CEB INDIA PVT. LTD.,GURGAON vs. ACIT, GURGAON

2 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 Assessee by Sh. S.P. Singh, AR; Sh. Manoneet Dalal, Adv.; Sh. Yishu Goel, Adv.; & Ms. Somya Seth, CA Respondent by Sh. Amrendra Kumar, CIT(DR) Date of hearing 25.01.2017 Date of pronouncement 17.03.2017 ORDER PER O.P. KANT, A.M.: These four appeals of the assessee are directed against separate orders of the Assessing Officer under Section 144C/143(3) of the Income-tax Act, 1961. All these four appeals are in respect of same assessee and the grounds raised in appeals are almost similar and thus same are heard together and disposed off by this consolidated order for convenience.

ITA No. 6328/Del/2012 for AY: 2008-09

2. First we take up for AY: 2008-09 for adjudication. Grounds raised in the appeal are reproduced as under:

1. That on the facts and in the circumstances of the case and in law, the order passed by the Learned Assessing Officer (“AO”) is bad in law and void ab-initio.

2. That on facts and circumstances of the case and in law, the reference made by the learned Assessing Officer suffers from jurisdictional error as the learned Assessing Officer did not record any reasons in the draft assessment order based on which he reached the conclusion that it was “expedient and necessary” to refer the matter to the learned Transfer Pricing Officer (“TPO”) for computation of the arm’s length price, as is required under section 92CA(1) of the Income Tax Act, 1961 (“Act”).

3 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 3. The on facts and circumstances of the case and in law, the learned Assessing Officer erred in making an addition of Rs.1,34,72,719/- to the returned income of the appellant by re-computing the arm’s length price of the international transactions under Section 92 of the Act.

4. The learned AO/Ld. TPO/Ld. DRP erred on facts and in law in the assessment of the arm’s length price of the assessee’s international transactions with associated enterprises in the following manner- 4.1 Using the power conferred under Section 133(6) of the Act for collecting information that was not available to the Assessing in the public domain and using the information so collected for the purpose of selection of comparable companies. The said action is in complete violation of the fundamental principles of natural justice as (a) information which was not available with the assessee has been used; and (b) the Assessee was not given any opportunity to cross-examine the companies whose information has been used by the learned Transfer Pricing Officer. 4.2 Rejecting, based on his subjective grounds and presumptions, the comparability analysis conducted by the Assessee for determining the arm’s length price and conducting a fresh comparability analysis. 4.3 Rejecting the comparable companies set adopted by the assessee on the basis of additional/modified quantitative filters, which lack valid basis and accepting companies which are functionally or otherwise not comparable to the appellant. 4.4 Incorrectly computing margins of comparable companies selected in the final comparable set.

5. The Ld. AO/Ld. TPO/Ld. DRP have erred in applying different transfer pricing methodology, including different quantitative and qualitative filters, despite the fact that the factual matrix, circumstances and the terms of international transactions continue to be the same as in earlier years.

6. The Ld. AO/Ld. TPO/Ld. DRP has erred in not appreciating the fact that the assessee is enjoying the tax holiday benefits conferred under the tax holiday benefits as per the Software Technology Park 4 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 of India (herein after referred to as “STPI”) Scheme. Thus, there is no motive on the part of the assessee to shift the profits to any other jurisdiction.

7. Ld. AO/Ld. TPO/Ld. DRP erred in not correctly appreciating the Function, Asset and Risk Profit of the appellant and thus erred in denying the adjustment for the difference in risk profile and other economic adjustment to the appellant.

8. Ld. AO/Ld. TPO/Ld. DRP erred in selecting the current year (i.e. financial year 2007-08) data for comparability despite the fact that at the time of comparison done by the assessee, the complete date for financial year 2007-08 was not available within the public domain. That the above grounds are independent and without prejudice to each other. The assessee craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of objection either before or during the course of the proceedings in the interest of natural justice.

Name of Company OP/OC % S. No.

1. Accentia 44.50 2. Aditya Birla Minaes -0.55 Asit C Mehta 9.40 3.

4. Caliber Point Business Solutions (Segment) 10.97 5. Coral Hub (Vishal Int.) 51.84 6. Cosmic Global 24.30 7. Crossdomain Solution Pvt. Ltd. 26.96 8. Datamatics Financial (BPO Division) 34.87 E4e (earlier known Nitanny) 16.87 9.

10. Eclerx 66.50 11. Genesys International 48.15 12. HCL Comnet Systems & Services Ltd. (Seg.) 32.97 13. ICRA (Seg.) 11.11 14. Infosys BPO 20.03 15. I-Service India Private Limited 9.73 Spanco Limited (Seg.) 8.94 16.

17. Acropetal Technologies Ltd. (Seg.) 35.30 18. Wipro BPO 30.23 19. R System International Limited (Seg.) 4.30 Average 25.61 4.1 Following the directions of the learned DRP, the Assessing Officer computed the revised average margin of 19 comparables at 25.61% and after allowing the working capital adjustments of 1.71%, the arm’s length price margin was computed at 23.90%. Applying the said average margin over operating cost, the Assessing Officer computed the adjustment under Section 192CA of the Act, amounting to Rs.1,34,72,790/- in the impugned order. Aggrieved with the adjustment so made, the assessee 7 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 is in appeal before the Tribunal raising the grounds as reproduced above.

6. The learned Authorized Representative submitted that if the above comparables are excluded from the set of comparables, the average margin of the comparables will be in the safe limit. The submissions of the Ld. counsel for excluding the above comparables are summarized as under:

(A)Accentia Technologies Ltd. 6.1 The Learned Authorized Representative submitted to exclude the above comparable due to the following reasons: i. He referred to page no. 26 of the paper book and submitted that the comparable company had acquired five companies/business in the relevant year, namely, Thunaga Software Pvt. Inc. Ltd., purchase of business in GSR Systems Inc., purchase of business in GSR Physician Billing Service Inc., purchase of business in Denmed Transcription Services Inc. and investment in Accentia FZE and purchase of business in Denmed Transcription Service Inc and in post acquisition period the profitability of the company has gone substantially high , thus it cannot be considered as one of the comparables because of this extraordinary events during the year.

8 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 ii. He referred to page 28 of the paper book and submitted that apart from the ITES enabled services, the company earned revenue from software development and implementation and for which no segment information is available in the annual report of the company. iii. He further submitted that the Ld. TPO considered the profitability of the ‘Accentia’ at an overall entity level which includes income from software development (19.13%) which cannot be compared with the assessee company. iv. The learned Authorized Representative submitted that in the following cases ‘Accentia Technologies Ltd.’ had been directed to be rejected as comparable as compared to ITES companies.

1. Symphony Marketing Solution India (P) Ltd. Vs. Income Tax Officer (AY: 2008-09)[2013] 38 taxmann.com 55 (Bangalore- Trib.) [ Para 10 & 11, Page 82 of Cnv. Paperbook].

2. BNY Mellon International Operations (India) P. Ltd. (ASSESSMENT YEAR-2008-09) Vs. Asstt. Commissioner of Income Tax [2014] 52 Taxmann.com 306 (Pune-Trib.) [Para 9- 9.2, Page 97 of Cnv. Paperbook].

(B)Coral hub ( Previously known as Vishal Information Technologies Ltd.) 6.2 The learned Authorized Representative requested for rejection of the comparable due to the following reasons: i. Referring to page 31 of the paper book, the learned Authorized Representative submitted that the business model of the company ‘Coral Hub’ is different from the business model of the assessee company. He submitted that the ‘Coral Hub’ subcontracts majority of its work to third party vendors ,which was evident from the profit and loss account of the company for relevant year. He submitted 9 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 that the vendor payment is approximately 85.58% of the total cost incurred by the Coral Hub. A chart of such expenses was submitted by the learned Authorized Representative, which is reproduced as under:

Assessment Vendor Vendor Employee Employee year Payments Payment/cost cost (INR) cost/Cost (INR) 2008-09 261,801,923 85.58% 11,140,357 4.40% 2009-10 398,376,162 81.83% 231,15,053 4.75% ii. The learned Authorized Representative further referred to page no. 29 of the paper book and submitted that as per Director’s Report contained in the annual report, Coral Hub entered into a new vertical i.e. Digital Library & Print on Demand (“POD”) in financial year 2007-08. He also referred to page no. 30 of the paper book and submitted that the company capitalized expenses of INR 4.27 crores pertaining to conversion of books into POD. iii. He referred to page no. 30 of the paper book and submitted that in schedule 6 of the profit and loss account, the company has huge inventories of POD publishing titles. iv. In view of the above, the learned counsel submitted that the Coral Hub is functionally dissimilar to the assessee company and need to be excluded from the set of comparables. v. In support of the above contentions, the learned counsel further submitted that in the following decisions, the Coral Hub was directed to be rejected as comparables to ITES Companies:

10 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 “Once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services.”

2. Symphony Marketing Solutions India (P) Ltd. Vs. Income Tax Officer (AY: 2008-09), 38 taxmannn.com 55 (Bangalore-Trib.) 3. BNY Mellon International Operations (India) P. Ltd. (ASSESSMENT YEAR 2008-09) Vs. Asstt. Commissioner of Income Tax [2014] 52 Taxmann.com 306 (Pune-Trib.)

(c)Eclerx Serviced Limited (“Eclerx”) 6.3 The learned Authorized Representative submitted for rejection of the above comparable due to the following reasons: i. The Learned Authorized Representative referred to page 33 of the paper book and submitted that during relevant year the ‘Eclerx’ acquired a UK based company, which led to the acquisition of new customers to Eclerx. He submitted that Eclerx Services Ltd. acquired Igentica Travel Solutions Ltd. (“ITS”) during the relevant year and the said acquisition provided the company with 28 large customers thereby increasing the customer base and overall revenues of the company. He submitted that Transfer Pricing Officer adopted a filter and rejected the comparable ‘Allsec Technologies’ on the basis that during the year that there was amalgamations and acquisitions. Accordingly, he submitted that ‘Eclerx Services Ltd’. should also be excluded form the set of comparables in view of these extraordinary events of acquisition of the companies during the year. ii. The learned Authorized Representative submitted that the functions performed by the ‘Eclerx Services Ltd.’ are not 11 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 comparable with the assessee company due following observations: (a) eClerx Services Ltd. provides data analytics and data process solutions to some of the largest brands in the world. (b) It is recognized as expert in chosen market – financial services and retail and manufacturing. (c) It is industry specialized company and helps in meeting complex client needs, date analytics specialization in two business verticals – financial services and retail and manufacturing. (d) It also provides tailored outsourcing process and management services including multitude of data aggregation, mining and maintenance services. (e) It has employed over 1500 domain specialists and provides complete business solutions with the help of process improvement, automation and dedicated workforce. In view of above, learned counsel submitted that M/s. Eclerx Services Ltd. is functionally different from the assessee company, thus, the same need to be excluded from the set of comparables. iii. The learned counsel submitted that Eclerx Services Ltd. incurred INR 14.6 crores on advertising and marketing during the year, which is 12.50% of sales, which created a brand for the company, whereas the assessee company did not incur expenditure on advertisement or marketing. iv. The learned Authorized Representative further relied on the following decisions wherein ‘Eclerx Services Ltd.’ has been directed to be rejected as comparables to ITes companies: Delhi High court ruling of Rampgreen Solutions Pvt. Ltd. Vs. CIT (AY: 2008-09)

12 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 “Once again clear that both Vishal and eClerx could not be taken as comparables for determing the ALP. Vishal and eClerx, both are into KPO servies.” Symphony Marketing Solutions India (P) ltd. Vs. Income Tax Officer (AY: 2008-09) [2013] 38 taxman.com 55 (Bangalore – Trib.) 7. On the other hand, in respect of the exclusion of the three comparables, the learned CIT(DR) relied on the findings of the lower authorities.

A) Accentia Technologies Ltd. 8.1The learned Authorized Representative has referred to the extraordinary events of the acquisition of 4 companies during the relevant year. The Hon’ble Jurisdictional High Court in the case of Principal CIT Vs. Amriprise India Pvt. Ltd. in ITA 461/2016 , observed that exclusion of three comparables by the ITAT, where the acquisitions resulted in higher profits, was not unreasonable. Since the Accentia Technologies Ltd. has acquired five companies during the year and sales of pre acquisition period ( AY 2007-08) amounting to Rs. 287.23 Millions has gone upto Rs. 503.63 Millions for post acquisition period ( AY 2008-09 ), has gone to Rs. 503.63 millions. which is evident from the following chart submitted by learned Authorized Representative:

Particulars Pre-Acquisition Period (AY) Post Acquit ion Period (AY) 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Sales 0.35 0.29 287.23 503.63 787.21 927.62 1069.03 Operating 1.00 1.61 215.30 348.91 516.21 648.42 718.90 cost Operating -0.65 -1.32 71.93 154.72 271.00 279.21 350.13 Profit OP/OC -65.11% -82.26% 33.41% 44.34% 52.50% 43.06% 48.70% Average 95.96 821.87 Sales Average -37.98 47.15% OP/OC 8.2 Further, on perusal of the page 27 of the paper book, it is evident that the comparable company was having revenue from software development and implementation and thus, the company cannot be compared with the assessee company at entity level. The assessee company is claimed to be engaged only in the ITES segment. 8.3 Further we find that , in the case of Symphony Marketing solutions India (P) Ltd. Vs. Income Tax Officer (supra), the Accnetia Technologies Ltd has been excluded as one of the comparable to ITES companies by the Tribunal as under:

“(1) Accentia Technologies Ltd. (Seg.) 10. This was considered as a comparable by the TPO and listed at Sl.No.1 of the comparable companies chosen by the TPO. The ld. counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was draw to the annual report of this company for the A.Y. 2007- 08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a comparable owing to extra ordinary events that took place during the 14 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 previous year. The Tribunal upheld the order of the DRP observing as follows:- "I. Accentia Technologies Ltd.

10. It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner- "17.5. In addition to the above, the Director's Report of the company for the FY 2007-08 revealed the merger and the demerger. A company known as Techmen Tools Pvt. Ltd. had amalgamated with Mold-tek Technologies Ltd. with effect form 1st October, 2006. There was a de- merger of Plastic Division of the company and the resulting company is known as Moldtek Plastics Limited. The de-merger from the Moldtek Technologies took place with effect from 1st April, 2007. The merger and the de- merger needed the approval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the ITA No.1316/Bang/2012accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial year 31.3. 2008. The assessee filed Form No.21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective date of the scheme of merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger."

11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de- merger will have an effect on the profitability of the company in the 15 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact ahs taken place, then the aforesaid comparable has to be excluded."

10. It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner- "17.5. In addition to the above, the Director’s Report of the company for the FY 2007-08 revealed the merger and the demerger. A company known as Techmen Tools Pvt. Ltd. had amalgamated with Mold-tek Technologies Ltd. with effect from 1st October, 2006. There was a de- merger of Plastic Division of the company and the resulting company is known as Moldtek Plastics Limited. The de-merger from the Moldtek Technologies took place with effect from 1st April, 2007. The merger and the de- merger needed the approval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial year 31.3. 2008. The assessee filed Form No.21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective date of the scheme of merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger."

11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de- merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation 17 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded."

11. We have considered the submissions of the Id. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. It is clear that during the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a ITA No.l316/Bang/2012 comparable. We therefore hold that this company cannot be considered as a comparable.' 9.1 Similarly, we find the Hyderabad Bench of the Tribunal in the case of Hyundai Motors India Engineering (P.) Ltd. (supra) following the decision of the Bangalore Bench of the Tribunal has held Accentia Technologies Ltd. warrants exclusion as a comparable due to the happening of certain extraordinary events in this company during the impugned assessment year. The relevant observation of Tribunal from pages 7 to 9 of the order read as under: "I Accentia Technologies Ltd. (Seg.) This was considered as a comparable by the TPO and listed at Sl. No. 1 of the comparable companies chosen by the TPO. The Id. Counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was drawn to the annual report of this company for the A.Y. 2007- 08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. was mentioned. Our attention was also drawn to the decision of the Hyderabad IT AT Bench in the case of Capital IQ Information Systems India JTA No.l316/Bang/2012 Pvt. Ltd. v. DC IT [2013] 32 Taxman.com 21 (Hvd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a comparable owing to extra ordinary events that took place during the previous year. The Tribunal upheld the order of the DRP observing as follows :- "I. Accentia Technologies Ltd.

11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de- merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded." We have considered the submissions of the ld. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. Similar View was also taken in the case of Symphony Marketing 19 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 Solutions India (P.) Ltd. (supra) by the Bangalore Bench. It is clear that during the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a comparable. We therefore hold that this company cannot be considered as a comparable.' 9.2 Respectfully following the decisions of the Bangalore and Hyderabad Benches of the Tribunal and in absence of any contrary material brought to our notice, we hold that Accentia Technologies Ltd. cannot be taken as a comparable due to happening of certain extraordinary events during the impugned assessment year. We, therefore, direct the Assessing Officer to exclude the said company as a comparable.” 8.5 In view of the above discussion and the finding of the Tribunal (supra) in above cases, we are of the opinion that M/s. Accentia Technologies Ltd. being functionally different and having extraordinary events during the relevant year, cannot be considered as comparable to the assessee company and accordingly, we direct the AO/TPO to exclude the said company from the set of comparables.

(B)Coral Hub (Previously known as Vishan Information Technologies Ltd.)

8.6 The learned Authorized Representative referred to page 30 wherein as per the financials of Coral Hub, the company has capitalized expenses of INR 4.27 crores pertaining to conversion of books into POD and the company has huge inventories of POD publishing titles. We find that the Coral Hub outsources its services to vendors and does not perform all Services at own. As against, the assessee company is not having any inventory/stock and performs services at own. 8.7 The company has different business model as it subcontracts majority of its work to third party vendors. From the perusal of the 20 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 cost items in the profit and Loss Account of the Coral Hub for assessment year 2007-08, we find “Data Entry charges & vendor payments’ as part of the operating cost in schedule 14 and the said vendor payments approximate 85.58% of the total cost incurred by Coral Hub. As against assessee has carried out its functions with own employees. Thus, the assessee company is functionally different from the Coral Hub. 8.8 In the case of Symphony Marketing Solutions India (P) Ltd. (supra), the Tribunal has directed to reject Coral Hub as comparables to ITES Companies. The relevant para of the decision (supra) is reproduced as under:

“15. Following the decision of the Tribunal referred to above, we hold that Coral Hubs Ltd. cannot be considered as a comparable. It may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable on the basis of detailed discussion in the TP order for the A.Y. 2007-08. In fact in A.Y. 2007-08, there was no determination of ALP and therefore there was no occasion for any order being passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library & Print on Demand in F.Y. 2007-08. In the case of Capital IQ Information Systems India Pvt. Ltd. (supra), the ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:- "IV. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): 16. The assessee has objected for this company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but the business model of the company is also different as it sub-contracts majority of its ITES works to third party vendors and has also made significant payments to those vendors. The payments made to vendors towards the data entry charges also supports the fact that the company outsources its works. In the circumstances, it cannot be taken as a comparable to the ITES functions performed by the assessee. Since this company is acting as agent only by outsourcing its works to the third party vendors. In this context, the assessee relied upon the order of the DRP in assessee's own case for the assessment year 2008-09, wherein the DRP, after taking into consideration, the aforesaid aspect, has accepted the claim of the assessee. The assessee further submitted that the Income-tax Appellate Tribunal Mumbai Bench in the case of Asstt. CIT v. Maersk 21 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 Global Service Centre (India) (P.) Ltd. [2011] 133 ITD 543/16 taxmann.com 47 (Mum.), a copy of which is submitted before us, has also directed for the exclusion of the aforesaid company since it has outsourced a considerable portion of its business.

17. After considering the submissions of the learned Authorised Representative for the assessee, we find that the DRP, in the proceedings for the assessment year 2008-09 in assessee's own case, after taking note of the composition of the vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it prints upon clients request, concluded as follows- ITA No.1316/Bang/2012 "18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped form the final list of comparables." In case of Maersk Global service Centre India (P.) Ltd. (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- "Insofar as the cases of tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded." In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable."

16. It is also further noticed that the employee cost/operating sales of this company is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%. This Tribunal in the case of First Advantage Offshore Services Ltd. v. CIT, IT(TP)A No.1086/Bang/2011, order dated 30.4.2013, has taken the following view:- "36. 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 DR's argument that the employee cost filter is applicable only to ITA No.1316/Bang/2012 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 be said that the said filter is not applicable to ITES segment, where comparably less skilled 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 of employees would definitely be more and thus the employee 22 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 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." 17. Applying the aforesaid decisions, we are of the view that Coral Hubs Ltd. cannot be considered as a comparable.”

8.9 Further, in the case of BNY Mellon International Operations (India) P. Ltd. (supra), the Tribunal held as under:

“9.3 So far as Coral Hubs Ltd. (Formerly known as Vishal Informatics Technologies Ltd.,) is concerned we find the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India (P.) Ltd. {supra) has held Coral Hubs Ltd. cannot be considered as a comparable. The relevant observation of the Tribunal from pages 10 to 14 read as under: '(3) Coral Hubs Ltd.

15. Following the decision of the Tribunal referred to above, we hold that Coral Hubs Ltd. cannot be considered as a comparable, ft may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable on the basis of detailed discussion in the TP order for the A.Y. 2007-08. In fact in A.Y. 2007-08, there was no determination of ALP and therefore there was no occasion for any order being passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library & Print on Demand in F.Y. 2007-08. In the case of Capital IQ Information Systems India Pvt. Ltd. {supra), the ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:— "IV. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): 16. The assessee has objected for this company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but the business model of the company is also different as it sub-contracts majority of its ITES works to third party vendors and has also made significant payments to those vendors. The payments made to vendors towards the data entry charges also supports the fact that the company outsources its works. In the circumstances, it cannot be taken as a comparable to the ITES functions performed by the assessee. Since this company is acting as agent only by outsourcing its works to the third party vendors. In this context, the assessee relied upon the order of the DRP in assessee's own case for the assessment year 2008-09, wherein the DRP, after taking into consideration, the aforesaid aspect, has accepted the claim of the assessee. The assessee further submitted that the Income-tax Appellate Tribunal Mumbai Bench in the case of Asstt. CIT v. Maersk Global Service Centre (India) (P.) Ltd. 120111 133 ITD 543/16 taxmann.com 47 (Mum.), a copy of which is submitted before us, has also directed for the exclusion of the aforesaid company since it has outsourced a considerable portion of its business.] 17. After considering the submissions of the learned Authorised Representative for the assessee, we find that the DRP, in the proceedings for the assessment year 2008-09 in assessee's own case, after taking note of the composition of the vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it prints upon clients request, concluded as follows- "18.4 In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable 24 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 comparable to the taxpayer and hence needs to be dropped from the final list of comparables." In case of Maersk Global service Centre India (P.) Ltd. {supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- "Insofar as the cases of tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded." In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable."

16. It is also further noticed that the employee cost/operating sales of this company is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%. This Tribunal in the case of First Advantage Offshore Services Ltd. v. CIT, IT(TP)A No.l086/Bang/2011, order dated 30.4.2013, has taken the following view:- "36. 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 DR's 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 be said that the said filter is not applicable to ITES segment, where comparably less skilled 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 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."

(c)Eclerx Services Ltd. (“Eclerx”)

26 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 8.11 The learned Authorized Representative referred to page no. 33 and submitted that the ‘Eclerx’ has acquired a UK based Company. On page 14 of the annual report for financial year 2007-08, it is mentioned that the company has acquired ‘Igentical Travel Solutions Ltd.’ The said acquisition has provided the company with 28 large customers thereby increasing the customer base and overall revenues of the company. Thus there being an extra ordinary event of merger which has increased the profitability of the company, it need to be excluded from the set of comparables as held in the case of ‘Accentia Technolgies ltd’ in preceding paras. 8.12 The function of the assessee company is different as compared to Eclarx Services Ltd. as the Eclarx Services Ltd. provides specialized services in the nature of a Knowledge Process Outsourcing ( KPO) like data analytics, data process solution, tailored outsourcing process and management services including multitude of data aggregation, mining and maintenance services. Eclarx Services Ltd. is industry specialized company and helps in meeting complex clients needs, data analytics specialization in two business verticals – financial services and retail and manufacturing. Thus, the services provided by the assessee company to its AEs is completely different from the services provided by Eclarx Services Ltd. 8.13 In the case of Symphony Marketing Solution India (P.) Ltd. (supra), the Tribunal has directed to reject Eclarx Services Ltd. as comparables to ITes Companies. The relevant paras are reproduced as under:

“(5) Eclerx Services Ltd.

20. This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that this company offers 27 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. It has further been submitted that extra ordinary events and peculiar circumstances prevail in the case of the assessee in as much as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:- "14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that that the concerned company is engaged in providing Knowledge Process Outsourcing(KPO) Services.

8.14 In view of the above discussion and the finding of the Tribunal (supra), we are of the opinion the ‘Eclarx Services Ltd.’ being functionally different and having extraordinary events during the relevant year, cannot be considered as comparable to the assessee company and accordingly, we direct to exclude the said company from the set of comparables. 8.15 We further direct the Assessing Officer/TPO to compute the average margin of comparables after excluding three comparables above and compute the arm’s length price of the international transaction accordingly. The ground No. 4.3 of the appeal is accordingly allowed.

28 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 9.0 The remaining grounds have not been pressed before us by the Ld. Counsel of the assessee, and hence same are dismissed as infructuous. 10. In the result, appeal of the assessee is partly allowed.

ITA No. 1088/Del/2014 for AY: 2009-10 11. Now we take up for AY: 2009-10. The grounds raised in the appeal are reproduced as under:

1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer (“AO ) is bad in law and void ab-initio.

2. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was “expedient and necessary” to refer the matter to the Ld. Transfer Pricing Officer (“TPO”) for computation of the arm’s length price, as is required under section 92CA(1) of the Income Tax Act, 1961 (“Act”).

3. That on facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. Dispute Resolution Panel (“DRP”) erred in making an addition of Rs. 23,814,797/- to the returned income of the Appellant by re-computing the arm’s length price of the international transactions under section 92 of the Act. Thus, in passing the order, the Ld. AO/Ld. TPO/Ld. DRP erred in: 3.1 Rejecting the comparable companies set adopted by the Appellant in its transfer pricing documentation on the basis of additional/modified quantitative filters which lacked valid and sufficient reasoning; 3.2 Accepting companies which were functionally not comparable to the Appellant in terms of Functions, Assets and Risk profile. 3.3 Including companies with high/supernormal margins in the comparable set adopted 3.4 Not providing the benefit of economic adjustment on account of difference in working capital profile 3.5 Denied the benefit of economic adjustments on account of difference in risk profile in arriving at the arm’s length mean margin 4. The Ld. AO/ Ld. TPO has erred in not appreciating the fact that the Appellant is a company incorporated under the provisions of the Companies Act, 1956 and enjoying the tax holiday benefits conferred under the tax holiday benefits as per the Software Technology Park of India (herein after referred to as “STPI”) Scheme. Thus, there is no motive on the part of the Appellant to shift the profits to any other jurisdiction. Hence the case of the Appellant falls squarely within the ambit of aforementioned principle 5. The Ld. AO/ Ld. TPO erred in disregarding the multiple year data selected by the Appellant in the TP Documentation and in selecting the current year (i.e. financial year 2008-09) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for financial year 2008-09 was not available within the public domain 6. The Ld. AO/Ld. TPO wrongly computed the margins of comparable companies selected by him.

7. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings u/s 271(l)(c) of the Act mechanically and without recording any adequate satisfaction for such initiation.

8. That the Ld. AO erred in facts and in law in charging and computing interest under section 234B and 234D of the Act. That the above grounds are independent and without prejudice to each other. The Assessee craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of objection either before or during the course of proceedings in the interest of the natural justice.”

30 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 12. The facts of the case are identical to the facts in appeal having ITA No. 6328/Del/2012, except the amount of international transaction and the Profit Level Indicator (‘PLI’). During the year, in its transfer pricing study, the assessee has shown international transaction of provision of ITES services amounting to Rs.32,36,23,222/- and computed OP/OC margin at 14.69%. The assessee computed average margin of comparable at 14.28%, whereas, post DRP directions, the TPO computed the arm’s length margin at 25.02%, which resulted into adjustment of Rs.3,11,74,426/-.

14. In ground no. 3.2, learned Authorized Representative disputed the comparability of the following two comparables:

(A) Coral Hub (previously known as Vishal information technologies Ltd: 14.1 The learned Authorized Representative submitted to reject the company due to the following reasons: i. The Ld. AR referred to page no. 42 of the paper book and submitted that as per the financial report of the ‘Coral Hub’, the company has capitalized expenses of Rs.4.66 crores pertaining to conversation of books into POD. He further submitted that the business model of the company is also different as it subcontracts majority of its work to third party vendors. The said vendor payments approximate 90.57% of the total cost incurred by the Coral Hub and the Coral Hub does not adopt the normal and routine business model for an otherwise pure play ITes company. The learned counsel further submitted that the Coral Hub 31 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 outsources its services to vendor and does not perform services at its own. The ld. counsel referred to page 43 of the paper book and submitted that Coral Hub has huge inventories of POD publishing titles, which includes electronic publishing/digital publication of the books, he articles etc. ii. Ld. AR relied on the decision of the Tribunal in the case of Mercer consulting India private limited in ITA No. 966/Del/2014 wherein it is held that Coral Hub has outsourced most of its work.

(B) Eclerx Services Ltd. ( “ Eclerx”)

14.2 The learned Authorized Representative submitted to reject the company due to following reasons: i. The Ld. AR referred to page 45 of the paper book and submitted that the company acquired Igentica solutions Ltd (ITS) during the year and three subsidiaries of ITS were wound up to reduce the corporate structure and transfer the contracts to the parent. Further the company commissioned its SEZ facilitate Pune during the year. He submitted that in view of these extraordinary events, the company cannot be compared with assessee. ii. The Ld. AR submitted that the services functions performed by the company are similar to functions performed in last year, and which are different from the research related services rendered by the assessee to its AE and thus the company being functionally different, cannot be compared with assessee. iii. The Ld. AR also drawn our attention towards Rs. 27 crore spent on advertising and marketing for creating a brand of the company, 32 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 which is 13.73 percent of sales. Whereas the assessee did not incur any expenditure on advertising and marketing. iv. The Ld. AR relied on the decision of the Tribunal in the case of M/s capital IQ information systems (India) private limited in ITA No. 124/Hyd/2014 and ITA No. 170/Hyd/2014 for assessment year 2009-10 wherein E-clerx has been directed to be rejected as comparable to ITES companies.

15. The Ld. CIT(DR), on the other hand, relied on the order of the lower authorities.

(A) Coral Hub 16.1 We do not find any substantial change in the functions performed by the company in the immediately preceding year, wherein we have already held the company as functionally dissimilar to the assessee. In the year under consideration also the company is having huge inventory of POD publishing titles and vendor payment being more than 90% of total cost. The Tribunal in the case of Mercer consulting (India) private limited (supra) directed to reject the company as comparable to ITES companies. The relevant finding of the Tribunal is reproduced as under:

“Coral Hub Ltd. 12.1 This case was earlier included by the assessee in the list of comparables in the transfer pricing study by considering multiple-year data. However, when the TPO required the assessee to furnish data of comparables for the current year alone, the assessee requested for the exclusion of this case from the list of comparables. The Id. DR opposed this 33 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 contention by urging that the assessee cannot be allowed to resile from its original stand. 12.2 We are disinclined to sustain the legal objection taken by the Id. DR that the assessee should be prohibited from taking a stand contrary to the one which was taken at the stage of the TP study or during the course of proceedings before the authorities below. It goes without saying that the object of assessment is to determine the income in respect of which the assessee is rightly chargeable to tax. As the income not originally offered for taxation, if otherwise chargeable, is required to be included in the total income, in the same breath, any income wrongly included in the total income, which is not otherwise chargeable, should be excluded. There can be no estoppel against the provisions of the Act. Extending this proposition further to the context of the transfer pricing, if the assessee fails to report an otherwise comparable case, then the TPO is obliged to include it in the list of comparables, and in the same manner, if the assessee wrongly reported an incomparable case as comparable in its TP study and then later on claims that it should be excluded then, there should be nothing to forbid the assessee from claiming so, provided the TPO is satisfied that the case so originally reported as comparable is, in fact, not comparable. The Special Bench of the Tribunal in Dy. CIT v. Quark Systems Ltd. 120101 38 SOT 307 (Chd) has also held that a case which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal if the assessee proves that the same was wrongly included. 12.3 Reverting to the facts of the extant case, we find that the position as obtaining in the present case is rather simple inasmuch as the assessee, having originally included this case in the list of comparables, made a categorical claim before the TPO for excluding it because of non- comparability. As no reason has been given by the TPO for accepting or rejecting the assessee's request, it would be worthwhile to take up the reasons now given by the assessee for consideration and decision. The Id. AR has pointed out that Vishal Information Technologies Ltd., now known as Coral Hub Ltd., outsources significant portion of its work from outside vendors. We find from the material on record suggests that outsourcing charges constitute 90% of the total operating cost in this case. On a specific query, the Id. DR admitted that our assessee is engaged in the business of doing activities at its own without any outsourcing. This crucial factor, having a greater bearing on the profitability, makes it distinguishable from the assessee. The Mumbai Bench of the Tribunal in the case of Hapag Lloyd Global Services {supra) has held that Vishal Information Technologies Ltd. cannot be considered as comparable because of the overwhelming outsourcing activity carried out by it. This view was taken by relying on another order passed by the Mumbai Bench of the Tribunal in Asstt. CLT v. Maersk Global Service Center (India) (P.) Ltd. f20111 133 ITD 543/16 taxmann.com 47. In the later case also, the Tribunal held that the case of Vishal Information Technologies Ltd. or Coral Hub Ltd. was not includible in the list of comparables because of major outsourcing. Since the facts of the instant case are on all fours with these two cases, we are of 34 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 the considered opinion that this case is required to be excluded from the list of comparables. We order accordingly.”

16.2 In view of the discussion above and respectfully following the decision of the Tribunal in the case of Mercer Consulting (India) Private Limited (supra), the company is directed to be excluded from the set of comparables for the year under consideration.

(B) Eclerx Services Ltd. 16.3 The functions performed by the company during the year are almost identical to the functions performed in the immediately preceding year, wherein we have held the company as functionally dissimilar to the assessee. It is evident from the page 50 of the paper book that the company is expert in the markets of financial services, retail and manufacturing. The company has employed 1500 specialist and provided complete business solution. In view of above, the research related services rendered by the assessee to its AEs is completely different from the services provided/functions performed by the company and thus it cannot be compared with the assessee. Further the Tribunal in the case of M/s Capital IQ Information Systems (India) Private Limited (supra) has directed to reject E-clerx as comparable to ITES companies. The relevant para of the said decision is reproduced as under: “(3) Eclerx Services Ltd.

16.4 In view of our discussion and respectfully following the finding of the Tribunal in the case of M/s Capital IQ Information Systems (India) Private Limited (supra), we hold that said company is functionally dissimilar to the assessee company and direct the AO/TPO to exclude the above company from the set of comparables.

17. In ground No. 3.4, the assessee has challenged disallowance of working capital adjustment.

18. The Ld. AR supporting the ground invited our attention that in the immediately preceding year, the assessee has been allowed working capital adjustment by the ld. TPO as well as by the Ld. DRP. The Ld. Authorized Representative submitted that by allowing customers/creditors to defer payments for a certain period, any company foregoes the right to receive its revenue immediately and earn additional income by reinvesting these revenues over the deferral period. He further submitted that all companies have their own limit for deferring such payments and the limits determine that working capital cycles and such 36 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 cycles would have direct impact on the revenue and cost of any entity. He further submitted that for due economic analysis, it becomes important to make an adjustment for different working capital positions so as to eliminate the impact of such factors from an arm’s length comparison. In support of his contention, he relied on the decision of the Tribunal in the case of the Demag Cranes & component ( India) Pvt Limited in ITA No. 120/PN/2011. 19.. On the other hand, the Ld. CITDR relied on the order of the lower authorities.

“31. We have so far analysed Rule 10B(1)(e) on one side and other sub-rules and in the context of the TNMM, we have analysed the need for the elimination of the difference, if any in the comparable uncontrolled transactions, which materially affect the profit margin in the open market. It is the requirement of the Rules. Who supplies the set of comparable is not the determining factor on this issue. Having noticed the difference, the revenue has to quantify the difference, if any and then revenue must decide if that difference constitutes ‘materially affect’ the price in open market. If the answer is affirmative, the said difference has to be removed and the margin has to be adjusted for arriving at the credible comparable PLI. Further, it is a settled proposition that the ‘working capital’ 37 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 adjustment is one such adjustment that is required to be made in TNMM. The revenue’s contention that the ‘differences’ specified should refer to only (i) the factor of demand and supply; (ii) existence of marketable intangibilities ie brand name etc; (iii) geographical location and the like, and such difference has to be in respect of the functions undertaken, assets employed and the risks assumed only. Further, the revenue’s views that by making adjustments, the net profits arrived are not of real type of profits and they are notional ones, which goes against the spirit of TNMM. All these objections of the revenue are not based only settled propositions. The provisions of 10B(1)(e) provides for the manner of adjustments vide its sub clauses (i) to (iv), which were already analysed in the preceding paragraphs of this order. Briefly, (i) NPM realized from target transaction is computed in relation to cost incurred or sales effected or assets employed or to be employed or any other relevant base; (ii) NPM realized from a comparable uncontrolled transactions is computed having the same base; (iii) the NPM mentioned at (ii) is adjusted taking into account the differences, if any, which could materially affect the NPM in the open market. Thus, the scope of adjustments is defined, which is discussed by us in the preceding paragraphs. The sub clause (iii) specifies that the adjustments are to be made on account of differences, if any. Therefore, in this regard, the litmus test to be applied is if the ‘difference, if any, is capable of affecting the NPM in open market? If any factor is capable of such affect, yes, TPO is under statutory obligation to consider and examine and eliminate such difference. AO/TPO/DRP cannot say that difference is likely exist in all accounts appearing in P&L account or Balance sheet, which are likely to materially affect the NPM in open market and therefore, the demands of the assessee should be ignored, is not the correct approach. Revenue’s reasoning that the demanded adjustments should not be entertained by the TPO merely on the basis the comparables are supplied by the assessee is not the correct. In our opinion, it is the duty of the TPO to apply the provisions of rule 10B(1)(e) to establish the ALP in relation to international transaction as per the TNPM, which is an undisputed method found applicable to the present case by both the parties. It is a settled accounting principle that the net margins can be influenced by some of the same factors which can influence price or gross margins. Further, it is the requirement of the rules / provisions that any difference which is likely to materially affect the NPM in open market has to be eliminated. TPO must know that the TNMM visualizes the undertaking of the thorough comparability analys and elimination of the differences through the requisite adjustments. Yes, data availability is the limitation and both the parties need to ensure the procurement and use of the proper documentation. Therefore, we dismiss the revenue’s contention that no further adjustment if any is entertained once the comparables are supplied by the assessee and when they are accepted by the TPO. Thus, working capital is a factor which influence the price in the open market and therefore the net profit margin of the business segment of the assessee which is targeted by the TPO/AO/DRP. Hence, in principle, we hold that the TPO/AO/DRP has failed to entertain the objections of the assessee on the ‘working capital’ adjustments issue. Therefore, we direct them to allow the requisite adjustment on account of the impugned ‘working capital’ while determining the Arm’s Length operating Margin of the Comparables. Thus, relevant grounds of assessee’s appeal are allowed.”

38 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 21. In view of discussion above and respectfully following the decision of the Tribunal in the case of Demag Cranes and Component (India) Private Limited (supra), we direct the TPO/AO to allow the working capital adjustments to the assessee. The ground of the appeal is accordingly allowed.

ITA No. 963/Del/2015 for AY 2010-11 24. Now we take up appeal having for AY 2010. The grounds raised in the appeal are as under: “1. That on the facts and in the circumstances of the case, the order passed by the Ld. Assessing Officer (“AO”) is bad in law and void ab-initio.

2. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was “expedient and necessary” to refer the matter to the Ld. Transfer Pricing Officer (“TPO”) for computation of the arm’s length price, as is required under section 92CA(1) of the Income Tax Act, 1961 (“Act”).

3. That on facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. Dispute Resolution Panel (“DRP”) erred in making an addition of Rs. 4,20,24,399/- to the returned income of the Appellant by re-computing the arm’s length price of the international transactions under section 92 of the Act. In passing the said orders, the Ld. AO/Ld. TPO/Ld. DRP erred in: 3.1 Not accepting the quantitative filters selected by the Appellant in its transfer pricing documentation/fresh search and has instead applied his own additional/ quantitative filters which lacked valid and sufficient reasoning; 39 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 3.2 Rejecting the comparable companies set adopted by the Appellant in its transfer pricing documentation; 3.3 Accepting companies which were functionally not comparable to the Appellant in terms of Functions, Assets and Risk profile and including companies with high/supernormal margins / turnover; 3.4 Not providing the benefit of economic adjustment on account of difference in working capital and risk profile in arriving at the arm’s length mean margin; 4. The Ld. AO/ Ld. TPO has erred in not appreciating the fact that the Appellant is a company incorporated under the provisions of the Companies Act, 1956 and enjoying the tax holiday benefits conferred under the tax holiday benefits as per the Software Technology Park of India (herein after referred to as “STPI”) Scheme. Thus, there is no motive on the part of the Appellant to shift the profits to any other jurisdiction.

5. The Ld. AO/ Ld. TPO erred in disregarding the multiple year data selected by the Appellant in the TP Documentation and in selecting the current year (i.e. financial year 2009-10) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for financial year 2009-10 was not available within the public domain.

7. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings u/s 271(l)(c) of the Act mechanically and without recording any adequate satisfaction for such initiation.

8. That the Ld. AO erred in facts and in law in charging and computing interest under section 234B and 234D of the Act That the above grounds are independent and without prejudice to each other. The Assessee craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of objection either

(A) Accentia technologies Ltd. 27.1 The learned Authorized Representative submitted that the company need to be rejected as comparable due to the following reasons: i. There are following extraordinary events during the year:

41 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 (a) that during the year the company acquired IQ group companies namely Tactiq Ltd, centric Ltd and Neologig limited, which were engaged in full product development, software design and development etc. (b) that during the year the company also acquired Assent Infoserve private limited, which was engaged in business of medical transcription encoding. ( page 54 to 56 of the paper book referred). (c) that the acquisitions are reflected in the addition to fixed assert schedule by way of recognition of goodwill amounting to INR 19,06,51, 057/- (d) profitability of the company turned around dramatically from - 65.11% in financial year 2004-05 to 42% in financial year 2009-10. (i) The company earned revenue from sources like medical transcription, billing and coding and software development and implementation, however segment information is not available in the annual report of the company and in absence of segmental data the company cannot be taken as comparable. (Page 58 and 59 of the paper book referred) (ii) That in following decisions , the company has been excluded as comparable to ITES companies: (a) Ameriprise India private limited in ITA No. 7014/Del/2014 for AY 2010-11 (b) Equant solutions India Pvt. Ltd in ITA No. 1202/Del/2015 for AY 2010-11.

(B) TCS E-serve Ltd. 42 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 27.2 The learned Authorized Representative submitted that the company need to be rejected as comparable due to the following reasons: (i) The company is not functionally comparable with the assessee as it was engaged in providing high-end transaction processing, technical services involving software testing, verification and validation of software at the time of implementation and data centre management activities. In the synopsis, the learned AR submitted a chart of comparison of the company with assessee, which is reproduced as under:

Particulars TCS E Serve CEB India Functions The company is engaged in providing high CEB India is engaged end transaction processing, technical in providing services involving software testing, information research verification and validation of software at the and related support time of implementation and data centre services to its AE management activities. [Refer page 67 of Cnv. Paperbook] Risk Operate as full-fledged risk taking Operate at minimal entrepreneur risk Brand Enjoys the brand value of its Holding Nil Company, TATA Group. TCS is paying Tata Sons Limited, the ultimate holding company, a contribution for using its brand name, TATA. [Refer page 68 of Cnv. Paperbook] Payment of The company has paid INR 42,097 thousands Nil Royalty to TATA Sons Limited as Tata Brand Loyalty. [Refer page 68 of Cnv. Paperbook] Other Economies of scale Not applicable to the Appellant (ii) The company was having sales turnover of Rs. 1, 359.41 crores for the year under consideration as against the assessee’s turnover of Rs. 40 crores for the said year, which is almost 34 43 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 times the turnover of the assessee (page 69 of the paper book referred) (iii) The company is a part of an eminent Tata group and received support from it in terms of its large-scale operation and clientele. During the year the TCS paid INR 42,097 thousands to Tata Sons Ltd towards Tata brand equity contribution (iv) That in following decisions of the Tribunal, the company has been excluded as comparable to ITES companies: (a) Ameriprise India Pvt. Ltd., ITA No. 7014/Del/2014, for AY 2010-11 (TCS E- Serve Ltd. is engaged in BPO and high end technical services and no segmental information available). (b) Equant Solutions India Pvt. Ltd. (Involved in software testing and high end technical services, it also owns huge intangible and use of TATA Brand), ITA No. 1202/Del/2015, AY 2010-11.

(C) TCS E-Serve International Ltd. 27.3 The Authorized Representative submitted that the company is not comparable to the assessee company due to the following reasons: (i) The company is not functionally comparable to the assessee. A chart of comparison submitted in the synopsis, by the Ld. counsel is reproduced as under: Particulars TCS E Serve International CEB India Functions TCS E Serve International provides CEB India is engaged ITES/BPO and technical services. Such in providing technical services involve software information research testing, verification and validation of and related support software at the time of implementation services to its AE and data centre management activities. [Refer page 61 of Cnv. Paperbook] Risk Operate as full-fledged risk taking Operate at minimal entrepreneur risk 44 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 Brand Enjoys the brand value of its Holding Nil Company, TATA Group. TCS is paying Tata Sons Limited, the ultimate holding company, a contribution for using its brand name, TATA. [Refer page 62 of Cnv. Paperbook] Payment of The company has paid INR 3,737 Nil royalty thousands to TATA Sons Limited as Tata Brand Loyalty. [Refer page 62 of Cnv. Paperbook] Not applicable to the Other Economies of scale Appellant (ii) No segment information was available in respect the the company to bifurcate the income and expenses between the ITES/BPO services and technical services in the nature of software testing, verification and validation (page 63 of the paper book referred). (iii) the company provides services predominantly to one client namely Citigroup (page 61 of the paper book referred). (iv) the company has witnessed an abnormal growth in revenue and profitability of 174% and 286% respectively as compared to the last year. (v) The company possesses brand value due to its acquisition by Tata group, which tend to influence the pricing policy and thereby directly impacting the margins earned by the company. (vi) that in following decisions of the Tribunal, the company has been excluded as comparable to ITES companies: (a) Ameriprise India Pvt. Ltd., ITA No. 7014/Del/2014, for AY 2010-11 (TCS E service Ltd. is engaged in BPO and high end technical services and no segmental information available).

45 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 (b) Equant Solutions India Pvt. Ltd. (Involved in software testing and high end technical services, it also owns huge intangible and use of TATA Brand), ITA No. 1202/Del/2015, AY 2010-11.

(A) Accentia Technology Ltd. 29.1 The learned counsel has highlighted the extra ordinary events of merger and amalgamation of various companies with the company taken place during the year. The event of merger and acquisition of various company with assessee has impacted the profitability of the company during the year and in the circumstances, following our decision in for assessment year 2008- 09, we are of the opinion that this company cannot be compared with assessee company. Further , the company has shown income from medical transcription, billing and coding, and software development and implementation and no segment data in respect of ITES services is available in the annual report of the company, thus functions of this company cannot be compared at entity level with the functions of assessee company. Further we also note that Tribunal in the case of Ameriprise India Private Limited (supra) held the company as not comparable in absence of segmental information. The relevant finding of the Tribunal is reproduced as under:

46 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 “A. Challenge to the inclusion of companies 8 Accentia Technologies Ltd. 8.1 The assessee objected to the inclusion of this company in the list of comparables on several reasons namely – "Reasons for rejection (1). Extraordinary events during AY 2010-11 (acquisitions) (pg.38,39,79 of Paperbook-1) (2). Functional dissimilarity - It's a KPO and has diversified business operations (pg. 4 of Paperbook-1) (3). Insufficient segmental details (pg. 81 of Paper book -1) This comparable has been rejected recently by the Hon'ble ITAT, in Assessee's own case for AY 2009-10 ( ITA No. 2010/Del/2014- Ameriprise India Pvt. Ltd. vs. ACIT) for the reason that apart from ITES, the company also generates revenue from software products and segmental figures are not available. (pg. 15, 16 of the order) Also, recently rejected as a comparable in Techbooks International Pvt. Ltd. (ITA No. 240/Del/2015 for AY 2010-11) (pg. 18 and 19 of the order- year of amalgamation-extraordinary financial event). Moreover, applying the Hon'ble Delhi High Court judgment in the case of Rampgreen Solutions vs. CIT (ITA No. 102/2015), Hon'ble Delhi ITAT in Avaya India Pvt. Ltds. vs. ACIT (ITA No. 5528/Del/2011) has excluded this comparable on the ground that KPO services cannot be compared to BPO services." 8.2 The TPO discussed the functional comparability of this company and, in the ultimate analysis, came to hold that it was functionally comparable with the assessee company and hence includible. 8.3 We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report of this company, a copy of which has been placed in the paper book. Notes to Accounts of this company, indicate about the amalgamation of Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon'ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015 and Techbook International P. Ltd. vs DCIT (ITA No. 240/Del/2015) vide its order dated 47 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 06.07.2015. In view of the fact that there was merger of Asscent Infoserve Pvt. Ltd. with Accentia Technologies Ltd. by way of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this extra-ordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables.” 29.2 In the case of Equant Solutions India Private Limited (supra) the company has been excluded from the list of comparables as it was engaged in software development and no segmental data available owned huge intangibles and extraordinary events during the year. The relevant part of the decision is extracted as under:

“20. Accentia Technologies Ltd. a. The TPO has taken this comparable stating that the company is functionally similar and passes by the filters applied by the TPO. The TPO further stated that the assessee has not demonstrated how the acquisition has affected the profitability and pricing of the comparable. Before the DRP, the assessee reiterated argument made before TPO. Further, the DRP retained the comparable holding that FAR profile of the company is similar. Before us, the ITA No. 1202/Del./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010- 11 assessee contended that the comparable company provides high- end functions such as knowledge process outsourcing, legal process outsourcing. Further, the company is providing software as a service in healthcare outsourcing area. The company also developed software products in BPO management and healthcare therefore it is functionally dissimilar and should be excluded as comparable. He further submitted that the comparable has significant amount of brand and IPR and further it does not contain segment wise result with respect to various segment in which it operates. Further during the Financial Year 2009-10 there is amalgamation also in the comparable company which is an extra ordinary event and therefore it affect overall profitability of the company. As regards the selection of this comparable, the learned counsel for the assessee has relied on the decisions of this Tribunal in the cases of Capital IQ Information Systems (India) Pvt. Ltd. v. Addl./Dy. Commissioner of Income-tax, Circle 1(2), Hyderabad and vice versa (ITA No. 124 and 170/Hyd/2014 dated 31.7.2014); Hyundai Motors India Engineering P. Ltd., Hyderabad v. DCIT, Circle 2(2), Hyderabad (ITA NHo. 255/Hyd/2014 dated 31.7.2014), wherein M/s. Accentia Technologies Limited(Seg) was excluded by the Tribunal from the list of comparables on the ground that it was ITA No. 1202/Del./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 a case of mergers and acquisition, and the company was also found to be functionally different. b. LD Dr relied on the order of lower authorities and also submitted that all these reasons have been considered by TPO while selecting the comparables.

48 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 c. We have considered the rival contention. During the year this comparable has been gone into substantial business restructuring resulting into extraordinary circumstances during the FY 2009-10 subsidiary of Ascentia got amalgamated with this company and the figures of the business results for the year ending 31st March 2010. In this case also excluded the figures of amalgamated company and due to which the comparable has high OP by TC margin. The relevant observations of the Tribunal as recorded in para 19.2 of the order passed in the case of Excellence Data Research Pvt. Ltd., Hyderabad v. ITO Ward 2(1), Hyderabad (ITA No. 159/Hyd/2014 dated 31.7.2014); being relevant in this case, are reproduced below- "19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, ITA No. 1202/Del./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected." As pointed out by the learned counsel for the assessee, there was amalgamation of a company during the relevant year, and the said company, therefore, cannot be considered as comparable due to this extraordinary event which occurred in the relevant year as rightly held by the Tribunal inter alia in the case of Excellence Data Research P. Ltd. (supra). We, therefore, follow the decision of the coordinate bench of this Tribunal in the case of Excellence Data Research Services Pvt. Ltd. (supra) and direct the AO/TPO to exclude the Accentia Technologies Limited from the list of comparables on this ground. Further, this company also provides KPO services, LPO and DPO besides offering software services. Therefore as this enrolled in knowledge processing outsourcing it is functionally dissimilar to the ITA No. 1202/Del./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 assessee. Further, it does not contain segment wise functional results and in absence of such segmental information, it cannot be used for comparing the PLI of the assessee. It is also noted that it is also having significant amount of brands, intellectual property rights and goodwill as compared to the assessee. Therefore, in view of the above reasons this company is required to be excluded. Further relying on the decision of Jurisdictional high court in case of Rampgreen Solutions Pvt Ltd (TS-387-HC- 2015(DEL)-TP) where in it is held that KPO are ITeS where the service providers have to employ advanced level of skills and knowledge. This is absent in this case of assessee which is low end ITES service provider such as which enables network management and other back office support services performed by assessee which primarily include remote monitoring and maintenan ce of Equant global network platforms and services, coordination, remote configuration, and implementation of quality customer networking solutions. Therefore this comparable is ordered for its exclusion accordingly.”

29.3 In view of our discussion above and respectfully following the decision of the Tribunal in the case of Ameriprise India private limited (supra) and Equant solutions India private limited (supra), we hold that in absence of segmental information, the company cannot be compared functionally with assessee company and accordingly, we direct the AO/TPO to exclude the company from the set of comparables.

TCS E-serve Ltd. 30.1 The company was engaged in providing high-end transaction processing, technical services involving software testing, verification and validation at the time of implementation, data centre management activities, which is evident from page 67 of the paper book. This fact makes the company functionally different from the assessee company which has been characterized as ITES company. Further, the brand value of being part of TATA group is certainly having impact on the profitability of the company. In the circumstances company cannot be compared with the assessee. Further we also note that Tribunal in the case of Ameriprise India private limited (supra) held the company as not comparable in absence of segmental information. The relevant finding of the Tribunal is reproduced as under:

“12. TCS e-Serve Ltd. 12.1 The assessee objected to its inclusion by contending that this is exceptional year of operation for this company as it is the first full year of operations after its takeover by TCS. It was also contended that this company is functionally dissimilar and the segmental information are insufficient. The TPO repelled the assessee's objections and included it in the final set of comparables.

50 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 12.2. We have heard the rival submissions and perused the relevant material on record. A copy of the Annual report of this company is available on page 398 of the paper book. Ld. Counsel for the Assessee submitted that like TCS e- Serve International Limited, this Company is also engaged in providing 'Transaction processing' and 'Technical services'. By referring to Profit & Loss Account in standalone financials of the Company it was pointed out that during the relevant financial year, the Company has received Income of Rs. 1,35,94,110/- from Transaction Processing and Other Services. On referring to Schedule 'O' - Notes to Accounts it is given that - "Background and principal activities TCS e-Serve Limited is engaged in the business of providing Informaiton Technology - Enables Services (ITES) / Business Process Outsourcing (BPO) services, primarily to Citigroup entities globally.

The Company's operations broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities." 12.3 We also note that 'Segmental Information' given in Point No. 8 of Schedule 'O' - Notes to Accounts in standalone financials of the annual report shows that Company is engaged in Business Process Outsourcing (transaction processing) services to the Banking & Financial Services Industry (BFSI), which is considered as a single segment. 12.4 It was fairly conceded by Ld. AR that this company has been considered as Comparable by the Delhi Bench of Tribunal in Techbook International P. Ltd. (supra), by observing as follows : "The company's overview has been discussed on page 467 of the paper book, which divulges that this company : "is in the business of providing business process management services in the banking and financial services (BFSI), vertical ( i.e. industry vertical) to help its customers achieve their business objectives by providing innovative best-in-class services." We find that this company is also providing ITES. Unlike TCS e- Serve International Ltd., this company is not providing any technical services involving software testing, verification and validation of software etc. Since the functional profile of this company on a broader basis is no different from that of the assessee, both being involved in rendering ITES, we are not inclined to treat this company as incomparable. The ld. AR argued that the nature of 51 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 the ITES provided by this company is different from that of the assessee and hence the same be excluded. We are disinclined to sustain this objection. Matching of the exact functional similarity is dispensed with under the TNMM, which is not so under the Comparable uncontrolled price method. The TNMM approves comparability on the basis of broader overall similarity. When we consider the nature of services provided by this company, being the ITES, which is similar to that of those rendered by the assessee, again the ITES, we cannot order its exclusion simply for the reason that the verticals of ITES are somewhat different. If one goes to make a comparison in the way suggested by the ld. AR under the TNMM, then it will be very difficult, if not impossible, to find out a ditto comparable. A company which satisfies the broader parameters of comparability in the overall same segment, cannot be excluded due to somewhat different nature of such overall activity. An examination of the comparables chosen by the assessee, which have been accepted by the TPO, also satisfy only the test of overall similarity and not the peculiar similarity, as has been now contrastly contended for the exclusion of this company. This argument, therefore, fails." 12.5 We have gone through the annual report of Company and have carefully considered the reasoning given by coordinate Bench in the case of Techbook International P. Ltd. (supra). On perusal of Schedule 'O' - Notes to Accounts of the Standalone financials of the Company, it is clear that the Company is engaged in "transaction processing" and "technical services" activities. No separate segmental details are available. On a careful reading of the decision of coordinate Bench in Techbook International P. Ltd. (supra) it is clear that Schedule 'O' - Notes to Accounts in respect to carried out by Company and relevant segmental details were never brought to the attention of the Bench. We find that in the absence of the availability of any such segregation of the total revenue of this company, it is not possible to separately consider its profitability from rendering of `Transaction processing services'. Thus, the entity level figures render this company as unfit for comparison. Following the above reasons also taken note in the case of TCS e-Serve International Limited, we order for the elimination of this company from the final set of comparables.” 30.2 In the case of Equant Solutions India private Limited (supra) the company has been excluded from the list of comparable as it was engaged in software testing and high-end technical services, owned huge intangibles and use of Tata Brand. The relevant part of the decision is extracted as under:

“24. TCS E Serve Limited 52 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 a. TPO included this comparable, which has a margin of 63.42%. The ld DRP has also held that the far profile of the company is similar. Before us, ld. AR submitted that the company is dissimilar functionally. In addition to BPO services, it is also engaged in technical services such as software testing, verification and validation. It has also developed software such as transport management software. It does not have segmental reporting too. It was further submitted that the company owns substantial intangible assets in form of software licenses and it makes a payment for Tata Brand and therefore it gets the benefit use brand value of Tata. b. Ld. DR relied on the orders of lower authorities and submitted that all the above reasons for selection of this comparable has bene considered by the TPO. c. We have also considered the rival contention for exclusion of TCS e-service Ltd. It is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, verification and ITA No. 1202/Del./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 validation. It is also developed a software such as transport management software therefore functionally this company is dissimilar to the assessee company. It also owns huge intangible and use of 'Tata' Brand, which has definitely benefited this comparable, it is directed to be excluded.

30.3 In view of above discussion and respectfully following the decision of the Tribunal in the case of Ameriprise India Private limited (supra) and Equant Solutions India Private Limited (supra), we hold that company as functionally dissimilar to the assessee company and accordingly we direct the AO/TPO to exclude the company from the set of the comparables.

TCS E-Serve International Ltd. 31.1 On perusal of the page 61 of the paper book, we find that that the company was engaged in providing technical services such as software testing, verification and validation of software at the time of implementation and data centre management activities and it is evident from the page 63 of the paper book that no segment information was available to bifurcate the income and expenses 53 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 between the ITES services and technical services. Further, the company is a part of the Tata group, which has impacted the margins of the company. Further, we also note that Tribunal in the case of Ameriprise India Private Limited (supra) held that the company as not comparable in absence of segmental information. The relevant finding of the decision is reproduced as under:

“11. TCS E-Serve International Ltd. 11.1. The assessee objected to the inclusion of this company on the ground that there is exceptional rise in turnover and profits, as this is the second year of operations of the Company and first full-year as a step down subsidiary of TCS. It was also agitated that Company is functionally dissimilar and there are insufficient segmental information. The TPO noticed that this company was also offering ITES. He did not treat high turnover of this company as a relevant factor in considering the comparability. Eventually, this company was included in the final set of comparables. 11.2 We have heard the rival submissions and perused the relevant material on record. Notes to Accounts indicate that this company is engaged in the business of providing IT enabled services/BPO services primarily to Citigroup entities globally. The operations of this company : 'broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities.' It is manifest that this company is engaged in rendering BPO services to the banking and financial services industry (BFSI) and Travel, Tourism and Hospitality (TTH). It is providing services to BFSI and TTH and such services include `Transaction processing' and `Technical services'. In other words, the remuneration of this company from the above referred two segments includes compensation for rendering `Technical services' and `Transaction processing'. Insofar as the `Transaction processing' services are concerned, these are ITES, which are broadly similar to those rendered by the assessee, though not specifically similar. However, the `Technical services' involve software testing, verification and validation of software item, implementation and data centre management activities. The `Technical services' rendered by this company are in the nature of servicing and maintenance of software. At this stage, it is relevant to note that a company providing software services may be of two types, viz., a company providing software development services and a company providing software services other than software development services (hereinafter also called 'a company providing non-development software services').

54 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 11.3 At this juncture we are inclined to quote view taken by the Delhi Bench of Tribunal in Techbook International P. Ltd. (supra), while considering the same comparable, it is observed that - "In order to properly appreciate the vital difference between these two types of companies, it is significant to note that a company which develops software is called a company rendering software development services. Software development services also include maintenance of software and updation of the software so as to suit the ever changing requirements of the users. A company using, inter alia, a software for obtaining the desired results, is called a company providing non- development software services. Thus, it is crystal clear that there is a phenomenal difference between a company providing software development services and a company providing software non- development services in terms of expertise, professional qualification and experience required for rendering such services. A company providing software non-development services performs a relatively low- end service. Thus the line of distinction is that whereas a company providing software development services helps in the creation, maintenance or updation of a software, on the other hand, a company providing non-development software services obtains the desired result with the use of an existing software. Further, whereas the output of the former is a software in itself or a stage in the ultimate creation of a software, the output of the later is the processed information from the raw data obtained with the help, inter alia, of a software. From the above discussion, it is overt that a company providing software development services is distinct from and incomparable with a company providing non-development software services." 11.4 We find that the assessee is a company providing non-development software services, in the nature of conversion of data from hard copy or files into electronic format. The assessee is not providing any software development services to its AE. On the other hand, this company is also providing `Technical services' to its AE involving software testing, verification and validation of software, which are akin to software maintenance services falling, within the overall category of software development services. The TPO has taken entity level figures of TCS E-Serve International Ltd. for comparison. We note that, there is no bifurcation available in respect of the revenues of this company from Transaction processing (which are in the nature of ITES, the same as provided by the assessee) and Technical services (which are in the nature of software development, absent in the assessee's case). In the absence of the availability of any such segregation of the total revenue of this company, it is not possible to separately consider its profitability from rendering of `Transaction processing services'. As such, the entity level figures render this company as unfit for comparison. Therefore, we order for the removal of this company from the final set of comparables.”

55 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 31.2 In the case of Equant solutions India private limited (supra) the company has been excluded from the list of comparable. The relevant part of the decision is extracted as under:

23. TCS E Serve International Ltd. a. This comparable was taken by TPO where the margin is 54.02%. The TPO has taken this comparable considered this a company in IPS industry and considered it as a singled segment. The TPO was also of the view that there are no exceptional circumstances, which is related in the increase in the profit. Before DRP the argument of the assessee were rejected and it was held that far profile of the company is similar to that of the appellant. Before us it was submitted that in addition to BPO services this company is engaged in providing technical services like software testing, verification and validation of the software which falls under software development services activity, which also includes transaction processing, technical services, therefore it is functionally dissimilar. Further it was also ITA No. 1202/Del./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 contended that there is no segmental date ITES and software development activity of the company is available and this comparable owns substantial amount of intangibles in the form of software licenses and it owns Tata Bran in which company is making payment. It was further submitted that the company has volatile margin over the year and its profitability has gone up 173% on account increased in infrastructure and therefore this comparable should be excluded. b. Ld. DR relied on the orders of lower authorities and supported them. c. We have considered the rival contention regarding the exclusion of TCS E- service International Ltd. the comparable is engaged in the business of BPO service and provides high-end technology services such as software testing, verification and validation of the software. Therefore, it is functionally dissimilar to the assessee. Further annual report of the company does not provide any segmental information related to ITES as well as software development services. The company also owns intangible of substantial amount and is benefitted usually by the Tata Brad. The company is also making appellant for use of such brand. Therefore this aspect also makes this comparable is ITA No. 1202/Del./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 inappropriate and therefore we order to exclude this comparable.

31.3 In view of our discussion above and respectfully following the decision of the Tribunal in the case of Ameriprise India Private Limited (supra) and Equant Solutions India Private limited (supra), we hold that the company TCS E-Serve International Ltd. cannot be compared with 56 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 assessee company and accordingly, we direct the AO/TPO for exclusion of the above company from the set of the comparable for computing average margin of the comparables. Thus ground No. 3.3 is allowed.

1. That on the facts and in the circumstances of the case, the order passed by the Ld. Assessing Officer (“AO ) is bad in law and void ab-initio.

57 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 5,19,95,761/- to the returned income of the Appellant by re-computing the arm’s length price of the international transactions under section 92 of the Act.

4. The Ld. AO/Ld. TPO/Ld. DRP erred in not accepting the quantitative filters selected by the Appellant in its transfer pricing documentation/fresh search and has instead applied his own additional/ quantitative filters which lacked valid and sufficient reasoning.

5. The Ld. AO/Ld. TPO/Ld. DRP erred in rejecting the comparable companies set adopted by the Appellant in its transfer pricing documentation and erred in accepting companies which were functionally not comparable to the Appellant in terms of Functions, Assets and Risk profile and including companies with high/supernormal margins / turnover.

6. The Ld. AO/Ld. TPO/Ld. DRP erred in not providing the benefit of economic adjustment on account of difference in risk profile in arriving at the arm’s length mean margin.

8. The Ld. AO/Ld. TPO erroneously computed the margins of comparable companies selected by him.

10. The Ld. AO/ TPO/DRP erred in fact and in law by considering the arm’s length value of fixed assets imported by the Assessee from its AEs during FY 2010-11 as NIL, thereby making an adjustment of INR 69,550.

11. The Ld. AO/ Ld. TPO has erred in not appreciating the fact that the Appellant is a company incorporated under the provisions of the Companies Act, 1956 and enjoying the tax holiday benefits conferred under the tax holiday benefits as per the Software Technology Park of India (herein after referred to as “STPI”) Scheme. Thus, there is no motive on the part of the Appellant to shift the profits to any other jurisdiction.

13. That the Ld. AO erred in facts and in law in charging and computing interest under section 234B and 234D of the Act.

That the above grounds are independent and without prejudice to each other. The Assessee craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of objection either before or during the course of proceedings in the interest of the natural justice.”

(A) TCS E-Serve Ltd. 37.1 The Authorized Representative submitted that the company need to be rejected as comparable due to the following reasons: i. The company engaged in high-end transaction processing, technical services involving software testing, verification and validation of software at the time of implementation and data centre management activities. The company is a part of eminent Tata group and received support from it in terms of large scale operation and clientele. During the year, company has paid INR 26,809 59 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 thousands to Tata Sons Ltd as Tata brand equity contribution (page 81 of the paper book referred). The company is having sales turnover of INR 1442.42 crores for year under consideration as compared to turnover of INR 45 crore of the assessee for the said year, which is almost 32 times that of the assessee. ii. The company has been excluded from the list of comparables by the Tribunal in the case of Goldman Sachs (India) Securities Private Limited Vs. ACIT in ITA(TP) No. 927/Mum/2016.

(B) Eclerx Services Ltd ( “Eclerx”) 37.2 The learned AR submitted that the company is functionally dissimilar to the assessee company due to following reasons: (i) the company is engaged in providing data analytics and data process solutions to some of the largest brand in the word.( Page 73 of the paper book referred) (ii) the company is exporting in chosen market-trade processing support, reference data maintenance and margin and exposure management (page 74 of the paper book referred) (iii) it is an industry specialist company and helps in meeting complex clients need, that analytics specialisation into two business verticals-financial services and retail and manufacturing (page 75 of the paper book referred) (iv) it has a scalable delivery model and services offered including trade processing, reference data, accounting and finance and expense management activities

60 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 38. We have heard the rival submissions and perused the relevant material on record. Both the companies have been directed to exclude from the set of comparables in appeals of the preceding years. For the year under consideration, the comparability of the above two companies is decided as under:

TCS E-serve Ltd. 40.1 On perusal of the page 77 of the paper book, which is part of the annual report of the company, we find that the company was engaged in providing technical services as compared to the services of the assessee which are characterized as ITES services. The company is also having huge sales turnover as compared to the assessee. The company is also part of TATA group, which has impacted its profitability. In the circumstances, the company is functionally dissimilar to the assessee and cannot be compared with the assessee. The said company has also been excluded by the Tribunal as a comparable to ITES companies in the case of Goldman Sachs (India) securities private limited (supra). The relevant part of the decision is extracted as under:

“4.2.b. In the case of Capitia India Pvt. Ltd. (supra) the Tribunal had held that TCS was not a valid comparable for IT-e services in following manner: "i) M/s TCS e-Serve:- From the perusal of its Annual reports, it is seen that, this company is engaged in the business of providing ITES services and BPO services primarily to 'Citi Group' entities globally. It operations comprised of transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities. From the perusal of the profit and loss account, the revenue shown from transaction processing and other services is approximately Rs.1442.42 crores. There are no segmental details and any other bifurcation as to what comprised of transaction processing charges and other services. That apart, it is seen that, this 61 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 company is a part of Tata Group and has a huge brand value across the world and also owns huge intangibles. Thus, there is a huge difference in the assets employed by this Company as compared to the assessee which also reflects in its revenue and profit margin. Its intangible assets itself is more than Rs. 3337.4 crores as on 1st April, 2010 and additions during the year were more than Rs.756.24 crores. Thus, this company having huge intangibles assets cannot be compared with the assessee who has no significant intangibles. That apart, it has been pointed out by the Ld. Counsel that, this company has been emerged with TCS in the year 2009 which has led to shooting up of its profit margin to 13% to 68%-70%. This factor itself points out that its high profit margin were due to its huge brand value, which cannot be held to be comparable with captive service provider like Assessee Company. So far as the decision of ITAT Delhi Bench in the case of 'Techbooks International Pvt. Ltd' is concerned as pointed out by the Ld. Counsel, we find that this decision of the Tribunal has been distinguished and explained by the subsequent three decisions of the Delhi Bench of the ITAT, wherein, the Tribunal has categorically held that, in absence of any segmental details and segregation of the total revenue this comparable company cannot held to be comparable. The relevant observation of the Tribunal in the case of Ameriprise India Pvt. Ltd (supra) reads as under:- 12.5 We have gone through the annual report of Company and have carefully considered the reasoning given by the coordinate Bench in the case of Techbook International P Ltd (supra). On perusal of Schedule 'O' - Notes to Accounts of the Standalone financials of the Company, ITA(TP)/927/M/16(11-12)Goldman Sachs (India)Securities Pvt.Ltd. it is clear that the Company is engaged in "transaction processing" - and "technical services" activities. No separate segmental details are available. On a careful reading of the decision of coordinate Bench in Techbook International P td (supra) it is clear that Schedule 'O' - Notes to Accounts in respect to carried out by Company and relevant segmental details were never brought to the attention of the Bench. We find that in the absence of availability of any such segregation of the total revenue of this company, it is not possible to separately consider its profitability from rendering of "Transaction processing services". Thus, the entity level figures render this company as unfit for comparison. Following the above reasons also taken note in the case of TCS e-Service International Limited, we order for the elimination of this company from the final set of comparables". Subsequently in the case of Equant Solutions India Pvt. Ltd also this company has been held to be un-comparable on the following reasoning: "We have also considered the rival contention for exclusion of TCS e-service td. It is mainly involved in transaction processing 62 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 and technology services. It carries on business of providing technology service such as software testing, verification and validation. It is also developed a software such as transport management software therefore functionally this company is dissimilar to the assessee company. It also owns huge intangible and uses of Tata Brand, which has definitely benefited this comparable, it is directed to be excluded". This, in view of our discussion and also following the precedence in the aforesaid cases, we hold that TCS e-Serve cannot be held to be comparable company, accordingly, we direct the AO/TPO to exclude the same from comparability list." Respectfully following the same, we hold that TCE e-Service cannot be considered a valid comparable in the case of the assessee.” 40.2 In view of above and respectfully following the precedence in aforesaid case, we hold that the company cannot be compared with assessee and accordingly, we direct the AO/TPO to exclude the company from the set of the comparables for the year under consideration. Eclerx Services Ltd. 40.3 On perusal of the page 73 to 75 of the paper book, which are part of the annual report of the company, and the submission of learned Authorized Representative, We find that services provided by the company are completely different from the research related services rendered by the assessee to its AE and thus it cannot be treated as functionally similar to the assessee. Further we find that the Tribunal in the case of Goldman Sachs (India) securities private limited (supra) has excluded the above company for comparable to ITES companies. The relevant para of the decision is extracted as under:

“4.2.a. We would like to deal with the inclusion/exclusion of the comparables by the DRP. We find that the Tribunal had excluded AT and ECL from the list of the valid comaparables, while deciding the appeal filed by the assessee for the earlier year(supra).We are reproducing the relevant paragraphs of the order and same read as under:

63 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 "56.We have considered the submissions of the parties and perused the material available on record. As per the annual report of this company, it is noted that the company is engaged in offering solutions in the field of data analytics, operations management, audits and re- conciliation, matrics management and reporting services. The functionality of the company was not only considered by the Tribunal, Mumbai Special Bench, in the case of Maersk Global Centres India Pvt. Ltd. (supra), but a host of other decisions referred to earlier, wherein, it has been held that the company is involved in providing high end services which is in the nature of KPO, hence, cannot be compared to a general ITES provider. In fact, the Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd., ITA no.102 o 2015, has held that this company being a KPO service provider cannot be considered as a comparable to ITES companies. We may further mention, many of the orders passed by the co-ordinate benches of the Tribunal rejecting Eclerx Services Ltd. as a comparable to ITES service provider is for the very same assessment year 2008-09. Therefore, respectfully following the view expressed by various judicial authorities, we hold that Eclerx Services Ltd. being functionally different cannot be treated as comparable to the assessee." XXXXXXX ITA(TP)/927/M/16(11-12)Goldman Sachs (India)Securities Pvt.Ltd. "67.We have considered the submissions of the parties and perused the material available on record. We have noted that the Tribunal, Bangalore Bench, in Symphony Marketing Solutions India Pvt. Ltd. (supra), after perusing the annual report of this company found that major source of income is from providing engineering design service which is not comparable to ITES / BPO functions. The Bench observed, provision of engineering design service is a high end service amongst the BPO which requires high skill, hence, it can be regarded as KPO service. The bench, therefore, excluded the company as a comparable to ITES / BPO segment. The Tribunal, Hyderabad Bench, in M/s. Market Tools Research Pvt. Ltd. v/s DCIT, following co-ordinate bench decision in Symphony Marketing Solutions India Pvt. Ltd. (supra) has also held that the company cannot be treated as comparable to a company performing ITES / BPO functions. As these decisions rendered by the Tribunal are for the very same assessment year, respectfully following the same, we direct exclusion of this company from the list of comparables. It has been submitted before us by the learned Sr. Counsel that on exclusion of these companies, the margin of the assessee would be within +/- 5% tolerance band of the arithmetic mean of the comparable companies requiring no further adjustment to the price charged. In view of the aforesaid submissions of the learned Sr. Counsel, we do not consider it necessary to deal with the other comparables objected to by the assessee as it is merely of academic interest. Ground no.2, raised by the assessee is partly allowed." Respectfully following the same, we hold that AT and ECL have to be excluded from the list of the valid comparables.”

64 1088/Del/2014; 963/Del/2015 & 6683/Del/2015 AY: 2008-09, 2009-10, 2010-11 & 2011-15 40.4 In view of above discussion and respectfully following the decision of the Tribunal in the case of Goldman Sachs (India) securities private limited (supra), we are of the opinion that company cannot be considered as comparable to the assessee, and accordingly we direct the AO/TPO to exclude the above company from the set of of comparables chosen finally by the TPO, post the direction of the DRP.