M/S. EQUANT SOLUTIONS INDIA PVT LTD.,GURGAON vs. DCIT, GURGAON

ORDER PER: LALIET KUMAR, J.M.:

This is an appeal preferred by the assessee against the order dated 20/02/2014 of the Assessing officer for the A.Y. 2009-10 framed pursuant to the direction of the ld. DRP dated 26/12/2013. The assessee has raised various

Equant Solutions India Pvt. Ltd. Vs DCIT grounds in its appeal. However, the assessee has pressed only following two grounds :-

“2.6 rejection 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: 2.6.1 exclusion of companies whose data for F.Y. 2008-09 was not available; 2.6.2 exclusion of companies having service income to sales less than 75% (as against other operating to sales than 50% applied by the appellant); 2.6.3 exclusion of companies with related party transactions (RPT) greater than 25% of their sales; 2.6.4 exclusion of companies with export sales that are less than 75% of their total revenue; 2.6.5 exclusion of companies with diminishing revenues/persistent losses for last three years upto and including F.Y. 2008-09; 2.6.6 exclusion of companies having different financial year ending (i.e. not March 31, 2009); 2.6.7 and rejecting, in particular, the following filters applied by the appellant in its TP documentation/fresh search; 2.6.7.1 companies having research and development costs to sales less than 3% were accepted; and;

Equant Solutions India Pvt. Ltd. Vs DCIT 2.6.7.2 companies with net worth less than zero were rejected; 2.6.7.3 companies having advertising, marketing and distribution costs to sales less than 3% were accepted. 2.9 including certain companies that are not comparable to the appellant in terms of functions performed, assets employed and risks assumed; The other grounds taken by the assessee in its appeal were not pressed during the course of hearing, therefore, the remaining grounds are dismissed being not pressed.

3.1 Paragraph Nos. 7, 8, 8.1, 8.2, 8.3 and 9 of the show cause notice provides as under:-

“7. Use of Current Year Data:-

It is proposed to use the current year data alone i.e. the data pertaining to the FY 2008-09. The use of earlier year data is not acceptable as you have not shown any reasons as to how the earlier year data has an influence on transfer prices. In the absence of any cogent, relevant and reliable evidence to prove that the data for preceding two years revealed fact have an influence on the determination of the ALP, in view of proviso to rule 10B(4) use of the data pertaining to the two earlier years FY 2006-07 and FY 2007-08 is not justified. Hence, unless it is shown that conditions as mentioned in the aforesaid proviso are fulfilled, it is proposed to use only the current year data and to exclude the earlier year data.

8. Comparables selected by the taxpayer:- The comparables selected by you in both the search processes are discussed as under:-

Equant Solutions India Pvt. Ltd. Vs DCIT Sl. No. Name of the Company Remarks 1. Aditya Birla Minocs Worldwide Ltd. Passes all filters, hence a suitable comparable.

2. Aegis BPO Services (Gurgaon) Company fails export filter, Limited hence rejected.

3. BNR Udyog Ltd. Service income to sales is 59.03% (less than 75%) hence rejected.

4. Cameo Corporate Services Ltd. Service Income is 19.57% to sales, hence rejected.

5. Cosmic Global Limited Passes all filters, hence a suitable comparable.

6. CSS Techenergy Ltd. (Formerly Export is 23% of the sales, known as CS Software Enterprise hence this is not a suitable Limited) comparable. 7. eZest Solutions Limited The company is providing software development services, hence functionally different, Rejected.

8. FCS Software Solutions Limited The company is providing software development services, hence functionally different, The company is also having declining sales for last 3 years, hence, rejected.

Equant Solutions India Pvt. Ltd. Vs DCIT 15. Microland Limited This is a suitable comparable, however, Segmental results has to be taken for ITES services.

Sl. Name No. 1 Aditya Birla Minacs Worldwide Ltd. 2. Cosmic Global Limited 3. Informed Technologies India Limited 4. Infosys BPO Ltd. 5. Microland Limited

8.2 As a further step, the accept-reject matrix that you have provided alongwith the fresh search conducted by you, has been examined.

Equant Solutions India Pvt. Ltd. Vs DCIT It is seen that some of the comparables that have been rejected on qualitative grounds are actually suitable comparables. These are analysed below:-

Sl. No. Comparable TPO’s Remarks 1. Coral Hub You have rejected these companies on the ground that these are functionally different. 2 eClerx Service However, the annual report of the companies have been perused.

3. Genesys International They are very much ITES Limited companies.

Sl. No. Comparable OP/OC 1. Aditya Birla Minacs Worldwide Ltd. 1.71% 2. Coral Hub 36.93% 3. Cosmic Global 50.70% 4. eClerx Services 47.00% 5. Genesys International Limited 58.45% 6. Informed Technology Limited 23.16% 7. Infosys BPO Ltd. 24.42% 8. Microgenetic Systems Ltd. 23.25% 9. Microland Ltd. (Segment) -21.63% Average 27.11% 9. Computation of Operating Margin:

Equant Solutions India Pvt. Ltd. Vs DCIT Particulars Amount Operating Income 1,719,892.547

Operating Cost 1,409,686,951 Add Forex Loss 85,655,404 Total Operating Cost 1,495,342,355

Operating Profit 224,550,192

OP/OC 15.02% 3.2 Thereafter, the case was discussed by the TPO with the AR of the company, the comparables selected by the assessee and rejected by the assessee were analysed by the TPO and finally the OP/OC of the assessee was worked out at 24.52% based on inclusion of four comparables namely:

Sl. No. Comparable TPO’s Remarks 1. Coral Hub You have rejected these companies on the ground that these are functionally different. 2 eClerx Service However, the annual report of the companies have been perused. 3. Genesys International They are very much ITES Limited companies. 4. Microgenetic Systems They pass all filters also. Ltd. These are suitable comparables. Finally the comparables arrived at by the TPO were as under:-

Sl. No. Comparables OP/OC 1 Aditya Birla Minacs Worldwide Ltd. 0.50% 2. Coral Hub 36.93% 3. Cosmic Global 48.20% 4. eClerx Services 47.00%

Equant Solutions India Pvt. Ltd. Vs DCIT 5. Genesys International Limited 58.45% 6. Informed Technology Limited 23.13% 7. Infosys BPO Ltd. 15.83% 8. Microgenetic Systems Ltd. 10.00% 9. Microland Ltd. (Segment) 19.32% Average 24.52% 4. Being aggrieved by the order of the TPO, the assessee preferred proceedings before the DRP and filed objection to the draft assessment order.

The DRP, after considering the material on record has issued a direction to the AO/TPO and has held as under:-

“After carefully considering the submission and the order of the TPO, the DRP is of the view that the rejection of the TP study by the TPO is justified for the following reasons: i. The taxpayer had used data pertaining to prior year for carrying out comparability analysis without fulfilling the conditions mentioned in the Proviso to 'Rule 10B(4) i.e. the taxpayer did not demonstrate that the data in the case of those comparables would materially affect the transactions carried out in the current year. ii. TP order is also considered under the light of Circular No. 12 of 2001 and Circular No. 14/2001 and Instruction No. 3 of 2003 which reaffirm the legal position that if conditions mentioned in clauses (a) to Equant Solutions India Pvt. Ltd. Vs DCIT (d) of section 92C(3) are satisfied, the ALP determined by the tax payer can be rejected. iii. The TPO's action is correct in accordance with the ratio of the special bench of the Hon'ble ITAT in the case of M/s Aztech Software [294 ITR 125 (AT)] wherein it has been held that when tax authorities are of the opinion that the ALP has not been correctly determined by the tax payer, they can substitute their own ALP on the basis of material or information furnished by the assessee or collected by them.

Based on the above, the DRP is of the view that there were flaws in the search process carried out by the assessee. The action of the TPO is upheld.”

Further the DRP has directed the TPO to exclude Microgenetic Systems Limited in the list of comparables.

4.1 Based on the direction issued by the DRP, comparables as per the TPO post DRP directions for ITES Segments were as under:-

Sl. No. Company’s Name Margin OP/TC 1 Aditya Birla Minacs Worldwide Ltd. 23.88% 2. Vishal Information Technologies Limited 38.69% (Coral Hub Limited) 3. Cosmic Global Services Limited 48.20% 4. Eclerx Services Limited 57.70% 5. Genesys International corporation Limited 58.45%

Equant Solutions India Pvt. Ltd. Vs DCIT 6. Informed Technologies Limited 22.61% 7. Infosys BPO Ltd. 24.51% 8. Microland Ltd. (Seg) -15.64% Average 32.30% Further the assessment order dated 20/2/2014 finalized by the A.O. provided the total income of the assessee to the tune of Rs. 17,15,15,080/-.

Equant Solutions India Pvt. Ltd. Vs DCIT “14. From a perusal of the above order of the DRP, it is clear that the assessee’s objections/contentions against the inclusion/exclusion of the comparables has not been dealt by the DRP while exercising the appellate jurisdiction against a quasi-judicial order of the TPO, which exercise is sine qua non for deciding the issue as to whether a comparable is comparable to the FAR of the tested party i.e. assessee. Simply by observing that tested party is broadly comparable will not suffice. We are of the opinion that the DRP cannot absolve from its duty without going into the merits of the contention of the assessee as to whether a comparable company is comparable to it or not as envisaged by the Act and Rules governing the subject. Since the DRP has not met the contention of the assessee in respect of inclusion/exclusion of comparable in its order, we deem it fit to remand the matter back to the file of DRP for fresh adjudication. Ex consequenti, the DRP order is set aside and the matter remanded back to the file of the DRP for passing a speaking order in respect of all the grounds raised before it and has to deal with each of the comparables contested above by the assessee. Needless to say that when considering the arguments in respect of selection of the comparables, the DRP must keep in mind the following aspects:-

(a) Companies with extra ordinary circumstances, like those which suffered events like merger/demerger, impacting the financial results could not be treated as comparables:

Equant Solutions India Pvt. Ltd. Vs DCIT (b) Companies which are functionally dissimilar cannot be taken as comparables;

(c) Companies acting merely as intermediary having outsourced its activity cannot be considered as comparables;

(d) Companies whose directors were involved in fraud cannot be taken as comparable, as their financials are not reliable.

The aforesaid aspects may be kept in mind by the DRP while addressing the objections in respect to inclusion/exclusion of comparables and pass a specking order after giving adequate opportunity to the assessee.”

Equant Solutions India Pvt. Ltd. Vs DCIT 7. In the light of the above, the issue under appeal is restored back to the file of the DRP for fresh adjudication. Accordingly, this appeal of the assessee is allowed for statistical purposes only.

The order pronounced in the open court on 24.11.2016.