SWISS RE SHARED SERVICES (INDIA) PRIVATE LIMITED,BANGALORE vs. DCIT, BANGALORE

way of this common order for the sake of convenience. (B)/11, 172(B)/12 & 111(B)/12 2

2. First we take up the appeals for the assessment year 2005-06 i.e. ITA Nos.172(B)/2012 and IT(TP)A No.111(B)/2012.

“The grounds stated hereunder are independent of, and without prejudice to one another. The Appellant submits as under: 1 Assessment and reference to Transfer Pricing Officer are bad in law a) The final assessment order issued by the Deputy Commissioner of Income-tax, Circle 12(3) ['DCIT' or 'AO'], is bad on facts and in law, and is in violation of the principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Swiss Re Shared Services (India) Private Limited ('the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Income- tax Act, 1961 ['the Act']. b) The AO has erred in law in making a reference to the Deputy Commissioner of Income Tax - Transfer Pricing - V ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA (1) of the Act.

a) The AO/TPO erred on facts and in law in conducting fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed. b) On the facts and in the circumstances of the case and in law, the learned TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which are a pre-requisite condition to make (B)/11, 172(B)/12 & 111(B)/12 3 any adjustment under the provision of Chapter X of the Act. 3 Comparability analysis adopted by the AO/TPO for determination of arm's length price a) The AO/TPO grossly erred on facts in benchmarking the transactions of the captive Information Technology enabled (,ITeS') services of the Appellant with companies operating as fully fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-a-vis comparable companies. b) The AO/TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the Appellant. c) The AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as com parables to the Appellant, without establishing functional comparability. d) The AO/TPO also erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. e)The AOITPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income- tax Rules and arbitrarily applying a 25% related party criteria in accepting I rejecting com parables. f) The AO/TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2007) and inconsistently applying such filter. g) The AO/TPO grossly erred on facts in arbitrarily rejecting companies having ITeS revenues less than 75% of total operating revenue and inconsistently applying such filters, without considering the specific segmental results. h) The AOI TPO erred in rejecting companies having export revenues less than 25% of total sales. i) The AO/TPO also erred on facts in arbitrarily rejecting companies based in their financial results without considering the functional comparability.

(B)/11, 172(B)/12 & 111(B)/12 4 j) The AO/TPO erred on facts and in law in considering a set 'secret data', i.e. data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified.

K ) The AO/TPO also erred on facts and in law in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies.

4 Erroneous data used by the AO/TPO a) The AO/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law in not applying the multiple-year data while computing the margin of alleged comparable companies as such data had an influence in determining the pricing policy of the Appellant.

5 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO

The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 1OB to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure and (d) risk profile between the Appellant and the comparable companies.

6 Variation of 5% from the arithmetic mean The AO/TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant.

7 Deduction under section 1OA of the Income-tax Act, 1961 On the facts and circumstances of the case, the learned AO erred in computing the deduction under section 1OA of the Income-tax Act, 1961 ('the Act') at Rs.53,633,766. a) The learned AO erred in reducing expenditure incurred in foreign currency of Rs. 5,521,806 from the 'export turnover' as expenditure having been incurred by the Appellant for rendering technical services outside India. The learned appreciate that the company is not engaged in rendering technical services outside India and therefore the adjustment was not warranted in the first place. c) Without prejudice to the grounds in (b) above, even assuming while denying, that reduction of expenditure in (B)/11, 172(B)/12 & 111(B)/12 5 foreign currency from the 'export turnover' is warranted, a corresponding adjustment ought to have been made even from the 'total turnover'. The appellant relies on the decision of the jurisdictional Karnataka High Court in the case of CIT v. Dell International Service Private Limited and Others [ITA Nos. 450 of 20081451 of2008}.

8 Interest under section 234B of the Act

The learned AO has erred in levying interest under section 234B of the Act of Rs. 7,268,642.

9 Directions issued by the Honorable Dispute Resolution Panel ['DRP'] a) The Honorable DRP has erred in law and on facts in not taking cognizance of the objections filed by the Appellant in relation to the draft assessment order/TP Order issued by the AOI TPO in the proceedings before them. b) The Honorable DRP erred in facts and in law in confirming the draft assessment order of the AO. c) The Honorable DRP erred in concluding that communication expenses ought to be reduced from export turnover despite there being no such adjustment made by the AO in the draft order. d) The Honorable DRP erred in misinterpreting the definition of 'export turnover' for the purpose of computing deduction under section 10A insofar as it directed that travelling expenses incurred by the Appellant has to be reduced from export turnover since such expenses are attributable to the delivery of computer software outside India. e) Without prejudice to the above, having given the directions to make adjustment to 'export turnover', the Honorable DRP erred in not giving a direction for making a corresponding adjustment to the 'total turnover' as well.

10 Relief a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. c) Further, the appellant prays that the adjustment in relation to transfer pricing maters made by the ld.AO/TPO and upheld by Hon’ble DRP is bad in law and liable to be deleted”.

(B)/11, 172(B)/12 & 111(B)/12 6

“1. The order of the Learned CIT(A) in so far as it relates to the following grounds is opposed to law and facts of the case.

2. The Id. CIT(A) erred in holding that telecommunication and other expenses incurred in foreign currency amounting to Rs.79.40,977/- are to be excluded from total turnover as well whereas such exclusion is permitted to arrive at the export turnover only as per the definitions given in Sec.10A of the Act and total turnover has not been defined in the section.

3. On the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the TPO erred in not excluding com parables having any related party transactions.

4. The learned CIT(A) erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s Infosys Technologies Ltd., in Software segment and M/s Wipro BPO Solutions Ltd., in ITES segment as com parables.

5. The Id. CIT(A) erred in holding that profit on cost of more than 50% of the comparable company(ies) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from that of the appellant company.

6. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.

7. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above”. .

15. We have considered the rival submissions. We find that out of nine comparables selected by the TPO, some comparables were rejected by the ld.CIT(A). Out of these comparable rejected by the ld. CIT(A), ld. AR of the assessee conceded that three such comparables should be reinstated because, the same were rejected by the ld. CIT(A) by applying 0% RPT filter and now the RPT filter should be applied at 15% and when 15% filter is applied, these three companies satisfies the RPT filter. These three companies are;

a) M/s Allsec Technologies Ltd., b) M/s Transworks Information Services Ltd., c) Ace Software Exports Ltd., Hence, we hold that these three comparables rejected by the ld. CIT(A) by applying 0% RPT filter are good comparables because these companies are satisfying 15% RPT filter and there is no other basis pointed out by any side to reject any of these comparables.

As per the above discussion, we find that the order of the ld. CIT(A) is required to be modified by rejecting one comparable i.e. M/s Vishal Information Technologies Ltd., which was accepted by the ld.CIT(A) and by incorporating three comparables which were rejected by the ld. CIT(A) by applying 0% RPT filter and these three comparables are ; (B)/11, 172(B)/12 & 111(B)/12 11 a) M/s Allsec Technologies Ltd., b) M/s Transworks Information Services Ltd., c) Ace Software Exports Ltd., We order accordingly.

The grounds stated hereunder are independent of, and without prejudice to one another. The Appellant submits as under: 1 Assessment and reference to Transfer Pricing Officer are bad in law c)The final assessment order issued by the Deputy Commissioner of Income-tax, Circle 12(3) ['DCIT' or 'AO'], is bad on facts and in law, and is in violation of the principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Swiss Re Shared Services (India) Private Limited ('the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. d)The AO has erred in law in making a reference to the Deputy Commissioner of Income Tax - Transfer Pricing - V ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA (1) of the Act.

2 The fresh comparable search undertaken by the TPO is bad in law b)The AO/TPO erred on facts and in law in conducting fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is (B)/11, 172(B)/12 & 111(B)/12 12 liable to be quashed. c)On the facts and in the circumstances of the case and in law, the learned TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which are a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. 3 Comparability analysis adopted by the AO/TPO for determination of arm's length price b)The AO/TPO grossly erred on facts in benchmarking the transactions of the captive Information Technology enabled (,ITeS') services of the Appellant with companies operating as fully fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-a-vis comparable companies. c)The AO/TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the Appellant. c) The AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as com parables to the Appellant, without establishing functional comparability. d) The AO/TPO also erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. e)The AOITPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income- tax Rules and arbitrarily applying a 25% related party criteria in accepting I rejecting com parables. f) The AO/TPO also erred on facts and in law In arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2007) and inconsistently applying such filter. h)The AO/TPO grossly erred on facts in arbitrarily rejecting companies having ITeS revenues less than 75% of total operating revenue and inconsistently applying such filters, without considering the specific segmental results.

(B)/11, 172(B)/12 & 111(B)/12 13 b)The AOI TPO erred in rejecting companies having export revenues less than 25% of total sales. c)The AO/TPO also erred on facts in arbitrarily rejecting companies based in their financial results without considering the functional comparability. d)The AO/TPO erred on facts and in law in considering a set of 'secret data', i.e. data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. The AO/TPO also erred on facts and in law in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies. 4 Erroneous data used by the AO/TPO c)The AO/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. d)The AO/TPO erred in law in not applying the multiple- year data while computing the margin of alleged comparable companies as such data had an influence in determining the pricing policy of the Appellant. 5 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure and (d) risk profile between the Appellant and the comparable companies. 6 Variation of 5% from the arithmetic mean The AO/TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant. 7 Deduction under section 10A of the Income-tax Act, 1961 b)On the facts and circumstances of the case, the learned AO erred in computing the deduction under section 10A of the Income-tax Act, 1961 ('the Act') at Rs. 53,633,766. c)The learned AO erred in reducing expenditure incurred in foreign currency of Rs. 5,521,806 from the 'export turnover' as expenditure having been incurred by the Appellant for rendering technical services outside India. The learned appreciate that the company is not engaged in rendering technical services outside India and therefore the adjustment was not warranted in the first place.

(B)/11, 172(B)/12 & 111(B)/12 14

Without prejudice to the grounds in (b) above, even assuming while denying, that reduction of expenditure in foreign currency from the 'export turnover' is warranted, a corresponding adjustment ought to have been made even from the 'total turnover'. The appellant relies on the decision of the jurisdictional Karnataka High Court in the case of eIT v. Dell International Service Private Limited and Others [ITA Nos. 450 of 20081451 of2008}.

8 Interest under section 234B of the Act The learned AO has erred in levying interest under section 234B of the Act of Rs. 7,268,642. 9 Directions issued by the Honorable Dispute Resolution Panel ['DRP'] f)The Honorable DRP has erred in law and on facts in not taking cognisance of the objections filed by the Appellant in relation to the draft assessment order/TP Order issued by the AOI TPO in the proceedings before them. g)The Honorable DRP erred in facts and in law in confirming the draft assessment order of the AO. h)The Honorable DRP erred in concluding that communication expenses ought to be reduced from export turnover despite there being no such adjustment made by the AO in the draft order. i)The Honorable DRP erred in misinterpreting the definition of 'export turnover' for the purpose of computing deduction under section 10A insofar as it directed that travelling expenses incurred by the Appellant has to be reduced from export turnover since such expenses are attributable to the delivery of computer software outside India. Without prejudice to the above, having given the directions to make adjustment to 'export turnover', the Honorable DRP erred in not giving a direction for making a corresponding adjustment to the 'total turnover' as well.

10 Relief d)The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. e)The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. c) Further, the appellant prays that the adjustment in relation to transfer pricing matters made by the ld. AO/TPO and upheld by the Hon’ble DRP is bad in law and liable to be deleted.”.

(B)/11, 172(B)/12 & 111(B)/12 15

As per this chart, 27 comparables are selected by the TPO with adjusted average mean of 28.33%. Out of these 27 comparables, the assessee is seeking exclusion of 8 comparables which are as under;

1) M/s Eclerz Systems Ltd., 2) M/s HCL Comnet Systems & Services Ltd., (Seg.) 3) M/s Infosys BPO Ltd., 4) M/s Maple E-Solutions Ltd., 5) M/s Moldtek Technologies Ltd., (Seg.) 6) M/s Triton Corp Ltd., 7) M/s Vishal Information Technologies Ltd., 8) M/s Wipro Ltd., (Seg.)

“8.1.2 We have considered the rival submissions as well as relevant material on record. We find that the company Eclerx Services Ltd. is engaged in diversified activity of providing services including (B)/11, 172(B)/12 & 111(B)/12 16 analytic services and data process solutions to its global clients. The service provided by Eclerx Services Ltd., is in various areas including capital market and therefore, the services are in the nature of consultancy and end to end support through trade centre including trade confirmation, settlement, transaction, maintenance and analytic and reporting. Thus it is apparent from the nature of the activity of this company that it is not providing a simple service of data processing but it is engaged in the activity of providing high- end services involving decision making analysis which requires thought process and evaluation of various facts and factors. Functional comparability of this company with that of simple BPO's service providing company has been examined by the Special Bench in the case of Maersk Global Services Center (India) (P.) Ltd. (supra) in paras. 82 & 83 as under :

"82. Insofar as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets— financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over ??? domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd, is also claimed to have a scalable delivery model and (B)/11, 172(B)/12 & 111(B)/12 17 solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns.

83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP."

Thus it is clear that the Special Bench found that this company is not comparable with BPO company which are engaged only in low-end services of data processing Accordingly, we direct the AO/TPO to exclude Eclerx Services Ltd. from the list of comparables for the purposes of determining ALP.

ITA Nos. 1274(B)/11, 172(B)/12 & 111(B)/12 18 8.1.3 We further note that the Hon'ble Delhi High Court in of 2015 dated 10/8/2015 has confirmed the view taken by the special bench of the Tribunal in the case of Maerks Globel Centers India (P.) Ltd. (supra). Accordingly, we direct the AO/TPO to exclude eCIerx Services Ltd. from the list of comparables for the purpose of determining the ALP. 8.2 HCL Comnet System & Services Ltd. (seg.):

The learned AR of the assessee has submitted that the accounting year of HCL Comnet System & Services Ltd. (seg.) is ending at different points of time of year and therefore, the financial data of the said company cannot be considered as contemporaneous to that of the assessee which is following the financial year as the accounting year. In support of his contention, he has relied upon the following decisions: i. Sandstone Capital Advisors (P.) Ltd. v. Asstt. CIT [2014] 147 ITD 240/[2013] 32 taxmann.com 216 (Mum. - Trib.) ii. Asstt. CIT v. Hapag Lloyd Global Services (P.) Ltd. [2014] 62 SOT 8/[2013] 34 taxmann.com 241 (Mum. - Trib.) iii. Saven Technologies Ltd. v. ACIT [IT Appeal No. 1416 (Hyd.) of 2010, dated 10-1-2014] iv. Evonik India (P.) Ltd. v. Dy. CIT [2014] 51 taxmann.com 124 (Mum. - Trib.) v. Telelogic India (P.) Ltd. v. Dy. CIT [2015] 69 SOT 135/58 taxmann.com 364 (Mum. - Trib.) vi. Honeywell Automation India Ltd. v. Dy. CIT (ITA No. 4/Pune/08, dated 10-2-2009)

On the other hand, the learned departmental representative has relied upon the orders of the authorities below and submitted that the TPO has examined the functional comparability of this company (B)/11, 172(B)/12 & 111(B)/12 19 and found that this company complies with filters applied by the TPO. Accordingly, this is a good comparable for determining the ALP in respect of international transactions in the ITES segment. 8.2.1 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that HCL Comnet System & Services Ltd. (seg.) is following its accounting year from 1st July to 30th June. For the year under consideration, the financial accounts are prepared for the year ended on 30th June, 2007. Therefore, it is clear that for the financial year under consideration, only partial data are available from 1st July 2006 to 31st March 2007. At the outset, we note that an identical issue has been considered by this Tribunal in a series of decisions as relied upon by the assessee and referred (supra). In the case of Sandstone Capital Advisors (P.) Ltd. (supra), the Tribunal vide its order dated 6/2/2013 held in para 10 to 10.3 as under:

"10. We have considered the rival submissions and relevant material on record. The TPO has rejected this comparable because the financial data for the Financial Year 2007-08 were not available in the public domain and hence, it was held that this company is not a suitable comparable. There is no dispute that the data furnished by the assessee are regarding the financial results as on 30.6.2007. Therefore, as far as the financial year 2007-08 is concerned, the data available were only for 3 months.

10.1 As per Rule 10B(4), the data to be used in analysing the comparability of or uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Therefore, it is mandatory for the purpose of comparing the data of an uncontrolled transaction with an international transaction that the same should relating to the financial year in which the international transaction (B)/11, 172(B)/12 & 111(B)/12 20 has been entered into. The information, data and documents should be contemporaneous.

10.2 Undisputedly, the final accounts of Arix Consultants Pvt. Ltd. are prepared on 30th June; therefore, the objection raised by the TPO has merits. The Pune Benches of the Tribunal in the case of Honeywell Automation India Ltd in vide order dated 10th Feb 2009 has also taken a similar view.

10.3 Apart from this, as it has been fairly conceded by the Ld Sr counsel for the assessee that there are related party transaction in the case of Arix Consultants Pvt. Ltd as it is evident from the note on account at page 89 of the paper book. Therefore, in view of the fact that this company is having related party transactions, the same cannot be considered as a proper comparable. "

We further note that a similar view has been taken in all other decisions as relied upon by the Tribunal in the case of ACIT v. Loyal Groth Services (supra) the Tribunal vide its order dated 26/02/2013 has held in para. 7.2 as under:

"7.2 The learned Departmental Representative contended that the financial year end of a comparable case matches with assessee, it cannot be considered as comparable because of different financial year endings are distorted. He relied passed by the Mumbai Bench of the Tribunal in the case of Capital Advisors. Private Limited v. ACIT in ITA No 2012. Vide its order dated 06.02.2013, the Tribunal, after considering the prescription of Rule I0B(4) and an another case the Tribunal in Honeywell Automation India Ltd., has mandatory for the purposes of comparing the data of m wpm transaction with an international transaction that the to the financial year ending similar to that of the assessee. The ld. DR contended that since the case of CMC Limited financial year ending vis-a-vis that of the assessee, have been excluded. No contrary precedent was brought to our notice by the learned AR. In fact, the (B)/11, 172(B)/12 & 111(B)/12 21 argument advanced by this regard was not seriously challenged by the ld. AR, following the precedent, we hold that this case should from the list of comparables."

Accordingly, by following series of decisions of the Tribunal on the point, we hold that this company cannot be treated as a good comparable for the purpose of determining the ALP. Hence, the AO/TPO is directed to exclude this company from the list of comparable for the purpose of determination of ALP. 8.3 Infosys Technologies Ltd.

The learned AR of the assessee has referred to the Annual Report of this company at page 57 of the paper book and submitted that though this company was initially selected by the assessee, however, the assessee has raised objections against this company even before the TPO and further before the DRP. Therefore, this company functionally different and has to be excluded from the list of comparables. The learned AR of the assessee has pointed but that his company is having more than 17000 employees in comparison to only 6 employees of the assessee. Therefore, even on the parameter of the scale and strength of employees, this company cannot be considered as functionally comparable with that of the assessee. Further, he has referred to the Annual Report of the company and submitted that during the year under consideration, there is amalgamation of PAN Financial Services India Pvt. Ltd. w.e.f. 1/4/2008. The scheme of amalgamation has been approved by the Hon'ble High Court on 6/4/2009 and 10/3/2009. Therefore, there is an extraordinary event of amalgamation during the year under consideration and hence this company cannot be considered as a good comparable for the purpose of determining the ALP. Apart from the above objections, learned AR of the assessee has further submitted that this company is engaged in providing business process management services to organizations which are providing (B)/11, 172(B)/12 & 111(B)/12 22 service of outsourcing business process. Therefore, this company is in a different kind of business activity in providing the management service of business processes and is not directly providing any business process outsource services. Thus, this company cannot be considered as a functionally comparable.

On the other hand, the learned Departmental Representative has submitted that this company is in the business activity of providing ITES and therefore, it satisfies all the tests and filters applied by the TPO. The functional comparability has been examined by the DRP and it was found that this company is in the same line of activity under the category of ITeS. He has relied upon the order of the authorities below. 8.3.1 We have considered the rival submissions as well as relevant material on record. We note that in para 16.2.15 of the Annual Report of this company, it has been reported that there was amalgamation w.e.f 1/4/2008. The relevant part of the information provided in the Annual Report reads as under:

"Amalgamation of PAN Financial Services India Private Limited

The Board of Directors in their meeting held on October 6, 2008. approved, subject to the approval of the Honorable High Courts of Karnataka and Chennai, a Scheme' of amalgamation ("the Scheme") to amalgamate PAN Financial Services India Private Limited ("PAN Financial"), a wholly owned subsidiary of the Company engaged in providing business process management of services, with the Company with effect from April 1, 2008 ("effective date"). The approval of the High Court was received on April 6, 2009 and filed with the respective Registrar of Companies of Karnataka and Tamilnadu on April 6, 2009 and March 10, 2009 respectively. Accordingly on the scheme becoming effective, the financial statement of PAN Financial has been merged with the company."

(B)/11, 172(B)/12 & 111(B)/12 23

It is clear that there was extraordinary event of amalgamation during the year under consideration. Therefore, in view of the extraordinary development of amalgamation of another company, this company cannot be considered as a good comparable for the assessment year under consideration, Apart from this, we further note that as per the segment reporting in para. 16.2.21 of Annual Report this company is providing business process management services as under:

"Segment reporting

The company's operations primarily relate to providing business process management services to organizations that outsource their business processes. Accordingly, revenues represented along industry classes comprise the primary basis of segmental information set out in these financial statements. Secondary segmental reporting is performed on the basis of the geographical location of customers.

The accounting principles consistently used in the preparation of the financial statements are also consistently applied to record income in individual segments. These are set out in the note on significant accounting policies."

Thus it is clear that the revenue earned by this company is from the activity inclusive of operation primarily relates to providing business process management services to other organization engaged in outsourcing business process. This company is not engaged in direct activity of BPO but it provides service to BPOs and that too management service to BPO. Therefore, in our considered view, this company is engaged in a different nature of activity to that of the assessee provided to its AE. Accordingly, we direct the AO/TPO to exclude this company from the list of comparables.

(B)/11, 172(B)/12 & 111(B)/12 24 8.4 Mapple e solutions Ltd: The learned AR of the assessee has submitted that the financial statements of this company cannot be relied upon owing to the directors of this company involved in the fraud. He has relied upon the following decisions: i. First Advantage Offshore Services (P.) Ltd. v. CIT (ITA No. l086/Bang/2011, dated 30-4-2013) ii. Goldman Sachs Services (P.) Ltd. v. Dy. CIT [2015] 60 taxmann.com 310 (Bang. - Trib.) iii. Stream International Services (P.) Ltd. v. Asstt. CIT [2015] 152 ITD 664/53 taxmann.com 19 (Mum. - Trib.)

On the other hand, learned departmental representative has objected to the exclusion of this company and submitted that when this company is functionally similar to the assessee, then involvement of a director in some activity of fraud cannot be related to the business of the company, until and unless the fraud is committed in respect of the business activity of the said company. He has relied upon the orders of the authorities below. 8.4.1 We have considered the rival submissions as well as the relevant material on record. We find force and substance in the argument of the learned departmental representative that in the absence of any specific allegation that the alleged fraud by the director is in respects of business activity of the company, the said activity of fraud by the director in other business activity not related to the business of the assessee-company cannot be taken as a ground for doubting the financial statement of the assessee and thereby excluding the said company from a list of comparables. However, we find that this Tribunal in a number of cases as relied upon by the assessee, has held that this company cannot be taken as a good comparable because of the reason that the directors of the company were involved in fraud activity and therefore, financial statements of this company cannot be relied upon. In the case of First Advantage (B)/11, 172(B)/12 & 111(B)/12 25

Offshore Services (P.) Ltd. (supra) the Tribunal has held in para. 41 as under:

"41. As far as the companies Mapel ESolution Ltd and Triton Corp Ltd., the learned counsel for the assessee submitted that these two companies are to be excluded from the list of comparables, as for the relevant assessment year, they were allegedly involved in financial fraud and results of these two companies cannot be relied upon. For this purpose, the learned counsel for the assessee placed reliance upon the decision of Hyderabad Bench of the Tribunal in the case of Capital IQ Information (cited supra). On going through the said order, we find that the Hyderabad Bench of the Tribunal has considered the decision of the Tribunal at Delhi in the case of ITO v. CRM Services India Pvt. Ltd. in of Del 2009 dated 30.06.2011 wherein it was held that the financial results of these two companies cannot be accepted as they were under serious indictment. Thus it is seen that the decision of the Tribunal in the case of CRM Services relates to assessment year 2007-08 and the decision of the Hyderabad Bench also is for the assessment year 2007-08. Therefore, if the results of these two companies cannot be accepted for the same assessment year in the case of another company, we are unable to see how they can be taken as comparables in the case of the assessee herein for the very same assessment year. Therefore, we direct the TPO to exclude these two companies also from the list of comparables. As far the issue of considering the foreign exchange fluctuation as operating revenue is concerned, we hold that this amount also is to be considered as part of operating revenue in view of the decision of this Bench of the Tribunal in the case Trilogy E-Business Software India Pvt. Ltd. Therefore, the AO shall recompute the ALP by taking into account the foreign exchange fluctuation also as operating revenue. As far as the result of Mega Soft is concerned, we have already directed that the ALP shall be computed in the case of the software segment (B)/11, 172(B)/12 & 111(B)/12 26 after making correction to the net margin of Mega Soft Ltd., on the basis of the order of this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. "

Similar view has been taken by this Tribunal in other decisions relied upon by the assessee Accordingly, following the earlier decisions of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. 8.5 Mold-Tek Technologies Ltd.

The learned AR of the assessee has referred to the director's report of M/s Mold-Tex Technologies Ltd. and submitted that this Co. was having an extraordinary event of demerger of its subsidiary M/s Mold Tek Tech. Ltd. and amalgamated with Tekmen Tool (P.) Ltd. The scheme of amalgamation was approved by the Hon'ble Andhra Pradesh High Court vide order dated 15/07/2008 therefore, there was amalgamation and demerger in respect of this Co. during the year under consideration. He has referred to the business activity of the said Co. as involved in the structural engineering KPO. Thus, the learned AR has submitted that this Co. is entirely in the different nature of activity and functions which is not comparable with the assessee. In support of his contention he has relied upon the decisions of the Special Bench of Mumbai (supra). The learned AR has pointed out that this Co. is declaring only one segment operating revenue therefore, this cannot be compared with the assessee. 8.5.1-2 On the other hand, learned DR has relied upon the orders of the authorities below and submitted that this Co. is in the field of ITES and therefore, functionally comparable with the assessee. 8.5.3 We have considered the rival submissions as well as the material on record. At the outset, we note that functional analysis of the Co. has been examined by the Special Bench in the case of (B)/11, 172(B)/12 & 111(B)/12 27

Maersk Global Centers India (P.) Ltd (supra) in paras 81 & 83 as under:

"81. Insofar as the case of M/s Mold Tek Technologies Ltd is concerned, it is observed from the annual report of the said company for the FY 2007-08 placed at pp. 139 to 151 of the paper book that the said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further, information of M/s Mold Tek Technologies Ltd available on their website is furnished in the form of printout at pp. 158 to 165 of the paper book and a perusal of the same shown that it is a leading provider of engineering and design services with specialization in civil, structural and mechanical engineering services. It is stated to have a strong team of skilled resources with world class resources and skill sets. It is also stated to have consistently helped the clients to cut down design and development cost of civil, structural, mechanical and plant design by 30-40 per cent and delivered technologically superior outputs to match and exceed expectations. It is claimed to have in-house software development team, quality control training and trouble shooting facilities. M/s Mold Tek is also rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of M/s Mold Tek as well as on its website, we are of the view that the said company is mainly involved in providing high- end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low-end services. It may be pertinent to note here that the financial year 2007-08 was a unique year for Mold Tek Tech. Ltd. as the scheme of arrangement involving amalgamation between (B)/11, 172(B)/12 & 111(B)/12 28

Tekmen Tool (P.) Ltd and Mold Tek Tech. Ltd. and demerger between Mold Tek Technologies Ltd., simultaneously, was sanctioned by the Hon'ble Andhra Pradesh High Court by 15th July, 2008 with the appointed date for amalgamation and demerger being as October, 2007 and April 2007 respectively. It is also pertinent to note that while working out the operating margin of the said company provision for derivative loss of Rs. 6.43 Crores made by Mold Tek Tech. Ltd. was excluded by the AO treating the same as non-operating expenses whereas in the case of Rusabh Diamonds v. Asstt. CIT [reported at (2013) 155 TTJ (Mum.) 386 (2013) 89 DTR (Mum.) (Trib.) 57 Ed] it was held by the Division Bench of this Tribunal that the gain or loss arising from the forward contract entered for the purpose of foreign currency exposure on the export and import has to be taken into consideration while computing the operating profit.

services coupled with extraordinary event of amalgamation and demerger. Following the decision of this Special Bench in the case of Maersk Global Centres India (P.) Ltd. (supra), Mumbai Benches of the Tribunal in the case of Lionbridge Technologies (P.) Ltd. v. ITO [2014] 151 ITD 553/48 taxmann.com 46 also took a similar view in para-7 as under:

"7. By applying the arithmetic mean of 30.10% an adjustment of Rs. 10,39,54,664/- was sustained by DRP. Out of the comparables taken by the DRP, learned AR has contended against three companies namely; Mold Tek Tech. Ltd., Exclerx Service Ltd and Acropetal Tech. Ltd which were alleged to be functionally different from the assessee company being a low-end back office support service provider. We found that Mold Tek Tech. Ltd provides KPO services in the field of engineering. We also found that Mold Tek has demerged its subsidiary Mold Tek Plastics Ltd w.e.f. April, 2007 which is an extra-ordinary event. Furthermore, since the Mold Tek is into providing KPO engineering services, hence, cannot be functionally compared with the assessee company which is engaged in the provision of back office operations. For this purpose, reliance may be placed on the decision of Special Bench in the case of Maersk Global Centres India (P.) Ltd. ITA No. 7466/Mum/2012. Accordingly, we do not find any justification in the order of DRP for not excluding Mold Tek as comparable which is a Knowledge Processing Company. Thus, the DRP was not justified in the comparing the same with the assessee which is functionally different insofar as assessee is engaged in providing low-end back office support services". 8.5.5 In view of the above facts and nature of the functions performed by the Mold Tek which have been examined by the Special Bench and found is not compared with the low-end ITES service provider Co. we hold that this Co. is functionally not (B)/11, 172(B)/12 & 111(B)/12 30 comparable with that of the assessee. Accordingly, we direct the AO/TPO to exclude Mold Tek from the list of comparables. 8.6 Tricom Corporation Ltd.

The learned AR of the assessee has submitted that the financial statements of this company cannot be relied upon for the purpose of determining ALP because of the directors of this company involved in the fraud. He further submitted that there was merger during the year under consideration. Therefore, this company cannot be considered as a good comparable. In support of his contention, he has relied upon the following decisions: i. First Advantage Offshore Services (P.) Ltd.'s case (supra) ii. Stream International Services (P.) Ltd.'s case (supra)

On the other hand, learned Departmental Representative has relied upon the order of the authorities below. 8.6.1 We have considered the rival submissions as well as relevant material on record. We note that the comparability of this company has been examined by the Tribunal in the case of First Advantage Offshore Services (P.) Ltd. (supra) which has already been reproduced in the foregoing paragraphs. This company has merged with Mold-Tek Technologies Ltd. during the year under consideration. In view of the findings in respect of Mold-Tek Technologies Ltd., we are of the opinion that this company cannot be considered as a good comparable company. 8.7 Vishal Information Technologies Ltd. (Coral Hub Ltd.)

The learned AR of the assessee has submitted that this company does not qualify the employees filter of 25% adopted by the TPO. He has pointed out that this company has outsourced its activities and therefore, being a different business model to a routine ITES provider, cannot be considered as a good comparable. In support of his contention, he has relied upon the following decisions:

(B)/11, 172(B)/12 & 111(B)/12 31 i. Rampgreen Solutions (P.) Ltd. v. CIT [2015] 234 Taxman 573/60 taxmann.com 355 (Delhi) ii. First Advantage Offshore Services (P.) Ltd.'s case (supra) iii. Stream International (P.) Ltd.'s case (supra) iv. Goldman Sachs Services (P.) Ltd. v. Dy. CIT [2015] 63 taxmann.com 9 (Bang. - Trib.) v. C3i Support Services (P.) Ltd. v. Asstt. CIT [2014] 151 ITD 348/46 taxmann.com 453 (Hyd. - Trib.)

On the other hand, learned Departmental Representative has relied upon the order of the authorities below. 8.7.1 We have considered the rival submissions as well as relevant material on record. We note that the comparability of this company with ITES service provider has been examined by the Tribunal in various cases as relied upon by the learned AR of the assessee. In the case of First Advantage Offshore Services (P.) Ltd. (supra) it has been held in para. 35 as under:

"35. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee's own case for the assessment year 2006-07. This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DRs argument that the employee cost filter is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot he said that the said filter is not applicable to ITES segment, where comparably less employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number (B)/11, 172(B)/12 & 111(B)/12 32 of employees would definitely be more and thus the employee cost would be high and thus application of employee cost filter to the ITES sector is also justified. In view of the same, we direct the TPO to apply the employee cost filter to exclude companies with employee cost of less than 25% from the list of comparables for the computation of ALP. "

Similar view has been taken by the Tribunal in the other decisions. We further note that the Hon'ble High Court in the case of Rampgreen Solutions (P.) Ltd. (supra) has also decided this issue in favour of the assessee. Accordingly, we direct the AO to exclude this company from the list of comparable. 8.8 Wipro Ltd. (seg.)

The learned AR of the assessee submitted that this company is an industry leader and also owns tangibles. He has further submitted that the company is engaged in product development and services. However, the segmental information is not available. He has pointed out that there is a amalgamation during the year. He has relied upon the decision of co-ordinate bench of this Tribunal in case of 3DPLM Software Solution Ltd. v. Dy. CIT [2014] 42 taxmann.com 333.

On the other hand, learned DR relied upon the orders of the authorities below and submitted that this company was found to be functionally similar to the ITES service provided by the assessee. 8.8.1 We have considered the rival submissions and relevant material on record. At the outset, we note that an identical issue of comparability of this company has been examined by this Tribunal in the case of GXS India Technology Centre (P.) Ltd. v. ITO [2015] 62 taxmann.com 276 (Bang. - Trib.) wherein it has been held in paras 17.2 and 17.3 as under:

(B)/11, 172(B)/12 & 111(B)/12 33

"17.2 We have considered the rival submissions and relevant material on record. We note that in case of 3DPLM Software Solutions Ltd. (supra), this Tribunal has considered the functional comparability of this company in paras 12.4.1 and 12.4.2 as under:

12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison.

12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No. 227/Bang/2010) has held that a company owning intangibles cannot be compared to a low-risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co- ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer (TPO) to omit this company from the set of comparable companies in the case on hand for the year under consideration.

(B)/11, 172(B)/12 & 111(B)/12 34

17.3 As it was found that this company owns Intellectual Property Rights in the form of registered patents and several pending applications for grant of patents. Therefore, the said company owning intangibles cannot be compared to low-risk captive services provider.

Following the finding of the co-ordinate bench of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables."

Accordingly, we direct the AO/TPO to re-compute the ALP after exclusion of the above companies from the list of comparables. The assessee claims that mean margin of the comparable after exclusion of the above comes to around 17.85% which is within tolerance range of +/-5%. We direct the TPO to consider the claim of the assessee of granting the benefit of tolerance range +/-5% as raised in ground No. 3 of the concise grounds.

India(P)Ltd.,(Supra) and in the present case also, as per the assessee’s profile noted by the TPO on page-2 of his order, the assessee company is engaged in providing ITES and therefore, it appears to be a BPO company and the ld. DR of the revenue could not point out any difference in facts as compared to facts in the case of M/s Flextronics Tech. India (P) Ltd., (Supra). Hence respectfully following this Tribunal order we, hold that these eight comparables should be excluded from the list of final comparables and the TP adjustment, if any, has to (B)/11, 172(B)/12 & 111(B)/12 35 be made on the basis of remaining comparables as per law. We direct AO/TPO accordingly.

Order was pronounced in the open court on the date mentioned on the caption page)