Equant Solutions India (P) Ltd., Gurgaon V. ACIT, Gurgaon

ITA 5520/DEL/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97282 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 month(s) 10 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: 2007-2008
• Appeal Filed On: 08-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BHASKAR GOSWAMI SENIOR
• Keywords: Business income; 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.5520/DEL./2011 (ASSESSMENT YEAR : 2007-08) 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 D IRECTED AGAINST THE ASSESSMENT ORDER DATED 27.10.2011 PASSED U/S 14 3(3) R.W.S 144C OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT) FOR THE ASSESSMENT YEAR 2007-08. 2. THE APPELLANT/ASSESSEE, EQUANT SOLUTIONS INDIA P RIVATE LIMITED ('THE COMPANY' OR 'ASSESSEE) IS A SUBSIDIARY OF EGN BV, NETHERLANDS. 2 ITA NO.5520/DEL./2011 DURING THE RELEVANT ASSESSMENT YEAR (AY) 2007-08 I .E. FINANCIAL YEAR (FY) 2006-07, THE ASSESSEE WAS PRIMARILY ENGAG ED IN PROVIDING SERVICES OF TWO SEGMENTS :- (I) INFORMATION TECHNOLOGY ENABLED SERVICES (HEREINAFTE R REFERRED TO AS 'ITES') - INFORMATION TECHNOLOGY ENABLED NETWORK MANAGEMENT / TECHNICAL SUPPORT AND OTHER BACK-OFFICE SUPPORT SER VICES IN THE NATURE OF REMOTE MONITORING AND MAINTENANCE OF THE EQUANT'S GLOBAL NETWORK PLATFORMS AND SERVICES, COORDINATION AND REMOTE CONFIGURATION AND IMPLEMENTATION OF QUALITY CUSTOME R NETWORKING SOLUTIONS TO ITS GROUP COMPANY IN IRELAND, EQUANT N ETWORK SERVICES INTERNATIONAL LTD. (II) CONTRACT SOFTWARE DEVELOPMENT SERVICES (HEREINAFTER REFERRED TO AS 'CSD') FOR DEVELOPING SOFTWARE APPLICATIONS FOR USE WITHIN EQUANT GROUP/ ASSOCIATED ENTERPRISES (HEREINAFTER REFERRED TO AS 'AES'). FOR RENDERING THESE SERVICES, THE ASSESSEE WAS REMU NERATED ON AN ARM'S LENGTH COST PLUS BASIS I.E. IT WAS COMPENSATE D FOR ALL ITS OPERATING COSTS, PLUS A PRE-AGREED MARK-UP OF 15% T HEREON. 3. DURING THE RELEVANT FY, THE ASSESSEE UNDERTOOK T HE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES WHICH WERE DULY REPORTED IN THE ACCOUNTANT'S REPORT (FORM NO 3CEB) FILED ALONG WITH THE RETURN:- 3 ITA NO.5520/DEL./2011 PARTICULARS (INTERNATIONAL TRANSACTIONS) ADJUSTMENT OUTCOME OF TP ORDER AFTER DRP DIRECTIONS PROVISION OF ITES AND CSD SERVICES 97,11,94,161 ADJUSTMENT OF RS. 13.044,743 ON CSD SERVICES AND RS. 75,513,180 ON ITES SERVICES PURCHASE OF FIXED ASSETS 3,42,43,723 ACCEPTED INTEREST ON LOAN (PAID) 1,60,71,371 ACCEPTED REIMBURSEMENT OF EXPENSES PAID 4,73,41,015 ACCEPTED 4. DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS, AT THE TRANSFER PRICING OFFICER'S ('TPO') ASKED FOR CURRENT YEAR I. E. FY 2006-07 DATA, SO FRESH SEARCH RESULTS WERE SUBMITTED BY THE ASSES SEE. A SUMMARY OF THE FRESH SEARCH RESULTS FOR THE ITES AND THE CSD S ERVICES IS AS FOLLOWS: TABLE: BENCHMARKING ANALYSIS BASED ON FRESH SEARCH FOR FY 2006-07 PARTICULARS CSD SERVICES ITES NO OF COMPARABLES 10 15 MEAN UNADJUSTED OP/TC OF COMPARABLES 9.06% 5.34% MEAN WORKING CAPITAL ADJUSTED OP/TC OF COMPARABLES 8.16% 3.52% ASSESSEES OP/TC 15% 5. THE TPO PROPOSED AN ADJUSTMENT OF RS.L,30,44,743 TO THE INCOME FROM THE CSD SEGMENT AND AN ADJUSTMENT OF RS . 7,55,13,180 4 ITA NO.5520/DEL./2011 TO THE INCOME FROM THE ITES SEGMENT. THE ABOVE ADJU STMENT MADE BY THE TPO TO THE INCOME OF THE ASSESSEE WAS UPHELD BY THE ASSESSING OFFICER (HEREINAFTER REFERRED TO AS 'AO') IN HIS DR AFT ASSESSMENT ORDER. THE ASSESSEE FILED DETAILED OBJECTIONS BEFORE THE D ISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS 'DRP') AGAINST TH E ADJUSTMENT MADE BY THE AO. HOWEVER, ACCORDING TO LD. AR, THE DRP WI THOUT PROVIDING ANY DETAILED DIRECTIONS REGARDING THE COMPARABLES, CONFIRMED THE AFORESAID ADJUSTMENT PROPOSED BY THE AO AND THE AO PASSED THE FINAL ASSESSMENT ORDER UNDER SECTION 143(3) OF THE INCOME -TAX ACT, 1961 (HEREINAFTER THE ACT) MAKING AN ADJUSTMENT OF RS .88,557,923 TO THE ASSESSEE 'S RETURNED INCOME. 6. THE FINAL SET OF COMPARABLES AS PER THE REVISED TPO ORDER ARE: CSD SEGMENT : COMPARABLE MARK-UP IN TP ORDER POST-DRP DIRECTION : S.NO. NAME OF THE COMPANY 1. ACCEL TRANSMATIC LTD (SEG.) 20.91% 19.5% 2. AVANI CIMCON TECHNOLOGIES LTD. 50.28% 47.81% 3. CELESTIAL LABS LTD. 58.35% 53.14% 4. DATAMATICS LTD 1.38% - 1.31% 5. E-ZEST SOLUTIONS LTD. 35.63% 34.58% 6. FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) 25.31% 24.15% 7. GEOMETRIC LTD. (SEG.) 10.71% 8.84% 8. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. 36.63% 33.46% 5 ITA NO.5520/DEL./2011 9. IGATE GLOBAL SOLUTIONS LTD. 7.49% 4.87% 10. INFOSYS TECHNOLOGIES LTD 40.30% 37.96% 11. ISHIR INFOTECH LTD. 30.12% 29.46% 12. KALS INFORMATION SYSTEMS LTD. (SEG.) 30.55% 22.54% 13. LGS GLOBAL LTD. (LANCO GLOBAL SOLUTIONS LTD.) 15.75% 14.33% 14. LUCID SOFTWARE LTD. 19.37% 16.21% 15. MEDIASOFT SOLUTIONS LTD. 3.66% 0.87% 16. MEGASOFT LTD. (SEG) 60.23% 50.21% 17. MINDTREE LTD. 16.90% 14.54% 18. PERSISTENT SYSTEMS LTD. 24.18% 22.21% 19. QUINTEGRA SOLUTIONS LTD. 12.56% 8.46% 20. RS SOFTWARE (INDIA) LTD. 13.47% 12.33% 21. R SYSTEMS INTERNATIONAL LTD. (SEG.) 15.07% 12.43% 22. SASKEN COMMUNICATION TECHNOLOGIES LTD. 22.17% 20.21% 23. SIP TECHNOLOGIES & EXPORTS 13.90% 9.91% 24. TATA ELXSI LTD. (SEG.) 26.51% 25.26% 25. THIRWARE SOLUTIONS LTD. (SEG.) 25.12% 20.65% 26. WIPRO LTD. (SEG.) 33.43% 33.27% MEAN OP / TC 25% 22.13% ITES TP ORDER COMPARABLES S.NO. NAME OF THE COMPANY 1. ACCENTIA TECHNOLOGIES LTD 30.61% 25.52% 2. ADITYA BIRLA MINACS WORLDWIDE LTD. 11.98% 10.52% 3. ALLSEC TECHNOLOGIES LTD. 27.31% 25.08% 4. APEX KNOWLEDGE SOLUTIONS PVT. LTD 12.83% 12.51% 5. APOLLO HEALTHSTREET LTD -13.55% -21.11% 6. ASIT C. MEHTA FINANCIAL SERVICES LTD. 24.21% 22.18% 7. BODHTREE CONSULTING LTD (SEG.) 29.58% 28.93% 8. CALIBER POINT BUSINESS SOLUTIONS LTD 21.26% 19.62% 9. COSMIC GLOBAL LTD. 12.40% 10.84% 10. DATAMATICS FINANCIAL SERVICES LTD (SEG.) 5.07% -1.64% 11. ECLERX SERVICES LTD. 89.33% 85.06% 12. FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) 8.62% 5,58% 6 ITA NO.5520/DEL./2011 13. GENESYS INTERNATIONAL CORPORATION LTD 13.35% 8.06% 14. H C L COMNET SYSTEMS & SERVICES LTD (SEG.) 44.99% 43.29% 15. ICRA TECHNO ANALYTICS LTD. (SEG.) 12.24% 10.92% 16. INFORMED TECHNOLOGIES INDIA LTD. 35.56% 34.12% 17. INFOSYS B P O LTD 28.78% 27.97% 18. ISERVICES INDIA PVT LTD 49.47% 47.79% 19. MAPLE ESOLULTIONS LTD. 34.05% 29.54% 20. MOLD- TEK TECHNOLOGIES LTD 113.49% 113.97% 21. R SYSTEMS INTERNATIONAL LTD. (SEG.) 20.18% 17.74% 22. SPANCO LTD. (SEG.) 25.81% 19.05% 23. TRITON CORP LTD. 34.93% 27.01% 24. VISHAL INFORMATION TECHNOLOGIES LTD. (CORAL HUB LIMITED) 51.19% 41.58% 25. WIPRO LTD. (SEG.) 29.70% 29.40% 26. NITTANY OUTSOURCING SERVICES LTD. 11.50% 10.02% MEAN OP / TC 29.42% 26.29% 7. AGGRIEVED WITH THE DRP DIRECTIONS AS WELL AS FI NAL ASSESSMENT ORDER, THE ASSESSEE FILED AN APPEAL BEFORE US. (A) CSD COMPARABLES 8. AS PER THE LD. AR, THE FOLLOWING COMPARABLES ARE FUNCTIONALLY DIFFERENT BECAUSE THEY ARE PRODUCT COMPANIES :- (I) AVANI CIMCON TECHNOLOGIES LIMITED ('AVANI') 8.1 AS PER THE LD. AR, ITS PRODUCT IS OIVNS PRODUCT S AND TOOK OUR ATTENTION TO EXHIBIT 1. LD. AR CONTENDED THAT AS P ER THE COMPANY'S WEBSITE, IT IS INVOLVED IN PROVISION OF IT AND RELA TED SERVICES AND OWNS SOFTWARE PRODUCTS, LIKE, DXCHANGE, TRAVEL SOLU TIONS, INSURANCE 7 ITA NO.5520/DEL./2011 SOLUTION, CUSTOMER APPRECIATION AND RELATIONSHIP MA NAGEMENT APPLICATION (CARMA), CONTENT MANAGEMENT SYSTEMS ETC . ITS WEBSITE, AVANI HAS PROVIDED YEAR WISE MILESTONES AC HIEVED WHEREIN IT IS STATED THAT PRODUCT DXCHANGE WAS INTRODUCED IN 2 006 AND THE IMPROVED VERSION IN THE YEAR 2007. 8.2 THE FOLLOWING CASE LAWS HAVE BEEN RELIED UPON B Y THE LD. AR :- MOTOROLA SOLUTIONS INDIA PUT LTD (ITA NO. 5637/DEL/ 2011)(AY 2007-08), DE SHAW INDIA SOFTWARE PVT LTD (ITA NO. 2071/HYD/20 11)(AY 2007-08), LOGICA PRIUATE LTD (ITA NO.1129/BANG/2011)(AY 2007- 08), LGS GLOBAL LTD (FORMERLY KNOWN AS LANCO GLOBAL SYST EMS LTD.) (ITA NO.1885/HYD/2011) (AY 2007-08) 8.3 ACCORDING TO LD. AR, SEGMENTAL DETAILS EXCLUDIN G REVENUE FROM PRODUCT SALE IS NOT AVAILABLE IN AUDITED FINANCIALS . IN THIS REGARD, HE RELIED ON THE FOLLOWING CASE LAWS :- INTOTO SOFTWARE INDIA PUT. LTD. (ITA.NO.1196/HYD/20 10)(AY 2005-06), ITA NO.1197/HYD/2010 (AY 2005-06), ITA.NO.2102/HYD/2011 (AY 2007-08) 8 ITA NO.5520/DEL./2011 (II) CELESTIAL LABS LIMITED ('CELESTIAL') 8.4 LD. AR CONTENDED THAT THIS COMPARABLE OWNS PROD UCTS AND TOOK OUR ATTENTION TO EXHIBIT 2. ACCORDING OT LD. AR, T HE CELESTIAL COMPANY IS PRIMARILY INTO DEVELOPMENT OF SOFTWARE T OOLS AS PRODUCTS FOR APPLICATION IN THE FIELD OF BIO TECHNOLOGY, PHA RMACEUTICAL AND HEALTH CARE INDUSTRY. EG: CELSUITE TOOL IS USED FOR DEVELOPING NEW MOLECULE IN DRUG DEVELOPMENT AREA, CELTOX TOOL IS U SED FOR PREDICTING TOXICITY LEVEL IN THE DRUG DEVELOPMENT, CELMINE - N AND CELMINE - P IS USED FOR DATA MINING THE SOFTWARE TOOLS DEVELOPED B Y CELESTIAL ARE PROPRIETARY IN NATURE AND PROTECTED USING PATENT. 8.5 LD. AR IN THIS REGARD RELIED ON THE FOLLOWING C ASE LAWS:- TOLUNA INDIA PUT. LTD. VS ACIT (ITA NO.5645/DEL/201 1)(AY 2007-08), MOTOROLA SOLUTIONS INDIA PVT. LTD (ITA NO.5637/DEL/ 2011)(AY 2007-08) TATA MCGRAW HILL EDUCATION PVT. LTD (ITA NO.5857/DE L/2011) (AY 2007-08), LGS GLOBAL LTD (FORMERLY KNOWN AS LANCO GLOBAL SYST EMS LTD (ITA NO. 1885,/HYD/2011) CAY 2007-08). (III) FELXTRONICS SOFTWARE SYSTEMS LIMITED ('FLEXTR ONIC') (SEGMENTAL) 8.6 LD. AR SUBMITTED THAT DETAILS SHOW THAT THIS CO MPARABLE COMPANY OWNS PRODUCTS AND TOOK OUR ATTENTION TO EXH IBIT 3. 9 ITA NO.5520/DEL./2011 ACCORDING TO LD. AR, FLEXTRONICS HAS LAUNCHED A NE W PRODUCT IN FY 2006-07 NAMED CAS (CONVERGED ACTIVE SOLUTION), AND ALSO HAS A FEW OTHER PRODUCTS NAMELY ASN WIMAX GATEWAY CALLED ASN LITE. COMPANY DEVELOPS SOFTWARE PRODUCTS AND PROVIDES SOF TWARE CONSULTING SERVICES FOR USE IN THE TELE-COMMUICATIO NS INDUSTRY AND ALSO SELLS TELECOMMUNICATION EQUIPMENT AND PROVIDES SERVICES IN BUSINESS PROCESS OUTSOURCING. 8.7 LD. AR SUBMITTED THAT SEGMENTAL INFORMATION WAS NOT AVAILABLE, HOWEVER, IN ITS SEGMENTAL DATA DISCLOSURE, THE COMP ANY HAS DISCLOSED DATA FOR 'PRODUCTS AND SERVICES' AS A COMPOSITE SEG MENT AND THEREFORE, NO BIFURCATION IS AVAILABLE BETWEEN THE TWO ACTIVI TIES OF THE COMPANY. 8.8 LD. AR RELIED UPON THE FOLLOWING CASE LAWS :- TOLUNA INDIA (ITA NO.5645/DEL/2011) (AY 2007-08) DE SHAW INDIA SOFTWARE PVT. LTD (ITA NO. 2071/HYD/2 011) (2007-08). (IV) THIRDWARE SOLUTIONS LIMITED ('THIRDWARE') (SEGMENTAL) 8.9 LD. AR CONTENDED THAT THIS COMPARABLE IS ENAGED IN SALE OF SOFTWARE PRODUCTS AND TOOK OUR ATTENTION TO EXHIBIT 4. ACCORDING TO LD. AR, AS PER THE ANNUAL REPORT OF FY 2006-07, THI RDWARE DERIVES 10 ITA NO.5520/DEL./2011 REVENUE FROM VARIOUS SOURCES SUCH AS SALE OF LICENS E, SOFTWARE SERVICES, EXPORT FROM SEZ UNIT, REVENUE FROM SUBSCR IPTION ETC. 8.10 THERE IS NO INFORMATION RELATING TO SEGMENTAL BREAK-UP IN THE ANNUAL REPORT. 8.11 LD. AR RELIED UPON THE FOLLOWING CASE LAWS :- DE SHAW INDIA SOFTWARE PVT LTD (ITA NO.2071/HYD/201 1)(AY 2007-08). INTOTO SOFTWARE INDIA PVT. LTD. [ITANO.1196/HYD/201 0)(AY 2005- 06). ITANO.1197/HYD/2010(A.Y 2005-06). ITA.NO.2102/HYD/2011)(AY 2007-08). 3DPLM SOFTWARE SOLUTIONS LTD. (SUCCESSOR TO DELMIA SOLUTIONS PVT LTD) (IT(TP) A.NO.1303/BANG/2012 (AY 2008-09) (V) E-ZEST SOLUTIONS LIMITED ('E-ZEST') 8.12 ACCORDING TO LD. AR, THIS COMPANY HAS DIVERSIF IED BUSINESS AND TOOK OUR ATTENTION TO EXHIBIT 5. ACCORDING TO LD. AR, BASED ON THE COMPANY WEBSITE, IT UNDERTAKES DIVERSIFIED ACTIVITI ES. IT PROVIDES SERVICES SUCH AS CUSTOM SOFTWARE DEVELOPMENT, CRM E RP, OPEN SOURCE ERP, KNOWLEDGE MANAGEMENT CONSULTING, HEALTH CARE MANUFACTURING, MANUFACTURING SOLUTIONS, LEGAL SOLUT IONS ETC. LD. AR ALSO CONTENDED THAT AS PER THE ANNUAL REPORT OF E-Z EST, NO SEGMENTAL DETAILS ARE PROVIDED. 11 ITA NO.5520/DEL./2011 8.13 LD. AR RELIED ON THE FOLLOWING CASE LAWS :- 3DPLM SOFTWARE SOLUTIONS LTD. (SUCCESSOR TO DELMIA SOLUTIONS PVT LTD) (IT(TP) A NO.1303/BANG/2012) (AY 2008-09), SYMPHONY SERVICES PUNE PVT LTD (ITA NO. 257/PN/2013 ) (AY 2008-09). LD. AR POINTED OUT THAT THIS COMPARABLE FAILS TPO F ILTER. (VI) HELIOS & MATHESON INFORMATION TECHNOLOGY LIMIT ED ('HELIOS') 8.14 LD. AR CONTENDED THAT THIS COMPARABLE FAILS EM PLOYEE COST FILTER AND TOOK OUR ATTENTION TO EXHIBIT 6. HE POINTED OU T THAT COMPANY FAILS EMPLOYEE COST FILTER APPLIED BY THE TPO WHICH ARE A S BELOW :- PARTICULARS AMOUNT INCOME FROM SOFTWARE SALES AND SERVICES (A) 1,786 ,380,304 STAFF WELFARE (B) 186,43,728 EMPLOYEE COST / SALES (B/A) 1.04% ALSO, THE LD. AR SUBMITTED THAT THE COMPANY PROVIDE S VARIOUS DIVERSIFIED SERVICES, LIKE, APPLICATION MANAGEMENT SERVICES, ITES- BPO SERVICES, EXECUTIVE EDUCATION- INFO SYSTEM, ETC . 8.15 THE CASE LAWS RELIED UPON BY THE LD. AR ARE AS UNDER :- 12 ITA NO.5520/DEL./2011 TOLUNA INDIA (ITA NO.5645/DEL/2011) (AY 2007-08) MOTOROLA SOLUTIONS INDIA PVT LTD (ITA NO.5637/DEL/2 011)(AY 2007-08) PTC SOFTWARE (INDIA) PVT. LTD. (ITA NO.1605/PN/2011 ) (AY 2007-08) (VII) ISHIR INFOTECH LIMITD ('ISHIR') 8.16 LD. AR CONTENDED THAT THIS COMPANY FAILS EMPLO YEE COST FILTER AND TOOK OUR ATTENTION TO EXHIBIT 7, WHICH ARE AS F OLLOWS :- PARTICULARS AMOUNT SALES (A) 74,209,887 SALARY AND STAFF WELFARE (B) 2,935,065 DIRECTORS REMUNERATION (C) 1,00,000 TOTAL EMPLOYEE COST (D=B+C) 3,935,065 EMPLOYEE COST / SALES (D/A) 5.30% 8.17 LD. AR RELIED ON THE FOLLOWING CASE LAWS :- DE SHAW INDIA SOFTWARE PVT LTD (ITA NO. 2071/HYD/20 11)(AY 2007-08) VIRTUSA (INDIA) PVT LTD (ITA NO.1962/HYD/2011)(AY 2 007-08) MOTOROLA SOLUTIONS INDIA PVT LTD (ITA NO.5637/DEL/2 011)(AY 2007-08) INVENSYS DEVELOPMENT CENTRE INDIA PVT LTD (ITA NO. 1780/HYD/2011) (AY 2006-07) 13 ITA NO.5520/DEL./2011 (VIII) KALS INFORMATION SYSTEMS LIMITED ('KALS') (SEGMENTAL) 8.18 LD. AR CONTENDED THAT THIS COMPANY FAILS SERVI CE INCOME FILTER AND TOOK OUR ATTENTION TO EXHIBIT 8. LD. AR SUBMIT TED THAT KALS FAILS TPO'S FILTER OF ACCEPTING COMPANIES WITH SOFT WARE SERVICE REVENUE IN EXCESS OF 75% OF TOTAL INCOME AS PER ANN UAL REPORT AND SEGMENTAL INFORMATION IS NOT AVAILABLE. LD. AR FURT HER SUBMITTED THAT ON A PERUSAL OF THE ANNUAL REPORT, IT CAN BE OBSERV ED THAT KALS HAS REVENUE OF 23% FROM TRADING IN SOFTWARE AND REVENUE EARNED FROM TRAINING IS 4%, WHICH ARE AS UNDER :- TOTAL SALES (A) 20,905,322 INCOME FROM SOFTWARE DEVELOPMENT- EXPORT SALE (B) 20,009,937 REVENUE- TRAINING (C) 862,400 CHANGE IN INVENTORY DURING THE YEAR (1,36,08,315- 1,01,22,401) (D) 3,485,914 MARK-UP EARNED ON COST (E) 30.55% SALES VALUE- INVENTORY (F= D+ D*E) 4,550,861 PERCENTAGE REVENUE FROM TRADING (F/B) 23% PERCENTAGE REVENUE FROM TRAINING (C/A) 4% 14 ITA NO.5520/DEL./2011 8.19 LD. AR RELIED UPON THE FOLLOWING CASE LAWS :- MOTOROLA SOLUTIONS INDIA PVT LTD (ITA NO. 5637/DEL/ 2011)(AY 2007-08) DE SHAW INDIA SOFTWARE PVT LTD (ITA NO. 2071/HYD/20 11)(AY 2007-08) LOGICA PRIVATE LTD (IT (TP)A.NO.1129/BANG/2011) (AY 2007-08) AXSYS HEALTHTECH LTD. (ITA.NO.2076/HYD/2011) (AY 20 07-08) CONEXANT SYSTEMS INDIA PUT. LIMITED (ITA NO.1429/HY D/2010), ITA NO.1978/HYD/2011 (AY 2007-08). DPDJ SOFTUIARE SOLUTIONS LTD (IT (TP) A.NO.1303/BAN G/2012)(AY 2008-09) BEARING PROPERTU SERVICES P.LTD (ITA NO.1124/BANG/2 011) PYRAMID IT CONSULTING PVT. LTD (ITA NO. 5401/DEL201 2)(AY 2008-09) (IX) MEGASOFT LIMITED ('MEGASOFT') 8.20 LD. AR SUBMITTED THAT AMALGAMATION TOOK PLACE IN THIS YEAR AND TOOK OUR ATTENTION TO EXHIBIT 9. HE SUBMITTED THAT THE COMPANY HAS UNDERGONE BUSINESS RESTRUCTURING ACTIVITIES DURING THE YEAR WHERE IN THE BUSINESS PERFORMANCE OF VISUAL SOFT TECHNOLOGIE S LIMITED, W.E.F. OCTOBER 1, 2006 HAS BEEN AMALGAMATED WITH THE FINAN CIAL PERFORMANCE OF THE COMPANY. (X) PERSISTENT SYSTEMS LIMITED ('PERSISTENT') 15 ITA NO.5520/DEL./2011 8.21 LD. AR SUBMITTED THAT THE MERGER TOOK PLACE IN THIS YEAR AND TOOK OUR ATTENTION TO EXHIBIT 19. HE SUBMITTED THA T AS PER THE ANNUAL REPORT OF PERSISTENT, IT HAS UNDERGONE SIGNIFICANT RESTRUCTURING DURING THE RELEVANT FY WHEREIN A SUBSIDIARY, CONTROL NET (INDIA) PRIVATE LIMITED WAS MERGED INTO THE COMPANY. 8.22 THE LD. AR RELIED UPON THE DECISION IN THE CAS E OF TATA MCGRAW HILL EDUCATION PVT LTD (ITA NO.5857/DEL/2011)(AY 20 07-08). 8.23 LD. AR SUBMITTED THAT THE COMPANY DERIVES ITS INCOME FROM THE SALE OF SOFTWARE SERVICES AS WELL AS PRODUCTS. SINC E THE ANNUAL REPORT DOES NOT PROVIDE ANY FURTHER BREAK-UP OF INCOME INT O PRODUCTS AND SERVICES, THE COMPANY CANNOT BE TREATED AS FUNCTION ALLY COMPARABLE TO THE ASSESSEE. HE SUBMITTED THAT THE SEGMENTAL I NFORMATION IS ALSO AVAILABLE. 8.24 HE RELIED ON THE FOLLOWING CASE LAWS :- INTOTO SOFTWARE INDIA PUT. LTD. [ITA.NO.1196/HYD/2 01)(AY 2005- 06) ITA NO.1197/HYD/2010 (AY 2005-06), ITA.NO.2102/HYD/2011 (AY 2007-08) 16 ITA NO.5520/DEL./2011 (XI) SASKEN COMMUNICATION TECHNOLOGIES LIMITED ('SA SKEN') (SEGMENTAL) 8.25 LD. AR SUBMITTED THAT THE MERGER TOOK PLACE IN THIS YEAR AND TOOK OUR ATTENTION TO EXHIBIT 11. HE SUBMITTED THA T THE COMPANY HAS UNDERGONE RESTRUCTURING DURING THE RELEVANT FY BY W AY OF MERGER WITH SASKEN NETWORK SYSTEMS LIMITED, INTEGRATED SOF TECH SOLUTIONS PRIVATE LIMITED AND BOTNIA HITECH OY, FINLAND. 8.26 LD. AR RELIED ON THE FOLLOWING CASE LAWS :- TATA MCGRAW HILL EDUCATION PVT LTD (ITA NO. 5857/DE L2011)(AY 2007-08). TOLUNA INDIA (ITA NO.5645/DEL/2011) (AY 2007-08) MOTOROLA SOLUTIONS INDIA PVT LTD (ITA NO. 5637/DEL/ 2011)(AY 2007-08) 8.27 LD. AR SUBMITTED THAT ALSO, AS PER THE ANNUAL REPORT OF THE COMPANY FOR FY 2006-07, THE COMPANY OWNS SIGNIFICAN T AMOUNT OF INTANGIBLES AMOUNTING TO RS.95.34 CRORES. 8.28 HE RELIED ON THE DECISION IN THE CASE OF MOTOR OLA SOLUTIONS INDIA PVT LTD (ITA NO. 5637/DEL/2011) (AY 2007-08). 8.29 LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY IS A GIANT COMPANY AND REJECTED BY THE TRIBUNAL FOLLOWING THE PRINCIPLE LAID 17 ITA NO.5520/DEL./2011 DOWN BY HONBLE DELHI HIGH COURT IN THE CASE OF AGN ITY INDIA TECHNOLOGIES PRIVATE LIMITED (ITA NO.1204/ HC/2011) (XII) INFOSYS TECHNOLOGIES LIMITED ('INFOSYS') 8.30 LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY IS A GIANT COMPANY AND TOOK OUR ATTENTION TO EXHIBIT 12. HE SUBMITTED THAT INFOSYS HAS SUBSTANTIALLY HIGH TURNOVER OF RS.13,14 9 CRORES (APPROX 700 TIMES THE TURNOVER OF ASSESSEE OF RS.17 CRORES FROM THE CSD SERVICES), THEREFORE, SHOULD BE REJECTED BASED ON E STABLISHED JUDICIAL PRECEDENTS BY THE HON'BLE DELHI HIGH COURT IN THE C ASE OF AGNITY INDIA TECHNOLOGIES LTD. (ITA 1204/2011) WHICH REJEC TED INFOSYS ON VARIOUS FACTORS, WHICH INCLUDES FACTORS SUCH AS TUR NOVER, CAPITAL, ADVERTISING, SALES PROMOTION AND BRAND BUILDING EXP ENSES, AND EXPENDITURE ON R&D. 8.31 LD. AR FURTHER SUBMITTED THAT INFOSYS HAS SUBS TANTIAL INTANGIBLE ASSETS VALUED BY THE COMPANY AT RS.89,069 CRORES CO MPRISING BRAND VALUE ITSELF AT RS. 31,617 CRORES (AS ON MARCH 31, 2007) AS PROVIDED IN THE RELEVANT EXTRACTS OF THE ANNUAL REPORT FOR 2007 . 18 ITA NO.5520/DEL./2011 8.32 LD. AR RELIED UPON THE FOLLOWING CASE LAWS :- MOTOROLA SOLUTIONS INDIA PVT. LTD (ITA NO.5637/DEL/ 2011)(AY 2007-08), DE SHAW INDIA SOFTWARE PVT LTD (ITA NO. 2071/HYD/2 011)(AY 2007-08) LOGICA PRIVATE LTD (ITA NO.1129/BANG/2011)(AY 2007- 08) LGS GLOBAL LTD (FORMERLY KNOWN AS LANCO GLOBAL SYST EMS LTD (ITA NO. 1885/HYD/2011)(AY 2007-08) TOLUNA INDIA (ITA NO.5645/DEL/2011)(AY 2007-08) 8.33 LD. AR SUBMITTED THAT ALSO, INFOSYS OWNS PRODU CTS/ IPR AND LEVERAGES ON ITS PREMIUM BANKING SOLUTION FINACLE R AS EVIDENCED BY ITS ANNUAL REPORT FOR IT 2006-07 AND THE COMPANY AL SO UNDERTAKES SIGNIFICANT EXPENDITURE ON R&D AS IS EVIDENT FROM I TS ANNUAL REPORT. HE SUBMITTED THAT STANDALONE SEGMENTAL INFORMATION FOR SOFTWARE DEVELOPMENT SERVICES IS NOT AVAILABLE. 8.34 LD. AR RELIED ON THE FOLLOWING CASE LAWS :- AXSYS HEALTH TECH LTD. (ITA.NO.2076/HYD/2011)(AY 20 07-08) AGNITY INDIA TECHNOLOGIES PRIVATE LIMITED (ITA 1204 /HC/2011) PYRAMID IT CONSULTING (ITA NO. 5401/DEL/2012)(AY 20 08-09) 3DPLM SOFTWARE SOLUTIONS LTD (IT (TP) A.NO.1303/BANG/2012)(AY 2008-09) BEARING PROPERTY SERVICES P. LTD (ITA NO.1124/BANG/ 2011)(AY 2008-09) 19 ITA NO.5520/DEL./2011 (XIII) WIPRO LIMITED (SEG.) (WIPRO) 8.35 LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY IS A GIANT COMPANY AND TOOK OUR ATTENTION TO EXHIBIT 13. HE SUBMITTED THAT THE SALES/ TURNOVER OF WIPRO FOR FY 2006-07 IS INR 9,669 CRORES (CONSIDERING ONLY THE IT SERVICES SEGMENT) AS AGAIN ST THE ASSESSEE'S TOTAL SALES/ TURNOVER OF MERELY INR 17 CRORES PERTA INING TO THE PROVISIO OF IT SERVICES. HE SUBMITTED THAT IT WOULD BE ABSURD TO COMPARE THE ASSESSEE WITH COMPANIES HAVING TURNOVER IS MORE THAN 500 TIMES THE SIZE OF THE ASSESSEE. 8.36 LD. AR RELIED ON THE FOLLOWING CASE LAWS :- TOLUNA INDIA (ITA NO. 5645/DEL/2011)(AY 2007-08) LGS GLOBAL LTD (FORMERLY KNOWN AS LANCO GLOBAL SYST EMS LTD (ITA NO.1885/HYD/2011)(AY 2007-08) BEARING POINT BUSINESS CONSULTING PVT. LTD. (ITA NO.1124/BANG/2011) (AY 2007-08) TRILOGY E-BUSINESS (ITA NO.1089/BANG/2011)(AY 2007- 08) NDS SERVICES PAY- TV TECHNOLOGY PVT. LTD. (IT (TP)A .NO.1089 AY 2007-08) WITNESS SYSTEMS SOFTWARE INDIA PVT LTD (IT(TP)A.NO.1366/BANG/2011) (AY 2007-08) AGNITY INDIA TECHNOLOGIES PVT. LTD. (ITA 1204/HC/20 11) 8.37 LD. AR FURTHER SUBMITTED THAT THE STANDALONE F INANCIAL DATA OF WIPRO FOR FY 2006-07 IS NOT AVAILABLE IN THE PUBLIC DOMAIN. HE SUBMITTED THAT THE ANNUAL REPORT OF THE COMPANY FOR FY 2006-07 20 ITA NO.5520/DEL./2011 PROVIDES THE ABRIDGED FINANCIAL DATA WHICH WOULD NO T PROVIDE THE DETAILED FINANCIAL INFORMATION THAT WOULD BE REQUIR ED TO DETERMINE THE COMPARABILITY OF THE COMPANY. 8.38 LD. AR RELIED ON THE FOLLOWING CASE LAWS :- TATA MCGRAW (ITA NO.857/DEL/2011) WITNESS SYSTEMS SOFTWARE INDIA PVT LTD. (IT(TP)A.NO.1366/BANG/2011) ACTIS ADVISERS PVT LTD (ITA NO.5277/DEL/2011) (AY: 2007-08) ITA NO. 958/DEL/2012 (AY 2006-07) CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. (I TA NO.961 HYD/2011)(AY 2008-09) ITES SERVICES 9. LD. AR SUBMITTED THAT THE BUSINESS RESTRUCTURING / AMALGAMATIONS / MERGERS / DEMERGERS / EXTRA ORDINAR Y CIRCUMSTANCES OCCURRED DURING THE YEAR. (XIV) ACCENTIA TECHNOLOGIES LIMITED ('ACCENTIA') 9.1 LD. AR SUBMITTED THAT AMALGAMATION TOOK PLACE I N THIS YEAR AND TOOK OUR ATTENTION TO EXHIBIT 14. LD. AR SUBMITTED THAT DURING FY 2006-07, AN AMALGAMATION OCCURRED WHEREIN ACCENTIA TOOK OVER IRIDIUM TECHNOLOGIES AND GEOSOFT TECHNOLOGIES. 21 ITA NO.5520/DEL./2011 9.2 LD. AR RELIED ON THE FOLLOWING CASE LAWS:- CAPITAL 10 INFORMATION SYSTEMS (INDIA) PVT. LTD (IT A NO.1961/HYD/2011)(AY 2007-08) ZAVATA INDIA PRIVATE LIMITED (ITA NO.1781/HYD/2011) (AY 2007- 08) AVINEON INDIA PVT LTD (ITA NO.1989/HYD/2011)(AY 200 7-08) STREAM INTERNATIONAL SERVICES PVT LTD (ITA NO.8290/MUM/2011)(AY 2007-08) BNY MELLON INTERNATIONAL OPERATIONS (INDIA) PVT. LT D. (ITA NO.2380/PN/2012)(AY 2008-09) TNS INDIA PVT LTD (ITA NO. 604 & 419/HYD/2014) (AY 2009-10) 9.3 LD. AR SUBMITTED THAT THE FOLLOWING COMPARABLES FAILS TPO FILTERS :- (XV) ASIT C. MEHTA FINANCIAL SERVICES LIMITED ('ASIT ') 9.4 LD. AR SUBMITTED THAT THIS COMPARABLE FAILS EMP LOYEE COST FILTER AND TOOK OUR ATTENTION TO EXHIBIT 15. HE SUBMITTED THAT THE COMPANY FAILS THE EMPLOYEE COST TO TOTAL COST FILTER OF 25% AS APPLIED BY THE TPO. LD. AR FURTHER SUBMITTED THAT THE COMPANY HAS AN EMPLOYEE COST TO SALES RATIO OF 24.79% AS UNDER :- SALES (OPERATING) 63,415 EMPLOYEE COST 15,720 EMPLOYEE COST/ SALES 24.79% 22 ITA NO.5520/DEL./2011 9.5 HE RELIED ON THE DECISION IN THE CASE OF ZAVATA INDIA PRIVATE LIMITED (ITA NO.1781/HYD/2011) (AY 2007-08). 9.6 LD. AR SUBMITTED THAT THE COMPANY IS ENGAGED IN THE PROVISION OF HIGH-END SERVICES IN THE NATURE OF GIS SERVICES AND MOBILE ASSETS TRACKING. FURTHER, THE COMPANY IS ENGAGED IN PROVID ING PORTFOLIO MANAGEMENT SERVICES AND INVESTMENT SERVICES. 9.7 LD. AR RELIED ON THE DECISION OF AVINEON INDIA PVT LTD (ITA NO.1989/HYD/2011) (AY 2007-08). (XVI) H C L COMNET SYSTEMS & SERVICES LIMITED ('HCL COMNET') (SEGMENTAL) 9.8 LD. AR SUBMITTED THAT THIS COMPANY FAILS FINANC IAL YEAR ENDING FILTER AND TOOK OUR ATTENTION TO EXHIBIT 16. HE SU BMITTED THAT THE COMPANY FAILS FINANCIAL YEAR ENDING FILTER APPLIED BY THE TPO AS ITS FINANCIAL YEAR ENDS ON JUNE 30, 2007. (XVII) INFORMED TECHNOLOGIES INDIA LIMITED ('INFORM ED') 9.9 LD. AR SUBMITTED THAT THIS COMPANY FAILS THE EM PLOYEE COST FILTER AND TOOK OUR ATTENTION TO EXHIBIT 17. HE SU BMITTED THAT THE 23 ITA NO.5520/DEL./2011 COMPANY FAILS THE EMPLOYEE COST TO TOTAL COST FILTE R OF 25% AS APPLIED BY THE LD. TPO. THE COMPANY HAS AN EMPLOYEE COST TO SALES RATIO OF 21. 77% DURING FY 2006-07 AS UNDER :- SALES AND SERVICES 40,776,342 EMPLOYEE COST (B) 8,876,921 EMPLOYEE COST/ REVENUE (B/A) 21.77% 9.10 FURTHER, LD. AR SUBMITTED THAT THE COMPANY HAD A SUPERNORMAL GROWTH OF MORE THAN 130% DURING THE YEAR AND ALSO, THE COMPANY HAS AN ABNORMALLY HIGH MARGIN OF 34.12% WHICH RENDERS I T UNFIT TO BE TAKEN AS A COMPARABLE FOR BENCH-MARKING A LOW RISK CAPTIVE UNIT SUCH AS THE ASSESSEE. 9.11 LD. AR RELIED ON THE DECISION OF CUMMINS TURBO TECHNOLOGIES LTD. UK - INDIA BRANCH (ITA NO. 161 & 269/PN/2013. (TS-W4- ITAT-2014/PN2/2013) TP. ITAT PUNE) (AY 2007-08). 9.12 LD. AR SUBMITTED THAT THE FOLLOWING COMPARABLE S ARE FUNCTIONALLY DIFFERENT :- 24 ITA NO.5520/DEL./2011 (XVIII) BODHTREE CONSULTING LIMITED (SEGMENTAL) ('BODHTREE') 9.13 LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND TOOK OUR ATTENTION TO EXHIBIT 18. HE SUBMITTED THAT BODHTREE IS A SOFTW ARE DEVELOPMENT AND PRODUCT COMPANY WHICH CANNOT BE CONSIDERED SIMI LAR TO ITES SERVICES PROVIDED BY THE ASSESSEE. FURTHER, HE SUBM ITTED THAT THE TPO HIMSELF HAS CONSIDERED BODHTREE AS A COMPARABLE TO THE ASSESSEE'S CSD SEGMENT IN AY 2009-10. 9.14 LD. AR SUBMITTED THAT FROM THE ANNUAL REPORT O F BODHTREE, IT IS OBSERVED THAT THE EXTRA ORDINARY PROFIT OF THE COMP ANY WAS DUE TO THE HIRING OF E-PAPER BUSINESS AND WEB BASED ASSESSMENT SERVICES BY THE COMPANY TO A SEPARATE COMPANY AND THE COMPANY FORME D ANOTHER COMPANY BY NAME OF LEARNSMART (INDIA) PVT. LTD. (XIX) ECLERX SERVICES LIMITED ('ECLERX') 9.15 LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY IS ENGAGED IN THE BUSINESS OF HIGH END KPO SERVICES. HE SUBMITT ED THAT THE DATA ANALYTICS SERVICES PERFORMED BY ECLERX IS FUNCTIONA LLY DIFFERENT AND ARE MORE VALUE ADDING AND HIGH END IN NATURE COMPAR ED TO THE ROUTINE 25 ITA NO.5520/DEL./2011 OUTSOURCED SERVICE FUNCTIONS PERFORMED BY THE ASSES SEE UNDER ITES SEGMENT. HE SUBMITTED THAT THE SEGMENTAL DATA NOT AVAILABLE AND COMPANY ALSO STATES IT IS NOT COMPARABLE TO BPO AND ALSO OWNS SIGNIFICANT JP. 9.16 LD. AR RELIED ON THE FOLLOWING CASE LAWS:- ZAVATA INDIA PRIVATE LIMITED [TS-156-ITAT-2013-HYD) -TP] (AY 2007-08 STREAM INTERNATIONAL SERVICES PVT LTD [TS-312-ITAT- 2014-MUM)- TP](AY 2007-08) COGNIZANT TECHNOLOGY SERVICES PVT. LTD. (ITA NOS.2106/HYD/2011) (AY 2007-08) AND (1864/HYD/2012) (AY 2008- 09) CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD VS. DCIT [TS- 720-ITAT-2012-HYD)-TP7)(AY 2007-08) MAERSK GLOBAL SERVICE CENTRES (INDIA) PVT LTD (ITA NO. 2594/MUM/2014, [TS-13-ITAT- 2015 (MUM)-TP), ITAT MUMBAI)(AY 2009-10) MARKET TOOLS RESEARCH PVT LTD (ITA NO 11/ HYD/2012)(AY 2008-09) (XX) GENESYS INTERNATIONAL CORPORATION LIMITED ('GE NESYS') 9.17 LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY IS ENGAGED IN THE BUSINESS OF HIGH END KPO SERVICES AND TOOK OUR ATTENTION TO EXHIBIT 19. HE SUBMITTED THAT GENESYS IS MAINLY EN GAGED IN THE AREA OF GEOGRAPHICAL INFORMATION SYSTEM SERVICES AND THE GIS SERVICES PERFORMED BY GENESYS ARE FUNCTIONALLY DIFFERENT FRO M THE FUNCTIONS PERFORMED BY THE ASSESSEE UNDER ITS IT ENABLED SER VICES SEGMENT 26 ITA NO.5520/DEL./2011 WHICH ARE PRIMARILY IN THE NATURE OF BACK- OFFICE S UPPORT, REMOTE MONITORING CO-ORDINATION ETC. SERVICES. FURTHER, LD . AR SUBMITTED THAT THE COMPANY ALSO HAS ABNORMAL VARIATIONS IN ITS YEA R TO YEAR FINANCIAL RESULTS. HE SUBMITTED THAT DURING THE YEAR THE ENGI NEERING AND INFORMATION BUSINESS DIVISION WAS DEMERGED FROM THE COMPANY EFFECTIVE OCTOBER 1, 2007 AND TRANSFERRED TO A SEPA RATE COMPANY, GI ENGINEERING SOLUTIONS LIMITED. (XXI) MOLD-TEK TECHNOLOGIES LIMITED ('MOLD-TEK) 9.18 LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY IS ENGAGED IN THE BUSINESS OF HIGH END KPO SERVICES AND TOOK OUR ATTENTION TO EXHIBIT 20. HE SUBMITTED THAT MOLD -TEK IS ENGAGED IN THE BUSINESS OF RENDERING ENGINEERING SERVICES IN THE NATURE OF GIS SERVICES WHICH ARE HIGHER-UP ON THE VALUE CHAIN WHICH CANNOT BE CO MPARED WITH BACK OFFICE SUPPORT SERVICES SUCH AS NETWORK, DATA AND H ELPDESK SERVICES PROVIDED BY THE ASSESSEE. 9.19 LD. AR RELIED ON THE FOLLOWING CASE LAWS :- STREAM INTERNATIONAL SERVICES PVT LTD [TS-312-ITAT- 2014(MUM TP] AY (2007-08) ZAVATA INDIA PRIVATE LIMITED [TS-156-ITAT-2013CHYD) -TP] (AY 2007-08) MAERSK GLOBAL SERVICE CENTRE (ITA NO.7466/MUM/2012) (SB)(AY 2009-10) 27 ITA NO.5520/DEL./2011 FURTHER, HE SUBMITTED THAT DURING THE YEAR, THE COM PANY ACQUIRED CROSS ROAD DETAILING INC., AN ENGINEERING SERVICES COMPANY KPO AND DUE TO THIS DURING THE YEAR 2006-07, MOLD- TEK EXPE RIENCED SUPERNORMAL GROWTH OF MORE THAN 200% IN RELATION TO KPO DIVISION. 9.20 THE CASE LAWS RELIED UPON BY THE LD. AR ARE AS UNDER :- KNOAH SOLUTIONS PVT LTD (ITA NO.140./HYD/2013) CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. (I TA NO.1961/HYD/2011)(AY 2007-08). 9.21 LD. AR SUBMITTED THAT THE COMPANY HAS A RELATI VELY LOW EMPLOYEE COST/ SALES RATIO (APPROX 8%) AS AGAINST T HE EMPLOYEE COST/ SALES RATIO FOR THE ASSESSEE AS UNDER :- PARTICULARS AMOUNT (IN INR) INCOME FROM OPERATIONS (A) 881,188 EMPLOYEES REMUNERATION & BENEFITS (B) 66,881 EMPLOYEE COST / SALES (B) / (A) 7.59% 9.22 LD. AR RELIED ON THE DECISION OF AVINEON INDIA PVT LTD [TS- 30S-ITAT-2013-HYD)- TP](AY 2007-08) 9.23 LD. AR SUBMITTED THAT THIS COMPANY IS A GIANT COMPANY AND REJECTED BY THE TRIBUNAL FOLLOWING THE PRINCIPLE L AID DOWN BY 28 ITA NO.5520/DEL./2011 HONBLE DELHI HIGH COURT IN THE CASE OF AGNITY INDI A TECHNOLOGIES PVT. LTD. (ITA NO. 1204/HC/2011) 9.24 LD. AR SUBMITTED THAT THE SALES/TURNOVER OF TH E COMPANY IS RS.649.51 CRORE AS AGAINST THE ASSESSEES SALES / T OTAL TURNOVER OF RS.80 CRORE FROM IT ENABLED SERVICES SEGMENT. 9.25 LD. AR RELIED ON THE FOLLOWING CASE LAWS :- ZAVATA INDIA PRIVATE LIMITED (ITA NO.1781/HYD/2011) (AY 2007- 08) AVINEON INDIA PVT LTD (ITA NO.1989/HYD/2011)(AY 200 7-08) CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD (IT A NO.1961/HYD/2011)(AY 2007-08) ACTIS ADVISERS PVT LTD. (ITA NO.5277/DEL/2011 AND I TA NO. 958/DEL/2012)(AY 2007-08), AGNITY INDIA TECHNOLOGIES P. LTD (ITA NO.1204/HC/20 11) MARKET TOOLS RESEARCH PUT LTD (ITA NO.1811/HYD/2012 )(AY 2008-09) (XXIII) WIPRO LIMITED (SEGMENT) ('WIPRO') 9.26 LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY IS A GIANT COMPANY AND TOOK OUR ATTENTION TO EXHIBIT 22. HE S UBMITTED THAT THE SALES/ TURNOVER OF WIPRO ITES SEGMENT FOR THE FY 200 6-07 IS RS.940 CRORES AS AGAINST THE ASSESSEE'S SALES/ TURNOVER OF RS.80 CRORES. 29 ITA NO.5520/DEL./2011 9.27 LD. AR RELIED UPON THE FOLLOWING CASE LAWS :- TATA MCGRAW HILL EDUCATION PVT LTD (ITA NO.5857/DEL /2011)(AY 2007-08) ADAPTEC INDIA PRIVATE LIMITED (ITA NO.1801/HYD/09)( AY 2007- 08) MARKET TOOLS RESEARCH PUT. LTD. (ITA NO.2066/HYD/20 11) (AY 2007-08) 9.28 LD. AR SUBMITTED THAT THE FOLLOWING COMPARABLE HAS UNRELIABLE FINANCIALS:- (XXIV) MAPLE ESOLUTIONS LIMITED ('MAPLE') & TRITON C ORP LIMITED ('TRITON') 9.29 LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY HAS UNRELIABLE FINANCIALS. HE SUBMITTED THAT THE DIRECTORS OF THE SE COMPANIES WERE INVOLVED IN FRAUD AND HENCE THEIR FINANCIAL RESULTS WERE UNRELIABLE AND THE DIRECTOR - THE RASTOGI FAMILY CHEATED THE GOVER NMENT OF INDIA IN LATE 1980S AND LATE 1990S. 9.30 LD. AR RELIED ON THE FOLLOWING CASE LAWS :- CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. (I TA NO.1961/HYD/2011)(AY 2007-08) MARKET TOOLS RESEARCH PVT. LTD. (ITA NO. 2066/HYD/2 011)(AY 2007-08) COGNIZANT TECHNOLOGY SERVICES PVT. LTD. (ITA NOS.2106/HYD/2011)(AY 2007-08) AND (1864/HYD/2012)( AY 2008) HSBC ELECTRONIC DATA PROCESSING INDIA LTD. [ITA NO.1624/HYD/2010) (AY 2006-07). 30 ITA NO.5520/DEL./2011 9.31 LD. AR FURTHER SUBMITTED THAT MAPLE HAS EXTREM ELY VOLATILE MARGINS. MAPLE HAS SHOWN 100% LOSS IN FINANCIAL YEA R 2002-03 BUT ALL OF A SUDDEN IT HAS SHOWN PROFIT OF 37.38% IN FI NANCIAL YEAR 2004- 05. IN FINANCIAL YEAR 2008-09, IT AGAIN SUFFERED LO SSES WITH A NEGATIVE MARGIN OF -65.23%. 9.32 LD. AR RELIED ON THE DECISION OF ACTIS ADVISER S PVT LTD - ITA NO.5277/DEL/2011 (AY: 2007-08) AND ITA NO. 958/DEL/ 2012 (AY 2006-07) . 9.33 LD. AR SUBMITTED THAT THE FOLLOWING COMPARABLE HAS ABNORMAL MARGINS :- (XXV) ISERVICES INDIA PRIVATE LIMITED ('ISERVICES ') 9.34 LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY HAS ABNORMAL MARGINS. HE SUBMITTED THAT THE COMPANY HAS AN ABNO RMALLY HIGH MARGIN OF 34.12% WHICH RENDERS IT UNFIT TO BE TAKEN AS A COMPARABLE FOR BENCHMARKING A LOW ISK CAPTIVE UNIT SUCH AS TH E ASSESSEE AS UNDER:- PARTICULARS FY 06-07 FY 07-08 FY 08-09 FY 09-10 FY20-11 FY 11- 12 FY 12-13 OP/TC 46.58% NA NA 47.41% - 6.85% 6.58% - 3.63% 31 ITA NO.5520/DEL./2011 9.35 LD. AR RELIED ON THE FOLLOWING CASE LAWS :- PENTAIR WATER INDIA PVT LTD (ITA NO.03/PNJ/2013, ITA NO.06/PNJ/2013, TS-153 ITAT-2014(PAN)-TP), [2014- T II- 108-ITAT-PANAJI- TP), ITAT PANAJI) - AY 2007-08 9.36 LD. AR SUBMITTED THAT THE FOLLOWING COMPARABLE HAS DIFFERENT BUSINESS MODEL :- (XXVI) INFORMATION TECHNOLOGIES LIMITED (CORAL HUB LIMITED) ('VISHAL' OUTSOURCING COMPANY) 9.37 LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY HAS DIFFERENT BUSINESS MODEL AND TOOK OUR ATTENTION TO EXHIBIT 23 . HE SUBMITTED THAT VISHAL OUTSOURCES MOST OF ITS SERVICES TO THIR D PARTY CONTRACTORS WHICH IS EVIDENCED BY THE LOW EMPLOYEE COST TO SALE S RATIO OF THE COMPANY. VISHAL HAS SIGNIFICANT PAYMENT TOWARDS VEN DORS AND LOW PERSONNEL COST AS A PERCENTAGE OF SALES. HE SUBMITT ED THAT THE INTERMEDIARY FUNCTIONS OF VISHAL CAN ONLY BE COMPAR ED TO THAT OF A DISTRIBUTOR WHICH TAKES TITLE TO SERVICE/ PRODUCT F OR RESALE TO THE CUSTOMER WHEREAS THE ASSESSEE IS A PROVIDER OF BACK OFFICE SERVICES ON ITS OWN. THUS, LD. AR SUBMITTED THAT THE OUTSOURCI NG MODEL FOLLOWED 32 ITA NO.5520/DEL./2011 BY VISHAL CANNOT BE CONSIDERED TO BE COMPARABLE CUS TOMER TO BE COMPARABLE TO THE BUSINESS MODEL FOLLOWED BY THE AS SESSEE AS UNDER :- PARTICULARS AMOUNT (IN INR) INCOME FROM OPERATIONS (A) 306,010,382 PERSONNEL COST 7,027,631 HIRING CHARGES 1,359,045 EMPLOYEE COST (B) 8,386,676 EMPLOYEE COST / SALES (B/A) 2.74% 9.38 LD. AR RELIED ON THE FOLLOWING CASE LAWS :- ZAVATA INDIA PRIVATE LIMITED [TS-156-ITAT-2013-CHD) -TP](AY 2007-08) AVINENO INDIA PVT. LTD [TS-308-ITAT-2013-HYD)-TP] A Y 2007- 08) COGNIZANT TECHNOLOGY SERVICES PVT. (ITA NO.2106/HYD /2011)(AY 2007-08) AND 1864/HYD/2012 (AY 2008-09) CAPITAL IQ SYSTEMS (INDIA) PVT. LTD VS. DCIT [TS-72 O-ITA T- 2012 CHYD)- TP (AY 2007-08) 9.39 LD. AR SUBMITTED THAT THE COMPANY FAILS THE RP T FILTER AS APPLIED BY THE TPO. DURING THE YEAR THE COMPANY HAS AN RPT RATIO OF 86.82% 9.40 LD. AR RELIED ON THE DECISION OF PTC SOFTWARE (INDIA) PVT. LTD. (ITA NO. 1605/PN/ 2011)(AY 2007-08) 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. THE LD. AR POINTED OUT TO US THAT THE AFOR ESAID OBJECTIONS 33 ITA NO.5520/DEL./2011 REGARDING FILTERS, COMPARABLES, ETC. HAD BEEN TAKEN BEFORE THE DRP. HOWEVER, THE DRP HAS NOT ADDRESSED THE ISSUES AND H AD ONLY PASSED A CRYPTIC ORDER WITHOUT DISCUSSING THE MERIT OF THE M ATTER. THE LD. AR TOOK OUR ATTENTION TO PAGES 17 & 18 OF THE DRP ORDE R WHEREIN THE OBJECTION OF THE ASSESSEE AND DRP OBSERVATION ARE G IVEN AS UNDER :- 3.7 WITHOUT PREJUDICE TO ASSESSEES OTHER CONTENTI ONS, FAILING TO APPLY THE WAGES/ SALES RATIO FILTER TO THE ITES COM PARABLES (AS APPLIED VIS-A-VIS THE CSD COMPARABLES) AND THEREBY ADOPTING AN INCONSISTENT STAND BETWEEN THE ITES AND CSD COMPARABLES AND APPL YING THIS FILTER SELECTIVELY ONLY TO THE CSD COMPARABLES, MORE SO WH EN THE SAID FILTER WAS APPLIED TO THE ITES SEGMENT IN THE PREVIOUS ASS ESSMENT YEAR I.E. AY 2006-07; DRP'S OBSERVATION: 3.7.1 FILTERS HAVE BEEN APPLIED AS RELEVANT FACTS A ND CIRCUMSTANCES OF THE SECTOR. SO THERE IS NO INCONSISTENCY IN THE APPROACH OF TPO. 3.8 INCLUDING HIGH-PROFIT MAKING COMPANIES IN THE F INAL COMPARABLES SET FOR BENCHMARKING A LOW RISK CAPTIVE UNIT SUCH AS THE ASSESSEE (DISREGARDING JUDICIAL PRONOUNCEMENTS ON T HE ISSUE), THUS DEMONSTRATING AN INTENTION TO ARRIVE AT A PRE-FORMU LATED OPINION WITHOUT COMPLETE AND ADEQUATE APPLICATION OF MIND W ITH THE SINGLE- MINDED INTENTION OF MAKING AN ADDITION TO THE RETUR NED INCOME OF THE ASSESSEE; 3.9 INCLUDING CERTAIN COMPANIES THAT ARE NOT COMPAR ABLE TO THE ASSESSEE IN TERMS OF FUNCTIONS PERFORMED ASSETS EMP LOYED AND RISKS ASSUMED; 3.10 RESORTING TO ARBITRARY REJECTION OF LOW-PROFIT / LOSS MAKING COMPANIES BASED ON ERRONEOUS AND INCONSISTENT REASO NS; 3.11 EXCLUDING CERTAIN COMPANIES ON ARBITRARY/ FRIV OLOUS GROUNDS EVEN THOUGH THEY ARE COMPARABLE TO THE ASSESSEE IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED; 34 ITA NO.5520/DEL./2011 DRP'S OBSERVATION: 3.8.1 GROUNDS NO. 3.8, 3.9, 3.10 AND 3.11 DEALS WIT H COMPATIBILITY ISSUE HENCE CONSIDERED TOGETHER. THE COMPARABLES US ED IN BOTH SEGMENTS HAVE BEEN PUT THROUGH A FILTRATION PROCESS TO ARRIVE AT A SET WHICH IS BROADLY COMPARABLE WITH REFERENCE TO FAR T O THAT OF THE ASSESSEE. IN THE CIRCUMSTANCES, DRP FINDS' NO REASO N TO DISTURB THE ORDER OF TPO ON THESE GROUNDS. HENCE, OBJECTIONS AR E REJECTED. GROUND NO. 3.12 IGNORING THE BUSINESS/ COMMERCIAL R EALITY THAT SINCE THE ASSESSEE (VIS-A-VIS BOTH ITS ITES/ CSD SERVICES ) IS REMUNERATED ON AN ARM'S LENGTH COST PLUS BASIS, I.E. IT IS COMPENS ATED FOR ALL ITS OPERATING COSTS PLUS A PRE-AGREED MARK-UP BASED ON A BENCHMARKING ANALYSIS, THE ASSESSEE UNDERTAKES MINIMAL BUSINESS RISKS AS AGAINST COMPARABLE COMPANIES THAT ARE FULL FLEDGED RISK TAK ING ENTREPRENEURS, AND BY NOT ALLOWING A RISK ADJUSTMENT TO THE ASSESS EE ON ACCOUNT OF THIS FACT; AND ASSESSEE RELIED ON MENTOR GRAPHICS WHERE IT WAS HEL D THAT ADJUSTMENT SHOULD BE MADE TO MARGINS OF COMPARABLE COMPANIES TO ACCOUNT FOR DIFFERENCES IN FUNCTIONS PERFORMED AND RISKS ASSUMED BETWEEN THE COMPARABLE COMPANIES AND THE ASSESSEE. DRP'S OBSERVATION: 3.12.1 DRP HAS CONSIDERED ALL THE SUBMISSIONS AN D IS OF THE VIEW THAT THE ASSESSEE CANNOT BE COMPARED TO A RISK FREE SECURITY (5 YEAR ZERO COUPON GOVT. BOND). FURTHER MECHANICAL ADJUSTM ENT CANNOT BE MADE TO THE MARGINS OF THE COMPARABLES WITHOUT KNOW ING WHICH RISK WAS TAKEN BY THE ENTITY CONCERNED AND HOW ITS PROFI TABILITY WAS AFFECTED. EVEN METHODOLOGY, WHETHER AD HOC ADJUSTME NT AS IN CASE OF SONY INDIA, CAPM AS SUGGESTED BY THE ASSESSEE, OR S HARPE RATIO (WHICH IS A MEASURE OF THE EXCESS RETURN ON RISK UN DERTAKEN BY AN ENTITY INVESTING IN A PARTICULAR ASSET), AS APPLIED BY HYDERABAD ITAT IN THE CASE OF ADP PRIVATE LTD, REQUIRES ROBUST DA TA, IN THE ABSENCE OF WHICH RISK ADJUSTMENT CANNOT BE CONSIDERED FOR ENHA NCING COMPARABILITY. THUS THE OBJECTION IS REJECTED. GROUND NO. 3.13 COMMITTING A NUMBER OF FACTUAL ERRO RS IN ACCEPT- REJECT OF COMPARABLES AND/ PR OR IN THE COMPUTATION OF THE OPERATING PROFIT MARGINS OF THE COMPARABLES; DRP/S OBSERVATION: THE TPO IS DIRECTED TO VERIFY AND RE-COMPUTE IF NEC ESSARY OPERATING PROFIT MARGINS OF THE COMPARABLES AND RE-COMPUTE AL P ACCORDINGLY, IF REQUIRED. 35 ITA NO.5520/DEL./2011 GROUND NO. 3.14 DISREGARDING JUDICIAL PRONOUNCEMENT S IN INDIA IN UNDERTAKING THE TP ADJUSTMENT. DRP/S OBSERVATION: THE ASSESSEE HAS OBJECTED TO DISREGARDING JUDICIAL PRONOUNCEMENT IN INDIA IN UNDERTAKING TP ADJUSTMENTS. 3.14.1 THE ASSESSEE ITSELF HAS CONTENDED THAT THIS IS A GENERAL GROUND. ON EXAMINATION DRP FINDS THAT THE PERSUASIVE VALUE OF VARIOUS ITAT DECISIONS HAS BEEN ACKNOWLEDGED BY THE TPO AND DIST INCTION ON FACTS AND LAW MADE BASED FACTS OF THE CASE. IN THE CIRCUM STANCES, THIS BEING A GENERAL GROUND, THE CONTENTIONS ARE DULY CONSIDER ED AND NO SPECIFIC DIRECTIONS ARE BEING ISSUED. 11. FROM A PERUSAL OF THE ABOVE ORDER OF THE DRP, I T IS CLEAR THAT THE ASSESSEES OBJECTIONS / CONTENTIONS AGAINST THE INC LUSION/EXCLUSION OF THE COMPARABLES HAS NOT BEEN DEALT BY THE DRP WHILE EXERCISING THE APPELLATE JURISDICTION AGAINST A QUASI-JUDICIAL ORD ER OF THE TPO, WHICH EXERCISE IS SINE QUA NON FOR DECIDING THE ISSUE AS TO WHETHER A COMPARABLE IS COMPARABLE TO THE FAR OF THE TESTED P ARTY I.E. ASSESSEE. SIMPLY BY OBSERVING THAT TESTED PARTY IS BROADLY CO MPARABLE WILL NOT SUFFICE. WE ARE OF THE OPINION THAT THE DRP CANNOT ABSOLVE FROM ITS DUTY WITHOUT GOING INTO THE MERITS OF THE CONTENTIO N OF THE ASSESSEE AS TO WHETHER A COMPARABLE COMPANY IS COMPARABLE TO IT OR NOT AS ENVISAGED BY THE ACT AND RULES GOVERNING THE SUBJEC T. SINCE THE DRP HAS NOT MET THE CONTENTION OF THE ASSESSEE IN RESPE CT OF INCLUSION/EXCLUSION OF COMPARABLE IN ITS ORDER, WE DEEM IT FIT TO 36 ITA NO.5520/DEL./2011 REMAND THE MATTER BACK TO THE FILE OF DRP FOR FRESH ADJUDICATION. EX CONSEQUENTI, THE DRP ORDER IS SET ASIDE AND THE MAT TER REMANDED BACK TO THE FILE OF THE DRP FOR PASSING A SPEAKING ORDER IN RESPECT OF ALL THE GROUNDS RAISED BEFORE IT AND HAS TO DEAL WITH EACH OF THE COMPARABLES CONTESTED ABOVE BY THE ASSESSEE. NEEDLESS TO SAY T HAT WHEN CONSIDERING THE ARGUMENTS IN RESPECT TO SELECTION O F THE COMPARABLES, THE DRP MUST KEEP IN MIND THE FOLLOWING ASPECTS:- (A) COMPANIES WITH EXTRA ORDINARY CIRCUMSTANCES, LI KE THOSE WHICH SUFFERED EVENTS LIKE MERGER/DEMERGER, IMPACTI NG THE FINANCIAL RESULTS COULD NOT BE TREATED AS COMPARABL ES; (B) COMPANIES WHICH ARE FUNCTIONALLY DISSIMILAR CAN NOT BE TAKEN AS COMPARABLES; (C) COMPANIES ACTING MERELY AS INTERMEDIARY HAVING OUTSOURCED ITS ACTIVITY CANNOT BE CONSIDERED AS COMPARABLES; (D) COMPANIES WHOSE DIRECTORS WERE INVOLVED IN FRAU D CANNOT BE TAKEN AS COMPARABLE, AS THEIR FINANCIALS ARE NOT RELIABLE. 37 ITA NO.5520/DEL./2011 THE AFORESAID ASPECTS MAY BE KEPT IN MIND BY THE DR P WHILE ADDRESSING THE OBJECTIONS IN RESPECT TO INCLUSION / EXCLUSION OF COMPARABLES AND PASS A SPEAKING ORDER AFTER GIVING ADEQUATE OPPORTUNITY TO THE ASSESSEE. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL 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.