IHG IT Services (India) Pvt. Ltd., Gurgaon V. ITO, New Delhi

ITA 5890/DEL/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2685 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 11-08-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 23-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Y KAKKAR SENIOR
• Assessee Lawyers: VASANTH VASUDEVAN CAS
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Scheme of amalgamation
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I : NEW DELHI) BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL MEMBER ITA NO.5890 /DEL./2010 (ASSESSMENT YEAR : 2006-07) IHG IT SERVICES (INDIA) PVT. LTD., VS. ITO, WARD 1 1 (3), 11 TH FLOOR, BUILDING NO.10, TOWER C, NEW DELHI. DLF CYBER CITY, DLF PHASE II, GURGAON 122 002 (HARYANA) (PAN : AAHCS8349E) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI ATUL JAIN & VASANTH VASUDEVAN , CAS REVENUE BY : MS. Y. KAKKAR, SENIOR DR DATE OF HEARING : 11.08.2015 DATE OF PRONOUNCEMENT : 30.09.2015 O R D E R PER A.T. VARKEY, JUDICIAL MEMBER : THIS APPEAL, AT THE INSTANCE OF THE ASSESSEE, IS DI RECTED AGAINST THE ORDER DATED 21.10.2010 UNDER SECTION 143 (3) R EAD WITH SECTION 144C (5) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER R EFERRED TO THE ACT) IN PURSUANCE TO THE DIRECTION OF THE DRP-II, NEW DELHI FOR THE ASSESSMENT YEAR 2006-07. 2 ITA NO.5890/DEL/2010 2. THE ASSESSEE FILED E-RETURN OF INCOME ON 17.11.2 006 DECLARING AN INCOME OF RS.84,825/- WHICH WAS PROCESSED U/S 14 3 (1) OF THE ACT AND LATER ON SELECTED FOR SCRUTINY. 3. THE ASSESSEE COMPANY, A WHOLLY OWNED SUBSIDIARY OF INTERCONTINENTAL HOTELS GROUP (ASIA PACIFIC) PTE. L TD., SINGAPORE, IS ENGAGED INTER ALIA IN THE BUSINESS OF PROVIDING BAC K OFFICE ACCOUNTING SUPPORT TO GROUPS VARIOUS HOTELS AND CORPORATE OFF ICES ALL OVER THE WORLD AND REGISTERED AS 100% EXPORT ORIENTED UNIT F OR EXPORT OF COMPUTER SOFTWARE/IT ENABLED SERVICES (ITES). THIS ASSESSMENT YEAR IS THE FIRST YEAR OF COMMENCING ITS OPERATION. DUR ING THE YEAR, RECEIPTS BY WAY OF FEE OF RS.8,36,65,502/- AND OTHE R INCOME OF RS.8,32,618/- HAS BEEN SHOWN. 4. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSE E HAD ENTERED INTO INTERNATIONAL TRANSACTION FOR AN AGGREGATE VAL UE OF RS.8,36,65,502/-. THE CASE WAS REFERRED TO THE TRA NSFER PRICING OFFICER (TPO) FOR COMPUTATION OF ARMS LENGTH PRICE (ALP) FOR INTERNATIONAL TRANSACTION. 3 ITA NO.5890/DEL/2010 5. THE ALP OF THE INTERNATIONAL TRANSACTIONS REPRES ENTING THE ITES PROVIDED TO THE ASSOCIATED ENTERPRISES (AE) IS DETE RMINED BY APPLYING OF TRANSACTIONAL NET MARGIN METHOD (TNMM) WHICH IS STATED TO BE THE MOST APPROPRIATE METHOD IN THE FAC TS AND CIRCUMSTANCES OF THE CASE. THE OPERATING PROFIT TO TOTAL COST (OP/TC) RATIO IS TAKEN AS PROFIT LEVEL INDICATOR (PLI) IN T HE TNMM ANALYSIS. FOR COMPARING ASSESSEES NET PROFIT, THE ASSESSEE H AD IDENTIFIED 13 COMPARABLE COMPANIES AND THREE YEARS AVERAGE PLI OF THESE 13 COMPANIES WAS COMPUTED AS 15.70% (PAGE 134 OF THE P APER BOOK). 6. THE TPO VIDE ORDER DATED 26.08.2009 REJECTED THE TRANSFER PRICING STUDY OF THE ASSESSEE AND MODIFIED THE FILT ERS AND REJECTED FIVE COMPARABLES SELECTED BY THE ASSESSEE FROM THE 13 CO MPARABLES WHICH IT HAD USED IN ITS STUDY. THE OBJECTIONS IN RESPEC T TO INCLUSION OF TWO COMPARABLES, NAMELY, VISHAL INFORMATION TECHNOLOGIE S LTD. AND NUCLEUS NETSOFT & GIS INDIA LTD. WAS REJECTED BY TH E TPO AND WERE DULY INCLUDED IN THE FINAL COMPARABLES SELECTED BY HIM TO COMPUTE THE ALP. THEREAFTER, THE TPO SELECTED A LIST OF EIGHT COMPARABLES AND PROPOSED AN ADJUSTMENT OF RS.1,44,77,679/- BY COMPU TING THE MEAN PLI OF THE COMPARABLE COMPANIES AT 33.14% AS AGAINS T PLI OF 4 ITA NO.5890/DEL/2010 ASSESSEE AT 14.51%. THEREAFTER, THE DISPUTE RESOLU TION PANEL (DRP) VIDE ORDER DATED 27.09.2010 UPHELD THE ADJUSTMENT M ADE BY THE TPO, SUBJECT TO THE DIRECTION OF THE DRP THAT CORRECTED MARGINS OF THREE COMPARABLES BE USED WHILE COMPUTING THE ALP AND DIR ECTED TO RECOMPUTE THE OPERATING MARGIN OF THE ASSESSEE AS W ELL AS THE COMPARABLE COMPANIES. AS PER THE SAID DIRECTION, R EVISED FINAL LIST OF THE COMPARABLE COMPANIES IS AS UNDER :- 1. ACE SOFTWARE EXPORTS LTD. 8.24 2. ALLSEC TECHNOLOGIES LTD. 18.67 3. FORTUNE INFOTECH LTD. 17.35 4. NUCLEUS NETS OF AND GIF IND. LTD. 60.01 5. SPANCO LTD. 14.45 6. TRANSWORKS INFORMATION SERVICES LTD. 20.33 7. CSS TECHNOLOGIES LTD. 19.14 8. VISHAL INFORMATION TECHNOLOGIES LTD. 48.03 MEAN ARITHMETIC 25.78 AS A RESULT OF THE ABOVE, THE FINAL ASSESSMENT WAS COMPLETED VIDE ORDER DATED 21.10.2010 PASSED UNDER SECTION 143(3) READ WITH SECTION 144C (5) OF THE ACT ASSESSING THE TOTAL INCOME OF T HE ASSESSEE AT RS.91,37,130/- WHICH IS AS UNDER :- 1. TOTAL COST INCURRED BY ASSESSEE RS.7,37,14,272/- 2. ARMS LENGTH PRICE CALCULATED AS PER MARGIN 25.78% RS.9,27,17,811/- 3. REVENUE SHOWN RS.8,36,65,502/- 4. DIFFERENCE (2 3) RS.90,52,309 5 ITA NO.5890/DEL/2010 5. THE ASSESSMENT IS COMPLETED AS INCOME PROCESSED U/S 143 (1) RS.84,825/- 6. ADDITION FINALLY DETERMINED BY DISPUTE RESOLUTION PANEL RS.90,52,309/- RS.91,37,134/- 7. DURING THE COURSE OF HEARING, THE LD. COUNSEL FO R THE ASSESSEE SUBMITTED THAT ALL HIS CONTENTIONS VIS--VIS RAISED IN THE MEMO OF APPEAL ARE CONFINED TO THE INCLUSION OF ONE COMPARA BLE I.E. GENESYS INTERNATIONAL CORPORATION LTD. AND EXCLUSION OF TWO COMPANIES FROM THE LIST OF COMPARABLES WHICH IS FINALLY SELECTED, I.E. VISHAL INFORMATION TECHNOLOGIES LTD. AND NUCLEUS NETSOFT & GIS INDIA LTD. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERU SED THE MATERIAL ON RECORD. PICKING UP EACH OF THE COMPARA BLE CONTESTED BEFORE US IN THIS APPEAL, FIRST, WE TAKE GENESYS IN TERNATIONAL CORPORATION LTD. (I) GENESYS INTERNATIONAL CORPORATION LTD. 9. THE ASSESSEES GRIEVANCE IS THAT THE SAID COMPAN Y WHICH WAS INCLUDED IN ITS STUDY AS A COMPARABLE HAS BEEN REJ ECTED BY THE TPO BY HOLDING AS UNDER :- 6 ITA NO.5890/DEL/2010 THE ASSESSEES SALES HAVE GROWN FROM RS.4.61 CRORE S IN FY 2004-05 TO RS.8.37 CRORES IN FY 2005-06. WHILE THE ASSESSEE IS DEMONSTRATING SUCH GOOD RESULTS, THE SALES OF GE NESYS INTL. CORPN HAVE BEEN CONSISTENTLY FALLING FROM RS.23.90 CRORES IN FY 2002-03 TO RS.13.97 CRORES IN FY 2005-06. HENCE THE TWO CAN NEVER BE COMPARABLE. HENCE THIS COMPANY HAS BE EN RIGHTLY REJECTED. 10. THOUGH THE ASSESSEE HAS RAISED OBJECTION BEFORE THE DRP AGAINST THE EXCLUSION OF THE SAID COMPANY FROM THE LIST OF COMPARABLE COMPANIES ON THE GROUND OF IRREGULAR GROWTH PATTERN , WE FIND THAT THERE IS NO DISCUSSION BY THE DRP ON THE SAID OBJEC TION RAISED BY THE ASSESSEE. THE LD. AR SUBMITTED THAT RULE 10B(2) WH ICH ENUMERATES 4 COMPARABILITY PARAMETERS NOWHERE SPEAKS OF GROWTH PATTERN' OR 'DECLINE PATTERN' AS A COMPARABILITY PARAMETER. HE F URTHER SUBMITTED THAT EVEN AFTER DECLINE IN SALES OF GENESYS INTERNA TIONAL CORPORATION FROM RS.23.90 CRORES IN FY 2002-03 TO RS.13.97 CROR ES IN FY 2005- 06, THE SALES WERE MORE THAN THE ASSESSEES SALES O F RS.8.37 CRORES IN THAT YEAR. LD. AR SUBMITTED THAT THE SAID COMPANY S WAGES/ SALES RATIO AT 32% (PAGE 188 OF PB) WAS ALSO WITHIN THE R ANGE OF WAGES/ SALES RATIO OF OTHER ACCEPTED COMPARABLES AND THIS FIGURE OF 32 % WAS BASED ON DATABASE INFORMATION AND ON THE BASIS OF A NNUAL REPORT OF THIS COMPANY AND THE FIGURE STANDS REVISED FROM 32% TO 48%. HE 7 ITA NO.5890/DEL/2010 FURTHER SUBMITTED THAT HIGH OR LOW RATE OF PROFITS ARE NOT A PRESCRIBED FACTOR FOR INCLUDING OR EXCLUDING COMPARABLES. AND EXCLUSION IS JUSTIFIED ONLY IF HIGHER OR LOWER PROFIT RATE IS RE SULTED ON ACCOUNT OF EFFECT OF FACTORS GIVEN IN RULE 10B(2) R.W. SUB-RUL E (3). LD. AR POINTED OUT THAT FUNCTIONAL COMPARABILITY IS KEY CR ITERIA FOR TNMM AND GENESYS INTL. CORPN IS ALSO ENGAGED IN IT ENABL ED SERVICES, AND HAS BEEN CONSIDERED AS A COMPARABLE COMPANY FOR AY 2008-09 BY THE TPO HIMSELF. HE SUBMITTED THAT THE TURNOVER FILTER WAS NOT APPLIED BY EITHER ASSESSEE OR TPO WHILE SELECTING COMPARABLE C OMPANIES, SO ACCORDING TO LD. AR, A COMPANY CANNOT BE ARBITRARIL Y REJECTED ON THE BASIS OF TURNOVER. HE PRAYED THAT THIS COMPANY CAN NOT BE REJECTED FOR THE REASON OF DECLINING SALES WHEN THE TPO HAS NOT QUESTIONED FUNCTIONAL COMPARABILITY OF GENESYS INTERNATIONAL C ORPORATION LTD. ACCORDING TO HIM, THE INCREASE OR DECREASE IN REVEN UE, PROFIT, ETC. IS A COMMERCIAL REALITY AND USE OF SUCH REJECTION CRITER IA AMOUNTS TO IMPOSITION OF ARTIFICIAL CONDITIONS. THE LD. AR PO INTED OUT THAT DESPITE DECLINE IN TURNOVER, THE SALES OF GENESYS I NTERNATIONAL CORPORATION LTD. WAS MORE THAN THE ASSESSEES TURNO VER FOR FY 2005- 06. ACCORDING TO HIM, GENESYS HAS REPORTED INCREAS E IN THE 8 ITA NO.5890/DEL/2010 PROFITABILITY VIS--VIS THE PREVIOUS YEAR. THE LD. AR ALSO POINTED OUT THAT INCONSISTENT APPROACH OF THE TPO WHEREIN HE PO INTED OUT THAT ON ONE HAND, THE TPO REJECTED GENESYS INTERNATIONAL CO RPORATION LTD. FOR HAVING A DIFFERENT GROWTH PATTERN I.E. DECLININ G SALES WHEREAS, ON THE OTHER HAND, HE ACCEPTED ANOTHER COMPANY I.E. NU CLEUS NETSOFT & GIS INDIA LTD. WHICH HAD REPORTED MORE THAN 350% IN CREASE IN OPERATING REVENUE DURING THE YEAR UNDER CONSIDERATI ON AND HE TOOK OUR ATTENTION TO THE ORDER OF THE TRIBUNAL IN NORTEL NE TWORKS INDIA P. LTD. VS. ADDL.CIT (ITA NOS.4765/DEL/2011 & 427/DEL/2013) WHEREIN IT HAS BEEN HELD THAT, A COMPANY CANNOT BE EXCLUDED FROM THE COMPARABLES MERELY FOR THE REASON OF HAVING LOW TUR NOVER. THUS, THE LD. AR PLEADED THAT THIS COMPANY MAY BE RETAINE D IN THE LIST OF COMPARABLES. 11. ON THE OTHER HAND, THE LD. DR TOOK OUR ATTENTIO N TO PAGE 33 OF THE ANNUAL REPORT OF GENESYS INTERNATIONAL CORPORAT ION LTD. WHEREIN SCHEDULE M COMPANYS BACKGROUND IS STATED THAT GE NESYS INTERNATIONAL CORPORATION LTD. IS ENGAGED IN PROVID ING GEOGRAPHICAL INFORMATION SERVICES COMPRISING PHOTOGRAMMETRY, REM OTE SENSING, CARTOGRAPHY, DATA CONVERSION, RELATED COMPUTER BASE D SERVICES AND 9 ITA NO.5890/DEL/2010 INFORMATION TECHNOLOGY ENABLED AND OTHER RELATED SE RVICES, WHEREAS THE ASSESSEE IS ONLY ENGAGED IN BACK OFFICE SUPPORT I.E. ITES TO ITS AE AND POINTED OUT THAT THE FUNCTIONAL PROFILE OF THIS COMPANY, GENESYS INTERNATIONAL CORPORATION LTD., IS TECHNOLOGY DRIVE N. SO, THEREFORE, IT IS NOT FUNCTIONALLY SIMILAR AND, THEREFORE, THE TPO RIGHTLY DID NOT INCLUDE THE SAID COMPANY IN THE LIST OF COMPARABLES THOUGH HAS NOT COMMENTED UPON THE FUNCTIONAL DIS-SIMILARITY WITH T HE ASSESSEE. 12. WE HAVE HEARD BOTH THE PARTIES, HAVE GONE THROUG H THE RECORDS AND GONE THROUGH THE ANNUAL REPORT OF GENESYS INTER NATIONAL CORPORATION LTD. WE FIND THAT THE ASSESSEE IS ENGA GED IN THE BACK OFFICE SUPPORT ITES SYSTEM FOR ITS AE IN RESPECT OF ACCOUNTING SUPPORT, BILLING, ACCOUNT RECONCILIATION, ETC. WHER EAS WE FIND THAT GENESYS INTERNATIONAL CORPORATION LTD. IS INTO MAPP ING BUSINESS AND IT PROVIDES GEOGRAPHICAL INFORMATION SERVICES COMPR ISING PHOTOGRAMMETRY, REMOTE SENSING, CARTOGRAPHY, DATA C ONVERSION, RELATED COMPUTER BASED SERVICES AND INFORMATION TEC HNOLOGY ENABLED AND OTHER RELATED SERVICES, WHICH CANNOT BE BY ANY STRETCH OF IMAGINATION BE SAID TO BE COMPARABLE TO THAT OF THE ASSESSEE. SINCE GENESYS INTERNATIONAL CORPORATION LTD. IS FUNCTIONA LLY DIS-SIMILAR 10 ITA NO.5890/DEL/2010 WITH THAT OF THE ASSESSEE, WE ENDORSE THE DECISION OF THE TPO TO EXCLUDE THE SAID COMPANY FROM THE LIST OF COMPARABL ES THOUGH ON A DIFFERENT GROUND THAN THAT HAS BEEN STATED BY THE T PO. (II) VISHAL INFORMATION TECHNOLOGIES LTD. 13. THE ASSESSEE IS AGGRIEVED BY THE INCLUSION OF T HIS COMPANY IN THE FINAL LIST OF COMPARABLES THOUGH THE SAID COMPA NY WAS INCLUDED INITIALLY BY THE ASSESSEE IN ITS LIST OF COMPARABLE S TO CALCULATE THE ALP. THE ASSESSEE THOUGH HAD INCLUDED THE SAID COMPANY I N ITS LIST OF COMPARABLES HAS EVERY RIGHT TO OBJECT TO ITS INCLUS ION BEFORE THE TPO BECAUSE THERE IS NO ESTOPPEL AGAINST LAW. SO THE C ONTENTION OF THE LD. DR AGAINST THE ASSESSEE TURNING AROUND TO OBJECT TO THE SAID COMPANY BEING INCLUDED IN THE LIST OF COMPARABLES IS REJECT ED. 14. THE OBJECTION OF THE ASSESSEE WAS REJECTED BY T HE TPO AS UNDER:- THE ASSESSEE HAS TRIED TO MAKE SOME ARGUMENT ABOUT THE WAGES/SALES RATIO OF SOME OF THE COMPANIES. IT BE M ENTIONED HERE THAT NASSCOM-CRISIL ALSO CONDUCTED A STUDY PUB LISHED IN FEB 2007, REGARDING THE COST STRUCTURE AND PROFI T MARGINS OF IT COMPANIES IN INDIA. AS PER THIS SURVEY THE WAGES AND SALARY CONSTITUTES A MAJOR PART OF THE COST INCURRED BY TH E IT/ITES COMPANIES IN INDIA. SALARIES AND WAGES 46.1%...... .. THE ASSESSEE'S WAGES/SALES RATIO IS 53%. THIS ITSELF IS BEYOND THE RESULTS THROWN UP BY THE NASSCOM SURVEY. HENCE A 11 ITA NO.5890/DEL/2010 WAGES/SALES ANALYSIS OF COMPARABLES IN THIS CASE CA NNOT BE A PRIMARY FILTER. 15. AGAINST THE SAID INCLUSION MADE BY THE TPO, THE ASSESSEE OBJECTED BEFORE THE DRP THE INCLUSION OF THE SAID C OMPANY AS UNDER :- IT MAY BE MENTIONED THAT THE TPO HAS ONLY POINTED THAT AS A SAMPLE THE WAGES/ SALES RATIO OF THE FINALLY CHOSEN SET OF COMPARABLES FALL IN THE ACCEPTABLE BAND OF WAGES/ S ALES RATIO, AS COMPARED TO THE ASSESSEE'S RATIO. THE TPO HAS GIVEN VALID REASONS FOR SELECTION OF VISHAL INFORMATION TECHNOL OGIES LIMITED...... IN VIEW OF THE DETAILED DISCUSSIONS IN THE TPO'S ORDER, WE DECLINE TO INTERFERE IN THE ORDER OF THE TPO IN SO FAR AS SELECTION OF THE COMPARABLES IS CONCERNED.' 16. THE LD. AR POINTED OUT THAT IN THE SHOW-CAUSE N OTICE ISSUED BY THE TPO AT PAGE 24 OF THE PAPER BOOK, THE TPO DID R EFER TO THE WAGES TO SALES RATIO OF ACCEPTED COMPARABLES BETWEEN 18.6 7% TO 51.8% AND ALSO MENTIONED THAT ALL COMPARABLES CHOSEN FALL IN AN ACCEPTABLE BAND OF WAGES/SALES RATIO WHEN COMPARED TO ASSESSEES RA TIO OF 53%. THE LD. AR SUBMITTED THAT THE SAID COMPANY SHOULD BE EX CLUDED FROM THE FINAL LIST OF COMPARABLES OF TPO. ACCORDING TO HIM , THE COMPANY IS FUNCTIONALLY DIS-SIMILAR CARRIES INVENTORY IN ITS B ALANCE SHEET REPRESENTING 20.18% OF THE NET CURRENT ASSETS. IT HAS A LOW EMPLOYEE COST OF 1.25% OF OPERATING REVENUE AND HAS OUTSOURC ED BUSINESS OF 12 ITA NO.5890/DEL/2010 44.81% OF OPERATING INCOME. ACCORDING TO THE LD. A R, THIS COMPANY PERFORMS HIGHLY AUTOMATED SERVICES LIKE DATA DIGITI ZATION. SO, THIS COMPANY CANNOT BE COMPARED WITH THAT OF THE ASSESSE E. LD. AR POINTED OUT THAT THE COMPANY IS ENGAGED IN PROVIDIN G SOLUTIONS TO THE PRINT PRODUCTION INDUSTRY WITH SERVICES LIKE E-PUBL ISHING, E-BOOK, PRINT ON DEMAND, DATA AND DOCUMENT MANAGEMENT, DATA CONVE RSION, DIGITAL LIBRARY MANAGEMENT ETC. ACCORDINGLY IT MAINTAINS IN VENTORY THUS THE SAID COMPANY IS FUNCTIONALLY DIFFERENT TO THE ASSES SEES BUSINESS. FURTHER, HE SUBMITTED THAT VISHAL CARRIES INVENTORY IN ITS BALANCE SHEET AMOUNTING TO RS.4.23 CRORES REPRESENTING 20.18% OF THE NET CURRENT ASSETS AND INVENTORY IS USUALLY NIL IN A TYPICAL IT ES COMPANY. THE LD. AR POINTED OUT THAT WHEN TPO HAS HIMSELF REFERRED T O THE NASSCOM SURVEY THAT THE AVERAGE WAGES AND SALARIES TO SALES RATIO OF IT/ITES INDUSTRY IN INDIA WAS 46.1 %, THERE WAS NO REASON TO ACCEPT VISHAL INFO TECHNOLOGIES LTD WITH WAGES/ SAL ES RATIO OF 1.25% AS FUNCTIONALLY COMPARABLE. THE LD. AR SUBMITTED TH AT THE MAIN ASSET USED IN ITES INDUSTRY IS MANPOWER ONLY, SO THE WAGE S/ SALES RATIO SHOULD BE A PRIMARY FILTER FOR SELECTING COMPARABLE IN ITES INDUSTRY 13 ITA NO.5890/DEL/2010 HE FURTHER SUBMITTED THAT THE ASSESSEES WAGES TO S ALES IS 53%, WHICH CANNOT BE CONSIDERED AS COMPARABLE TO VISHAL AT 1.2 5%. 17. HAVING CONSIDERED THE ABOVE OBJECTION, WE ARE I N AGREEMENT WITH THE SUBMISSION OF THE LD. COUNSEL THAT VISHAL INFORMATION TECHNOLOGIES LTD. IS NOT A VALID COMPARABLE AS HELD IN GOOGLE INDIA PVT. LTD. VS. DCIT, BANGALORE (ITA NO.1368/BANG./20 10 FOR AY 2006-07) WHEREIN GOOGLE INDIA WAS ENGAGED IN THE BU SINESS OF SOFTWARE DEVELOPMENT SERVICES AND ITES. THE OBJECT ION IN REGARD TO EXCLUSION OF THE SAID COMPANY FROM THE LIST OF COMP ARABLES WAS ACCEPTED BY THE TRIBUNAL AND HELD AS UNDER :- 15. AS REGARDS THE ISSUE OF (8) VISHAL INFORMATION TECHNOLOGIES LTD., WE FIND THAT, IT IS ADOPTED BY T HE TPO. THE DRP HELD THAT VISHAL INFORMATION TECHNOLOGIES HAS O UTSOURCED ITS CALL CENTRE WORK AND, THEREFORE, THE EMPLOYEE C OST IS LESS THAN 25% AS IS THE COMMON PRACTICE AMONG OTHER ITES SERV ICES. THE TPO AS WELL AS THE DRP HAVE RECORDED THAT IN THE IT ES SECTOR, EMPLOYEES FILTER OF LESS THAN 25% ALONE IS NOT APPL ICABLE FOR THE REASON THAT IN ADDITION TO THE AMPLE COSTS, THE COM MISSION COSTS ARE ALSO IMPORTANT. WHEN COMPANY HAS OUTSOURCED ITS ITES SERVICES, IT CANNOT BE SAID THAT ITS BUSINESS RESUL TS WOULD BE COMPARABLE TO ANY OTHER ITES SERVICE PROVIDER RENDE RING THE SERVICES ENTIRELY ON ITS OWN. IN SUCH CIRCUMSTANCES , THE NET MARGINS OF THE TWO COMPARABLES CANNOT BE ON THE SAM E BASIS. THE DECISIONS RELIED UPON BY THE LEARNED COUNSEL FO R THE ASSESSEE ALSO HELD THAT THE EMPLOYEE COST FILTER IS IMPORTAN T FILTER TO BE ADOPTED FOR THE PURPOSE OF COMPUTING ALP. IN THE CA SE OF MAERSK GLOBAL SERVICES CENTRE (INDIA) PVT. LTD., IN ITA NO.3774/M/2011, THE TRIBUNAL AT MUMBAI HAS HELD THA T VISHAL 14 ITA NO.5890/DEL/2010 INFORMATION TECHNOLOGIES LTD. HAS TO BE EXCLUDED FR OM THE LIST OF COMPARABLES OF ITES COMPANY AS IT HAS OUTSOURCED ITS SERVICES. IN VIEW OF THE SAME, WE DIRECT THE AO TO EXCLUDE THIS COMPANY ALSO FROM THE LIST OF COMPARABLES. HAVING REGARD TO THE ABOVE DECISION AND HAVING GONE THROUGH THE ANNUAL REPORT, WE CONCUR THAT WHEN THE COMPANY HAS OUTSOURCED ITS SERVICE, IT CANNOT BE SAID THAT ITS BUSINESS RESULT S WOULD BE COMPARABLE TO ANY OTHER ITES PROVIDER RENDERING THE SERVICES E NTIRELY ON ITS OWN. SO, THE NET MARGINS OF THE TWO COMPANIES CANNOT BE ON THE SAME BASIS. WE RELY ALSO ON THE HONBLE JURISDICTIONAL HIGH COU RT DECISION IN THE CASE OF RAMPGREEN SOLUTIONS PVT. LTD. VS. CIT (ITA 102/2015 ORDER DATED 10.08.2015) WHEREIN THE HONBLE HIGH COURT HE LD AS UNDER :- 38. IN OUR VIEW, EVEN VISHAL COULD NOT BE CONSIDER ED AS A COMPARABLE, AS ADMITTEDLY, ITS BUSINESS MODEL WAS C OMPLETELY DIFFERENT. ADMITTEDLY, VISHALS EXPENDITURE ON EMPL OYMENT COST DURING THE RELEVANT PERIOD WAS A SMALL FRACTION OF THE PROPORTIONATE COST INCURRED BY THE ASSESSEE, APPARENTLY, FOR THE REASON THAT MOST OF ITS WORK WAS OUTSOURCED TO OTHER VENDORS/SERVICE PROVIDERS. THE DRP AND THE TRIBUNAL ERRED IN BRUSHING ASIDE THIS V ITAL DIFFERENCE BY OBSERVING THAT OUTSOURCING WAS COMMON IN ITES IN DUSTRY AND THE SAME WOULD NOT HAVE A BEARING ON PROFITABILITY. PLAINLY, A BUSINESS MODEL WHERE SERVICES ARE RENDERED BY EMPLO YING OWN EMPLOYEES AND USING ONES OWN INFRASTRUCTURE WOULD HAVE A DIFFERENT COST STRUCTURE AS COMPARED TO A BUSINESS MODEL WHERE SERVICES ARE OUTSOURCED. THERE WAS NO MATERIAL FOR THE TRIBUNAL TO CONCLUDE THAT THE OUTSOURCING OF SERVICES BY VISHAL WOULD HAVE NO BEARING ON THE PROFITABILITY OF THE SAID ENTITY. 15 ITA NO.5890/DEL/2010 18. IN THE LIGHT OF THE ABOVE, WE ARE OF THE OPINIO N THAT VISHAL INFORMATION TECHNOLOGIES LTD. CANNOT BE USED AS A C OMPARABLE AND SO WE DIRECT THE AO TO EXCLUDE THIS COMPANY FROM THE L IST OF COMPARABLES. (III) NUCLEUS NETSOFT & GIS INDIA LTD. 19. THE LD. AR CONTENDED THAT NUCLEUS NETSOFT & GIS INDIA LTD. CANNOT BE COMPARED WITH THAT OF THE ASSESSEE BECAUS E THE SEGMENTAL DETAILS ARE NOT AVAILABLE AND EXTRA ORDINARY EVENT I.E. AMALGAMATION HAS TAKEN PLACE IN THE RELEVANT FINANCIAL YEAR. HE TOOK US TO PAGE 7 AND 31 OF THE ANNUAL REPORT TO SHOW THAT THERE HAS BEEN AMALGAMATION. THE LD. DR COULD NOT CONTROVERT THE SAID FACT OF AM ALGAMATION TAKING PLACE IN THE CASE OF THE SAID COMPANY. 20. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD. A PERUSAL OF THE ANNUAL REPORT SHOWS THAT AN EXTRA ORDINARY EVENT OF AMALGAMATION HAS TAKEN PLACED IN THE RELEV ANT ASSESSMENT YEAR UNDER CONSIDERATION AS FOLLOWS:- .THE SCHEME OF AMALGAMATION (THE SCHEME) OF ER STWHILE NUCLEUS NETSOFT & GIS (INDIA) LTD., THE TRANSFEROR COMPANY, WITH 16 ITA NO.5890/DEL/2010 THE COMPANY WAS SANCTIONED BY HONBLE HIGH COURT OF JUDICATURE OF BOMBAY ON 22 ND FEBRUARY, 2006. ON COMPLYING WITH THE REQUISITE FORMALITIES, THE SCHEME BECAME EFFECTIVE AND OPERATIVE RETROSPECTIVELY FROM THE APPOINTED DATE OF 1 APRIL 2005 AS PER THE SCHEME. IN THE ACCOMPANYING FINANCIAL STATEMENTS, RESULTS OF THE TRANSFEROR COMPANY HAVE BEEN INCORPORATED AND THE F IGURES GIVEN HEREIN AND ELSEWHERE IN THIS ANNUAL REPORT ARE NOT STRICTLY COMPARABLE WITH THOSE OF PREVIOUS YEAR. WE FIND THAT THIS COMPANY, NUCLEUS NETSOFT & GIS IN DIA LTD., HAS DURING THE YEAR OUTSOURCED SUBSTANTIAL PART OF ITS BUSINESS TO OUTSIDE VENDORS. THEREFORE, WE ARE OF THE OPINION THAT THI S COMPANY SHOULD BE EXCLUDED FROM THE SET OF COMPARABLES. IT IS ORD ERED ACCORDINGLY. 21. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF SEPTEMBER, 2015. SD/- SD/- (R.S. SYAL) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: THE 30 TH DAY OF SEPTEMBER, 2015 TS COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A)-IX, NEW DELHI. 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI