FUTURE FIRST INFO SERVICES PRIVATE LTD. ,DELHI vs. AO CIRCLE-7(1), DELHI

3. On facts and in law, the Ld. AO/ Ld. TPO and Hon'ble DRP erred in considering functional characterization of the Appellant akin to an "investment/ trading advisor' instead of an 'IT enabled back office support service provider failing to appreciate the fact that the said functional characterization has not been challenged in prior years.

4. On facts and in law, the Ld. AO/Ld. TPO and Hon'ble DRP erred in violating the provisions of Rule 10B(2) by introducing companies which are functionally dissimilar to the Appellant and have high an volatile margins.

5. Without prejudice, the Ld. AO/Ld. TPO and Hon'ble DRP erred on facts and in law by rejecting, without any cogent reason, additional functionally comparable companies identified by Appellant on a "without prejudice basis" 2

6. Without prejudice, the Ld. AO/ Ld. TPO and Hon'ble DRP erred on facts and in law by really computing the transfer pricing adjustment of INR 158,308,574 and considering total cost/income instead of only operating items as defined under Rule 10TA of the Rules while computing the said adjustment.

III. Interest on outstanding receivables-adjustment of INR 5,962,994 7. On facts and in law, the Ld. AO/Ld. TPO and Hon'ble DRP erred in re- characterizing the continuing debit balance of receivables of the Appellant as a 'deemed interest-free loan' granted by Appellant to the AE during the relevant previous year and arbitrarily imputing an incorrectly calculated interest at SBI base rate prevalent during FY 2016-17, plus a mark-up and making an addition of INR 5,962,994 to the income of the Appellant.

8. On facts and in law, the Ld. AO/Ld. TPO and Hon'ble DRP erred in not appreciating that the order of Hon'ble Tribunal passed in Appellant's own case in AY 2014-15 has deleted adjustment on similar issue.

9. Without prejudice, the Ld. AO/ Ld. TPO and Hon'ble DRP erred in ignoring that the operating profit margin earned by the Appellant was higher than the working capital adjusted arm's length margin of comparables at 5.88% thereby subsuming the impact of outstanding receivables.

10. Without prejudice, the Ld. AO/ Ld. TPO and Hon'ble DRP erred in disregarding judicial precedents upholding the fact that since the alleged transaction was denominated in foreign currency, an international LIBOR based rate should be considered.

Future First Info Services Pvt. Ltd. IV. Consequential Objections 11. The Ld. AO has erred in law in initiating penalty proceedings under Section 270A of the Act for under reporting of income in consequence to misreporting.

12. The Ld. AO erred in levying interest under Section 2348 of the Act. The above Grounds of Appeal are independent and without prejudice to each other.

The Appellant craves leave to supplement, withdraw, amend add and/or otherwise after or modify, any or will ground of the appeal stated hereinabove and to submit such statements, documents and papers as may be considered necessary either before or during the appeal hearing.”

1. 1. Researching markets listed on major regulated futures and options exchanges, foreign exchange markets and securities markets as specified from time to time by MERCURY. In particular, the Service Provider will examine and analyze short and medium-term trends of the products and the correlations between trends that may affect the markets.

2. Preparing proposals for MERCURY to take positions, and to sell and buy assets in the analyzed markets within the detailed investment policy guidelines set by MERCURY from time to time.

Future First Info Services Pvt. Ltd. 3. Preparing proposals for MERCURY regarding implementation of market and concentration risk management policies within the detailed investment policy guidelines set by MERCURY from time to time. 4. Providing IT related services, including information technology or computer or internet-based services of various kinds but not limited to any international capital or securities market or international derivatives exchanges.

5. Preparing management account reports and providing any other business information services including data analysis and processing, business support and data entry, as may be required by MERCURY from time to time.

It is clear from above excerpts from the agreement that assessee is providing non-binding investment/trading advisory/proposals based on the research carried out by within the overall Policy guidelines set by its AE. To understand more about these guidelines, assessee was asked to furnish them vide notice dated 04.11.2020, however no such guidelines were furnished by assessee. In response assessee furnished an evasive reply mentioning "It is respectfully submitted that due to the dynamic nature of the business, the AE provides continuous ongoing guidance and support to the assessee in order to enable the Assessee to provide services." Moreover, no supporting documents such as Policy document, emails, SOPs, etc. were furnished to substantiate even this statement.

Further assessee was asked to furnish the proposals prepared for MERCURY as mentioned in point 2 and point 3 above. In response, assessee submitted only two documents. One of the documents is without any context and the second document is an analysis of the FOMC statement. These documents discuss scenario analysis based on various factors. Even though the reply of assessee is again evasive and the documents furnished cannot 6 Future First Info Services Pvt. Ltd. he classified as proposals to take positions, to sell and buy assets in the analyzed markets or as proposals regarding implementation of market and concentration risk management policies, as these documents discuss the impact of FOMC statement. However, scenario analysis as done in these documents forms the building block of investment advisory service.

Assessee's contention that its AE bears capital, market, regulatory and compliance service has been accepted and not been challenged in the showcause notice as well. Further, it has never been contented that assessee is using its own capital for carrying out trading/investment activities. It has been clearly highlighted that assessee is providing non- binding investment/trading advisory to its AE through the use of IT tools, Bloomberg, Reuters databases etc. Here it is pertinent to mention that assessee was asked vide notice dated 04.11.2020 to provide details about the tool where buy sell details are entered by employees and also he was asked to furnish parameters for accept/rejection decision taken Mercury. In response, assessee submitted that "all the orders proposed by the Assessee are subject to acceptance rejection by the AE. Accordingly, the final decision as regards all the orders vest with Mercury. The AE follows a methodical procedure to review and accept/reject the orders proposed by the Assessee. The AE also continuously monitors the activities of the Assessee and manages its exposure." Assessee reply has again found to be evasive, neither does it mention any specific about the criteria followed by Mercury for acceptance/rejection nor it mentions about the ratio of proposals accepted by Mercury based on such criteria.

To understand more about the work profile of employees, specific details about bonus component of their salary structure were asked vide notice dated 04.11.2020 and again vide notice dated 20.11.2020. However, reply of the assessee has been again found wanting and incomplete.

Future First Info Services Pvt. Ltd. The contention of assessee that the activities performed by it can be characterized as back-office operations, data processing and data mining, support centers is untenable as assessee is involved in preparation of investment/trading proposals for its AE through the use of research and analysis. The key service rendered by assessee is delivery of these proposals based on the in-depth and expert analysis carried out by its employees using various technical tools and databases.

Further, assessee has contended its FAR profile cannot be re-characterized and has quoted judicial precedents to support the same. It is important to mention here that the case laws quoted by assessee are distinguished on facts and law from that of the assessee. Moreover, the interpretation of services rendered and functions performed by the assessee are derived from the assessee's own submission regarding the services given to its AE.

At this juncture it is relevant to mention here that principle of res judicata is not applicable in case of TP proceedings and every year is a separate legal proceeding.”

3.1 The Transfer Pricing Officer (‘TPO’), vide its order dated 16 January 2021, considered the functional characterization of appellant assessee as an investment/trading advisor instead of the ITeS provider and consequently, rejected the economic analysis undertaken BY the appellant assessee in TP documentation. Thereafter, the TPO, applying NCP margin of 30.33% based on two new comparables selected by him, determined ALP of INR 158,308,574. Further, the TPO worked out interest of INR 5,962,994 on outstanding receivables from AE and added the same into the returned income. Thus, by making additions aggregating to INR 164,271,568, the draft assessment order Future First Info Services Pvt. Ltd. dated 20 April 2021 was passed. The assessee filed the ‘Objection’ against the said draft assessment order before the Hon’ble Dispute Resolution Panel (‘DRP’), who issued directions vide order dated 14 January 2022, wherein contentions of the Ld. TPO were upheld. Hence, this appeal is before us.

4.1 The Ld. AR drew out attention to the Safe Harbour Rules [Rule-10 TA(e) of the Rules notified by CBDT] wherein the back-office operations, data processing and data mining and support centers had been characterized as ITeS. Thus, it was contended that the appellant assessee’s business activities fell under ITeS. Reliance was place on the Tribunal decision in the case of American Express (India) Pvt. Ltd [ITA No 1868/Del/2015). It was further contended that the appellant assessee's business model and the agreement with the AE remained same since AY 2009-10 to the relevant year and it performed similar functions since then; hence, the principle of consistency had to be applied as the nature of service of the assessee had never been disputed before by the Revenue. In this regard, the Ld. AR drew our attention to the decision of the Tribunal in assessee’s own case for AY 2012-13, wherein Future First Info Services Pvt. Ltd. the Tribunal vide order dated 16th November 2021 had held that the assessee could not be characterized as a high-end KPO as it was engaged in performing back-office support functions. The Ld. AR placing reliance on the following decisions, prayed for upholding the rule of consistency:  Radhasoami Satsang (193 ITR 321),  Excel Industries Limited 358 ITR 295,  Berger Paints India Ltd. (266 ITR 99),  Union of India Vs. Kaumudini Narayan Dalal & Other (249 ITR 219),  Brintons Carpets Asia P Ltd. (ITA No.1296/PN/10)  Management Structure & Systems (2010) 41 DTR 426)  Bengal Tiger Line Pte. Ltd. [2020] 121 taxmann.com 165 (Chennai Trib.)

4.2 The Ld. AR further contended that the services provided by the appellant assessee were not comparable to an investment/trading services provider for the simple reason that the appellant assessee’s activities were mere mechanical application of systems/tools provided by the AE as the back- office support functions required limited knowledge of financial markets and that was why younger employees with average age of 27 years (as on 31 March 2017) were employed. The appellant assessee, being a captive service provider was not engaged in developing any commercial/business relationships with anyone engaged with business dealing of its AE. Further, it was submitted that the appellant assessee was not engaged in formulating financial models and undertaking any analytics as it did not indulge in any investment/ Future First Info Services Pvt. Ltd. trading advisory functions such as analytics, construction of financial models, target short listing, strategic decision making, etc. It was further submitted that the appellant assessee’s AE used to regulate and monitor all the activities undertaken by the appellant assessee. The appellant assessee’s AE used to manage its own exposure profits/losses earned from its primary activities.

4.3 The Ld. AR further contended that the appellant assessee’s activities were not as sensitive, critical or as risk oriented as those of its AE and or investment/trading advisor and thus, appellant assessee should not be compared with the companies engaged in providing investment/trading advisory services and consequentially, their profit margins. The Ld. AR placed reliance on the decision of the Tribunal in the case of Apax Partners India Advisers, wherein Mumbai Tribunal had held that the companies engaged in IT enabled services/KPOs were not comparable to the taxpayer engaged in investment advisory services since providing investment advisory services required high level of knowledge. Similar view held in Caryle India Advisors (P) Ltd, vs. ACIT [(2012) 146 TTJ 521] was upheld by the Hon'ble Bombay High Court reported in 357 ITR 584.

4.4 The Ld. AR argued that the Ld. TPO had erred in considering total cost/income instead of only ‘operating items’ while computing the adjustment. Alternatively, he prayed to consider only ‘operating items’ while calculating the transfer pricing adjustment in case the assessee was not held engaged in providing ITeS. The Ld. AR further pleaded to allow benefit of +/- 3% tolerance

5.1 The Ld. AR submitted that SPT was not comparable as it provided advice and consultancy in the field of listed and unlisted shares. With the help of details mentioned on page Nos. 1092 and 1095 of Paper Book-III (‘PB’), the Ld. AR submitted that SPT was engaged in share consultancy and had subscription income, whereas the appellant assessee was providing ITeS. This comparable had earned fluctuating/abnormal margins. The financials of SPT did not disclose segmental information. It was further submitted that SPT was engaged in securities investment till FY 2014-15. It had recorded purchase of securities and inventory during the year (segmental details not available). During FY 2015-16, such inventory had been written off/sold which caused huge variation in its profits. Further, SPT advisors had displayed expansion traits in FY 2016-17 as it had acquired premises/software. The Ld. AR placing reliance on the following decisions, prayed for exclusion of this comparable on the reasoning of fluctuating margins (pages 267-269 of PB-II):  Maersk Global Centres (India) Pvt. Ltd. (ITA No. 7466/Mum/2012)  Adobe Systems India Pvt. Ltd. [2011] 014 ITR 0084 (Del)

5.2 The Ld. AR, placing reliance on the following decisions, argued that SPT was not a suitable comparable as there was no segmental information (pages 266 of PB-II):  Evalueserve SEZ (Gurgaon) Pvt. Ltd. (TS-125-HC-2018(DEL)-TP]  Talcordia Technologies India Pvt Ltd.  Intoto Software India Pvt. Ltd. [2013] 35 taxmann.com 421 (Hyd. Trib.)

5.3 It was further submitted by the Ld. AR that SPT’s marketing expenses were around 7.02% of the total expenditure as against NIL of the appellant assessee as it was a captive service provider. Judicial pronouncements relied upon (refer pages 264 of PB-II) in this regard were:  Hyundai Motor India Engineering Pvt. Ltd (ITA No. 1807/Hyd/2017)  Evalueserve. Com P. Ltd. 5.4 The Ld. AR further submitted that SPT had different business model and risk profile as it dealt directly with third parties, whereas the appellant assessee was a captive service provider; hence, it was not a suitable comparable. In support of the above arguments, the Ld. AR placed reliance on the decision of the Hon'ble Delhi High Court in the case of Rampgreen Solutions (P.) Ltd. 60 taxmann.com 355 and the decision of the Tribunal in the case of Philips Software Center Private Limited [2008-TIOL-471-ITAT-BANG]. It was further argued that SPT was not a suitable comparable because it failed Future First Info Services Pvt. Ltd. turnover filter and had high brand value and domestic sales only as against the appellant assessee, a captive service provider deriving exclusive profit from export.

6.1 With the help of details mentioned on page Nos. 987, 1002, 1056, 1066 and 1080 of PB-III, the Ld. AR submitted that SPT was engaged in product distribution; such as Mutual Fund, Insurance etc., whereas the appellant assessee was providing ITeS. This comparable had earned fluctuating/ abnormal margins. The Ld. AR drew our attention on the financials of AFD to submit that there had been huge increase (of around 47.94%) in miscellaneous and other expenses without proportionate increase in the turnover. It was further submitted that the Profit & Loss account of AFD 15 Future First Info Services Pvt. Ltd. showed that this comparable had derived revenue from co-branding services. The Ld. AR, placing reliance on the principle laid down by the Hon'ble High Court of Delhi in the case of Oracle (OFSS) BPO Services (P.) Ltd. - ([2018] 90 taxmann.com 388 (Delhi) - [AY 2007-08] that brand value had significant role in garnering profits and negotiate contracts, argued that this comparable was not at all a suitable comparable. Reliance was also placed on the decision in the case of Mindteck (India) Ltd. vs DCIT [IT(TP)] A No. 70/Bang/2014).

6.2 The Ld. AR further submitted that SPT had different business model and risk profile as it dealt directly with third parties. Further, it was submitted this comparable failed turnover filter and had domestic sales only as against the appellant assessee, a captive service provider deriving exclusive profit from export. Hence, it was not a suitable comparable.

6.3 On the issue of interest on outstanding receivables, the Ld. AR submitted that the appellant assessee had not have any debt. Adjustments made on this score in preceding years had been deleted by the Ld. CIT(A). Reliance was placed on the decisions in the cases of Bechtel India (P) Ltd. 85 taxmann.com 121 (Del.), Boeing India Pvt. Ltd. TS-790-HC-2022 (Del.) and Vossloh Beekay Castings Ltd. (Del-Trb.). Further, it was submitted that the receivables were continuing debts; hence, these were not in the nature of international transactions and outstanding receivables could not be equated with loans as the margin earned was more than the ALP. Alternatively, it was submitted to allow the working capital adjustments and Future First Info Services Pvt. Ltd. LIBOR. It was contended that the TPO had erred in applying SBI Base rate and mark-up over it. These debts were recovered within 9 months as per the RBI guidelines.

7.1 The Ld. CIT-DR, placing emphasis on details mentioned on page 29, 31 and 32 of PB-I, submitted that the assessee was mainly an investment consultant & advisor and that was why it first analyzed the market data provided by its AE using algorithm after proper testing. With the help of Block Diagram on page 47 of PB-I and other details thereon in 5.2.1.3, submitted that the appellant assessee used to perform 5 functions as detailed above. Out of which first 3 required specializations as these were high skilled jobs, which the assessee had performed to the satisfaction of its AE. Hence, the averaging Future First Info Services Pvt. Ltd. of age done by the Ld. AR to submit that younger employees were not competent to analyze and advice on investment did not have any merit in the advanced financial market scenario as it did not reflect the proper analysis of the data. Averaging of age in any organization was bound to be on the bottom side of a pyramid as number decreased on the top in the Human Resource, contended by the Ld. CIT-DR. Thus, this logic of the Ld. AR did not hold good, submitted the Ld. CIT-DR. Further, emphasis was supplied on economic analysis mentioned on pages 57-59 of PB-I by the Ld. CIT-DR to submit that the comparables of the appellant assessee mentioned in its TP Study were functionally different and the TPO had rightly categorized the appellant assessee as Investment Consultant & Finance advisor.

7.2 For SPT, the Ld. CIT-DR, placing emphasis on details mentioned on pages 1090, 1092 and 1095 of PB-II, submitted that this comparable performed almost similar functions as those of the appellant assessee and it had not dealt in trading of share and derivatives. Thus, this comparable had been suitably selected by the TPO.

7.3 In case of AFD, the Ld. CIT-DR was not able to contradict the submission of the Ld. AR that there were no segmental data for different segments.

7.4 The Ld. CIT-DR, in support of above contentions/arguments/ submission, placed reliance on the decision of the Hon’ble Delhi High Court in the case of Krishak Bharti Corp. Ltd. 350 ITR 24. Further, the Ld. CIT-DR 18 Future First Info Services Pvt. Ltd. placed reliance on decisions of Tribunal in the cases of Bechtel India (P) Ltd. 85 taxmann.com 121 (Del.), Apache Footwear India (P) Ltd. 148 taxmann.com 371 (Hyd.), Jubliant Pharmova Ltd. (Del.), Ameriprise India (P) Ltd. 62 taxmann.com 237 (Del.) and Techbook International (P) Ltd. 63 taxmann.com 114 (Del.).