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Keystroke Pro India Pvt. Ltd., F-3/4, 1st & 2nd Floors, Okhla Industrial Area, Phase-I, New Delhi. Vs. Income Tax Officer, Ward 14(3), Room No. 305, C.R. Building, New Delhi.
June, 21st 2019
ITA No. 1446/Del/2016
Assessment year 2011-12



              IN THE INCOME TAX APPELLATE TRIBUNAL
                    DELHI BENCH `I-2' NEW DELHI

           BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER
                               AND
          SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER

                           ITA NO. 1446/DEL/2016
                          Assessment Year: 2011-12
      Keystroke Pro India Pvt. Ltd.,            Income Tax Officer,
      F-3/4, 1st & 2nd Floors,                  Ward 14(3),
      Okhla Industrial Area,               vs   Room No. 305,
      Phase-I, New Delhi.                       C.R. Building,
                                                New Delhi.
      Appellant                                 Respondent

                   Assessee by : Shri Sandeep Sapra, Adv.
                  Department by: Ms Saweta Nakra, Sr. DR

                Date of hearing : 14.06.2019
        Date of pronouncement : 20.06.2019


                               ORDER

PER SUDHANSHU SRIVASTAVA, JM:
                This appeal is preferred by the assessee against the

final assessment order dated 29.01.2016 passed subsequent to

the directions of the Ld. Dispute Resolution Panel-1, New Delhi

(DRP) for assessment year 2011-12.

2.0             Brief facts of the case are that the assessee company

was incorporated in the year 2000 and has been engaged in the

business         of providing Information Technology (IT) enabled

services.        During the year under consideration, the assessee


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ITA No. 1446/Del/2016
Assessment year 2011-12



company had provided services to its Associated Enterprise (AE)

M/s Keystroke Pro India Pvt. Ltd. which included sourcing,

providing and processing various types of data as well as

providing information technology enabled services including

electronic processing of data.          The services provided by the

assessee company fall within the meaning of `computer software'

as per clause (b) of item (i) of Explanation to section 10A of the

Income Tax Act, 1961 (hereinafter called 'the Act').             The

undertakings of the company at Vadodara, Gujarat and Noida are

also registered in the Software Technology Park of India (STPI) at

STPI, Gandhi Nagar and Noida respectively. The undertaking at

Noida had commenced production/manufacture on 1.9.2001 and

the assessment year under consideration is the ninth year of

operation of the undertaking while the undertaking at Vadodara

had commenced operations on 1.5.2009 and the assessment year

under consideration is the second year of operation.

2.1             The return of income was filed declaring an income of

Rs. 82,010/- after claiming deduction u/s 10A of the Act at Rs.

45,78,637/- for the undertaking at Noida and at Rs. 5,14,486/-

for the undertaking at Vadodara.          The assessee declared book

profit of Rs. 43,75,175/- u/s 115JB of the Act and also paid tax


                                    2
ITA No. 1446/Del/2016
Assessment year 2011-12



as per the provisions of section 115JB. The case was selected for

scrutiny through CASS to examine the claim of exemption u/s

10A of the Act.

2.2             During the year under consideration, the company had

also entered into international transaction of providing IT enabled

services to its UK based AE and the value of transaction was Rs.

5,33,73,181/-. The assessee had used Transactional Net Margin

Method (TNMM) to determine the Arm's Length Price (ALP) of the

said transaction. As per the assessee, this transaction was at

arm's length.             Since the value of international transaction

exceeded Rs. 5 crore, reference to the TPO was made u/s 92CA of

the Act.

2.3             The       assessee   had       selected   16   companies   as

comparables by using OP/TC to determine the Profit Level

Indicator (PLI). The average margin of the comparables as worked

out by the assessee was 12.91% whereas the assessee had

worked out its own margin at 10.94%. Based on this analysis,

the assessee had concluded that its international transactions

were at arm's length. The TPO accepted the methodology adopted

by the assessee and accepted TNMM as the Most Appropriate

Method but rejected nine comparables out of the 16 as selected


                                           3
ITA No. 1446/Del/2016
Assessment year 2011-12



by the assessee and introduced two additional comparables and

worked out the mean operating margin at 25.77%.                  Based on

this, the TPO proposed an upward adjustment of Rs. 71,54,140/-.

2.4             The assessee filed objections before the Ld. DRP

challenging the upward revision of the ALP by the TPO and the

Ld. DRP gave partial relief to the assessee by directing eClerx

Services Ltd. to be excluded from the list of comparables, TCS E-

serve Ltd. to be retained in the list of comparables, IServices India

Pvt. Ltd. to be considered as a comparable if the company passed

the filters and was functionally comparable.             Savi Infoservices

India Pvt. Ltd. was also directed to be considered as a comparable

if    this    company     passed   the   filters   and   was   functionally

comparable. The remaining comparables selected by the assessee

but not accepted by the TPO were directed to remain excluded

from the list of comparables. Direction was given to give working

capital adjustment to the assessee as per the guidelines and the

assessee's prayer for risk adjustment was not accepted.

2.5             Based on the directions of the Ld. DRP, in the final

assessment order, the margins of the comparable companies were

re-calculated by the TPO and the mean was worked out to




                                     4
ITA No. 1446/Del/2016
Assessment year 2011-12



21.07% and the revised TP adjustment was proposed at Rs.

48,92,246/-.

2.6             Now the assessee is before this Tribunal (ITAT) and has

challenged the final assessment order by raising the following

grounds:-

       "1. That the Ld. Assessing Officer (AO), Ld. Transfer
      Pricing Officer (TPO) and Hon'ble Dispute Resolution
      Panel (DRP) have erred on facts and under the law in:

      (i)   passing the impugned order which is bad in law;
      (ii)  passing the order without demonstrating that the
      Appellant Co. had motive of tax evasion;

        (iii) rejecting/not considering three (3) comparable
        companies (viz. IServices India Pvt Ltd, Savi Infoservices
        India Pvt Ltd and Microgenetics Systems Ltd) as
        selected by the Appellant Co while carrying out fresh TP
        study for AY 2011-12;

        (iv)   not considering the facts/submissions/objections
        made before them that out of the remaining eight (8)
        comparable companies as selected by TPO, TCS e serve
        Ltd. ought to be excluded on various grounds from the
        list of such comparable companies;

      (v)    Without prejudice to 1 (i) to 1 (iv) above, if high
      turnover companies having turnover of more than Rs. 200
      crores are also to be considered/taken into account, then
      there was no justification for excluding Infosys BPO as
      comparable company.






      (vi)    Without prejudice to 1 (i) to 1 (iv) above, there was
      no justification for not allowing economic adjustments for
      differences on account of risks assumed by the Appellant
      Co. vis-a-vis the comparable Cos



                                     5
ITA No. 1446/Del/2016
Assessment year 2011-12



      (vii)  inappropriately computing the operating margins
      of comparables and the Appellant and not considering
      the facts/submissions/ made before them to provide
      detailed line by line margin computation/working of the
      adjusted average OP/OC percentage of 21.07% of the 8
      comparable companies as finally retained by TPO/AO
      pursuant to directions of DRP;

             not giving effect to the rectification order dated
        (viii)
        13.03.2015 as passed by DCIT, TPO- 2(1)(1)

      2.     That the addition on account of upward transfer
      pricing adjustment of Rs.48,92,246/- as made by the
      authorities below are arbitrary, unjust, illegal and at any
      rate, without prejudice, very excessive.

        That the penalty proceedings u/s 271 (1)(c) of I.T. Act as
      initiated on the basis of TP Adjustment are illegal."



3.0              At the outset, the Ld. Authorised Representative (AR)

drew our attention to the final list of comparables which remained

after the TPO had given effect to the directions of the Ld. DRP.

The comparables are as under:-

  S.No.          Company Name                                 Adjusted OP/OC
  (i)            Informed Technologies India                       9.59
  (ii)           Accentia Technologies Ltd.                        25.21
  (iii)          Datamatics Clobal Services Ltd.                   4.65
  (iv)           E4e Healthcare Business Services Pvt. Ltd.        9.77
  (v)            Jindal Intellicom Ltd.                            13.69
  (Vi)           TCS e-serve Ltd.                                  69.31
  (vii)          Stryker Global Services Pvt. Ltd.                 17.00
  (viii)         SITEL India Ltd.                                  19.30
  Average                                                          21.07




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ITA No. 1446/Del/2016
Assessment year 2011-12



3.1             The Ld. AR submitted that the assessee was not

pressing ground nos. 1(i), (ii), (iii), (v), (vi), (vii), (viii) and 3 and 4.

The Ld. AR submitted that as per ground no. 1(iv), the assessee

was praying for exclusion for TCS E-serve Ltd. and inclusion of

IServices India Pvt. Ltd., Savi infoservices India Pvt. Ltd. and

Microgenetic Systems Ltd. The arguments of the Ld. AR vis-a-vis

the exclusion of TCS E-serve Ltd. and inclusion of the three

comparables were as under:-

    i)       TCS E-serve Ltd.

            The Ld. AR submitted that the assessee was praying for

            exclusion of this company as a comparable because this

            company is engaged          in the   business    of providing

            ITES/Business Process outsourcing (BPO) services and its

            operations broadly comprise of transaction processing

            and       technical   processing   and   technical     services,

            collections, customer care and payments in relation to the

            services offered by Citigroup to its corporate and retail

            clients. It was further submitted that technical services

            involve software testing, verification and validation of

            software at the time of implementation and data centre

            management activities. Our attention was drawn to page


                                        7
ITA No. 1446/Del/2016
Assessment year 2011-12



            450 of the paper book (Director's report and annual

            accounts) wherein these activities were mentioned. It was

            submitted that this company is functionally dissimilar to

            the assessee company which is a low-end BPO providing

            transaction and data centre management services only to

            its UK based AE and, thus, is a captive service provider.

            It was further submitted that this company had a huge

            brand value because of its close connection with the Tata

            Group and further that this company had a huge

            turnover and goodwill being one of the giants of the

            industry and, therefore, it could not be considered as a

            comparable to the assessee company. It was submitted

            that another giant company Infosys Pvt. Ltd. was

            excluded on a similar reasoning in assessee's own case

            for assessment year 2010-11. Reliance was also placed

            on another order of ITAT Delhi Bench in the case of

            Kronos Solutions India (P) Ltd. vs. ACIT reported 88

            taxmann.com 310 (Delhi Tribunal) wherein this company

            was directed to be excluded on a similar reasoning.




                                    8
ITA No. 1446/Del/2016
Assessment year 2011-12



        (ii)     I-Services India Pvt. Ltd.

                The ld. AR submitted that the assessee was praying for

                inclusion of this company as a comparable as it was

                functionally similar and the Ld.DRP had directed that the

                same be included if it passed the necessary filters as

                applied by the TPO but the TPO had not given any reason

                for excluding the same subsequent to the directions of

                the Ld. DRP. Our attention was drawn to Para 3.4 of the

                directions of the Ld. DRP wherein this direction had been

                given by the Ld. DRP.



        (iii)    Savi Infoservice (India) Pvt. Ltd.

                It was submitted that the assessee was praying for

                inclusion of this company also in the final set of

                comparables and that the Ld. DRP had directed the

                inclusion of this company if it passed all the filters as

                applied by the TPO but the TPO/Assessing Officer had

                kept this company out of the final set of comparables

                without assigning any reason.         Attention was again

                drawn to Para 3.4 of the directions of the Ld. DRP

                wherein this company was directed to be included.


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ITA No. 1446/Del/2016
Assessment year 2011-12



        (iv)     Microgenetics Systems Ltd.

               The Ld. AR submitted that the assessee was praying for

               inclusion of this company also as this company was

               engaged       in   medical      transcription      services    and

               accordingly it was functionally similar and it had passed

               all the filters as applied by the TPO. It was also

               submitted by the Ld. AR that the TPO has excluded this

               company       on   the    ground      that   the   related    party

               transaction filter was not met although the relevant data

               with respect to the related party transaction was duly

               filed before the TPO.           It was submitted that this

               company was prayed to be included before the Ld. DRP

               also and the prayer for its inclusion formed part of the

               objections filed before the Ld. DRP but the Ld. DRP has

               not discussed the issue.



4.0             In        response,     the    Ld.     Senior     Departmental

Representative (Sr. DR) submitted that with respect to all the

companies under challenge by the assessee either for inclusion or

for exclusion had been duly considered and examined by the TPO

as well as the Ld. DRP. With respect to TCS E-serve Ltd., it was


                                          10
ITA No. 1446/Del/2016
Assessment year 2011-12



submitted that the assessee had not been able to meet the

observations of the TPO in this regard and further that the Ld.

DRP had also reached the same conclusion after considering the

observations of the TPO and no interference was called for. The

Ld. Sr. DR placed extensive reliance on the observations of the

TPO in respect of all the four comparables and vehemently argued

that the TPO and the Ld. DRP had given a finding of fact which

need not be disturbed.

5.0              We have heard the rival submissions and perused the

material available on record. We now take the comparables one

by one.

            i)       TCS E-serve Ltd.

            It is the assessee's contention that this company deserves

            to be excluded as a comparable company for the reason

            that it is functionally dissimilar to this company.          It is

            undisputed that the assessee company provides IT

            enabled services to its UK based AE only and, thus, it is a

            captive       service   provider   whereas   TCS   E-serve   Ltd.

            provides transaction processing as well as technical

            services. It is further seen that TCS E-serve Ltd. provides

            a broad spectrum of activities involving the processing,


                                          11
ITA No. 1446/Del/2016
Assessment year 2011-12



            collections, customer care and payments in relation to the

            services offered by Citigroup to its corporate and retail

            clients.       Technical services involve software testing,

            verification and validation of software at the time of

            implementation and data centre management activities.

            This is evident from a reading from the notes to accounts

            contained in the annual report of TCS E-serve Ltd. for

            assessment year 2010-11. Thus, there is strength in the

            contention of the assessee that TCS E-serve Ltd. has

            entered in activities which are beyond transaction and

            data processing services as being provided by the

            assessee to its AE and, thus, it can be safely concluded

            that this company is functionally dissimilar to the

            assessee company.          We also find support from the

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

            Actis Global Services Pvt. Ltd. in ITA 94/2017 wherein

            vide judgment dated 15.5.2017, the Hon'ble Delhi High

            Court had upheld the order of ITAT Delhi Bench in

            directing the exclusion of this comparable on the ground

            that     TCS    E-serve   Ltd.   was   involved   both   in   the

            transaction processing and technical services and was not


                                        12
ITA No. 1446/Del/2016
Assessment year 2011-12



            therefore a comparable with respect to a company

            engaged only in BPO activities. Admittedly, the assessee

            is also a BPO company and the finding to this effect has

            been recorded by the ITAT in assessee's own case for

            assessment year 2009-10 wherein it has been mentioned

            that this company is into providing low-end BPO services.

            Therefore, we deem it appropriate to exclude this

            company from the final set of comparables.

            ii)      IServices India Pvt. Ltd.

                  The assessee is praying for inclusion of this company

                  on the ground that it is functionally similar. We note

                  that the Ld. DRP has also directed this company to be

                  included in the list of comparables if it passes all the

                  filters as applied by the TPO. We also note that this

                  direction of the Ld. DRP has not been implemented in

                  so far as the TPO has excluded this company without

                  recording   any   finding.     Therefore,   we   deem   it

                  appropriate to restore this comparable to the file of the

                  TPO with the direction to implement the direction of

                  the Ld. DRP and pass a speaking order on this

                  comparable.


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ITA No. 1446/Del/2016
Assessment year 2011-12



            iii)      Savi Inforservice (India) Pvt. Ltd.

                   The assessee is praying for inclusion of this company

                   on the ground that it is functionally similar and the Ld.

                   DRP has directed that the same be included if it passes

                   all the filters as applied by the TPO but again this

                   company has not been included without any reason

                   being assigned by the TPO. Therefore, we direct that

                   the TPO/Assessing Officer should give effect to the

                   directions of the Ld. DRP in respect of this comparable

                   also and decide on its inclusion/exclusion by passing a

                   speaking order.

            iv)       Microgenetics Systems Ltd.

                   We note that the TPO has excluded this company on

                   the ground that the related party transaction filter was

                   not met. On the other hand, it is the contention of the

                   assessee that data with respect to the related party

                   transaction was duly filed before the TPO. In view of

                   the contradictory stand by the assessee and the

                   department, we deem it appropriate to restore this

                   comparable also to the file of the TPO with the direction

                   to re-examine the inclusion of this comparable after


                                         14
ITA No. 1446/Del/2016
Assessment year 2011-12



                duly considering the data with respect to related party

                transactions.



    5.1                   The other grounds of appeal are dismissed as not

pressed.

6.0              In the final result, the appeal of the assessee stands

partly allowed.

  Order pronounced in the open court on 20th June, 2019.


       Sd/-                                          Sd/-

   (N.S. SAINI)                               (SUDHANSHU SRIVASTAVA)
 ACCOUNTANT MEMBER                               JUDICIAL MEMBER


Dated: 20th JUNE, 2019
`GS'


Copy forwarded to: -

        1)      Appellant
        2)      Respondent
        3)      CIT(A)
        4)      CIT
        5)      DR
                          By Order
                                                    ASSTT. REGISTRAR




                                         15
ITA No. 1446/Del/2016
Assessment year 2011-12




Date of dictation

Date on which the typed draft is placed before the
dictating Member
Date on which the typed draft is placed before the Other
Member

Date on which the approved draft comes to the Sr.PS/PS
Date on which the fair order is placed before the
Dictating Member for pronouncement

Date on which the fair order comes back to the Sr.PS/PS
Date on which the final order is uploaded on the website
of ITAT
Date on which the file goes to the Bench Clerk
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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