DCIT, NEW DELHI vs. M/S. FIS GLOBAL BUSINESS SOLUTIONS INDIA PVT. LTD., NEW DELHI

Vide Ground No.1, the Revenue has challenged the Ld. CIT(A)’s finding ofdeletion ofthe addition of INR 167,024,863/-made by the TPO by making upward adjustment in ALP.The Revenue, in SDS segment, has challenged exclusion of Megasoft Ltd. (Megasoft). The Ld. CIT(A) has excludedMegasoft as comparable on the reasoning that it has different financial year ending and extraordinary circumstances in the nature of business restructuring affecting its profitability significantly. The Ld. CIT-DR submitted that the Ld. CIT(A) had failed to establish/demonstrate that how the amalgamation of Visual Software Technologies Ltd. into Megasofthad impacted the profitability of the company particularly when the assessee itself had proposed Visualsoft Technologies Ltd. (which was acquired by Megasoft) as a CO No.02/Del/2015 CO No.03/Del/2013 valid comparable in the SDS segment. The Ld. CIT-DR argued that the assessee had not raised these issues of different financial year ending and extraordinary event before the TPO and therefore, the TPO had no occasion to examine these issues. He further, submitted that the TPO gathered information under Section 133(6) of the Income-tax Act, 1961 (hereinafter, the ‘Act’)to recast the financials of the Company for year ending March 31, 2007.It was further contended by the Ld. CIT-DR that there was nothing wrong in using information gathered information under Section 133(6) of the Act and recasting the financial for the relevant period. To buttress this argument, the Ld. CIT-DR placed reliance on the decision of the Tribunal in the case of Steria (India) Ltd.[2020] 122 taxmann.com 267 (Del.).

On the other hands, the Ld. Counselcontended that Megasoft hadbeen rightly excluded from the list of comparables for the simple reasoning that it had acquired Visual Software Technologies Ltd. (Visualsoft)during the year, which affected its profitability. This extraordinary event happenedduring the relevant year had affected the profitability of Megasoftthus it became an unsuitable comparable as it failed the comparability test under Rule 10B(3) of the Income tax Rules, 1962. In support of his argument, the Ld. Counsel referred to the management commentary in the annual report, which acknowledged the amalgamationhaving a material impact on the company's margins. Further, it was argued that there was no requirement under the CO No.02/Del/2015 CO No.03/Del/2013 law to demonstrate that the extraordinary event actually had an impact on the margins. The Ld. Counsel further submitted that the Ld. CIT-DR had misconstrued the Rule 10(B)(3) of the Income-tax Rules as this Rule did not impose an onus upon an assessee to show that a difference had a material bearing on the margins. The language used in this Rule "likely to have a material bearing", clearly meant thereby that as long as there was a difference between the comparable, which likely might have a material bearing on the margins, such comparable would have to be excluded. The Ld. Counsel drew our attention that Megasoft had also failedone of the filters applied by the TPO; i.e. different financial year ending. There was no quarterly data available in the public domain which could enable the TPO to recast the financials of the company. However, the TPO, after obtaining financials for remaining period under section 133(6) of the Act, recasted the fianacials for 12 months. It was argued by the Ld. Counsel that such exercise was not justified as the financials of Megasoftcould not be reliably recasted. Hence, the Ld. CIT(A) had righly held Megasoft as non-suitable comparable.

The Ld. Counsel further contended that there was no merit in the arguments of the Ld. CIT-DR that the TPO had no occasion to examine the issues of different financial year ending and extraordinary event of acquisition by Megasoft. It was argued that there was no estoppel against CO No.02/Del/2015 CO No.03/Del/2013 law in transfer pricing cases as the object of the entire exercise was to ultimately determine as to whether the international transactions were at arm's length. The Ld. Counsel submitted that the Tribunal is vested with sufficient powers to examine a comparable on merits and decide the matter irrespective of the fact that whether a particular ground has been raised at earlier stage or not. To buttress his argument, the Ld. Counsel relied upon the decision of the Hon'ble Delhi High Court in the case of Mentor Graphics (India) Pvt. Ltd. [ITA 787/2019] rendered on September 05, 2023. The Ld. Counsel further submitted that the powers of the Ld. CIT(A), being co- terminus with those of the TPO, had decided the appeal after examining these issues in-depth. The Ld. Counsel, placing reliance on the decision of Mumbai Tribunal in the case of Maersk Global Service Center (India) (P.) Ltd. [2011] 16 taxmann.com 47, submitted that the Ld. CIT-DR should not be allowed to set up a new case at the fag end of the proceedings after more than a decade.

The Ld. Counsel further submitted that the Revenue had raised the issue inclusion of Megasoft as one of the comparables and not the Visualsoft. After acquisition of VisualsoftbyMegasoft, Visualsoft ceased to exist as a separate entity. This acquisition, an extraordinary event,had materially impacted the profitability of Megasoftrendering it an unsuitable comparable. Since this acquisition/amalgamation had not impactedthe profitability CO No.02/Del/2015 CO No.03/Del/2013 ofVisualsoft before pre-acquisition; therefore, the assessee had selected Visualsoft as one of the comparables. However, Visualsoft had been rejected by the TPO as suitable comparable. Accordingly, the Ld. Counsel contended that the Ld. CIT-DR’s arguments of inconsistency in the assessee’s TP study were devoid of any merit. The Ld. Counsel further submitted that the Hon'ble Delhi High Court in the case of Steria India merely provided that a judicial precedent pertaining to another assessee with a distinct & dissimilar functional profile could not be the sole basis for excluding a comparable. Thus, the Ld. Counsel argued that the ratio decidendi of the Steria decision was not applicable in the case in hand.

The Ld. Counsel argued that the information gathered under section 133(6) of the Act could not be used against the assessee because such information/data was neither in conformity with the annual report of the company nor was in public domain. To buttress his arguments, the Ld. Counsel placed reliance on the decisionsof Delhi Tribunal in the cases of Motorola Solution India (P) Ltd. [2014] 48 taxmann.com 248and Giesecke &Devrient India Pvt. Ltd. (ITA No. 5924/Del/2012), wherein it had been held that if there was complete contradiction between the information obtained under section 133(6) of the Act and annual report then the said information could not be substituted for the information contained in the annual report.Further, The Ld. Counsel drew our attention to the annual report of CO No.02/Del/2015 CO No.03/Del/2013 this Company to submit that the said Company was functionally dissimilar to that of the assessee. This Company had two divisions: (i) Xius dealt in telecom products and (ii)Blue-Ally dealt in both products and services, specifically developing and managing products for other companies (Page 6-7 and 58-59 of the Convenience Compilation). However, no segmental data of this Company was available in public domain. The audited financials merely recognized revenue from consulting and telecom without clearly distinguishing the revenue from services (Page 5 and 29 of the Convenience Compilation), whereas the assessee exclusively provided services only and it did not deal in software product sales.

The Ld. Counsel placed reliance on the decision Delhi Tribunal in the case of Kaplan India Pvt. Ltd. (ITA No. 2907/Del/2014), wherein Megasoft was excluded as a comparable on the ground that it was functionally different from the assessee who was engaged in software development services. The Tribunal, in the case of Kaplan India (supra), observed that the Company was engaged in multifarious activities including sale of software developments and had undergone the extraordinary event of amalgamation, though the impact of this extraordinary event was not possible to be measured/quantified for adjustment. The Ld. Counsel also relied upon the following decisions for exclusion ofMegasoft from the list of comparables:  Infogain India (P.) Ltd. (2020) 116 taxmann.com 386 (Del. Trib)

We have heard both parties and have perused the material available on the record. After careful consideration of material on the record and facts in entirety, we find force in the argument of the Ld. Counsel that this issue is squarely covered by the decision of the coordinate bench of Tribunal in the case of Kaplan India Pvt. Ltd. (ITA No. 2907/Del/2014). The relevant part of this case (Kaplan India Pvt. Ltd.) reads as under:

The Ld. CIT-DR supported the order of the TPO.

The Ld. Counsel contended that this Company did not pass through the filters of functional similarities and 75% revenue from ITeS. The Ld. Counsel specifically submitted that this Company wasengaged in the business of engineering design & detailing services, website design services, software testing, in-house development etc. Thus, it was contended that this comparable was functionally dissimilar. The Ld. Counsel further submitted that thiscomparabledid not fulfil the prime condition of the filters applied by the TPO (companies whose revenue from IT enabled services was not less than 75% of total operating revenue). The Ld. Counsel took us to page 60 of the Convenience Compilation; i.e. the Annual report of theCompany showing segmental revenue from the IT Division at INR 114 million out of the total revenue of INR 958million (11.89% of the total revenue). Thus, it was contended that this Company was rightlyexcluded by the Ld. CIT(A). Further, the Ld. Counsel contended that this Company was functionally different as it was engaged in the business of Knowledge Process Outsourcing (KPO); whereas the assessee was a BPO. The Ld. Counsel further submitted that this Company had two segments:  Plastic Division is engaged in manufacturing of lube & oils. paints, pet products, consumer products, etc.

The Ld. Counsel submitted that the assessee had provided Back Office Support services (BPO services) like data entry services and call center services; whereas Mold-Tek was KPO. The functional profiles, risk exposures, and economic contributions of KPOs and BPOs were distinct and consequentially their profitability and cost structures were also different and distinct. In support of the above arguments, the Ld. Counsel placed reliance on the decision of the Hon'ble Delhi High Court in the case of Rampgreen Solutions (P.) Ltd. 60 taxmann.com 355. The relevant part of the said decision reads as under: "34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) (P.) Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge: KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 108(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services CO No.02/Del/2015 CO No.03/Del/2013 with completely different content and value. Thus, where the tested party is not BPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently."

The Ld. Counsel, drawing our attention to the low employee cost of 7.6% of Mold-Tek (Page 61 of the Convenience Compilation) as against 54% employee cost of the assessee, submitted that Mold-Tek was not a service- based company. To strengthen his arguments, the Ld. Counsel placed reliance on the decision of the Hon'ble Delhi High Court in the case of Honeywell International (India) (P). Ltd. 158 taxmann.com 376. In this case, the Hon'ble High Court, in an appeal for AY 2007-08, excluded Mold-Tek on the ground that it was a KPO service provider and thus, the same could not be compared to the assessee of that case, who was engaged in provision of low-end services. The Ld. Counsel further submitted that the facts of the instant case were identical, and therefore, following the order of the Hon'ble Delhi High Court in the case of Honeywell International (India) (P). Ltd., Mold-tek should be excluded as a comparable.

We have heard both parties and have perused the material available on the record. After careful consideration of material on the record and facts CO No.02/Del/2015 CO No.03/Del/2013 in entirety, we find force in the argument of the Ld. Counsel that this issue is squarely covered by the decision of the Hon'ble Delhi High Court in the case of Honeywell International (India) (P). Ltd. We therefore, are of the considered view that this issue is squarely covered by the decision of the Hon'ble Delhi High Court in the case of Honeywell International (India) (P). Ltd. We therefore, following the reasoning given by the Hon'ble Delhi High Court in the case of Honeywell International (India) (P). Ltd., decline to interfere with the finding of the Ld. CIT(A) on this score. Accordingly, the exclusion of Mold-Tek from the final set of comparables by the Ld. CIT(A) is held justified.

In view of the above, other grounds of Revenue do not require separate adjudication. In the result, this appeal of the Revenue is dismissed as above. CO No. 3/Del/2013 for AY 2007-08 20. The Ld. Counseldid not press ground Nos. 1, 2, 4, 6, 9 and 10 as some of these grounds are general and consequential. Therefore, these grounds stand dismissed. He not only challenged the use of information gathered under section 133(6) of the Act (not available in public domain) for determining ALP but also the selection of functionally dissimilar comparables. He prayed for exclusion of 5 Companies; namely, Infosys Technologies Ltd., Wipro Ltd. (segmental), Avani Cimcom Technologies Ltd., CO No.02/Del/2015 CO No.03/Del/2013 Celestial Labs Ltd. and Kals Information Systems Ltd. from the list of comparables in SDS Segment on the following reasoning: SDS Segment i) Infosys Technologies Ltd. a. Incomparable size and scale:A giant company, engaged into diversified business of consulting, software product development, etc. was not a suitable comparable to the assessee, a captive service provider (Page 33 and 37 of the Convenience Compilation). b. Product Company with no segmental financials: Its substantial revenue was from sale of proprietary products like Finacle, Infosys Acticedesk, while the assessee’srevenue was from software services only (Page 29, 33 of the Convenience Compilation). c. Brand: Infosys, a market leader, should be excluded from the list of comparables due to its well-established brand, substantial R&D, and high marketing expenses(Page 34, 36 and 41 of the Convenience Compilation).

In support of the above submission for exclusion of Infosys, the Ld. Counsel placed reliance on the decisions of the Hon'ble Delhi High Court in the cases of Agnity India Technologies (I) Ltd. [2013] 36 taxmann.com 289 and Microsofi India (R& D) (P) Ltd. [2023] 153 taxmann.com 199, where Infosys was excluded on similar grounds. The Ld. Counsel further drew our

The Ld. CIT-DR, on the issue of exclusion of Infosys, submitted that high turnover or brand value could not be the reason for exclusion of this comparable as the assessee had failed to demonstrate how the brand name, high R&D expenditure had impacted the margins of Infosys Tech. The Ld. CIT-DR, emphasizing the Rule 10(B)(3) of Income-tax Rules, argued that an uncontrolled transaction should be comparable if the differences between the comparables did not have any material impact on the profit margins. To buttress his submission, the Ld. CIT-DR relied upon the decision of the Hon'ble Delhi High Court in the case ofChryscapital Investment Advisors (India) (P) Ltd. [2015] 56 taxmann.com 417 where it was observed that huge profit or huge turnover, ipso facto did not lead to its exclusion. Further, he also placed reliance on the decisions of the ITAT in the cases of Willis Processing Services (I) (P.) Ltd. [2013] 30 taxmann.com 350 (Mum.), Deloitte Consulting India (P.) Ltd. [2011] 12 taxmann.com 500 (Hyd.) and Capgemini India (P.) Ltd. [2013] 33 taxmann.com (Mum.) to submit that the orders of lower authorities were justified in this regard.

On the other hand, the Ld. Counsel; in rebuttal, submitted that the Ld. CIT-DR had misconstrued the Rule 10(B)(3) of the Income-tax Rules as this Rule did not impose an onus upon an assessee to show that a difference CO No.02/Del/2015 CO No.03/Del/2013 had a material bearing on the margins. The language used in this Rule "likely to have a material bearing", clearly meant thereby that as long as there was a difference between the comparable, which likely might have a material bearing on the margins, such comparable would have to be excluded. The Ld. Counsel further submitted that the decision of Hon'ble Delhi High Court in Chryscapital (supra) had been subsequently considered by the Hon'ble Delhi High Court in the cases of Sanvih Info Group (P.) Ltd. [2019] 108 taxmann.com 655 andSymphony Marketing Solutions India (P) Ltd. [2020] 113 taxmann.com 77, wherein the Hon'ble High Court had clarified that giant corporations like Infosys could not be compared to a company like the assessee. In response to the Tribunal decisions relied upon by the Ld. CIT-DR, the Ld. Counsel submitted that these decisions did not reflect the correct position of law and had been rendered prior to the decision of the Hon'ble Delhi High Court in the case of Agnity India Technologies (P) Ltd. (supra). Hence, these decisions had no binding precedent here.

We have heard both parties and have perused the material available on the record. After careful consideration of material on the record and facts in entirety, we find force in the argument of the Ld. Counsel that this issue is squarely covered by the decision of the Hon'ble Delhi High Court in the cases of Agnity India Technologies (P) Ltd. (supra), Sanvih Info Group (P.) Ltd. (supra) and Symphony Marketing Solutions India (P) Ltd. (supra). We therefore, following the reasoning given by the Hon'ble Delhi High Court in CO No.02/Del/2015 CO No.03/Del/2013 the cases of Agnity India Technologies (P) Ltd. (supra), Sanvih Info Group (P.) Ltd. (supra) and Symphony Marketing Solutions India (P) Ltd. (supra), hold that the Ld. CIT(A) is not justified in retaining/including Infosys Technologies Ltd. in the final set of comparables particularly when the Ld. CIT(A), himself has excluded it from the final set of comparables in AY 2008- 09 on similar grounds. We therefore, direct the AO/TPO to exclude Infosys Technologies Ltd. from the final set of comparables. ii) Wipro Ltd. (segmental) 25. The Ld. Counsel sought exclusion of Wipro Ltd. (segmental) on the reasoning; that it had (i) High turnover, (ii) large scale operations, (iii) Brand value, (iv) Significant R& D expenses and (v) intellectual property rights (Page 65 and 70 of the Convenience Compilation). The Ld. Counsel, in principle, reiterated almost all arguments/submissions/contentions as mentioned above in the case ofInfosys Tech. The Ld. Counsel drew our attention to the decision of the Hon'ble Bombay High Court in the case of Pentair Water India (P.) Ltd. [2016] 69 taxmann.com 180; wherein the Hon'ble High Court had directed for exclusion of Wipro Ltd. on the ground of high turnover. The Ld. Counsel also relied upon the Ld. CIT(A)'s order in assessee'sown case for the AY 2008-09 wherein the Ld. CIT(A) had excluded Wipro Ltd.

We have heard both parties and have perused the material available on the record. The assessee is a captive service provider to one and only one CO No.02/Del/2015 CO No.03/Del/2013 AE. Its scale of operation is limited to one party and it has no brand value of its own in the market. The reasoning for exclusion Wipro Ltd. given by the Hon'ble Bombay High Court in the case of Pentair Water India (P.) Ltd. (supra) and the reasoning given above for exclusion Infosys, are held applicable in this case also. After careful consideration of material on the record and facts in entirety, we find force in the argument of the Ld. Counsel that Wipro Ltd. (segmental)is not a suitable comparable on the reasoningthat Wipro Ltd. (segmental)turnover along with scale of operations is very high as compared to the assessee and Wipro Ltd. (segmental)has its own brand value and intellectual property rights and R & D. In view of the above, we are of the considered opinion that these distinguishable parameters make it unsuitable comparable.We thus, hold that the Ld. CIT(A) is not justified in retaining/including Wipro Ltd. (segmental)in the final set of comparables particularly when the Ld. CIT(A), himself has excluded it from the final set of comparables in AY 2008-09 on similar grounds. We therefore, direct the AO/TPO to excludeWipro Ltd. (segmental)from the final set of comparables. iii) Avani Cimcon Technologies Ltd.

The Ld. Counsel sought exclusion of this comparable on the reasoning that this Company was functionally different as it was engaged in provision of product development and owned unique products like "Dxchange", "Avani Cimcon Technologies". "Marketing Automation suite CARMA" (Page 43-44 of the Convenience Compilation), whereas the assessee was engaged in CO No.02/Del/2015 CO No.03/Del/2013 providing software development services. Further, the Ld. Counsel submitted that the annual report of this Comparable company did not contain segmental details relating to the operating income from IT services and sale of software products and therefore, in absence of such segmental financials, it could not be considered as a suitable comparable. The Ld. Counsel placed reliance on the decision of the Hon'ble Delhi High Court in the case of Alcatel Lucent India Ltd. [2024] 167 taxmann.com 595, wherein it had been held that Avani Cimcon, being engaged in the business of software products, was not a suitable comparable to an assessee engaged in the provision of software development services, particularly in the absence of segmental data. The Ld. Counsel submitted that the present case was squarely covered by decision on the issue of exclusion of Avani Cimconfrom the list of comparables. The relevant part of the decision of the Hon'ble Delhi High Court in the case of Alcatel (supra) reads as under: “27. It is clear from the profit and loss account of Avani that its entire income from operations was Rs. 3,54,77,523/- (which included income from its software products). In addition to this income, Avani had also earned interest on deposit with banks amounting to Rs. 7,70,376/-; subsidy of Rs. 1,06,064/-; and, profit on sale of investment of Rs. 64,343/-. Concededly, the Tribunal had not bifurcated Avani's income, segment wise. As noted, the TPO proceeded on the basis that no part of the income of Avani was from product export. However, this assumption is not supported by the information as available on the website of Avani. The information available on the website of Avani indicates that it does provide "plug and play solutions" and it has developedvarious products including products named "DXchange CARAMA, Content Management System, Business Rules Engine etc.”

We have heard both parties and have perused the material available on the record. After careful consideration of material on the record and facts in entirety, we find force in the argument of the Ld. Counsel that this issue is squarely covered by the decision of the Hon'ble Delhi High Court in the case ofAlcatel Lucent India Ltd. (supra). We therefore, following the reasoning given by the Hon'ble Delhi High Court in the case ofAlcatel Lucent India Ltd. (supra), hold that the Ld. CIT(A) is not justified in retaining/including Avani Cimcon Technologies Ltd.in the final set of comparables. We therefore, direct the AO/TPO to excludeAvani Cimcon Technologies Ltd.from the final set of comparables. (iv) Celestial Labs Ltd.

The Ld. Counsel sought exclusion of this company on the reasoning that the Ld. CIT(A) had rejected this comparable in the assessee's own case for the AY 2008-09 on the ground of functional dissimilarity. The relevant finding of CIT(A) reads as under: "Celestial Bio Labs is engaged in research in Life sciences which is different from Assessee’sbusiness. This company is not in field of software. It is functionally different from the appellant. Accordingly, the AO/TPO is directed to exclude it from the final set of comparables."

Taking us through the functional profile of the company, the Ld. Counsel submitted that Celestial Labs was engaged in the field of IT/bio informatics, biotechnology, consultancy work and offered enterprise resource CO No.02/Del/2015 CO No.03/Del/2013 planning solutions, data warehousing, business intelligence solutions and bio services like clinical data management, gene sequence analysis, molecular modeling, design and development of drug molecules dedicated to health sector to government, institution pharma and biotech companies, hospitals and medical centers (Page 46 of the Convenience Compilation). Further, the Ld. Counsel submitted that Celestial Labs was engaged in diversified activities in life sciences business and its segmental financials were not available in the public domain (Page 52 of the Convenience Compilation). Thus, it was contended that this Companywas not a suitable comparable.Further, the Ld. Counsel submitted that this Company, engaged in the significant R & D activities,had significant intangibles in the form of patents (Page 46 of the Convenience Compilation). The Ld. Counsel submitted that the annual financial report of the company revealed that the company had incurred INR 25.2million on R & D of Drug Molecule (Page 50 of the Convenience Compilation). On the other hand, it was categorically submitted that the assessee had neither undertaken any R&D activities nor owned any intellectual property to its name. in support of his arguments for exclusion of this comparable, the Ld. Counsel placed reliance on the decision of the Hon'ble P & H High Court in the case of Comverse Network Systems India Pvt. Ltd. [ITA No. 547 of 2017 (O&M), wherein the Hon'ble High Court upheld the exclusion of Celestial Labs on similar grounds; i.e. functional CO No.02/Del/2015 CO No.03/Del/2013 dissimilarity and presence of intangibles. The relevant finding of the Hon'ble High Court reads as under: “15. The counsel for the revenue relies upon the order passed by the TPO and argued that the ITAT failed to appreciate the findings and observations given by the TPO From the order of the ITAT it is clear that this Company is engaged in diverse field of bio-informatics and related fields in addition to the ERP solutions and is functionally not similar to the software development segment of the assessee. The above finding of fact has not been shown to be perverse in any manner and hence Celestial Labs Limited has rightly been excluded by the ITAT.”

The Ld. CIT-DR relied upon the Ld. TPO's order and submitted that information obtained under section 133(6) of the Act showed that the company was engaged in the business of providing software development services whose segmental financials are not available in the public domain and was therefore, a suitable comparable. The Ld. Counsel rebutted the arguments of the Ld. CIT-DR by submitting that the information obtained under section 133(6) of the Act clearly revealed that Celestial Labs itself had admitted that it had been working for developing software tools to offer services in the field of biotechnology, pharmaceutical and health care industry. The Ld. Counsel argued that the information obtained under section 133(6) of the Act, being not available in public domain, should not be considered to recast the annual financial.

We have heard both parties and have perused the material available on the record. The reasoning for exclusion ofCelestial Labs given by the Ld. CO No.02/Del/2015 CO No.03/Del/2013 CIT(A) in AY 2008-09 is basically functional dissimilarities.After careful consideration of material on the record and facts in entirety, we find force in the argument of the Ld. Counsel that Celestial Labs is not a suitable comparable on the reasoningthat there are no functional similarities and it has patent right as intellectual property and R & D. We are of considered view that the reasoning given by the Hon'ble P & H High Court in the case of Comverse Network Systems India Pvt. Ltd. [ITA No. 547 of 2017 (O&M) for exclusion of Celestial Labsis held equally applicable in this case. In view of the above, we are of the considered opinion that these distinguishable parameters make it unsuitable comparable. We thus, hold that the Ld. CIT(A) is not justified in retaining/including Celestial Labsin the final set of comparables particularly when the Ld. CIT(A), himself has excluded it from the final set of comparables in AY 2008-09 on similar grounds. We therefore, direct the AO/TPO to excludeCelestial Labs Ltd.from the final set of comparables. v) Kals Information Systems Ltd.

The Ld. Counsel has sought exclusion of this company on the ground that this company was predominantly a software product company and thus, the same was not a suitable comparable(Page 58 of the Convenience Compilation). Further, it was submitted that the financials of the company showed that this company had 2 segments; (i) Application Software Segment and (ii) Training. In the Application Software Segment, it was engaged in the CO No.02/Del/2015 CO No.03/Del/2013 business of sale of software products and services but no segmental details were available with regard to this division (Page 59 of the Convenience Compilation).The Ld. Counsel placed reliance on the decision of the Hon'ble Bombay High Court in the case of CTT PTC Software (P) Ltd. (2016) 75 taxmann.com 31, where the Hon'ble High Court, while dealing with an appeal for AY 2007-08 in the case of an assessee who was engaged in the provision of software services, had upheld the exclusion of Kals on similar grounds. On the other hand, the Ld. CIT-DR submitted that the company in its response to notice under section 133(6) of the Act had admitted that it was a pure software development service provider.The Ld. Counsel reiterated that the information obtained under section 133(6) of the Act was completely contrary to what was given in the annual report and therefore, the same required to be discarded.

We have heard both parties and have perused the material available on the record. In view of the fact that Kals Information Systems Ltd. is engaged in the business of sale of software products and services with no segmental details availablein the public domain, the reasoning given for exclusion of Kals Information Systems Ltd. in the decision of the Hon'ble Bombay High Court in the case of CTT PTC Software (P) Ltd. (supra) is held equally applicable in this case. After careful consideration of material on the record and facts in entirety, we find force in the argument of the Ld. Counsel CO No.02/Del/2015 CO No.03/Del/2013 that Kals Information Systems Ltd.is not a suitable comparable on the reasoninggiven for exclusion of Kals Information Systems Ltd. in the decision of the Hon'ble Bombay High Court in the case of CTT PTC Software (P) Ltd. (supra). In view of the above, we hold that the Ld. CIT(A) is not justified in retaining/including Kals Information Systems Ltd.in the final set of comparables. We therefore, direct the AO/TPO to excludeKals Information Systems Ltd. from the final set of comparables. ITeS segment 35. The assessee, vide its CO, has challenged inclusion of Accentia Technologies Ltd., Eclerx Services Ltd., HCL Comnet Systems & Services Ltd., Vishal Information Technologies Ltd. and Wipro Ltd. (segmental) in ITeS segment. He therefore, prayed for exclusion of these Companiesfrom the list of comparables in ITeS Segment on the following reasoning: i) Accentia Technologies Ltd.

The Ld. Counsel highlighted that this company had been rejected by Ld. CIT(A) in AY 2008-09 on the grounds of extraordinary event. Geosoft Technologies (Trivandrum) Ltd. and Iridium Technologies (India) Pvt. Ltd, two subsidiaries of the company were amalgamated into Accentia Technologies Ltd. The Company's board of directors approved the merger/amalgamation of their two subsidiary (51% owned) companies into a single legal entity, to be known as Accentia Technologies Ltd. The amalgamation was approved in December 2006. There were multiple CO No.02/Del/2015 CO No.03/Del/2013 acquisitions by the company in the relevant financial year (Page 5 of the Convenience Compilation). The Ld. Counsel submitted that the finding of the Ld. CIT(A) in its order for AY 2008-09 would equally applicable in the relevant year; AY 2007-08 as well and these extraordinary events were likely to have material bearing on the margins of the company. Therefore, it could not be considered as a comparable in terms of Income-tax Rules, 1962.

The Ld. Counsel further submitted that Accentiawas engaged in the business of receivables management and had only one segment; Healthcare Receivables Management. There was no mention about any revenue derived or profits attributable to the segment (s) considered under ITes services and therefore, this company could not be considered as a valid comparable (Page 5 and 11 of the Convenience Compilation). The Ld. Counsel drew our attention to the fact mentioned in the TPO’s order that the annual report of this company was not available and the TΡΟ’s finding was based on the information obtained under section 133(6) of the Act.

On the other hand, the Ld. CIT-DR reiterated the submission made in respect of comparables discussed in the preceding paragraphs that the extraordinary event could not be the standalone reason for discarding a comparable and the assessee had to demonstrate how the margins of the company were impacted by that extraordinary event. On the issue of functional dissimilarity, the Ld. CIT-DR relied upon the Ld. TPO's finding CO No.02/Del/2015 CO No.03/Del/2013 and the information obtained under section 133(6) of the Act; wherein it was categorically mentioned that Accentia'sITeS segment was engaged in medical transcription services, medical billing services, medical coding services and therefore, was a suitable comparable.In rebuttal, the Ld. Counsel, in addition to the above submission, relied upon the decision of Hon'ble Delhi High Court in the case of Honeywell International (supra) AY 2007-08, where the Hon'ble High Court had upheld the exclusion of this comparable on the ground of extraordinary event; amalgamation.

We have heard both parties and have perused the material available on the record. In view of the fact that Accentia is engaged in medical transcription services, medical billing services, medical coding services falling in the ITeS. However, this company is found engaged in multiple acquisition and amalgamation in the relevant year also. This comparable was considered by the ITAT in the case of Reservation Data Maintenance India Pvt.Ltd.,ITA No. 5351/Del/2017 (AY 2010-11); wherein the coordinate bench did not find any valid reason to interfere with the finding of the Ld. CIT(A) as under: “5. Heard rival submissions perused the orders of the authoritiesbelow. In so far as the Accentia Technologies Ltd. is concerned, wefind that theTribunal in the immediately preceding assessment yearexcluded this company as comparable vide order in dated 2.12.2022. It is further observed that the ld.CIT (Appeals) after considering the submissions of the assessee andthe averments of “4.2.1 I have carefully considered the submissions made by theappellant and have also considered the findings recorded bythe TPO in this regard. It is clearly evident from the annualaccounts of this company, there has been an extraordinaryactivity of amalgamation in the year under consideration. M/s.Accentia has amalgamated with M/s AsscentInfoserve. Even theauditors note that owing to amalgamation the financial results ofM/s Accentia are not comparable with its results for earlieryears. Moreover M/s Accentia is into providing KPO services andeven otherwise is not comparable with the appellant which iscarrying on BPO Activities. Ld. ITAT in case of Equant SolutionsIndia Pvt. Limited (supra) dealing with a case for Assessment Year 2010-11 has rejected use of this company as a comparable for this very reason by holding as under: "We have considered the rival contention. During the year this comparable has been gone into substantial business restructuring resulting into extraordinary circumstances during the FY 2009-10 subsidiary of Ascentia got amalgamated with this company and the figures of the business results for the year ending 31st March 2010. In this case also excluded the figures of amalgamated company and due to which the comparable has high OP by TC margin. The relevant observations of the Tribunal as recorded in para 19.2 of the order passed in the case of Excellence Data Research (P) Ltd. v. ITO 66 SOT 15(URO) (Hyd.); being relevant in this case, are reproduced below:

At the outset, the Ld. Counsel submitted that Eclerx should be excluded from the list of comparables because it was functionally different as it was engaged in providing KPO services such as data analytics, operation management services and audit reconciliation services. Further, the Ld. Counsel submitted that detailed arguments along with supporting judicial decisions taken in the case Mold-Tek (para 13, 14 & 15 of this order) would be treated his argument/submission/contention in this comparable also. On the issue of presence of intangibles/advertising & marketing expense, the CO No.02/Del/2015 CO No.03/Del/2013 Ld. DR reiterated that the assessee had not demonstrated how these have impacted the margins of Eclerx. iii) HCL Comnet Systems & Services Ltd.

The Ld. Counsel submitted that HCL Comnetwas a KPO service provider engaged in the business of providing end user computing services, managed security services, networking services and tools and process consulting services (Page 22 of the Convenience Compilation). HCL Comnetwas a full risk bearing entrepreneur and therefore, it could not be compared to the assessee, a captive service provider. In support of the arguments, the Ld. Counsel place reliance on the decision of the coordinate bench in the case of Everest Business Advisory India (P) Ltd. [2018] 89 taxmann.com 323 (Delhi Trib.) (AY 2007-08) where on identical facts, the coordinate bench had directed for exclusion of HCL Comnet. The relevant paragraph is reproduced below for reference: "52. Keeping in view the functional profile of the HCL Comnet which is into high end KPO services and by applying the principle laid down in Rampgreen Solutions (P) Ltd. (supra), it cannot be compared with taxpayer which is a captive ITES service provider. Moreover, HCL Comnet is having huge employee cost for Rs. 185.28 crores as against total turnover of the taxpayer to the tune of Rs. 5 crores.

So, in view of the matter, we order to exclude HCL Comnet from the final set of comparables for benchmarking the international transactions."

The Ld. Counsel further submitted that this company did not fulfill the conditions laid down to be an eligible comparable as it had a different financial year ending and therefore, it should be excluded from the list of comparables. The annual report of the company available in public domain showed results for the year end June 2007 (Page 22 of the Convenience Compilation) and there was no quarterly data available in the public domain which could enable the TPO to recast the financials of the company. The Ld. Counsel placed reliance on the decision of Hon'ble Delhi High Court in the case of McKinsey Knowledge Centre India Pvt. Ltd. [ITA 217/2014] where the Hon'ble High Court hadheld that comparables with different financial year ending could be selected if the quarterly data was available in public domain for reasonably extrapolation to reconstruct the financials of the company. Since the quarterly data was not available; therefore, he prayed for exclusion of the company from the list of comparables.

On the other hand, the Ld. CIT-DR submitted that the TPO gathered the data for the relevant period (01-04-2006 to 31-03-2007) under section 133(6) of the Act and therefore, the company could be said to have passed all CO No.02/Del/2015 CO No.03/Del/2013 the filters selected by the TPO.The Ld. Counsel opposed the said contention that any data gathered under section 133(6) of the Act, if contrary to the dataavailable in the public domain could not be used against the assessee and thus, this comparable was liable to be rejected.

We have heard both parties and have perused the material available on the record.KPO services are broadly classified into four kinds of services: Data Analytics and Insights: Addressing business problems across  industries and domains to empower organisations with actionable insights through cutting edge data analytics Market Research/ Business Research: Providing research services and  strategy consulting for accurate and succinct answers to the most pressing business questions Global Reporting and Performance Management: Providing efficient  reporting and performance measurement across industries to achieve operational excellence and productivity Data Management: Efficient solutions for data integration, storage,  retrieval and sharing for robust business reporting and analytics as required by various stakeholders 46. We have heard both parties and have perused the material available on the record. After careful consideration of material on the record and facts in entirety, we find force in the argument of the Ld. Counselthat Eclerx CO No.02/Del/2015 CO No.03/Del/2013 Services Ltd. and HCL Comnet Systems & Services Ltd., having functional dissimilarities being KPO are not suitable comparables. Following the reasoning given above in case of Mold-Tek and the decision of the coordinate bench in the case of Everest Business Advisory India (P) Ltd. (supra) we are of the considered view that Eclerx Services Ltd. and HCL Comnet Systems & Services Ltd. are not suitable comparables as they have not functional similarities. In view of the above, we are of the considered opinion that these distinguishable parameters make Eclerx Services Ltd. and HCL Comnet Systems & Services Ltd. unsuitable comparables. We thus, hold that the Ld. CIT(A) is not justified in retaining/including Eclerx Services Ltd. and HCL Comnet Systems & Services Ltd.in the final set of comparables. We therefore, direct the AO/TPO to excludeEclerx Services Ltd. and HCL Comnet Systems & Services Ltd.from the final set of comparables. iv) Vishal Information Technologies Ltd.

The Ld. Counsel submitted that Vishal Information Tech had different business model compared to the assessee as it had outsourced its ITeS functions to third-party vendors, meaning its profit margins are primarily attributable to the services provided by those vendors (Pages 24-25 of the Convenience Compilation). In contrast, the assessee was a ITeS company and it had not outsourced its services. Hence, Vishal Information Tech was not a suitable comparable. In support of this argument, the Ld. Counsel relied on the Ld. CIT(A)'s order in the assessee's own case for AY 2008-09, CO No.02/Del/2015 CO No.03/Del/2013 where the Ld. CIT(A) had excluded this company on similar ground. The Ld. DR placed reliance on Ld. TPO's findings in respect of this company.

We have heard both parties and have perused the material available on the record. After careful consideration of material on the record and facts in entirety, we do not find force in the argument of the Ld. Counsel that Vishal Information Tech. Ltd. is having any functional dissimilarities. The dissimilarities pointed out by the Ld. Counsel is only that this comparable has outsourced its ITeS, whereas the assessee not. After careful consideration of material on the record and facts in entirety, the profit margin arisen toVishal Information Tech. Ltd. should be lower being high cost of outsourced services than the assessee’s inhouse cost for similar services. However, it is not so. That is why the upward adjustment in ALP has taken place on this score.This comparable is found engaged in similar ITeS in the relevant year. In view of the above, we hold that the Ld. CIT(A) is justified in retaining/including Vishal Information Tech. Ltd.in the final set of comparables. We therefore, do not find any infirmity in the impugned order in respect of this comparable. We therefore, decline to interfere with the finding of the Ld. CIT(A) in this regard. Accordingly, Vishal Information Tech. Ltd.is held validly included in the list of final comparables. v) Wipro Ltd. (segmental)

The above finding in para 26 [SDS Segment] is held applicable mutatis mutandisin this comparable also. We therefore, direct the AO/TPO to exclude Wipro Ltd. (segmental)from the final set of comparables in this segment also. FOR AY 2008-09 51. The assessee has chosen TNMM on a segmental basis as the most appropriate method for both segments i.e. SDS and ITeS Segment and Operating Profit by Operating Cost as the profit level indicator ("PLI"), which, in principle, has been accepted by the AO/TPO for benchmarking the assessee’s international transactions. However, the TPO has added/modified comparables by taking different/modified filters. The TPO selected 19 comparables for SDS Segment and 20 for ITeS segment. For SDS Segment, the TPO took (i) 6comparables out of the Assessee's TP Study and (ii) 13 new comparables chosen by the TPO after modifying filters for selection of comparables. For ITeS Segment, the TPO took (i) 4comparables out of the Assessee's TP Study and (ii) 16 new comparables chosen by the TPO after modifying filters for selection of comparables. The facts of this case are almost similar to that of the AY 2007-08. All comparables selected by the TPO for AY 2008-09 are identical to those selected in AY 2007-08, except for CO No.02/Del/2015 CO No.03/Del/2013 one comparable: Infosys BPO Ltd. Aggrieved by the order of the AO/TPO, the assessee filed an appeal before the Ld. CIT(A), who rejected few comparables. SDS segment 52. In the SDS segment, the Revenue has challenged the exclusion of Infosys Technologies Ltd., Wipro Ltd. (seg), Celestial Biolabs, Flextronics Software Systems Ltd. and I-Gate Global Solutions Ltd., while the assessee, vide its CO, has challenged the inclusion of Avani Cimcom Technologies Ltd. and Kals Information Systems Ltd. Both Ld. Representatives were fare enough to admit that except Flextronics Software Systems Ltd. and I-Gate Global Solutions Ltd., the disputed comparables in AY 2008-09 were identical to those considered in AY 2007-08 and thus, they requested to consider theirabove-mentioned arguments/submissions/contentions of AY 2007-08 in AY 2008-09 as well.

We have heard both parties. The above findings in the comparables; namely, Infosys Technologies Ltd., Wipro Ltd. (seg), Celestial Biolabs, Avani Cimcom Technologies Ltd. and Kals Information Systems Ltd. are held applicable mutatis mutandis in these comparables in AY 2008-09also. We therefore, direct the AO/TPO to excludethese comparable from the final set of comparables accordingly.

On the other hand, the Ld. Counselsubmitted that this Company was not functionally comparable because its 11% of operating revenue was from sale of products. It was submitted that the "design services" provided by Flextronics were not comparable to the software services provided by the assessee and the software development was one sub-segment of the "services portfolio" of Flextronics. The financial information for Flextronics was available in the public domain for a 9-month period from 30th June, 2006 to 31st March, 2007. However, the TPO, after obtaining financials for remaining period under section 133(6) of the Act, recasted the fianacials for 12 months. Flextronics had merged with Aricent Technologies Holdings Limited with effect from 01 April 2007. Hence, the re-organisation of Flextronics, in view of this extra-ordinary activity, should not be considered as a comparable. ii) I-Gate Global Solutions Ltd.

The Ld. CIT-DR supported the order of the TPO.

The Ld. Counsel, on the other hand, submitted that this Company was not functionally comparable because the subsidiary company of the IGATE CO No.02/Del/2015 CO No.03/Del/2013 got amalgamated with iGATE during FY 2007-08, which was an extra ordinary event. The business of this Company was on large scale with diversity and geographical dispersion of customers, whereas the assessee, a captive user with limited services.

We have heard both parties and have perused the material available on the record. After careful consideration of material on the record and facts in entirety, we find force in the argument of the Ld. Counsel that Flextronics Software Systems Ltd. and I-Gate Global Solutions Ltd. having functional dissimilarities are not suitable comparables. Further, these comparableshad undergone the extraordinary event of amalgamation during the relevant year, though the impact of this extraordinary event was not possible to be measured/quantified for adjustment. This amalgamation process makes Flextronics Software Systems Ltd. and I-Gate Global Solutions Ltd. unsuitable comparables. In view of the above, we hold that the Ld. CIT(A) is justified in excluding Flextronics Software Systems Ltd. and I-Gate Global Solutions Ltd. from the final set of comparables. Following the above findings in the cases of comparables under gone amalgamation, we do not find any infirmity in the impugned order in respect of these comparables. We therefore, decline to interfere with the finding of the Ld. CIT(A) in this regard. Accordingly, Flextronics Software Systems Ltd. and I-Gate Global Solutions Ltd. are held validly excluded from the list of final comparables.

We have heard both parties. The above findings in the comparables; namely, Accentia Technologies Ltd., Coral Hub Ltd. (earlier known as Vishal Information Technologies Ltd.), and Mold-Tek Technologies Limited, Eclerx Services Ltd., HCL Comnet Systems & Services Ltd.and Wipro Ltd. (segmental) are held applicable mutatis mutandis in these comparables in AY 2008-09 also. We therefore, direct the AO/TPO to excludethese comparable from the final set of comparables accordingly. i) Infosys BPO Ltd. (Ground No. 1 of CO No. 2/Del/2015 AY 2008-09) 62. Both Ld. Representative reiterated their respective submissions made in relation to Wipro Ltd. and Infosys Technologies Ltd.

We have heard both parties. The above findings in the comparables; namely, Infosys Technologies Ltd. and Wipro Ltd. (segmental) are held applicable mutatis mutandis in this comparable of AY 2008-09 also. We therefore, direct the AO/TPO to excludeInfosys BPO Ltd. from the final set of comparables accordingly.

In the result, both appeals of the revenue stand dismissed and both Cos are allowed as above. Order pronounced in open Court on 09 May, 2025