ORDER

R.S. Syal, Accountant Member - This appeal by the Revenue and Cross objection by the assessee emanate from the order passed by the Commissioner of Income-tax (Appeals) on 09.03.2010 in relation to the assessment year 2004-2005.

2. The only effective ground raised by the Revenue in its appeal is as under:-

"On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs. 1,47,72,113/- made by the TPO/AO in respect of Arm's Length Price determined by the TPO by rejecting the method of the assessee, without appreciating the fact that the functional and product profile of the companies relied by the assessee is totally different and is not related with the activity of the assessee."

3. Briefly stated the facts of the case are that the assessee was incorporated on 31.12.2002 as an indirect subsidiary of British Petroleum (BP).BP is one of the world's largest petroleum and petrochemical group which is divided into four main business segments : Exploration and Production; Refining and Marketing; Petrochemicals; and Gas, Power and Renewables. BP operates in over 100 countries. The assessee(BPISPL) is engaged in providing support and advisory services to BP and its other group companies. It had international transactions with its Associated Enterprises (AE) exceeding Rs. 5 crore during the year relevant to the assessment year under consideration. The Assessing Officer (AO) made reference to the Transfer Pricing Officer (TPO) for ascertaining the Arm's Length Price (ALP) in respect of such international transactions. The TPO noted that BPISPL entered into following international transactions with its AEs:-

4. As per the Audit Report in Form No. 3CEB, the Arm's Length Price of the international transactions was same as recorded in the books of account. From the Transfer Pricing study and details filed by the assessee, it was observed by the TPO that BPISPL was primarily set up to provide various business supports services to its group companies including legal, taxation, I.T., human resources, audit, security. The assessee stated to have anticipated the need for assistance in relation to various aspects of the lubricants industry for discharging services to its AEs. Considering its proximity to Castrol India Limited (CIL), which was well established in the business of manufacturing and marketing of lubricants, the assessee entered into an arrangement with it for receiving necessary support on need basis. As per the terms of said agreement, the assessee agreed to suffer the proportionate costs of CIL's personnel (such as salaries, allowances, contributions to PF etc.) involved in providing requisite support to it with a mark-up of 5%. These costs were then to be charged out by the assessee to BPME at a mark-up of 2.5% . Additionally, all out of pocket expenses incidental to the provision of such support (such as travelling, telephone, canteen, training expenses etc.) were agreed to be reimbursed to CIL at actual but the assessee was to charge these costs to BPME with a mark-up of 7.5%. Apart from that the assessee was to be charged a fixed amount per month for infrastructure support and common utilities (such as rent, electricity, maintenance, fixed assets etc.) provided by/shared with CIL. These costs were to be charged out to BPME with a mark-up of 7.5%. The assessee adopted Transactional Net Margin Method (TNMM) to benchmark its transactions using OP / TC as its Profit Level Indicator (PLI). It was claimed before TPO that during the year ending 31st March, 2004, it achieved a return on operating profit at 8.71% over its costs as against 12.80% of the comparable cases and was thus within the permissible plus minus 5% range. The TPO, on perusal of the entire details filed before him, observed that the assessee had explained in its submission dated 10.11.2006 that proportionate cost of CIL's personnel and out of pocket expenses charged by CIL to the assessee were in the nature of "pass through" costs and the assessee-company did not charge mark-up on such 'pass through' costs. The same was found to be contradictory to the assessee's submissions by which it was stated that it charged its AEs with a mark-up of 2.5% on expenses reimbursed to CIL in respect of proportionate cost on personnel and further mark-up of 7.5% to its AE in respect of out of pocket expenses reimbursed to CIL. As regards infrastructure supporting common utilities, the TPO noted that the details of markup held by CIL for those services was not provided. It was also observed that the assessee-company computed its OP / TC at 12.12% considering the cost reimbursed by it to CIL in respect of the latter's personnel and out of pocket expenses as 'pass through' charges and not pertaining to the cost base of the assessee-company. He noted that such 'pass through' cost was debited in the books of account of the assessee-company and formed part and parcel of the cost-base of providing services to AE.

5. In support of its claim that the recorded value of the transactions was the ALP of the transactions, the assessee submitted a list of comparable cases using the results of financial year 2003-2004 with adjusted OP / TC percentage as under:-

6. As per the above list of comparable cases, the mean of OP/TC (hereinafter called profit rate) was worked out at 8.02%, which was claimed to be close to its profit rate. On going through the list of comparable cases, the TPO found that some cases were having different functional as well as product profile as compared to that of assessee-company. Out of the list of comparable cases supplied by the assessee, the TPO held FI Sofex Ltd. (hereinafter referred to as FI) and Mukund Engineers Limited (Infotech segment)(hereinafter referred to as ME) as incomparable cases. It was seen that as per Transfer Pricing study report, the assessee was engaged in providing Accounting and Control Support Services, Legal and Tax Support Services, Management, HSE and Human Resource Services, Lubricant Support Services, Marketing Support Services, Technical Support Services and services relating to development, maintenance and operation of International delivery data capture systems, invoicing and cash / debt collection. The TPO observed that the product profile of FI for the year comprised of income from software services at Rs. 82,31,765 and income from IT enabled services at Rs. 72,39,330. Similarly as regards the second case, viz., ME, the TPO observed that the sales figure of Rs. 13.52 crore for the year in question included major portion as income representing value of contract work executed at Rs. 9.69 crore apart from income from equipment provided, income from leasing business and income from Infotech training. It was, therefore, held that the assessee's product profile was quite different from that of these two cases. Apart from that, it was also noticed by the TPO that these two cases were outliners showing profit rate at minus of 75% and 33% respectively. Excluding these two cases from the list of comparable cases furnished by the assessee for the purpose of benchmarking assessee's international transaction, the TPO worked out adjusted profit rate of the comparable cases in relation to the remaining 10 parties at 20.55%on the penultimate page of his order. This was found to be much less than the assessee's profit rate of 4.79%. He, therefore, computed ALP as under:-

7. It was, therefore, proposed that an upward adjustment of Rs. 1,47,72,113 was required to be made by the Assessing Officer. After considering the report of the TPO, the AO made such addition u/s 92CA(4).

8. Apart from several other contentions raised in the first appeal with which we are not concerned as not having been assailed, it was contended on behalf of the assessee that the TPO was not justified in excluding the above mentioned two low profit cases. It was also argued that in the eventuality of the exclusion of these cases, two extreme profit cases also ought to have been excluded so as to make the transfer pricing study even. The learned CIT(A),vide paras 4.9 onwards at page 25 of the impugned order, considered the question whether rejection of these two comparable cases was appropriate or not. As regards FI , the assessee highlighted that the TPO had inadvertently considered revenue from IT enabled services as revenue from Software services and vice versa for the years ending 31.03.2002 and 31.03.2003. As regards ME, the assessee submitted that the analysis of the company's "Infotech" segment for financial year 2001-2002 and 2002-2003 would show that the segment's operations consisted of Electronic Data Processing Services and training activities etc. It was contended on behalf of the assessee that the Infotech segment continued to provide Electronic Data Processing Services. After recording the assessee's submission in this direction, the learned CIT(A) held in para 4.16 that : "Based on the above, I am inclined to accept the view of the assessee that the above two companies ought to be retained in the set of comparables, as they are functionally comparable to the assessee. If the above companies are reinstated, the OP/TC margin of the comparables for FY 2003-04 works out to 8.02%. In contrast, the Appellant's margin (after including pass-through costs) is 4.79%".

9. Thereafter the learned CIT(A) proceeded to examine the alternative contention of the assessee for simultaneously excluding two super profit case from the list of comparables. It was observed that Hinduja TMT Limited (hereinafter called as HT) and Datamatics Technologies Limited (hereinafter called as DT) showed profit margin at 68.7% and 75.6%. He opined that the super profit making cases were liable to be excluded. By eliminating these two cases as well, he worked out the adjusted profit rate at 7.67%. As the case of the assessee fell within the plus / minus 5% range of the ALP established by the mean margin of the comparable cases under both the scenarios, that is 7.67% or 8.02%, the learned CIT(A) held that the transactions recorded by the assessee in its Profit and loss account were at ALP. He, therefore, ordered for the deletion of addition, against which the Revenue has come up in second appeal.

10. We have heard the rival submissions and perused the relevant material on record. It is observed that the assessee entered into international transactions with its AEs and determined the ALP of such transactions at the same level at which these were recorded in the books of account. In determining the ALP, the assessee followed TNMM. The application of such method as the most appropriate method has not been disputed by the TPO. The difference in computation of ALP has arisen because of the exclusion by the TPO of FI and ME from the list of comparable cases supplied by the assessee. The learned CIT(A) vide para 4.16 of the impugned order, extracted above, has held that these two cases ought to have been retained in the set of comparable cases. He further proceeded to hold that if these two loss making cases were to be excluded, then the two extreme profit making cases, namely, HT and DT should also be excluded. Apart from that, there is no dispute on any other aspect on the computation of ALP. We will distinctly examin these issues under challenge.

WHETHER CASES OF FI &ME WERE RIGHTLY INCLUDED BY CIT(A) ?

11.1. From the TP study report of the assessee it is essentially noticed that the services provided by it to its AEs were in the nature of Accounting and Control Support Services, Legal and Tax Support Services, Management, HSE and Human Resource Services, Lubricant Support Services, Marketing Support Services, Technical Support Services and services relating to development, maintenance and operation of International delivery data capture systems, invoicing and cash / debt collection. The case of FI considered by the TPO as not comparable and liable for elimination from the list of comparable cases supplied by the assessee divulges income from software services at Rs. 82,31,765 and income from IT enabled services at Rs. 72,39,330for the year ending 31.03.2004, which is the year under consideration. The learned A.R. admitted that the nature of services provided by the assessee to its AEs match only with the IT enabled services rendered by FI and not the software services made available by FI. This indicates that the software services which constitute more than 53% of the revenues of such other company are different from that of the assessee-company. The learned CIT(A) has held that this company as functionally comparable to the assessee-company by noting that the TPO had inadvertently considered the revenue from IT enabled services as revenue from software services and vice versa for the years ending 31.03.2002 and 31.03.2003. It is relevant to note that we are dealing with assessment year 2004-2005 and in this respect the figures of software services and income from IT enabled services of FI recorded by the TPO for the year ending 31.3.2004 are perfectly in order. These figures can be verified from the copy of Profit and loss account of this company available at page 70 of the paper book.

11.2. At this juncture it is relevant to note the mandate of Rule 10B(4) which provides that : 'The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into.' When more than 53% of FI's revenue is arising from a source, which is admitted to be functionally incomparable to the assessee-company, in our considered opinion, the TPO was justified in excluding such case from the list of comparable cases tendered by the assessee. The learned CIT(A) was needlessly swayed by the assessee's contention about the wrong mentioning of figures of earlier years, which, in fact, do not have any bearing when we consider the figures of current year.

11.3. Insofar as ME is concerned, it is seen from that company's Profit and loss account for the year ending 31.03.2004 that as against the total income from operations at Rs. 13.52 crore, the income from Infotech training, stated to be the only activity similar to that carried on by the assessee is only Rs. 3.60 crore, which constitutes 26% of the total income. It was in such factual backdrop that the TPO held that the product profile of this company was quite different from that of the assessee-company. The learned CIT(A) has considered other irrelevant details in holding it to be comparable, which are really not germane to the issue.

11.4. Section 92 of the Income-tax Act, 1961 provides that any income arising from an international transaction shall be computed having regard to the ALP. Section 92C deals with the computation of ALP. Sub-section (1) of section 92C prescribes that the ALP in relation to an international transactions shall be determined by any of the prescribed methods, which inter alia include TNMM. Rule 10B of Income-tax Rules, 1962 provides the mechanism for determination of ALP u/s 92C. Rule 10B(1)(e)(i)provides that the ALP in relation to an international transaction shall be determined by TNMM by which the net profit margin realized by the enterprises from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. Sub-clause (ii) of clause (e) of Rule 10B(1) provides as under:-

"the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transaction is computed having regard to the same base;" (Emphasis supplied)

11.5. From the prescription of the above Rule it can be seen that the net profit margin is to be considered qua the comparable uncontrolled transaction or number of such uncontrolled transactions. "Uncontrolled transaction" has been defined in Rule 10A(a) to mean "a transaction between enterprises other than associate enterprises, whether resident or non-resident". When we consider Rule 10B(1)(e) in juxtaposition to Rule 10A(a), the position which emerges is that in applying the TNMM, net profit margin realized from a comparable uncontrolled transaction is to be taken into consideration. The conditions thus envisaged for making a case as comparable for this purpose, should not only be comparable but also have uncontrolled transactions. These twin conditions need to be cumulatively satisfied. If such other case is only comparable but has controlled transactions or vice-versa, it shall fall outside the ambit of list of comparable cases. In the light of the mandate of rules 10B read with 10A, we shall evaluate the contention raised on behalf of the Revenue impressing upon us that these two cases were rightly excluded by the TPO and the ld. CIT(A) was not justified in overturning this decision.

11.6. Insofar as FI is concerned it is seen that its income from IT enabled services is Rs. 72,39,330 which includes income of Rs. 61,32,688 from a related party i.e. FI Sofex LLC. This fact has been pointed out by the ld. DR from page 80 of the assessee's paper book, indicating statement of transactions with related parties, which contention has remained uncontroverted from the side of the asssessee. Thus it becomes manifest that around 85% of FI's income from IT enabled services is from a controlled company, thereby failing the prescription of Rule 10B(1)(e)(ii) read with Rule 10A(a), which talks of comparable uncontrolled transactions. As a major chunk of the comparable income of FI has resulted from its associated enterprise, it would thus become controlled transactions, thereby losing the tag of uncontrolled transactions. The second case which was included by the assessee in the list of comparable cases but excluded by the TPO is that of ME. When we consider the Annual accounts of this company at pages 116 onwards of the assessee's paper book, it becomes vivid that the income from 'Infotech business' stated to be comparable to the services provided by the assessee is Rs. 3.60 crore. This entire amount was earned from the transactions with its related parties as is apparent from pages 144 and 145 of the paper book. Thus such transactions also do not fall in category of uncontrolled transactions. The case of ME also thereby fails the test for finding its place in the list of comparable cases.

11.7. It was contended by the ld. AR that the argument now raised by the ld. DR on rule 10B read with rule 10A was not considered by the authorities below and hence the same should be ignored. We are not persuaded by this submission. The ld. DR has not set up a new case in favour of the Revenue. He simply supported the order of the TPO on one additional aspect. Whereas the TPO held that these two cases as not comparable because of the qualitative difference in the nature of services provided by them vis-Ã-vis the assessee, the ld. DR, apart from propelling this argument, also put forth that these two cases were incomparable for want of transactions, whatever little resemblance their services had with those provided by the assessee, with their associated enterprises. It is wholly improper to argue that the ld. DR has set up an altogether different case. A line of distinction needs to be drawn between a new argument and an additional plea on the same point. The present case falls in the latter category and not the former. As such we are not inclined to entertain the argument raised on behalf of the assessee that the ld. DR transgressed his limit by arguing on a new point. Be that as it may, it is simple and plain that there can be no estoppel against legislation (including delegated legislation). When Rule 10B unequivocally provides that the comparable case should be that of uncontrolled transactions, there is no point in arguing that this piece of delegated legislation should be ignored simply because the TPO did not expressly mention it in so many words. Further it is axiomatic, that when the TPO excluded these two cases by holding that these were not comparable because of the difference between the nature of services provided by them and the assessee, he was not required to consider remaining aspects of the matter in fortifying his conclusion.

11.8. These two cases which have been excluded by the TPO are not only substantially incomparable having different functional as well as product profile as compared to that of assessee-company but encompass wholly or majority of controlled transactions, thereby failing both the conditions of rule 10B. In our considered opinion these cases were rightly excluded by the TPO. The impugned order holding otherwise, is consequently set aside.

WHETHER CASES OF HT &DT WERE RIGHTLY EXCLUDED BY CIT(A) ?

12.1. Next contention urged by the ld. DR is that the ld. CIT(A) was not justified in expunging two extreme profit cases from the list of comparables for finding out the average profit rate. On the other hand, the learned Counsel for the assessee vehemently argued that if FI and ME were outliers i.e. extreme cases of losses, then HT and DT having extreme profit rates, were also outliers qualifying for the elimination from the list of comparable cases. To buttress this submission he relied on the Special Bench order in the case of Dy. CIT v. Quark Systems (P) Ltd. [2010] 38 SOT 307/132 TTJ 1 (Chd.) (SB) . He stated that in the case of Quark Systems (P) Ltd. (supra), it has been held that if one case representing extreme position in terms of loss was to be excluded, then the elimination of another case representing extreme profit should also be done away with.

12.2. It is noticed that the TPO worked out mean of profit rate at 20.55% by excluding the cases of FI and ME. In this calculation of 20.55%, the other 10 companies also including DT giving profit rate at 75.6% and HT giving profit rate at 68.7% were continued to remain in the list. We are not convinced with the submission advanced on behalf of the assessee that simply because two loss making cases have been excluded from the list of comparable cases for determining the mean margin rate of profit, the other two cases of extreme profit should also be excluded. Rule 10B(1)(e)(ii) clearly refers to 'a comparable uncontrolled transaction or a number of such transactions'. It not only talks of one transaction which is comparable and uncontrolled, but also contemplates a number of such transactions. By using such comparable transactions in plural, it has been made clear that if there are a number of such transactions under consideration, then their average should be adopted as a benchmark. It is obvious that the very rationale of having average in case of more than one transactions is to iron out the effect of extreme cases and finding the profit margin as a representative of the whole lot.

12.3. The cases of FI and ME have been held by us to be rightly excluded by the TPO because of their having different product profile and also not satisfying the requirement of Rule 10B read with Rule 10A as uncontrolled transactions. These are the reasons in support of their exclusion from the list of comparable cases and not because there was high loss in such cases. This elimination by itself would not support the omission of HT and DT, being the cases with extreme profit rate. The exclusion by the ld. CIT(A) of these cases on the sole reason of high profits, is not sustainable. Before eliminating such cases from the count, it was incumbent upon him to show that such cases were incomparable on the basis of relevant considerations and not the higher or lower profit rates. It is imperative to note that the list of 12 comparable cases was provided by the assessee and not something created by the TPO as per his own whims and fancies. When the list of comparable cases was furnished by the assessee, it was the turn of the TPO to find out whether such cases were, in fact, comparable or not and if not, then to exclude them after showing how these were not comparable. The ld. CIT(A) was not empowered to order the exclusion of two high profit cases without showing that these were not comparable as per the relevant considerations, which we will discuss infra.

12.4. A case is a comparable when it satisfies the prescription of Rule 10B(2), which is as under:-

"Rule 10B (2): For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely :—

(a) the specific characteristics of the property transferred or services provided in either transaction ;
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions ;
(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions ;
(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail."

12.5. Further sub-rule (3) of rule 10B provides that an uncontrolled transaction shall be comparable to an international transaction if—

(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market ; or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.

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 ld. 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.

12.7. Now let us examine the facts of the case of Quark Systems (P.) Ltd. (supra), which is the trump card of both the ld. CIT(A) as well as the assessee. In that case it was contended on behalf of the assessee, by way of an additional ground, that a particular case with high profit rate was not comparable with that of the case before the Bench on account of positive reasons pointed out and hence the same be excluded. The Bench, while holding that the assessee could not be estopped from pointing out that such case was wrongly taken as a comparable, remitted the matter to the AO for de novo examination of the assessee's claim in this regard. Thus it is palpable that the decision of the case is not as has been projected, that the special bench of the tribunal ordered for the exclusion of high profit rate case from the list of comparables supplied by the assessee. On the contrary, we find that it remitted the matter to the AO for examination of the claim as to whether such high profit case could be excluded.

12.8. Adverting to the facts of the instant case it is noted that the ld CIT(A), without considering any data of HT and DT or comparing it with the assessee's facts, simply ordered for elimination on sole the reason of their having high profit margins. He failed to test the facts of those cases on the touchstone of the mandate of sub-rule (2) read with sub-rule (3) of rule 10B. As such we are not inclined to uphold the impugned order on this score.

12.9. The learned A.R. submitted that relevant factors of these two cases did not match with that of the assessee. However he was not readily equipped with the financial statements and other relevant details of HT and DT to demonstrate his point of view. In our considered opinion and respectfully following the Special Bench order in Quark Systems (P.) Ltd. (supra), it would be just and fair if the view taken by the ld. first appellate authority on this aspect of the matter is set aside and the case is sent back to the AO for considering whether or not HT and DT are comparable, and then deciding consequently as per law, after allowing a reasonable opportunity of being heard to the assessee. It is made clear that the assessee shall place all the relevant material before the AO/TPO so as to facilitate the determination of the question as to whether or not the cases of DT and HT should be excluded from the list of comparable for the reason of their incomparability in terms of sub-rule (2) read with sub-rule (3) of rule 10B.

13. To sum up, we hold that the cases of FI and ME will be excluded from the list of total comparable cases supplied by the assessee and the cases of DT and HT shall be considered by the Assessing Officer/TPO as to whether they qualify their exclusion or not. The remaining exercise of the computation of ALP will be consequently done.

14. The cross objection filed by the assessee was not pressed by the learned A.R.

15. In the result, the appeal of the Revenue is partly allowed and the cross objection of the assessee is dismissed.