UTStarcom Inc., New Delhi V. DDIT, New Delhi

ITA 1829/DEL/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3840 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 27-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 28-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Rule of consistency; Scheme of amalgamation
• Section: 92D; 244A; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1829/DEL./2014 (ASSESSMENT YEAR : 2009-10) UT STARCOM INC., VS. DDIT, CIRCLE 2 (2), 49, FIRST FLOOR, LSC NO.1, INTERNATIONAL TAXATION , PLOT NO.13 & 14, DDA MARKET, NEW DELHI SECTOR 6, DWARKA, NEW DELHI 110 075. (PAN : AAACU5017A) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI RAJAN SACHDEV, MANEESH BAWA A ND JITENDRA SINGH, CAS REVENUE BY : SHRI H.K. CHOUDHARY, CIT DR DATE OF HEARING : 11.09.2017 DATE OF ORDER : 25.10.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. UT STARCOM INC. (HEREINAFTER R EFERRED TO AS THE TAXPAYER) BY FILING THE PRESENT APPEAL SOU GHT TO SET ASIDE THE IMPUGNED ORDER DATED 22.01.2014, PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TP O UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE INCOM E-TAX ACT, 1961 ITA NO.1829/DEL/2014 2 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2009- 10 ON THE GROUNDS INTER ALIA THAT :- 1. DENIAL OF CLAIM UNDER SECTION 10A OF THE ACT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED DEPUTY DIRECTOR OF INCOME- TAX, CIRCLE 2(2), INTERNATIONAL TAX, NEW DELHI ('LD . AO') UNDER DIRECTIONS ISSUED BY THE HON'BLE DISPUTE RESOLUTION PANEL - II, NEW DELHI ('HON'BLE DRP'), ERRED IN NOT ALLOWING THE CLAIM OF BENEFIT UNDER SECTION 10A OF THE INCOME-TAX ACT, 1961 ('THE ACT') OF RS. 58,57,059 TO THE APPELLANT'S TOTAL INCOME. 1.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN DENYIN G AND THE HON'BLE DRP HAS ERRED IN CONFIRMING THE ACTION OF THE LD. AO ON THE DISALLOWANCE OF THE APPELLANT'S CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT AMOUNTING TO RS. 58,57,059. 1.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN HOLDING AN D THE HON'BLE DRP HAS FURTHER ERRED IN CONFIRMING THE ACTION OF THE LD. AO, THAT THERE IS NO EXPORT O F SOFTWARE BY THE BRANCH IN INDIA TO THE HEAD OFFICE. 1.3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN HOLDING AN D THE HON'BLE DRP HAS FURTHER ERRED IN CONFIRMING THE ACTION OF LD. AO, THAT THE APPELLANT IS NOT A SEPARATE TAXABLE ENTITY AND' AS A CONSEQUENCE A PERSON CANNOT EARN PROFIT FROM ITSELF. 1.4 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO AND THE HON'BLE DRP HAS FAILED TO APPRECIATE THAT IF THE APPROACH ADOPT ED BY THEM IS CONSIDERED TO BE IN ACCORDANCE WITH LAW , NO INCOME COULD BE SAID TO RESULT IN THE HANDS OF T HE APPELLANT IN INDIA. ITA NO.1829/DEL/2014 3 1.5 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO AND THE HON'BLE DRP HAVE REACHED TO ERRONEOUS CONCLUSION OF DISALLOWING THE BENEFIT CLAIMED UNDER SECTION 10A OF THE ACT BY PLACING RELIANCE ON JUDICIAL PRECEDENTS WHICH ARE NOT APPLICABLE TO THE APPELLANT'S CASE. 1.6 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN AND THE HON'BLE DRP HAS FURTHER ERRED IN NOT FOLLOWING PRINCIPLE OF CONSISTENCY. 2. TRANSFER PRICING ('TP') ADJUSTMENT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ADDITIONAL DIRECTOR OF- INCOME-TAX, TRANSFER PRICING OFFICER - II (4) (LD. TPO') AND LD. AO UNDER THE DIRECTIONS ISSUED BY THE HON'BLE DRP ERRED IN MAKING AN ADDITION ON ACCOUNT OF TP ADJUSTMENT AMOUNTING TO INR 49,10,761 IN RELATION TO INFORMATION TECHNOLOGY ENABLED SERVICES CITES') RENDERED BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISE (AE'). 2.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP HAS GROSSLY ERRED BY SUMMARILY REJECTING THE APPELLANT'S OBJECTIONS AND NOT CONSIDERING APPELLANT'S ARGUMENTS, CONTENTIONS AND MATERIAL PLACED ON RECORD DURING THE COURSE OF PROCEEDINGS UNDER SECTION 144C OF THE ACT. 2.2 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. TPO HAS ERRED AND THE HON'BLE DRP HAS FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LD. TPO OF DISREGARDING, WITHOUT CITING ANY MATERIAL DEFECTS, THE BENCHMARKING ANALYSIS AND COMPARABLE COMPANIES SELECTED BY THE APPELLANT IN ITS TP STUDY MAINTAINE D AS PER SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 (THE RULES') AND VARIOU S SUBMISSIONS MADE BY THE APPELLANT. ITA NO.1829/DEL/2014 4 2.3 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. TPO AND HON'BLE DRP HAS ERRED IN ADOPTING AN ARBITRARY SEARCH STRATEGY FOR SELECTION OF ALLEGED COMPARABLE COMPANIES. SPECIFICALLY, THE LD. TPO AND HON'BLE DRP HAS GROSSLY ERRED - 2.3.1 BY ADOPTING INAPPROPRIATE FILTERS IN THE PROCESS OF SELECTING ALLEGED COMPARABLE COMPANIES 2.3.2 BY ADOPTING COMPANIES AS COMPARABLE TO THE APPELLANT HAVING COMPLETE DISREGARD TO THEIR FUNCTIONAL COMPARABILITY 2.3.3 BY DISREGARDING THE MULTIPLE-YEAR DATA APPROACH AND CONSIDERING THE DATA WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENTS. 2.4 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. TPO HAS ERRED AND THE HON'BLE DRP HAS FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LD. TPO IN NOT ALLOWIN G APPROPRIATE ADJUSTMENT(S) IN ACCORDANCE WITH THE PROVISIONS OF RULE 10B OF THE RULES. 2.5 THAT ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW, THE LD. TPO HAS ERRED AND THE HON'BLE DRP HAS FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LD. TPO IN NOT FOLLOWING THE PRINCIPLE OF CONSISTENCY. 2.6 THAT ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW, THE LD. TPO HAS ERRED AND THE HON'BLE DRP HAS FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LD. TPO IN MAKING THE ADJUSTMENT WITHOUT DEMONSTRATING THAT THE APPELLANT HAD ANY MOTIVE TO SHIFT PROFITS OUTSIDE OF INDIA. 3. INTEREST UNDER SECTION 2340 AND SECTION 244A OF THE ACT ITA NO.1829/DEL/2014 5 3.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN WITHDRAWING INTEREST UNDER SECTION 244A AND LEVYING INTEREST U/S 234D OF THE ACT CONSEQUENT TO THE ABOV E DISALLOWANCES. 4. PENALTY PROCEEDINGS UNDER SECTION 271 (1 )(C) OF THE ACT 4.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT AS PER THE IMPUGNED ORDER CONSEQUENTIAL TO THE ABOVE DISALLOWANCES. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : UT STARCOM INCS INDIA BR ANCH IS THE INDIAN BRANCH OF UTS US AND IS INTO PROVIDING SOFTW ARE DEVELOPMENT SERVICES TO UTS US AND IT ENABLED CUSTO MER SUPPORT SERVICES TO THE GROUP CUSTOMERS IN THE ASIA-PACIFIC REGION. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER ENTERED INT O INTERNATIONAL TRANSACTIONS WITH ITS AE AS UNDER :- NATURE OF INTERNATIONAL TRANSACTION METHOD SELECTED AMOUNT PAID (INR) AMOUNT RECEIVED (INR) SOFTWARE DEVELOPMENT SERVICES TNMM - 75,869,700 IT ENABLED SERVICES TNMM - 30,994,717 PURCHASE OF FINISHED GOODS TNMM 2,308,785,581 - PURCHASE OF FIXED ASSETS TNMM 4,649,356 - SALE OF FIXED ASSETS CUP - 1,931,829 COST RECHARGES TNMM 654,968,444 - REIMBURSEMENT OF EXPENSES CUP - 822,465 ITA NO.1829/DEL/2014 6 3. LD. TPO MADE THE ADJUSTMENT OF INTERNATIONAL TRA NSACTIONS ENTERED IN THE ASSOCIATED ENTERPRISES (AE) IN RESPE CT OF PROVISIONS OF INFORMATION TECHNOLOGY (ITES). 4. THE TAXPAYER IN ORDER TO BENCHMARK ITS INTERNATI ONAL TRANSACTIONS QUA ITES HAS CHOSEN 20 COMPARABLES OUT OF WHICH THE TPO HAS PROPOSED TO SELECT 10 COMPARABLES BY TREATI NG 3 MORE COMPARABLES HAVING AVERAGE OF 68.69%. THE LD. TPO AFTER DISPOSING OF THE OBJECTIONS RAISED BY THE TAXPAYER QUA THE PROPOSED COMPARABLES TO BE TAKEN FOR BENCHMARKING THE INTERN ATIONAL TRANSACTIONS FINALLY SELECTED 5 COMPARABLES HAVING AVERAGE OP/OC OF 38.03% AND ACCORDINGLY COMPUTED THE ARMS LENGTH PRICE (ALP) OF INTERNATIONAL TRANSACTION QUA PROVISIONS O F ITES AS UNDER:- S.NO. COMPARABLES OP/OC (%) 1. ACCENTIA TECHNOLOGIES LTD. 52.52 2. COSMIC GLOBAL LTD. 50.70 3. CROSSDOMAIN SOLUTION PVT. LTD. 25.63 4. INFOSYS BPO 24.28 5. CORAL HUB 37.03 AVERAGE 38.03 5. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP BY WAY OF RAISING OBJECTIONS AND THE LD. DRP HAS DIRECTED TO ELIMINATE ONE COMPARABLE, NAMELY, CORAL HUB LIMITED FROM THE FINA L SET OF COMPARABLES HAVING AVERAGE MEAN OF 36.17% AS AGAINS T TAXPAYERS ITA NO.1829/DEL/2014 7 NET COST + MARGIN (NCPM) OF 15%. IN COMPLIANCE TO THE DIRECTIONS ISSUED BY THE LD. DRP, AO MADE ADJUSTMENT OF RS.49, 10,761/- ON ACCOUNT OF ALP OF INTERNATIONAL TRANSACTION QUA ITE S. FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIB UNAL BY WAY OF FILING THE PRESENT APPEAL. 6. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUND NO.1 7. GROUND NO.1 IS GENERAL IN NATURE AND DOES NOT RE QUIRE ANY ADJUDICATION. GROUND NO.2.1 8. GROUND NO.2.1 IS NOT PRESSED, HENCE DISMISSED AS NOT PRESSED. GROUNDS NO.2.2, 2.3, 2.4, 2.5 & 2.6 9. UNDISPUTEDLY, TRANSACTIONAL NET MARGIN METHOD (T NMM) AND NET COST PLUS MARGIN (NCPM) AS PROFIT LEVEL IND ICATOR (PLI) AS MOST APPROPRIATE METHOD ADOPTED BY THE TAXPAYER FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION PERTAINI NG TO ITES HAS ITA NO.1829/DEL/2014 8 BEEN ACCEPTED BY THE TPO/DRP/AO. FUNCTIONAL PROFIL E OF THE TAXPAYER IS ALSO NOT IN DISPUTE. OUT OF 6 COMPARAB LES CHOSEN BY THE TPO, 1 COMPARABLE CORAL HUB LIMITED HAS BEEN ELIM INATED BY THE LD. DRP AND IN COMPLIANCE THERETO, THE AO RECOM PUTED THE ALP IN RESPECT OF INTERNATIONAL TRANSACTIONS QUA PR OVISION OF ITES AT RS.3,59,05,478/- (RS.3,59,05,478/- MINUS RS.3,09 ,94,717/- = ALP DETERMINED BY THE ASSESSEE RS.49,10,761/-). 10. THE LD. AR FOR THE TAXPAYER TO CUT SHORT HIS AR GUMENTS SOUGHT TO EXCLUDE 4 COMPARABLES FROM THE FINAL SET OF COMPARABLES CHOSEN BY THE TPO/DRP FOR BENCHMARKING INTERNATIONA L TRANSACTION QUA ITES VIZ. ACCENTIA TECHNOLOGIES LTD ., COSMIC GLOBAL LIMITED, CROSSDOMAIN LIMITED AND INFOSYS BPO LIMITED. 11. UNDISPUTEDLY, THE TAXPAYER IS A LOW RISK CAPTIV E ITES PROVIDER TO ITS AE AND ITS FUNCTIONAL PROFILE OF TH E TAXPAYER IS NOT DISPUTED BY THE REVENUE AS IS EVIDENT FROM THE ORDE R PASSED BY THE LD. TPO AS WELL AS DRP. THE TAXPAYER CLAIMED TO HA VE REMUNERATED AT COST + MARK-UP OF 17.55% AS AGAINST MARGIN OF COMPARABLES COMPUTED BY THE TPO/DRP AT 36.17% FOR P ROVISION OF ITES. IT IS ALSO NOT IN DISPUTE THAT FUNCTIONAL PROFILE OF THE TAXPAYER HAS NOT UNDERGONE ANY CHANGE DURING THE YE AR UNDER ASSESSMENT. ITA NO.1829/DEL/2014 9 12. HOWEVER, THE LD. DR CONTENDED THAT THE TAXPAYER IS NOT A LOW END SERVICE PROVIDER AS ITS MAJOR CLIENTS ARE BSNL, MTNL, ETC. AND DREW OUR ATTENTION TOWARDS PAGE153 VOL.I OF THE PAPER BOOK. IN PARA 8(A) OF FORM NO.3CD, AVAILABLE AT PAGE 153 OF THE PAPER BOOK, SHOWS THAT THE TAXPAYER IS ENGAGED INTER ALIA IN THE BUSINESS OF DEVELOPMENT AND EXPORT OF TELECOMMUNICATION SOFT WARE, SERVICES AND MARKETING OF TELECOM RELATED EQUIPMENT AND PLANNING, ENGINEERING, SUPPLY, INSTALLATION, COMMISSIONING, T ESTING, OPERATION AND MAINTENANCE OF TELECOMMUNICATION TURNKEY PROJEC TS. FURTHER, THE TAXPAYER ALSO DEALS IN SUPPLY OF ADSL CPES. LD . DR FOR THE REVENUE FURTHER DREW OUR ATTENTION TOWARDS AGREEMEN T BETWEEN THE TAXPAYER AND UT STARCOM INC. US WHEREIN TAXPAYE R IS SHOWN TO HAVE SET UP AN ESCALATION CENTRE IN INDIA FOR REN DERING IT ENABLED SERVICES IN CONNECTION WITH TELECOMMUNICATI ON NETWORK AND PROVIDING REMOTE MAINTENANCE SERVICES. LD. DR ALSO DREW OUR ATTENTION TOWARDS PARA 2.3 OF LD. DRP WHEREIN THE TAXPAYER IS SHOWN INTO THE BUSINESS OF SOFTWARE DEVELOPMENT SER VICES AND IT ENABLED CUSTOMER SUPPORT SERVICES TO UTS USS CUSTO MER IN ASIA- PACIFIC REGION. LD. DR FURTHER CONTENDED THAT THE TAXPAYERS ESCALATION CENTRE IS NOT MERELY A CALL CENTRE, IT I S RATHER RESOLVING THE PROBLEMS OF THE CUSTOMERS NETWORK AND IT IS NOT A ROUTINE BPO. ITA NO.1829/DEL/2014 10 13. HOWEVER, THE LD. DR HAS MERELY RELIED UPON PREA MBLE OF THE AGREEMENT SO AS TO DIFFERENTIATE THE FUNCTIONAL PRO FILE OF THE TAXPAYER TO TREAT IT AS HIGH END SERVICE PROVIDER. BUT WHEN WE EXAMINE PARA 4.3.17 OF TRANSFER PRICING DOCUMENT, A VAILABLE AT PAGE 99 OF THE PAPER BOOK VOL.I, IT IS CATEGORICALL Y MENTIONED THAT, AS AND WHEN CUSTOMERS OF US ENCOUNTER ANY DIFFICUL TY WITH THE OPERATION OF THEIR UTS NETWORK, THEY CONTACT WITH E SCALATION CENTRE FOR REPAIR/MAINTENANCE/TROUBLE SHOOTING. IN THE ESCALATION CENTRE, UTS INDIA BRANCH PERSONNEL OPEN A TROUBLE T ICKET, ALLOCATE ENGINEERS, AND USE SIMULATION TECHNIQUES (I.E. REPL ICATE THE PROBLEMS FACED BY THE CUSTOMERS USING THE EQUIPMENT AT THE ESCALATION CENTRE) TO TRY AND RESOLVE THE PROBLEM. UTS INDIA BRANCH PERSONNEL THEN GUIDE THE CUSTOMERS STEP-BY-S TEP TO RESOLVE THE PROBLEM ON THEIR (CUSTOMERS) NETWORK. 14. FURTHERMORE PARA 4.3.18 OF TRANSFER PRICING DOC UMENT GOES TO PROVE THAT ESCALATION CENTRE HAS A TEAM OF APPRO XIMATELY TEN PEOPLE, COMPRISING MAINLY POSTGRADUATES/ENGINEERS A ND ITS ACTIVITIES ARE ESSENTIALLY IN THE NATURE OF IT ENAB LED BACK OFFICE SUPPORT SERVICES. CUSTOMER PROBLEMS ARE MOSTLY RES OLVED OFF-SITE AND IN CASE THE PROBLEM IS NOT RESOLVED, IT ESCALAT ES THE PROBLEM TO THE UTS OFFICE IN THE REGION. SO, MERELY BY RELYIN G UPON THE PREAMBLE, WE CANNOT CALL THE TAXPAYER PER SE HIGH E ND SERVICE ITA NO.1829/DEL/2014 11 PROVIDER. MOREOVER, LD. TPO/ DRP HAVE NEVER CHALLE NGED THE PROFILE OF THE TAXPAYER AND THE ENTIRE AGREEMENT AL ONG WITH TPO DOCUMENTATION HAS TO BE READ IN ENTIRETY. SO, IN T HESE CIRCUMSTANCES, THE CONTENTIONS RAISED BY THE LD. DR ARE NOT SUSTAINABLE AND WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE IS A LOW END RISK FREE CAPTIVE ITES PROVIDER TO ITS AE. MOREOVER FUNCTIONAL PROFILE OF THE TAXPAYER HAS BEEN ACCEPTE D BY THE REVENUE IN THE PRECEDING ASSESSMENT YEARS AND DURIN G THE YEAR UNDER ASSESSMENT, THERE IS NO CHANGE IN ITS BUSINES S MODEL AS THE TAXPAYER IS STILL WORKING FOR ITS AE ON THE BASIS O F ITS AGREEMENT DATED 01.01.2004, AVAILABLE AT PAGE 225 OF THE PAPE R BOOK. 15. NOW, WE WILL EXAMINE COMPARABLES SOUGHT TO BE E XCLUDED BY THE TAXPAYER FROM FINAL SET OF COMPARABLES FOR B ENCHMARKING THE INTERNATIONAL TRANSACTIONS ONE BY ONE. ACCENTIA TECHNOLOGIES LTD. (ACCENTIA) 16. THE TAXPAYER SOUGHT THE EXCLUSION OF ACCENTIA O N THE GROUNDS INTER ALIA THAT THERE WAS EXTRA ORDINARY EV ENTS WHICH HAVE IMPACTED ITS PLI; THAT THERE IS FUNCTIONAL DISSIMIL ARITY IN THE ACCENTIA VIS--VIS THE TAXPAYER AS IT IS INTO HEALT H CARE RECEIVABLES MANAGEMENT SERVICES. HOWEVER, LD. TPO/DRP BRUSHED ASIDE THE OBJECTIONS RAISED BY THE TAXPAYER BY OBSERVING THAT THE ACQUISITION ITA NO.1829/DEL/2014 12 BY ACCENTIA IS SITUATED IN USA AND HAS NO BEARING O N ITS BUSINESS IN INDIA AND HAS ALSO NOT IMPACTED THE REVENUE IN T HE CURRENT FINANCIAL YEAR. 17. WHEN WE EXAMINE THE ANNUAL REPORT, AVAILABLE AT PAGES 1 TO 67 OF THE PAPER BOOK, HIGHLIGHTS OF THE ACHIEVEMENT OF THE ACCENTIA IN THE YEAR 2008-09 ARE GIVEN AS UNDER :- OPENED A PRODUCTION CENTRE IN KOLKATA; OPENED A PRODUCTION CENTRE IN CHANDIGARH; CONSOLIDATED THE OPERATIONS OF THE EXISTING THREE PRODUCTION UNITS IN HYDERABAD, AND ADDED ON MORE PRODUCTION CENTRE IN THIS CITY; CONSOLIDATED THE OPERATIONS OF GSR PHYSICIANS BILLING SERVICE, SPECIALIZED IN BILLING AND COLLECT IONS, BASED IN FLORIDA, USA; CONSOLIDATED THE OPERATIONS OF GSR SYSTEMS, A SOFTWARE COMPANY SPECIALIZING IN HRCM, BASED IN FLORIDA, USA; COMPLETED THE ACQUISITION OF OAK TECHNOLOGIES INC., USA AND HAS RAPIDLY INCREASED ITS CUSTOMER BASE FRO M NEW JERSEY AND NEIGHBOURING AREAS. HIGH GROWTH POTENTIAL SINCE WE ARE NOW OFFERING MEDICAL CODING AND BILLING SERVICES AS WELL; CONSOLIDATED THE OPERATIONS OF DENMED INC., THE ACQUIRED MEDICAL TRANSCRIPTION COMPANY BASED IN SALEM, OREGON, USA, SERVING THE PORTLAND AREA; STREAMLINED THE PRODUCTION OPERATIONS AT THE NEW FACILITY AT THE TECHNOPARK CAMPUS, TRIVANDRUM, INCLUDING THE BILLING OPERATIONS; STARTED INITIAL WORK FOR SETTING UP OF AN IT PARK A T SEZ, VISAKHAPATNAM, WHERE THE COMPANY OWNS LAND. ITA NO.1829/DEL/2014 13 18. FURTHERMORE, AT PAGE 32 OF THE ANNUAL REPORT, P ERFORMANCE OF OAK TECHNOLOGIES INC. IS HIGHLIGHTED AS UNDER :- DURING THE CURRENT YEAR THE COMPANY COMPLETED THE ACQUISITION OF 96% OF M/S OAK TECHNOLOGIES INC., A HEALTHCARE BACK OFFICE PROCESSING COMPANY ENGAGED IN MEDICAL BILLING, CODING AND TRANSCRIPTION ACTIVI TIES AND HAVING A GLOBAL WORK FORCE OF OVER THOUSAND EMPLOYEES IN INDIA, PHILIPPINES AND USA. IN THE FINANCIAL YEAR 2008, OAK TECHNOLOGIES INC. ACHIEVED A TURNOVER OF 10.3 MILLION USD, OAK TECHNOLOGIES IS HAVING ITS HEAD QUARTERS IN NEW JERSEY. 19. COMPARABILITY OF THE ACCENTIA HAS BEEN EXAMINED BY THE COORDINATE BENCH OF THE TRIBUNAL IN CASE OF XCHANGING TECHNOLOGY VS. DCIT IN ITA NO.1897/DEL/2014 ORDER D ATED 24.04.2015 , COPY AVAILABLE AT PAGES 20 TO 30 OF THE COMPENDIU M OF CASE LAWS, WITH ACCENTIA WHICH WAS ALSO PROVIDING T O ITS AE INFORMATION TECHNOLOGY ENABLED SERVICES AND HAS DIR ECTED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES BY RETUR NING FOLLOWING FINDINGS :- 9.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. WE HAVE ALSO GONE THROUGH THE ANNUAL REPORT OF THIS COMPANY FOR THE Y EAR IN QUESTION, WHICH HAS BEEN PLACED IN THE PAPER BOO K. IT CAN BE NOTICED FROM PAGE 31 OF THE ANNUAL REPORT THAT DURING THE YEAR UNDER CONSIDERATION THIS COMPANY COMPLETED THE ACQUISITION OF 96% OF M/S OAK TECHNOLOGIES INC., A HEALTHCARE BACK-OFFICE PROCESS ING COMPANY ENGAGED IN MEDICAL BILLING, CODING AND TRANSCRIPTION ACTIVITIES AND HAVING SUBSTANTIAL GLO BAL WORK FORCE. THE MUMBAI BENCH OF THE TRIBUNAL IN PETRO ARALDITE (P) LTD. VS. DCIT (2013) 154 TTJ ITA NO.1829/DEL/2014 14 (MUM) 176, HAS HELD THAT A COMPANY CANNOT BE CONSIDERED AS COMPARABLE BECAUSE OF EXCEPTIONAL FINANCIAL RESULTS DUE TO MERGERS/DEMERGERS. SIMILA R VIEW HAS BEEN TAKEN BY THE DELHI BENCH OF THE TRIBU NAL IN SEVERAL CASES INCLUDING CIENA INDIA PVT. LTD. VS . DCIT (ITA NO.3324/DEL/2013) VIDE ITS ORDER DATED 23.4.2015. IN VIEW OF THE FACT THAT THERE WAS MERG ER OF SOME ENTITY WITH ACCENTIA TECHNOLOGIES LTD., WE HOL D THAT THIS COMPANY CANNOT BE CONSIDERED AS COMPARABL E. ACCORDINGLY, THE SAME IS DIRECTED TO BE EXCLUDED FR OM THE FINAL LIST OF COMPARABLES. 20. ACCENTIA HAS ALSO BEEN ORDERED TO BE EXCLUDED F ROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING INTERNATIONAL T RANSACTIONS IN CASE OF AMERIPRISE INDIA PVT. LTD. VS. DCIT IN ITA NO.7014/DEL/2014 ORDER DATED 19.01.2016 AND THE SAID ORDER HAS ALREADY BEEN UPHELD BY THE HONBLE JURISDICTIONAL H IGH COURT IN ITA NO.461/2016 DATED 19.10.2016 BY MAKING FOLLOWIN G OBSERVATIONS :- THE ASSESSEE REPORTED INTERNATIONAL TRANSACTIONS FOR THE RELEVANT YEAR, WITH ITS AE. IN ITS TRANSFER PRICING REPORT, IT INCLUDED CERTAIN DETAILS AND DATA OF CER TAIN COMPARABLES. THE TPO AND THEREAFTER THE DRP INCLUDED CERTAIN OTHER COMPARABLES; THE ASSESSEES GRIEVANCE WITH RESPECT TO THE INCLUSION OF THE THRE E COMPARABLES WAS ACCEPTED IN THE APPEAL BY THE IMPUGNED ORDER. THE COMPARABLES SO EXCLUDED WERE M/S ACCENTIA TECHNOLOGIES, IGATE GLOBAL CONSULTANTS LTD AND INFOSYS BPO. THE EXCLUSION WAS ON THE GROUN D THAT IN RESPECT OF EACH COMPARABLE, CERTAIN EXTRAORDINARY EVENTS HAD OCCURRED DURING THE PREVIO US PERIODS WHICH DISTORTED THE PROFITABILITY THEREBY INCREASING THE MARGIN. ITA NO.1829/DEL/2014 15 21. EVEN FUNCTIONAL BUSINESS MODEL OF ACCENTIA VIS- -VIS THE TAXPAYER IS DISSIMILAR AS THE ACCENTIA IS ONE OF TH E VERY FEW COMPANIES THAT HAVE EXPERTISE IN ALL THE AREAS OF T RANSCRIPTION, CODING, BILLING AND COLLECTIONS. IT HAS OVER A DEC ADE OF EXPERIENCE IN THIS FIELD, AND IS THE ONLY COMPANY IN THIS SEGM ENT LISTED IN THE BOMBAY STOCK EXCHANGE. IT HAS OFFSHORE DEVELOPMENT CENTERS (ODCS) IN DIFFERENT CITIES OF THE COUNTRY AND HAS O VER 3000 TRAINED PROFESSIONALS WORKING ROUND THE CLOCK, ALL 365 DAYS OF THE YEARS. FURTHERMORE, ACCENTIA IS A GIANT COMPANY HAVING 300 0 TRAINED PROFESSIONALS AS AGAINST 12 EMPLOYEES WORKING WITH THE TAXPAYER. 22. SO, IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, W E HEREBY DIRECT TO EXCLUDE ACCENTIA FROM THE FINAL SET OF CO MPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS QUA ITE S. COSMIC GLOBAL LIMITED (COSMIC) 23. THE TAXPAYER SOUGHT TO EXCLUDE COSMIC FROM THE FINAL SET OF COMPARABLES ON GROUND OF DIFFERENT BUSINESS MODEL, ABNORMAL PROFIT AND HAVE BEEN PROVIDING OTHER SERVICES LIKE MEDICAL TRANSCRIPTIONS AND ITS BPO SERVICES IS VERY INSIGNI FICANT I.E. 5.11%. WHEN WE EXAMINE PROFIT & LOSS ACCOUNT, AVAILABLE AT PAGE 76 OF THE ANNUAL REPORT, COSMIC HAS PAID TRANSLATION CHAR GES OF RS.3,00,25,326/- AND BPO SERVICES IS VERY INSIGNIFI CANT TO THE TUNE ITA NO.1829/DEL/2014 16 OF 5.11%. THE TAXPAYER OUTSOURCED SIGNIFICANT PORT ION OF ITS SERVICES I.E. TRANSLATION SERVICES AS IS EVIDENT FO RM PROFIT & LOSS ACCOUNT DISCUSSED ABOVE. 24. NOT ONLY THIS, COSMIC IS HAVING VOLATILE PROFIT S OVER THE YEARS WHICH IS TABULATED AS UNDER :- FY 2006 - 07 23.40% FY 2007 - 08 24.30% FY 2008 - 09 48.20% FY 2009 - 10 (RELEVANT FY) 18.28% FY 2010 - 11 8.06% 25. HONBLE HIGH COURT OF DELHI IN CASE OF RAMPGREEN SOLUTIONS PVT. LTD. VS. CIT IN ITA 102/2015 ORDER D ATED 10.08.2015 AFFIRMED THE DECISION RENDERED BY THE TRIBUNAL EXCLUDING THE VISHAL ON THE GROUND THAT VISHALS EX PENDITURE ON EMPLOYMENT COST DURING THE RELEVANT PERIOD VIS--VI S TESTED PARTY APPARENTLY FOR THE REASON THAT MOST OF ITS WORK WAS OUTSOURCED TO OTHER VENDORS VIZ. SERVICE PROVIDERS. SO, IN THE I NSTANT CASE ALSO, SUBSTANTIAL WORK HAS BEEN OUTSOURCED BY THE COSMIC WHICH MAKES IT UNFIT AS COMPARABLE VIS--VIS ASSESSEE COMPANY. 26. FURTHERMORE IN CASE CITED AS THE PR. CIT VS. XCHANGING TECHNOLOGY SERVICES INDIA P. LTD. IN ITA 813/2015 O RDER DATED 20.10.2015 , HONBLE HIGH COURT UPHELD THE FINDINGS RETURNED B Y ITA NO.1829/DEL/2014 17 COORDINATE BENCH OF THE TRIBUNAL TO EXCLUDE COSMIC FROM THE FINAL SET OF COMPARABLES ON THE GROUND THAT IT HAS OUTSOU RCED ITS MAJOR ACTIVITIES WHEREAS THE TAXPAYER WAS DOING THE BUSIN ESS IN-HOUSE. 27. FURTHERMORE THE TRIBUNAL IN CASE OF SCHLUMBERGER GLOBAL SUPPORT CENTRE LTD. VS. DDIT (INTL.TAXN.-II), PUNE IN ITA NO.86/PN/2013 ORDER DATED 30.10.2015 ORDERED TO EXCLUDE COSMIC FOR COMPARABILITY WITH SCHLUMBERGER GLOBAL SUPPORT CENTRE LIMITED, AN ITES SERVICE PROVIDER, ON GROUND OF VOL ATILE PROFIT BY DETERMINING FOLLOWING FINDINGS :- 50. IN VIEW OF THE ABOVE DECISIONS AND CONSIDERIN G THE FACT THAT COSMIC GLOBAL LTD. HAD ABNORMAL PROFI T IN THE F.Y. 2008-09 AS COMPARED TO 2 PRECEDING AND 2 SUCCEEDING YEARS WE ARE OF THE CONSIDERED OPINION T HAT COSMIC GLOBAL LTD. CANNOT BE CONSIDERED AS A COMPARABLE AND HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 51. EVEN OTHERWISE ALSO, WE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT COSMIC GLOBAL LTD. AND THE ASSESSEE ARE IN OPPOSITE SIDES OF THE VALUE CHAIN. FROM THE DETAILS FURNISH ED BY THE ASSESSEE, WE FIND THE EMPLOYEE COST OF COSMIC GLOBAL LTD. IS RS.1,57,11,463/- ON A TURNOVER OF RS.7,37,02,584/- AND THUS THE EMPLOYEE COST TO TURN OVER RATIO COMES TO 21.32%. IN THE CASE OF THE ASSESSEE AS AGAINST THE TOTAL EMPLOYEE COST OF RS.5,86,15,132/- THE TURNOVER IS RS.11,02,81,913/- AND THE RATIO OF EMPL OYEE COST TO TURNOVER COMES TO 53.15%. FURTHER, COSMIC GLOBAL LTD. HAS PAID TRANSLATION CHARGES OF RS.3,00,25,306/- TO THIRD PARTIES WHICH IS TO THE T UNE OF 40.74% OF ITS TURNOVER WHICH INDICATES OUTSOURCING OF WORK. THEREFORE, WE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT FUNCTIONALLY COSMIC GLOBAL LTD. IS INCOMPARABLE TO THE ASSESSEE. ITA NO.1829/DEL/2014 18 THE VARIOUS DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE TO THE PROPOSITION THAT COMPANIES WITH LOW EMPLOYEE COST/SALES RATIO OUTSOURCING SUBSTANTIAL PORTION OF WORK HAS TO BE REJECTED. THE DELHI BENC H OF THE TRIBUNAL IN THE CASE OF XCHANGING TECHNOLOGY SERVICES INDIA PVT. LTD. (SUPRA) AT PARA 8 OF THE O RDER HAS OBSERVED AS UNDER : 8. THE TPO CONSIDERED COSMIC GLOBAL LTD. AS COMPARABLE WITH THE ASSESSEE COMPANY ON ENTITY LEVEL. WE HAVE EXAMINED THE ANNUAL REPORT OF THIS COMPANY FOR THE YEAR IN QUESTION, WHICH IS AVAILABLE IN THE PAPER ITA NO.1897/DEL/2014 BOOK. IT CAN BE NOTICED THAT ITS REVENUE FROM OPERATIONS STANDS AT RS.7,37,02,584/-, WHICH CONSISTS OF THREE AMOUNTS, NAMELY, MEDICAL TRANSCRIPTION AND CONSULTANCY SERVICE CHARGES AMOUNTING TO RS.9,90,737/-; TRANSLATION CHARGES AMOUNTING TO RS.6,99,35,756/-; AND ACCOUNTS BPO CHARGES AMOUNTING TO RS.27,76,090/-. THIS COMPANY OUTSOURCED THE ACTIVITY OF TRANSLATION. 57.31% OF TOTAL OPERATING EXPENSES INCURRED BY THIS COMPANY ARE OUTSOURCING CHARGES. ADMITTEDLY, OUTSOURCING IS CONFINED TO TRANSLATION, FOR WHICH IT PAID CHARGES AT RS.3.00 CRORE. IN OUR CONSIDERED OPINION, THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE WITH THE ASSESSEE COMPANY FOR THE REASON OF ITS MAJOR ACTIVITY, NAMELY, TRANSLATION, WITH REVENUE OF RS.6.99 CRORE (OUT OF TOTAL REVENUE OF RS.7.35 CRORE), BEING DISSIMILAR WITH THE ASSESSEE'S ACTIVITIES UNDER THIS SEGMENT. THE SECOND REASON FOR CONSIDERING THIS COMPANY AS INCOMPARABLE ON ENTITY LEVEL IS THE BUSINESS MODEL ADOPTED BY IT. I T CAN BE SEEN THAT THIS COMPANY HAS OUTSOURCED MAJOR ACTIVITIES IN COMPARISON WITH THE ASSESSEE DOING ITS BUSINESS IN- HOUSE. IT GOES WITHOUT SAYING THAT THESE TWO BUSINESS MODELS, NAMELY, OUTSOURCING SERVICES AND PROVIDING IN-HOUSE SERVICES, CANNOT BE ITA NO.1897/DEL/2014 COMPARED WITH EACH OTHER BECAUSE OF THEIR INHERENT DIFFERENCES. SINCE THE TPO HAS CONSIDERED THIS COMPANY AS COMPARABLE ON ENTITY ITA NO.1829/DEL/2014 19 LEVEL, WE HOLD THAT THE SAME CANNOT BE SO TREATED. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE CASE OF UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. VS. ACIT (ITA NO.6312/DEL/2012) VIDE ITS ORDER DATED 28.8.2014. RESPECTFULLY FOLLOWING THE PRECEDENT, WE DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. ACCENTIA TECHNOLOGIES LTD. 52. FOLLOWING THE DECISION CITED (SUPRA), WE HOLD T HAT EVEN ON THIS ISSUE ALSO COSMIC GLOBAL LTD. CANNOT B E CONSIDERED AS COMPARABLE. WE ACCORDINGLY DIRECT TH E AO TO EXCLUDE COSMIC GLOBAL LTD. FROM THE LIST OF COMPARABLES. GROUND OF APPEAL NO.2 IS ACCORDINGLY ALLOWED. 28. SO, IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, W E ARE OF THE CONSIDERED VIEW THAT COSMIC IS NOT A SUITABLE COMPA RABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF THE TAXPAYER QUA ITES. CROSSDOMAIN LIMITED (CROSSDOMAIN) 29. THE TAXPAYER SOUGHT TO EXCLUDE CROSSDOMAIN ON T WO GROUNDS : (I) THAT IT IS FUNCTIONALLY DISSIMILAR; A ND (II) THAT ITS COMPLETE FINANCIALS ARE NOT AVAILABLE AND RELIED UP ON THE DECISION RENDERED BY HONBLE HIGH COURT AS WELL AS COORDINAT E BENCH OF THE TRIBUNAL CITED AS RAMPGREEN SOLUTIONS PVT. LTD. (SUPRA), VERTEX CUSTOMER SERVICES VS. DCIT ITA NO.572/DEL/2014, MAR KET TOOLS VS. DCIT (2013) 40 TAXMANN.COM 390 AND OKS SPAN T ECH VS. ITO ITA NO.481/DEL/2014 . ITA NO.1829/DEL/2014 20 30. HOWEVER, LD. TPO ACCEPTED THIS COMPANY AS ITES COMPANY OF THE LD. DRP WITHOUT DECIDING THE MERITS OF THE O BJECTIONS RAISED BY THE TAXPAYER REJECTED THE OBJECTIONS RAISED BY T HE TAXPAYER AND ACCEPTED THE LOGIC OF THE TPO AND CONSEQUENTLY PROC EEDED TO RETAIN THIS COMPANY AS COMPARABLE. 31. CROSSDOMAIN COME UP FOR SCRUTINY FOR ITS COMPAR ABILITY WITH VERTEX CUSTOMER SERVICES INDIA PVT. LTD. (SUPRA), A LOW END ITES BPO BEFORE COORDINATE BENCH OF THE TRIBUNAL, WHICH HAS ORDERED TO EXCLUDE THE SAME FROM THE LIST OF COMPARABLE BY RETURNING FOLLOWING FINDINGS :- 20. THIS COMPARABLE HAS BEEN INCLUDED BY THE TPO HAVING 25.63% MARGIN AND REJECTED THE CONTENTION OF THE ASSESSEE THAT IT IS ENGAGED IN HIGH END SERVICE S IN THE AREA OF PAYROLL MATER FILE EMPLOYEE QUERY MANAGEMENT AND TAX CALCULATION. THE SAME CONTENTION S REITERATED BEFORE US AND THESE TWO DECISION WERE CI TED BEFORE US:- A. GLOBAL E:BUSINESS OPERATIONS PVT. LTD. VS. DCIT (IT(TP)A NO.1678/BANG/2012 B. FLEXTRONICS TECHNOLOGIES (INDIA ) PVT. LTD. VS. DCIT ITA 1559/BANG/2012 21. THE LD. DR RELIED ON THE ORDERS OF THE TPO AND DRP. 22. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND ALSO PERUSED SCHEDULE NO.13 OF ANNU AL REPORT FOR FY 2008-09. WE HAVE ALSO PERUSED THE DECISION OF COORDINATE BENCH CITED BEFORE US WHEREI N THE FUNCTIONAL PROFILE OF THIS COMPARABLE IS DISCUS SED. IN GLOBAL E: BUSINESS OPERATIONS PVT. LTD. VS. DCIT ITA NO.1829/DEL/2014 21 (IT (TP) A NO.1678/BANG/2012. THE FUNCTIONAL PROFIL E OF THE COMPANY IS AS UNDER:- (4) CROSSDOMAIN SOLUTIONS LTD. 24. THIS COMPANY WAS CONSIDERED AS A COMPARABLE AND LISTED AT SL.NO.8 OF THE COMPARABLES CHOSEN BY THE TPO. IT IS THE STAND OF THE ASSESSEE THAT THIS COMP ANY IS NOT FUNCTIONALLY COMPARABLE. AS OBSERVED IN THE CAS E OF CORAL HUBS LTD., THE TPO REJECTED THE PLEA OF THE ASSESSEE ON THE BASIS OF A NONEXISTENT TP ORDER PAS SED FOR THE A.Y. 2007-08. IT IS SEEN THAT THE BUSINESS PROFILE OF THIS COMPANY IS RE-ENGINEERED PAYROLL SERVICE. T HIS COMPANY IS ALSO ENGAGED IN THE DEVELOPMENT OF INFORMATION SYSTEMS. THESE ACTIVITIES ARE TOTALLY DIFFERENT FROM THE ACTIVITIES OF THE ASSESSEE WHICH PERFORM VERY LIMITED/LOW END FUNCTIONS BACK OFFICE SERVICES. THE REVIEW AND BUSINESS FUNCTIONS OF CROS S DOMAIN ARE AS FOLLOWS:- WITH A DECADE OF EXPERIENCE IN PAYROLL OUTSOURCING, CROSSDOMAIN HAS CREATED A RE- ENGINEERED PAYROLL SERVICE EFFIPAY THAT PROCESSES AND DELIVERS ACCURATE PAYROLL TO CLIENTS WITH HEADCOUNT UP TO 1000 EMPLOYEES IN JUST 4 HOURS*. WITH EFFIPAY LITE AND EFFIPAY LITE PLUS, OUR BOUQUET OF SERVICES COVER END TO END PAYROLL, RETRIALS, REIMBURSEMENT, TAX PROOF VERIFICATIONS UPTO ISSUE OF FORM 16 FOR EMPLOYEES OF OUR CLIENTS ACROSS DIFFERENT INDUSTRY VERTICALS. OUR PROCESSES ARE HIGHLY SCALABLE AND PROVIDE END TO END PAYROLL SOLUTIONS TO CLIENTS WITH HEADCOUNT RANGING FROM 5 TO 65,000. CROSS DOMAINS IT KNOWLEDGE AND DOMAIN COMPETENCE HAS PROVIDED THE EDGE TO DEVELOP INFORMATION SYSTEMS TO IMPLEMENT PROCESS INNOVATION AND CONTINUOUSLY INCREASE EFFICIENCY AND TURN-AROUND-TIME FOR BUSINESS CRITICAL PROCESSES. SOURCE: HTTP://WWW.CROSS-DOMAIN.COM AS CAN BE SEEN FROM THE ABOVE, THE BUSINESS OF CROSS DOMAIN RANGES FROM HIGH END KPO ITA NO.1829/DEL/2014 22 SERVICES, DEVELOPMENT OF PRODUCT SUITES AND ROUTINE LOW END ITES SERVICE. HOWEVER, THERE IS NO BIFURCATION AVAILABLE FOR SUCH VERTICALS OF SERVICES. THEREFORE THE ASSESSEE CONTENDS THAT CROSS DOMAIN CANNOT BE COMPARED TO A ROUTINE ITES SERVICE PROVIDER. 25. WE ARE OF THE VIEW THAT IN THE ABSENCE OF ANY REASONS GIVEN TO THE CONTRARY EITHER BY THE TPO OR THE DRP FOR REGARDING THIS COMPANY AS A COMPARABLE; THIS COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES, ACCEPTING THE PLEA OF THE ASSESSEE. WE HOLD ACCORDINGLY. 23. FURTHER HONOURABLE DELHI HIGH COURT HAS ALSO HELD IN RAMPGREEN SOLUTIONS PVT LTD V CIT IN 60 TAXMANN.COM 355 AS UNDER :- 25. WHILST VOICE CALL CENTER REPRESENTS THE LOWER-END OF ITES, KPO REPRESENTS SERVICES INVOLVING A HIGHER LEVEL OF SKILLS AND KNOWLEDGE. INDIA HAS VAST HUMAN RESOURCES AND A LARGE NUMBER OF HIGHLY-SKILLED TECHNICAL PROFESSIONALS. THE EXPRESSION 'KPO' INDICATES THE INVOLVEMENT OF DOMAIN KNOWLEDGE IN PROVIDING ITES. TYPICALLY, KPO INCLUDES INVOLVEMENT OF ADVANCE SKILLS; THE SERVICES PROVIDED MAY INCLUDE ANALYTICAL SERVICES, MARKET RESEARCH, LEGAL RESEARCH, ENGINEERING AND DESIGN SERVICES, INTELLECTUAL MANAGEMENT ETC. ON THE OTHER HAND, VOICE CALL CENTERS ARE NORMALLY INVOLVED IN CUSTOMER SUPPORT AND PROCESSING OF ROUTINE DATA. IN THE CASE OF MAERSK GLOBAL CENTERS (INDIA) (P.) LTD.(SUPRA) A SPECIAL BENCH OF THE TRIBUNAL HAD REFERRED TO A REPORT PREPARED BY NATIONAL SKILL DEVELOPMENT CORPORATION (NSDC) ON HUMAN RESOURCE AND SKILL REQUIREMENTS IN IT AND ITES SECTOR (2022) AND NOTED THAT THE KPO SECTOR HAS BEEN DESCRIBED AS 'A VALUE PLAY'. THE SAID REPORT ALSO INDICATES THAT KPO SERVICES ARE LIKELY TO SPAN ACTIVITIES SUCH AS 'PATENT ADVISORY, HIGH-END RESEARCH AND ANALYTICS, ONLINE MARKET RESEARCH AND LEGAL ADVISORY'. ITA NO.1829/DEL/2014 23 26. A KNOWLEDGE PROCESS IS UNDERSTOOD AS A HIGH VALUE ADDED PROCESS CHAIN WHEREIN THE PROCESSES ARE DEPENDENT ON ADVANCED SKILLS, DOMAIN KNOWLEDGE AND THE EXPERIENCE OF THE PERSONS CARRYING ON SUCH PROCESS. 24. THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF HONOURABLE DELHI HIGH COURT IN RAMPGREEN SOLUTIONS P LTD WHERE THE FUNCTIONAL PROFILE OF COMPANY IS VE RY HIGH END KPO SERVICES IT CANNOT BE COMPARED WITH TH E ASSESSEE AND HENCE WE DIRECT EXCLUSION OF THIS COMPARABLE. 32. HONBLE HIGH COURT OF DELHI IN RAMPGREEN SOLUTIONS PVT. LTD. (SUPRA) EXPLAINED THE FUNCTIONAL DISSIMILARITY BET WEEN BPO AND KPO AS UNDER :- 25. WHILST VOICE CALL CENTER REPRESENTS THE LOWER- END OF ITES, KPO REPRESENTS SERVICES INVOLVING A HI GHER LEVEL OF SKILLS AND KNOWLEDGE. INDIA HAS VAST HUMAN RESOURCES AND A LARGE NUMBER OF HIGHLY-SKILLED TECHNICAL PROFESSIONALS. THE EXPRESSION KPO INDICATES THE INVOLVEMENT OF DOMAIN KNOWLEDGE IN PROVIDING ITES. TYPICALLY, KPO INCLUDES INVOLVEMENT OF ADVANCE SKILLS; THE SERVICES PROVIDED MAY INCLUDE ANALYTICAL SERVICES, MARKET RESEARCH, LEGAL RESEARC H, ENGINEERING AND DESIGN SERVICES, INTELLECTUAL MANAGEMENT ETC. ON THE OTHER HAND, VOICE CALL CENTE RS ARE NORMALLY INVOLVED IN CUSTOMER SUPPORT AND PROCESSING OF ROUTINE DATA. IN THE CASE OF MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. V. ACIT(SUPRA) A SPECIAL BENCH OF THE TRIBUNAL HAD REFERRED TO A REP ORT PREPARED BY NATIONAL SKILL DEVELOPMENT CORPORATION (NSDC) ON HUMAN RESOURCE AND SKILL REQUIREMENTS IN IT AND ITES SECTOR (2022) AND NOTED THAT THE KPO SECTOR HAS BEEN DESCRIBED AS A VALUE PLAY. THE SA ID REPORT ALSO INDICATES THAT KPO SERVICES ARE LIKELY TO SPAN ACTIVITIES SUCH AS PATENT ADVISORY, HIGH-END RESEARCH AND ANALYTICS, ONLINE MARKET RESEARCH AND LEGAL ADVISORY. ITA NO.1829/DEL/2014 24 26. A KNOWLEDGE PROCESS IS UNDERSTOOD AS A HIGH VALUE ADDED PROCESS CHAIN WHEREIN THE PROCESSES ARE DEPENDENT ON ADVANCED SKILLS, DOMAIN KNOWLEDGE AND THE EXPERIENCE OF THE PERSONS CARRYING ON SUCH PROCESSES. 33. FROM THE PROFILE OF THE COMPANY AVAILABLE IN PU BLIC DOMAIN BROUGHT ON RECORD BY THE TAXPAYER AT PAGES 59 & 60 OF THE PAPER BOOK GOES TO PROVE THAT CROSSDOMAIN IS ONE OF THE L EADING KPO (KNOWLEDGE PROCESS OUTSOURCING) PROVIDERS, RENDERIN G A WIDE RANGE OF VALUE BASED QUALITY SERVICES IN THE AREA O F PAYROLL & HR, FINANCE AND ACCOUNTING, ADMINISTRATION AND TAX PROC ESSES, INSURANCE PROCESS FOR LEADING COMPANIES IN US, EURO PE AND INDIAN MARKET. FURTHERMORE IT IS CATEGORICALLY MENTIONED THAT CROSSDOMAIN IS AN INSURANCE KPO AND PAYROLL KPO HAV ING DECADE OF EXPERIENCE IN PAYROLL OUTSOURCING. CROSSDOMAIN HAS CREATED REENGINEERED PAYROLL SERVICE. IT ANALYZE SALARIES A ND RETRIALS AMOUNTING TO MORE THAN 75000 RECORD. 34. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT CROSSDOMAIN IS HIGH END KPO SE RVICES, DEVELOPMENT OF PRODUCT SUITS AND ROUTINE LOW END IT ES SERVICES AND ITS BIFURCATION AVAILABLE FOR SUCH VERTICALS OF SERVICES IS NOT AVAILABLE MAKES IT FUNCTIONALLY INCOMPARABLE WITH THE TAXPAYER WHICH IS INTO PROVIDING LOW END BPO SERVICES. MORE OVER, ITA NO.1829/DEL/2014 25 CROSSDOMAIN IS INTO REENGINEERING PAYROLL SERVICES, DEVELOPMENT OF INFORMATION SYSTEM AND THESE ACTIVITIES ARE ALSO DI FFERENT FROM THE ACTIVITIES PERFORMED BY THE TAXPAYER WHICH ARE VERY LIMITED LOW END FUNCTION. SO, CONSEQUENTLY WE ORDER TO EXCLUDE CROSSDOMAIN FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. INFOSYS BPO LIMITED (INFOSYS) 35. THE TAXPAYER SOUGHT EXCLUSION OF INFOSYS ON GRO UNDS INTER ALIA THAT IT IS FUNCTIONALLY DISSIMILAR; THAT IT HA S GONE INTO MERGER AND ACQUISITIONS; THAT IT IS A GIANT COMPANY HAVING EXCELLENT PROFILE OF ITS EMPLOYEES. 36. LD. DRP RETAINED INFOSYS AS COMPARABLE BY MEREL Y STATING THAT THE TPO HAS GIVEN SUFFICIENT REASONS TO ACCEPT INFOSYS AS A COMPARABLE COMPANY. 37. HOWEVER, FUNCTIONAL DISSIMILARITY OF INFOSYS WI TH THE TAXPAYER HAS ALREADY BEEN EXAMINED BY COORDINATE BE NCH OF THE TRIBUNAL IN CASE OF OMNIGLOBE INFORMATION TECHNOLOGIES (INDIA) PVT. LTD. IN ITA NO.1052/DEL/2014 ORDER DATED 07.09 .2016 AND DIRECTED TO EXCLUDE THIS COMPANY BY FOLLOWING THE D ECISION RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN CASE OF EQUANT SOLUTIONS INDIA PVT. LTD. VS. DCIT IN ITA ITA NO.1829/DEL/2014 26 NO.1202/DEL/2015 FOR AY 2010-11 BY RETURNING FOLLOWING FINDINGS:- 26. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH TH E PARTIES AND PERUSED THE MATERIAL AVAILABLE ON THE RECORD. AS REGARDS TO THE ISSUE RELATING TO EXCLUSI ON OF INFOSYS BPO LTD., TCS E-SERVE INTERNATIONAL LTD. AN D TCS E-SERVE LTD. IS CONCERNED, IT IS NOTICED THAT T HIS ISSUE HAS BEEN DECIDED BY THE ITAT DELHI BENCH I, NEW DELHI IN THE CASE OF EQUANT SOLUTIONS INDIA PVT . LTD. VS DCIT IN ITA NO. 1202/DEL/2015 FOR THE ASSESSMENT YEAR 2010-11 (SUPRA) AND THE RELEVANT FINDINGS HAVE BEEN GIVEN IN PARAS 22 TO 24 OF THE O RDER DATED 21.01.2016 WHICH READ AS UNDER: 22. INFOSYS BPO LIMITED A. THE ASSESSEE FURTHER OBJECTED TO INCLUSION OF INFOSYS BPO LTD AS COMPARABLE WHICH HAS A MARGIN AT 31.44%. BEFORE THE TPO ASSESSEE SUBMITTED THAT, THIS IS THE COMPANY, WHICH HAS VERY HIGH TURNOVER AND HAS HUGE BRAND VALUE. SUBMISSION OF THE ASSESSEE THAT HIGHER PROFITS IS BECAUSE OF HIGHLY ESTABLISHED BRAND IN THE MARKET PLACE. TPO REJECTED THE CONTENTION OF THE ASSESSEE HOLDING THAT THE ASSESSEE HAS FAILED TO ESTABLISH HOW THE BRAND HAS INFLUENCED INCREASED PROFITABILITY OF THE COMPARABLE. THE LD DRP ALSO REJECTED THE CONTENTION OF THE ASSESSEE. BEFORE US, THE ASSESSEE SUBMITTED THAT COMPARABLE IS ENGAGED IN HIGH-END INTEGRATED SERVICES IN IMPROVING THE COMPETITIVE POSITION OF THEIR CLIENTS AND MANAGE THEIR BUSINESS PROCESS AND PROVIDING VALUE ADDED SERVICES TO THEM. FURTHER, THE INFOSYS ALSO CARRYING HUGE BRAND VALUE AND THEREFORE THIS COMPARABLE SHOULD NOT BE TAKEN. B. LD DR RELIED ON THE ORDERS OF LOWER AUTHORITIES AND STATED THAT ALL THE REASONS HAVE BEEN CONSIDERED BY THE TPO AND DRP FOR INCLUSION OF THIS COMPARABLE. ITA NO.1829/DEL/2014 27 C. WE HAVE CONSIDERED THE RIVAL CONTENTION REGARDING EXCLUSION OF INFOSYS BPO LTD. IT IS ENGAGED IN HIGH AND INTEGRATED SERVICES AND THEREFORE IT IS FUNCTIONALLY DISSIMILAR. THE INFOSY S BRAND IS INDISPUTABLY IS A HUGE BRAND AND DEFINITELY, RESULT OF THAT BRAND GOES TO THIS COMPARABLE. THEREFORE, THE BRAND OF INFOSYS DEFINITELY RESULTS IN OPENING HIGHER PROFITS TO THI S COMPANY. IN VIEW OF THE FOLLOWING DECISIONS, THE SAME IS REQUIRED TO BE EXCLUDED AND HENCE IT IS ORDERED ACCORDINGLY. . 27. SO, RESPECTFULLY FOLLOWING THE AFORESAID REFER RED TO ORDER OF THE CO-ORDINATE BENCH, WE DIRECT THE AO/TPO TO EXCLUDE THE SAID COMPANIES I.E. M/S INFOS YS BPO, M/S TCS E-SERVE INTERNATIONAL LTD. AND M/S TCS E-SERVE LTD. FROM THE LIST OF THE COMPARABLES WHILE WORKING OUT THE OPERATING PROFIT/OPERATING COST RAT IO. 38. HONBLE HIGH COURT OF BOMBAY IN CASE CITED AS CIT VS. M/S. PENTAIR WATER INDIA PVT. LTD. IN TAX APPEAL NO.18 O F 2015 ORDER DATED 16.09.2015 ALSO ORDERED TO EXCLUDE THIS COMPANY OUT OF THE LIST OF COMPARABLES ON GROUND OF TURNOVER TO THE TU NE OF RS.649.56 CRORES AS AGAINST THE TESTED PARTY AT RS.11 CRORES WHICH IS MORE THAN 55 TIMES OF THE TAXPAYERS TURNOVER. 39. FURTHERMORE APPRAISAL OF THE ANNUAL REPORT OF I NFOSYS, AVAILABLE AT PAGES 106 TO 151 OF THE PAPER BOOK, GO ES TO PROVE THAT INFOSYS HAS UNDERGONE REORGANIZATION OF ITS SUBSIDI ARIES AS UNDER :- ITA NO.1829/DEL/2014 28 RE-ORGANISATION OF SUBSIDIARIES THE SHAREHOLDERS MAY BE AWARE THAT AS PART OF MAKIN G OUR COMPANY A TRULY GLOBAL ENTITY AND ALSO AS PART OF I NVESTMENT STRATEGY, OUR COMPANY CONCLUDED A SALE AND PURCHASE AGREEMENT WITH KONINKLIJKE PHILLIPS ELECTRONICS N.V (PHILLIPS ) BY MEANS OF WHICH OUR COMPANY MADE A 100% INVESTMENT IN THE SHA RE CAPITAL AMOUNTING RS.1 07.13 CRORE IN P -FINANCIAL SERVICES HOLDING BV, THE NETHERLANDS ENTITY (HOLDING COMPANY) WHICH IN TURN MADE AN INVESTMENT IN THREE ENTITIES SITUATED IN IN DIA (CHENNAI), POLAND (LODZ) AND THAILAND (BANGKOK) [OPERATING COM PANY]. DURING THE YEAR UNDER REVIEW, YOUR COMPANY HAS RE-O RGANIZED THE SUBSIDIARIES AS FOLLOWS: A. TRANSFER OF SHARES FROM P-FINANCIAL SERVICES HOL DING B.V. TO INFOSYS BPO LIMITED. B. LIQUIDATION OF P-FINANCIAL SERVICES HOLDING B. V . (DIRECT SUBSIDIARY OF INFOSYS BPO HOLDING 100% SHAREHOLDING IN EACH OF POLAND, THAILAND AND CHENNAI SUBSIDIARIES) C. MERGER OF PAN FINANCIAL SHARED SERVICES INDIA PR IVATE LIMITED WITH INFOSYS BPO LIMITED. THE LIQUIDATION PROCEEDING CONSISTING OF THE INVEST MENT OF INFOSYS BPO LIMITED HAS MADE IN P-FINANCIAL HOLDING SERVICES B.V. HAS BEEN OFF-SET WITH THE PROCEEDS THAT INFOSY S BPO LIMITED NEEDS TO PAY TO P-FINANCIAL HOLDING SERVICES B.V. F OR THE TRANSFER OF SHARES IT HAS MADE TO INFOSYS BPO LIMIT ED. A. TRANSFER OF SHARES FROM P-FINANCIAL SERVICES HO LDING B.V. TO INFOSYS BPO LIMITED INFOSYS BPO LIMITED ENTERED INTO SHARE PURCHASE AGR EEMENTS WITH P-FINANCIAL SERVICES HOLDING B.V. BY MEANS OF WHICH THE ENTIRE SHARES P-FINANCIAL SERVICES HOLDING B.V. HOL DS IN THE THREE SUBSIDIARIES (I.E) INFOSYS BPO (POLAND) SP.Z. O.O., INFOSYS BPO (THAILAND) LIMITED AND PAN FINANCIAL SHARED SER VICES INDIA PRIVATE LIMITED WERE TRANSFERRED TO INFOSYS B PO LIMITED ON DECEMBER 31, 2008. AS A RESULT OF THE SAID TRANS FER, THE SAID THREE SUBSIDIARIES WHICH WERE HITHERTO STEP-DOWN SU BSIDIARIES OF INFOSYS BPO LIMITED BECAME THE DIRECT SUBSIDIARIES OF INFOSYS BPO LIMITED. B. LIQUIDATION OF P-FINANCIAL SERVICES HOLDING B.V . P-FINANCIAL SERVICES HOLDING BV, A LIMITED LIABILIT Y COMPANY INCORPORATED UNDER THE DUTCH LAWS AND 100% WHOLLY O WNED SUBSIDIARY OF INFOSYS BPO LIMITED WAS LIQUIDATED IN ACCORDANCE ITA NO.1829/DEL/2014 29 WITH DUTCH LAWS WITH EFFECT FROM CLOSE OF BUSINESS HOURS OF DECEMBER 31, 2008. THE ASSETS AND LIABILITIES OF TH E COMPANY HAVE BEEN TRANSFERRED TO INFOSYS BPO LIMITED. C. MERGER OF PAN FINANCIAL SHARED SERVICES INDIA P RIVATE LIMITED WITH INFOSYS BPO LIMITED A SCHEME OF AMALGAMATION UNDER SECTION 391 AND 394 OF THE COMPANIES ACT, 1956 WAS FILED IN THE HIGH COURT OF MADRAS AND HIGH COURT OF KARNATAKA, BANGALORE FOR MERGING PAN FINANCIAL SHARED SERVICES INDIA PRIVATE LIMITED WIT H INFOSYS BPO LIMITED. BOTH THE COURTS HAVE APPROVED THE SCHE ME OF AMALGAMATION OF PAN FINANCIAL SHARED SERVICES INDIA PRIVATE LIMITED WITH INFOSYS BPO LIMITED WITH EFFECT FROM A PRIL 1, 2008 AND HENCE THE STANDALONE ACCOUNTS HAVE BEEN RE-STAT ED TO THE REFLECT THE ORDER OF THE HIGH COURTS. CONSEQUENT TO THE ABOVE RE-ORGANISATION, INFOSYS BP O LIMITED HAS THE FOLLOWING SUBSIDIARIES AS ON MARCH 31,2009 S.NO. NAME OF SUBSIDIARY COUNTRY OF INCORPORATION PERCENTAGE OF HOLDING 1. INFOSYS BPO S.R.O CZECH REPUBLIC 100% 2. INFOSYS BPO (POLAND) SP.Z.O.O. POLAND 100% 3. LNFOSYS BPO (THAILAND) LIMITED THAILAND 100% 40. SO, SUCH A LARGE SCALE OF REORGANIZATION OF SUB SIDIARIES CERTAINLY IMPACTED ITS PLI. EVEN OTHERWISE, ITS HU GE HIGHLY QUALIFIED WORK FORCE AS IS EVENT FROM PAGES 75 TO 7 8 OF THE PAPER BOOK GOES TO PROVE THAT THIS COMPANY IS HAVING NO C OMPARABILITY WITH THE TAXPAYER WHICH IS A LOW END ITES SERVICE P ROVIDER. 41. SO, IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, W E ORDER TO EXCLUDE INFOSYS FROM THE FINAL SET OF COMPARABLES F OR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. ITA NO.1829/DEL/2014 30 GROUND NO.3 42. GROUND NO.3 IS CONSEQUENTIAL IN NATURE. GROUND NO.4 43. GROUND NO.4 IS PREMATURE AND DOES NOT REQUIRE A NY ADJUDICATION. 44. RESULTANTLY, THE APPEAL FILED BY THE ASSESSEE I S PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 25 TH DAY OF OCTOBER, 2017. SD/- SD/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 25 TH DAY OF OCTOBER, 2017 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.