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

The assessee has raised following grounds of appeal:

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.

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" Future First Info Services Pvt. Ltd. 3 through a fresh benchmarking analysis during the course of Transfer Pricing assessment proceedings.

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.

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.

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.

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. 4 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.

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 relevant facts giving rise to this appeal are that the appellant assessee, engaged in the activity of providing information technology enabled support services, filed its Income Tax Return (‘ITR’) on 22.11.2017 declaring income of Rs.32,03,55,990/-. The case was selected for complete scrutiny. During the relevant year, the appellant assessee has provided certain services to its Associated Enterprise (‘AE’); namely, Mercury Derivatives Trading Ltd., Mauritius, which is engaged in trading of derivatives in commodities and interest rate futures. As per the appellant assessee, it has utilized its comprehensive infrastructure, technology and human resource to provide the services to its AE. In relation to the aforesaid services provided to the AE, the appellant has characterized itself as an IT enabled support services provider in its TP documentation and has determined the arm’s length price (‘ALP) accordingly. The appellant assessee has adopted the Transactional Net Margin Future First Info Services Pvt. Ltd. 5 Method (‘TNMM’) as the Most Appropriate Method (MAM) and Operating Profit by Operating Cost as the Profit Level Indicator (‘PLI’), which, in principle, has been accepted by the AO/TPO for benchmarking the assessee’s international transactions with its AE. However, the AO considered the appellant assessee as financial advisor; investment/trading advisor as against the claim of the back-office IT enabled support services provider. The AO/TPO rejected the appellant assessee’s economic analysis. The relevant finding of the TPO is as under: “Assessee has repeatedly harped on the point that it is engaged in provision of back-office IT enabled services. It has also highlighted that it uses IT infrastructure which includes use of online software, live information services and research on international databases such as Bloomberg and Reuters to provide these services. The primary point of contention here is what is the nature of these services? At this point it pertinent to look at the services agreement between Mercury Derivatives Trading Limited and Futures First Info Services Private Limited dated 11.07.223. The services provided by Futures First as mentioned in schedule to aforesaid agreement are: 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. 6 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.

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.

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. 9 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. The Ld. AR submitted that the appellant assessee used to provide the IT enabled services to its AE by using online software live information services and research on international databases such as Bloomberg and Reuters for performing company/industry analyses, secondary data analyses, capital market analyses, commodity demand and supply research, etc. and it did not bear any significant risks. It was further submitted that the appellant assessee performed IT enabled support services only and did not undertake any key decision-making functions/strategic decisions. For such services, the appellant assessee charged cost-plus mark-up of 20% basis. Further, the Ld. AR submitted that the AE of the assessee used to provide online tools and knowledge of market strategies to enable the appellant assessee to perform support activities. It was further submitted that the appellant assessee’s works were based on continuous and ongoing instructions, guidance, standardized processes, trainings, specifications, provided by its AE. The assessee relied on the guidance and knowledge support received from AE and accordingly, all the related risks and rewards arising out of such data were vested with the AE. It was brought to our notice that all propositions made by the appellant assessee were subject to acceptance/rejection by the AE as it used its own capital and bore capital risks including risks of Markets, Future First Info Services Pvt. Ltd. 10 Regulatory Authorities and Compliance risks. It was contended that the main business activities of the AE being a trader in commodities and interest rate futures would not determine the nature of the business of the appellant assessee. It was further argued that the support functions performed by the appellant assessee could not be itself characterized as investment/trading advisory services. The Ld. AR place reliance on the following decisions:  ITC Infotech India Ltd. [L.Τ.Α No. 2222 & 2223/Kol/2010].  Sojitz India (P) Ltd. (I.T.A Nos.-5186/Del/2011 & 5433/Del/2012].  Cotton Naturals (I) Pvt. Ltd. (ITA No. 233/2014) (Delhi High Court),  Sony India (P) Ltd. (ITA No. 1189/Del/2005) Delhi ITAT,  EKS Appliances Limited (2012) 345 ITR 241 (Delhi High Court),  Li & Fung India Pvt. Ltd. (ITA 306/2012) Delhi ITAT.

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. 11 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.)

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. 12 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.

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, ITA No.628/Mum/2013, 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 Future First Info Services Pvt. Ltd. 13 range as per the proviso to section 92C(2) of the Act without prejudice and if warranted.

On merit, the Ld. AR argued two comparables selected by the TPO. He contended that the TPO had selected two functionally dissimilar comparables; SPT Investment Advisory Services Ltd. (‘SPT’) and Angel Financial Advisor Pvt. Ltd. (‘AFD’) to quantify the transfer pricing adjustment.

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) Future First Info Services Pvt. Ltd. 14  Sap Labs India Pvt. Ltd. [2010] 006 ITR 0081 (Bang)

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. ITA No.7821/Mum/2011  Intoto Software India Pvt. Ltd. [2013] 35 taxmann.com 421 (Hyd. Trib.)

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. ITA No. 5148/DEL/2017

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. 15 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.

The Ld. AR submitted that AFD was not comparable as it was engaged in the single segment of distribution of financial products such as Mutual Fund, Insurance etc. It was contended that AFD was not a suitable comparable even in cases of companies engaged in investment/trading advisory as held by the Tribunal in the case of Goldman Sachs Asset Management (India) Pvt. Ltd. [ITA No. 502/Mum/2016] that New Berry Advisors Ltd. was not a suitable comparable since it was engaged in distribution and marketing of financial products and thus it was held functionally dissimilar to the company which provided non-binding investment advisory services (page 272 of PB-II) similar to the appellant assessee’s profiles.

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 Future First Info Services Pvt. Ltd. 16 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).

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.

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. ITA No. 5618/Del/2017 (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. 17 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.

The Ld. CIT-DR drew our attention to page 10 of the TPO’s order and the service agreement (page 746 of the PB) between the appellant assessee and its AE to submit that the appellant assessee was performing 5 functions as detailed therein at page 10 of the TPO’s order. It was submitted by the Ld. CIT- DR that functions numbered 1 to 3 were of Investment Consultant & Finance advisor, whereas the remaining functions numbered 4 & 5 were in the nature of ITeS. It was contended that the appellant assessee used to charge cumulatively for entire services rendered by it. The specific bills raised by the appellant assessee for these two works; (i) Investment Consultancy & Finance advise and (ii) ITeS would divulge the sums in aggregate charged for these two services; (i) Investment Consultancy & Finance advisor and (ii) ITeS separately.

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. 18 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.

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.

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.

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 Future First Info Services Pvt. Ltd. 19 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. ITA No. 526/Del/2022 (Del.), Ameriprise India (P) Ltd. 62 taxmann.com 237 (Del.) and Techbook International (P) Ltd. 63 taxmann.com 114 (Del.). 8. The Ld. CIT-DR, drawing our attention to the schedule of Profit and Loss account of the assessee, submitted that it was not a debt free company as it paid interest of about INR 5 Lakhs. Hence, the facts of this case were different and thus, the appellant assessee was required to charge interest on outstanding receivables as per provisions of section 92F(v) of the Act read with Rule10B(2)(c) of the Income Tax Rules. He, emphasizing on the fact that the appellant assessee’s trade receivables were more than 10% and trade payable was only 0.5%, submitted that the appellant assessee was required to charge the interest on outstanding receivables. He placed reliance on the decision of the Hon’ble Delhi High Court in the case of Kusum Health Care (P) Ltd. 300 CTR 343. 9. In counter, the Ld. AR submitted that the interest of INR 5 Lakhs was not on the debt but on other liabilities; security received from customers.

We have heard both parties and have perused the material available on the record. We have gone through various decisions relied upon by both parties. After careful consideration of material on the record and facts in entirety, we find force in the argument of the Ld. CIT-DR that the appellant Future First Info Services Pvt. Ltd. 20 assessee had provided two types of services; (i) Investment Consultancy & Finance advisor and (ii) ITeS. Accordingly, we hold that the appellant assessee is neither exclusive Investment Consultant & Finance advisor nor ITeS provider. Its functions are mixed having both kinds of services. We are of the considered view that the 1st category of service requires specialization being high skilled jobs and it falls under the category of financial advisor; investment/trading advisor as against the claim of exclusive back-office IT enabled support services provider. Further, we are of the considered view that the 2nd category of service falls under the category of the IT enabled support services.

In view of the above, it is hereby held that the assessee performed both kinds of services; (i) Investment Consultancy & Finance advisor and (ii) ITeS. Accordingly, these two different segments and their financials need to be compared separately. Thus, the entire revenue of the appellant assessee compared with comparables of one segment by the AO/TPO is not justified as the ALP of both segments are bound to be different. There are two different scenarios; (i) In case, financials of these two different services/segments are separable and independent; then the proportionate revenue on segmental basis needs to be compared separately with the suitable comparables of that particular segment. (ii) In case, financials of these two different services/segments are inseparable and inter-dependent; then the entire revenue in aggregate Future First Info Services Pvt. Ltd. 21 needs to be compared separately with the suitable comparables having both segments together.

In view of the above submissions/contentions/arguments, we are of the considered view that SPT is suitable comparable as for as 1st scenario is concerned as its entire revenue falls under the head ‘Investment Consultancy & Finance advisor’, whereas AFD will become a suitable comparable in second scenario where segmental data is not available. Thus, two categories of comparables falling under each service/segment; (i) Investment Consultancy & Finance advisor and (ii) ITeS have to be brought in the final set of comparables of each segment and respective financials have to be compared as per two different scenarios mentioned above in para 11. Considering the facts in entirety and above detailed discussion, we deem it fit to set aside the issue of comparables to the AO/TPO for selecting final sets of comparables afresh for both segments/services as mentioned above and compare different segments under two different scenarios separately as mentioned above to arrive the ALP. Thus, in view of the above observations and discussions, the issue of comparables is remitted back to the files of the AO for doing needful to arrive the ALP, in accordance with law, after providing adequate opportunity of being heard to the appellant assessee. Ordered accordingly. The appellant assessee, no doubt, shall cooperate in remitted proceedings.

The next issue is interest on outstanding receivables. Finance Act 2012 has clarified the scope of "international transaction" by inserting Explanation Future First Info Services Pvt. Ltd. 22 to Section 92B of the Act to include "any other debt arising during the course of business". Thus, the said outstanding receivables are held international transactions. It is the fact that the assessee has paid interest on securities received from the customers. We are not going into the analysis that whether the securities received from customers do fall under the category of debt. We are convinced with the principle applied by the TPO to work out the interest on outstanding receivables. Keeping in view the facts in this regards and rival parties submissions, we direct the AO/TPO to allow the working capital adjustments and also apply the LIBOR+300 basis points. Thus, in view of the above, this issue is also remitted back to the files of the AO for doing needful. 14. In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced in open Court on 29th August, 2025 (YOGESH KUMAR U.S.) (AVDHESH KUMAR MISHRA) JUDICIAL MEMBER ACCOUNTANT MEMBER