Transfer pricing provisions do not put any cap on number of comparable to be selected by TPO

IN THE ITAT MUMBAI BENCH ‘K’

Willis Processing Services (I) (P.) Ltd.

Versus

Deputy Commissioner of Income-tax 2(3), Mumbai

 IT Appeal Nos. 4429 & 4547 (Mum.) of 2012
[ASSESSMENT YEAR 2007-08]

MARCH  1, 2013

 ORDER

Vijay Pal Rao, Judicial Member

These cross appeals are directed against the order dated 3.4.2012 of the CIT(A) for the AY 2007-08.

2. The assessee has raised the following grounds in this appeal:

1.            Deduction under section 10A of the Act

               1.1 The learned CIT(A) erred in confirming the disallowance of the deduction of Rs. 5,24,70,604/-claimed under section 10A of the Act.

               1.2 The learned CIT(A) erred in stating that the conditions specified under section 10A(2)(ii) and (iii) of the Act are not satisfied.

               1.3 The learned CIT(A) erred in confirming that the appellant company has not computed the deduction under section 10A of the Act in accordance with the provisions of subsection (4) of section 10A of the Act.

               1.4 The learned CIT(A) erred in not providing an opportunity to the appellant company before disallowing the deduction under the provisions of section 10A(2)(ii) and 10A(2)(iii) of the Act.

               1.5 The appellant prays that the Hon’ble ITAT direct the learned Assessing Officer to delete the disallowance under section 10A of the Act.

2.            Deduction of Technical Fees and Satellite Link Charges from Export Turnover

               2.1 The learned CIT(A) erred in contending that this ground is inconsequential once the appellant company is held not eligible for the said deduction.

               2.2 The appellant prays that the learned Assessing Officer be directed not to exclude satellite charges, technical fees, interest earned on bank deposit and miscellaneous income from export turnover for the purpose of computing deduction under section 10A of the Act.

3.            Transfer Pricing Adjustment

               3.1 The learned CIT(A) erred in upholding adjustment of Rs. 7,52,20,419/- in respect of the Information Technology Enabled Services (“ITES”) rendered by the appellant u/s. 92CA(3) read with 92C(3) of the Income Tax Act, 1961 (“the Act”).

               3.2 The learned CIT(A) erred in holding that the transactions entered into by the appellant with its Associated Enterprises (“AEs”) were not at arm’s length.

               3.3 The learned CIT(A) erred in rejecting the benchmarking analysis performed by the appellant;

•             The learned CIT(A) erred on the facts and circumstances of the case and in law, in partially rejecting the search process methodology followed by the appellant on erroneous grounds and conducting a new search process.

•             The learned CIT(A) erred in rejecting the independent comparable companies selected by the appellant in its transfer pricing study report without providing any adequate reasons.

               3.4 The learned CIT(A) erred in upholding that the fresh search process conducted by the Transfer Pricing Officer (“TPO”) is appropriate without appreciating the facts that there was no adequate reasons/need for conducting a new search process by the TPO. The range of comparable companies, 8 comparable companies, even after rejecting 3 comparable companies was adequate.

               3.5 The learned CIT(A) erred in upholding the inappropriate benchmarking analysis adopted by the TPO;

•             The learned CIT(A) erred in confirming the undertaking of fresh comparable companies search analysis which is against requirement under Rule 10D(4), that contemporaneous documentation as alone can be considered.

•             The learned CIT(A) erred in law in not appreciating that, in conducting the fresh comparability analysis, the learned TPO has used the data which was not available as on the specified date (as defined in Section 92F(iv) of the Act).

•             The learned CIT(A) erred in confirming that the learned TPO had not violated the rules of natural justice by not providing/sharing the complete details of the benchmarking analysis carried out by him.

•             The learned CIT(A) erred in confirming TPO’s stand in applying the filters adopted in the fresh search.

               3.6 The learned CIT(A) disregard of Rule 10B(2) and Rule 10B(3) of the Income Tax Rules, 1962;

•             The learned CIT(A) erred in law and facts in disregarding the comparability factors specified under Rule 10B(2) of the Income-tax Rules, 1962 [‘the Rules’] and the provisions contained in Rule 1 OB(3) of the Rules which specifies that an adjustment should be made to account for differences between the transactions that may materially affect the price of such transactions.

•             The learned CIT(A) erred in not considering the additional evidence relating to the grant of working capital adjustment on the margin of the comparable companies proposed by the TPO and which was granted to the appellant by the TPO in AY 2006-07.

•             The learned CIT(A) erred in disregarding the differences in risk profile of the appellant (being a captive service provider) and the alleged comparable companies selected by TPO, by not allowing the risk adjustment made by the appellant.

               3.7 The learned CIT(A) erred in not appreciating the fact that the margin earned by the appellant is reflective of the services rendered by a contract service provider.

               3.8 The learned CIT(A) erred in confirming the selection of final comparable companies, selected by the TPO, without considering the differences in functional, risk and assets profile of the comparable companies vis-à-vis the appellant.

               3.9 The learned CIT(A) erred in confirming the rejection of the use of multiple year data for computing the cost plus margins of the comparable companies.

               3.10 The learned CIT(A) erred in not appreciating the fact that the TPO has taken recourse to the provisions of Section 133(6) of the Act for the purpose of ascertaining and identifying companies for comparability analysis.

               3.11 The learned CIT(A) erred in not allowing the standard deduction of 5% as per the proviso to the section 92C(2) of the Act.

               3.12 The learned CIT(A) has erred in not appreciating that the appellant is an entity registered under the Software Technology Parks of India (STPI) scheme and claims tax benefits under section 10A of the Act and has no reason to suppress its profits from its operations to manipulate the transfer prices.

               3.13 The learned CIT(A) erred in not granting reasonable and adequate opportunity of being heard to the appellant.”

3. Ground no.1 is regarding denial of deduction u/s 10A.

3.1 The assessee company is engaged in the business of processing information relating to insurance claims received from Trinity Processing Services Ltd. (TSPL). Thus, the total income earned by the assessee is from the services rendered to TPSL, UK. During the year under consideration, the assessee claimed deduction of Rs. 5,24,70,604/- u/s 10A of the IT Act. The Assessing Officer noted from Form No.56F that the assessee has computed the deduction u/s 10A with reference to the number of employees as it was done in the last year and not as prescribed in sub. Sec. (iv) of sec. 10A of the Act. Thus, the Assessing Officer has observed that the claim is not in accordance with the provisions of sec. 10A and the same was disallowed as in the AY 2006-07. Apart from this, the Assessing Officer has also observed that the assessee has debited a sum of Rs. 50,00,615/- under the head ‘satellite link charges’ and Rs. 1.03,01,183/- under the head ‘technical service fees. The Assessing Officer asked the assessee as to why the same should not be excluded from the export turnover for the purpose of computing the deduction u/s 10A. The Assessing Officer held that the expenditure incurred towards insurance, freight, communication and expenses incurred in foreign exchange in providing the technical services outside India are to be excluded from the export turnover; but the same shall form part of the total turnover for the purpose of computation of deduction u/s 10A. Since the exclusion of technical service fee, satellite link charges, is an issue to be dealt with in ground no.2 raised by the assessee; therefore, ground no.1 is only with respect to the disallowance of deduction u/s 10A.

3.2 The CIT(A) held that the assessee does not fulfil all the conditions laid down u/s 10A(2) of the Act. Further, even the computation of so called eligible profit done by the assessee is not as per the provisions of sec. 10A(4). The CIT(A), apart from confirming the action of the Assessing Officer that the computation of the eligible profit by the assessee, is not as per the provisions of sec. 10A(4) has also held that the assessee has consolidated its SEEPZ unit at Andheri and its existing Vikroli unit. Such consolidation of existing unit would bring into existence of a consolidated unit and as such, the consolidated unit has come into existence, as a result of restructuring of business already in existence; thereby the conditions as prescribed under section 10A(2) are not satisfied.

4. Before us the ld. Sr. counsel for the assessee has submitted that the assessee had two units one at SEEPZ Andheri and other one at Vikroli. The unit at Vikroli qualifies for deduction u/s 10A of the Act for the year under consideration. The first unit of the assessee commenced business in the year 1993 and since then the deduction u/s 10A has been allowed by the Assessing Officer consistently so long it was eligible for deduction u/s 10A. The ld. Sr. counsel for the assessee has submitted that a new unit at Vikroli was set up by the assessee in the year 1999 and doing the same activity as in the first unit. The assessee claimed deduction u/s 10A for both the units for the AY 2000-01 and the Assessing Officer allowed the claim of deduction u/s 10A in respect of both the units for the AY 2000-01 onwards.

4.1 The ld. Sr. counsel has further submitted that for the AY 2004-05, the assessee claimed deduction u/s 10A only in respect of Vikroli unit. For the AY 2005-06 also the Assessing Officer has accepted the claim of deduction u/s 10A for the Vikroli unit. The employees of the first unit i.e, SEEPZ Andheri were transferred to Vikroli unit and the assessee used to reduce the claim to the extent of the employees transferred from Andheri unit to Vikroli unit w.e.f AY 2004-05.

4.2 The ld. Sr. counsel has further submitted that for the AY 2006-07, the Tribunal has allowed the claim of the assessee. He has further submitted that when the claim of the assessee was allowed in the earlier year, then the Assessing Officer cannot disallow the claim for the year under consideration. In support of his contention, he has relied upon the decision of the Hon’ble jurisdictional High Court in the case of CIT v. Paul Brother reported in 216 ITR 548 and submitted that the Hon’ble High Court has held that unless the relief granted to the assessee in the earlier year was withdrawn, the ITO could not disallow the relief granted in the subsequent years. He has also relied upon the decision of the Hon’ble Jurisdictional High Court in the case of CIT v. Western Outdoor Interactive P. Ltd. vide order dated 14.8.2010 in IT Appeal no.1150 of 2010 = (2012-TIOL-625-HC-MUM-IT)and submitted that by following the decision in the case of Paul Brothers (supra), the Hon’ble High Court has held that it is not necessary to decide whether SEEPZ was setup/formed by splitting up the first unit when the relief for the first assessment year has not been withdrawn, the ITO cannot withdraw the relief granted for the subsequent years. Thus, the ld. Sr. counsel has submitted that when the claim of the assessee was accepted for the AY 2000-01 onwards till AY 2005-06, then the Assessing Officer cannot withdraws the deduction in the subsequent years.

4.3 On the other hand, the ld. DR has submitted that the unit at SEEZP (Andheri) had been consolidated with Vikroli unit and there are no separate books of accounts maintained by the assessee for both the units after such consolidation; therefore, the deduction u/s 10A cannot be allowed to such a consolidated unit as there is no concept of highbird on the basis of which, a part of the unit can be considered as eligible and other part would be considered as not eligible. Thus, the entire claim of the assessee is liable to be rejected as held by the CIT(A). She has pointed out that the ld. CIT(A) has found that the undertaking has been formed by the assessee by restructuring of the business already in existence and therefore, the deduction u/s 10A is not available to such undertaking. She has relied upon the order of the CIT(A) and submitted that this is not the case of allocation of the expenses into the eligible and non-eligible units and then deriving the separate profits for the purpose of claiming deduction u/s 10A of the Act. In fact, there is only one consolidated unit which came into existence by reconstruction of the units already in existence and such consolidated unit was formed by even transfer of machinery previously used. The ld. DR has vehemently contended that the earlier years cannot operate as res-judicate because the new facts came into the knowledge of the Assessing Officer for the first time during the Assessment Year 2006-07 and therefore, there is no bar for deciding the issue of deduction u/s 10A on the basis of the facts came to the knowledge of the Assessing Officer.

4.4 In rebuttal, the ld. Sr. counsel for the assessee has submitted that these facts exited even at the time of first year when the claim of deduction u/s 10A in respect of the Vikroli unit. However, the Assessing Officer applied his mind and disallowed the claim for the first time only for the AY 2006-07 and this year. Therefore, the issue is covered by the decision of the Hon’ble jurisdictional High Court in the case of Paul Brothers (supra) as well as in the case of Western Outdoor Interactive P. Ltd. (supra) as well as the decision of the Tribunal for the AY 2006-07.

5. We have considered the rival submissions and relevant material on record. The Assessing Officer has disallowed the claim of deduction u/s 10A on the ground that the assessee has computed the deduction u/s 10A with reference to the number of employees which is not as per the provisions of sub. Sec 4 of sec. 10A of the Act. Thus, the Assessing Officer questioned the method adopted by the assessee for computation of the eligible profit of 10A unit on the basis of number of employees. Since no separate books of accounts are maintained for each unit one is eligible for deduction u/s 10A and another for not eligible unit.

5.1 At the outset, we note that an identical issue has been considered and decided by the Tribunal in assessee’s own case for the AY 2006-07 in para 9 to 9.3 as under:

9.            We have considered the issue. AO relied on the provisions of section 10A(4) for disallowing the entire claim under section 10A, which was being allowed in earlier years without any dispute. Provisions of section 10A(4) are as under:

               “10A(4): For the purposes of [sub-sections (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking”.

               9.1 As can be seen, it is only a method provided for arriving at the profits derived from export of articles or things of computer software and assessee has followed head count method for arriving at the export turnover and expenditure for the Vikroli unit in the absence of separate books of account. This is one of the methodologies adopted in arriving at the export turnover and the profits so as to work out the profits of the Units.

               9.2 Similar issue was considered by the Hon’ble Delhi High Court in the case of Commissioner of Income-tax v. EHPT India (P.) Ltd.   (2011-TIOL-839-HC-DEL-IT) wherein the facts are that the assessee was operating two units, one software Technological Park unit (STP), which was engaged in the development of software and its export, and the other domestic unit (non-STP unit), which was engaged in the implementation of the telecom software for vendors and customers in India. In the returns filed for the years under appeal the assessee computed the profits from the STP unit by apportioning the indirect or common expenses on the basis of the head-count of the employees working in the said unit and the domestic unit and claimed deduction under section 10A in respect of STP unit accordingly. The Assessing Officer, however, took the view that the head count basis of apportionment of common expenses was not appropriate and it resulted in more profits being shown from the STP units. He adopted the basis of turnover of respective units for apportioning the common expenses. As a consequence of re-apportionment, common expenses attributable to the domestic unit came down by Rs 40 lakhs. The Assessing Officer, therefore, disallowed Rs.40 lakhs from domestic unit and allocated to STP Unit. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer. On second appeal, the Tribunal upheld methodology adopted by the assessee and deleted the addition made by the Assessing Officer. On further appeal, the Hon’ble Delhi High Court held:

               “The fate of the appeals must depend upon the answer to the question whether the method adopted by the assessee, namely, that of apportioning the indirect expenses between the STP unit and the non- STP domestic unit on the basis of the ‘head-count’ is an unreasonable method and if it has been followed consistently by the assessee in the past and has also been accepted by the department, should the revenue authorities be permitted to disturb the same in the years under appeal. The settled position in such matters is to examine whether the method which is canvassed for acceptance is the one (a) which has been consistently accepted by both the parties, namely, the assessee and the revenue in the past; (b) which is a reasonable method having regard to the nature of the business and other relevant factors and (c) which does not distort the profits. There is no dispute that the head-count method has been consistently followed and accepted without demur in the past. A departure therefrom is sought to be made only in the years under consideration by the departmental authorities. That it is a reasonable method and fair to both sides is indicated by the conduct of the revenue authorities in accepting it in the past. The reasonableness or fairness of the method of head-count adopted by the assessee can be said to be indicated by the fact that in the assessment year 2002-03 the assessee apportioned more common expenses to the STP unit, thereby reducing its profits and consequently reducing the claim for deduction under section 10A and at the same time offering a higher income in the domestic unit than what would have been offered had the turnover method of apportionment adopted by the Assessing Officer been followed.

               It was only as a matter of principle that the Commissioner (Appeals) upheld the method adopted by the Assessing Officer even though the result was in favour of the assessee. Neither the Assessing Officer nor the Commissioner (Appeals) has raised any serious questions about the validity of the head-count method adopted by the assessee nor have they pointed out any commercial accounting principle or accounting standard that repudiates the method. [Para 8]

               Section 10A provides for deduction for profits derived from the export of software for a period of ten years. During the period of tax-holiday, it is desirable that the same method of computing the profits of the STP unit is adopted so that any distortion is avoided. It is not to be understood as laying down a proposition that in all cases arising under section 10A, where the question of apportionment of common/indirect expenses between the taxable and the exempt units arises, the head-count method is the most appropriate method. The question will have to depend, in the very nature of things, on the nature of the business and the facts of the particular case. Instant decision is confined to the facts of the present case. In the instant case, there is no finding by the revenue authorities that by adopting the head-count method which was hitherto being accepted by them there was a distortion of the profits nor have they said that the headcount method of accounting is not the correct method of accounting. All that they have said is that in their opinion the turnover basis of apportionment of the expenses is more logical and needs to be applied. In the instant case, the Assessing Officer has accepted the head-count method adopted by the assessee in the past but has rejected it only for the years under appeal. This would disturb or distort the profits. The question whether the head-count method is the most appropriate method has been raised by the Assessing Officer in the course of the assessment proceedings and it has been stated by the assessee that though the turnover basis preferred by the Assessing Officer may be more suited to manufacturing businesses, in the case of service industry such as the assessee’s case the headcount method would be more appropriate to be followed for the purpose of apportioning the indirect expenses. It appears to be a plausible view, though it can possibly also be a debatable view. But merely because there can be more than one method of apportioning the common expenses between the STP and domestic units it cannot be said that the method of head-count followed by the assessee should be discarded, that too mid-way, even though it was not questioned at any time in the past.

               The provisions of sub-section (4) of section 10A, relied upon by the Assessing Officer, apply for the purpose of segregating the profits of the business into export profits and domestic profits. It is a statutory formula for ascertaining what are profits derived from the export of the eligible items. It has to be read with sub-section (1). It says that the export profits have to be apportioned on the basis of the ratio which the export turnover bears to the total turnover of all the businesses of the eligible undertaking. The instant case is not concerned with sub-section (4). That sub-section will apply when the combined profits – profits of the exempt unit and those of the non-exempt unit – have been ascertained; the next step will be to apportion them on the basis of the ratio which the export turnover bears to the total turnover. Instant case is concerned with the stage before that. Instant case is concerned with the method by which the indirect or common expenses – expenses which are incurred for both the exempt and taxable units – are to be apportioned between the two units. To apply the formula prescribed in sub-section (4) may be appropriate in a given case considering its peculiar facts. But applying the same formula to all cases of apportionment without having regard to the history of assessments and other relevant factors may not be justified.

               In a case where alternative methods of apportionment of the expenses are recognized and there is no statutory or fixed formula, the endeavour can only be towards approximation without any great precision or exactness. If such is the endeavour, it can hardly be said that there is an attempt to distort the profits. On the contrary, distortion of profits may arise if the consistently adopted and accepted method of apportionment is sought to be disturbed in a few years, especially in a case such as the instant one where the deduction under section 10A is available over a period of ten years and only in some years the method of apportionment of income is disturbed. In other words, there is no ‘just cause’ made out for abandoning the past method.

               The appeal filed by the revenue is accordingly dismissed.

               9.3 Respectfully following the above principles laid down, we are of the opinion that there is no need to disturb the method of apportionment of expenditure and turnover which were accepted by AO in earlier years. Assessee is eligible for deduction under section 10A and the reason for disallowing entire claim cannot be accepted. Even the DRP was not correct in rejecting the assessee objection stating that the issue is pending before the ITAT, the fact of which is not correct. However, in the anxiety of disallowing the entire claim, AO has not examined the apportionment of export turnover and expenses of units. Therefore, as this aspect was not examined by AO, for examination of the actual apportionment and arriving at the profits of the units the matter is restored to the file of AO. AO is free to examine the issue of deriving at the profits of eligible unit. While considering, the submissions with reference to the non-claiming of deduction on employees transferred from SEEPZ to Vikroli should also be examined. Assessee should be given due opportunity. We make it clear that the deduction of claim under section 10A is eligible on Vikroli unit and AO is only directed to examine the quantum of deduction. This quantum of deduction may also depend on the issues in other grounds which are dealt with later. The ground No.1 is considered allowed.”

5.2 Thus, it is clear that for the Assessment Year 2006-07, this Tribunal has held that the Assessing Officer is not justified in rejecting the claim of the assessee for deduction u/s 10A. However, the Assessing Officer has not examined the apportionment of export turnover and expenses of the units and accordingly, set aside the issue to examine the quantum of deduction after examination of the actual apportionment and profit of the units eligible for deduction u/s 10A and non eligible unit respectively.

5.3 The CIT(A) has added one more reason for disallowance of the deduction u/s 10A that the assessee does not fulfil the condition as laid down u/s 10A(2) of the I T Act because the assessee has consolidated two existing units into one and thereby a consolidated unit came into existence by reconstruction of the already existing unit. Thus, the CIT(A) has made out a case that two existing units; one eligible for deduction u/s 10A; and another non eligible unit were consolidated and by virtue of this consolidation, the new consolidated unit came into existence by reconstruction of the existing unit. Hence, it violates the conditions as prescribed under 10A(2)(ii)&(iii) of the Act.

5.4 There is no dispute on the legal proposition on the issue of denial of the deduction, if the deduction was allowed in the first year, then for the subsequent Assessment Year, the Assessing Officer cannot disallow the claim of the assessee without disturbing the order of the earlier year, more specifically first year, when eligibility of the new establishment/unit has to be tested.

5.5 The Hon’ble jurisdictional High Court in the case of Paul Brothers (supra) has observed and held in paras 3 to 6 as under:

“3. The Tribunal allowed the appeals. It held that : (i) since the assessment order for the year 1981-82 was merged in the appellate order, revisional jurisdiction could not be exercised ; (ii) the Assessing Officer’s order based on a binding decision of the High Court could not be interfered with in revisional jurisdiction ; (iii) unless deductions allowed for the assessment year 1980-81 on the same ground were withdrawn, they could not be denied for the subsequent years.

4. That in view of the merger of the Income-tax Officer’s order for the assessment year 1981-82 in appeal, revisional jurisdiction could not be exercised is a settled position having been concluded against the Revenue by several decisions of this court including CIT v. P. Muncherji and Co. [1987] 167 ITR 671.

5. The Calcutta High Court in the case of Russell Properties Pvt. Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 and the Allahabad High Court in K. N. Agrawal v. CIT [1991] 189 ITR 769 have held that where the Income-tax Officer’s order is passed on the basis of a binding decision, revisional power under section 263 cannot be exercised to undo the said order. The Income-tax Officer is a quasi-judicial authority and the principle laid down is sound. We endorse the same.

6. Either in section 80HH or in section 80J, there is no provision for withdrawal of special deduction for the subsequent years for breach of certain conditions. Hence unless the relief granted for the assessment year 1980-81 was withdrawn, the Income-tax Officer could not have withheld the relief for the subsequent years. [See Gujarat High Court decision in the case of Saurashtra Cement and Chemical Industries Ltd. v. CIT [1980] 123 ITR 669].”

6. Following the decision in the case of Paul Brothers (supra), the Hon’ble High Court has again reiterated the legal proposition in the case of CIT v. Western Outdoor Interactive P. Ltd. (supra) in para 6 as under;

“(6) We have considered the submissions. We find that the submissions made by Mr. Pardiwalla on the basis of the decision of this Court in the matter of Paul Brothers (supra) and Director of Information Pvt. Ltd. (supra) merits acceptance. Therefore, in this case, it is not necessary for us to decide whether SEEPZ unit was set up/formed by splitting up of the first unit. In both the above decisions, this Court has held that where a benefit of deduction is available for a particular number of years on satisfaction of certain conditions under the provisions of the Income Tax Act, then unless relief granted for the first assessment year in which the claim was made and accepted is withdrawn or set aside, the Income Tax officer cannot withdraw the relief for subsequent years. More particularly so, when the revenue has not even suggested that there was any change in the facts warranting a different view for subsequent years. In this case for the assessment years 2000-01 and 2001-02 the relief granted under Section 10A of the Act to SEEPZ unit has not been withdrawn. There is no change in the facts which were in existence during the assessment year 2000-01 vis-a-vis the claim to exemption under section 10A of the Act. Therefore, it is not open to the department to deny the benefit of Section 10A for subsequent assessment years i.e. assessment years 2002-03 and 2003-04 and 2004-05. Besides that, on consideration of the facts involved both the Commissioner of Income Tax (Appeals) and the Tribunal have recorded a finding of fact that the SEEPZ unit is not formed by splitting up of the first unit.”

7. Thus, it is clear that, if the claim of the assessee was allowed for the first year, then without withdrawing the claim granted for the earlier AY, the revenue cannot deny the benefit of sec. 10A of the subsequent years, if there is no change in the facts and circumstances, which were in existence during the first Assessment Year and the assessment in which the claim has been denied. Hence, in case there is no change in the facts and circumstances subsequent to first year which could have rendered the assessee ineligible for deduction u/s 10A, the claim of the assessee cannot be denied in the subsequent Assessment Year when the claim is accepted for the first Asst Year.

7.1 However, in the case of the assessee, the CIT(A) has pointed out a new aspect to the issue for the first time during the AY under consideration that the assessee has formed a consolidated unit by restructuring of two existing units. But this fact is not clear from the record whether this new development had occurred during the year under consideration or it was already in existence right from the first year of assessment.

8. Since it is not clear whether the non-eligible unit at Andheri was still in existence or closed by the assessee to bring into existence the alleged consolidated unit as held by the CIT(A); therefore, this fact is required to be examined by considering inter-alia the number of employees working in the two units when the new unit was established by the assessee at vikroli only after comparing the number of employees and machinery installed in both the units, it can be determined whether the two existing units were merged and consolidated to bring into existence a new unit and thereby a new unit has been set up by restructuring of the existing unit during the year under consideration. Accordingly, on both the aspects; one considered by the Tribunal in the AY 2006-07; and the other one which has been brought out by the CIT(A) for the first time during the year under consideration, the matter is remanded to the records of the Assessing Officer for examination, verification and then decide the issue as per law.

8.1 Ground no.2 is regarding technical fee and satellite link charges excluded from export turnover.

8.2 Though the Assessing Officer denied the claim of deduction u/s 10A; however, alternatively, the Assessing Officer has also reduced the satellite link charges of Rs. 50,00,615/- and technical service fee of Rs. 1,03,01,183 from export turnover while computing the deduction u/s 10A. The CIT(A) has held that once the issue of deduction u/s 10A has been decided against the assessee, then this ground of appeal has become consequential.

9. We have heard the ld. Sr. counsel for the assessee as well as the ld. DR and considered the relevant material on record. At the outset, we note that this issue has been considered and decided by this Tribunal in assessee’s own case for the AY 2006-07 in para 10 to 11.2 as under;

“10. Ground no.2 is on the issue of reduction of technical fees and satellite link charges from export turnover. Assessing Officer while rejecting the entire claim of section 10A however alternatively also reduced the technical fees and satellite link charges of Rs.1,73,59,069and Rs.2,02,10,562 respectively from export turnover for the purpose of computing the deduction under section 10A thereby restricting the computation under section 10A. As stated in Ground No.1, the DRP declined to interfere as the matter was pending before the ITAT on this issue.

11. The DRP was not correct fully as the issue on ‘technical fees’ was not pending before the ITAT as the Revenue seems to have accepted the decision of the CIT(A) in AY 2004- 05 and 2005-06. There is only an appeal on the issue of ‘satellite charges’. Be that as it may, the issue arises as under. Assessee processes raw data received from TPSL UK and sends them back to UK via computers. To ensure consistent delivery of the above mentioned services, TPSL is providing training of employees to assessee in India for implementation of new process and changes to the existing process. In view of the services rendered by TPSL UK assessee made payment of technical fees to TPSL, UK. At the time of making payment, it was the submission of assessee that the reduction of expenditure incurred in respect of technical fees in foreign exchange from export turnover arises only when assessee provides technical services outside India. Relying on the explanation to Clause-4 of section 10A, it was the submission that the entire processing of data takes place in India and therefore, there is no need to exclude the technical service fees. The learned CIT(A) in assessment year 2004-05 examined this issue elaborately and gave an opportunity to AO. After considering the report of AO and the facts of the case, the CIT(A) deleted the said adjustment made to the export turnover holding as under:

“6.2 However, the submissions relating to technical fees are found to be having some force and merit in view of the fact that for excluding the expenses relating to technical services from the export turnover as per above definition the conditions required to be fulfilled are that the expenses, if any, has been incurred in foreign exchange in providing technical services outside India. As the claim of the appellant that the technical services were not provided outside India is found to be factually correct, therefore, the expenses relating to technical services is not required to be deducted. Accordingly AO is directed not to deduct this amount from the export turnover. To this extent the appellant gets relief. Therefore, Ground No.1 is partly allowed in favour of the appellant”.

Following the above findings in assessment year 2004-05 which the Revenue accepted, the CIT(A) in assessment year 2005-06 also deleted the same. Even in AY 2005-06 there is no appeal by the Revenue to ITAT. Therefore, since the issue was already held in favour of assessee on facts, we are of the opinion that the principles of judicial consistency require that AO should not have excluded the amount from the export turnover. The DRP also was not correct in rejecting the issue. In view of this, we allow the ground raised by assessee on this issue of expenses for ‘technical services’.

11.1 The other amount involved in Ground No.2 is with reference to the ‘satellite expenses’. AO excluded this amount also to arrive at the export turnover as defined under section 10A(4). After considering the submissions in assessment year 2004-05, the ITAT in ITA No.4329/Mum/08 _{2010-TI0L-576-ITAT-MUM} held in favour of assessee as under:

“7. However, while completing the assessment the A.O. treated the above satellite link charges as part of telecommunication charges. This issue was discussed elaborately by the Coordinate Bench in the case of Patni Telecom (P.) Ltd. v. ITO (wherein one of us, the J.M. was a member) 22 SOT 26 (Hyd) = (2008-TIOL-665-ITAT-HYD) wherein on similar facts the issue was considered with reference to export turnover as defined in clause (iv) of section 10A and held as under:

“Export turnover has been defined in clause (iv) of the Explanation 2 to sec 10A. The meaning of ‘export turnover’ is also provided in other sections of the Act, say clause(c) of section 80HHE and Explanation (b) to section 80HHC. According to Explanation (b) to section 8OHHC, export turnover means the sale proceeds receivable in foreign exchange as per sub-section 2(a) of section 80HHC of all goods which are exported out of India, but which does not include freight and insurance. Similarly, total turnover for the purpose of deduction under section 80HHC, which is defined in Explanation (ba) at the end of section 80HHC in the negative term, means as not including freight and insurance attributable to transport of goods or merchandise beyond the custom station and profit on sale of licence, cash assistance, duty drawback, etc. Thus, the term ‘export turnover’ does not include freight and insurance attributable to transport. Explanation (c) to section 80HHE is similar to clause (iv) of Explanation 2 to section 10A.

On an analysis of definition of ‘export turnover’ as provided in clause (iv) of the Explanation 2 to section 10A, it is clear that for the purpose of not including in the consideration received in or brought into India in convertible foreign exchange there are two types of expenditures. The first type of expenditure is freight, telecommunication charges, or insurance attributable to the delivery of article or thing or computer software out of India. The second type of expenditure is expenditure, if any, incurred in foreign exchange in providing technical services outside India. The basic idea or intention for deducting the first type of expenditure, i.e. freight, telecommunication charges, or insurance charges is that delivery of goods should be Free on Board (FoB). The CBDT vide its Circular No. 564, dated 5-7-1990 clarified this aspect in respect of deduction under section 8OHHC. On the basis of the above discussion, it can be said that only those freight, communication charges of insurance attributable to delivery of goods out of India are to be considered while reducing from consideration received in convertible foreign exchange. Thus, if such expenses are not attributable to delivery of goods outside India, such expenses are not required to be deducted from the consideration. Normally, in a transaction of purchase and sale, there are two types of conditions between the parties. One is where price quoted of goods is inclusive of all expenses or in other words price quoted is only in respect of goods. Another condition is where price of goods and charges of expenses are separately stated. In a case where such expenses are to be separately charged, invoices are prepared showing value of the goods and such expenses. If the quoted price is inclusive of such expenses, then consolidated value of the goods is only mentioned in the invoice. In a case where only value of goods is quoted, expense is borne by the supplier. In cases where expenses have not been separately charged, the convertible foreign exchange received is consideration of the goods only. Where such expenses are separately charged in the invoices, the consideration received in convertible foreign exchange includes the value of the goods and such expenses. If the consideration received is only against the goods, then there is no need to deduct such expenses from the consideration received in convertible foreign exchange. In case where such expenses are separately charged, the expenses are required to be reduced from the consideration received for the purpose of arriving at the export turnover. The logic and reason behind this have been explained by the CBDT vide its Circular No. 564, dated 5- 7-1990, that the delivery of the goods should be Free on Board (FoB). The goods exported at FOB is important in the sense that deduction under section 10A is permissible only in respect of consideration received against goods and not for the consideration received against freight, etc. All the assessees should get deduction under section 10A on consideration received against supply of goods at FoB. Therefore, the condition of delivery of goods at FoB has been put and the definition of ‘export turnover’ as provided in clause (iv) of the Explanation 2 to section 10A is required to be interpreted accordingly.

In the instant case, the Assessing Officer had deducted the ISP expenses from foreign exchange consideration treating it as communication charges. The said expenditure on ‘Internet Service Provider (ISP)’ does not come within the scope of telecommunication charges as provided in clause (iv) of Explanation 2 to section 10A, because ISP is for transmitting the data, i.e., software developed by the assessee. The ISP expenses incurred were in respect of development of software, i.e., goods. The ISP expenses were not attributable to the delivery of computer software, outside India and, therefore, such expenses need not be excluded from consideration in foreign exchange. However, if for the sake of arguments it was presumed that the expenditure incurred was attributable to delivery of goods outside India even though same was not to be excluded. The words ‘received’ and ‘but not include’ used in clause (iv) of Explanation 2 to section 10A are significant. What is to be excluded is out of what is received. In the instant case, the assessee received consideration against software, i.e., goods. For this purpose, the assessee had demonstrated by referring to invoices and agreement. The agreement, invoices and the turnover clearly showed that the assessee did not recover any such expenditure. Therefore, there was no scope for any exclusion from the export turnover on account of such expenses. If at all on presumption, it was to be excluded for the purpose of ‘export turnover’, then on the same assumption, reason and analogy it should be excluded from ‘total turnover’. Therefore, the Assessing Officer was not correct in excluding ISP expenses from consideration received in convertible foreign exchange while calculating export turnover for the purpose of section 10.”

8. The ISP expenses considered in the above said decision are similar to the satellite link charges paid by the assessee. As seen from the bills placed on record before the authorities the assessee has paid satellite link charges to VSNL, MTNL and also to Software Technology Park India (STPI) towards bi- monthly half circuit charges/international half circuit charges and rent for TMI – Frame Relay CCT charges including port charges. The port charges, however, were calculated on the basis of USD per annum basis where as rest of the charges were paid on annual lease agreement periodically and these are fixed charges not connected with the delivery attributable to the export of goods. Even though the assessee has utilized the satellite link for receiving data and also for transferring data this cannot be considered as telecommunication charges for delivery of goods on FOB basis. Not only that what the assessee was getting was a fixed service charge for processing data from the foreign company, Trinity Processing Services Ltd. on a monthly basis in terms of the agreement dated 16th October 2001. There are no separate charges recovered from the foreign company towards telecommunication charges which can be considered as amount recovered in foreign exchange from the foreign party. Since no such amount is recovered or included in the turnover, question of exclusion from the export turnover also does not arise on the facts of the case.

9. Assessee has made an alternate contention that the satellite link charges, in case they are considered as telecommunication charges this should also be excluded from the total turnover as considered by the Special bench in the case of ITO v. Sak Soft Ltd. 313 ITR 353 (AT)(SB) – 2009-TIOL-187-ITAT-MAD-SB wherein it was held that parity to be maintained with export turnover to that of total turnover and where expenses on telecommunication charges or insurance attributable to delivery of articles or things or computer software outside India or expenses incurred in foreign exchange in providing technical services outside India required to be excluded from export turnover, they are also to be excluded from total turnover. Since we have considered that the satellite link charges cannot be considered as telecommunication charges to be excluded as per the definition of export turnover there is no need to consider the alternate contention. Accordingly, this alternate ground raised is not considered as it becomes academic in nature.

10. After considering the facts of the case and the principles established by the Coordinate bench in the case of Patni Telecommunication (P) Ltd. v. ITO 22 SOT 26 (Hyd) – 2008-TIOL-665-ITAT-HYD, it is held that the expenses on satellite link charges does not come within the scope of ‘telecommunication charges’ as provided in clause (iv) of Explanation 2 to section 10A and accordingly, the A.O. is directed not to exclude the same from export turnover A.O. is directed to recalculate the deduction under section 10A. Assessee’s grounds are considered allowed”.

11.2 As seen from the order of the CIT(A) in assessment year 2005-06, it is noticed that the CIT(A) has followed the above order of the ITAT while giving relief on ‘satellite charges’. In view of the order of the ITAT in assessment year 2004-05, we hold that the satellite charges cannot be considered as ‘telecommunication charges’ so as to exclude from the export turnover. We accordingly uphold assessee’s grievance on this issue. Ground No.2 is allowed.”

9.1 Following the earlier order of this Tribunal, we decide this issue in favour of the assessee and against the revenue.

10. Ground no.3 is regarding transfer pricing adjustment in respect of services rendered by the assessee to its Associated Enterprise (AE).

10.1 The assessee is providing/rendering information Technology enabled Services (ITES) to its overseas affiliates/AEs namely Tyrinty Processing Services Ltd. (TPSL), UK and Willis Processing Services Inc., USA. ITES provided by the assessee to its AE includes;

(i)           processing of insurance claims, premiums, and treaties;

(ii)          Accounting for insurance underwriters and clients;

(iii)         Insurance accounting support services and

(iv)         data processing.

10.2 The assessee furnished Transfer Pricing report in support of the arm’s length price (ALP) of 10.54% by adopting TNMM as the most appropriate method and using PLI as operating profit to cost for benchmarking its international transactions after considering the three years weighted average margins which comes to 9.90%. The assessee carried out the search from Prowess and Capitaline databases and selected 11 companies as comparables as under:

S. No.	Name of the company	PLI % (Cost Plus Ratio)	PLI % (Cost Plus Ratio) (updated
1.	Allied Digital Services Ltd.	18.2	26.3%
2.	Ask Me Info Hubs Ltd.	-3.9	0.3%
3.	Caliber Point Business solutions Ltd.	32.4	24.1%
4.	I C R A Online Ltd.	12.7	29.8%
5.	Maple Esolutions Ltd.	36	34.3%
6.	Maars Software International Ltd.	3.8	-1.7%
7.	MCS Ltd.	6.5	13.8%
8.	Spanco Telesystems & Solutions Ltd. (seg)	22.3	21.5%
9.	Sparsh B P O Services Ltd.	-49.30	7.4%
10.	Transworks Information Services Ltd.	14.50	12.4%
11.	Visualsoft Technologies Ltd.	15.70	NA
	Arithmetic Mean	9.9	16.82

10.3 Thus, the assessee claimed that its cost plus margin is 10.54% which is more than the comparables cost plus margin of 9.90% and accordingly, its international transition is at ALP.

10.4 The TPO did not agree with the computation of margin of comparables by considering three years weighted average cost plus margin and proposed to consider the updated single year data of comparable which gives the average margin of 16.82%. The TPO has also found that only 9 comparables appearing at Sl. Nos, 1,2,3,4,5,8,9,10 & 11 have functions broadly similarly to ITES functions of the assessee; whereas the comparables at Sl. Nos 6 & 7 are not considered as comparable to those of the assessee. Since the data regarding the comparable at Sl no.11 was not available, the TPO rejected the same. Thus, out of 11 comparables selected by the assessee, the TPO rejected 3 comparables namely Maars Software International Ltd; MCS Ltd. and Visualsoft Technologies Ltd. Maars Software International Ltd. and MCS Ltd. were rejected on the ground of functionally different; whereas Visualsoft Technologies Ltd., was rejected due to non availability of data. The TPO was of the view that the 8 companies provided in the TP study are not adequate and reasonable number of comparables and accordingly for broad level of comparability allowed under TNMM a fresh search was carried out by the TPO. Consequently the TPO selected a set of 25 comparables of ITES purported to have been performed functions broadly comparable to the activity of the assessee related to ITES as under:

S. No.	Name of the Comparable Company	PLI (%)
1.	Accentia Technologies Ltd.	38.26
2.	Aditya Birla Minacs Worldwide Ltd. (Earlier Transworks Information Services Ltd.)*	11.98
3.	Allsec Technologies Ltd.	27.31
4.	Apex Knowledge Solutions Pvt. Ltd.	12.83
5.	Appollo Healthstreet Ltd.	-13.55
6.	Asit C. Mehta Financial Services Ltd.	24.21
7.	Bodhtree Consulting Ltd. (Seg.)	29.58
8.	Caliber Point Business Solutions Ltd. *	21.26
9.	Cosmic Global Ltd.	12.40
10.	Datamatics Financial Services Ltd. (Seg.)	5.07
11.	Eclerx Services Ltd.	90.43
12.	Flextronics Software Systems Ltd. (Seg.)	14.54
13.	Genesys International Corporation Ltd.	13.35
14.	H C L Comnet Systems & Services Ltd. (Seg.)	44.99
15.	I C R A Techno Analytics Ltd. (Seg.)	12.24
16.	Informed Technologies India Ltd.	35.56
17.	Infosys B P O Ltd.	28.78
18.	IServices India Pvt. Ltd.	50.27
19.	Maple Esolutions Ltd.*	34.05
20.	Mold-Tek Technologies Ltd.	113.49
21.	R Systems International Ltd. (Seg.)	20.18
22.	Spanco Ltd. (Seg.)	25.81
23.	Triton Corp Ltd.	34.93
24.	Vishal Informational Technologies Ltd.	51.19
25.	Wipro Ltd. (Seg.)	29.70
	Arithmetic Mean	30.75

10.5 Since 3 comparables are common companies as in the 8 comparables provided by the assessee in the TP report; therefore, in nutshell, the TPO proposed to add 22 more comparables.

10.6 In response, the assessee filed its objection/submissions vide letter dt 6.10.2010 and broadly submitted that these are;

(i)           Functionally incomparable companies;

(ii)          Two of the comparables having super normal profit;

(iii)         Exceptional year of operation on account of de-merger,

(iv)         Financial information not available in the public domain

10.7 The TPO rejected the objections raised by the assessee against the inclusion of 22 more comparables and cited the reasons that these 25 comparables (22 new plus 3 common) companies have been selected by the department for ITES only and thus, the assessee’s claim for non acceptability is not correct.

10.8 As regards the super normal profit, the TPO has observed that the set of 25 comparables are variation in PLI ranging from (-) 13.55 % to 111.49% and TNMM arithmetic mean takes care of such variation on account of larger set of comparables in order to obtain better results.

10.9 As regards the exceptional event of de-merger, the TPO held that even after merger function of the companies remain the same and therefore, no merit attributable on account of de-merger.

10.10 Moving to the objections of non availability of financial information in public domain, the TPO recorded in the order that the assessee has been provided all the information regarding financial information of 25 comparables companies including the companies whose financial information are not available in the public domain.

10.11 After rejecting the objections of the assessee, the TPO determined the ALP of international transactions by applying arithmetic mean of total 30 comparables, 8 by the assessee and 22 new added by the TPO at 28.47% as under:

Sl. No	Name of the Comparable Co.	PLI(%)	Remark
1	Accentia Technologies Ltd.	38.26	Department
2	Aditya Birla Minacs Worldwide Ltd. (Earlier Transworks Information Ser Ltd.)	11.98	Common
3	Allied Digital Services Ltd.	26.3	Assessee
4	Allsec Technologies Ltd.	27.31	Department
5	Apex Knowledge Solutions P. Ltd.	12.83	Department
6	Appollo Healthstreet Ltd.	13.55	Department
7	Asit C Mehta Fin Services Ltd.	24.21	Department
8	Ask Me Info. Hubs Ltd.	0.3	Assessee
9	Bodhtree Consulting Ltd. (Seg)	29.58	Department
10	Caliber Point Business Solutions Ltd.	21.26	Common
11	Cosmic Global Ltd.	12.4	Department
12	Datamatics Fin. Services Ltd. (Seg)	5.07	Department
13	Eclerx Ser Ltd.	90.43	Department
14	Flextroncis Software Sys Ltd. (seg)	11.54	Department
15	Genesys International Corpn. Ltd.	13.35	Department
16	HCL Comnet Sys & Ser Ltd. (seg)	44.99	Department
17	ICRA Online Ltd.	29.8	Assessee
18	ICRA Techno Analytics Ltd. (seg)	12.24	Department
19	Informed Technologies India Ltd.	35.56	Department
20	Infosys BPO Ltd.	28.78	Department
21	I Services India P. Ltd.	50.27	Department
22	Maple Esolutions Ltd.	34.05	Common
23	Mold -Tek Technologies Ltd.	113.49	Department
24	R Systems International Ltd. (seg)	20.18	Department
25	Spanco Ltd. (seg)	25.81	Department
26	Spanco Tele-systems & Solutions Ltd.(Seg)	21.5	Assessee
27	Sparsh BPO Services Ltd.	7.4	Assessee
28	Triton Corpn Ltd.	34.93	Department
29	Vishal Information Technologies Ltd.	51.19	Department
30	Wipro Ltd. (seg)	29.7	Department
	Arithmetic Mean	28.47
	Assessee	10.54

10.12 Accordingly, the TPO made an adjustment of Rs. 7,52,20,419/ to ALP in the international transaction of the assessee vide order dt 26.10.2010. On appeal, the Commissioner of Income Tax (Appeals) confirmed the action of the TPO/Assessing Officer as far as the inclusion of 21 comparables and reject one comparable namely Vishal Information Technologies Ltd.

13. Before us, the ld. Sr. counsel for the assessee at the threshold challenged the action of the TPO in carrying out a fresh search for adding 22 more comparables when 8 comparables, out of 11 selected by the assessee were already accepted by the TPO. Thus, the ld. Sr. counsel has submitted that there was no requirement of any fresh search for selecting the other comparables once the TPO accepted the 8 comparables selected by the assessee which are more than sufficient for determination of the ALP. In support of his contention, the ld. Sr. counsel has relied upon the decision of the Delhi Benches of the Tribunal in the case of Haworth India P. Ltd. in ITA No.5341/Del/2010 = (2011-TII-64-ITAT-DEL-TP) as well as decision in the case of Vedaris Technology P. Ltd. in ITA No.4372/Del/2009 = (2010-TII-10-ITAT-DEL-TP)wherein the Tribunal has opined that under TNMM even one comparable was adequate to determine the ALP.

13.1 On the other hand, the ld. DR has submitted that the facts in the case of Haworth India P Ltd. (supra) as well as in the case of Vedaris Technology P. Ltd. (supra) are totally different to that of the assessee’s case and therefore, these decisions of the Tribunal are not applicable in the facts of the present case where more comparables were available. He has relied upon the decision of the Special Bench of this Tribunal in the case of Aztec Software and Technology Services Ltd. v. Assistant Commissioner of Income-tax reported in 294 ITR 32 = (2007-TII-01-ITAT-BANG-SB-TP)wherein it was held that 10 comparables are also not enough to determine the ALP under TMNN. The ld. DR has further submitted that the company Haworth India P Ltd. (supra) is in the business of sale of imported furniture and there were no adequate comparable companies available in the public domain. Therefore, in those peculiar circumstances, this Tribunal has held that even one comparable was adequate to determine the ALP.

13.2 In rebuttal, the ld. Sr. counsel for the assessee has submitted that in the case of Haworth India P. Ltd. (supra), the Tribunal has given the finding after considering the ruling of the Special Bench of this Tribunal in the case of Aztec Software and Technology Services Ltd. (supra) and therefore, it was held that even one comparable was sufficient to determine the ALP.

14. We have considered the rival submissions and carefully gone through the relevant material as well as the provisions relating to the Transfer Pricing Regulations. As per the provisions of sec. 92CA(3), the TPO has jurisdiction/power to gather and consider all relevant material and information apart from the evidence, information and documents produced by the assessee as required u/s 92D(3) to determine the ALP in relation to the international transaction.

14.1 Sub sec. (7) of sec 92CA empowers the TPO for the purpose of determining the ALP to exercise any of the powers specified in clause (a) to (d) of sub. sec. (1) of sec 132 or sub. sec. (6) of sec 133 or 133A. Thus, under the TP regulations, there is no embargo on the powers of the TPO in carrying out fresh search for gathering more relevant information, documents etc., while determining the ALP in relation to international transactions.

14.2 The assessee has challenged the action of the TPO on the ground that after accepting 8 comparables selected by the assessee, the TPO is not justified in carrying out fresh search and adding 22 more comparables. The contention of the ld. Sr. counsel is based on the logic that the 8 comparables, as selected by the assessee and accepted by the TPO, are more than sufficient for determination of the ALP and therefore, there was no requirement, which justified the fresh search carried out by the TPO in inclusion of 22 more comparables.

14.3 We do not agree with the proposition advanced by the ld. Sr. counsel for the assessee because there cannot be a fixed number of comparables to be considered as sufficient or appropriate number for determination of the ALP as a general parameter. The sufficient number of comparables depends upon the facts and circumstances of the each case and there cannot be a fixed criteria or parameter for number of comparables, which can be universally applied to each and every case for determination of the ALP. It is an accepted rule of sampling that larger size of sample would better and adequate represent the lot or population to which the sample belongs. Therefore, to get an adequate result and better representation, the size of sample must be large enough. The same rule is applicable in the case of number of comparables selected for representing the true and correct ALP in relation to the international transaction. The endeavour should be made to bring more and more comparables so that a proper and realistic price can be determined which represents the price prevailing in the open market.

14.4 Under the Transfer Pricing Regulations, the number of comparables may be one or more than one; but there is no upper limit prescribed u/s 92C of the I T Act. However, the first proviso to se.92(2) indicates that more than one price can be considered for determination of ALP and in such a case, the ALP shall be taken to be arithmetic mean of such price. Therefore, the size of number of comparables has not been prescribed under the provisions of TP Regulations provided under the I T Act. However, the sufficiency of number depend largely on the availability of the comparables where the number of comparables available is large, then it is always better to consider as many as possible number of comparables which can give an adequate and proper representation of the price prevailing in open market in the said industry, business, trade etc., to which the comparables and international transactions belong.

14.5 In the case of Haworth India P Ltd. (supra). the Tribunal has observed that only one comparable was left which was selected by the assessee itself in its TP study and the TPO did not choose to carry out a fresh search, then the said comparable can be taken to compute the ALP. The relevant part of the Tribunal’s observation in para 77 is as under:

77. Now coming to the case Law relied upon by Id. DR which convey that only one comparable is sufficient and it has been held by the Tribunal in other cases that arm length price can be worked out even on the basis of one comparable. In the case of Vedaris Technology Pvt. Ltd. v. ACIT (supra) 20 comparables were short listed and mean margin was worked out at 16.585% and out of those only one comparable was Left namely Sophia Software Ltd. on the basis of which the arm Length price was determined. Here, it is the case of Ld. AR that the said case is not applicable to assessee’s case as in that case both the parties had accepted one comparable only. But that is not the only basis on which the Tribunal has rested its decision. The other case of similar nature is Parrot Systems TSI India Ltd. v. DCIT (supra). Moreover, the comparable which has been Left was selected by the assessee itself in its TP study and no reason whatsoever is given that how the said comparable could not be taken to compute arm length price of the assessee. Therefore, we reject the submission of the assessee that on the basis of one comparable, the arm length price could not be determined and fresh search was required to be taken as per submissions made before DRP. The facts of the present case do not warrant the fresh search to be taken into consideration as there is no valid reason to do so.”

14.6 The finding of the Tribunal is on the point whether in a case where only comparable is left which is selected by the assessee in the TP study, then the TPO is not bound to carry out a fresh search. Therefore, the Tribunal’s decision is not on the point of restricting the power and jurisdiction of the TPO to carry out the fresh search; but it is in the peculiar facts of the said case when only one comparable was left and in view of the TPO, no fresh search was required, then the ALP can be determined on the basis of one comparable. Therefore, the said finding of the Tribunal cannot be understood and inferred as a bar on the jurisdiction of the TPO to carry out a fresh search.

14.7 In the case of Vedaris Technology (P.) Ltd. (supra) also, the Tribunal has observed that when both the parties have accepted the sole comparable left, then it is to be a valid comparable case. Again the finding of the Tribunal is not on the point of jurisdiction of the TPO; but is on the point when one comparable which is left and accepted by both the parties and the TPO chose not to carry out a fresh search, then the ALP can be determined on the basis of one comparable. But where the TPO in his wisdom decides to exercise his power and jurisdiction to carry out a fresh search, then there is no such provision or law which restricts the powers/jurisdiction of the TPO to carry out the fresh search, if the comparables included by the TPO are found as good comparables for determination of the ALP.

15. In view of the above discussion, we do not find any substance or merits in the objections raised by the assessee against the fresh search carried out by the TPO.

16. Now, we take up the comparables selected by the TPO and the objections raised by the assessee one-by-one.

(i) Accentia Technologies Ltd:

17. The ld. Sr. counsel for the assessee has pointed out that this company has been specifically rejected as comparable by the Hyderabad benches of the Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. in 1961/Hyd/2011 = (2012-TII-148-ITAT-HYD-TP). He has referred paras 10 & 11 of the said decision of the Hyderabad Benches of the Tribunal and submitted that the Tribunal has rejected this comparable after taking note of the fact that there was an extra ordinary event like merger and de-merger in the said company which will have an effect on profitability in the financial year in which such event takes place. Thus, the ld. Sr. counsel for the assessee has submitted that the company’s revenue and profit numbers are largely driven by extra ordinary event in the form of amalgamation. Therefore, the said company cannot be considered as a comparable for the purpose of determination of ALP. The ld. Sr. counsel has submitted that the company was formed as a result of amalgamation which took place between Geosoft Technologies (Trivandrum) Ltd. and Iridium Technologies (India) Pvt. Ltd. The amalgamation was approved in 2006. Hence, on the ground of such extra ordinary events, the financial numbers cannot be compared to assessee’s financial numbers for the fiscal year.

17.1 On the other hand, the ld. DR has submitted that the Delhi Benches of the Tribunal in the case of Actis Advisors Pvt. Ltd. in ITA No. 5277/Del/2011 = (2012-TII-136-ITAT-DEL-TP)has rejected the contention of the assessee and accepted the Accentia Technologies Ltd. as a good comparable in ITES segment.

17.2 In rebuttal, the ld. Sr. counsel has submitted that in the case of Actis Advisors Pvt. Ltd, the Tribunal dealt with the objection against Accentia Technologies Ltd. on the ground of marking expenditure and not on account of extra ordinary events because no such objection was raised by the assessee in the said case.

18. We have considered the rival submissions and carefully perused the relevant material on record. The assessee has raised the objection against this company because of the alleged merger/amalgamation. It is to be noted that in the case of Actis Advisors Pvt. Ltd. (supra), the Delhi Benches of this Tribunal has dealt with the objection raised by the assessee on the ground that the company incurred advertisement and marketing expenses more than 3% and hence should not be considered as comparable because they are functionally different from the assessee who had incurred less than 3% of the sale in the area of marking and advertisement expenditure.

18.1 Thus, it is clear from the finding recorded by the Delhi Benches of the Tribunal that the objections regarding extra ordinary events like merger and de-merger neither raised nor considered in the said decision. However, as far as the functional similarity and other objections raised by the assessee in the said case of Actis Advisors Pvt. Ltd. (supra), the company Accentia Technologies Ltd. was found as a comparable in the ITES segments.

18.2 In the case of Capital IQ information Systems India Pvt. Ltd. (supra), the Hyderabad Bench of the Tribunal has observed that if there is an amalgamation during the financial year relevant to Assessment Year under consideration, which has mixed the final results, then the aforesaid comparables has to be excluded and this fact of amalgamation was directed to be verified by the TPO. The relevant part of the order of the Tribunal in para 11 is as under:

11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded.”

18.3 We are also of the view that if extra ordinary events like merger and de-merger or amalgamation took place during the financial year relevant to the Assessment Year under consideration, and because of the merger/de-merger the company became functionally different then the said company should be excluded from the comparables. However, if the merger of the two functionally similar companies took place then the event of merger itself cannot be taken a factor for exclusion of the said comparable.. Accordingly, we direct the AO/TPO to verify this fact and accordingly decide the comparability of this company namely Accentia Technologies Ltd.

(ii) Aditya Birla Minacs worldwide Ltd.

&

(iii) Allied Digital Services Ltd:

19. Both these comparables are common as selected by the assessee and accepted by the TPO; therefore, no dispute or objections are raised in this respect on this comparable.

(iv) Allsec Technologies:

20. The ld. AR has submitted that this company is having related party transaction constituting 17.77% of the total revenue. Therefore, this company should not be considered as a comparable. In support of his contention, the ld. AR has relied upon the following decisions:

(i)           Avaya India P. Ltd. – ITA No. 5150/Del/2010 = (2011-TII-139-ITAT-DEL-TP)

(ii)          Sony India P. Ltd. – ITA No. 1731/Del/09 = (2009-TII-09-ITAT-DEL-TP)

(iii)         Philips Software Services Ltd. – ITA No.218/BNG/08 = (2008-TII-09-ITAT-BANG-TP)

(iv)         CRM Services India P. Ltd. – ITA No.4068/Del/2009 = (2011-TII-86-ITAT-DEL-TP)

(v)          Bentton India P. Ltd. – ITA No.3829/Del/2010 = (2012-TII-05-ITAT-DEL-TP)

20.1 Thus, the ld. AR has submitted that the Tribunal in the above mentioned decisions has held that 10 to 15% of the related party transactions should be considered as threshold for considering an entity as comparable. He has pointed out that in some of the cases like Sony India P. Ltd., Philips Software, the Tribunal has held that the comparables having related party transactions of even Rs. 1/- should be excluded.

20.2 On the other hand, the ld. DR has contended that 25% of the related party transactions be considered as threshold. In support of his contention, he has relied upon the decision of the Delhi Benches of the Tribunal in the case of Actis Advisors Pvt. Ltd. (supra). The ld. DR has referred sec 92A of the Act and submitted that it requires 26% shareholding in another enterprise to constitute an Associated Enterprise; therefore, 25% as threshold limit for related party transaction would be appropriate.

20.3 In rebuttal, the ld. AR has submitted that under the provisions of sec. 92A, 26% of the shareholdings is only one of several criteria for determination of the AE. There are various percentage prescribed in the said section for determination of the AE. E.g. Guarantees should be more than 10% of the borrowings for it to be considered as AE. Thus, the ld. AR has submitted that fixing of 25% threshold limit of related party transaction is not justified.

21. We have considered the rival submissions and carefully gone through the various decisions relied upon by either of the parties. As per the TP regulations, the international transaction is required to be compared with a similar; but uncontrolled transaction between unrelated parties. Therefore, as a rule of prudence, so far as possible a comparable should be considered having no related party transaction. But as we are conscious and aware of the fact that such a situation is highly impractical and almost impossible to have a comparable without a single related party transaction. Therefore, related party transaction cannot be completely ruled out while selecting the comparables. The question arises as how much and to what extent related party transaction can be accepted for considering the company as a good comparable. This Tribunal has given various threshold limits in series of decisions.

21.1 In the case of Avaya India P. Ltd. (supra), the Tribunal in para 18 has opined as under:

“18. We have carefully considered the rival submissions in the light of the material placed before us. So far as it relates to applying the filter for rejection of comparable companies having related party transactions as a percentage of sales more than 15%, we uphold the said filter. So as it relates to another filter rejecting the comparables whose current year financial data is not available we find that the said filter has been upheld by the DRP by following the decision of ITAT Delhi Bench in the case of Customer Services P. Ltd. v. ACIT 30 SOT 486 = (2009-TII-08-ITAT-DEL-TP) in which it has been held that commissioner of Income Tax (Appeals) was fully justified in holding that main rule of sec. 10B(4) was applicable to the facts of the assessee’s case and it was mandatory on the part of the TPO to use data relating to financial year 2002-03 in which the international transactions were admittedly enter into by the assessee with its associate enterprises. Therefore, the second filter is also upheld.”

21.2 The Tribunal has upheld the decision of the authorities below in applying filter for rejection of Comparable Company having related party transaction more than 15% of the total sales. Similarly in the case of Sony India P. Ltd. (supra), the Tribunal has dealt with an identical issue in para 115.3 asunder:

“115.3 On careful consideration of rival submissions, we see no justification for excluding above named three entities from the list of comparable for working out mean operating profit. It is an admitted position that these companies satisfy screening criteria (filters) adopted by the Transfer Pricing Officer at page 10 of the order except his observation that companies were having controlled transactions with related parties. The TPO and on appeal, the learned CIT (Appeals) did not substantiate the allegation by furnishing figures of controlled transactions to show that such transaction had significant impact on the profits of these companies. The taxpayer, on the other hand, has given percentage of transaction with related parties and we are of view that they are not so high as to exclude them from the list of comparables. We are further of view that an entity can be taken as uncontrolled if its related party transaction do not exceed 10 to 15% of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitability of comparable. For the purposes of comparison, what is to be judged is the impact of the related party transaction vis-a-vis sales and not profit since profit of an enterprise is influenced by large number of other factors. No dispute having been raised by TPO or the Id. CIT(A) that the other filters of functions, economic activities, product profiles etc are satisfied, we are of view that these three entities should also be taken in the list of comparables for working average / mean operating profit. Even as per OECD Guidelines, it is emphasized that large number of similar entities should be taken to make comparison broad based.

Respectfully, following the order of the Tribunal, we do not find any infirmity in CIT(A)’s order. Accordingly ground No.1.3 of revenues appeal stands dismissed.”

21.3 In the said case, the Tribunal has viewed that an entity can be taken as uncontrolled if its related party transaction do not exceed 10 to 15% of the total revenue. In this case, the Tribunal has not fixed any criteria of threshold; but laid down a range from 10 to 15% related party transaction of total revenue for considering the entity as an uncontrolled comparable.

21.4 In the case of Philips Software Centre Pvt. Ltd. (supra), the Tribunal in para 5.71 (vii) has observed that for the purpose of the comparability companies with even a single rupee of transactions with AE cannot be considered as comparable.

21.5 In the case of CRM Services India P. Ltd. (Supra), the Tribunal has reaffirmed the view as taken in the case of Sony India (supra) and held that the tolerance limit of related party transactions would be in the vicinity of 10 to 15%.

21.6 In the case of Benetton India P. Ltd. (supra), a similar view was taken by the Tribunal that the related party transactions should not exceed 10 to 15% of the total revenue.

21.7 On the contrary, the Tribunal in the case of Actis Advisers (supra) has held that an entity can be taken as uncontrolled, if its related party transaction do not exceed 25% of the total revenue. This view of the Tribunal is based upon the criteria enumerated u/s 92A(2) of the IT Act wherein expression of associate Enterprises has been defined, if certain conditions and criteria as provided thereunder are satisfied. One of the criteria is if an entity holds 26% shares in another entity, then it can be considered as AE. Thus it is clear that the Benches of Tribunal have taken divergent view in various decisions and held that an entity can be taken as uncontrolled, if its related party transaction ranging from 0 to 25% of the total revenue. In the majority of the cases, the range of related party transaction has been considered between 10 to 15% of the total revenue. It is discernible from the different views taken by the Tribunal in these decisions that there cannot be a fixed criteria/parameter which can be applied as a filter in respect of related party transactions for considering an entity as uncontrolled for the purpose of determination of the ALP.

21.8 In our view 0% related party transaction is an impossible situation and therefore, it is practically not possible to find out a comparable having no related party transaction. Therefore, a reasonable percentage of the total revenue from the related party transaction can be considered for selecting an uncontrolled comparable. There cannot be a single criteria/parameter which can be applied as general rule in all the cases. The related party transaction ranging from 10 to 25% of the total revenue can be considered having regard to the facts and circumstances of the given cases, 10% is the lowest limit and can be taken in the case where abundance number of comparables are available. Therefore, when there is no difficulty in searching the comparables, then the entity having more than 10% of the related party transaction should be excluded because the comparable should be an uncontrolled transaction and therefore, so far as it is possible, its result should not be influenced by related party transaction. In the normal circumstances, where a good number of comparables are available, then the limit of related party transactions should be 15% of the total revenue and in such case, an entity can be considered as uncontrolled, if related party transactions do not exceed 15% of the total revenue.

21.9 We are also of the view that 15% is an average and should be generally accepted in normal cases as a related party filter. In cases where comparables are not available in sufficient number, then this threshold limit of related party transaction can be relaxed to 20% of the total revenue.

21.10 The relaxation upto 20% is purely with a view to make it possible that a larger number of entities are taken as comparable so that the ALP so determined should be based on a broad based and technically represents price in the free market. In a extreme case where only one or few comparables are available, then an entity having related party transactions not exceeding 25% of the total revenue can be considered so that the ALP should be determined having comparison broad based, though this extreme limit of 25% can be considered only in exceptional cases.

21.11 In the case in hand, as it is evident that the TPO has found sufficient number of comparables and finally took 30 companies as comparables; therefore, this case does not fall under the category of exceptional cases where criteria of related party transactions can be relaxed more than 15% of the total revenue of the entity. Hence, we are of the considered opinion that in the case in hand, when there is no shortage of comparables, an entity can be considered as uncontrolled, if the related party transaction do not exceed 15% of the total revenue.

21.12 Having applied this criteria, we find that the company Allsec Technologies Ltd. having related party transactions constituting 17.77% of the total revenue would be excluded from the comparables on this ground alone. The ld. DR has pointed out that the percentage of related party transaction as given in the financial record of the company is in respect of the total business revenue and segment wise results from ITES segments are not available. Therefore, it cannot be said that whether related party transactions constituting 17.77% of the total revenue is proportionally equal in respect of the revenue from ITES segments. It is to be noted that the TPO has not taken segment results of this company; but margin and results are taken on the entity level; therefore, having more than 15% of the revenue from related party, this company deserves to be excluded from the comparable.

(v) Apex Knowledge Solutions P. Ltd.:

22. The ld. AR has submitted that this company is functionally not comparable as it was engaged in the business of software. He has referred the TPO order and submitted that the TPO itself has recorded the profile of the company as software. He has further submitted that there is no dispute that the company is in the business of software; therefore, the said company cannot be considered as comparable.

23 On the other hand, the ld. DR has submitted that before the TPO the assessee has accepted this company as comparable. He has referred the assessee’s objection at page 283 of the paper book and submitted that the assessee did not object this comparable. However, the ld. DR has submitted that as per the annual report of this company, it is deriving income from both export of software and ITES and segment results are not available.

24. Having considered the rival submissions and other relevant material on record, we note that the assessee has accepted this comparable before the TPO. However, since this fact has brought to our notice that this company is deriving income from export of software and ITES and segment results are not available; therefore, it is not possible to consider this company as a functionally comparable. Hence, in the absence of segment results, this company has to be excluded from the comparables.

(vi) Apollo Healthstreet Ltd:

25. We have heard the ld. AR as well as the ld. DR and considered the relevant material on record. Undisputedly, in the case of Apollo Healhstreet Ltd., the related party transaction is about 81% of the total turnover; therefore, this company can not be considered as comparable, solely on the ground of very high percentage of related party transactions to the total turnover. Accordingly, this company has to be excluded from the comparables.

(vii) Asit C Mehta Financial Services Ltd:

26. The ld. AR has submitted that this company is functionally not comparable with the assessee because it was into software products which included provision of software services. He has referred page 4 of the TPO order and submitted that the TPO itself has recorded the profile of the company, as software. Apart from this, the ld. AR has submitted that this company had related party transactions of 15.17% of the total revenue. Therefore, this company should be excluded from the comparables.

26.1 On the other hand, the ld. DR has submitted that as per Schedule-8 of the financial account, out of total income of Rs 63,415, income from ITES is Rs.60,908/- which is 96% of the total revenue. He has further submitted that there are segment results available which may be adopted for ITES margins.

27. We have considered the rival submissions and carefully perused the relevant material on record. Though, the TPO has taken the entity level results in the case of this comparable; however, the ld. DR has brought the details, which show that the income from ITES is about 96% of the total revenue. Therefore, as far as the functional comparability of this company is concerned, we find that this company is functionally comparable with the assessee.

27.1 Moreover, when segment results are available, then the same can be taken into consideration for the purpose of determination of the ALP.

27.2 As regards the related party transactions are concerned, since the related party transactions are in respect of the total business and it is not clear as how much percentage of the related party transactions is in the ITES segment. Therefore, this matter is required verification and examination on the facts as brought before us by the ld. DR. Accordingly, we remit this comparable to the record of the Assessing Officer/TPO to reconsider the same after taking into account the segment results and related party transactions in ITES segments and accordingly decide the comparability of this company in view of our observations.

(viii) Ask Me communication :

28. This comparable is common as it was assessee’s own comparable; therefore, no dispute has been raised before us.

29. (ix) Bodhtree Consulting Ltd:

29.1 The ld. Sr. counsel for the assessee has submitted that this company is engaged in the software product. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The ld. AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest technologies. Further, the company has identified only one segment i.e software development. Therefore, the ld. AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables.

29.2 On the other hand, the ld. DR has filed the information collected u/s 133(6) of the IT Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs. 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity.

29.3 In rebuttal, the ld. AR has submitted that the information filed by the ld. DR is not collected by the TPO of the assessee; but it was collected by the TPO of Hyderabad. Further, the annual report of this company clearly shows that the company is in the business of software development and therefore, this company is not a good comparable.

30. We have considered the rival submissions as well as the relevant material on record. The details filed by the ld. DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd. to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application. It is also made it clear in that letter that the said service is one of the sources which comes under the category of ITES which constitutes majority part of the data cleaning services. As per Annexure 2 of this letter, the said company received the revenue to the extent of 2.94 crores in respect of data cleaning services. The ld. AR of the assessee has objected the contention of the ld. DR that this company is in the ITES, which amounts to improving upon the order of the TPO.

30.1 However, we do not agree with the objection of the ld. AR because the stand of the ld. DR is not opposite to the order of the TPO; but this additional argument is in support of the order of the TPO for considering this company as a comparable. Since this information has been brought before us for the first time; therefore, we set aside this issue of comparability of this company to the record of the Assessing Officer/TPO for verification, examination of the complete information properly and then decide the issue after considering the objections of the assessee against this company.

(x) Caliber Point Business Solutions Ltd:

&

(xi) Cosmic Global Ltd:

31. These two companies are selected as comparable by the assessee and also accepted by the TPO. Therefore, no dispute has been raised before us in respect of these companies except the margin taken by the assessee in respect of Cosmic Global Ltd. at 11.31%; but the TPO/Assessing Officer has computed the same at 12.4%. Therefore, the Assessing Officer/TPO is directed to consider the reasons for the difference in the margins taken by the assessee and TPO respectively.

(xii) Datamatics Financial Services Ltd:

32. The ld. AR has submitted that this company is engaged in printing process and ITES services; therefore, this company cannot be considered as comparable at the entity level. The Ld AR has submitted that the information available at the website of the company indicates that the printing and processing services rendered by this company pertain to registrar and transfer agency services which includes financial transaction and processing; shareholder services and customer care; corporate action and connectivity and statutory compliance & MIS. Thus, the ld. AR has submitted that instead of taking ITES segment margin of 5.07%, the entity level margin of (-) 18.09% should be considered.

32.1 On the other hand, the ld. DR has submitted that the P&L account of this company clearly shows that the company is deriving income from ITES to the extent of 29 million (Rs. 2.92 crores). Since this company deriving income from printing business; therefore, this company cannot be taken on entity level. In support of his contention, the ld. AR has filed a copy of the P&L account of Datamatics Financial Services Ltd.

33. Having considered the rival submissions and relevant material on record, we find that the TPO has taken segmental results with respect to the ITES services. As per the profile of the company admittedly, the company is in the business of printing, processing and ITES segments. When the results at entity level are taken into consideration, then the income from printing and processing is also included, in our view that would de-hors the requirement of comparability. The P&L account of the company clearly segregates the income under three different segments; (i) printing and processing; (ii) exports of ITES services and (iii) other income. Accordingly, we do not find any error or illegality in the order of the TPO by considering the segmental results of this company. Hence, the objection raised by the ld. AR cannot be accepted.

(xiii) Eclerx Services Ltd.

34. The ld. AR has submitted that this company cannot be considered as comparable because of having super normal profit and Knowledge Processing outsourcing (KPO). He has filed a copy of the Annual report and speech of the Chairman to the Shareholders wherein it has been explained that this company is a data analytics KPO provider specializing in two business verticals – financial services and retail and manufacturing. This company provides solutions that do not just to reduce cost; but help the clients increase sales and reduce risk by enhancing efficiency by providing available insights that empower better decisions. It has been named as one of the ‘top 20 companies to watch’ by Business Today. This company is providing data analytics and data process solutions to some of the largest brands in the world. Thus, this company cannot be considered as comparable of the assessee. In support of his contention, the ld. AR has submitted that Hyderabad Benches of the Tribunal in chase of Capital IQ Information Systems India P. Ltd. (supra) has rejected this company as comparable on the ground of super profit and KPO services.

34.1 Per contra, The ld. DR has submitted that only objection raised by the assessee before the TPO was in respect of related party transactions constituting 9.12% of the total revenue. The assessee did not raise any objection of functional difference or super profit margin. The ld. DR has referred Rule 10B(2) of I T Rules and submitted that Rule 10B stipulates the various factors for determination of inclusion or exclusion of any case in the list of comparables. The said Rule does not prescribe the higher or lower profit rate as a deciding factor to make a case comparable. The ld. DR has also referred OECD transfer pricing guidelines on this point. In support of his contention, he has relied upon the following decisions:

(i)           Exxon Mobile Co India P. Ltd.

(ii)          BP India Services P. Ltd.

(iii)         Net Linx India P. Ltd.

(iv)         Actis Advisors P. Ltd.

(v)          Stream International Services P. Ltd.

34.2 As regards the functional difference, the ld. DR has submitted that there is no dispute on the point that the assessee as well as Eclerx Services Ltd. are in ITES services and as per the notification of CBDT dt 26.9.2010, the various products or services are notified in the category of ITES. Once a service falls under the category of ITES, then there is no sub classification of segment. Hence, in view of the various decisions of the Tribunal, it is contended that this company is a good comparable and cannot be excluded only on the basis of high profit margin. The ld. DR has further submitted that even in the products and services notified by the CBDT, the KPO is not recognized as a separate services. Therefore, the objection of the assessee is contrary to the services/products as notified by the CBDT under the category of information and ITES.

34.3 In rebuttal, the ld. AR has submitted that BPO focuses on mainly processing whereas KPO focuses on value addition/knowledge addition expertise. Therefore, KPO are not functionally comparable to ITES. He has reiterated that the extract of the annual report of the company states that this company is into KPO services, which is different from BPO services. He has relied upon the following decisions of the Tribunal:

(i)           SAP Labs – ITA No.398/Bang/2010= (2010-TII-44-ITAT-BANG-TP)

(ii)          Google India P. Ltd. – ITA NBo.1368/Bang/2010

(iii)         Adobe Systems IPL – ITA No.5043/Del/2010 = (2011-TII-13-ITAT-DEL-TP)

(iv)         TEVA India – ITA BNo.6107/Mum/2009 = (2011-TII-28-ITAT-MUM-TP)

(v)          Capital IQ- ITA No.1961/Hyd/2011 = (2012-TII-148-ITAT-HYD-TP)

34.4 We have considered the rival submissions and carefully perused the relevant material on record. The factors for determining inclusion or exclusion of any case in the list of comparables are specifically provided under Rule 10B(2). Therefore, unless and until there are specific reasons and factors as provide under the Rule 10B, an entity cannot be excluded or eliminated from the list of comparables solely on the basis of high profit making unit or loss making unit because no such factor finds place either in Rule 10B(2) or 10B(3) of IT Rule.

34.5 Even as per OECD TP guidelines, the extreme results might consist of losses or unusually high profits itself cannot be a factor for potential comparables; but further examination would be needed to understand the reasons for such extreme results. If some reasons are detected which indicate a defect in the comparability or exceptional conditions for such an extreme results, then only the case may be excluded from the proposed comparables. The concluding remarks given under the OECD TP guidelines in para 3.65 & 3.66 are as under:

“3.65 Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions! enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and where the losses incurred by third parties reflect a level of risks that is not comparable to the one assumed by the taxpayer in its controlled transactions. Loss-making comparables that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses.

3.66 A similar investigation should be undertaken for potential comparables returning abnormally large profits relative to other potential comparables.

Thus, it is clear that even the loss making or high profit making comparables that satisfy comparability analysis should not be rejected on the sale basis that they suffers loss or earned high profit.

34.6 In the case of Exmxon Mobil Company India P. Ltd. (supra), the Tribunal has discussing the issue in para 31(xi) as under:

(xi) Now, coming to the alternative arguments of the assessee that abnormal profit making unit is also to be eliminated on the same analogy on which loss making units are excluded, we, in principle, do not dispute this proposition. The various case laws relied upon by the assessee lay down that a comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making unit cannot also be automatically eliminated just because the comparable company earned higher profits than the average. The reason for rejecting the two loss making units is not just because they were loss making units but for the reasons which are already stated in the preceding paragraphs. If similar reasons existed in the higher profit making unit, then, it is for the assessee to bring out those reasons and seek exclusion of the same. A general argument that, you have to exclude units which have high profit range, in case you exclude units which have made loss is a general submission which cannot be accepted. In other words, as a general principle, both loss making unit and high profit making unit cannot be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that a comparable has incurred loss or has made abnormal profits. Thus, this ground is dismissed.

34.7 Similarly in the case of M/s B P India Services P. Ltd. (supra) the coordinate Benches of this Tribunal has adjudicated this issue in para 1.2.6 as under:

“12.6. Thus it is evident that the decisive factors for determining inclusion or exclusion of any case in/from the list of comparables are the specific characteristics of services provided, assets employed, risks assumed, the contractual terms and conditions prevailing including the geographical location and size of the markets, costs of labour and capital in the markets etc. Nowhere, the higher or lower profit rate, as presumed by the Id. CIT(A), has been prescribed as the determinative factor to make a case incomparable. Rightly so, because profit is not a factor in itself, but consequence of the effect of various factors. Only if the higher or lower profit rate results on account of the effect of factors given in rule 10B(2) read with sub-rule (3), that such case shall merit omission. If however such extreme profit rate is achieved because of factors other than those given in the rule, then such case would continue to find its place in the list of comparables.”

34.8 The findings of the coordinate Benches of this Tribunal referred above are clear on this point that inclusion and exclusion of the comparables cannot be decided on the basis of the factors other than the factor specified under Rule 10B(2). Hence, in views of the above discussion we do not accept the objections of the assessee that because of the abnormal profit margin this company should be rejected as a comparable.

34.9 Similar view has been taken by this Tribunal in the case of Net Linx India P. Ltd. (supra) and Stream International Services P. Ltd. (supra) wherein it was held that comparables cannot be deleted on the ground of high margin.

34.10 As regards functional difference, we find that KPO is a term given to the branch of BPO services, where apart from processing of the data, knowledge is also applied.

34.11 Even otherwise, this company provides data processing and data analytics service’s which is similar to the services of the assessee and therefore, it cannot be said that the business activity of the assessee and this company are materially and substantially different, which cannot be compared, specifically when services of both are in the nature of ITES. Further, the assessee has not raised such objection before the lower authorities and in particular before the TPO. Accordingly, we do not find any merit on this objection of the assessee.

(xiv) Flextronics Software Systems Ltd:

35. The ld. AR has submitted that this company is in the business of development of software products and providing software consultancy services which cannot be considered as a comparable to assessee’s case. In support of his contention, the ld. AR has submitted that in the case of Telecordia Technologies India Ltd. in ITA No. 7821/Mum/2011, this Tribunal had considered this company as comparable to the Telecordia as both were involved in development of software. The ld. AR has further submitted that this company is having related party transactions constituting more than 25% of the total revenue; therefore, it cannot be considered as a comparable.

35.1 On the other hand, the ld. DR has submitted that treating the said company as a comparable to Telecordia would not ruled out a comparability of the company with the assessee. As regards the related party transactions, the ld. DR has relied upon the decision of the Delhi Benches of the Tribunal in the case of Actis Advisers (supra) wherein threshold limit for related party transactions was considered at 25% to the total revenue.

36. Having considered the rival submissions and relevant material on record, we find that this company is having related party transactions constituting 25% of the total revenue. This fact has not been disputed by the department; therefore, in view of our finding in the foregoing paragraphs on the issue of related party transactions, this company cannot be considered as a good comparable when the related party transactions constitutes more than 15% of the total revenue. Accordingly, this company cannot be considered as a comparable.

(xv) Genesys International Corporation Ltd.

37. The ld. AR of the assessee has submitted that this company was engaged in the business of software services and I T consultancy services and hence, should be rejected as a comparable. He has referred the order of the TPO and submitted that the TPO itself has recorded in the impugned order that this company has software service and IT consultancy services.

37.1 On the other hand, the ld. DR has submitted that this company has derived the revenue from Geographical Information systems (GIS) activity which is ITES activity. He has filed a copy of the notification no. SO 890(E) dt 26.9.2000 showing that GIS is ITES activity. Thus, the ld. DR has submitted that this company is a good comparable as far as the functional similarity is concerned.

38. We have considered the rival submissions and relevant material on record. As far as the functional comparability of this company is concerned, it is clear from the annual report of this company that this company is engaged in the business of GIS activity. As per the notification no. SO 890(E) dt 26.9.2000 of CBDT, GIS is one of the ITES notified by the Board. For the sake of ready reference, we quote the notification no.SO 890(E) as under:

“In exercise of the powers conferred by clause (b) of item (I) of Explanation 2 of section 10A, clause (b) of item (I) of Explanation 2 of section l0B and Clause (b) of Explanation to section 80HHE of the Income- tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby specifies the following In formation Technology enabled products or services, as the case may be, for the purpose of said clauses, namely:

(i)           Back-office Operations;

(ii)          Call Centres;

(iii)         Content Development/Animation;

(iv)         Data Processing;

(v)          Engineering and Design;

(vi)         Geographic In formation System Services r-

(vii)        Human Resource Services;

(viii)       Insurance Claim Processing;

(ix)         Legal Databases;

(x)          Medical Transcription;

(xi)         Payroll;

(xii)        Remote Maintenance;

(xiii)       Revenue Accounting;

(xiv)        Support Centres; and

(xv)         Web-site Services’

38.1 When GIS is notified ITES/product, then undisputedly, this comparable and the assessee both are engaged in the ITES services; therefore, we do not find any substance or merit in the contention of the ld. AR that this company is functional different and cannot be considered as a comparable. We further note that even before the TPO, the assessee did not raise any such objection of functional difference. Hence, we find that this company is a good comparable of the assessee.

(xvi) HCL Comnet Systems & Services Ltd:

39. The ld. AR has submitted that the turnover of this company was very high as compared to the assessee; therefore, this company cannot be a good comparable because of vast difference of turnover. In support of his contention, he has relied upon the decision of the Hyderabad Benches of the Tribunal in the case of Capital IQ Information (supra) as well as the decision of the Bangalore Benches of the Tribunal in the case Trilogy E Business. Apart from this, the ld. AR has also submitted that this company had related party transactions constituting 21.52% of the total turnover; therefore, this company cannot be considered as a comparable.

39.1 On the other hand, the ld. DR has submitted that the turnover has no direct relation with the margin. He has submitted comparative details and chart to show that comparability of various companies having different turnover and margins and submitted that it is clear from the table as well as the graphic chart that the company having high turnover has low margin whereas low turnover has high margin. In support of his contention, he has relied upon the decision of this Tribunal in the case of M/s Symantec Software Solutions P. Ltd. in ITA No.7894/Mum/2010 dt 31.5.2011 = (2011-TII-60-ITAT-MUM-TP)

39.2 As regards the related party transactions constituting 21.52%, the ld. DR has submitted that in the case of Astic Advisory (supra), the Delhi Benches of the Tribunal has took threshold limit of related party transactions at 25% hence, this company is a good comparable.

40. Having considered the rival submissions and relevant material on record, we find that since the related party transactions constituting 21.52% of the total revenue; therefore, in view of our findings in the foregoing paragraphs on this issue, this company cannot be considered as a comparable. We will consider the issue of turnover filter while discussing other comparables.

(xvii) I C R A Online Ltd.

41. This company is a common comparable as selected by the assessee accepted by the TPO and therefore, no objection has been raised before us in respect of this company.

(xviii) ICRA Techno Analytics Ltd:

42. The ld. AR has submitted that this company was engaged in the business of computer software development services, sub-licensing and web development & hosting services. He has further submitted that this Company is having related party transactions constituting 23.86% of the total turnover. Therefore, this company cannot be taken as a comparable.

42.1 The ld. DR on the other hand has submitted that the TPO has taken segmental results of this company and the segmental report shows that there is a revenue from professional services to the extent of Rs. 7,33,18,000/-, out of the total revenue of Rs. 92 crores which is almost 80% of the total revenue. Therefore, this company is functionally comparable with the assessee.

42.2 As regards the related party transactions to the extent of 23.86%, the ld. DR has relied upon the decision of the Delhi Benches of the Tribunal in the case of Actis Advisors P. Ltd. (supra).

43. We have considered the rival submissions and carefully perused the relevant material on record. Undisputedly, the related party transactions constituting 23.86% of the total revenue; therefore, in view of our finding in the foregoing paragraph on this issue, this company cannot be considered as a comparable.

(xix) Informed Technologies India Ltd.

44. The ld. AR of the assessee has argued that this company undertakes substantial marketing expenditure and hence making it functionally not comparable with the assessee because the assessee does not incurred any expenditure by way of marketing as the marketing activities are executed by parent company. He has further submitted that this company is having related party transactions constituting 14.99% of the total turnover.

44.1 On the other hand, the ld. DR has submitted that on the basis of marketing expenditure, this company cannot be excluded as a comparable. In support of his contention, he has relied upon the decision of the Delhi Benches of the Tribunal in the case Actis Advisors P. Ltd. (supra)

44.2 As regards the related party transactions, the ld. DR has submitted that the related party transactions are less than 15%. Thus, in view of the decision of the Delhi Benches of the Tribunal in the case of Actis Advisors P. Ltd. (supra) it much below the threshold limit as considered by the Tribunal at 25%.

44.3 In rebuttal, the Ld AR has submitted that high marketing expenditure resulting in brand creation and hence, this comparable should be rejected.

45. We have considered the rival submissions and carefully perused the relevant material on record. As far as related party transactions constituting at 14.99% of the total revenue, in view of our finding on this issue of related party transactions, it is within the range of 15%; therefore, this comparable cannot be excluded on this ground alone.

45.1 On the objection of the marketing expenditure, we note that marketing expenditure has been shown by this company at Rs. 61,11,240/-which is otherwise not giving material effect on the price or cost charged or paid or profit arising from the operation of that company. Therefore, in the absence of any such factor or criteria provided under Rule 10B(2), a comparable cannot be excluded on the ground of marketing expenditure, which is not so material as to influence the profit margin significantly. Further, such a factor, if at all, may be considered for an appropriate adjustment as per Sub Rule 3 of Rule 10B subject to the fulfilment of the conditions provided therein.

45.2 Further, the Delhi Benches of the Tribunal in the case of Actis Advisors P. Ltd. (supra) has considered and decided an identical issue in para 26 as under:

“26. We have heard the rival contentions and gone through the record carefully. On page 24 to 26, learned TPO has considered this aspect. According to the learned TPO, the filters applied by the assessee in the TP Study report for eliminating the companies who had incurred expenses of more than 3% of the sales on advertisement and marketing is not an appropriate filter. According to the learned TPO independent enterprises has to incur marketing expenditure. In a service industries like I.T. enabled services, the assessee did not provide the basis on which such expenses resulted in any intangible unlike in manufacturing industries where substantial marketing expenditure create an intangible. Learned TPO invited the explanation of the assessee as to why this filter be not ignored. The assessee has filed a reply to the query of the TPO which has duly been noted by the learned TPO on pages 24 & 25 of the impugned order. On due consideration of assessee’ s objections, learned TPO has observed that the operative force of the assessee’s contention is that marketing and advertisement activities carried out by the comparable companies result in creation of marketing intangible, which would give return on such investment. In other words, the expenses incurred on advertisement and marketing creates a marketing intangible. Learned TPO rejected this contentions on the ground that such an argument is not based on any substantial analysis. The assessee made reference to WIPRO & Flex Tronic Software System and submitted that these companies have created marketing intangible, therefore, they are earning more profit then any other captive entity. Learned TPO rejected the contention of the assessee on the ground that 95% of the revenue of Infosys is from repeat business. The marketing intangible did not help Infosys to get any better business according to the learned TPO. On an analysis of the learned TPO’s order coupled with the contentions of the assessee, we are of the view that learned TPO has rightly observed that in the case of manufacturing or distribution companies marketing expenses over a period of time may create marketing intangible which will helpful to them for getting better business but it may not be applicable with equal force on service industries like I.T. Enabled Services. The instances of Infosys referred by the assessee has been specifically dealt with by the learned TPO, he has reproduced relevant portion of the annual report of Infosys on page 25. For buttressing this plea, learned counsel for the assessee mainly gave two explanation. In his first reasoning he pointed out that profit ratio of the companies who have incurred expenses less than 3% of the sales is 22.26%. The companies who have incurred expense more than 3% but less than 5% of the sales on AMP, their profit is 45.52%. Similarly, the companies who have incurred expense on AMP at 5% to 7% of sales, the profit is between 67.46%. These figure have been put from the result of comparable. We have extracted such comparable in para 24 on page 32 of this order. Contrary to this, Learned DR also pointed out that HCL Comnet System Services incurred 0.65% of sales on AMP but shown profit at 45.91%. Similarly, Maple E-solution incurred 0.16% and shown profit at 32.06%. Visual Infra-tech did not incur any expenditure but shown profit at 44.15%. Thus, the details referred by the learned counsel for the assessee do not advance the case of the assessee. What is the actual impact on the earning of income could not be demonstrated on the basis of these comparative details, graph etc. The next reasoning is that such companies are functionally different. Creation of marketing intangible is brand by incurring such expenses may be helpful in future. But how their FAR is substantially so different could not be explained. Learned TPO has looked into this aspect. He observed that material showing impact on Information & Technology Industry by such expenses had not been produced by the assessee. After taking into consideration the discussion made by the learned TPO as well as the DRP on this issue, we do not find any merit in the contentions of learned counsel for the assessee for exclusion of eight companies, extracted supra from the list of comparables.”

45.3 As it is clear that an identical contention has been considered and rejected by this Tribunal in the case of Actis Advisors P. Ltd. (supra). In the case in hand, the assessee has not brought out a case that advertisement and marketing expenditure is very high in relation to the turnover of the said company. Accordingly, this objection of the assessee is rejected.

(xx) Inforsys BPO Ltd:

&

(xxi) Wipro Ltd.

46. The ld. AR has submitted that due consideration should be given to the fact that the company possesses brand value which will directly impact the margins of the company. He has further submitted that the turnover of this company was very high in comparison to the assessee. Therefore, this company cannot be considered as a good comparable. In support of his contention, he has relied upon the decision in the case of Capital IQ Information (supra) as well as the decision of the Bangalore Benches of the Tribunal in the case Trilogy E Business.

46.1 On the other hand, the ld. DR has submitted that the turnover has no direct relation with the margin. He has submitted comparative details of various companies having different turnover and submitted that it is clear from the table as well as the graphic chart that high turnover has low margin whereas low turnover has high margin. In support of his contention, he has relied upon the decision of this Tribunal in the case of M/s Symantec Software Solutions (P.) Ltd. – ITA 7894/Mum./2010-(2011-TII-60-ITAT-MUM-TP)

46.2 In rebuttal, the ld. AR has submitted that in the case of Actis Advisors P. Ltd. (supra), the Tribunal has excluded this company on the ground of high turnover in para 31. He has also referred the Rule 10B(2) and submitted that the factor for comparability of an entity includes the size of markets; level of competition; assets employed for services. Therefore, the high turnover shows the size of market of the company is larger then the assessee. Similarly, the asset employed for services are also significantly more in comparison to the assessee. Hence, this company cannot be treated as a comparable.

47. We have considered the rival submissions as well as the relevant material on record. The assessee has mainly emphasised the objection of high turnover of Infosys BPO Ltd. in comparison to the assessee; therefore, this company cannot be treated as a comparable. The reliance was placed on the decision of the Hyderabad Benches of this Tribunal in case of Capital IQ Information (supra) as well as in the case of Agnity India Technologies (supra)

47.1 We note that in the case of Capital IQ Information (supra) the Tribunal has relied upon the decision in the case of Agnity India Technologies (supra) as well as in the case of Triniti Advanced Software Labs P. Ltd. (supra). We further note that all these decisions have primarily relied upon the decision of Bangalore Benches of this Tribunal in the case of Genesys Integrating Systems India P. Ltd. (supra) which has been relied upon by the Tribunal in case of Capital IQ Information in para 21 as under:

“21. On considering the submissions of the assessee in relation to these three companies, we find that the TPO has excluded the companies whose turnover is less than Rs. One Crore, on the ground that they may not be representing the industry trend. That very logic also applies to the companies having high turnover of over Rs.200 crores as against the assessee’s turnover of only Rs.60 crores, and therefore, it would be fair enough to exclude those companies also. In the case of Agnity India Technologies P. Ltd. (supra), the Delhi Bench of the Tribunal, while considering the comparability with companies which are market leaders in their field, and having substantially high turnover, observed as follows-

“5.2. Various arguments, as stated earlier, were taken before the DRP which inter-alia included rejection of comparable cases; application of arbitrary filter of wage to sales ratio; ignoring that the assessee is a limited risk company; inclusion of Infosys Technologies ltd.; and inclusion of Satyam Computers Services Ltd. in spite of the fact that its data is not reliable as publicly known. On the basis of these arguments, the DRP excluded the case of Satyam Computers Services Ltd., thereby reducing the arm’s length margin to 25.6%. It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the later is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited currency risk. Having considered these points, we are of the view that the case of the aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in the order. Therefore, we are of the view that this case is required to be excluded.”

Similar view has also been expressed by the Hyderabad Bench of the Tribunal in the case of Trinity Advanced Labs P. Ltd. (supra). In the case of MIs. Genesys Integrating India P. Ltd. (supra), the Bangalore Bench of the Tribunal has observed in the following manner-

“9. Having heard both the parties and having considered the rival contentions and also the juridical precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain for the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet and NASSCOM has given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in the range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study.”

In view of the aforesaid consistent decisions of the Tribunal, we accept the contention of the learned Authorised Representative for the assessee that the aforesaid three companies cannot be treated as comparable, considering their substantially high turnover as compared to that of the assessee. We also agree that the turnover filter of Rs.1 crore to Rs.200 crore as applied by the ITAT Bangalore Benchin the aforesaid decision, should also apply to the facts of the present case, considering the assessee’s turnover of mere Rs.60 crores. We therefore, hold that companies having turnover of Rs.1 crore to Rs.200 crore alone can be considered as comparable, in the case of the assessee.”

47.2 In the case of Genesys Integrating Systems India P. Ltd.. (supra), the Tribunal has made a classification of company is having turnover of Rs. 1 crore to Rs 200 crores as the comparable range of size of companies and further from Rs. 200 crores to Rs. 2000 crores as another slab of turnover. This classification is based on dun & Bradstreet having given different ranges of size of companies i.e. large, medium and smaller. Such classification by dun & Bradstreet was not made in the context of co0maprables under T P Regulations.

47.3 It is pertinent to note that as per this classification of the company on the basis of turnover from Rs. 1 crore to Rs. 200 crores, an entity having Rs. 1 crore can be compared with an entity having Rs.200 crores turnover ; but at the same time, an entity having Rs. 200 crores turnover cannot be compared with the entity having Rs. 201 crores turnover. Thus, this classification gives unrealistic result as far as the comparability of two entities having difference of Rs. one crore only cannot be compared. In our view for the purpose of comparing the profit margin of functionally similar entity the classification of such slab range is not practically workable. Therefore, as it is apparent from this classification that two entities can be compared having difference in the turnover upto Rs.199 crores; but at the same time, cannot be compared even if the difference of turnover of one cr. Therefore, with due respect, we are unable to accept such classification of comparables on the basis of fixed slabs of turnover.

47.4 Further, as brought to our notice by the ld. DR through the details and graphic chart there is no direct proportionate relation between the turnover and margin. The details applied by the ld. DR as shown in the graphic chart are as under:

S. No.	Name of the Company	Margin	Sales	Mean Margin	Sales Upto
1	Datamatics Financial Services Ltd. (Seg.)	5.07	2.92
2	Bodhtree Consulting (Segmental)	29.58	2.94
3	Informed Technologies India Ltd.	35.56	4.07
4	Cosmic Global Ltd.	12.04	4.27
5	Asit C Mehtra (Nucleus Netsoft)	24.21	6.09
6	Apex Knowledge Solutions P. Ltd.	12.38	6.63
7	Mold-Tek Technologies Ltd.	113.49	11.4
8	Maple Esolutions Ltd.	35.05	12.21
9	I Services India Pvt. Ltd.	50.27	16.29
10	Accentia Technologies Limited	38.26	16.57
11	R. Systems International Ltd. (Seg.)	20.18	17.33
12	Genesys International Corporation Limited	13.35	19.17
13	Flextronics Software (Seg)	14.54	21.41
14	Vishal Information Technologies Ltd.	51.19	30.6
15	Spanco Ltd. (Seg.)	25.81	35
16	Caliber Point Business Solutions Ltd.	21.26	39.29
17	Apollo Healthstreet Ltd.	-13.55	47.84	31.36	Upto 50
18	Triton Corp. Ltd.	34.93	53.36
19	I C R A Techno Analytics Ltd. (Seg.)	12.24	72.32
20	Eclerx Services Ltd.	90.43	86.2	31.29	Upto 100
21	Allsec Technology Ltd.	27.31	113.27	31.10	Upto 120
22	Aditya Birla Minacs	11.98	197.06	30.23	Upto 200
23	HCL Comnet (Seg.)	44.99	260.18	30.87	Upto 300
24	Infosys B P O Ltd.	28.78	649.56	30.78	Upto 650
25	Wipro Ltd. (Seg.)	29.7	939.77	30.74	Upto 940

47.5 It is manifest from this details and the comparative chart that there is no relation between the turnover and margin of an entity as it shows that the highest margin of the entity having Rs. 50 crores turnover and the lowest margin in case of the turnover upto Rs. 200 crores. It makes further clear that there is not much difference in the margin of the various entities having turnover upto Rs. 940 crores as the average margin of the entities upto the turnover of Rs.50 crores is 31.36%; whereas the margin of the entities having turnover upto Rs. 940 crores is 30.74%. Thus, there is not much difference in the margin whereas there is a vast difference in the turnover. The turnover is not a criteria as prescribed under the Rule 10B(2) for selecting the comparables. It is settled proposition that the decisive factor for determining inclusion or exclusion of any case as a comparable are prescribed under Rule 10B(2) which does not specify any such factor of turnover on the basis of which a particular case can be included or excluded in the list of comparables.

47.6 In the case of M/s Symantec Software Solutions P. Ltd. (supra), this Tribunal (one of us-JM-is the party) has considered and decided the issue of turnover filter in para 12.15.1 as under:

“12. Next objection of the assessee is regarding turnover filtering as well as difference in functions and risk profile of comparables.

13. The main contention of the Id AR of the assessee is that the comparables having more than 50 crores and less than 5 crores of turnover should be excluded for determining the ALP because the assessee’s revenue from marketing support services is about Rs. 20 crores. He has pointed out that as per Rule 10B(3), if there are material difference between the transaction being compared, then, reasonably accurate adjustments should be made to eliminate the material difference. The Id AR asserted that since the TPO has not made any such adjustment; therefore, the comparables, which are having more than 50 crores and less than 5 crores of turnover should be discarded.

14. Undisputedly, the comparables considered by the TPO are selected by the assessee and in its TP study; the assessee did not exclude the comparables on such basis of turnover. The assessee’s contention is that the assessee is a risk free entity whereas the comparables are not free from various risks and therefore appropriate adjustment on account of difference in function and risk profile should be made. We note that the assessee did not make any such adjustment of difference in function and risk profile of the comparables in the TP study. It is only when the TPO proposed to exclude some of the comparables as agreed by the assessee and to take only current year updated data into consideration for determining the ALP, the assessee raised these objections. There is no quarrel on the point that if the comparables proposed to be taken into consideration by the TPO are having an abnormal differences of turnover in comparison to the turnover of the assessee, and if it is apparent due to such abnormal difference in the turnover, the operating profits of the comparables is got distorted then in such a case, those comparables should be excluded from the list of the ALP.

15. In the case in hand, the assessee raised these objections only because some of the comparables are having high profit and also high difference in the turnover and not because of the high or low turnover has influenced the operating margin of the comparables. All the objections and contentions raised by the assessee in respect of this issue are general in nature and no specific fact has been brought on record to show that due to the difference in turnover the comparables become non-comparables. The assessee has not demonstrated as to how the difference in the turnover has influenced the result of the comparables. It is accepted economic principles and commercial practice that in highly competitive market condition, one can survive and sustain only by keeping low margin but high turnover. Thus, high turnover and low margin are necessity of the highly competitive market to survive.

15.1 Similarly, low turnover does not necessarily mean high margin in competitive market condition. Therefore, unless and until it is brought on record that the turnover of such comparables has undue influence on the margins, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself.”

47.7 When the assessee has not made out a case as how the high or low turnover has influenced operating margin and on the contrary there is no direct relation between the turnover and margin as clear from the details and graphic chart reproduced above, then a comparable cannot be rejected solely on the basis of high turnover. Even otherwise, the larger turnover and size of the entity may has an impact of economical cost of production in the manufacturing industry due to huge cost of fixed asset but not in service sector.

(xxii) I Services India P. Ltd.:

48. The ld. AR has referred the TPO order and contended that this company was engaged in the business of software and products. Apart from functionally different, the information about the company was not in public domain. Accordingly, the ld. AR has submitted that this company cannot be considered as a comparable.

48.1 On the other, the ld. DR has submitted that the assessee has raised the objection that the data is not available in the public domain; therefore, it may go back to TPO to verify, if the company is in the software or ITES.

49. Having considered the rival submissions and other relevant material on record, we note that the assessee raised the objection before the TPO that the information about the company is not available in the public domain; but the TPO has not addressed this objection of the assessee. Even before us nothing has been produced to show that the information/data in respect of this company is available in the public domain. In the absence of the information/data about the company, this company cannot be considered as a comparable. Further, the TPO has mentioned the profile of the said company as software services and products. In view of the fact that the information about the company was not available in the public domain at the time of transfer pricing proceedings and the TPO itself has taken the profile of the company as software services and products which is different from the business of the assessee, this company has to be excluded from the list of comparables.

(xxiii) Maple Esolution Ltd.

&

(xxiv) Triton Corpn Ltd:

50. The ld. AR has pointed out that Maple Esolution Ltd. acquired by Triton Corpn Ltd., therefore, Maple Esolution Ltd. was converted into Triton Corporation. He has further submitted that the Directors of Maple Esolution Ltd. were involved in fraud as has been considered and rejected by the Hyderabad Benches of the Tribunal in the case of Capital IQ Information (supra). He has also relied upon the decision of the Delhi Benches of the Tribunal in the case of CRM Services Ltd. in ITA 4068/Del/2009 = (2011-TII-86-ITAT-DEL-TP). The ld. AR has further submitted that though Maple Esolution Ltd. is a comparable company selected by the assessee in the TP study; however, based on the above facts, Maple Esolution Ltd. and Triton Corpn Ltd., both are required to be rejected as comparable. In support of his contention, he has relied upon the order of this Tribunal in the case of Stream International India P. Ltd. in ITA No.8997/Mum/2010 = (2013-TII-42-ITAT-MUM-TP).

50.1 On the other hand, the ld. DR has submitted that as recorded by the Tribunal in the decision relied upon by the assessee, fraud was done in the year 1980 – 1990 and in a different business, not related with the business of the company Maple Esolution Ltd. The ld. DR has filed the newspaper report showing serious fraud office of UK to show that fraud was done in 1980 to 1990 in the bicycle parts and there was no relation with the business of Maple Esolution Ltd. Thus, the ld. DR has submitted that when the allegation of fraud against the directors was not related to the company in question, then this cannot be a reason for rejection of the company as a comparables.

50.2 In rebuttal, the ld. AR has submitted that the Delhi Benches of this Tribunal in the case of CRM Services Ltd, has rejected this company as comparable after considering all these facts and arguments of the department.

51. We have considered the rival submissions and relevant material on record. The first objection raised by the assessee is the involvement of the directors of this company in the fraud. The Tribunal in the case of Capital IQ Information (supra) as well as CRM rejected this company as comparable. Undisputedly, the alleged fraud relates back to the period of 1980 to 1990 and it was in respect of business in bicycle parts not connected with the business activity of this company. There was no allegation of any malpractice or fraud in the business of these companies and the allegation of fraud was against the directors in person. Though the Tribunal in the case of Capital IQ Information (supra) and CRM Services (supra) has taken one of the grounds for rejecting this company as a comparable because the director of this company was reportedly involved in the fraud, in our considered opinion the said allegation of fraud against the directors and that too in the year 1980 to 1990 would not have influenced the business and margin of these companies when there is no allegation of any malpractice or fraud in connection with the business of these companies. Further, considerable time has passed when these allegations were reported up till the AY under consideration. Therefore, solely on the basis of the allegations of fraud and malpractice against a person in respect of unconnected business activity because the said person happens to be the director of these companies, cannot render these companies as non-comparables. There is no allegation against these companies or business activity of these companies. Therefore, it cannot be considered that the business or results of these companies are in any manner influenced or affected by the allegation of fraud against the directors in respect of other business activity that too more than two decades back.

51.1 So far as the Maple Esolution Ltd., is concerned, this company was selected by the assessee itself in TP study as comparable; therefore, we are not inclined to accept the objection raised by the assessee before us that the directors of these companies were involve din the fraud.

51.2 However, since Triton Corpn Ltd., acquired by Maple Esolution Ltd., therefore, we are of the view that if extra ordinary events like merger and de-merger or amalgamation took place during the financial year relevant to the Assessment Year under consideration, and because of the merger/de-merger the company became functionally different then the said company should be excluded from the comparables. However, if the merger of the two functionally similar companies took place then the event of merger itself cannot be taken a factor for exclusion of the said comparable.. Accordingly, we direct the AO/TPO to verify this fact and accordingly decide the comparability of this company namely Accentia Technologies Ltd.

(xxv) Mold Tex Technologies Ltd:

51.3 The ld. AR has referred threefold objections against inclusion of this company in the comparables. Firstly, this company has earned super normal profit; secondly this is not functionally comparable as it is engaged in the engineering services. He has referred page 301 & 302 of the paper book and submitted that the assessee raised these objections that there is a considerable differences in the business profile and the functions performed by this segment of Mold Tex vis-à-vis the business profile and functions performed by the assessee. The ld. AR has pointed out that this company operates in two business segments; plastic division and IT division. Plastic division is engaged in the manufacture of lube & oils, paints, pet products, consumer products etc., and IT division of the company specializes in providing structural design and detailing services which can be categorized as structural engineering services and in the nature of KPO. Thus, the I T segments of this company cannot be classified as falling within the scope and ambit of ITES segment. The third objection of the ld. AR is with respect to the extra ordinary events in the form of merger during the year as this fact has been recorded by the Hyderabad Bench in Capital IQ Information (supra). In support of his contention, he has relied upon the decision of the Tribunal in the case of Capital IQ Information (supra).

51.4 On the other hand, the ld. DR has submitted that in the case of Actis Advisors P. Ltd. (supra), the Delhi Benches of this Tribunal has considered this company as a good comparable after examining all the aspects relates to this company. He has relied upon the decision in the case of Actis Advisors P. Ltd. (supra),

52. We have considered the rival submission and relevant material on record. As far as the objection regarding super normal profit is concerned, this objection cannot be a sole ground for rejection of a comparable in view of our findings while discussing the comparable Eclerx Services P. Ltd. in para 34.4

52.1 As regards the extraordinary events of merger, we have decided the identical issue while discussing the comparable Accentia Technologies Ltd. in paras 17 to 18.3. Accordingly, we direct the Assessing Officer/TPO to verify this fact and accordingly decide the comparability of the company.

(xxvi) R System International Ltd:

53. We have heard the ld. AR as well as the ld. DR and considered the relevant material on record. Apart from the other objections, the ld. AR of the assessee has submitted that this company had related party transactions of 21.19% of the total turnover; therefore, it cannot be considered as a comparable.

53.1 On the other hand, the ld. DR has relied upon the decision of the Delhi Benches of the Tribunal in the case of Actis Advisors P. Ltd. and submitted that related part transaction is less than 25% of the total turnover and therefore, it can be a good comparable. There is no dispute on related party transaction of this company constituting 21.19% of the turnover. Hence, in view of our finding in the foregoing paras on this issue, this company cannot be considered as a good comparable

(xxvii) Specco Ltd.

&

(xxviii) Spanco Telesystems & Solutions Ltd:

54. The ld. AR has submitted that this company is functionally in comparable because of the fact that the revenue from ITES segment is only 8.21%. Thus, the ld. AR has submitted that this company is primarily engaged in telecom business and BPO is one of the smaller segment. Therefore, this company cannot be considered as a good comparable.

54.1 On the other hand, the ld. DR has submitted that the TPO has considered only segmental results and therefore, the other business activity has no role for determining comparability of these companies. He has further submitted that even the turnover from ITES segment is more than 35 crores, which is comparable to the turnover of the assessee. Hence, this company is a good comparables.

55. We have considered the rival submissions and carefully perused the relevant material on record. The main objection of the assessee against this company is functionally different. It is not disputed that the TPO has considered only the segmental results of this company relating to ITES services. Therefore, other business activity has no role to effect the results of the ITES segments which is compared with the assessee. Further, the turnover of the ITES segments is more than 35 crores which is quite comparable to the turnover of the assessee of 46 crores which shows that this company had a significant business of ITES. In view of these facts, we do not find any substance or merit in the objection of the assessee against this company. Accordingly, we hold that this company is a good comparable as segmental results are considered.

55.1 We further note that the Spanco Ltd. a comparable selected by the assessee is the same company but only the name is changed Therefore, when the assessee itself has selected this company as a comparable on segmental result, then there is no reason for objection when the same company was taken by TPO though with a different name. Accordingly, when both these comparables are the same companies, one has to be excluded.

55.2 Since there is a difference in the margin recorded by the TPO viz the assessee; therefore, for this limited purposes, this comparable is remanded to the record of the AO/TPO to verify and consider the correctness of margin.

(xxix) Sparsh BPO Services Ltd:

56. This comparable is common as selected by the assessee and accepted by the TPO; therefore, no dispute or objections are raised in this respect on this comparable.

Risk Adjustment And Working Capital Adjustments;

57. The ld. AR has submitted that the TPO as well as the CIT(A) did not consider the submissions regarding the risk adjustment and working in capital adjustment. He has further submitted that for the AY 2006-07, this Tribunal in assessee’s own case has accepted that the adjustment with respect to risk and working capital were to be given but remanded the issue to the Assessing Officer for quantification.

57.1 On the other hand, the ld. DR has submitted that the assessee has not claimed risk adjustment in the TP report; but the same was claimed only after TPO proposed the adjustment. He has referred the rule 10B(3) of the IT Rules and submitted that onus is on the assessee to prove whether the risk adjustment is required because of the reasons that such factors has materially effect the price or cost charged or paid or the profit arising from such transaction in the open market. Thus, the ld. DR has submitted that as per Rule 10B, a reasonable and accurate adjustment can be made to eliminate the material effect of such difference. He has also referred and relied upon the UN Manual of transfer pricing and submitted that the assessee has to work out each and every individual risk factor as illustrated in the UN manual on Transfer Pricing. In the absence of such working, no adjustment can be given merely on the basis of submissions. He has further submitted that there are some risk involvements even in case of a single customer. Therefore, all these factors have to be taken into account while working out the risk factor and adjustment. He has further submitted that as per UN manual on Transfer Pricing, there is no universally accepted method for risk adjustment. However, in practice, certain methods are adopted to quantify the fact of risk on anticipation profitability e.g weighed average cost of capital/capital asset pricing model. However, it has been mentioned that both the methods are based upon the risk models used in relation to risk of securities. Most statistical methods have their inherence known limitations. Therefore, risk adjustment must be carefully and only if a reasonable and actuate adjustment is possible. He has relied upon the following decisions:

(i)           M/s Symantec Software Solutions P. Ltd. – ITA 7894/Mum/2010= (2011-TII-60-ITAT-MUM-TP)

(ii)          Interra Inforamtion Technologies (I) Pvt. Ltd. ITA 5568/Del/2010 = (2012-TII-142-ITAT-DEL-TP)

(iii)         Marubeni India P. Ltd. ITA 809/Del/2009 = (2011-TII-36-ITAT-DEL-TP)

57.2 As regards the working capital adjustment, the DR has submitted that since the TPO has allowed the working capital adjustment for the AY 2005-06, and therefore, this issue may be remanded to the record of the TPO for calculation of working capital adjustment.

58. We have considered the rival submissions as well as the relevant material on record. It is thumb rule of business and commerce that more risk is related to more anticipated/expected profit. However, the actual return may or may not directly depend upon the degree of risk assumed in a particular business.

58.1 As per UN manual of Transfer pricing risk adjustment must be made carefully and only when a reasonable and accurate adjustment is possible and not merely on the basis of notion or presumption.

58.2 This Tribunal time and again has observed in the decisions as relied upon by the ld. DR that any adjustment can be made only when it is proved on the basis of actual risk or any other factor by proper data and accurate calculation. No adjustment can be made on adhoc basis but it should be based on some tangible material and accurate calculation of quantification of the comparative risk. For the AY 2006-07, this tribunal in para 24 & 25 has observed and remanded the issue as under:

“24. We have considered the detailed submissions made by the learned Counsel and the learned DR. At the outset we have noted that the information obtained by AD by writing to various companies while selecting the comparables has not been provided to assessee at all. Assessee has raised these objections not only before the TPO but also before the DRP. Since information relied upon by the TPO is not available in public domain, it is incumbent on the TPD to furnish the relevant information to assessee. In a case where the information is not furnished to assessee it becomes secret information which can not be used against assessee. Most of the objections raised by assessee with reference to the selection of comparables by the TPO are with reference to the information not available in the public domain, but obtained by TPO and also with the various filters considered by the TPO in rejecting assessee’s comparables. We also notice that there is no uniformity in rejection of assessee’s comparables and selection of comparables by the TPO (a) on the reason that various filters considered by the TPO himself has not been followed and (b) that some of the companies selected by assessee were rejected on unreasonable grounds (loss making company etc). In order to compare a company with assessee, and to benchmark the same, proper and appropriate FAR analysis is required to be done and when assessee has given detailed objections both to the TPO as well as to the DRP, it is incumbent on them to rebut the objections. It is not proper to reject all the objections without discussing them in the order. We also notice that assessee has given detailed objections. There was no discussion at all by the DRP on these objections. As far as the working capital adjustment is concerned, how the same was arrived at could not be analyzed by us. Even the learned CIT (DR) has also accepted that this issue may be remitted to the TPO for fresh examination.

25. With reference to the risk adjustment so sought by assessee, there is merit in the CIT DR’s argument that assessee has not provided any risk adjustment in TP study submitted by them. In our view, the claim for risk adjustment is only to make adjustments to the ALP so as to leverage the profit margin/profit on cost margin. The action of AO in cherry picking the comparables which has high profit margin and ignoring the low profit margin companies and also assessee’s contention about the risk adjustment so as to leverage the margin cannot be accepted. In fact, all companies conducting business will have the same risk i.e market risk, customer risk, government policy risk etc. and there may be variations in the extent of risk, but risk is associated with conducting business. Unless the risk is quantified in certain objective manner and can be represented by way of numbers, it is very difficult to make adjustment on presumptions and surmises. Unless the risk adjustment is quantified in a scientific manner, this aspect can only be examined in the FAR analysis. In fact it is the duty of assessee as well as the TPO to conduct a proper FAR analysis so that the right comparables are selected. Once the comparables are accepted and selected, except for the working capital adjustment and some other adjustments as may be required, we are of the opinion that no further risk adjustment need to be made. In view of this, we are not fully agreeing with assessee’s contentions as far as risk adjustment is concerned. Further, there is no correlation with bank lending rates and risks involved as claimed by assessee.”

58.3 Accordingly, the issue regarding risk adjustment and working adjustments are remanded to the record of the AO/TPO for verification and adjudication as per law after considering the rival submissions made before us.

ITA No.4429/Mum/2012 (by Revenue):

59. The revenue has raised the following grounds in its appeal:

“(a) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding amount of Rs. 47,13,384/-paid to Equant Network Services Ltd., was neither royalty nor fees for technical services without appreciating that the payment made to Equant Network Services Ltd., is in the nature of royalty payment since it involves the use of commercial equipment.

(b) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the ratio the decision of ITAT Hyderabad in the case of Frontline Soft Ltd., wherein such payment was held to be royalty’.

2. (a) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the assessee’s appeal to exclude Vishal Information Technology Ltd., as a comparable without appreciating the fact that the said company does not outsource its ITeS except for hiring additional manpower, hence is functionally similar to the assessee.

(b) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing ITAT’s order in case of Mearsk Global Services Centre (India) Ltd., in excluding Vishal Information Technology Ltd., as a comparable overlooking the fact that the Hon’ble ITAT did not have complete facts before it pertaining to the operation of the said company when it is evident from the details of the said company that no part of its ITeS job is outsourced to any outside vendors.

(c) On the facts and circumstances of the case and in law, the Ld. CIT(A)’s decision to exclude Vishal Information Technology Ltd., ought to be restored as a comparable company for benchmarking the ALP of the international transactions.”

60. Ground no.1 is regarding royalty or fee for technical services.

60.1 We have considered the rival submissions and relevant material on record. At the outset we note that for the Assessment Year 2006-07, this Tribunal has considered and decided the identical issue in para 13 as under:

13. Ground No.3 is on the issue of disallowance under section 40(a)(ia) on the payments made to Equant Network Services Ltd. which in the opinion of AC is in the nature of ‘fees for technical services’ and therefore, liable for tax to be deducted at source. Since assessee was not deducting tax, the same was disallowed under section 40(a)(ia). When this disallowance was proposed assessee submitted that the CIT(A) has already adjudicated the issue in his order passed under section 250 r.w. rule 201 & 20(1)A of the Act that the payment made to Equant is neither royalty nor fees for technical services. On the reason that the Department has not accepted the decision and is pending before the ITAT, the DRP did not interfere and directed AC to finalise the draft assessment order as proposed. It was submitted that this issue was already decided by the ITAT in ITA No.5129/Mum/09 dated 31.5.2011 wherein after elaborate discussion running to pages 13, the ITAT held that the payments are not liable for deduction of tax at source. The conclusion by the ITAT vide Para No.11 is as under:

“11. As already noted by us, the payments made by the assessee in the present case to Equant in connection with the satellite link charges were for the use of standard facility which did not involve use or right to use the channel of communication. Equant was providing multipoint data connectivity services to the assessee to facilitate data communication with its clients belonging to Willis group having their offices at Ipswich, UK and Nashville, USA. The intention of the assessee company was to avail connectivity services and it was not concerned as to which equipments were used to provide such connectivity services. The assessee had no right to access the equipments forming part of communication channel except for data communication and transmission. The assessee had no control over the said equipments or physical access to it. There is nothing to show positive act of utilization, application or employment of equipment for the desired purpose. The assessee could not come face to face with the equipments, operate it or control its functions in some manner. It had no possessory rights in relation to the said equipments. It only took advantage of a facility of use of sophisticated equipment installed and provided by the service provider. Having regard to all these facts of the case and keeping in view the decisions of Authority for Advanced Ruling (AAR) in the cases of ISRO Satellite Centre (supra) and Dell International Services (India) P. Ltd. (supra), we are of the view that the payment made by the assessee to Equant in connection with standard communication services made available to anyone who is willing to pay was not in the nature of royalty but the same was in the nature of business profit and in the absence of any P.E. of Equant in India, it was not chargeable to tax in India. The assessee thus was not liable to deduct tax at source from the payment made to Equant for such services and it, therefore, could not be treated as assessee in default u/s 201(1) and interest u/s 201(1A) also could not be charged as rightly held by the learned CIT (Appeals). We, therefore, uphold the impugned order of the learned CIT(A) on this issue and dismiss this appeal filed by the Revenue. Since this issue was crystallized by the order of the Income Tax Appellate Tribunal in the same assessment, we are of the opinion that the disallowance u/s 40(a)(ia) does not arise, as there is no need to deduct tax on the above amount paid to Equant Network Services Ltd. Accordingly, the disallowance made by Assessing Officer stands deleted. Ground no.3 is allowed.”

60.2 Following the earlier order of this Tribunal in assessee own case we decide this issue in favour of the assessee and against the revenue.

61. Ground no.2 is regarding comparable namely Vishal Information Technology Ltd., which has been deleted by the CIT(A).

61.1 The CIT(A) has excluded this comparable on the ground that this company outsourcing its business and the employees cost is less than 1% of the total cost. The CIT(A) has followed the decision of the Tribunal in the case of Mearesk Global Services Centre India Ltd., wherein the Tribunal has observed that this company has outsourced a considerable portion of business and therefore, cannot be compared with an entity which is carried out the entire operation itself.

62. Before us, the ld. DR has produced the details obtained u/s 133(6) and submitted that this company is having seating capacity of 75 out of which 60 was the capacity utilized by this company. Thus, the ld. DR has submitted that the finding of the CIT(A) is contrary to the fact where the said company has utilized more than 80% of the seating capacity of the employees.

62.1 On the other hand, the ld. AR has submitted that the information produced by the ld. DR as obtained u/s 133(6) was not addressed to the concerned TPO. Further, the said information was not complete in the context that whether this company has outsourced its business or not. The ld. AR has referred the Schedule 15 to the balance sheet and pointed out that for a sale of Rs. 31 crors only Rs. 70 lacs were paid towards salary to the employees and Rs. 13 crores were paid to the vendors for outsourcing services which shows that the major business of the said company was outsourcing. In support of his contention, he has relied upon the following decisions:

(i)  Maersk Global Services Centre ITA No.3774/Mum/2011 = (2011-TII-133-ITAT-MUM-TP)

(ii) Nextlinx India P. Ltd. ITA No.454/Bang/2011 = (2012-TII-139-ITAT-BANG-TP)

(iii) 24/7 Customer Comm (P.) Ltd. ITA No.227/Bang/2010 = (2012-TII-143-ITAT-BANG-TP)

(iv) Google India P. Ltd. ITA No.1368/Bang/2010

(vi) Brigade Global Services P. Ltd. ITA No.1494/Hyd/2010

63. We have considered the rival submissions and relevant material on record. As it is clear from the letter which was addressed to the TPO Chennai in response to the notice us 133(6) that the said information was not sought by the TPO of the assessee and therefore, this information has not been considered by the lower authorities.

63.1 We find that the CIT(A) while rejecting this comparable has not examined the relevant evidence in respect of this fact whether this company has outsourced majority of its business or used 80% of seat capacity. Therefore, in the interest of justice, we remand this comparable to the record of the AO/TPO for proper examination of the relevant facts and then decide the comparability of this company as per law.

64. In the result, the appeal filed by the assessee as well as the revenue are partly allowed.

NF