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Income Tax Officer Ward 11(3), New Delhi Vs. M/s ICC India Pvt. Ltd., 4th Floor, NSIC-STP, Okhla Industrial Estate, New Delhi
September, 10th 2015
                   DELHI BENCHES: "I-1 ": NEW DELHI


                                 ITA No: 2630/Del/2011
                                   Asstt. Year : 2002-03

              Income Tax Officer              Vs.    M/s ICC India Pvt. Ltd.,
              Ward 11(3), New Delhi                  4th Floor, NSIC-STP,
                                                     Okhla Industrial Estate,
                                                     New Delhi
              (Appellant)                            (Respondent)

            Assessee by   : Ms. Vandana Bhandari
            Department by : Sh. Amrendra Kumar, CIT,DR

                             Date of Hearing      : 02.09.2015
                            Date of pronouncement : 09.09.2015



        This is an appeal filed by the Revenue directed against the order of the

CIT(A)-XX, New Delhi, dated 22.03.2011 for the assessment year 2002-03.

The Revenue raised the following grounds of appeal:

   1.      On the facts and circumstances of the case and in law the order of the
           Ld. CIT(A) is wrong, and the against the provisions of law which is
           liable to be set aside.
   2.      On the facts and in the circumstances of the case & in law, the order of
           deleting the addition of Rs. 53,23,591/- on account of upward
           adjustment of Arm's Length Price of the Internation Transaction
           ignoring the facts that......

           (a) The upward adjustment was made by the TPO based upon the date
               of Comparables.

             (b) The CIT(A) has simply accepted the contention of the assessee
                 without discussing the relevant date based on M/s Datamatics
                 Technologies Ltd. and Infotech Enterprises Ltd., for which he has
                 directed to exclude the names of these companies to arrive at the
                 mean of OP/TC Ratio.
             (c) The CIT(A) has not established that the above two companies in
                 fact had the international transactions of more than 15-20% with
                 the related parties.
     3.      The appellant craves leave to add, alter or amend any ground of appeal
             raised above at the time of hearing.
2.        Brief facts of the case are that the respondent assessee-company is a

company duly incorporated under the provision of the Companies Act, 1956. It

is engaged in the business of providing information technology enabled services

to its parent company Interactive Composition Corporation (ICC). The return of

income for the assessment year 2002-03 was filed on 07.01.2003 disclosing nil

income. The case was selected for scrutiny assessment. Since the respondent

assessee-company reported international transaction in its report in form 3CEB,

a reference under Section (3) was made to Transfer Pricing Officer (TPO)-1,

New Delhi.

3.        It is reported that during the year under consideration, the respondent

assessee-company entered into the following international transactions with its


             S. No.   International Transaction   Method Value (in Rs. )
                1.    Export     of   Software/IT CPM          6,98,47,580
                 2.   Import of Computer hardware CUP            14,62,516

4.        In support of the respondent assessee-company's claim that the price

charged by it for the service rendered to its AE was at arm's length, the

respondent assessee-company filed a report in Form 3CEB as required under the

provisions of Section 92E of the Act. The respondent assessee-company also

made a detailed analysis of international transactions. The respondent assessee-

company had adopted Cost Plus Method (CPM) as the most appropriate method

for determining the arm's length price. The international transactions entered

into by it are at arm's length. Due to availability of reliable data, the respondent

assessee-company has made itself as the tested party, i.e., assessee's operating

profit margin over the cost has been compared with the margin of other

comparable companies in India engaged in similar function. The operating

profits to total cost was adopted as the profit level indicate ("PLI"). In the

transfer pricing study, the respondent assessee-company had chosen the

following 12 comparables and their weighted average operating profit margin

was worked out at 4.82% as below:

                Name of the company                 OP/TC
                Allsoft Corporation Ltd.            5.80%
                Fortune Informatics Ltd.            -1.90%
                Intellivisions Software Ltd.        2.03%
                Oasis Infotech Ltd.                 6.73%
                Sriven Multitech Ltd.               7.29%
                Neilsoft Ltd.                       5.07%
                Eastern Software Systems Ltd.       6.29%
                Cummins Infotech Systems Ltd.       -0.90%
                C S Software Enterprise Ltd.        8.74%
                Agenda Metmarketing Ltd.            8.93%
                Savvion India Ltd.                  6.11%
                D C Elcot Software Ltd.             3.69%
                Average OP/TC                       4.82%

5.     Computation of arm's length price by the assessee

       Since the OP/TC ratio of the assessee as worked out by it was -2.68% as

compared to 4.82% of the comparables, it made an adjustment of Rs.

53,82,342/- in the Income and offered the same for taxation. The adjustment has

been worked out as under:

       Total Cost                                 Rs.    7,18,19,973
(The assessee has removed foreign exchange fluctuation loss and interest expense being non
operating expenses from the total cost to arrive at the adjusted total expenditure)

       Arm 's Length Consideration (A)            Rs.    7,52,29,922
       (applying 4.82% OP/TC ratio)
       Consideration actually received (B)        Rs.    6,98,47,580
       Difference (A-B)                           Rs.      53,82,342

6.     The learned Transfer Pricing Officer while accepting the most

appropriate    method      used    by    the    respondent    assessee-company        for

benchmarking the international transactions rejected the transfer pricing study

conducted by the respondent assessee-company and chosen his own

comparables, which are as follows:

         Name of the company                        Adjusted OP/TC%
         Ace Software Exports Ltd.                  11.66%
         Allsec Technologies Ltd.                   2.79%
         Datamatics technologies Ltd.               30.93%
         Genesys Internation Corp. Ltd.             29.45%
         Infotech Enterprises Ltd.                  26.65%
         Karvy Consultants Ltd.                     8.03%
         MCS Ltd.                                   1.62%
         Max Healthscribe Ltd.                      1.77%
         Ask Me Info Hub Ltd.                       (-)6.28%
         Average OP/TC                              11.85%

The TPO computed the Arm's length price as follows:


     In the manner discussed above, the arithmetic mean of operating profit
     over the total cost margins of the comparables for the financial year
     2001-02 works out to 11.85%. The arm's length price of the internation
     transactions entered into by the assessee with its AE is worked out as

     Total Cost of Provision of services by the assessee:       Rs. 7,20,21,767/-
     (Adjusted total Cost of the services provided to AE as provided by the assessee
     increased by the financial expenses of Rs. 2,51,187/- since the margins of the
     comparables are on total cost basis which includes financial charges also.)

     Margin @ 11.85% of the above                               Rs. 85,32,246

     Arm's length price to be charged from the AE:              Rs. 8,05,53,513/-

     13.1      In the manner discussed above the arm's length price of the
     international transaction entered into by the assessee with its AE is
     determined at Rs. 8,05,53,513/- in place of Rs. 6,98,47,580/-.
     Accordingly, an adjustment of Rs. 1,07,05,933/- is to be made to the
     income of the assessee being the difference between the arm's length
     price and the price charged by the assessee from its AEs for rendering
     services to them. Since the assessee has itself offered Rs. 53,82,342/- for
     taxation only the balance amount of Rs. 53,23,591/- shall be added to the
     income of the assessee."

7.      The Assessing Officer passed the consequential final assessment order

dated 21st March, 2005 after taking into consideration the order of TPO passed

under section 92CA(3) of the Act. Being aggrieved by this assessment order,

an appeal was filed before the CIT(A)-XX, New Delhi, who vide order dated

22nd March, 2011 deleted two comparables chosen by TPO i.e. (1) Datamatics

Technologies Ltd, and (2) Infotech Enterprises Ltd. on the ground that these

parties had substantial related party transactions. The relevant paragraph of the

CIT(A)'s order is reproduced below:

     "I have carefully considered the facts and submissions filed by the
     appellant. After considering the facts, documentary evidences placed on
     records and arguments presented by the AR, I am satisfied that the two
     comparables used by the TPO i.e. 1) Datamatics Technologies Ltd.; and
     2) Infotech Enterprises Limited have substantial related party transactions
     and therefore cannot be used for determination of arms's length price of
     the international transaction. Hon'ble ITAT has held in the case of Sony
     India (P.) Ltd. Vs. DCIT [2008] 114 ITD 448 (DELHI) that "an entity
     can be taken as uncontrolled if its related party transaction do not exceed
     10 to 15 per cent of total revenue. Within the above limit, transactions
     cannot be held to be significant to influence the profitability of

     After eliminating the above two companies from the comparables;
     arithmetical mean margin based on the remaining companies is arrived at
     7.01% and the arm's length price based on arithmetical mean margin
     comes to Rs. 76,801,693/-. Since the price of international transaction
     offered to tax by the appellant i.e. Rs. 75,229,922/- is within the
     permissible +/-5% range of the price (upper limit 80,641,783/-, and lower
     limit 72,961,613/-) based on arithmetic mean as allowed under proviso to
     sub section 2 of section 92C, I hold the appellant's international
     transaction of Export of Software/IT Services with AEs during the year
     to be at arm's length.

     Keeping in view the above, this ground of appeal of the appellant is
     allowed. The assesse officer is directed to make necessary

        Being aggrieved by the above findings of the CIT(A), the Revenue had

come up with the present appeal before us.

8.      The learned CIT-DR vehemently argued that the CIT(A) was not justified

in deleting the two comparables chosen by the TPO, inasmuch as, no evidence

was brought on record establishing that these two comparables had substantial

related party transactions.

9.    On the other hand, the ld. Authorized Representative relied upon the

order of the CIT(A).

10.   We heard the rival submission and perused the material on record. The

CIT(A) deleted the two comparables, namely, M/s Datamatics Technologies

Ltd. and Infotech Enterprises Ltd. on the ground that these companies had

substantial related party transactions. The provisions of Section 92 provides that

income arising from international transaction is to be computed having regard

to ALP. Section 92F(ii) defines "arm's length price" to mean a price which is

applied or proposed to be applied in a transaction between persons other than

associated enterprises, in uncontrolled conditions. To compute ALP the results

of the international transaction are benchmarked against comparable

uncontrolled transaction. The mandate of s. 92F(ii) is that ALP shall be

computed considering price applied or proposed to be applied in transactions

between non-AE's.

11.   When selection of external comparables, one needs to ensure that such

external comparables are uncontrolled. The companies having controlled

transactions therefore needs to be eliminated. Then the issue that crops up is

what should be the related party transaction ratio for excluding as comparable.

This issue had come up before the Tribunal in numerous cases. The Delhi

Coordinate Bench in the case of M/s Sony India Pvt. Ltd. Vs. DCIT [2008] 114

ITD 448 (Del), held that the companies having relating party transactions of not

exceeding 15% can be taken as a comparable. This ratio was followed by the

Coordinate Benches of the Tribunal in the following decisions:

   i.   Customer.Com Pvt. Ltd. Vs. DCIT, [2012] 28 258 (Bang.)
        : [2013] 140 ITD 344 (Bang.) : [2013] 21 ITR (Trib.) 514 (Bang.)
  ii.   ITO Vs. CRM Services India (P.) Ltd. [2011] 14 96 (Del) :
        [2011] 48 SOT 41 (Del) (URO).
 iii.   CSR India (P) Ltd. Vs. ITO [2013] 31 265 (Bang.)
 iv.    Logica Pvt. Ltd. Vs. ACIT, IT(TP)A No. 1129/Bang/2011: TS-131-
  v.    Avaya India (P.) Ltd. Vs ACIT [2013] 33 569 (Del-Trib.)
        : [2012] 15 ITR (T) 237 (Del-Trib.)
 vi.    ACIT Vs. Sakata Inx. (India) Ltd. [2012] 21 37 (JP.)
        :[2012] 53 SOT 165 (JP.)
vii.    Huawei Tehnologies India Pvt. Ltd. Vs. ITO, IT(TP) No.
viii.   Wills Processing Services (India) (P.) Ltd. vs. DCIT, TS-49-OITAT-
        2013 (Mum.)-TP

12.     Thus, the law is fairly well settled to the extent that the companies having

in related party transactions more than 15% cannot be considered as

comparable. But in the present case, though the CIT(A) adopted the same parity

of reasoning while deleting the two comparables chosen by TPO, he had not

referred to any evidence on the record in support of the conclusion drawn that

these comparables had related party transactions exceeding 15%, nor the

Authorized Representative of the respondent assessee company could establish

this fact conclusively before us. No relief can be granted based on mere reliance

on the legal proposition without supporting evidence on record. Therefore, we

are of the considered opinion that the interest of justice would be met, if the

matter is restored to the file of the Assessing Officer for the verification of this

issue, after affording reasonable opportunity of being heard to the assessee-

company. If it is found on verification that the ratio of related party transactions

is more than 15%, these companies may be excluded as comparables.

13.   In the result, the appeal filed by the Revenue is partly allowed for

statistical purposes.

      Order pronounced in the open court on 9th September, 2015

             Sd/-                                           Sd/-
    (DIVA SINGH)                               (INTURI RAMA RAO)
  JUDICIAL MEMBER                             ACCOUNTANT MEMBE
Dated: 9th September, 2015
Copy of the Order forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
6. Guard File                         By order
                                             Dy. Registrar, ITAT, New Delhi
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