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ITA 1333/DEL/2015

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5387 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 09-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : I-2 : NEW DELHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO.1333/DEL/2015 ASSESSMENT YEAR: 2010-11 KNOWLEDGE PLATFORM INDIA PVT. LTD., C/O RAVI GUPTA, ADVOCATE, E-6A, KAILASH COLONY, NEW DELHI. PAN: AACCK1186E VS. DCIT, CIRCLE-14(2), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI P.C. YADAV, ADVOCATE REVENUE BY : SHRI RAKESH KUMAR, SR. DR DATE OF HEARING : 10.01.2019 DATE OF PRONOUNCEMENT : 29.01.2019 ORDER PER R.K. PANDA, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 21.11.2014 PASSED BY THE DRP-14, NEW DELHI, RELATING TO ASSESS MENT YEAR 2010-11. 2. GROUND NOS.1,4 AND 5 BEING GENERAL IN NATURE ARE DISMISSED. 3. GROUND OF APPEAL NO.3 BY THE ASSESSEE READS AS U NDER:- ITA NO.1333/DEL/2015 2 3. THAT THE LD.A.O/DRP HAS ERRED ON FACTS AND IN L AW IN MAKING THE ADDITION OF RS.10,470 BY INVOKING THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT, 1961. 4. THE LD. COUNSEL FOR THE ASSESSEE, AT THE TIME OF HEARING, DID NOT PRESS THIS GROUND DUE TO SMALLNESS OF THE AMOUNT FOR WHICH THE LD. DR HAS NO OBJECTION. ACCORDINGLY, GROUND OF APPEAL NO.3 IS DISMISSED AS NOT PRESSED. 5. GROUND OF APPEAL NOS.2.1 TO 2.5 BY THE ASSESSEE READ AS UNDER:- 2.1 THAT THE HON'BLE MEMBERS OF THE DRP HAVE ERRED ON FACTS AND IN LAW IN HOLDING THAT THE TPO WAS CORRECT IN THE SELECTION O F COMPARABLES AND IN UPHOLDING THE ADJUSTMENTS OF RS.88,04,775 U/S 92CA OF THE INCOME TAX ACT, 1961. 2.2 THAT THE HON'BLE MEMBERS OF THE DRP HAVE ERRED ON FACTS AND IN LAW IN HOLDING THAT THE COMPARABLES USED BY THE TPO ARE CO RRECT. 2.3 THAT THE LD. ASSESSING OFFICER HAS ERRED ON FAC TS AND IN LAW IN MAKING AN ADDITION OF RS.88,04,775/- ON THE BASIS OF THE O RDER PASSED BY TPO. 2.4. THAT THE LD. ASSESSING OFFICER/TPO/DRP HAS ERR ED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE APPELLANT IS NON-RISK BEARING ENTITY WHICH DOES THE FACILITATING FUNCTIONS AND IN CATEGORIZING THE APP ELLANT AS SOFTWARE DEVELOPER. 2.5 THAT THE LD. TPO HAS ERRED ON FACTS AND IN LAW IN OBSERVING THAT THE APPELLANT HAS USED COMPARABLE DATA FOR MORE THAN PR EVIOUS TWO YEARS AND HAS ARRIVED AT THE ALP ON THE BASIS OF IRRELEVANT CONSI DERATIONS. 6. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A COMPANY ENGAGED IN PROVIDING CUSTOMIZED E-LEARNING MODULES AND IT ENAB LED SERVICES TO ITS PARENT COMPANY AT SINGAPORE. THE ASSESSEE FILED ITS RETUR N OF INCOME ON 24 TH SEPTEMBER, 2010 DECLARING INCOME OF RS.30,86,800/-. SINCE THE ASSESSEE HAD UNDERTAKEN INTERNATIONAL TRANSACTIONS WITH ITS AE, A REFERENCE U/S 92CA(1) WAS MADE BY THE ASSESSING OFFICER TO THE TPO FOR DETERMINATION OF T HE ALP OF THE INTERNATIONAL ITA NO.1333/DEL/2015 3 TRANSACTION. THE TPO, DURING THE COURSE OF TP ASSE SSMENT PROCEEDINGS NOTED THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF PACIFIC KN OWLEDGE PLATFORM PTE LTD. PROVIDING E-MODULE LEARNING SOFTWARE SERVICES TO K NOWLEDGE PLATFORM SINGAPORE. HE OBSERVED THAT THE ASSESSEE DURING THE IMPUGNED ASSE SSMENT YEAR HAS UNDERTAKEN THE FOLLOWING INTERNATIONAL TRANSACTIONS:- 1. DEVELOPING E-LEARNING MODULES AND RELATED WORK 6 ,69,27,856 7. HE OBSERVED THAT THE MAIN INTERNATIONAL TRANSACT ION OF THE ASSESSEE IS THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES. THE AS SESSEE HAS APPLIED TNMM AS THE MOST APPROPRIATE METHOD AND THE OP/TC RATIO IS TAKE N AS THE PROFIT LEVEL INDICATOR IN THE TNMM ANALYSIS. THE PLI OF THE COMPANY IS ARRIV ED AT 10.1% ON COST WHEREAS THE AVERAGE PLI OF THE SIX COMPARABLES AS PER FRESH SEA RCH EXECUTED BY THE ASSESSEE WAS AT 8.5%. IT WAS ACCORDINGLY STATED THAT THE PRICE CHA RGED IN ITS INTERNATIONAL TRANSACTION BEING MORE THAN THE ARITHMETICAL MEAN OF THE COMPAR ABLES, THE PRICE CHARGED IS AT ARMS LENGTH. 8. HOWEVER, THE TPO DID NOT ACCEPT THE CONTENTION O F THE ASSESSEE. THE TPO MADE FRESH SEARCH OF THE COMPARABLES BY APPLYING NE W FILTERS SUCH AS (1) COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FINANCIAL YEAR 2009-10 (2) COMPANIES WHOSE SOFTWARE DEVELOPMENT INCOME IS LESS THAN RS.5 CRORE S; (3) COMPANIES WHOSE REVENUE FROM SERVICES IS LESS THAN 75% OF THE TOTAL OPERATI NG REVENUES; (4) COMPANIES WHO HAVE EXPORT SALES LESS THAN 75% OF THE SALES FROM S OFTWARE DEVELOPMENT SERVICES; (5) COMPANIES HAVING MORE THAN 25% RPT; (6) COMPANIES W HO HAVE PERSISTENT LOSS FOR THE ITA NO.1333/DEL/2015 4 LAST THREE YEARS UPTO AND INCLUDING FINANCIAL YEAR 2009-10; (7) COMPANIES WHOSE EMPLOYEE COST IS LESS THAN 25% OF THE OPERATING COS T; (8) COMPANIES HAVING DIFFERENT FINANCIAL YEARS I.E., NOT MARCH 31, 2010; (9) COMP ANIES THAT ARE FUNCTIONALLY DIFFERENT FROM THE TAX PAYER; AND (10)COMPANIES THAT ARE HAVI NG PECULIAR ECONOMIC CIRCUMSTANCES. HE ALSO PROPOSED TO USE ONLY THE CUR RENT YEAR DATA I.E., DATA PERTAINING TO F.Y. 2009-10. BASED ON THE ABOVE FILTERS, THE T PO FINALLY SELECTED 22 COMPARABLES WHOSE AVERAGE WAS 22.08% AND PROPOSED AN UPWARD ADJ USTMENT OF RS.72,70,603/- U/S 92CA(2) OF THE IT ACT. THE TPO ACCORDINGLY CONFRON TED THE ASSESSEE AS TO WHY THE ABOVE ADDITION SHOULD NOT BE MADE. 9. THE ASSESSEE FILED REPLY CHALLENGING THE SELECTI ON OF THE COMPARABLES SELECTED BY THE TPO. THE REQUEST OF THE ASSESSEE TO ADD CER TAIN COMPARABLES HAVING TURN OVER OF LESS THAN RS.5 CRORES WAS REJECTED BY THE TPO ON THE GROUND THAT THESE ARE VERY SMALL COMPANIES AND THE MARGIN EARNED BY THESE COMP ANIES FLUCTUATE TO EXTREMES BECAUSE OF THE NARROW BASE. FURTHER, ACCORDING TO HIM, THE RELIABILITY OF THE DATA IN RESPECT OF THE SMALL COMPANIES IS ALSO NOT ALWAYS V ERY HIGH. THEIR CONTRIBUTION TOWARDS OVERALL TURNOVER OF THE INDUSTRY IS NEGLIGI BLE AND, THEREFORE, MORE OFTEN THEY ESCAPE FROM THE EYES OF THE REGULATORS. FURTHER, T HE SMALL COMPANIES LACK COMPETITIVE STRENGTH, LACK OPERATIONAL EFFICIENCIES AND ALSO LA CK HUMAN RESOURCES. ACCORDING TO THE TPO, THE RELIABILITY OF THE FINANCIAL DATA FOR COMP ANIES WITH LOW LEVELS OF SALES/OPERATING INCOME CAN BE SIGNIFICANTLY REDUCED BECAUSE THE SAME PERSONS ARE OFTEN BOTH MAJOR SHAREHOLDERS AND ALSO THE KEY EMPL OYEES, THEREBY OBLITERATING THE ITA NO.1333/DEL/2015 5 ECONOMIC DISTINCTION BETWEEN PROFITS AND SALARIES. RELYING ON VARIOUS DECISIONS, THE TPO REJECTED THE ARGUMENT OF THE ASSESSEE TO ADD CE RTAIN COMPANIES WHOSE TURNOVER WAS LESS THAN RS.5 CRORE. SIMILARLY, HE ALSO REJEC TED THE ARGUMENT OF THE ASSESSEE CHALLENGING THE SELECTION OF CERTAIN COMPANIES WITH ABNORMAL MARGINS/SUPER NORMAL PROFITS. AFTER CONSIDERING THE VARIOUS ARGUMENTS O F THE ASSESSEE CHALLENGING THE VARIOUS FILTERS ADOPTED BY THE TPO, THE TPO FINALLY SELECTED THE FOLLOWING 23 COMPANIES WHOSE AVERAGE MARGIN IS 21.97%:- SL.NO. NAME OF THE COMPANY OP/OC WITHOUT FOREX 1. ACCELYA KALE SOLUTIONS LTD. 13.65% 2. AKSHAY SOFTWARE TECHNOLOGIES LTD. -1.07% 3. ALLGO EMBEDDED 9.67% 4. CTIL LTD. 18.11% 5. E-INFOCHIPS BANGALORE LTD. 71.38% 6. EVOKE TECH 18.56% 7. E-ZEST SOLUTIONS 18.66% 8. INFINITE DATA SYSTEM PRIVATE LIMITED 88.25% 9. KULIZA TECHNOLOGIES PRIVATE LIMITED 15.50% 10. LARSEN & TOUBRO INFOTECH LTD. 19.06% 11. MINDTREE LTD. (SEGMENT) 13.92% 12. PERSISTENT SYSTEMS LIMITED 29.02% 13. PERSISTENT SYSTEMS & SOLUTIONS LIMITED 11.37% 14. QUINTEGRA SOLUTIONS LTD. -8.20% 15. R S SOFTWARE (INDIA) LTD. 10.18% 16. SANKHYA INFOTECH 18.11% 17. SASKEN COMMUNICATION TECHNOLOGIES LTD. 17.54% 18. SONATA SOFTWARE 35.87% 19. TATA ELXSI (SEGMENT) 20.29% 20. THINKSOFT GLOBAL SERVICES LTD. 17.35% 21 THIRDWARE SOLUTIONS LIMITED 33.43% 22. ZYLOG SYSTEMS LIMITED 25.07% 23 LOGIX MICROSYS 9.52% AVERAGE 21.97% ITA NO.1333/DEL/2015 6 10. THE TPO ACCORDINGLY PROPOSED AN UPWARD ADJUSTME NT OF RS.88,04,775/- TOWARDS ARMS LENGTH PRICE OF THE INTERNATIONAL TRA NSACTION UNDERTAKEN BY THE ASSESSEE. THE ASSESSING OFFICER IN THE PROPOSED ORDER MADE TH E ABOVE ADDITION. THE ASSESSEE APPROACHED THE DRP, BUT, WITHOUT ANY SUCCESS. AGGR IEVED WITH SUCH ORDER OF THE DRP, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 11. THE LD. COUNSEL FOR THE ASSESSEE HAS ALSO FILED AN ADDITIONAL GROUND WHICH READS AS UNDER:- ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE DRA FT ASSESSMENT ORDER AS AFFIRMED BY THE DRP, IS BAD IN LAW AND VOID AB INITIO , AS THE IMPUGNED YEAR OF ASSESSMENT HAS BEEN SELECTED BY THE A.O. IN UTTER D ISREGARD OF THE GUIDELINES OF THE CBDT, WHICH GUIDELINES CLEARLY PROVIDES THAT CA SES WHERE INTERNATIONAL VALUE OF INTERNATIONAL TRANSACTION EXCEEDS RS.15 CRORE, W OULD ONLY BE SELECTED VIA MANUAL INSTRUCTIONS. 12. THE LD. COUNSEL FOR THE ASSESSEE ASSESSEE SUBMI TTED THAT THE ADDITIONAL GROUND FILED BY THE ASSESSEE IS PURELY A LEGAL GROUND AND DOES NOT REQUIRE ANY FRESH FACTS TO BE INVESTIGATED. RELYING ON VARIOUS DECISIONS INCLUDI NG THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. VARAS INTERNATIONAL REPORTED IN 284 ITR 80 (SC); NATIONAL THERMAL POWER CORPORATION LTD. VS. CIT REP ORTED IN 229 ITR 383 (SC); AND THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL I N THE CASE OF DHL OPERATORS REPORTED IN 108 TTJ 152 (SB), HE SUBMITTED THAT THE ADDITIONAL GROUND RAISED BY THE ASSESSEE SHOULD BE ADMITTED. 12.1 AFTER HEARING BOTH THE SIDES AND CONSIDERING T HE FACT THAT THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS PURELY A LEGAL ONE, THE S AME IS ADMITTED FOR ADJUDICATION. ITA NO.1333/DEL/2015 7 13. BEFORE ADJUDICATING THE ADDITIONAL GROUND, WE W OULD FIRST LIKE TO DECIDE THE APPEAL ON MERIT. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS BASICALLY CHALLENGING THE ADDITION OF RS.88,04,775/ - ON THE GROUND THAT THE TPO HAS ERRED IN HOLDING THAT THE ASSESSEE IS PROVIDING SOF TWARE DEVELOPMENT SERVICES AND BY HOLDING SO, THE TPO HAS ERRED IN SELECTING SIX COMP ARABLES WHOSE FUNCTIONS ARE DIFFERENT FROM THAT OF THE ASSESSEE. FURTHER, THE S ELECTION OF COMPARABLES ON THE BASIS OF THEIR TURNOVER, RISK AND EXPORT SALES IS NOT COR RECT SINCE THESE CANNOT BE COMPARED WITH THAT OF THE ASSESSEE AND, THEREFORE, BY APPLYI NG THESE FILTERS, THEY SHOULD HAVE BEEN EXCLUDED BY THE TPO FROM THE LIST OF COMPARABL ES. THE LD. COUNSEL FOR THE ASSESSEE, REFERRING TO THE ORDER OF THE TPO SUBMITT ED THAT THE TPO HAS MADE AN ALLEGATION THAT THE ASSESSEE HIMSELF HAS CONTENDED NOT TO APPLY THE TURNOVER FILTER. HOWEVER, THIS IS FACTUALLY INCORRECT AND WRONG SINC E THE ASSESSEE HAS NEVER CONTENDED TO THE APPLICABILITY OF THIS FILTER. IT WAS POINTE D OUT TO THE TPO THAT THE ASSESSEE BEING A SMALL COMPANY, THEREFORE, COMPANIES HAVING TURNOV ER OF RS.5 CRORE OR LESS THAN RS.5 CRORES SHOULD ALSO BE INCLUDED IN THE LIST OF COMPA RABLES. FOR THE ABOVE PROPOSITION, THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO PAGE 160 OF THE PAPER BOOK WHERE VIDE CLAUSE NO.C, THE ASSESSEE HAS MADE OBJECTION TO THE TURNOVER FILTER ADOPTED BY THE TPO. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FOLLOWING NINE COMPANIES WHICH ARE ENGAGED IN SOFTW ARE DEVELOPMENT CANNOT BE CONSIDERED AS COMPARABLE WHOSE TURNOVER IS MORE THA N RS.100 CRORE AS AGAINST THE TURNOVER OF THE ASSESSEE AT RS.6.69 CRORE:- ITA NO.1333/DEL/2015 8 SL.NO. NAME OF THE COMPANY 1. ACCELYA KALE SOLU. 2. L& T INFOTECH 3. MINDTREE 4. PERSISTENT SYSTEMS 5. R.S. SOFTWARE 6. SASKEN SOFTWARE 7. SONATA SOFTWARE 8. TATA ELEXSI 9. ZYLOG SYSTEMS LTD. 14. RELYING ON THE FOLLOWING DECISIONS, HE SUBMITTE D THAT THE COMPANIES HAVING HUGE TURNOVER CANNOT BE TAKEN AS COMPARABLES:- A. CIT VS. NEW RIVER SOFTWARE SOLUTIONS, 85 TAXMAN.COM 302 (DEL); B. WITNESS SYSTEM SOFTWARE INDIA PVT. LTD. VS. DCIT, 3 4 TAXMAN.COM 183 (BANGALORE TRIB.); AND C. CIT VS. AGINITY INDIA TECHNOLOGIES PVT. LTD. 36 TAX MANN.COM 289 (DEL). 15. HE FURTHER SUBMITTED THAT THE INTERNATIONAL TRA NSACTION OF THE ASSESSEE IS A LOW RISK SELLING AS THE ASSESSEE HAS ONLY MADE SALES TO ITS AE AND NOT TO ANY OUTSIDER. THEREFORE, THE COMPANIES HAVING HIGH RISK SELLING C ANNOT BE COMPARED WITH THE ASSESSEE AND, THEREFORE, THE TPO HAS ERRED IN EXCLU DING THE COMPANIES HAVING EXPORT SALES BELOW 75%. 16. HE SUBMITTED THAT OUT OF THE 23 COMPARABLES CHO SEN BY THE TPO, 21 COMPANIES ARE ENGAGED IN THE SOFTWARE DEVELOPMENT S EGMENT WHICH LINE IS COMPLETELY ITA NO.1333/DEL/2015 9 DIFFERENT FROM E-LEARNING. RELYING ON VARIOUS DECI SIONS, HE SUBMITTED THAT E-LEARNING IS IT ENABLED SERVICES AND CANNOT BE HELD AS SOFTWA RE DEVELOPMENT SERVICE. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FOLLOWI NG SIX COMPARABLES ARE ALSO NOT COMPARABLES BECAUSE OF THE CRITERIA LAID DOWN BY TH E TPO HIMSELF:- A. INFINITE DATA- ABNORMALLY HUGE SALES AND PROFIT BEF ORE TAX IN COMPARISON TO 2009 (137 OF PB). A PERUSAL OF THE SUBMISSIONS VIS- A-VIS DISTINCTION MADE BY THE ASSESSEE WOULD PROVE BEYOND DOUBT THAT THIS COMPANY IS FULL FLEDGE RISK BEARING WHEREAS ASSESSEE IS CAPTIVE SERVICE PROVIDER DEALIN G ONLY WITH ITS AE AND HENCE BOTH CANNOT BE COMPARED. B. E-ZEST SOLUTIONS - NO EXPORT SALES DURING THE YEAR- DETAILED SUBMISSION AS PER PAGE NO-136 OF PB. C. THIRDWARE SOLUTIONS. IT HAS DIVERSIFIED INCOME SOUR CES AND HIGH RISK BEARING COMPANY (PAGE NO-155). D. CTIL- TECHNICAL EDUCATION SECTOR AND NOT E-LEARNING SERVICES. FURTHER IT IS HIGH RISK BEARING COMPANY AND HENCE NOT COMPARABLE WITH ASSESSEE (PAGE132 OF PB. E. E-INFO CHIPS-EXTRAORDINARY PROFITS (PAGE134 OF PB) HUGE FIXED ASSETS WHEREAS ASSESSEE HAS NO FIXED ASSET, FURTHER HIGH RISK BEAR ING COMPANY- F. SANKHAYA INFOTECH- LESS THAN 25% RELATED PARTY T RANSACTIONS (PAGE-146 OF PB) 17. HE ACCORDINGLY SUBMITTED THAT THESE COMPARABLES SHOULD ALSO BE EXCLUDED. HE SUBMITTED THAT ONCE THE ABOVE 15 COMPANIES (I.E., N INE COMPANIES ON ACCOUNT OF TURNOVER AND SIX COMPARABLES ON ACCOUNT OF DISTINCT IVE FEATURES) ARE EXCLUDED, THEN, THE PLI OF THE REMAINING SEVEN COMPARABLES COMES TO 10.06% WHEREAS THE PLI OF THE ASSESSEE IS AT 10.1% WHICH IS WITHIN THE +/- 5% RAT IO. THEREFORE, NO ADDITION IS CALLED FOR. HE, ACCORDINGLY SUBMITTED THAT THE ORDER OF T HE DRP SUSTAINING THE ADJUSTMENT MADE BY THE TPO/ASSESSING OFFICER SHOULD BE DELETED . ITA NO.1333/DEL/2015 10 18. THE LD. DR, ON THE OTHER HAND, HEAVILY RELIED O N THE ORDER OF THE ASSESSING OFFICER/TPO/DRP. 19. WE HAVE CONSIDERED THE RIVAL ARGUMENT MADE BY B OTH THE SIDES AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND THE ASSESSEE, IN THE INST ANT CASE, IS ENGAGED IN PROVIDING CUSTOMIZED E-LEARNING MODULES AND IT ENABLED SERVIC E TO ITS PARENT COMPANY AT SINGAPORE. THE ASSESSEE DURING THE YEAR UNDER CONS IDERATION HAS ENTERED INTO AN INTERNATIONAL TRANSACTION AMOUNTING TO RS.6,69,27,8 56/- THE DETAILS OF WHICH HAVE ALREADY BEEN GIVEN IN THE PRECEDING PARAGRAPHS. WE FIND THE TPO, AFTER CONSIDERING THE VARIOUS ARGUMENTS ADVANCED BY THE ASSESSEE SELE CTED 23 COMPARABLES WHOSE AVERAGE MARGIN WAS CALCULATED AT 29.97%. BASED ON THE AVERAGE MARGIN OF THE COMPARABLES, THE TPO HAD PROPOSED AN UPWARD ADJUSTM ENT OF RS.88,04,775/- WHICH WAS ADOPTED BY THE ASSESSING OFFICER IN THE PROPOSE D ORDER AND UPHELD BY THE DRP. ACCORDINGLY, THE ADDITION OF RS.88,04,775/- HAS BEE N MADE BEING THE ALP OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSES SEE. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT OUT OF 23 COMPARABLES SELECTED BY THE ASSESSING OFFICER/TPO, NINE COMPARABLES THE DETAILS OF WHICH ARE GIVEN AT PARA 13 SHOULD BE EXCLUDED BECAUSE OF THEIR TURNOVER EXCEEDING MORE T HAN RS.100 CRORES. IT IS HIS ARGUMENT THAT WHEN THE TPO HAS EXCLUDED THE COMPANI ES HAVING TURNOVER OF RS.5 CRORES OR LESS, THEN, THE TPO SHOULD NOT HAVE SELEC TED COMPARABLES WHOSE TURNOVER IS MORE THAN RS.100 CRORES. SIMILARLY, IT IS ALSO THE ARGUMENT OF THE LD. COUNSEL FOR THE ITA NO.1333/DEL/2015 11 ASSESSEE THAT THE SIX COMPARABLES (THE DETAILS OF W HICH ARE GIVEN AT PARA 16) ARE ALSO TO BE EXCLUDED ON THE BASIS OF THEIR DISTINCTIVE FEATU RES AND FAR ANALYSIS. THUS, ACCORDING TO HIM, IF THE 15 COMPANIES ARE EXCLUDED, THEN, THE MARGIN OF THE REMAINING EIGHT COMPARABLES WILL BE 10.06% AS AGAINST 10.1% D ECLARED BY THE ASSESSEE AND WILL FALL WITHIN +/- 5% RATIO AND, THEREFORE, NO ADJUSTM ENT IS REQUIRED. 20. WE FIND SOME FORCE IN THE ARGUMENT OF THE LD. C OUNSEL FOR THE ASSESSEE. IT IS AN ADMITTED FACT THAT THE ASSESSEE, DURING THE TP ASSE SSMENT PROCEEDINGS, HAS REQUESTED THE TPO TO SELECT CERTAIN COMPARABLES WHOSE TURNOVE R IS RS.5 CRORE OR LESS. HOWEVER, WE FIND FROM THE ORDER OF THE TPO THAT HE REJECTED THE ARGUMENT OF THE ASSESSEE ON THE GROUND THAT COMPANIES HAVING TURNOVER OF LESS THAN RS.5 CRORES HAVE TO BE EXCLUDED BECAUSE THE MARGIN EARNED BY THESE COMPANIES FLUCTU ATE TO EXTREMES BECAUSE OF NARROW BASE AND RELIABILITY OF THE DATA IN RESPECT OF THESE COMPANIES IS ALSO NOT ALWAYS VERY HIGH. ACCORDING TO HIM, THE CONTRIBUTION OF S UCH COMPANIES TOWARDS OVERALL TURNOVER OF THE INDUSTRY IS NEGLIGIBLE FOR WHICH TH EY ESCAPED THE EYES OF THE REGULATOR. FURTHER, THEY LACK COMPETITIVE STRENGTH, LACK OPER ATIONAL EFFICIENCIES AND ALSO LACK HUMAN RESOURCES. IT IS ALSO HIS OPINION THAT THE R ELIABILITY OF THE FINANCIAL DATA FOR COMPANIES WITH LOW LEVELS OF SALES/OPERATING INCOME CAN BE SIGNIFICANTLY REDUCED BECAUSE THE SAME PERSONS ARE OFTEN MAJOR SHAREHOLDE RS AND ALSO KEY EMPLOYEES THEREBY OBLITERATING THE ECONOMIC DISTINCTION BETWE EN PROFITS AND SALARIES. WE DO NOT FIND ANY MERIT IN THE APPROACH OF THE TPO REJECTING THE CLAIM OF THE ASSESSEE TO SELECT CERTAIN COMPARABLES WITH TURNOVER OF LESS THAN RS.5 CRORES WHEN THE TURNOVER OF THE ITA NO.1333/DEL/2015 12 ASSESSEE IS ONLY 6.68 CRORES DURING THE YEAR. IN O UR OPINION, IF THE TPO HAS REJECTED CERTAIN COMPANIES FROM THE LIST OF COMPARABLES ON T HE BASIS OF LOW TURNOVER, THEN BY ADOPTING THE SAME CRITERIA HE SHOULD HAVE EXCLUDED AT LEAST THE COMPANIES WHOSE TURNOVER IS MORE THAN RS.100 CRORES. WE FIND FROM T HE LIST THAT EVEN CERTAIN COMPANIES ARE HAVING TURNOVER OF MORE THAN RS.1000 CRORES. F URTHER, THE ASSESSEE IN THE INSTANT CASE IS A CAPTIVE SERVICE PROVIDER AND WORKING EXCL USIVELY FOR THE AE AND ITS ENTIRE EXPORT SALE IS TO THE AE. HOWEVER, IN THE INSTANT CASE, THE ABOVE NINE COMPANIES WHOSE DETAILS HAVE BEEN GIVEN IN THE PRECEDING PARA GRAPHS ARE NOT CAPTIVE SERVICE PROVIDERS AND THEY ARE NOT WORKING EXCLUSIVELY FOR THE AE AND THEIR ENTIRE SALES IS NOT TO THE AE. EVEN OTHERWISE ALSO THESE COMPANIES CAN NOT BE CONSIDERED AS COMPARABLE WITH THAT OF THE ASSESSEE COMPANY DUE TO THE FOLLOW ING FAR ANALYSIS:- 1) ACCELYA KALE SOLUTIONS LTD . IS ENGAGED IN SOFTWARE PACKAGE AND SERVICE AS AVAILABLE IN PUBLIC DOMAIN WHEREAS ASSESSEE IS I N E-LEARNING MODULES AND CONTENT WRITING. IT HAS INCURRED HUGE R&D EXPENDIT URE WHEREAS ASSESSEE HAS NOT INCURRED ANY SUCH EXPENDITURE. FURTHER, THE ABOVE COMPARABLE IS A FULL RISK BEARING COMPANY WHEREAS ASSESSEE IS A CAPTIVE SERVI CE PROVIDER TO ITS AE WITH ZERO RISK. THEREFORE, THIS COMPANY CANNOT BE CONSI DERED AS COMPARABLE. 2) L&T INFOTECH: THIS COMPANY IS FUNCTIONALLY DIF FERENT BEING IN ITES, SOFTWARE DEVELOPMENT AND ENGINEERING WHEREAS ASSESS EE IS IN E-LEARNING MODULES. IT HAS A HUGE ASSET BASE OF RS.1028 CRORES WHEREAS ASSESSEE HAS ASSETS OF RS.2.29 CRORE ONLY. IT HAS INCURRED HUGE ADVERTISEMENT EXP ENDITURE OF RS.2.24 CRORE AS ITA NO.1333/DEL/2015 13 AGAINST NIL BY THE ASSESSEE. APART FROM THIS IT IS A FULL RISK BEARING COMPANY WHEREAS ASSESSEE IS A ZERO RISK BEARING COMPANY BEI NG CAPTIVE SERVICE PROVIDER TO ITS AE. THEREFORE, THIS COMPANY CANNOT BE CONSIDER ED AS COMPARABLE. 3) MINDTREE LTD.: THIS COMPANY IS AGAIN FUNCTIONAL LY DIFFERENT BEING IN ITES AND HAS DIVERSIFIED BUSINESS ACTIVITY. ALTHOU GH THE TPO HAS TAKEN SEGMENTAL REVENUE, HOWEVER, ALLOCATION OF ASSETS HA S NOT BEEN CONSIDERED. FURTHER, IT HAS HUGE ASSET BASE OF RS.649 CRORES AS AGAINST RS.2.29 CRORES IN CASE OF THE ASSESSEE. IT HAS HUGE GEOGRAPHICAL MARKET S UCH AS USA, EUROPE AND INDIA AND FEW OTHER COUNTRIES WHEREAS ASSESSEE HAS ONLY S INGAPORE. FURTHER, IT HAS ACQUIRED A BIG COMPANY NAMELY AZTEC SOFT LTD., A LI STED COMPANY WHICH HAS CONTRIBUTED TO ITS REVENUE. THUS, EXTRAORDINARY EV ENT HAS TAKEN PLACE. THEREFORE, THIS COMPANY IN OUR OPINION CANNOT BE CONSIDERED AS A COMPARABLE. 4) PERSISTENT SYSTEMS LTD.: THIS COMPANY IS FUNCTI ONALLY DIFFERENT BEING IN PRODUCT ENGINEERING, TECHNOLOGY CONSULTING AND IP-L ED BUSINESS. IT HAS INCURRED RS.52 CRORES IN R&D EXPENSES AND HAS ASSETS OF RS.6 42.36 CRORES. THEREFORE, THIS CANNOT BE COMPARED WITH THAT OF THE ASSESSEE C OMPANY. 5) R.S. SOFTWARE (INDIA) LTD.: THIS COMPANY BEING IN E-PAYMENTS SOFTWARE COMPANY WHICH IS HIGH END FUTURISTIC BUSINESS IS FU NCTIONALLY DIFFERENT FROM THE ASSESSEE. FURTHER, IT HAS ASSET OF RS.32 CRORES AS AGAINST RS.2.29 CRORES IN CASE OF THE ASSESSEE. THEREFORE, THIS COMPANY CANNOT BE RE TAINED AS COMPARABLE. ITA NO.1333/DEL/2015 14 6) SASKEN COMMUNICATION TECHNOLOGIES LTD.: THIS C OMPANY AGAIN IS A HIGH END COMPANY MAKING SATELLITE PHONES AND IS FUNCTION ALLY UNRELATED WITH THE ASSESSEE. IT HAS MANY SUBSIDIARIES. IT HAS HUGE A SSETS OF RS.483 CRORES INCLUDING 36 PATENTS AND 31 ARE UNDER GRANT. ITS GEOGRAPHICAL AREA COVERS UK, USA AND OTHER BIG COUNTRIES. THEREFORE, THIS COMPANY IN OU R OPINION CANNOT BE COMPARED WITH THAT OF THE ASSESSEE. 7) SONATA SOFTWARE: THIS COMPANY HAS THREE LARGE SUBSIDIARIES INCLUDING ONE IN GERMANY AND IS ONE OF THE TOP TEN PLAYERS IN R&D. IT HAS ASSET BASE OF RS.292 CRORES AND IS ONE OF THE TOP 20 IT FIRMS IN INDIA. THEREFORE, THIS COMPANY IN OUR OPINION CANNOT BE COMPARED. 8) TATA ELEXSI (SEGMENT): THIS COMPANY IS A SPEC IALIZED EMBEDDED SOFTWARE DEVELOPMENT COMPANY AND IS IN COMPLEX SEGM ENT WHICH CANNOT BE COMPARED WITH THAT OF THE ASSESSEE COMPANY. IT HAS INCURRED HUGE R & D EXPENDITURE WHICH IS 3% OF ITS TOTAL TURNOVER. IT HAS ASSETS OF RS.208 CRORES AND HAS INCURRED ADVERTISEMENT EXPENSES OF ABOUT RS.3 C RORES. THEREFORE, THIS IN OUR OPINION CANNOT BE CONSIDERED AS A COMPARABLE WITH T HAT OF THE ASSESSEE COMPANY. 9) ZYLOG SYSTEMS LTD.: THIS COMPANY AGAIN IS A HIG H END FULL RISK BEARING COMPANY AND HAS EIGHT SUBSIDIARIES. IT HAS ACQUIRE D A NUMBER OF COMPANIES DURING THE YEAR AS PER REPORT OF THE DIRECTORS AND HAS A HUGE ASSET BASE OF RS.785.60 CRORES. IT HAS SPENT RS.13.91 CRORES ON MARKETING AND SELLING EXPENSES AND RS.46 CRORES TOWARDS SALES COMMISSION. ITS GEO GRAPHICAL MARKET CONSISTS OF ITA NO.1333/DEL/2015 15 80 COUNTRIES. THEREFORE, THIS COMPANY IN OUR OPINI ON CANNOT BE CONSIDERED AS A COMPARABLE. 20.1 IN VIEW OF THE ABOVE DISCUSSION, WE FIND MERIT IN THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ABOVE NINE COMPAR ABLES SHOULD BE EXCLUDED. WE, ACCORDINGLY DIRECT THE A.O./TPO TO EXCLUDE THE ABOV E NINE COMPARABLES. 21. NOW, COMING TO THE SIX COMPARABLES AS ARGUED BY THE ASSESSEE IS CONCERNED, WE FIND FROM PAGE 137 OF THE PAPER BOOK THAT THE AS SESSEE POINTED OUT THE DIFFERENCES BETWEEN INFINITE DATA SYSTEM PVT. LTD. AND THE ASSE SSEE. IN THE CASE OF INFINITE DATA SYSTEM, THE COMPANY EARNS ITS REVENUE FROM TECHNICA L SUPPORT. A PERUSAL OF THE DETAILS FILED SHOWS THIS COMPANY HAS REVENUE FROM INFRASTRU CTURE MANAGEMENT SERVICES. THE COMPANY HAS ENTERED INTO WITH CUSTOMERS ON TIME AND MATERIAL BASIS. FURTHER, IT IS A FULL-FLEDGED RISK BEARING COMPANY EARNING FROM NON- AES, THUS, ENJOYS MORE REVENUE AND IS IN A POSITION TO DOMINATE THE TERMS OF SERVI CES. IT IS ALSO SEEN FROM THE SUBMISSION BEFORE THE TPO THAT IN 2009, THE COMPANY HAD TURNOVER OF AROUND RS.4 CRORES AND IT RAN INTO LOSS BEFORE THAT. HOWEVER, DUE TO SOME SUPER ACTIVITIES, THE TURNOVER JUMPED TO MORE THAN 900% IN THE RELEVANT Y EAR. FURTHER INFINITE DATA SYSTEMS PVT. LTD. IS LOCATED IN JAPAN WHEREAS KNOWL EDGE INDIA IS BASED AT SINGAPORE. WE, THEREFORE, FIND MERIT IN THE ARGUMENT OF THE LD . COUNSEL FOR THE ASSESSEE THAT THIS COMPANY SHOULD NOT BE TREATED AS A COMPARABLE AND H AS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. WE FIND THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES (P) LTD., 36 TAXMANN.COM 289 (DE L) UNDER SIMILAR CIRCUMSTANCES ITA NO.1333/DEL/2015 16 HAS REJECTED THIS COMPANY AS A COMPARABLE . THEREFORE, THIS COMPANY IS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 22. SO FAR AS E-ZEST SOLUTIONS IS CONCERNED, WE FIN D FROM PAGE 136 OF THE PAPER BOOK THAT THIS COMPANY IS IN SOFTWARE DEVELOPMENT A ND SALE OF SOFTWARE ALSO. AS PER THE ANNUAL REPORT OF THE COMPANY, IT HAS SPECIAL EX PERTISE IN EMERGING TECHNOLOGIES SUCH AS CLOUD, SAS AND BUSINESS INTELLIGENCE, ETC. THEREFORE, THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE CO MPANY. FURTHER, THERE IS EXISTENCE OF STOCK WHEREAS IN THE CASE OF THE ASSESSEE COMPANY, THERE IS NO SUCH STOCK. FURTHER, THIS COMPANY IS INTO SOFTWARE DEVELOPMENT WHEREAS K NOWLEDGE INDIA IS ENGAGED IN PREPARATION OF E-LEARNING MODULES. WE, THEREFORE, FIND MERIT IN THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT THIS COMPANY SHOULD B E EXCLUDED FROM THE LIST OF COMPARABLES. FOR THE ABOVE PROPOSITION, WE FIND SU PPORT FROM THE DECISION OF THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF INTOTO SOFTWARE INDIA (P) LTD VS. ACIT VIDE ITA NOS.1196 & 1197/HYD/2010 AND BATCH OF OTHER APPEALS, ORDER DATED 24 TH MAY, 2013. 23. SO FAR AS THIRDWARE SOLUTIONS IS CONCERNED, WE FIND THIS COMPANY HAS DIVERSIFIED INCOME SOURCE AND HIGH RISK BEARING COM PANY. A PERUSAL OF PAGE 155 OF THE PAPER BOOK SHOWS THAT THIS COMPANY IS ENGAGED I N IMPLEMENTATION AND CUSTOMER SERVICE WHICH INCLUDE TRAINING, CUSTOMIZED DEVELOPM ENT AND HELP DESK SERVICES FOR ERP SOFTWARE AND DISTRIBUTION OF SOFTWARE PRODUCTS OF THE COMPANY QUAD INC AND HYPERION SOLUTIONS CORPORATION. FURTHER, IT HAS AS SETS OF RS.66.15 CRORES WHEREAS THE ITA NO.1333/DEL/2015 17 ASSESSEE HAS ASSETS OF ONLY RS.2.29 CRORES. THIRDW ARE SOLUTIONS IS A HIGH RISK BEARING COMPANY WHEREAS THE ASSESSEE IS A LOW RISK COMPANY SINCE THE SALES ARE TO THE AE ONLY. WE, THEREFORE, FIND MERIT IN THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT THIS COMPANY SHOULD BE EXCLUDED FROM THE LIST OF CO MPARABLES. WE ACCORDINGLY DIRECT THE TPO/A.O. TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 24. SO FAR AS CTIL LTD. IS CONCERNED, WE FIND THIS COMPANY IS INTO TECHNICAL/VOCATIONAL HIGHER EDUCATION WHICH IS NORM ALLY DIFFERENT FROM THE CASE OF THE ASSESSEE. FURTHER, AS PER THE NOTES TO ACCOUNTS OF THE COMPANY, THE REVENUE CONSISTED OF SOFTWARE DEVELOPMENT AND FROM SALE, ETC. AND THE COMPANY HAD SHOWN 166% GROWTH IN REVENUE AND 126% IN NET PROFIT DUE TO ACQ UISITION OF MANY SUBSIDIARIES. THUS, EXTRAORDINARY EVENTS HAVE TAKEN PLACE DURING THE YEAR WHICH IS NOT THERE IN THE CASE OF THE ASSESSEE. FURTHER, THIS IS HIGH RISK B EARING COMPANY WHEREAS THE ASSESSEE IS A LOW RISK BEARING COMPANY WHICH IS LIMITED TO T HE AGREEMENT WITH THE PARENT COMPANY. FURTHER, CTIL LTD. HAS INCURRED HUGE AMOU NT TOWARDS R&D EXPENDITURE AND IT HAS LARGE-SCALE OF OPERATIONS INCLUDING SEVE N SUBSIDIARIES WHEREAS THE ASSESSEE HAS NOT INCURRED ANY R&D EXPENDITURE AND HAS NO SUB SIDIARIES AT ALL. WE, THEREFORE, FIND MERIT IN THE ARGUMENT OF THE LD. COUNSEL FOR T HE ASSESSEE THAT THIS COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. 25. SO FAR AS E-INFOCHIPS IS CONCERNED, A PERUSAL O F PAGE 134 OF THE PAPER BOOK SHOWS THAT THIS IS A HIGH RISK BEARING COMPANY WHER EAS THE ASSESSEE IS A LOW RISK BEARING COMPANY. IT OWNS ASSETS SUCH AS LAND, BUIL DING, ETC. AND THEREBY SAVES RENTAL ITA NO.1333/DEL/2015 18 COST WHEREAS THE ASSESSEE HAS NO SUCH ASSETS. FURT HER, THE TPO, WHILE CALCULATING THE OPERATING PROFITS OF E-INFOCHIPS BANGALORE LTD., HA S INCLUDED THE DIVIDEND INCOME/INTEREST INCOME AND HAS ALSO CONSIDERED THE EXPENSES INCURRED TO EARN SUCH INCOME. HOWEVER, IN THE CASE OF THE ASSESSEE, THE ASSESSING OFFICER, WHILE COMPUTING THE PROFIT OF KNOWLEDGE INDIA REMOVES BOTH THESE FA CTORS. SINCE E-INFOCHIPS IS A HIGH RISK BEARING COMPANY, THEREFORE, THE SAME CANNOT BE COMPARED WITH THE PROFITABILITY OF THE ASSESSEE COMPANY WHICH IS A LOW RISK BEARING CO MPANY. FURTHER, THE GEOGRAPHICAL MARKET IS DIFFERENT FROM THAT OF THE ASSESSEE COMPA NY. WE, THEREFORE, DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 26. SO FAR AS THE SANKHYA INFOTECH IS CONCERNED, IT IS ALSO THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT SANKHYA INFOTECH HAS LESS THAN 25% OF RPT TRANSACTION. HOWEVER, IT IS NOT DISCERNIBLE FROM THE DETAILS GI VEN BY THE ASSESSEE REGARDING RPT OF SANKHYA INFOTECH. IN OUR OPINION, IN ABSENCE OF AN Y DISTINGUISHABLE FEATURES BROUGHT TO OUR NOTICE, THIS COMPANY HAS TO BE RETAINED AS A COMPARABLE. THEREFORE, WE UPHOLD THE ORDER OF THE A.O./TPO/DRP IN RETAINING THIS COM PANY AS A COMPARABLE. ONCE THE 14 COMPARABLES ARE EXCLUDED FROM THE LIST OF COMPAR ABLES TAKEN BY THE ASSESSING OFFICER IN THE FINAL ORDER, THE PLI OF THE COMPARAB LES WILL BE WITHIN +/- 5% AND ACCORDINGLY NO TP ADJUSTMENT IS CALLED FOR. THE GR OUNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY DISPOSED OF. SINCE THE ASSESSEE SUCCEED S ON MERIT, THE ADDITIONAL GROUND IS NOT BEING ADJUDICATED BEING ACADEMIC IN NATURE. ITA NO.1333/DEL/2015 19 27. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. THE DECISION WAS PRONOUNCED IN THE OPEN COURT ON 2 9.01.2019. SD/- SD/- (SUCHITRA KAMBLE) (R.K. PANDA) JUDICIAL MEMBER AC COUNTANT MEMFBER DATED: 29 TH JANUARY, 2019 DK COPY FORWARDED TO 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASSTT. REGISTRAR, ITAT, NEW DELHI