Agilent Technologies (International) Pvt. Ltd., Gurgaon V. ACIT, Gurgaon

ITA 6047/DEL/2012

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 2943 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-06-2013
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I1
• Assessment Year: 2008-2009
• Appeal Filed On: 04-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C.I.T. TP
• Assessee Lawyers: S. G.C. SRIVASTAVA
• Keywords: Related party transaction; Transfer pricing
• Section: 10; 92C; 143(3); 92F; 40(a)(ia); 133(6); 10B; 144C; 92CA

Judgement Text

ITA NO. 6047/Del/2012 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “I”, NEW DELHI BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. No. 6047/Del/2012 A.Y. : 2008-09 Agilent Technologies International) Private Limited, Plot No. CP-11, Sector-8, IMT Manesar, Gurgaon – 122051Haryana (PAN:AADCA4115C) vs. Assistant Commissioner of Income Tax, Circle 1(1), Gurgaon (Appellant ) (Appellant )(Appellant ) (Appellant ) (Respondent ) (Respondent )(Respondent ) (Respondent ) Assessee by : S/Sh. G.C. Srivastava, Manoneet Dalal, Ashwin Vishwanathan & Ms. Preeti Bhardwaj, Advocates Department by : Sh. Peeyush Jain, C.I.T.(D.R.) (TP) ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AMPER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM This appeal by the Assessee is directed against the order passed by the Assessing Officer u/s. 144C/143(3) of the I.T. Act, 1961. It may be mentioned that for a minor clarification from assessee the case was fixed on 14.6.2013. Sh. Samir Sharma, Sr. D.R. applied for adjournment and contends that for T.P. matters he is not authorized to argue. Since the case was fixed only for a minor clarification from assessee, the adjournment application is rejected and clarification was given by the assessee. 2. The grounds of appeal read as under:- The learned assessing officer ('AO') has erred in passing the assessment order dated 25 October 2012 under section 143(3) read with section 144c of the income-tax act, 1961 ('the act') after considering the initial adjustments proposed by the learned Transfer Pricing Officer (TPO) in his order passed under section 92ca(3) of the act and the directions of the Hon'ble dispute resolution panel ('DRP') in that respect. ITA NO. 6047/Del/2012 2 Each of the ground is referred to separately, and may kindly be considered independent of each other. That, on the facts and circumstances of the case and in law, 1. The AO / DRP has erred in making an addition 251,958,313 to the total income of the appellant on account of adjustment in the arm's length price (ALP) of the international transactions related to contract it-e bled service contract software developments services entered into by the appellant with its associated enterprises (collectively referred to as 'impugned transactions'). 2. The DRP has erred in concurring with findings of the AO/ TPO and disregarding, without appropriate justification, the economic analysis undertaken by the appellant for establishing the alp of the impugned transactions. 3. The AO/ TPO has erred in conducting a fresh economic analysis for determination of the alp of the impugned transactions and holding that the appellant's international transaction pertaining to provision of contract software development services and contract it- enabled services are not at arm's length. . 4. The AO/ TPO has erred by: a) not accepting the use of multiple year data, as adopted by the appellant in its TP documentation; and b) determining the arm's length margins / prices using data pertaining only to financial year ('FY') 2007-08 which was not available to the appellant at the time of complying with the Indian TP documentation requirements. ITA NO. 6047/Del/2012 3 5. The AO/ TPO has erred, by wrongly rejecting certain comparable companies and adding functionally dissimilar companies to the final set of comparables for the impugned transactions. 6. The TPO/AO has erred by rejecting certain comparable companies identified by the appellant on the ground that they do not meet the filter of employee cost greater than 25 percent of revenue. 7. The AO/ TPO has erred, by selecting certain companies which are earning super normal profits as comparable to the appellant. 8. The TPO/AO has erred by rejecting certain comparable companies identified by the appellant on the ground that they do not meet the filter of onsite revenue greater than 75 percent of export revenues. 9. The AO/ TPO has erred by exercising his powers under section 133(6) of the act to obtain information which was not available in public domain and relying upon the same for comparability purposes. 10. The AO/ TPO has erred by excluding companies with turnover less than Rs. 1 crore but not applying a similar filter to exclude oversized companies. 11. The AO/ TPO has erred, by rejecting certain com parables identified by the appellant as having economic performance contrary to industry behavior. 12. The AO/ TPO has erred, by rejecting certain comparables identified by the appellant for having different accounting year than the appellant (i.e. companies having accounting year other than ITA NO. 6047/Del/2012 4 march 31 or companies whose financial statements were for a period other than 12 months). 13. The TPO has passed an order under section 92CA (3) which has computational errors in the margin of certain comparables used in determination of ALP. 14. The AO/ DRP has erred, by not making suitable adjustments to account for differences in the risk profile of the appellant vis-a-vis the comparables. 15. The AO/ DRP has erred in not providing the benefit of the arm's length range as provided under proviso to section 92C of Act for purposes of computing the arm's length price under section 92F of the act. 16. The AO has erred by disallowing freight charges and hotel expenses under section 40(a)(ia) of the act without appreciating the fact that the appellant was not required to deduct tax on the payment of such expenses. without prejudice to this fact, AO has erred by not enhancing the deduction under section 10A of the act to the extent of the above disallowances as the same increased the income of the STP undertaking, despite clear directions from DRP in this regard. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays for appropriate relief based on the said grounds of appeal and facts and circumstances of the case.” 3. As regards the above grounds of appeal, ld. Counsel of the assessee submitted that the assessee’s grievance is confined to ITA NO. 6047/Del/2012 5 inclusion of four comparables in software services segment. It has been argued that these comparables have been wrongly included by the TPO. The same are as follows:- I. Avani Cincom Technologies Ltd. II. Kals Infosystems Ltd. III. Wipro Limited. IV. Infosys Ltd. 3.1 Further, ld. Counsel of the assessee submitted that with regard to IT enabled services, assessee’s grievance is confined to inclusion of 8 comparables. It has been submitted that these comparables were wrongly included by the TPO. I. Accentia Technologies Limited. II. Acropetal Technologies Limited. III. Eclerx Limited. IV. Genesys International Limited. V. Vishal Information System (now known as Coral Hub) VI. HCL Comnet VII. Wipro BPO VIII. Infosys BPO 4. In light of the aforesaid, we confine our adjudication in this case to the inclusion of the aforesaid comparables by the TPO. Assessee is a wholly own subsidiary of Agilent Technologies International Europe BV (AE- Associated Enterprises). The assessee provides contracts software services and IT enabled / BPO services to its AEs and is remunerated on a cost plus markup basis. The TPO proposed the adjustment in both the segments of the assessee’s business. The assessee submitted objections against the proposed ITA NO. 6047/Del/2012 6 adjustments before the DRP. The DRP provided some relief while upholding the TPO’s order on most grounds. The details of assessee’s another comparables transaction are tabulated below :- Particulars Provision of software services Provision of ITAT- enabled services Method selected (Accepted by the TPO) TNMM TNMM Profit Level Indicator (Accepted by the TPO) OP/OC OP/OC Value of international transaction (INR) 36,35,19,061 169,42,28,100 Appellant’s margin 13.24% 9.68% Arm’s length margin as per Assessing Officer 21.23% 24.33% Adjustment (INR) 2,56,47,694 22,63,10,619 TNMM: Transactional Net Margin Method; OP: Operating Profit; OC: Operating Costs. 5. Now we proceed with the adjudication of the assessee’s grounds regarding wrong inclusion of comparables. A. A.A. A. S SS Software oftware oftware oftware S SS Services ervices ervices ervices Segment SegmentSegment Segment (I) (I)(I) (I) Avnani Avnani Avnani Avnani C CC Ci ii in nn ncom Technologies Ltd. com Technologies Ltd. com Technologies Ltd. com Technologies Ltd. With regard to the comparables TPO observed that as per information available in the public domain, it is a software development and consulting company. It is based in India with offices in U.S. The Company has a varied base in Australia, US, Africa, UK and the European Unions with major focus in travel and insurance industry. The TPO observed that Annual Report of the Company was not available. RPT information was not available. Hence, notice u/s. 133(6) was issued to the Company to get complete information. TPO further observed that as per the reply ITA NO. 6047/Del/2012 7 received from the company, it qualifies all the filters applied by the TPO. Hence, the same was proposed as comparable. The assessee objected to the same for the following reasons:- “Unreliable information and non availability of information in public domain. The aforesaid company has been considered as a comparable by your office after obtaining financial information for the period ended 31 st March, 2008 under section 133(6) of the Act. In this regard, the assessee wishes to state that information provided by the company was not available in public domain and hence should not be used for the purpose of comparability. Kindly refer paragprah 5 and various sub paras under it which contains the Assessee’s contentions against the use of information gathered u/s. 133(6). Earning super normal profits The assessee submits that Avani is earning super-normal profits and should be rejected while arriving at the ALP. The assessee has in section 9 of this submission mentioned various judicial decisions in support of rejection of companies with the abnormally high margins. In light of the above, Avani should not be considered comparable to the assessee.” TPO did not agree with the assessee’s contention. He held that company is considered as a comparable. Now the assessee has submitted that the said company provides states of the art technology to different organizations. It develops software products like DXchange which comes in three ITA NO. 6047/Del/2012 8 versions. The assessee company is only providing software development services and hence, cannot be compared with the company which is into software product development. In this regard, it has further been submitted that TPO himself has rejected the software product, companies like Cybermate Infotech Ltd, Lucid Software Solutions and Zenith Infotech while finalizing the set of comparables companies for software services. It has been submitted that TPO cannot cherrypick comparable so as to include high margin companies. It has further been submitted that in view of the TPO’s own finding in this regard, there will be no justification for inclusion of these comparables. Besides, it has been submitted that ITAT has itself recognized this distinction. Reliance in this regard was placed on Trilogy E-Business Software India Pvt. Ltd. I.T.A. No. 1054/Bang.2/011. Hence, it was submitted that software product company are rejected by the TPO himself. Hence, this comparable is liable to be rejected. 6. We have carefully considered the submissions of both the parties in this regard. We find that Assessing Officer himself has rejected the software product companies like Cybermate Info Tech Ltd., Lucid Software Solutions and Zenith Info Tech. (Page 47 of the TPO’s order) while finalizing set of comparable companies for software services. However, we note that the assessee has not objected before the TPO on this aspect. In our opinion, assessee’s submissions is cogent that software product companies cannot be compared as comparable companies for software services. Hence, we remit this issue to the file of the Assessing Officer to examine as to whether the assessee’s contention that this comparable is a software product company, is correct or not. If the same is found to be software product company, then same will be liable for exclusion from the comparable. ITA NO. 6047/Del/2012 9 II. II.II. II. Kals Info Kals InfoKals Info Kals Infos ss systems Ltd. ystems Ltd. ystems Ltd. ystems Ltd. 7. The TPO in this regard has observed that this comparable was rejected by the assessee in the transfer pricing document saying that ‘functionally different’. However, no reasons were given in the Annexures. TPO observed that this Company is mainly into the software development. As per the information submitted by the company in response to section 133(6) notice, it is into two segments (i) software development services and (ii) training. The segmental details were also submitted. It qualified all the filters applied by the TPO. Hence, it was proposed as a comparable. The assessee raised following objections against these comparables. “Kals Info Systems Limite (KALS) “Kals Info Systems Limite (KALS)“Kals Info Systems Limite (KALS) “Kals Info Systems Limite (KALS) Your goodself has propos~d the aforementioned company to be considered as a comparable. However, on review of the annual report of the company for the year ended 31st March 2008, it is observed that the company in into provision of software development services as well as sale of software products: • "Inventories" under the Schedules to the financial statements on page 16 of the annual report discloses "Software development" as inventory and work-in- progress. It is to be noted that a pure software services provider would not be able to disclose such details 05 it does not carry any such inventory or work-in-progress. • "Background" under the Schedules to the financial statements on page 18 of the annual report clearly states: "The company is engaged in development of Software and Software products since its inception. The company consisting of STPI unit engaged in Development of Software and Software Products and a Training Centre engaged in training of Software professionals on online projects." (emphasis supplied) • "Revenue recognition" under the Notes to the financial statements on page 18 of the annual report clearly states: ITA NO. 6047/Del/2012 10 'The Company derives its revenues primarily from software services and software products. • “Fixed assets" under the schedules to the financial statements shows "Software LA Vision" as a fixed asset. Further, according to the website of KALS (http://www.kalsinfocomjproductS.htm). the company has developed two products: • Virtual insure; and • La - Vision This re-iterates the fact that KALS earns revenues from the development of software products. • The segmental information provided under Notes on Accounts on Page 19 of the annual report provides the breakup of revenues from two segments: aJ Application Software; and b) Training. In addition to the above, without prejudice to our contention that it would be incorrect to use information obtained under section 133(6), the Assessee humbly wishes to submit that as per the response files by KALS to the notice under section 133(6), the company has stated that it derives income from two segments, Application software segment and Training segment. Given the above, your goodself would appreciate that software products revenue forms part of the Application software segment. if your goodself proposes to compare companies engaged in development of software products with the Assessee (software development services provider), it would defeat the whole purpose of doing an FAR analysis. Therefore, unless adequate breakup of software development services and software products is obtained, the aforesaid company should not be selected as a comparable." 8. The TPO observed that assessee has argued that the company has shown inventory and that a pure software services provider ITA NO. 6047/Del/2012 11 would not be able to disclose such details as it does not carry any such inventory or work in progress. However, the TPO was not in agreement with the proposition. He observed that this is factually incorrect and many software development service companies disclose inventory or work in progress or unbilled revenue. In this regard, TPO referred to the financial of Infosys. TPO further observed that there has been main argument is that the company has revenues by way of sale of products and training, but the break up is not available. TPO observed that it is apparent that the assessee did not read the notice issued by the TPO properly. The relevant information furnished by the Company as communicated to the assessee was reproduced below:- “ Description of our business activities during the F.Y 2007...08 and F.Y 2008-09 The core of our business may be classified as that of Pure Software Development Service Provider. In essence we get project (software development ) orders from our clients drawn from various verticals such as Insurance, Telecom, Manufacturing etc. We execute the project through the entire SDLC (Software Development Life Cycle) In most cases i.e. starting from design to delivery, testing and training. In some instances especially in the insurance vertical – we use ready made object libraries (code that is already written) and build customized portions on the top of that. The use of ready made object libraries is only to the tune of about (3.4 to 6.96%) in the year 2007-08 to 2008-09. These apart we have a small amount of revenue from domestic language activities contributing between 4.24% to 7.01% in the year 2007-08 to 2008-009.” Referring to the above, TPO observed that use of readymade object libraries (which may if at all be considered as product) is only 3.4 to 6.96% and training constitutes only 4.24-7.01% of its revenues for the Financial Year 2007-08. Thus, the revenues from ITA NO. 6047/Del/2012 12 software development services constitute more than 75% of the total operating revenues. Thus, it qualifies service income filter which has been accepted by the tax payer also. TPO held that the assessee company was considered as comparable as it is generating predominant (>75%) revenues from software development services. 9. Now the Assessee has submitted before us that this company develops products and also provides services but there is no break up available between these two items in its annual report. Its website also evidences the products developed by it. In this regard, assessee has submitted that the Assessing Officer has himself rejected the software development companies. Hence, it has been submitted that the TPO cannot cherrypick comparable so as to include high margin companies. It has further been submitted that reliance is placed upon the decision of the ITAT in Trilogy E-Business Software India Pvt. Ltd. in I.T.A. No. 1054/Bang/2011 which has specifically rejected Kals Infosystems Ltd. on the grounds that it is a software product company. Hence, it has been submitted that since software product companies have been rejected by the TPO himself and it is evident from the extracts of annual reports and case law of Triology that this Company is software product company. Hence, it has been submitted that this company should not be considered as comparable. 10. We have heard both the counsel and perused the records. We find that it is true that TPO has himself rejected the software product companies as comparable in the analysis of transaction related to software services. Assessee has allegedly that this company develops products and also provides services, but there is no breakup available between these two items in its annual report. As against he above, TPO has referred to the report obtained u/s. ITA NO. 6047/Del/2012 13 133(6). From the above, TPO has observed that use of readymade object libraries is only 3.4 to 6.96% and training constitutes only 4.24-7.01% of its revenues for the Financial Year 2007-08 to 2008- 09. Thus, the revenues from software development services constitute more than 75% of the total revenues. Hence, it qualifies the services income filter which has been accepted by the tax payer also. As regards the decision of the Tribunal relied by the assessee, the same is not relevant here, because the TPO has considered the financial results and product profile of the company for the 2007-08 & 2008-09. III. III. III. III. Infosys Technology Ltd. Infosys Technology Ltd. Infosys Technology Ltd. Infosys Technology Ltd. 11. On this comparable the Assessing Officer noted that the Annual Report is available for the financial year 2007-08. Based on the information submitted by the Company, it qualifies all the filters supplied by the TPO. Hence, this company was proposed as comparable to the assessee. The assessee did not accept this proposition. It was submitted that Infosys has non comparables services as compared to the assessee. In this regard, reference was made to the Infosys diversified services offering, product offering and intangibles assets. 12. Further, it was submitted that as per the recent ruling of the Delhi ITAT in the case of Agnity India Technologies Pvt. Ltd. Vs ITO" New Delhi (ITA No 3856/DeI/2010J, it has been held that Infosys Technologies Limited should be rejected on account of the difference in risk levels assumed, huge revenues derived from software services and the fact that they are market leaders. In this regard, the relevant extract of the ruling is reproduced below: "It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the latter ITA NO. 6047/Del/2012 14 is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited currency risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded.” Given the differences in the functions, assets and risks borne by Infosys via-a-vis ATI (risk mitigated software service providers) .. Infosys is should be rejected as "functionally different” for software development services companies. Without prejudice to the above, Infosys has a turnover of Rs. 15,648 Crores and should be rejected. In section 6.6 of this submission we have highlighted the detailed reasons for the application of an upper turn over filter of Rs. 450 Crores. In light of all of the above, it was considered that Infosys should be rejected as a comparable.“ 13. As regards the assessee’s objections about turnover, Assessing Officer noted that there is no link between the margin and the turnover of the company. Companies having much lower turnover than Infosys have higher or similar margin and vice-versa. He further referred to analysis of Infosys which showed that even when it had a very low turnover the margin was almost the same. ITA NO. 6047/Del/2012 15 14. Similarly, the TPO further noted that assessee’s argument that brand has helped in better margin is also not correct. He observed that there is no linkage between the two. Companies like Kals, Celestial Biolab, Softsol, etc. with much lower turnover and with no brand name have earned margins which are either higher than Infosys or almost the same. TPO further observed that brand may bring more revenues but not necessarily higher margins. TPO further observed that any brand comes with a cost i.e. huge expenses are required to be incurred to build brand value. Thus, the brand may generate revenue, but with a cost compensating any extra benefit, if any derived from such effort. Assessing Officer further referred to the ITAT, Vishakapatnam decision in the case of LG Polymers India Pvt. Ltd. (2011-TII-97-ITAT-Vizag-TP) which has held that brand name is only one of the factors but not the only factor which affects profitability. Hence, the TPO held that the assessee’s argument that companies having large scale of operations and brand name have better margins is without any basis, thus liable for rejection. 15. TPO further observed that there is no denial of the fact that Infosys sells Software Products for banking in the name of Finacle. But, the revenues from software products are of only Rs. 597 crores crores out of its operating revenues of Rs. 15,648/- crores. Hence, the TPO observed that the Revenue from software products constitute only 3.82% of the operating revenue for the financial year 2007-08. So, more than 95% of its revenues are from software development services and thus it qualifies the TPO’s filter of more than 75% revenues form software development services. 16. TPO further observed that assessee’s contention that Infosys renders end to end solutions is also not correct. That the assessee never went into the horizontals or verticals while selecting the ITA NO. 6047/Del/2012 16 comparables. That it is not correct to say that Revenue of Infosys comes from end to end solutions. More than 90% of its revenue comes from maintenance or enhancement of the software and not from end to end solutions. TPO further observed that subsequent to Agnity Technologies’s decision ITAT Delhi in the case of ST Micro (2011-TII-63-ITAT-Del-TP) has upheld the inclusion of Infosys as a comparable despite the fact that in that case also the assessee’s turnover was much lower than the Infosys. Accordingly, TPO observed that Infosys shall be selected as comparable. 17. Assessee has contended before us that Infosys cannot be considered as a comparable to the assessee on account of the following differences:- Parameter Parameter Parameter Parameter Appellant Appellant Appellant Appellant Infosys Infosys Infosys Infosys Functional profile Captive contract service provider Full risk bearing entrepreneurial entity. Nature of services Routine software services Diversified operations encompassing products and services like technical consulting, design, development, re- engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services. Intangible assets employed No intangible assets Intangible including brand, goodwill and patents Bargaining power None Company commands premium pricing. In the article in “The Economic Times” on 12 Jan 2011 named “Infy’s premium pricing power for projects dips”, it is written that “in my mind, the premium pricing for us was between ITA NO. 6047/Del/2012 17 10 and 15%. It would have come down a bit, but we still command premium. Today it is definitely not 15%”, SD Shibulal, COO of Infosys said in an interview last month. In many ways, Infosy’s relationship with large customers such as BT and Goldman Sachs helped it bill its premium positioning in the past. IV. IV.IV. IV. WIPRO LTD. WIPRO LTD.WIPRO LTD. WIPRO LTD. 18. This Company was rejected in the TP document saying that it is ‘functionally different’. However, TPO noted that no reasons were given in the Annexures. He observed that the company qualifies all the filters supplied by the TPO. The assessee objected to this proposition. The Assessee submitted that Wipro is engaged in providing IT services and trading of IT products to its clients and there is no breakup of revenues between IT services and products. Assessee further submitted that no information of IT services, BPO services and software products revenue break up is available in the public domain at the stand alone financial statement level. Further, at the consolidated level, comparable services constitute only 70 percent of consolidated revenues. Hence, Wipro should be rejected as functionally different and should not be considered as comparable. Further it was submitted that in the company’s annual report it was stated that company is engaged in selling and servicing high-end IT products and then maintaining them over its life cycle. It was further submitted that Wipro has undergone an amalgamation during the financial year 2007-08. It was submitted that TPO has himself excluded companies having peculiar economic ITA NO. 6047/Del/2012 18 circumstances. It was further submitted that Wipro was earning abnormally high profits and should be rejected while arriving at the ALP. It was further submitted that Wipro has huge turnover of Rs. 17819.50 crores and should be rejected. 19. Against the above submissions of the assessee, the TPO observed that TPO has tried to get the segmental information from the company. The TPO has considered only IT services segment on standalone basis. Further, the TPO did not consider the BPO services as it is a separate segment. TPO observed that IT services segment of the company is into software development services and segmental details are available, hence, the Company is considered as a comparable at segment level. The TPO further referred that services of the WIPRO such as R&D services application development and maintenance, package implementation, consulting services etc. form part of software development services. TPO further observed that 79% of consolidated revenues from IT services are in the nature of software development services and the taxpayer did not go into horizontals within software development services. Further, the IT services segment revenue do not constitute any sales by way of software product. Thus, on stand alone basis, the I.T. services segment is into software development services and it qualifies all the filters applied by the TPO. TPO further observed that assessee objects that Wipro abnormally high profits is not correct. A margin of 28.38% by no stretch of imagination can be termed as abnormal. Similarly, the asseessee’s objection on the ground of turnover and brand are not acceptable in view of the discussion made in the case of Infosys. Further, the TPO further observed that the assessee’s contention that there has been exceptional year of performance because of amalgamation is also not acceptable. It has not been shown as to how the amalgamation has changed the ITA NO. 6047/Del/2012 19 functionality of the company particularly when software segment has been considered by the TPO. Secondly, even if amalgamation has been there the same has not impacted whatsoever on the profitability. The margins of the company in the software as well as consolidated levels have remained almost the same as in preceding year (s) viz around 28-30%. In view of the above discussion TPO observed that this company shall be retained as a comparable. 20. TPO further observed that assessee’s objection that comparable having abnormally high margin should not be selected is not correct. He referred to several ITAT decision wherein comparables having high margin were considered acceptable. He observed that in comparability analysis loss or so called higher margin is not a determining factor unless there are any peculiar economic circumstances in such a case. He observed that just like loss making companies, super normal profits making companies are also part of the industry and hence, cannot be rejected merely because they have earned such profits. 21. Assessee in submissions before us submitted that Wipro cannot be considered as comparable to the assessee on account of the following differences and functions performed, assets used and risks undertaken by the two entities. Parameter Parameter Parameter Parameter Appellant Appellant Appellant Appellant Wipro Wipro Wipro Wipro Functional profile Captive contract service provider Full risk bearing entrepreneurial entity. Nature of services Routine software services Diversified operations encompassing Application Development Maintenance (ADM) Services, Testing Services and Consulting Services Intangible assets employed No intangible assets Intangible including brand ITA NO. 6047/Del/2012 20 Exception circumstances during the year None The company underwent a merger (Directors Report F.Y. 2007-08) The Scheme of Amalgamation for merger of Wipro Infrastructure Engineering Limited, Wipro Healthcare I.T. Limited, Quantech Global Services Limited (subsidiary companies) with Wipro Limited was approved during the financial year 2007-08 by the Hon’ble High Court of Karnataka and the Hon’ble High Court of Andhra Pradesh. The Scheme of Amalgamation for merger of mPact Technology Services Private Limited, mPower Software Services (India) Private Limited (step subsidiary companies) with Wipro Limited was approved during the financial year 2007-08 by the Hon’ble High Court of Karnataka and the Hon’ble High Court of Bombay. 22. In this regard, Ld. Departmental Representative has submitted that turnover and size of the company cannot become the basis of rejection. In this regard, following case laws were relied upon :- - Wills Processing Services (I) P ltd. – I.T.A. No. 4546/Mum/2012 - Capagemini India Private Limited – I.T.A. No. 7861/Mum/2011 ITA NO. 6047/Del/2012 21 - ST Microelectronics Private Limited – I.T.A. No. 1806/Del/2008 23. Assessee’s further submissions in this regard are as follows:- “i. Inclusion of comparable by assessee in its transfer pricing study of preceding year: It is submitted that the assessee had included Infosys as a comparable company but during the proceeding before TPO, the assessee seriously disputed the inclusion of Wipro and Infosys in the preceding year and the dispute was also raised before the TPO, DRP and also before ITAT. However, the matter was remanded back by ITAT to TPO to provide information of 133(6) which was not shared by TPO in preceding year. It may be submitted that the assessee is entitled to dispute the inclusion of a comparable before TPO even though it is included in its Transfer Pricing Study. It is further submitted that since the matter has been remanded back by ITAT to TPO, proceeding for preceding years are not finalised and that cannot become the basis for inclusion of com parables. The com parables need to be included in the comparable set purely on the basis of comparability of its functions, assets and risk vis-a-vis tested party and not on the basis of the what has been done by the assessee of the TPO in the earlier year. Further, it is also submitted that Infosys· was not considered as a comparable by the Appellant in its transfer pricing documentation for the present year i.e AY 2008-09. It was reviewed based on latest available ITA NO. 6047/Del/2012 22 information and found to be functionally not comparable and hence, rejected. Reliance in this regard is placed on Special Bench decision of Chandigarh bench in the case of DCIT Vs MIs Quark Systems Private limited [2010­TIOL- 31-ITAT-CHD-SB] which held the following: “....Accordingly on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as a comparable As we have noted earlier as well, the transfer pricing was in the initial stages in this year and we are inclined to take a rather liberal approach by giving assessee an opportunity to make out its case properly and place all the relevant facts before the tax authorities so that proper arms length price can be determined in accordance with the law the proceedings before the tax authorities are not adversarial proceedings and the assessee should not therefore be placed at under advantage because of his inadvertent and bonafide mistakes .. " ii. Functional differences of the Wipro and Infosys with that of assessee: In this regard, it is submitted that there are various decisions of the tribunal where com parables have been rejected on the basis of its turnover. These are: Case law Names Case law Names Case law Names Case law Names Brief reason for Brief reason for Brief reason for Brief reason for acceptance and rejection acceptance and rejectionacceptance and rejection acceptance and rejection Relevant para Relevant para Relevant para Relevant para Actis Advisors Pvt Ltd ITA 5277/Del/2011 Excluded on account of high turnover Para 37 Agnity India Technologies Pvt. Ltd. ITA No. 3856(Del)/2010 Infosys is an industrial giant and assumes all risks. Cannot be compared to a captive Para 5.2 ITA NO. 6047/Del/2012 23 service provider. Deloitte Consulting India Pvt. Ltd. I.T.A. No. 1082/Hyd./2010 Intangibles or outsourcing of manpower will not merely affect the price or profit margin. Para 37 Capital IQ Information Systems (India ) Pvt. Ltd. I.T.A.No. 1961/Hyd/2011 Rejected on account of high turnover and functional difference Para 21 Triniti Advanced Software Labs (P) Ltd. I.T.A. No. 1129/Hyd/2005 Wipro is an industrial giant undertaking working independently and hence cannot be compared to the appellant. Para 9 It may kindly be appreciated that majority of the decisions of the ITAT are in favour of the tax payer holding that Infosys are Wipro are not comparable due to high turnover. However, it is submitted that turnover by itself may not be sufficient ground to accept or reject a company but it could lead to examination of functional differences which are vital for comparability and if it is demonstrated that such differences exist (like the ones outlined above in -the table), then the company should not be considered as a comparable. The decision of Delhi Bench in case of Agnity holds these companies are non comparable not only on the basis of turnover but also due to functional differences which is exactly the case of the appellant. It is submitted that there are wide differences in the functions performed, risk assumed and assets employed by Wipro and Infosys vis-a-vis assessee. In this regard assessee placed reliance on the decision of Hon'ble Delhi ITAT in Agnity India Technologies Pvt. ltd. Vs ITO, New Delhi (ITA No 3856(Del)/2010) where similar chart has been placed by the assessee tabulating the differences between functions, risk and ITA NO. 6047/Del/2012 24 assets. Tribunal after duly considering the submissions of assessee reached the following conclusion at para 5.2: "It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded" Further reliance in place on the decision of Triniti Advanced Software Labs (P) Ltd. ITA No. 11291Hydl2005 which excluded Wipro at para 9 "M/s WIPRO is a large industrial giant undertaking working independently with principles to principle relationship. On the other hand, the assessee is dependent contractor. " In light of the above, it is submitted that Wipro and Infosys should be rejected because it is functionally not comparable to the Appellant. Attention is drawn to ACIT, Mumbai Vs Maersk Glbal Service Center (India) Pvt ltd (ITA No. 377 4/Mum/2011) ('Maersk Global'), in which the ITAT held as follows: - ".....Insofar as WIPRO BPO Solutions Limited is concerned, we find that their turnover is eleven times greater than that of the Assessee. This company having such a high brand value along with much higher turnover, in our considered opinion, has been rightly excluded by the CIT(A).....” ITA NO. 6047/Del/2012 25 Hon'ble Hyderabad ITAT in the case of DC IT, Hyderabad vs. MIs Deloitte Consulting India Pvt Ltd (2011-TII-88-ITAT-HYD-TP) ('Deloitte Consulting') held that comparability should also analyze the size of the company, as follows: "37. Now, we deal with the issue whether the TPO was correct in selecting WIPRO BPO having turnover of 20 times more than the assessee company as comparable or· not. We find that this issue is covered in favor of the assessee by the decision of Delhi ITAT in the case of Agnity India Technologies Pvt. Limited (2010) ITA No. 3856/Del/2010. We find that the Wipro BPO is not at all comparable as the assessee company is pigmy compared to giant Wipro. Wipro Company's turnover is 20 times more than the assessee company. Hence, the assessee company is not comparable with Wipro BPO, the reasoning being that the latter is a giant company having 20 times more turnover than the assessee company. In view of this, based on the facts and the circumstances of the case, and following the decision of Delhi Bench of ITA T in the aforesaid case, we are of the view that Wipro BPO should be excluded from the list of comparable companies. Hence, the ground raised by the assessee on this issue is allowed." (Emphasis supplied) In the case MIs Telcordia Technologies India Private Limited Vs ACIT (ITA No. 7821/M um/2011) the Hon'ble ITA T held as follows: '7.4 The parameter for identifying comparable entity has to be seen from the angle of functions formed by the company, size of the company in terms of the sales revenue, stage of business cycle and company's growth cycle. In the case of Infosys, there are huge intangible assets which as per the information provided by the learned AR are valued at Rs. 69, 552 crores, which comprises of ITA NO. 6047/Del/2012 26 brand value itself at RS.22, 915 crores. Based on such fund valuation, the profit of Infosys is predominantly due to its premium branding. It is India's NO.2 software service exporter and Third in the world as an IT Service company. It is a giant company which is evident from its revenue fund from the sales which itself is more than Rs. 13145 crores and expenditure on advertisement/sales promotion and expenditure on R & D is at RS.69 crores and Rs. 167 crores respectively, whereas in the case of the Assessee the revenue is only 10.7 crores with no expenditure on advertisement, sales and promotion etc., which are borne by the associated enterprises. Even from the test of 'FAR' i.e., function performed, assets employed and risk assumed, comparability analysis miserably fails in this case. The comparison of function and profile as has been reproduced in para 6(iv) above, mostly shows that the profit level indicators in relation to return of cost, return of sales and return of assets are huge between Infosys and the Assessee company and therefore, the Infosys cannot be treated as comparable entity for making comparability analysis with the Assessee company. The comparability of Infosys Technology of the company as that of an Assessee has been dealt with ITAT Delhi Bench in the case of 'Agnity India Technologies Private Limited' (ITA NO.3856/Delhi/2010), wherein it was held that Infosys is a giant in the area of development of software and it assumes all risks, leading to higher profit and cannot be compared with the company which is a captive unit of its parent company assuming only limited currency risk. In view of the above finding, we hold that the Infosys cannot be taken as a comparable for determining the arms length price in the case of the Assessee .. :. " The cases relied upon by the revenue do not apply to our case for the reason that we are nor seeking exclusion of these com parables ITA NO. 6047/Del/2012 27 merely on the basis of their turnover as held in Willis and Capgemini but on account of functional difference, a basis not taken before the Hon'ble Mumbai bench. The decision in the cases of Wills and Capgemini are per incuriam to that extent. The only decision which is apt to the facts and arguments advanced before the Hon'ble Bench is Agnity which is in favour of the taxpayer. 24. We have heard both the counsel and perused the records. We find that assessee has objected to the inclusion of Infosys and WIPRO on account of huge difference in size and turnover and functional difference. It has been inter-alia submitted by the assessee that majority of decisions from ITAT are in favour of the tax payers holding that Infosys & WIPRO are not comparable due to higher turnover. We find that there are tribunal decisions both in favour of the proposition as well as against the proposition that huge difference in turnover affects comparability. Now it has come to our notice that a Special Bench has been constituted to consider the impact of turnover on comparability. Now when the Special Bench is seized with the matter, it would not be appropriate for us to adjudicate this issue. Hence, we remit the issue of inclusion of these comparables to the files of TPO. The TPO shall consider the same afresh, after the decision of Special Bench is available. B. B.B. B. IT ENABLED SERVICES IT ENABLED SERVICES IT ENABLED SERVICES IT ENABLED SERVICES (i) (i)(i) (i) Accentia Technologies Limited Accentia Technologies Limited Accentia Technologies Limited Accentia Technologies Limited (ATL) (ATL) (ATL) (ATL) 25. .. . As regards this comparable the TPO noted that this company has ITES segment which is into medical transcription services and qualifies all the filters by the TPO. Hence, the company was proposed as a comparable. Assessee objected to this proposition. It was submitted that there were non-comparable services. It was year of exceptional circumstances. TPO did not agree with the ITA NO. 6047/Del/2012 28 above. TPO has considered the company as a comparable because its revenue from ITES is more than 75% of the total revenue. In this regard, TPO referred to the Annual Report of the Company. He observed that the revenue from ITES is 80.87% of the total revenue of the company. Hence, the company passed the 75% revenue filter applied by the TPO. As regards the assesse’s objections of extra ordinary circumstances TPO observed that the assessee has not adduced any evidence from the Annual Report or otherwise how this event had an influence on pricing or the margin earned by the company for the F.Y. 2007-08. Hence, the TPO held that the above comparable has been rightly included. 26. Now the assessee has submitted before us that Company with extraordinary event such as merger and amalgamation should be rejected. It has been submitted that during the financial year 2007-08 Geosoft Technologies (Trivandrum) Limited and Iridium Technologies India Pvt. Ltd. were merged with ATL. Also, Accentia purchased the business of Thunga Software Private Limited, GSR Systems Inc., GSR Phsician Billing services Inc., Denmed Transription Services Inc. and Accential FZE. It has been submitted that such a restructuring undertaken by ATL is an exceptional circumstances and has resulted in volatility in revenues and margins, as evident form the table below:- Financial Year Financial Year Financial Year Financial Year Sales (In Rs.) Sales (In Rs.)Sales (In Rs.) Sales (In Rs.) % Change in sales % Change in sales % Change in sales % Change in sales 2006-07 287,231,663 - 2007-08 509,346,944 77.33% 2008-09 801,440,931 57.35% Hence, it has been submitted that companies having extraordinary events like amalgamation etc. should not be ITA NO. 6047/Del/2012 29 considered as comparable as the financials of the company are not reliable during that year. That the TPO has himself excluded companies like Allsec Technologies for the same reason. It has further been submitted that ATL has been rejected in the case of Capital IQ Information Systems India Pvt, Ltd. vs. DCIT (I.T.A. No. 1961/Hyd./2011) for exactly this reason. Further in the case of Wills Processing Services (I) P Ltd. (Supra) also this contention’s has been accepted and observation are as under:- “ We are also of the view that if extra ordinary events like merger and de-merger or amalgamation took place during the financial year relevant to the assessment year under consideration, and because of the merger / de- merger the company became functionally different then the said company should be excluded from the comparables. However, if the merger of the two functionally similar companies took place then the event of merger itself cannot be taken a factor for exclusion of the said comparable. Accordingly, we direct the Assessing Officer /TPO to verify this fact and accordingly decide the comparability of this company namely Accentia Technologies Ltd.” 27. We have carefully considered the submissions and perused the records. We agree with the contention that companies with extraordinary events such as merger and amalgamation should be rejected, if because of merger, de-merger the company becomes functionally different. However, as held in Wills Processing (Supra) above if the merger of the two functionally similar companies took place, the event of merger itself cannot be taken as a factor for ITA NO. 6047/Del/2012 30 exclusion of the said comparable. Accordingly, we direct the Assessing Officer /TPO to verify this fact and accordingly decide the comparability of this company namely Accentia Technologies Ltd. (ATL) II. Acropetal Technologies Limited II. Acropetal Technologies Limited II. Acropetal Technologies Limited II. Acropetal Technologies Limited 28. As regards this comparable, TPO observed that it has ITES Segment which qualifies all the filters supplied by the TPO. Hence, the Company was proposed as a comparable. The assessee objected to the same. It was submitted that Acropetal is engaged in the business of engineering design services and cannot be compared to the routine IT Enabled Services provided by the ATI. It was further submitted that the company’s website states that Acropetal has a state of the art R&D incubation centre which clearly points out towards the high end service delivery model which the company follows. However, TPO did not consider that the Company is functionally dissimilar. He observed that the Company is providing IT enabled services. The IT Enabled Service are thus services that are rendered using information technology. Further the Company in its reply categorically stated that it is registered with STPI and is into ITES. Assessing Officer further referred to the CBDT Circular SO 890 (E) dated 26.9.2000, which had given a detailed list of product and services that could be claimed under ITES for the purpose of 10A & 10B as under:- “The information technology enabled products or services to mean: i) Back Office operative. ii) Call Centres iii) Content development or animation; iv) Date processing ITA NO. 6047/Del/2012 31 v) Engineering and design. vi) Geographic Information System Services. vii) Human Resources Services viii) Insurance Claim Processing. ix) Legal databases. x) Medical Transcription. xi) Payroll; xii) Remote Maintenance. xiii) Revenue accounting. xiv) Support Centres, and xv) Web site services. Referring to this Circular, TPO observed that engineering and design services as rendered by the company are in the nature of IT Enabled Services. Hence, TPO held that the comparable has been rightly included. III. III.III. III. eClerx Services Ltd. eClerx Services Ltd. eClerx Services Ltd. eClerx Services Ltd. 29. As regards this comparable, TPO observed that it qualifies all the filters applied by the TPO. Hence, the same was considered as a comparable. 30. Now as regards the inclusion of the above comparables, assessee has submitted before us that Acropetal Ltd. is engaged in providing Engineering and Design Services. It has further been submitted that as regards the Eclerx Ltd., the company is providing data analytical Knowledge Processing Outsourcing (KPO) services, thus these two companies are not comparable to the assessee company. It has been submitted that these companies provide KPO Services and not BPO services. It has been submitted that KPO is used to describe outsourced support that requires deep domain knowledge and the exercise of judgement and interpretation. KPO’s ITA NO. 6047/Del/2012 32 is, therefore, employ people with advanced educational degree, specific training, and specialized business experience. Hence, it has been submitted that Acropetal Ltd. and eClerx should be rejected. 31. We find that as to whether KPO should be included in the category of ITES services has been considered by this Tribunal in I.T.A. No. 6286/Del/2012 vide order dated 22.3.2013 in the case of RAMPgreen Solutions Private Limited vs. ACIT. In this case, the Tribunal has held as under:- 12. We have carefully considered the submissions and perused the records. As regards the functional difference, we note that there is no dispute on the point that assessee as well as eClerx Services Ltd. are in ITES services. As per the Notification of the CBDT dated 20.9.2000, the various products or services are notified in the category of ITES. Once a service falls under the category of ITES, then there is no sub-classification of segment. We note that even in the products and services notified by the CBDT, the KPO is not recognized as a separate service. The objection of the assessee is contrary to the services/products as notified by the CBDT under the category of information and ITES. Thus, we find that the KPO is a term given to the Branch of the BPO services where apart from the processing of the data knowledge is also applied. Even otherwise, this company provides data processing and data analytics services which is similar to the services of the assessee and therefore, it cannot be said that the business activity of the assessee and this company are materially and substantially different, which cannot be compared especially as the services of both are in the nature of ITA NO. 6047/Del/2012 33 ITES. In this regard, we find that the identical view has been expressed by the ITAT, Mumbai Bench in I.T.A. No. 4547/Mum/2012 vide order dated 1.3.2013 in the case M/s Willis Processing Services (I) Pvt. Ltd. vs. DCIT.” 32. From the above, we note that as per the Notification of CBDT dated 26.9.2000 the various products and services are notified in the category of IT enabled products and services. We find that engineering and design services are very much included in the said list. The decision of Tribunal as referred above states that these services are in the nature of ITES. Thus, on the basis of above exposition of the ITAT, we do not find any cogency in the assessee’s submissions that these companies; KPO Services are distinct from BPO services and not comparable. Hence, we affirm the inclusion of these two comparables. IV. IV.IV. IV. Genesys International Limited Genesys International Limited Genesys International Limited Genesys International Limited 33. On this issue, TPO observed that as the company satisfied all the filters applied by the TPO. The same was considered as comparable. Assessee objected to the same. It was submitted that this comparable is providing non-comparable services. It was further submitted that Company was engaged in the business of Geographical Information Services which includes the generation, processing, management and maintenance of data for GIS and other information management system and all other services necessary for successful geospatial data implementation. TPO was not in agreement with the above. He held that assessee cannot take a plea that data conversion, data migration, data maintenance services being provided by Genesys are not similar to IT Enabled Services being performed by the taxpayer. TPO further referred to the CBDT Circular No. SO 890(E) dated 26.9.2000 which gave a ITA NO. 6047/Del/2012 34 detailed list of products and services that could be claimed under ITES for the purpose of section 10A and 10B of the Act. Hence, TPO rejected the assessee’s objection in this regard. 34. The assessee has submitted before us that Genesis International Ltd. is engaged in providing Geographical Information Services which includes the generation, processing, management, and maintenance of data for GIS and other information management systems and all other services necessary for successful geospatial data implementation. Genesys has a highly specialized work force comprising of urban planners, cartographers, remote sensing scientists, photogrammetrists, civil engineers, field survey personnel and rocket scientists. 35. The Ld. Departmental Representative on the other hand relied upon the case of Wills Processing Services wherein Mumbai, ITAT held that based on notification no. SO 890(E) dated 26.9.2000 of CBDT all such services fall under ambit of ITES. 36. Against the above submissions in rejoinder it has been submitted by the assessee that assessee reference to the said Circular should be made for limited purpose of determining the eligibility of tax exemption under section 10 or 80HHE. It has been submitted that this Circular does not hold that services listed there as ‘IT Enabled Services’ are having same functional profile and are functionally comparable for transfer pricing purposes. Further it has been submitted that the matter was not properly argued before Mumbai, Tribunal Bench. 37. We have considered the submissions. We find that the above issue has already been adjudicated by us in the preceding paragraphs in relation to Acropetal and eClerx Services. Geographical Information System are very much included in the ITA NO. 6047/Del/2012 35 CBDT Circular NO. SO 890(E) dated 26.9.2000 which has given a detailed list of product and services which could be claimed under ITES for the purpose of Section 10A and 10B. The assesses argument that CBDT Notification as mentioned above should be considered only for the purpose of determining eligibility for tax exemption is not acceptable. The said Circular has been duly relied upon in ITAT decision cited above. Hence, based upon the reasoning mentioned in the above paragraphs and also relying upon the said precedents as well as precedent from the ITAT, Mumbai Bench, in the case of Wills Processing (Supra), we hold that TPO was correct in adding this as a comparable. V. V.V. V. Vishal Informatio Vishal InformatioVishal Informatio Vishal Information n n n Technologies Ltd. Technologies Ltd.Technologies Ltd. Technologies Ltd.– –– –Now Known as C Now Known as CNow Known as C Now Known as Coral Hub oral Huboral Hub oral Hub Limited. Limited. Limited. Limited. 38. As regards this comparable, Assessing Officer considered the same as comparable. Assessee objected to the same on the ground that it has not comparable cost structure. In this regard, it was submitted that employee cost of Coral Hub is only 4.39 percent of its operating cost and it has substantial vendor payments, hire charges etc. for Rs. 21.82 crores (i.e. 87 percent of its total expenditure) evidencing that the company has outsourced most part of its work and has not provided the services itself. It has been submitted that the Company which has outsourced most of its work will have a different business and revenue model as compared to service providers. It has further submitted that there are different business dynamics applicable to these two set of operating models respectively and a comparison of Coral Hub with the Assessee is ITA NO. 6047/Del/2012 36 inappropriate. However, TPO was not convinced. He referred to the information received from the comparable by issue of notice u/s. 133(6). TPO further observed as under:- “It can be seen from above that data conversion services (ITES) rendered by the taxpayers involves 9-10 steps. Of this process, stages 1 to 5 are performed by manpower vendors’ personnel in the office premises of the company and stages 6 to 9 are performed by the employees of the company. The expenses incurred for Vendors’ personnel are debited to data entry charges, vendor payments etc. Thus, as clarified by the company, the expenses under the head ‘data entry and vendor payments’ are towards personnel of vendors’ working from the premises of the company. Hence, the taxpayer’s argument that the company outsources its major work is incorrect and also clarified by the company as above. The company is thus rendering IT enabled services using its own assets and human resources (may not be on the roll of the company), and is functionally similar to the taxpayer. Recently, ITAT, Hyderabad in the case of Deloitte Consultant Pvt. Ltd. has upheld the inclusion of this company.“ 39. Now the assessee has submitted before us that this company outsourced its activities to external vendors and hence, follows a different business model vis-a-vis the assessee who employs its own personnel for rendering BPO services. Further, assessee has submitted that there are case laws of the Tribunal both in favour as ITA NO. 6047/Del/2012 37 well as against the above proposition. In light of the above, it has been submitted that this company should be rejected. 40. We find that the issue of comparability of Vishal Information System has been considered by this tribunal by the same Bench in the case of case of RAMgreen Solutions Private Limited vs. ACIT vide order dated 22.3.2013 in I.T.A. No. 6286/Del/2012 (A.Y. 2008-09) (Supra). In this case the Tribunal has held as under:- “19. Further, as regards the outsourcing issue is concerned, we agree with the DRP that outsourcing of routine non-discretionary functions, call centre, data entry, claim processing etc. to other parties is very common feature of ITeS industry. There is no dispute that the assessee derives its entire revenue from ITeS segment. The financial results shows that the company earns income from single revenue stream of IT Enables services. In this regard, we find that the ITAT, Hyberadbad in the case of Deloitte Consultant Pvt. Ltd. (Supra) on the same issue has held as under:- “It appears that the VITL has outsourced the manpower and the cost of outsourcing appears to have been included in the other heads of the expenditure instead of wages­employee cost. Moreover, the intangibles will not materially affect the price or profit earning. By outsourcing the manpower, the VITL would have incurred more cost compared to the assessee company, thus resulting in lesser operating profit. But, having considered the findings of the TPO, we find that the intangibles or outsourcing the manpower will not materially ITA NO. 6047/Del/2012 38 affect the price or profit margin. In our considered opinion, no two comparable companies can be replicas of each other. The application of Rule 10B should carried out and judged not with technical rigor, but on a broader prospective. In this view of the matter, we find no infirmity in the order of the Ld. Commissioner of Income Tax (A) in confirming the action of the TPO by selecting the VITL as comparable company.“ 41. Thus, we find that in the above exposition, it has been held that outsourcing of routine non-discretionary functions, call centre, data entry, claim processing etc. to other parties is very common feature of ITeS industry. There is no dispute that the assessee derives its entire revenue from ITeS industry. The financial results shows that the company earns income from single revenue stream of IT Enables services. Hence, following the above decision from the Tribunal in the case of RAMgreen Solutions Pvt. Ltd. (Supra), we uphold the inclusion of this comparable. VI. VI. VI. VI. HCL COMNET SYSTEMS & SERVICES LTD. HCL COMNET SYSTEMS & SERVICES LTD. HCL COMNET SYSTEMS & SERVICES LTD. HCL COMNET SYSTEMS & SERVICES LTD. 42. As regards this comparable, Assessing Officer held that it qualifies all the filters supplied by the TPO. The assessee objected to the said inclusion on various grounds including different financial year end; inadequate information; non comparable services; non- existent company in the assessee’s search matrix. However, the above objections were not accepted by the TPO. 43. Now the assessee has submitted before us that comparable with related party more than 25% should be rejected. In this regard, assessee has submitted that this company has a related party transactions in excess of 25 % of sales. This is a filter which has ITA NO. 6047/Del/2012 39 been applied by the Assessee and accepted by the TPO and DRP. But the assessee did not take this plea before the TPO and DRP. But based on information currently available assessee wishes to plead that on fact, the company should be excluded. 44. We have carefully considered the submissions. We find that assessee’s grievance regarding the inclusion of the above comparable is that it had a related party transactions in excess of 25% which is a filter which has been applied by the assessee and accepted by the TPO and DRP. Assessee could not take this plea earlier. But now based on information currently available, assessee has pleaded that the Company be excluded. We find that the concerned filter in this case has already been accepted by the Revenue. Under the circumstances, we remit this issue to the file of the TPO. The TPO shall examine if the Company is having related party transaction in excess of 25%, if the same is found to be true, the Company would be liable to be excluded. 45. Further, the assessee has submitted that this Company has been rejected by the ITAT in Capital IQ case on the ground that it is a IT giant. We find that we have already remitted the issue relating to the impact of the turnover on the comparability while adjudicating the case of Infosys and Wipro as above. On the same reasoning, we remit this issue to the file of the TPO. The TPO shall consider this aspect of the issue, if needed, after the judgement of the Special Bench is available with regard to this impact of turnover on comparability. VII & VIII. VII & VIII.VII & VIII. VII & VIII. WIPRO BPO WIPRO BPO WIPRO BPO WIPRO BPO / / / / INFOSYS BPO INFOSYS BPO INFOSYS BPO INFOSYS BPO 46. We find that while considering the Software Services Segment, we have already considered the inclusion of Wipro and Infosys as a comparable. We find that assessee has inter-alia objected on the ITA NO. 6047/Del/2012 40 inclusion of the comparable on the ground of huge difference turnover. As similar matter has been referred to the Special Bench of the Tribunal to consider the impact of turnover on comparability, we remit the inclusion of these comparables to the file of the TPO. The TPO shall consider the same afresh, after the decision of the Special Bench is available. 47. In the result, the assessee’s appeal is partly allowed for statistical purposes. Order pronounced in the Open Court on 14/6/2013. Sd/- Sd/- [ [[ [R.P. TOLANI R.P. TOLANIR.P. TOLANI R.P. TOLANI] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA][SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBERJUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER Date 14/6/2013 “SRBHATNAGAR” “SRBHATNAGAR”“SRBHATNAGAR” “SRBHATNAGAR” Copy forwarded to: Copy forwarded to: Copy forwarded to: Copy forwarded to: - -- - 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY By Order, Assistant Registrar, ITAT, Delhi Benches ITA NO. 6047/Del/2012 41