ACIT, New Delhi V. M/s. Reservation Data Maintenance India (P) Ltd., New Delhi

ITA 2516/DEL/2017

AI Insights

The case involves an appeal by the Revenue against the order of the CIT (Appeals) which excluded certain companies from the list of comparables used to determine the ALP of international transactions conducted by M/s. Reservation Data Maintenance India Pvt. Ltd. with its associated enterprises. The Tribunal examined the functional similarities and financial circumstances of the comparables and upheld the CIT (Appeals)'s decision, noting that the excluded companies either had different business models or underwent significant changes that affected their comparability. The assessee's cross objections regarding the use of current year data for benchmarking and the inclusion of certain comparables were also addressed, with some grounds being dismissed as not pressed or based on precedents that favored the Revenue.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 113168 (ITAT-DELHI)
• Duration Of Justice: 13 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-12-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 08-09-2022
• Assessment Year: misc
• Appeal Filed On: 26-09-2009
• Other Referred Cases: Mumbai International Airport Private Limited Vs. Golden Chariot Airport, Cummins Turbo Technologies Ltd., PTC Software (India) (P.) Ltd., Capital IQ Information Systems (India) (P.) Ltd. Vs. Addl. CIT, Daksh Business Process Services (P.) Ltd. Vs. CIT, Rampgreen Solutions (P.) Ltd. Vs. CIT, Maersk Global Centers (India) (P.) Ltd. Vs. CIT, Quark Systems (P.) Ltd. Vs. CIT, WNS Business Consulting Services Ltd. Vs. ACIT
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Share purchase agreement; International transaction
• Section: 72

Judgement Text

I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 1 IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH “I”NEW DELHI ] BEFORE SHRI G. S. PANNU, PRESIDENT A N D SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER आ.अ.सं./I.T.A No.2516/Del/2017 िनधाᭅरणवषᭅ/Assessment Year: 2009-10 ACIT, Circle : 21 (2), New Delhi. बनाम Vs. M/s. Reservation Data Maintenance India Pvt.Ltd., E-9, Connaught House, Connaught Place, New Delhi – 110 001. PAN No. AAACR0121L A N D C. O. No. 151/Del/2020 [ in आ.अ.सं./I.T.A No.2516/Del/2017 ] िनधाᭅरणवषᭅ/Assessment Year: 2009-10 M/s. Reservation Data Maintenance India Pvt. Ltd., E-9, Connaught House, Connaught Place, New Delhi – 110 001. बनाम Vs. DCIT, Circle : 15 (1), New Delhi. PAN No. AAACR0121L अपीलाथᱮ/Appellants ᮧ᭜यथᱮ/Respondents िनधाᭅᳯरतीकᳱओरसे /Assessee by : Shri Tarandeep Singh, Advocate; राज᭭वकᳱओरसे /Revenue by : Shri M. Baranwal, Sr. D.R.; सुनवाईकᳱतारीख/ Date of hearing: 09/09/2022 उ᳃ोषणाकᳱतारीख/Pronouncement on : 02/12/2022 I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 2 आदेश /O R D E R PER C. N. PRASAD, J. M. : 1. This appeal and the cross objection are filed by the Revenue and the assessee respectively against the order of the ld. Commissioner of Income Tax (Appeals)-38, New Delhi [hereinafter referred to CIT (Appeals)] dated 30.01.2017 for the assessment year 2009-10. 2. The Revenue in its appeal has raised the following grounds of appeal:- “1. Whether the Ld.CIT(A) was justified in rejecting high margin comparables contested by the taxpayer and allowing to retain other low margin comparables in the final set of the TPO unopposed by the taxpayer, which were discharging similar nature of functions referred to as KPO by the Ld. CIT(A)even while ignoring the decision of the Hon’ble Supreme Court in the case of Mumbai International Airport Private Limited Vs. Golden Chariot Airport with regard to the “Doctrine of Election” and the “Doctrine of approbation and Reprobation”, wherein it has been laid down that litigant cannot change and choose its stand to suit its convenience. 2. Whether the Ld. CIT(A) was justified in laying down stringent standards of capability and attempting to identify exact replica of the taxpayer for comparability analysis, whereas the Indian law and the international jurisprudence recognize the reality that there cannot be an exact comparable in a given situation without any difference without any differences appreciating that such stringency will defeat the purpose of flexibility provided in comparability analysis for determination of ALP. 3. Whether the Ld. CIT(A) was justified in rejecting M/s Eclerx Services Ltd., M/s Accentia Technologies Limited and M/s Cosmic Global Limited as a comparable companies and relying upon the concept of KPO Vs. BPO in comparability analysis, super normal profit and functional difference whereas in reality there is a seamlessness in ITES functions and the comparability analysis is based upon functions, assets and risks than on the outcome of the service. 4. Whether the Ld. CIT(A) was justified in rejecting M/s Vishal Information Technologies Ltd. a. By holding that this company follows different model of business withoutappreciating that the provisions of the law especially those laid down under Sub- sec.2 and Sub-sec.3 of Rule 10B, do not assign any role to difference in mode of engagement of employees whether by way of employing them in their own premises through a vendor or on their own rolls for purpose of comparability analysis. I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 3 b. Without appreciating the fact that many of the comparables in ITESindustryprovide services through the employees of vendors and yet debit expenses under the head “Employee Expenditure” and thus, the same cannot be identified for the purpose of comparability. 3. The Revenue filed appeal against order of the ld. CIT (Appeals) in rejecting four comparables, namely, M/s. Eclerx Services Ltd., M/s. Accentia Technologies Limited, M/s. Cosmic Global Limited and M/s. Vishal Information Technologies Ltd. (Coral Hub) out of final set of comparables selected by the TPO, for the purpose of arriving at Arm’s Length Price (ALP) of the international transactions entered into by the assessee with its AEs. 3. Briefly stated the facts are that the assesese company is part of Deutsche Lufthansa AG which is a globally operating aviation group with around 400 companies and subsidiaries (collectively the Lufthansa Group). The group companies operate primarily in six business segments: passenger Transportation, Logistics, Maintenance, Repair and Overhaul (MRO), Information Technology (IT) Systems, Catering and Leisure Travel. The Passenger Transportation includes Lufthansa City Line GmbH, Air Dolomiti S.p.A., Eurowings Luftverkehrs AG (the Eurowings group) and Germanwings GmbH. The Logistics business operates through Lufthansa Cargo group. The Catering business includes LSG Lufthansa Services/Sky Chefs group. IT services is operated through Lufthansa Systems group. 4. The Assessing Officer based on the Transfer Pricing Documentation furnished by the assessee and on the facts presented in the analysis of functions performed, risks borne and I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 4 assets used, the assessee company has been characterized as an Information Technology (IT) enabled service provider with limited risk taking service provider which assumes minimal risks. The assessee noted Operating Profit margin to operating cost (OP/OC) on its international transactions was shown as under:- Profit and Loss Account F.Y. 2008-09 Operating Income Data/Software Receipts 360,021,854 IT enables Services Receipts 13,034,487 Other Operating Income 911,337 TOTAL OPERATING INCOME 373,967,678 OPERATING EXPENSES Other Operating Expenses 1,325,143 Employee Cost 217,096,399 Administration Cost 55,015,770 Selling Cost 615,926 Managerial Remuneration 13,824,027 Depreciation 14.10,9109 TOTAL OPERATING EXPENSES 301,987,103 OPERATING PROFIT 71,980,574 Non- Operating Income Interest on Fixed Deposit 5,453,381 Profit on Exchange Fluctuation 13,570,696 Non Operating Expense Donation 5,000 Interest Paid 251,905 Loss on Sale/Discard of assets 62,565 PROFIT BEFORE TAX 90,685,181 OP/OC 23.84% 5. The Arm’s Length Price of the international transaction representing data processing services provided by the assessee to its Associated Enterprises (AE) had been determined by applying Transactional Net Margin Method (TNMM). The operating profit to total I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 5 cost (OP/OC) ratio had been taken as the profit level indicator (PLI) in the TNMM analysis. The PLI of the assessee company was arrived at 23.84%. In the TP documentation the average PLI of the comparables was arrived at 14.34% as per the analysis carried out by the assessee. The assessee further up-dated mean margin of the comparables and calculated the mean margin at 10.10% through its submissions dated 9.05.2012. 6. After analysing transfer pricing documents and approach of the assessee towards the use of factors and search of comparables the Assessing Officer noted certain defects and a show cause was issued to the assessee. After considering the replies of the assessee the TPO selected final 7 set of comparables along with margins to determine Arm’s Length Price in the case of the assessee company as follows: S. No. Company Final Margin 1. Accentia Tech. 52.52% 2. Cosmic Global 50.90% 3. Crossdomain 25.63% 4. Infosys BPO 24.28% 5. Eclerx Services Ltd. 66.01% 6. Aditya Birla Minacs Worldwide Limited.. 23.22% 7. Coral Hub 37.05% Mean 39.94% 7. Accordingly the TPO made computation of Arm’s Length Price as under:- I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 6 Operating Cost. Rs.30,19,87,103 Add: Arm’s length margin – OP TC. 39.94% Arm’s length margin Rs.12,06,13,648 Operating revenue Rs.42,26,00,751 Operating revenue disclosed Rs.37,39,67,678 Difference Rs.4,86,330,73 % of International Transactions in Total 83.78% Difference to be adjusted. Rs.4,07,44,788 8. The assessee preferred appeal before the ld. CIT (Appeals) in considering the following comparables while computing the mean arm’s length margin . 1. Accentia Technology Ltd. 2. Crossdomain Solution Ltd. 3. Eclerx Services Ltd. 4. Coral Hub Ltd. 9. Assessee also contended before the ld. CIT (Appeals) that the following comparables should be considered for computing the mean arm’s length margin of the comparables:- 1. Datamatics Financial Services Ltd. 2. Motif India Infotech Pvt. Ltd. 3. Omega Healthcare Management Services Pvt. Ltd. 10. The ld. CIT (Appeals) considering the submissions and averments of the TPO excluded Eclerx Services Ltd., Accentia Technology Ltd., Cosmic Global Ltd. and Vishal Information Technology Ltd. (Coral Hub).The Revenue is in appeal before us in rejecting four comparables I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 7 by the ld. CIT (Appeals) out of final set of comparables selected by the TPO. 11. M/s. Cosmic Global Ltd.: With respect to this comparable, the ld. DR referring to page 31 of the assessment order submits that this comparable is selected by the assessee and he has not objected in inclusion of this comparable in the final set of comparables before the TPO, but the ld. CIT (Appeals) excluded the same. The ld. DR submits that since this comparable was picked up by the assessee and not by the TPO the ld. CIT (Appeals) should not have excluded this comparable. Therefore, ld. DR requests that this comparable be retained and only for the purpose of computing margins direction may be given to the Assessing Officer in respect of this comparable. 12. On the other hand, the ld. Counsel for the assessee, Shri Tarandeep Singh, referring to the written submissions filed before the ld. CIT (Appeals) submits that the assessee demonstrated with statistics before the ld. CIT (Appeals) that M/s. Cosmic Global is outsourcing major portion of its BPO activities and hence is having a different FAR profile in comparison to that of the assessee as the assessee is itself carrying on BPO activities with 71.81% of its total expenditure comprising of employee cost. The ld. Counsel submits that the financial statement of Cosmic Global clearly show that the said concern has incurred substantial portion of its total expenditure towards translation cost (approximately 57.28%) and one of the main items of its revenue is income from translation charges (approximately 94.88%). The ld. Counsel submits that assessee also relied on the decision of the Pune Bench of the Tribunal in the case of Cummins Turbo Technologies Ltd., reported in [(2016) 68 taxmann.com 273 (Pune) (Trib.)] where in Hon’ble ITAT following the ratio of the Hon’ble Delhi High Court in the case of Rampgreen I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 8 Solutions (P.) Ltd. [(2015) 377 ITR 533] held that Cosmic Global Ltd., was operating in different business model as the said concern was engaged in BPO and translation services whereas the assessee was an ITES provider and, therefore, Cosmic Global Ltd. was functionally dissimilar. The ld. Counsel further submits that the Pune Bench also considered the decision in the case of Pr. CIT Vs. PTC Software (India) (P.) Ltd. [(2019) 101 taxmann.com 117 (Bom.); BNY Mellon International Operations (India) (P.) Ltd. Vs. DCIT and also M/s. Capial IQ Information Systems (India) (P.) Ltd. Vs. Addl. CIT [(2014) 49 taxmann.com 313 (Hyd)] wherein it has been held that Cosmic Global is not to be considered as a comparable. 13. The ld. Counsel further submits that the Pune Bench of the Tribunal in the case of Cummins Turbo Technologies Ltd. (supra) also has taken note of the fact that the Tribunal in the case of Pr. CIT Vs. PTC Software (India) (P.) Ltd. held that in view of Special Bench of Chandigarh Tribunal in the case of CIT Vs. Quark Systems (P.) Ltd. [(2010) 38 SOT 307 (Chd.)] even if the assessee not challenged inclusion of a comparable either before the TPO or DRP the assessee can challenge for exclusion of such comparable before the Tribunal. The ld. Counsel submits that all these submissions were made before the ld. CIT (Appeals) and the ld. CIT (Appeals) considering the submissions rightly excluded Cosmic Global Ltd. from the comparables. 14. Accentia Technology Ltd.: The ld. DR referring to page Nos. 25 and 26 of TPO’s order submits that the objections of the assessee were considered by the TPO and held that there is functional similarity between Accentia Technology Ltd. and the assessee, as both are engaged in providing ITES services. The TPO observed that the clients/subscribers to which they are catering to are not important as long as their functions I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 9 remain the same. The ld. DR submits that since the observations of the TPO that the objection of the assessee that there are no segmentals, negated by the TPO since Accentia Technology Ltd., has one segment i.e. healthcare receivable management and the reporting of the segments does not arise. The ld. DR submits that the TPO has rightly rejected the contentions of the assessee to exclude Accentia Technology Ltd. from final set of comparables. 15. Referring to para 5.1.1 of CIT (Appeal) order, the ld. Counsel submits that Accentia had acquired 96% stake in M/s. Oak Technologies Inc. during financial year 2008-09 relevant to assessment year under consideration i.e. 2009-10 and, therefore, it should be rejected as comparable having peculiar economic circumstances and TPO himself has set criteria of rejecting companies affected by some peculiar economic circumstances. The ld. AR also submits that Accentia Technologies Ltd., in its management discussion and analysis stated that owing to the acquisition the company was able to increase its customer base from New Jersey and neighboring areas. Therefore, based on this it can be definitely inferred that the acquisition has certainly helped in the increase of top line and the bottom line of the company. The ld. Counsel for the assessee submits that taking all these facts into consideration the ld. CIT (Appeals) also following the decision of the Tribunal in the case of Excellence Data Research (P,) Ltd. [66 SOT 15 (Hyd.) (URO)] has rightly excluded Accentia Technologies Ltd. as comparable company holding that owing to extra-ordinary events this cannot be selected as a comparable. 16. Eclerx Services Ltd.: The ld. DR referring to page Nos. 28 and 29 of TPO’s order submits that the TPO rejected the contentions of the assessee that this company cannot be considered as comparable for the reason that the share purchase agreement of the company was executed I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 10 in the year 2007 while the financial year under consideration is 2008-09. Also further AMP expenditure is not a factor applied either by the office of the TPO or the assessee to select comparables. The ld. DR further submits that under TNMM it is impossible to pick comparable of the assessee which is replica of the assessee company. The ld. DR, therefore, submits that the TPO has rightly rejected the contention of the assessee that Eclerx Services Ltd., should be excluded from final set of comparables. 17. The ld. Counsel for the assessee submits that Eclerx Services Ltd., which is a KPO service provider cannot be compared with that of the assessee which is engaged in the business of providing ITES-BPO services. The ld. Counsel for the assessee submits that though this crucial function itself was high-lighted before the TPO, however, the TPO chose not to comment on the functional dissimilarity. The ld. Counsel for the assessee submits that the ld. CIT (Appeals) has rightly held that the activities of the assessee are routine activities and Eclerx is a KPO and hence is not a fit comparable. The ld. Counsel for the assessee submits that the ld. CIT (Appeals) also relied on the decision of M/s. Daksh Business Process Services (P.) Ltd. [(2016) 72 taxmann.com 44 (Del.)] in rejecting the Eclerx as not a comparable. The ld. Counsel also placed reliance on the decision of the Delhi High Court in the case of Rampgreen Solutions (P.) Ltd.Vs. CIT [377 ITR 533] wherein Eclerx Services Ltd., which was providing KPO services was rejected as a comparable as the Rampgreen Solutions (P.) Ltd. was engaged in Information Technology Enabled Services (ITES). 18. Coral Hub Ltd. (formerly known as M/s. Vishal Technologies Ltd.): The ld. DR referring to page Nos. 28 of TPO’s order submits that the TPO rejected the contention of the assessee that Coral Hub I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 11 should be excluded from comparables on the ground that in ITES sector the number of employees is not very important and the determining factor for doing business. The ld. DR supported the order of the ld. TPO. 19. The ld. Counsel for the assessee submits that the assessee has objected for inclusion of Coral Hub Ltd., for the reason that Coral Hub Ltd., is out-sourcing its activities to third party ventures and, therefore, its business model is different. The ld. Counsel for the assessee submits that the Hon’ble Delhi High Court in the case of Rampgreen Solutions (P.) Ltd. Vs. CIT (supra) at para 38 held that a company which out-sourced its activities cannot be held comparable of a company which carries BPO activities with its own employee man-power. The ld. Counsel submits that the decision of the Hon’ble Delhi High Court squarely applies to the facts of the assessee’s case. 20.1 Heard rival submissions perused the orders of the authorities below. With respect to Cosmic Global we find that the ld. CIT (Appeals) excluded this company from final set of comparables for the reason that Cosmic Global is out-sourcing limited portion of its BPO work. The ld. CIT (Appeals) also relied upon the decision of the Pune Bench in the case of Cummins Turbo Technologies Ltd. (supra) wherein the Tribunal following the decision of the Hon’ble Delhi High Court in the case of Rampgreen Solutions (P.) Ltd. Vs. CIT (supra) held that the business model in which Cosmic Global Ltd. has functioned is quite dissimilar to the business model of the assessee while carrying out the activities of ITES provider. 20.2 We further observe that for the very same assessment year i.e. assessment year 2009-10 the Tribunal in the case of ACIT Vs. WNS I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 12 Business Consulting Services Ltd. In ITA. 7439/Del/2017 dated 11.04.2022 the Delhi Bench of the Tribunal affirmed the order of the ld. CIT (Appeals) in excluding Cosmic Global Ltd. as one of the comparables for the reason that Cosmic Global Ltd. is functionally different from that of the assessee as it out-sourced major part of its work and it had an exceptional performance, high turnover, abnormal profit in the relevant assessment year. The Tribunal while coming to the said conclusion observed as under:- “8.1 The Ld. DR argued that this company was chosen by the assessee itself as comparable and that no objection before the Ld. TPO was taken by the assesee against its inclusion during the transfer pricing proceedings. The assessee challenged the inclusion of this company as comparable for the first time before the Ld. CIT(A). Therefore the claim of the assessee for the exclusion of this company being incomparable for the various reasons cited before the Ld. CIT(A), is not sustainable in law. 8.2 The Ld. AR argued that this company was wrongly chosen by the assessee and that there can be no estoppel against the provisions of the Act. In support, the Ld. AR relied on the decision of the Special Bench of the Tribunal in Dy. CIT vs. Quark System (P.) Ltd. (2010) 38 SOT 307. So far as the comparability of this company viz-a-viz the assessee is concerned, the Ld. AR relied on the submissions of the assessee made before the Ld. CIT(A) for excluding this company as comparable and the findings of the Ld. CIT(A) in respect thereof. 8.3 We have heard the Ld. Representative of the parties and perused the material on record as well as the orders of the Ld. TPO/AO/CIT(A). The very first contention of the Ld. AR is that even if the assessee did not take up the issue of considering this company as comparable during the transfer pricing proceedings, the assessee cannot be prohibited from adopting a different stand later before the appellate authorities. We agree with the contention of the Ld. AR in view of the decision of the Special Bench of the Tribunal in the case of Quark Systems (P.) Ltd. (supra) wherein the Hon’ble Bench held the company which was included by the assessee and also by the Ld. TPO in the list of comparables at the time of computing arm’s length price can be I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 13 excluded by the Tribunal, if the assessee proves that the same was wrongly included. 8.4 From the perusal of the Ld CIT(A)’s order, we notice that before the Ld. CIT(A) the assessee has submitted that this company is functionally different from that of the assessee and outsources major part of its work and that this company had an exceptional performance, high turnover, abnormal profits in the relevant assessment year. Hence, this company should not be considered as comparable to that of the assessee. The Ld. CIT(A) after considering the detailed submissions made by the assessee in respect of exclusion of this company and various judicial pronouncements relied upon by the assessee in support thereof, directed the Ld. AO/TPO to exclude this company from the list of comparable companies by recording the following finding :- “6.1.3.2 I have perused the submission of appellant and the Annual Report of the Company for FY 2008-09 and it is observed that Cosmic Global is engaged in outsourcing of business operations. It is also noted that the Appellant does not outsource any part of its operations to any third-party whatsoever. This point has also been upheld in several rulings for AY 2009-10, including Delhi ITAT and High Court rulings in the cases of Sun Life India and Xchanging Technology. Accordingly, the Appellant’s claim in respect of this company is allowed and the AO/TPO is directed to exclude this company from the list of comparable companies.” The Ld. CIT(A) arrived at his final conclusion to exclude this company by recording cogent reasons supported by precedents based on aforementioned submissions of the assessee and material on record. Hence, we endorse the findings of the Ld. CIT(A) and accordingly hold that this company be excluded from the list of comparable companies. 9. Accordingly, we conclude that there is no merit in the appeal of the Revenue as we have endorsed the findings of the Ld. CIT(A) in the matter of exclusion of the aforementioned three companies from the list of comparable companies. The Ld. AO / TPO is, therefore directed to determine the ALP of the international transaction of “provision of ITeS” afresh in consonance with our above directions.” I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 14 20.3 In view of the above we affirm the order of the ld. CIT (Appeals) in excluding Cosmic Global Ltd., from the final set of comparables selected by the TPO for the purpose of bench-marking international transactions. 21.1 With regard to the comparable, namely, Accentia Technologies Ltd. we find that the Hon’ble Bombay High Court in the case of DCIT Vs. PTC Software India Pvt. Ltd. [101 taxmann.com 117] held as under:- “(i) The impugned order of the Tribunal has excluded M/s. Accentia Technologies Ltd., from the list of comparables to determine the ALP of the Respondent’s transactions. (ii) The impugned order renders a finding of fact that the nature of activities carried out by M/s. Accentia Technologies Ltd. are different from that carried out by Respondent M/s. Accentia Technologies Ltd. develops its own software and rendered Medical transcription services while the Respondent is providing BPO Services. Besides the impugned order of the Tribunal held that high profit margins of M/s. Accentia Technologies Ltd., was attributable to amalgamation which took place in the previous years relevant to subject Assessment Year. Therefore, not comparable. (iii) In fact, this Court in Pr. CIT Vs. Aptara Technologies (P.) Ltd. [(2018) 92 taxmann.com 240] has upheld the view of the Tribunal in not accepting the Accentia Technologies Ltd., as comparable, inter alia, on account of fact that extra- ordinary event such as merger/amalgamation would affect the profitability of M/s. Accentia Technologies Ltd., Thus making it incomparable. (iv) Further, in that case, as in this case, the Tribunal has also recorded a finding of fact that the activities of M/s. Accentia Technologies Ltd., and the Respondent are different. Thus not comparable. The above finding of fact is not shown to be perverse.” I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 15 21.2 As could be seen from the above the Hon’ble Bombay High Court affirmed the order of the Tribunal in holding that the nature of activities carried out by Accentia Technologies Ltd. are different from that carried by the assessee PTC Software India Pvt. Ltd. It was observed that Accentia Technologies Ltd. developed its own soft-ware and rendered medical prescription services while the assessee is providing BPO services. It was also the observation that the high profit margin of Accentia Technologies Ltd. was attributable to amalgamation which took place in the previous year relevant to assessment year 2009-10 which is the same assessment year in the case of the assessee also under consideration before us. The Hon’ble High Court also took note of the fact that in the case of PCIT Vs. Uptron Technologies Ltd. [92 taxmann.com 240] the view of the Tribunal in not accepting the Accentia Technologies Ltd. as comparable was upheld for the reason that extraordinary event such as merger/ amalgamation would effect the is profitability of Accentia Technologies Ltd. thus making this company as in-comparable. We further notice that the co-ordinate bench of the Tribunal in the case of ACIT Vs. WNS Business Consulting Services Pvt. Ltd. in ITA. 7439/Del/2017 dated 11.04.2022 for the assessment year 2009-10 held as under:- “6.1 The Ld. DR strongly relied upon the order of the Ld. TPO and drew our attention to the Ld. TPO’s comments for rejecting the objection raised by the assessee against inclusion of this company in the list of comparables. The objections of the assessee and the TPO’s remarks as recorded in para 8 page 24-25 of the TPO’s order is reproduced below :- S. No. Name of the Company Objections of the assessee Remarks of this office 1. Accentia Technologies Ltd. The assessee’s arguments for rejection on the grounds that the The objection is not acceptable as the services offered by the company are ITES services may be to I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 16 company is not functionally comparable. a different sector in comparison to that of the assessee, but in TNMM so much of minor difference can be tolerated as TNMM allows some degree of flexibility and tolerance in the matter of selection of comparables because, under this method, Net Margins are compared and some amount of functional dissimilarity can be tolerated at the net margin level, i.e., to a certain extent, functional dissimilarities are subsumed and taken care of at the net margin level. Therefore, it is an appropriate comparable. 6.2 The Ld. AR submitted that there were certain extraordinary events that took place in this company in the form of mergers and acquisitions in the relevant financial year and hence this company should not be considered as a comparable company. He further placed reliance on the submissions made by the assessee before the Ld. CIT(A) which are recorded by him in para 6.1.1.1 of his order and pleaded for exclusion of this company on the ground of functional dissimilarity and high turnover of this company as compared to that of the assessee. He submitted that the case of the assessee is squarely covered by several decisions of the jurisdictional Delhi ITAT and Hon’ble Delhi High Court for AY 2009- 10 itself wherein this company has been held to be a non- comparable company. 6.3 We have heard the Ld. Representative of the parties and perused the material on record as well as the orders of the Ld. TPO/AO/CIT(A). In the light of the detailed submissions of the assessee and various judicial precedents in support of its contention, the Ld. CIT(A) directed the Ld. AO/TPO to exclude this company from the list of comparable companies by recording the following finding :- I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 17 “6.1.1.2. I have perused the submission of appellant and the Annual Report of the Company for FY 2008-09. It is observed that Accentia is engaged in several mergers and acquisitions during the said year. Besides, the company is functionally different vis-a-vis the Appellant, being engaged in software services and products and KPO services (which are not comparable to IT-enabled Services rendered by the Appellant). This viewpoint has also been upheld in several rulings for AY 2009-10, including Delhi ITAT rulings in the case of Sun Life India, Xchanging Technology and Macquarie Global. Accordingly, the AO/TPO is directed to exclude this company from the list of comparable companies.” 6.4 The case of the assessee is supported by several decisions of the Jurisdictional ITAT and Hon’ble Delhi High Court wherein it has consistently been held that a company cannot be considered as comparable because of exceptional financial results due to mergers, demergers etc, one of such comparable companies considered by the authorities/ courts being Accentia Technologies Ltd. The Delhi High Court in the case of PCIT vs. Ameriprise India Pvt. Ltd. (ITA 461/2016) has upheld the finding of the Tribunal that M/s. Accentia Technologies Ltd. be excluded from the list of comparables on the ground that certain events had occurred during the previous periods which distorted the profitability thereby increasing the margin. The Ld. TPO in his order has made a remark that certain amount of functional dissimilarity is subsumed in TNMM at net margin level and hence this company is an appropriate comparable. We are unable to subscribe to this view of the Ld. TPO. In our opinion, this indicates that the Ld. TPO himself is somewhere convinced that functions performed by this company are different than that of the assessee. The Ld. CIT(A) has categorically recorded the finding that this company is functionally different than that of the assessee after looking at the annual report of this company and the information available in public domain submitted by the assessee before him. We notice that the Ld. CIT(A) directed to exclude this company as a comparable after recording cogent reasons backed with precedents. We, therefore do not find any reason to interfere with the findings of the Ld. CIT(A) and uphold his view.” 21.3 Respectfully following the decision of the Hon’ble Bombay High Court we hold that the functions of the assessee company and the comparable selected by the TPO with that of Accentia Technologies Ltd., I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 18 are dissimilar and also since during the assessment year 2009-10 there were extra-ordinary events such as merger/amalgamation, this company cannot be considered as comparable. Thus, the ld. CIT (Appeals) has rightly excluded Accentia Technologies Ltd. from the final set of comparables selected by the TPO. We affirm the order of the ld. CIT (Appeals) on this score. 23.1 With regard to Eclerx Services Ltd. we find that the activities of Eclerx Services Ltd., is a KPO providing specialized services whereas the activities of the assessee are in the nature of routine BPO services. We observe that the ld. CIT (Appeals) following the decision of the Hyderabad Bench of the Tribunal in the case of Daksh Services Ltd. (supra) held that Eclerx Services Ltd., cannot be used as a comparable. We observe from the order of the Hyderabad Bench of the Tribunal in the case of Daksh Business Process Services Ltd., (which was extracted by the ld.CIT (Appeals) in his order at page 11) that Eclerx Services Ltd. provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets financial services and retail and manufacturing. There is also a finding that the company claimed to be providing complete business solutions by combining people processing improvement and automation. The company claimed to have employed over 1500 domain specialists working for the clients and it is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals - financial services and retail and manufacturing. Therefore, the Tribunal keeping in view the nature of service rendered by Eclerx Services Ltd. and its functional profile held that this company is mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with assessee Daksh Business Process I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 19 Services Ltd. which is mainly engaged in providing low-end services to the group concerns. 23.2 We also find that Hon’ble Delhi High Court in the case of Rampgreen Solutions (P.) Ltd. Vs. CIT (supra) excluded Eclerx Services Ltd. which is a KPO service provider from comparing with that of a low- end ITES provider. The Hon’ble High Court held as under:- “35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) (P.) 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/sendee characteristics, functions undertaken, assets used, risks assumed. This is essentia! to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP. 37. Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) (P.) Ltd. (supra), the Special I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 20 Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, contenT operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assesses. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. In Maersk Global Centers (India) (P.) Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in Capital IQ Information Systems (India) (P.) Ltd. (supra), wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits.” 23.3 In the case on hand the assessee is providing only ITES services and whereas Eclerx Services Ltd. which provides data analytics and data processing solutions to some of the largest brands in the world and is recognized expert in chosen markets financial services, retail and manufacturing is a data analytic KPO service provider specialized in two verticals financial services and retail manufacturing, cannot be considered as a comparable company of that of the assessee and the ld. CIT (Appeals) rightly excluded Eclerx Services Ltd. from the final set of comparables selected by the TPO. I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 21 24.1 With regard to Coral Hub (formerly known as Vishal Technologies Ltd.) we notice that this company has out-sourced its BPO activities and the Hon’ble Delhi High Court in the case of Rampgreen Solutions (P.) Ltd. Vs. CIT (supra) held that a company which out-sourced its activities cannot be held comparable with a company which carries BPO activities as business model of both the companies are different. The Hon’ble High Court observed as under:- “38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the out-sourcing of services by Vishal would have no bearing on the profitability of the said entity.” 24.2 We also observe that the Pune Bench of the Tribunal in the case of Cummins Turbo Technologies Ltd. (supra) observed that the Hyderabad Bench of the Tribunal in the case of Capital IQ Systems Pvt. Ltd. (supra) held that concerns, who act as inter-mediatories having out-sourced its activity cannot be said to be with a concern which is rendering services through its own employees and, therefore, the concerns are out-sourced its activities are not a good comparable company to include for the purpose of comparability analysis as such companies operates under a different business model which impairs operating margins. In view of the above, we hold that the I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 22 ld. CIT (Appeals) rightly excluded Coral Hub Ltd. from the final set of comparable companies selected by the TPO. Thus, we sustain the order of the ld. CIT (Appeals) and reject the grounds raised by the Revenue. 25. Coming to cross objection filed by the assessee the following grounds were raised:- “1. That on facts and in law the CIT(A) has erred in upholding the use of only the current year data for benchmarking of international transactions. 2. That on facts and in law the CIT(A) erred in upholding use of M/s Crossdomain Solutions Limited as a comparable. 3. That on facts and in law the CIT(A) erred in upholding rejection of M/s Datamatics Financial Services Ltd as a comparable. 4. Thaton facts and in law the AO/CIT(A) erred in not allowing benefit of working capital adjustment.” 26. The ld. Counsel for the assessee, at the outset, submits that ground No. 1 of cross objection i.e. as to whether only current year data can be used for bench-marking international transactions, submits that the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. Vs. DCIT [(2015) 376 ITR 183 (Del.)] decided the issue against the assessee. 27. In view of the submissions of the ld. Counsel, following the decision of the Hon’ble Delhi High Court this ground is dismissed. 28. The ld. Counsel submits that ground Nos. 2 and 3 raised in the cross objections are in respect of comparables, namely, Crossdomain Services Ltd. and Datamatics Function Services Ltd. as comparables and these grounds are not pressed. I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 23 29. In view of the submissions of the ld. Counsel, ground Nos. 2 and 3 are dismissed as not pressed. 30. In respect of ground No. 4 that the AO/CIT (Appeals) erred in not allowing benefit of working capital adjustment the ld. Counsel referring to page No. 21 of the order of the ld. CIT (Appeals) submits that the ground raised by the assessee before the ld. CIT (Appeals) for not allowing working capital adjustment has been decided as infructuous without considering the submissions of the assessee. 31. On hearing both the parties, we restore this ground to the file of the Assessing Officer, who shall consider the claim of the assessee in accordance with law. This ground is allowed for statistical purpose. 32. In the result, the appeal of the Revenue is dismissed and the cross objection of the assessee is partly allowed, for statistical purpose. Order pronounced in the open court on : 02/12/2022. Sd/- Sd/- ( G. S. PANNU ) ( C. N. PRASAD ) PRESIDENT JUDICIAL MEMBER Dated : 02/12/2022. *MEHTA* Copy forwarded to 1. Appellants; 2. Respondents; I.T.A. No. 2516/Del/2017 AND C. O. No. 151/Del/2020. 24 3. CIT 4. CIT (Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, New Delhi. Date of dictation 25.10.2022 Date on which the typed draft is placed before the dictating member 02.11.2022 Date on which the typed draft is placed before the other member 02.12.2022 Date on which the approved draft comes to the Sr. PS/ PS 02.12.2022 Date on which the fair order is placed before the dictating member for pronouncement 02.12.2022 Date on which the fair order comes back to the Sr. PS/ PS 02.12.2022 Date on which the final order is uploaded on the website of ITAT 02.12.2022 Date on which the file goes to the Bench Clerk 02.12.2022 Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the order