Iqor India Services Pvt. Ltd., New Delhi vs Assessee

iQor India Services Private Ltd., Vs. ITO, Ward 11(4) B-92, 9th Floor, Himalaya House New Delhi 23, K.G. Marg New Delhi - 110 001.

(PAN: AABCI2835F)

ITA NO.5934/DEL/2012 (ASSESSMENT YEAR: 2007-08)

ITO, Ward 11(4) Vs. iQor India Services Private Ltd., New Delhi B-92, 9th Floor, Himalaya House 23, K.G. Marg New Delhi - 110 001.

(PAN: AABCI2835F)

(Appellant) (Respondent)

Date of Hearing : 25.03.2015 Date of Pronouncement : .....04.2015

Appellant by : Shri Arun Chhabra & Ms Kanika Makkar, CAs Respondent by : Shri Judy James, Standing Counsel DR

PER GEORGE GEORGE K., JM:

These are the cross appeals directed against the CIT(A)'s order dated

28.09.2012. The relevant assessment year is 2007-08. 2

ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

2. In assessee's appeal (ITA No.6034/Del/2012), 16 grounds are raised,

however, in the course of hearing, the Ld. Authorised Representative of the

assessee company confined his arguments for exclusion of four companies from

the comparable list as taken by the TPO.

3. In Revenue's Appeal (ITA No.5934/Del/2012), the solitary effective

ground raised reads as follows:

"1. Whether on the facts and circumstances of the case, Ld. CIT(A) was correct in directing to keep comparable M/s Mold Tek Technologies Ltd. away from the list of comparable in view of the CBDT's Circular No SO 890(E) dated 28.09.2000 wherein it is held that "Engineering Design" is within the ambit of IT Enable Services".

4. We shall first take up for adjudication the assessee 's appeal.

ITA NO.6034/Del/2012 (ASSESSEE'S APPEAL)

5. The brief facts of the case are that the assessee is a company,

incorporated on 30.09.2004. The assessee is subsidiary of Intellirisk

Management Corporation (IRMC, US) providing information technology

enabled services (ITES) to its AE namely, IRMC US for the relevant financial

year. In the TP documentation, the assessee was characterized as limited risk IT

enabled service provider, rendering call centre and support service to its AE.

The assessee had undertaken the following international transaction with its

AE :-

3

ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

S. No. Description of each transaction Amount

1. Management support services fee 1,89,72,148

2. Information Technology enabled 11,51,05,389

3. Reimbursement of expenses incurred 4,45,50,064 on behalf of AE

6. With reference to international transaction in Sl.Nos. 1 & 2 in assessee's

transfer pricing study, seven comparables were taken and three years weighted

margin of the comparables were determined at 16.95%. The assessee margin

was shown at 15.90% and therefore it was stated in the TP study, the

international transactions were at arm's length.

7. The TPO rejected the transfer pricing study conducted by the assessee.

The TPO conducted an independent search of comparable, based on the

Functions, Assets and Risks (FAR) of the assessee. The TPO also used a

different set of filters to select the comparables and arrived at twenty five

comparable companies. The TPO adopted the current year's data to compute the

margins of the comparables. After providing the working capital adjustment,

profit level indicator (PLI) of the comparables was computed at 28.29%. Since

the assessee margin was not within the permissible range, adjustment of Rs.

1,43,39,353/- was made to international transaction. The computation of the

arm's length price done by the TPO reads as follows:-

"25. Computation of Arms Length Price :

The arithmetic mean of the Profit Level indicator is taken as the arms length margin (Please see Annexure E for details of 4 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

computation of PLI of the comparables). Based on this, the arms length price of the IT enabled services rendered by you is computed as under :

Arithmetic mean PLI : 30.07% Less: Working Capital adjustment (Annexure-F): 1.78% Adj. Arithmetic mean PLI : 28.29%

Arms Length Price:

Operating Cost Rs.115,688,589 Arms Length Margin 28.29% of the Operating Cost Arms Length Price (ALP) Rs.148,416,890

26. Price received vis-a-vis the Arms Length Price:

The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under :

Arms Length Price Rs.148,416,890 Price shown in the Rs.134,077,537 international transactions Shortfall being adjustment u/s Rs. 14,339,353 92CA

8. There is no dispute with regard to the most appropriate method adopted

by the assessee, namely, Transaction Net Margin Method (TNMM). The PLI

used by the taxpayer was operating profit/total cost (OP/TC) which also

accepted by the TPO.

9. Aggrieved by the adjustment made to the arm's length price, assessee

preferred an appeal to the CIT(A). The CIT(A) partly rejected the objection of

the assessee.

5 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

10. Aggrieved by the order of CIT(A), the assessee is in appeal before us,

raising sixteen grounds. However, in the course of hearing of appeal, the

Authorised Representative confined his arguments to Ground No 7, namely,

whether the CIT(A) was justified in including in the list of comparables

companies, the following four companies:-

(i) Eclerx Services Pvt. Ltd (ii) Vishal information Technology Ltd. (iii) Maple E Solutions Ltd. (iv) Triton Corporation Ltd.

11. The brief submission made by the Authorised Representative for the

assessee with respect to each of the above comparable four companies read as

follows :

"Eclerx Services Limited ('Eclerx') - (Refer Page 9 of Chart of Issues) The difference in the operating margins of Eclerx (OP/TC of 89.33%) vis-a- vis the Appellant operating with a margin of 15.90%.

In this regard, it is respectfully submitted that the ITAT Special Bench (Mumbai), in case of Maersk Global Centres (India) Private Limited Vs. ACIT Cir 6(3) ((I .T.A. No.7466/Mum/2012),para no. 99, (page 695-696 of the paperbook) has held that companies earning abnormally high profits should invite further investigation to ascertain whether the entities earning such super normal profits should be included in the list of final comparables or not.

Eclerx is engaged in providing data analytics services with expertise in financial services and retail and manufacturing. The services provided by the company are high end in nature involving special knowledge and domain expertise and hence the company ought not to be compared to a low end ITES service provider like the Appellant engaged in providing call centre services for various industries. The above is supported by this company's own reply to the notice u/s 133(6). (Refer page 976-979 of the paper-book) 6 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

The Appellant draws your attention to the ruling of the Hon'ble Special Bench in the matter of 'Maersk Global Centres (India) Private Ltd vs ACIT (I .T.A. No.7466/Mum/2012) (Please refer page 692-694 of the paper-book). The relevant portion of the said ruling is produced here-in-under:

"In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals - financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns.

For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tek Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 7 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

comparables finally taken by the AO/TPO as per the direction of the DRP."

Emphasis supplied

The Appellant humbly contends that the aforesaid ruling is equally applicable to the case of the Appellant. The Appellant is a low end service provider engaged in providing call center services to itsAE. It is respectfully submitted that majority of the workforce of the Appellant comprises of graduates and undergraduates and the services provided by Appellant does not require any specialized knowledge or skills. In view of the above it is pleaded that this company be rejected. The Appellant's contentions are fortified by several rulings of the coordinate benches of the Hon'ble ITAT. These rulings are produced here-in-under for the kind perusal of your honours:

• M/s. United Health Group Information v/s ACIT (ITA No. 6312/Del/2012) AY 2008-09 • ITO vs. M/s. Knoah Solutions (P) Ltd. (ITA No.1407/Hyd/13) AY 2007-08 Para 8 (Page 705-706 of the paperbook) • M/s. Capital IQ Information Systems (India ) Pvt. Ltd. (ITA No.124/Hyd/2014) AY 2009-10 Para 18.2 (Page 700-701 of paperbook ) • Cognizant Technology Services Pvt. Ltd. Vs. ACIT (ITA.Nos. 2106 & 1864/Hyd/2011) AY 2007-08 & 2008-09 (Page 709-719 of the paperbook) • Zavata India Private Limited Vs. The DCIT (ITA No.1781/Hyd/2011) AY 2007-08 (page 722-723 of the paperbook) • C3i Support Services P. Ltd. Vs. ACITT (TA.No.2183/Hyd/2011) AY 2007-08 (page 737-738 of the paperbook) • M/s. Excellence Data Research Pvt. Ltd. vs. Income Tax Officer Ward 2(1) AY 2009-10 (ITA No.159/Hyd/2014) (page 746-747 of the paperbook) • M/s. Hyundai Motors India Engineering P. Ltd. Vs. DCIT AY 2009-10 (ITA No.255/Hyd/14) (page 753 of the paperbook) • M/s. Maersk Golbal Service Centres (India) Private Limited vs DCIT AY 2009-10 (ITA No. 2594/Mum/2014) ( refer page 1204-1205 of paperbook) • HSBC Electronic Data Processing India Private Limited vs DCIT AY 2009-10(ITA No. 247/Hyd/2014)( refer page 1185-1190 of paperbook) • M/s. Berkadia Services India Private Limited vs DCIT AY 2009-10(ITA No. 1802/hyd/2013)(refer page 1339-1341 of paperbook)

Vishal InformationTechnologies Private Limited ('Vishal')(Refer Page 18 of Chart of Issues) The Appellant had raised the claim for rejection of Vishal during the assessment proceedings and before the CIT(A).

8 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

Vishal is engaged in diversified activities such as e-publishing. It is therefore functionally different from the Appellant.

Hon'ble Delhi bench of the tribunal has ruled in the favour of exclusion of this company in the matter of United Health Group Information Services Pvt. Ltd. vs. ACIT (ITA No. 6312/Del/2012) (page885-886 of the paperbook) Para 12.2 on the grounds of being engaged in different business vertical namely E Publishing , document scanning and indexing.

Further, your Honours' attention is invited to the difference in the operating margins of Vishal (OP/TC of 51.19%) vis-a-vis the Appellant operating with a margin of 15.90%.

In this regard, it is respectfully submitted that the Hon'ble High Court in the case of B.A. Continuum India Private Limited (I.T.A.A. No. 440 of 2014) has upheld the rejection of Vishal by relying on the ITAT ruling in the case of M/S Brigade Global Services Private Limited vs ITO ward 1(1) AY 2005-06 [143 ITD 59] wherein Vishal has been rejected on account of the fact that its employee cost to total cost ratio is very low.

It is also respectfully submitted that the ITAT Special Bench (Mumbai), in case of Maersk Global Centres (India) Private Limited Vs. ACIT Cir 6(3) (Supra),para no. 99, (page 695-696 of the paperbook)has held that companies earning super normal profits should invite further investigation to ascertain whether the entities earning such super normal profits should be included in the list of final comparables or not.

In that case it is noted by the Hon'ble bench that the DRP has itself rejected Vishal on account of functional differences particularly taking note of its low employee cost and outsourcing model.

Your Honours' attention is also invited to the recent decision of the Honble Delhi bench in case of Techbooks International Pvt. Ltd. Vs. ACIT Cir-1, ITA No.4990/Del/2011, Noida, AY 2007-08 Para 21-24, (page 854 of the paperbook),wherein, after a detailed analysis, Hon'ble Bench has rejected VishaL as a comparable even though the assessee had initially included the same as a comparable company. The Tribunal took note of the low employee cost of Vishal at 3% as compared to 60% and the outsourced model of operation as signified by data entry charges. The said decision pertains to AY 2007-08 and is squarely applicable to the Appellant's case, whose wages/total cost ration stands at 58.01%. (Refer page no. 92 & 361 of the paper-book).

Similar view has been held by Hon'ble Delhi Bench in the case of Heartland Delhi Transcription & Services Private Limited vs ITO Ward - 12(3)AY 9 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

2005-06 (ITA No. 6043/Del/2012) (Refer page 1320-1321 of paperbook ) wherein the bench has rejected Vishal on account of the fact that it has different business model.

Furthermore it is humble submission of the Appellant that the Ld. TPO has used the information obtained u/s 133(6) to refute the contentions of the Appellant (Refer page no. 59-60 of the TPO order). However the information has been used in relation to subsequent financial year, i.e. FY 2007-08. However, the same has not been shared with the Appellant.

The significant functional differences coupled with the fact that Vishal is a very high profit making company and operates on an outsourcing model warrants rejection of the same as comparable particularly in view of the above cited decisions.

The Appellant also invites the attention of the Hon'ble bench to the fact that this company was rejected by the Ld. CIT(A) in the Appellant's own case pertaining to AY 2008-09.

In the following cases, where the assessee was an ITeS service provider, revenue's contention to include Vishal was rejected by the Hon'ble Tribunal:

• M/s. United Health Group Information v/s ACIT (ITA No. 6312/Del/2012) AY 2008-09 ( refer page885-886 of paperbook) • M/s Mercer Consulting (India) Private Limited vs DCIT (ITA No. 966/Del/2014) • M/s. Google India Private Limited vs. DCIT (I.T.(TP). A. No. 1170/Bang/2011) AY 2007-08 Para 20 (page 881 of the paperbook) • C3i Support Services P. Ltd. Vs. ACITT (TA.No.2183/Hyd/2011) AY 2007-08 Para 12.4.1 (page 736-738 of the paperbook) • Symphony Marketing Solutions India Pvt. Ltd. vs ITO [IT(TP)A No. 1316/Bang/2012] AY 2008-09 para 17, page no. of paperbook volume (page 865-869 of the paperbook) • ACIT VS Maersk Global Service Centre (India) Private Limited ITA.

No.3774/Mum/2011, AY 2005-06 para 48 (page 873 of the paperbook) • Capial IQ Information Sytems (India) (P.) ITA No. 1961/Hyd/2011, AY 2009-10 Para 17, (page 830-831 of the paperbook) • Zavata India Private Limited Vs. The DCIT (ITA No.1781/Hyd/2011)AY 2007-08 Para 17 (page 720-721 of the paperbook) • M/s. Maersk Golbal Service Centres (India) Private Limited vs DCIT AY 2009-10 (ITA No. 2594/Mum/2014) (page 1203-1204of the paperbook) • M/s. BNY Mellon International Operations India (Private) Limited vs DCIT AY 2008-09 (ITA No. 2380/PN/2012) (page 1262-1265of the paperbook) 10 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

In view of the above it is pleaded that this company be rejected from the comparables list.

Maple ESolutions Limited ('Maple')and Triton Corp Limited ('Triton')(Refer page 24 of Chart of Issues) The Appellant humbly submits that the promoters of these companies were involved in the fraud, albeit for earlier years. Hence the financial results of these companies may be distorted and accordingly cannot be relied upon. The above view is fortified by the following judicial precedents:

• M/s. Capital IQ Information Systems (India ) Pvt. Ltd. vs. DCIT (ITA No.1961/Hyd/2011) AY 2007-08 Para 19 (page 831-832 of the paperbook) • ITO vs. CRM Services India (P) Ltd.(ITA No. 4068 (Del)/2009) AY 2006- 07 (page 889-891 of the paperbook) • M/s.Stream International Services Pvt.Ltd vs. ACIT AY 2007-08 (ITA No. 8290/Mum/2011) (page 1351-1352 of the paperbook) • M/s. Pentair Water India Pvt. Ltd. vs. ACIT (ITA NO. 02/PNJ/2013) and ACIT vs. M/s. Pentair Water India Pvt. Ltd. (ITA NO. 05 /PNJ/2013) AY 2006-07 Para 4.3.1 (i) (page 893 of the paperbook) • M/s. IVY Comptech Pvt. Ltd. vs. The ACIT (ITA No. 1558/Hyd/2010) AY 2005-06 Para 7(b) (page 899 of the paperbook) • M/s. Market Tools Research Pvt. Ltd. vs. DCIT ((ITA No.1150/Hyd/2011) AY 2005-06 Para 16 (page 902 of the paperbook) • M/s. HSBC Electronic Data Processing India Ltd. vs. ACIT AY 2006-07 (ITA No.1624/Hyd/2010 & Stay Application No.210/Hyd/2012 therein) Para 12.1 (page 906 of the paperbook) • M/s.Stream International Services Pvt.Ltd vs. The Director of Income tax (ITA No.8997/Mum/2010) AY 2006-07 Para 17, (page 911 of the paperbook)

Furthermore, this company has income to the tune of INR 5.8 crores from trading of IT peripherals, which is more than 10% of the total revenue of this company. No segmental information has been reported and during FY 2008- 09 the Ld. TPO has himself rejected this company on this ground.

Also, the Ld. TPO himself rejected Triton in the first show cause notice issued by it dated 7th May 2010 and introduced it in the set in the second notice dated 27th August,2010.

In view of the above, it is pleaded that this company be excluded from the comparables list.

11

ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

Although the Appellant has challenged the selection of few other comparables, however, if the rejection of Mold-tek is upheld and Eclerx, Vishal , Maple and Triton are later rejected then the margin earned by the Appellant from the international transaction falls within the+/- 5% range."

12. Per contra, the Ld. Departmental Representative strongly supported the

assessment order.

13. We have carefully perused the orders of the authorities below along with

relevant documentary evidences brought to our notice during the course of

hearing. Let us now consider the companies which have been strongly objected

by the Ld. Counsel for being considered in the final list of comparables.

(i) Eclerx Services Ltd.

Eclerx is engaged in providing data analytics services with expertise in

financial service and retail and manufacturing. The service provided by the

company are high end in nature involving special knowledge and domain

expertise and therefore, not functionally comparable with the assessee company

which is engaged in providing low end ITES enabled call centre services to its

AE. The fact Eclerx Services Ltd. is providing high end services involving

special knowledge and domain expertise is evident from the company's own

reply to the notice u/s 133(6) which is placed at pages 976 to 979 of the paper

book filed by the assessee. The Hon'ble Special Bench of the Tribunal in case

of Maersk Global Centre (India) Private Ltd. vs. ACIT (ITA No.7466/Mumbai/ 12 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

2012) had excluded Eclerx Services Pvt. Ltd. from the list of comparables for

the reason that it is providing high end services involving specialised

knowledge and domain expertise and same cannot be compared with companies

which are mainly engaged in providing low end services to group companies.

The relevant finding of the Hon'ble Tribunal read as follows :-

"In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals - financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns.

For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tek Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company 13 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP."

The above ruling of Hon'ble Special bench is equally applicable to the facts of

this case, as it is evident from the functional profile of the assessee company

that it is a low end services provider, namely, engaged in providing call centre

servers to its AE. For the aforesaid reasons, we direct the TPO to exclude

Eclerx Services Ltd. from the final list of comparables.

(ii) Vishal Information Technology Ltd.

Vishal Information Technology ltd is engaged in diversified

activities such as e-publishing, therefore, it is functionally different from

assessee. Further, the Hon'ble Tribunal in the case of Techbooks

International Pvt. Ltd. vs. ACIT Cir-1, in ITA No.4990/Del/2011 in AY

2007-08 has also rejected Vishal as a comparable even though the

assessee in that case had initially included the same as comparable

company. The Tribunal held Vishal was having low employee cost of 3%

in comparison to 60% of assessee in that case. In the relevant year

assessee wages/total cost ratio stands at 58.01%. and therefore not

functionally comparable with the assessee company. Moreover, Vishal is

very high profit making company and operates on outsourcing model and

hence, has different business model to that of assessee. Further, the 14 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

CIT(A) in the subsequent year i.e AY 2008-09 also rejected the same

from the list of comparable in the assessee 's own case. Therefore, we

accept the contention of the Ld. Counsel and direct for the exclusion of

this company from the final list of comparables.

(iii) Maple E Solutions Ltd. and Triton Corporation Ltd.

The promoters of the company were involved in the fraud for

earlier years, hence the financial results of these companies are distorted

and accordingly cannot be relied upon. The said view has also been held

in various judicial rulings namely:

• M/s. Capital IQ Information Systems (India ) Pvt. Ltd. vs. DCIT (ITA No.1961/Hyd/2011) AY 2007-08 Para 19 (page 831-832 of the paperbook)

• ITO vs. CRM Services India (P) Ltd.(ITA No. 4068 (Del)/2009) AY 2006- 07 (page 889-891 of the paperbook)

• M/s.Stream International Services Pvt.Ltd vs. ACIT AY 2007-08 (ITA No. 8290/Mum/2011) (page 1351-1352 of the paperbook)

• M/s. Pentair Water India Pvt. Ltd. vs. ACIT (ITA NO. 02/PNJ/2013) and ACIT vs. M/s. Pentair Water India Pvt. Ltd. (ITA NO. 05 /PNJ/2013) AY 2006-07 Para 4.3.1 (i) (page 893 of the paperbook)

• M/s. IVY Comptech Pvt. Ltd. vs. The ACIT (ITA No. 1558/Hyd/2010) AY 2005-06 Para 7(b) (page 899 of the paperbook)

• M/s. Market Tools Research Pvt. Ltd. vs. DCIT ((ITA No.1150/Hyd/2011) AY 2005-06 Para 16 (page 902 of the paperbook)

• M/s. HSBC Electronic Data Processing India Ltd. vs. ACIT AY 2006-07 (ITA No.1624/Hyd/2010 & Stay Application No.210/Hyd/2012 therein) Para 12.1 (page 906 of the paperbook) 15 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

• M/s.Stream International Services Pvt.Ltd vs. The Director of Income tax (ITA No.8997/Mum/2010) AY 2006-07 Para 17, (page 911 of the paperbook)

In view of the above we direct for the exclusion of this company from the final

list of comparables.

14. Considering the functional analysis of this company discussed

hereinabove and in the light of the various orders of the Tribunal (supra), we

direct for the exclusion of the Eclerx Services Ltd., Vishal Information

Technologies Pvt. Ltd. Maple E Solutions Ltd. and Triton Corporation Ltd.

from the final list of comparables and the matter is restored back to the file of

the AO/TPO for reworking of the margins.

ITA NO 5934/Del/2012 (REVENUE'S APPEAL)

15. The DR has relied on the AO/TPO order and objected for exclusion of

Mold-tek Technologies Limited by CIT(A).

16. The CIT(A) in his order has worked out the margins of the comparables

after removing Moldtek Technologies. The relevant findings of the CIT (A) at

para 8.20 reads as follows :

"8.20 I have considered the submission and the order of the TPO. The segmental reporting of the company as quoted in the earlier paragraphs creates a sufficient doubt about the truthfulness of the results of ITES segment.

This company has two segments, ITES and Plastic division. ITES is having 100% exemption whereas on the profits of plastic 16 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

division the company has to pay tax. It is not uncommon to see such financial results where the tax exempt unit has extraordinary profit while the taxpaying unit suffers losses under the same management control. The extraordinary profits in the ITES segment reaching upto 113% for the FY 2006-07 is a pointer in this direction. In the subsequent audited accounts, this fact of ending the tax holiday for ITES segment is mentioned by the annual report and some corrective entries have been passed.

The employee cost filter might not have been used by the TPO but in the presence of extraordinary deviation from the ratio of employee cost to sales of the appellant's case cannot be simply brushed. Aside. As submitted by the appellant, this ratio (Employee cost / Sales) is much higher in the case of the appellant and 7.6% in the case of Mold-Tek Technologies Ltd. By implication, either Mold-Tek Technologies Ltd. has employed larger capital against the man power to get the kind of productivity to generate profit of 113% or the employees are so extraordinary that they have accepted the lower wages and still work so hard for the company to generate that kind of profitability. In either situation, the company becomes not comparable to the appellant.

Even on functionality ground Mold-Tek Technologies Ltd. is not comparable because the appellant is in the back office research services area whereas this comparable is mainly dealing in engineering design and detailing services, web site design services, software testing, in-house software development etc.

Therefore, I hold that this company should be excluded from the list of comparables."

17. The AR has submitted as follows :

"The department is challenging rejection of Mold-tek Technologies Limited ('Mold-tek') in view of the CBDT Circular No.SO890(E) dated 28/09/2000 wherein it was held that engineering design is within the ambit of IT enabled services. There is no infirmity in the order of CIT(A) has passed a detailed well-reasoned order citing cogent reasons for rejection of the said comparable. (Refer page 52 to 56 of CIT(A)).

17 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

The rejection of Mold-tek is also warranted for the following reasons:

Your Honours' attention is invited to the difference in the operating margins of Mold-Tek Technologies Ltd. ('Moldtek') (OP/TC of 113.49%) (Refer annexure E of the TPO order) vis-a-vis the respondent operating with a margin of 15.90%.(Refer page 22 of the paperbook).

In this regard, it is respectfully submitted that the ITAT Special Bench (Mumbai), in case of Maersk Global Centres (India) Private Limited Vs. ACIT Cir 6(3) (Supra),para no. 99, (page 695-696 of the paperbook)has held that companies earning super normal profits should invite further investigation to ascertain whether the entities earning such super normal profits should be included in the list of final comparables or not.

The company is engaged in providing engineering consulting services as part of its IT operations. The company has specifically categorized its IT operations as KPO in its annual report (Refer page 518 of the paperbook). Further as per the reply u/s 133(6) the company provides engineering design drawing and detailed structural engineering using 3D and 2D software(Refer page 980-983 of the paperbook) of the Act. The structural engineering services rendered by the company are high end in nature and are in no way comparable to the low-end back office support services rendered by the assessee. In relation to this, following are the extracts of the annual report:

"Mold-Tek has designed & detailed more than 4000 buildings (120,000 tons) of various complexities following various US/ Canadian national & state codes.

Our team has expertise ranging from the conventional design &detailing tools like CAD/CAM/Stadd Pro to the contemporary software tools like X-Steel, SDS-2 and RISA."

The respondent would like to draw your attention to the fact that the company witnessed certain extraordinary circumstances in the year. As evident from the annual report of the company for FY 2006-07, the company has acquired Cross Road Detailing Inc., an engineering services KPO in April 2007. Further, the company has plans to merge M/s. Teck Men Tools Private Limited, while at the same time it also plans to demerge its entire plastic packaging business into a separate business entity. Further, the company has witnessed exponential growth as evidenced by the following statement from the annual report:

"Your Company has maintained accelerated growth as envisaged in the previous report, both in terms of Revenues and Net Profits. Overall sales have gone up by 35.17% from Rs.70.87 crore to Rs.95.80 crore largely fuelled by growth of 204% in the IT (KPO) 18 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

Division billings from Rs.375 lakhs in 2005-06 to Rs.1140 lakhs in 2006-07. Apart from enhancing billings, IT (KPO) Division has contributed towards more than doubling the profitability of your Company.......

..........The manpower, which was 40 in the year 2005, is now more than 200."

(Refer page no. 475 of the paperbook)

In addition to the above, it is also worth noting that the TPO has himself applied diminishing revenue filter wherein the companies with diminishing revenue for last three year including the relevant year were rejected as comparables by stating that the same does not reflect ITES industry trend which is growing at a CAGR of more than 40% during the last 10 years.

(Refer page no. 21 of the TPO order)

Drawing analogies from the above, the respondent humbly submits Moldek having a CAGR of 210.82 % from FY 2004-05 to FY 2006-07 (Page no. 973 of the paperbook) is also not in line with the industry trend and is an outlier. Accordingly, Moldek should be rejected as comparable company.

Further as evidenced from the annual report of the company for FY 2007-08, the company gave effect to the above scheme of amalgamation and demerger with effect from October 2006 and the entire accounts of the company for FY 2006-07 were also revised.

In the case of Toluna India Private Limited vs. ACIT AY 2007-08 (ITA No. 5645/ Del/2011) (Refer page 840 of the paperbook) it was held that a company cannot be considered as comparable because of exceptional financial results due to merger/demerger.

The respondent humbly draws your attention to the ruling of the Hon'ble Special Bench in the matter of 'Maersk Global Centres (India) Private Ltd vs ACIT (Supra)(Page 691-694 of the Paperbook). The relevant portion of the said ruling is produced here-in-under:

"In so far as the case of Mold-Tek Technologies Ltd. is concerned, it is observed from the annual report of the said company for the financial year 2007-08 placed at page 139 to 151 of the paper book that the said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further information of Mold-Tek Technologies Ltd. available on their 19 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

Website is furnished in the form of printout at page 158 to 165 of the paper book and a perusal of the same shows that it is a leading provider of engineering and design services with specialization in civil, structural and mechanical engineering services. It is stated to have a strong team of skilled resources with world class resources and skill sets. It is also stated to have consistently helped the clients to cut down design and development costs of civil, structural, mechanical and plant design by 30-40% and delivered technologically superior outputs to match and exceed expectations. It is claimed to have in-house software development team, quality control training and trouble-shooting facilities. M/s Mold-Tek is also rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of Mold-Tek as well on its website, we are of the view that the said company is mainly involved in providing high-end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low-end services........... It is also pertinent to note that while working out the operating margin of the said company, provision for derivative loss of Rs. 6.43 crores made by Mold-Tek technologies Ltd. was excluded by the A.O. treating the same as non-operating expenses whereas in the case of Rushabh Diamonds (supra), it was held by the Division Bench of this Tribunal that the gain or loss arising from the forward contract entered into for the purpose of foreign currency exposure on the export and import has to be taken into consideration while computing the operating profit...................

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

Emphasis supplied

The respondent humbly contends that the findings of the aforesaid ruling in respect of functional comparability of the company are equally applicable to the case of the respondent. The respondent is a low end service provider 20 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

engaged in providing call center services to its AE. In view of the above, it is pleaded that this company be rejected.

The respondent's contentions are fortified by several rulings of the coordinate benches of the Hon'ble ITAT. These rulings are produced here-in- under for the kind perusal of your honours:

• Capial IQ Information Sytems (India) (P.) ITA No. 1961/Hyd/2011, AY 2007-08Para 17, (page 828-828A of the paperbook) ITO vs. M/s. Knoah Solutions (P) Ltd. (ITA No.1407/Hyd/13) AY AY 2007-08 Para 8 (Page 706 of the Paperbook)

• Zavata India Private Limited Vs. The DCIT (ITA No.1781/Hyd/2011) AY 2007-08 Para 29-31 (Page 725-726 of the Paperbook)

• Lionbridge Technologies Private Limited vs. ITOAY 2008-09 (ITA No.7498/Mum/2012) Para 7 (Page 969 of the Paperbook)"

18. We have heard the rival submissions and perused the relevant material on

record. During the year under consideration, the financial results of Moldtek

Technologies as available are after the acquisition of Cross Road Detailing Inc.,

an engineering service KPO. Further as evidenced from the annual report of the

company for FY 2007-08, the company gave effect to the above scheme of

amalgamation and demerger with effect from October 2006 and the entire

accounts of the company for FY 2006-07 were also revised. In the case of

Toluna India Private Limited vs. ACIT ay 2007-08 (ITA No.5645/Del/2011), it

was held that a company cannot be considered as comparable because of

exceptional financial results due to merger/ demerger.

19. Further, the company Moldtek Technology is engaged in providing

engineering consulting services as part of its IT operations. The Company has

specifically categorized its IT operations as KPO in its annual report. The 21 ITA NO.6034/DEL/2012 ITA NO.5934/DEL/2012

Company has also accepted in its reply u/s 133(6) that the company provides

engineering design drawing and detailed structural engineering using 3D and

2D software's. The Engineering design services provided by the company are

high end in nature involving special knowledge and domain expertise and

therefore, not functionally comparable with the assessee company which is

engaged in providing low end ITES enabled call centre services. Therefore, we

hold CIT (A) is justified in excluding this company from the final list of

comparable.

20. In the result, the appeal filed by the assessee is allowed for statistical

purposes and the appeal filed by the Revenue is dismissed.

Order pronounced in open court on this 27th day of April, 2015.

Sd/- sd/- (J.S. REDDY) (GEORGE GEORGE K.) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated the 27th day of April, 2015 TS

Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A)-XX, New Delhi. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.