DCIT, New Delhi V. M/s Rampgreen Solutions Pvt. Ltd.,(Erstwhile vCostomer Services India Pvt. Ltd), New Delhi

ITA 1618/DEL/2016

AI Insights

The case involves two appeals, one by the assessee, M/s. Rampgreen Solutions Pvt. Ltd., and the other by the Revenue, against the final assessment order passed by the Assessing Officer under various sections of the Income Tax Act, 1961. The appeals primarily revolved around the Transfer Pricing (TP) adjustments made by the TPO, the selection and exclusion of comparable companies for benchmarking, and the application of working capital adjustments. The Tribunal examined the grounds raised by both parties, including the appropriateness of selected comparables, the application of interest rates for working capital adjustments, and the treatment of forex gains/losses. The Tribunal's decision was influenced by previous judgments and the specific functional and financial characteristics of the companies involved.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 113073 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 02-02-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 27-03-2016
• Other Referred Cases: Mumbai International Airport Pvt. Ltd. Vs. Golden Chariot Airport, Chryscapital Investment Advisors (India) Pvt. Ltd. Vs. DCIT, CIT Vs. Mckinsey Knowledge Centre India Pvt. Ltd., Cadence Design Systems (I) (P.) Ltd. Vs. ACIT, Techbooks International (P.) Ltd. Vs. DCIT, CIT Vs. Mercer Consulting (India) (P.) Ltd., Ameriprise India (P.) Ltd. Vs. DCIT, Excellence Data Research (P.) Ltd. Vs. ITO, S & P Capital IQ (India) (P.) Ltd. Vs. DCIT, Swiss Re Shared Services (India) (P.) Ltd. Vs. ACIT, Hyundai Motors India Engineering (P.) Ltd. Vs. DCIT, Lionbridge Technologies (P) Ltd. Vs. ACIT, Orange Business Services India Solutions (P.) Ltd. Vs. Dy. CIT, H T Media Ltd. Vs. PCIT, Maxopp Investment Ltd. Vs. CIT, Woodward Governor India (P) Ltd. Vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Business expenditure; International transaction; Earning of tax free income; Wholly owned subsidiary; Scheme of amalgamation; Rule 8D; Set aside; Capital Gains
• Section: 271(1)(c); 234B; 14A; 64; 72; 13; 22; 92CA

Judgement Text

Cross I.T.A. Nos. 1404 & 1618/Del/2016 1 IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH “I” NEW DELHI ] BEFORE SHRI G. S. PANNU, PRESIDENT A N D SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER आ.अ.सं/.I.T.A No. 1404/Del/2016 िनधाᭅरणवषᭅ/Assessment Year: 2011-12 M/s. Rampgreen Solutions Pvt. Ltd. [Erstwhile vCustomer Services India Pvt. Ltd.] C–95, Lower Ground Floor, Lajpat Nagar – I, New Delhi – 110 024. बनाम Vs. DCIT, Circle : 21 (1), New Delhi. PAN : AABCV0770E A N D आ.अ.सं./I.T.A No. 1618/Del/2016 िनधाᭅरणवषᭅ/Assessment Year: 2011-12 DCIT, Circle : 21 (1), New Delhi. बनाम Vs. M/s. Rampgreen Solutions Pvt. Ltd. [Erstwhile vCustomer Services India Pvt. Ltd.] C–95, Lower Ground Floor, Lajpat Nagar – I, New Delhi – 110 024. PAN : AABCV0770E अपीलाथŎ / Appellants ŮȑथŎ / Respondents Cross I.T.A. Nos. 1404 & 1618/Del/2016 2 िनधाᭅᳯरतीकᳱओरसे / Assessee by : Ms. Shashi M. Kapila; Adv.; & Shri Sushil Kumar, Adv.; Shri M. A. Gohel, C. A.; राज᭭वकᳱओरसे / Department by : Ms. Rajeshwari R., Sr. D.R.; & Shri Sanjay Kumar, Sr. D.R. Shri Mahesh Shah, [CIT] - D. R.; & Shri Sanjay Kumar, Sr. D.R. सुनवाईकᳱतारीख/ Date of hearing : 03/02/2023 उद्घोषणाकीतारीख/Pronouncement on : 24/03/2023 आदेश / O R D E R PER C. N. PRASAD, J. M. : 1. These two appeals are filed by the assessee and Revenue against the final assessment order passed by the Assessing Officer under section 143(3)/144C/92CA(4) of the Income Tax Act, 1961 (the Act) dated 29.01.2016 on the directions of the DRP dated 30.11.2015 passed under section 144C(5) of the Act. 2. The assessee as well as the Revenue in its appeals have raised the following substantive grounds of appeal:- I.T.A No. 1404/Del/2016 [by the assessee] : “TP adjustments. 1. That on the facts and in circumstances of the case the Ld. DRP erred in sustaining the addition of Rs. 4,09,29,957/- made by TPO u/s 92CA of the Act. Cross I.T.A. Nos. 1404 & 1618/Del/2016 3 2. That the Ld. DRP has has erred in sustaining the filters applied by the TPO/ AO which are arbitrary and legally unjustified thereby rejecting certain comparable companies which were selected by the appellant company to benchmark the international transaction with AE. 3. That the Ld. DRP has erred both in facts and in law in accepting inappropriate comparables selected by the TPO/ AO, which in terms of F.A.R. are materially different with the appellant company. 4. That the Ld. DRP erred in law and on facts while sustaining the order of TPO/AO without making adjustment on account of differences in the risk profile of the appellant vis-à-vis the comparable companies. 5. That the Ld. DRP erred in law and on facts while sustaining the addition made by the TPO/ AO on account of working capital adjustment on receivables in U. S. dollars from the US holding company by the Philipines Branch of the assessee company, which in an independent PE liable to tax in Philipines. 6. The Ld. DRP has erred in law and on facts in sustaining the working capital adjustment made by the TPO/ AO by applying SBI Prime Lending Rate of 11.75% per annum instead of prevailing bank rate applicable to US Currency. Addition u/s 14A of the act. 7. That the Ld. DRP has erred both in facts and in law in sustaining the addition u/s 14A read with Rule 8D made by the AO without in absence of any finding that appellant had incurred the impugned expenditure for the purpose of earning exempt income. 8. That the Dd. DRP/AO has erred both in facts and in law in making addition arbitrarily under section 14A, being equal to the entire amount of dividend of Rs. 5,53,170/- earned by the assessee company. 9. The Ld. AO erred in levy of interest under section 234A, 234B and 234C of the Act. Cross I.T.A. Nos. 1404 & 1618/Del/2016 4 10. The Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act.” I.T.A No. 1618/Del/2016 [by the Revenue] : ”1. Whether the DRP was justified in rejecting two high margin comparables contested by the taxpayer and allowing to retain other low margin comparables in the final set of the TPO unopposed by the taxpayer, which were discharging similar nature of functions referred to as KPO by the Hon'ble DRP even while ignoring the decision of the Hon'ble Supreme Court in the case of Mumbai International Airport Pvt. Ltd. Vs. Golden Chariot Airport with regard to the "Doctrine of Election" and the "Doctrine of Approbation and Reprobation" wherein it has been laid down that a litigant cannot change and choose its stand to suit its convenience? 2. Whether the Hon'ble DRP was justified in laying down stringent standards of comparability and attempting to identify exact replica of the taxpayer for comparability analysis, whereas the Indian law and the International jurisprudence recognized the reality that there cannot be an exact comparable in a given situation without any differences without appreciating that such stringency will defeat the purpose of flexibility provided in comparability analysis for determination of ALP? 3. Whether the Hon'ble DRP was justified in rejecting M/s. Eclerx Services Ltd., as a comparable company and propounding the concept of KPO VS.BPO in comparability analysis, whereas in reality there is seamlessness in ITES functions and comparability analysis is bases on functions assets and risks? 4. Whether the Hon'ble DRP was justified in holding that Accentia Technologies Ltd. is a KPO, even while in reality the company is engaged in Medical Transcription, Income from Coding, Billing and collection which are a low-end IT enabled service? Cross I.T.A. Nos. 1404 & 1618/Del/2016 5 5. Whether, the DRP was justified in considering the Forex gain/loss as operating in nature for determination of ALP, when same has no relation with the business of the assessee? 6. Whether the DRP-2 was justified in directing the AO to re-compute the disallowance u/s 8D by excluding investment which do not yield any exempt income? 7. The appellant craves to be allowed to add any fresh ground of appeal and/or delete or amend any of the grounds of appeal.” 3. A reference under section 92C(1) of the Act was made by the DCIT, Circle : 17(1) New Delhi [Assessing Officer] for determination of Arms Length Price in the international transactions undertaken by the assessee during the financial year 2010-11 relevant to assessment year 2011-12. Business profile of the assessee and the Group: 4. The assessee M/s. vCustomer Services India Pvt. Ltd. [for short vCustomer India] is a wholly owned subsidiary of vCustomer US. M/s. vCustomer India is primarily engaged in providing IT enabled services to its parent company vCustomer US. The assessee has the expertise in providing process driven quality centric Business Process Outsourcing [BPO] services, contract centre and technology enabled services through its state of art facilities located in two cities in India, namely, New Delhi and Pune. The following international transactions have been entered into by the assessee with its Associated Enterprise [AE]. Cross I.T.A. Nos. 1404 & 1618/Del/2016 6 Nature of international transactions Method Amount (INR) 1. Provision of IT enabled services TNMM 18,17,57,915/- 2. Reimbursement of expenses by AEs --- 31,49,114/- 5. The assessee has chosen TNMM as the method and OP/TC as the PLI. The assessee in its TP report has arrived at a set of 9 comparables with a mean margin of 6.82 and worked out its margin at 27.81%. Based on the analysis the assessee has concluded that its transactions are at Arms Length. The assessee bench marked the international transactions relating to IT enabled services using the TNMM as the most appropriate method with OP/TC as PLI margin of the following 9 comparable companies:- S. No. Company Name Weighted Average OP/OC (%) 1. Aditya Birla Minacs Worldwide Limited 0.52 2. Caliber Point Business Solutions Ltd. 18.09 3. CGVAk Software Limited 2.39 4. Cepha Imaging Private Ltd. 2.06 5. Informed Technologies India Ltd. 19.39 6. Fortune Infotech Limited 10.03 7. Jindal Intellicom Private Limited 7.59 8. Microgenetics Systems Limited 1.13 9. R Systems International -BPO services 5.01 Mean 6.82 Cross I.T.A. Nos. 1404 & 1618/Del/2016 7 6. Out of the above 9 comparables selected by the assessee TPO accepted 2 comparables, namely, Jindal Intellicom Private Limited and Microgenetics Systems Limited, which are appearing at serial Nos. 7 and 8. The TPO rejected the remaining 7 and suo moto selected 7 more comparables and taken the following final set of comparables for bench marking the international transactions relating to IT enabled services:- S. No. Company Name Weighted Average OP/OC (%) 1. Accentia Technologies Ltd. 59.83 2. e4e Healthcare Business Services Pvt. Ltd. 44.45 3. Eclerx Services Ltd. 89.28 4. ICRA Techno Analytics Limited Infosys BPO Ltd. 56.72 5. Infosys B.P.O. Ltd. 52.27 6. Jindal Intellicom Ltd. 47.47 7. Microgenetic Systems Ltd. 31.52 8. TCS E-Serve Ltd. 102.70 9. Acropetal Technologies Ltd. (Seg) 44.72 Average 58.77 7. Accordingly the Arms Length Price of the international transactions related to IT enabled services was bench marked by the TPO taking the Arms Length Price at a margin of 58.77% and proposed adjustment under section 92CA at Rs.6,91,43,062/-. Draft assessment order was passed on 20.03.2015 proposing the said adjustment under section 92CA of the Act and also disallowance Cross I.T.A. Nos. 1404 & 1618/Del/2016 8 under section 14A read with Rule 8D at Rs.14,94,534/-. The assessee submitted its objections before the DRP and the DRP by order darted 30.11.2015 directed the Assessing Officer to exclude Accentia Technologies Ltd. and Eclerx Services Ltd. from the list of the comparables selected by the TPO and the rest of the comparables sustained by the TPO was selected by the DRP. 8. Before us the ld. Counsel for the assessee submits that the assessee is agitating in its appeal for inclusion and exclusion of the following comparables from the final set of comparables. (A) For inclusion : (i) CGVAk Software Limited (ii) Informed Technologies India Ltd. (iii) R. Systems International - BPO services (B) For exclusion : (i) ICRA Techno Analytics Limited. (ii) Infosys B.P.O. Ltd. (iii) TCS E-Serve Ltd. (iv) Acropetal Technologies Ltd. (Seg) 9. The Revenue in its appeal is challenging the directions of the DRP in excluding Accentia Technologies Ltd. and Eclerx Services Ltd. The ld. Counsel for the assessee submits that Accentia Technologies Ltd. is engaged in the business of medical transcription and coding and it provides integrated end to end software services and remodeling its own business is clear from its Cross I.T.A. Nos. 1404 & 1618/Del/2016 9 annual report which is placed at page Nos. 24 to 26 of the paper book. The ld. Counsel submits that the finance, assets and risks are different and, therefore, these two companies are functionally not comparable. 10. The ld. Counsel for the assessee further submits that both the above comparables have been excluded by the Tribunal for the assessment years 2010-11 and 2008-09 and the decision of the Tribunal has been upheld by the Hon’ble Delhi High Court in assessee’s own case. 11. The ld. DR fairly accepts the position. 12. Heard rival submissions. We observe that the DRP considering the submissions of the assessee and taking note of the fact that the Tribunal/Hon’ble High Court in assessee’s own case excluded Accentia Technologies Ltd. and Eclerx Services Ltd. from the list of comparable companies and directed the TPO/AO to delete these comparables observing as under:- S.No. Name of the company Assessee's comention TPO's contention DRP' view 1. Accentia Technologies Ltd. Functionally similar – KPO & Soflware - product comply Excluded in its own case by Hon'ble ITAT for AY 2010-11. Functionally similar to e4e Healthcare Services Pvt. Ltd. which has been taken as comparable by assessee. Following Hon’ble ITAT decision in assessee's own case, the panel directs the FPO/AO to delete this comparable 2. Eclerix Services Ltd. Functionally dissimilar -leading KPO providing data analytics, data management and process improvement solutions Functionally similar Following Hon’ble Delhi HC decision in assessee's own case, the panel directs the TPO/AO to delete this comparable. Cross I.T.A. Nos. 1404 & 1618/Del/2016 10 Hon'ble Delhi high court has excluded this comparable in assessee's own case for AY 2008-09. 13. Further we have also perused the orders of the Tribunal and the Hon’ble Delhi High Court wherein these two comparables have been excluded. Thus, we do not see any infirmity in the directions of the DRP for exclusion of Accentia Technologies Ltd. and Eclerx Services Ltd. from the final set of comparables. The grounds raised by the Revenue on this issue are rejected. CG VAk Software Limited : 14. Coming to assessee’s appeal, the inclusion of CG VAk Software and Exports Limited in the final set of comparables the ld. Counsel for the assessee submits that the Tribunal in assessee’s own case for the assessment year 2010-11 by order dated 4.11.2015 in ITA. No. 1066/Del/2015 has accepted for inclusion of this company as comparable. The ld. Counsel for the assessee further submits that the decision of the Tribunal was also upheld by the Hon’ble Delhi High Court vide its order dated 27.05.2016 in ITA. 340/2016. The ld. Counsel submits that these orders are placed at page Nos. 442-443 and 455 in Volume 2 of the paper book. The ld. Counsel further submits that the reason for exclusion of this company is the same this year also. The ld. Counsel submits that the TPO excluded this company on the ground of low turnover as the sales of BPO segment are less than Rs.1 crore. 15. The ld. DR placed reliance on the order of the DRP/TPO. Cross I.T.A. Nos. 1404 & 1618/Del/2016 11 16. We observe that the facts for assessment year 2010-11 are identical to the facts for the year under consideration i.e. Assessment Year 2011-12 and the Tribunal in Assessment Year 2010-11 directed for inclusion of this company in the list of comparables following the decision of the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd. wherein it has been held that high or low turnover cannot be the criteria for acceptance/rejection of any comparable when there is no dispute that the comparable is carrying on the same functions as that of the assessee. The Tribunal further observed that this company has been accepted as comparable in the case of Techbook International Pvt. Ltd. This decision of the Tribunal has been upheld by the Hon’ble Delhi High Court. Therefore, following the decision of the Tribunal as well as the Hon’ble High Court we direct the TPO/AO to include this company in the final list of comparables. Informed Technologies India Ltd. : 17. Coming to Informed Technologies India Ltd., the ld. Counsel for the assessee submits that TPO has excluded this company on the ground of low turnover. The ld. Counsel further submits that if a comparable is otherwise functionally comparable and similar and the difference as per Rule 10B(2) is not material it cannot be excluded merely on the basis of high or low turnover and high or low profit of the clause or that it follows different financial year. Reliance was placed on the following decisions:- (i) Chryscapital Investment Advisors (India) P. Ltd. Vs. DCIT [(2015) 376 ITR183 (Del.)] Cross I.T.A. Nos. 1404 & 1618/Del/2016 12 (ii) CIT Vs. Mckinsey Knowledge Centre India Pvt. Ltd. [ITA. No. 217/2014 dated 27.03.2015 (D.H.C.)] (iii) Cadence Design Systems (I) (P.) Ltd. Vs. ACIT [(2018) 93 taxmann.com 227 (Delhi Trib.)] 18. On the other hand, the ld. DR referring to page Nos. 6 and 32 of the TPO’s order submits that Informed Technologies India Ltd., was rejected as comparable for the reason that the company has rental income of Rs.2.08 crores out of its total income of Rs.4.08 crores and the company in its annual report reported income from data processing and BPO services income at Rs.1.75 crores. Therefore, the ld. DR submits that the TPO rejected this company as comparable for the reason that the main income is of income from other sources and it fails service income filter. The ld. DR submits that the contention of the assessee that this comparable has been rejected on low turnover is not correct. 19. Heard rival submissions perused the orders of the authorities below. On perusal of the order of the TPO, we observe that Informed Technologies India Ltd. was rejected by the TPO for the reason that as per the annual report of the company income from data processing and BPO services was shown at Rs.1.75 crores out of total income of the company at Rs.4.08 crores. The TPO observed that out of the total income of Rs.4.08 crores the other income is Rs.2.32 crores and hence its main income is from other income and, therefore, it failed service income filter and, therefore, not considered as comparable. The TPO also observed that the Cross I.T.A. Nos. 1404 & 1618/Del/2016 13 company has rental income of Rs.2.08 crores and the expenses corresponding the same are not ascertainable. 20. The ld. Counsel, however, submitted that the TPO has excluded this company on the ground of low turnover which appears to be not correct. The TPO observed that the assessee has used filter of the ratio of service income to total income filter at atleast 75%. The TPO observed that the service income filter which was set by the assessee failed because as per the annual report the other income is more than the service income and not on account of low turnover. Thus the decisions relied on by the ld. Counsel for the assessee has no application to the facts of the case. In view of the above we uphold the directions of the DRP and TPO in excluding Informed Technologies India Ltd. from final set of comparables. R. Systems International - BPO services : 21. With regard to R Systems International - BPO services, the ld. Counsel submits that the TPO rejected this comparable on the ground that this company follows calendar year as against financial year. The ld. Counsel for the assessee placing reliance on the following decisions submits that if a company which is otherwise functionally comparable it cannot be excluded merely on the ground that it follows different financial year:- (i) CIT Vs. Mckinsey Knowledge Centre India Pvt. Ltd. [ITA. No. 217/2014 dated 27.03.2015 (D.H.C.)] (ii) Cadence Design Systems (I) (P.) Ltd. Vs. ACIT [(2018) 93 taxmann.com 227 (Delhi Trib.)] Cross I.T.A. Nos. 1404 & 1618/Del/2016 14 (iii) Techbooks International (P.) Ltd. Vs. DCIT [(2015) 63 taxmann.com 14 (Del.)] (iv) CIT Vs. Mercer Consulting (India) (P.) Ltd. [(2016) 390 ITR 615 (P & H)]. 22. On the other hand, the ld. DR supported the orders of the DRP/TPO. 23. Heard rival submissions perused the orders of the authorities below. The TPO rejected this company as comparable on the ground that this company has different financial year ending. The TPO also observed that the financial data of this company is available for a period of 12 months ending December, 2010 and since the data is not available for the period ending March, 2011, he concluded that this company is not comparable company. 24. In the case of CIT Vs. Mckinsey Knowledge Centre India Pvt. Ltd. (supra) the Hon’ble Delhi High Court held as under:- “13. So far as the Arms Length Price (ALP) determination and the Transfer Pricing upward adjustments, are concerned, in its TP documentation, the assessee determined Transactional Net Margin Method (TNMM) as the most appropriate method to determine the ALP of the international transaction pertaining to the provision of IT support services. The TPO in the order accepted only 7 out of the 11 comparable companies and rejected the rest based on reasons that one of them, Fortune Infotech Ltd. ("FIL") had a different financial year ending, the other two - Kirloskar Computer Services Ltd ("KCSL") and Mercury Outsourcing Management Ltd. ("MOML") had a turnover of less than 1 Crore and finally, Genesis International Cross I.T.A. Nos. 1404 & 1618/Del/2016 15 Corporation Ltd ("GICL") was rejected because it seemingly had a negative growth graph. 14. The Revenue is in appeal before this Court questioning the admissibility of the above mentioned comparables while computing Arm's Length Price regarding the IT Support services after the TPO and AO rejected the above mentioned companies but was later allowed by the CIT (A) and ITAT. While the AO had confirmed the findings of the TPO, the Ld. CIT(A) after considering the Assessee's submissions accepted all the four companies rejected by the TPO. The revenue submits that Fortune Infotech Ltd. was correctly rejected by TPO because the company had different financial year ending on December, 2006, whereas Assessee's financial year ended on March, 2006. There is nothing shown to the court that supports the revenue's argument that the ITAT fell into error in holding that if a comparable is following different financial year then the same cannot be included in the list of comparables selected for benchmarking the international transaction. Therefore, the ITAT has held that if the comparable is functionally same as that of tested party then same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record, the results for financial year can reasonably be extrapolated then the comparable cannot be excluded solely on the ground that the comparables have different financial year endings. 25. Similar view has been taken by the Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Mercer Consulting (India) (P.) Ltd. (supra). Ratio of the above decision applied to the facts of the case. The TPO excluded R. Systems International Ltd. on the ground that this company has different Financial Year ending. The TPO did not reject this company on functional comparability analysis. Thus following the above decisions, we direct the AO/TPO to include R Systems International Cross I.T.A. Nos. 1404 & 1618/Del/2016 16 Ltd. - BPO services as comparable company in the final set of comparables. ICRA Techno Analytics Ltd. : 26. The ld. Counsel submits that the TPO included ICRA Techno Analytics Ltd. on the ground that it is functionally comparable to the assessee company. The ld. Counsel for the assessee submits that there are material differences in functions, assets and risks and the company has diversified activities of software development engineering services. Therefore, it is submitted that ICRA Techno Analytics Ltd. is functionally different. The ld. Counsel further submits that there is no significant information for BPO services. The ld. Counsel further submitted as under:- “Functionally different. This is functionally different company Notes to accounts annual report for year ended 31.03.2011 states: "BACK GROUND: The Company was incorporated on July 27, 1992 as Computer Exchange Private Limited (CEPL) and subsequently became wholly owned subsidiary of ICRA Limited August 25. 2005 and was renamed as ICRA Techno Analytics Limited (ICTEAS). The company is engaged in the software development & consultancy..engineering services, web development & hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing." (Pg 231/91) Revenue recognition. In the note detailing of the revenue recognition which also form a part of its annual report it has been stated that its revenue stream consisted of software development consultancy, engineering services, web development and hosting. Thus ICRA Techno Analytics had more than one segment. (Pg. 231/FS-1) Cross I.T.A. Nos. 1404 & 1618/Del/2016 17 (a) No segmental information. Segmental information is available for two segments i.e, services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting. No segmental information for BPO services. (Pg. 279-280/FS-1) “ 27. The ld. Counsel further submits that this company has been excluded by the Bangalore bench of the Tribunal in the case of Cerner Healthcare Solutions (P.) Ltd. Vs. ITO [(2017) 79 taxmann.com 64 (Bangalore – Trib.) for assessment year 2010-11 for the reason that ICRA Techno Analytics Ltd. was into diversified activities, software development, consultancy and engineering services, web development and hosting and subsequently diversified into business analysis and business processing outsourcing and, therefore, it is not functionally comparable with that of the assessee. The ld. Counsel further submits that similar view has been taken by the Bangalore Bench of the Tribunal in the case of Applied Material India (P.) Ltd. [73 taxmann.com 160]. 28. The ld. DR supports the order of the DRP/TPO. 29. Heard rival submissions perused the orders of the authorities below. From the perusal of the order of the TPO, we find that ICRA Techno Analytics Ltd. has been selected by the comparable by the TPO for the reason that this company is functionally comparable to the assessee. It is the submission of the ld. Counsel that as per annual report schedule to notes forming part of the annual report for the year ended 31.03.2011 it is stated that the company is engaged in the software development, consultancy, engineering Cross I.T.A. Nos. 1404 & 1618/Del/2016 18 services, web development and web hosting and subsequently diversified into the domain of business analytic and designs process outsourcing. It is the submission that significant information is available for two sigments i.e. services and sales comprising software development, software consultancy, engineering services, web development and web hosting. It is the submission that no significant information is provided for BPO services. 30. The Bangalore Bench of the Tribunal in the case of Cerner Healthcare Solutions (P.) Ltd. Vs. ITO (supra) held that when ICRA Techno Analytics Ltd. is engaged in diversified activities of software development and consultancy, engineering services, web development and hosting and substantially diversified itself into domain of business analysis and business process outsourcing then the same cannot be regarded as functionally comparable with that of the assessee, who is rendering software development services to its AE. Thus, following the decision of the Bangalore Bench of the Tribunal we direct the TPO/AO to exclude ICRA Techno Analytics Ltd. from the final list of comparables. Infosys B.P.O. Ltd. : 31. The ld. Counsel submits that the TPO included this company in the final list of comparables for the reason that this company is functionally comparable to the assessee. The ld. Counsel submits that there is material difference in functions, assets and risks between the assessee and this company. The ld. Counsel further submits that in assessee’s own case this company Cross I.T.A. Nos. 1404 & 1618/Del/2016 19 was excluded by the Tribunal for assessment year 2010-11 vide order dated 14.11.2015 and this order of the Tribunal was also affirmed by the Hon’ble Delhi High Court vide order dated 27.05.2016 which is placed at page No. 455 of Volume 2 of the paper book. 32. On the other hand, the ld. DR submits that Infosys B.P.O. Ltd. was excluded in the assessment year 2010-11 for the reason that there was acquisition of the company and there is no such acquisition during the assessment year under consideration and, therefore, the facts are entirely different. 33. Heard rival submissions perused the orders of the authorities below. The Tribunal in assessee’s own case for assessment year 2010-11 excluded Infosys B.P.O. Ltd., observing as under:- “34. Infosys BPO: In the case of Techbook International Pvt. Ltd. (supra)/ the Tribunal has excluded this company from the list of comparables/by observing as under: 10.5.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company, which is available on page 449 onwards of the paper book, that there was acquisition by this company of McCamish Systems LLC. Such information is available on page 456 of the paper book. Acquisition of Mcf.amish Systems LLC during the year, being an extraordinary financial event, renders it incomparable. Following the reasons taken note of above, we order for the elimination of this company from the final set of comparables." Respectfully following the Tribunal’s decision in the case of Techbook International Pvt. Ltd. (supra), this company is excluded from the list of comparables.” Cross I.T.A. Nos. 1404 & 1618/Del/2016 20 34. Further the Hon’ble High Court affirmed the order of the Tribunal in ITA. No. 340 of 2016 dated 27.05.2016. The ld. Counsel for the assessee except stating that the Tribunal and High Court excluded this company as comparable in the immediately preceding assessment year, nothing was brought to our notice as to how this company is functionally not comparable with that of the assessee company for the assessment year under consideration. It is a mere assertion of the ld. Counsel for the assessee that there are material differences in functions, assets and risks. 35. In the case of Cadence Design Systems (I) (P.) Ltd. Vs. ACIT (supra) the Tribunal observed as under:- “Infosys BPO Limited and TCS E-Serve Limited : 83. Now coming to Infosys BPO Limited and TCS E-Serve Limited, these two companies are disputed by the assessee on the ground of functional dissimilarity inasmuch as Infosys BPO Ltd. is providing high end integrated services for business platforms, customer services outsourcing, finance and accounting, human resources outsourcing, legal process outsourcing, sales and fulfillment, sourcing and procurement outsourcing etc. And also having goodwill of Rs. 227 crores; whereas TCS e services providing technical services in the nature of software testing, verification and validation of software at the time of implementation and data centre management activities. Ld. AR submitted that both these companies are having significantly large scale operations. 84. Ld. TPO rejected these contentions and held that these two companies are engaged in providing ITES services and, therefore, are good comparables. He further held that holding of intangible has no effects on the profits. Ld. DRP held that these companies are functionally similar, high turnover has no correlation to high profits and when they are functionally similar large scale operation is no ground Cross I.T.A. Nos. 1404 & 1618/Del/2016 21 to reject the same. In respect of TCS e-services, he held that the contention of the assessee that its transactions with Citi Bank group are not shown in the Notes to Accounts cannot be accepted because once there is change in the ownership of the erstwhile company, the Citi group of companies cannot be held to be related to TCS e services. 85. Ld. DR brought to our notice that for the AY 2010-11, a Coordinate Bench of this Tribunal extensively dealt with the comparability of these two companies and reached a conclusion that these two companies are valid comparables for the back office support transactions. He submitted that there is no change of functions of these two companies from earlier years. So also the functions of the assessee. He, therefore, urged to uphold the action of the Id. DRP for this year. 86. In reply, it is the argument of the Id. AR that the order for AY 2010-11 was pronounced on 5.1.2018 and the assessee is carrying the matter in appeal to higher forums. However, he brought to our notice that a Coordinate Bench of this Tribunal in BC Management Services (P.) Ltd. v. Dy. CIT, ITA 6134/Del/2015 and batch by order dated 25.5.2017 held that : “18. We have heard the rival submissions perused the relevant findings given in the impugned orders as well as the material placed on record. One of the main points of distinction which is quite ostensible is that the "TCS E serve" is a subsidiary of Tata consultancy services Ltd, which is one of the leading and gentle company in the world and has an inherent element of very high brand value associated with it. Such a high brand value definitely has an impact on the pricing policy, niche market, contractual terms, etc. and thereby affecting the profit margins. Annual report of this company reflects that used payments have been made by TCS e-serve to TCS Ltd further use of the brand as a "royalty". This fact itself shows the effect of brand value in the pricing mechanism. And further analysis it is the same that the employee cost base is more than 64 times than the assessee and even the turnover is also more than Cross I.T.A. Nos. 1404 & 1618/Del/2016 22 67 times as compared to the assessee. This only goes to suggest that assets employed by "TCS e- serve" along with Hughes intangibles in the form of brand value definitely has a huge effect in PLI and vitiates the comparability under FAR analysis with a company like assessee which is a captive service of either without much intangibles and risks. Another important thing which has been pointed out by Ld. counsel is that, the operation of "TCS e- serve" broadly comprise of transaction processing and technical services including software testing, verification and validation for which no segmental bifurcations is available. In the options of such vital information of the margins of such varied segments it becomes quite difficult to put such company in the comparability basket so as to benchmark and correct profit margin." It is, therefore, clear that because of the employee cost base of TCS e services at 64 times and turnover at 67 times compared to the assessee in such case, suggest that the assets employed by TCS e-serve with huge intangible in the form of brand value, definitely has a huge effect in PLI and vitiates the comparability under FAR analysis with a company which is a captive service provider without much tangibles and risks. It is further pointed out that the operations of TCS e-serve broadly comprise of transaction processing and technical services including software testing, verification and validation, for which no segmental bifurcation is available, in the absence of which margins of various segments would be difficult to be compared. Ld. AR submitted that these observations are applicable to the case of the assessee also on all fours. He further submitted that these observations of the Tribunal are upheld by the Hon'ble jurisdictional High Court in Principal CIT v. B.C. Management Services (P) Ltd. [2018] 89 taxmann.com 68 (Delhi), in the following manner:- On a reading of the order of the Tribunal in BC Management case (supra), it is clear that the Tribunal did not find that TCS e-Serve is functionally dissimilar to the BC Management services (P) Ltd. (supra). In spite of the same, the Tribunal recorded that the employee cost base at more than 64 times and the turnover at more Cross I.T.A. Nos. 1404 & 1618/Del/2016 23 than 67 times as compared to the assessee therein suggests that the assets employed by the TCS e-serves along with huge intangibles in the form of brand value impacted the PLI and vitiated the comparability under FAR analysis. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value; that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court cannot be termed as unreasonable. The rationale for exclusion is, therefore, upheld. 87. It is, therefore, clear now that in spite of a close functional similarity between the assessee and the TCS E- serve, in view of the close connection between TVS e-serve and Tata Consultancy Services Ltd., which is a high brand value; that distinguished it and marked it out for exclusion. The rationality for exclusion adopted by the Tribunal basing on the brand value associated with TCS Consultancy which reflected an impacted TCS e-serve profitability in a positive manner is upheld by the Hon'ble jurisdictional High Court which is binding on this Tribunal. Merely because the binding precedent of the Hon'ble High Court in this order dated 28.11.2017 was not brought to the notice of the Tribunal when it pronounced its order on 5.11.2018 does not make any difference on the binding nature of this decision or its applicability to the facts of the present case. As a matter of law, had such decision been brought to the notice of the Tribunal in assessee's own case for the AY 2010-11, still it would have bound the Tribunal to follow the same. In the circumstances, we find no option but to follow the binding precedent of the jurisdictional High Court in the case of B.C. Management Services (P) Ltd. (supra) and to hold that. Infosys BPO Limited and TCS E-Serve Limited are not good comparables to the assessee and both these companies deserve to be deleted Cross I.T.A. Nos. 1404 & 1618/Del/2016 24 from the list of comparables from bench marking the international transactions.” 36. We observe that Infosys B.P.O. Ltd. was excluded by the Tribunal and the High Court in assessee’s own case for the earlier assessment year for the reason that there was extraordinary event happened as there was acquisition in the case of Infosys B.P.O. Ltd., during the assessment year 2010-11. During the assessment year under consideration i.e. assessment year 2011-12 it was not brought to our notice that any extraordinary event has happened. It was also not brought to our attention as to how there are material differences in functions, assets and risks. However, in the case of Cadence Design Systems (I) (P.) Ltd. Vs. ACIT (supra) the Tribunal excluded Infosys B.P.O. Ltd. for the assessment year 2011- 12 holding that it is not as good comparable accepting the submissions of the assessee that Infosys B.P.O. Ltd. is having significantly large operations and is providing high-end integrated services for business platforms, customer service, outsourcing service, functions and accounting on account of resources outsourcing medical process, outsourcing sales and fulfillment, sourcing and procurement outsourcing etc. and also having goodwill of Rs.2.27 crores. We observe that all these factors have not been examined by the TPO while including this company as comparable. Therefore, we restore this comparable to the file of the AO/TPO to re-examine in detail keeping in view the decisions of the Tribnunal in assessee’s own case and the Delhi Bench in the case of Cadence Design Systems (I) (P.) Ltd. Vs. ACIT (supra) and decide in Cross I.T.A. Nos. 1404 & 1618/Del/2016 25 accordance with law for the purpose of exclusion/inclusion in the final set of comparables. TCS e-Serve Ltd. : 37. The ld. Counsel for the assessee submits that this company was included by the TPO observing that this company is functionally comparable to assessee. The ld. Counsel submits that there are material differences in functions, assets and risks. 38. The ld. Counsel for the assessee further submitted as under:- “(iv) TCS e Serve Ltd. (A R. 437-551/FS-II) (a) Functionally different. It is engaged in the business of providing high end technology services such as software testing, verification and validation of the software. Annual Report Schedule o notes forming part of the financial report states as under: "1. Background and principal activities. TCS e-Serve Limited is engaged in the business of providing information Technology- Enabled Services (ITES) /Business Process Outsourcing (BPO) services, primarily to Citigroup entities globally. The company's operations broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup of its corporate and retail clients. Technical services involve software testing, and validation of software at the time of implementation and data centre management activities." (Pg. 525/FS-II) This comparable functionally has TWO business segments; namely, 'Transaction Process Services' to bank and 'Technical Services', like its subsidiary, 'TCS e-Serve International Ltd.' Segmental details however are not available. Cross I.T.A. Nos. 1404 & 1618/Del/2016 26 It is submitted that the technical services are functionally altogether different. It is therefore, incomparable to the assessee company, which is routine contract centre service. (b) Brand Value. Tata Consultancy Service holds 96.26% share holding in the company During the year under consideration, this company has made payment of Rs. 2.60 crore towards use of Tata brand for royalty. (Pg.524/FS II) (c) Intangible assets. This company is having huge assets base of Rs. 380.29 crore which includes software license of Rs. 33.76 crore. During the year under consideration it made addition of Rs. 75.62crore which include 9.78 crore for software. It also uses the advantage of liveraging global clients of TCS Ltd. It cannot be compared with the assessee company' which has no significant intangibles. (Pg. 515/FS-II) (d) Extraordinary economic event. As per Annual Report of the company there is amalgamation with CitiCorp Credit Services India Ltd. Relevant extracts of the AR as under: 1) "The Company allotted 1,600,000 (previous year: 1,600,000) equity shares of Rs. 10 each as fully paid up pursuant to the scheme of amalgamation with Citicorp Credit Services India Limited without payment being received in cash." (Pg. 481/FS-II) Excluded in 1) The Tribunal in assessee's own case for assessment year 2010-11 held that TCS e-service Ltd. is also in the business of rendering technical services such as software testing, verification and validation. But no segmental details are available. This issue was restored to AO to examine the contention of the assessee. (Pg. 419 at 440/ Vol 2) However, for A.Y. 2011-12, coordinate benches have clearly excluded it as incomparable in following cases:- i) Orange Business Services India Solutions (P.) Ltd. [2016] 71 taxmann.com 206 (Delhi - Trib.) (pg. 579 at 586 of Vol-III). [ASSESSMENT YEAR 2011-12] (Copy of order is at pg. 579 at 586/Vol.-III) Exevo India (P.) Ltd. [2016] 72 taxmann.com 339 (Delhi - Trib.) [ASSESSMENT ii) YEAR 2011-12] Cross I.T.A. Nos. 1404 & 1618/Del/2016 27 In the case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT [2016] 71 taxmann.com 206 (Delhi - Trib.) the Tribunal observed that selected company is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, verification and validation. It also developed a software such as transport management software, therefore, functionally this company is dissimilar to the assessee- company. Thus, selected company has to be excluded from the final list of comparable. [Para 13] iii) Its exclusion is also upheld in Cadence Design (Para 83-87) iv) Lionbridge Technologies (P) Ltd. [2017] 82 taxmann.com 202 (Mum.) [ASSESSMENT YEAR 2011-12] v) FIL India Business Services (P.) Ltd. [2016] 70 taxmann.com 42 (Delhi - Trib.) [ASSESSMENT YEAR 2010-11] 3) Whether a company in whose case extraordinary event of amalgamation took place during relevant year, was not acceptable as comparable - Held, yes [Para 10] vi) ICC India (P.) Ltd. [2016] 71 taxmann.com 164 (Delhi - Trib.) [ASSESSMENT YEAR 2007-08] 4) Whether companies in whose case extraordinary event of amalgamation took place during relevant year, could not be accepted as valid comparables - Held, yes - Ameriprise India (P.) Ltd. [2016] 66 taxmann.com 246 (Del. Trib.) [ASSESSMENT YEAR 2010-11] “ 39. The ld. DR supported the orders of the DRP/TPO. 40. Heard rival submissions perused the orders of the authorities below. We observe that the issue of exclusion of this company from final set of comparables was decided by the Tribunal in the immediately preceding assessment year in assessee’s own case wherein the Tribunal restored the matter back to the file of the AO/TPO observing as under:- 27. TCS e-Serve Ltd.: Ld. counsel referred to para 10 of Tribunal's decision in the case of Techbook International Pvt. Cross I.T.A. Nos. 1404 & 1618/Del/2016 28 Ltd. (supra) and pointed out that this comparable was directed not to be excluded, inter alia, observing that unlike TCS e-Serve International Ltd., this company was not providing any technical service involving software testing, verification and validation of software etc. It was further observed that since the functional profile of this company on a boarder basis was not different from that of the assessee, both being involved in rendering ITES, this company was to be retained as comparable. 28. Ld. counsel referred to page 503 of the PB, wherein the annual report of this company is contained and pointed out that both the background and principal activity of this company were identical as that in the case of TCS e-Serve International Ltd., reproduced earlier, which was as under: "TCS e-Serve Limited is engaged in the business of providing information Technology- Enabled Services (ITES) Business Processing Outsourcing (BPO) services, primarily to Citigroup entities globally." 29. Ld. counsel further referred to page 515 of the PB, wherein the notes forming part of the financial statements are contained and in regard to the segmental information it has been observed that the company was engaged in business process outsourcing (transaction processing) services to the Banking & financial services industry (BFSI), which was considered as a single segment. He, therefore, pointed out that the segmental information was also identical to TCS e- Serve International Ltd. and, thus, no separate segmental information in regard to technical services carried out by the comparable, was given. He pointed out that on the same reasoning, as in TCS e-Serve International Ltd., this should also be excluded. 30. Having heard both the parties, we find that in the case of Techbook International Pvt. Ltd. (supra), the Tribunal has declined to exclude this comparable, inter alia, on the ground that this company was not providing any technical service involving software testing, verification and validation of software. We find that the Tribunal has observed as under: Cross I.T.A. Nos. 1404 & 1618/Del/2016 29 "10.3.2. We have heard the rival submissions and perused the relevant material on record. A copy of the Annual report of this company is available on page 466 of the paper book. The company's overview has been discussed on page 467 of the paper book, which divulges that this company "is in the business of providing business process management services in the banking and financial services (BFSI), vertical ( i.e. industry vertical) to help its customers achieve their business objectives by providing innovative best- in-class services." We find that this company is also providing ITES. Unlike TCS e- Serve International Ltd. this company is not providing any technical services involving software testing, verification and validation of software etc. Since the functional profile of this company on a broader basis is no different from that of the assessee, both being involved in rendering ITES, we are not inclined to treat this company as incomparable. The Id.AR argued that the nature of the ITES provided by this company is different from that of the assessee and hence the same be excluded. We are disinclined to sustain this objection. Matching of the exact functional similarity is dispensed with under the TNMM, which is not so under the Comparable uncontrolled price method. The TNMM approves comparability on the basis of broader overall similarity. When we consider the nature of services provided by this company, being the ITES, which is similar to that of those rendered by the assessee, again the ITES, we cannot order its exclusion simply for the reason that the verticals of ITES are somewhat different. If one goes to make a comparison in the way suggested by the id. AR under the TNMM, then it will be very difficult, if not impossible, to find out a ditto comparable. A company which satisfies the broader parameters of comparability in the overall same segment, cannot be excluded Due to somewhat different nature of such overall activity. An examination of the cornparables chosen by the assessee, which have been accepted by the TPO, also satisfy only the Lest of overall similarity and not the Cross I.T.A. Nos. 1404 & 1618/Del/2016 30 peculiar similarity, as has been now contrastly contended for the exclusion of this company. This argument, therefore, fails. 10.3.3. In so far as the objection of the ld. AR about the high profit/high turnover of this company is concerned, we find that the Hon'ble Delhi High Court in Chrys Capital Investment Advisors (India) P. Ltd. Vs. DCIT has held, vide its judgment dated 27.4.2015, that high profit or high turnover is not a criteria to exclude an otherwise. comparable company. It is further noticed that the Hon'ble Delhi High Court in CIT Vs. Agnity India Technologies (P.) Ltd. (2013) 219 Tasman 26 (Del) examined the comparability of Infosys Technologies from the angle of its inclusion or otherwise in the list of comparable of Agnity India Technologies, a captive unit providing ITES to its AE alone. In that case, the TPO treated three companies as comparable, namely, Sat yam Computer Service Ltd., L&T Infotech Ltd. and Infosys Technologies. The DRP excluded Sat yam Computer only. The Tribunal eluded only Infosys Technologies Ltd., by impliedly retaining L&T Infotech Ltd. as a good comparable. On appeal by the Revenue, the Honourable High Court upheld the Tribunal order excluding Infosys on the strength of certain relevant distinguishing features including its giantncss in terms of sales, nature of work and other factors. Thus it follows that L&T Infotech Ltd., which is otherwise a vast company with much higher turnover, finally found the status of a comparable with a captive company providing ITES to its AE alone. 10.3.4. Coming back to the facts of our case, we find that since TCS e-Serve Ltd. is functionally comparable with the assessee company on an overall basis and no special reasons for its higher profit/ turnover have been brought to our notice. Consequently, we hold that the authorities were justified in including this company in the list of comparables". Cross I.T.A. Nos. 1404 & 1618/Del/2016 31 31. However, the main contention of ld. counsel for the assessee is that the assessee in Techbook International Pvt. Ltd. (supra), did not bring to the notice of the Tribunal, certain business characteristics, which were reported in the annual report of Tata e-Serve Ltd. for F.Y. 2009-10. Therefore, the matter is restored back to the file of AO to examine the assessee's contention in the light of observations of the ITAT in the case of Techbook International Pvt. Ltd. (supra), while considering the TCS e-Serve International Ltd. We order accordingly.” 41. Since the Tribunal in assessee’s own case restored this comparable to the file of the TPO for re-examination keeping in view of the observations of the Tribunal, we feel it appropriate to restore this comparable to the file of the AO/TPO and decide in the light of the observations of the Tribunal in assessee’s own case for assessment year 2010-11 and also keeping in view various decisions and contentions raised by the assessee on functionality, brand value, intangible assets, extraordinary economic events pointed out in the assessment year under consideration as stated above and decide for the purpose of exclusion/ inclusion from the final set of comparables. Acropetal Technologies Ltd. (Seg) : 42. The ld. Counsel for the assessee submits that the TPO included this company as comparable holding that this company has engineering design, service, information technology services, health care segments and the engineering design segment is considered as comparable. The ld. Counsel submits that there are material differences in functions, assets and risks acquisition, Cross I.T.A. Nos. 1404 & 1618/Del/2016 32 health care and the primary services of the company was health care services and significant R & D activities as against IT enabled services of the assessee company. The ld. Counsel further submitted as under:- “(a) Acquisition: "client base expansion is also the core focus area of our acquisitions. In line with this strategic focus, we acquired Line Beyond Inc. USA and Optech Consulting Inc. USA. (Pg. 641 & 648/FS-III) (b) Functionally different. Acropetal Technologies Ltd, is a functionally different company. It renders service in the field of engineering design, health-care enterprise solutions and IT infrastructure solutions. Annual Report of the company at pg. 8 states as under: It comprised of architectural, structural, electrical, plumbing, steel detailing, and utilities designing. (Pg. 643/FS-III) Ld. TPO has selected 'Engineering Design Service' (KPO) segment, which is materially different from routine BPO cum call centre like the assessee company. (Seg. Pg. 688/FS-11.) (b). Healthcare. Its revenue model appears at page 9 of its annual report. It is mentioned that the said company was providing comprehensive offerings using its deep domain understanding of infrastructural healthcare, engineering design and enterprise solutions. (Pg. 644/FS-III)” 43. The ld. Counsel further submits that this company has been excluded by the Hyderabad Bench of the Tribunal in the case of S & P Capital IQ (India) (P.) Ltd. Vs. DCIT [(2016) 72 taxmann.com 326 (Hyd.)] for assessment year 2011-12. It is submitted that the Bangalore Bench of the Tribunal also excluded this comparable in the case of Swiss Re Shared Services (India) (P.) Ltd. Vs. ACIT Cross I.T.A. Nos. 1404 & 1618/Del/2016 33 [(2016) 76 taxmann.com 22 (Bangalore – Trib.) for assessment year 2011-12. 44. On the other hand, the ld. DR relied on the orders of the DRP/TPO. 45. Heard rival submissions perused the orders of the DRP/TPO and the decisions relied on. On perusal of the order of the TPO, we observe that the TPO considered Acropetal Technologies Ltd. engineering design segment as one of the comparable companies on functional similarity. We observe that this company has been considered as a high-end software development company and a KPO services provider and cannot be a comparable to that of a company providing ITES services by the Bangalore Bench Tribunal in the case of S & P Capital IQ (India) (P.) Ltd. Vs. DCIT (supra) for the assessment year 2011-12 wherein the Tribunal observed as under:- 21. Arguing for exclusion of Acropetal Technologies Ltd, (seg), Ld. AR submitted that Acropetal Technologies Ltd, was rendering service in the field of engineering design for health-care enterprise solutions and IT infrastructure solutions. As per the Ld. AR, AO took the engineering design services done by Acropetal Technologies Ltd, as a comparable segment with ITES services of the assessee. Ld. AR pointed out that engineering design services rendered by M/s. Acropetal was entirely different from the type of services done by the assessee. Further according to him Hyderabad bench of the Tribunal in the case of Excellence Data Research (P.) Ltd. v. ITO [2014] 66 SOT 15/49 taxmann.com 409 (Hyd. - Trib.) had held that Acropetal Technologies Ltd, was not a good comparable in the BPO segment. As per the Ld. AR M/s. Excellence Data Research P. Ltd, was rendering back office data creation, content development and support services which were not comparable to what assessee was doing. Though the Cross I.T.A. Nos. 1404 & 1618/Del/2016 34 decision of the Hyderabad Bench was for A. Y. 2009-10, as per the Ld. AR, M/s. Acropetal Technologies Ltd, was doing the very same business during the relevant previous year also and therefore it could be considered as a good precedent. 22. Per contra, Ld. DR submitted that TPO had considered the argument of the assessee that BPO and KPO had to be distinguished. According to him, Acropetal Technologies Ltd, was giving engineering design services and the assessee was rendering insurance support services. Though these services did not fit in the same mould, the level of expertise required stood more or less on the same pedestal. According to him, applying the yardsticks laid down by Hon'ble Delhi High Court in the judgment of Rampgreen Solutions (P) Ltd. (supra), Acropetal Technologies Ltd, could be taken as a good comparable. 23. We have perused the orders and heard the rival contentions. There is no dispute that M/s. Acropetal was having at least three segments, namely, engineering design services, IT service and health care. TPO had taken engineering design service as a good comparable with that of the services done by the assessee. Engineering Design Services that were being rendered by Acropetal Technologies Ltd, appears at page 8 of its annual report. It comprised of architectural, structural, electrical, plumbing, steel detailing, and utilities designing. Its revenue model appears at page 9 of its annual report. It is mentioned that the said company was providing comprehensive offerings using its deep domain understanding of infrastructural healthcare, engineering design and enterprise solutions. In our opinion, the type of services that was being provided by Acropetal Technologies Ltd, was not at all comparable with the type of services that the assessee was providing. It is also mentioned in the annual report of the said company that it was providing high end services in the engineering design services. No doubt as mentioned by the Ld. DR, it may not be feasible to have comparables which fit in the exact mould as that of an assessee in TP analysis. However, when one company is giving sophisticated set of services which involves higher level of skill sets, and the other is doing it on a lower level, we cannot say that the former should be considered as a comparable to the latter. Though for a different year, comparability of Acropetal Cross I.T.A. Nos. 1404 & 1618/Del/2016 35 Technologies Ltd, (seg) had come up before Hyderabad bench of the Tribunal in the case of Excellence Data Research (P.) Ltd. (supra). Observations of the Tribunal as it appears at para 18.1 reads as under: "18.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end, by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company." 24. Considering all these, we are constrained to take a view that engineering design services segment of M/s. Acropetal Technologies Ltd, (seg), cannot be considered as a proper comparable for the TP study of the assessee. 46. This decision applies to the facts of the assessee’s case as there is no dispute that Acropetal Technologies Ltd. is having engineering design service segment, which was compared to that of the assessee. The type of services that was being provided by Acropetal Technologies Ltd. was not comparable with the type of services that the assessee is providing. Acropetal Technologies Ltd. was providing high-end services in the engineering design services and whereas the assessee is providing ITES services to its AE. In view of the above, we direct the AO/ TPO to exclude Acropetal Technologies Ltd. from the final set of comparables. Cross I.T.A. Nos. 1404 & 1618/Del/2016 36 47. Coming to ground No. 4 of the grounds of appeal of the assessee in not granting risk adjustment by DRP/TPO the ld. Counsel submits that appropriate direction may be given to the TPO to determine the adjustment on account of risk in view of the following decisions:- (i) HyundaI Rotem Company ITA. No. 510/Del/2016 dated 22.11.2017 (Del); (ii) Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT ITA. No. 2584/PUN/2012 order dated 10.02.2017 (Pune); (iii) Sony India Pvt. Ltd. cited as 114 ITD 448 (Del); (iv) ITO Vs. M/s. Supportsoft India Pvt. Ltd. in IT (TP) A. No. 1372/Bang/2011 order dated 28.03.2013 (Bang) (see at pg. 53-63/WS) (v) St-Ericsson India P. Ltd. dated 3.07.2018 ITA. No. 609/Del/2015 [A.Y. 2010-11] (Para 17-21 of order annexed at pg. 48A-52/WS). 48. On the other hand, the ld. DR submits that risk adjustment is not allowed automatically and It has to be looked into each and every comparable. 49. On hearing both the sides, we are of the view that this issue has to go back to the file of the ld. AO/TPO to decide afresh keeping in view the judgements of various benches as referred to above after providing adequate opportunity of being Cross I.T.A. Nos. 1404 & 1618/Del/2016 37 heard to the assessee. The TPO shall decide the issue in accordance with law. 50. Coming to ground Nos. 5 and 6 in respect of working capital adjustment, the ld. Counsel submits that DRP/TPO have applied prime lending rate of SBI on domestic rupee loans for the purpose of determining working capital adjustment. The ld. Counsel submits that the working capital adjustment was done behind the back of the assessee without providing necessary working. The ld. Counsel submits that no opportunity was given to the assessee regarding working capital adjustment. The assessee was not provided the work-sheet of computation OP/OC margin as per show cause is altogether different from the margins finally determined by the TPO. 51. The ld. Counsel further submits that the TPO/DRP included Philippines PE branch for determining working capital adjustment whereas this branch did not perform any work during this year. The ld. Counsel submits that Philippines PE branch had closed down on 31.03.2010 and had done no transactions during the year. Therefore, it is submitted that it could not be included to determine the working capital adjustment as there were no transactions and has no relationship with business of assessee at all during this year. 52. The ld. Counsel further submits that in any case the issue is covered in favour of the assessee in its own case for assessment year 2010-11 by ITAT order dated 4.01.2015 in ITA. No. 1066/Del/2015. The ld. Counsel submits that the Tribunal held that Cross I.T.A. Nos. 1404 & 1618/Del/2016 38 interest has to be determined as per US currency and not as per prime lending rate as applied by the TPO, following the judgement in the case of CIT Vs. Cotton Naturals (I) (P.) Ltd. [276 CTR 445], the Tribunal directed the TPO to re-compute the working capital adjustment on the basis of interest as per US currency. This decision of the Tribnunal has been confirmed by the Hon’ble Delhi High Court by dismissing the appeal of the Revenue observing that the issue consisting the rate of interest for working capital adjustment is covered against the Revenue and in favour of the assessee in terms of decision of this court in CIT Vs. Cotton Naturals (I) (P.) Ltd. (supra). Therefore, it is the submission of the ld. Counsel that TPO was obliged to re-compute working capital on the basis of interest as per US currency. 53. On the other hand, the ld. DR submits that the decision in the case of CIT Vs. Cotton Naturals (I) (P.) Ltd. (supra) will not apply to the facts of the case. 54. We observe that similar issue has been decided by the Tribunal in assessee’s own case for assessment year 2010-11 wherein it has been held that interest has to be determined as per US currency and not as per the prime lending rate as applied by the TPO. We observe that the Tribunal set aside the impugned order and remit the matter to the file of TPO for fresh adjudication on account of TP adjustment, observing as under:- “56. Ground nos. 13 & 14: These grounds relate to adjustments made on account of working capital adjustment by ld. TPO. Ld. TPO had made the working Cross I.T.A. Nos. 1404 & 1618/Del/2016 39 capital adjustment by using the OECD methodology given in Annexure to Chapter 3 of OECD guidelines on transfer pricing and applied SBI Prime Lending Rate as on 30th June of the relevant financial year, as the interest rate. He computed the working capital adjustment as under: "a) Compute the average of opening and closing balance of inventories, trade debtors/ receivables, trade creditors/ payable of both the tested party and the comparables on revenue account. b) Work out the net working capital ratio (in pecentage) after dividing the net working capital by operating cost/ sales of such denominator (as is used in the PLI) both for the tested party and the comparables. c) Determine the difference between the tested party's rate with that of each comparables. d) Thereafter multiply the above difference by interest rate i.e. SBASR as on 30.06.2009 i.e. 11.75% e) Lastly, these adjustments are to be added to the profit margin of comparable companies. 57. Ld. counsel pointed out that assessee is receiving only in US dollar and, therefore, the interest rate is to be as per the US currency. He relied on the decision of Hon'ble Delhi High Court in the case of Cotton Natural (P) Ltd. (2015) 276 CTR 445, wherein it is observed as under: "Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party, Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of Cross I.T.A. Nos. 1404 & 1618/Del/2016 40 return on the money lent, i.e. the rate of interest. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian rupees would not be the relevant MP comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR, which is applicable to loans in Indian rupee. The PLR, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR is not applicable to loans to be repaid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply. Cotton Natureals (I) (P) Ltd. Vs. CIT (2015) 169 TTJ (Del) 685 (P) Ltd. VS. CIT (2015) 169 TTJ (Del) 685 affirmed." 58. Therefore, interest has to be determined as per US currency and not as per the prime lending rate, as applied by TPO. Under such circumstance, we set aside the impugned order and remit the matter to the file of TPO for fresh determination on account of TP adjustment towards interest not realized from its AE on the debts arising during the course of business. Ground is allowed for statistical purposes.” 55. This decision of the Tribunal has been affirmed by the High Court by rejecting the appeal of the Revenue, observing as under:- “4. As regards the other issue concerning foreign exchange fluctuation loss being considered as part of the operative expenses, the issue stands covered against the Revenue and in favour of the Assessee by the decision of the Supreme Court in Commissioner of Income-tax v. Woodward Governor India (P) Ltd. (2009) 312 ITR 254 (SC). Likewise, the issue concerning the rate of interest for capital Cross I.T.A. Nos. 1404 & 1618/Del/2016 41 adjustment is covered against the Revenue and in favour of the Assessee in terms of the decision of this Court in Cotton Natural (P) Ltd. v. CIT (2015) 276 CTR 445. Consequently, no substantial question of law arises in respect of these issues as well.” 56. Considering the rival submissions, we hold that since the issue has been decided in the case of the assessee by the Tribunal and the High Court, we direct the TPO/AO to re-compute the working capital adjustment keeping in view the directions of the Tribunal and the High Court in assessee’s own case. However, in so far as including the income of Philippines PE branch for determining the working capital adjustment, we restore this issue to the file of the AO/TPO to examine afresh in the light of the submissions of the assessee that Philippines PE branch had closed down on 31.03.2010 and no transactions were carried out during the year and, therefore, could not be included to determine the working capital adjustment as there were no transactions and has no relationship with business of the assessee during the year. The TPO/AO shall examine this issue afresh in accordance with law and compute the working capital adjustment accordingly. Needless to say adequate opportunity be given to the assessee along with the proposed workings while re-computing the working capital adjustment. 57. Coming to ground Nos. 7 and 8 in respect of disallowance under section 14A read with Rule 8D. In the draft assessment order the AO observed that assessee made investments in shares and mutual funds and earned dividend income of Rs.5,53,170/- under section 10(34) of the Act as exempt income. Cross I.T.A. Nos. 1404 & 1618/Del/2016 42 58. The Assessing Officer also did not accept the contention of the assessee that it had not incurred any expenditure for making investments and earning dividend income and the Assessing Officer applied Rule 8D(2)(iii) and disallowed Rs.14,94,534/- being 0.5% of average value of investment, as income attributable for earning dividend income. The DRP considering the submissions of the assessee held that the main contention of the assessee is that the investments in mutual funds investment from which dividend earned is not exempt and should not be considered for computation under Rule 8D and accordingly directed the Assessing Officer to re-compute the disallowance under Rule 8D by excluding investments which do not yield any exempt income and disallowance should be restricted to the dividend income declared by the assessee. Against the directions of the DRP, both the assessee as well as the Revenue are in appeal. 59. The ld. Counsel for the assessee submits that DRP has erred in sustaining the disallowance under Rule 14A read with Rule 8D in absence of any finding that the appellant had incurred the impugned expenditure for the purpose of earning exempt income. Reliance was placed on Maxopp Investment Ltd. Vs. CIT [(2012) 347 ITR 272 (Del.)] and H T Media Ltd. Vs. PCIT [(2017) 399 ITR 576 (Del.)]. 60. On hearing both the sides and perusing the orders of the Assessing Officer as well as the DRP, we find that the Assessing Officer applying Rule 8D(2)(iii) made disallowance at Rs.14,94,534/- and while doing so considered even the mutual funds where the Cross I.T.A. Nos. 1404 & 1618/Del/2016 43 dividend is not exempt. The assessee contended before the DRP that investments in mutual funds from which it had earned dividend income of Rs.5,53,170/- and capital gains of Rs.52,24,832/-. The capital gains arising out of mutual funds are taxable and on the exempt dividend income assessee had not incurred any expenditure for earning such income. The contention of the assessee has been dealt with by the DRP by directing the Assessing Officer to exclude those investments which do not yield exempt income to exclude for the purpose of computing disallowance under Rule 8D(2)(iii) and restrict the disallowance only to the dividend income earned. We do not see any infirmity in the order passed by the DRP. Therefore, the grounds raised by the assessee as well as the Revenue on this issue are rejected. 61. The only ground remained for adjudication in the appeal of the Revenue is whether the DRP was justified in considering the forex gain/loss operating in nature for determination of ALP. 62. The ld. Counsel for the assessee submits that this issue is covered in favour of the assessee in assessee’s own case for the assessment year 2010-11 by the Tribunal vide ITAT order dated 4.11.2015 in ITA. No. 1066/Del/2015. The ld. Counsel submits that the decision of the Tribunal was also upheld by the Hon’ble Delhi High Court in ITA. 340/2016 dated 27.05.2016. 63. The ld. DR supports the orders of the TPO/Assessing Officer. Cross I.T.A. Nos. 1404 & 1618/Del/2016 44 64. Heard rival submissions perused the orders of the authorities below. We find that an identical issue has been decided in assessee’s own case for the assessment year 2010-11 by the Tribunal vide ITAT order dated 4.11.2015 in ITA. No. 1066/Del/2015 observing as under:- “55. We have considered the rival submissions and have perused the record of the case. We find considerable force in the submission of Id. counsel for the assessee that ld. DRP wrongly invoked Safe Harbour Rule for coming to the conclusion that forex gain/ loss was not to be treated as operating income/ loss for current assessment year because the Safe Harbour Rules, in any case, were applicable from 18-9-2013 and prior to that the said Rules could not be applied. That apart, it is not disputed that in the case of assessee forex gain/ loss was related to sale price of export, which was in US dollar. Therefore, the entire receipts were on revenue account. This issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of Woodward Governor's (supra), wherein it has been held that forex gain/loss in the revenue account is a trading receipt, or, as the case may be, business expenditure, allowable u/s 37(1) of the Act. We, accordingly, direct that the forex gain/ loss be treated as operating income/ loss both in the case of tested party as well as comparable and the PLI should be determined accordingly. Ground No. 12 is allowed accordingly.” 65. This decision of the Tribunal has been affirmed by the Hon’ble High Court by order dated 27.05.2016 dismissing the appeal of the Revenue holding that no substantial question of law arises and while holding so, the Hon’ble High Court observed as under:- “4. As regards the other issue concerning foreign exchange fluctuation loss being considered as part of the operative expenses, the issue stands covered against the Revenue and in favour of the Assessee by the decision of the Cross I.T.A. Nos. 1404 & 1618/Del/2016 45 Supreme Court in Commissioner of Income-tax v. Woodward Governor India (P) Ltd. (2009) 312 ITR 254 (SC). Likewise, the issue concerning the rate of interest for capital adjustment is covered against the Revenue and in favour of the Assessee in terms of the decision of this Court in Cotton Natural (P) Ltd. v. CIT (2015) 276 CTR 445. Consequently, no substantial question of law arises in respect of these issues as well.” 66. Respectfully following the said decision, we reject the ground raised by the Revenue. 67. In the result, the appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed. Order pronounced in the open court on : 24/03/2023. Sd/- Sd/- ( G. S. PANNU ) ( C. N. PRASAD ) PRESIDENT JUDICIAL MEMBER Dated : 24/03/2023. *MEHTA* Copy forwarded to : 1. Appellants; 2. Respondents; 3. CIT 4. CIT (Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, New Delhi. Cross I.T.A. Nos. 1404 & 1618/Del/2016 46 Date of dictation 20.03.2023 Date on which the typed draft is placed before the dictating member 22.03.2023 Date on which the typed draft is placed before the other member 24.03.2023 Date on which the approved draft comes to the Sr. PS/ PS 24.03.2023 Date on which the fair order is placed before the dictating member for pronouncement 24.03.2023 Date on which the fair order comes back to the Sr. PS/ PS 24.03.2023 Date on which the final order is uploaded on the website of ITAT 24.03.2023 Date on which the file goes to the Bench Clerk 24.03.2023 Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the order