Hyundai Motors India Engineering P. Ltd. v. Ito

ORDER

B. Ramakotaiah, Accountant Member - This appeal by assessee is against the orders of the A.O. under section 143(3) read with section 144C(13) of the I.T. Act, 1961, consequent to the directions given by the Disputes Resolution Panel (in short "DRP"), Hyderabad dated 13.09.2012. The issue in this appeal is with reference to the transfer pricing adjustments made by the TPO/A.O.

2. The assessee in its appeal has raised six grounds with sub-grounds which are generally cotentions/arguments. Ground No.1 and 6 are general in nature and therefore, they need no adjudication. Ground No. 2.1.1, 2.2, 2.4 have not been pressed in the course of arguments and as such, they are dismissed as not pressed. Ground No. 2.7, 3 and 4 also have not been pressed, consequent to A.O. rectifying the order under section 154 and accordingly, these grounds are also dismissed as not pressed. Ground No.5 is with reference to interest under section 234B, which is consequential in nature. Ground No. 2.8 is application of 92C(2) proviso of plus or minus 5% to the arms length range and Ground No. 2.9 is an argument that assessee, having benefit under section 10A does not have any motive to charge less from the AE and there is no tax avoidance by the assessee. Ground No. 2.8 is statutory provision whereas ground No.2.9 is an argument which does not require any adjudication. The remaining grounds are mainly on

Therefore, the main issue is to be considered in this appeal are, with reference to various filters selected by the TPO, comparables and risk adjustments.

3. Briefly stated, assessee Hyundai Motor India Engineering P. Ltd (in short "HMIEPL") is a company incorporated in November, 2006 as a subsidiary of Hyundai Motor India Limited (in short "HMIL"). The assessee HMIEPL and HMIL formed part of Hyundai Motor Company, Korea. The assessee is engaged in the business of providing support services in connection with Computer Aided Engineering (in short "CAE") / Computer Aided Design (in short "CAD"). The assessee is involved in providing support services in connection of modeling and iterative simulation. It receives the basic design from its group company. With respect to CAD modelling, assessee makes a 3-D CAD modelling data of vehicle components using CAD software tools. The CAE modelling services comprises of finite modelling for the computer simulation which would involve breaking down the model into various structures. The TPO as well as the assessee charecterised assessee as a routine support service provider with skilled and trained workforce and it assumes less than normal risk associated with carrying out such business.

3.1 During the year assessee's operating revenue was to the tune of Rs.15.79 crores and operating cost was Rs.15.27 crores. The operating profit to cost ratio was 3.38%. In its transfer pricing report, assessee reported I.T. Enabled services (in short "ITES") at Rs.15.12 crores and also import of computer at Rs. 2.69 crores. The TPO and the assessee accepted the TNMM is the most appropriate method on the facts and circumstances of the case, even though assessee justified by way of cost plus method also which was not considered by the TPO. Assessee has selected six comparables in its T.P. study which the TPO, on reference from the A.O., rejected and selected 22 comparables by applying various filters.

FILTERS:

4. There is no dispute with many filters except with reference to the filters like the turnover filter and RPT filter and export sales filter. The TPO excluded the companies whose receipts are less than Rs. 1 crore and above Rs.150 crores, whereas, assessee wants the companies with less than Rs. 1 crore also to be included. Even though this objection was raised before the DRP, there is no decision on it. Considering that extreme turnover companies are excluded generally from comparability, we also affirm the range of companies adopted by the TPO in its filter as the assessee's turnover was about Rs.15.79 crores. So, the range selected by the TPO is accepted.

4.1 The next filter on which there is dispute is with reference to related party transactions (RPT). Assessee applied this filter on related party transactions exceeding 10%, whereas, TPO selected companies having transactions exceeding 25%. This issue was objected to by the assessee whereas, DRP discussed this issue and rejected as under :

"The assessee objects to the adoption of 25% RPT filter for selection of comparables. It would not be a practical approach to consider only companies with NIL related party transactions because almost all the companies have related party transactions to some extent. Nil % criteria would result in selection of very small number of companies which may not give sufficient base for comparison. Therefore, 25% is a proper threshold limit for related party transactions. For these reasons the threshold limit of 25% for RPT looks reasonable. Hence, the objection of the assessee is rejected."

4.2 After considering the rival contentions, we agree with the observations of the DRP, as threshold limit of 25% for RPT looks reasonable. We affirm the DRP opinion on this.

4.3 The next objection is with reference to export sales filter. Even though assessee has not applied any filter in its T.P. study, the TPO excluded companies having less than 25% revenue as export sales. This was objected to by the assessee before the DRP but there is no decision on this issue. Considering the comparability study on selection of cases, we do not see any reason to disagree with the TPO's filter adopted. As this also being reasonable, we affirm the same. However, in case of any specific objection when comparing the comparables selected by the TPO, this issue will be analysed afresh, if required. Therefore, grounds raised by the assessee on various filters are rejected.

COMPARABLES:

5. In making the T.P. adjustment, the TPO selected 22 companies and arrived at an average PLI of 29.16% (OP/OC). After giving working capital adjustments, it was determined at 24.12%. Out of the 20 comparables selected by the TPO, the DRP however accepted the assessee's objections and excluded two comparables at Item No.6 and Item No.17 i.e., Coral Hub (Vishal Info.) and Mold Tek. The assessee is objecting to some of the comparables in the final list of 18 comparables after the DRP order and also non inclusion of some of the comparables (2) selected by assessee. The list of Comparable companies as finally selected are as under :

6. We have heard submissions of both the parties. The learned Counsel gave detailed chart on each of the companies that were considered as comparable by the TPO and has also explained as to why some of those companies cannot be considered as comparables. He mainly relied on the Coordinate Bench decisions in the case of Symphony Marketing Solutions India (P.) Ltd. v. ITO [2013] 38 taxmann.com 55 (Bang) which in turn, has relied on the ITAT, Hyderabad 'A' Bench decision in the case of Capital IQInformation Systems (India)(P.) Ltd. v. Dy. CIT (International Taxation) [2013] 32 taxmann.com 21/57 SOT 14 (URO) . Learned Counsel also relied on the decision of ITAT, Hyderabad 'B' Bench in the case of Zavata India (P.) Ltd. v. Dy. CIT [2013] 35 taxmann.com 423 .

7. The learned D.R. on the other hand, relied on the order of the TPO and directions of the DRP wherein the DRP has given reasons as to why the objections of the assessee to the comparables proposed by the TPO should not be accepted.

7.1 Assessee has no objection for accepting the companies at sl.nos. (3) Aditya Birla Minacs, (4) Asit C Mehta, (5) Caliber Point Business Solutions Ltd., (9) e4e (13) ICRA Online Ltd. (seg.) (15) I-Services India P. Ltd. (16) R Systems International Ltd. (seg.) (17) Spanco Ltd. We will deal with the objections with rest of comparables while we take-up each of these for consideration.

I. ACCENTIA TECHNOLOGIES LTD. (Seg.)

This was considered as a comparable by the TPO and listed at Sl.No.1 of the comparable companies chosen by the TPO. The ld. Counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was drawn to the annual report of this company for the A.Y. 2007-08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. was mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems (India) (P.) Ltd. (supra). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a comparable owing to extra ordinary events that took place during the previous year. The Tribunal upheld the order of the DRP observing as follows :—

'I. Accentia Technologies Ltd.

10. It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner:—

"17.5. In addition to the above, the Director's Report of the company for the FY 2007-08 revealed the merger and the demerger. A company known as Techmen Tools Pvt. Ltd. had amalgamated with Mold-tek Technologies Ltd. with effect form 1st October, 2006. There was a de- merger of Plastic Division of the company and the resulting company is known as Moldtek Plastics Limited. The de-merger from the Moldtek Technologies took place with effect from 1st April, 2007. The merger and the de- merger needed the approval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the ITA No.1316/Bang/2012 accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial year 31.3. 2008. The assessee filed Form No.21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective date of the scheme of merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger."

11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact ahs taken place, then the aforesaid comparable has to be excluded.'

We have considered the submissions of the ld. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. Similar View was also taken in the case of Symphony Marketing Solutions India (P.) Ltd. (supra) by the Bangalore Bench. It is clear that during the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a comparable. We therefore hold that this company cannot be considered as a comparable.

II. ACROPETAL TECHNOLOGIES LTD. (Seg.)

This company is listed at Sl.No.2 of the comparables chosen by the TPO. As far as this company is concerned, the objection of the assessee is that this company is not functionally comparable. The assessee is a BPO company that provides CAD/ CAE services.. As far as Acropetal Technologies Ltd. is concerned, this company does the business of export of software services. It is also seen from the segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it derives income from engineering design services and software development services. It is also pertinent to point out that before the TPO, the assessee raised an objection that this company performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the services rendered by this company fall in the definition of ITES.

II. 1 We have considered the submissions of the learned counsel for the Assessee. Ld Counsel submission was that this company was excluded in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench, so the same require exclusion. In the above case it was considered like this:

"13. We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No.15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The performance of Engineering Design Services is regarded as providing high end services among the BPO which requires high skill whereas the services performed by the Assessee are routine low end ITES functions. We therefore hold that this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPO]."

As can be seen above, even though the said company was excluded on the differentiation of high end services being provided by this company, as noticed assessee also provide high end services in CAD / CAE designing areas. These are High end services as considered by the Bangalore bench. Therefore we are of the opinion that functions of assessee are similar to the above Company. The objections of assessee are rejected.

III. CROSSDOMAIN SOLUTIONS LTD. :

This company was considered as a comparable and listed at Sl.No.7 of the comparables chosen by the TPO. It is the stand of the assessee that this company is not functionally comparable. It is seen that the business profile of this company is re-engineered payroll service. This company is also engaged in the development of information systems. The review and business functions of Cross Domain is as follows:—

'"With a decade of experience in Payroll Outsourcing, Crossdomain has created a re-engineered payroll service EFFIPAY - that processes and delivers accurate payroll to clients with headcount up to 1000 employees in just 4 hours*. With Effipay Lite and Effipay Lite Plus, our bouquet of services cover end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000."

"Crossdomain's IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and turn-around-time for business critical processes."'

Source : http:/www.cross-domain.com

As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider.

III.1. We are of the view that in the absence of any

reasons given to the contrary either by the TPO or the DRP for regarding this company as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. We hold accordingly.

IV ECLERX SERVICES LTD. :

This company is listed at Sl.No.10 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. It has further been submitted that extra ordinary events and peculiar circumstances prevail in the case of the assessee in as much as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India (P.) Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:—

"14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that that the concerned company is engaged in providing Knowledge Process Outsourcing(KPO) Services.

15. On considering the objections of the assessee in relation to this company, we accept the contention of the assessee that this company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, which is distinct from the nature of services provided by the assessee."

We are of the view that in the light of the decision of the Hyderabad Bench referred to above, this company cannot be regarded as a comparable for the reason that it was having extraordinary event and super normal profits. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench.

V. GENESYS INTERNATIONAL CORPORATION LTD.

This company is listed at Sl. No.11 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the stand of the assessee has been that this company is functionally not comparable and that it has a different employee skill set and that this company performs R&D services and also owns intangibles. This company is a geospatial services content provider specialising in land based technologies. From the notes to accounts of this company, it is seen that this company is engaged in providing geographical information services comprising of photogrammetry, remote sensing cartography, data conversion related computed based services and other related services. Further the business of this company requires skilled manpower and scientists, civil engineers, etc. Besides the above, this company also carries out R&D services and own intangibles. The aforesaid facts, in our view, will take this company out of the list of comparables. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. In view of the above, we are of the view that this company cannot be regarded as a comparable and deserves to be excluded from the list of comparables.

VI. INFOSYS BPO LTD.

This company is listed at Sl.14 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the ld. counsel for the assessee that this company has a brand value and therefore there would be significant influence in the pricing policy which will impact the margins. Schedule 13 to the profit & loss account of this company for the F.Y. 2007-08 shows that this company incurred huge selling and marketing expenses. The brand value of the Infosys has been valued at Rs.31,863 Crores. Infosys BPO, being a subsidiary of Infosys, has an element of brand value associated with it. This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comaparables. We therefore accept the contention of the assessee that this company cannot be regarded as a comparable. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. Therefore, we direct the AO/TPO to exclude the same.

VII. HCL Comnet Systems & Services Limited:

VIII. Wipro Limited

The assessee has objected for these two companies being taken as comparables mainly on the ground that these companies are industrial giants considering their turnover compared to that of the assessee, whose turnover is only Rs.15 crores. It is the contention of the assessee that these companies are industrial giants in the area of software development and since these companies assume all risks, they earn higher amount of revenue resulting in higher profit, whereas the assessee operates in a risk mitigated environment. Therefore, the margin of profit is also less. In this context, the learned Authorised Representative for the assessee relied upon the decision of the ITAT Delhi Bench in the case of Agnity India Technologies (P.) Ltd. v. ITO [IT Appeal No.3856 (Delhi) of 2010, dated 4-11-2010] and in the case of Triniti Advanced, Software Labs (P) Ltd. v. Asstt. CIT [2011] 14 taxmann.com 24/47 SOT 197 (Hyd.) (URO) . The Authorised Representative for the assessee further contended that when the TPO has rejected companies with turnover of less than Rs. One crore, by stating that these companies may not be representing the industry trend, by applying the very same logic, he should not have also considered the companies having turnover of more than Rs.200 crores. In this context, the learned Authorised Representative for the assessee has relied upon the decision of the ITAT Bangalore Bench in the case of Climate Systems India Ltd. v. Commissioner Of Income-Tax [2012] 53 SOT 159/20 taxmann.com 715 (Bang.) .

On considering the submissions of the assessee in relation to these companies, we find that the TPO has excluded the companies whose turnover is less than Rs.One Crore, on the ground that they may not be representing the industry trend. That very logic also applies to the companies having high turnover of over Rs.200 crores as against the assessee's turnover of only Rs.15 crores, and therefore, it would be fair enough to exclude those companies also. In the case of Agnity India Technologies (P.) Ltd. (supra), the Delhi Bench of the Tribunal, while considering the comparability with companies which are market leaders in their field, and having substantially high turnover, observed as follows:—

"5.2. Various arguments, as stated earlier, were taken before the DRP which inter-alia included rejection of comparable cases; application of arbitrary filter of wage to sales ratio; ignoring that the assessee is a limited risk company; inclusion of Infosys Technologies ltd.; and inclusion of Satyam Computers Services Ltd. in spite of the fact that its data is not reliable as publicly known. On the basis of these arguments, the DRP excluded the case of Satyam Computers Services Ltd., thereby reducing the arm's length margin to 25.6%. It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the later is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited currency risk. Having considered these points, we are of the view that the case of the aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in the order. Therefore, we are of the view that this case is required to be excluded."

Similar view has also been expressed by the Hyderabad Bench of the Tribunal in the case of Trinity Advanced Software Labs (P.) Ltd. (supra). In the case of Genisys Integrating Systems (India) (P.) Ltd. (supra), the Bangalore Bench of the Tribunal has observed in the following manner—

"9. Having heard both the parties and having considered the rival contentions and also the juridical precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain for the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet and NASSCOM has given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in the range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study."

In view of the aforesaid consistent decisions of the Tribunal, we accept the contention of the learned Authorised Representative for the assessee that the aforesaid companies cannot be treated as comparable, considering their substantially high turnover as compared to that of the assessee. We accept the contention of assessee that these companies can not be regarded as comparables.

IX. COSMIC GLOBAL :

This comparable with operating profits by total cost after adjustments of working capital was shown at 26.51% by the TPO. Assessee has not objected to this comparable initially in the objections to the draft order and vide annexure-26, it has agreed for taking this company as comparable company but subject to modification of the mark-up/margin calculated. Assessee submitted at page 203 of the objections to the draft order vide annexure-26, that operating profit by operating cost arrived at by the TPO was 24.30% whereas, after inclusion of interest and bank charges that comes to 23.30%. This revised working was furnished as part of the objections with a request for taking the revised margin against this comparable. However, subsequently, vide letter dated 30.07.2012 assessee objected to the comparable on the reason that it fails employee cost filter. The employee cost shown was at Rs.1.17 crores which is 19.96% of the operating revenue of Rs.5.87 crores. It was submitted by the learned Counsel that employees cost filter determined by the TPO was between 45% to 60% whereas, this company has only 19.96% as employee cost. Accordingly, this company is not a comparable company as it may be outsourcing the work.

The learned D.R. however, submitted that assessee has accepted the same in the TPO proceedings. Therefore, should not be excluded now.

While there was no objection for assessee objecting to the comparable even at a later stage when it comes to know of new facts, what we noticed is that the assessee's objections before the DRP dated 30.07.2012 have not been addressed by the DRP. It is for the TPO to determine whether this company falls within the filters as adopted by the TPO himself. If the assessee fails the employee cost filter, then the same cannot be accepted as a comparable company. In order to examine this aspect, we are of the opinion that selection of this comparable is to be restored to the file of the TPO for fresh examination, after giving due opportunity of hearing to the assessee. The issue is restored to the file of the TPO.

X DATAMATICS FINANCIAL (BPO) DIV. :

The assessee objected to the selection of this comparable as it is not functionally comparable and specifically raised objection in annexure-16 where detailed objections on each company selected has been mentioned. It was the contention that the assessee was in the finance business whereas, the assessee is in I.T. enabled services( ITES) to provide support services in connection with CAE/CED. It was submitted that Datamatics Financial (BPO) Div. cannot be compared to the assessee. Further, it was also submitted that if at all be compared, the same can be compared at the entity level and not at ITES segment. However, after initially objecting to selection of the comparables, the assessee raised further objections vide letter dated 30th July, 2012 specifically mentioning about Datamatics Financial (BPO) Div. that it fails revenue filter. It was submitted that ITES revenue is Rs.6.06 crores which is 48.97% of the operating revenue of Rs.12.37 crores.

The learned D.R. however submitted that what is adopted is only segmental profit and not the entity profit and the filters applicable to the data is within the parameters.

We have considered the issue. As seen from the objections raised by the assessee, the Datamatics Financial (BPO) Div. is in the two segmental business of printing and processing and ITES services. If taken at entity level, it certainly fails the filters provided by the TPO i.e., having not less than 75% revenue from export activities. However, A.O. has not taken the entire entity as a whole. He has obtained information under section 133(6) and the data was provided to the assessee as seen from the objections raised by the assessee before the DRP. What the TPO has taken is only the receipts pertaining to ITES Division and as stated in page 119, the operating income was taken at Rs.6.19 crores out of which export of ITES services admittedly was at Rs.6.06 crores. Therefore, on this basis, it has more than 75% of revenue's from export of ITES services and therefore, it does not fail the filters provided, if only segmental profits are taken. Since A.O. has taken only segmental profits and has not taken entire entity as such, we are of the opinion that objection raised by the assessee, that it fails the revenue filter does not hold good. Therefore, we do not see any reason to exclude this company from the comparables selected.

8. COMPARABLES REJECTED BY TPO:

A. JINDAL INTELLICOM PVT. LTD. :

The assessee also wants inclusion of Jindal Intellicom Pvt. Ltd. Originally, the TPO vide his office letter dated 17.08.2011 proposed Jindal Intellicom Pvt. Ltd. as one of the comparable companies out of 23 companies selected by him (at Item No.17). However, out of this 23 companies, 3 companies were dropped by the TPO, one such being the above i.e., Jindal Intellicom Pvt. Ltd. As per para 14.1 at page 26 of the TPO order, it was stated that it was failed RPT filter. RPT are at Rs.6,39,73,545/- out of operating revenues of Rs.19,57,63,431/-. However, the assessee vide letter dated 08.09.2011 has objected to the company on the functionality. Assessee has objected 17 comparables on the basis of functionality, out of which, Jindal Intellicom Pvt. Ltd. has been objected for the reason that "this company cannot be treated as comparable as the nature of services are distinct and separate". Hence, the company is to be rejected. Since the assessee has objected to on the basis of functionality, the TPO accepted the same and did not include in the final list of comparables. However, assessee vide annexure-31 contended before the DRP that the above company should be selected as comparable on the basis of related party transactions filter. The entire objections placed before the DRP is about calculating related party filter. It further submitted that assessee is performing similar functions as compared to the assessee and does not fail the RPT filter.

After perusing the business of Jindal Intellicom Pvt. Ltd. as well as the arguments of the learned Counsel, we are of the opinion that this company is functionally different from the assessee company, as it is in the call centre activity and not exactly in provision of services of high end in the area CAD/CAE services. Since that company in the call centre activity, we agree with the initial objection of the assessee that the company should be rejected on functionality. Even though assessee is contesting only on the basis of related party transactions, no arguments were extended before us about the functionality aspect of the above company. Keeping original objections in mind, we are of the opinion that the above company is not functionally similar to the assessee's operations and accordingly, the same cannot be selected. The arguments of the assessee on this issue are rejected.

B. INFORMED TECHNOLOGIES :

The assessee also contested before the DRP about inclusion of Informed Technologies. Its contention vide annexure-32 to the objections before DRP was that TPO has not selected this company on the ground that company fails ITES revenue of more than 75% of operating income filter applied by the TPO. In fact, this company is not in the TPO's selection and no where discussed in the T.P. order. Since it is not selected by the TPO, we are unable to examine why the same was excluded as there is no discussion in the order. It was the contention of the assessee before the DRP that the above company is in similar business of BPO operations and is ITES revenue is about Rs.2.96 crores which is 100% of the operating revenue and therefore, satisfied the filter adopted by the A.O. Further, its contention was that it is in the similar business like Datamatics Financial (BPO) Div. (as discussed above) and since Datamatics Financial (BPO) Div. is selected as comparable company, this company also should be selected. Assessee also relied on the Coordinate Bench decision of Mumbai Tribunal in the case of DHL Express (India) (P.) Ltd. v. Addl. CIT [2012] 17 taxmann.com 40/49 SOT 112 (Mum.)(URO) wherein the non-operating income such as interest income, rent receipts, dividends etc., were excluded while considering the operational income, as these items have nothing to do with the main operations of the assessee. It was the contention of the assessee that if these non-operating incomes are excluded the assessee falls within the filters adopted by the TPO and TPO not selected this case wrongly. The DRP, however, has not discussed this issue at all. As we have pointed out, there is no discussion by the TPO in the order as it is not in list the comparables selected by the TPO, because of application of filters, may be the filter is wrongly applied by including non-operational income as part of operational income. Since, these aspects could not be verified by us, we cannot direct the TPO to accept this as a comparable. To be fair to the assessee, since, this comparable was not at all discussed either by TPO or by DRP, even though specifically raised vide annexure-32, we are of the opinion that the issue requires examination by the TPO. We have already upheld inclusion of Datamatics Financial (BPO) Div. segmental as a comparable above. Since the operations are stated to be similar, this aspect require examination by TPO. In case, this company satisfies parameters/filters adopted by the TPO, then, this should be considered afresh, after giving due opportunity of hearing to the assessee. Therefore, selection of this comparable is restored to the file of the TPO/A.O. to examine and decide accordingly.

9. RISK ADJUSTMENT :

Assessee raised ground No. 2.5 with reference to disregard of Rule 10B(2) and Rule 10B(3) and vide sub-rule 2.5.2. assessee has raised the risk adjustment issue. Assessee raised this issue before the DRP vide annexure-9 in the objections to the draft order. Assessee admits that it did not provide any risk adjustment in the T.P. documentation as margin of the comparable companies presented in the T.P. return was in line with the assessee's operating margin. It was the submission that assessee at any point of time did not deny the fact that comparable companies selected in the T.P. report have fair market risk. Therefore, assessee reserves the right to conduct such risk adjustment in future during the time of assessment. It was submitted that risk adjustments quantified was at 0.1%. Learned Counsel referred to annexure-9 and ground taken in this regard before the DRP to submit that DRP also has not considered the risk adjustment even though assessee has provided two ways of quantifying the market risk. It was the submission that the risk adjustment is to be considered by the TPO and relied on various legal arguments as placed in paras 7 and 9 of the annexure-9 to the objections to the draft order.

10. After hearing rival contentions, we are of the opinion that this issue is to be examined by the TPO afresh. Assessee admits that it is having a single customer risk, whereas, other comparable companies has market risk. The TPO in fact, discussed this issue elaborately vide para 16.2 onwards and vide para 16.2.3 analysed the risk and concluded that there is no risk adjustment given as the single customer risk/political risk of tax payer combined with arithmetic mean price considered in the case of comparable companies qualifies the risk differential if any between the tax payer and comparable Indian enterprise. Since DRP has not given any opinion on this, we are of the opinion that this issue requires detailed examination afresh by the TPO and DRP. In case of any adjustment to be required to be done, after excluding the comparables as stated above and inclusion of other comparables if any after examination as directed therein, risk adjustments may be considered by the TPO, if such situation arises. In case the PLI determined after examination of the comparables is within the parameters and no adjustment is to be made for the international transaction, then, adjustment for risk may become academic in nature. With these observations, the issue of risk adjustment is restored to the file of the TPO for necessary consideration. Ground is accordingly considered as allowed for statistical purposes.

11. The A.O. / TPO is directed to examine the issues as directed above, excluding the comparables which are decided as not comparable and re-compute the arithmetic mean so as to examine whether any T.P. adjustment is required as per the provisions of the Act. The Grounds are considered as partly allowed for statistical purposes.

12. In the result, appeal of the assessee is partly allowed for statistical purposes.

POOJA