INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH “I-2”: NEW DELHI

BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
AND

SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
(Through video Conferencing)

ITA No. 5665/Del/2016

(Assessment Year: 2007-08)

Orange Business Services India Vs. DCIT,
Circle-3,
Solutions Pvt. Ltd, Gurgaon

(earlier known as Equant Solutions (Respondent)

India Pvt. Ltd)
Tower-B, 8th Floor, DLF Infinity Tower,

Phase-II, Cyber City, Sector-25,

Gurgaon

PAN: AABCE4540P

(Appellant)

Assessee by : Shri Ravi Sharma, Adv
Revenue by: Shri H. K. Chourdhary, CIT DR
Date of Hearing
Date of pronouncement 28/08/2020
25/11/2020

O R D E R

PER PRASHANT MAHARISHI, A. M.

1. This appeal is filed by Orange business services India solutions private limited (earlier
known Equant solutions India private limited) (assessee/appellant ) against the order of The
Deputy Commissioner Of Income Tax, Circle – 3, Gurgaon passed u/s 143 (3) read with
Section 144C of The Income Tax Act 1961 (The Act) dated 31st of August 2016 wherein the
return filed by the assessee on 31 October 2007 declaring a taxable income of Rs 769,642
was assessed at ₹ 75,977,580/– wherein the addition on account of the arm’s-length price of
the international transaction was of ₹ 75,207,938/– in pursuance of the direction of the
learned Dispute Resolution Panel – I, New Delhi (the learned DRP) is made.

2. Assessee aggrieved with that order has preferred this appeal raising following grounds of

appeal:-

“1. The Learned Assessing Officer (‘Ld. AC))/ Learned Transfer Pricing Officer (‘Ld.
TPO’) (following the directions of the Hon’ble Dispute Resolution Panel (‘Hon’ble
DRP’)) erred on facts and in law in enhancing the income of the Appellant by Rs.
7,52,07,938 without appreciating the factual positions/ submissions of the Appellant.

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2. The Hon’ble DRP grossly erred on facts and in law in not following the specific
directions of the Hon’ble Tribunal and in doing so exceeded its jurisdiction by giving
the following directions;

2.1. Inclusion of Maple E-Solutions Ltd and Triton Corp Ltd - deviating from the
directions of the Hon’ble Tribunal that companies whose directors were
involved in fraud cannot be taken as comparable as their financials are not
reliable;

2.2. Inclusion of Vishal Information Technologies Limited- deviating from the
directions of the Hon’ble Tribunal that companies acting merely as
intermediary having outsourced its activity cannot be taken as comparable;

2.3. Inclusion of Persistent Systems Limited, Sasken Communications
Technologies Limited (Seg), Accentia Technologies Limited , Mold-Tek
Technologies Limited- deviating from the directions of the Hon’ble Tribunal
that companies with extra ordinary circumstances, like those which suffered
events like merger/demerger, impacting the financial results cannot be taken
as comparable;

2.4. Inclusion of functionally dissimilar companies - deviating from the directions
of the Hon’ble Tribunal that companies which are functionally dissimilar
cannot be taken as comparable.

3. The Hon’ble DRP grossly erred on facts and in law in not following the rule of
consistency, by including Accentia Technologies and Vishal Information
Technologies Limited as comparable in AY 2007-08 and holding the same companies
incomparable in the immediately subsequent year (AY 2008-09).

4. The Ld. AO/ Ld. TPO (following the directions of the Hon’ble DRP) erred in
enhancing the income of the Appellant by Rs. 7,52,07,938 holding that the
international transactions of the Appellant pertaining to provision of information
technology enabled services (‘ITeS’) segment and contract software development
(‘CSD’) segment do not satisfy the arm’s length principle envisaged under the Income
Tax Act, 1961 (‘the Act’) and in doing so, have grossly erred in:

4.1. not appreciating that none of the conditions set out in section 920(3) of the
Act are satisfied in the present case;

4.2. ignoring the fact that the Appellant is entitled to tax holiday under section
10A of the Act on its profit and therefore would not have any untoward motive
of deriving a tax advantage by manipulating transfer prices of its
international transactions;

4.3. disregarding the functional analysis submitted by the Appellant in the
Transfer Pricing (‘TP’) documentation with respect to ITeS segment and
classified the Appellant as a Knowledge Process Outsourcing (‘KPO’) service
provider;

4.4 disregarding the Arm’s Length Price (‘ALP’) as determined by the Appellant
in the TP documentation maintained by it in terms of section 92D of the Act
read with Rule 10D of the Income-tax Rules, 1962 (‘Rules’) as well as fresh
search; and in particular modifying/ rejecting the filters applied by the
Appellant;

4.5. disregarding multiple year/ prior years’ data as used by the Appellant in the TP
documentation and holding that current year (i.e. FY 2006-07) data for comparable
companies should be used despite the fact that the same was not necessarily available

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to the Appellant at the time of preparing its TP documentation, and in doing so have
grossly erred in;

4.5.1. interpreting the requirement of ‘contemporaneous’ data in the Rules to
necessarily imply current/ single year (i.e. FY 2006-07) data; and

4.5.2. holding that at the time of creating/ maintaining the TP documentation, the
Appellant could have procured current/ single year data (i.e. FY 2006-07
data) from sources other than the electronic databases, when in fact
practically no such other sources were available in case of most companies;

4.6. collecting information of the companies by exercising power granted to him under
section 133(6) of the Act that was not available to the Appellant in the public domain
and relying on selective information for comparability purposes (and to the extent of
completely ignoring reliable data available in public domain/ annual reports in
numerous cases) and in doing so violating the fundamental principles of natural
justice by relying on the information sourced under section 133(6);

4.6.1. and in doing so violating the fundamental principles of natural justice by
relying on the information sourced under section 133(6); and also by

4.6.2. not sharing with the appellant, in case of a number of comparables, the
information/ reply received by the TPO/ AO u/s 133(6);

4.7. rejecting comparability analysis undertaken by the Appellant in the TP
documentation/ fresh search and conducting a fresh comparability analysis based on
application of the following additional/ revised filters in determining the ALP for the
international transactions:

4.7.1. exclusion of companies having different financial year ending (i.e. not March
31, 2007);

4.7.2. exclusion of companies with export sales that are less than 25% of their total
revenue;

4.7.3. exclusion of companies with diminishing revenues/ persistent losses for last
three years upto and including FY 2006-07;

4.7.4. exclusion of companies with related party transactions (‘RPT’) greater than
25% of their sales;

4.7.5. adopting employee cost/ revenues filter greater than 25% of their total
revenues as a search criteria for short listing and evaluating comparables for
contract software development services; and rejecting, in particular, the
following filters applied by the Appellant in its TP documentation/ fresh
search:

4.7.7. companies with operating income (i.e. income other than manufacturing and
trading income) to sales greater than 50% were accepted;

4.7.8. companies with net worth less than zero were rejected;

4.7.9. companies having research & development costs to sales less than 3% were
accepted; and;

4.7.10.companies having advertising, marketing and distribution costs to sales less
than 3% were accepted.

4.8. without prejudice to the Appellant’s other contentions, failing to apply the employee
cost to sales ratio filter to the ITES segment [as applied vis-a-vis the CSD segment]
and thereby adopting an inconsistent stand between ITES and CSD comparables and

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applying this filter selectively only to the CSD segment; more so when the said filter
was applied to the ITES segment in the previous assessment year i.e. AY 2006-07 and
thus acting in an inconsistent and arbitrary manner;

4.9. including companies having high margin / volatile operating profit margins in the
final comparables’ set for benchmarking a low risk captive unit such as the Appellant
(disregarding judicial pronouncements on the issue), thus demonstrating an intention
to arrive at a pre-formulated opinion without complete and adequate application of
mind with the single-minded intention of making an addition to the returned income
of the Appellant;

4.10. including certain companies that are not comparable to the Appellant in terms of
functions performed, assets employed and risks assumed;

4.11. resorting to arbitrary rejection of low-profit/ loss making companies based on
erroneous and inconsistent reasons;

4.12. excluding certain companies on arbitrary/ frivolous grounds even though they are
comparable to the Appellant in terms of functions performed, assets employed and
risks assumed;

4.13. ignoring the business/ commercial reality that since the Appellant (vis-a-vis both its
ITES/ CSD services) is remunerated on an arm’s length cost plus basis, i.e. it is
compensated for all its operating costs plus a pre-agreed mark-up based on a
benchmarking analysis, the Appellant undertakes minimal business risks as against
comparable companies that are full- fledged risk taking entrepreneurs, and by not
allowing a risk adjustment to the Appellant on account of this fact;

4.14. not allowing the appellant the application of (+/-) 5% range available as per the
proviso to section 92C(2) of the Act; and

4.15. disregarding judicial pronouncements in India in undertaking the TP adjustment;

5. The Ld. AO/TPO grossly erred in not taking cognizance of adopting the computation
of operating mark-up of comparable companies as per Safe Harbour Rules, 2013 as
directed by the Hon’ble DRP. Hence, ignoring the fact that the said directions are
binding on the Ld. AO as per Section 1440(13) of the Act.

6. The Hon’ble DRP erred in disregarding the detailed arguments/ submissions put
forth by the Appellant during the course of the DRP/ assessment proceedings while
passing its direction under section 144C of the Act;

7. That the Ld. AO erred on facts and in law in charging interest under sections 234 A,
B, C and D of the Act;

8. The Ld. AO has grossly erred by initiating penalty under section 27i(i)(C) of the Act
mechanically and without recording any satisfaction for its initiation.”

3. Brief facts of the case shows that assessee is a subsidiary of EGN Bv Netherlands and is
engaged in providing IT enabled network management/technical support and other back-
office support services. Assessee is also engaged in providing contract software development
services for developing software application for use within the group.

4. The assessee filed its return of income on 31/10/2007 declaring a taxable income of ₹
769,642/–. During the course of assessment proceedings it was found that assessee has
entered into certain international transaction and therefore the reference was made to the
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learned transfer pricing officer to determine the arm’s-length price of those international
transactions assessee reported following international transaction in its Form no 3CEB
report.

Serial nature of transaction amount in rupees

number 97,11,94,161
3,42,43,723
1 software development services/IT enabled services 1,60,71,371
4,73,41,015
2 purchase of fixed assets

3 interest on loan

4 reimbursement of expenses paid

5. The assessee benchmarked these international transactions by adopting the transactional net
margin method as the most appropriate method. The assessee aggregated both the
transactions of software development services and IT enabled services. Assessee selected 18
comparables with an average profit margin at the rate of 13% on its cost and mark up on total
cost to the taxpayer is arrived at 15% on cost and therefore it was stated in transfer pricing
study report that the price charged by assessee is at arm’s-length.

6. The learned transfer pricing officer agreed with the most appropriate method of the
transactional net margin method however rejected the filter applied by the assessee. He also
segregated the transactions of the software development services and IT enabled services.
With respect to the IT enabled services he selected 26 comparable companies whose average
Arithmetic mean of profit level indicator was 29.42% and after that he has granted working
capital adjustment of 3.13% and therefore the adjusted Arithmetic mean of profit level
indicator was 26.29%. He applied the above margin on the operating cost of ₹ 698,079,289
resulting into the arm’s-length price of ₹ 881,604,314 whereas the price shown by the
assessee was 80,60,91,154 and therefore proposed a shortfall/adjustment on account of ITeS
services of ₹ 75,513,180.

7. Similarly with respect to the software development services he selected 26 comparables
whose Arithmetic mean of profit level indicator was 25% and thereafter granted working
capital adjustment of 2.87 percentage and therefore the adjusted mean PLI was derived at
22.13%. He applied on the total operating cost of ₹ 145,867,314 the above ratio and
determine the arm’s-length price of the international transaction as Rs 17,81,47,750 against
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the price charged by the assessee of ₹ 165,103,007/– and therefore proposing the
shortfall/adjustment on account of software development services of Rs 1 30,44,743. The
order u/s 92CA of the Income Tax Act was passed on 25th of October 2010 by The
Additional Commissioner Of Income Tax (Transfer pricing) – 1 (2), New Delhi. The
assessee preferred objection is before the Dispute Resolution Panel – 1, New Delhi who
passed its direction. The DRP confirmed the adjustment proposed by the TPO. Consequently
the final assessment was passed by the learned assessing officer u/s 143 (3) making an
adjustment of ₹ 88,557,923/– to the assessee is returned income. The assessee preferred an
appeal before the coordinate bench which remanded the matter back to the learned Dispute
Resolution Panel for fresh adjudication. Consequent to that the learned Dispute Resolution
Panel has issued a direction u/s 144C (5) on 29th of June 2016 in case of the assessee and
directed the TPO to recompute the transfer pricing adjustment after making the revised
calculations. The learned transfer pricing officer then revised conclusion wherein for
software development services, he selected 25 comparables whose average mean of the
profit level indicator was 23.55% and after granting working capital adjustment the adjusted
mean was derived at 20.97% and according to that the arm’s-length price was derived at ₹
176,455,689 and adjustment based on the direction of the learned Dispute Resolution Panel
was Rs. 1 30,52,682/–. Similarly for ITeS segment the average mean of PLI was determined
at 27.69% of 25 comparables and after granting working capital adjustment of 3.07% the
adjusted mean was derived at 24.62% and thereafter the adjustment of Rs. 6,38,55,256/– was
made. The learned Transfer Pricing Officer passed an order in pursuance to the direction of
the Dispute Resolution Panel in pursuance to the direction of the coordinate bench on 29
June 2016. Consequently the final assessment order was passed by the learned assessing
officer on 31st of August 2016 u/s 143 (3) read with Section 144C of the income tax act 1961
on 31st of August 2016 determining the total income of the assessee at ₹ 75,977,580/– against
the returned income of the assessee of Rs. 7,69,004 642/–.

8. At the time of the hearing it was pointed out that there is a rectification order dated 2 June
2019 passed wherein the adjustment on account of information technology enabled services
segment was revised to RS NIl. Therefore the assessee does not want to press upon the
grounds related to that addition. Therefore the only addition remains is with respect to the
software development services segment. Assessee objects to inclusion of Infosys
technologies Ltd, Wipro Ltd, celestial labs Ltd, thirdware solutions Ltd and persistent
Systems Ltd.

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9. The learned authorised representative submitted a detailed chart along with the annual
financial statements of the comparable companies and has raised several objections with
respect to inclusion of the above comparable selected by the learned Transfer Pricing Officer
and retained by the learned Dispute Resolution Panel. He also referred to plethora of judicial
precedents to support his case.

10. The learned departmental representative vehemently supported the order of the learned
transfer pricing officer/dispute resolution panel.

11. We have carefully considered the rival contentions and perused the orders of the lower
authorities.

12. With respect to the Infosys technologies Ltd in assessee’s own case for assessment year 2010
– 11 the coordinate bench in ITA number 1202/del/2015 has directed to exclude this
company from comparability analysis based on the reason of comparable company is having
huge brand value. The order of the coordinate bench has further been affirmed by the
honourable Punjab and Haryana High Court. Further the learned Dispute Resolution Panel in
assessee’s own case for assessment year 2010 – 11 placing reliance on the decision of the
honourable Delhi High Court in Agnity India technologies private limited ITA number
1204/2011 has also excluded this comparable. The learned departmental representative could
not show us any reason to retain this comparable on those two grounds. Accordingly we
direct the learned assessing officer/TPO to exclude Infosys technologies Ltd from the
comparability analysis.

13. With respect another comparable Wipro Ltd’s turnover is Rs. 9668 crores against the
assessee’s total sales and turnover is of ₹ 17 crores. The turnover of the comparable is more
than 500 times the size of the assessee. The honourable Bombay High Court in case of CIT
versus Pentair water India private limited [2016] 69 taxmann.com 180 (Bombay)[16-09-
2015] has held that where comparable has multiple times of turnover over the size of the
assessee, same is not comparable. This particular comparable was excluded in that particular
case where the turnover was Rs. 939 crores of the comparable company against the turnover
of the assessee of only ₹ 11 crores. Therefore respectfully following the decision of the
honourable Bombay High Court we direct the learned transfer pricing officer/assessing
officer to exclude Wipro Ltd as a comparable company from the comparability analysis.

14. With respect to persistent Systems Ltd in assessee’s own case for assessment year 2000 – 11
this comparable company was rejected in ITA number 1202/del/2015 which has been
affirmed by the honourable Punjab and Haryana High Court. Therefore respectfully
following the decision of the honourable High Court, in absence of any distinguishing facts

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and features brought to our notice, we direct the learned transfer pricing officer/AO to
exclude the above comparable company.
15. Accordingly we direct the learned Transfer Pricing Officer/AO to exclude the above three
comparable companies from the comparability analysis for software development segment.
Accordingly ground number four of the appeal of the assessee is partly allowed.
16. The assessee submitted before us that if Infosys Limited, Wipro Ltd and persistent Systems
are excluded from the comparability analysis, he does not want to press any other further
arguments with respect to the transfer pricing adjustment. As we have already directed the
learned AO/TPO to exclude the above three comparables, all other grounds of appeal are
disposed of as dismissed without further adjudication.
17. Accordingly appeal of the assessee is partly allowed.
Order pronounced in the open court on 25/11/2020.

-Sd/- -Sd/-

Sd/- Sd/-
(AMIT SHUKLA) (PRASHANT MAHARISHI)
JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated : 25/11/2020
A K Keot

Copy forwarded to

1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT

ASSISTANT REGISTRAR
ITAT, New Delhi

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Date of dictation 25.11.2020
Date on which the typed draft is placed before the dictating member 25.11.2020
Date on which the typed draft is placed before the other member 25.11.2020
Date on which the approved draft comes to the Sr. PS/ PS 25.11.2020
Date on which the fair order is placed before the dictating member 25.11.2020
for pronouncement
Date on which the fair order comes back to the Sr. PS/ PS 25.11.2020
Date on which the final order is uploaded on the website of ITAT 25.11.2020
date on which the file goes to the Bench Clerk 25.11.2020
Date on which the file goes to the Head Clerk
The date on which the file goes to the Assistant Registrar for
signature on the order
Date of dispatch of the order

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