Omniglobe Information Technologies (India) Pvt. Ltd., New Delhi V. ADDL. CIT, SPECIAL RANGE -7, New Delhi

ITA 6980/DEL/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 8975 (ITAT-DELHI)
• Duration Of Justice: 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-10-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2013-2014
• Appeal Filed On: 22-11-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Bad and doubtful debts
• Section: 143(3); 234B

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL, DELHI BENCH I-2, NEW DELHI BEFORE : SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NO. 6980/DEL./2017 ASSESSMENT YEAR: 2013-14 OMNIGLOBE INFORMATION TECHNOLOGIES (INDIA) PVT. LTD., E-11, RAJOURI GARDEN, NEW DELHI PAN-AAACO 6606M (APPELLANT) VS. ADDL. CIT, SPCL.RANGE - 7, NEW DELHI. (RESPONDENT) APPELLANT BY SHRI ABHISHEK AGARWAL, ADVOCATE RESPONDENT BY SHRI SANJAY KUMAR YADAV, SR. DR ORDER PER L.P. SAHU, A.M.: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE AO/TPO PASSED U/S. 143(3)/92CA/144C OF THE IT ACT DATED 16 .10.2017 PASSED IN PURSUANCE TO THE DIRECTION OF THE DRP DATED 25.08.2 017 ON THE FOLLOWING GROUNDS OF APPEAL : 1. THAT THE ASSESSING OFFICER (AO) ERRED ON FACTS AND IN LAW IN COMPLETING ASSESSMENT UNDER SECTION 144C READ WITH SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (THE ACT) AT AN INCOME OF RS . 4,72,94,133 AS AGAINST RETURNED INCOME OF RS. 2,61,11,546. 2. THAT THE AO ERRED ON FACTS AND IN LAW IN MAKING A DJUSTMENT OF RS 2,11,82,587 TO THE ARMS LENGTH PRICE OF THE INTER NATIONAL TRANSACTIONS OF BPO/DATA PROCESSING SERVICES RENDERED TO THE ASSOCI ATED ENTERPRISE ON THE BASIS OF ORDER PASSED BY THE TRANSFER PRICING OF FICER (TPO) UNDER SECTION 92CA(3) OF THE ACT. DATE OF HEARING 19.07.2018 DATE OF PRONOUNCEMENT 15 .10.2018 ITA NO. 6980/DEL./2017 2 3. THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN COMPU TING THE OPERATING PROFIT MARGIN OF THE APPELLANT AT 6.99% A S AGAINST THE CORRECT OPERATING PROFIT MARGIN OF 7.98%, ALLEGEDLY HOLDING THAT: I. THE VALUES REPORTED IN THE TRANSFER PRICING DOCUM ENTATION FOR COMPUTATION OF OPERATING PROFIT MARGIN OF THE APPEL LANT DO NOT RECONCILE WITH THE VALUES REPORTED IN THE AUDITED FINANCIAL S TATEMENT FOR THE FINANCIAL YEAR 2012-13. II. THE FOREIGN EXCHANGE GAIN/LOSS IS TO BE CONSIDE RED AS NON- OPERATING FOR COMPUTING OPERATING PROFIT MARGIN OF THE APPELLANT AND THE COMPARABLE COMPANIES. 4. THAT THE AO/TPO, ERRED ON FACTS AND IN LAW IN CON SIDERING EXCHANGE FLUCTUATION INCOME OF RS. 29,03,948 AS NON-OPERATIN G ITEM OF INCOME FOR COMPUTING THE OPERATING PROFIT MARGIN OF THE APPELL ANT DISREGARDING THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP). 4.1 THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN TERMS OF RULE 10B(1)(E) OF THE INCOME TAX RULES, 1963, WHILE APPLYING TNM METHOD, NET PROFIT EARNED BY THE APPELLANT FROM TRANSACTION UNDERTAKEN WITH ASSOCIATED ENTERPRISE IS REQUIRED T O BE BENCHMARKED. 5. THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN REJEC TING COMPARABLE COMPANIES ON THE BASIS OF ADDITIONAL FILTER OF EXPO RT SALES LESS THAN 75% OF THE TOTAL INCOME, WITHOUT APPRECIATING THAT SELECTI ON OF COMPARABLE COMPANIES ON THE BASIS OF SUCH QUANTITATIVE FILTERS ALONE, DEFIES THE PURPOSE OF THE BENCHMARKING ANALYSIS. 6. THAT THE TPO ERRED ON FACTS AND IN LAW IN CONSIDER ING THE FOLLOWING COMPANIES IN THE FINAL SET OF COMPARABLE COMPANIES NOT APPRECIATING THAT THERE WERE NOT FUNCTIONALLY COMPARABLE TO THE APPEL LANT FOR THE PURPOSE OF UNDERTAKING BENCHMARKING ANALYSIS APPLYING TNMM I. IGATE SOLUTIONS LTD. II. CAPGEMINI BUSINESS SERVICES (INDIA) PVT. LTD. III. E4E HEALTHCARE 7. THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN NOT A LLOWING APPROPRIATE RISK ADJUSTMENT TO ESTABLISH COMPARABIL ITY ON ACCOUNT OF THE ITA NO. 6980/DEL./2017 3 APPELLANT BEING A LOW-RISK-BEARING CAPTIVE SERVICE PROVIDER AS OPPOSED TO THE COMPARABLE COMPANIES WHO WERE INDEPENDENT ITES S ERVICE PROVIDER 8. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE AO/TPO ERRED IN REJECTING THE CONTENTION OF THE APPE LLANT REGARDING RISK ADJUSTMENT, ALLEGEDLY HOLDING THAT THE APPELLANT FA ILED TO PROVIDE ANY EVIDENCE TO DEMONSTRATE THAT WHETHER ANY RISK WAS A CTUALLY UNDERTAKEN BY THE COMPARABLE COMPANIES AND SUCH RISKS AFFECTED THEIR OPERATING PROFIT MARGIN. 9. THAT THE AO/TPO ERRED ON FACTS AND IN LAW IN NOT A LLOWING COMPARABILITY ADJUSTMENT ON ACCOUNT OF WORKING CAPI TAL EMPLOYED BY THE APPELLANT VIS-A-VIS COMPARABLE COMPANIES. 10. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 234B AND SECTION 234C OF THE ACT. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E FILED RETURN OF INCOME ON 26.11.2013 DECLARING INCOME OF RS.2,61,11,546/-. TH E CASE WAS SELECTED FOR SCRUTINY AND STATUTORY NOTICES WERE ISSUED TO THE A SSESSEE. THE ASSESSEE IS IN THE BUSINESS OF BPO/DATA PROCESSING TO ITS ASSOCIAT E ENTERISES. IT IS A COMPANY INCORPORATED ON 19.03.2004, DURING THE YEAR WAS WHO LLY OWNED 100% SUBSIDIARY OF M/S. OMNIGLOBE INTERNATIONAL LLC, USA (ASSOCIATE ENTERPRISES/AE). THE ASSESSEE ALSO PROVIDED INFORMA TION TECHNOLOGY ENABLED SERVICES (ITES) RELATING TO PHONE ACTIVATION AND LO CAL NUMBER PORTABILITY TO VARIOUS CLIENTS FOR AND ON BEHALF OF ITS PARENT COM PANY. THE ASSESSEE COMPANY WAS COVERED UNDER THE TRANSFER PRICING AUDIT AND TH E CASE WAS REFERRED TO TRANSFER PRICING OFFICER (TPO) ON 05.08.2015 FOR DE TERMINING THE ARMS LENGTH PRICE (ALP) U/S. 92CA(3) IN RESPECT OF INTER NATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS AE. THE LD. TPO IN CLUDED COMPANIES WHICH WERE REJECTED BY THE ASSESSEE IN THE TRANSFER PRICI NG DOCUMENTATION EITHER ON ACCOUNT OF FUNCTIONAL DISSIMILARITY OR INSUFFICIENT FINANCIAL INFORMATION AND ITA NO. 6980/DEL./2017 4 ARRIVED AT A SET OF THE 13 COMPARABLE COMPANIES. AC CORDINGLY, HE PASSED THE ORDER ON 13.10.2016 AND DETERMINED THE ALP FOR THE PROVISION OF ITES AFTER CONSIDERING 13 COMPANIES AND CALCULATED AVERAGE MEA N BY OP/OC AT 14.50% AS UNDER : SR.NO. COMPANY NAME OP/OC (%) 1. ACCENTIA TECHNOLOGIES LTD. 13.92 2. INFORMED TECHNOLOGIES INDIA LTD. 3.28 3. MICROGENETICS SYSTEMS LTD. 16.25% 4. JINDAL INTELECOM LTD. ( - ) 2.99% 5. ACROPETAL TECHNOLOGIES 14.98% 6. E4E HEALTHCARE 17.11% 7. CAPGEMINI BUSINESS SERVICES (INDIA) PVT. LTD. 26.30% 8. NEW VC SERVCES PVT. LTD. 20.07% 9. DATAMATICS GLOBAL SERVICES LTD. 17.11% 10. CALIBER POINT BUSINESS SOLUTIONS 2.19% 11. R SYSTEMS INTERNATIONAL 15.34% 12. IGATE SOLUTIONS 23.61% 13. TECH MAHINDRA 21.33% AVERAGE 14.50% AFTER CALCULATING THE ABOVE ARMS LENGTH MARGIN AVE RAGE AT 14.50%, THE LD. AO/TPO MADE UPWARD ADJUSTMENT IN RELATION TO INTERN ATIONAL TRANSACTIONS RELATED TO ITES AS UNDER : PARTICULARS AMOUNT IN RS. OPERATING COST 305,345,595 ARMS LENGTH MARGIN (%) 14.50% ARMS LENGTH MARGIN (RS.) 44,275,111 ARMS LENGTH PRICE 349,620,706 PRICE CHARGED BY THE ASSESSEE 326,693,412 INTERNATIONAL TRANSACTION 626,638,206 3% OF PRICE CHARGED IN INTERNATIONAL TRANSACTION 9,799,146 DIFFERENCE BETWEEN ALP AND PRICE CHARGED BY ASSESSEE 22,927,294 PERCENTAGE OF SERVICES PROVIDED TO AES TO TOTAL REVENUE 99.98 PROPORTIONATE DIFFERENCE FOR WHICH ADJUSTMENT IS REQUIRED TO BE MADE 22,923,420 ITA NO. 6980/DEL./2017 5 ACCORDINGLY, THE LD. AO/TPO MADE UPWARD ADJUSTMENT OF RS.2,29,23,420/- BEING THE ALP OF INTERNATIONAL TRANSACTIONS FOR ITE S PROVIDED TO ITS AE. FURTHER, THE AO ALSO OBSERVED THAT THE ASSESSEE HAS CREDITED IN HIS PROFIT AND LOSS ACCOUNT FOREIGN EXCHANGE FLUCTUATION GAIN OF R S.29,03,948/- WHICH WAS NOT CONSIDERED AS OPERATING INCOME BY THE AO WHILE PASSING THE DRAFT ASSESSMENT ORDER. DURING THE COURSE OF DETERMINATIO N OF ALP BY THE TPO, IT WAS NOTICED THAT THE ASSESSEE HAD ENTERED INTO THE INTERNATIONAL TRANSACTION OF PROVISION OF ITES AMOUNTING TO RS.32,66,38,206/- WI TH ITS AE. IN THE TP DOCUMENTATION FOR THE PURPOSE OF BENCHMARKING, THE ASSESSEE HAD APPLIED TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPR IATE METHOD CONSIDERING ITSELF AS THE TESTED PARTY AND OPERATING PROFIT TO OPERATING COST RATIO AS THE MOST APPROPRIATE PROFIT LEVEL INDICATOR (PLI). 3. FOR APPLICATION OF TNMM, THE ASSESSEE CONSIDERED THE FOLLOWING TWO COMPARABLE COMPANIES IN THE TRANSFER PRICING DOCUME NTATION WITH AN AVERAGE OPERATING PROFIT MARGIN OF (-) 8.48% AS UNDER : S.NO. COMPANY NAME OP/OC (%) 1. ALLSEC TECHNOLOGIES LIMITED ( - )4.19 2. NUCLEUS GIS & ITES LIMITED ( - )12.77 AVERAGE ( - )8.48% WHILE CALCULATING OPERATING PROFIT MARGIN BY THE LD . TPO, HE APPLIED THE FOLLOWING QUANTITATIVE AND QUALITATIVE FILTERS FOR SELECTION/REJECTION OF COMPARABLE COMPANIES : (I). USE OF CURRENT YEAR DATA (II). COMPANIES HAVING SALES LESS THAN 1 CR. WERE R EJECTED (III). COMPANIES HAVING SERVICE INCOME TO TOTAL INC OME RATIO MORE THAN 75% WERE SELECTED. ITA NO. 6980/DEL./2017 6 (IV). COMPANIES HAVING INCOME FROM EXPORT SALES AT LEAST 75% OF THE TOTAL INCOME WERE SELECTED. (V). COMPANIES HAVING EMPLOYEE COST TO TOTAL COST L ESS THAN 25% WERE REJECTED. (VI). COMPANIES HAVING RPT MORE THAN 25% OF TOTAL I NCOME WERE REJECTED. (VII). COMPANIES THAT ARE AFFECTED BY SOME PECULIAR ECONOMIC CIRCUMSTANCES. (VIII). COMPANIES UNDERTAKING SIGNIFICANTLY DIFFERE NT FUNCTIONS COMPARED TO ASSESSEE. BASED ON THE AFORESAID FILTERS, THE TPO IN IMPUGNED ORDER REJECTED ALL THE COMPARABLE COMPANIES CONSIDERED BY THE ASSESSEE IN THE TRANSFER PRICING DOCUMENTATION, FOR THE REASON SUBMITTED AS UNDER : S.NO. COMPANY NAME REMARKS OF TPO 1. ALLSEC TECHNOLOGIES LIMITED THIS COMPANY FAILS EXPORT INCOME MORE THAN 75%. HENCE, NOT A SUITABLE COMPARABLES. 2. NUCLEUS GIS & ITES LIMITED THIS COMPANY FAILS EXPORT INCOME MORE THAN 75%. HENCE, NOT A SUITABLE COMPARABLES. 4. ON THE BASIS OF THE TPO ORDER, THE AO PASSED THE DRAFT ASSESSMENT ORDER. AGAINST THE DRAFT ASSESSMENT ORDER, THE ASSESSEE RA ISED OBJECTION BEFORE THE LD. DRP. THE LD. DRP AFTER CONSIDERING THE SUBMISSI ONS AND EXPLANATIONS OF THE ASSESSEE GAVE DIRECTION REGARDING THE FOREIGN EXCHA NGE FLUCTUATION AS UNDER : AS FAR AS FOREIGN EXCHANGE FLUCTUATION IS CONCERNE D, AS PER THE TP STUDY FILED BY THE ASSESSEE, THE ASSESSEE BEARS THE FOREIGN EXCHANGE R ISK SINCE ITS FUNCTIONAL CURRENCY IS RUPEES AND IT GETS PAYMENTS IN US$. THE AE OF TH E ASSESSEE DOES NOT BEAR FOREIGN EXCHANGE RISK. IN VIEW OF THIS, THE TPO IS DIRECTED TO TREAT FOREIGN EXCHANGE FLUCTUATION AS OPERATING IN NATURE IF IT IS LINKED TO THE OPERATIONS OF THE ASSESSEE. SIMILAR TREATMENT (TREATING FE FLUCTUATION AS OPERA TING) SHOULD BE GIVEN IN THE CASE OF COMPARABLES ALSO. 5. FURTHER, THE TURNOVER FILTER WAS ALSO REJECTED B Y THE DRP AND RISK ADJUSTMENT WAS ALSO REJECTED BY THE DRP. FURTHER, T HE ASSESSEE OBJECTED TO ITA NO. 6980/DEL./2017 7 FIVE COMPARABLE COMPANIES OUT OF 13 COMPANIES TAKEN BY THE TPO. THE LD. DRP AFTER MAKING DETAILED DISCUSSION ISSUED DIRECTIONS TO THE TPO VIDE ORDER DATED 25.08.2017. IN PURSUANCE TO THE DIRECTIONS OF THE L D. DRP, THE AO WORKED OUT THE AVERAGE MARGIN AT 13.93% AND FINALLY MADE ADJUS TMENT OF RS.2,11,82,587/- TO THE INCOME OF THE ASSESSEE. FEE LING AGGRIEVED FROM THE FINAL ORDER OF THE ASSESSING OFFICER, THE ASSESSEE IS IN APPEAL BEFORE THE INCOME-TAX APPELLATE TRIBUNAL. 6. GROUND NO. 1 & 2 ARE GENERAL IN NATURE AND DO NO T REQUIRE ANY SPECIFIC ADJUDICATION. 7. IN RESPECT OF GROUND NO. 3, 4 AND 4.1, THE AR OF THE ASSESSEE SUBMITTED THAT THE FOREIGN EXCHANGE GAIN EARNED BY THE ASSESS EE IS GENERATED FROM THE SERVICES RENDERED TO AE. IT IS AN OPERATING INCOME. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS FOLLOWED THE TNMM AS MOST APPROPRI ATE METHOD FOR CALCULATING THE OPERATING PROFIT MARGIN WHICH HAS N OT BEEN CONSIDERED BY THE AO/TPO. HE ALSO RELIED ON MANY JUDGMENTS PLACED ON THE PAPER BOOK. EVEN THOUGH THE LD. DRPS SPECIFIC DIRECTIONS WERE TO CO NSIDER THE FOREIGN EXCHANGE GAIN AS OPERATING INCOME, THE AO HAS NOT CONSIDERED THE SAME IN THE FINAL ASSESSMENT ORDER. THEREFORE, THE FOREIGN EXCHANGE G AIN SHOULD BE CONSIDERED FOR CALCULATION OF OPERATING PROFIT MARGIN. THE TPO HAS CALCULATED OPERATING PROFIT MARGIN AT 6.99% WHEREAS IT SHOULD BE 7.98%. 8. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDE R OF THE LOWER AUTHORITY. 9. AFTER HEARING BOTH THE SIDES AND PERUSING THE EN TIRE MATERIAL AVAILABLE ON RECORD AND CASE LAWS CITED BY THE ASSESSEE, WE F IND THAT THE AO WAS NOT ITA NO. 6980/DEL./2017 8 JUSTIFIED IN NOT FOLLOWING THE DIRECTIONS GIVEN BY THE LD. DRP. WE, THEREFORE, REMIT THIS MATTER BACK TO THE AO/TPO TO CONSIDER TH E FOREIGN EXCHANGE GAIN AS OPERATING INCOME OF THE ASSESSEE WHILE WORKING OUT THE OPERATING PROFIT MARGIN OF THE ASSESSEE, AS DIRECTED BY THE LD. DRP. WE FURTHER DIRECT THAT THE AO/TPO SHOULD CALCULATE OPERATING PROFIT MARGIN AS PER RULE 10B(1)(E) OF THE INCOME TAX RULES, 1963, IF THE ASSESSEE SATISFIES T HE CONDITIONS AS PER RULES. NEEDLESS TO SAY, THE ASSESSEE SHALL BE GIVEN REASON ABLE OPPORTUNITY OF BEING HEARD. ACCORDINGLY, THESE GROUNDS ARE ALLOWED FOR S TATISTICAL PURPOSES. 10. GROUND NO. 5 CHALLENGES THE REJECTION OF COMPAR ABLE COMPANIES ON THE BASIS OF ADDITIONAL FILTER OF EXPORT SALES LESS THA N 75% OF THE TOTAL INCOME. IN THIS CONTEXT, WE DO NOT FIND ANY JUSTIFICATION TO D ISCARD THE CONCLUSION REACHED BY THE AUTHORITIES BELOW WHILE CONSIDERING THIS FIL TER AS APPROPRIATE FILTER FOR COMPARABILITY ANALYSIS IN THE FACTS OF THE PRESENT CASE. THE LD. AR OF THE ASSESSEE FAILED TO REBUT THE FINDING OF THE LD. DRP THAT MORE THAN 86% OF THE OPERATING REVENUE IS EARNED BY ASSESSEE OUT OF EXPO RT SALES. THEREFORE, CONSIDERING THE QUANTUM OF EXPORT GROSS REVENUE OF THE ASSESSEE, THE AUTHORITIES BELOW HAVE RIGHTLY APPLIED THIS FILTER AS AN APPROPRIATE FILTER FOR COMPARABILITY ANALYSIS. ACCORDINGLY, THIS GROUND OF ASSESSEE HAS NO MERIT AND IS LIABLE TO FAIL. 11. GROUND NO.6 RELATES TO SELECTION OF CERTAIN COM PARABLES, WHICH ACCORDING TO THE ASSESSEE ARE NOT COMPARABLE COMPAN IES, ALTHOUGH THE ASSESSEE HAS CHALLENGED THE SELECTION OF COMPARABLE S, NAMELY, IGATE SOLUTIONS LTD., CAPGEMINI BUSINESS SERVICES (INDIA) PVT. LTD. AND E4E HEALTHCARE BUSINESS SERVICES LTD. ITA NO. 6980/DEL./2017 9 12. IGATE SOLUTIONS LTD. : THE LD. AR OF THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLE S CONTENDING AS UNDER : A) THE COMPANY IS NOT PASSING RPT FILTER IT IS SUBMITTED THAT THE COMPANY IS NOT PASSING ON THE FILTER OF RELATED PARTY TRANSACTION IN EXCESS OF 25%, APPLIED BY THE TPO. THE RELATED PARTY TRANSACTION WORKS OUT TO 36.09% OF SALES (REFER PAGE 338 OF THE PAPER BOOK), AS UNDER PARTICULARS AMOUNT ( IN MILLION) REVENUE FROM OPERATIONS I GET TECHNOLOGIES I NC. 9,551 I HATE TECHNOLOGIES I NC., KANNADA 1,236 I GET COMPUTER SYSTEMS (UK) LTD 1,320 OTHERS 235 TOTAL 12,342 SALES REVENUE 34,195 RPT AS % SALES 36.09% THE COMPANY, IT IS SUBMITTED, OUGHT TO BE REJECTED FROM THE FINAL SET OF COMPARABLE COMPANIES, FOR THIS REASON ALONE. A) MERGERS/ACCUSATIONS DURING THE YEAR DURING THE YEAR UNDER CONSIDERATION, IGATECOMPUTER SYSTEMS LTD (FORMERLY KNOWN AS PATNI COMPUTER SYSTEMS LTD.) MERGED WITH IGATE S OLUTIONS LTD. WIDE ORDER DATED 10.05.2013 W.E.F. 01.04.2012. IT IS PERTINENT TO NOTE THAT THE FINANCIAL RESULTS OF THE COMPANY FOR THE FINANCIAL YEAR 2012 13 ARE AFFECTED ON ACCOUNT OF THE MERGER UND ERTAKEN DURING THE YEAR UNDER CONSIDERATION. THE FIGURES REPORTED IN THE AUDITED FINANCIAL STATEMENTS OFIGATESOLUTIONS LTD FOR THE YEAR ENDING MARCH, 201 3 INCLUDES ASSETS, LIABILITIES, INCOME, EXPENDITURE, PROFITS AND LOSSES OF IGATECOM PUTER SYSTEMS LTD. FOR THE PERIOD BEGINNING FROM 01.04. 2012 TO 31/03/2013. TH E FACT THAT THE FINANCIAL RESULTS OF THE COMPANY FOR THE FINANCIAL YEAR 2012 13 ARE AFFECTED DUE TO THE MERGER UNDERTAKEN DURING THE YEAR ARE REPRODUCED AT PAGE 20 21 OF THE ANNUAL REPORT (PAGE 321 322 OF THE PAPER BOOK). IT SHALL FURTHER BE NOTED THAT THE MERGING ENTITY, I.E.IGATECOMPUTER SYSTEMS (FORMERLY KNOWN AS PATNI COMPUTER SYSTEMS), IS ENGA GED IN THE BUSINESS OF PROVIDING IT AND IT ENABLED SERVICES. THE SERVICES RENDERED BY THE COMPANY UNDER THE IT SEGMENT INCLUDES, APPLICATION DEVELOPMENT, A PPLICATION MAINTENANCE AND SUPPORT, VERIFICATION AND VALIDATION, ENTERPRISE A PPLICATION SOLUTIONS, BUSINESS ITA NO. 6980/DEL./2017 10 INTELLIGENCE AND DATA WAREHOUSING (REFER PAGE 8 OF THE ANNUAL REPORT OF PATNI COMPUTER SYSTEMS). (ANNUAL REPORT ENCLOSED AT PAGES 536 605 OF THE PAPER BOOK). ACCORDINGLY, EVEN IF IT IS ASSUMED THAT THE COMPANY , IGATESOLUTIONS LTD IS ENGAGED IN PROVIDING IT ENABLED SERVICES, WHICH IS AKIN TO THE SERVICES RENDERED BY THE APPELLANT, PURSUANT TO THE MERGER OF IGATE COMPUTER SYSTEMS LTD (FORMERLY KNOWN AS PATNI COMPUTER SYSTEMS), IGATESOLUTIONS LTD OUGH T NOT BE CONSIDERED AS COMPARABLE TO THE APPELLANT, AS THE MERGING ENTITY IS ALSO ENGAGED IN PROVIDING IT SERVICES, WHICH INCLUDES APPLICATION DEVELOPMENT ET C. B) FUNCTIONALLY NOT COMPARABLE AND SEGMENTAL DAUGHTER NOT AVAILABLE THE COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING INFORMATION TECHNOLOGY AND IT ENABLED SERVICES TO THE CUSTOMERS. AT PAGE 21 OF TH E ANNUAL REPORT, IT IS MENTIONED THAT THE COMPANY IS SPECIALISED IT AND ITES IS PROV IDER (PAGE 321 OF THE PAPER BOOK). FROM NOTES TO ACCOUNTS: SEGMENT REPORTING, IT IS EV IDENT THAT THE COMPANY IS ENGAGED IN TWO BUSINESS SEGMENTS, NAMELY, INFORMATI ON TECHNOLOGY AND IT ENABLED SERVICES. IT IS SUBMITTED THAT SINCE THE OPERATING RESULTS OF THE IT ENABLED SERVICES SEGMENT IS NOT AVAILABLE IN THE AUDITED FINANCIAL STATEMENT, T HEREFORE, THE COMPANY CANNOT BE CONSIDERED AS COMPARABLE TO THE APPELLANT. DECISIONS RELIED UPON RELIANCE IS PLACED ON THE FOLLOWING DECISIONS, WHER EIN THE HONBLE BENCHES OF THE TRIBUNAL HAVE CONSISTENTLY TAKEN A VIEW TO EXCLUDE COMPANIES HAVING EXTRA-ORDINARY EVENT DURING THE YEAR UNDER CONSIDERATION: CAPITAL IQ INFORMATION SYATEMS (INDIA) PVT. LTD. (I TA NO. 1961/HYD/2011) APPROVED BY HONBLE HIGH COURT IN ITA NO. 305 OF 20 14 CL 481-508(ITAT)/ 697-698 (HC) XCHANGING TECHNOLOGY SERVICES INDIA PVT. LTD. VS. D CIT (ITA NO. 1897/DEL/2014) APPROVED HONBLE HIGH COURT IN ITA NO. 813/2015- CL 699- 700 (HC) /701-711 (ITAT) AMERIPRISE INDIA PVT. LTD. VS. DCIT (ITA NO. 7014/D EL/2011) APPROVED BY HONBLE HIGH COURT IN ITA NO. 461/2016- 759-786 (IT AT) TOLUNA INDIA PVT. LTD. VS ACIT (ITA NO. 5645/DEL/20 11) LEAR AUTOMOTIVE INDIA P. LTD. VS ACIT (ITA NO. 5612 /DEL/2011) AND GLOBAL LOGIC INDIA PVT. LTD. VS ACIT (ITA NO. 5809/ DEL/2011) AGILENT TECHNOLOGIES ( INTERNATIONAL )PVT. LTD. VS. ITO (ITA NO. 1620/DEL/2015, 477 & 6420/DEL/2016 TRANSCEND MT SERVICES PVT. LTD. VS ACIT ( ITA NO. 4 048/DEL/2013) VERTEX CUSTOMER SERVICES INDIA P.LTD. VS. DCIT (ITA NO. 1508/ DEL/2015) EXEVO INDIA PVT. LTD. VS DCIT (ITA NO. 20/DEL/2017 ) ALCATEL LUCENT INDIA LTD. VS ADDL. CIT (ITA NO. 1 112 /DEL/2017) CIENA INDIA PVT. LTD. VS DCIT (ITA NO. 3324/DEL/201 3) EQUANT SOLUTIONS INDIA PVT. LTD. VS DCIT IN ITANO. 1202/DEL/2015 NCS PEARSON INDIA PRIVATE LIMITED V ACIT (ITA NO. 2 556/DEL/2014) ITA NO. 6980/DEL./2017 11 RELIANCE IS ALSO PLACED ON THE DECISION OF DELHI BE NCH OF TRIBUNAL IN THE CASE OF FOLLOWING DECISIONS, WHEREIN, THE HONBLE TRIBUNAL DIRECTED T O EXCLUDE A COMPANY ON ACCOUNT OF NON- AVAILABILITY OF SEGMENTAL DATA: I. VODAPHONE INDIA SERVICES VS. DCIT( ITA NO. 7140 & 7 097 / MUM/2012 ) II. MACQUIRE GLOBAL SERVICES (P.) LTD. (ITA 6803/ DELHI /2013) CL 509-533 HONBLE TRIBUNAL IN THE CASE OF APPELLANT FOR TH E ASSESSMENT YEAR 2011 12[ITA NO. 1003/DEL/2016] EXCLUDED ACCENTIA TECHNOLOGIES LTD FROM THE FINAL SET OF COMPARABLE COMPANIES, INTERALIA, ON ACCOUNT OF EXTRAORDINARY E VENT OF A MERGER/ACQUISITIONS AND NONAVAILABILITY OF SEGMENTAL ACCOUNTS. CL 615 6 27. FURTHER, IGATE GLOBAL SOLUTIONS LTD ITSELF HAS BEEN REJECTED AS COMPARABLE, ON ACCOUNT OF MERGER/ACQUISITION AND ABSENCE OF SEGMENTAL ACCOUNT S, IN THE FALLING DECISIONS; VERTEX CUSTOMER SERVICES VS DCIT, CIRCLE 28 (1), IN DIA PRIVATE LIMITED VS DCIT (ITA NUMBER 1508/DEL/2015) CL 712 740 EVALUESERVE SEZ ( GURGAON ) P. LTD. VS ACIT (ITA N O. 1467/DEL/2017) AMERIPRISE INDIA PVT. LTD. VS DCIT (ITA NO. 7014/D EL/2014) CL 759 786 THE ASSESSEE HAS FURTHER RELIED ON THE FOLLOWING D ECISIONS : (I). ITA NO. 461/2016, PCIT VS. AMERIPRISE INDIA PV T. LTD. DATED 19.10.2016 (DELHI H.C.) (II). ITA NO. 124/2018 PCIT VS. M/S. ORACLE (OFSS)B PO SERVICES PVT. LTD. (DELHI H.C.) 13. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ER OF LOWER AUTHORITIES AND SUBMITTED THAT IT IS A GOOD COMPARABLE COMPANY BECAUSE IT IS ENGAGED IN PROVIDING ITES. IT WAS ALSO SUBMITTED THAT THE AMAL GAMATION WILL NOT AFFECT THE BUSINESS OF THE COMPANY. 14. IN OUR OPINION, IT IS CLEAR FROM THE ANNUAL REP ORT OF THIS COMPANY THAT RELATED PARTY TRANSACTION FILTER IS MORE THAN 25% . THE TPO HAS REJECTED HAS THE RPT FILTER MORE THAN 25 % ITSELF (SUPRA). IT IS FURTHER SEEN FROM THE DIRECTORS REPORT WHICH IS ON PAPER BOOK PAGE NO. 3 07 THAT THE COMPANY HAS MERGED WITH IGATE COMPUTER SYSTEMS LTD. THE DIRECTO RS REPORT IS AS UNDER : ITA NO. 6980/DEL./2017 12 IGATE COMPUTER SYSTEMS LTD. (ICSL) (FORMERLY KNOWN AS PATNI COMPUTER SYSTEMS LTD) WAS MERGED WITH THE COMPANY, PURSUANT TO THE APPROVAL OF THE SCHEME OF ARRANGEMENT BY THE SHAREHOLDERS OF BO TH COMPANIES AND ORDER DATED MAY 10, 2013 OF THE HONBLE HIGH COURT HAVING JUDICATURE AT BOMBAY, WHICH BECAME EFFECTIVE FROM MAY 27, 2013. TH E APPOINTED DATE FIXED UNDER THE SCHEME OF ARRANGEMENT WAS APRIL 01, 2012. ACCORDINGLY, ICSL STANDS MERGED WITH THE COMPANY AS ON THE APPOI NTED DATE. DUE TO EXTRAORDINARY EVENTS OCCURRED DURING THE YEA R, THE FINANCIAL RESULT IS AFFECTED. FURTHER, NO SEGMENTAL INFORMATION IS AVAI LABLE ON THE ANNUAL REPORT. MOREOVER, IGATE HAS UNDERGONE RESTRUCTURING BY WAY OF AMALGAMATION, AS DISCUSSED ABOVE. IGATE IS ALSO HAVING HUGE TURNOVER OF RS.34,195 . IN VIEW OF BOTH THE COUNTS AS NARRATED ABOVE AND AF TER CONSIDERING THE CASE LAWS CITED BY THE ASSESSEE , WE DIRECTED TO THE AO/ TPO TO EXCLUDE THIS COMPANY NOT BEING A SUITABLE COMPARABLE. 15. CAPGEMINI BUSINESS SERVICES (INDIA) PVT. LTD.: THE LEARNED AR OF THE ASSESSEE RELIED ON THE WRITTEN SUBMISSIONS FOR EXCL USION OF THIS COMPANY FROM THE LIST OF COMPARABLES, STATING AS UNDER : A) FUNCTIONALLY NOT COMPARABLE IT IS SUBMITTED THAT AS PER THE BUSINESS INFORMATIO N PROVIDED UNDER HEAD NOTES TO ACCOUNTS OF THE ANNUAL REPORT (REFER PAGE 135 OF THE PAPER BOOK), THE COMPANY IS A PROVIDER OF FINANCIAL SHARD SERVICES AND GOVER NANCE., RISK AND COMPLIANCE SERVICES. FURTHER UNDER THE HEAD REVENUE RECOGNITIO N, THE COMPANY STATES THAT IT DERIVES ITS REVENUE PRIMARILY FROM BUSINESS PROC ESS MANAGEMENT SERVICES AND ASSURANCE AND COMPLIANCE SERVICES. THE COMPANY IS ALSO ENGAGED IN THE BUSINESS OF PROV IDING SUPPLY CHAIN, PROCUREMENT, TECHNICAL PUBLICATION SERVICES IN THE FINANCIAL YEAR 2012 13. THE COMPANY ALSO PROVIDES OPERATIONAL CONTROL ASSESSMEN TS, IT RISK ASSESSMENT, SAS 70, ASSURANCE ANDRISK MANAGEMENT SERVICES TO MANY AROUND THE GLOBE. IT IS SUBMITTED THAT THE AFORESAID SERVICES ARE IN THE NATURE OF KPO SERVICES AND CANNOT BE CONSIDERED COMPARABLE TO THE CAPTIVE SERV ICES RENDERED BY APPELLANT BEING IN THE PHONE ACTIVATION. ITA NO. 6980/DEL./2017 13 REFERENCE IN THIS REGARD IS ALSO MADE TO RULE 10 TA OF THE INCOME TAX RULES, WHICH, THE SAFE HARBOUR RULES, PROVIDES FOLLOWING S ERVICES TO BE CONSIDERED IN THE NATURE OF KPO SERVICES: (G) KNOWLEDGE PROCESS OUTSOURCING SERVICESMEANS THE FOLLOWING BUSINESS PROCESS OUTSOURCING SERVICES PROVIDED MAINLY WITH T HE ASSISTANCE OR USE OF INFORMATION TECHNOLOGY REQUIRING APPLICATION OF KNO WLEDGE AND ADVANCED ANALYTICAL AND TECHNICAL SKILLS, NAMELY:- (I) GEOGRAPHIC INFORMATION SYSTEM; (II) HUMAN RESOURCE SERVICES; (III) ENGINEERING AND DESIGN SERVICES; (IV) ANIMATION OR CONTENT DEVELOPMENT AND MANAGEME NT: (V) BUSINESS ANALYTICS; (VI) FINANCIAL ANALYTICS; OR (VII) MARKET RESEARCH, BUT DOES NOT INCLUDE ANY RESEARCH AND ALLOTMENT SERV ICES WHETHER OR NOT IN THE NATURE OF CONTRACT RESEARCH AND DEVELOPMENT SERVICE S; IT IS SUBMITTED THAT THE NATURE OF SERVICES PROVIDE D BY THE COMPANY, VIZ, FINANCIAL SHARED SERVICES AND GOVERNANCE, RISK AND COMPLIANCE SERVIC ES, INVOLVE ADVANCE ANALYTICAL AND TECHNOLOGICAL SKILLS, AND ARE IN THE NATURE OF KPO SERVICES. THEREFORE, THE COMPANY OUGHT NOT BE CONSIDERED AS C OMPARABLE TO THE APPELLANT ON ACCOUNT OF FUNCTIONAL DISSIMILARITY. IT SHALL ALSO BE NOTED THAT AS PER THE WEBSITE OF T HE COMPANY, THE COMPANY IS PROVIDING SERVICES IN THE FOLLOWING AREAS: TRANSFORMATION AND INNOVATION DIGITAL SERVICES CLOUD SERVICES TECHNOLOGY SOLUTIONS BUSINESS OPERATIONS CYBERSECURITY & RISK ALL OUR SERVICES COMPLETE DETAILS OF SERVICES PROVIDED UNDER EACH HE AD AS SHOWN ABOVE IS ENCLOSED AT PAGES 609 TO 614 OF THE PAPER BOOK. IN FACT, ON THE WEBSITE OF THE COMPANY UNDER HEAD F EATURED JOBS, THE COMPANY HAS SOUGHT APPLICATION OF CANDIDATES HAVING MOST ADVANCED TECH NOLOGY EXPERIENCES, REPRODUCED AS UNDER : PORTFOLIO MANAGEMENT 14-16 YEARS- BANGALORE; SALESFORCE 6 TO 9 YEARS BANGALORE MULESOLF DEVELOPER 6 TO 9 YEARS CHENNAI SALESFORCE DEVELOPER HYDERABAD MAGENTO DEVELOPER 6 TO 9 YEARS BANGALORE & MUM BAI SENIOR CONSULTANTS ITA NO. 6980/DEL./2017 14 FROM THE AFORESAID, IT SHALL BE NOTED THAT THE COM PANY IS NOT ONLY ENGAGED IN PROVIDING OUTSOURCING SERVICES, BUT IS ALSO ENGAGED IN SOFTWA RE DEVELOPMENT AND RELATED SERVICES AND PROVISION OF KPO SERVICES. NEEDLESS TO MENTION THAT IN THE ABSENCE OF SEGMENTA L RESULTS WITH REGARD TO BPO/OUTSOURCING SEGMENT, THE COMPANY CANNOT BE CONS IDERED AS COMPARABLE TO THE APPELLANT WITH REGARD TO ITS ENTITY WIDE OPERATION. B) NONAVAILABILITY OF COMPLETE FINANCIAL INFORMATION IT IS FURTHER SUBMITTED THAT THECOMPANY IS A WHOLL YOWNED SUBSIDIARY OF CAPGEMINI S.A. FRANCE AND THE ENTIRE GROUP OPERATES THROUGH ITS SU BSIDIARY ACROSS 40 COUNTRIES. HOWEVER, THE RELATED PARTY TRANSITION DETAIL IS NOT AVAILABLE IN THE ANNUAL REPORT BEING AVAILABLE IN THE PUBLIC DOMAIN AND THEREFORE, THE B ASIS FILTERS APPLIED BY THE TPO CANNOT BE VERIFIED. IN VIEW OF THE AFORESAID, IT IS SUBMITTED THAT THE COMPANY CANNOT BE CONSIDERED AS AN APPROPRIATE COMPARABLE FOR THE PURPOSE OF APPLYING TNMM. HONBLE TRIBUNAL IN THE CASE OF APPELLANT FOR THE A SSESSMENT YEAR 2012 13 IN ITA NO. 6014/DEL/2016, EXCLUDED INFORMED TECHNOLOGIES I NDIA LTD FROM THE FINAL SET OF COMPARABLE COMPANIES, BEING ENGAGED IN PROVISION OF KPO SERVICES SUCH AS FINANCIAL RESEARCH SERVICES, DATA MANAGEMENT SERVI CES TO THE FINANCIAL CONTENT INDUSTRY. CL 628 648. A COMPANY ENGAGED IN PROVISION OF KPO SERVICES CAN NOT BE REGARDED AS AN APPROPRIATE COMPARABLE FOR THE PURPOSE OF BENCHMARK ING THE INTERNATIONAL TRANSITION OF PROVISION OF BPO SERVICES[RAMPGREEN SOLUTIONS PVT. LTD VS. CIT (377 ITR 533)]. CL 670 696 RELIANCE, IN THIS REGARD, IS PRAISED ON THE FOLLOWI NG DECISIONS, WHEREIN, THE HONBLE TRIBUNAL DIRECTED TO EXCLUDE A COMPANY ON ACCOUNT OF NON-AVAILABILITY OF SEGMENTAL DATA: III. VODAPHONE INDIA SERVICES VS. DCIT( ITA NO. 7140 & 7 097 / MUM/2012 ) IV. MACQUARIE GLOBAL SERVICES (P.) LTD. (ITA 6803/ DELH I/2013) CL 509-535 16. THE LD. DR, ON THE OTHER HAND, RELIED ON THE OR DERS OF AUTHORITIES BELOW. 17. IN OUR OPINION, IT IS CLEAR FROM THE BUSINESS P ROFILE OF THIS COMPANY THAT THE COMPANY IS ENGAGED IN PROVIDING BPO SERVICES IN THE NATURE OF BUSINESS PROCESS MANAGEMENT SERVICES AND ASSURANCE AND COMPL IANCE SERVICES. THE COMPANY IS ALSO PROVIDING BUSINESS PROCESS OUTSOURC ING SERVICES IN FINANCE ITA NO. 6980/DEL./2017 15 AND ACCOUNTING IN INDIA. THE COMPANY ALSO OFFERS FI NANCIAL SHARE SERVICES AND SHARBANES OXLEY COMPLIANCE SERVICES TO THE INDUSTRI ES IN THE DOMAIN OF CUSTOMER PRODUCTS, RETAIL AND DISTRIBUTION, FINANCI AL SERVICES, LIFE SCIENCE AND HEALTHCARE, MANUFACTURING, MEDIA AND ENTERTAINMENT AND UTILITIES. THE ARGUMENTS OF THE LD. DR HAS NO FORCE IN VIEW OF THE FACT THAT THE AO /TPO HIMSELF HAS ADMITTED IN HIS ORDER THAT THE ASSESSEE WAS IN THE BUSINESS OF BPO/DATA PROCESSING AND IN ITES RELATING TO PHONE A CTIVATION AND LOCAL NUMBER PORTABILITY TO VARIOUS CLIENTS FOR AND ON BE HALF OF ITS PARENT COMPANY. NOWHERE IN THESE ORDERS, THE AUTHORITIES HAVE OBSER VED THAT ASSESSEE WAS PROVIDING HIGH-END KNOWLEDGE BASED SERVICES REQUIRI NG HIGH SKILL. IN OUR CONSIDERED OPINION, THE ABOVE COMPARABLE COMPANY IS ENGAGED IN BPO/KPO. THE KPO IS NOTHING BUT EXTENDED VERSION OF BPO. THE CONTENTION OF THE ASSESSEE IS ALSO THAT THE ASSESSEE IS ENGAGED IN BP O/KPO SERVICES, BUT NO SEGMENTAL INFORMATION IS AVAILABLE, WHICH IS NECESS ARY TO TREAT THIS COMPANY AS APPROPRIATE COMPARABLE. WE, THEREFORE, DIRECT TH E AO/TPO TO ANALYSE THE COMPARABILITY TEST OF THIS COMPANY ON THE BASIS OF SEGMENTAL INFORMATION, IF HE POSSESSES THE SAME. 18. E4E HEALTHCARE: THE LD. AR FOR EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES HAS STATED AS UNDER : A) FUNCTIONALLY NOT COMPARABLE AND SEGMENTAL DATA NOT AVAILABLE AS PER PAGE 54 (227 OF THE PAPER BOOK), BESIDES PRO VIDING IT ENABLED SERVICES, THE COMPANY IS ALSO ENGAGED IN THE BUSINESS OF RENDERIN G SOFTWARE DEVELOPMENT SERVICES. HOWEVER, SEGMENTAL DATA WITH RESPECT TO IT ENABLED SERVICES SEGMENT IS NOT AVAILABLE IN THE AUDITED FINANCIAL STATEMENT OF THE COMPANY. FURTHER, AS PER PAGE 56 (PAGE 229 OF THE PAPER BOOK ), THE COMPANY DERIVES ITS REVENUE PRIMARILY FROM REVENUE CYCLE MANAGEMENT OF U.S. BASED THE HEALTHCARE CLIENT. REVENUE IS DERIVED FROM BILLING, CODING AND CLAIM PROCESS SERVICES. ITA NO. 6980/DEL./2017 16 A FURTHER SCRUTINY OF THE NATURE OF SERVICES PROVID ED BY THE COMPANY FROM THE WEBSITE OF THE COMPANY REVEALED THAT THE COMPANY IS PROVIDING HOST OF SERVICES AND END TO - END SOLUTIONS TO THE HEALTHCARE INDUSTR Y. A FEW SNAPSHOT OF THE WEBSITE OF COMPANY IS AS UNDER; HEALTHCARE BUSINESS SOLUTIONS ENHANCE YOUR MARGINS OUR 23 - YEAR EXPERIENCE HAS TAUGHT US THAT THERE I S NO MAGIC POTION ARE SILVER BULLET FOR IMPROVING FINANCIAL PERFORMANCE. IT CAN O NLY BE ACHIEVED BY LEVERAGING BEST PRACTICES, TESTED PROCESS, AND INNOV ATIVE TECHNOLOGY. OUR APPROACH HISTORICALLY ADDRESSES REVENUE CYCLE MANAG EMENT FROM THE MOMENT A PATIENT ENTERS THE SYSTEM TO THE FINAL DO LLAR BEING COLLECTED OR PAID ALL THIS, WHILE DELIVERING BETTER OUTCOMES IN QUALIT Y, TURNAROUND TIMES, AND PRODUCTIVITY. THE VARIOUS SERVICES AND SOLUTIONS PROVIDED BY THE COMPANY, AS DEMONSTRATED ON THE WEBSITE IS REPRODUCED HEREUNDER PROVIDER SOLUTIONS MEDICAL BILLING COMPANIES INTEGRATED PRACTICE AND RCM CODING AND COMPLIANCE HOSPITAL SERVICES HOSPITAL CODING PAYER SOLUTIONS CLAIMS MANAGEMENT AND ADMIN COST AVOIDANCE AND AUDIT MEDICAL RECORD AUDIT CONTACT CENTRE SOLUTIONS TECHNOLOGY SOLUTIONS PAYER PLATFORMS COMPUTER ASSISTED CODING WORKFLOW TOOLS VALUE ADDED SERVICES CASE STUDIES HEALTHCARE & LIFE SCIENCE ANALYTICS DETAILED SERVICES AS EXTRACTED FROM THE WEBSITE OF THE COMPANY IS ENCLOSED AT PAGES 606 TO 609 OF THE PAPER BOOK. FROM THE AFORESAID, IT SHALL BE NOTED THAT FOR THE REVENUE CYCLE MANAGEMENT SERVICES PROVIDED TO ITS HEALTH CLIENTS, THE COMPANY IS NOT ONLY PROVIDING JUST BILLING, CODING AND CLAIM PROCESSING SERVICES, BUT ALSO PROVIDING A UDIT SERVICES AS WELL AS TECHNOLOGY SOLUTIONS SUCH AS PAYER PLATFORM, WORKFL OW TOOLS ETC. IT IS SUBMITTED THAT THE DIVERSE SERVICES PROVIDED BY THE COMPANY IS IN THE NATURE OF IT SERVICES AND KPO SERVICES APART FROM IT ENABLED SERVICES. ITA NO. 6980/DEL./2017 17 HONBLE TRIBUNAL IN THE CASE OF APPELLANT FOR THE ASSESSMENT YEAR 2011 12[ITA NO. 1003/DEL/2016] EXCLUDED ACCETIA TECHNOLOGIES LTD. FORM THE FINAL SET OF COMPARABLE COMPANIES, INTER ALIA, ON THE BASIS THAT THE COMPANY PROVIDES SERVICES IN HEALTHCARE DIVISION AND ALSO ENGAGED IN THE BUSI NESS OF PROVIDING KPO SERVICES. THE COMPANY WAS ALSO EXCLUDED ON ACCOUNT OF NON-AVA ILABILITY OF SEGMENTAL ACCOUNTS. FOLLOWING THE DECISION FOR ASSESSMENT YEAR 2011 12 THE HONBLELTIRUNAL IN THE APPEAL FOR ASSESSMENT YEAR 2012 13 IN ITA NO. 601 4/DEL/ 2016, EXCLUDED ACROPETAL TECHNOLOGIES LTD AND BNR UDYOG LTD FROM T HE FINAL SET OF COMPARABLE COMPANIES, BEING ENGAGED IN PROVISION OF KPO SERV ICES IN HEALTHCARE SEGMENT A COMPANY ENGAGED IN PROVISION OF KPO SERVICES CAN NOT BE REGARDED AS AN APPROPRIATE COMPARABLE FOR THE PURPOSE OF BENCHMARK ING THE INTERNATIONAL TRANSITION OF PROVISION OF BPO SERVICES[RAMPGREEN S OLUTIONS PVT. LTD VS. CIT (377 ITR 533)]. THE COMPANY HAS ITSELF BEEN REJECTED AS COMPARABLE IS TO A ITES ENABLED SERVICES PROVIDER IN THE FOLLOWING CASES: HOV SERVICES LTD. VS. JCIT (2016) 73 TAXMANN.COM 31 1 CL 787 818 SCHLUMBERGER INDIA TECHNOLOGY CENTRE PVT. LTD. VS. DCIT (ITA NO. 640/PN/2014) CL 741 758 19. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ERS OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE ASSESSEE HAS PRO DUCED THE PRINT OUT OF BUSINESS PROFILE OF THIS COMPANY ON 20.01.2018, WHI CH AT PB-606 TO 608, WHICH IS NOT RELIABLE AND MAY DIFFER FROM ACTUAL BU SINESS ACTIVITIES OF THE COMPANY. THE CASE OF ASSESSEE IS RELATED TO A.Y. 20 13-14. 20. IN OUR OPINION, THE LD. DRP HAS GIVEN DIRECTION THAT IF THIS COMPANY PASSES THE EMPLOYEE COST FILTER, IT CAN BE RETAINED AS COMPARABLE. WE FURTHER OBSERVE FROM THE PAPER BOOK OF ASSESSEE THAT IN ASS ESSEES OWN CASE FOR A.Y. 2011-12, THIS COMPANY WAS SELECTED AS COMPARABLE ON WHICH NO OBJECTION WAS RAISED BY THE ASSESSEE UPTO THE STAGE OF TRIBUNAL. SIMILARLY, IN THE CASE OF ASSESSEE FOR A.Y. 2012-13, THE DRP HAD MENTIONED TH AT ASSESSEE HAS NO OBJECTION ON INCLUSION OF THIS COMPANY. HOWEVER, KE EPING IN VIEW THE ITA NO. 6980/DEL./2017 18 OBJECTION OF ASSESSEE IN THE SUBMISSIONS MADE BEFOR E THE TRIBUNAL, THE ITAT REMITTED THIS MATTER BACK TO THE FILE OF DRP FOR RE -DECIDING THE SAME AFTER AFFORDING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. NO FURTHER INFORMATION PURSUANT TO THE REMAND PROCEEDINGS, IS FURNISHED BY THE ASSESSEE BEFORE US. IT IS NOTABLE THAT BEFORE THE LD. DRP, T HE ASSESSEE RAISED OBJECTION ON THIS COMPANY ONLY ON ACCOUNT OF NON-COMPARABILITY O F EMPLOYEES COST AND NO OBJECTION WAS RAISED EITHER ON FUNCTIONAL TEST. THE OBJECTION REGARDING NON- AVAILABILITY OF ANNUAL REPORT WAS NOT RAISED BY THE ASSESSEE BEFORE THE TPO. THE LD. DRP WAS ALSO OF THE VIEW THAT WHEN THE ASSE SSEE CHALLENGED THE EMPLOYEES COST FILTER HAVING NOT BEEN PASSED, IT LE ADS TO SAY THAT THE ASSESSEE WAS HAVING ANNUAL ACCOUNTS OF THE SAID COMPANY. KE EPING IN VIEW THESE FACTS, THE LD. DRP REMITTED IT TO THE AO TO COMPARE THIS C OMPANY ON THE BASIS OF EMPLOYEES COST FILTER. IN PURSUANCE TO THIS, THE AO /TPO AFTER GOING THROUGH THE ANNUAL REPORT OF THIS COMPANY FOUND THAT THIS C OMPANY PASSES THE EMPLOYEES COST FILTER AND THEREFORE, IN OUR CONSIDE RED OPINION, HAS RIGHTLY INCLUDED THIS COMPANY AS AN APPROPRIATE COMPARABLE. IN PRESENCE OF ABOVE FACTS, THE OBJECTIONS OF THE ASSESSEE ON FUNCTIONAL DISSIMILARITY OR NON- AVAILABILITY OF SEGMENTAL DATA ARE NOT FOUND ACCEPT ABLE AT ALL. WE, THEREFORE, CONCLUDE THAT THE LD. AUTHORITIES BELOW HAVE RIGHTL Y INCLUDED THIS COMPANY AS AN APPROPRIATE COMPARABLE IN THE INSTANT CASE. 21. IN RESPECT OF GROUND NO. 7 & 8, THE ASSESSEE HAS RA ISED GROUNDS RELATING TO RISK ADJUSTMENT NOT GRANTED BY THE AO/TPO. THE A R OF THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AU THORITIES AND SUBMITTED THAT THE ASSESSEE SHOULD BE ALLOWED RISK ADJUSTMENT BECAUSE THE ASSESSEE IS DEALING ONLY WITH ITS HOLDING COMPANY. ON THE OTHER HAND, THE LD. DR RELIED ON ITA NO. 6980/DEL./2017 19 THE ORDER OF THE LOWER AUTHORITIES AND HE SUBMITTED THAT THE AUTHORITIES BELOW HAVE DISCUSSED THIS ISSUE IN DETAIL. 22. AFTER GOING THROUGH THE ORDERS OF THE AUTHORITI ES BELOW AND SUBMISSIONS OF THE ASSESSEE, WE OBSERVE THAT THERE IS NO INFIRM ITY IN THE ORDERS OF THE LOWER AUTHORITIES. THE FINDINGS REACHED BY THE AUTHORITIE S BELOW ARE AS UNDER : RISK ADJUSTMENT THE ASSESSEE HAS ARGUED THAT IT IS WORKING IN A RI SK MITIGATED ENVIRONMENT AND DOES NOT TAKE MARKET RISK, CREDIT RISK, PRICING RISK, ETC. O N SINGLE CUSTOMER RISK IT IS CLAIMED THAT IT IS GETTING CONTINUOUS BUSINESS FROM THE AE AND THERE I S NO SUCH RISK. AS REGARDS POLITICAL AND COUNTRY RISK, IT IS STATED THAT THE SAME ARE APPLIC ABLE TO AIL AND IS NOT PECULIAR TO ASSESSEE ALONE. THE ASSESSEE HAS NOT PROVIDED ANY QUANTIFIC ATION OF THE DIFFERENT KINDS OF TASKS ASSUMED BY THE COMPARABLES AND CLAIMED NOT AVAILABL E IN THE CASE OF ASSESSEE, THUS, THE COMPUTATION OF RISK ADJUSTMENT BY THE ASSESSEE IS V AGUE AND WITHOUT ANY BASIS AS THE ASSESSEE HAS NOT FURNISHED ANY FACTUAL INPUT CORREL ATING ITS FUNCTIONING, DIE FUNCTIONING OF THE SERVICE SECTOR AND THE FUNCTIONING OF DIE COMPA RABLE COMPANIES. FROM THE ABOVE, IT IS OBSERVED THAT THE ASSESSEE HAS NOT BEEN ABLE TO ASS IGN ANY EVIDENT AND ACCEPTABLE VALUE TO THE ADJUSTMENT CLAIMED ON ACCOUNT OF ZERO RISK BORN BY THE ASSESSEE. THE ASSESSEE HAS ALSO NOT FURNISHED THE RISK PROFILES OF THE COMPARABLES, EVEN-WHILE THE ASSESSEE HAS OBJECTED THE ACTION OF THIS OFFICE FOR NOT ALLOWING ANY ADJUSTME NT FOR DIFFERENCE IN RISK PROFILE OF THE ASSESSEE AND THAT OF COMPARABLES. THE PRIMARY' ARGU MENT OF THE ASSESSEE IS THAT IT WAS REMUNERATED ON COST PLUS BASIS, I.E, THE ENTIRE COS T INCURRED BY THE ASSESSEE IS REIMBURSED BY ITS AE ALONG WITH A CERTAIN MARKUP AND, ACCORDIN GLY, IS WAS WORKING IN A RISK FREE ENVIRONMENT. 1'HE ASSESSEE FURTHER CONTENDED THAT T HE PROFITS ARE DIRECTLY LINKED WITH THE RISK PROFILE , T E., MORE IS THE RISK MORE SHOULD B E THE PROFIT AND, THEREFORE, SINCE THE ASSESSEE WAS NOT CARRYING ANY RISK, IT SHOULD HAVE BEEN ALLOWED ADJUSTMENT FOR ASSUMING LOWER RISK AS COMPARED TO THE COMPARE' VS. THIS PAN EL HAS CAREFULLY CONSIDERED THE ARGUMENTS OF THE ASSESSEE. THE ADJUSTMENT FOR FUNCT ION - : DIFFERENCES, IF ANY. CAN BE MADE ONLY IF THOSE DIFFERENCES CAN BE ASCERTAINED ACCURA TELY AND THEN IMPACT ON THE MARGINS CAN BE ASSESSED WITH REASONABLE ACCURACY. IN THIS CASE, NO INFORMATION IS AVAILABLE ABOUT THE RISK PROFILE OF THE COMPARABLES, I.E. HOW MUCH WAS THE RISK ASSUMED IN RESPECT OF FUNCTIONS CARRIED OUT BY THEM, WHAT WAS THEIR BUSINESS MODEL, I.E., EITHER COST PLUS OR FULL TIME EQUIVALENT (FIE) OR LUMP-SUM. CONSIDERATION. IN THE ABSENCE OF RELIABLE INFORMATION ABOUT THE RISK PROFILE OF THE COMPARABLES, IT IS IMPOSSIB LE TO QUANTIFY THE ADJUSTMENT FOR DIFFERENCE IN THE RISK PROFILE. MOREOVER, THE ASSES SEE ALSO BEARS SINGLE CUSTOMER RISK WHICH IS A SIGNIFICANT RISK. IN STOCK MARKET ALSO, COMPAN IES WITH DIVERSIFIED CUSTOMER BASE COMMANDS BETTER VALUATIONS AS COMPARED TO THE COMPA NIES HAVING SINGLE CUSTOMER OR NARROWER CUSTOMER BASE. AFTER CAREFUL CONSIDERATION OF THE MATTER THIS OFF ICE IS OF THE VIEW THAT RISK ADJUSTMENT AS A GENERAL RULE CANNOT BE ALLOWED UNLESS IT IS CLEARLY SHOWN THAT THE COMPARABLE.- HAD ACTUALLY ITA NO. 6980/DEL./2017 20 UNDERTAKEN SUCH RISK AND HOW THE SAME MATERIALLY AF FECTED THEIR MARGINS. THE REVISED OECD GUIDELINES OF 2010 HAS ALSO STATED IN PARA 3.5 4 AS UNDER: 'ENSURING THE NEEDED LEVEL OF TRANSPARENCY OF COMPA RABILITY ADJUSTMENTS NUN DEPEND UPON THE AVAILABILITY OF AN EXPLANATION OF AN Y ADJUSTMENT PERFORMED, THE REASONS FOR THE ADJUSTMENTS BEING CONSIDERED APPROPR IATE HOW THEY WERE CALCULATED, HOW THEY CHANGED THE RESULTS FOR EACH COMPARABLE AN D HOW THE ADJUSTMENT IMPROVES COMPARABILITY. ISSUES REGARDING DOCUMENTATI ON OF COMPARABILITY ADJUSTMENTS TIRE DISCUSSED IN CHAPTER V .' 8.2. PROM THE ABOVE GUIDELINES, IT CAN BE SEEN THAT UNL ESS IT IS SHOWN THAT HOW THE RISK ADJUSTMENT WOULD CHANGE THE RESULT OF EACH COM PARABLE AND HOW THE SAME WOULD IMPROVE THE COMPARABILITY AND UNLESS ADEQUATE REASONS ARE GIVEN FOR SUCH ADJUSTMENT, NO ADJUSTMENT CAN BE ALLOWED TO THE ASS ESSEE. IN THE PRESENT CASE EXCEPT POINTING OUT VARIOUS RISKS THE ASSESSEE HAS NOT SHOWN WITH EVIDENCE AS TO WHETHER EACH OF THE RISK WAS ACTUALLY UNDERTAKEN BY THE COMPARABLES OR NOT AND IF SO HOW THESE RISKS AFFECTED EACH OF THEM AND WHETHER SUCH ADJUSTMENT WOULD IMPROVE THE COMPARABILITY. IT MAY ALSO BE MENTIONED THAT: IT IS INCORRECT TO SAY THAT THE ASSESSEE IS WORKING VIRTUALLY IN A RISK FR EE ENVIRONMENT. THE ASSESSEE TOO BEARS SEVERAL RISKS LIKE TECHNOLOGY RISK, FOREIGN E XCHANGE RISK, MANPOWER RISK, SINGLE CUSTOMER RISKS, ETC. THE VARIOUS RISKS TO WH ICH ASSESSEE IS EXPOSED ARE BEING DISCUSSED BELOW:- NO. RISK TO ASSESSEE THE DISCUSSION ON VARIOUS RISKS AS PER THE MATRIX A S DISCLOSED IN TRANSFER PRICING REPORT AND ALSO REMAR KS OF THIS OFFICE ON THE SAME 1. MARKET RISK DISCLOSED IN TRANSFER PRICING REPORT, THE ASSESSEE S CLAIM THAT IT DOES NOT BEAR MARKET RISK AS IT RENDERS SERVICES - EXCLUSIVELY TO ITS AE IS NOT ACCEPTABLE. IN FACT, THE ASSESSEE BEARS A MUCH BIGGER MARKET RISK VIZ. SINGLE CUSTOMER RISK, J AS THE ASSESSEE IS WHOLLY DEPENDENT ON ITS AE, ITS ENTIRE EXISTENCE IS DEPENDENT ON IT. IF THE AE RUNS OUT OF BUSINESS OR IF AC - BUSINESS GETS REDUCED SUBSTANTIALLY, THE ASSESSEES BUSINESS WILL ALSO GET ADVERSELY AFFECTED THE ASSESSEE BEING A CAPTIVE SERVICE PROVIDER CANNOT EVEN LOOK, FOR OTHER 1 CUST OMERS. THU?, IN FACT THE ASSESSES RUNS A GREATER RISK THAN AN AVERAGE INDEPENDENT ENTITY THAT CAN ALWAYS LOOK FOR OTHER C USTOMERS OR OTHER MARKETS 2. SERVICE LIABILITY DISCLOSED IN TRANSFER PRICING REPORT. THE ASSESSES ARGUES THAT INDEPENDENT I COMPARABLES BEAR LULL RESPONSIBILITY FOR DELIVERY OF FINAL SERVICES TO CLIENTS AND HENCE EXPOSED TO S ERVICE FAILURES RISK WHEREAS THE ASSESSEE IS NOT EXPOSED TO THIS RI SK AS IT DRIES NOT HAVE ANY CONTRACTUAL LIABILITY FOR LOSSES OR DA MAGES' FOR SERVICE FAILURES AND THE COST OF REWORK (IF ANY) WO ULD BE RECOVERABLE FROM AE ON A COST PLUS BASIS. IT IS NAI VE TO ARGUE THAT THE ASSESSES IS NOT RESPONSIBLE FOR QUALITY OF SERVICE AND ITA NO. 6980/DEL./2017 21 THUS DOES NOT BEAR RISK FOR DELIVERY 1 OF SERVICES. FURTHER, IT IS THE DUTY OF THE INDEPENDENT ENTERPRI SE TO RECTIFY SUCH ERROR AT AN ADDITIONAL COST, WHICH IN FACT, RE DUCES THE PROFITABILITY AS IT CANNOT GET MORE THAN THE PREVAI LING RATE IN THE MARKET FOR THE SERVICES RENDERED. THE REWORKS U NLESS EXCEPTIONAL ARE A PART OF RUNNING BUSINESS AND ARE FACTORED IN STATED PROFITS. 3 PRICE RISK NOT DISCLOSED IN TRANSFER PRICING REPORT BUT ACTUAL LY BORNE BY ASSESSES. : 4, CAPACITY UTILIZATION RISK DISCLOSED IN TRANSFER PRICING, REPORT. THE ASSESSEE STATES THAT AS IT IS COMPENSATED EVEN ON' THE IDLE CAPACITY, IT DO ES NOT BEAR THIS RISK. HOWEVER, MOST INDEPENDENT COMPANIES ARE CHARGING ALMOST SIMILAR MAN-HOUR RATES. FURTHER, IT IS NOT T HE CASE OF ASSESSEE THAT INDEPENDENT COMPANIES ARE CHARGING AT A PREMIUM RATE TO ACCOUNT FOR UNDER UTILIZATION OF CA PACITY. FURTHER, AS THE OPERATING MARGIN IS COMPUTED AFTER CONSIDERING THE COMPLETE EMPLOYEE COST WHICH INCLUDES THE SALAR Y FOR THE PERIOD OF UNDER UTILIZATION OF EMPLOYEES, THE EFFEC T OF THIS RISK IS ALREADY TAKEN CARE OF WHILE COMPUTING THE OPERAT ING MARGIN. IT HAS ALSO NOT BEEN SHOWN THAT MARGINS CHANGE BECA USE OF UNDER UTILIZATION. 5. FOREIGN EXCHANGE RISK DISCLOSED IN TRANSFER PRICING REPORT. HOWEVER, IT H AS BEEN CONSIDERED A NONOPERATING ITEM BOTH FOR ASSESSES AN D COMPARABLE COMPANIES. BESIDES, HEDGING COSTS INCURR ED BY COMPARABLE COMPANIES ARE ALREADY PART OF THEIR P&L AND HAVE ALREADY REDUCED THEIR PROFITS. 6. CREDIT & COLLECTION RISK DISCLOSED IN TRANSFER PRICING REPORT. IT IS NOT SHO WN THAT THE AE PAYS THE MONEY IN ADVANCE. IF NOT SO. ASSESSEE ALSO HAS CREDIT RISK AS THERE IS NO GUARANTEE THAT THE AE SHALL ALW AYS BE IN A POSITION TO PAY THE ASSESSES. IN ANY. CASE, THE RIS K ON ACCOUNT OF COLLECTION IS VERY MINIMAL AND IT GETS NULLIFIED AT NET LEVEL DUE TO THE FACT THAT THE MARGIN OF THE COMPARABLE COMPA NIES IS COMPUTED ONLY AFTER DEDUCTING THE BAD DEBTS/ PROVIS ION FOR BAD DEBTS AS OPERATING EXPENSES. 7. GOVERNMENT & INSTITUTIONAL NOT DISCLOSED IN TRANSFER PRICING REPORT BUT ACTUAL LY BORNE BY ASSESSES. 8. OPERATIONAL RISK NOT DISCLOSED IN TRANSFER PRICING REPORT BUT ACTUAL LY BORNE BY ASSESSES. 9. INFRASTRUCTURE FAILURE RISK NOT DISCLOSED IN TRANSFER PRICING REPORT BUT ACTUAL LY BORNE BY ASSESSEE. 10. MANPOWER RISK DISCLOSED IN TRANSFER PRICING REPORT BUT A CTUALLY BORNE BY ASSESSES, IT IS ARGUED THAT THE HIGH ATTRITION RATE RESULTING IN HIGHER TRAINING COSTS, IDLE TIME ETC WILL HAVE AN I MPACT ON THE PRICING OF COMPARABLES. HOWEVER, IT IS AN ONGOING P HENOMENON IN ANY RUNNING COMPANY AND THE COSTS ON ACCOUNT OF THE SAME ITA NO. 6980/DEL./2017 22 ARE ALREADY FACTORED IN THE P&L OF COMPARABLES. AS REGARDS LOSS OF VALUABLE PERSONNEL AND RELATED HUMAN INTANGIBLE, EVEN THE ASSESSES IS EXPOSED TO THIS RISK. 11. SECURITY RISK NOT DISCLOSED M TRANSFER PRICING REPORT BUT ACTUALL Y HOME BY ASSESSES. 12. ENVIRONMENTAL RISK NOT DISCLOSED IN TRANSFER PRICING REPORT BUT ACTUAL LY BORNE BY ASSESSEE. 13. TECHNOLOGY RISK COMPARABLE COMPANIES AS WELL .AS THE ASSESSES TIRE EXPOSED TO SIMILAR TYPE OF TECHNOLOGICAL OBSOLESCENCE OR RISK, FURTHER, TECHNOLOGICAL CHANGES ARE AN ONGOING PHENOMENON AND PLACE AN ADDITIONAL COST BURDEN WHICH PULL DOWN THE PROFI TABILITY OF THE COMPARABLE COMPANIES AS WELL. IT MAY BE MORE RELEVANT FOR COMPANIES WHICH HAVE SUBSTANTIAL ASSETS AND RUN THE RISK OF THEIR PRODUCTS GETTING OBSOLETE THIS RISK IS NOT VERY RELEVANT FOR SERVICE INDUSTRY. 8.3. JUDICIAL DECISIONS: IN VARIOUS JUDICIAL PRONOUNCEMENTS THE RISK ADJUSTM ENT HAS NOT BEEN ALLOWED BY THE ITATS. SOME OF THESE DECISIONS ARE DISCUSSED BELOW: (A) VEDARIS TECHNOLOGY (2010-TII-10-ITAT-DEL-TP: NO RISK ADJUSTMENT TO BE ALLOWED EVEN ON AD HOC BASIS (B) M/S MARUBENI INDIA PRIVATE LTD. T20N-TII-36RITA T~DF.L-TP) IN WHICH IT WAS HELD THAT AS THE ASSESSEE FAILED TO BRING ANY EVIDENCE O N RECORD TO SHOW THAT-THERE WAS ANY DIFFERENCE IN RISK PROFILES OF COMPARABLE COMPANIES AND SINCE THE ASSESSES FAILED ID FILE THE DETAILS EXHIBITING RISK BORNE BY COMPARABLES, N O RISK ADJUSTMENT CAN BE GIVEN, EVEN ON AD HOC BASIS. M/S ADP PRIVATE LTD. (2011-TII-44-ITAT-HYD-TP WHERE IN THE IT AT HELD THAT THERE IS NO THUMB RULE FOR ALLOWANCE OF RISK ADJUSTMENT (D) M/S SYMANTEC SOFTWARE SOLUTIONS PRIVATE LTD, (2 011-TII-60-ITAT-MUM-TP): THE ITAT HELD THAT;- I. UNTIL AND UNLESS IT IS SHOWN THAT THE DIFFERENCE IN FUNCTION AND RISK RESULTS IN DEFLATION OR INFLATION OF FINANCIAL RESULTS OF THE COMPARABLE S, IT IS NOT A GENERAL RULE TO GRANT IT AS A STANDARD ADJUSTMENT. II. THE ASSESSEE COULD NOT SHOW HOW SUCH DIFFERENCE IN RISK AND FUNCTIONS AFFECTED THE RESULTS OF THE- COMPARABLES. (E). M/S ST MICRO ELECTRONICS (2011-TII-63-ITAT-DE L-TP): THE ASSESSEE'S CLAIM THAT IS WAS A RISK TREE CAPTIVE SERVICE PROVIDER AND HENCE CANNOT BE COMPARED WITH COMPARABLES WHO WERE LULL ENTREPRENEURS WAS NOT ACCEPTED BY THE ITAT. (F). M/S. EXXON MOBILE COMPANY INDIA PVT. LTD. (20 1 L-TII 68-ITAT-MUM-TP): THE ITAT HELD THAT SINCE WORKING CAPITAL ADJUSTMENT HAS BEEN GIVEN AND THE ASSESSEE HAS NOT WORKED OUT THE RISK ADJUSTMENT, NO ADJUSTMENT CAN B E GRANTED ON THIS ACCOUNT ITA NO. 6980/DEL./2017 23 (G). M/S DELOITTE CONSULTING INDIA P LTD: ITA NO. 1082/HYD/2010, ITAT HYDERABAD DATED 22.7.2011: IN THIS DECISION THE ITAT HELD AS UNDER; ''THE NEXT GROUND IS WITH REGARD TO THE ISSUE THAT THE TPO/CIT (A) NOT ALLOWING ANY ADJUSTMENT TOWARDS VALUABLE INTANGIBLES OWNED BY AN D IN RESPECT OF ENTREPRENEURIAL RISK BORNE BY THE COMPARABLES. WE F IND THAT THERE ARE SEVERAL FACTORS SUCH AS MARKET RISKS ENVIRONMENTAL RISK, EN TREPRENEURIAL RISK AND FUNCTIONAL RISK ETC.. WHICH AFFECT THIS MUTER AND WHICH ULTIMA TELY, AFFECT THE RESULTS OF THE COMPANY. ALL THE AFORESAID FACTORS MAKE IT IMPRACTI CABLE TO ANY AUTHORITY TO FIND OUT EXACT DUPLICATE COMPANY OF THE ASSESSEE AS COMPARAB LE. SOME VARIATION BOUND TO EXIST. WE FIND THAT THE TPO HAD MADE EFFORTS TO IDE NTIFY THE COMPARABLES WHOSE FUNCTIONS ARE SIMILAR TO THE ASSESSEE COMPANY BY AP PLYING FILTER QUANTITATIVELY AND QUALITATIVELY TO ELIMINATE, THE DIFFERENCES BETWEEN THE ASSESSES COMPANIES WITH THAT OF COMPARABLE COMPANIES NEUTRALIZE THE AFORESAID RI SK FACTORS. THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE IN THE WRITTEN SUB MISSIONS AS WELL AS SUBMISSIONS MADE BEFORE US WERE ALL IN THE BACKGROUND OF SHOWIN G THE ASSESSEE COMPANY ITS LOW END PERFORMER. WE DO NOT FIND FORCE IN THE CONTENTI ON OF THE-LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE IS A RISK FREE SERVICE PROVIDER AND SUFFICIENT ADJUSTMENT NEEDS TO BE ALLOWED TO COMPARE WITH THE OTHER COMPA RABLE COMPANIES. THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON SEVERAL DECISIONS IN SUPPORT OF HIS CASE THAT THERE SHOULD BE SOME ADJUSTMENT FOR RISK TO BE GIVEN HOWEVER, WE FIND THAT THE FIRST APPELLATE AUTHORITY UTTER GOING THROUGH THE A GREEMENT, ENTERED BY THE ASSESSEE COMPANY WITH THE AE. OBSERVED THAT THE ASSESSEE COM PANY IS AN INDEPENDENT CONTRACTING ENTITY AND SHALL BE SOLELY RESPONSIBLE FOR DETERMINING THE MANNER, MEANS AND METHODS BY WHICH II PERFORMS ITS OBLIGATION UNDER THE SAID CON TRACT AS PER ARTICLES, THE ASSESSEE COMPANY HAS UNDERTAKEN T HE WARRANTY THAT ALL ITS WORK AND DOCUMENTATION TO BE DELIVERED TO THE ASSOCIATE ENTERPRISE SHALL BE FREE OF ERROR IN A NUTSHELL, THE ASSESSEE COMPANY WAS CARRYING SEVERAL RISKS WHILE UNDERTAKING VARIOUS WORKS SERVICES FAR AS ASSOCIATE ENTERPRISE IN VIEW OF THIS MATER A FTER CONSIDERING THE DETAILED REASONING GIVEN BY THE CIT (A) TPO IN THEIR ORDERS, IN OUR CONSIDERED OPINION, IT CANNOT BE SAID THAT THE ASSE SSEE COMPANY WAS OPERATING IN A RISK FREE ENVIRONMENT AND ACCORDINGLY THE ASSESSEE COMPANY IS NOT ENTITLED TO ANY ADJUSTMENT TOWARDS RISKS BORNE BY VARIOUS COMPARABL E COMPANIES. THEREFORE, WE CONFIRM THEIR ORDERS ON THIS ISSUE. HENCE, THE GROU ND RAISED BY THE ASSESSES ON THIS ISSUE IS REJECTED. ' (H). RELIANCE ON THE JUDGMENT OF M/S INTEILINET TEC HNOLOGIES INDIA PVT. LTD VS ITO (ITA NO. 1237 (BANG)/2010) IS NOT OF MUCH HELP AS IN THA T CASE ITAT HAS NOT ACCEPTED THE ASSESSEES CONTENTION OF RISK ADJUSTMENT OF 5.5%, T HE ITAT HAS ONLY SET ASIDE THE MATTER TO TPO TO CONSIDER VARIOUS CONTENTION OF THE ASSESSEE AND DECIDE THE PERCENTAGE OF RISK ADJUSTMENT IN ACCORDANCE WITH LA W. HOWEVER, IF THE METHODOLOGY GIVEN BY THE-ASSESSEE IN ITS CONTENTION DOES NOT LE AD TO REASONABLY ACCURATE ADJUSTMENT, THE LAW IS NOT IN FAVOUR OF GRANTING AN ADJUSTMENT. HENCE, THE JUDGMENT CANNOT SAID TO BE TO LAYING DOWN THAT A RISK ADJUST MENT SHOULD BE ALLOWED EVEN IF IT DOES NOT RESULT IN REASONABLE ACCURATE ADJUSTMENT. ITA NO. 6980/DEL./2017 24 8.6. HENCE, IT CAN BE SEEN FROM THE ANALYSIS OF VAR IOUS JUDGMENTS THAT THE ISSUE OF GRANT OF RISK ADJUSTMENT IS NOT YET SETTLED. IN SOME DECI SIONS, COURTS HAVE NOT ALLOWED ANY RISK ADJUSTMENT, IN SOME DECISIONS, COURTS HAVE PRI NCIPALLY AGREED THAT THERE ARE DIFFERENCES BETWEEN RISK PROFILE OF THE ASSESSEE AN D COMPARABLES AND SO THERE SHOULD BE RISK ADJUSTMENT. HOWEVER, THE COURTS HAVE NOT YET RULED ON THE ISSUE WHETHER ANY PARTICULAR METHOD RESULTS IN REASONABLY ACCURATE ADJUSTMENT OR NOT. FURTHER, WHETHER THE ASSESSEE HAS A SIGNIFICANTLY D IFFERENT RISK PROFILE FROM THAT OF COMPARABLES, THEREFORE WARRANTING A RISK ADJUSTMENT IS A QUESTION OF FACT AND HAS TO BE DECIDED ON THE FACTS OF THE CASE. 8.7. IT IS NOT SUFFICIENT TO MERELY SPELL OUT RISKS . IT HAS TO BE SHOWN WHICH RISK WAS ACTUALLY UNDERTAKEN BY THE COMPARABLES AND TO WHAT EXTENT IT AFFECTED THE PROFITABILITY. THE ASSESSEE HAS NOT DONE SO. ADJUST MENT CAN BE ALLOWED ONLY IF IT IS DEMONSTRATED THAT IS LEADING TO BETTER COMPARABILIT Y AND ONLY WHEN A CREDIBLE METHODOLOGY IS ADOPTED FOR CALCULATING A REASONABLY ACCURATE ADJUSTMENT. 8.8. SINCE, THE METHODOLOGY IS NOR WELL ESTABLISHED AND-REQUIRES MAKING SEVERAL ASSUMPTIONS, THE RISK ADJUSTMENT CALCULATED AS PER THE METHODOLOGY WILL NOT LEAD TO REASONABLY ACCURATE ADJUSTMENT AS REQUIRED AS PER T HE INCOME TAX ACT AND RULES. THEREFORE, IT WILL NOT BE POSSIBLE TO GIVE RISK ADJ USTMENT UNDER THE INDIAN LAW. 8.9. THE DISCUSSION ON THE RISK ADJUSTMENT IS SUM MARIZED AS UNDER: A. AS DISCUSSED ABOVE, THE ASSESSEE HAS ALSO UNDERTAK EN SEVERAL RISKS. THEREFORE, IT IS NOT CORRECT TO SAY THAT IT IS A RISK MITIGATED ENTI TY. B. THE ASSESSEE IS TOTALLY DEPENDENT ON THE AE TOR BU SINESS. THUS THE ASSESSEE TAKES THE RISKS ASSOCIATED WITH HEAVY DEPENDENCE ON A SIN GLE CUSTOMER. IN COMMON BUSINESS PARLANCE IT IS KNOWN AS 'SINGLE CUSTOMER R ISK. C. THE COMPENSATION MODEL WITH THE AE DOES NOT GUARAN TEE VOLUME OF BUSINESS NOR TIRE PERIOD. THE AGREEMENT CAN BE TERMINATED BY ANY PARTY AT ANY TIME AFTER GIVING A STIPULATED PERIOD NOTICE. THUS THE ASSESSEE IS NOT FREE FROM THE RISK OF LOSING BUSINESS ENTIRELY OR LOSING VOLUME OF BUSINESS. D. THE ASSESSEE IS NOT COMPENSATED ANY AMOUNT FOR TER MINATION OF AGREEMENT EVEN IF IT IS TERMINATED WITHOUT ANY CAUSE. NO INDEPENDENT ENTERPRISE WOULD LIKE TO AGREE FOR A TERMINATION CLAUSE WITHOUT COMPENSATION IF IT IS TERMINATED WITHOUT ANY CAUSE. ITA NO. 6980/DEL./2017 25 E. THE INDEPENDENT ENTREPRENEUR HAS TO INCUR EXPENDIT URE ON MARKETING, ETC. WHICH IS DEBITED TO THE PROFIT AND LOSS ACCOUNT. BUT, IT IS ALWAYS NOT NECESSARY THAT THESE RISKS REFLECTED IN THE MARKETING, SALES PROMOTION EXPENSE S WILL AUTOMATICALLY BE COMPENSATED BY INCREASE IN SALES OR HIGHER MARGINS FOR EXAMPLE, INCREASED MARKETING EFFORTS IN SOME SEGMENTS OF MARKET MAY NO T YIELD RESULTS FOR A COMPANY AND THEREBY THERE MAY BE A LOSS ON THIS MARKETING E FFORT WHICH MAY BRING DOWN THE OVERALL PROFITABILITY RATHER THAN INCREASE THE PROF ITABILITY. THUS IF UNDERTAKING THE MARKET RISK ETC. HELPS IN EARNING ANY EXTRA MARGIN, THE BENEFIT IS MORE THAN SET OFF BY THE CORRESPONDING EXPENDITURE. THE SAME APPLIES TO CREDIT RISK, SERVICE- LIABILITY, TECHNOLOGY RISK ETC. F. IF IS INCOMXT TO SAY THAT HIGHER THE RISK, THE HIG HER IS THE MARGIN THOUGH IT IS TRUE THAT ONE EXPECTS HIGHER MARGIN WHEN ONE UNDERTAKES HIGHER RISK. TITUS REALIZATION OF RISK IS DIFFERENT FROM EXPECTED RETURN BASED ON RISK UNDERTAKEN. FINALLY SELECTED COMPARABLES HAVE ALMOST SIMILAR RISK' AS ALL ARE IN DEPENDENT ENTREPRENEURS BUT THEIR MARGINS VARY SUBSTANTIALLY. G. DIFFERENT: COMPARABLES CAN HAVE DIFFERENT RISK PRO FILES AND DIFFERENT PROFIT MARGINS. THE PROVISO TO SEC. 92C{2) OF THE ACT PROVIDES FOR ADOPTING ARITHMETICAL MEAN OF THE DIFFERENT PRICES. THIS PROVISION NEUTRALIZES THE EF FECT OF DIFFERENCE IN THE RISK PROFILE, IF ANY BETWEEN THE TAX PAYER AND THE COMPARABLES AS REALIZED RISK MAY PULL DOWN THE PROFITABILITY BELOW THE RISK TREE RETURN. H. IT IS NOT SUFFICIENT TO MERELY SPELL OUT .RISKS , .IT HAS TO BE SHOWN WHICH RISK WAS ACTUALLY UNDERTAKEN BY THE COMPARABLES AND TO WHAT EXTENT IT AFFECTED THE PROFITABILITY. ADJUSTMENT CAN HE ALLOWED ONLY IF IT IS DEMONSTRATED THAT IS LEADING TO BETTER COMPARABILITY AND ONLY WHEN A CREDIBLE METHO DOLOGY IS ADOPTED FOR CALCULATING A REASONABLY ACCURATE ADJUSTMENT. THE M ETHODOLOGY USED BY THE ASSESSEE DOES NOT HAVE ANY APPLICATION IN THE AREA OF TRANSF ER PRICING. I. IN THE VARIOUS DECISIONS OF THE ITATS AS REFERRE D TO ABOVE NO RISK ADJUSTMENT HAS BEEN ALLOWED IN SUCH CASES IN ABSENCE OF ANY CREDIB LE METHODOLOGY TO GRAM RISK ADJUSTMENT. IN VIEW OF THE ABOVE DISCUSSION IT IS HELD THAT NO RISK ADJUSTMENT IS TO BE GIVEN TO THE ASSESSEE. 8.10. FURTHER THE ASSESSEE HAS QUANTIFIED THE RISK ADJUST MENT BASED ON THE DIFFERENCE BETWEEN BANK RATE AND PLR. IT IS MENTIONED HERE THA T REFERENCE TO PLR AND BANK RATES IN THE CONTEXT OF TRANSFER PRICING IS NOT PER TINENT. THOUGH THE HONORABLE ITAT WAS PERSUADED IN THE CASE OF PHILIPS THAT BANK RATE S AND PLR ARE IN SOME WAY CONNECTED WITH THE UNDER LYING RISK OF LENDING; IN FACT IT IS NOT. SO. LOOSELY SPEAKING BANK RATE IS THE RATE AT WHICH THE CENTRAL BANK (RB I IN INDIA) ADVANCES CREDIT TO OTHER BANKS. THE BANK RATE ALSO REFERS TO THE RATE OF INTEREST CHARGES ON INTERBANK SHORT TERM BORROWINGS (CALL MONEY). HOWEVER IT IS I N NO WAY CONNECTED WITH THE PERCEIVED UNDER LYING RISKS. BEFORE SETTING THE BAS E FATE SYSTEM, BANKS USED ANOTHER RATE SYSTEM CALLED PRIME LENDING RATE (PLR) TO SET THEIR LENDING RATES. IT WAS ITA NO. 6980/DEL./2017 26 NOTICED BY THE RBI THAT BANKS USED TO MANIPULATE TH IS PLR TO LOWER LEVEL TO OFFER DISCOUNTED LENDING RATES FOR THE BORROWERS. IT MAY CAUSE THE LOSS FOR THE BANKS IF THEY OFFER LOAN WITH MUCH CHEAPER PRICE. THE REAL I NTENTION OF THE RBI IS TO MAKE THE BANKING SYSTEM MUCH STRONGER AFTER THE GLOBAL FINAN CIAL CRISIS. THE BANKS MEET HUGE LOSS BECAUSE OF THE DEFAULT LOANS. THE MAIN REASON IS, WHEN BANKS OFFER LOANS WITH CHEAPER PRICE TO LURE THE CUSTOMERS, MOST OF THE CU STOMERS WITHOUT ADEQUATE FINANCIAL SUPPORT TO GET THE LOANS. BASE RATE SYSTE M PROVIDES MORE TRANSPARENCY ON SELLING THE RATES. EACH BANK USES SAME CRITERIA TO SET THEIR BASE RATES. BASE RATE SYSTEM IS ARRIVED AT TAKING INTO THE ACCOUNT, THE C OST OF DEPOSITS AND COST OF KEEPING ASIDE CASH TO MEET CLR AND SLR, IT IS CONVENIENT FO R THE BANKS TO ADJUST THE LENDING RATES AFTER THE CHANGES ON POLICY RATES BY THE RBI. 8.11. IN THE FOLLOWING CATEGORIES OF LOANS PLR OR BASE RA TE IS NOT APPLICABLE: AGRICULTURAL LOANS LOANS GIVEN TO OWN EMPLOYEES * LOANS AGAINST DEPOSIT * EXPORT CREDIT 8.12. AS PER RBI GUIDELINES BASE RATE SHALL INCLUDE ALL THOSE ELEMENTS OF THE LENDING RATES THAT ARE COMMON ACROSS ALL CATEGORIES OF BORROWERS. WHILE EACH BANK MAY DECIDE ITS OWN BASE RATE, SOME OF THE CRITERIA THAT COULD GO I NTO THE DETERMINATION OF THE BASE RATE ARE: (I) COST OF DEPOSITS; (II) ADJUSTMENT FOR THE NEGATIVE CARRY IN RESPECT OF CRR AND SLR; (HI) UNALLOWABLE OVERHEAD COST FOR BANKS S UCH AS AGGREGATE EMPLOYEE COMPENSATION RELATING TO ADMINISTRATIVE FUNCTIONS I N CORPORATE OFFICE, DIRECTORS AND AUDITORS LEES, LEGAL AND PREMISES EXPENSES, DE PRECIATION, COST OF PRINTING AND STATIONERY, EXPENSES INCURRED ON COMMUNICATION AND ADVERTISING, IT SPENDING, AND COST INCURRED TOWARDS DEPOSIT INSURANCE; AND (IV) P ROFIT MARGIN. IT IS GENERALLY KNOWN FACT THAT THE RBI USES INTEREST RATES AS A ME ASURE OF MONETARY POLICY TO CONTROL LIQUIDITY IN THE MARKET OR AS AN ANTI INFLA TIONARY MEASURE. 8.13. THE RBI POLICY ANNOUNCEMENT MAKES IT VERY CLEAR TH AT PLR/BASE RATE AND BANK RATES ARE NOT THE FUNCTIONS OF RISK ADJUSTMENTS BUT ARE MEASURES USED BY THE RBI AS TOOLS OF MONETARY POLICY TO CONTROL INFLATION; TO R EGULATE EXCESS CASH FLOW IN THE MARKET AND TO RELEASE/SUCK OUT LIQUIDITY FROM THE M ARKET. IT IS NAIVE TO POSTULATE THAT THE DIFFERENCE BETWEEN THE BANK RATE AND THE P LR/BASE RATE REPRESENT THE UNDERLYING RISK OF LENDING,. THE 29RYSTALL'S ARGUME NT IS THEREFORE NOT ACCEPTABLE. 8.14. FURTHER, IN THE ASSESSEE OWN EASE FOR AY 2012-13, T HE ASSESSEE HAS FILED AN APPEAL BEFORE DRP AGAINST THE ORDER U/S 92CA(3) PASSED BY THE TPO ON THIS ISSUE. HOWEVER, THE DRP VIDE ITS ORDER DATED 14.09.2016 HA S DISMISSED THE ASSESSEES GROUND WITH THE REMARKS IT IS ALSO WORTH ADDING TH AT IT IS NOT SUFFICIENT TO MERELY SPELL OUT RISKS, IT HAS TO BE SHOWN WHICH RISK WAS ACTUALLY UNDERTAKEN BY THE COMPARABLES AND TO WHAT EXTENT IT AFFECTED THE PROF ITABILITY.. SINCE, THE METHODOLOGY IS NOT WELL ESTABLISHED AND REQUIRES MA KING SEVERAL ASSUMPTIONS, THE RISK ADJUSTMENT CALCULATED AS PER THE METHODOLOGY W ILL NOT LEAD TO REASONABLY ACCURATE ADJUSTMENT AS REQUIRED AS PER THE INCOME T AX ACT AND RULES. THEREFORE, IT WILL NOT BE POSSIBLE TO GIVE RISK ADJUSTMENT UNDER THE INDIA LAW. ITA NO. 6980/DEL./2017 27 DRP DIRECTIONS: OBJECTIONS IX AND X ARE RELATED TO RISK ANALYSIS AN D RISK ADJUSTMENTS HENCE ARE BEING ADJUDICATED TOGETHER. RISK ADJUSTMENT AS A GENERAL RULE CANNOT BE ALLOWED UNLESS IT IS DEMONSTRATED THAT THE COMPARABLES HAD ACTUALLY U NDERTAKEN SUCH RISK AND HOW THE SAME MATERIALLY AFFECTED THEIR MARGINS. UNLESS IT IS SHOWN THAT HOW THE RISK ADJUSTMENT WOULD CHANGE THE RESULT OF EACH COMPARAB LE AND HOW THE SAME WOULD IMPROVE THE COMPARABILITY AND UNLESS ADEQUATE REASO NS ARE GIVEN FOR SUCH ADJUSTMENT, NO ADJUSTMENT CAN BE ALLOWED TO THE TAX PAYER. IN THE PRESENT CASE, THE TAXPAYER HAS NOT SHOWN WITH EVIDENCE AS TO WHETHER EACH OF THE RISK WAS ACTUALLY UNDERTAKEN OR NOT BY THE COMPARABLES AND IF SO, HOW THESE RISKS AFFECTED EACH OF THEM AND WHETHER SUCH ADJUSTMENT WOULD IMPROVE THE COMPARABILITY. PROBABILITY OF RISK AND CERTAINTY OF RISK ARE TWO DIFFERENT ASPECT S AND CANNOT BE EQUATED FOR THE PURPOSE OF ADJUSTMENT. ALL THIS REQUIRES ROBUST AND RELIABLE DATA, BOTH FOR THE ASSESSEE AND THE COMPARABLES IN THE ABSENCE OF WHIC H RISK ADJUSTMENT CANNOT BE CONSIDERED FOR ENHANCING COMPARABILITY. THUS, THE O BJECTION IS DISMISSED. 23. IN THE RESULT, THESE GROUNDS OF APPEAL ARE REJE CTED. 24. GROUND NO.9, CHALLENGES THE WORKING CAPITAL ADJ USTMENT OF ASSESSEE VIS- A-VIS COMPARABLE COMPANIES. AFTER GOING THROUGH THE ORDER OF THE LOWER AUTHORITIES, THIS ISSUE HAS NOT BEEN DEALT AND THE ASSESSEE HAS ALSO NOT RAISED THIS ISSUE BEFORE THE DRP, BUT RAISED BEFORE US. TH EREFORE, THIS GROUND IS NOT ACCEPTED. 25. GROUND NO. 10 REGARDING CHARGING OF INTEREST 23 4B AND 234C IS CONSEQUENTIAL IN NATURE. THE AO IS DIRECTED TO GIVE ITS CONSEQUENTIAL EFFECT. 26. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH OCTOBER, 2018. SD/- SD/- (BHAVNESH SAINI) (L.P. SA HU) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 15 TH OCTOBER, 2018 *AKS*