ORANGE BUSINESS SERVICES INDIA SOLUTIONS PVT. LTD.,,GURGAON vs. DCIT, GURGAON

O R D E R PER PRASHANT MAHARISHI, A. M.

1. The Learned Assessing Officer (‘Ld. AC))/ Learned Transfer Pricing Officer (‘Ld. TPO’) (following the directions of the Hon’ble Dispute Resolution Panel (‘Hon’ble DRP’)) erred on facts and in law in enhancing the income of the Appellant by Rs. 7,52,07,938 without appreciating the factual positions/ submissions of the Appellant.

2. The Hon’ble DRP grossly erred on facts and in law in not following the specific directions of the Hon’ble Tribunal and in doing so exceeded its jurisdiction by giving the following directions; 2.1. Inclusion of Maple E-Solutions Ltd and Triton Corp Ltd - deviating from the directions of the Hon’ble Tribunal that companies whose directors were involved in fraud cannot be taken as comparable as their financials are not reliable; 2.2. Inclusion of Vishal Information Technologies Limited- deviating from the directions of the Hon’ble Tribunal that companies acting merely as intermediary having outsourced its activity cannot be taken as comparable; 2.3. Inclusion of Persistent Systems Limited, Sasken Communications Technologies Limited (Seg), Accentia Technologies Limited , Mold-Tek Technologies Limited- deviating from the directions of the Hon’ble Tribunal that companies with extra ordinary circumstances, like those which suffered events like merger/demerger, impacting the financial results cannot be taken as comparable; 2.4. Inclusion of functionally dissimilar companies - deviating from the directions of the Hon’ble Tribunal that companies which are functionally dissimilar cannot be taken as comparable.

3. The Hon’ble DRP grossly erred on facts and in law in not following the rule of consistency, by including Accentia Technologies and Vishal Information Technologies Limited as comparable in AY 2007-08 and holding the same companies incomparable in the immediately subsequent year (AY 2008-09). 4. The Ld. AO/ Ld. TPO (following the directions of the Hon’ble DRP) erred in enhancing the income of the Appellant by Rs. 7,52,07,938 holding that the international transactions of the Appellant pertaining to provision of information technology enabled services (‘ITeS’) segment and contract software development (‘CSD’) segment do not satisfy the arm’s length principle envisaged under the Income Tax Act, 1961 (‘the Act’) and in doing so, have grossly erred in: 4.1. not appreciating that none of the conditions set out in section 920(3) of the Act are satisfied in the present case; 4.2. ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profit and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; 4.3. disregarding the functional analysis submitted by the Appellant in the Transfer Pricing (‘TP’) documentation with respect to ITeS segment and classified the Appellant as a Knowledge Process Outsourcing (‘KPO’) service provider; 4.4 disregarding the Arm’s Length Price (‘ALP’) as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (‘Rules’) as well as fresh search; and in particular modifying/ rejecting the filters applied by the Appellant; 4.5. disregarding multiple year/ prior years’ data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2006-07) data for comparable companies should be used despite the fact that the same was not necessarily available Page | 2

to the Appellant at the time of preparing its TP documentation, and in doing so have grossly erred in; 4.5.1. interpreting the requirement of ‘contemporaneous’ data in the Rules to necessarily imply current/ single year (i.e. FY 2006-07) data; and 4.5.2. holding that at the time of creating/ maintaining the TP documentation, the Appellant could have procured current/ single year data (i.e. FY 2006-07 data) from sources other than the electronic databases, when in fact practically no such other sources were available in case of most companies; 4.6. collecting information of the companies by exercising power granted to him under section 133(6) of the Act that was not available to the Appellant in the public domain and relying on selective information for comparability purposes (and to the extent of completely ignoring reliable data available in public domain/ annual reports in numerous cases) and in doing so violating the fundamental principles of natural justice by relying on the information sourced under section 133(6); 4.6.1. and in doing so violating the fundamental principles of natural justice by relying on the information sourced under section 133(6); and also by 4.6.2. not sharing with the appellant, in case of a number of comparables, the information/ reply received by the TPO/ AO u/s 133(6); 4.7. rejecting comparability analysis undertaken by the Appellant in the TP documentation/ fresh search and conducting a fresh comparability analysis based on application of the following additional/ revised filters in determining the ALP for the international transactions: 4.7.1. exclusion of companies having different financial year ending (i.e. not March 31, 2007); 4.7.2. exclusion of companies with export sales that are less than 25% of their total revenue; 4.7.3. exclusion of companies with diminishing revenues/ persistent losses for last three years upto and including FY 2006-07; 4.7.4. exclusion of companies with related party transactions (‘RPT’) greater than 25% of their sales; 4.7.5. adopting employee cost/ revenues filter greater than 25% of their total revenues as a search criteria for short listing and evaluating comparables for contract software development services; and rejecting, in particular, the following filters applied by the Appellant in its TP documentation/ fresh search: 4.7.7. companies with operating income (i.e. income other than manufacturing and trading income) to sales greater than 50% were accepted; 4.7.8. companies with net worth less than zero were rejected; 4.7.9. companies having research & development costs to sales less than 3% were accepted; and; 4.7.10.companies having advertising, marketing and distribution costs to sales less than 3% were accepted. 4.8. without prejudice to the Appellant’s other contentions, failing to apply the employee cost to sales ratio filter to the ITES segment [as applied vis-a-vis the CSD segment] and thereby adopting an inconsistent stand between ITES and CSD comparables and Page | 3 applying this filter selectively only to the CSD segment; more so when the said filter was applied to the ITES segment in the previous assessment year i.e. AY 2006-07 and thus acting in an inconsistent and arbitrary manner; 4.9. including companies having high margin / volatile operating profit margins in the final comparables’ set for benchmarking a low risk captive unit such as the Appellant (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the single-minded intention of making an addition to the returned income of the Appellant; 4.10. including certain companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 4.11. resorting to arbitrary rejection of low-profit/ loss making companies based on erroneous and inconsistent reasons; 4.12. excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 4.13. ignoring the business/ commercial reality that since the Appellant (vis-a-vis both its ITES/ CSD services) is remunerated on an arm’s length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the Appellant undertakes minimal business risks as against comparable companies that are full- fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact; 4.14. not allowing the appellant the application of (+/-) 5% range available as per the proviso to section 92C(2) of the Act; and 4.15. disregarding judicial pronouncements in India in undertaking the TP adjustment; 5. The Ld. AO/TPO grossly erred in not taking cognizance of adopting the computation of operating mark-up of comparable companies as per Safe Harbour Rules, 2013 as directed by the Hon’ble DRP. Hence, ignoring the fact that the said directions are binding on the Ld. AO as per Section 1440(13) of the Act.

6. The Hon’ble DRP erred in disregarding the detailed arguments/ submissions put forth by the Appellant during the course of the DRP/ assessment proceedings while passing its direction under section 144C of the Act; 7. That the Ld. AO erred on facts and in law in charging interest under sections 234 A, B, C and D of the Act; 8. The Ld. AO has grossly erred by initiating penalty under section 27i(i)(C) of the Act mechanically and without recording any satisfaction for its initiation.”

learned transfer pricing officer to determine the arm’s-length price of those international transactions assessee reported following international transaction in its Form no 3CEB report.

Serial nature of transaction amount in rupees number software development services/IT enabled services 97,11,94,161 1 purchase of fixed assets 3,42,43,723 2 interest on loan 1,60,71,371 3 reimbursement of expenses paid 4,73,41,015 4

the price charged by the assessee of ₹ 165,103,007/– and therefore proposing the shortfall/adjustment on account of software development services of Rs 1 30,44,743. The order u/s 92CA of the Income Tax Act was passed on 25th of October 2010 by The Additional Commissioner Of Income Tax (Transfer pricing) – 1 (2), New Delhi. The assessee preferred objection is before the Dispute Resolution Panel – 1, New Delhi who passed its direction. The DRP confirmed the adjustment proposed by the TPO. Consequently the final assessment was passed by the learned assessing officer u/s 143 (3) making an adjustment of ₹ 88,557,923/– to the assessee is returned income. The assessee preferred an appeal before the coordinate bench which remanded the matter back to the learned Dispute Resolution Panel for fresh adjudication. Consequent to that the learned Dispute Resolution Panel has issued a direction u/s 144C (5) on 29th of June 2016 in case of the assessee and directed the TPO to recompute the transfer pricing adjustment after making the revised calculations. The learned transfer pricing officer then revised conclusion wherein for software development services, he selected 25 comparables whose average mean of the profit level indicator was 23.55% and after granting working capital adjustment the adjusted mean was derived at 20.97% and according to that the arm’s-length price was derived at ₹ 176,455,689 and adjustment based on the direction of the learned Dispute Resolution Panel was Rs. 1 30,52,682/–. Similarly for ITeS segment the average mean of PLI was determined at 27.69% of 25 comparables and after granting working capital adjustment of 3.07% the adjusted mean was derived at 24.62% and thereafter the adjustment of Rs. 6,38,55,256/– was made. The learned Transfer Pricing Officer passed an order in pursuance to the direction of the Dispute Resolution Panel in pursuance to the direction of the coordinate bench on 29 June 2016. Consequently the final assessment order was passed by the learned assessing officer on 31st of August 2016 u/s 143 (3) read with Section 144C of the income tax act 1961 on 31st of August 2016 determining the total income of the assessee at ₹ 75,977,580/– against the returned income of the assessee of Rs. 7,69,004 642/–.