H&S Software Development And Knowledge Management Centre (P) Ltd, Gurgaon V. ITO, New Delhi

ITA 516/DEL/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2810 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 11-07-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 27-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: VEENU AGARWAL CAS; MANONEET DALA
• Keywords: Transfer pricing; International transaction; Initiation of penalty proceedings
• Section: 10; 2; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.516/DEL./2015 (ASSESSMENT YEAR : 2010-11) M/S. H & S SOFTWARE DEVELOPMENT VS. DCIT, WARD 11 ( 1), AND KNOWLEDGE MANAGEMENT CENTRE NEW DELHI. PVT. LTD., MVLI PARK UNIT NO.501 & 502, 5 TH FLOOR, NEAR RED CROSS SOCIETY, SECTOR 15, PART II, GURGAON 122 001 (HARYANA) (PAN : AABCH2697E) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI MANONEET DALA & VISHNU GOEL, A RS S/SHRI GAURAV BHUTANI & VEENU AGARWAL, CAS REVENUE BY : SHRI H.K. CHOUDHARY, CIT DR DATE OF HEARING : 25.01.2018 DATE OF ORDER : 20.03.2018 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. H & S SOFTWARE DEVELOPMENT AND KNOWLEDGE MANAGEMENT CENTRE PVT. LTD. (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILING THE PRESENT APPEAL SOU GHT TO SET ASIDE THE IMPUGNED ORDER DATED 27.11.2014, PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TP O UNDER ITA NO.516/DEL/2015 2 SECTION 143 (3) READ WITH SECTION 144C OF THE INCOM E-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2010- 11 ON THE GROUNDS INTER ALIA THAT :- 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. ASSESSING OFFICER ('AO') E RRED IN ASSESSING THE TOTAL INCOME OF THE APPELLANT AT RS.22,530,675/- AS AGAINST INCOME OF RS.1,932,894/- RETURNED BY THE APPELLANT, AFTER MAKING TRANSFER PR ICING ADJUSTMENT OF RS.20,288,060/- AND REDUCING EXPENDITURE AMOUNTING TO RS.2,091,983/- FROM EXPOR T TURNOVER' FOR THE PURPOSES OF COMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT. FOR TRANSFER PRICING MATTERS: 2. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE REFERENCE MADE BY THE LD. AO SUFFERS FR OM JURISDICTIONAL ERROR AS THE LD. AO DID NOT RECORD A NY REASONS IN THE ASSESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WAS 'EXPEDIENT AND NECESSARY' TO REFER THE MATTER TO THE LD. TRANSFER PRICING OFFICER ('TPO') FOR COMPUTATION OF THE ARM' S LENGTH PRICE, AS IS REQUIRED UNDER SECTION 92 CA (1 ) OF THE ACT. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN DETERMINING THE ARM 'S LENGTH PRICE ('ALP') OF THE APPELLANT'S INTERNATION AL TRANSACTIONS AT RS.161,838,198/- AS AGAINST RS.L41,550,138/- DETERMINED BY THE APPELLANT AND RECOMMENDING AN ADDITION OF RS.20,288,060/- ON THAT ACCOUNT TO THE APPELLANT'S INCOME BY: 3.1 MODIFYING THE COMPARABILITY ANALYSIS CONDUCTED IN THE TRANSFER PRICING DOCUMENTATION OF THE APPELL ANT ON INAPPROPRIATE AND INADEQUATE GROUNDS: 3.2 REJECTING THE APPLICABILITY OF FUNCTIONAL FILT ER APPLIED IN THE SEARCH PROCESS BY THE APPELLANT: ITA NO.516/DEL/2015 3 3.3 ADOPTING A NEW SEARCH CRITERION AND INCONSISTENTLY APPLYING CERTAIN ADDITIONAL QUANTITA TIVE FILTERS: 3.4 REJECTING THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT WITHOUT PROVIDING COGENT AND SUFFICIE NT REASONING: 3.5 SELECTING COMPANIES WHICH WERE NOT COMPARABLE TO THE APPELLANT ON VARIOUS GROUNDS: 3.6 CONFIRMING THE SELECTION OF CURRENT YEAR (I.E. FINANCIAL YEAR 2009-10) DATA FOR COMPARABILITY; 3.7 ERRED IN NOT APPRECIATING THE FACT THAT THERE IS NO MOTIVE PM THE PART OF THE APPELLANT TO SHIFT THE PR OFITS TO ANY OTHER JURISDICTION SINCE IT CLAIMS TAX HOLIDAY BENEFITS AS PER THE SOFTWARE TECHNOLOGY PARK OF IND IA. FOR CORPORATE TAX MATTERS: 4. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. AO HAS ERRED IN LAW AS WELL AS ON FACTS IN HOLDING THAT THE EXPENDITURE INCURRED BY THE ASSESS EE IN FOREIGN CURRENCY TOWARDS COMMUNICATION CHARGES AMOUNTING TO RS.1,84,211/- HAS TO BE EXCLUDED FROM THE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING THE AMOUNT OF DEDUCTION UNDER SECTION 10A OF THE ACT, WITHOUT APPRECIATING THE FACT THAT THE SAID EXPENSE S ARE NOT ATTRIBUTABLE TO DELIVER ANY ARTICLE OR THING OR COMPUTER SOFTWARE OUTSIDE INDIA AND HAVE NOT BEEN INCURRED IN PROVIDING TECHNICAL SERVICES OUTSIDE IN DIA. THE SAME RELATES ONLY TO THE INPUT SERVICES USED BY THE ASSESSEE FOR SOFTWARE DEVELOPMENT IN INDIA. 4.1 WITHOUT PREJUDICE TO THE ABOVE, BASED ON THE F ACTS AND CIRCUMSTANCES OF THE CASE, THE LD. AO HAS ERRED IN LAW AS WELL AS ON THE FACTS OF THE CASE BY EXCLUDIN G THE FOREIGN CURRENCY EXPENDITURE TOWARDS COMMUNICATION CHARGES AMOUNTING TO RS.1,84,211/- FROM 'EXPORT TURNOVER' WITHOUT REDUCING THE SAME FROM THE 'TOTAL TURNOVER' FOR THE PURPOSE OF COMPUTING DEDUCTION UN DER SECTION 10A OF THE ACT. ITA NO.516/DEL/2015 4 5. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E, THE LD. AO HAS ERRED IN LAW AS WELL AS ON FACTS IN HOLDING THAT THE EXPENDITURE INCURRED BY THE ASSESS EE IN FOREIGN CURRENCY TOWARDS DATABASE FEES AMOUNTING TO RS.19,07,772/- HAS TO BE EXCLUDED FROM THE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING THE AMOUNT OF DEDUCTION UNDER SECTION 10A OF THE ACT, WITHOUT APPRECIATING THE FACT THAT THE SAID EXPENSES HAVE N OT BEEN INCURRED IN PROVIDING TECHNICAL SERVICES OUTSI DE INDIA. THE SAME RELATES ONLY TO THE INPUT SERVICES USED BY THE ASSESSEE DURING THE COURSE OF ITS NORMAL OPERATIONS IN INDIA. 5.1 WITHOUT PREJUDICE TO THE ABOVE, BASED ON THE F ACTS AND CIRCUMSTANCES OF THE CASE, THE LD. AO HAS ERRED IN LAW AS WELL AS ON THE FACTS OF THE CASE BY EXCLUDIN G THE FOREIGN CURRENCY EXPENDITURE TOWARDS DATABASE FEES AMOUNTING TO RS.19,07,772/- FROM 'EXPORT TURNOVER' WITHOUT REDUCING THE SAME FROM THE 'TOTAL TURNOVER' FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 10 A OF THE ACT. 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. AO/ LD. TPO ERRED IN NOT EXAMINI NG THE VALIDITY OF INITIATION OF PENALTY PROCEEDINGS U /S 271 (1) (C) OF THE ACT. 7. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN CHARGING AND COMPUTING INTEREST UNDER SECTION 234B, 234C AND 234 D OF THE ACT. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : M/S. H & S SOFTWARE DEVE LOPMENT AND KNOWLEDGE MANAGEMENT CENTRE PVT. LTD. (H&S KMC), TH E TAXPAYER PERFORMS BACK OFFICE FUNCTIONS RELATING TO CREATION AND MAINTENANCE OF DATABASE OF PROSPECTIVE EMPLOYEES AN D CANDIDATES ITA NO.516/DEL/2015 5 WHO HAVE SENT THEIR RESUMES TO HEIDRICK & STRUGGLES (H&S) GROUP. THE DATABASE IS SEARCH PALACE, HEIDRICK & S TRUGGLES GROUPS PROPRIETARY SOFTWARE TOOL, USED TO PERFORM ALL OF HEIDRICK & STRUGGLES GROUPS SERVICES WHEREAS GROUP COMPANY IS THE OWNER OF INTANGIBLES ASSOCIATED WITH SEARCH PALACE. THE TAXPAYER IS ALSO RESPONSIBLE FOR MAINTAINING AND DEVELOPING THE SOFT WARE AND OTHER RELATED TOOLS. THUS, H&S KMC INDIA, THE TAXPAYERS ACTIVITIES ARE SUPPORTING H&SS INTANGIBLE CREATION AND MAINTENANC E ACTIVITIES PARTICULARLY AS IT APPLIES TO THE SOFTWARE TOOLS. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER ENTERED INTO INTERNA TIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES (AE) AS UNDER :- S.NO. NATURE OF TRANSACTIONS TNMM ARMS LENGTH PRICE AS PER TAXPAYER (I) DATABASE SUPPORT AND RESEARCH SERVICES TNMM 14,15,50,138 (II) DATABASE FEES TNMM 19,07,772 (III) RESTRICTED SHARE UNITS COST TNMM 12,91,126 (IV) REIMBURSEMENT OF EXPENSES RECEIVED NA 21,03,646 (V) REIMBURSEMENT OF EXPENSES RECEIVED NA 52,744 (VI) REIMBURSEMENT OF EXPENSES PAID NA 2,43,511 3. THE TAXPAYER IN ITS TP ANALYSIS APPLIED TRANSACT IONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) WITH OPERATING PROFIT / OPERATING COST (OP/OC) AS T HE PROFIT LEVEL ITA NO.516/DEL/2015 6 INDICATOR (PLI) IN ORDER TO BENCHMARK ITS INTERNATI ONAL TRANSACTIONS BY SELECTING 7 COMPARABLES HAVING THE AVERAGE MARGI N OF 13.62% VIS--VIS TAXPAYERS MARGIN OF 13.81% AND FOUND ITS INTERNATIONAL TRANSACTION AT ARMS LENGTH. 4. HOWEVER, TPO AFTER ACCEPTING THE METHOD USED BY THE TAXPAYER FOR TP ANALYSIS APPLIED SOME ADDITIONAL FI LTERS AND REJECTED 6 COMPARABLES OUT OF 7 COMPARABLES CHOSEN BY THE TAXPAYER AND SELECTED 11 NEW COMPARABLES HAVING MAR GIN OF 33.14% VIS--VIS TAXPAYERS MARGIN OF 13.81% AND TH EREBY MADE ADJUSTMENT OF RS.240,44,219/- ON ACCOUNT OF ARMS L ENGTH. TPO, HOWEVER, DENIED THE WORKING CAPITAL ADJUSTMENT BY A DOPTING OECD METHODOLOGY AND APPLYING THE SBI PRIME LENDING RATE, WHICH WAS HOWEVER GRANTED BY THE LD. DRP. 5. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP WHO HAS DISPOSED OF THE OBJECTIONS BY GIVING PART RELIEF AS TO PROVIDING WORKING CAPITAL ADJUSTMENT TO THE TAXPAYER. FEELIN G AGGRIEVED, THE TAXPAYER AS WELL AS REVENUE HAVE COME UP BEFORE THE TRIBUNAL BY WAY OF FILING CROSS APPEALS. HOWEVER, THE CROSS AP PEAL FILED BY THE REVENUE HAS ALREADY BEEN DISMISSED VIDE ITA NO.6662 /DEL/2014 ORDER DATED 04.01.2018 BY THE COORDINATE BENCH OF T HE TRIBUNAL. 6. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ITA NO.516/DEL/2015 7 ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUND NO.1 7. GROUND NO.1 IS GENERAL IN NATURE, HENCE DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. GROUNDS NO.2 & 3 8. THE LD. TPO AFTER APPLYING VARIOUS FILTERS CHOSE N 1 COMPARABLE FROM 7 COMPARABLES SELECTED BY THE TAXPA YER AND INTRODUCED HIS OWN 11 COMPARABLES. THE FINAL LIST OF COMPARABLES SELECTED BY THE TPO FOR BENCHMARKING THE INTERNATIO NAL TRANSACTIONS AFTER DIRECTIONS ISSUED BY THE LD. DRP BY ALLOWING WORKING CAPITAL ADJUSTMENT TO THE TAXPAYER IS AS UN DER :- SL. NO. NAME OF THE COMPARABLE COMPANY ADJUSTED AVERAGE MARGIN (2010) 1 ACCENTIA TECHNOLOGY LTD. 39.29% 2 COSMIC GLOBAL 15.78% 3 E4E HEALTHCARE LTD. 20.02% 4 FORTUNE INFOTECH LTD. 20.39% 5 ICRA TECHNO ANALYSTICS LTD. 22.49% 6 INFOSYS BPO LTD. 28.89% 7 TCS ESERVE INTERNATIONAL LTD. 55.25% 8 TCS ESERVE LTD. 61.19% 9 ECLERX SERVICES LTD. 54.42% 10 INTERGLOBE TECHNOLOGIES LTD. 6.48% 11 JINDAL INTELLICOM LTD. 14.27% 12 IGATE GLOBAL SOLUTIONS LTD. 22.97% AVERAGE 30.12% ITA NO.516/DEL/2015 8 9. TPO ON THE BASIS OF AVERAGE MARGIN OF COMPARABLE AT 30.12% VIS--VIS 13.81% OF THE TAXPAYER COMPUTED AR MS LENGTH PRICE (ALP) AS UNDER :- OPERATIONAL COST 12,43,76,113 ARMS LENGTH PRICE AT A MARGIN OF 30.12% 16,18,38,198.24 PRICE RECEIVED 14,15,50,138 PROPOSED ADJUSTMENT U/S 92CA 20,288,060 HENCE, ADJUSTMENT U/S. 92CA IS REVISED IN THIS CASE TO RS.20,288,060/- IN PLACE OF RS.2,40,44,219/- AS MAD E IN THE ORIGINAL ORDER. 10. THE LD. AR FOR THE TAXPAYER IN ORDER TO CUT SHO RT ITS ARGUMENTS SOUGHT EXCLUSION OF ACCENTIA TECHNOLOGIES LIMITED, TCS ESERVE LTD. AND TCS ESERVE INTERNATIONAL LIMITE D FROM THE FINAL SET OF COMPARABLES ALLEGED TO HAVE BEEN WRONG LY ACCEPTED AS COMPARABLES BY THE TPO/DRP. WE SHALL EXAMINE COMPA RABILITY OF AFORESAID COMPARABLES ONE BY ONE AS UNDER. ACCENTIA TECHNOLOGIES LIMITED (ACCENTIA) 11. BEFORE TPO, THE TAXPAYER HAS RAISED OBJECTION F OR ITS INCLUSION AS COMPARABLE BUT TPO OVERRULED THE OBJEC TION AND OBSERVED THAT ACCENTIA IS INTO HEALTH CARE RECYCLE MANAGEMENT WHICH IS PREDOMINANTLY ITES AND RETAINED ACCENTIA A S A VALID COMPARABLE. ITA NO.516/DEL/2015 9 12. HOWEVER, THE LD. AR FOR THE TAXPAYER SOUGHT EXC LUSION OF ACCENTIA ON GROUNDS INTER ALIA THAT IT IS FUNCTIONA LLY DISSIMILAR.; THAT ITS SEGMENTAL INFORMATION IS NOT AVAILABLE; THAT IT HAS UNDERGONE EXTRA ORDINARY EVENTS DURING THE YEAR UNDER ASSESSM ENT AND RELIED UPON THE DECISION OF THE COORDINATE BENCH OF THE TR IBUNAL IN TAXPAYERS OWN CASE FOR AY 2007-08 IN ITA NO.6455/D EL/2012, (RELEVANT PARAS 15 19 - AVAILABLE AT PAGES 130-13 1 OF CONVENIENCE PAPER BOOK), AMERIPRISE INDIA PVT. LTD. IN ITA NO.7014/DEL/2014 FOR AY 2010-11 (RELEVANT PARAS 8 8.2 AVAILABLE AT PAGES 46 48 OF CONVENIENCE PAPER BOOK) AND EQUANT SOLUTIONS INDIA PVT. LTD. IN ITA NO.1202/DEL/2015 FOR AY 2010-11 (RELEVANT PARA 20 AVAILABLE AT PAGES 83 87 OF CONVENIENCE PAPER BOO K). 13. PERUSAL OF RELEVANT PAGE 25 OF CONVENIENCE PAPE R BOOK OF ANNUAL REPORT OF ACCENTIA PROVES THAT CURRENTLY, AC CENTIA IS OFFERING THE ENTIRE GAMUT OF SERVICES UNDER HEALTHC ARE RECEIVABLES CYCLE MANAGEMENT VIZ., MEDICAL TRANSCRIPTION, MEDIC AL CODING AND BILLING AND RECEIVABLES MANAGEMENT SERVICES, TO DIFFERENT CLIENTS; IN SOME CASES SEPARATELY AND IN SOME CASE, ALL THE THREE DIFFERENT SERVICE ARE OFFERED TO THE SAME CLIENT. THE DELIVERY OF THESE SERVICES IS USING THIRD PARTY SOFTWARE IN MOS T CASES AND IN SOME CASES, USING PROPRIETARY SOFTWARE. SAME IS TH E CASE WITH HARDWARE INFRASTRUCTURE TOO. FURTHERMORE, PERUSAL O F PAGE 29 OF THE ITA NO.516/DEL/2015 10 CONVENIENCE PAPER BOOK, WHICH IS SCHEDULE FORMING P ART OF THE CONSOLIDATED BALANCE SHEET, SHOWS THAT DUE TO ACQUI SITION, THERE HAS BEEN HUGE ADDITION TO THE FIXED ASSETS BY WAY OF RE COGNITION OF GOODWILL AMOUNTING TO RS.19,06,51,057/-. SO, DURIN G THE YEAR UNDER ASSESSMENT, ACCENTIA HAS ACQUIRED IG GROUP OF COMPANIES CONSISTING OF THREE COMPANIES VIZ. TACTIQ LTD., CEN TRIC LTD. AND NEOLOGIQ LTD., WHICH ARE ENGAGED IN FULL PRODUCT DE VELOPMENT LIFECYCLE INVOLVING ELECTRONIC DESIGN AND DEVELOPME NT ETC. 14. WHEN WE EXAMINE PAGES 30 & 31 OF THE SCHEDULE F ORMING PART OF THE PROFIT AND LOSS ACCOUNT OF ACCENTIA, IT BECOMES APPARENTLY CLEAR THAT APART FROM THE INCOME OF THE ACCENTIA, MEDICAL TRANSCRIPTION, BILLING AN DECODING, IT IS A LSO INTO DEVELOPING OWN SOFTWARE PRODUCTS, BUT THE SAID INCOME IS NOT S HOWN SEPARATELY RATHER THE ENTIRE INCOME IS SHOWN UNDER HEAD MEDICA L TRANSCRIPTION, BILLING AND COLLECTION, INCOME FROM CODING ETC. SO , ITS SEGMENTAL INFORMATION IS NOT AVAILABLE. 15. TAKING INTO CONSIDERATION AFORESAID FACTS QUA A CCENTIA, IT WAS FOUND TO BE AN UNSUITABLE COMPARABLE VIS--VIS TAXPAYER IN ITS OWN CASE FOR AY 2007-08 (SUPRA) AND SINCE THEN THERE IS NO CHANGE IN THE BUSINESS MODEL. FURTHERMORE, ACCENTIA HAS A LSO NOT BEEN FOUND A SUITABLE COMPARABLE IN CASES OF AMERIPRISE INDIA PVT. LTD. (SUPRA) AND EQUANT SOLUTIONS INDIA PVT. LTD. (SUPRA) BY THE ITA NO.516/DEL/2015 11 COORDINATE BENCH OF THE TRIBUNAL VIS--VIS A ROUTIN E ITES SERVICE PROVIDER LIKE THE TAXPAYER. 16. KEEPING IN VIEW THE FACTS INTER ALIA THAT ACCEN TIA IS INTO THE FIELD OF MEDICAL TRANSCRIPTION, BILLING AND CODING AND ALSO DEVELOPING ITS OWN SOFTWARE PRODUCTS; THAT IT HAS U NDERGONE EXTRA ORDINARY EVENTS MAKING HUGE ADDITION IN ITS ASSETS IMPACTING PROFITABILITY BECAUSE OF ACQUISITION AND ITS SEGMEN TAL INFORMATION IS NOT AVAILABLE; IT IS NOT A SUITABLE COMPARABLE VIS- -VIS TAXPAYER WHICH IS A ROUTINE ITES SERVICE PROVIDER. SO, WE O RDER TO EXCLUDE ACCENTIA FROM THE FINAL SET OF COMPARABLES. TCS ESERVE LIMITED (TCS ESERVE) 17. TPO RETAINED TCS ESERVE AS A COMPARABLE DESPITE OBJECTIONS RAISED BY THE TAXPAYER. NOW, THE TAXPAY ER SOUGHT EXCLUSION OF TCS ESERVE ON THE GROUNDS INTER ALIA T HAT IT IS FUNCTIONALLY DISSIMILAR; THAT IT IS A BIG BRAND BEI NG PART OF TATA GROUP; THAT IT HAS HIGHLY FLUCTUATING MARGIN AND IN COMPARABLE SIZE OF OPERATION. WHEN WE EXAMINE FUNCTIONAL PROFILE O F TCS ESERVE FROM PAGE 45 OF CONVENIENCE PAPER BOOK, TCS ESERVE OPERATION BROADLY COMPRISE OF TRANSACTION PROCESSING AND TECH NICAL SERVICE. TRANSACTION PROCESS INCLUDES THE BROAD SPECTRUM OF ACTIVITIES INVOLVING THE PROCESSING, COLLECTIONS, CUSTOMER CAR E AND PAYMENTS ITA NO.516/DEL/2015 12 RELATION TO THE SERVICES OFFERED BY CITIGROUP TO IT S CORPORATE AND RETAIL CLIENTS. TECHNICAL SERVICES INVOLVE SOFTWARE TESTING, VERIFICATION AND VALIDATION OF SOFTWARE AT THE TIME OF IMPLEMENTATION AND DATA CENTRE MANAGEMENT ACTIVITIE S WHEREAS THE TAXPAYER IS INTO PROVIDING BACK OFFICE SERVICES REL ATED TO MAINTENANCE AND DATABASE WORKING ON MINIMAL RISK. 18. MOREOVER, THE TAXPAYER IS A BIG BRAND OF TATA G ROUP AND HAS PAID ROYALTY TO THE TUNE OF RS.42907 THOUSANDS TO T ATA SONS LIMITED. MOREOVER, TCS ESERVE IS HAVING HIGHLY FLU CTUATING MARGINS WHICH IS TABULATED BY THE TAXPAYER IN ITS S YNOPSIS AND REPRODUCED AS UNDER FOR READY REFERENCE :- PARTICULARS FY 2010- 11 FY 2009- 10 FY 2008- 09 FY 2007-08 OPERATING REVENUE 15,045,559 14,051,005 12 ,247,385 9,967,959 GROWTH (Y-O-Y) 7% 15% 23% NA OPERATING COST 8,508,785 8,384,788 11,129,169 7,564 ,985 GROWTH (Y-O-Y) 1% -25% 47% NA OPERATING PROFIT 6,536,774 5,666,217 1,118,216 2,40 2,974 GROWTH (Y - O - Y) 15% 407% - 53% NA OP/OC 76.82% 67.58% 10.05% 31.76% 19. FURTHERMORE, WHEN WE COMPARE THE SALES TURNOVER OF TCS ESERVE WHICH IS RS.1359.41 CRORES VIS--VIS RS.14.1 5 CRORES OF THE TAXPAYER DURING THE YEAR UNDER ASSESSMENT, AS IS EV IDENT FROM PAGE 47 OF THE CONVENIENCE PAPER BOOK, NO DOUBT, APPAREN TLY HIGH TURNOVER IS NOT A GROUND TO REJECT ANY COMPARABLE B UT WHEN WE EXAMINE IT IN THE LIGHT OF THE FACT THAT TCS ESERVE IS A BIG BRAND ITA NO.516/DEL/2015 13 WORKING AS A FULL-FLEDGED RISK BEARING ENTREPRENEUR , IT CERTAINLY IMPACTS ITS PROFITABILITY. 20. COMPARABILITY OF TCS ESERVE WAS EXAMINED BY THE COORDINATE BENCH OF THE TRIBUNAL IN AMERIPRISE INDIA PVT. LTD. (SUPRA) HAVING SIMILAR BUSINESS MODEL LIKE THE TAXP AYER AND HAS BEEN ORDERED TO BE EXCLUDED FROM THE FINAL SET OF C OMPARABLES BY DETERMINING FOLLOWING FINDINGS :- 12.5 WE HAVE GONE THROUGH THE ANNUAL REPORT OF COMPANY AND HAVE CAREFULLY CONSIDERED THE REASONING GIVEN BY COORDINATE BENCH IN THE CASE OF TECHBOOK INTERNATIONAL P. LTD. (SUPRA). ON PERUSAL OF SCHEDU LE O NOTES TO ACCOUNTS OF THE STANDALONE FINANCIAL S OF THE COMPANY, IT IS CLEAR THAT THE COMPANY IS ENGAGE D IN TRANSACTION PROCESSING AND TECHNICAL SERVICES ACTIVITIES. NO SEPARATE SEGMENTAL DETAILS ARE AVAIL ABLE. ON A CAREFUL READING OF THE DECISION OF COORDINATE BENCH IN TECHBOOK INTERNATIONAL P. LTD. (SUPRA) IT IS CLEAR THAT SCHEDULE O NOTES TO ACCOUNTS IN RESP ECT TO CARRIED OUT BY COMPANY AND RELEVANT SEGMENTAL DETAILS WERE NEVER BROUGHT TO THE ATTENTION OF THE BENCH. WE FIND THAT IN THE ABSENCE OF THE AVAILABIL ITY OF ANY SUCH SEGREGATION OF THE TOTAL REVENUE OF THIS COMPANY, IT IS NOT POSSIBLE TO SEPARATELY CONSIDER ITS PROFITABILITY FROM RENDERING OF `TRANSACTION PROCES SING SERVICES. THUS, THE ENTITY LEVEL FIGURES RENDER TH IS COMPANY AS UNFIT FOR COMPARISON. FOLLOWING THE ABOV E REASONS ALSO TAKEN NOTE IN THE CASE OF TCS E-SERVE INTERNATIONAL LIMITED, WE ORDER FOR THE ELIMINATION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. 21. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE AND FO LLOWING THE DECISION RENDERED BY THE COORDINATE BENCH OF THE TR IBUNAL IN AMERIPRISE INDIA PVT. LTD. (SUPRA), WE ARE OF THE CONSIDERED VIEW ITA NO.516/DEL/2015 14 THAT BECAUSE OF FUNCTIONAL DISSIMILARITY HAVING HIG H BRAND VALUE, HIGHLY FLUCTUATING MARGIN AND HUGE SIZE OF THE COMP ANY AND ITS OPERATION, TCS ESERVE IS NOT A VALID COMPARABLE VIS --VIS THE TAXPAYER WHICH IS INTO PROVIDING BACK OFFICE SERVIC ES RELATED TO MAINTENANCE AND DATABASE WORKING ON MINIMAL RISK HA VING MEAGER TURNOVER OF RS.14.15 CRORES. TCS ESERVE INTERNATIONAL LTD. (TCS ESERVE INTERNATIONAL 22. TPO RETAINED THIS COMPARABLE DESPITE OBJECTIONS RAISED BY THE TAXPAYER AND DRP ALSO CONCURRED WITH THE TPO IN RETAINING THIS COMPANY AS A COMPARABLE. NOW, THE TAXPAYER SOUGHT EXCLUSION OF TCS ESERVE INTERNATIONAL ON GROUNDS INTER ALIA THAT IT IS FUNCTIONALLY DISSIMILAR; THAT SEGMENTAL DATA IS NOT AVAILABLE; THAT IT IS PROVIDING SERVICES PREDOMINANTLY TO THE CITI GRO UP; THAT THE COMPANYS REVENUE AND PROFITABILITY HAS INCREASED B Y 174% AND 286% IN FY 2008-09 AND 2009-10 RESPECTIVELY AS COMP ARED TO PRECEDING YEARS; THAT IT HAS HUGE BRAND VALUE; THAT IT HAS ACQUIRED CITI GROUP AND RELIED UPON THE DECISIONS OF THE COO RDINATE BENCH OF THE TRIBUNAL IN AMERIPRISE INDIA PVT. LTD. (SUPRA) AND EQUANT SOLUTIONS INDIA PVT. LTD. (SUPRA). 23. WHEN WE EXAMINE PROFILE OF THE TCS ESERVE INTER NATIONAL FROM PAGE 39 OF THE CONVENIENCE PAPER BOOK, ITS OPE RATIONS BROADLY ITA NO.516/DEL/2015 15 COMPRISE OF TRANSACTION PROCESSING AND TECHNICAL SE RVICES. TRANSACTION PROCESSING INCLUDES THE BROAD SPECTRUM OF ACTIVITIES INVOLVING THE PROCESSING, COLLECTIONS, CUSTOMER CAR E AND PAYROLL RELATION TO THE SERVICES OFFERED BY CITIGROUP TO IT S CORPORATE AND RETAIL CLIENTS. TECHNICAL SERVICES INVOLVE TESTING , VERIFICATION AND VALIDATION OF SOFTWARE AT THE TIME OF IMPLEMENTATIO N OF DATA CENTRE MANAGEMENT. 24. FURTHERMORE, WHEN WE EXAMINE NOTES FORMING PART OF THE FINANCIAL STATEMENT, AVAILABLE AT PAGE 41 OF THE CO NVENIENCE PAPER BOOK, NO SEGMENTAL INFORMATION IS AVAILABLE QUA ITE S SERVICES AND TECHNICAL SERVICES. FROM THE DIRECTORS REPORT AVA ILABLE AT PAGES 42 & 43 OF THE CONVENIENCE PAPER BOOK REFERRING NOTES OF ACCOUNTS OF ANNUAL REPORT, TCS INTERNATIONAL PROVIDES SERVICES PRE- DOMINANTLY TO CITI GROUP. THIS INFORMATION IS CORR OBORATED BASED ON THE EXTRACT OF THE ACQUISITION PROVIDED BELOW, W HERE IN THE ACQUISITION OF CITI ABC ARM ALSO COMES ALONG WITH A $ 2.5 BILLION CONTRACT OVER A PERIOD OF 9.5 YEARS. MOREOVER, FIN ANCE RESULTS OF TCS ESERVE INTERNATIONAL DETAILED AT PAGE 42 OF THE CONVENIENCE PAPER BOOK SHOWS THAT ACQUISITION LED TO HUGE PROFI TS WHICH IS EXTRACTED AS UNDER :- OPERATIONS & BUSINESS REVIEW ITA NO.516/DEL/2015 16 FINANCIAL YEAR 2009-10 IS THE SECOND YEAR OF OPERAT IONS FOR THE COMPANY AND FIRST FULL YEAR AS A STEP DOWN SUBSIDIARY OF TATA CONSULTANCY SERVICES LIMITED (TC S). COMPANY HAS RECORDED ALL-ROUND GROWTH IN VOLUME OF BUSINESS AND PROFITABILITY IN THE YEAR. TOTAL INCOM E AT RS.150.40 CRORE WAS NEARLY THREE TIMES HIGHER AS COMPARED WITH LAST YEAR INCOME OF RS.54.64 CRORE. O F THIS, THE OPERATING INCOME CONSTITUTED RS.149.29 CR ORE, HIGHER BY 173% OVER PREVIOUS YEAR FIGURE OF RS.54.4 6 CRORE AND IS ENTIRELY CONSTITUTED OF EXPORTS INCOME . OTHER INCOME AMOUNTING TO RS.110.53 LAKHS IS ESSENTIALLY THE INCOME EARNED FROM INVESTMENT OF SURPLUS FUNDS AS AGAINST THE PREVIOUS YEAR'S OTHER INCOME OF RS.18.59 LAKHS AND IS IN LINE WITH THE GR OWTH IN OPERATIONAL INCOME. REFLECTING GROWTH IN BUSINESS, YOUR COMPANY REGISTE RED A PROFIT AFTER TAX OF RS.44.95 CRORE AS PREVIOUS YE AR LOSS OF RS.24.54 CRORE. YOUR COMPANY WAS ABLE TO EXPAND ITS MARGINS IN THIS FISCAL ON THE BACK OF IMPROVED OPERATIONAL PERFORMANCE AND INCREASED UTILIZATION OF INFRASTRUCTURE CAPACITIES CREATED IN THE LAST YEAR. THE SEZ UNITS OF THE COMPANY AT GURGAON AND CHENNAI HAVE RETAINED THE STATUS OF 'NET FOREIGN EXCHANGE EARNER' WITHIN THE MEANING OF THE SPECIAL ECONOMIC ZONES, ACT, 2005. AS ON MARCH 31, 2010, 1592 EMPLOYEES WERE ON ROLLS OF THE COMPANY. 25. MOREOVER DUE TO ACQUISITION OF TCS ESERVE INTER NATIONAL BY THE TATA GROUP TO WHOM IT HAS PAID RS.3,737 THOUSAN DS AS TATA BRAND LOYALTY, ITS MARGIN HAS BEEN DIRECTLY IMPACTE D. 26. THE COORDINATE BENCH OF THE TRIBUNAL IN AMERIPRISE INDIA PVT. LTD. (SUPRA) HAS HELD AS UNDER : 11.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. NOTES TO ACCOUNTS INDICATE THAT THIS COMPANY IS ENGAGED IN T HE BUSINESS OF PROVIDING IT ENABLED SERVICES/BPO SERVI CES PRIMARILY TO CITIGROUP ENTITIES GLOBALLY. THE OPERA TIONS ITA NO.516/DEL/2015 17 OF THIS COMPANY : BROADLY COMPRISE OF TRANSACTION PROCESSING AND TECHNICAL SERVICES. TRANSACTION PROCESSING INCLUDES THE BROAD SPECTRUM OF ACTIVITIE S INVOLVING PROCESSING, COLLECTIONS, CUSTOMER CARE AN D PAYMENTS IN RELATION TO THE SERVICES OFFERED BY CIT IGROUP TO ITS CORPORATE AND RETAIL CLIENTS. TECHNICAL SERV ICES INVOLVE SOFTWARE TESTING, VERIFICATION AND VALIDATI ON OF SOFTWARE AT THE TIME OF IMPLEMENTATION AND DATA CEN TRE MANAGEMENT ACTIVITIES. IT IS MANIFEST THAT THIS CO MPANY IS ENGAGED IN RENDERING BPO SERVICES TO THE BANKING AND FINANCIAL SERVICES INDUSTRY (BFSI) AND TRAVEL, TOURISM AND HOSPITALITY (TTH). IT IS PROVIDING SERV ICES TO BFSI AND TTH AND SUCH SERVICES INCLUDE `TRANSACTION PROCESSING AND `TECHNICAL SERVICES. IN OTHER WORDS, THE REMUNERATION OF THIS COMPANY FROM THE ABOVE REFERRED TWO SEGMENTS INCLUDES COMPENSATION F OR RENDERING `TECHNICAL SERVICES AND `TRANSACTION PROCESSING. INSOFAR AS THE `TRANSACTION PROCESSING SERVICES ARE CONCERNED, THESE ARE ITES, WHICH ARE BROADLY SIMILAR TO THOSE RENDERED BY THE ASSESSEE, THOUGH NOT SPECIFICALLY SIMILAR. HOWEVER, THE `TECHNICAL SERVICES INVOLVE SOFTWARE TESTING, VERIFICATION AND VALIDATION OF SOFTWARE ITEM, IMPLEMENTATION AND DATA CENTRE MANAGEMENT ACTIVITIE S. THE `TECHNICAL SERVICES RENDERED BY THIS COMPANY A RE IN THE NATURE OF SERVICING AND MAINTENANCE OF SOFTW ARE. AT THIS STAGE, IT IS RELEVANT TO NOTE THAT A COMPAN Y PROVIDING SOFTWARE SERVICES MAY BE OF TWO TYPES, VI Z., A COMPANY PROVIDING SOFTWARE DEVELOPMENT SERVICES AND A COMPANY PROVIDING SOFTWARE SERVICES OTHER THAN SOFTWARE DEVELOPMENT SERVICES (HEREINAFTER ALSO CAL LED A COMPANY PROVIDING NON-DEVELOPMENT SOFTWARE.) 27. IN THE LIGHT OF THE PROFILE OF TCS ESERVE INTER NATIONAL DISCUSSED IN THE PRECEDING PARAS WHICH IS A BIG BRA ND OPERATING AS FULL-FLEDGED RISK BEARING COMPANY AND ITS PROFITABI LITY HAS INCREASED BY 174% AND 286% IN FY 2008-09 AND 2009-1 0 RESPECTIVELY DUE TO ACQUISITION AND THE FACT THAT I T IS FUNCTIONALLY ITA NO.516/DEL/2015 18 DISSIMILAR, IT CANNOT BE A VALID COMPARABLE VIS--V IS TAXPAYER WHICH IS INTO PROVIDING BACK OFFICE SERVICES RELATED TO M AINTENANCE AND DATABASE WORKING ON MINIMAL RISK AS A CAPTIVE SERVI CE PROVIDER. SO, WE ORDER TO EXCLUDE TCS ESERVE INTERNATIONAL AS A COMPARABLE FROM THE FINAL LIST OF COMPARABLES. GROUNDS NO.4, 4.1, 5 & 5.1 28. AO HAS DENIED THE BENEFIT OF INCLUSION OF EXPEN DITURE INCURRED BY THE TAXPAYER IN FOREIGN CURRENCY TOWARD S COMMUNICATION CHARGES TO THE TUNE OF RS.1,84,211/- AND EXPENDITURE INCURRED BY THE TAXPAYER IN FOREIGN CUR RENCY IN DATABASE FEE AMOUNTING TO RS.19,07,772/- FOR THE PU RPOSE OF DEDUCTION U/S 10A OF THE ACT BY IGNORING THE SETTLE D PROPOSITION OF LAW IN VARIOUS JUDGMENTS RENDERED BY THE TRIBUNAL A S WELL AS HONBLE HIGH COURT PARTICULARLY IN DCIT VS. BINAY SEMANTICS LTD. (2007) 109 TTJ 556 WHEREIN IT IS HELD AS UNDER :- 7.4 I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APPELLANT AS WELL AS THE ORDER OF THE AO. THE AO IS NOT RIGHT IN EXCLUDING OTHER INCOME WHILE COMPUTING THE PROFI T ELIGIBLE FOR DEDUCTION U/S 10A ONCE AGAIN WHEN THE APPELLANT ITSELF HAD DEDUCTED IT WHILE COMPUTING TH E ELIGIBLE DEDUCTION U/S 10A. THIS AMOUNTS TO DOUBLE DISALLOWA NCE. THEREFORE, THE AO IS DIRECTED TO DELETE THE DEDUCTI ON OF RS.1,41,274/- WHILE CALCULATING 10A DEDUCTION. THERE IS MERIT IN EXCLUDING THE 20% OF THE TELECOMMUNICATION EXPENSES AS CALCULATED BY HIM FRO M THE TOTAL TURNOVER A WELL. THIS ISSUE HAS BEEN DECIDED BY THE HIGHER AUTHORITIES IN TATA ELXSI AND OTHER CASES (S UPRA). ITA NO.516/DEL/2015 19 THEREFORE, AO IS DIRECTED TO EXCLUDE THE TELECOMMUN ICATION EXPENSES AMOUNTING TO RS.5,307,691/- (PERTAINING TO THIS ASSESSMENT YEAR) FROM THE TOTAL TURNOVER WHILE CALC ULATING THE DEDUCTION U/S 10A OF THE IT ACT. TO THIS EXTENT , RELIEF IS GIVEN TO THE ASSESSEE . 29. WHEN IT IS NOT IN DISPUTE THAT FOR THE PURPOSE OF SECTION 10A, THE TERM TOTAL TURNOVER IS TO BE INTERPRETED BY C OMPUTING THE ENTIRE EXPORT TURNOVER AS WELL AS DOMESTIC TURNOVER AND IN CASE, EXPENSES ARE TO BE EXCLUDED FROM EXPORT TURNOVER, T HE SAME ARE TO BE EXCLUDED FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING THE DEDUCTION U/S 10A OF THE ACT. SO, WE ARE OF TH E CONSIDERED VIEW THAT THE AO HAS ERRED IN NOT EXCLUDING THE COM MUNICATION CHARGES AND EXPENDITURE INCURRED BY THE TAXPAYER IN FOREIGN CURRENCY IN DATABASE FEES OF RS.1,84,211/- AND RS.1 9,07,772/- RESPECTIVELY FROM THE TOTAL TURNOVER FOR THE PURPOS E OF CALCULATING THE DEDUCTION U/S 10A OF THE ACT. SO, GROUNDS NO.4 , 4.1, 5 & 5.1 ARE DETERMINED IN FAVOUR OF THE ASSESSEE. 30. RESULTANTLY, THE APPEAL FILED BY THE TAXPAYER I S PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 20 TH DAY OF FEBRUARY, 2018. SD/- SD/- (N.K. SAINI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 20 TH DAY OF MARCH, 2018/TS ITA NO.516/DEL/2015 20 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.