HSBC PROFESSIONAL SERVICES (I) P. LTD,MUMBAI vs DCIT RG 8(2), MUMBAI

Income Tax Appellate Tribunal, MUMBAI BENCH “K” MUMBAI

Before: SHRI ABY T VARKEY & SHRI OM PRAKASH KANT

For Appellant: Mr. Niraj Sheth, AR

For Respondent: Mr. V.K. Agarwal, DR

Hearing: 01/07/2022Pronounced: 13/09/2022

PER OM PRAKASH KANT, AM KANT, AM These cross appeals by the These cross appeals by the Revenue and the assessee have and the assessee have been preferred against the order dated 24/10/2011 passed by the been preferred against the order dated 24/10/2011 passed by the been preferred against the order dated 24/10/2011 passed by the Ld. Commissioner of Income Commissioner of Income-tax (Appeals)-15, Mumbai [in short 15, Mumbai [in short ‘the Ld. CIT(A)’] for assessment year 2006 ] for assessment year 2006-07.

The grounds raised by the The grounds raised by the Revenue in its appeal are in its appeal are reproduced as under: reproduced as under:

"On the facts and in the circumstances of the case and in law, "On the facts and in the circumstances of the case and in law, "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Transfer Pricing the Ld. CIT(A) erred in deleting the Transfer Pricing the Ld. CIT(A) erred in deleting the Transfer Pricing Adjustment of Rs. 1,06,65,264/ Adjustment of Rs. 1,06,65,264/- made u/s. 92CA(3) of the Act, made u/s. 92CA(3) of the Act, without appreciating the facts of the case". out appreciating the facts of the case". 2. On the facts and in the circumstances of the case and in law, the On the facts and in the circumstances of the case and in law, the On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the benefit of Ld. CIT(A) erred in allowing the benefit of -5% relief to the 5% relief to the assessee, without appreciating the fact that no standard assessee, without appreciating the fact that no standard assessee, without appreciating the fact that no standard deduction of 5% to the deduction of 5% to the assessee is envisaged under section assessee is envisaged under section 92C(2) of the Act". 92C(2) of the Act". 3. The appellant prays that the order of the Ld. CIT(A) on the The appellant prays that the order of the Ld. CIT(A) on the The appellant prays that the order of the Ld. CIT(A) on the above ground be set aside and that of the AO be restored". above ground be set aside and that of the AO be restored". above ground be set aside and that of the AO be restored".

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The grounds raised by the assessee in its appeal are grounds raised by the assessee in its appeal are grounds raised by the assessee in its appeal are

reproduced as under: reproduced as under:

The learned Commissioner of Income learned Commissioner of Income-tax (Appeals) tax (Appeals)-15, Mumbai ('CIT Mumbai ('CIT-A') erred on facts and in law in allowing only A') erred on facts and in law in allowing only partial relief in relation to the transfer pricing adjustment partial relief in relation to the transfer pricing adjustment partial relief in relation to the transfer pricing adjustment made by Assessing Officer /Transfer pricing officer ('AO/TPO) made by Assessing Officer /Transfer pricing officer ('AO/TPO) made by Assessing Officer /Transfer pricing officer ('AO/TPO) despite the fact that t despite the fact that the AO and the TPO have incorrectly he AO and the TPO have incorrectly disregarded the benchmarking analysis and the resultant disregarded the benchmarking analysis and the resultant disregarded the benchmarking analysis and the resultant comparable companies identified by the Appellant as part of comparable companies identified by the Appellant as part of comparable companies identified by the Appellant as part of its transfer pricing report (TP Report') maintained on a its transfer pricing report (TP Report') maintained on a its transfer pricing report (TP Report') maintained on a contemporaneous basis as per Section 92D of the Act read contemporaneous basis as per Section 92D of the contemporaneous basis as per Section 92D of the with Rule 10D of the Rules without assigning any cogent with Rule 10D of the Rules without assigning any cogent with Rule 10D of the Rules without assigning any cogent reasons thereof. reasons thereof. 2. The learned CIT The learned CIT-A erred on facts and in law in upholding the A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO/TPO erred in order of the AO/TPO despite the fact that the AO/TPO erred in order of the AO/TPO despite the fact that the AO/TPO erred in making transfer pricing adjustment by incorrectly invoking making transfer pricing adjustment by incorrectly i making transfer pricing adjustment by incorrectly i the provisions of Section 92C(3)(a) of the Act. the provisions of Section 92C(3)(a) of the Act. 3. The learned CIT The learned CIT-A erred on facts and in law in upholding the A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO order of the AO/TPO despite the fact that the AO and the TPO order of the AO/TPO despite the fact that the AO and the TPO have conducted a fresh benchmarking analysis using (i) have conducted a fresh benchmarking analysis using (i) have conducted a fresh benchmarking analysis using (i) inappropriate search fi inappropriate search filters; (ii) non contemporaneous data, lters; (ii) non contemporaneous data, (iii) functionally dissimilar companies as comparables; and (iii) functionally dissimilar companies as comparables; and (iii) functionally dissimilar companies as comparables; and significantly substituting the Appellant's analysis with a significantly substituting the Appellant's analysis with a significantly substituting the Appellant's analysis with a standard set of comparables for the Information Technology standard set of comparables for the Information Technology standard set of comparables for the Information Technology Enabled Service (ITeS') segment which is Enabled Service (ITeS') segment which is adopted by the adopted by the Income Income-tax department for assessment year 2006 tax department for assessment year 2006-07 in an arbitrary manner and with a pre arbitrary manner and with a pre-determined mind set of determined mind set of

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making a transfer pricing adjustment. Thus, the Appellant making a transfer pricing adjustment. Thus, the Appellant making a transfer pricing adjustment. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the prays that the fresh benchmarking analysis conducted by the prays that the fresh benchmarking analysis conducted by the learned TPO learned TPO is liable to be quashed as the same is contrary to is liable to be quashed as the same is contrary to the provisions of law and has resulted in selection of the provisions of law and has resulted in selection of the provisions of law and has resulted in selection of companies suffering from quantitative and qualitative companies suffering from quantitative and qualitative companies suffering from quantitative and qualitative dissimilarities. dissimilarities. 4. The learned CIT The learned CIT-A erred on facts and in law in upholding the A erred on facts and in law in upholding the order of the AO/T order of the AO/TPO despite the fact that the AO and TPO PO despite the fact that the AO and TPO have rejected the use of data for two preceding financial years have rejected the use of data for two preceding financial years have rejected the use of data for two preceding financial years (viz. FY 2004 (viz. FY 2004-05 and FY 2003-04) in addition to the previous 04) in addition to the previous year i.c. 2005 year i.c. 2005-06 as permitted under the provisions of Rule 06 as permitted under the provisions of Rule 10D(4) of the Rules as elaborat 10D(4) of the Rules as elaborated in the TP Report. ed in the TP Report. 5. The learned CIT The learned CIT-A erred on facts and in law in upholding the A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO order of the AO/TPO despite the fact that the AO and the TPO order of the AO/TPO despite the fact that the AO and the TPO have used secret comparable companies by considering have used secret comparable companies by considering have used secret comparable companies by considering companies for which data was not available in public domain companies for which data was not available in public domain companies for which data was not available in public domain at the time of preparation of transfer pricing study report and at the time of preparation of transfer pricing study report and at the time of preparation of transfer pricing study report and subsequently invoking the powers given under Section 133(6) subsequently invoking the powers given under Section 133(6) subsequently invoking the powers given under Section 133(6) of the Act for gathering data not available in the public of the Act for gathering data not available in the public of the Act for gathering data not available in the public domain and thereafter using such data for benchmarking domain and thereafter using such data for benchmarking domain and thereafter using such data for benchmarking international trans international transactions of the Appellant. The exercise actions of the Appellant. The exercise undertaken by the TPO under Section 133(6) of the Act is undertaken by the TPO under Section 133(6) of the Act is undertaken by the TPO under Section 133(6) of the Act is selective and arbitrary and hence should be outrightly selective and arbitrary and hence should be outrightly selective and arbitrary and hence should be outrightly rejected. rejected. 6. The learned CIT The learned CIT-A erred on facts and in law in upholding the A erred on facts and in law in upholding the order of the AO/TPO despite the fa order of the AO/TPO despite the fact that the AO and the TPO ct that the AO and the TPO have determined the arm's length price based on data which have determined the arm's length price based on data which have determined the arm's length price based on data which was not available as on the specified date [as defined in was not available as on the specified date [as defined in was not available as on the specified date [as defined in Section 921(iv) of the Act read with Rule 10B(4) of the Rules). Section 921(iv) of the Act read with Rule 10B(4) of the Rules). Section 921(iv) of the Act read with Rule 10B(4) of the Rules).

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The learned CIT The learned CIT-A erred on facts and in law in upholding the pholding the order of the AO/TPO despite the fact that the AO and the TPO order of the AO/TPO despite the fact that the AO and the TPO order of the AO/TPO despite the fact that the AO and the TPO did not allow any adjustments as warranted under Rule did not allow any adjustments as warranted under Rule did not allow any adjustments as warranted under Rule 10B(1)(e)(iii) of the Rules to account for difference between 10B(1)(e)(iii) of the Rules to account for difference between 10B(1)(e)(iii) of the Rules to account for difference between international transactions and the alleged comparable international transactions and the alleged comparable international transactions and the alleged comparable uncontrolled uncontrolled transactions selected by the learned AO/TPO. transactions selected by the learned AO/TPO. The Appellant prays that the additions to the appellant's The Appellant prays that the additions to the appellant's The Appellant prays that the additions to the appellant's income made in relation to transfer pricing matters by income made in relation to transfer pricing matters by income made in relation to transfer pricing matters by the AO/ TPO and upheld by the Hon'ble CIT(A) be deleted. the AO/ TPO and upheld by the Hon'ble CIT(A) be deleted. the AO/ TPO and upheld by the Hon'ble CIT(A) be deleted. Levy of Interest under Section 234B an Levy of Interest under Section 234B and 234C of the Act d 234C of the Act 8. On the facts and in the circumstances of the case and in law, On the facts and in the circumstances of the case and in law, On the facts and in the circumstances of the case and in law, the learned AO erred in levying interest under section 234B the learned AO erred in levying interest under section 234B the learned AO erred in levying interest under section 234B and 234C of the Act. The Appellant prays that the AO be and 234C of the Act. The Appellant prays that the AO be and 234C of the Act. The Appellant prays that the AO be directed to delete the interest under the Act. directed to delete the interest under the Act. 4. At the outset, we may like to mention that the then set, we may like to mention that the then set, we may like to mention that the then Assessing Officer of the case vide vide letter dated 08/02/2021 intimated letter dated 08/02/2021 intimated to the Departmental Representative Departmental Representative for withdrawal of the appeal in view for withdrawal of the appeal in view of the tax effect involved being below the limit prescribed by the of the tax effect involved being below the limit prescribed by the of the tax effect involved being below the limit prescribed by the Central Board of Direct Taxes(CBDT) al Board of Direct Taxes(CBDT) vide Circular Circular No. 17 of 2019. The said intimation duly forwarded by the concerned Range The said intimation duly forwarded by the concerned Range The said intimation duly forwarded by the concerned Range Officer i.e. Additional Commissioner of Income i.e. Additional Commissioner of Income-tax, is placed on record. The tax, is placed on record. The Ld. Departmental Representative Departmental Representative also agreed that tax effect agreed that tax effect involved

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in ground raised by the ground raised by the Revenue is below the limit prescribed by the is below the limit prescribed by the CBDT. In view of petition of the T. In view of petition of the Ld. Assessing Officer Assessing Officer for withdrawing the appeal, the appeal of the withdrawing the appeal, the appeal of the Revenue Revenue is dismissed as withdrawn.

As far as appeal of the assessee is co As far as appeal of the assessee is concerned, before us the ncerned, before us the Ld. counsel of the assessee only challenged inclusion/exclusion of of the assessee only challenged inclusion/exclusion of of the assessee only challenged inclusion/exclusion of certain comparables in the final list of the comparables sustained by certain comparables in the final list of the comparables sustained by certain comparables in the final list of the comparables sustained by the Ld. CIT(A). The assessee has also filed additional ground of The assessee has also filed additional ground of The assessee has also filed additional ground of appeal challenging the appeal challenging the rejection of certain comparables by the rejection of certain comparables by the AO/TPO, which is reproduced as under: AO/TPO, which is reproduced as under:

The Ld. CIT(A) erred on the facts in upholding the order of the The Ld. CIT(A) erred on the facts in upholding the order of the The Ld. CIT(A) erred on the facts in upholding the order of the AO/TPO in rejecting functionally comparable companies AO/TPO in rejecting functionally comparable companies AO/TPO in rejecting functionally comparable companies selected by the Appellant in its transfer pricing report. selected by the Appellant in its transfer pricing report. selected by the Appellant in its transfer pricing report. 6. We have heard parties on the issue of admissibility of the have heard parties on the issue of admissibility of the have heard parties on the issue of admissibility of the additional ground. In view of settled principle laid down by the additional ground. In view of settled principle laid down by the additional ground. In view of settled principle laid down by the Hon’ble Supreme Court in the case of Hon’ble Supreme Court in the case of CIT Vs NTPC CIT Vs NTPC 229 ITR 383 (SC), the additional ground raised by the assessee is admitted as , the additional ground raised by the assessee is admitted as , the additional ground raised by the assessee is admitted as

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issues involved being of legal nature and being of legal nature and no investigation of fresh no investigation of fresh facts is required.

The brief facts relevant for the The brief facts relevant for the adjudication of the issue in dispute are that the assessee company M/s HSBC the assessee company M/s HSBC Professional the assessee company M/s HSBC Services (India) Private Limited is incorpora (India) Private Limited is incorporated in India and 98% of ted in India and 98% of the shareholding is held by HSBC holdings BV ing is held by HSBC holdings BV, Netherlands and Netherlands and balance two percent is held by Hong Kong and Shanghai banking balance two percent is held by Hong Kong and Shanghai banking balance two percent is held by Hong Kong and Shanghai banking Corp Ltd., India. The assessee company is engaged in providing , India. The assessee company is engaged in providing , India. The assessee company is engaged in providing personals to various entities of the HSBC gro personals to various entities of the HSBC group for conducting audit up for conducting audit services.

7.1 For the year under consideration, the assessee filed its return For the year under consideration, the assessee filed its return For the year under consideration, the assessee filed its return of income on 17/11/2006 declaring total income of of income on 17/11/2006 declaring total income of of income on 17/11/2006 declaring total income of ₹1,02,39,397/-. The return of income filed by the assessee was selected for scrutiny The return of income filed by the assessee was selected for scrutiny The return of income filed by the assessee was selected for scrutiny assessment any statutory notices under the assessment any statutory notices under the Income-tax tax Act, 1961 (in short ‘the Act’) were issued and complied with. In view of ) were issued and complied with. In view of ) were issued and complied with. In view of international transactions carried out by the assesse international transactions carried out by the assesse international transactions carried out by the assessee with its

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Associated Enterprises Associated Enterprises, the Ld. Assessing Officer referred the matter referred the matter of determination of arm of determination of arm’s length price of the international s length price of the international transactions to the Ld. Ld. Transfer Pricing Officer (TPO). (TPO). On perusal of the transfer pricing the transfer pricing study submitted by the assessee ssessee, the Ld. TPO noticed certain international transaction international transactions carried out by the s carried out by the assessee, which are reproduced in para 4 of his order dated , which are reproduced in para 4 of his order dated , which are reproduced in para 4 of his order dated 21/10/2009. For ready reference, summary of said international 21/10/2009. For ready reference, summary of said international 21/10/2009. For ready reference, summary of said international transactions is extracted as under: transactions is extracted as under:

Sr. No. Nature of Transaction of Transaction Amount (₹) Method used 1. Provision Provision of of support support services services to to 9,44,70,575/- TNMM Associated Enterprises Associated Enterprises 2. Interest paid on Overdraft facilities Interest paid on Overdraft facilities 1,38,522/- CUP 3. Interest paid on unsecured loans Interest paid on unsecured loans 19,56,644/- CUP 4. Payment of Rent and Payment of Rent and Utility charges 33,40,152/- TNMM 5. Payment on account of secondee salaried Payment on account of secondee salaried 82,90,036/- TNMM and other costs and other costs 6. Payment in respect of car provided to Payment in respect of car provided to 1,87,340/- TNMM employee 7. Payment in respect of human resource Payment in respect of human resource 7,18,141/- TNMM cost shared 8. Payment in respect of accommodation Payment in respect of accommodation 24,31,141/- TNMM provided to the Employee & Depreciation provided to the Employee & Depreciation of Furniture provided of Furniture provided 11,15,33,344/- 7.2 The Ld. TPO further noted in para five of his order that the TPO further noted in para five of his order that the TPO further noted in para five of his order that the assessee in its transfer pricing study selected Transac assessee in its transfer pricing study selected Transac assessee in its transfer pricing study selected Transactional Net

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Margin Method (TNMM) a (TNMM) as the most appropriate method s the most appropriate method for benchmarking international transactions. The benchmarking international transactions. The Ld. TPO has noted the TPO has noted the admission of the assessee that admission of the assessee that no independent comparable independent comparable companies were identified in search of the companies were identified in search of the companies were identified in search of the “Prowess” and “capitaline” database, which rendered services identical to that of database, which rendered services identical to that of database, which rendered services identical to that of the assessee and therefore the assessee broadened its search the assessee and therefore the assessee broadened its search the assessee and therefore the assessee broadened its search criteria so as to include companies that are engaged in processing criteria so as to include companies that are engaged in processing criteria so as to include companies that are engaged in processing jobs [i.e. Information Technology Information Technology (IT) enabled/Business Process Business Process Outsourcing services services (BPO)] as broadly comparable to the functions (BPO)] as broadly comparable to the functions and risk profile of the assessee. The assessee selected 11 companies and risk profile of the assessee. The assessee selected 11 companies and risk profile of the assessee. The assessee selected 11 companies as comparables and as comparables and arithmetic mean of their weighted aver mean of their weighted average of profit level indicator ( profit level indicator (operating profit/total cost) was cost) was worked out to 11.45%. The list of comparables selected by the assessee has been The list of comparables selected by the assessee has been The list of comparables selected by the assessee has been reproduced by the Ld. TPO in para five of his order Ld. TPO in para five of his order. For ready Ld. TPO in para five of his order reference, the said list of comparables is extracted as under : list of comparables is extracted as under : list of comparables is extracted as under :

Sl. No. Name of the Company Wtd. Avg. 1. Ask Me Info Ltd. Info Ltd. -1.10

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MCS Ltd. 6.00 3. CMC Ltd. 6.37 4. C.S. Software Enterprise Ltd. C.S. Software Enterprise Ltd. 11.15 5. Ace Software Enterprises Ltd. Ace Software Enterprises Ltd. 11.93 6. Mhasis BFL Ltd. Mhasis BFL Ltd. 12.36 7. Tata Share Registry Ltd. Tata Share Registry Ltd. 13.02 8. HCL Technologies HCL Technologies 13.06 9. Allsec Technologies Ltd. Allsec Technologies Ltd. 13.45 10. Spanco Telesystems and Solutions Ltd. Telesystems and Solutions Ltd. 19.73 11. Datamatics Technologies Ltd. Datamatics Technologies Ltd. 19.97 Arithmetic Mean 11.45 7.3 It was submitted by the assessee before the It was submitted by the assessee before the Ld. Ld. TPO that three years weighted average of PLI years weighted average of PLI of assessee being more than the being more than the arithmetic mean of the PLI of the comparables, the international mean of the PLI of the comparables, the international mean of the PLI of the comparables, the international transactions carried out by the assessee were at arm’s length. transactions carried out by the assessee were at arm’s length. transactions carried out by the assessee were at arm’s length.

7.4 The Ld. TPO accepted search carried for ITes industry accepted search carried for ITes industry accepted search carried for ITes industry for benchmarking the international transactions of the assessee benchmarking the international transactions of the assessee benchmarking the international transactions of the assessee but he rejected the weighted average of multiple year data adopted by the rejected the weighted average of multiple year data adopted by the rejected the weighted average of multiple year data adopted by the assessee for working out profit level indicator. The assessee for working out profit level indicator. The Ld. Ld. TPO applied the current year data for computing profit level indicator of the the current year data for computing profit level indicator of the the current year data for computing profit level indicator of the assessee as well as the comparable companies. The assessee as well as the comparable companies. The assessee as well as the comparable companies. The Ld. TPO also applied filters of export turnover more than 25% and related party applied filters of export turnover more than 25% and related party applied filters of export turnover more than 25% and related party transactions (RPT) less than 25% for selecting comparables engaged transactions (RPT) less than 25% for selecting comparables engaged transactions (RPT) less than 25% for selecting comparables engaged

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in the ITes/BPO industry. Accordingly, the in the ITes/BPO industry. Accordingly, the Ld. TPO accepted only TPO accepted only

three comparables chosen by the assessee namely chosen by the assessee namely ‘Allsec

Technologies Ltd.’, ‘Ace software exports Ace software exports’ and ‘Spanco Spanco Telemetry

Systems and solutions Ltd and solutions Ltd’. The Ld. TPO himself carried out TPO himself carried out search

of the database(s) and came out with a fresh list of comparables. and came out with a fresh list of comparables. and came out with a fresh list of comparables.

After considering objections of the assessee, the After considering objections of the assessee, the Ld. Ld. TPO made a

final list of comparables and final list of comparables and arithmetic mean of of their PLI was

worked out to 24%. The list of the comparables . The list of the comparables, objection of the , objection of the

assessee and remarks of the TPO, reproduced in para 5.6.2 of the assessee and remarks of the TPO, reproduced in para 5.6.2 of the assessee and remarks of the TPO, reproduced in para 5.6.2 of the Ld.

TPO, is extracted as under: TPO, is extracted as under:

Sl. No. Company Name Name Objection Remark 1. Ace Software Exports Ltd. Ace Software Exports Ltd. Accepted 2. Allsec Technologies Ltd. Allsec Technologies Ltd. Accepted 3. Apex Knowledge Solutions Pvt. Ltd. Apex Knowledge Solutions Pvt. Ltd. It is into software In response to notice u/s In response to notice u/s development 133(6), 133(6), the the company company categorically categorically stated stated that that they are into IT enabled they are into IT enabled services. It also qualifies all services. It also qualifies all the filters applied the TPO. the filters applied the TPO. The same is considered as a The same is considered as a comparable. comparable. 4. Asit C Mehta Financial Services Ltd. ial Services Ltd. Annual report uses word It is mainly engaged in ITES, It is mainly engaged in ITES, (Earlier known as Nucleus Netsoft Nucleus Netsoft ITES and software software may be a minor software may be a minor & GIS (India) Ltd) development, therefore not part, for this reason only the part, for this reason only the acceptable main segment is named as main segment is named as ITES by the company in its ITES by the company in its Annual Report. Ann Notice u/s 133(6) was 5. Cosmic Global Ltd (Seg) Cosmic Global Ltd (Seg) It is functionally different Notice u/s 133(6) was with predominantly in issued. issued. As As per per the the

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transcription Information submitted by Information submitted by the company, it is into IT the company, it is into IT enabled enabled services services and and qualifies qualifies all all the the filters filters applied by the TPO. Thus applied by t the company is considered the company is considered as as a a comparable. comparable. Only Only segmental segmental data data is is considered. considered. More More importantly it is a part of importantly it is a part of the same industry the same industry with with similar functions assets and similar functions assets and risks. risks. 6. Datamatics Financial Services Ltd Datamatics Financial Services Ltd Annual Report is available Annual Report is available (Seg) for the FY 2005-06 133(6) notice was issued to subenit notice was issued to subenit segmental segmental details. details. In In response, response, the the company company submitted submitted segmental segmental financials of ITES segment. financials of ITES segment. The ITES segment qualifies The ITES segment qualifies all the filters applied by the all the filters applied by the TPO. Thus the ITES segment TPO. Thus the ITES segment of of the the company company is is considered as a comparable considere 7. Flextronics Software Systems Ltd Flextronics Software Systems Ltd It provides a variety Based on the segmental Based on the segmental (Seg) services, no segmental data information submitted by information submitted by available the company response to the company response to notice notice u/s u/s 133(6) 133(6) the the company company has has an an ITES ITES segment and this segment segment and this qualifies qualifies all all the the filters filters applied by the TPO. applied by the TPO. 8. Goldstone Goldstone Infratch Infratch Ltd Ltd (Seg) (Seg) (Earlier known as Goldstone (Earlier known as Goldstone Teleservices Ltd) 9. Maple eSolutions Ltd Income includes sale of Sale of software is only for Sale of software is only for software and runs a call ₹9000/ 9000/-. The functions, centre assets and risks in call assets and risks in call centre are akin to any other centre are akin to any other ITES ITES service, service, therefore, therefore, comparable. comparable. 10. R Systems International Ltd. R Systems International Ltd. It has related party Since Since the the related related party party transactions, therefore transactions are only 9.2%, transactions are only 9.2%, controlled the the comparable is uncontrolled uncontrolled 11. Spanco Ltd. (Seg.) (Earlier known Spanco Ltd. (Seg.) (Earlier known Accepted as Spanco Telesystems & solutions as Spanco Telesystems & solutions Ltd.) 12. Transworkss Information Services Transworkss Information Services Company is inot providing It is a subsidiary of Aditya It is a subsidiary of Aditya Ltd. CRM/KPO/Marketing? IT Birla Nuvo Ltd. Now known Birla Nuvo Ltd. Now known

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solutions services, as per as as Aditya Aditya Birla Birla Minac Minac web-site Worldwide Limited. 133(6) Worldwide Limited. 133(6) notice was issued. As per notice was issued. As per the information submitted the information submitted by the company, it qualifies by the company, it qualifies all the filters applied by the all the filters applied by the TPO including RPT filter TPO including RPT filter (241% of the revenues). (241% of the rev Thus it is considered as a Thus it is considered as a comparable. comparable. The The illustrations illustrations given given by by assessee are part of ITES assessee are part of ITES only. only. 13. Vishal Information Technologies Vishal Information Technologies It has related party In response to letter issued In response to letter issued Ltd transactions, therefore u/s 133/6), the company u/s 133/6), the uncontrolled has stated that it did as stated that it did not have any transaction with have any transaction with any associated enterprise any associated enterprise 7.5 The Ld. TPO rejected the contention of the assessee for TPO rejected the contention of the assessee for TPO rejected the contention of the assessee for

providing working capital adjustment as well as risk adjustment in providing working capital adjustment as well as risk adjustment in providing working capital adjustment as well as risk adjustment in

absence of any quantifiable data provided by the a absence of any quantifiable data provided by the assessee. ssessee.

7.6 The Ld. TPO vide vide his order dated 21/10/2009 his order dated 21/10/2009 computed the

adjustment of ₹1,06,65, 1,06,65,264/-as under:

5.8 Determination of Arms Length Price: Determination of Arms Length Price: Total Cost incurred by assessee on providing Office Services Total Cost incurred by assessee on providing Office Services (In absence of separate accounts (In absence of separate accounts (proportionate cost being taken) (₹9,64,87,892/-/107507875*94470575) /107507875*94470575) ₹8,47,86,967/- ₹ Mark Up as per comparables Mark Up as per comparables 10,51,35,839/- 10,51,35,839/ Transaction Price ₹9,44,70,575/- ₹ Adjustment ₹1,06,65,264/- ₹ 8. The Ld. Assessing Officer Assessing Officer issued draft assessment order to the issued draft assessment order to the

assessee proposing the addition for transfer pricing adjustment of assessee proposing the addition for transfer pricing adjustment of assessee proposing the addition for transfer pricing adjustment of

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₹1,06,65,264/-, against which the assessee did not chose to object , against which the assessee did not chose to object , against which the assessee did not chose to object before the Ld. Dispute Resolution Panel (DRP), and therefore after Dispute Resolution Panel (DRP), and therefore after Dispute Resolution Panel (DRP), and therefore after expiry of period prescribed for objecting before the Ld DRP i.e. one prescribed for objecting before the Ld DRP i.e. one prescribed for objecting before the Ld DRP i.e. one month, the Assessing Officer Assessing Officer passed final assessment order on passed final assessment order on 26/02/2010 making t making transfer pricing addition of ₹1,06, 1,06,65, 264/-.

Against the order of the Against the order of the Ld. Assessing Officer Assessing Officer, the assessee preferred appeal before the Ld. CIT(A) and raised various grounds preferred appeal before the Ld. CIT(A) and raised various grounds preferred appeal before the Ld. CIT(A) and raised various grounds challenging the order of the challenging the order of the Ld. Assessing Officer. As far as selection . As far as selection of comparables, is concerned the Ld. CIT(A) after considering the , is concerned the Ld. CIT(A) after considering the , is concerned the Ld. CIT(A) after considering the submission of the assessee, partly al submission of the assessee, partly allowed the appeal of the assessee lowed the appeal of the assessee and sustained following comparables having arithmetic mean and sustained following comparables having arithmetic mean and sustained following comparables having arithmetic mean of PLI at 22.32%. The list of comparables sustained by the Ld CIT(A) is as %. The list of comparables sustained by the Ld CIT(A) is as %. The list of comparables sustained by the Ld CIT(A) is as under:

Sr. No. Name of the Comparable Company Name of the Comparable Company Single year margin 1. Ace Software Exports Ace Software Exports Limited 7.72 2. Mphasis BFL Ltd Mphasis BFL Ltd 10.53 3. Allsec Technologies Limited Allsec Technologies Limited 28.51 4. Spanco Telesystems and Solutions Limited(seg) Spanco Telesystems and Solutions Limited(seg) 20.86 5. Datamatics Financial sevices Limited(seg) Datamatics Financial sevices Limited(seg) 24.99 6. Asit C Mehta Financial services(Nucleus Netsoft and Gis(India) Asit C Mehta Financial services(Nucleus Netsoft and Gis(India) 22.62

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 15 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

Limited) 7. Cosmic Global Limited (seg) Cosmic Global Limited (seg) 16.03 8. Flextronics Software Systems Limited(seg) Flextronics Software Systems Limited(seg) 14.54 9. Goldstone Infratech Limited(seg) Goldstone Infratech Limited(seg) 29.01 10. Maple eSolutions Ltd Maple eSolutions Ltd 32.66 11. R Systems International Limited R Systems International Limited 15.11 12. Transworks Information Services Limited Transworks Information Services Limited 19.56 13. Vishal Information Technologies Limited Information Technologies Limited 48.03 Arithmetical Mean Arithmetical Mean 22.32 10. The assessee before us has challenged exclusion of The assessee before us has challenged exclusion of 7 The assessee before us has challenged exclusion of comparables retained retained by the Ld. CIT(A) and inclusion of and inclusion of one comparables, which was was rejected by the ld. TPO.

11.

Before us the assessee has filed Before us the assessee has filed a paperbook in two volumes paperbook in two volumes containing pages 1 to 1107. 1 to 1107.

12.

We have heard rival submission of the parties on the issue of We have heard rival submission of the parties on the issue of We have heard rival submission of the parties on the issue of exclusion/inclusion exclusion/inclusion of comparables for determination of arms of comparables for determination of arms length price of the international transa length price of the international transactions. As far as selection of ctions. As far as selection of most appropriate method as Transactional Net Margin Method most appropriate method as Transactional Net Margin Method most appropriate method as Transactional Net Margin Method (TNMM), there is no dispute between the parties. Under the TNMM, (TNMM), there is no dispute between the parties. Under the TNMM, (TNMM), there is no dispute between the parties. Under the TNMM, for comparison of the assessee with the comparable compani for comparison of the assessee with the comparable compani for comparison of the assessee with the comparable companies, functions carried out, asse functions carried out, assets deployed and risk assumed assumed (FAR) by

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 16 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

the assessee are to be compared with the FAR analysis of the the assessee are to be compared with the FAR analysis of the the assessee are to be compared with the FAR analysis of the comparable companies. comparable companies. Therefore, before we embark upon Therefore, before we embark upon adjudication of exclusion/inclusion exclusion/inclusion of comparables, it is necessary , it is necessary to refer the FAR analysis of the assessee comp to refer the FAR analysis of the assessee company, available on page any, available on page 13 to 16 of the paperbook, which is reproduced as under 13 to 16 of the paperbook, which is reproduced as under 13 to 16 of the paperbook, which is reproduced as under:

“4. Functional Analysis Functional Analysis 4.1 Functions Performed Functions Performed HPSI is responsible for providing appropriately skilled professionals to HPSI is responsible for providing appropriately skilled professionals to HPSI is responsible for providing appropriately skilled professionals to the Contracting Entity so as to enable the Contracting the Contracting Entity so as to enable the Contracting Entity to carry Entity to carry out its auditing activity. There are various departments within HSBC, out its auditing activity. There are various departments within HSBC, out its auditing activity. There are various departments within HSBC, which conduct internal audits relating to inter alia Retail, Credit, which conduct internal audits relating to inter alia Retail, Credit, which conduct internal audits relating to inter alia Retail, Credit, General, Investment Bank, Insurance, Treasury, Securities, Private General, Investment Bank, Insurance, Treasury, Securities, Private General, Investment Bank, Insurance, Treasury, Securities, Private Banking, Management Office and IT Banking, Management Office and IT systems/projects. HPSI has to recruit professionals possessing the requisite academic HPSI has to recruit professionals possessing the requisite academic HPSI has to recruit professionals possessing the requisite academic qualifications and appropriate skill qualifications and appropriate skill-sets. HPSI believes that a large sets. HPSI believes that a large portion of the global needs for audit personnel can be sourced from portion of the global needs for audit personnel can be sourced from portion of the global needs for audit personnel can be sourced from India, as staffing cost in India India, as staffing cost in India are lower and due to the availability of are lower and due to the availability of trained and educated human resource pool. The current organization trained and educated human resource pool. The current organization trained and educated human resource pool. The current organization structure of HPSI is as follows: structure of HPSI is as follows: The employees recruited by HPSI are thoroughly screened in India and The employees recruited by HPSI are thoroughly screened in India and The employees recruited by HPSI are thoroughly screened in India and subsequently experts from London/ Hong Kong are invited to interview subsequently experts from London/ Hong Kong are invited to interview subsequently experts from London/ Hong Kong are invited to interview them on technical aspects. The training of the recruited personnel is them on technical aspects. The training of the recruited personnel is them on technical aspects. The training of the recruited personnel is

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 17 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

conducted by the Contracting Entity in London / conducted by the Contracting Entity in London / Hong Kong as the case Hong Kong as the case maybe.

The professionals assigned by HPSI are required to follow the The professionals assigned by HPSI are required to follow the The professionals assigned by HPSI are required to follow the operational procedures and service levels as required by the Contracting operational procedures and service levels as required by the Contracting operational procedures and service levels as required by the Contracting Entity. The professionals require being familiar with the guidelines Entity. The professionals require being familiar with the guidelines Entity. The professionals require being familiar with the guidelines provided by the HSBC Gr provided by the HSBC Group Audit Standards Manual in force, and are oup Audit Standards Manual in force, and are expected to be able to pick up and adhere to other pertinent guidelines expected to be able to pick up and adhere to other pertinent guidelines expected to be able to pick up and adhere to other pertinent guidelines issued by the Contracting Entity. The professionals provided by HPSI are issued by the Contracting Entity. The professionals provided by HPSI are issued by the Contracting Entity. The professionals provided by HPSI are expected to:

 Assist in creation of audit planning memoranda in acc Assist in creation of audit planning memoranda in acc Assist in creation of audit planning memoranda in accordance with the schedule of work, turnaround times and reporting formats the schedule of work, turnaround times and reporting formats the schedule of work, turnaround times and reporting formats prescribed by the Contracting Entity. prescribed by the Contracting Entity.  Assist in conducting audit reviews of auditable entities as prescribed Assist in conducting audit reviews of auditable entities as prescribed Assist in conducting audit reviews of auditable entities as prescribed by the Contracting Entity, which inter by the Contracting Entity, which inter-alia involves evaluating: alia involves evaluating: - the adequacy of the system of internal controls and the operation / quacy of the system of internal controls and the operation / quacy of the system of internal controls and the operation / susceptibility of the environment to frauds or failures in internal susceptibility of the environment to frauds or failures in internal susceptibility of the environment to frauds or failures in internal controls; - the effectiveness of workflow procedures to ensure the most efficient the effectiveness of workflow procedures to ensure the most efficient the effectiveness of workflow procedures to ensure the most efficient use of resources; use of resources; - the degree of compliance wit the degree of compliance with internal, regulatory and statutory h internal, regulatory and statutory policies, procedures and policies, procedures and requirements; - the degree of reliability and integrity of financial reporting; the degree of reliability and integrity of financial reporting; the degree of reliability and integrity of financial reporting; - the adequacy and effectiveness of the security and integrity of the IT the adequacy and effectiveness of the security and integrity of the IT the adequacy and effectiveness of the security and integrity of the IT systems; systems; systems; the the the management management management and and and control control control of of of the the the IT IT IT functions/departments, projects and installations; functions/departments, projects and installations; - the effectiveness of the controls over the protection of assets; and the the effectiveness of the controls over the protection of assets; and the the effectiveness of the controls over the protection of assets; and the effectiveness of management. effectiveness of management.

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 18 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

 Assist in reporting audit findings in the format prescribed by the Assist in reporting audit findings in the format prescribed by the Assist in reporting audit findings in the format prescribed by the Contracting Entity. Significant in Contracting Entity. Significant internal control weaknesses and ternal control weaknesses and recommendations for strengthening key controls / increasing recommendations for strengthening key controls / increasing recommendations for strengthening key controls / increasing operational efficiency are examples of key findings that are reported. operational efficiency are examples of key findings that are reported. operational efficiency are examples of key findings that are reported.

While on assignment they perform services such as reviewing the While on assignment they perform services such as reviewing the While on assignment they perform services such as reviewing the existing operations of the Cont existing operations of the Contracting Entities and assisting in the racting Entities and assisting in the writing of the audit report, by completing the report for the sections writing of the audit report, by completing the report for the sections writing of the audit report, by completing the report for the sections that have been assigned to them. A typical overseas audit schedule that have been assigned to them. A typical overseas audit schedule that have been assigned to them. A typical overseas audit schedule for an auditor at HPSI would involve two weeks of onsite auditing for an auditor at HPSI would involve two weeks of onsite auditing for an auditor at HPSI would involve two weeks of onsite auditing and one week o and one week of compilation of findings/report writing (offsite f compilation of findings/report writing (offsite work) at the HPSI office. Due to the specialisation aspect, an auditor work) at the HPSI office. Due to the specialisation aspect, an auditor work) at the HPSI office. Due to the specialisation aspect, an auditor would normally work for the same Contracting Entity all the time, would normally work for the same Contracting Entity all the time, would normally work for the same Contracting Entity all the time, although an auditor may be requested to assist an alternate although an auditor may be requested to assist an alternate although an auditor may be requested to assist an alternate Contracting Entity in case of manpower shortages. ng Entity in case of manpower shortages.

4.1.1 Other functions

HPSI avails of certain overdraft and loan facilities from the Bank. HPSI avails of certain overdraft and loan facilities from the Bank. HPSI avails of certain overdraft and loan facilities from the Bank. We understand that the Bank offers these facilities at terms and We understand that the Bank offers these facilities at terms and We understand that the Bank offers these facilities at terms and conditions similar to those offered to independent third par conditions similar to those offered to independent third par conditions similar to those offered to independent third parties.

The Bank has seconded certain employees to HPSI. These employees The Bank has seconded certain employees to HPSI. These employees The Bank has seconded certain employees to HPSI. These employees remain on the payroll of the Bank and are accordingly paid salaries remain on the payroll of the Bank and are accordingly paid salaries remain on the payroll of the Bank and are accordingly paid salaries by the Bank. Such payroll cost is cross by the Bank. Such payroll cost is cross-charged by

the Bank to HPSI on a pure cost basis. HPSI has been allocated off the Bank to HPSI on a pure cost basis. HPSI has been allocated off the Bank to HPSI on a pure cost basis. HPSI has been allocated office space by the Bank. The Bank recovers share of rent cost/security space by the Bank. The Bank recovers share of rent cost/security space by the Bank. The Bank recovers share of rent cost/security deposit from HPSI. deposit from HPSI.

4.2 Risks Assumed 4.2 Risks Assumed

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 19 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

4.2.1 Contract risk 4.2.1 Contract risk

The professionals deputed by HPSI work under the control and The professionals deputed by HPSI work under the control and The professionals deputed by HPSI work under the control and guidance of the Contracting Entity and therefore HPSI does not guidance of the Contracting Entity and therefore HPSI does not guidance of the Contracting Entity and therefore HPSI does not undertake any contract risk in respect of the timing/quality of work undertake any contract risk in respect of the timing/quality of work undertake any contract risk in respect of the timing/quality of work undertaken by the professionals. undertaken by the professionals.

4.2.2 Market risk 4.2.2 Market risk

HPSI does not undertake any market risk since it is a captive HPSI does not undertake any market risk since it is a captive HPSI does not undertake any market risk since it is a captive provider of professionals to the HSBC Group and does not service any provider of professionals to the HSBC Group and does not service any provider of professionals to the HSBC Group and does not service any external party. Further HPSI is assured a cost plus mark nal party. Further HPSI is assured a cost plus mark nal party. Further HPSI is assured a cost plus mark-up and accordingly does not face any uncertainty as regards revenues. accordingly does not face any uncertainty as regards revenues. accordingly does not face any uncertainty as regards revenues.

4.2.3 Currency risk Currency risk

HPSI calculates the billing amounts in local currency but prepares HPSI calculates the billing amounts in local currency but prepares HPSI calculates the billing amounts in local currency but prepares the invoices in US Dollars or the local the invoices in US Dollars or the local currency of the Contracting currency of the Contracting Entity. Any surplus/shortfall in the payment of the invoice upon Entity. Any surplus/shortfall in the payment of the invoice upon Entity. Any surplus/shortfall in the payment of the invoice upon conversion to INR is adjusted in the next invoice. Accordingly the conversion to INR is adjusted in the next invoice. Accordingly the conversion to INR is adjusted in the next invoice. Accordingly the Contracting Entity undertakes currency risk on account of Contracting Entity undertakes currency risk on account of Contracting Entity undertakes currency risk on account of unfavorable fluctuation of the Indian unfavorable fluctuation of the Indian rupee vis-à-vis the US Dollar / vis the US Dollar / relevant local currency of the Contracting Entity, from the date of relevant local currency of the Contracting Entity, from the date of relevant local currency of the Contracting Entity, from the date of the invoice to the payment date. the invoice to the payment date.

4.2.4 Attrition risk Attrition risk

Retention of adequate personnel possessing appropriate skill Retention of adequate personnel possessing appropriate skill Retention of adequate personnel possessing appropriate skill-sets is important for HPSI. Employee attr important for HPSI. Employee attrition can impair HPSI's ability to ition can impair HPSI's ability to provide adequate auditing resources to Contracting entities and is provide adequate auditing resources to Contracting entities and is provide adequate auditing resources to Contracting entities and is

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 20 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

therefore a risk faced by HPSI. However, recruitment of suitably therefore a risk faced by HPSI. However, recruitment of suitably therefore a risk faced by HPSI. However, recruitment of suitably skilled individuals has not been an issue to date. skilled individuals has not been an issue to date. 4.2.5 Credit risk 4.2.5 Credit risk Since HPSI deals ex Since HPSI deals exclusively with the HSBC Group and accordingly clusively with the HSBC Group and accordingly does not undertake significant credit risk. does not undertake significant credit risk. 4.2.6 Idle time risk 4.2.6 Idle time risk HPSI is remunerated on a cost plus basis over total costs and the HPSI is remunerated on a cost plus basis over total costs and the HPSI is remunerated on a cost plus basis over total costs and the Contracting Entities are billed for the full amount of the costs. Contracting Entities are billed for the full amount of the costs. Contracting Entities are billed for the full amount of the costs. Accordingly t Accordingly the Contracting Entities undertake idle time risks. he Contracting Entities undertake idle time risks.” 13. On perusal of the above functional analysis, we find that perusal of the above functional analysis, we find that perusal of the above functional analysis, we find that assessee is engaged in recruiting personals in India on the basis of assessee is engaged in recruiting personals in India on the basis of assessee is engaged in recruiting personals in India on the basis of their academic qualifications and skill sets for the work of audit in their academic qualifications and skill sets for the work of audit in their academic qualifications and skill sets for the work of audit in various fields of finance, management, information technology et ious fields of finance, management, information technology etc. ious fields of finance, management, information technology et for Associated Enterprises Associated Enterprises. The auditors selected by the assessee are . The auditors selected by the assessee are being further screened and trained by respective entity who is using being further screened and trained by respective entity who is using being further screened and trained by respective entity who is using the services. These auditors perform services of reviewing the the services. These auditors perform services of reviewing the the services. These auditors perform services of reviewing the existing operations of the contracting entities and assist them in existing operations of the contracting entities and assist them in existing operations of the contracting entities and assist them in writing audit report. These auditors would do on report. These auditors would do on-site site auditing (at

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 21 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

the place of the contracting entity) a the place of the contracting entity) and one week of report writing nd one week of report writing (off-site work) at the office of the assessee site work) at the office of the assessee.

14.

The assessee has entered into agreement for provision of audit The assessee has entered into agreement for provision of audit The assessee has entered into agreement for provision of audit services with Assoc Associated Enterprises. A copy of one of such . A copy of one of such agreement with Associated Enterprise Associated Enterprise namely HSBC electronic data BC electronic data processing (Guangong) Limited (HDPG), is placed on pag Guangong) Limited (HDPG), is placed on pag Guangong) Limited (HDPG), is placed on page 121 to 127 of the paperbook. The range of professional audit services 127 of the paperbook. The range of professional audit services 127 of the paperbook. The range of professional audit services rendered by the assessee rendered by the assessee to HDPG is listed in clause o HDPG is listed in clause -2 (on page 122 of PB) along with Schedule of PB) along with Schedule-I, available on page 126 of the , available on page 126 of the paperbook. The details of said services is reproduced as under: etails of said services is reproduced as under: etails of said services is reproduced as under:

“2. Services Services 2.1 HPSI will be responsible for providing sufficient auditors to HPSI will be responsible for providing sufficient auditors to HPSI will be responsible for providing sufficient auditors to enable the adequate execution of the Services. the adequate execution of the Services. The range of professional audit services ("Services") rendered by The range of professional audit services ("Services") rendered by The range of professional audit services ("Services") rendered by HPSI to HDPG is noted in the attached Schedule 1. HPSI to HDPG is noted in the attached Schedule 1. 2.3 Both parties will follow the operational procedures and service 2.3 Both parties will follow the operational procedures and service 2.3 Both parties will follow the operational procedures and service levels as agreed between the levels as agreed between the parties from time to time.

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 22 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

2.4 The Services will be provided in accordance with the The Services will be provided in accordance with the The Services will be provided in accordance with the guidelines provided by the HSBC Group Audit Standards Manual in guidelines provided by the HSBC Group Audit Standards Manual in guidelines provided by the HSBC Group Audit Standards Manual in force at that time. force at that time. Schedule 1 The Services The range of professional audit services rendered by HPSI to HDP The range of professional audit services rendered by HPSI to HDP The range of professional audit services rendered by HPSI to HDPG will include all, or part, of the following: will include all, or part, of the following:

Creation of audit planning memoranda in accordance with the 1. Creation of audit planning memoranda in accordance with the 1. Creation of audit planning memoranda in accordance with the schedule of work. schedule of work.

covering the following issues: 2. Reviews of auditable entities 2. Reviews of auditable entities covering the following issues:

 the adequacy of the system of internal controls of the the adequacy of the system of internal controls of the the adequacy of the system of internal controls of the operatio operation and the susceptibility of the environment to frauds n and the susceptibility of the environment to frauds or failures in internal controls; or failures in internal controls;  the effectiveness of workflow procedures to ensure the most the effectiveness of workflow procedures to ensure the most the effectiveness of workflow procedures to ensure the most efficient use of resources; the degree of compliance with efficient use of resources; the degree of compliance with efficient use of resources; the degree of compliance with internal, regulatory and statutory policies, procedures and internal, regulatory and statutory policies, proc internal, regulatory and statutory policies, proc requirements; requirements;  the degree of reliability and integrity of financial reporting: the degree of reliability and integrity of financial reporting: the degree of reliability and integrity of financial reporting: the adequacy and effectiveness of the security and integrity of the adequacy and effectiveness of the security and integrity of the adequacy and effectiveness of the security and integrity of the IT systems; the IT systems;  the management and control of the IT functions/departments, the management and control of the IT functions/departments, the management and control of the IT functions/departments, projects and installations; projects and installations;  the effectiveness of the controls over the protection of assets; the effectiveness of the controls over the protection of assets; the effectiveness of the controls over the protection of assets; and the effectiveness of management. and the effectiveness of management.

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 23 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

Types of reviews conducted will include, inter alia, Retail, C Types of reviews conducted will include, inter alia, Retail, C Types of reviews conducted will include, inter alia, Retail, Credit, General, Investment Bank General, Investment Bank Insurance, Treasury, Securities, Private Insurance, Treasury, Securities, Private Banking, Manageme Banking, Management Office and IT systems/projects. 3. Report writing of the findings made in the reviews conducted. 3. Report writing of the findings made in the reviews conducted. 3. Report writing of the findings made in the reviews conducted. 4. Any other activity as required, including ad hoc project work, 4. Any other activity as required, including ad hoc project work, 4. Any other activity as required, including ad hoc project work, independent advice etc. independent advice etc.” 15. In background of above functions carried out by the assessee, background of above functions carried out by the assessee, background of above functions carried out by the assessee, now, we are adjudicating the issue of exclusion/inclusion of we are adjudicating the issue of exclusion/inclusion of we are adjudicating the issue of exclusion/inclusion of comparables. Firstly, we are taking exclusion of following comparables. Firstly, we are taking exclusion of following comparables. Firstly, we are taking exclusion of following seven comparables.

Vishal Information Vishal Information Technologies Ltd:

16.

The Ld. counsel Ld. counsel before us has submitted that the company before us has submitted that the company cannot be accepted as comparable as it outsources a considerable d as comparable as it outsources a considerable d as comparable as it outsources a considerable portion of its business. The portion of its business. The Ld. counsel referred to page counsel referred to page 163 of the paperbook and submitted that employee cost of the assessee ( paperbook and submitted that employee cost of the assessee ( paperbook and submitted that employee cost of the assessee (i.e. ₹8,80,67,819/-) constitute 89% of the total cost and no outsourcing ) constitute 89% of the total cost and no outsourcing ) constitute 89% of the total cost and no outsourcing expenses are incurred by the assessee company. As against es are incurred by the assessee company. As against, the es are incurred by the assessee company. As against

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 24 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

comparable company has incurred data entry charges and vendor comparable company has incurred data entry charges and vendor comparable company has incurred data entry charges and vendor payments of ₹11,49,14,563/ 11,49,14,563/- out of the total expenditure of out of the total expenditure of ₹17,41,71,957/-, which constitutes 65.98% of the total expenditure. , which constitutes 65.98% of the total expenditure. , which constitutes 65.98% of the total expenditure. Thus, according to the ording to the Ld. counsel, the business model of the , the business model of the comparable company being different from the assessee company, comparable company being different from the assessee company, comparable company being different from the assessee company, same is functionally different from the assessee. The same is functionally different from the assessee. The same is functionally different from the assessee. The Ld. counsel in support of his contention has relied on the support of his contention has relied on the decision of the Hon’ble decision of the Hon’ble Punjab and Haryana High Court in the case of Punjab and Haryana High Court in the case of PCIT Vs IHG IT PCIT Vs IHG IT services India Private Limited for assessment year 2006 services India Private Limited for assessment year 2006 services India Private Limited for assessment year 2006-07 reported in (2017) 88 taxmann.com 642 ( (2017) 88 taxmann.com 642 (P& H). On the contrary, . On the contrary, the Ld. DR submitted that nowhere outsourcing wor DR submitted that nowhere outsourcing wor DR submitted that nowhere outsourcing world has been mentioned in the Annual Report in the Annual Report and data entry charges incurred by and data entry charges incurred by the assessee might have been separately identified the assessee might have been separately identified the assessee might have been separately identified and grouped in the annual report, and merely on the basis of separate identifying of the annual report, and merely on the basis of separate identifying of the annual report, and merely on the basis of separate identifying of data entry charges, the company cannot be data entry charges, the company cannot be classified as outsourcing classified as outsourcing model company.

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 25 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

17.

We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that dispute and perused the relevant material on record. We find that dispute and perused the relevant material on record. We find that Hon’ble Punjab and Haryana court in the case of IHG IT services Hon’ble Punjab and Haryana court in the case of IHG IT services Hon’ble Punjab and Haryana court in the case of IHG IT services India Private Limited (supra) for assessment year 2006 ed (supra) for assessment year 2006 ed (supra) for assessment year 2006-07 has observed as under:

“5. As far as Vishal Information Technologies Limited is concerned, 5. As far as Vishal Information Technologies Limited is concerned, 5. As far as Vishal Information Technologies Limited is concerned, there is no difficulty whatsoever for the Tribunal has come to a clear there is no difficulty whatsoever for the Tribunal has come to a clear there is no difficulty whatsoever for the Tribunal has come to a clear finding of fact that it outsourced about 44.81% of its finding of fact that it outsourced about 44.81% of its business. For business. For instance, it was observed that Vishal Information Technologies instance, it was observed that Vishal Information Technologies instance, it was observed that Vishal Information Technologies Limited has a low employee cost of Limited has a low employee cost of 1.25% of operating revenue. The 1.25% of operating revenue. The Tribunal also observed that the TPO had himself referred to the Tribunal also observed that the TPO had himself referred to the Tribunal also observed that the TPO had himself referred to the NASSCOM survey that the average wages and salari NASSCOM survey that the average wages and salaries to sales ratio es to sales ratio of IT/ITES industry in India was 46.1%. The assessee's wages to sales of IT/ITES industry in India was 46.1%. The assessee's wages to sales of IT/ITES industry in India was 46.1%. The assessee's wages to sales is 53% which is not comparable to Vishal Information Technologies is 53% which is not comparable to Vishal Information Technologies is 53% which is not comparable to Vishal Information Technologies Limited whose wages to sales is 1.25%. This is a finding of fact and Limited whose wages to sales is 1.25%. This is a finding of fact and Limited whose wages to sales is 1.25%. This is a finding of fact and there is nothing to indicate that there is nothing to indicate that the same is erroneous much less the same is erroneous much less perverse. The exclusion of Vishal Information Technologies Limited is, perverse. The exclusion of Vishal Information Technologies Limited is, perverse. The exclusion of Vishal Information Technologies Limited is, therefore, justified. therefore, justified.” 18. We find that in the find that in the above decision percentage of outsourced decision percentage of outsourced business of the comparable company of the comparable company has been reported as 44.81% has been reported as 44.81% whereas before us the assessee has pointed out the ratio of whereas before us the assessee has pointed out the ratio of whereas before us the assessee has pointed out the ratio of

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 26 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

outsourcing expenses to the total expenses as 65.98%. Therefore, it outsourcing expenses to the total expenses as 65.98%. Therefore, it outsourcing expenses to the total expenses as 65.98%. Therefore, it is essential to verify the exact quantum of outsourcing expenses in is essential to verify the exact quantum of outsourcing expenses in is essential to verify the exact quantum of outsourcing expenses in the case of the comparable compa the case of the comparable company. Accordingly, we set aside the ny. Accordingly, we set aside the matter of exclusion of the company to the file of the matter of exclusion of the company to the file of the Ld. Ld. TPO with the direction to ascertain quantum of outsourcing expenses and the direction to ascertain quantum of outsourcing expenses and the direction to ascertain quantum of outsourcing expenses and the business model of the company by way of issue of notice under business model of the company by way of issue of notice under business model of the company by way of issue of notice under section 133(6) of the section 133(6) of the Act and then if the business model of the business model of the company is found to be based on outsourcing, then same shall be found to be based on outsourcing, then same shall be found to be based on outsourcing, then same shall be excluded from the set of the comparables in accordance with law. It excluded from the set of the comparables in accordance with law. It excluded from the set of the comparables in accordance with law. It is needless to mention that assessee shall be afforded adequate is needless to mention that assessee shall be afforded adequate is needless to mention that assessee shall be afforded adequate opportunity of being h opportunity of being heard on the issue in dispute.

Asit C Mehta financial services ( Asit C Mehta financial services ([Nucleus netsoft and GIS netsoft and GIS (India) Limited ] (India) Limited ]

19.

The Ld. counsel Ld. counsel of the assessee submitted that the company of the assessee submitted that the company need to be excluded from the set of the comparables due to three need to be excluded from the set of the comparables due to three need to be excluded from the set of the comparables due to three reasons. Firstly, the company has undergone amalgamation during company has undergone amalgamation during company has undergone amalgamation during

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 27 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

the year (PB-323), which has changed the business model of the , which has changed the business model of the , which has changed the business model of the company. Secondly, data processing charges company. Secondly, data processing charges incurred incurred are of ₹1.04 crores, out of the total operating and other expenses of out of the total operating and other expenses of out of the total operating and other expenses of ₹2.41 crores (PB-320) and therefore more than 40% of the expenses are ) and therefore more than 40% of the expenses are ) and therefore more than 40% of the expenses are outsourced. Thirdly, revenue stream consist of IT enabled services Thirdly, revenue stream consist of IT enabled services Thirdly, revenue stream consist of IT enabled services and software development (PB ftware development (PB-319). There is no separate segment 319). There is no separate segment for IT enabled services and therefore company cannot be considered services and therefore company cannot be considered services and therefore company cannot be considered as comparable at entity level. rable at entity level. The Ld. DR on the other hand DR on the other hand submitted that Ld. CIT(A) has directed to take the segment result submitted that Ld. CIT(A) has directed to take the segment result submitted that Ld. CIT(A) has directed to take the segment result relating to ITes for benchmarking relating to ITes for benchmarking instead of entity level results, instead of entity level results, therefore, company is functionally similar at segment level. therefore, company is functionally similar at segment level. therefore, company is functionally similar at segment level.

20.

We have heard rival submission of the parties on the issue in ve heard rival submission of the parties on the issue in ve heard rival submission of the parties on the issue in dispute. As evident from the paperbook page 323 ( t from the paperbook page 323 ( t from the paperbook page 323 (Annual Report page 31), another company namely Nucleus Netsoft and page 31), another company namely Nucleus Netsoft and page 31), another company namely Nucleus Netsoft and GIS (India) Ltd. was amalgamated with the Company as amalgamated with the Company. The relevant information The relevant information of the annual report is reproduced as under : annual report is reproduced as under :

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 28 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

“1. AMALGAMATION 1. AMALGAMATION

a. Pursuant to the scheme of amalgamation ('the scheme). Pursuant to the scheme of amalgamation ('the scheme). Pursuant to the scheme of amalgamation ('the scheme). Nucleus Netsoft And GIS (India) Ltd (NNGIL) was Nucleus Netsoft And GIS (India) Ltd (NNGIL) was Nucleus Netsoft And GIS (India) Ltd (NNGIL) was amalgamated with the Company with effect from the amalgamated with the Company with effect from the amalgamated with the Company with effect from the appointed date i.e. April 2005 as sanctioned by the Hon'ble appointed date i.e. April 2005 as sanctioned by appointed date i.e. April 2005 as sanctioned by High Court of Judicature at Bombay, on February 10, 2006, High Court of Judicature at Bombay, on February 10, 2006, High Court of Judicature at Bombay, on February 10, 2006, and filed with Registrar of Companies on February 22, 2006. and filed with Registrar of Companies on February 22, 2006. and filed with Registrar of Companies on February 22, 2006. All the assets and liabilities of erstwhile Nucleus Netsoft And All the assets and liabilities of erstwhile Nucleus Netsoft And All the assets and liabilities of erstwhile Nucleus Netsoft And GIS (India) Ltd stand transferred to and vested with the GIS (India) Ltd stand transferred to and vested with the GIS (India) Ltd stand transferred to and vested with the Company with effect from April 1, 2005, the appointed date. ny with effect from April 1, 2005, the appointed date. ny with effect from April 1, 2005, the appointed date. The scheme has accordingly been given effect to above The scheme has accordingly been given effect to above The scheme has accordingly been given effect to above financial statements. financial statements. b. The amalgamation has been accounted for under the "Pooling The amalgamation has been accounted for under the "Pooling The amalgamation has been accounted for under the "Pooling of Interest Method" as prescribed in Accounting Standard (AS- of Interest Method" as prescribed in Accounting Standard (AS of Interest Method" as prescribed in Accounting Standard (AS 14) issued by the Institute of Chartered Accountants of India. ssued by the Institute of Chartered Accountants of India. ssued by the Institute of Chartered Accountants of India. Accordingly the assets, liabilities and reserves of the erstwhile Accordingly the assets, liabilities and reserves of the erstwhile Accordingly the assets, liabilities and reserves of the erstwhile 'Nucleus Nelsoft And GIS (India) Ltd' as at April 1, 2005 have 'Nucleus Nelsoft And GIS (India) Ltd' as at April 1, 2005 have 'Nucleus Nelsoft And GIS (India) Ltd' as at April 1, 2005 have been taken over at their respective book values. been taken over at their respective book values. c. The assets of The assets of Rs.39.541.385, liabilities of Rs.6,449,847, capital Rs.39.541.385, liabilities of Rs.6,449,847, capital reserves Rs.16,287,405 and revenue reserve of Rs. 1,686,933 of reserves Rs.16,287,405 and revenue reserve of Rs. 1,686,933 of reserves Rs.16,287,405 and revenue reserve of Rs. 1,686,933 of NNGIL were taken over by the Company on amalgamation. In NNGIL were taken over by the Company on amalgamation. In NNGIL were taken over by the Company on amalgamation. In terms of the Scheme, no shares of the Company were issued or terms of the Scheme, no shares of the Company were issued or terms of the Scheme, no shares of the Company were issued or allotted in respect of allotted in respect of the holding of the Company in NNGIL the holding of the Company in NNGIL and in consideration of the amalgamation of NNGIL with and in consideration of the amalgamation of NNGIL with and in consideration of the amalgamation of NNGIL with Company. The company's investment in NNGIL of Rs.2,699,723 Company. The company's investment in NNGIL of Rs.2,699,723 Company. The company's investment in NNGIL of Rs.2,699,723 comprising of 269,900 of Equity Share of Rs. 10/- each were comprising of 269,900 of Equity Share of Rs. 10/ comprising of 269,900 of Equity Share of Rs. 10/ transferred to a trust for the benefit of the transferred to a trust for the benefit of the Company. Company.

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 29 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

d. 15,11,720 equity shares of Rs. 10 each fully paid the Company 15,11,720 equity shares of Rs. 10 each fully paid the Company 15,11,720 equity shares of Rs. 10 each fully paid the Company (New Equity shares) have been allotted the shareholders' (New Equity shares) have been allotted the shareholders' (New Equity shares) have been allotted the shareholders' erstwhile NNGIS including Trust the ratio 1 new equity share erstwhile NNGIS including Trust the ratio 1 new equity share erstwhile NNGIS including Trust the ratio 1 new equity share for every one share of Rs. 10 each held in NNGIS. The new for every one share of Rs. 10 each held in NNGIS. The new for every one share of Rs. 10 each held in NNGIS. The new equity sh equity shares issued and allotted shall in all respects rank pari ares issued and allotted shall in all respects rank pari passu with the existing share the Company. passu with the existing share the Company. e. Pursuant to the scheme of amalgamation ('the scheme') Pursuant to the scheme of amalgamation ('the scheme') Pursuant to the scheme of amalgamation ('the scheme') sanctioned by the Hon'ble High Court of Judicature at sanctioned by the Hon'ble High Court of Judicature at sanctioned by the Hon'ble High Court of Judicature at Bombay, the debit balance in the Profit and Loss Account of Bombay, the debit balance in the Profit and Loss Bombay, the debit balance in the Profit and Loss the Company prior to amalgamation, amounting to the Company prior to amalgamation, amounting to the Company prior to amalgamation, amounting to Rs.5.75,620 has been adjusted against securities premium Rs.5.75,620 has been adjusted against securities premium Rs.5.75,620 has been adjusted against securities premium account of the Company. The Hon'ble High Court of Judicature account of the Company. The Hon'ble High Court of Judicature account of the Company. The Hon'ble High Court of Judicature at Bombay, has permitted the Company from dispensing with at Bombay, has permitted the Company from dispensing with at Bombay, has permitted the Company from dispensing with the use of the words the use of the words 'And Reduced' as a suffix to its name. 'And Reduced' as a suffix to its name. f. Subsequent year end, the name of the Company been changed Subsequent year end, the name of the Company been changed Subsequent year end, the name of the Company been changed 'Nucleus And GIS (India) Limited' approved by Registrar 'Nucleus And GIS (India) Limited' approved by Registrar 'Nucleus And GIS (India) Limited' approved by Registrar Companies vide now Certificate Incorporation dated May Companies vide now Certificate Incorporation dated May Companies vide now Certificate Incorporation dated May 2006. g. As a result of above, figures in respect As a result of above, figures in respect of current financial of current financial year are not comparable with those of the previous financial year are not comparable with those of the previous financial year are not comparable with those of the previous financial year.

20.1 In view of settled law that In view of settled law that concern with extraordinary events concern with extraordinary events

of merger/demerger cannot be comparable in the years of of merger/demerger cannot be comparable in the years of of merger/demerger cannot be comparable in the years of such

merger/demerger we direct the we direct the Ld. AO/TPO to exclude this O to exclude this

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 30 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

company from the set of the comparables for computing company from the set of the comparables for computing company from the set of the comparables for computing arithmetic mean of PLI of comparables. mean of PLI of comparables.

Transworks information services Ltd: Transworks information services Ltd:

21.

The Ld. counsel Ld. counsel submitted that this company also outsource a submitted that this company also outsource a considerable portion of its business and therefore business model considerable portion of its business and therefore business model considerable portion of its business and therefore business model being different from the assessee, the company cannot be accepted being different from the assessee, the company cannot be accepted being different from the assessee, the company cannot be accepted as valid comparable. The as valid comparable. The Ld. counsel however did not file financials however did not file financials of the company to support his contention and relied on the decision mpany to support his contention and relied on the decision mpany to support his contention and relied on the decision of the Tribunal Mumbai Mumbai Bench in the case of Franklin Templeton of Franklin Templeton International services India Private Limited Vs DCIT reported International services India Private Limited Vs DCIT reported International services India Private Limited Vs DCIT reported in (2018) 89 taxmann.com 439 (Mumbai in (2018) 89 taxmann.com 439 (Mumbai-Trib).

22.

The Ld. DR submitted th DR submitted that this comparable was not challenged at this comparable was not challenged by the assessee before the Ld. CIT(A) and it has been challenged for by the assessee before the Ld. CIT(A) and it has been challenged for by the assessee before the Ld. CIT(A) and it has been challenged for first time before the first time before the Tribunal. The Ld. DR further referred to DR further referred to objection of the assessee before the objection of the assessee before the Ld. TPO and the remark of the TPO and the remark of the

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 31 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

Ld. TPO, wherein the assessee sought to exclude the company on TPO, wherein the assessee sought to exclude the company on TPO, wherein the assessee sought to exclude the company on being functionally different, whereas the being functionally different, whereas the Ld. TPO called for the TPO called for the information under section 133(6) of the information under section 133(6) of the Act and after verification and after verification that it qualifies all the filters and functions that it qualifies all the filters and functions are in the natur are in the nature of ITes only, he included the company into set of comparables. nly, he included the company into set of comparables. nly, he included the company into set of comparables.

23.

We have heard rival submission of the parties. We find that the We have heard rival submission of the parties. We find that the We have heard rival submission of the parties. We find that the Ld. TPO has gathered financial and functional details of the company TPO has gathered financial and functional details of the company TPO has gathered financial and functional details of the company by way of using his authority under section 133(6) o by way of using his authority under section 133(6) o by way of using his authority under section 133(6) of the Act. Since the said information has not been provided to the assessee, we feel the said information has not been provided to the assessee, we feel the said information has not been provided to the assessee, we feel it appropriate to restore this issue back to the file of the it appropriate to restore this issue back to the file of the it appropriate to restore this issue back to the file of the Ld. AO/TPO with the direction to provide all the information gathered under with the direction to provide all the information gathered under with the direction to provide all the information gathered under section 133(6) about the company t section 133(6) about the company to the assessee and decide the o the assessee and decide the issue of exclusion/inclusion of the company after providing issue of exclusion/inclusion of the company after providing issue of exclusion/inclusion of the company after providing adequate opportunity of being heard to the assessee. adequate opportunity of being heard to the assessee. adequate opportunity of being heard to the assessee.

Datamatics financial services Ltd (segmental); Datamatics financial services Ltd (segmental); Datamatics financial services Ltd (segmental);

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 32 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

24.

The Ld. counsel Ld. counsel of the assessee submitted that the company of the assessee submitted that the company fails the filter of Related Party Transactions Related Party Transactions (RPT) more than 25% of more than 25% of the total Revenue. In support of the contention the . In support of the contention the Ld. counsel Ld. counsel relied on the decision of the on the decision of the Tribunal Mumbai Bench in the case of in the case of Stream international services Private Limited Vs ADIT international services Private Limited Vs ADIT international services Private Limited Vs ADIT reported in (2013) 31 taxmann.com 227 (2013) 31 taxmann.com 227 for assessment year 2006 for assessment year 2006-07, wherein the company has been rejected on the ground of related wherein the company has been rejected on the ground of related wherein the company has been rejected on the ground of related party transactions(RPT) more than 25%. But no annual report or party transactions(RPT) more than 25%. But no annual report or party transactions(RPT) more than 25%. But no annual report or financial statement of the company financial statement of the company has been filed by the assess been filed by the assessee to support of its contention of RPT being more than 25%. support of its contention of RPT being more than 25%. support of its contention of RPT being more than 25%.

25.

The Ld. DR on the other hand referred to the remark of the DR on the other hand referred to the remark of the DR on the other hand referred to the remark of the Ld. TPO, wherein he has mentioned that segmental financial of the ITeS TPO, wherein he has mentioned that segmental financial of the ITeS TPO, wherein he has mentioned that segmental financial of the ITeS segment of the company were gathered by way of segment of the company were gathered by way of segment of the company were gathered by way of issue of notice under section 133(6) of the under section 133(6) of the Act, and the said segment qualifies all , and the said segment qualifies all the filters applied by the the filters applied by the Ld. TPO.

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 33 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

26.

We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in dispute. We find that information gathered under section 133(6) of dispute. We find that information gathered under section 133(6) of dispute. We find that information gathered under section 133(6) of the Act has not been provided to the assessee to ascertain the fact of been provided to the assessee to ascertain the fact of been provided to the assessee to ascertain the fact of RPT being more than 25% i.e. a filter applied by the RPT being more than 25% i.e. a filter applied by the RPT being more than 25% i.e. a filter applied by the Ld. TPO, therefore we set aside the finding of the therefore we set aside the finding of the Ld. CIT(A) and restore the CIT(A) and restore the issue of exclusion/inclusion of the company from the final set of the issue of exclusion/inclusion of the company from the final set of the issue of exclusion/inclusion of the company from the final set of the comparables to the file of the comparables to the file of the Ld. AO/TPO for deciding a fresh after AO/TPO for deciding a fresh after providing information gathered under section 133(6) of the providing information gathered under section 133(6) of the providing information gathered under section 133(6) of the Act to the assessee.

Goldstone Infratech Limited (Segmental): Goldstone Infratech Limited (Segmental):

27.

The Ld. counsel Ld. counsel of the assessee referred to page 409 of the of the assessee referred to page 409 of the paperbook and submitted that export turnover of the company is paperbook and submitted that export turnover of the company is paperbook and submitted that export turnover of the company is merely ₹2,29,721/- (0.14 (0.14%) as compared to the total turnover of as compared to the total turnover of ₹30,89,44,530/- and therefore company fails the export filters and therefore company fails the export filters and therefore company fails the export filters of minimum 25% of tur of turnover. The Ld. counsel also refer also referred to the decision of the Tribunal Tribunal Hyderabad Bench in the case of Hyderabad Bench in the case of HSBC

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 34 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

Electric data processing India Ltd Vs ACIT reported in (2013) Electric data processing India Ltd Vs ACIT reported in (2013) Electric data processing India Ltd Vs ACIT reported in (2013) 38 taxmann.com 141 38 taxmann.com 141 wherein the company has been rejected on wherein the company has been rejected on the basis of foreign exchange the basis of foreign exchange earning being less than 25% of the earning being less than 25% of the total revenue of the company. total revenue of the company.

28.

The Ld. DR on the other hand referred to the remark of the Ld. DR on the other hand referred to the remark of the Ld. DR on the other hand referred to the remark of the Ld. CIT(A), wherein he has held that the CIT(A), wherein he has held that the Ld. TPO has only considered TPO has only considered BPO division at segment level as comparable with its sales BPO division at segment level as comparable with its sales BPO division at segment level as comparable with its sales at ₹5.03 crores and not the total revenue . He submitted that the export crores and not the total revenue . He submitted that the export crores and not the total revenue . He submitted that the export turnover is with respect to another division of telecom sector turnover is with respect to another division of telecom sector turnover is with respect to another division of telecom sector and therefore said filter does not a therefore said filter does not apply on the BPO segment of the pply on the BPO segment of the company.

29.

We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. On perusal of dispute and perused the relevant material on record. On perusal of dispute and perused the relevant material on record. On perusal of the page 409 of the paperbook we find that sales of the company are the page 409 of the paperbook we find that sales of the company are the page 409 of the paperbook we find that sales of the company are from two divisions. The first division is ions. The first division is telecom and insulated telecom and insulated divisions, wherein the turnover has been bifurcated in domestic wherein the turnover has been bifurcated in domestic wherein the turnover has been bifurcated in domestic

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 35 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

turnover at ₹25,84,43, 25,84,43,794/- and export turnover of and export turnover of ₹2,29,721/-. The other division is BPO division wherein the turnover has been The other division is BPO division wherein the turnover has been The other division is BPO division wherein the turnover has been mentioned at ₹5,02,71, 5,02,71,015/-. In the BPO division no such . In the BPO division no such bifurcations of domestic bifurcations of domestic and export turnover has been reported. export turnover has been reported. Since the Ld. TPO has considered only BPO division for comparison TPO has considered only BPO division for comparison TPO has considered only BPO division for comparison with the assessee, the contention of the with the assessee, the contention of the Ld. counsel Ld. counsel of the assessee of complying up export filter is not relevant. The sa up export filter is not relevant. The sa up export filter is not relevant. The said objection of the Ld. counsel of the assessee is accordingly rejected. As the of the assessee is accordingly rejected. As the of the assessee is accordingly rejected. As the assessee in its transfer assessee in its transfer pricing study has considered IT pricing study has considered ITes/BPO activity as functionally similar to the assessee, the comparable activity as functionally similar to the assessee, the comparable activity as functionally similar to the assessee, the comparable company is held to be functionally similar and therefore contention is held to be functionally similar and therefore contention is held to be functionally similar and therefore contentions of the Ld. counsel to exclude this company are accordingly rejected to exclude this company are accordingly rejected to exclude this company are accordingly rejected.

Spanco Telesystems and Sloutions Limited (segmental): Telesystems and Sloutions Limited (segmental): Telesystems and Sloutions Limited (segmental):

30.

The Ld. counsel Ld. counsel of the assessee submitted that company need of the assessee submitted that company need to be excluded from the set to be excluded from the set of the comparables because it ac of the comparables because it acquired another company i.e. Intelenet BPO services Private Limited in another company i.e. Intelenet BPO services Private Limited in another company i.e. Intelenet BPO services Private Limited in year

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 36 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

2005, which has distorted its comparability and rendered the 2005, which has distorted its comparability and rendered the 2005, which has distorted its comparability and rendered the company as unfit for comparison. t for comparison. The Ld. counsel also referred that also referred that company fails the export filter of minimum export revenue as 25% company fails the export filter of minimum export revenue as 25% company fails the export filter of minimum export revenue as 25% of the total revenue. He referred to the decision of Mumbai He referred to the decision of Mumbai He referred to the decision of Mumbai Bench of Tribunal in the case of in the case of Franclin Templeton International Services International Services India Private Limited Vs DCIT reported in (2018) 89 ia Private Limited Vs DCIT reported in (2018) 89 ia Private Limited Vs DCIT reported in (2018) 89 taxmann.com 439, wherein the company has been rejected , wherein the company has been rejected on the , wherein the company has been rejected grounds of demerger of the unit and failure of condition of export grounds of demerger of the unit and failure of condition of export grounds of demerger of the unit and failure of condition of export filter.

31.

The Ld. DR on the other and submitted that this comparable DR on the other and submitted that this comparable DR on the other and submitted that this comparable company was selected by the assessee in its transfer pricing study y was selected by the assessee in its transfer pricing study y was selected by the assessee in its transfer pricing study and accepted by the and accepted by the Assessing Officer. Further it is exclusion was . Further it is exclusion was not challenged before the Ld. CIT(A). not challenged before the Ld. CIT(A).

32.

Before us the assessee has not filed annual report of the Before us the assessee has not filed annual report of the Before us the assessee has not filed annual report of the company in support of its claim of merger of another company with company in support of its claim of merger of another company with company in support of its claim of merger of another company with the assessee and also for verification of application of export filter. the assessee and also for verification of application of export filter. the assessee and also for verification of application of export filter.

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 37 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

Therefore in the interest of justice, we feel it appropriate Therefore in the interest of justice, we feel it appropriate Therefore in the interest of justice, we feel it appropriate to restore the issue of exclusion/inclusion of this company into set of the the issue of exclusion/inclusion of this company into set of the the issue of exclusion/inclusion of this company into set of the comparables to the file of the comparables to the file of the Ld. AO/TPO for deciding a AO/TPO for deciding afresh.

Maple e-solutions Ltd solutions Ltd

33.

The Ld. counsel Ld. counsel of the assessee submitted that this company of the assessee submitted that this company need to be excluded on the gro need to be excluded on the ground that owners/directors of the und that owners/directors of the company had been involved in fraud company had been involved in fraud. In support of his contention . In support of his contention relied on the decision of Hon’ble Bombay High Court in the case of relied on the decision of Hon’ble Bombay High Court in the case of relied on the decision of Hon’ble Bombay High Court in the case of CIT versus Cummins Terbo technologies Ltd reported in CIT versus Cummins Terbo technologies Ltd reported in CIT versus Cummins Terbo technologies Ltd reported in (2018) 91 taxmann.com 307 (2018) 91 taxmann.com 307 for assessment year 2007 ment year 2007-08. The Ld. counsel also submitted that company is in the call centre which is a also submitted that company is in the call centre which is a also submitted that company is in the call centre which is a specialised ITeS service and therefore also need to be excluded specialised ITeS service and therefore also need to be excluded specialised ITeS service and therefore also need to be excluded being functionally dissimilar. The being functionally dissimilar. The Ld. DR on the other hand DR on the other hand submitted that assessee itself has c submitted that assessee itself has classified in the category of lassified in the category of ITes/BPO and if assessee insist for exclusion of the company on the ITes/BPO and if assessee insist for exclusion of the company on the ITes/BPO and if assessee insist for exclusion of the company on the ground of call centre, then other comparable ground of call centre, then other comparables selected by the selected by the

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 38 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

assessee also need to be excluded being functionally dissimilar. The assessee also need to be excluded being functionally dissimilar. The assessee also need to be excluded being functionally dissimilar. The Ld. DR further submitted tha DR further submitted that allegation of fraud on the t allegation of fraud on the owners/directors were pertaining way back to almost more than 20 owners/directors were pertaining way back to almost more than 20 owners/directors were pertaining way back to almost more than 20 years and therefore merely on years and therefore merely on substantiated allegation substantiated allegation of fraud, company cannot be excluded. company cannot be excluded.

34.

We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in dispute. We find that dispute. We find that on the issue of non-reliability of financial data reliability of financial data of the company, the , the Hon’ble High Court of Bombay Hon’ble High Court of Bombay in the case of Commins turbo technologies Ltd (supra) has held as under: Commins turbo technologies Ltd (supra) has held as under: Commins turbo technologies Ltd (supra) has held as under:

“15. In our considered opinion, the difference in In our considered opinion, the difference in functions sought to be canvassed by the assessee is functions sought to be canvassed by the assessee is functions sought to be canvassed by the assessee is emerging from record. Merely because the two kind of emerging from record. Merely because the two kind of emerging from record. Merely because the two kind of activities are referred to as ITES in a Notification by the activities are referred to as ITES in a Notification by the activities are referred to as ITES in a Notification by the CBDT does not imply that the same have to CBDT does not imply that the same have to be understood be understood as functionally identical/similar. In as functionally identical/similar. In-fact, the dissimilarity fact, the dissimilarity in the functions performed by assessee and Maple in the functions performed by assessee and Maple in the functions performed by assessee and Maple eSolutions Ltd. is quite evident and the same has also not eSolutions Ltd. is quite evident and the same has also not eSolutions Ltd. is quite evident and the same has also not been disputed by the lower authorities. On this aspect, we been disputed by the lower authorities. On this aspect, we been disputed by the lower authorities. On this aspect, we are of the o are of the opinion that the said concern is liable to be pinion that the said concern is liable to be excluded from the list of comparables. Apart therefrom, the excluded from the list of comparables. Apart therefrom, the excluded from the list of comparables. Apart therefrom, the decision of our Co decision of our Co-ordinate Benches of Delhi and ordinate Benches of Delhi and

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 39 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

Hyderabad in CRM Services India (P.) Ltd. (supra) and Hyderabad in CRM Services India (P.) Ltd. (supra) and Hyderabad in CRM Services India (P.) Ltd. (supra) and Capital IQ Information Systems (India) (P) Ltd. (supra) Capital IQ Information Systems (India) (P) Ltd. Capital IQ Information Systems (India) (P) Ltd. respectively also support assessee's plea that the said respectively also support assessee's plea that the said respectively also support assessee's plea that the said concern is liable to be excluded from the final set of concern is liable to be excluded from the final set of concern is liable to be excluded from the final set of comparables because of unreliability of the financial data comparables because of unreliability of the financial data comparables because of unreliability of the financial data of the said concern. Therefore, on both the above counts, of the said concern. Therefore, on both the above counts, of the said concern. Therefore, on both the above counts, we set- -aside the order of the CIT(A) on this aspect and er of the CIT(A) on this aspect and direct the Assessing Officer to exclude Maple eSolutions Ltd. direct the Assessing Officer to exclude Maple eSolutions Ltd. direct the Assessing Officer to exclude Maple eSolutions Ltd. from the final list of comparables. Thus, on th from the final list of comparables. Thus, on this point also is point also assessee succeeds assessee succeeds.” 35. Respectfully, following the Hon’ble Bombay High Court following the Hon’ble Bombay High Court following the Hon’ble Bombay High Court (supra), we direct the the Ld. AO/TPO to exclude the company out of the AO/TPO to exclude the company out of the set of the comparables on the ground of unreliability of financial set of the comparables on the ground of unreliability of financial set of the comparables on the ground of unreliability of financial data because of fraud committed by the owners/directors. data because of fraud committed by the owners/directors. data because of fraud committed by the owners/directors.

36.

The Ld. counsel of the assessee has sought inclusion of the of the assessee has sought inclusion of the M/s C S Software Enterprises Ltd. Enterprises Ltd., which was excluded by the excluded by the Ld. TPO from the set of the comparables. from the set of the comparables.

C S software Enterprises Ltd: C S software Enterprises Ltd:

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 40 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

37.

The Ld. Counsel The Ld. Counsel of the assessee submitted that of the assessee submitted that Ld. TPO rejected the company as comparable on the ground that it was rejected the company as comparable on the ground that it was rejected the company as comparable on the ground that it was engaged in developme engaged in development of the software and no segment data was nt of the software and no segment data was available. The Ld. counsel Ld. counsel drawn our attention to Annual Report Annual Report of the company and referred any and referred Paper Book pages 615, 630 pages 615, 630, 637 and 646 to support that for assessment year 2006 to support that for assessment year 2006-07 company 07 company was having only one segment of ITeS only an ITeS only and therefore it is functionally d therefore it is functionally similar to the assessee.

38.

The Ld. DR on the other end relied on the order of the DR on the other end relied on the order of the Ld. TPO DR on the other end relied on the order of the and the Ld. CIT(A).

39.

We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in dispute and perused the relevant dispute and perused the relevant material on record. On perusal of material on record. On perusal of the Annual Report of the company of the company, we find that regarding segment we find that regarding segment reporting on page 646 of the paperbook ( on page 646 of the paperbook (page 47 of the annual page 47 of the annual report) in clause 8, it is reported as under: it is reported as under:

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 41 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

“8. Segment Reporting : Segment Reporting : The Company is engaged in The Company is engaged in providing Information Technology providing Information Technology Enabled Services which in the context of Accounting Standard Enabled Services which in the context of Accounting Standard Enabled Services which in the context of Accounting Standard-17 issued by ICAI are considered to issued by ICAI are considered to constitute one single segment.” constitute one single segment.” 39.1 From above reporting in Annual Report, it is evident that From above reporting in Annual Report, it is evident that From above reporting in Annual Report, it is evident that company is having only one seg having only one segment of Information Technology Information Technology enabled services. Further on perusal of the other pages of the enabled services. Further on perusal of the other pages of the enabled services. Further on perusal of the other pages of the Annual Report also it is evident that company is primarily in the also it is evident that company is primarily in the also it is evident that company is primarily in the field of IT-BPO and no where it is reported that company is in and no where it is reported that company is in and no where it is reported that company is in software development. The observa software development. The observation of the Ld CIT(A) that tion of the Ld CIT(A) that company is engaged in software company is engaged in software development and th and there is no separate segment of IT separate segment of ITes, is without any basis. Accordingly basis. Accordingly, The Ld. AO/TPO is directed to include the company into the set of the AO/TPO is directed to include the company into the set of the AO/TPO is directed to include the company into the set of the comparables.

40.

The ground ground ground raised raised raised by by by the the the assessee assessee assessee challenging challenging challenging exclusion/inclusion of certain comparables is exclusion/inclusion of certain comparables is accordingly, accordingly, allowed partly for statistical purposes. partly for statistical purposes.

M/s HSBC Professional Services Pvt. Ltd. Professional Services Pvt. Ltd. 42 ITA Nos. 8753 & 8823/M/2011 ITA Nos. 8753 & 8823/M/2011

41.

In the result, the appeal filed by the In the result, the appeal filed by the Revenue Revenue is dismissed, whereas the appeal filed by the assessee is allo whereas the appeal filed by the assessee is allo whereas the appeal filed by the assessee is allowed partly for statistical purposes.

Order pronounced in the open Court in unced in the open Court in 13/09/2022. /09/2022. Sd/- Sd/ Sd/- (ABY T VARKEY ABY T VARKEY) (OM PRAKASH KANT OM PRAKASH KANT) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 13/09/2022 Dragon Legal/Rahul Sharma, Sr. P.S. Copy of the Order forwarded to forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Sr. Private Secretary) (Sr. Private Secretary) ITAT, Mumbai ITAT, Mumbai

HSBC PROFESSIONAL SERVICES (I) P. LTD,MUMBAI vs. DCIT RG 8(2), MUMBAI