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

ITA 107/DEL/2016

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 4251 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 01-12-2016
• Assessment Year: misc
• Appeal Filed On: 07-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: DEEPIKA AGARWAL CAS
• Keywords: Related party transaction; Business income; Transfer pricing; Advance ruling
• Section: 143(3); 154; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.107/DEL/2016 ASSESSMENT YEAR : 2010-11 STERIA INDIA LTD. (EARLIER KNOWN AS XANSA (INDIA) LTD.), SEA VIEW SPECIAL ECONOMIC ZONE, BUILDING NO.4, PLOT NO.20 & 21, SECTOR-135, GAUTAM BUDH NAGAR, NOIDA. PAN: AAACX0385L VS. DCIT, CIRCLE-24(2), CR BUILDING, IP ESTATE, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, SR. ADVOCATE; SHRI NEERAJ JAIN, ADVOCATE; MS SHAILY GUPTA, & MS DEEPIKA AGARWAL, CAS DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT, DR DATE OF HEARING : 03.11.2016 DATE OF PRONOUNCEMENT : 04.11.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E FINAL ASSESSMENT ORDER DATED 30.11.2015 PASSED BY THE ASSESSING OFFI CER (AO) U/S 143(3) ITA NO.107/DEL/2016 2 READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEA R 2010-11. 2. THE FIRST GROUND IS GENERAL WHICH DOES NOT REQUI RE ANY ADJUDICATION. 3. GROUND NO. 3 OF THE APPEAL ABOUT THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.22,35,9 0,000 IN `I.T. ENABLED SERVICE SEGMENT WAS NOT PRESSED BY THE LD. AR. THE SAME, THEREFORE, STANDS DISMISSED. 4.1. GROUND NOS. 4 AND 6 ARE AGAINST THE DISALLOWAN CE U/S 40(A)(I) OF THE ACT OF EXPENDITURE AMOUNTING TO RS.26,63,16,345/- I NCURRED BY THE ASSESSEE AS MANAGEMENT SERVICES FEES ON THE GROUND THAT THE ASSESSEE FAILED TO DEDUCT TAX AT SOURCE IN TERMS OF SECTION 195 OF THE ACT. 4.2. BRIEFLY STATED, THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE INCURRED AN EXPENDITURE OF RS.26.63 CRORE AS REMUNERATION FO R MANAGEMENT SERVICES TO GROUPE STERIA SCA (STERIA FRANCE). NO DEDUCTION OF TAX AT SOURCE WAS MADE BEFORE MAKING THIS PAYMENT. INVOKI NG THE PROVISIONS OF SECTION 40(A)(I) READ WITH SECTION 195 OF THE AC T, THE AO DISALLOWED ITA NO.107/DEL/2016 3 THIS EXPENDITURE. IN DOING SO, HE NOTICED THAT THE ASSESSEES APPLICATION FILED BEFORE THE AUTHORITY FOR ADVANCE RULING (AAR) WAS DISMISSED VIDE RULING DATED 2.5.2014 HOLDING THAT THE PAYMENT MADE BY THE ASSESSEE FOR THE MANAGEMENT SERVICES PROVIDED BY GR OUPE STERIA SCA WILL BE TAXABLE AS FEE FOR TECHNICAL SERVICES AND , ACCORDINGLY, THE ASSESSEE IS LIABLE TO WITHHOLD TAX AS PER THE PROVI SIONS OF SECTION 195 OF THE ACT. 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. THE LD. AR HAS BROUGHT TO OUR N OTICE THAT THE SAID RULING OF THE AAR WAS CHALLENGED BY THE ASSESSEE BE FORE THE HONBLE DELHI HIGH COURT. VIDE ORDER DATED 28.7.2016, THE HONBLE DELHI HIGH COURT HAS HELD ON THE LAST PAGE THAT: (I) THE PAYME NT MADE BY THE ASSESSEE TO STERIA FRANCE FOR THE MANAGEMENT SERVIC ES PROVIDED BY THE LATTER CANNOT BE TAXED AS FEES FOR TECHNICAL SERVI CES; AND (II) THE SAID PAYMENTS ARE NOT LIABLE TO WITHHOLDING OF TAX U/S 1 95 OF THE ACT. BY RENDERING THIS JUDGMENT, A COPY OF WHICH HAS BEEN P LACED ON RECORD, THE HONBLE HIGH COURT HAS VACATED THE RULING OF THE AA R ON THIS ISSUE. IN ITA NO.107/DEL/2016 4 THE GIVEN CIRCUMSTANCES, WE ARE OF THE CONSIDERED O PINION THAT THE ENDS OF JUSTICE WOULD MEET ADEQUATELY IF THE IMPUGNED OR DER ON THIS ISSUE IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF AO. WE ORDER ACCORDINGLY AND DIRECT HIM TO DECIDE THIS ISSUE AFR ESH IN CONSONANCE WITH THE JUDGMENT OF THE HONBLE DELHI HIGH COURT PASSED IN THE ASSESSEES OWN CASE. 5.1. GROUND NO. 5 IS AGAINST REDUCING THE DEDUCTION U/S 10A FROM RS.26,37,50,768/- AS CLAIMED BY THE ASSESSEE TO RS .15,41,43,089/-, INTER ALIA , BY EXCLUDING THE FOLLOWING THREE ITEMS OF EXPENSE S CLAIMED BY THE ASSESSEE FROM `EXPORT TURNOVER ALONE :- - TELECOMMUNICATION CHARGES RS. 1,26,919 - SUBSISTENCE FOR ONSITE EMPLOYEES RS. 35,58,881 - STANDBY AND CALLOUT CHARGES RS.6,52,43,727 TOTAL RS.6,89,29,527 5.2. SUCCINCTLY, THE FACTS OF THIS ISSUE ARE THAT T HE ASSESSEE EARNED INCOME FROM ITS NOIDA UNIT-IV, WHICH IS ELIGIBLE F OR DEDUCTION U/S 10A OF THE ACT. IN THE RECOMPUTATION OF DEDUCTION, THE AO EXCLUDED ITA NO.107/DEL/2016 5 TELECOMMUNICATION CHARGES, SUBSISTENCE FOR ONSITE E MPLOYEES AND STANDBY AND CALLOUT CHARGES FROM THE AMBIT AND AMOU NT OF EXPORT TURNOVER, IMPLIEDLY, IN LINE WITH THE DEFINITION O F SUCH EXPORT TURNOVER GIVEN IN EXPLANATION 2 (IV) AT THE END OF SECTION 1 0A. HOWEVER, SUCH EXCLUSION WAS NOT MADE FROM THE AMOUNT OF TOTAL TU RNOVER, AGAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE US. 5.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT MATERIAL ON RECORD, IT IS MANIFEST THAT THE AO COMP UTED DEDUCTION U/S 10A BY REDUCING THE ABOVE REFERRED THREE EXPENSES F ROM THE FIGURE OF `EXPORT TURNOVER WITHOUT CORRESPONDINGLY REDUCING SUCH AMOUNTS FROM THE FIGURE OF TOTAL TURNOVER IN THE FORMULA GIVE N FOR COMPUTING THE AMOUNT OF DEDUCTION. THIS APPROACH, IN OUR CONSIDER ED OPINION, IS NOT RIGHT. WHEN A PARTICULAR AMOUNT IS EXCLUDED FROM T HE NUMERATOR OF `EXPORT TURNOVER, IT HAS, NATURALLY, TO BE EXCLUDE D FROM THE DENOMINATOR OF `TOTAL TURNOVER AS WELL IN THE COMPUTATION OF D EDUCTION U/S 10A. IT IS SO FOR THE REASON THAT `TOTAL TURNOVER ALWAYS INCL UDES `EXPORT TURNOVER AND IF A PARTICULAR ITEM IS NOT A PART OF EXPORT TU RNOVER, THAT CANNOT ITA NO.107/DEL/2016 6 PARTAKE THE CHARACTER OF TOTAL TURNOVER AS WELL. TH E HONBLE BOMBAY HIGH COURT IN CIT VS. GEMPLAST JEWELLERY INDIA LTD. (2011) 330 IT R 175 (BOM) HAS HELD TO THIS EXTENT. SIMILAR VIEW HAS BEEN TAK EN BY THE DELHI BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR TH E A.Y. 2009-10, A COPY OF WHICH ORDER IS AVAILABLE ON RECORD. RESPEC TFULLY FOLLOWING THE PRECEDENT, WE DIRECT THAT THE TOTAL OF THE ABOVE RE FERRED THREE EXPENSES BE SIMULTANEOUSLY EXCLUDED FROM THE AMOUNT OF TOTAL T URNOVER AS WELL. 6.1. GROUND NO. 7 IS AGAINST EXCLUDING PROPORTIONAT E AMOUNT OF INTEREST INCOME FROM THE TOTAL PROFITS IN THE RE-COMPUTATION OF DEDUCTION U/S 10A OF THE ACT. THE FACTS OF THIS GROUND ARE THAT THE AO IN RECOMPUTING THE AMOUNT OF DEDUCTION U/S 10A OBSERVED THAT THE ASSES SEE EARNED INTEREST INCOME AMOUNTING TO RS.15,77,91,539/- WHICH WAS RIG HTLY OFFERED AS INCOME FROM OTHER SOURCES. THE AO APPORTIONED THE TOTAL INTEREST INCOME OF RS.15.77 CRORE AMONGST DIFFERENT UNITS ON THE BASIS OF THEIR TURNOVER AND COMPUTED SHARE OF NOIDA UNIT-IV STP IN SUCH INTEREST INCOME AT RS.3,72,83,704/-. THE AMOUNT OF `BUSINES S PROFITS ELIGIBLE FOR DEDUCTION U/S 10A WAS RECOMPUTED BY REDUCING, INTER ALIA , SUCH ITA NO.107/DEL/2016 7 AMOUNT OF INTEREST AT RS.3.72 CRORE AND ODD. RELEV ANT DISCUSSION HAS BEEN MADE IN SUB-PARAS (VI), (VII) AND (X) OF PARA 4.2 OF THE ASSESSMENT ORDER. THE ASSESSEE HAS ASSAILED THE REDUCTION IN THE AMOUNT OF `BUSINESS PROFITS BY INTEREST INCOME ALLOCATED TO NOIDA UNIT-IV AMOUNTING TO RS.3.72 CRORE. 6.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD. THE LD. AR CANDIDLY ADMITTED TH AT INTEREST INCOME EARNED BY THE ASSESSEE FROM BANKS IS OTHERWISE NOT ELIGIBLE FOR DEDUCTION U/S 10A AND THAT WAS THE REASON FOR THE ASSESSEE SUO MOTU OFFERING THE SAME AS `INCOME FROM OTHER SOURCES. THE CONTROVERS Y IS ABOUT THE FURTHER REDUCTION OF SUCH PROPORTIONATE AMOUNT OF I NTEREST FROM THE `BUSINESS PROFITS OF NOIDA UNIT IV FOR THE PURP OSES OF DEDUCTION U/S 10A. THE ASSESSEES AUDITED FINANCIAL STATEMENTS AR E AVAILABLE ON PAGES 479-503 OF THE PAPER BOOK. ON GOING THROUGH THE P ROFIT & LOSS ACCOUNT OF THE COMPANY, WE FIND THAT `PROFIT BEFORE TAX HAS BEEN COMPUTED AT RS.8,63,746/- (FIGURE IN RS. 000). `OT HER INCOME SHOWN UNDER THE HEAD INCOME INCLUDES INTEREST ON BANK D EPOSITS AMOUNTING TO ITA NO.107/DEL/2016 8 RS.1,57,792/- (FIGURE IN RS.000). THUS, IT IS CLEA R THAT THE AMOUNT OF INTEREST FROM BANK TOTALING RS.15.77 CRORE AND ODD FORMS PART OF `PROFIT BEFORE TAX, WHICH IS THE STARTING POINT OF COMPUTA TION OF TAXABLE INCOME AT PAGE 474 OF THE PAPER BOOK. IN SUCH A COMPUTATI ON OF TOTAL INCOME, THE ASSESSEE HAS EXCLUDED TOTAL INTEREST INCOME OF RS.15,77,91,539/- FROM THE AMOUNT OF PROFIT BEFORE TAX AS PER P&L ACC OUNT TO WORK OUT THE INCOME UNDER THE HEAD PROFIT AND GAINS FROM BU SINESS OR PROFESSION AT RS.92,37,62,537. INTEREST INCOME OF RS.15.77 CRO RE HAS BEEN SEPARATELY SHOWN UNDER THE HEAD INCOME FROM OTHER SOURCES FOR COMPUTING GROSS TOTAL INCOME OF RS.81.78 CRORE. TH IS SHOWS THAT THE INTEREST INCOME OF RS.15.77 CRORE HAS BEEN EXCLUDED FROM THE BUSINESS INCOME, WHICH ALSO INCLUDES ELIGIBLE INCOME FROM NO IDA UNIT-IV STP. 6.3. TO BE MORE SPECIFIC, THE COMPUTATION OF DEDUCT ION U/S 10A IS AVAILABLE ON PAGES 509 AND 510 OF THE PAPER BOOK AS ANNEXURE 10 TO THE COMPUTATION OF TOTAL INCOME. THE ASSESSEE ALSO PLA CED BEFORE THE AO UNIT-WISE PROFITS, WHOSE COPY HAS BEEN PLACED BEFOR E US. FROM THIS UNIT- WISE PROFIT & LOSS ACCOUNT, IT CAN BE SEEN THAT THE ASSESSEE COMPUTED ITA NO.107/DEL/2016 9 PROFIT BEFORE TAX OF NOIDA UNIT IV AT RS.1,56,686 /- (IN RS.000). IN COMPUTING SUCH PROFIT, THE ASSESSEE INCLUDED INTERE ST ON BANK DEPOSITS AT RS.62 (IN RS.000). WHILE COMPUTING THE AMOUNT OF D EDUCTION U/S 10A AS PER ANNEXURE 10, THE ASSESSEE STARTED WITH THIS FIG URE OF RS.15,66,85,756/- AS PROFIT BEFORE TAX AS PER THE P &L ACCOUNT. THEREAFTER, INTEREST INCOME OF RS.62,481/- WAS REDU CED AS INCOME TO BE ASSESSED SEPARATELY. AFTER MAKING CERTAIN ADDITION S AND DELETIONS, BEING THE ITEMS INADMISSIBLE AND ADMISSIBLE UNDER THE INC OME-TAX ACT, 1961, THE ASSESSEE COMPUTED INCOME UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION RELATABLE TO NOIDA UNIT-IV AT RS.26,37,50,768/-. IT IS THIS FIGURE, WHICH THE AO HAS TAKEN IN PARA 4 .2(X) FROM WHICH INTEREST, AS ALLOCATED BY HIM AT RS.3,72,83,704/-, HAS BEEN REDUCED. THUS, IT IS APPARENT THAT THE INTEREST INCOME ALLOC ATED BY THE AO TO NOIDA UNIT-IV IS NOT A PART OF THE PROFITS OF NOIDA UNIT-IV AMOUNTING TO RS.26,37,50,768/-. THE ONLY INTEREST INCOME INCLUD ED BY THE ASSESSEE IN SUCH COMPUTATION AT RS.62,481/- WAS SUO MOTU EXCLUDED IN COMPUTING THE BUSINESS PROFITS FOR THE PURPOSE OF DEDUCTION U /S 10A. WHEN THE INTEREST INCOME ALLOCATED BY THE AO AT RS.3.72 CROR E AND ODD DOES NOT ITA NO.107/DEL/2016 10 FORM PART OF THE TOTAL BUSINESS PROFITS AMOUNTING T O RS.26.37 CRORE, THERE CAN BE NO LOGIC IN REDUCING THE AMOUNT OF ALLOCATED INTEREST FROM SUCH BUSINESS PROFITS. 6.4. THE ASSESSEE FURNISHED A CALCULATION AT THE INSTANCE OF THE AO TO BRING HOME ITS POINT THAT NO FURTHER REDUCTION WAS WARRANTED FROM THE BOOK PROFITS IN THE COMPUTATION OF DEDUCTION U/S 10 A, WHOSE COPY HAS BEEN PLACED AT PAGE 515 OF THE PAPER BOOK. IT CAN BE NOTICED THAT IN COMPUTING THE INCOME UNDER THE HEAD `PROFIT AND GA INS OF BUSINESS OR PROFESSION (BEFORE/ AFTER APPORTIONMENT OF INTERES T INCOME TO THE NOIDA UNIT-IV), THE ASSESSEE STARTED WITH PROFIT BEFORE TAX AS PER P& L ACCOUNT AT RS.15,66,85,756 / RS.19,39,06,979 INCLUDING INTE REST INCOME OF RS.62,481 / RS.3,72,83,704. THEREAFTER, SUCH INTERE ST INCOME OF RS.62,481 / RS.3,72,83,704 HAS BEEN REDUCED TO ARRI VE AT INCOME UNDER THE HEAD `PROFITS AND GAINS OF BUSINESS OR PROFESSI ON AT RS.26,37,50,768 / RS.26,37,50,768. IT IS THIS FIGURE OF RS.26,37,5 0,768, WHICH HAS BEEN TAKEN BY THE AO BEFORE REDUCING, INTER ALIA, THE AMOUNT OF INTEREST INCOME OF RS.3,72,83,704. ONCE THE INTEREST INCOME OF RS.3,72,83,704 ITA NO.107/DEL/2016 11 DOES NOT FORM PART OF THE BUSINESS PROFITS ELIGIBLE FOR DEDUCTION U/S 10A, THERE CAN BE NO QUESTION OF ONCE AGAIN REDUCING SUC H INTEREST INCOME FROM THE AMOUNT OF ELIGIBLE BUSINESS PROFITS. WE, THEREFORE, OVERTURN THE IMPUGNED ORDER TO THIS EXTENT AND DIRECT THAT THE I NTEREST INCOME APPORTIONED TO THE ELIGIBLE UNIT BE NOT SEPARATELY REDUCED SINCE THE BUSINESS PROFITS ELIGIBLE FOR DEDUCTION U/S 10A WER E ALREADY EXCLUSIVE OF THE SAME. THIS GROUND IS ALLOWED. 7. GROUND NOS. 8, 9 AND 10 WERE NOT PRESSED BY THE LD. AR. THE SAME, THEREFORE, STAND DISMISSED. 8. GROUND NO. 11 IS CONSEQUENTIAL. 9.1. GROUND NO. 2 IS AGAINST MAKING OF TRANSFER PRI CING ADJUSTMENT AMOUNTING TO RS.75,47,44,000/- IN THE `SOFTWARE DE VELOPMENT SERVICES SEGMENT OF THE ASSESSEE. 9.2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A SUBSIDIARY OF STERIA UK CORPORATE LTD., UK, AN I.T. SERVICE COMPANY IN THE UNITED KINGDOM. THE ASSESSEE PROVIDES BOTH SOFT WARE AND BPO SERVICES TO ITS CUSTOMERS. IT REPORTED, INTER ALIA , AN INTERNATIONAL ITA NO.107/DEL/2016 12 TRANSACTION OF `PROVISION OF SOFTWARE SERVICES WIT H THE TRANSACTED VALUE OF RS.3,31,67,83,807/-. THE TRANSACTIONAL NET MARG IN METHOD (TNMM) WAS SELECTED AS THE MOST APPROPRIATE METHOD WITH THE PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT/OPERATING COST (OP/OC). CERTAIN COMPANIES WERE SELECTED, WHOSE MEAN OP/OC W AS SHOWN WITHIN THE PERMISSIBLE RANGE OF THE ASSESSEES DECL ARED PROFIT RATE. THE AO MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INT ERNATIONAL TRANSACTIONS. IN THE ORIGINAL ORDER DATED 17.1.201 4 PASSED BY THE TPO, 16 COMPANIES WERE CONSIDERED AS COMPARABLE WITH AN AVERAGE OF OP/OC AT 33.45%. THE DISPUTE RESOLUTION PANEL (DRP), VID E ITS ORDER DATED 20.10.2015, DIRECTED TO CONSIDER THE FOREX FLUCTUAT ION GAIN/LOSS AS AN ITEM OF OPERATING NATURE AND ALSO TO EXCLUDE THREE COMPANIES FROM THE FINAL SET OF COMPARABLES DRAWN BY THE TPO, NAMELY, INFOSYS LTD., PERSISTENT SYSTEMS PVT. LTD. AND WIPRO TECHNOLOGIES SERVICES LTD. THE AO, IN HIS FINAL ORDER DATED 30.11.2015, GIVING EFF ECT TO THE DRPS DIRECTION, CONSIDERED FOREIGN EXCHANGE FLUCTUATION AS AN ITEM OPERATING NATURE IN THE HANDS OF COMPARABLES ONLY. THEREAFT ER, CERTAIN ITA NO.107/DEL/2016 13 RECTIFICATION PROCEEDINGS WERE TAKEN UP BEFORE THE DRP, TPO AND AO. VIDE THE FINAL ORDER PASSED BY THE AO U/S 154 DATED 28.4.2016, THE AMOUNT OF TP ADJUSTMENT GOT REDUCED TO RS.37,39,22, 000/- WITH THE FOLLOWING 12 COMPANIES AS COMPARABLE :- SL.NO. NAME OF THE COMPANY WC ADJUSTED OP/OC (%) 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 1.07 2. E-INFOCHIPS BANGALORE LTD. 67.97 3. EVOKE TECHNOLOGIES LTD. 22.74 4. E-ZEST SOLUTIONS 18.14 5. LARSEN & TOUBRO INFOTECH LTD. 25.29 6. LGS GLOBAL LTD. 10.29 7. MINDTREE LTD. 25.8 8. RS SOFTWARE (INDIA) LTD. 15.16 9. SASKEN COMMUNICATION TECH LTD. 27.78 10. TATA ELXSI LTD. 19.79 11. THINKSOFT GLOBAL SERVICES LTD. 12.37 12. THIRDWARE SOLUTIONS 42.8 10. IN THE INSTANT PROCEEDINGS, THE ASSESSEE IS FIR STLY AGGRIEVED AGAINST THE INCLUSION OF THE FOUR COMPANIES IN THE LIST OF COMPARABLES, NAMELY, ITA NO.107/DEL/2016 14 E-INFOCHIPS BANGALORE LTD., THIRDWARE SOLUTIONS,TAT A ELXSI LTD., AND SASKEN COMMUNICATION TECH LTD. 11. BEFORE EMBARKING UPON THE COMPARABILITY OR OTHE RWISE OF THE ABOVE COMPANIES, IT IS PERTINENT TO CONSIDER THE AS SESSEES FUNCTIONAL PROFILE UNDER THE SOFTWARE SERVICES SEGMENT. A CO PY OF THE ASSESSEES TRANSFER PRICING STUDY REPORT IS AVAILABLE ON PAGE 123 OF THE PAPER BOOK. PROFILE OF STERIA GROUP AS A WHOLE HAS BEEN GIVEN IN PARA 2.03 OF THE TP STUDY REPORT, WHICH MANIFESTS THAT THE STERIA G ROUP IS A MAJOR I.T. SERVICE PROVIDER IN EUROPE IN PUBLIC SECTOR, FINANC IAL SERVICES, TELECOMMUNICATIONS AND MEDIA, RETAIL, UTILITIES AND TRANSPORT. PROFILE OF THE ASSESSEE HAS BEEN SET OUT IN PARA 2.02 OF T HE PAPER BOOK. UNDER THE SEGMENT SOFTWARE SERVICES, THE ASSESSEE IS EN GAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO STERIA UK BOTH OFF SHORE SOFTWARE DEVELOPMENT SERVICES RENDERED IN INDIA AND ONSITE S OFTWARE DEVELOPMENT RENDERED AT THE CLIENTS LOCATION IN UK. APART FROM THAT, THE ASSESSEE IS ALSO PROVIDING MAINTENANCE SERVICES TO STERIA LTD., UK IN RESPECT OF THE PROJECTS HANDLED FROM INDIA AND THE PROJECTS EXECUT ED AT THE CLIENTS ITA NO.107/DEL/2016 15 LOCATION IN UK. IN ADDITION, THE ASSESSEE IS PROVI DING TESTING SERVICES, WHICH COMPRISE OF TESTING AND QUALITY ASSURANCE CON SULTANCY, MANAGED TESTING SERVICES, BUSINESS PROCESS TESTING, TEST AU TOMATION, SPECIALIZED TESTING AND TEST ENVIRONMENT SERVICES. WE HAVE ALS O GONE THROUGH THE AGREEMENT EFFECTIVE FROM 1.4.2009 BETWEEN THE ASSES SEE AND STERIA LTD., UK, WHOSE COPY HAS BEEN PROVIDED TO US. THIS AGREE MENT PROVIDES THAT STERIA LTD., UK, UNDERTAKES SOFTWARE PROJECTS PRIMA RILY FOR UK CLIENTS AND THE ASSESSEE IS ENGAGED IN PROVIDING SIMILAR SE RVICES AS STERIA LTD., UK. THERE IS NO DETAILED ELABORATION OF SERVICES T O BE RENDERED EXCEPT A BRIEF MENTION IN CLAUSE 2 OF THE AGREEMENT, AS PER WHICH STERIA LTD., UK, SHALL IDENTIFY SPECIFIC REQUIREMENTS/PROJECTS I N RESPECT OF WHICH IT MAY WISH TO AVAIL, INTER ALIA , SOFTWARE SERVICES FROM THE ASSESSEE AT THE PRESCRIBED RATES OF REMUNERATION. THIS SHOWS THAT THE ASSESSEE IS BASICALLY ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS ONLY CLIENT, STERIA LTD., UK, CATERING TO ITS CUSTOMERS IN PUBLIC SECTOR, FINANCIAL SERVICES, TELECOMMUNICATIONS AND MEDIA, R ETAIL, UTILITIES AND TRANSPORT. WITH THIS BACKDROP OF THE NATURE OF SERV ICES RENDERED BY THE ITA NO.107/DEL/2016 16 ASSESSEE, WE WILL PROCEED TO EXAMINE THE COMPARABIL ITY OR OTHERWISE OF THE COMPANIES ASSAILED BEFORE US. 12.1. BEFORE THAT, WE WOULD LIKE TO DEAL WITH A S UBMISSION ADVANCED BY THE LD. AR, WHICH IS COMMON TO MOST OF SUCH COMPANI ES, THAT CERTAIN BENCHES OF THE TRIBUNAL IN OTHER CASES HAVE HELD TH EM TO BE NOT COMPARABLE. IN THAT VIEW OF THE MATTER, IT WAS URG ED THAT THOSE COMPANIES, BEING EX FACIE INCOMPARABLE, BE EXCLUDED FROM THE LIST OF COMPARABLES DRAWN BY THE TPO. 12.2. WE EXPRESS OUR RESERVATIONS IN ACCEPTING SU CH A BROAD PROPOSITION. IT IS AXIOMATIC THAT IF COMPANY A IS FUNCTIONALLY DIFFERENT FROM COMPANY B, THEN, SUCH A COMPANY CANNOT BE CO NSIDERED AS COMPARABLE. TWO COMPANIES CAN BE TREATED AS COMPARA BLE WHEN BOTH ARE DISCHARGING THE OVERALL SIMILAR FUNCTIONS, THOUGH T HERE MAY BE SOME MINOR DIFFERENCES IN SUCH FUNCTIONS, NOT MARRING TH E OTHERWISE COMPARABILITY. NOTWITHSTANDING THE FUNCTIONAL SIMIL ARITY, MANY A TIMES A COMPANY CEASES TO BE COMPARABLE BECAUSE OF OTHER RE ASONS AS WELL. TO CITE AN EXAMPLE, IF COMPANY A, THOUGH FUNCTIONALL Y SIMILAR TO ITA NO.107/DEL/2016 17 COMPANY B, BUT HAS RELATED PARTY TRANSACTIONS (RP TS) BREACHING A PARTICULAR LEVEL, THEN, SUCH COMPANY CANNOT BE CONS IDERED AS COMPARABLE TO COMPANY A IN THE YEAR IN WHICH THE RPTS BREACH SUCH A LEVEL. IF, HOWEVER, IN THE SUBSEQUENT YEAR, THE RELATED PARTY TRANSACTIONS FALL BELOW THAT BARRIER, THEN SUCH COMPANY WOULD AGAIN BECOME COMPARABLE. IN THE LIKE MANNER, A COMPANY MIGHT HAVE BEEN TREATED AS N ON-COMPARABLE DUE TO THE TPO ADOPTING ITS ENTITY LEVEL RESULTS FOR CO MPARISON WITH THE SEGMENTAL RESULTS OF THE CASE BEFORE HIM, BUT IN A LATER CASE, THE TPO MAY TAKE ONLY THE RELATED SEGMENT RESULTS. IN SUCH A LATER CASE, THE COMPANY TREATED AS NON-COMPARABLE TO THE FIRST COMP ANY MAY BECOME COMPARABLE TO THE SECOND COMPANY. TO PUT IT SIMPLY, IF COMPANY A HAS BEEN HELD TO BE INCOMPARABLE VIS-A-VIS COMPANY B, THEN IT IS NOT ESSENTIAL THAT COMPANY A WOULD BE INCOMPARABLE TO COMPANY C ALSO. WHAT IS RELEVANT TO CONSIDER IS, FIRSTLY, THE FUNCT IONAL PROFILE OF COMPANY A VIS-A-VIS COMPANY C. IF BOTH ARE FUNCTIONALLY SIMILAR, THE N NOTWITHSTANDING THE FACT THAT COMPANY A WAS HELD TO BE INCOMPARABLE TO COMPANY B, IT MAY STILL BE COMPARABLE TO COMPA NY C. DESPITE THE FACT THAT COMPANY A IS FUNCTIONALLY SIMILAR TO CO MPANY B, IT STILL ITA NO.107/DEL/2016 18 MIGHT HAVE BEEN DECLARED AS INCOMPARABLE TO COMPANY B BECAUSE OF OTHER RELEVANT REASONS. IF COMPANY A PASSES THE SAME REASONS VIS-A- VIS COMPANY C, THEN COMPANY A WILL FIND ITS PLACE I N THE LIST OF COMPARABLES OF COMPANY C, NOTWITHSTANDING THE F ACT THAT IT WAS HELD TO BE INCOMPARABLE TO COMPANY B. THE CRUX OF THE MATTER IS THAT THE MERE FACT THAT COMPANY A HAS BEEN HELD TO BE NOT COMPARABLE IN A JUDICIAL ORDER PASSED IN THE CASE OF COMPANY B, D OES NOT PER SE MAKE IT INCOMPARABLE IN ALL THE SUBSEQUENT CASES TO FOLLOW. NOT ONLY COMPANY A HELD TO BE INCOMPARABLE TO COMPANY B CAN BE C OMPARABLE TO COMPANY C, BUT COMPANY X HELD TO BE COMPARABLE TO COMPANY Y CAN ALSO BE INCOMPARABLE TO COMPANY Z, DEPENDING UPON THE FUNCTIONAL PROFILE AND THE APPLICABILITY OR OTHERWI SE OF THE RELATED FACTORS. THUS, IT IS CLEARLY DEDUCTIBLE THAT IF A PARTICULAR COMPANY HAS BEEN HELD TO BE NOT COMPARABLE IN THE CASE OF ANOTH ER COMPANY, THEN SUCH FORMER COMPANY WILL ALSO CEASE TO BE COMPARAB LE TO THE ASSESSEE COMPANY ALSO. THE COMPARABILITY OF EACH COMPANY NEE DS TO BE ASCERTAINED ONLY AFTER MATCHING THE FUNCTIONAL PROF ILE AND THE RELEVANT ITA NO.107/DEL/2016 19 REASONS OF THE OTHER COMPANY. ERGO, THIS PRELIMINAR Y CONTENTION RAISED ON BEHALF OF THE ASSESSEE IS REJECTED AS DEVOID OF MERITS. 13. WITH THE ABOVE PARAMETERS AND THE FACTUAL MA TRIX ON HAND, WE WILL DISTINCTLY EXAMINE IN SERIATIM THE COMPANIES CHALLENGED BY THE ASSESSEE TO ASCERTAIN IF THEY ARE REALLY COMPARABLE. I) E-INFOCHIPS BANGALORE LTD. 14.1. THE TPO PROPOSED THIS COMPANY AS COMPARABLE WHICH WAS OBJECTED TO BY THE ASSESSEE. NOT CONVINCED, THE TPO HELD THIS COMPANY COMPARABLE AS IT WAS FOUND BY HIM TO BE FUNCTIONALL Y SIMILAR AND ALSO PASSING ALL THE FILTERS APPLIED BY HIM. THE DRP DI D NOT ALLOW ANY RELIEF. THE ASSESSEE IS AGGRIEVED AGAINST ITS INCLUSION IN THE FINAL TALLY OF COMPARABLES. 14.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUA L REPORT OF THIS COMPANY, A COPY OF WHICH IS PLACED AT PAGE 212 ONWA RDS OF THE PAPER BOOK, THAT ITS ONLY SOURCE OF REVENUE IS `INCOME FR OM SOFTWARE SERVICES TO THE TUNE OF RS.43,04,66,481. SEGMENTAL INFORMAT ION HAS BEEN GIVEN ITA NO.107/DEL/2016 20 AS NOTE NO. 16 ON PAGE NO. 219 OF THE PAPER BOOK IN DICATING THAT: THE COMPANY IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPMEN T AND I.T. ENABLED SERVICES WHICH IS CONSIDERED THE ONLY REPOR TABLE BUSINESS SEGMENT.. FROM THE ABOVE NOTE, IT IS CLEAR THAT THIS COMPANY IS ENGAGED IN RENDERING NOT ONLY SOFTWARE DEVELOPMENT, BUT ALSO I.T. ENABLED SERVICES AND HAS COMBINED REVENUES FROM BOT H THE STREAMS CLUBBED UNDER THE MAIN HEAD OF INCOME FROM SOFTWAR E SERVICES. THE ASSESSEE IS ALSO ENGAGED IN RENDERING SOFTWARE DEVE LOPMENT SERVICES AND I.T. ENABLED SERVICES. HOWEVER, BOTH THESE SEGMENT S HAVE BEEN SEPARATELY BENCHMARKED AND THE DISPUTE UNDER CONSID ERATION IS ONLY QUA THE SEGMENT OF SOFTWARE DEVELOPMENT SERVICES. SINCE THERE IS NO SEPARATE INFORMATION AVAILABLE OF THIS COMPANY RELA TING TO SOFTWARE DEVELOPMENT SERVICES AND THE DETAILS OF INCOME HAVE BEEN GIVEN IN A CONSOLIDATED MANNER ALSO INCLUDING I.T. ENABLED SER VICES SEGMENT, WE ARE NOT INCLINED TO TREAT THIS COMPANY AS COMPARABL E ON ENTITY LEVEL WITH THE ONLY SOFTWARE DEVELOPMENT SERVICES SEGMENT OF T HE ASSESSEE. THIS COMPANY IS, THEREFORE, DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. ITA NO.107/DEL/2016 21 II) THIRDWARE SOLUTIONS 15.1. THE TPO PROPOSED THIS COMPANY AS COMPARABLE . THE ASSESSEE OBJECTED TO ITS INCLUSION IN THE LIST OF C OMPARABLES BY CONTENDING THAT ITS SEGMENTAL RESULTS WERE DRAWN ON GEOGRAPHICAL BASIS. THE TPO REJECTED THE ASSESSEES CONTENTION BY NOTIC ING THAT THE REVENUES IN THE OVERSEAS SEGMENT CAME FROM EXPORT OF SOFTWAR E SERVICES AND THE BALANCE REVENUE COMING FROM INDIA SEGMENT WERE IN R ELATION TO SUBSCRIPTION, SALE OF LICENCE AND OTHER SOFTWARE SE RVICES. THE ASSESSEE IS AGGRIEVED AGAINST THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES ON THE BASIS OF SUCH GEOGRAPHICAL SEGME NTS. 15.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE ANNUAL ACCOUNTS OF THIS CO MPANY ARE AVAILABLE ON PAGES 222 ONWARDS OF THE PAPER BOOK. FROM THE C OPY OF PROFIT & LOSS ACCOUNT, IT CAN BE SEEN THAT THERE ARE TWO ITE MS OF INCOME, VIZ., `SALES AND `OTHER INCOME. BIFURCATION OF `SALES AS PER SCHEDULE 12 CONSISTS OF EXPORT FROM SEZ UNITS, EXPORT FROM STP I UNIT, REVENUE FROM SUBSCRIPTION, SALE OF LICENCE AND SOFTWARE SER VICES. IT IS FURTHER DISCERNIBLE FROM THE SEGMENT REPORTING, AS REPRODUC ED ON PAGE 76 OF THE ITA NO.107/DEL/2016 22 TPOS ORDER, THAT THE FIGURES HAVE BEEN GIVEN ON TH E BASIS OF GEOGRAPHICAL SEGMENTS, VIZ., `INDIA COMPRISING OF PRODUCTS AND OTHER SERVICES AND `OVERSEAS COMPRISING OF SOFTWARE SE RVICES. THE TPO HAS TAKEN ONLY THE `OVERSEAS SEGMENT FOR THE PURPOSES OF INCLUSION IN THE LIST OF COMPARABLES, WHICH ENCOMPASSES ONLY EXPORT OF SOFTWARE SERVICES. AS THE SEGMENT OF THE ASSESSEE UNDER CON SIDERATION IS ALSO ONLY SOFTWARE SERVICES, IT IS VIVID THAT THIS SEGMENT OF THIRDWARE SOLUTIONS TAKEN BY THE TPO FULLY MATCHES AND IS HENCE COMPARA BLE. WE, THEREFORE, HOLD THAT THE TPO WAS JUSTIFIED IN INCLU DING THIS COMPANY IN THE LIST OF COMPARABLES. III) TATA ELXSI LTD. 16.1. THIS COMPANY WAS CHOSEN BY THE TPO AS COM PARABLE BY NOTICING THAT ITS OPERATIONS PREDOMINANTLY RELATED TO PROVIDING SYSTEMS INTEGRATION AND SOFTWARE DEVELOPMENT SERVICES IN TH E INFORMATION TECHNOLOGY FIELD. THE ASSESSEES OBJECTIONS AS TO THE FUNCTIONAL DISSIMILARITY WERE IGNORED. THAT IS HOW, THE ASSESS EE IS IN APPEAL BEFORE US AGAINST THE INCLUSION OF THIS COMPANY IN THE FIN AL SET OF COMPARABLES. ITA NO.107/DEL/2016 23 16.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS A ND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ANNUA L REPORT OF THIS COMPANY IS AVAILABLE ON PAGE 241 ONWARDS OF THE PAP ER BOOK, FROM WHICH IT CAN BE SEEN THAT IT HAS TWO ITEMS OF REVEN UE, VIZ., `SALES AND SERVICES AND `OTHER INCOME. BREAKUP OF SALES AND SERVICES TOTALING RS.37,637.04 LAC IS AVAILABLE AS PER SCHEDULE 13. F IRST ITEM AMOUNTING TO RS.2167.51 LAC IS SALES AND SUPPORT AND THE REMAI NING AMOUNT OF RS.35469.53 LAC IS `SERVICES. THE TPO HAS TAKEN EN TITY LEVEL FIGURES OF THIS COMPANY FOR COMPARISON. ON GOING THROUGH THE DETAILS OF CURRENT ASSETS, IT CAN BE SEEN THAT THERE ARE INVENTORIES A MOUNTING TO RS.6.24 LAC AS AT THE END OF THE YEAR. THIS SHOWS THAT THIS CO MPANY, APART FROM RENDERING SOFTWARE DEVELOPMENT SERVICES, IS ALSO EN GAGED IN MAKING SALES OF SOFTWARE, WHICH IS COMPONENT OF SALES AN D SUPPORT AMOUNTING TO RS.2167.51 LAC. AS THE ASSESSEE IS NOT ENGAGED IN ANY SALE OF PRODUCTS, THIS COMPANY, ON ENTITY LEVEL, CEASES TO BE COMPARABLE. WE, THEREFORE, ORDER FOR THE EXCLUSION OF THIS COMPANY. ITA NO.107/DEL/2016 24 IV) SASKEN COMMUNICATIONS 17.1. THIS COMPANY WAS ORIGINALLY TAKEN BY THE ASSESSEE AS COMPARABLE, WHICH WAS NOT OBJECTED TO BY THE TPO. THE LD. AR CONTENDED THAT THIS COMPANY WAS INADVERTENTLY INCLU DED IN THE LIST OF COMPARABLES. INVITING OUR ATTENTION TOWARDS THE AN NUAL REPORT OF THIS COMPANY, IT WAS IMPRESSED THAT IT HAS SHOWN REVENUE S UNDER ONE HEAD ALONE WITH THE CAPTION OF REVENUES, WHICH IS COMM ON TO SOFTWARE SERVICES, SOFTWARE PRODUCTS AND OTHER SERVICES. AS THE ASSESSEE WAS NOT ENGAGED IN ANY SOFTWARE PRODUCTS, THE LD. AR CONTEN DED THAT THE SAME BE EXCLUDED. 17.2. THE LD. DR VIGOROUSLY OBJECTED TO THE EVEN CONSIDERATION OF THE CONTENTION OF THE ASSESSEE FOR THE EXCLUSION OF SAS KEN COMMUNICATIONS ON THE REASONING THAT IT WAS CHOSEN AS COMPARABLE B Y THE ASSESSEE ITSELF AND NOW IT WAS IMPERMISSIBLE TO RESILE FROM ITS OWN STAND. REFERRING TO PAGE 213 OF THE PAPER BOOK, BEING ANNEXURE 4, WHICH IS PART OF THE TRANSFER PRICING STUDY REPORT, THE LD. DR POINTED O UT THAT THIS COMPANY HAS BEEN CONSISTENTLY TREATED BY THE ASSESSEE AS CO MPARABLE, NOT ONLY IN THE YEAR UNDER CONSIDERATION, BUT IMMEDIATELY TWO P RECEDING YEARS AS ITA NO.107/DEL/2016 25 WELL. ON MERITS, IT WAS POINTED OUT THAT SEGMENTAL INFORMATION HAS BEEN GIVEN BY THIS COMPANY IN NOTE NO. 9 TO THE NOTES TO ACCOUNTS. HE INVITED OUR ATTENTION TOWARDS SEGMENTAL PROFIT & LO SS ACCOUNT GIVING BREAK-UP OF REVENUE AMOUNTING TO RS.40,150.89 LAC I N THREE PARTS, NAMELY, FROM SOFTWARE SERVICES AT RS.37,736.22 LAC, SOFTWARE PRODUCTS AT RS.2,041.90 LAC AND OTHER SERVICES RS.372.77 LAC . IT WAS SHOWN THAT THERE IS ALSO A MENTION IN THE ANNUAL REPORT OF SEP ARATE PROFITS IN RESPECT OF THE ABOVE THREE SEGMENTS. IT WAS, ERGO, ARGUED THAT THERE WAS NO WARRANT FOR EXCLUDING THIS COMPANY FROM THE FINAL S ET OF COMPARABLES. 17.3. WE ARE DISINCLINED TO SUSTAIN THE PRELIM INARY LEGAL OBJECTION TAKEN BY THE LD. DR THAT THE ASSESSEE SHOULD BE PRO HIBITED FROM TAKING A STAND CONTRARY TO THE ONE WHICH WAS TAKEN AT THE ST AGE OF THE TP STUDY OR DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO. IT GOES WITHOUT SAYING THAT THE OBJECT OF ASSESSMENT IS TO DETERMINE THE I NCOME IN RESPECT OF WHICH THE ASSESSEE IS RIGHTLY CHARGEABLE TO TAX. AS THE INCOME NOT ORIGINALLY OFFERED FOR TAXATION, IF OTHERWISE CHARG EABLE, IS REQUIRED TO BE INCLUDED IN THE TOTAL INCOME, IN THE SAME BREATH, A NY INCOME WRONGLY ITA NO.107/DEL/2016 26 INCLUDED IN THE TOTAL INCOME, WHICH IS OTHERWISE NO T CHARGEABLE, SHOULD BE EXCLUDED. THERE CAN BE NO ESTOPPEL AGAINST THE P ROVISIONS OF THE ACT. EXTENDING THIS PROPOSITION FURTHER TO THE CONTEXT O F THE TRANSFER PRICING, IF THE ASSESSEE FAILS TO REPORT AN OTHERWISE COMPAR ABLE CASE, THEN THE TPO IS OBLIGED TO INCLUDE IT IN THE LIST OF COMPARA BLES, AND IN THE SAME MANNER, IF THE ASSESSEE WRONGLY REPORTED AN INCOMPA RABLE CASE AS COMPARABLE IN ITS TP STUDY AND THEN LATER ON CLAIMS THAT IT SHOULD BE EXCLUDED THEN, THERE SHOULD BE NOTHING TO FORBID TH E ASSESSEE FROM CLAIMING SO, PROVIDED THE TPO IS SATISFIED THAT THE CASE SO ORIGINALLY REPORTED AS COMPARABLE IS, IN FACT, NOT COMPARABLE. THE SPECIAL BENCH OF THE TRIBUNAL IN DCIT VS. QUARK SYSTEMS PVT. LTD. (2010) 132 TTJ (CH D) (SB) 1 HAS ALSO HELD THAT A CASE WHICH WAS INCLUDED BY T HE ASSESSEE AND ALSO BY THE TPO IN THE LIST OF COMPARABLES AT THE T IME OF COMPUTING THE ALP, CAN BE EXCLUDED, IF THE ASSESSEE PROVES THAT THE SAME WAS WRONGLY INCLUDED. 17.4. REVERTING TO THE FACTS OF THE EXTANT CASE, WE FIND THAT THE ASSESSEE ITSELF TREATED THIS COMPANY AS COMPARABLE NOT ONLY IN THIS YEAR BUT ALSO IN ITA NO.107/DEL/2016 27 AT LEAST TWO PRECEDING YEARS. THOUGH THERE IS NO LE GAL EMBARGO IN CLAIMING THAT THIS COMPANY WAS WRONGLY TREATED AS C OMPARABLE, BUT THE TPO MUST GET AN OPPORTUNITY TO VET THE ASSESSEES C LAIM OF NON- COMPARABILITY. THE ANNUAL REPORT OF THIS COMPANY GI VING BREAK-UP OF THE SEGMENTAL REVENUES ETC. WAS NOT AVAILABLE WITH THE TPO, WHO SIMPLY ACCEPTED THE ASSESSEES CLAIM OF COMPARABILI TY. NOW SINCE THE ASSESSEE IS RESILING FROM ITS CONSISTENT STAND OF C OMPARABILITY, IT IS BUT NATURAL THAT THE TPO SHOULD ALSO BE GIVEN AN OPPORT UNITY TO EXAMINE THE ASSESSEES CLAIM AND THEN DECIDE AS TO THE COMPARAB ILITY OR OTHERWISE OF THIS COMPANY. WE, THEREFORE, SET ASIDE THE IMPUGNE D ORDER TO THIS EXTENT AND DIRECT A FRESH EXAMINATION OF THE ASSESSEES CL AIM IN THIS REGARD. 18. APART FROM THE ABOVE INCLUSIONS, THE ASSESSEE HAS ALSO CHALLENGED THE EXCLUSION OF SOME OF THE COMPANIES BY THE TPO, WHICH WE WILL DEAL WITH ONE BY ONE. (I) CG VAK SOFTWARE & EXPORTS LTD. 19.1. THIS COMPANY WAS INCLUDED BY THE ASSESSEE I N THE LIST OF COMPARABLES. THE TPO EXCLUDED THE SAME BY NOTICING THAT IT WAS ITA NO.107/DEL/2016 28 OPERATING IN I.T. AND ITES SEGMENTS. THE ASSESSEE IS AGGRIEVED AGAINST SUCH EXCLUSION. 19.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. THE ANNUAL REPORT OF THIS COMP ANY IS AVAILABLE ON PAGES 1-42 OF THE PAPER BOOK. IT CAN BE SEEN FROM THE PROFIT & LOSS ACCOUNT OF THIS COMPANY THAT THE FIRST ITEM UNDER T HE HEAD INCOME IS INCOME FROM SOFTWARE DEVELOPMENT, SERVICES & PRODU CTS, WHICH HAS BEEN SPLIT INTO TWO PARTS, NAMELY, `OVERSEAS AND ` DOMESTIC MARKETS. UNDER THE HEAD SIGNIFICANT ACCOUNTING POLICIES, T HIS COMPANY HAS PROVIDED UNDER THE HEAD REVENUE RECOGNITION THAT THE REVENUE FROM SOFTWARE DEVELOPMENT SERVICES AND PRODUCTS ARE RECO GNIZED ON COMPLETION OF CONTRACT OR STAGE OF COMPLETION AS PE R THE APPLICABLE TERMS AND CONDITIONS AGREED WITH CUSTOMERS. WHEN WE PERU SE SCHEDULE-12 DETAILING `INCOME FROM SOFTWARE DEVELOPMENT, SERVIC ES & PRODUCTS IN `OVERSEAS MARKET, IT COMES TO THE FORE THAT APART FROM EARNING INCOME FROM SOFTWARE SERVICES, THIS COMPANY ALSO EARNED IN COME FROM BUSINESS PROCESS OUTSOURCING SERVICES, WHICH FALL S IN THE REALM OF I.T. ITA NO.107/DEL/2016 29 ENABLED SERVICES. NOTE NO. 6 TO NOTES ANNEXED AND FORMING PART OF THE ACCOUNTS FOR THE YEAR FURTHER DIVULGES THAT THIS CO MPANY EARNED INCOME FROM `MEDICAL TRANSCRIPTION, WHICH HAS BEEN RIGHTL Y CATEGORIZED AS `BUSINESS PROCESS OUTSOURCING SERVICES. DIRECTORS REPORT UNDER THE HEAD `REVIEW OF BUSINESS DISCLOSES THAT: `THE CONT RIBUTIONS OF BUSINESS FROM VARIOUS MARKETS WERE : SOFTWARE SERVICES CONTR IBUTED TO 86% AND BPO SERVICES 14%. SINCE THE INCOME OF THIS COMPANY ALSO INCLUDES INCOME FROM I.T. ENABLED SERVICES AND THERE IS NO S EGMENTAL INFORMATION QUA THE SOFTWARE SERVICES ALONE, WE ARE CONSTRAINED TO TREAT IT AS COMPARABLE AND THE SAME IS HELD TO HAVE BEEN RIGHTL Y EXCLUDED. 19.3. WHILE DEALING WITH E-INFOCHIPS BANGALORE L TD. (SUPRA), WHOSE INCLUSION WAS ASSAILED BY THE ASSESSEE, WE HAVE ADO PTED THE SAME REASONING FOR DIRECTING ITS EXCLUSION. IN LINE WIT H THE REASONS ASCRIBED TO ABOVE WHILE EXCLUDING E-INFOCHIPS BANGALORE LTD., B ANGALORE, WE COUNTENANCE THE ACTION OF THE TPO IN EXCLUDING THIS COMPANY FROM THE LIST OF COMPARABLES. ITA NO.107/DEL/2016 30 (II) GOLDSTONE TECHNOLOGIES LTD . 20.1. THIS COMPANY WAS INCLUDED BY THE ASSESSEE IN THE TALLY OF COMPARABLES WHICH WAS EXCLUDED BY THE TPO BY HOLDIN G THAT IT WAS ENGAGED IN THE FIELD OF I.T. AND I.T. ENABLED SERVI CES AND PRESENTLY RENDERING I.T. ENABLED SERVICES. THE ASSESSEES CO NTENTION THAT IT WAS ONLY IN SOFTWARE DEVELOPMENT SERVICES, WAS REJECTED BY THE TPO AFTER REFERRING TO THE RELEVANT PAGES OF THE ANNUAL REPOR T OF THIS COMPANY. THE ASSESSEE IS AGGRIEVED AGAINST SUCH EXCLUSION. 20.2. HAVING HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE PROFIT & LOSS ACCOUNT OF T HIS COMPANY WHICH IS AVAILABLE ON PAGE 71 OF THE PAPER BOOK THAT IT E ARNED `INCOME BY WAY OF `SALES EXPORTS AND `SALES DOMESTIC. BIFURCATI ON OF SUCH SALES HAS BEEN GIVEN IN SCHEDULE NO.13 WITH THE NARRATION: S OFTWARE & SERVICES EXPORTS DOMESTIC. THUS, IT IS CLEAR THAT THIS COMPANY, APART FROM EARNING INCOME FROM SOFTWARE, IS ALSO EARNING INCOM E FROM I.T. ENABLED SERVICES. IN ITS ANNUAL REPORT, UNDER THE HEAD 12 . ADDITIONAL INFORMATION REQUIRED AS PER PARAS 3 AND 4 OF PART I I OF THE SCHEDULE VI TO ITA NO.107/DEL/2016 31 THE COMPANIES ACT, 1956, IT HAS BEEN REPORTED THA T: THE COMPANY IS ENGAGED IN INFORMATION TECHNOLOGY & INFORMATION TEC HNOLOGY ENABLED SERVICES. SEGMENT REVENUES HAVE BEEN SET OUT IN NO TE 9, FROM WHICH IT IS DISCERNIBLE THAT IT EARNED INCOME, INTER ALIA, FROM MEDIA DIVISION AMOUNTING TO RS.17.40 MILLIONS. THE ABOVE DISCUSSI ON AMPLY PROVES THAT IT IS NOT ONLY EXCLUSIVELY ENGAGED IN RENDERIN G SOFTWARE DEVELOPMENT SERVICES, BUT ALSO I.T. ENABLED SERVICE S AND HAS ALSO EARNED INCOME FROM MEDIA DIVISION. NO SEPARATE SEGMENTAL I NFORMATION FOR DEDUCING THE PLI OF THIS COMPANY FROM SOFTWARE DEVE LOPMENT IS AVAILABLE ON RECORD. AS WE ARE CONSIDERING THE ASSE SSEES `SOFTWARE DEVELOPMENT SEGMENT ALONE, THIS COMPANY AT ENTITY LEVEL, CEASES TO BE COMPARABLE. WE, THEREFORE, UPHOLD THE IMPUGNED ORD ER ON THIS SCORE. (III) QUINTEGRA SOLUTIONS LTD. 21.2. THE ASSESSEE TREATED THIS COMPANY AS COMPARAB LE WHICH VERSION WAS REJECTED BY THE TPO ON THE GROUND THAT IT WAS ALSO A PRODUCT COMPANY HAVING DECLINING SALES AND VERY HIG H DEBTORS. THE ASSESSEE HAS CHALLENGED THE EXCLUSION OF THIS COMPA NY. ITA NO.107/DEL/2016 32 21.2. HAVING HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE SALES OF THIS COMPANY ARE ON FALLING TREND. IN THE YEAR ENDING 31.3.2008, THIS COMPANY MADE SALES OF R S.88.12 CRORE WHICH IN THE NEXT YEAR STOOD REDUCED TO RS.77.2 CRO RE AND IN THE YEAR UNDER CONSIDERATION TO RS.37.38 CRORE, WITH A FURT HER SLIDE TO RS.17.69 CRORE IN THE NEXT YEAR. REVIEW OF OPERATIONS AND OUTLOOK GIVEN IN THE DIRECTORS REPORT MAKES IT EXPLICIT THAT: THE COMP ANY HAS NOT RECOVERED FROM THE BURDEN OF THE HEAVY LOSS INCURRE D BY TAKEOVER OF SOME COMPANIES AS BRIEFED IN THE LAST ANNUAL REPORT . THIS DECIPHERS THAT THE COMPANY IS REGULARLY INCURRING LOSSES, WHICH FA CT IS FURTHER BORNE OUT FROM ITS PROFIT & LOSS ACCOUNT INDICATING HAVING IN CURRED LOSS OF RS.15.77 CRORE IN THIS YEAR AND RS.21.30 CRORE IN T HE PRECEDING YEAR. THOUGH SIMPLICITOR HIGH OR LOW TURNOVER CANNOT BE A CRITERIA FOR EXCLUDING A COMPANY FROM THE LIST OF COMPARABLES AS HAS BEEN HELD BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. VS. DCIT (2015) 376 ITR 183 (DEL), BUT THE PERSISTENT LOSSES COUPLED WITH DECLINING TURNOVER O VER THE PERIOD INDICATE ABNORMAL FINANCIAL CIRCUMSTANCES, WHICH RENDER IT NON-COMPARABLE AND ITA NO.107/DEL/2016 33 JUSTIFY THE EXCLUSION OF SUCH A COMPANY FROM THE LI ST OF COMPARABLES. UNDER THESE CIRCUMSTANCES, WE ARE SATISFIED THAT TH E TPO WAS RIGHT IN EXCLUDING THIS COMPANY FROM THE LIST OF COMPARABLES . 22. TO SUM UP, WE SET ASIDE THE IMPUGNED ORDER ON T HE ISSUE OF ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT IN THE SOFTWARE DEVELOPMENT SERVICES SEGMENT AND REMIT THE MATTER T O THE FILE OF AO/TPO FOR FRESH DETERMINATION OF THE ALP OF THE IN TERNATIONAL TRANSACTION IN CONSONANCE WITH OUR ABOVE DIRECTIONS . NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNI TY OF BEING HEARD IN SUCH FRESH PROCEEDINGS. 23. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 04.11.201 6. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED,04 TH NOVEMBER, 2016. DK ITA NO.107/DEL/2016 34 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.