DCIT, GURGAON vs. M/S. PROMETRIC TESTING (P) LTD., GURGAON

PER O.P. KANT, AM:

These cross appeals by the assessee and the Revenue are directed against order dated 03/11/2014 passed by the Learned Commissioner of Income Tax (Appeals)-2, Faridabad [in short ‘the Ld. CIT(A)’] for assessment year 2008-09. 2. The grounds raised by the assessee are reproduced as under:

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3.5 By upholding the approach of Ld. TPO in selecting the current year (i.e. financial year 2007-08) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for financial year 2007-08 was not available within the public domain. That the above grounds are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above, grounds of objection either before or during the course of proceedings in the interest of the natural justice.

2.1 The grounds raised by the Revenue are reproduced as under:

2.2 The assessee filed letter dated 27th November, 2019, mentioning therein the additional grounds, which read as under:

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‘Cosmic Global Ltd.’ in support service segment. This comparable was selected by the assessee before Ld. TPO and did not seek it’s exclusion either before the learned TPO or before the Learned CIT(A). It’s exclusion has been sought for the first time before the Tribunal. The second issue is for computing correct operating margin of comparable ‘M/s R Systems International Ltd.’ under Information Technology enabled Services (ITeS) segment. The Learned Counsel of the assessee submitted that at the time of selection of the comparable M/s Cosmic Global full information was not available in the public domain and subsequently on being noticed outsourcing model of the comparable and decision of the Hon’ble High Court in the case of ‘Rampgreen Solutions Private Limited’ [ITA No. 102/2015 (Delhi HC)], wherein it is held that a comparable with different business model cannot be compared with the taxpayer, the assessee chose to challenge the comparable before the Tribunal. Regarding ‘R-Systems International Ltd.’, the learned Counsel submitted that the learned TPO without providing any basis for calculation, incorrectly computed the operating margin as 10.34% instead of 4.30%. 4.1 In support of his contention that assessee can challenge the exclusion of a comparable before the Tribunal, even though it was not challenged before the lower authorities, the learned Counsel of the assessee relied on following judgments:

• DCIT Vs. Quark Systems (P.) Ltd., [2010] 38 SOT 307 (Chd. SB) • CIT Vs. Quark Systems (P) Ltd., [2011] 244 CTR 542 (P&H HC) • Navisite India Pvt. Ltd. Vs. ITO, [ITA No. 5329/Del./2012] • A.M. Tod Company India Pvt. Ltd. Vs. ITO [ITA No. 492/Mum./2006]

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4.2 Relying on the above judgments, the learned Counsel of the assessee submitted that additional ground of the assessee might be admitted. 4.3 On the other hand, the learned DR submitted that assessee is very casual in raising additional ground, which is reflected from letter filed for admitting additional ground where the learned Dispute Resolution Panel (DRP) has been mentioned instead of Ld. CIT(A). The Learned DR also submitted that the contention of new information in public domain regarding the comparable is not correct as order of the Learned TPO was passed on 31/10/2011 and order of the Learned CIT(A) was passed on 3/11/2014 whereas the assessee is approaching now in the year 2019 for admitting the additional ground. Accordingly, he submitted that additional ground of the assessee might not be admitted. 4.4 We have heard rival submission of the parties on the issue of additional ground raised. On the issue of exclusion of comparable which was selected by the assessee before the learned TPO, the Tribunal in the case of DCIT Vs. Quark Systems (P) Ltd. (supra) has held as under:

“30. Learned special counsel for the Revenue Shri Kapila has vehemently argued that "Datamatics" was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the learned CIT(A) in appeal. Therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins. We are unable to accept above contention. In the first place, these are initial years of implementation of transfer pricing legislation in India and taxpayers as well as tax counseltants were not fully conversant with this new

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branch of law when proceedings were initiated or even at appellate stage. Besides, Revenue authorities, including TPO were required to apply statutory provisions and consider for purposes of comparison functions, assets and risks (turnover), profit and technology employed by the tested party and other enterprises taken as comparable. Statutory duty is cast on them to undertake above exercise. This has not been done in this case. We would only say that prima facie, as per the material, to which reference has been drawn by Shri Aggarwal, Datamatics does not appear to be comparable. Even if the taxpayer or its counsel had taken Datamatics as comparable in its T.P. audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics referred to by Shri Aggarwal. The Tribunal is a fact- finding body and, therefore, has to take into account all the relevant material and determine the question as per the statutory regulations. 31. In the case of CIT vs. Bharat General Reinsurance Co. Ltd. (1971) 81 ITR 303 (Del), the Hon’ble Delhi High Court observed as under :

"It is true that the assessee itself had included that dividend income in its return for the year in question but there is no estoppel in the IT Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quit apart from it, it is incumbent on the IT Department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the Department to tax that income in that year even though legally such income did not pertain to that year." 32. In the case of R.B. Jessaram Fatehchand vs. CIT (1971) 81 ITR 409 (All), it has been found and observed as under :

"Mr. Brijlal Gupta appearing for the Department pointed out that the assessee itself filed separate returns for the two parts of a single accounting period. The assessee applied for registration for the first period only. The assessment for the second period proceeded as

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against an unregistered firm. It was, therefore, urged by Mr. Gupta that it is not open to the assessee to urge now that a single assessment under s. 26(1) ought to have been made. Now, there cannot be an estoppel against statute. If in fact the procedure adopted by the ITO was incorrect, the defect is not cured by the attitude taken up by the assessee." 33. In the case of CIT vs. C. Parakh& Co. (India) Ltd. (1956) 29 ITR 661 (SC), their Lordships of Supreme Court made the following observations :

"On the question of the admissibility of the deduction of Rs. 1,23,719, the contention of the appellant is that as the respondent had itself split up the commission of Rs. 3,12,699 paid to the managing agents, and appropriated Rs. 1,23,719 thereof to the profits earned at Karachi and had debited the same with it, it was not entitled to go back upon it, and claim the amount as a deduction against the Indian profits. We do not see any force in this contention. Whether the respondent is entitled to a particular deduction or not will depend on the provision of law relating thereto, and not on the view which it might take of its rights, and consequently, if the whole of the commission is under the law liable to be deducted against the Indian profits, the respondent cannot be estopped from claiming the benefit of such deduction, by reason of the fact that it erroneously allocated a part of it towards the profits earned in Karachi. What has, therefore, to be determined is whether, notwithstanding the apportionment made by the respondent in the profit and loss statements, the deduction is admissible under the law." 34. In the case of CIT vs. V. MR. P. Firm (1965) 56 ITR 67 (SC), the following observations of their Lordships of Supreme Court are as under :

"The decision in Amarendra Narayan Roy vs. CIT AIR 1954 Cal 271 has no bearing on the question raised before us. There the concessional scheme tempted the assessee to disclose voluntarily all his concealed income and he agreed to pay the proper tax upon it. The agreement there related to the quantification of taxable income but in the present case what is sought to be taxed is not a taxable income. The assessee in such a case can certainly raise the plea that his income is not taxable under the Act. We, therefore, reject this plea." 35. In para 4.16 of latest report, the OECD provides the following guidelines :

"In practice, neither countries nor taxpayers should misuse the burden of proof in the manner described above. Because of the

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difficulties with transfer pricing analysis, it would be appropriate for both taxpayers and tax administrations to take special care and to use restraint in relying on the burden of proof in the course of the examination of a transfer pricing case. More particularly, as a matter of good practice the burden of proof should not be misused by tax administrations or taxpayers as a justification for making groundless or unverifiable assertions about transfer pricing. A tax administration should be prepared to make good faith showing that its determination of transfer pricing is consistent with the arm’s length principle even where the burden of proof is on the taxpayer, and the taxpayers similarly should be prepared to make good faith showing that their transfer pricing is consistent with the arm’s length principle regardless of where the burden of proof lies." 36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. 37. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part.”

4.5 This decision of the Tribunal has been further upheld by the Hon’ble High Court of Punjab and Haryana as reported in (2011) 244 CTR 542. 4.6 Relying on the decision of the Tribunal and in the interest of the substantial justice, the issue raised by way of the additional ground deserves to be admitted. Accordingly, the additional ground was admitted and the parties were directed to address on the additional grounds along with the grounds raised in appeals. 5. The ground No. 1 of the appeal of the assessee is general and ground No. 2 and 3.5 were not pressed, accordingly same are dismissed as infructuous. 6. The remaining grounds pertaining to rejection of the comparables are taken up together. Before taking up those grounds, it is relevant to refer to the profile of the assessee

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company as mentioned by the learned Transfer Pricing Officer in para 1.3 of his order: “1.3.1 Prometric India is a member company of the Prometric group engaged in provision of computer based testing (“CBT") services to its overseas group companies and to its clients in India 1.3.2 Prometric India is headquartered in Delhi from where all its administrative and financial activities are carried out. It has a call- centre for test scheduling / test rescheduling / call-in information etc., and testing centers in 8 cities, including all 4 metropolitan cities of India for conducting CBT services. 1.3.3 Prometric India's activities include scheduling, rescheduling of appointments for CBT, call-in information about various tests offered and testing sites Testing centres are well equipped with the requisite equipments, which are required for CBT and provide utmost security and confidentiality. In the provision of these services, Prometric BV (“PBV") and Prometric Thomas Learning Pty. Ltd. (“PSA’) are the only customers of Prometric India In India, Prometric India conducts CBT tests for GRE, GREW, TOEFL, MCSE, CCNA, OCP etc. 1.3.4 Prometric India also provides support services to one of its associated enterprises in Netherlands for whom Prometric India identifies potential Authorised Prometric Testing Centres (“APTC"), assists in the delivery of marketing materials and information forms to potential APTCs, organizes attendance at conferences and meeting with regard to information technology testing in India, provides necessary assistance and support which the APTCs may require in respect of their testing activities for their respective clients. These services can be categorized as marketing support services.”

6.1 The assessee in its transfer pricing study reported following international transactions and method selected for determining arm’s-length price: Sl. No. Nature of Transactions Method Value of transaction 1. Provision of support 91,064,861 services for computer based testing 2. Provision of marketing TNMM OP/TC 31,134,838 support services 3. Provision of back office 46,184,808 based IT enabled services

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6.2 Further, the assessee selected 12 comparables for the support service for computer based testing and marketing support service segment and in view of the average margin of those comparables based on multiple year data, was worked out at 7.90%. The assessee’s margin being higher in both segments, the transactions were treated as at arm’s-length. Similarly, in the case of ITeS, seven comparables were chosen by the assessee and their mean margin was worked out at 10.04%, and thus, the transaction was considered at arm’s-length. 6.3 The learned TPO though accepted the method adopted by the assessee to benchmark the international transaction, however he rejected the comparability analysis and conducted a fresh benchmarking study on the basis of additional/modified quantitative filters. The Learned TPO rejected few comparables of the assessee and selected few comparables himself. The summary of the comparable companies selected by the Learned TPO are as follows:

Arm's Quantum of No. of Margin of the Segment Length Addition (in Comparables Appellant Margin INR) Marketing Support Service Segment (Page 123 of 7.00% 6,157,133 Volume I of the Paperbook) 28.16 Support Services for 11 % Computer based Testing 8.79% 16,218,949 Segment/Page 123 of Volume I of the Paperbook) IT enabled Services 38.07 Segment/Page 172 of 9 7.00% 13,410,860 % Volume I of the Paperbook)

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6.4 Final list of the comparables for the marketing and other support services (MSS) mentioned on page 44 of the learned TPO is reproduced as under:

Sl. No. Name of comparable OPHC (%) 1 Educational Counseltants India Ltd. (Seg.) 5.2 2 ICRA Management Counselting Services Ltd. 3.22 3 I DC India Ltd 14.87 4 ITDC Ltd (Seg) 9.4 5 Saket Projects Ltd (Seg.) 159.37 6 In House Productions Ltd (Seg.) 0.56 7 Choksi Laboratories Ltd. 29.2 8 Indus Technical & Financial Counseltants (Ltd.) 14.56 Rites Ltd. (Seg) 25.77 9 10 Technicom-Chemie (India) Ltd. 7.32 11 Wapcos (India) Ltd (Seg) 40.37 Average 28.16

6.5 The Learned TPO on the basis of mean margin of comparables at 28.16%, computed the arm’s-length price of transaction of support services for computer-based testing segment and marketing support service segment and accordingly proposed adjustment of ₹ 1,62,18,949/- and ₹ 61,57,133/- to the segment of computer based testing support services and marketing support services segment respectively. 6.6 The list of the comparables for IT enabled services mentioned at page 93 of Ld. TPO is reproduced as under:

Sl. No. Name of comparable OP/TC 1 Accentia Technologies Ltd 40.94 Caliber Point Business Solutions 2 Ltd 10.97 3. Cosmic Global Ltd. 23.3 V Eclerx Services Ltd. 65.88 HCL Comnet Systems & Services 5 Ltd. 37.99

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6 Mold-Tek Technologies Ltd 96.66 7 R Systems International Ltd. (Seg.) 10.34 8 Spanco Ltd (Seg.) 5.86 9. Vishal Information Technologies 50.68 Ltd . (Also known as Coral Hubs Ltd ) 38.07 Average

6.7 In view of the mean margin of comparable is under ITeS segment at 38.07% , the learned TPO worked out the arm’s-length price of the transaction at ₹ 5,95,95,668/- and proposed transfer pricing adjustment of ₹ 1,34,10,860/- for the shortfall. In this manner, the Learned TPO proposed total transfer pricing adjustment of ₹ 3,57,86,942/- (1,62,18,949 + 61,57,133 + 1,34,10,860) 6.8 The Learned CIT(A) rejected three comparables for MSS segment and 4 comparables in IteS segment. The summary of the comparable companies finally selected by the Ld. CIT(A) is as follows:

Arm's Length Quantum No. of Margin of the Segment Margin single of Addition Comparables Appellant year data (in INR) Marketing Support 7.00% NIL Service Segment 8 10.54% Support Services for Computer based 8.79% NIL Testing Segment IT enabled Services 5 20.23% 7.00% 5,710,514 Segment

6.9 In grounds along with additional grounds raised, the assessee is contesting inclusion of two comparables in the ITeS segment and one comparable in marketing and support service (MSS) segment. The assessee is also asking for computation of

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correct margin of one comparable. The Revenue on the other hand is seeking exclusion of the three comparables in the MSS segment and four comparables in ITeS segment. 6.10 We have heard both the parties through Video Conferencing facility and perused the paper books filed electronically.

ITA No.499/Del./2015 (Assessee’s Appeal) 7. We first take up the issues raised by the assessee in its appeal. In additional ground No.1 the assessee has sought exclusion of M/s Cosmic Global Ltd under IT enabled Services segment: 7.1 The learned Counsel submitted that this company was selected as comparable by the assessee but being contested before the Tribunal for its exclusion on the ground of different business model. The learned Counsel submitted that the company is functionally not comparable as main services provided by it are translation services. He further submitted that vendor payment of the company constitute 60.17% of the total cost and thus business model of the company is of outsourcing, . The assessee does not outsource its function and carries out the ITeS services through its own employees. The Learned Counsel submitted that the company has been held incomparable to ITeS service provider on account of outsourcing model in following judicial pronouncement: • BNY Mellon International Operations V/s PCIT (ITA No 1226/2015)- Bombay High Court • M/s Global E- Business Operations V/s PCIT (ITA No. 700/2017)- Karnataka High Court • M/s Venture India Private V/s ACIT (ITA No 1788/PUN/2014)- AY 2009-10 • UT Starcom Inc. V/s DDIT (ITA No 1829/Del/2014)- AY 2009-10

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• Mercer Consulting (India) Pvt Ltd [ITA No.966/Del/2014] [AY 2009-10] dated 06.6.2014 • M/s. Parexel International (India) Private Limited, Hyderabad (ITA No. 144 & 07/Hyd/2014) AY 2009-10 dated 30.9.2014 • PTC Software (India) Pvt. Ltd. (ITA NO.336/PN/2014) dated 31.10.2014 upheld by the Hon'ble Bombay High Court and followed in BNY Mellon International (Supra) • M/s. Excellence Data Research Pvt. Ltd., Hyderabad [ITA.No. 159/Hyd/2014] [AY 2009-10] dated 31.7.2014 • M/s. Hyundai Motors India Engineering Pvt. Ltd., Hyderabad [ITA.No. 255/Hyd/14] [AY 2009- 10] dated 31.7.2014 • Global e-business operations P. Ltd. [ITA No. 160/Bang/2014] [AY 2009-10] dated 28.02.2017 • Cummins Technologies India ltd. [ITA No. 784/PN/2014] [AY 2009-10] dated 30.03.2016 • BNY Mellon International Operation (India) Private Limited [ITA No. 23/PN/2014] [AY 2009-10] dated 11.02.2015 . ADP Pvt. Ltd. [ITA No. 191/Hyd/2014] [AY 2009-10] dated 18.01.2017

7.2 On the other hand, the Learned DR submitted that translation services are also in the nature of ITeS services and therefore functionally similar to the assessee. He also disputed the ratio of vendor payments to total cost in the case of the company presented by the assessee. 7.3 We have heard rival submission of the parties and perused the relevant material on record. This company was included by the assessee in its set of the comparables filed before the Learned TPO and the Ld. TPO also accepted this company as valid comparable. Now, the assessee is seeking exclusion of the company on the ground of functional dissimilarity and different business model. 7.4 On perusal of page 376 of the paper-book of the annual reports, which is director’s report of the company, wherein under the head review performance and business prospectus, the activity of the translation has been categorized as ITeS activity. No further detail as how the transaction services falls under ITeS

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category is given in the Annual Report. The process of service delivery is also not mentioned in the Annual Report. Further, the Learned DR submitted that CBDT has considered translation activity as part of ITeS activity. In view of the doubts raised by the assessee on the IteS nature of the translation services performed by the company and no further details available in the Annual Report, needs verification from the company, which may be carried out by the ld. AO/TPO by way of exercising authority under section 133(6) of the Act 7.5 Further, the assessee has stated that the company work on outsource model as against the assessee who provide services to the AEs through its own employees. The Learned DR on the other hand has objected for assuming the outsource model only on the basis of one entry of translation charges paid of ₹ 2,86,29,348/- out of total operating cost of ₹ 4,75,83,209/-. We have perused the Annual Report of the company and from schedule 14- Significant Accounting Policies (page 385 of Annual Report paper book) we find as follows: “1.6 The Company follows the procedure of deploying personnel as Transcriptionists and checkers for translation work only after imparting an intensive training programme. In the opinion of the Company, the intensive training programme is vital and necessary, without which the personnel will not be able to achieve the necessary competence for carrying out the operations. Such personnel after the training programme was absorbed by the Company as employees and the entire expenditure incurred on such personnel hithertofore accounted as Deferred Revenue Expenditure is now accounted as Revenue Expenditure during the year and written off. However the proportion of earlier years Deferred Revenue expenditure of Rs. 3,74,500 is written off. During this training period, the personnel are paid stipend.”

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7.6 Since exclusion of the company has been sought first time before the Tribunal, and in order to verify the exact nature ‘translation work’ and the ‘expenses on translation’ whether the same are in the nature of outsourcing or incurred by the assessee in developing employees, we feel it appropriate to restore the issue of exclusion of the company from the set of the comparables to the file of the Learned AO/TPO for verifying from the Annual Report or by way of issuing notice under section 133(6) of the Act to the company. It is needless to mention that the assessee shall be provided copy of the information gathered by the AO/TPO from the company and also provide adequate opportunity of being heard on the issue. The additional ground No.1 of the appeal is accordingly allowed for statistical purposes. 8. In additional ground No. 2, the assessee has sought for adopting correct margin of comparable M/s R Systems International Ltd under the ITeS segment. 8.1 The Learned Counsel of the assessee submitted that corrected margin of the company should be considered for computation of the arm’s-length margin. He submitted that the company follows year ending, which is different from the assessee. Accordingly, submitted that computation of margin might be remanded to the file of the learned TPO based on quarterly filing of the company. 8.2 On the other hand, the Learned DR relied on the margin computed by the learned TPO. 8.3 We have heard rival submission of the parties on the issue in dispute. In our opinion, in transfer pricing, comparability of the assessee has to be made with other companies in identical

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environment. Therefore, same financial period of both the assessee and the comparable should be considered for comparison. In view of the above facts and circumstances, we direct the learned TPO to compute the margin of this company after taking into consideration the financial results of four quarters, which have been considered in the case of the assessee. The relevant ground of the appeal ground is accordingly allowed for statistical purposes. 9. In regular ground No. 3.1 to 3.4 of the appeal, under the ITes segment , the assessee has only challenged inclusion of ‘M/s Vishal Information Technologies Ltd.’ in set of comparables. 9.1 The Learned Counsel of the assessee submitted that the company subcontracts majority of its work to 3rd party vendors. He submitted that vendor payments approximate to 85.58% of the total cost incurred by the company and thus, it needs to be excluded on the ground of business model. He submitted that company has been rejected as comparable to ITeS companies in following decisions: • Rampgreen Soultions Private Limited [ITA 102/2015] - Delhi HC - please refer para 8 • BNY Mellon International Operations V/s PCIT (ITA No 1226/2015)- High Court • Everest Business Advisory India Private Limited V/s DCIT (ITA No 43/ Del/ 2013)- AY 2007- OS • M/s BA Continuum India Private Limited V/s ACIT (ITA No 1144/Hyd/2014)- AY 2008-09 • M/s Symphony Marketing Solutions India Private Limited V/s ITO (IT (PA) No 1316/Bang/2012)- AY 2008-09 • PTC Software (India) Pvt. Ltd. (ITA NO.336/PN/2014) for AY (2009-10) dated 31.10.2014 • M/s. Capital IQ Information Systems (India ) Pvt. Ltd (ITA No.l961/Hyd/2011 ; AY 2007- OS; Paragraph 17 and 23 Page 20-21 and 25); wherein, the Hon'ble ITAT relied upon DPP directions for subsequent year, i.e. AY 2008-09 in assessee's own case based on similar facts of the case in both the years.

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• Zavata India Private Limited [ITA No.l781/Hyd/2011; AY 2007-08; Paragraph 16- Page 9] In this case, the Hon'ble ITAT followed the order of Capital IQ Information Systems wherein, the Hon'ble ITAT had relied upon DRP directions for subsequent year, i.e. AY 2008-09 in assessee's own case based on similar facts of the case in both the years. • HSBC Electronic Data Processing India Ltd.ITA No.l624/Hyd/2010; AY 2006-07; Paragraph 9.2- Page 6; wherein, the Hon'ble ITAT relied upon DRP directions for subsequent year, AY 2008-09 in assessee's own case based on similar facts of the case in both the years. • Cognizant Technology Services Pvt. Ltd.,Hyderabad ITA No.255/Hyd/14 AY 2007-08,2008- 09

9.2 The Learned DR, on the other hand, contested that in the case of the company claim of salary expenses being low as compared to vendor payment is not correct. Before the Learned TPO, the assessee challenged inclusion of the company “Vishal Information Technology Ltd.” on the ground of outsourcing model. The learned TPO rejected this ground following the finding of the Tribunal in the case of Deloitte Consultant Private Limited (supra). Before the Learned CIT(A) this ground was not taken and only the company was challenged on the ground of functional dissimilarity, which was rejected by the Learned CIT(A). The Learned Counsel of the assessee has referred to Schedule 14A of financial statement (page 401 of the paper-book of Annual Reports) and has submitted that vendor payment constitute 85.58% of the total cost. However, on verification of the schedule, we find that alleged vendor payments actually consist of opening stock of work in progress also and there is no separate amount of vendor payments mentioned specifically in financial statements. From the other parts of the annual report also we are unable to decipher whether the company work mainly on outsource model. In the facts and circumstances of the case, we feel it appropriate

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to restore this issue to the file of the Learned AO/TPO to verify exercising authority under 133(6) of the Act and if it is found that business model of the company is outsourced model, the issue may be decided in accordance with law. 9.3 In the ground No. 3.1 to 3.4 of the appeal, under marketing support service and other support service segment, the assessee has challenged inclusion of one comparable, namely, M/s Choksi Laboratories Ltd. 9.4 The learned Counsel submitted that this company is engaged in lab testing of products for clients or as a regulatory requirement for pharmaceuticals, food and agriculture products, construction materials, chemicals etc. He further submitted that the company also provides services in the field of pollution- control and has been certified by several regulatory bodies and also accredited by the National Accreditation Board for Testing and Calibration Laboratories. He further submitted that company is highly capital intensive company, employing net fixed assets amounting to 148% of the operating income as compared to the assessee which deploys routing tangible constituting only 6.98% of the operating income. He further submitted that company has been rejected in following cases as comparable to ITeS segment: • Yum Restaurants India Private Limited V/s ITO (ITA No 6168/Del/2012)-AY 2008-09 • M/s Brown Forman World Wide LLC V/s DDIT (ITA 6139/Del/2012)- AY 2008-09 • Ciena India Pvt. Ltd vs DCIT [ITA No.3324/Del/2013] AY 2008-09 • Genzyme India Pvt. Ltd. vs ACIT [ITA No.892/Del/2014] AY 2009-10 • Brown Forman Worldwide LLC vs DDIT [ITA Nos.433 & 6139/Del/2012] AY 2007-08 & AY 2008-09 • Avaya India Pvt. Ltd. vs DCIT [ITA no. 146/Del/2013] AY 2008-09 • Corning SAS-India Branch Office Vs DDIT [ITA No.5713/Del./2012] AY 2008-09

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9.5 The learned DR, on the other hand, relied on the finding of the Ld. CIT(A) and submitted that company is functionally similar to the assessee. He further submitted that the assessee company is also capital intensive company and therefore cannot be rejected on the ground of asset deployed by the company. 9.6 We have heard rival submission of the parties and perused the relevant material on record. The learned TPO held the testing services of the company as functionally similar to support services provided by the assessee. He also rejected the contention of the assessee that 58% of the assets of the company were testing instruments, on the ground that plant and machinery in the case of the assessee also constitutes 58.81% of the fixed assets. The Ld. CIT(A) upheld the finding of the learned TPO. We have perused the annual report of the company (page 20 of annual report), wherein the segment reporting on page 22 of the annual report MSS paper-book, is mentioned, which is reproduced as under for ready reference:

“08. Segmental Reporting: The Company treats Analytical Charges & Consultancy Receipts as a single segment and therefore details of segments are not separately shown. The Company is a Commercial Testing House engaged in testing of various products and also offers services in the field of pollution control as allied activity. The company is managed organizationally as a unified entity with various functional heads reporting to the top management and is not organised along segments. There are, therefore, no separate segments within the Company as defined by AS-17 (Segmental Reporting) issued by the ICAI.”

9.7 In our opinion, testing of products and services in the field of the pollution-control are functionally different from the

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providing marketing support services. For providing testing services higher technical skills and experiences are required whereas support services can be provided using comparatively less technical persons. In view of different nature of services , we hold the company as functionally dissimilar and accordingly direct the Learned AO/TPO to exclude the company from the final set of the comparable. 9.8 The grounds No. 3.1 to 3.4 of the appeal of the assessee are partly allowed for statistical purposes.

ITA No.397/Del./2015 (Revenue’s Appeal) 10. Now, we take up the appeal of the Revenue. In ground No.1 exclusion of ‘Saket Project Ltd.’ has been challenged. 10.1 The learned DR submitted that the TPO has already considered segment result and, therefore, Ld. CIT(A) is not justified in excluding the company on the ground of functional dissimilarity. 10.2 The Learned Counsel of the assessee, on the other hand, relied on the finding of the Learned CIT(A) and submitted that TPO has taken the event management division for comparison which constitutes for only 25% of the business and has 159% profit. He further challenged the accuracy of allocation of the expenses to various segments by the company. He further submitted that this company has been excluded in the case of marketing support service provider in following decisions: • Yum Restaurants India Private Limited V/s ITO (ITA No 1097/Del/2014)-AY 2009-10 • Yum Restaurants India Private Limited V/s ITO (ITA No 6168/Del/2012)-AY 2008-09

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• M/s Qualcomm India Private Limited V/s DCIT (ITA No 6059/Dei/2012)- AY 2008-09 • M/s Honeywell Turbo Technologies (India) Private Limited (ITA No 2584/PUN/2012)- AY 2008-09 • M/s. Premier Exploration Services Pvt. Ltd., ITA No.5293/Del./2012, AY 2008-09 Paragraph 9, Page 13 wherein, the Hon'ble ITAT. • M/s DHL Express (India) Private Limited (I.T.A.N0.7360/Mum/2010 - A.Y 2006-07 "held that when direct comparables are available, comparables with segmented results should not be used.

10.3 We have heard rival submission of the parties and perused the orders of the lower authorities on the issue-in-dispute. The learned TPO retained the company in the set of the comparables on the ground that the company cannot be excluded due to super profit during particular year. He rejected the contention of the assessee of non-reliability of expense allocation by the company under different segments. The Ld. CIT(A), however, excluded the company on the ground of the functional dissimilarity. The company is engaged in four segments, namely, publication, energy, event management and pharmaceuticals. It was admitted by the assessee that “event management” segment was found comparable during financial year 2005-06 and 2006-07 but in the year under consideration the assessee sought exclusion on the ground of unreliability of segment information. Before us, the learned Counsel of the assessee has referred to activities carried out under event management segment (page 34 of the paper book of MSS annual report) reported in directors report (page 4 of the annual report), which reads as under: “During the year under review, the company has arrange the major events like TEXCELLENCE 2007. STEAMTECH 2007 and SYNERGY FOR ENERGY 2008. Your company has also shown very good growth in this division and earned the revenue of Rs.169.94 lacs as against Rs.107.11 lacs during the previous year having the improved performed of 59%. The event management activities are

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mainly for industry and now it is getting momentum. With the last growth and development. It is hoped to get increasing revenue from this division.”

10.4 The function of managing events utilizing services of various professionals cannot be compared with the function of providing marketing support. The Ld. CIT(A) has also followed finding of the Tribunal in the case of Premier exploration services private limited (supra) and Nortel networks India private limited (supra), where the company has been rejected on the ground of functional dissimilarity. In view of the above, we do not find any infirmity in the finding of the Ld. CIT(A) on the issue in dispute and accordingly we uphold the same. The ground No.1 of the appeal of the Revenue is accordingly dismissed. 11. In ground No.2, the Revenue has challenged exclusion of ‘Wapcos Limited’. In ground No. 3 exclusion of ‘Rites Limited’ has been challenged by the Revenue. 11.1 The learned DR submitted that both the companies have been excluded on the ground of public sector undertaking. According to him if companies are functionally similar to the assessee, same should not be excluded merely on the ground of being public sector companies. 11.2 On the contrary, the learned Counsel of the assessee submitted that M/s Wapcos Limited in addition to being a government-owned company, functionally not comparable as it provides consultancy services relating to water and power infrastructure sectors etc. He further submitted that this company has been rejected by the Learned CIT(A) in assessee’s own case for assessment year 2009-10 on the basis of different

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functional profile and said finding of the Learned CIT(A) has been accepted by the Department and no the appeal has been filed. 11.3 As far as company Rites Limited, is concerned the learned Counsel of the assessee submitted that in addition to being a government-owned company, it is also not functionally comparable as it is engaged in rendering consultancy services mainly in the transportation infrastructure sectors. Further submitted that company has been rejected in assessee’s own case for assessment year 2009-10 and 2010-11 on the basis of different functional profile and no further appeal has been filed by the Department on this issue. 11.4 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The Ld. CIT(A) has excluded above both companies observing as under: “(b) I have considered the facts of the case, the submissions of the appellant and various judicial cases on the subject. Before adjudicating on the comparability of these companies with the appellant company, it is necessary to have an overview of the functions of the two companies: RITES Ltd provides pre-project planning services in the fields of engineering design, construction and project management for railway tracks and electrification together with traffic arfd software consultancy assignments to Malaysian Railways. Hence the services provided by it are extremely technical in nature requiring highly qualified technical personnel. WAPCOS renders consultancy services relating to water, power and infrastructure sectors. Services offered include market intelligence, feasibility studies, planning/ project formulation, field and geo- technical investigations, engineering design, contract management, quality assurance & management and human resource development. It also executes turnkey projects on a regular basis. RITES Ltd and WAPCOS LTD cannot be considered as a comparable for the following reasons:

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(i)Whereas the appellant was engaged in providing marketing and support services to its parent, RITES Ltd and WAPCOS LTD are public sector engineering companies providing end to end engineering solutions to their clients who are not their parent company. Hence the aforesaid PSUs are functionally very different from the appellant company.

(ii)On the basis of functional dissimilarity, RITES Ltd and WAPCOS LTD have been rejected as comparables in the case of companies providing marketing and support services by the Hon'ble ITAT in a number of cases. In the case of DCIT Vs MCI Com I Ltd 25 taxmann.com 520,(Del)(2012) it was held as under:

"The view of the first appellate authority that UIL, Rites, Wapcos and TCE are engineering companies and provide end- to-end solutions and whereas the assessee company provides marketing support services to the parent company, which is in the nature of support service and hence not functionally comparable, is to be agreed with. She rightly concluded that the risk profile is vastly different and hence on this count also they are not comparable. This factual conclusions are not disputed by the department."

On the basis of the aforesaid judgment a similar view was taken by Hon'ble ITAT Delhi in the case of H&M Hennes and Mauritz India (P)Ltd Vs DCIT (ITA No 4704 of 2012)

(iii).In a more recent judgment in the case of Nortel Networks India (P) Ltd Vs Addl CIT(2014) 44 taxmann.com 26, both WAPCOS and RITES have been excluded on the basis of functional dissimilarity with a company providing marketing and support services.”

11.5 We agree with the finding of the Learned CIT(A) on the issue in dispute as services of consultancy and providing engineering solutions cannot be compared with the activity of providing market support services. Further, both are government-owned companies, who gets priority in getting any government contract and thus there profitability gets influenced by related party transactions. Accordingly, we do not find any infirmity in the finding of the Learned CIT(A) on the issue in dispute and

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accordingly, we uphold the same. The ground No. 2 and 3 of the appeal of the Revenue are accordingly dismissed. 12. In ground No. 4, Revenue has challenged exclusion of M/s Accentia technologies Ltd. 12.1 The learned DR submitted that in view of the CBDT Circular, the activity of the company is in the nature of the ITeS and, therefore, it is a valid comparable. 12.2 On the other hand, Learned Counsel of the assessee relied on the finding of the Learned CIT(A) and submitted that company operates into segments i.e. ITeS and software development, and therefore it cannot be compared with the assessee at entity level. 12.3 We have heard rival submission of the parties on the issue- in-dispute and perused the order of the lower authorities. We find that before the learned TPO, the assessee sought to exclude the company on the ground of multiple segments and extraordinary event. The contention of the assessee was rejected by the learned TPO. The learned TPO noted that the company shown revenue from ITeS as well as software development and implementation but the revenue from ITes was 80.87% therefore it was selected as comparable. The objection of extraordinary event was also rejected on the ground that the assessee did not adduce any evidence of impact of the extraordinary event on the margin of the company. The learned CIT(A), however, rejected the findings of the learned TPO and excluded the company. The finding of the Ld. CIT(A) on the issue in dispute is reproduced as under: “(c) (I) I have considered the facts of the case, the submissions of the appellant and various judicial cases on the subject.The TPO, erred in including Accentia as a comparable on account of the following reasons:

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1.Extraordinary events in the form of merger of 4 companies with Accentia, which took place during the year and had a considerable impact on its profitability and hence OP/TC. While the turnover increased by 75% in FY 2007-08 over the immediately preceding year, the profits increased by 23% during the corresponding period. Several prominent decisions relied upon by the appellant rule out a company being used as a comparable in a year in which such extraordinary events have taken place. (Capital IQ Information Systems (India ) Pvt. Ltd [ITA No.l961/Hyd/2011 *AY 2007-08]; M/s. Market Tools Research Pvt Ltd.[ ITA No.l811/Hyd/2012; AY 2008-09). (ii). Functionally, there is a major difference between the two sets of companies. Accentia earns revenue from various sources viz. Software Development & Implementation Medical Transcription and Billing &. Coding. However, its operations have been classified under a single segment namely "Healthcare Receivables Management and no segmental information has been provided by it in its annual report. Hence I hold that Accentia should not have been used as a comparable on account of the fact that there were significant mergers during the year.”

12.4 Before us, the Learned DR could not rebut the finding of Ld. CIT(A) of existence of extraordinary event and impact on margin of the company. In our opinion, the finding of the Ld. CIT(A) on the issue-in-dispute is justified and no interference is required on the same. Accordingly, we uphold the same. The ground no. 4 of the appeal is accordingly dismissed. 13. In ground No.5, the Revenue has challenged exclusion of E- Clarx Services Ltd. The learned DR submitted that the finding of the Ld. CIT(A) that company is engaged in providing KPO services is not correct and the company is mainly engaged in ITeS segment only. 13.1 The learned Counsel, on the other hand, relied on the order of the Learned CIT(A).

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13.2 We have heard rival submission of the parties on the issue in dispute and perused the order of the lower authorities. Before the Learned TPO, the assessee sought exclusion of the company on the ground of functional dissimilarity as company being a knowledge processing outsourcing (KPO) company. According to the learned TPO, in view of TNMM selected as most appropriate method, only broad similarity of function was required. The learned TPO also rejected objection of the assessee of extraordinary event during the year under consideration and intangibles owned by the company. The Learned CIT(A) excluded the company from the set of comparables, observing as under: “c) I have considered the facts of the case, the submissions of the appellant and various judicial pronouncements on the issue. The TPO erred in including E Clerx Services Ltd as a comparable on account of the following reasons: • E Clerx Services Ltd offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. • Extra ordinary events and peculiar circumstances prevailed in the case of this company as it acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. • The Hon'ble Bangalore Tribunal in the case of Capital IQ Information Systems India (P.) Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Appellant and the Tribunal held as follows: — “The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that that the concerned company is engaged in providing Knowledge Process Outsourcing(KPO) Services. On considering the objections of the assessee in relation to this company, we accept the contention of the assessee that

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this company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, which is distinct from the nature of services provided by the assessee." We are of the view that in the light of the decision of the Hyderabad Bench referred to above, this company cannot be regarded as a comparable for the reason that it was functionally different." • Hence on the basis of the aforesaid arguments, I hold that E- clerx should not have been used as a comparable by the TPO. This comparable is accordingly directed to be excluded.”

13.3 In our opinion, it is settled law that KPO companies engaged in providing high-end information technology services cannot be compared with BPO companies engaged in providing low end ITeS services due to difference in quality of human resources employed for rendering the services. Accordingly, we do not find any error in the order of the Learned CIT(A) on the issue- in-dispute and we accordingly, uphold the same. The ground No. 5 of the appeal of the Revenue is accordingly dismissed. 14. In ground No. 6, the Revenue has challenged exclusion of M/s HCL Comnet Systems and Services Ltd.’ 14.1 The Learned DR submitted that CIT(A) is not justified in rejecting the comparable on the ground of related party transaction. According to him while comparing related party transactions, entire transaction of purchase and sales cannot be compared with the sales only. 14.2 The Learned Counsel, on the other hand, relied on the order of the Ld. CIT(A). 14.3 We have heard rival submission of the parties on the issue in dispute and perused the order of the lower authorities. The Ld. CIT(A) has excluded the company on the ground of related party

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transactions being more than 25% of the sales. The relevant finding of the Ld. CIT(A) is reproduced as under: “(c)I have considered the submissions of the appellant and gone through the facts of this case. The appellant is challenging the inclusion of this comparable on two fronts, firstly the massive disparity in turnover of the appellant company on the one hand and HCL on the other and RPT being more than 25% in the case of the comparable company. As regards the latter, the TPO had chosen RPT transactions greater than 25% as a filter for selecting the final list of comparables. Once RPT in excess of 25% was adopted by the TPO as a filter, no comparable failing to satisfy this filter should have been included. Besides there are a number of case laws where comparables having RPT in excess of 25% have been excluded. (ADP(P) Ltd Vs DCIT(2011) 10 taxmann.com 160) (Kyd-Trib); Global Logic India(P) Ltd Vs DCIT (2011) 12 taxmann.com 2S5 (De!-Trib) ACIT Vs Hapag Lloyd Global Services(P) Ltd (ITA No 8499 dated 28- 2-13).In light of this discussion if RPT is in excess of 25% this comparable should be excluded. (ii)As regards turnover difference between the appellant and the comparable company, I hold that whereas the turnover of HCL was 495 crores, the appellant's turnover was hardly 4.6 crores. As has been rightly held in the cases of Market Tools Research(supra),Capital IQ information System lndia(P) Ltd Vs ACIT(supra)CSR India(P) Ltd Vs ITO (2013) 31 taxmann.com 265(Bang-Trib) and Actis Advisers(P) Ltd Vs DCIT (Delhi), the TPO should not have considered HCL Comnet System as a comparable on account of these reasons. Thus I hold that the TPO erred in including HCL as a comparable and it should thus be excluded from the list of comparables.”

14.4 We do not agree with the finding of the Ld. CIT(A) on the issue in dispute. The Learned CIT(A) has clubbed the transaction of sale, purchase, payment for facilities, management contracts etc. and then worked out ratio of these transaction to sales. The said ratio has been worked out to 26.44 %. In our opinion, if total related party transactions have to be compared, then same should be compared with total transaction of purchase and sales etc. carried out by the assessee. Comparing the total related party transaction with the sales reflect a distorted view of the measure

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of related party impact on the margin of the company. The Learned Counsel was directed to provide any binding judicial precedent where a company was rejected on the basis of filter of ratio of total RPT to sales being more than 25%, however no such information was provided by him. In the facts and circumstances, we are of the opinion that the company cannot be rejected on the ground of RPT filter. The direction of the Learned CIT(A) on the issue in dispute are set aside and the Learned AO/TPO is directed to retain the said company as comparable in the final set of the comparables. The ground No.6 of the appeal of the Revenue is accordingly allowed. 15. In ground no.7, the Revenue has challenged exclusion of M/s Mold-Tek Technologies Ltd. 15.1 The Learned DR relied on the order of the TPO, whereas the learned Counsel of the assessee submitted that in view of the extraordinary event of demerger of the plastic division of the company and amalgamation of Teck Men Tools Private Limited during the year under consideration, the company cannot be included as a valid comparable. He supported the order of the Ld. CIT(A) on the issue in dispute and also relied on following decisions: • M/s Symphony Marketing Solutions India Private Limited V/s ITO (IT (PA) No 1316/Bang/2012)- AY 2008-09 • M/s BA Continuum India Private Limited V/s ACIT (ITA No 1144/Hyd/2014)- AY 2008-09 • ICC India Private Limited V/s DCIT (ITA No 25/Del/2012)- AY 2007- 08 • M/s. Capital IQ Information Systems (India ) Pvt. Ltd (ITA No.l961/Hyd/2011; AY 2007-08 Paragraph 12,13 and 23, Page 17 and 25) wherein, the Hon'ble ITAT relied upon DRP directions for subsequent year, i.e. AY 2008-09 in assessee's own case based on similar facts of the case in both the years.

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• Zavata India Private Limited [ITA No.l781/Hyd/2011; AY 2007-08; Paragraph 31- Page 15".In this case, the Hon'ble ITAT followed the order of Capital IQ Information Systems wherein, the Hon'ble ITAT had relied upon DRP directions for subsequent year, i.e. AY 2008-09 in assessee's own case based on similar facts of the case in both the years. . M/s Avineon India Pvt. Ltd. ITA No. 1989/Hyd/2011; AY 2008-09; Paragraph D (3),Page 15;.

15.2 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The learned CIT(A) excluded the company from the final set of the comparables observing as under: “(c) I have considered the facts of the case and gone through the submissions of the appellant. The following arguments emerge out of the facts of the case and appellant's submissions which are in support of excluding the company from the list of comparables.

(i).This was an exceptional year since there was merger/demerger on account of which supernormal profits accrued to the company.

(ii). On account of exceptional events during the year, companies have been excluded as comparables by the Hon'ble HAT in a number of cases. In the case of Capital IQ Vs DCIT(supra), on the issue of including Mold Tech as a comparable it was held as under:

"On careful consideration of the submissions of the assessee we find that the DRP, as already stated earlier, in the proceedings for the assessment year 2008-09 has accepted the assessee's contention that this company cannot be treated as comparable because of exceptional financial result due to merger/demerger. In view of the aforesaid, we accept the assessee's contention that this company cannot be treated as comparable. That apart, it is also a fact that this company has shown super normal profit working out to 113%. The Income- tax Appellate Tribunal, Mumbai Bench in the case of Teva India (P.) Ltd. (supra) has observed that companies showing supernormal profit cannot be treated as comparable. The relevant observations of the Tribunal in that case are extracted hereunder for convenience- "32. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that although a detail submission was made on behalf of the assessee before the learned CIT(A) on the basis of FAR

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analysis to show that the selection of M/s. Vimta Labs as comparable is not justified’, the learned CIT(A) has not accepted the stand of the assessee on the issue without giving any cogent or convincing reasons. In its recent decision rendered in the case of Adobe Systems India Pvt Ltd. (ITA No.5043/Dei/2000 dtd. 21.01.2011) + (2011 -TII-13-ITAT- DEL-TP), Delhi Bench of ITAT has held that exclusion of comparables showing supernormal profits as compared to other comparable is fully justified. We, therefore set aside the impugned order of the id. CIT(A) on this issue and restore the matter to the file of the A.O. with a direction to decide the same afresh after taking into consideration the submissions made by the assessee before the learned CIT(A) and keeping in view the Delhi Bench of ITA in the case of Abode Systems India Pvt. Ltd. (supra).

In this view of the matter, we accept the contentions of the assessee that this company cannot be treated as a comparable."

(iii). From the next year, as per the appellant, the TPO also did not include Mold-Tech as a comparable.

(iv). Mold Tech in its Audit Report for FY 2010-11 made a disclosure that since it was coming out of tax free zone in FY 2011-12, certain adjustments were made in its books for 2010-11 in relation to amounts pertaining to preceding years. This means that for years prior to FY 2010- 11, the accounts of the company were not reflecting the true margins and thus profits.

Hence on the basis of these arguments together with various case laws on this issue, I hold that the AO erred in including Mold Tech as a comparable.”

15.3 In view of judicial precedent, the Ld. CIT(A) is justified in excluding the company because of extraordinary event of merger/demerger. The Learned CIT(A) has also noted that the TPO himself has not included the company as comparable in subsequent year. Accordingly, we uphold the order of the Ld. CIT(A) on the issue in dispute. The ground No.7 of the appeal of the Revenue is accordingly dismissed.

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Sd/- Sd/- (AMIT SHUKLA) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 25th January, 2021. RK/-(D.T.D.S.) Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi