Deputy Commissioner of Income-tax v. Quark Systems (P.) Ltd.

1. On recommendations dated 4-5-2009 made by the Division Bench of this Tribunal. Hon’ble President has constituted this Special Bench. Initially the reference was made for deciding a particular question but pursuant to the request made by both the parties. Hon’ble President referred both the appeals in its entirety to be decided by the Special Bench. That is how we have come to in-seisin of matter.

2. These cross-appeals are directed against the order dated 28-11-2008 passed by learned CIT(A), Chandigarh in the matter of assessment under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) for the assessment year 2004-05. The issue in dispute relates to the determination of Arm’s Length Price under section 92C(2) of the Act.

3. The relevant material facts are like this. The assessee before us is an Indian company which is a fully owned subsidiary of a Switzerland based company by the name of Quark Systems SARL, Switzerland (QSSS). If is a captive unit working exclusively for its parent company. On 1-4-2001, the assessee entered into a service contract with its parent company which, inter alia, provided that the assessee will render following technical services to the parent company :

3.1-1 Advisory services in relation to business systems and processes, data processing data integration, system integration, system upgradation, system planning, installation and other modification, network services, add-on systems, off site and on site projects, telecom and electronic communication, facilities management, evaluation, programming, software and system implementations, software development and software services.

3.1-2 Feasibility study for the projects from time to time, including market survey, and preparation of project reports.

3.1-3 Explore for adaptation the requisite local technology, expertise and skill.

3.1-4 Assist in the manufacture, development and modification of Software according to the required standards and technology.

3.1-5 Assist in research and development.

3.1-6 Advise proper marketing, selling and distribution techniques.

3.1-7 Advise introduction of the operation and maintenance system suitable for the computer hardware, machinery to be used in the development/manufacture, to ensure safe and efficient normal life.

3.1-8 Assist and advise appropriate safety measures and appropriate appliances to comply with the statutory requirements and otherwise.

3.1-9 Assist in conducting constant market research and advise change in the designs, or other techniques according to the changed demands of the customers.

4. The parent company is in the business of making specialized software for the Media Companies, which is generally used for layout of news-papers and periodicals. The assessee-company assists the parent company by way of providing help to customers facing technical problems and is a dedicated service provider for the said purpose. In consideration of the services so rendered, the assessee receives a fees computed with reference to associated costs plus 13.5 per cent mark up thereon, it may be stated that in the original agreement, mark up as only 10 per cent but with effect from 1-9-2001, the mark up was increased to 13.5 per cent.

5. In the course of assessment proceedings, a reference was made by the Transfer Pricing Officer (TPO) for determination of arm’s length price in respect of the international transactions with the assessee entered into with its parent company. The TPO took note of the fact that the assessee has employed Transactions Net Margin Method for the purpose of computing arm’s length price and did not dispute the same. He, however, noted that the one of the comparable independent comparable selected by the assessee included in the computation of arm’s length price is M/s. Imercius Technologies India Pvt. Ltd., which shows a net loss at the rate of 73.48 per cent in response to, the Transfer Pricing Officer requiring the assessee to show cause as to why this comparable not be excluded, on the ground that it is a continuous loss-making company, that this is not comparable with the tested party and that its financial statement are not reliable, the assessee submitted as follows:

"M/s. Imercius Technology India Pvt. Ltd. - Insufficient financials

Your query is with regard to that the financial data are not sufficient. In this regard it is respectfully submitted that we have relied upon and employed the "Center for mentoring Indian Economics" PROWESS Database to identify potential comparable independent companies PROWESS contains financial data of over 81 largely publicly trading companies. The data is collected from annual/quarterly results, Government reports and other sources. This is one of the most reliable and correct database to search the comparable independent companies. Whatever financial information, this database has reveal, we have incorporated in our transfer pricing study and furnished to Your Honour.

Further, we have furnished that this company was incorporated in the year 2002. There, the question with regard to data for the year 2001 does not arise. Further data relating to 2002 to 2003 is not available. There could be the possibility that the company might not have commenced any activities. The available data is only for the year 2004 and this is complete, reliable and sufficient and has already been provided to Your Honour."

In the light of the above, Your Honour will find that the financials relating to this company are sufficient. Further Your Honour cannot ignore comparable independent companies on the ground that the data for the prior year are not made available.

6. While no dispute was raised on the other comparables, the aforesaid comparable was rejected by the Transfer Pricing Officer by observing as follows:—

"M/s. Imercius Technology India Pvt. Ltd. as a comparable :

The assessee himself admitted that the company was incorporated in the year 2002 and there is a possibility that the company might not have commenced the activities in the year 2002-03 and the only available data relating to operation is for the year 2004. The submission of the assessee suggests that the company is a start up company cannot be taken as a comparable. Further the balance sheet of M/s. Imercius Technologies (India) Ltd. is at Annexure ‘A’ of this order. It is seen that Net worth of company on 31-3-2004 is negative. It is a international practice not to take Negative Net companies as a comparable. Further, the turnover of M/s. Imercius Technologies is Rs. 1.46 crores as on 31-3-2004, which is much less than for turnover of tasted party. In view of the net worth and turnover criteria this company is rejected as a comparables."

7. Aggrieved by the actions taken by the Assessing Officer, the assessee carried the matter in appeal before CIT(A) but without any success. The learned CIT(A) upheld the exclusion of the said company and observed that the turnover of a Imercius Technology India Pvt. Ltd. was just Rs. 145.73 lakhs whereas the turnover of the assessee was Rs. 13.6 crores. It was also observed that M/s. Imercius Technology India Pvt. Ltd. was in the first year of its operation, which essentially applies that the expenditure for setting up will be much large and the turnover will be lower. Learned CIT(A) also noted that the income is also not comparable for the reasons that as evident from the notes of the accounts, the company is engaged in transition services and customers contact services which was different from the activities of the personal expenses are unusually high at Rs. 217.67 lakhs as compared to the turnover of Rs. 145.73 lakhs. Accordingly, computation of mean profits was upheld. Learned CIT(A), however, noted that the benefit of 5 per cent should have been given by the Transfer Pricing Officer in terms of the proviso of section 92C(2) of the Act and, accordingly, directed the TPO to grant the same.

8. None of the parties is satisfied. The assessee is aggrieved of the CIT(A) upholding the exclusion of M/s. Imercius Technologies India Pvt. Ltd. from the comparable parties and revenue is aggrieved of the relief so granted by the CIT(A) with reference to 5 per cent relaxation in terms of provisions of section 92C(2) of the Act. Both the parties are now in appeal before us.

9. In addition to the above two issues, one more issue is raised for our consideration. This is raised by the assessee as an additional ground of appeal. It is assessee’s contention that one of the independent comparable which has been included by the assessee as also by the TPO has been wrongly included in the comparable for more reasons than one. Firstly, according to the assessee, in the case of Data Matrix Technologies Ltd., out of total sales of Rs. 54.85 crores, its transactions with the associated concern amount to Rs. 17.15 crores which works out to 31.27 per cent of the total sales made by the Datamatics Technologies Ltd. The assessee submits as is the accepted transfer pricing practice in terms of O.E.C.D. guidelines, as also sanction by law in India, such transactions with the associated parties cannot be considered as uncontrolled transactions. It is also submitted that there is an arithmetical error on account of which operating expenses of Rs. 579 crores were not taken into account while aggregating total expenditure as a result of which the original profit to cost ratio worked out to 138.46 per cent. The assessee’s contention is that the inclusion of this comparable, which takes into account profit on cost at 138.46 per cent has vitiated the transfer pricing analyses. It is submitted that this mistake is an inadvertent mistake and in any event since the CIT(A) had balance sheet of the Data Matrix Technologies Ltd. before whom he ought to have been taken into account the correct position. Without prejudice to the argument that Datamatics Technologies Ltd., for the above reasons, should not be included as a comparable at all. The assessee also contends that in any event revised operating margin to cost ratio is 93.06 per cent which would have been taken into account in the computation of mean profit and comparable entities. In effect, thus, we are also called upon to adjudicate, subject to admission of this additional ground so raised by the assessee, as to whether or not Datamatics Technologies Ltd. should be excluded from the comparables.

10. As far as appeal for the revenue is concerned, the only issue raised is whether or not in the facts addition circumstances of the case, the learned CIT(A) has erred in allowing benefit of 5 per cent to the assessee whereas the relevant provisions of section 92C(2) is meant to cover only marginal case and not to allow a standard deduction of 5 per cent in all cases.

11. We have heard the rival contentions, perused the material on record and duly considered the factual matrix of the case as also the applicability of the legal position.

12. As far as this issue in appeal is concerned, learned representative fairly agreed that this issue is not required to be reconsidered in the light of the amendment brought about in proviso to section 92C(2) which, inter alia, states "It is variation between the arm’s length price so determined and price at which the international transaction has actually been undertaken does not exceed 5 per cent of the latter, the price at which international transaction has actually been undertaken shall be deemed to be arm’s length price". These wording are significantly different in a scope and application from the relevant provisions in the pre-amended provisions to section 92C(2) which provided that "at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5 per cent of such arithmetical mean is to be taken as the arm’s length price". The learned representative has agreed that the matter needs to be reconsidered by the Assessing Officer in the light of the amendment in law, we are not addressing ourselves on this issue. Ld. counsel for the assessee, however, invited our attention to the fact that the amendment cannot be viewed as retrospective as it is effective from 1-10-2009. Since the matter is being remanded to the file of the Assessing Officer for adjudication de novo we need not address ourselves to this issue to save and except for observing that assessee is at liberty to raise all such contentions as he deems fit including above contention before the Assessing Officer and direct the Assessing Officer to deal with the contentions of the assessee by way of a speaking order after giving due and fair opportunity of hearing to the assessee and in accordance with law. We leave it there.

13. In the result, as far as the appeal filed by the revenue is concerned, the same is allowed for statistical purposes in the terms indicated above.

14. That takes us to the appeal filed by the assessee. As we have mooted earlier in this order the main issue agitated by the assessee is that the CIT(A) was not justified in upholding the exclusion of M/s. Imercius Technologies India Pvt. Ltd. from the list of comparables taken into account for arriving at mean profit to compute arm’s length price.

15. In the course of hearing before us, Shri Aggarwal, learned counsel for the assessee addressed us at length on the reasons as to why the said comparable should not have been excluded. The learned counsel invited our attention to the list of comparables accepted by the TPO and pointed out except that when the TPO has accepted two other loss-making units as comparable, there is no good reason for him to exclude the case of M/s. Imercius Technologies India Pvt. Ltd. Our attention was invited to a reasoning adopted by the authorities below in justifying such an exclusion. It was pointed out that the main reason for excluding M/s. Imercius Technologies India Pvt. Ltd. is stated to be that it is a start up company and, therefore, it cannot be taken as a comparable but then according to the learned counsel the M/s. Imercius Technologies India Pvt. Ltd. as evident from the Director’s report of the said company placed on record had more than 100 employees and was a functional company. According to learned counsel, as to whether a company in the first year of operation or not does not materially effect the comparability for the reason that as is evident from the profit and loss account of the M/s. Imercius Technologies India Pvt. Ltd. which was placed in the paper book there are no major start up expenditure reflected therein. As from the reasons of the TPO, that net worth of M/s. Imercius Technologies India Pvt. Ltd. was negative and that increases with the international practice negative worth company are not taken as comparable, learned counsel stated that if the figures in the beginning of the year are taken into account, the assessee-company has a positive worth and marginal negative worth as reflected in the accounts of loss incurred in the relevant year itself. In any case, according to the learned counsel, the fact of net worth does not make any material difference in this particular case. The promoter company has in addition to subscription of equity had funded the M/s. Imercius Technologies India Pvt. Ltd. by way of unsecured loans amounting to Rs. 4 crores. It is submitted that where the parent company funds the subsidiary company by way of subscription to share equity or by way of long-term loans, on a conceptual note it does not make a difference inasmuch as both the items, i.e., equity capital and long-term loans are part of the capital. Learned counsel then invited our attention to the reason of low turnover of M/s. Imercius Technologies India Pvt. Ltd. on account of which the comparable was rejected. Learned counsel pointed out that no doubt the turnover of the assessee-company is 13.6 crores whereas the turnover of M/s. Imercius Technologies India Pvt. Ltd. is Rs. 1.46 crores. The mere fact that the turnover of M/s. Imercius Technologies India Pvt. Ltd. is low does not render it incomparable. He submitted that a turnover filter of Rs. one crore was applied to the entities included in the Prowess database in response to a question from the Bench he admitted that no filter was applied to the higher turnover. In other words, according to the ld. counsel for the assessee of Companies engaged in the similar business as the assessee were included in the comparable as long as their turnover was more than Rs. 1 crore. In response to a question from the Bench, ld. counsel for the assessee admitted that no filter were applied on the basis of assess based of the tested party and the comparables. A lot of emphasis was, however, placed on the facts that, according to the description given in the Prowess data base, the tested party as also M/s. Imercius Technologies India Pvt. Ltd. were engaged in the same business inasmuch as they were placed under the same head and same code under Prowess data base. Learned counsel then made elaborate submissions of various adjustments required to be made to the profits of the tested parties on account of low risk due to assessee being a captive unit and all business risk is borne by the foreign parent company. For the reasons we set out a little late it is really not necessary, however, to go into the adjustments sought to be made by the learned counsel.

16. In response to Bench question that the employee cost in the case of M/s. Imercius Technologies India Pvt. Ltd. are unusually high at 164 per cent of the receipts, as against 56 per cent of the receipts in the case of tested party, learned counsel submitted that when a comparable is functionally accepted, the other criteria cannot be applied as a reason for rejection of the comparables. On the contrary, he justified such a case being included in the computation of mean profits so as to leave to a proper mix of comparables which in turn leads to better reliability of resultant mean profits.

17. In response to Bench’s question that as per the Director’s report of M/s. Imercius Technologies India Pvt. Ltd., the company was engaged in the "telemarketing activities" which is not comparable with the activity of the tested party, i.e., providing help to customers facing technical problems and dedicated service provider for the said purposes, the learned counsel submitted that functions are to be taken at the border level, it was once again emphasized that the tested party as also M/s. Imercius Technologies India (P.) Ltd. was placed under the same broad category of Information Technology & Information Technology Enable Production Services (ITES). Our attention was also invited to the Notification issued by the CBDT under sections 10A and 10B, i.e., Notification No. 890E, dated 26-9-2000 which includes call centres in "Information Technology Enabled Services" (ITES). It was also submitted that the balance sheet description and the stated business activities of the assessee are same.

18. Learned counsel then invited our attention to the fact that one of the comparables included in the computation of mean profits to comparables units is of Data Matrix Technologies Ltd. it was pointed out that Company details including the balance sheet of the said comparable was before the learned Commissioner and that the net profit to cost ratio interest in the said case was as high as 138 per cent. Learned counsel submitted that when a high loss-making unit is to be ignored for the purpose of comparable to be taken into account for computation of mean profit, on the same logic, the company showing in such high profit as 138 per cent of operating profit to cost should also be excluded. It was submitted that as evident from financial statement of the said company and the disclosure made therein by way of notes to accounts, Data Matrix Technologies Ltd. had huge transactions with the associated enterprises. It was the case of the assessee that on account of these intra associated enterprises transactions, the comparability of Data Matrix Technologies Ltd. is also vitiated in law. Learned counsel did admit that Datamatics Technologies Ltd. was included in transfer pricing study given by the assessee himself but, according to him, it cannot be open to the revenue authorities to blow hot and cold at the same time. Inasmuch as once they exclude a high loss making comparable they must also exclude a high profit-making company. According to the learned counsel for the assessee, when an authority is empowered to do something he has a corresponding duty to exercise such powers in a fair when circumstances so justify or warrant it was submitted that the powers of the CIT(A) are co-terminus to the powers of the Assessing Officer and TPO and once the CIT(A) had all relevant details before him including the fact that Datamatics Technologies Ltd. had over 37 per cent intra associated transfer price transactions, it was the duty of the CIT(A) to exclude Datamatics Technologies Ltd. from the comparables. Learned counsel also submitted that all the relevant details are already on record inasmuch as relevant annual account of Datamatics Technologies Ltd. filed before the CIT(A), we must entertain these grievances of the assessee on merits. Learned counsel for the assessee relied upon Hon’ble Supreme Court Judgment in the case of National Thermal Power Co. Ltd. v. Commissioner Of Income Tax [1998] 229 ITR 383 in support of prayer for admission of the aforesaid additional ground. Without prejudice to the above arguments, learned counsel submitted that there is an arithmetical difference in the computation of mean profit which escaped the attention of the assessee inasmuch as expenses of Rs. 5.79 crores were not taken into account while computing the operating profits. It is, thus, prayed that the same be taken into account now which will bring down the operating profit to cost ratio figure.

19. Learned counsel further argues that since two of the comparables, which are loss-making comparables have already been admitted to be comparable entities by the TPO and since M/s. Imercius Technologies India Pvt. Ltd. is excluded mainly for the reason that it is high loss-making comparable, a deduction of average loss as a percentage of those two comparable units, should be given from the loss incurred by M/s. Imercius Technologies India Pvt. Ltd. for inclusion in the computation for mean profits. Learned counsel once again makes a reference to various adjustments required to be made to the operating profits on account of low risk to the assessee before us. A reference is made to the figure of Economic Survey for the purpose of adjustments required on account of low risk. It is urged that 20 per cent adjustments should be given on account of low risk profile of the assessee-company.

20. On the strength of those submissions, learned counsel urges us to hold that M/s. Imercius Technologies India Pvt. Ltd. should be included as a comparable for the purpose of computing mean profit so as to arrive at arm’s length price and also to direct that Datamatics Technologies Ltd. is to be excluded from the list of comparables for the said purpose. In addition to these two prayers, learned counsel also seeks adjustments to the profits to tested parties mainly on account of low risk.

21. Shri S.D. Kapila, learned Special counsel for the assessee, vehemently opposes the admission of the additional ground regarding excluding of Datamatics Technologies Ltd. at this stage. He submits that Datamatics Technologies Ltd. was included in the list of comparable given by the assessee himself, therefore, there is no good reason for the assessee to back out from the same. In all fairness, he did accept that the computation of operating profits of Datamatics Technologies Ltd. is indeed vitiated inasmuch as operating profits of 5.79 crores have not been taken into account to arrive at correct figure of operating profits. As a result of this error, the net operating profit to cost ratio which is actually 93.06 per cent as against 138.46 per cent adopted by the IPO. Learned Special counsel, however, submits that tinkering with the loss of comparables at this stage and a fresh determination as to which comparable be accepted and which one should not be accepted will lead to revising the transfer pricing analysis conducted by the assessee himself. He submits that such an exercise will open floodgates of uncertainty to the settled assessments of transfer pricing cases. Shri Kapila also submitted that the onus was not on the assessee to give all the relevant details to the TPO, which he obviously and admittedly did not do nor did he do so at the stage to proceedings before the CIT(A). Shri Kapila submits that there is no material on record to show that even before the CIT(A), such details were ever filed. As regards the question of Intra Associated Enterprises transaction being involved in the turnover of the Datamatics, Shri Kapila submits that this issue was never taken up before any of the authorities below. The details were also not available in the Prowess database and have come to the light only as a result of detailed balance sheet of Datamatics Technologies Ltd. company filed now by the assessee. In such circumstances, according to the learned special counsel, we should not entertain a grievance regarding exclusion of Datamatics Technologies Ltd. in the comparables without prejudice to this opposition learned counsel fairly submits that in the event, the Tribunal is pleased to admit this ground of appeal, the matter can at best be remitted to the file of the Assessing Officer for the limited purpose of examining the relevant fact regarding Datamatics Technologies Ltd. Learned counsel further submits that in case, we are inclined to remit the matter to the file of the Assessing Officer, he has no objection to the matter being restored to the file of the Assessing Officer as such but an exercise should be for the limited purposes of examining specific points as the Bench may deem fit but it should not be for the purposes of revisiting the entire transfer pricing analysis it is also submitted that the question as to what further adjustments need to be made in the profits so as to eliminate the impact of variations between the assessee and the comparables cannot be addressed at this stage as it would amount to revisiting entire transfer pricing study, and that the remand should be confined to the question as to whether or not a particular comparable can be taken into account or not.

22. As regards the exclusion of M/s. Imercius Technologies India Pvt. Ltd. from the list of comparable, Shri Kapila invited our attention to the Director’s report in the case of M/s. Imercius Technologies India Pvt. Ltd. which categorically states that M/s. Imercius Technologies India Pvt. Ltd. is in the business of rendering telemarketing services which is neither an Information Technology nor in an Information Technology Enable Services. He submits that the telemarketing services is an entirely diffe-rent service in approach and it cannot be compared with a high technical driven service like one being done by the tested party. Learned counsel submits that the activities undertaken by the assessee are not even functionally similar with this comparable. It is submitted that no FAR is conducted at any stage nor is it successfully demonstrated that the activities of the assessee are the same, or even materially similar, to this comparable. Learned counsel submits that for this short reason alone, the exclusion of Imercius is justified. It is also submitted that in any event start up companies cannot be compared with the assessee, and the fact that employee costs are far in excess of the turnover itself in the case of this start up company supports this proposition. Learned counsel submits that the higher employee costs in the initial stages is not unusual because not only lots of paid employee hours are used in training them and in allowing them to learn the work, many of the trained staff are kept ready for work without there being any productive work for them at the initial stages. He submits that the employees are to be trained and kept ready for work before we can be even solicited, leave aside accepting the work. Learned counsel, thus, submits that this comparable is wholly unsuitable for being taken into account in the case of the assessee. It is submitted that in the case of telemarketing activity, the time gap between recruiting the staff and being able to get any yield from them is much higher. It is submitted that the assessee being a captive unit has assured work from the very initial stage and, therefore, assessee in later years of being business cannot be comparable at all with a telemarketing company at the very initial stage. Learned counsel further submits that the work profile of the employees of Imercius and the assessee before us is entirely different. He submits that the Imercius being a loss-making company in the start up stage can indeed not be compared with the assessee. For all these reasons, he supports the stand of the authorities below and urges us not to interfere in the matter.

23. In rejoinder, learned counsel for the assessee reiterates his submissions and urges us to hold that Imercius be included in the comparables for the purposes of working out ALP of the services rendered by the assessee on the TNMM basis. He further urges us to direct the Assessing Officer to exclude Datamatics from the list of comparables for working out mean profit.

24. We have given our careful consideration to the rival submissions, material on record as also to the factual matrix of the case and the applicable legal position.

25. On the question whether or not the CIT(A) was justified in excluding Imercius, we have noted that the very basic requirements of FAR analysis have not been met with by the assessee so as to justify its inclusion in the compatibles. The functions performed by the assessee are as noted in paragraph 3 above, are in the nature of sales and support services for the parent company, whereas the functions performed by Imercius, as evident from the directors’ report of the said company - which is part of the records, are in the nature of telemarketing services. Sales support and technical services are inherently of different character and scope than telemarketing services. In telemarketing, fluctuation of profits is very high as the gains are contingent upon the results obtained. The earnings of a telemarketing company are usually a percentage of the sales generated. As against this, in sales and technical support provided by the assessee before us, the gains are not dependent on the business results generated by the services rendered inasmuch as the profits of the assessee are dependant on the services actually rendered by the assessee and are not contingent upon the business results generated by such services. A plain function of service rendered by the Imercius would show that if these functions are not compatible with that of the assessee nor these functions belong to the genus to which functions performed by the assessee belong it is, thus, futile to suggest that merely because the assessee-company as also Imercius is grouped under the same head in Prowess database, the comparability is established. The risk analysis to the two organizations, i.e., the assessee and the Imercius clearly show that these two entities are not on even ground. The business risk in the telemarketing activity, as we have noted above, is much higher than the risk in assessee’s business. We have also noted that Imercius had a negative net worth. A business organization with negative net worth cannot be treated at par with a normal business organization. The turnover of Imercius is only 1.47 crores, whereas no other comparable had less than 5 crores turnover and the assessee has a turnover of Rs. 13.06 crores. Even the filter of lower turnover at Rs. 1 crore is without any reasonable basis and there is no filter for higher turnover at all. The application of turnover filter also leaves much to be desired and has no rationale basis. In our considered view, it is improper to proceed on the basis that the turnover of Rs. 1 crore to infinite is a reasonable classification as turnover base. While we agree that merely because a comparable is making loss, it cannot be excluded from the list of comparables for the purposes of computation of arm’s length price. Imercius is a case in which not only functional area is different, Imercius has a negative net worth but also because turnover of the Imercius has no comparison with the assessee-companies. For all these reasons, the exclusion of Imercius is quite justified and, therefore, action of CIT (Appeals) on this issue is upheld. Our reasoning may be different but our conclusions are the same as arrived at by the authorities below.

26. In view of the above discussions, we hold that the authorities below were quite justified in excluding Imercius from the list of comparables for the purposes of ascertaining arm’s length price under the TNMM method. We uphold and affirm the action of the authorities below on this count.

27. We can now proceed to consider the question of exclusion of Datamatics from the list of comparable in computation of arm’s length price. The relevant facts have been stated by Shri Aggarwal and it is an admitted position that some fundamental mistakes have been committed in computation of the profit ratio as well. It will indeed be gross miscarriage of justice, if we allow these mistakes to be perpetuated. We further add that all the data, to which reference has been made by Shri Aggarwal is available in the balance sheet of Datamatics and is part of record available in public domain it will not be correct to have lope-sighted view and make selection of such figure as would serve one’s purpose. Every detail in the process for determination of fair arm’s length price, as is relevant, has to be considered so that a fair view is adopted.

Relevant provisions of Transfer Pricing

28. At this stage, we deem it necessary to refer to the relevant Indian Regulations on Transfer Pricing and to some case laws.

29. Under rule 10B of Income-tax Rules, provision is made for various methods for determination of arm’s length price. Clause (e) of this rule relates to the step required to be taken where Transactional Net Margin Method (TNMM) is applied. Sub-clause (i) of the said sub-rule is as under:

"10B. Determination of arm’s length price under section 92C.

(e) transactional net margin method, by which—

(i )the net profit margin realized by the enterprise 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:"

The aforesaid sub-clause has been reproduced only to emphasize that even under TNMM Indian Regulations attach considerable significance to "assets employed or to be employed" and must be taken into consideration; then sub-rule (2) of rule 10B requires application of FAR test for judging comparability of international transaction with uncontrolled transaction and is as under :

"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 taws 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."

30. Learned Special counsel for the revenue Shri Kapila has vehemently argued that "Datamatics" was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the learned CIT (Appeals) in appeal. Therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins. We are unable to accept above contention. In the first place, these are initial years of implementation of Transfer Pricing Legislation in India and taxpayers as well as tax consultants were not fully conversant, with this new branch of law when proceedings were initiated or even at appellate stage. Besides, revenue authorities, including TPO were required to apply statutory provisions and consider for purposes of comparison functions, assets and risks (turnover), profit and technology employed by the tested party and other enterprises taken as comparable statutory duty is cast on them to undertake above exercise. This has not been done in this case. We would only say that prima facie, as per the material, to which reference has been drawn by Shri Aggarwal. Datamatics does not appear to be comparable. Even if the taxpayer or its counsel had taken Datamatics as comparable in its I P audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover. Besides differences in assets and other characteristics referred to by Shri Aggarwal. The Income-tax Appellate Tribunal is a fact-finding body and, therefore, has to take into account all the relevant material and determine the question as per the statutory regulations.

31. In the case of Commissioner Of Income-Tax v. Bharat General Reinsurance Co. Ltd.* [1971] 81 ITR 303, the Hon’ble Delhi High Court observed as under :

"It is true that the assessee itself had included that dividend income in is return for the year in question but there is no estoppel in the Income-tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quit apart from it, it is incumbent on the Income-tax Department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year."

32. In the case of R.B. Jessaram Fatehchand v. CIT [1971] 81 ITR 409 (All.), it has been found and observed as under:

"Mr. Brijlal Gupta appearing for the department pointed out that the assessee itself filed separate returns for the two parts of a single accounting period. The assessee applied for registration for the first period only. The assessment for the second period proceeded as against an unregistered firm. It was, therefore, urged by Mr. Gupta that it is not open to the assessee to urge now that a single assessment under section 26(1) ought to have been made. Now, there cannot be an estoppel against statute. If in fact the procedure adopted by the Income-tax Officer was incorrect, the defect is not cured by the attitude taken up by the assessee."

33. In the case of CIT v. C. Parakh & Co. (India) Ltd. [1956] 29 ITR 661 , Their Lordships of Supreme Court made the following observations:

"On the question of the admissibility of the deduction of Rs. 1,23,719, the contention of the appellant is that as the respondent had itself split up the commission of Rs. 3,12,699 paid to the managing agents, and appropriated Rs. 1,23,719 thereof to the profits earned at Karachi and had debited the same with it, it was not entitled to go back upon it, and claim the amount as a deduction against the Indian profits. We do not see any force in this contention. Whether the respondent is entitled to a particular deduction or not will depend on the provision of law relating thereto, and not on the view which it might take of its rights, and consequently, if the whole of the commission is under the law liable to be deducted against the Indian profits, the respondent cannot be estopped from claiming the benefit of such deduction, by reason of the fact that it erroneously allocated a part of it towards the profits earned in Karachi. What has, therefore, to be determined is whether, notwithstanding the apportionment made by the respondent in the profit and loss statements, the deduction is admissible under the law."

34. In the case of CIT v. V.MR.P. Firm, Muar [1965] 56 ITR 67 , the following observations of Their Lordships of Supreme Court are as under :

"The decision in Amarendra Narayan Roy v. CIT AIR 1954 Cal. 271 has no bearing on the question raised before us. There the concessional scheme tempted the assessee to disclose voluntarily all his concealed income and he agreed to pay the proper tax upon it. The agreement there related to the quantification of taxable income but in the present case what is sought to be taxed is not a taxable income. The assessee in such a case can certainly raise the plea that his income is not taxable under the Act. We, therefore, reject this plea."

35. In para 4.16 of latest report, the OECD provides the following guidelines :

"In practice, neither countries nor taxpayers should misuse the burden of proof in the manner described above. Because of the difficulties with transfer pricing analysis, it would be appropriate for both taxpayers and tax administrations to take special care and to use restraint in relying on the burden of proof in the course of the examination of a transfer pricing case. More particularly, as a matter of good practice the burden of proof should not be misused by tax administrations or taxpayers as a justification for making groundless or unverifiable assertions about transfer pricing. A tax administration should be prepared to make good faith showing that its determination of transfer pricing is consistent with the arm’s length principle even where the burden of proof is on the taxpayer, and the taxpayers similarly should be prepared to make good faith showing that their transfer pricing is consistent with the arm’s length principle regardless of where the burden of proof lies."

36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer.

37. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. For the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part.

38. Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the Assessing Officer. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the Assessing Officer for consideration of claim of the taxpayer and make a de novo adjudication of the arm’s length price after providing reasonable opportunity of being heard to the assessee. We order accordingly.

39. We have, however, also noted that the very basis of selection of comparables and application of filters leaves lot to be desired. As we have noted earlier as well, the transfer pricing was in the initial stages in this year and we are inclined to take a rather liberal approach by giving assessee an opportunity to make out its case properly and place all the relevant facts before the tax authorities so that proper arm’s length price can be determined in accordance with the law the proceedings before the tax authorities are not adversarial proceedings and the assessee should not, therefore, be placed at under advantage because of his inadvertent and bona fide mistakes. With this objective in sight, and having no led inconsistencies in selection of compatibles, while we uphold the exclusion of Imercius from comparables, we also deem it fit and proper to remit the matter to the file of the Assessing Officer for adjudication de novo in the light of the above observations and in accordance with the law. We direct the assessee to place all the relevant material before the Assessing Officer and/or Transfer Pricing Officer and fully co-operate in expeditious disposal of the matter in accordance with the law. The matter stands restored to the file of the Assessing Officer as such.

40. In view of the above discussions, and subject to the above observations, while we reject assessee’s grievance against exclusion of Imercius from comparables, we allow the appeal filed by the assessee for statistical purposes in the terms indicated above.

41. To sum up, both the appeals are allowed for statistical purposes.