SCHNEIDER ELECTRIC INDIA PVT. LTD.,GURGAON V. ACIT, NEW DELHI

ITA 1076/DEL/2016

AI Insights

The case involves Schneider Electric India Pvt. Ltd., which appealed against the assessment order passed under sections 144C, 143(3), and 254 of the Income Tax Act, 1961, concerning the assessment year 2007-08. The primary issues in the appeal were related to transfer pricing adjustments made by the TPO concerning various segments of international transactions and the denial of deduction under section 10A. The Tribunal found that the TPO had not adequately considered the additional evidence and submissions provided by the assessee during the remand proceedings and directed a fresh assessment.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 46870 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-04-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2007-2008
• Other Referred Cases: CIT v. TEI Technologies (P.) Ltd., Kyungshin Industrial Motherson Ltd. v. ACIT, Quark Systems India Pvt. Ltd. v. ACIT, Sony India (P) Limited v. CIT, Hinduja Ventures Ltd. v. ACIT, Demag Cranes & Components (India) Pvt. Ltd. v. ACIT, Mentor Graphics (Noida) Pvt. Ltd. v. ACIT, E-Gain Communication (P) Ltd. v. ITO, TNT India Ltd. v. ACIT, Vedaris Technology (P) Ltd. v. ACIT, Mercer Consulting (India) Pvt. Ltd. v. ACIT, Indian & Eastern Newspaper Society vs. CIT, Swadeshi Cotton Mills Co. Ltd. vs. Union of India, Collector of Central Excise v. ITC Ltd., C.B Gautham vs Union of India and Others
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR DHANESTA
• Assessee Lawyers: ROHIT TIWARI; TANYA; WAY OF; WAY OF SUPPLEMENTARY
• Keywords: Set aside; Opportunity of being heard; Additional evidence; Revised return; Transfer pricing; International transaction; Rectification of order; Wholly owned subsidiary; Related party transaction; Working capital adjustments
• Section: 143(3); 119; 254(2); 22; 133(6); 113; 13; 144C; 244A; 10B; 92D; 20; 101

Judgement Text

"ITA No.1076/Del/2016 Page | 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI “I” BENCH: NEW DELHI BEFORE SHRI VIKAS AWASTHY, JUDICIAL MEMBER & SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER ITA No.1076/Del/2016 [Assessment Year : 2007-08] Schneider Electric India Pvt.Ltd., 9th Floor, Tower C Building No.10, DLF Cyber City, Phase-II, Gurgaon Hartyana-122002 PAN-AABCS1642G vs ACIT Circle-22(2) Room No. 226 C.R. Building New Delhi-110002 APPELLANT RESPONDENT Appellant by Shri Rohit Tiwari, Adv. & Tanya, Adv. Respondent by Shri Rajesh Kumar Dhanesta, Sr.DR Date of Hearing 17.01.2025 Date of Pronouncement 09.04.2025 ORDER PER PRADIP KUMAR KEDIA, AM : The captioned appeal has been filed at the instance of the assessee against the assessment order dated 30.12.2015 passed under s. 144C r.w.s. 143(3) r.w.s. 254 of the Income Tax Act, 1961 [“the Act”] in pursuance to the direction of Dispute Resolution Panel (“DRP”) pertaining to assessment year 2007-08. The assessee has raised the following grounds of appeal:- Transfer pricing matter “That on the facts and circumstances of the case, and in law: 1. The assessment order passed by the Learned Assessing Officer ('Ld. AO') is bad in law; 2. The AO/Ld. TPO have erred on facts and in law in enhancing the income of the Appellant by INR 21.53.53.349 by holding that the international transactions pertaining to purchase of raw material, research and development (R&D) support services segment and business support services does not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. TPO/Ld. AO has grossly erred in: 2.1. disregarding the arm's length price ('ALP') as determined by the Appellant in the Transfer Pricing (TP) documentation maintained by ITA No.1076/Del/2016 Page | 2 it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules'); 2.2. disregarding multiple year/ prior years' data as used by the Appellant in the TP documentation and holding that current year [i.e. Financial Year ('FY) 2006-07] data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; Purchase of raw material 2.3. failing to appreciate that the international transactions of the Appellant relating to import of components for manufacture of electrical equipment would meet the arm's length principle on a transaction-by-transaction basis and disregarded selection of overseas tested party on account of incorrect appreciation of facts and material place on record; R&D support services segment (sub-grounds 2.4 to 2.8) 2.4. distorting, without reason, the quantitative screens/filters applied and set of comparables arrived at by the Appellant, following a detailed and robust search methodology carried out in the TP report as well as fresh search analysis; 2.5. including certain companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed and excluding certain comparable companies on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 2.6. not verifying the computational errors in the margins of comparable companies while arriving at the ALP; 2.7. not providing the benefit of a working capital adjustment while computing the ALP and thereby disregarding the law, international guidance and judicial precedents in this regard; 2.8. ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profits and thereby, failing to appreciate that the Appellant would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; Business support services segment (sub-grounds 2.09 to 2.12) 2.9. distorting the comparability analysis conducted by the Appellant in the TP Documentation and fresh search analysis; 2.10. including certain companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed and excluding certain comparable companies on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; ITA No.1076/Del/2016 Page | 3 2.11. not verifying the computational errors in the margins of comparable companies while arriving at the ALP; 2.12. not providing the benefit of a working capital adjustment while computing the ALP and thereby disregarding the law, international guidance and judicial precedents in this regard; 3. denying the benefit of (+/-) 5 percent range mentioned in proviso to section 92C(2) of the Act while computing the ALP. Corporate Tax matters 4. that on the facts of the case and in law, the Ld. AO has erred in passing the Assessment order dated 30.12.2015 under section 143(3) read with section 144C and 254 of the Act in pursuance to the directions of Hon'ble ITAT (ITA no 5728/Del/2011, order dated 22.11.2012) by not allowing to the Appellant the deduction u/s 10A amounting to Rs 2,85,03,926 and in doing so has gravely erred in: 4.1. Not following the rectified order of Hon'ble ITAT dated 19.02.2015 passed u/s 254(2) of the Act in the Appellant's own case for the Assessment Year 2007-08 wherein Ld. AO has been directed to verify the claim of the Appellant u/s 10A of the Act as per the original return of Income. 4.2. Not appreciating the submission filed by the Appellant on facts and merits of the case, and ignoring the fact that Appellant is eligible to claim deduction under the provisions of section 10A as per form 56F obtained by the appellant and having duly been furnished to Ld. AO/DRP and in fact such claim was duly made in original return though withdrawn in revised return on account of divergent view of the Courts on deduction/exemption under section 10A of the Act. 4.3. Not following the Jurisdictional High Court decision in the case of CIT v. TEI Technologies (P.) Ltd. 361 ITR 36 (Delhi) holding the view that the provisions of section 10A of the Act are in the nature of exemption and is not affected by the overall taxable income or loss of the assessee for the year under consideration. 5. The Ld. AO has erred in initiating penalty proceedings u/s 271(1)(c), 271BA and 271AA of the Act mechanically and without recording any adequate satisfaction for such initiation. 6. The Ld. AO has grossly erred on facts and in law by proposing to compute interest u/s 234D of the Act and withdraw interest u/s 244A of the Act mechanically and without recording any satisfactory reasons for the same. That the above grounds and sub-grounds of objections are without prejudice to each other.” ITA No.1076/Del/2016 Page | 4 2. Briefly stated, the assessee i.e. Schneider Electric India Private Limited was incorporated in 1995 as a wholly owned subsidiary of Schneider Electric Industries SAS (\"Schneider SAS\"). The company is engaged in the manufacturing of Low Voltage (\"LV\") and Medium Voltage (\"MV\") equipment i.e. air circuit breakers (\"ACBs\"), miniature circuit breakers (\"MCBs\"), moulded case circuit breakers (\"MCCBs\"), push buttons, low voltage control panels, medium voltage control panels and ring master units. The assessee company had segmented its business operations into manufacturing, distribution and services segments to analyze and demonstrate the arm's length nature of its transfer prices with its associated enterprises (\"AES\"). The assessee company further segregated its manufacturing segment into three sub-segments namely Manufacturing TP', 'Manufacturing Local' and 'Manufacturing Hyderabad. Further, the 'Manufacturing TP' is segregated in 'Manufacturing Import' and 'Manufacturing Export'. Similarly, the services segment of the assessee was segregated into \"E-content', 'Business Support Services', and 'Contract R&D Support Services sub segments. 2.1. The international transactions undertaken by the assessee during the year are provided in table below:- Summary of international transactions S.No. Nature of transaction Amount in INR crores 1. Import of electrical equipment for resale 262.82 2. Payment for repair and maintenance service 0.07 3. Import of components 147.36 4. Export of manufacturing goods 28.14 5. Import of capital equipments 1.82 6 Repair and maintenance services(income) 0.14 7. Management support system 10.26 8. Cost contribution arrangement 4.82 9. Royalty 6.80 10. E-content/e-catalogue 11.14 11. Business support services 5.25 12. Research and development support services 45.55 13. Reimbursement of expenses(recoverable) 13.22 14. Reimbursement of expenses(payable) 5.64 2.2. The summary of economic analysis of the impugned international transactions undertaken by the Company during the financial year (FY\") 2006- 07 with its associated enterprises (\"AEs\") has been presented in the table below: ITA No.1076/Del/2016 Page | 5 Summary of economic analysis in Transfer Pricing (“TP”) study S.No. Nature of international transactions Method applied Profit Level Indicator(“PLI”) Tested party margin Arm’s length margin (TP report) 1. Import of components (“Manufacturing import”) Transactional Net Margin Method (“TNMM”) Operating Profit/Sales (“OP/Sales”) 11.70% 10.67% Export of manufacturing goods (“manufacturing export”) 7.82% 2. Contract Research and Development (“Contract R & D”) segment TNMM Operating Profit/Total cost (“OP/TC”) 5.02% 10.37% 3. Provision of Business Support Services TNMM 4.32% 9.28% Based on the above results, it is the stand of the assessee that the international transactions undertaken during the subject year to be at arm’s length. 3. The present appeal has arisen in the second round of proceedings. In the first round of proceedings, in the course of transfer pricing assessment, the TPO proposed the following:- a. Rejected the segmented financials for manufacturing operations stating the following:- (i) Segmentation is not supported by audited financials; (ii) Segmentation is not supported by Accounting Standard 17: (iii) Payment of royalty, import of capital equipment, payment under cost contribution arrangement and reimbursement of expenses are also allocated to other manufacturing segments viz. Manufacturing Local and Manufacturing Hyderabad and hence the said international transactions would not be benchmarked unless entire manufacturing segment is aggregated; and (iv) No basis provided for allocation of cost and thereby resulting in excessive loss allocated in Manufacturing Local segment and excessive profit allocated in Manufacturing TP segment. ITA No.1076/Del/2016 Page | 6 b. Rejected the use of multiple year data and proceed to consider current year data for the purpose of computing arm's length price. c. Distorted the comparable set using inconsistent selection criterion. d. Rejected the fresh search of comparables provided at time of assessment proceedings with respect to contract R&D service segment and business support service segment. e. Thus, the TPO proposed certain adjustments with respect to manufacturing segment; Contract R&D service segment and business support service segment. 4. The DRP upheld the order of the TPO/AO in case of the manufacturing segment. However, the DRP accepted the assessee’s contentions for acceptance of certain comparable companies thereby provided marginal relief in both business support service segment and contract R&D service segment. The assessment was completed u/s 144C of the Act, wherein, the AO assessed the total income of the assessee at INR 717,539,766 as against a loss return of INR 13,851,671. The adjustment made in final assessment order has been tabulated below: Total adjustment made by the AO Particulars Adjustment in INR Transfer Pricing Manufacturing segment 596,409,616 Contract R&D service segment 9,150,032 Business support service segment 57,803,317 Corporate tax On account of claim of royalty expenditure on paid basis 68,028,472 Total adjustment 731,391,437 5. In the first round of proceedings before ITAT, the assessee submitted various additional evidences pertaining to its manufacturing segment in order to support the ‘transaction by transaction analysis approach’ followed by the assessee to determine the ALP of the international transactions pertaining to manufacturing segment. Furthermore, the assessee also submitted its various contentions on the filters applied by the TPO, comparables accepted/rejected by the TPO with respect to Contract R&D services segment and BSS segment, ITA No.1076/Del/2016 Page | 7 following various jurisprudences. Thereafter, the Co-ordinate Bench of ITAT vide its order dated November 22, 2012 accepted the contention of the assessee and directed the AO/TPO to analyze the additional evidences submitted by the assessee with respect to its manufacturing segment and set aside the entire matter for fresh consideration including the matters pertaining to Contract R&D services and BSS segment of the assessee. The relevant extract from the order passed by the ITAT has been encapsulated below:- \"5. Considering the above submissions we find that in the case Kyungshin Industrial Motherson Ltd. (Supra) the primary contentions of the assessee involved was regarding analysis of suppliers profitability for imports and limiting the variation on account of transfer pricing only to the proportion of related party transactions. The authorities below did not address the issues for want of data. The Tribunal acceded to the assessee's plea for accepting these additional evidences and remanding the matter to the authorities below for fresh adjudication. Again in the case of Quark Systems India Pvt. Ltd. (Supra) the Special Bench of the Tribunal has held that the appellant cannot be estopped from highlighting mistakes in the assessment even though such mistake is the result of evidence adduced by the tax payer. We find that in the present case the assessee has also colluted supplementary evidence to corroborate the arm's length nature of its international transactions in adherence to the principles and contentions made before the authorities below. We thus in the interest of justice set aside the matter to the file of the A.O. to first ascertain to his satisfaction that the instances furnished by the assessee by way of supplementary evidence are indeed comparable to the case of the assessee to corroborate the arm's length nature of its international transaction in adherence to the principles of arm's length and then analyse pricing policy of the assessee in the light of the said evidence which was not in the possession of the assessee earlier. It is needless to mention over here that while deciding the issue afresh the A.O. will afford opportunity of being heard to the assessee. 6. We also set aside the issues raised in ground nos. 7 and 8 of the appeal to the file of the AO for his fresh consideration in view of the above development in this regard pointed out by the Id. AR. after affording opportunity of being heard to the assessee. The ground nos. 1, 1.1 to 6, 7 and 8 are thus allowed for statistical purposes.” 6. Pursuant to the order passed by the ITAT, the AO initiated the second round of assessment proceedings. 7. In the course of assessment proceedings pursuant to ITAT order, the TPO as claimed by the assessee, didn't accept the various evidences produced by the assessee in order to substantiate the ‘transaction by transaction’ approach ITA No.1076/Del/2016 Page | 8 followed by it for benchmarking the international transactions with respect to its manufacturing segment. The TPO adjudicated on different issues as follows: Manufacturing segment-The TPO proceeded to reject all the additional evidences submitted before the ITAT to support transaction by transaction approach and its various submissions before the TPO during the remand back proceedings on the basis of his own conjecture and surmises. However, TPO accepted the contention of the assessee to restrict the TP adjustment in respect of its manufacturing segment to the quantum of international transactions entered with the AE and provided proportionate relief to the assessee. Contract R&D support services and BSS segment- In respect of R&D support services segment and BSS segment, the ITAT vide order dated November 22, 2012 (Supra) had set aside the matter back to the file of TPO/AO to decide the matter afresh. However, no effect was given to such directions by TPO during the remand back assessment proceedings and TPO simply followed the earlier order without adjudicating on any of the issues pertaining to contract R&D support services and BSS segment. 8. The AO passed the draft assessment order incorporating the order passed by the TPO. Aggrieved with the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (“DRP”). However, the DRP has not provided relief to the assessee. 9. The final set of comparable companies selected by the TPO have been tabulated below: Final set of comparables- Manufacturing segment S.No. Company Name OP/Sales 1. Elpro International Limited 2.87% 2. Havells India Limited 8.94% 3. Indo Asian Fugegear limited 11.36% 4. Kaycee Industries Limited 4.76% 5. Reed Relays and Electronics India Limited 17.37% 6. Salzer Electronics Limited 10.49% Arithmetic Mean 9.30% Final set of comparables- Contract R &D segment S.No. Company Name OP/TC 1 KALS Information Systems Ltd. (Seg.) 30.55% 2. LGS Global Ltd. (Lanco Global Solutions Ltd.) 15.75% 3. Mindtree Ltd. (Earlier Mindtree Consulting 16.90 ITA No.1076/Del/2016 Page | 9 Ltd.) 4. R S Software (India) Ltd. 13.47% 5. R Systems International Ltd. (Seg) 15.07% Arithmetic Mean 18.35% Final set of comparables- Business support segment S.No. Company Name OP/TC 1. Empire Industries Ltd. 24.03% 2. IL & FS Academy for insurance & Finance Ltd. 48.43% 3. National Small Industries Corporation Ltd. -0.31% 4. TSR Darashaw Ltd. 33.89% 5. Priya International Ltd. (Indenting) 16.00% 6. Khaitan India Limited 9.00% Arithmetic Mean 21.84% 10. The summary of remand back/second round of proceedings before AO/TPO/DRP in respect of the transactions, for which an adjustment has been made on account of TP issues are as follows:- Summary of TP adjustment S.No. Name of the transaction PLI No. of comparables Appellant’s margin Arm’s length margin Adjustment in INR 1. Manufacturing segment OP/Sales 6 -1.71% 9.30% 148,400,000 2. R&D Support Service segment OP/TC 5 5.02% 18.35% 57,803,317 3. Business Support Services segment OP/TC 6 4.32% 21.84% 9,150,032 Total adjustment in INR 215,353,349 11. The contentions of the assessee before the Tribunal in respect of manufacturing segment is summarized as under:- (i) The TPO/DRP have proposed to benchmark the manufacturing segment of the assessee by aggregating the different sub-segments that the Company operates in. The assessee humbly submits that the manufacturing sub- segments ought to be benchmarked independently since they operate under different business models under each sub-segment. (ii) The assessee’s detailed contentions with respect to manufacturing segment is as follows:- * Functional difference between manufacturing sub-segments The assessee is operating through different business models in its 4 segments, viz. Manufacturing Import, Manufacturing Export, Manufacturing Local and Manufacturing Hyderabad. The summary of the FAR profiles of the 4 sub- segments has been presented under for the Bench's ready reference: ITA No.1076/Del/2016 Page | 10 Summary of FAR analysis for manufacturing sub-segments of SEIPL Particulars Manufacturing Import-License manufacturing Manufacturing Export-contract manufacturing Manufacturing Local-Independent operations Manufacturing Hyderabad-Start up manufacturing unit A. Functions Performed Forecasting of demand  x  x Contract and pricing negotiation  x  x Product design x x  x Procurement of raw material     Quality check of raw material    x Manufacturing of products     Inventory management  x   (limited) Marketing and sales  x  x Technology function x x  x Functions relating to starting up a unit x x x  (extensive) B. Assets utilized Manufacturing facilities     Distributing infrastructure  x   Warehousing facilities  x   Plant & machincery     Furniture and fixtures     Marketing intangibles x x  (limited) x Technical know- how x x  (limited) x C. Risks Undertaken Market risk  x   Product liability/warrant y risk   (limited)   Inventory risk  x   Capacity utilization risk  x   Credit risk     Price risk  x   R&D risk  x x  x Technology risk x x  x Note 1: Start-up functions includes identification of place of manufacturing unit, obtaining legal & regulatory licenses and approvals, installation of plant & machinery and extensive quality test of sample product to be manufactured. From the above, it is evident that the assessee is operating through different business models in each of its sub-segments. The detailed ITA No.1076/Del/2016 Page | 11 evaluation of the business model each sub-segment is operating in has been presented hereunder:  License Manufacturing Segment (Manufacturing Import); In this segment, SEIPL produces goods under a licence agreement with its AEs, using manufacturing intangibles owned by the AEs (licensor). Such as patents, product designs, manufacturing process and know-how. Under this segment, SEIPL pays royalties for the use of the licenced intangibles, buys raw materials from its AEs and holds Inventories of the raw materials and finished goods. Therefore, it bears the risks associated with both holding inventories and selling products, including demand and pricing risk.  Contract Manufacturing Segment (Manufacturing Export): In this segment, SEIPL assumes lesner risks than a typical licence manufacturer. The Company produces goods for its AEs and it is the AEs who directly bear demand and final customer pricing risks. In this case, SEIPL, as the contract manufacturer, is compensated by its AEs through a return to enable the Company to earn an arm's length mark-up on total costs incurred in servicing the AEs orders. In addition, if the products made by the Company comply with the AE's product and quality specifications, SEIPL has guaranteed purchases of the goods from its AEs. Therefore, the contract manufacturer bears limited risks associated with holding finished goods and selling them as compared with a licence manufacturer for the fact that the contract manufacturer has assured buyer and assured return.  Full-fledged Manufacturing Segment (Manufacturing Local): In this segment, SEIPL is operating as a full-fledged manufacturer, responsible for providing the space, machinery and team to manufacture the parts, as well as all materials and goods necessary for production of goods for third party independent customers. In doing so, SEIPL assumes all risks associated with selling the products. In the present case, it can be concluded that Transfer Pricing provisions are not applicable to this segment.  Start-up Manufacturing Segment (Manufacturing Hyderabad); This segment pertains to the newly set up Hyderabad facility of SEIPL, wherein the Company only carried out the initial phase of manufacturing activities from November 2006 to March 2007. Due to this, there were extraneous indirect costs incurred in connection with the operations and a low value of revenue was generated. Considering the same, the segment can be considered a separate 'start-up manufacturing segment undertaking necessary costs associated with the initial phase of production. To further corroborate the above segmental analysis, the assessee has also submitted the reconciliation of the segmental accounts with the company-wide statement of profit and loss as part of the submission under rule 29 before the Hon'ble ITAT. In addition to the above, the assessee would like to stress upon the fact that the TPO has accepted the segmentation provided for the service segments without raising concerns over the nature of segments or the allocation methodology utilized therein. The tax authorities have only ITA No.1076/Del/2016 Page | 12 proceeded to reject the manufacturing sub-segments on arbitrary grounds. Considering the above, the assessee submits that the 4 sub-segments of the assessee's manufacturing business ought to be evaluated separately for analysis for determination of arm's length standard under each segment. 12. The submissions of assessee in respect of Working Capital Adjustments is also extracted as under:- “At the outset, the assessee points out that in the TP order, TPO has not provided for an adjustment for the differences in the working capital between the assessee and the comparables. However, the DRP in the second round of assessment proceedings directed the TPO to provide the assessee with working capital adjustment. The relevant extract from the DRP's direction is as follows:- \"The TPO hall also consider allowing working capital adjustment to the assessee subject to variations in receivables and inventory vis-à-vis the comparables that distort the comparability. Principle wise the adjustment should be allowed if the variations in working capital deployment are established before the TPO.\" The TPO has however failed to follow the above binding direction of the DRP thereby failed to provide the assessee with working capital adjustment. The assessee's contentions are as follows:- A working capital adjustment analysis seeks to adjust the profitability of each comparable company based on the working capital position of the Company to reflect the differences in working capital investment. Thus, the adjustment tries to isolate the interest effects (taking into account the time value of money) that result from the opportunity costs of holding working capital. The interest effects in the comparable company's data are not completely eliminated but rather adjusted to the Company's level of interest effects. The interest effects in the comparable company's data are not completely eliminated but rather adjusted to the Company's level of interest effects. Prime-lending rate ('PLR') is used as the appropriate cost of capital because it can be determined with reasonable accuracy and is the best available estimate of the cost of capital. For this purpose, the PLR is secured from CMIE (i.e. Center for Monitoring Indian Economy) and Reserve Bank of India publications. In this context, the assessee places reliance on: (i) the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2017; (ii) Rule 10B(3) of the Income Tax Rules, 1961; (iii) Recent rulings in the case of Demag Cranes & Components (India) Pvt. Limited ITA [No.120/PN/2011], Mentor Graphics (Noida) Pvt. Ltd. [112 TTJ 408] ('Mentor Ruling), E-Gain Communication (P) Ltd. vs ITO (118 ITD 243) in ITA NO 1685/PN/2007 ('E-Gain Ruling). TNT India Lad Vs ACIT (ITA No.1442 (BNG)/08), Vedaris ITA No.1076/Del/2016 Page | 13 Technology (P) Ltd. (ITA No. 4372(Del)/2009), Mercer Consulting (India) Pvt. Ltd. (ITA No.966/Del/2014). Accordingly, based on the aforesaid submission and judicial precedents, the assessee contends that it be granted the benefit of working capital adjustment.  Risk adjustment The ITAT would appreciate that the comparable uncontrolled companies proposed to be selected in respect of services provided by the assessee, operate under uncontrolled conditions bearing certain risks during the course of its operations. As a result, such comparable uncontrolled companies earn a risk premium, which is not being earned by a contract service provider similar to the assessee as it is risk insulated. Therefore, to such extent the profits of the contract service provider would be lesser and thus an adjustment in this regard is warranted. The risk adjustment will automatically provide the adjustment towards systematic risks borne by the comparable companies vis-à-vis the assessee. The assessee thus submits that the assessee reserves the right to file a detailed risk adjustment quantifying the adjustment on account of risk differential in due course of time.” 13. The submissions of assessee in respect of Contract R& D and Business support services segments as under:- “At the outset, the assessee submits that the during the first round of appeal proceedings before the ITAT, the Bench set aside the Grounds with respect to inclusion/exclusion of comparables in both segments back to the file of AO/ TPO to decide the matter afresh, vide order dated November 22, 2012. The relevant extract from the order has been provided hereunder for the ITAT's ready reference: “5 (...) We find that in the present case the assessee has also collated supplementary evidence to corroborate the arm's length nature of its international transactions in adherence to the principles and contentions made before the authorities below. We thus in the interest of justice set aside the matter to the file of the AO to first ascertain to his satisfaction that the instances furnished by the assessee by way of supplementary evidence are indeed comparable to the case of the assessee to corroborate the arm's length nature of its international transaction in adherence to the principles of arm's length and then analyse pricing policy of the assessee in the light of the said evidence which was not in the possession of the assessee earlier. It is needless to mention over here that while deciding the issue afresh the A.O. will afford opportunity of being heard to the assessee.” It is to be noted here, that the ITAT remanded hack all the grounds relating to the transfer pricing adjustment to the file of the AO/TPO for fresh adjudication. ITA No.1076/Del/2016 Page | 14 During the remand back proceedings, various submissions were filed before the TPO containing the contentions with respect to both service segments. A Summary of the submissions filed has been provided below for the Bench's ready reference: S.No. Date of submission Particulars 1. October 07, 2014 Application u/r 29 of the Rules seeking permission to file additional evidences before the ITAT, including the detailed list of all additional evidences. 2. October 08, 2014 Detailed submission including contentions in relation to contract R&D and Business support services segments. 3. January 22, 2015 Submission filed before the TPO providing clarifications on the non-time barring nature of the remand back proceedings and a request to accord the Appellant a reasonable opportunity to explain the detailed contentions in the case. Pursuant to the above, the TPO did not issue any show-cause notice providing its findings on the assessee's contentions or requesting the assessee to show cause why the adjustment should not be proposed on the issue of comparables in the contract R&D and business support service segments. The TPO proceeded to pass the order during the remand back assessment proceedings by simply following the earlier order passed during the first round of assessment, without adjudicating on any of the issues pertaining to contract R&D or business support services segments (refer page 10 & 11 of the TPO order dated January 30, 2015). Subsequently, the assessee also filed the detailed grounds of appeal with respect to both service segments before the DRP, however, the DRP Panel proceeded to reject the assessee's contentions without providing any cogent reasons against the same. It is also to be noted that the Assessee had furnished a fresh search before the TPO/DRP during the first round of proceedings, however, the same has not been adjudicated upon during the remand back proceedings. Hence, the assessee humbly submits that the DRP/TPO has failed to provide opportunity of being heard to the assessee. In this regard, the assessee submits that as per the provisions of the Act, an assessment completed without providing an opportunity of being heard, is null and void. The assessee places reliance on the following judicial precedents wherein it has been held that the income-tax proceedings are quasi- ITA No.1076/Del/2016 Page | 15 judicial proceedings and therefore, the AO/TPO is bound to give opportunity of being heard to the assessee.  Indian & Eastern Newspaper Society vs. CIT (1979) (119 ITR 996)  Swadeshi Cotton Mills Co. Ltd. Vs. Union of India, (1981 1 SCC 664)  Collector of Central Excise v. ITC Ltd. (1995-SC) 2 SCC 38  C.B Gautham vs Union of India and Others (199 ITR 530) (SC) 14. In this backdrop, the broad contentions of the assessee are extracted hereunder:- “that following filters were applied by DRP in the first round of assessment, which were not applied by the TPO:- * Rejection of companies with less than 25% of operating revenue from software development as export sales; and * Rejection of companies having onsite revenues of 75% or more of their total export revenue from software development services. Thereafter, the assessee filed an appeal before the ITAT against the application of such filters by DRP. The ITAT vide order dated November 22, 2012 set aside the matter back to the file of AO. The TPO to decide the matter afresh. Without prejudice to the primary contention raised in the preceding paragraphs, the assessee’s contentions with respect to filters adopted by the TPO/DRP and comparables are as follows:- a. Reasons for rejection of onsite revenue filter  This is a business exigency and can't be applied as a systematic filter.  Absence of authenticated information for application of such filter.  assessee wasn't provided with sufficient time to analyse the data obtained by DRP vide power granted under Section 133(6) of the Act for application for such filter.  TPO has himself discouraged the use of such data for performing comparability analysis. In this regard, the assessee further submits that having regard to above contentions of the assessee following comparables are ought to be included in the final set of comparables for contract R&D services. Companies to be accepted pursuant to rejection of onsite revenue filter: S.No. Name of comparable OP/TC 1. Akshay Software Technologies Ltd. 4.78% 2. Maars International Software Ltd. -1.66% 3. Melstar Information Technologies Ltd. -4.94% b. Reasons for rejection of export revenue filter  For the purpose of economic analysis, it is essential to consider functional comparability rather than geographical customer location. ITA No.1076/Del/2016 Page | 16  Definition of uncontrolled transaction under Rule 10A(a) of the Income-tax, Rules 1962 (\"the Rules\") specifically mentions that such transaction can be whether between resident or non-resident.  All the three conditions of Rule 10B should be cumulatively satisfied for rejection of domestic companies. In this regard, the assessee further submits that having regard to above contentions of the assessee, following comparables are ought to be included in the final set of comparables for contract R&D services segment. Companies to be accepted pursuant to rejection of export revenue filter S.No. Name of comparable OP/TC 1. Powersoft Global Solutions Ltd. 16.64% 2. V& K Softech Ltd. 5.14% 3. Vama Industries Ltd. (Software development and services segment) 10.99% c. Assessee's contentions against the comparables rejected by the TPO/ DRP The assessee humbly submits that the DRP/ TPO has rejected some comparables on the basis of functional comparability. The contentions of the assessee against the exclusion of such comparables is provided below: Companies to be accepted pursuant to contentions of the assessee on functional similarity S.No. Name of comparable OP/TC Remarks of the Ld.DRP Assessee’s contentions 1. ICRA Techno Analytics Ltd. 10.94% Annual Report is available for the FY 2006- 07. It is in the business of IT products and services, Engineering services and KPO. As the company is in to IT services and BPO and in the absence information functionality and segmental details, the company was asked u/s 133(6) to submit the information. As per the information submitted, it appears that most of the revenues from software development services are from onsite. But the information submitted by the company is not clear on this account. Thus the same is not considered as a comparable. Onsite Revenue Filter- 57.24% and is accordingly, clearing the Ld. DRP's/TPO's own onsite revenue filter of onsite revenue/total export revenue. Functional Similarity- Revenue from services consists of revenue earned from services performed for software development & consultancy, sub- licensing fee, web development & hosting, etc. which is recognised as and when services are performed.\" 2. Indus 2.06% As per the information Functionally similar The ITA No.1076/Del/2016 Page | 17 Networks Ltd. (Software Services Segment) submitted by the company u/s 133(6), it has three segments i) Software Services, ii) ITES and in Manufacturing. The revenue from software services does not constitute more than 75% of the operating revenues of the company. The company stated that software services include software development services and software Products. The segmental results are neither available. Hence, rejected. relevant \"Software Services\" segment has been considered for the purpose of comparability and further as per the snapshot of the annual report, Indus is not engaged in dealing with software products. 3. V M F Soft Tech Limited 0.15% Based on the information gathered about the company it is seen that the company is functioning on job work basis. As the predominant work is outsourced, the company is functionally dissimilar, Thus the company is rejected as a comparable Functionally similar The Company has income and corresponding expenses from software development services. Hence the Ld. DRP/TPO'S comments are not applicable. d. assessee 's contentions against the comparables accepted by the TPO/ DRP The assessee humbly submits that the DRP/TPO has accepted some comparables on the basis of functional comparability. The contentions of the assessee against the inclusion of such comparables is provided below. Companies to be rejected pursuant to contentions of the assessee on functional similarity S.No. Name of comparable Correct OP/TC Appellant’s contention 1. Kals Information Systems Ltd. (seg.) 30.55% Significant revenue from product and no segmental details available: the share of revenue from trading in software is 23% and revenue earned from training is 4%  Bindview India P. Lad [TS-818- ITAT-2011]  United Health Group Information Services Pvt Lid (TS-255-ITAT- 2014(DEL)-TP)  Systech Integrators India Pvt Ltd (TS-82-ITAT-2014(BANG)-TP]  Prana Studios Pvt Lad (TS-10-ITAT- 2015(Mum)-TP) 2. R Systems International Ltd.- 10.09% Incorrect margin of 15.07% considered by Hon’ble DRP against correct margin ITA No.1076/Del/2016 Page | 18 Segmental of 10.09% The assessee, without prejudice to the above contentions, would like to propose certain additional companies which are comparable to the assessee, in terms of functions performed, assets employed and risks assumed. Further, these additional comparables clears all the filters applied by the DRP/TPO. Hence, the assessee requests the ITAT to appreciate that since the below mentioned comparables perform similar function to that of the assessee, they should be included in the final set of comparables. S.No. Name of comparable Assessee’s contentions 1. SIP Technologies & Exports Ltd. (“SIP Technologies”) Functionally similar Engaged in providing software development services. This comparable was also proposed by the Appellant in fresh search submitted before Ld. TPO. However, Hon'ble DRP hadn't adjudicated on the same during the first round of assessment. Passes filters applied by the Ld. DRP/TPO- -RPT filter, -Export filter: -Persistent losses filter, and -Onsite revenue filter 2. Datamatics Ltd. (“Datamatics”) Functionally similar Consulting, Information Technology (IT) services Passes filters applied by the Ld. DRP/TPO- - RPT filter: -Export filter: -Persistent losses filter; and -Onsite revenue filter 3. Quintegra Solutions Ltd. (“Quintegra”) Functionally similar-Engaged in providing software and application development services. Passes filters applied by the Ld. DRP/TPO- - RPT filter: -Export filter: -Persistent losses filter; and -Onsite revenue filter 4. iGate Global Solutions Limited (“igate”) Functionally similar-iGate is an IT company engaged in providing software and application development services Passes filters applied by the Ld. DRP/TPO- - RPT filter: -Export filter: -Persistent losses filter; and -Onsite revenue filter Therefore, after a combined consideration of above contentions of the assessee, it would like to submit the proposed set for the reference of the ITAT:  Scenario 1-After working capital adjustment, accepting comparables selected by the DRP/ TPO (excluding Kals, functionally dissimilar), ITA No.1076/Del/2016 Page | 19 including comparables ought to be selected after rejection of onsite revenue filter and export sales filter and including functionally similar comparables rejected by DRP during the first round of assessment.  Scenario 2-Including additional comparables proposed by the assessee in the Scenario 1. Different scenarios proposed by the assessee after making working capital adjustment to the correct margins of comparables S.No. Name of comparable Particulars Scenario 1 Scenario 2 OP/TC Working capital adjusted OP/TC OP/TC Working capital adjusted OP/TC 1. Datamatics Limited Additional comparable proposed by the Appellant - - 0.84% -1.58% 2. iGate Global Solutions Limited Additional comparable proposed by the Appellant - - 7,49% 5.81% 3. Quintegra Solutions Ltd. Additional comparable proposed by the Appellant - - 15.95% 11.89% 4. S I P Technologies & Exports Ltd. Additional comparable proposed by the Appellant - - 14.12% 10.28% 5. KALS Information Systems Ltd. (Seg.) Final AO order comparable - - - - 6. LGS Global Ltd/Lanco Global Systems Ltd. Final AO order comparable -16.03% 14.30% 16.03% 14.30% 7. Mindtree Limtied Final AO order comparable 16.90% 14.71% 16.90% 14.71% 8. R S Software Ltd. Final AO order comparable 13.48% 13.14% 13.48% 13.14% 9. R Systems International Ltd.- Segmental Final AO order comparable 10.09% 10.09% 10.09% 10.09% 10. ICRA Techno Analystics Ltd. Functionally similar comparable rejected by Ld.DRP during first round of assessment 10.94% 0.78% 10.94% 0.78% 11. Indus Networks Ltd. (Software Services Segment) Functionally similar comparable rejected by Ld.DRP during first round of assessment 2.06% 2.06% 2.06% 2.06% 12. VMF Soft Tech Ltd. Functionally similar comparable rejected by Ld.DRP during first round of assessment 0.15% -55.94% 0.15% -55.94% 13. Powersoft Global Solutions Ltd. Rejected on export sales filter by Ld.DRP 16.64% 11.40% 16.64% 11.40% 14. V&K Softech Ltd. Rejected on export sales filter by Ld.DRP 5.14% 5.92% 5.14% 5.92% ITA No.1076/Del/2016 Page | 20 15. Vama Industries Ltd. (Software development services segment) Rejected on export sales filter by Ld.DRP 10.99% 10.99% 10.99% 10.99% 16. Akshay Software technologies Ltd. Rejected on onsite revenue filter by Ld.DRP 4.78% 4.60% 4.78% 4.60% 17. Marrs Software International Ltd. Rejected on onsite revenue filter by Ld.DRP -1.66% -6.28% -1.66% -6.28% 18. Melstar Information technologies Ltd. Rejected on onsite revenue filter by Ld.DRP -4.94% -9.98% -4.94% -9.98% Count 13 13 17 17 Mean 7.74 1.21% 8.18% 2.48% Thus, as is evident from the above set of analysis, the assessee's margin (OP/TC) of 5.02% is at arm's length in view of section 92C(2) of the Act and hence this provides evidence that the international transaction of assessee pertaining to contract R&D service segment were in accordance with the arm's length standard required under the Indian Regulations. Thus, the assessee contends that in light of the above analysis, no further adjustment is warranted. 15. The contentions of the assessee in respect of ‘Business support service’ segment is extracted as under:- “In this regard, the assessee would like to submit that during first round of assessment DRP included/excluded certain comparables from the final set on the basis of functional comparability. Thereafter, the assessee filed an appeal before the ITAT against the certain comparables wherein the assessee's contentions weren't accepted by the DRP/ TPO. The ITAT vide order dated November 22, 2012 set aside the matter back to the file of AO/ TPO to decide the matter afresh. Without prejudice to the primary contention covered in Section VI above, the assessee's contentions with respect to comparables adopted by the TPO/ DRP and comparables are as follows:- IL&FS Academy for Insurance & Finance Ltd. It reported an OP/TC margin of 48.43% vis-à-vis an OP/TC margin of 4.83% and 0.53% in the prior years i.e. FY 2004-05 and FY 2005-06 respectively. A perusal of the Director's Report of FY 2006-07 indicated that the company had shifted its product offering mix during the year to higher order training programmes with higher margins. Hence, the assessee submits that IL&FS Academy for Insurance & Finance Ltd. ought to be excluded for benchmarking business support services rendered to its AEs. TSR Darashaw Ltd. ITA No.1076/Del/2016 Page | 21 It reported an OP/TC margin of 33.89% vis-à-vis an OP/TC margin of 15.38% and 14.38% in the prior years i.e. FY 2004-05 and FY 2005-06 respectively. A perusal of the Director's Report of FY 2006-07 indicated that there has been a potential growth in the payroll business of the company resulting in an increase in the income of the company by 40%. Hence, the assessee submits that TSR Darashaw Lad ought to be excluded for benchmarking business support services rendered to its AEs. In this regard, useful reference may be made to the judgment of the Hon'ble Delhi Bench in the case of Sony India (P) Limited [114 ITD 448) in ITA Nos 1189/ Del/2005, 819/ Del/2007 & 820/2007] (\"Sony Ruling\") (relevant extract reproduced below). \"We are also not impressed by the arguments of learned Departmental Representative that Videocon International was included in the list of comparables furnished by the taxpayer. In our considered opinion, there is sufficient material on record to show that taxpayer in proceedings before the TPO as well as before the learned CIT (Appeals) had argued that there were huge differences between the taxpayer and the Videocon International Ltd and therefore, Videocon International should be excluded from comparison”. The assessee also places reliance on the Quark Systems Ruling (38 SOT 307) where it was held by the ITAT that: \"The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer.\" 38. Accordingly on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown it's prima-facie case\" Thus, the jurisdictional ITAT Bench has un-equivocally stated that, merely because the assessee had included a comparable in its TP documentation, it could not be debarred from seeking rejection of that company at a later stage of assessment/appellate proceedings. Thus, the assessee contends that the high margins of the aforementioned companies during the relevant year are outcome of the extra-ordinary conditions faced by the companies during the year. Hence, the high profit companies deserves to be excluded from the final set of comparable companies, a. assessee's contentions against the rejection of certain comparable companies by DRP during first round of Assessment The Assessee would also highlight that in the first round of proceedings, the DRP/ TPO rejected Agrima Consultants International Ltd with OP/TC ITA No.1076/Del/2016 Page | 22 of -8.58% in FY 2006-07, submitted during fresh search on account of having dissimilar functional profile as the company was involved in supply of peons and administrative staff to offices. However, the assessee was not provided any basis for arriving at such a conclusion. b. Additional comparables proposed by the assessee The assessee, without prejudice to the above contentions, would like to propose certain additional companies which are comparable to the assessee, in terms of functions performed, assets employed and risks assumed. Further, these additional comparables clears all the filters applied by the DRP/ TPO and also has been accepted by TPO in succeeding years. Hence, the assessee requests the ITAT to appreciate that since the below mentioned comparables perform similar function to that of the assessee, they should be included in the final set of comparables. Business support services segment -Additional comparables S.No. Name of comparable Business Description OP/TC Working capital adjusted OP/TC 1. ICRA Management Consulting Services Limited The company is engaged in the consultancy business. It is engaged in the providing multi-line management/development consulting services. This comparable has been accepted by the Ld. TPO himself in the succeeding years i.e. 15.75% 10.54% 2. Rediff.com India Limited The company provides online internet based services focused on Indian and global Indian community. The company provides an interface for global companies to showcause their offerings through its websites which offers search engine and facilitate them with advertising service. This comparable has been accepted by the Ld. TPO himself in the succeeding years. 10.13% 8.10% Furthermore, the assessee would also like to submit that correct margins of comparables should be used for computation of ALP for business support service segment. In final assessment order, the DRP/ AO/ TPO have used incorrect margins of two comparable companies as follows:- ITA No.1076/Del/2016 Page | 23 Business support services-Incorrect margin of comparables considered by DRP/ AO Particulars Incorrect OP/TC taken in Final AO order Correct OP/TC National Small Industries Corp.Ltd. -0.31% -4.85% Khaitan India Limited (Marketing Segment) 9.00% 8.67% Thus, the assessee would like to submit before the ITAT that after taking into consideration the above contentions of the assessee, the following set of comparables should be used for determination of arm's length price of international transaction pertaining to Business Support Services Segment. Business Support services segment-Proposed set of comparables S.No. Name of company OP/TC Working capital adjusted OP/TC 1. Empire Industries Ltd. (Trading and indenting Segment) 24.03% 24.03% 2. Priya International Ltd. (Indenting) 16.00% 15.71% 3. Khaitan India Ltd. (Marketing Division) 8.67% 8.67% 4. National Small Industries Corp.Ltd. -4.85% -5.12% 5. ICRA Management Consulting Services Limited 15.75% 10.54% 6. Rediff.com India Limited 10.13% 8.10% 7. Agrima Consultants International Limited -8.58% -8.12% Arithmetic Mean 8.69% 7.69% Appellant’s Margin 4.32% Thus, as is evident from the above analysis, the assessee's margin (OP/TC) of 4.32% is well within the arm's length requirement as per section 92C(2) of the Act, and this provides evidence that the international transaction of assessee pertaining to business support services segment were in accordance with the arm's length standard required under the Indian Regulations'. Hence, the assessee contends that no further adjustment is warranted in this segment. 16. Without prejudice to the submissions towards contract R&D and Business Support service in para 13 and further to the detailed contention provided in para 14, the assessee additionally submits below the summary of comparable-wise contentions for both contract R&D and business support services segment for ready-reference:- ITA No.1076/Del/2016 Page | 24 S.No. Name of comparable Remarks of the Ld.DRP(First round of proceedings) Appellant’s contention before DRP (second round of proceedings) Remarks of the Ld.DRP (second round of proceedings) Appellant’s appeal before Hon’ble ITAT 1. Akshay Software Technologies Ltd. Rejected on the basis of onsite revenue filter and functional dissimilarity (please refer page 358 of the paper book) * Onsite Revenue Filter - incorrect filter applied by the DRP. Comparable ought to be accepted after disregarding the filter. (please refer page 106 to 108 of the paper book) * Functional Similarity- having a wholly owned subsidiary in the US(as per the TPO) is not a criteria to reject comparables. Fruther, the company is engaged in providing software development services. *Sale of products -The company only earns 4.35% of its revenue from sale of products. (please refer page 113 to 114 of the paperbook) Upheld the onsite revenue filter as a valid filter. (Please refer page 22 of the paperbook) No remarks on the functional comparability of the company The onsite revenue filter has been arbitrarily applied and should not be applied for determining the ALP of the company. Considering the same and the functional similarity of the company, it ought to be accepted in the final set. 2. Maars International Software Ltd. Rejected on the basis of declining sales, functional dissimilarity (manpower services) and onsite revenue filter (please refer page 379 of the paperbook) * Functional similarity - The company is involved in providing services related to software development and not manpower services. * Increasing trend in revenue, positive net worth -the company has increasing trend in sales and has positive net worth. Thus, TPO’s rejection reason is invalid. * Onsite Revenue Filter- incorrect filter applied by the DRP. Comparable ought to be accepted after disregarding the filter (Please refer page 118 to 119 of the paperbook) Upheld the onsite revenue filter as a valid filter. (Please refer page 22 of the paperbook) No remarks on the functional comparability of the company The company is functionally similar to the Appellant and increasing trend in revenue itself is not an appropriate reason for rejection. Hence, it ought to be accepted. 3. Melstar Information Technologies Ltd. Rejected on the basis of onsite revenue filter and due to the company having declining revenues (please refer page 380 of the paperbook) * Onsite Revenue Filter- incorrect filter applied by the DRP. Comparable ought to be accepted after disregarding the filter. * Increasing trend in revenue, positive net worth -the company has increasing trend in sales and has positive net worth. Thus, TPO’s rejection reason is invalid. (Please refer page 119 to 120 of the paperbook) Upheld the onsite revenue filter as a valid filter. (Please refer page 22 of the paperbook) No remarks on the functional comparability of the company The onsite revenue filter is arbitrary and should not be applied. Further, increasing trend in revenue itself is not an appropriate reason for rejection. Hence, it ought to be accepted. 4. ICRA Techno Analytics Ltd. Rejected on the basis of onsite revenue filter and functional dissimilarity (please refer page 378 to 379 of the paperbook) Segmental data available-The company has been rejected on an entity level comparison. The Appellant submits that comparability may be restricted to its “software development” segment. Onsite Revenue Filter- 57.254% and is accordingly, clearing the Ld.DRP’s./TPO’s own onsite revenue filter of onsite revenue/total export revenue. Functional Similarity-Revenue Upheld the onsite revenue filter as a valid filter. (Please refer page 22 of the paperbook) No remarks on the functional comparability of the company The onsite revenue filter is arbitrary and should not be applied for determining the ALP of the company. Considering the same and the functional similarity of the company, it ought to be ITA No.1076/Del/2016 Page | 25 from services consists of revenue earned from services performed for software development & consultancy, sub-licensing fee, web development & hosing, etc. which is recognized as and when services are performed.” (Please refer page 117 to 119 of the paperbook). accepted in the final set. 5. Computech International Ltd. Rejected on the basis of functional dissimilarity (sale of software products) and declining sales (Please refer page 378 to 379 of the paperbook) Functional Similarity-From the annual report of the company, it is evident that the company is engaged in provision of software development services. Revenue is stable-The Revenue of the company was stable, and saw a minor incline as compared for the previous year. The Ld.DRP’s contention has no basis. (please refer page 114 to 115 of the paperbook) Not adjudicated upon Company ought to be accepted on the grounds of functional similarity 6. Exensys Software Solutions Ltd. Rejected on the basis of functional dissimilarity (sale of software products) and declining sales (Please refer page 378 of the paperbook) Functional Similarity- business profile similar to kals information systems ltd. (seg.) comparable accepted by the TPO/.DRP. Comparable has been rejected due to cherry picking of high margin comparables. (please refer page 109 of the paperbook) Not adjudicated upon Company ought to be accepted on the grounds of functional similarity 7. Powersoft Global Solutions Ltd. Rejected on export filter (please refer page 380 of the paperbook) Export Filter incorrect filter applied by the DRP. Comparable ought to be accepted after disregarding the filter -For the purpose of economic analysis, it is essential to consider functional comparability rather than geographical customer location. -Definition of uncontrolled transaction under Rule 10A(a) specifically mentions that such transaction can be between resident or non- resident. -All the three conditions of Rule 10B should be cumulatively satisfied for rejection of domestic companies. (please refer page 101 to 103 of the paperbook) Upheld the export filter as a valid filter. (please refer page 22 of the paperbook). No remarks on the functional comparability of the company The export filter has been arbitrarily applied and should be rejected for determining the ALP of the company. Hence, these comparables ought to be accepted. 8. V & K Softech Ltd. Rejected on export filter (please refer page 382 of the paperbook) 9. Vama Industries Ltd. Rejected on export filter (please refer page 382 of the paperbook) 10. Indus Networks Ltd. (software services segment) Rejected on the basis of functional dissimilarity and lack of segmental information (please refer page 379 of the * Functionally similar- The relevant \"Software Services\" segment has been considered for the purpose of comparability and further as per the snapshot of the annual report, Indus is not engaged in dealing with Not adjudicated upon Company ought to be accepted on the grounds of functional similarity ITA No.1076/Del/2016 Page | 26 paperbook) software products. * Segmental information available The segmentals of the Company are available on Page 38 of the annual report, and the 'software services' segment has been considered for comparability. (please refer page 117 to 118 of the paper book) 11. VMF Soft Tech Ltd. Rejected on the basis of functional dissimilarity (please refer page 379 of the paperbook) Functionally similar- The Company has income and corresponding expenses from software development services. Hence the Ld. DRP/TPO's comments are not applicable. (please refer page 120 to 121 of the paperbook) Not adjudicated upon Company ought to be accepted on the grounds of functional similarity 12. LGS Global Ltd. Accepted by DRP (please refer page 379 of the paper book) To be rejected due to super normal growth in revenue and profits (please refer page 96 to 100 of the paper book) Not adjusted upon Comparable to be rejected due to super normal growth in revenue and profits The company also had significant acquisitions during the year.(Techorbit Inc. USA and Global It Inc, USA, became wholly owned subsidiaries to the company w.e.f 01.10.2006 and 01.01.2007 respectively.) 13. R S Software (India) Ltd. Accepted by DRP (please refer page 380 of the paper book) To be rejected due to super normal growth in revenue and profits (please refer page 96 to 100 of the paper book) Not adjusted upon Comparable to be rejected due to super normal growth in revenue and profits Functionally dissimilar- Company offers multi-rail expertise developed by delivering transformative solutions across the digital payments value chain- Infrastructure, Application, Services. No segmental information available. 14. Kals Information Systems Ltd. (Seg.) Accepted by Ld.TPO/Ld. DRP (Please refer page 379 of the paper Significant revenue from product and no segmental details available: the share of revenue from trading in Directed to ld.TPO to exclude the company from Company ought to be rejected based upon the directions of the ITA No.1076/Del/2016 Page | 27 book) software is 23% and revenue earned from training is 4% (please refer page 122 to 123 of the paperbook) Rejected as comparable in the following case laws: Bindview India P. Ltd [TS-818- ITAT-2011] United Health Group Information Services Pvt Ltd [TS-255-ITAT-2014(DEL)-TP] Systech Integrators India Pvt Ltd [TS-82-ITAT-2014(BANG)- TP] Prana Studios Pvt Ltd [TS-10- ITAT-2015(Mum)-TP] (please refer page 123 to 127 of the paperbook) the final set of comparables after verifying the functional comparability (Please refer page 23 of the paperbook) Ld.DRP. 15. SIP technologies & Exports Ltd. NA Functionally similar - Engaged in providing software development services. This comparable was also proposed by the Appellant in fresh search submitted before Ld. TPO. However, Hon'ble DRP hadn't adjudicated on the same during the first round of assessment. Passes filters applied by the Ld. DRP/TPO- -RPT filter; -Export filter; -Persistent losses filter; and -Onsite revenue filter (please refer page 128 to 131 of the paperbook) Not adjudicated upon The company is functionally similar to the Appellant and passes all filters applied by the Ld.DRP. Hence, it ought to be accepted. 16. Datamatics Ltd. NA Functionally similar - Consulting, Information Technology (IT) services Passes filters applied by the Ld. DRP/TPO- -RPT filter; -Export filter; -Persistent losses filter; and -Onsite revenue filter (please refer page 131 to 134 of the paperbook) Not adjudicated upon The company is functionally similar to the Appellant and passes all filters applied by the Ld.DRP. Hence, it ought to be accepted. 17. Qunitgra Solutions Ltd. NA Functionally similar - Engaged in providing software and application development services. Passes filters applied by the Ld. DRP/TPO- -RPT filter; -Export filter; -Persistent losses filter; and Not adjudicated upon The company is functionally similar to the Appellant and passes all filters applied by the Ld.DRP. Hence, it ought to be accepted. ITA No.1076/Del/2016 Page | 28 -Onsite revenue filter (please refer page 135 to 138 of the paperbook) 18. iGate Global Solutions Limited NA Functionally similar - iGate is an IT company engaged in providing software and application development services Passes filters applied by the Ld. DRP/TPO - -RPT filter; -Export filter; -Persistent losses filter; and -Onsite revenue filter (please refer page 139 to 141 of the paperbook) Not adjudicated upon The company is functionally similar to the Appellant and passes all filters applied by the Ld.DRP. Hence, it ought to be accepted. B. Business support service segment S.No. Name of comparable Remarks of the Ld.DRP (First round of proceedings) Appellant’s contention before DRP (second round of proceedings) Remarks of the Ld.DRP (second round of proceedings) Appellant’s appeal before Hon’ble ITAT 1. IL & FS Academy for Insurance & Finance Ltd. Accepted by DRP (Please refer page 347 of the paper book) Change in business profile during FY 06-07-Company shifted its product offering mix during the year to higher order training programmes * Abnormal profit - Resultantly, the company earned 48.43% margin during FY 2006-07, compared to 4.83% and 0.53% during previous years. (please refer page 154 to 155 of the paperbook) The variations in margin do not indicate volatility or unreliability of the financials of these entities. The same have hence been correctly retained by the TPO. (please refer page 24 of the paper book) The Appellant has provided specific information and screenshots to demonstrate the change in business activities. Hence, the companies ought to be rejected. 2. TSR Darashaw Ltd. Accepted by DRP (Please refer page 348 of the paper book) * Functionally dissimilar - Engage in diversified services under payroll processing, trust fund administration and statutory compliance businesses. Further, due to a lack of segmental data availability, it cannot be held comparable to the BSS service segment of SEIPL. * Change in business profile during FY 06-07 Company shifted its business profile to focus on payroll business of the Company leading to abnormally high profits. (please refer page 154 to 155 of the paperbook) 3. Agrima Consultants International Ltd. Rejected on the basis of functional dissimilarity (please refer page 349 of the paper book) Functionally similar - engaged in undertaking feasibility reports for industrial clients. DRP's findings are incorrect. * No cogent reason given by Ld. DRP - Ld. DRP misconstrued the company's business profile, thus The company is functionally ITA No.1076/Del/2016 Page | 29 wrongfully rejecting it based on incorrect details. (please refer page 155 to 158 of the paperbook) similar to the Appellant and passes all filters applied by the Ld.DRP. Hence, the comparable ought to be accepted. 4. ICRA Management Consutlign Services Ltd. NA * Functionally similar - The company is engaged in consultancy business and providing multi-line management/development consulting services * Accepted as comparable in AY 08-09 and AY 09-10 (please refer page 158 to 160 of the paperbook) Rejected on the basis of functional dissimilarity without providing any cogent reasons (Please refer page 24 of the paper book) 5. Rediff.com India Ltd. NA * Functionally similar - The company provides an interface for global companies to showcase their offerings through its website which offers search engine and facilitation services. * Accepted as comparable in AY 08-09 and AY 09-10 (please refer page 158 to 160 of the paperbook) 17. The Ld.CIT DR for the Revenue, on the other hand, defended final assessment order under challenge and submitted that the final assessment order has been framed in accordance with law after taking due cognizance of the directions given in the order of the Tribunal dated 07.12.2022. The Ld.CIT DR also submitted that the ITAT in the first round had set aside the adjustments made in relation to manufacturing segment alone for the purposes of verification qua the additional evidences whereas the grievance of the assessee encompasses adjustments manufacturing segments; R& D service segments and business support services segment. 18. In the re-joinder, the Ld. Counsel for the assessee adverted to the order of the Co-ordinate Bench dated 22.11.2012 and submitted that the averments made by the CIT DR is wholly incorrect. The Tribunal vide paras 5 & 6 of its aforesaid order had set aside the entire matter for fresh consideration including the matters pertaining to contract R & D services and business support services segments of the assessee. The Ld. Counsel for the assessee also submitted that ITAT has passed order in the case of group companies namely, Schneider Electric Infrastructure Ltd. (“SCIL”) for AY 2017-18 in ITA No.64/Ahd/2022 order dated 07.12.2022 where the facts are identical to the ITA No.1076/Del/2016 Page | 30 case of the assessee with only difference being the location of the group company being in Gujarat in that case. Both the assessee as well as SCIL have manufacturing segments. In SCIL case, the TPO correctly accepted the sub-segments of manufacturing segments as presented by SCILs independent Chartered Accountant (“CA”). The ITAT also directed the TPO to accept the profit margin computation as certified by SCILs independent C.A. The ITAT in group company case further held that the profit margin of the non-AE segments should be compared with the profit margins of the AE segment as can be seen from paras 10.11 to 10.12 and 10.20 to 10.24 of the appellate order passed under s. 254(1) of the Act in the case of group company. The assessee thus contends that similar to the relief granted to the group company, the TPO requires to be directed to accept the sub-segments of the manufacturing segments as opined to be true and fair by the assessee’s independent C.A. The TPO be further directed to compare the profits margins of these sub-segments. The assessee also relied upon certain decisions to support its contentions regarding the acceptance of sub-segments prepared by its independent C.A viz [1] CIT 8, Mumbai Vs. Tara Jewels Exports Pvt. Ltd. (ITA Num 1814 of 2013, Bombay High Court); [2] Lumus Technology Heat Transfer BV vs. DCIT (ITA No. 6227/Del/20212), dated 21/2/2014; and [3]. Hinduja Ventures Ltd. Vs ACIT, Mumbai (ITA No. 8866/Mum/2010 dated 02/04/2012). 19. With respect to the deduction claimed under s. 10A, the Ld. Counsel for the assessee contends that in the light of the subsequent order passed by the Tribunal under s. 254(2) of the Act in M.A.No.165/Del/2014 arising in ITA No.5728/Del/2011 order dated 19.02.2015, the claim of deduction under s. 10A ought to have been allowed by the AO and has been wrongfully denied. 20. We have heard the rival submissions and perused the material available on record and referred in the course of hearing. ITA No.1076/Del/2016 Page | 31 21. As emerging from records and from the oral and written submissions from the respective sides, the transfer pricing adjustments with reference to manufacturing segment at INR 14,84,00,000/-; Transfer pricing business support service segment at INR 5,78,03,317/-; TP adjustments in contract R&D service segment at INR 91,50,032/- aggregating to INR 21,53,53,349/- is under challenge. The assessee has also inter-alia challenged denial of deduction under s. 10A claimed with reference to the total income computed by the AO as a result of TP adjustments. 22. With reference to the TP adjustments made in manufacturing segment, it is the case of the assessee that the TPO has omitted to examine the ALP applying ‘transactions by transactions approach’ in the light of additional evidences placed before the Tribunal and largely omitted to taking into account various submissions despite the matter having been set aside for fresh determination. The TPO has only provided proportionate relief in respect of its manufacturing segment and restricted the TP adjustments to the quantum of international transactions entered with AE. Besides, the direction of the ITAT in its order dated 22.11.2022 to re-examine the contentions of the assessee towards R&D support service segment and business support service segment has not been given due effect. The TPO has simply followed its previous order without adjudicating the issues pertaining to contract R&D support services and business support services segments. Similarly, the order passed under s. 254(2) stands merged with the ITAT order earlier passed under s. 254(1) of the Act and therefore the directions with respect to allowabilty of eligible claim of deduction under s. 10A ought to have been given due consideration. The observations made in the 254(2) order with reference to s.10A has not been weighed by the TPO/DRP/AO. The assessee further contends that principles applied by the Co-ordinate Bench of ITAT in the case of group company namely, Schneider Electric Infrastructure Ltd. for determination of transfer pricing adjustments by the Tribunal in similar circumstances should apply mutatis mutandis. 23. The assessee has filed detailed submissions in writing as well as made lengthy oral submissions as broadly extracted in the preceding paragraphs. ITA No.1076/Del/2016 Page | 32 The objections of the assessee ranges from failure to apply ALP principles in the assessment order passed under challenge; failure to apply interpretation rendered by Co-ordinate Benches and in disregarding multiple year/prior years data used by the assessee. As further contended, plea towards international transactions relating to import of components for manufacturing of electrical equipment would meet arm’s length principles on a transaction by transaction basis as canvassed by the assessee have been ignored. The contention towards selection of overseas tested party is also alleged to have been disregarded contrary to position of law and based on incorrect appreciation of facts. The assessee also asserts that the TPO has included certain companies that are not comparable to the assessee in terms of the functions performed, assets employed and risks assumed. Likewise, as contended, the TPO has wrongly excluded certain comparables companies for the purposes of TP adjustments. As further contended, the benefit of working capital adjustment while computing the ALP has also not been borne in mind. In the light of order passed by the Tribunal under s. 254(12) of the Act, the assessee also claims tax holiday under s. 10A on profits arrived at after the adjustments so made in accordance with law and alleges that the lower authorities have failed to apply the principles laid down by the Jurisdictional High Court in the case of CIT vs TEI Technology Pvt.Ltd. 361 ITR 36 (Del). 24. Multiple other objections have been raised as noted in the preceding paragraphs. 25. We find considerable force in the plea of the assessee for appropriate relief from such alleged errors committed by the lower authorities. We thus consider it expedient to restore all the issues placed before the Tribunal back to the file of the TPO/AO for fresh determination of such issues in the light of submissions made and various claims asserted before the Tribunal. It shall be open to the assessee to make such submissions and adduce such evidences as may be considered expedient. The TPO/DRP/AO shall pass fresh order in accordance with law by way of a speaking order. ITA No.1076/Del/2016 Page | 33 26. In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced in the open Court on 09th April, 2025. Sd/- Sd/- (VIKAS AWASTHY) JUDICIAL MEMBER (PRADIP KUMAR KEDIA) ACCOUNTANT MEMBER *Amit Kumar, Sr.P.S* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "