Copal Research India Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 7079/DEL/2014

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 4097 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 7 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-08-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 19-05-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 30-12-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMIT MOHAN GOVIL
• Assessee Lawyers: ANUBHAV RUSTOGI
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 10B

Judgement Text

PAGE 1 OF 22 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-2 NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SH.PRASHANT MAHARISHI, ACCOUNTANT MEMBER I.T.A .NO.-7 079/DEL/2014 (ASSESSMENT YEAR -2010-11) COPAL RESEARCH INDIA PVT.LTD., PLOT NO.267, PHASE-II, UDYOG VIHAR, GURGAON-122015. PAN-AACCC1159R (APPELLANT) VS DCIT, CIRCLE-6(2), NEW DELHI. (RESPONDENT) I.T.A .NO.-1113/DEL/201 6 (ASSESSMENT YEAR- 2011-12) COPAL RESEARCH INDIA PVT.LTD., PLOT NO.267, PHASE-II, UDYOG VIHAR, GURGAON-122015. PAN-AACCC1159R (APPELLANT) VS ACIT, CIRCLE-6(2),ROOM NO.390,C.R.BUILDING, NEW DELHI. (RESPONDENT) APPELLANT BY SHRI R OHIT TIWARI, CA & SH. ANUBHAV RUSTOGI, ADV. RESPONDENT BY SHRI A MIT M OHAN GOVIL, CIT(DR) DATE OF HEARING 1 9 .0 5 .2016 DATE OF PRONOUNCEMENT 1 6 .0 8 .2016 O R D E R PER DIVA SINGH, JUDICIAL MEMBER BOTH THESE APPEALS HAVE BEEN FILED BY THE ASSESSEE ASSAILING THE CORRECTNESS OF THE ORDERS U/S 143(3) R.W.S. 144C OF THE INCOME TAX ACT , 1961 DATED 28.11.2014 AND 29.01.2016 OF AO PERTAINING TO 2010-11 & 2011-12 AY S RESPECTIVELY. 1.1. ALTHOUGH VARIOUS GROUNDS HAVE BEEN RAISED BY THE ASSESSEE, HOWEVER, AT THE TIME OF HEARING, LD.AR SUBMITTED THAT HE WOULD BE ARGUING O NLY GROUND NO.4.5 IN BOTH THE YEARS AS I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 2 OF 22 IDENTICAL ISSUES ARE RAISED IN THEM AND GROUND NO. 6 IN ITA NO.7079/DEL/2014. FOR READY- REFERENCE, THE GROUNDS FROM ITA NO.7079/DEL/2014 AR E REPRODUCED HEREUNDER:- 4.5. ERRONEOUSLY INCLUDING CERTAIN FUNCTIONALLY DI SSIMILAR COMPANIES THAT ARE NOT COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIO NS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED AND EXCLUDING CERTAIN CO MPARABLE COMPANIES ON ARBITRARY/FRIVOLOUS GROUNDS; . 6. THE LD. AO ERRED IN CONFIRMING THE ADDITION OF IMPUTED INTEREST MADE BY THE LD. TPO, WITHOUT HAVING CONSIDERED THE DIRECTIO NS BY THE LD.DRP AND NOT GIVING ANY OPPORTUNITY TO THE APPELLANT TO BE HEARD OR TO EXPLAIN, THAT THE APPELLANT HAS RELEVANT DOCUMENTS TO CLEARLY LAY OUT THE TERMS OF PAYMENT SUPPORTED BY THE INVOICES AND AGREEMENTS IN PLACE ( WHICH CLEARLY STATE THE PAYMENT TERMS BEING 180 DAYS). 2. IN THE CONTEXT OF GROUND NO.4.5, THE LD.AR SUBMITTE D THAT THE ASSESSEE IS ENGAGED IN IT ENABLED SERVICES AND SOFTWARE DEVELOPMENT SER VICES TO ITS GROUP COMPANIES AS PER THE TP STUDY MADE AVAILABLE BY THE TAXPAYER. THE ASSES SEE, IT WAS SUBMITTED IS PRIMARILY ENGAGED IN THE PROVISIONS OF INFORMATION TECHNOLOGY (HEREINAFTER REFERRED TO AS IT) ENABLED BACK OFFICE SUPPORT SERVICES IN THE NATURE OF CUSTOMIZED BUSINESS/FINANCIAL RESEARCH SUPPORT TO COPAL GROUP. IN RETURN FOR RENDERING TH ESE SERVICES THE ASSESSEE WAS REMUNERATED ON AN ARMS LENGTH COST PLUS BASIS I.E. COSTS PLUS A MARK-UP THEREON. IN THE YEAR UNDER CONSIDERATION, IT WAS SUBMITTED THE ASSE SSEE ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS:- S.NO. DESCRIPTION OF THE TRANSACTIONS AMOUNT (IN RUPEES) 1. PROVISIO N OF IT ENABLED BACK OFFICE SUPPORT SERVICES 462,105.21 2.1. THE ASSESSEE SELECTED TRANSACTIONAL NET MARGIN MET HOD (HEREINAFTER REFERRED TO AS TNMM) AS THE MOST APPROPRIATE METHOD SELECTING PR OFIT LEVEL INDICATOR (HEREINAFTER REFERRED TO AS PLI) AS OPERATION PROFIT/TOTAL COS T (HEREINAFTER REFERRED TO AS OP/TC) IN ITS TRANSFER PRICING STUDY REPORT. SELECTING 15 CO MPARABLES THEREIN THE ASSESSEE IT WAS I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 3 OF 22 SUBMITTED CLAIMED THAT ITS TRANSACTION WAS WITHIN A RMS LENGTH PRICE AS USING MULTIPLE YEAR DATA THE MEAN MARGIN OF THE 15 COMPARABLES WAS 14.2 7% AND THE ASSESSEES MARGIN WAS 18.29%. THE TPO OBJECTED TO THE USE OF MULTIPLE YEA R DATA AND DIRECTED THAT A FRESH SEARCH USING THE DATA FROM F.Y.2009-10 BE MADE. IN THE FR ESH SEARCH CARVED OUT THE ASSESSEE APPLIED THE FOLLOWING FILTERS FOR CONDUCTING THE CO MPARABLE ANALYSIS IN THE BENCHMARKING PROCESS:- COMPANIES HAVING OTHER OPERATING INCOME (OTHER THA N MANUFACTURING AND TRADING INCOME) TO SALES GREATER THAN 50% WERE AC CEPTED; COMPANIES HAVING RESEARCH & DEVELOPMENT COSTS TO SA LES LESS THAN 3% WERE ACCEPTED; COMPANIES HAVING NET FIXED ASSETS TO SALES LESS THA N 3% WERE ACCEPTED; COMPANIES HAVING AVERAGE SALES LESS THAN INR 1 CROR E WERE REJECTED; COMPANIES WITH NET WORTH LESS THAN ZERO WERE REJECT ED; AND COMPANIES HAVING ADVERTISING, MARKETING AND DISTRIB UTION COSTS TO SALES LESS THAN 3% WERE ACCEPTED. 2.2. THE FOLLOWING COMPARABLE COMPANIES WERE SELECTED I N THE FRESH SEARCH PROCESS APPLYING THE ABOVE QUANTITATIVE FILTERS WHICH WERE ANALYZED QUALITATIVELY [INCLUDING EXAMINATION OF RELATED PARTY TRANSACTIONS TO EXCLUD E COMPANIES WITH RPT GREATER THAN 10% AND THE ASSESSEE CAME UP WITH THE FOLLOWING COMPARA BLES:- S.NO. NAME OF THE COMPARABLE OP/TC% MARGIN FOR FY 2009-10 1. A O K IN - HOUSE B P O SERVICES LTD. 0.27% 2. ADITYA BIRLA MINACS WORLDWIDE LTD. 7.92% 3. CAMEO CORPROATE SERVICES LTD. 7.84% 4. COSMIC GLOBAL LTD. 16.65% 5. IN HOUSE PRODUCTIONS LTD. 17.30% 6. INFORMED TECHNOLGIES INDIA LTD. 21.15% 7. JINDAL INTELLICOM PVT.LTD. 13.92% 8. MICROLAND LTD. - IT ENABLED SERVICES - 3.79% 9. SPARSH B P O SERVICES LTD. 2.77% 10. TATA SERVICES LTD. 1.39% 11. TECHPROCESS SOLUTIONS LTD. (PROCESSING) 3.98% ARITHMETIC MEAN 8.13% I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 4 OF 22 2.3. THE ECONOMIC ANALYSIS IN THE TP STUDY AS WELL AS THE FRESH SEARCH UNDERTAKEN BY THE ASSESSEE WAS OBJECTED TO BY THE TPO WHO ISSUED A SH OW CAUSE NOTICE AND PROPOSED TO SUBSTITUTE THE RESULTS OF THE ASSESSEES ECONOMIC A NALYSIS WITH THE RESULTS OF FRESH SEARCH UNDERTAKEN BY HIMSELF APPLYING HIS OWN SET OF QUANT ITATIVE AND QUALITATIVE FILTERS. 2.4. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE FILED SUBMISSIONS DATED 10.12.2013 SETTING OUT ITS ARGUMENTS/CONTENTIONS AG AINST THE APPROACH PROPOSED TO BE FOLLOWED BY THE TPO. SOME OF THE COMPARABLES SOUGH T TO BE EXCLUDED/INCLUDED BY THE TPO WERE OBJECTED TO ON THE BASIS OF SPECIFIC DOCUMENTS . COPY OF THESE IT WAS SUBMITTED IS PLACED AT PAGES 316 TO 447 OF THE PAPER BOOK. 2.5. REFERRING TO THE TPOS ORDER DATED 16.01.2014 IT WA S SUBMITTED THAT NOTWITHSTANDING THE DETAILED SUBMISSIONS, THE ASSESSEE WAS SERVED W ITH THE AFORESAID ORDER WHEREIN OP/TC MARGIN OF THE FOLLOWING 10 COMPARABLES AT 29.87% HA D BEEN ARRIVED AT THE BY THE TPO:- S.NO. NAME OF THE COMPANY MARGIN (OP/TC) 1. COSMIC GLOBAL LIMITED 18.28% 2. JINDAL INTELLIICOM LIMITED 13.62% 3. * INFOSYS BPO LIMITED 31.46% 4. * ACCENTIA TECH. LIMITED 42.52% 5. * E4E HEALTHCARE 31.03% 6. FORTUNE INFOTECH LIMITED 22.80% 7. * IGATE GLOBAL SOLUTIONS LIMITED 24.54% 8. MICROLAND (ITES SEGMENT) - 3.01% 9. * TCSE - SERVE INTERNATIONAL LIMITED 54.03% 10. * TCSE - SERVE LIMITED 63.42% AVERAGE 29.87% [*-CHALLENGED IN THE PRESENT PROCEEDINGS] 2.6. THUS IT WAS HIS SUBMISSION THAT THE GRIEVANCE OF T HE ASSESSEE IS POSED ON THE COMPARABLES INCLUDED/EXCLUDED BY THE TPO. PURSUANT TO THE ORDER OF THE TPO, A DRAFT ASSESSMENT ORDER IT WAS SUBMITTED WAS ISSUED PROPO SING THE ADJUSTMENT RECOMMENDED BY THE TPO. I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 5 OF 22 2.7. APART FROM THE SAID GRIEVANCE IT WAS SUBMITTED THA T VIDE GROUND NO.6 THE ADDITION BY WAY OF ADJUSTMENT OF RS.3.30 LACS TO THE INCOME OF THE ASSESSEE IS ASSAILED. REFERRING TO THE FACTS RELATABLE TO IT. IT WAS SUBMITTED TH AT FOR THE DELAY IN RECEIPT OF PAYMENT FOR SERVICES RENDERED TO THE AE, THE TPO CHARGED RATE OF 14.88% INTEREST PER ANNUM FOR THE PERIOD OF DELAY IN RECEIPT OF PAYMENTS FROM THE AES BEYOND THE TIME STIPULATED IN THE SERVICE AGREEMENT. ADDRESSING THE SAID GROUND IT W AS SUBMITTED THAT THE TPO IN ITS ORDER HAS ASCERTAINED THAT PAYMENT FOR INVOICES RAISED BY THE APPELLANT HAS NOT BEEN RECEIVED WITHIN THE STIPULATED TIME AS PROVIDED IN THE SERVI CE AGREEMENT AND ACCORDINGLY, HAS TREATED DELAYED PAYMENTS AS AN UNSECURED LOAN FACILITY ADVA NCED TO THE AES. THE RATE OF INTEREST CHARGED IT WAS SUBMITTED WAS VERY HIGH. 2.7.1. THESE ISSUES IT WAS SUBMITTED WERE AGITATED BY WAY OF OBJECTIONS BEFORE THE DRP. QUA THE ISSUE AGITATED IN GROUND NO.6 IT WAS SUBMIT TED THE DRP ISSUED DIRECTIONS DATED OCTOBER 10, 2014 TO THE TPO TO VERIFY THE AMOUNT OF RECEIVABLE: (I) INCASE THE AGGREGATE AMOUNT OF RECEIVABLES FROM THE AES DOES NOT EXCEED R S.50 CRORES, APPLY PRIME LENDING RATE OF SBI AS ON JUNE 30 OF THE RELEVANT PREVIOUS YEAR PLUS 150 BASIS POINTS (II) IN CASE THE AGGREGATE AMOUNT OF RECEIVABLES FROM THE AES EXCEEDS RS.50 CRORES, APPLY PRIME LENDING RATE OF SBI AS ON JUNE 30 OF THE RELEVANT PREVIOUS YEAR PLUS 300 BASIS POINTS. 2.7.2. THE SAID DIRECTION OF THE DRP IT WAS SUBMITTED HAVE NOT BEEN CARRIED OUT. 2.8. IN THIS BACKGROUND REFERRING TO THE FINALLY SET UP COMPARABLES COMPANIES SELECTED BY THE TPO, IT WAS SUBMITTED THAT THE COMPARABLE FOUND MENTIONED AT SL.NO.3, 4, 5, 9 & 10 ARE OBJECTED TO AND THE OBJECTIONS POSED IN THE WRITTEN SUBMISSION TO THE COMPARABLES FOUND MENTIONED AT SL.NO.6 IS NOT BEING PRESSED. I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 6 OF 22 2.9. IN THIS BACKGROUND IT WAS SUBMITTED THAT RELYING UP ON THE SAID GROUND 4.5, THE ASSESSEE HAS TWO FOLD REQUESTS THAT IS THE EXCLUSIO N OF THE 7 (NOW SIX) SPECIFIC COMPARABLE COMPANIES INTRODUCED BY THE TPO AND INCLUSION OF 6 NEW COMPARABLE COMPANIES WHICH HAVE NOT BEEN INCLUDED BY THE TPO OR THE DRP. THE REASON S IN SUPPORT OF THEIR EXCLUSION AND EXCLUSION IT WAS SUBMITTED IS BASED ON JUDICIAL PRE CEDENT AND FACTS AS SET OUT IN THE SYNOPSIS FILED. THE 7 (NOW SIX) COMPARABLE COMPANIE S WHOSE EXCLUSION IS SOUGHT, IT WAS SUBMITTED ARE FOUND MENTIONED AT SERIAL NO. 3, 4, 6 ,5, 7, 9 AND 10 AND THEY READ AS UNDER:- (I) INFOSYS BPO LIMITED; (II) ACCENTIA TECH. LIMITED; (III) E4E HEALTHCARE; (IV) IGATE GLOBAL SOLUTIONS LIMITED; (V) TCSE-SERVE INTERNATIONAL LIMITED; AND (VI) TCSE-SERVE LIMITED. 2.10. REITERATING THE REQUEST FOR MODIFYING THE REQUEST FOR SEEKING EXCLUSION, IT WAS SUBMITTED BY THE LD. AR THAT INSTEAD OF SEEKING EXC LUSION OF 7 COMPARABLE COMPANIES, HE IS UNDER INSTRUCTIONS TO MODIFY THE REQUEST BY STATING THAT THE EXCLUSION OF THE COMPARABLE COMPANY AT SERIAL NO. 6 I.E. FORTUNE INFOTECH LTD IS NOT BEING INSISTED UPON AND THE REQUEST MAY BE MODIFIED TO SEEKING THE EXCLUSION OF ONLY THE REMAINING 6 COMPARABLE COMPANIES. 2.11. THE INCLUSION IS SOUGHT OF THE FOLLOWING 6 COMPARA BLE COMPANIES WHICH HAVE BEEN EXCLUDED BY THE TPO:- (I) SPARSH BPO SERVICES LTD. (SPARSH) (II) IN HOUSE PRODUCTIONS LTD. (HEALTHCARE SEGMENT ) (IN HOUSE) (III) AOK IN-HOUSE BPO SERVICES LIMITED (IV) INFORMED TECHNOLOGIES INDIA LTD. (INFORMED TE CHNOLOGIES) (V) TECHNOPROCESS SOLUTIONS LIMITED-PROCESSING SERV ICES SEGMENT (TECHPROCESS) (VI) CAMEO CORPORATE SERVICES LIMITED (CAMEO). I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 7 OF 22 2.12. ACCORDINGLY IT WAS HIS SUBMISSION THAT IF THE ASSE SSEE SUCCEEDS IN HIS PRAYERS TO SEEK EXCLUSION OF 6 COMPARABLES AND INCLUSION OF ANOTHER 6 COMPARABLES, THE FINAL MARGIN OF THE COMPARABLE WHICH WOULD REMAIN WOULD SHOW THAT THE C OMPARABLE MEAN OF THE 10 COMPARABLE WOULD BE 7.95% AND WHEN COMPARED WITH TH E ASSESSEES MARGIN OF 18.29% IT CAN BE SAID TO BE MEETING THE ARMS-LENGTH TEST AND THE INTERNATIONAL TRANSACTION OF PROVISION OF IT SERVICES CAN BE CONSIDERED TO BE AT ARMS-LENGTH. AS A RESULT THEREOF THE ADDITION ON THE BASE OF TRANSFER PRICING ADJUSTMENT MAY BE REQUIRED TO BE DELETED. 3. THE FOLLOWING CHART WAS RELIED UPON IN SUPPORT OF THE ABOVE SUBMISSION:- S. NO. NAME OF THE COMPANY OP/TC - AS PER THE TPO ORDER FINAL DISPOSITION 1. COSMIC GLOBAL LIMITED 18.28% 18.28% 2. JINDAL INTELLICOM LIMITED 13.62% 13.62% 3. INFOSYS BPO LIMITED 31.46% X 4 TECHPROCESS SOLUTIONS LIMITED -PROCESS SEGMENT 3.98 % 3.98% 5 ACCENTIA TECH. LIMITED 42.52% X 6 E4E HEALTHCARE 31.03% X 7 CAMEO CORPORATE SERVICES LIMITED 7.84% 7.84% 8 INFORMED TECHNOLOGIES INDIA LIMITED 21.15% 21.15% 9 FORTUNE INFOTECH LIMITED 22.80% X 10 IGATE GLOBAL SOLUTIONS LIMITED 24.54% X 11 MICROLAND (ITES SEGMENT) -3.01% -3.01% 12 TCSE-SERVE INTERNATIONAL LIMITED 54.03% X 13 SPARSH BPO SERVICES LIMITED 2.77% 2.77% 14 IN HOUSE PRODUCTIONS LIMITED -(HEALTHCARE SEGMEN T) 17.30% 17.30% 15 TCSE-SERVE LIMITED 63.42% X 16 AOK IN HOUSE BPO SERVICES LIMITED 0.27% 0.27% 17 TATA SERVICES LIMITED 1.39% 1.39% ARITHMETIC MEAN 20.79% 7.95% I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 8 OF 22 3.1. ADDRESSING THE REASONS FOR SEEKING EXCLUSION OF TH E 7 COMPARABLE COMPANIES WHICH HAS BEEN MODIFIED TO A LIST OF 6 COMPARABLE COMPANI ES, THE LD. AR SUBMITTED THAT EXCLUSION OF ACCENTIA TECHNOLOGIES LTD IS SOUGHT ON THE GROUND THAT THE SAID COMPARABLE I S ENGAGED IN DIVERSIFIED ACTIVITIES SUCH AS KNOWLEDGE PROCESS, OUTSOURCING, LEGAL PROCESS OUTSOURCING, DATA PROCESS OUTSOURCING, THUS IT IS E NGAGED IN HIGH-END SOFTWARE SERVICES. IT WAS HIS SUBMISSION THAT WITHOUT ASSIGNING ANY REASO NS, THE COMPARABLE HAS BEEN RETAINED. THE OBJECTIONS IT WAS SUBMITTED WERE BEFORE THE DRP ALSO. 3.1.1. APART FROM THAT IT WAS SUBMITTED THAT DURING FY 2009 -10, ACCENTIA AMALGAMATED WITH ONE OF ITS SUBSIDIARIES. CONSEQUENTLY, THE EXTRAOR DINARY EVENT IMPACTED THE OVERALL PROFITABILITY OF ACCENTIA AS ITS FINANCIAL RESULTS FOR THE YEAR ENDED MARCH 31,2010 ARE INCLUSIVE OF THE FIGURES OF THE AMALGAMATING SUBSID IARY DUE TO WHICH, ACCENTIA HAS EARNED AN ABNORMALLY HIGH OP/TC OF 42.97%. (PLEASE REFER P AGE 89 AND 96 OF ARC). 3.2. EXCLUSION OF E4 E HEALTHCARE BUSINESS SERVICES PRIVATE LIMITED WAS SOUGHT ON THE GROUND THAT IT WAS PROVIDING HEALTHCARE OUTSOUR CING SERVICES AND SOFTWARE DEVELOPMENT SERVICES AND THE SEGMENTAL INFORMATION WAS NOT AVAI LABLE. IT WAS HIS SUBMISSION THAT WITHOUT ASSIGNING ANY REASONS, THE COMPARABLE HAS B EEN RETAINED. THESE OBJECTIONS WERE BEFORE THE DRP ALSO. 3.3. EXCLUSION OF FORTUNE INFOTECH LTD HAS BEEN GIVEN UP. HOWEVER, EXCLUSION OF I GATE GLOBAL SOLUTION LIMITED IT WAS SUBMITTED IS REQUESTED ON THE GROUND THAT T HE SAID COMPANY IS ENGAGED IN DIVERSIFIED BUSINESS ACTIVITI ES I.E. IT AND IT ENABLED SERVICES, OFFSHORE OUTSOURCING SOLUTIONS WHICH ARE NOT COMPAR ABLE TO SERVICES PROVIDED UNDER THE ITES SERVICE SEGMENT OF THE ASSESSEE AND FOR THIS SP ECIFIC SEGMENT SEGMENTAL I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 9 OF 22 INFORMATION/DETAILS ARE NOT AVAILABLE. IT WAS HIS SUBMISSION THAT WITHOUT ASSIGNING ANY REASONS, THE COMPARABLE HAS BEEN RETAINED. THESE O BJECTIONS WERE BEFORE THE DRP ALSO. 3.4. EXCLUSION OF INFOSYS BPO LIMITED IT WAS SUBMITTED IS SOUGHT ON THE GROUND THAT INFOSYS BPO IS ENGAGED IN PROVIDING HIGH-END INTEGR ATED SERVICES HOLDS BRAND VALUE BY ASSISTING ITS CLIENTS IN IMPROVING THEIR COMPETITIV E POSITIONING BY MANAGING THE BUSINESS PROCESSES IN ADDITION TO PROVIDING INCREASED VALUE WHEREAS THE ASSESSEE ENGAGED IN PROVISIONS OF ITES SERVICES ONLY. IT WAS SUBMITTED THAT THESE OBJECTIONS HAVE BEEN PLACED BEFORE THE DRP HOWEVER WITHOUT ASSIGNING ANY REASON S, THE SAID COMPARABLE HAS BEEN RETAINED. 3.5. THE EXCLUSION OF TCS E-SERVE INTERNATIONAL LTD WAS SOUGHT ON THE GROUND THAT IT WAS ENGAGED IN THE PROVISION OF BUSINESS PROCESS OU TSOURCING ACTIVITIES AND TECHNICAL SERVICES LIKE SOFTWARE TESTING VERIFICATION AND VAL IDATION OF THE SOFTWARE. THE SAID FACTS IT WAS SUBMITTED WERE EVIDENT FROM FINANCIAL DETAILS A T PAGE 570 OF THE ARC INDICATES THAT THE REVENUE FROM TRANSACTION PROCESSING AND OTHER SERVI CES. THE OTHER SERVICES, IT WAS SUBMITTED INCLUDES TECHNICAL SERVICES WHICH HAVE BE EN DEFINED ON PAGE 684 OF THE ARC AS THE COMPANYS OPERATION BROADLY COMPRISE OF TRANSAC TION PROCESSING AND TECHNICAL SERVICES. TRANSACTION PROCESSING INCLUDES THE BROAD SPECTRUM OF ACTIVITIES INVOLVING THE PROCESSING, COLLECTIONS, CUSTOMERS CARE AND PAYMENTS IN RELATIO N TO THE SERVICES OFFERED BY CITIGROUP TO ITS CORPORATE AND RETAIL CLIENTS. TECHNICAL SERVIC ES INVOLVE SOFTWARE TESTING, VERIFICATION AND VALIDATION OF SOFTWARE AT THE TIME OF IMPLEMENTATIO N AND DATA CENTRE MANAGEMENT ACTIVITIES. THESE OBJECTIONS IT WAS SUBMITTED WERE BEFORE THE DRP DESPITE THAT THE COMPARABLE HAS BEEN RETAINED WITHOUT ASSIGNING ANY REASONS. I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 10 OF 22 3.6. EXCLUSION OF TCS E-SERVE LIMITED, IT WAS SUBMITTED HAS BEEN SOUGHT ON THE GROUND THAT THIS COMPANY IS INTO PROVISION OF BUSIN ESS PROCESS OUTSOURCING ACTIVITIES AND TECHNICAL SERVICES LIKE SOFTWARE TESTING, VERIFICAT ION AND VALIDATION OF THE SOFTWARE. THE OWNERSHIP OF IPRS ALSO MAKES PAYMENT FOR THE BRAND TATA, THE SAID COMPARABLE AN INCOMPARABLE. 4. ADDRESSING THE INCLUSION OF THE 6 COMPARABLES WHIC H WAS REQUESTED THE LD.AR SUBMITTED THAT THE COMPARABLES HAVE BEEN WRONGLY R EJECTED BY THE TPO AND THE OBJECTIONS OF THE ASSESSEE HAVE BEEN OVER-RULED BY THE DRP. 4.1. ADDRESSING SPARSH BPO SERVICES LTD IT WAS SUBMITTED IT HAS BEEN EXCLUDED BY THE TPO ON THE GROUND THAT IT FAILS THE EXPORT SALES FI LTER AND THE NET WORTH FILTER ON WHICH REASONING THE DRP HAS REFUSED TO INTERFERE. THE LD. AR SUBMITTED THAT THE ASSESSEE DOES NOT AGREE WITH THE REJECTION OF COMPANIES HAVING TH E EXPORT SALES FILTER LESS THAN 75% AND HAS MADE DETAILED SUBMISSIONS TO SUBSTANTIATE THE A RGUMENT. APART FROM THAT THE TPO HAS ALSO REJECTED THE SAID COMPANY ON THE GROUND THAT I T DID NOT PASS THE NET WORTH FILTER. THE LD. AR SUBMITTED THAT THE SAID REASONING OF THE TPO IS NOT CORRECT AS THE SAID COMPARABLE HAD A POSITIVE NET WORTH. 4.2. ADDRESSING THE REASONS FOR INCLUSION OF IN-HOUSE PRODUCTIONS LTD HEALTHCARE SEGMENT IT WAS SUBMITTED THAT THE TPO HAS HELD THAT THE CO MPANY FAILS THE EXPORT SALES FILTER. THE DRP HAS UPHELD THE EXPORT SALES FILTER . ADDRESSING THE SYNOPSIS FILED THE LD. AR SUBMITTED THAT THIS OBJECTION OF THE TPO HAS NOT BE EN ACCEPTED BY THE ASSESSEE. THE HEALTHCARE SEGMENT IT HAS BEEN ARGUED IS FUNCTIONAL LY COMPARABLE TO THE ASSESSEE. I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 11 OF 22 4.3. THE INCLUSION OF AOK IN-HOUSE BPO SERVICES LTD IT WAS SUBMITTED HAS NOT BEEN PERMITTED BY THE TPO AGAIN ON THE GROUNDS THAT IT D OES NOT MEET THE EXPORT SALES FILTER WHICH FILTER HAS BEEN UPHELD BY THE DRP AND HAS BEE N OBJECTED TO BY THE ASSESSEE. 4.4. THE INCLUSION OF INFORMED TECHNOLOGIES INDIA LTD IT WAS SUBMITTED HAS BEEN NOT PERMITTED BY THE TPO ON THE GROUND THAT THE COMPANY FAILS THE TOTAL SALES FILTER WHICH HAS BEEN UPHELD BY THE DRP AS THE TURNOVER OF THE INFOR MED TECHNOLOGIES WAS FOUND TO BE LESS THAN 5 CRORES. THE SAID REASONING WAS NOT AGREED TO BY THE ASSESSEE. 4.5. THE INCLUSION OF TECHNOPROCESS SOLUTIONS LIMITED PROCESSING SERVICES SEGMENT IS REQUESTED ON THE GROUND THAT THE REASONING OF TH E TPO THAT IT WAS FUNCTIONALLY NOT COMPARABLE WAS INCORRECT AND THE DRP HAS UPHELD THE CONCLUSION OF THE TPO ON THE GROUND THAT THOUGH IT PASSES THE TURNOVER FILTER, I T FAILS THE EXPORT FILTER OF 75%. 4.6. THE INCLUSION OF CAMEO CORPORATE SERVICES LTD IT WAS SUBMITTED IS REQUESTED ON THE GROUND THAT THE TPO HAS HELD THAT THE COMPANY F AILS THE EXPORT SALES FILTER WHICH REASONING HAS BEEN UPHELD BY THE DRP AND IS STILL O BJECTED TO BY THE ASSESSEE. 5. THE LD. CIT DR ADDRESSING GROUND NO.6 IS AGREED TH AT THE TPO HAD NO OCCASION OR CALL TO DISREGARD THE DIRECTIONS OF THE DRP AND THE PRAYER OF THE ASSESSEE THAT THE TPO BE DIRECTED TO CARRY OUT THE DIRECTIONS WERE NOT OBJEC TED TO. 5.1. ADDRESSING THE REQUEST OF THE LD. AR THAT THE 6 S PECIFIC COMPARABLES WHOSE EXCLUSION IS SOUGHT THE LD. CITDR HAD STRONG OBJECT ION. IT WAS HIS ARGUMENT THAT MERELY RAISING ARGUMENTS THAT THERE HAS BEEN RESTRUCTURIN G OR AMALGAMATION IN THE CASE OF A COMPANY BY ITSELF CAN NOT LEAD TO THE CONCLUSION TH AT THE NET PROFITABILITY OF THE COMPARABLE COMPANY HAS BEEN IMPACTED SO AS TO EXCLUDE THE SAME . IT WAS HIS SUBMISSION THAT THE LAW REQUIRES THAT THE ASSESSEE DEMONSTRATES THAT AS A R ESULT OF SOME EXTRAORDINARY EVENT THE I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 12 OF 22 NET PROFITABILITY OF THE COMPANY IS IMPACTED ONLY T HEN IT SHOULD BE TAKEN OUT FROM THE LIST OF COMPARABLES. ADVANCING GENERAL ARGUMENTS WITHOUT DE MONSTRATING THIS FACT IT WAS HIS SUBMISSION CAN BE OF NO HELP TO THE ASSESSEE. RELYI NG UPON JUDICIAL PRECEDENT WHERE THESE FACTS WERE NOT ARGUED BY THE REVENUE AND WHEREIN ON ACCOUNT OF ABSENCE OF ANY ARGUMENT FROM THE REVENUE THE MERE EVENT OF AMALGAMATION OR RESTRUCTURING HAS BEEN TAKEN TO BE A SITUATION THAT THE COMPARABLE HAS TO BE EXCLUDED, I T WAS SUBMITTED CANNOT BE SAID TO BE PRECEDENT FOR ALL TIMES TO COME. THE OBJECTION OF THE REVENUE IT WAS SUBMITTED HAS TO BE ADDRESSED BY THE ASSESSEE AND THE LAW REQUIRES THE ASSESSEE TO DEMONSTRATE THE IMPACT OF THE EVENT ON THE COMPARABLES NET PROFITABILITY. IT WAS HIS SUBMISSION THAT THE METHOD FOLLOWED IS TNMM AND THE REQUIREMENTS OF THE TNMM A RE WELL UNDERSTOOD BY THIS TIME AND THUS THE ARGUMENTS OF THE ASSESSEE AFTER HAVING SEL ECTED THE METHOD TO DRAW OUT FINE DISTINCTIONS IN THE COMPARABLE COMPANIES SHOULD NOT BE ALLOWED. THE TAX PAYER IT WAS ARGUED WELL KNOWS THAT MINOR DIFFERENCES IN FUNCTIO NALITY ARE TOLERATED BY THE TNMM AND THIS IS AN ACCEPTED POSITION. THE VERY FACT THAT T HE TAXPAYER HAS ALSO SELECTED THE TNMM AS A METHOD ITSELF DEMONSTRATES THAT THE DATA IS NOT R OBUST. CONSEQUENTLY RESORT HAS BEEN MADE TO THE SAID METHOD. IT WAS HIS SUBMISSION THAT THESE VERY ARGUMENTS HAVE NOT BEEN ACCEPTED BY THE DRP AND THOUGH THE ASSESSEE MAY BE WITHIN HIS RIGHTS TO ARGUE THAT THE DRP MAY NOT HAVE PASSED A VERY SPEAKING ORDER. HOW EVER THE FACT REMAINS THAT ON FUNCTIONALITY, THE REQUIREMENTS OF TNMM METHOD ARE FULLY FULFILLED AS EACH OF THESE COMPARABLES FULLY SATISFIES THE LEVEL OF COMPARABIL ITY EXPECTED. THE FUNCTIONAL PROFILE OF THE ASSESSEE INFACT DEMONSTRATES THAT IT WAS A HIGH EN D IT ENABLED SERVICE AND NOT A LOW END ROUTINE IT SERVICE PROVIDER BECAUSE IF THE INTANGIB LES USED BY THE ASSESSEE ARE SEEN, IT HAS ACCESS TO ALL THE TRADEMARKS, PROCESSES AND INTANGI BLES OF THE COPAL GROUP AND THUS IN THE I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 13 OF 22 COMPARABLES SELECTED VIS--VIS THE ASSESSEE THERE I S NOT MUCH MARGINAL DIFFERENCE. ACCORDINGLY IT WAS HIS PRAYER THAT THE COMPARABLE M AYBE RETAINED AND THE PRAYER OF THE ASSESSEE BE DISMISSED. 5.2. ADDRESSING THE REQUEST OF THE ASSESSEE TO INCLUDE 6 NEW COMPARABLES, IT WAS HIS SUBMISSION THAT NO ARGUMENTS JUSTIFYING THEIR INCLU SION HAS BEEN ADVANCED. THE GENERAL ARGUMENT THAT THE INCLUSION IS JUSTIFIED DESPITE FA ILING THE EXPORT SALES FILTER CAN BE NO ARGUMENT THE APPLICATION OF THE FILTER BY THE TPO H AS BEEN UPHELD BY THE DRP. WHAT IS WRONG WITH THE SAID CONCLUSION HAS NOT BEEN BROUGHT OUT IN THE ORDER. MERELY SAYING THAT IT IS WRONGLY APPLIED CANNOT BE A JUSTIFICATION. IT W AS ALSO HIS SUBMISSION THAT THE ASSESSEE HAS NOT SUBMITTED UNDER WHICH GROUND THE SAID ARGUM ENT IS BEING MADE AS THE FILTERS HAVE NOT BEEN OBJECTED TO BY THE ASSESSEE IN THE PRESENT PROCEEDINGS. REFERRING TO THE RECORD, IT WAS ARGUED THAT IN THE FACE OF THE CLEAR CUT FINDIN G OF THE TPO UPHELD BY THE DRP THAT THE EXPORT SALES FILTER IS NOT FULFILLED. THE PRAYER F OR INCLUSION OF THESE 6 COMPARABLES IT WAS SUBMITTED MAY BE DISMISSED. FIVE OUT OF THESE SIX COMPARABLES, IT WAS SUBMITTED DO NOT FULFILL THE EXPORT SALES FILTER AS PER THE TPO AND TECH PROCESS SOLUTIONS LIMITED PROCESSING SERVICES SEGMENT THOUGH THE TPO HAS GIVEN A FINDING THAT FUNCTIONAL LY IT IS NOT COMPARABLE, THE DRP HAS CATEGORICALLY OBSERVED THAT IT FAILS TH E EXPORT FILTER AND THUS THE ARGUMENT OF THE ASSESSEE MAY BE DISMISSED. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. A PERUSAL OF THE TPOS ORDER SHOWS THAT COPAL INDIA H AS AN ITES AGREEMENT WITH COPAL GROUP UNDER WHICH IT PROVIDES SERVICES TO ITS FOREIGN AE. IT PRIMARILY PROVIDES BACK OFFICE SUPPORT FOR COPAL GROUPS GLOBAL OPERATIONS THROUGH CUSTOMI ZED RESEARCH AND INFORMATION SUPPORT SERVICE, DATA ENTRY AND DATA MINING SERVICES ETC. I T HAS BEEN DESCRIBED THAT THE RANGE OF I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 14 OF 22 SERVICES PROVIDED BY THE COMPANY VARIES FROM BUSINE SS INFORMATION/DATA GATHERING, TRANSACTION PROCESSING, LIBRARY DOCUMENT SERVICES, DATA MINING/ENTRY AND GENERAL BUSINESS INFORMATION RESEARCH SUPPORT SERVICES. IN THE YEAR UNDER CONSIDERATION, THE FOLLOWING INTERNATIONAL TRANSACTION WAS DISCLOSED BY THE ASSE SSEE IN THIS TRANSFER PRICING REPORT:- S.NO. DESCRIPTION OF THE TRANSACTIONS AMOUNT (IN RUPEES) 1. PROVISION OF IT ENABLED BACK OFFICE SUPPORT SERVICES 462,105.21 6.1. IN THE FAR ANALYSIS CARRIED OUT BY THE TPO, THE AS SESSEE WAS DESCRIBED AS UNDER:- COPAL INDIA HAS AN ITES AGREEMENT WITH COPAL GROUP UNDER WHICH IT PROVIDES BACK-OFFICE SUPPORT FOR COPAL GROUP'S GLOBAL OPERAT IONS THROUGH CUSTOMIZED REMOTE RESEARCH AND INFORMATION SUPPORT SERVICES. IN ADDITION TO THE ABOVE, DURING THE YEAR UNDER CON SIDERATION, COPAL INDIA HAS ALSO PROVIDED SAME/ SIMILAR SERVICES TO A THIRD PART Y IN INDIA. THE VARIOUS SERVICES RENDERED BY COPAL INDIA TO THE THIRD PARTY CLIENT ARE IN THE NATURE OF COLLATING COVERAGE INITIATION REPORTS, QU ARTERLY REPORTS, REPORTS AGAINST OCCURRENCE OF SIGNIFICANT EVENTS AS PER PREDEFINED TEMPLATES PROVIDED BY THE CLIENT IN ADDITION TO ALL OF THE ABOVE. COPAL INDIA ALSO P ROVIDES CERTAIN OTHER SERVICES IN DIE NATURE OF HUMAN RESOURCE, FINANCE AND GENERAL ADMINISTRATIVE SUPPORT TO A FEW THIRD PARTIES IN INDIA. (EMPHASIS PROVIDED) 6.2. CONSIDERING THE REQUEST OF THE ASSESSEE WHEREIN IN CLUSION OF 6 COMPARABLES IS SOUGHT ON THE GROUND THAT THE ASSESSEE DOES NOT AGR EE WITH THE CONSISTENT VIEW OF THE TAX AUTHORITIES THAT THESE SPECIFIC COMPANIES WHO ADMIT TEDLY FAIL THE EXPORT EARNINGS FILTERS SHOULD STILL BE INCLUDED, WE FIND THAT NO REASON EX CEPT THAT DESPITE FAILING THE FILTER THEY SHOULD BE RETAINED HAS BEEN GIVEN. THE FACT REMAIN S THAT NO OBJECTION TO THE APPLICATION OF THIS FILTER BY WAY OF ANY GROUND HAS BEEN AGITATED BEFORE US. THE RECORD SHOWS THAT THE ASSESSEE HAD OBJECTED TO THE APPLICATION OF THIS FI LTER BEFORE THE TAX AUTHORITIES WHICH HAS NOT MET WITH SUCCESS AT THE STAGE OF THE TPO AS WOU LD BE EVIDENT FROM THE FOLLOWING EXTRACT:- I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 15 OF 22 7.3 EXPORT EARNINGS FILTER ASSESSEE HAS OBJECTED TO THE APPLICATION OF THIS F ILTER TO ELIMINATE COMPANIES WITH EXPORT TURNOVER LESS THAN 75%. THE THRESHOLD OF 75 % HAS BEEN UTILIZED TO GET COMPARABLES CLOSER TO THE ASSESSEE AS IT IS ENTIREL Y EXPORT ORIENTED. THERE IS NO MERIT IN THE ARGUMENT OF THE TAXPAYER THAT ONCE FUN CTIONALITY IS PROVED THE SAME IS SUFFICIENT TO SELECT A COMPARABLE. APART FROM SI MILARITY IN FUNCTIONALITY THE ECONOMIC CIRCUMSTANCES IN WHICH THE TESTED PARTY AN D THE COMPARABLE COMPANIES ARE OPERATING ARE EQUALLY IMPORTANT IT WILL NOT BE CORRECT TO SAY THAT IF A COMPANY IS PERFORMING SIMILAR FUNCTIONS THEN IRRESPECTIVE O F THE ECONOMIC CIRCUMSTANCES INCLUDING VASTLY DIFFERENT GEOGRAPHICAL LOCATIONS T HE SAME SHOULD BE TAKEN AS A COMPARABLE. THE RATIONALE OF THIS FILTER IS DISCUSS ED BELOW: AS PER SUB-RULE (1) OF RULE 10B, THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO CONDITIONS PREVAILING IN THE MARKETS, THE GEOGRA PHICAL LOCATION, THE SIZE OF THE MARKET, COSTS OF LABOUR, OVERALL ECONOMIC DE VELOPMENT, LEVEL OF COMPETITION ETC. IN THIS REGARD, THE RELEVANT PORTI ON OF RULE 10B IS REPRODUCED AS UNDER: 'CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LO CATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, C OSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMEN T AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE O R RETAIL'. . THE DOMESTIC COMPANIES CANNOT BE TREATED AS COMPARA BLE TO THE TAXPAYER WHO IS WHOLLY OR MAINLY EXPORT ORIENTED BECAUSE: A) CONDITIONS PREVAILING IN THE EXPORT AND DOMESTI C MARKET IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE ARE DIFFERENT B) GEOGRAPHICAL LOCATIONS(DOMESTIC AND EXPORT) ARE DIFFERENT C) SIZE OF THE MARKETS(DOMESTIC AND EXPORT) TO WH ICH THE COMPANIES CATER TO ARE DIFFERENT D) COST OF LABOUR AND CAPITAL IN THE MARKETS (DOMES TIC AND EXPORT) ARE DIFFERENT E) OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPE TITION IS DIFFERENT(DOMESTIC AND EXPORT) F) GOVERNMENT INCENTIVES IN THE FORM OF TAX EXEM PTIONS ARE AVAILABLE ONLY FOR EXPORTERS. G) DOMESTIC SOFTWARE SERVICE MARKET MAINLY FOLLOW S A HYBRID MODEL IN WHICH THE SUPPLY OF HARDWARE ALSO FORMS PART OF SOFTWARE SERV ICES, H) IN AN EXPORT ORIENTED BUSINESS, THE QUALITY CONTROL REQUIREMENTS ARE GENE RALLY MUCH HIGHER THAN THAT IN A DOMESTIC BUSINESS. IN EXPORT BUSINESS, THERE IS A ZERO TOLERANCE FOR DEFECTS. AS THE PRICING FOR SERVICES DIFFERS IN THE DOMESTIC MARKET VIS-A-VIS WITH THE EXPORT MARKET, THE LEVEL OF COMPETITION, THE SIZE O F THE MARKET, COST ADVANTAGE DIFFER IN THE DOMESTIC MARKET VIS-A-VIS WITH THE EX PORTS AND THE INCENTIVES DIFFER FOR EXPORTERS VIS-A-VIS WITH THE DOMESTIC PLAYERS, A PREDOMINANTLY DOMESTIC COMPANY IN THE SERVICE SECTOR CANNOT BE COMPARED WI TH THE TAXPAYER WHO IS MAINLY A IT ENABLED SERVICE PROVIDER. IT MAY BE MENTIONED THAT THE OPERATING MARKET IS ON E OF THE INFLUENCING FACTOR IN DETERMINING THE PROFITABILITY BUT NOT THE SOLE FACTOR. SECONDLY, THE MARGIN I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 16 OF 22 IS NOT THE DETERMINING FACTOR IN APPLYING THIS FILT ER. AS THERE ARE MAJOR DIFFERENCES IN PRICING, MARKETS ETC, THESE DIFFERENCES WOULD IN FLUENCE THE PRICES IN THE DOMESTIC MARKET. PRICING IS DETERMINED BY THE MARKE T FORCES AND IT IS THE EQUILIBRIUM POINT WHERE THE WILLINGNESS TO PAY AND CAPABILITY TO DELIVER THE SERVICES. IN THE CASE OF EXPORT MARKET, THE PRICING IS DETERMINED BY WHAT THE COMPANY LOCATED IN US OR OTHER SIMILARLY DEVELOPED COUNTRIES ARE WILLING TO PAY. THIS WOULD BE DETERMINED BY THE COST ARBITRAGE BETW EEN INDIA AND THE US OR OTHER SIMILARLY DEVELOPED COUNTRIES. IN THE CASE OF DOMESTIC MARKET, AS THE COST ARBITRAGE IS NOT AVAILABLE, THE WILLINGNESS TO PAY FOR SERVICES IS DECIDED BY THE DOMESTIC MARKET. THUS THESE TWO PRICES WOULD BE DIF FERENT. THE PRICE A PERSON WILLING TO PAY FROM INDIA AND THE PRICE A PERSON WI LLING TO PAY FROM US OR OTHER DEVELOPED COUNTRIES FOR SAME OR NEAR SIMILAR SERVIC E WILL BE DIFFERENT. THE MAIN REASON FOR APPLYING THIS FILTER IS THAT GEOGRAPHICA L MARKETS OF THE OTHER PARTY IN THE TRANSACTIONS I.E. CUSTOMER IS DIFFERENT IN THE CASE OF DOMESTIC MARKET WHICH IS INDIA AND EXPORT MARKET OF THE TAXPAYER AND ALSO PR ICING MECHANISM IS INFLUENCED BY SUCH FACTORS FOR WHICH REASONABLE ADJUSTMENTS CA NNOT BE MADE TO ACCOUNT FOR THE DIFFERENCES IN GEOGRAPHICAL MARKETS, AND. OTHER PREVAILING MARKET CONDITIONS LIKE LEVEL OF COMPETITION ETC. 6.3. THE SAID ISSUE WAS AGITATED BEFORE THE DRP AND REJE CTED ON THE FOLLOWING REASONING:- ON THIS ISSUE, THE REASONING OF THE TPO AND THE AR GUMENTS OF THE TAXPAYER HAS BEEN CONSIDERED BY THIS PANEL. THE TAXPAYER IS MAI NLY AN EXPORT ORIENTED SOFTWARE DEVELOPMENT SERVICE PROVIDER GETTING PRIMA RILY REVENUES FROM EXPORTS IN THIS SEGMENT. HENCE, MINIMUM THRESHOLD LIMIT OF 75 % EXPORT EARNINGS FROM SOFTWARE DEVELOPMENT SERVICES WAS APPLIED WHEREIN T HE COMPANIES WHOSE EXPORT REVENUES FROM SOFTWARE DEVELOPMENTS SERVICES ARE LE SS THAN 75% OF THE OPERATING REVENUES WERE EXCLUDED AS THESE COMPANIES OPERATE PREDOMINANTLY IN INDIA WHEN COMPARED TO THE TAXPAYER WHOSE PRACTICAL LY ENTIRE REVENUE COME FROM EXPORTS. EXPORTS OF TAXPAYER IN IT ENABLED SERVICE S ARE 100%,. SO, COMPARABLE COMPANIES WILL BE THOSE COMPANIES WHERE MOST OF THE INCOME IS FROM EXPORTS. HENCE, THE TPO WAS JUSTIFIED IN APPLYING A THRESHOL D OF 75%. THIS WILL ENSURE FURTHER REFINEMENT OF FUNCTIONAL PROXIMITY IN FAR A NALYSIS. THE OBJECTION OF THE TAXPAYER IS, THEREFORE, REJECTED. 6.4. THE RECORD SHOWS THAT THE ISSUE IN THE PRESENT PRO CEEDINGS IS ADDRESSED IN GROUND NO. 4.3. HOWEVER THE LD.AR HAS STARTED HIS OPENING ARGUMENTS IN THE FACTS OF THE PRESENT CASE BY STATING THAT THE ONLY ISSUE AGITATED IN THE PRESENT APPEAL IS ADDRESSED IN GROUND NO. 4.5 AND GROUND NO.6 THUS IT CANNOT BE SAID THAT ANY CHALLENGE HAS BEEN POSED TO THE FILTERS. THE RECORD SHOWS THAT THE OPENING PRAYER OF THE LD. AR HAS BEEN MADE IN THE BACKGROUND WHERE ORIGINALLY THE APPEAL IS SHOWN TO HAVE BEEN A RGUED BEFORE ANOTHER CONSTITUTION ON 15.06.2015; 16.06.2015 AND FINALLY CONCLUDED ON 17. 06.2015, THEREAFTER IT WAS FIXED FOR I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 17 OF 22 CLARIFICATION ON VARIOUS DATES FROM 17.08.2015 TO 0 5.11.2015 AND FINALLY RELEASED FRO A FRESH HEARING. THE ASSESSEE MAY HAVE PREPARED A SYNOPSIS TO ARGUE THE APPEAL ON VARIOUS GROUNDS HOWEVER IN THE PRESENT PROCEEDINGS THE LD.A R HAS STARTED HIS ARGUMENTS BY STATING THAT ONLY ADDRESSING GROUND NO. 4.5 AND 6 IN THE P RESENT PROCEEDINGS ARE BEING PRESSED AND THE GROUND ADDRESSING THE FILTERS HAS NOT BEEN PRESSED. WE FIND THAT DESPITE THE LD.CIT DRS OBJECTING TO THE ASSESSEES ARGUMENTS, NO EFFORT WAS MADE BY THE LD.AR TO REVISE HIS POSITION BY PRAYING THAT THE GROUND ASSA ILING THE FILTER IS BEING PRESSED. THUS IT IS FOUND THAT THE LD.AR HAS ATTEMPTED TO ARGUE THE ISS UE WITHOUT A SPECIFIC GROUND IN THE FACE OF THE DEPARTMENTAL OPPOSITION. THUS, THE ARGUMENT S IN THESE PECULIAR FACTS WITHOUT A GROUND OR A PRAYER CANNOT BE PERMITTED. WE FURTHER FIND THAT THE LD.AR HAS NOT CARED TO ADVANCE ANY ARGUMENT MAKING OUT A CASE THAT THE APP LICATION OF THE SAID FILTER IS INAPPROPRIATE IN THE FACTS OF THE PRESENT CASE. ACC ORDINGLY IN THE FACTS AS THEY STAND THE PRAYER OF THE ASSESSEE FOR THE INCLUSION OF THE 6 C OMPARABLE CANNOT NOW BE ACCEPTED. THIS EXCLUSION, WE FIND HAS BEEN BASED ON THE BASIS OF S PEAKING REASONS JUSTIFYING THE ACTION WHEREIN NO INFIRMITY HAS BEEN POINTED OUT BY THE LD . AR. 6.4. ADDRESSING THE EXCLUSION OF THE 6 COMPARABLES WHIC H HAVE BEEN RETAINED BY THE DRP AND INTRODUCED BY THE TPO, WE FIND THAT AS FAR AS T HE LAW IS CONCERNED, IT IS VERY CLEAR IN AS MUCH AS KNOWLEDGE PROCESS OUTSOURCING CANNOT BE EQU ATED TO A LOW-END ITES ENABLED SERVICE PROVIDER. THE HONBLE DELHI HIGH COURT IN ORDER DATED 10.08.2015 HAS CATEGORICALLY HELD IN THE CASE OF RAMPGREEN SOLUTIONS PVT. LTD. V S CIT THAT A COMPANY WHO IS PROVIDING ROUTINE CALL CENTRE SERVICES CANNOT BE EQUATED TO A KPO. THE HONBLE COURT HAS HELD THAT KPO INDICATES THE INVOLVEMENT OF ADVANCE SKILLS; TH E SERVICES PROVIDED MAY INCLUDE ANALYTICAL SERVICES, LEGAL RESEARCH, ENGINEERING AN D DESIGN SERVICES, INTELLECTUAL I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 18 OF 22 MANAGEMENTS ETC. A KPO IS UNDERSTOOD AS A HIGH-END VALUE ADDED PROCESS CHAIN WHEREIN THE PROCESSES ARE DEPENDENT ON ADVANCED SKILLS, DOM AIN KNOWLEDGE AND THE EXPERIENCE OF THE PERSONS CARRYING ON SUCH PROCESSES. THUS, THE PRAYER ON FACTS NEEDS TO BE CONSIDERED. WE ALSO FIND THAT INSTANCES WHERE SEGMENTAL HAVE NO T BEEN MADE AVAILABLE NECESSITATE THAT THE SAID COMPARABLE SHOULD BE EXCLUDED. INSTANCES WHERE THE SERVICES ARE SHOWN TO BE OUTSOURCED OR FOR THAT MATTER THE SERVICES ARE PERF ORMED OFF-SITE AND IT CAN BE SHOWN THAT THE NET PROFITABILITY OF THE COMPANY IS IMPACTED WO ULD AGAIN NECESSITATE THEIR EXCLUSION. SIMILAR WOULD BE THE POSITION WHERE RELATED PARTY T RANSACTIONS FILTER IS NOT FULFILLED WOULD JUSTIFY ITS EXCLUSION. INSTANCES WHERE THE ASSESSE E CAN DEMONSTRATE THAT THE COMPARABLE HAS UNDERGONE AN EXTRAORDINARY EVENT BY WAY OF AMAL GAMATION/ACQUISITION ETC WHEREIN NET PROFITABILITY OF THE SPECIFIC COMPARABLE COMPANY HA S BEEN IMPACTED OR BY INCLUSION OF FINANCIALS OF THE AMALGAMATING SUBSIDIARY HAVING AN Y EXTRAORDINARY ABNORMALITY HAVE ALSO BEEN INCLUDED HAS IMPACTED THE NET PROFITABILITY P RAYER FOR EXCLUSION IS JUSTIFIED. AS SUCH COMPARABLES ON FACTS CAN BECOME TAINTED AND JUSTIFY THEIR EXCLUSION. THERE IS ALSO PRECEDENT AVAILABLE TO SEEK EXCLUSION OF A COMPARAB LE WHICH HAS BEEN INCLUDED DESPITE OWNING SIGNIFICANT IPRS BRANDS ETC AS A RESULT OF I MPACTING THE NET PROFITABILITY OF THE SAID COMPARABLE. THIS IS NOTWITHSTANDING THE FACT THAT T HE REVENUE AT TIMES HAS BEEN ABLE TO ARGUE AND INSIST UPON THE REASONING BEING RECORDED THAT UNLESS AND UNTIL THE IMPACT ON NET PROFITABILITY IS DEMONSTRATED, THE COMPARABLE COMPA NY SHOULD NOT BE EXCLUDED AS MERELY BECAUSE IT OWNS IPRS AND HAS ACCESS TO BRANDS AND I S CONSIDERED TO BE THUS COMMANDING HIGH BARGAINING POWER FOR SERVICES RENDERED IN TERM S OF PRICES ON ACCOUNT OF THE AVAILABILITY OF IN-HOUSE IPRS OR BRANDS THEN THE COSTS INCURRED FOR THE USAGE OF THE IPRS AND BRANDS IMPACTING THE GROSS RETURNS WOULD BE ADDRESSED IN T HE NET PROFITABILITY WHICH IS WHAT A I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 19 OF 22 TNMM ADDRESSES. THE IMPACT OF IPRS AND BRANDS ON N ET PROFITABILITY THE REVENUE CAN ARGUE WOULD BE NEGATED. THERE MAY BE A VALID POINT IN THE SAID ARGUMENT WHICH IS WHY THE MERE OWNERSHIP OF BRANDS BY ITSELF MAY NOT BE A GOO D ENOUGH GROUND TO EXCLUDE A COMPARABLE UNLESS THE ASSESSEE IS ABLE TO DEMONSTR ATE THAT AS A RESULT OF THIS FACT THE NET PROFITABILITY IS IMPACTED. MENTION OF THESE BASIC F UNDAMENTAL FACTS IS NECESSITATED IN VIEW OF THE FACT THAT ON ACCOUNT OF THE INTENSE ARGUMENTS A DVANCED BY THE PARTIES BEFORE THE BENCH THE FOCUS IS KNOWN TO SHIFT FROM THE FUNDAMENTALS O F THE METHOD BEING APPLIED TO THE HAIR SPLITTING EXERCISE OF SEEKING INCLUSION/EXCLUSION O F COMPARABLES. IT NEEDS TO BE KEPT IN MIND THAT WHENEVER THE TAXPAYER CHOOSES TNMM AS THE MOS T APPROPRIATE METHOD AND THE SELECTION OF THIS METHOD HAS NOT BEEN UPSET BY THE REVENUE THEN IT CAN BE SAID TO BE A POSITION THAT BOTH THE PARTIES FULLY AGREE THAT THE CHOICE OF METHOD WOULD DICTATE THE SELECTION OF COMPARABLES. IT IS AN ACCEPTED POSITIO N THAT IN A TNMM METHOD WHAT IS NECESSARY TO BE SEEN IS THE NET PROFITABILITY AND T HE MINOR DIFFERENCES IN FUNCTIONAL COMPARABILITY TO THE EXTENT INSISTED UPON BY THE TA XPAYER BEFORE THE ITAT IS NOT IN THE TRUE SPIRIT OF THE METHOD AND IN FACT VIOLATES AND IS CO NTRARY TO THE REASONING AND RATIONAL OF THE METHODOLOGY HAVING BEEN CHOSEN AND ACCEPTED. IN THE FACTS OF THE PRESENT CASE, WE FIND THAT INTENSE HAIR SPLITTING EXERCISE WHICH HAS BEEN DONE BY THE TAXPAYER ON THE BASIS OF WHICH EXCLUSION OF THE 6 COMPARABLES IS SOUGHT AGRE EING FUNDAMENTALLY THAT THE JUDICIAL PRECEDENT IS CLEAR BY THE DECISION OF THE HONBLE J URISDICTION HIGH COURT IN THE CASE OF RAMP GREEN SOLUTIONS PVT. LTD. VS CIT 377 ITR 533 (DELHI) THAT KPO CANNOT BE SAID TO BE EQUATED TO A LOW-END ITES ENABLED COMPANY. WE FIND THAT IN THE FACTS OF THE PRESENT CASE THE FAR ANALYSIS CHARACTERIZATION WHICH IS THE FUNDAMENTAL FOUNDATIONAL FACT IS AN EXERCISE WHICH IS REQUIRED TO BE ADDRESSED. CONSID ERING THE ARGUMENTS RAISED, WE FIND THAT I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 20 OF 22 THE OCCASION TO RAISE ARGUMENT FOR EXCLUSION OF SIX COMPARABLES AND INCLUSION OF ANOTHER SIX COMPARABLES WHICH ARGUMENT WE HAVE REJECTED HAS ARI SEN SOLELY ON ACCOUNT OF THE FACT THAT THE FOUNDATIONAL EXERCISE OF PROPER FAR ANALYSIS OF THE ASSESSEE HAS NOT BEEN DONE. DRAWING SUPPORT FROM THE ORDER DATED 13.07.2016 IN VIRAGE LOGIC INTERNATIONAL INDIA BRAND VS JCIT IN ITA NO.6918/DEL/2014, WE FIND THAT IN THE FACTS OF THE PRESENT CASE ALSO THIS FUNDAMENTAL EXERCISE WHICH IS THE FOUNDATION O N WHICH THE CASE FOR EITHER SIDE IS TO BE BUILT IS UNFORTUNATELY AN EXERCISE WHICH IS ATTEMPT ED IN HASTE WITHOUT ADEQUATE CARE AND ATTENTION EITHER BY THE TAX PAYER OR BY THE TAX AUT HORITIES WHO BOTH RUSH THROUGH THIS FUNDAMENTAL EXERCISE AT THE INITIAL STAGES IN UNDUE HASTE SATISFIED EASILY AS LONG AS THEIR RESPECTIVE STAND APPEARS TO BE REFLECTED IN THE COM PARABLES SELECTED. THE SELECTION WHEN CHALLENGED AT THE APPELLATE STAGE OFTEN RESULTS IN A SITUATION WHERE THE ENTIRE EDIFICE CRUMBLES DESPITE A VALIANT PATCH WORK ATTEMPT TO UP HOLD THE EDIFICE IT HAS BEEN SEEN THAT THE ENTIRE SELECTION PROCESS OFFERED AND CONSIDERE D STANDS WIPED OUT. THOUGH, WE NOTE THAT THE TAX PAYER AT THE STAGE OF THE TP STUDY NO DOUBT MAY BE HANDICAPPED BY THE INSUFFICIENCY OF DATA IN THE PUBLIC DOMAIN AS IT MA Y NOT BE SUFFICIENTLY ROBUST AND READILY AVAILABLE COMPLETELY. HOWEVER AT THIS STAGE AVAILABILITY OF DATA CANNOT B E A HANDICAP. WE ARE OF THE VIEW THAT IN A TNMM METHODOLOGY IDENTICA L FAR ANALYSIS CANNOT BE INSISTED UPON AND THE METHOD IS INFACT RESORTED TO WHEN THE COMPL ETE DATA IS NOT AVAILABLE. IN THAT CASE THE IMPACT ON THE NET PROFITABILITY OF THE MINOR VA RIATIONS IN THE COMPARABLE COMPANIES SO SELECTED IS CONSIDERED CAPABLE OF TOLERATING MINOR VARIATIONS IN THE FAR ANALYSIS OF THE COMPARABLES. THE SELECTION OF THIS METHOD IS RESOR TED TO FOR THIS VERY PURPOSE AND THE METHOD IS ROBUST ENOUGH TO TOLERATE MINOR VARIATION S IF ANY. IT IS A FACT THAT A PERFECT NEAR IDENTICAL COMPARABLE COMPANY IS A RARITY AND GENERA LLY CAN BE SAID TO BE A VIRTUALLY I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 21 OF 22 IMPOSSIBLE CONDITION INCAPABLE OF BEING FULLY FULFI LLED. WE ARE OF THE VIEW THAT IT IS FOR THIS VERY PURPOSE THAT TNMM AS A METHOD IS OFTEN RESORTE D TO. THE MINOR DIFFERENCE IF ANY ARE ADDRESSED BY COMPARING NET PROFITABILITY OF THE COM PARABLES. THUS BROAD COMPARABILITY OF A FAIRLY LARGE NUMBER OF COMPARABLE COMPANIES CAN FUR THER ENSURE THAT MINOR VARIATIONS IF ANY ARE OFFSET BY TAKING A FAIRLY LARGE SAMPLE. AN Y MAJOR IMPACT OF THEIR FAR ON THEIR NET PROFITABILITY IF STILL SO WARRANTED ON FACTS CAN BE ADDRESSED BY CARRYING OUT APPROPRIATE ADJUSTMENTS THE NEED FOR WHICH HAS TO BE DEMONSTRAT ED ON THE BASIS OF RECORD SO AS TO BRING THEIR FAR IN ALIGNMENT WITH THAT OF THE TEST ED PARTY I.E. THE ASSESSEE. THE RULES MOREOVER PERMIT ADJUSTMENTS IN THE COMPARABLES SELE CTED IF IT CAN BE DEMONSTRATED THAT THESE WOULD IMPACT THE PROFITABILITY OF THE COMPARA BLE SELECTED. THUS BEFORE CONSIDERING THE COMPARABLES THE FAR ANALYSIS ON THE BASIS OF THE FU NCTIONS PERFORMED ASSETS AVAILABLE AND RISKS ASSUMED NEED TO BE ANALYZED IN DETAIL IF NEED BE TO THE LEVEL OF HAIR SPLITTING WHICH THE TAX PAYERS ATTEMPT FOR THE COMPARABLES. THEREAFTER THE SELECTION OF COMPARABLES IS AN EXERCISE WHICH WOULD BE HUGELY FACILITATED AND RELA TIVELY FREE FROM THE NEED TO ADDRESS MICRO VARIATIONS. ACCORDINGLY, THE ISSUE IS RESTOR ED TO THE FILE OF THE TPO TO CARRY OUT THIS EXERCISE AND PASS A SPEAKING ORDER IN ACCORDANCE WI TH LAW. NEEDLESS TO SAY THAT THE ASSESSEE SHALL BE AFFORDED A REASONABLE OPPORTUNITY OF BEING HEARD. 7. GROUND NO.6 STANDS RESTORED TO THE TPO DIRECTING H IM TO CARRY OUT THE DIRECTIONS OF THE DRP WHEREIN NO INFIRMITY HAS BEEN POINTED OUT B Y THE PARTIES. 8. IN THE RESULT, ITA NO.7079/DEL/2014 IS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. 9. SINCE FACTS AND ARGUMENTS QUA THE ISSUE OF COMPARA BLES ADDRESSED IN GROUND NO.4.5 IS STATED TO BE IDENTICAL TO ITA NO.7079/DEL/2014. ON ACCOUNT OF SIMILAR REASONING ON FACTS, THE ISSUE WITH IDENTICAL DIRECTION IS RESTORED TO T HE FILE OF THE TPO. I.T.A .NO.-7079/DEL/2014 & 1113/DEL/2016 PAGE 22 OF 22 10. IN THE RESULT, ITA NO.1113/DEL/2016 IS PARTLY ALLO WED FOR STATISTICAL PURPOSES. 11. IN THE RESULT, ITA NO.7079/DEL/2014 AND ITA NO.111 3/DEL/2016 ARE ALLOWED FOR STATISTICAL PURPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 16 TH OF AUGUST, 2016. SD/- SD/- (PRASHANT MAHARISHI) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER *AMIT KUMAR* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSIS TANT REGISTRAR ITAT NEW DELHI