Equant Solutions India Pvt. Ltd., Gurgaon V. ACIT, Gurgaon

ITA 3760/DEL/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97276 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 3 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 24-06-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 12-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BHASKAR GOSWAMI SENIOR
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I : NEW DELHI) BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL MEMBER ITA NO.3760/DEL./2013 (ASSESSMENT YEAR : 2006-07) M/S. EQUANT SOLUTIONS INDIA PVT. LTD., VS. ACIT, CIRCLE-1, INFINITY TOWER, TOWER-B, GURGAON. 8 TH FLOOR, DLF PHASE II, SECTOR- 25 GURGAON (HARYANA) (PAN : AABCE4540P) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI KANCHAN KAUSHAL, FCA AND SHRI RAVI SHARMA ADVOCATE REVENUE BY : SHRI BHASKAR GOSWAMI, SENIOR DR DATE OF HEARING : 24.06.2015 DATE OF PRONOUNCEMENT : 18.09.2015 O R D E R PER A.T. VARKEY, JUDICIAL MEMBER : THIS APPEAL, AT THE INSTANCE OF THE ASSESSEE, IS DI RECTED AGAINST THE ASSESSMENT ORDER DATED 12.04.2013 PASSED U/S 14 3(3) R.W.S 144C OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT) FOR THE ASSESSMENT YEAR 2006-07. 2. THE APPELLANT/ASSESSEE, EQUANT SOLUTIONS INDIA P RIVATE LIMITED ('THE COMPANY' / 'ASSESSEE') IS A SUBSIDIARY OF EGN BV, NETHERLANDS. 2 ITA NO.3760/DEL./201 3 THE RELEVANT ASSESSMENT YEAR 2006-07 I.E. FINANCIAL YEAR ('FY') 2005- 06 WAS THE FIRST YEAR OF OPERATIONS OF THE ASSESSEE . DURING FY 2005-06 THE ASSESSEE WAS PRIMARILY ENGAGED IN PROVIDING SERVICES IN THE FOLLOWING TWO SEGMENTS :- (I) INFORMATION TECHNOLOGY ENABLED SERVICES (HERE INAFTER REFERRED TO AS 'ITES') - INFORMATION TECHNOLOGY ENA BLED NETWORK MANAGEMENT / TECHNICAL SUPPORT AND OTHER BA CK- OFFICE SUPPORT SERVICES INCLUDING REMOTE MONITORING AND MAINTENANCE OF THE EQUANT GROUP'S GLOBAL NETWORK PLATFORMS AND SERVICES, CO-ORDINATION, REMOTE CONFI GURATION AND IMPLEMENTATION OF QUALITY CUSTOMER NETWORKING SOLUTIONS TO ITS GROUP COMPANY IN IRELAND, EQUANT N ETWORK SERVICES INTERNATIONAL LIMITED. (II) CONTRACT SOFTWARE DEVELOPMENT (HEREINAFTER RE FERRED TO AS 'CSD') SERVICES - DEVELOPING AND MAINTENANCE OF SOF TWARE APPLICATIONS FOR USE WITHIN EQUANT GROUP/ ASSOCIATE D ENTERPRISES (HEREINAFTER REFERRED TO AS 'AES'). 2. FOR RENDERING THESE SERVICES TO THE AES, THE ASSESSEE WAS REMUNERATED ON AN ARM'S LENGTH COST PLUS BASIS I.E IT WAS COMPENSATED FOR ALL ITS OPERATING COSTS, PLUS A PRE-AGREED MARK -UP OF 15% THEREON. 3 ITA NO.3760/DEL./201 3 3. DURING THE RELEVANT FY, THE ASSESSEE UNDERTOOK THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES WHICH WERE DULY REPORTED IN THE ACCOUNTANT'S REPORT (FORM NO 3CEB) FILED ALONG WITH THE RETURN OF INCOME: SR. NO. NATURE OF TRANSACTIONS VALUE (RS.) METHOD APPLIED OUTCOME AFTER DRP 1 PROVISION OF INFORMATION TECHNOLOGY SERVICES PROVISION OF ITES SERVICES 40,06,69,992 TRANSACTIONAL NET MARGIN METHOD (TNMM) ADJUSTMENT PROVISION OF CSD SERVICES 2 PURCHASE OF FIXED ASSETS 82,73,525 ACCEPTED 3 REIMBURSEMENT OF EXPENSES PAID 2,77,76,960 ACCEPTED 4 INTEREST ON LOAN 18,78,706 COMPARABLE UNCONTROLLED PRICE METHOD ACCEPTED 4. WE TAKE NOTE THAT ALL INTERNATIONAL TRANSACTIONS APART FROM PROVISION OF INFORMATION TECHNOLOGY SERVICES WERE A CCEPTED TO BE AT ARM'S LENGTH BY THE TRANSFER PRICING OFFICER (TPO') / ASSESSING OFFICER (AO') AND HENCE, ARE NOT BEING DISCUSSED F URTHER. 5. DURING THE TP ASSESSMENT PROCEEDINGS, THE DATA FOR CURRENT YEAR I.E. FY 2005-06 DATA, FRESH SEARCH RESULTS WERE SUB MITTED BY THE ASSESSEE (WITHOUT PREJUDICE TO ITS STAND THAT MULTIPLE YEAR DATA SHOULD BE RELIED UPON). A SUMMARY OF THE FRESH SEARCH RESU LTS FOR ITES AND CSD SERVICES CONSIDERING SINGLE YEAR DATA WERE PROV IDED AS FOLLOWS : 4 ITA NO.3760/DEL./201 3 PARTICULARS CSD SERVICES (REFER PAGE 171 OF THE PAPER BOOK) ITES ( REFER PAGE 170 OF THE PAPERBOOK) NO OF COMPARABLES 20 11 MEAN WORKING CAPITAL ADJUSTED OP/TC OF COMPARABLES 2.95%(6.98% BEFORE WORKING CAPITAL ADJUSTMENT 3.24%( 5.39% BEFORE WORKING CAPITAL ADJUSTMENT DATA USED FY2005-06 15.22% ASSESSEES OP/TC 6. IN THE TP ORDER, THE TPO MENTIONED THAT SINCE TH E ASSESSEE DOES NOT MAINTAIN DATA FOR ITES SERVICES AND CSD SERVICE S SEPARATELY THEREFORE THE COMPANY IS BEING BENCHMARKED AGAINST BOTH THE SETS TAKEN TOGETHER. ACCORDINGLY, DESPITE THE ASSESSEE 'S OBJECTION IN RELATION TO AGGREGATION OF BOTH THE SEGMENTS, THE TPO USED A SET OF 7 COMPANIES (3 ITES COMPANIES AND 4 SOFTWARE DEVELOPM ENT SERVICES COMPANIES) HAVING MEAN OP /TC MARGIN OF 29.90% AND UNDERTOOK A TP ADJUSTMENT OF RS.5,10,40,169, ACCORDING TO THE A SSESSEE, IN THE FOLLOWING MANNER WHICH IS SHOWN BELOW IN CHART FORM : - PARTICULARS CSD ITES NO OF COMPARABLES(AS CONSIDERED BASES ON FRESH SEARCH-REFER TABLE ABOVE) 20 11 LESS: REJECTED ON THE GROUNDS OF THEM FAILING WAGES/SALES FILTER OF 30-60 PRECENT NOT APPLIED 5 LESS: REJECTED ON FUNCTIONAL / QUALITATIVE GROUNDS(DISCUSSED IN DETAIL HEREINAFTER) 15 4 LESS: ERRONEOUSLY IGNORED / OVERLOOKED ONE COMPANY 1 - ADD:COMPANY REJECTED IN THE FRESH SEARCH ON GROUND OF RPT REINSTATED BY LD TPO - 1 5 ITA NO.3760/DEL./201 3 FINALLY CONSIDERED COMPARABLES 4 3 AGGREGATED FINALLY CONSIDERED COMPARABLES 7 MEAN WORKING CAPITAL ADJUSTED OP/TC OF COMPARABLES 29.9% ASSESSEES OP/TC 15.2 2% 7. THE ABOVE ADJUSTMENT MADE BY THE TPO TO THE INCO ME OF THE ASSESSEE WAS UPHELD BY THE AO IN DRAFT ASSESSMENT O RDER. THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLU TION PANEL (HEREINAFTER REFERRED TO AS DRP') AGAINST THE ADJU STMENT MADE BY THE AO. HOWEVER, THE DRP CONFIRMED THE AFORESAID ADJUST MENT PROPOSED BY THE AO/TPO AND THE AO PASSED THE FINAL ASSESSMEN T ORDER UNDER SECTION 143(3) OF THE ACT MAKING AN ADJUSTMENT OF R S. 5,10,40,169/- TO THE ASSESSEE'S RETURNED INCOME. 8. AGGRIEVED WITH THE DRP DIRECTIONS AS WELL AS FIN AL ASSESSMENT ORDER, THE ASSESSEE FILED AN APPEAL BEFORE THE INCO ME TAX APPELLATE TRIBUNAL (HEREINAFTER REFERRED TO AS THE TRIBUNAL) . IN THE LIGHT OF THE NON-SPEAKING DIRECTIONS PASSED BY THE DRP, THE TRIB UNAL VIDE ORDER DATED 27.05.2011 REMANDED BACK THE CASE TO DRP FOR A FRESH ADJUDICATION OF THE ISSUES RAISED. IN PURSUANCE TO THE DIRECTIONS OF THE TRIBUNAL, THE DRP PASSED THE DIRECTIONS DATED MARCH 4, 2013 REJECTING 6 ITA NO.3760/DEL./201 3 THE CONTENTIONS OF THE ASSESSEE. THE DRP DIRECTED T HE TPO TO VERIFY THE MARGINS AND RPT IN THE CASE OF ONE OF THE FINAL COMPANIES SELECTED BY THE TPO IN THE TPO ORDER, NAMELY NUCLEU S NETSOFT AND GIS LIMITED ('NUCLEUS') AND RE-COMPUTE THE ALP ACCO RDINGLY. THE TPO PASSED THE ORDER GIVING EFFECT TO DRP DIRECTION S DATED MARCH 11, 2013 WHEREIN THE MARGIN OF NUCLEUS WAS RECOMPUTED A S 44.83% AND THE ADJUSTMENT WAS REDUCED TO RS.3,99,82,138/-. THE AO PASSED THE FINAL ASSESSMENT ORDER DATED APRIL 12, 2013 CONFIRM ING THE MARGIN OF THE COMPARABLES AS 26.72% AND ADJUSTMENT OF RS.3,99 ,82,138/-. 9. AGGRIEVED, THE ASSESSEE IN THE SECOND ROUND IS B EFORE US. 10. THE LD. AR TOOK OUR ATTENTION TO THE FINAL SET OF COMPARABLES AND THE MARK-UP EARNED BY THEM AS PER THE REVISED TPO O RDER ARE :- S.NO. NAME OF THE COMPARABLE OP/TC 1. TRANSWORKS INFORMATION SERVICE LIMITED 19.62% 2. TRITON CORP LIMITED 20.58% 3. NUCLEUS NETSOFT & GIS LIMITED 44.83% 4. SYSTEMLOGIC SOLUTION LIMITED 30.94% 5. TRANSWORLD INFOTECH LIMITED 25.39% 6. CAMBRIDGE TECHNOLOGY ENTERPRISE LIMITED 24.66% 7. SIP TECHNOLOGY & EXPORTS LIMITED 21.04% MEAN MARGIN 26.72% 7 ITA NO.3760/DEL./201 3 THE LD. AR SUBMITS THAT WHILE PASSING THE FINAL ORD ER THE AO/TPO HAS APPLIED THE EMPLOYEE COST FILTER ON ONLY ITES C OMPARABLES AND OMITTED TO APPLY THE SAME WHILE SELECTING COMPARABL ES FOR THE CSD SEGMENT. THIS STAND HAS BEEN CONTRADICTED BY THE AO /TPO IN THE SUBSEQUENT YEARS WHEREIN HE HAS APPLIED THIS FILTER ONLY ON CSD SEGMENT. SUCH A STAND OF THE AO/TPO IS AGAINST THE SETTLED LEGAL POSITION AND RATHER EMPLOYEE COST FILTER SHOULD BE APPLIED ON CSD AS WELL AS ITES SEGMENTS BOTH. 10.1 ACCORDING TO LD. AR, IN CASE, IF THE EMPLOYEE COST FILTER OF 30% TO 60% IS APPLIED UNIFORMLY ON BOTH THE SEGMENTS, T HE FOLLOWING TP ORDER COMPARABLES NEED TO BE REJECTED AS THEY ARE NOT PASSING THE SAID FILTER :- PARTICULARS NUELEUS NETSOFT&GIS LIMITED SYSTEM SOLUTION LIMITED TRANSWORLD INFOTECH LIMITED CAMBRIDGE TECHNOLOGY ENTERPRISE LIMITED EMPLOYEE COST 13,529,958 (NOT DISCLOSED IN THE ANNUAL REPORT) 38,493,107 112,599,504 DIRECTORS REMUNERATION 56,000 - - 1,000,000 MEAL & ENTERTAINMENT EXPENSES 34,880 MANAGERIAL COMMISSION 5,953,833 TOTAL EMPLOYEE COST(A) 13,315,958 - 38,493,107 119,588,217 8 ITA NO.3760/DEL./201 3 INCOME FROM OPERATION (B) 56,774,933 158,708,237 144,169,462 184,039,726 EMPLOYEE COST/SALES RATIO (A/B) 23.45% 0.00% 26.70% 64.98% REFERENCE OF ANNUAL REPORT PAGE 27 & 28 OF ANNUAL REPORT (EXHIBIT 1) PAGE 8 OF ANNUAL REPORT (EXHIBIT 2) PAGE18 & 22 OF THE ANNUAL REPORT (EXHIBIT 3) PAGE 24 & 29 OF THE ANNUAL REPORT (EXHIBIT 4) 10.2 IT WAS FURTHER SUBMITTED BY THE LD. AR THAT AP ART FROM FAILING THE EMPLOYEE COST FILTER APPLIED BY THE TPO, NUCLEUS NE TSOFT & GIS LIMITED DURING FY 2005-06 ALSO HAD BUSINESS RESTRUC TURING ACTIVITIES, WHEREIN IT MERGED WITH NUCLEUS SECURITIES LTD. THIS FACT IS EVIDENT FROM PAGE 3 OF THE FY 2005-06 ANNUAL REPORT OF THE COMPANY (EXHIBIT 5). 10.3 IT WAS SO CONTENDED BY THE LD. AR THAT AS THE ABOVE COMPANIES' EMPLOYEE COST TO SALES RATIO IS NOT WITHIN 30 TO 60 PERCENT RANGE, THEY SHOULD BE REJECTED FROM THE FINAL SET OF COMPARABLE COMPANIES. THE FINAL SET OF TPO ORDER COMPARABLES PASSING THE EMPL OYEE COST FILTER APPLIED BY THE LD. TPO IS AS FOLLOWS: S.NO. COMPANY NAME MARGIN AS PER TPO 1. TRANSWORKS INFORMATION SERVICE LTD. 19.62% 2. TRITON CORP LTD 20.58% 3. SIP TECHNOLOGY & EXPORTS LTD. 21.04% AVERAGE 20.41% 9 ITA NO.3760/DEL./201 3 10.4 THEREAFTER, ACCORDING TO LD. AR, THE COMPARABL ES ARM'S LENGTH MARK-UP OF 20.41% FALLS WITHIN THE +/-5% RANGE OF T HE ASSESSEE'S MARK-UP OF 15.22% AS PRESCRIBED BY THE PROVISO TO S ECTION 92C(2) OF THE ACT AND HENCE THE ADJUSTMENT MADE BY THE LD. AO /TPO OF RS. 3,99,82,138/- RESULTANTLY SHALL STAND DELETED. 11. THE LD. DR RELIED ON THE ORDERS OF THE DRP/TPO, HOWEVER, FAIRLY AGREED THAT WHEN EMPLOYEE COST FILTER IS USE D IN THE ITES SEGMENT, IT SHOULD NOT HAVE BEEN OMITTED TO USE IT IN CSD SEGMENT. HOWEVER, HE WANTED THE SAME EXERCISE TO BE DONE BY THE TPO/AO IN THE REMAND PROCEEDING ONLY. THE LD. DR ALSO SUBMITT ED THAT THIS FILTER SHOULD NOT BE MADE A PRECEDENT WHEN COMPUTING T.P. ASSESSMENT IN SUBSEQUENT YEARS, THOUGH APPLIED BY THE TPO THIS YE AR. 12. THE ISSUE REGARDING EMPLOYEE COST FILTER WILL B E DEALT LATER. 13. WITHOUT PREJUDICE TO THE ABOVE CONTENTION WHICH WE WILL DEALT LATER, THE LD. AR PLEADED FOR THE INCLUSION OF THE FOLLOWING COMPARABLES : 10 ITA NO.3760/DEL./201 3 (A) VJIL CONSULTING LIMITED ('VJIL') THE TPO IN THE TP ORDER REJECTED VJIL ON THE FOLLO WING GROUNDS :- - STATIC OR DECLINING SALES - NEGATIVE MARGINS THE LD. AR SUBMITTED THAT THE FALL IN THE COMPANY' S SALES REVENUE OVER THE THREE YEAR PERIOD CONSIDERED BY LD . TPO AMOUNTS TO MERE 1-2 PERCENT AS IS EVIDENT FROM THE TABLE BELOW . PARTICULARS SALES (1) % CHANGE IN SALES (2) TOTAL COST (3) OPERATING PROFIT (4) OP/TC AS PER ANNUAL REPORT (5) MARGIN REPORTED BY LD. TPOTHE SHOW CAUSE NOTICE (6) FY 2005- 06 15.38 1.28% 14.17 1.21 8.51% -1.38% FY 2004- 05 15.60 2.99% 14.58 1.02 6.97% -2.27% FY 2003 - 03 16.06 - 15.01 1.05 7.01% - 1% ACCORDING TO LD. AR, REJECTION OF AN OTHERWISE FUN CTIONALLY COMPARABLE COMPANY ON THE GROUND OF A MERE 1-2 PERC ENT DECREASE IN SALES REVENUE IS COMPLETELY WITHOUT ANY ECONOMIC LO GIC OR EVEN GENERAL BUSINESS/ COMMERCIAL SENSE. 11 ITA NO.3760/DEL./201 3 FURTHER, ACCORDING TO LD. AR, IT PASSES THE EMPLOY EE COST FILTER APPLIED BY THE LD. TPO AS IT HAS AN EMPLOYEE COST T O SALES RATIO OF 38.24% AND THUS SHOULD BE ACCEPTED AS A COMPARABLE COMPANY. (B) TATA SERVICES LIMITED (TATA) THIS COMPANY WAS REJECTED BY THE TPO ON THE BASIS THAT THE FUNCTIONS PERFORMED BY TATA HAVE WIDER RAMIFICATION S THAN THE ASSESSEE AS THE ASSESSEE IS A CAPTIVE SERVICE PROVI DER. THUS AT FUNCTIONAL LEVELS, BOTH THE COMPANIES ARE NOT COMPA RABLE. THE LD. AR CONTENDED THAT NONE OF THE COMPARABLE C OMPANIES FINALLY SELECTED BY THE LD. TPO ARE CAPTIVE SERVIC E PROVIDERS' NOR CAN THEY BE CAPTIVE SERVICE PROVIDER AS OTHERWISE THEY GET COVERED UNDER RELATED PARTY TRANSACTIONS. ACCORDINGLY, THE LD. AR SUBMITTED THAT IN CASE THE TPO'S AIM WAS TO SELECT 'CAPTIVE' SERVICE PROVIDER FOR COMPAR ISON WITH THE ASSESSEE, THEN IN THAT CASE, NONE OF THE 7 COMPARAB LES SELECTED IN THE FINAL SET OF THE TP ORDER SHOULD BE USED TO BENCHMA RK THE OPERATIONS OF THE ASSESSEE AS THEY ARE ALL ENTREPRENEUR COMPAN IES. THUS, LD. AR CONTENDED THAT TATA SHOULD BE ACCEPTE D AS AN APPROPRIATE COMPARABLE AS IT IS PERFORMING FUNCTION S SIMILAR TO THE 12 ITA NO.3760/DEL./201 3 ASSESSEE AND ALSO PASSES THE EMPLOYEE COST FILTER W ITH AN EMPLOYEE COST TO SALES RATIO OF 34.94%. (C) TSR DARASHAW LIMITED ('TSR') TSR WAS REJECTED BY THE TPO ON THE BASIS OF FUNCTI ONAL SIMILARITY ON THE GROUNDS THAT IT IS INVOLVED IN FI NANCIAL AND INVESTMENT ACTIVITIES. FURTHER THE COMPANY SEEMS TO BE A PART OF THE TATA GROUP. IN THIS REGARD IT WAS SUBMITTED THAT TSR IS ENGAGED IN PROVIDING BPO SERVICES IN THE AREAS OF PAYROLL AND EMPLOYEES' TRUST FUND ADMINISTRATION & MANAGEMENT, RECORD MANAGEMENT AND DEPOSITORY RELATED SUPPORT SERVICES. THE MAJOR ACTIVITIES UNDE RTAKEN BY THE COMPANY AS PER THE ANNUAL REPORT ARE EXPLAINED BELO W: PAYROLL & EMPLOYEES' TRUST FUND ADMINISTRATION & MANAGEMENT RECORD MANAGEMENT: STORAGE, RETENTION & RETRIEVAL O F PHYSICAL AND/ OR ELECTRONIC RECORDS DEPOSITORY RELATED SERVICES: ELECTRONIC CONNECTIVIT Y WITH NSDL/ CDSL AND TRANSMISSION OF INFORMATION TO CLIEN T COMPANIES THROUGH PREFERABLE ELECTRONIC MEDIA' 13 ITA NO.3760/DEL./201 3 FURTHER, THE FOLLOWING TABLE PROVIDES AN ACTIVITY W ISE BREAKDOWN OF THE SALES REVENUE OF THIS COMPANY. THIS HELPS ESTAB LISH THAT THIS COMPANY HAS NOT EARNED ANY REVENUE FROM INVESTING A ND FINANCING ACTIVITIES DURING THE FY 2005-06. SEGMENT NAME SALES (RS. IN CR.) FY 2005-06 PAYROLL 2.47 R&T 9.25 RECORD 0.85 FURTHER IT WAS SUBMITTED THAT THE RELATED PARTY TRA NSACTIONS DURING FY 2005-06 OF TSR DOES NOT EXCEED 10% OF SALES. THE CO MPUTATION OF THE SAME IS PROVIDED BELOW : PARTICULARS RS.LACS SERVICE CHARGES 125.99 SALES 1449.51 RECORD 8.69% ALSO, ACCORDING TO LD. AR, THE COMPANY PASSES THE E MPLOYEE COST FILTER WITH AN EMPLOYEE COST TO SALES RATIO OF 36.9 1%. THUS IN VIEW OF THE ABOVE, IT WAS PLEADED THAT TSR SHOULD BE ACCEPT ED AS A FINAL COMPARABLE COMPANY. WORKING CAPITAL ADJUSTMENT: 14. THE LD. AR SUBMITTED THAT THE TPO HAS DENIED TH E BENEFIT OF THE WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE DURING T HE SAID AY. 14 ITA NO.3760/DEL./201 3 HOWEVER, THE TPO IN THE FOLLOWING TWO AYS NAMELY, A Y 2007-08 AND AY 2008-09 HAS GRANTED WORKING CAPITAL ADJUSTME NT TO THE ASSESSEE. IN VIEW OF THE CONTRADICTORY APPROACH OF THE TPO, IT WAS PLEADED BY THE LD. AR THAT THE BENEFIT OF THE WORKI NG CAPITAL ADJUSTMENT IN AY 2006-07 BE GRANTED AS WELL. NAME OF THE COMPARABLE OPERATING PROFIT / TOTAL COST (UNADJUSTED) TRANSWORKS INFORMATION SERVICE LIMITED 19.62% TRITON CORP LIMITED 20.58% SIP TECHNOLOGY & EXPORTS LIMITED 21.04% VJIL CONSULTING LIMITED 6.36% TATA SERVICES LIMITED 6.33% TSR DARASHAW LIMITED 14.38% AVERAGE 14.72% 15. WE HAVE HEARD BOTH THE PARTIES AND HAVE GONE THR OUGH THE RECORDS. FIRSTLY, WE WOULD LIKE TO DEAL WITH THE P RELIMINARY CONTENTION RAISED BEFORE US REGARDING EMPLOYEE COST FILTER USED BY THE TPO WHILE SELECTING THE COMPARABLES. THE LD. AR HA S BROUGHT TO OUR NOTICE THAT THE TPO HAS USED EMPLOYEE COST FILTER O F 30% TO 60% IN THE ITES SEGMENT WHEREAS HE HAS NOT APPLIED THE SAI D EMPLOYEE COST FILTER OF 30% TO 60% IN THE CASE OF CSD SEGMENT. T HE LD. DR FAIRLY AGREES THAT WHEN THE TPO HAD APPLIED THE EMPLOYEE C OST FILTER IN ONE SEGMENT THEN THE SAME SHOULD HAVE BEEN APPLIED IN T HE OTHER SEGMENT 15 ITA NO.3760/DEL./201 3 ALSO, BUT HE POINTED OUT THAT THIS SHOULD NOT BECOM E A PRECEDENT FOR OTHER ASSESSMENT YEARS. ON A QUERY TO THE LD. AR A BOUT THE EMPLOYEE COST TO SALES RATIO OF THE ASSESSEE COMPANY, HE BRO UGHT TO OUR NOTICE THE FOLLOWING CHART WHICH IS AS GIVEN BELOW :- WE HAVE GONE THROUGH ANNUAL REPORT OF THE ASSESSEE AND FIND THAT THE ASSESSEE HAD A TOTAL INCOME OF RS.400,688,271 AND PERSONAL E XPENSES AS PER SCHEDULE 12 IS RS.203,921, 217 WHICH COMES TO 50.90%. 16. IT SHOULD BE KEPT IN MIND THAT W HILE FIXING THE EMPLOYEE COST FILTER, REGARD SHOULD BE FIRST BE TO THE EMPLOYEE COST TO S ALES RATIO OF TESTED PARTY VIZ. ASSESSEE, AND SINCE IN THE PRESENT CASE SINCE THE EMPLOYEE COST TO SALES RATIO IS 50.90%, WE DIRECT THAT THE F ILTER HAS TO BE APPLIED BY APPLYING THE RANGE OF EMPLOYEE COST TO SALES OF 30% TO 60% AS HAS BEEN DONE IN THE ITES SEGMENT. WE DIRECT ACCORDING LY AND ALSO EXPRESSES THAT THIS DIRECTION WILL NOT BE QUOTED BY THE ASSESSEE AS A PRECEDENT FOR OTHER ASSESSMENT YEARS. PARTICULARS AMOUNT IN RS. SERVICE REVENUE (A) 400,669,992 PERSONNEL EXPENSES 203,921,217 TOTAL EMPLOYEE COST (B) 203,921,217 WAGES/SALES RATIO [(B)/(A)] 50.90% 16 ITA NO.3760/DEL./201 3 17. SINCE THE LD. AR HAS STATED BEFORE US THAT IF T HIS FILTER IS APPLIED TO THE CSD SEGMENT THEN THE COMPARABLES ARMS LENGT H MARK-UP OF 20.41% FALLS WITHIN THE +/-5% RANGE OF THE ASSESSEE 'S MARK-UP OF 15.22%. IN THE SAID SCENARIO, THE ADJUDICATION OF THE REST OF THE CONTENTIONS BECOME ACADEMIC AND SO NOT ADJUDICATED. 18. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 18 TH DAY OF SEPTEMBER, 2015. SD/- SD/- (J.S. REDDY) (A.T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 18 TH DAY OF SEPTEMBER, 2015 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.