Global E-Business Operations Private Limited, Bangalore V. Deputy Commissioner Of Income Tax, Circle-5(3)(2), Bangalore

ITA 174/BANG/2022

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 8448 (ITAT-BANGALORE)
• Duration Of Justice: 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-11-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 09-11-2022
• Assessment Year: misc
• Appeal Filed On: 14-10-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HARINDER KUMAR
• Assessee Lawyers: PADAMCHAND KHINCHA; INVOKING PROVISIONS OF
• Keywords: Business income; Depreciation; Transfer pricing; Business expenditure; International transaction; Question of law; Fair market value; Revenue expenditure; TDS
• Section: 37; 92C; 43B; 234B; 37(1); 10B; 143(1); 195; 192; 64; 43; 48; 73; 72; 13; 22

Judgement Text

IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore IN THE INCOME TAX APPELLATE TRIBUNAL “C’’ BENCH: BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER IT(TP)A No.174/Bang/2022 Assessment Year: 2017-18 M/s. Global E-Business Operations Pvt. Ltd. 1 st Floor, Hewlett Packard Enterprise Sy.No.192, Whitefield Road Mahadevpura Post Bangalore PAN NO : AABCG2843D Vs. Deputy Commissioner of Income-tax Circle 5(3)(2) Bangalore APPELLANT RESPONDENT Appellant by : Shri Padam Chand Khincha, A.R. Respondent by : Shri Harinder Kumar, D.R. Date of Hearing : 10.11.2022 Date of Pronouncement : 16.11.2022 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by assessee is directed against final assessment order passed u/s 144(3) r.w.s. 144C(13) of the Income-tax Act,1961 ['the Act' for short] for the assessment year 2017-18. The assessee has raised following grounds of appeal:- Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 2 of 75 1.1. The learned Assessing Officer ('learned AO'), learned Transfer Pricing Officer ('learned TPO') and the Honourable Dispute Resolution Panel ('Hon'ble DRP') grossly erred in adjusting the Transfer Price ("TP") by INR 1,44,30,40,000, with respect to the international transactions undertaken by the Appellant, under section 92CA of the Income Tax Act, 1961 ("the Act"). 1.2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of subsection (3) of section 92C of the Act. 1.3. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the economic and comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ('ALP') of the international transaction thereby following a non-transparent approach. 1.4. The learned AO/ learned TPO/ Hon'ble DRP erred in selecting the companies only if the data pertaining to FY 2016-17 is available in the public databases. 1.5. The learned AO/ learned TPO/ Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies thereby not considering the fact that the relevant data for the concerned financial year could be deduced from the corresponding financials. 1.6. The learned AO/learned TPO/Hon'ble DRP erred in applying export earning filter of 75% of the total sales, leading to a narrower set of comparable companies. 1.7. The learned AO/learned TPO/Hon'ble DRP erred in law and facts by not applying the upper limit for the sales turnover filter. The learned TPO/ Hon'ble DRP erred in law and facts by not appreciating the fact that since lower limit on the turnover filter has been accepted by both Appellant and learned TPO, similar filter should also be applied on the upper limit on turnover while carrying out the comparability analysis. 1.8. The learned AO/learned TPO/Hon'ble DRP in law and facts in modifying persitent loss filter applied by the Appellant in TP documentation and thereby rejecting comparable companies having losses in 2 out of 3 years as against 3 out of 3 years as applied by the Appellant. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 3 of 75 1.9. The learned AO/learned TPO/Hon'ble DRP erred in laws and in facts in the computation of Related Party Transaction ("RPT") filter by taking only RPT Incdme/Total Income or RPT Expenditure/Total Expenditure instead of taking the total value of RPT transactions (RPT income + RPT Expenditure) in the numerator and sales in the denominator. 1.10. The learned AO/learned TPO/Hon'ble DRP erred in computing the operating profit to operating cost of the Appellant at 6.97% by not considering 'service tax refund' as part of "Operating Revenue". In doing so, the learned TPO and Hon'ble DRP have erred in not appreciating the fact that service tax arises in the normal course of business operations. Further the Hon'ble DRP have erred in rejecting the Appellant's submission that, in the previous FYs, service tax expense was treated as operating in nature (i.e., as part of operating cost base of the Appellant) while calculating the operating profit mark-up earned in relation to the provision of Information Technology Enabled Services ("ITES") to the Associated Enterprises. Hence when the services tax refund is credited in the Profit & Loss statement as 'other income' then for the purposes of TP, the same requires to be considered as part of 'Operating Revenue' as a matter of maintaining parity. 1.11. Notwithstanding and without prejudice to our primary contention that the Employee Stock Option Plan ("ESOP") expenditure is not to be disallowed under section 37 of the Act, the Honorable DRP having upheld the said disallowance, have erred in not providing corresponding adjustment of such disallowed expenditure from the operating expenses of the Appellant for the purpose of computing its revised mark-up. 1.12. The learned AO/ learned TPO/ Hon'ble DRP erred in considering bad and doubtful debts as non-operating in nature. 1.13. The learned AO/ learned TPO/ Hon'ble DRP erred in not allowing appropriate adjustments towards working capital differential existing between the Appellant vis-a-vis independent comparable companies. 1.14. The learned AO/ learned TPO/ Hon'ble DRP erred in not allowing appropriate adjustment towards the risk difference between the Appellant vis-à-vis the comparable companies. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 4 of 75 Comparable companies – Information Technology Enabled Services (“ITES”) 1.15 The learned AO/learned TPO/Hon’ble DRP have grossly erred in not rejecting the following companies: - Microland Limited; - Datamatics Business Solutions Limited; − Vitae International Accounting Services Private Limited; − Manipal Digital Systems Private Limited; - CES Ltd; - SPI Technologies India Private Limited; - Inteq BPO Services Private Limited; and - Infosys BPO Limited. 1.16. The learned AO/ learned TPO/ Hon'ble DRP have grossly erred in rejecting following companies that ought to have been accepted as comparable: − Cosmic Global Limited; − Allsec Technologies Limited; − BNR Udyog Limited; − Bhilwara Infotechnology Limited; − R Systems International Limited; − ISN Global Solutions Private Limited; and − E-Zest Solutions Limited; 1,17, The learned TPO has erred in stating that E-Zest Solutions Limited fails the export revenue filter and therefore did not include the comparable in the final set, when E-Zest Solutions Limited actually passes the said export revenue filter for FY 2016-17, FY 2015-16 and FY 2014-15. 1.18. The learned TPO and Hon'ble DRP have erred in rejecting companies sought for 'inclusion' by the Appellant by stating the reason that such comparable companies are not appearing the learned TPO's matrix. In this regard, such reason for rejection is incorrect in light of the recent Bangalore Tribunal ruling in the case of Prism Industries [TS-73-ITAT-2022(Bang)-TP] dated February 17, 2022 which held that Hon'ble DRP was not justified in not considering the inclusion of comparables merely because they did not figure in learned TPO's search matrix and therefore the same should be considered in the light of information available in the public domain. The following comparable companies were rejected by the learned TPO / Hon'ble DRP by stating that the same does not appear in search matrix of the learned TPO: − Bhilwara Information Technology Limited; − R Systems International Limited; and ISN Global Solutions Private Limited IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 5 of 75 B. Corporate Tax 2. Incorrect disallowance with respect to expenditure on ESOP under section 37 of the Act — INR 7,29,00,000 2.1. The Learned AO and Honorable DRP have erred in law and on facts, in disallowing the expenditure on ESOP of INR 7,29,00,000 under section 37 of the Act without appreciating the submissions furnished by the Appellant. 2.2. The Learned AO and Honorable DRP have erred in law, in disregarding the decision of the jurisdictional Karnataka High Court in the case of Biocon Limited, [2020] 121 taxmann.com 351 (Kar.) and Bangalore Tribunal in the case of Northern Operating Services Private Limited [IT(TP)A No.759/Bang/2017] and Novo Nordisk, [2014] 42 taxmann.com 168 wherein it was held that discount on issuance of ESOP is an allowable business expenditure under section 37 of the Act. 2.3. The learned AO and Honorable DRP have erred in law and on facts by stating that there is no outflow of money resulting in an expense whereas the fact is that there is a clear outflow of economic resources/cash in the hands of the appellant, which is wholly and exclusively used for the purpose of business in India. 2.4. The learned AO and Honorable DRP have erred in law and on facts by not appreciating that the difference between the market value and the purchase price of shares is being taxed as perquisite in the hands of the employees. 2.5. The Learned AO and Honorable DRP have erred in law and on facts, in disregarding the employee listing, sample debit notes/invoices and sample Form 16 copies submitted during the Assessment/DRP proceedings by the Appellant. 2.6. The Learned AO and Honorable DRP have erred in law and on facts, in considering the ESOP expenditure as fictitious expenditure and making false allegation that the ESOP expenditure is a colorable device adopted for avoidance of tax which is totally inappropriate and misdirected. Further, the Learned AO and Honorable DRP have considered the ESOP cross charge by the Ultimate holding company as fictional and notional in nature which is totally misplaced. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 6 of 75 2.7. The Honorable DRP has erred in law and on facts by placing reliance on the case laws decided in different context and not applicable to the facts of the Appellant. 2.8. The Honorable DRP has erred in law and on facts by stating that the ESOP is uncertain by not appreciating the fact that the ESOP expenses are actual expenses claimed by the Appellant, based on actual invoices issued and actual payments made. Non-Applicability of section 195 of the Act 2.9. The learned AO has erred in law and on facts by disregarding that the ESOP expense is liable to TDS under section 192 of the Act as "perquisite" in the hands of the employees and appropriate taxes are deducted and remitted by the Appellant, which is evidenced by sample Form 16 copies furnished before the honorable AO and DRP. 2.10. The learned AO has erred in law and on facts by stating that the provisions of section 195 of the Act shall be applicable on the remittance of reimbursement towards ESOP without taking cognizance of the fact that there was no "income" element arising to the recipient from such remittances. 2.11. The learned AO has erred in law and on facts by stating that the provisions of section 195 of the Act have not been complied with and consequently reimbursement towards ESOP shall suffer disallowance under section 40(a)(i) of the Act, without evaluating the fact that the provisions of section 195 of the Act are not applicable to such remittances. 2. 1 2 . T h e l e ar ne d A O h as e r r e d i n la w an d on f a c t s b y r e l y i ng on d e c i s i o n of D a n fo s s I n du s t r i e s P L t d (20 0 4) 26 8 I T R 1 p r o no u nc e d b y t he H o n' bl e Authority for Advance Ruling ("AAR"). The transaction covered by the said decision is very different on facts as compared to the Appellant and the same cannot be applied here. 2.13. The learned AO has err ed in law and on facts, in disregarding that the remittance tow ards recovery of ESO P charges is not taxable under the provisions of India-USA Double Taxation Avoidance Agreem ent. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 7 of 75 2.14. The learned AO has erred in law and on facts by contending that the said ESOP cross charge is liable to TDS under section 192 of the Act as "perquisite" in the hands of the employees and also liable to TDS under section 195 of the Act on the reimbursement to the Ultimate Holding Company, thereby resulting in double taxation of same amount. 2.15. The learned AO has erred in law and on facts by contradicting his own statement by stating that on one hand there is an element of "income" included in the reimbursement made to the Ultimate Holding Company for the expenditure on ESOP whereas on the other hand, the learned AO states that the said expenditure is notional / fictitious in nature. 3. Disallowance of depreciation on slump sale as per intimation under section 143(1) of the Act — INR 22,08,81,498 3.1. The Appellant had entered into a slump sale during the year under consideration and in accordance with the sixth proviso to Section 32 of the Act, the Appellant has claimed depreciation amounting to Rs. 22,08,81,498 on assets transferred under slump sale, based on the number of days the assets have been put to use by the Appellant. 3.2. On account of the limitation of disclosure in the ROI, the Appellant claimed the amount of Rs. 22,08,81,498 under SI.No. 12(ii) of Schedule BP of ROI. Further, the Appellant submits that said depreciation also forms a part of disclosure in Annexures to Tax Audit Report in Form 3CD for AY 2017-18. 3.3. In light of the above, the Centralized Processing Centre (CPC) erred in making an addition in the Intimation under section 143(1) of the Act, in respect of the above depreciation claimed by the appellant. 3.4. The learned AO has erred in not granting an opportunity of being heard to the appellant and has made an addition in the assessment order merely on the basis of intimation order issued by CPC when the said addition was not proposed in the draft order. 3.5. Without prejudice to the above, the learned AO erred in not considering the rectification application filed by the Appellant on the said adjustment. 4. Disallowance of employees' contribution to welfare fund as per intimation under section 143(1) of the Act — INR 6,05,333 IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 8 of 75 4.1. The learned AO erred in disallowing employees' contribution to welfare fund [amounting to INR 6,05,333 and deposited by the Appellant before the due date of filing the return of income] under section 36(1)(va) read with section 43B of the Act. 4.2. The learned AO erred in not following the binding decisions of the Hon'ble Supreme Court in Rajasthan State Beverages Corporation Ltd [2017] 84 taxmann.com 185 on the same question of law. 4.3. The learned AO has erred in not granting an opportunity of being heard to the appellant and has made an addition in the assessment order merely on the basis of intimation order issued by CPC when the said addition was not proposed in the draft order. 4.4. Without prejudice to the above, the learned AO erred in not considering the rectification application filed by the Appellant on the said adjustment. 5. Other matters 5.1. The Learned AO has erred, in law and on facts, in initiating penalty proceedings under section 270A of the Act. 5.2. The Learned AO has erred, in law and on facts, in computing and levying interest under section 234B of the Act. 2. Ground Nos.1 to 1.9 are general in nature, which do not require adjudication. 2.1 Ground Nos.2 to 2.8, ground Nos.3 to 3.5 and ground Nos.4 to 4.4 are not pressed before us. Accordingly, these grounds of appeal are dismissed as not pressed. 2.2 Ground No.5.1 is preposterous and hence, dismissed. 2.3 Ground No.5.2 is consequential and mandatory in nature, which do not require any adjudication. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 9 of 75 3. Now coming to ground No.1.10 we once again reproduce the ground as follows: 1.10 The learned AO/learned TPO/Hon'ble DRP erred in computing the operating profit to operating cost of the Appellant at 6.97% by not considering 'service tax refund' as part of "Operating Revenue". In doing so, the learned TPO and Hon'ble DRP have erred in not appreciating the fact that service tax arises in the normal course of business operations. Further the Hon'ble DRP have erred in rejecting the Appellant's submission that, in the previous FYs, service tax expense was treated as operating in nature (i.e., as part of operating cost base of the Appellant) while calculating the operating profit mark-up earned in relation to the provision of Information Technology Enabled Services ("ITES") to the Associated Enterprises. Hence when the services tax refund is credited in the Profit & Loss statement as 'other income' then for the purposes of TP, the same requires to be considered as part of 'Operating Revenue' as a matter of maintaining parity. 3.1 The ld. A.R. submitted as follows: 3.2 Accounting of Service Tax cost by the Assessee upto 31 st March 2016 – The ld. A.R. submitted that the Assessee used to do the accounting for expenses inclusive of Service Tax. Thus, the Service Tax amount used to get accounted as regular operating expenses. He stated an example of accounting as below: Rental Invoice amount XYZ as below: Monthly Rent Payable =INR 100,000 Service Tax ©12.36% = INR 1,236 INR101,236 Accounting in Books of Appellant as below: Entry 1 Debit – Rent Expenses INR 101,236 Credit – Payable to XYZ INR 101,236 IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 10 of 75 Entry 2 Debit – Payable to XYZ INR 101,236 Credit – Bank Account INR 101,236 3.2 Treatment of Service Tax cost in the billing by the Assessee- The ld. A.R. submitted that the Assessee is a captive service provider entity which provide services to its group affiliates outside India on cost plus basis. For the purposes of billing all costs accounted in books are considered. As the Service Tax is being accounted as expenditure (as explained in the example above) the same is included as operating cost in billing by the assessee to its group affiliates. He stated that if we go with above example in point 1 the rental expenses included in cost base by the assessee would be INR 101,236 (inclusive of Service Tax). 3. 3 S er vi c e T ax Ref u nd r ec e i p t b y th e Ap p el l a n t – T he l d . A. R. f ur th er s ub m i tt ed t h a t th e A ss es se e b e i ng a n Exp or t ser v ic e p r ov id e r fi l ed cl a i m s f or Se r vi ce T a x r ef u nd on in p ut se rv i c es f o r m ul ti p l e e a r li e r yea r s . T h e A p p el l a nt a cc oun te d f or S e r vi ce T ax R ef u nd o n ly up on a ctu a l re ce ip t the r eof . T h e s a i d a m ou nt w a s cr e d i te d t o P & L b y d e bi ti ng the B a n k . As c a n b e i n f e r r ed f r om t he F in a n ci a l Sta tem e n ts (F S ) t h a t on A p r i l 1 , 2 0 1 6 ( a t th e b eg inn in g o f FY 2 0 1 6 -1 7 ) t he re w a s no a s s et s i n th e b ook s of t he a ss ess ee t ow a r ds S e rv i ce T ax R ef u nd r ece i v a b l e. 3.4 The ld. A.R. submitted that during FY 2016-17 the assessee received multiple Service tax Refunds for earlier periods totalling to INR 201,899,422. Further, some more Service Tax refund amounting to INR 276,491,677 (Refund application IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 11 of 75 amount INR 282,417,014) for earlier periods were received beyond March 2017 but before finalising the statutory financials of FY 2016-17. 3.5 The above amounts of Service Tax Refunds received were accounted in the Financial Statements (FS) of year ended March 2017 as below: 3.6 Service tax Refund Amount Received during FY 2016-17 (upto March 2017) Debit GL 10710160 - Bank Account (BS) - INR 201,899,422 Credit GL 37090000 - Other Income (P&L)- INR 201,899,422 Service tax Refund Amount Received in June 2017 (before signing of audited FS of FY 2016-17) Debit GL 12900000 - Balances with statutory/government authorities - INR 282,417,014 Credit GL 37090000 - Other Income (P&L)-INR 282,417,014 3.7 The ld. A.R. further submitted that the Service Tax refund received during FY 2016-17 was directly credited to the P&L (as there was no receivable against the same). For the Service Tax Refund received post March 2017 but before signing of the audited financials for FY 2016-17 a Journal Entry was posted to record accrual of Service Tax Refund. This was done in accordance with generally accepted accounting practices wherein significant events occurring after Balance Sheet date are to be reported in the Financial Statement if the same come to notice before signing of the audited FS. This is mandated as per Accounting Standard 10 "Events occurring post Balance Sheet Date". Thus, there was a total credit of INR 484,316,435 IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 12 of 75 in the FY 2016-17 P&L of the assessee towards receipt of Service Tax refund which was disclosed in FS as "Other Income". 3.8 Treatment of Service Tax Refund receipt by the assessee in billing – The ld. A.R. stated that as explained in para 3.2 above, the assessee used to bill the Service Tax amount alongwith relevant expenses to its affiliates on cost plus basis. On receipt of refund, the cost base for billing had to be reduced by crediting the relevant expenses. As these refund receipts were for specific period and not for individual input services, the receipt was credited to P&L as "Other Income". In essence, the effect was to reverse the service tax amount debited to relevant expense accounts in earlier periods which was already billed to affiliates on cost plus basis. 3.9 He stated that as the Service Tax amount when debited to P&L as part of relevant expenses was considered as "Operating Expenses" while determining the cost base for cost plus billing by the assessee, the receipt of same being credited to P&L has to be considered "Operating Income" to ensure consistency in treatment for transfer pricing purposes. 3.10 The ld. A.R. submitted that the assessee has followed a consistent approach of adding the service tax cost as incurred in the cost base for cost plus billing. The Transfer Pricing Officer (TPO) had consistently accepted the treatment in earlier years' transfer pricing assessment. Accordingly, the TPO should not change the approach in current year when the same cost has been reversed due to receipt of service tax refund. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 13 of 75 3.11 Further, he submitted that the service tax refund receivable is arising in the normal course of business operations and has a direct nexus to the export of services undertaken by the Assessee. In the TP order, learned TPO has adopted export service filter to identify the companies comparable to the business of the Assessee. The application of such filter would result in set of companies which are also exporter of services, such companies would also be similarly claiming a refund of the service tax on such input services. 3.12 The ld. A.R. submitted that several judicial precedents have held that any expenses or provision for expenses if those are related to business activity would be considered "Operating Expenses". Further, he submitted that if there is any reversal of any expenses (debit to P&L) which was considered "Operating Expenses" in nature earlier, the reversal thereof has to be considered "Operating Income" in nature. 3.13 In this regard, he placed reliance on the following decisions: (a) IT(TP)A No.113/Bang/2018- AMD India Private Limited Relying on other jurisprudences in the matter the Tribunal held that provision written back should be regarded as part of the operating revenue of the Assessee while determining PLI. (b) ITA No.2016 and 1972/Bang/2018- Toyota Kirloskar Motors Private Limited. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 14 of 75 Relying on other jurisprudences in the matter the Tribunal held that when in the year of creating the provision the same was treated as operating expense in nature, reversal of the same should also be treated as operating revenue in nature. 4. The Ld. D.R. submitted that it is admitted by the assessee that the service tax refund pertains to the service tax amounts of earlier years. The assessee also admitted that these service tax amounts were expensed off along with the operating costs in the respective years. The assessee contended that since such service tax forms part of the operating cost of the previous year's refund has to be considered as part of operating income in the current year. The income received as refund on account of excess taxes paid in previous years cannot be part of operating income of the current year. Such amount paid back can be considered as income from other sources. Further, Ld. D.R. stated that the assessee has disclosed the main revenue from IT enabled services at Rs.99,217 lakhs from exports and Rs.8168 lakhs as other income. The Ld. D.R. further submitted that the assessee in its submissions stated that the service tax refund of Rs.4736 lakhs has been shown under other income in the audited financial statements for the F.Y. 2016-17. Therefore, the service tax refund content has not been disclosed as operating revenue by the assessee itself in its financials. This shows that such i ncom e is not op er a ti ng inco m e of th e curren t ye a r a s th e inco m e ha s no d i r ect r ela tion w i th the c ur rent ye a r ea r n ing ma c h in er y of t he a ss es se e. The r ef or e, L d. D. R. sta t ed th a t the TPO h a s c or r ectl y trea te d se r vice tax r ef un d a s non -op e ra ti ng i n com e . Accor di n gl y, o b je ction is di s po se d of . IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 15 of 75 4.1 The ld. D.R. further submitted that the other item of re- measurement loss on defined benefit plans has been disclosed below the profit line in its profit and loss account for the F.Y. 2016- 17. This item has been specifically classified under the head other comprehensive income that will not be classified to profit and loss in subsequent periods. This itself explains that this item of laws will not be part of profit and loss account of the assessee. Therefore, the nature of this item is not directly related to the operating part of the assessee and hence TPO has correctly treated service tax refund as non-operating income. 4.2 The ld. D.R. submitted that in the Transfer Pricing (TP) study done by the Transfer Pricing Officer (TPO), he has excluded the other income of the assessee as well as all the comparables while working out the operating margins. This action is uniform and as such the assessee and the comparables are on the same footing. The assessee has itself shown 'service tax refund' as non-operating income in its financials and so the same has been excluded by the TPO. 4.3 The ld DR further submitted that now in this case assessee is arguing that the income, which it shown as non-operating, is actually operating income. Accepting this contention of the assessee would lead to a lopsided result as similar information is not available from the other comparables. The other comparables might also be having similar income which they might have declared as 'other income' or non-operating income. So after excluding the same the TPO has adopted their operating margins at lower level. So allowing this amount to be included in the operating margins of the assessee alone would not give the correct IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 16 of 75 state of affairs as the comparison with the comparables would become lopsided i.e at one end the income is not being considered for computing margins of comparables but it is being considered for computing margins of the assessee. As such the assessee gets double benefit leading to its operating margin being increased and that of comparables remaining at reduced level due to non-consideration of such income in their cases. In view of above the ld DR stated that the arguments of the assessee need to be rejected. 4.4 The ld DR further stated that alternatively, the TPO should be allowed to collect information regarding breakup of 'other income from the selected comparables and give same treatment of such income for the assessee as well as the comparables. This aspect that the other comparables would also be having similar service tax refund is also admitted by the assessee in para 2.4 of its written submissions filed during hearing on 10.11.2022. 4.5 He stated that the operating income/revenue of the assessee is only that which it receives from its AE on cost plus basis and not anything else. Service tax refund is not the operating income for the year under consideration but relates to some other years. Merely because it has been received during the year, it does not become operating income of the year under consideration as it is neither connected with any revenue of the year under consideration nor is it related to any expenditure of the year under consideration. So the same needs to be treated as non-operating in nature. 4.6 He further stated that the assessee has itself claimed that it is charging the AE on cost plus basis. This service tax was treated as cost in earlier years and profit margin on the same was earned by the assessee in such year. So its profits got enhanced during that year and it got the benefit of such enhanced profit in its TP study for that IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 17 of 75 year. Now in the year under consideration, it has received the refund and thus its cost is effectively reduced and to that extent its profit received on cost plus basis gets reduced if such refund has been taken into account by the assessee while reporting its cost to the AE (as argued in written submission by the assessee). So naturally in one year it has already benefitted by showing higher profit and in the year under consideration (in year of refund) it has received lesser profits from AE so the same only can be considered. The actual operating income is what it has received and the same cannot be artificially inflated now by adding service tax refund to its operating income. 4.7 He stated that the reliance of the assessee on the decisions in the cases of AMD India Private Ltd and. Toyota Kirloskar Motors Pvt Ltd is misplaced as the issue of treatment of 'service tax refund' was never under consideration in either of those cases. The issue adjudicated was the treatment of provisions. In AMD India too, the TPO had never commented specifically that the provision was being disallowed the same related to service tax refund. The issue was that of a mere provision as the same cannot be treated as same as the dispute in the appeal under consideration. 4.8 The assessee is claiming that it is accounting service tax refund in the year of actual receipt (para 2.3 of the written submissions). But at the same time, it is accounting for the service tax refund (Rs 2,76,491,677/-) received in the FY 2017-18 also in the year under consideration by relying on the accounting practices. This is self-contradictory as the assessee is just trying various means in order to show higher profit margins. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 18 of 75 4.9 The ld DR stated that the assessee is well aware that it is eligible for service tax refund. So, in actual it is not a cost for it and as such it should not have claimed it as expenditure while getting remunerated from AE on cost plus basis. So, by doing so neither it would have had higher profit in one year nor lower in another year i.e. on receipt of refund. However, it has planned its ways to have the advantage twice i.e. able to show more profits from the AE by charging cost plus on the service tax and then again showing higher profit in the year of tax refund by treating it as operating income. The operating income of the assessee is only that which it receives from its AE on cost plus basis and not anything else. If such income gets enhanced due to service tax payment or gets reduced due to service tax refund (as corresponding expenditure gets increased or reduced), that only is its operating income on cost plus basis. 5. We have heard the rival submissions and perused the materials available on record. The main contention of the ld. A.R. is that the payment of service tax has been considered as a part of operating expenses and on refund of the same by the authorities to be considered as operating income. In this regard, the ld. A.R. placed reliance on the following two judgements: a) Order of the Delhi Bench of Tribunal in the case of Sony India (P) Ltd. v. Deputy Commissioner of Income-tax (114 ITD 448) (Delhi) b) Order of the Bangalore Bench of the Tribunal in the case of Logical Private Limited v. ACIT (36 taxmann.com 374)(Blr.) IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 19 of 75 5.1 On the other hand, ld. D.R. made a contention that the payment of service tax is not relating to the ITES segment and that part of the cost cannot be considered as a part of the Operating expenses. Similarly, refund of the service tax cannot be considered as part of the Operating income of the assessee. The reliance placed by the assessee on various judgements misplaced. In our opinion, if service tax payment or provisions considered as an operating expenditure related to ITES segment on same analogy the refund of service tax relating to the ITES segment to be considered as operating income. In other words, if the service tax payment/provisions relate to the ITES segment and that has gone into the computation of income in any assessment year, refund of same relating to the ITES segment is to be considered as operating profit. With this observation, we remit this issue to the file of AO/TPO for fresh consideration. 6. Ground No.1.11 is only academic in view of our findings in ground No.2 (infra), which does not require any adjudication. 7. Ground No.1.12 is kept it open, in view of our finding in ground Nos.1.15 to 1.16. 8. Ground No.1.13 is reproduced below: “1.13 The learned AO/ learned TPO/ Hon'ble DRP erred in not allowing appropriate adjustments towards working capital differential existing between the Appellant vis-a-vis independent comparable companies.” 8.1 Facts of the case are that the assessee claimed working capital adjustment while computing the net profit margin, which constitutes difference if any, between the comparable uncontrolled transactions or between the enterprises entering into such transactions, which IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 20 of 75 could materially affect the amount of net profit margin in open market as per 10B(3) of the Rules. 9. The ld. DRP observed that Rule 10B provides for making reasonably accurate adjustment to the uncontrolled comparable transaction to eliminate the material effects of differences on the price, cost or profits. The assessee has argued for working capital adjustment contending that there exist differences in the payable and receivable position between the assessee and the comparables. However, it was not demonstrated with any data or information as to the impact of such difference on the price, cost or profits, and as to whether such difference materially affect the price, cost or profits. The 'Accounts payables' and 'Receivables' shown in the balance sheet only reflects the position as at the end of the financial year, and as such it would not enable to measure the impact of working capital on the costs, price or profits. The working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc. all of which cannot be captured in the year end Receivable or Payable position. Besides, the 'Payable' and 'Receivable' position stated in the Balance Sheet may not exactly reflect as to whether it arises from transaction relating to Revenue Account or Capital Account as there is no uniformity in the accounting or reporting requirements, and an intermixing is generally possible. The cost ascribable to the working capital would be different to different enterprises depending on the cost of fund to the enterprise, the cost of money in the economy it operates etc. In view of these, a reasonable accurate adjustment is not possible, as the differences in working capital requirements itself is based on IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 21 of 75 various assumptions. Besides, ld. DRP noted that the assessee had failed to demonstrate such material differences so as to warrant an adjustment. In these circumstances, he argued that revenue is inclined to uphold the TPO's reasoning and reject the assessee's claim for working capital adjustment. Against this assessee is in appeal before us with this ground of appeal. 10. We have heard the rival submissions and perused the material available on record. The Tribunal consistently granting working capital adjustment to the assessee while computing ALP of international transactions and this view was fortified by the order of the Tribunal in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A No.1940/Bang/2017 dated 4.8.2021 wherein held as under: “15. The learned counsel for the Assessee brought to our notice the decision of the Tribunal in Assessee’s own case for AY 2012-13 wherein on an identical issue, the Tribunal held that working capital adjustment cannot be denied to the Assessee, in IT (TP) A.No. 1939/Bang/2017 Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.). “10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT(A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C . 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a) to (d) (e)transactional net margin method, by which,— IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 22 of 75 (i)the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f) ..... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 23 of 75 development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 11. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the “TPG”) contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.473.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm’s length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: • None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or • Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called “comparability adjustments. 13. In Paragraph 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: “13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 24 of 75 interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: • A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) • This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers – (less) the period granted to pay debts to suppliers.” 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures. (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 25 of 75 enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT(A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non- trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT(A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India ITA No.2112/Mds/2011 (2013) 38 taxmann.com. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT(A) in the impugned order. In the matter of determination of Arm’s Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm’s Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 26 of 75 Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO Vs. E Value Serve.com (2016) 75 taxmann.com 195(Del-Trib) has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opeing and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an excact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)’s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT(A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT(A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO’s working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at page 173 & 192 of the Assessee’s paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1)( e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: “(3) An uncontrolled transaction shall be comparable to an international transaction if— IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 27 of 75 (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.” 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.” 16. Respectfully following the aforesaid decision, we hold that the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.” 10.1 In view of above order of the Tribunal, we direct the AO/TPO to grant working capital adjustment. Ordered accordingly. 11. Next ground No.1.14 is reproduced below: “1.14 The learned AO/ learned TPO/ Hon'ble DRP erred in not allowing appropriate adjustment towards the risk difference between the Appellant vis- à-vis the comparable companies.” 11.1 The ld. A.R. submitted that this ground is only academic and hence it does not require any adjudication. Hence, this ground is dismissed. 12. Next ground No.1.15 is reproduced below: Comparable companies – Information Technology Enabled Services (“ITES”) 1.15 The learned AO/learned TPO/Hon’ble DRP have grossly erred in not rejecting the following companies: - Microland Limited; - Datamatics Business Solutions Limited; − Vitae International Accounting Services Private Limited; IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 28 of 75 − Manipal Digital Systems Private Limited; - CES Ltd; - SPI Technologies India Private Limited; - Inteq BPO Services Private Limited; and - Infosys BPO Limited. 12.1 Out of the above, assessee wants exclusion of following 4 comparables only and no argument put with regard to the other comparables. Hence, other comparables were not considered for adjudication and accordingly dismissed. i. Microland Limited ii. Manipal Digital Systems Private Limited iii. Datamatics Business Solutions Limited iv. Infosys BPO Limited. Microland Limited: 12.1.1 The contention of the ld. A.R. is that it is not functionally comparable to the assessee’s case. However, ld. DRP observed that the TPO has mentioned in the order that as per the annual report, the services offered by this company has been described as ‘Infrastructure Management & IT enabled services’. Ld. DRP observed that the infrastructure management services are in the nature of monitoring IT infrastructure of the customers and are akin to provision of ITES services or back office support services. As per the Rule 10TA of the Income Tax Rules, 1962 (Safe Harbour Rules), the remote maintenance services which contributes 60% of the revenue of the company is very much within the definition of ITES. As the company’s revenue is predominantly from revenue management services (60%) and consultancy (17%), ld. DRP noted that all the activities of this company are in the nature of ITeS services and comparable to the assessee at any entity level. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 29 of 75 Therefore, ld. D.R. stated that the ld. DRP was of the view that this company is functionally comparable and upheld as comparable. 12.1.2 We have heard the rival submissions and perused the materials available on record. We have carefully gone through the financials of the Microland Limited engaged in provisions of IT Infrastructure Services, providing remote infrastructure management, segmental details of the company does not provide detailed information to check certain filters, such as, export filter at segmental level. Microland Limited has also invested in the development and its own service management platform “Smart Centre” for delivering infrastructure management services. As seen from its annual report total ITES revenue is 60%. The AO/TPO included 17% of selling services revenue as part of the revenue from ITES, which is not correct. In our opinion, it does not satisfy the 75% of sales as filter and the income from ITES services is only 60%. Hence, it is directed that Microland Limited is to be excluded from the list of comparables. Manipal Digital Systems Private Limited 12.1.3 The contention of the Ld. A.R. is that it is not functionally similar to the assessee’s case as no segmental details are available and advertisement & sales promotion expenses works out at 6.5% in assessment year under consideration, 7.19% in assessment year 2016-17 & 8.78% in assessment year 2015-16. Hence, he argued that this company be excluded from the list of comparables. 12.1.4 The ld. D.R. submitted that it is crystal clear from the annual report that the principal business activity of the company is given as IT enabled services which contributes 100% turnover of the company. On perusal of the breakup of the revenue given at page 41 IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 30 of 75 of annual report, the revenue earned from IT enabled services is Rs. 23.63 out of total revenue of Rs.24.34 crores, which comes to around 97.08%. He submitted that t he other activities like pre-media work, e-distribution contributes around Rs.0.70 crores, which is a minor revenue. The assessee, based on the website information, argued that the company is into diversified activities that can be classified as KPO services as per the definition of safe harbour rules. At the outset, he noted that the information put in Website cannot be given complete credence, as they are mere forward-looking information and statements with the motive of advertisement and other promotional gains. The functional aspect has to be determined by the information in the annual report, which is based on audited financial statements and management reports, for qualitative analysis of comparability. The fact that the company is into ITES segment is corroborated by the corporate. information given at page 45 of the annual report, where it is lucidly stated that "the main business of the company is to provide information technology enabled services that means pre-press activities mainly to overseas as well as domestic customers". Therefore, the ld. D.R. stated that the pleas raised based on information said to be available in the website are liable to be rejected is in limine in view of the information given in the annual report on the functional aspect. 12.1.5 Further, the ld. D.R. stated that this company operates under a single primary segment. The profit margins of various comparables will be averaged and a variation of 3% is also permitted. These aspects take care of some differences which are bound to be there between various comparables. In view of the above, he argued that ITeS services cannot be further . classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 31 of 75 functional similarity is more relevant than product similarity. It is a fact that this company falls in the category of ITeS. Hence, he stated that the objection on the functional dissimilarity of the company is to be rejected. 12.1.6 As regards lack of segmental information, the ld. D.R. stated that the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As stated above while discussing the functional profile the company derives its total revenue from the RTES activities only. This is further supported by the clarificatory note No. 27 at page 52 of the annual report that "the company was operating under one reportable geographical segment and one business segment. Therefore, disclosure as prescribed under AS 17- segment reporting is not applicable. Hence, he argued that the objection on lack of segmental information is not valid and not acceptable. 12.1.7 The ld. D.R. further stated that the assessee contended that this comparable has incurred significant selling, marketing expenses. From the perusal of the annual report, ld. DR noted that the expenses on this count is only 5.05% of the total sales and which is not at all significant to affect the profitability of the comparable. Accordingly, ld. D.R. stated that that this plea is rejected by the ld. DRP and selection of this company is upheld by ld DRP. 12.1.8 We have heard the rival submissions and perused the materials available on record. As per the annual report of the company, it is also in end-to-end content services across the value chain. From the website and annual report, it is clearly evident that the company is also engaged in web development, mobile application development. The company also provides publishing editorial & IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 32 of 75 composition services, which includes creating layout & artwork for advertisements and brochures, typesetting services and proof reading. As per revenue from operations, it includes “Revenue from web development and other services” (INR 2.18 Cr) and “income from e-book Distribution” (INR 69 lakhs), without providing the segmental revenue and profitability with respect to ITES segment. Advertising and sales promotion expenses at 6.50%, 7.19% & 8.78% of total expenditure in FY 2016-17, FY 2015-16 & FY 2014-15 respectively. 12.1.9 Further, the Tribunal in the case of Iron Mountain Services Ltd. in IT(TP)A No.307/Bang/2022 dated 20.9.2022 has held as under:- 16. “The next company the assessee seeks to exclude is Manipal Digital Systems Pvt. Ltd. In this regard, it was submitted that this company is engaged in provision of multiple high-end services including KPO activity like Design Services, Animation. It was submitted that no segmental details were available in the financial statements on the variety of services provided by this company like Design Services, Animation. Reliance was placed on the decision of the ITAT, Pune Bench in the case of Credence Resource Management Pvt. Ltd., (supra) wherein this company was excluded by the Pune Bench with the following observations: “8. The assessee submits that the Manipal Digital Systems Private Limited is functionally different from the assessee which is involved in provision of ITes services. As per the annual report of the company, the activity undertaken by the company is in the nature of pre-press activities which is not comparable to the assessee. That further in the website of the company, it is engaged in the diversified set of activities which involves graphic solutions, packaging brand management, digital publishing and digital content solutions. Therefore, the assessee submits that this company should be rejected from the final set of comparables companies. 9. The TPO was of the opinion that in this company i.e. Manipal Digital Systems Private Limited, 90% of the revenue is earned from ITes which is similar to that of the assessee company. The TPO further observed that most of the information provided by the assessee was from website and it cannot be said reliable source of information as any company while projecting itself in public domain tries to shows its diverse functioning and range of products so as to create a brand image of itself. With these observations, the IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 33 of 75 contention of the assessee was rejected and the company was taken as comparable company. 10. That before the Ld. DRP, objections have been raised by the assessee which are at running Page No.34 of the appeal memo and therein, apart from reiterating the submissions made before the TPO, the assessee has stated that as per the online advertising laws and guidelines provided by the Advertising Standard Council of India, advertisements are based on principle of truthfulness and honesty of representation and there cannot be any misleading advertisement. That further, since the audited financial statements do not provide detailed description of operations/products in which the company deals, the website can be referred to for the analysis of functions performed by the company. The Ld. DRP vide Para (c) of Page No.67 to 70 of its order and as per reasoning therein, had upheld the findings of the TPO and included Manipal Digital Systems Private Limited in the final set of comparables companies. That again the prime observation of the Ld. DRP in this regard was that more than 90% of the total revenue of the operation of the company comes from ITes. 11. At the time of hearing, the Ld. Counsel for the assessee took us through the annual report of the company at Volume –II, Page 1279 onwards, Page 1302 having notes of accounts. The Ld. Counsel vehemently submitted that on perusal of the annual report, notes of accounts, nothing can be stated whether at all this company i.e. Manipal Digital Systems Private Limited is engaged in the business of call center or not. The realm of ITes involves various activities and on general principle the Revenue cannot say that since majority of the earning of the said company comes from ITes, it is comparable company with that of the assessee company. 12. Placing strong reliance on the decision of the Honble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. Vs. CIT, ITA No.102/2015 dated 10.08.2015 copy of which is placed before us, the Ld. Counsel brought to our notice at Para 31 wherein the Hon’ble Delhi High Court observed that the Tribunal had held that once a service falls under the category of ITes then there is no subclassification of segment. Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITes. The Hon’ble Delhi High Court rejecting such view of the Tribunal had held that such a view, if upheld, would be contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITes encompasses a wide spectrum of services that use Information Technology based delivery. Such service could include rendering highly technical services by qualified technical personnel involving advanced skills and knowledge, such as engineering, design and support. While, on the other end of the spectrum ITes would also include IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 34 of 75 voice based call centers that render routine customer support for their clients. The relevant portion of the judgment is extracted as follows for the sake of completeness: “.............Clearly, characteristics of the service rendered would be dissimilar. Further, both service providers cannot be considered to be functionally similar. Their business environment would be entirely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous. 32. It has been pointed out that whilst the Tribunal in Willis Processing Services (India) Pvt. Ltd. v. DCIT (supra) held that no distinction could be made between KPO and BPO service providers, however, a contrary view had been taken by several benches of the Tribunal in other cases. In Capital IQ Information System India (P.) Ltd. v. Dy. CIT, (IT) [2013] 32 taxmann.com 21 and Lloyds TSB Global Services Pvt. Ltd. v. DCIT, (ITA No. 5928/Mum/2012 dated 21th November 2012), the Hyderabad and Mumbai Bench of the Tribunal respectively accepted the view that a BPO service provider could not be compared with a KPO service provider. 33. The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra) struck a different cord. The Special Bench of the Tribunal held that even though there appears to be a difference between BPO and KPO Services, the line of difference is very thin. The Tribunal was of the view that there could be a significant overlap in their activities and it may be difficult to classify services strictly as falling under the category of either a BPO or a KPO. The Tribunal also observed that one of the key success factors of the BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 35 of 75 KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower-end ITeS such as Call Centers etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold. 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 36 of 75 risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP.” 13. The Ld. Counsel for the assessee further submitted therefore, it is clear that merely because two companies are doing ITes services, on general categorization comparability is not permitted and one has to look into the specific services rendered in the spectrum of ITes and for this reason, the said company i.e. Manipal Digital Systems Private Limited is not a comparable company with that of the assessee company since absolutely functionally different. The Ld. Counsel also submitted that the TPO should have specifically stated why he has selected this company as comparable with that of the assessee company since the onus is on him to give reason for such inclusion. The logic was shown from the decision of the Pune Bench of the Tribunal in the case of M/s. Tasty Bite Eatables Limited Vs. ACIT, ITA No.1823/PUN/2018 for the assessment year 2014-15 dated 03.06.2021 wherein it was held that since the comparable chosen by the assessee, the onus is upon it to prove the functional comparability of this company. Extending the same logic, the Ld. Counsel submitted that it was also for the TPO to explain the reasons for inclusion of this company i.e. Manipal Digital Systems Private Limited since it was chosen as comparable by him. 14. We are of the considered view on going through the order of the TPO, findings of the Ld. DRP and the various judicial pronouncements placed on record, first of all the Revenue has selected Manipal Digital Systems Private Limited as comparable to that of the assessee company based on the earning of the company from ITes. However, there is no segmental specification provided neither by the TPO nor by the Ld. DRP for the reason of such inclusion of this company in the final set of comparable companies with that of the assessee company. In the decision of the Hon’ble Delhi High Court (supra.), it is very much clear in the wide spectrum of ITes if two companies are to be comparable one has to look into the characteristic of service or business provided under ITes by them. This exercise was not done by the Department in this case. We also opine that as per Indian Council for Advertising, the online advertising has to be published on true and honest disclosure basis and therefore, when proper documentation of activities are not physically available, in such scenario, referring the website for information is correct option and the information therein cannot be doubted. These are all multi- national companies and certain amount of honesty has to be attributed to them since all are functioning as per relevant rules and laws. With these observations and respectfully, following the IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 37 of 75 judgment of the Hon’ble Delhi High Court (supra.) we direct the AO/TPO to exclude this company i.e. Manipal Digital Systems Private Limited from the final set of comparables with that of the assessee company.” 17. Learned DR submitted that the aforesaid decision was in relation to Assessment Year 2016-17 whereas the case of the assessee in this appeal is in reference to Assessment Year 2017-18. Learned Counsel for the assessee submitted that the functional profile of the comparable company as well as the assessee remains the same for both Assessment Years 2016-17 and 2017-18 and therefore the decisions cited above are applicable to Assessment Year 2017-18 also. 18. We have given a careful consideration to the rival submissions and are of the view that it would be just and appropriate to set aside the question of comparability of Manipal Digital Systems Pvt. Ltd., to the TPO/AO to examine as to whether the functional profile of the assessee and the assessees in the decisions cited by the learned AR remains the same in Assessment Year 2017-18 as it was in Assessment Year 2016-17.” 12.1.10 Accordingly, the above comparable i.e. Manipal Digital Systems Pvt. Ltd. is directed to be excluded from the list of comparables. Datamatics Business Solutions Limited 12.1.11 The ld. A.R. submitted that the TPO erred in computing export revenue percentage. The correct percentage are 76%, 72% & 66%, respectively for FY 2016-17, FY 2015-16 & FY 2014-15. This company is functionally dissimilar – BPM services of the company essentially involves high-end KPO services, like business research, analytics, etc., which requires skilled labour. No segmental financials were given and without prejudice to the fact that the above functionality counter, margins for last two years should not be considered as they are failing export revenue filter. Hence, the ld. A.R. requested for exclusion of this company from the list of comparables. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 38 of 75 12.1.12 The ld. D.R. submitted that as per the Form No. MGT-9 forming part of the annual report, the principal activity of the company is described as IT enabled Services and BPM Service providers deriving income around 87.29%. In this case the difference in various segments i.e. low end to high end in ITES services is mainly on account differences in the skill/qualification and pay structure of employees and, therefore, the main point to be considered is whether such differences between employees is going to materially affect the margin of the comparables. On the basis of billing rates / skills no conclusion could be drawn that margins in different segments of ITES services is also different. This is because if the billing rate is high in the high-end services, the cost of the employees who are highly qualified/skilled also goes up steeply and, therefore, the margins are not much affected. In fact, no evidence has been produced before us to show that margins in the high end segments of ITES services is high compared to low end services. Therefore, ld. DRP did not accept the argument advanced by learned AR that the comparables belonging to high end segments such as KPO etc. should be excluded from the comparability list on this ground alone. He stated that in fact, KPO is a term given to a branch of BPO in which apart from processing data, knowledge is also applied. In view of the above, ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. Accordingly, ld. DR objected the plea of the assessee. Therefore, he stated that the company is functionally similar to the assessee as it is being predominantly into ITES company. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 39 of 75 12.1.13 The ld. DR further stated that as regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As regards, the export revenue as given in Note No. 18, the revenue is around Rs.50.43 crores as on 31.03.2017 as against total revenue of Rs.62.70 crores, which comes to 80.43%. As the company is functionally similar and satisfies the filters adopted by the TPO including export revenue filter of more than 75%, the company is considered as comparable. Therefore, he stated that the action of the TPO considering the company is upheld by the Ld. DRP. 12.1.14 The ld. D.R. further stated that at the outset, it is pertinent to note, that the assessee has challenged the selection of some comparables, relying on some decisions of Tribunal either in assessee's own case or in some other case, holding that certain companies are to be excluded as comparable for some other years. The comparability of a company cannot be determined with regard to decisions of the appellate bodies rendered for some other year, as the business and economic factors are dynamic and different in each year both in the case of tested party and comparables. The issue is well settled that simply because a comparable has been included or excluded in some year that action or inaction by itself in transfer pricing issues on comparability cannot constitute a precedent to be blindly followed ad infinitum. Whether a particular company is a comparable or not is an exercise, which has to be carried out every year in the case of an assessee considering the facts of that specific year and not blindly following the precedent, which has been laid down in earlier or subsequent year. A comparable is a comparable on facts and not because a IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 40 of 75 precedent makes it so. Neither can the tax payer insist that a comparable be included nor can it be insisted that it be excluded only on the ground of it having been included or excluded in some other previous assessment year. 12.1.15 The ld. D.R. further submitted that in case of Agnity India Technologies Pvt. Ltd vs Assessee, the Coordinate Bench of New Delhi Tribunal in 1.T.A.No.6485/De1/2012 for assessment year 2008-09 observed that precedents cannot be blindly followed. The relevant observations made are extracted as under: - "Para 7.3,,, ...... .3. Having heard the rival submissions and perused the material available on record we find that in the peculiar facts and circumstances of the case where the Hon'ble High Court has not approved of the approach of the ITAT in relying upon the precedent available in assessee's own case for the immediately preceding assessment year which precedent stood approved by the Hon'ble High Court itself we find that the prayer of the Ld. DR that decision be made first on facts on record and thereafter precedence be considered is not only a settled legal position but in the facts of the present case following this settled position the issue has been remanded despite the fact that the Co- ordinate Bench had followed the precedence in assessee's own case. Para 13 ............ We find on facts that the prayer of the tax payer for exclusion of the said comparable cannot be ousted on the ground that it was not objected to in the previous assessment year. Whether 5 particular comparable is accepted or rejected in a previous assessment year consciously or inadvertently by the assessee or the authorities is not the basis on which the issues can be decided. As and when challenge is posed of the inclusion or exclusion of a comparable the challenge has to be considered on the basis of facts and evidence on record for that year. It is after the facts and evidences are taken into consideration that the relevance of applying a precedent would come into play. In the facts of the present case, we find that the revenues from the software development segment of this comparable constituted 96% and this finding of fact has not been assailed by the assessee." IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 41 of 75 12.1.16 Therefore, the ld. DR submitted that inclusion or exclusion of a comparable has to be necessarily justified on the basis of facts available on record, the FAR analysis and the information in the annual reports submitted for each year and not on the basis of judicial precedent. 12.1.17 We have heard the rival submissions and perused the materials available on record. The main contention of the ld. AR is that segmental financials are not available and also TPO has not considered the correct percentage of export revenue in the earlier 3 assessment years and also margin of last 2 assessment years cannot be considered in view of the export revenue filter. In our opinion, these facts are required to be examined by the AO/TPO. Accordingly, we remit this issue to the file of AO/TPO for reconsideration of this comparable and include this comparable i.e. Datamatics Business Solutions Limited in the list of comparables if it satisfies the export revenue filter. Infosys BPO Limited: 12.1.18 The ld AR submitted that in assessee’s own case in earlier assessment year, it was not considered as comparable and he relied on the order of the Tribunal in the assessee’s own case in ITA No.212/Bang/2021 dated 27.9.2022 in the assessment year 2016- 17. 12.1.19 The ld. D.R. submitted that on perusal of the annual report, it was noted that this company offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. Further, at Page 31 and 32 under Note 11 Segment Reporting, it is clearly stated that the company's operations primarily relate to providing IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 42 of 75 business process management services, and accordingly revenues represented along with industry classes comprise the primary basis of segmental information. Thus, primary business activity of this company is business process management services, in various verticals such as FSI, MFG, RCL, ECS. The ld DR further submitted that at page 81 of annual report, Note 2.24, the report clearly states that as per function wise classification it has income from business process management services. The company's catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical focus areas. In view of the above information in the annual report, ld. D.R. stated that there is no merit in the plea that this company is functionally different, and that it has diversified activities, and hence stated that this plea be rejected. 12.1.20 We have heard the rival submissions and perused the materials available on record. We have considered the arguments of both parties. In the assessment year 2016-17, in the assessee’s own case in IT(TP)A No.212/Bang/2021 dated 27.9.2022, the Tribunal has considered this company as not comparable wherein held as under: “10. As mentioned earlier, the limited submission of the assessee before the Tribunal as per ground 1.12 is seeking exclusion of three companies from the list of comparable companies, namely, (i) Infosys BPO Limited, (ii) SPI Technologies India Private Limited, and (iii) Eclerx Services Limited. We find in the case of assessee’s group company namely EIT Services India Pvt. Ltd. v. DCIT (supra), the above three companies were excluded from the list of comparables on account of functional dissimilarities. We find that profile of the assessee in the instant case and that of the assessee in case of EIT services India Pvt. Ltd. are identical. Moreover, the assessment year is the same. The relevant finding of the Tribunal in the case of EIT Services India Pvt. Ltd. v. DCIT (supra) reads as follows (For exclusion of (i) Infosys BPO Limited, (ii) SPI Technologies India Pvt. Ltd. and (iii) Eclerx Services Limited) :- IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 43 of 75 “13. Further, the assessee wants exclusion of following comparables in IT enabled services. i. Infosys BPO Ltd. ii. SPI Technologies Pvt. Ltd. iii. Eclerx Services Ltd. i. Infosys BPO Ltd. 13.1 The Ld. A.R. submitted that that Infosys BPO offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. The n o m e nc l a t ur e i n t he p r o f i t a n d l o s s a c c ou nt i n di c a te s t hat t he i n c om e i s e ar ne d f r o m ‘ R e v e nu e f r om bu s i n e s s p r o c e ss m an ag e m e n t s e r v ic e s ’ w h i c h s ug g es t s th at th e c o m p any i s e n ga g e d i n c o ns ul t anc y a n d m an a ge m e n t s e r v i c e s un l ik e t he A p pe l l a nt w h i c h i s i nv o l v e d on l y i n p r o v i di n g I T E S a s a c a p ti v e s e r v i c e pr ov i d e r e nt i t y . 13.2 Further, Infosys BPO Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore - Trib.) AY 2016-2017 (He referred Page 162-163 of the Case Law Compilation, Para 11 - 21). Below is the relevant extract from the order for ready reference: 11. The ld. AR submitted that Infosys BPM Ltd. should be rejected as a comparable because it is functionally not comparable, has diversified activities and lack of segmental data, different business model, brand profits, various revenue models, presence of intangibles, outsourcing costs, marketing expenses and turnover. It offers business outsourcing solutions to several clients and span across multiple industry segments. The company's catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical focus areas. 12. The DRP was of the view that just because the company is providing cloud based services over various mainframe computers, the company would not be functionally different as claimed by the assessee and rejected this plea of the assessee. 13. Regarding the plea of the assessee that this company is into high end ITES service provider, and hence not comparable, the DRP held that under TNMM, there is no requirement that the comparables should render the same or identical services. It would be sufficient, if the services fall under the broad industry segment ITES. In this regard the DRP relied on the Bangalore Tribunal decision in the case of GE India Technology Centre (P.) Ltd. v. Dy. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 44 of 75 DIT [2013] 30 taxmann.com 249/141 ITD 245 and other decisions wherein it was observed that TNMM requires only broad comparability. 14. The contention of the assessee that Infosys BPO has various Revenue Models and its revenues are generated principally on time and material basis, transaction basis and fixed price contracts and therefore, it should not be compared with the assessee, the DRP observed that as the assessed failed to demonstrate as to how the different methods of billing would affect the Functional comparability or impact the profitability. Unless the same is demonstrated with credible evidence, it remains a theoretical argument without any backing with facts and figures and hence rejected it. 15. The assessee pointed out that this company has reported an amount of Rs. 136 crore as 'cost of Technical sub-contractors' which constitutes about 4.45% of total revenue of the company during the year. The DRP observed that the annual report mentions that these sub-contractors are used for operational activities. This is a common practice in almost all the companies to give a small portion of the work to some other subcontractors for a variety of reasons. This may allow the company to focus on its core activities. Sometimes it may be to meet the mismatch in certain skill-sets that are required in various projects. These expenses are incurred in the routine course of business. This cannot be held to be a criteria to affect the functional comparability of a company and more so in the facts of this case, wherein the sub-contracting expenses are about 4.45% only. This objection was accordingly rejected. 16. Regarding the lack of segment data to reject it as a comparable, the DRP was of the view that when it has been held that all the services being done by this company falls in the category of ITeS, then the absence of segmental information remains a theoretical argument. 17. The assessee has also argued that this company has significant intangibles and brand and hence not functionally comparable. The DRP noted that the expenditure incurred towards brand was just Rs. 19 crore which is meagre considering its operating revenue of Rs. 3050 crores. Further, the assessee could not point to any information from the annual report to indicate brand has contributed to the revenue growth or profitability. Therefore, the presence of brand, as such, has not affected comparability. Further, there is no information in the annual report to indicate that the company has undertaken any major R&D initiatives & own intangibles. Therefore, the presence of intangible in the form of goodwill, which is also insignificant, as the value is only Rs. 19 crore compared to the revenue from operations of Rs. 3050 crores do not have any impact on the profits of the company. Hence, these pleas were rejected by the DRP. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 45 of 75 18. The assessee's contention that this comparable has incurred significant selling and marketing expense was also not accepted by the DRP, since from the perusal of the annual report, the DRP noted that the expenses on this count is only 4.56% of the total expenditure and which is not at all significant to affect the profitability of the comparable. 19. Thus, in view of the discussions held above, all the grounds raised by the assessee were rejected and the action of the AO/TPO was upheld by the DRP. 20. We have heard both the parties and perused the material on record. This comparable has been considered as not comparable in SwissRe Global Business Solutions India (P.) Ltd. v. Dy. CIT [2020] 116 taxmann.com 716 (Bang. - Trib.) wherein it was observed as under :— "We have perused submissions advanced by both sides in light of records placed before us. We note that this company is providing services in various areas of sourcing and procurement, customer services, finance and accounting legal process outsourcing, sales and fulfilment, analytics, business platforms, business transformation services, human resource outsourcing and technology solution optimisation. It is noted that this comparable also provides services in financial services and insurance, manufacturing, energy utilities communications and services and retail, consumer packaged foods, logistics and life services. Further in the annual report it has been mentioned that this comparable provides services that are different from routine back-office services. This noting itself makes this comparable not functionally similar with that of assessee. Accordingly we direct this comparable to be excluded from finalist." 21. In view of the above order of the Tribunal, we are inclined to hold that this company should be excluded from the list of comparables. 13 .3 The c om p any has a l so bee n exc l ud ed i n t he ca s e of A DP (P .) Lt d. [2 0 22 ] 13 5 t ax m ann.c om 44 (H yde r ab a d - Tr ib. ) A Y 2 01 6-2 01 7 by t he Hy de rab ad T ri bu nal. 13 .4 In vi ew of th e a bov e -m en tio ne d rea sons , Ld. A .R . req ue st ed to di re c t t he TP O to ex clu de t his co m par a ble f rom t he fi na l li st o f I Te S Se gm e nt . 13.5 Ld. D.R. relied on the order of Ld. DRP. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 46 of 75 1 3 . 6 W e h a v e h e a r d t h e r i v a l s u b mi s s i o n s a n d p e r u s ed t h e m a t e r i a l s a v a i l a b l e o n r e c o r d . T h i s c o m p a n y h a s b e e n c o n s i d e re d a s i n t h e c a s e o f A D P P v t . L t d . c i t e d ( s u p r a a n d h e l d t h a t t h i s c o m p any c a nn o t b e i n c l u d e d b y o b s e r v i ng a s u n d e r: - “16.1 Infosys BPO Ltd.: The ld. AR submitted that this company may be excluded from the final set of comparables for the reason that this company has incurred outsourcing costs for FY 2013-14, FY 2014-15 and FY 2015-16 and the outsourcing cost incurred by this company reflects a different operating model and hence cannot be compared with the assessee company. Further, he submitted that while this company operates under various revenue model as per the assignments i.e., proportional completion method on rendering services, whereas the assessee charges a mark-up on the cost incurred to provide the services. Further, he submitted that since the cost structure and revenue model of this company is different with that of the assessee, this company ought to be rejected as a comparable company. He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) wherein the coordinate bench excluded this company as comparable. 16.2 The ld. DR, on the other hand, submitted that presence of outsourcing cost/subcontracting cost does not affect functional comparability. Further, it reduces the operating margin of the company, which is beneficial to the assessee. He, therefore, submitted that the TPO/DRP has rightly included this company as comparable. 16.3 We have considered the rival submissions and perused the material on record as well as the orders of TPO/DRP. We find that the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) has excluded this company as comparable by observing as under: '38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 201011 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under: "6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS E-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover and functionally different. With reference to Infosys BPO, the objection was that the said company renders vide array of services and has high brand value and turnover is also very high. With reference to TCS E-serve Ltd., there was exceptional event as the company was taken over by Tata Consultancy Services in the year 2008-09 and heavy turnover IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 47 of 75 is due to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E-clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee's objections and accordingly, directed the TPO to exclude the above three companies. There are other directions of the DRP on TP adjustments on which neither party has raised grounds, except the Revenue on the above exclusion of three companies. 7. Referring to the order of the TPO, it was the contention of Ld.DR that DRP was not correct in excluding them on the basis of the turnover, whereas Ld. Counsel submitted that DRP has followed the decisions of the Co- ordinate Benches in excluding the above three comparables. 8. We have considered the rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS E-Serve Ltd., is concerned, the Co-ordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010-11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under: ITA No 2233 of 2018 ADP Private Ltd Hyderabad "TCS e-SERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are exceptional circumstances during the relevant financial year due to which this company is not comparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental details of this company are not IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 48 of 75 available and hence, has to be excluded on this count also. 11.2.2 We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of this company. The Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Ltd., [2013] 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon'ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS e-Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS EServe Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Accordingly, assessee's grounds of appeal No. 6 is partly allowed. 8.1 Respectfully following the above decision of the Coordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables.' IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 49 of 75 We observe from the financial statements of this company, that this company is functionally dissimilar and use robotics automation and diversified activities. Therefore, following the decision of the coordinate bench, we direct the AO/TPO to exclude this company as comparable for determining ALP. 13.7 In view of the above order of the coordinate bench of Hyderabad, we direct the AO/TPO to exclude this company viz. Infosys BPO Ltd. from the list of comparables from the final list of ITeS segment. ii. SPI Technologies Pvt. Ltd. 14. The Ld. A.R. submitted that the company is into diversified business activities. The Company is engaged in data processing and related services, primarily in the typesetting business, including transformation of unedited manuscripts into final print-ready files, supply of structured data for electronic publishing and providing end-to-end project management services. 14.1 SPI Technologies India Private Limited has been excluded in the case of Entercoms Solutions Private Limited [TS-548-ITAT-2021(PUN)-TP] Page 10 of the order – AY 2015-2016. Below is the relevant extract from the order for ready reference: “10. We, place reliance on the afore-stated judicial precedents where there is an emerging consistent view in this regard that if an extraordinary event has taken place by way of amalgamation that company cannot be considered as a comparable one and following the same parity of reasoning, we direct the Assessing Officer/TPO to exclude SPI Technologies India Pvt. Ltd. from the final set of comparables while computing international transactions in respect of the Assessee in ITes segment.” 14.2 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment. 14.3 Ld. D.R. relied on the order of Ld. DRP. 14.4 We have heard the rival submissions and perused the materials available on record. This company has been considered a s n o t a c o m p a ra b l e i n t h e c a s e o f E n t e rc o ms S ol u t i o n s P v t . L t d . i n a s s e s sm e n t y e a r 2 01 5 - 1 6 i n I T A N o . 1 8 2 6/ P u n e / 2 0 1 9 d a t e d 2 5 . 1 0 .2 0 2 1 wh e r e i n h e l d a s un d e r : - 8. We find the Hon’ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax Vs. PTC Software (I) (P) Ltd. (2019) 101 taxmann.com 117 (Bombay) has held that in case the assessee rendering ITES services to AE, a company in whose case extraordinary event of IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 50 of 75 amalgamation took place during relevant year, could not be accepted as comparable and was decided in favour of the assessee. Similarly in the case of Pr. Commissioner of Income Tax Vs. J.P Morgan India (P) Ltd. (2019) 102 taxmann.com 335 (Bombay) , the Hon’ble Jurisdictional High Court on the same issue has held as follows: “(iv) Mr. Percy Pardiwalla, learned senior counsel appearing on behalf of the respondent invited our attention to the final decision of this Court in Pr. CIT v. Aptara Technology (P.) Ltd. [2018] 92 taxmann.com 240 and Pr. CIT v. PTC Software (I) (P.) Ltd. [2019] 101 taxmann.com 117 (Bom.). In both the above decisions this Court has taken a view that merger/amalgamation is an extra ordinary event and would have an impact /effect on the financial results of the company. Thus, in both the aforesaid decisions, this Court upheld the view of the Tribunal that where merger/amalgamation have taken place and it is not a normal event then such a company would cease to be comparable. This of course is subject to the Revenue being able to show that amalgamation/merger did not have any effect of the profitability of the company. This has not been shown by the Revenue either to the Tribunal or before us. Therefore, this issue stands covered by the decision of this Court in Aptara Technology (P.) Ltd.'s case (supra) and PTC Software (I) (P.) Ltd.'s case (supra) in favour of the respondent. This more particularly in view of the absence of the Revenue even attempting to show that the merger and amalgamation that took place in the case of comparable M/s. Keynote Corporate Securities Limited was such that it would not have any impact on its profitability. It is true that in case of PTC Software (I) (P.) Ltd. case (supra) this question has been admitted, however, the admission was on the facts and circumstances of that case. In any case the issue now stands concluded by final orders of this Court in case of Aptara Technology (P.) Ltd. (supra) and PTC Software (I) (P.) Ltd.'s case (supra) and it is being followed. (v) In view of the above, as the proposed question is covered by the decision of this Court, no substantial question of law arises. Thus, not entertained.” 9. That even the Pune Bench of the Tribunal in the case of Brintons Carpets Asia (P) Ltd. Vs. Deputy Commissioner of Income Tax, ITA No.1312 & 1349/PN/2015 dated 29th March, 2019 observed that the assessee before the Tribunal had first claimed that Accentia Technologies Ltd. cannot be selected in the final list of comparables as during the year under consideration, there was an extraordinary event of amalgamation. Thereafter, the Tribunal has analyzed how and what extraordinary event took place in that case and in such IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 51 of 75 scenario, the company cannot be considered as comparable one and the relevant extracts in this regard are as follows: “13. ............. The learned Authorized Representative for the assessee has pointed out that though the CIT (A) says that there is no such amalgamation but his finding is totally incorrect. In this regard, reliance was placed on the ratio laid down by Pune Bench of Tribunal in Dover India (P.) Ltd. v. Dy. CIT [2017] 88 taxmann.com 115 (Pune - Trib.), wherein for assessment year 201011 itself, the said concern Accentia Technologies Ltd. was excluded being high end KPO service provider. Further, the Tribunal in BNY Mellon International Operations (India) (P.) Ltd. (supra) have noted the extraordinary event of acquisition and also amalgamation of another concern and held that the said concern could not be selected as comparable. The relevant findings of Tribunal are in paras 12 and 13, which read as under:— '12. The next concern against which the assessee has raised objections is Accentia Technologies Ltd. on the ground of extraordinary events during the year under consideration. The said concern had acquired IQ group of companies in the United Kingdom and there was amalgamation of Asscent Infoserve Pvt. Ltd. with the said concern and because of these extraordinary events, the margins of said companies should not be included in the final set of comparables. The Pune Bench of Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT (2016) 72 taxmann.com 352 (Pune - Trib) and Cummins Turbo Technologies Ltd. v. DCIT (2017) 79 taxmann.com 260 (Pune - Trib) has held that the said concern cannot be accepted as comparable. The Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT (supra) held as under:— "14. We find that the Tribunal in assessee's own case in assessment year 2008-09 in ITA No.2235/PN/2012, order dated 02.02.2015 had held that the said concern could not be considered as comparable because of certain extraordinary events. The said ratio was also applied in assessee's own case while benchmarking the international transaction of assessee with its associate enterprises in assessment year 2009-10 in ITA No.267/PN/2014, order dated 29.04.2015. The Tribunal vide order dated 02.02.2015 had held that the concern Accentia Technologies Ltd. could not be included in the final set of comparables holding as under:— "13. Next, assessee had contended that Accentia Technologies Ltd. has been wrongly included by the TPO as a comparable concern. As per the assessee, the said concern was engaged in functionally different activities. It was pointed out that the said concern is engaged in providing medical transaction, billing and coding services, application development & customization (segmental data not IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 52 of 75 available). Moreover, it was contended that the sales/turnover of the said concern was more than Rs. 50 crores for the year under consideration which did not meet with turnover filter applied by the assessee. On this point, it was pointed out that the assessee had selected sales/turnover filter of 1-50 crores i.e. any concerns having a turnover exceeding Rs. 50 crores were excluded. Thirdly, it was pointed out that the activities of the said concern were not comparable to the activities of the assessee. 11. The TPO has noted the aforesaid objections of the assessee in para 18.1 of his order and has rejected the same by merely noticing that 75% of the revenue/income of the said concern is from ITES and therefore it is to be considered as a comparable. Before us, the Ld. Representative for the assessee has reiterated the submissions put- forth before the TPO in order to justify exclusion of the said concern from the list of comparables. In particularly, it has been pointed out that for the very same assessment year, the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. v. ITO, (2013) 38 taxmann.com 55 (Bang.) has excluded the said concern from the list of comparables in a similar situation following the decision of the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited v. DCIT, (2013) 32 taxmann.com 21 (Hyd.). 15. We have considered the submissions of the Ld. Representative for the assessee and also the stand of the Revenue as emerging from the order of the TPO. In our view, the ratio laid down by the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) and by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) is squarely applicable to the present case also. The aforesaid Benches of the Tribunal found that during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable." 15. Further, similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia Technologies Ltd. was not comparable to the entities engaged in ITES. Following the same parity of reasoning, we hold that Accentia Technologies Ltd. is to be excluded from the final set of comparables." IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 53 of 75 13. Following the same parity of reasoning as in Aptara Technologies Pvt. Ltd. v. ACIT (supra) and Cummins Turbo Technologies Ltd. v. DCIT (supra), we hold that Accentia Technologies Ltd. cannot be compared as comparable because of extraordinary events of acquisition and amalgamation during the year. Accordingly, we direct the Assessing Officer/TPO to exclude Accentia Technologies Ltd. from final list of comparables.” 10. We, place reliance on the afore-stated judicial precedents where there is an emerging consistent view in this regard that if an extraordinary event has taken place by way of amalgamation that company cannot be considered as a comparable one and following the same parity of reasoning, we direct the Assessing Officer/TPO to exclude SPI Technologies India Pvt. Ltd. from the final set of comparables while computing international transactions in respect of the assessee in ITes segment.” 14.5 In view of the above order, we direct the AO/TPO to exclude SPI Technologies Pvt. Ltd. from the list of comparables selected for ITeS segment. iv. Eclerx Services Ltd. 15. Ld. A.R. submitted that the company offers solutions in the nature of Knowledge Process Outsourcing (KPO) Services. The Appellant submits that the nature of the high end KPO services demanding presence of different skillsets performed by the Company cannot be compared to the low end ITES functions performed by the Appellant. 15.1 Further, Eclerx Services Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore - Trib.) AY 2016-2017 (Refer Page 163 of the Case Law Compilation, Para 22-30). Below is the relevant extract from the order for ready reference: 22. Regarding exclusion of Eclerx Services Ltd., the assessee argued that this company is a KPO company and hence, it is not a good comparable. The DRP observed that there is a thin line of difference between BPO and KPO services. KPO is termed as an upward shift of the BPO industry in the value. chain. Thus, BPO trying to upgrade itself as KPO is likely to render both BPO as well as KPO services in the process of evolution and therefore, such an entity cannot be considered strictly as either BPO or KPO. In view of the above, ITeS service's cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. The DRP noted that the functional profile of this company was similar to the assessee. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 54 of 75 23. Regarding the amalgamation of wholly owned subsidiary Agilyst Consulting Pvt. Limited has taken place with effect from 1-4-2015, the DR observed that the assessee has not demonstrated any increase in profits due to this amalgamation. Therefore, this amalgamation has no impact on comparability. Accordingly, the plea was rejected. 24. With regard to acquisition resulting in inorganic growth, the DRP noted that the company has acquired entire shareholding of CLX Europe SPA, Italy, as on 22nd April 2015 and this acquisition was made by the company's overseas subsidiary e-Clerx Investments (UK) Ltd. Therefore, there is no merit of the objection, as the standalone financials of this company are considered for comparability. 25. The assessee also raised the objection that there is increase in revenue, but according to the DRP, it has failed to bring on record any evidence to suggest that this abnormal inorganic growth has impacted the profit margin of the company. It is observed that the profit margin of this company has been consistently at the same level during the last few years. The ALP margin is determined with reference the average profit margin of a comparable for three years and also taking into account the defined median value of the PLIs of the comparable. These will even out such differences. The DRP was of the opinion that it will not be proper to reject a comparable only on account of inorganic growth of top line, which otherwise is functionally comparable. 26. The DRP further observed that it was consistently held that high profit margin as such cannot be reason for exclusion when it is otherwise functionally comparable. Accordingly, there is no need to reject a functionally comparable company on account of having super profits. 27. The Assessee submitted that Eclerx suffers business concentration risk unlike the Assessee, who operates as a risk-free entity. The DRP observed that as far as the limited risk in the case of captive service providers is concerned, if this argument is accepted then it cannot be compared to any company as most of the companies will be independent companies. Rather it should be compared to independent companies only as the price received for the services by them will be determined by market forces, which is not the case of the assessee. The assessee itself can be characterized as a contract service provider, which means that it operates on a cost plus model. Therefore, this argument was also rejected. 28. Thus, the DRP upheld the rejection of this company as a comparable. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 55 of 75 29. We have heard both the parties on the issue. This company has also been considered as not comparable in assessee's own case for A.Y. 2014- 15 in IT(TP)A No. 3181/Bang/2018 dated 21-5-2020 wherein it was observed as under :— "It is noted that this company is involved in high-end KPO services whereas assessee is providing IT enabled services by rendering remote data processing in the field of reinsurance. In our opinion functions performed by this company is not similar to that of assessee even though assessee before us also carries out certain services on contract basis. Ld. AR has placed reliance upon decision of Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. v. CIT [2015] 60 taxmann.com 355/234 Taxman 573/377 ITR 533 Hon'ble Court had held that once a company falls into the category of high-end KPO, it cannot be functionally comparable with a BPO service provider like that of assessee. Applying this reissue in the present case, we direct Ld.AO to eliminate this comparable from final list." 30. In view of the above order of the Tribunal, we are inclined to direct that Eclerx Services Ltd. be excluded from the list of comparables. 15.2 The company has also been ex cluded in the case of ADP (P.) L td. [2022] 135 taxmann.com 44 (Hyderabad - Trib.) AY 2016-2017 by the Hyderabad Tribunal. 15.3 In view of the ab ove-m ention ed re aso ns , the Ld. A. R . requ e sted to dir ect the TPO to ex clude this compar abl e from the final lis t of IT eS Segm e nt. 15.4. Ld. D.R. relied on the order of Ld. DRP 15.5 We have heard the rival submissions and per us ed the materials available on record. T his com pany is not consider ed as com parable in the case of A DP Pvt. Ltd. cited (s upra) in ass essm ent year 2016-17, wherein they excluded the comparable ground N o.7 of that or der vide para 17 to 17.4 wherein held as under:- “17. Eclerx Services Ltd.: The ld. AR of the assessee submitted that this company may be excluded as comparable from the final set of comparables as this company is engaged in providing KPO services, different to low end BPO services provided by the assessee. He submitted that Safe Harbor Rules recognizes ITeS activities under tow distinct categories i.e., BPO and KPO and activities of this company falls under IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 56 of 75 KPO services. He submitted that the services provided by this company of following: (a) Contract Risk Review, (b) Margin Exposure Management, (c) Online Operations and web analytics, (d) CRM and business intelligence, (e) Content creation, (f) business process consulting. 17.1 He further submitted that as per NIC code provided in the annual report, this company has been classified as KPO and has been awarded as leading KPO's in India, basis award and accolades received. He submitted that this company has undertaken the following extraordinary transactions thereby impacting the operating margins: (a) Acquisition of CLX Europe (b) Amalgamation of Agilest consulting (P.) ltd. 17.2 He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) wherein the co-ordinate bench excluded this company as comparable. 17.3 The ld. DR, on the other hand submitted that this company is engaged in rendering ITeS, therefore, functionally comparable to assessee. He submitted that amalgamation has no impact on the profits of the company. He, therefore, submitted that TPO/DRP has rightly included this company as comparable to assessee company. 17.4 We have considered the rival submissions and perused the material on record as well as the orders of TPO/DRP. We find that the coordinate bench in assessee's own case for AY 2014-15 cited supra has excluded this company as comparable by observing as under: 38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 201011 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under: "6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS e-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover and functionally different. With reference to Infosys BPO, the objection was that the said company renders vide array of services and has high brand value and turnover is also very high. With reference to TCS E-serve Ltd., there was exceptional event as the company was taken over by Tata Consultancy Services in the year 2008-09 and heavy turnover is due IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 57 of 75 to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E-clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee's objections and accordingly, directed the TPO to exclude the above three companies. There are other directions of the DRP on TP adjustments on which neither party has raised grounds, except the Revenue on the above exclusion of three companies. 7. Referring to the order of the TPO, it was the contention of Ld.DR that DRP was not correct in excluding them on the basis of the turnover, whereas Ld. Counsel submitted that DRP has followed the decisions of the Co-ordinate Benches in excluding the above three comparables. 8. We have considered the rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS e-Serve Ltd., is concerned, the Co-ordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010-11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under: ITA No 2233 of 2018 ADP Private Ltd Hyderabad "TCS eSERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are exceptional circumstances during the relevant financial year due to which this company is not comparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental details of this company are not available and hence, has to be excluded on this count also. 11.2.2 We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 58 of 75 and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of this company. The Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies P. Ltd., (2013) 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon'ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS E-Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS e- Serve Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Accordingly, assessee's grounds of appeal No. 6 is partly allowed. 8.1 Respectfully following the above decision of the Co-ordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables. We observe from the financial statements that this company is functionally dissimilar and engaged in KPO and BPO services and amalgamation of Agilest Consulting Pvt. Ltd., vide page No. 23 of paper book volume -1 para 8 and acquisition of CLX Europe which impacts on the profits of the company. From the financial statements of the Chairman's message placed at page No. 18 of paper book volume - 1, it has been categorically stated that after acquisition of CLX Europe, the revenue has grown by 30%, which clearly shows that it impacts on the profitability of the company. These are extraordinary events. Therefore, If an extraordinary event has taken place by way of amalgamation in a company, that company cannot be considered as a comparable as held by the co-ordinate bench of ITAT, Pune, in the case of Entercoms Solutions (P.) Ltd. (supra). Accordingly, we direct the AO/TPO to exclude this company as comparable from the list of comparables.” 15.6 In view of the above order of the Tribunal, we direct the AO/TPO to exclude this company viz. Eclerx Services Ltd. from the list of comparables.” IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 59 of 75 11 In view of the above order of the Tribunal, which is a group company of the assessee, and having same profile of the assessee, we direct the TPO to exclude (i) Infosys BPO Limited, (ii) SPI Technologies India Private Limited, and (iii) Eclerx Services Limited from the list of comparables and recompute the ALP of the international transaction.” 12.1.21 In view of the above order of the Tribunal in assessee’s own case and having same profile of the assessee, we direct the AO/TPO to exclude Infosys BPO Ltd. from the list of comparables. 13. The assessee has raised ground No.1.16 for inclusion of following comparable companies: a. Cosmic Global Limited; b. Allsec Technologies Limited; c. BNR Udyog Limited; d. Bhilwara Infotechnology Limited; e. R Systems International Limited; f. ISN Global Solutions Private Limited; and g. E-Zest Solutions Limited; 13.1 At the time of hearing, the ld. A.R. pressed only following 4 comparables for inclusion: a. Bhilwara Infotechnology Limited; b. R Systems International Limited; c. ISN Global Solutions Private Limited; and d. E-Zest Solutions Limited; 13.2 The other comparables are not pressed. Accordingly, dismissed as not pressed. Bhilwara Infotechnology Limited & R Systems International Limited: 13.3 The ld. DR submitted that the Ld. DRP given findings that the above companies do not figure in the search matrix of the TPO. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 60 of 75 The ld. DRP has already upheld the rejection of TP document of the assessee which in turn means that a fresh search has to be conducted by the TPO. Based on the fresh search, the TPO has identified the comparables. The assessee can only ask those companies out of the TPO's search matrix which have been wrongly rejected by the TPO. As these companies do not figure in the TPO's search matrix, ld. DRP opined in his report that the functionality is not required to be seen at all, as it amounts to cherry picking. 13.4 We have heard the rival submissions and perused the materials available on record. The ld AR submitted that this comparable may go back to file of AO/TPO to verify whether it satisfies all the filters adopted by AO/TPO. We accede to the request of the ld. AR. Accordingly, these two comparables i.e. Bhilwara Infotechnology Ltd. and R. Systems International Limited are remitted to the file of AO/TPO for fresh consideration to verify whether they satisfy all the filters adopted by AO/TPO while selecting comparables. Ordered accordingly. ISN Global Limited: 13.5 The ld. DR stated that the Ld. DRP has observed in his order that this comparable do not figure in the search matrix of the TPO. The ld. DR stated that the ld. DRP has already upheld the rejection of TP document of the assessee which in turn means that a fresh search has to be conducted by the TPO. Based on the fresh search, the TPO has identified the comparables. The assessee can only ask those companies out of the TPO's search matrix which have been wrongly rejected by the TPO. As these companies do not figure in the TPO's search matrix, the ld. DRP opined in his observation that the functionality is not required to be seen at all, as it amounts to IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 61 of 75 cherry picking. Against this assessee is in appeal before us and submitted that this company is functionally comparable to assessee and passes through all filters adopted by the AO/TPO. 13.6 We have heard the rival submissions and perused the materials available on record. This company is considered as not comparable by Ld. DRP itself in next assessment year i.e. 2018-19 and he observed that on perusal of the annual report on record no doubt the company is engaged in business of business process outsourcing and data processing. As per the information in the annual report, the company is into ITES services and functionally comparable to the assessee. Hence, the ld. DRP directed the TPO to verify the financials and consider the company for inclusion if satisfies all the filters. 13.7 In view of the above, we are of the opinion that for this assessment year 2016-17, the ld. DRP is not justified in excluding this comparable from the list of comparable. Accordingly, we direct the AO/TPO to include this company ISN Global Solutions Ltd. in the list of comparables. E-Zest Solutions Limited: 13.8 Now coming to E-Zest Solutions Limited, the ld. DRP observed that on perusal of the annual report it was noted that the company has income from sale of services amounting to Rs.81.46 crores as per the information statement of profit and loss account given at page nos. 123-125 of the annual report. The company reported that it is exclusively engaged in the business of IT enabled services. This is the context of on segment reporting and is considered to constitute a single primary segment. As it is part of search matrix of the TPO and functionally similar to the assessee, the TPO is IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 62 of 75 directed to include the comparable for the comparability analysis under ITES segment if it satisfies the filters adopted by the TPO. 13.9 However, the AO/TPO has not included E-Zest Solutions Ltd. in the list of comparables while determining the ALP. However, we direct the AO/TPO to pass the above order in conformity with the order of the Ld. DRP as recorded in para 13.8 above. This ground of appeal of the assessee is allowed. Corporate Tax Issues (Grounds 2.1 to 2.15): 14. The assessee has raised following grounds of appeal: B. Corporate Tax 2. Incorrect disallowance with respect to expenditure on ESOP under section 37 of the Act — INR 7,29,00,000 2.1. The Learned AO and Honorable DRP have erred in law and on facts, in disallowing the expenditure on ESOP of INR 7,29,00,000 under section 37 of the Act without appreciating the submissions furnished by the Appellant. 2.2. The Learned AO and Honorable DRP have erred in law, in disregarding the decision of the jurisdictional Karnataka High Court in the case of Biocon Limited, [2020] 121 taxmann.com 351 (Kar.) and Bangalore Tribunal in the case of Northern Operating Services Private Limited [IT(TP)A No.759/Bang/2017] and Novo Nordisk, [2014] 42 taxmann.com 168 wherein it was held that discount on issuance of ESOP is an allowable business expenditure under section 37 of the Act. 2.3. The learned AO and Honorable DRP have erred in law and on facts by stating that there is no outflow of money resulting in an expense whereas the fact is that there is a clear outflow of economic resources/cash in the hands of the appellant, which is wholly and exclusively used for the purpose of business in India. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 63 of 75 2.4. The learned AO and Honorable DRP have erred in law and on facts by not appreciating that the difference between the market value and the purchase price of shares is being taxed as perquisite in the hands of the employees. 2.5. The Learned AO and Honorable DRP have erred in law and on facts, in disregarding the employee listing, sample debit notes/invoices and sample Form 16 copies submitted during the Assessment/DRP proceedings by the Appellant. 2.6. The Learned AO and Honorable DRP have erred in law and on facts, in considering the ESOP expenditure as fictitious expenditure and making false allegation that the ESOP expenditure is a colorable device adopted for avoidance of tax which is totally inappropriate and misdirected. Further, the Learned AO and Honorable DRP have considered the ESOP cross charge by the Ultimate holding company as fictional and notional in nature which is totally misplaced. 2.7. The Honorable DRP has erred in law and on facts by placing reliance on the case laws decided in different context and not applicable to the facts of the Appellant. 2.8. The Honorable DRP has erred in law and on facts by stating that the ESOP is uncertain by not appreciating the fact that the ESOP expenses are actual expenses claimed by the Appellant, based on actual invoices issued and actual payments made. Non-Applicability of section 195 of the Act 2.9. The learned AO has erred in law and on facts by disregarding that the ESOP expense is liable to TDS under section 192 of the Act as "perquisite" in the hands of the employees and appropriate taxes are deducted and remitted by the Appellant, which is evidenced by sample Form 16 copies furnished before the honorable AO and DRP. 2.10. The learned AO has erred in law and on facts by stating that the provisions of section 195 of the Act shall be applicable on the remittance of reimbursement towards ESOP without taking cognizance of the fact that there was no "income" element arising to the recipient from such remittances. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 64 of 75 2.11. The learned AO has erred in law and on facts by stating that the provisions of section 195 of the Act have not been complied with and consequently reimbursement towards ESOP shall suffer disallowance under section 40(a)(i) of the Act, without evaluating the fact that the provisions of section 195 of the Act are not applicable to such remittances. 2. 1 2 . T h e l e ar ne d A O h as e r r e d i n la w an d on f a c t s b y r e l y i ng on d e c i s i o n of D a n fo s s I n du s t r i e s P L t d (20 0 4) 26 8 I T R 1 p r o no u nc e d b y t he H o n' bl e Authority for Advance Ruling ("AAR"). The transaction covered by the said decision is very different on facts as compared to the Appellant and the same cannot be applied here. 2.13. The learned AO has err ed in law and on facts, in disregarding that the remittance tow ards recovery of ESO P charges is not taxable under the provisions of India-USA Double Taxation Avoidance Agreem ent. 2.14. The learned AO has erred in law and on facts by contending that the said ESOP cross charge is liable to TDS under section 192 of the Act as "perquisite" in the hands of the employees and also liable to TDS under section 195 of the Act on the reimbursement to the Ultimate Holding Company, thereby resulting in double taxation of same amount. 2.15. The learned AO has erred in law and on facts by contradicting his own statement by stating that on one hand there is an element of "income" included in the reimbursement made to the Ultimate Holding Company for the expenditure on ESOP whereas on the other hand, the learned AO states that the said expenditure is notional / fictitious in nature. 14.1 The ld AR relied on the earlier order of the Tribunal in assessee’s own case in IT(TP)A No.212/Bang/2021 dated 27.9.2022 in support of the above grounds regarding Corporate Tax. 14.2 The Ld. D.R. stated that the Transfer Pricing study done by the TPO and the assessment framed by the Assessing Officer (AO) are distinct. While working the arm's length price (ALP), the TPO is not supposed to take into account the additions or IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 65 of 75 disallowances which the AO might make while finalizing the assessment. The TP study is entirely based on the financials of the assessee and that of the comparables and the TPO is required to work out ALP on the basis of the same. He may get some issues clarified from the comparable companies, if any doubt arises from financials, but the income tax assessment orders passed in the case of such comparables are neither sought nor practical or desirable. So considering the operating profits of the assessee alone on the basis of various disallowances or additions made to its income by the AO would result in undue advantage being given to the assessee for the purposes of computing its margins as no such information of comparables is used in computing their margins. Such a TP study will thus be lopsided. There is no such intention of the legislature to give such treatment is also evident from the fact that the TP analysis and ALP is computed by TPO before the AO passes the assessment order. If the intention of the legislature was that the operating margins of the assessee should be enhanced on the basis of disallowance or additions made by the AO then it could have specified that a preliminary draft assessment order will first be passed by the AO after making disallowances or additions and thereafter the TP study would be carried out to determine ALP by the TPO which can then be added to income of the assessee and then AO would pass the final draft assessment order. The DRP has correctly placed reliance on the decision on the case of Cushman and Wakefield (India) (P) Ltd (Para 2.12.3 of DRP order page 47-48). The same is reiterated. 14.3 The ld DR further stated that the assessee is getting remunerated on cost plus basis. So its operating cost is what it has declared to its AE for purposes of remuneration on above basis. So IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 66 of 75 ESOP expenditure is part of such expense claimed by it as part of its operating cost and it has got remunerated on cost plus basis on the same from the AE. Any change in the expenditure or income by the AO will thus not alter the operating cost or operating revenue of the assessee, which are considered by the TPO for the purpose of ALP determination. 14.4 He further stated that as discussed supra on the issue of 'service tax refund', in the Transfer Pricing (TP) study done by the Transfer Pricing Officer (TPO), while working out the operating margins the assessee as well as all comparables are on the same footing as their financials alone have been considered. Now in this case assessee is arguing that if ESOP expenses are disallowed then its operating expenses should also be reduced and the profit margins be enhanced. Accepting this contention of the assessee would lead to a lopsided result as similar information is not available from the other comparables. The other comparables might also be having similar or other disallowances. So allowing this amount to be excluded from the operating expenses of the assessee alone would not give the correct state of affairs as the comparison with the comparables would become lopsided i.e at one end such disallowed expenses are not being considered for computing margins of comparables but it is being excluded for computing margins of the assessee. As such the assessee gets double benefit leading to its operating margin getting increased and that of the comparables remaining low as no such exclusion was done in their cases. In view of above the arguments of the assessee need to be rejected. Alternatively, the TPO should be IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 67 of 75 allowed to collect information regarding breakup of disallowances made in the cases of the selected comparables and give same treatment of such disallowances for the assessee as well as the comparables. 15. We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that the ground Nos.2.1 to 2.15 are relating to disallowance with respect expenditure on ESOP u/s 37 of the Act. Similar issue came for consideration in assessee’s own case in IT(TP)A No.212/Bang/2021 vide order dated 27.9.2022 in which the Tribunal has held as under: 17. Grounds 2.1 to 2.15 relate to disallowance of ESOP expenses u/s 37 of the I.T.Act. The employees of the assessee was eligible to participate in share based compensation scheme of the ultimate holding company, whereby the shares of the ultimate holding company are granted to the employees of the assessee on satisfying certain conditions. As per Note 28 of the financial statement, the assessee had two types of share based compensation scheme operational, namely, Employee Stock Purchase Plan (ESPP) and Employee Stock Incentive Plan (ESIP) (hereinafter referred to as ESOP Scheme). It was stated that the shares were issued below market price and the discounted value was treated as perquisite u/s 17(2) of the I.T.Act in the hands of the employees and assessee had deducted appropriate TDS u/s 192 of the I.T.Act. It was stated that to the extent of discount, the holding company had cross charged the assessee. It was stated that it is in respect of cross charges incurred towards options exercised and shares purchased by employees of the assessee, the same was claimed as deduction u/s 37 of the I.T.Act. The A.O., however, held that ESOP expenditure booked by the assessee and reimbursed to the holding company is a fictitious expenditure and notional in nature. Though the A.O. had mentioned about the violation of the provisions of section 195(1) of the I.T.Act and consequent disallowance u/s 40(a)(i) of the I.T.Act, the A.O. held that the assessee has not satisfied conditions specified u/s 37 of the I.T.Act for claiming such expenditure. The objections filed before the DRP was rejected and the DRP agreed by the conclusions drawn by the A.O. 18. Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the issue raised is squarely covered by the order of the Tribunal in assessee’s group case in EIT Services India Pvt. Ltd. v. DCIT (supra). It was stated that the Tribunal in the above mentioned case, had followed the IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 68 of 75 dictum laid down by the Hon’ble jurisdictional High Court in the case of CIT v. Biocon Limited reported in 121 taxmann.com 351 (Karnataka), wherein it was categorically held that ESOP expenditure is deductible u/s 37 of the I.T.Act. 19. The learned DR was unable to controvert the submissions of the learned AR. 20. We have heard rival submissions and perused the material on record. In assessee’s group case, namely, EIT Services India Pvt. Ltd. v. DCIT (supra), had held that the ESOP expenditure is to be allowed as a deduction u/s 37 of the I.T.Act. The Tribunal had followed the judgment of the Hon’ble jurisdictional High Court in the case of CIT v. Biocon Limited (supra). The relevant finding of the Tribunal in assessee’s group case, reads as follows:- “20.27 We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before the Hon’ble Karnataka High Court in the case of CIT Vs. Biocon Ltd. cited (supra) wherein it was held as under:- “From a perusal of section 37(1) of the Income-tax Act, 1961 it is evident that the provision permits deduction of expenditure laid out or expended and does not contain a requirement that there has to be a payout. If an expenditure has been incurred, section 37(1) of the Act would be attracted. Section 37 does not envisage incurrence of expenditure in cash. An assessee is entitled to claim deduction under the provision if the expenditure has been incurred. It is well settled in law that if a business liability has arisen in the accounting year, it is permissible as deduction, even though, the liability may have to be quantified and discharged at a future date. Section 2(15A) of the Companies Act, 1956, defines "employees stock option" to mean option given to whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate to securities offered by the company at a pre-determined price. In an employees stock option plan a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at a discount and the same amount of discount represents the difference between IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 69 of 75 market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vests with the employees. The expression "expenditure" also includes a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for the purposes of section 37(1). The primary object of the exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, it cannot be construed as short receipt of capital. Held, dismissing the appeal, that the deduction of the discount on the employees stock option plan over the vesting period was in accordance with the accounting in the books of account, which had been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. For assessment year 2009-10 onwards the Assessing Officer had permitted the deduction of the employees stock option plan expenses. The Revenue could not be permitted to take a different stand with regard to the assessment year 200405. The expenses were deductible.” 21. In view of the above judgement of Hon’ble Karnataka High Court in the cas e of Biocon Ltd., w e ar e in agree m ent w ith the contention of as s ess ee’s counsel in pr inciple on this iss ue . How ev er, w e mak e it clear that th e A O has to v er ify w hether the said amount has be en subject to TD S in the asses sment y ear und e r consideration u/s 19 2/195 of the Act as a rgued by th e L d. A.R . before us. Ac cor dingly, this is sue is rem itte d to AO for fres h consideration in th e l ight of above.” 21. The assessee has raised grounds with regard to the issue that the assessee is not liable for TDS u/s 195 of the I.T.Act (refer grounds 2.9 to 2.15). We are of the view that these grounds need not be adjudicated, since, on perusal of the final assessment, it is clear that the disallowance of ESOP expenses has made under the provisions of section 37 of the I.T.Act (though there was some discussion in the draft assessment order with reference to disallowance u/s 40(a)(i) of the IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 70 of 75 I.T.Act). Therefore, grounds 2.1 to 2.8 are allowed and ground 2.9 to 2.15 is not adjudicated. 15.1 This issue further came for consideration before this Tribunal in the case of Hewlett Packard (India) Software Operation Pvt. Ltd. in ITA No.413/Bang/2022 dated 3.10.2022 wherein held as under: “3. We have heard the rival submiss ions and perused the materials available on record. Similar issue came for consideration before this Tribunal in the case of Novo Nordisk Inia Pvt. Ltd. in ITA No.1275/Bang/2011 dated 30.9.2013, wherein it was held as under:- 18. “We have considered the rival submissions. It is clear from the facts on record that there was an actual issue of shares of the parent company by the assessee to its employees. The difference, between the fair market value of the shares of the parent company on the date of issue of shares and the price at which those shares were issued by the assessee to its employees, was reimbursed by the assessee to its parent company. This sum so reimbursed was claimed as expenditure in the profit & loss account of the assessee as an employee cost. The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. in ITA No.248/Bang/2010, A.Y. 2004-05 and other connected appeals, by order dated 16.07.2013, wherein it was held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income. The Special Bench held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. 19. In the present case, there is no dispute that the liability has accrued to the assessee during the previous year. The only question to be decided is as to whether it is the expenditure of the assessee or that of the parent company. We are of the view that the observations of the CIT(A) in para 5.6 of his order that these expenses are the expenses of the foreign parent company is without any basis and lie in the realm of surmises. The foreign parent company has a policy of offering ESOP to its employees to attract the best talent as its work force. In pursuance of this policy of the foreign parent company, allowed its subsidiaries/affiliates across the world to issue its shares to the employees. As far as the assessee in the present case which is an affiliate of the foreign parent company is concerned, the shares were in fact acquired by the assessee IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 71 of 75 from the parent company and there was an actual outflow of cash from the assessee to the foreign parent company. The price at which shares were issued to the employees was paid by the employee to the Assessee who in turn paid it to the parent company. The difference between the fair market value of the shares of the price at which shares were issued to the employees was met by the Assessee. This factual position is not disputed at any stage by the revenue. In such circumstances, we do not see any basis on which it could be said that the expenditure in question was a capital expenditure of the foreign parent company. As far as the assessee is concerned, the difference between the fair market value of the shares of the parent company and the price at which those shares were issued to its employees in India was paid to the employee and was an employee cost which is a revenue expenditure incurred for the purpose of the business of the company and had to be allowed as deduction. There is no reason why this expenditure should not be considered as expenditure wholly and exclusively incurred for the purpose of business of the assessee. 20. We fail to see any basis for the observation of the CIT(A) that the obligation to issue shares at a discounted price to the employees of the Assessee was that of the foreign parent company and not that of the Assessee. Admittedly, the shares were issued to employees of the Assessee and it is the Assessee who has to bear the difference in cost of the shares. The expenditure is necessary for the Assessee to retain a health work force. Business expediency required that the Assessee incur such costs. The parent company will be benefitted indirectly by such a motivated work force. This will be no ground to deny the deduction of a legitimate business expenditure to the Assessee as laid down by the Hon’ble Supreme Court in the case of Sassoon J.David (supra). 21. The reference by the CIT(A) to the provisions of Sec.40A(2)(b) of the Act is again without any basis. The price of the shares of NNAS is arrived at by applying the average market price for the period 3 rd October, - 17the October, 2005 in the Copenhagen Stock Exchange. The price so arrived at and the price at which shares are issued to the employees of the Assessee is the benefit which the employees get under the ESOP. The Assessee or its parent company can never influence the stock market prices on a particular date. There is no evidence or even a suggestion made by the CIT(A) in his order. There is no basis to apply the provisions of Sec.40A(2)(b) of the Act. 22. With regard to the decision of the ITAT in the case of Accenture (supra), we find that the facts of the case of Accenture (supra) are identical. In the case of Accenture (supra), the facts were that the assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed Rs. 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The CIT(A) deleted the addition made by the AO. The CIT(A) found that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL, the Indian affiliate/Assessee and not to the employees of the IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 72 of 75 parent company. The CIT(A) also found that though the shares of the parent company have been allotted, the same have been given to the employees of the Assessee at the behest of the Assessee. The CIT(A) thus held that it was an expense incurred by the assessee to retain, motive and award its employees for their hard work and is akin to the salary costs of the assessee. The same was therefore business expenditure and should be allowable in computing the taxable income of the assessee. The tribunal upheld the view of the CIT(A). It can be seen from the decision in the case of Accenture (supra) that the shares of the foreign company were allotted and given to the employees of affiliate in India at the behest of the affiliate in India. The CIT(Appeals), however, presumed that the facts in the instant case of the assessee was that the shares were allotted to the employees of the affiliate in India at the behest of the foreign company. This is not the factual position in the assessee’s case, as the assessee had on its own framed the NNIPL ESOP Scheme, 2005, to benefit its employees. NNAS may have a global policy of rewarding employees of affiliates with its shares being given at a discount and that policy might be the basis for the Assessee to frame ESOP. That by itself will not mean that the ESOP was at the behest of the parent company. In any event the immediate beneficiary is the Assessee though the parent company may also be indirect beneficiary of a motivated work force of a subsidiary. We are of the view that the factual basis on which the CIT(Appeals) distinguished the decision of the Mumbai Bench of ITAT in the case of Accenture (supra) is erroneous. 23. With regard to the observations of the CIT(Appeals) that the ESOP actually benefits only the parent company, we are of the view that the expenditure in question is wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company is also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1) of the Act. The decision of the Hon’ble Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. (supra) and the Hon’ble Karnataka High Court decision in the case of Mysore Kirloskar Ltd. (supra) clearly support the plea of the assessee in this regard. 24. We are of the view that in the facts and circumstances of the present case, the expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure. 25. For the reasons given above, we direct the expenditure be allowed as deduction.” 4.1. Further, the Tribunal in the case of Global e-Business Operations (P) Ltd. in IT(TP)A No.212/Bang/2021 dated 27.09.2022 has held as under:- IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 73 of 75 “20. We have heard rival submissions and perused the material on record. In assessee’s group case, namely, EIT Services India Pvt. Ltd. v. DCIT (supra), had held that the ESOP expenditure is to be allowed as a deduction u/s 37 of the I.T.Act. The Tribunal had followed the judgment of the Hon’ble jurisdictional High Court in the case of CIT v. Biocon Limited (supra). The relevant finding of the Tribunal in assessee’s group case, reads as follows:- “20.27 We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before the Hon’ble Karnataka High Court in the case of CIT Vs. Biocon Ltd. cited (supra) wherein it was held as under:- “From a perusal of section 37(1) of the Income-tax Act, 1961 it is evident that the provision permits deduction of expenditure laid out or expended and does not contain a requirement that there has to be a payout. If an expenditure has been incurred, section 37(1) of the Act would be attracted. Section 37 does not envisage incurrence of expenditure in cash. An assessee is entitled to claim deduction under the provision if the expenditure has been incurred. It is well settled in law that if a business liability has arisen in the accounting year, it is permissible as deduction, even though, the liability may have to be quantified and discharged at a future date. Section 2(15A) of the Companies Act, 1956, defines "employees stock option" to mean option given to whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate to securities offered by the company at a pre-determined price. In an employees stock option plan a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at a discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vests with the employees. IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 74 of 75 The expression "expenditure" also includes a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for the purposes of section 37(1). The primary object of the exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, it cannot be construed as short receipt of capital. Held, dismissing the appeal, that the deduction of the discount on the employees stock option plan over the vesting period was in accordance with the accounting in the books of account, which had been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. For assessment year 2009-10 onwards the Assessing Officer had permitted the deduction of the employees stock option plan expenses. The Revenue could not be permitted to take a different stand with regard to the assessment year 200405. The expenses were deductible.” 21. In view of the above judgement of Hon’ble Karnataka High Court in the case of Biocon Ltd., we are in agreement with the contention of assessee’s counsel in principle on this issue. However, we make it clear that the AO has to verify whether the said amount has been subject to TDS in the assessment year under consideration u/s 192/195 of the Act as argued by the Ld. A.R. before us. Accordingly, this issue is remitted to AO for fresh consideration in the light of above.” 21. The assessee has raised grounds with regard to the issue that the assessee is not liable for TDS u/s 195 of the I.T.Act (refer grounds 2.9 to 2.15). We are of the view that these grounds need not be adjudicated, since, on perusal of the final assessment, it is clear that the disallowance of ESOP expenses has made under the provisions of section 37 of the I.T.Act (though there was some discussion in the draft assessment order with reference to disallowance u/s 40(a)(i) of the I.T.Act). Therefore, grounds 2.1 to 2.8 are allowed and ground 2.9 to 2.15 is not adjudicated.” 4.2. In view of the above order of the Tribunal, we are inclined to allow both the above grounds taken by the assessee.” IT(TP)A No.174/Bang/2022 M/s. Global E-Business Operations Pvt. Ltd., Bangalore Page 75 of 75 15.2 In view of the above, taking a consistent view, the above issue is decided in favour of the assessee and against the department. 16. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 16 th Nov, 2022 Sd/- (George George K.) Judicial Member Sd/- (Chandra Poojari) Accountant Member Bangalore, Dated 16 th Nov, 2022. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.