NewRiver Software Services Pvt. Ltd., Hyderabad V. ACIT, New Delhi

ITA 451/DEL/2013

• Counselvise Citation: 45120114 RSA 2013
• Duration Of Justice: 2 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 26-02-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 24-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JUDY JAMES STANDING COUN SEL
• Assessee Lawyers: TAPAN GUPTA; MANISH MATTA
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRI BUNAL DELHI BENCH I NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI H.S. SIDHU : JUDICIAL MEMBER ITA NO. 451/DEL/2013 A.Y. 2008-09 NEW RIVER SOFTWARE SERVICES PVT. LTD. VS. ACIT CIRC LE-13(1), (SINCE MERGED WITH BROADRIDGE NEW DELHI. FINANCIAL SOLUTIONS (INDIA) PVT. LTD. SURVEY NO. 64, HI TECH CITY, SERILINGAMPALLY, RANGAREDDY DISTRICT HYDERABAD. PAN: AACCN 3301 N ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI TAPAN GUPTA CA & SHRI MANISH MATTA CA RESPONDENT BY : SHRI JUDY JAMES (STANDING COUN SEL) DATE OF HEARING : 26-02-2015 DATE OF ORDER : 27-03-2015. O R D E R PER S.V. MEHROTRA, A.M:- THIS APPEAL, PREFERRED BY THE ASSESSEE, IS DIRECTE D AGAINST THE ASSESSMENT ORDER DATED 30-11-2012, FRAMED BY THE A O PURSUANT TO DRP DIRECTIONS U/S 144C, PERTAINING TO ASSESSMENT YEAR 2008-09. 2. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE DID N OT PRESS GROUND NOS. 1,2,3, 4, 6 & 7. ACCORDINGLY, THE SAME STAND DISMISSED BEING NO T PRESSED. 2 ITA 451/DEL/2013 3. THE ASSESSEE COMPANY HAD FILED ITS RETURN OF INC OME DECLARING NIL INCOME AND BOOK PROFIT OF RS. 1,32,14,390/-. THE ASSESSEE HAD DECLARED BUSINESS INCOME OF RS. 1,53,39,519/- AND THE SAME HAD BEEN CLAIMED EXE MPT U/S 10B. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY WAS ENGAGE D IN THE BUSINESS OF PROCESSING INFORMATION AND DATA THROUGH MEANS OF EL ECTRONIC AND INFORMATION TECHNOLOGY ENABLED INFRASTRUCTURE. 3.1. THE ASSESSEE HAD REPORTED FOLLOWING INTERNATIO NAL TRANSACTIONS IN FORM 3CEB: S. NO. NATURE OF TRANSACTION METHOD USED BY ASSESSEE AMOUNT(RS.) 1. PROCESSING INFORMATION AND DATA THROUGH MEANS OF ELECTRONIC AND INFORMATION TECHNOLOGY TNMM 119,755,134/- 3.2. THE AO HAD MADE A REFERENCE TO TPO FOR DETERMI NATION OF ALP U/S 92CA(3) IN RESPECT OF ABOVE TRANSACTIONS. THE TPO NOTICED T HAT ASSESSEE WAS ENGAGED IN THE SERVICES OF ONLINE FINANCIAL SERVICES, WHICH INCLUD ED STRATEGIC ADVISORY SERVICES, INDUSTRY AND OPERATION EXPERTISE, COMPLIANCE FOCUS SERVICES, WEB MARKETING SERVICES, ELECTRONIC COMMERCE KNOWLEDGE SERVICES, A ND INTELLIGENCE AND BEST PRACTICE SERVICES. HE NOTED THAT IT ENABLED BACK OFFICE PROCESSING SERVICES WERE PROVIDED TO NEW RIVER US, WHICH WAS INVOLVED IN FUL L FLEDGED MARKETING, ENCOMPASSING A WIDE RANGE OF OTHER ALLIED ACTIVITIE S. THE ASSESSEE HAD SHOWN PLI OF OP/OC AT 10.33%, WHICH HAD BEEN BENCHMARKED WITH THE ARITHMETIC MEAN OF 8.45% IN RESPECT OF 17 COMPARABLES SELECTED BY THE ASSESSEE AND, THEREFORE, THE ASSESSEES CONTENTION WAS THAT THE ASSESSEES NET M ARGINS WERE WITHIN THE RANGE OF + 5%. 3.3. THE TPO SHOW CAUSED THE ASSESSEE AND OBSERVING AS UNDER: 3 ITA 451/DEL/2013 THE ASSESSEE CONTENTION AS STATED ABOVE WAS CONSID ERED. HOWEVER THE COMPARABLES SELECTED BY THE ASSESSEE AR E REJECTED FOR THE FOLLOWING ANY OR ALL INAPT FILTERS: A. COMPANIES WHOSE SUPPORT SERVICE INCOME < RS. 1 CROR E NEED TO BE EXCLUDED. B. COMPANIES WHOSE SUPPORT SERVICE RECEIPTS ARE LESS T HAN 75% OF THE TOTAL OPERATING REVENUES NEED TO BE EXCL UDED. C. COMPANIES HAVING MORE THAN 25% RELATED PARTY TRANSACTIONS (SALES AS WELL AS EXPENSES COMBINED) N EED TO BE EXCLUDED. D. COMPANIES HAVING DIMINISHING REVENUES/ PERSISTENT L OSSES FOR THE LAST 3 YEARS UPTO AND INCLUDING FY 2007-08 NEED TO BE EXCLUDED. E. COMPANIES THOSE ARE EXPANSIVELY FUNCTIONALLY DIFFER ENT FROM THE TAXPAYER NEED TO BE EXCLUDED 3.4. LD. TPO PROPOSED 24 COMPARABLES FOR BENCHMARKI NG THE INTERNATIONAL TRANSACTIONS RELATING TO PROVISION OF MARKET SUPPOR T/ INFORMATION SERVICES, THE AVERAGE PLI OF WHICH WAS COMPUTED AT 28.05% AS NOTED AT PAGES 3 & 4 OF TPOS ORDER. 3.5. THE ASSESSEE FILED ITS REPLY, WHICH IS CONTAIN ED AT PAGE 5 OF LD. TPOS ORDER. LD. TPO PROPOSED FOLLOWING COMPARABLES TO BE SELECTED FOR BENCHMARKING PURPOSES IN THE CASE OF ASSESSEE: S. NO. NAME OF THE COMPARABLE OP/TC(%) 1. CORAL HUB (VISHAL INF) 51.84 2. CALIBER POINT BUSINESS SOLUTION (SEG) 10.97 3. ECLERX 66.25 4. SPANCO LTD. (SEG) 08.94 5. R SYSTEMS INTERNATIONAL LTD. (SEG) 28.46 4 ITA 451/DEL/2013 3.6. LD. TPO ALSO CONSIDERED THE ISSUE RAISED BY AS SESSEE REGARDING, INTER ALIA, DENIAL OF WORKING CAPITAL ADJUSTMENT AND REJE CTED THE SAME OBSERVING THAT ASSESSEE HAD NOT DEMONSTRATED THAT THERE WAS DIFFERENCE IN THE LEVELS OF WORKING CAPITAL EMPLOYED VIS-A-VIS THE COMPARABLES. HE FURTHER OBSERVED THAT THE AUDITED ACCOUNTS OF THE ASSESSEE DID NOT S HOW THAT IT HAD RECEIVED ANY ADVANCE FROM ITS AES. HE OBSERVED THAT IN THE A BSENCE OF RELIABLE DATA NO ADJUSTMENT COULD BE ALLOWED. 3.7. LD. TPO AFTER CONSIDERING THE ASSESSEES OBJEC TION IN DETAIL USED THE COMPARABLES AS TABULATED EARLIER. HE, ACCORDINGLY, MADE AN ADJUSTMENT OF RS. 1,98,93,462/- AS UNDER: TOTAL COST : RS. 108,709,790/- ALP AT A MARGIN OF 28.46% : RS. 139,648,596/- PRICE RECEIVED : RS. 119,755,134/- ADJUSTMENT U/S 92CA : RS. 19,893,462/- 4. BEFORE LD. DRP, THE ASSESSEE HAD, INTER ALIA, TA KEN A GROUND THAT LD. AO/TPO ERRED ON FACTS AND IN LAW BY CHERRY PICKING COMPANIES WHICH HAD SHOWN VERY HIGH MARGINS VIS-A-VIS THE INDUSTRY BENC HMARK, WITHOUT CONSIDERING THE FUNCTIONAL AND OPERATIONAL COMPARAB ILITY. 4.1. THE ASSESSEES CONTENTION WAS THAT IT WAS A LO W RISK CAPTIVE UNIT, AS IT WAS REMUNERATED ON COST PLUS BASIS BY ITS AES FOR S OFTWARE DEVELOPMENT SERVICES TO THEM AND, THEREFORE, IT SHOULD NOT HAVE BEEN COMPARED WITH COMPANIES WITH VERY HIGH MARGINS DUE TO DIFFERENCE IN FUNCTIONAL AND RISK PROFILE. 5 ITA 451/DEL/2013 4.2. LD. DRP REJECTED THE ASSESSEES CONTENTION, IN TER ALIA, OBSERVING THAT THE PROFIT MARGINS OF ANY COMPANY IS NOT AN INDICAT OR OF ITS FUNCTIONAL PROFILE. IT WAS FURTHER POINTED OUT THAT IN A SET O F FUNCTIONALLY COMPARABLE COMPANIES, THERE COULD BE COMPANIES WITH LOW MARGIN AS WELL AS HIGH MARGINS. WHAT IS MATERIAL IS THE FUNCTIONAL COMPARA BILITY. MOREOVER, WHILE TAKING ARITHMETIC MEAN, SUCH DIFFERENCE WILL ULTIMA TELY AVERAGE OUT. 4.3. LD. DRP HAD RELIED ON THE DECISION OF ITAT MUM BAI IN THE CASE OF EXXON MOBIL CO. INDIA PVT. LTD. (2011-TII-68-ITAT-M UM- TP). THE ASSESSEE HAD ALSO OBJECT4ED TO THE INCLUSI ON OF ECLERX SERVICES LTD. AS A COMPARABLE COMPANY TO THE ASSESSEE ON FOLLOWIN G GROUNDS: (A) FUNCTIONALLY NON COMPARABLE SERVICES AS IT WAS A KP O AND CARRIED ON DIVERSIFIED OPERATIONS. (B) COMPANY WAS ENGAGED IN FINANCIAL SERVICES IN THE NA TURE OF ACCOUNT RECONCILIATION, TRADE ORDER MANAGEMENT SERVICES ETC . (C) RATED AS LEADING KPO NELSO HALL. 4.4. LD. DRP REJECTED THIS CONTENTION FOR THE FOLLO WING REASONS: (I) THE FUNCTIONS PERFORMED BY THE IMPUGNED COMPARABLES WAS DATA ANALYSIS AND DATA PROCESS SOLUTIONS WHICH ARE VERY MUCH IN THE NATURE OF ITES. (II) AS PER ASSESSEES OWN DESCRIPTION IN ITS TP REPORT, IT WAS STATED THAT IN ADDITION TO CORE CATEGORIES OF CIS, F&A, HR M, KNOWLEDGE SERVICES AND PROCUREMENT ITES-BPO SERVICES WERE ALS O PERFORMED. 4.5. LD. DRP POINTED OUT THE FOLLOWING EXAMPLES OF OTHER HORIZONTAL ITES BPO SERVICES: - CONTENT DEVELOPMENT AND PUBLISHING - MEDICAL TRANSCRIPTION SERVICES. 6 ITA 451/DEL/2013 - ECONOMETRICS, DATA ANALYSIS, MODELING AND FORECASTI NG - ANIMATION AND DESIGNING. 4.6. BEFORE LD. DRP THE ASSESSEE HAD ALSO RAISED A DDITIONAL GROUND THAT IN THE SHOW CAUSE NOTICE THE TPO PROPOSED A SET OF 24 COMPANIES OUT OF WHICH 15 COMPANIES WERE ACCEPTED BY ASSESSEE AS COMPARABL E COMPANIES AND 9 WERE OBJECTED. HOWEVER, THE TPO SELECTED ONLY 5 CO MPANIES IN HIS ORDER AS COMPARABLES FOR THE COMPUTATION OF ALP. LD. DRP AFT ER CONSIDERING THE ASSESSEES CONTENTION DIRECTED THAT FOLLOWING 12 CO MPARABLES BE USED TO DETERMINE THE ALP: SL. NO. NAME OF COMPARABLE OP/TC(%) 1. ADITYA BIRLA MINACS -0.55 2. ASIT C MEHTA 9.1 3. CORAL HUB (VISHAL INF) 51.84 4. COSMIC GLOBAL 24.3 5. CROSSDOMAIN SOLUTION P LTD. 26.96 6. E4E(EARLIER KNOWN NITANNY) 17.5 7. ECLERX 66.25 8. ICRA(SEG) 11.22 9. INFOSYS BPO 20.03 10. I-SERVICES IND P. LTD. 10.92 11. WIPRO BPO 30.3 12. R SYSTEM INTERNATIONAL LTD(SEG) 4.3 MEAN 22.77 5. BEFORE US THE ASSESSEE HAS PRIMARILY OBJECTED TH E INCLUSION OF FOLLOWING FOUR COMPARABLES: (I) CORAL HUB (VISHAL INFORMATION TECHNOLOGIES LTD.); (II) ECLERX SERVICES LTD. (III) INFOSYS BPO LTD. (IV) WIPRO LTD. (SEGMENTAL) 7 ITA 451/DEL/2013 5.1. CORAL HUB (VISHAL INFORMATION TECHNOLOGIES LTD .) : LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS COMPANY IS FUNCTIO NALLY DIFFERENT, INTER ALIA, BECAUSE ITS BUSINESS MODEL IS BASED ON OUTSOURCING . IN THIS REGARD HE POINTED OUT THAT DATA ENTRY CHARGES INCURRED BY THI S COMPANY ARE 84.52% OF TOTAL EXPENDITURE AND THERE IS NEGLIGIBLE PERSONNEL COST INCURRED BY IT. LD. COUNSEL RELIED ON FOLLOWING DECISIONS IN SUPPORT OF ITS CONTENTION FOR EXCLUSION OF THIS COMPANY FROM LIST OF COMPARABLES: - MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (ITA NO. 37 74/MUM/2011 & CO 111/MUM/2011- ORDER DATED 9-11-2011); - UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. [2014] 50 TAXMANN.COM 177 (DEL-TRIB.); - BNY MELLON INTERNATIONAL OPERATIONS (INDIA) PVT. LT D. [2014] 52 TAXMANN.COM 306 (PUNE-TRIB.) - TECHBOOKS INTERNATIONAL PVT. LTD. [2014] 45 TAXMANN .COM 528 (DELHI-TRIB.). 5.2. LD. COUNSEL SUBMITTED THAT IN ASSESSEES CASE SALARY COST IS 54.67% WHEREAS IN THE CASE OF CORAL HUB SALARY COST IS 4.4 % AND, THEREFORE, IT CANNOT BE COMPARED WITH ASSESSEE. 5.3. ECLERX SERVICES LTD. : AS REGARDS ECLERX SERVICES LTD., LD. COUNSEL SUBMITTED THAT IT IS NOT FUNCTIONALLY COMPARABLE BE CAUSE THIS COMPANY IS CARRYING ON KPO ACTIVITIES. FURTHER, HE SUBMITTED T HAT AS PER THE ANNUAL REPORT, THIS COMPANY WAS ENGAGED IN PROVIDING HIGH END SERVICES LIKE DATA ANALYTICS AND CUSTOMIZED PROCESS SOLUTIONS. HE SUBM ITTED THAT SINCE THE COMPANYS ACTIVITIES WERE SPECIALIZED AND COMPLEX, THEREFORE, IT IS NOT COMPARABLE TO BPO OR AN IT OUTSOURCING COMPANY IN W HICH ASSESSEE IS ENGAGED. HE POINTED OUT THAT THIS COMPANY DELIVERED DATA SOLUTIONS TO 8 ITA 451/DEL/2013 COMPANIES BUSINESS NEEDS THROUGH COST EFFECT COMBIN ATION OF DELIVERY PROCESS AND TECHNOLOGY. 5.4. FURTHER, LD. COUNSEL SUBMITTED THAT EXTRA ORDI NARY EVENTS OF ACQUISITION HAVE TAKEN PLACE. THE ASSESSEE RELIED ON FOLLOWING CASE LAWS FOR EXCLUSION OF THIS COMPANY FROM LIST OF COMPARABLES: - MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. - UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. - M/S CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. [ ITA 5271/DEL/2012 AY 2007-08). 5.5. INFOSYS BPO LIMITED: AS REGARDS INFOSYS BPO LI MITED, LD. COUNSEL SUBMITTED THAT THIS IS NOT COMPARABLE TO ASSESSEE FOR THE FOLLOWING REASONS: (I) THE TURNOVER OF INFOSYS BPO LIMITED IS 69 TIMES OF THE ASSESSEE COMPANY. (II) IT IS GIANT AND HAS BRAND VALUE. (III) BRAND BUILDING & ADVERTISEMENT EXPENSE (IV) SELLING AND MARKETING EXPENDITURE 6.17% OF OPERATI NG REVENUE. (V) HUGE ASSETS BASE OF RS. 130.89 CRORES (VI) EXTRAORDINARY EVENTS ACQUISITIONS. 5.6. WIPRO BPO :AS REGARDS WIPRO BPO, LD. COUNSEL SUBMITTED THAT T HIS IS ALSO NOT COMPARABLE TO ASSESSEE FOR THE FOLLOWING R EASONS: (I) TURNOVER IS 97 TIMES OF THE ASSESSEE (II) PRESENCE OF INTANGIBLES (III) FILED 17 PATENTS IN AY 2008-09. 9 ITA 451/DEL/2013 6. LD. STANDING COUNSEL SHRI JUDY JAMES SUBMITTED THAT THERE IS NO DISPUTE AS REGARDS ADOPTION OF TNMM METHOD FOR COMP UTATION OF ALP AND BY TAKING PLI AS OP/OC. LD. STANDING COUNSEL SUBMIT TED THAT ASSESSEE IS RENDERING KNOWLEDGE PROCESSING OUTSOURCING (KPO) SERVICE AND NOT BUSINESS PROCESSING OUTSOURCING (BPO) SERVICE. H E SUBMITTED THAT KPO IS HIGH END KNOWLEDGE SERVICE FOR CARRYING OUT PROCES SING, WHEREAS BPO IS LOW END SERVICE AS COMPARED TO KPO. HE REFERRED TO PAGE 2 OF TPOS ORDER TO POINT OUT THAT ASSESSEE IN THE RELEVANT YEAR WAS ENGAGED IN THE SERVICES OF ONLINE FINANCIAL SERVICES, WHICH INCLUDED STRATEGIC ADVISORY SERVICES, INDUSTRY AND OPERATION EXPERTISE, COMPLIANCE FOCUS SERVICES, WEB MARKETING SERVICES, ELECTRONIC COMMERCE KNOWLEDGE SERVICES, A ND INTELLIGENCE AND BEST PRACTICE SERVICES, IT ENABLED BACK OFFICE PROCESSIN G SERVICES TO NEW RIVER US, WHICH IS FULL FLEDGED MARKETING, ENCOMPASSING A WIDE RANGE OF OTHER ALLIED ACTIVITIES, WHICH ARE COMPARABLE TO A KPO AN D NOT TO BPO. 6.1. LD. STANDING COUNSEL SUBMITTED THAT THIS COMPA NY HAS NOW MERGED WITH BROADRIDGE FINANCIAL SOLUTIONS (INDIA) PVT. LT D. W.E.F. 1-7-2011, BUT NOT IN ASSTT. YEAR UNDER CONSIDERATION. HE SUBMITTED TH AT IN CASE OF BPO NORMALLY FOLLOWING ACTIVITIES WOULD BE THERE : (A) CALL FACILITY (B) SELLING PRODUCTS; MARKETING DEMANDS; NO HIGH END SE RVICE. 6.2. EMPLOYEES ARE TRAINED TO TAKE UP CALLS AND GIV E INFORMATIONS TO SPECIFIED CUSTOMERS. IN BPO NO MASTERY IS REQUIRED E.G. INSURANCE COMPANIES AND MANUAL IS LAID DOWN FOR PROCEDURE. 10 ITA 451/DEL/2013 6.3. WHEREAS IN CASE OF KPO, TRAINING IS IMPORTANT, WHERE THE TRAINED PERSON HAS TO USE KNOWLEDGE AND ACCORDINGLY SPECIAL ISTS ARE REQUIRED IN CASE OF KPO WHO DEAL WITH HIGH END SERVICES. HE SUBMITTE D THAT KPO IS THE LATEST OUTSOURCING PROCESS WHICH INVOLVES APPLICATION OF T RAINING, EXPERTISE TO RESEARCH DATA ANALYSIS, OTHER INFORMATION BASED ACT IVITIES. 6.4. LD. STANDING COUNSEL ADVANCED HIS SUBMISSIONS WITH REFERENCE TO VARIOUS IMPUGNED COMPARABLES SELECTED BY TPO. 6.5. CORAL HUB . AS REGARDS THIS COMPANY, LD. STANDING COUNSEL SU BMITTED THAT NOTHING IS THERE ON RECORD TO SUBSTANTIATE FUN CTIONAL PROFILE OF THIS COMPANY. 6.6. IN THIS REGARD LD. STANDING COUNSEL REFERRED T O THE ANNUAL REPORT CONTAINED AT PAGE 476 OF THE PB. HOWEVER, HE REFERR ED TO PARA 12.2 AT PAGE 10 OF THE DECISION IN THE CASE OF UNITED HEALTH GRO UP INFORMATION SERVICES PVT. LTD. (SUPRA), WHEREIN THE TRIBUNAL HAS NOTICE D FROM ANNUAL REPORT THAT IT WAS MAINLY ENGAGED IN E-PUBLISHING BUSINESS AND HAD MORE THAN, 10,000 CLASSIC BOOKS TO ITS CREDIT WHICH WERE ALSO CONVERT ED INTO LARGE FONT TITLES FOR VISUALLY CHALLENGED. HE, THEREFORE, SUBMITTED THAT FUNCTIONS PERFORMED BY THIS COMPANY WERE AKIN TO KPO AND COMPARABLE TO ASS ESSEES FUNCTIONS. 6.7. LD. STANDING COUNSEL POINTED OUT THAT THE DEC ISION IN THE CASE OF BNY MELLON INTERNATIONAL OPERATIONS (INDIA) PVT. LTD. ( SUPRA) IS NOT APPLICABLE BECAUSE AS PER PARA 9.5 OF THE SAID DECISION, IT IS NOTICED THAT THE COMPANY WAS NOT ENGAGED IN E-PUBLISHING BUSINESS AND, THERE FORE, IT WAS HELD THAT CORAL HUBS LTD. COULD NOT BE CONSIDERED AS A COMPAR ABLE. THIS WAS ENGAGED 11 ITA 451/DEL/2013 IN THE BUSINESS OF IT ENABLED SERVICES/ BUSINESS, T HEREFORE, IT IS NOT COMPARABLE TO THE ASSESSEES HIGH END SERVICES. 6.8. AS REGARDS ASSESSEES RELIANCE ON TRIBUNALS D ECISION IN THE CASE OF M/S TECHBOOKS INTERNATIONAL PVT. LTD. (SUPRA), LD. STANDING COUNSEL REFERRED TO PARAS 5.3 & 5.4 OF THE ORDER, AS REPRO DUCED BELOW: 5.3. HOWEVER, WE FIND FROM THE TRIBUNAL ORDER FOR T HE ASSESSMENT YEAR 2007-08 THAT THE CASE OF VISHAL INF ORMATION TECHNOLOGIES LTD. (NOW CALLED AS CORAL HUB LTD.) HAS BEEN HELD TO BE NOT COMPARABLE BECAUSE OF DIFFERENT BUSI NESS MODEL AS IT WAS OUTSOURCING EXECUTION OF CONTRACT FROM EX TERNAL VENDORS. THE TRIBUNAL HAS NOTED IN PARA 13 OF ITS ORDER, A COPY OF WHICH IS AVAILABLE ON RECORD, THAT THE EMPLOYEE COST IN THE CASE OF VITL WAS A MERE 3% OF THE TOTAL COST, WHERE AS IN THE CASE OF THE ASSESSEE IT STOOD AT 60%. THE POSITION FOR THE CURRENT YEAR IS ALSO MORE OR LESS SIMILAR. THE EMPL OYEES COST OF VITL FOR THE INSTANT YEAR IS AT 2.71 % OF THE TOTAL COST AS AGAINST A LITTLE MORE THAN 60% OF THE ASSESSEE. 5.4. AT THIS JUNCTURE, IT IS PARAMOUNT TO RECORD TH E CONTENTION OF THE ID. DR THAT THE FILTER OF EMPLOYEES COST TO TOTAL COST IS NOT RELEVANT AS IT DOES NOT ULTIMATELY IMPACT THE OVERA LL PROFLTABILITY. HE FORTIFIED THIS CONTENTION ON THE STRENGTH OF THE ORDER PASSED BY THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS DEOLITE CONSULTING INDIA PVT. LTD. (A COPY OF ORDER PLACED ON RECORD) IN WHICH IT HAS BEEN HELD T HAT SUCH A FILTER DOES NOT IMPACT THE OVERALL PROFITABILITY AND THE SPECIFIC CASE OF VITL HAS BEEN HELD TO BE COMPARABLE. 6.9. HE SUBMITTED THAT TRIBUNAL DID NOT FOLLOW THE CONTRARY VIEW TAKEN IN THE CASE OF DEOLITE CONSULTING INDIA PVT. LTD. (SU PRA) ON THE GROUND OF CONSISTENCY AND, THEREFORE, THIS DECISION CANNOT BE OF ANY ASSISTANCE TO THE ASSESSEE. 12 ITA 451/DEL/2013 6.10. AS REGARDS RELIANCE OF TRIBUNAL IN THE CASE OF M/S MAERSK GLOBAL SERVICE CENTER (INDIA) P. LTD. (SUPRA) IS CONCERNED , LD. COUNSEL REFERRED TO PARA 29 AND POINTED OUT THAT THIS COMPANY WAS CAPTI VE SERVICE PROVIDER RENDERING BACK OFFICE SUPPORT SERVICES TO ITS AES. THE ACTIVITIES UNDERTAKEN BY THE ASSESSEE WERE ESSENTIALLY IT ENABLED SERVICE S SUCH AS DATA ENTRY, TRANSCRIPTION AND DATA OF SHIPPING DOCUMENTS SUCH A S BILL OF LADING ETC. THEREFORE, THIS DECISION IS NOT APPLICABLE TO ASSES SEE WHICH IS PRIMARILY CARRYING ON STRATEGIC ADVISORY SERVICES WHICH ARE HIGH END FINANCIAL SERVICES, WHEREAS M/S MAERSK GLOBAL SERVICE CENTER (INDIA) P. LTD. WAS CARRYING ON LOW END SERVICES. 6.11. AS REGARDS ECLERX SERVICES LTD., LD. STANDING COUNSEL SUBMITTED THAT THE RELIANCE PLACED BY ASSESSEE ON THE TRIBUNALS DECISION IN THE CASE OF M/S CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. ( ITA NO. 5271/DEL/2012 ORDER DATED 4-12-2014) IS NOT CORRECT. IN THIS RE GARD HE SUBMITTED THAT IN REGARD TO ECLERX SERVICES LTD., AS COMPARABLE, THE TRIBUNAL IN PARA 8 OBSERVED AS UNDER: IV) ECLERX SERVICE LTD. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE ANNUAL REPORT OF T HIS COMPANY FOR THE FINANCIAL YEAR 2006-07 DOES NOT THR OW ANY LIGHT ON THE NATURE OF BUSINESS CARRIED ON BY IT. H OWEVER, THE ANNUAL REPORT FOR THE FINANCIAL YEAR 2007-08, A COP Y OF WHICH IS AVAILABLE ON THE PAPER BOOK, DIVULGES THE NATURE OF BUSINESS CARRIED ON BY IT. IT IS SEEN THAT THIS COMPANY IS A KNOWLEDGE PROCESS OUTSOURCING (KPO) COMPANY PROVIDING DATA AN ALYTICS AND DATA PROCESSING SOLUTION TO ITS CLIENTS. IT IS A RECOGNIZED EXPERT IN FINANCIAL SERVICES AND RETAIL AND MANUFAC TURE. IT PROVIDES CONSULTING SERVICES AND ALSO PROCESS OUTSO URCING. THE 13 ITA 451/DEL/2013 ABOVE DETAILS HAVE BEEN POINTED OUT BY THE ID.AR FR OM THE ANNUAL ACCOUNTS OF THIS COMPANY FOR THE FINANCIAL Y EAR 2007- 08. NOTHING HAS BEEN BROUGHT ON RECORD BY THE ID. D R TO SHOW THAT THE FUNCTIONS PERFORMED BY THIS COMPANY IN THE RELEVANT YEAR WERE ANY DIFFERENT. WHEN WE CONSIDER THE NATUR E OF ASSESSEE'S BUSINESS, WHICH IS PRIMARILY THAT OF PRO CESSING INSURANCE CLAIM AND DATA ENTRY, IT BECOMES VIVID TH AT ECLERX SERVICE LTD. CANNOT BE CONSIDERED AS FUNCTIONALLY C OMPARABLE WITH THE ASSESSEE COMPANY. THE SAME IS THEREFORE, D IRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 6.12. LD. STANDING COUNSEL SUBMITTED THAT FOR AFORE MENTIONED REASONS TRIBUNAL HELD THAT ECLERX SERVICES LTD. IS NOT COMP ARABLE TO M/S CALIBRATED HEALTH CARE SYSTEMS INDIA PVT. LTD. IN THE PRESENT CASE ASSESSEE IS DEALING IN FINANCIAL SERVICES LIKE ECLERX SERVICES LTD. AND, THEREFORE, RIGHTLY SELECTED AS COMPARABLE. 6.13. AS REGARDS THE ASSESSEES RELIANCE ON TRIBUNA LS DECISION IN THE CASE OF HYUNDAI MOTORS INDIA ENGINEERING P. LTD. (ITA NO . 1850/HYD/2012 ORDER DATED 21-02-2014) IS CONCERNED, LD. STANDING COUNSEL SUBMITTED THAT THE SAID COMPANY IS ALSO FUNCTIONALLY DIFFERENT BEC AUSE THIS COMPANY WAS ENGAGED IN THE BUSINESS OF PROVIDING SUPPORT SERVIC ES IN CONNECTION WITH THE COMPUTER AIDED ENGINEERING (IN SHORT CAE). COMPUT ER AIDED DESIGN (IN SHORT CAD). THIS COMPANY WAS INVOLVED IN PROVIDING SUPPORT SERVICES IN CONNECTION OF MODELING AND ITERATIVE SIMULATION. IT RECEIVED THE BASIC DESIGN FROM ITS GROUP COMPANY. 6.14. AS REGARDS INFOSYS BPO AND WIPRO BPO, LD. STA NDING COUNSEL POINTED OUT THAT NO OBJECTION WAS TAKEN BEFORE TPO. OBJECTION WAS TAKEN BEFORE DRP. THERE IS NO DISPUTE ABOUT FUNCTIONAL SI MILARITY AND ONLY 14 ITA 451/DEL/2013 OBJECTION IS WITH RESPECT TO TURN OVER OF THE ASSES SEE. AS REGARDS ASSESSEES RELIANCE ON THE DECISION OF THE TRIBUNAL IN THE CAS E OF AGINITY INDIA TECHNOLOGIES PVT. LTD. (ITA NO. 3856/DEL/2010) AND THAT OF HONBLE DELHI HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES PVT . LTD. (2013) 219 TAXMAN 26 (DELHI), HE SUBMITTED THAT THE DECISION O F HONBLE DELHI HIGH COURT IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. WAS NOT DEALING WITH INFOSYS BPO BUT DEALT ONLY WITH SOFTWARE DEVELOPMEN T SERVICES SEGMENT. HE POINTED OUT THAT AGNITY TECHNOLOGIES LTD. CARRIES O N FOLLOWING FUNCTIONS: -SOFTWARE SERVICE DEVELOPMENT - BPO OPERATION THROUGH INFOSYS BPO. - KPO OPERATION - LPO OPERATION 6.15. HE FURTHER REFERRED TO AGNITY TECHNOLOGIES LT D. DECISION AND POINTED OUT THAT TRIBUNAL HAD NOT DISCUSSED THE INFOSYS BPO . 7. LD. COUNSEL FOR THE ASSESSEE IN THE REJOINDER S UBMITTED THAT BROAD COMPARABILITY IS TO BE SEEN. HE POINTED OUT THAT TH E CORAL HUB WAS TPOS COMPARABLE AND NOT OF ASSESSEE. THEREFORE, IT CANNO T BE ARGUED AT THIS STAGE THAT THE FUNCTIONAL PROFILE OF THE SAME WAS NOT AVA ILABLE. HE POINTED OUT THAT BUSINESS MODEL OF CORAL HUB IS DIFFERENT AND, THERE FORE, IN THE CASE M/S TECHBOOKS INTERNATIONAL PVT. LTD., IT WAS REJECTED AS COMPARABLE. 7.1. AS REGARDS INFYSYS BPO AND CALIBRATED HEALTHCA RE SYSTEMS INDIA PVT. LTD. ARE CONCERNED LD. COUNSEL POINTED OUT THAT TH E DECISION OF HONBLE DELHI HIGH COURT IS SQUARELY APPLICABLE BECAUSE AS SESSEE IS A CAPTIVE SERVICE 15 ITA 451/DEL/2013 PROVIDER AND R&D EXPENDITURE HAD BEEN INCURRED. IT HAS NO INTANGIBLES. IT IS A RISK MITIGATED COMPANY AND HAS VERY SMALL TURN OV ER. 7.3. THE ASESSEE IS PROVIDING FINANCIAL ADVISORY S ERVICES, SO CANOT BE COMPARED WITH ITE AND ITES. 7.4. AS REGARDS THE ECLERX SERVICE LTD LD. COUNSEL REFERRED TO PAGE 373 OF THE TP STUDY REPORT OF ASSESSEE TO DEMONSTRATE THAT LD. STANDING COUNSEL IS REFERRING TO THE GROUP STRUCTURE AND NOT TO ASESSEE . HE SUBMITTED THAT ASSESSEE IS NOT IN FINANCIAL ADVISORY SERVICE AND I S ONLY IN IT ENABLED SERVICE AND BPO SERVICE. 7.8. IN THIS REGARD HE REFERRED TO PAGE 376 OF THE PB TO DEMONSTRATE THAT ASSESSEE IS CARRYING ON FOLLOWING OPERATIONS: - TAGGING - ASSOCIATION OF SUPPLEMENTS - ASSOCIATION OF SUPPLEMENTS - CATEGORIZATION OF SUPPLEMENTS - LEVEL O- TAGGING OF AVERAGE ANNUAL RETURN BAR CHA RT - LEVEL 10- TAGGING OF $ 10,000 LINE CHART - TAGGING THE DATA RELATED TO 529 PLANS VIZ. PLAN D OCUMENTS, PLAN PERFORMANCE AND NASD - CREATION OF ENVELOPE FOR CUSIPS OF MF AND VA - UPDATION OF PNET DATABASE - PROCESSING OF MSRB - PROCESSING OF BROADRIDGE PDFS CUISP CD UPDATE - NASDAQ TICKER UPDATE - SPECIFIC CHEM REQUESTS - CANADIAN MUTUAL FUNDS - AND VARIOUS REPORTS FROM US OFFICE. 7.9. LD. COUNSEL FURTHER SUBMITTED THAT THE DISTINC TION BETWEEN BPO AND KPO HAS BEEN AMPLIFIED IN THE SAFE HARBOUR RULES FR OM WHICH IT IS EVIDENT 16 ITA 451/DEL/2013 THAT ASSESSEE WAS PROVIDING ONLY BPO SERVICE TO THE GROUP. HE POINTED OUT THAT ASSESSEE IS NOT KPO. THE ASSESSEES PROFILE IS COMPLETELY DIFFERENT FROM KPO. LD. STANDING COUNSEL SUBMITTED THAT SAFE HARBO R RULES WERE NOT APPLICABLE IN THE ASSESSMENT YEAR UNDER CONSIDERATI ON. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE RECORD OF THE CASE. KEEPING IN VIEW THE FOREGOING DISCUSSION, THE SHORT CONTROVERSY BEFORE US IS NOW CONFINED TO INCLUSION OF FOLLOWING FOUR COMPANIES, BEING INCLUDED IN THE LIST OF COMPARABLES BY TPO, WHETHE R JUSTIFIED IN THE FACTS AND CIRCUMSTANCES OF THE CASE OR NOT. (I) CORAL HUB (VISHAL INFORMATION TECHNOLOGIES LTD.); (II) ECLERX SERVICES LTD. (III) INFOSYS BPO LTD. (IV) WIPRO LTD. (SEGMENTAL) 8.1. BEFORE WE EMBARK UPON TO CONSIDER DIFFERENT CO MPARABLES, IT IS NECESSARY TO FIRST EXAMINE THE SUBMISSION OF LD. S TANDING COUNSEL REGARDING NATURE OF SERVICES RENDERED BY ASSESSEE. THE MAIN C ONTENTION OF LD. STANDING COUNSEL IS THAT ASSESSEE WAS IMPARTING HIGH END KNO WLEDGE SERVICE WHICH COME WITHIN THE AMBIT OF KPO AND NOT MERE BPO. HE H AS ALSO ELUCIDATED A DISTINCTION BETWEEN BPO AND KPO AS WE HAVE NOTICED IN THE DETAILED ARGUMENTS ADVANCED BY LD. STANDING COUNSEL. IF WE E XAMINE THE SERVICES IMPARTED BY ASSESSEE ON THE TOUCH STONE OF THE DIST INCTION HIGHLIGHTED BY THE LD. STANDING COUNSEL, WE FIND CONSIDERABLE SUBSTANC E IN HIS SUBMISSIONS. ADMITTEDLY ASSESSEE WAS ENGAGED IN THE SERVICE OF ONLINE FINANCIAL SERVICES, WHICH INCLUDED STRATEGIC ADVISORY SERVICES, INDUSTR Y AND OPERATION EXPERTISE, COMPLIANCE FOCUS SERVICES, WEB MARKETING SERVICES, ELECTRONIC COMMERCE KNOWLEDGE SERVICES, AND INTELLIGENCE AND BEST PRACT ICE SERVICES. THESE 17 ITA 451/DEL/2013 SERVICES WERE PROVIDE TO NEW RIVER US, AE OF ASSESS EE. ALL THESE SERVICES WHICH THE ASSESSEE WAS IMPARTING, REQUIRED SPECIAL KNOWLEDGE AND COULD NOT BE IMPARTED IN A ROUTINE MANNER. THE EMPLOYEE ACTUA LLY UNDERTAKING THESE SERVICES WAS REQUIRED TO ANALYSE VARIOUS DATAS BY EMPLOYING HIS SPECIAL KNOWLEDGE AND THEN ONLY IT COULD PROVIDE ITS AE WIT H NECESSARY SUPPORT. IT CANNOT BE DENIED THAT THESE WERE HIGH END SERVICES, REQUIRING STRATEGIC DECISION MAKING BEFORE ARRIVING AT FINAL CONCLUSION . WE, THEREFORE, ARE NOT INCLINED TO ACCEPT THE ASSESSEES SUBMISSIONS THAT IT WAS MERE A BPO. THE VARIOUS DECISIONS RELIED UPON BY LD. COUNSEL FOR TH E ASSESSEE ARE PRIMARILY WITH REFERENCE TO BPO AND NOT KPO. THE DISTINCTION ELUCIDATED IN SAFER HARBOUR RULES IS ALSO IN SAME LINES. 8.2. NOW WE PROCEED TO EXAMINE THE IMPUGNED COMPANI ES INCLUDED AS COMPARABLES BY TPO. 8.3. CORAL HUB (VISHAL INFORMATION TECHNOLOGIES LTD .) : THE ANNUAL REPORT OF THIS COMPANY IS CONTAINED AT PAGE 476 TO 525 OF THE PB. HOWEVER, THE ACTUAL OPERATIONS CARRIED OUT BY ASSESSEE HAVE NOT BEEN SPECIFIED. THE ASSESSEES MAIN CONTENTION IS THAT THIS COMPANY WAS OUTSOURCING A CONSIDERABLE PORTION OF THEIR BUSINESS AS IS EVIDEN T FROM THE OUTSOURCING COST TO TOTAL COST WHICH WAS 85.58% AS NOTED EARLIER. TH EREFORE, THE BUSINESS MODEL OF THIS COMPANY CANNOT BE COMPARED WITH THE B USINESS MODEL OF ASSESSEE WHERE SALARY COST WAS 54.67% OF THE TOTAL COST. WHEN THE BUSINESS OPERATIONS ARE OUT SOURCED, THE PROFIT MARGINS ARE BOUND TO INCREASE SUBSTANTIALLY AS COMPARED TO A BUSINESS WHICH IS CA RRIED ON THROUGH EMPLOYEES. THEREFORE, THIS COMPANY CANNOT BE INCLUD ED IN THE LIST OF COMPARABLES, THOUGH IT MIGHT BE CARRYING ON THE SIM ILAR FUNCTIONS WHICH 18 ITA 451/DEL/2013 ASESSSEE WAS CARRYING ON. THE FUNCTIONAL PROFILE NO DOUBT IS ONE OF THE MAJOR CRITERIA BUT NOT THE SOLE CRITERIA FOR DECIDING WHE THER THE SAID COMPANY CAN BE INCLUDED IN THE LIST OF COMPARABLES OR NOT. THE ASSETS AND RISK PROFILE ALSO HAS TO BE TAKEN INTO CONSIDERATION. THIS COMPANY WA S SELECTED BY TPO AND, THEREFORE, THE SUBMISSIONS OF LD. STANDING COUNSEL ON THE GROUND OF FUNCTIONAL PROFILE CANNOT BE ACCEPTED. MOREOVER, WE NOTE THAT LD. COUNSEL HAS POINTED OUT THAT DATA ENTRY CHARGES WERE 84.5% OF TOTAL EXPENDITURE AND, THEREFORE, THIS CANNOT BE COMPARED TO ASSESSEE, WHI CH WAS PRIMARILY IMPARTING HIGH END SERVICES. WE, ACCORDINGLY, DIREC T FOR EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. 8.4. ECLERX SERVICE LTD.: LD. COUNSEL FOR THE ASSE SSEE HAS, INTER ALIA, RELIED ON THE DECISION OF TRIBUNAL IN THE CASE OF M/S CAL IBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. (SUPRA). IN THIS DECISION W E NOTE THAT THE TRIBUNAL HAS OBSERVED THAT THIS COMPANY WAS A KNOWLEDGE PROC ESS OUTSOURCING KPO COMPANY, PROVIDING DATA ANALYTIC AND DATA PROCESSIN G SOLUTIONS TO ITS CLIENTS. IT IS FURTHER OBSERVED THAT IT IS A RECOGNIZED EXP ERTISE IN FINANCIAL SERVICES AND RETAIL MANUFACTURING AND PROVIDE CONSULTANCY SE RVICES AND ALSO PROCESS OUTSOURCING. THIS COMPANY WAS REJECTED BY THE TRIBU NAL OBSERVING THAT THE NATURE OF ASESSEES BUSINESS VIZ. M/S CALIBRATED H EALTHCARE SYSTEMS INDIA PVT. LTD. (SUPRA) WAS IN PROCESSING INSURANCE CLAI M AND DATA ENTRY. THEREFORE, THIS DECISION, IN OUR OPINION, IS OF NO HELP TO ASSESSEE. IN THE PRESENT CASE ALL THE FUNCTIONS ARE CARRIED OUT BY A SSESSEE FOR ITS AES AND, THERE IS NO DOUBT IT WAS A CAPTIVE SERVICE PROVIDER . HOWEVER, THE IMPORTANT ASPECT WHICH IS TO BE CONSIDERED IS AS TO WHAT FUNC TIONS WERE BEING PERFORMED BY ASSESSEE. IF ASSESSEE WAS MERELY PROVI DING DATA TO ITS AE WITHOUT ANY ANALYSIS AND PERFORMING ITS FUNCTIONS O NLY IN A MECHANICAL 19 ITA 451/DEL/2013 MANNER, THEN NO DOUBT IT WOULD BE COMPARABLE TO BPO BUT WHEN THE RESULTS PROVIDED TO AE ARE AFTER DETAILED ANALYSIS AFTER EM PLOYING SKILLS OF HIGHEST STANDARDS, THEN IT WOULD COME WITHIN THE AMBIT OF B PO. THEREFORE, MERELY ON THE GROUND THAT ASSESSEE IS A CAPTIVE SERVICE PR OVIDER, IT CANNOT BE SAID THAT THIS COMPANY WAS FUNCTIONALLY NOT COMPARABLE. LD. COUNSEL HAS POINTED OUT THAT EXTRAORDINARY EVENTS OF ACQUISITION HAD O CCURRED. HOWEVER, IN THIS YEAR NO SUCH EXTRAORDINARY EVENTS TOOK PLACE. WE, T HEREFORE, ARE NOT INCLINED TO ACCEPT THE ASSESSEES CONTENTION ON THIS COUNT A ND UPHOLD THE FINDINGS OF DRP ON THIS COUNT. 8.5. AS FAR AS INFOSYS BPO AND WIPRO BPO ARE CONCER NED, LD. STANDING COUNSEL SUBMITTED THAT THE DECISION OF HONBLE DELH I HIGH COURT IN THE CASE OF AGINITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA), DE ALS PRIMARILY WITH SOFTWARE DEVELOPMENT SERVICES. BE THAT AS IT MAY, W E ARE IN AGREEMENT WITH LD. COUNSEL FOR THE ASSESSEE THAT KEEPING IN VIEW T HE HUGE TURNOVER, ECONOMIES OF SCALE, BRAND VALUE AND OTHER FACTORS P OINTED OUT BY LD. COUNSEL IN HIS SUBMISSIONS AND ALSO KEEPING IN VIEW THE DEC ISION OF HONBLE DELHI HIGH COURT IN THE CASE OF AGINITY INDIA TECHNOLOGIE S PVT. LTD. (SUPRA) THESE TWO COMPANIES CANNOT BE INCLUDED IN THE LIST OF COM PARABLES BECAUSE THE ASSESSEES TURN OVER WAS ONLY RS. 11 CRORES. 8.6. LD. STANDING COUNSEL HAS POINTED OUT THAT IN AGINITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA), ONLY SOFTWARE DEVEL OPMENT SERVICES HAVE BEEN CONSIDERED, BUT WE FIND THAT IN THE CASE OF AG INITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA), THE TRIBUNAL, VIDE ITA NO. 3856/ DEL/2010, CONTAINED AT ANNEXURE H IN THE CASE LAW PAPER BOOK, FILED BY A SSESSEE, HAD CONSIDERED ONLY THE PROFILE OF INFOSYS TECHNOLOGIES LTD. IN PA RA 3.3 OF ITS ORDER, THE TRIBUNAL HAS OBSERVED AS UNDER: 20 ITA 451/DEL/2013 FOR THE SAKE OF READY REFERENCE, THE CASE OF THE LD . COUNSEL FOR EXCLUDING THE CASE OF INFOSYS TECHNOLOGIES LTED. IS SHOWN IN TABULAR FORM AS UNDER:- BASIS/ PARTICULAR INFOSYS TECHNOLOGIES LTD. AGNITY INDIA RISK PROFILE OPERATE AS FULL FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISK AS THE 100% SERVICES ARE PROVIDED TO AES. NATUR E OF SERVICES DIVERSIFIED- CONSULTING, APPLICATION DESIGN, DEVELOPMENT, RE- ENGINEERING AND MAINTENANCE, SYSTEM INTEGRAT ION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROGRESS MANAGEMENT ETC. (REFER PAGE 117 OF THE PAPER BOOK) CONTRACT SOFTWARE DEVELOPMENT SERVICES. REVENUE RS. 9,028 CRORES RS. 16.09 CRORES OWNERSHIP OF BRANDED/ PROPRIETARY PRODUCTS DEVELOPS/ OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICEDESK, INFOSYS IPROWE, INFOSYS MCONNECT. ALSO, THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS REVENUE FROM SALE OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE) AS PER THE ANNUAL REPORT OF THE COMPANY, IT HAS INTANGIBLES ASSETS WORTH APPROX. RS. 69,500 CRORES FOR THE PERIOD ENDED MARCH 31,2006 ONSITE VS. OFFSHORE AS MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES REND ERED BY INFOSYS ARE ONSITE (I.E. SERVICES PERFORM ED AT THE CUSTOMERS LOCATION OVERSEAS). REVENUE SPLIT ONSITE (49.80%) AND OFFSHORE (50.20%) (REFER PAGE 117 OF THE PAPER BOOK) TYPICALLY, ONSITE SERVICES COMMAND HIGHER BILLABLE RATES AND CONSEQUENTLY IT WOULD NOT BE APPROPRIATE TO COMPARE THE APPELLANT THE APPELLANT PROVIDE ONLY OFFSHORE SERICES (I.E. REMOTELY FROM INDIA) 21 ITA 451/DEL/2013 W HICH EARNS ITS ENTIRE INCOME FROM OFFSHORE SERVICES WITH INFOSYS WHICH EARNS MORE THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES. EXPENDITURE ON ADVERTISING/ SALES PROMOTION AND BRAND BUILDING RS. 61 CRORES RS. NIL (AS THE 100% SERVICES ARE PROVIDED TO AES) EXPENDITURE ON RESEARCH & DEVELOPMENT RS. 102 CRORES RS. NIL OTHER 100% OFFSHORE (FROM INDIA). 8.7. WE, THEREFORE, ARE NOT INCLINED TO ACCEPT THE SUBMISSIONS ADVANCED BY LD. STANDING COUNSEL THAT TRIBUNAL DID NOT DISCUSS INFOSYS BPO AND WAS CONFINED ONLY TO SOFTWARE SERVICE DEVELOPMENT. 8.8. ACCORDINGLY, WE DIRECT THE AO TO EXCLUDE FOLLO WING THREE COMPANIES FROM THE LIST OF COMPARABLES. (I) CORAL HUB (VISHAL INFORMATION TECHNOLOGIES LTD.) (II) INFOSYS BPO (III) WIPRO BPO 9. THE ASSESSEE HAS TAKEN ONE MORE GROUND REGARDING WORKING CAPITAL ADJUSTMENT, WHICH HAD BEEN DENIED TO THE ASSESSEE ON THE GROUND THAT THERE ARE NO MEANS TO ASCERTAIN THE WORKING CAPITAL DEPLO YED BY THE COMPARABLES THROUGHOUT THE YEAR. THE REASONING GIVEN BY LD. DRP IS THAT CAPITAL WORKING ADJUSTMENT SHOULD BE COMPUTED ON THE BASIS OF DAILY AVERAGE OF WORKING CAPITAL DEPLOYED BY THE ASSESSEE AND EACH OF THE C OMPARABLES RESPECTIVELY. WE ARE NOT INCLINED TO ACCEPT THIS REASONING OF RE VENUE AUTHORITIES BECAUSE THE OPENING WORKING CAPITAL AND CLOSING WORKING CAP ITAL IS DECIDING FACTOR 22 ITA 451/DEL/2013 FOR DETERMINING THE WORKING CAPITAL DEPLOYED BY AN Y ORGANIZATION. WE FIND THAT IN CASE OF UNITED HEALTH CARE INFORMATION SERV ICES PVT. LTD. (SUPRA), THE TRIBUNAL IN PARA 13.2 OF ITS ORDER HAS OBSERVED AS UNDER: 13.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD, IT IS MANIFEST THAT TH E WORKING CAPITAL ADJUSTMENT IS REQUIRED WITH REFERENCE TO ST OCK, TRADE RECEIVABLE AND TRADE PAYABLES. BY CARRYING THE HIGH TRADE RECEIVABLES, A COMPANY ALLOWS ITS CUSTOMERS A RELAT IVELY LONGER PERIOD TO PAY THEIR ACCOUNTS, WHICH RESULTS INTO HI GHER INTEREST COST AND LOWER PROFIT. BY CARRYING HIGH TRADE PAYAB LES, A COMPANY BENEFITS FROM A RELATIVELY LONGER PERIOD AV AILABLE TO IT FOR PAYING BACK ITS SUPPLIERS, WHICH RESULTS INTO I TS LOWER INTEREST COST AND HIGHER PROFIT. SIMILARLY, HIGH ST OCK. MEANS BLOCKAGE OF FUNDS AND THE RESULTANT LOWER PROFIT. T HESE THREE INGREDIENTS DIRECTLY IMPACT THE WORKING CAPITAL AN D RESULTANT PROFIT OF COMPARABLES VIS-A-VIS THE ASSESSEE. A WOR KING CAPITAL ADJUSTMENT IS REQUIRED TO BE EFFECTED FOR BRINGING THE COMPARABLES AND THE ASSESSEE AT THE SAME PEDESTAL. THE LD. DRP UPHELD THE DENIAL OF SUCH ADJUSTMENT BY NOTICIN G THAT THERE WERE NO MEANS TO ASCERTAIN THE WORKING CAPITA L DEPLOYED BY THE COMPARABLES THROUGHOUT THE YEAR ON DAILY BAS IS. IF THE CONTENTION OF THE LD. DRP IS TAKEN TO A LOGICAL CON CLUSION, THEN THERE CAN NEVER BE A WORKING CAPITAL ADJUSTMENT, BE CAUSE IN NO CASE, THE DAILY FIGURES OF COMPARABLES WOULD COME T O THE FORE. SINCE, THE AUTHORITIES BELOW HAVE DENIED WORKING CA PITAL ADJUSTMENT TO THE ASSESSEE ON FLIMSY GROUND, WE VAC ATE THEIR ACTION AND HOLD IN PRINCIPLE THAT THE GRANT OF WORK ING CAPITAL ADJUSTMENT, IF OTHERWISE AVAILABLE, CANNOT BE JEOPA RDIZED. HOWEVER, AS REGARDS THE QUANTUM OF WORKING CAPITAL ADJUSTMENT, WE DIRECT THE AO/TPO TO VET THE CORRECT NESS OF THE AMOUNT OF WORKING CAPITAL ADJUSTMENT CLAIMED BY THE ASSESSEE AND THEN DECIDE ITS ALLOWABILITY AS PER LAW. WE ARE IN RESPECTFUL AGREEMENT WITH THE ABOVE OBSER VATIONS. 23 ITA 451/DEL/2013 10. IN VIEW OF ABOVE DISCUSSION, WE DIRECT THE LD. TPO TO ALLOW WORKING CAPITAL ADJUSTMENT WHILE DETERMINING THE PROFIT MAR GINS OF COMPARABLES. 11. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCED IN OPEN COURT ON 27/03/2015.. SD/- SD/- (H.S. SIDHU ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 27/03/2015. *MP* COPY OF ORDER TO: 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI.