United Health Group Information Services Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 6312/DEL/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7417 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 26-08-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 20-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: YOGESH K VERMA
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I, NEW DELHI BEFORE SH. R. S. SYAL, AM AND SH. GEORGE GEORGE K. , JM ITA NO. 6312/DEL/2012 : ASSTT. YEAR : 2008-09 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD., 11 TH FLOOR, TOWER- A, DLF TOWERS JASOLA, JASOLA DISTRICT CENTRE NEW DELHI-110025 VS ASSISTANT COMMISSIONER OF INCOME- TAX, CIRCLE-18(1), NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. AADCA6769Q ASSESSEE BY : SH. NITIN NARANG, CA, HARPREET AJMANI , ADV. & DEEPAK C HOPRA, ADV. REVENUE BY : SH. YOGESH K. VERMA, CIT DR DATE OF HEARING : 26.8.2014 DATE OF PRONOUNCEMENT : 28.8.2014 ORDER PER R. S. SYAL, AM: THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE ORDER PASSED BY THE ASSESSING OFFICER ON 31.10.2012 U/S 143(3) R.W.S. 1 44C OF THE INCOME- TAX ACT, 1961 (HEREINAFTER ALSO CALLED `THE ACT) I N RELATION TO THE ASSESSMENT YEAR 2008-09. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THA T THE ASSESSEE WAS INCORPORATED IN INDIA IN JANUARY 2007. IT IS ENGAGE D IN THE BUSINESS OF PROVIDING EXPERTISE IN SOFTWARE DEVELOPMENT, HEALTH CARE CLAIM ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 2 ADJUDICATION AND BIO-PHARMACEUTICAL SERVICES. SEVEN INTERNATIONAL TRANSACTIONS - PROVISION OF CLAIM PROCESSING SERVI CES (ITES), PROVISION OF DATA ANALYTICS SERVICES, PROVISION OF SOFTWARE DEVELOPMENT SERVICES, CLINICAL RESEARCH SERVICES , REIMBURSEMENT OF EXPENSES TO THE ASSESSEE, REIMBURSEMENT OF EXPAT RIATES SALARIES BY THE ASSESSEE AND ADVANCE MONEY RECEIVED - WERE RE PORTED BY THE ASSESSEE. THE ASSESSEE FURNISHED SEGMENT WISE FINA NCIAL DATA TO DEMONSTRATE THAT ITS INTERNATIONAL TRANSACTIONS WER E AT ALP ON SEGMENTAL LEVEL UNDER THE TRANSACTIONAL NET MARGIN METHOD (TN MM). THE TPO EXAMINED THE RESULTS OF VARIOUS SEGMENTS SEPARATELY BY APPLYING TNMM WITH THE SAME FILTER OF THE OP/TC. THE TPO ACCEPTED THE LAST FOUR TRANSACTIONS AT ARMS LENGTH PRICE (ALP). HE CLUBBE D FIRST TWO TRANSACTIONS OF PROVISION OF CLAIM PROCESSING SERV ICES AND PROVISION OF DATA ANALYTICS SERVICES UNDER A COMMON ITES SE GMENT AND BENCHMARKED THEM ON A CONSOLIDATED BASIS. SIMILARLY HE DID NOT ACCEPT THE PRICE DECLARED BY THE ASSESSEE FOR PROVISION O F SOFTWARE DEVELOPMENT SERVICES AT ALP. 3. THE POSITION WHICH, THEREFORE, EMERGES IS TH AT THE TPO DID NOT DISPUTE THE CORRECTNESS OF THE SEGMENTAL DATA. HE H AS ALSO BENCHMARKED THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE AT T HE SEGMENTAL LEVEL RATHER THAN ENTITY LEVEL. SINCE THE DISPUTE IN THE PRESEN T APPEAL RELATES TO THE TRANSFER PRICING ADJUSTMENT IN TWO SEGMENTS, VIZ., ITES AND SOFTWARE DEVELOPMENT SERVICES, WE WILL CONSIDER THEM ONE BY ONE. ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 3 A. ITES SEGMENT 4. FIRSTLY, WE TAKE UP THE ITES SEGMENT , INT ERNATIONAL TRANSACTIONS IN RESPECT OF WHICH AMOUNTED TO RS. 75,18,04,293/- UND ER CLAIM PROCESSING SERVICES AND RS. 5,32,54,700/- UNDER TH E PROVISION OF DATA ANALYTICS SERVICES. NO SERIOUS OBJECTION HAS BEEN TAKEN BY THE LD. AR ON THE CLUBBING OF THESE TWO INTERNATIONAL TRANSACT IONS BY THE TPO UNDER THE OVERALL ITES SEGMENT. AS SUCH, WE ARE ALSO PROC EEDING ACCORDINGLY. 5. WE WANT TO MAKE IT CLEAR THAT THERE IS NO DI SPUTE AS REGARDS THE APPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD; USE OF CURRENT YEAR DATA ALONE; AND THE CALCULATION OF THE ASSESE ES PLI. THE ASSESSEE CHOSE EIGHT COMPANIES AS COMPARABLE UNDER THE SEGME NT IN ITS TP STUDY REPORT BY USING MULTIPLE YEAR DATA. ON BEING CALLED UPON TO RE-RUN THE DATABASES USING CURRENT YEAR DATA AND APPLYING THE CORRECT FILTERS, THE ASSESSEE REDUCED THE NUMBER OF COMPANIES AS COMPARA BLE TO SIX. THE TPO CARRIED OUT FRESH SEARCH AT HIS LEVEL AND BROUG HT SEVEN NEW COMPANIES AS COMPARABLE. BY ELIMINATING TWO COMPANI ES FROM THE ASSESSEES LIST OF COMPARABLES, INCLUDING SEVEN COM PANIES CHOSEN BY HIM AS COMPARABLE AND ONE MORE COMPANY AT THE INSTA NCE OF ASSESSEE, THE TPO DREW A LIST OF TWELVE COMPARABLE COMPANIES WITH THEIR RESPECTIVE AND ARITHMETIC MEAN OF SUCH OP/TC AS UND ER:- ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 4 SL. NO. NAME OF COMPARABLE OP/TC (%) 1. COSMIC GLOBAL LTD. 23.3 2. CALIBER POINT BUSINESS SOLUTIONS LTD. 10.97 3. R SYSTEMS INTERNATIONAL LTD. (SEG.) 4.3 4. TRITON CORP LTD. 23.81 5. ASIT C MEHTA FINANCIAL SERVICES LTD. (SEG.) 9.42 6. ECLERX SERVICES LTD. 65.88 7. GENESYS INTERNATIONAL CORPN LTD. 47.4 8. INFOSYS BPO LTD. 20.01 9. JINDAL INTELLICOM PVT. LTD. -8.66 10. MOLD-TEK TECHNOLOGIES LTD. 96.66 11. VISHAL INFORMATION TECHNOLOGIES LTD. 50.68 12. SPANCO LTD. 8.94 AVERAGE 29.39 6. BY CALCULATING THE PLI OF OP/TC OF SUCH COMPARAB LE COMPANIES AT 29.39%, THE TPO PROPOSED THE TRANSFER PRICING ADJUS TMENT UNDER THIS SEGMENT TO THE TUNE OF RS. 12,35,42,873/-. THE ASSE SSEE OBJECTED BEFORE THE DISPUTE RESOLUTION PANEL (DRP) TO SUCH ADDITION PROPOSED BY THE ASSESSING OFFICER IN THE DRAFT ORDER PURSUANT TO TH E TPOS ORDER. CERTAIN DIRECTIONS WERE ISSUED BY THE DRP. THE TPO RECALCUL ATED THE TRANSFER PRICING ADJUSTMENT UNDER ITES SEGMENT AT RS. 6,34,0 1,567/-. THE ASSESSING OFFICER MADE SUCH ADDITION FOR A SUM OF R S. 6.34 CRORE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT UNDER ITES S EGMENT. 7. THE ASSESSEE IS AGGRIEVED ON THIS ISSUE ON TW O COUNTS, VIZ., I. NOT ALLOWING WORKING CAPITAL ADJUSTMENT AND II. THE IN CLUSION OF THE FOLLOWING FOUR COMPANIES IN THE LIST OF COMPARABLES : - ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 5 I) COSMIC GLOBAL LTD. II) ECLERX SERVICES LTD. III) GENESYS INTERNATIONAL CORPN LTD. IV) VISHAL INFORMATION TECHNOLOGIES LTD. 8. BEFORE CONSIDERING THE COMPARABILITY OR OTHERWIS E OF THE ABOVE COMPANIES WITH THE ASSESSEE, IT IS SINE QUA NON TO FIRST ASCERTAIN THE ASSESSEES FUNCTIONAL PROFILE. UNDER THIS SEGMENT, THE ASSESSEE IS ENGAGED IN PROVIDING THE MANUAL CLAIM PROCESSING S ERVICES TO ITS FOREIGN A.E. AND ALSO PROVIDING SERVICES RELATING T O ANALYZING DATA ON HEALTH INSURANCE, LAUNCHING LUCRATIVE INSURANCE PRO DUCTS. HERE IT IS IMPORTANT TO MENTION THAT THE UNITED HEALTH CORP. G ROUP IS, INTER ALIA , ENGAGED IN HEALTH RELATED INSURANCE BUSINESS. SO TH E SERVICES PROVIDED BY THE ASSESSEE UNDER THIS SEGMENT ARE MAINLY IN TH E NATURE OF PROCESSING ON MANUAL BASIS, THE INSURANCE CLAIMS LODGED BY ITS POLICY-HOLDERS. WITH THE ABOVE BACKGROUND OF THE NATURE OF FUNCTIONS PER FORMED BY THE ASSESSEE UNDER THIS SEGMENT, WE WILL PROCEED TO DEC IDE AS TO WHETHER THE ABOVE REFERRED FOUR COMPANIES ARE COMPARABLE OR NOT . COSMIC GLOBAL LTD. 9.1. THIS COMPANY WAS INITIALLY CHOSEN BY THE ASSES SEE AS ITS COMPARABLE AND RESULTANTLY, THE TPO INCLUDED THE SA ME IN THE FINAL LIST OF COMPARABLES WITHOUT ANY DISCUSSION. THE LD. AR C ONTENDED THAT THIS ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 6 COMPANY WAS INADVERTENTLY CHOSEN AS COMPARABLE AND HENCE THE SAME SHOULD BE ELIMINATED ON ACCOUNT OF FUNCTIONAL DIFFE RENCES. 9.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY THAT THE FINANCIAL RESULTS IN THE BALANCE SHEET AND PROF IT AND LOSS ACCOUNT ARE AVAILABLE ONLY ON ENTITY LEVEL. INCOME FROM OPERATI ONS HAS BEEN SHOWN AS RS. 5.86 CRORE, THE BREAK-UP OF WHICH IS AVAILAB LE IN SCHEDULE 9. IT IS DISCERNIBLE FROM THE SCHEDULE THAT THE MEDICAL TRAN SCRIPTION AND CONSULTANCY SERVICES ARE ONLY TO THE TUNE OF RS. 7. 04 LAC, WHEREAS THE MAJOR CHUNK IS THE AMOUNT OF TRANSLATION CHARGES ST ANDING AT RS. 5.59 CRORE WITH THE LAST COMPONENT OF REVENUE FROM BPO A T A FIGURE OF RS. 19.63 LAC. WHEN WE PERUSE THE EXPENDITURE SIDE OF T HE PROFIT AND LOSS OF THIS COMPANY, IT IS PALPABLE THAT IT PAID TRANSL ATION CHARGES AMOUNTING TO RS. 2.86 CRORE. THUS, IT IS MANIFEST THAT THE RE VENUE FROM MEDICAL TRANSCRIPTION SERVICES, WHICH COULD BEAR SOMEWHAT S IMILARITY WITH THE ASSESSEE, IS HARDLY 1% OF THE TOTAL REVENUES OF THI S COMPANY. THE MAJOR PART IS THE INCOME FROM TRANSLATION CHARGES AT RS. 5.59 CRORE OUT OF TOTAL REVENUES OF RS. 5.86 CRORE, WHICH IS TOTALLY DISSIM ILAR TO THAT OF THE ASSESSEE. THE ASSESSEE IS NOT INTO ANY TRANSLATION BUSINESS. AS THE ASSESSEE IS ENGAGED IN RENDERING INSURANCE CLAIM PR OCESSING SERVICES TO ITS A.E UNDER THIS SEGMENT, WE FIND NO LOGICAL COM PARISON OF COSMIC GLOBAL WITH THAT OF THE ASSESSEE. ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 7 9.3. WE ARE NOT AGREEABLE WITH THE LD. DR THAT TH IS COMPANY CANNOT BE EXCLUDED BECAUSE IT WAS INITIALLY INCLUDED BY THE A SSESSEE IN ITS LIST OF COMPARABLES. THE OBVIOUS REASON IS THE DIFFERENTIA TION IN THE FUNCTIONAL PROFILES OF TWO COMPANIES. MERELY BECAUSE THE ASSES SEE INADVERTENTLY INCLUDED THIS COMPANY IN THE LIST OF COMPARABLE, C AN BE NO REASON TO BAR THE ASSESSEE FROM CLAIMING THAT IT WAS WRONGLY INCL UDED. WHAT IS ESSENTIAL IN THIS REGARD IS TO SEE WHETHER THE COMP ANY IS, IN FACT, COMPARABLE OR NOT; AND NOT WHETHER IT WAS INCLUDED BY THE ASSESSEE OR THE TPO IN THE LIST OF COMPARABLES. WE, THEREFORE, HOLD THAT COSMIC GLOBAL LTD. IS INCOMPARABLE TO THE ASSESSEE AND DIR ECT TO EXCLUDE IT FROM THE LIST OF COMPARABLES. THE ASSESSEE SUCCEEDS. ECLERX SERVICES LTD. 10.1. THIS COMPANY WAS INCLUDED BY THE TPO IN HIS LIST OF COMPARABLES. THE ASSESSEE OBJECTED TO ITS INCLUSION BY POINTING OUT SOME FUNCTIONAL DIFFERENCES. NOT CONVINCED, THE TPO WENT AHEAD WITH ITS INCLUSION, WHICH GOT THE SEAL OF APPROVAL FROM THE DRP. 10.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT THIS COMPAN Y IS ENGAGED IN PROVIDING DATA ANALYTICS AND CUSTOMIZED PROCESS SOL UTIONS TO A HOST OF GLOBAL CLIENTS. IT PROVIDES SERVICES TO THE BANKING , MANUFACTURING, RETAIL, TRAVEL AND HOSPITABILITY VERTICALS. THE SOL UTIONS OFFERED BY IT INCLUDE DATA ANALYTICS, OPERATION MANAGEMENT, AUDIT AND RECONCILIATION, ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 8 METRICS MANAGEMENT AND REPORTING SERVICES. THIS COM PANY ALSO PROVIDES TAILORED PROCESS OUTSOURCING AND MANAGEMENT SERVICE S ALONG WITH A MULTITUDE OF DATA AGGREGATION, MINING AND MAINTENAN CE SERVICES. A LOOK AT THE FUNCTIONAL PROFILE OF THIS COMPANY FROM ITS ANNUAL REPORT, IT CAN BE SEEN THAT IT IS NOWHERE CLOSE TO THE ASSESSEES INS TANT SEGMENT OF MANUAL CLAIM PROCESSING SERVICES. 10.3. IT IS FURTHER RELEVANT TO NOTE THAT THIS C OMPANY ACQUIRED UK BASED IGENICA AND TRAVEL SOLUTIONS LTD. ON 27.7.2007 AND THE FINANCIAL RESULTS OF THAT COMPANY ARE ALSO INCLUDED IN ITS. RECENTLY, THE DELHI BENCH OF THE TRIBUNAL IN TOLUNA INDIA PVT. LTD. VS ACIT (ITA NO. 5645/DEL/2013) VIDE ITS ORDER DATED 26.8.2014 HAS H ELD THAT THE MERGERS/DE-MERGERS IN A COMPANY MAKE SUCH YEAR AS U NFIT FOR COMPARISON. IN REACHING THIS CONCLUSION, THE DELH I BENCH FOLLOWED AN ORDER PASSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN PETRO ARALDITE (P) LTD. VS DCIT (2013) 154 TTJ (MUM.) 176 IN WHICH IT HAS BEEN HELD THAT A COMPANY CANNOT BE CONSIDERED AS COMPARABLE BECAUS E OF EXCEPTIONAL FINANCIAL RESULTS DUE TO MERGER/DE-MERGER ETC. IN V IEW OF THE FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT T HIS COMPANY CANNOT BE INCLUDED IN THE LIST OF COMPARABLES. THE ASSESSEE S UCCEEDS. ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 9 GENESYS INTERNATIONAL CORPN. LTD. 11.1. THE TPO INCLUDED THIS COMPANY IN THE LIST O F COMPARABLES BY OBSERVING FROM ITS ANNUAL REPORT THAT IT OPERATED I N A SINGLE BUSINESS SEGMENT. THE ASSESSEE OBJECTED TO ITS INCLUSION, BU T WITHOUT SUCCESS. 11.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D PERUSING THE RELEVANT MATERIAL IN RECORD, WE FIND THAT THIS COMPANY IS EN GAGED IN RENDERING GEOSPATIAL SERVICES CATERING TO THE NEEDS OF CONSUM ER MAPPING, NAVIGATION AND INTERNET PORTALS. IT IS PROVIDING MA PPING TECHNOLOGIES MANAGING THE EARTHS RESOURCES AND SURFACES AT A TI ME. TALENT ECO SYSTEM WITH THIS COMPANY INCLUDES URBAN PLANNERS, CARTOGRA PHERS, REMOTE SENSING SCIENTISTS ETC. AND EVEN ROCKET SCIENTISTS, GIVING ITS SKILLS IN ALL KINDS OF LAND BASE WORK. WHEN WE CONSIDER THE NATUR E OF WORK DONE BY THE ASSESSEE UNDER ITS ITES SEGMENT, WHICH IS SIMPL Y THAT OF PROCESSING INSURANCE CLAIMS MANUALLY, WE FAIL TO SEE AS TO HOW THIS COMPANY CAN BE CONSIDERED AS COMPARABLE. WE, THEREFORE, ORDER FOR THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. THE ASSESSEE SUCCEEDS. VISHAL INFORMATICS 12.1. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES BY NOTICING THAT IT WAS ENGAGED IN PROVIDING BPO SERVI CES. THE ASSESSEE FAILED TO CONVINCE HIM AND THE DRP THAT IT WAS INCO MPARABLE. ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 10 12.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY THAT IT IS MAINLY ENGAGED IN E-PUBLISHING BUSINESS. IT H AS MORE THAN 10,000 CLASSIC BOOKS TO ITS CREDIT WHICH ARE ALSO CONVERTE D INTO LARGE FONT TITLES FOR VISUALLY CHALLENGED. APART FROM E-PUBLISHING, T HIS COMPANY IS ALSO ENGAGED IN DOCUMENTS SCANNING & INDEXING. IT CAN B E SEEN FROM THE FINANCIAL RESULTS OF THIS COMPANY THAT BOTH THE SEG MENTS VIZ., E- PUBLISHING AND DOCUMENTS SCANNING ETC. HAVE BEEN CO MBINED AND THERE ARE NO SEPARATE FINANCIAL RESULTS IN RESPECT OF DOC UMENTS SCANNING WORK, WHICH MAY BE COMPARABLE WITH THE ASSESSEE TO SOME E XTENT. AS THE ASSESSEE IS NOT ENGAGED IN ANY E-PUBLISHING BUSINES S AND THE FINANCIALS GIVEN BY THIS COMPANY ARE ON CONSOLIDATED BASIS, WE DIRECT TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. THE ASSE SSEE SUCCEEDS. 13.1. NOW, WE ESPOUSE THE NEXT CONTENTION RAISED BY THE LD. AR ABOUT THE DENIAL OF WORKING CAPITAL ADJUSTMENT, WHICH WAS CLAIMED BEFORE THE TPO. THE DRP ECHOED THE TPOS ORDER ON THIS SCORE BY NOTICING THAT THE ASSESSEE TOOK THE AVERAGE OF THE AMOUNT OF WORK ING CAPITAL DEPLOYED BY THE COMPARABLES ON THE FIRST AND LAST DAY OF ACC OUNTING PERIOD TO COMPUTE THE WORKING CAPITAL ADJUSTMENT AND THERE WE RE NO MEANS TO ASCERTAIN THE WORKING CAPITAL DEPLOYED BY THE COMPA RABLES THROUGHOUT THE YEAR ON DAILY BASIS. THE ASSESSEE IS AGGRIEVED. ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 11 13.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD, IT IS MANIFEST THAT THE WORKING CAPITAL ADJUSTMENT IS REQUIRED WITH REFERENCE TO STOCK, TRADE RECEIVABLE AND TRADE PAYABLES. BY CARRYING THE HIGH TRADE RECEIVABLES, A COMPANY ALLO WS ITS CUSTOMERS A RELATIVELY LONGER PERIOD TO PAY THEIR ACCOUNTS, WHI CH RESULTS INTO HIGHER INTEREST COST AND LOWER PROFIT. BY CARRYING HIGH TR ADE PAYABLES, A COMPANY BENEFITS FROM A RELATIVELY LONGER PERIOD AV AILABLE TO IT FOR PAYING BACK ITS SUPPLIERS, WHICH RESULTS INTO ITS L OWER INTEREST COST AND HIGHER PROFIT. SIMILARLY, HIGH STOCK MEANS BLOCKAG E OF FUNDS AND THE RESULTANT LOWER PROFIT. THESE THREE INGREDIENTS DIR ECTLY IMPACT THE WORKING CAPITAL AND RESULTANT PROFIT OF COMPARABLES VIS--VIS THE ASSESSEE. A WORKING CAPITAL ADJUSTMENT IS REQUIRED TO BE EFFECTED FOR BRINGING THE COMPARABLES AND THE ASSESSEE AT THE SA ME PEDESTAL. THE LD. DRP UPHELD THE DENIAL OF SUCH ADJUSTMENT BY NOTICIN G THAT THERE WERE NO MEANS TO ASCERTAIN THE WORKING CAPITAL DEPLOYED BY THE COMPARABLES THROUGHOUT THE YEAR ON DAILY BASIS. IF THE CONTENTI ON OF THE LD. DRP IS TAKEN TO A LOGICAL CONCLUSION, THEN THERE CAN NEVER BE A WORKING CAPITAL ADJUSTMENT, BECAUSE IN NO CASE, THE DAILY FIGURES O F COMPARABLES WOULD COME TO THE FORE. SINCE, THE AUTHORITIES BELOW HAVE DENIED WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE ON FLIMSY GROUND , WE VACATE THEIR ACTION AND HOLD IN PRINCIPLE THAT THE GRANT OF WORK ING CAPITAL ADJUSTMENT, IF OTHERWISE AVAILABLE, CANNOT BE JEOPARDIZED. HOWE VER, AS REGARDS THE QUANTUM OF WORKING CAPITAL ADJUSTMENT, WE DIRECT TH E AO/TPO TO VET ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 12 THE CORRECTNESS OF THE AMOUNT OF WORKING CAPITAL AD JUSTMENT CLAIMED BY THE ASSESSEE AND THEN DECIDE ITS ALLOWABILITY AS PE R LAW. 14. IN THE FINAL ANALYSIS, WE SET ASIDE THE TRANSFE R PRICING ADJUSTMENT OF RS. 6.34 CRORE MADE BY THE A.O UNDER THE ITES SE GMENT AND SEND THE MATTER BACK TO A.O/TPO FOR A FRESH COMPUTATION OF T HE ALP OF THE INTERNATIONAL TRANSACTIONS UNDER THIS SEGMENT AS PE R LAW, IN CONSONANCE WITH OUR DIRECTIONS ABOVE. NEEDLESS TO SAY, THE AS SESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD. B. SOFTWARE DEVELOPMENT SEGMENT 18. THE ASSESSEE REPORTED INTERNATIONAL TRANSACTION S UNDER THIS SEGMENT TO THE TUNE OF RS. 93.86 CRORE. CERTAIN COMPARABLES WERE CHOSEN TO SHOW THAT THE INTERNATIONAL TRANSACTIONS WERE AT ALP. IN DOING SO, THE ASSESSEE SELECTED TNMM AS THE MOST APPROPRIATE METHOD. THE T PO CARRIED OUT A FRESH EXERCISE FOR SELECTING NEW COMPARABLES. AFTER SEEKING OBJECTIONS FROM THE ASSESSEE, HE FINALLY DREW A LIST OF TWENTY COMPANIES AS COMPARABLE WHICH ALSO INCLUDED SOME OF THOSE CHOSEN BY THE ASSESSEE. THE ARITHMETIC MEAN OF OP/TC OF SUCH COMPARABLE COM PANIES WAS DETERMINED AT 25.63%. ACCORDINGLY A TP ADJUSTMENT OF RS. 10.95 CRORE WAS PROPOSED. THE ASSESSEE OBJECTED TO THE SAME BEF ORE THE DRP. ON RECEIPT OF DIRECTIONS FROM THE DRP, THE TPO RECOMPU TED THE WORKING CAPITAL ADJUSTMENT UNDER THIS SEGMENT AT RS. 5,11,3 3,714/-. THE ASSESSING OFFICER MADE ADDITION FOR THIS SUM. THE A SSESSEE IS AGGRIEVED ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 13 AGAINST THE TRANSFER PRICING ADJUSTMENT UNDER THE SOFTWARE DEVELOPMENT SEGMENT BY CONTENDING THAT FIRSTLY, TH E WORKING CAPITAL ADJUSTMENT OUGHT TO HAVE BEEN ALLOWED AND SECONDLY, THE FOLLOWING THREE COMPARABLES SHOULD HAVE BEEN EXCLUDED FROM THE LIST OF COMPARABLES : - I) 3K TECHNOLOGIES LTD. II) INFOSYS TECHNOLOGIES LTD. III) KALS INFORMATION SYSTEMS LTD. (SEGMENT) 19. IN ORDER TO EXAMINE AND DECIDE ABOUT THE COMPAR ABILITY OR OTHERWISE OF THESE THREE COMPANIES, IT IS OF UTMOST IMPORTANCE TO CONSIDER THE NATURE OF JOB DONE BY THE ASSESSEE UND ER THIS SEGMENT. INTERNAL PAGE 7 OF THE TP STUDY REPORT DIVULGES THA T THE ASSESSEE HAS CERTAIN SELF-DEVELOPED DATA PROCESSING AND DATA ANA LYTICS SOFTWARE WHICH ARE USED FOR SEVERAL INTERNAL PURPOSES, INCLUDING B ENEFIT DESIGN, BENCHMARKING, CLAIM PROCESSING, COST TRADING, MARKE TING, MANAGING RELATIONS AND INCREASING EFFICIENCY AND PROFITABILI TY. WHEN WE PERUSE THE TERMS OF THE SERVICE AGREEMENT BETWEEN THE ASSESSEE AND ITS A.E, PURSUANT TO WHICH SUCH SERVICES WERE RENDERED, IT T URNS OUT THAT THE ASSESSEE WAS SUPPOSED TO DO THE FOLLOWING : - 1. DEVELOPMENT, TESTING AND MAINTENANCE OF INTERNA L COMPANY SOFTWARE PURSUANT TO COMPANY SOFTWARE DEVELOPMENT L IFE CYCLE (SDLS) PROCESS. ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 14 A) PROVIDE LARGE SCALE SHARED SERVICES TESTING INFRAST RUCTURE CAPABILITY. B) PROVIDE DEVELOPMENT, TESTING AND OPERATIONS FOR SPE CIFIED DATA MAPS USING BEST METHODS FOR EXTRACT, TRANSFORM AND LOAD (EDL) DATA WAREHOUSE PROCESSES. 20. FROM THE ABOVE SERVICES RENDERED BY THE ASSE SSEE WHICH HAVE BEEN SET OUT IN EXHIBIT-B OF THE SERVICES AGREEMENT, IT IS CLEAR THAT THE ASSESSEE IS ENGAGED IN DEVELOPMENT, TESTING AND MAI NTENANCE OF INTERNAL COMPANY SOFTWARE IN RESPECT OF TESTING INFRASTRUCTU RE CAPABILITY AND OF SPECIFIED DATA TO BE USED BY ITS A.E. AS THESE SOF TWARE DEVELOPMENT SERVICES HAVE BEEN RENDERED TO ITS AE IN RESPECT OF THE BUSINESS CARRIED ON BY THE LATTER, IT ASSUMES SIGNIFICANCE TO SEE TO THE NATURE OF THE BUSINESS OF SUCH AE TO FIND OUT THE CORRECT NATURE OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE ASSESSEE. 21. THE LD. AR HAS FILED A COPY OF EXTRACT OF IN FORMATION FILED BY UNITED HEALTH GROUP (ITS A.E), WHICH WAS FURNISHED BEFORE THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION. IT DIVU LGES THE NATURE OF ACTIVITY UNDERTAKEN BY THE FOREIGN A.E., WHICH HAS BROADLY FOUR FUNCTIONS, NAMELY, HEALTH CARE SERVICES, OPTUM HEAL TH, INGENIX AND PRESCRIPTION SOLUTIONS. IN SO FAR AS FIRST TWO FUNC TIONS ARE CONCERNED, THESE ARE QUA THE PROVISION OF HEALTH CARE SOLUTIONS BY MEANS O F HEALTH INSURANCE POLICIES ETC. CATERING TO DIFFERENT AGE-G ROUPS. THE THIRD ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 15 FUNCTION, NAMELY, INGENIX IS AN ALTOGETHER DIFFERE NT WORK TOTALLY UNRELATED TO THE HEALTH SERVICES. PAGE 7 OF THIS RE PORT INDICATES THAT INGENIX OFFERS DATABASE AND DATA MANAGEMENT SERVICE S, SOFTWARE PRODUCTS, PUBLICATIONS, CONSULTING AND ACTUARIAL SE RVICES, BUSINESS PROCESS OUTSOURCING SERVICES AND PHARMACEUTICAL DAT A CONSULTING AND RESEARCH SERVICES. THE DESCRIPTION OF THE FOURTH FU NCTION, NAMELY, PRESCRIPTION SOLUTIONS HAS BEEN SET OUT ON PAGE 8 O F THIS REPORT, WHICH INCLUDES RETAIL NETWORK, PHARMACY MANAGEMENT, MAIL ORDER PHARMACY SERVICES, SPECIALTY PHARMACY SERVICES, BENEFIT DESI GN CONSULTATION, DRUG UTILIZATION REVIEW AND DISEASE THERAPY MANAGEMENT E TC. FROM THE ABOVE FOUR BROADER FUNCTIONS CARRIED OUT BY THE ASSESSEE S A.E, IN WHICH THE ASSESSEE IS PROVIDING SOFTWARE DEVELOPMENT SERVICES , IT CAN BE SEEN THAT THE NATURE OF SOFTWARE DEVELOPMENT BY THE ASSESSEE IS OF QUIET A WIDE RANGE. WE WANT TO MAKE IT MANIFEST FROM THE SERVIC ES AGREEMENT THAT THE INTELLECTUAL PROPERTY RIGHTS IN RESPECT OF THE SOFTWARE DEVELOPED BY THE ASSESSEE DO NOT VEST IN IT BUT WITH ITS A.E. FU RTHER, THE OWNERSHIP AND COPYRIGHT OF THE SOFTWARE DEVELOPED BY THE ASS ESSEE ALSO LIE WITH ITS A.E AND THE ASSESSEE HAS NO RIGHT IN THEM. 22. WITH THE ABOVE OVERVIEW OF THE NATURE OF WOR K DONE BY THE ASSESSEE UNDER THE SOFTWARE DEVELOPMENT SEGMENT, LET US EXAMINE THE COMPARABILITY OF THE THREE DISPUTED COMPANIES. ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 16 3K TECHNOLOGIES LTD. 23.1. THE TPO INCLUDED THIS COMPANY IN THE LIST O F COMPARABLES BY OBSERVING THAT IT WAS ONLY ENGAGED IN THE SOFTWARE DEVELOPMENT. THE ASSESSEE OBJECTED TO ITS INCLUSION BY ARGUING THAT ITS EMPLOYEE COST WAS 3.74% OF THE TOTAL COST AND HENCE IT WAS NOT PASSIN G THE FILTER OF EMPLOYEES COST MORE THAN 25% OF THE TOTAL COST. THE TPO REJECTED THIS CONTENTION BY NOTICING THAT ONSITE-EXPENSES WERE ALSO PART OF EMPLOYEES COST, WHICH WERE NOT CONSIDERED BY THE AS SESSEE. 23.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY THAT APART FROM PERSONNEL COST OF RS. 1.15 CRORE, THERE ARE ONSITE EXPENSES TO THE TUNE OF RS. 26.74 CRORE AND ALSO ADMINISTR ATIVE AND OTHER EXPENSES AMOUNTING TO RS. 3.50 CRORE, WHICH ALSO INCLUDE PERSONNEL COST. AS CAN BE SEEN FROM THE DETAILS OF ADMINISTR ATIVE AND OTHER EXPENSES GIVEN IN SCHEDULE-11 OF THE ANNUAL ACCOUN TS THAT THE DIRECTORS REMUNERATION AMOUNTING TO RS. 1.08 CRORE IS PART OF IT, WHICH IS NOTHING BUT PERSONNEL COST. IN SO FAR AS ONSITE EXPENSES ARE CONCERNED, IT CAN BE SEEN THAT THE NATURE OF BUSINE SS OF THE COMPANY IS THAT OF DEVELOPMENT OF COMPUTER SYSTEM AND OTHER RE LATED ACTIVITIES. IT IS BUT NATURAL THAT WHEN THE COMPANY IS RENDERING SERV ICES TO ITS CUSTOMER AT THEIR DOORSTEP, IT WILL INCUR ONSITE EXPENSES, W HICH WOULD PREDOMINANTLY INCLUDE THE PERSONNEL COST. AS THE BU SINESS OF THIS ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 17 COMPANY HAS NOT BEEN SHOWN TO BE FUNCTIONALLY DIFFE RENT FROM THAT OF THE ASSESSEE AND FURTHER IT IS AN ADMITTED POSITION THAT EVEN IF A PART OF SUCH ONSITE EXPENSES IS INCLUDED IN THE PERSONNEL COST, IT WOULD PASS THE FILTER OF EMPLOYEE COST MORE THAN 25% OF THE TO TAL COST, WE UPHOLD THE VIEW TAKEN BY THE TPO IN THIS REGARD. THE ASSES SEE FAILS. INFOSYS TECHNOLOGIES LTD. 24. FROM THE ABOVE DESCRIPTION OF THE NATURE OF SERVICES RENDERED BY THE ASSESSEE TO ITS AE ON A COST PLUS BASIS WITHOUT HAVING ANY INTANGIBLE ASSETS OR RETAINING ANY INTELLECTUAL PROPERTY RIGHT S IN THE WORK DONE BY IT, WE FIND THAT INFOSYS TECHNOLOGIES LTD., WHICH IS OT HERWISE A GIANT COMPANY IN TERMS OF RISK PROFILE, SCALE, NATURE OF SERVICES, REVENUE OWNERSHIP OF BRANDED/PROPRIETARY PRODUCTS, ONSITE A ND OFFSHORE SERVICES, ETC., CANNOT BE COMPARED WITH THE ASSESSEE. OUR VI EW IS FORTIFIED BY THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. [(2013) 219 TAX MAN 26 (DEL)]. THE PARAMETERS ON WHICH INFOSYS TECHNOLOGIES LTD., WAS HELD TO BE NOT COMPARABLE WITH THAT ASSESSEE, ARE FULLY APPLICABLE HERE ALSO. WE, THEREFORE, DIRECT THE EXCLUSION OF THIS COMPANY FRO M THE LIST OF COMPARABLES. THE ASSESSEE SUCCEEDS. ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 18 KALS INFORMATION SYSTEM LTD. (SEGMENT) 25.1. THE TPO INCLUDED THE SOFTWARE DEVELOPMENT SEGMENT OF THIS COMPANY IN THE LIST OF COMPARABLES. THE ASSESSEE IS AGGRIEVED AGAINST THIS INCLUSION. 25.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, IT IS FOUND AS AN ADMITTED POSI TION THAT THE TPO ADOPTED SOFTWARE DEVELOPMENT SEGMENT OF THIS COM PANY. FROM THE ANNUAL REPORT OF THIS COMPANY IT CAN BE NOTICED THA T THIS SEGMENT ALSO INCLUDES REVENUES FROM SOFTWARE PRODUCTS. IN VIEW OF THE FACT THAT THE ASSESSEE IS NOT ENGAGED IN SELLING ANY SOFTWARE PR ODUCTS, WE HOLD THAT THE FINANCIALS OF THIS COMPANY UNDER THIS SEGMENT C ANNOT BE COMPARED WITH THE ASSESSEE. THE CONTRIBUTION BY THE SALE OF SOFTWARE PRODUCTS TO THE OVERALL REVENUE OF THIS SEGMENT CANNOT BE PRECI SELY ASCERTAINED FOR DETERMINING THE QUESTION OF ITS COMPARABILITY. AS S UCH, THIS COMPANY IS DIRECTED TO BE EXCLUDED. THE ASSESSEE SUCCEEDS. 26. THE LD. AR ALSO ASSAILED THE IMPUGNED ORDER IN NOT ALLOWING WORKING CAPITAL ADJUSTMENT UNDER THIS SEGMENT AS WE LL. WE HAVE DISCUSSED THE ISSUE OF WORKING CAPITAL ADJUSTMENT W HILE DEALING WITH A. ITES SEGMENT ABOVE. WE ADOPT THE SAME REASONS HERE ALSO AND DIRECT THE A.O/TPO TO CONSIDER THE QUESTION OF GRANT OF WORKIN G CAPITAL ADJUSTMENT IN ACCORDANCE WITH OUR ABOVE DIRECTIONS. ITA NO. 6312/DEL/2012 UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD. 19 27. IN THE FINAL ANALYSIS, WE SET ASIDE THE TRANSFE R PRICING ADJUSTMENT OF RS. 5.11 CRORE FINALLY MADE BY THE A.O UNDER THE SOFTWARE SEGMENT AND SEND THE MATTER BACK TO A.O/TPO FOR A FRESH COM PUTATION OF THE ALP OF THE INTERNATIONAL TRANSACTIONS UNDER THIS SE GMENT AS PER LAW, IN CONSONANCE WITH OUR ABOVE DIRECTIONS. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD. 28. NO OTHER ISSUE WAS PRESSED BY THE LD. AR. 29. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED F OR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 28/8/2014. SD/- SD/- (GEORGE GEORGE K.) (R. S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 28/8/2014 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR