EFFECTIVE TELESERVICES PVT. LTD.,,GANDHINAGAR vs. THE DY.CIT, GANDHINAGAR CIRCLE,, GANDHINAGAR

आयकर अपील�य अ�धकरण, अहमदाबाद �यायपीठ ‘D’ अहमदाबाद IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER And M/s. MADHUMITA ROY, JUDICIAL MEMBER आयकर अपील सं./I.T.A. No. 3077/Ahd/2015 (�नधा�रण वष� / Assessment Year :2010-11) बनाम/ Effective Teleservices Pvt. Ltd. DCIT, Gandhinagar Circle, 1st Floor, IT Tower IV, Vs. Gandhinagar. Infocity, Nr. Infroda Circle, Gandhinagar – 382009 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AAA CE9 318 E (अपीलाथ� /Appellant) (��यथ� / Respondent) .. अपीलाथ� ओर से /Appellant by : Dhinal Shah, AR ��यथ� क� ओर से / Respondent by: Apporva Bharadwaj, Sr. DR सुनवाई क� तार�ख / Date of Hearing 25/02/2019 घोषणा क� तार�ख /Date of pronouncement 13/05/2019 आदेश/O R D E R PER WASEEM AHMED - AM:

The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax Appeals, Gandhinagar [Ld.CIT(A) in short] dated 31/08/2015 arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") dated 10/03/2014 relevant to the Assessment Year (AY) 2010-2011.

The assessee has raised the following ground of appeal:

ITA No.3077/Ahd/2015 A.Y.2010-11

On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) - Gandhinagar, Ahmedabad [herein after referred to as "CIT (A)"] erred on the following grounds, which are independent, separate/alternative and without prejudice to one another: Ground No. 1 - Transfer Pricing Adjustment of Rs 1.67,98.967 1.1 On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in confirming the action of the learned transfer pricing officer in not considering the Transfer Pricing analysis submitted by the Appellant and confirming the upward adjustment made by the learned transfer pricing officer to the extent of Rs 1,67,98,967. 1.2 On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in confirming the action of learned transfer pricing officer in rejecting the Internal Comparable Uncontrolled Price ("CUP") method adopted by the Appellant as the most appropriate method for benchmarking the international transaction of the Appellant. 1.3 On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in confirming the action of the learned transfer pricing officer in rejecting the Internal Transaction Net Margin Method ("TNMM") adopted by the Appellant as the most appropriate method for benchmarking the international transaction of the Appellant. 1.4 The learned CIT (A) has erred by not considering risk adjustments proposed by Appellant for adjusting in different risks assumed by Appellant while dealing with AE and non AE. Alternatively if External TNMM is considered as most appropriate method 1.5 On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in accepting the External Transactional Net Margin Method ("TNMM") method adopted by the learned transfer pricing officer as the most appropriate method for benchmarking the international transactions undertaken by the Appellant. 1.6 The learned CIT (A) has erred in confirming action of the learned transfer pricing officer in applying arbitrary filters for selecting the companies as comparable to the business of the Appellant. 1.7 The learned CIT (A) has erred in confirming the action of the learned transfer officer in considering the financial data of the comparable companies only for the single year ended 31 March 2010 instead of multiple year data for determining the arm's length price.

1.8 The learned CIT (A) has erred in confirming the action of the learned transfer pricing officer in rejecting the certain companies identified as comparable by the Appellant. 1.9 The learned CIT(A) has erred in confirming the action of the learned transfer pricing officer in selecting certain companies as comparable to the business of the Appellant. GROUND NO. 2 - LEVYING OF CONSEQUENTIAL INTEREST UNDER SECTION 234B AND234DOFTHEACT 2.1. The learned CIT (A) has erred in confirming the action of the learned assessing officer in computing consequential interest under section 234B and 234D of the Act. Page 2 of 21

ITA No.3077/Ahd/2015 A.Y.2010-11 GROUND NO. 3 - LEVY OF PENALTY UNDER SECTION 27U1XO OF THE ACT

3.1. The learned C1T(A) has erred in confirming the action of the learned assessing officer in initiating penalty proceedings under section 271(l)(c) of the Act. The first issue raised by the assessee is that the ld. CIT-A erred in making upward transfer pricing adjustment on the services rendered to its AE for Rs. 1,67,98,967.00 only.

Nature of services Associate Enterprise (AE) Amount (Rs.) Provision for call Etech Inc. 1903, Berry 18,63,87,386/- centre and related Drive, Nacogdoches, TX – services 7564 USA Reimbursement of Etech Inc. 1903, Berry 1,11,74,431/- expenses (Call Drive, Nacogdoches, TX – termination and 7564 USA internet charges)

2.1 The Assessee filed the transfer pricing study report in respect of these transactions wherein it benchmarked its international transaction with AE by applying internal CUP method.

2.2 The assessee also claimed that similar services were rendered to Non AEs. The assessee in respect of the services rendered to its AE charged the fees at the rate of Rs. 275.49 per hour whereas in case of non AE it calculated the hourly rate charged at the rate of Rs. 126.24 per hour. Accordingly, the assessee in its TP study report claimed that price charged in case of non AEs is lower than AE, therefore, the transactions with the AE are at Arm Length Price (ALP).

ITA No.3077/Ahd/2015 A.Y.2010-11 (i) In case of AE, fee is receivable on per hour basis whereas in case of Non AE fees are being received on the basis of per unit sales or leads provided by the assessee. (ii) The nature of services such as inbound and outbound services, voice chat services, operation support services etc. provided to its AE are different from the nature of the services provided to non AE. As such the services rendered to Non-AE include the services as provision of client’s data in respect of sale of products or telemarketing of the third party product.

(iii) In respect of AE, the assessee charged the fees on per hour basis irrespective of the outcome while in case of non AEs fees has been charged only when sale or lead is confirmed.

(iv) The assessee was assured of remuneration in case of AE while the same is not the case with non AEs. Therefore, the risk profile in both the cases is totally different. 3.1 The assessee alternatively in its TP study report has also benchmarked the transactions by taking internal TNMM method where operating profit to operating cost was taken as PLI. 3.2 The TPO on the perusal of TP study report further noted that turnover with non AEs was only Rs. 31.75 lacs against the turnover of 1864.07 lacs with the AEs. The expenditure in case of non AEs was Rs. 103.21 Lacs, therefore, margin was -70.10% against the margin of 10.97% in case of AE. The TPO was of the view that any independent party would not enter into any transaction only to enhance its capacity utilization at the rate where it is not able to recover even its cost. 3.3 Accordingly, TPO was of the view that third party segment is not comparable with the AE segment as already discussed that risk profile is different in both the segment.

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ITA No.3077/Ahd/2015 A.Y.2010-11 3.4 In view of above, TPO was of the view that the internal comparable selected by the assessee is not appropriate and reasonable accurate adjustment also cannot be made in the available facts and circumstances. 3.5 Accordingly, TPO issued show cause notice to assessee to explain how in the given facts and circumstances internal CUP AND internal TNMM is the most appropriate method. 3.6 In response to the notice, the assessee submitted that identical call Centre services were provided to both AE and non AEs and only different rates were charged. Therefore, rejection of internal CUP for benchmarking is not correct. 3.7 In respect of internal TNMM, assessee submitted that if there were differences in the risk profile, TPO ought to have made the adjustment in respect of risk profile between AE and non AE segment. The assessee in support of his contention also submitted calculation of adjustment of risk by taking the difference between PLR rate and Bank rate where PLR rate as a normal risk bearing rate whereas Bank rate is as risk free return. Accordingly, the assessee worked out the difference in rate as 5.25% (11.50%-6.25%) and contended that by making the upper adjustments of 5.50% in non AE segment, both the segment would be comparable as after adjustments margins of non AE would reach to -75.65%. 3.8 However, TPO disregarded the contention of assessee and held that CUP can be applied in the cases where services rendered are highly comparable which is not in the present case as discussed in the SCN, therefore, internal CUP applied by assessee for the purpose of benchmarking is rejected. 3.9 In respect of internal TNMM, the TPO held that assessee has only submitted calculation of quantification of the risk but has not established any link for the difference in the return between Government security and AAA rated bonds with the risk profile of AE and non AEs segment.

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ITA No.3077/Ahd/2015 A.Y.2010-11 3.10 The TPO further held that as per the provision of rule 10B(2) and 10B(3), reasonable accurate adjustment can be made to eliminate the differences only where differences are such which are not likely to affect the price and profit from such transaction. But it is not possible to work out the effect on the margins in present facts and circumstances. 3.11 The TPO in support of his findings also observed that there is difference of almost 57.41 times between AE and non AEs turnover which is an important criterion for deciding the comparable cases as already held in various judicial pronouncements. 3.12 Accordingly, TPO rejected the internal CUP and internal TNMM as most appropriate method. 4. Being aggrieved by the order of TPO/AO, assessee carried the matter to ld. CIT (A) and submitted that merely different pricing mechanism with the AE and non AEs does not have any impact on determination of the most appropriate method and it does not make services to both companies as non-comparable. 4.1 Assessee also submitted that if TPO make the risk adjustments in respect of non AE business as per the provisions of Rule 10B(1)(a), then the rate charged from non AEs would further reduce. Accordingly, assessee contended that internal CUP is most appropriate method and no adjustment is warranted. 4.2 In respect of TNMM assessee submitted that third parties are independent parties. Therefore the rates charged by them are also on market rates as with independent parties. Therefore it is not possible to charge the rate higher than market rate. 4.3 Assessee also submitted that as per Para 3.26 of OECD guidelines internal TNMM should be given preference wherever it is possible. This view has also been upheld at various judicial forums. Further, risk adjustment of 5.55% is done on the basis that maximum risk could be the difference between risk free rate and risk bearing rate and for this purpose rate is also taken from the website of RBI. Page 6 of 21

ITA No.3077/Ahd/2015 A.Y.2010-11 4.4 Assessee also submitted that turnover filter should not be applied where internal TNMM has been selected as most appropriate method. In this regard assessee also placed his reliance on ITAT Delhi in case of Lummus Technology Heat transfer BV vs. DCIT (126 TTJ 263). 4.5 The ld. CIT (A) after considering the submission disregarded the contention of assessee by observing that though the services provided by the assessee under both the agreements are in the nature of call Centre/BPO services but they are quite different. As such under the CUP method high level of comparability in the characteristics of services provided is required. Further, the basis of remuneration charged in both the case is different. Accordingly, ld. CIT (A) dismissed the appeal of assessee by following his own order of AY 2009-10. 4.6 In respect of TNMM, the ld. CIT(A) held that there is huge difference between the turnover of the AE segment and non AEs segment. Therefore the same are not comparable. Thus the contention of assessee that the turnover needs to be ignored while applying the internal TNMM is not tenable in the present facts and circumstances. 4.7. Further, in the case (supra), as relied by the assessee, the matter was remanded back to determine the cost allocation properly and further held that if non AEs transactions are more only up to 5% but cost allocation is more than 50% then further examination is required. In the present case also assessee has not justified the basis of allocation of cost between AE and Non-AEs as the non AE business forms only 1.7% of AE business and 1.6% of total turnover. Accordingly, ld. CIT (A) dismissed the appeal of assessee. Aggrieved by the order of ld. CIT (A), assessee is in appeal before us. 5. The Ld. AR before us filed a written submission as detailed under: • Rejection of internal CUP analysis undertaken by the Appellant The Appellant had entered into similar transactions with AE as well as unrelated third parties. Accordingly for the purposes of benchmarking its international transaction, the Appellant selected

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ITA No.3077/Ahd/2015 A.Y.2010-11 Internal Comparable Uncontrolled Price method ('Internal CUP') as the most appropriate method. The brief of the services rendered to both AE as well as Non AEs is as under: AE Non AEs located in UK ETech Inc. K & M Marketing Satellite Repair Credit Universal Product Pvt. Ltd. Services Ltd. Management International Systems Majority of hours in Outbound call Outbound call Outbound call Outbound call inbound/outbound sevices services services services call services

The copy of the agreements with AE as well as third parties are submitted at page nos 212 to 238 of the factual paper book. The Appellant earned average hourly rate from its AE business of Rs.275.49 per hour. As against the same, the average hourly rate from Non AE business was Rs.126.24 per hour. Accordingly as the average hourly rate earned from AE business was more than Non-AE business, the transaction was concluded to be at arm's length. Copy of computation of average hourly rate earned from AE business as well as Non AE business is submitted at page no 239 of the factual paper book. The learned TPO as well as CIT (A) held that as the pricing mechanism in case of AE as well as Non-AEs was different and hence, CUP is not applicable. In this regard the Appellant submits it that had provided identical call center services to both its AEs as well as non AEs and these services were directly comparable. Further the fact that the services rendered as similar and hence internal CUP is the most appropriate method. This has been accepted by your Honour's in Appellants own case on similar facts for AY 2009-10. The relevant observations of your Honour's is given at para 11 & 12 of the ITAT order. Kindly refer page nos 3 & 4 of ITAT order given in legal paper book. Hence it is prayed that internal CUP should be accepted as most appropriate method. 5. On the other hand the Ld. DR before us vehemently supported the order of the lower authorities.

“10. We have given thoughtful consideration to the orders of the authorities below. We find that the assessee is eligible for tax holiday u/s. 10A of the Act, therefore, we do not find any merit in holding that the assessee manipulated the prices and shifted the profits to the overseas jurisdiction for avoiding taxes in India. Moreover, the taxes rates in the USA are higher than the tax rates prevailing in India. Moreover, the AE of the appellant company has incurred losses in Page 8 of 21

ITA No.3077/Ahd/2015 A.Y.2010-11 providing end to end services to third parties. If the assessee had directly undertaken contracts with the third parties in USA, it would also have incurred operating losses as against operating profits earned while undertaking transactions with AEs. 11. We find that the appellant company has earned average hourly rate from its AE business at Rs. 274.39 per hour. As against the same, the average hourly rate from Non AE business was Rs. 108.82 per hour. Thus, the average hourly rate earned from AE business was more than Non AE business. The only reason for rejecting the assessee’s contention is that the pricing mechanism in case of AE as well as Non AEs was different; therefore, CUP is not applicable. In our considered opinion, merely because pricing mechanism is different, internal CUP should not have been rejected. 12. We find that the TPO has mentioned in the order that the risk profile of AE and non AE is entirely different. In our considered opinion, reasonable accurate adjustment cannot be made for such risk differences and if the risk adjustment is made, the same would further reduce the average hourly rate charged from AE which is, as mentioned elsewhere, lower than the average hourly rate charged from AE. Therefore, in our understanding of the facts, internal CUP should have been accepted as most appropriate method.”

6.1 Similarly, the identical issue related to internal TNMM method was also raised in assessee’s own appeal of assessment year 2009-10 in ITA No. 2411/Ahd/2014 where issue was decided in favour of assessee by the ITAT vide order dated 16-01-2018 by observing as under:

“13. For the sake of completeness of the adjudication, rejection of internal TNMM analysis undertaken by the appellant during the course of transfer pricing assessment should not have been rejected. We find that the appellant company has provided identical services to AE as well as non AEs and functions performed, assets used and risks assumed in AE as well as non AE business were similar. Therefore, in our considered opinion, even internal TNMM can be considered as most appropriate method. We find that the operating margin of the appellant from the AE segment was derived at 30.90% and the operating margins in the non AE segment was derived at Rs. 74.92%. 14. The TPO rejected the internal TNMM analysis on the basis that as the appellant has made operating loss in non AE business, the transactions with non AEs are not at independent rates and they have been undertaken only to increase capacity utilization. The total turnover of Non AE segment of Rs. 5.67 lacs as against the turnover of Rs. 1909.60 lacs in the case of international transactions with AE. The ld. CIT(A) confirmed the rejection by holding that the turnover of the third party segment is very much less compared to that with AE. The ld. CIT(A) further held that the appellant has not proved the allocation of the common cost between AE and non AEs and whether they are scientific and at arm’s length. We find that the TPO has nowhere disputed the common cost allocation made by the appellant. We also find that the ld. CIT(A) has also never raised any doubt on the allocation. Insofar as the difference in the turnover, we find that the Tribunal Delhi Bench in the case of Lummus Technology Heat Transfer BV Vs. DCIT 42 taxmann.com 342 has held as under:- Page 9 of 21

ITA No.3077/Ahd/2015 A.Y.2010-11

ITA No.3077/Ahd/2015 A.Y.2010-11 transaction incomparable. If the size of uncontrolled transaction is too big, it may call for an adjustment for volume business. If the size of the uncontrolled transaction is too small, it may provoke an inquiry by the TPO to ensure that it is not a contrived transaction outside the normal course of business or with regard to other significant factors surrounding smallness of such transaction. However, in our considered view, in none of these cases, a comparable can be rejected on the basis of its size per se. In this view of the matter, the authorities below were clearly in error in rejecting the internal comparable, i.e. profitability of assessee's transactions with non AEs, on the ground that the volume of business with non AEs was too small vis-a-vis business with AEs. In view of these discussions, as also bearing in mind entirety of the case, the assessee was quite justified in adopting internal TNMM and comparing the profit earned on its transactions with AEs with profit earned with non-AEs. Accordingly, the ALP adjustment of Rs. 2,72,42,940/- deserves to be deleted. We order so. The assessee gets the relief accordingly. 15. The Tribunal Hyderabad Bench in the case of NTT Data Global Delivery Services Limited. 63 taxmann.com 92 had taken a similar view and followed the findings given in the case of Lummus Technology Heat Transfer BV (supra).”

6.2 Respectfully following the same we are of the view that assessee rightly benchmarked the transaction by choosing the internal CUP method as most appropriate method and alternatively also rightly benchmarked the internal TNMM method as most appropriate method to determine the ALP. Accordingly, the appeal of the assessee is allowed.

Now coming to the alternate ground of appeal raised by the assessee for taking the external TNMM

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ITA No.3077/Ahd/2015 A.Y.2010-11 • Companies whose data is not available for the FY 2009-10 were excluded and the data for the FY 2009-10 has been considered for the period from 01-04- 2009 to 31-03-2010. • Companies whose IT enabled service income <Rs, 1 cr. were excluded • Companies whose IT enabled service revenue is less than 75% of the total operating revenues were excluded • Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the operating revenues were excluded • Companies who have less than 75% of the revenues as export sales were excluded Companies who have diminishing revenues/persistent losses for the period under consideration were excluded • Companies having different financial year ending (i.e. not March 31, 2010) or data of the company dues not fall within 12 month period Le. 01-04-2009 to 31-03-2010, were rejected • Companies that are functionally different from that of taxpayer or working in peculiar economic circumstances, after giving valid reasons, were excluded, • Companies having turnover less than Rs 1 cr and more than Rs 200 cr were rejected.

7.1 In view of the above the TPO selected 8 companies as comparables. The list of such comparables is available on page 60 to 61 of the TPO order. At the same time the assessee suggested three companies as comparables but the TPO rejected the same. The details of the companies suggested by the assessee stand as under: i. Informed technologies India Ltd ii. CG-Vak Software and exports Ltd iii. R systems International Ltd 7.2 On appeal to the ld. CIT-A rejected some of the comparables suggested by the TPO and all the comparables suggested by the assessee.

7.3 Against the order of the ld. CIT-A, the assessee is in appeal before us in respect of the exclusion of the company confirmed as comparable. The detail of the company stands as under: i. Cross Domain Solution Pvt. Ltd Page 12 of 21

ITA No.3077/Ahd/2015 A.Y.2010-11 7.4 Similarly, the assessee is also in appeal for the inclusion of certain companies which were rejected by the ld. CIT-A as detailed under: i. CG-Vak Software and exports Ltd ii. R systems International Ltd 7.5 Now we are proceeding further to adjudicate one by one the applicability of these comparables in the given facts and circumstances. First we take up the comparables selected by the TPO and confirmed by the ld. CIT-A, but objected by the assessee. i. Cross Domain Solution Pvt. Ltd 8. The TPO after applying the abovementioned filters proposed to take this comparable. However, the assessee objected on the selection of this company as comparable on the ground that this company is engaged in providing knowledge providing outsourcing (KPO) services whereas assessee is engaged in providing business processing outsourcing (BPO) services. The assessee also contended that there is not available the sufficient data of the company to analyze the comparability. 8.1 However, the TPO after placing his reliance on the decision of ITAT Mumbai in case of Vodafone India services (P) Ltd (36 taxmann.com 127) disregarded the contention of assessee by observing that there is no material available on record that the comparable is engaged in KPO services. 8.2 Further, TPO also obtained the data under section 133(6) of the Act from the comparable company and held that comparable company is engaged in the data processing services in insurance sector. Accordingly the TPO held that it is a fit case for comparable. Aggrieved assessee preferred as appeal to the ld. CIT-A. 8.3 The assessee before the ld. CIT (A) filed the screenshot from the website of the comparable company and contended that it is a leading entity in providing KPO services Page 13 of 21

ITA No.3077/Ahd/2015 A.Y.2010-11 in insurance, healthcare, HR and accounting domains. In support of his contention assessee also relied on some of case laws. 8.4 The assessee also relied on safe harbor rules as notified on 18th September 2013 and contended that CBDT itself has differentiated between KPO & BPO services and prescribed different margins for both the services. 8.5 The TPO has only considered the information received u/s 133(6) as per his convenience as comparable party submitted that it is engaged in data processing in insurance sector but at the same time it also submitted that it is not a call centre. 8.6 However, the ld. CIT (A) disregarded the contention of assessee and held that assessee is contending only on the basis of various rulings and rules without bringing any material on records. Further, the assessee is also only relying on the website information without meeting out the observation of TPO. Accordingly, ld. CIT (A) dismissed the appeal of the assessee. Aggrieved by the order of ld. CIT (A), the assessee is in appeal before us. 9. The LD. AR before us submitted as under: Cross Domain Solution Pvt Ltd The learned TPO and CIT(A) has erred in considering this company as functionally comparable to the Appellant. In this regard, the Appellant submits that this company is engaged in rendering high-end KPO service and hence cannot be compared with the Appellant who is a low end BPO services provider. For detailed discussion kindly refer Para 2.6,4 of submission filed dated 15 May 2015 before the learned CIT(A). (Refer page no 187 of the factual paper book) Further, reliance in this regard is also placed on the following judicial precedents: -ACIT vs Monster.com (India) Private Limited (Hyderabad ITAT) [2017] (86 Taxmann.com 186) (Refer para 17.1 at page 30 of legal paper book) - BP India Services (P.) Ltd vs ACIT (Mumbai ITAT) [2015] (55 Taxmann.com 150) (Refer para 9 at page no 39 of legal paper book) 10. On the other hand, the Ld. DR vehemently supported the order of authorities below.

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ITA No.3077/Ahd/2015 A.Y.2010-11 11. We have the heard the rival contentions of both the parties and perused the materials available on record. In the instant case we note that none of lower authorities brought any material on record that the impugned comparable is not engaged in providing the KPO services. The Ld. DR also before us failed to bring anything on record against the argument of the ld. AR. Therefore, by looking the nature of services provided by the assessee such as various call centre, operation support staff services etc. it is safe to presume that company is engaged in providing KPO services.

11.1 We also note that in the case similar facts and circumstances the ITAT Hyderabad in the case of ACIT vs. Monster.com (India) private limited (86 taxmann.com 186) has held that cross domain is not a fit case for comparable. The relevant extract is as under:

“17.1 With regard to comparables i.e. Crossdomain Solutions Ltd. and TCS E Serve Ltd., the coordinate bench of this Tribunal in the case of S&P Capital IQ (India) Ltd. v. Dy. CIT [2016] 72 taxmann.com 326 (Hyd. - Trib.), has directed the TPO/AO to exclude from the list of comparables, by observing as under: '1. Crossdomain Solutions Ltd. This company was considered as a comparable and listed at Sl.No.7 of the comparables chosen by the TPO. It is the stand of the assessee that this company is not functionally comparable. It is seen that the business profile of this company is re-engineered payroll service. This company is also engaged in the development of information systems. The review and business functions of Cross Domain is as follows:— "With a decade of experience in Payroll Outsourcing, Crossdomain. has created a re-engineered payroll service EFFIPAY - that processes and delivers accurate payroll to clients with headcount up to 1000 employees in just 4 hours", With Effipay Lite and Effipay Lite Plus, our bouquet of services cover end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000. " "Crossdomain's IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and tum-a round-time for business critical processes. " Source: http:/ www.cross-domain.com As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider. III. 1 We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this c9mpany as a comparable, this company should be excluded Page 15 of 21

ITA No.3077/Ahd/2015 A.Y.2010-11 from the list of comparables, accepting the plea of the Assessee. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. We hold accordingly". 14.3 Facts are being similar in this year, the same has to be excluded. Moreover the web report placed indicates that this company is in market research and analysis and IT services which include software development and maintenance. There is no segmental information. In the absence of segmental data, it cannot be stated that the company is functionally similar. In view of the order in earlier year and based on annual report and web data of this year, it is better the same is excluded. We accordingly direct the TPO / AO to exclude the same.”

11.2 Similar view was also taken by the ITAT Mumbai in case of BP India services (p) Ltd vs ACIT (55 taxmann.com 150) as under:

“9. We have considered rival contentions and also deliberated on the judicial pronouncements supporting the contention of the assessee for excluding Cross Domain Solutions Ltd. from the list of comparables. We found that this company is engaged in development of products suites and routine low end ITES service. Crossdomain's IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and turn-around-time for business critical processes. The business of Cross Domain ranges from high end KPO services, development of product suits and routine low end ITES service as compared to the advisory and support services provided by assessee. Thus, we found it functionally different. Accordingly, we direct the AO/TPO to exclude M/s Cross Domain Solutions Limited from the list of comparables.”

11.3 In view of the above we hold that the Cross domain solution pvt. Ltd. is engaged in KPO services. Therefore the same is not a fit comparable in the given facts & circumstances. Hence we direct the TPO to exclude this company as comparable.

11.4 Now we take up the comparables selected by the assessee and objected by the TPO and ld. CIT-A.

i. R systems International Ltd

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ITA No.3077/Ahd/2015 A.Y.2010-11 advertisement, marketing and promotion (AMP) expenditure of Rs. 2.29 crores which is 11.42% of total revenue of Rs. 20.05 crores. As such the company was not developing its brand name or trade mark.

12.1 Assessee further submitted that AMP expenditure of Rs. 2.29 crores also includes other expenses such as marketing salary, marketing travel, commission on sales and advertising & sales promotion which are in the nature of selling expenses. Therefore such expenses cannot be clubbed with AMP expenses. The assessee in its support also placed reliance on L.G. Electronics India (P.) Ltd. vs. ACIT (152 TTJ 273) and contended that if the abovementioned selling expenses are excluded then AMP expenditure would hardly constitute only 0.015% of total sales. 12.2 However, the TPO observed that assessee itself has admitted the fact that the company has incurred the AMP. Accordingly the TPO held that the ITES segment of R system was incomparable. 12.3 The TPO from the information obtained from R system u/s 133(6) also observed that it has given segmental result in respect of software development services and BPO services. The TPO further observed that on one hand the assessee is objecting the inclusion of entities engaged in diversified activities whose segmental data is not available and on other hand it seeks to include R system at an entity level. Accordingly, the TPO held that R system is not to be included as comparable case. 12.4 The aggrieved assessee carried the matter to ld. CIT (A) who held that the reason given by the TPO in respect of concept of AMP may be wrong but his findings were correct as extraordinary margins require adjustments. As such only ordinary margins can be considered for the comparison. The ld. CIT(A) further held that R system cannot be compared as the assessee company is having low risk whereas the comparable R system is having high risk due to incurring extraordinary cost.

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ITA No.3077/Ahd/2015 A.Y.2010-11 12.5 The Ld. CIT (A) also held the exercise of assessee is post facto analysis. As such the assessee did not file the comparable in the TP study report rather it was submitted only during the assessment proceeding.

16.1 Regarding this we note that ld. CIT (A) in assessment year 2009-10 has confirmed this company as comparable. Now this year it has been rejected on account that it is a risk bearing entity. In this regard we are of the view that department cannot Page 18 of 21

ITA No.3077/Ahd/2015 A.Y.2010-11 cherry pick the comparables as per its convenience. Once in a year it has been held that it is a case fit for comparable then in later years it cannot be excluded as comparable company unless there is any material change within the entity related to its structure or business. Just because a company in any particular year incurred any heavy expenditure on account of AMP cannot be held as non comparable. 16.2 The relevant finding of the ld. CIT-A for the AY 2009-10 stands as under: After considering the above, the operating margins of the comparable companies comes to 29.045% [i.e (53.17 + 4.92)/2 i.e OP/TC of remaining comparables viz Cosmic Global Limited and R Systems International Ltd respectively] and accordingly the AO/TPO are directed to rework. 16.3 It is also pertinent to note here that assessee before TPO also submitted that the AMP expenditure also includes some expenses such as marketing salary, marketing travel, commission on sales and advertising & sales promotion which are not in AMP nature. However ld. TPO failed to give any findings on it. The ld. DR also did not argue in this regard before us, therefore, we are assuming it to be in the nature of selling expenses and not in the nature of AMP expenses. Accordingly, we are of the opinion this comparable should be taken in to account while benchmarking the transaction. ii. CG-Vak Software and exports Ltd 16.4 TPO rejected this company as comparable on the reasoning that its turnover is less than Rs. 1 Crores and its margin had been fluctuating during the past and subsequent years. Accordingly, the company was not able to meet the filter criteria set by the TPO. Thus the TPO did not select this company as comparable. 17. Aggrieved, assessee carried the matter to ld. CIT (A) and submitted that TPO has only considered the profit of relevant segment and not the margin of the entity as a whole. 17.1 In respect of turnover filter of Rs. 1 crores assessee relied on Advance pricing agreement program training manual of USA and contended that where less comparable cases can produce more reliable final result then the less comparable cases can be

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ITA No.3077/Ahd/2015 A.Y.2010-11 taken. Assessee in support of his contention also relied on DCIT vs. M/s Quark systems private Limited (2010-TIOL-31-ITAT- CHD-SB).

17.2 Assessee also contended that the TPO is considering the high turnover of Rs. 200 crores as against the assessee turnover of Rs. 18.63 crores with AE which is 10 times. Therefore, the TPO should also consider the lower side of the turnover.

17.3. However, the ld. CIT (A) disregarded the contention of assessee by observing that turnover relevant to BPO segment does not exceed Rs. 1 crores, therefore, it does not fulfill the applied filter criteria.

17.4 The ld. CIT (A) without prejudice also held that the exercise of assessee is post facto analysis as the assessee has not submitted the comparable in the TP study report rather it was submitted only during the assessment proceeding.

Aggrieved by the order of ld. CIT (A), the assessee is in appeal before us.

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ITA No.3077/Ahd/2015 A.Y.2010-11 20. We have heard the rival contention and perused the materials on record. In the instant case we note that the same company was also rejected in the preceding assessment year 2009-10 by the lower authorities on same turnover filter criteria and coordinate bench of this tribunal in ITA No. 2411/Ahd/2014 decided the issue in favour of assessee by observing as under: “19. A similar view was taken by the Tribunal in Hyderabad Bench in the case of Capital IQ Informtion Systems (India) Pvt. Ltd. 49 taxmann.com 313 wherein the Co-ordinate Bench has followed the findings of the Tribunal Delhi Bench in the case of Mercer Consulting India Private Limited (supra). The Comparable CG-Vak Sofware & Exports Limited was rejected as the turnover of the company is less than 1 crore and hence does not qualify turnover filter. The turnover of the relevant segment of the company is 86.10 lacs but just because this company does not pass the turnover filter of 1 crore should not have been rejected as the business is exactly similar to that of the appellant company.”

20.1 Accordingly, respectfully following the same we also direct the TPO to consider this companies as discussed above as comparable. Hence the ground of appeal of the assessee is allowed. 21. The next issue raised by the assessee is consequential and therefore we dismissed the same. 22. In the result the appeal of the assessee is partly allowed.

Order pronounced in the Court on 13/05/2019 at Ahmedabad.

-Sd- -Sd- (Ms MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 13/05/2019 Manish

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