XLHEALTH CORPORATION INDIA PRIVATE LIMITED,BANGALORE vs. ASST. COMMISSIONER OF INCOME TAX, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER

IT(TP)A No. 2311/Bang/2016 Assessment Year: 2012-13

M/s. XLHealth Corporation India Pvt. Ltd., No. 54, Abacus Centre, 1st Main, Sarakki Industrial Area, III Phase, J P Nagar, Bangalore – 560 078. PAN: AAACX 0544K ……Appellant Vs. The Assistant Commissioner of Income -tax, Circle 7 (1)(2), Bangalore. .. ......Respondent

Appellant by : Shri Nageshwar Rao, Advocate Respondent by : Shri Biswarajan Sarmal, CIT (DR)

Date of hearing : 14.11.2017 Date of Pronouncement : 09.02.2018

O R D E R Per SHRI INTURI RAMA RAO, AM:

This is an appeal filed by the assessee-company directed against the assessment order passed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’] dated 30/11/2016 for the Assessment Year 2012-13.

IT(TP)A No. 2311/Bang/2016 Page 2 of 25 XL Health Corp. It is stated that the appellant is remunerated on cost + mark up basis.

IT(TP)A No. 2311/Bang/2016 Page 3 of 25 6. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for the purpose of bench marking the international transactions.

i. Use of current year data. ii. Companies having different financial year ending (i.e. not March 31, 2012) or data of the company which does not fall within 12 month period i.e. 01/04/2011 to 31/03/2012, were rejected.

iii. Companies whose service income<Rs.1 cr. were excluded.

iv. Companies whose SWD/IT enabled Service is less than 75% of the total operating revenues were excluded. v. Companies who have more than 25% related party transactions of the sales were excluded. vi. Companies who have export service income less than 75% of the sales were excluded.

vii. Companies with employee cost less than 25% of turnover were excluded.

7.1 Applying the above filters, the TPO rejected Fortune Infotech Ltd. and R Systems Internationals, out of 8 comparables selected by the assessee-company and accepted the balance 6 comparables selected by the assessee-company and finally selected the following 10 comparables:

IT(TP)A No. 2311/Bang/2016 Page 4 of 25

7.2 The TPO computed average profit margin of the said comparable in respect of ITES segment at 28.11% after giving working capital adjustment of 1.10%, adjusted arithmetical mean of comparable was determined at 27.01%. On the said basis, the TPO computed TP adjustment as follows;

IT(TP)A No. 2311/Bang/2016 Page 5 of 25 directions from the Hon’ble DRP, the AO passed final ast. order u/s 143(3) r.w.s 144C (13) of the Act.

“1. That, the final assessment order framed by the learned Assistant Commissioner of Income-tax, Circle 7(1)(2), Bangalore (hereinafter referred to as 'the learned AO') pursuant to the directions of the Hon'ble Dispute Resolution Panel — II (hereinafter referred to as 'the Hon'ble DRP') under section 143(3) read with section 144C of the Income-tax Act, 1961 ('the Act'), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio. 2. That, without prejudice, the learned AO has grossly erred in making a transfer pricing addition of INR 3,90,03,802/- and a corporate tax addition of INR 5,01,840 while computing the income of the Appellant. The addition made to the returned income is highly unjustified. Part I — Transfer Pricing Grounds 3. That, in framing the impugned assessment, the reference made by the learned AO under section 92CA (1) of the Act suffers from jurisdictional error, as the learned AO had not recorded any reasons nor he had any material whatsoever on the basis of which he could even reach a prima-facie opinion, that it was 'necessary or expedient' to refer the matter to the learned Deputy Commissioner of Income Tax, Transfer Pricing – 2 (2)(2), Bangalore (hereinafter referred to as 'the learned TPO') for computation of arm's length price ('ALP'). 4. That on the fact of the case and in law. the learned TPO / Hon'ble DRP has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ('the Rules'), and conducting a fresh economic analysis for the determination of the ALP of the Appellant's international transaction pertaining to provision of IT enabled services by the Appellant and holding that the said international transaction is not at an arm's length without sharing the detailed accept reject matrix for selection or rejection of companies evaluated by him.

IT(TP)A No. 2311/Bang/2016 Page 6 of 25 5. That on the facts of the case and in law, the learned TPO / Hon'ble DRP has erred in rejecting the Appellant's claim to use multiple year data for computing the arm's length price and. instead, has adhered to the use of single year updated data to conclude the ALP of the international transaction which was not available to the Appellant at the time of undertaking transfer pricing study required to be maintained under Section 92D of the Act. 6. That on fact of the case and in law, the learned TPO/ Hon'ble DRP has erred in application of inappropriate filters based on low turnover, different financial year end, service income, export service income and employee cost for identifying companies comparable to the Appellant. 7. That on fact of the case and in law, the learned TPO/ Hon'ble DRP has erred in applying service income filter of INR 1 crore as a comparability criterion without an application of a corresponding upper turnover filter. 8. That on the facts of the case and in law, the learned TPO / Hon'ble DRP has erred in treating provision for bad and doubtful debts and bank charges as non-operating items while determining the arm's length price of the impugned international transaction of the Appellant. 9. That on the fact of the case and in law, the learned TPO / Hon'ble DRP has erred in not allowing a risk adjustment to the Assessee on account of the fact that the Appellant is a captive service provider for its associated enterprises and is remunerated on a cost plus basis irrespective of the outcome of the services provided and hence undertakes no market risk, service liability risk, credit and collection risk as against comparable companies that are the full-fledged risk taking entrepreneurs. 10. That on the facts of the case and in law, the learned TPO/ Hon'ble DRP has erred in selection of functionally non- comparable companies and rejection of comparable companies, as per provisions of Rule 10B(2), for the purpose of determination of ALP of the international transaction pertaining to IT enabled services rendered by the Appellant. 11. That on the facts of the case and in law, the learned TPO/ Hon'ble DRP has erred in cherry-picking of companies as comparables by selecting the companies as comparables despite failing the quantitative filters applied by the learned TPO at the company wide level.

IT(TP)A No. 2311/Bang/2016 Page 7 of 25 12. That on facts of the case and in law, the learned TPO/ Hon’ble DRP has erred in selecting certain companies which are earning super normal profits as compared to the Appellant. Part II — Corporate Tax Grounds 13. That, on the facts and in the circumstances of the case and in law, the learned AO/ Hon’ble DRP have erred in disallowing depreciation of Rs. 5,01,840 on the software acquired and capitalized by the assessee, under section 40(a)(ia) of the Act on the basis that TDS has not been done thereon. 13.1 That, on the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP have erred, in not appreciating that depreciation, being a statutory allowance under section 32 of the Act, cannot be disallowed under section 40(a)(ia) of the Act, and, in ignoring the judicial precedents relied upon by the Appellant in this regard. 13.1.1 That, on the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP have erred in not following the binding ruling of the jurisdictional Bangalore bench of the Tribunal in the case of Kawasaki Microelectronics vs. DDIT (155 ITD 402) [Jurisdictional Bangalore ITAT] (2015). 13.1.2 That, on the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP, while placing reliance on the decision of the Mumbai ITAT in the case of M/s V Kay Translines (P) Ltd vs ITO (2011-TOIL-318-ITAT-Mumbai), have ignored the fact that the Mumbai ITAT itself in a subsequent decision in the case of Sonic Biochem Extractions (P.) Ltd. (59 SOT 4)[2013] has held that section 40(a)(ia) disallowance is only with reference to the claim made in the profit and loss account towards revenue expenditure. 13.2 That, without prejudice to ground 13.1, on the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP have erred in concluding that payment for software in the instant case is in the nature of 'royalty' under Act, and in ignoring the judicial precedents relied upon by the Appellant in this regard. 13.2.1 That, without prejudice to ground 13.2, on the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP have erred in not appreciating that retrospective amendment to the definition of royalty cannot be held as a ground to hold that the assessee should have deducted tax at source from payments

IT(TP)A No. 2311/Bang/2016 Page 8 of 25 made prior to insertion of the amendment (doctrine of impossibility of performance). 13.2.2 That, without prejudice, on the facts and in the circumstances of the case and in law, the learned Hon'ble DRP has erred in holding that 'the amount paid to obtain computer software cannot be added to the block of assets of computer as the nature of payment for computer software is that of Royalty; and since computer software no longer remains part of the block of assets, so depreciation claimed on it needs to be disallowed'. 14. That on the facts of the case and in law, the learned AO has erred in not allowing set off of MAT credit of INR 63,00,690 under section 115JAA of the Act which was brought forward from earlier year(s). 15. That on the facts of the case and in law, the learned AO has erred in computing interest under section 234B of the Act. 16. That on the facts of the case and in law, the learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. All the above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the above grounds of appeal and the facts and circumstances of the case. Additional grounds of appeal:- 17. "The learned AO / TPO and DRP erred in accepting BNR Udyog Limited, Universal Print Systems Limited, Excel Infoways Limited, lnfosys BPO Limited and TCS-e-Serve Limited as comparable companies applying incorrect comparability criteria." 18. "The learned AO / TPO and DRP erred in accepting e4e Healthcare Business Services Private Limited as comparable company which was chosen as comparable in transfer pricing study but upon availability of more details in public domain, this company is found to be not comparable and should be excluded from the final set of comparable companies."

IT(TP)A No. 2311/Bang/2016 Page 9 of 25 19. "The learned AO / TPO and DRP erred in rejecting R Systems International Limited and Caliber Point Business Solutions Limited as comparable companies." 20. The Hon'ble DRP erred in rejecting Informed Technologies Limited as comparable company.”

IT(TP)A No. 2311/Bang/2016 Page 10 of 25 However the above observations have been turned down by the TPO by holding as under. “The company performs functions which are comparable to the taxpayer's and further, brand does not fetch profit margins, it only increases the revenue. Secondly, size does not matter in software/ITES industry which is only employee driven and not capital driven. TPO relies on the judgement of Hon ITAT in the case of Capgemini India Pvt. Ltd., (ITA No.7861/Mum/2011). The taxpayer has relied on various judgements of Hon Tribunals holding that Infosys BPO is not comparable in specific cases. These decisions are rendered in respect of a specific set of facts which cannot be applied to the taxpayer. It is relevant to mention here the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors(India) Pvt Ltd Vs DCIT,(56 taxman.com 417) wherein the Hon'ble Delhi High Court held that "Mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from list of comparables for purposes of determination of ALP''. The company clears the <25% RPT filter applied by the TPO. The corrected margin is 36.30%. ii) The Hon’ble DRP also confirmed the findings.

iii) Even before us the ld. Counsel for the assessee-company reiterated the same submissions made before the TPO and contended before us that it is functionally not comparable as it is : a) Functionally not comparable – wide array of services – sourcing and procurement, customer service, finance and accounting, knowledge services, human resources in various verticals such as banking and capital markets, communication media and entertainment, manufacturing emerging market solutions, insurance and healthcare, retail, energy, utilities and resource, automotive and aerospace, transportation and services.

b) Operates as full-fledged risk bearing entrepreneur whereas Appellant is risk insulated

c) Big Brand Value – The Company’s spend on brand building is almost equivalent to 22% of the Appellant’s income from rendering of IT enabled services and therefore is not comparable to the Appellant.

IT(TP)A No. 2311/Bang/2016 Page 11 of 25 d) Exceptional year operation – Acquired 100 percent voting interest in Portland Group Pty. Limited. Acquisition of Portland Group Pty.

e) Significantly Large scale of operations – INR 1312.41 crores turnover vis-à-vis INR 30.39 crores of the Appellant in ITeS segment (43 times of Appellant’s revenue). The TPO should apply a corresponding upper turnover filter.

and also placed reliance on the decisions of the co-ordinate bench of this Tribunal in the following cases: a) M/s. Global e-Business Operations (P.) Ltd. Vs. DCIT in IT(TP)A Nos. 160 & 289/Bang/2014 b) Tesco Hindustan Service Centre (P.) Ltd. in IT(TP)A Nos. 191 & 569/Bang/2015 c) Baxter India (P.) Ltd. Vs. ACIT in ITA No. 6158/Del/2016

iv) On the other hand the ld.CIT (DR) submitted that the issue of comparability requires to be adjudicated based on the facts on the record and not merely on the basis of precedent and only after a FAR analysis of the comparables and the tested party on the issue of functionality he submitted that only a broad functionality is required to be examined. The ld. DR also submitted that knowledge process outsourcing is also part and parcel of business process outsourcing solutions where, apart from process of data, knowledge also applied.

v) We heard rival submissions and perused the material on record. The rival submissions and perused the material on record. From the perusal of the Annual Report of this Infosys BPO Ltd. placed at pages 464 to 582, at page no. 482 it is stated as under. “The company is committed to providing best-in-class services to both horizontal and vertical focus areas. Horizontal solutions comprise of Sourcing and Procurement, Customer Service, Finance & Accounting, Knowledge Services, Human resources, while Vertical (Industry) solutions include Banking & Capital Markets, Communication Media & Entertainment, Manufacturing, Emerging Market Solutions, Insurance & Healthcare, Retail, Energy, Utilities & Resources, Automotive & Aerospace, Transportation & Services.

IT(TP)A No. 2311/Bang/2016 Page 12 of 25 We believe in continuously building a business mix, which will allow us to provide long-term and continuing benefits to our clients. Our objective is to enable our customers move up the risk-reward curve, by providing them the benefits of outsourcing, while effectively managing and mitigating risks associated with off-shoring based on our experience and process management skills. Since inception, Infosys BPO has focused on end-to-end outsourcing and operates on the principle that true BPO is transformational – in addition to the cost arbitrage, Infosys BPO consistently demonstrates enterprise wide improvement in client operations through process optimization, process reengineering and best practices.”

vi. Further it is stated at page no. 471 that during the year under consideration this company had acquired Australia-based Portland Group Pty Ltd. From the perusal of the functional profile of the company it is clear that it is into knowledge process outsourcing which is high value added services which means high end Business Process Outsourcing. Thus the Hon’ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. Vs. CIT as reported in 377 ITR 533 (Delhi) explained the distinction between business process outsourcing and knowledge process outsourcings as under:

“34. We have reservations as to the Tribunal’s aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression ‘BPO’ and ‘KPO’ are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression ‘KPO’ in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider

IT(TP)A No. 2311/Bang/2016 Page 13 of 25 may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently.”

The Hon’ble High Court reversed the decision of the Special bench of this Tribunal in the case of Maersk Global Centers (India) Pvt. Ltd. v. ACIT, ITA 7466/Mum/2012.

vii) Thus, having regard to the decision of the Hon’ble Delhi High court in the case of Rampgreen Solutions (P.) Ltd. Vs. CIT (supra), the entity Infosys BPO Ltd. cannot be compared with that of the assessee-company before us as it is a low end Business Process Outsourcing services provider. Further the company Infosys BPO Ltd. also possess intangibles, high brand value which is not the case of the assessee- company and therefore we direct the TPO/AO to exclude this company from the list of comparables.

B. TCS e-Serve Limited:- This company was selected as a comparable by the TPO and the assessee-company objected before the TPO on the grounds that this company was engaged in knowledge process outsourcing activities like Analytics, Financial Planning and Analysis, Legal Process Outsourcing and Research, Human Resource Outsourcing Solutions, High level Accounting and Finance Functions like CFO Functioning, Setting up of Finance Centers – which are of purely Knowledge Outsourcing Process activities and it is a technology solution provider and it is also further contended that this company owns brand value and belongs to Tata Group, which enjoys brand value, and possess intellectual property rights. The TPO rejected the objection of the assessee-company by holding as under. “The Annual report of the company is available. The company is mainly engaged in providing BPO services in BFSI domain. Being functionally comparable, it is being considered.”

The findings of the TPO were confirmed by the Hon’ble DRP.

IT(TP)A No. 2311/Bang/2016 Page 14 of 25

ii) Being aggrieved, the assessee-company is in appeal before us. It was contended that this company cannot be compared with that of the assessee-company on the grounds that : a) Functionally dissimilar – core business processing services, analytics & insights (KPO) and support services for both data and voice processes. No segmental information regarding BPO services. b) Further, engaged in provision of technology solution, c) Presence of valuable intangibles d) Part of the Tata group hence owns significant brand value that contributes to the economic profitability. e) Insufficient segmental information – earns revenue through two services transaction processing and technical services, no segmental available f) High turnover – INR 1578.44 crores vis-à-vis INR 30.39 crores of the Appellant in ITeS segment turnover (57 times of Appellant’s revenue). The TPO should apply a corresponding upper turnover filter in case of application of low turnover filter.

and also reliance placed on decision of Baxter India (P.) Ltd. Vs. ACIT (supra).

iii) On the other hand, the ld. CIT (DR) made same submissions as made in the case of Infosys BPO Ltd. (supra). We have heard the rival submissions and perused the material on record. From the perusal of the Annual Report of this entity placed at page nos. 583 to 678 of paper book, at page no. 604 it is stated as under. “2. COMPANY OVERVIEW Your Company, along with its subsidiary companies - TCS e- Serve International Limited and TCS e-Serve America Inc., is primarily engaged in the business of providing Business Process Services (BPO) for its customers in Banking, Financial Services and Insurance domain. The Company's operations include delivering core business processing services, analytics & insights (KPO) and support services for both data and voice processes.

IT(TP)A No. 2311/Bang/2016 Page 15 of 25 Your Company is an integral part of the Tata Consultancy Services' (TCS) strategy to build on its 'Full Services Offerings' that offer global customers an integrated portfolio of services ranging from IT services to BPO services. The Company provides its services from various processing facilities, backed by a robust and scalable infrastructure network tailored to meet clients' needs. A detailed Business Continuity Plan has also been put in place to ensure the services are provided to the customers without any disruptions.”

Thus, this company is also stated to be a Knowledge Process Outsourcing and therefore for the reasons stated by us while dealing with this issue of comparability of the company Infosys BPO Ltd. shall equally hold good and therefore we direct the AO/TPO to exclude this company from the list of comparables.

C. Universal Print Systems Ltd.:- This company was selected by the TPO by obtaining information by exercising of the power vested with him under the provisions of section 133(6) of the IT Act. The TPO held that this company satisfies all the filters selected by him. However this company was objected by the assessee-company before the TPO on the grounds of functional differences as it is engaged in the business activities such as printing and allied activities, high profit making company and also fails the employee cost filter, the objections of the assessee-company were over ruled by the TPO by holding as under:

“Counter to the objection on Functional Comparability: The functions of the comparable are similar in the sense that the Pre-Press BPO unit provides back office support services. Counter to the objection on High Margins: Reliance is placed on the decisions of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors and the Delhi Tribunal in Nokia India Pvt Ltd (ITA No. 242/D/2010). Counter to the objection on Employee Cost Filter: The company operates in four major segments viz., Repro, Label Printing, Offset Printing and Pre-press BPO and for our study, only the Pre-press BPO segment has been considered. Therefore, filters are to be applied only on the figures of this segment. The company was specifically asked to furnish the details of employee

IT(TP)A No. 2311/Bang/2016 Page 16 of 25 cost u/s 133(6) of the Act. Vide its letter dated 18/12/2015, the company has furnished P&L a/c of Pre press BPO segment, from which it is seen that the employee cost relating to Pre-Press BPO segment is Rs. 268.76(Lacs). The employee cost of Rs. 268.76(Lacs) on a turnover of Rs. 611.96 (Lakhs) works out to 44%. Therefore, this comparable clears the employee cost filter. The response received from the company u/s 133(6) of the Act has been attached with this order. (Annexure-G) The TPO has used only current data for the F.Y 2011-12. The corrected margin is 52.46%.” The Hon’ble DRP also confirmed the findings of TPO.

ii) Being aggrieved, the assessee-company is before us. It is contended by the assessee that this company fail revenue filter more than 75% from ITES segment and also functionally not comparable with that of the assessee-company and also fails the filter of earnings from export against 75% of the total revenue and also fails the employee cost filter as employee cost is only 18.56% of the sales.

iii) We heard the rival submissions and perused the material on record. We have perused the Annual Report of this company placed at pages 352 to 463 of paper book. From the page no. 354 it is stated as under. “In 2011-12, Your Company faced many challenges ranging from historically steep fuel price increases, non-availability of power throughout the year and high raw material costs. The Labels and Offset divisions in particular were negatively impacted due to non-availability of power. Tamil Nadu on the whole, faced drastic power outages and restrictions, which were mainly directed at industries in order to keep the vote banks happy. The two divisions saw as much as 6 hours of power cuts in a day in addition to two days of "power holidays" in a week. Although this situation is expected to ease in the coming months, it has had an adverse impact on operations in 2011-12. The periodic fuel price increases through our 2011-12 not just ensured high inflation cutting across every input element, but also adversely affected our cost of captive power generation which became the only source of power during certain periods in 2011-12. In addition, procurement cost of raw materials such as paper, film and ink rose

IT(TP)A No. 2311/Bang/2016 Page 17 of 25 substantially along with market expectation regarding price reduction of printed products.”

From this it is very clear that this company is into the business of printers whereas the assessee-company is into the Business Process Outsourcing. Therefore by no structure of imagination these two companies can be considered to be functionally similar and therefore we direct the AO / TPO to exclude this company from the list of comparables.

D. BNR Udyog Limited (Medical Transcription segment):- This is a company selected by the TPO and the inclusion of this company was contested by the assessee-company before TPO for the following reasons: “XL Health is engaged in providing the 'Manual claim processing services' to its foreign A.E. Here it is important to mention that the XLHealth Corp. group is, inter alia, engaged in health related insurance business. So the services provided by the assessee under this segment are mainly in the nature of processing on manual basis, the insurance claims lodged by its policyholders. Whereas the Business nature of the Comparable Company BNR Udyog is Medical Transcription services, which is totally dissimilar to that of the Assessee. As XLHealth is engaged in rendering the Medicare Support, Insurance Claims Processing and Data Operations, we find no logical comparison of BNR Udyog with XLHealth.”

ii) The above objections were rejected by the TPO by holding that medical transcriptions also fall within the ITES which are similar to that of the assessee-company. Even before the DRP it was contested that companies had high margin of 50.61% and also it is contested that it fails the filter of 75% of export earnings applied by the TPO as the earnings from the export earnings in these companies is only 42.91% and also fails the RPT filter of 25% applied by the TPO as the RPT in this case is 49.60%. These objections have been over ruled by Hon’ble DRP by holding that mere fact that the company is a high profit making ipso facto cannot be a reason to exclude from the list of comparables. As regards the export earning filter, the Hon’ble DRP held that the TPO has considered the segmental data only, entire receipts are from exports. As

IT(TP)A No. 2311/Bang/2016 Page 18 of 25 regards the RPT filter, the DRP rendered a categorical finding that there are no transactions with the AE in respect of medical transcription services. Thus the DRP confirmed the findings of the TPO.

iii) Being aggrieved, the assessee-company is before us. The learned counsel, again reiterated the same submissions made before the DRP but had not laid any evidence on record confronting the findings of the DRP. From the Annual Report filed before us placed in the paper book at page nos. 679 to 728, on page no. 689 it was stated as under. “3. Operations and Overview: During the year under review your company has achieved a gross turnover of Rs.36,302,498 as against the turnover of Rs.10,766,512 of the previous year registering a growth of 29.65%. Apart from Medical Transcription, your company has diversified in Medical Billing and Coding for US clients, Business support services, and E-Governance projects in India. The Company is also in process of empanelment with various government authorities for providing business support services throughout the country.”

From the above it is clear that there are no abnormal growth in the turnover of the company. Further the activities of the company are purely in the nature of ITES and the segmental details are in respect of the business activities of medical transcriptions which are available at page no. 722 of the paper book in respect of disclosure of related party transactions it is clearly stated at page no. 722 of the paper book that there are no related party transactions. Thus the submissions made by the assessee-company are not supported by material on record. Therefore we do not see any reason to interfere with the findings of the lower authorities. Accordingly, we direct the AO / TPO to include this company in the list of comparables.

E. Excel Infoways Limited:- This company was selected by the TPO and the assessee-company had contested its inclusion before the TPO. Though, it was stated before us that the inclusion of this company in the list of comparables was

IT(TP)A No. 2311/Bang/2016 Page 19 of 25 contested before the TPO. A mere look at the explanation filed by the assessee-company pursuant to the show cause notice issued by the TPO, it is clear that this company was not contested before the TPO. Even before the Hon’ble DRP, the objections were filed on the ground that this company does not pass through the filter of export earnings of more than 75% of the earnings and also the employee cost filter of 25%. These objections were over ruled by Hon’ble DRP. The objections of the assessee-company are as under. “7.13 In relation to objection regarding treating Excel Infoways Limited as a comparable, the assessee has submitted that the company fails export revenue filter and employee cost filter as applied by TPO. The submissions of the assessee have duly been considered. In relation to this comparable, no objection, whatsoever was raised by the assessee before TPO. In this case the TPO has taken segmental data for the purposes of calculation of the margin. Since in the segment related to ITES of this company the entire revenue is from the exports, so the company passes the export revenue filter. So the objection of the assessee is without any merit and the same is not accepted. As regards employee cost filter, the TPO had used the information called for u/s 133(6) of the Act and the employee cost was found to be more than 25%. The assessee has also argued that the current year of this company was exceptional, as management decided to close down the business, there was steep reduction in profits and company entered into new line of business and made some investments in an Infra company. The above submissions of the assessee have duly been considered. As regards the closing down of the existing business. the management had taken such decision to close down the business in future. So how it has impacted the present business of the assessee could not be explained by the assessee. Similarly, how starting of a new line of business has effected the ITES segment especially when TPO has used segmental data of this company in the case of assessee, could also not be explained by the assessee. So the objection of the assessee in relation to this comparable is also not accepted.”

ii) Being aggrieved, the assessee-company is before us vide this grounds of appeal contending that this company cannot be taken as a comparable with that of the assessee-company on the ground that there was no sufficient segmental information and this company operates both IT Services and ITES and fails filter of export earnings of more than 75% and employee cost is less than 25% of the revenue.

iii) We have considered the rival submissions and perused the material on record. The assessee-company had not led any evidence in

IT(TP)A No. 2311/Bang/2016 Page 20 of 25 support of the submissions made, no Annual Report for the company was also filed before us. In the circumstances, we have no option but to confirm the findings of Hon’ble DRP and therefore we direct the AO/TPO to include this company in the list of comparables.

a). R Systems International Ltd.:- This company was rejected by the TPO on the ground that this company follows different financial year for accounting purposes. The exclusion was contested before Hon’ble DRP on the following grounds. - Use of "contemporaneous" data" does not necessarily mean selection of companies having financial year from April to March - Inappropriateness of different accounting year ending filter - Financials cover a 12-month period (like the Assessee), thereby establishing comparability - In light of Hon'ble ITAT judgment in case of Mercer Consulting (India) Private Limited Vs. DCIT (ITA 966/Del/2014), the operating margin (considering the TPO's position regarding operating and non- operating items) pertaining to IT enabled service segment for year ending 31 March 2011 is submitted by the Assessee. i.e., 0.32% - The learned TPO has not cited any instances of functional dissimilarity of R Systems vis-a-vis the Assessee and accordingly, it can be safely assumed that learned TPO does not have any reservations in this regard.

ii) The Hon’ble DRP also confirmed the TPO’s finding by upholding the appropriate application of the filter of same financial year ending.

IT(TP)A No. 2311/Bang/2016 Page 21 of 25 iii) Being aggrieved, the appellant is in appeal before us. It is contended that there is no functional dissimilarity between this company and the assessee-company and use of contemporary data does not necessarily mean selection of companies having financial year from April to March and reliance in this regard was placed on these two decisions.

a) CIT Vs. Mckinsey Knowledge Centre India Pvt. Ltd. in ITA No. 217/2014, High Court of Delhi b) Baxter India (P.) Ltd. Vs. ACIT (supra)

The prescribed rules for comparability postulate that contemporary data should alone be used. Therefore the application of filter of same financial year ending is appropriate filter. The appropriateness of this filter was not challenged before the TPO. The DRP also upheld the validity of application of this filter. Therefore we do not find any reason to include this company in the list of comparables.

Similarly in the case of Caliber Point Business Solutions Ltd. also the reasoning given was in respect of R Systems International Ltd. equally holds good. Therefore we uphold the exclusion of Caliber Point Business Solutions Ltd. from the list of comparables.

c) Informed Technologies Ltd.:- This company was included by the assessee-company in its TP study but rejected by the TPO on the ground that the financial statements are unreliable, no segmental data was available and other income constitute 48% of total operating income etc. Before Hon’ble DRP also similar objections were reiterated. The same was rejected by holding as under. “7.17 Although assessee had not raised any objection in relation to M/s Informed Technologies India Ltd. as comparable, however during proceedings before this Panel the assessee was asked as to why the said company should not be excluded from the list of comparables as data of M/s Informed Technologies India Ltd was not reliable in view of specific comments of the auditor as well as because of the fact that segmental data was not available. In response to the same the assessee replied that it has not objected to the inclusion of this company in the list of comparables by the

IT(TP)A No. 2311/Bang/2016 Page 22 of 25 TPO and so there is no reason to exclude it at this stage. This was further argued by the assessee that the company is functionally comparable and the same should not be excluded just on the basis of casual comments of the auditor. This was also argued that ‘other income’ shown in the accounts was on net basis and so the other expenditure relates to ITES segment. The submissions of the assessee have duly been considered, however the same are not accepted. As per provisions of section 144C (8) read with explanation, the DRP is well within its power to consider the matters arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee. Further, from the annual report of the company it is observed that the company is having substantial ‘other income’, which is about 48% of the total revenue, however, segmental details are not available and as such direct and indirect expenses relating to this ‘other income’ cannot be segregated. Although a part of such income under head ‘other non-operating income’ is shown to be net of expenses directly attributable to such income, however details of indirect expenses relating to earning of this income as well as direct / indirect expenses for earning the remaining part of ‘other income’ is not available. While working out the margins of this company the TPO has taken the revenue from operations (ITES) but while taking the expenses, entire expenses debited to the profit and loss account (other than interest and finance charges) have been considered as relating to ITES segment. This has resulted in distorted margins of this company in the ITES segment. Further page 19 of the annual report of this company reads as follows. (iii) In respect of loans, either granted by the Company, secured or unsecured to/from companies, firms or other parties covered in the register maintained under section 301 of the Companies Act 1956. A In respect of an unsecured loan (including advances) granted in the earlier years to one company covered in the register maintained under Section 301 of the Companies Act, 1956: (a) The maximum amount outstanding during the year was Rs. 74,55,954 (previous year Rs.74,55,954) and the year end balance was Rs. Nil, as the same has been written off during the year. (b) The terms and condition of the said loan (including advance) seems, prima facie, prejudicial to the interest of the company as the company has granted the same interest free. (c) In the opinion of the management, the loan is irrecoverable now as name of the company has been struck off from the Registrar of Companies on 13th

IT(TP)A No. 2311/Bang/2016 Page 23 of 25 May, 2011. Attention is invited to note no.15 in this regard. --------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- (vii) The Company does not have an Internal Audit System commensurate with size of the Company and nature of its business.” Further, note 15 on page 31 is as follows: NOTES ON FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST MARCH,2012 As at 31st As at 31st 15 SHORT TERM LOANS AND March, 2012 March, 2011 ADVANCES Rupees Rupees Unsecured Considered Doubtful or Bad Loans and advances to related parties Mangnachem Pharmaceuticals Pvt. Ltd. 7,455,954 7,455,954 Less: Provision for doubtful advances - (7,455,954) Less: Written off (7,455,954) - Considered Good Others 6,369,432 1,103,262 Total 6,369,432 1,103,262 15.4 The Company has advanced sums aggregating to Rs. 74,55,954 to Magnachem Pharmaceuticals Pvt. Limited, a company under the same management. In view of the continuing losses, erosion of entire net worth and no signs of recovery in the foreseeable future, the company made full provision for these doubtful advances in the year 2005-2006. During the year name of Magnachem Pharmaceuticals Pvt. Ltd. has been struck off from the Register of Companies on 13th May, 2011 and the Company is dissolved. As a result the advances of Rs.74,55,954 have been written off in the current year against the provision made in 2005-2006. (emphasis supplied) Considering the facts that segmental data is not available. the action of the management which is prejudicial to the interest of the company and non-existence of internal audit, this company selected by the TPO is directed to be excluded from the list of comparables.” The ld. Counsel has not confronted the DRP order. Therefore we uphold the exclusion of this company from the list of comparables.

IT(TP)A No. 2311/Bang/2016 Page 24 of 25

IT(TP)A No. 2311/Bang/2016 Page 25 of 25 not claimed as revenue expenditure. Therefore, there was also no reason to disallow depreciation on such capitalized amount as the aforesaid provision does not deal with deduction of depreciation. Having considered arguments from both the sides, we are of the view that there is no error in the order of the. learned CIT(A) which requires correction from us. Thus, this ground is also dismissed." The cases relied on by the learned AR of the assessee also reiterated the same position of law. In the light of this, we hold that the Assessing Officer was not justified in making disallowance u/s 40(a)(ia) on account of alleged failure to deduct tax at source on purchase of software capitalized in books of account.” Respectfully following the decision of the coordinate bench we hold that the assessee lower authorities was not correct in not allowing the depreciation on the software and therefore we direct the AO to allow the depreciation on the software. These grounds of appeal are allowed.

Order pronounced in the open court on 09th February, 2018

Sd/- sd/- (SUNIL KUMAR YADAV) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Place : Bengaluru. D a t e d : 09/02/2018 /MS/EKS/ Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order

Senior Private Secretary, ITAT, Bangalore.