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Black Rock Services India Private Limited, 3rd Floor, Rolta Corporate Towers, 187, Phase-I, Udyog Vihar, Gurgaon vs. The Income Tax Officer, 5th Floor, HSIDC Building Vanijya Nikunj, Udyog Vihar, Phase-V, Gurgaon
May, 06th 2019

Referred Sections:
Section 72 of the Income Tax Act,
Section 11(4) of the Income-tax Act.
Section 11 to 13 of Income-tax Act

Referred Cases / Judgments
Welfare Society vs. Additional Commissioner of Income Tax and in assessee’s own case in ITA No. 4326/Del/2014 (AY 2008-09)
M/s KSD Charitable Trust vs. Additional Commissioner of Income Tax, Range-1, Meerut.
CIT(E) vs. Subros Educational Society (2018) 303 CTR 0001 (SC)
CIT(E) vs. Subros Educational Society (Supra)
Society vs. Additional CIT in ITA No. 4056/Del/214 in AY 2009-10.
CIT Vs. Institute of Banking (reported in 264 ITR 110 (Bom.)
CIT Vs. Matri Sewa Trust, 242 ITR 20 (Mad.);
CIT Vs. Institute of Banking, 264 ITR 110(Bom.);
CIT Vs. Maharana of Mewar CharitableFoundation 164 ITR 439 &
Govindu Naicker Estate Vs. ADIY, 248 ITR368”
CIT Vs. Institute of Banking reported in 264 ITR
CIT(E) vs. Subros Educational Society (2018) 303 CTR 0001 (SC)

 

                                   Black Rock Services India Private Ltd Vs. Income Tax Officer
                                                              ITA No 1671 & 441/ Del/2015-16
                                                                         AY 2010-11 & 2011-12


                       INCOME TAX APPELLATE TRIBUNAL
                         DELHI BENCH "I-1": NEW DELHI
                  BEFORE SHRI H. S. SIDHU, JUDICIAL MEMBER
                                      AND
               SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER

                                    ITA No. 1671/Del/2015
                                  (Assessment Year: 2010-11)
        Black Rock Services India Private     Vs.         The Income Tax Officer,
                                                      th
                     Limited,                        5 Floor, HSIDC Building Vanijya
     3rd Floor, Rolta Corporate Towers, 187,           Nikunj, Udyog Vihar, Phase-V,
         Phase-I, Udyog Vihar, Gurgaon                           Gurgaon
              PAN: AABCH4449Q
                    (Appellant)                                (Respondent)


                                     ITA No. 441/Del/2016
                                  (Assessment Year: 2011-12)
         Black Rock Services India Private     Vs.     The Assistant Commissioner of
                     Limited,                                   Income tax ,
      rd
     3 Floor, Rolta Corporate Towers, 187,                      Circle-1(1),
          Phase-I, Udyog Vihar, Gurgaon                           Gurgaon
               PAN: AABCH4449Q
                    (Appellant)                                (Respondent)


                  Assessee by :                         Shri K. M. Gupta, Adv
                                                     Shri Anubhav Rastogi, Adv
                  Revenue by:                      Shri Sandeep Kr. Mishra, Sr. DR
                Date of Hearing                               13/02/2019
             Date of pronouncement                            06/05/2019


                                         ORDER

PER PRASHANT MAHARISHI, A. M.

                                    ITA No. 1671/Del/2015
                                  (Assessment Year: 2010-11)
1.   This appeal is filed by Black Rock services India private limited in ITA number
     1671/Del/2015 for Assessment Year 2010  11 against the order of The Income Tax Officer,
     Ward  1 (1), Gurgaon [The ld AO ] passed u/s 143 (3) read with section 144C of The
     Income Tax Act[ The Act] on 24/2/2015 wherein the transfer pricing adjustment of INR 1
     4283265/ pursuant to the direction of The Dispute Resolution Panel III, New Delhi [ The
     ld DRP ] dated 22/12/2014 under section 144C (5) of the act was incorporated wherein
1|Page
     objections were filed by the assessee against the draft of the proposed assessment passed by
     the learned AO wherein adjustment proposed by The Additional Commissioner Of Income
     Tax, Transfer Pricing, Chandigarh [ The Ld TPO] as per order passed u/s 92CA (3) of the
     act dated 24/1/2014 the adjustment of INR 1 5891990/ was proposed to the international
     transaction of INR 1 38558316/ was incorporated.
2.   The assessee has raised the following grounds of appeal in ITA No. 1671/Del/2015 for the
     Assessment Year 2010-11:-

     "1.    The assessment order passed by the Learned Assessing Officer (,,Ld. AO) pursuant to
            the directions of Learned Dispute Resolution Panel (,,Ld. DRP) based on the facts
            and in the circumstance of the case is bad in law and void ab-initio.
     2.     The Ld. DRP and the Ld. Transfer Pricing Officer (,,Ld. TPO) / Ld. AO (following
            the directions of the Ld. DRP), erred both on facts and in law in confirming the
            addition to the extent of Rs. 1,42,83,265 holding that the international transactions
            pertaining to provision of routine IT enabled services do not satisfy the arms length
            principle envisaged under the Act and in doing so have grossly erred by:
            2.1     not finding any merit in the objections of the Appellant that none of the
                   conditions set out in section 92(1(3) of the Act are satisfied in the present
                   case;
            2.2     rejecting the Transfer Pricing (,,TP) documentation maintained by the
                   Appellant under section 92D of the Act and Rule 10D of the Rules and
                   disregarding the arms length price (,,ALP) as determined by the Appellant in
                   the TP documentation;
            2.3     disregarding the fact that the Appellant is a captive IT enabled service
                   provider which does not bear substantial risks associated with its functions
                   and therefore cannot be compared to full fledged entrepreneur service
                   providers;
            2.4     disregarding multiple year/prior years data used by the Appellant in the TP
                   documentation and holding that current year (i.e. Financial Year (,,FY) 2009-
                   10) data for comparable companies should be used despite the fact that the
                   same was not necessarily available to the Appellant at the time of preparing
                   its TP documentation;
            2.5     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:
                   (i)     exclusion of companies whose data for FY 2009-10 was not available;
                   (ii)    exclusion of companies with related party transactions greater than
                           25% of their sales;
                   (iii)    exclusion of companies with export sales that are less than 25% of
                           their total revenue;
                   (iv)     exclusion of companies with diminishing revenues/persistent losses
                           for last three years upto and including FY 2009-10;
                   (v)     exclusion of companies having different financial year ending (i.e. not
                           March 31, 2010);
                                                                                          Page | 2
                            and rejecting, in particular, the following filters applied by the
                            Appellant in its fresh search:
                    (i)     companies having other operating income (i.e. income other than
                                   manufacturing and trading income) to sales greater than 50%
                            were accepted;
                    (ii)    companies having research & development costs to sales less than %
                            were accepted;
                    (iii)   companies having advertising, marketing and distribution costs to
                            sales less than 3% were accepted.
     2.6     including high-profit making companies with different scale of operations and high
            turnover in the final comparables set for benchmarking a captive service provider
            such as the Appellant (disregarding judicial pronouncements on the issue);
     2.7     including certain companies that are not comparable to the Appellant in terms of
            functions performed, assets employed and risks assumed;
     2.8     including certain companies in the comparables set that had achieved supernormal
            growth as a result of extraordinary circumstances during the year, thereby
            incorrectly comparing such companies to the Appellant which operates as a captive
            services provider and has stable growth under normal circumstances;
     2.9     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;
     2.10    ignoring the business/ commercial reality that since the Appellant is remunerated on
            an a cost plus basis, (i.e. it is compensated for all its operating costs plus a pre-
            agreed mark-up) 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;
     2.11    not providing for working capital adjustment claimed by the Assessee and thus
            consequently arriving at an erroneous mark-up on cost for the comparable
            companies selected in the TP Order.
     3.     The Ld. TPO/ Ld. AO/ Ld. DRP have grossly erred on facts and in law by
            disregarding judicial pronouncements in India in undertaking the TP adjustment.
     4.     The Ld. TPO/ Ld. AO has grossly erred on facts and in law by initiating penalty
            under section 271 (i)(c) of the Act mechanically and without recording any
            satisfaction for its initiation.
     5.     The Ld. TPO/ Ld. AO has grossly erred on facts and in law by proposing to compute
            interest under section 234A, 234B, 234C and 234D of the Act mechanically and
            without recording any satisfactory reasons for the same.


3.   The brief facts of the case show that assessee is engaged in rendering back-office information
     technology enabled services [ ITes]     and related services to its associated enterprise and
     third-party customers in India. The back-office services and the related services performed
     by the appellant included web search, data entry, data management, assistance in financial
     and economic evaluation analytical services and other services.           The assessee was
     remunerated at the rate of cost +12% markups by its associated enterprise. The assessee
                                                                                           Page | 3
     entered into an international transaction of the provision of these ITeS services amounting to
     INR 122569557/ amongst the other international transaction of reimbursement of expenses
     and advances received which are not in dispute before us. The assessee benchmarked the
     provision of ITeS services by selecting 12 comparables whose average mean margin of PLI
     of OP /TC was considered to be 11.85% and as assessee has earned the margin of 12% over
     the cost, the assessee stated that its international transactions are at arms-length.
4.   The assessee furnished its return of income on 13/10/2010 declaring income of INR
     4652993/. As assessee has entered into an international transaction the learned AO referred
     the matter to the learned TPO for determining the arms-length price[ ALP] u/s 92CA (3)
     of the act in respect of the international transaction. The learned TPO examined the nature
     of the business of the assessee and the functional analysis carried on. He noted that assessee
     characterized itself as a provider of IT enabled services, selected transactional net margin
     method [ TNMM] as the most appropriate method [ MAM ] and carried out search using
     Prowess and capitaline databases selecting 10 comparables whose weighted average of profit
     level indicator was 11.85 percentage by considering multiple year data. The TPO asked the
     assessee to submit the updated margins using only the data for financial year 2009  10.
     Assessee submitted the same where the average PLI of operating profit to operating cost of
     all these 10 comparables was calculated at 5.3% against the assessees own profit level
     indicator of 12%. The learned transfer pricing officer further verified the accept/reject
     metrics of the assessee and noted that vertical of the IT enabled industry was not a criteria
     for rejection/acceptance of a company as a comparable.            Therefore he noted that the
     companies engaged in IT enabled services were treated as comparables irrespective of the
     verticals that is the industry to which it caters, horizontal verticals such as functions like
     back-office operations, medical transcription et cetera. He accepted the transactional net
     margin method as the most appropriate method selected by the assessee. He therefore on
     examination of the transfer pricing study report found that it has several defects, further the
     comparable selected by the assessee were also not proper and therefore he carried out the
     fresh search and included further 7 comparables. Those comparables were offered for the
     comment of the assessee and finally after considering       it , and updating various margin of
     those comparables, he selected 11 comparables whose operating profit to operating cost
     average margin was 26.61%. He applied the above margin on the operational cost of the
     assessee of INR 10 9437104/ and found that against the price received of INR 122666327/
     the ALP is RS. 138558317/ and therefore he proposed an adjustment u/s 92CA(3) of INR
     15891990/.







                                                                                             Page | 4
5.   The assessee against the draft of the proposed assessment made by the learned assessing
     officer preferred objection before the learned DRP who rejected the argument of the assessee
     with respect to the various comparables, however with respect to the margins of those
     comparables, it directed the learned TPO to verify them and correct the computational errors.
     Consequent to those directions the learned TPO passed an order on 22/12/2014 giving effect
     to the direction of the DRP retaining all these 11 comparables whose average margin and
     therefore the proposed adjustment was reduced to INR 14283265/. The above adjustment
     was incorporated in the assessment order u/s 143 (3) read with section 144C of the act dated
     24/2/2015 where the assessed income was determined at INR 18936258/ against the
     returned income of INR 4652993/ wherein the adjustment on account of the arms-length
     price of INR 14283265/ was made. Assessee aggrieved with the order has preferred this
     appeal before us.
6.   The 1st ground of appeal is general in nature, no arguments advanced by both the parties,
     hence it is dismissed.
7.   The ground number 2 of the appeal challengesthe addition on account of determination of
     the arms-length price of amounting to INR 14283265/ with respect to the ITeS services. At
     the beginning of the hearing the learned authorised representative submitted a chart and
     stated that out of the 11 comparable selected by the learned transfer pricing officer it is
     contesting only 5 comparables which according to him are functionally dissimilar, having
     substantial brand, non availability of the segmental information, extraordinary events and
     circumstances in those companies with respect to the amalgamation et cetera and certain
     other factors. He heavily relied upon the several judicial precedents wherein four out of
     those 5 comparables have been excluded from the comparability analysis in case of some
     other assesses. Therefore he submitted that those comparables should also be excluded from
     the comparability analysis in case of the international transactions of the assessee also. We
     will deal with each of the comparable independently looking into their functionality and
     comparing it with the functionality of the assessee.
8.   The learned departmental representative also vehemently objected to the argument of the
     authorised representative that those 5 comparables should be excluded on the basis of the
     judicial precedents rendered in some other cases. He vehemently submitted that mandate of
     rule 10 B provides for comparability analysis with the functions of the assessee of those
     comparable companies. Unless the assessee demonstrates with adequate documentation that
     the companies in whose case these comparables are excluded is having the same functional
     profile as that of the assessee. He otherwise referred to the order of the learned transfer
     pricing officer and the learned dispute resolution panel and stated that all the objection stated

                                                                                             Page | 5
     by the assessee have been considered by them in their respective orders. He referred to each
     of the comparable in the comments given by the learned TPO and the direction of the learned
     dispute resolution panel with respect to these comparables.
9.   We have carefully considered the rival contention and perused the orders of the lower
     authorities. On careful analysis of the balance sheet of the company and the profit and loss
     account , it is apparent that assessee has provided services of INR 125375557/ during the
     year and earned profit before tax of INR 14701374/. The assessee has the share capital of
     INR 486930/ and the reserve and surpluses of Rs. 49322227/ making the shareholders
     funds of Rs . 49809157/. Assessee has fixed assets of gross block of Rs 25114818 and the
     net block of Rs. 7733525/. Looking at the fixed assets of the assessee company as per the
     fixed assets schedule, it has tangible assets mainly and also the intangible assets in the form
     of the software, whose written down value is INR 1758512/ out of the total written down
     value of all the assets of Rs. 7733525/. Originally this company was formed in the name
     of Helix advisors India private limited on 22/06/2000.           Subsequently because of an
     agreement dated 22/12/2009 , shares of the company were transferred from Alex financial
     group LLC to BlackRock advisors Singapore PTE limited. Consequent to this, name of the
     assessee was also changed to Blackrock services India private limited. As per the transfer
     pricing study report in para number 4.3.2, assessee submitted that it provides IT enabled
     back-office services outsourcing to Helix US and Helix LLC. It is further submitted that
     the primary business/functions of the Indian entity includes:-
        a. origination support services which include activities like preparation of summary of
            loan request materials, input/entry of data from sources such as the operating
            statement, rent roll etc into models created by the clients into online database
            subscribed to by Alex US and Alex LLC.
        b. Lease abstracting support services includes activities like entry of lease data into
            Excel-based models developed by the client, operation management of data and
            documentation is an undertaking related database, web search and analysis.
        c. Prescreen report includes activities like entering basic financial information into
            client underwriting model, preparation of the asset summary et cetera.
        d. The research activities include carrying out extensive web searches on industry
            benchmarks, other information/better relating to markets, customize transaction
            surveillance and report generations thereof.
        e. In underwriting support the assessee carries on activities like entry of financial and
            other data of the client into Excel-based financial models developed by Alex US
            undertaking activities like data entry, database document management and related

                                                                                            Page | 6
             web research for assisting in preparing credit which database conducting estoppels
             reviews et cetera
         f. fixed income advisory and analytics services includes comprehensive investment due
             diligence and survival and services for CMS investors by utilizing the data analytics
             and sound realistic judgment, investors can make seed MBS investments with
             confidence. Additional clients include CTO originators/managers commercial and
             investment banks bond insurance firms and hedge funds.
         g. In financial administration the activities included the full services accounting,
             investment fund administration, transaction processing, valuation review, due
             diligence and surveillance for the alternative assets.

         On the basis of the above analysis it is further stated that the Alex India is primarily
         involved in execution of routine backup and activities like web searches, data entry,
         document management et cetera an initial quality control. These activities figure at the
         lower end of the group service value chain.         Therefore as such these activities are
         voluminous and time-consuming in nature they involve significantly greater time and
         effort to the Indian entity personal visits the US personal      for projects. It is further
         stated that during financial year 2009  10 in addition to the primary activity of providing
         IT enabled back-office process outsourcing and related services to its associated
         enterprise,   assessee is also engaged in providing IT enabled back-office process
         outsourcing and related services in the nature of payroll processing, financial
         administration, record-keeping etc. to 3rd parties in India which is considered as the
         domestic business of the assessee. It is further stated that these services are similar to
         some of the services provided by assessee to its associated enterprises. With respect to
         the assets, it has been stated that assessee does not own any intangible which are
         significant and does not undertake any activity on its own account that leads to the
         development of the non routine intangibles with respect to the international business.
         Further with respect to the risk metrics , it is submitted that all risks with respect to the
         domestic business are borne by the Alex India, assessee, whereas with respect to the
         transaction with associated enterprise, major risk are borne by the associated enterprises.
         Based on this the assessee characterized       itself as a routine IT enabled back-office
         business process outsourcing servie provider, which assumes a routine risk associated
         with carrying out its international business and employes route intangible assets for
         providing such services. This FAR analysis prepared by the assessee remains undisputed.

10.   The 1st comparable challenged by the assessee is Accentia technologies           Ltd which is
      included by the learned transfer pricing officer. The assessee submitted that it is functionally
                                                                                              Page | 7
      dissimilar, it has significant amount of the brands, it does not have the segmental information
      required for the comparability analysis and has undergone the extraordinary events during the
      year in the form of amalgamation. It is further stated that this company was found to be
      functionally dissimilar by the coordinate bench in the assessees own case for assessment
      year 2008  09, wherein it is found that extraordinary events have taken place during the year
      in the case of the above comparable. The learned authorised representative relied upon the
      plethora of judicial precedents where in case of some other functionally different assessee
      this comparable is excluded.
11.   The learned transfer pricing officer considered the argument of the assessee that it is
      functionally dissimilar and rejected that stating that annual report has been produced and it is
      seen that the company is into an healthcare receivable cycle management predominantly
      which is an ITeS segment. He further held that 86% of the receipt is from healthcare
      receivable field and a small portion is in the coding activity. He thereafter extracted the
      annual accounts and the reports of the above comparable company and stated that healthcare
      management receivable system is of one single operational segment consisting of various
      activities which are closely related and complementary and the services cannot be termed as
      diversified activity. He further held that SaaS (software as a service) is nothing but bundle of
      all the services under one umbrella. He therefore held that the above comparable company y
      is functionally similar and passes all the filters applied. He further held that there is no
      abnormal fluctuation in the profit earning capacity of the comparable for the year under this
      situation and it is showing good margin consistently over the years and therefore there is no
      issue of supernormal profits. Therefore he stated that the comparable is robust comparable in
      case of the taxpayer and is retained as a suitable comparable. The learned dispute resolution
      panel was also of the view that the FAR profile of the company is essentially similar to that
      of the assessee hence it was retained as a comparable.
12.   We have carefully considered the rival contentions and perused the annual account of
      comparable company placed at page number 119  226 of the paper book.
13.   As in the case of the assessee for assessment year 2008  09 the coordinate bench has
      directed the learned TPO to exclude the above comparable only for the reason that it has an
      extraordinary events taken place during that year. Therefore for following the order of the
      coordinate bench in assessees own case for the earlier year the facts must be similar that
      there should be an extraordinary event during this year in the case of the comparable.
      Otherwise the decision of the coordinate bench is distinguishable on the facts in absence of
      any such information available. Therefore merely on the basis of the earlier year  s order of


                                                                                              Page | 8
      the coordinate bench in assessees own case, this comparable cannot be excluded and it is
      required to be tested on its own merit.
14.   The assessee has also contested that it has undergone amalgamation of another company with
      the comparable company. The AR referred to page numbers 78 of the annual report wherein
      in ,,notes to accounts     the reference has been made that pursuant to the scheme of
      amalgamation of Accentia private limited with the company as approved by the shareholder
      in the court convened meeting held on 25th day of April 2009 and subsequently sanctioned by
      the honourable High Court of Mumbai vide order dated 21/08/2009 and the High Court of
      Karnataka vide order dated 06/02/2010, the assets and liability of the erstwhile company
      was transferred invested in this company with effect from 01/04/2008. On reading the above
      note it is apparently clear that amalgamation has happened with effect from 01/04/2008, and
      therefore it does not pertain to this year which is assessment year 2010  11 (FY 2009-10).
      There is no financial impact on the profitability / price of the comparable company shown to
      us. Therefore we reject the argument that there is an extraordinary event in the comparable
      company.
15.   On careful consideration of the annual report of the above comparable company for financial
      year 2009  10 placed,        at page number 41 of the annual report it is stated that the
      comparable company provides healthcare and receivable management services involving
      medical transcription, medical coding, billing and receivables management (collections). At
      page number 42, description of the medical transcription services have been provided which
      shows brief process of the medical transcription giving the process flowchart and in the end it
      is stated that medical transcription profession is considered very much a skilled work which
      can be done only after undergoing 6 to 8 months of rigorous training as it involves the
      identifying the generic name and trade name of the various drugs. That can be done only
      after reference to the pharmacology reference books which should always be a part of the
      library of a medical transcription profession. Further at page number 43 medical coding has
      also been explained by way of a flowchart. The company says that it has a sizeable number
      of certified coders which is assigning codes to diagnosis and procedures which help in
      financial reimbursement from insurance companies and government companies et cetera. It is
      further stated that medical coders are specialized in coding after thorough training program
      and certification. Further the assessee has contended that it has a significant amount of
      brands and software for providing IT services. For this proposition we look at page number
      37 of the annual report wherein management discussion and analysis it is submitted that it is
      the 1st company to offer SaaS model HMRC area. It is also entering into the legal process
      outsourcing segment. It is also using Immaculate business process outsourcing management

                                                                                             Page | 9
      solutions for healthcare, financial and insurance sector and health the dox  cutting-edge
      offshore HRC solutions for healthcare sector are provided by this company.           Therefore,
      looking to the functions performed by the Accentia technology and the various kinds of
      advanced assets in the form of software et cetera utilized, it is apparent that functionally the
      above company is not comparable with the assessee company. Hence we direct the learned
      transfer pricing officer /learned AO to exclude the above company from the comparability
      analysis.
16.   The 2nd comparable challenged by the assessee is Infosys BPO Ltd stating that it is
      functionally dissimilar and is providing high end integrated services in the nature of business
      transformation services, sourcing and procurement outsourcing et cetera. It ws further
      stated that it has a significant intangible assets and there are extraordinary events such as
      acquisition of a company. The learned authorised representative further referred to the
      several judicial precedents wherein the above comparable company has been excluded.
17.   The learned transfer pricing officer rejected the all the contention of the assessee and stated
      that the above company is an ITeS company and fully comparable in the case of the assessee.
      Further it was stated that the presence of the brand value has not been shown to have made
      any impact on the profitability of this company and therefore same cannot be excluded. The
      learned dispute resolution panel also affirmed the finding of the learned transfer pricing
      officer.
18.   We have carefully considered the annual report of Infosys BPO Ltd for financial 2009  10
      placed at page number 213  296 of the paper book. Undoubtedly the comparable company
      belongs to Infosys group and therefore it has the support and backing of the Infosys brand
      which will have its own impact on the profitability and price of this comparable company. It
      is also not necessary that the comparable company must have spent for the brand value. In
      the present case of comparable is not required to do so as it belongs to as such one of the
      largest group in the IT segment "Infosys". As per page number 281 in schedule 12 selling
      and marketing expenses shows that comparable company has spent approximately INR
      7,500,000 towards the brand building and advertisement expenditure. Coupled with the fact
      that the comparable company belongs to Infosys group, has incurred the expenditure on the
      brand building and annual report itself shows the imprint of being part of the large IT
      segment group, it is apparent that the functional profile, the assets utilized by the comparable
      company are not comparable with the assessee company. Therefore, for this reason only, we
      direct the learned transfer pricing officer, AO to exclude the above comparable from
      comparability analysis.


                                                                                            Page | 10
19.   With reference to the argument of the learned authorised representative that it has acquired
      one company MaCmish system LLC and therefore there is an extraordinary event in the
      company, deserves to be rejected at the threshold because it is merely a purchase of shares of
      the target company by this comparable. Purchasing shares of the company does not make
      any impact on the price of the margin of the comparable company. Therefore there is no
      extraordinary event when a company invests in some other company by purchase of shares.
      It is neither a case of amalgamation/merger. Hence on this ground the above comparable
      company cannot be excluded.
20.   Further the authorised representative also stated that there is an amalgamation of PAN
      financial services India private limited with the company and therefore it should be excluded.
      We have carefully considered the contention and find that the board of directors in that
      meeting held on 06/10/2008 approved subject to the approval of the Karnataka and mothers
      High Court of scheme of amalgamation to amalgamate PAN financial services India private
      limited which is engaged in providing business process management services with the
      Infosys BPO Ltd with effect from 01/04/2008. Therefore even if there is an amalgamation or
      merger, it has happened in financial year 2008  09, and impugned financial year before us
      is financial year 2009  10 , hence it does not pertain to this year and therefore for this reason
      Infosys BPO cannot be excluded.
21.   However for the reasons given by us above, we direct the learned TPO/AO to exclude the
      Infosys BPO Ltd from the comparability analysis for the reasons of having huge brand value.
22.   The 3rd comparable challenged by the assessee is TCS E serve international Ltd which is
      stated to be the functionally dissimilar as it is engaged in transaction processing and technical
      services like software testing, verification and validation of the software. It was further
      stated that there is no availability of the segmental information and further the comparable
      company enjoys the Tata brand and is contributing significantly by payment thereof.
23.   We have carefully considered the contentions and find the annual Report of the above
      comparable company placed at page number 297  371 of the paper book. Apparently TCS
      E serve international is a subsidiary of Tata consultancy services Ltd. Behind the above
      comparable company, there is a ,,Tata brand, which is almost 10 times bigger than Infosys
      brand ( on market cap basis) . On the perusal of schedule M of the profit and loss account
      there is a payment of 3738000s towards the Tata brand equity contribution. For this reason
      that it belongs to Tata group and has also contributed to Tata brand which is one of the
      largest brand in the information technology segment, there is a definite impact on the pricing
      capacity of the comparable which the assessee lacks. Hence, we find that TCS E serve


                                                                                              Page | 11
      international Ltd deserves to be excluded. Accordingly we direct the learned TPO  AO to
      exclude the above comparable.
24.   The 4th comparable that challenge by the assessee is TCS E serve limited stating that it is
      functionally dissimilar engaged in the transaction processing and technical services like
      software testing, verification and validation of the software. It was further stated that like
      TCS E serve international Ltd it also belongs to the Tata group and owns significant
      intangible as well as makes payment for Tata brand equity. It is further stated that the scale
      of operation of this company itself makes it not comparable with the assessee. The learned
      transfer pricing officer rejected the arguments of the assessee similar to TCS E serve
      international Ltd. The learned dispute resolution panel also rejected the objection of the
      assessee.
25.   On identical facts and circumstances we have excluded TCS E serve international Ltd that it
      belongs to a Tata group and has paid contribution for Tata brand. We have also perused the
      annual report of the comparable company which is placed at page number 372  507 of the
      paper book on careful analysis of the annual report it is found that in schedule ,,N, Tata
      brand equity contribution of this comparable companies is           Rs 46065 (in thousands).
      Therefore we direct the learned transfer pricing officer to exclude the above comparable from
      the comparability analysis.
26.   The last comparable , 5th , challenged by the assessee is e4e healthcare business services Ltd
      stating that it is engaged in medical transcription services and other diversified services. The
      learned transfer pricing officer considered the above issue at page number 67 of his order
      where the assessee contested that it is not functionally comparable and it is engaged in
      software development activities and segmental accounts are not available.
27.   The learned transfer pricing officer has held that though the company is primarily engaged in
      the business of providing healthcare outsourcing services for the healthcare industry and the
      primary source of the income of that company is that activity. In view of this it was held that
      it is a comparable company. The learned dispute resolution panel also agreed with the
      finding of the learned TPO. The assessee also relied on the decision of coordinate bench in
      case of Bechtel India private limited vs DCI ITA number 1478/del/2015 for assessment
      year 10  11 wherein the above comparable was rejected on account of being engaged in both
      software development and healthcare services and on availability of segmental information
      being functionally dissimilar (KPO) and the product company.
28.   We have carefully considered the contention of the assessee as well as the orders of the
      learned TPO and dispute resolution panel. The assessee has submitted the copies of the
      annual accounts of the above company placed at page number 1  34 of the paper book. We

                                                                                            Page | 12
      have also considered the order of the coordinate bench in ITA number 1478/del/2015 at para
      number 3 at page number 17 where above comparable company has been excluded from the
      comparability analysis. We find that the facts before us are quite distinct as we do not find
      any reference in the order of the coordinate bench that how the assessee is engaged into a
      software development activity. Even otherwise the coordinate bench considered that this
      comparable is functionally dissimilar to the Bechtel however it never held that it is
      functionally dissimilar to this assessee. Hence, reliance on that decision deserves to be
      rejected.
29.   On analysis of note number 1.1 of schedule 1 being significant accounting policies of
      schedule to the financial statements it is apparent that this company is primarily engaged in
      the business of providing healthcare outsourcing services for the healthcare industry. The
      revenue stream of this company is also income from services. The revenue recognition
      mentioned that note number 1.4 of the significant accounting policies provides that as per
      the profit and loss account,      company derives its revenue primarily from healthcare
      outsourcing services. The revenue from outsourcing services recognizes the related services
      are performed, in accordance with the specific terms of the contract with the customers.
      Earnings in excess of billings are classified as advance   revenue while billing in excess of
      the cost and earning is classified as unearned revenue. In view of this it is apparent that
      assessee is not engaged in any software development activities. We have also perused
      schedule 16 notes to the accounts wherein ,,commitments and contingent liabilities company
      it is referred that companys software development centers in India are 100 % export
      oriented units under the software technology Park guidelines. But that does not make that
      assessee is engaged in the business of software development activities also, unless, the
      accounts, revenue stream, relevant cost, directors report, management discussion and analysis
      shows otherwise. It is also not mentioned anywhere in the report that assessee is engaged in
      medical transcription, according services. In view of this, we reject the contention of the
      learned authorised representative and uphold the order of the learned TPO as well as the
      learned dispute resolution panel, that this company is functionally comparable as it is
      engaged in the outsourcing services as assessee is engaged in. In view of this, we find no
      infirmity in the order of the learned TPO/DRP in including the above comparable company
      for the comparability analysis. Hence we direct them to retain the above comparable.
30.   The next adjustment by the assessee is with respect to the granting of working capital
      adjustment. The learned transfer pricing officer at page number 76 of his order has held that
      assessee has failed to give any answer that why the working capital adjustment should be
      allowed to the assessee. The learned transfer pricing officer further held that that in case of

                                                                                            Page | 13
      the service industry as it does not have any inventory, issue becomes quite irrelevant.
      Further he also noted that assessee has not been able to demonstrate that the difference in the
      working capital deployed is making a difference in the margins earned by the assessee and
      the other comparables. The learned dispute resolution panel also considered this argument of
      the assessee vides ground number 11 and 12. Even before us, assessee has only relied upon
      the submissions made before the learned dispute resolution panel for allowability of the
      working capital adjustment, however, it did not provide any working of the same. In view
      of the   absence of proper working and the reasons given by the assessee before the lower
      authorities or before us, we do not find any reason to accept the contention of the learned
      authorised representative.    Therefore we reject the argument of the working capital
      adjustment while computing the margins.
31.   Accordingly ground number 2 of the appeal of the assessee is partly allowed.
32.   Ground number 3 of the appeal is with respect to the judicial decisions on the transfer pricing
      adjustment not followed by the lower authorities. No specific arguments were advanced
      before us. Even otherwise the comparability analysis is a complete factual analysis and
      therefore any comparable which is held to be not comparable for consideration in case of any
      other assessee cannot be held to be not comparable with the whole world, as that would make
      that comparable which has been excluded on the basis of the judicial precedent as a unique
      comparable and only ,,one alien existing in the whole corporate world. Such is not the
      mandate of the income tax act and rules there under. The comparability is to be tested only
      with the functional analysis of the assessee viz a viz the comparable contested. The judicial
      decisions, unless otherwise warranted, cannot be relied upon for exclusion of such
      comparables. Hence we reject the ground number 3 of the appeal.
33.   Ground 4 is with respect to initiation of the penalty proceedings and ground number 5 is with
      respect to the charging of interest under the various provisions of the income tax act, both are
      consequential in nature, hence both are dismissed.
34.   In view of this appeal of the assessee in ITA number 1671/del/2015 for assessment year 2010
       11 is partly allowed.
                                       ITA number 441/del/2016
                                       Assessment year 2011  12
35.   This appeal is filed by the assessee against the order of the learned assistant Commissioner
      Of Income Tax, Circle  1 (1), Gurgaon (the learned AO) passed u/s 143 (3) read with
      section 144C of The Income Tax Act on 23/11/2015 in pursuance of the direction of the
      learned Dispute Resolution Panel  1 (the learned DRP) New Delhi dated 10/del/2015 in
      objection filed by the assessee in draft of the proposed assessment passed by the learned






                                                                                            Page | 14
      Deputy Commissioner Of Income Tax, Circle 1 (1) wherein the adjustment of                    Rs
      33397407/ to the international transaction of the assessee was made by the order of       The
      Assistant Commissioner Of Income Tax, Transfer Pricing Officer  1 (1) (1), New Delhi
      passed u/s 92CA (3) dated 07/01/2015 was considered an adjustment to the arms-length
      price of the international transactin of Rs. 33397407/ proposed by the learned TPO was
      made of Rs. 28328904/.
36.   The assessee has raised the following grounds of appeal in ITA No. 441/Del/2016 for the
      Assessment Year 2011-12:-
      "1.    The assessment order passed by the Learned Assessing Officer (,,Ld. AO) u/s 143(3)
             read with section 144C of the Act, pursuant to the directions of Ld. Dispute
             Resolution Panel (,,Ld. DRP) u/s 1440(5), based on the facts and in the circumstance
             of the case is bad in law.
      2.     The Ld. DRP and the Ld. Transfer Pricing Officer (,,Ld. TPO) / Ld. AO (following
             the directions of the Ld. DRP), erred both on facts and in law in confirming the
             addition to the extent of INR 27,848,043 holding that the international transactions
             pertaining to provision of low risk IT enabled services do not satisfy the arms length
             principle envisaged under the Act and in doing so have grossly erred by:
             2.1    not finding any merit in the objections of the Appellant that none of the
                    conditions set out in section 920(3) of the Act are satisfied in the present case;
             2.2    rejecting the Transfer Pricing (,,TP) documentation maintained by the
                    Appellant under section 92D of the Act and Rule 10D of the Income-Tax
                    Rules, 1962 ("Rules") and disregarding the arms length price (,,ALP) as
                    determined by the Appellant in the TP documentation;
             2.3    disregarding the fact that the Appellant is a captive IT enabled service
                    provider which does not bear substantial risks associated with its functions
                    and therefore cannot be compared to full-fledged entrepreneur service
                    providers;
             2.4    erred in using comparable company data available at the time of assessment
                    proceedings, instead of using data available at the time of preparing the TP
                    documentation. In doing so, the learned TPO has ignored the fact that this
                    data was not available to the Assessee at the time of compilation of the TP
                    documentation;
             2.5    disregarding multiple year/prior years data used by the Appellant in the TP
                    documentation and holding that current year (i.e. Financial Year (,,FY) 2010-
                    11) data for comparable companies should be used despite the fact that the
                    same was not necessarily available to the Appellant at the time of preparing
                    its TP documentation;
             2.6    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:
                    (i)    exclusion of companies whose data for FY 2010-11 was not available;
                    (ii)   exclusion of companies whose ITES income is less than INR 5 crores;


                                                                                            Page | 15
            (iii)   exclusion of companies whose revenue from services is less than 75%
                    of the total operating revenues;
            (iv)    exclusion of companies with export sales less than 75% of the sales
                    from ITES;
            (v)      exclusion of companies with persistent losses for last three years upto
                    and including FY 2010-11;
            (vi)    exclusion of companies having different financial year ending (i.e. not
                    March 31, 2011);
            and rejecting, in particular, the following filters applied by the Appellant in its
            fresh search:
            (i)     companies having other operating income (i.e. income other than
                    manufacturing and trading income) to sales greater than 50% were
                    accepted;
            (ii)    companies having research & development costs to sales less than 3%
                    were accepted;
            (iii)   companies having advertising, marketing and distribution costs to
                    sales less than 3% were accepted.
     2.7     including high-profit making companies with different scale of operations
            and high turnover in the final comparables set for benchmarking a captive
            sendee provider such as the Appellant (disregarding judicial pronouncements
            on the issue);
     2.8     including certain companies that are not comparable to the Appellant in
            terms of functions performed, assets employed and risks assumed;
     2.9     including certain companies in the comparables set that had achieved
            supernormal growth as a result of extraordinary circumstances during the
            year, thereby incorrectly comparing such companies to the Appellant which
            operates as a captive services provider and has stable growth under normal
            circumstances;
     2.10    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;
     2.11    ignoring the business/ commercial reality that since the Appellant is
            remunerated on an a cost plus basis, (i.e. it is compensated for all its
            operating costs plus a pre-agreed mark-up) 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.
3.   The Ld. TPO/ Ld. AO/ Ld. DRP have grossly erred on facts and in law by
     disregarding judicial pronouncements in India in undertaking the TP adjustment.
4.   The Ld. AO/Ld. TPO/Ld. DRP have erred in enhancing the income of the Assessee by
     INR 480,861 by incorrectly applying an interest rate of LIBOR plus 400 basis points
     for the period of delay in the realization of receivables from associated enterprise
     (,,AE) beyond 30 days.
5.   The Ld. TPO/ Ld. AO /Ld. DRP has grossly erred on facts and in law by initiating
     penalty under section 271(i)(c) of the Act mechanically and without recording any
     satisfaction for its initiation."
                                                                                     Page | 16
37.   There is no change in the facts and circumstances of the case of the assessee for assessment
      year 2000  11 and assessment year 2011  12 , so far as the services provided by the
      assessee     are concerned. During the year the assessee has entered into an international
      transaction with its associated enterprise of provision of information technology enabled
      services (ITeS) of Rs. 216186841/.        The assessee benchmarked above international
      transaction selecting 16 comparables, adopting the profit level indicator of operating profit
      by total cost (OP/TC), computing the margin of the comparable at 9.34 percentage and
      comparing it with the cost plus markup model of the assessee of 15%, submitted in the
      transfer pricing study report that international transaction of provision of ITeS services
      carried out by the assessee is at arms-length.
38.   The learned transfer pricing officer rejected the TP study report prepared by the assessee and
      carried out the fresh search taking the single year data as provided by the Indian tax laws,
      adopted certain filters and selected finally     7 comparables whose average profit level
      indicator was 31.51 % (OP/TC) and compared it with the margin of the assessee which is
      15% and made an adjustment of INR 31657652 /- on ALP of transactionof provision of
      ITeS services.
39.   On objection before the learned dispute resolution panel, 1 of the comparable was excluded
      and further the margins were recomputed. Therefore ultimately 6 comparables were upheld
      for inclusion whose average margin PLI was 29.50 percentage and the ultimate adjustment
      was revised to INR 27848043/. Further adjustment with respect to the interest cost of the
      receivables imputed at INR 1739755/ by the learned transfer pricing officer which has been
      reduced by the learned dispute resolution panel to INR 480861/. Consequently this appeal
      is filed by the assessee.
40.   The ground number 1 of the appeal is general in nature and therefore the same is dismissed.
41.   The ground number 2 challenges the transfer pricing adjustment of INR 2 7848043/. The
      assessee challenges the inclusion of the comparable as under:-
          a. Accentia technologies Ltd
          b. Eclerx services Ltd
          c. TCS E serve limited
          d. Infosys BPO Ltd
42.   The arguments of the both the parties with respect to the exclusion of above comparables
      remained the same as were advanced for assessment year 2000  11.             The only new
      comparable which assessee is seeking for exclusion is Eclrex services Ltd.
43.   We have carefully considered the rival contentions and perused the orders of the lower
      authorities. On comparison of the functions performed by the assessee as well as the

                                                                                           Page | 17
      functions performed by the comparable companies, discussion made by us in the order of the
      assessee for assessment year 2010  11, we direct the learned transfer pricing officer to
      exclude (1) Accentia technologies Ltd, (2) TCS E serve limited, (3) Infosys BPO Ltd for
      reason given by us therein.
44.   Now we come to the new comparable E clrex services Ltd, which assessee contest for
      exclusion stating that it is functionally dissimilar as it is engaged in rendering knowledge
      process services focused on financial services and sales and marketing support services.
      Therefore the contention of the learned authorised representative is that it is KPO which
      cannot be compared with the functions of the assessee. It was submitted that the functions
      provided by the assessee are not at all knowledge process outsourcing functions. The learned
      TPO held that it is functionally similar, though it is a KPO as claimed by the assessee,
      several services provided by the taxpayer are also of similar nature. He further held that all
      the services of the taxpayer are not high end and therefore both the lower end and high-end
      comparables have been used. He further held that the services provided by the comparable
      are part and parcel of the ITeS segment. The learned dispute resolution panel upheld the
      findings of the learned TPO.
45.   We have carefully considered the rival contentions and find that knowledge process
      outsourcing comparable cannot be held to be comparable with the functions provided by the
      assessee, such is the mandate of the decision of the honourable Delhi High Court in the
      Rampgreen solutions private limited vs. CIT (ITA number 102/2015 for assessment year
      2008  09). Ld TPO has also accepted that        comparable company is a KPO. Therefore
      respectfully following the decision of the honourable Delhi High Court, we direct the
      learned transfer pricing officer to exclude the above comparable from the comparability
      analysis.
46.   The assessee did not contest any other issues as mentioned in ground number 2, and therefore
      the ground number 2 of the appeal of the assessee is decided on the exclusion of the above
      comparable is only and same is partly allowed.
47.   Ground number 3 is not pressed before us, therefore, the same is dismissed.
48.   Ground number 4 is challenged by the assessee where the contention of the assessee is that
      the receivables outstanding beyond 30 days from the associated enterprise are deemed as
      loan and charging notional interest at the rate of one month LIBOR +400 basis points
      resulting into the interest rate of 4.78% for the period of delay in receipt of payment beyond
      30 days of the invoice is not correct. The learned transfer pricing officer after the direction
      of the learned dispute resolution panel has made an adjustment of INR 4 80861/  against the
      original adjustment proposed by the learned transfer pricing officer of INR 1 739755/.

                                                                                           Page | 18
49.        The learned authorised representative submitted that interest on receivable is not an
           international transaction is the interest proposed to be charged is already built in the sale
           price and thus no interest needs to be computed on the outstanding receivable from its
           associated enterprises. He further supported the above contention by the judicial precedent in
           case of principal Commissioner of income tax vs. Kusum healthcare private limited and
           Agilent technologies Ltd vs ITO (91 taxmann.com 59) of the honourable Delhi High Court.
50.        We have carefully considered the rival contention and find that the issue has been squarely
           covered in favour of the assessee by the decision of the honourable Delhi High Court
           wherein it was found that though there is a credit period allowed by the assessee to the
           associated enterprise of only 180 days however the associated enterprise are allowed to linger
           for long and interest was computed by the AO/TPO, the honourable Delhi High Court
           deleted the above adjustment.       Therefore respectfully following the decision of the
           honourable Delhi High Court we direct the learned AO/TPO to delete the above adjustment
           to the arms-length price on account of delayed receivable from its associated enterprise as
           the facts are similar as stated in the decision of the honourable Delhi High Court.
           Accordingly ground number 4 of the appeal of the assessee is allowed.
51.        Ground number 5 and 6 of the appeal are consequential in nature pertaining to the initiation
           of the penalty proceedings in charging of interest. Therefore there dismissed.
52.        Accordingly appeal of the assessee for assessment year 2011  12 is partly allowed.
           Order pronounced in the open court on 06/05/2019.

                   -Sd/-                                                      -Sd/-
            (H. S. SIDHU)                                              (PRASHANT MAHARISHI)
           JUDICIAL MEMBER                                              ACCOUNTANT MEMBER

Dated: 06/05/2019
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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