Hyundai Motors India Engineering Private Limited, Hyderabad V. The Income Tax Officer, Ward-2(2), Hyderabad

ITA 1850/HYD/2012

• Counselvise Citation: 185022514 RSA 2012
• Duration Of Justice: 1 year(s) 1 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 24-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Keywords: Related party transaction; Transfer pricing; International transaction; Working capital adjustments
• Section: 143(3); 133(6); 144; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO.1850/HYD/2012 ASSESSMENT YEAR 2008-2009 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. HYDERABAD PAN AABCH 7867C VS. THE ITO, WARD 2(2) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. GIRISH DAVE FOR REVENUE : MR. P. SOMASEKHAR REDDY DATE OF HEARING : 15.01.2014 DATE OF PRONOUNCEMENT : 21.02.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY ASSESSEE IS AGAINST THE ORDERS OF THE A.O. UNDER SECTION 143(3) READ WITH SECTION 144 C(13) OF THE I.T. ACT, 1961, CONSEQUENT TO THE DIRECTIONS GIVEN BY THE DISPUTES RESOLUTION PANEL (IN SHORT DRP), HYDERAB AD DATED 13.09.2012. THE ISSUE IN THIS APPEAL IS WITH REFERE NCE TO THE TRANSFER PRICING ADJUSTMENTS MADE BY THE TPO/A.O. 2. THE ASSESSEE IN ITS APPEAL HAS RAISED SIX GROUN DS WITH SUB-GROUNDS WHICH ARE GENERALLY COTENTIONS/ARG UMENTS. GROUND NO.1 AND 6 ARE GENERAL IN NATURE AND THEREFO RE, THEY NEED NO ADJUDICATION. GROUND NO. 2.1.1, 2.2, 2.4 HA VE NOT BEEN PRESSED IN THE COURSE OF ARGUMENTS AND AS SUCH, THE Y ARE DISMISSED AS NOT PRESSED. GROUND NO. 2.7, 3 AND 4 A LSO HAVE NOT BEEN PRESSED, CONSEQUENT TO A.O. RECTIFYING THE ORDER 2 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. UNDER SECTION 154 AND ACCORDINGLY, THESE GROUNDS AR E ALSO DISMISSED AS NOT PRESSED. GROUND NO.5 IS WITH REFER ENCE TO INTEREST UNDER SECTION 234B, WHICH IS CONSEQUENTIAL IN NATURE. GROUND NO. 2.8 IS APPLICATION OF 92C(2) PROVISO OF PLUS OR MINUS 5% TO THE ARMS LENGTH RANGE AND GROUND NO. 2. 9 IS AN ARGUMENT THAT ASSESSEE, HAVING BENEFIT UNDER SECTIO N 10A DOES NOT HAVE ANY MOTIVE TO CHARGE LESS FROM THE AE AND THERE IS NO TAX AVOIDANCE BY THE ASSESSEE. GROUND NO. 2.8 IS ST ATUTORY PROVISION WHEREAS GROUND NO.2.9 IS AN ARGUMENT WHIC H DOES NOT REQUIRE ANY ADJUDICATION. THE REMAINING GROUNDS ARE MAINLY ON (A) FILTERS ADOPTED BY THE TPO (GROUNDS 2.1.2, 2.3 ); (B) COMPARABLES SELECTED/NOT SELECTED BY TPO (2.6); AND (C) RISK ADJUSTMENTS (2.5). THEREFORE, THE MAIN ISSUE IS TO BE CONSIDERED IN TH IS APPEAL ARE, WITH REFERENCE TO VARIOUS FILTERS SELECTED BY THE TPO, COMPARABLES AND RISK ADJUSTMENTS. 3. BRIEFLY STATED, ASSESSEE HYUNDAI MOTOR INDIA ENGINEERING P. LTD (IN SHORT HMIEPL) IS A COMPANY INCORPORATED IN NOVEMBER, 2006 AS A SUBSIDIARY OF H YUNDAI MOTOR INDIA LIMITED (IN SHORT HMIL). THE ASSESSEE HMIEPL AND HMIL FORMED PART OF HYUNDAI MOTOR COMPANY, KORE A. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING SU PPORT SERVICES IN CONNECTION WITH COMPUTER AIDED ENGINEER ING (IN SHORT CAE) / COMPUTER AIDED DESIGN (IN SHORT CAD ). THE ASSESSEE IS INVOLVED IN PROVIDING SUPPORT SERVICES IN CONNECTION OF MODELING AND ITERATIVE SIMULATION. IT RECEIVES THE BASIC DESIGN FROM ITS GROUP COMPANY. WITH RESPECT T O CAD 3 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. MODELLING, ASSESSEE MAKES A 3-D CAD MODELLING DATA OF VEHICLE COMPONENTS USING CAD SOFTWARE TOOLS. THE CA E MODELLING SERVICES COMPRISES OF FINITE MODELLING FO R THE COMPUTER SIMULATION WHICH WOULD INVOLVE BREAKING DO WN THE MODEL INTO VARIOUS STRUCTURES. THE TPO AS WELL AS T HE ASSESSEE CHARECTERISED ASSESSEE AS A ROUTINE SUPPORT SERVICE PROVIDER WITH SKILLED AND TRAINED WORKFORCE AND IT ASSUMES L ESS THAN NORMAL RISK ASSOCIATED WITH CARRYING OUT SUCH BUSIN ESS. 3.1. DURING THE YEAR ASSESSEES OPERATING REVENUE WAS TO THE TUNE OF RS.15.79 CRORES AND OPERATING COST W AS RS.15.27 CRORES. THE OPERATING PROFIT TO COST RATIO WAS 3.38 %. IN ITS TRANSFER PRICING REPORT, ASSESSEE REPORTED I.T.ENAB LED SERVICES (IN SHORT ITES) AT RS.15.12 CRORES AND ALSO IMPOR T OF COMPUTER AT RS. 2.69 CRORES. THE TPO AND THE ASSESS EE ACCEPTED THE TNMM IS THE MOST APPROPRIATE METHOD ON THE FACTS AND CIRCUMSTANCES OF THE CASE, EVEN THOUGH AS SESSEE JUSTIFIED BY WAY OF COST PLUS METHOD ALSO WHICH WAS NOT CONSIDERED BY THE TPO. ASSESSEE HAS SELECTED SIX CO MPARABLES IN ITS T.P. STUDY WHICH THE TPO, ON REFERENCE FROM THE A.O., REJECTED AND SELECTED 22 COMPARABLES BY APPLYING VA RIOUS FILTERS. FILTERS: 4. THERE IS NO DISPUTE WITH MANY FILTERS EXCEPT WI TH REFERENCE TO THE FILTERS LIKE THE TURNOVER FILTER A ND RPT FILTER AND EXPORT SALES FILTER. THE TPO EXCLUDED THE COMPANIES WHOSE RECEIPTS ARE LESS THAN RS. 1 CRORE AND ABOVE RS.150 CRORES, WHEREAS, ASSESSEE WANTS THE COMPANIES WITH LESS THA N RS. 1 CRORE ALSO TO BE INCLUDED. EVEN THOUGH THIS OBJECTI ON WAS 4 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. RAISED BEFORE THE DRP, THERE IS NO DECISION ON IT. CONSIDERING THAT EXTREME TURNOVER COMPANIES ARE EXCLUDED GENERA LLY FROM COMPARABILITY, WE ALSO AFFIRM THE RANGE OF COMPANIE S ADOPTED BY THE TPO IN ITS FILTER AS THE ASSESSEES TURNOVER WAS ABOUT RS.15.79 CRORES. SO, THE RANGE SELECTED BY THE TPO IS ACCEPTED. 4.2. THE NEXT FILTER ON WHICH THERE IS DISPUTE IS WITH REFERENCE TO RELATED PARTY TRANSACTIONS (RPT). ASSE SSEE APPLIED THIS FILTER ON RELATED PARTY TRANSACTIONS EXCEEDING 10%, WHEREAS, TPO SELECTED COMPANIES HAVING TRANSACTIONS EXCEEDING 25%. THIS ISSUE WAS OBJECTED TO BY THE AS SESSEE WHEREAS, DRP DISCUSSED THIS ISSUE AND REJECTED AS U NDER : THE ASSESSEE OBJECTS TO THE ADOPTION OF 25% RPT FI LTER FOR SELECTION OF COMPARABLES. IT WOULD NOT BE A PRACTIC AL APPROACH TO CONSIDER ONLY COMPANIES WITH NIL RELATE D PARTY TRANSACTIONS BECAUSE ALMOST ALL THE COMPANIES HAVE RELATED PARTY TRANSACTIONS TO SOME EXTENT. NIL % CRITERIA W OULD RESULT IN SELECTION OF VERY SMALL NUMBER OF COMPANIES WHIC H MAY NOT GIVE SUFFICIENT BASE FOR COMPARISON. THEREFORE, 25% IS A PROPER THRESHOLD LIMIT FOR RELATED PARTY TRANSACTIO NS. FOR THESE REASONS THE THRESHOLD LIMIT OF 25% FOR RPT LO OKS REASONABLE. HENCE, THE OBJECTION OF THE ASSESSEE IS REJECTED. 4.3 AFTER CONSIDERING THE RIVAL CONTENTIONS, WE AG REE WITH THE OBSERVATIONS OF THE DRP, AS THRESHOLD LIMI T OF 25% FOR RPT LOOKS REASONABLE. WE AFFIRM THE DRP OPINION ON THIS. 4.4. THE NEXT OBJECTION IS WITH REFERENCE TO EXPOR T SALES FILTER. EVEN THOUGH ASSESSEE HAS NOT APPLIED ANY FI LTER IN ITS T.P. STUDY, THE TPO EXCLUDED COMPANIES HAVING LESS THAN 25% REVENUE AS EXPORT SALES. THIS WAS OBJECTED TO BY TH E ASSESSEE BEFORE THE DRP BUT THERE IS NO DECISION ON THIS ISS UE. CONSIDERING THE COMPARABILITY STUDY ON SELECTION OF CASES, WE 5 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. DO NOT SEE ANY REASON TO DISAGREE WITH THE TPOS FI LTER ADOPTED. AS THIS ALSO BEING REASONABLE, WE AFFIRM THE SAME. HOWEVER, IN CASE OF ANY SPECIFIC OBJECTION WHEN COMPARING THE C OMPARABLES SELECTED BY THE TPO, THIS ISSUE WILL BE ANALYSED AF RESH, IF REQUIRED. THEREFORE, GROUNDS RAISED BY THE ASSESSEE ON VARIOUS FILTERS ARE REJECTED. COMPARABLES: 5. IN MAKING THE T.P. ADJUSTMENT, THE TPO SELECTED 22 COMPANIES AND ARRIVED AT AN AVERAGE PLI OF 29.16 % (OP/OC). AFTER GIVING WORKING CAPITAL ADJUSTMENTS, IT WAS DETERMINED AT 24.12%. OUT OF THE 20 COMPARABLES SEL ECTED BY THE TPO, THE DRP HOWEVER ACCEPTED THE ASSESSEES OB JECTIONS AND EXCLUDED TWO COMPARABLES AT ITEM NO.6 AND ITEM NO.17 I.E., CORAL HUB (VISHAL INFO.) AND MOLD TEK. THE AS SESSEE IS OBJECTING TO SOME OF THE COMPARABLES IN THE FINAL L IST OF 18 COMPARABLES AFTER THE DRP ORDER AND ALSO NON INCLUS ION OF SOME OF THE COMPARABLES (2) SELECTED BY ASSESSEE. THE LIST OF COMPARABLE COMPANIES AS FINALLY SELECTED ARE AS UND ER : S.NO. COMPANY 1. ACCENTIA TECHNOLOGIES LTD. 2. ACROPETAL TECHNOLOGIES LTD. (SEG) 3. ADITYA BIRLA MINACS WORLD WISE LTD 4. ASIT CIT(A) MEHTA FINANCIAL SERVICES LTD 5. CALIBER POINT BUSINESS SOLUTIONS LTD. (SEG) 6. COSMIC GLOBAL LTD 7. CROSSDOMAIN SOLUTIONS P. LTD. 8. DATAMATICS FINANCIAL SERVICES (BPO) DIV. 9. E4E HEALTH CARE SOLUTIONS(EARLIER KNOWN AS NITTA NY) 10. ECLERX SERVICES LTD 11. GENESYS INTERNATIONAL CORPORATION LTD 12. HCL COMNET SYSTEMS & SERVICES LTD. (SEG.) 13. ICRA ONLINE LTD. (SEG.) 6 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. 14. INFOSYS BPO 15. I-SERVICES INDIA PVT. LTD. 16. R SYSTEMS INTERNATIONAL LTD. (SEG.) 17. SPANCO LTD. (SEG.) 18. WIPRO BPO 6. WE HAVE HEARD SUBMISSIONS OF BOTH THE PARTIES. THE LEARNED COUNSEL GAVE DETAILED CHART ON EACH OF THE COMPANIES THAT WERE CONSIDERED AS COMPARABLE BY THE TPO AND HAS ALSO EXPLAINED AS TO WHY SOME OF THOSE COMP ANIES CANNOT BE CONSIDERED AS COMPARABLES. HE MAINLY RELI ED ON THE COORDINATE BENCH DECISIONS IN THE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD. 38 TAXMAN.COM 5 (BANG) DATED 14.08.2013 WHICH IN TURN, HAS RELIED ON THE I TAT, HYDERABAD A BENCH DECISION IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA P. LTD. 32 TAXMAN.COM 21 DATED NOVEMBER 23, 2012. LEARNED COUNSEL ALSO RELIED ON THE DECISION OF ITAT, HYDERABAD B BENCH IN THE CASE O F ZAVATA INDIA P. LTD. VS. DCIT, HYDERABAD REPORTED AT 35 TA XMAN.COM 423 DATED 07.06.2013. 7. THE LEARNED D.R. ON THE OTHER HAND, RELIED ON T HE ORDER OF THE TPO AND DIRECTIONS OF THE DRP WHEREIN THE DRP HAS GIVEN REASONS AS TO WHY THE OBJECTIONS OF THE A SSESSEE TO THE COMPARABLES PROPOSED BY THE TPO SHOULD NOT BE A CCEPTED. 7.2 ASSESSEE HAS NO OBJECTION FOR ACCEPTING TH E COMPANIES AT SL.NOS. (3) ADITYA BIRLA MINACS, (4) A SIT C MEHTA, (5) CALIBER POINT BUSINESS SOLUTIONS LTD., (9) E4E (13) ICRA ONLINE LTD. (SEG.) (15) I-SERVICES INDIA P. LTD. (16) R SYSTEMS INTERNATIONAL LTD. (SEG.) (17) SPANCO LTD. WE WIL L DEAL WITH THE 7 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. OBJECTIONS WITH REST OF COMPARABLES WHILE WE TAKE-U P EACH OF THESE FOR CONSIDERATION. I. ACCENTIA TECHNOLOGIES LTD. (SEG.) THIS WAS CONSIDERED AS A COMPARABLE BY THE TPO AND LISTED AT SL.NO.1 OF THE COMPARABLE COMPANIES C HOSEN BY THE TPO. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE FACT THAT THERE ARE EXTRA ORDINARY EVENTS THAT OCCURRED DURING THE PREVIOUS YEAR IN THIS COMPANY. OUR ATTEN TION WAS DRAWN TO THE ANNUAL REPORT OF THIS COMPANY FOR THE A.Y. 2007- 08 WHEREIN THE FACT THAT THIS COMPANY HAD ACQUIRED THUNGA SOFTWARE PVT. LTD., GSR PHYSICIANS BILLING SERVICES INC., GSR SYSTEMS INC. AND DENMED INC. WAS MENTIONED. OUR ATT ENTION WAS ALSO DRAWN TO THE DECISION OF THE HYDERABAD ITA T BENCH IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA IT A NO.1316/BANG/2012 PVT. LTD. V. DCIT [ 2013] 32 TAXM AN.COM 21 (HYD. TRIB). IN THE AFORESAID DECISION, THE HYDE RABAD BENCH OF THE TRIBUNAL HAD TO DEAL WITH A CASE OF DETERMIN ATION OF ALP IN THE CASE OF AN ASSESSEE WHO WAS PROVIDING ITES B USINESS SUPPORT SERVICES FOR THE A.Y. 2007-08. THE TPO HAD CONSIDERED ACCENTIA TECHNOLOGIES LTD. AS A COMPARABLE. THE DRP HOWEVER HELD THAT THE SAID COMPANY CANNOT BE COMPARED AS A COMPARABLE OWING TO EXTRA ORDINARY EVENTS THAT TOOK PLACE DURING THE PREVIOUS YEAR. THE TRIBUNAL UPHELD THE O RDER OF THE DRP OBSERVING AS FOLLOWS :- 'I. ACCENTIA TECHNOLOGIES LTD. 10. IT IS THE SUBMISSION OF THE ASSESSEE THAT THIS COMPANY CANNOT BE TREATED AS A COMPARABLE BECAUSE OF UNCOMPARABLE FINANCIAL RESULTS ARISING OUT OF AMALGAMATION IN THE COMPANY. IN THIS REGARD, THE 8 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. ASSESSEE HAS RELIED UPON THE ORDER OF THE DRP FOR T HE ASSESSMENT YEAR 2008-09 IN ASSESSEE'S OWN CASE. IT IS SEEN THAT THE DRP WHILE CONSIDERING SIMILAR OBJECTI ON PLACED BY THE ASSESSEE IN THE CASE OF ANOTHER COMPA NY, VIZ. MOLD TEK TECHNOLOGIES LTD., IN THE PROCEEDINGS RELATING TO THE ASSESSMENT YEAR 2008-09, HAS OBSERV ED IN THE FOLLOWING MANNER- '17.5. IN ADDITION TO THE ABOVE, THE DIRECTOR'S REP ORT OF THE COMPANY FOR THE FY 2007-08 REVEALED THE MERGER AND THE DEMERGER. A COMPANY KNOWN AS TECHMEN TOOLS PVT. LTD . HAD AMALGAMATED WITH MOLD-TEK TECHNOLOGIES LTD. WIT H EFFECT FORM 1ST OCTOBER, 2006. THERE WAS A DE- MERG ER OF PLASTIC DIVISION OF THE COMPANY AND THE RESULTING C OMPANY IS KNOWN AS MOLDTEK PLASTICS LIMITED. THE DE-MERGER FROM THE MOLDTEK TECHNOLOGIES TOOK PLACE WITH EFFECT FRO M 1ST APRIL, 2007. THE MERGER AND THE DE- MERGER NEEDED T HE APPROVAL OF THE HON'BLE HIGH COURT OF ANDHRA PRADES H AND ALSO THE APPROVAL OF THE SHAREHOLDERS. THE SHAREHOLDERS OF THE COMPANY GAVE APPROVAL FOR THE M ERGER AND THE DE-MERGER ON 25.01.2008 AND THE HON'BLE HIG H COURT OF ANDHRA PRADESH HAD APPROVED THE MERGER AND DE-MERGER ON 25TH JULY, 2008. SUBSEQUENTLY, THE ITA NO.1316/BANG/2012 ACCOUNTS OF MOLDTEK TECHNOLOGIES FOR FY 2007-08 WERE REVISED. ON A PERUSAL OF THE AN NUAL REPORT IT IS NOTICED THAT TECKMEN TOOLS PVT. LTD. A ND THE PLASTIC DIVISION OF THE COMPANY WERE DEMERGED AND T HE RESULTING COMPANY WAS NAMED AS MOLDTEK PLASTICS LTD . THE KPO BUSINESS REMAINED WITH THE COMPANY. A PERUS AL OF THE ANNUAL REPORT REVEALED THAT TO GIVE EFFECT T O THE MERGER AND DEMERGER, THE FINANCIAL STATEMENTS WERE REVISED AND RESTATED AFTER SIX MONTHS FORM THE END OF THE FINANCIAL YEAR 31.3. 2008. THE ASSESSEE FILED FORM NO.21 UNDER THE COMPANIES ACT WITH THE REGISTRAR OF COMPA NIES ON 26TH AUGUST, 2008. THUS THE EFFECTIVE DATE OF TH E SCHEME OF MERGER AND DEMERGER WAS 26TH AUGUST, 2008 . THE ANNUAL REPORT SUPPORTED THE ARGUMENT OF THE ASSESSEE THAT THERE WERE MERGER AND DEMERGER IN THE FINANCIAL YEAR AND IT WAS AN EXCEPTIONAL YEAR OF PERFORMANCE AS FINANCIAL STATEMENTS WERE REVISED BY THIS COMPANY MUCH AFTER THE CLOSURE OF THE PREVIOUS YEAR . THE PANEL AGREES WITH THE CONTENTION OF THE ASSESSEE TH AT IT IS AN EXCEPTIONAL YEAR HAVING SIGNIFICANT IMPACT ON TH E PROFITABILITY ARISING OUT OF MERGER AND DEMERGER.' 9 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. 11. ON CAREFUL CONSIDERATION OF THE MATTER, WE ALSO AGREE WITH THE AFORESAID VIEW OF THE DRP THAT EXTRA-ORDIN ARY EVENT LIKE MERGER AND DE-MERGER WILL HAVE AN EFFECT ON THE PROFITABILITY OF THE COMPANY IN THE FINANCIAL YEAR IN WHICH SUCH EVENT TAKES PLACE. IT IS THE CONTENTION OF THE ASSESSEE THAT IN CASE OF THE AFORESAID COMPANY, THERE IS AMALGAMATION IN DECEMBER, 2006, WHICH HAS IMPACTED THE FINANCIAL RESULT. THIS FACT HAS TO BE VERIFIED BY THE TPO. IF IT IS FOUND UPON SUCH VERIFICATION THAT THE AMALGAMATION IN FACT AHS TAKEN PLACE, THEN THE AFOR ESAID COMPARABLE HAS TO BE EXCLUDED.' WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. COUN SEL FOR THE ASSESSEE AND ARE OF THE VIEW THAT THE RATI O LAID DOWN BY THE HYDERABAD BENCH OF THE ITAT IS SQUARELY APPLICA BLE TO THE PRESENT CASE ALSO. SIMILAR VIEW WAS ALSO TAKEN IN T HE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA(P) LTD (SUPRA) B Y THE BANGALORE BENCH. IT IS CLEAR THAT DURING THE PREVIO US YEAR THERE WERE EXTRA ORDINARY EVENTS THAT TOOK PLACE IN THIS COMPANY WHICH WARRANTS EXCLUSION OF THIS COMPANY AS A COMPA RABLE. WE THEREFORE HOLD THAT THIS COMPANY CANNOT BE CONSI DERED AS A COMPARABLE. II. ACROPETAL TECHNOLOGIES LTD. (SEG.) THIS COMPANY IS LISTED AT SL.NO.2 OF THE COMPARABLES CHOSEN BY THE TPO. AS FAR AS THIS COMPA NY IS CONCERNED, THE OBJECTION OF THE ASSESSEE IS THAT TH IS COMPANY IS NOT FUNCTIONALLY COMPARABLE. THE ASSESSEE IS A B PO COMPANY THAT PROVIDES CAD/ CAE SERVICES.. AS FAR AS ACROPETAL TECHNOLOGIES LTD. IS CONCERNED, THIS COMP ANY DOES THE BUSINESS OF EXPORT OF SOFTWARE SERVICES. IT IS ALSO SEEN FROM THE SEGMENTAL REVENUE OF THIS COMPANY (NOTE 15 TO T HE NOTES ON ACCOUNTS TO ANNUAL REPORT FOR 07-08) THAT IT DER IVES INCOME FROM ENGINEERING DESIGN SERVICES AND SOFTWARE DEVEL OPMENT 10 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. SERVICES. IT IS ALSO PERTINENT TO POINT OUT THAT BE FORE THE TPO, THE ASSESSEE RAISED AN OBJECTION THAT THIS COMPANY PERFORMS DIFFERENT FUNCTIONS AND MAINLY ENGAGED IN THE AREA OF SOFTWARE DEVELOPMENT SERVICES AND ENGINEERING DESIGN SERVICE S. THE TPO IN HIS ORDER HAS OBSERVED THAT THE SERVICES RENDERE D BY THIS COMPANY FALL IN THE DEFINITION OF ITES. II. 1 WE HAVE CONSIDERED THE SUBMISSIONS OF THE L EARNED COUNSEL FOR THE ASSESSEE. LD COUNSEL SUBMISSION WAS THAT THIS COMPANY WAS EXCLUDED IN THE CASE OF SYMPHONY MARKET ING SOLUTIONS INDIA(P) LTD (SUPRA) BY THE BANGALORE BEN CH, SO THE SAME REQUIRE EXCLUSION. IN THE ABOVE CASE IT WAS CO NSIDERED LIKE THIS: 13. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LEARN ED COUNSEL FOR THE ASSESSEE. ON A PERUSAL OF THE NOTE NO.15 OF NOTES TO ACCOUNTS WHICH GIVES SEGMENTAL REVENUE OF THIS COMPANY, IT IS CLEAR THAT THE MAJOR SOURCE OF INCOM E FOR THIS COMPANY IS FROM PROVIDING ENGINEERING DESIGN SERVIC E AND INFORMATION TECHNOLOGY SERVICES. THE FUNCTIONS PERF ORMED BY THE ENGINEERING DESIGN SERVICES SEGMENT OF THE COMPANY CANNOT BE CONSIDERED AS COMPARABLE TO THE ITES/BPO FUNCTIONS PERFORMED BY THE ASSESSEE. THE PERFORMANCE OF ENGINEERING DESIGN SERVICES IS REGAR DED AS PROVIDING HIGH END SERVICES AMONG THE BPO WHICH REQ UIRES HIGH SKILL WHEREAS THE SERVICES PERFORMED BY THE AS SESSEE ARE ROUTINE LOW END ITES FUNCTIONS. WE THEREFORE HO LD THAT THIS COMPANY COULD NOT HAVE BEEN SELECTED AS A COMPARABLE, ESPECIALLY WHEN IT PERFORMS ENGINEERING DESIGN SERVICES WHICH ONLY A KNOWLEDGE PROCESS 11 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. OUTSOURCING [KPO] WOULD DO AND NOT A BUSINESS PROCE SS OUTSOURCING [BPO]. AS CAN BE SEEN ABOVE, EVEN THOUGH THE SAID COMPANY WAS EXCLUDED ON THE DIFFERENTIATION OF HIGH END SERVICE S BEING PROVIDED BY THIS COMPANY, AS NOTICED ASSESSEE ALSO PROVIDE HIGH END SERVICES IN CAD / CAE DESIGNING AREAS. THE SE ARE HIGH END SERVICES AS CONSIDERED BY THE BANGALORE BE NCH. THEREFORE WE ARE OF THE OPINION THAT FUNCTIONS OF A SSESSEE ARE SIMILAR TO THE ABOVE COMPANY. THE OBJECTIONS OF ASS ESSEE ARE REJECTED. III. CROSSDOMAIN SOLUTIONS LTD. : THIS COMPANY WAS CONSIDERED AS A COMPAR ABLE AND LISTED AT SL.NO.7 OF THE COMPARABLES CHOSEN BY THE TPO. IT IS THE STAND OF THE ASSESSEE THAT THIS COMPANY IS N OT FUNCTIONALLY COMPARABLE. IT IS SEEN THAT THE BUSINE SS PROFILE OF THIS COMPANY IS RE-ENGINEERED PAYROLL SERVICE. THIS COMPANY IS ALSO ENGAGED IN THE DEVELOPMENT OF INFORMATION SYST EMS. THE REVIEW AND BUSINESS FUNCTIONS OF CROSS DOMAIN IS AS FOLLOWS:- 'WITH A DECADE OF EXPERIENCE IN PAYROLL OUTSOURCING , CROSSDOMAIN HAS CREATED A RE-ENGINEERED PAYROLL SER VICE EFFIPAY - THAT PROCESSES AND DELIVERS ACCURATE PAYR OLL TO CLIENTS WITH HEADCOUNT UP TO 1000 EMPLOYEES IN JUST 4 HOURS*. WITH EFFIPAY LITE AND EFFIPAY LITE PLUS, OU R BOUQUET OF SERVICES COVER END TO END PAYROLL, RETRI ALS, REIMBURSEMENT, TAX PROOF VERIFICATIONS UPTO ISSUE O F FORM 16 FOR EMPLOYEES OF OUR CLIENTS ACROSS DIFFERENT IN DUSTRY VERTICALS. OUR PROCESSES ARE HIGHLY SCALABLE AND PR OVIDE END TO END PAYROLL SOLUTIONS TO CLIENTS WITH HEADCO UNT RANGING FROM 5 TO 65,000.' 'CROSSDOMAIN'S IT KNOWLEDGE AND DOMAIN COMPETENCE HAS PROVIDED THE EDGE TO DEVELOP INFORMATION SYSTEM S TO 12 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. IMPLEMENT PROCESS INNOVATION AND CONTINUOUSLY INCRE ASE EFFICIENCY AND TURN-AROUND-TIME FOR BUSINESS CRITIC AL PROCESSES.' SOURCE : HTTP:/WWW.CROSS-DOMAIN.COM AS CAN BE SEEN FROM THE ABOVE, THE BUSINESS OF CROS S DOMAIN RANGES FROM HIGH END KPO SERVICES, DEVELOPMENT OF P RODUCT SUITES AND ROUTINE LOW END ITES SERVICE. HOWEVER, T HERE IS NO BIFURCATION AVAILABLE FOR SUCH VERTICALS OF SERVICE S. THEREFORE THE ASSESSEE CONTENDS THAT CROSS DOMAIN CANNOT BE C OMPARED TO A ROUTINE ITES SERVICE PROVIDER. III.1. 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 COMPAN Y SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES, ACCEPTING THE PLEA OF THE ASSESSEE. SIMILAR VIEW WAS ALSO TAKEN IN THE CA SE OF SYMPHONY MARKETING SOLUTIONS INDIA(P) LTD (SUPRA) B Y THE BANGALORE BENCH. WE HOLD ACCORDINGLY. IV ECLERX SERVICES LTD. : THIS COMPANY IS LISTED AT SL.NO.10 IN THE LIST O F COMPARABLE COMPANIES CHOSEN BY THE TPO. IT IS THE S TAND OF THE ASSESSEE THAT THIS COMPANY OFFERS SOLUTIONS THA T INCLUDE DATA ANALYTICS, OPERATIONS MANAGEMENT, AUDITS AND RECONCILIATION AND THEREFORE HAS TO BE CLASSIFIED A S HIGH END KPO. IN SUPPORT OF THE STAND OF THE ASSESSEE, EXTRA CTS FROM THE ANNUAL REPORT OF THIS COMPANY HAVE BEEN POINTED OUT . IT HAS FURTHER BEEN SUBMITTED THAT EXTRA ORDINARY EVENTS A ND PECULIAR CIRCUMSTANCES PREVAIL IN THE CASE OF THE ASSESSEE I N AS MUCH AS THIS COMPANY ACQUIRED A UK BASED COMPANY WHICH H AS 13 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. SIGNIFICANTLY CONTRIBUTED TO THE INCREASE IN THE CU STOMER AND REVENUE BASE OF THE COMPANY. THIS TRIBUNAL IN THE C ASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. (SUP RA) HAD AN OCCASION TO DEAL WITH COMPARABILITY OF THIS COMPANY IN THE CASE OF AN ITES COMPANY SUCH AS THE ASSESSEE AND THE TRI BUNAL HELD AS FOLLOWS:- '14. THE ASSESSEE HAS OBJECTED FOR THIS COMPANY BEI NG TAKEN AS COMPARABLE MAINLY ON THE GROUND THAT IT WA S HAVING A SUPERNORMAL PROFIT OF 89%, AND AS SUCH IT CANNOT BE TAKEN AS A COMPARABLE IN VIEW OF THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE M/S. TEVA INDIA LTD. (SUPRA). THAT APART, RELYING UPON THE ANNUAL R EPORT OF THE COMPANY, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE HAS CONTENDED THAT THAT THE CONCERNED COMPANY IS ENGAGED IN PROVIDING KNOWLEDGE PROCESS OUTSOURCING(KPO) SERVICES. 15. ON CONSIDERING THE OBJECTIONS OF THE ASSESSEE I N RELATION TO THIS COMPANY, WE ACCEPT THE CONTENTION OF THE ASSESSEE THAT THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE BOTH FOR THE REASONS THAT IT WAS HAVING SUPERNORMAL PROFIT AND IT IS ENGAGED IN PROVIDING K PO SERVICES, WHICH IS DISTINCT FROM THE NATURE OF SERV ICES PROVIDED BY THE ASSESSEE.' WE ARE OF THE VIEW THAT IN THE LIGHT OF THE DECISI ON OF THE HYDERABAD BENCH REFERRED TO ABOVE, THIS COMPANY CAN NOT BE REGARDED AS A COMPARABLE FOR THE REASON THAT IT WAS HAVING EXTRAORDINARY EVENT AND SUPER NORMAL PROFITS. SIMI LAR VIEW WAS ALSO TAKEN IN THE CASE OF SYMPHONY MARKETING S OLUTIONS INDIA(P) LTD (SUPRA) BY THE BANGALORE BENCH. V. GENESYS INTERNATIONAL CORPORATION LTD. THIS COMPANY IS LISTED AT SL. NO.11 IN T HE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. AS FAR AS T HIS COMPANY IS CONCERNED, THE STAND OF THE ASSESSEE HAS BEEN THAT 14 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE AND THA T IT HAS A DIFFERENT EMPLOYEE SKILL SET AND THAT THIS COMPANY PERFORMS R&D SERVICES AND ALSO OWNS INTANGIBLES. THIS COMPAN Y IS A GEOSPATIAL SERVICES CONTENT PROVIDER SPECIALISING I N LAND BASED TECHNOLOGIES. FROM THE NOTES TO ACCOUNTS OF THIS CO MPANY, IT IS SEEN THAT THIS COMPANY IS ENGAGED IN PROVIDING GEOG RAPHICAL INFORMATION SERVICES COMPRISING OF PHOTOGRAMMETRY, REMOTE SENSING CARTOGRAPHY, DATA CONVERSION RELATED COMPUT ED BASED SERVICES AND OTHER RELATED SERVICES. FURTHER THE BU SINESS OF THIS COMPANY REQUIRES SKILLED MANPOWER AND SCIENTIS TS, CIVIL ENGINEERS, ETC. BESIDES THE ABOVE, THIS COMPANY ALS O CARRIES OUT R&D SERVICES AND OWN INTANGIBLES. THE AFORESAID FACTS, IN OUR VIEW, WILL TAKE THIS COMPANY OUT OF THE LIST OF COMPARABLES. SIMILAR VIEW WAS ALSO TAKEN IN THE CASE OF SYMPHON Y MARKETING SOLUTIONS INDIA(P) LTD (SUPRA) BY THE BAN GALORE BENCH. IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THA T THIS COMPANY CANNOT BE REGARDED AS A COMPARABLE AND DESE RVES TO BE EXCLUDED FROM THE LIST OF COMPARABLES. VI. INFOSYS BPO LTD. THIS COMPANY IS LISTED AT SL.14 IN THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. AS FAR AS T HIS COMPANY IS CONCERNED, IT IS THE SUBMISSION OF THE L D. COUNSEL FOR THE ASSESSEE THAT THIS COMPANY HAS A BRAND VALU E AND THEREFORE THERE WOULD BE SIGNIFICANT INFLUENCE IN T HE PRICING POLICY WHICH WILL IMPACT THE MARGINS. SCHEDULE 13 T O THE PROFIT & LOSS ACCOUNT OF THIS COMPANY FOR THE F.Y. 2007-08 SHOWS THAT THIS COMPANY INCURRED HUGE SELLING AND MARKETI NG EXPENSES. THE BRAND VALUE OF THE INFOSYS HAS BEEN V ALUED AT RS.31,863 CRORES. INFOSYS BPO, BEING A SUBSIDIARY O F INFOSYS, 15 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. HAS AN ELEMENT OF BRAND VALUE ASSOCIATED WITH IT. T HIS IS ALSO CLEAR FROM THE PRESENCE OF BRAND RELATED EXPENSES I NCURRED BY THIS COMPANY. PRESENCE OF A BRAND COMMANDS PREMIUM PRICE AND THE CUSTOMERS WOULD BE WILLING TO PAY, FOR THE SERVICES/PRODUCTS OF THE COMPANY. INFOSYS BPO IS AN ESTABLISHED PLAYER WHO IS NOT ONLY A MARKET LEADER BUT ALSO A COMPANY EMPLOYING SHEER BREADTH IN TERMS OF ECONOMI ES OF SCALE AND DIVERSITY AND GEOGRAPHICAL DISPERSION OF CUSTOMERS. THE PRESENCE OF THE AFORESAID FACTORS WILL TAKE THI S COMPANY OUT OF THE LIST OF COMAPARABLES. WE THEREFORE ACCEP T THE CONTENTION OF THE ASSESSEE THAT THIS COMPANY CANNOT BE REGARDED AS A COMPARABLE. SIMILAR VIEW WAS ALSO TAK EN IN THE CASE OF SYMPHONY MARKETING SOLUTIONS INDIA(P) LTD (SUPRA) BY THE BANGALORE BENCH. THEREFORE, WE DIRECT THE AO/TP O TO EXCLUDE THE SAME. VII. HCL COMNET SYSTEMS & SERVICES LIMITED: VIII. WIPRO LIMITED THE ASSESSEE HAS OBJECTED FOR THESE TWO COMPANIE S BEING TAKEN AS COMPARABLES MAINLY ON THE GROUND THA T THESE COMPANIES ARE INDUSTRIAL GIANTS CONSIDERING THEIR T URNOVER COMPARED TO THAT OF THE ASSESSEE, WHOSE TURNOVER IS ONLY RS.15 CRORES. IT IS THE CONTENTION OF THE ASSESSEE THAT T HESE COMPANIES ARE INDUSTRIAL GIANTS IN THE AREA OF SOFT WARE DEVELOPMENT AND SINCE THESE COMPANIES ASSUME ALL RI SKS, THEY EARN HIGHER AMOUNT OF REVENUE RESULTING IN HIGHER P ROFIT, WHEREAS THE ASSESSEE OPERATES IN A RISK MITIGATED E NVIRONMENT. THEREFORE, THE MARGIN OF PROFIT IS ALSO LESS. IN TH IS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE RELIED UPON THE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF AGNITY INDIA 16 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. TECHNOLOGIES P. LTD. V/S. ITO IN ITA NO.3856/DEL/20 10 DATED 4TH NOVEMBER, 2010 AND IN THE CASE OF TRINITI ADVAN CED SOFTWARE LABS (P) LTD. (2011-TII-92-ITAT-HYD-TP). T HE AUTHORISED REPRESENTATIVE FOR THE ASSESSEE FURTHER CONTENDED THAT WHEN THE TPO HAS REJECTED COMPANIES WITH TURNO VER OF LESS THAN RS. ONE CRORE, BY STATING THAT THESE COMP ANIES MAY NOT BE REPRESENTING THE INDUSTRY TREND, BY APPLYING THE VERY SAME LOGIC, HE SHOULD NOT HAVE ALSO CONSIDERED THE COMPANIES HAVING TURNOVER OF MORE THAN RS.200 CRORES. IN THIS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSES SEE HAS RELIED UPON THE DECISION OF THE ITAT BANGALORE BENC H IN THE CASE OF M/S. GENESYS INTEGRATING SYSTEM(INDIA) P. L TD. (2011) (2012) 53 SOT 159 / 20 TAXMANN.COM 715 (BANG.) (URO ) / 64 DTR 225. ON CONSIDERING THE SUBMISSIONS OF THE ASSESSEE I N RELATION TO THESE COMPANIES, WE FIND THAT THE TPO H AS EXCLUDED THE COMPANIES WHOSE TURNOVER IS LESS THAN RS.ONE CR ORE, ON THE GROUND THAT THEY MAY NOT BE REPRESENTING THE IN DUSTRY TREND. THAT VERY LOGIC ALSO APPLIES TO THE COMPANIE S HAVING HIGH TURNOVER OF OVER RS.200 CRORES AS AGAINST THE ASSESSEE'S TURNOVER OF ONLY RS.15 CRORES, AND THEREFORE, IT WO ULD BE FAIR ENOUGH TO EXCLUDE THOSE COMPANIES ALSO. IN THE CASE OF AGNITY INDIA TECHNOLOGIES P. LTD. (SUPRA), THE DELHI BENCH OF THE TRIBUNAL, WHILE CONSIDERING THE COMPARABILITY WITH COMPANIES WHICH ARE MARKET LEADERS IN THEIR FIELD, AND HAVING SUBSTANTIALLY HIGH TURNOVER, OBSERVED AS FOLLOWS- '5.2. VARIOUS ARGUMENTS, AS STATED EARLIER, WERE TA KEN BEFORE THE DRP WHICH INTER-ALIA INCLUDED REJECTION OF COMPARABLE CASES; APPLICATION OF ARBITRARY FILTER O F WAGE TO SALES RATIO; IGNORING THAT THE ASSESSEE IS A LIMITE D RISK 17 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. COMPANY; INCLUSION OF INFOSYS TECHNOLOGIES LTD.; AN D INCLUSION OF SATYAM COMPUTERS SERVICES LTD. IN SPIT E OF THE FACT THAT ITS DATA IS NOT RELIABLE AS PUBLICLY KNOW N. ON THE BASIS OF THESE ARGUMENTS, THE DRP EXCLUDED THE CASE OF SATYAM COMPUTERS SERVICES LTD., THEREBY REDUCING TH E ARM'S LENGTH MARGIN TO 25.6%. IT IS ARGUED THAT THE CASE OF THE ASSESSEE IS NOT COMPARABLE WITH INFOSYS TECHNOLOGIE S LTD., THE REASON BEING THAT THE LATER IS GIANT IN THE ARE A OF DEVELOPMENT OF SOFTWARE AND IT ASSUMES ALL RISKS, L EADING TO HIGHER PROFIT. ON THE OTHER HAND, THE ASSESSEE IS A CAPTIVE UNIT OF ITS PARENT COMPANY IN THE USA AND IT ASSUME S ONLY LIMITED CURRENCY RISK. HAVING CONSIDERED THESE POIN TS, WE ARE OF THE VIEW THAT THE CASE OF THE AFORESAID INFO SYS AND THE ASSESSEE ARE NOT COMPARABLE AT ALL AS SEEN FROM THE FINANCIAL DATA ETC. OF THE TWO COMPANIES MENTIONED EARLIER IN THE ORDER. THEREFORE, WE ARE OF THE VIEW THAT THIS CASE IS REQUIRED TO BE EXCLUDED.' SIMILAR VIEW HAS ALSO BEEN EXPRESSED BY THE HYDERAB AD BENCH OF THE TRIBUNAL IN THE CASE OF TRINITY ADVANCED LAB S P. LTD. (SUPRA). IN THE CASE OF M/S. GENESYS INTEGRATING IN DIA P. LTD. (SUPRA), THE BANGALORE BENCH OF THE TRIBUNAL HAS OB SERVED IN THE FOLLOWING MANNER- '9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS AND ALSO THE JURIDICAL PRECEDENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTED TH E COMPANIES WHICH ARE MAKING LOSSES AS COMPARABLES. T HIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR I DENTIFYING THE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER L IMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEA RNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN B USINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN FOR T HE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETT ER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THE REFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT M ARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNA L WHEN COMPANIES WHICH ARE LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD 18 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET AND NASSCOM HAS GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE F EEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT T HE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THE RANG E HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO H AVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TA KEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY.' IN VIEW OF THE AFORESAID CONSISTENT DECISIONS OF TH E TRIBUNAL, WE ACCEPT THE CONTENTION OF THE LEARNED AUTHORISED REP RESENTATIVE FOR THE ASSESSEE THAT THE AFORESAID COMPANIES CANNO T BE TREATED AS COMPARABLE, CONSIDERING THEIR SUBSTANTIA LLY HIGH TURNOVER AS COMPARED TO THAT OF THE ASSESSEE. WE AC CEPT THE CONTENTION OF ASSESSEE THAT THESE COMPANIES CAN NOT BE REGARDED AS COMPARABLES. IX. COSMIC GLOBAL : THIS COMPARABLE WITH OPERATING PROFITS BY TOTAL COS T AFTER ADJUSTMENTS OF WORKING CAPITAL WAS SHOWN AT 26.51% BY THE TPO. ASSESSEE HAS NOT OBJECTED TO THIS COMPARABLE I NITIALLY IN THE OBJECTIONS TO THE DRAFT ORDER AND VIDE ANNEXURE -26, IT HAS AGREED FOR TAKING THIS COMPANY AS COMPARABLE COMPAN Y BUT SUBJECT TO MODIFICATION OF THE MARK-UP/MARGIN CALCU LATED. ASSESSEE SUBMITTED AT PAGE 203 OF THE OBJECTIONS TO THE DRAFT ORDER VIDE ANNEXURE-26, THAT OPERATING PROFIT BY OP ERATING COST ARRIVED AT BY THE TPO WAS 24.30% WHEREAS, AFTER INC LUSION OF INTEREST AND BANK CHARGES THAT COMES TO 23.30%. THI S REVISED WORKING WAS FURNISHED AS PART OF THE OBJECTIONS WIT H A REQUEST 19 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. FOR TAKING THE REVISED MARGIN AGAINST THIS COMPARAB LE. HOWEVER, SUBSEQUENTLY, VIDE LETTER DATED 30.07.2012 ASSESSEE OBJECTED TO THE COMPARABLE ON THE REASON THAT IT FA ILS EMPLOYEE COST FILTER. THE EMPLOYEE COST SHOWN WAS AT RS.1.17 CRORES WHICH IS 19.96% OF THE OPERATING REVENUE OF RS.5.87 CRORES. IT WAS SUBMITTED BY THE LEARNED COUNSEL THAT EMPLOYEES COST FILTER DETERMINED BY THE TPO WAS BETWEEN 45% TO 60% WHEREAS, THIS COMPANY HAS ONLY 19.96% AS EMPLOYEE C OST. ACCORDINGLY, THIS COMPANY IS NOT A COMPARABLE COMPA NY AS IT MAY BE OUTSOURCING THE WORK. THE LEARNED D.R. HOWEVER, SUBMITTED THAT ASSESSEE HAS ACCEPTED THE SAME IN THE TPO PROCEEDINGS. THERE FORE, SHOULD NOT BE EXCLUDED NOW. WHILE THERE WAS NO OBJECTION FOR ASSESSEE OBJE CTING TO THE COMPARABLE EVEN AT A LATER STAGE WHEN IT COM ES TO KNOW OF NEW FACTS, WHAT WE NOTICED IS THAT THE ASSESSEE S OBJECTIONS BEFORE THE DRP DATED 30.07.2012 HAVE NOT BEEN ADDRE SSED BY THE DRP. IT IS FOR THE TPO TO DETERMINE WHETHER THI S COMPANY FALLS WITHIN THE FILTERS AS ADOPTED BY THE TPO HIMS ELF. IF THE ASSESSEE FAILS THE EMPLOYEE COST FILTER, THEN THE S AME CANNOT BE ACCEPTED AS A COMPARABLE COMPANY. IN ORDER TO EXAMI NE THIS ASPECT, WE ARE OF THE OPINION THAT SELECTION OF THI S COMPARABLE IS TO BE RESTORED TO THE FILE OF THE TPO FOR FRESH EXAMINATION, AFTER GIVING DUE OPPORTUNITY OF HEARING TO THE ASSE SSEE. THE ISSUE IS RESTORED TO THE FILE OF THE TPO. 20 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. X DATAMATICS FINANCIAL (BPO) DIV. : THE ASSESSEE OBJECTED TO THE SELECTION OF THIS COMP ARABLE AS IT IS NOT FUNCTIONALLY COMPARABLE AND SPECIFICALLY RAI SED OBJECTION IN ANNEXURE-16 WHERE DETAILED OBJECTIONS ON EACH CO MPANY SELECTED HAS BEEN MENTIONED. IT WAS THE CONTENTION THAT THE ASSESSEE WAS IN THE FINANCE BUSINESS WHEREAS, THE A SSESSEE IS IN I.T. ENABLED SERVICES( ITES) TO PROVIDE SUPPORT SERVICES IN CONNECTION WITH CAE/CED. IT WAS SUBMITTED THAT DATA MATICS FINANCIAL (BPO) DIV. CANNOT BE COMPARED TO THE ASSE SSEE. FURTHER, IT WAS ALSO SUBMITTED THAT IF AT ALL BE CO MPARED, THE SAME CAN BE COMPARED AT THE ENTITY LEVEL AND NOT AT ITES SEGMENT. HOWEVER, AFTER INITIALLY OBJECTING TO SELE CTION OF THE COMPARABLES, THE ASSESSEE RAISED FURTHER OBJECTIONS VIDE LETTER DATED 30 TH JULY, 2012 SPECIFICALLY MENTIONING ABOUT DATAMATICS FINANCIAL (BPO) DIV. THAT IT FAILS REVEN UE FILTER. IT WAS SUBMITTED THAT ITES REVENUE IS RS.6.06 CRORES W HICH IS 48.97% OF THE OPERATING REVENUE OF RS.12.37 CRORES. THE LEARNED D.R. HOWEVER SUBMITTED THAT WHAT IS ADOPTED IS ONLY SEGMENTAL PROFIT AND NOT THE ENTITY PROFIT AND THE FILTERS APPLICABLE TO THE DATA IS WITHIN THE PA RAMETERS. WE HAVE CONSIDERED THE ISSUE. AS SEEN FROM THE OBJECTIONS RAISED BY THE ASSESSEE, THE DATAMATICS F INANCIAL (BPO) DIV. IS IN THE TWO SEGMENTAL BUSINESS OF PRIN TING AND PROCESSING AND ITES SERVICES. IF TAKEN AT ENTITY LE VEL, IT CERTAINLY FAILS THE FILTERS PROVIDED BY THE TPO I.E ., HAVING NOT LESS THAN 75% REVENUE FROM EXPORT ACTIVITIES. HOWEV ER, A.O. HAS NOT TAKEN THE ENTIRE ENTITY AS A WHOLE. HE HAS OBTAINED INFORMATION UNDER SECTION 133(6) AND THE DATA WAS P ROVIDED TO 21 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. THE ASSESSEE AS SEEN FROM THE OBJECTIONS RAISED BY THE ASSESSEE BEFORE THE DRP. WHAT THE TPO HAS TAKEN IS ONLY THE RECEIPTS PERTAINING TO ITES DIVISION AND AS STATED IN PAGE 1 19, THE OPERATING INCOME WAS TAKEN AT RS.6.19 CRORES OUT OF WHICH EXPORT OF ITES SERVICES ADMITTEDLY WAS AT RS.6.06 C RORES. THEREFORE, ON THIS BASIS, IT HAS MORE THAN 75% OF R EVENUES FROM EXPORT OF ITES SERVICES AND THEREFORE, IT DOES NOT FAIL THE FILTERS PROVIDED, IF ONLY SEGMENTAL PROFITS ARE TAK EN. SINCE A.O. HAS TAKEN ONLY SEGMENTAL PROFITS AND HAS NOT TAKEN ENTIRE ENTITY AS SUCH, WE ARE OF THE OPINION THAT OBJECTIO N RAISED BY THE ASSESSEE, THAT IT FAILS THE REVENUE FILTER DOES NOT HOLD GOOD. THEREFORE, WE DO NOT SEE ANY REASON TO EXCLUDE THIS COMPANY FROM THE COMPARABLES SELECTED. 8. COMPARABLES REJECTED BY TPO: A. JINDAL INTELLICOM PVT. LTD. : THE ASSESSEE ALSO WANTS INCLUSION OF JINDAL INTELLICOM PVT. LTD. ORIGINALLY, THE TPO VIDE HIS O FFICE LETTER DATED 17.08.2011 PROPOSED JINDAL INTELLICOM PVT. LT D. AS ONE OF THE COMPARABLE COMPANIES OUT OF 23 COMPANIES SELECT ED BY HIM (AT ITEM NO.17). HOWEVER, OUT OF THIS 23 COMPAN IES, 3 COMPANIES WERE DROPPED BY THE TPO, ONE SUCH BEING T HE ABOVE I.E., JINDAL INTELLICOM PVT. LTD. AS PER PARA 14. 1 AT PAGE 26 OF THE TPO ORDER, IT WAS STATED THAT IT WAS FAILED RPT FILTER. RPT ARE AT RS.6,39,73,545/- OUT OF OPERATING REVENUES O F RS.19,57,63,431/-. HOWEVER, THE ASSESSEE VIDE LETTE R DATED 08.09.2011 HAS OBJECTED TO THE COMPANY ON THE FUNCT IONALITY. ASSESSEE HAS OBJECTED 17 COMPARABLES ON THE BASIS O F FUNCTIONALITY, OUT OF WHICH, JINDAL INTELLICOM PVT. LTD. HAS BEEN 22 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. OBJECTED FOR THE REASON THAT THIS COMPANY CANNOT BE TREATED AS COMPARABLE AS THE NATURE OF SERVICES ARE DISTINCT A ND SEPARATE . HENCE, THE COMPANY IS TO BE REJECTED. SINCE THE ASS ESSEE HAS OBJECTED TO ON THE BASIS OF FUNCTIONALITY, THE TPO ACCEPTED THE SAME AND DID NOT INCLUDE IN THE FINAL LIST OF COMPA RABLES. HOWEVER, ASSESSEE VIDE ANNEXURE-31 CONTENDED BEFORE THE DRP THAT THE ABOVE COMPANY SHOULD BE SELECTED AS COMPAR ABLE ON THE BASIS OF RELATED PARTY TRANSACTIONS FILTER. THE ENTIRE OBJECTIONS PLACED BEFORE THE DRP IS ABOUT CALCULATI NG RELATED PARTY FILTER. IT FURTHER SUBMITTED THAT ASSESSEE IS PERFORMING SIMILAR FUNCTIONS AS COMPARED TO THE ASSESSEE AND D OES NOT FAIL THE RPT FILTER. AFTER PERUSING THE BUSINESS OF JINDAL INTELLICOM PVT. LTD. AS WELL AS THE ARGUMENTS OF THE LEARNED C OUNSEL, WE ARE OF THE OPINION THAT THIS COMPANY IS FUNCTIONALL Y DIFFERENT FROM THE ASSESSEE COMPANY, AS IT IS IN THE CALL CEN TRE ACTIVITY AND NOT EXACTLY IN PROVISION OF SERVICES OF HIGH EN D IN THE AREA CAD/CAE SERVICES. SINCE THAT COMPANY IN THE CALL CE NTRE ACTIVITY, WE AGREE WITH THE INITIAL OBJECTION OF TH E ASSESSEE THAT THE COMPANY SHOULD BE REJECTED ON FUNCTIONALITY. EV EN THOUGH ASSESSEE IS CONTESTING ONLY ON THE BASIS OF RELATED PARTY TRANSACTIONS, NO ARGUMENTS WERE EXTENDED BEFORE US ABOUT THE FUNCTIONALITY ASPECT OF THE ABOVE COMPANY. KEEPING ORIGINAL OBJECTIONS IN MIND, WE ARE OF THE OPINION THAT THE ABOVE COMPANY IS NOT FUNCTIONALLY SIMILAR TO THE ASSESSEE S OPERATIONS AND ACCORDINGLY, THE SAME CANNOT BE SELE CTED. THE ARGUMENTS OF THE ASSESSEE ON THIS ISSUE ARE REJECTE D. 23 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. B. INFORMED TECHNOLOGIES : THE ASSESSEE ALSO CONTESTED BEFORE THE DRP ABOUT INCLUSION OF INFORMED TECHNOLOGIES. ITS CONTENTION VIDE ANNEXURE-32 TO THE OBJECTIONS BEFORE DRP WAS THAT T PO HAS NOT SELECTED THIS COMPANY ON THE GROUND THAT COMPAN Y FAILS ITES REVENUE OF MORE THAN 75% OF OPERATING INCOME F ILTER APPLIED BY THE TPO. IN FACT, THIS COMPANY IS NOT IN THE TPOS SELECTION AND NO WHERE DISCUSSED IN THE T.P. ORDER. SINCE IT IS NOT SELECTED BY THE TPO, WE ARE UNABLE TO EXAMINE W HY THE SAME WAS EXCLUDED AS THERE IS NO DISCUSSION IN THE ORDER. IT WAS THE CONTENTION OF THE ASSESSEE BEFORE THE DRP T HAT THE ABOVE COMPANY IS IN SIMILAR BUSINESS OF BPO OPERATI ONS AND IS ITES REVENUE IS ABOUT RS.2.96 CRORES WHICH IS 100% OF THE OPERATING REVENUE AND THEREFORE, SATISFIED THE FILT ER ADOPTED BY THE A.O. FURTHER, ITS CONTENTION WAS THAT IT IS IN THE SIMILAR BUSINESS LIKE DATAMATICS FINANCIAL (BPO) DIV. (AS D ISCUSSED ABOVE) AND SINCE DATAMATICS FINANCIAL (BPO) DIV. IS SELECTED AS COMPARABLE COMPANY, THIS COMPANY ALSO SHOULD BE SEL ECTED. ASSESSEE ALSO RELIED ON THE COORDINATE BENCH DECISI ON OF MUMBAI TRIBUNAL IN THE CASE OF DHL EXPRESS (INDIA) P. LTD. ITA.NO.7360/MUM/2010 WHEREIN THE NON-OPERATING INCO ME SUCH AS INTEREST INCOME, RENT RECEIPTS, DIVIDENDS E TC., WERE EXCLUDED WHILE CONSIDERING THE OPERATIONAL INCOME, AS THESE ITEMS HAVE NOTHING TO DO WITH THE MAIN OPERATIONS O F THE ASSESSEE. IT WAS THE CONTENTION OF THE ASSESSEE THA T IF THESE NON-OPERATING INCOMES ARE EXCLUDED THE ASSESSEE FAL LS WITHIN THE FILTERS ADOPTED BY THE TPO AND TPO NOT SELECTED THIS CASE WRONGLY. THE DRP, HOWEVER, HAS NOT DISCUSSED THIS I SSUE AT ALL. AS WE HAVE POINTED OUT, THERE IS NO DISCUSSION BY T HE TPO IN 24 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. THE ORDER AS IT IS NOT IN LIST THE COMPARABLES SELE CTED BY THE TPO, BECAUSE OF APPLICATION OF FILTERS, MAY BE THE FILTER IS WRONGLY APPLIED BY INCLUDING NON-OPERATIONAL INCOME AS PART OF OPERATIONAL INCOME. SINCE, THESE ASPECTS COULD NOT BE VERIFIED BY US, WE CANNOT DIRECT THE TPO TO ACCEPT THIS AS A COMPARABLE. TO BE FAIR TO THE ASSESSEE, SINCE, THIS COMPARABLE WAS NOT AT ALL DISCUSSED EITHER BY TPO OR BY DRP, E VEN THOUGH SPECIFICALLY RAISED VIDE ANNEXURE-32, WE ARE OF THE OPINION THAT THE ISSUE REQUIRES EXAMINATION BY THE TPO. WE HAVE ALREADY UPHELD INCLUSION OF DATAMATICS FINANCIAL (BPO) DIV. SEGMENTAL AS A COMPARABLE ABOVE. SINCE THE OPERATIONS ARE STA TED TO BE SIMILAR, THIS ASPECT REQUIRE EXAMINATION BY TPO. IN CASE, THIS COMPANY SATISFIES PARAMETERS/FILTERS ADOPTED BY THE TPO, THEN, THIS SHOULD BE CONSIDERED AFRESH, AFTER GIVIN G DUE OPPORTUNITY OF HEARING TO THE ASSESSEE. THEREFORE, SELECTION OF THIS COMPARABLE IS RESTORED TO THE FILE OF THE TPO/ A.O. TO EXAMINE AND DECIDE ACCORDINGLY. 9. RISK ADJUSTMENT : ASSESSEE RAISED GROUND NO. 2.5 WITH REFERENCE TO DISREGARD OF RULE 10B(2) AND RULE 10B(3) AND VIDE SUB-RULE 2.5.2. ASSESSEE HAS RAISED THE RISK ADJUSTMENT ISSU E. ASSESSEE RAISED THIS ISSUE BEFORE THE DRP VIDE ANNEXURE-9 IN THE OBJECTIONS TO THE DRAFT ORDER. ASSESSEE ADMITS THAT IT DID NOT PROVIDE ANY RISK ADJUSTMENT IN THE T.P. DOCUMENTATI ON AS MARGIN OF THE COMPARABLE COMPANIES PRESENTED IN THE T.P. RETURN WAS IN LINE WITH THE ASSESSEES OPERATING MA RGIN. IT WAS THE SUBMISSION THAT ASSESSEE AT ANY POINT OF TIME D ID NOT DENY THE FACT THAT COMPARABLE COMPANIES SELECTED IN THE T.P. REPORT HAVE FAIR MARKET RISK. THEREFORE, ASSESSEE RESERVES THE RIGHT TO 25 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. CONDUCT SUCH RISK ADJUSTMENT IN FUTURE DURING THE T IME OF ASSESSMENT. IT WAS SUBMITTED THAT RISK ADJUSTMENTS QUANTIFIED WAS AT 0.1%. LEARNED COUNSEL REFERRED TO ANNEXURE-9 AND GROUND TAKEN IN THIS REGARD BEFORE THE DRP TO SUBMI T THAT DRP ALSO HAS NOT CONSIDERED THE RISK ADJUSTMENT EVEN TH OUGH ASSESSEE HAS PROVIDED TWO WAYS OF QUANTIFYING THE M ARKET RISK. IT WAS THE SUBMISSION THAT THE RISK ADJUSTMENT IS T O BE CONSIDERED BY THE TPO AND RELIED ON VARIOUS LEGAL A RGUMENTS AS PLACED IN PARAS 7 AND 9 OF THE ANNEXURE-9 TO THE OBJECTIONS TO THE DRAFT ORDER. 10. AFTER HEARING RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT THIS ISSUE IS TO BE EXAMINED BY THE TP O AFRESH. ASSESSEE ADMITS THAT IT IS HAVING A SINGLE CUSTOMER RISK, WHEREAS, OTHER COMPARABLE COMPANIES HAS MARKET RISK . THE TPO IN FACT, DISCUSSED THIS ISSUE ELABORATELY VIDE PARA 16.2 ONWARDS AND VIDE PARA 16.2.3 ANALYSED THE RISK AND CONCLUDED THAT THERE IS NO RISK ADJUSTMENT GIVEN AS THE SINGLE CUS TOMER RISK/POLITICAL RISK OF TAX PAYER COMBINED WITH ARIT HMETIC MEAN PRICE CONSIDERED IN THE CASE OF COMPARABLE COMPANIE S QUALIFIES THE RISK DIFFERENTIAL IF ANY BETWEEN THE TAX PAYER AND COMPARABLE INDIAN ENTERPRISE . SINCE DRP HAS NOT GIVEN ANY OPINION ON THIS, WE ARE OF THE OPINION THAT THIS IS SUE REQUIRES DETAILED EXAMINATION AFRESH BY THE TPO AND DRP. IN CASE OF ANY ADJUSTMENT TO BE REQUIRED TO BE DONE, AFTER EXC LUDING THE COMPARABLES AS STATED ABOVE AND INCLUSION OF OTHER COMPARABLES IF ANY AFTER EXAMINATION AS DIRECTED TH EREIN, RISK ADJUSTMENTS MAY BE CONSIDERED BY THE TPO, IF SUCH S ITUATION ARISES. IN CASE THE PLI DETERMINED AFTER EXAMINATIO N OF THE COMPARABLES IS WITHIN THE PARAMETERS AND NO ADJUSTM ENT IS TO 26 ITA.NO.1850/HYD/2012 HYUNDAI MOTORS INDIA ENGINEERING P. LTD. BE MADE FOR THE INTERNATIONAL TRANSACTION, THEN, AD JUSTMENT FOR RISK MAY BECOME ACADEMIC IN NATURE. WITH THESE OBSE RVATIONS, THE ISSUE OF RISK ADJUSTMENT IS RESTORED TO THE FIL E OF THE TPO FOR NECESSARY CONSIDERATION. GROUND IS ACCORDINGLY CONSIDERED AS ALLOWED FOR STATISTICAL PURPOSES. 11. THE A.O. / TPO IS DIRECTED TO EXAMINE THE ISSU ES AS DIRECTED ABOVE, EXCLUDING THE COMPARABLES WHICH ARE DECIDED AS NOT COMPARABLE AND RE-COMPUTE THE ARITHM ETIC MEAN SO AS TO EXAMINE WHETHER ANY T.P. ADJUSTMENT I S REQUIRED AS PER THE PROVISIONS OF THE ACT. THE GROU NDS ARE CONSIDERED AS PARTLY ALLOWED FOR STATISTICAL PURPOS ES. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST FEBRUARY, 2014. SD/- SD/- (SAKTIJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACOUNTANT MEMBER HYDERABAD, DATE 21 ST FEBRUARY, 2014 VBP/- COPY TO : 1. HYUNDAI MOTORS INDIA ENGINEERING P. LTD., SURVEY NO .5/2 & 5/3, OPP. HITECH CITY RAILWAY STATION, IZZATNAGA R, LINGAMPALLY MANDAL, R.R. DISTRICT, HYDERABAD. 2. INCOME TAX OFFICER, WARD 2 (2), HYDERABAD. 3. DISPUTES RESOLUTION PANEL (DRP), HYDERABAD 4. ADDL.CIT, TRANSFER PRICING, HYDERABAD 5. D.R. ITAT, A BENCH, HYDERABAD.