Equant Solutions India Pvt. Ltd., Gurgaon V. ACIT, Gurgaon

ITA 5906/DEL/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97278 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 9 month(s) 22 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: 2008-2009
• Appeal Filed On: 26-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BHASKAR GOSWAMI SENIOR
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary

Judgement Text

1 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.5906/DEL./2012 (ASSESSMENT YEAR : 2008-09) 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 DI RECTED AGAINST THE ASSESSMENT ORDER DATED 24.08.2012 PASSED U/S 14 3(3) R.W.S 144C OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT) FOR THE ASSESSMENT YEAR 2006-07. 2 ITA NO.5906/DEL./2012 2. THE APPELLANT/ASSESSEE, EQUANT SOLUTIONS INDIA P RIVATE LIMITED (THE COMPANY' / 'ASSESSEE) IS A SUBSIDIARY OF EGN BY NETHERLANDS. DURING THE RELEVANT ASSESSMENT YEAR (AY) 2008-09 I. E. FINANCIAL YEAR (FY) 2007-08, THE ASSESSEE WAS PRIMARILY ENGAGED IN PROVIDING SERVICES IN FOLLOWING TWO SEGMENTS:- (I) INFORMATION TECHNOLOGY ENABLED SERVICES (HEREINAFTE R REFERRED TO AS 'ITES') - INFORMATION TECHNOLOGY ENABLED NETW ORK MANAGEMENT / TECHNICAL SUPPORT AND OTHER BACK-OFFIC E SUPPORT SERVICES IN THE NATURE OF REMOTE MONITORING AND MAI NTENANCE OF THE EQUANT'S GLOBAL NETWORK PLATFORMS AND SERVIC ES, COORDINATION AND REMOTE CONFIGURATION AND IMPLEMENT ATION OF QUALITY CUSTOMER NETWORKING SOLUTIONS TO ITS GROUP COMPANY IN IRELAND, EQUANT NETWORK SERVICES INTERNATIONAL L TD. (II) CONTRACT SOFTWARE DEVELOPMENT SERVICES (HEREINAFTER REFERRED TO AS 'CSD') FOR DEVELOPING SOFTWARE APPLICATIONS F OR USE WITHIN EQUANT GROUP/ ASSOCIATED ENTERPRISES (HEREIN AFTER 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 3 ITA NO.5906/DEL./2012 THE ACCOUNTANT'S REPORT (FORM NO 3CEB) FILED ALONG WITH THE RETURN OF INCOME :- SR. NO. NATURE OF TRANSACTIONS VALUE (RS.) METHOD APPLIED OUTCOME AFTER DRP 1 PROVISION OF INFORMATION TECHNOLOGY SERVICES PROVISION OF ITES SERVICES 1,32,75,03,839 TRANSACTIONAL NET MARGIN METHOD (TNMM) ADJUSTMEN T PROVISION OF CSD SERVICES 2 PURCHASE OF FIXED ASSETS 48,44,593 ACCEPTED 3 REIMBURSEMENT OF EXPENSES PAID 2,58,57,152 ACCEPTED 4 INTEREST ON LOAN 1,89,13,353 COMPARABLE UNCONTROLLED PRICE METHOD (CUP) ACCEPTED 4. DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS, THE TRANSFER PRICING OFFICER'S ( HEREINAFTER REFERRED TO AS 'TPO') ASKED FOR CURRENT YEAR I.E. FY 2007-08 DATA, SO FRESH SEARCH RESULTS WERE SUBMITTED BY THE ASSESSEE. A SUMMARY OF THE FRESH SEARCH RESULTS FOR THE ITES AND THE CSD SERVICES IS AS FOLLOWS: PARTICULARS ITES CSD NO OF COMPARABLES 11 9 MEAN OP/TC 10.47% 12.01% ASSESSEE S OP/TC CONSIDERING FOREX GAIN/ LOSS AS NON-OPERATING IN NATURE 15.03% 15.03% ASSESSEES OP/TC CONSIDERING FOREX GAIN/ LOSS AS OPERATING IN NATURE 17.47% 17.47% 5. THE TPO, AFTER REJECTING THE ASSESSEE'S BENCHMAR KING STUDY IN THE TP REPORT AS WELL AS THE FRESH SEARCH PROVIDED BY THE ASSESSEE, 4 ITA NO.5906/DEL./2012 UNDERTOOK A FRESH SEARCH USING CURRENT YEAR DATA ON HIS OWN ACCORD USING ARBITRARY QUANTITATIVE AND QUALITATIVE FILTER S AND PROPOSED A SET OF 20 COMPARABLES IN CASE OF CSD SERVICES WITH MEAN OP I TC MARGIN OF 26.16% (23.38% AFTER WORKING CAPITAL ADJU STMENT) AND 21 COMPARABLES IN THE ITES SET WITH MEAN OP ITC MARGIN OF 29.10% (25.37% AFTER WORKING CAPITAL ADJUSTMENT) THE TP OR DER. 6. THE TPO PROPOSED AN ADJUSTMENT OF RS. 92,29,906 TO THE INCOME FROM THE CSD SEGMENT (WITHOUT GIVING BENEFIT OF THE +1-5% RANGE AS PRESCRIBED BY PROVISO TO SECTION 92C(2) OF THE ACT) AND AN ADJUSTMENT OF RS. 7,90,25,482 TO THE INCOME FROM TH E ITES SEGMENT. THE ABOVE ADJUSTMENT MADE BY THE LD. TPO TO THE INC OME OF THE ASSESSEE WAS UPHELD BY THE AO IN HIS DRAFT ASSESSME NT ORDER. THE ASSESSEE FILED DETAILED OBJECTIONS BEFORE THE DISPU TE RESOLUTION PANEL (DRP') AGAINST THE ADJUSTMENT MADE BY THE AO. THE DRP DIRECTED THE AO/TPO TO PROVIDE BENEFIT OF THE +1-5% RANGE AN D TO VERIFY THE MARGIN COMPUTATIONS OF THE COMPARABLES PROPOSED IN THE TP ORDER. 7. BASED ON LD. DRP DIRECTIONS, THE ADJUSTMENT MADE BY THE LD. TPO TO THE CSD SEGMENT WAS DELETED AS THE ARM'S LEN GTH MARK-UP OF 23.38% WAS WITHIN THE + 1-5% RANGE OF THE MARK-UP O F THE ASSESSEE. 5 ITA NO.5906/DEL./2012 FURTHER, THE LD. TPO VERIFIED THE FACTUAL ERRORS IN COMPUTATION, AND IT WAS OBSERVED THAT THE MARK-UP OF ONE OF THE COM PAR ABLES, NAMELY GOLDSTONE TECHNOLOGIES LIMITED HAS BEEN INCORRECTLY CONSIDERED AT 28% INSTEAD OF 25.87%. THE LD. TPO THEN REVISED THE ALP OF THE ITES SEGMENT TO 25.26% AND PROPOSED AN ADJUSTMENT O F RS.7,79,45,050 TO THE INCOME OF THE ASSESSEE FROM T HE ITES ACTIVITY. 8. THE FINAL SET OF ITES COMPARABLES AND THEIR MARK -UP COMPUTATIONS POST DRP DIRECTIONS IS TABULATED BELOW :- ITES TP ORDER COMPARABLES S.NO. NAME OF THE COMPANY WORKING CAPITAL ADJUSTED (OP/TC)% 1. ACCENTIA TECHNOLOGIES LTD 39.60% 2. ADITYA BIRLA MINACS WORLDWIDE LTD. -9.12% 3. ASIT C. MEHTA FINANCIAL SERVICES LTD. 6.93% 4. CALIBER POINT BUSINESS SOLUTIONS LTD 6.72% 5. CORAL HUB LIMITED (VISHAL INFORMATION TECHNOLOGIES LTD) 38.13% 6. COSMIC GLOBAL LTD. 23.42% 7. CROSSDOMAIN SOLUTION P LTD. 25.40% 8. DATAMATICS FINANCIAL SERVICES LTD (BPO DIVISION) 32.60% 9. E4E HEALTHCARE BUSINESS SOLUTIONS P. LTD. (EARLIER KNOWN AS NITTAN OUTSOURCING SERVICES LTD.) 14.08% 10. ECLERX SERVICES LTD. 64.02% 11. GENESYS INTERNATIONAL CORPORATION LTD 44.07% 12. H C L COMNET SYSTEMS & SERVICES LTD (SEG.) 29.60% 13. I C RA ONLINE LTD. (SEG.) 7.65% 6 ITA NO.5906/DEL./2012 14. INFOSYS B P O LTD 18.16 15. ISERVICES INDIA PVT LTD 7.78% 16. MOLD- TEK TECHNOLOGIES LTD 89.40% 17. SPANCO LTD. (SEG.) 3.11% 18. ACROPETAL TECHNOLOGIES LTD (SEG.) 27.99% 19. WIPRO LTD. (SEG.) 35.52% 20. R SYSTEMS INTERNATIONAL LTD. (SEG.) 2.65% 21. GOLDSTONE TECHNOLOGIES LTD 25.87% AVERAGE 25.26% 9. THE AO, IN CONFORMITY WITH THE TP ORDER, UPHELD THE ADJUSTMENT AND PROCEEDED TO ISSUE THE DRAFT ASSESSMENT ORDER U /S 144C(1) OF THE ACT. 10. AGGRIEVED WITH THE DRP DIRECTIONS AS WELL AS FI NAL ASSESSMENT ORDER, THE ASSESSEE FILED AN APPEAL BEFORE THE INCO ME TAX APPELLATE TRIBUNAL (ITAT). 11. THE MAIN GRIEVANCE OF THE ASSESSEE IS IN RESPEC T TO INCLUSION / EXCLUSION OF COMPARABLES. 12. LD. AR CONTENDED THAT BUSINESS RESTRUCTURING AC TIVITIES / MERGERS / AMALGAMATIONS / EXTRA ORDINARY CIRCUMSTAN CES (I) ACCENTIA TECHNOLOGIES LIMITED ('ACCENTIA') LD. AR SUBMITTED THAT AMALGAMATION TOOK PLACE IN T HIS YEAR AND TOOK OUR ATTENTION TO EXHIBIT 1. LD. AR SUBMITTED THAT ACCENTIA 7 ITA NO.5906/DEL./2012 DURING THE SAID YEAR AMALGAMATED WITH THE UNITS IN TRIVANDRUM, NAMELY IRIDIUM TECHNOLOGIES & GEOSOFT TECHNOLOGIES. LD. AR RELIED ON THE FOLLOWING CASE LAWS :- SYMPHONY MARKETING SOLUTIONS INDIA LTD [IT(TP) NO.1316/BANG/2012 (AY 2008-09) HYUNDAI MOTORS INDIA ENGINEERING PVT. LTD ITA NO. 1850/HYD/2012) (AY 2008-09) CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. V. D CIT [ITA NO.124/HYD/2014 & ITA NO.170/HYD/2014 (AY 2009-10) MINDTECK (INDIA) LTD (IT(TP)A.NO.70/BANG/2014)(AY 2009-10) FURTHER, ACCENTIA HAS VERY LOW EMPLOYEE COST TO SA LES RATIO DURING FY 2007-08 :- PARTICULARS AMOUNT (IN RS.) SALES & SERVICES (A) 509,346,944 EMPLOYEE COST (B) 60,018,773 SALARY & ALLOWANCES TO STAFF 54,844,678 SALARIES TO DIRECTORS 1,560,000 CONTRIBUTION TO ESI 38,507 CONTRIBUTION TO PF 476,925 STAFF WELFARE EXPENSES 1,708,901 TRAINING & RECRUITMENT EXPENSES 1,289,762 EMPLOYEE COST FILTER (B)/(A) 11.78% LD. AR RELIED ON THE DECISION OF SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD [TS-234-ITAT-2013(BANG)-TP](A.Y 2008 -09) 8 ITA NO.5906/DEL./2012 LD. AR ALSO SUBMITTED THAT ACCENTIA PROVIDES MEDIC AL TRANSCRIPTION, MEDICAL CODING, MEDICAL BILLING SERV ICES AND ALSO SOFTWARE DEVELOPMENT SERVICES AND OPERATES IN ONE S EGMENT AND COMPANY OWNS PRODUCTS, SUCH AS, IMTAS, IRTS, IAMS, IPMS ETC. LD. AR SUBMITTED THAT STANDALONE SEGMENTAL INFORMA TION IS NOT AVAILABLE. LD. AR RELIED ON THE FOLLOWING CASE LAWS :- VODAFONE INDIA SERVICES PVT. LTD. (FORMERLY 3 GLOBA L SERVICES P. LTD.) (ITA NO. 7140/MUM/2012 AND ITA NO. 7097/MUM/2012)(AY 2009-10) MAERSK GLOBAL SERVICE CENTRES (INDIA) PVT LTD (ITA NO. 2594/MUM/2014 (AY 2009-10) TNS INDIA PVT LTD (ITA NO.604 & 419/HYD/2014)(AY 20 09-10) BNY MELLON INTERNATIONAL OPERATIONS (INDIA) PVT. LT D. [TS-3S8- ITAT-2014(PUN)-TP) (AY 2009-10) (II) ASIT C. MEHTA FINANCIAL SERVICES LIMITED ('ASIT') LD. AR SUBMITTED THAT TRANSFER OF BUSINESS TOOK PL ACE IN THIS YEAR AND TOOK OUR ATTENTION TO EXHIBIT 2. HE SUBMI TTED THAT ASIT IS ENGAGED IN PROVISION OF HIGH-END SERVICES IN THE NA TURE OF GIS SERVICES ETC. WHICH IS FUNCTIONALLY DIFFERENT FROM THE ITES SERVICES UNDERTAKEN BY THE ASSESSEE. FURTHER, LD. AR SUBMITT ED THAT THE 9 ITA NO.5906/DEL./2012 COMPANY ALSO SELLS GOODS AND PRODUCTS (STOCK-IN-TRA DE- RS.621,448 & COST OF GOODS SOLD RS.22,79,225). LD. AR ALSO SUBMITTED THAT DURING THE YEAR, ASIT H AS TRANSFERRED BUSINESS OF THE COMPANY'S ITES BUSINESS TO A WHOLLY OWNED SUBSIDIARY - NUCLEUS GIS AND ITES LTD. LD. AR RELIED ON THE DECISION OF AVINEON INDIA PVT .LTD (ITA NO.1989/HYD/2011) (AY 2007-08) (III) MOLD -TEK TECHNOLOGIES LIMITED ('MOLD-TEK') LD. AR SUBMITTED THAT IN THE CASE OF COMPARABLE, DEMERGER TOOK PLACE IN THIS YEAR AND TOOK OUR ATTENTION TO EXHIBI T 9. HE SUBMITTED THAT DURING THE YEAR, MOLD-TEK DEMERGED WITH TECKME N TOOLS LIMITED WHICH HAS IMPACTED ITS PROFITABILITY. LD. AR SUBMITTED RELIED ON THE FOLLOWING CASE LAW S:- KNOAH SOLUTIONS PUT LTD (ITA NO.1407/HYD/2013)(AY 2 007-08) CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. (I TA NO.1961/HYD/2011) (AY 2007-08). 10 ITA NO.5906/DEL./2012 LD. AR FURTHER SUBMITTED THAT IT PROVIDES HIGH E ND STRUCTURAL ENGINEERING KPO SERVICES TO VARIOUS CLIENTS AND ALS O HAS AN IN-HOUSE SOFTWARE DEVELOPMENT TEAM, QUALITY CONTROL TRAINING AND TROUBLE- SHOOTING FACILITIES. LD. AR RELIED ON THE FOLLOWING CASE LAWS :- SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD [IT(TP) NO. 1316/BANG/2012] A.Y 2008-09) LIONBRIDGE TECHNOLOGIES PVT LTD (ITA NO.7498/MUM/20 12)(AY 2008-09) COGNIZANT TECHNOLOGY SERVICES PVT. LTD. [ITA NOS.2106/HYD/2011](AY 2007-08) AND 1864/HYD/2012 (A Y 2008- 09) ZAVATA INDIA PRIVATE LIMITED (ITA NO. 1781/HYD/2011 ) (AY 2007- 08) (IV) WIPRO LTD. (SEG.) (WIPRO) LD. AR SUBMITTED THAT AMALGAMATION TOOK PLACE IN THIS YEAR AND TOOK OUR ATTENTION TO EXHIBIT 11. HE SUBMITTED THAT DURING THE YEAR, THERE WAS AN AMALGAMATION OF WIPRO INFRASTRUCT URE ENGINEERING LIMITED, WIPRO HEALTHCARE IT LIMITED, QUANTECH GLOBA L SERVICES LIMITED WITH WIPRO LIMITED. FURTHER, WIPRO ACQUIRED INFOCROSSING INC., & OK! TECHNO CENTRE SINGAPORE PTE. 11 ITA NO.5906/DEL./2012 LD. AR SUBMITTED THAT THERE IS SIGNIFICANT SPENDING ON R&D ACTIVITIES BY WIPRO CURRENTLY INVOLVED IN 40 INNOVAT ION PROJECTS AND HAS CONTRIBUTED 11% OF GLOBAL IT SERVICES AND PRODU CTS REVENUE. HE SUBMITTED THAT WIPRO HAS 40 REGISTERED PATENTS. FURT HER, THE AUDITED ANNUAL REPORT OF WIPRO DOES NOT DISCLOSE ANY SEGMENT AL INFORMATION AND THE TPO HAS RELIED ON INFORMATION U/S 133(6). LD. AR SUBMITTED THAT THE FOLLOWING COMPARABLES ARE FUNCTIONALLY DIFFERENT :- (V) CROSSDOMAIN SOLUTION P LTD. ('CROSS DOMAIN') LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT SERVICES AND TOOK OUR ATTENTION TO EXHIBIT 9. HE SUBMITTED THAT CROSS DOMAIN PROVIDES SOFTWARE DEVELOPMENT SERVICES ALONG WITH PRODUCT LIFECYCLE M ANAGEMENT SERVICES (PLM), DEVELOPMENT OF PRODUCT SUITES AND ROUTINE LOW END ITES SERVICE. LD. AR SUBMITTED THAT NO SEGMENTAL INFORMATION FOR ITES SERVICES IS AVAILABLE. 12 ITA NO.5906/DEL./2012 LD. AR RELIED ON THE FOLLOWING CASE LAWS :- SYMPHONY MARKETING SOLUTIONS INDIA PUT. LTD (IT(TP) NO.1316/BANG/2012)(AY 2008-09) MARKET TOOLS RESEARCH PVT LTD (ITA NO.1811/HYD/2012 )(AY 2008-09) HYUNDAI MOTORS INDIA ENGINEERING PVT. LTD (ITA NO.18501HYD/2012) (AY 2008-09) (VI) EELERX SERVICES LIMITED ('ECLERX') LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY IS ENGAGED IN THE BUSINESS OF HIGH END KNOWLEDGE PROCESS OUTSOURC ING SERVICES AND TOOK OUR ATTENTION TO EXHIBIT 5. LD. AR SUBMITTED THAT ECLERX IS A KNOWLEDGE PROCESS OUTSOURCING (KPO) COMPANY ENGAGED IN PROVIDING DATA ANALYTICS AND DATA PROCESS SOLUTIONS TO THE CUSTOMERS AND IT PROV IDES SALES & MARKETING SERVICES (COMPRISING ONLINE OPERATIONS SU PPORT, OFFLINE OPERATIONS & DATA MANAGEMENT AND COMPETITIVE PRICIN G & CATALOG ANALYTICS) AND FINANCIAL SERVICES (COMPRISING BACK OFFICE SERVICES, REFERENCE DATA MANAGEMENT, FINANCE AND ACCOUNTING, RISK MANAGEMENT AND ANCILLARY SERVICES) WHICH ARE HIGH E ND IN NATURE AS COMPARED TO THE ASSESSEE'S. 13 ITA NO.5906/DEL./2012 LD. AR SUBMITTED THAT SEGMENTAL DATA NOT AVAILAB LE AND COMPANY ALSO STATES IT IS NOT COMPARABLE TO BPO AND IT ALSO OWNS SIGNIFICANT IP AND HAS ACQUIRED UK BASED IGENTICA T RAVEL SOLUTIONS LIMITED IN JULY 2007. LD. AR RELIED ON THE FOLLOWING CASE LAWS :- UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD ( ITA NO.6312/DEL/2012)(AY 2008-09) LIONBRIDGE TECHNOLOGIES PUT LTD (ITA NO.7498/MUM/2012)(AY 2008-09) MARKET TOOLS RESEARCH PUT LTD (ITA NO.1811/HYD/2012 )(AY 2008-09) SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD [IT (TP ) NO.1316/BANG/2012] (AY 2008-09) COGNIZANT TECHNOLOGY SERVICES PUT. LTD. [ITA NOS.2106/HYD/2011](AY 2007-08) AND 1864/HYD/2012 (A Y 2008-09) MAERSK GLOBAL SERVICE CENTRES (INDIA) PVT. LTD (ITA NO.2594/MUM/2014) (AY 2009-10) CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. V. D CIT [ITA NO.124/HYD/2014 & ITA NO.170/HYD/2014 (AY 2009-10) (VII) ACROPETAL TECHNOLOGIES LTD (ACROPETAL) (SEGMENTAL) LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY IS ENGAGED IN THE BUSINESS OF HIGH END KNOWLEDGE PROCESS OUTSOURC ING SERVICES AND TOOK OUR ATTENTION TO EXHIBIT 10. HE SUBMITTED THA T ACROPETAL PROVIDES HIGH END KPO SERVICES (ENGINEERING DESIGN) RELATED TO ARCHITECTURAL, STRUCTURAL, HEATING, VENTILATING AND AIR CONDITIONING 14 ITA NO.5906/DEL./2012 (HVAC), ELECTRICAL, PLUMBING, STEEL DETAILING, EXTE RNAL UTILITIES AND BUILDING INFORMATION MODELING (BIM). LD. AR RELIED ON THE FOLLOWING CASE LAWS :- SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD [IT (TP ) NO.1316/BANG/2012] (AY 2008-09) MARKET TOOLS RESEARCH PVT. LTD (ITA NO. 1811/HYD/20 12)(AY 2008-09) INS INDIA PVT. LTD (ITA NO. 604 & 419/HYD/2014) (AY 2009-10) EXCELLENCE DATA RESEARCH PVT LTD (ITA NO.159/HYD/20 14)(AY 2009-10) CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT LTD (ITA NO. 124/HYD/2014) (AY 2009-10). (VIII) GENESYS INTERNATIONAL CORPORATION LIMITED ('GENESY S') LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY IS ENGAGED IN THE BUSINESS OF HIGH END KNOWLEDGE OUTSOURCING PROC ESS SERVICES AND TOOK OUR ATTENTION TO EXHIBIT 6. HE SUBMITTED THAT GENESYS IS MAINLY ENGAGED IN THE AREA OF GEOGRAPHICAL INFORMATION SYS TEM SERVICES. THE GIS PERFORMED BY GENESYS IS FUNCTIONALLY DIFFER ENT FROM THE FUNCTIONS PERFORMED BY THE ASSESSEE UNDER ITS IT EN ABLED SERVICES SEGMENT WHICH ARE PRIMARILY IN THE NATURE OF BACK- OFFICE SUPPORT, REMOTE MONITORING CO-ORDINATION ETC. SERVICES. LD. AR RELIED ON THE FOLLOWING CASE LAWS :- 15 ITA NO.5906/DEL./2012 SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD [IT(TP) A.NO. 1316/BANG/2012] (AY 2008-09) HYUNDAI MOTORS INDIA ENGINEERING PVT. LTD (ITA NO. 1850/HYD/2012) (AY 2008-09) CAPITAL HEALTH GROUP INFORMATION SERVICES PVT LTD ( ITA NO.6312/DEL/2012)(AY 2008-09) CAPITAL IQ INFORMATION SYSTEMS INDIA PUT. LTD. U. D CIT [ITA NO.124/HYD/2014 & ITA NO.170/HYD/2014] (IX) DATAMATICS FINANCIAL SERVICES LIMITED ('DATAMATICS' ) LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY IS FUNCTIONALLY DIFFERENT AND TOOK OUR ATTENTION TO EX HIBIT 12. HE SUBMITTED THAT THE COMPANY IS ALSO INVOLVED IN REGI STRAR & SHARE TRANSFER ACTIVITIES AS WELL AS IN PROCESSING & PRIN TING ACTIVITIES. LD. AR SUBMITTED THAT SEGMENTAL DATA IS NOT AVAILABLE. LD. AR FURTHER SUBMITTED THAT DURING THE YEAR, THE COMPANY IS FOLL OWING A MIXED BASIS OF ACCOUNTING (CASH AS WELL AS MERCANTILE) WH ICH MAY HAVE IMPACTED THE PROFITABILITY OF THE COMPANY DURING TH E YEAR. DIFFERENT BUSINESS MODEL (X) CORAL HUB LIMITED (VISHAL INFORMATION TECHNOLOGIES LTD) ('CORAL HUB') LD. AR SUBMITTED THAT THIS COMPARABLE COMPANY HA S DIFFERENT BUSINESS MODEL AND TOOK OUR ATTENTION TO EXHIBIT 3. HE SUBMITTED THAT 16 ITA NO.5906/DEL./2012 CORAL HUB OUTSOURCES MOST OF ITS SERVICES TO THIRD PARTY CONTRACTORS WHICH IS EVIDENCED BY THE LOW EMPLOYEE COST TO SALE S RATIO OF THE COMPANY AND THE COMPANY HAS SIGNIFICANT PAYMENT TOW ARDS VENDORS AND LOW PERSONNEL COST AS A PERCENTAGE OF SALES. H E SUBMITTED 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 OUTSOURCIN G MODEL FOLLOWED BY CORAL HUB CANNOT BE CONSIDERED TO BE COMPARABLE TO THE BUSINESS MODEL FOLLOWED BY THE ASSESSEE AS UNDER :- PARTICULARS AMOUNT SALES (A) 380,784,348 PERSONNEL COST (B) 11,140,357 EMPLOYEE COST FILTER (B)/(A) 2.93% LD. AR RELIED ON THE FOLLOWING CASE LAWS :- CUMMINS TURBO TECHNOLOGIES LTD. UK - INDIA BRANCH ( ITA NO. 161 & 26/PN/2013) (AY 2008-09) UNITED HEALTH GROUP INFORMATION SERVICES PVT LTD (I TA NO. 6312/DEL/2012)(AY 2008-09) 24 X 7 CUSTOMER.COM PVT. LTD.(ITA NO. 227/BANG/2010 ) 17 ITA NO.5906/DEL./2012 BNY MELLON INTERNATIONAL OPERATIONS (INDIA) PVT. LT D (ITA NO.2380/PN/2012) (AY 2009-10) LD. AR SUBMITTED THAT THE COMPARABLE COMPANY IS A GIANT COMPANY AND IS REJECTED BY THE TRIBUNAL FOLLOWING T HE PRINCIPLE LAID DOWN BY HONBLE DELHI HIGH COURT IN THE CASE OF AGN ITY INDIA TECHNOLOGIES PRIVATE LIMITED (ITA NO. 1204/HC/2011 ). (XI) INFOSYS B P O LIMITED (INFOSYS) LD. AR SUBMITTED THAT THE COMPARABLE COMPANY IS A GIANT COMPANY AND TOOK OUR ATTENTION TO EXHIBIT 8. HE SU BMITTED THAT INFOSYS BPO IS ENGAGED IN PROVIDING HIGH END INTEGR ATED SERVICES BY ASSISTING ITS CLIENTS IN IMPROVING THEIR COMPETITIV E POSITION BY MANAGING THEIR BUSINESS PROCESSES IN ADDITION TO PR OVIDING INCREASED VALUE, WHEREAS THE ASSESSEE'S ACTIVITY WITH REGARD TO PROVISION OF OUTSOURCED BUSINESS PROCESSES, LIKE, REMOTE MONITOR ING AND MAINTENANCE OF AES NETWORK PLATFORMS AND CO-ORDINAT ION ETC. SERVICES IS LOW-END IN NATURE BEARING MINIMAL RISKS. LD. AR FURTHER SUBMITTED THAT INFOSYS BPO EARNS HIGHER PROFITS ON ITS COST O N ACCOUNT OF ITS HIGHLY ESTABLISHED BRAND IN THE MARKETPLACE AND INF OSYS BPO SPENDS AMOUNT ON BRAND BUILDING. 18 ITA NO.5906/DEL./2012 LD. AR RELIED ON THE FOLLOWING CASE LAWS :- MARKET TOOLS RESEARCH PVT LTD (ITA NO. 1811/HYD/201 2, [TS- 294-ITAT-2013CHYD)-TP], ITAT HYDERABAD) (AY 2008-09 ) SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD [IT(TP) NO. 1316/BANG/2012] (AY 2008-092 HYUNDAI MOTORS INDIA ENGINEERING PVT LTD (ITA NO. 18/HYD/2012) (AY 2008-09) PAREXEL INTERNATIONAL INDIA PVT LTD (ITA NO.144/HYD /2014) (AY 2009- 10) INS INDIA PVT LTD (ITA NO. 604 & 419/HYD/2014)(AY 2 009-10) INTERNATIONAL SPECIALTY PRODUCTS (I) PVT LTD (ITA N O. 218/HYD/2014) (AY 2009-10) CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. V. D CIT [ITA NO.124/HYD/2014 & ITA NO.170/HYD/2014] (AY 2009-10) , LD. AR SUBMITTED THAT THE FOLLOWING COMPARABLES FAILS FINANCIAL YEAR FILTER :- (XII) H C L COMNET SYSTEMS & SERVICES LTD ('HCL CO MNET') (SEGMENTAL) LD. AR SUBMITTED THAT THE COMPARABLE COMPANY FAI LS FINANCIAL YEAR ENDING FILTER AND TOOK OUR ATTENTION TO EXHIBI T 7. HE SUBMITTED THAT HCL COMNET FAILS FINANCIAL YEAR ENDING FILTER APPLIED BY THE TPO. HE FURTHER SUBMITTED THAT COMPANY'S FINANCIAL YEAR ENDS ON JUNE 30, 2008 FOR FY 2007-08. 19 ITA NO.5906/DEL./2012 13. 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 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 21 & 22 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; 20 ITA NO.5906/DEL./2012 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; 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: THE INCOME TAX RULES PROVIDE REASONABLE AND ACCURAT E ADJUSTMENT SHOULD BE MADE. AS DISCUSSED ABOVE WE DO NOT FIND THAT THIS CONDITION HAS BEEN MADE. 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. 21 ITA NO.5906/DEL./2012 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. 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. 14. 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 22 ITA NO.5906/DEL./2012 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 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; 23 ITA NO.5906/DEL./2012 (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. 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. 15. 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 24 ITA NO.5906/DEL./2012 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.