Headstrong Services (India) Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 714/DEL/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6450 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 16-03-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 05-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Bad and doubtful debts
• Section: 143(3); 10B; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM ITA NO.714/DEL/2015 ASSESSMENT YEAR : 2010-11 HEADSTRONG SERVICES (INDIA) PVT. LTD. DELHI INFORMATION TECHNOLOGY PARK, SHASTRI PARK, NEW DELHI PAN : AABCT7650D VS. DCIT CIRCLE-11(1) NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESWAR RAO, ADV. , SH. SHAILESH KUMAR, ADV., SH. PARTH, ADV. DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT,DR DATE OF HEARING : 16 .03.2016 DATE OF PRONOUNCEMENT : 18 .03.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (AO) ON 26.12 .2014 UNDER ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 2 SECTION 144C READ WITH SECTION 143(3) OF THE INCOME -TAX ACT, 1961 (HEREINAFTER ALSO CALLED `THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2010-11. I. SOFTWARE DEVELOPMENT SERVICES 2. FIRST ISSUE RAISED IN THIS APPEAL IS AGAINST TH E ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS. 14,71, 91,526/- MADE IN THE INTERNATIONAL TRANSACTION OF `PROVISION OF SOFT WARE DEVELOPMENT SERVICES. BRIEFLY, STATED THE FACTS OF THE CASE A RE THAT THE ASSESSEE IS 100% SUBSIDIARY OF HEADSTRONG SERVICES LLC. IT IS A 100% EXPORT ORIENTED UNIT FOR MANUFACTURE AND EXPORT OF COMPUTE R SOFTWARE AND IS ENGAGED IN THE RENDERING SOFTWARE DEVELOPMENT SERVI CES AND IT ENABLED SERVICES (ITES). THE ASSESSEE REPORTED FIVE INTERNA TIONAL TRANSACTIONS IN ITS AUDIT REPORT IN FORM NO. 3CEB, INCLUDING PROV ISION OF SOFTWARE DEVELOPMENT SERVICES WITH TRANSACTED VALUE OF RS. 134,37,46,752/-. THE ASSESSEE USED THE TRANSACTIONAL NET MARGIN METHOD ( TNMM) AS THE MOST APPROPRIATE METHOD. PROFIT LEVEL INDICATOR (PL I) OF OPERATING PROFIT / TOTAL COST (OP/TC) WAS APPLIED. THE ASSES SEE CALCULATED ITS PLI ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 3 AT 11.79%. CERTAIN COMPANIES WERE SELECTED AS COMPA RABLE FOR THIS INTERNATIONAL TRANSACTION WITH THEIR AVERAGE MARGIN AT 11.43%. THAT IS HOW, THE ASSESSEE TRIED TO DEMONSTRATE THAT THIS IN TERNATIONAL TRANSACTION WAS AT ARMS LENGTH PRICE (ALP). UNCONVINCED, THE T RANSFER PRICING OFFICER (TPO) RECAST THE FINANCIALS OF THE ASSESSEE FOR THE INTERNATIONAL TRANSACTION OF `SOFTWARE DEVELOPMENT SERVICES, AS UNDER: OPERATING INCOME INCOME FROM OPERATIONS 176,06,48,375 MISC. INCOME 864,634 TOTAL OPERATING INCOME 1,761,513,009 OPERATING EXPENSES TOTAL COST 1,60,05,39,757 TOTAL EXPENSES 1,60,05,39,757 LESS : NON-OPERATIONAL EXPENSES FINANCIAL EXPENSES 15,40,275 FOREX LOSS 6,00,71,190 PROVISION FOR DOUBTFUL DEBTS 96,526 LOSS ON SALE/DISCARD OF FIXED ASSETS 19,21,957 PROVISION FOR DOUBTFUL ADVANCES 20,41,221 TOTAL OPERATING EXPENSES 1,53,48,68,589 OPERATING PROFIT 22,66,44,420 OP/OC 14.77% ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 4 3. AFTER MAKING CERTAIN INCLUSIONS/EXCLUSIONS IN THE LIST OF COMPARABLES DRAWN BY THE ASSESSEE, THE TPO WORKED OUT AVERAGE P ROFIT MARGIN OF THE FINALLY SELECTED COMPARABLES AT 24.88%. SUCH PROFIT RATE OF 24.88% WAS APPLIED ON TOTAL OPERATING COSTS INCURRED BY THE AS SESSEEE AT RS. 153.48 CRORE TO WORK OUT TRANSFER PRICING ADJUSTMENT AMOUN TING TO RS.31,62,04,137/-. THE ASSESSEE CHALLENGED THE TPO S WORKING OF ALP OF THE INTERNATIONAL TRANSACTION OF `PROVISION OF S OFTWARE DEVELOPMENT SERVICES BEFORE THE DISPUTE RESOLUTION PANEL (DRP) . CERTAIN RELIEFS WERE DIRECTED BY THE DRP. IN THE ORDER PASSED BY TH E TRANSFER PRICING OFFICER, GIVING EFFECT TO THE TRANSACTIONS OF THE D RP, AND CERTAIN ORDER U/S 154, FINALLY AN ADDITION OF RS.14,71,91,526 HAS BEEN MADE TOWARDS TRANSFER PRICING ADJUSTMENT ON THE INTERNATIONAL TR ANSACTION OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. THE ASSESSEE IS AGGR IEVED AGAINST SUCH ADDITION. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THERE IS NO DISPUTE O N THE APPLICATION OF THE TNMM AS THE MOST APPROPRIATE METHOD WITH PLI OF OP/TC. THE ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 5 CONTROVERSY BEFORE US REVOLVES AROUND MAKING OF TRA NSFER PRICING ADDITION ON TRANSACTIONS WITH NON-AES ALSO; COMPUTA TION OF THE ASSESSEES PROFIT MARGIN; AND SELECTION OF COMPARAB LES. 5. WE WILL TAKE UP THESE THREE ASPECTS FOR CONSI DERATION IN SERIATIM. A) TP ADJUSTMENT IN RESPECT OF TRANSACTIONS WITH NON-AES? 6.1. THE FIRST ISSUE CHALLENGED BEFORE US UNDER TH E INTERNATIONAL TRANSACTION OF `PROVISION OF SOFTWARE DEVELOPMENT S ERVICES IS AGAINST THE COMPUTATION OF TRANSFER PRICING ADJUSTMENT IN R ESPECT OF TRANSACTION WITH ASSOCIATED ENTERPRISES (AES) AND NON-AES. COM PUTATION OF THE ARMS LENGTH PRICE (ALP) BY THE TPO ON PAGE 48 AND 49 OF HIS ORDER DIVULGES THAT HE TOOK TOTAL OPERATIONAL COSTS OF TH E SOFTWARE DEVELOPMENT SEGMENT AT RS.153,48,68,589/-. BY APPLYING ARITHME TIC MEAN OF THE PROFIT RATE OF COMPARABLES AT 24.88% ON SUCH TOTAL COSTS, HE PROPOSED A TRANSFER PRICING ADJUSTMENT OF RS.31,62,04,137/-. THE LD. AR CONTENDED THAT NO TRANSFER PRICING ADJUSTMENT IS POSSIBLE IN RESPECT OF TRANSACTIONS WITH NON-AES. ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 6 6.2. IT IS UNCONTROVERTED, AS IS ALSO APPARENT FROM THE TPOS ORDER, THAT THE TRANSFER PRICING ADJUSTMENT HAS BEEN MADE BY CONSIDERING THE TOTAL COSTS INCURRED BY THE ASSESSEE IN RESPECT OF TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES (AE) AND NON-AES. IT CAN BE SEEN THAT THE TPO HAS TAKEN THE FIGURE OF REVENUE AT RS.1.76 CRORE WH ILE CALCULATING THE ALP OF THE INTERNATIONAL TRANSACTION FROM `PROVISIO N OF SOFTWARE DEVELOPMENT SERVICES. AS AGAINST THAT, WHEN WE SEE PAGE 2 OF THE TPOS ORDER DETAILING THE INTERNATIONAL TRANSACTION S, IT COMES TO THE FORE THAT THE AMOUNT OF REVENUE FROM `PROVISION OF SOFTW ARE DEVELOPMENT SERVICES IS ONLY RS.1.34 CRORE. THIS SHOWS THAT TH E BALANCE AMOUNT IS REVENUE FROM NON-AE TRANSACTIONS. AN ADDITION TOWAR DS TRANSFER PRICING ADJUSTMENT CAN BE MADE BY COMPARING THE ASSESSEES PROFIT RATE FROM THE INTERNATIONAL TRANSACTION WITH THAT OF COMPARABLE U NCONTROLLED TRANSACTIONS. UNDER THE TNMM, THE PROCESS IS SIMPLE IN INITIALLY FINDING OUT THE OPERATING PROFIT MARGIN OF THE ASSESSEE AND THEN THE AVERAGE ADJUSTED OPERATING PROFIT MARGIN OF COMPARABLES. S UCH ADJUSTED PROFIT MARGIN OF THE COMPARABLES CONSTITUTES BENCHMARK MAR GIN, WHICH IS THEN ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 7 MATCHED WITH THE OPERATING PROFIT MARGIN FROM THE A SSESSEES INTERNATIONAL TRANSACTION (WHICH IS ALWAYS WITH AE) . IT IS NOT PERMISSIBLE TO MAKE TRANSFER PRICING ADJUSTMENT, BY APPLYING THE AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLES, ON THE ASSESSEES UNIVERSAL TRANSACTIONS ENTERED INTO WITH BOTH THE AES AND NON -AES. AS THE ENTIRE EXERCISE UNDER CHAPTER-X IS CONFINED TO COMPUTING T OTAL INCOME OF THE ASSESSEE FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO THE ARMS LENGTH PRICE, THERE IS NO SCOPE FOR COMPUTING INCOM E FROM NON- INTERNATIONAL TRANSACTIONS HAVING REGARD TO THE ALP . AS THE TPO HAS COMPUTED THE TRANSFER PRICING ADJUSTMENT QUA ALL THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE UNDER THIS SEGMENT WITH REFEREN CE TO THE BASE OF TOTAL COSTS, ALSO INCLUSIVE OF COSTS RELEVANT FO R TRANSACTIONS WITH NON- AES, WE VACATE THE IMPUGNED ORDER TO THIS EXTENT AN D RESTORE THE MATTER TO THE FILE OF THE TPO/AO FOR RECALCULATING THE AMO UNT OF ADDITION OF TRANSFER PRICING ADJUSTMENT BY TAKING INTO CONSIDER ATION THE INTERNATIONAL TRANSACTIONS ONLY UNDER THIS SEGMENT, TO THE EXCLU SION OF TRANSACTIONS WITH NON-AES. ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 8 B) COMPUTATION OF THE ASSESSEES PROFIT MARGIN 7.1. THE SECOND ASPECT IS ABOUT THE COMPUTATION OF THE ASSESSEES OPERATING MARGIN AT 14.77%. WE HAVE REPRODUCED ABO VE THE WORKING OF SUCH PROFIT RATE. THERE IS NO CONFLICT ON THE CALCU LATION OF `OPERATING INCOME AT RS.176,15,13,009/-, EXCEPT TO THE EXTENT OF INCLUSION OF REVENUE FROM NON-AES IN IT. WE HAVE DIRECTED HEREIN ABOVE TO RESTRICT THE DETERMINATION OF THE ALP OF INTERNATIONAL TRANSACTI ON FROM PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND THE CONSEQUENTIAL TRANSFER PRICING ADJUSTMENT ONLY IN RESPECT OF TRANSACTION WITH AES. RESULTANTLY, IT IS DIRECTED THAT IN FINDING OUT THE ALP OF THIS INTERN ATIONAL TRANSACTION, THE AMOUNT OF REVENUE FROM NON-AE TRANSACTIONS SHOULD B E EXCLUDED. 7.2. THE MAJOR CONTROVERSY ROTATES AROUND THE COM PUTATION OF OPERATING COSTS WORKED OUT BY THE TPO AT RS.153.48 CRORE. IN THIS REGARD, WE FIND THAT THE STARTING POINT OF THIS FIG URE IS `OPERATING EXPENSES TO THE TUNE OF RS.1,60,05,39,757, WHICH F IGURE HAS BEEN DETERMINED BY THE TPO BY TAKING THE AMOUNT OF TOTAL EXPENSES FROM THE PROFIT & LOSS ACCOUNT AT RS.1,66,69,44,440, WHICH H AS BEEN APPORTIONED ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 9 BETWEEN SOFTWARE DEVELOPMENT SERVICES AND ITES IN T HE PROPORTION OF REVENUES AT RS.176.34 CRORE AND RS.7.30 CRORE TOTAL ING RS.183.64 CRORE, THEREBY GIVING THE FIGURE OF OPERATING COSTS IN REL ATION TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES AT RS.1,60,05,39,757. AS THE FIGURE OF RS.166.69 CRORE CONSISTS OF CERTAIN EXPENSES, WE WI LL TAKE UP SUCH EXPENSES ONE BY ONE FOR THE PURPOSES OF DISTRIBUTIO N BETWEEN THE TWO SEGMENTS. 7.3. FIRST ITEM OF COSTS IS `PERSONNEL EXPENSES AMOUNTING TO RS.1,23,85,27,756. WE FIND THAT THE ASSESSEE HAS B EEN REMUNERATED IN THE OTHER INTERNATIONAL TRANSACTION OF RENDERING IT ES AT COST PLUS 50% MARKUP. DEFINITION OF `COST HAS BEEN GIVEN IN EX HIBIT B OF THE AGREEMENT BETWEEN THE ASSESSEE AT ITS US AE : `TO M EAN ALL EMPLOYEES EXPENSES. THE TERM `EMPLOYEES EXPENSES HAS BEEN F URTHER DEFINED TO MEAN : `THE ACTUAL PAYROLL COSTS OF THE EMPLOYEES A ND DOES NOT INCLUDE THE EMPLOYEE EXPENSES WHICH ARE REIMBURSED SEPARATE LY WITHOUT MARK- UP. THIS DIVULGES THAT THE ASSESSEE HAS BEEN COMPE NSATED UNDER ITES AT 50% OVER AND ABOVE EMPLOYEES COST. SINCE THE REVENU E FROM THIS ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 10 INTERNATIONAL TRANSACTION REPRESENTING 150% IS RS.7 ,30,47,418, WE HOLD THAT THE EMPLOYEE COST FOR RENDERING ITES BE TAKEN AT RS.4,86,98,278 (RS.7,30,47,418 *100/150). THE REMAINING EMPLOYEE COST IS RELATABLE TO SOFTWARE DEVELOPMENT SERVICES. WE HAVE ALSO GONE TH ROUGH AN AGREEMENT WITH M/S WELLS FARGO INDIA SOLUTIONS PVT. LTD., WHICH IS A NON-AE AND THE ASSESSEE HAS RENDERED SOFTWARE DEVEL OPMENT SERVICES TO THIS INDIAN COMPANY ALSO. IT IS COMMON SUBMISSION T HAT AGREEMENTS WITH OTHER NON-AES ARE ON THE SAME TERMS AS WITH M/S WEL LS FARGO. NO MECHANISM HAS BEEN SET OUT UNDER THIS AGREEMENT FOR DETERMINING THE PERSONNEL COSTS INCURRED BY THE ASSESSEE IN RENDERI NG SERVICES TO NON- AE. IN THE ABSENCE OF ANY MECHANISM FOR APPORTIONME NT OF EMPLOYEE COST BETWEEN AE AND NON-AE TRANSACTIONS OF SOFTWARE DEVELOPMENT SERVICES, WE DIRECT THAT THE REMAINING PERSONNEL CO STS (AFTER EXCLUSION OF RS.4,86,98,278) BE APPORTIONED BETWEEN AE AND NON- AE TRANSACTIONS IN THE RATIO OF REVENUE. 7.4. THE NEXT ITEM OF EXPENSE AS PER THE ASSESSE ES PROFIT AND LOSS ACCOUNT IS `OPERATIONAL AND OTHER EXPENSES. THE TP O, IN THE FIRST STEP, ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 11 HAS BIFURCATED SUCH EXPENSES ALONG WITH OTHERS IN T HE RATIO OF REVENUE FROM SOFTWARE DEVELOPMENT AND ITES SEGMENTS. THEN H E REDUCED NON- OPERATIONAL EXPENSES OF FINANCIAL EXPENSES, FOREX L OSS, PROVISION OF DOUBTFUL DEBTS, LOSS ON SALE/DISCARDED OF FIXED ASS ETS AND PROVISION FOR DOUBTFUL ADVANCES, TO FIND OUT THE AMOUNT OF TOTAL OPERATING EXPENSES OTHER THAN PERSONNEL EXPENSES. THE LD. AR COULD NOT POINT OUT ANY RATIONAL BASIS FOR APPORTIONMENT OF SUCH EXPENSES, OTHER THAN THE REVENUE FROM THE RELEVANT SEGMENTS. WE, THEREFORE, UPHOLD I N PRINCIPLE, THE APPORTIONMENT OF SUCH OTHER EXPENSES, EXCEPT DEPREC IATION, IN THE RATIO OF REVENUE FROM BOTH THE SEGMENTS. AS REGARDS THE F IVE ITEMS TREATED BY THE TPO AS NON-OPERATING NATURE, THE LD. AR DID NOT RAISE ANY OBJECTION TO SUCH TREATMENT. WE, THEREFORE, HOLD THAT THAT TH E OTHER PROPORTIONATE EXPENSES RELATING TO SOFTWARE DEVELOPMENT SEGMENT A S DEDUCED FROM THE BIFURCATION ON THE BASIS OF REVENUE, SHOULD BE FURT HER APPORTIONED BETWEEN AE AND NON-AE TRANSACTIONS IN THE RATIO OF THE REVENUE FROM THE TWO STREAMS. THE FIVE ITEMS OF NON-OPERATING E XPENSES ARE ALSO DIRECTED TO BE REDUCED IN THE SAME WAY. IN THE ALTE RNATIVE, THE TPO MAY ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 12 TAKE THE GROSS FIGURE OF SUCH OTHER EXPENSES OTHER THAN PERSONNEL EXPENSES AND DEPRECIATION FROM PROFIT AND LOSS ACCO UNT; REDUCE THE SAME WITH THE GROSS FIGURES OF FIVE ITEMS TAKEN BY HIM AS NON-OPERATING; DIVIDE THE BALANCE BETWEEN SOFTWARE DEVELOPMENT SER VICES AND ITES SEGMENTS IN THE RATIO OF REVENUE FROM BOTH; AND THE N DIVIDE THE PART RELATABLE TO SOFTWARE DEVELOPMENT SERVICES SEGMENT BETWEEN THE AE AND NON-AE TRANSACTIONS ON THE BASIS OF THEIR RESPECTIV E GROSS REVENUE. THE PROPORTIONATE PART RELATABLE TO THE AE TRANSACTIONS BE CONSIDERED IN THE CALCULATION OF OP/OC OF THE INTERNATIONAL TRANSACTI ON OF RENDERING SOFTWARE DEVELOPMENT SERVICES. AS REGARDS DEPRECIAT ION, WE FIND THAT THE ASSESSEE, INTER ALIA, EARNED RENT OF RS.88,90,195 AND CREDITED IT TO PROFIT AND LOSS ACCOUNT. THIS AMOUNT OF RENT HAS BE EN TAKEN AS NON- OPERATING INCOME AND RIGHTLY SO. ONCE RENT IS NON-O PERATING, THEN THE AMOUNT OF DEPRECIATION ON THE ASSETS YIELDING RENT CANNOT ALSO BE TREATED AS OPERATING EXPENSES. ACCORDINGLY, WE DIRECT THAT THE ABOVE DISCUSSED EXERCISE OF BIFURCATING `OTHER OPERATING EXPENSES BE CARRIED OUT IN ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 13 RESPECT OF DEPRECIATION ALSO, BUT AFTER REDUCING SU CH AMOUNT OF DEPRECIATION AS RELATES TO THE ASSETS FETCHING RENT AL INCOME. C) SELECTION OF COMPARABLES 8. THE ASSESSEE AGITATED INCLUSION OF CERTAIN COMPA NIES BY THE TPO IN THE FINAL LIST OF COMPARABLES AND ALSO SOUGHT INTER VENTION ON CERTAIN COMPANIES WHICH, IN ITS OPINION, OUGHT TO HAVE BEEN INCLUDED IN SUCH LIST, WHICH HAVE BEEN IGNORED BY THE TPO. 9. BEFORE GOING INTO THE QUESTION OF COMPARABILITY OF THE COMPANIES ASSAILED BEFORE US, IT IS RELEVANT TO UNDERSTAND TH E NATURE OF ACTIVITY CARRIED OUT BY THE ASSESSEE IN RENDERING SOFTWARE D EVELOPMENT SERVICES TO ITS AES. AS PER AGREEMENT DATED 1.1.2009 BETWEE N THE ASSESSEE AND HEDSTRONG UK LIMITED, A COPY OF WHICH HAS BEEN PLAC ED ON RECORD, THERE IS AN ELABORATION OF `SERVICES AS PER EXHIBI T A. THIS EXHIBIT STIPULATES THAT THE ASSESSEE IS `ENGAGED IN THE BUS INESS OF PROVIDING BUSINESS ORIENTED TECHNOLOGY CONSULTING SERVICES AN D OF DEVELOPING, INTEGRATING, ENHANCING AND MAINTAINING COMPUTER SOF TWARE FOR ITS CUSTOMERS. THE ASSESSEE IS PROVIDING END-TO-END SY STEMS INTEGRATION ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 14 AND CONSULTING SERVICES IN FOCUSED VERTICAL MARKET SEGMENTS INCLUDING SECURITIES AND INVESTMENT BANKING, AIRLINES & TRANS PORT AND TECHNOLOGY. THE ASSESSEES TP STUDY REPORT DISCLOS ES THAT SALES AND MARKETING IS DONE BY HEADSTRONG US. THOUGH CONTRACT NEGOTIATIONS ARE DONE BY HEADSTRONG US, BUT `HEADSTRONG INDIA IS RES PONSIBLE FOR THE PROVISION OF THE REQUESTED SERVICES. FURTHER, WHER EAS HEADSTRONG US IS RESPONSIBLE FOR THE CONCEPTUALIZATION OF SERVICES, THE ASSESSEE IS RESPONSIBLE FOR THE PERFORMANCE OF SUCH SERVICES. I NTELLECTUAL PROPERTY RIGHTS IN THE WORK DONE BY THE ASSESSEE VEST IN HEA DSTRONG US. IT IS PERTINENT TO NOTE THAT UNLIKE THE A.Y. 2008-09, FOR WHICH SEPARATE ORDER HAS BEEN PASSED BY THIS BENCH ON 11.2.2016, THIS YE AR, THE ASSESSEE HAS ALSO EARNED SOFTWARE DEVELOPMENT REVENUE FROM NON-A ES AS WELL. THE ABOVE NARRATION OF FACTS INDICATES THAT THE ASSESSE E IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS AES. WITH THE ABOVE BACKGROUND IN MIND, WE WILL EXAMINE THE COMPARABILI TY OR OTHERWISE OF THE COMPANIES ASSAILED IN THE INSTANT APPEAL. ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 15 10. FIRSTLY, WE WILL DEAL WITH THE COMPANIES WH ICH HAVE BEEN INCLUDED BY THE TPO IN THE FINAL SET OF COMPARABLES AND THE ASSESSEE CLAIMS THEM TO BE INCOMPARABLE. A SUBMISSION COMMON TO SOME OF SUCH COMPANIES WAS MADE BY THE LD. AR THAT CERTAIN BENCHES OF THE TRIBUNAL IN OTHER CASES HAVE HELD THEM TO BE NOT COMPARABLE. IN THAT VIEW OF THE MATTER, IT WAS URGED THAT THOSE COMPANIES, BEING EX FACIE INCOMPARABLE, BE AUTOMATICALLY EXCLUDED FROM THE LIST OF COMPARABLES DRAWN BY THE TPO. 11. WE EXPRESS OUR DOUBTS IN ACCEPTING SUCH A BRO AD PROPOSITION. IT IS AXIOMATIC THAT IF COMPANY A IS FUNCTIONALLY DIFFE RENT FROM COMPANY B, THEN, SUCH COMPANY CANNOT BE CONSIDERED AS COM PARABLE. TWO COMPANIES CAN BE CONSIDERED AS COMPARABLE WHEN BOTH ARE DISCHARGING THE OVERALL SIMILAR FUNCTIONS, THOUGH THERE MAY BE SOME MINOR DIFFERENCES IN SUCH FUNCTIONS, NOT MARRING THE OTHE RWISE COMPARABILITY. NOTWITHSTANDING THE FUNCTIONAL SIMILARITY, MANY A T IMES A COMPANY CEASES TO BE COMPARABLE BECAUSE OF OTHER REASONS AS WELL. TO CITE AN EXAMPLE, IF COMPANY A, THOUGH FUNCTIONALLY SIMILA R TO COMPANY B, BUT HAS RELATED PARTY TRANSACTIONS (RPTS) BREACHING A PARTICULAR LEVEL, ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 16 THEN, SUCH COMPANY CANNOT BE CONSIDERED AS COMPARAB LE TO COMPANY A IN THE YEAR IN WHICH THE RPTS BREACH SUCH A LEVEL. IF, HOWEVER, IN THE SUBSEQUENT YEAR, THE RELATED PARTY TRANSACTIONS FAL L BELOW THAT LIMIT, THEN SUCH COMPANY WOULD AGAIN BECOME COMPARABLE. TO PUT IT SIMPLY, IF COMPANY A HAS BEEN HELD TO BE INCOMPARABLE VIS-A-VIS COMPANY B, THEN IT IS NOT ESSENTIAL THAT COMPANY A WOULD BE INCOMPARABLE TO COMPANY C ALSO. WHAT IS RELEVANT TO CONSIDER IS, FIRSTLY, THE FUNCTIONAL PROFILE OF COMPANY A VIS-A-VIS COMPANY C. IF BOTH ARE FUNCTIONALLY SIMILAR, THEN NOTWITHSTANDING THE FACT THAT COMPANY A WAS HELD TO BE INCOMPARABLE TO COMPANY B, IT MAY STILL BE COMPAR ABLE TO COMPANY C. DESPITE THE FACT THAT COMPANY A IS FUNCTIONA LLY SIMILAR TO COMPANY B, IT MAY STILL HAVE BEEN DECLARED AS INC OMPARABLE TO COMPANY B BECAUSE OF OTHER RELEVANT REASONS. IF COMPANY A PASSES THE SAME REASONS VIS-A-VIS COMPANY C, THEN COMPANY A WILL FIND ITS PLACE IN THE LIST OF COMPARABLES OF COMPANY C, N OTWITHSTANDING THE FACT THAT IT WAS HELD TO BE INCOMPARABLE TO COMPANY B. THE CRUX OF THE MATTER IS THAT THE MERE FACT THAT COMPANY A HAS B EEN HELD TO BE NOT ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 17 COMPARABLE IN A JUDICIAL ORDER PASSED IN THE CASE O F COMPANY B, DOES NOT PER SE MAKE IT INCOMPARABLE IN ALL THE SUBSEQUENT CASES TO FOLLOW. NOT ONLY COMPANY A HELD TO BE INCOMPARABLE TO COM PANY B CAN BE COMPARABLE TO COMPANY C, BUT COMPANY X HELD TO BE COMPARABLE TO COMPANY Y CAN ALSO BE INCOMPARABLE TO COMPANY Z , DEPENDING UPON THE FUNCTIONAL PROFILE AND THE APPLICABILITY OR OTH ERWISE OF THE RELATED FACTORS. THERE CAN BE NO HARD AND FAST RULE THAT I F A PARTICULAR COMPANY HAS BEEN FOUND TO BE NOT COMPARABLE IN THE CASE OF ANOTHER COMPANY, THEN SUCH FORMER COMPANY WOULD CEASE TO BE COMPARAB LE TO THE ASSESSEE COMPANY ALSO. COMPARABILITY OF EACH COMPANY NEEDS T O BE ASCERTAINED ONLY AFTER MATCHING THE FUNCTIONAL PROFILE AND THE RELEVANT FACTORS OF THE OTHER COMPANY. ERGO, THIS CONTENTION RAISED ON BEHA LF OF THE ASSESSEE CANNOT BE ACCEPTED. WITH THE ABOVE PARAMETERS IN MI ND AND THE FACTUAL MATRIX AT HAND, WE PROCEED TO EXAMINE THE COMPANIES CHOSEN BY THE TPO FOR ASCERTAINING IF THEY ARE REALLY COMPARABLE. (I) E-INFOCHIPS BANGALORE LIMITED ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 18 12.1. THE TPO PROPOSED THE INCLUSION OF THIS CO MPANY IN THE SET OF COMPARABLES, WHICH WAS RESISTED BY THE ASSESSEE CON TENDING THAT THE SAME WAS ENGAGED IN SOFTWARE DEVELOPMENT AND IT ENA BLED SERVICES, THAT WAS THEIR ONLY REPORTABLE BUSINESS SEGMENT. TH E TPO REJECTED THE CONTENTION OF THE ASSESSEE BY NOTICING THAT MANY CO MPANIES TREAT IT AND ITES AS ONE SEGMENT. NO RELIEF WAS ALLOWED BY THE D RP. THE ASSESSEE IS AGAINST INCLUSION OF THIS COMPANY IN THE LIST OF CO MPARABLES. 12.2. AFTER CONSIDERING THE RIVAL SUBMISSION AN D PERUSED THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY AVAILABLE ON PAGE 352 OF THE PAPER BOOK THAT ITS P & L ACCOUNT SHOWS `INCOME FROM SOFTWARE SERVICES AS ONE UNIT AT RS. 43,04,66,481/-. SCHEDULES 7 GIVES BREAK UP OF THIS INCOME WITH INC OME FROM SOFTWARE SERVICES AT RS. 37.13 CRORE AND CONSULTANCY CHAR GES AT RS. 5.90 CRORE. SEGMENTAL INFORMATION OF THIS COMPANY IS AVA ILABLE ON PAGE 66 OF ITS ANNUAL REPORT WHICH STATES THAT : THE COMPANY IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPMENT AND I.T. ENABLED SE RVICES WHICH IS CONSIDERED THE ONLY REPORTABLE BUSINESS SEGMENT. T HIS INDICATES THAT THE ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 19 REVENUE FROM SOFTWARE DEVELOPMENT AND ITES HAS BEEN CLUBBED BY THIS COMPANY WHICH ALSO INCLUDES CONSULTANCY CHARGES. NO DOUBT CONSULTANCY CHARGES IN RELATION TO SOFTWARE DEVELOP MENT ARE PART OF OVERALL SOFTWARE DEVELOPMENT, BUT THE INCLUSION OF ITES IN THE OVERALL SEGMENT FRUSTRATES THE COMPARABILITY. WE ARE CURRE NTLY DEALING WITH THE INTERNATIONAL TRANSACTION OF `PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND THE INTERNATIONAL TRANSACTION OF ITE S IS SEPARATE WHICH HAS ALSO BEEN BENCHMARKED DISTINCTLY. IN OUR CONSIDERED OPINION, E- INFOCHIPS BANGALORE LTD. HAVING A POOL OF BOTH SOF TWARE DEVELOPMENTS AND ITES SEGMENTS INTO THE OVERALL SEGMENT DESIGNAT ED AS `SOFTWARE DEVELOPMENT, CANNOT BE CONSIDERED AS COMPARABLE O N ENTITY LEVEL WITH THE INTERNATIONAL TRANSACTION OF `SOFTWARE DEVELOPM ENT OF THE ASSESSE. WE, THEREFORE, ORDER FOR THE EXCLUSION OF THIS COMP ANY FROM THE LIST OF COMPARABLES. (II) INFINITE DATA SYSTEM PVT. LTD. 13.1. REJECTING THE ASSESSEES CONTENTION THAT TH E FINANCIAL DATA OF THIS COMPANY WAS NOT AVAILABLE IN THE PUBLIC DOMAIN, THE TPO INCLUDED IT BY ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 20 OBSERVING THAT IT WAS ENGAGED IN PROVIDING SOFTWARE TECHNICAL SERVICES TO SOLE CUSTOMER, VIZ., FUJITSU SERVICES LTD. THE TPO HAS ALSO NARRATED THE SERVICES RENDERED BY THIS COMPANY WHICH WERE FOUND TO BE PRIMARILY IT SERVICES. HENCE, THIS COMPANY WAS INCLUDED IN THE L IST OF COMPARABLES, AGAINST WHICH THE ASSESSEE IS AGGRIEVED BEFORE US. 13.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE TOTAL SALES OF THIS COMPANY FOR THE CORRESPONDING YEAR ENDING IS RS. 38.31 CROR E. PARA 17.2.13 OF THE ANNUAL REPORT OF THIS COMPANY PROVIDES THAT: `THE C OMPANY IS PRIMARILY A SERVICES COMPANY ENGAGED IN TECHNICAL C ONSULTING, DESIGN & DEVELOPMENT OF SOFTWARE, MAINTENANCE, SYSTEMS INTE GRATION, IMPLEMENTATION, TESTING AND INFRASTRUCTURE MANAGEME NT SERVICES. NEXT PARA 17.2.14 DEALING WITH SEGMENT REPORTING PROVI DES THAT : `THE COMPANYS OPERATIONS ARE PREDOMINANTLY RELATED TO P ROVIDING SOFTWARE TECHNICAL CONSULTANCY SERVICES TO ITS SOLE CUSTOMER FUJITSU SERVICES LTD. NARRATION OF THE ABOVE FACTS FROM THE ANNUAL REPORT OF THIS COMPANY MAKES IT EXPLICIT THAT IT IS ENGAGED IN PROVIDING T ECHNICAL CONSULTANCY, ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 21 DESIGN AND DEVELOPMENT OF SOFTWARE. THE LD. ARS CO NTENTION THAT THE ASSESSEE IS NOT INTO CONSULTANCY SERVICES IS INCORR ECT AS HAS BEEN NOTED ABOVE FROM THE RELEVANT PARTS OF ITS AGREEMENT WITH HEADSTRONG UK LTD. SHOWING THAT THE ASSESSEE IS ALSO INTO SOFTWARE CON SULTANCY. BE THAT AS IT MAY, IN OUR CONSIDERED OPINION, SOFTWARE CONSULTANC Y SERVICES CANNOT BE CONSIDERED AS INDEPENDENT OF SOFTWARE DEVELOPMENT S ERVICES, WHICH NECESSARILY IMPLIES APPLYING SUCH CONSULTANCY IN TH E SOFTWARE DEVELOPMENT. ANOTHER CONTENTION RAISED BY THE LD. A R THAT INFINITE DATA SYSTEM IS DOING ALL THE ACTIVITIES IN THE DEVELOPME NT OF SOFTWARE INCLUDING ITS CONCEPTUALIZATION, WHEREAS SOME OF SU CH ACTIVITIES ARE DONE BY THE ASSESSEES AE, IN OUR CONSIDERED OPINION IS AGAIN INCONSEQUENTIAL. WE HAVE NOTICED ABOVE THAT THE ROLE OF THE ASSESSEE S AE IS LARGELY THAT OF SALES AND MARKETING INCLUDING THE CONCEPTUALIZAT ION OF SERVICES BUT THE WORK OF SOFTWARE DEVELOPMENT IS DONE BY THE ASS ESSEE ALONE. FURTHER, IF ASSESSEE IS DOING, SAY, FIVE PARTS OF THE OVERAL L SIX OR SEVEN PARTS OF THE SOFTWARE DEVELOPMENT, IT CANNOT BE SAID THAT THE AS SESSEE IS NOT INTO SOFTWARE DEVELOPMENT. ACTIVITIES OF THE ASESSEE, WH ICH ADMITTEDLY ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 22 CONSTITUTE A MAJOR CHUNK OF THE OVERALL SOFTWARE DE VELOPMENT, CANNOT BE CONSIDERED AS DIFFERENT FROM THE SOFTWARE DEVELOPME NT. WE, THEREFORE, REFUSE TO ACCEPT THIS CONTENTION URGED ON BEHALF OF THE ASSESSEE. 13.3. THEREAFTER IT WAS ALSO ARGUED THAT SINCE IN FINITE DATA SYSTEM IS PROVIDING SERVICES TO ITS SOLE CUSTOMER AND THE TER MS OF PROVIDING SERVICES TO THE SOLE CUSTOMER ARE GOVERNED / CONTRO LLED BY THE AE OF THIS COMPANY AND HENCE IT SHOULD BE TREATED AS A CONTROL LED TRANSACTION. THIS SUBMISSION IS IN THE AIR. NO RELEVANT MATERIAL WORT H THE NAME HAS BEEN PLACED ON RECORD TO SUBSTANTIATE THIS CONTENTION OF CONTROLLED TRANSACTION. 13.4. LAST ARGUMENT OF THE LD. AR ABOUT THE DIFF ERENT BUSINESS MODEL ADOPTED BY THIS COMPANY IN THE SENSE OF RECEIVING D EFICIT CHARGES ARISING ON ACCOUNT OF UNDER UTILIZATION OF ITS RESOURCES, A GAIN, FAILS TO CONVINCE US IN ORDERING THE EXCLUSION OF THIS OTHERWISE FUNC TIONALLY COMPARABLE COMPANY. OUR FIRST REASON FOR SUCH DECISION IS THAT SUCH CHARGES STANDING AT RS. 31.38 LAKH ARE LESS THAN EVEN 1% OF THE REVE NUE FROM THE CUSTOMER. ONCE THE FUNCTIONAL COMPARABILITY IS ACCE PTED, AT THE MOST, THIS FACTOR MAY REQUIRE ADJUSTMENT IN THE PROFIT RA TE OF THIS COMPANY ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 23 TAKEN AS COMPARABLE, RATHER THAN EXCLUDING THE COMP ANY FROM THE LIST OF COMPARABLES. FURTHER, SUCH AN ADJUSTMENT CAN BE MAD E, IF IT IS SHOWN THAT THE ASSESSEES CAPACITY ALSO REMAINED UNDER-UT ILIZED WITHOUT THERE BEING ANY CORRESPONDING COMPENSATION. ONCE THE ASSE SSEES IDLE CAPACITY HAS NOT BEEN SHOWN, THERE CAN BE NO QUESTI ON OF ALLOWING ANY ADJUSTMENT ON THIS SCORE. 13.5. TAKING A HOLISTIC VIEW OF THE MATTER, WE DE CLINE TO INTERFERE WITH THE DECISION OF THE AUTHORITIES BELOW IN TREATING T HIS COMPANY AS COMPARABLE. (III) INFOSYS TECHNOLOGIES LTD . 14.1. THE TPO NOTICED THAT THIS COMPANY WAS FIND ING PLACE IN THE ACCEPT/REJECT MATRIX BUT WAS REJECTED IN THE TP DOC UMENTATION BY CLAIMING THAT IT FAILED FUNCTIONAL COMPARABILITY. THE TPO FOUND THIS COMPANY TO BE INTO SOFTWARE DEVELOPMENT SERVICES QU ALIFYING ALL THE FILTERS APPLIED BY HIM. THE ASSESSEE RAISED CERTAI N OBJECTIONS AGAINST THE INCLUSION OF THIS COMPANY, BUT WITHOUT ANY SUCCESS. THE TPO INCLUDED ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 24 THE SAME IN THE FINAL LIST OF COMPARABLES. THE ASS ESSEE IS AGGRIEVED AGAINST ITS INCLUSION IN THE ULTIMATE SET OF COMPAR ABLES. 14.2. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT CAN BE SEEN THAT T HE TPO HAS INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES BY REJECTIN G THE ASSESSEES CONTENTION ABOUT THE BRAND OF THIS COMPANY HELPING IN EARNING HUGE PROFITS AND ALSO THE BRAND-RELATED PRODUCTS SWELLIN G THE ULTIMATE PROFIT RATE OF THIS COMPANY. WE FIND THAT THE ASSESSEE IS A CAPTIVE UNIT RENDERING SERVICES TO ITS AE ALONE WITHOUT ACQUIRIN G ANY INTELLECTUAL PROPERTY RIGHTS IN THE WORK DONE BY IT IN THE DEVEL OPMENT OF SOFTWARE. THE HONBLE DELHI HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES (P) LTD. (2013) 219 TAXMANN 26 (DEL) CONSIDERED THE GIANTNESS OF INFOSYS LTD., IN TERMS OF RISK PROFILE, NATURE OF SERVICES, NUMBER OF EMPLOYEES, OWNERSHIP OF BRANDED PRODUCTS AND BRAND RELATED PRO FITS, ETC. IN COMPARISON WITH SUCH FACTORS PREVAILING IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD., BEING, A CAPTIVE UNIT PROVI DING SOFTWARE DEVELOPMENT SERVICES WITHOUT HAVING ANY IP RIGHTS I N THE WORK DONE BY ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 25 IT. AFTER MAKING COMPARISON OF VARIOUS FACTORS AS ENUMERATED ABOVE, THE HONBLE DELHI HIGH COURT HELD INFOSYS LTD. TO BE IN COMPARABLE TO AGNITY INDIA TECHNOLOGIES PVT. LTD. THE FACTS OF TH E INSTANT CASE ARE MORE OR LESS SIMILAR INASMUCH AS THE EXTANT ASSESSE E IS ALSO A SERVICE PROVIDER WITH A LIMITED NUMBER OF EMPLOYEES AT ITS DISPOSAL AND ALSO NOT OWNING ANY BRANDED PRODUCTS WITH NO EXPENDITURE ON R&D ETC. WHEN WE CONSIDER ALL THE ABOVE FACTORS IN A HOLISTIC MAN NER, THERE REMAINS ABSOLUTELY NO DOUBT THAT INFOSYS TECHNOLOGIES LTD. IS INCOMPARABLE TO THE ASSESSEE COMPANY. RESPECTFULLY FOLLOWING THE J UDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN AGNITY INDIA (SUPRA) , WE HOLD THAT INFOSYS TECHNOLOGIES LTD. CANNOT BE TREATED AS COMP ARABLE TO THE ASSESSEE COMPANY. THIS COMPANY IS, THEREFORE, DIRE CTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. (IV) SONATA SOFTWARE LIMITED 15.1. THE TPO PROPOSED THIS COMPANY AS COMPARABLE WHICH WAS OBJECTED TO BY THE ASSESSEE ON THE GROUND THAT IT H AS SIGNIFICANT RELATED PARTY TRANSACTIONS (RPTS). THE TPO COMPUTED RPTS FR OM THE ITEMS OF ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 26 PROFIT & LOSS ITEMS OF THIS COMPANY AT 11.93%. THE REMAINING ITEMS PERTAINING TO THE BALANCE SHEET WAS IGNORED. THAT I S HOW, THE TPO FOUND THIS COMPANY TO BE COMPARABLE. THE ASSESSEE HAS CHA LLENGED THE COMPUTATION OF THE RPTS. 15.2. WE HAVE HEARD BOTH THE SIDES AND GONE THROU GH THE RELEVANT MATERIAL ON RECORD . IT IS FOUND THAT THE PREDOMINANT VIEW OF THE TRIBUN AL ACROSS THE COUNTRY IN SEVERAL CASES IS THAT THE TRA NSACTIONS OF A COMPANY HAVING MORE THAN 25% OF RELATED PARTY TRANSACTION S (RPTS) ARE CONSIDERED AS CONTROLLED, THEREBY FAILING THE TEST OF COMPARABILITY. THIS VIEW HAS BEEN TAKEN IN SEVERAL DECISIONS INCLUDING BY THE DELHI BENCH IN TOLUNA INDIA PVT. LTD. (SUPRA) AND ACTIS ADVISERS PVT. LTD. VS. DCIT, (2012) 20 ITR 138 (DEL.)(TRIB.). AND MUMBAI BENCH IN STREAM INTERNATIONAL SERVICES PVT. LTD. VS. ACIT (IT) (201 3) 141 ITD 492 (MUM.) . 15.3. AS AGAINST THE TPOS CALCULATION OF RPTS O F THIS COMPANY AT 11.93%, THE LD. AR HAS PLACED ON RECORD ITS CALCULA TION OF RPTS OF THIS COMPANY AT 55.95%. WE FIND THAT NONE OF THE CALCUL ATIONS IS CORRECT. ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 27 MECHANISM FOR CALCULATING THE PERCENTAGE OF RELATED PARTY TRANSACTIONS HAS BEEN BROADLY LAID DOWN BY THE DELHI BENCH OF TH E TRIBUNAL IN NOKIA INDIA PRIVATE LTD. VS. DCIT, 2014-TII- 224-ITAT- DE L-TP . SINCE THE CALCULATION DONE BY BOTH THE SIDES, VIZ., THE TPO A ND THE ASSESSEE IS NOT CORRECT, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR FRESH DETERMINATION OF THE PERCENTAGE OF RELATED PARTY TRANSACTIONS OF THIS COMPANY IN CONSONANCE WITH THE BROADER PRINCIPLES LAID DOWN IN THE CASE OF NOKIA INDIA PRIVATE LTD (SUPRA), TO THE EXTENT THESE ARE APPLICABLE. IT IS MADE CLEAR THAT IF AFTE R DOING THIS EXERCISE, THE RELATED PARTY TRANSACTIONS OF THIS COMPANY ARE FO UND TO BE MORE THAN 25%, THEN IT SHOULD BE EXCLUDED FROM THE SET OF CO MPARABLES AND IN THE OTHERWISE SITUATION, IT SHOULD CONTINUE IN THE LIS T OF COMPARABLES. (V) TATA ELXI LIMITED (SEGMENT) 16.1. THE TPO PROPOSED THIS COMPANY AS COMPARABLE , WHICH WAS OBJECTED TO BY THE ASSESSEE ON THE GROUND OF DIFFER ENT FUNCTIONAL PORTFOLIO. HE REJECTED SUCH A CONTENTION AND INCLUD ED IT IN THE SET OF COMPARABLES. ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 28 16.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY, WHOSE COPY HAS BEEN PROVIDED IN THE PAPER BOOK, THA T IT HAS TWO PRIMARY SEGMENTS, NAMELY, SYSTEMS INTEGRATION & SUPPORT AND SOFTWARE DEVELOPMENT AND SERVICES. THE TPO HAS TAKEN SECOND SEGMENT OF SOFTWARE DEVELOPMENT AND SERVICES FOR THE PURPOSES OF COMPARISON WITH THE ASSESSEE. ON A FURTHER PERUSAL OF THE DET AILS OF THIS SEGMENT, IT COMES TO OUR NOTICE FROM PAGE 13 OF THE ANNUAL REPO RT THAT DESIGN AND DEVELOPMENT OF HARDWARE IS ALSO INCLUDED IN IT. SIN CE REVENUE FROM `HARDWARE IS ALSO INCLUDED IN THE `SOFTWARE DEVELO PMENT AND SERVICES SEGMENT OF THIS COMPANY, WE FAIL TO SEE AS TO HOW I T CAN BE TREATED AS COMPARABLE WITH THE ASSESSEE COMPANY, WHICH HAS NOT RENDERED ANY HARDWARE SERVICES. WE, THEREFORE, ELIMINATE THIS CO MPANY FROM THE LIST OF COMPARABLES. 17. NOW WE WILL EXAMINE THE COMPANIES REFUSED BY THE TPO, WHICH THE ASSESSEE CLAIMS, AS COMPARABLE. (I) CG-VAK SOFTWARE & EXPORTS LIMITED ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 29 18.1. THE ASSESSEE TREATED THIS COMPANY AS COMPAR ABLE, WHICH THE TPO REFUSED TO ACCEPT. THE ASSESSEE INSISTS ON THE INCL USION OF THIS COMPANY IN THE LIST OF COMPARABLES. 18.2. AFTER GOING THROUGH THE RELEVANT MATERIAL O N RECORD INCLUDING THE ANNUAL REPORT OF THIS COMPANY, WE FIND THAT ITS PRO FIT & LOSS ACCOUNT INDICATES `INCOME FROM SOFTWARE DEVELOPMENT, SERVIC ES & PRODUCTS. IT IS FURTHER DISCERNIBLE THAT IT IS ENGAGED IN RESEAR CH & DEVELOPMENT ACTIVITY. THIS FACTOR IS TRACEABLE FROM PAGE 6 OF ITS ANNUAL REPORT WHICH INDICATES: `THE NATURE OF BUSINESS OF SOFTWARE DEVE LOPMENT INVOLVES INBUILT, CONSTANT RESEARCH AND DEVELOPMENT AS A PAR T OF ITS PROCESS OF MANUFACTURING (DEVELOPMENT). THE COMPANY IS DEVELOP ING APPLICATION ENGINES, RE-USABLE CODES AND LIBRARIES AS A PART OF ITS R&D ACTIVITIES. A PERUSAL OF THE ABOVE NARRATION INDICATES THAT THIS COMPANY IS ALSO ENGAGED IN UNDERTAKING RESEARCH & DEVELOPMENT ACTIV ITIES UNDER THE `SOFTWARE DEVELOPMENT SEGMENT. AS THE ASSESSEE IS NOT DOING ANY R&D, THIS SIGNIFICANT DIFFERENCE TAKES IT INTO AN A LTOGETHER DIFFERENT BUSINESS MODEL, VITIATING COMPARABILITY. WE, THEREF ORE, UPHOLD THE ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 30 ASSESSMENT/TPOS ORDER IN NOT INCLUDING THIS COMPAN Y IN THE FINAL SET OF COMPARABLES. (II) CALIBER POINT BUSINESS SOLUTIONS LIMITED (OTHE R SEGMENT); HELIOS & MATHESON INFORMATION TECHNOLOGY LIMITED; AND SILV ERLINE TECHNOLOGIES LIMITED : 19.1. THE ASSESSEE INCLUDED THESE COMPANIES IN ITS LIST OF COMPARABLES. HOWEVER, THE TPO ELIMINATED THEM ON T HE GROUND THAT THESE WERE FOLLOWING DIFFERENT YEAR ENDINGS AND, HE NCE, WERE NOT COMPARABLE. THE LD. AR FAIRLY ACCEPTED THAT THE AB OVE COMPANIES WERE FOLLOWING DIFFERENT YEAR ENDINGS FOR MAINTAINING TH EIR ACCOUNTS IN CONTRAST TO THE ASSESSEE FOLLOWING FINANCIAL YEAR E NDING 31 ST MARCH. IT WAS, HOWEVER, SUBMITTED THAT THESE COMPANIES SHOULD NOT HAVE BEEN EXCLUDED FOR THIS REASON ALONE WHEN THEY ARE OTHERW ISE FUNCTIONALLY SIMILAR, A FACT WHICH HAS NOT BEEN DISPUTED BY THE TPO. THE LD. DR OPPOSED THIS CONTENTION BY SUBMITTING THAT SINCE TH E DATA FOR THE YEAR ENDING OF THESE COMPANIES DOES NOT MATCH WITH THE Y EAR ENDING OF THE ASSESSEE THESE WERE RIGHTLY EXCLUDED. ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 31 19.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D PERUSING THE RELEVANT MATERIAL, IT IS NOTICED THAT THE ASSESSEE COMPANY I S HAVING FINANCIAL YEAR ENDING COVERING PERIOD 1.4.2009 TO 31.3.2010. IN T HAT VIEW OF THE MATTER, A VALID COMPARISON CAN BE MADE ONLY IF THE COMPARABLE COMPANY HAS ALSO THE SAME FINANCIAL YEAR. IN THIS REGARD, W E CONSIDER IT APPROPRIATE TO NOTE THE RELEVANT PART OF SUB-RULE ( 4) OF RULE 10B WHICH PROVIDES THAT: THE DATA TO BE USED IN ANALYZING TH E COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE IN TERNATIONAL TRANSACTION HAD BEEN ENTERED INTO. IT IS OBVIOUS FROM THE LANG UAGE OF SUB-RULE (4) THAT THE COMPARABILITY OF AN UNCONTROLLED TRANSACTI ON CAN BE ANALYZED ONLY WITH THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. I N OTHER WORDS, IF THE TESTED PARTY HAS MARCH YEAR ENDING, THEN, THE COMPA RABLES MUST ALSO HAVE THE DATA RELATING TO THE FINANCIAL YEAR ENDING 31 ST MARCH ITSELF. IF SUCH A DATA IS NOT AVAILABLE, THEN, A COMPANY ALBEI T FUNCTIONALLY COMPARABLE, DISQUALIFIES. ESPOUSING THE FACTS OF T HE EXTANT CASE, WE FIND ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 32 THAT INSOFAR AS THE FUNCTIONAL COMPARABILITY OF THE SE COMPANIES IS CONCERNED, THE TPO HAS NOT DISPUTED THE SAME. THE O NLY REASON GIVEN FOR THEIR EXCLUSION IS THE NON-AVAILABILITY OF DATA FOR THE RELEVANT FINANCIAL YEAR. THE LD. AR CONTENDED THAT THOUGH TH E YEAR ENDINGS OF THE ABOVE COMPANY WERE DIFFERENT, YET, THE ASSESSEE WAS IN A POSITION TO PUT FORWARD THEIR DATA FOR THE FINANCIAL YEAR 1.4.2009 TO 31.3.2010 FROM THEIR ANNUAL REPORTS ONLY. IT WAS SO STATED ON THE BASIS OF THE AVAILABILITY OF THE QUARTERLY DATA FROM THE ANNUAL REPORTS OF TH ESE COMPANIES, WHICH COULD BE ADJUSTED FOR THE FINANCIAL YEAR ENDING 31. 3.2010. IF THE CONTENTION OF THE ASSESSEE IS CORRECT, THAT THE REL EVANT DATA FOR THE CONCERNED FINANCIAL YEAR CAN BE DEDUCED FROM THE IN FORMATION AVAILABLE FROM THEIR ANNUAL REPORTS, THEN, THERE CAN BE NO OB JECTION TO THEIR INCLUSION IN THE LIST OF COMPARABLES WITH THE ADJUS TED DATA FOR THE RELEVANT FINANCIAL YEAR ITSELF. UNDER SUCH CIRCUMS TANCES, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF TPO/AO FOR EXAMINING THIS ASPECT OF THE MATTER. IT IS CLARIFI ED THAT ONLY IF THE ASSESSEE SUCCEEDS IN PROVIDING THE RELEVANT DATA OF THESE COMPANIES FOR ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 33 THE CONCERNED FINANCIAL YEAR ON THE BASIS OF THE IN FORMATION AVAILABLE FROM THEIR ANNUAL REPORTS ONLY, THE TPO SHOULD IN CLUDE THESE COMPANIES IN THE LIST OF COMPARABLES BY CONSIDERING THEIR OP/TC ON THE BASIS OF THE FINANCIAL YEAR ENDING 31.3.2010. IF H OWEVER, EVEN THOUGH THE QUARTERLY DATA IS AVAILABLE AND CAN BE COMPILED FOR THE RELEVANT FINANCIAL YEAR, BUT THE AMOUNTS OF OPERATING PROFIT OR OPERATING COST ETC. FOR THE RELEVANT FINANCIAL YEAR ARE NOT DIRECTLY AV AILABLE WITHOUT ANY APPORTIONMENT OR TRUNCATION, THEN THESE COMPANIES S HOULD NOT BE CONSIDERED AS COMPARABLE. (III) GOLDSTONE TECHNOLOGIES LIMITED : 20.1. THE ASSESSEE INCLUDED THIS COMPANY IN THE L IST OF COMPARABLES WHICH WAS EXCLUDED BY THE TPO ON THE GROUND THAT IT WAS ENGAGED IN PROVIDING IT SERVICES AND IT ENABLED SERVICES. 20.2. HAVING REGARD TO THE FACTS OF THE INSTANT C ASE AND THE SUBMISSIONS ADVANCED ON BEHALF OF BOTH THE SIDES, WE FIND THAT THIS COMPANY IS ENGAGED IN PROVIDING BOTH IT SERVICES AND ITE SERVI CES, WHICH FACT HAS ALSO NOT BEEN DISPUTED BY THE LD. AR. SINCE WE ARE BENCHMARKING THE ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 34 INTERNATIONAL TRANSACTION OF `SOFTWARE DEVELOPMENT SERVICES, SUCH A COMPANY ALSO RENDERING ITES, CANNOT BE CONSIDERED AS COMPARABLE. THE ASSESSMENT ORDER IS ACCORDINGLY UPHELD. (IV) MAVERIC SYSTEMS LIMITED : 21.1. THE ASSESSEE CONSIDERED THIS COMPANY AS COM PARABLE, WHICH WAS REJECTED BY THE TPO ON THE GROUND THAT ITS ANNUAL A CCOUNTS WERE NOT AVAILABLE IN PUBLIC DOMAIN. 21.2. HAVING HEARD BOTH THE SIDES AND PERUSED TH E RELEVANT MATERIAL ON RECORD, WE FIND THAT THE POSITION CONTINUES TO REMA IN SAME BEFORE US AS WELL. THE LD. AR CANDIDLY ADMITTED THAT THE ANNUAL ACCOUNTS OF THIS COMPANY ARE STILL NOT AVAILABLE. IN THE ABSENCE OF THIS BASIC DATA, WE CANNOT TAKE COGNIZANCE OF THIS COMPANY FROM THE ANG LE OF COMPARABILITY. THE IMPUGNED ORDER IS UPHELD. II. I.T. ENABLED SERVICES 22. THE ASSESSEE REPORTED AN INTERNATIONAL TRANSAC TION OF `PROVISION OF IT ENABLED / BPO SERVICES WITH TRANSACTED VALUE AT RS. 7,30,47,418/-. ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 35 THE ASSESSEE USED THE TNMM AS THE MOST APPROPRIATE METHOD WITH OP/TC AS ITS PLI. EIGHT COMPANIES WERE CHOSEN AS CO MPARABLE WITH THEIR AVERAGE MARGIN OF PROFIT AT 11.79%. THE ASSES SEE COMPUTED ITS OWN PROFIT MARGIN AT 14.27%. THAT IS HOW, IT WAS SHOWN THAT THIS INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH PRICE . THE TPO CHANGED COMPOSITION OF COMPARABLES BY INCLUDING SOME NEW CO MPANIES AND EXCLUDING SOME FROM THE LIST OF THE ASSESSEE. THERE AFTER, HE RE-WORKED OUT THE OPERATING PROFIT MARGIN OF THE ASSESSEE FRO M THIS INTERNATIONAL TRANSACTION AND CONSEQUENTIAL TRANSFER PRICING ADJU STMENT, AS UNDER :- OPERATING INCOME INCOME FROM OPERATIONS 73,047,418 MISC. INCOME 35,873 TOTAL OPERATING INCOME 73,083,291 OPERATING EXPENSES TOTAL COST 66,404,683 TOTAL EXPENSES 66,404,683 LESS : NON-OPERATIONAL EXPENSES FINANCIAL EXPENSES 63,904 FOREX LOSS 2,492,289 PROVISION FOR DOUBTFUL DEBTS 4,005 LOSS ON SALE/DISCARED OF FIXED ASSETS 79,740 PROVISION FOR DOUBTFUL ADVANCES 84,688 TOTAL OPERATING EXPENSES 63,680,056 ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 36 OPERATING PROFIT 9,403,235 OP/OC 14.77% OPERATIONAL COST 63,680,056 ARMS LENGTH PRICE AT A MARGIN OF 36.08% 86,655,820 PRICE RECEIVED 73,083,291 105% OF THE PRICE RECEIVED 76,737,456 PROPOSED ADJUSTMENT U/S 92CA 13,572,529 23. THIS LED TO THE TRANSFER PRICING ADJUSTMENT O F RS. 1,35,72,529/- FROM THE INTERNATIONAL TRANSACTION OF PROVISION OF ITES/ BPO SERVICES. THE ASSESSEE CHALLENGED THE TPOS WORKING OF ALP OF THI S INTERNATIONAL TRANSACTION BEFORE THE DRP. CERTAIN RELIEF WAS DIRE CTED. THE TPO, GIVING EFFECT TO THE DIRECTIONS OF THE DRP AND AFTE R PASSING ORDER U/S 154, WORKED OUT FRESH AMOUNT OF TRANSFER PRICING AD JUSTMENT AT RS.96,11,630/-, WHICH IS UNDER CHALLENGE BEFORE US . 24. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THERE IS NO DISPUTE O N THE APPLICATION OF THE TNMM AS THE MOST APPROPRIATE METHOD WITH PLI OF OP/TC. CONTROVERSY BEFORE US IS FOCUSED ON THE COMPUTATION OF THE ASSESSEES ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 37 PROFIT MARGIN FROM THIS INTERNATIONAL TRANSACTION; AND SELECTION OF COMPARABLES. WE WILL DEAL WITH THESE ISSUES SEPARAT ELY. A) COMPUTATION OF THE ASSESSEES PROFIT MARGIN 25. FIRST WE TAKE UP THE COMPUTATION OF THE ASSES SEES PROFIT MARGIN BY THE TPO. WHILE DEALING WITH THE COMPUTATION OF ASSE SSEES PROFIT MARGIN FROM THE INTERNATIONAL TRANSACTION OF `PROVISION OF SOFTWARE DEVELOPMENT SERVICES, WE HAVE GIVEN SUPRA CERTAIN DIRECTIONS. BOTH THE SIDES ARE IN AGREEMENT THAT SUCH DIRECTIONS WOULD MUTATIS MUTANDIS APPLY TO THIS INTERNATIONAL TRANSACTION OF `PROVISI ON OF ITES AS WELL. FOLLOWING THE VIEW, WE DIRECT TO RETAIN THE FIGURE OF OPERATING INCOME AT RS. 7.30 CRORE, AS RIGHTLY TAKEN BY THE TPO, WHICH HAS NOT BEEN OBJECTED BY THE LD. AR AS WELL. AS REGARDS THE CALCULATION O F OPERATING EXPENSES, WE DIRECT TO TAKE EMPLOYEES EXPENSES AT RS.4,86,98, 278/-; TOTAL AMOUNT OF DEPRECIATION IS DIRECTED TO BE APPORTIONED BETWE EN THE INTERNATIONAL TRANSACTIONS OF `SOFTWARE DEVELOPMENT AND `ITES, TO THE EXCLUSION OF THE AMOUNT RELATABLE TO RENTAL INCOME, IN THE RATIO OF REVENUES; REMAINING AMOUNT OF OPERATING EXPENSES ARE DIRECTED TO BE APPORTIONED, ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 38 AS DEDUCED AFTER DEDUCTION OF FIVE ITEMS TREATED BY THE TPO AS OF NON- OPERATING NATURE, IN THE RATIO OF REVENUE FROM THE TRANSACTIONS OF SOFTWARE DEVELOPMENT WITH AES, NON-AES AND ITES. TH IS WORKING WILL GIVE THE FIGURE OF OPERATING PROFIT MARGIN OF THE A SSESSEE FROM THE INTERNATIONAL TRANSACTION OF ITES. (B) COMPARABLES 26. HERE AGAIN THE ASSESSEE HAS CHALLENGED CERTAI N INCLUSIONS AND EXCLUSIONS MADE BY THE TPO. BEFORE TAKING UP THE CO MPARABILITY OR OTHERWISE OF THE COMPANIES DISPUTED BEFORE US, IT I S SINE QUA NON TO CONSIDER THE NATURE OF SERVICES RENDERED BY THE ASS ESSEE UNDER THIS INTERNATIONAL TRANSACTION. EXHIBIT B OF THE AGREEME NT WITH HEADSTRONG US, DIVULGES THE NATURE OF ITES PROVIDED BY THE ASS ESSEE, WHICH ARE - ACCOUNTING SERVICES, RECRUITMENT, PROJECT MANAGEME NT, HUMAN RESOURCES AND QUALITY AND ASSURANCE. NOW, WE WILL PROCEED TO EXAMINE IF THE COMPANIES CHOSEN BY THE TPO BUT CHAL LENGED BY THE ASSESSEE, ARE REALLY COMPARABLE. (I) ACCENTIA TECHNOLOGIES LTD ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 39 27.1. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES ON SEVERAL GROUNDS INCLUDING PECULIA R ECONOMIC CIRCUMSTANCES OWING TO ACQUISITION OF ASSCENT INFOS ERVE PVT. LTD. DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. THE TPO DISCUSSED THE FUNCTIONAL COMPARABILITY OF T HIS COMPANY AND, IN THE ULTIMATE ANALYSIS, CAME TO HOLD THAT IT WAS FUN CTIONALLY COMPARABLE WITH THE ASSESSEE COMPANY AND HENCE INCLUDIBLE. 27.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. WE HAVE ALSO GONE THROUGH THE ANNUAL REPORT OF THIS COMPANY, A COPY OF WHICH HAS BEEN PLACED IN THE PAP ER BOOK. NOTES TO ACCOUNTS OF THIS COMPANY INDICATE ABOUT THE AMALGAM ATION OF ASSCENT INFOSERVE PVT. LTD. WITH IT AS APPROVED BY THE SHAR EHOLDERS IN THE COURT CONVENED MEETING HELD ON 25.4.2009 AND, SUBSEQUENTL Y, SANCTIONED BY THE HONBLE HIGH COURT ON 21.8.2009. THE MUMBAI BEN CH OF THE TRIBUNAL IN PETRO ARALDITE (P) LTD. VS. DCIT (2013) 154 TTJ (MU M) 176, HAS HELD THAT A COMPANY CANNOT BE CONSIDERED AS CO MPARABLE BECAUSE OF EXCEPTIONAL FINANCIAL RESULTS DUE TO MER GERS/DEMERGERS. ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 40 SIMILAR VIEW HAS BEEN BOLSTERED BY THE DELHI BENCH OF THE TRIBUNAL IN SEVERAL CASES INCLUDING CIENA INDIA PVT. LTD. VS. DCIT (ITA NO.3324/DEL/2013) VIDE ITS ORDER DATED 23.4.2015. IN VIEW OF THE FACT THAT THERE WAS MERGER OF ASSCENT INFOSERVE PVT. LTD . WITH ACCENTIA TECHNOLOGIES LTD. BY WAY OF AMALGAMATION DURING THE YEAR ITSELF, WE HOLD THAT THIS COMPANY CANNOT BE CONSIDERED AS COMP ARABLE DUE TO THIS EXTRA-ORDINARY FINANCIAL EVENT. ACCORDINGLY, THE S AME IS DIRECTED TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. (II) INFOSYS BPO 28.1. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES. THE ASSESSEES OBJECTIONS AGAINST ITS INCLUSION WERE OV ERTURNED. 28.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY, WHICH IS AVAILABLE IN THE PAPER BOOK, THAT THERE WA S ACQUISITION BY THIS COMPANY OF MCCAMISH SYSTEMS LLC. SUCH INFORMATION IS AVAILABLE IN THE PAPER BOOK. ACQUISITION OF MCCAMISH SYSTEMS LL C DURING THE YEAR, BEING AN EXTRAORDINARY FINANCIAL EVENT, RENDE RS IT INCOMPARABLE. ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 41 FOLLOWING THE REASONS TAKEN NOTE OF ABOVE, WE ORD ER FOR THE ELIMINATION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. (III) TCS E-SERVE INTERNATIONAL LTD . 29.1. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY ON THE GROUND THAT IT PROVIDED FINANCIAL INFORMATION PROCE SSING AND CUSTOMER CONTACT SERVICES WITH HIGH LEVEL OF FOREIGN EXPENDI TURE AND ABNORMAL PROFITS. THE TPO NOTICED THAT THIS COMPANY WAS ALS O OFFERING ITES. 29.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. THE ANNUAL REPORT OF THIS COMP ANY IS AVAILABLE IN THE PAPER BOOK. NOTES TO ACCOUNTS INDICATE THAT TH IS COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING IT ENABLED SER VICES/BPO SERVICES PRIMARILY TO CITIGROUP ENTITIES GLOBALLY. THE OPER ATIONS OF THIS COMPANY : BROADLY COMPRISE OF TRANSACTION PROCESSING AND T ECHNICAL SERVICES. TRANSACTION PROCESSING INCLUDES THE BROAD SPECTRUM OF ACTIVITIES INVOLVING PROCESSING, COLLECTIONS, CUSTOMER CARE AN D PAYMENTS IN RELATION TO THE SERVICES OFFERED BY CITIGROUP TO IT S CORPORATE AND RETAIL CLIENTS. TECHNICAL SERVICES INVOLVE SOFTWARE TESTI NG, VERIFICATION AND ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 42 VALIDATION OF SOFTWARE AT THE TIME OF IMPLEMENTATI ON AND DATA CENTRE MANAGEMENT ACTIVITIES. IT IS MANIFEST THAT THIS C OMPANY IS ENGAGED IN RENDERING BPO SERVICES TO THE BANKING AND FINANCIAL SERVICES INDUSTRY (BFSI) AND TRAVEL, TOURISM AND HOSPITALITY (TTH). IT IS PROVIDING SERVICES TO BFSI AND TTH AND SUCH SERVICES INCLUDE `TRANSACTION PROCESSING AND `TECHNICAL SERVICES. IN OTHER WO RDS, THE REMUNERATION OF THIS COMPANY FROM THE ABOVE REFERRED TWO SEGMENT S INCLUDES COMPENSATION FOR RENDERING `TECHNICAL SERVICES AND `TRANSACTION PROCESSING. INSOFAR AS THE `TRANSACTION PROCESSING SERVICES ARE CONCERNED, THESE ARE ITES, WHICH ARE BROADLY SIMILA R TO THOSE RENDERED BY THE ASSESSEE, THOUGH NOT SPECIFICALLY SIMILAR. HOWEVER, THE `TECHNICAL SERVICES INVOLVE SOFTWARE TESTING, VERI FICATION AND VALIDATION OF SOFTWARE ITEM, IMPLEMENTATION AND DATA CENTRE MA NAGEMENT ACTIVITIES. SUCH `TECHNICAL SERVICES RENDERED BY THIS COMPANY ARE IN THE NATURE OF SERVICING AND MAINTENANCE OF SOFTWARE. AT THIS ST AGE, IT IS RELEVANT TO NOTE THAT A COMPANY PROVIDING SOFTWARE SERVICES MAY BE OF TWO TYPES, VIZ., A COMPANY PROVIDING SOFTWARE DEVELOPMENT SERV ICES AND A ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 43 COMPANY PROVIDING SOFTWARE SERVICES OTHER THAN SOFT WARE DEVELOPMENT SERVICES (HEREINAFTER ALSO CALLED A COMPANY PROVID ING NON-DEVELOPMENT SOFTWARE SERVICES OR ITES). IN ORDER TO PROPERLY APPRECIATE THE VITAL DIFFERENCE BETWEEN THESE TWO TYPES OF COMPANIES, IT IS SIGNIFICANT TO NOTE THAT A COMPANY WHICH DEVELOPS SOFTWARE IS CALLED A COMPANY RENDERING SOFTWARE DEVELOPMENT SERVICES. SOFTWARE DEVELOPMENT SERVICES ALSO INCLUDE MAINTENANCE OF SOFTWARE AND UPDATION OF THE SOFTWARE SO AS TO SUIT THE EVER CHANGING REQUIREMENTS OF THE USERS. A COMPANY USING, INTER ALIA, A SOFTWARE FOR OBTAINING THE DESIRED RESULTS, IS CA LLED A COMPANY PROVIDING NON-DEVELOPMENT SOFTWARE SERVICES OR ITES. THUS, IT IS CRYSTAL CLEAR THAT THERE IS A PHENOMENAL DIFFERE NCE BETWEEN A COMPANY PROVIDING SOFTWARE DEVELOPMENT SERVICES AND A COMPA NY PROVIDING SOFTWARE NON-DEVELOPMENT SERVICES IN TERMS OF EXPER TISE, PROFESSIONAL QUALIFICATION AND EXPERIENCE REQUIRED FOR RENDERING SUCH SERVICES. A COMPANY PROVIDING SOFTWARE NON-DEVELOPMENT SERVICES (ITES) PERFORMS A RELATIVELY LOW-END SERVICE. THUS THE LINE OF DIST INCTION IS THAT WHEREAS A COMPANY PROVIDING SOFTWARE DEVELOPMENT SERVICES HEL PS IN THE CREATION, ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 44 MAINTENANCE OR UPDATION OF A SOFTWARE, ON THE OTHER HAND, A COMPANY PROVIDING NON-DEVELOPMENT SOFTWARE SERVICES OBTAINS THE DESIRED RESULT WITH THE USE OF AN EXISTING SOFTWARE. FURTHER, WHER EAS THE OUTPUT OF THE FORMER IS A SOFTWARE IN ITSELF OR A STAGE IN THE UL TIMATE CREATION OF A SOFTWARE, THE OUTPUT OF THE LATER IS THE PROCESSED INFORMATION FROM THE RAW DATA, OBTAINED WITH THE HELP, INTER ALIA, OF A SOFTWARE. FROM THE ABOVE DISCUSSION, IT IS OVERT THAT A COMPANY PROVID ING SOFTWARE DEVELOPMENT SERVICES IS DISTINCT FROM AND INCOMPARA BLE WITH A COMPANY PROVIDING NON-DEVELOPMENT SOFTWARE SERVICES. 29.3. WE FIND THAT THE ASSESSEE UNDER THIS INTE RNATIONAL TRANSACTION HAS PROVIDED ONLY ITES OR NON-DEVELOPMENT SOFTWARE SERV ICES, IN THE NATURE OF ACCOUNTING, RECRUITMENT AND PROJECT MANAGEMENT E TC. ON THE OTHER HAND, THIS COMPANY IS ALSO PROVIDING `TECHNICAL S ERVICES TO ITS AE INVOLVING SOFTWARE TESTING, VERIFICATION AND VALIDA TION OF SOFTWARE, WHICH ARE AKIN TO SOFTWARE MAINTENANCE SERVICES FALLING, WITHIN THE OVERALL CATEGORY OF `SOFTWARE DEVELOPMENT SERVICES. THE TPO HAS TAKEN ENTITY LEVEL FIGURES OF TCS E-SERVE INTERNATIONAL LTD. FOR COMPARISON. THERE IS ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 45 NO BIFURCATION AVAILABLE IN RESPECT OF THE REVENUES OF THIS COMPANY FROM TRANSACTION PROCESSING (WHICH ARE IN THE NATURE OF ITES, THE SAME AS PROVIDED BY THE ASSESSEE) AND TECHNICAL SERVICES (W HICH ARE IN THE NATURE OF SOFTWARE DEVELOPMENT, ABSENT IN THE ASSES SEES CASE). IN THE ABSENCE OF THE AVAILABILITY OF ANY SUCH SEGREGATION OF THE TOTAL REVENUE OF THIS COMPANY, IT IS NOT POSSIBLE TO SEPARATELY C ONSIDER ITS PROFITABILITY FROM RENDERING OF `TRANSACTION PROCESSING SERVICES . AS SUCH, THE ENTITY LEVEL FIGURES RENDER THIS COMPANY UNFIT FOR COMPARI SON. ERGO, WE ORDER FOR THE REMOVAL OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. (IV) TCS E-SERVE LTD . 30.1. THE TPO PROPOSED TO TREAT THIS COMPANY AS COMPARABLE. THE ASSESSEE OBJECTED TO ITS INCLUSION BY CONTENDING TH AT IT WAS PROVIDING FINANCIAL INFORMATION PROCESSING AND CUSTOMER CONTA CT SERVICES WITH HIGH OPERATING REVENUE AND PECULIAR ECONOMIC CIRCUM STANCES LEADING TO ABNORMAL PROFITS. THE TPO REPELLED THE ASSESSEES OBJECTIONS AND INCLUDED IT IN THE FINAL SET OF COMPARABLES. ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 46 30.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. A COPY OF THE ANNUAL REPORT OF THIS COMPANY IS AVAILABLE IN THE PAPER BOOK. THE COMPANYS OVERVIE W HAS BEEN DISCUSSED IN THE PAPER BOOK, WHICH DIVULGES THAT T HIS COMPANY : IS IN THE BUSINESS OF PROVIDING BUSINESS PROCESS MANAGEME NT SERVICES IN THE BANKING AND FINANCIAL SERVICES (BFSI), VERTICAL ( I .E. INDUSTRY VERTICAL) TO HELP ITS CUSTOMERS ACHIEVE THEIR BUSINESS OBJECTIVE S BY PROVIDING INNOVATIVE BEST-IN-CLASS SERVICES. WE FIND THAT TH IS COMPANY IS ALSO PROVIDING ITES. UNLIKE TCS E-SERVE INTERNATIONAL L TD., THIS COMPANY IS NOT PROVIDING ANY TECHNICAL SERVICES INVOLVING SOFT WARE TESTING, VERIFICATION AND VALIDATION OF SOFTWARE ETC. SINCE THE FUNCTIONAL PROFILE OF THIS COMPANY ON A BROADER BASIS IS NO DIFFERENT FROM THAT OF THE ASSESSEE, BOTH BEING INVOLVED IN RENDERING ITES, WE ARE NOT INCLINED TO TREAT THIS COMPANY AS INCOMPARABLE. THE LD. AR ARGU ED THAT THE NATURE OF THE ITES PROVIDED BY THIS COMPANY IS DIFFERENT FROM THAT OF THE ASSESSEE AND HENCE THE SAME BE EXCLUDED. WE ARE DISINCLINED TO SUSTAIN THIS OBJECTION. WHEN WE CONSIDER THE NATURE OF SERVICE S PROVIDED BY THIS ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 47 COMPANY, BEING THE ITES, WHICH IS SIMILAR TO THAT O F THOSE RENDERED BY THE ASSESSEE, AGAIN THE ITES, WE CANNOT ORDER ITS E XCLUSION SIMPLY FOR THE REASON THAT THE VERTICALS OF ITES ARE SOMEWHAT DIFFERENT. A COMPANY WHICH SATISFIES THE BROADER PARAMETERS OF COMPARABI LITY IN THE OVERALL SAME SEGMENT, CANNOT BE EXCLUDED DUE TO SLIGHTLY DI FFERENT NATURE OF SUCH OVERALL ACTIVITY. AN EXAMINATION OF THE COMPA RABLES CHOSEN BY THE ASSESSEE, WHICH HAVE BEEN ACCEPTED BY THE TPO, ALSO SATISFY ONLY THE TEST OF OVERALL SIMILARITY AND NOT THE PECULIAR SIM ILARITY, AS HAS BEEN NOW CONTENDED FOR THE EXCLUSION OF THIS COMPANY. THIS A RGUMENT IS, THEREFORE, REJECTED. 30.3. IN SO FAR AS THE OBJECTION OF THE LD. AR AB OUT THE HIGH PROFIT/HIGH TURNOVER OF THIS COMPANY IS CONCERNED, WE FIND THAT THE HONBLE DELHI HIGH COURT IN CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) P. LTD. V S. DCIT (2015) 376 ITR 183 (DEL) HAS HELD THAT THE MERE FACT THAT AN ENTITY MAKES HIGH/EXTREMELY HIGH PROFITS/LOSSES DOE S NOT, IPSO FACTO, LEAD TO ITS EXCLUSION FROM THE LIST OF COMPARABLES FOR T HE PURPOSES OF DETERMINATION OF ALP. SIMILAR VIEW HAS BEEN TAKEN I N RAMPGREEN ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 48 SOLUTIONS PVT. LTD VS. CIT (2015) 377 ITR 533 (DEL) TO THE EFFECT THAT A POTENTIAL COMPARABLE CANNOT BE EXCLUDED MERELY ON T HE GROUND OF ITS ABNORMALLY HIGHER PROFIT. IT IS FURTHER NOTICED TH AT THE HONBLE DELHI HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES (P.) LTD. (2013 ) 219 TAXMAN 26 (DEL) EXAMINED THE COMPARABILITY OF INFOSYS TECHNOLOGIES FROM THE ANGLE OF ITS INCLUSION OR OTHERWISE IN THE LIST OF COMPARABLE OF AGNITY INDIA TECHNOLOGIES, A CAPTIVE UNIT PROVIDING ITES TO ITS AE ALONE. IN THAT CASE, THE TPO TREATED THREE COMPANIE S AS COMPARABLE, NAMELY, SATYAM COMPUTER SERVICE LTD., L&T INFOTECH LTD. AND INFOSYS TECHNOLOGIES. THE DRP EXCLUDED SATYAM COMPUTER ONLY . THE TRIBUNAL EXCLUDED ONLY INFOSYS TECHNOLOGIES LTD., BY IMPLIED LY RETAINING L&T INFOTECH LTD. AS A GOOD COMPARABLE. ON APPEAL BY TH E REVENUE, THE HONOURABLE HIGH COURT UPHELD THE TRIBUNAL ORDER EXC LUDING INFOSYS ON THE STRENGTH OF CERTAIN RELEVANT DISTINGUISHING FEA TURES INCLUDING ITS GIANTNESS IN TERMS OF SALES, NATURE OF WORK AND OTH ER FACTORS. THUS IT FOLLOWS THAT L&T INFOTECH LTD., WHICH IS OTHERWISE A VAST COMPANY WITH ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 49 MUCH HIGHER TURNOVER, FINALLY FOUND THE STATUS OF A COMPARABLE WITH A CAPTIVE COMPANY PROVIDING ITES TO ITS AE ALONE. 30.4. COMING BACK TO THE FACTS OF OUR CASE, WE F IND THAT TCS E-SERVE LTD. IS FUNCTIONALLY COMPARABLE WITH THE ASSESSEE C OMPANY ON AN OVERALL BASIS AND NO SPECIAL REASONS FOR ITS HIGHER PROFIT/ TURNOVER HAVE BEEN BROUGHT TO OUR NOTICE. CONSEQUENTLY, WE HOLD THAT T HE AUTHORITIES BELOW WERE JUSTIFIED IN INCLUDING THIS COMPANY IN THE LIS T OF COMPARABLES. 31. NOW WE WILL EXAMINE THE COMPANIES REFUSED BY THE TPO AS COMPARABLE. THE ASSESSEE HAS CHALLENGED NON-INCLUSI ON OF CERTAIN COMPANIES IN THE FINAL TALLY OF COMPARABLES, WHICH WERE NOT TREATED BY THE TPO AS COMPARABLE. THE LD. AR WANTS THEIR INCLU SION. (I) CG-VAK SOFTWARE & EXPORTS LTD. (BPO SEGMENT) 32. THE ASSESSEE TREATED THIS COMPANY AS COMPARAB LE WHICH WAS REMOVED BY THE TPO ON THE GROUND THAT ITS SALE WAS AT A LOWER LEVEL. WHILE DISCUSSING THIS COMPANY UNDER THE INTERNATION AL TRANSACTION OF `PROVISION OF SOFTWARE DEVELOPMENT SERVICES, WE HA VE FOUND IT TO BE INCOMPARABLE BECAUSE OF ITS UNDERTAKING RESEARCH & DEVELOPMENT ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 50 ACTIVITIES, WHICH CAN BE PERTINENT TO THE SOFTWARE DEVELOPMENT SERVICES SEGMENT ALONE. THERE CAN BE NO QUESTION OF ANY RESE ARCH & DEVELOPMENT IN RELATION TO THE ITES. THE TPO HAS EX CLUDED THIS COMPANY FROM COMPARABILITY ONLY ON THE BASIS OF LOW TURNOVER, WITHOUT DISPUTING THE FUNCTIONAL SIMILARITY. WE HAVE DISCUS SED ABOVE THAT HIGH OR LOW PROFIT / TURNOVER CAN BE NO CRITERIA FOR EXC LUDING AN OTHERWISE COMPARABLE COMPANY FROM THE LIST OF COMPARABLES. FO LLOWING THE SAME VIEW, WE HOLD THAT CG VAK (BPO SEGMENT) SHOULD BE T REATED AS COMPARABLE. THE ASSESSEE SUCCEEDS. (II) DATAMATICS FINANCIAL SERVICES LTD. 33.1. THE TPO REJECTED THIS COMPANY AS COMPARABLE AND HENCE EXCLUDED THE SAME. THE ASSESSEE IS INSISTING ON ITS INCLUSION. 33.2. WE HAVE GONE THROUGH THE ANNUAL REPORT OF THIS COMPANY, WHICH IS AVAILABLE IN THE PAPER BOOK. ITS PROFIT & LOSS ACCOUNT INDICATES REVENUE FROM OPERATIONS FROM ITES. IT CAN BE SEEN F ROM THE FURTHER DATA AVAILABLE ON THE RECORD THAT IT IS ENGAGED IN PROVI DING ITES. WE, THEREFORE, HOLD THIS COMPANY TO BE COMPARABLE. ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 51 (III) MICROGENETICS SYSTEMS LTD. 34. THE TPO EXCLUDED THIS COMPANY FROM THE LIST O F COMPARABLES. AFTER GOING THROUGH THE ANNUAL ACCOUNTS OF THIS COM PANY, A COPY OF WHICH IS AVAILABLE ON RECORD, IT CAN BE SEEN THAT A LTHOUGH IT IS ENGAGED IN PROVIDING ITES, YET THE MAJOR PART OF THE SERVICES RENDERED BY IT ARE BEING OUTSOURCED FROM THIRD PARTIES. WHEREAS, ITS S ALARIES ARE RS. 89.15 LAC, MEDICAL TRANSCRIPTION CHARGES PAID STAND AT RS . 95.48 LAC. SUCH MEDICAL TRANSCRIPTION CHARGES ARE IN THE NATURE OF JOB WORK GOT DONE BY THIS COMPANY FROM OUTSIDE. THERE IS HARDLY ANY NEED TO EMPHASIZE THAT THESE TWO BUSINESS MODELS, VIZ., OUTSOURCING SERVIC ES FROM OUTSIDE AGENCIES AND RENDERING IN-HOUSE SERVICES, ARE COMPL ETELY DIFFERENT FROM EACH OTHER. SINCE THIS COMPANY IS PROVIDING ITES AF TER OUTSOURCING FROM THIRD PARTIES, THE SAME CANNOT BE CONSIDERED AS COM PARABLE TO THE ASSESSEE COMPANY WHICH IS RENDERING EXCLUSIVELY IN- HOUSE SERVICES. WE THEREFORE, HOLD THAT THIS COMPANY WAS RIGHTLY EXCLU DED BY THE TPO. (IV) R SYSTEMS INTERNATIONAL TRANSACTION LTD. (SEGMENTAL) ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 52 35.1. THE TPO EXCLUDED THIS COMPANY ON THE GROUND OF DIFFERENT YEAR ENDING. THE ASSESSEE IS AGGRIEVED WITH THIS DECIS ION OF THE TPO. 35.2. WHILE DEALING WITH CERTAIN COMPANIES, SUCH AS, CALIBER POINT BUSINESS SOLUTIONS LTD. ETC. UNDER THE INTERNATIONA L TRANSACTION OF `SOFTWARE DEVELOPMENT SERVICES, WE HAVE GIVEN CERT AIN DIRECTIONS TO THE TPO FOR EXAMINING IF THOSE COMPANIES COULD BE C ONSIDERED AS COMPARABLE. SIMILAR DIRECTIONS ARE DIRECTED TO BE A PPLIED TO R SYSTEMS INTERNATIONAL LTD. AS WELL. (V) CALIBER POINTS BUSINESS SOLUTIONS LTD. (OTHER SEGME NT) : 36.1. THIS COMPANY WAS NOT TAKEN AS COMPARABLE B EFORE THE TPO. AS SUCH THERE CAN BE NO QUESTION OF ANY FINDING RETURN ED IN HIS ORDER ON THIS POINT. THE ASSESSEE RAISED OBJECTION BEFORE THE DRP CONTENDING THAT THIS COMPANY (SEGMENT) SHOULD BE CONSIDERED AS COMPARABL E. WITHOUT DISPOSING OFF THE ASSESSEES OBJECTIONS, THE DRP WE NT AHEAD. WE HAVE SEEN THE ANNUAL REPORT OF THIS COMPANY, WHICH ARE A VAILABLE ON PAGE 269 OF THE PAPER BOOK. IT CAN BE SEEN THAT CERTAIN SEGM ENTAL DETAILS ARE AVAILABLE. IN VIEW OF FACT THAT NONE OF THE AUTHORI TIES BELOW HAS ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 53 EXAMINED THE COMPARABILITY OR OTHERWISE OF THIS CO MPANY, WE CONSIDER IT APPROPRIATE TO SEND THIS MATTER BACK TO THE AO/T PO FOR EVALUATING THE ASSESSEES CONTENTION ABOUT THE COMPARABILITY OR OT HERWISE OF THIS COMPANY. 37. WITH THE ABOVE DIRECTIONS, WE SET ASIDE THE I MPUGNED ORDER ON THE QUESTION OF ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT UNDER THE INTERNATIONAL TRANSACTIONS OF RENDERING `SOFTWARE D EVELOPMENT SERVICES AND PROVIDING `ITES AND REMIT THE MATTER TO THE FI LE OF AO/TPO FOR DETERMINING THE ALP OF THESE TWO INTERNATIONAL TRAN SACTIONS AFRESH IN CONFORMITY WITH THE DISCUSSION MADE IN THIS ORDER. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED AN ADEQUATE OPPORTUNITY OF HEARING. 38.1. GROUND NOS. 15 AND 16 ARE AGAINST THE ADDIT ION OF RS. 5,53,05,768/- ON ACCOUNT OF RE-ALLOCATION OF INDIRE CT COSTS AMONGST ELIGIBLE UNITS (SECTION 10A) AND NON ELIGIBLE UNIT ON THE BASIS OF GROSS REVENUE RECEIPTS. THE FACTS APROPOS THESE GROUNDS A RE THAT THE ASSESSEE OPERATED THREE UNITS NAMELY D-4 II UNIT (NON ELIGIB LE), UNIT D-4 UNIT ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 54 (ELIGIBLE) AND BANGLORE UNIT (ELIGIBLE). FROM THE C OMPUTATION OF INCOME FILED BY THE ASSESSEE, THE AO OBSERVED THAT THE ASS ESSEE HAD SHOWN A LOSS OF RS. 3.90 CRORE FROM THE NON-ELIGIBLE UNIT, WHEREAS PROFITS OF RS. 20.76 CRORE AND RS. 5.66 CRORE WERE SHOWN FROM THE ELIGIBLE UNITS. THE WORKING OF SUCH PROFIT/LOSS FROM ELIGIBLE/NON ELIGI BLE UNITS HAS BEEN GIVEN ON PAGE 4 OF THE FINAL ASSESSMENT ORDER. THE DISPUTE IN THE PRESENT APPEAL IS ONLY AGAINST THE ALLOCATION OF `INDIRECT COSTS AMONGST THE THREE UNITS. WHEREAS THE ASSESSEE CLAIMS TO HAVE ALLOCATE D INDIRECT COSTS TOTALING RS. 63.49 CRORE AMONGST THE THREE UNITS IN A RATIONAL MANNER, THE ASSESSING OFFICER APPORTIONED SUCH COSTS ON THE BAS IS OF UNIT-WISE GROSS REVENUE. THAT IS HOW, THE AMOUNT OF INDIRECT COSTS IN THE NON-ELIGIBLE UNIT WAS REDUCED, WHICH LED TO REDUCTION IN THE CLA IM OF DEDUCTION U/S 10A OF THE ACT. THE DRP ALLOWED SOME RELIEF. THE AS SESSEE IS STILL UNSATISFIED. 38.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. ON A PERTINENT QUERY, IT WAS S UBMITTED BY THE LD. AR THAT THE ASSESSEE WAS MAINTAINING SEPARATE ACCOUNTS IN RESPECT OF THREE ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 55 UNITS, RESULTS FROM WHICH WERE CLUBBED FOR DRAWING UP THE FINAL ACCOUNTS OF THE ASSESSEE-COMPANY. ON THE OTHER HAND, LD. DR CONTENDED THAT NO SUCH SEPARATE UNIT-WISE ACCOUNTS WERE MAINTAINED. I T WAS ONLY DURING THE COURSE OF ASSESSMENT PROCEEDING THAT THE ASSESSEE S PLIT UP COMBINED ACCOUNTS IN THREE PARTS AS PER ITS CONVENIENCE AND THAT TOO, ON THE INSTRUCTIONS OF THE AO. WE FIND THAT IF SEPARATE AC COUNTS ARE MAINTAINED THEN THERE CAN BE NO DIFFICULTY IN EXAMINING INDIRE CT COSTS INCURRED IN RESPECT OF SUCH UNITS SEPARATELY. HOWEVER, IF CONSO LIDATED ACCOUNTS ARE MAINTAINED AND ALLOCATION IS MADE THEREAFTER FOR DE TERMINING THE PROFIT/LOSS FROM THREE UNITS SEPARATELY, THEN THE Q UESTION ARISES ABOUT THE BASIS OF APPORTIONMENT OF INDIRECT COSTS AMONGST TH E THREE UNITS. IT PRIMA FACIE APPEARS FROM THE LANGUAGE OF THE ASSESSMENT ORDER T HAT THE ASSESSEE MAINTAINED CONSOLIDATED ACCOUNTS AND APPORTIONMENT OF EXPENSES WAS DONE AT THE INSTANCE OF THE AO ALONE. BE THAT AS IT MAY, WE HAVE TO DECIDE THE BASIS OF ALLOCATION OF INDIRECT EXPENSES , FOR WHICH THE ASSESSEE ALSO CONCEDED TO SOME EXTENT BEFORE THE DR P FOR APPORTIONMENT ON CERTAIN BASIS GIVEN IN THE PAPER B OOK. WE AGREE WITH ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 56 THE LD. AR THAT ALL THE EXPENSES CANNOT BE APPORTIO NED ON THE BASIS OF GROSS RECEIPTS FROM EACH UNIT. THERE ARE CERTAIN EX PENSES WHICH HAVE SEPARATE KEYS FOR ALLOCATIONS. IN SUCH CIRCUMSTANCE S, EACH EXPENDITURE NEEDS TO BE VIEWED FROM THE APPORTIONMENT ANGLE SEP ARATELY AND THERE CANNOT BE A STRAIT JACKET FORMULA FOR APPORTIONING THEM ON THE BASIS OF GROSS REVENUE. UNDER THE GIVEN CIRCUMSTANCES, WE SE T ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO FOR MAKING APPORTIONMENT OF ALL THE INDIRECT COSTS SEPARATELY ON SOME REASONABLE BASIS. IF THE RELEVANT KEYS ARE AVAILABLE FOR SOME EXPENSES, THEN THEY SHOULD BE ALLOCATED ON THE BASIS OF SUCH KEYS. THE REMAINING EXPENSES CAN BE APPORTIONED IN THE RATIO OF GROSS RECEIPTS F ROM THESE THREE UNITS. THE AO IS DIRECTED TO DO IT AFRESH AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN THIS REGARD. 39. THE LAST GROUND IS ABOUT ALLOWING OF FOREIG N TAX CREDIT AMOUNTING TO RS.2,35,708/-. THE ASSESSING OFFICER IS DIRECTED TO EXAMINE THE ASSESSEES CLAIM AND ALLOW RELIEF, IF AVAILABLE, AS PER LAW. ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 57 40. IN THE RESULT THE APPEAL IS PARTLY ALLOWED FO R STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 18. 03.2 016. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 18 TH MARCH, 2016. BINITA COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI. ITA NO.714/DEL/2014 HEADSTRONG SERVICES (INDIA) PVT . LTD. 58 DATE 1. DRAFT DICTATED ON 16.3.2016 2. DRAFT PLACED BEFORE THE AUTHOR 18.3.2016 3. DRAFT PLACED BEFORE THE OTHER MEMBER 4. APPROVED DRAFT COMES TO THE SR.PS/PS 5. FILE SENT TO THE BENCH CLERK 18.3.2016 6. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 7. DATE ON WHICH FILE GOES TO THE AR 8. DATE OF DISPATCH OF ORDER. *