Evalueserve.com Pvt. Ltd., New Delhi v. DCIT, New Delhi

ITA 1814/DEL/2017 | 2012-2013
Pronouncement Date: 01-11-2019 | Result: Partly Allowed

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Appeal Details

RSA Number 181420114 RSA 2017
Assessee PAN AAACE8014F
Bench Delhi
Appeal Number ITA 1814/DEL/2017
Duration Of Justice 2 year(s) 7 month(s) 4 day(s)
Appellant Evalueserve.com Pvt. Ltd., New Delhi
Respondent DCIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 01-11-2019
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted I
Tribunal Order Date 01-11-2019
Assessment Year 2012-2013
Appeal Filed On 27-03-2017
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI AMIT SHUKLA JUDICIAL MEMB ER AND SHRI O.P. KANT ACCOUNTANT MEMBER ITA NO. 1814/DEL/2017 A.Y. 201 2-13 EVALUESERVE.COM PVT. LTD. A-47 LOWER GROUND FLOOR HAUZ KHAS NEW DELHI VS DCIT CIRCLE-8(2) NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. AAACE8014F ASSESSEE BY : MS. ANANYA KAP OOR ADV. REVENUE BY : SH. H.K. CHOUDHA RY CIT- DR DATE OF HEARING : 05.08.2019 DATE OF PRONOUNCEMENT: 1.11.2019 ORDER PER AMIT SHUKLA J.M.: THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSE E AGAINST FINAL ASSESSMENT ORDER DATED 30.01.2017 PA SSED BY THE ASSESSING OFFICER U/S 143(3) READ WITH SECTION 144(C) (13) IN PURSUANCE OF DIRECTIONS GIVEN BY DRP VIDE ORDER DATED 21.12.2016 FOR ASSESSMENT YEAR 2012-13. 2. IN VARIOUS GROUNDS OF APPEAL ASSESSEE HAS CHALLE NGED TRANSFER PRICING ADJUSTMENT OF RS. 10 82 46 897/- M ADE ON INTERNATIONAL TRANSACTIONS WITH THE AES FOR RENDERI NG OF IT ENABLED SERVICES (ITES). ITA NO. 1814/DEL/2017) 2 3. BRIEF FACTS QUA THE TRANSFER PRICING ADJUSTMENT ARE THAT THE ASSESSEE COMPANY I.E. E-VALUESERVE.COM PVT. LT D. IS A WHOLLY OWNED SUBSIDIARY OF E-VALUESERVE LTD. BERMUD A. IT IS ENGAGED IN THE BUSINESS OF PROVIDING IT ENABLED SER VICES TO ITS AES AND IS ALSO REGISTERED WITH SOFTWARE TECHNOLOGY PARKS OF INDIA (STPI). THE ASSESSEE DERIVES BUSINESS FROM FO LLOWING SEGMENTS: - A) CORPORATE AND PROFESSIONAL SERVICES B) FINANCIAL SERVICES C) INTELLECTUAL PROPERTY RESEARCH IN THE TP STUDY REPORT THE ASSESSEE HAS GIVEN FOLLO WING ANALYSIS OF THESE 3 SEGMENTS IN THE FOLLOWING MANNE R: - EVS INDIA CARRIES OUT IT ENABLED SERVICES INFO RM OF RESEARCH ACTIVITIES ACCORDING TO THE TERMS OF THE A GREEMENT WITH ITS AE. THE RESEARCH CARRIED OUT BY EVS INDIA IS DRIVEN BY CORPORATE AND PROFESSIONAL SERVICES FINANCIAL S ERVICES AND INTELLECTUAL PROPERTY RESEARCH. NORMALLY THE C LIENT EXECUTIVES (BASED IN BERMUDA US EUROPE AND ASIA- PACIFIC) OPERATING FROM OVERSEAS FORM THE INTERFACE BETWEEN THE CLIENT AND EVS INDIA. THE DELIVERABLE IS TYPICALLY IN THE FORM OF A RESEARCH REPORT THAT IS FORWARDED DIRECTLY TO THE CLIENT(S) UNDER THE SUPERVISION AND POST A QUALITY ASSURANCE BY THE AES. THE REPORTS AND RESEARCH STUDIES PREPARED BY E VS INDIA ARE OWNED BY THE CLIENT ONLY. THE OPERATIONS OF EVS INDIA PRIMARILY COMPRISE THE FOLLOWING SEGMENTS: A ) CORPORATE AND PROFESSIONAL SERVICES (CAPS): THIS SE GMENT CATERS TO PRIMARILY MARKET RESEARCH FIRMS BASED OVE RSEAS. IT FOCUSES ON PRIMARY RESEARCH IN THE NATURE OF BUSINE SS TO BUSINESS SURVEYS ONLY WHERE DATA IS COLLECTED VIA T ELEPHONIC SURVEYS. THE SURVEYS ARE CARRIED OUT ON A CASE TO C ASE BASIS AND AS PER THE SPECIFIC CLIENT REQUIREMENTS. THE EMPLOYEES COMPRISE MAINLY GRADUATES UNDERGRADU ATES AND MBAS. THE SURVEYS CARRIED OUT INCLUDE SURVEYS LIKE ANALYZING THE TRENDS IN IT AND TELECOM SPENDING ET C. THESE ITA NO. 1814/DEL/2017) 3 SURVEYS ARE NORMALLY CARRIED OUT ON THE BASIS OF A QUESTIONNAIRE RECEIVED FROM THE CLIENT. EVS INDIA CARRIES OUT RESEARCH BASED ASSIGNMENTS OF THE FOLLOWING NATURE: PERIODIC RESEARCH: PERIODIC RESEARCH PROJECTS ARE ONGOING IN NATURE. THE PROJECTS INCLUDE DATABASE CONTENT CR EATION MANAGEMENT AND UPDATION OF EXISTING RESEARCH. PROJECT RESEARCH: PROJECT RESEARCH INVOLVES RESEARCH FROM SECONDARY SOURCES. IT ALSO MAKES USE OF FORECASTING MODELING AND FINANCIAL ANALYSIS. TYPICALLY IT INVO LVES INDUSTRY STUDIES COVERING THE MARKET SIZE VALUE CH AIN ANALYSIS GROWTH RATES AND DEMAND AND SUPPLY PROJEC TIONS EVS INDIA HAS CONDUCTED STUDIES AND PREPARED RESEAR CH REPORTS FOR VARIOUS SECTORS LIKE THE TELECOM SECTOR PHARMACEUTICAL SECTOR ETC. THE INTELLECTUAL PROPER TY RIGHTS FOR THE REPORTS ARE OWNED BY THE END CUSTOMER. RAPID RESEARCH: RAPID RESEARCH ASSIGNMENTS TYPICALLY HAVE 24 HOURS AS THE TURNAROUND TIME. THESE ARE MOSTLY B ASED ON BRIEF CLIENT REQUESTS RECEIVED FROM THE AES. B) FINANCIAL SERVICES (FS): EVS INDIA HAS A TEAM OF EMPLOYEES EXCLUSIVELY DEDICATED TO TRACKING STOCKS AND MUTUAL FUNDS. TYPICALLY AN INVESTMENT RESEARCH AND FINANCIAL ANALYTICS ASSIGNMENT AS DISCUSSED ABOVE COULD ALSO BE PERIODIC OR PROJECT BASED. EVS INDIA MAKES USE OF A VARIETY OF RESEARCH TOOLS INCLUDING WEB DATABASES AND PUBLICATIONS APART FROM ANALYTIC S AND FORECASTING. THE INDUSTRIES COVERED INCLUDE FINANCI AL SERVICES (BANKING AND INSURANCE) HI-TECH (SOFTWARE ELECTRO NICS ENGINEERING NANO-TECHNOLOGY NETWORKING BIOMEDICA L ENGINEERING) TELECOM EQUIPMENT AND OPERATORS PHARMACEUTICALS AND BIOTECH CHEMICALS ENERGY AND CONSUMER PRODICTS. C) INTELLECTUAL PROPERTY RESEARCH (IP): THE INTELLECTUAL PROPERTY RESEARCH INCLUDES RESEARCH ON PATENTS DRA FTING OF PATENT APPLICATIONS PRIOR ART SEARCH ETC. ESSENTIA LLY EVS INDIA OFFERS THE FOLLOWING KIND OF SERVICES TO ITS AES: D) PATENT ASSESSMENT: THIS IS CONCERNED WITH EVALUATING WHETHER A PRODUCT CAN BE PATENTED OR NOT . IT INVOLVES FINDING OUT WHETHER A PATENT EXISTS FOR A SIMILAR ITA NO. 1814/DEL/2017) 4 PRODUCT IN THE GLOBAL MARKET. E) DRAFTING OF PATENT APPLICATIONS: THE AES ARE RESPONSIBLE FOR END TO END PATENT APPLICATION FILIN G THROUGH PATENT COUNSELS IN THE RELEVANT JURISDICTIO N. EVS INDIA PREPARES A DRAFT AND SENDS IT EITHER TO THE C LIENT OR PATENT ATTORNEY ASSOCIATED WITH AES TO BE FILED. THEREAFTER LAWYERS ASSOCIATED WITH THE AE VET TH E DRAFT AND FILE IT. F) INTELLECTUAL PROPERTY ASSET MANAGEMENT: EVS INDIA OFFERS PATENT TO PRODUCT MAPPING IP RESEARCH AND ANALYSIS AND PATENT CONSULTING AS PART OF INTELLECT UAL PROPERTY RESEARCH. IT ASSISTS IN MAINTAIN A RELEVAN T PORTFOLIO OF PATENTS OFFERS CONSULTING IN OVERLAP AND INFRINGEMENT AND HELPS IN LOCATING POTENTIAL COMPA NIES WHICH WOULD BE INTERESTED IN LICENSING A PARTICULAR INVENTION. MARKETING AND AFTER SALES: EVS INDIA DOES NOT UNDERTAKE ANY MARKETING AND SALES EFFORTS AS IT CARRIES OUT O FFSHORE RESEARCH ACTIVITIES ON BEHALF OF ITS AE. THE AE IS RESPONSIBLE FOR THE BUSINESS DEVELOPMENT MARKETING ACTIVITIES AND QUALITY ASSURANCE FOR EVERY PROJECT UNDERTAKEN BY E VS INDIA. THE AES BASED ON THE MARKET AND ECONOMIC SC ENARIO PREPARES THE GENERAL WORLDWIDE MARKETING STRATEGY F OR THE GROUP. EVS INDIA SECURES CONTRACTS OWING TO THE BRAND NAME AND GOODWILL ENJOYED BY ITS AE. FOR PROVISION OF THE AFOREMENTIONED SERVICES AES REMUNERATE EVS INDIA O N AN HOURLY BASIS. ROUTINE FUNCTIONS: THESE BUSINESS SUPPORT FUNCTIONS ARE THE PART OF NORMAL COURSE OF BUSINESS AND ARE INDIS PENSABLE IN THE ECONOMIC ENVIRONMENT. STRATEGIC POLICIES: ALL LONG-TERM POLICIES ARE DEVELOPED AND FORMULATED BY EVS INDIA WHILE HAVING CONSENSUS WITH ITS AES. THE COMPANYS MANAGEMENT PEOPLE TAKE CARE OF CORPORATE COMMUNICATIONS DEALING WITH CUSTOMER AS SOCIATE COMPANIES ETC. FINANCE AND ACCOUNTING AND IT: EVS INDIA PREPARES ITS OWN FINANCIAL STATEMENTS. EVS INDIA FORMULATES ITS BUDGET ON AN ANNUAL BASIS. ITA NO. 1814/DEL/2017) 5 HUMAN RESOURCE MANAGEMENT: EVS INDIA PERFORMS RECRUITMENT SOFT SKILLS TRAINING PERFORMANCE EVAL UATION AND OTHER RELATED FUNCTIONS THE EMPLOYEE STRENGTH OF EVS INDIA WAS ABOUT 1163 PERSONNEL INCLUDING THE CORPORATE GROUP AS ON MARCH 31 2012. ASSETS ANY BUSINESS REQUIRES ASSETS WITHOUT WHICH IT CANNO T CARRY OUT ITS ACTIVITIES. THE ASSETS MIGHT BE CLEARLY REC OGNIZABLE I.E. TANGIBLE (PLANT & MACHINERY EQUIPMENT BUILDING ET C) OR THEY MIGHT BE INTANGIBLE ASSETS (BRAND-NAME TRADEMARKS TECHNICAL KNOW-HOW PATENTS ETC.). THE FOLLOWING I S THE LIST OF ASSETS USED BY EVS INDIA: TANGIBLE ASSETS THE TANGIBLE ASSETS EMPLOYED IN EVS INDIA ARE CONSI DERED ESSENTIAL FOR RUNNING THE BUSINESS. EVS INDIA BEING AN ITES SERVICE PROVIDER DOES NOT HAVE A SIGNIFICANT TANGIB LE ASSET BASE OR CARRYING OUT ITS OPERATIONS EVS INDIA DOES NOT OWN ANY LAND AND CARRIES OUT ITS OPERATIONS EVS INDIA DOES NOT OWN ANY LAND AND CARRIES OUT ITS OPERATIONS ON RENT ED PREMISES. ITS TANGIBLE ASSET BASE COMPRISES OF COMP UTERS OFFICE EQUIPMENT AND FURNITURE AND FITTINGS AND LEA SE IMPROVEMENTS. INTANGIBLE ASSETS EVS INDIA BEING IN THE RESEARCH FIELD HUMAN CAPIT AL FORMS ITS CORE RESOURCE. THE EMPLOYEES OF EVS INDIA COMPR ISE UNDERGRADUATES GRADUATES ENGINEERS AND MBAS. THE BUSINESS OF THE E-VALUESERVE GROUP DOES NOT RES ULT IN THE DEVELOPMENT OF ANY FORM OF INTELLECTUAL PROPERTY RI GHTS. THE COPYRIGHTS RELATING TO THE REPORTS IF ANY ARE HELD BY THE CLIENT ONLY. THE MARKETING INTANGIBLE IS OWNED BY THE ASSOCIATED ENTERPRISE. EVS INDIA DOES NOT OWN ANY NON-ROUTINE INTANGIBLES AND DOES NOT OWN TRADE SECRETS OR UNDERTAKE RESEARCH AN D DEVELOPMENT ACTIVITIES ON ITS ACCOUNT THAT WOULD LE AD TO THE DEVELOPMENT OF NON-ROUTINE INTANGIBLES. RISK ANALYSIS ITA NO. 1814/DEL/2017) 6 RISKS ARE THOSE BUSINESS FACTORS THAT MAY EXPOSE A COMPANY TO THE POSSIBILITY OF LOSS OR DAMAGE. IN OT HER WORDS RISK IS THE PROBABILITY THAT A PARTICULAR ADVERSE E VENT MAY OCCUR DURING A STATED PERIOD OF TIME OR MAY RESULT FROM A PARTICULAR CHALLENGE. THE FOLLOWING SECTION DISCUSS ES THE RISK BORNE BY COMPANY VIS-A-VIS GROUP COMPANIES. CUSTOMER CREDIT RISK WHEN A COMPANY PROVIDES SERVICES TO A CUSTOMER IN A DVANCE OF CUSTOMER PAYMENT THE COMPANY RUNS THE RISK THAT THE CUSTOMER WILL FAIL TO MAKE PAYMENT. THIS RISK IS KN OWN AS CUSTOMER CREDIT RISK. FOREIGN EXCHANGE RISK EXCHANGE RATE RISK RELATES TO THE POTENTIAL VARIABI LITY OF PROFITS THAT CAN ARISE BECAUSE OF CHANGES IN FOREIG N EXCHANGE RATES. SUCH RISKS ARISE WHEN DOING BUSINES S IN ANY MARKET THAT IS AFFECTED BY INTERNATIONAL TRADE AND CAN ARISE EVEN IF A COMPANY DOES NOT CONDUCT ACTUAL TRANSACTIONS IN A FOREIGN CURRENCY. EVS INDIA IS REMUNERATED BY ITS AES FOR SERVICES PR OVIDED TO IT IN US DOLLARS. HOWEVER IN THE CASE OF THIRD PAR TY DOMESTIC CONTRACTS EVS INDIA RECEIVES PAYMENT IN INR. ACCOR DINGLY EVS INDIA IS EXPOSED TO FOREIGN CURRENCY RISK FOR A E SERVICES. THE AES DO NOT BEAR THIS RISK TO ANY SIGNIFICANT EX T5ENT WITH RESPECT TO EVS INDIAS OPERATIONS. ENTREPRENEURIAL RISK THERE ARE TWO DISTINCT SOURCES OF UNCERTAINTY IN ENTREPRENEURIAL VENTURES: I) UNCERTAINTY REGARDING MARKET DEMAND AND 2) UNCERTAINTY REGARDING CAPABILITY. TH E FIRST TYPE OF UNCERTAINLY IS CHARACTERIZED AS EXOGENOUS UNCERTAINTY BECAUSE IT EMERGES AS A STATE OF NATUR E. THE SECOND TYPE OF UNCERTAINTY IS REFERRED TO AS ENDOG ENOUS UNCERTAINTY BECAUSE ENTREPRENEURS REALIZE THAT THER E IS HIGH RISK OF FAILURE AS IT IS TIED TO THEIR CAPABILITY. AS EVS INDIA IS REMUNERATED ON AN HOURLY BASIS BY I TS AES IT IS EXPOSED TO THIS RISK. THIS AES ARE INDIRECTLY EX POSED TO THIS RISK FOR THE INDIAN OPERATIONS. PRICE RISK THIS RISK ARISES DUE TO THE COMPETITIVE PRESSURES P REVAILING ITA NO. 1814/DEL/2017) 7 IN THE MARKET WHICH LEAD TO PRICE UNDERCUTTING THE REBY ADVERSELY IMPACTING THE PROFITABILITY OF THE COMPAN Y. EVS INDIA IS COMPENSATED FOR THE SERVICES RENDERED BY I T BY ITS AES ON AN HOURLY RATE BASIS. AS THIS COMPENSATION I S SUBJECT TO MARKET DYNAMICS THE COMPANY IS EXPOSED TO PRICE RISK. AS THE AES COMPETE IN THE OPEN MARKET THEY ARE EXPO SED TO THIS RISK. MANPOWER RISK MANPOWER IS ONE OF THE MOST VALUABLE RESOURCES EMPL OYED BY AN ORGANIZATION FOR CARRYING OUT ITS DAY-TO-DAY OPERATIONS. THE INCREASING COMPETITION IN THE MARKE T PLACE COMBINED WITH OTHER UNCONTROLLED VARIABLES RESULT I N EXPOSURE TO MANPOWER RISK. EVS INDIA HAS SKILLED WO RKFORCE AND IS ACCORDINGLY EXPOSED TO THIS RISK. EVS INDIAN HAS SKILLED WORKFORCE AND IS ACCORDINGLY EXPOSED TO THIS RISK. THE ITES INDUSTRY IS CHARACTE RIZED BY A HIGH LEVEL OF ATTRITION. THE AES ARE INDIRECTLY EXPOSED TO THIS RISK FOR THE INDIAN OPERATIONS. 4. THE TOTAL TRANSACTION VALUE WITH ITS AES ON ACCO UNT OF PROVISION OF ITES WAS DECLARED AT 137 96 87 844/-.T O BENCHMARK THE SAID INTERNATIONAL TRANSACTION THE A SSESSEE HAD ADOPTED TNMM AS THE MOST APPROPRIATE METHOD BY ADOPTING PLI AS OP/OC WHICH RESULTED INTO PROFIT M ARGIN OF 18.94%. AFTER CARRYING OUT VARIOUS QUANTITATIVE AND QUALITATIVE ANALYSES ASSESSEE SHORTLISTED LISTED 9 COMPARABLE COMPANIES WITH AVERAGE PROFIT MARGIN OF 10.75%. ACCORDINGLY IT WAS REPORTED THAT ASSESSEES INTERNATIONAL TRANSACTION ARE AT ARMS LENGTH PRICE. THE TPO REJECTED ASSESSEES COMPARABL E AND ALSO THE FILTERS AND OTHER PARAMETERS ADOPTED BY THE ASS ESSEE IN THE TP STUDY REPORT. THE TPO THEN CARRIED OUT HIS O WN SEARCH ANALYSIS AND SHORTLISTED 12 COMPARABLES WHICH ARE A S UNDER: - ITA NO. 1814/DEL/2017) 8 S. NO. COMPANY LONG NAME OP/OC 1. ACCENTIA TECHNOLOGIES LTD. 11.09% 2. ECLERX SERVICES LTD. 59.92% 3. INFORMED TECHNOLOGIES INDIA LTD. 20.66% 4. JINDAL INTELLICOM LTD. 1.42% 5. TCS E-SERVE LTD. 64.09% 6. EXCEL INFOWAYS LTD.(SEG.) (IT/BPO) 40.77% 7. R SYSTEMS INTERNATIONAL LTD. (SEG.) (BPO) 0.19% 8. INFOSYS BPO LTD. 36.92% 9. ACROPETAL TECHNOLOGIES LTD. (SEG.) 17.79% 10. BNR UDYOG LIMITED 48.60% 11. E4E HEALTHCARE BUSINESS SERVICES P. LTD. 21.40% 12. MICROGENETICS SYSTEMS LTD. 8.07% AVERAGE 27.58% 5. OUT OF AFORESAID 12 COMPARABLES IT HAS BEEN CON TENDED THAT BY THE ASSESSEE IF 6 COMPARABLES WERE TO BE EX CLUDED ON THE GROUND THAT THEY ARE NOT COMPARABLE ON FAR ANAL YSIS TO THE ASSESSEE THEN OTHER COMPARABLES WILL BECOME AC ADEMIC AND INFRUCTUOUS. THE SIX COMPARABLES CHALLENGED BY THE ASSESSEE FOR EXCLUSION ARE: (I) E-CLERX SERVICES LTD. (II) ACCENTIA TECHNOLOGIES LTD. (III) B N R UDYOG LTD. (IV) EXCEL INFOWAYS LTD. (V) INFOSYS BPO LTD. (VI) TCS E-SERVE LTD. 6. NOW WE SHALL TAKE UP EACH OF THESE 6 COMPARABLES HEREIN BELOW:- ITA NO. 1814/DEL/2017) 9 I) ECLERX SERVICES LTD. 6.1 BEFORE THE TPO THE ASSESSEE HAS OBJECTED FOR THE INCLUSION OF THIS COMPARABLE ON THE GROUNDS THAT; FIRSTLY IT IS FUNCTIONALLY NOT COMPARABLE BECAUSE THIS COMPANY IS INTO SOFTWARE DEVELOPMENT AND DESIGN SERVICES; SECONDLY THIS COMPANY HAD EXTRAORDINARY EVENTS RESULTING INTO ABN ORMAL MARGINS; THIRDLY UNRELIABLE DATA OF THIS COMPANY IN PUBLIC DOMAIN; AND LASTLY THIS COMPANY HAS BEEN REJECTED IN VARIOUS JUDICIAL RULING AS A COMPARABLE WITH ITES COMPANIES . LD. TPO HAS REJECTED ALL THE CONTENTION OF THE ASSESSEE ON THE GROUND THAT ANNUAL REPORT OF SAID COMPANY MAKES IT CLEAR T HAT IT IS ENGAGED IN DATA PROCESSING ACTIVITIES WHICH ARE CAT EGORIZED AS ITES AND THERE IS NOTHING TO SHOW THAT INCREASE IN REVENUES DUE TO AMALGAMATION AND ACQUISITION HAS LED TO ANY ABNORMAL INCREASE IN THE MARGINS EARNED BY THIS ENTITY IN TH E YEAR UNDER CONSIDERATION. THE COMPARATIVE PLI WAS GIVEN AS UND ER: - PARTICULARS MAR-09 MAR-10 MAR-11 MARCH- 12 SALES (CR) 197.09 257.02 341.91 472.46 OP/OC 57.16% 55.84% 56.82% 61.22% 6.2. BEFORE US LD. COUNSEL FOR THE ASSESSEE HAD SUBMITTED THAT ECLERX IS ENGAGED IN DATA ANALYTICS FINANCIAL SERVICES AND DATA PROCESSING SOLUTIONS AND THE SAME COMPANY HAS BEEN REJECTED BY HONBLE DELHI HIGH COURT IN THE CASE OF RAMGREEN SOLUTIONS REPORTED IN 377 ITR 533. APART FROM THAT LD. COUNSEL SUBMITTED THAT THIS COMPANY HAS TWO SEGMENT S VIZ. FINANCIAL SERVICES; AND SALES AND MARKETING SERVICE S SEGMENT. UNDER THE FINANCIAL SERVICES SEGMENT ECLERX PROVID ES SERVICES ITA NO. 1814/DEL/2017) 10 SUCH AS CONSULTING BUSINESS ANALYSIS AND SOLUTION TESTING. IT PROVIDES A BROAD SUITE OF SERVICES THAT ALLOW ITS C LIENTS TO OPERATE ON A DAY TO DAY BASIS INCLUDING TRADE PROC ESSING REFERENCE DATA ACCOUNTING AND FINANCE AND EXPENSE MANAGEMENT ACTIVITIES. UNDER SALES AND MARKETING SE RVICES ECLERX PROVIDES ONLINE OPERATIONS WEB ANALYTICS S OCIAL MEDIA MODERATION AND ANALYTICS DATA REPORTING CRM PLATF ORM SUPPORT BUSINESS INTELLIGENCE COMPETITOR BENCHMAR KING AND PRICING BUSINESS PROCESS CONSULTING. THESE SERVICE S ARE VERY DIFFERENT FROM THE SERVICES RENDERED BY THE ASSESSE E. REGARDING EXTRAORDINARY EVENTS LD. COUNSEL SUBMITT ED THAT ECLERX HAS ACQUIRED THE ENTIRE SHAREHOLDING OF AGIL YST INC. WHICH IS PROVIDING OPERATIONS AND DATA ANALYSIS SUP PORT TO THE TELECOMMUNICATION COMPANIES. THE ACQUISITION ADDED DELIVERY CAPABILITY OF THE COMPANY AND ADDED ADDITIONAL 1000 PEOPLE INTO THE COMPANY. LASTLY SHE SUBMITTED THAT THE SA ME VERY COMPARABLE HAS BEEN REJECTED BY THE TRIBUNAL IN ASS ESSEES OWN CASE FOR A.Y. 2008-09 AND ALSO IN THE CASE OF S ISTER CONCERN E-VALUESERVE.COM PVT. LTD. SEZ WHOSE FUNCTIONAL PROFILE IS IDENTICAL TO THE ASSESSEE. TRIBUNAL HAS HELD THAT ECLERX NOT COMPARABLE. SHE ALSO POINTED OUT THAT TH E SAID TRIBUNAL ORDER IN THE CASE OF E-VALUESERVE.COM PVT. LTD. SEZ PASSED IN ITA NO. 1467/DEL/2015 & ITA NO. 5147/DEL/ 2017 HAVE BEEN UPHELD BY THE HONBLE DELHI HIGH COURT IN THE APPEAL FILED BY THE DEPARTMENT VIDE JUDGMENT AND OR DER DATED 26.02.2018 IN ITA NO. 241/2018 AND 948/2018. THUS THIS COMPARABLE SHOULD BE EXCLUDED. ITA NO. 1814/DEL/2017) 11 6.3 ON THE OTHER HAND LD. CIT-DR SUBMITTED THAT ASSESSEE IS ALSO KPO AND TPO HAS DEALT ASSESSEES S IMILAR OBJECTION IN DETAILED MANNER AND UNDER TNMM BROAD COMPARABILITY HAS TO BE SEEN. THIS COMPANY WAS ALSO ENGAGED IN DATA PROCESSING ACTIVITIES AND THEREFORE IT IS AKIN TO ITES. FURTHER THE EFFECT OF EXTRAORDINARY EVENT DOES NOT HAVE MUCH IMPACT IN THE PLI BECAUSE THE MARGIN OF THIS COMPAN Y HAS ALWAYS BETWEEN 56% TO 61 %. THUS HE STRONGLY RELIE D UPON ORDER OF THE TPO AND DRP. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PER USED THE RELEVANT MATERIALS REFERRED AND RELIED UPON BY THE PARTIES. FROM THE PERUSAL OF THE FUNCTIONAL PROFILE OF THE A SSESSEE FOR ALL THE THREE SEGMENTS IT IS SEEN THAT IN SO FAR A S CORPORATE AND PROFESSIONAL SERVICES ARE CONCERNED IT IS MAINL Y IN PRIMARY MARKET RESEARCH IN THE NATURE OF BUSINESS OF CERTAI N IT AND TELECOM SECTOR AND COLLECTION OF DATA AND SERVICE L IKE ANALYZING THE TRENDS IN THE INDUSTRIES LIKE IT AND TELECOM WHICH IS BASED ON QUESTIONNAIRE AND SURVEY. UNDER T HE FINANCIAL SERVICES IT IS MAINLY INTO TRACKING OF ST OCKS AND MUTUAL FUNDS FOR WHICH IT MAKES VARIETY OF RESEARCH TOOLS; AND UNDER THE INTELLECTUAL PROPERTY RESEARCH IT MAINLY CONCENTRATES ON RESEARCH ON PATENTS DRAFTING OF PATENT APPLICAT IONS PATENT ASSESSMENT ETC. THE ASSESSEE DOES NOT UNDERTAKE ANY MARKETING AND SALES EFFORTS FOR AES AS AE UNDERTAKE S BUSINESS DEVELOPMENT MARKETING ACTIVITIES AND QUAL ITY ASSURANCE FOR PROJECT UNDERTAKEN BY ASSESSEE. THE L IST OF TANGIBLE AND INTANGIBLE ASSETS AS HIGHLIGHTED BY TH E ASSESSEE SHOW THAT IT DOES NOT HAVE SIGNIFICANT TANGIBLE ASS ETS WHICH ITA NO. 1814/DEL/2017) 12 MAINLY COMPRISES OF COMPUTERS OFFICE EQUIPMENT FUR NITURE ETC.; AND INTANGIBLE ASSETS ARE BASICALLY HUMAN RES OURCES COMPRISED OF GRADUATES ENGINEERS AND MBAS AND DOES NOT OWN ANY FORM OF IPR. RISK ANALYSIS HAS ALSO BEEN IN CORPORATED IN THE EARLIER PART OF THE ORDER WHICH SHOWS THAT I T IS A LOW RISK ENTITY. 7.1 IN SO FAR AS ECLERX IS CONCERNED FIRST OF A LL FROM THE PERUSAL OF THE ANNUAL REPORT WE FIND THAT UNDER TH E HEAD FINANCIAL SERVICES IT IS PROVIDING BROAD SUITE OF SERVICES SUCH AS CONSULTING BUSINESS ANALYSIS AND SOLUTION TESTI NG. THE SERVICES RENDERED UNDER SALES AND MARKETING SERVICE S AS HIGHLIGHTED BY THE LD. COUNSEL COMPRISE OF ONLINE O PERATIONS WEB ANALYTICS DATA REPORTING CRM PLATFORM SUPPORT BUSINESS PROCESS CONSULTING ETC. WHICH SHOWS THAT IT IS PROVIDING HIGH END KPO SERVICES IN FINANCIAL SECTOR AND ALSO UNDERTAKING SIGNIFICANT SALES AND MARKETING SERVICE S AND STRATEGIES. THE FUNCTIONS CARRIED OUT BY ECLERX HAV E BEEN FOUND TO BE INCOMPARABLE WITH THE ASSESSEES FUNCTI ON BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008- 09. NOT ONLY THAT IN THE CASE OF SISTER CONCERN OF THE ASSESSEE EVALUESERVE SEZ GURGAON HAVING EXACTLY SIMILAR FUNC TIONS ECLERX HAS BEEN REJECTED. WE FIND THAT HONBLE DEL HI HIGH COURT IN THE CASE OF RAMPGREEN SOLUTIONS (SUPRA) QU A ECLERX HAS OBSERVED AS UNDER :- 3 7. APPLYING THE AFORESAID PRINCIPLES TO THE FACTS O F THE PRESENT CASE IT IS ONCE AGAIN CLEAR THAT BOTH VISHAL AND ECLERX COULD NOT BE TAKEN AS COMPARABLES FOR DETERM INING THE ALP. VISHAL AND ECLERX BOTH ARE INTO KPO SERVI CES. IN ITA NO. 1814/DEL/2017) 13 MAERSK GLOBAL CENTERS (INDIA) (P.) LTD. (SUPRA) THE SPECIAL BENCH OF THE TRIBUNAL HAD NOTED THAT ECLERX IS ENGA GED IN DATA ANALYTICS DATA PROCESSING SERVICES. PRICING ANALYTICS BUNDLING OPTIMIZATION CONTENT OPERATION SALES AND MARKETING SUPPORT PRODUCT DATA MANAGEMENT REVENUE MANAGEMENT. IN ADDITION. ECLERX ALSO OFFERED FINANCIAL SERVICES SUCH AS REAL-TIME CAPITAL MARKETS MIDDLE AND BACK- OFFICE SUPPORT PORTFOLIO RISK MANAGEMENT SERVICES AND VARIOUS CRITICAL DATA MANAGEMENT SERVICES. CLEARLY THE AFORESAID SERVICES ARE NOT COMPARABLE WITH THE SERV ICES RENDERED BY THE ASSESSEE. 7.2 FOLLOWING THE SAME PRINCIPLE THE TRIBUNAL IN A SSESSEES OWN CASE IN A.Y. 2008-09 HAD MADE FOLLOWING OBSERVA TIONS: - 44.13 ECLERX SERVICES LTD.: THE LD. AR SUBMITTED T HAT THIS COMPARABLE IS FUNCTIONALLY DISSIMILAR. IT IS ENGAGE D IN DATA ANALYSIS AND FINANCIAL SERVICES AND THIS POSITION F OR THIS COMPARABLE HAS BEEN ACCEPTED BY THE HONBLE DELHI H IGH COURT IN RAMPGREEN SOLUTIONS FOR A.Y. 2008-09. ECLE RX SERVICES LTD. IS ENGAGED IN PROVIDING DATA ANALYSIS AND DATA PROCESS SOLUTIONS. PRICING ANALYTICS BUNDLING OPTI MIZATION CONTENT OPERATIONS SALES AND MARKETING SUPPORT PR ODUCT DATA MANAGEMENT REVENUE MANAGEMENT ARE SOME OF ITS FUNCTIONS. THIS COMPANY PROVIDES TAILORED PROCESS OUTSOURCING AND MANAGEMENT SERVICES IN ADDITION TO MULTITUDE OF THE DATA AGGREGATION AND MINING AND MAINTENANCE SERVICES. THERE IS EXTRAORDINARY EVENTS DURING A.Y. 2008-09 THAT OF ACQUISITION. ECLERX SERVICES L TD. HAS BEEN ACQUIRED UK BASED IGENTICA TRAVEL SOLUTIONS LT D. WHICH GAVE IT A NEW CUSTOMER BASE. THE LD. AR RELIED UPON THE DECISION OF THE HON BLE DELHI HIGH COURT IN CASE O F PCIT VS. AMERIRPRISE INDIA PVT. LTD. (ITA NO. 461/2016). 44.14 THE LD. DR RELIED UPON THE ORDER OF THE TPO/AO AND THE DIRECTIONS OF THE DRP. 44.15 WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. ECLERX SERVI CES LTD. IS ITA NO. 1814/DEL/2017) 14 ENGAGED IN PROVIDING DATA ANALYSIS AND DATA PROCESS SOLUTIONS. PRICING ANALYTICS BUNDLING OPTIMIZATION CONTENT OPERATIONS SALES AND MARKETING SUPPORT PRODUCT DA TA MANAGEMENT REVENUE MANAGEMENT ARE SOME OF ITS FUNCTIONS. IT IS ENGAGED IN DATA ANALYTICS AND FINA NCIAL SERVICES AND THIS POSITION FOR THIS COMPARABLE HAS BEEN ACCEPTED BY THE HONBLE DELHI HIGH COURT IN RAMPGRE EN SOLUTIONS FOR A.Y. 2008-09. THERE IS EXTRAORDINARY EVENTS DURING A.Y. 2008-09 THAT OF ACQUISITION. THEREFORE IT WILL BE APPROPRIATE TO EXCLUDE THIS COMPARABLE. THEREFORE WE DIRECT THE TPO/AP TO EXCLUDE THIS COMPARABLE FROM THE FINA L LIST OF THE COMPARABLES. 7.3 FURTHER IN THE CASE OF EVALUESERVE SEZ THIS COM PARABLE HAS BEEN EXCLUDED AFTER OBSERVING AS UNDER :- 12. THE NEXT COMPARABLE BY THE ASSESSEE IS THAT EC LARX SERVICES SUBMITTING THAT IT IS A KNOWLEDGE PROCESS OUTSOURCING (KPO) UNIT AND THEREFORE CANNOT BE COMP ARED WITH THE ITES SERVICE PROVIDER LIKE ASSESSEE. THE A SSESSEE HAS RELIED ON THE DECISION OF HON'BLE DELHI HIGH CO URT OF RAMGREEN SOLUTIONS PVT. LTD VS. CIT. 13. THE ID DR SUBMITTED THAT THE ASSESSEE IS ALSO A KNOWLEDGE PROCESS OUTSOURCING UNIT AS IT EMPLOYS 61 6 PERSONNEL. HE REFERRED TO PAGE NO. 6 OF THE ORDER O F THE ID TRANSFER PRICING OFFICER FOR THIS. HE SUBMITTED THA T ASSESSEES CASE FALLS INTO ALL THREE HORIZONTAL SEG MENTS OF ITES INDUSTRIES SUCH AS CALL CENTRE AND TECHNICAL S UPPORT PAYMENT SUPPLY CHAIN AND ANALYTICS. HE THEREFORE S TATED THAT ECLARX IS THE RIGHT COMPARABLE. 14. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTEN TIONS AND PERUSED THE ANNUAL REPORT OF THE COMPARABLE FOR AY 2010-11 AT PAGE NO. 734 TO 83.7 OF THE PAPER BOOK. THE FUNC TIONS OF THE COMPANY ARE DESCRIBED AT PAGE NO. 23 OF ITS ANN UAL REPORT UNDER MANAGEMENT DISCUSSION AND ANALYSIS. IT PROVIDES THAT ECLERX SUPPORTS ITS CLIENTS THROUGH I TS TWO ITA NO. 1814/DEL/2017) 15 BUSINESS UNITS- CAPITAL MARKETS AND SALES AND MARKE TING SUPPORT. ACROSS BOTH THESE UNITS THE COMPANY SUPPO RTS AND IMPROVES PROCESSES THAT ARE CORE OF ITS CUSTOMERS D AY TO DAY BUSINESS OPERATIONS. THE COMPANY CONTINUES TO FOCUS ON ENGAGEMENTS WHERE IT CAN TAP THE LARGEST PERCENTAGE OF CLIENT SPEND BY LEVERAGING ITS DOMAIN EXPERTISE AND BY BRINGING TOGETHER CONSULTING PROJECT MANAGEMENT AN D SOLUTION BASED SERVICE DELIVERY. IN THE CAPITAL MAR KETS DIVISION THE COMPANY TODAY PROVIDES END-TO-END FIN ANCIAL TRANSACTION SUPPORT SERVICES SUCH AS TRADE BOOKING TRADE CONFIRMATION ASSET SERVICING CASH SETTLEMENTS CLI ENT SERVICING RISK MANAGEMENT AND REFERENCE DATA INTEGR ITY ACROSS ALL ASSET CLASSES AND ITS SERVICES SPAN BOT H SELL SIDE (THE LARGE BANKS) AND BUY SIDE ( THE FUNDS AND ASSE TS MANAGERS) FURTHERMORE THE COMPANY PROVIDES STRATEG IC AND PROCESS CONSULTING SERVICES HELPING CLIENTS DEVISE SOLUTIONS TO IMPROVE EFFICIENCY REDUCE RISK AND MEET REGULAT ORY AND MARKET DEMANDS. SIMILARLY IN THE SALES AND MARKETI NG SUPPORT DIVISION THE COMPANY TODAY SUPPORTS CLIENT S IN ALL ELEMENTS OF PRODUCT AND SERVICES MARKETING AND SALE S WITH A FOCUS ON ONLINE SUPPORT TO INCLUDE CONTENT DEVELOPM ENT AND MANAGEMENT SEARCH ENGINE MANAGEMENT WEB OPERATION S PRICING AND CUSTOMER ANALYTICS PRODUCT DATABASE MANAGEMENT AND CATALOG AUDITS. THE COMPANY IS ALSO PURSUING A STRATEGY OF CREATING A PORTFOLIO OF PLAT FORM ATTACHED SERVICES BY CREATING A SUITE OF SERVICES THAT ARE COMPLEMENTARY TO INDUSTRY STANDARD IT PLATFORMS. A GLANCE AT THE FUNCTIONAL PROFILE OF THIS COMPANY DIVULGES THAT IT IS BASICALLY A KNOWLEDGE PROCESS OUTSOURCING (KPO) COM PANY PROVIDING DATA ANALYTICS AND DATA PROCESS SOLUTIONS TO GLOBAL CLIENTS. THIS COMPANY PROVIDES END TO END SU PPORT THROUGH TRADE LIFE CYCLE INCLUDING TRADE CONFIRMATI ONS AND SETTLEMENTS ETC. IT ALSO PROVIDES SALES AND MARKETI NG SUPPORT SERVICES TO LEADING GLOBAL MANUFACTURING RETAIL T RAVEL AND LEISURE COMPANIES THROUGH ITS PRICING AND PROFITABI LITY SERVICES. FURTHER THIS COMPANY HAS ALSO DEVELOPED I T TOOL AND PROCESS AUTOMATION. FROM THE ABOVE DISCUSSED NA TURE ITA NO. 1814/DEL/2017) 16 OF BUSINESS CARRIED ON BY E- CLERX SERVICES LTD. I T IS PATENT THAT THE SAME BEING A KPO COMPANY IS QUITE DIFFERE NT FROM THE ASSESSEE PROVIDING ONLY IT ENABLED SERVICES TO ITS AE WHICH FALL IN THE REALM OF BPO SERVICES. APART FROM THAT IT IS FURTHER OBSERVED THAT THIS COMPANY HAS SIGNIFICANT INTANGIBLES WHICH IT USES IN RENDERING KPO SERVICES AGAINST WHICH THE ASSESSEE DOES NOT HAVE ANY INTANGIBLES. T HE HON'BLE JURISDICTIONAL HIGH COURT IN RAMPGREEN SOLU TIONS (P.) LTD. V. CIT [2015] 234 TAXMAN 573/60 TAXMANN.COM 35 5 (DELHI) HAS HELD THAT E-CLERX SERVICES LTD. BEING ENGAGED IN KPO CANNOT BE TREATED AS COMPARABLE OF AN ASSESSEE ENGAGED IN RENDERING BPO SERVICES. IN VIEW OF THE D IRECT JUDGMENT OF THE HON 'BLE JURISDICTIONAL HIGH COURT ON THE POINT WE DIRECT TO ELIMINATE E- CLERX FROM THE LIS T OF COMPARABLES. AS SUCH E-CLERX SERVICES LTD. CANNOT BE CONSIDERED AS COMPARABLE. 7.4 THE SAID JUDGMENT HAS ALSO BEEN CONFIRMED BY TH E HONBLE HIGH COURT IN THE FOLLOWING MANNER: - 1. THE REVENUE CHALLENGES AN ORDER OF THE INCOME T AX APPELLATE TRIBUNAL (ITAT) WHICH ACCEPTED THE ASSESS EES CONTENTIONS SO FAR AS COMPARISON WITH SIX ENTITIES IN THE DETERMINATION OF ARMS LENGTH PRICE (ALP) AND TRANS FER PRICING ADJUSTMENT UNDER SECTION 93CA OF THE INCOME TAX ACT 1961 [HEREAFTER THE 1961 ACT] WAS CONCERNE D. 2. THE ASSESSEE IS ENGAGED IN IT-ENABLED SERVICES (IT ES) SUCH AS RESEARCH ACTIVITIES IN TERMS OF AGREEMENTS WITH ITS ASSOCIATED ENTERPRISE (AE). IT PRIMARILY CONCERNS I TSELF WITH BUSINESS INFORMATION MARKET RESEARCH AND INTELLECT UAL PROPERTY RESEARCH. 3. THE TRANSFER PRICING OFFICER (TPO) WHILE CARRYING OUT THE ALP DETERMINATION PROCEDURE TOOK INTO ACCOUNT THE PROFITABILITY AND MARGINS OFTEN COMPARABLE ENTITIES . THE ASSESSEE WAS AGGRIEVED BY THE INCLUSION OF SIX OF T HEM AND APPROACHED THE DISPUTES RESOLUTION PANEL (DRP). ITS ITA NO. 1814/DEL/2017) 17 CONTENTIONS WERE REJECTED AND THE DRAFT ASSESSMENT ORDER WAS FINALIZED BY THE ASSESSING OFFICER (AO). 4. THE ASSESSEE THEREFORE APPEALED TO THE IT AT WHI CH ACCEPTED THE ASSESSEES PLEA AND DIRECTED THE EXCLU SION OF THE SAID SIX COMPARABLES FOR VARIOUS REASONS. THAT IS THE SUBJECT MATTER OF REVENUES APPEAL. 5. THIS COURT NOTICES THAT AS FAR AS THE EXCLUSION OF THREE COMPARABLES - M/S. TCS E-SERVE LIMITED; M/S. TCS E- SERVE INTERNATIONAL LIMITED AND M/S. INFOSYS BPO LTD. IS CONCERNED THE IT AT WAS COGNIZANT OF AND TOOK NOTE OF THE CIRCUMSTANCES THAT THESE ENTITIES HAD A HIGH BRAND VALUE AND THEREFORE WERE ABLE TO COMMAND GREATER PROFIT S; BESIDES THEY OPERATED ON ECONOMIC UPSCALE. THIS AP PROACH CANNOT BE FAULTED HAVING REGARD TO THE DECISION OF THIS COURT IN PR. COMMISSIONER OF INCOME TAX V. B.C. MANAGEMEN T SERVICES PVT. LTD. 2018 (89) TAXMAN.COM 68 (DEL) W HICH READS AS FOLLOWS: 13. THE EXCLUSION OF SECOND COMPARABLE ICRA TECHNO ANALYTICS LTD. WAS ON THE BASIS THAT IT HAD ENGAGED ITSELF IN PROCESSING AND PROVIDING SOFTWARE DEVELOPMENT AN D CONSULTANCY AND ENGINEERING SERVICES/WEB DEVELOPMEN T SERVICES. THE REASONS FOR EXECUTION WERE FUNCTIONAL DISSIMILARITIES AND THAT SEGMENTAL DATA WERE UNAVAI LABLE. AGAIN THE FINDINGS OF THE IT AT ARE REASONABLE AND BASED ON RECORD. THE THIRD COMPARABLE THAT THE AO/TPO EXC LUDED IS TCS E- SERVE. THE IT AT OBSERVED THAT THOUGH THE RE IS A CLOSE FUNCTIONAL SIMILARITY BETWEEN THAT ENTITY AND THE ASSESSEE HOWEVER THERE IS A CLOSE CONNECTION BETW EEN TCS E-SERVE AND TATA CONSULTANCY SERVICE LTD. WHICH WAS HIGH BRAND VALUE; THAT DISTINGUISHED IT AND MAR KED IT OUT FOR EXCLUSION. THE ITAT RECORDED THAT THE BRAND VALUE ASSOCIATED WITH TCS CONSULTANCY REFLECTED IMPACTED TCS E-SERVE PROFITABILITY IN A VERY POSITIVE MANNER. TH IS INFERENCE TOO IN THE OPINION OF COURT CANNOT BE TE RMED AS UNREASONABLE. THE RATIONALE FOR EXCLUSION IS THEREF ORE ITA NO. 1814/DEL/2017) 18 UPHELD. THE ASSESSEE WAS AGGRIEVED BY THE INCLUSION OF ACCENTIA A SOFTWARE DEVELOPMENT COMPANY. THE REVENU E IS AGGRIEVED BY THE EXCLUSION OF ACCENTIA FROM THE TP ANALYSIS. THE DRP HAD DIRECTED ITS DELETION. WE OBS ERVE THAT THE ITAT HAS NOTICED THE UNAVAILABILITY OF THE SEGMENTAL DATA SO FAR AS THESE COMPARABLES ARE CONCERNED. FURTHERMORE THE FUNCTIONALITY OF THIS E NTITY WAS CONCERNED IT IS DIFFERENT FROM THAT OF THE ASS ESSEE; ACCENTIA WAS ENGAGED IN KPO SERVICES IN THE HEALTHC ARE SECTOR. 14. IN VIEW OF THE ABOVE FINDINGS THIS COURT IS OF THE OPINION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES. THE APPEALS ARE DISMISSED. 6. THE ITAT NOTED THAT M/S. ACCENTIA TECHNOLOGIES LTD . WAS MAINLY PERFORMING MEDICAL TRANSCRIPTION SERVICES. I T WAS OF THE OPINION THAT ITS SERVICE WAS SIMILAR TO THE ONE THAT THE ASSESSEE WAS ENGAGED IN. HOWEVER IT ALSO NOTED THA T THERE WAS NO SEGMENTED DATA AND ON THAT ACCOUNT DIRECTE D THE EXCLUSION OF THAT ENTITY FROM THE LIST OF COMPARABL ES. LIKEWISE IN THE CASE OF M/S. ICRA TECHNO ANALYSIS LTD. IT WAS FOUND THAT THE SAID ENTITY WAS ENGAGED IN BUSIN ESS INTELLIGENCE AND ANALYTICS SUPPLIES SOFTWARE DEVEL OPMENT CONSULTANCY SERVICES ENGINEERING SERVICES WEB DEV ELOPMENT AND HOSTING SERVICES. BESIDES FUNCTIONAL DISSIMILAR ITY THE ITAT ALSO NOTED THAT THERE WAS NO SEGMENTED DATA TO COMPARE ITS ACTIVITY WITH THE ASSESSEE. LIKEWISE I N THE M/S. ECLERX SERVICES THE ITAT NOTED THAT ITS ACTIVITY W AS FUNCTIONALLY DISSIMILAR BECAUSE IT PERFORMED KPO FU NCTION WHEREAS THE ASSESSEE WAS CLASSIFIABLE AS BPO. 7. ALL THE REASONS GIVEN BY THE ITAT IN THE OPINION O F THE COURT ARE JUSTIFIED AND SUPPORTED BY THE JUDGM ENT IN B.C. MANAGEMENT (SUPRA). IN THE CASE OF M/S. ECLARX SERVICES THE FINDINGS OF FACT WITH RESPECT TO DISS IMILARITY BINDS THE REVENUE. ITA NO. 1814/DEL/2017) 19 7.5 WHEN ON SIMILAR FACTS AND CIRCUMSTANCES ECLE RX HAS BEEN FOUND TO BE INCOMPARABLE WITH THE ASSESSEE WH ICH FINDING HAS BEEN AFFIRMED BY HONBLE DELHI HIGH COU RT AND THERE IS NO CHANGE IN THE MATERIAL FACTS AND CIRCUM STANCES IN THIS YEAR THEN WE DO NOT FIND ANY REASON TO DEVIAT E FROM SUCH FINDING. ACCORDINGLY RESPECTFULLY FOLLOWING THE S AME WE DIRECT THE TPO/ AO TO EXCLUDE ECLERX FROM COMPARABILITY LI ST. II) ACCENTIA TECHNOLOGIES LTD. 8. THIS COMPARABLE CHOSEN BY THE TPO WAS OBJECTED B Y THE ASSESSEE BEFORE THE TPO ON THE GROUND THAT FIRSTLY IT IS FUNCTIONALLY NOT SIMILAR; SECONDLY PRESENCE OF IPRS THIRDLY EXTRAORDINARY EVENT OF ACQUISITION OF A SOFTWARE DE VELOPMENT COMPANY DURING THE FINANCIAL YEAR 2011-12; AND LASTLY THERE ARE NO SEGMENTAL DETAILS. THIS COMPANY IS INTO MEDI CAL TRANSCRIPTION MEDICAL BILLING MEDICAL CODING CLA IMS PROCESSING AND SOFTWARE DEVELOPMENT IMPLEMENTATION SERVICES. LD. TPO HELD THAT SINCE THE COMPARABLES CHOSEN BY H IM ARE PROVIDING ITES SERVICES SIMILAR TO THE ASSESSEE AND UNDER TNMM BROUGHT COMPARABILITY HAS TO BE SEEN THEREFOR E IT IS A FIT COMPARABLE. HE OBSERVED THAT THIS COMPANY IS I NTO HEALTH CARE RECEIVABLE CYCLE MANAGEMENT WHICH IS PRE-DOMI NANTLY UNDER ITES. THE ENTIRE FUNCTIONS OF MEDICAL TRANSCR IPTION CODING BILLING AND COLLECTION IS ONE COMPLETE SEGME NT AND ALL THESE VARIOUS SPECIFIC SEGMENTS ARE CLOSELY RELATED TO EACH OTHER. AS FAR AS DEVELOPING OF PROPRIETARY SOFTWARE PRODUCTS TPO OBSERVE THAT THERE IS NO REFERENCE OF ANY REVEN UE FROM THE ITA NO. 1814/DEL/2017) 20 SOFTWARE PRODUCTS IN THE ANNUAL REPORT. THUS HE HE LD THAT SAME IS A GOOD COMPARABLE. 8.1 BEFORE US THE LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT FROM THE PERUSAL OF THE P & L ACCOUNT IT CAN B E SEEN THAT REVENUES FROM OPERATIONS ARE FROM DIFFERENT SOURCE S I.E. MEDICAL TRANSCRIPTION BILLING AND CODING AND EMR A ND SAAS. HOWEVER THE ANNUAL REPORT STATES THAT IT HAS ONLY ONE SEGMENT. THUS THERE IS NO SEGMENTAL DETAIL FOR VAR IOUS STREAMS OF REVENUE. SHE FURTHER SUBMITTED THAT THIS COMPANY IS INTO MEDICAL TRANSCRIPTION CODING AND MEDICAL B ILLING SERVICES AND ALSO SOFTWARE DEVELOPMENT SERVICES AND ALSO HAS DEVELOPED ITS OWN PRODUCTS SUCH AS IMTAS IRTS IA MS IPMS. APART FROM THAT SHE SUBMITTED THAT THERE WER E EXTRAORDINARY EVENTS IN A.Y. 2012-13 IN THE FORM OF AMALGAMATION AND ACQUISITION THEREFORE DUE TO SUC H EXTRAORDINARY EVENT THIS COMPARABLE CANNOT BE INCLU DED IN THIS YEAR. SHE FURTHER POINTED OUT THAT IN THE ASSE SSMENT YEAR 2008-09 THE TRIBUNAL IN ASSESSEES OWN CASE FOLLOW ING THE PRINCIPLE LAID DOWN BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. AMERIPRISE INDIA (P) LTD. IN ITA NO. 461/2016 HAS UPHELD THE EXCLUSION OF THE SAID COMPARABLE. APART FROM THAT THE TRIBUNAL IN CASE O F SISTER CONCERN I.E. EVALUESERVE.COM SEZ WHICH HAS A SIMI LAR FUNCTION PROFILE HAS DIRECTED TO EXCLUDE THE SAID C OMPARABLE; AND THIS JUDGMENT OF THE TRIBUNAL HAS BEEN UPHELD B Y THE HONBLE DELHI HIGH COURT ALSO. ITA NO. 1814/DEL/2017) 21 8.2 ON THE OTHER HAND LD. CIT-DR STRONGLY REL IED UPON THE ORDER OF AUTHORITIES BELOW AND SUBMITTED THAT THE A CTIVITIES CARRIED OUT BY ACCENTIA TECHNOLOGIES LTD. IS NOTHING BUT ITES SERVICES AND ALL THE THREE FUNCTIONS ARE INTER RELA TED AND THEREFORE NO SEPARATE SEGMENT IS REQUIRED TO BE SE EN. UNDER THE TNMM IF A COMPARABLE COMPANY IS CARRYING OUT S IMILAR FUNCTIONS WHICH ARE IN THE CATEGORY OF ITES THEN S AME CANNOT BE EXCLUDED ON SUCH MINUTE FUNCTIONAL DIFFERENCE. H E SUBMITTED THAT ASSESSEE IS ALSO RENDERING KPO SERVI CES THROUGH PROFESSIONALS AND THEREFORE ACCENTIA TECHN OLOGIES LTD. WHICH IS INTO HEALTH CARE AND KPO THEREFORE I T IS A GOOD COMPARABLE. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PER USED THE RELEVANT FINDING GIVEN THE IMPUGNED ORDERS AS W ELL AS THE MATERIAL REFERRED BEFORE US. ACCENTIA TECHNOLOGIES LTD. IS A COMPANY WHICH IS PROVIDING MEDICAL TRANSCRIPTION SE RVICES WHICH ENCOMPASSES PROCESS OF PRESCRIBING OR CONVERT ING VOICE RECORDED REPORTS AS DETECTED BY PHYSICIANS OR OTHER HEALTH CARE PROFESSIONALS WHO VET THE ACTUAL TRANSCRIPTION . APART FROM THAT IT IS PROVIDING MEDICAL CODING BILLING AND CO LLECTION SERVICES. MEDICAL CODING IS RELATED TO PROCEDURES O F FINANCIAL ASSESSMENT WHICH HELP INSURANCE COMPANIES AND GOVER NMENT COMPANIES. MEDICAL BILLING IS DESCRIBED AS MEDICAL PRACTICE MANAGEMENT WHICH INVOLVES BILL ON INSURANCE COMPANI ES BY HOSPITALS FOR ON BEHALF OF THE PERSONNEL FOR MEDICA L CARE EXPENSES WHICH ARE MAJORLY FROM US MARKETS. NO DOU BT ECLERX IS PROVIDING KIND OF ITES SERVICES WHICH REQ UIRES SPECIAL SKILLS BUT WHAT IS RELEVANT TO ANALYSE IS THE NATU RE OF BUSINESS ITA NO. 1814/DEL/2017) 22 AND THE FUNCTIONS CARRIED OUT FOR EARNING THE REVEN UE AND PROFITABILITY. HIGHLY SPECIALIZED AND SKILLED SERVI CES DEFINITELY HAVE HIGHER PROFITABILITY. FURTHER ASSETS DEPLOYED IN THE FORM OF HUMAN RESOURCES AND OTHER TANGIBLE AND INTANGIBL E AND RISKS UNDERTAKEN ALSO IMPACTS THE MARGINS. APART FR OM THAT FROM THE PERUSAL OF THE ANNUAL ACCOUNTS OF THE SAID COMPANY IT IS SEEN THAT IT HAS SHOWN REVENUES FROM VARIOUS OPERATIONS SEPARATELY LIKE FROM BILLING CODING MEDICAL DISC RETE REPORTABLE TRANSCRIPTION AND MEDICAL TRANSCRIPTION. HOWEVER FOR VARIOUS STREAMS OF INCOME THERE ARE NO SEGMENTA L DETAILS OR SEGMENTAL ACCOUNT. IN FACT IT HAS BEEN REPORTED THAT THERE IS ONLY ONE SEGMENT CALLED AS HEALTH CARE RECEIVABLE MANAGEMENT. AS POINTED OUT BY THE LD. COUNSEL THIS COMPANY IS ALSO INTO SOFTWARE DEVELOPMENT SERVICES AND ALSO OWN PROPRIETARY PRODUCTS LIKE IMTAS IRTS IAMS IPMS WHICH IS USED FOR VARIOUS FUNCTIONS. DUE TO THESE FACTORS AN D COMPARISON OF FUNCTIONAL PROFILES THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2008-09 HAS DIRECTED TO EXCLUDE T HIS COMPANY. FURTHER IN THIS YEAR THERE WAS ACQUISITIO N OF SOFTWARE DEVELOPMENT COMPANY NAMELY MEDEX HEALTHCA RE GLOBAL WHICH IS INTO DEVELOPMENT OF SOFTWARE RELATE D TO EMR AND SAAS. 9.1 OTHER IMPORTANT FACT IS THAT THE TRIBUNAL IN THE CASE OF SISTER CONCERN I.E. EVALUE SEZ WHICH IS HAVING IDE NTICAL FUNCTIONAL PROFILE HAS DIRECTED TO EXCLUDE THE SAID COMPARABLE AFTER OBSERVING AS UNDER :- 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTE NTIONS AS WELL AS PERUSED THE ANNUAL ACCOUNTS OF THE COMPARAB LES. AT ITA NO. 1814/DEL/2017) 23 PAGE NO. 1172 WE HAVE PERUSED SCHEDULE 10 OF THE N OTES ON ACCOUNT WHEREIN IT HAS MENTIONED THAT W.E.F. 01.04. 2008 A COMPANY WHICH WAS ENGAGED IN THE BUSINESS OF MEDICA L TRANSCRIPTION AND CODING HAS BEEN AMALGAMATED WITH THE COMPARABLE. IT IS FURTHER STATED FIGURES FOR THIS Y EAR ARE RELATED TO AMALGAMATING COMPANY ALSO. THE PROFIT AN D LOSS ACCOUNT OF THE COMPARABLE SHOWS THAT SALES AND SERV ICES OF THE COMPANY ARE ACCORDING TO SCHEDULE NO. 8. THERE IS NO CHANGE IN THE INCOME SEGMENT OF THE ASSESSEE AFTER AMALGAMATION AS AMALGAMATING COMPANY WAS ALSO HAVIN G THE SAME BUSINESS HENCE THERE IS NO IMPACT OF AMALGAMATION ON THE COMPANY WITH RESPECT TO FUNCTIO NS PERFORMED. THEREFORE MERELY THERE IS AN AMALGAMATI ON DURING THE YEAR IT CANNOT BE EXCLUDED AS COMPARABLE AS IT DOES NOT CHANGE THE FUNCTIONAL PROFILE OF THE COMPA RABLE COMPANY. HOWEVER AT PAGE NO. 27 THE LD TPO HAS CONFIRMED THAT THIS COMPANY IS ENGAGED IN THE BUSIN ESS OF HEALTHCARE CYCLE MANAGEMENT WHICH COMPRISES OF MEDI CAL TRANSCRIPTION CODING AND BILLING AND COLLECTION. T HE MEDICAL TRANSCRIPTION BUSINESS REQUIRES SPECIAL SKILL AND A LSO EMPLOYS MEDICAL PROFESSIONAL WHO FINALLY VET THE AC TUAL TRANSCRIPTION. FURTHER MEDICAL CODING IS RELATED TO PROCEDURE OF FINANCIAL ASSESSMENT. MEDICAL BILLING IS MAINTEN ANCE OF FINANCIAL ACCOUNTS ON INSURANCE COMPANY ETC FOR THE PURPOSES OF RECOVERY OF SUMS BY DOCTORS. THEREFORE MEDICAL TRANSCRIPTION IS A SERVICE WHICH REQUIRES EMPLOYMEN T OF MEDICAL PROFESSIONAL ALSO. HOWEVER THE MEDICAL COD ING THE BILLING MAY NOT REQUIRE HIGHER TECHNICAL SKILL. IN ANNUAL ITA NO. 1814/DEL/2017) 24 REPORT THE COMPANY HAS MENTIONED THAT IT HAS ONLY O NE SEGMENT AND THEREFORE IT DOES NOT HAVE SEGMENTAL RE SULTS PERTAINING TO MEDICAL TRANSCRIPTION VIS-A-VIS CODIN G AND BILLING ACTIVITY. ACCORDING TO US THE MEDICAL TRANS CRIPTION ITSELF CANNOT BE SAID TO BE COMPARABLE WITH THE FUN CTIONS PERFORMED BY THE ASSESSEE. HOWEVER THE MEDICAL COD ING AND BILLING ACTIVITIES ARE SIMILAR TO THE FUNCTIONS PERFORMED BY THE ASSESSEE. BUT IN ABSENCE OF THE SEGMENTAL A CCOUNTS WITH RESPECT TO MEDICAL CODING AND BILLING ACTIVITE S THIS COMPARABLE CANNOT BE INCLUDED. HENCE TPO IS DIRECT ED TO EXCLUDE IT. 9.2 THIS DECISION OF THE TRIBUNAL HAS ALSO BEEN UPH ELD BY THE HONBLE HIGH COURT. SINCE FUNCTIONAL PROFILE AND OT HER COMPARABILITY FACTORS OF THE ASSESSEE AS WELL AS CO MPARABLE COMPANY ACCENTIA TECHNOLOGIES LTD. REMAINS THE SAME THEREFORE WE DO NOT FIND ANY REASON DEVIATE FROM EARLIER YEAR ORDERS OF THE TRIBUNAL AS WELL AS THE JUDGMENT OF H ONBLE DELHI HIGH COURT. ACCORDINGLY ACCENTIA TECHNOLOGIES LTD. IS DIRECTED TO BE EXCLUDED. III) BNR UDYOG LTD. 10. THE LD. TPO HAS INCLUDED THIS COMPARABLE BY TAK ING THE MEDICAL TRANSCRIPTION SEGMENT OF THE SAID COMPANY A ND ALSO HELD THAT IT ALSO PASSES THE RPT FILTER. HE OBSERVE D THAT THE FACTOR OF RPT TRANSACTION WHICH WAS OBJECTED BY THE ASSESSEE WAS RS. 1.7 CRORES AND SUCH TRANSACTIONS ARE ONLY WITH THE ENTERPRISES HAVING COMMON MANAGEMENT PERSONNEL. THE SE TRANSACTIONS HAVE NO BEARING ON THE MEDICAL TRANSCR IPTION ITA NO. 1814/DEL/2017) 25 SEGMENT BECAUSE TRANSACTION OF RS. 1.7 CRORES SHOWN AS RELATED PARTY TRANSACTION PERTAINS TO 2 ENTERPRISES BOTH OF WHICH ARE INDEPENDENT ENTERPRISES. BEFORE US THE L D. COUNSEL SUBMITTED THAT FIRSTLY IT IS DISSIMILAR LIKE ACCE NTIA TECHNOLOGIES LTD. AS IT IS PROVIDING MEDICAL TRANSC RIPTION SERVICES AND HAS NO SEGMENTAL DETAILS. 10.1 ON THE OTHER HAND LD. CIT-DR SUBMITTED THA T THIS COMPANY HAS TWO STREAMS OF REVENUE AND HAS SEGMENTA L RESULTS ONE BUSINESS SUPPORT AND OTHER MEDICAL TRANSCRIPTION. MEDICAL TRANSCRIPTION IS DIFFERENT F ROM MEDICAL CODING AND THEREFORE IT CANNOT BE AT PAR WITH ACCE NTIA TECHNOLOGIES. TPO HAS ONLY TAKEN SEGMENTAL RESULT O F MEDICAL TRANSCRIPTION SEGMENT WHICH IS NOTHING BUT ITES. 11. AFTER CONSIDERING THE AFORESAID SUBMISSIONS WE FIND THAT FIRST OF ALL ON PERUSAL OF THE ANNUAL REPORT IT IS SEEN THAT APART FROM MEDICAL TRANSCRIPTION ACTIVITIES IT IS ALSO INTO MEDICAL BILLING AND CODING SERVICES. THE FUNCTIONAL PROFILE OF THE MEDICAL TRANSCRIPTION SEGMENT IS ALMOST AKIN TO FUNCTIONS OF ACCENTIA TECHNOLOGIES LTD. AND AGAIN FOR THE VAR IOUS ACTIVITIES OF MEDICAL TRANSCRIPTION MEDICAL BILLIN G AND CODING SERVICES THERE IS NO SEPARATE SEGMENT. IN THE CASE OF EVALUESERVE SEZ THE TRIBUNAL AFTER DETAIL ANALYSIS HAS EXCLUDED THE SAID COMPARABLE. THE FINDING OF THE TR IBUNAL NOW STANDS CONFIRMED BY THE HONBLE DELHI HIGH COURT (S UPRA). ACCORDINGLY RESPECTFULLY FOLLOWING THE SAME THIS COMPARABLE IS ALSO DIRECTED TO BE EXCLUDED. ITA NO. 1814/DEL/2017) 26 IV) EXCEL INFOWAYS LTD. 12. THE ASSESSEE HAS OBJECTED INCLUSION OF THIS COM PARABLE ON THE GROUND THAT IT FAILS EMPLOYEE COST TO TOTAL SALES FILTER AS IT IS LESS THAN 25%. LD. TPO ON THE BASIS OF INFORM ATION RECEIVED FROM THE SAID COMPANY U/S 133(6) OBSERVED THAT THE EMPLOYEE COST RS. 2.02 CRORES WHICH PERTAINS TO ITE S/BPO SEGMENT AND LOOKING TO THE FACT THAT SEGMENT REVENU E UNDER ITES / BPO SEGMENT IS RS. 7.07 CRORE IS MORE THAN 25% OF THE SEGMENTAL REVENUE. HENCE THE COMPANY PASSES TH E FILTER OF EMPLOYEE COST. REGARDING OBJECTION OF HIGH TURNO VER AND HIGH MARGIN OF THIS COMPANY THE SAME HAS BEEN REJE CTED AFTER DETAIL DISCUSSION. 12.1 BEFORE US THE LD. COUNSEL SUBMITTED THAT T HE EMPLOYEE COST TO NET SALES AS REPORTED IN ANNUAL REPORT WAS AS UNDER :- EMPLOYEE COST (AMOUNT IN 000) NET SALES (AMOUNT IN 000) EMPLOYEE COST/NET SALES INR 20 215 INR 154 921 13.05% THE INFORMATION AND THE MANNER IT HAS BEEN CLUBBED BY THE TPO CANNOT BE HELD TO BE RELIABLE BECAUSE THIS COM PANY REVENUE FROM INFRA ACTIVITY SEGMENT IS 49% AND IT I S NOT POSSIBLE THAT NO EMPLOYEE WAS HIRED IN INFRA ACTIVI TY SEGMENT. DUE TO THIS DISCREPANCY THIS TRIBUNAL IN THE CASE OF BAXTER INDIAN VS. ACIT ITA NO. 6158/2016 HAS DIRECTED TO E XCLUDE THE SAID COMPANY. FURTHER THIS COMPANY IS ALSO INV OLVED IN DEVELOPMENT OF INFRASTRUCTURE FACILITY FOR WHICH TH ERE IS NO ITA NO. 1814/DEL/2017) 27 SEGMENTAL DETAILS. APART FROM THAT SHE POINTED OUT THAT THERE IS HUGE DIMINISHING REVENUE AND PROFIT MARGIN WHIC H ACCORDING TO TPOS OWN FILTER COULD NOT HAVE BEEN I NCLUDED. THE DETAILS OF REVENUES AND PROFIT MARGIN RIGHT FRO M THE F.Y 2009-10 TO 2014-15 WAS GIVEN IN THE FOLLOWING MANNE R :- PARTICULARS FINANCIAL YEAR 2009-10 (INR000) 2010-11 (INR000) 2011-12 (INR000) 2012-13 (INR000) 2013-14 (INR000) 2014-15 (INR000) REVENUE 204 161.34 203 526.39 79 096.95 76 098.54 52 792.12 22 994.38 OPERATING COST 43 986.99 50 751.24 55 991.57 47 539.99 41 355.78 22 895.57 OPERATING PROFIT 160 174.35 152 775.14 23 105.38 28 558.55 11 436.34 98.81 OP/OC (%) 364.14% 301.03% 41.27% 60.07% 22.65% 0.43% 12.2 ON THE OTHER HAND LD. CIT-DR RELIED ORDER O F THE TPO AND SUBMITTED THAT FROM THE PERUSAL OF THE ANN UAL REPORT IT CAN BE SEEN THAT THIS COMPANY HAS SHOWN SALE OF INFRA ACTIVITIES UNDER THE HEAD OTHER SALES; AND IT HAS D ECLARED PURCHASE OF STOCK IN TRADE AND WHEN THERE IS PURCHA SE AND SALE OF STOCK THEN THERE IS NO REQUIREMENT OF ANY EMPLOYEE COST TO BE ALLOCATED AND FURTHER INFORMATION RECEI VED U/S 133(6) CANNOT BE DOUBTED. FURTHER THE CONCEPT OF DI MINISHING REVENUE CANNOT BE A FACTOR FOR EXCLUSION. 13. AFTER CONSIDERING AFORESAID SUBMISSIONS WE F IND THAT APART FROM ITES-BPO SEGMENT THIS COMPANY IS ALSO C ARRYING BUSINESS OF INFRASTRUCTURE FACILITY WHICH ALMOST CO NSTITUTES 49% OF THE REVENUE. THERE ARE NO SEGMENTAL DETAILS FOR THESE ITA NO. 1814/DEL/2017) 28 TWO ACTIVITIES. THE PROFIT MARGIN ON SUCH ACTIVITY OF DEVELOPMENT OF INFRASTRUCTURE FACILITY CANNOT BE ID ENTIFIED AND THEREFORE IT CANNOT BE HELD THAT SUCH A HUGE MARGI N REPORTED BY THE SAID COMPANY IS ON ACCOUNT OF ITES/BPO SEGME NT OR DEVELOPMENT OF INFRASTRUCTURE FACILITY. ON THIS GRO UND ALONE WE DO NOT FIND IT TO BE FIT COMPARABLE. OTHER ASPEC T OF EMPLOYEE COST FILTER AND DIMINISHING REVENUES AND P ROFITS ARE NOT BEING CONSIDERED. V) INFOSYS BPO LTD. 14. REGARDING THIS COMPARABLE TPO HAS REJECTED ALL THE CONTENTION OF THE ASSESSEE THAT THIS COMPANY HAS HI GH BRAND VALUE AND INTANGIBLES AND IT IS A GIANT COMPANY IN TERMS RISK PROFILE AND NATURE OF SERVICES AND HELD THAT SINCE IT IS ALSO INTO PROVIDING ITES SAME SHOULD BE INCLUDED. 15. AFTER HEARING BOTH THE PARTIES WE FIND ON P ERUSAL OF THE MATERIAL PLACED ON RECORD THAT INFOSYS IS NOT ONLY HIGH TURNOVER COMPANY BUT ALSO HAS A HIGH BRAND VALUE A ND INTANGIBLES AS COMPARED TO THE ASSESSEE WHICH HAS V ERY INSIGNIFICANT INTANGIBLES. APART FROM THAT INFOSYS IN TERMS OF RISK PROFILE SKILL NATURE OF SERVICES REVENUE A ND OWNERSHIP OF BRAND PROPRIETARY PRODUCTS CLEARLY OUTWEIGHS THE FAR ANALYSIS COMPARISON WITH THE ASSESSEE. BECAUSE OF T HESE FACTORS HONBLE DELHI HIGH COURT IN SEVERAL DECISI ONS HAS HELD THAT GIANT COMPANIES LIKE INFOSYS AND WIPRO CANNOT BE COMPARED WITH LOW RISK OR CAPITAL SERVICE PROVIDER. THE LISTS OF SAID JUDGMENT ARE AS UNDER:- ITA NO. 1814/DEL/2017) 29 1) DELHI HIGH COURT-PCIT VS. ORACLE (OFSS) BPO SE RVICES P. LTD. ITA NO. 124/2018) 2) DELHI HIGH COURT-PCIT VS. NEW RIVER SOFTWARE SERVICES P. LTD. (ITA NO. 924/2016) ORDER DATED 22.08.2017- 3) DELHI HIGH COURT-CIT VS. AGNITY INDIA TECHNOL OGIES P. LTD. (2013) 219 TAXMAN 26 (DEL) 4) DELHI HIGH COURT-CIT VS. AGNITY INDIAN TECHNOL OGIES P. LTD. (ITA NO. 447/2018) 5) DELHI HIGH COURTIN PCIT VS. EVALUESERVE SEZ ( GURGAON) P. LTD. ITA NO. 241/2018 ORDER DATED 26.02.2018 6) DELHI HIGH COURTN IN PCIT VS. EVALUESERVE SEZ (GURGAON) P. LTD. ITA NO. 948/2018 ORDER DATED 29.08.2018. 15.1 FROM THE PERUSAL OF THE ANNUAL REPORT OF THE SAID COMPANY IT IS SEEN THAT IT IS AMONGST THE TOP TEN B PO OF THE COUNTRY AND HAS AROUND 18 383 EMPLOYEES WITH HUGE ADVERTISEMENT EXPENDITURE AND MARKETING OF RS. 8.73 CRORES AS COMPARED TO THE ASSESSEE WHICH HAS 1163 EMPLOYEE S AND UNDERTAKES NO SUCH EXPENSE; AND THE TURNOVER OF INF OSYS IS MORE THAN RS.1312 CRORES AS COMPARED TO ASSESSEES TURNOVER WHICH IS AT RS. 144 CRORES. FURTHER IN ASSESSEES OWN CASE AS WELL AS IN THE CASE OF SISTER CONCERN THIS TRIBUNA L HAS EXCLUDED INFOSYS BPO BASED ON THESE COMPARABILITY F ACTORS. LOOKING TO THE SCALE OF OPERATIONS AND PRESENCE OF HIGH VALUABLE ASSETS BOTH TANGIBLE AND INTANGIBLE THIS COMPANY HAS CONSISTENTLY BEEN HELD TO BE INCOMPARABLE WITH CAPTIVE ITA NO. 1814/DEL/2017) 30 SERVICE PROVIDER COMPANIES. ACCORDINGLY WE DIRECT THE EXCLUSION OF THIS COMPARABLE. VI) TCS E-SERVE LTD. 16. THE TPO HAS INCLUDED THIS COMPARABLE HOLDING TH AT IT CARRIES OUT THE FUNCTION OF ITES AND HIGH TURNOVER AND BRAND VALUE IS NOT RELEVANT FACTOR AND BRAND EXPENSES IS ONLY RS. 3.67 CRORES. 17. AFTER HEARING BOTH THE PARTIES AND PERUSAL OF MATERIAL PLACED ON RECORD WE FIND THAT TCS E-SERVE LTD. LIK E INFOSYS BPO IS A GIANT COMPANY WHICH HAS HIGH BRAND VALUE A ND INTANGIBLES AND IN TERMS OF RISK PROFILE SKILL NA TURE OF SERVICE REVENUE ETC. THIS COMPARABLE HAS BEEN REJECTED IN V ARIOUS JUDICIAL RULINGS. THE TURNOVER OF TCS IS MORE THAN RS. 1578 CRORE AND THIS COMPANY IS HAVING HUGE ASSETS AND IS UNDER TAKING HIGH RISK WHICH HAVE DIRECT IMPACT ON TURNOV ER AND IN PROFITABILITY. IF A COMPANY IS HAVING HUGE ASSET BA SE BRAND VALUE GOODWILL AND PRESENCE IN GLOBAL MARKET WITH SIGNIFICANT R & D THEN IT CANNOT BE COMPARED WITH A COMPANY WH ICH IS PURELY CAPTIVE SERVICE PROVIDER IN ITES/BPO HAVING LOW RISK AND INSIGNIFICANT ASSETS. EVEN THE DEPLOYMENT OF HU MAN RESOURCES SHOWS THAT TCS HAS 14 785 EMPLOYEES WHERE AS THE ASSESSEE HAS 1163 EMPLOYEES. THIS FACTOR ITSELF SHO WS THAT IN THE TERMS OF HUMAN RESOURCES THERE IS HUGE DIFFERE NCE IN THE ASSETS DEPLOYED. NOW THERE IS LATEST JUDGMENT OF H ONBLE DELHI HIGH COURT DATED 24 TH JULY 2019 IN THE CASE OF M/S. AVAYA INDIA PVT. LTD. VS. ACIT IN ITA NO. 532/2019 WHICH HAD CONSIDERED THE COMPARABILITY OF TCS E-SERVE LTD. A ND TCS ITA NO. 1814/DEL/2017) 31 SERVE INTERNATIONAL LTD. WITH THE COMPANY PROVIDING ITES SERVICES. THE RELEVANT SUBSTANTIAL QUESTION OF LAW ADMITTED BY THE HONBLE HIGH COURT READS AS UNDER :- WHETHER THE ITAT WAS JUSTIFIED IN UPHOLDING THE OR DER OF THE TPO AND THE DRP IN NOT EXCLUDING M/S. TCS E-SER VE LIMITED; M/S. TCS E-SERVE INTERNATIONAL LIMITED FRO M THE LIST OF COMPARABLES FOR THE PURPOSES OF DETERMINING THE ARMS- LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS INVO LVING THE ASSESSEE? 17.1 HONBLE HIGH COURT HAS DEALT THIS ISSUE IN DETAIL A FTER OBSERVING AS UNDER:- ANALYSIS AND REASONS 15. THE ABOVE SUBMISSIONS HAVE BEEN CONSIDERED. IN A LARGE NUMBER OF DECISIONS THIS COURT HAS EMPHASIZED THAT FOR THERE TO BE RELIABLE BENCHMARK STUDIES FOR DETERMIN ING ALP NOT ONLY THE COMPARABLES HAVE TO BE FUNCTIONALLY SI MILAR BUT SHOULD HAVE SIMILAR BUSINESS ENVIRONMENT AND RISKS AS THE TESTED PARTY. A DETAILED EXPOSITION OF THE LEGAL PO SITION WITH SPECIFIC REFERENCE TO RULE 10 B (2) OF THE INCOME T AX RULES 1962 IS FOUND IN THIS COURT S DECISION IN CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. V. DCIT 376 ITR 183 (DEL) AS UNDER: '30. THE REASONING ADOPTED IN VARIOUS JUDGMENTS NOT ICED ABOVE SHOWS THAT FUNCTIONAL ANALYSIS SEEKS TO IDEN TIFY AND COMPARE THE ECONOMICALLY SIGNIFICANT ACTIVITIES AND RESPONSIBILITIES UNDERTAKEN ASSETS USED AND RISKS ASSUMED BY THE PARTIES TO THE TRANSACTION. QUANTITATIVE AND ITA NO. 1814/DEL/2017) 32 QUALITATIVE FILTERS/CRITERIA HAVE BEEN USED IN DIFF ERENT CASES TO INCLUDE OR EXCLUDE COMPARABLES. THE INTUITIVE LO GIC FOR EXCLUDING BIG COMPANIES FROM THE LIST OF COMPARABLE S WHILE UNDERTAKING THE FAR ANALYSIS OF A SMALLER COMPANY I S ATTRACTIVE GIVEN THAT SUCH BIG COMPANIES PROVIDE S ERVICES TO DIVERSE CLIENTELE PERFORM MULTIFARIOUS FUNCTIONS OFTEN ASSUME RISKS AND EMPLOY INTANGIBLE ASSETS WHICH ARE SPECIALLY DESIGNED UNLIKE IN THE CASE OF SMALLER C OMPANIES. THE BIGGER COMPANIES HAVE AN ESTABLISHED REPUTATION IN THE SEGMENT ARE WELL KNOWN AND EMPLOY ECONOMIES OF SCA LE TO A TELLING END. ON THE OTHER HAND THESE OBVIOUS - A ND APPARENT FEATURES SHOULD NOT BLIND THE TPO FROM THE OBLIGATION TO CARRY OUT THE TRANSFER PRICING EXERCI SE WITHIN THE STRICT MANDATE OF SECTION 92 C AND RULES 10-A TO 10 -E. 31. ARM'S LENGTH PRICE DETERMINATION IN RESPECT OF AN INTERNATIONAL TRANSACTION HAS NECESSARILY TO CONFIR M TO THE MANDATE OF RULE 10B. IN THIS CASE THE METHOD FOLLO WED FOR DETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATI ONAL TRANSACTION ADOPTED BY THE ASSESSEE AND THE REVENUE IS THE TNMM. THE COMPARABILITY OF AN INTERNATIONAL TRANSAC TION WITH AN UNCONTROLLED TRANSACTION HAS IN SUCH CASES TO BE SEEN WITH REFERENCE TO THE FUNCTIONS PERFORMED TAK ING INTO ACCOUNT THE ASSETS EMPLOYED OR TO BE EMPLOYED AND T HE RISKS ASSUMED BY THE RESPECTIVE PARTIES TO THE TRAN SACTION AS PER RULE 10B(2)(B). THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED (CONTEMPLATED BY R ULE 10B(2)(A)) IN EITHER TRANSACTIONS MAY BE SECONDARY FOR JUDGING COMPARABILITY OF AN INTERNATIONAL TRANSACTI ON IN THE ITA NO. 1814/DEL/2017) 33 TNMM BECAUSE THE PRICE CHARGED OR PAID FOR PROPERT Y TRANSFERRED OR SERVICES PROVIDED AND THE DIRECT AND INDIRECT COST OF PRODUCTION INCURRED BY THE ENTERPRISE IN RE SPECT OF PROPERTY TRANSFERRED OR SERVICES PROVIDED GO INTO R ECKONING COMPARABILITY ANALYSIS IN THE TRANSACTION METHODS I.E. THE COMPARABLE UNCONTROLLED PRICE RESALE PRICE AND COS T PLUS WHEREAS THE PROFIT BASED METHOD SUCH AS TRANSACTION AL NET MARGIN METHOD TAKES INTO ACCOUNT THE NET MARGIN RE ALISED. IN TNMM COMPARABILITY OF AN INTERNATIONAL TRANSACT ION WITH AN UNCONTROLLED TRANSACTION IS TO BE SEEN WITH REFE RENCE TO FUNCTIONS PERFORMED AS PROVIDED IN SUB-RULE (2)(B) OF RULE 10B READ WITH SUB-RULE (1)(E) OF THAT RULE AFTER TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASS UMED BY THE RESPECTIVE PARTIES TO THE TRANSACTION. AS NO TICED EARLIER RULE 10B(3) MANDATES THAT A GIVEN OR SELEC T UNCONTROLLED TRANSACTION SELECTED IN TERMS OF RULE 10B(2) 'SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTIO N' IF NONE OF THE DIFFERENCES IF ANY BETWEEN THE COMPARED TRANSACTIONS OR BETWEEN ENTERPRISES ENTERING INTO SUCH TRANSACTIONS 'ARE LIKELY TO MATERIALLY AFFECT THE P RICE OR COST CHARGED OR PAID OR THE PROFIT ARISING FROM SUCH TRA NSACTION IN THE OPEN MARKET OR REASONABLY ACCURATE ADJUSTMENT C AN BE MADE TO ELIMINATE THE EFFECTS OF SUCH DIFFERENCE.' 32. NOW THE SEQUITUR OF RULE 10B (2) AND (3) IS TH AT IF THE COMPARABLE ENTITY OR ENTITY S TRANSACTIONS BROADLY CONFORM TO THE ASSESSEE S FUNCTIONING IT HAS TO ENTER INTO THE MATRIX AND BE APPROPRIATELY CONSIDERED. THE CRUCIAL EXPRES SION GIVING INSIGHT INTO WHAT WAS INTENDED BY THE PROVIS ION CAN ITA NO. 1814/DEL/2017) 34 BE SEEN BY THE USE OF THE EXPRESSION: 'NONE OF THE DIFFERENCES IF ANY BETWEEN THE TRANSACTIONS BEING COMPARED OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED OR PAID IN .. SUCH TRANSACTIONS IN THE OPE N MARKET.' THE OTHER EXERCISE WHICH THE TPO HAS TO NECESSARILY PERFORM IS THAT IF THERE ARE SOME DIFFERENCES AN ATTEMPT T O 'ADJUST' THEM TO 'ELIMINATE THE MATERIAL EFFECTS' SHOULD BE MADE: '(II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE T O ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. ' 33. SUCH BEING THE CASE IT IS CLEAR THAT EXCLUSION OF SOME COMPANIES WHOSE FUNCTIONS ARE BROADLY SIMILAR AND W HOSE PROFILE - IN RESPECT OF THE ACTIVITY IN QUESTION CA N BE VIEWED INDEPENDENTLY FROM OTHER ACTIVITIES- CANNOT BE SUBJ ECT TO A PER SE STANDARD OF LOSS MAKING COMPANY OR AN 'ABNOR MAL' PROFIT MAKING CONCERN OR HUGE OR 'MEGA' TURNOVER CO MPANY. AS EXPLAINED EARLIER RULE 10B (2) GUIDES THE SIX M ETHODS OUTLINED IN CLAUSES (A) TO (F) OF RULE 10B(1) WHIL E JUDGING COMPARABILITY. RULE 10B (3) ON THE OTHER HAND INDI CATES THE APPROACH TO BE ADOPTED WHERE DIFFERENCES AND DISSIMILARITIES ARE APPARENT. THEREFORE THE MERE CIRCUMSTANCE OF A COMPANY - OTHERWISE CONFORMING TO THE STIPULATIONS IN RULE 10B (2) IN ALL DETAILS PRESENTING A PECULIAR FEATURE - SUCH A S A HUGE PROFIT OR A HUGE TURNOVER IPSO FACTO DOES NOT LEAD TO ITS EXCLUSION. THE TPO FIRST HAS TO BE SATISFIED THAT SUCH DIFFERENCES DO NOT 'MATERIALLY AFFECT THE PRICE...O R COST'; ITA NO. 1814/DEL/2017) 35 SECONDLY AN ATTEMPT TO MAKE REASONABLE ADJUSTMENT TO ELIMINATE THE MATERIAL EFFECT OF SUCH DIFFERENCES H AS TO BE MADE. 34. THE COURT IS ALSO AWARE OF THE FACTORS MENTIONE D IN RULE 10B (2) I.E. CHARACTERISTICS OF THE SERVICE PROVID ED FUNCTIONS PERFORMED TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED BY THE RESPECTIVE P ARTIES TO THE TRANSACTIONS; CONTRACTUAL TERMS OF THE TRANS ACTIONS INDICATING HOW THE RESPONSIBILITIES RISKS AND BENE FITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS THE LAWS AND THE GOVERNMENT ORDERS IN FORCE; COSTS OF LABOUR AND CAPITAL IN THE MARKETS OVERALL ECONOMIC DEVELOPMEN T AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WH OLESALE OR RETAIL. THESE ELEMENTS COMPREHEND THE SIMILARITI ES AND DISSIMILARITIES; CLAUSE (F) OF RULE 10C(2) SPECIFIC ALLY PROVIDES THAT 'THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJ USTMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES IF ANY BET WEEN THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS AND THE NATURE EXTENT AND RELIABILITY OF ASSUMPTIONS R EQUIRED TO BE MADE IN APPLICATION OF A METHOD' HAVE TO BE TAKE N INTO CONSIDERATION BY THE TPO. 36. THIS COURT HOLDS THAT IN THE FACTS OF THE PRESE NT CASE THE ASSESSEE WAS INCORRECT BOTH IN ITS RELIANCE PLACED UPON ITA NO. 1814/DEL/2017) 36 PREVIOUS YEARS DATA AS WELL AS THE MANNER OF SUCH RELIANCE. FIRST THE ASSESSEE S JUSTIFICATION FOR RELYING ON SUCH DATA IS THE VOLATILITY IN THE COMPARABLES PROFIT MARGINS AND THE CONSEQUENT INABILITY TO TRANSACT AT A CONSISTENT ALP. HOWEVER THIS IS NOT WARRANTED HERE IN. WHILST THERE MAY BE A WIDE FLUCTUATION IN THE PROFI T MARGINS OF COMPARABLES FROM YEAR-TO- YEAR THIS BY ITSELF D OES NOT JUSTIFY THE NEED TO TAKE INTO ACCOUNT PREVIOUS YEAR S PROFIT MARGINS. THE TRANSFER PRICING MECHANISM PROVIDED IN THE ACT AND THE RULES PRESCRIBES THAT WHILE DETERMINING THE ALP THE ARITHMETIC MEAN OF ALL COMPARABLES IS TO BE ADOPTED . THIS IS TO OFFSET THE CONSEQUENCE OF ANY EXTREME MARGINS TH AT COMPARABLES MAY HAVE AND ARRIVE AT A BALANCED PRICE . SIMILARLY THE WIDE FLUCTUATIONS IN PROFIT MARGINS OF THE SAME ENTITY ON A YEAR-TO-YEAR BASIS WOULD BE OFFSET BY T AKING THE ARITHMETIC MEAN OF ALL COMPARABLES FOR THE ASSESSME NT YEAR IN QUESTION. IN ANY CASE IN THE EVENT THAT THE VOL ATILITY IS ON ACCOUNT OF A MATERIALLY DIFFERENT ASPECT INCAPABLE OF BEING ACCOUNTED FOR THE ANALYSIS UNDER WOULD RULE 10B (3 ) WOULD EXCLUDE SUCH AN ENTITY FROM BEING CONSIDERED AS A COMPARABLE. SECONDLY AS REGARDS THE MANNER OF USIN G PREVIOUS YEARS DATA THE ASSESSEE HAS TAKEN THE ARITHMETIC MEAN OF THE COMPARABLES PROFIT MARGINS FOR THE ASSESSMENT YEAR IN QUESTION AND TWO PREVIOUS YEARS. THIS COURT DISAGREES. THE PROVISO TO RULE 10B(4) READ WITH TH E SUB- RULE ITSELF INDICATES THAT THE PURPOSE FOR WHICH P REVIOUS YEARS DATA MAY BE CONSIDERED IS - ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH A N ITA NO. 1814/DEL/2017) 37 INTERNATIONAL TRANSACTION. IT DOES NOT PRESCRIBE TH AT ONCE AN UNCONTROLLED TRANSACTION HAS BEEN HELD TO BE A COMPARABLE IN ORDER TO OBVIATE AN APPARENT VOLATILITY IN THE DATA THE ARITHMETIC MEAN OF THREE YEARS (THE A SSESSMENT YEAR IN QUESTION AND TWO PREVIOUS YEARS) MAY BE TAK EN. THAT WOULD AMOUNT TO ASSIGNING EQUAL WEIGHT TO THE DATA FOR EACH OF THE THREE YEARS WHICH IS AGAINST THE MANDATE OF RULE 10B(4). THE USE OF THE WORD 'SHALL' IN RULE 10B(4) AND NOTICEABLY 'MAY' IN THE PROVISO IMPLIES THAT THE RELEVANT ASSESSMENT YEAR S DATA IS OF PRIMARY CONSIDERATION AS OPPOSED TO PREVIOUS YEARS DATA. 39. THIS COURT PROCEEDS ON THE BASIS THAT THERE IS SUFFICIENT GUIDANCE AND CLARITY IN RULE 10B ON THE PRINCIPLES APPLICABLE FOR DETERMINATION OF ALP. THESE INCLUDE THE VARIOUS FACTORS TO BE TAKEN INTO CONSIDERATION APPROACH TO BE ADOPTED (FUNCTIONS PERFORMED TAKING INTO ACCOUNT RISKS BOR NE AND ASSETS EMPLOYED SIZE OF THE MARKET THE NATURE OF COMPETITION TERMS OF LABOUR EMPLOYMENT AND COST O F CAPITAL GEOGRAPHICAL LOCATION ETC). THE EXTENT OF ACCURATE ADJUSTMENTS POSSIBLE TOO IS A FACTOR TO BE CONSID ERED. RULE 10B (3) THEN UNDERLINES WHAT THE ALP DETERMINING EX ERCISE ENTAILS IF THERE ARE DISSIMILARITIES WHICH MATERIA LLY AFFECT THE PRICE CHARGED ETC: THE FIRST ATTEMPT HAS TO BE TO E LIMINATE THE COMPONENTS WHICH SO MATERIALLY AFFECT THE PRICE OR COST. IN OTHER WORDS GIVEN THE DATA AVAILABLE IF THE DISTO RTING FACTOR CAN BE SEVERED AND THE OTHER DATA USED THAT COURSE HAS TO BE NECESSARILY ADOPTED.' (ALL EMPHASIS IN ORIGINAL) ITA NO. 1814/DEL/2017) 38 16. IN RAMPGREEN SOLUTIONS PVT. LTD. V. CIT (2015) 377 ITR 533 THIS COURT FURTHER DISCUSSED RULE 10-B (2) OF THE IT RULES. THIS COURT POINTED OUT HOW ALTHOUGH BOTH THE KNOWLEDGE PROCESS OUTSOURCING (KPO) SERVICES AND TH E BUSINESS PROCESS OUTSOURCING (BPO) SERVICES FALL WI THIN THE BROAD DEFINITION OF ITES COMPANIES ENGAGED IN KPO SERVICES CANNOT BE USED AS COMPARABLES FOR THE TP STUDY OF A COMPANY ENGAGED IN PROVIDING BPO SERVICES. IN THAT PROCESS IT WAS OBSERVED BY THIS COURT AS UNDER: '20. IN ORDER FOR THE BENCHMARKING STUDIES TO BE RE LIABLE FOR THE PURPOSES OF DETERMINING THE ALP IT WOULD BE ES SENTIAL THAT THE ENTITIES SELECTED AS COMPARABLES ARE FUNCT IONALLY SIMILAR AND ARE SUBJECT TO THE SIMILAR BUSINESS ENV IRONMENT AND RISKS AS THE TESTED PARTY. IN ORDER TO IMPUTE A N ALP TO A CONTROLLED TRANSACTION IT WOULD BE ESSENTIAL TO EN SURE THAT THE INSTANCES OF UNCONTROLLED ENTITIES/TRANSACTIONS SELECTED AS COMPARABLES ARE SIMILAR IN ALL MATERIAL ASPECTS THAT HAVE ANY BEARING ON THE VALUE OR THE PROFITABILITY AS T HE CASE MAY BE OF THE TRANSACTION. ANY FACTOR WHICH HAS AN INF LUENCE ON THE PLI WOULD BE MATERIAL AND IT WOULD BE NECESSAR Y TO ENSURE THAT THE COMPARABLES ARE ALSO EQUALLY SUBJEC TED TO THE INFLUENCE OF SUCH FACTORS AS THE TESTED PARTY. THIS WOULD OBVIOUSLY INCLUDE BUSINESS ENVIRONMENT; THE NATURE AND FUNCTIONS PERFORMED BY THE TESTED PARTY AND THE COM PARABLE ENTITIES; THE VALUE ADDITION IN RESPECT OF PRODUCTS AND SERVICES PROVIDED BY PARTIES; THE BUSINESS MODEL; A ND THE ASSETS AND RESOURCES EMPLOYED. IT CANNOT BE DISPUTE D THAT THE FUNCTIONS PERFORMED BY AN ENTITY WOULD HAVE A M ATERIAL ITA NO. 1814/DEL/2017) 39 BEARING ON THE VALUE AND PROFITABILITY OF THE ENTIT Y. IT IS THEREFORE OBVIOUS THAT THE COMPARABLES SELECTED AN D THE TESTED PARTY MUST BE FUNCTIONALLY SIMILAR FOR ASCER TAINING A RELIABLE ALP BY TNMM. RULE 10B (2) OF THE INCOME TA X RULES 1962 ALSO CLEARLY INDICATES THAT THE COMPARABILITY OF CONTROLLED TRANSACTIONS WOULD BE JUDGED WITH REFERE NCE TO THE FACTORS AS INDICATED THEREIN. CLAUSE (A) AND (B ) OF RULE 10B (2) EXPRESSLY INDICATE THAT THE SPECIFIC CHARAC TERISTICS OF THE SERVICES PROVIDED AND THE FUNCTIONS PERFORMED W OULD BE FACTORS FOR CONSIDERING THE COMPARABILITY OF UNCONT ROLLED TRANSACTIONS WITH CONTROLLED TRANSACTIONS. ...... 30. AS INDICATED ABOVE IN ORDER TO DETERMINE THE A LP IN RELATION TO A CONTROLLED TRANSACTION THE ANALYSIS MUST INCLUDE COMPARABLES WHICH ARE SIMILAR IN ALL ASPECT S THAT HAVE A MATERIAL BEARING ON THEIR PROFITABILITY. PAR AGRAPH 1.36 OF THE 'OECD TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS' PUBLISHED IN 2010 (HEREAFTER 'OECD GUIDELINES') IND ICATES THE 'COMPARABILITY FACTORS' WHICH ARE IMPORTANT WHI LE CONSIDERING THE COMPARABILITY OF UNCONTROLLED TRANSACTIONS/ENTITIES WITH THE CONTROLLED TRANSACTIONS/ENTITIES. SUB-RULE (2) OF RULE JOB OF THE INCOME TAX RULES 1962 ALSO MANDATES THAT THE COMPARABILIT Y OF INTERNATIONAL TRANSACTIONS WITH UNCONTROLLED TRANSA CTIONS WOULD BE JUDGED WITH REFERENCE TO THE FACTORS INDIC ATED UNDER CLAUSES (A) TO (D) OF THAT SUB-RULE WHICH AR E SIMILAR TO THE COMPARABILITY FACTORS AS INDICATED UNDER THE OE CD GUIDELINES. ..... ITA NO. 1814/DEL/2017) 40 36. AS POINTED OUT EARLIER THE TRANSFER PRICING AN ALYSIS MUST SERVE THE BROAD OBJECT OF BENCHMARKING AN INTERNATI ONAL TRANSACTION FOR DETERMINING AN ALP. THE METHODOLOGY NECESSITATES THAT THE COMPARABLES MUST BE SIMILAR I N MATERIAL ASPECTS. THE COMPARABILITY MUST BE JUDGED ON FACTORS SUCH AS PRODUCT/SERVICE CHARACTERISTICS FU NCTIONS UNDERTAKEN ASSETS USED RISKS ASSUMED. THIS IS ESS ENTIAL TO ENSURE THE EFFICACY OF THE EXERCISE. THERE IS SUFFI CIENT FLEXIBILITY AVAILABLE WITHIN THE STATUTORY FRAMEWOR K TO ENSURE A FAIR ALP'.' 17. THE ABOVE DICTUM WAS FOLLOWED AND REITERATED IN AVENUE ASIA ADVISORS PVT. LTD. V. DY CIT (2017) 398 ITR 320 (DEL) WHERE THIS COURT INTER ALIA OBSERVED THAT 'THOUGH IN THE TNMM METHOD THERE IS SUFFICIENT TOLERANCE MERE BRO AD FUNCTIONALITY IS BY ITSELF INSUFFICIENT.' 18. ON THE ASPECT OF EXCLUSION OF COMPARABLES THAT HAVE A HIGH ECONOMIC UPSCALE VIZ. INFOSYS TCS AND WIPRO PARTICULAR REFERENCE MAY BE MADE TO THE DECISION OF THIS COURT IN PCIT V. BC MANAGEMENT SERVICES PVT. LTD. ( SUPRA) WHERE A PARTICULAR REFERENCE WAS MADE TO TCS E-SERV E AS UNDER: '13. ...THE THIRD COMPARABLE THAT THE AO/TPO EXCLUD ED IS TCS E-SERVE. THE ITAT OBSERVED THAT THOUGH THERE IS A CLOSE FUNCTIONAL SIMILARITY BETWEEN THAT ENTITY AND THE A SSESSEE HOWEVER THERE IS A CLOSE CONNECTION BETWEEN TCS E- SERVE AND TATA CONSULTANCY SERVICE LTD. WHICH WAS HIGH BR AND VALUE: THAT DISTINGUISHED IT AND MARKED IT OUT FOR EXCLUSION. ITA NO. 1814/DEL/2017) 41 THE ITAT RECORDED THAT THE BRAND VALUE ASSOCIATED W ITH TCS CONSULTANCY REFLECTED IMPACTED TCS E-SERVE PROFITAB ILITY IN A VERY POSITIVE MANNER. THIS INFERENCE TOO IN THE OPI NION OF COURT CANNOT BE TERMED AS UNREASONABLE. THE RATION ALE FOR EXCLUSION IS THEREFORE UPHELD.' 19. THE SAME DECISION ALSO NOTED THAT ONE REASON FO R EXCLUSION WAS THE 'UNAVAILABILITY OF THE SEGMENTAL DATA' FOR THE ABOVE COMPARABLE. 20. IN M/S. ORACLE (OFSS) BPO SERVICES PVT. LTD. (D ECISION DATED 5TH FEBRUARY 2018 IN ITA 124 OF 2018) WHILE UPHOLDING THE EXCLUSION OF M/S.WIPRO LTD. FROM THE LIST OF COMPARABLES IT WAS NOTED THAT THE ITAT TOOK INTO AC COUNT THE RELATED PARTY TRANSACTIONS (RPT ).THE FILTER ADOPTED WAS TO EXCLUDE COMPARABLES WITH UNRELATED PARTY TRANSAC TIONS EQUAL TO OR IN EXCESS OF 75% OF THEIR BUSINESS. THE ITAT DID THAT ON THE BASIS THAT WIPRO LTD. HAD A SIGNIFICANT BRAND PRESENCE IN THE MARKET AND COULD THEREFORE NOT BE DEEMED TO BE A COMPARABLE ENTITY. THIS COURT EXPLAINED THE RPT FILTER AS UNDER: 'THE RPT FILTER IS RELEVANT AND FITS IN WITH THE O VERALL SCHEME OF A TRANSFER PRICING STUDY WHICH IS PREMISED PRIMA RILY ON COMPARING LIGHT ENTITIES HAVING SIMILAR IF NOT IDEN TICAL FUNCTIONS. THEREFORE IF A PARTICULAR ENTITY PREDOM INANTLY HAS TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISE - IN EXC ESS OF A CERTAIN THRESHOLD PERCENTAGE ITS PROFIT MAKING CAP ACITY MAY RESULTED IN A DISTORTED PICTURE EITHER WAY.' ITA NO. 1814/DEL/2017) 42 21. A REFERENCE MAY NEXT BE MADE TO THE DECISION IN THE PRINCIPAL COMMISSIONER OF INCOME TAX-3 V. EVALUESER VE SEZ (GURGAON) PVT. LTD . (SUPRA) WHERE A REFERENCE IS MADE TO THE EARLIER DECISION TO THE BC MANAGEMENT SERVICES PVT. LTD. (SUPRA). THIS DECISION DEALT WITH THE EXCLUSION OF THREE SPECIFIC COMPARABLES WHICH HAVE ALSO INVOLVED IN T HE PRESENT CASE NAMELY M/S.TCS E-SERVE LTD. M/S.TCS E - SERVE INTERNATIONAL LTD. AND M/S. INFOSYS BPO LTD. THIS COURT UPHELD THE EXCLUSION OF ALL THREE COMPARABLES AND IN PARTICULAR SINCE THE ENTITIES HAD 'A HIGH BRAND VAL UE AND THEREFORE WERE ABLE TO COMMAND GREATER PROFITS; BES IDES THEY OPERATED ON ECONOMIC UPSCALE.' 22. THE REVENUE S APPEAL AGAINST THE SAME ASSESSEE FOR AY 2011-2012 AGAINST ANOTHER ORDER OF THE ITAT EXCL UDING TCS E-SERVE INTERNATIONAL LIMITED INFOSYS BPO LIMI TED FROM COMPARABLES MET THE SAME FATE. IN ITS DECISION DATE D 29TH AUGUST 2018 THE COURT REFERRED TO THE EARLIER DECI SION DATED 26TH FEBRUARY 2018 WHICH AGAIN PERTAINED TO AY 201 0- 2011. REFERENCE WAS AGAIN MADE TO THE DECISION IN B C MANAGEMENT SERVICES LIMITED. 23. IT APPEARS THEREFORE THAT THIS COURT HAS CONSIS TENTLY UPHELD DECISIONS OF THE ITAT EXCLUDING BOTH THESE V ERY COMPARABLES. THE ITAT ITSELF APPEARS TO HAVE TAKEN A CONSISTENT VIEW IN A LARGE NUMBER OF CASES EXCLUDIN G THESE TWO COMPARABLES AND ITS DECISIONS HAVE BEEN UPHELD BY THIS COURT. ILLUSTRATIVELY REFERENCE MAY BE MADE TO THE DECISION OF THE TRIBUNAL IN VERTEX CUSTOMER SERVICES INDIA PRIVATE ITA NO. 1814/DEL/2017) 43 LIMITED V. DCIT (2017) 88 TAXMANN.COM 286 ( DEL- TRI) STRYKER GLOBAL TECHNOLOGY CENTRE PRIVATE LIMITED V. DCIT (2017) 87 TAXMANN.COM 43 ( DEL-TRI) SAMSUNG HEAVY INDUSTRIES PRIVATE LIMITED V. DCIT (2017) 84 TAXMANN.COM 154 ( DEL-TRI) AND EQUANT SOLUTIONS INDIA PRIVATE LIMITED V. DCIT (2016) 66 TAXMANN.COM 192 (DELHI-TRIBUNAL). 24. ALL OF THESE DECISIONS PERTAINED TO AY 2010-201 1. WHAT WEIGHED INVARIABLY IS THE FACT THAT BOTH COMPANIES HAD HUGE TURNOVERS WHEN COMPARED TO THE TESTED ENTITY. BOTH ENTITIES HAD CLOSE CONNECTION OF THE TATA GROUP OF COMPANIES AND TCS E-SERVE INTERNATIONAL HAD GIVEN A HUGE AMOUNT T O TCS TOWARDS BRAND EQUITY. FURTHER THERE WAS NO SEGMENTA L BIFURCATION BETWEEN THE TRANSACTION PROCESSING AND TECHNICAL SERVICES. THE ASSETS EMPLOYED BY TCS E-SERVE ALONG WITH HUGE INTANGIBLES IN THE FORM OF BRAND VALUE WERE FO UND TO HAVE A DEFINITE CONSIDERABLE EFFECT ON ITS PLI. THE SE FACTORS VITIATED ITS COMPARABILITY UNDER THE FAR ANALYSIS W ITH THE TESTED COMPANY WHICH COULD BE A CAPITAL SERVICE PR OVIDER WITHOUT MUCH INTANGIBLE AND RISKS. 25. IN THIS CONTEXT IT REQUIRES TO BE NOTED THAT TH E ITAT ALSO REFERRED TO THE DECISION OF THIS COURT CIT V. AGNITY INDIA TECHNOLOGIES PRIVATE LIMITED (2013) 36 TAXMANN.COM 289. 26. THE COURT MAY ALSO NOTE THAT THE KARNATAKA HIGH COURT HAS IN PCIT V. SOFTBRANDS (2018) 406 ITR 513 (KAR) NOTED AS UNDER: ITA NO. 1814/DEL/2017) 44 '48. THE TRIBUNAL OF COURSE IS EXPECTED TO ACT FAIR LY REASONABLY AND RATIONALLY AND SHOULD SCRUPULOUSLY A VOID PERVERSITY IN THEIR ORDERS. IT SHOULD REFLECT DUE A PPLICATION OF MIND WHEN THEY ASSIGN REASONS FOR RETURNING THE PAR TICULAR FINDINGS. 49. FOR INSTANCE WHILE DEALING WITH COMPARABLES OF FILTERS IF UNEQUALS LIKE SOFTWARE GIANT INFOSYS OR WIPRO ARE C OMPARED TO A NEWLY ESTABLISHED SMALL SIZE COMPANY ENGAGED I N SOFTWARE SERVICE IT WOULD OBVIOUSLY BE WRONG AND P ERVERSE. THE VERY WORD 'COMPARABLE' MEANS THAT THE GROUP OF ENTITIES SHOULD BE IN A HOMOGENEOUS GROUP. THEY SHO ULD NOT BE WILDLY DISSIMILAR OR UNLIKE OR POLES APART. SUCH WILD COMPARISONS MAY RESULT IN THE BEST JUDGMENT ASSESSM ENT GOING HAYWIRE AND DIRECTIONLESS WILD WHICH MAY LAN D UP THE FINDINGS OF THE TRIBUNAL IN THE REALM OF PERVER SITY ATTRACTING INTERFERENCE UNDER SECTION 260-A OF THE ACT.' 27. THERE IS MERIT IN THE CONTENTION OF THE ASSESSE E THAT THE SCALE OF OPERATIONS OF THE COMPARABLES WITH THE TES TED ENTITY IS A FACTOR THAT REQUIRES TO BE KEPT IN VIEW. TCS E -SERVE HAS A TURNOVER OF RS.1359 CRORES AND HAS NO SEGMENTAL R EVENUE WHEREAS THE ASSESSEES ENTIRE SEGMENTAL REVENUE IS A MERE 24 CRORES. AS OBSERVED BY THIS COURT IN ITS DECISIO N DATED 5TH AUGUST 2016 IN ITA 417/2016(PCIT V. ACTIS GLOBA L SERVICES PRIVATE LIMITED) 'SIZE AND SCALE OF TCS S OPERATION MAKES IT AN INAPPOSITE COMPARABLE VIS-A- VIS THE PE TITIONER.' AS ALREADY POINTED OUT EARLIER THERE IS A CLOSER CO MPARISON OF TCS E-SERVE LIMITED WITH INFOSYS BPO LIMITED WITH E ACH OF ITA NO. 1814/DEL/2017) 45 THEM EMPLOYING 13 342 AND 17 934 EMPLOYEES RESPECTI VELY AND MAKING RS.37 CRORES AND RS.19 CRORES AS CONTRIB UTION TOWARDS BRAND EQUITY. WHEN RULE 10(B) (2) IS APPLIE D I.E. THE FAR ANALYSIS NAMELY FUNCTIONS PERFORMED ASSETS O WNED AND RISKS ASSUMED IS DEPLOYED THEN BRAND AND HIGH ECONOMIC UPSCALE WOULD FALL WITHIN THE DOMAIN OF 'A SSETS' AND THIS ALSO WOULD MAKE BOTH THESE COMPANIES AS UNSUITABLE COMPARABLES. 28. THE DIRECTORS REPORT OF TCS E-SERVE LIMITED BE ARS OUT THE CONTENTION OF THE ASSESSEE THAT BOTH ENTITIES H AVE BEEN LEVERAGING TCSS SCALE AND LARGE CLIENT BASE TO INCR EASE THEIR BUSINESS IN A SIGNIFICANT WAY. THE SUBMISSION THAT THE TWO COMPARABLES OFFER AN ILLUSTRATION OF 'AN IDENTICAL TRANSACTION BEING CONDUCTED IN AN UNCONTROLLED MANNER' OVERLOOK S THE EFFECT OF THE TATA BRAND ON THE PERFORMANCE OF THE IMPUGNED COMPARABLES. THE QUESTION WAS NOT MERELY WHETHER TH E MARGINS EARNED BY THE TATA GROUP IN PROVIDING CAPTI VE SERVICE TO THE CITI ENTITIES WERE AT ARM S LENGTH. THE QUESTION WAS WHETHER THEY OFFERED A RELIABLE BASIS TO RE- CALIBRATE THE PLI OF THE ASSESSEE WHOSE SCALE OF OP ERATIONS WAS OF A MUCH LOWER ORDER THAN THE TWO IMPUGNED COMPARABLES. THE MERE FACT THAT THE TRANSACTIONS WE RE IDENTICAL WAS NOT IN TERMS OF THE LAW EXPLAINED IN THE ABOVE DECISIONS EITHER A SOLE OR A RELIABLE YARDSTICK TO DETERMINE THE APPOSITE CHOICE OF COMPARABLES. 29. FOR ALL OF THE AFOREMENTIONED REASONS THE COUR T FINDS MERIT IN THE CONTENTION OF THE ASSESSEE THAT BOTH T HE ITA NO. 1814/DEL/2017) 46 IMPUGNED COMPARABLES VIZ. TCS E- SERVE LIMITED AND TCS E-SERVE INTERNATIONAL LIMITED OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE PURPOSES OF DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS INVOLVING THE ASS ESSEE AND ITS AES. 18. RESPECTFULLY FOLLOWING THE AFORESAID PRINCIP LE OF HONBLE JURISDICTIONAL HIGH COURT WHICH APPLIES IN THE PRES ENT CASE ALSO WE DIRECT THE TPO TO EXCLUDE THE SAID COMPARAB LE. 19. IN VIEW OF OUR AFORESAID FINDING THE LD. AO/TP O IS DIRECTED TO RECOMPUTE THE ALP AFTER EXCLUDING THE A FORESAID SIX COMPARABLES. 20. OTHER GROUNDS HAVE NEITHER BEEN PRESSED NOR A RGUED THEREFORE SAME ARE DISMISSED. 21. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST NOVEMBER 2019 SD/- SD/- ( O.P.KANT) ( AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 01/11/2019 *BINITA* COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT ITA NO. 1814/DEL/2017) 47 4. CIT(A) 5. DR ITAT NEW DELHI. TRUE COPY ASSTT. RE GISTRAR I TAT NEW DELHI SL.NO. DESCRIPTION DATE 1. DATE OF DICTATION BY THE AUTHOR .11.2019 2. DRAFT PLACED BEFORE THE DICTATING MEMBER .11.2019 3. DRAFT PLACED BEFORE THE SECOND MEMBER 4. DRAFT APPROVED BY THE SECOND MEMBER 5. DATE OF APPROVED ORDER COMES TO THE SR. PS 6. DATE OF PRONOUNCEMENT OF ORDER 7. DATE OF FILE SENT TO THE BENCH CLERK 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER ITA NO. 1814/DEL/2017) 48