DCIT, New Delhi V. M/s Timex Group India Ltd., Noida

CO 95/DEL/2016

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9378 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 9 month(s) 3 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 20-12-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I1
• Next Hearing Date: 31-05-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 17-03-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Wholly owned subsidiary; Onus to prove
• Section: 143(3); 92B; 234B; 144; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE HONBLE VICE PRESIDENT, SHRI G.D. AGRAWAL AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.845/DEL./2016 (ASSESSMENT YEAR : 2011--12) M/S. TIMEX GROUP INDIA LIMITED, VS. DCIT, CIRCLE 25 (2), FIRST FLOOR, TOWER B, NEW DELHI. PLOT NO.B 37, SECTOR 1, NOIDA 201 301 (UTTAR PRADESH). (PAN : AAACT0773C) CO NO.95/DEL/2016 (IN ITA NO.845/DEL./2016) (ASSESSMENT YEAR : 2011--12) DCIT, CIRCLE 25 (2), VS. M/S. TIMEX GROUP INDIA LIM ITED, NEW DELHI. FIRST FLOOR, TOWER B, PLOT NO.B 37, SECTOR 1, NOIDA 201 301 (UTTAR PRADESH). (PAN : AAACT0773C) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, SENIOR ADVOCATE SHRI NEERAJ JAIN, ADVCOATE SHRI ROMIT KATYAL, CA SHRI SAHIL SHARMA, CA REVENUE BY : SHRI SANJAY I. BARA, CIT DR DATE OF HEARING : 13.11.2018 DATE OF ORDER : 20.12.2018 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : ITA NO.845/DEL/2016 CO NO.95/DEL/2016 2 THE AFORESAID APPEAL FILED BY THE ASSESSEE AND CROS S OBJECTIONS FILED BY THE REVENUE ARE BEING DISPOSED OFF BY WAY OF CONSOLIDATED ORDER TO AVOID REPETITION OF DISCUSSIO N. 2. THE APPELLANT, M/S. TIMEX GROUP INDIA LIMITED, (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILI NG THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 31.12.2015 PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASS ED BY THE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH SECTION 144 C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2011-12 ON THE GROUNDS INTER ALIA THAT :- GENERAL 1. THAT THE IMPUGNED ORDER OF ASSESSMENT FRAMED BY THE ASSESSING OFFICER IN PURSUANCE OF THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO A S 'DRP') UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME- TAX ACT, 1961 (ACT'), IS BAD IN LAW, VIOLATIVE OF PRINCIPLES OF NATURAL JUSTICE AND VOID AB-INITIO. 1.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING THE ASSESSMENT UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT ('THE ACT') AT A N INCOME OF RS.165,588,189 AS AGAINST NIL RETURNED IN COME. TRANSFER PRICING ISSUES: 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN MAKING ADDITION TO THE INCOME OF THE APPELLANT TO T HE EXTENT OF RS.28,27,99,372 ON ACCOUNT OF THE ALLEGED DIFFER ENCE IN THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION S. ADVERTISEMENT, MARKETING AND SALES PROMOTION EXPENS ES: 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING TRANSFER PRICING ADJUSTMENT AMOUNTING TO ITA NO.845/DEL/2016 CO NO.95/DEL/2016 3 RS.27,87,32,906 IN RELATION TO ADVERTISEMENT, MARKE TING AND SALES PROMOTION EXPENSES (HEREINAFTER REFERRED TO A S 'THE AMP EXPENSES') INCURRED BY THE APPELLANT. 3.1 THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT AMP EXPENSES, ETC., UNILATERALLY INCURRED BY THE APPELLANT IN INDIA COULD NOT BE CHARACTERIZE D AS AN INTERNATIONAL TRANSACTION AS PER SECTION 92B OF THE ACT, IN THE ABSENCE OF ANY PROVED UNDERSTANDING / ARRANGEME NT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE (HEREINAFTER REFERRED TO AS 'AE'), SO AS TO INVOKE THE PROVISIONS OF SECTION 92 OF THE ACT. 3.2 WITHOUT PREJUDICE THAT THE DRP / TPO ERRED ON FACTS AND IN LAW IN NOT EXCLUDING THE FOLLOWING SELLING E XPENSES AGGREGATING TO RS.11,25,29,382 FROM THE AMP EXPENDI TURE FOR THE PURPOSE OF THE BENCHMARKING ANALYSIS: S.NO. PARTICULARS AMOUNT (RS.) 1 SELLING AND DISTRIBUTION EXPENSES 3,15,24,071 2 HOARDING EXPENSES 64,98,948 3 SHOWCASE AND DISPLAY EXPENSES 93,36,589 4 MINIMUM GUARANTEE 4,41,44,493 5 SALES PROMOTION 2,10,25,281 TOTAL 11,25,29,382 3.3 WITHOUT PREJUDICE, THE DRP/TPO ERRED ON FACTS AND IN LAW IN APPLYING MARKUP OF 42.19%, BEING GROSS PR OFIT MARGIN OF THE COMPARABLE COMPANIES, ON THE ALLEGED EXCESS AMP EXPENDITURE INCURRED BY THE APPELLANT, WHILE COMPUTING THE VALUE OF COMPENSATION TO BE RECEIVED BY THE APPELLANT ON ACCOUNT OF PROMOTION OF 'TIMEX' BRAND. PROVISION OF BACK OFFICE SUPPORT SERVICES 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.40,66,466 IN RELATION TO THE TRANSACTION OF PROV ISION OF BACK OFFICE SUPPORT SERVICES UNDERTAKEN BY THE APPE LLANT. 4.1 THAT THE TPO ERRED ON FACTS AND IN LAW IN COMP ARING THE APPELLANT, PROVIDING ROUTINE BACK OFFICE SUPPOR T SERVICES, ITA NO.845/DEL/2016 CO NO.95/DEL/2016 4 WITH THE FOLLOWING FUNCTIONALLY DIFFERENT COMPANIES FOR THE PURPOSE OF BENCHMARKING ANALYSIS: I. ACCENTIA TECHNOLOGIES LTD. II. ACROPETAL TECHNOLOGIES LIMITED(SEG) III. ECLERX SERVICES LIMITED IV. ICRA TECHNO ANALYTICS LIMITED V. INFOSYS BPO LTD VI. TCS E-SERVE LTD 4.2 THAT THE TPO ERRED ON FACTS AND IN LAW IN REJE CTING THE FOLLOWING COMPANIES WITH EXPORT EARNINGS LESS T HAN 75% OF TOTAL INCOME, NOT APPRECIATING THAT COM PARABLES COMPANIES ARE REQUIRED TO BE SELECTED ON THE BASIS OF THEIR FUNCTIONAL PROFILE AND NOT ON THE BASIS OF LOCATION OF THEIR CUSTOMERS: I. CAMEO CORPORATE SERVICES LTD II. DELTA SERVICES (INDIA) PVT LTD III. CSS TECHNERGY LTD 4.3 THAT THE TPO ERRED ON FACTS AND IN LAW IN REJE CTING SPARSH BPO ON THE BASIS THAT THE COMPANY HAS A NEGA TIVE NETWORTH, NOT APPRECIATING THAT THE COMPANY HAS POS ITIVE NET WORTH AS ON MARCH 31, 2011 4.4 THAT THE TPO ERRED ON FACTS AND IN LAW IN REJE CTING TWINSTAR EXPORT LTD. ON THE BASIS THAT IT IS ENGAGE D IN MANUFACTURING OF INSULATORS 4.5 THAT THE TPO ERRED ON FACTS AND IN LAW IN REJE CTING R SYSTEMS INTERNATIONAL LTD ON THE BASIS THAT IT HAS A DIFFERENT FINANCIAL YEAR, NOT APPRECIATING THAT THE COMPANY I S FUNCTIONALLY COMPARABLE TO THE APPELLANT. 4.6 THAT THE TPO ERRED ON FACTS AND IN LAW IN CONSIDERING FOREIGN EXCHANGE FLUCTUATION AS AN ITEM OF NON- OPERATING NATURE FOR COMPUTING OPERATING PROFIT MAR GIN OF THE APPELLANT AND THE COMPARABLE COMPANIES 4.7 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT ALLOWING APPROPRIATE ADJUSTMENT ON ACCOUNT FAVORABL E WORKING CAPITAL POSITION OF THE APPELLANT VIS-A-VIS THE COMPARABLE COMPANIES ITA NO.845/DEL/2016 CO NO.95/DEL/2016 5 4.8 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT ALLOWING APPROPRIATE RISK ADJUSTMENT HOLDING THAT ' THE TAXPAYER HAS NOT SHOWN WITH EVIDENCE AS TO WHETHER EACH OF THE RISKS WERE ACTUALLY UNDERTAKEN BY THE COMPARABL ES. 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN LEVYING INTEREST UNDER SECTION 234B AND SECTION 234 C OF THE ACT. 3. THE OBJECTOR, DCIT, CIRCLE 25 (2), NEW DELHI, BY FILING THE PRESENT CROSS OBJECTIONS CHALLENGED THE ASSESSMENT ORDER DATED 31.12.2015 PASSED BY THE ASSESSING OFFICER QUA THE ASSESSMENT YEAR 2011-12 ON THE GROUNDS INTER ALIA THAT :- 1. THAT UNDER RULE 27 OF THE INCOME TAX (APPELLATE TRIBUNAL) RULE, 1963, THE REVENUE SUPPORTS THE ORDE R OF DRP PASSED IN THE CASE OF M/S TIMEX GROUP OF INDIA LTD. FOR A.Y. 2011-12 DETERMINING THE ALP AT RS.28,27,99,372/- AS AGAINST RS.24,74,23,188/- AS DETERMINED BY THE TPO. 2. THAT IF THE ABOVE FINDING OF THE DRP IS NOT UPHE LD, UNDER RULE 22 OF THE INCOME TAX (APPELLATE TRIBUNAL) RULE S, 1963, THE FOLLOWING GROUNDS MAY KINDLY BE CONSIDERED AS A CRO SS OBJECTION: (I) THAT IN THE FACTS AND CIRCUMSTANCES OF THE CAS E THE LD. DRP ERRED IN REJECTING THE BRIGHT LINE TEST METHOD ADOPTED BY THE TRANSFER PRICING OFFICER FOR DETERMINING THE VA LUES OF ALP. (II) THAT THE REVENUE RESERVES THE RIGHT TO AMEND, MODIFY, ADD TO OR WITHDRAW THE ABOVE GROUNDS OF CROSS OBJECTION .' 4. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : THE TIMEX GROUP INDIA LTD ., A SUBSIDIARY OF TIMEX GROUP LUXURY WATCHES B.V. IS INTO DESIGNIN G, MANUFACTURING AND MARKETING INNOVATIVE TIMEPIECES A ND JEWELLERY. TIMEX GROUP COMPANIES INCLUDE THE TIMEX BUSINESS UN IT (TIMEX, TIMEX IRONMAN, OPEX, TX, NAUTICA, MARC ECKO); TIMEX GROUP ITA NO.845/DEL/2016 CO NO.95/DEL/2016 6 LUXURY WATCHES (VALENTINO, SALVATORE, FERRAGAMO); S EQUEL (GUESS) AND VERTIME (VERSACE, VERSUS). THE TIME GR OUPS BRAND PORTFOLIO INCLUDE GLOBAL BRANDS LIKE TIMEX, TX, VER SACE, VERSUS, VALENTINO, GUESS, VINCENT BERARD, GUESS COLLECTION, FERRAGAMO, ECKO, NAUTICA AND OPEX. 5. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER E NTERED INTO INTERNATIONAL TRANSACTIONS AS UNDER :- NATURE OF TRANSACTION SALES OPERATING COST (OC) OPERATING PROFIT (OP) OP/OC (%) PROVISION OF SOFTWARE DEVELOPMENT SERVICES 2,60,97,175 2,42,59,000 18,38,000 7.58% 6. THE TAXPAYER HAS INCURRED ADVERTISEMENT, MARKETI NG AND PROMOTIONAL (AMP) EXPENDITURE DURING THE YEAR UNDER ASSESSMENT AS UNDER :- PARTICULARS AMOUNT IN RS. ADVERTISEMENT AND SALES PROMOTION EXPENDITURE (GROSS) 20,76,15,000 SELLING AND DISTRIBUTION EXPENSES 4,10,75,000 TOTAL AMP 24,86,90,000 SALES 175,68,00,000 7. THE TAXPAYER INCURRED RS.24,86,90,000/- ON ACCOU NT OF AMP EXPENDITURE WHICH ACCOUNTS FOR 14.16% TO THE SALES RATIO. THE TPO IN ORDER TO BENCHMARKING INTERNATIONAL TRANSACT ION QUA AMP EXPENSES APPLIED BRIGHT LINE METHOD BY FOLLOWING THE SPECIAL BENCH DECISION PASSED BY THE TRIBUNAL. THE LD. TPO IN ORDER TO ITA NO.845/DEL/2016 CO NO.95/DEL/2016 7 DETERMINE ARMS LENGTH PRICE (ALP) OF AMP EXPENDITU RE INCURRED BY THE TAXPAYER REJECTED TWO COMPARABLES VIZ. HMT I NTERNATIONAL LIMITED AND TITAN INDUSTRIES LIMITED AND CHOSEN TWO COMPARABLES SELECTED BY THE TAXPAYER AND DETERMINED THE BRIGHT LINE METHOD OF THE TWO COMPANIES TO WORK OUT THE AMP EXPENSES/SALE S PERCENTAGE AS UNDER :- NO. NAME OF THE COMPANY AMP EXPENSE / SALES (%) 1 KDDL LTD. 2.12% 2 KAMLA RETAILS LTD. 1.49% MEAN 1.81% 8. THE LD. TPO FURTHER ADDED MARK-UP OF AMP SPENT T O THE TUNE OF 12.26% QUA NON-ROUTINE AMP ACTIVITIES CARRI ED OUT BY THE TAXPAYER FOR PERFORMING ADDITIONAL SIGNIFICANT MARK ETING FUNCTION FOR ITS ASSOCIATED ENTERPRISES (AE). IT IS THE CAS E OF THE TPO THAT THE TAXPAYER THROUGH ITS NON-ROUTINE MARKETING (AMP ACTIVITIES) HAS NOT ONLY ENHANCED THE BRAND VALUE OF THE AE IN INDIA BUT HAS ALSO DEVELOPED MARKET INTANGIBLES FOR ITS AE WHICH HAS RESULTED IN ENHANCED SALE AND PROFIT TO THE AE FOR WHICH IT HAS NOT BEEN REIMBURSED. SO, THE LD. TPO BY TAKING INTO ACCOUNT THE PRIME LENDING RATE (PLR) OF STATE BANK OF INDIA (SBI) AND ULTIMATELY ADDED MARK-UP AT 12.26%. CONSEQUENTLY, THE LD. TPO COMPUTED ITA NO.845/DEL/2016 CO NO.95/DEL/2016 8 THE ALP OF REIMBURSEMENT ON THE BASIS OF PERCENTAGE AMP TO SALES BY APPLYING THE BRIGHT LINE LIMIT AS UNDER :- ADVERTISEMENT, MARKETING AND SALES PROMOTION (A) 24,86,90,000 TOTAL EXPENDITURE ON AMP (B) 24,86,90,000 SALES OF ASSESSEE (C) 175,68,00,000 AMP% OF ASSESSEE [D = B/C*100] 14.16% ARMS LENGTH LEVEL OF AMP% (E) 1.81% ARMS LENGTH LEVEL OF AMP EXPENSES [F=C*E%] 3,17,98,080 AMOUNT SPENT IN EXCESS OF BRIGHT LINE AND ON CREATION OF MARKETING INTANGIBLE [G=B-F] 21,68,91,920 MARK-UP @ 12.26% 2,65,90,949 THE AMOUNT BY WHICH THE ASSESSEE COMPANY SHOULD HAVE BEEN REIMBURSED BY AE [I = G+H] 24,34,82,869 9. HOWEVER, IN COMPLIANCE TO THE DIRECTIONS ISSUED BY THE DRP, THE TPO HAS COMPUTED THE AMP EXPENSES INCURRED BY T HE TAXPAYER FOR BRAND PROMOTION OF AE ON THE BASIS OF ITS AMP/G ROSS PROFIT RATIO VIS--VIS COMPARABLE COMPANIES BY APPLYING MA RK-UP OF 42.19% (BEING THE AVERAGE GP/COST RATIO OF COMPARAB LE COMPANY ON THE ALLEGED EXCESS AMP EXPENSES) MADE ADDITION O F RS.27,87,32,906/- ON ACCOUNT OF AMP EXPENSES WHICH IS AS UNDER:- EXCESS AMP (A) 19,60,28,487 MARKUP (B) @ 42.19% 8,27,04,418 AMP ADJUSTMENT [C = A+B] 27,87,32,906 10. THE TAXPAYER DURING THE YEAR UNDER ASSESSMENT A LSO ENTERED INTO INTERNATIONAL TRANSACTIONS OF PROVISION OF ITE S IN THE NATURE OF ITA NO.845/DEL/2016 CO NO.95/DEL/2016 9 PAY-ROLL PROCESSING, ACCOUNT PROCESSING ETC. TO THE TUNE OF RS.2,60,97,175/-. THE TAXPAYER IN ORDER TO DETERMI NE THE ALP OF INTERNATIONAL TRANSACTIONS APPLIED TRANSACTIONAL NE T MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) WITH OPERATING PROFIT/OPERATING COST AS PLI AND CHOSEN 7 COMPANIES AS COMPARABLES WITH AVERAGE OP/OC AT 8.75% AS AGAINST OP/OC OF THE TAXPAYER AT 7.85% AND FOUND ITS INTERNATIONAL T RANSACTIONS AT ARMS LENGTH. 11. HOWEVER, TPO SELECTED 10 COMPARABLES WITH AVERA GE OP/OC AT 24.34% AND PROPOSED ALP ADJUSTMENT OF RS.4 0,66,466/- ON ACCOUNT OF DIFFERENCE IN THE MARGIN OF COMPARABL E COMPANIES OF THE TAXPAYER. 12. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. DRP BY FILING OBJECTIONS WHO HAS DISPOSED OF THE SAME. FEELING A GGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL AND THE ASSESSEE HAS ALSO FILED THE CROSS OBJECTION. 13. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE S OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.845/DEL/2016 CO NO.95/DEL/2016 10 GROUND NO.1 OF ITA NO.845/DEL/2016 (ASSESSEES APPEAL) 14. GROUND NO.1 IS GENERAL IN NATURE, HENCE REQUIRE S NO ADJUDICATION. GROUNDS NO.2 & 3 TO 3.3 OF ITA NO.845/DEL/2016 (ASSESSEES APPEAL) GROUNDS NO.1 & 2 OF CO NO.95/DEL/2016 (REVENUES CO) 15. UNDISPUTEDLY, THE TAXPAYER IS INTO THE BUSINESS OF MANUFACTURING AND SALE OF WATCHES AND IS ALSO INTO DISTRIBUTION OF WATCHES IMPORTED FROM ITS AE. IT IS ALSO NOT IN DI SPUTE THAT 85% OF THE TURNOVER OF THE TAXPAYER IS SALE OF WATCHES MAN UFACTURED BY THE TAXPAYER IN INDIA, IT BEING OPERATED AS A FULL-FLED GED MANUFACTURER AND FULL RISK BEARING DISTRIBUTOR. IT IS ALSO NOT IN DISPUTE THAT THE TPO HAS APPLIED BRIGHT LINE METHOD FOR DETERMININ G THE EXISTENCE OF INTERNATIONAL TRANSACTION IN ORDER TO COMPUTE THE ALP OF SUCH TRANSACTION. IT IS ALSO NOT IN DISPUTE THA T THE LD. TPO HAS PROCEEDED ON THE PREMISE THAT THE TAXPAYER BY INCUR RING NON- ROUTINE MARKETING (AMP) ACTIVITIES HAS NOT ONLY ENH ANCED THE BRAND VALUE OF ITS AE IN INDIA BUT HAS ALSO DEVELOP ED MARKETING INTANGIBLE FOR THE AE WHICH ENHANCED SALE AND PROVI DED BENEFITS TO THE AE. IT IS ALSO NOT IN DISPUTE THAT THE TPO HAS ADDED MARKUP OF ITA NO.845/DEL/2016 CO NO.95/DEL/2016 11 12.26% ON THE GROUND THAT THE TAXPAYER HAS SIGNIFIC ANTLY ASSUMED GREATER RISK THAN THE ALP. 16. PURSUANT TO THE SHOW-CAUSE NOTICE DATED 05.01.2 015 ISSUED BY THE LD. TPO, THE ASSESSEE HAS CONDUCTED FRESH SE ARCH TO SELECT THE COMPARABLES. ACCORDINGLY, THE TAXPAYER HAS SEL ECTED 4 COMPARABLES VIZ. (I) HMT INTERNATIONAL LTD.; (II) K DDL LTD.; (III) KAMLA RETAIL LTD.; AND (IV) TITAN INDUSTRIES LTD. 17. THE LD. TPO OUT OF THE 4 COMPARABLES REJECTED H MT INTERNATIONAL LTD. AND TITAN INDUSTRIES LTD. AS COM PARABLES CHOSEN BY THE TAXPAYER AND FINALLY SELECTED 2 COMPARABLES FOR THE PURPOSE OF DETERMINING BRIGHT LINE LIMIT WHICH ARE AS UNDER :- NO. NAME OF THE COMPANY AMP EXPENSE / SALES (%) 1 KDDL LTD. 2.12% 2 KAMLA RETAILS LTD. 1.49% MEAN 1.81% 18. THE LD. TPO ALSO TAKEN THE VIEW THAT THE TAXPAY ER IN PROVIDING AMP SERVICES UTILIZED ITS OWN FUNDS AND P ROCEEDED TO ADD THE MARKUP AT LEAST EQUAL TO THE PRIME LENDING RATE OF SBI AND THEREBY ADDED THE TOTAL OF 12.26% MARKUP ON AMP EXP ENDITURE. 19. THE LD. AR FOR THE TAXPAYER CONTENDED INTER ALI A THAT INCURRING AMP EXPENSES BY THE TAXPAYER IS NOT AN I NTERNATIONAL TRANSACTION AND THAT THE LD. TPO HAS MERELY RELIED UPON THE ITA NO.845/DEL/2016 CO NO.95/DEL/2016 12 BRIGHT LINE TEST TO INFER THE INTERNATIONAL TRANS ACTIONS BETWEEN THE TAXPAYER AND ITS AE WITHOUT HAVING ANY COGENT MATER IAL/EVIDENCE ON RECORD. 20. BARE PERUSAL OF THE ORDER UNDER CHALLENGE PASSE D BY THE LD. TPO PARTICULARLY AT PAGES 67, 73 AND 75 GOES TO PRO VE THAT THE ENTIRE ADJUSTMENT QUA AMP EXPENSES HAS BEEN MADE BY THE TPO ON THE BASIS OF BRIGHT LINE METHOD AND NO MATERIAL WHATSOEVER HAS BEEN BROUGHT ON RECORD TO SHOW THAT IF THE TAXPAYER AND AE HAVE ACTED IN CONCERT AND THAT THEY HAVE ENTERED INTO AN Y AGREEMENT TO ENTER INTO INTERNATIONAL TRANSACTIONS QUA AMP EXPEN SES. 21. HONBLE DELHI HIGH COURT IN SONY ERICSSON INDIA PVT. LTD. V. CIT (2015) 374 ITR 118 (DEL.) AND SUBSEQUENTLY IN MARUTI SUZUKI INDIA LTD. V. CIT (2016) 328 ITR 210 (DEL.) HAS CATEGORICALLY HELD THAT BLT IS NOT A VALID BASIS FO R DETERMINING THE EXISTENCE OF INTERNATIONAL TRANSACTION OR FOR THAT MATTER FOR COMPUTING THE ALP OF SUCH INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES. SO, IN THESE CIRCUMSTANCES, THE ORDE R OF TPO PASSED BY MAKING BLT AS BASIS OF THE ALP ADJUSTMENT IS NOT SUSTAINABLE IN THE EYES OF LAW. 22. FURTHERMORE, HONBLE DELHI HIGH COURT IN SUBSEQ UENT DECISIONS VIZ. BAUSCH & LOMB EYE CARE (INDIA) PVT. LTD. V. ADDITIONAL CIT (2016) 381 ITR 227 (DEL.) AND HONDA SIEL POWER ITA NO.845/DEL/2016 CO NO.95/DEL/2016 13 PRODUCTS LTD. V. DY. CIT (2016) 237 TAXMAN 304 HELD THAT IT IS FOR THE REVENUE TO FIRSTLY DISCHARGE THE ONUS TO PROVE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION BETWEEN THE TAXPAYER A ND ITS AE AND ONLY THEREAFTER ALP OF INTERNATIONAL TRANSACTIONS I NVOLVING AMP CAN BE COMPUTED. 23. IT IS FURTHER CONTENDED BY THE LD. AR FOR THE T AXPAYER THAT QUANTITATIVE ADJUSTMENT MADE BY THE TPO ON ACCOUNT OF AMP EXPENSES IS NOT PERMISSIBLE WITHIN THE FRAMEWORK OF CHAPTER-X AS HAS BEEN HELD BY THE HONBLE DELHI HIGH COURT IN MARUTI SUZUKI INDIA LTD. V. CIT ITA NO.110/2014 & 710/2015) . HONBLE HIGH COURT HAS CATEGORICALLY HELD THAT NONE OF THE SUBST ANTIVE OR PROCEDURAL PROVISIONS OF CHAPTER-X PERMITS ADJUSTME NT ON ACCOUNT OF AMP EXPENSES. 24. THE TAXPAYER HAS CONTESTED BEFORE LD. DRP THAT INCURRING OF AMP EXPENSES ARE NOT INTERNATIONAL TRANSACTIONS AND BLT METHOD HAS NO STATUTORY BASIS TO INFER THE EXISTENCE OF IN TERNATIONAL TRANSACTIONS QUA AMP EXPENSES, HOWEVER, THE LD. DRP HAS PROCEEDED TO HOLD INTER ALIA THAT INCURRING OF AMP EXPENSES IS AN INTERNATIONAL TRANSACTION AND DIRECTED TO EXCLUDE T HE ROUTINE SELLING AND DISTRIBUTION EXPENSES AND DIRECTED THE TPO TO U SE THE COST PLUS METHOD AND FURTHER DIRECTED TO APPLY THE MARKUP ON EXCESS AMP EXPENSES AS PER SUB-CLAUSE (II) OF RULE 10B(1)(C). ITA NO.845/DEL/2016 CO NO.95/DEL/2016 14 25. HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT FOL LOWING THE DECISION RENDERED BY HONBLE DELHI HIGH COURT IN MARUTI SUZUKI INDIA LTD. V. CIT (SUPRA), THE FIRST STEP FOR THE REVENUE TO BENCHMARK THE AMP EXPENSES IS TO ESTABLISH THE EXIS TENCE OF INTERNATIONAL TRANSACTION; IF IT IS PROVED, THEN TO PROCEED FOR BENCHMARKING THE TRANSACTIONS QUA AMP EXPENSES. NO W, IT IS THE SETTLED PRINCIPLE OF LAW THAT EXISTENCE OF INTERNAT IONAL TRANSACTION QUA AMP EXPENSES REQUIRES TO BE ESTABLISHED DE HORS THE BRIGHT LINE TEST, PARTICULARLY WHEN THE TAXPAYER HAS CATE GORICALLY DENIED THE EXISTENCE OF INTERNATIONAL TRANSACTION AND 87% OF ITS TURNOVER IS FROM THE SALE OF ITS MANUFACTURING IN INDIA. MOREO VER, WITHOUT PREJUDICE, IT IS THE CASE OF THE TAXPAYER THAT DESP ITE THE DIRECTIONS ISSUED BY THE LD. DRP, THE TPO HAS WRONGFULLY PROCE EDED TO CONSIDER SELLING AND DISTRIBUTION EXPENSES AS PART OF THE AMP EXPENSES FOR THE PURPOSES OF APPLYING THE BRIGHT LI NE TEST. 26. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT SINCE THE TAXPAYER IS A FULL-F LEDGED MANUFACTURER AS 87% OF ITS TURNOVER IS FROM THE SAL E OF ITS MANUFACTURED GOODS IN INDIA AND THE ENTIRE AMP EXPE NSES HAVE BEEN INCURRED BY IT TO ENHANCE ITS SALE IN INDIA AN D NOT FOR PROMOTING THE BRAND OF ITS AE AND FOR CREATING INTA NGIBLES FOR ITS AE, THE ALLEGED EXCESS AMP EXPENDITURE DOES NOT FAL L IN THE ITA NO.845/DEL/2016 CO NO.95/DEL/2016 15 CATEGORY OF INTERNATIONAL TRANSACTIONS. MOREOVER, THE REVENUE HAS NOT BROUGHT ON RECORD ANY COGENT EVIDENCE TO PROVE THESE FACTS. SO, FOLLOWING THE LAW LAID DOWN BY THE HONBLE DELH I HIGH COURT IN CASE CITED AS MARUTI SUZUKI INDIA LTD. V. CIT (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT ADJUSTMENT MADE BY THE REV ENUE ON ACCOUNT OF INCURRENCE OF AMP EXPENSES ARE NOT SUSTA INABLE IN THE EYES OF LAW. 27. LEARNED DR FOR THE REVENUE, ALTHOUGH ADMITTED T HE LEGAL POSITION ENUNCIATED IN THE PRECEDING PARAGRAPHS, BU T HE CONTENDED THAT SINCE ALL THE AFORESAID DECISIONS ARE LYING CH ALLENGED BEFORE THE HON'BLE APEX COURT, THE MATTER MAY BE KEPT PENDING TILL THE DECISION BY HON'BLE APEX COURT. HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT SINCE IT IS A STAY GRANTED MAT TER AND THE PROCEEDINGS BEFORE THE SECOND APPELLATE AUTHORITY H AVE NOT BEEN STAYED BY ANY HIGHER FORUM, THE SAME CANNOT BE KEPT PENDING. 28. AFTER CONSIDERING THE LEGAL POSITION AS DISCUSS ED IN THE PRECEDING PARAGRAPHS, WE ARE OF THE CONSIDERED OPIN ION THAT THE ALP OF AN INTERNATIONAL TRANSACTION INVOLVING AMP E XPENSES, THE ADJUSTMENT MADE BY THE TPO/DRP/AO IS NOT SUSTAINABL E IN THE EYES OF LAW. AT THE SAME TIME, WE CANNOT IGNORE THE SUBMISSION MADE BY THE LEARNED DR THAT THE MATTER IS PENDING B EFORE HON'BLE APEX COURT AND THE DECISION OF HON'BLE APEX COURT W OULD BE ITA NO.845/DEL/2016 CO NO.95/DEL/2016 16 BINDING UPON ALL THE AUTHORITIES. IN VIEW OF THE AB OVE, WE SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND RESTORE THE MAT TER TO THE FILE OF THE ASSESSING OFFICER. WE HOLD THAT AS PER THE FACT S OF THE CASE AND THE LEGAL POSITION AS OF NOW AND DISCUSSED ABOVE IN THIS ORDER, THE ADJUSTMENT MADE BY THE TPO/DRP/AO IN RESPECT OF AMP EXPENSES IS NOT SUSTAINABLE. HOWEVER, IF THE ABOVE DECISIONS OF HON'BLE JURISDICTIONAL HIGH COURT WHICH IS UNDER CONSIDERAT ION BEFORE THE HON'BLE APEX COURT IS MODIFIED OR REVERSED BY THE H ON'BLE APEX COURT, THEN THE ASSESSING OFFICER WOULD PASS THE OR DER AFRESH CONSIDERING THE DECISION OF HON'BLE APEX COURT. IN THOSE CIRCUMSTANCES, HE WILL ALSO ALLOW OPPORTUNITY OF BE ING HEARD TO THE ASSESSEE. GROUNDS NO.4 TO 4.8 29. THE TAXPAYER DURING THE YEAR UNDER ASSESSMENT E NTERED INTO INTERNATIONAL TRANSACTIONS QUA PROVISION OF INFORMA TION TECHNOLOGY ENABLED SERVICES (ITES) IN THE FORM OF PROVISIONS O F SERVICES IN THE NATURE OF PAYROLL PROCESSES, ACCOUNT PROCESSES, ETC. TO THE TUNE OF RS.2,60,97,175/- WITH ITS ASSOCIATED ENTERPRISES (AE). 30. THE TAXPAYER IN ORDER TO BENCHMARK ITS INTERNAT IONAL TRANSACTIONS QUA ITES APPLIED TRANSACTIONAL NET MAR GIN METHOD WITH OPERATING PROFIT/TOTAL COST (OP/TC) AS PROFIT LEVEL INDICATOR ITA NO.845/DEL/2016 CO NO.95/DEL/2016 17 (PLI), CHOSEN 7 COMPARABLES HAVING ARITHMETIC MEAN OF 8.75% AS AGAINST OP/OC OF THE TAXPAYER AT 7.58% AND FOUND IT S INTERNATIONAL TRANSACTIONS AT ARMS LENGTH. 31. INITIALLY, THE TPO SELECTED 19 COMPARABLES WITH AVERAGE OP/OC OF 23.82%. HOWEVER, AFTER LD. DRPS ORDER, T PO SELECTED 10 COMPARABLES TO BENCHMARK THE INTERNATIONAL TRANS ACTIONS QUA ITES WHICH ARE AS UNDER :- S.NO. NAME OF THE COMPANY OP/TC % 1. ACCENTIA TECHNOLOGIES LTD. 28.89% 2. ACROPETAL TECHNOLOGIES LIMITED (SEG) 14.26% 3. E4E HEALTHCARE BUSINESS SERVICES PVT. LTD. 9.77% 4. ECLERX SERVICES LTD. 56.82% 5. ICRA TECHNO ANALYTICS LIMITED 24.83% 6. INFOSYS B P O LTD. 17.86% 7. JINDAL INTELLICOM LTD. 13.70% 8. MICROGENETIC SYSTEMS LTD. -3.20% 9. TCS E SERVE LTD. 69.23% 10. JINDAL INTELLICOM LTD. 11.20% MEAN 24.34% 32. IT IS THE CASE OF THE TAXPAYER THAT THE ADJUSTM ENT MADE BY THE TPO IS NOT SUSTAINABLE AS THE TPO HAS SELECTED COMP ARABLES ENGAGED IN PROVISION OF KPO SERVICES AND SOUGHT TO EXCLUDE (I) ACCENTIA TECHNOLOGIES LTD.; (II) ACROPETAL TECHNOLO GIES LIMITED (SEG); (III) ECLERX SERVICES LTD.; (IV) ICRA TECHNO ANALYTICS LIMITED; (VI) INFOSYS B P O LTD.; AND TCS E SERVE LTD., FROM THE FINAL SET OF COMPARABLES ON THE GROUND HAT THE SAME ARE NOT VALID COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTIONS. ITA NO.845/DEL/2016 CO NO.95/DEL/2016 18 33. UNDISPUTEDLY, THE LD. DRP HAS ACCEPTED THE CONT ENTIONS RAISED BY THE TAXPAYER THAT THE TPO HAS ERRED IN CH ARACTERIZING THE PROVISIONS OF INFORMATION TECHNOLOGY SUPPORT SERVIC ES (ITSS) INVOLVING PAYROLL PROCESSING, ACCOUNT PROCESSING, E TC. SERVICES AS SOFTWARE DEVELOPMENT SERVICES, AS KPO SERVICES. SO , ITES CONSISTING OF PAYROLL PROCESSING, ACCOUNT PROCESSIN G, ETC. CANNOT BE TREATED AS KPO SERVICES. IT IS CONTENDED BY THE LD . AR FOR THE TAXPAYER THAT AS AGAINST THE DIRECTIONS ISSUED BY T HE DRP THAT ALL THE COMPARABLES TO BE TAKEN FOR BENCHMARKING THE IN TERNATIONAL TRANSACTIONS SHOULD BE OF BPO SERVICES, BUT THE LD. TPO HAS CHOSEN ALL THE COMPANIES AS COMPARABLES WHICH ARE INTO KPO SERVICES. SO, WE WOULD DISCUSS THE AFORESAID COMPARABLES CHAL LENGED BY THE TAXPAYER ONE BY ONE TO EXAMINE THEIR SUITABILITY VI S--VIS THE TAXPAYER. ACCENTIA TECHNOLOGIES LTD. (ACCENTIA) 34. AFTER DRPS ORDER, LD. TPO HAS INTRODUCED ACCEN TIA HAVING OP/TC OF 29.18% AS A COMPARABLE WHICH THE TAXPAYER HAS CHALLENGED FOR EXCLUSION ON THE GROUND THAT ACCENTI A IS ENGAGED IN PROVIDING KPO SERVICES AS WELL AS SOFTWARE SERVICES TO ITS AE AND IT ALSO OWNS VARIOUS SOFTWARE PRODUCTS, NAMELY, (I) INSTAKARE, (II) INSTAWEB, (III) INSTAPMS, (IV) INSTASCRIBE ETC.. ITA NO.845/DEL/2016 CO NO.95/DEL/2016 19 35. WE HAVE PERUSED THE ANNUAL REPORT OF ACCENTIA, RELEVANT INFORMATION IS AVAILABLE AT PAGE 5 OF THE ANNUAL RE PORT, WHICH IS EXTRACTED FOR READY PERUSAL AS UNDER :- ACCENTIA HAS GONE A LONG WAY FROM BEING A SINGLE LOCATION, SINGLE SERVICE FIRM TO A MULTI LOCATION, DIVERSIFIED KNOWLEDGE PROCESS OUTSOURCING COMPANY, OPERATING FROM MULTIPLE LOCATIONS IN INDIA, USA, UK AND THE MIDDLE EAST. NOT RESTING AT BEING ONE OF TH E FASTEST GROWING HEALTHCARE RECEIVABLES CYCLE MANAGEMENT COMPANIES, WE HAVE NOW VENTURED INTO OFFERING SOFTWARE AS A SERVICE MODEL IN THE HEALTHC ARE OUTSOURCING AREA, SINCE THE US ADMINISTRATION HAS MADE SWEEPING CHANGES IN THE HEALTHCARE SECTOR, ESPECIALLY IN THE DOCUMENTATION AREA. IN 1998-1999 WHEN THE UNITS IN TRIVANDRUM AND BANGALORE WERE STARTED, MEDICAL TRANSCRIPTION WAS A LITTLE KNOWN INDUSTRY. IN THE DECADE THAT FOLLOWED, ACCENTIA VENTURED INTO CODING, BILLING AND COLLECTI ONS IN HRCM, BUT SINCE THE CHANGE OVER FROM TRADITIONAL MEDICAL TRANSCRIPTION TO EMR (ELECTRONIC MEDICAL RECORDS) IS HAPPENING, WE ARE NOW LOOKING TO CAPITA LISE ON THE HUGE OPPORTUNITIES THAT IS NOW OPEN FOR HEALTHCARE BPO COMPANIES BY ADAPTING TO THE CHANGED SCENARIO. TODAY ACCENTIA IS A TRULY GLOBAL COMPANY WITH THOUSANDS OF TALENTED PROFESSIONALS AND OPERATIONS IN TRIVANDRUM, KOCHI, BANGALORE, HYDERABAD AND BHUBANESWAR IN INDIA; FORT LAUDERDALE, PORTLAND, OREGON, CHICAGO AND NEW JERSEY IN THE US, LONDON IN THE UK AND RAZ AI KHAIMA IN THE MIDDLE EAST. 36. PERUSAL OF PAGE 31 OF THE ANNUAL REPORT FURTHER GOES TO PROVE THAT ACCENTIA OWNS NUMEROUS SOFTWARE PRODUCTS VIZ. (I) INSTAKARE, (II) INSTAWEB, (III) INSTAPMS, (IV) INSTASCRIBE ETC .. FURTHERMORE, ITA NO.845/DEL/2016 CO NO.95/DEL/2016 20 PERUSAL OF THE PROFIT & LOSS ACCOUNT, AVAILABLE AT PAGE 43 OF THE ANNUAL REPORT, PAPER BOOK, GOES TO PROVE THAT SEGME NTAL FINANCIAL OF THIS COMPANY TO WORK OUT PROFITABILITY WITH RESPECT TO ITES SEGMENT AND SOFTWARE DEVELOPMENT SEGMENT IS NOT AVA ILABLE. 37. HONBLE DELHI HIGH COURT IN CASE CITED AS PR.CIT VS. B.C. MANAGEMENT SERVICES (P.) LTD. (2018) 403 ITR 45 ( DELHI) HAS AFFIRMED THE FINDINGS RETURNED BY THE TRIBUNAL EXCL UDING ACCENTIA AS A COMPARABLE VIS--VIS ROUTINE ITES PROVIDER ON GROUND OF BEING ENGAGED IN KPO SERVICES IN HEALTH CARE SECTOR . MOREOVER, ACCENTIA OWNS VARIOUS SOFTWARE PRODUCTS, AS DISCUSS ED IN THE PRECEDING PARAS. EVEN, SEGMENTAL FINANCIALS TO WOR K OUT THE PROFITABILITY OF ACCENTIA QUA ITES SEGMENT AND SOFT WARE SEGMENT ARE ALSO NOT AVAILABLE. THE LD. TPO HAS SELECTED A CCENTIA AS A COMPARABLE EVEN AGAINST THE DIRECTIONS ISSUED BY TH E LD. DRP THAT COMPANY ENGAGED IN KPO SERVICES IS NOT TO BE SELECT ED AS COMPARABLE. SO, IN THESE CIRCUMSTANCES, WE ORDER T O EXCLUDE ACCENTIA BEING NOT A VALID COMPARABLE. ACROPETAL TECHNOLOGIES LTD. (SEG.) (ACROPETAL) 38. TPO HAS SELECTED ACROPETAL (SEGMENT) WHICH IS C HALLENGED BY THE TAXPAYER ON THE GROUND THAT IT IS ENGAGED IN PROVISION OF PROVIDING HIGH-END SERVICES IN HOSPITAL MANAGEMENT SYSTEM, ITA NO.845/DEL/2016 CO NO.95/DEL/2016 21 ELECTRONIC MEDICAL RECORDS, PACS, DIAGNOSTICS AND W ORKFLOW MANAGEMENT. PERUSAL OF ANNUAL REPORT OF ACROPETAL, RELEVANT PORTION AVAILABLE AT PAGE 95 OF THE ANNUAL REPORT P APER BOOK, SHOWS THAT WITHIN ITES SEGMENT, ACROPETAL IS ENGAGED IN H EALTH CARE BY PROVIDING HIGH END SERVICES VIZ. HOSPITAL MANAGEMEN T SYSTEM, ELECTRONIC MEDICAL RECORDS, PACS, DIAGNOSTICS AND W ORKFLOW MANAGEMENT. SO, PROVIDING HIGH END HEALTH CARE SER VICES REQUIRE APPLICATION OF SPECIALIZED KNOWLEDGE AND SKILL, WHI CH OTHERWISE CANNOT BE COMPARED WITH ROUTINE ITES PROVIDER. 39. HONBLE DELHI HIGH COURT IN RAMPGREEN SOLUTIONS P. LTD. VS. CIT (2015) 377 ITR 533 (DELHI) DEFINED THE KNOWLEDGE PROCESS OUTSOURCING (KPO) AS A HIGH VALUE ADDED PRO CESS CHAIN WHEREIN THE PROCESS ARE DEPENDING ON ADVANCE SKILLS , DOMAIN KNOWLEDGE AND THE EXPERIENCE OF PERSONS CARRYING ON SUCH PROCESSES AND AS SUCH, IS UNDERSTOOD AS THE HIGH EN D OF ITES IN TERMS OF VALUE ADDITION. IN THE RAMPGREEN SOLUTIONS P. LTD. VS. CIT (SUPRA), HONBLE HIGH COURT HELD THAT A KPO SERVICE S PROVIDER CANNOT BE CONSIDERED AS A VALID COMPARABLE FOR BENC HMARKING THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY AN ENTIT Y RENDERING ROUTINE VOICE CALL SERVICES I.E. ITES SERVICES. 40. WHEN IT IS NOT IN DISPUTE THAT ACROPETAL IS INT O PROVIDING HIGH END SERVICES IN HEALTH CARE SERVICES AND AS SU CH, IT IS A KPO, IT ITA NO.845/DEL/2016 CO NO.95/DEL/2016 22 CANNOT BE A VALID COMPARABLE VIS--VIS TAXPAYER WHO IS A ROUTINE ITES SERVICE PROVIDER AS PER THE RATIO OF THE JUDGM ENT IN RAMPGREEN SOLUTIONS P. LTD. VS. CIT (SUPRA). SO, WE ORDER TO EXCLUDE ACROPETAL FROM THE FINAL SET OF COMPARABLES . ECLERX SERVICES LTD. (ECLERX) 41. THE TAXPAYER AGAIN CHALLENGED THE EXCLUSION OF ECLERX BEING ENGAGED IN THE PROVISION OF KNOWLEDGE PROCESS OUTSO URCING (KPO) SERVICES AS IT IS INTO PROVIDING DATA ANALYTI CS, WEB ANALYTICS, SEARCH ENGINE ANALYTICS, PRICE AND COMPETITIVE INTE LLIGENCE ETC.. 42. PERUSAL OF THE ANNUAL REPORT OF ECLERX SHOWS TH AT IT IS INTO PROVIDING HIGH END KPO SERVICES. SERVICES BEING PR OVIDED BY THE ECLERX ARE HIGHLIGHTED AT PAGE 172 OF THE PAPER WHI CH ARE EXTRACTED AS UNDER :- ECLERX POWERS THE OPERATIONS OF THE SALES & MARKE TING DIVISIONS OF SOME OF THE LARGEST FORTUNE / FINANCIA L TIMES / INTERNET RETAILER 500 SCALE COMPANIES GLOBALLY, AUG MENTING BANDWIDTH TO DRIVE GREATER QUALITY AND CONTROL TO T HEIR DIGITAL OPERATIONS, DATA MANAGEMENT AND ANALYTICS NEEDS. SO ME OF THE KEY SALES & MARKETING FUNCTIONS WE SUPPORT INCLUDE WEB CONTENT MANAGEMENT & MERCHANDISING EXECUTION, WEB ANALYTICS , SOCIAL MEDIA MODERATION AND ANALYTICS, SEARCH ENGINE ANALY TICS & SUPPORT, CRM PLATFORM SUPPORT, LEAD GENERATION, CUS TOMER DATA MANAGEMENT, SUPPLY CHAIN AND CHANNEL ANALYTICS, PRI CE & CATALOGUE COMPETITIVE INTELLIGENCE AND BROADER DATA COLLECTION, CLEANSING, ENRICHING AND REPORTING. WE WORK WITH OVER 30 GLOBAL FORTUNE 500 SCALE CLIEN TS INCLUDING ANY OF THE WORLD'S LEADING HIGH TECH AND INDUSTRIAL MANUFACTURING & DISTRIBUTORS, ONLINE RETAIL, INTERA CTIVE MEDIA & ENTERTAINMENT, SOFTWARE VENDORS, TRAVEL AND LEISU RE AND FINANCIAL SERVICES COMPANIES. ITA NO.845/DEL/2016 CO NO.95/DEL/2016 23 43. THE RATIO OF THE JUDGMENT IN RAMPGREEN SOLUTIONS P. LTD. VS. CIT (SUPRA) IS APPLICABLE TO THE FACTS AND CIRCUMSTANCE S OF THE CASE IN WHICH ECLERX HAS BEEN SPECIFICALLY ORDERED TO BE EXCLUDED AS A COMPARABLE VIS--VIS ROUTINE ITES SERVICES PRO VIDER ON THE GROUND THAT ECLERX IS INTO KNOWLEDGE PROCESS OUTSOU RCING (KPO) SERVICES. SO, IN THESE CIRCUMSTANCES, WE FIND ECLE RX IS NOT A VALID COMPARABLE, HENCE ORDERED TO BE EXCLUDED FROM THE F INAL SET OF COMPARABLES. ICRA TECHNO ANALYTICS LTD. (ICRA) 44. THE TAXPAYER SOUGHT EXCLUSION OF ICRA BY AGAIN RELYING UPON RAMPGREEN SOLUTIONS P. LTD. VS. CIT (SUPRA) ON THE GROUND THAT IT IS ENGAGED IN THE PROVISION OF BUSINESS INTELLIGENC E AND ANALYTIC SERVICES. ANNUAL REPORT OF ICRA, AVAILABLE AT PAGE 319 OF THE PAPER BOOK, EXPLAINS THE SERVICES BEING RENDERED BY IT AR E AS UNDER :- THE COMPANY IS ENGAGED IN THE SOFTWARE DEVELOPMENT & CONSULTANCY, ENGINEERING SERVICES, WEB DEVELOPMEN T & HOSTING AND SUBSEQUENTLY DIVERSIFIED ITSELF INTO THE DOMAIN OF BUSINESS ANALYTICS AND BUSINESS PROCESS OUTSOURCING. 45. SO, WHEN ICRA IS INTO PROVIDING SOFTWARE DEVELO PMENT AND HIGH END ANALYTIC SERVICES, THE SAME CANNOT BE TAKE N AS A COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTIONS VIS-- ITA NO.845/DEL/2016 CO NO.95/DEL/2016 24 VIS THE TAXPAYER WHO IS A ROUTINE BACK OFFICE PROCE SSING SERVICES PROVIDER. SO, AGAIN BY APPLYING THE RATIO OF RAMPGREEN SOLUTIONS P. LTD. VS. CIT (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT ICRA BEING INTO PROVIDING HIGH END SERVICES IN THE NATUR E OF TURFVIEW ANALYTICS, BUSINESS ANALYTICS, SALES ANALYTICS, ETC ., AND WHICH IS ALSO INTO PROVIDING ITES SERVICES, IT CANNOT BE A VALID COMPARABLE VIS-- VIS TAXPAYER. SO, WE ORDER TO EXCLUDE THE SAME. INFOSYS B P O LIMITED (INFOSYS BPO) 46. THE TAXPAYER SOUGHT TO EXCLUDE INFOSYS BPO ON G ROUND OF HIGH TURNOVER AND RELIED UPON THE DECISION RENDERED BY COORDINATE BENCH OF THE TRIBUNAL IN AGNITY INDIA TECHNOLOGIES PVT. LTD. VS. ITO (ITA NO.3856/DEL/2010) , SUBSEQUENTLY AFFIRMED BY HONBLE DELHI HIGH COURT. 47. IT IS THE CASE OF THE TAXPAYER THAT THE TPO HAS APPLIED TURNOVER CRITERIA IN ORDER TO SELECT THE COMPARABLE S FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS WHICH S HOULD BE APPLIED BOTH ON LOW AND HIGH TURNOVER OF THE COMPAN Y. UNDISPUTEDLY, INFOSYS BPO IS HAVING TURNOVER OF RS. 1129.11 CRORES. THE TAXPAYER HAS GIVEN FUNCTIONAL PROFILE OF INFOSYS BPO VIS--VIS TAXPAYER WHICH IS EXTRACTED FOR READY PER USAL AS UNDER :- ITA NO.845/DEL/2016 CO NO.95/DEL/2016 25 PARAMETERS INFOSYS LTD. ASSESSEE RISK PROFILE OPERATES AS FULL FLEDGED RISK TAKING ENTREPRENEURS OPERATES AS A CAPTIVE SERVICE PROVIDER NATURE OF SERVICES PROVIDES B USINESS PROCESS MANAGEMENT SERVICES AS PART OF THE HIGHLY INTEGRATED STRATEGY FOLLOWED BY THE INFOSYS GROUP PROVIDES ROUTINE TRANSACTION PROCESSING SERVICES UNDER THE GUIDANCE REVENUE RS.1129.11 CRORES RS.2.60 CRORES OWNERSHIP OF BRAND/ PROPRIETA4RY SOFTWARE / R&D EXPLOITS THE BRAND INFOSYS FOR SOLICITING BUSINESS OPERATES AS A CAPTIVE SERVICE PROVIDER, NOT UNDERTAKING MARKETING ACTIVITY 48. SO, WHEN WE EXAMINE THE FUNCTIONAL PROFILE OF I NFOSYS BPO, IT IS DIS-SIMILAR TO THE TAXPAYER BECAUSE INFOSYS B PO IS INTO PROVIDING BUSINESS PROCESS MANAGEMENT SERVICES AS A GAINST ROUTINE ITES BEING PROVIDED BY THE TAXPAYER. MOREOVER, INF OSYS BPO IS OPERATING AS A FULL-FLEDGED RISK BEARING ENTREPRENE UR AS AGAINST TAXPAYER WHICH IS A CAPTIVE SERVICE PROVIDER. SO, KEEPING IN VIEW THE TURNOVER OF INFOSYS BPO WHICH IS RS.1129.11 CRO RES AGAINST RS.2.60 CRORES OF THE TAXPAYER AND INFOSYS BPO IS H AVING A HUGE BRAND VALUE WITH CONSIDERABLE R&D ACTIVITIES, IT CA NNOT BE A VALID COMPARABLE VIS--VIS TAXPAYER. 49. IN THE SIMILAR SET OF FACTS, INFOSYS BPO HAS BE EN ORDERED TO BE EXCLUDED BY THE COORDINATE BENCH OF THE TRIBUNAL IN HYUNDAI MOTORS ENGINEERING INDIA PVT. LTD. VS. ITO (ITA ITA NO.845/DEL/2016 CO NO.95/DEL/2016 26 NO.1850/HYD/2012) AND CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. (ITA NO.124/HYD/2014) . 50. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE FI ND THAT INFOSYS BPO IS NOT A VALID COMPARABLE VIS--VIS TAX PAYER, HENCE ORDERED TO BE EXCLUDED. TCS E-SERVE LIMITED (TCS E-SERVE) 51. THE TAXPAYER SOUGHT EXCLUSION OF TCS E-SERVE AG AIN ON THE GROUND THAT IT IS INTO PROVIDING KNOWLEDGE PROCESS OUTSOURCING (KPO) SERVICES. WHEN WE EXAMINE THE TCS E-SERVE OV ERVIEW IN THE ANNUAL REPORT, AVAILABLE AT PAGE 550 OF THE ANN UAL REPORT PAPER BOOK, IT SHOWS THAT IT IS PROVIDING A BROAD RANGE O F SERVICES THAT CATER TO PROCESS MANAGEMENT REQUIREMENTS FOR DELIVE RY OF WIDE RANGE OF FINANCIAL PRODUCTS AND ENTERPRISE SUPPORT FUNCTION WHICH INCLUDE FINANCIAL INFORMATION PROCESSING (DATA PROC ESSING); CUSTOMER CARE (VOICE BASED); BUSINESS PROCESS MANAG EMENT AND ANALYTICS. THOUGH THE COMPANY IS PROVIDING BPO SER VICES BUT ITS ANALYTIC SERVICES ARE HIGH END KPO SERVICES, WHICH MAKES IT INCOMPARABLE TO THE TAXPAYER WHICH IS PROVIDING ROU TINE BPO SERVICES. 52. THE TAXPAYER HAS SPECIFICALLY RELIED UPON THE I NFORMATION AVAILABLE AT THE WEBSITE OF REUTERS ( HTTP://IN.REUTERS.COM /FINANCE/STOCKS/COMPANY PROFILE?SYMBOL=CIGR.BO) TO PROVE THAT ITA NO.845/DEL/2016 CO NO.95/DEL/2016 27 TCS E-SERVE IS ENGAGED IN PROVISION OF KPO SERVICES WHICH IS AS UNDER :- ' TCS E-SERVE LIMITED, A PART OF TATA CONSULTANCY S ERVICES (TCS), IS A BUSINESS PROCESS SERVICES (BPO) PROVIDE R. THE COMPANY DELIVERS BUSINESS PROCESSING SERVICES, ANAL YTICS AND INSIGHTS (KPO) AND SUPPORT SERVICES FOR BOTH DATA A ND VOICE PROCESSES. THE COMPANY OPERATES ACROSS VARIOUS INDU STRY SEGMENTS, WHICH INCLUDE BANKING AND FINANCIAL SERVI CES INDUSTRY (BFSI), TRAVEL, TOURISM AND HOSPITALITY (TTH), AND ENERGY AND UTILITIES (E&U). THE GEOGRAPHIC SEGMENTS OF THE COM PANY ARE INDIA, AMERICAS, EUROPE AND OTHERS. THE COMPANY IS FOCUSED ON THE BANKING, FINANCIAL SERVICES AND INSURANCE DOMAI NS. THE COMPANY'S SUBSIDIARIES INCLUDE TCS E-SERVE INTERNAT IONAL LIMITED AND TCS E-SERVE AMERICA INC.' 53. FURTHERMORE, PERUSAL OF THE SCHEDULE-O OF NOTES FORMING PART OF THE FINANCE STATEMENTS, AVAILABLE AT PAGE 6 20 OF THE ANNUAL REPORT PAPER BOOK, SHOWS THAT TCS E-SERVE PARTIALLY BEARS THE COST OF DEVELOPMENT OF BRAND TATA BY MAKING CONTRIBUTION TO TATA BRAND EQUITY FUND IN CONSULTATION FOR THE RIGHT TO USE THE SAID BRAND. SO, IT IS APPARENTLY CLEAR THAT TCS E-SERVE EXPLOITED THE BRAND TATA WHICH IS A GIANT COMPANY, AND IS EXPLOIT ING THE GOODWILL AND RECOGNITION OF THE ESTABLISHED TATA BR AND LEADING TO THE HIGH VOLUME BUSINESS AND FROM TIME TO TIME PRIC ING. 54. SO, BY APPLYING THE RATIO LAID DOWN BY HONBLE DELHI HIGH COURT IN RAMPGREEN SOLUTIONS P. LTD. VS. CIT (SUPRA), TCS E- SERVE BEING INTO PROVIDING KPO CANNOT BE TAKEN AS A VALID COMPARABLE VIS--VIS THE TAXPAYER. ITA NO.845/DEL/2016 CO NO.95/DEL/2016 28 55. COORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS BECHTEL INDIA PVT. LTD. VS. DCIT (ITA NO.1478/DEL/2015) HAS ORDERED TO EXCLUDE TCS E-SERVE AS A VALID COMPARABLE VIS--VIS ROUTINE ITES PROVIDER BY RETURNING FOLLOWING FINDINGS :- THIS COMPANY HAS BEEN SELECTED BY THE LD. TPO AS A COMPARABLE. THIS COMPANY UNDERTAKES, CUSTOMER SERVI CE, TRANSACTION PROCESSES, COLLECTIONS, RISK MANAGEMENT , AND ANALYTICS, AND HAS CREATED A LOT OF APPLICATIONS WH ICH ARE IN THE NATURE OF INTELLECTUAL PROPERTY IN TERMS OF RECONCI LIATION SOFTWARE, FUND TRANSFERS, ETC. THE COMPANY ALSO UND ERTAKES SOFTWARE TESTING AND VALIDATION ACTIVITIES. POSSESS ION OF INTELLECTUAL PROPERTY RIGHTS HAS TO BE FACTORED IF SUCH A COMPANY IS TO BE TAKEN AS COMPARABLE. THIS CANNOT BE DONE U NLESS THERE IS APPROPRIATE DATA. FURTHER, FROM THE TP STUDY WE OBS ERVE THAT, THIS COMPANY IS A WHOLLY OWNED SUBSIDIARY OF TCS E SERVE INTERNATIONAL LTD. DURING THE YEAR UNDER CONSIDERAT ION, THIS COMPANY HAS MADE PAYMENTS TOWARDS USE OF TATA BRAND . CONSEQUENTIALLY USE OF THE TCS BRAND HAS SUBSTANTIA LLY INCREASED THE OPERATING PROFITS POST ACQUISITION. H ENCE WE ARE OF THE OPINION THAT THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE. WE THEREFORE DIRECT TO EXCLUDE THIS COMPARABLE.' 56. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT TCS E-SERVE BEING INTO HIGH EN D KPO SERVICES AND IS ALSO EXPLOITING BRAND TATA CANNOT B E A VALID COMPARABLE VIS--VIS TAXPAYER WHICH IS A ROUTINE IT ES PROVIDER. SO, WE ORDERED TO EXCLUDE THE SAME. 57. IN VIEW OF OUR FINDINGS, GROUNDS NO. 3 TO 3.8 Q UA TP ADJUSTMENT ON ACCOUNT OF AMP EXPENSES, APPEAL FILED BY THE ASSESSEE IS ALLOWED AS PER FINDINGS RETURNED IN PRE CEDING PARAS. HOWEVER, APPEAL QUA TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ITES IS ALLOWED FOR STATISTICAL PURPOSES. IN VIEW OF WHAT HAS BEEN ITA NO.845/DEL/2016 CO NO.95/DEL/2016 29 DISCUSSED ABOVE, THE AO/TPO IS DIRECTED TO COMPUTE THE TRANSFER PRICING ADJUSTMENT OF INTERNATIONAL TRANSACTIONS AC CORDINGLY. CONSEQUENTLY, APPEAL FILED BY THE TAXPAYER IS PARTL Y ALLOWED AS PER FINDINGS GIVEN IN PRECEDING PARAS NO.28 & 57 AND CR OSS OBJECTION FILED BY THE REVENUE IS HEREBY DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 20 TH DAY OF DECEMBER, 2018. SD/- SD/- (G.D. AGRAWAL) (KULDIP SINGH) VICE PRESIDENT JUDICIAL MEMBER DATED THE 20 TH DAY OF DECEMBER, 2018 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A). 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.