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 Income Tax Addition Made Towards Unsubstantiated Share Capital Is Eligible For Section 80-IC Deduction: Delhi High Court

Morningstar India Pvt. Ltd, 9th Floor, Platinum Tech Park, Plot No. 17/18, Sector-30A, Vashi, Navi Mumbai vs DCIT, Circle-17(1), Delhi
May, 06th 2019

Referred Sections:
section 143 (3)
section 144C of The Income Tax Act
section 920(3) of the Act
section 92D of the Act

Referred Cases / Judgments
Ramp green solutions private limited vs. CIT

 




                                   Morningstar India Pvt. Ltd Vs DCIT
                                              ITA No. 1520/Del/2015
                                           Assessment Year: 2010-11



               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. 1520/Del/2015
                        (Assessment Year: 2010-11)
     Morningstar India Pvt. Ltd, Vs.              DCIT,
       9th Floor, Platinum Tech                Circle-17(1),
                  Park,                            Delhi
     Plot No. 17/18, Sector-30A,
         Vashi, Navi Mumbai
          PAN: AAACX0362K
              (Appellant)                     (Respondent)


             Assessee by :             Mr. Piyush Chawla, CA
                                       Ms. Shruti Khimta, CA
             Revenue by:              Shri Sandeep Kr. Mishra,
                                               Sr. DR
          Date of Hearing                   07/02/2019
       Date of pronouncement                06/05/2019


                              ORDER

PER PRASHANT MAHARISHI, A. M.

1.   This appeal is filed by assessee, Morningstar India private limited
     for assessment year 2010 ­ 11 against the order of the learned
     Deputy Commissioner Of Income Tax, Circle 17 (1), New Delhi
     (the learned Assessing Officer) (AO) under section 143 (3) read
     with section 144C of The Income Tax Act [ The Act] passed in
     pursuance to the direction of the learned Dispute Resolution
     Panel ­ III (the learned DRP), New Delhi dated 27/11/2014

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                                    Morningstar India Pvt. Ltd Vs DCIT
                                              ITA No. 1520/Del/2015
                                           Assessment Year: 2010-11



     against objection filed by the assessee      in   proposed draft of
     assessment dated 14/2/2014 wherein the order u/s 92 CA (3) of
     the Act passed by The Assistant Director Of Income Tax, Transfer
     Pricing Officer ­ I (6), New Delhi (the learned TPO) dated
     28/1/2014 proposing an adjustment of INR 25575349/­ as
     arms-length price (ALP) of the International Transaction ( IA) was
     upheld.
2.   The assessee has raised the following grounds of appeal:-

     "That on the facts and circumstances of the case, and in law;
     1.   The assessment order passed by the Learned Assessing
          Officer (,,Ld. AO) pursuant to the directions of Learned
          Dispute Resolution Panel (,,Ld. DRP) is bad in facts and law.
     2.   The Ld. AO (following the directions of the Ld. DRP), erred
          both on facts and in law in confirming the addition of Rs.
          14,770,775/- to the income of the Appellant proposed by the
          Transfer Pricing Officer (,,Ld. TPO) by holding that the related
          party international transactions pertaining to provision of IT
          Enabled back-office support (,,ITES) services do not satisfy
          the arms length principle envisaged under the Income-tax
          Act, 1961 ('the Act'). In doing so, the Ld. DRP and the Ld. AO
          have grossly erred in agreeing with and upholding the Ld.
          TPOs action of:
          2.1   not appreciating that none of the conditions set out in
                section 920(3) of the Act are satisfied in the instant
                case;
          2.2   disregarding the Arms Length Price (,,ALP) as
                determined by the Appellant in the Transfer Pricing (TP)
                documentation maintained as per 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;
          2.3   rejecting the comparability analysis undertaken by the
                Appellant in the TP documentation and conducted a
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                           Morningstar India Pvt. Ltd Vs DCIT
                                     ITA No. 1520/Del/2015
                                  Assessment Year: 2010-11



      fresh comparability analysis based on application of the
      following additional/ revised filters in determining the
      ALP:
      2.3.1 exclusion of companies with export sales that are
           less than 75% of their total revenue/ sales as a
           comparability criterion;
      2.3.2 exclusion of companies identified by the Appellant
           with employee cost less than 25% of their
           operating cost as a comparability criterion;
      2.3.3 applying sales filter of Rs. 5 crore on for selecting
           comparable companies, thereby rejecting the
           turnover filter of Rs. 1 crore, applied by Appellant;
           and
      2.3.4 exclusion  of  companies    with   diminishing
            revenues/ having persistent losses during the
            year under consideration as a comparability
            criterion.
2.4   including companies having abnormal margins/volatile
      margins in the final comparables set without
      appreciating the fact those abnormal/volatile margins
      are due to certain abnormal conditions like business
      restructuring, super normal growth in revenue/net
      profits etc. and on the other hand resorting to arbitrary
      rejection of low-profit/loss making companies based on
      erroneous and inconsistent reasons.
2.5   including certain companies in the final set that are not
      comparable to the ITES segment of the Appellant in
      terms of functions performed, assets employed and
      risks assumed and excluding certain companies on
      arbitrary/ frivolous/inconsistent grounds even though
      they are comparable to the Appellant in terms of
      functions performed, assets employed and risks
      assumed;
2.6   ignoring the business/ commercial reality that since the
      Appellant is remunerated on an arms length cost plus
      basis, i.e. it is compensated for all its operating costs
      plus a pre-agreed mark-up based on a benchmarking
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                                 Morningstar India Pvt. Ltd Vs DCIT
                                           ITA No. 1520/Del/2015
                                        Assessment Year: 2010-11



             analysis, the Appellant undertakes minimal business
             risks as against comparable companies that are full-
             fledged risk taking (which may include market risk,
             price risk, capacity utilization risk, etc.) entrepreneurs
             as is evident from the volatile margins earned over the
             period of years and by not allowing a risk adjustment to
             the Appellant on account of the fact."
3. Brief facts of the case shows that assessee is a 100% subsidiary
  of Corporate Fundamentals Incorporation, USA engaged in the
  business of captive Data processing services provider to its group
  companies. The assessee is also involved in the sale of access to
  online databases in services of Morningstar incorporation USA.
  The assessee company filed its return of income (ROI) on
  29/9/2010 declaring loss of INR 14666670/­. The assessment
  u/s 143 (3) of the act was taken up and it was found that
  assessee   has    entered   into   an   international   transaction
  amounting to INR 121476495/­ with its associated enterprise.
  Case was referred to the learned transfer pricing officer for
  determining its arms-length price. The learned transfer pricing
  officer found that assessee has entered into a transaction of
  provision of data processing and software services to its
  associated enterprise amounting to Rs. 116698529/­ which was
  benchmarked by the assessee adopting the Transactional Net
  Margin Method (TNMM) is most appropriate method (MAM) using
  the profit level indicator (PLI) of operating profit/total cost
  (OP/TC) selecting 7 comparable wherein the comparable mean
  PLI was 12.19 percent and assessee has earned the margin of
  14.04 %, assessee submitted that its international transaction is

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                                   Morningstar India Pvt. Ltd Vs DCIT
                                             ITA No. 1520/Del/2015
                                          Assessment Year: 2010-11



carried out at arms-length. The learned transfer pricing officer
issued a show cause notice with respect to the several aspects of
the benchmarking analysis of the assessee. After that          he issued
a show cause notice with respect to the selection of the
comparables, use of current year data, the rejection of the certain
filters et cetera.    The learned TPO also referred to the cost
allocation methodology adopted by the assessee for the login sale
revenue of the assessee. Thereafter recording the objection of the
assessee and considering reply of the assessee after giving the
reasons for the rejection, the learned TPO finally selected 12
comparables whose average profit level indicator of operating
profit/operating     cost   was    found   to    be   31.47   percentage,
compared it with the PLI of the assessee and determined arms-
length price of the transaction at Rs. 139444849/- against the
transaction value of Rs. 113869500/­. Accordingly shortfall of
transfer   pricing    adjustment     of    INR   25575349/-          was
determined.     Consequently draft of proposed assessment was
passed.     Assessee objected it before the learned dispute
resolution Panel.      The learned dispute resolution passed the
direction on 27/11/2014.          As per the direction of the learned
dispute resolution panel all the 12 comparables selected by the
learned transfer pricing officer was approved and the authentic
mean of operating profit/total cost of the comparable companies
was computed at 28.83 percentages. Based on those directions
order u/s 143 (3) read with section 144C of the act was passed.
Subsequently an order u/s 154 of the income tax act was passed

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                                   Morningstar India Pvt. Ltd Vs DCIT
                                             ITA No. 1520/Del/2015
                                          Assessment Year: 2010-11








  by the learned Deputy Commissioner Of Income Tax, Transfer
  Pricing Officer ­ 2 (1) (1), New Delhi on 18/12/2014 wherein the
  proposed adjustment u/s 92CA of the act was restricted to INR
  14770775/­.        Assessee aggrieved with the assessment order
  passed u/s 143 (3) read with section 144C         has preferred this
  appeal before us.
4. The learned authorised representative submitted that assessee
  challenges   the    transfer   pricing   adjustment   made   to   the
  international transaction of the assessee of INR 147770775/­
  and is pressing for exclusion of following comparables:
    a. Accentia technologies Ltd
    b. E Clerx services Ltd
    c. Infosys BPO Ltd
    d. TCs E serve international Ltd
5. He submitted a detailed chart with respect to the each of the
  comparable. Over and above, this he also pressed for inclusion
  of the comparable Mphasis finsources Ltd.
6. The learned departmental representative vehemently supported
  the order of the learned transfer pricing officer and the learned
  dispute resolution panel.
7. We have carefully considered the rival contention and perused
  the orders of the lower authorities.       The only dispute is with
  respect to the software development and maintenance and data
  processing services of the assessee. Assessee is performing the
  IT support services to its associated enterprise.       It is an IT
  support and software development and maintenance service

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                                 Morningstar India Pvt. Ltd Vs DCIT
                                           ITA No. 1520/Del/2015
                                        Assessment Year: 2010-11



  provider to its associated enterprise whereas its associated
  enterprise are engaged in marketing and sales, quality control,
  invoicing on collection, client relationship, engagement control,
  execution of services and management support services for
  software development.      Therefore according to the transfer
  pricing study report furnished by the assessee and not disputed
  by the learned assessing officer,    Morningstar India, assessee
  provides, assistance in website and web application development
  of customers of associated enterprise, assistance in development
  and maintenance of STAR framework and Morningstar corporate
  website, assistance into tracking and data feeding, assistance in
  sales analysis and market research and assistance in quality
  testing of software developed by associated enterprises. Assessee
  is also involved in sale of online access of various databases of
  Morningstar group from its Mumbai office.         It provided data
  processing and software services to its associated enterprise
  Morningstar incorporation of INR 58412756/­       and to Corporate
  fundamental incorporation of INR 58285773/­. The only dispute
  rose before us is the selection of comparables.
8. The 1st comparable disputed by the assessee for its exclusion is
  Actentia technologies Ltd stating that it is functionally dissimilar
  as it is engaged in medical transcription services and further it
  has a significant amount of brands , IPRS and goodwill. Further
  due to non-availability of the segmental information and
  business restructuring resulting in extraordinary circumstances
  being amalgamation in the company, it should be excluded. The

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                                 Morningstar India Pvt. Ltd Vs DCIT
                                           ITA No. 1520/Del/2015
                                        Assessment Year: 2010-11



  assessee further relied upon several judicial precedents wherein
  the above comparable company was excluded.
9. 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 growing of all the
  services under one umbrella. He therefore held that the above
  comparable companies functionally similar and passes all the
  filters applied by the learned transfer pricing officer. 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



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                                  Morningstar India Pvt. Ltd Vs DCIT
                                            ITA No. 1520/Del/2015
                                         Assessment Year: 2010-11



    of the company is essentially similar to that of the assessee
    hence it was retained as a comparable.
10. On careful consideration of the annual report of the above
    comparable company for financial year 2009 ­ 10 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 with 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

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                                   Morningstar India Pvt. Ltd Vs DCIT
                                             ITA No. 1520/Del/2015
                                          Assessment Year: 2010-11



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 MHRC
area.    It is also entering into the legal process outsourcing
segment.      It is also using Immaculate business process
outsourcing management solutions for healthcare, financial and
insurance sector and health the dox ­ cutting-edge offshore HRC
solutions for healthcare sector are provided by this company.
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.                 And therefore we
reject the argument that there is an extraordinary event in the
comparable company.              However looking to the functions
performed by the Accentia technology and the various kinds of

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                                   Morningstar India Pvt. Ltd Vs DCIT
                                             ITA No. 1520/Del/2015
                                          Assessment Year: 2010-11



     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.
11. The next comparable challenged for its exclusion is E Clerx
     services Ltd 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 and
     TPO services.   It is further stated that it provides end-to-end
     financial transaction support services with services that span
     both on the sale side and buy-side of the financial transaction.
     The   comparable    company    also   provides   strategy   process
     consulting services helping clients devise solution to improve
     efficiency, reduce risk and meet regulatory and market demands.
     In the sales and marketing support division, the comparable
     company provides services in all elements of products and
     services marketing. It is further argued that honourable Delhi
     High Court in Ramp green solutions private limited vs. CIT it is
     held that it is engaged in the knowledge process outsourcing
     business and therefore it cannot be compared with simple ITeS
     service provider.
12. Before the learned transfer pricing officer assessee contested for
     exclusion of the above comparable stating that it is functionally
     dissimilar and a very large company.        The learned transfer
     pricing officer rejected the contention of the assessee and stated

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                                         Morningstar India Pvt. Ltd Vs DCIT
                                                   ITA No. 1520/Del/2015
                                                Assessment Year: 2010-11



    that assessee itself has accepted that these companies into a
    BPO segment and therefore he rejected the contention of the
    assessee as the comparable company passed all the filters. The
    learned transfer pricing officer further stated that under the
    TNMM method the standard of comparability are relatively
    relaxed and only broad similarity of the functions are required to
    be compared.          The learned dispute resolution panel also
    approved the contention of the learned transfer pricing officer.
13. We have carefully perused the annual accounts of                      E Clrex
    services for financial year 2009 ­ 10 placed at page number 109-
    212 of the paper book. On page number 4 of the annual report,
    it is mentioned that E Clrex services Ltd is a leading knowledge
    process outsourcing company supporting its clients. Therefore it
    is apparent that it is a knowledge process outsourcing company.
    It is also undisputed that the profile of the assessee company is
    not of knowledge process outsourcing company. The honourable
    Delhi High Court in Ramp green solutions private limited vs. CIT
    [2015] 60 taxmann.com 355 (Delhi)/ [2015] 234 Taxman 573 (Delhi)/ [2015] 377 ITR
    533 (Delhi)/ [2015] 279 CTR 441 (Delhi) has held that expression 'KPO'

    indicates the involvement of domain knowledge in providing ITeS.
    Typically, KPO includes involvement of advanced skills; the
    services    provided     may include        analytical services, market
    research, legal research, engineering and design services,
    intellectual management etc. It is further held that the KPO
    sector has been described as 'a value play'. The honourable High
    Court referred to in report and held that KPO services are likely
    to span activities such as 'patent advisory, high-end research
                                                                            Page | 12
                                      Morningstar India Pvt. Ltd Vs DCIT
                                                ITA No. 1520/Del/2015
                                             Assessment Year: 2010-11



      and analytics, online market research and legal advisory'.
      Therefore respectfully following the decision of Honourable Delhi
      High court      as stated above, it is apparent that the E clerx
      services Ltd is not a comparable company with the ITeS segment
      of the assessee. Therefore, we direct the learned transfer pricing
      officer/AO to exclude this company.
14. The 3rd comparable contested is Infosys BPO Ltd. The learned
      authorised representative says that above company provides
      high-end     integrated   services   in    the   nature   of   business
      transformation services, sourcing and procurement outsourcing
      et cetera and which has a significant intangible asset in the form
      of Infosys brand.     It is further stated that it has acquired a
      company and therefore there is an extraordinary event hence it
      should be excluded. He further referred to page number 264 of
      the paper book wherein the amalgamation has taken place of
      PAN financial services India private limited with comparable
      company. Therefore it is stated that it should be excluded.
15.   The learned transfer pricing officers considered the above
      objection of the assessee vide para number 15.5 page number 28
      of his order.   He held that as per the profit and loss account,
      significant accounting policies and notes on accounts of the
      above company, it is clear that this company is an ITeS company
      and fully comparable with the assessee.           With respect to the
      presence of brand value the learned TPO noted that annual
      report of Infosys BPO does not mention anything regarding the
      brand deriving its profitability.         He further stated that by

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                                    Morningstar India Pvt. Ltd Vs DCIT
                                              ITA No. 1520/Del/2015
                                           Assessment Year: 2010-11



    spending a meager amount of revenue Infosys BPO could not
    have generated brand value as suggested by the taxpayer. The
    learned dispute resolution panel also upheld reasoning given by
    the learned transfer pricing officer.
16. 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 an Infosys group, has
    incurred the expenditure on the brand building and on the
    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.



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                                   Morningstar India Pvt. Ltd Vs DCIT
                                             ITA No. 1520/Del/2015
                                          Assessment Year: 2010-11



17. 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 invest 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.
18. 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.



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                                    Morningstar India Pvt. Ltd Vs DCIT
                                              ITA No. 1520/Del/2015
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19. 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.
20. The 4th comparable TCS E serve international Ltd challenged by
     the learned AR on functional dissimilarity stating that it is
     engaged in transaction processing and technical services like
     software testing, verification and validation of the software. It is
     further contended that segment information is not available. The
     AR further stated that there are extraordinary event in the form
     of acquisition by the comparable company from Citigroup of
     certain business. It was further stated that there is a payment
     for TATA brand equity, further the comparable became part of
     TATA group and has a huge scale and large client base which
     has enhanced its offerings and has also started servicing new
     clients during the year under review.     Hence it was submitted
     that this company is not comparable with the assessee company.
     He also referred to several judicial precedents where the above
     company was held to be not comparable for the reason of the size
     and scale of its operation which makes it an inapposite
     comparable.
21. Before the learned transfer pricing officer assessee argued that it
     is a very large company which has been rejected by the learned
     transfer pricing officer in para number 15.6 of his order.      The
     learned dispute resolution panel also rejected the contention of
     the assessee and upheld its inclusion by the TPO.








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                                   Morningstar India Pvt. Ltd Vs DCIT
                                             ITA No. 1520/Del/2015
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22. We have carefully considered the contentions and find the
    annual account 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.
    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 international
    Ltd deserves to be excluded. Accordingly we direct the learned
    TPO ­ AO to exclude the above comparable.
23. The last comparable challenged by the assessee is TCS E serve
    limited. The assessee challenged its exclusion for the reason of
    the   functional dissimilarity as the     comparable companies
    engaged in transaction processing and technical services like
    software testing, verification and validation of the software. The
    learned authorised representative also challenged it as it owns
    intangibles, pays for Tata brand equity and non availability of the
    segment information. Further it is also not comparable on the
    ground of incomparable scale of operations.
24. The learned transfer pricing officer in para number 15.7 of the
    order rejected the argument of the assessee similar to TCS E



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                                    Morningstar India Pvt. Ltd Vs DCIT
                                              ITA No. 1520/Del/2015
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     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
     thousands.    Therefore we direct the learned transfer pricing
     officer to exclude the above comparable from the comparability
     analysis.
26. The next ground on the comparability analysis of the assessee is
     that one comparable selected by the assessee by the name of
     Mphasis Fincources Ltd has been rejected by the learned transfer
     pricing officer as it failed the employee cost filter. The learned
     authorised representative submitted that on perusal of the page
     number 13 of the annual report indicated that the total employee
     cost is INR 7 2651206 and the total expenditure incurred by the
     assessee is INR 1 63475456 and therefore the employee cost is
     only 44.44 percentage and thus meets the filter applied by the
     learned transfer pricing officer.   He further stated that even if
     only salary cost is taken then also the employee cost to total cost
     comes to 40% approximately.         It was further stated that the
     above companies also functionally comparable and therefore it
     should be included for the comparability analysis. With respect

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                                          Morningstar India Pvt. Ltd Vs DCIT
                                                    ITA No. 1520/Del/2015
                                                 Assessment Year: 2010-11



     to the financial result for FY 2009 ­ 10, he submitted a copy
     thereof.
27. The learned transfer pricing officer rejected the above comparable
     stating that that is not a suitable comparable as it has been
     selected by the assessee on the basis of the data for a financial
     year 2008 ­ 09 despite the fact that assessee has used
     companies with financial year for           FY 2009 ­ 10 as a filter.
     Further according to the TPO the functional profile is also
     different and employee compensation is a percentage to total
     expenses is less than 25%. The learned dispute resolution panel
     also accepted the reasons recorded by the learned transfer
     pricing officer for its rejection.
28. We have carefully considered the contention of the assessee on
     this aspect. In the transfer pricing study report submitted before
     the learned transfer pricing officer the assessee did not submit
     the financial for Year 2009 ­ 10 of this comparable company.
     Further same were neither produced before the learned transfer
     pricing officer or before the learned dispute resolution panel and
     it is first-time produced before us. There is no application made
     by the assessee of admission of any additional evidences also. In
     view of this we do not find any merit in the case of the assessee
     for inclusion of the above comparable. Hence we reject the same.
29. In ground number 2.6 the assessee also contested that the claim
     for risk adjustment may be allowed as the appellant undertakes
     minimum business risk as against comparable companies that
     are full-fledged risk entrepreneurs. The learned transfer pricing

                                                                     Page | 19
                                     Morningstar India Pvt. Ltd Vs DCIT
                                               ITA No. 1520/Del/2015
                                            Assessment Year: 2010-11



       officer and the learned dispute resolution panel has rejected the
       argument of the assessee for the reason that assessee failed to
       demonstrate before them that the risk profile of the assessee is
       making a difference in the margins earned by the assessee and
       the comparables. Before us also assessee could not demonstrate
       that how the risk profile is making a difference in the margin of
       the comparable companies as well as the assessee. Therefore we
       do not find any reason to interfere in the decision of the learned
       transfer pricing officer and approved by the learned dispute
       resolution panel.
30. Accordingly we direct the learned transfer pricing officer to
       exclude Accentia technology Ltd, E Clerx services Ltd, Infosys
       BPO Ltd, TCS E serve international Ltd and TCS E serve limited.
       Accordingly ground number 2 of the appeal is partly allowed.
31. Ground number 1 and ground number 3 of the appeal is general
       in nature and therefore there dismissed.
32. Accordingly appeal of the assessee 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

Copy forwarded to

  1.   Applicant
  2.   Respondent
  3.   CIT
  4.   CIT (A)
                                                                  Page | 20
             Morningstar India Pvt. Ltd Vs DCIT
                       ITA No. 1520/Del/2015
                    Assessment Year: 2010-11



5. DR:ITAT
                       ASSISTANT REGISTRAR
                           ITAT, New Delhi




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