SCHNEIDER ELECTRIC INDIA PVT. LTD.,GURGAON vs. ACIT, NEW DELHI

1. The assessment order passed by the Learned Assessing Officer ('Ld. AO') is bad in law;

2. The AO/Ld. TPO have erred on facts and in law in enhancing the income of the Appellant by INR 21.53.53.349 by holding that the international transactions pertaining to purchase of raw material, research and development (R&D) support services segment and business support services does not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. TPO/Ld. AO has grossly erred in: 2.1. disregarding the arm's length price ('ALP') as determined by the Appellant in the Transfer Pricing (TP) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules'); 2.2. disregarding multiple year/ prior years' data as used by the Appellant in the TP documentation and holding that current year [i.e. Financial Year ('FY) 2006-07] data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; Purchase of raw material 2.3. failing to appreciate that the international transactions of the Appellant relating to import of components for manufacture of electrical equipment would meet the arm's length principle on a transaction-by-transaction basis and disregarded selection of overseas tested party on account of incorrect appreciation of facts and material place on record; R&D support services segment (sub-grounds 2.4 to 2.8) 2.4. distorting, without reason, the quantitative screens/filters applied and set of comparables arrived at by the Appellant, following a detailed and robust search methodology carried out in the TP report as well as fresh search analysis; 2.5. including certain companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed and excluding certain comparable companies on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 2.6. not verifying the computational errors in the margins of comparable companies while arriving at the ALP; 2.7. not providing the benefit of a working capital adjustment while computing the ALP and thereby disregarding the law, international guidance and judicial precedents in this regard; 2.8. ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profits and thereby, failing to appreciate that the Appellant would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; Business support services segment (sub-grounds 2.09 to 2.12) 2.9. distorting the comparability analysis conducted by the Appellant in the TP Documentation and fresh search analysis; 2.10. including certain companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed and excluding certain comparable companies on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; Page | 2 2.11. not verifying the computational errors in the margins of comparable companies while arriving at the ALP; 2.12. not providing the benefit of a working capital adjustment while computing the ALP and thereby disregarding the law, international guidance and judicial precedents in this regard; 3. denying the benefit of (+/-) 5 percent range mentioned in proviso to section 92C(2) of the Act while computing the ALP. Corporate Tax matters 4. that on the facts of the case and in law, the Ld. AO has erred in passing the Assessment order dated 30.12.2015 under section 143(3) read with section 144C and 254 of the Act in pursuance to the directions of Hon'ble ITAT (ITA no 5728/Del/2011, order dated 22.11.2012) by not allowing to the Appellant the deduction u/s 10A amounting to Rs 2,85,03,926 and in doing so has gravely erred in: 4.1. Not following the rectified order of Hon'ble ITAT dated 19.02.2015 passed u/s 254(2) of the Act in the Appellant's own case for the Assessment Year 2007-08 wherein Ld. AO has been directed to verify the claim of the Appellant u/s 10A of the Act as per the original return of Income. 4.2. Not appreciating the submission filed by the Appellant on facts and merits of the case, and ignoring the fact that Appellant is eligible to claim deduction under the provisions of section 10A as per form 56F obtained by the appellant and having duly been furnished to Ld. AO/DRP and in fact such claim was duly made in original return though withdrawn in revised return on account of divergent view of the Courts on deduction/exemption under section 10A of the Act. 4.3. Not following the Jurisdictional High Court decision in the case of CIT v. TEI Technologies (P.) Ltd. 361 ITR 36 (Delhi) holding the view that the provisions of section 10A of the Act are in the nature of exemption and is not affected by the overall taxable income or loss of the assessee for the year under consideration.

5. The Ld. AO has erred in initiating penalty proceedings u/s 271(1)(c), 271BA and 271AA of the Act mechanically and without recording any adequate satisfaction for such initiation.

6. The Ld. AO has grossly erred on facts and in law by proposing to compute interest u/s 234D of the Act and withdraw interest u/s 244A of the Act mechanically and without recording any satisfactory reasons for the same. That the above grounds and sub-grounds of objections are without prejudice to each other.”

2. Briefly stated, the assessee i.e. Schneider Electric India Private Limited was incorporated in 1995 as a wholly owned subsidiary of Schneider Electric Industries SAS ("Schneider SAS"). The company is engaged in the manufacturing of Low Voltage ("LV") and Medium Voltage ("MV") equipment i.e. air circuit breakers ("ACBs"), miniature circuit breakers ("MCBs"), moulded case circuit breakers ("MCCBs"), push buttons, low voltage control panels, medium voltage control panels and ring master units. The assessee company had segmented its business operations into manufacturing, distribution and services segments to analyze and demonstrate the arm's length nature of its transfer prices with its associated enterprises ("AES"). The assessee company further segregated its manufacturing segment into three sub-segments namely Manufacturing TP', 'Manufacturing Local' and 'Manufacturing Hyderabad. Further, the 'Manufacturing TP' is segregated in 'Manufacturing Import' and 'Manufacturing Export'. Similarly, the services segment of the assessee was segregated into "E-content', 'Business Support Services', and 'Contract R&D Support Services sub segments. 2.1. The international transactions undertaken by the assessee during the year are provided in table below:- Summary of international transactions S.No. Nature of transaction Amount in INR crores 1. Import of electrical equipment for resale 262.82 2. Payment for repair and maintenance service 0.07 3. Import of components 147.36 4. Export of manufacturing goods 28.14 5. Import of capital equipments 1.82 6 Repair and maintenance services(income) 0.14 7. Management support system 10.26 8. Cost contribution arrangement 4.82 9. Royalty 6.80 10. E-content/e-catalogue 11.14 11. Business support services 5.25 12. Research and development support services 45.55 13. Reimbursement of expenses(recoverable) 13.22 14. Reimbursement of expenses(payable) 5.64 2.2. The summary of economic analysis of the impugned international transactions undertaken by the Company during the financial year (FY") 2006- 07 with its associated enterprises ("AEs") has been presented in the table below:

Summary of economic analysis in Transfer Pricing (“TP”) study S.No. Nature of Method Profit Level Tested party Arm’s length international applied Indicator(“PLI”) margin margin (TP transactions report) 1. Import of Transactional Operating 11.70% 10.67% components Net Margin Profit/Sales (“Manufacturing Method (“OP/Sales”) import”) (“TNMM”) Export of 7.82% manufacturing goods (“manufacturing export”) 2. Contract TNMM Operating 5.02% 10.37% Research and Profit/Total Development cost (“Contract R & (“OP/TC”) D”) segment 3. Provision of TNMM 4.32% 9.28% Business Support Services Based on the above results, it is the stand of the assessee that the international transactions undertaken during the subject year to be at arm’s length.

3. The present appeal has arisen in the second round of proceedings. In the first round of proceedings, in the course of transfer pricing assessment, the TPO proposed the following:- a. Rejected the segmented financials for manufacturing operations stating the following:- (i) Segmentation is not supported by audited financials; (ii) Segmentation is not supported by Accounting Standard 17: (iii) Payment of royalty, import of capital equipment, payment under cost contribution arrangement and reimbursement of expenses are also allocated to other manufacturing segments viz. Manufacturing Local and Manufacturing Hyderabad and hence the said international transactions would not be benchmarked unless entire manufacturing segment is aggregated; and (iv) No basis provided for allocation of cost and thereby resulting in excessive loss allocated in Manufacturing Local segment and excessive profit allocated in Manufacturing TP segment. b. Rejected the use of multiple year data and proceed to consider current year data for the purpose of computing arm's length price. c. Distorted the comparable set using inconsistent selection criterion. d. Rejected the fresh search of comparables provided at time of assessment proceedings with respect to contract R&D service segment and business support service segment. e. Thus, the TPO proposed certain adjustments with respect to manufacturing segment; Contract R&D service segment and business support service segment.

4. The DRP upheld the order of the TPO/AO in case of the manufacturing segment. However, the DRP accepted the assessee’s contentions for acceptance of certain comparable companies thereby provided marginal relief in both business support service segment and contract R&D service segment. The assessment was completed u/s 144C of the Act, wherein, the AO assessed the total income of the assessee at INR 717,539,766 as against a loss return of INR 13,851,671. The adjustment made in final assessment order has been tabulated below: Total adjustment made by the AO Particulars Adjustment in INR Transfer Pricing Manufacturing segment 596,409,616 Contract R&D service segment 9,150,032 Business support service segment 57,803,317 Corporate tax On account of claim of royalty expenditure on paid 68,028,472 basis Total adjustment 731,391,437

5. In the first round of proceedings before ITAT, the assessee submitted various additional evidences pertaining to its manufacturing segment in order to support the ‘transaction by transaction analysis approach’ followed by the assessee to determine the ALP of the international transactions pertaining to manufacturing segment. Furthermore, the assessee also submitted its various contentions on the filters applied by the TPO, comparables accepted/rejected by the TPO with respect to Contract R&D services segment and BSS segment, Page | 6 following various jurisprudences. Thereafter, the Co-ordinate Bench of ITAT vide its order dated November 22, 2012 accepted the contention of the assessee and directed the AO/TPO to analyze the additional evidences submitted by the assessee with respect to its manufacturing segment and set aside the entire matter for fresh consideration including the matters pertaining to Contract R&D services and BSS segment of the assessee. The relevant extract from the order passed by the ITAT has been encapsulated below:- "5. Considering the above submissions we find that in the case Kyungshin Industrial Motherson Ltd. (Supra) the primary contentions of the assessee involved was regarding analysis of suppliers profitability for imports and limiting the variation on account of transfer pricing only to the proportion of related party transactions. The authorities below did not address the issues for want of data. The Tribunal acceded to the assessee's plea for accepting these additional evidences and remanding the matter to the authorities below for fresh adjudication. Again in the case of Quark Systems India Pvt. Ltd. (Supra) the Special Bench of the Tribunal has held that the appellant cannot be estopped from highlighting mistakes in the assessment even though such mistake is the result of evidence adduced by the tax payer. We find that in the present case the assessee has also colluted supplementary evidence to corroborate the arm's length nature of its international transactions in adherence to the principles and contentions made before the authorities below. We thus in the interest of justice set aside the matter to the file of the A.O. to first ascertain to his satisfaction that the instances furnished by the assessee by way of supplementary evidence are indeed comparable to the case of the assessee to corroborate the arm's length nature of its international transaction in adherence to the principles of arm's length and then analyse pricing policy of the assessee in the light of the said evidence which was not in the possession of the assessee earlier. It is needless to mention over here that while deciding the issue afresh the A.O. will afford opportunity of being heard to the assessee.

6. Pursuant to the order passed by the ITAT, the AO initiated the second round of assessment proceedings.

7. In the course of assessment proceedings pursuant to ITAT order, the TPO as claimed by the assessee, didn't accept the various evidences produced by the assessee in order to substantiate the ‘transaction by transaction’ approach Page | 7 followed by it for benchmarking the international transactions with respect to its manufacturing segment. The TPO adjudicated on different issues as follows: Manufacturing segment-The TPO proceeded to reject all the additional evidences submitted before the ITAT to support transaction by transaction approach and its various submissions before the TPO during the remand back proceedings on the basis of his own conjecture and surmises. However, TPO accepted the contention of the assessee to restrict the TP adjustment in respect of its manufacturing segment to the quantum of international transactions entered with the AE and provided proportionate relief to the assessee. Contract R&D support services and BSS segment- In respect of R&D support services segment and BSS segment, the ITAT vide order dated November 22, 2012 (Supra) had set aside the matter back to the file of TPO/AO to decide the matter afresh. However, no effect was given to such directions by TPO during the remand back assessment proceedings and TPO simply followed the earlier order without adjudicating on any of the issues pertaining to contract R&D support services and BSS segment.

Summary of FAR analysis for manufacturing sub-segments of SEIPL Particulars Manufacturing Manufacturing Manufacturing Manufacturing Import-License Export-contract Local-Independent Hyderabad-Start up manufacturing manufacturing operations manufacturing unit A. Functions Performed Forecasting of  x  x demand Contract and  x  x pricing negotiation Product design x x  x Procurement of     raw material Quality check of    x raw material Manufacturing     of products Inventory  x   (limited) management Marketing and  x  x sales Technology x x  x function Functions x x x  (extensive) relating to starting up a unit B. Assets utilized Manufacturing     facilities Distributing  x   infrastructure Warehousing  x   facilities     Plant & machincery Furniture and     fixtures Marketing x x  (limited) x intangibles Technical know- x x  (limited) x how C. Risks Undertaken Market risk  x   Product   (limited)   liability/warrant y risk Inventory risk  x   Capacity  x   utilization risk Credit risk     Price risk  x   R&D risk  x x  x Technology risk x x  x Note 1: Start-up functions includes identification of place of manufacturing unit, obtaining legal & regulatory licenses and approvals, installation of plant & machinery and extensive quality test of sample product to be manufactured. From the above, it is evident that the assessee is operating through different business models in each of its sub-segments. The detailed Page | 10 evaluation of the business model each sub-segment is operating in has been presented hereunder:  License Manufacturing Segment (Manufacturing Import); In this segment, SEIPL produces goods under a licence agreement with its AEs, using manufacturing intangibles owned by the AEs (licensor). Such as patents, product designs, manufacturing process and know-how. Under this segment, SEIPL pays royalties for the use of the licenced intangibles, buys raw materials from its AEs and holds Inventories of the raw materials and finished goods. Therefore, it bears the risks associated with both holding inventories and selling products, including demand and pricing risk.  Contract Manufacturing Segment (Manufacturing Export): In this segment, SEIPL assumes lesner risks than a typical licence manufacturer. The Company produces goods for its AEs and it is the AEs who directly bear demand and final customer pricing risks. In this case, SEIPL, as the contract manufacturer, is compensated by its AEs through a return to enable the Company to earn an arm's length mark-up on total costs incurred in servicing the AEs orders. In addition, if the products made by the Company comply with the AE's product and quality specifications, SEIPL has guaranteed purchases of the goods from its AEs. Therefore, the contract manufacturer bears limited risks associated with holding finished goods and selling them as compared with a licence manufacturer for the fact that the contract manufacturer has assured buyer and assured return.  Full-fledged Manufacturing Segment (Manufacturing Local): In this segment, SEIPL is operating as a full-fledged manufacturer, responsible for providing the space, machinery and team to manufacture the parts, as well as all materials and goods necessary for production of goods for third party independent customers. In doing so, SEIPL assumes all risks associated with selling the products. In the present case, it can be concluded that Transfer Pricing provisions are not applicable to this segment.  Start-up Manufacturing Segment (Manufacturing Hyderabad); This segment pertains to the newly set up Hyderabad facility of SEIPL, wherein the Company only carried out the initial phase of manufacturing activities from November 2006 to March 2007. Due to this, there were extraneous indirect costs incurred in connection with the operations and a low value of revenue was generated. Considering the same, the segment can be considered a separate 'start-up manufacturing segment undertaking necessary costs associated with the initial phase of production. To further corroborate the above segmental analysis, the assessee has also submitted the reconciliation of the segmental accounts with the company-wide statement of profit and loss as part of the submission under rule 29 before the Hon'ble ITAT. In addition to the above, the assessee would like to stress upon the fact that the TPO has accepted the segmentation provided for the service segments without raising concerns over the nature of segments or the allocation methodology utilized therein. The tax authorities have only Page | 11 proceeded to reject the manufacturing sub-segments on arbitrary grounds. Considering the above, the assessee submits that the 4 sub-segments of the assessee's manufacturing business ought to be evaluated separately for analysis for determination of arm's length standard under each segment.

During the remand back proceedings, various submissions were filed before the TPO containing the contentions with respect to both service segments. A Summary of the submissions filed has been provided below for the Bench's ready reference: S.No. Date of submission Particulars 1. October 07, 2014 Application u/r 29 of the Rules seeking permission to file additional evidences before the ITAT, including the detailed list of all additional evidences.

2. October 08, 2014 Detailed submission including contentions in relation to contract R&D and Business support services segments.

3. January 22, 2015 Submission filed before the TPO providing clarifications on the non-time barring nature of the remand back proceedings and a request to accord the Appellant a reasonable opportunity to explain the detailed contentions in the case.

Pursuant to the above, the TPO did not issue any show-cause notice providing its findings on the assessee's contentions or requesting the assessee to show cause why the adjustment should not be proposed on the issue of comparables in the contract R&D and business support service segments. The TPO proceeded to pass the order during the remand back assessment proceedings by simply following the earlier order passed during the first round of assessment, without adjudicating on any of the issues pertaining to contract R&D or business support services segments (refer page 10 & 11 of the TPO order dated January 30, 2015). Subsequently, the assessee also filed the detailed grounds of appeal with respect to both service segments before the DRP, however, the DRP Panel proceeded to reject the assessee's contentions without providing any cogent reasons against the same. It is also to be noted that the Assessee had furnished a fresh search before the TPO/DRP during the first round of proceedings, however, the same has not been adjudicated upon during the remand back proceedings. Hence, the assessee humbly submits that the DRP/TPO has failed to provide opportunity of being heard to the assessee. In this regard, the assessee submits that as per the provisions of the Act, an assessment completed without providing an opportunity of being heard, is null and void. The assessee places reliance on the following judicial precedents wherein it has been held that the income-tax proceedings are quasi- judicial proceedings and therefore, the AO/TPO is bound to give opportunity of being heard to the assessee.  Indian & Eastern Newspaper Society vs. CIT (1979) (119 ITR 996)  Swadeshi Cotton Mills Co. Ltd. Vs. Union of India, (1981

1. SCC 664)  Collector of Central Excise v. ITC Ltd. (1995-SC)

2. SCC 38  C.B Gautham vs Union of India and Others (199 ITR 530) (SC)

14. In this backdrop, the broad contentions of the assessee are extracted hereunder:- “that following filters were applied by DRP in the first round of assessment, which were not applied by the TPO:- * Rejection of companies with less than 25% of operating revenue from software development as export sales; and * Rejection of companies having onsite revenues of 75% or more of their total export revenue from software development services. Thereafter, the assessee filed an appeal before the ITAT against the application of such filters by DRP. The ITAT vide order dated November 22, 2012 set aside the matter back to the file of AO. The TPO to decide the matter afresh. Without prejudice to the primary contention raised in the preceding paragraphs, the assessee’s contentions with respect to filters adopted by the TPO/DRP and comparables are as follows:- a. Reasons for rejection of onsite revenue filter  This is a business exigency and can't be applied as a systematic filter.  Absence of authenticated information for application of such filter.  assessee wasn't provided with sufficient time to analyse the data obtained by DRP vide power granted under Section 133(6) of the Act for application for such filter.  TPO has himself discouraged the use of such data for performing comparability analysis. In this regard, the assessee further submits that having regard to above contentions of the assessee following comparables are ought to be included in the final set of comparables for contract R&D services. Companies to be accepted pursuant to rejection of onsite revenue filter: S.No. Name of comparable OP/TC 1. Akshay Software Technologies Ltd. 4.78% 2. Maars International Software Ltd. -1.66% 3. Melstar Information Technologies Ltd. -4.94% b. Reasons for rejection of export revenue filter  For the purpose of economic analysis, it is essential to consider functional comparability rather than geographical customer location. Page | 15  Definition of uncontrolled transaction under Rule 10A(a) of the Income-tax, Rules 1962 ("the Rules") specifically mentions that such transaction can be whether between resident or non-resident.  All the three conditions of Rule 10B should be cumulatively satisfied for rejection of domestic companies. In this regard, the assessee further submits that having regard to above contentions of the assessee, following comparables are ought to be included in the final set of comparables for contract R&D services segment. Companies to be accepted pursuant to rejection of export revenue filter S.No. Name of comparable OP/TC 1. Powersoft Global Solutions Ltd. 16.64% 2. V& K Softech Ltd. 5.14% 3. Vama Industries Ltd. (Software 10.99% development and services segment)

c. Assessee's contentions against the comparables rejected by the TPO/ DRP The assessee humbly submits that the DRP/ TPO has rejected some comparables on the basis of functional comparability. The contentions of the assessee against the exclusion of such comparables is provided below: Companies to be accepted pursuant to contentions of the assessee on functional similarity S.No. Name of OP/TC Remarks of the Ld.DRP Assessee’s comparable contentions 1. ICRA Techno 10.94% Annual Report is Onsite Revenue Filter- Analytics Ltd. available for the FY 2006- 57.24% and is 07. It is in the business of accordingly, clearing the IT products and services, Ld. DRP's/TPO's own Engineering services and onsite revenue filter of KPO. As the company is onsite revenue/total in to IT services and BPO export revenue. and in the absence information functionality Functional Similarity- and segmental details, Revenue from services the company was asked consists of revenue u/s 133(6) to submit the earned from services information. As per the performed for software information submitted, it development & appears that most of the consultancy, sub- revenues from software licensing fee, web development services are development & hosting, from onsite. But the etc. which is recognised information submitted by as and when services the company is not clear are performed." on this account. Thus the same is not considered as a comparable.

2. Indus 2.06% As per the information Functionally similar The Page | 16 Networks Ltd. submitted by the relevant "Software (Software company u/s 133(6), it Services" segment has Services has three segments i) been considered for the Segment) Software Services, ii) ITES purpose of and in Manufacturing. comparability and The revenue from further as per the software services does not snapshot of the annual constitute more than 75% report, Indus is not of the operating revenues engaged in dealing with of the company. software products. The company stated that software services include software development services and software Products. The segmental results are neither available. Hence, rejected.

It reported an OP/TC margin of 33.89% vis-à-vis an OP/TC margin of 15.38% and 14.38% in the prior years i.e. FY 2004-05 and FY 2005-06 respectively. A perusal of the Director's Report of FY 2006-07 indicated that there has been a potential growth in the payroll business of the company resulting in an increase in the income of the company by 40%. Hence, the assessee submits that TSR Darashaw Lad ought to be excluded for benchmarking business support services rendered to its AEs. In this regard, useful reference may be made to the judgment of the Hon'ble Delhi Bench in the case of Sony India (P) Limited [114 ITD 448) in Del/2005, 819/ Del/2007 & 820/2007] ("Sony Ruling") (relevant extract reproduced below). "We are also not impressed by the arguments of learned Departmental Representative that Videocon International was included in the list of comparables furnished by the taxpayer. In our considered opinion, there is sufficient material on record to show that taxpayer in proceedings before the TPO as well as before the learned CIT (Appeals) had argued that there were huge differences between the taxpayer and the Videocon International Ltd and therefore, Videocon International should be excluded from comparison”. The assessee also places reliance on the Quark Systems Ruling (38 SOT 307) where it was held by the ITAT that: "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."

raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown it's prima-facie case" Thus, the jurisdictional ITAT Bench has un-equivocally stated that, merely because the assessee had included a comparable in its TP documentation, it could not be debarred from seeking rejection of that company at a later stage of assessment/appellate proceedings. Thus, the assessee contends that the high margins of the aforementioned companies during the relevant year are outcome of the extra-ordinary conditions faced by the companies during the year. Hence, the high profit companies deserves to be excluded from the final set of comparable companies, a. assessee's contentions against the rejection of certain comparable companies by DRP during first round of Assessment The Assessee would also highlight that in the first round of proceedings, the DRP/ TPO rejected Agrima Consultants International Ltd with OP/TC Page | 21 of -8.58% in FY 2006-07, submitted during fresh search on account of having dissimilar functional profile as the company was involved in supply of peons and administrative staff to offices. However, the assessee was not provided any basis for arriving at such a conclusion. b. Additional comparables proposed by the assessee The assessee, without prejudice to the above contentions, would like to propose certain additional companies which are comparable to the assessee, in terms of functions performed, assets employed and risks assumed. Further, these additional comparables clears all the filters applied by the DRP/ TPO and also has been accepted by TPO in succeeding years. Hence, the assessee requests the ITAT to appreciate that since the below mentioned comparables perform similar function to that of the assessee, they should be included in the final set of comparables. Business support services segment -Additional comparables S.No. Name of Business Description OP/TC Working comparable capital adjusted OP/TC

1. ICRA Management The company is engaged 15.75% 10.54% Consulting Services in the consultancy Limited business. It is engaged in the providing multi-line management/development consulting services. This comparable has been accepted by the Ld. TPO himself in the succeeding years i.e.

Furthermore, the assessee would also like to submit that correct margins of comparables should be used for computation of ALP for business support service segment. In final assessment order, the DRP/ AO/ TPO have used incorrect margins of two comparable companies as follows:-

Business support services-Incorrect margin of comparables considered by DRP/ AO Particulars Incorrect OP/TC taken Correct OP/TC in Final AO order National Small -0.31% -4.85% Industries Corp.Ltd. Khaitan India Limited 9.00% 8.67% (Marketing Segment)

Thus, the assessee would like to submit before the ITAT that after taking into consideration the above contentions of the assessee, the following set of comparables should be used for determination of arm's length price of international transaction pertaining to Business Support Services Segment. Business Support services segment-Proposed set of comparables S.No. Name of company OP/TC Working capital adjusted OP/TC 1. Empire Industries Ltd. (Trading and 24.03% 24.03% indenting Segment) 2. Priya International Ltd. (Indenting) 16.00% 15.71% 3. Khaitan India Ltd. (Marketing Division) 8.67% 8.67% 4. National Small Industries Corp.Ltd. -4.85% -5.12% 5. ICRA Management Consulting Services 15.75% 10.54% Limited 6. Rediff.com India Limited 10.13% 8.10% 7. Agrima Consultants International -8.58% -8.12% Limited Arithmetic Mean 8.69% 7.69% Appellant’s Margin 4.32% Thus, as is evident from the above analysis, the assessee's margin (OP/TC) of 4.32% is well within the arm's length requirement as per section 92C(2) of the Act, and this provides evidence that the international transaction of assessee pertaining to business support services segment were in accordance with the arm's length standard required under the Indian Regulations'. Hence, the assessee contends that no further adjustment is warranted in this segment.

S.No. Name of Remarks of the Appellant’s contention Remarks of the Appellant’s comparable Ld.DRP(First before DRP (second round of Ld.DRP (second appeal before round of proceedings) round of Hon’ble ITAT proceedings) proceedings) 1. Akshay Software Rejected on the * Onsite Revenue Filter - Upheld the The onsite Technologies basis of onsite incorrect filter applied by the onsite revenue revenue filter has Ltd. revenue filter and DRP. Comparable ought to be filter as a valid been arbitrarily functional accepted after disregarding filter. applied and dissimilarity the filter. (Please refer page should not be (please refer page (please refer page 106 to 108 22 of the applied for 358 of the paper of the paper book) paperbook) determining the book) ALP of the * Functional Similarity- No remarks on company. having a wholly owned the functional Considering the subsidiary in the US(as per comparability of same and the the TPO) is not a criteria to the company functional reject comparables. Fruther, similarity of the the company is engaged in company, it providing software ought to be development services. accepted in the final set. *Sale of products -The company only earns 4.35% of its revenue from sale of products. (please refer page 113 to 114 of the paperbook) 2. Maars Rejected on the * Functional similarity - The Upheld the The company is International basis of declining company is involved in onsite revenue functionally Software Ltd. sales, functional providing services related to filter as a valid similar to the dissimilarity software development and not filter. Appellant and (manpower manpower services. (Please refer page increasing trend services) and 22 of the in revenue itself onsite revenue * Increasing trend in revenue, paperbook) is not an filter (please refer positive net worth -the appropriate page 379 of the company has increasing trend No remarks on reason for paperbook) in sales and has positive net the functional rejection. Hence, worth. Thus, TPO’s rejection comparability of it ought to be reason is invalid. the company accepted. * Onsite Revenue Filter- incorrect filter applied by the DRP. Comparable ought to be accepted after disregarding the filter (Please refer page 118 to 119 of the paperbook) 3. Melstar Rejected on the * Onsite Revenue Filter- Upheld the The onsite Information basis of onsite incorrect filter applied by the onsite revenue revenue filter is Technologies revenue filter and DRP. Comparable ought to be filter as a valid arbitrary and Ltd. due to the accepted after disregarding filter. should not be company having the filter. (Please refer page applied. Further, declining * Increasing trend in revenue, 22 of the increasing trend revenues positive net worth -the paperbook) in revenue itself (please refer company has increasing trend is not an page 380 of the in sales and has positive net No remarks on appropriate paperbook) worth. Thus, TPO’s rejection the functional reason for reason is invalid. comparability of rejection. Hence, (Please refer page 119 to 120 the company it ought to be of the paperbook) accepted.

B. Business support service segment S.No. Name of Remarks of the Appellant’s contention Remarks of the Appellant’s comparable Ld.DRP (First before DRP (second round of Ld.DRP (second appeal before round of proceedings) round of Hon’ble ITAT proceedings) proceedings) 1. IL & FS Accepted by DRP Change in business profile Academy for during FY 06-07-Company The variations in The Appellant (Please refer page Insurance & shifted its product offering margin do not has provided 347 of the paper Finance Ltd. mix during the year to higher indicate volatility specific book) order training programmes or unreliability of information and the financials of screenshots to * Abnormal profit - these entities. demonstrate the Resultantly, the company The same have change in earned 48.43% margin during hence been business FY 2006-07, compared to correctly activities. 4.83% and 0.53% during retained by the Hence, the previous years. TPO. companies ought (please refer page to be rejected. (please refer page 154 to 155 24 of the paper of the paperbook) book) 2. TSR Darashaw Accepted by DRP * Functionally dissimilar - Ltd. Engage in diversified services (Please refer page under payroll processing, 348 of the paper trust fund administration and book) statutory compliance businesses. Further, due to a lack of segmental data availability, it cannot be held comparable to the BSS service segment of SEIPL. * Change in business profile during FY 06-07 Company shifted its business profile to focus on payroll business of the Company leading to abnormally high profits. (please refer page 154 to 155 of the paperbook) 3. Agrima Rejected on the Functionally similar - engaged Consultants basis of in undertaking feasibility International functional reports for industrial clients. Ltd. dissimilarity DRP's findings are incorrect. (please refer page 349 of the paper * No cogent reason given by book) Ld. DRP - Ld. DRP misconstrued the company's The company is business profile, thus functionally Page | 28 wrongfully rejecting it based similar to the on incorrect details. Appellant and passes all filters (please refer page 155 to 158 applied by the of the paperbook) Ld.DRP. Hence, 4. ICRA NA * Functionally similar - The the comparable ought to be Management company is engaged in Consutlign consultancy business and accepted. Services Ltd. providing multi-line management/development Rejected on the consulting services basis of functional * Accepted as comparable in dissimilarity AY 08-09 and AY 09-10 without providing any (please refer page 158 to 160 cogent reasons of the paperbook) (Please refer page 5. 24 of the paper Rediff.com India NA * Functionally similar - The book) Ltd. company provides an interface for global companies to showcase their offerings through its website which offers search engine and facilitation services. * Accepted as comparable in AY 08-09 and AY 09-10 (please refer page 158 to 160 of the paperbook)

The objections of the assessee ranges from failure to apply ALP principles in the assessment order passed under challenge; failure to apply interpretation rendered by Co-ordinate Benches and in disregarding multiple year/prior years data used by the assessee. As further contended, plea towards international transactions relating to import of components for manufacturing of electrical equipment would meet arm’s length principles on a transaction by transaction basis as canvassed by the assessee have been ignored. The contention towards selection of overseas tested party is also alleged to have been disregarded contrary to position of law and based on incorrect appreciation of facts. The assessee also asserts that the TPO has included certain companies that are not comparable to the assessee in terms of the functions performed, assets employed and risks assumed. Likewise, as contended, the TPO has wrongly excluded certain comparables companies for the purposes of TP adjustments. As further contended, the benefit of working capital adjustment while computing the ALP has also not been borne in mind. In the light of order passed by the Tribunal under s. 254(12) of the Act, the assessee also claims tax holiday under s. 10A on profits arrived at after the adjustments so made in accordance with law and alleges that the lower authorities have failed to apply the principles laid down by the Jurisdictional High Court in the case of CIT vs TEI Technology Pvt.Ltd. 361 ITR 36 (Del).