Kronos Solutions India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 1685/DEL/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4378 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 28-06-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 30-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: H S CHOUDHARY
• Keywords: Transfer pricing; Principle of natural justice; International transaction
• Section: 234B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMB ER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 6386/DEL/2016 ASSESSMENT YEAR : 2012-13 KRONOS SOLUTIONS INDIA PVT. LTD., VS AD DL. CIT, 807, NEW DELHI HOUSE, SPECIAL RANGE-05, BARAKHAMBA ROAD, C.R. BUILDING, NEW DELHI. NEW DELHI. ITA NO. 1685/DEL/2016 ASSESSMENT YEAR: 2011-12 KRONOS SOLUTIONS INDIA PVT. LTD., VS DC IT, 807, NEW DELHI HOUSE, CIRCLE-14(2), BARAKHAMBA ROAD, NEW DELHI. NEW DELHI. (PAN: AACCD4922B) (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI NISHANT SAINI, ADITYA ANAND, ANKIT BHATIA, ADV. RESPONDENT BY : SHRI H.S. CHOUDHARY, CIT DR DATE OF HEARING: 08.08.2017 DATE OF PRONOUNCEMENT: 22.09.2017 O R D E R PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER BOTH THE APPEALS HAVE BEEN PREFERRED BY THE ASSESSE E. ITA NO. 1685/DEL/2016 PERTAINS TO ASSESSMENT YEAR 2011- 12 WHEREAS ITA NO. 6386/DEL/2016 PERTAINS TO ASSESSMEN T YEAR 2012-13. ITA NO. 1685 IS AGAINST THE FINAL ASSESSM ENT ORDER DATED 29.1.2016 PASSED SUBSEQUENT TO THE DIRECTIONS OF THE ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 2 HONBLE DRP-I, NEW DELHI VIDE ITS ORDER DATED 21.12 .15 WHEREAS ITA NO. 6386 CHALLENGES THE FINAL ASSESSMENT ORDER DATED 7.11.2016. BOTH THE APPEALS WERE HEARD TOGETHER AN D NOW THEY ARE BEING DISPOSED OF THROUGH THIS COMMON ORDER. 2. THE ASSESSEE, KRONOS SOLUTIONS INDIA (P) LTD. (KRONOS INDIA), WAS INCORPORATED IN DECEMBER 2006 AS A SUBSIDIARY O F KRONOS SOLUTIONS INC. (KRONOS INC.) WHICH IN TURN IS A WHO LLY OWNED SUBSIDIARY OF KRONOS INCORPORATED USA (KRONOS US). KRONOS INDIA IS A 100% EXPORT ORIENTED UNIT AND IS ALSO AN OFFSHORE DEVELOPMENT CENTRE FOR KRONOS US. AS PER THE TRANS FER PRICING STUDY (TP STUDY), KRONOS INDIA IS ENGAGED IN DELIVE RING AN INTEGRATED SUITE OF SOFTWARE DEVELOPMENT SERVICES T HAT ENABLES ORGANIZATION TO REDUCE COSTS, INCREASE PRODUCTIVITY , IMPROVE EMPLOYEE SATISFACTION, AND ENHANCE THE LEVEL OF SER VICE THEY PROVIDE. KRONOS INDIA IS ALSO ENGAGED IN PROVISION OF BACK OFFICE SUPPORT SERVICES WHICH INVOLVES APPLICATION SUPPORT SERVICES, TECHNICAL SUPPORT AND HOSTING SERVICES AND APPLICAT ION AND TECHNICAL SUPPORT IN RELATION TO CLOUD SERVICES. I N RESPECT OF APPLICATION SUPPORT SERVICES, THE ASSESSEES SERVIC ES INCLUDE PROVIDING SUPPORT SERVICES IN RESPECT OF THE APPLIC ATIONS ALREADY ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 3 DEVELOPED BY THE ASSOCIATED ENTERPRISES (AE). THE SERVICES ALSO INCLUDE FIXING OF BUGS. WITH RESPECT TO TECHNICAL SUPPORT SERVICES, THE SAME INCLUDE ADDRESSING THE QUERIES RAISED BY T HE CUSTOMER ON AES. THE QUERIES ADDRESSED BY THE ASSESSEE ARE IN THE NATURE OF CONFIGURATION ISSUES, DATA CORRUPTION ISSUES AND BUG ISSUES. WITH RESPECT TO HOSTING SERVICES, THE ASSESSEE PROV IDES MONITORING, HELP DESK, INCIDENT RESPONSE, CHANGE AN D RELEASE MANAGEMENT, ASSET TRACKING AND REPORTING. THE NATU RE OF HOSTING SERVICES INCLUDES TECHNICAL ADMINISTRATIVE MAINTENA NCE, TROUBLESHOOTING AND SUPPORT FOR ALL SERVERS. FURTH ER, THE ASSESSEE IS ALSO ENGAGED IN MONITORING THE CLOUD SO DEVELOPE D BY THE AE TO ENSURE THAT THE APPLICATION IS FUNCTIONING AS PER T HE REQUIREMENTS. ITA NO. 1685/DEL/2016 FOR ASSESSMENT YEAR 2011-12: 3. DURING THE CAPTIONED YEAR, THE RETURN DECLARIN G INCOME OF RS. 3,03,72,440/- WAS FILED. THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF PROVIDER OF SOFTWARE SERVICES AND B ACK OFFICE SUPPORT. THE ASSESSEE COMPANY HAD ENTERED INTO INT ERNATIONAL TRANSACTIONS WITH AES AND ON A REFERENCE TO THE TRA NSFER PRICING OFFICER (TPO) U/S 92C, THE TPO PROPOSED AN ADJUSTME NT OF RS. ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 4 2,44,54,233/- IN RESPECT OF PROVISION OF SOFTWARE D EVELOPMENT SERVICES AND RS. 50,74,969/- WITH RESPECT TO PROVIS ION OF IT ENABLED SERVICES, THUS MAKING TOTAL ADJUSTMENT OF R S. 2,95,29,202/-. THE ASSESSEE APPROACHED THE HONBLE DRP WHO DIRECTED THE TPO TO INCLUDE/EXCLUDE THE COMPARABLES ON GROUND OF FUNCTIONAL DIFFERENCE AND ACCORDINGLY THE ADJUST MENT ON ACCOUNT OF SOFTWARE DEVELOPMENT SUPPORT SERVICES WA S REDUCED TO RS. 1,68,08,253/- IN THE FINAL ASSESSMENT ORDER. THE ASSESSEE FILED A RECTIFICATION APPLICATION BEFORE THE TPO AN D POST THE RECTIFICATION APPLICATION, THE TPO DELETED THE ADJU STMENT ON ACCOUNT OF SOFTWARE DEVELOPMENT SUPPORT SERVICES SE GMENT. 3.1 HOWEVER, WITH RESPECT TO BACK OFFICE SUPPORT SERVICES, THE TPO REJECTED 11 OUT OF 14 COMPARABLES SELECTED BY T HE ASSESSEE IN THE TRANSFER PRICING STUDY AND INCLUDED FIVE NEW CO MPARABLES IN THE FINAL SET. THE FINAL COMPARABLE SET ADOPTED BY THE TPO IS AS UNDER:- ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 5 S.NO. C CO MPANY NAME OP/ OC (%) MARGINS AS CONSIDERED BY THE TPO COMPARABLE CONSIDERED BY THE TPO / APPELLANT 1 ACENTIA TECHNOLOGIES LIMITED 29.18% APPELLANT 2 E4 E4E HEALTHCARE BUSINESS SERVICES PRIVATE LIMITED 9.77% LD. TPO 3 EC ECLERX SERVICES LIMITED 56.82% LD. TPO 4 1C IC RA TECHNO ANALYTICS LIMITED (SEGMENT) 25.24% LD. TPO 5 IN IN OSYS BPO LIMITED 17.86% APPELLANT 6 T TCSE - SERVE LIMITED 69.31% LD. TPO 7 ACRO PETAL TECHNOLOGIES LIMITED (SEGMENTAL) 14.36% LD. TPO 8 JI JIN DAL LNTELLICOM LIMITED 13.70% APPELLANT MEAN 29.53% 3.2 THE TPO ALSO DID NOT INCLUDE ECONOMIC ADJUSTM ENTS LIKE WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT WHIL E COMPUTING THE ARMS LENGTH MARGIN IN THE BACK OFFICE SUPPORT SERVICES SEGMENT OF THE ASSESSEE COMPANY. THE TPO DETERMINE D THE ARMS LENGTH MARGIN IN THE BACK OFFICE SUPPORT SERVICES S EGMENT OF ASSESSEE COMPANY AT 29.53% AS AGAINST THE ASSESSEE S MARGIN OF 16.02% AND PROPOSED AN ADJUSTMENT OF RS. 50,74,969/ - . ON THE ASSESSEEE APPROACHING THE HONBLE DRP, THE HONBLE DRP ACCEPTED THE APPROACH AND THE COMPARABLES CONSIDERE D BY THE TPO AND DIRECTED THE TPO TO PROVIDE WORKING CAPITAL ADJUSTMENT AND ALSO TO RE-COMPUTE THE MARGINS OF THE ASSESSEE AS WELL AS THE OF THE COMPARABLES BY REMOVING COMPUTATIONAL ERRORS . THE HONBLE DRP WHILE REJECTING THE ASEESEEES CLAIM FO R EXCLUDING COMPARABLES HELD THAT THE FUNCTIONAL PROFILE OF THE ASSESSEE WITH ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 6 REFERENCE TO THE BACK OFFICE SUPPORT SEGMENT WAS AK IN TO A KNOWLEDGE PROCESSING OUTSOURCING (KPO) SERVICE WHER EAS THE ASSESSES CONTENTION WAS THAT IT WAS NOT A KPO BUT ONLY A BACK OFFICE SERVICE PROVIDER. HOWEVER, THE TPO DID NOT PROVIDE THE WORKING CAPITAL ADJUSTMENT AS PER THE DIRECTIONS OF THE HONBLE DRP AND ALSO DID NOT CORRECT THE MARGINS AS DIRECTE D BY THE HONBLE DRP AND ACCORDINGLY, THE ADJUSTMENT WITH RE SPECT TO BACK OFFICE SUPPORT SERVICE SEGMENT CONTINUED TO RE MAIN AT RS. 50,74,969/- AND THE ASSESSING OFFICER ALSO ISSUED T HE FINAL ASSESSMENT ORDER ON 29.01.2016 BY MAKING THE SAME A MOUNT OF ADJUSTMENT. ON RECTIFICATION APPLICATION FILED BY THE ASSESSEE, THE TPO, HOWEVER, REDUCED THE ADJUSTMENT TO RS. 46,80,5 39/-. THE FINAL SET OF COMPARABLES POST THE RECTIFICATION ORD ER IS AS UNDER:- FINAL SET OF COMPARABLES S. NO. COMPANY NAME WORKING CAPITAL ADJUSTED OP/ OC 1 ACCENTIA TECHNOLOGIES LIMITED 27.89% 2 E4E HEALTHCARE BUSINESS SERVICES PRIVATE 9.55% 3 ECLERX SERVICES LIMITED 54.19% 4 INFOSYS BPO LIMITED 16.65% 5 T C S E-SERVE LIMITED 68.28% 6 ACROPETAL TECHNOLOGIES LIMITED (SEGMENTAL) 14.27% 7 JINDAL INTELLICOM LIMITED 11.70% 8 ICRA TECHNO ANALYTIC LIMITED 25.24% ARITHMETIC MEAN 28.48% ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 7 4. AGGRIEVED, THE ASSESSEE HAS APPROACHED THE ITA T AND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO / LEARNED TRANSFER PRICING OFFICER (LD. TPO) / LEARNED DISPUTE RESOLUTION PANEL (LD. DRP ) ERRED IN MAKING AN ADDITION OF INR 2,18,83,222/- TO THE RETURNED INCOME OF THE APPELLANT BY RE-COMPUTING TH E ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION PERTAINING TO BACK OFFICE SUPPORT SERVICE SEGMENT, UNDER SECTION 92 OF THE ACT. THUS, IN PASSING THE ORDER, THE LD. AO / LD. TPO / LD. DRP ERRED IN: 1.1 REJECTING THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT IN ITS TRANSFER PRICING DOCUMENTATION ON THE BASIS OF ADDITIONAL/ MODIFIED QUANTITATIVE FILTERS WHICH LACKED VALID AND SUFFICIENT REASONING; 1.2 ACCEPTING COMPANIES WHICH WERE FUNCTIONALLY NO T COMPARABLE TO THE APPELLANT; 1.3 NOT CONSIDERING THE CORRECT COMPUTATION OF OPE RATING MARGINS OF CERTAIN COMPARABLES; 1.4 DENYING THE BENEFIT OF ECONOMIC ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN RISK PROFILE IN ARRIVING A T THE ARMS LENGTH MARGIN; 1.5 ACCEPTING HIGH TURNOVER COMPANIES AS COMPARABL ES AND THEREBY IGNORING THE IMPACT OF ECONOMIES OF SCA LE; AND 1.6 THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. AO/LD. TPO/LD. DRP ERRED IN SELECTING THE CURRENT YEAR (I.E. FINANCIAL YEAR 2010-11) DATA FOR COMPARABILITY DESPITE THE FACT THAT AT THE TIME OF PREPARATION OF TRANSFER PRICING DOCUMENTATION BY TH E APPELLANT, THE COMPLETE DATA FOR FINANCIAL YEAR 201 0-11 WAS NOT AVAILABLE WITHIN THE PUBLIC DOMAIN. 2. THAT THE LD. AO / LD. TPO ERRED IN NOT FOLLOWIN G THE DIRECTIONS OF THE LD. DRP THAT COMPARABILITY ADJUST MENT (WORKING CAPITAL ADJUSTMENT) SHOULD BE PROVIDED TO APPELLANT WHILE DETERMINING THE ARMS LENGTH PROFIT MARGIN. ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 8 3. THAT THE LD. AO/LD. TPO/LD. DRP ERRED IN LAW AN D FACTS OF THE CASE BY NOT CONSIDERING THE FOREIGN EX CHANGE GAIN/LOSS AS OPERATING IN NATURE WHILE COMPUTING TH E MARGINS OF THE APPELLANT COMPANY AND COMPARABLE COMPANIES. 4. THAT THE LD. AO HAS ERRED IN CHARGING INTEREST UNDER SECTION 234B AND 234C OF THE ACT AMOUNTING TO INR 44,95,692/- AND INR 5,792/- RESPECTIVELY. 5. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, LD. AO ERRED IN INITIATING PENALTY PROC EEDINGS UNDER SECTION 271(1 )(C) OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, DE LETE, RESCIND, FORGO OR WITHDRAW ANY OF THE ABOVE GROUNDS OF APPEAL EITHER BEFORE OR DURING THE COURSE OF THE PROCEEDINGS BEFORE THE HONBLE INCOME TAX APPELLATE TRIBUNAL IN THE INTEREST OF NATURAL JUSTICE. THE AF ORESAID GROUNDS ARE MUTUALLY EXCLUSIVE AND WITHOUT PREJUDIC E TO EACH OTHER. 5. THE LD. AR SUBMITTED THAT THE HONBLE DRP, WHI LE PASSING THE DIRECTIONS, HELD THAT THE FUNCTIONAL PROFILE OF THE ASSESSEE WITH REFERENCE TO BACK OFFICE SUPPORT SERVICES WAS AKIN TO A KPO WHICH WAS PATENTLY INCORRECT. IT WAS SUBMITTED THAT THER E WAS A VAST DIFFERENCE IN THE FUNCTIONAL PROFILE OF THE ASSESSE E VIS-A-VIS A KPO AND THAT THE ASSESSEES FUNCTIONAL PROFILE WAS AKIN TO AN INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) PROV IDER. LD. AR REFERRED TO RULE 10TA(E) AND RULE 10TA(G) OF THE SA FE HARBOUR RULES FOR THE DEFINITION OF KPO AND ITES. LD. AR SUBMITTED THAT ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 9 THE ASSESSEE WAS ENGAGED IN RENDERING BACK OFFICE S UPPORT SERVICES WHICH INVOLVED APPLICATION SUPPORT SERVICE S, TECHNOLOGY SUPPORT SERVICES, HOSTING SERVICES AND APPLICATION AND TECHNICAL SUPPORT IN RELATION TO THE CLOUD SERVICE. IT WAS A LSO SUBMITTED THAT ITES FOLLOWS BUSINESS PROCESS OUTSOURCING SERV ICES WITH THE ASSISTANCE OR USE OF INFORMATION TECHNOLOGY AND INC LUDES BACK OFFICE OPERATIONS, CALL CENTRE OR CONTRACT CENTRE S ERVICE, DATA PROCESSING AND DATA MINING, INSURANCE CLAIM PROCESS ING, LEGAL DATA BASE, CREATION AND MAINTENANCE OF MEDICAL TRAN SCRIPTION EXCLUDING MEDICAL ADVICE, TRANSLATION SERVICE, PAYR OLL, REMOTE MAINTENANCE, REVENUE ACCOUNTING SUPPORT CENTRES, WE BSITE SERVICES, DATA SEARCH INTEGRATION AND ANALYSIS, REM OTE EDUCATION EXCLUDING CONTENT DEVELOPMENT, CLINICAL DATA BASE M ANAGEMENT SERVICE, CLINICAL DATA BASE MANAGEMENT SERVICE. IT WAS ALSO SUBMITTED THAT AS PER THE DEFINITION OF ITES THE SA ME DID NOT INCLUDE ANY RESEARCH AND DEVELOPMENT SERVICES. LD. AR FURTHER SUBMITTED THAT AS FAR AS KPOS ARE CONCERNED, THEY P ROVIDE BUSINESS PROCESS OUTSOURCING SERVICES, MAINLY WITH THE ASSISTANCE OF INFORMATION TECHNOLOGY REQUIRING APPLICATION OF KNOWLEDGE AND ADVANCED ANALYTICAL AND TECHNICAL SKILLS. IT WAS S UBMITTED THAT KPOS USUALLY PROVIDE SERVICES IN THE NATURE OF GEOG RAPHICAL ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 10 INFORMATION SYSTEM, HUMAN RESOURCE SERVICES, ENGINE ERING AND DESIGN SERVICES, ANIMATION OR CONTENT DEVELOPMENT A ND MAINTENANCE, BUSINESS ANALYTICS, FINANCIAL ANALYTIC S AND MARKET RESEARCH. IT WAS SUBMITTED THAT THE FUNCTIONS PERF ORMED BY THE ASSESSEE WERE NOT AT ALL RELATED TO THE SERVICES CO VERED BY THE DEFINITION OF A KPO AND THE TPO DID NOT CONSIDER TH E ASSESSEE AS A KPO BUT THE HONBLE DRP, WITHOUT ANALYSING THE FU NCTIONAL PROFILE OF THE ASSESSEE AND WITHOUT PROVIDING ANY C OGENT REASONING, HELD THE ASSESSEES FUNCTIONS AS AKIN TO A KPO. IT WAS REITERATED THAT THE FUNCTIONS OF THE ASSESSEE WERE MORE AKIN TO ITES SERVICES PROVIDER AND NOT A KPO. 5.1 COMING TO THE COMPARABLES, THE LD. AR ADVANCED HIS ARGUMENTS AS UNDER:- I) TCS E-SERVE LIMITED IT WAS SUBMITTED THAT TCS E-SERVE EARNED REVEN UE FROM FINANCIAL INFORMATION PROCESSING, VOICE BASED CUSTO MER CONTRACT, BUSINESS PROCESS MANAGEMENT AND ANALYTICS. IT WAS ALSO SUBMITTED THAT THE ERSTWHILE CITIGROUP GLOBAL SERVI CES WAS TAKEN OVER BY THE TCS DURING FINANCIAL YEAR 2008-09 AND P OST THE TAKEOVER BY TATA CONSULTANCY SERVICES LIMITED TCS E -SERVE UTILIZED THE LARGE CUSTOMER BASE OF TCS TO ACHIEVE GREATER ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 11 OPERATIONAL EFFICIENCIES. HE DREW OUR ATTENTION TO THE ANNUAL REPORT OF TCS E-SERVE AND SUBMITTED THAT THIS COMPA NY WAS ENGAGED IN ACTIVITIES BEYOND NORMAL BUSINESS PROCES SING SERVICES AND PROVIDED TECHNICAL SERVICES IN THE NATURE OF SO FTWARE TESTING, VERIFICATION, VALIDATION ETC. WHEREAS THE ASSESSEE WAS ONLY PERFORMING ROUTINE BACK OFFICE FUNCTIONS AND ACCORD INGLY THIS COMPANY WAS FUNCTIONALLY DISSIMILAR TO THE ASSESSEE COMPANY. 5.2 RELIANCE WAS PLACED ON THE JUDGMENT OF HON'BL E DELHI HIGH COURT IN THE CASE OF ACTIS GLOBAL SERVICES PVT. LT D. IN ITA 94/H.C./2017 WHEREIN THE HON'BLE HIGH COURT AFFIRME D THE ORDER OF THE ITAT OF EXCLUDING TCS AS A COMPARABLE BY NOT ING THAT TCS WAS INVOLVED IN TRANSACTION PROCESSING AND TECHNICA L SERVICES. IT WAS FURTHER SUBMITTED THAT THE ANNUAL REPORT OF TCS E-SERVE DID NOT PROVIDE SEGMENTAL INFORMATION AND, THEREFORE, O N THIS GROUND ALSO, THIS COMPARABLE OUGHT TO BE REJECTED. THE LD . AR ALSO ASSAILED THE INCLUSION OF TCS E-SERVICE ON THE GROU ND OF INCOMPARABLE SCALE OF OPERATIONS AND SUBMITTED THAT TCS E-SERVE HAS A TURNOVER OF 330 TIMES THAN THAT OF THE ASSESS EES BACK OFFICE SEGMENT. RELIANCE WAS PLACED ON A PLETHORA OF CASE LAWS ON THIS CONTENTION AS WELL. IT WAS ALSO SUBMITTED THAT TCS E-SERVE HAD A VERY SIGNIFICANT BRAND PRESENCE DUE TO ITS ASSOCIAT ION WITH THE ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 12 TATA BRAND AND ON THIS COUNT ALSO, THE COMPARABLE N EEDED TO BE REJECTED. IT WAS ALSO SUBMITTED THAT TCS E-SERVE B ORE SIGNIFICANT RISKS SUCH AS MACRO-ECONOMIC RISKS, CURRENCY RISKS, ABILITY TO HIRE AND RETAIN TALENT, DATA PROTECTION, PRESSURE O N BILLING RATES, TECHNOLOGY, NETWORK AND TELECOMMUNICATIONS RISK, RI SKS FROM OPERATIONS, FINANCIAL RISK, LEGAL AND STATUTORY LIA BILITIES RISK, RISK DUE TO MAN-MADE AND NATURAL DISASTERS, GOVERNMENT P OLICIES ETC. WHICH INDICATED THAT THE COMPANY IS A FULL RISK BEA RING ENTREPRENEURIAL COMPANY WHEREAS THE ASSESSEE WAS A LOW RISK CAPTIVE UNIT OF ITS AE. EXCLUSION WAS SOUGHT OF TH IS COMPARABLE ON THIS GROUND ALSO. II) ECLERX SERVICES LIMITED 5.3 LD. AR SUBMITTED THAT THIS COMPANY WAS ALSO F UNCTIONALLY DISSIMILAR AS THIS COMPANY WAS A KPO ENGAGED IN FIN ANCIAL SERVICES AND SALES AND MARKETING SERVICES. HE REFE RRED TO THE ANNUAL REPORT OF THE COMPANY ECLERX SERVICES LIMITE D AND POINTED OUT THAT UNDER SALES AND MARKETING FUNCTIONS, THE C OMPANY PROVIDED WEB CONTENT MANAGEMENT AND MERCHANDISING E XECUTION, WEB ANALYTICS, SOCIAL MEDIA MODERATION, ANALYTICS, SEARCH ENGINE ANALYTICS AND SUPPORT, CRM PLATFORM SUPPORT, LEAD G ENERATION, CUSTOMER DATA MANAGEMENT, SUPPLY CHAIN AND CHANNEL ANALYTICS, ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 13 PRICE AND CATALOGUE COMPETITIVE INTELLIGENCE AND BR OADER DATA COLLECTION, CLEANSING, ENRICHING AND REPORTING. IT WAS SUBMITTED THAT AS PER THE DEFINITION OF KPO, THE FUNCTIONS PE RFORMED BY ECLERX SERVICES LIMITED FELL WITHIN THE MEANING OF A KPO FOR PROVIDING HIGH END SERVICES WHICH WAS WAY BEYOND TH E REALM OF SERVICES PERFORMED BY THE ASSESSEE COMPANY AS THE A SSESSEES COMPANY ONLY PROVIDED BACK OFFICE SERVICES WHICH WE RE MORE IN THE NATURE OF ITES SERVICES. RELIANCE WAS PLACED O N A NUMBER OF JUDGEMENTS WHEREIN ECLERX SERVICES LIMITED HAD BEEN EXCLUDED AS A COMPARABLE ON THE GROUND OF BEING A KPO AND CA TERING TO HIGH END CLIENTS. IT WAS ALSO SUBMITTED THAT THIS COMPARABLE HAD A TURNOVER 78 TIMES MORE THAN THAT OF THE ASSESSEE AND, THEREFORE, THE SCALE OF OPERATIONS WERE INCOMPARABL E. IT WAS ALSO SUBMITTED THAT THIS COMPANY HAD A SIGNIFICANT INTAN GIBLES ASSETS AMOUNTING TO RS. 2.94 CRORES AS COMPARED TO THE ASS ESSEES INTANGIBLE ASSETS OF RS. 23.10 LAKH AND THE EXCLUSI ON OF ECLERX SERVICES LIMITED WAS SOUGHT ON THIS GROUND ALSO. I T WAS ALSO SUBMITTED THAT THIS COMPANY BORE THE RISKS ASSOCIAT ED WITH THE HIGH END SERVICE PROVIDER WHEREAS THE ASSESSEE COMP ANY WAS A BACK END SERVICE PROVIDER HAVING A VERY LOW RISK DU E TO BEING A CAPTIVE SERVICE PROVIDER. IT WAS ALSO SUBMITTED TH AT THIS COMPANY ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 14 MOSTLY OPERATED THROUGH OUTSOURCING MODEL WHEREAS T HERE WAS NO OUTSOURCING DONE BY THE ASSESSEE COMPANY. III) R SYSTEMS INTERNATIONAL LIMITED 5.4 THE LD. AR SUBMITTED THAT THIS COMPANY WAS RE JECTED BY THE TPO/HONBLE DRP ON ACCOUNT OF DIFFERENT FINANCIAL Y EAR ENDING. LD. AR PLACED RELIANCE ON JUDGMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF MCKINSEY KNOWLEDGE CENTRE PVT. LTD. IN ITA 217/2014 WHEREIN IT WAS HELD THAT IF FROM THE AVAIL ABLE DATA ON RECORD, THE RESULTS FOR FINANCIAL YEAR CAN REASONAB LY BE EXTRAPOLATED THEN THE COMPARABLE CANNOT BE EXCLUDED SOLELY ON THE GROUND THAT THE COMPARABLES HAVE DIFFERENT FINA NCIAL YEAR ENDINGS. IT WAS SUBMITTED THAT THIS JUDGMENT OF T HE HIGH COURT WAS NOT AVAILABLE AT THE TIME OF THE PROCEEDINGS BE FORE THE HONBLE DRP AND THE ASSESSMENT PROCEEDINGS. LD. AR ALSO DREW OUR ATTENTION TO THE COMPUTATION MADE BY THE ASSESS EE IN WHICH THE FINANCIAL RESULTS OF R SYSTEMS INTERNATIONAL LI MITED HAVE BEEN TABULATED SO AS TO MATCH WITH THE RESULTS OF THE AS SESSEE COMPANY ON THE BASIS OF SAME FINANCIAL YEAR ENDING. IT WAS SUBMITTED THAT ITAT MUMBAI IN MAERSK GLOBAL SERVICE CENTRES (INDIA) PVT. LTD. AND ITAT DELHI IN AMERIPRISE INDI A PVT. LTD. HAD HELD THAT THERE CAN BE NO OBJECTION TO THE INCLUSIO N OF A COMPANY ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 15 IN THE FINAL LIST OF COMPARABLES WITH THE ADJUSTED DATA FOR THE RELEVANT FINANCIAL YEAR WHERE THE RELEVANT DATA CAN BE DEDUCTED FROM THE INFORMATION AVAILABLE FROM ANNUAL REPORTS. IT WAS SUBMITTED THAT R SYSTEMS INTERNATIONAL LIMITED SHOU LD BE INCLUDED AS A COMPARABLE. IV) INFOSYS BPO LIMITED 5.5 THE LD. AR SUBMITTED THAT THE ASSESSEE ITSELF HAD INITIALLY SELECTED THIS COMPANY IN THE TP STUDY BUT THAT INCL USION WAS BEING SOUGHT TO BE REJECTED BECAUSE OF FUNCTIONAL D ISSIMILARITY AND INCOMPARABLE SCALE OF OPERATIONS. THE LD. AR S UBMITTED THAT THE ASSESSEE CANNOT BE PREVENTED FROM REJECTING A C OMPARABLE SOLELY ON THE GROUND THAT THE SAME HAD INITIALLY BE EN INCLUDED IN ITS TP DOCUMENTATION OR SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. RELIANCE WAS PLACED ON THE ORDER OF ITAT CHANDIGARH (SPECIAL BENCH) IN THE CASE OF QUAR K SYSTEMS PVT. LTD FOR THE PROPOSITION THAT THE TAXPAYER SHOU LD BE GIVEN AN OPPORTUNITY RECTIFY THE BONA FIDE MISTAKE IN ITS TP ANALYSIS IF IT IS BASED ON FACTS ON RECORD. RELIANCE WAS ALSO PLACED ON ANOTHER ORDER OF ITAT MUMBAI BENCH IN THE CASE OF UCV INDIA PVT. LTD. WHEREIN IT WAS HELD THAT THE ASSESSEE IS NOT PINNED DOWN TO HIS STATEMENT IN THE FIRST ROUND OF HIS TRANSFER PRICIN G PROCEEDINGS. IT ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 16 WAS SUBMITTED THAT THE INFOSYS BPO LTD. WAS ENGAGED IN HIGH END INTEGRATED SERVICES BY ASSISTING ITS CLIENTS IN IMP ROVING THEIR COMPETITIVE POSITIONING BY MANAGING THEIR BUSINESS PROCESSES IN ADDITION TO PROVIDING INCREASED VALUE. IT WAS FURT HER SUBMITTED THAT THIS COMPANY HAD A TURNOVER 260 TIMES MORE THA N THAT OF THE ASSESSEE COMPANY. RELIANCE WAS PLACED ON THE J UDGMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF ACTIS GLOBA L SERVICES PVT. LTD. (SUPRA) WHEREIN THIS COMPANY WAS REJECTED ON G ROUND OF HIGH TURNOVER. RELIANCE WAS ALSO PLACED ON THE CASE OF AGNITY INDIA TECHNOLOGIES VS ITO IN ITA 1204/DEL/2011 WHEREIN TH E ITAT DELHI BENCH HAD REJECTED THIS COMPARABLE ON THE GRO UND OF HIGH TURNOVER. LD. AR ALSO SUBMITTED THAT INFOSYS BPO W AS ASSOCIATED WITH THE BRAND INFOSYS WHICH WAS ONE OF THE MOST PROMINENT BRANDS IN THE INDIAN IT INDUSTRY. INFOSYS BPO BEIN G A SUBSIDIARY OF INFOSYS HAD AN ELEMENT OF BRAND VALUE ASSOCIATED WITH IT AND IT INCURRED SIGNIFICANT AMOUNT OF BRAND PROMOTION AND ADVERTISING EXPENSES WHICH LED TO THE CREATION OF MARKETING INT ANGIBLES. IT WAS SUBMITTED THAT INFOSYS BPO WAS A GIANT COMPANY WITH HIGH RISK PROFILE AND IT OPERATED AS A FULL-FLEDGED ENTR EPRENEUR AND, THEREFORE, IT COULD NOT BE COMPARED WITH BACK OFFIC E SUPPORT SERVICE PROVIDER LIKE THE ASSESSEE AND, ACCORDINGLY , THE SAME ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 17 SHOULD BE EXCLUDED FROM THE FINAL SET OF COMPARABLE S. LD. AR ALSO RELIED ON A NUMBER OF CASE LAWS WHERE INFOSYS BPO H AD BEEN EXCLUDED AS A COMPARABLE. LD. AR SUBMITTED THAT IF THE THREE COMPARABLES AS ARGUED ABOVE ARE EXCLUDED AND COMPAR ABLE AS SUGGESTED IS INCLUDED, THE ARITHMETIC MEAN OF OP/TC WOULD WORK OUT TO 14.54% WHEREAS THE ASSESSEES OP/TC WAS 16.0 2% AND, THEREFORE, THE SAME WILL SATISFY THE ARMS LENGTH C RITERIA. 6. IN RESPONSE, THE LD. CIT DR REFERRED TO THE T P DOCUMENTATION AND READ OUT EXTENSIVELY FROM THE SAME TO SUPPORT H IS ARGUMENT THAT AS PER THE FUNCTIONS SPELT OUT IN THE TP DOCUM ENTATION REPORT, THE ASSESSEE COMPANY WAS ESSENTIALLY A KPO. LD. CIT DR SUBMITTED THAT AS THE ASSESSEE WAS MODIFYING THE SO FTWARE, THERE WAS VALUE ADDITION TO THE SOFTWARE AND THIS WAS NOT A SIMPLE BACK OFFICE SUPPORT SERVICE PER SE. 6.1 ON THE ISSUE OF EXCLUSION OF ECLERX SERVICES LIMITED, LD. CIT DR SUBMITTED THAT THE OUTSOURCING DID NOT INVALIDAT E THE FUNCTIONAL PROFILE AND, THEREFORE, THE SAME SHOULD NOT BE EXCLUDED. ON EXCLUSION OF TCS, IT WAS SUBMITTED TH AT BOTH THE ASSESSEE COMPANY AS WELL AS TCS WERE SERVICE PROVID ERS AND NEITHER DOES THE TURNOVER AFFECT THE PROFIT LEVEL I NDICATOR (PLI) NOR DOES THE BRAND VALUE CHANGE THE FUNCTIONAL PROFILE. IT WAS ALSO ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 18 SUBMITTED THAT INTANGIBLE ASSETS HAD RELEVANCE ONLY IN THE CASE OF PUBLIC LIMITED COMPANIES AND NOT IN THE CASE OF PRI VATE LIMITED COMPANIES AND, THEREFORE, THIS COMPARABLE WAS ALSO A GOOD COMPARABLE FOR THE ASSESSEE COMPANY. ON THE ISSUE OF EXCLUSION OF INFOSYS BPO, IT WAS SUBMITTED THAT THE ARGUMENTS WERE SIMILAR TO THAT IN CASE OF TCS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAS NOT BEEN ABLE TO BRING OUT THE NATURE OF MISTAK E IN SELECTING THIS COMPARABLE AS A COMPARABLE. IT WAS SUBMITTED THAT THIS COMPARABLE SHOULD BE RETAINED IN THE FINAL SET OF C OMPARABLES. 6.2 ON THE ISSUE OF ASSESSEES PLEA FOR INCLUDING R SYSTEMS IN THE SET OF COMPARABLES, THE LD. CIT DR PLACED RELIA NCE ON THE OBSERVATIONS OF THE TPO AND SUBMITTED THAT WHEN OTH ER COMPARABLES WERE AVAILABLE, THEN THERE WAS NO JUSTI FICATION INTRODUCING A NEW COMPARABLE. 6.3 THE LD. CIT DR READ OUT EXTENSIVELY FROM THE OR DER OF THE TPO AND THE HONBLE DRP AND VEHEMENTLY ARGUED THAT NO ALTERATION SHOULD BE MADE IN THE FINAL SET OF COMPA RABLES. ITA 6386/DEL/2016 ASSESSMENT YEAR 2012-13: 7. FOR THIS YEAR, THE RETURN OF INCOME WAS FILED DECLARING INCOME OF RS. 73202670/-. ON A REFERENCE BEING MADE TO TH E TPO, THE ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 19 TPO DISREGARDED THE APPROACH FOLLOWED BY THE ASSESS EE IN THE TP STUDY AND WITH REFERENCE TO BACK OFFICE SUPPORT SER VICE REJECTED SIX OUT OF ELEVEN COMPARABLES SELECTED BY THE ASSES SEE AND INCLUDED FOUR NEW COMPARABLES IN THE FINAL SET. TH E FINAL SET OF COMPARABLES, AS ADOPTED BY THE TPO, WAS AS UNDER:- 7.1 THE TPO ALSO REJECTED R SYSTEM INTERNATIONAL L TD. AND DID NOT ALLOW WORKING CAPITAL AND RISK ADJUSTMENT. THE OP/TC OF THE COMPARABLES CHOSEN BY THE TPO WAS 26.24% WHEREAS TH E ASSESSEES MARGIN WAS 15.88% AND ACCORDINGLY THE TP O PROPOSED AN ADJUSTMENT OF RS. 57,32,595/-. ON THE ASSESSEE APPROACHING THE HONBLE DRP, THE HONBLE DRP ACCEPTED THE APPRO ACH AND THE COMPARABLES AS FORMULATED BY THE TPO BUT DIRECTED T HE TPO TO PROVIDE ADJUSTMENT WITH REFERENCE TO WORKING CAPITA L AND ALSO S. NO. COMPANY NAME OP/ TC (%) MARGINS AS CONSIDERED IN TP ORDER COMPARABLE CONSIDERED BY . TPO / APPELLANT 1 ACCENTIA TECHNOLOGIES LIMITED 11.95% LD. TPO 2 INFORMED TECHNOLOGIES INDIA LIMITED 7.62% APPELLANT 3 E4E HEALTHCARE BUSINESS SERVICES PRIVATE LIMITED 19.85% APPELLANT 4 ECLERX SERVICES LIMITED 58.40% LD. TPO 5 INFOSYS BPO LIMITED 36.75% APPELLANT 6 T C S E - SERVE LIMITED 63.69% LD. TPO 7 ACROPETAL TECHNOLOGIES LIMITED (SEGMENTAL) 18.32% LD. TPO 8 JINDAL INTELLICOM LIMITED -0.05% APPELLANT 9 MICROGENETICS SYSTEMS LIMITED 19.61% APPELLANT MEAN 26.24% ............................... .... - - ...... ............. ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 20 DIRECTED THE TPO TO RE-COMPUTE THE MARGINS OF THE A SSESSEE AS WELL AS OF THE COMPARABLE COMPANIES BY REMOVING COM PUTATIONAL ERRORS. THE FINAL SET OF COMPARABLES POST THE DRP DIRECTIONS ARE AS UNDER:- 7.2 THEREAFTER, THE ASSESSING OFFICER PASSED THE FI NAL ASSESSMENT ORDER REDUCING THE ADJUSTMENT TO RS. 49, 41,097/- WITH RESPECT TO BACK OFFICE SUPPORT SERVICE SEGMENT . NOW, THE ASSESSEE HAS APPROACHED THE ITAT AND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. AO / LEARNED TRANSFER PRICING OFFICER (LD. TPO) / LEARNED DISPUTE RESOLUTION PANEL (LD. DRP) ERRED IN MAKING AN ADDITION OF INR 49,41,097/- TO THE RETURN ED INCOME OF THE APPELLANT BY RE-COMPUTING THE ARMS L ENGTH PRICE OF THE INTERNATIONAL TRANSACTION PERTAINING T O BACK OFFICE SUPPORT SERVICE SEGMENT, UNDER SECTION 92 OF THE ACT. THUS, IN PASSING THE ORDER, THE LD. AO / LD. TPO / LD. DRP ERRED IN: S. NO. COMPANY NAME WORKING CAPITAL ADJUSTED OP/TC 1 ACCENTIA TECHNOLOGIES LIMITED 8.49% 2 INFORMED TECHNOLOGIES INDIA LIMITED 5.59% 3 E4E HEALTHCARE BUSINESS SERVICES PRIVATE 20.42% 4 ECLERX SERVICES LIMITED 56.17% 5 INFOSYS BPO LIMITED 33.39% 6 T C S E-SERVE LIMITED 61.66% 7 ACROPETAL TECHNOLOGIES LIMITED (SEGMENTAL) 18.30% 8 JINDAL INTELLICOM LIMITED -0.37% 9 MICROGENETICS SYSTEMS LIMITED 19.66% ARITHMETIC MEAN 24.81% ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 21 1.1. REJECTING THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT IN ITS TRANSFER PRICING DOCUMENTATION ON THE BASIS OF ADDITIONAL/ MODIFIED QUANTITATIVE FILTERS WHICH LACKED VALID AND SUFFICIENT REASONING; 1.2. CHARACTERIZING THE FUNCTIONAL PROFILE OF THE APPEL LANT IN THE IMPUGNED SEGMENT AS A KNOWLEDGE PROCESS OUTSOURCING COMPANY PROVIDING SIGNIFICANT TECHNICAL FUNCTIONS A ND THEREBY IGNORING THE ACTUAL FUNCTIONAL PROFILE OF T HE BACK OFFICE SEGMENT; 1.3. ACCEPTING COMPANIES WHICH WERE FUNCTIONALLY NOT COMPARABLE TO THE APPELLANTS BACK OFFICE SEGMENT; 1.4. ACCEPTING HIGH TURNOVER COMPANIES AS COMPARABLES A ND THEREBY IGNORING THE IMPACT OF ECONOMIES OF SCALE; 1.5. REJECTING COMPANIES WHOSE ACCOUNTING YEAR DOES NOT END WITH MARCH 31, 2012 ON THE BASIS THAT THE TRANSACTI ONS TAKING PLACE IN A DIFFERENT PERIOD CANNOT BE COMPAR ED; 1.5.1 WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO/ L D. DRP/ LD. TPO ERRED IN REJECTING THE COMPARABLE R SYSTEM S INTERNATIONAL LIMITED WHOSE DATA FOR THE FINANCIAL YEAR (FY) 2011-12 CAN BE DEDUCED FROM ITS PUBLISHED / AUDITED ANNUAL ACCOUNTS THEREBY SATISFYING THE SAID FILTER. 1.6. DENYING THE BENEFIT OF ECONOMIC ADJUSTMENT ON ACCO UNT OF DIFFERENCE IN RISK PROFILE IN ARRIVING AT THE ARMS LENGTH MARGIN; AND 1.7. SELECTING THE CURRENT YEAR (I.E. FY 2011-12) D ATA FOR COMPARABILITY DESPITE THE FACT THAT AT THE TIME OF PREPARATION OF TRANSFER PRICING DOCUMENTATION BY THE APPELLANT, THE COMPLETE DATA FOR FY 2011-12 WAS NOT AVAILABLE WITH IN THE PUBLIC DOMAIN. 2. THAT THE LD. AO / LD. TPO ERRED IN NOT COMPUTING TH E MARGIN OF THE APPELLANT FOR THE BACK OFFICE SUPPORT SERVICES SEGMENT AS PER THE DIRECTIONS OF THE LD. DRP, THERE BY FOLLOWING AN INCONSISTENT APPROACH FOR MARGIN COMPU TATION OF THE APPELLANT VIS-A-VIS THE COMPARABLES. ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 22 3. THAT THE LD. AO ERRED IN CHARGING INTEREST UNDER SE CTION 234B AND 234C OF THE ACT AMOUNTING TO INR 11,25,999 AND INR 317,219 RESPECTIVELY. 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, LD. AO ERRED IN INITIATING PENALTY PROCEEDI NGS UNDER SECTION 271(1)(C) OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, DE LETE, RESCIND, FORGO OR WITHDRAW ANY OF THE ABOVE GROUNDS OF APPEAL EITHER BEFORE OR DURING THE COURSE OF THE PR OCEEDINGS BEFORE THE HONBLE INCOME TAX APPELLATE TRIBUNAL IN THE INTEREST OF THE NATURAL JUSTICE. THE AFORESAID GROU NDS ARE MUTUALLY EXCLUSIVE AND WITHOUT PREJUDICE TO EACH OT HER. 8 . AT THE OUTSET, THE LD. AR SUBMITTED THAT THE ASSESS EE WAS CHALLENGING THE INCLUSION OF ECLERX SERVICES LIMITE D, TCS E-SERVE LIMITED AND INFOSYS BPO LIMITED AND WAS PRAYING FOR THEIR EXCLUSION AND WAS ALSO PRAYING FOR INCLUSION OF R S YSTEMS INTERNATIONAL LTD. IT WAS ALSO SUBMITTED THAT THE ARGUMENTS FOR THE EXCLUSION OF THESE THREE COMPARABLES HAD ALREAD Y BEEN ADVANCED DURING THE COURSE OF HEARING FOR ASSESSMEN T YEAR 2011- 12 AND, THEREFORE, THE SAME WERE NOT BEING REPEATED FOR THE SAKE OF BREVITY. IT WAS ALSO SUBMITTED THAT EVEN IF ECL ERX AND TCS E- SERVE LIMITED AND INFOSYS BPO WERE EXCLUDED FROM TH E FINAL SET OF COMPARABLES, THE ASSESSEE WOULD BE WITHIN THE MARGI N OF 5%. LD. AR FURTHER SUBMITTED THAT ON EXCLUSION OF THESE THREE COMPARABLES, THE OP/TC AFTER PROVIDING FOR WORKING CAPITAL ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 23 ADJUSTMENT OF THESE COMPARABLES WOULD BE 11% WHEREA S THE ASSESSEES OPYTC WOULD BE 16.14% WHICH WOULD BE WIT HIN THE PERMITTED RANGE. 8.1 LD. CIT DR ALSO SUBMITTED THAT HIS ARGUMENTS WOULD BE THE SAME FOR THE THREE COMPARABLES AS WERE ADVANCED DUR ING THE COURSE OF HEARING FOR ASSESSMENT YEAR 2011-12. HE ALSO READ OUT EXTENSIVELY FROM THE ORDER OF THE TPO AND THE HONB LE DRP AND PLACED HEAVY RELIANCE ON THE SAME. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL AVAILABLE ON RECORD. AS FAR AS THE APPEAL FOR ASSESSMENT YEAR 2011-12 IS CONCERNED, THE ASSESSEE HAS CHALLENGED THE INCLUSION OF CERTAIN COMPARABLES. O UR ADJUDICATION ON THE COMPARABLES IS AS UNDER:- I) TCS E-SERVE LIMITED IT IS EVIDENT THAT WHILE THE ASSESSEE COMPANY PROVIDES BACK OFFICE SUPPORT SERVICE, TCS E-SERVE LIMITED PROVIDE S TRANSACTION PROCESSING AS WELL AS TECHNICAL SERVICES. IT IS SE EN THAT TCS E- SERVE LIMITED PROVIDES A BROAD SPECTRUM OF SERVICES WHICH INCLUDE PROCESSING, COLLECTION, CUSTOMER CARE AND P AYMENTS IN RELATION TO THE SERVICES OFFERED BY THE CITI GROUP TO ITS CORPORATE AND RETAIL CLIENTS. TECHNICAL SERVICES INVOLVING SO FTWARE TESTING, ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 24 VERIFICATION AND VALIDATION OF THE SOFTWARE AT THE TIME OF IMPLEMENTATION AND DATA CENTRE MANAGEMENT ACTIVITIE S. THIS IS EVIDENT FROM A READING FROM THE NOTES TO ACCOUNTS C ONTAINED IN THE ANNUAL REPORT OF TCS E-SERVE LIMITED. THUS, TH ERE IS STRENGTH IN THE CONTENTION OF THE ASSESSEE THAT TCS E-SERVE LIMITED IS ENGAGED IN ACTIVITIES WHICH ARE BEYOND PROVIDING BA CK OFFICE SUPPORT SERVICE AND THUS THIS COMPANY IS FUNCTIONAL LY DISSIMILAR. WE ALSO FIND THAT THE HON'BLE DELHI HIGH COURT IN T HE CASE OF ACTIS GLOBAL SERVICES PVT. LTD. IN ITA 94/2017 HAD UPHELD THE ORDER OF ITAT DELHI DIRECTING THE DELETION OF THIS COMPARABL E FROM THE FINAL SET OF COMPARABLES ON THE GROUND THAT TCS WAS INVOL VED, BOTH IN TRANSACTION PROCESSING AND TECHNICAL SERVICES, AND WAS, THEREFORE, NOT A COMPARABLE COMPANY WITH RESPECT TO A COMPANY ENGAGED ONLY IN BPO ACTIVITIES. THEREFORE, WE DEEM IT APPR OPRIATE TO EXCLUDE THIS COMPANY FROM THE FINAL SET OF COMPARAB LES AND DIRECT THE TPO/ASSESSING OFFICER ACCORDINGLY. II) ECLERX SERVICES LIMITED AS PER THE ANNUAL REPORT OF THIS COMPANY, IT I S SEEN THAT THIS COMPANY IS ENGAGED IN FINANCIAL SERVICES, WEB CONTE NT MANAGEMENT AND MERCHANDISING EXECUTION, WEB ANALYTI CS, SOCIAL ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 25 MEDIA MODERATION AND ANALYTICS, SEARCH ENGINE ANALY TICS AND SUPPORT, CRM PLATFORM SUPPORT, LEAD GENERATION, CUS TOMER DATA MANAGEMENT, SUPPLY CHAIN AND CHANNEL ANALYTICS, PRI CE AND CATALOGUE COMPETITIVE INTELLIGENCE AND BROADER DATA COLLECTION, CLEANSING, ENRICHING AND REPORTING WHEREAS THE ASSE SSEES IMPUGNED SEGMENT IS A BACK OFFICE SEGMENT WHICH CAN ONLY BE CHARACTERISED AS A ROUTINE ITES SERVICE PROVIDER. THEREFORE, IT IS EVIDENT THAT THIS COMPANY IS FUNCTIONALLY DISSIMILA R TO THE ASSESSEE COMPANY. THE HON'BLE DELHI HIGH COURT IN THE CASE OF ACTIS GLOBAL SERVICES PVT. LTD. IN ITA 417/2016 HAD DIRECTED ECLERX TO BE EXCLUDED AS A COMPARABLE ON THE GROUND OF IT BEING A KPO AND CATERING TO HIGH END CLIENTS. EXLERX WAS A LSO EXCLUDED BY ITAT DELHI IN COPAL RESEARCH INDIA PVT. LTD. (IT A NO. 1713/DEL/2014), WILLIS PROCESSING SERVICES (INDIA) PRIVATE LIMITED (ITA NO. 1890/DEL/2015), B.C. MANAGEMENT SERVICES P RIVATE LIMITED (ITA NO. 6134/DEL/2015) AND CORPORATE EXECU TIVE BOARD INDIA PRIVATE LIMITED IN ITA NO. 6683/DEL/2015. TH EREFORE, APPLYING THE RATIO OF THE ABOVE SAID ORDERS AS WELL AS FINDING STRENGTH IN THE ARGUMENTS OF THE LD. AR THAT THIS C OMPANY IS FUNCTIONALLY DISSIMILAR TO THE ASSESSEE COMPANY, WE DIRECT THE TPO/ASSESSING OFFICER TO EXCLUDE THIS COMPANY FROM THE FINAL SET ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 26 OF COMPARABLES. III) INFOSYS BPO LIMITED INITIALLY, THE ASSESSEE ITSELF HAD SELECTED TH IS COMPANY IN ITS TRANSFER PRICING STUDY BUT NOW, THE ASSESSEE SEEKS TO EXCLUDE THIS COMPANY ON THE GROUNDS OF BEING FUNCTIONALLY DISSIM ILAR, INCOMPARABLE SCALE OF OPERATIONS AND DIFFERENCE IN BRAND VALUE AND ECONOMIES OF SCALE. LD. AR HAS ALSO PLACED REL IANCE ON THE ORDER OF ITAT CHANDIGARH SPECIAL BENCH IN THE CASE OF QUARK SYSTEMS PVT. LTD. REPORTED IN 2010-TIOL-31-ITAT-CHD -SB FOR THE PROPOSITION THAT THE TAX PAYER SHOULD BE GIVEN AN O PPORTUNITY TO RECTIFY A BONA FIDE MISTAKE IN ITS TRANSFER PRICING ANALYSIS DURING AN ASSESSMENT IF IT IS BASED ON FACTS ON RECORD. P LACING RELIANCE ON THE RATIO OF THE DECISION OF THE SPECIAL BENCH O F THE ITAT IN QUARK SYSTEMS PVT. LTD. (SUPRA) WE DEEM IT FIT TO E XAMINE THE ASSESSEES CLAIM FOR EXCLUSION OF BPO INFOSYS FROM THE FINAL SET OF COMPARABLES. THE LD. AR HAS ARGUED THAT THIS COMPAN Y WAS ENGAGED IN PROVIDING HIGH-END INTEGRATED SERVICES B Y ASSISTING ITS CLIENTS IN IMPROVING THEIR COMPETITIVE POSITIONING BY MANAGING THEIR BUSINESS PROCESSES IN ADDITION TO PROVIDING I NCREASED VALUE AND, HENCE, WAS FUNCTIONALLY DISSIMILAR TO THE BACK END OFFICE SUPPORT SERVICES BEING PROVIDED BY THE ASSESSEE. I T IS SEEN THAT ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 27 INFOSYS BPO LTD. HAS BEEN REJECTED AS A COMPARABLE BY ITAT DELHI BENCH IN NEW RIVER SOFTWARE SERVICES PVT. LTD. REPO RTED IN ITA NO. 451/DEL/2013 ON THE GROUND OF HUGE TURNOVER, EC ONOMIES OF SCALE AND BRAND VALUE. IT IS ALSO SEEN THAT THE HO N'BLE HIGH COURT OF DELHI HAD REJECTED THIS COMPANY AS A COMPARABLE IN AGNITY INDIA TECHNOLOGIES VS ITO IN ITA NO. 1204/2011 ON T HE GROUND OF HIGH TURNOVER WHEREIN THE COMPARABLE HAD A TURNOVER OF 58 TIMES OF THE ASSESSEE. SIMILARLY, THE HON'BLE DELHI HIGH COURT IN ACTIS GLOBAL SERVICES PVT. LTD. IN ITA 94/2017 REJECTED THIS COMPARABLE ON THE GROUND OF HIGH TURNOVER WHEREIN T HE COMPARABLE HAD A TURNOVER OF 66 TIMES OF THE TAXPAY ER. IN THE ASSESSEES CASE, IT IS SEEN THAT THE ASSESSEES TUR NOVER FROM BACK OFFICE SEGMENT AMOUNTS TO RS. 4.35 CRORES WHEREAS, AS PER THE ANNUAL REPORT OF INFOSYS BPO, THE TURNOVER WAS RS. 1129.11 CRORE WHICH IS APPROXIMATELY 260 TIMES MORE THAN THAT OF THE ASSESSEES TURNOVER. THEREFORE, WE ARE INCLINED TO AGREE WITH THE CONTENTIONS OF THE LD. AR AND DEEM IT FIT TO REMIT THIS COMPARABLE TO THE FILE OF THE ASSESSING OFFICER/TPO WITH THE D IRECTION TO DELETE THIS COMPANY FROM THE FINAL SET OF COMPARABLES AFTE R DUE VERIFICATION OF THE FIGURES OF TURNOVER OF THE ASSE SSEE AS WELL AS OF THE COMPARABLE. HENCE, THIS COMPANY STANDS EXCLUDE D FOR ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 28 STATISTICAL PURPOSES. IV) R SYSTEMS INTERNATIONAL LIMITED IT IS SEEN THAT THE TPO/HONBLE DRP HAD REJECT ED THIS COMPANY ON ACCOUNT OF DIFFERENT FINANCIAL YEAR ENDI NG. HOWEVER, THE ASSESSEE HAS RE-CAST THE PROFIT AND LOSS ACCOUN T OF THE COMPANY AS PER THE QUARTERLY AUDITED RESULTS AND HA S DERIVED THE UPDATED OPERATING MARGIN. THE HON'BLE HIGH COURT H AS HELD IN MCKINSEY KNOWLEDGE CENTRE INDIA PVT. LTD. IN ITA NO . 217/2014 THAT IF FROM THE AVAILABLE DATA ON RECORD, THE RESU LTS FOR FINANCIAL YEAR CAN REASONABLY BE EXTRAPOLATED, THEN THE COMPA RABLE CANNOT BE EXCLUDED SOLELY ON THE GROUND THAT THE COMPARABL ES HAVE DIFFERENT FINANCIAL YEAR ENDINGS. THEREFORE, WE DE EM IT APPROPRIATE TO RESTORE THIS COMPARABLE ALSO TO THE FILE OF THE TPO/ASSESSING OFFICER FOR VERIFYING THE COMPUTATION , AS RECAST BY THE ASSESSEE, AND INCLUDE THIS COMPARABLE IN THE FI NAL SET OF COMPARABLES. 10. AS FAR AS THE APPEAL FOR AY 2012-13 IS CONCER NED, IN THIS YEAR ALSO, THE ASSESSEE WANTS EXCLUSION OF TCS E-SE RVE LTD., ECLERX SERVICES LIMITED AND INFOSYS BPO LTD. AND WA NTS INCLUSION OF R. SYSTEMS INTERNATIONAL LTD. THE ARGUMENTS ADV ANCED BY BOTH THE PARTIES ON ALL THESE FOUR COMPARABLES WERE SIMILAR AS IN ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 29 THE PLEADINGS FOR ASSESSMENT YEAR 2011-12 AND NO NE W DISTINGUISHING FACT WAS POINTED OUT BY EITHER OF TH E PARTIES. AS WE HAVE ALREADY DIRECTED EXCLUSION OF TSE E-SERVE AND ECLERX LTD. IN THE FINAL SET OF COMPARABLES IN ASSESSMENT YEAR 201 1-12, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THESE T WO COMPARABLES FROM THE FINAL SET OF COMPARABLES FOR A SSESSMENT YEAR 2012-13 AS WELL. FURTHER, AS WE HAVE DIRECTED THE EXCLUSION OF INFOSYS BPO LTD. AFTER DUE VERIFICATION BY THE T PO IN ASSESSMENT YEAR 2011-12, WE DIRECT THE ASSESSING OF FICER/TPO TO EXCLUDE THIS COMPARABLE FROM THE FINAL SET OF COMPA RABLES FOR ASSESSMENT YEAR 2012-13 AS WELL AFTER DUE VERIFICAT ION BY THE TPO AND AFTER GIVING PROPER OPPORTUNITY TO THE ASSESSEE . WE HAVE ALSO DIRECTED INCLUSION OF R. SYSTEMS INTERNATIONAL LTD. AFTER DUE VERIFICATION OF THE FINANCIALS AS RECOMPUTED BY THE ASSESSEE IN APPEAL FOR ASSESSMENT YEAR 2011-12. LIKEWISE, FOR ASSESSMENT YEAR 2012-13 ALSO, WE RESTORE THIS COMPARABLE TO TH E FILE OF THE TPO TO INCLUDE THIS COMPARABLE IN THE FINAL SET OF COMPARABLES AFTER VERIFYING THE FINANCIALS AS RECAST BY THE ASS ESSEE AND AFTER GIVING PROPER OPPORTUNITY TO THE ASSESSEE TO PRESEN T ITS CASE. ITA NO. 6386/DEL/2016 & ITA 1685/D/2016 AY 2012-13, 2011-12 30 11. IN THE RESULT, BOTH THE APPEALS OF THE ASSESS EE STAND ALLOWED IN TERMS OF OUR ABOVE DIRECTIONS. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND SEPTEMBER, 2017. SD/- SD/- (B.P. JAIN) (SUDHANSH U SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 22ND SEPTEMBER 2017 GS COPY FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER ASSTT. REGISTRAR