HSBC PROFESSIONAL SERVICES (I) P. LTD, MUMBAI V. DCIT RG 8(2), MUMBAI

ITA 8823/MUM/2011

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 7645 (ITAT-MUMBAI)
• Duration Of Justice: 10 year(s) 8 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-09-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: K
• Assessment Year: 2006-2007
• Appeal Filed On: 28-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Tax effect; Set aside
• Section: 92D; 234B; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “K” MUMBAI BEFORE SHRI ABY T VARKEY (JUDICIAL MEMBER) AND SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) ITA No. 8753/MUM/2011 Assessment Year: 2006-07 JCIT-8(2), (OSD), Room No. 216-A, Aayakar Bhavan, M.K. Road, Mumbai-400020. Vs. M/s HSBC Professional Services (India) Pvt. Ltd., Kamla Bhavan, Swami Nityanand Marg, Andheri (East), Mumbai-400069. PAN No. AABCH 0705 R Appellant Respondent ITA No. 8823/MUM/2011 Assessment Year: 2006-07 HSBC Professional Services (India) Private Limited, 6 th floor, Shiv Building, CTS No. 139 & 140B, Sahar Road, Vile Parle (East), Mumbai-400057. Vs. The Deputy Commissioner of Income-tax Range 8(2), Mumbai. PAN No. AABCH 0705 R Appellant Respondent Assessee by : Mr. Niraj Sheth, AR Revenue by : Mr. V.K. Agarwal, DR Date of Hearing : 01/07/2022 Date of pronouncement : 13/09/2022 PER OM PRAKASH KANT, AM These cross appeals by the been preferred against the order dated 24/10/2011 passed by the Ld. Commissioner of Income ‘the Ld. CIT(A)’] for assessment year 2006 2. The grounds raised by the reproduced as under: 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Transfer Pricing Adjustment of Rs. 1,06,65,264/ without appreciating the facts of the case". 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the benefit of assessee, without appreciating the fact that no standard deduction of 5% to the 92C(2) of the Act". 3. The appellant prays that the order of the Ld. CIT(A) on the above ground be set aside and that of the AO be restored". M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 ORDER KANT, AM These cross appeals by the Revenue and the assessee have been preferred against the order dated 24/10/2011 passed by the Commissioner of Income-tax (Appeals)-15, Mumbai [in short ] for assessment year 2006-07. The grounds raised by the Revenue in its appeal are reproduced as under: "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Transfer Pricing Adjustment of Rs. 1,06,65,264/- made u/s. 92CA(3) of the Act, out appreciating the facts of the case". On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the benefit of -5% relief to the assessee, without appreciating the fact that no standard deduction of 5% to the assessee is envisaged under section 92C(2) of the Act". The appellant prays that the order of the Ld. CIT(A) on the above ground be set aside and that of the AO be restored". Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 2 and the assessee have been preferred against the order dated 24/10/2011 passed by the 15, Mumbai [in short in its appeal are "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Transfer Pricing made u/s. 92CA(3) of the Act, On the facts and in the circumstances of the case and in law, the 5% relief to the assessee, without appreciating the fact that no standard assessee is envisaged under section The appellant prays that the order of the Ld. CIT(A) on the above ground be set aside and that of the AO be restored". 3. The grounds raised by the assessee in its appeal are reproduced as under: 1. The learned Commissioner of Income Mumbai ('CIT partial relief in relation to the transfer pricing adjustment made by Assessing Officer /Transfer pricing officer ('AO/TPO) despite the fact that t disregarded the benchmarking analysis and the resultant comparable companies identified by the Appellant as part of its transfer pricing report (TP Report') maintained on a contemporaneous basis as per Section 92D of the with Rule 10D of the Rules without assigning any cogent reasons thereof. 2. The learned CIT order of the AO/TPO despite the fact that the AO/TPO erred in making transfer pricing adjustment by incorrectly i the provisions of Section 92C(3)(a) of the Act. 3. The learned CIT order of the AO/TPO despite the fact that the AO and the TPO have conducted a fresh benchmarking analysis using (i) inappropriate search fi (iii) functionally dissimilar companies as comparables; and significantly substituting the Appellant's analysis with a standard set of comparables for the Information Technology Enabled Service (ITeS') segment which is Income arbitrary manner and with a pre M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 grounds raised by the assessee in its appeal are reproduced as under: learned Commissioner of Income-tax (Appeals) Mumbai ('CIT-A') erred on facts and in law in allowing only partial relief in relation to the transfer pricing adjustment made by Assessing Officer /Transfer pricing officer ('AO/TPO) despite the fact that the AO and the TPO have incorrectly disregarded the benchmarking analysis and the resultant comparable companies identified by the Appellant as part of its transfer pricing report (TP Report') maintained on a contemporaneous basis as per Section 92D of the with Rule 10D of the Rules without assigning any cogent reasons thereof. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO/TPO erred in making transfer pricing adjustment by incorrectly i the provisions of Section 92C(3)(a) of the Act. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO have conducted a fresh benchmarking analysis using (i) inappropriate search filters; (ii) non contemporaneous data, (iii) functionally dissimilar companies as comparables; and significantly substituting the Appellant's analysis with a standard set of comparables for the Information Technology Enabled Service (ITeS') segment which is adopted by the Income-tax department for assessment year 2006 arbitrary manner and with a pre-determined mind set of Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 3 grounds raised by the assessee in its appeal are tax (Appeals)-15, A') erred on facts and in law in allowing only partial relief in relation to the transfer pricing adjustment made by Assessing Officer /Transfer pricing officer ('AO/TPO) he AO and the TPO have incorrectly disregarded the benchmarking analysis and the resultant comparable companies identified by the Appellant as part of its transfer pricing report (TP Report') maintained on a contemporaneous basis as per Section 92D of the Act read with Rule 10D of the Rules without assigning any cogent A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO/TPO erred in making transfer pricing adjustment by incorrectly invoking A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO have conducted a fresh benchmarking analysis using (i) lters; (ii) non contemporaneous data, (iii) functionally dissimilar companies as comparables; and significantly substituting the Appellant's analysis with a standard set of comparables for the Information Technology adopted by the tax department for assessment year 2006-07 in an determined mind set of making a transfer pricing adjustment. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO the provisions of law and has resulted in selection of companies suffering from quantitative and qualitative dissimilarities. 4. The learned CIT order of the AO/T have rejected the use of data for two preceding financial years (viz. FY 2004 year i.c. 2005 10D(4) of the Rules as elaborat 5. The learned CIT order of the AO/TPO despite the fact that the AO and the TPO have used secret comparable companies by considering companies for which data was not available in public domain at the time of preparation of transfer pricing study report and subsequently invoking the powers given under Section 133(6) of the Act for gathering data not available in the public domain and thereafter using such data for benchmarking international trans undertaken by the TPO under Section 133(6) of the Act is selective and arbitrary and hence should be outrightly rejected. 6. The learned CIT order of the AO/TPO despite the fa have determined the arm's length price based on data which was not available as on the specified date [as defined in Section 921(iv) of the Act read with Rule 10B(4) of the Rules). M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 making a transfer pricing adjustment. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed as the same is contrary to the provisions of law and has resulted in selection of companies suffering from quantitative and qualitative dissimilarities. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and TPO have rejected the use of data for two preceding financial years (viz. FY 2004-05 and FY 2003-04) in addition to the previous year i.c. 2005-06 as permitted under the provisions of Rule 10D(4) of the Rules as elaborated in the TP Report. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO have used secret comparable companies by considering companies for which data was not available in public domain at the time of preparation of transfer pricing study report and subsequently invoking the powers given under Section 133(6) of the Act for gathering data not available in the public domain and thereafter using such data for benchmarking international transactions of the Appellant. The exercise undertaken by the TPO under Section 133(6) of the Act is selective and arbitrary and hence should be outrightly rejected. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO have determined the arm's length price based on data which was not available as on the specified date [as defined in Section 921(iv) of the Act read with Rule 10B(4) of the Rules). Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 4 making a transfer pricing adjustment. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the is liable to be quashed as the same is contrary to the provisions of law and has resulted in selection of companies suffering from quantitative and qualitative A erred on facts and in law in upholding the PO despite the fact that the AO and TPO have rejected the use of data for two preceding financial years 04) in addition to the previous 06 as permitted under the provisions of Rule ed in the TP Report. A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO have used secret comparable companies by considering companies for which data was not available in public domain at the time of preparation of transfer pricing study report and subsequently invoking the powers given under Section 133(6) of the Act for gathering data not available in the public domain and thereafter using such data for benchmarking actions of the Appellant. The exercise undertaken by the TPO under Section 133(6) of the Act is selective and arbitrary and hence should be outrightly A erred on facts and in law in upholding the ct that the AO and the TPO have determined the arm's length price based on data which was not available as on the specified date [as defined in Section 921(iv) of the Act read with Rule 10B(4) of the Rules). 7. The learned CIT order of the AO/TPO despite the fact that the AO and the TPO did not allow any adjustments as warranted under Rule 10B(1)(e)(iii) of the Rules to account for difference between international transactions and the alleged comparable uncontrolled The Appellant prays that the additions to the appellant's income made in relation to transfer pricing matters by the AO/ TPO and upheld by the Hon'ble CIT(A) be deleted. Levy of Interest under Section 234B an 8. On the facts and in the circumstances of the case and in law, the learned AO erred in levying interest under section 234B and 234C of the Act. The Appellant prays that the AO be directed to delete the interest under the Act. 4. At the outset, we may like to mention that the then Officer of the case vide Departmental Representative of the tax effect involved being below the limit prescribed by the Central Board of Direct Taxes(CBDT) The said intimation duly forwarded by the concerned Range i.e. Additional Commissioner of Income Ld. Departmental Representative M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO did not allow any adjustments as warranted under Rule 10B(1)(e)(iii) of the Rules to account for difference between international transactions and the alleged comparable uncontrolled transactions selected by the learned AO/TPO. The Appellant prays that the additions to the appellant's income made in relation to transfer pricing matters by the AO/ TPO and upheld by the Hon'ble CIT(A) be deleted. Levy of Interest under Section 234B and 234C of the Act On the facts and in the circumstances of the case and in law, the learned AO erred in levying interest under section 234B and 234C of the Act. The Appellant prays that the AO be directed to delete the interest under the Act. set, we may like to mention that the then vide letter dated 08/02/2021 intimated Departmental Representative for withdrawal of the appeal in view of the tax effect involved being below the limit prescribed by the al Board of Direct Taxes(CBDT) vide Circular The said intimation duly forwarded by the concerned Range i.e. Additional Commissioner of Income-tax, is placed on record. The Departmental Representative also agreed that tax effect Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 5 pholding the order of the AO/TPO despite the fact that the AO and the TPO did not allow any adjustments as warranted under Rule 10B(1)(e)(iii) of the Rules to account for difference between international transactions and the alleged comparable transactions selected by the learned AO/TPO. The Appellant prays that the additions to the appellant's income made in relation to transfer pricing matters by the AO/ TPO and upheld by the Hon'ble CIT(A) be deleted. d 234C of the Act On the facts and in the circumstances of the case and in law, the learned AO erred in levying interest under section 234B and 234C of the Act. The Appellant prays that the AO be set, we may like to mention that the then Assessing letter dated 08/02/2021 intimated to the for withdrawal of the appeal in view of the tax effect involved being below the limit prescribed by the Circular No. 17 of 2019. The said intimation duly forwarded by the concerned Range Officer tax, is placed on record. The agreed that tax effect involved in ground raised by the CBDT. In view of petition of the withdrawing the appeal, the appeal of the withdrawn. 5. As far as appeal of the assessee is co counsel of the assessee only challenged inclusion/exclusion of certain comparables in the final list of the comparables sustained by the Ld. CIT(A). The assessee has also filed additional ground of appeal challenging the AO/TPO, which is reproduced as under: 9. The Ld. CIT(A) erred on the facts in upholding the order of the AO/TPO in rejecting functionally comparable companies selected by the Appellant in its transfer pricing report. 6. We have heard parties on the issue of admissibility of the additional ground. In view of settled principle laid down by the Hon’ble Supreme Court in the case of (SC), the additional ground raised by the assessee is admitted as M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 ground raised by the Revenue is below the limit prescribed by the T. In view of petition of the Ld. Assessing Officer withdrawing the appeal, the appeal of the Revenue As far as appeal of the assessee is concerned, before us the of the assessee only challenged inclusion/exclusion of certain comparables in the final list of the comparables sustained by The assessee has also filed additional ground of appeal challenging the rejection of certain comparables by the AO/TPO, which is reproduced as under: The Ld. CIT(A) erred on the facts in upholding the order of the AO/TPO in rejecting functionally comparable companies selected by the Appellant in its transfer pricing report. have heard parties on the issue of admissibility of the additional ground. In view of settled principle laid down by the Hon’ble Supreme Court in the case of CIT Vs NTPC , the additional ground raised by the assessee is admitted as Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 6 is below the limit prescribed by the Assessing Officer for Revenue is dismissed as ncerned, before us the Ld. of the assessee only challenged inclusion/exclusion of certain comparables in the final list of the comparables sustained by The assessee has also filed additional ground of rejection of certain comparables by the The Ld. CIT(A) erred on the facts in upholding the order of the AO/TPO in rejecting functionally comparable companies selected by the Appellant in its transfer pricing report. have heard parties on the issue of admissibility of the additional ground. In view of settled principle laid down by the CIT Vs NTPC 229 ITR 383 , the additional ground raised by the assessee is admitted as issues involved being of legal nature and facts is required. 7. The brief facts relevant for the dispute are that the assessee company M/s HSBC Services (India) Private Limited is incorpora the shareholding is held by HSBC holdings BV balance two percent is held by Hong Kong and Shanghai banking Corp Ltd., India. The assessee company is engaged in providing personals to various entities of the HSBC gro services. 7.1 For the year under consideration, the assessee filed its return of income on 17/11/2006 declaring total income of The return of income filed by the assessee was selected for scrutiny assessment any statutory notices under the short ‘the Act’) were issued and complied with. In view of international transactions carried out by the assesse M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 being of legal nature and no investigation of fresh The brief facts relevant for the adjudication the assessee company M/s HSBC (India) Private Limited is incorporated in India and 98% of ing is held by HSBC holdings BV, Netherlands and balance two percent is held by Hong Kong and Shanghai banking , India. The assessee company is engaged in providing personals to various entities of the HSBC group for conducting audit For the year under consideration, the assessee filed its return of income on 17/11/2006 declaring total income of The return of income filed by the assessee was selected for scrutiny assessment any statutory notices under the Income-tax ) were issued and complied with. In view of international transactions carried out by the assesse Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 7 no investigation of fresh of the issue in the assessee company M/s HSBC Professional ted in India and 98% of Netherlands and balance two percent is held by Hong Kong and Shanghai banking , India. The assessee company is engaged in providing up for conducting audit For the year under consideration, the assessee filed its return of income on 17/11/2006 declaring total income of ₹1,02,39,397/-. The return of income filed by the assessee was selected for scrutiny tax Act, 1961 (in ) were issued and complied with. In view of international transactions carried out by the assessee with its Associated Enterprises of determination of arm transactions to the Ld. the transfer pricing noticed certain international transaction assessee, which are reproduced in para 4 of his order dated 21/10/2009. For ready reference, summary of said international transactions is extracted as under: Sr. No. Nature of Transaction 1. Provision of support services to Associated Enterprises 2. Interest paid on Overdraft facilities 3. Interest paid on unsecured loans 4. Payment of Rent and 5. Payment on account of secondee salaried and other costs 6. Payment in respect of car provided to employee 7. Payment in respect of human resource cost shared 8. Payment in respect of accommodation provided to the Employee & Depreciation of Furniture provided 7.2 The Ld. TPO further noted in para five of his order that the assessee in its transfer pricing study selected Transac M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 Associated Enterprises, the Ld. Assessing Officer referred the matter of determination of arm’s length price of the international Ld. Transfer Pricing Officer (TPO). the transfer pricing study submitted by the assessee international transactions carried out by the , which are reproduced in para 4 of his order dated 21/10/2009. For ready reference, summary of said international transactions is extracted as under: of Transaction Amount (₹) Provision of support services to Associated Enterprises 9,44,70,575/- Interest paid on Overdraft facilities 1,38,522/- Interest paid on unsecured loans 19,56,644/- Payment of Rent and Utility charges 33,40,152/- Payment on account of secondee salaried and other costs 82,90,036/- Payment in respect of car provided to 1,87,340/- Payment in respect of human resource 7,18,141/- Payment in respect of accommodation provided to the Employee & Depreciation of Furniture provided 24,31,141/- 11,15,33,344/- TPO further noted in para five of his order that the assessee in its transfer pricing study selected Transac Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 8 referred the matter s length price of the international (TPO). On perusal of ssessee, the Ld. TPO s carried out by the , which are reproduced in para 4 of his order dated 21/10/2009. For ready reference, summary of said international Method used TNMM CUP CUP TNMM TNMM TNMM TNMM TNMM TPO further noted in para five of his order that the assessee in its transfer pricing study selected Transactional Net Margin Method (TNMM) a benchmarking international transactions. The admission of the assessee that companies were identified in search of the “capitaline” database, which rendered services identical to that of the assessee and therefore the assessee broadened its search criteria so as to include companies that are engaged in processing jobs [i.e. Information Technology Outsourcing services and risk profile of the assessee. The assessee selected 11 companies as comparables and profit level indicator ( 11.45%. The list of comparables selected by the assessee has been reproduced by the Ld. TPO in para five of his order reference, the said list of comparables is extracted as under : Sl. No. 1. Ask Me Info Ltd. M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 (TNMM) as the most appropriate method benchmarking international transactions. The Ld. TPO has noted the admission of the assessee that no independent comparable companies were identified in search of the database, which rendered services identical to that of the assessee and therefore the assessee broadened its search criteria so as to include companies that are engaged in processing Information Technology (IT) enabled/Business Process services (BPO)] as broadly comparable to the functions and risk profile of the assessee. The assessee selected 11 companies as comparables and arithmetic mean of their weighted aver profit level indicator (operating profit/total cost) was The list of comparables selected by the assessee has been Ld. TPO in para five of his order list of comparables is extracted as under : Name of the Company Info Ltd. Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 9 s the most appropriate method for TPO has noted the independent comparable companies were identified in search of the “Prowess” and database, which rendered services identical to that of the assessee and therefore the assessee broadened its search criteria so as to include companies that are engaged in processing Business Process (BPO)] as broadly comparable to the functions and risk profile of the assessee. The assessee selected 11 companies mean of their weighted average of cost) was worked out to The list of comparables selected by the assessee has been Ld. TPO in para five of his order. For ready list of comparables is extracted as under : Wtd. Avg. -1.10 2. MCS Ltd. 3. CMC Ltd. 4. C.S. Software Enterprise Ltd. 5. Ace Software Enterprises Ltd. 6. Mhasis BFL Ltd. 7. Tata Share Registry Ltd. 8. HCL Technologies 9. Allsec Technologies Ltd. 10. Spanco Telesystems and Solutions Ltd. 11. Datamatics Technologies Ltd. 7.3 It was submitted by the assessee before the years weighted average of PLI arithmetic mean of the PLI of the comparables, the international transactions carried out by the assessee were at arm’s length. 7.4 The Ld. TPO accepted search carried for ITes industry benchmarking the international transactions of the assessee rejected the weighted average of multiple year data adopted by the assessee for working out profit level indicator. The the current year data for computing profit level indicator of the assessee as well as the comparable companies. The applied filters of export turnover more than 25% and related party transactions (RPT) less than 25% for selecting comparables engaged M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 C.S. Software Enterprise Ltd. Ace Software Enterprises Ltd. Mhasis BFL Ltd. Tata Share Registry Ltd. HCL Technologies Allsec Technologies Ltd. Telesystems and Solutions Ltd. Datamatics Technologies Ltd. Arithmetic Mean It was submitted by the assessee before the Ld. years weighted average of PLI of assessee being more than the mean of the PLI of the comparables, the international transactions carried out by the assessee were at arm’s length. accepted search carried for ITes industry benchmarking the international transactions of the assessee rejected the weighted average of multiple year data adopted by the assessee for working out profit level indicator. The Ld. the current year data for computing profit level indicator of the assessee as well as the comparable companies. The applied filters of export turnover more than 25% and related party transactions (RPT) less than 25% for selecting comparables engaged Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 10 6.00 6.37 11.15 11.93 12.36 13.02 13.06 13.45 19.73 19.97 11.45 Ld. TPO that three being more than the mean of the PLI of the comparables, the international transactions carried out by the assessee were at arm’s length. accepted search carried for ITes industry for benchmarking the international transactions of the assessee but he rejected the weighted average of multiple year data adopted by the Ld. TPO applied the current year data for computing profit level indicator of the assessee as well as the comparable companies. The Ld. TPO also applied filters of export turnover more than 25% and related party transactions (RPT) less than 25% for selecting comparables engaged in the ITes/BPO industry. Accordingly, the three comparables Technologies Ltd.’, ‘Ace software exports Systems and solutions Ltd of the database(s) and came out with a fresh list of comparables. After considering objections of the assessee, the final list of comparables and worked out to 24%. The list of the comparables assessee and remarks of the TPO, reproduced in para 5.6.2 of the TPO, is extracted as under: Sl. No. Company Name 1. Ace Software Exports Ltd. 2. Allsec Technologies Ltd. 3. Apex Knowledge Solutions Pvt. Ltd. 4. Asit C Mehta Financial Services Ltd. (Earlier known as Nucleus Netsoft & GIS (India) Ltd) 5. Cosmic Global Ltd (Seg) M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 in the ITes/BPO industry. Accordingly, the Ld. TPO accepted only chosen by the assessee namely Ace software exports’ and ‘Spanco and solutions Ltd’. The Ld. TPO himself carried out and came out with a fresh list of comparables. After considering objections of the assessee, the Ld. final list of comparables and arithmetic mean of . The list of the comparables, objection of the assessee and remarks of the TPO, reproduced in para 5.6.2 of the TPO, is extracted as under: Name Objection Ace Software Exports Ltd. Accepted Allsec Technologies Ltd. Accepted Apex Knowledge Solutions Pvt. Ltd. It is into software development In response to notice u/s 133(6), the company categorically stated that they are into IT enabled services. It also qualifies all the filters applied the TPO. The same is considered as a comparable. ial Services Ltd. Nucleus Netsoft Annual report uses word ITES and software development, therefore not acceptable It is mainly engaged in ITES, software may be a minor part, for this reason only the main segment is named as ITES by the company in its Ann Cosmic Global Ltd (Seg) It is functionally different with predominantly in Notice u/s 133(6) was issued. As per the Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 11 TPO accepted only chosen by the assessee namely ‘Allsec Spanco Telemetry TPO himself carried out search and came out with a fresh list of comparables. Ld. TPO made a of their PLI was , objection of the assessee and remarks of the TPO, reproduced in para 5.6.2 of the Ld. Remark In response to notice u/s 133(6), the company categorically stated that they are into IT enabled services. It also qualifies all the filters applied the TPO. The same is considered as a comparable. It is mainly engaged in ITES, software may be a minor part, for this reason only the main segment is named as ITES by the company in its Annual Report. Notice u/s 133(6) was issued. As per the 6. Datamatics Financial Services Ltd (Seg) 7. Flextronics Software Systems Ltd (Seg) 8. Goldstone Infratch Ltd (Seg) (Earlier known as Goldstone Teleservices Ltd) 9. Maple eSolutions Ltd 10. R Systems International Ltd. 11. Spanco Ltd. (Seg.) (Earlier known as Spanco Telesystems & solutions Ltd.) 12. Transworkss Information Services Ltd. M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 transcription Information submitted by the company, it is into IT enabled services and qualifies all the filters applied by t the company is considered as a comparable. Only segmental data is considered. More importantly it is a part of the same industry with similar functions assets and risks. Datamatics Financial Services Ltd Annual Report is available for notice was issued to subenit segmental details. In response, the company submitted segmental financials of ITES segment. The ITES segment qualifies all the filters applied by the TPO. Thus the ITES segment of the company is considere Flextronics Software Systems Ltd It provides a variety services, no segmental data available Based on the segmental information submitted by the company response to notice u/s 133(6) the company has an ITES segment and this qualifies all the filters applied by the TPO. Goldstone Infratch Ltd (Seg) (Earlier known as Goldstone Income includes sale of software and runs a call centre Sale of software is only for ₹9000/ assets and risks in call centre are akin to any other ITES service, therefore, comparable. R Systems International Ltd. It has related party transactions, therefore controlled Since the related party transactions are only 9.2%, the uncontrolled Spanco Ltd. (Seg.) (Earlier known as Spanco Telesystems & solutions Accepted Transworkss Information Services Company is inot providing CRM/KPO/Marketing? IT It is a subsidiary of Aditya Birla Nuvo Ltd. Now known Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 12 Information submitted by the company, it is into IT enabled services and qualifies all the filters applied by the TPO. Thus the company is considered as a comparable. Only segmental data is considered. More importantly it is a part of the same industry with similar functions assets and risks. Annual Report is available the FY 2005-06 133(6) notice was issued to subenit segmental details. In response, the company submitted segmental financials of ITES segment. The ITES segment qualifies all the filters applied by the TPO. Thus the ITES segment of the company is considered as a comparable Based on the segmental information submitted by the company response to notice u/s 133(6) the company has an ITES segment and this segment qualifies all the filters applied by the TPO. Sale of software is only for 9000/-. The functions, assets and risks in call centre are akin to any other ITES service, therefore, comparable. Since the related party transactions are only 9.2%, the comparable is uncontrolled It is a subsidiary of Aditya Birla Nuvo Ltd. Now known 13. Vishal Information Technologies Ltd 7.5 The Ld. TPO rejected the contention of the assessee for providing working capital adjustment as well as risk adjustment in absence of any quantifiable data provided by the a 7.6 The Ld. TPO vide adjustment of ₹1,06,65, 5.8 Determination of Arms Length Price: Total Cost incurred by assessee on providing Office Services (In absence of separate accounts (₹9,64,87,892/-/107507875*94470575) Mark Up as per comparables Transaction Price Adjustment 8. The Ld. Assessing Officer assessee proposing the addition for transfer pricing adjustment of M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 solutions services, as per web-site as Aditya Birla Minac Worldwide Limited. 133(6) notice was issued. As per the information submitted by the company, it qualifies all the filters applied by the TPO including RPT filter (241% of the rev Thus it is considered as a comparable. The illustrations given by assessee are part of ITES only. Vishal Information Technologies It has related party transactions, therefore uncontrolled In response to letter issued u/s 133/6), the has stated that it did have any transaction with any associated enterprise TPO rejected the contention of the assessee for providing working capital adjustment as well as risk adjustment in absence of any quantifiable data provided by the assessee. vide his order dated 21/10/2009 1,06,65,264/-as under: Determination of Arms Length Price: Total Cost incurred by assessee on providing Office Services (In absence of separate accounts (proportionate cost being taken) /107507875*94470575) ₹ Mark Up as per comparables 10,51,35,839/ ₹ ₹ Assessing Officer issued draft assessment order to the assessee proposing the addition for transfer pricing adjustment of Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 13 as Aditya Birla Minac Worldwide Limited. 133(6) notice was issued. As per the information submitted by the company, it qualifies all the filters applied by the TPO including RPT filter (241% of the revenues). Thus it is considered as a comparable. The illustrations given by assessee are part of ITES only. In response to letter issued u/s 133/6), the company as stated that it did not have any transaction with any associated enterprise TPO rejected the contention of the assessee for providing working capital adjustment as well as risk adjustment in ssessee. his order dated 21/10/2009 computed the ₹8,47,86,967/- 10,51,35,839/- ₹9,44,70,575/- ₹1,06,65,264/- issued draft assessment order to the assessee proposing the addition for transfer pricing adjustment of ₹1,06,65,264/-, against which the assessee did not chose to object before the Ld. Dispute Resolution Panel (DRP), and therefore after expiry of period prescribed for objecting before the Ld DRP i.e. one month, the Assessing Officer 26/02/2010 making t 9. Against the order of the preferred appeal before the Ld. CIT(A) and raised various grounds challenging the order of the of comparables, is concerned the Ld. CIT(A) after considering the submission of the assessee, partly al and sustained following comparables having arithmetic mean at 22.32%. The list of comparables sustained by the Ld CIT(A) is as under: Sr. No. Name of the Comparable Company 1. Ace Software Exports 2. Mphasis BFL Ltd 3. Allsec Technologies Limited 4. Spanco Telesystems and Solutions Limited(seg) 5. Datamatics Financial sevices Limited(seg) 6. Asit C Mehta Financial services(Nucleus Netsoft and Gis(India) M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 , against which the assessee did not chose to object Dispute Resolution Panel (DRP), and therefore after prescribed for objecting before the Ld DRP i.e. one Assessing Officer passed final assessment order on making transfer pricing addition of ₹1,06, Against the order of the Ld. Assessing Officer preferred appeal before the Ld. CIT(A) and raised various grounds challenging the order of the Ld. Assessing Officer. As far as selection , is concerned the Ld. CIT(A) after considering the submission of the assessee, partly allowed the appeal of the assessee and sustained following comparables having arithmetic mean %. The list of comparables sustained by the Ld CIT(A) is as Name of the Comparable Company Ace Software Exports Limited Mphasis BFL Ltd Allsec Technologies Limited Spanco Telesystems and Solutions Limited(seg) Datamatics Financial sevices Limited(seg) Asit C Mehta Financial services(Nucleus Netsoft and Gis(India) Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 14 , against which the assessee did not chose to object Dispute Resolution Panel (DRP), and therefore after prescribed for objecting before the Ld DRP i.e. one passed final assessment order on 1,06,65, 264/-. Assessing Officer, the assessee preferred appeal before the Ld. CIT(A) and raised various grounds . As far as selection , is concerned the Ld. CIT(A) after considering the lowed the appeal of the assessee and sustained following comparables having arithmetic mean of PLI %. The list of comparables sustained by the Ld CIT(A) is as Single year margin 7.72 10.53 28.51 20.86 24.99 22.62 Limited) 7. Cosmic Global Limited (seg) 8. Flextronics Software Systems Limited(seg) 9. Goldstone Infratech Limited(seg) 10. Maple eSolutions Ltd 11. R Systems International Limited 12. Transworks Information Services Limited 13. Vishal Information Technologies Limited Arithmetical Mean 10. The assessee before us has challenged exclusion of comparables retained comparables, which was 11. Before us the assessee has filed containing pages 1 to 1107. 12. We have heard rival submission of the parties on the issue of exclusion/inclusion length price of the international transa most appropriate method as Transactional Net Margin Method (TNMM), there is no dispute between the parties. Under the TNMM, for comparison of the assessee with the comparable compani functions carried out, asse M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 Cosmic Global Limited (seg) Flextronics Software Systems Limited(seg) Goldstone Infratech Limited(seg) Maple eSolutions Ltd R Systems International Limited Transworks Information Services Limited Information Technologies Limited Arithmetical Mean The assessee before us has challenged exclusion of retained by the Ld. CIT(A) and inclusion of was rejected by the ld. TPO. Before us the assessee has filed a paperbook in two volumes 1 to 1107. We have heard rival submission of the parties on the issue of exclusion/inclusion of comparables for determination of arms length price of the international transactions. As far as selection of most appropriate method as Transactional Net Margin Method (TNMM), there is no dispute between the parties. Under the TNMM, for comparison of the assessee with the comparable compani functions carried out, assets deployed and risk assumed Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 15 16.03 14.54 29.01 32.66 15.11 19.56 48.03 22.32 The assessee before us has challenged exclusion of 7 and inclusion of one paperbook in two volumes We have heard rival submission of the parties on the issue of of comparables for determination of arms ctions. As far as selection of most appropriate method as Transactional Net Margin Method (TNMM), there is no dispute between the parties. Under the TNMM, for comparison of the assessee with the comparable companies, assumed (FAR) by the assessee are to be compared with the FAR analysis of the comparable companies. adjudication of exclusion/inclusion to refer the FAR analysis of the assessee comp 13 to 16 of the paperbook, which is reproduced as under “4. Functional Analysis 4.1 Functions Performed HPSI is responsible for providing appropriately skilled professionals to the Contracting Entity so as to enable the Contracting out its auditing activity. There are various departments within HSBC, which conduct internal audits relating to inter alia Retail, Credit, General, Investment Bank, Insurance, Treasury, Securities, Private Banking, Management Office and IT HPSI has to recruit professionals possessing the requisite academic qualifications and appropriate skill portion of the global needs for audit personnel can be sourced from India, as staffing cost in India trained and educated human resource pool. The current organization structure of HPSI is as follows: The employees recruited by HPSI are thoroughly screened in India and subsequently experts from London/ Hong Kong are invited to interview them on technical aspects. The training of the recruited personnel is M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 the assessee are to be compared with the FAR analysis of the comparable companies. Therefore, before we embark upon exclusion/inclusion of comparables, it is necessary to refer the FAR analysis of the assessee company, available on page 13 to 16 of the paperbook, which is reproduced as under Functional Analysis Functions Performed HPSI is responsible for providing appropriately skilled professionals to the Contracting Entity so as to enable the Contracting Entity to carry out its auditing activity. There are various departments within HSBC, which conduct internal audits relating to inter alia Retail, Credit, General, Investment Bank, Insurance, Treasury, Securities, Private Banking, Management Office and IT systems/projects. HPSI has to recruit professionals possessing the requisite academic qualifications and appropriate skill-sets. HPSI believes that a large portion of the global needs for audit personnel can be sourced from India, as staffing cost in India are lower and due to the availability of trained and educated human resource pool. The current organization structure of HPSI is as follows: The employees recruited by HPSI are thoroughly screened in India and subsequently experts from London/ Hong Kong are invited to interview them on technical aspects. The training of the recruited personnel is Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 16 the assessee are to be compared with the FAR analysis of the Therefore, before we embark upon , it is necessary any, available on page 13 to 16 of the paperbook, which is reproduced as under: HPSI is responsible for providing appropriately skilled professionals to Entity to carry out its auditing activity. There are various departments within HSBC, which conduct internal audits relating to inter alia Retail, Credit, General, Investment Bank, Insurance, Treasury, Securities, Private HPSI has to recruit professionals possessing the requisite academic sets. HPSI believes that a large portion of the global needs for audit personnel can be sourced from are lower and due to the availability of trained and educated human resource pool. The current organization The employees recruited by HPSI are thoroughly screened in India and subsequently experts from London/ Hong Kong are invited to interview them on technical aspects. The training of the recruited personnel is conducted by the Contracting Entity in London / maybe. The professionals assigned by HPSI are required to follow the operational procedures and service levels as required by the Contracting Entity. The professionals require being familiar with the guidelines provided by the HSBC Gr expected to be able to pick up and adhere to other pertinent guidelines issued by the Contracting Entity. The professionals provided by HPSI are expected to:  Assist in creation of audit planning memoranda in acc the schedule of work, turnaround times and reporting formats prescribed by the Contracting Entity.  Assist in conducting audit reviews of auditable entities as prescribed by the Contracting Entity, which inter - the adequacy of the system of internal controls and the operation / susceptibility of the environment to frauds or failures in internal controls; - the effectiveness of workflow procedures to ensure the most efficient use of resources; - the degree of compliance wit policies, procedures and - the degree of reliability and integrity of financial reporting; - the adequacy and effectiveness of the security and integrity of the IT systems; the management and control of the IT functions/departments, projects and installations; - the effectiveness of the controls over the protection of assets; and the effectiveness of management. M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 conducted by the Contracting Entity in London / Hong Kong as the case The professionals assigned by HPSI are required to follow the operational procedures and service levels as required by the Contracting Entity. The professionals require being familiar with the guidelines provided by the HSBC Group Audit Standards Manual in force, and are expected to be able to pick up and adhere to other pertinent guidelines issued by the Contracting Entity. The professionals provided by HPSI are Assist in creation of audit planning memoranda in acc the schedule of work, turnaround times and reporting formats prescribed by the Contracting Entity. Assist in conducting audit reviews of auditable entities as prescribed by the Contracting Entity, which inter-alia involves evaluating: quacy of the system of internal controls and the operation / susceptibility of the environment to frauds or failures in internal the effectiveness of workflow procedures to ensure the most efficient use of resources; the degree of compliance with internal, regulatory and statutory policies, procedures and requirements; the degree of reliability and integrity of financial reporting; the adequacy and effectiveness of the security and integrity of the IT systems; the management and control of the IT functions/departments, projects and installations; the effectiveness of the controls over the protection of assets; and the effectiveness of management. Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 17 Hong Kong as the case The professionals assigned by HPSI are required to follow the operational procedures and service levels as required by the Contracting Entity. The professionals require being familiar with the guidelines oup Audit Standards Manual in force, and are expected to be able to pick up and adhere to other pertinent guidelines issued by the Contracting Entity. The professionals provided by HPSI are Assist in creation of audit planning memoranda in accordance with the schedule of work, turnaround times and reporting formats Assist in conducting audit reviews of auditable entities as prescribed alia involves evaluating: quacy of the system of internal controls and the operation / susceptibility of the environment to frauds or failures in internal the effectiveness of workflow procedures to ensure the most efficient h internal, regulatory and statutory the degree of reliability and integrity of financial reporting; the adequacy and effectiveness of the security and integrity of the IT systems; the management and control of the IT the effectiveness of the controls over the protection of assets; and the  Assist in reporting audit findings in the format prescribed by the Contracting Entity. Significant in recommendations for strengthening key controls / increasing operational efficiency are examples of key findings that are reported. While on assignment they perform services such as reviewing the existing operations of the Cont writing of the audit report, by completing the report for the sections that have been assigned to them. A typical overseas audit schedule for an auditor at HPSI would involve two weeks of onsite auditing and one week o work) at the HPSI office. Due to the specialisation aspect, an auditor would normally work for the same Contracting Entity all the time, although an auditor may be requested to assist an alternate Contracting Entity in case of manpower shortages. 4.1.1 HPSI avails of certain overdraft and loan facilities from the Bank. We understand that the Bank offers these facilities at terms and conditions similar to those offered to independent third par The Bank has seconded certain employees to HPSI. These employees remain on the payroll of the Bank and are accordingly paid salaries by the Bank. Such payroll cost is cross the Bank to HPSI on a pure cost basis. HPSI has been allocated off space by the Bank. The Bank recovers share of rent cost/security deposit from HPSI. 4.2 Risks Assumed M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 Assist in reporting audit findings in the format prescribed by the Contracting Entity. Significant internal control weaknesses and recommendations for strengthening key controls / increasing operational efficiency are examples of key findings that are reported. While on assignment they perform services such as reviewing the existing operations of the Contracting Entities and assisting in the writing of the audit report, by completing the report for the sections that have been assigned to them. A typical overseas audit schedule for an auditor at HPSI would involve two weeks of onsite auditing and one week of compilation of findings/report writing (offsite work) at the HPSI office. Due to the specialisation aspect, an auditor would normally work for the same Contracting Entity all the time, although an auditor may be requested to assist an alternate ng Entity in case of manpower shortages. Other functions HPSI avails of certain overdraft and loan facilities from the Bank. We understand that the Bank offers these facilities at terms and conditions similar to those offered to independent third par The Bank has seconded certain employees to HPSI. These employees remain on the payroll of the Bank and are accordingly paid salaries by the Bank. Such payroll cost is cross-charged by the Bank to HPSI on a pure cost basis. HPSI has been allocated off space by the Bank. The Bank recovers share of rent cost/security deposit from HPSI. 4.2 Risks Assumed Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 18 Assist in reporting audit findings in the format prescribed by the ternal control weaknesses and recommendations for strengthening key controls / increasing operational efficiency are examples of key findings that are reported. While on assignment they perform services such as reviewing the racting Entities and assisting in the writing of the audit report, by completing the report for the sections that have been assigned to them. A typical overseas audit schedule for an auditor at HPSI would involve two weeks of onsite auditing f compilation of findings/report writing (offsite work) at the HPSI office. Due to the specialisation aspect, an auditor would normally work for the same Contracting Entity all the time, although an auditor may be requested to assist an alternate HPSI avails of certain overdraft and loan facilities from the Bank. We understand that the Bank offers these facilities at terms and conditions similar to those offered to independent third parties. The Bank has seconded certain employees to HPSI. These employees remain on the payroll of the Bank and are accordingly paid salaries the Bank to HPSI on a pure cost basis. HPSI has been allocated office space by the Bank. The Bank recovers share of rent cost/security 4.2.1 Contract risk The professionals deputed by HPSI work under the control and guidance of the Contracting Entity and therefore HPSI does not undertake any contract risk in respect of the timing/quality of work undertaken by the professionals. 4.2.2 Market risk HPSI does not undertake any market risk since it is a captive provider of professionals to the HSBC Group and does not service any external party. Further HPSI is assured a cost plus mark accordingly does not face any uncertainty as regards revenues. 4.2.3 Currency risk HPSI calculates the billing amounts in local currency but prepares the invoices in US Dollars or the local Entity. Any surplus/shortfall in the payment of the invoice upon conversion to INR is adjusted in the next invoice. Accordingly the Contracting Entity undertakes currency risk on account of unfavorable fluctuation of the Indian relevant local currency of the Contracting Entity, from the date of the invoice to the payment date. 4.2.4 Attrition risk Retention of adequate personnel possessing appropriate skill important for HPSI. Employee attr provide adequate auditing resources to Contracting entities and is M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 4.2.1 Contract risk The professionals deputed by HPSI work under the control and guidance of the Contracting Entity and therefore HPSI does not undertake any contract risk in respect of the timing/quality of work undertaken by the professionals. 4.2.2 Market risk HPSI does not undertake any market risk since it is a captive provider of professionals to the HSBC Group and does not service any nal party. Further HPSI is assured a cost plus mark accordingly does not face any uncertainty as regards revenues. Currency risk HPSI calculates the billing amounts in local currency but prepares the invoices in US Dollars or the local currency of the Contracting Entity. Any surplus/shortfall in the payment of the invoice upon conversion to INR is adjusted in the next invoice. Accordingly the Contracting Entity undertakes currency risk on account of unfavorable fluctuation of the Indian rupee vis-à-vis the US Dollar / relevant local currency of the Contracting Entity, from the date of the invoice to the payment date. Attrition risk Retention of adequate personnel possessing appropriate skill important for HPSI. Employee attrition can impair HPSI's ability to provide adequate auditing resources to Contracting entities and is Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 19 The professionals deputed by HPSI work under the control and guidance of the Contracting Entity and therefore HPSI does not undertake any contract risk in respect of the timing/quality of work HPSI does not undertake any market risk since it is a captive provider of professionals to the HSBC Group and does not service any nal party. Further HPSI is assured a cost plus mark-up and accordingly does not face any uncertainty as regards revenues. HPSI calculates the billing amounts in local currency but prepares currency of the Contracting Entity. Any surplus/shortfall in the payment of the invoice upon conversion to INR is adjusted in the next invoice. Accordingly the Contracting Entity undertakes currency risk on account of vis the US Dollar / relevant local currency of the Contracting Entity, from the date of Retention of adequate personnel possessing appropriate skill-sets is ition can impair HPSI's ability to provide adequate auditing resources to Contracting entities and is therefore a risk faced by HPSI. However, recruitment of suitably skilled individuals has not been an issue to date. 4.2.5 Credit risk Since HPSI deals ex does not undertake significant credit risk. 4.2.6 Idle time risk HPSI is remunerated on a cost plus basis over total costs and the Contracting Entities are billed for the full amount of the costs. Accordingly t 13. On perusal of the above functional analysis, we find that assessee is engaged in recruiting personals in India on the basis of their academic qualifications and skill sets for the work of audit in various fields of finance, management, information technology et for Associated Enterprises being further screened and trained by respective entity who is using the services. These auditors perform services of reviewing the existing operations of the contracting entities and assist them in writing audit report. These auditors would do on M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 therefore a risk faced by HPSI. However, recruitment of suitably skilled individuals has not been an issue to date. 4.2.5 Credit risk Since HPSI deals exclusively with the HSBC Group and accordingly does not undertake significant credit risk. 4.2.6 Idle time risk HPSI is remunerated on a cost plus basis over total costs and the Contracting Entities are billed for the full amount of the costs. Accordingly the Contracting Entities undertake idle time risks. perusal of the above functional analysis, we find that assessee is engaged in recruiting personals in India on the basis of their academic qualifications and skill sets for the work of audit in ious fields of finance, management, information technology et Associated Enterprises. The auditors selected by the assessee are being further screened and trained by respective entity who is using the services. These auditors perform services of reviewing the existing operations of the contracting entities and assist them in report. These auditors would do on-site Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 20 therefore a risk faced by HPSI. However, recruitment of suitably clusively with the HSBC Group and accordingly HPSI is remunerated on a cost plus basis over total costs and the Contracting Entities are billed for the full amount of the costs. he Contracting Entities undertake idle time risks.” perusal of the above functional analysis, we find that assessee is engaged in recruiting personals in India on the basis of their academic qualifications and skill sets for the work of audit in ious fields of finance, management, information technology etc. . The auditors selected by the assessee are being further screened and trained by respective entity who is using the services. These auditors perform services of reviewing the existing operations of the contracting entities and assist them in site auditing (at the place of the contracting entity) a (off-site work) at the office of the assessee 14. The assessee has entered into agreement for provision of audit services with Assoc agreement with Associated Enterprise processing (Guangong) Limited (HDPG), is placed on pag 127 of the paperbook. The range of professional audit services rendered by the assessee of PB) along with Schedule paperbook. The details of said services is reproduced as under: “2. Services 2.1 HPSI will be responsible for providing sufficient auditors to enable the adequate execution of the Services. The range of professional audit services ("Services") rendered by HPSI to HDPG is noted in the attached Schedule 1. 2.3 Both parties will follow the operational procedures and service levels as agreed between the M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 the place of the contracting entity) and one week of report writing site work) at the office of the assessee. The assessee has entered into agreement for provision of audit Associated Enterprises. A copy of one of such Associated Enterprise namely HSBC electronic data Guangong) Limited (HDPG), is placed on pag 127 of the paperbook. The range of professional audit services rendered by the assessee to HDPG is listed in clause of PB) along with Schedule-I, available on page 126 of the etails of said services is reproduced as under: Services HPSI will be responsible for providing sufficient auditors to the adequate execution of the Services. The range of professional audit services ("Services") rendered by HPSI to HDPG is noted in the attached Schedule 1. 2.3 Both parties will follow the operational procedures and service levels as agreed between the parties from time to time. Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 21 nd one week of report writing The assessee has entered into agreement for provision of audit . A copy of one of such BC electronic data Guangong) Limited (HDPG), is placed on page 121 to 127 of the paperbook. The range of professional audit services o HDPG is listed in clause -2 (on page 122 , available on page 126 of the etails of said services is reproduced as under: HPSI will be responsible for providing sufficient auditors to The range of professional audit services ("Services") rendered by 2.3 Both parties will follow the operational procedures and service 2.4 The Services will be provided in accordance with the guidelines provided by the HSBC Group Audit Standards Manual in force at that time. The range of professional audit services rendered by HPSI to HDP will include all, or part, of the following: 1. Creation of audit planning memoranda in accordance with the schedule of work. 2. Reviews of auditable entities  the adequacy of the system of internal controls of the operatio or failures in internal controls;  the effectiveness of workflow procedures to ensure the most efficient use of resources; the degree of compliance with internal, regulatory and statutory policies, proc requirements;  the degree of reliability and integrity of financial reporting: the adequacy and effectiveness of the security and integrity of the IT systems;  the management and control of the IT functions/departments, projects and installations;  the effectiveness of the controls over the protection of assets; and the effectiveness of management. M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 The Services will be provided in accordance with the guidelines provided by the HSBC Group Audit Standards Manual in force at that time. Schedule 1 The Services The range of professional audit services rendered by HPSI to HDP will include all, or part, of the following: 1. Creation of audit planning memoranda in accordance with the schedule of work. 2. Reviews of auditable entities covering the following issues: the adequacy of the system of internal controls of the operation and the susceptibility of the environment to frauds or failures in internal controls; the effectiveness of workflow procedures to ensure the most efficient use of resources; the degree of compliance with internal, regulatory and statutory policies, proc requirements; the degree of reliability and integrity of financial reporting: the adequacy and effectiveness of the security and integrity of the IT systems; the management and control of the IT functions/departments, projects and installations; the effectiveness of the controls over the protection of assets; and the effectiveness of management. Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 22 The Services will be provided in accordance with the guidelines provided by the HSBC Group Audit Standards Manual in The range of professional audit services rendered by HPSI to HDPG 1. Creation of audit planning memoranda in accordance with the covering the following issues: the adequacy of the system of internal controls of the n and the susceptibility of the environment to frauds the effectiveness of workflow procedures to ensure the most efficient use of resources; the degree of compliance with internal, regulatory and statutory policies, procedures and the degree of reliability and integrity of financial reporting: the adequacy and effectiveness of the security and integrity of the management and control of the IT functions/departments, the effectiveness of the controls over the protection of assets; Types of reviews conducted will include, inter alia, Retail, C General, Investment Bank Banking, Manageme 3. Report writing of the findings made in the reviews conducted. 4. Any other activity as required, including ad hoc project work, independent advice etc. 15. In background of above functions carried out by the assessee, now, we are adjudicating the issue of exclusion/inclusion of comparables. Firstly, we are taking exclusion of following comparables. 1. Vishal Information 16. The Ld. counsel cannot be accepted as comparable as it outsources a considerable portion of its business. The paperbook and submitted that employee cost of the assessee ( ₹8,80,67,819/-) constitute 89% of the total cost and no outsourcing expenses are incurred by the assessee company. As against M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 Types of reviews conducted will include, inter alia, Retail, C General, Investment Bank Insurance, Treasury, Securities, Private Banking, Management Office and IT systems/projects. 3. Report writing of the findings made in the reviews conducted. 4. Any other activity as required, including ad hoc project work, independent advice etc.” background of above functions carried out by the assessee, we are adjudicating the issue of exclusion/inclusion of comparables. Firstly, we are taking exclusion of following Vishal Information Technologies Ltd: Ld. counsel before us has submitted that the company d as comparable as it outsources a considerable portion of its business. The Ld. counsel referred to page paperbook and submitted that employee cost of the assessee ( ) constitute 89% of the total cost and no outsourcing es are incurred by the assessee company. As against Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 23 Types of reviews conducted will include, inter alia, Retail, Credit, Insurance, Treasury, Securities, Private 3. Report writing of the findings made in the reviews conducted. 4. Any other activity as required, including ad hoc project work, background of above functions carried out by the assessee, we are adjudicating the issue of exclusion/inclusion of comparables. Firstly, we are taking exclusion of following seven before us has submitted that the company d as comparable as it outsources a considerable counsel referred to page 163 of the paperbook and submitted that employee cost of the assessee (i.e. ) constitute 89% of the total cost and no outsourcing es are incurred by the assessee company. As against, the comparable company has incurred data entry charges and vendor payments of ₹11,49,14,563/ ₹17,41,71,957/-, which constitutes 65.98% of the total expenditure. Thus, according to the comparable company being different from the assessee company, same is functionally different from the assessee. The support of his contention has relied on the Punjab and Haryana High Court in the case of services India Private Limited for assessment year 2006 reported in (2017) 88 taxmann.com 642 ( the Ld. DR submitted that nowhere outsourcing wor mentioned in the Annual Report the assessee might have been separately identified the annual report, and merely on the basis of separate identifying of data entry charges, the company cannot be model company. M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 comparable company has incurred data entry charges and vendor 11,49,14,563/- out of the total expenditure of , which constitutes 65.98% of the total expenditure. ording to the Ld. counsel, the business model of the comparable company being different from the assessee company, same is functionally different from the assessee. The support of his contention has relied on the decision of the Hon’ble Punjab and Haryana High Court in the case of PCIT Vs IHG IT services India Private Limited for assessment year 2006 (2017) 88 taxmann.com 642 (P& H). On the contrary, DR submitted that nowhere outsourcing wor in the Annual Report and data entry charges incurred by the assessee might have been separately identified the annual report, and merely on the basis of separate identifying of data entry charges, the company cannot be classified as outsourcing Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 24 comparable company has incurred data entry charges and vendor out of the total expenditure of , which constitutes 65.98% of the total expenditure. , the business model of the comparable company being different from the assessee company, same is functionally different from the assessee. The Ld. counsel in decision of the Hon’ble PCIT Vs IHG IT services India Private Limited for assessment year 2006-07 . On the contrary, DR submitted that nowhere outsourcing world has been and data entry charges incurred by the assessee might have been separately identified and grouped in the annual report, and merely on the basis of separate identifying of classified as outsourcing 17. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that Hon’ble Punjab and Haryana court in the case of IHG IT services India Private Limited (supra) for assessment year 2006 observed as under: “5. As far as Vishal Information Technologies Limited is concerned, there is no difficulty whatsoever for the Tribunal has come to a clear finding of fact that it outsourced about 44.81% of its instance, it was observed that Vishal Information Technologies Limited has a low employee cost of Tribunal also observed that the TPO had himself referred to the NASSCOM survey that the average wages and salari of IT/ITES industry in India was 46.1%. The assessee's wages to sales is 53% which is not comparable to Vishal Information Technologies Limited whose wages to sales is 1.25%. This is a finding of fact and there is nothing to indicate that perverse. The exclusion of Vishal Information Technologies Limited is, therefore, justified. 18. We find that in the business of the comparable company whereas before us the assessee has pointed out the ratio of M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that Hon’ble Punjab and Haryana court in the case of IHG IT services ed (supra) for assessment year 2006 5. As far as Vishal Information Technologies Limited is concerned, there is no difficulty whatsoever for the Tribunal has come to a clear finding of fact that it outsourced about 44.81% of its business. For instance, it was observed that Vishal Information Technologies Limited has a low employee cost of 1.25% of operating revenue. The Tribunal also observed that the TPO had himself referred to the NASSCOM survey that the average wages and salaries to sales ratio of IT/ITES industry in India was 46.1%. The assessee's wages to sales is 53% which is not comparable to Vishal Information Technologies Limited whose wages to sales is 1.25%. This is a finding of fact and there is nothing to indicate that the same is erroneous much less perverse. The exclusion of Vishal Information Technologies Limited is, therefore, justified.” find that in the above decision percentage of outsourced of the comparable company has been reported as 44.81% whereas before us the assessee has pointed out the ratio of Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 25 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that Hon’ble Punjab and Haryana court in the case of IHG IT services ed (supra) for assessment year 2006-07 has 5. As far as Vishal Information Technologies Limited is concerned, there is no difficulty whatsoever for the Tribunal has come to a clear business. For instance, it was observed that Vishal Information Technologies 1.25% of operating revenue. The Tribunal also observed that the TPO had himself referred to the es to sales ratio of IT/ITES industry in India was 46.1%. The assessee's wages to sales is 53% which is not comparable to Vishal Information Technologies Limited whose wages to sales is 1.25%. This is a finding of fact and the same is erroneous much less perverse. The exclusion of Vishal Information Technologies Limited is, decision percentage of outsourced has been reported as 44.81% whereas before us the assessee has pointed out the ratio of outsourcing expenses to the total expenses as 65.98%. Therefore, it is essential to verify the exact quantum of outsourcing expenses in the case of the comparable compa matter of exclusion of the company to the file of the direction to ascertain quantum of outsourcing expenses and the business model of the company by way of issue of notice under section 133(6) of the company is found to be based on outsourcing, then same shall be excluded from the set of the comparables in accordance with law. It is needless to mention that assessee shall be afforded adequate opportunity of being h 2. Asit C Mehta financial services ( (India) Limited ] 19. The Ld. counsel need to be excluded from the set of the comparables due to three reasons. Firstly, the company has undergone amalgamation during M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 outsourcing expenses to the total expenses as 65.98%. Therefore, it is essential to verify the exact quantum of outsourcing expenses in the case of the comparable company. Accordingly, we set aside the matter of exclusion of the company to the file of the Ld. direction to ascertain quantum of outsourcing expenses and the business model of the company by way of issue of notice under section 133(6) of the Act and then if the business model of the found to be based on outsourcing, then same shall be excluded from the set of the comparables in accordance with law. It is needless to mention that assessee shall be afforded adequate opportunity of being heard on the issue in dispute. Asit C Mehta financial services ([Nucleus netsoft and GIS (India) Limited ] Ld. counsel of the assessee submitted that the company need to be excluded from the set of the comparables due to three company has undergone amalgamation during Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 26 outsourcing expenses to the total expenses as 65.98%. Therefore, it is essential to verify the exact quantum of outsourcing expenses in ny. Accordingly, we set aside the Ld. TPO with the direction to ascertain quantum of outsourcing expenses and the business model of the company by way of issue of notice under business model of the found to be based on outsourcing, then same shall be excluded from the set of the comparables in accordance with law. It is needless to mention that assessee shall be afforded adequate netsoft and GIS of the assessee submitted that the company need to be excluded from the set of the comparables due to three company has undergone amalgamation during the year (PB-323), which has changed the business model of the company. Secondly, data processing charges crores, out of the total operating and other expenses of (PB-320) and therefore more than 40% of the expenses are outsourced. Thirdly, revenue stream consist of IT enabled services and software development (PB for IT enabled services and therefore company cannot be considered as comparable at entity level. submitted that Ld. CIT(A) has directed to take the segment result relating to ITes for benchmarking therefore, company is functionally similar at segment level. 20. We have heard rival submission of the parties on the issue in dispute. As evident from the paperbook page 323 ( page 31), another company namely Nucleus Netsoft and Ltd. was amalgamated with the Company of the annual report is reproduced as under : M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 , which has changed the business model of the company. Secondly, data processing charges incurred out of the total operating and other expenses of ) and therefore more than 40% of the expenses are Thirdly, revenue stream consist of IT enabled services ftware development (PB-319). There is no separate segment services and therefore company cannot be considered rable at entity level. The Ld. DR on the other hand submitted that Ld. CIT(A) has directed to take the segment result relating to ITes for benchmarking instead of entity level results, therefore, company is functionally similar at segment level. ve heard rival submission of the parties on the issue in t from the paperbook page 323 ( page 31), another company namely Nucleus Netsoft and as amalgamated with the Company. The relevant information annual report is reproduced as under : Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 27 , which has changed the business model of the incurred are of ₹1.04 out of the total operating and other expenses of ₹2.41 crores ) and therefore more than 40% of the expenses are Thirdly, revenue stream consist of IT enabled services 319). There is no separate segment services and therefore company cannot be considered DR on the other hand submitted that Ld. CIT(A) has directed to take the segment result instead of entity level results, therefore, company is functionally similar at segment level. ve heard rival submission of the parties on the issue in t from the paperbook page 323 (Annual Report page 31), another company namely Nucleus Netsoft and GIS (India) The relevant information “1. AMALGAMATION a. Pursuant to the scheme of amalgamation ('the scheme). Nucleus Netsoft And GIS (India) Ltd (NNGIL) was amalgamated with the Company with effect from the appointed date i.e. April 2005 as sanctioned by High Court of Judicature at Bombay, on February 10, 2006, and filed with Registrar of Companies on February 22, 2006. All the assets and liabilities of erstwhile Nucleus Netsoft And GIS (India) Ltd stand transferred to and vested with the Company with effect from April 1, 2005, the appointed date. The scheme has accordingly been given effect to above financial statements. b. The amalgamation has been accounted for under the "Pooling of Interest Method" as prescribed in Accounting Standard (AS 14) issued by the Institute of Chartered Accountants of India. Accordingly the assets, liabilities and reserves of the erstwhile 'Nucleus Nelsoft And GIS (India) Ltd' as at April 1, 2005 have been taken over at their respective book values. c. The assets of reserves Rs.16,287,405 and revenue reserve of Rs. 1,686,933 of NNGIL were taken over by the Company on amalgamation. In terms of the Scheme, no shares of the Company were issued or allotted in respect of and in consideration of the amalgamation of NNGIL with Company. The company's investment in NNGIL of Rs.2,699,723 comprising of 269,900 of Equity Share of Rs. 10/ transferred to a trust for the benefit of the M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 1. AMALGAMATION Pursuant to the scheme of amalgamation ('the scheme). Nucleus Netsoft And GIS (India) Ltd (NNGIL) was amalgamated with the Company with effect from the appointed date i.e. April 2005 as sanctioned by High Court of Judicature at Bombay, on February 10, 2006, and filed with Registrar of Companies on February 22, 2006. All the assets and liabilities of erstwhile Nucleus Netsoft And GIS (India) Ltd stand transferred to and vested with the ny with effect from April 1, 2005, the appointed date. The scheme has accordingly been given effect to above financial statements. The amalgamation has been accounted for under the "Pooling of Interest Method" as prescribed in Accounting Standard (AS ssued by the Institute of Chartered Accountants of India. Accordingly the assets, liabilities and reserves of the erstwhile 'Nucleus Nelsoft And GIS (India) Ltd' as at April 1, 2005 have been taken over at their respective book values. The assets of Rs.39.541.385, liabilities of Rs.6,449,847, capital reserves Rs.16,287,405 and revenue reserve of Rs. 1,686,933 of NNGIL were taken over by the Company on amalgamation. In terms of the Scheme, no shares of the Company were issued or allotted in respect of the holding of the Company in NNGIL and in consideration of the amalgamation of NNGIL with Company. The company's investment in NNGIL of Rs.2,699,723 comprising of 269,900 of Equity Share of Rs. 10/ transferred to a trust for the benefit of the Company. Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 28 Pursuant to the scheme of amalgamation ('the scheme). Nucleus Netsoft And GIS (India) Ltd (NNGIL) was amalgamated with the Company with effect from the appointed date i.e. April 2005 as sanctioned by the Hon'ble High Court of Judicature at Bombay, on February 10, 2006, and filed with Registrar of Companies on February 22, 2006. All the assets and liabilities of erstwhile Nucleus Netsoft And GIS (India) Ltd stand transferred to and vested with the ny with effect from April 1, 2005, the appointed date. The scheme has accordingly been given effect to above The amalgamation has been accounted for under the "Pooling of Interest Method" as prescribed in Accounting Standard (AS- ssued by the Institute of Chartered Accountants of India. Accordingly the assets, liabilities and reserves of the erstwhile 'Nucleus Nelsoft And GIS (India) Ltd' as at April 1, 2005 have Rs.39.541.385, liabilities of Rs.6,449,847, capital reserves Rs.16,287,405 and revenue reserve of Rs. 1,686,933 of NNGIL were taken over by the Company on amalgamation. In terms of the Scheme, no shares of the Company were issued or the holding of the Company in NNGIL and in consideration of the amalgamation of NNGIL with Company. The company's investment in NNGIL of Rs.2,699,723 comprising of 269,900 of Equity Share of Rs. 10/- each were Company. d. 15,11,720 equity shares of Rs. 10 each fully paid the Company (New Equity shares) have been allotted the shareholders' erstwhile NNGIS including Trust the ratio 1 new equity share for every one share of Rs. 10 each held in NNGIS. The new equity sh passu with the existing share the Company. e. Pursuant to the scheme of amalgamation ('the scheme') sanctioned by the Hon'ble High Court of Judicature at Bombay, the debit balance in the Profit and Loss the Company prior to amalgamation, amounting to Rs.5.75,620 has been adjusted against securities premium account of the Company. The Hon'ble High Court of Judicature at Bombay, has permitted the Company from dispensing with the use of the words f. Subsequent year end, the name of the Company been changed 'Nucleus And GIS (India) Limited' approved by Registrar Companies vide now Certificate Incorporation dated May 2006. g. As a result of above, figures in respect year are not comparable with those of the previous financial year. 20.1 In view of settled law that of merger/demerger cannot be comparable in the years of merger/demerger we direct the M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 15,11,720 equity shares of Rs. 10 each fully paid the Company (New Equity shares) have been allotted the shareholders' erstwhile NNGIS including Trust the ratio 1 new equity share for every one share of Rs. 10 each held in NNGIS. The new equity shares issued and allotted shall in all respects rank pari passu with the existing share the Company. Pursuant to the scheme of amalgamation ('the scheme') sanctioned by the Hon'ble High Court of Judicature at Bombay, the debit balance in the Profit and Loss the Company prior to amalgamation, amounting to Rs.5.75,620 has been adjusted against securities premium account of the Company. The Hon'ble High Court of Judicature at Bombay, has permitted the Company from dispensing with the use of the words 'And Reduced' as a suffix to its name. Subsequent year end, the name of the Company been changed 'Nucleus And GIS (India) Limited' approved by Registrar Companies vide now Certificate Incorporation dated May As a result of above, figures in respect of current financial year are not comparable with those of the previous financial In view of settled law that concern with extraordinary events of merger/demerger cannot be comparable in the years of we direct the Ld. AO/TPO to exclude this Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 29 15,11,720 equity shares of Rs. 10 each fully paid the Company (New Equity shares) have been allotted the shareholders' erstwhile NNGIS including Trust the ratio 1 new equity share for every one share of Rs. 10 each held in NNGIS. The new ares issued and allotted shall in all respects rank pari Pursuant to the scheme of amalgamation ('the scheme') sanctioned by the Hon'ble High Court of Judicature at Bombay, the debit balance in the Profit and Loss Account of the Company prior to amalgamation, amounting to Rs.5.75,620 has been adjusted against securities premium account of the Company. The Hon'ble High Court of Judicature at Bombay, has permitted the Company from dispensing with 'And Reduced' as a suffix to its name. Subsequent year end, the name of the Company been changed 'Nucleus And GIS (India) Limited' approved by Registrar Companies vide now Certificate Incorporation dated May of current financial year are not comparable with those of the previous financial concern with extraordinary events of merger/demerger cannot be comparable in the years of such O to exclude this company from the set of the comparables for computing mean of PLI of comparables. 3. Transworks information services Ltd: 21. The Ld. counsel considerable portion of its business and therefore business model being different from the assessee, the company cannot be accepted as valid comparable. The of the company to support his contention and relied on the decision of the Tribunal Mumbai International services India Private Limited Vs DCIT reported in (2018) 89 taxmann.com 439 (Mumbai 22. The Ld. DR submitted th by the assessee before the Ld. CIT(A) and it has been challenged for first time before the objection of the assessee before the M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 company from the set of the comparables for computing mean of PLI of comparables. Transworks information services Ltd: Ld. counsel submitted that this company also outsource a considerable portion of its business and therefore business model being different from the assessee, the company cannot be accepted as valid comparable. The Ld. counsel however did not file financials mpany to support his contention and relied on the decision Mumbai Bench in the case of Franklin Templeton International services India Private Limited Vs DCIT reported in (2018) 89 taxmann.com 439 (Mumbai-Trib). DR submitted that this comparable was not challenged by the assessee before the Ld. CIT(A) and it has been challenged for first time before the Tribunal. The Ld. DR further referred to objection of the assessee before the Ld. TPO and the remark of the Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 30 company from the set of the comparables for computing arithmetic submitted that this company also outsource a considerable portion of its business and therefore business model being different from the assessee, the company cannot be accepted however did not file financials mpany to support his contention and relied on the decision of Franklin Templeton International services India Private Limited Vs DCIT reported at this comparable was not challenged by the assessee before the Ld. CIT(A) and it has been challenged for DR further referred to TPO and the remark of the Ld. TPO, wherein the assessee sought to exclude the company on being functionally different, whereas the information under section 133(6) of the that it qualifies all the filters and functions only, he included the company into set of comparables. 23. We have heard rival submission of the parties. We find that the Ld. TPO has gathered financial and functional details of the company by way of using his authority under section 133(6) o the said information has not been provided to the assessee, we feel it appropriate to restore this issue back to the file of the with the direction to provide all the information gathered under section 133(6) about the company t issue of exclusion/inclusion of the company after providing adequate opportunity of being heard to the assessee. 4. Datamatics financial services Ltd (segmental); M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 TPO, wherein the assessee sought to exclude the company on being functionally different, whereas the Ld. TPO called for the information under section 133(6) of the Act and after verification that it qualifies all the filters and functions are in the natur nly, he included the company into set of comparables. We have heard rival submission of the parties. We find that the TPO has gathered financial and functional details of the company by way of using his authority under section 133(6) o the said information has not been provided to the assessee, we feel it appropriate to restore this issue back to the file of the with the direction to provide all the information gathered under section 133(6) about the company to the assessee and decide the issue of exclusion/inclusion of the company after providing adequate opportunity of being heard to the assessee. Datamatics financial services Ltd (segmental); Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 31 TPO, wherein the assessee sought to exclude the company on TPO called for the and after verification are in the nature of ITes nly, he included the company into set of comparables. We have heard rival submission of the parties. We find that the TPO has gathered financial and functional details of the company by way of using his authority under section 133(6) of the Act. Since the said information has not been provided to the assessee, we feel it appropriate to restore this issue back to the file of the Ld. AO/TPO with the direction to provide all the information gathered under o the assessee and decide the issue of exclusion/inclusion of the company after providing adequate opportunity of being heard to the assessee. Datamatics financial services Ltd (segmental); 24. The Ld. counsel fails the filter of Related Party Transactions the total Revenue. In support of the contention the on the decision of the international services Private Limited Vs ADIT (2013) 31 taxmann.com 227 wherein the company has been rejected on the ground of related party transactions(RPT) more than 25%. But no annual report or financial statement of the company support of its contention of RPT being more than 25%. 25. The Ld. DR on the other hand referred to the remark of the TPO, wherein he has mentioned that segmental financial of the ITeS segment of the company were gathered by way of under section 133(6) of the the filters applied by the M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 Ld. counsel of the assessee submitted that the company Related Party Transactions (RPT) more than 25% of . In support of the contention the Ld. counsel on the decision of the Tribunal Mumbai Bench in the case of international services Private Limited Vs ADIT (2013) 31 taxmann.com 227 for assessment year 2006 wherein the company has been rejected on the ground of related party transactions(RPT) more than 25%. But no annual report or financial statement of the company has been filed by the assess support of its contention of RPT being more than 25%. DR on the other hand referred to the remark of the TPO, wherein he has mentioned that segmental financial of the ITeS segment of the company were gathered by way of under section 133(6) of the Act, and the said segment qualifies all the filters applied by the Ld. TPO. Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 32 of the assessee submitted that the company more than 25% of Ld. counsel relied in the case of Stream international services Private Limited Vs ADIT reported in for assessment year 2006-07, wherein the company has been rejected on the ground of related party transactions(RPT) more than 25%. But no annual report or been filed by the assessee to support of its contention of RPT being more than 25%. DR on the other hand referred to the remark of the Ld. TPO, wherein he has mentioned that segmental financial of the ITeS segment of the company were gathered by way of issue of notice , and the said segment qualifies all 26. We have heard rival submission of the parties on the issue in dispute. We find that information gathered under section 133(6) of the Act has not been provided to the assessee to ascertain the fact of RPT being more than 25% i.e. a filter applied by the therefore we set aside the finding of the issue of exclusion/inclusion of the company from the final set of the comparables to the file of the providing information gathered under section 133(6) of the the assessee. 5. Goldstone Infratech Limited (Segmental): 27. The Ld. counsel paperbook and submitted that export turnover of the company is merely ₹2,29,721/- (0.14 ₹30,89,44,530/- and therefore company fails the export filters minimum 25% of tur decision of the Tribunal M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 We have heard rival submission of the parties on the issue in dispute. We find that information gathered under section 133(6) of been provided to the assessee to ascertain the fact of RPT being more than 25% i.e. a filter applied by the therefore we set aside the finding of the Ld. CIT(A) and restore the issue of exclusion/inclusion of the company from the final set of the comparables to the file of the Ld. AO/TPO for deciding a fresh after providing information gathered under section 133(6) of the Goldstone Infratech Limited (Segmental): Ld. counsel of the assessee referred to page 409 of the paperbook and submitted that export turnover of the company is (0.14%) as compared to the total turnover of and therefore company fails the export filters of turnover. The Ld. counsel also refer Tribunal Hyderabad Bench in the case of Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 33 We have heard rival submission of the parties on the issue in dispute. We find that information gathered under section 133(6) of been provided to the assessee to ascertain the fact of RPT being more than 25% i.e. a filter applied by the Ld. TPO, CIT(A) and restore the issue of exclusion/inclusion of the company from the final set of the AO/TPO for deciding a fresh after providing information gathered under section 133(6) of the Act to of the assessee referred to page 409 of the paperbook and submitted that export turnover of the company is as compared to the total turnover of and therefore company fails the export filters of also referred to the Hyderabad Bench in the case of HSBC Electric data processing India Ltd Vs ACIT reported in (2013) 38 taxmann.com 141 the basis of foreign exchange total revenue of the company. 28. The Ld. DR on the other hand referred to the remark of the Ld. CIT(A), wherein he has held that the BPO division at segment level as comparable with its sales crores and not the total revenue . He submitted that the export turnover is with respect to another division of telecom sector therefore said filter does not a company. 29. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. On perusal of the page 409 of the paperbook we find that sales of the company are from two divisions. The first division is divisions, wherein the turnover has been bifurcated in domestic M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 Electric data processing India Ltd Vs ACIT reported in (2013) 38 taxmann.com 141 wherein the company has been rejected on the basis of foreign exchange earning being less than 25% of the total revenue of the company. DR on the other hand referred to the remark of the Ld. CIT(A), wherein he has held that the Ld. TPO has only considered BPO division at segment level as comparable with its sales crores and not the total revenue . He submitted that the export turnover is with respect to another division of telecom sector therefore said filter does not apply on the BPO segment of the We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. On perusal of the page 409 of the paperbook we find that sales of the company are ions. The first division is telecom and insulated wherein the turnover has been bifurcated in domestic Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 34 Electric data processing India Ltd Vs ACIT reported in (2013) wherein the company has been rejected on earning being less than 25% of the DR on the other hand referred to the remark of the Ld. TPO has only considered BPO division at segment level as comparable with its sales at ₹5.03 crores and not the total revenue . He submitted that the export turnover is with respect to another division of telecom sector and pply on the BPO segment of the We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. On perusal of the page 409 of the paperbook we find that sales of the company are telecom and insulated wherein the turnover has been bifurcated in domestic turnover at ₹25,84,43, The other division is BPO division wherein the turnover has been mentioned at ₹5,02,71, bifurcations of domestic Since the Ld. TPO has considered only BPO division for comparison with the assessee, the contention of the of complying up export filter is not relevant. The sa the Ld. counsel of the assessee is accordingly rejected. As the assessee in its transfer activity as functionally similar to the assessee, the comparable company is held to be functionally similar and therefore contention of the Ld. counsel to exclude this company are accordingly rejected 6. Spanco Telesystems and Sloutions Limited (segmental): 30. The Ld. counsel to be excluded from the set another company i.e. Intelenet BPO services Private Limited in M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 25,84,43,794/- and export turnover of The other division is BPO division wherein the turnover has been 5,02,71,015/-. In the BPO division no such bifurcations of domestic and export turnover has been reported. TPO has considered only BPO division for comparison with the assessee, the contention of the Ld. counsel up export filter is not relevant. The sa of the assessee is accordingly rejected. As the assessee in its transfer pricing study has considered IT activity as functionally similar to the assessee, the comparable is held to be functionally similar and therefore contention to exclude this company are accordingly rejected Telesystems and Sloutions Limited (segmental): Ld. counsel of the assessee submitted that company need to be excluded from the set of the comparables because it ac another company i.e. Intelenet BPO services Private Limited in Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 35 and export turnover of ₹2,29,721/-. The other division is BPO division wherein the turnover has been . In the BPO division no such export turnover has been reported. TPO has considered only BPO division for comparison Ld. counsel of the assessee up export filter is not relevant. The said objection of of the assessee is accordingly rejected. As the pricing study has considered ITes/BPO activity as functionally similar to the assessee, the comparable is held to be functionally similar and therefore contentions to exclude this company are accordingly rejected. Telesystems and Sloutions Limited (segmental): of the assessee submitted that company need of the comparables because it acquired another company i.e. Intelenet BPO services Private Limited in year 2005, which has distorted its comparability and rendered the company as unfit for comparison. company fails the export filter of minimum export revenue as 25% of the total revenue. He referred to the decision of Mumbai Tribunal in the case of India Private Limited Vs DCIT reported in (2018) 89 taxmann.com 439, wherein the company has been rejected grounds of demerger of the unit and failure of condition of export filter. 31. The Ld. DR on the other and submitted that this comparable company was selected by the assessee in its transfer pricing study and accepted by the not challenged before the Ld. CIT(A). 32. Before us the assessee has not filed annual report of the company in support of its claim of merger of another company with the assessee and also for verification of application of export filter. M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 2005, which has distorted its comparability and rendered the t for comparison. The Ld. counsel also referred that company fails the export filter of minimum export revenue as 25% He referred to the decision of Mumbai in the case of Franclin Templeton International Services ia Private Limited Vs DCIT reported in (2018) 89 , wherein the company has been rejected grounds of demerger of the unit and failure of condition of export DR on the other and submitted that this comparable y was selected by the assessee in its transfer pricing study and accepted by the Assessing Officer. Further it is exclusion was not challenged before the Ld. CIT(A). Before us the assessee has not filed annual report of the company in support of its claim of merger of another company with the assessee and also for verification of application of export filter. Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 36 2005, which has distorted its comparability and rendered the also referred that company fails the export filter of minimum export revenue as 25% He referred to the decision of Mumbai Bench of International Services ia Private Limited Vs DCIT reported in (2018) 89 , wherein the company has been rejected on the grounds of demerger of the unit and failure of condition of export DR on the other and submitted that this comparable y was selected by the assessee in its transfer pricing study . Further it is exclusion was Before us the assessee has not filed annual report of the company in support of its claim of merger of another company with the assessee and also for verification of application of export filter. Therefore in the interest of justice, we feel it appropriate the issue of exclusion/inclusion of this company into set of the comparables to the file of the 7. Maple e-solutions Ltd 33. The Ld. counsel need to be excluded on the gro company had been involved in fraud relied on the decision of Hon’ble Bombay High Court in the case of CIT versus Cummins Terbo technologies Ltd reported in (2018) 91 taxmann.com 307 counsel also submitted that company is in the call centre which is a specialised ITeS service and therefore also need to be excluded being functionally dissimilar. The submitted that assessee itself has c ITes/BPO and if assessee insist for exclusion of the company on the ground of call centre, then other comparable M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 Therefore in the interest of justice, we feel it appropriate the issue of exclusion/inclusion of this company into set of the comparables to the file of the Ld. AO/TPO for deciding a solutions Ltd Ld. counsel of the assessee submitted that this company need to be excluded on the ground that owners/directors of the company had been involved in fraud. In support of his contention relied on the decision of Hon’ble Bombay High Court in the case of CIT versus Cummins Terbo technologies Ltd reported in (2018) 91 taxmann.com 307 for assessment year 2007 also submitted that company is in the call centre which is a specialised ITeS service and therefore also need to be excluded being functionally dissimilar. The Ld. DR on the other hand submitted that assessee itself has classified in the category of ITes/BPO and if assessee insist for exclusion of the company on the ground of call centre, then other comparables selected by the Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 37 Therefore in the interest of justice, we feel it appropriate to restore the issue of exclusion/inclusion of this company into set of the AO/TPO for deciding afresh. of the assessee submitted that this company und that owners/directors of the . In support of his contention relied on the decision of Hon’ble Bombay High Court in the case of CIT versus Cummins Terbo technologies Ltd reported in ment year 2007-08. The Ld. also submitted that company is in the call centre which is a specialised ITeS service and therefore also need to be excluded DR on the other hand lassified in the category of ITes/BPO and if assessee insist for exclusion of the company on the selected by the assessee also need to be excluded being functionally dissimilar. The Ld. DR further submitted tha owners/directors were pertaining way back to almost more than 20 years and therefore merely on company cannot be excluded. 34. We have heard rival submission of the parties on the issue in dispute. We find that of the company, the Commins turbo technologies Ltd (supra) has held as under: “15. functions sought to be canvassed by the assessee is emerging from record. Merely because the two kind of activities are referred to as ITES in a Notification by the CBDT does not imply that the same have to as functionally identical/similar. In in the functions performed by assessee and Maple eSolutions Ltd. is quite evident and the same has also not been disputed by the lower authorities. On this aspect, we are of the o excluded from the list of comparables. Apart therefrom, the decision of our Co M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 assessee also need to be excluded being functionally dissimilar. The DR further submitted that allegation of fraud on the owners/directors were pertaining way back to almost more than 20 years and therefore merely on substantiated allegation company cannot be excluded. We have heard rival submission of the parties on the issue in dispute. We find that on the issue of non-reliability of financial data , the Hon’ble High Court of Bombay Commins turbo technologies Ltd (supra) has held as under: In our considered opinion, the difference in functions sought to be canvassed by the assessee is emerging from record. Merely because the two kind of activities are referred to as ITES in a Notification by the CBDT does not imply that the same have to be understood as functionally identical/similar. In-fact, the dissimilarity in the functions performed by assessee and Maple eSolutions Ltd. is quite evident and the same has also not been disputed by the lower authorities. On this aspect, we are of the opinion that the said concern is liable to be excluded from the list of comparables. Apart therefrom, the decision of our Co-ordinate Benches of Delhi and Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 38 assessee also need to be excluded being functionally dissimilar. The t allegation of fraud on the owners/directors were pertaining way back to almost more than 20 substantiated allegation of fraud, We have heard rival submission of the parties on the issue in reliability of financial data Hon’ble High Court of Bombay in the case of Commins turbo technologies Ltd (supra) has held as under: In our considered opinion, the difference in functions sought to be canvassed by the assessee is emerging from record. Merely because the two kind of activities are referred to as ITES in a Notification by the be understood fact, the dissimilarity in the functions performed by assessee and Maple eSolutions Ltd. is quite evident and the same has also not been disputed by the lower authorities. On this aspect, we pinion that the said concern is liable to be excluded from the list of comparables. Apart therefrom, the ordinate Benches of Delhi and Hyderabad in CRM Services India (P.) Ltd. (supra) and Capital IQ Information Systems (India) (P) Ltd. respectively also support assessee's plea that the said concern is liable to be excluded from the final set of comparables because of unreliability of the financial data of the said concern. Therefore, on both the above counts, we set- direct the Assessing Officer to exclude Maple eSolutions Ltd. from the final list of comparables. Thus, on th assessee succeeds 35. Respectfully, following the Hon’ble Bombay High Court (supra), we direct the set of the comparables on the ground of unreliability of financial data because of fraud committed by the owners/directors. 36. The Ld. counsel C S Software Enterprises Ltd. from the set of the comparables. 8. C S software Enterprises Ltd: M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 Hyderabad in CRM Services India (P.) Ltd. (supra) and Capital IQ Information Systems (India) (P) Ltd. respectively also support assessee's plea that the said concern is liable to be excluded from the final set of comparables because of unreliability of the financial data of the said concern. Therefore, on both the above counts, -aside the order of the CIT(A) on this aspect and direct the Assessing Officer to exclude Maple eSolutions Ltd. from the final list of comparables. Thus, on this point also assessee succeeds.” following the Hon’ble Bombay High Court the Ld. AO/TPO to exclude the company out of the set of the comparables on the ground of unreliability of financial data because of fraud committed by the owners/directors. of the assessee has sought inclusion of the Enterprises Ltd., which was excluded by the from the set of the comparables. C S software Enterprises Ltd: Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 39 Hyderabad in CRM Services India (P.) Ltd. (supra) and Capital IQ Information Systems (India) (P) Ltd. (supra) respectively also support assessee's plea that the said concern is liable to be excluded from the final set of comparables because of unreliability of the financial data of the said concern. Therefore, on both the above counts, er of the CIT(A) on this aspect and direct the Assessing Officer to exclude Maple eSolutions Ltd. is point also following the Hon’ble Bombay High Court AO/TPO to exclude the company out of the set of the comparables on the ground of unreliability of financial data because of fraud committed by the owners/directors. of the assessee has sought inclusion of the M/s excluded by the Ld. TPO 37. The Ld. Counsel rejected the company as comparable on the ground that it was engaged in developme available. The Ld. counsel the company and referred to support that for assessment year 2006 only one segment of ITeS only an to the assessee. 38. The Ld. DR on the other end relied on the order of the and the Ld. CIT(A). 39. We have heard rival submission of the parties on the issue in dispute and perused the relevant the Annual Report of the company reporting on page 646 of the paperbook ( report) in clause 8, it is reported as under: M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 The Ld. Counsel of the assessee submitted that rejected the company as comparable on the ground that it was engaged in development of the software and no segment data was Ld. counsel drawn our attention to Annual Report any and referred Paper Book pages 615, 630 to support that for assessment year 2006-07 company ITeS only and therefore it is functionally DR on the other end relied on the order of the We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. On perusal of of the company, we find that regarding segment on page 646 of the paperbook (page 47 of the annual it is reported as under: Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 40 of the assessee submitted that Ld. TPO rejected the company as comparable on the ground that it was nt of the software and no segment data was Annual Report of pages 615, 630, 637 and 646 07 company was having d therefore it is functionally similar DR on the other end relied on the order of the Ld. TPO We have heard rival submission of the parties on the issue in material on record. On perusal of we find that regarding segment page 47 of the annual “8. Segment Reporting : The Company is engaged in Enabled Services which in the context of Accounting Standard issued by ICAI are considered to 39.1 From above reporting in Annual Report, it is evident that company is having only one seg enabled services. Further on perusal of the other pages of the Annual Report also it is evident that company is primarily in the field of IT-BPO and no where it is reported that company is in software development. The observa company is engaged in software separate segment of IT AO/TPO is directed to include the company into the set of the comparables. 40. The ground raised by the assessee challenging exclusion/inclusion of certain comparables is partly for statistical purposes. M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 Segment Reporting : The Company is engaged in providing Information Technology Enabled Services which in the context of Accounting Standard issued by ICAI are considered to constitute one single segment.” From above reporting in Annual Report, it is evident that having only one segment of Information Technology enabled services. Further on perusal of the other pages of the also it is evident that company is primarily in the and no where it is reported that company is in software development. The observation of the Ld CIT(A) that company is engaged in software development and th separate segment of ITes, is without any basis. Accordingly AO/TPO is directed to include the company into the set of the ground raised by the assessee challenging exclusion/inclusion of certain comparables is accordingly, partly for statistical purposes. Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 41 providing Information Technology Enabled Services which in the context of Accounting Standard-17 constitute one single segment.” From above reporting in Annual Report, it is evident that Information Technology enabled services. Further on perusal of the other pages of the also it is evident that company is primarily in the and no where it is reported that company is in tion of the Ld CIT(A) that and there is no basis. Accordingly, The Ld. AO/TPO is directed to include the company into the set of the ground raised by the assessee challenging accordingly, allowed 41. In the result, the appeal filed by the whereas the appeal filed by the assessee is allo statistical purposes. Order pronounced in the open Court in Sd/- (ABY T VARKEY JUDICIAL MEMBER Mumbai; Dated: 13/09/2022 Dragon Legal/Rahul Sharma, Sr. P.S. Copy of the Order forwarded to 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// M/s HSBC Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 In the result, the appeal filed by the Revenue whereas the appeal filed by the assessee is allo unced in the open Court in 13/09/2022. Sd/ ABY T VARKEY) (OM PRAKASH KANT JUDICIAL MEMBER ACCOUNTANT MEMBER forwarded to : BY ORDER, (Sr. Private Secretary) ITAT, Mumbai Professional Services Pvt. Ltd. ITA Nos. 8753 & 8823/M/2011 42 Revenue is dismissed, whereas the appeal filed by the assessee is allowed partly for /09/2022. Sd/- OM PRAKASH KANT) ACCOUNTANT MEMBER (Sr. Private Secretary) ITAT, Mumbai