THE COMMISSIONER OF INCOME-TAX vs DELL INTERNATIONAL SERVICES INDIA PRIVATE LIMITED
- Court
- Karnataka High Court
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ITA No. 505 of 2014
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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
TH
DATED THIS THE 29 DAY OF OCTOBER, 2026
PRESENT
THE HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE
AND
THE HON'BLE MRS. JUSTICE K.S. HEMALEKHA
INCOME TAX APPEAL NO.505 OF 2014
BETWEEN:
1. THE COMMISSIONER OF INCOME-TAX,
C.R. BUILDING, QUEENS ROAD,
BANGALORE.
2. THE DEPUTY COMMISSIONER OF INCOME-TAX
CIRCLE-11(3),
RASHTROTHANA BHAVAN,
NRUPATHUNGA ROAD,
BANGALORE-560 001.
…APPELLANTS
(BY SRI. E.I. SANMATHI, ADVOCATE A/W
MR. NIRMAL MATHEW, ADVOCATE)
AND:
DELL INTERNATIONAL SERVICES INDIA PRIVATE LIMITED
(SUCCESSOR IN INTEREST TO EMC SOFTWARE
AND SERVICES INDIA PRIVATE LIMITED
INTO WHICH EMC DATA STORAGE SYSTEMS (INDIA)
PRIVATE LIMITED STOOD AMALGAMATED)
HAVING ITS REGISTERED OFFICE AT
CRYSTAL DOWNS, OFF,
INTERMEDIATE RING RD.,
EMBASSY GOLF LINKS BUSINESS PARK,
DOMLUR, BENGALURU,
KARNATAKA - 560071.
Digitally signed by
MAHALAKSHMI B M
Location: High Court
of Karnataka
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ITA No. 505 of 2014
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(AMENDED AS PER COURT
ORDER DATED 29.10.2026)
…RESPONDENT
(BY SRI. T. SURYANARAYANA, SENIOR ADVOCATE A/W
SMT. TANMAYEE RAJKUMAR, ADVOCATE)
THIS ITA IS FILED UNDER SECTION 260A OF THE INCOME
TAX ACT, 1961, PRAYING TO FORMULATE THE SUBSTANTIAL
QUESTIONS OF LAW STATED ABOVE; ALLOW THE APPEAL AND
SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX
APPELLATE TRIBUNAL, BANGALORE IN ITA NO.1274/BANG/2010
DATED 18.07.2014 AND CONFIRM THE ORDER OF THE APPELLATE
COMMISSIONER CONFIRMING THE ORDER PASSED BY THE
DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(3),
BANGALORE AND ETC.
THIS APPEAL, COMING ON FOR FINAL HEARING, THIS DAY,
JUDGMENT WAS DELIVERED THEREIN AS UNDER:
CORAM: HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE
and
HON'BLE MRS. JUSTICE K.S. HEMALEKHA
ORAL JUDGMENT
(PER: HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE)
1. The Revenue has filed the present appeal under Section
260A of the Income Tax Act, 1961 [ the Act ] impugning the order
dated 18.07.2014 [ impugned order ] passed by the learned
Income Tax Appellate Tribunal Bangalore Bench ‘B’, Bangalore
[ Tribunal ], in IT (TP).A No.1274/Bang/2010 for the Assessment
Year [ AY ] 2006-2007.
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2. The respondent is the successor-in-interest of EMC Data
Storage Systems (India) Private Limited [ Assessee ], which stood
amalgamated with EMC Software and Services India Private
Limited, which in turn amalgamated into the respondent.
3. The Assessee preferred an appeal before the Tribunal
against the Assessment Order dated 17.09.2010, passed by the
Assessing Officer [ AO ] under Section 143(3) read with Section
144C of the Act. The Assessee was, inter alia, aggrieved by the
transfer pricing adjustments made pursuant to the directions issued
by the Transfer Pricing Officer [ TPO ].
4. The Assessee is a subsidiary of EMC Corporation, a
company incorporated in the United States of America. The
Assessee’s business is organised into the following three separate
divisions:
i. Software Development Services [ SwD ];
ii. Information Technology enabled Services [ ITeS ]; and
iii. Marketing Support Services.
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5. The Assessee provides software development and marketing
services to its Associated Enterprises [ AEs ], namely, EMC
(Benelux) BV/s.a.r.I.Netherlands and EMC Corporation, US. It also
provides ITeS to EMC (Benelux) BV/s.a.r.l.Netherlands.
6. The Assessee had filed its return of income for the AY 2006-
2007 on 24.10.2006, declaring its income at ` 4,66,18,718/-. The
said return was initially processed under Section 143(1) of the Act
on 01.10.2007. It was subsequently selected for scrutiny and the
AO issued a notice under Section 143(2) of the Act on 22.10.2007.
7. Since the Assessee had entered into international
`
transactions exceeding 15.00 crores, the AO made a reference to
the TPO under Section 92CA of the Act for determination of the
Arm’s Length Price [ ALP ] of the said international transactions.
8. The learned TPO passed an order dated 26.10.2009
directing transfer pricing adjustments to the extent of
` 8,72,05,905/-.The said Adjustments comprise ` 8,41,17,749/- in
respect of the SwD services and ` 30,88,156/- in respect of
international transactions relating to the provision of ITeS.
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9. The AO passed a draft assessment order, inter alia,
incorporating the transfer pricing adjustments as directed by the
learned TPO. The Assessee filed objections to the draft
assessment order before the Dispute Resolution Panel, Bangalore
[ DRP ], inter alia , objecting to the proposed transfer pricing
adjustments. The DRP passed an order dated 27.08.2010 rejecting
the Assessee’s objections to the transfer pricing adjustments,
except that it directed the AO to adopt a 51.73% margin for
Megasoft Ltd. instead of 52.74%, and to recompute the Assessee's
total income accordingly. Pursuant to these directions, the AO
passed the assessment order, which the Assessee appealed
before the learned Tribunal.
10. The Revenue has projected the following questions for
consideration of this Court:
" 1. "Whether, on the facts and in the circumstances of
the case, the Tribunal was right in directing the assessing
officer to exclude the telecommunication expenses of
Rs.1,89,67,308/- and insurance expenses of Rs.1,24,748
both from the export turnover as well as the total turnover
without appreciating the fact that there is no provision in
section 10A that such expenses should be reduced from the
total turnover, as clause (iv) of the Explanation 2 to section
10A provides that such expenses are to be reduced only
from the export turnover ?"
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2. "Whether the Tribunal was justified, on the facts and
in the circumstances of the case, in allowing relief to the
assessee by relying on the decision of the High Court in the
case of Tata Elxsi Ltd., 349 ITR 98 without appreciating that
the decision of the High Court has not reached its finality
and SLPs have been filed against such orders on this issue
in a number of cases including the case of Tata Elxsi Ltd.,?"
3. "Whether, the Hon'ble Tribunal was correct in holding
that the functions of the assessee is not comparable to the
functions of KALS Information Systems Ltd., Accel
Transmatics Limited and Lucid Software Ltd by relying on
the decisions of the co-ordinate benches rendered in other
cases and applying the decisions to the facts of the
assessee without making a FAR analysis of the assessee
and the companies which it directed to be omitted from the
list of comparables?"
4. "Whether, the Hon'ble Tribunal was correct in holding
that the functions of the assessee is not comparable to the
functions of KALS Information Systems Ltd, Accel
Transmatics Limited and Lucid Software Ltd without
appreciating that the comparables satisfy all the qualitative
and quantitative filters applied by the TPO?"
5. "Whether, on the facts and circumstances of the
case, the Tribunal was correct in following the decisions of
the other benches of the Tribunal while rejecting the
comparables included by the TPO in the final list without
appreciating that the selection of comparables in a case
depends upon assessees specific FAR analysis?"
6. "Whether, on the facts and circumstances of the case
the Tribunal was right in following the decision of the other
benches of the Tribunal without appreciating the specific
facts brought on record by the TPO?"
7. "Whether, on the facts and circumstances of the
case, the Hon'ble Tribunal was justified in fixing the RPT
filter at 15% of total revenue and deleting Megasoft Ltd.,
Aztec Software Ltd. and Geometric Software Ltd., from the
list of comparables, by relying on the decisions of the
Tribunal in other cases, including those of other benches of
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Tribunal, without going into specific facts in the case of the
taxpayer and without adducing the basis for arriving at the
15% cut off for RPT filter, in the case of the taxpayer ?"
8. "Whether, on the facts and in the circumstances of
the case the Tribunal was correct in fixing a limit of 15% to
the RPT filter without appreciating the fact that the
assessing officer had fixed the RPT filter at 25% which is in
line with the limits prescribed in section 92A(2) of the Act ?"
9. "Whether, on the facts and circumstances of the
case, the Tribunal was correct in holding that M/s. Tata
Elxsi Ltd., cannot be taken as comparable being functionally
different without appreciating that it satisfied all the
qualitative and quantitative filters applied by the TPO?"
10. "Whether, the Hon'ble Tribunal was correct in
excluding Vishal Information Technologies Ltd., (VITL),
Goldstone Infratech Ltd., Datamatic Financial Services Ltd.,
Maple e-Solutions Ltd., and Nucleus Netsoft & GIS (India)
Ltd., as comparables, by relying on the decision of Tribunal
in other cases, including those of other benches of Tribunal,
without going into the specific facts in the case of the
assessee?"
11. "Whether, the Hon'ble Tribunal is correct in deciding
that advances received be included for the purpose of
computing working capital adjustment without appreciating
that the TPO had not included the same as the assessee
had added fixed assets of Rs.54 Crores while showing
Rs.5.44 Crores of advances received as still outstanding
towards the AEs?"
12. "Whether, on the facts and circumstances of the
case, the Tribunal was correct in not appreciating the fact
that if any filter or criteria applied by the taxpayer for search
of comparables is accepted or any filter or criteria applied
by the TPO is relaxed, the entire accept / reject matrix
changes resulting in a new comparable set including those
companies which are not taken either by the assessee or by
the TPO in its final comparable set and which may not be
finding a place in the TP order under section 92CA?" "
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11. The Coordinate Bench of this Court had considered the
aforesaid questions of law and dismissed the appeal by order
dated 13.07.2018. While doing so, the Coordinate Bench, inter alia,
referred to its earlier decision in Principal Commissioner of
1
Income Tax and Another Vs. M/s. Softbrands India Pvt. Ltd.
12. The Revenue preferred a Special Leave Petition before the
Supreme Court against the order dated 13.07.2018. The said
petition was tagged with a batch of matters including the appeal
arising out of this Court’s decision in M/s. Softbrands India Pvt.
Ltd . ( supra ). The Supreme Court, inter alia , held that the question
of whether the ALP had been determined by following the
provisions of the Act and the Rules made thereunder may give rise
to questions of law; therefore, all the appeals relating to transfer
pricing adjustments could not be rejected on the ground that they
did not entail any substantial question of law.
13. The Supreme Court disposed of the batch of matters by its
decision in SAP Labs India (P) Ltd. Vs. Income-tax Officer and
2
other appeals . The present appeal was remanded to consider the
1
ITA No.536/2015 c/w ITA No.537/2015 D.D. 25.06.2018
2
2023 INSC 394; [2023] 149 taxmann.com 327 (SC)
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transfer pricing questions, bearing in mind the observations made
by the Supreme Court in SAP Labs India (P) Ltd. ( supra ).
Re: Question Nos.1 and 2:
14. As rightly pointed out by the learned counsel for the parties,
question Nos.1 and 2 do not arise for consideration by this Court.
The learned counsel appearing for the Assessee also points out
that question Nos.1 and 2 are covered by the decision of the
Supreme Court in Commissioner of Income-Tax, Central-III Vs.
3
HCL Technologies Ltd. .
Re: Question Nos.3 and 4:
15. These questions relate to the Revenue’s challenges to the
decision of the learned Tribunal to exclude the following three
companies as comparables for determining the ALP of the
Assessee:
i. KALS Information Systems Limited;
ii. Accel Transmatics Limited; and
iii. Lucid Software Limited
3
(2018) 404 ITR 719 (SC)
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16. The question of whether the said companies are comparable
to a company with a functional profile similar to the Assessee on
4
FAR analysis is squarely covered by this Court's decision in The
Commissioner of Income-Tax and Another Vs M/S. Logica
5
Private Ltd. .
Re: Question Nos.5, 6 and 12:
17. Question Nos.5 and 6 relate to the Tribunal’s reliance on
other precedents. The said questions are also covered by the
decision of the Co-Ordinate Bench of this Court in SAP Labs
6
India Private Limited Vs. The Income Tax Officer . In the
said decision, the Court observed as under:
"19.1 The said contention cannot be accepted. Once the
Tribunal, in the case of any taxpayer, records findings
regarding the functions performed, assets employed, or
risks assumed and, on that basis, finds justification to
include or exclude a comparable, there can be no
prohibition in following such decision where it relates to the
same assessment year or to the preceding years, as
permissible under Rule 10B, provided the relevant facts and
circumstances remain identical. If the functional analysis
and other relevant factors continue to be the same, and the
issue has already been adjudicated by the Tribunal, no fault
can be found with the Tribunal following its earlier decision
instead of undertaking a repetitive exercise. Merely because
4
Function, asset and risk
5
ITA No.338/2013 D.D. 28.10.2026
6
ITA No.10/2011 D.D. 28.08.2026
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the Tribunal has relied upon its earlier decision, it cannot be
said that its findings are not in conformity with Section 92C
of the Act and Rule 10B of the Rules.
19.2 However, it is always open to the Revenue or the
assessee to demonstrate that the inclusion or exclusion of a
particular comparable in the earlier decision was incorrect
or that the facts of the present case are distinguishable so
as to warrant a different conclusion."
18. In the recent decision in M/s. Logica Private Ltd ( supra ),
this Court had observed as under:
" 60. The question whether the learned ITAT could rely on
an order passed in case of another assessee must be
answered in the affirmative, provided that the learned ITAT
concludes that the material facts of the case relied upon are
similar to the facts relating to the Assessee. In the context
of transfer pricing adjustments, if the learned ITAT comes to
the conclusion that the business activities carried on by the
Assessee in another case are similar to the business
activities carried on by the Assessee, it would be
appropriate for the learned ITAT to take a similar view
unless it finds other reasons to distinguish the case from the
earlier precedent.
"
19. In view of the above, the questions of law framed in this
regard cannot be construed as substantial questions of law arising
for consideration in the present appeal.
Re: Question Nos.7 and 8
20. The present questions relate to the use of the Related Party
Transaction [ RPT ] filter at 15%. Concededly, the said question
stands covered in favour of the Assessee by the decision of this
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Court in SAP Labs India Private Limited Vs. The Income Tax
Officer ( supra ) as well as in M/s. Logica Private Ltd. ( supra ).
Re: Question No.9:
21. This question relates to the exclusion of Tata Elxsi Limited as
a comparable. The learned Tribunal excluded the said company by
following the decision of a Coordinate Bench of the Tribunal in M/S.
Logica Private Ltd. (order dated 28.02.2013 passed in ITA
No.1129/Bang/2011).
22. This question is also squarely covered by the decision of this
Court in The Commissioner of Income-Tax and Another Vs.
M/s. Logica Private Ltd. ( supra ).
Re: Question No.10 :
23. The Revenue seeks to challenge the exclusion of the
following five companies as comparables:
i. Vishal Information Technologies Ltd., (VITL);
ii. Goldstone Infratech Ltd.;
iii. Datamatic Financial Services Ltd.;
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iv. Maple e-Solutions Ltd.; and
v. Nucleus Netsoft and GIS (India) Ltd.
24. The learned Tribunal excluded the said companies by
referring to the decision in HSBC Electronic Data Processing
7
India Limited Vs. ACIT .
25. It is the Revenue’s case that the learned Tribunal could not
have excluded those companies merely by relying on the earlier
decision and was required to examine the facts in the given case.
26. A plain reading of the order passed by the learned Tribunal
indicates that the Tribunal had considered the facts relating to the
comparable companies, which had a bearing on the profile of the
five companies, as noted by the Tribunal in the earlier decision.
The learned Tribunal had set out, in extenso, the observations
8
made in the said earlier decision . We consider it apposite to
reproduce the same.
" 24. We have considered the rival submissions. As far as
comparable companies chosen by the TPO at S.No.7, 8, 5,
1 and 3 in the list of comparable companies given at para-
20 of this order, we find that the Hyderbad Bench of the
7
ITA No.1624/Hyd/2010 D.D. 28.06.2013
8
HSBC Electronic Data Processing India Limited Vs. ACIT
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ITAT in the case of HSBC Electronic Data Processing India
Ltd. Vs. ACIT, ITA No.1624/Hyd/2010 by order dated
28.6.2013 considered comparability of these companies in
the case of a company engaged in rendering IT enabled
services to its AE similar to that of the Assessee in the
present case. The tribunal held that the aforesaid
companies are not comparable. The following were the
relevant observations of the Tribunal.
"8. The first objection is with reference to selection
of comparable data by the TPO with reference to the
following five companies-
(a) Vishal Information Technologies Ltd.
(b) Goldstone Infratech Ltd.
(c) Datamatic Financial Services Ltd.(seg)
(d) Maple e-Solutions Ltd.
(e) Nucleus Netsoft & GIS(India) Ltd. (now known as
(Asit C.Mehta Financial Services Ltd.)
Vishal Information Technologies Ltd.
9. The assessee's objection with reference to
inclusion of this comparable is on the reason that
the company is functionally different, also does not
satisfy the filters such as employee cost and on-site
revenue filter. It was submitted that employee cost
forms a major portion of the total cost of BPO
services and in the assessee's case employee cost
is 62% of the total cost, whereas in the selected
company the employee cost is less than 2%, which
indicates that most of the work was outsourced and
the out-sourcing cost was at 88.64% of the
operating cost. It was further submitted that the ITAT
Bangalore in the case of First Advantage Off-shore
Services (ITA No.1252/Bang/2010) has directed to
use employee turnover filter in a consistent manner
for selection of comparables and in the case of
Maersk Global Services Centre (India) Pvt. Ltd. (14
ITR(Trib) 541) the Mumbai Bench of the Tribunal
has analysed and rejected this company as
comparable for the reason that it has outsourced a
considerable portion of it's business and is
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functionally different. Moreover, it was also
submitted that the DRP in the later year of 2008-09
vide its order dated 3.8.2012 has rejected this
company as a comparable (name changed to Coral
Hub Ltd.), vide para 18 of the order, wherein
ultimately, it was decided that there is major
difference in functionality and the business model
and the DRP Bench was of the view that Coral Hub
(formerly known as Vishal Information Technology
Ltd.) was not a suitable comparable and needs to be
dropped from the final set of comparables. Based on
the above submissions, it was submitted that this
company cannot be used as a comparable and has
to be excluded.
9.1. The learned Departmental Representative,
however relied on the orders of the TPO.
9.2. After considering the rival contentions, we
find considerable force in the contentions advanced
by the learned counsel. There is no dispute with
reference to the fact that most of the cost incurred
by the company taken as comparable is outsourcing
cost, as can be seen from the Annual report placed
in the paper-book and ITAT, Mumbai in the case of
Maersk Global Service Centre (supra) has analysed
and rejected this company as comparable, due to
the reason that it has outsourced a considerable
portion of its business and it is functionally different.
This factor was also approved by the DRP in
assessee's own case in the later year, as can be
seen from the copy of the order placed on record,
for assessment year 2008-09. In view of this, we
direct the Assessing Officer to exclude this company
from the list of comparables.
Goldstone Infratech Ltd
10. The assessee's objection for inclusion of this
comparable is on the basis of the filter on foreign
exchange earnings, diminishing revenue filter and
functionality, being run on lease basis. It was
submitted that this company was rejected in the
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case of Stream International Services Pvt. Ltd. V/s.
ADIT(International Taxation) by the Mumbai Bench
of the Tribunal, vide its order dated 11.1.2013 in ITA
No.8997/Mum/2010 for assessment year 2006- 07.
10.1. After considering the rival contentions, we are
of the opinion that the business model of the above
company is different from that of the assessee. In
this case, the foreign exchange revenue is less than
1% of the total turnover. Therefore, it fails the filter
provided by the Assessing Officer, on the basis of
the foreign exchange earnings. Further, the
Revenue from BPO is failing over a period of three
years. This issue was considered by the coordinate
Bench (Mumbai Bench) of the Tribunal in the case
of Stream International Services Ltd.(supra) wherein
it was considered as under-
"14. The inclusion of second case objected to by
the Id. AR is that of Goldstone Infratech Limited
(Seg) (earlier known as Goldstone Teleservices
Limited). Here it is relevant to note that the TPO,
inter alia, applied filter of 'Companies with export
revenues more than 25% of the revenues'.
Annual accounts of Goldstone Teleservices
Limited indicate total revenue of the company at
Rs.30.89 crore from three segments, viz.,
Telecommunication at Rs.13.63 crore, BPO at
Rs.5.02 crore and Insulator at Rs.12.23 crore.
The break up of such revenue of Goldstone
Teleservices Limited has been provided at page
236 of the paper book. Schedule forming part of
the annual accounts of Goldstone Teleservices
Limited divulges earnings in foreign currency at
Rs.4.24 lakh. Such detail is available at page 239
of the paper book. When we compare earning in
foreign currency at Rs.4.24 lakh with the earnings
of BPO at Rs.5.02 crore or for that purpose of the
entity as a whole at Rs.30.89 crore, it becomes
manifest that this case does not pass through the
filter adopted by the TPO, being, the 'companies
whose export revenues are more than 25% of the
revenues'.
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Therefore, we are of the opinion, that this company cannot
be considered as a comparable for the purpose of
determining the ALP in this case. We direct the same to be
excluded.
Datamatic Financial Services Ltd.
11. The assessee's objection to inclusion of this comparable
is on the basis of Related Party Transactions filter. It was
submitted that RPT exceeds 25% of the sales and
therefore, to be excluded. The assessee relied on the
decision of the coordinate Bench of the Tribunal (Mumbai
Bench) in the case of Stream International Services (supra),
wherein, wherein with reference to this comparable
company, it was held as under :
"11. The first is M/s. Datamatics Financial Services
Limited. It can be observed that the TPO applied filter
of "Companies with less than 25% related party
transactions". The learned Counsel for the assessee
took us through the Annual accounts of Datamatics
Financial Services Limited, and submitted that the
gross income of this company for the year ending on
31.03.2006 was at Rs.2.31 crore as against total
expenses of Rs.1.84 crore. Referring to pages 319
and 320 of the paper book, our attention was drawn
towards Annexure-2 to demonstrate that the
“Transactions with the Associated Parties within the
meaning of section 92A and 92B of the Income-tax
Act, 1961" showed one major transaction with
Datamatics Limited towards Reimbursement of
expenses' at Rs.99.14 lakh. The learned AR
contended that the transactions of Datamatics
Financial Services Limited with other AEs amounted
to Rs.14.31 lakh making total of transactions with the
AEs at Rs.1.13 crore. It was submitted that the
percentage of transaction with related parties is much
more than 25%, being, the filter adopted by the TPO
himself and hence the same should be excluded.
12. In the opposition, the learned Departmental
Representative contended that the major transaction of
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Rs.99.14 lakh of Datamatics Financial Services Limited with
Datamatics Limited was towards 'Reimbursement of
expenses'. Since the reimbursement of expenses does not
include any profit element, the Id. DR urged that the same
be excluded. He stated that once this transaction is
excluded, the other transaction of Rs.14.31 lakh are less
than 25% of the total transaction with related parties.
13. We do not find any force in the contention advanced by
the learned Departmental Representative for the exclusion
of transactions with Datamatics Limited towards
'Reimbursement of expenses' from the overall transactions
entered into by Datamatics Financial Services Ltd. with its
AEs. Section 92F(v) defines 'transaction' in the context of
transfer pricing provisions to include an arrangement,
understanding or action in concert whether or not it is formal
or in writing or whether or not it is intended to be
enforceable by legal proceeding. There is no reference to
any transaction having necessarily including profit element
or mark-up so as to fall within the definition of 'transaction'
under Chapter X of the Income-tax Act. Since the TPO
applied filter of having companies with less than 25%
related party transactions, it is not open to argue that the
transactions of reimbursement of expenses duly reported by
Datamatics Financial Services Limited as an 'international
transaction' within the meaning of section 92B should be
ignored simply because they represent reimbursement of
expenses. If the contention of the Id. DR that the
reimbursement of expenses not involving profit element
should not be construed as a transaction, is taken to a
logical conclusion, it would mean that all such dealings will
cease to be transactions for the purposes of Chapter-X of
the Act. Once these dealings are not considered as
'transactions', these will also cease to be international
transactions, going out of the purview of section 92 itself.
Obviously, such a view point is contrary to the clear
intention and the language of the relevant provisions. A
pure reimbursement of expenses by one AE to another AE
is very much a 'transaction' as per section 92F(v) and
consequently is equally an international transaction as per
section 92B requiring consideration as per section 92 of the
Act. Be that as it may, the learned Departmental
Representative could not demonstrate the fact that such
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reimbursement of expenses was without any markup. As
the so called comparable case of Datamatics Financial
Services Limited was included by the TPO in the final list of
comparables, in our considered opinion, the same is liable
to be excluded as it involves related party transactions at
much higher level, as against the filter adopted by the TPO
himself, being companies with less than 25% related party
transactions. We order accordingly."
In view of the above, since this company fails in this filter
adopted by the TPO, we direct the TPO to exclude this
company from the list of comparables adopted.
Maple e-Solutions Ltd.
12. The objection of the assessee with reference to this
company is with regard to the financials of the company, on
the ground of unreliability of data. It was submitted that
selection of this company was rejected in the case of CRM
Services India Pvt. Ltd. in ITA No.468/Del/2009 and also in
the case of Stream International Services (supra). Further,
the assessee also relied on the DRP order in assessment
year 2007-08, with reference to the above company.
12.1. We have considered the rival sub missions. We agree
with the objections of the assessee. In the case of Stream
International Services P. Ltd. (supra), it is held with
reference to this company as under:
"18. We are unable to uphold the contention raised by
the learned Departmental Representative. It is
apparent from two orders passed - one by the Delhi
Bench and the other by the Hyderabad Bench of the
Tribunal - that the case of Maple e-Solutions Limited
has been directed to be excluded from the list of
comparables. As the assessment year under
consideration is 2006-2007 and the Delhi Bench of the
Tribunal has also considered the same assessment
year while directing the exclusion of the case of Maple
e-Solutions Limited from the list of comparables, we
are unable to accept the contention of the Id. DR in
this regard. It is more so because no contrary view
has been brought by the Ld. DR to our notice.
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Respectfully following the precedents, we direct the
exclusion of this case from the final list of
comparables."
Since the DRP in assessee's own case for assessment year
2007-08 also considered and excluded this company, we
uphold the assessee's objection in this regard and direct the
Assessing Officer to exclude this company from the
comparables adopted.
Nucleus Netsoft & GIS(India) Ltd.
13. The last objection was with reference to the above
company, which is on similar facts as that of Vishal
Information Technologies, discussed above. It was
submitted that this company is functionally different and fails
under the employee cost filter. It was further submitted that
there is a scheme of amalgamation of earlier company by
the orders of the Hon'ble High Court of Judicature of
Bombay, on 22.2.2006 and in view of amalgamation, the
financials have changed and the business model also
changed. Referring to the annual report placed on record, it
was submitted that as against Rs.24.02 lakhs of employee
st
costs for the year ending 31 March, 2005, the employee
cost has increased to Rs.132.59 lakhs. Further, the data
processing charges is also to the extent of Rs.1.04 crores,
which indicates that the assessee is outsourcing the work.
Accordingly, it cannot be selected as a comparable. Due to
amalgamation during the year, the assessee's business
model has changed and because of employee cost filter
also, this comparable has to be excluded.
13.1 After considering the rival submissions, we are of the
opinion that this company cannot be selected as
comparable not only on the reason of failing employee cost
filter, but also due to amalgamation during the year, which
has changed the business model of the company.
14. In view of the foregoing discussion, we agree with the
assessee's objection that the above five comparables
should be excluded.
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25. The facts and circumstances and the Assessment
year for which the aforesaid companies were not
considered as comparable are identical to the case decided
by the Hyderbad Bench of ITAT and that of the case of the
Assessee. Respectfully following the decision of the
Hyderbad Bench of ITAT, we direct the TPO to exclude the
aforesaid companies from the list of comparable while
arriving at the arithmetic mean of comparable. The relevant
grounds of appeal of the Assessee are allowed. "
27. As is apparent from the above, the learned Tribunal
had referred to the specific facts relating to the companies that
were excluded and had accepted the findings recorded by the
Tribunal in its earlier decision. We note that the Revenue has not
produced any materials to controvert the facts that were relied
upon by the Tribunal in HSBC Electronic Data Processing India
Limited ( supra ), which were expressly accepted by the Tribunal.
T he Revenue has merely framed a general question on the
assumption that the learned Tribunal did not examine the facts in
the present case. However, we note that the Tribunal noted the
functional profile of the Assessee and, in that context, found that
the aforesaid companies, selected as comparables, ought to be
excluded on the basis of a FAR analysis.
28. We asked the learned counsel for the Revenue whether
there was any specific fact as noted by the learned Tribunal, which
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was ex-facie erroneous on the material placed on the record.
However, the learned counsel is unable to point out any material
that would controvert the facts recorded by the Tribunal.
Importantly, no question of law has been framed challenging any
finding of fact as perverse.
29. Further, learned counsel submits that the TPO gave reasons
for including the aforesaid companies. The Tribunal's finding that
the selected comparables ought to be excluded must be tested
against the reasons set out by the learned Tribunal. Since we find
no material to controvert the said findings recorded by the Tribunal
relating to the FAR analysis, we cannot accept that any substantial
question of law arises for consideration in this Court.
Re: Question No.11:
30. This question relates to the working capital adjustment. The
Assessee had challenged the working capital adjustment made by
the TPO on the ground that adjustment did not take into account
the advances received by the Assessee from its AE. The TPO had
excluded the same on the ground that the advances had been
utilized for acquiring fixed assets. However, the Assessee has
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pointed out that the advances were received to render contractual
services in the future. Thus, the learned Tribunal examined the
said contention and found merit in the Assessee’s contention.
Paragraph No.26 of the impugned order is set out below:
" 26. After excluding the aforesaid 5 companies from the
list of comparable, the arithmetic mean of the OP/TC margin
of the remaining companies before working capital
adjustment comes to 17.85% and after working capital
adjustment allowed by the TPO comes to 16.74%. The
Assessees OP/TC margin is however at 8.00%. The
Assessee has in its grounds of appeal challenged the
manner in which working capital adjustment had been
allowed by the TPO. In this regard the Assessee has
pointed out that while working out the adjustment to be
made to the profit margins on account of working capital
adjustment, the TPO did not take into account the advance
received by EMC India (Assessee) from its Associated
Enterprise on the ground that these advances were utilized
for acquiring fixed assets. The Assessee pointed out before
DRP that the advances received by the Assessee from its
AE were monies paid in advance by the AE for contractual
services to be rendered by the Assessee to them in future.
It was pointed out that out of the total advances received
from AE of Rs.56,13,36,329 a sum of Rs.49,24,92,142
pertains to advance for future services. Similar advances as
st
on March, 31 2005 was Rs.43,31,75,394 out of which
Rs.38,73,53,427 pertains to advances for future services.
The Assessee also pointed out that the above factum of
advances having been received for rendering future
services were also pointed out in Schedule 9 to the Notes
on Accounts to the Audited financials of the Assessee for
st
the year ending 31 March, 2006. It was also pointed out
that the Foreign Inward Remittance Certificate (FIRC)
authenticated by Citibank under which the Assessee
received payments also clearly reveal the fact that the
monies received were advance for services to be rendered.
Thus it was argued that the advances received were for
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rendering services and should be considered in
computation of working capital adjustment. The Assessee
also pointed out that the cash profits for the year ending
st
31 March, 2006 of the Assessee was Rs.29,80,73,006/-
which was much higher than the investment in fixed assets
made by the Assessee during the previous year. This
according to the Assessee was sufficient to demonstrate
that the assessee did not utilize the advances received for
purchase of fixed assets. "
31. The learned counsel for the Revenue submits that the
question as to whether the advances were for working capital or
capital is not supported by any factual finding. However, we find
that the said contention is ex facie erroneous. The learned Tribunal
had noted that Schedule 9 to the Notes on Accounts to the Audited
Financial Statements of the Assessee for the year ending
31.03.2006 reflected the receipt of the advance. The Tribunal also
noted that the Foreign Inward Remittance Certificate (FIRC)
authenticated by Citibank also reflected that the advances had
been received towards services to be rendered in the future.
32. Thus, the finding of the learned Tribunal that the amounts
were received as working capital is based on material on record.
The Revenue has not contested either the final accounts or the
FIRCs, which evidence the receipt of the payments.
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33. The question whether the advances have been received as
working capital or otherwise is essentially a question of fact. Since
the Tribunal's decision is based on reliable material, no question of
law arises for consideration.
34. In view of the above, no substantial question of law
arises for consideration before this Court in this appeal. The
appeal is accordingly dismissed.
Sd/-
(VIBHU BAKHRU)
CHIEF JUSTICE
Sd/-
(K.S. HEMALEKHA)
JUDGE
MBM
List No.: 2 Sl No.: 10