Xchanging Technology Services India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 1222/DEL/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97205 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-09-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 12-06-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 03-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIVEK WADEKAR; YASYASAINI KAKKAR SENIOR D
• Assessee Lawyers: SANDEEP S KARH AIL S; NAGESHWAR RAO ANKIT D AGGRAWAL
• Keywords: Depreciation; Transfer pricing; International transaction; Scheme of amalgamation
• Section: 10B; 32

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I: NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI A. T. VARKEY, JUDICIAL MEMBER ITA NO.1222/DEL/2015 (ASSESSMENT YEAR: 2010-11) XCHANGING TECHNOLOGY SERVICES INDIA PRIVATE LIMITED, RECTANGE-1, D-4, DISTRICT CENTRE, SAKET, NEW DELHI-110 019 VS DCIT, CIRCLE-27(2), NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI NAGESHWAR RAO, ANKIT D. AGGRAWAL & SANDEEP S. KARHAIL, ADVOCATES RESPONDENT BY : SH VIVEK WADEKAR, CIT DR & MS. YASYASAINI KAKKAR, SENIOR DR DATE OF HEARING 12.06.2015 DATE OF PRONOUNCEMENT 08.09.2015 ORDER PER A. T. VARKEY, JUDICIAL MEMBER 2 ITA NO.1222/DEL/2015 THIS APPEAL, AT THE INSTANCE OF THE ASSESSEE, IS DI RECTED AGAINST THE FINAL ASSESSMENT ORDER DATED 26.12.2014, UNDER SECT ION 143(1) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFT ER THE ACT) IN PURSUANCE TO THE DIRECTIONS OF DISPUTES RESOLUTION PANEL (DRP) DATED 05.11.2014 FOR THE ASSESSMENT YEAR 2010-11. 2. IN THIS APPEAL, THE FOLLOWING GROUNDS HAVE BEEN RAISED :- 1. WITHOUT PREJUDICE TO THE ABOVE, THE ORDER OF TH E LEARNED AO AND DIRECTIONS OF THE HON'BLE DRP ARE BASED ON INCO RRECT INTERPRETATION OF LAW AND THEREFORE ARE BAD IN LAW. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW AND BASED ON THE DIRECTIONS OF DRP, THE LEARNED AO ERRED IN ASSESSING THE TOTAL INCOME OF THE APPELLANT AT RS. 16,65,79,490 AS AGAINST RETURNED INCOME OF RS. 12,61,73,755 COMP UTED BY THE APPELLANT. 3. THE LEARNED AO / TRANSFER PRICING OFFICER ('T PO') ERRED IN MAKING AN ADDITION OF RS. 2,14,03,620 AND RS. 1,90, 02,115 TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF ADJ USTMENT IN THE ARM'S LENGTH PRICE WITH RESPECT TO THE IT ENABL ED SERVICES AND SOFTWARE DEVELOPMENT SERVICES TRANSACTION RESPE CTIVELY ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED E NTERPRISE. 4. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED , IN LAW AND IN FACTS, BY NOT ACCEPTING THE ECONOMIC ANALYSIS UNDER TAKEN BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES, AND CONDUCTING A FRESH ECONOMI C ANALYSIS FOR THE DETERMINATION OF THE ALP IN CONNECTION WITH THE IMPUGNED INTERNATIONAL TRANSACTION AND HOLDING THAT THE APPELLANT'S INTERNATIONAL TRANSACTION IS NOT AT ARM 'S LENGTH. 3 ITA NO.1222/DEL/2015 5. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED , IN LAW AND IN FACTS, BY DETERMINING THE ARM'S LENGTH MARGIN/ PRIC E USING ONLY FY 2009-10 DATA WHICH WAS NOT ENTIRELY AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TRANSFE R PRICING DOCUMENTATION REQUIREMENTS. 6. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED , IN LAW AND IN FACTS, BY ACCEPTING / REJECTING COMPANIES BASED ON UNREASONABLE COMPARABILITY CRITERIA. 7. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED , IN LAW AND FACTS, BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUN T FOR DIFFERENCES IN THE WORKING CAPITAL POSITION OF THE APPELLANT VIS- A-VIS THE COMPARABLES. 8. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED, IN LAW AND FACTS, BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUN T FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VI S-A-VIS THE COMPARABLES. 9. THE LEARNED AO ERRED, IN LAW AND IN FACTS, IN I NITIATING PENALTY PROCEEDINGS U/S 271(L)(C) OF THE ACT. 3. IN THIS MATTER GROUND NOS.1 & 2 ARE GENERAL IN N ATURE AND DO NOT REQUIRE ADJUDICATION. 4. GROUND NO.5 IS REGARDING MULTIPLE YEAR DATA WHIC H IS NO LONGER RES-INTEGRA AND NOW THE SETTLED POSITION OF LAW IS THAT ONLY THE CONTEMPORANEOUS YEAR DATA IS TO BE TAKEN INTO CONSI DERATION FOR THE PURPOSES OF BENCH MARKING PURPOSES AS PER RULE 10B (4) OF THE INCOME- TAX RULES, 1962 (HEREINAFTER THE RULES). THIS PO SITION IS NOW WELL 4 ITA NO.1222/DEL/2015 SETTLED BY THE DECISION OF HONBLE JURISDICTIONAL H IGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS (I) PVT. LTD. V S. DCIT DATED 27.04.2015. MORE SO, IT IS ADMITTED BY THE PARTIES THAT THE CURRENT APPEAL WILL NOT FALL WITHIN THE EXCEPTION PROVIDED UNDER THE PROVISO TO RULE 10B (4). 5. GROUND NOS.3, 4 & 6 CHALLENGE THE VARIOUS FACETS OF ADJUSTMENTS MADE/UPHELD IN THE INSTANT CASE BY THE TPO/DRP. 6. BRIEF FACTS OF THE CASE ARE THAT XCHANGING TECHN OLOGY SERVICES INDIA PRIVATE LIMITED ('XCHANGING INDIA') IS A SUBS IDIARY OF XCHANGING RESOURCING SERVICES LIMITED, UK AND ENGAGED IN THE BUSINESS OF RENDERING CONTRACT SOFTWARE DEVELOPMENT AS WELL AS INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) TO XCHANGING GRO UP COMPANIES. THE ASSESSEE IS REGISTERED AS A 100% EXPORT ORIENTE D UNIT UNDER THE SOFTWARE TECHNOLOGY PARKS OF INDIA (STPI) SCHEME. THE ASSESSEE IS CURRENTLY ASSESSED TO TAX BY DCIT, CIRCLE 18 (1), N EW DELHI. THE ASSESSEES CASE WAS REFERRED TO THE ADDITIONAL DIRE CTOR OF INCOME-TAX (TRANSFER PRICING)-II (4) (TPO) FOR DETERMINATION O F THE ARMS LENGTH 5 ITA NO.1222/DEL/2015 PRICE (ALP) FOR THE INTERNATIONAL TRANSACTIONS ENTE RED INTO BY THE ASSESSEE DURING THE FINANCIAL YEAR 2009-10. THE AS SESSMENT PROCEEDINGS WERE INITIATED BY THE LD. TPO FOR DETERMINING THE A RMS LENGTH NATURE OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. TH E LD. TPO REQUESTED FOR CERTAIN INFORMATION/DOCUMENTS WHICH WERE DULY FURNI SHED BY THE ASSESSEE. SUBSEQUENTLY, THE LD. TPO PASSED AN ORDE R DATED 16.01.2014 MAKING CERTAIN ADJUSTMENT TO THE ALP OF THE INTERNA TIONAL TRANSACTIONS OF THE ASSESSEE. 6.1 THE ASSESSEE OPERATES IN TWO SEGMENTS I.E. SOFT WARE DEVELOPMENT SEGMENT AND ITES SEGMENT. DURING THE FY 2009-10, TH E ASSESSEE HAD FOLLOWING INTERNATIONAL TRANSACTIONS WITH ASSOCIATE D ENTERPRISES (AES) WHICH WERE PICKED-UP FOR SCRUTINY BY THE TPO :- S. NO. PARTICULARS METHOD ADOPTED PLI TOTAL VALUE (RS.) 1. PROVISION OF SOFTWARE DEVELOPMENT SERVICES TNMM (SEGMENTAL) OP/TC 33,51,548/- 2. PROVISION OF IT ENABLED SERVICES 40,02,92,121/- 6 ITA NO.1222/DEL/2015 6.2 IN RESPECT OF THE ASSESSEE'S IMPUGNED INTERNATI ONAL TRANSACTION OF PROVISION OF IT SERVICES AND ITES, THE TRANSFER PRI CING ANALYSIS WAS UNDERTAKEN IN THE FOLLOWING MANNER :- 6.3 THE ASSESSEE HAD UNDERTAKEN ANALYSIS SELECTING THE TRANSACTIONAL NET MARGIN METHOD ('TNMM') AS THE MOST APPROPRIATE METHOD. IN ORDER TO IDENTIFY COMPANIES WHICH ARE COMPARABLE TO THE ASSESSEE, SEARCH WAS CONDUCTED ON PROWESS (A DATABASE COMPILE D AND MANAGED BY THE CENTRE FOR MONITORING INDIAN ECONOMY) AND CAPIT ALINE (A DATABASE COMPILED AND MANAGED BY CAPITAL MARKET PUBLISHERS) FOR OBTAINING PUBLICLY AVAILABLE FINANCIAL INFORMATION OF COMPANI ES IN INDIA ENGAGED IN SIMILAR BUSINESS ACTIVITY AS THE ASSESSEE. FOR THE COMPANIES IDENTIFIED AS COM PARABLES, WEIGHTED AVERAGE OF OPE RATING PROFIT EARNED ON OPERATING COSTS WERE COMPUTED USING THE FINANCIA L DATA PERTAINING TO FY 2007 -08, FY 2008-09 AND FY 2009-10, WHICH WAS A VAILABLE TO THE ASSESSEE AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENTS. IN CONNECTION WITH THE INTERNATIONAL TRANSACTION OF PROVISION OF IT SERVICES, THE ARITHM ETIC MEAN OF THE 7 ITA NO.1222/DEL/2015 UNADJUSTED NET MARGINS OF THE COMPARABLE COMPANIES WAS13.18 PERCENT ON OPERATING COST. AS THE ASSESSEE'S NET MARGIN OF 15.48 PERCENT WAS HIGHER THAN THE ARM'S LENGTH MARGIN OF COMPARABLE C OMPANIES, THE PRICE CHARGED BY THE ASSESSEE IN RESPECT OF THE IT SERVIC ES TRANSACTION WAS CONSIDERED TO BE AT ARM'S LENGTH IN ACCORDANCE WITH THE INDIAN TRANSFER PRICING REGULATIONS. IN CONNECTION WITH THE INTERN ATIONAL TRANSACTION OF PROVISION OF ITES, THE ARITHMETIC MEAN OF THE UNADJ USTED NET MARGINS OF THE COMPARABLE COMPANIES WAS 14.27 PERCENT ON OPERA TING COST. AS THE ASSESSEE'S NET MARGIN OF 24.96 PERCENT WAS HIGHER T HAN THE ARM'S LENGTH MARGIN OF COMPARABLE COMPANIES, THE PRICE CHARGED B Y THE ASSESSEE IN RESPECT OF THE ITES TRANSACTION WAS CONSIDERED TO B E AT ARM'S LENGTH IN ACCORDANCE WITH THE INDIAN TRANSFER PRICING REGULAT IONS. 6.4 PER CONTRA TO THE ABOVE APPROACH OF THE ASSESSE E, IN THE TP ORDER DATED 16.01.2014, THE LD. TPO HAS COMPUTED THE AVER AGE NET MARGIN OF THE COMPARABLE COMPANIES FOR THE IT SERVICES AND IT ES TRANSACTIONS AS 28.06% AND 31.81% ON OPERATING COST RESPECTIVELY AS AGAINST 13.18% 8 ITA NO.1222/DEL/2015 AND 14.27% ORIGINALLY COMPUTED BY THE ASSESSEE IN I TS TP DOCUMENTATION REPORT. 6.5 BASED UPON THE DISCUSSION IN THE TP ORDER, TPO SELECTED FOLLOWING COMPARABLES FOR BENCH-MARKING SOFTWARE DEVELOPMENT AND ITES SEGMENT AS UNDER:- FIRST ITES SEGMENT S.NO. COMPANY NAME ADJUSTED OP/OC (%) 1. ACCENTIA TECHNOLOGIES LTD. 40.20 2. COSMIC GLOBAL LTD. 20.29 3. E4E HEALTHCARE 31.55 4. FORTUNE INFOTECH LTD. 21.38 5. I-GATE GLOBAL LTD. 24.09 6. INFOSYS B P O LTD. 30.17 7. JINDAL INTELLICOM LTD. 14.95 8. OMEGA HEALTHCARE 13.11 9. T C S E-SERVE INTERNATIONAL LTD. 55.43 10. T C S E-SERVE LTD. 65.27 AVERAGE 31.81 7. ACCORDINGLY, THE ARMS LENGTH PRICE OF THE INTER NATIONAL TRANSACTION RELATED TO PROVISO OF ITES IS CALCULATED AS BELOW :- OPERATING COST (A) 32,03,40,125 ARMS LENGTH MARGIN (%) 31.81% MARGIN (B) 10,19,00,194 9 ITA NO.1222/DEL/2015 ARMS LENGTH PRICE (A+B) = C 42,22,40,319 PRICE CHARGED BY THE ASSESSEE (D) 40,02,92,121 PROPOSED ADJUSTMENT 2,19,48,198 8. THE COMPARABLES THAT SHALL BE USED IN THE SOFTWA RE DEVELOPMENT SERVICES ARE AS UNDER :- S.NO. COMPANY NAME OP/OC (%) ADJUSTED OP/OC (%) 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. -1.04 -0.42 2. CAT TECHNOLOGIES LTD. 11.48 4.49 3. E-INFOCHIPS BANGALORE LTD. 72.69 65.99 4. EVOKE TECHNOLOGIES PVT. LTD. 19.02 19.67 5. E-ZEST SOLUTIONS LTD. 18.66 16.36 6. INFINITE DATA SYSTEMS PVT. LTD. 84.65 84.65 7. INFOSYS LTD. 45.08 46.41 8. KULIZATECH 18.85 17.66 9. LARSEN & TOUBRO INFOTECH LTD. 20.48 20.97 10. LGS GLOBAL LTD. 12.79 8.36 11. MAVERIC SYSTEMS LTD. 16.17 15.68 12. MINDTREE LTD. 16.62 15.46 13. PERSISTENT SYSTEMS LTD. 30.50 28.80 14. SASKEN COMMUNICATION TECHNOLOGY LTD. 17.54 18.87 15. TATA ELXSI LTD. 19.82 17.98 16. THINKSOFT GLOBAL SERVICES LTD. 17.35 14.55 17. THIRDWARE SOLUTION LTD 41.63 38.98 18. WIPRO TECHNOLOGY SERVICES LTD. 70.60 70.60 AVERAGE 29.96 28.06 9. ACCORDINGLY, THE ARMS LENGTH PRICE OF THE INTER NATIONAL TRANSACTION RELATED TO PROVISION OF IT SERVICES WAS CALCULATED AS BELOW :- 10 ITA NO.1222/DEL/2015 TOTAL COST RS.29,02,24,261 ARMS LENGTH PRICE AT A MARGIN OF 28.05% RS.37,16,6 0,657 PRICE RECEIVED RS.33,51,58,550 PROPOSED ADJUSTMENT U/S 92CA RS.3,65,02,107 10. THE TPOS BENCH-MARKING APPROACH HAS BEEN PRINC IPALLY UPHELD BY THE DRP BARRING EXCLUSION OF FEW COMPARABLES IN THE ORIGINAL SET ADOPTED BY THE TPO, POST- DRP ORDER FOLLOWING TP AD JUSTMENT HAS BEEN RECALCULATED BY TPO BY ORDER DATED 18.12.2014 AS UN DER :- S.NO. NATURE OF INTERNATIONAL TRANSACTION ADJUSTMEN T U/S 92CA (RS.) 1. PROVISION OF IT ENABLED SERVICES 2,14,03,620 2. PROVISION OF SOFTWARE DEVELOPMENT SERVICES 1,90, 02,115 TOTAL 4,04,05,735 11. BEFORE US, AS REGARDS SOFTWARE DEVELOPMENT SEGM ENT, LD. AR OBJECTED ONLY TO THE FACTUM OF M/S. INFOSYS & M/S. WIPRO BEING INCLUDED IN THE FINAL SET OF COMPARABLES ADOPTED BY THE TPO. HE ALSO OBJECTED TO EXCLUSION OF M/S. CALIBRA & M/S. R SYST EMS. LET US TAKE UP EACH OF THESE COMPARABLES INDIVIDUAL AS UNDER :- 11 ITA NO.1222/DEL/2015 M/S. INFOSYS 12. VIS--VIS THIS COMPARABLE, BEFORE THE LOWER AUT HORITIES IT WAS SUBMITTED BY THE ASSESSEE AS UNDER :- IN THIS REGARD AND WITHOUT PREJUDICE TO THE TP DO CUMENTATION MAINTAINED BY THE ASSESSEE, IT WISHES TO SUBMIT THA T, INFOSYS SHOULD BE REJECTED ON ACCOUNT OF THE DIFFERENCE IN LEVELS OF FUNCTIONS PERFORMED AND LEVELS OF RISK ASSUMED VIS-A-VIS THE ASSESSEE, HUGE REVENUES DERIVED FROM SOFTWARE SERVICES IN COMPARIS ON TO THE ASSESSEE AND THE FACT THAT IT IS A MARKET LEADER OW NING SIGNIFICANT AMOUNT OF INTANGIBLE ASSETS AND INCURRING HUGE EXPE NDITURE ON RESEARCH AND DEVELOPMENT. THE FUNCTIONAL DIFFERENCE OF THE ASSESSEE WITH INFOSYS IS EVIDENT FROM THE ANNUAL REPORT OF T HE COMPANY AND THE RELEVANT EXTRACTS ARE REPRODUCED FOR YOUR GOODSELF' S EASE OF REFERENCE: INFOSYS OWNS PATENTS AND HAS ALSO FILED NUMEROUS PA TENT APPLICATIONS WHICH ARE PENDING APPROVALS. THESE HAV E BEEN FILED BY SOFTWARE ENGINEERING AND TECHNOLOGY LABS ( SETLABS) WHICH IS THE CENTER FOR APPLIED TECHNOLOGY RESEARCH IN SOFTWARE ENGINEERING AND ENTERPRISE TECHNOLOGY CREATED BY IN FOSYS. THE RELEVANT EXTRACT CONTAINED IN PAGE 15 OF THE ANNUAL REPORT IS PRODUCED BELOW : DURING THE, YEAR SET LABS IP CELL FILED 31 PATENT APPLICATIONS IN THE UNITED STATES PATENT AND TRADEMARK OFFICE (USPTO) A ND INDIAN 12 ITA NO.1222/DEL/2015 PATENT OFFICE. WE NOW HAVE AN AGGREGATE OF 224 PAT ENT APPLICATIONS PENDING IN INDIA AND THE U.S. AND THE USPTO HAS GRANTED NINE PATENTS. PAGE 27 OF THE ANNUAL REPORT SUGGESTS THAT INFOSYS EARNS REVENUE FROM SOFTWARE PRODUCTS. 1.B SOFTWARE PRODUCTS THE REVENUE FROM SOFTWARE PRODUCTS GREW 9.1% COMPA RED TO 42% IN THE PREVIOUS YEAR. OF THE SOFTWARE PRODUCTS REVENU E, 82.1% CAME FROM EXPORTS COMPARED TO 75.7% IN THE PREVIOUS YEAR. THE COMPANY HAS INCURRED HUGE RESEARCH AND DEVELOP MENT EXPENDITURE AND THE SAME IS EVIDENT FROM THE PAGE 58 OF THE ANN UAL REPORT: 24 .2.6. RESEARCH AND DEVELOPMENT EXPENDITURE PARTICULARS YEAR ENDED MARCH 31, 2010 2009 CAPITAL 3 31 REVENUE 435 237 THE FIXED ASSETS SCHEDULE OF THE COMPANY SUGGESTS THAT IT OWNS INTANGIBLES IN THE FORM OF INTELLECTUAL PROPERTY R IGHTS. THE SAME IS CONTAINED ON PAGE 50 OF THE ANNUAL REPORT: 13 ITA NO.1222/DEL/2015 3. FIXED ASSETS PARTICULARS ORIGINAL COST DEPRECIATION AND AMORTIZA TION NET BOOK VALUE AS AT APRIL 1, 2009 ADDI- TIONS/ ADJUST- MENTS DELETIONS/ RETIRE- MENT/ ADJUST- MENTS AS AT MARCH 31, 2010 AS AT APRI L 1, 2009 FOR THE YEAR DELETIONS/ ADJUST- MENTS AS AT MARC H 31, 2010 AS AT MARC H 31, 2010 AS AT MARC H 31, 2009 GOODWILL 689 227 - 916 - - - - 916 689 LAND : FREEHOLD LEASEHOLD 172 113 6 36 - - 178 149 - - - - - - - - 178 149 172 113 BUILDINGS 2913 387 - 3300 535 210 - 745 2555 2378 PLANT AND MACHINERY 1183 213 133 1263 521 259 132 648 615 662 COMPUTER EQUIPMENT 1233 204 186 1251 960 272 186 1046 205 273 FURNITURE AND FIXTURE 720 99 109 710 359 151 107 403 307 361 LEASEHOLD IMPROVEMENTS 54 2 1 55 28 12 3 37 18 26 VEHICLES 4 1 - 5 1 1 - 2 3 3 INTELLECTUAL PROPERTY RIGHTS 12 - - 12 12 - - 12 - - 7093 1175 429 7839 2416 905 428 2893 4946 4677 PREVIOUS YEAR 5439 1999 345 7093 1986 761 331 2416 4677 ALSO, THE ANNUAL REPORT INDICATES THAT 'INFOSYS' BR AND IS ONE OF THE MOST IMPORTANT INTANGIBLE ASSETS OWNED BY THE COMPA NY. PAGE 15 OF THE ANNUAL REPORT SUPPORTS THE STATEMENTS: BRANDING : WE BELIEVE THAT THE INFOSYS BRAND IS ONE OF THE MOST IMPORTANT INTANGIBLE ASSETS THAT WE OWN. DURING TH IS FISCAL YEAR, WE HAVE BEEN APPRECIATED BY THE FOLLOWING BODIES AS A RECOGNITION OF HOW WE OPERATE AND CONDUCT BUSINESS : RANKED AS THE MOST ADMIRED COMPANY IN INDIA ACCORDI NG TO THE WALL STREET JOURNAL SURVEY 14 ITA NO.1222/DEL/2015 RANKED AMONG THE 50 MOST RESPECTED COMPANIES IN THE WORLD BY REPUTATION INSTITUTES GLOBAL REPUTATION PULSE 2009 RANKED AMONG THE TOP 25 COMPANIES IN BUSINESS WEEK S INFOTECH 100 RANKED AMONG THE TOP 25 COMPANIES IN THE WORLD FOR DEVELOPING LEADERS BY FORTUNE / HEWITT RANKED AS THE BEST COMPANY TO WORK FOR IN INDIA BY BUSINESS TODAYS NINTH SURVEY OF BEST COMPANIES TO WORK FOR . FROM THE ABOVE IT IS EVIDENT THAT INFOSYS IS FUNCTI ONALLY NOT COMPARABLE. INFOSYS OPERATES AS A FULL-FLEDGED RISK BEARING ENTREPRENEUR, UNDERTAKING FUNCTIONS AND BEARING RIS KS WHICH ARE FAR GREATER THAN THE ASSESSEE WHICH IS RISK MITIGATED C APTIVE SERVICE PROVIDER. THE FUNCTIONAL DIFFERENCE OF THE ASSESSEE WITH INFO SYS IS CAPTURED IN THE TABLE BELOW FOR YOUR GOODSELF'S CASE OF REFERENCE: PARTICULARS INFOSYS TECHNOLOGIES LIMITED XTSI RISK PROFILE OPERATES AS A FULL-FLEDGED RISK BEARING ENTREPRENEUR OPERATES AT MINIMAL RISKS AS THE 100% SERVICES ARE PROVIDED TO AES NATURE OF SERVICES EARNS REVENUE FROM SOFTWARE DEVELOPMENT SERVICES AND PRODUCTS PURE CONTRACT SOFTWARE DEVELOPMENT SERVICE PROVIDER REVENUE RS.21,140 CRORE RS.73.54 OWNERSHIP OF INTANGIBLES/ PRODUCTS OWNS 9 PATENTS AND HAS 224 PATENTS APPLICATIONS PENDING IN INDIA AND US. ALSO OWNS DOES NOT OWN ANY INTANGIBLES IN ANY FORM 15 ITA NO.1222/DEL/2015 SOFTWARE PRODUCTS (WHICH INCLUDES ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE) ONSITE VS OFFSHORE MORE THAN 50% OF THE INCOME IS FROM ONSITE SERVICES MOST OF THE REVENUE COMPOSITION IS OFFSHORE EXPENDITURE ON ADVERTISING SALES PROMOTION HAS INCURRED SELLING AND MARKETING EXPENDITURE TO THE TUNE OF 974 CRORE. HAS 65 MARKETING OFFICES IN TOTAL. DOES NOT UNDERTAKE ANY EXPENDITURE ON ADVERTISING/ SALES PROMOTION AS ENTIRE SERVICES REVENUE IS FROM AES. EXPENDITURE ON RESEARCH AND DEVELOPMENT RS.440 CRORE DOES NOT UNDERTAKE PRODUCT DEVELOPMENT, MERELY PROVIDES SOFTWARE DEVELOPMENT SERVICES TO AES. HE HAS REFERRED TO FOLLOWING DECISION: A) AGINITY TECHNOLOGIES ITA NO. 3856/D/2010 B) CIT V. AGINITY TECHNOLOGIES 262 CTR 291 (DEL) C) ATRENTA (INDIA) PVT. LTD. D) TOLUNA INDIA PVT. LTD. VS. ACIT (FORMERLY GREENF IELD ONLINE (P) LTD. 166 TTJ 128 (DEL) E) CORDYS R&D (INDIA) PVT. LTD. ITA N. 1092/HYD/201 0 DATED 3.1.2014 WHEREIN THE ITAT EXCLUDED INFOSYS TECHNOLO GIES AS IT IS NOT FUNCTIONALLY DIFFERENT BUT IS A GIANT COMPAN Y IN THE FIELD OF SOFTWARE DEVELOPMENT SERVICES HAVING CONSIDERABL E BRAND VALUE AND ASSUMED ALL RISKS RELATED TO BUSINESS. FU RTHER, APPEAL OF REVENUE AGAINST THIS ORDER HAS BEEN DISMI SSED BY THE HONBLE ANDHRA PRADESH HIGH COURT VIDE AN ORDER DATED 18.06.2014 IN ITA NO. 371/2014. 13. ON THE OTHER HAND THE LD. DR RELIED ON FINDINGS OF DRP. 16 ITA NO.1222/DEL/2015 14. WE HAVE CONSIDERED RIVAL SUBMISSIONS, PERUSED T HE MATERIAL ON THE RECORD. IN THE CASE OF AGNITY TECHNOLOGIES, ITA NO. 3856/DEL/2010, A COORDINATE BENCH HAS HELD AS UNDER:- IT IS ARGUED THAT THE CASE OF THE ASSESSEE IS NOT COMPARABLE WITH INFOSYS TECHNOLOGIES LTD., THE REASON BEING THAT THE LATTER IS GIANT IN THE AREA OF DEVELOPMENT OF SOFTWARE AND IT ASSUMES ALL RISKS, L EADING TO HIGHER PROFIT. ON THE OTHER HAND, THE ASSESSEE IS A CAPTIV E UNIT OF ITS PARENT COMPANY IN THE USA AND IT ASSUMES ONLY LIMITED CURR ENCY RISK. HAVING CONSIDERED THESE POINTS, WE ARE OF THE VIEW THAT TH E CASE OF AFORESAID INFOSYS AND THE ASSESSEE ARE NOT COMPARABLE AT ALL AS SEEN FROM THE FINANCIAL DATA ETC. OF THE TWO COMPANIES MENTIONED EARLIER IN THIS ORDER. THEREFORE, WE ARE OF THE VIEW THAT THIS CASE IS REQ UIRED TO BE EXCLUDED 15. THE AFORESAID ORDER WAS UPHELD BY THE HONBLE D ELHI HIGH COURT AFTER TAKING NOTE OF THE CHART AS GIVEN BELOW: BASIC PARTICULAR INFOSYS TECHNOLOGIES LTD. ASSESSEE RISK PROFILE OPERATE AS FULL-FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100 PERCENT SERVICES ARE PROVIDED TO AES NATURE OF SERVICES DIVERSIFIED-CONSULTING, APPLICATION DESIGN, DEVELOPMENT, RE- ENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS CONTRACT SOFTWARE DEVELOPMENT SERVICES 17 ITA NO.1222/DEL/2015 MANAGEMENT, ETC. (REFER PAGE 117 OF THE PAPER BOOK) TURNOVER 20,264 CRORES 209.83 CRORES OWNERSHIP BRANDED/PROPRI ETARY PRODUCTS DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS MCONNECT. ALSO THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE) ONSITE VS. OFFISHORE AS MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E. SERVICES PERFORMED AT THE CUSTOMERS LOCATION OVERSEAS). AND OFFSHORE (50.20 PER CENT) REFER P. 117 OF THE PAPER BOOK) THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES THE APPELLANT PROVIDES ONLY OFFSHORE SERVICES (I.E. REMOTELY FROM INDIA) EXPENDITURE ON ADVERTISING/SALE S PROMOTION AND BRAND BUILDING RS. 80 CRORES RS. NIL (AS THE 1-PERCENT SERVICES ARE PROVIDED TO AES) EXPENDITURE ON RESEARCH AND DEVELOPMENT RS. 236 CRORES RS. NIL OTHER 100 PER CENT OFFSHORE (FROM INDIA) 18 ITA NO.1222/DEL/2015 16. ON THE BASIS OF THE ABOVE CHART, THE HONBLE HI GH COURT AFFIRMED THE CONCLUSION THAT A CAPTIVE UNIT OF A COMPARABLE COMPANY WHICH ASSUMED ONLY A LIMITED RISK CANNOT BE COMPARED WITH A GIANT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE WHO ASSUMES ALL TYPES OF RISKS LEADING TO HIGHER PROFITS. THE FACTS OF THE APPELLA NT ARE AKIN AND THE COMPARATIVE CHART OF ASSESSEE VIS A-VIS M/S INFOSY S CLEARLY DEPICTS THE SAME AND THEREFORE, DO NOT WARRANT ANY DIFFERENT CO NCLUSION. THE APPELLANT IS ALSO CAPTIVE SERVICE PROVIDER TO ITS A E AND AS SUCH, M/S. INFOSYS LTD. IS NOT A VALID COMPARABLE WITH THE APP ELLANT AND WE DIRECT ITS EXCLUSION FROM THE COMPARABLES. M/S. WIPRO TECHNOLOGY SERVICES LIMTIED 17. AS REGARDS THIS COMPARABLE, THE ASSESSEE HAD TH E FOLLOWING OBJECTIONS TAKEN BEFORE THE LOWER AUTHORITIES :- IN THIS REGARD, THE ASSESSEE WISHES TO SUBMIT THA T WIPRO SHOULD BE REJECTED ON THE GROUND THAT THERE IS INSUFFICIENT F INANCIAL INFORMATION IN THE ANNUAL REPORT TO CONCLUDE ON ITS COMPARABILITY. 19 ITA NO.1222/DEL/2015 AS PER THE PROFIT AND LOSS ACCOUNT OF FY 2009-10, 1 00% INCOME IS FROM 'REVENUE' AND NO FURTHER BREAK UP IS PROVIDED, AS DEPICTED IN THE EXTRACT OF PAGE 5 BELOW: SCHEDULE 2010 2009 INCOME REVENUE 3,993,928,222 3,643,586,896 OTHER INCOME 13 111,817,731 208,593,516 4,105,745,953 3,852,180,412 NO REVENUE OR SEGMENTAL BREAK UP IS AVAILABLE BETWE EN SOFTWARE SERVICES AND INFRASTRUCTURE SUPPORT SERVICES AND NO INFORMATION ABOUT THE NATURE OF BUSINESS IS AVAILABLE IN THE AN NUAL REPORT. FURTHER, THE 'BALANCE SHEET ABSTRACT AND THE COMPAN Y'S GENERAL BUSINESS PROFILE' SECTION ON PAGE 14 DOES NOT PROVI DE ANY INFORMATION REGARDING THE TYPE OF PRODUCTS/ SERVICE S THE COMPANY DEALS IN AS SHOWN BELOW: V. GENERIC NAMES OF THE THREE PRODUCTS/SERVICES OF THE COMPANY(AS PER MONETARY TERMS) (I) ITEM CODE NO (ITC COD.) PRODUCT DESCRIPTION (II) ITEM CODE NO (ITC CODE) PRODUCT DESCRIPTION (III) ITEM CODE NO (ITC CODE) PRODUCT DESCRIPTION YOUR GOODSELF HAS ALSO DISCUSSED THE POINT ON CITIG ROUP TECHNOLOGY SERVICES (NOW KNOWN AS WIPRO TECHNOLOGY SERVICES LI MITED) BEING TAKEN OVER FOR A CASH CONSIDERATION OF $127 MILLION BY WIPRO 20 ITA NO.1222/DEL/2015 LIMITED AS A RESULT OF WHICH WIPRO TECHNOLOGY SERVI CES LIMITED WOULD NOW BE PROVIDING INFORMATION TECHNOLOGY SERVI CES AND SOLUTIONS TO CITI ENTITIES WORLDWIDE. THE SAME HAS ALSO BEEN PROVIDED IN THE ANNUAL REPORT ON PAGE 1 AS SHOWN BE LOW: OPERATIONS WIPRO LIMITED (WIPRO) HAS REACHED AN AGREEMENT WITH CITIGROUP INC. FOR ACQUIRING ALL OF CITIGROUP INTEREST IN CTS W.E.F. 21 JANUARY 2009. ON 21 JANUARY 2009, WIPRO SIGNED A MASTER SER VICE AGREEMENT (MSA) WITH CITIGROUP INC. FOR THE DELIVER Y OF TECHNOLOGY INFRASTRUCTURE SERVICES AND APPLICATION DEVELOPMENT AND MAINTENANCE SERVICES FOR THE PERIOD OF SIX YEARS. T HE MSA PROVIDES FOR THE DELIVERY OF AT LEAST $500 MILLION IN SERVIC E REVENUES OVER THE PERIOD OF THE CONTRACT. AFTER THE ACQUISITION BY WI PRO, THE NAME OF CTS WAS CHANGED TO WIPRO TECHNOLOGY SERVICES LIMITE D ('WTS' OR 'THE COMPANY') ON 16 MARCH 2009. IN THIS REGARD, THE ASSESSEE WISHES TO SUBMIT THAT ACCEPTING WIPRO TECHNOLOGY AS A COMPARABLE WOULD CONTRADICT YOUR OW N VIEWS ON THE FILTERS TO BE ADOPTED, SINCE YOUR GOODSELF HAS ACCE PTED IN THE SHOW CAUSE NOTICE ITSELF THAT COMPANIES THAT ARE AFFECTE D BY FACTORS LIKE MERGERS AND ACQUISITIONS OR SUCH OTHER FACTORS WHIC H AFFECT THE OPERATIONS OF THE COMPANY SUBSTANTIALLY SHOULD NOT BE USED AS COMPARABLES AS THEY WILL NOT PROVE TO BE GOOD BENCH MARKS. THE RELEVANT EXTRACT AS ON PAGE 5 HAS BEEN PROVIDED BEL OW FOR YOUR EASY REFERENCE: 21 ITA NO.1222/DEL/2015 8. SELECT COMPANIES BASED ON AN ANALYSIS OF THE NATURE OF OPERATIONS UNDERTAKEN BY EACH OF THE COMPANIES. THE RATIONALE FOR EXCLUDING COMPANIES THAT ARE AFFECTED BY FACTORS LIKE PERSISTENT LOSSES, DECLINING SALES, EXTRAORDINARY INCOME OR EXPENSE, MERGERS AND ACQUISITIONS OR OTHER SUCH FACTORS WHICH AFFECT THE OPERATIONS OF THE COMPANY SUBSTANTIALLY SHOULD NOT BE USED AS COMPARABLES AS THEY WILL NOT PROVE TO BE GOOD BENCHMARKS, IS DISCUSSED SUBSEQUENTLY. AN ANALYSIS OF COMPANIES IN THE ACCEPT/REJECT MATRIX HAS ALSO BEEN DONE BY THIS OFFICE WITH RESPECT TO THE NATURE OF FUNCTION/OPERATIONS. AND THE EXTRACT REGARDING THE SAME POINT HAS ALSO B EEN STATED ON PAGE 7 OF THE SHOW CAUSE NOTICE ISSUED BY YOUR GOOD SELF : VIII COMPANIES THAT ARE AFFECTED BY SOME PECULIAR ECONOM IC CIRCUMSTANCES: COMPANIES THAT ARE AFFECTED BY FACTORS LIKE PERSIST ENT LOSSES, DECLINING SALES, EXTRAORDINARY INCOME OR EXPENSE, M ERGERS AND ACQUISITIONS OR OTHER SUCH FACTORS WHICH AFFECT THE OPERATIONS OF THE COMPANY SUBSTANTIALLY SHOULD NOT BE USED AS COMPARA BLES AS THEY WILL NOT PROVE TO BE GOOD BENCHMARKS. THE RELEVANT EXTRACTS FROM THE ANNUAL REPORT ARE EN CLOSED AS ITEM 5 IN THE SUPPORTING BOOKLET ATTACHED TO THE SUBMISSIO N. COMPANY SHOULD BE REJECTED AS IT IS EARNING SUPER-P ROFITS THE ASSESSEE SUBMITS THAT WIPRO TECHNOLOGY HAS POST ED AN OPERATING MARGIN OF MORE THAN 70% AND UNDER THE CIR CUMSTANCES WHEN THE SOFTWARE INDUSTRY WAS FACING RECESSION. HE NCE WIPRO 22 ITA NO.1222/DEL/2015 TECHNOLOGY HAS EARNED SUPER PROFITS AND SUCH COMPAN IES SHOULD BE REJECTED WHILE ARRIVING AT THE ALP. THE ASSESSEE WI SHES TO BRING TO YOUR GOODSELF'S NOTICE THE FOLLOWING JUDICIAL DECIS IONS IN SUPPORT OF THIS CONTENTION: EGAIN COMMUNICATION PRIVATE LIMITED (ITA NO. 1885/PN/2007) PHILIPS SOFTWARE CENTRE PRIVATE LIMITED VS. ACIT (1 19 TTJ 721) DCIT VS. M/S QUARK SYSTEMS PRIVATE LIMITED (ITA NO.100/CHD/ 2009) ITO, MUMBAI VS. M/S SAUNAY JEWELS PRIVATE LIMITED [ ITA NO. 5758/MUM/2007] M/S SAP LABS INDIA PRIVATE LIMITED VS. ACIT, BANGAL ORE [ITA NO. 398/BANG/2008] M/S ADOBE SYSTEMS INDIA PRIVATE LIMITED VS. ACIT, N OIDA (ITA NO. 5043/DE1/2010) M/S NIT LTD VS. ACIT (2011-TII-16-ITAT-DEL-TP) SAPIENT CORPORATION PRIVATE LIMITED (ITA NO. 5263/D E1/2010) CONSIDERING THE ABOVE FACTS, IT WOULD BE INCORRECT TO ACCEPT WIPRO TECHNOLOGY AS A COMPARABLE ON THE GROUNDS THAT THER E IS LACK OF SUFFICIENT FINANCIAL INFORMATION IN PUBLIC DOMAIN A S WELL AS THE FACT THAT THE COMPANY IS AFFECTED BY PECULIAR ECONOMIC C IRCUMSTANCES. 18. LD. DR RELIED UPON THE ORDER OF THE DRP. 23 ITA NO.1222/DEL/2015 19. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND HAVE GONE THROUGH THE RECORDS. THE ARGUMENTS O F THE LD. AR THAT ONLY ON ACCOUNT OF SUPER NORMAL PROFIT THIS COMPARA BLE SHOULD BE EXCLUDED IS NOT TENABLE IN THE LIGHT OF THE HONBLE JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF CHRYSCAPITAL.(SUPRA) BEFORE THE DRP, THE ASSESSEE RAISED THE OTHER OBJECTIONS AS WERE RAISED BEFORE US I.E. THIS COMPANY IS RENDERING DIFFERENT SERVICES, THERE IS I NSUFFICIENT SEGMENTAL INFORMATION, IT FAILS RPT FILTER AND THERE IS AN EX TRA ORDINARY EVENT DURING THE YEAR. THE DRP OBSERVATION ON THE AFORESAID OBJ ECTION IS AS UNDER:- DRP HAS CONSIDERED THE OBJECTION OF THE ASSESSEE. D RP IS OF THE OPINION THAT THE EVENT IS NOT EXTRAORDINARY IN THE SENSE THAT THIS IS GOING TO AFFECT THE PROFIT MARGIN OF THE COMPARABLE COMPANY. SO CALLED EXTRAORDINARY EVENT IS THAT THIS COMPANY ACQ UIRED 100% HOLDING OF CITY TECHNOLOGY SERVICES LTD. THIS IS T YPICALLY A SHARE HOLDER ACTIVITY USING THE RESOURCES OF RESERVES OR SURPLUS. THEREFORE, THIS CANNOT BE TAKEN AS AFFECTING THE FUNCTIONS PER FORMED BY THE ASSESSEE RESULTING INTO AFFECTING ITS PROFITABILITY . THEREFORE, DRP REJECTS THE ARGUMENTS OF THE ASSESSEE AND JUSTIFIES THE ACTION OF THE TPO. 24 ITA NO.1222/DEL/2015 WE CONCUR WITH THE FINDING OF DRP WHILE REPELLING T HE OBJECTION REGARDING EXTRA-ORDINARY EVENT TAKING PLACE FOR THI S COMPARABLE, BUT FOR A DIFFERENT REASON, I.E. THE RELEVANT EXTRA ORDINARY EVENT TOOK PLACE IN THE PRECEDING FINANCIAL YEAR I.E. FY 2008-09. HOWEVER, WE CONCUR WITH THE SUBMISSIONS ADVANCED BY LD AR THAT THE DIRECTORS R EPORT AND NOTES TO ACCOUNT FOR THIS COMPARABLE ARE NOT AVAILABLE IN PU BLIC DOMAIN. LD. DR HAS NOT BEEN ABLE TO CONTROVERT THIS FACT. SINCE S UFFICIENT INFORMATION FOR THIS COMPARABLE IS NOT AVAILABLE, WE DIRECT EXCLUSI ON OF THIS COMPANY AS A COMPARABLE. CALIBER POINT BUSINESS SOLUTIONS LTD. & R SYSTEMS INTERNATIONAL LTD. 20. WE FIND THAT THE LOWER AUTHORITIES HAVE MERELY REJECTED THESE COMPARABLES ON THE GROUND THAT THESE COMPANIES HAVE DIFFERENT FINANCIAL YEAR ENDING 31 ST DECEMBER 2009. WE FIND THAT THIS ISSUE IS NO LONG ER RES INTEGRA. IN THE CASE OF M/S. MERCER CONSULTING (INDIA) PV T. LTD. IN ITA NO.966/DEL/2014, ITAT BY ORDER DATED 06.06.2014, D EALT A SIMILAR ISSUE AS UNDER :- 25 ITA NO.1222/DEL/2015 11.7. WE FIND THAT R. SYSTEMS INTERNATIONAL LTD. H AS BEEN EXCLUDED BY THE TPO SOLELY FOR THE REASON THAT ITS FINANCIAL YEAR IS DIFFERENT WITHOUT CONSIDERING THAT THE DATA FOR THE FINANCIAL YEAR ADOPTED BY THE ASSESSEE CAN BE EASILY COMPILED FROM THE AUDITED ST ATEMENTS OF SUCH COMPANY. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDE R ON THIS ISSUE AND REMIT THE MATTER TO THE TPO/AO FOR INCLUDING TH E CASE OF R. SYSTEMS INTERNATIONAL LTD. IN THE LIST OF COMPARABL ES BY WORKING OUT THE FIGURES RELEVANT TO THE FINANCIAL YEAR ENDING 3 1.3.09 FROM THE AUDITED ACCOUNTS OF R. SYSTEMS INTERNATIONAL LTD. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE TPO TO RE-EXAMINE THESE COMPARABLES BY REWORKING THEIR MARGINS AS ON 31 ST MARCH 2010 AS AFORESTATED IN THE ORDER. ITES SEGMENT ACCENTIA TECHNOLOGIES LTD. 21. AS REGARDS THIS COMPARABLE, IT HAS BEEN BROUGHT TO OUR NOTICE DURING THE YEAR UNDER CONSIDERATION. THERE HAS BEE N AN EXTRA ORDINARY EVENT IN THE DETAILS OF WHICH ARE GIVEN AT PAGE 78 OF ANNUAL REPORT AS UNDER :- (B) NOTES TO ACCOUNTS 26 ITA NO.1222/DEL/2015 1. AMALGAMATION OF ASSCENT INFOSERVE PRIVATE LIMITED W ITH THE COMPANY. PURSUANT TO THE SCHEME OF AMALGAMATION OF THE ERSTW HILE ASSCENT LNFOSERVE PRIVATE LIMITED (SUBSIDIARY OF TH E COMPANY) WITH THE COMPANY AS APPROVED BY THE SHAREHOLDER IN THE C OURT CONVENED MEETING HELD ON THE 25 TH DAY OF APRIL, 2009 AND SUBSEQUENTLY SANCTIONED BY THE HONORABLE HIGH COURT OF JUDICATUR E AT MUMBAI VIDE ORDER DATED 21ST AUGUST 2009 AND HONORABLE HIGH COU RT OF KARNATAKA AT BANGALORE VIDE ORDER DATED 6TH FEBRUARY 201 0, T HE ASSETS AND LIABILITIES OF THE ERSTWHILE COMPANY WAS TRANSFERRE D AND VESTED IN THE COMPANY WITH EFFECT FROM 1 ST APR, 2008 AND THE SCHEME HAS BEEN GIVEN EFFECT TO IN THE ACCOUNTS OF THE YEAR. ASSCENT LNFOSERVE PRIVATE LIMITED WAS ENGAGED IN TH E BUSINESS OF MEDICAL TRANSCRIPTION AND CODING AND HAS THE SOF TWARES WHICH ARE BEING USED BY THE ACCENTIA TECHNOLOGIES LTD IN SERV ING THE END TO END RESULTS. AS A CONSEQUENCE OF AMALGAMATION: THE ASSETS, LIABILITIES AND ACCUMULATED RESERVES OF THE ERSTWHILE ASSCENT INFOSERVE PRIVATE LIMITED (AS AT 1 ST APR 2008) HAVE BEEN INCORPORATED IN THE BOOKS OF ACCOUNTS OF THE C OMPANY AS PER 'POOLING OF INTEREST' METHOD AS PRESCRIBED BY A S14 NOTIFIED UNDER COMPANIES AUDITING STANDARDS 2006. THE RESULT ANT GOODWILL AS SPECIFIED IN THE SCHEME OF AMALGAMATION HAS BEEN 27 ITA NO.1222/DEL/2015 INCORPORATED IN THE BOOKS OF THE ACCOUNTS OF THE CO MPANY AND SAME WILL BE AMORTIZED OVER THE PERIOD OF 10 YEARS . THE FINANCIAL RESULTS OF THE COMPANY FOR THE YEAR E NDED 31 ST MARCH, 2010 ARE INCLUSIVE OF THE FIGURES OF THE AMA LGAMATING COMPANY. 11,88,313 EQUITY SHARES (8.84% OF THE COMPANY'S INC REASED SHARE CAPITAL) HAVE BEEN ISSUED TO THE SHAREHOLDERS OF THE ASSCENT INFOSERVE PRIVATE LIMITED IN THE RATIO OF O NE EQUITY SHARE IN ACCENTIA TECHNOLOGIES LTD FOR EVERY 1.6 EQ UITY SHARES HELD IN ASSCENT INFOSERVE PRIVATE LIMITED. PENDING COMPLETION OF THE RELEVANT FORMALITIES OF T RANSFER OF CERTAIN ASSETS AND LIABILITIES ACQUIRED PURSUANT TO THE SCH EME, SUCH ASSETS AND LIABILITIES REMAIN IN THE NAME OF THE ERSTWHILE AMA LGAMATING COMPANIES. IN VIEW OF THE ABOVE AMALGAMATION BEING EFFECTIVE T HE FIGURES FOR THE YEAR ENDED 31 ST MAR, 2010 ARE INCLUSIVE OF THE FIGURES RELATING TO THE AMALGAMATING COMPANY AND THUS ARE NOT COMPAR ABLE WITH THOSE OF THE PREVIOUS YEAR. 2. CONVERSION OF SHARE WARRANTS TO EQUITY SHARES: THE COMPANY HAS ISSUED 400000 EQUITY SHARES DURING THE YEAR AT THE RATE OF RS.135.99 PER SHARE INCLUDING THE SH ARE PREMIUM OF RS.125.99 PER SHARE AS PART OF CONVERSION OF SHARE WARRANTS. THESE 28 ITA NO.1222/DEL/2015 SHARES WOULD BE ENTITLED FOR THE FULL DIVIDEND FOR THE YEAR, IN ACCORDANCE WITH THE TERMS OF THE ISSUE. THE EARNING S PER SHARE HAS BEEN CALCULATED CONSIDERING THE PRO-RATA INCREASE I N THE EQUITY CAPITAL. AMOUNT RECEIVED RS 2,710,000 DURING THE YE AR 2007-08 TOWARDS 5HARE WARRANTS HAVE BEEN FORFEITED AND ADJU STED IN THE CAPITAL RESERVE ACCOUNT. 3. THE COMPANY HAS BOUGHT ANOTHER 13% STAKE IN TRAN S SERVICE INC MAKING A TOTAL INVESTMENT OF 23%. DURING THE YE AR, COMPANY INVESTED USD ONE AND HALF MILLION FOR 260 EQUITY SH ARES OF TRANS SERVICE INC, USA. 22. IN THE LIGHT OF THE AFORESAID AMALGAMATION, WHI CH IS HAVING AN IMPACT ON THE FIGURES DISCLOSED AS OF 31 ST MARCH 2010, WE FIND FORCE IN THE CONTENTION OF THE LD. AR, THIS COMPANY SHOULD B E EXCLUDED FROM THE COMPARABLE AND WE ORDER ACCORDINGLY. TCS E SERVE INTERNATIONAL LTD. & TCS E-SERVE LTD. 23. WE FIND THAT FOR BOTH THESE COMPARABLES, THE FO LLOWING OBJECTIONS WERE RAISED BEFORE US :- TCS E-SERVE INTERNATIONAL LTD. ('TCS INTERNATIONAL ') WHY TCS INTERNATIONAL SHOULD BE REJECTED? 29 ITA NO.1222/DEL/2015 EXCEPTIONAL YEAR OF OPERATION - FIRST FULL-YEAR OF OPERATION SINCE ITS ACQUISITION BY TCS [PG. 8 OF ANNUAL REPOR T],A COMPANY WITH A HUGE BRAND NAME; THREE-FOLD INCREASE IN TURNOVER AND HUGE PROFITS EARNED DURING THE YEAR VIS-A-VIS PRECEDING YEAR WHE N THE COMPANY WAS MAKING LOSSES [PG. 21 OF ANNUAL REPORT]. EARNING SUPER-NORMAL PROFITS DUE TO EXCEPTIONAL YEA R OF OPERATION - RELIANCE PLACED ON MAERSK GLOBAL SERVIC E CENTRES (INDIA) PRIVATE LIMITED VS. ACIT (ITA NO. 7466/MUM/2012) (S B) (AY 2008- 09) - PARA 99 INSUFFICIENT SEGMENTAL INFORMATION: BROAD RANGE OF ITES SERVICES COMPRISING OF 'FINANCIAL INFORMATION PROCE SSING', 'CUSTOMER CONTACT' AND 'FUNCTIONAL TESTING SERVICES'; IT SERV ICES COMPRISE OF SOFTWARE TESTING, VERIFICATION AND VALIDATION OF SO FTWARE AT THE TIME OF IMPLEMENTATION AND DATA CENTRE MANAGEMENT ACTIVITIE S. [PG. 32 OF ANNUAL REPORT] NO BREAK-UP OF SEGMENTAL DETAILS IN ANNUAL REPORT [PG. 40 OF ANNUAL REPORT] - RELIANCE PLACED ON CARL YLE INDIA ADVISORS PVT. LTD. VS. DCIT (ITA NO.7367/MUM/2012) (AY 2008- 09) - PARA 12, PG. 9 AND TELECHORDIA TECHNOLOGIES INDIA P. LTD. VS . ACIT (ITA NO.7821/MUM/2011) (AY 2007-08) - PG.17. 3. TCS E-SERVE LIMITED ('TCS LIMITED')' WHY TCS LIMITED SHOULD BE REJECTED? 30 ITA NO.1222/DEL/2015 EXCEPTIONAL YEAR OF OPERATION - FIRST FULL-YEAR OF OPERATION SINCE ITS ACQUISITION BY TCS [PG. 13 OF ANNUAL REPO RT], A COMPANY WITH A HUGE BRAND NAME; MORE THAN TWO- FOLD INCREAS E IN PBT VIS-A- VIS PRECEDING YEAR [PG. 92 OF ANNUAL REPORT]. EARNING SUPER-NORMAL PROFITS DUE TO EXCEPTIONAL YEA R OF OPERATION - RELIANCE PLACED ON MAERSK GLOBAL SERVIC E CENTRES (INDIA) PRIVATE LIMITED VS. ACIT (ITA NO.7466/MUM/2012) (SB ) (AY 2008- 09) - PARA 99 INSUFFICIENT SEGMENTAL INFORMATION: BROAD RANGE OF ITES SERVICES COMPRISING OF PROCESSING, COLLECTIONS, CUS TOMER CARE AND PAYMENTS IN RELATION TO THE SERVICES OFFERED BY CIT IGROUP TO ITS CORPORATE AND RETAIL CLIENTS; AND IT SERVICES COMPR ISE OF SOFTWARE TESTING, VERIFICATION AND VALIDATION OF SOFTWARE AT THE TIME OF IMPLEMENTATION AND DATA CENTRE MANAGEMENT ACTIVITIE S. [PG. 106 OF ANNUAL REPORT] NO BREAK-UP OF SEGMENTAL DETAILS AVA ILABLE IN ANNUAL REPORT [PG.118 OF ANNUAL REPORT] - RELIANCE PLACED ON CARLYLE INDIA ADVISORS (SUPRA) AND TELECHORDIA TECHNOLOGIES (SUPR A). 24. THE TPOS OBSERVATION IS AS UNDER :- AS REGARDS THE FUNCTIONAL PROFILE, BOTH THESE CASE S OF TCS E SERVE AND TCS E SERVE INTERNATIONAL LTD., ARE FUNCTIONALL Y SIMILAR TO THE CASE OF THE ASSESSEE AS BOTH ARE PROVIDING SERVICES IN T HE IT ENABLED SERVICES 31 ITA NO.1222/DEL/2015 SEGMENTS. THE RELEVANT EXTRACTS FROM THE RESPECTIV E ANNUAL REPORTS ARE GIVEN AS UNDER :- TCS E-SERVE INTERNATIONAL LTD. AS PER P-39/AR:-''THE COMPANY IS ENGAGED IN BUSINES S PROCESS OUTSOURCING (TRANSACTION PROCESSING) SERVIC ES TO THE BANKING &FINANCIAL SERVICES INDUSTRY (BFSI) AND TRAVEL, TOURISM AND HOSPITALITY (TTH) , WHICH ARE CONSIDERED AS INDUSTRY SEGMENT. GEOGRAPHIC SEGMENTS OF THE COMPANY ARE AMERICAS, EUROPE AND OTHERS.' TCS E-SERVE LTD. AS PER P-33/AR:-'COMPANY PROVIDES A BROAD RANGE OF SERVICES THAT CATER TO THE LTD. PROCESS MANAGEMENT REQUIREMENTS FOR DELIVERY .OF WIDE RANGE OF FINANCI AL PRODUCTS AND ENTERPRISE SUPPORT FUNCTIONS, WHICH IN CLUDE- FINANCIAL INFORMATION PROCESSING (DATA PROCESSING): CUSTOMER CONTACT (VOICE BASED) FUNCTIONAL TESTING SERVICES' AS PER P-74/AR:-'THE COMPANY IS ENGAGED IN BUSINESS PROCESS OUTSOURCING (TRANSACTION PROCESSING) SERVIC ES TO THE BANKING &FINANCIAL SERVICES INDUSTRY (BFSI) AND TRAVEL, TOURISM AND HOSPITALITY (TTH), WHICH ARE CONSIDERED AS INDUSTRY SEGMENT. GEOGRAPHIC SEGMENTS OF THE COMPANY ARE INDIA, AMERICAS, EUROPE AND OTHERS. ' AS PER P-105/AR:-'TCS E-SERVE LIMITED IS ENGAGED IN THE BUSINESS OF PROVIDING INFORMATION TECHNOLOGY - ENABLED SERVICES (ITES) / BUSINESS PROCESS OUTSOURC ING (BPO) SERVICES, PRIMARILY TO CITIGROUP ENTITIES GLO BALLY. THE COMPANY'S OPERATIONS BROADLY COMPRISE OF TRANSACTION PROCESSING AND TECHNICAL SERVICES. TRANSACTION PROCESSING INCLUDES THE BROAD SPECTRUM OF ACTIVITIES INVOLVING THE PROCESSING, COLLECTIONS, C USTOMER CARE AND PAYMENTS IN RELATION TO THE SERVICES OFFER ED BY CITIGROUP TO ITS CORPORATE AND RETAIL CLIENTS. ' IN VIEW OF THE ABOVE DISCUSSION, BOTH TCS E SERVE A ND TCS E SERVE INTERNATIONAL LTD. SHALL BE USED AS COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTION RELATING TO PROVISION OF ITES USING TNMM. 32 ITA NO.1222/DEL/2015 25. WE HAVE CAREFULLY CONSIDERED THE CONTENTION RAI SED BY BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE FIN D THAT THE ARGUMENT OF SUPER NORMAL PROFIT AND EXCEPTIONAL YEAR OF OPERATI ONS, IS NOT A VALID GROUND IN THE LIGHT OF DECISION IN CHRYSCAPITAL (SU PRA). AS REGARDS THE OBJECTION IN RESPECT TO INSUFFICIENT SEGMENTAL INFO RMATION IS CONCERNED, WE FIND NO MERIT IN THE SAME. ON A PERUSAL OF THE ANNUAL REPORT OF TCS E-SERVE LTD., IT IS OBSERVED THAT THE COMPANY IS EN GAGED IN BPO ACTIVITIES UNDER A SINGLE SEGMENT. NOTE 8 AT PAGE 117 OF ANNUAL ACCOUNTS STATE AS UNDER :- 8. SEGMENT INFORMATION CONSEQUENT TO REORGANISATION OF ITS GLOBAL ORGANISA TION WITH THE OBJECTIVE OF MAKING INDUSTRY PRACTICE ITS FOCAL POI NT FOR PERFORMANCE EVALUATION AND INTERNAL1INANCIAL REPORTING AND DECI SION MAKING, THE COMPANY HAS REVIEWED AND REVISED THE MANNER IN WHIC H IT VIEWS THE BUSINESS RISKS AND RETURNS AND MONITORS ITS OPERATI ONS. ACCORDINGLY AS REQUIRED UNDER ACCOUNTING STANDARD 17 'SEGMENT REPO RTING' (AS- 17), THE FORMAT OF REPORTING PRIMARY SEGMENT INFORM ATION HAS BEEN CHANGED TO BUSINESS SEGMENTS AND SECONDARY SEGMENT INFORMATION HAS BEEN CHANGED TO GEOGRAPHY. 33 ITA NO.1222/DEL/2015 THE COMPANY IS ENGAGED IN BUSINESS PROCESS OUTSOURC ING (TRANSACTION PROCESSING) SERVICES TO THE BANKING & FINANCIAL SERVICES INDUSTRY (BFSI), WHICH IS CONSIDERED AS A SINGLE SE GMENT. GEOGRAPHIC SEGMENTS OF THE COMPANY ARE INDIA, AMERI CAS, EUROPE AND OTHERS. 26. MOREOVER, THE PRINCIPAL SOURCE OF REVENUE OF TH IS COMPARABLE IS ONLY ONE I.E. TRANSACTION PROCESSING AND OTHER SERV ICES OF RS.1.35 CRORES CREDITED IN THE P&L ACCOUNT (PAGE 91 OF THE ANNUAL REPORTS). THE LD. AR HAS NOT BEEN ABLE TO SUBSTANTIATE THAT THE OTHER SERVICES ELEMENT IS HAVING A DIFFERENT NATURE OR CLASS VIS--VIS TRANSA CTION PROCESSING RECEIPT OF THIS COMPARABLE. CONTRARY TO THIS, THE AUDITED ANNUAL ACCOUNTS, CERTIFY THAT BOTH, THESE RECEIPTS ARE RANK PARRI PASSU AND HAVE THE SAME NATURE AND FUNCTION. SIMILAR IS THE POSITION WITH M/S. TC S E-SERVE INTERNATIONAL LTD. SO THEREFORE WE UPHOLD THE INCLU SION OF THESE TWO COMPARABLES. 27. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. 34 ITA NO.1222/DEL/2015 ORDER PRONOUNCED IN THE OPEN COURT ON THIS 8 TH DAY OF SEPTEMBER, 2015. S SD/- SD/- (R.S. SYAL) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: THE 8 TH DAY OF SEPTEMBER, 2015 TS COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI