M/s. Fidelity Business Services India Pvt. Ltd., Bangalore V. DCIT, New Delhi

ITA 4180/DEL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3494 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 05-07-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 30-07-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Revised return
• Section: 143(3); 234B; 133(6); 11

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2: NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT ME MBER ITA NO. 5872/DEL/2011 ASSESSMENT YEAR: 2007-08 AND ITA NO. 4180/DEL/2014 ASSESSMENT YEAR: 2008-09 O R D E R PER AMIT SHUKLA, J.M. THE AFORESAID APPEALS HAVE BEEN FILED BY THE ASSESSEE AGAINST FINAL ASSESSMENT ORDER DATED 28.10.2011, PASSED IN P URSUANCE OF DRP DIRECTIONS DATED 2 ND AUGUST 2011 FOR THE QUANTUM OF ASSESSMENT PASSED U/S 144C/ 143(3) FOR ASSESSMENT YEAR 2007-08; AND ORDER FIDELITY BUSINESS SERVICES INDIA PVT. LTD. PINEHURST, EMBASSY GOLF LINKS BUSINESS PARK, OFF. INTERMEDIATE RING ROAD, BANGALORE 560071 PAN AAACF6175E VS. DCIT CIRCLE -11 (1), ROOM NO. 312, C.R. BUILDING, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI G.S. SRIVASTAVA, SR. ADVOCATE SHRI SUVINAY K DASH, ADVOCATE DEPARTMENT BY : SHRI H.K. CHOUDHARY, CIT(DR) DATE OF HEARING 05/02/2018 DATE OF PRONOUNCEMENT 13/02/2018 ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 2 DATED 5.5.2014, PASSED BY LD. CIT (APPEALS)-XX, NEW DELHI FOR THE ASSESSMENT YEAR 2008-09. SINCE THE ISSUES INVOLVED IN BOTH THE APPEALS ARE COMMON ARISING OUT OF IDENTICAL SET OF FAC TS, THEREFORE, SAME WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY WAY OF THIS CONSOLIDATED ORDER. 2. BEFORE US THE LD. COUNSEL FOR THE ASSESSEE SHRI G.C. SRIVASTAVA SUBMITTED THAT ASSESSEE HAS FILED REVISED GR OUNDS OF APPEAL FOR THE REASON THAT, GROUNDS OF APPEAL RELATING TO TRANS FER PRICING ADJUSTMENT RESULTING FROM THE TRANSACTIONS ENTERED INT O BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AES) BASED A T USA, BOTH FOR THE SOFTWARE DEVELOPMENT SERVICES (IT SEGMENT) AND INF ORMATION TECHNOLOGY SERVICES (ITES SEGMENT) HAVE BEEN ADJUDI CATED AND SETTLED UNDER THE MUTUAL AGREEMENT PROCEDURE (MAP) IN TERMS OF RULE 44H OF THE INCOME TAX RULES. NOW THE ISSUE WHICH REMAINS FOR ADJUDICATION IS ON ACCOUNT OF TRANSFER PRICING ADJUSTM ENT ON ACCOUNT OF THESE TWO SEGMENTS RELATED TO NON-USA AES. THE REVI SED GROUNDS OF APPEAL AS RAISED BY THE ASSESSEE NOW READS AS UNDER: - 1. THAT THE ORDER OF THE DEPUTY COMMISSIONER OF INCOM E TAX , CIRCLE 11(1), NEW DELHI (ASSESSING OFFICER OR AO) TO T HE EXTENT PREJUDICIAL TO THE APPELLANT, IS BAD IN LAW, CONTRA RY TO FACTS AND CIRCUMSTANCES OF THE CASE AND LIABLE TO THE QUASHED . 2. THAT THE AO AND THE DISPUTE RESOLUTION PANEL (PANE L) ERRED IN UPHOLDING THE REJECTION OF THE APPELLANTS TRANSFER PRICING (TP) DOCUMENTATION BY THE ADDL COMMISSIONER OF INCOME-TA X (TRANSFER PRICING)-1 (2), NEW DELHI (TRANSFER PRICING OFFICE R OR TPO) 3. THAT THE AO AND THE PANEL ERRED IN BOTH IN FACTS AN D IN LAW IN CONFIRMING THE ACTION OF THE TPO OF MAKING THE FOLL OWING ADJUSTMENTS IN THE ORDER TO THE TRANSFER PRICE OF T HE APPELLANT; A) SOFTWARE DEVELOPMENT SERVICES RENDERED TO ASSOCIATE D ENTERPRISES, NAMELY, FIDELITY INVESTMENTS MANAGEMEN T (HK) ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 3 LTD. HONGKONG AND KVH SYSTEMS SOLUTIONS LTD. BERMUD A RS. 121,107,610 (ON A COST BASE OF RS. 1,206,251,420); AND B) INFORMATION TECHNOLOGY ENABLED SERVICES PROVIDED TO ASSOCIATED ENTERPRISES, NAMELY, FIDELITY INVESTMENT S MANAGEMENT (HK) LTD. HONG KONG AND KVH CO. LTD. JAP AN RS. 164,322,789 (ON A COST BASE OF RS. 1,387,861,39 5) HOLDING THAT THESE INTERNATIONAL TRANSACTIONS DO NO T SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED BY THE INCOME TAX ACT, 1961 (THE ACT). 4. THAT THE AO AND THE PANEL ERRED IN: 4.1. UPHOLDING THE REJECTION OF COMPARABILITY ANALYSIS O F THE APPELLANT IN THE TP DOCUMENTATION AND IN SUBMISSION S PROVIDED DURING THE ASSESSMENT PROCEEDINGS, AND CONFIRMING THE COMPARABILITY ANALYSIS AS ADOPTED BY THE TPO IN THE TP ORDER. 4.2. UPHOLDING THE ACT OF THE TPO OF COLLECTING INFORMAT ION OF THE COMPANIES BY EXERCISING POWER GRANTED TO HIM UNDER SECTION 133(6) OF THE ACT. 4.3. DISREGARDING APPLICATION OF MULTIPLE YEAR/PRIOR YEA R DATA AS USED BY THE APPELLANT IN THE TP DOCUMENTATION AND H OLDING THAT CURRENT YEAR (I.E. FINANCIAL YEAR 2006-07) DAT A FOR COMPARABLE COMPANIES SHOULD BE USED. 4.4. IGNORING THE LIMITED RISK NATURE OF THE SERVICES PR OVIDED BY THE APPELLANT AS DETAILED IN THE TP DOCUMENTATION A ND IN UPHOLDING THE CONCLUSION OF THE TPO THAT NO ADJUSTM ENT ON ACCOUNT OF RISK DIFFERENTIAL IS REQUIRED WHILE DETE RMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION S OF THE APPELLANT. 5. THAT THE PANEL FAILED TO APPRECIATE THAT THE WORKIN G CAPITAL ADJUSTMENT DONE BY THE TPO WAS NOT CORRECT AND ERRE D IN NOT DIRECTING THE AO/TPO TO CORRECTLY COMPUTE THE WORKI NG CAPITAL ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 4 ADJUSTMENT IN RESPECT OF SOFTWARE DEVELOPMENT SERVI CES SEGMENT OF THE APPELLANT. 6. THE AO AND THE PANEL ERRED IN NOT GRANTING THE BENE FIT OF LOWER RANGE OF +/-5% IN DETERMINATION OF ARMS LENGTH PRI CE. 7. THAT THE AO HAS ERRED IN CONSIDERING THE RETURNED I NCOME OF RS. 8,82,21,970 IN THE ORDER AS AGAINST AN AMOUNT OF RS . 8,75,60,355 AS PER THE REVISED RETURN OF INCOME FILED BY THE AP PELLANT. 8. THAT THE AO ERRED IN NOT GRANTING THE CREDIT FOR TA X DEDUCTED AT SOURCE OF RS. 1,70,80,955, ADVANCE TAX OF RS. 83,00 ,000 AND SELF ASSESSMENT TAX OF RS. 53,36,223 IN THE ASSESSMENT O RDER 9. THAT THE AO ERRED IN LEVYING INTEREST OF RS. 18,87, 61,258 UNDER SECTION 234B OF THE ACT. 3. THE ONLY EFFECTIVE GROUND IS GROUND NO. 3, WHICH RELATES TO TRANSFER PRICING ADJUSTMENTS ON THE PROVISIONS OF SERVI CES RELATING TO SOFTWARE DEVELOPMENT SERVICES RENDERED TO FIDELITY INVESTMENTS MANAGEMENT (HK) LTD., HONG KONG AND KVH SYSTEMS SOLUTIO NS LTD., BERMUDA; AND INFORMATION TECHNOLOGY SERVICES PROVI DED TO SAME AES. THE ASSESSEE COMPANY, I.E., M/S. FIDELITY BUSI NESS SERVICES INDIA PRIVATE LIMITED IS A SUBSIDIARY OF FID HOLDING (MAURI TIUS) LIMITED WHICH IS PART OF THE FIDELITY GROUP. THE ASSESSEE PRO VIDES SERVICES TO BOTH FMR GROUP OF COMPANIES AND THE FIL, GROUP OF C OMPANIES MAINLY PROVIDING IT SERVICES (SOFTWARE DEVELOPMENT) AND ITE S SERVICES. THE FUNCTIONS PERFORMED UNDER THE SEGMENT OF IT ENABLED SERVICES HAVE BEEN HIGHLIGHTED IN THE TP STUDY REPORT IN THE FOLLOWIN G MANNER:- 4.3.27 THE SOFTWARE DEVELOPMENT ACTIVITY IS UNDER TAKEN FOR FIL GROUP OF COMPANIES' GLOBAL REQUIREMENTS. THE BASIC REQUIREMENT ANALYSIS OF THE PROJECTS IS UNDERTAKEN AT FIDELITY GROUP, WHICH INCORPORATES THE VARIOUS REQU IREMENTS OF THE USERS WITHIN THE FIL GROUP. THE VARIOUS PROJ ECTS ARE DRIVEN IN A GLOBAL COLLABORATIVE MANNER WHEREBY THE PROJECT MANAGER OR PROGRAMME MANAGER FOR A SPECIFIC PROJECT IS ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 5 BASED IN UK OR INDIA. THE PRIMARY RESPONSIBILITY OF THE DEVELOPMENT ACTIVITY IS WITH THE LOCATION HAVING TH E REQUIRED RESOURCES. 4.3.28 THE ACTIVITIES PERFORMED ARE MAINLY, A) M AINTENANCE RELATED WORK, B) NEW DEVELOPMENT UNDERTAKEN ON CHANGEOVER O F OPERATING SYSTEMS AND C) WEB BASED SOFTWARE DEVELOP MENT ACTIVITY. THE COMPLETE PROFILE OF THE VARIOUS DEVEL OPMENT WORKS ALONG WITH THE RELEVANT ACTIVITIES (IN TERMS OF THE VALUE CHAIN) IS PROVIDED BELOW: 4.3.29 SERVICE DESK & SECURITY: THE SERVICE DESK C OMPRISES OF UNDERTAKING IT SUPPORT, CUSTOMER & INFORMATION UPDA TES, SERVICE ALERTS, PROVIDING MANAGEMENT INFORMATION AN D .REPORTS. THE SECURITY SERVICES CONSIST OF MANAGING THREAT, ACCESS, APPLICATION SECURITY, IDENTITY AND OTHER SE CURITY RELATED MEASURES & OPERATIONS. THE SERVICE DESK ACT IVITY IS OPERATED FROM INDIA. 4.3.30 INFRASTRUCTURE: THIS CONSISTS OF CHANGE MAN AGEMENT, REMOTE SERVER MANAGEMENT, AND DESKTOP RELEASES. THE SAID ACTIVITY IS PRIMARILY DRIVEN FROM FIL GROUP WI TH INDIA BEING THE SUPPORT CENTRE. 4.3.31 SYSTEM CONFIGURATION & DEVELOPMENT (SC&D): T HE SAID ACTIVITIES CONSIST OF VERSION MANAGEMENT, RELEASE MANAGEMENT AND ENVIRONMENT MANAGEMENT. THE SAID ACTIVITY IS PRIMARILY DRIVEN FROM FIL GROUP WITH IN DIA AGAIN PLAYING A SUPPORTING ROLE. 4.3.32 TESTING: THIS COMPRISES OF CREATING TEST PAR AMETERS AND UNDERTAKING PERFORMANCE TESTING OF THE SOFTWARE DEV ELOPED. THE TESTING ACTIVITIES IS PRE-DOMINANTLY UNDERTAKEN IN INDIA BY CREATING TEST PROCESSES, PROGRAMS ETC. 4.3.33 QUALITY & TRAINING: THIS ACTIVITY CONSTITUTE S UNDERTAKING PROCESS DESIGN, AUDITS, CMMI CONSULTING, TECHNICAL TRAINING FOR THE DEVELOPERS ETC. 4.3.34 MAINTENANCE & SUPPORT: IN THIS PROCESS, BUG FIXES, SMALL ENHANCEMENTS, PRODUCTION SUPPORT, DATABASE ADMINISTRATION ARE UNDERTAKEN. THE MAINTENANCE AND ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 6 SUPPORT TEAMS ARE LARGELY BASED IN INDIA, WHEREAS T EAMS IN UK ACT AS BACKUP. 4.3.35 APPLICATION DEVELOPMENT: THE ACTIVITY CONSIS TS OF ANALYSIS, DESIGN, DEVELOPMENT, AND TESTING. BUSINESS PROCESS OPERATIONS - IT ENABLED SERVICES 4.3.36 THE BUSINESS OPERATIONS OF FIL GROUP ARE SPR EAD IN UK AND INDIA. THE INDIAN UNIT UNDERTAKES TO PROVIDE SERVIC ES FOR EUROPEAN RETAIL AND THE INDIAN ASSET MANAGEMENT COMPANY BASED IN MUMBAI. THE INDIAN ENTITY IS CATER ING TO THE RETAIL SIDE (LE. INDIVIDUAL INVESTORS) OF FIDEL ITY GROUP BUSINESS. THE BACK-OFFICE OPERATIONS ARE SEGREGATED INTO ONSHORE AND OFFSHORE ACTIVITY. VARIOUS FUNCTIONAL O WNERS OF SPECIFIC PROCESSES ARE SPREAD GLOBALLY. HOWEVER, FU NCTIONS LIKE UK SERVICE CENTRE ARE UNDERTAKEN IN UK. 4.3.37 INDIA SERVICE CENTRE: IT PROVIDES CUSTOMER S UPPORT SERVICES VIDE PHONES WHEREIN IT RESOLVES ISSUES AND CONCERNS OF CUSTOMERS IN TERMS OF THEIR INDIVIDUAL PORTFOLIO OF INVESTMENTS. FURTHER, IT ALSO PROVIDES SUPPORT TO V ARIOUS INDIVIDUAL INVESTORS WHOSE FUNDS ARE BEING MANAGED BY FIDELITY, BROKERS, FINANCIAL ADVISORS ETC. RESOLVIN G VARIOUS QUERIES AND ISSUES ON SPECIFIC FUNDS. THE TEAMS MAY PROVIDE E-MAIL SUPPORT IN CERTAIN CASES TO QUERIES RAISED BY CUSTOMERS. 4.3.38 FIDELITY HAS OWN FUNDS (LE. CUSTOMERS WHO H AVE INVESTED INTO FIDELITY'S OWN MUTUAL FUNDS) AND CUSTOMER FUND S (LE. CUSTOMERS HAVING INVESTMENTS IN NON-FIDELITY MUTUAL FUNDS TRANSFERS THEIR VARIOUS PORTFOLIO FUNDS INTO FIDELI TY FOR MANAGING AND ADMINISTRATION). 4.3.39 TRANSACTION PROCESS: FOR GETTING INCOME TAX BENEFIT, PROFESSIONALS IN UK ARE REQUIRED INVEST IN CERTAIN SPECIFIED TAX-SAVING INSTRUMENTS. THE SAME ARE ISA (INDIVIDUA L SAVING ACCOUNT) AND PEP (PERSONAL EQUITY PLAN). THE PEP WA S IN VOGUE IN UK UP TO 1999, POST THAT THE ISA WAS INTRO DUCED AS A NEW SCHEME. THE ACTIVITY CAN BE SUB- CLASSIFIED I NTO: A) ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 7 NEW BUSINESS, B) ONGOING MAINTENANCE AND C) POST PROCESSING/INDEXING 4.3.40 THE ABOVE ACTIVITIES FOLLOW ALL/ SOME OF THE BELOW MENTIONED PROCESSES: A) FILLING OF APPLICATION FORM IN UK, B) SCANNING IN UK AND SEND TO INDIA, C) NEW APPLICATION (I.E. NEW ACCOUNTING OPENING), D) DEALING, E) PRICING, F) CUS TOMER CONFIRMATION AND G) EXIT. A) NEW BUSINESS: IN THIS NEW APPLICATION IS REGIST ERED BASED ON THE APPLICATION FILED BY THE INDIVIDUAL INVESTOR IN UK. THE SAME IS SCRUTINIZED AND THE VARIOUS PARAMETERS ARE UPLOADED ON TO THE FIDELITY SYSTEM. THE MONEY COMES IN AND THE DEALS A RE FROZEN FOR UK BY NOON INDIA TIME. THE SAME ARE BASED ON THE PR ICING (NAV) DISCLOSED FOR THE VARIOUS MUTUAL FUNDS. CERTAIN PAR T OF THE DEALING IS DONE IN THE NEW BUSINESS, WHICH IS MOSTLY BUYING RELATED. WHEREAS THE OTHER PART RELATES TO SELLS AND SWITCHE S BETWEEN FUNDS WITHIN THE ISN PEP SCHEME. IN ALL CLOSE TO 40 0 INSTRUCTIONS ARE PROCESSED AND VERIFIED ON A DAILY BASIS. FOR PR OPER VALIDATION THE UPDATION IS DONE BY MORE THAN TWO PEOPLE AND IN CASE OF ANY MISMATCH A THIRD PERSON UNDERTAKES TO SCRUTINIZE TH E APPLICATION. AS DEALS ARE REQUIRED TO BE PLACED FOR INVESTORS ON A DAILY BASIS THE SAME ARE COMPLETED WITHIN THE FIRST HALF. B) ONGOING MAINTENANCE: THIS REFERS TO UPDATION OF CLIENT DETAILS MAINLY CHANGE OF ADDRESS, BENEFICIARY DETAILS, LIQU IDATION OF PORTFOLIO ETC. THESE ACTIVITIES ARE QUEUED ACCORDIN G TO ITS PRIORITY AND UPDATED BY THE TEAM. CERTAIN VERIFICATION QUEUE S ARE USED FOR VALIDATION OF THE PROCESS. C) POST PROCESSING: THE FILED APPLICATIONS ARE SCAN NED ON THE INDIA SYSTEM AND ARCHIVED FOR FUTURE REFERENCE AND USAGE. THE SAME ARE SPREAD ACROSS A COUPLE OF DAYS FOR COMPLETION. 4.3.41 POFC (PRODUCT OPERATIONS & FINANCIAL CONTROL ): THE POFC ACTIVITY WAS INITIATED DURING THE CURRENT FISCAL. T HE ACTIVITIES UNDERTAKEN BY INDIA SPECIFICALLY INCLUDE CONTROL, O PERATIONS AND UNIT RECONCILIATION OF UNIT BETWEEN THE FUND NE TWORK, ASSET MANAGEMENT COMPANY AND THE CUSTOMER, CASH FLO W RECONCILIATION OF CLIENT ACCOUNTS AND SETTLEMENT AC COUNTS. IT ALSO INVOLVES MATCH OF CASH I.E. ALLOCATION OF MONE Y RECEIVED ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 8 FROM BANK ACCOUNT TO A PARTICULAR DEAL OR CLIENT'S ACCOUNT. A TEAM ALSO UNDERTAKES REGULAR QUALITY CHECKS IN TERM S OF WHETHER THE PROCESSES ARE BEING CORRECTLY FOLLOWED AND ALSO UNDERTAKES TO STUDY AND IMPLEMENT FOR PROCESS IMPROVEMENTS. 4.3.42 CENTRAL FINANCE: THE OPERATIONS INCLUDE UK A CCOUNT PAYABLE, ACCOUNT PAYABLE FOR THE ASSET MANAGEMENT COMPANIES, OVERALL GROUP CONTROLLING INCLUDING ACCO UNT RECONCILIATION, UPDATE BANK DATA BASES, INTER-COMPA NY ACCOUNTING, BALANCE SHEET CONTROL AND UK ACCOUNTING - B SHARES (AN INVESTMENT MANAGEMENT PRODUCT FOR THE FA R EAST COUNTRIES). THE B-SHARE PRODUCT UNDERTAKES CONTROL AND REVENUE ACCOUNTING, MANAGEMENT ACCOUNTING (VARIOUS ALGORITHMS TO SPLIT MANAGEMENT ACCOUNTING FOR COST AND REVENUE). 4.3.43 THE TEAM IN INDIA IS INVOLVED IN INTER-COMP ANY SETTLEMENTS BETWEEN THE VARIOUS FIL COMPANIES. THE ACTIVITIES I NCLUDE GROUP CONTROLLING THAT MEANS WHETHER CONTROLS ARE A DEQUATE IN RELATION TO SETTLEMENTS AND INTER-COMPANY RECONC ILIATION, COMPLIANCE WITH POLICIES. 4. AS PER THE AGREEMENT WITH THE AES THE ASSESSEE WAS COMPENSATED WITH COST PLUS MARK UP OF 13% FOR PROVISIO N OF SERVICES UNDER BOTH THE SEGMENTS. THE ASSESSEE HAS GIVEN FOLL OWING SEGMENTAL DETAILS:- DESCRIPTION SOFTWARE DEVELOPMENT I.T. ENABLED SERVICES OPERATING REVENUES 5,967,881,511 3,744,816,057 OPERATING EXPENSES 5,281,310,946 3,256,361,789 OPERATING PROFIT 686,570,565 488,454,268 PROFIT MARGIN TO COST 13% 15% ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 9 5. FOR BENCHMARKING THE TRANSACTION THE ASSESS EE HAS ADOPTED TNMM AS MOST APPROPRIATE METHOD AND ASSESSEE HAD SELEC TED 18 COMPARABLES IN THE SOFTWARE DEVELOPMENT SERVICES SEG MENT AND 12 COMPARABLE IN IT ENABLED SERVICES SEGMENTS. THE TPO AFTER ANALYSING THE TP STUDY REPORT OF THE ASSESSEE AND THE COMPARABLES SELECTED BY THE ASSESSEE, REJECTED ASSESSEES MOST OF THE COMPARAB LES AND SELECTED VARIOUS COMPARABLES OF HIS OWN SEARCH PROCESS AND A FTER DETAILED DISCUSSION MADE ADJUSTMENT OF RS. 53,02,43,477/- FOR SOFTWARE DEVELOPMENT SERVICES; AND RS. 38,55,53,236/- FOR IT ENABLED SERVICES, THEREBY MAKING TOTAL ADJUSTMENT OF RS. 91.58 CRORES. FI NALLY, THE ASSESSEE IS CHALLENGING 8 COMPARABLES IN THE IT SEG MENT AND 5 COMPARABLES IN THE ITES COMPARABLES. THE COMPARABLES CONTESTED BY THE ASSESSEE IN IT SEGMENT ARE AS UNDER:- S. NO. NAME MARGINS 1. INFOSYS TECHNOLOGIES LTD. 39.14% 2. PERSISTENT SYSTEMS LTD. 23.12% 3. WIPRO LTD. (SEG) 34.39% 4. AVANI CIMCON TECHNOLOGIES LTD. 49.15% 5. CELESTIAL LABS LTD. 54.57% 6. FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.)25.09% 7. KALS INFORMATION SYSTEMS LTD. (SEG) 23.45% 8. MEGASOFT LTD. 51.59% ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 10 SIMILARLY FOR ITES SEGMENT, COMPARABLES CONTESTED BY THE ASSESSEE ARE AS UNDER:- S. NO. NAME MARGINS 1. ACCENTIA TECHNOLOGIES LTD. (SEG) 25.99% 2. INFOSYS BPO LTD. 28.48% 3. ECLERS SERVICES LTD. 86.03% 4. MOLD-TEK TECHNOLOGIES LTD. (SEG) 115.2 0% 5. VISHAL INFORMATION TECHNOLOGIES LTD. 42.19% (CORAL HUB) 6. IN BRIEF, THE ARGUMENTS OF LD. COUNSEL SHRI G. C. SRIVASTAVA BEFORE US HAS BEEN THAT SO FAR AS THE IT SEGMENT IS CON CERNED THE FOLLOWING THREE COMPARABLES NAMELY, I) INFOSYS TECHN OLOGIES LTD., II) PERSISTENT SYSTEMS LTD.; AND III) WIPRO LTD. (SEG.), ARE COVERED IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE BY THE TRIBUNAL FOR THE ASSESSMENT YEAR 2010-11. APART FROM THAT, ON MERITS AL SO HE SUBMITTED THAT EVEN INDEPENDENTLY ALSO THESE COMPARABLES CANNOT BE TAKEN AS COMPARABLES, LIKE IN THE CASE OF INFORMATION TECHNOLOGIES INDIA LTD., HE SUBMITTED THAT, FIRSTLY , IT IS FUNCTIONAL DISSIMILAR AND PROFITS ARE MAINLY DUE TO PREMIUM BRANDING AND IPRS, OWNERSHIP OF INTANGIBLES; AND SECONDLY , REVENUE FROM SOFTWARE PRODUCTS WHICH IN THE CASE OF ASSESSEES ABSENT. IN SUPPORT HE RELIED UP ON VARIOUS JUDGMENTS OF THE TRIBUNAL FOR WHICH HE HAS FILED A S EPARATE CHART. IN THE CASE OF PERSISTENT SYSTEM LTD., HE SUBMITTED THAT THERE WAS A MERGER OF A SUBSIDIARY INTO THE COMPANY IN THIS YEAR AND THIS FACTOR ALONE IS SUFFICIENT FOR NOT TAKING INTO AS COMPARABLE C OMPANY. FOR WIPRO LTD., HE SUBMITTED THAT, FIRSTLY , IT IS FUNCTIONALLY DIFFERENT; ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 11 SECONDLY , NON AVAILABILITY OF STANDALONE FINANCIAL DATA FOR F INANCIAL YEAR 2006-07; THIRDLY , IT OWNS HUGE INTANGIBLES; AND LASTLY , IT IS ENGAGED IN BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PR ODUCT AND DEVELOPMENT SERVICES FOR WHICH NO SEGMENTAL BIFURCATI ON ARE AVAILABLE. IN THE CASE OF OTHER COMPARABLES ALSO, HE POINTED OUT TH AT FIRSTLY , THEY ARE MAINLY INTO SOFTWARE PRODUCTS; AND SECONDLY , SEGMENTAL INFORMATION/DATA FOR THE SALE OF SOFTWARE PRODUCTS WERE NOT AVAILABLE IN THE PUBLIC DOMAIN. THUS, THESE COMPARABLES ALSO CANNOT BE TAKEN FOR COMPARABILITY ANALYSIS. LASTLY, REGARDING MEGASO FT LTD., HE SUBMITTED THAT THERE WAS AN ACQUISITION DURING THE YEAR AND THUS THIS COMPANY ALSO NEEDS TO BE EXCLUDED. 7. SIMILARLY FOR THE ITES SEGMENT, MR SRIVASTAVA S UBMITTED THAT ACCENTIA TECHNOLOGIES LTD., INFOSYS BPO LTD. HAVE BEEN EXCLUDED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESS MENT YEAR 2010- 11. APART FROM THAT, HE SUBMITTED THAT THEY ARE NOT ONLY FU NCTIONING DISSIMILAR BUT ALSO DID NOT HAVE SEGMENTAL INFORMATIO N FOR VARIOUS FUNCTIONS AND REVENUE STREAMS AND WERE HAVING HUGE I NTANGIBLE BRANDS. FOR THE OTHER COMPARABLES ALSO, LIKE ECLERX S ERVICES LTD., HE SUBMITTED THAT IT WAS ENGAGED IN KPO SERVICES AND HENCE FUNCTIONALLY DISSIMILAR; AND IN THE CASE OF MOLD-TEK TECHNOLOGIES LIMITED, IT WAS FUNCTIONALLY DISSIMILAR AND THERE WAS A MERGER AND D E MERGER IN THIS CASE DURING THE YEAR. LASTLY, FOR VISHAL INFORMATION T ECHNOLOGIES LTD. ALSO HE SUBMITTED THAT IT IS FUNCTIONALLY DISSIMILAR AND FAILS RPT FILTER AND ALSO ITS OUTSOURCES ITS ACTIVITIES WHICH ITSELF GOE S TO SHOW THAT IT HAS A DIFFERENCE BUSINESS MODEL. IN SUPPORT OF THESE COMPARABLES HE HIGHLIGHTED VARIOUS DECISIONS OF THE TRIBUNAL, WHEREI N THESE COMPARABLES HAVE BEEN REJECTED FROM THE COMPANIES WH O ARE CAPTIVE SERVICE PROVIDERS AND SIMPLY PROVIDING BACK OFFICE SUPPORT OF SERVICES. ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 12 8. ON THE OTHER HAND, LD. CIT (DR) SUBMITTED IN THE PRESENT CASE IT WOULD BE VERY DIFFICULT TO TREAT THE SIMILAR NATU RE OF TRANSACTIONS WITH TWO DIFFERENT AES IN DIFFERENT PARAME TERS, BECAUSE IN THE CASE OF US BASED AES UNDER THE MAP, MARGIN ACCEPT ED FOR THE IMPUGNED ASSESSMENT YEARS IS OF 15.70% FOR IT SERVIC ES AND 14.68% FOR IT ENABLED SERVICES. THUS, IT CANNOT BE HELD THAT FOR SAME TRANSACTIONS THE MARGINS SHOULD BE 13%. IF FOR THE US AES HIGHER MARGINS HAVE BEEN ACCEPTED, THEN SAME MARGIN SHOULD BE APPLIED FOR NON US AES. OTHERWISE ON MERITS ALSO, HE SUBMITTED THAT H E CAN POINT OUT THE FACTORS WHICH HAVE BEEN DISCUSSED BY THE TPO WH ILE CONSIDERING THE COMPARABILITY WITH THESE COMPARABLES AND HOW THEY CANNOT BE REJECTED SIMPLY FOLLOWING THE OTHER TRIBUNAL DECISIONS. HOWEVER, HE SUBMITTED THAT INSTEAD OF GOING INTO THESE AS PECTS AND IN ALL FAIRNESS, IT WOULD BE PROPER THAT THE MARGINS WHICH HAVE BEEN ACCEPTED IN MAP WITH US AES SAME SHOULD BE APPLIED H ERE ALSO. 9. LD. COUNSEL FOR THE ASSESSEE SHRI G.S. SRIVA STAVA SUBMITTED THAT TO END THE LITIGATION AND TO ATTAINED FINALITY FOR THES E YEARS, ASSESSEE IS READY TO ACCEPT THE ADJUSTMENT BASED ON THE MARGINS ACCEP TED IN THE MAP. 10. AFTER CONSIDERING THE AFORESAID SUBMISSIO NS AND ON PERUSAL OF THE MATERIAL PLACED ON RECORD, WE FIND THAT THE TOTAL IN TERNATIONAL TRANSACTION WITH ALL THE AES INCLUDING THOSE COVERED U NDER THE MAP SETTLEMENT IS AS UNDER:- 1. SOFTWARE DEVELOPMENT SERVICES: SL. NO. NAME OF ASSOCIATED ENTERPRISE VALUE OF INTERNATIONAL TRANSACTION (RS.) COVERED UNDER MAP SETTLEMENT ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 13 1. FIDELITY INVESTMENT INSTITUTIONAL SERVICES COMPANY, USA 4,516,850,248 YES 2. FIDELITY BROADBAND GROUP, USA 87,810,554 YES 3. FIDELITY INVESTMENTS MANAGEMENT (HK) LTD., HONGKONG 1,348,771,361 NO 4. KVH SYSTEMS SOLUTIONS LTD. BERMUDA 14,449,348 NO TOTAL 5,967,881,511 2. IT ENABLED SERVICES: S. NO. NAME OF ASSOCIATED ENTERPRISE VALUE OF INTERNATIONAL TRANSACTION (RS.) COVERED UNDER MAP SETTLEMENT 1. FIDELITY EMPLOYER SERVICES COMPANY LLC, USA 2,148,806,297 YES 2. FIDELITY INVESTMENTS MANAGEMENT (HK) LTD. HONGKONG 1,517,646,305 NO 3. KVH CO. LTD. JAPAN 78,363,455 NO TOTAL 3,744,816,057 11. THUS, HERE WE HAVE A SITUATION WHERE PART OF THE SAME TRANSACTION BOTH IN IT SEGMENT AS WELL AS ITES SEGMENT MARGINS OF 15.70% AND 14.68% HAVE BEEN ACCEPTED BY THE ASSESSEE AND BY THE REVENUE AUTHORITIES. NOW FOR THE SAME NATURE OF TRANSAC TIONS IT WOULD BE VERY DIFFICULT TO ACCEPT ASSESSEES MARGIN OF 13% OR THAT OF THE TPO ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 14 WHO HAS APPLIED HIGHER MARGIN. ACCORDINGLY, IN WAKE OF MAP SETTLEMENT, WE HOLD THAT FOR THE SOFTWARE DEVELOPMENT SER VICES (IT SERVICE) THE PROFIT MARGIN FOR THE ASSESSMENT YEAR 2007 -08 SHOULD BE TAKEN AS 15.70%; AND FOR THE 2008-09 IT SHOULD BE TAKEN AS 15.91%; WHEREAS, IN THE ITES SEGMENT THE PROFIT MARGIN FOR THE A SSESSMENT YEAR 2007-08 SHOULD BE TAKEN AS 14.68%; AND FOR AY 2 008-09 IT SHOULD BE TAKEN AS 14.89%. THUS, WE ARE NOT ENTERING INTO THE ADJUSTMENTS OR ADJUDICATION OF VARIOUS COMPARABLES A S RAISED BY THE ASSESSEE BEFORE US. ACCORDINGLY, WE DIRECT THE TPO TO MAKE THE ADJUSTMENT AFTER TAKING INTO THE NET PROFIT MARGIN AS ADO PTED/ AGREED IN THE MAP TO BENCHMARK THE TRANSACTION OF NON US AE A LSO. IN VIEW OF THE ABOVE, THE GROUNDS RELATING TO TRANSFER PRICING ADJUSTMENT ARE TREATED AS PARTLY ALLOWED. 12. LASTLY, COMING TO THE GROUND RELATING TO NON GRANTING OF TDS AT SOURCE WHICH HAS BEEN TAKEN AS BOTH THE YEARS, WE DIRE CT THE AO TO VERIFY THE SAME AND ALLOW IN ACCORDANCE WITH LAW. THE GROUND RELATING TO NON GRANT OF BENEFIT OF LOWER RANGE OF +/-5% HAS NO T BEEN PRESSED AND GROUND RELATING TO SECTION 234B IS ADMITTED TO BE CON SEQUENTIAL. OTHER GROUNDS ARE GENERAL IN NATURE. 13. SIMILARLY IN THE ASSESSMENT YEAR 2008-09 ALSO SIMILAR GROUNDS HAVE BEEN TAKEN AND THEREFORE OUR DIRECTIONS IN THE AB OVE APPEAL WILL APPLY FOR 2008-09 ALSO. ACCORDINGLY, BOTH THE APPEAL S OF THE ASSESSEE ARE PARTLY ALLOWED. IN THE RESULT BOTH THE APPEALS OF THE ASSESSEE ARE PAR TLY ALLOWED. ITA NO. 5872/DEL/2011 & ITA NO. 4180/DEL/20 14 FIDELITY BUSINESS SERVICE IND IA PVT. LTD. 15 ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH FEBRUARY, 2018. SD/- SD/- (PRASHANT MAHARISHI) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: /02/2018 VEENA COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI