Csav Group India Pvt. Ltd. , Haryana vs Assessee

Assessee by : Sh. Rohit Tiwari, CA Department by : Smt. Anuradha Mishra, CIT(DR)

Date of Hearing : 14-5-2015 Date of Order : 29-5-2015

ORDER

PER H.S. SIDHU : JM This appeal by the Assessee is directed against the

assessment order dated 8.7.2010 of the Assessing Officer passed

u/s. 143(3) of the I.T. Act, 1961 pertaining to assessment year

2006-07. The grounds raised by the Assessee read as under:-

"That on the facts and circumstances of the case, and in law;

1. That the Assessment Order passed in pursuance to the

directions issued by the Learned Dispute Resolution Panel ('Ld

DRP') IS a vitiated order as the Ld. DRP erred both on facts and

in law in confirming the addition made by the Ld. Assessing

1 ITA NO. 3954/Del/2010

Officer ('AO')/ Ld. Transfer Pricing Officer ('TPO') to the

appellant's income by issuing a non-speaking order without

appropriate application of mind and in undue haste;

2. The Ld. DRP erred both on facts and in law in confirming

the Ld. AO/ TPO's action of making an adjustment of Rs.

17,324,009 to the income of the appellant holding that its

international transactions of provision of Back Office and and

Vessel Planning Support Services do not satisfy the arm's

length principle envisaged under the Act. In doing so the Ld.

DRP has grossly erred in agreeing with the Ld. TPO's action of:

2.1. aggregating the activities of Vessel Planning Support

Services and Back Office Support Services carried out by the

appellant for the purpose of economic analysis, based on

incorrect presumptions and surmises, thereby ignoring the fact

that these two activities have distinct functional profile and

hence should be analysed separately; 2.2. resorting to

arbitrary rejection of low-profit! loss making companies

included in the comparable set, based on erroneous and

inconsistently applied filtration criteria/ reasons, thereby

retaining only high-profit making companies (in the final

comparable set) for benchmarking the appellant's international

transactions; not appreciating the functional profile of the

2 ITA NO. 3954/Del/2010

appellant and in applying inconsistent basis while adjudicating

on the functional comparability of the comparables, thereby

erroneously including in the final comparable set certain

companies with differential functional profile; 2.4. not

appreciating the fact that in the relevant assessment year the

appellant was entitled to a tax holiday on its profits from

provision of Vessel Planning Support Services and Back Office

Support Services and therefore did not have any untoward

motive of deriving any tax advantage by manipulating the

transfer prices of its international related party transactions;

2.5. holding that only current year (i.e, FY 2005-06) data for

comparable companies should be used for comparability

analysis despite the fact that the same was not necessarily

available to the appellant at the time of preparing its TP

documentation;

2.5.1. without prejudice, in considering only the comparables'

analysis presented by the appellant in respect of its Back

Office Support Services segment, carried out using current

year data, submitted during the course of assessment

proceedings while at the same time erroneously ignoring/

disregarding the comparables analysis presented by the

3 ITA NO. 3954/Del/2010

appellant in respect of Vessel Planning Support Services

carried out on the same basis;

2.6. denying the benefit of a working capital adjustment to the

appellant;

2.7. erroneously retaining in the final comparable set certain

companies which have earned extraordinarily high operating

margins, thus signifying a high element of entrepreneurial risk

as opposed to the limited risk bearing captive services

provided by the appellant;

2.8. not appreciating the risk profile of the functions carried

.out by the appellant and incorrectly agreeing with the Ld. TPO

that the appellant is a risk bearing entity;

2.8.1. rejecting the detailed computation of risk

adjustment submitted by the appellant during the assessment

proceeding, based on various subjective premises/

presumption, while at the same time failing to provide an

alternative basis for computation;

2.9. denying the benefit of (+!-) 5 percent [as per proviso to

section 92C(2) of the Act] available to the appellant.

The above grounds are without prejudice to each other

4 ITA NO. 3954/Del/2010

The appellant craves leave to alter, amend or withdraw all or

any of the grounds herein or add any further grounds as may

be considered necessary either before or during the hearing."

2. The brief facts of the case are that the assessee filed its return

of income declaring income of Rs.11,68,763/- on 21.11.2006. Notice

under section 143(2) of the Income-tax Act, 1961 was issued on

10.10.2007 and duly served. In response to this notice, Ms Neelu

Bahl and Shri Anuj Mahajan, CAs, appeared from time to time and

filed details. Books of accounts were produced and examined on test

check basis. The case was discussed with the authorised

representatives. During the relevant previous year the assessee was

engaged in the business of providing vessel planning support

services and other back office support services to CSAV Group

companies. The assessee entered into the following international

transactions with its Associated Enterprises, as defined in section

92A of the IT Act:

Name of the AE Description of Amount ALP declared by transaction received the assessee NCLL Provisions of 76223478 76223478 services CSAVSA Provision of 62898208 62898208 services CNP Provision of 14717006 14717006 services CSVSA Reimbursement 24640 24640 of Expenses received CSAV Reimbursement 336630 336630

5 ITA NO. 3954/Del/2010

GmbH of Expenses received CSAV HK Reimbursement 65630 65630 of Expenses received CSAV GmbH Cost recharges NA NA paid Total 154265592 154265592

2.1 The case of the assessee was referred to the Transfer Pricing

Officer-I, New Delhi on 13.3.2008 uls 92CA of the IT Act. The

Transfer Pricing Officer-I(4), New Delhi passed order uls 92CA(3) of

the IT Act on 15.09.2009. In the report, the TPO determined the

Arm's Length Price of different services provided by the assessee to

its Associated Enterprises assessee at Rs.17,11,62,701/- as against

Rs.15,38,38,692/- charged by the assessee for these services

resulting in difference of Rs.1,73,24,009/-.

2.2 Keeping in view the above, the assessee was asked to explain

as to why addition of Rs.1,73,24,009/- not be made to its income u/s

92CA read with section 92C(4) of the IT Act, vide order sheet entry

dated 07.10.2009. In response thereto, the assessee stated vide its

letter dated 22.10.2009 that its reply is as per its letter dated

3.8.2009 and 17.8.2009 addressed to the TPO. After considering the

submissions of the assessee, the AO was agreed with the finding of

the TPO by holding that the same is as per the law on the subject.

As regards to the pleadings of the assessee regarding exercising the

6 ITA NO. 3954/Del/2010

option of taking the ALP at 5% less or 5% more than the mean of

comparable prices. The AO is of the view that firstly, this option

could only be exercised if the assessee had suo-motto declared the

ALP as the price of services charged by it to its Associated

Enterprise as per section 92 of the IT Act. The assessee had this

option at the time of filing of return which it failed to exercise.

Secondly, even at the stage of assessment, the assessee has only

stated that it wants to exercise the option of taking the ALP at 5%

more or 5% less than the mean of comparable prices. The assessee

has not specified which value (i.e., value more than or the value less

than the mean of comparable prices) it wants to adopt. Thirdly, as

per section 92CA(4) of the IT Act, the Assessing Officer has to

compute the income of the assessee in conformity with the Arm's

Length Price as so determined by the TPO after amendment in this

sub-section by the Finance Act, 2007 w.e.f. 1.6.2007. After

considering all replies and submissions of assessee, AO held that

the total income of the assessee has to be determined on the basis

of ALP determined by the TPO. The assessee did not exercise the

option of taking the ALP at plus/minus 5% of the arithmetic mean of

ALPs based upon different comparables. The AO has to compute the

total income of the assessee as per the ALP determined by the TPO.

AO referred the judgment of the Hon'ble Delhi High Court in the case

of Moser Baer vs. Additional Commissioner of Income-tax in Writ

7 ITA NO. 3954/Del/2010

Petition (Civil) no. 6974/2008 wherein it has been held that "The

Assessing Officer, after the amendment brought about by virtue of

Finance Act, 2007, has no choice but to proceed to compute total

income of the assessee under sub-section (4) of section 92C in

conformity with the ALP determined by the TPO." The AO rejected

this submission of the assessee and the total income of the assessee

was assessed on the basis of ALP of Rs.15,38,38,692/- as

determined by the TPO.

2.3 AO made the addition of Rs.1,73,24,009/-, being the difference

between the Arm's Length Price and the price charged by the

assessee and added to the income of the assessee u/s 92C(4) of the

IT Act.

2.4 The Draft Assessment Order was passed under section 144C of

the I.T. Act in this case on 29.12.2009. The assessee preferred

appeal before the Dispute Resolution Panel against this order under

the provisions of this section. The DRP-I, New Delhi passed order

under this section in Appeal No. 218/27.1.2010 on 30.6.2010 in

which the DRP observed that " Sh. Kedar Kulkarni argued about

exclusion of various companies from his list of comparable

companies offered by assessee in the TP documentation study. Out

of 13 comparables 8 has been rejected on the grounds of them

being functionally dissimilar. 5 company which have been selected

8 ITA NO. 3954/Del/2010

for comparability are from assessee's list only. The AR of the

assessee argued for Vishal Information Technologies to be rejected

in the list of comparable. It is found surprising that assessee wants

to reject his own comparables offered initially in his TP report. Such

cherry picking has not been argued out. The TPO's order needs no

further intervention". The AO has passed this order as per the

draft assessment order dated 29.12.2009 and finally the income of

the assessee was assessed as under:-

Income from business as declared by the assessee: Rs. 11,68,763

Add: Addition U/S 92C(4) as discussed above: Rs. 1,73,24,009

Business income: Rs. 1,84,92,772

Total Income : Rs. 1,84,92,772

Total income (rounded off): Rs. 1,82,92,770

3. The AO assessed the income at Rs. 1,84,92,770/- vide his order

dated 8.7.2010 passed under section 143(3) of the I.T. Act, 1961.

4. Against the above order of AO, assessee is in appeal before

the Tribunal.

5. Ld. Counsel of the Assessee, Shri Rohit Tiwari, reiterated the

contentions raised in the grounds of appeal and in order to

substantiate his claim he filed the Synopsis.

6. On the other hand, Ld. DR relied upon the order of the AO.

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ITA NO. 3954/Del/2010

7. We have heard both the parties and perused the relevant records available with us, especially the order of the Revenue Authorities and the synopsis filed by the assessee. We find that during the Financial Year ('FY') 2005-06, the assessee undertook the following international transactions with its AEs:

a) Provision of services

b) Cost recharges (paid)

c) Reimbursement of expenses (received)

7.1 The above mentioned transactions were duly reported in the

Accountant's Report (Form No 3CEB) filed along with the appellant's

return of income for the relevant Assessment Year.

7.2 For the purpose of establishing compliance with the arm's

length standard, the appellant segregated its income from provision

of services into:

a) Provision of vessel planning support services hereinafter

referred to as 'vessel planning segment', and

b) IT enabled back-office support services hereinafter referred to

as 'back-office segment'.

7.3 The assessee's international transactions of reimbursement of

expenses have been accepted by the Transfer Pricing Officer (Ld.

TPO') to be-at arm's length.

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ITA NO. 3954/Del/2010

7.4 For establishing the arm's length nature of its operations in the

vessel planning segment and back-office segment, in its Transfer

Pricing (TP) Report for the relevant FY, the assessee adopted

Transactional Net Margin Method ('TNMM') as the Most Appropriate

Method ('MAM') using the return on total cost (OP/TC margin) as the

Profit Level Indicator ("PU").

7.5 Using multiple year data (for FY 2003-04, FY 2004-05 and FY

2005-06, to the extent available at the time of the documentation),

the appellant, in its TP documentation, carried out the benchmarking

analysis the results of which are provided in Table 1 below:

Table 1: Summary of Benchmarking Analysis (TP Documentation)

(Refer TP Study at page 34 & 45 of paperbook and Refer TPO Order

at page 14 of Appeal set)

Particulars Vessel Planning Services Back Office services

PLI used OP/TC OP/TC

No of comparables 7 20

Comparables' margin 11.01% 9.93%

Appellant's margin 18% 13%

Conclusion At arm's length At arm's length

11 ITA NO. 3954/Del/2010

7.6 During the course of the TP assessment proceedings, the Ld.

TPO directed the assessee to submit the current year (i.e., FY 2005-

06) data for comparable companies considered in its TP study.

Further, the Ld. TPO proposed to aggregate the 'vessel planning

segment' and 'back-office segment' of the appellant and analyse it

on an entity-wide basis. The following table summarizes the results

of the fresh search undertaken by the appellant:

Table 2: Summary of Fresh Search for Comparables

Particulars Vessel Planning Services Back Office services

PLI used OP/TC OP/TC

No of comparables 7 13

Comparables' margin 11.16% 10.56%

Appellant's margin 18% 13%

Conclusion At arm's length At arm's length

7.7 However, the Ld. TPO rejected the segmented TP analysis

carried out by the assessee and analyzed the appellant as an ITES/

back-office service company on an entity wide basis, computing the

appellant's entity-wide OPITC margin at 15.06%.

7.8 Further, the Ld TPO disregarded the fresh search undertaken

by the appellant for benchmarking its 'vessel planning segment' and

12 ITA NO. 3954/Del/2010

instead proceeded to benchmark the assessee on an entity wide

basis on the basis of the fresh search analysis (referred above)

undertaken by the assessee for benchmarking its 'back-office'

segment. The purported action of the Ld. TPO is summarised in

Table 3 below:

No of comparables Back office Services (as considered in the fresh search based on 13

updated current ear data - refer table above

Less: Companies rejected on the grounds of them 8

them functionally dissimilar

Comparable companies finally selected 5

Comparable's mean margin 28.02%

Appellant's margin 15.06%

Appellant's OPI TC margin outside the +/- 5 percent range

7.9 The Ld. TPO relied upon the set of top 5 high profit making

comparable companies with a mean OPITC margin of 28.02 percent,

thereby arriving at a TP adjustment of Rs 17,324,009.

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ITA NO. 3954/Del/2010

7.10 Pursuant to the order passed by the Ld. TPO, the Ld.AO issued

a draft order computing the total income, of the asssessee at Rs.

18,492,770 after considering the TP adjustment of Rs. 17,324,009.

7.11 Aggrieved with the draft assessment order, the assessee filed

its detailed submissions in the form of objections before the Learned

Dispute Resolution Panel CDRP') as provided in section 144C of the

Act. However, the Ld. DRP upheld the adjustment made by the Ld.

TPO. (refer page no. 4 of the order of the DRP dt. June 3, 2010)

8. Now, with regard to the captioned appeal, the appellant wishes

'to submit the following against the Order of the Ld. DRP/Ld. TPO:

A. 'Cherry picking' in selection of final comparables by the Ld.

TPO Inclusion of High margin Companies

9. The Ld. TPO has undertaken a detailed analysis of the 13

comparable companies relied upon by the appellant, the Ld. TPO has

erred in rejecting certain companies considered comparables by the

appellant and ultimately resorted to a set of high profit making

comparables to arrive at the ALP. In doing this the Ld. TPO, has

erroneously rejected only those 8 companies which were loss-

making/ low profit making companies on the alleged/ purported

grounds of functional dissimilarity and retained the top 5

comparable companies with very high profit margins out of the 13

14 ITA NO. 3954/Del/2010

comparable companies selected by the appellant vide its fresh

search. This can be clearly observed from Table below: .

1 Vishal lnformation Technologies Ltd. 63.56% Accepted

2 Triton Corp Ltd. 20.58%' Accepted

3 C S Software Enterprise Ltd. 19.87% Accepted

4 Transworks Information Services Ltd. 19.62% Accepted

5 Cosmic Global Ltd. 16.48% Accepted

6 TSR Darashaw Ltd 1.4.38% Rejected

7 Tutis Technologies 9.47% Rejected

8 National Securities Depository Ltd 6.21% Rejected

9 Ask Me Info Hubs Ltd. 4.67% Rejected

10 Indus Networks Ltd. (ITeS Segment) 4.20% Rejected

11 Tata Services Ltd. 2.07% Rejected

12 Datamatics Financial Services -14.24% Rejected

13 Twinstar Software Exports Ltd -29.55% Rejected

Mean 10.56%

Final set of comparables by the Ld. TPO:

Table 4: Fresh Search Comparables for Back-office services

15 ITA NO. 3954/Del/2010

S.No. Company Name OP/TC TPO's Disposition 1 Vishal Information Technologies Ltd. 63.56% Accepted

2 Triton Corp Ltd. 20.58% Accepted

3 C S Software Enterprise Ltd. 19.87% Accepted

4 Transworks Information Services Ltd. 19.62% Accepted

5 Cosmic Global Ltd. 16.48% Accepted

Mean 28.02% .-

10. Further, the Ld. TPO has held certain companies (as

mentioned in Table 5 below) to be functionally not comparable on

the premise that the said companies are engaged in the activity of

medical transcriptions. In this regard, the Ld. TPO has resorted to

inconsistent application of criteria.

11. This is evident from the fact that the annual report of one of

the comparable companies i.e., Cosmic Global Services, accepted by

the Ld. TPO in the final comparable companies set clearly and

unambiguously specifies that the company's activities being IT

services include medical transcription, translation and software

development. (for relevant extracts please refer Annexure 1 of this

Submission).

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ITA NO. 3954/Del/2010

12. The functions carried out by two of the comparable companies,

i.e., Indus Networks and Twinstar Software Exports, rejected by the

Ld. TPO on account of functional dissimilarity vis-a-vis Cosmic Global

Services are given in Table 5 below for ready reference:

Table 5: Functions performed by Indus Networks (ITES Segment) and

Company name Cosmic Global Indus Networks Twinstar Services Ltd. (ITES Software Segment) Exports Functions The company's Company's ITES in the performed activities being operations nature of back IT enabled primarily office operation services include comprise of and medical medical providing transcriptions transcription, software (domestic sales translation and services, IT and exports) software enabled constitute the development. services, company's (for relevant manufacturing entire extracts please and others. (for operations. (for refer Annexure relevant relevant 1 of this extracts please extracts please submission) refer Annexure refer Annexure 2 of this 3 of this submission) submission) Please refer For the page no. 138 purposes of the benchmarking analysis the profitability of the company's ITES business segment has been considered.

(please refer page no. 139 of the Paper Book) TPO's Accepted Rejected Rejected

17 ITA NO. 3954/Del/2010

Disposition

13. Considering the above, in the instant case, assesee's counsel

requested that if Cosmic Global Services is accepted as a final

comparable company then the ITES Segment of Indus Networks and

Twinstar Software Exports should also be included in the final

comparable companies set on the same premise.

14. We find that retention of VishaI Information Technologies in the

final comparable set, it is pertinent to note that on accepting the top

5 high profit margin companies the Ld. TPO failed to consider the

following facts pertaining to Vishal Information Technologies which

clearly evidence that it is functionally not comparable to the

assessee

15. During the relevant year, the company is providing agency

services by way of outsourcing the services to third party vendors

and acting as an intermediary between the final customer and the

vendor. This is evident from the fact that during the last three years,

the company has incurred relatively high expenses towards

payments to vendors in comparison to pay outs to its personnel.

Table 6 below provides details of vendor payment charges as a

percentage of sales and also the personnel cost as a percentage of

sales of the company for the last three years for perusal:

18

ITA NO. 3954/Del/2010

Table 6: Trend of Payments to Personnel and Vendors

Particulars 2003-04 2004-05 2005-06 Date entry and 76,928,836 113,511,647 114,914,563 vendor payment Personnel 1,915,371 1,970,458 3,201,756 costs Sales 138,822,227 208,233,000 256,428,476 Vendor 55.42% 54.51% 44.81% payment as a percentage of sale Personnel cost 1.38% 0.94% 1.25% as a percentage of sale Appellant's NA 51.01% 55.07% Personnel cost as a percentage of sale

16. We find that the intermediary functions of Vishal can only be

compared to that of a distributor which takes title to service product

for resale to the customer. On the contrary the asessee is a provider

of back office services on its own (appellant has a wages/ sales ratio

of 55 percent as compared to a wages/sales ratio of 1.25 percent of

Vishal).

17. It is an established fact that the distributor of services is

functionally different from a contract service provider. (for detailed

submission please refer page no. 141 to 142 of the Paper book).

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ITA NO. 3954/Del/2010

Given such a low wages/ sales ratio, Vishal does not appear to be a

service provider at all but is more of distributor.

18. Further, during the relevant year, the company's parent

company Amex Information Technologies Limited ('Amex')

undertook certain restructuring exercise resulting in its entire ITES

operations being conducted through Vishal Information

Technologies.

19. As a result of the restructuring exercise, Amex sold its 100%

stake in Basiz Fund Accounting Services Limited (a separate entity

formed by conversion of the Fund Accounting KPO & E Accounting

division of Amex) to Vishal at market value. Further, Amex's E

Publishing & Digital Library divisions were also shifted to Vishal

during the said year.

20. With regard to the business operations of Vishal Information

Technologies, the company besides providing IT. enabled services

also provides technical services and solutions. For eg in respect of e-

publishing services being provided, the company has developed

automated tools to make such conversion fast and accurate. In

respect of digital library services, the company is working on text to

speech solution with C-DAC for visually challenged. (for relevant

extracts please refer Annexure 4.1 of this Submission)

20 ITA NO. 3954/Del/2010

21. However, in complete disregard of the submissions/contentions

of the assessee, the Ld. DRP/Ld. TPO stated that the assessee

cannot claim that Vishal is functionally not comparable just because

the TPO has alleged that some other companies (also considered by

the assessee) are functionally not comparable.

22. In this regard, the assessee's counsel stated that merely

because the said company was considered in the TP

documentation/fresh search by the appellant, the said fact does not

preclude the appellant from making a claim for its rejection based

on current year information and backed by real and cogent reasons

based on functional profile. In this regard, useful reference was

drawn by the Ld. Counsel of the assessee to the judgment of the

Hon'ble jurisdictional Delhi Bench of the ITAT in the case of Sony

India (P) Limited [114 ITD 448] in ITA Nos 11891 Del/200S, 8191

Del/2007 & 8201 2007] ('Sony Ruling') (for relevant extracts please

refer page no. 55.. to 56 of the Compendium of Case Laws):

"We are also not impressed by the arguments of learned

Departmental Representative that Videocon International was

included in the list of comparables furnished by the taxpayer.

In our considered opinion, there is sufficient material on record

to show that taxpayer in proceedings before the TPO as well as

before the learned CIT(Appeals) had argued that there were

21 ITA NO. 3954/Del/2010

huge differences between the taxpayer and the Videocon

International Ltd and therefore, Videocon International should

be excluded from comparison.

23. It is pertinent to note that for non-inclusion of Vishal as a

comparable, the assessee had made detailed submissions to the Ld.

TPO (refer page no. 306 to 307 of the Paper Book) as well as the Ld.

DRP(refer page no. 139.to 142 of the Paper Book).

24. The assessee also places reliance on the judgment of Hon'ble

Chandigarh Bench in the case of DCIT Vs M/s Quark Systems Pvt.

Ltd. lTAs No. 115/CHD/2009 and 100/CHD/2009] ('Quark Ruling') (for

relevant extracts please refer page 110. 87 and 89 of the

Compendium of Case Laws), wherein the Hon'ble Tribunal has

opined in the following manner:

"30. Learned Special counsel for the revenue Shri Kapila

has vehemently argued that "Datamatics" was taken as

one of the comparables by the taxpayer and no objection

to its inclusion was raised before the TPO or before the

learned CIT (Appeals) in appeal. Therefore, the taxpayer

should not be permitted to raise additional ground and

ask for exclusion of the above enterprise in the

determination of the average margins. We are unable to

accept above contention. In the first place, these are

22 ITA NO. 3954/Del/2010

initial years of implementation of Transfer Pricing

Legislation in India and taxpayers as well as tax

consultants were not fully conversant, with this new

branch of law when proceedings were initiated or even at

appellate stage .................

38. Accordingly on facts and circumstances of the case,

we hold that taxpayer is not stopped from pointing out

that Datamatics has wrongly been taken as comparable.

While admitting additional ground of appeal raised by the

assessee to require us to consider whether or not

Datamatics should be included in the comparable, we

make no comments on merit except observing that

assessee from record has shown it's prima-facie case.

25. Ld. Counsel of the assessee also stated that the issue in

dispute is squarely covered by the decision of the Tribunal in the

case of M/s TNS India Pvt. Ltd. vs. Addl. CIT passed on 27.6.2014 in

ITA No. 108/Hyd/2011 Assessment Year 2006-07 vide order dated

wherein the Vishal Information Technologies Ltd. has been excluded

from the list of comparables. The relevant finding of the Tribunal in

this regard as under:-

"We have considered submission of the parties and

perused the materials on records. As can be seen from

23 ITA NO. 3954/Del/2010

the facts on record, assessee as well as TPO has not gone

into verticals / horizontals of the ITES sector while

selecting comparables. However, as can be seen from

the materials placed on record, the employee cost of this

company is abnormally low compared to the assessee,

which presupposes that it has outsourced major portion

of its work to third parties. ITAT Mumbai Bench in case of

Maershk Global Services Centre (India) Pvt. Ltd. (14 ITR

[Trib] 541) after considering this aspect rejected it as a

comparable. Following the aforesaid decision of the ITAT

Mumbai Bench, the coordinate bench of this Tribunal in

case of M/s HSBC Electronic Data Processing India Ltd.,

vs. Addl. CIT in ITA No. 1624/Hyd/2014 dated 28.6.2013

has directed the AO to exclude this from the list of

comparables. The finding of the coordinate Bench is

extracted hereunder for convenience:

"9.2 After considering the rival contentions, we find

considerable force in the contentions advanced by the

learned counsel. There is no dispute with reference to

the fact that most of the cost incurred by the company

taken as comparable is outsourcing cost, as can be seen

from the Annual Report placed in the paper book and

ITAT, Mumbai in the case of Maersk Global Service Centre

24 ITA NO. 3954/Del/2010

(Supra) has analysed and rejected this company as

comparable, due to the reason that it has outsourced a

considerable portion of its business and it is functionally

different. This factor was also approved by the DRP in

assessee's own case in the later year, as can be seen

from the copy of the order placed on record, for

assessment year 2008-09. In view of this, we direct the

AO exclude this company from the list of comparables."

Since the aforesaid decisions of the coordinate benches

pertain to the same assessment year, following the view

expressed therein, we also direct the AO/TPO to exclude the

aforesaid company from the list of comparables.

26. Ld. Counsel of the assessee also stated that the issue in

dispute is squarely covered by the decision of the Tribunal in the

case of M/s Google India Pvt. Ltd. vs. DCIT passed on 19.10.2012 in

ITA No. 1368/Bang/2010 Assessment Year 2006-07 vide order dated

wherein the Vishal Information Technologies Ltd. has been excluded

from the list of comparables. The relevant finding of the Tribunal in

this regard as under:-

"15. As regards is issue of (8) Vishal Information

Technologies Ltd., we find that, it is adopted by the TPO.

The DRP held that Vishal Information Technologies has

25 ITA NO. 3954/Del/2010

outsourced its call centre work and, therefore, the

employee cost is less than 25% as is the common

practice among other ITES services. The TPO as well as

the DRP have recorded that in the ITES sector,

employees filter of less than 25% alone is not applicable

for the reason that in addition to the ample costs, the

commission costs are also important. When company

has outsourced its ITES services, it cannot be said that

its business results would be comparable to any other

ITES service provider rendering the services entirely on

its own. In such circumstances, the net margins of the

two comparables cannot be on the same basis. The

decisions relied upon by the learned counsel for the

assessee also held that the employee cost filter is

important filter to be adopted for the purpose of

computing ALP. In the case of Maersk Global Services

Centre (India) Pvt. Ltd., in ITA No. 3774/M/2011, the

Tribunal at Mumbai has held that Vishal Information

Technologies Ltd., has to be excluded from the list of

comparables of ITES company as it has outsourced its

services. In view of the same, we direct the AO exclude

this company also from the list of comparables.

26

ITA NO. 3954/Del/2010

27. Thus, taking the above into consideration, it can reasonably be

construed that merely because the assessee had included a

comparable in its TP documentation, it could not be debarred from

seeking rejection of that company at a later stage of assessment!

appellate proceedings. Applying the same principle, the assessee

pleads to consider the aforementioned reasons for excluding Vishal

as a comparable. Further, under TNMM, minor differences in the

business profile of the appellant and the comparables would be

evened out. However, selecting only few comparables from the

entire comparable set would defeat the meaning of application of

TNMM as the most appropriate method.

28. Further, without prejudice to the assessee's contentions of

including other low profit/loss making companies, the following

Table summarises the average operating margin results after

excluding Vishal Information Technologies from the final comparable

companies set:

Arm's Length Margin excluding Vishal

Company name OP/TC

CS Software Enterprise Ltd. 19.87%

Cosmic Global Ltd. 16.48%

Transworks Information Services Ltd. 19.62%

27 ITA NO. 3954/Del/2010

Triton Corp Ltd. 20.58%

Mean 19.14%

29. As mentioned above, the assessee's OP/TC margin as

computed by the Ld. TPO at entity level is 15.06 percent. On

application of the +/-5% range prescribed in the Proviso to section

92C(2) of the Income Tax Act, 1961, the appellant meets the arm's

length standard.

Table 7.1: Computation of Arm's length Price as per the proviso to

section 92C(2) of the Income Tax Act, 1961

Particulars Amount (INR) Total Revenue booked by 153,838,692 appellant (A) Total cost booked by appellant 133,697,881 (B) Operating Profit at 19.14% (C) 25,589,774 Operating Profit booked (D) 20,140,811 Difference (E) = (C)-(D) 5,448,963 Arm's length price (ALP) (F) = (A) 159,287,655 & (E) 105% of the ALP 167,252,038 95% of the ALP 151,323,272

30. In the background of the aforesaid discussions and

respectfully following the precedents of the Tribunal in the case of

M/s TNS India Pvt. Ltd. vs. Addl. CIT passed on 27.6.2014 in ITA No.

108/Hyd/2011 Assessment Year 2006-07 (Supra) and M/s Google

India Pvt. Ltd. vs. DCIT passed on 19.10.2012 in ITA No.

28 ITA NO. 3954/Del/2010

1368/Bang/2010 (Supra) Assessment Year 2006-07, we direct the

AO to exclude M/s Vishal Information Technologies Ltd. from the list

of comparables.

31. In the result, the Appeal filed by the Assessee stands allowed

for statistical purposes.

Order pronounced in the Open Court on 29/5/2015.

Sd/- Sd/-

[S.V. MEHROTRA] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER

Date 29/5/2015 "SRBHATNAGAR" Copy forwarded to: - 1. Appellant -

2. Respondent - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches

29