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2015 (5) TMI 303 - ITAT PUNE

2015 (5) TMI 303 - ITAT PUNE - TMI - Transfer pricing adjustment - segment relating to the Provision of software services - wrong selection of comparable - Held that:- The point made out by the assessee for exclusion of KALS Information Systems Ltd. (Application Software Segment) is on a sound footing inasmuch as the said concern is functionally distinct from the activities of Provision of software services rendered by the assessee.

Transworld Infotech Ltd. (earlier known as Sterling .....

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in agreement with the submissions of the assessee that the said concern is excludible from the final set of comparables

CSA (India) Ltd. (ESS Segment) functionally different as pointed out by the assessee vis-à-vis the R&D services segment of the said concern are germane and relevant to decide about the inclusion of the said concern for the comparability analysis. Therefore, we direct the lower authorities to exclude the margins relatable to the R&D services segment of the said conce .....

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ce support services segment. Undoubtedly, Infosys BPO Ltd. owns significant intangibles and eminent brand value whereas in the case of the assessee before us there is no such situation. The turnover achieved by Infosys BPO Ltd. is many times higher in comparison to the assessee; the said concern is a giant in comparison to the assessee. In our view, the presence of the aforesaid factors justify assessee’s assertion that the said concern be excluded from the list of comparables.

Cosmic .....

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the final set of comparables as was contended by the assessee in the course of the Transfer Pricing proceedings.

M/s In House Productions Ltd. (Healthcare Division) he only reason advanced by the TPO to reject the said concern was his perception that the financial data of the said concern was not reliable. The perception of the TPO is based on the fact that a fire destroyed major portion of the account books of the concern. The point made out by the assessee is that the audited financ .....

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l Ltd. (BPO Segment) in the immediately preceding assessment year the said concern had a positive margin. Nevertheless, in order to examine as to whether it is a consistent loss-making or not, a trend over more than one year is required to be evaluated. For the said purpose, we deem it fit and proper to restore the matter back to the file of the TPO, who shall examine the financial results of the said concern for two years prior and subsequent to the assessment year under consideration so as to .....

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sioner of Income Tax, Circle 1(2), Pune (in short the Assessing Officer ) passed u/s 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961 (in short the Act ) dated 07.01.2014, passed in conformity with the directions given by the Dispute Resolution Panel, Pune (in short the DRP ) dated 31.12.2013. 2. In this appeal, the Grounds of Appeal raised by the assessee read as under: - 1. The Ld. Assessing Officer ('AO') pursuant to the directions of the Ld. Dispute Resolution Panel ('DRP') .....

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not at arm's length under the Income-tax Act, 1961 ('the Act'). 2. On the facts and in the circumstances of the case, the Ld. DRP/AO erred in modifying the benchmarking analysis, as conducted by the appellant using Transactional Net Margin Method ('TNMM') for benchmarking its international transactions pertaining to provision of IT and ITES services to the AE, and thereby modifying the set of comparables. In doing so, the Ld. DRP/AO specifically erred in: a) Eliminating compa .....

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rch conducted by the appellant on a without prejudice basis). 3. The Ld. DRP/AO erred in considering the single year data for the comparables i.e. data for FY 2008-09 only and disregarding multiple year data which was considered by the appellant in accordance with the provisions of Rule 10B(4) of the Income-tax Rule, 1962 ("Rules"). 4. The Ld. DRP / AO erred in not allowing an adjustment for the difference between the level of risk borne/assets employed by the comparables and the appel .....

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e Ld. AO while passing the assessment order has erred by not following the DRP directions for disposing off the rectification application filed by the appellant for rectifying certain mistakes in the transfer pricing order. 6. The Ld. AO while passing the assessment order has erred in computing the tax computation by not considering the advance tax and tax deducted at source amounts. Further, on a without prejudice basis, the AO has also erred in the tax computation by not considering the credit .....

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nder the provisions of the Companies Act, 1956 and is, interalia, engaged in the business of providing software solutions and back office operations exclusively to its associated enterprises abroad. For the assessment year under consideration, it filed a return of income declaring total income of ₹ 2,33,171/-, which was subject to a scrutiny assessment. The international transactions entered by the assessee with its associated enterprises related to Provision of software services and Provi .....

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f the Act dated 26.03.2013 proposing the above addition to the returned income, assessee preferred to raise objections before the Dispute Resolution Panel (DRP) who vide its order dated 31.12.2013 primarily rejected the pleas of the assessee and upheld the determination of arm's length price of the international transactions as done by the TPO. As a consequence, the Assessing Officer has passed an assessment order u/s 143(3) r.w.s. 144C(13) of the Act dated 07.01.2014 whereby adjustment of & .....

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Ground of Appeal No.2 whereby inclusion and exclusion of certain concerns from the final set of comparables adopted by the TPO is sought to be challenged. 6. In order to appreciate the rival contentions, the following discussion is relevant. The appellant company is a 100% Export Oriented Unit (EOU) registered with the Software Technology Parks of India (STPI) and its income derived from such activities is eligible for deduction u/s 10A of the Act. Primarily, assessee is engaged in Provision of .....

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within assured return on costs incurred by it. In order to appreciate the services being rendered by the assessee to its associated enterprises, which reflect international transactions within the meaning of section 92B of the Act, it is appropriate to observe that PFG is a global financial services leader which offers wide range of financial products and services, such as retirement and investor services, insurance, asset management and financial services through financial services company. PF .....

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such services at ₹ 45,26,17,038/-. The second stream of international transactions entered with the associated enterprises relate to the administrative support services provided by the assessee for various service divisions of PFG e.g. investor services division, health services division and individual life insurance, underwriting operations division, etc.. Such services has been categorized as Provision of back office support services for which assessee has been remunerated during the yea .....

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made having regard to the arm's length price determined on an application of the Transactional Net Margin (TNM) Method. Notably, in the Transfer Pricing Study carried out by the assessee, TNM Method was selected as the most appropriate method in order to be benchmark the international transactions of Provision of software services and Provision of back office support services undertaken by the assessee with its associated enterprises. In so far as the application of the TNM Method in order t .....

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the Provision of software services is concerned, the Profit Level Indicator (PLI) was computed by the assessee at 15.66% based on the formula Operating Profit/Total Cost (OP/TC). On the basis of the comparables selected in the Transfer Pricing Study the arithmetic mean of the PLI of the comparables was taken at 14.48% and on this basis assessee had asserted before the TPO that its international transactions of Provision of software services to the associated enterprises was at an arm's lengt .....

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chnologies Ltd. 8.23% 3. F C S Software Solutions Ltd. 15.61% 4. L G S Global Ltd. 18.88% 5. Compucom Software Ltd. (Software Segment) 42.09% 6. Transworld Infotech Ltd. (Sterling International Enterprises Ltd.) 46.73% 7. KALS Information Systems Ltd. (Application Software Segment) 42.36% 8. ICSA (India) Ltd. (ESS Segment) 60.78% ARITHMETIC MEAN 32.79% 11. In this manner, by adopting the aforesaid final set of comparables, the TPO compared the assessee s PLI of 15.66% in the segment of Provision .....

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mpucom Software Ltd. (Software Segment); (ii) Transworld Infotech Ltd. (Sterling International Enterprises Ltd.); (iii) KALS Information Systems Ltd. (Application Software Segment); and, (iv) ICSA (India) Ltd. (ESS Segment) are liable to be excluded from the final set of comparables. Secondly, it is sought to be made out that the TPO has erred in adopting the margin of 27.60% in the case of Mindtree Consulting Ltd. inasmuch as according to the assessee, only the margin relating to the IT service .....

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stems Ltd. (Application Software Segment), the case setup by the assessee is that the said concern is functionally not comparable with the activity of Provision of software services rendered by the assessee. According to the assessee, the said concern is engaged in developing software products as well as Provision of software development services whereas assessee is only engaged in providing software development services. At the time of hearing, the Ld. Representative for the assessee referred t .....

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tware products developed by the said concern. It was pointed out that the TPO in the assessee s own case for assessment year 2007-08 as also for assessment year 2010-11 in his orders passed u/s 92CA(3) of the Act dated 28.01.2013 and 29.01.2014 respectively excluded the said concern from the final set of comparables. It was also pointed out that under identical circumstances, the Pune Bench of the Tribunal in the case of PTC Software (India) Private Limited vs. DCIT vide ITA No.336/PN/2014 dated .....

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e to be included as a comparable. 16. We have carefully considered the rival submissions. We find that the point made out by the assessee for exclusion of KALS Information Systems Ltd. (Application Software Segment) is on a sound footing inasmuch as the said concern is functionally distinct from the activities of Provision of software services rendered by the assessee. Ostensibly, for the very same assessment year in the case of PTC Software (India) Private Limited (supra), the Pune Bench of the .....

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in ITA No.1605/PN/2011 relating to assessment year 2007-08 vide order dated 30.04.2013 had held the said company to be not functionally comparable with the assessee. The relevant finding of the Tribunal vide para 19 is as under: 19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern (KALS Information Systems Ltd.) has not been found to be functionally comparable with the assessee in the immediately preceding assessment ye .....

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ower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee s segment of IT services. 28. In the year under consideration also, the said company KALS Information Systems Ltd. is engaged in the sale of software product .....

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wed its earlier decision in the case of PTC Software (India) Pvt. Ltd. for assessment year 2007-08 dated 30.04.2013. Evidently, the IT services segment of PTC Software (India) Pvt. Ltd. (supra) was engaged in rendering software development services which did not include development of any software products as was being done by KALS Information Systems Ltd. (Application Software Segment). Ostensibly, in the case of the appellant also in the course of rendering of Provision of software services to .....

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for exclusion of KALS Information Systems Ltd. (Application Software Segment) has been accepted. For all the aforesaid reasons, we uphold the plea of the assessee for exclusion of KALS Information Systems Ltd. (Application Software Segment) from the final set of comparables. We direct accordingly. 18. The second point made out by the assessee is for exclusion of Transworld Infotech Ltd. (earlier known as Sterling International Enterprises Ltd.) from the final set of comparables. The TPO vide his .....

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efore pointed out that since the data of the said concern did not correspond to the financial year of the assessee, the said concern cannot be construed to be a good comparable. We find that factually the aforesaid position is not in dispute. Moreover, rule 10B(4) of the Income Tax Rules, 1962 (in short the Rules ) provides that the data to be used in analyzing the comparability of an uncontrolled transaction with the international transaction shall be the data relating to the financial year in .....

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of the TPO in including ICSA (India) Ltd. (ESS Segment) as a comparable in the final set of comparables. The stand of the assessee before the lower authorities as well as before us is to the effect that the said concern is functionally not comparable to assessee s activity of rendering of Provision of software services to its associated enterprises. Secondly, it has also been pointed out that the said concern has significantly high Research and Development expenses and on this point also the sa .....

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for the comparability analysis by the TPO was software services segment which did not include product development activity. Therefore, the segment considered for comparability analysis is similar in function to assessee s activity of Provision of software services to its associated enterprises. 21. We have carefully considered the rival submissions. Firstly, we may refer to the decision of the Pune Bench of the Tribunal in the case of PTC Software (India) Pvt. Ltd. dated 30.04.2013 (supra) where .....

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ee s plea to evaluate the exclusion or inclusion of the said concern based on the level of R&D expenses incurred. On this point, it is pointed out that in so far as the ICSA (India) Ltd. (ESS Segment) is concerned, it is carrying on significant R&D activities and the ratio of expenditure of R&D to sales is almost 3% (i.e. ₹ 1983.79 lacs / ₹ 66350.72 lacs). The aforesaid position was canvassed by the assessee before the lower authorities as is evident from page 86 of the a .....

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) Ltd. (ESS Segment) cannot be considered as a good comparable so as to justify its inclusion for the purposes of the comparability analysis. Another aspect which has been made out by the assessee is that the ESS Segment of ICSA (India) Ltd. is also, inter-alia, engaged in providing embedded software solutions i.e. hardware products along with the software solutions and does not merely provide standalone software services to its associated enterprises. In this context, the Ld. Representative for .....

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s aspect also we find that the assessee has justifiable case for seeking exclusion of the said concern from the final set of comparables. We have also perused the order passed by the TPO u/s 92CA(3) of the Act for assessment year 2010-11 dated 29.01.2014 (supra) wherein the stand of the assessee for exclusion of the said concern from the final set of comparables stands accepted, a copy of the said order is placed at pages 637 to 668 of the Paper Book. Furthermore, the Ld. Representative for the .....

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t of comparables in the present year too. We hold so. 22. The next point made out by the assessee is for exclusion of Compucom Software Ltd. (Software Segment) from the final set of comparables. In this context, the plea of the assessee is that the said concern is not only engaged in rendering software development services but also sale of software products, end-to-end mobile solutions, IT infrastructure services, etc. and in support a reference has been made to pages 162 to 213 of the Paper Boo .....

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to 668 respectively. 23. On the other hand, the Ld. CIT-DR has defended the inclusion of Compucom Software Ltd. (Software Segment) in the final set of comparables on the ground that the product description of the said concern was computer software and therefore it was a good comparable. It was submitted by the Ld. CIT-DR that while applying the TNM Method only a broad comparability is required to be ensured and not a very strict level of comparability is required to be made out. Therefore, accor .....

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generation and Treasury, etc.. Assessee also pointed out that the said concern was majorly rendering services to the Government bodies as was evident from the extract of the Annual Report filed for relevant period. Even with regard to the software services segment, which has been adopted by the TPO to be comparable with assessee s activities, it was pointed out that the said segment was involved in Infrastructure Development, IT Infrastructure Solutions, Mobile Solutions and Development & S .....

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arities, and a concern can be said to be functionally comparable with the tested party if it is engaged in similar activity. However, in the present case, it is required to be appreciated that M/s Compucom Software Ltd. (Software Segment) is engaged in a wide spectrum of activities noted earlier and its customer profile includes Government bodies, etc. whereas the assessee is a captive software service provider rendering pure software development services to its associated enterprises as per the .....

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ivity, we are inclined to uphold assessee s plea that the software segment of Compucom Software Ltd. is not comparable to assessee s segment of Provision of software services to its associated enterprises. We accordingly direct the lower authorities to exclude the said concern from the final set of comparables. 26. With respect to the dispute in the software services segment, another point made out by the assessee was that the margin of Mindtree Consulting Ltd. considered by the TPO at 27.60% wa .....

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tal level, which was required to be done. 27. In this context, the Ld. CIT-DR referred to the discussion made by the TPO in para 10(5) of the impugned order to justify non-adoption of segmental profits for the purposes of comparability analysis. According to the Ld. CITDR, the said concern was engaged in the activity of computer software and even the R&D services were nothing but to support development services therefore the margin of the said concern at the entity level reflected profits fr .....

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mental reporting. As per the Annual Report, the said concern is having two business segments viz. IT services and R&D services. The segmental profits relating to R&D services and IT services have been separately enumerated therein. The plea of the assessee is that the margin relating to the IT services segment alone be considered comparable to assessee s activities of Provision of software services and not the margin relatable to the R&D services segment of the said concern. It has b .....

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ion of the said concern for the comparability analysis. Therefore, we direct the lower authorities to exclude the margins relatable to the R&D services segment of the said concern and consider only the margin relatable to the IT services segment alone to benchmark assessee s activity of Provision of software services to its associated enterprises. Thus, on this aspect also assessee succeeds. 29. Apart from the aforesaid, there is no other plea raised by the assessee with regard to the determ .....

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services rendered by the assessee to its associated enterprises for stated value of ₹ 18,82,13,428/-. On this aspect also, the TPO disagreed with assessee s assertion that the stated value of the international transactions are at an arm's length price. The TPO selected the following final set of comparables for the purposes of determining the arm's length price of international transactions pertaining to back office support services :- Sr.No. Company OP/TC using single year data f .....

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int made out by the assessee is to exclude Infosys BPO Ltd. from the final set of comparables. The plea of the assessee is that the said concern was a giant in its area of operation and possessed brand value of Infosys Technology Ltd. whereas assessee was a captive service provider with no significant intangibles or brand value. The Ld. Representative pointed out that Infosys BPO Ltd. has undertaken brand building exercise over a period of time by incurring huge expenditure and that the said con .....

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the activity carried out by Infosys BPO Ltd. and therefore the said concern be not be excluded from the final set of comparables. 34. We have carefully considered the rival submissions. In the case of Agnity India Technologies Pvt. Ltd. (supra), the Hon ble High Court noted that M/s Infosys Technologies Ltd. was a concern with a turnover of ₹ 9028 crores whereas the assessee before it i.e. Agnity India Technologies Pvt. Ltd. was having a turnover of ₹ 16.09 crores. The Hon ble High .....

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was not the case of Infosys Technologies Ltd.. Under these circumstances, the Hon ble Delhi High Court approved the decision of the Tribunal which held that Infosys Technologies Ltd. could not be compared with M/s Agnity India Technologies Pvt. Ltd. having regard to the financial data, etc. of the two concerns. Considering the aforesaid parity of reasoning, it has to be appreciated in the present case that the activities undertaken by Infosys BPO Ltd. cannot be qualitatively compared with the ac .....

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be excluded from the list of comparables. We hold so. 35. The second point made out by the assessee is that the TPO erred in including Cosmic Global Ltd. in the final set of comparables. In this context, the plea of the assessee before the lower authorities as well as before us is that the said concern was sub-contracting most of its work whereas assessee was undertaking its activities by itself. It was pointed out that the said concern was sub-contracting majority of its translation services wo .....

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d, the Ld CIT-DR referred to the discussion made by the TPO in para 11(1) of the order by pointing out that the said concern was a part of the search conducted by the assessee also. Therefore, according to her, the said concern cannot be excluded at the present stage. 37. In our considered opinion, the point made out by the Ld. CIT-DR that the assessee had initially selected the said concern as comparable cannot be the sole basis to reject assessee plea for exclusion of the said concern if the a .....

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e Bangalore Bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. vs. DCIT vide ITA No.227/Bang/2010 dated 09.11.2012. The decision of the Pune Bench of the Tribunal in the case of PTC Software (India) Pvt. Ltd. dated 30.04.2013 (supra) is also to the similar effect. Therefore, in our considered opinion, having regard to the difference in the business model brought out by the assessee, M/s Cosmic Global Services Ltd. is liable to the excluded from the final set of comparables. We hold .....

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rn was not available in public domain. For the said reason, the financial data with regard to the said concern was not considered by the TPO in the comparability analysis. 40. The Ld. Representative for the assessee asserted at the time of hearing that the TPO was wrong in stating that the Annual Report of the said concern was not available in the public domain whereas assessee had duly furnished a copy of the Annual Report of the said concern pertaining to financial year under consideration. In .....

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ich are emerging from page 116 of the appeal Paper Book. Even before the DRP, assessee had asserted that the Annual Report of the said concern was duly submitted to the TPO and therefore it could not be said that the financial data of the said concern was not available in public domain. The activities rendered by the said concern have also been detailed in the submissions before the DRP and it was asserted that the said concern is functionally comparable to assessee s activities of providing bac .....

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absence of any adverse finding that the activities of the said concern are not comparable to assessee s activity of rendering back office support services to its associated enterprises, we deem it fit and proper to direct the lower authorities to include the said concern in the final set of comparables as was contended by the assessee in the course of the Transfer Pricing proceedings. 42. The next point made out by the assessee is for inclusion of M/s In House Productions Ltd. (Healthcare Divisi .....

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On the other hand, the Ld. Representative for the assessee vehemently pointed out that the Auditor s Report of the said concern does not reveal any adverse finding or qualification with regard to the unreliability of the financial data. It was therefore contended that the TPO has misdirected himself in questioning the integrity of the financial data reflected in the Annual Report of the said concern. 44. We have carefully considered the rival submissions. Having regard to the discussion in the .....

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aid stand of the assessee cannot be brushed aside lightly. On the other hand, the TPO has not advanced any credible basis which could demonstrate unreliability of the financial data. In our considered opinion, it would meet the ends of justice if the TPO is called upon to re-visit the controversy with regard to the inclusion of In House Productions Ltd. afresh having regard to the submissions and the material which the assessee may put-forth before him. Accordingly, we deem it fit and proper to .....

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sessee is for inclusion of Galaxy Commercial Ltd. (BPO Segment)in the final set of comparables. The TPO rejected the said concern from the final set of comparables on the ground that it was a consistently loss-making concern. Before us also, the Ld. CIT-DR has reiterated the point made out by the TPO in order to exclude the said concern from the final set of comparables. 46. The Ld. Representative for the appellant pointed out that the BPO segment of the said concern was not a consistent loss-ma .....

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luated. For the said purpose, we deem it fit and proper to restore the matter back to the file of the TPO, who shall examine the financial results of the said concern for two years prior and subsequent to the assessment year under consideration so as to formulate a belief as to whether or not it is a consistently loss-making concern. If the Assessing Officer/TPO comes to conclude, having regard to the aforesaid trend analysis that it is a consistently loss-making unit then the same is liable to .....

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