAVE H ELD THAT DURING THE A.Y 2004-05 THE APPELLANT HAD UNABSORBE D DEPRECIATION OF RS. 3 85 20 781/- AND THEREFORE IN COMPLIANCE WITH THE CARRY FORWARD & SET OFF OF LOSS PROVISIONS CONT AINED IN CHAPTER VI OF THE ACT THE APPELLANT HAS CARRY FORWARD AND SET OFF SUCH UNABSORBED DEPRECIATION LOSS AGAINST THE INCOME FRO M OTHER SOURCES. 56. THIS GROUND OF APPEAL IS IDENTICAL TO GROUND N O.2 RAISED BY THE REVENUE IN AY 05-06. WHILE DECIDING THE GROUND OF APPEAL O F THE REVENUE WE HAVE ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 38 ALREADY HELD THAT THE ASSESSEE IS ENTITLED TO SET O FF UNABSORBED DEPRECIATION AGAINST INTEREST INCOME. FOR THE REASONS STATED TH EREIN THE GROUND OF APPEAL RAISED BY THE ASSESSEE IS ALLOWED AND THE AO IS DIR ECTED TO ALLOW THE SET OFF AS CLAIMED BY THE ASSESSEE. 57. GROUND NO.3 RAISED BY THE ASSESSEE READS AS FO LLOWS: GROUND III: TREATING INTEREST ON L/C MARGIN & BANK GUARANTEE OF RS.3 36 697/- AS INCOME FROM OTHER SOURCES: 1. ON THE FACTS IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE AO ERRED IN TREATING INTEREST INCOME ON L/C MARGIN & B ANK GUARANTEE AS INCOME FROM OTHER SOURCES AS AGAINST BUSINESS IN COME OF THE ELIGIBLE 10A UNIT FOR THE FIRST TIME IN HIS FINAL A SSESSMENT ORDER WITHOUT HAVING CONSIDERED SO IN HIS DRAFT ASSESSMENT ORDER U/S. 144C AND ACCORDINGLY ERRED IN DENYING DEDUCTION U/S. 10A IN RESPECT OF SUCH INTEREST INCOME. 58. FOR DECIDING GROUND NO.3 IT IS NECESSARY TO HA VE A LOOK AT THE PROVISIONS OF SEC.144-C OF THE ACT WHICH WERE INTRODUCED BY T HE FINANCE ACT 2009 WEF. 1-4-2009. THE SAID PROVISIONS PROVIDE THAT I N THE CASE OF ELIGIBLE ASSESSEE THE ASSESSING OFFICER SHALL NOTWITHSTAND ING ANYTHING TO THE CONTRARY CONTAINED IN THIS ACT IN THE FIRST INSTAN CE FORWARD A DRAFT OF THE PROPOSED ORDER OF ASSESSMENT (HEREAFTER IN THIS SEC TION REFERRED TO AS THE DRAFT ORDER) TO THE ELIGIBLE ASSESSE IF HE PROPOS ES TO MAKE ON OR AFTER THE 1ST DAY OF OCTOBER 2009 ANY VARIATION IN THE INCO ME OR LOSS RETURNED WHICH IS PREJUDICIAL TO THE INTEREST OF SUCH ASSESSEE. F OR THE PURPOSE OF SEC.144C OF THE ACT ELIGIBLE ASSESSEE HAS BEEN DEFINED UNDE R SEC.144-C (15) TO (I) ANY PERSON IN WHOSE CASE THE VARIATION REFERRED TO IN S UB-SECTION (1) ARISES AS A CONSEQUENCE OF THE ORDER OF THE TRANSFER PRICING OF FICER PASSED UNDER SUB- SECTION (3) OF SECTION 92CA ; AND (II) ANY FOREIGN COMPANY. ADMITTEDLY IN THE CASE OF THE ASSESSEE THERE WAS REFERENCE TO THE TPO U/S.92CA OF THE ACT FOR DETERMINATION OF ALP OF INTERNATIONAL TRANSACTION B ETWEEN THE ASSESSEE AND ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 39 ITS AE. THEREFORE THE ASSESSEE IS AN ELIGIBLE ASSE SSSEE TO WHOM THE PROVISIONS OF SEC.144C OF THE ACT WILL APPLY. IN THE CASE OF ASSESSMENTS IN THE CASE OF ELIGIBLE ASSESSEE SEC.144C OF THE ACT PRESCRIBES PROCEDURE WHERE THE AO PROPOSES VARI ATION TO THE INCOME OR LOSS RETURNED BY THE ELIGIBLE ASSESSEE. THE AO HAS TO FIRST PASS A DRAFT ASSESSMENT ORDER. THE COPY OF THE DRAFT ASSESSMENT ORDER IS SERVED ON THE ASSESSEE AND IF THE ASSESSEE OBJECTS TO THE VARIATI ON THEN HE HAS TO FILE HIS OBJECTIONS TO THE DISPUTE RESOLUTION PANEL (DRP) AN D THE ASSESSING OFFICER. THE DISPUTE RESOLUTION PANEL SHALL IN A CASE WHERE ANY OBJECTION IS RECEIVED ISSUE SUCH DIRECTIONS AS IT THINKS FIT FOR THE GUIDANCE OF THE ASSESSING OFFICER TO ENABLE HIM TO COMPLETE THE ASS ESSMENT. 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 VARIATION OR ISSUE ANY DIRECTION FOR FURTHER ENQUIRY AND PASS ING OF THE ASSESSMENT ORDER. EVERY DIRECTION ISSUED BY THE DISPUTE RESOL UTION PANEL SHALL BE BINDING ON THE ASSESSING OFFICER. UPON RECEIPT OF THE DIRECTIONS ISSUED UNDER BY THE DRP THE ASSESSING OFFICER SHALL IN C ONFORMITY WITH THE DIRECTIONS COMPLETE NOTWITHSTANDING ANYTHING TO T HE CONTRARY CONTAINED IN SECTION 153 THE ASSESSMENT WITHOUT PROVIDING ANY F URTHER OPPORTUNITY OF BEING HEARD TO THE ASSESSEE WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH SUCH DIRECTION IS RECEIVED. U/S.253(1) (D) O F THE ACT ANY ASSESSEE AGGRIEVED BY AN ORDER PASSED BY AN ASSESSING OFFICE R UNDER SUB-SECTION (3) OF SECTION 143 OR SECTION 147 IN PURSUANCE OF THE D IRECTIONS OF THE DISPUTE RESOLUTION PANEL OR AN ORDER PASSED UNDER SECTION 1 54 IN RESPECT OF SUCH ORDER MAY APPEAL TO THE APPELLATE TRIBUNAL AGAINST SUCH ORDER. THUS IT IS CLEAR FROM THE PROVISIONS THAT WHATEVER VARIATION IS PROPOSED TO BE MADE TO THE LOSS OR INCOME RETURNED BY AN ELIGIBLE ASSESSE HAS TO BE SPELT OUT IN THE DRAFT ASSESSMENT ORDER PASSED BY THE AO SO THAT THE ASSESSEE CAN PROJECT HIS GRIEVANCE AGAINST SUCH VARIATION BE FORE THE DRP. THE FAIR ORDER PASSED BY THE AO ON RECEIPT OF DIRECTIONS FRO M THE DRP CANNOT BE AT ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 40 VARIANCE WITH THE DIRECTIONS ISSUED BY THE DRP NOR CAN THE AO DEAL WITH ISSUES NOT CONSIDERED IN THE DRAFT ASSESSMENT ORDER . IF THE AO IS PERMITTED TO MAKE ANY VARIATION TO THE LOSS OR INCOME RETURNE D BY THE ELIGIBLE ASSESSE WHICH IS NOT SPELT OUT IN THE DRAFT ASSESSMENT ORDE R THEN THE ASSESSEE WILL HAVE NO OPPORTUNITY TO ADDRESS HIS GRIEVANCE BEFORE THE DRP. 59. IN THE PRESENT CASE THE AO TREATED INTEREST O N L/C.MARGIN AND BANK GURANTEE EARNED BY THE ASSESSEE OF RS.3 36 697/- AS INCOME FROM OTHER SOURCES IN THE FAIR ORDER PASSED. THE ASSESSEE HA D CLAIMED THE SAME AS INCOME FROM BUSINESS AND HAD ALSO CLAIMED THAT TH E SAME IS ELIGIBLE FOR DEDUCTION U/S.10-A OF THE ACT. IN THE DRAFT ASSESS MENT ORDER HE DID NOT DEAL WITH THIS ISSUE AT ALL. THE ASSESSEE HAS THEREFORE OBJECTED TO THE SAID ACTION OF THE AO IN GROUND NO.3 RAISED ABOVE. 60. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE ST ATUTORY PROVISIONS OF SEC.144-C OF THE ACT WHICH HAVE BEEN DISCUSSED ABO VE THE AO HAD NO JURISDICTION TO CONSIDER AN ISSUE WHICH WAS NOT CON SIDERED IN THE DRAFT ASSESSMENT ORDER PASSED U/S.144C OF THE ACT. ON TH IS GROUND THE IMPUGNED ACTION OF THE AO IS HELD TO BE BAD IN LAW. THE AO IS THEREFORE DIRECTED TO CONSIDER THE INTEREST INCOME IN QUESTION AS INCOME FROM BUSINESS. 61. IN THE RESULT THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON TH E 22ND DAY OF JULY 2011. SD/- SD/- (B.RAMAKOTAIAH ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 22ND JULY.2011 ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 41 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RF BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.5887/MUM/2010(A.Y.2005-06) ITA NO.7125/MUM/2010(A.Y. 2006-07) 42 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 14&15/7/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 19/7/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER