Sun Life India Service Centre Pvt. Ltd., Gurgaon V. DCIT, Gurgaon

ITA 1489/DEL/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97434 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 6 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 24-09-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 12-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: DAKSH S BHARDWAJ
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, AM & SMT. BEENA A. PILLAI, JM ITA NO.1489/DEL/2014 ASSESSMENT YEAR : 2009-10 SUN LIFE INDIA SERVICE CENTRE PVT. LTD., UNITECH WORLD, TOWER-B, 2 ND FLOOR, SECTOR-39, GURGAON. PAN: AAJCS6520K VS. DCIT, CIRCLE-2, GURGAON. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI G.C. SRIVASTAVA, ADVOCATE, SHRI SAURABH SRIVASTAVA, CA & SHRI DAKSH S. BHARDWAJ, ADVOCATE. DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT, DR DATE OF HEARING : 24. 09.2015 DATE OF PRONOUNCEMENT : 28.09.2015 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE FINA L ORDER DATED 27.2.2014 PASSED BY THE ASSESSING OFFICER (AO) U/S 144C(13) OF THE ITA NO.1489/DEL/2014 2 INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2009-10. 2. THE FIRST ISSUE RAISED IN THIS APPEAL IS AGAINST THE ADDITION MADE BY THE AO ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS AN INDIAN COMPANY, A PART OF SUN LIFE GROUP, WHICH HAS DIVER SIFIED FINANCIAL SERVICES ORGANIZATION PROVIDING SAVINGS, RETIREMENT AND PENSION PRODUCTS AND LIFE AND HEALTH INSURANCE IN CANADA, US, UK AND ASIA. THIS GROUP ALSO OPERATES MUTUAL FUNDS AND INVESTMENT MANAGEMEN T BUSINESSES. THE ASSESSEE PROVIDED SOFTWARE DEVELOPMENT AND MAINTENA NCE SUPPORT SERVICES, ADVISORY AND ALSO BACK OFFICE SUPPORT SE RVICES TO ITS ASSOCIATED ENTERPRISES (AES) FOR ASSISTANCE IN THEIR PROJECTS. THE ASSESSEE, INTER ALIA, REPORTED FOUR INTERNATIONAL TRANSACTIONS IN FORM N O. 3CEB CONSISTING OF `PROVISION OF SOFTWARE DEVELOPMENT AN D MAINTENANCE SUPPORT SERVICES WITH THE TRANSACTED VALUE OF RS.3 9.45 CRORE-; `PROVISION OF BACK OFFICE SUPPORT SERVICES WITH TH E TRANSACTED VALUE OF RS.6.52 CRORE; `PROVISION OF F&A SUPPORT SERVICES WITH THE TRANSACTED ITA NO.1489/DEL/2014 3 VALUE OF RS.1.51 CRORE AND PROVISION OF ADVISORY S ERVICES WITH THE TRANSACTED VALUE OF RS.1.75 CRORE. IN ORDER TO DEM ONSTRATE THAT ITS INTERNATIONAL TRANSACTIONS WERE AT ARMS LENGTH PRI CE (ALP), THE ASSESSEE APPLIED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) WITH THE PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT TO TOTAL COST (OP/TC). ON A REFERENCE MADE BY THE AO, THE TRANSFER PRICING OFFI CER (TPO) NOTICED THAT THE SEGMENT OF `PROVISION OF BACK OFFICE SUPPO RT SERVICES WAS NO DIFFERENT FROM THE SEGMENT OF `PROVISION OF FINANCI AL AND ACCOUNTS SUPPORT SERVICES. HE, THEREFORE, MERGED THESE TWO SEGMENTS INTO ONE FOR CONDUCTING THE BENCHMARKING ANALYSIS. THOUGH T HE ASSESSEE INITIALLY USED MULTIPLE-YEAR DATA OF COMPARABLES, HOWEVER, DU RING THE COURSE OF THE TP PROCEEDINGS, SUCH DATA WAS RESTRICTED TO A S INGLE YEAR, AT THE TPOS INSTANCE. THE ALP OF THESE INTERNATIONAL TRA NSACTIONS WAS DETERMINED BY THE TPO. ON RAISING CERTAIN DISPUTES BEFORE THE DISPUTE RESOLUTION PANEL (DPO), THE ASSESSEE GOT CERTAIN RE LIEFS. IN THE FINAL ORDER, THE TPO MADE AN ADDITION IN RESPECT OF THESE THREE SEGMENTS TOTALING RS.6,47,47,465, WHICH HAS BEEN ASSAILED BY THE ASSESSEE IN THE PRESENT APPEAL. ITA NO.1489/DEL/2014 4 A. PROVISION OF SOFTWARE DEVELOPMENT AND MAINTENANCE SUPPORT SERVICES. 4. THE TPO FIRST TOOK UP SOFTWARE DEVELOPMENT SERVI CES SEGMENT IN WHICH THE ASSESSEE HAD COMPUTED ITS OP/TC AT 12.56% . THE ASSESSEE CHOSE 22 COMPANIES AS COMPARABLE. BY EMPLOYING THE CURRENT YEARS DATA, THE ASSESSEE REDUCED NUMBER OF COMPARABLES. THE TPO FINALLY SHORTLISTED 16 COMPANIES AS COMPARABLES, WHICH HAVE BEEN LISTED ON PAGE 66 OF HIS ORDER. THE AVERAGE OF OP/TC OF THES E 16 COMPANIES WAS DETERMINED AT 28.74% BY APPLYING THIS PLI AS BENC HMARK, THE TPO WORKED OUT TP ADJUSTMENT OF RS.6,38,46,198/-. THE DRP ALLOWED CERTAIN RELIEF WHICH REDUCED THE TRANSFER PRICING A DJUSTMENT UNDER SOFTWARE DEVELOPMENT SERVICE SEGMENT TO RS.4,82,48, 394. THE ASSESSEE IS AGGRIEVED AGAINST THE SUSTENANCE OF ADDITION TO THIS EXTENT. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE TPO HA S CHANGED COMPOSITION OF COMPARABLES BY EXCLUDING SOME COMPANIES FROM THE ASSESSEES LIST AND INCLUDING FRESH COMPARABLES IN HIS FINAL TALLY. THE GRIEVANCE OF THE ASSESSEE UNDER THIS SEGMENT IS CONFINED AGAINST THE INCLUSION OF FIVE ITA NO.1489/DEL/2014 5 COMPANIES AND NON-INCLUSION OF TWO COMPANIES. WE W ILL TAKE UP THESE COMPANIES ONE BY ONE FOR ASCERTAINING WHETHER OR NO T THEY ARE COMPARABLES. 6. THE COMPARABILITY OR OTHERWISE OF THE DISPUTE D COMPANIES CAN BE JUDGED ONLY AFTER ASCERTAINING THE NATURE OF SERVIC ES PROVIDED BY THE ASSESSEE UNDER THIS SEGMENT WHICH HAS TWO SUB-CLASS IFICATIONS, NAMELY, SOFTWARE DEVELOPMENT SERVICES AND MAINTENANCE SUPPO RT SERVICES. SOFTWARE DEVELOPMENT SERVICES REFER TO THE DEVELOPM ENT OF MODULES BY THE ASSESSEE AND ALSO PARTS OF MODULES FOR THE SOFT WARE BEING USED BY ITS OVERSEAS GROUP ENTITIES. MAINTENANCE SUPPORT SERVIC ES REFER TO THE SERVICES INCLUDING BUG FIXING, CARRYING OUT MAINTEN ANCE AND SUPPORT SERVICES WITH SOFTWARE USED BY ITS OVERSEAS GROUP E NTITIES. THE ASSESSEE ENTERED INTO SERVICES AGREEMENT DATED 1.4.2006 WITH SUN LIFE IRELAND, UNDER WHICH IT UNDERTOOK TO PROVIDE SOFTWARE DEVELO PMENT AND MAINTENANCE SERVICES TO ITS OVERSEAS GROUP ENTITIES . THESE SERVICES HAVE BEEN PROVIDED UNDER THE DIRECTIONS OF SUN LIFE IREL AND. THE ASSESSEE HAS BEEN COMPENSATED WITH COST PLUS MARK UP BY SUN LIFE IRELAND. THE ITA NO.1489/DEL/2014 6 ASSESSEE PROVIDED SOFTWARE DEVELOPMENT AND MAINTENA NCE SERVICES DURING THE YEAR UNDER CONSIDERATION IN PURSUANCE OF THE SAME AGREEMENT DATED 1.4.2006 UNDER WHICH SERVICES WERE PROVIDED I N THE PRECEDING YEAR AS WELL. 7. NOW, WE PROCEED TO EXAMINE THE COMPARABILITY OF THE COMPANIES INCLUDED BY THE TPO IN THE FINAL SET OF COMPARABLES , AS UNDER:- I) CAT TECHNOLOGIES LTD . 8.1. THE TPO CONSIDERED THIS COMPANY AS COMPARABLE. THE ASSESSEES OBJECTIONS AGAINST THE INCOMPARABLE FUNCTIONAL PROF ILE OF THIS COMPANY WERE REJECTED. THE TPO NOTICED THAT THIS COMPANY L AUNCHED A JOB PORTAL VIZ., LOGTALENT.COM, WHICH WAS QUITE SUCCESSFUL WIT H JOB ASPIRANTS. THE ASSESSEES OBJECTION ABOUT THE INCOMPARABILITY OF T HIS FUNCTION ADOPTED BY CAT TECHNOLOGIES LTD., WAS HELD BY THE TPO TO BE IRRELEVANT IN VIEW OF INSIGNIFICANT CONTRIBUTION OF SUCH A PORTAL TO T HE ASSESSEES INCOME. THE TPO OBSERVED THAT MAJORITY OF THE INCOME OF THI S COMPANY WAS FROM `SOFTWARE DEVELOPMENT & CONSULTING SERVICES. INCOME OF THIS COMPANY FROM `TRAINING AND `MEDICAL TRANSCRIPTION WAS FOUND TO BE ITA NO.1489/DEL/2014 7 MINIMAL. HE, THEREFORE, CONSIDERED THIS COMPANY AS PREDOMINANTLY A SOFTWARE DEVELOPMENT PROVIDER. THE ASSESSEES REQUE ST BEFORE THE DRP FOR THE EXCLUSION OF THIS COMPANY MET WITH THE FATE OF DISMISSAL. NOW, THE ASSESSEE IS BEFORE US ASSAILING THE INCLUSION O F THIS COMPANY. 8.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY, A COPY OF WHICH IS AVAILABLE ON PAGES 1 ONWARDS OF TH E PAPER BOOK, THAT ITS TOTAL INCOME FROM OPERATIONS IS RS.9,35,57,676/ -, WITH THE FOLLOWING BREAK-UP :- TRAINING INCOME - RS.2,44,107/- SOFTWARE DEVELOPMENT AND CONSULTING SERVICES - RS.8,49,39,375/- MEDICAL TRANSCRIPTION RECEIPTS - RS.83,74,194/- 8.3. IT IS THIS TOTAL FIGURE OF RS.9.36 CRORE WHICH HAS BEEN TAKEN BY THE TPO. IT SHOWS THAT THE TPO HAS INCLUDED CAT TECHNOL OGIES LTD. AS COMPARABLE ON ENTITY LEVEL. ON A PERUSAL OF THE ABO VE DETAIL OF INCOME OF THIS COMPANY, IT IS APPARENT THAT IT NOT ONLY IN CLUDES REVENUES FROM MEDICAL TRANSCRIPTION AND TRAINING, BUT THE MAJOR C OMPONENT OF RS.8.49 ITA NO.1489/DEL/2014 8 CRORE IS INCOME FROM SOFTWARE DEVELOPMENT AND CONS ULTING SERVICES. IT IS REITERATED THAT THE SEGMENT UNDER CONSIDERATI ON IS `SOFTWARE DEVELOPMENT AND MAINTENANCE SUPPORT SERVICES AND T HE ASSESSEE HAS A SEPARATE INTERNATIONAL TRANSACTION OF PROVISION OF ADVISORY SERVICES WITH THE TRANSACTED VALUE AT RS.1.75 CRORE, WHOSE A LP HAS BEEN DISJOINTEDLY DETERMINED BY THE TPO. WHEN WE COME B ACK TO THE REVENUES OF CAT TECHNOLOGIES LTD., IT IS SEEN THAT THE MAJOR COMPONENT OF RS.8.49 CRORE IS ON ACCOUNT OF `SOFTWARE DEVELOP MENT AND CONSULTING SERVICES. SINCE THE SEGMENT OF THE ASSESSEE UNDER CONSIDERATION IS ONLY `SOFTWARE DEVELOPMENT AND MAINTENANCE SUPPORT SERVI CES INDEPENDENT OF `ADVISORY SERVICES, IT BECOMES MANIFEST THAT A COMPANY RENDERING BOTH THE SOFTWARE DEVELOPMENT AND ALSO ADVISORY SER VICES, CANNOT BE CONSIDERED AS COMPARABLE ON ENTITY LEVEL WITH THE A SSESSEES SEPARATE SEGMENT OF SOFTWARE DEVELOPMENT MAINTENANCE SUPPORT SERVICES. BE THAT AS IT MAY, CAT TECHNOLOGIES LTD., HAS ALSO EARNED M EDICAL TRANSCRIPTION RECEIPTS OF RS.83.74 LAC AND TRAINING INCOME OF RS. 2.44 LAC, BOTH OF WHICH HAVE BEEN COMBINED WITH THE INCOME FROM SOFTW ARE DEVELOPMENT AND CONSULTING SERVICES. ONE CANNOT ASCERTAIN WITH PRECISION THE ITA NO.1489/DEL/2014 9 CONTRIBUTION MADE BY THE INCOME FROM MEDICAL TRANSC RIPTION AND TRAINING TO THE OVERALL PROFITABILITY OF CAT TECHNO LOGIES LTD., SO THAT THE OTHER INCOME MAY BE SEGREGATED. AS SUCH, WE F AIL TO COMPREHEND AS TO HOW THE ENTITY LEVEL COMPARISON OF THIS COMPANY WITH THE ASSESSEES `SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES SEG MENT CAN BE CONSTRUED AS VALID. THIS COMPANY IS, THEREFORE, DIR ECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. II) INFOSYS TECHNOLOGIES LTD. 9.1. THE TPO NOTICED THAT THIS COMPANY WAS FINDING PLACE IN THE ACCEPT/REJECT MATRIX. HE FOUND IT TO BE ENGAGED INT O SOFTWARE DEVELOPMENT SERVICES QUALIFYING ALL THE FILTERS APP LIED BY HIM. THE ASSESSEE RAISED CERTAIN OBJECTIONS BEFORE THE DRP A GAINST THE INCLUSION OF THIS COMPANY, BUT WITHOUT ANY SUCCESS. THE TPO COMPUTED OPERATING PROFIT MARGIN OF THIS COMPANY AT 40.74% AND CONSID ERED IT ACCORDINGLY. THE ASSESSEE IS AGGRIEVED AGAINST THE INCLUSION OF THIS COMPANY IN THE EVENTUAL SET OF COMPARABLES. ITA NO.1489/DEL/2014 10 9.2. WE ARE DISINCLINED TO SUSTAIN THE PRELIMINARY OBJECTION TAKEN BY THE LD. DR THAT THE ASSESSEE SHOULD BE PROHIBITED F ROM ADOPTING A STAND CONTRARY TO THE ONE WHICH WAS TAKEN AT THE STAGE OF THE TP STUDY OR DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO. IT GOES WITHOUT SAYING THAT THE OBJECT OF AN ASSESSMENT IS TO DETERMINE TH E INCOME 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 INCLUDED IN THE TOTAL INCOME, WHICH IS OTHERWISE NO T CHARGEABLE, SHOULD ALSO BE EXCLUDED. THERE CAN BE NO ESTOPPEL AGAINST THE PROVISIONS OF THE ACT. EXTENDING THIS PROPOSITION FURTHER TO THE CONT EXT OF THE TRANSFER PRICING, WE FIND THAT IF AN ASSESSEE FAILS TO REPO RT AN OTHERWISE COMPARABLE COMPANY, THEN THE TPO IS OBLIGED TO INCL UDE IT IN THE LIST OF COMPARABLES, AND IN THE SAME MANNER, IF AN ASSESSE E WRONGLY REPORTS AN INCOMPARABLE CASE AS COMPARABLE IN ITS TP STUDY AND THEN LATER ON CLAIMS THAT IT SHOULD BE EXCLUDED, THEN, THERE SHO ULD BE NOTHING TO FORBID SUCH AN ASSESSEE FROM CLAIMING SO, PROVIDED THE TP O IS SATISFIED THAT THE COMPANY SO ORIGINALLY REPORTED AS COMPARABLE IS , IN FACT, NOT ITA NO.1489/DEL/2014 11 COMPARABLE. THE SPECIAL BENCH OF THE TRIBUNAL IN DCIT VS. QUARK SYSTEMS PVT. LTD. (2010) 132 TTJ (CHD) (SB) 1 HAS ALSO HELD THAT A COMPANY WHICH WAS INCLUDED BY THE ASSESSEE AND ALSO BY THE TPO IN THE LIST OF COMPARABLES AT THE TIME OF COMPUTING ALP, C AN BE EXCLUDED BY THE TRIBUNAL, IF THE ASSESSEE PROVES THAT THE SAME WAS WRONGLY INCLUDED. 9.3. TURNING TO THE FUNCTIONAL COMPARABILITY, WE F IND THAT THE ASSESSEE IS SIMPLY A CAPTIVE UNIT RENDERING SERVICES TO ITS AE ALONE WITHOUT ACQUIRING ANY INTELLECTUAL PROPERTY RIGHTS IN THE W ORK DONE BY IT IN THE DEVELOPMENT OF SOFTWARE. THE HONBLE DELHI HIGH CO URT IN CIT VS. AGNITY INDIA TECHNOLOGIES (P) LTD. (2013) 219 TAXMA NN 26 (DEL) CONSIDERED THE GIANTNESS OF INFOSYS LTD., IN TERMS OF RISK PROFILE, NATURE OF SERVICES, NUMBER OF EMPLOYEES, OWNERSHIP OF BRAN DED PRODUCTS AND BRAND RELATED PROFITS, ETC. IN COMPARISON WITH THE FACTORS PREVAILING IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD., BEING, A CAPTIVE UNIT PROVIDING SOFTWARE DEVELOPMENT SERVICES WITHOUT HAV ING ANY IP RIGHTS IN THE WORK DONE BY IT. AFTER MAKING COMPARISON OF VA RIOUS FACTORS AS ENUMERATED ABOVE, THE HONBLE DELHI HIGH COURT HELD INFOSYS LTD. TO BE ITA NO.1489/DEL/2014 12 INCOMPARABLE WITH AGNITY INDIA TECHNOLOGIES PVT. LT D. THE FACTS OF THE INSTANT CASE ARE MORE OR LESS SIMILAR INASMUCH AS T HE EXTANT ASSESSEE IS ALSO A CAPTIVE SERVICE PROVIDER WITH A LIMITED NUMB ER OF EMPLOYEES AT ITS DISPOSAL AND ALSO NOT OWNING ANY BRANDED PRODUCTS W ITH NO EXPENDITURE ON R&D ETC. WHEN WE CONSIDER THE ABOVE FACTORS IN A HOLISTIC MANNER, THERE REMAINS ABSOLUTELY NO DOUBT IN OUR MINDS THAT INFOSYS TECHNOLOGIES LTD. IS INCOMPARABLE WITH THE ASSESSEE COMPANY. RESPECTFULLY FOLLOWING THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN AGNITY INDIA (SUPRA) , WE HOLD THAT INFOSYS TECHNOLOGIES LTD., CANNOT BE TREATED AS COMPARABLE WITH THE ASSESSEE C OMPANY. HERE IT IS PERTINENT TO MENTION THAT THE TRIBUNAL IN THE ASSES SES OWN CASE FOR IMMEDIATELY PRECEDING ASSESSMENT YEAR IN ITA NO.579 9/DEL/2012 VIDE ITS ORDER DATED 27.5.2015, HAS ALSO REMOVED THIS CO MPANY FROM THE FINAL SET OF COMPARABLES. THIS COMPANY IS, THEREFORE, DIR ECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. ITA NO.1489/DEL/2014 13 III) TATA ELXSI . 10.1. THE TPO INCLUDED THIS COMPANY IN THE TALLY OF COMPARABLES. THE ASSESSEE OBJECTED TO THE PROPOSED INCLUSION OF THIS COMPANY BY ARGUING THAT IT WAS ENGAGED IN SALE OF EQUIPMENT AND SOFTWA RE LICENSES ALSO. THE TPO REFUSED TO ACCEPT THE ASSESSEES OBJECTIONS. N O RELIEF WAS ALLOWED BY THE DRP AND FINALLY THIS COMPANY CAME TO BE INCL UDED IN THE FINAL SET OF COMPARABLES. 10.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE TOTAL REVENUE OF THIS COMPANY FOR THE YEAR IN QUESTION STANDS AT RS.41851 LAC, CONSISTING OF REVENUE OF RS.2352.41 LAC FROM SALES AND SUPORT AND RS.39499 .19 LAC FROM SERVICES. SEGMENTAL REPORTING DONE BY THIS COMPA NY INDICATES THE SPLIT OF TOTAL REVENUE OF RS.41851.60 LAC INTO TWO SEGMEN TS, NAMELY, RS.4008.75 LAC UNDER THE SEGMENT SYSTEMS INTEGRATI ON AND SUPPORT AND RS.37843.03 LAC UNDER THE SOFTWARE DEVELOPMENT AND SERVICES SEGMENT. THE DESCRIPTION OF SYSTEMS INTEGRATION AND SUPPORT SEGMENT HAS BEEN GIVEN ON PAGE 13 OF THE ANNUAL REPORT WHIC H INDICATES THAT THIS ITA NO.1489/DEL/2014 14 SEGMENT REFERS TO: `A WIDE RANGE OF TECHNICAL COMPU TING SOLUTIONS SPANNING HIGH END COMPUTING PLATFORMS, NETWORKING, MECHANICAL DESIGN AUTOMATION TOOLS, ENTERPRISE STORAGE SOLUTIONS, DIG ITAL MEDIA AND LIFE SCIENCES SOLUTIONS. THIS DESCRIPTION OF THE SY STEMS INTEGRATION AND SUPPORT SEGMENT INDICATES THE NATURE OF REVENUES, BEING FROM SALES/LICENSING OF SOLUTIONS CATERING TO THE REQUIR EMENTS OF DIFFERENT INDUSTRIES. OUR FINDING IS FORTIFIED BY ANNEXURE T O DIRECTORS REPORT WHICH ALSO GIVES NARRATION OF SYSTEMS INTEGRATION AND SUPPORT. IT HAS BEEN MENTIONED THAT: THIS SEGMENT OFFERS TURNKEY S OLUTIONS COMPRISING OF INTEGRATION OF HARDWARE AND SOFTWARE PRODUCTS SO URCED FROM GLOBAL PRINCIPALS FOR DOMESTIC CUSTOMERS. THE SOLUTIONS A RE OFFERED IN THE AREA OF TECHNICAL COMPUTING USED IN A WIDE RANGE OF INDU STRIES SUCH AS AUTOMOTIVE, PHARMACY, DEFENCE, METEOROLOGY. YOUR C OMPANYS TECHNICAL SOLUTIONS INVOLVE SUPPLY OF DIFFERENT PRO DUCTS SOURCED FROM DIFFERENT GLOBAL PRINCIPALS BASED ON A SET OF THE C USTOMERS ENGINEERING IT REQUIREMENTS. FURTHER, WHEN WE PERUSE THE SCHEDULE OF FIXED ASSETS OF THIS COMPANY, IT CAN BE FOUND THAT THERE IS A MENTI ON OF AN ASSET INTANGIBLES SOFTWARE WITH ITS CLOSING WRITTEN D OWN VALUE AT ITA NO.1489/DEL/2014 15 RS.1423.16. SCHEDULE TO THE FINANCIAL STATEMENTS F URTHER INDICATE PARTICULARS IN RESPECT OF SALES, PURCHASES, STOCKS, ETC. FROM THE ABOVE NARRATION OF FACTUAL POSITION EXTRACTED FROM THE AN NUAL REPORT OF THIS COMPANY, IT CAN BE SEEN THAT THIS COMPANY IS ALSO E NGAGED IN SALE OF SOFTWARE PRODUCTS/SOLUTIONS AND HAS ITS OWN INTANGI BLES. THE REVENUES UNDER SYSTEMS INTEGRATION AND SUPPORT SEGMENT OF THIS COMPANY STAND AT RS.4008.75 CRORE, OUT OF ITS TOTAL REVENUE OF RS .41851.60. FOR COMPARISON, THE TPO HAS TAKEN THE FIGURES OF THIS C OMPANY AT ENTITY LEVEL, STARTING WITH A REVENUE AT RS.41851.60 CRORE . SINCE THE OVERALL PROFIT OF THIS COMPANY INCLUDES THE EFFECT OF PROFI T FROM SALE/LICENSING OF SOFTWARE PRODUCTS/SOLUTIONS AND THERE IS NO MEASURE TO ISOLATE SUCH PROFIT FROM THE OVERALL PROFIT OF SOFTWARE DEVELOPMENT SEG MENT, WE HOLD THAT THIS COMPANY AT AN ENTITY LEVEL CANNOT BE CONSIDERE D AS COMPARABLE WITH THE ASSESSEES `SOFTWARE DEVELOPMENT AND MAINTENANC E SEGMENT. THIS COMPANY IS, THEREFORE, DIRECTED TO BE EXCLUDED. ITA NO.1489/DEL/2014 16 IV) TCS LTD . 11.1. THIS COMPANY WAS CHOSEN BY THE TPO AS COM PARABLE. THE ASSESSEES OBJECTIONS ABOUT THIS COMPANYS INCOMPAR ABILITY WERE TURNED DOWN. 11.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY THAT ITS TOTAL INCOME COMPRISES OF REVENUES FROM `IT AND CONSULTANCY SERVICES AT RS.21535.75 CRORE AND `SALE OF EQUIPME NT AND SOFTWARE LICENSES AT RS.868.25 CRORE. THE TPO HAS TAKEN EN TITY LEVEL FIGURES OF THIS COMPANY FOR THE PURPOSES OF MAKING COMPARISON. WHEN WE PERUSE THE SEGMENTAL REPORTING GIVEN BY THIS COMPANY, IT I S FOUND THAT THE SAME HAS BEEN DONE ON THE BASIS OF GEOGRAPHICAL LOCATION S AND THERE ARE NO FUNCTIONAL SEGMENTS. IT HAS BEEN NOTICED ABOVE THA T TOTAL REVENUE OF THIS COMPANY INCLUDES A LARGER CHUNK FROM THE SALE OF EQ UIPMENT AND SOFTWARE LICENSES, WHICH RENDERS IT INCOMPARABLE WI TH THE ASSESSEES `SOFTWARE AND MAINTENANCE SUPPORT SERVICES SEGMENT UNDER CONSIDERATION. ITA NO.1489/DEL/2014 17 11.3. SIGNIFICANTLY, PAGE 23 OF THE ANNUAL REPORT OF THIS COMPANY DIVULGES THAT: DURING THE YEAR 2008-09, THE COMPAN Y HAS ACQUIRED CITIGROUP INC.S (CITI) 96.26% INTEREST IN TCS E-SE RVE LTD. (FORMERLY KNOWN AS CITIGROUP GLOBAL SERVICES LTD.), THE INDI A-BASED CAPITAL BPO, FOR A TOTAL CONSIDERATION OF USD 504.54 MILLION. T HIS INDICATES THAT THIS COMPANY MADE ACQUISITION DURING THE YEAR IN QUESTIO N WHICH IS AN EXTRAORDINARY FINANCIAL EVENT. THE MUMBAI BENCH OF THE TRIBUNAL IN PETRO ARALDITE (P) LTD. VS. DCIT (2013) 154 TTJ (MU M) 176, HAS HELD THAT A COMPANY CANNOT BE CONSIDERED AS COMPARABLE B ECAUSE OF EXCEPTIONAL FINANCIAL RESULTS DUE TO MERGERS/DEMERG ERS. SIMILAR VIEW HAS BEEN BOLSTERED BY THE DELHI BENCH OF THE TRIBUN AL IN SEVERAL CASES INCLUDING CIENA INDIA PVT. LTD. VS. DCIT (ITA NO.3324/DEL/2013) VIDE ITS ORDER DATED 23.4.2015. THE LD. DR CONTENDED TH AT THE MERE FACT OF ACQUISITION AND MERGER SHOULD NOT BE CONSIDERED AS A DECISIVE TEST FOR EXCLUSION OF A COMPANY UNLESS IT HAS AFFECTED THE P ROFITABILITY DUE TO SUCH MERGER ETC. WE ARE NOT INCLINED TO ACCEPT THIS CONTENTION FOR THE OBVIOUS REASON THAT ONCE ACQUISITION AND MERGER ETC . HAS TAKEN PLACE, IT IS ALWAYS LIKELY TO AFFECT THE PROFITABILITY OF SUC H A COMPANY IN THE YEAR ITA NO.1489/DEL/2014 18 OF ACQUISITION ETC. THERE CANNOT BE ANY STANDARD YA RDSTICK TO MEASURE THE IMPACT OF SUCH A FACTOR ON THE OVERALL PROFITABILIT Y OF SUCH A COMPANY. IT IS RELEVANT TO HIGHLIGHT THAT WE ARE CONSIDERING TH E EXCLUSION OF A COMPANY ON THIS SCORE. IN OUR CONSIDERED OPINION, WHEN OTHER COMPARABLES ARE AVAILABLE, THE EXCLUSION OF A PROBA BLE COMPARABLE COMPANY CANNOT HAVE MUCH SIGNIFICANCE IN CONTRAST T O A SITUATION OF INCLUSION OF A PROBABLE INCOMPARABLE. RESPECTFULLY FOLLOWING THE ABOVE REFERRED DECISIONS, WE HOLD THAT TCS LTD. CANNOT B E CONSIDERED AS COMPARABLE WITH THE ASSESSEES SOFTWARE DEVELOPMENT AND MAINTENANCE SEGMENT ON THIS COUNT AS WELL. THE SAME IS DIRECTE D TO BE EXCLUDED. V) THIRDWARE SOLUTIONS LTD . 12.1. THIS COMPANY WAS DIRECTLY CHOSEN BY THE TP O AS COMPARABLE. THE DRP REFUSED TO INTERVENE IN THE TPOS SELECTION . THE ASSESSEE IS NOW ASSAILING THE INCLUSION OF THIS COMPANY IN THE FINAL SET OF COMPARABLES. 12.2. WE HAVE HEARD BOTH THE SIDES AND PERUSED T HE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED FROM THE ANNUAL REPORT O F THIS COMPANY THAT ITA NO.1489/DEL/2014 19 APART FROM REVENUE FROM SOFTWARE SERVICES, THIS COMPANY HAS ALSO EARNED REVENUE FROM SALES. THE TPO HAS CONSIDERED ENTITY LEVEL FIGURES OF THIS COMPANY FOR COMPARISON. IN VIEW OF THE JOINING OF THE REVENUE FROM SALES WITH THE REVENUE FROM SOFTWARE S ERVICES, THIS COMPANY CEASES TO BE COMPARABLE WITH THE ASSESSEES `SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES SEGMENT. HER E, IT IS PERTINENT TO MENTION THAT THIS COMPANY WAS CONSIDERED BY THE TPO AS COMPARABLE IN THE IMMEDIATELY PRECEDING YEAR AS WELL. THE TRIBUNA L VIDE ITS AFORENOTED ORDER, HAS HELD IT TO BE INCOMPARABLE. SINCE NO DI STINGUISHING FEATURES OF THE FUNCTIONAL PROFILE OF THIS COMPANY AND THE A SSESSEE FOR THE CURRENT YEAR VIS--VIS THE PRECEDING YEAR HAVE BEEN BROUGHT TO OUR NOTICE , FOLLOWING THE PRECEDENT, WE ORDER FOR THE REMOVAL O F THIS COMPANY FROM THE LIST OF COMPARABLES. 13. APART FROM CHALLENGING THE INCLUSION OF THE ABOVE REFERRED FIVE COMPANIES IN THE FINAL SET OF COMPARABLES BY THE TP O, THE ASSESSEE HAS ALSO ASSAILED THE NON-INCLUSION OF TWO COMPANIES, N AMELY, QUINTEGRA ITA NO.1489/DEL/2014 20 SOLUTIONS LTD., AND ZYLOG SYSTEMS LTD. WE WILL SEP ARATELY DEAL WITH THESE COMPANIES. I) QUINTEGRA SOLUTIONS LTD . 14.1. THE ASSESSEE TREATED THIS COMPANY AS COMP ARABLE. THE TPO REFUSED TO ACCEPT THE COMPARABILITY BY OBSERVING TH AT THIS COMPANY HAS COPYRIGHTS INCLUDED IN ITS FIXED ASSETS AND WAS ALS O HAVING SEVERAL PRODUCTS CUSTOMIZED FOR ITS CLIENTS. 14.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY THAT IT HAS COPYRIGHTS INCLUDED IN ITS SCHEDULE OF FIX ED ASSETS WITH THE CLOSING WRITTEN DOWN VALUE AT RS.2.17 CRORE. APART FROM THAT, IT IS SEEN THAT THIS COMPANY IS REGULARLY INCURRING EXPENSES O N RESEARCH AND DEVELOPMENT. THIS COMPANY IS ALSO EARNING REVENUE FROM SALE OF SOFTWARE PRODUCTS APART FROM RENDERING SOFTWARE SER VICES. FOLLOWING THE VIEW TAKEN FOR THE EXCLUSION OF THIRDWARE SOLUTIONS LTD. ETC. ABOVE, WE HOLD THAT THIS COMPANY HAS BEEN RIGHTLY EXCLUDED FR OM THE LIST OF COMPARABLES BY THE TPO BECAUSE OF THE JOINING OF I TS INCOME FROM SALE ITA NO.1489/DEL/2014 21 OF PRODUCTS WITH THE INCOME FROM RENDERING OF SOFTW ARE DEVELOPMENT SERVICES. THE TPOS ACTION IS, THEREFORE, APPROVED . II) ZYLOG SYSTEMS LTD . 15. THIS COMPANY WAS CONSIDERED BY THE ASSESSEE AS COMPARABLE. THE TPO REFUSED TO ACCEPT IT AS COMPARABLE ON THE GROUN D THAT ITS REVENUES WERE SEGMENTED INTO ONSHORE AND OFFSHORE SERVICES. CERTAIN OTHER REASONS FOR EXCLUSION HAVE ALSO BEEN GIVEN BY THE T PO. THOUGH THE LD. AR INITIALLY ARGUED FOR RECOGNIZING THIS COMPANY AS COMPARABLE, BUT AFTER NOTING THE DIFFERENCES IN THE FUNCTIONAL PRO FILE OF THIS COMPANY WITH THE `SOFTWARE DEVELOPMENT AND MAINTENANCE SERV ICE SEGMENT OF THE ASSESSEE, IT WAS FAIRLY CONCEDED THAT THIS COMP ANY WAS NOT COMPARABLE. UNDER SUCH CIRCUMSTANCES, WE APPROVE T HE VIEW TAKEN BY THE TPO IN EXCLUDING IT FROM THE LIST OF COMPARABLE S. B. BACK OFFICE SUPPORT SERVICES AND F & A SUPPORT SERVICES. 16. THE ASSESSEE SEPARATELY REPORTED THE INTERNATIO NAL TRANSACTIONS OF `PROVISION OF BACK OFFICE SUPPORT SERVICES AND `PR OVISION OF F&A ITA NO.1489/DEL/2014 22 SUPPORT SERVICES. SEPARATE OP/TC WAS COMPUTED AND IT WAS CLAIMED THAT THESE INTERNATIONAL TRANSACTIONS WERE AT ARMS LENGTH PRICE (ALP). THE TPO MERGED THESE INTERNATIONAL TRANSACTIONS FOR BENCHMARKING. THE ASSESSEE HAD CHOSEN CERTAIN COMPANIES AS COMPAR ABLES. THE TPO MADE ALTERATIONS IN COMPARABLES. FINALLY, TEN COMP ANIES WERE CHOSEN AS COMPARABLE OF THIS MERGED SEGMENT, WHICH HAVE BEEN LISTED ON PAGE 88 OF THE TPOS ORDER. AVERAGE OP/TC OF THESE COMPANI ES WAS COMPUTED AT 37.15%. BY APPLYING THIS PROFIT RATE AS BENCHMA RK, THE TPO RECOMMENDED TRANSFER PRICING ADJUSTMENT TO THE TUNE OF RS.1.89 CRORE. THE DRP ALLOWED SOME RELIEF BY REDUCING THE ADJUSTM ENT TO RS.1.48 CRORE. THE ASSESSEE IS AGGRIEVED AGAINST THE SUSTE NANCE OF BALANCE ADDITION UNDER THIS MERGED SEGMENT. 17. THE LD. AR DID NOT SERIOUSLY RAISE ANY DISP UTE AGAINST THE MERGER OF THE TWO SEGMENTS BY THE TPO. AS SUCH, WE ARE PR OCEEDING TO DETERMINE THE ALP OF THESE MERGED SEGMENTS INTO ONE . 18. BACK OFFICE SUPPORT SERVICE PROVIDED BY THE ASS ESSEE INCLUDE POLICY ADMINISTRATION AND MAINTENANCE AND ALSO CONT RACT GENERATION. ITA NO.1489/DEL/2014 23 GENERATING INSURANCE CONTRACTS FOR THE CUSTOMERS OF OVERSEAS GROUP ENTITIES AND SENDING THEM TO THE RESPECTIVE OVERSEA S OF SUN LIFE GROUP ENTITIES IS ONE OF THE ACTIVITIES PERFORMED BY THE ASSESSEE FOR ITS AES. IT ALSO ENCOMPASSES UPDATING THE FINANCIAL AND PERSONN EL DATA OF CLIENTS OF OVERSEAS GROUP ENTITIES. FINANCE AND ACCOUNTS SUPP ORT SERVICES ARE IN THE NATURE OF FINANCIAL AND ACCOUNTING SUPPORT SERV ICES RENDERED BY THE ASSESSEE UNDER THE DIRECTIONS ISSUED BY SUN LIFE, C ANADA. THE ASSESSEE WAS COMPENSATED AT COST PLUS MARK-UP IN RELATION TO BOTH THE BACK OFFICE SUPPORT AND F&A SUPPORT SERVICES. WITH THE ABOVE BA CKGROUND OF THE NATURE OF ACTIVITIES CARRIED OUT BY THE ASSESSEE UN DER THIS MERGED SEGMENT OF PROVISION OF SERVICES, WE WILL NOW EXPLO RE AS TO WHETHER THE COMPANIES ASSAILED BEFORE US ARE, IN FACT, COMPARAB LE OR NOT. 19. THE ASSESSEE HAS DISPUTED INCLUSION OF FIVE COM PANIES IN THE FINAL SET OF COMPARABLES WITH WHICH WE WILL DEAL HEREINAF TER. ITA NO.1489/DEL/2014 24 I) ACCENTIA TECHNOLOGIES LTD . 20.1. THE TPO CONSIDERED THIS COMPANY AS COMPARAB LE. THE ASSESSEES OBJECTIONS ABOUT ITS FUNCTIONAL INCOMPARABILITY WER E REPELLED. THAT IS HOW, THIS COMPANY CAME TO BE INCLUDED IN THE FINAL SET OF COMPARABLES. 20.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D GOING THROUGH THE ANNUAL REPORT OF THIS COMPANY, WE FIND THAT DURING THE YEAR IN QUESTION CERTAIN ACQUISITIONS AND MERGERS WERE UNDERTAKEN BY THIS COMPANY, WHICH IS APPARENT FROM PAGE 29 OF THE ANNUAL REPORT . IT HAS BEEN MENTIONED THAT THIS COMPANY: COMPLETED THE ACQUISI TION OF OAK TECHNOLOGIES INC., USA AND HAS RAPIDLY INCREASED IT S CUSTOMER BASE FROM NEW JERSEY AND NEIGHBORING AREAS. THIS SHOWS THAT EXTRAORDINARY FINANCIAL EVENT HAPPENED DURING THE YEAR IN THIS CO MPANY BY MEANS OF ACQUISITION, THEREBY RENDERING IT AS UNFIT FOR COMP ARISON WITH THE ASSESSEES PROFITABILITY UNDER THIS SEGMENT. FOLLO WING THE VIEW TAKEN HEREINABOVE WHILE DISCUSSING THE EXCLUSION OF TCS L TD. FROM THE `SOFTWARE DEVELOPMENT AND MAINTENANCE SEGMENT OF T HE ASSESSEE, WE ITA NO.1489/DEL/2014 25 DIRECT THE ELIMINATION OF THIS COMPANY ALSO FROM TH E FINAL LIST OF COMPARABLES. II. COSMIC GLOBAL LTD . 21.1. THIS COMPANY WAS INCLUDED BY THE ASSESSEE IN ITS LIST OF COMPARABLES. HOWEVER, IT WAS ARGUED THAT THE SAME BE ELIMINATED AS IT WAS WRONGLY CHOSEN. 21.2. AFTER HEARING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS COMPANY WAS S UBJECT MATTER OF CONSIDERATION BY THE TRIBUNAL IN ITS ORDER FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AS WELL. AFTER MAKING A DETAILED A NALYSIS, THE TRIBUNAL HAS APPROVED THE VIEW TAKEN BY THE TPO IN CONSIDERI NG THIS COMPANY AS A FIT COMPARABLE. FOLLOWING SUCH A VIEW TAKEN IN TH E IMMEDIATELY PRECEDING ASSESSMENT YEAR, WE UPHOLD THE TPOS ORDE R REJECTING THE ASSESSEES CONTENTION FOR EXCLUSION. ITA NO.1489/DEL/2014 26 III. CORAL HUB (VISHAL INFORMATION TECHNOLOGY LTD. ) 22.1. THE ASSESSEE CHOSE THIS COMPANY AS COMPARAB LE. AS SUCH, NO OBJECTION WAS TAKEN BEFORE THE TPO AGAINST ITS INCL USION. HOWEVER, THE ASSESSEE ARGUED BEFORE THE DRP THAT THIS COMPANY WA S WRONGLY INCLUDED. THE DRP REFUSED TO ACCEPT THE ASSESSEES CONTENTION. THAT IS HOW THE ASSESSEE IS AGGRIEVED BEFORE US. 22.2. IN VIEW OF DISCUSSION MADE SUPRA , WE ARE NOT INCLINED TO ACCEPT THE PRELIMINARY OBJECTION RAISED BY THE LD. DR AGAI NST THE INCLUSION OF THIS COMPANY ON THE PREMISE THAT THE ASSESSEE HAD I TSELF CHOSEN IT AS COMPARABLE. 22.3. COMING TO THE FUNCTIONAL COMPARABILITY OF THIS COMPANY, WE OBSERVE FROM ITS ANNUAL REPORT THAT IT IS OUTSOURCI NG ITS MAJOR ACTIVITIES. SUCH OUTSOURCING CHARGES CONSTITUTE AROUND 90.57% O F THE TOTAL OPERATING COST. AS AGAINST THIS, THE ASSESSEE IS E NGAGED IN PROVIDING THE SERVICES UNDER THIS SEGMENT AT ITS OWN WITHOUT ANY OUTSOURCING. THIS CRUCIAL DIFFERENCE BETWEEN THE MANNER OF PERFORMING SERVICES HAS AN IMPORTANT BEARING ON THE ULTIMATE PROFITABILITY. T HE DELHI BENCH OF THE ITA NO.1489/DEL/2014 27 TRIBUNAL IN THE CASE OF MERCER CONSULTING (INDIA) PVT. LTD. VS. DCIT IN ITA NO.9666/DEL/2014 , HAS APPROVED THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES BY, IN TURN, RELYING O N THE TWO TRIBUNAL ORDERS PASSED BY THE MUMBAI BENCHES IN HAPAG LLOYD GLOBAL SERVICES AND ACIT VS. MERSK GLOBAL SERVICES CENTRE (INDIA) PVT. LTD. WE NOTE THAT THE TRIBUNAL HAS ALSO EXCLUDED THIS COMPANY FR OM THE LIST OF COMPARABLES FOR THE IMMEDIATELY PRECEDING YEAR. IN VIEW OF THE ABOVE REASONS AND RESPECTFULLY FOLLOWING THE ABOVE PRECED ENTS, WE DIRECT TO UNLOAD THIS COMPANY FROM THE LIST OF COMPARABLES. IV) E-CLERX SERVICES LTD . 23.1. THE TPO CONSIDERED THIS COMPANY AS COMPARAB LE. THE ASSESSEES OBJECTION THAT E-CLERX SERVICES LTD., IS A KNOWLEDG E PROCESS OUTSOURCING (KPO) COMPANY AND WAS ENGAGED IN RENDER ING HIGH END SERVICES, WAS REJECTED. THE ASSESSEE IS ASSAILING THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES. 23.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD. WITHOUT GOING INTO THE FURTHE R DETAILS, IT IS OBSERVED ITA NO.1489/DEL/2014 28 THAT THE HONBLE JURISDICTIONAL HIGH COURT IN THE C ASE OF RAMPGREEN SOLUTIONS PVT. LTD. VS. CIT VIDE ITS JUDGMENT DATED 10.8.2015 HAS OBSERVED THAT E-CLERX IS ENGAGED IN KPO SERVICES W HICH CANNOT BE COMPARED WITH A COMPANY PROVIDING LOW-END BPO SERVI CES. TURNING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE SEG MENT OF THE ASSESSEE UNDER CONSIDERATION IS `BACK OFFICE SUPPORT PLUS F& A SERVICES. BY NO STANDARD, A KPO COMPANY LIKE E-CLERX CAN BE CONSID ERED AS COMPARABLE WITH THE `BACK OFFICE SUPPORT PLUS F&A SERVICES SE GMENT OF THE ASSESSEE. WE, THEREFORE, ORDER FOR THE REMOVAL OF THIS COMPANY FROM THE LIST OF COMPARABLES. II) GENESIS INTERNATIONAL CORPORATION LTD . 24.1. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES. THE ASSESSEES OBJECTIONS ABOUT ITS FUNCTIONAL DISS IMILARITY WERE JETTISONED. 24.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS COMPANY IS EN GAGED IN RENDERING FULL RANGE OF GEOSPATIAL SERVICES TO ITS CUSTOMERS. THESE SERVICES, IN ITA NO.1489/DEL/2014 29 SIMPLE TERMS, MEAN THE SERVICES RELATING TO THE POS ITIONING OF THINGS ON THE EARTHS SURFACE. THESE INCLUDE 3-D MAPPING, NA VIGATION MAPS, IMAGE PROCESSING, CADASTRAL MAPPING, ETC. WHEN WE CONSIDER THE NATURE OF SERVICES PROVIDED BY THIS COMPANY AND THEN COMPA RE THEM WITH THE COMBINED BACK OFFICE, FINANCIAL AND ACCOUNTING SUPP ORT SERVICES RENDERED BY THE ASSESSEE UNDER CONSIDERATION, IT TU RNS OUT THAT BOTH ARE POLES APART FROM EACH OTHER. THIS COMPANY IS TOTALL Y INCOMPARABLE WITH THIS SEGMENT OF THE ASSESSEE. AT THIS STAGE, IT IS FURTHER PERTINENT TO MENTION THAT THE TPO HAS HIMSELF EXCLUDED THIS COMP ANY FROM THE LIST OF COMPARABLES FOR THE IMMEDIATELY SUCCEEDING YEAR BY NOTICING IT TO BE A FUNCTIONALLY DIFFERENT COMPANY. AS SUCH, WE ARE NOT INCLINED TO ACCEPT THE COMPARABILITY OF THIS COMPANY WITH THE ASSESSEE S MERGED `BACK OFFICE SUPPORT AND F&A SUPPORT SERVICES SEGMENT. T HIS COMPANY IS DIRECTED TO BE TAKEN AWAY FROM THE TALLY OF COMPARA BLES UNDER THIS SEGMENT. ITA NO.1489/DEL/2014 30 C. ADVISORY SERVICES SEGMENT 25. THE TPO RECOMMENDED A TRANSFER PRICING ADJUST MENT UNDER THIS SEGMENT FOR A SUM OF RS.17,08,751. THE ASSESSEE ASS AILED THE DRAFT ORDER ON THIS ISSUE BEFORE THE DRP. PURSUANT TO THE DIRE CTIONS GIVEN BY THE DRP, THE AO MADE AN ADDITION OF RS.16,04,147 IN HIS FINAL ORDER. THIS ADDITION IS IN CHALLENGE BEFORE US. DURING THE COU RSE OF HEARING, CERTAIN QUERIES WERE RAISED FROM THE BENCH, BUT THE LD. AR DID NOT HAVE THE REQUISITE MATERIAL TO ANSWER THEM. IN VIEW OF THE NON-AVAILABILITY OF THE RELEVANT MATERIAL AND EVIDENCE, WE DISMISS THIS GRO UND SUBJECT TO THE PLUS MINUS ALLOWABILITY OF THE WORKING CAPITAL ADJU STMENT AND ADJUSTMENT ON ACCOUNT OF FOREX GAIN/LOSS AS DISCUSS ED INFRA . D. WORKING CAPITAL ADJUSTMENT . 26. THIS CLAIM OF THE ASSESSEE IS COMMON TO ALL THE THREE SEGMENTS FINALLY CONSIDERED BY THE TPO. THE ASSESSEE REQUEST ED FOR GRANT OF WORKING CAPITAL ADJUSTMENT. THE TPO REFUSED TO ALL OW SUCH ADJUSTMENT BY NOTICING THAT THE ASSESSEE HAD NOT DEMONSTRATED THAT THERE WAS ANY DIFFERENCE IN THE LEVELS OF WORKING CAPITAL EMPLOYE D BY IT VIS--VIS THE ITA NO.1489/DEL/2014 31 COMPARABLES. HE, FURTHER NOTICED THAT THE ISSUE OF WORKING CAPITAL WOULD BE RELEVANT ONLY WHEN THERE IS A SITUATION OF INVEN TORY REMAINING TIED UP OR RECEIVABLES BEING HELD UP, WHICH CANT BE RELEVA NT IN A SERVICE INDUSTRY, AS IS THE ASSESSEE ENGAGED IN. HE, THERE FORE, REFUSED TO ALLOW ANY WORKING CAPITAL ADJUSTMENT. NO RELIEF WAS ALLO WED BY THE DRP. 27. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ASSESSE E LODGED A CLAIM FOR GRANT OF WORKING CAPITAL ADJUSTMENT IN RESPECT OF A LL THE THREE SEGMENTS, NAMELY, PROVISION OF SOFTWARE DEVELOPMENT AND MAINT ENANCE SERVICES; MERGED SEGMENT OF PROVISION OF BACK OFFICE SUPPORT AND F&A SERVICES; AND ADVISORY SERVICES. THE TPO REFUSED TO ALLOW SU CH ADJUSTMENT, INTER ALIA , BY OPINING THAT THE FINANCIALS OF THE COMPANY SHO WED CONSOLIDATED INCOME FROM ALL THE THREE SEGMENTS AND, HENCE, IT W AS NOT POSSIBLE TO ASCERTAIN CREDITORS AND DEBTORS PERTAINING TO EACH SEGMENT. THE DRP STRENGTHENED THE CASE OF THE TPO BY ADDING ONE MORE REASON, BEING THE NECESSITY AND NON-AVAILABILITY OF DAILY AVERAGE OF WORKING CAPITAL DEPLOYED AS AGAINST THE USE BY THE ASSESSEE OF THE AVERAGE OF SUCH ITA NO.1489/DEL/2014 32 FIGURES OF WORKING CAPITAL ON THE FIRST AND THE LAS T DAYS OF THE ACCOUNTING PERIOD. 28. WE ARE NOT INCLINED TO ACCEPT THE VIEW CANVASSE D BY THE AUTHORITIES BELOW THAT THE WORKING CAPITAL ADJUSTMENT CANNOT BE ALLOWED AS THE ASSESSEE IS IN SERVICE INDUSTRY. SUCH AN ADJUSTMENT IS RESTRICTED TO INVENTORY, TRADE RECEIVABLES AND TRADE PAYABLES. I F A COMPANY CARRIES HIGH TRADE RECEIVABLES, IT WOULD MEAN THAT IT IS AL LOWING ITS CUSTOMERS RELATIVELY LONGER PERIOD TO PAY THEIR DUES, WHICH W ILL RESULT INTO HIGHER INTEREST COST AND THE RESULTANT LOW NET PROFIT. SI MILARLY, BY CARRYING HIGH TRADE PAYABLES, A COMPANY BENEFITS FROM A RELATIVEL Y LONGER PERIOD AVAILABLE TO IT FOR PAYING BACK THE DUES TO ITS SUP PLIERS, WHICH REDUCES THE INTEREST COST AND INCREASES PROFITS. IN ORDER TO NEUTRALIZE THE DIFFERENCES ON ACCOUNT OF CARRYING HIGH OR LOW INVE NTORY, TRADE PAYABLES AND TRADE RECEIVABLES, IT BECOMES EMINENT TO ALLOW WORKING CAPITAL ADJUSTMENT SO AS TO BRING THE CASE OF THE ASSESSEE AT PAR WITH THE OTHER FUNCTIONALLY COMPARABLE ENTITIES. WE, THEREFORE, A GREE IN PRINCIPLE WITH THE GRANT OF WORKING CAPITAL ADJUSTMENT. ITA NO.1489/DEL/2014 33 29. THE VIEW TAKEN BY THE DISPUTE RESOLUTION PAN EL (DRP) FOR COMPUTING SUCH ADJUSTMENT ON THE BASIS OF DAILY AVE RAGE OF WORKING CAPITAL DEPLOYED BY THE TESTED PARTY AND ALSO EACH OF THE COMPARABLES, IS NOT TENABLE BECAUSE OF THE ORDER PASSED BY THE DELH I BENCH OF THE TRIBUNAL IN THE CASE OF NAVISITE INDIA PVT. LTD. VS. ITO (ITA NO.5329/DEL/2012) . VIDE ITS ORDER DATED 31.5.2013, THE TRIBUNAL HAS HELD THAT THE COMPONENTS OF THE WORKING CAPITAL DEP LOYED SHOULD BE CONSIDERED ON ANNUAL BASIS WITH THE AVERAGE OF OPEN ING AND CLOSING FIGURES. WE, THEREFORE, HOLD THAT THE ENTITLEMENT O F THE ASSESSEE TO THE WORKING CAPITAL ADJUSTMENT, CANNOT BE DENIED. 30. NOTWITHSTANDING THE OTHERWISE AVAILABILITY O F THE WORKING CAPITAL ADJUSTMENT, WE ARE UNABLE TO COUNTENANCE THE CALCUL ATION GIVEN BY THE ASSESSEE AT ITS FACE VALUE BECAUSE OF AN IMPORTANT FACTOR. IT IS AN UNDISPUTED POSITION THAT THE ASSESSEE MADE UP ITS A CCOUNTS ON AN ENTITY LEVEL. IT WAS ONLY WITH A VIEW TO SHOW THAT ITS IN TERNATIONAL TRANSACTIONS WERE AT ALP, THAT IT BIFURCATED THE CONSOLIDATED AC COUNTS INTO DIFFERENT SEGMENTS. SUCH BIFURCATION OF ACCOUNTS INTO DIFFER ENT SEGMENTS HAS NOT ITA NO.1489/DEL/2014 34 BEEN DISPUTED BY THE TPO INASMUCH AS HE HAS NOT CHA LLENGED THE CORRECTNESS OF THE FIGURES SO DEDUCED IN RESPECT OF OPERATING PROFITS ETC. OF EACH SEGMENT. BUT, WHEN IT COMES TO THE COMPUTA TION OF WORKING CAPITAL ADJUSTMENT, ONE NEEDS TO LOOK ONLY AT THE F IGURES OF INVENTORY, TRADE RECEIVABLES AND TRADE PAYABLES. THESE FIGURE S CAN BE CULLED OUT FROM BALANCE SHEET WITHOUT ANY REFERENCE TO THE SEG REGATED INCOME STATEMENT OF EACH SEGMENT. ON A POINTED QUERY FROM THE BENCH, THE LD. AR CONCEDED THAT THERE MAY BE SOME TRADE RECEIVABLE S OR PAYABLES COMMON TO THE `SOFTWARE DEVELOPMENT SEGMENT, `MER GED SEGMENT AND ADVISORY SERVICES SEGMENT. IN SUCH A SITUATI ON, IT BECOMES RELEVANT TO SEE AS TO HOW THE FIGURES OF SUCH TRADE RECEIVABLES OR PAYABLES HAVE BEEN PLACED IN THE COMPUTATION OF WOR KING CAPITAL ADJUSTMENT UNDER EACH SEGMENT. THE LD. AR ARGUED T HAT THE CALCULATION OF THE WORKING CAPITAL ADJUSTMENT HAS NOT BEEN CHAL LENGED BY THE TPO AND, HENCE, THE SAME SHOULD BE ACCEPTED AS SUCH. WE ARE NOT CONVINCED WITH THIS PROPOSITION FOR THE OBVIOUS REASON THAT W HEN THE TPO REJECTED THE ASSESSEES CLAIM FOR THE GRANT OF ANY WORKING C APITAL ADJUSTMENT AT THE THRESHOLD ITSELF, THERE WAS NO OCCASION FOR HIM TO EXAMINE THE ITA NO.1489/DEL/2014 35 VERACITY OF THE COMPUTATION OF WORKING CAPITAL ADJU STMENT AS PUT FORTH ON BEHALF OF THE ASSESSEE. UNDER SUCH CIRCUMSTANCE S, WE DIRECT THE AO/TPO TO COMPUTE AND ALLOW WORKING CAPITAL ADJUSTM ENT, IF ANY, AVAILABLE UNDER ALL THESE SEGMENTS, NAMELY, `PROVIS ION OF SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES, `PROVISION OF BACK OFFICE SUPPORT SERVICES AND F&A SUPPORT SERVICES AND ADV ISORY SERVICES DISTINCTLY IN THE LIGHT OF OUR ABOVE DISCUSSION. I T IS NOTICED THAT SIMILAR ADJUSTMENT HAS BEEN ALLOWED BY THE TRIBUNAL IN THE ASSESSEES CASE FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, A COPY O F WHICH ORDER HAS BEEN PLACED ON RECORD. ONCE IT IS HELD THAT SUCH AN ADJUSTMENT IS ALLOWABLE, THEN IT SHOULD BE CARRIED OUT WHETHER IT FAVOURS OR DISFAVORS THE ASSESSEE. IT GOES WITHOUT SAYING THAT THE ASSES SEE WILL BE ALLOWED AN OPPORTUNITY OF HEARING IN SUCH FRESH DETERMINATION OF THE WORKING CAPITAL ADJUSTMENT, IF ANY. E. FOREIGN EXCHANGE GAIN/LOSS . 31. THE NEXT ISSUE RAISED IN THIS APPEAL IS AGAINST THE TREATMENT OF FOREIGN EXCHANGE (FOREX) GAIN/LOSS AS AN ITEM OF NO N-OPERATING NATURE. ITA NO.1489/DEL/2014 36 ON A PERTINENT QUERY, IT WAS ADMITTED BY THE LD. AR THAT THE FOREX GAIN/LOSS IN THE HANDS OF THE ASSESSEE RELATES TO I TS REVENUE TRANSACTIONS ALONE. THE LD. DR RELIED ON THE ORDERS PASSED BY T HE AUTHORITIES BELOW. 32. WE FIND MERIT IN THE CONTENTION RAISED ON BEHAL F OF THE ASSESSEE ABOUT THE TREATMENT OF FOREIGN EXCHANGE GAIN/LOSS A S AN ITEM OF OPERATING NATURE. AS REGARDS THE NATURE OF SUCH FOREIGN EXCHA NGE GAIN EARNED BY THE ASSESSEE, THE LD. AR PUT FORTH THAT THE SAME IS IN RELATION TO THE TRADING ITEMS EMANATING FROM THE INTERNATIONAL TRAN SACTIONS. NO CONTRARY MATERIAL HAS BEEN PLACED ON RECORD BY THE LD. DR. IF THE FOREIGN EXCHANGE GAIN/LOSS RESULTED FROM THE TRADING ITEMS ONLY, WE FAIL TO APPRECIATE AS TO HOW IT CAN BE TREATED AS NON-OPERA TING. 33. THE SPECIAL BENCH OF THE TRIBUNAL IN ACIT VS PRAKASH I. SHAH (2008) 115 ITD 167 (MUM)(SB) HAS HELD THAT THE GAIN DUE TO FLUCTUATIONS IN THE FOREIGN EXCHANGE RATE EMANATING FROM EXPORT IS ITS INTEGRAL PART AND CANNOT BE DIFFERENTIATED FROM THE EXPORT PROCEE DS SIMPLY ON THE GROUND THAT THE FOREIGN CURRENCY RATE HAS INCREASED SUBSEQUENT TO SALE BUT PRIOR TO REALIZATION. IT WENT ON TO ADD THAT WH EN GOODS ARE EXPORTED ITA NO.1489/DEL/2014 37 AND INVOICE IS RAISED IN CURRENCY OF THE COUNTRY WH ERE SUCH GOODS ARE SOLD AND SUBSEQUENTLY WHEN THE AMOUNT IS REALIZED I N THAT FOREIGN CURRENCY AND THEN CONVERTED INTO INDIAN RUPEES, THE ENTIRE AMOUNT IS RELATABLE TO THE EXPORTS. IN FACT, IT IS ONLY THE T RANSLATION OF INVOICE VALUE FROM THE FOREIGN CURRENCY TO THE INDIAN RUPEES. THE SPECIAL BENCH HELD THAT THE EXCHANGE RATE GAIN OR LOSS CANNOT HAVE A D IFFERENT CHARACTER FROM THE TRANSACTION TO WHICH IT PERTAINS. THE BENCH FOU ND FALLACY IN THE SUBMISSION MADE ON BEHALF OF THE REVENUE THAT THE E XCHANGE RATE DIFFERENCE SHOULD BE DETACHED FROM THE EXPORTS AND BE CONSIDERED AS AN INDEPENDENT TRANSACTION. EVENTUALLY, THE SPECIAL B ENCH HELD THAT SUCH AN EXCHANGE RATE FLUCTUATION GAIN/LOSS ARISING FROM EXPORTS CANNOT BE VIEWED DIFFERENTLY FROM THE SALE PROCEEDS. 34. IN THE CONTEXT OF TRANSFER PRICING, THE BAN GALORE BENCH OF THE TRIBUNAL IN SAP LABS INDIA PVT. LTD. VS ACIT (2011) 44 SOT 156 (BANGALORE) HAS HELD THAT FOREIGN EXCHANGE FLUCTUATION GAIN IS PART OF OPERATING PROFIT OF THE COMPANY AND SHOULD BE INCLU DED IN THE OPERATING REVENUE. SIMILAR VIEW HAS BEEN TAKEN IN TRILOGY E BUSINESS SOFTWARE ITA NO.1489/DEL/2014 38 INDIA (P) LTD. VS DCIT (2011) 47 SOT 45 (URO) (BANG ALORE) . THE MUMBAI BENCH OF THE TRIBUNAL IN S. NARENDRA VS ADDL. CIT (2013) 32 TAXMAN.COM 196 HAS ALSO LAID DOWN TO THIS EXTENT. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPIN ION THAT THE AMOUNT OF FOREIGN EXCHANGE GAIN/LOSS ARISING OUT OF REVENU E TRANSACTIONS IS REQUIRED TO BE CONSIDERED AS AN ITEM OF OPERATING R EVENUE/COST. HOWEVER, IT IS MADE CLEAR THAT IT SHOULD BE DEALT W ITH IDENTICALLY BOTH IN THE CALCULATION OF THE PLI OF THE ASSESSEE AS WELL AS THE COMPARABLES UNDER ALL THE THREE SEGMENTS. 35. IN VIEW OF THE FOREGOING DISCUSSION, WE SET ASI DE THE IMPUGNED ORDER ON THE QUESTION OF ADDITION ON ACCOUNT OF TRA NSFER PRICING ADJUSTMENT UNDER ALL THE THREE SEGMENTS MADE BY THE TPO AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR RE-DETERMINATION O F THE ALP AFRESH IN CONSONANCE WITH OUR DIRECTIONS GIVEN IN THE EARLIER PARTS OF THIS ORDER. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REA SONABLE OPPORTUNITY OF BEING HEARD. ITA NO.1489/DEL/2014 39 36. THE ONLY OTHER GROUND WHICH SURVIVES FOR OUR CO NSIDERATION IN THIS APPEAL IS AGAINST NOT REDUCING LEASE LINE CHARGES F ROM `TOTAL TURNOVER, AFTER EXCLUDING IT FROM `EXPORT TURNOVER. THE ASS ESSEE CLAIMED THE BENEFIT OF SECTION 10A. CONSIDERING THE MANDATE OF EXPLANATION 2 (IV) TO SECTION 10A OF THE ACT, THE AO OPINED THAT LEASE LINE CHARGES WERE IN THE NATURE OF TELECOMMUNICATION CHARGES INCURRED IN FOREIGN CURRENCY ATTRIBUTABLE TO DELIVERY OF COMPUTER SOFTWARE OUTSI DE INDIA. HE, THEREFORE, REDUCED THIS AMOUNT FROM `EXPORT TURNOVE R. THE ASSESSEES CONTENTION FOR GIVING A SIMILAR TREATMENT TO THIS A MOUNT IN THE COMPUTATION OF `TOTAL TURNOVER, WAS REJECTED. 37. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD, WE FIND FORCE IN THE CONTENTION ADVANCED BY THE LD. AR, REQUIRING THE EXCLUSION OF THIS AMOUNT FROM `TO TAL TURNOVER AS WELL. THE OBVIOUS REASON IS THAT WHEN A PARTICULAR ITEM D OES NOT FORM PART OF EXPORT TURNOVER, WHICH, IN TURN, IS A NECESSARY ING REDIENT OF THE TOTAL TURNOVER, THE SAME HAS TO BE NECESSARILY EXCLUDED F ROM THE COMPUTATION OF LATTER. IT HAS BEEN BROUGHT TO OUR NOTICE THAT THE TRIBUNAL IN ASSESSEES ITA NO.1489/DEL/2014 40 OWN CASE FOR THE A.YS. 2007-08 AND 2008-09 HAS DECI DED THIS ISSUE IN ASSESSEES FAVOUR. THE LD. AR ALSO INVITED OUR ATT ENTION TO THE JUDGMENT OF THE HONBLE HIGH COURT RENDERED IN THE CASE OF T HE ASSESSEE APPROVING THE VIEW TAKEN BY THE TRIBUNAL FOR THE EA RLIER YEAR. RESPECTFULLY FOLLOWING THE PRECEDENTS, WE ALLOW THI S GROUND OF APPEAL. 38. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 28.09.201 5. SD/- SD/- [BEENA A. PILLAI] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 28 TH SEPTEMBER, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.