Everest Business Advisory India Pvt Ltd New Delhi v. Dcit New Delhi

In The Income Tax Appellate Tribunal Delhi Bench I New Delhi Before Shri B P Jain Accountant Member And Shri Kuldip Singh Judicial Member Ita No 41 Del 2013 Assessment Year 2007 08 Dcit Circle 11 1 Vs M S Everest Business Adv Isory India New Delhi P Ltd A 1 B 27 Janakpuri New Delhi 110 058 Pan Aabce 2871 R Ita No 1191 Del 2013 Assessment Year 2007 08 M S Everest Business Advisory India Vs Dcit Circ Le 11 1 P Ltd New Delhi A 1 B 27 Janakpuri New Delhi 110 058 Pan Aabce 2871 R Appellant Respondent Assessee By Ms Vandana Bhandare Advocate Revenue By Shri Neeraj Kumar Senior Dr Date Of Hearing 16 11 2017 Date Of Order 15 12 2017 O R D E R Per Kuldip Singh Judicial Member Since Common Questions Of Facts And Law Have Been R Aised In Both The Aforesaid Cross Appeals Emanated From S Ingle Impugned Ita Nos 41 1191 Del 2013 2 Order The Same Are Being Disposed Off By Way Of Co Nsolidated Order To Avoid Repetition Of Discussion 2 The Appellant Deputy Commissioner Of Income Tax Circle 11 1 New Delhi Hereinafter Referred To As The Taxpayer By Filing The Present Appeal Being Ita No 41 Del 2013 Sought To Set Aside The Impugned Order Dated 30 10 2012 Passed B Y The Cit Appeals Xx New Delhi Qua The Assessment Year 200 7 08 On The Ground That On The Facts And Circumstances Of The Case And In Law The Ld Cit A Has Erred In Deleting The Addition Of Rs 58 25 317 Made On Account Of Arms Length Pric E 3 The Appellant M S Everest Business Advisory In Dia Pvt Ltd Hereinafter Referred To As The Taxpayer By Filing The Present Appeal Being Ita No 1191 Del 2013 Sought To Set Asi De The Impugned Order Dated 30 10 2012 Passed By The Cit Appeals Xx New Delhi Qua The Assessment Year 2007 08 On Th E Grounds Inter Alia That That On The Facts And Circumstances Of The Case A Nd In Law 1 The Ld Cit A Ao Erred In Rejecting The Benchmarking Approach Adopted By The Appellant In T He Transfer Pricing Study And Thereby Making A Transfe R Pricing Adjustment Of Rs 42 17 582 To The Income Of The Appellant By Holding That The International Transaction Of Export Of Services Of The Appellan T Ita Nos 41 1191 Del 2013 3 Does Not Satisfy The Arms Length Principle Envisag Ed Under The Income Tax Act 1961 The Act 2 The Ld Cit A Has Erred Both In Facts And In Law In Confirming The Action Of The Ld Assessing Offic Er Ao As The Reference Made By The Ld Ao Suffers Fr Om Jurisdictional Error The Ld Ao Has Not Recorded A Ny Reasons In The Draft Assessment Order Based On Whic H He Reached The Conclusion That It Was Necessary Or Expedient To Refer The Matter To The Ld Transfer Pricing Officer Tpo For Computation Of The Arm S Length Price Alp As Is Required Under Section 92 Ca 1 Of The Income Tax Act 1961 Act 3 The Ld Cit A Has Erred Both In Facts And In Law In Confirming The Action Of The Ld Tpo Of Making A N Adjustment To The Income Of The Appellant By Rs 42 17 582 Holding That The International Transactions Do Not Satisfy The Arms Length Princ Iple Envisaged Under The Act And In Doing So Grossly Er Red In 3 1 Not Appreciating That None Of The Conditions Set Out In Section 92 C 3 Of The Act Are Satisfied In T He Instant Case 3 2 Not Appreciating That The Assessee Had Prepare D The Detailed Contemporaneous Transfer Pricing Documentation Bona Fide And In Compliance With The Act And Income Tax Rules 1962 The Rules 3 3 Not Appreciating The Fact That The Assessee Ha D Selected Uncontrolled Comparable Companies Based On A Detailed Functional Asset And Risk Far Analysis Following A Methodical Benchmarking Process Thereby Rejecting The Comparable Company Set Data Which Ha D Been Provided By The Assessee For Benchmarking Its Transactions Of Provision Of It Enabled Services W Ithout Giving Reasons That Were Cogent Or Backed By Any So Und Evidence 3 4 Disregarding Multiple Year Prior Years Data As Used By The Assessee In Its Transfer Pricing Tp Ita Nos 41 1191 Del 2013 4 Documentation Report And Holding That Current Year I E Fy 2006 07 Data For Comparable Companies Should Be Used Despite The Fact That The Same Was Not Availab Le To The Assessee At The Time Of Preparing Its Tp Documentation And In Interpreting The Requirement Of Contemporaneous Data In The Rules To Necessarily Imply Only Current Single Year I E Fy 2006 07 D Ata 3 5 Not Appropriately Considering The Functions Assets And Risk Profile Of The Companies Used For Comparison With The It Enabled Services Provided By The Assessee 3 6 By Excluding Certain Companies On The Basis O F Declining Sales Declining Profitability 3 7 By Including Certain Companies Which Are Not Comparable To The Assessee In Terms Of Functions Performed Assets Employed And The Risks Assumed 3 8 By Including Certain Companies Which Are Not Comparable To The Assessee In Terms Of The Turnover Or Abnormal Margins Varied Cost Structures Or In Res Pect Of Controlled Uncontrolled Transaction 3 9 By Treating The Assessee As A Profit Center A Nd Not Considering The Fact That The Assessee Is Operating As A Cost Plus Unit And Thereby Characterizing The Appellant As A Full Risk Bearing Entrepreneur 3 10 By Including The Segments Of The Companies Despite Knowing That Margin Calculations Of Such Segments Are Subjective 3 11 By Using The Power Of Under Section 133 6 O F The Income Tax Act 1961 For Obtaining The Information 3 12 Violating The Principles Of Natural Justice By Not Providing The Assessee A Reasonable Opportunity Of Being Heard While Rejecting Including Certain Companies Ita Nos 41 1191 Del 2013 5 3 13 Denying A Risk Adjustment To The Operating P Rofit Margins Of The Comparables And In Doing So Have Grossly Erred In 3 13 1 Stating That Detailed Working Or Formula Ap Plied For Calculation Of Risk Adjustment Has Not Been Pro Vided By The Assessee While Also Failing To Clarify What Would Constitute The I Detailed Working For The Purpose Of Undertaking A Risk Adjustment 3 13 2 Reaching A Conclusion That Risk Adjustment Is Required But In The Absence Of The Formula Cannot B E Provided For 3 14 Violating The Principles Of Natural Justice By Not Sharing With The Assessee Despite Having Adequate Time At Their Disposal To Do So The Concerns Issues In This Regard In Terms Of The Alleged Purported Shortcom Ings Deficiencies In The Assessees Claim For A Risk Adjustment And Thereby Denying The Assessee A Reasonable Opportunity To Study Examine The Said Ba Sis And Provide Its Comments Objections Thereto 3 15 Disregarding The Fact That The Price Of International Transactions Of The Assessee In The P Ast Years Have Been Accepted By The Department As Being At Arms Length 3 16 Computing The Profit Margins Of The Comparab Le Companies By Taking Arbitrary Decisions In Respect Of Inclusion Exclusion Of Certain Items Of Cost Rev Enue And In Total Disregard To Established Judicial Prec Edents 3 17 Disregarding Judicial Pronouncements In Indi A In Making The Tp Adjustment And 3 18 Disregarding The Prevalent Law By Denying Th E Benefit Of 5 Mentioned In The Proviso To S Ection 92 C 2 Of The Act To The Assessee 4 On The Facts And In The Circumstances Of The Cas E And In Law Penalty Cannot Be Initiated Under Secti On 271 1 C Of The Act Ita Nos 41 1191 Del 2013 6 5 On The Facts And In The Circumstances Of The Cas E And In Law The Ld Ao Has Erred By Charging Intere St U S 234 Band 234 C Of The Act 4 Briefly Stated The Facts Necessary For Adjudicat Ion Of The Controversy At Hand Are Everest Advisory India P Rivate Limited The Taxpayer Was Incorporated As A Captive Unit Of Everest Group Of Companies To Provide Advisory And Information Techn Ology Enabled Services Ites It Also Provides Ites Res Earch And Analysis On Issue Of Outsourcing Market And Advis Ory Services To Support Client Engagement Owned By The Ae During The Year Under Assessment Taxpayer Entered Into Internation Al Transactions With Its Ae As Reported U S 92 Ce Income Tax Act 19 61 For Short The Act As Under It Enabled Services Rs 5 01 05 563 Advisory Services Rs 2 70 97 470 5 The Taxpayer Reported Its Financial Result For F Y 2006 07 As Under Description Amount Total Revenue Rs 9 00 74 177 Total Cost Rs 8 36 29 769 Operating Profit Pbit Rs 72 99 720 Operating Profit To Cost Ratio 8 72 6 The Taxpayer Selected Itself As A Tested Party Applied Transactional Net Margin Method Tnmm As The Most Ita Nos 41 1191 Del 2013 7 Appropriate Method Mam For The Purpose Of Search For Uncontrolled Comparables The Taxpayer Taken 13 Co Mparables With Average Profit Margin Of 12 06 On Cost As Aga Inst Taxpayers Margin Of 15 On Operating Cost And Found Its Inter National Transaction At Arms Length 7 Tpo After Accepting All The Filters Or Quantita Tive Criteria Applied By The Taxpayer For Benchmarking The Intern Ational Transaction Applied Additional Filters Viz Using F Inancial Information For Fy 2006 07 And To Exclude The Compa Nies Having Abnormal Financials Only After Defining Abnormal V Ariations Introduced Some Other Filters Like Rejecting Compan Ies Having Turnover Less Than Rs 1 Crore Companies Having Ite S Revenues Of At Least 75 Of Its Revenue From Ites Rejecting Co Mpanies Having Consistent Losses Diminishing Revenue Filter Rejec Ting Companies Having Export Earnings Of More Than 25 Of Revenue Etc For Benchmarking The International Transaction 8 Finally Tpo Selected 25 Comparables Having Aver Age Of 28 37 30 07 Less Working Capital Adjustment Of 1 70 And Consequently Determined The Arms Length Price As U Nder Arms Length Price Rs 5 59 30 880 Price Shown In The International Transactions Rs 5 01 05 563 Shortfall Being Adjustment U S 92 Ca Rs 58 25 317 Ita Nos 41 1191 Del 2013 8 9 The Taxpayer Carried The Matter Before The Ld C It A Who Has Only Removed Three Companies Viz Mold Tek Tec Hnologies Ltd Triton Corp Ltd And Maple Solutions Ltd Feeling Aggrieved The Taxpayer As Well As The Revenue Has Come Up Before The Tribunal By Way Of Filing The Present Appeals 10 We Have Heard The Ld Authorized Representative S Of The Parties To The Appeal Gone Through The Documents R Elied Upon And Orders Passed By The Revenue Authorities Below In T He Light Of The Facts And Circumstances Of The Case 11 The Taxpayer By Moving A Separate Application S Ought To Raise Additional Grounds In This Appeal To The Foll Owing Effect On The Ground That These Are Legal Grounds As The Necessar Y Facts Are Already On Record 1 That On Facts And Circumstances Of The Case The Tpo Erred In Wrong Computation Of The Ncp Margin Of The Assessee By Not Including Miscellaneous Income Of Rs 4 09 843 As Operating Income For The Purpose O F Computing Op Oc 2 That On Facts And Circumstances Of The Case And In Law The Ao Cit A Grossly Erred In Not Givin G Full Credit Of Pre Paid Taxes Amounting To Rs 81 35 018 Paid By Way Of Advance Tax And Tax Deducted At Sour Ce 12 Ld Dr For The Revenue Opposed The Application For Additional Evidences On The Ground That By Way Of A Dditional Ita Nos 41 1191 Del 2013 9 Evidences Only Question Of Law Can Be Raised And T He Grounds Now Sought To Be Raised Are Factual One And All These E Xpenses Are Operating In Nature And That Recovery From The Empl Oyee From Current Salary Cannot Be Non Operating In Nature Both Ld Ar For The Taxpayer As Well As Ld Dr For The Revenue Reli Ed Upon The Decision Rendered By The Honble Supreme Court In National Thermal Power Company Ltd Vs Cit 1998 229 Itr 383 Sc 13 Ratio Of The Judgment In Case Of National Thermal Power Company Ltd Supra Is That The Tribunal Will Have The Discretion To Allow Or Not Allow A New Ground To Be Raised But Where The Tribunal Is Only Required To Consider A Q Uestion Of Law Arising From The Facts Which Are On Record In The A Ssessment Proceedings We Fail To See Why Such A Question Shou Ld Not Be Allowed To Be Raised When It Is Necessary To Consid Er That Question In Order To Correctly Assess The Tax Liability Of A N Assessee 14 The Tribunal Has Jurisdiction To Examine The Qu Estion Of Law Which Arises From Facts Moreover The Facts Now S Ought To Be Brought On Record By Way Of Additional Grounds Were Not Before Tpo Due To Inadvertence On The Part Of The Taxpayer The Perversity Of Facts Certainly Turned To Be A Question Of Law So When Question Of Law Arises From Factual Perversity As In The Cas E At Hand We Are Ita Nos 41 1191 Del 2013 10 Of The Considered View That Additional Grounds Are Required To Be Allowed As It Will Go To The Roots Of The Case Co Nsequently Application For Additional Evidence Moved By The Ta Xpayer Is Allowed 15 So Far As International Transaction Qua Provisi On Of Advisory Services To The Tune Of Rs 2 70 97 470 Is Concern Ed Tpo Has Accepted The Profitability Of This Segment Howeve R Tpo Has Disputed The Back Office Research Support Services And Has Proposed The Tp Adjustment Of Rs 58 25 317 The Tpo Has A Ccepted The Tnmm As The Most Appropriate Method Applied By The Taxpayer With Operating Profit Operating Cost As Profit Le Vel Indicator Pli Tpo Also Accepted Billing Method Of Ae As C Ost Plus 15 16 Ld Dr For The Revenue Contended That Before Ex Amining The Exclusion Or Inclusion Of The Comparables For Bench Marking The International Transaction Qua Ites It Is Required To Decide As To Whether The Taxpayer Is A Low End Business Processi Ng Office Bpo Or Knowledge Processing Office Kpo 17 Undisputedly Neither Tpo Nor The Taxpayer In T Heir Tp Study Has Analyzed The Verticals Of The Profile Of Compar Ables It Is Also Not In Dispute That Whatever Search Has Been Carrie D Out By The Taxpayer Has Been Rejected By The Ld Tpo And He Ha S Conducted Fresh Search Himself It Is Also Not In Dispute Th At Tpo Analyzed Ita Nos 41 1191 Del 2013 11 Both The Agreements Entered Into Between Taxpayer A Nd Ae Available At Pages 75 And 85 Of The Paper Book Tp O While Conducting Its Search Applied Section 10 B 4 18 The Ld Dr For The Revenue To Support His Argum Ent That The Taxpayer Is Not A Low End Bpo Rather Kpo Referred T O Master Intellectual Property Agreement Mip Agreement Ent Ered Into Between The Taxpayer And Its Ae Available At Pages 75 To 89 Of The Paper Book For Ready Perusal Operative Part Of M Ip Agreement Is Reproduced As Under Master Intellectual Property Agreement This Master Intellectual Property Agreement This Master Ip Agreement Is Entered Into Between Everest Global Inc A Texas Corporat Ion Ip Owner Which Is The Successor In Interest To Everest Partners Lp And Everest Business Advisor Y India Private Limited An India Corporation Ip Developer Whereas Ip Owner Owns Certain Valuable Intellectual Property As Below The Intell Ectual Property And Ip Owner May In The Future Need To Have Additional Intellectual Property Developed An D Whereas Ip Developer Has In The Past Developed Intellectual Property On Behalf Of The Ip Owner And May In The Future Develop Additional Intellectual Prope Rty On Behalf Of The Ip Owner And Whereas Ip Owner Has In The Past Permitted Ip Developer To Use Its Intellectual Property In Excha Nge For Certain Agreed Fees And Ip Owner Is Willing To Continue To Do So In The Future And Ita Nos 41 1191 Del 2013 12 Whereas The Parties Desire To Document And Ratify Their Previous Agreements Relating To The Developme Nt And Use Of Intellectual Property And To Formalize T Heir Agreements Regarding The Future Development And Use Of Intellectual Property G Intellectual Property Refers Collectively To A Ll Research Systems Methods Know How Processes Specifications Forms Templates Operating Procedu Res Patents Copyrights Trademarks Trade Names Trade Secrets Proprietary Information Techniques Model S Inventions Customer Information Software Programs Sourcing Processes And Procedures Methodologies A Nd Trade Secrets Relating To The Business Of The Ip Ow Ner Or Its Affiliates Including But Not Limited To The Items Listed In Attachment B Hereto All Whether Or Not Patented Or Copyrighted In Any Country 3 Development Of Intellectual Property A Development Ip Developer Agrees That It Will Employ All Personnel And Make All Efforts Necessary For The Continued Development Maintenance Expansion And Or Enhancement Of Ip Owners Intellectual Property In A Timely Manner In Accordance With Ip Owners Specifications And With Industry Standards B Costs In Consideration Of The Services Stated I N Subsection A Above Ip Owner Agrees That It Will Pay To Ip Developer All Costs Of Development Incurred By Ip Developer For The Development Maintenance Expansion And Or Enhancement Of Intellectual Property By Ip Developer Together With A Profit Margin Or Uplift Of 15 Fifteen Percent Of Such Costs Of Development Attachment C Shows The Allocation Methodology For Indirect Cost C Payment Costs Of Development Shall Be Paid By Ip Owner In U S Dollars Ita Nos 41 1191 Del 2013 13 4 Use Of Intellectual Property A Use In Consideration Of The Payments Stated Below During The Term Of This Master Ip Agreement Ip Owner Agrees To Make The Intellectual Property Freely Available For The Commercial Use Of Ip Developer Without Limiting The Foregoing Ip Owner Agrees That It Will I Make Available To Ip Developer All Everest Trademarks And Trade Names Ii Make Available To Ip Developer All Of Its Written Or Electronic Marketing Materials Including But Not Limited To All Websites And Pages Webinars Brochures And Other Client Communication Materials Iii Provide To Ip Developer All Software Used In Assisting Clients With Use And Implementation Of Its Intellectual Property Iv Allow Ip Developer To Use Any And All Factual Information Examples Models Samples Referrals Studies To Market Intellectual Property And Related Services Or Implement Strategies Relating To Intellectual Property V Allow Ip Developer Access To Its Proprietary Databases Database Access B Fees In Consideration For The Agreements By Ip Owner Stated Above Ip Developer Shall Pay Ip Owner Fees Calculated In Accordance With The Method For Calculating Fees For Use Of Intellectual Property Set Forth In Attachment A 19 The Ld Dr For The Revenue Contended That Since The Taxpayer Is Intellectual Property Developer As Is Apparent From Ita Nos 41 1191 Del 2013 14 Para 1 Of Mip Agreement And Carrying Out Numerous W Orks Qua For Developing Intellectual Property As Has Been Re Ferred In Para G Above It Is Not A Low End Bpo The Ld Dr Also Ref Erred To Para 3 A Reproduced In The Preceding Paras Wherein The Taxpayer Agreed That It Will Employ All Personnel All Personnel And Make All Efforts Necessary For The Continued Development Maintenanc E Expansion And Or Enhancement Of Ip Owners Intellectual Prope Rty In A Timely Manner In Accordance With Ip Owners Specification S And With Industry Standards 20 Para 4 Of The Mip Agreement Further Provides Th At The Ae Has Made Available To The Taxpayer Ip Developer O F Everest Trademarks And Trade Names All Of Its Written Or E Lectronic Marketing Material All Software Used In Assisting Clients With Use And Employment Of Its Intellectual Property To Use Any And All Factual Information Examples Models Samples Etc Allowed Developer To Access To The Property Data Base And T Hat Ip Developer Shall Pay Ip Owner Fees Calculated In Accordance Wi Th The Method For Calculating Fees For Use Of Intellectual Proper Ty Set Forth In Attachment A Ld Dr Contended That All These Fact S Go To Prove That The Taxpayer Is Not A Low End Bpo 21 However When We Examine Mip Agreement In Total Ity As Contended By Ld Ar For The Taxpayer It Has Become Apparently Ita Nos 41 1191 Del 2013 15 Clear That No Doubt The Taxpayer Has Agreed To Dev Elop Intellectual Property For Its Ae With Its Own Work Force For Whi Ch The Entire Know How Has Been Undisputedly Provided By The Ae T O The Taxpayer Including Using The Intellectual Property Owned By The Ae For Developing Further Intellectual Property Para 3 A Is Categoric Enough That Taxpayer Will Employ All Personnel And Make All Efforts Necessary For Continued Development Maintenance E Xpansion And Or Enhancement Of Ip Owners Intellectual Prope Rty In A Timely Manner In Accordance With The Ip Owners Specificat Ions And With Industry Standards Mip Agreement Is Also Categori C Enough That Ae Shall Pay To The Taxpayer Cost Of Development In Curred By The Ip Developer With A Profit Margin Or Uplift Of 15 Or With A Profit Margin Or Uplift Of 15 Of Such Cost Of De Velopment As Per Para 7 E Of The Mip Agreement Ae Also Agree D To Indemnify Defend And Hold Harmless The Ip Develope R Against Any Claims That Any Intellectual Property It Provi Des To Them Violates Any Intellectual Rights Of Any Third Party 22 Furthermore When We Examine Attachment B Of Mi P Agreement It Is Categorically Mentioned That Intel Lectual Property Includes Research And Implementation Materials All Research White Papers Manuals Or Other Materials Whether Print O R Electronic Relating To The Intellectual Property Or To The Str Ategies Or Services Ita Nos 41 1191 Del 2013 16 Of Ip Owner And Software Any Software Created Or Owned By Ip Owner In Addition To The Definition Mentioned In Para 2 G Of The Agreement Which Shows That All The Materials Neces Sary For Developing Intellectual Property Including Intellec Tual Property Itself Are Owned By Ae 23 The Ld Dr For The Revenue Further Contended Th At Since Ae Is In The Business Of Advisory Services And Is Enti Tled To Sell In The Market It Cannot Be A Low End Bpo Or Kpo However When The Ld Tpo Has Not Disputed International Transactions Qua Advisory Services Which Is Admittedly A Kpo Rather Made Alp Adjustment Qua Ites Both Cannot Be Clubbed To Examine The Pro File Of The Taxpayer 24 Furthermore When We Examine The Risk Assumed B Y The Taxpayer Having Been Described In Its Tp Report Av Ailable At Pages 160 To 196 Of The Paper Book Relevant Pages 174 175 It Is Categorically Clear That So Far As Provision Of Ite S Research Services Rendered By The Taxpayer To Its Ae Is Conc Erned The Entire Service Delivery Risk Market Risk Foreign Risk C Redit Risk Capacity Utilization Risk And Government Policy Risk Is Assu Med By Ae Meaning Thereby That The Taxpayer Is Not A Tax Bear Ing Entity Rather Working For Its Ae On Cost Plus Mark Up Basis Ita Nos 41 1191 Del 2013 17 25 The Ld Dr For The Revenue Further Contended Th At When The Tpo Has Not Examined The Fact If The Taxpayer Is A Kpo Or Bpo Who Is Into Development Of Ip It Cannot Be Said Th At It Is A Low End Bpo However We Are Of The Considered View That W Hen It Is A Settled Principle Of Law That Content And Value Of The Services Rendered Is Necessary For Comparability And The Ent Ire Material Including Tp Report Of Taxpayer Was There Before Hi M 26 No Doubt Honble Delhi High Court In Rampgreen Solutions P Ltd Vs Cit 2015 60 Taxmann Com 355 Delhi Held That As Far As Possible Comparables Must Be S Elected Keeping In View The Comparable Factor And While App Lying Tnmm Broad Functionality Is Not Sufficient However Pe Rusal Of Para 34 Of Rampgreen Solutions P Ltd Supra Available At Page 300 Of The Case Laws Compilation Categorically Defines Bp O And Kpo Which Is Reproduced As Under For Ready Perusal 34 We Have Reservations As To The Tribunals Aforesaid View In Maersk Global Centers India Pvt Ltd Supra As Indicated Above The Expression B Po And Kpa Are Plainly Understood In The Sense Tha T Whereas Bpo Does Not Necessarily Involve Advanced Skills And Knowledge Kpo On The Other Hand Would Involve Employment Of Advanced Skills And Knowledge For Providing Services Thus The Expression Kpo In Common Parlance Is Used To Indicate An 1 Tes Provid Er Providing A Completely Different Nature Of Service Than Any Other Bpo Service Provider A Kpo Service Provi Der Would Also Be Functionally Different From Other Bpo Service Providers Inasmuch As The Responsibilities Ita Nos 41 1191 Del 2013 18 Undertaken The Activities Performed The Quality O F Resources Employed Would Be Materially Different I N The Circumstances We Are Unable To Agree That Broa Dly Ites Sector Can Be Used For Selecting Comparables Without Making Conscious Selection As To The Qualit Y Of The Content Of Services Rule 10 B 2 A Of The Inc Ome Tax Rules 1962 Mandates That The Comparability Of Controlled And Uncontrolled Transactions With Refer Ence To Service Product Characteristics This Factor Ca Nnot Be Undermined By Using A Broad Classification Of Ites Which Takes Within Its Fold Various Types Of Servic E Provider An Entity Rendering Kpo Content And Value Thus Where The Tested Party Is Not A Kpo Service Provider An Entity Rendering Kpo Services Cannot B E Considered As A Comparable For The Purposes Of Transfer Pricing Analysis The Perception That A Bp O Service Provider May Have The Ability To Move Up Th E Value Chain By Offering Kpo Services Cannot Be A Ground For Assessing The Transactions Relating To Services Rendered By The Bpo Service Provider By Benchmarking It With The Transactions Of Kpo Servic Es Providers The Object Is To Ascertain The Alp Of Th E Service Rendered And Not Of A Service Higher In Va Lue Chain That May Possibly Be Rendered Subsequently 27 Honble High Court Has Categorically Held That The Perception That The Bpo Services Provider May Have The Ability To Move Up The Value Chain By Offering Kpo Services Ca Nnot Be A Ground For Assessing The Transaction Relating To Se Rvices Rendered By Bpo Service Provider By Benchmarking It With The Transaction Of Kpo Service Provider The Object Is To Ascertai N The Alp Of Service Rendered And Not Of A Service Higher In Va Lue Chain That May Possibly Be Rendered Subsequently So In Othe R Words We Ita Nos 41 1191 Del 2013 19 Can Say That The Contents And Value Of The Services Is Necessary For Comparability 28 When We Examine Flow Of Work Between The Taxpay Er To Its Ae In Ites Segment It Cannot Be Treated As A High End Kpo As Contended By Ld Dr For Ready Perusal Flow Of Wo Rk Between The Taxpayer And Its Ae Is Reproduced As Under 1 Theme On Which Research Is To Be Performed Is Provided By Everest Usa 2 Concept And Overall Content Of The Report Is Provided By Everest Usa 3 Primary And Secondary Sources From Where Data Is To Be Gathered Is Also Specified By Everest Usa 4 The Examples Models Samples Referrals Studie S Data And Recommendations For Development Of Content Are Also Provided By Everest Usa 5 Everest Usa Monitors The Progress Of Works Performed By Everest India Through Weekly Calls Vi Deo Conferencing And Visits 6 Everest Usa Is Responsible For Content And Quality Of The Report To The End Client 7 Everest India Is Being Remunerated At Cost Plus 15 For The Functions Of Content Development Of Rep Orts Being Performed 8 Everest India Does Not Own Any Intangibles Ita Nos 41 1191 Del 2013 20 29 Honble High Court On The Basis Of Aforesaid Ca Tegorization Of Kpo And Bpo Excluded Vishal And Eclerx Which Are Into Kpo In Rampgreen Solutions P Ltd Supra Case 30 Honble High Court In Rampgreen Solutions P Ltd Supra Has Also Held That The Comparable Transacti Ons Entities Must Be Selected On The Basis Of Similarity With Th E Controlled Transaction Entity Comparability Of Controlled And Uncontrolled Transaction Has To Be Judged Inter Alia With Refere Nce To Comparability Factor As Indicated Under Rule 10 B 2 Of The Income Tax Rules 1962 So Function And Actual Se Rvices Rendered By The Taxpayer Vis Vis Comparables Are The Relev Ant Factors For Benchmarking The International Transaction And Not That The Taxpayer Comparables Are Kpo Or Bpo Moreover T Po Has Gone Into Detailed Functional Profile Of All The Co Mparables By Introducing Additional Filters In His Tp Study Th E Contention Of The Ld Dr That The Taxpayer Has Challenged Only Low Ma Rgin Comparable Cannot Be Accepted Because The Issue Of Comparability Is Factual One Which Requires To Be Determined On C Ase To Case Basis By Going Into Their Functional Profile 31 Furthermore When We Examine Tp Study Conducted By Tpo By Conducting Search I And Search Ii Available At Pages 180 181 182 Of The Paper Book It Has Accepted The Filter S Applied By The Ita Nos 41 1191 Del 2013 21 Taxpayer For Comparability Which Are Reproduced As Under For Ready Reference Of The 644 Companies Identified For Qualitative Analysis 631 Companies Were Rejected For Reasons Including The Following Companies Undertaking Different Functions Compared To Everest India Companies Having Persistent Operating Losses Companies Having Abnormal Variation In Financials And Companies Engaged In Significant Related Party Transactions 32 So When The Tpo Has Strictly Compared The Comp Any Strictly In The Lights Of Their Functions Vis Vis The Taxpayer By Accepting Segmental Profit Loss Account Of The As Sessee Available At Pages 88 89 Of The Paper Book It Ca Nnot Be Said That The Comparability Analysis Has Not Been Correctly C Onducted By Tpo Though The Benefit Of Decision Of Rampgreen Solutions P Ltd Supra Was Not Available With Him 33 The Contention Of The Ld Dr For The Revenue Th At Taxpayer Is Developing Patents And As Such Cannot Be Treated As A Low End Bpo Is Not Sustainable Because Mip Agreement When Read In Entirety Goes To Prove That No Doubt The Patents Are Being Developed By The Taxpayer That Too With Entire Assistance Of The Ae But Ultimately It Ita Nos 41 1191 Del 2013 22 Becomes Property Of Its Ae Which Cannot Change Its Business Model 34 So When We Examine The Services Rendered By Th E Taxpayer To Its Ae In The Light Of The Fact That The Taxpaye R Is A Risk Free Entity Working On Cost Plus Mark Up And Does Not Own Any I Ntangibles The Taxpayer Is A Low End Bpo 35 Now In The Backdrop Of The Aforesaid Findings Facts And Circumstances Of The Case And Arguments Addressed We Would Examine Suitability Of Companies Viz I Accentia Technologies Ltd Seg Ii Eclerx Services Ltd Iii Hcl C Omnet Ltd Seg Iv Vishal Information Technologies Ltd V Wipro Ltd Seg Vi Infosys Bpo Ltd Vii Informed Techn Ologies India Pvt Ltd Viii R Systems International And Ix Iservices India Pvt Ltd As Comparables Sought To Be Excluded By The Ld Ar For Benchmarking Its International Transaction Qua Ites Research One By One As Under Ita No 1191 Del 2013 Assessees Appeal Accentia Technology Ltd Segment 36 The Ld Ar For The Taxpayer Sought To Exclude A Ccentia From The Final Set Of Comparables For Benchmarking The I Nternational Transaction Qua Ites Segment On The Grounds Inter A Lia That It Is Ita Nos 41 1191 Del 2013 23 Functionally Dissimilar That Accentia Has Undergon E Merger And Acquisitions Leading To Abnormal Growth That Accen Tia Has More Than 60 Of The Operating Cost Towards Overseas Exp Enses As Against Nil Of The Taxpayer That Accentia Incurs S Ubstantial Marketing Expenses To The Extent Of 28 Rs 8 14 Cr Ores Of Rs 28 7 Crores Of The Sales Against Almost Nil Of The Taxpa Yer And Drew Our Attention Towards Relevant Documents Of The Annual Report Available At Pages 212 To 225 Of The Paper Book 37 However On The Other Hand Ld Dr For The Reve Nue Opposing The Exclusion Of Accentia Contended Inter Alia That When Tpo As Well As Taxpayer Have Taken The Entire Verti Cals Of Ites As Comparables And Now If Strict Functional Comparabil Ity Is Insisted Then Flextronics Software Is Also To Be Excluded T Hat Any Comparable Can Be Excluded On The Ground Of Extra O Rdinary Events Only If It Is Demonstrated By The Taxpayer That It Has Impacted Net Profitability And Relied Upon The Case Of The Coord Inate Bench Of The Tribunal In M S Virage Logic International India Brand Vs Jct I 2016 72 Taxmann Com 11 Delhi 38 As Discussed In The Preceding Paras Comparabil Ity For The Purposes Of Benchmarking The International Transact Ions Is To Be Examined On The Basis Of Contents And Value Of Serv Ices Rendered By The Taxpayer To Its Ae Vis Vis Comparables And Not On The Ita Nos 41 1191 Del 2013 24 Ground That If Accentia Is Excluded Then Some Other Comparable Is Also Liable To Be Excluded So Far As Functional P Rofile Of Accentia Is Concerned It Is Into Business Of Medical Transc Ription Medical Billing Medical Coding Health Care Receivables Ma Nagement Which Includes Development Of Software Products As Per Annual Report Of Accentia Available At Page 212 To 225 Of The Pa Per Book To Consolidate The Company It Has Successfully Amalga Mated M S Geosoft Technologies Trivandrum Limited And Iridi Um Technologies India Private Limited During The Re Levant Year Leading To Its 150 Growth As Compared To Previous Years I E From Rs 10 5 Crores To Rs 24 7 Crores Which Is 1007 In Revenue And 3197 In Profitability As Compared To The Earlier Y Ears As Is Evident From Balance Sheet Of Accentia Available A T Page 214 Of The Annual Report 39 Furthermore Balance Sheet Available At Page 21 2 To 214 Of The Paper Book Shows That Accentia Incurred 68 Of The Operating Cost Towards Overseas Business Expenses As Against Nil Of The Taxpayer Leading To Different Business Model By Deb Iting Rs 5 98 Crores Towards Employee Cost And Debiting Rs 8 14 C Rores Towards Overseas Business Marketing Cost Accentia During The Relevant Year Incurred Substantial Marketing Expenses Of 28 I E Rs 8 14 Crores On The Sale Of Rs 28 7 Crores As Against Alm Ost Nil Of The Ita Nos 41 1191 Del 2013 25 Taxpayer For Ready Reference Financials Of Accen Tia Extracted By The Ld Ar From Annual Report Are Reproduced As Und Er Accentia Technologies Ltd Fy 05 06 Fy 06 07 Fy 07 08 Particulars Heavy Mergers Acquisitions Heavy Mergers Acquisitions Total Operating Revenue 285 000 287 231 663 509 346 944 Age Increase In Revenue 1007 77 Total Exp 2 603 757 215 411 684 349 332 496 Operating Profit 2 318 758 71 819 979 155 450 748 Increase In Profits 3197 116 Op Oc 89 05 33 34 44 50 40 The Coordinate Bench Of The Tribunal In Taluna India Pvt Ltd In Ita No 5645 Del 2011 Available At Page 183 Of The Case Law Compilation And Ciena India P Ltd Vs Dcit 2015 57 Taxmann Com 329 Delhi Trib Decided The Issue Of Merger And Demerger For The Purpose Of Comparability And Held That Company Cannot Be Considered As Comparable Because Of Finan Cial Results Distorted Due To Mergers And Demergers Etc 41 Coordinate Bench Further Ordered To Exclude Acc Entia In Icc India Pvt Ltd Vs Dcit In Ita No 25 Del 2012 Available At Page 348 Of The Case Law Compilation Vol 2 By Foll Owing Ciena India P Ltd And Taluna India Pvt Ltd Supra Ordered To Exclude Accentia As Comparable Vis Vis Icc India Both Into Providing Low End Bpo Services On Ground Of Merger And Demerger Ita Nos 41 1191 Del 2013 26 42 So In View Of What Has Been Discussed Above Wh En We See The Financial Results Of Accentia Discussed In The Preceding Paras Extra Ordinary Growth Extra Ordinary Operating Cos T Towards Overseas Business Expenses And Substantial Market C Ost Towards Overseas Business Expenses It Leads To The Irresis Tible Conclusion That Growth Of 3197 In Profitability Of Accentia I N Comparison To Its Earlier Year Itself Is An Eye Opener To Make It Incomparable With The Taxpayer So We Order To Exclude Accentia Fro M The Final List Of Comparables Eclerx Services Ltd Eclerx 43 The Taxpayer Sought To Exclude Eclerx From The Final Set Of Comparables For Benchmarking The International Tran Saction Qua Ites On Ground Of Functional Dissimilarity Having Huge Brand Value Being In Top 20 Companies Having Significant Intangibles And That Eclerx Has Been Excluded By Tpo On Ground Of F Unctional Dissimilarity In Assessees Own Case In Ays 2011 12 2012 13 And Cit A Excluded Eclerx In Ay 2009 10 44 Ld Dr For The Revenue Reiterated His Arguments That Taxpayer Itself Is A Kpo And Even If Tpo Has Exclud Ed Eclerx In Ita Nos 41 1191 Del 2013 27 Earlier Years He Cannot Be Debarred From Including The Same For The Year Under Consideration 45 When We Examine The Functional Profile Of Ecler X From Its Annual Report Relevant Page 321 Of The Paper Book Which Is Chairmans Message It Is Categorically Mentioned T Hat Eclerx Is A Very Different Company With Industry Specialized Services For Meeting Complex Client Needs We Are Sometimes Com Pared To A Bpo Or An It Offshoring Company Which We Are Not We Are A Data Analytics Kpo Service Provider Specializing In Two Business Verticals Financial Services And Retail And Manuf Acturing We Provide Solutions That Do Not Just Reduce Cost But Help Our Clients Increase Sales And Reduce Risk By Enhancing Effici Encies And By Providing Valuable Insights That Empower Better Dec Isions We Provide Services To 50 Large Global Corporations Ac Ross Multiple Geographies 46 Furthermore Eclerx Is Having Huge Brand Value As Is Evident Form Annual Report Relevant Page 317 Of The Paper Book Wherein Eclerx Is Considered As We Win Our Fair Share Of Accolades Weve Been Named As One Of The Top 20 Companies To Watch By Business Today Best Of Breed By At Kearney Pri Cing Experts By The Yankee Group And Leading Kpo By N Elson Hall Industry Associations Have Also Recognized U S For Our Ita Nos 41 1191 Del 2013 28 Contribution We Are Pricing Experts At The Profes Sional Pricing Society And The Only Kpo On The Rolls Of The Intern Ational Swaps And Derivatives Association 47 Furthermore As Per Annual Report And Informat Ion Collected U S 133 6 Available At Pages 313 To 329 Of The P Aper Book Eclerx Is Providing Diverse Nature Of Services Having Own Segmental Data For Providing Numerous Such Services To Its Clients Moreover Eclerx Has Employed 1500 Domain Specialized To Rend Er Services To Its Clients As Against 20 Employees Of The Taxpayer Having Turnover Of Rs 5 Crores Only Moreover The Eclerx Is Havin G Huge Intangibles To The Tune Of 13 Of The Gross Total A Ssets 48 So When We Compare The Profile Of The Eclerx V Is Vis The Taxpayer Which Is A Captive Unit Of Everest Group O F Companies Providing Ites And Also Providing Ites Research And Analysis On The Issue Of Outsourcing Market And Advisory Servic Es To Support Client Engagement Owned By The Ae As Has Been Discu Ssed In Detail In The Preceding Paras And As Such Is Not A Valid Comparable 49 Moreover Eclerx Has Been Ordered To Be Exclude D By The Honble High Court Of Delhi In Rampgreen Solutions P Ltd Supra And The Coordinate Bench Of The Tribunal In Macquarie Global Services P Ltd Vs Dcit 2015 55 Taxma Nn Com 259 Delhi Trib On The Ground That Eclerx Is Engaged In Data Ita Nos 41 1191 Del 2013 29 Analytics Data Processing Services Pricing Analyt Ics Bundling Optimization Content Operation Sales And Marketin G Support Product Data Management Revenue Management In Ad Dition Eclerx Also Offered Financial Services Such As Real Time Capital Markets Middle And Back Office Support Portfolio Risk Management Services And Various Critical Data Manag Ement Services Clearly The Aforesaid Services Are Not Comparable With The Services Rendered By The Assessee 50 Furthermore Tpo In Ays 2011 12 And 2012 13 And Cit A In Ay 2009 10 In Taxpayers Own Case Have Order Ed To Exclude Eclerx On Ground Of Functional Dissimilarity When Business Model Of The Taxpayer Had Not Undergone Any Change During The Year Under Assessment To Adopt Consistent Approach Is Also Cardinal Principle Of Law So In View Of The Matter We Or Der To Exclude Eclerx From The Final Set Of Comparables For Benchm Arking The International Transactions Qua Ites Hcl Comnet Ltd Seg Hcl Comnet 51 The Taxpayer Further Sought Exclusion Of Hcl Co Mnet On Ground Of Functional Dissimilarity That Hcl Comnet Is A Big Company Having Significant Brand Value That Hcl Co Mnet Is Having Huge Assets Base Of Rs 188 90 Crores And Hav Ing Ites Ita Nos 41 1191 Del 2013 30 Revenue Of Rs 260 Crores As Against Taxpayers Turn Over Of Rs 5 Crores Business Profile Of Hcl Comnet As Intimate D U S 133 6 Of The Act Is As Under The Business Of The Assessee Company Is Categorize D As Ites Further The Assessee Company Seeks To Submit That The Assessee Company Also Offers Life Cycle Se Rvices For Strategic Off Sharing The Operation And Managem Ent Of It Infrastructure Client Server Or Internet Engagement To Enhance Visibility Improve Performan Ce And Reduce Costs It Provides End To End Infrastruc Ture Management Encompassing Network Devices Server Management Databases Systems Helpdesk Services A Nd Internet Site Operation Management The Assessee Company Deliver The It Infrastructure Management Services Through The Operations Management Center Omc In India The Omc Provides A Comprehensive Outsourcing Solution For Managing A Multi Vendor Or Multi Technology Environment With Services Customiz Ed To Meet Customers Unique Requirements Further Th E Company Also Renders Internet Services To A Whole H Ost Of Customers 52 Keeping In View The Functional Profile Of The H Cl Comnet Which Is Into High End Kpo Services And By Applying The Principle Laid Down In Rampgreen Solutions P Ltd Supra It Cannot Be Compared With Taxpayer Which Is A Captive Ites Serv Ice Provider Moreover Hcl Comnet Is Having Huge Employee Cost F Or Rs 185 28 Crores As Against Total Turnover Of The T Axpayer To The Tune Of Rs 5 Crores 53 Hcl Comnet Has Been Ordered To Be Excluded By T He Coordinate Bench Of The Tribunal In Icc India Pvt Ltd Supra On Ita Nos 41 1191 Del 2013 31 Account Of Functional Dissimilarity By Following Rampgreen Solutions P Ltd Supra Hcl Comnet Is Also Operating 24 X 7 In Three Shifts Whereas The Taxpayer Is Operating With Single Shift Only Moreover Hcl Comnet Is A Risk Bearing Company Wher Eas The Taxpayer Is A Captive Service Provider To Its Ae So There Is Stark Functional Dissimilarity Hcl Comnet Is Having Hug E Assets Base Of Rs 188 90 Crores And Ites Revenue Of Rs 260 Cror Es As Against The Total Turnover Of Rs 5 Crores Of The Taxpayer 54 So In View Of The Matter We Order To Exclude Hcl Comnet From The Final Set Of Comparables For Benchmarking The International Transactions Vishal Information Technologies Ltd Vishal 55 The Taxpayer Sought To Exclude Vishal On Ground Of Functional Dissimilarity Having Huge Assets And Com Pany Is Operating On Outsourcing Business Model Having Low Asset Base With Employee Cost Of 2 Of The Turnover Vis Vis The Taxpayer Who Has Employee Cost Turnover Ratio Of 36 56 The Ld Dr For The Revenue Contended That In Ca Se Vishal Is To Be Excluded On Ground Of Outsourcing Its Work Th En Cosmic Global And Spanco Are Also Liable To Excluded How Ever To Counter This Argument The Ld Ar For The Taxpayer Contended That Ita Nos 41 1191 Del 2013 32 Even Exclusion Of Cosmic And Spanco Will Not Cause Prejudice To The Taxpayer In Any Manner In These Circumstances We Are Not Going Into The Merits Of This Argument As The Compa Rability Of A Company Is Required To Be Examined On The Basis Of Functional Comparability And In The Light Of Section 10 B 2 O F The Act 57 Annual Report Of Vishal Is Available At Pages 3 36 To 347 Of The Paper Book Shows That Its Sales Is Pegged At Rs 30 60 10 382 Salaries And Wages To The Tune Of Rs 70 27 632 I E 2 3 As Against Sales Of The Taxpayer At Rs 5 01 05 563 A Nd Salaries Wages At Rs 1 82 37 882 I E 36 Vishal Has Been Ex Cluded By The Coordinate Bench Of The Tribunal In Ito Vs Heartland Delhi Transcription Services Pvt Ltd Ita No 6043 Del 2012 Techbooks International Ltd Vs Acit Ita No 4990 Del 2011 And Iqor India Services P Ltd Vs Ito 2015 6 9 Sot 37 Delhi Trib On Ground Of Different Business Model As It Outsourced Its Work To External Vendors To Save The Cost On Employees Which Is Apparent Form The Figure Of Empl Oyee Cost Vis Vis Sales Detailed In The Preceding Paras So W E Order To Exclude Vishal From The Final Set Of Comparables For Benchm Arking The International Transactions Ita Nos 41 1191 Del 2013 33 Wipro Ltd Seg Wipro 58 The Taxpayer Further Sought To Exclude Wipro Fr Om The Final Set Of Comparables On The Ground Inter Alia That It Is Functionally Dissimilar Being Into Wide Spectrum Of Services Th At The Nature Of Wipro Is Highly Capital Intensified Having 24 X 7 Ope Ration That The Wipro Is Having Revenue Of Rs 940 Crores And Operat Ing Assets Employed In Bpo Business Is Rs 781 Crores That Wip Ro Incurred Huge Expenditure On Research And Development To The Tune Of 8 5 Of The Total Revenue Having Employee Base Of 17464 That Wipro Is A Giant In Its Area Of Business Having Huge Brand V Alue And Goodwill And Owns Significant Intangibles That Wip Ro Is Having Inorganic Method Of Growth Which It Acquires From G Oodwill Brand Value And Presence In The Global Market 59 Ld Dr For The Revenue Contended That Before Tp O And Cit A The Taxpayer Have Only Argued High Turnover And Abnormal Margin As The Reason For Its Exclusion Which Cannot Be A Reason For Exclusion As Has Been Held By Honble High Court In Chryscapital Investment Advisors India P Ltd Vs Dcit 2 015 56 Taxmann Com 417 Delhi Ld Dr Further Contended That Since The Tpo Did Not Have The Opportunity To Examine The Argument Now Addressed Before The Tribunal It Should Be Restore D Back For Fresh Decision However We Are Of The Considered View T Hat When The Ita Nos 41 1191 Del 2013 34 Entire Annual Reports Relied Upon By The Taxpayer T O Examine The Business Profile Of Wipro Was There And Comparabili Ty Issue Is To Be Decided In View Of The Settled Principle Of Law Though Not Argued Specifically The Matter Is Not Liable To Be Restor Ed 60 Comparability Of The Wipro Has Been Examined By The Honble Delhi High Court And Coordinate Bench Of Th E Tribunal In Cases Of Cit Vs Agnity India Technologies Pvt Ltd In Ita 1204 2011 Dated 10 07 2013 Calibrated Healthcare Syst Ems India Pvt Ltd Vs Acit Ita No 5271 Del 2012 New Rive R Software Services P Ltd Vs Acit Ita No 451 Del 2013 A Nd United Health Group Information Services P Ltd Vs Aci T Ita No 6312 Del 2012 And Ordered To Be Excluded By Taking Into Account Its Functional Profile Risk Profile Natur E Of Services Ownership Of Ip Rates Expenditure On R D Etc 61 When We Compare The Aforesaid Business Profile Of Wipro Vis Vis The Taxpayer There Are Stark Dissimilari Ties As Wipro Is A Giant Company Having Huge Asset Base Brand Value Goodwill And Presence In The Global Market Spending 8 5 Of The Total Revenue On R D And It Is A Full Fledged Risk Bearing Servic E Provider Moreover Marketing Expenses Of Wipro Is 3 Of The Total Turnover Ita Nos 41 1191 Del 2013 35 62 So We Are Of The Considered View That Wipro Is Not A Suitable Comparable For Benchmarking The Internatio Nal Transactions Infosys Bpo Ltd Infosys Bpo 63 The Taxpayer Sought To Exclude Infosys Bpo On G Round Of Diversifying Business Process Management Services B Eing High End In Nature That It Provides End To End Process Solu Tion From Discovery Transition And Steady State Operations That It Provides Product Based Solution Such As Source To Pay Busine Ss Platform Hire To Retire Business Platform Order Management Business Platform Lifecycle Management Solution Etc And Th At The Infosys Bpo Is A Giant Company Having Turnover Of Rs 649 Cr Ores And Total Asset Base Of Rs 450 Crores Having Employee Base Of 11226 Having Significant Expenditure On Selling And Marketing To The Tune Of 6 Of The Turnover That Infosys Bpo Has Client Across The Globe And Has Rendered Business Process Management Services A Cross Diversified Business Verticals And It Has Having Hu Ge Brand Value And Goodwill And Owns Significant Intangibles And I S A Full Fledged Risk Bearing Service Provider 64 Ld Dr For The Revenue Opposing Exclusion Of In Fosys Bpo On The Grounds Inter Alia That Infosys Bpo Has Been Selected By The Ita Nos 41 1191 Del 2013 36 Taxpayer As A Comparable In Ay 2009 10 Accepted By The Tpo And No Appeal Has Been Filed Before The Cit A And Ita T But We Are Of The Considered View That Any Of The Comparable C Annot Be Excluded Or Included Merely On The Ground Of Accept Ance Or Rejection Of The Taxpayer During The Earlier Years Because There Is No Estoppel To Argue Afresh On Any Of The Comparable O N The Basis Of Facts And Case Laws 65 So When We Examine Business Profile Of The Inf Osys Bpo Vis Vis The Taxpayer Infosys Bpo Is A Full Fledg Ed Risk Bearing Company Having Huge Asset Base Turnover Of Rs 649 Crores And Total Asset Base Of Rs 450 Crores Having Employee B Ase Of 11226 As Against 20 Employee Of The Taxpayer And Turnover Of Rs 5 Crores Only Infosys Bpo Is Into Providing High End Servic Es Whereas The Taxpayer Is A Small Scale Captive Service Provider To Its Ae For Ites Services And Does Not Own Any Intangibles Or B Rand Value And Is Working On Cost Plus Basis 66 The Comparability Of Infosys Bpo Has Been Exami Ned By The Coordinate Bench Of The Tribunal In Rampgreen Solutions P Ltd Agnity India Technologies Pvt Ltd Calibrat Ed Healthcare Systems India Pvt Ltd New River Software Service S P Ltd And United Health Group Information Services P L Td Supra And Ordered To Be Excluded By Following Agnity India Ita Nos 41 1191 Del 2013 37 Technologies Ltd Supra Rendered By Honble Delhi High Court So In View Of The Matter We Order To Exclude Info Sys Bpo From The Final Set Of Comparables Informed Technologies India Pvt Ltd Informed 67 Initially The Ld Ar For The Taxpayer Sought T O Exclude Informed From The Final List Of Comparables For Ben Chmarking The International Transaction On Ground Of Sale Employe E Cost Filter But Later On Candidly Admitted That Functionality Of In Formed Is Similar To The Taxpayer So Far As Ites Are Concerned Howe Ver After Arguing For Sometimes The Ld Ar For The Taxpayer Preferred Not To Press Her Arguments For Exclusion Of Informed So We Decide This Issue Against The Taxpayer And Informed Is Ordered To Be Retained As A Suitable Comparable R Systems International R Systems 68 The Taxpayer Sought To Exclude R Systems From The Final Set Of Comparables On Ground That The Provision For Dou Btful Debts Of Rs 5 08 Crores Should Be Treated As Operating Expen Ses And Relied Upon The Case Of M S Kanexa Technologies Pvt Ltd Vs Dcit And Sony India Pvt Ltd Vs Dcit Ita No 11189 D El 2005 Ita Nos 41 1191 Del 2013 38 69 The Ld Dr For The Revenue Contended That This Issue Has Not Been Raised Before The Tpo And It Should Be Restore D To The Tpo To Examine The Factual Matrix 70 Coordinate Bench Of The Tribunal In M S Kanexa Technologies Pvt Ltd Supra Available At Pages 392 To 394 Of The Paper Book Held That Bad Debts And Provision For B Ad And Doubtful Debts Are Part Of The Operating Expenses And Tpo Ha S Been Directed To Recompute The Margin Of Comparable Company By In Cluding Bad Debts And Provision For Bad And Doubtful Debts As O Perating Expenses For The Purpose Of Computing Profit And Lo Ss Account Of The Comparable Companies 71 Following The Decision Rendered By The Coordina Te Bench Of The Tribunal In M S Kanexa Technologies Pvt Ltd Supra We Direct The Tpo To Consider The Provision For Doubtf Ul Debts As Operating Expenses And Then Compute The Profit Lo Ss Of The Comparable Company For Benchmarking The Internation Al Transaction Iservice India Pvt Ltd Iservice 72 The Taxpayer Sought To Exclude Iservice On Grou Nd Of Functional Dissimilarity As It Is Into Internet Ser Vice And Consulting Services When We Examine The Functional Profile O F Iservice From Ita Nos 41 1191 Del 2013 39 Website Provided By The Taxpayer The Iservice Is I Nto Web Hosting Email Services Spam Filtering Domain Names And Dn S Hosting 73 The Ld Dr Again Opposed The Iservice On The Gr Ound That This Argument Is Never Addressed Before The Tpo And When The Taxpayer Has Taken The Entire Vertical Of Ites Prov Iding Companies As Comparable And Now If Strict Functional Comparab Le Is Insisted Then This Filter Should Be Universally Applied To A Ll Comparables 74 When We Examine The Arguments Addressed By The Ld Ar For The Taxpayer In The Light Of The Rampgreen Solutions P Ltd Supra Only Functional Comparability Is The Hallma Rk For Benchmarking The International Transaction Busine Ss Profile Of Iservice Shows That The Same Is Into High End Diver Sifying Services Vis Vis The Taxpayer Who Is Into Divergent High E Nd Services Like Web Hosting Email Services Spam Filtering Domain Names And Dns Hosting Web Hosting Email Services Spam Fil Tering Domain Names And Dns Hosting Is Also Providing Web Design Services Domain Management Services And Email Management Ser Vices Which Makes It Functionally Dissimilar To The Taxpa Yer The Contention Of The Ld Dr That This Argument Has Not Been Addressed Before The Tpo Is Not Sustainable Because The Tpo I N Its Analysis Has To Compare Functional Profile Of Comparable Com Pany With The Taxpayer At The Very Outset Before Going Into Furth Er Detail So We Ita Nos 41 1191 Del 2013 40 Are Of The Considered View That Iservice Is Also No T A Suitable Comparable For Benchmarking The International Trans Action Risk Adjustment 75 The Ld Ar For The Taxpayer Contended That The Tpo Has Not Granted Risk Adjustment Despite The Fact That The T Axpayer Gets Assured Business From Its Ae And Is Remunerated On Cost Plus Basis And Relied Upon The Case Of Motorola Solutions Vs Acit Ita No 5637 Del 2011 76 The Coordinate Bench Of The Tribunal In The Cas E Of M S Intellinet Technologies India Pvt Ltd Vs Ito I Ta No 1238 Bang 2010 Order Dated 30 03 2012 Examined The Issue Of Risk Adjustment In Case Of A Single Customer And Decided The Same By Returning The Following Findings 7 Having Heard Both The Parties And Having Considered The Rival Contentions We Find That The Assessee Has Claimed The Risk Adjustment Which Is N Ot Allowed By The Tpo On The Ground That The Assessee Also Has The Risk Of Having A Single Customer The Ques Tion Before Us Is As To Whether The Risk Of Having A Sin Gle Customer Is Equivalent To The Marketing And Technic Al Risk Attached To The Comparables According To Th E Tpo The Assessee Has The Single Customer Risk Meaning If The Single Customer Refuses To Have Any Dealings With The Assessee The Assessee Would Lose All Of Its Business And There Would Be No Profit At All But As We See It The Risk Of Having A Single Customer Is Anticipated Risk Which May Or May Not Happen What We Have To See Is The Position In The Relevant Peri Od Ita Nos 41 1191 Del 2013 41 Whether The Assessee Had Encountered Such A Risk During The Relevant Period 7 1 As Seen From The Records The Assessee Had Acquired The Business And Also Earned Income Out Of The Said Transaction By Cost Plus Basis Thus It Can Be Seen That The Assessee Has Not Encountered The Risk Of H Aving A Single Customer Whereas The Same Cannot Be Said As Regards The Comparables As Pointed Out By The Lea Rned Counsel For The Assessee The Comparables Were Deal Ing In Open Market And Therefore They Were Prone To Th E Marketing And Technical Risks They Would Have Incurred Certain Expenditure On Marketing Services And Also To Safeguard The Technical Use By Them In Su Ch A Case The Risk Encountered By The Assessee Cannot B E Said To Be The Equivalent Risks Attached To The Comparables The Risk Attributed To The Assessee B Y The Tpo Is An Anticipated Risk Whereas The Risk Attribu Ted By The Assessee To The Comparables Is An Existing R Isk In Such Situation The Tpo Ought To Have Given The Risk Adjustment To The Net Margin Of The Comparables For Bringing Them On Par With The Assessee Company Th E Assessees Contention That The Risk Adjustment Shou Ld Be At 5 5 Or At The Difference Of Prime Lending Rate Of The Rbi And The Banks Is Not Acceptable To Us Therefo Re We Direct The Tpo To Consider All The Contentions O F The Assessee And After Taking Into Account All The Rele Vant Material Decide The Percentage Of Risk Adjustment T O Be Made In Accordance With Law This Ground Is Accordingly Allowed For Statistical Purposes 77 Following The Decision Rendered By The Coordina Te Bench Of The Tribunal The Tpo Is Directed To Decide The Iss Ue Afresh After Considering The Contentions Raised By The Taxpayer In The Light Of The Intellinet Technologies India Pvt Ltd And Motorol A Solutions Supra So The Issue Of Risk Adjustment Is Decid Ed In Favour Of The Taxpayer For Statistical Purposes Ita Nos 41 1191 Del 2013 42 Revenues Appeal Ita No 41 Del 2013 78 The Revenue Challenged The Impugned Order Passe D By Ld Cit A Deleting The Addition Of Rs 58 25 317 Mad E On Account Of Arms Length Price By Excluding Moldtek Technologies Ltd Triton Corp And Maple Esolutions From The Final List Of Comparables We Would Examine Suitability Of Afor Esaid Comparables Sought To Be Included For Benchmarking The International Transaction One By One As Under Moldtek Technologies Ltd 79 The Ld Dr For The Revenue Contended That Moldt Ek Technologies Ltd Is A Suitable Comparable And The Reasons Given By The Ld Cit A That Indulging In Evasion Of Tax By Overstating Profit In The 100 Exempt Ites Division And Underst Ating The Profit In The Plastic Division Which Is Without Any Evidence 80 However Ld Ar For The Taxpayer While Supporti Ng The Order Passed By The Ld Cit A Justified The Exclusion O F Moldtek Technologies Ltd On Two Grounds One Functional Dissimilarity And Two Merger Of Tech Men Tools Pvt Ltd W E F 01 10 2006 And Acquisition Of Crossroads Inc Usa W E F 28 04 2007 When We Examine The Reply Filed By Moldtek Technologies Ltd U S 133 6 Available At Pages 253 254 Of The Paper Book As Well As In Ita Nos 41 1191 Del 2013 43 The Light Of The Annual Report It Is Not In Disput E That Mold Tek Technologies Ltd Is Engaged In Engineering Consult Ing Services As Part Of Its It Of Kpo Division Of The Company The Company Specializes In Providing Structural Design Detail Ing Services For A Range Of Pemb Industrial Commercial Structures With Attachments For Canada Usa Europe Dubai Austra Lia We Are An Ites Company Registered With Software Technology Parks Of India So Business Profile Of Moldtek Technologies Ltd I S Diametrically Dissimilar Vis Vis The Taxpayer Bei Ng Engaged In Engineering Consulting Services Being Specialist I N Structural Design Detailing Services Industrial Commercial Structures With Attachments For Canada Usa Europe Dubai A Ustralia Moldtek Technologies Ltd Also Used Software Tools To Provide Structural Engineering Outputs So On Ground Of F Unctional Dissimilarity Moldtek Technologies Ltd Has Been R Ightly Excluded By The Ld Cit A 81 The Ld Cit A Has Rightly Taken The View That Extra Ordinary Profit In Ites Segment Reaching Up To 113 For The Year Under Assessment Shows That The Company Has Diverte D Its Profit To Evade Taxes Of Its Plastic Division By Showing Loss Es To The Ites Segment Which Is 100 Exempted Unit So The Ld C It A Has Ita Nos 41 1191 Del 2013 44 Rightly Excluded Moldtek Technologies Ltd On Groun D Of Extra Ordinary Profit Of 113 Which Needs No Interference 82 So Far As The Question Of Merger Of Teck Men To Ols Pvt Ltd And Acquisition Of Crossroads Inc Usa W E F 01 10 2006 And 28 04 2007 Respectively By The Taxpayer Is Concerne D Its Financial Results Available At Page 245 Of The Paper Book A Nnual Report Shows That Moldtek Technologies Ltd S Segmental Sa Le Have Gone Up By 35 17 From Rs 70 87 Crores To Rs 85 80 Crore S Largely Fuelled By Growth Of 204 In It Kpo Division Bill Ings From Rs 375 Lakhs In 2005 06 To Rs 1140 Lakhs In 2006 07 Moldtek Technologies Ltd Has Also Achieved A Profit Of Rs 830 71 Lakhs As Against Rs 394 97 Lakhs In The Previous Year Regist Ering A Growth Of 134 It Kpo Division Rose Sharply From Rs 1 60 Cr Ores To Rs 5 75 Crores Registering A Growth Of 259 4 It Is Also Categorically Referred In Directors Report Availa Ble At Page 246 Of The Paper Book That The Company Is Planning To Pur Sue Further Acquisition Opportunities To Maintain A Better Aver Age Rate Of Growth For Structural Engineering Services So We Are Of The Considered View That The Factum Of Merger And Acqui Sitions Also Make Moldtek Technologies Ltd As Unsuitable Compar Able Vis Vis The Taxpayer And Has Been Rightly Excluded By T He Ld Cit A Ita Nos 41 1191 Del 2013 45 Triton Corp And Maple Esolutions 83 The Revenue Challenged The Exclusion Of Triton Corp And Maple Esolutions By The Ld Cit A On The Ground T Hat Both The Comparables Are Part And Parcel Of Rastogi Group Wh Ich Is Under Serious Indictment And Relied Upon The Decision Ren Dered By The Coordinate Bench Of The Tribunal In Crm Services India Pvt Ltd Vs Cit The Ld Dr For The Revenue Opposed The Exclusion Of Triton Corp And Maple Esolutions On The Ground Tha T Crm Services India Pvt Ltd Is An Old Judgment And Till Date No Charges Have Been Framed Against The Directors Of The Afore Said Company 84 However We Are Of The Considered View That Pro Moters Of Triton Corp And Maple Esolutions Were Not Only Inv Olved In Fraud In Earlier Years But They Have Also Been Into Merge R And Acquisitions Not Only This Triton Corp And Mapl E Esolutions Have Been Ordered To Be Excluded On The Ground Of F Raud Committed By Its Promoters Not Only In Crm Services India Pvt Ltd Supra But Also In Numerous Cases Viz Iqor India Services P Ltd Icc India Pvt Ltd Calibrated Healthcar E Systems India Pvt Ltd Supra And Techbooks Electronics P Vt Ltd Ita No 1060 Del 2013 Ay 2008 09 Moreover When Under Tnmm Huge Pool Of Companies Is Available For Tp Analysis Companies With Shady Past Cannot Be Taken As Comparable So We Are Of The Ita Nos 41 1191 Del 2013 46 Considered View That Following The Decisions Render Ed By The Coordinate Bench Of The Tribunal In The Aforesaid C Ases The Ld Cit A Has Rightly Excluded Triton Corp And Maple Eso Lutions From The Final Set Of Comparables 85 Resultantly The Appeal Filed By The Taxpayer I S Partly Allowed For Statistical Purposes And The Appeal Fil Ed By The Revenue Is Dismissed Order Pronounced In Open Court On This 15 Th Day Of December 2017 Sd Sd B P Jain Kuldip Singh Accountant Member Judicial Member Dated The 15 Th Day Of December 2017 Ts Copy Forwarded To 1 Appellant 2 Respondent 3 Cit 4 Cit A 5 Cit Itat New Delhi Ar Itat New Delhi