Case Law Details

Case Name : Interra Information Technologies (India) (P.) Ltd. Vs Deputy Commissioner of Income-tax, Circle 11(1), New Delhi (ITAT Delhi)
Appeal Number : IT Appeal No. 5568 (DELHI) of 2010 and 5680 (DELHI) OF 2011
Date of Judgement/Order : 31/10/2012
Related Assessment Year : 2006-07 & 2007-08
Courts : All ITAT (5167) ITAT Delhi (1162)

IN THE ITAT DELHI BENCH ‘I’

Interra Information Technologies (India) (P.) Ltd.

Versus

Deputy Commissioner of Income-tax, Circle 11(1), New Delhi

IT APPEAL NOS. 5568 (DELHI) of 2010

and 5680 (DELHI) OF 2011

[ASSESSMENT YEARS 2006-07 & 2007-08]

OCTOBER 31, 2012

ORDER

J. Sudhakar Reddy, Accountant Member 

These appeals filed by the assessee are directed against the order of the Assessing Officer passed under sec. 143(3) read with sec. 144C of the Income-tax Act, 1961 (the Act).

2. Facts in brief – Interra Information Technologies (India) Private Limited, a company incorporated under the Companies Act, 1956, is a 100% subsidiary of Interra IT Inc., a US based company. Interra IT Inc. enters into contract with customers and subcontracts a part/whole of the work to Interra India. Interra Information Technologies (India) Private Limited is registered under the Software Technology Park (STP) Scheme of the Government of India and is primarily engaged in software development for its parent company. Besides these, Interra India also enters into direct contracts with end customers.

3. The Transfer Pricing Officer at Page 2 brought out the portfolio of the assessee in the following words:-

“Interra IT India has significant expertise in developing distributed enterprises software. It delivers high-quality, robust and scalable software services and solutions using multi-tiered client-server architecture. The software solutions can be distributed between IBM Mainframes, Unix Platforms and Microsoft Windows 2000 and XP. In many projects, the engineers in Interra have successfully applied their ingenuity in marrying legacy applications on the IMB Mainframe to today’s web-based client-server techniques to provide cost-effective solutions to complex problems.

The entire effort is backed by considerable experience in the state-of-the-art technologies like Microsoft DNA (Distributed Internet Architecture). Universal Data Access (UDA), MTS, IIS, COM/DCOM/COM+, OLAP AND COMTI. The team uses a host of development tools like Visual C++, Visual Basic and Visual InterDev, SQL server 7.0, Essbase. Interra India has recently started developing intranets and Microsoft Exchange based work flows.

Interra KIT India is also engaged in developing software applications on the IBM Mainframe. Focussed on financial and revenue management, these applications are hosted on the MVS and OS/390 platforms on IBM’s newsiest S/390 series Mainframe with Parallel Sysplex. The software is developed on Cobol and Assembly language, and uses DB2/5.x as the RDBMS and CICS 4.x as the transaction processor. The R&D center is connected online to the Microsoft Developer Network as well as IBM Developer Connection to have access to technology as it emerges in the market. The majority of consultants have an advanced degree in engineering from reputed institutions and considerable years of software development experience in top branded international software companies. The team has significant experience of executing complex software projects for high-profile global customers. To maintain consistency in quality, the company has adopted the best of practices in developing software with strict compliance to object-oriented modeling techniques, use of CASE tools and adhering to component-based development. To ensure that the engineers are in tune with the latest technology, they are encouraged to attend regular professional developer’s conference to upgrade their knowledge and skills.

Interra IT India has obtained ISO 9001 certification and CMM level 5 certification in Quality. The primary motivation for ISO 9001 & CMM 5 certification are to use the opportunity to review existing practices, which has been acclaimed by customers worldwide.

Software Services

The primary software services that the company provides are

  •  Multi-tier client-server application integrating Microsoft and IBM Platforms.

  •  Internet technologies.

  •  IBM Mainframe S/390.

  •  IBM AS/400

  •  Enterprise-wide business solutions using OLAP and data warehousing application.

  •  ERP (enterprise resource planning)

  •  Euro conversion

  •  Conversion, migration and porting

  •  E-Commerce and Supply Chain Management

  •  On-site Consultancy

  •  Product Development.”

4. During the year the assessee entered into the following international transactions:-

Nature of transaction

Method selected

Total value of transaction (Rs.)

Provision of software design and development services

 TNMM

216,272,595

Reimbursement of expenditure

CUP

 3,792,438

5. In the Transfer Pricing analysis the assessee stated that it has entered into direct contracts with Voxiva Inc. and also with domestic customers. It had used TNMM as a method and for this purpose took the operative profits divided by total cost as the profit level indicator. The assessee relied upon the internal comparables by using TNMM analysis and found that PLI 7.63% of “internal uncontrolled transaction” was lesser than the PLI of the “international controlled transaction” entered by the assessee with Interra India, which was found to be 8.98%.

6. Alternatively, the assessee benchmarked the international transactions entered into with its associated enterprise (AE), using TNMM method, with external comparable companies.

7. 52 external comparable companies were identified by the assessee and PLI was found at (-) .33% and it was concluded that the assessee’s controlled transactions with it’s AE, which was 8.98% PLI, was higher and hence at arm’s length. The assessee used multiple year data.

8. The Transfer Pricing Officer rejected the use of multiple year data by the assessee. He relied on the Special Bench decision in the case of Aztec Software & Technology Services Ltd., 294 ITR (AT) 32 and other decisions and only data for the year 2006, which would be the current year data, was taken for the purpose of benchmarking. A show case notice was issued to the assessee by the Transfer Pricing Officer, proposing an additional filter of wages to sales ratio, to the comparables used by the assessee, on the ground that wages and salary constitute a major part of the cost incurred by IT/ITES companies in India. He proposed to treat only those companies which have wages/sales ratio between 45% to 65% as comparable companies. Applying this he arrived at only eight comparable companies.

9. Thereafter the TPO proposed two more additional filters – (i) Negative ROG-Sales; & (ii) Declining operating profit. By this, he further reduced the comparables to five.

10. The assessee objected by stating that internal comparables should be used for benchmarking. Certain Other Objections were also raised by the assessee against the show cause notice, which we will deal in due course. The TPO rejected this contention of the assessee on the ground that unrelated transactions are just 1.4% of the total revenue earned by the assessee and hence, comparison with such transactions will not provide meaningful benchmarking. He held that uncontrolled transactions should be of sufficient economic significance to qualify as a benchmark.

11. He rejected the submissions of the assessee that filter of wages/sales should be pruned between 42% to 62% instead of 45% – 65% on the ground that the band of 45% to 65% is fair enough and the contention of the assessee is made only with the objective of achieving biased results.

12. In the case of Ram Informatics Ltd., he rejected the contention of the assessee on the ground that it has declining operating profit and hence not a comparable company.

13. In the case of Soft Pro Systems Ltd., he held that the company shall be compared at entity level as in the case of other companies, instead of using segmented financial data.

14. In the case of Sankhya Infotech he rejected the objection of the assessee that this company is in the aviation sector and held that the company is very much software developer.

15. He rejected the assessee’s submission that the parent company has low profitability and hence risk adjustment should be connected. The argument of the assessee asking for low resource utilization adjustment was rejected, on the ground that against total expenditure of Rs.21 crores (approximate), expenditure on personnel was Rs.12.87 crores, which amounts to 61% and such percentage is comparable to the results of the NASSCOM-CRISIL survey on the matter. The assessee’s fresh search which threw up nine comparables and which were sought to be included as additional evidence was rejected on the ground that the fresh search was embarked upon to achieve biased results.

16. The assessee’s argument on res judicata was rejected by relying on the decision of the Tribunal in the case of M/s. Carraro India Ltd. v. DCIT (2008-TIOL-519-ITAT-DEL).

17. The argument for grant of adjustment for risk at 5%, on the ground that the assessee is a captive service provider is rejected on the ground that, the assessee is exposed to all kinds of risks like, technological risk, government policies risk, environmental risks, security risks etc. The Transfer Pricing Officer also held that, being a captive service provider is itself a big risk as the assessee is dependent on only the AE. He also referred to other risks like human capital risk, intangible etc. Further the TPO held that reasonable accurate adjustment for risk cannot be done. He analyzed various risks and came to a conclusion that no risk analysis was conducted by the assessee and that the assessee has not discharged its initial onus and hence its claim for risk adjustment cannot be granted.

18. The other argument of the assessee such as, it has no intention to shift profits etc. was rejected based on the various judicial pronouncements. Thereafter the TPO has computed the arm’s length price at a margin of 16.3%, being arithmetic mean of the final set of four comparables. The assessee has carried the matter before the Dispute Resolution Panel (DRP). The objections were filed. The DRP rejected the objections raised by the assessee by approving the reasoning and finding given by the Transfer Pricing Officer.

19. Aggrieved the assessee is before us on the following grounds:-

“1. That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income-tax Act, 1961 (‘the Act’) at an income of Rs.4,76,19,822 as against the income of Rs.45,48,258 returned by the appellant.

2. That the assessing officer erred on facts and in law in making addition of Rs.2,37,40,619 of the alleged difference in the arm’s length price of the ‘international transactions’ of provision of software design and development services on the basis of the order passed under section 92CA(3) of the Act by the TPO.

2.1 That the assessing officer/TPO erred on facts and in law in rejecting the benchmarking analysis considering internal comparison on the ground that quantum of revenue from transactions with unrelated parties is economically insufficient.

2.2 That the assessing officer/TPO erred on facts and in law in holding that the internal comparability does not provide meaningful benchmarking, without pointing out any error or mistake in the profitability summary in relation to revenue earned from AE and non AEs transaction worked out by the appellant.

2.3 That the assessing officer/TPO erred on facts and in law in not appreciating the internal benchmarking analysis provides an ideal benchmark for determining the arm’s length price of the international transactions applying TNMM.

2.4 That the assessing officer/TPO erred on facts and in law in applying additional filters of percentage of wages to sale, persistent losses, declining operating profit and negative ROG-sales, ROG, related party transactions without appreciating the selection or rejection should be based on FAR analysis and not on financial results.

2.5 That the assessing officer/TPO erred in applying the abovementioned additional filters without raising any objection to the search process as adopted by the appellant in the Transfer Pricing Documentation.

2.6 That the assessing officer/TPO erred on facts and in law in applying inconsistent approach by eliminating loss making companies or companies with declining profit without eliminating the companies having significantly high margins.

2.7 That the assessing officer/TPO erred on facts and in law in applying the filter of wages to sales of 45-65% after relying on Nasscom-CRISIL survey, without appreciating the fact the wages constitute 52.78% of appellant’s total turnover.

2.8 That the assessing officer/TPO erred on facts in rejecting the claim of the assessee that the companies having wages to sales ratio within the band of 42%-62%, (i.e. +/- 10%) should be selected so as to benchmark the international transactions undertaken by the appellant.

2.9 That the assessing officer/TPO erred in rejecting Genesys International Corp. Ltd., Compulink Systems Ltd. as comparables allegedly holding that there has been decline in the sales without considering the financial results of subsequent years.

2.10 That the assessing officer/TPO erred in rejecting Ram Informatics Ltd as part of comparable companies on the reasoning of declining operating profitability and continually loss making company.

2.11 That the assessing officer/TPO erred in not considering the actual computation of operating profitability of Ram Informatics Ltd. furnished by the appellant without appreciating that the operating profit of the company has increased as compared to the preceding year.

2.12 That the assessing officer/TPO erred in rejecting the claim of the appellant that the profitability of only Software development segment of SoftPro Systems Limited should be considered.

2.13 That the assessing officer/TPO erred on facts and in law in not appreciating that the annual result of SoftPro Systems Limited shows that the lease/ rental income segment is the primary profit generating department of the company whereas the software development division has shown a loss of (-) 32% during the relevant previous year.

2.14 That the assessing officer/TPO erred in considering Sankhya Infotech as a comparable even though the company is rendering services to the aviation sector.

2.15 That the assessing officer/TPO erred in not considering the fresh database search conducted by the appellant based on the filters taken by TPO in the assessment for the preceding year.

2.16 That the assessing officer/TPO erred on facts and in law in not allowing adjustment to the extent of 5% over the cost on account of low risk assumed by the appellant as a contract service provider.

2.17 That the assessing officer./TPO erred on facts and in law in not appreciating that, considering that substantial portion of the combined profit margin has been received by the appellant and no adjustment on account of alleged transfer pricing adjustment warranted.

2.18 That the assessing officer/TPO erred on facts and in law in not appreciating that the associated enterprise has, in fact, incurred a loss from the international transactions and, therefore, no adjustment on account of the alleged difference in arm’s length price was even otherwise warranted.

2.19 That the assessing officer/TPO erred on facts and in law in not appreciating that the income of the appellant is exempt under section 10A of the Income Tax Act and hence, there could not be any motive for the transfer of profits outside India.

2.20 That the assessing officer/TPO erred on facts and in law in not following the transfer pricing order passed in the immediately preceding assessment year even when there is no change in the facts of the appellant’s case.

2.21 That the assessing officer/TPO erred on facts and in law in applying operating results for the relevant previous year as opposed to the contemporaneous data available at the time of making Transfer Pricing documentation which is in complete disregard of the contentions of the assessee.

2.22 Without prejudice, that the assessing officer/TPO erred in law in not allowing variation to the extent of (+/-)5%, while determining the arm’s length price of the ‘international transactions’

3. That the assessing officer erred on facts and in law in denying deduction amounting Rs.I,93,30,9451- under section 10A of the Income-tax Act, 1961 (‘the Act’) in respect of profits of Noida Unit, i.e. the undertaking set up in Noida Export Processing Zone (‘NEPZ’).

3.1 That the assessing officer erred on facts and in law in holding that the appellant is not entitled to claim deduction under section 10A of the Act by merely following the assessment orders for the assessment years 2002-03 and 2003-04 even though the said orders have been reversed by the Tribunal.”

20. The learned counsel for the assessee Shri Ajay Vohra submitted that the assessee is engaged in the business of rendering low end software maintenance services. His submissions are as follows –

(a)  Internal comparisons are available for the purpose of benchmarking and this should be referred.

(b)  Rejection of internal comparables on the ground stated by the TPO is unlawful and unsustainable in view of Rule 10B(1)(e) wherein the profit margin from transaction is required to be compared.

(c)  The Third Member Bench of the Mumbai Tribunal in the case of Technimount ICB Pvt. Ltd. v. ACIT in ITA Nos. 4608 & 5085/Mum/2010, have laid down that internal comparables have a higher degree of comparability for the reason that various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large same in case of an internal comparable.

21. He relied on number of other decisions for the proposition that only margins of a single transaction or the same class of transactions should form the basis of comparison under TNMM instead of relying on external comparables as provided in Paragraph 3.26 of the OECD Guidelines.

22. He disputed the findings of the TPO that the quantum of revenue derived from unrelated parties being economically insufficient to qualify as a suitable benchmark for the reason that, the assessee in the course of its business enters into several software development contracts of small volumes. The aggregate turnover of the assessee comprises of several small transactions and hence comparability of single transactions is permissible. He disputed the test laid down by the Revenue.

23. On external comparables he disputed the additional filters applied by the TPO on the ground that these filters have been used by the TPO to suit his requirement and to arrive at predetermined results.

24. That comparables should be placed on functional or asset profile and not on profit margin. He placed reliance on the following case laws:-

 (i)  Mentor Graphics (Noida) Pvt. Ltd., 109 ITD 101.

(ii)  E-Gain Communication Pvt. Ltd., 118 ITD 234

(iii)  Aztec Software India Pvt. Ltd., 107 ITD 141

(iv)  Sony India Pvt. Ltd., 114 ITD 448.

(v)  Philips Software, 26 SOT 226

(viQuark Systems Pvt. Ltd. v. DCIT (ITA Nos. 100 & 115/CHD/2009).

25. The TPO has selected the companies with very high operative profit margin and ignored or rejected other companies having low margin or loss. It was argued that selection of only high profit margin company and rejecting the loss making/low profit companies as comparable companies has distorted the results.

26. On application of filter of wages/sales ratio, he submitted that the survey referred to by the TPO was not available in the public domain and that the range of 42% to 62% may be considered as it would be (+)/(-) 10% range. He further submitted that without prejudice the assessee company was essentially a software development company and not an ITES/BPO company and hence, this filter cannot be applied.

27. On excluding comparable companies with negative ROG-Sales i.e. (a) Genesys International Corpn. Ltd. (OP/OC – 3.49%); & (b) Compulink Systems Ltd. (OP/OC (-) 4.65%), he referred to the objections filed before the DRP which is at pages 47 and 29 of the Paper Book and argued that there has been increase in sales of all the aforesaid companies in the subsequent years and hence, elimination of these comparables on the ground of trend of having negative ROG-Sales is factually not correct.

28. On exclusion of other comparables, he submitted as follows –

(a)  On Ram Informatics Ltd. Five years data was produced to demonstrate that the operative margin was actually increasing and hence the facts are wrongly stated by the TPO and the comparable has been wrongly rejected.

(b)  On comparable accepted by the TPO, he submitted that in the case of Soft Pro Systems, it is not functionally comparable as it is receiving lease rental income which has resulted in the assessee declaring profits and that if this is eliminated, it can be seen that a loss of (-) 32% arose out of software operation of this company.

(c)  On Sankhya Infotech it was submitted that it has entered into business activities of aviation service which are not similar to that of the assessee company. He tried to demonstrate that the functions of Sankhya Infotech are different when compared with the functions of the assessee company. He relied on certain case laws which we would refer latter and pleaded that significant differences appear in the analysis of those companies’ functions and other factors should lead to a conclusion that these companies are not to be included as comparables.

He argued that when the comparable companies finally adopted by the TPO are considered and when elimination of these two comparables is done, then the profit margin of the appellant company would be higher than the PLI declared and hence no addition was called for.

29. He pointed out that the assessee has conducted a fresh search to identify the comparable companies and based on fresh data obtained, nine companies were selected as comparables and that the Revenue was wrong to disregard the comparables found consequent to a fresh search. He argued that the TPO had sought to apply certain new selection/rejection filters, and in such a scenario the assessee had searched for fresh comparable based on this new criteria adopted by the T.P.O. from the public domain and this should have been accepted. Reliance was placed on the decision in the case of USB India Pvt. Ltd., 30 SOT 95 (Mum.).

30. He argued that the assessee is engaged in low end software service maintenance function and that it is a contract service provider and hence it would have lesser margins when compared to other software companies. He vehemently contended that the assessee cannot be expected to earn more profit than what has been earned from the combined operations of the two entities i.e. the assessee and its AE while dealing with unrelated parties.

31. That the assessee has low capacity utilization and sought adjustment for the same by relying on Rule 10B(3) as well certain decisions of the Tribunal which under certain circumstances have accepted such claims for adjustment.

32. One of the main contentions of Mr. Ajay Vohra is that the T.P. adjustment cannot exceed the amount of margin retained by the AE. He furnished a chart which gives the total revenues of the A.E., cost incurred and profit declared and it was argued that the adjustments if any, cannot exceed the profits combinedly derived, for the reason that notional income cannot be brought to tax.

33. He relied on the following case laws:-

(i)  Sony India P. Ltd. v. CBDT, 288 ITR 52 (Delhi).

(ii)  Philip Software Centre Pvt. Ltd. v. ACIT (ITA No.218 (Bang.)/2008).

(iii)  Kyungshin Industrial Motherson Ltd. (ITA No.1396/Del/2009).

(ivDCIT v. Global Ventedge P. Ltd.

(v)  Li & Fun (India) Pvt. Ltd. v. DCIT (ITA No.5156/Del/2010).

34. He submitted that the associated enterprise has incurred a loss and hence the question of shifting profits from India to AE does not arise. He further submitted that there is no motive to divert profits and hence there can be no adjustment in the provisions as the income in India is exempt u/s 10 and no such exemption is available to the AE.

35. He argued that the assessee is a captive service provider, rendering software development services to its overseas affiliates. While rendering services the assessee does not bear significant business and operational risks. Therefore, adjustment of 5% should be given in the operative profit margins of the independent comparable companies. It is argued that the overseas A.E. bear significant business on operational risks and the assessee is a protected entity bearing much service than the company which operates in open market conditions.

36. Reliance was placed on the decision in the case of Intellinet Technologies India Pvt. Ltd. v. ITO (ITA No.1237/Bang./2010) for the proposition that the principle of consistency has to be adhered to by the TPO. It was pointed out that no adjustment was made by the TPO in the earlier years on the similar facts. Reliance was also placed on the decision of Hon’ble Supreme Court in the case of Radhasoami Satsang v. CIT, 193 ITR 321.

37. On ground No.3.1 which is disallowance of deduction u/s 10A of the Act, he submitted that the issue has been considered by the Tribunal in the assessee’s own case for the assessment years 2002-03 and 2003-04 and resolved in favour of the assessee. He further submitted that the Hon’ble Delhi High Court has upheld this decision.

38. The learned counsel for the assessee submitted that he is not pressing ground No.2.21 and 2.22.

39. The learned DR Mr. Peeyush Jain on the other hand, vehemently controverted the submissions of the assessee’s counsel. He argued that the TPO has rightly rejected the internal comparables for the reason that it is economically miniscule and hence not comparable. He emphasized that the sale to the A.E. was 21.62 crores whereas sale to the third party, which is uncontrolled party, is only 8.76 lakhs, which, if analyzed, would not be a correct comparable. To demonstrate his point he argued that when an organization is selling 1 lakh tons of Tea to an AE and ½ ton of Tea is sold to a third party, then there cannot be a comparison as the transaction with the third party is economically insignificant. He further submits that if such comparables are allowed, it would give scope for tax avoidance and evasion by assessees, by indulging in small sample sales to third party, so as to demonstrate that the transactions with the AE are at arm’s length. He pleaded that insignificant transaction cannot be taken into account.

40. He relied on Rule 10B(2)(d) for the proposition that size of market is to be considered. He relied on the decision of ITAT, Pune Bench ‘A’ in ITA No.1296/PN/10 in the case of Brinton Carpets Asia Pvt. Ltd. v. DCIT, for the proposition that small value transactions cannot be taken as comparables. Significant volume difference between the two segments has to be considered as a factor for selection of comparables. He argued that domestic transactions cannot be compared with export transactions and hence benchmarking should not be done of PLI of export transactions with the PLI of domestic transactions. He further relied on the following case laws:-

(i)  Sony India Pvt. Ltd., 315 ITR 150;

(ii)  Sony India Pvt. Ltd. 114 ITD 448 (Del)(Trib.)

41. He further pointed out that the nature of transactions are different for the reason that in the case of third party transactions the assessee directly deals with the customers and whereas in case of international transactions the assessee routed the same through the AE and that in this indirect transaction with the ultimate customer, the AE is adding some value to the transaction. He relied on the following case laws:-

(a)  Destination of the World (Subcontinent) Pvt. Ltd. v. ACIT (ITA No.5534(Del)/2010).

(b)  Birlasoft (India) Ltd. (ITA No.3839/Del/2010).

He emphasized that concept of materiality has to be considered in cases where comparables transactions are sought to be picked up for being benchmarked.

42. He further submitted that domestic transactions cannot be considered for the purpose of benchmarking as comparables transaction with export transactions and for this proposition he relied on the decision in the case of Sony India Pvt. Ltd., 114 ITD 448 (Del). He argued that there is significant difference in the nature of domestic transactions and export transactions.

43. On the issue of filters the learned DR submitted that the information technology industry is based on wages, which form a significant part of expenditure of that industry, as it is manpower oriented. The TPO relied on data from public domain and on the facts this filter is a realistic filter and has been rightly applied. He relied on the decision of Delhi Bench of Tribunal in the case of Vedaris Technology, 133 TTJ 309 in support of the proposition that filter based on wages to sales was correctly applied.

44. On the issue of ROG-sales the learned DR submitted that the assessee is billing on a formula of cost + 7%. Hence, in cost + situation, a loss making unit cannot be taken as a comparable. He wondered how could loss making company be compared when the assessee is in a cost plus situation and when the question of law does not arise. In support of his proposition he relied on the following case laws:-

(i)  Sap Labs (India) Pvt. Ltd. In ITA No.398/Bang./2008, dated 30th August, 2010.

(iiDCIT v. Quark Systems Pvt. Ltd., 131 ITD 315.

45. On the range of 45% to 65% of wages to sales ratio, selected by the TPO, as against 42% to 62% range of wages to sales sought by the assessee, the learned DR submitted that the TPO has gone by the FAR analysis, NASSCOM survey and this is a reasonable range. On a query from the Bench as to why range of 50% to 55% should not taken when the assessee has shown wages to sales ratio of 52%, both the parties did not respond with a cohesive answer.

46. In the case of Genesys International Corpn. Ltd., being a comparable, he submitted that the data of subsequent years cannot be relied upon and only current year data has to be taken for which proposition he relied on the decision of Delhi Bench in the case of Mentor Graphics, 109 ITD 101 (Del). He also relied on the decision of Pune Bench in the case of Honeywell Automation (India) Ltd. v. DCIT, (ITA No.18/PN/2011).

47. On Soft Pro Systems he relied on the findings of the AO and argued that the same should be taken as a comparable. On fresh comparables he submitted that the AO has rightly not allowed the same for the reason that the assessee is picking up comparables with the objective to achieve such results which would lead to a conclusion that the transaction in question is at arm’s length. Such biased selection cannot be allowed at a latter stage. He submitted that the assessee has not given any reason as to why these comparables were not taken at an earlier point of time and what is the reason for admitting additional evidence.

48. On the issue of adjustment, he submitted that the assessee, being dependent for its entire work on the AE was at greater risk and hence it should receive more margin as compared to others. Relying on the findings of the AO he also submitted that there is no data based on which the risk could be analyzed and quantified so as to give a proper adjustment. That for quantification of risk, robust data is required and no such exercise was done by the assessee in its Transfer Pricing Study and only when confronted with an adjustment, the assessee invented the theory of risk adjustment.

49. On the issue of allocation of profits, and the claim of the assessee that the Transfer Pricing adjustment should not result in the total profits assessed being more than the total profits earned by the assessee and the AE put together, he submitted that this concept is foreign to Transfer Pricing Legislation. He pointed out that overall profits of the group is never subject to verification by the A.O. and there would be so many aspects which have to be examined and verified to come to a conclusion that the profit disclosed by the group is correct and pertains only to these transactions. He relied on the decision of ITAT, Mumbai in the case of Gharda Chemicals Ltd. v. DCIT in reported in 2009-TIOL-790-ITAT-MUM, for the proposition that such a cap or restriction cannot be placed under the law.

50. In the issue of res judicata the learned DR submitted that a mistake done earlier by the TPO cannot be perpetuated on the plea of consistency. He relied on the decision of Hon’ble Supreme Court in the case of Krishak Bharati Cooperative Ltd., 155 ITR 120 and submitted that when fresh information has come into the possession of the Revenue or if a more intelligent and correct exercise has been done, then the Revenue cannot be tied down on the ground that the earlier TPO has not exercised his mind on this issue and the Revenue cannot do the same now.

51. On Ground No.2.21 & 2.22 he pointed out that the assessee has not pressed the same.

52. On ground No.3 & 3.1 he relied on the order of the Assessing Officer.

53. The learned DR strongly disputed the contention of the assessee that it is in low end software maintenance services. He referred to the assessee’s Transfer Pricing Study to demonstrate that the contention of the assessee is not correct.

54. The learned DR distinguished the case laws relied upon by the assessee by submitting that what was stated was that the adjustment cannot exceed the combined turnover of the assessee as well as the A.E. and that no reference was made to the combined profits. On the issue of taxing notional profit, he submitted that such an eventuality would not arise if the assessee uses to determine ALP and discloses proper profits.

55. The learned counsel for the assessee in reply submitted that internal comparables are the most preferred comparables for benchmarking the international transactions. He argued that each software service assignment is not of significant value, whether it relates to the AE or to the unrelated party and hence are comparable transactions. Similar software services were rendered to domestic customers and could be taken as a comparable. Referring to the Rules he submitted that size of the market does not refer to volume or value of transaction but is refers to nature or characteristics of the market in which the transaction are undertaken. He argued that there is no inconsistency with Rule 10B(2)(d) and Rule 10B(1)(e). He submitted that internal comparable cannot be disregarded on the basis of volume and at best adjustment may be made to eliminate the differences on account of volumes. He submitted that Rule 10B(2)(d) is more relevant to identify the external comparable companies. He vehemently contended that the computation provisions are provided in the Act and that when transaction should be compared on stand alone basis, the mechanism provided cannot be ignored and that the rule has to be followed.

56. On the contention of the learned DR that the transaction entered into with the Associated Enterprise is different from the transaction entered into by the assessee with third parties, the learned counsel for the assessee submitted that, no such exercise has been done or a finding was given by the TPO or the AO. He submitted that international transactions are rendered to the AE which in turn bills the ultimate customers and similar transactions are entered into with the third party and hence there is no functional difference. The services in both the cases are performed by similar employees possessing similar set of skills. It has also been contended that despite smaller volume the assessee has earned lower margin in the unrelated party transaction which demonstrates that the transactions with AE were at arm’s length.

57. On comparison of domestic transactions he submitted that in the case of Sony India Ltd. (supra) the Tribunal at Para 113 has upheld the use of internal domestic comparables for the purpose of benchmarking the international transactions undertaken by the assessee. Reliance was placed on the decision of Delhi Bench of the Tribunal in the case of Wrigly (India) Pvt. Ltd. (ITA No.5224/Del/2010) for the proposition that domestic transaction involving similar products can be considered for benchmarking as valid comparables. On the reliance placed by the learned DR on the same case law i.e. Wrigly (India) Pvt. Ltd., the learned counsel for the assessee submitted that the filter of wages to sales was not applied either by the TPO or by the assessee in that case. It was on the employee cost of some of the comparable companies that was considered on case to case basis to differentiate companies engaged in software development from the companies engaged in trading of software. On reliance placed on Sony (India) Ltd. he submitted that the Tribunal observed that losses are normal business instances and that comparable companies cannot be rejected merely on the basis that it has incurred loss. On Sap Labs (India) Pvt. Ltd. and Quark Systems Ltd., he submitted that the Tribunal held that extreme cases cannot be considered. On reliance placed on the decision of Mentor Graphics (supra) it was submitted that the Tribunal objected to the use of future data only because the TPO was drawing inferences merely on the basis of assumptions and surmises. In the case of ADP Pvt. Ltd. (supra) he submitted that the case is distinguishable for the reason that the assessee is using data of subsequent years only for the purpose of analyzing the trend of turnover and profitability of the comparable companies just to demonstrate that such companies are not suffering from any extra-ordinary circumstances. On Honeywell (supra) the provisions for future loss made, was held as that which cannot be considered for the purpose of computing the operating margin. On Intellinet Technologies India Pvt. Ltd. v. ITO (ITA No.1267/Bang/2010) the Tribunal held that single customer risk is a hypothetical risk and the risk faced by the comparable companies is actual risk and therefore, adjustment to account for differences in risk is more than that. In the case of Gharda Chemicals (supra) he submitted that the argument of the assessee is that Transfer Pricing provisions are meant only to allocate the profit earned by the multinational groups from transactions with their associated enterprises whereas the contention of the assessee in Gharda Chemicals was on different footing i.e. even if the higher price charged from the AE, there was no change in the overall tax incidence of the group.

58. In the case of Global Vantage (supra) it only shows that adjustments cannot exceed total revenues and there is no concept of sharing revenue and only profit split is possible. He pointed out that the Tribunal upheld the findings of the CIT(A) that while making such analysis appropriate compensation should be apportioned to the AE for the functions performed by them.

59. We now take up ITA No.5680/Del/2011 for the A.Y. 2007-08. The learned counsel for the assessee submitted that grounds No. 1 & 2 are general in nature. Grounds No. 2.4 to 2.19 are issues relating to selection of comparables which company comparable viz. and arguments would be the same. Grounds No.2.20 to 2.25 are similar to the grounds raised in earlier assessment year and both the parties admitted that arguments remaining the same, no separate submissions are required. Grounds No.2.1 to 2.3 are against rejection of internal comparison for benchmarking. The learned counsel for the assessee submitted that during this year 15% of the turnover related to uncontrolled transactions with the third parties which are export sales. It was pointed out that the export turnover to AE was 15.51 crores whereas export to unrelated parties was 2.45 crores. It was further pointed out that domestic turnover with unrelated parties was 1.47 crores. The learned counsel argued that 25% of the turnover being uncontrolled transactions with third parties was, under the given circumstances, the best comparables. He pointed out that the TPO as well as the DRP followed their respective orders of the earlier years and have not examined the comparability of the transactions. He pleaded that in the current year the argument that the transactions are miniscule and economically insignificant cannot stand.

60. The arguments on comparables are as follows –

Re: Companies inappropriately selected by the TPO as comparable (ground No.2.4 – 2.18)

Sl. No.

Company Name

OP to Total Cost %

Reasons for rejection

Ref. Pg. no

1.

Avani Cimcon Technologies Ltd.

50.29

• Earning extraordinary profits.

2.

Celestial Labs Ltd

58.35

• Employee cost only 23.36% of sales. Does not satisfy the filters applied by the TPO.• Rejected by the DRP in assessment year 2008-09 in the case of Interra Infotech, a sister concern of the appellant and engaged in provision of identical services.

Pg 244, 248, 251

• Functionally not comparable, engaged in IT & ITES, Biotechnology and manufacturing business.Segmental results of IT division are not available.

• Even within the software domain, the company is primarily a software product company. It owns proprietary products such as Cell vision, CLL TOX etc.

• Super normal profit.

250

3.

Flextronics Software Systems Ltd. (Seg.)

25.31

• very high turnover of Rs.665 cr. Which is 33 times the turnover of the assessee.• also deals in software products.

Pg 253 & 265

4.

Infosys Technologies Ltd.

40.30

• Very high turnover of Rs.13,655 Cr which is 680 times the revenue of the appellant.• also deals in software products.

Pg 289

5.

KALS Information Systems Ltd. (Seg.)

 30.55

• deals in software products

Pg 317

6.

Mindtree Ltd.

16.90

• Very high turnover of Rs.590 Cr which is 30 times the turnover of the appellant

Pg 322

7.

Persistent Systems Ltd.

24.52

• Very high turnover of Rs.286.96 Cr which is 14 times the turnover of the appellant.• Deals in software products.

Pg 343, 351

8.

Sasken Communication Technologies Ltd. (Seg.)

22.16

• High Turnover of Rs. 366.31 Cr which is 18 times the turnover of the appellant.

Pg 372

9.

Tata Elxsi Ltd. (Seg.)

 26.51

• Turnover is 262.58 crores, which is 13 times the turnover of the appellant.

Pg 411

10.

Wipro Ltd.

 33.65

• Very high turnover of Rs.10,898 Cr which is 545 times the turnover of the appellant. Undertake significant research development.

Pg 424

11.

Megasoft Ltd.

60.23

• Super normal profit

12.

E-Zest Solutions Ltd.

 36.12

• Data for the company not available in public domain.

13.

Ishir Infotech Ltd.

30.12

• Data not available in public domain.

14.

Thirdware Solutions Ltd.

25.12

• Data not available in public domain.

15.

Helios & Matheson Information Technology Ltd.

36.63

• Revenue of Rs.183.50 Cr which is 12 times the turnover of the appellant.

Pg 436

After rejecting the aforesaid companies from the final list of comparables, the following companies are left as comparable.

Sl. No.

Company Name

OP to Total Cost%

1.

Accel Transmatic Ltd. (Seg.)

20.9

2.

Datamatics Ltd.

1.38

3.

IGate Global Solutions Ltd.

7.49

4.

LSG Global Ltd. (Lanco Global Solutions Ltd.)

15.75

5.

Lucid Software Ltd.

19.37

6.

Mediasoft Solutions Ltd.

3.66

7.

Quintegra Solutions Ltd.

12.56

8.

R.S. Software (India) Ltd.

13.47

9.

R. Systems International Ltd. (Seg.)

15.07

10.

Geometric Ltd.

10.71

11.

SIP Technologies & Exports Ltd.

13.9

Average

12.20%

Appellant

8.18%

Re: Exclusion of companies identified as comparable by the assessee (ground 2.15 & 2.16):

It was submitted that the TPO has wrongly excluded the following companies from the list of the comparable companies identified in the fresh search by the assessee company:

S. No.

Companies Remarks Page Number

1.

 VMF Soft tech Limited The TPO has rejected this company on the basis that the company is predominantly outsourcing it’s work and it fails the employee cost filter. However, the ratio of employee cost to revenue of this company is 54% which demonstrates the fact that it is performing significant functions in-house through it’s own employees. Pg 453

2.

Vision Computech Integrators Limited  Related party transaction is in excess of 25% – However, actual RPT is 23.15% Pg 461 & 474

In view of the aforesaid, it was submitted that VMF Softech and Vision Computech satisfies all the filters of TPO and should be considered as comparable for the purpose of benchmarking the international transactions of the assessee. In respect of cases of Celestial Labs Ltd. and Megasoft Ltd. It was contended that these companies are making super normal profits and hence, cannot be taken as comparables for the purpose of benchmarking. The assessee also disputed rejection of comparables by the TPO on the basis that they rendered on sight service which is inappropriate.

61. The learned DR on the other hand, controverted these submissions by arguing that in the case of internal comparables the submissions made for the assessment year 2006-07 have to be considered. He submits that though the volumes are not as miniscule as in the previous year, the fact remains that the nature of transactions is not the same. He again repeated his argument that the AE ex-value to the product given by the assessee and thereafter delivers the same to the ultimate customers and whereas in the case of direct sales to third parties no value addition is done. On the issue of inclusion and exclusion of comparables the learned DR relied on the order of the TPO as well as DRP and disputed the submissions of the assessee.

62. Rival contentions heard. On a careful consideration of contentions of both the parties and on perusal of papers on record as well as case laws cited, we hold as follows –

At Page 1 of this order we have extracted the nature of business of the assessee company, as given in the Transfer Pricing Report and as understood by the Revenue authorities. The claim of the assessee that it is engaged in the business of rendering low end software maintenance services, in its arguments before us, is contrary to the facts. No doubt the assessee stated that it had made claim before the TPO in one of its letters that it is a low end software maintenance service company. But the claim is contrary to the T.P. report filed by the assessee. The nature of business and the type of transactions are of great importance in adjudicating the transfer pricing matters. Such contrary claim made loosely cannot be countenanced.

63. Now we consider certain propositions relied on by the assessee.

The assessee in this case relied on more than 15 case laws for emphasizing its claim. Case laws are cited and it is claimed that the ratio laid down by coordinate Benches have to be followed. The Revenue also relied upon more than 20 decisions either for contradicting the claims of the assessee on certain propositions or for supporting the line of argument adopted by the TPO as approved by the DRP.

64. While arguing the case none of the parties have spoken about the nature of business and the nature of transactions in each of these case laws cited by them. The decision given in those cases or the observation made have to be referred to and it is claimed that they have precedenciary value. In Transfer Pricing our understanding is that the law and the rules have been prescribed and all the decisions cited by the parties were adjudicated based on the facts of each case. It is well settled that reliance should not be placed on decision without discussing the factual situation and as to how it will fit in. These are not legal principles, in the sense that it does not involve interpretation of law. Picking up samples or comparables, stating that in a given situation a particular methodology should be adopted for benchmarking a transaction or coming to a conclusion that particular method is most appropriate method etc. are not legal interpretations but only solution found by the Bench, in its own wisdom, given a certain fact situation. It is difficult to have a case where the functions, assets and risk situation are same as the case decided subsequently. Seldom two business models are the same. Quoting these case laws and relying upon them as if they have laid down binding legal precedence, to our mind is not only wrong but even misleading. Even in following a binding legal precedence, the Courts have cautioned that what has to be seen is whether the facts and circumstances are same. Though it is well settled, for sake of ready reference we quote following case laws:-

(i)  GVK Gautami Power Ltd. v. ACIT, 336 ITR 451 (A.P.) for the proposition that observations of Court are neither to be read as Euclid’s theorems nor as provisions of a statute and that too taken out of their context, the decision of the Court is only an authority for what is actually decides, what is the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made in it.

(iiCIT v. V.K. Ferro Alloys Industries P. Ltd., 299 ITR 191 (A.P.) for the proposition that observations in a judgement cannot be read out of context as laying down the law and must be examined in the light of the facts.

(iii)  CIT v. Baroda Peoples Co-operative Bank Ltd., 280 ITR 282 (Guj.) for the proposition that A decision takes its colour from the question involved, the scope and authority of a precedent should not be expanded beyond the needs of a given situation, mere casual expression carry no weight at all, nor every passing expression of a judge can be treated as an excathedra having the weight of authority (p. 298) 2003 7SCC 197); a decision not expressed, not accompanied by reasons cannot be deemed to be a law so as to have binding effect.

(iv)  Vinay Extraction P. Ltd. v. Vijay Khanna, 271 ITR 450 (Guj.) for the proposition that Court should not place reliance on the decisions without discussing how factual situation fits in, they are not to be read as Euclid’s theorems nor the observations therein as provisions of statute, observations must be read in the context in which they appear, one should avoid the temptation to decide cases by matching the colour.

(v)  Ajanta Pharma Ltd. v. ACIT, 267 ITR 200 (Bom.) for the proposition that no judgement can be read as statute, every decision is an authority for what it decides.

(vi)  S. Shanmugavel Nadar v. State of Tamil Nadu & Another, 263 ITR 658 (SC) for the proposition that for a declaration of law there should be a speaking order, a decision which is not expressed & is not founded on reasons nor on consideration of the issues cannot be deemed to be a law declared, to have a binding effect under article 141; a summary disposal by the SC, without laying down any law, is not a declaration; when no reasons are given, dismissal simpliciter is not a declaration of law by SC.

(vii)  Dr. Nalini Mahajan v. Director of Income-tax (Inv.), 257 ITR 123 (Delhi) for the proposition that a decision is only an authority for what it decides and not what can logically be deduced therefrom; even a slight distinction in facts may make lot of difference in decision making process; a point never considered in a decision shall not be an authority therefor.

(viii)  Gujarat Co-operative Bank Ltd. v. CIT, 250 ITR 229 (Guj.) for the proposition that for SC’s decision to be law has to be declared or stated vocally to support conclusion, not mere conclusion by which case is disposed of.

(ix)  CIT v. Sun Engineering Works P. Ltd., 198 ITR 297 for the proposition that it is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the complete “law” declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes its colour from the question involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court to support their reasonings.

(x)  Jaganmohan Rao (V.) v. CIT, 75 ITR 373 (SC) for the proposition that Picking up word/sentence from judgment divorced from context not permissible, to be read as a whole.

65. Hence, while adjudicating transfer pricing cases, we are of the opinion that there is no legal binding precedence on the issue of selection of most appropriate method, selection of comparable companies, selection of comparables transactions for benchmarking etc. as these are fact based and vary from company to company. Relying on precedence for each and every factual argument to drive home the point of the counsels, when facts are not at all similar is causing unnecessary clogging of the system resulting in slower delivery. We suggest that the law and the rules be applied first, arguments be based on them and broad proposition relied upon when situations warrant.

66. Hence, in transfer pricing cases the parties should devote much time to the nature of the companies’ business operations, nature of transactions, FAR analysis, study and method of choosing comparables etc. The logic or reasons behind selection of comparables for benchmarking and supporting these studies should be based on the Act and Rules rather than picking up orders of the different benches on the ground that they are precedent, without reference to the facts and nature of transactions. It should be understood that businesses are so varied and no two transactions are similar. Business models followed by the AEs and assessees are different. Geographical locations are different. We had to say this because in recent times, in the matter of transfer pricing adjudication, huge paper books running into thousands of papers filed and whereas the references made to only to a few pages. Numerous case laws are being relied upon though it is common knowledge that in transfer pricing they cannot be a precedent on facts and that the decisions are based on the particular facts. At best these case laws can be referred to for broad proposition on a given fact situation. Very few case laws are on the interpretation of law. In such cases we are bound by the legal proposition laid down therein.

67. Now we consider some other contentions of the assessee before we come to the aspect of rejection of internal comparables. Mr. Ajay Vohra argued that the transfer pricing adjustment at best cannot exceed the amount of margins retained by the assessee as well as the A.E. In other words, he states that the transfer pricing adjustment cannot exceed the total profits earned by the group, as it would result in taxation of notional income. Reliance was placed on the judgment of the Delhi High Court in the case of Sony India Pvt. Ltd. and other case laws. He urged the Bench to lay down this proposition with as many caveats or conditionalities as the Bench may deem proper.

68. In our considered view no such proposition can be laid down, as it would be against the law. Neither the Act nor the Rules provide for such capping of the adjustment. Such an exercise is not permissible under the Transfer Pricing provisions but also, it is not practical as the profits of the entire group are not subject to scrutiny of the Indian authorities. Multinationals have innumerous types of business and have multiple locations with multiple AEs and to lay down such a proposition would make the transfer pricing provisions unworkable. Under the Indian law, the T.P.O. is given a mechanism to determine ALP and make an adjustment. Such power is not subject to the acts of the assessee or it’s A.E. in different jurisdiction. Transfer Pricing Adjustment by the Revenue Officer of other jurisdiction have no bearing on the decision, that Indian authorities have to take under the Indian law.

69. Even otherwise, if the case of the assessee is that the profit of a transaction should be allocated to different jurisdictions, then profit-split method has been prescribed under the Rules and it is open to the assessee to follow it as the most appropriate method. When the rules gives the assessee a method whereby it can address its concerns, then it is not correct to ask for laying down of such a proposition. Coming to the decision of the Hon’ble Delhi High Court in the case of Sony India Pvt. Ltd. (supra) the philosophy or concept behind the Transfer Pricing as stated by the Hon’ble Finance Minister in the Budget Speech was culled out by the Court. The Hon’ble High Court has nowhere stated that the transfer pricing adjustment should be restricted to the combined profits earned by the entire group minus the profits already offered to tax in different jurisdictions. Hence this argument of Mr. Vohra is hereby rejected as devoid of merit.

70. The decision of Bangalore Bench of the Tribunal in the case of Philips Software Centre (P) Ltd., 26 SOT 226 cannot be followed in view of the law laid down by Larger Bench of the Tribunal in the case of Aztec Software.

71. Coming to the decision of Delhi Bench of Tribunal in the case of Kyungshin Industrial Motherson Ltd. v. DCIT (ITA No.1396/Del/2009), it is peculiar to its facts and is not applicable to the facts of the case.

72. In the case of Global Vantedge P. Ltd. (supra) the proposition was that the adjustment cannot exceed the gross amount that the A.E. receives on such transactions. In other words the combine profits cannot exceed the combined Gross receipts. Similarly in the case of Li & Fung (India) Pvt. Ltd. v. DCIT (ITA No.5156/Del/2010), on those set of facts the Tribunal said that adjustment cannot exceed the amount received by associated enterprises. This is not the case here. It is not the case of the assessee that combined profits of the assessee as well as the A.E. exceed the Gross receipts from the transactions by the A.E. Hence these case laws are not applicable.

73. In both these cases, it is nowhere stated that the adjustment should not exceed the combined profits of the group entity. When Transfer Pricing Study is done with appropriate comparables by adopting the most appropriate method, the question of Transfer Pricing adjustment being more than gross receipts from a transaction simply does not arise. The assessee as well as the Revenue authorities are bound to determined the ALP by applying the law and rules laid down and cannot be guided by extraneous parameters.

74. If the proposition of the assessee is accepted, then it would result in a situation where, when an Indian authority decides on the Transfer Pricing adjustment by fixing the arm’s length price and because the Revenue authorities of the other country in which the A.E. is situated decide to tax that entity on a particular ALP, then the arm’s length price arrived at by the Indian authorities by applying the law would require to be disturbed, which in our opinion is not correct as it is not permitted by the law. For all these reasons, this plea of the assessee is dismissed as devoid of merit.

75. The other contention of the assessee that the Transfer Pricing adjustment should not be made for the reason that the income of the assessee company is exempt under sec. 10A of the Act and hence there is no motive to divert profit, has to be rejected by applying the judgment of the Special Bench of the Tribunal in the case of Aztec Software (supra).

76. Coming to the claim for risk adjustment on the ground that the assessee is a captive service provider, we find that no such adjustment was claimed by the assessee in the Transfer Pricing Study. Only when the TPO sought to make a transfer pricing adjustment, the assessee has come out with this claim of being a captive service provider and hence an adjustment has to be given. The contra argument of the Revenue that being a dependent enterprise results in greater risk cannot be brushed aside. Being dependent on only one source for work is a risk factor to be considered. Higher risk means higher price. Before we go into the issue as to whether such an adjustment can be provided, we are of the opinion that any claim for adjustment, on the basis of risk or any other factors, has to be based on proper data and sound calculation. Ad hoc adjustments should not be granted as it becomes discretionary. The adjustment cannot be used to leverage the desired results, so as to prove or disprove that the assessee’s claim that its transactions with the AE are at arm’s length. In most of these cases the object sought to be achieved is determining the means by way of claims of various adjustments. Rarely such adjustment claims are based on Robust data. The arguments of both the parties on this issue have already been recorded by us and both these contradictory arguments have good weightage. The debate as to whether a captive service provider has lesser risk or a higher risk cannot be adjudicated by us in the absence of sufficient material. These are all subjective matters, in which one view cannot only be said to be correct. Much depends on the facts of the case and the material evidence furnished. Hence, we reject the claim of the assessee on the ground that the same is not supported by proper data and material, without going into the issue as to which argument on risk adjustment made by each of the party is correct.

77. On the argument that the TPO has not made any adjustment in the earlier years and on the principle of consistency no adjustment should be made, we find that the Transfer Pricing Officer in the A.Y.2005-06 has not exercised his mind in the lines and in the manner in which the TPO has done in this year. The material available with the TPO in the current year is vastly different to the material available with the TPO in the earlier year. In such circumstances, the principle of consistency does not hold water. No doubt it is desirable that the Revenue Authorities be consistent but in cases where the subsequent officer is able to gather further material, which would require him to decide in a way different from the decision taken by the AO in the earlier year, who did not have the benefit of such material, and when the analysis of the material is different, then in our view he is permitted to do so. There is no res judicata in the Income-tax Proceedings. The principle of consistency also has its limitations and cannot be applied across the board. The fact situation has to be seen. The ld. Counsel for the assessee has not demonstrated as to which particular conclusion of the previous TPO or AO was viewed in an opposite manner by the current T.P.O. It is a case of non application of mind by the previous T.P.O. on some issues. Hence this argument is rejected.

78. Coming to the argument that the service is a low end software maintenance service and combined profitability is low and hence the ALP is correct, we have already pointed out that there are factual contradictions in the assessee’s submissions and its own Transfer Pricing Report. Hence, this argument is rejected.

79. On the claim of adjustment of low capacity utilization or in other words, for the idle capacity, we find that in the Transfer Pricing Study the assessee has not made any such adjustment. The assessee follows cost plus method of billing it’s AE. It is not known as to how the costs are arrived at. On the utilization of man power, the fact whether there was assured volumes and the decision as to who bears the cost of idle capacity etc. are not stated. In the absence of such details and data, the question of granting adjustment on the ground of idle utilization of capacity does not arise. The findings of the T.P.O. on this issue based on broad parameter are upheld. The assessee is required to support its claim for any adjustment with robust data and full details and evidences so as to enable the TPO to examine the claim. The burden is on the assessee whenever it makes a claim and in this case, it has not discharged the burden of proof. These adjustments are being claimed only when adjustments are proposed by the T.P.O. in a Ad-hoc manner. If the claim was correct, then it should have been made in the T.P. Study itself and not, only to meet the goal of A.L.P.

80. We now consider the issue whether internal comparables has to be taken and if not as to whether the selection of comparables when external comparables are taken is correct or not. Before we go into the issue, we first deal with some of the general propositions relied upon by both the parties. Coming to the internal comparables, the assessee argued that under the rules the margin of the single transaction has to be compared to the margin of another transaction, or at best the group of similar transactions and under those circumstances, the volume is not criteria for rejecting the internal comparables. Reliance was placed on Rule 10B(1)(e) and on the decisions of Mumbai Bench of the Tribunal in the case of Technimount ICB Pvt. Ltd. v. ACIT (ITA No.4608 & 5085/Mum/2010) as well as UCB India (P) Ltd. v. ACIT, 30 SOT 95 (Mum.). The Revenue relies on Rule 10B(2)(d). The learned DR also gave an extreme example of one lac ton of Tea sold being compared with 1 Kg. of sample Tea given as a sample.

81. In our considered opinion the requirement of transaction margins being compared at a transaction level or at the level of a class of similar transactions, does not warrant comparing miniscule transactions with large transaction for the purpose of benchmarking. Benchmarking of transactions at the transaction level does not warrant ignoring the fact of materiality. The facts and circumstances of each case has to be seen. At the same time reliance placed by the learned DR on Rule 10B(2)(d) is not correct as the same does not apply to the factual situation. This Rule refers to external conditions and not to the miniscule nature of the comparable uncontrolled transactions. Rule 10B(1)(e) relied upon by the assessee also does not come to its rescue as the Rule does not lay down as to which transaction can be taken as a comparable uncontrolled transaction for the purpose of benchmarking the net profit margin with the controlled transaction. Thus the reasoning of both the parties on the issue does not fit into the facts of this case and has to be rejected.

82. Having said so we find in the assessment year 2007-08, the assessee has uncontrolled comparable transactions with third parties in export segment to the tune of 15% of total turnover. Further, it has uncontrolled transactions with the third parties in the domestic sector to the tune of 10% of the total turnover. Thus the uncontrolled transactions are significant part of total turnover of the assessee. The argument of the TPO for both the years is that the comparable is miniscule in nature and fails on the comparability of volumes or scale of operation. This argument and finding of the TPO is factually incorrect for the A.Y. 2007-08. 15% of the total turnover, in our opinion is sufficient sample which can be used for the purpose of benchmarking provided the transactions are functionally comparable. Even domestic uncontrolled transactions are about 10%. In case the transactions are functionally comparable these transactions can be used for benchmarking. Though the learned DR argued that the transactions are not comparable, we find that the TPO has not examined this aspect and has rejected the internal comparables on the ground of less volumes and economics of scale. Functional analysis has not been done at the transaction level. Hence for the A.Y. 2007-08, internal comparables have to be examined in the light of our above observation.

83. In view of the above discussion, we are of the considered opinion that ends of justice would be met if the issue is set aside to the AO/TPO to consider the internal comparables given by the assessee and arrive at a fresh decision on the matter for the Asst. Year 2007-08. The nature of transactions and the functions in these transactions have to be examined. In case there are variations, we direct the Transfer Pricing Officer to make suitable adjustment and arrive at an appropriate arm’s length price.

84. As we have taken this decision for the assessment year 2007-08 and though the internal comparables cited by the assessee for the assessment year 2006-07 cannot be considered significant on volumes, as the internal uncontrolled transactions for both the years are with the same parties and as the volumes for subsequent years are significant and as the nature of transactions with respect to the uncontrolled internal transactions for both the years are same, for the purpose of consistency, we are of the opinion that for the A.Y. 2006-07 also similar exercise need to be done by the AO/TPO. Our view is guided by our decision taken for the subsequent year.

85. In view of our decision, we do not consider it necessary to adjudicate the numerous other arguments raised by both parties as it would be an academic exercise.

86. Thus, we set aside these additions for both the assessment years under consideration to the AO/TPO for fresh adjudication in accordance with law. As we have upheld the contention of the assessee on the issue of internal comparables being taken for the purpose of benchmarking, as clearly stated we do not adjudicate the issue of selection of internal comparables as this would be an academic exercise. Therefore, these grounds are allowed for statistical purposes.

87. Ground No.3 is against the disallowance of deduction under sec. 10A of the Act. Pages 21 to 23 are to be reproduced.

88. Ground requesting for (+)/(-) 5% adjustment in terms of Proviso to sec. 92C of the Act is dismissed as not pressed.

89. In the result, both the appeals filed by the assessee are allowed in part.

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