Information gathered by TPO using authority u/s 133(6) should be provided to assessee

JCIT Vs HSBC Professional Services (India) Pvt. Ltd. (ITAT Mumbai)

ITAT Mumbai held that as TPO has gathered financial and functional details of the company by way of using his authority under section 133(6) of the Income Tax Act hence the same needs to provide all the gathered information to the assessee.

Facts-

The assessee company M/s HSBC Professional Services (India) Private Limited is incorporated in India and 98% of the shareholding is held by HSBC holdings BV, Netherlands and the balance of two per cent is held by Hong Kong and Shanghai banking Corp Ltd., India. The assessee company is engaged in providing personnel to various entities of the HSBC group for conducting audit services.

TPO noted that the assessee in its transfer pricing study selected Transactional Net Margin Method as the most appropriate method for benchmarking international transactions. TPO came out with a fresh list of comparables. After considering the objections, TPO made a final list of comparables and arithmetic mean of their PLI was worked out to 24%.

TPO rejected the contention of the assessee for providing working capital adjustment as well as risk adjustment in absence of any quantifiable data provided by the assessee. TPO computed adjustment of Rs. 1,06,65,264/-.

CIT(A) partly allowed the appeal of the assessee and sustained following comparables having arithmetic mean of PLI at 22.32%. Accordingly, assessee preferred the present appeal challenging exclusion of 7 comparables and inclusion of one comparables.

Conclusion-

TPO has gathered financial and functional details of the company by way of using his authority under section 133(6) of the Act. Since the said information has not been provided to the assessee, we feel it appropriate to restore this issue back to the file of the Ld. AO/TPO with the direction to provide all the information gathered under section 133(6) about the company to the assessee and decide the issue of exclusion/inclusion of the company after providing adequate opportunity of being heard to the assessee.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These cross appeals by the Revenue and the assessee have been preferred against the order dated 24/10/2011 passed by the Ld. Commissioner of Income-tax (Appeals)-15, Mumbai [in short ‘the Ld. CIT(A)’] for assessment year 2006 -07.

2. The grounds raised by the Revenue in its appeal are reproduced as under:

1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Transfer Pricing Adjustment of Rs. 1,06,65,264/- made u/s. 92CA(3) of the Act, without appreciating the facts of the case”.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the benefit of -5% relief to the assessee, without appreciating the fact that no standard deduction of 5% to the assessee is envisaged under section 92C(2) of the Act”.

3. The appellant prays that the order of the Ld. CIT(A) on the above ground be set aside and that of the AO be restored”.

3. The grounds raised by the assessee in its appeal are reproduced as under:

1. The learned Commissioner of Income- tax (Appeals) -15, Mumbai (‘CIT-A’) erred on facts and in law in allowing only partial relief in relation to the transfer pricing adjustment made by Assessing Officer /Transfer pricing officer (‘AO/TPO) despite the fact that the AO and the TPO have incorrectly disregarded the benchmarking analysis and the resultant comparable companies identified by the Appellant as part of its transfer pricing report (TP Report’) maintained on a contemporaneous basis as per Section 92D of the Act read with Rule 10D of the Rules without assigning any cogent reasons thereof.

2. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO/TPO erred in making transfer pricing adjustment by incorrectly invoking the provisions of Section 92C(3)(a) of the Act.

3. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO have conducted a fresh benchmarking analysis using (i) inappropriate search filters; (ii) non contemporaneous data, (iii) functionally dissimilar companies as comparable; and significantly substituting the Appellant’s analysis with a standard set of comparable for the Information Technology Enabled Service (ITeS’) segment which is adopted by the Income-tax department for assessment year 2006 -07 in an arbitrary manner and with a pre-determined mind set of making a transfer pricing adjustment. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed as the same is contrary to the provisions of law and has resulted in selection of companies suffering from quantitative and qualitative dissimilarities.

4. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and TPO have rejected the use of data for two preceding financial years (viz. FY 2004-05 and FY 2003-04) in addition to the previous year i.c. 2005-06 as permitted under the provisions of Rule 10D(4) of the Rules as elaborated in the TP Report.

5. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO have used secret comparable companies by considering companies for which data was not available in public domain at the time of preparation of transfer pricing study report and subsequently invoking the powers given under Section 133(6) of the Act for gathering data not available in the public domain and thereafter using such data for benchmarking international transactions of the Appellant. The exercise undertaken by the TPO under Section 133(6) of the Act is selective and arbitrary and hence should be out rightly rejected.

6. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO have determined the arm’s length price based on data which was not available as on the specified date [as defined in Section 921(iv) of the Act read with Rule 10B(4) of the Rules).

7. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO did not allow any adjustments as warranted under Rule 10B(1)(e)(iii) of the Rules to account for difference between international transactions and the alleged comparable uncontrolled transactions selected by the learned AO/TPO.

The Appellant prays that the additions to the appellant’s income made in relation to transfer pricing matters by the AO/ TPO and upheld by the Hon’ble CIT(A) be deleted. Levy of Interest under Section 234B and 234C of the Act

8. On the facts and in the circumstances of the case and in law, the learned AO erred in levying interest under section 234B and 234C of the Act. The Appellant prays that the AO be directed to delete the interest under the Act.

4. At the outset, we may like to mention that the then Assessing Officer of the case vide letter dated 08/02/2021 intimated to the Departmental Representative for withdrawal of the appeal in view of the tax effect involved being below the limit prescribed by the Central Board of Direct Taxes(CBDT) vide Circular No. 17 of 2019. The said intimation duly forwarded by the concerned Range Officer i.e. Additional Commissioner of Income-tax, is placed on record. The Ld. Departmental Representative also agreed that tax effect involved in ground raised by the Revenue is below the limit prescribed by the CBDT. In view of petition of the Ld. Assessing Officer for withdrawing the appeal, the appeal of the Revenue is dismissed as withdrawn.

5. As far as appeal of the assessee is concerned, before us the Ld. counsel of the assessee only challenged inclusion/exclusion of certain comparable in the final list of the comparable sustained by the Ld. CIT(A). The assessee has also filed additional ground of appeal challenging the rejection of certain comparable by the AO/TPO, which is reproduced as under:

9. The Ld. CIT(A) erred on the facts in upholding the order of the AO/TPO in rejecting functionally comparable companies selected by the Appellant in its transfer pricing report.

6. We have heard parties on the issue of admissibility of the additional ground. In view of settled principle laid down by the Hon’ble Supreme Court in the case of CIT Vs NTPC 229 ITR 383 (SC), the additional ground raised by the assessee is admitted as issues involved being of legal nature and no investigation of fresh facts is required.

7. The brief facts relevant for the adjudication of the issue in dispute are that the assessee company M/s HSBC Professional Services (India) Private Limited is incorporated in India and 98% of the shareholding is held by HSBC holdings BV, Netherlands and balance two percent is held by Hong Kong and Shanghai banking Corp Ltd., India. The assessee company is engaged in providing personals to various entities of the HSBC group for conducting audit services.

7.1 For the year under consideration, the assessee filed its return of income on 17/11/2006 declaring total income of ₹1,02,39,397/-. The return of income filed by the assessee was selected for scrutiny assessment any statutory notices under the Income-tax Act, 1961 (in short ‘the Act’) were issued and complied with. In view of international transactions carried out by the assesse e with its Associated Enterprises , the Ld. Assessing Officer referred the matter of  determination of arm ’s length price of the international transactions to the Ld. Transfer Pricing Officer (TPO). On perusal of the transfer pricing study submitted by the assessee , the Ld. TPO noticed certain international transaction s carried out by the assessee, which are reproduced in para 4 of his order dated 21/10/2009. For ready reference, summary of said international transactions is extracted as under:

7.2 The Ld. TPO further noted in para five of his order that the assessee in its transfer pricing study selected Transac tional Net Margin Method (TNMM) a s the most appropriate method for benchmarking international transactions. The Ld. TPO has noted the admission of the assessee that no independent comparable companies were identified in search of the “Prowess” and “capitaline” database, which rendered services identical to that of the assessee and therefore the assessee broadened its search criteria so as to include companies that are engaged in processing jobs [i.e. Information Technology (IT) enabled/Business Process Outsourcing services (BPO)] as broadly comparable to the functions and risk profile of the assessee. The assessee selected 11 companies as comparables and arithmetic mean of their weighted aver age of profit level indicator ( operating profit/total cost) was worked out to 11.45%. The list of comparables selected by the assessee has been reproduced by the Ld. TPO in para five of his order. For ready reference, the said list of comparables is extracted as under :

7.3 It was submitted by the assessee before the Ld. TPO that three years weighted average of PLI of assessee being more than the arithmetic mean of the PLI of the comparable, the international transactions carried out by the assessee were at arm’s length.

7.4 The Ld. TPO accepted search carried for Its industry for benchmarking the international transactions of the assessee but he rejected the weighted average of multiple year data adopted by the assessee for working out profit level indicator. The Ld. TPO applied the current year data for computing profit level indicator of the assessee as well as the comparable companies. The Ld. TPO also applied filters of export turnover more than 25% and related party transactions (RPT) less than 25% for selecting comparable engaged in the Its/BPO industry. Accordingly, the Ld. TPO accepted only three comparable chosen by the assessee namely ‘All sec Technologies Ltd.’, ‘Ace software exports ’ and ‘Spence Telemetry Systems and solutions Ltd ’. The Ld. TPO himself carried out search of the database(s) and came out with a fresh list of comparable. After considering objections of the assessee, the Ld. TPO made a final list of comparable and arithmetic mean of their PLI was worked out to 24%. The list of the comparable , objection of the assessee and remarks of the TPO, reproduced in para 5.6.2 of the Ld. TPO, is extracted as under:

7.5 The Ld. TPO rejected the contention of the assessee for providing working capital adjustment as well as risk adjustment in absence of any quantifiable data provided by the assessee.

7.6 The Ld. TPO vide his order dated 21/10/2009 computed the adjustment of ₹1,06,65, 264/-as under:

5.8. Determination of Arms Length Price:

Total Cost incurred by assessee on providing Office Services

(In absence of separate accounts (proportionate cost being taken)

8. The Ld. Assessing Officer issued draft assessment order to the assessee proposing the addition for transfer pricing adjustment of ₹1,06,65,264/-, against which the assessee did not chose to object before the Ld. Dispute Resolution Panel (DRP), and therefore after expiry of period prescribed for objecting before the Ltd DRP i.e. one month, the Assessing Officer passed final assessment order on 26/02/2010 making transfer pricing addition of ₹1,06, 65, 264/-.

9. Against the order of the Ld. Assessing Officer, the assessee preferred appeal before the Ld. CIT(A) and raised various grounds challenging the order of the Ld. Assessing Officer. As far as selection of comparable, is concerned the Ld. CIT(A) after considering the submission of the assessee, partly allowed the appeal of the assessee and sustained following comparable having arithmetic mean of PLI at 22.32%. The list of comparable sustained by the Ltd CIT(A) is as under:

10. The assessee before us has challenged exclusion of 7 comparable retained comparable, which was rejected by the ld. TPO.

11. Before us the assessee has filed a paper book in two volumes containing pages 1 to 1107.

12. We have heard rival submission of the parties on the issue of exclusion/inclusion of comparable for determination of arms length price of the international transactions. As far as selection of most appropriate method as Transactional Net Margin Method (TNMM), there is no dispute between the parties. Under the TNMM, for comparison of the assessee with the comparable companies, functions carried out, assets deployed and risk assumed (FAR) by the assessee are to be compared with the FAR analysis of the comparable companies. Therefore, before we embark upon adjudication of exclusion/inclusion of comparable, it is necessary to refer the FAR analysis of the assessee company, available on page 13 to 16 of the paper book, which is reproduced as under:

4. Functional Analysis

4.1 Functions Performed

HPSI is responsible for providing appropriately skilled professionals to the Contracting Entity so as to enable the Contracting Entity to carry out its auditing activity. There are various departments within HSBC, which conduct internal audits relating to inter alia Retail, Credit, General, Investment Bank, Insurance, Treasury, Securities, Private Banking, Management Office and IT systems/projects.

HPSI has to recruit professionals possessing the requisite academic qualifications and appropriate skill-sets. HPSI believes that a large portion of the global needs for audit personnel can be sourced from India, as staffing cost in India are lower and due to the availability of trained and educated human resource pool. The current organization structure of HPSI is as follows:

The employees recruited by HPSI are thoroughly screened in India and subsequently experts from London/ Hong Kong are invited to interview them on technical aspects. The training of the recruited personnel is conducted by the Contracting Entity in London / Hong Kong as the case maybe.

The professionals assigned by HPSI are required to follow the operational procedures and service levels as required by the Contracting Entity. The professionals require being familiar with the guidelines provided by the HSBC Group Audit Standards Manual in force, and are expected to be able to pick up and adhere to other pertinent guidelines issued by the Contracting Entity. The professionals provided by HPSI are expected to:

• • Assist in creation of audit planning memoranda in accordance with the schedule of work, turnaround times and reporting formats prescribed by the Contracting Entity.
  • Assist in conducting audit reviews of auditable entities as prescribed by the Contracting Entity, which inter-alia involves evaluating:

–    the adequacy of the system of internal controls and the operation / susceptibility of the environment to frauds or failures in internal controls;

–    the effectiveness of workflow procedures to ensure the most efficient use of resources;

–    the degree of compliance with internal, regulatory and statutory policies, procedures and requirements;

–    the degree of reliability and integrity of financial reporting;

–    the adequacy and effectiveness of the security and integrity of the IT systems; the management and control of the IT functions/departments, projects and installations;

–    the effectiveness of the controls over the protection of assets; and the effectiveness of management.

• Assist in reporting audit findings in the format prescribed by the Contracting Entity. Significant internal control weaknesses and recommendations for strengthening key controls / increasing operational efficiency are examples of key findings that are reported.

While on assignment they perform services such as reviewing the existing operations of the Contracting Entities and assisting in the writing of the audit report, by completing the report for the sections that have been assigned to them. A typical overseas audit schedule for an auditor at HPSI would involve two weeks of onsite auditing and one week of compilation of findings/report writing (offsite work) at the HPSI office. Due to the specialization aspect, an auditor would normally work for the same Contracting Entity all the time, although an auditor may be requested to assist an alternate Contracting Entity in case of manpower shortages.

4.1.1 Other functions

HPSI avails of certain overdraft and loan facilities from the Bank. We understand that the Bank offers these facilities at terms and conditions similar to those offered to independent third parties.

The Bank has seconded certain employees to HPSI. These employees remain on the payroll of the Bank and are accordingly paid salaries by the Bank. Such payroll cost is cross-charged by

the Bank to HPSI on a pure cost basis. HPSI has been allocated office space by the Bank. The Bank recovers share of rent cost/security deposit from HPSI.

4.2 Risks Assumed

4.2.1 Contract risk

The professionals deputed by HPSI work under the control and guidance of the Contracting Entity and therefore HPSI does not undertake any contract risk in respect of the timing/quality of work undertaken by the professionals.

4.2.2 Market risk

HPSI does not undertake any market risk since it is a captive provider of professionals to the HSBC Group and does not service any external party. Further HPSI is assured a cost plus mark-up and accordingly does not face any uncertainty as regards revenues.

4.2.3 Currency risk

HPSI calculates the billing amounts in local currency but prepares the invoices in US Dollars or the local currency of the Contracting Entity. Any surplus/shortfall in the payment of the invoice upon conversion to INR is adjusted in the next invoice. Accordingly the Contracting Entity undertakes currency risk on account of unfavorable fluctuation of the Indian rupee vis-à-vis the US Dollar / relevant local currency of the Contracting Entity, from the date of the invoice to the payment date.

4.2.4 Attrition risk

Retention of adequate personnel possessing appropriate skill-sets is important for HPSI. Employee attrition can impair HPSI’s ability to provide adequate auditing resources to Contracting entities and is therefore a risk faced by HPSI. However, recruitment of suitably skilled individuals has not been an issue to date.

4.2.5 Credit risk

Since HPSI deals exclusively with the HSBC Group and accordingly does not undertake significant credit risk.

4.2.6 Idle time risk

HPSI is remunerated on a cost plus basis over total costs and the Contracting Entities are billed for the full amount of the costs.

Accordingly the Contracting Entities undertake idle time risks.”

13. On perusal of the above functional analysis, we find that assessee is engaged in recruiting personals in India on the basis of their academic qualifications and skill sets for the work of audit in various fields of finance, management, information technology etc. for Associated Enterprises. The auditors selected by the assessee are being further screened and trained by respective entity who is using the services. These auditors perform services of reviewing the existing operations of the contracting entities and assist them in writing audit report. These auditors would do on -site auditing (at the place of the contracting entity) and one week of report writing (off-site work) at the office of the assessee .

14. The assessee has entered into agreement for provision of audit services with Associated Enterprises. A copy of one of such agreement with Associated Enterprise namely HSBC electronic data processing (Guangong) Limited (HDPG), is placed on page 121 to 127 of the paper book. The range of professional audit services rendered by the assessee to HDPG is listed in clause -2 (on page 122 of PB) along with Schedule-I, available on page 126 of the paper book. The details of said services is reproduced as under:

“2. Services

2.1 HPSI will be responsible for providing sufficient auditors to enable the adequate execution of the Services.

The range of professional audit services (“Services”) rendered by HPSI to HDPG is noted in the attached Schedule 1.

2.3 Both parties will follow the operational procedures and service levels as agreed between the parties from time to time.

2.4 The Services will be provided in accordance with the guidelines provided by the HSBC Group Audit Standards Manual in force at that time.

Schedule 1
The Services

The range of professional audit services rendered by HPSI to HDPG will include all, or part, of the following:

1. Creation of audit planning memoranda in accordance with the schedule of work.

2. Reviews of auditable entities covering the following issues:

• the adequacy of the system of internal controls of the operation and the susceptibility of the environment to frauds or failures in internal controls;
• the effectiveness of workflow procedures to ensure the most efficient use of resources; the degree of compliance with internal, regulatory and statutory policies, procedures and requirements;
• the degree of reliability and integrity of financial reporting: the adequacy and effectiveness of the security and integrity of the IT systems;
• the management and control of the IT functions/departments, projects and installations;
• the effectiveness of the controls over the protection of assets; and the effectiveness of management.

Types of reviews conducted will include, inter alia, Retail, Credit, General, Investment Bank Insurance, Treasury, Securities, Private Banking, Management Office and IT systems/projects.

3. Report writing of the findings made in the reviews conducted.

4. Any other activity as required, including ad hoc project work, independent advice etc. ”

15. In background of above functions carried out by the assessee, now, we are adjudicating the issue of exclusion/inclusion of comparable. Firstly, we are taking exclusion of following seven comparable.

1. Vishal Information Technologies Ltd:

16. The Ld. counsel before us has submitted that the company cannot be accepted as comparable as it outsources a considerable portion of its business. The Ld. counsel referred to page 163 of the paper book and submitted that employee cost of the assessee ( i.e. ₹8,80,67,819/-) constitute 89% of the total cost and no outsourcing expenses are incurred by the assessee company. As against, the comparable company has incurred data entry charges and vendor payments of ₹11,49,14,563/ – out of the total expenditure of ₹17,41,71,957/-, which constitutes 65.98% of the total expenditure. Thus, according to the Ld. counsel, the business model of the comparable company being different from the assessee company, same is functionally different from the assessee. The Ld. counsel in support of his contention has relied on the decision of the Hon’ble Punjab and Haryana High Court in the case of PCIT Vs IHG IT services India Private Limited for assessment year 2006 -07 reported in (2017) 88 taxmann.com 642 ( P& H). On the contrary, the Ld. DR submitted that nowhere outsourcing world has been mentioned in the Annual Report and data entry charges incurred by the assessee might have been separately identified and grouped in the annual report, and merely on the basis of separate identifying of data entry charges, the company cannot be classified as outsourcing model company.

17. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that Hon’ble Punjab and Haryana court in the case of IHG IT services India Private Limited (supra) for assessment year 2006 -07 has observed as under:

“5. As far as Vishal Information Technologies Limited is concerned, there is no difficulty whatsoever for the Tribunal has come to a clear finding of fact that it outsourced about 44.81% of its business. For instance, it was observed that Vishal Information Technologies Limited has a low employee cost of 1.25% of operating revenue. The Tribunal also observed that the TPO had himself referred to the NASSCOM survey that the average wages and salaries to sales ratio of IT/ITES industry in India was 46.1%. The assessee’s wages to sales is 53% which is not comparable to Vishal Information Technologies Limited whose wages to sales is 1.25%. This is a finding of fact and there is nothing to indicate that the same is erroneous much less perverse. The exclusion of Vishal Information Technologies Limited is, therefore, justified. ”

18. We find that in the above decision percentage of outsourced business of the comparable company has been reported as 44.81% whereas before us the assessee has pointed out the ratio of outsourcing expenses to the total expenses as 65.98%. Therefore, it is essential to verify the exact quantum of outsourcing expenses in the case of the comparable company. Accordingly, we set aside the matter of exclusion of the company to the file of the Ld. TPO with the direction to ascertain quantum of outsourcing expenses and the business model of the company by way of issue of notice under section 133(6) of the Act and then if the business model of the company is found to be based on outsourcing, then same shall be excluded from the set of the comparable in accordance with law. It is needless to mention that assessee shall be afforded adequate opportunity of being heard on the issue in dispute.

2. Asit C Mehta financial services ( [Nucleus net soft and GIS (India) Limited ]

19. The Ld. counsel of the assessee submitted that the company need to be excluded from the set of the comparable due to three reasons. Firstly, the company has undergone amalgamation during the year (PB-323), which has changed the business model of the company. Secondly, data processing charges incurred are of ₹1.04 cores, out of the total operating and other expenses of ₹2.41 cores (PB-320) and therefore more than 40% of the expenses are outsourced. Thirdly, revenue stream consist of IT enabled services and software development (PB -319). There is no separate segment for IT enabled services and therefore company cannot be considered as comparable at entity level. The Ld. DR on the other hand submitted that Ld. CIT(A) has directed to take the segment result relating to Its for benchmarking instead of entity level results, therefore, company is functionally similar at segment level.

20. We have heard rival submission of the parties on the issue in dispute. As evident from the paper book page 323 (Annual Report page 31), another company namely Nucleus Nets oft and GIS (India) Ltd. was amalgamated with the Company. The relevant information of the annual report is reproduced as under :

“1. AMALGAMATION

a. Pursuant to the scheme of amalgamation (‘the scheme). Nucleus Netsoft And GIS (India) Ltd (NNGIL) was amalgamated with the Company with effect from the appointed date i.e. April 2005 as sanctioned by the Hon’ble High Court of Judicature at Bombay, on February 10, 2006, and filed with Registrar of Companies on February 22, 2006. All the assets and liabilities of erstwhile Nucleus Netsoft And GIS (India) Ltd stand transferred to and vested with the Company with effect from April 1, 2005, the appointed date. The scheme has accordingly been given effect to above financial statements.

b. The amalgamation has been accounted for under the “Pooling of Interest Method” as prescribed in Accounting Standard (AS-14) issued by the Institute of Chartered Accountants of India. Accordingly the assets, liabilities and reserves of the erstwhile ‘Nucleus Nelsoft And GIS (India) Ltd’ as at April 1, 2005 have been taken over at their respective book values.

c. The assets of Rs.39.541.385, liabilities of Rs.6,449,847, capital reserves Rs.16,287,405 and revenue reserve of Rs. 1,686,933 of NNGIL were taken over by the Company on amalgamation. In terms of the Scheme, no shares of the Company were issued or allotted in respect of the holding of the Company in NNGIL and in consideration of the amalgamation of NNGIL with Company. The company’s investment in NNGIL of Rs.2,699,723 comprising of 269,900 of Equity Share of Rs. 10/- each were transferred to a trust for the benefit of the Company.

d. 15,11,720 equity shares of Rs. 10 each fully paid the Company (New Equity shares) have been allotted the shareholders’ erstwhile NNGIS including Trust the ratio 1 new equity share for every one share of Rs. 10 each held in NNGIS. The new equity shares issued and allotted shall in all respects rank pair passé with the existing share the Company.

e. Pursuant to the scheme of amalgamation (‘the scheme’) sanctioned by the Hon’ble High Court of Judicature at Bombay, the debit balance in the Profit and Loss Account of the Company prior to amalgamation, amounting to Rs.5.75,620 has been adjusted against securities premium account of the Company. The Hon’ble High Court of Judicature at Bombay, has permitted the Company from dispensing with the use of the words ‘And Reduced’ as a suffix to its name.

f. Subsequent year end, the name of the Company been changed ‘Nucleus And GIS (India) Limited’ approved by Registrar Companies vide now Certificate Incorporation dated May 2006.

g. As a result of above, figures in respect of current financial year are not comparable with those of the previous financial year.

20.1 In view of settled law that concern with extraordinary events of merger/demerger cannot be comparable in the years of such merger/demerger we direct the Ld. AO/TPO to exclude this company from the set of the comparable for computing arithmetic mean of PLI of comparable.

3. Transworks information services Ltd:

21. The Ld. counsel submitted that this company also outsource a considerable portion of its business and therefore business model being different from the assessee, the company cannot be accepted as valid comparable. The Ld. counsel however did not file financials of the company to support his contention and relied on the decision of the Tribunal Mumbai Bench in the case of Franklin Templeton International services India Private Limited Vs DCIT reported in (2018) 89 com 439 (Mumbai -Trib).

22. The Ld. DR submitted that this comparable was not challenged by the assessee before the Ld. CIT(A) and it has been challenged for first time before the Tribunal. The Ld. DR further referred to objection of the assessee before the Ld. TPO and the remark of the Ld. TPO, wherein the assessee sought to exclude the company on being functionally different, whereas the Ld. TPO called for the information under section 133(6) of the Act and after verification that it qualifies all the filters and functions are in the nature of ITes only, he included the company into set of comparable.

23 .We have heard rival submission of the parties. We find that the Ld. TPO has gathered financial and functional details of the company by way of using his authority under section 133(6) o f the Act. Since the said information has not been provided to the assessee, we feel it appropriate to restore this issue back to the file of the Ld. AO/TPO with the direction to provide all the information gathered under section 133(6) about the company t o the assessee and decide the issue of exclusion/inclusion of the company after providing adequate opportunity of being heard to the assessee.

4. Datamatics financial services Ltd (segmental);

24. The Ld. counsel of the assessee submitted that the company fails the filter of Related Party Transactions (RPT) more than 25% of the total Revenue. In support of the contention the Ld. counsel relied on the decision of the Tribunal Mumbai Bench in the case of Stream international services Private Limited Vs ADIT reported in (2013) 31 com 227 for assessment year 2006 -07, wherein the company has been rejected on the ground of related party transactions(RPT) more than 25%. But no annual report or financial statement of the company has been filed by the assess ee to support of its contention of RPT being more than 25%.

25. The Ld. DR on the other hand referred to the remark of the Ld. TPO, wherein he has mentioned that segmental financial of the ITeS segment of the company were gathered by way of issue of notice under section 133(6) of the Act, and the said segment qualifies all the filters applied by the Ld. TPO.

26. We have heard rival submission of the parties on the issue in dispute. We find that information gathered under section 133(6) of the Act has not been provided to the assessee to ascertain the fact of RPT being more than 25% i.e. a filter applied by the Ld. TPO, therefore we set aside the finding of the Ld. CIT(A) and restore the issue of exclusion/inclusion of the company from the final set of the comparables to the file of the Ld. AO/TPO for deciding a fresh after providing information gathered under section 133(6) of the Act to the assessee.

5. Goldstone Infratech Limited (Segmental):

27. The Ld. counsel of the assessee referred to page 409 of the paper book and submitted that export turnover of the company is merely ₹2,29,721/- (0.14 %) as compared to the total turnover of ₹30,89,44,530/- and therefore company fails the export filters of minimum 25% of turnover. The Ld. counsel also referred to the decision of the Tribunal Hyderabad Bench in the case of HSBC Electric data processing India Ltd Vs ACIT reported in (2013) 38 taxmann.com 141 wherein the company has been rejected on the basis of foreign exchange earning being less than 25% of the total revenue of the company.

28. The Ld. DR on the other hand referred to the remark of the Ld. CIT(A), wherein he has held that the Ld. TPO has only considered BPO division at segment level as comparable with its sales at ₹5.03 cores and not the total revenue . He submitted that the export turnover is with respect to another division of telecom sector and therefore said filter does not apply on the BPO segment of the company.

29. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. On perusal of the page 409 of the paper book we find that sales of the company are from two divisions. The first division is telecom and insulated divisions, wherein the turnover has been bifurcated in domestic turnover at ₹25,84,43, 794/- and export turnover of ₹2,29,721/-. The other division is BPO division wherein the turnover has been mentioned at ₹5,02,71, 015/-. In the BPO division no such bifurcations of domestic and export turnover has been reported. Since the Ld. TPO has considered only BPO division for comparison with the assessee, the contention of the Ld. counsel of the assessee of complying up export filter is not relevant. The sa the Ld. counsel of the assessee is accordingly rejected. As the assessee in its transfer pricing study has considered IT es/BPO activity as functionally similar to the assessee, the comparable company is held to be functionally similar and therefore contention s of the Ld. counsel to exclude this company are accordingly rejected 6. 6. Spanco Telesystems and Sloutions Limited (segmental):

30. The Ld. counsel of the assessee submitted that company need to be excluded from the set of the comparable because it acquired another company i.e. Intel net BPO services Private Limited in year 2005, which has distorted its comparability and rendered the company as unfit for comparison. The Ld. counsel also referred that company fails the export filter of minimum export revenue as 25% of the total revenue. He referred to the decision of Mumbai Bench of Tribunal in the case of Franklin Templeton International Services India Private Limited Vs DCIT reported in (2018) 89 taxmann.com 439, wherein the company has been rejected on the grounds of demerger of the unit and failure of condition of export filter.

31. The Ld. DR on the other and submitted that this comparable company was selected by the assessee in its transfer pricing study and accepted by the Assessing Officer. Further it is exclusion was not challenged before the Ld. CIT(A).

32. Before us the assessee has not filed annual report of the company in support of its claim of merger of another company with the assessee and also for verification of application of export filter.

Therefore in the interest of justice, we feel it appropriate to restore the issue of exclusion/inclusion of this company into set of the comparable to the file of the Ld. AO/TPO for deciding afresh.

7. Maple e-solutions Ltd

33. The Ld. counsel of the assessee submitted that this company need to be excluded on the ground that owners/directors of the company had been involved in fraud. In support of his contention relied on the decision of Hon’ble Bombay High Court in the case of CIT versus Cummins Terbo technologies Ltd reported in (2018) 91 taxmann.com 307 for assessment year 2007 -08. The Ld. counsel also submitted that company is in the call center which is a specialized ITeS service and therefore also need to be excluded being functionally dissimilar. The Ld. DR on the other hand submitted that assessee itself has classified in the category of Its/BPO and if assessee insist for exclusion of the company on the ground of call center, then other comparable s selected by the assessee also need to be excluded being functionally dissimilar. The Ld. DR further submitted that allegation of fraud on the owners/directors were pertaining way back to almost more than 20 years and therefore merely on substantiated allegation of fraud, company cannot be excluded.

34. We have heard rival submission of the parties on the issue in dispute. We find that on the issue of non-reliability of financial data of the company, the Hon’ble High Court of Bombay in the case of Commins turbo technologies Ltd (supra) has held as under:

“15. In our considered opinion, the difference in functions sought to be canvassed by the assessee is emerging from record. Merely because the two kind of activities are referred to as ITES in a Notification by the CBDT does not imply that the same have to be understood as functionally identical/similar. In-fact, the dissimilarity in the functions performed by assessee and Maple solutions Ltd. is quite evident and the same has also not been disputed by the lower authorities. On this aspect, we are of the opinion that the said concern is liable to be excluded from the list of comparable. Apart therefrom, the decision of our Co-ordinate Benches of Delhi and Hyderabad in CRM Services India (P.) Ltd. (supra) and Capital IQ Information Systems (India) (P) Ltd. (supra) respectively also support assessee’s plea that the said concern is liable to be excluded from the final set of comparable because of unreliability of the financial data of the said concern. Therefore, on both the above counts, we set-aside the order of the CIT(A) on this aspect and direct the Assessing Officer to exclude Maple solutions Ltd. from the final list of comparable. Thus, on this point also assessee succeeds.”

35. Respectfully, following the Hon’ble Bombay High Court (supra), we direct the Ld. AO/TPO to exclude the company out of the set of the comparable on the ground of unreliability of financial data because of fraud committed by the owners/directors.

36. The Ld. counsel of the assessee has sought inclusion of the M/s C S Software Enterprises Ltd. , which was excluded by the Ld. TPO from the set of the comparable.

8. C S software Enterprises Ltd:

37. The Ld. Counsel of the assessee submitted that Ld. TPO rejected the company as comparable on the ground that it was engaged in development of the software and no segment data was available. The Ld. counsel drawn our attention to Annual Report of the company and referred Paper Book pages 615, 630 , 637 and 646 to support that for assessment year 2006 -07 company was having only one segment of Its only an d therefore it is functionally similar to the assessee.

38. The Ld. DR on the other end relied on the order of the Ld. TPO and the Ld. CIT(A).

39. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. On perusal of the Annual Report of the company, we find that regarding segment reporting on page 646 of the paper book ( page 47 of the annual report) in clause 8, it is reported as under:

8. Segment Reporting :

The Company is engaged in providing Information Technology Enabled Services which in the context of Accounting Standard-17 issued by ICAI are considered to constitute one single segment.”

39.1 From above reporting in Annual Report, it is evident that company is having only one segment of Information Technology enabled services. Further on perusal of the other pages of the Annual Report also it is evident that company is primarily in the field of IT-BPO and no where it is reported that company is in software development. The observation of the Ltd CIT(A) that company is engaged in software development and there is no separate segment of IT es, is without any basis. Accordingly, The Ld. AO/TPO is directed to include the company into the set of the comparable.

40. The ground raised by the assessee challenging exclusion/inclusion of certain comparable is accordingly, allowed partly for statistical purposes.

41. In the result, the appeal filed by the Revenue is dismissed, whereas the appeal filed by the assessee is allowed partly for statistical purposes.