IT/ILT: A functionally comparable company ought not be excluded from comparable list merely because it had different accounting year particularly when data for financial year could be compiled from its audited accounts
■■■
[2016] 75 taxmann.com 306 (Chennai - Trib.) 
IN THE ITAT CHENNAI BENCH 'D'
RR Donnelley India Outsource (P.) Ltd.
v.
Deputy Commissioner of Income-tax, Corporate Circle-5(2), Chennai*
CHANDRA POOJARI, ACCOUNTANT MEMBER 
AND G. Pavan Kumar, JUDICIAL MEMBER 
IT Appeal No. 678 (mds.) of 2015
[ASSESSMENT YEAR 2010-11] 
AUGUST  18, 2016 
Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price (Comparables and adjustments/Comparables - Illustrations) - Assessment year 2010-11 - Assessee-company was engaged in business of information technology enabled services to group companies - Whether a functionally comparable company ought not be excluded from comparable list merely because it had different accounting year particularly when data for financial year could be compiled from its audited accounts - Held, yes - Whether matter should be reconsidered in case of comparable rejected for insufficient financials when a comparable's financials were available - Held, yes - Whether a company having turnover around Rs. one crore as against turnover of assessee-company of Rs. 317 crores, could not be compared with assessee - Held, yes - Whether when assessee had wrongly excluded a comparable company from TP study and found same to be a comparable company, it could be included at later stage - Held, yes - Whether assessee being engaged in business of developing unique intangibles to group companies could not be compared with company having developed and owned unique web based software by which it provided niche services to its customers - Held, yes [Paras 10-15] [Partly in favour of assessee] 
FACTS
 
■ 	 	The assessee-company was engaged in the business of information technology enabled services to the group companies.	
■ 	 	The TPO computed the ALP making an upward adjustment in respect of ITES. While making the TP adjustment so as to make determine the ALP, the TPO considered the five comparables.	
■ 	 	However, when the assessee carried the matter before the DRP, the DRP excluded one of them as comparables. The assessee wanted to include or exclude the two comparables.	
■ 	 	On appeal:	
HELD
 
Comparable R Systems International Ltd. 
■ 	 	In this case, there is no dispute that RSIL is functionally comparable to the assessee's case. However, the accounting year adopted by the RSIL is different from the assessee's accounting year. RSIL adopted 1st January to 31st December as accounting year as against the accounting year adopted by the assessee as 1st April and 31st March. However, data for the financial year could be compiled from its audited accounts. Hence, the assessee is directed to furnish data for the financial year 2009-10 (1st April and 31st March) to the TPO, who after due verification shall consider the same as comparable to the assessee's case so as to determine the ALP. [Para 6]	
Comparable Microgenetics Systems Ltd. 
■ 	 	This company was rejected on account of 'insufficient financial information' at the time of TP study prepared by the assessee. [Para 7]	
■ 	 	Financials for the year ended March 2010 relating to this company was uploaded in the MCA portal on 15-12-2011 and the assessee is in a position to place necessary financials of this company before the TPO. Accordingly, this issue is remitted to the file of the TPO for consideration and decide thereupon if it is functionally comparable to the assessee's case and turnover of that company is commensurate with the assessee-company. [Para 9]	
Comparable CG-VAK Software & Exports Ltd. 
■ 	 	The turnover of CG-VAK Software & Exports Ltd. is around Rs. one crore as against the turnover of the assessee-company at Rs. 317 crores. Accordingly, turnover of very small company cannot be compared with the assessee company's turnover. [Para 11]	
Comparable Datamatics Financial Services Ltd. 
■ 	 	This comparable was rejected by the assessee, as this was functionally different from the assessee. Before the DRP, the assessee has stated that both are in BPO operations and submitted that it is to be considered as comparable and placed reliance on the order of Tribunal, in Tata Power Solar Systems Ltd. v. Dy. CIT [2014] 41 taxmann.com 340 (Mum. - Trib.) and Sumit Diamond (India) (P.) Ltd. v. Addl. CIT [2013] 32 taxmann.com 394 (Mum. - Trib.), wherein it was held that a company wrongly included in TP study can be excluded at a later point of time. In a similar line, when the assessee has wrongly excluded a comparable company from the TP study and finds the same to be a comparable company, it could be included at latest stage. However, the DRP has not considered the argument of the assessee and rejected the same. If Datamatics Financial Services Ltd. is functionally comparable and if its turnover is commensurating with the assessee company's turnover, it is to be considered as comparable to determine the ALP. Accordingly, this issue is remitted to the TPO for fresh consideration. [Para 12]	
Comparable Fortune Infotech Ltd. 
■ 	 	The assessee was is engaged in the business of developing unique intangibles to the group companies. Fortune had developed and owned unique web based software by which it provides niche services to its customers. In view of this, the TPO should exclude Fortune from the list of comparable companies. [Para 14]	
Comparable e4e Healthcare Business Services Ltd. 
■ 	 	This company was not functionally comparable to the assessee's case and this company is in health care outsourcing services and in addition, it also renders software development services and it is the fact that segmental information was not available. The company was also a 100 per cent EOU, under STPI guidelines. Hence, this company should be excluded from the comparables. [Para 17]	
CASE REVIEW
 
Xchanging Technology Services (P.) Ltd. v. Dy. CIT [2015] 70 SOT 842/62 taxmann.com 253 (Delhi - Trib.) (para 6); Mercer Consulting (India) (P.) Ltd. v. Dy. CIT [2014] 150 ITD 1/47 taxmann.com 84 (Delhi - Trib.) (para 6); Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 (Delhi - Trib.) (para 6); Maersk Global Service Centres (India) (P.) Ltd. v. Dy. CIT [2015] 56 taxmann.com 129/69 SOT 33 (URO) (Mum. - Trib.) (para 6); Aegis Ltd. v. Asstt. CIT [IT Appeal No. 1213 (Mum.) of 2014, dated 27-7-2015] (para 6); Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxmann.com 6 (Delhi - Trib.) (para 15); Tata Power Solar Systems Ltd. v. Dy. CIT [2014] 41 taxmann.com 340 (Mum. - Trib.) (para 12) and Sumit Diamond (India) (P.) Ltd. v. Addl. CIT [2013] 32 taxmann.com 394 (Mum. - Trib.) (para 12) followed.
CASES REFERRED TO
 
Xchanging Technology Services (P.) Ltd. v. Dy. CIT [2015] 70 SOT 842/62 taxmann.com 253 (Delhi - Trib.) (para 6), Mercer Consulting (India) (P.) Ltd. v. Dy. CIT [2014] 150 ITD 1/47 taxmann.com 84 (Delhi - Trib.) (para 6), Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 (Delhi - Trib.) (para 6), Maersk Global Service Centres (India) (P.) Ltd.  v. Dy. CIT [2015] 56 taxmann.com 129/69 SOT 33 (URO) (Mum. - Trib.) (para 6), Aegis Ltd. v. Addl. CIT [IT Appeal No. 1213 (Mum.) of 2014, dated 27-7-2015] (para 6), Tata Power Solar Systems Ltd. v. Dy. CIT [2014] 41 taxmann.com 340 (Mum. - Trib.) (para 12), Sumit Diamond (India) (P.) Ltd. v. Addl. CIT [2013] 32 taxmann.com 394 (Mum. - Trib.) (para 12), 24/7 Customer Com (P.) Ltd. v. Dy. CIT [2013] 140 ITD 344/[2012] 28 taxmann.com 258 (Bang.) (para 14), Equant Solutions India (P.) Ltd. v. Dy. CIT [2016] 157 ITD 292/66 taxmann.com 192 (Delhi) (para 14), Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxmann.com 6 (Delhi - Trib.) (para 15) and Annam Software (P.) Ltd. v. ACIT [IT Appeal No. 2929 (Mad.) 2014, dated 15-5-2015] (para 19).
Vikram Vijayaraghavan, Adv.  for the Appellant. Arun C. Bharath, CIT for the Respondent.
ORDER
 
Chandra Poojari, Accountant Member - This appeal by the assessee is directed against the assessment order dated 27.2.2015 passed u/s. 143(3) r.w. Sec. 144C(13) of the Act consequent to the directions of the Dispute Resolution Panel (DRP) dated 29.12.2014 u/s. 144C(5) of the Act.
2. The assessee has raised the following grounds relating to transfer pricing :—
"2.	 	On the facts and in the circumstances of the case, the learned AO/TPO and the Hon'ble DRP erred in making an adjustment to the arm's length price ('ALP') of the Appellant's international transactions with related parties amounting to INR. 20,60,21,598/-.	
3.	 	The learned AOITPO and the Hon'ble DRP have erred, in law and in facts, by modifying certain quantitative and qualitative filters applied by the Appellant (without providing any cogent reasons) and applying certain additional filters, which are arbitrary in nature, for the purposes of determining the ALP.	
4.	 	The learned AOITPO and the Hon'ble DRP have erred, in law and in facts, by not providing the detailed search process (i.e. accept/reject matrix and the reason of rejections of the companies rejected qualitatively) of the fresh search conducted, thus resorted to cherry picking of the comparables.	
5. 	 	The learned AOITPO and the Hon'ble DRP have erred, in law and on facts, by selecting the following companies viz, (1) Fortune Infotech limited (2) Nittany Outsourcing Services Private Limited as functionally comparable to the Appellant based on their own conjectures and surmises.	
6.	 	The learned AO/TPO and the Hon'ble DRP have erred, in law and on facts, by rejecting R Systems Limited as comparable to the Appellant on the ground that the company follows a different accounting year, without appreciating the submissions made by the Appellant that application of a different accounting year filter is inappropriate.	
7.	 	The learned AO/TPO and the Hon'ble DRP have erred, in law and on facts, by rejecting CG-VAK Software & Exports Limited as comparable to the Appellant on the ground that the company's turnover is less than Rs 1 crore, without appreciating the submissions made by the Appellant that application of a turnover filter is inappropriate.	
8.	 	The learned AO/TPO and the Hon'ble DRP have erred, in law and on facts, by not considering two additional comparable companies namely (1) Migrogenetics Systems Limited (2) Datamatics Financial Services Limited for computation of ALP without appreciating the submissions made by the Appellant that the above companies are functionally comparable to the Appellant and satisfy all the filters adopted by the learned AO/TPO and the Hon'ble DRP.	
9.	 	The learned AO/TPO and the Hon'ble DRP, in law and in facts, by disregarding the financial analysis undertaken by the Appellant using multiple year data and determining the ALP using standalone financial data pertaining to FY 2009- 10, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements.	
10.	 	The learned AO/TPO and the Hon'ble DRP have erred, in law and in facts, in treating certain expenses as operating in nature for the purposes of transfer pricing analysis under transactional net margin method, in the Appellant's case without providing cogent reasons.	
11.	 	The learned AO/TPO and the Hon'ble DRP have erred, in law and in facts, by not making suitable adjustments to account for differences in the functional and risk profile of the Appellant vis-a-vis the comparables."	
However, at the time of hearing, the ld. AR put his arguments relating to selection of comparables by the Transfer Pricing Officer (TPO).
3. The facts of the case are that in the case of the assessee reference was received by the JCIT (TPO) II, Chennai from DCIT, Company Circle-V(4), Chennai (AO) for determination of the Arm's Length Price(ALP) for the international transactions undertaken by the assessee during the relevant assessment year 2010-11. The TPO, vide order dated 3.1.2014, computed the ALP making an upward adjustment of Rs. 44.87 crores in respect to ITES. Pursuant to the completion of the transfer pricing proceedings, the AO incorporated the transfer pricing adjustment and made certain other adjustments in the returned income in the draft assessment order which he passed u/s. 143(3) r.w.s.144C of the Act. Aggrieved by the aforesaid order, the assessee has raised objections in an application filed in form 35A before the DRP, Chennai.
3.1 The assessee is a 100% subsidiary company of Data Entry International Private Limited. The assessee company is engaged in the business of information technology enabled services to the group companies. While making the TP adjustment so as to make determine the ALP, the TPO considered the following comparables:—
(i)	 	Cosmic Global Limited	
(ii)	 	Informed Technologies India Limited	
(iii)	 	Fortune Infotech Limited	
(iv)	 	Jeevan Scientific Technology Ltd. (Segmental)	
(v)	 	e4e Healthcare Business Services Ltd.	
3.2 However, when the assessee carried the matter before the DRP, the DRP considered the following comparables:—
(i)	 	Cosmic Global Limited	
(ii)	 	Fortune Infotech Limited	
(iii)	 	Jeevan Scientific Technology Ltd. (Segmental)	
(iv)	 	e4e Healthcare Business Services Ltd.(formerly known as Nittany outsourcing services private limited)	
4. Now, the assessee wants to include or exclude the following comparables:—
(i)	 	R Systems International Ltd.,	
(ii)	 	Microgenetics Systems Ltd.	
According to the ld. AR, R Systems International Ltd. (RSIL) is comparable to the assessee's case. He submitted that TPO as well as DRP accepted that this company has functional comparability to the assessee's case. However, it was excluded by the TPO solely on the reason that its financial year is different without considering that the data for the financial year adopted by the assessee can be easily complied from the audited financial statement of that company. According to him, RSIL is to be considered as comparable to the assessee's case.
5. On the other hand, the ld. DR submitted that RSIL was not considered as comparable by the TPO for the reason that the entity has a different accounting year. It has closed the books of account by 31.12.2009. One of the filters adopted by the TPO is to exclude companies having different financial years other than 1st April and 31st March. He submitted that adequate number of comparables are available, the elimination of a single comparable for a valid reason cannot be questioned.
6. We have heard the rival submissions and perused the material on record. In this case, there is no dispute that RSIL is functional comparability to the assessee's case. However, the accounting year adopted by the RSIL is different from the assessee's accounting year. RSIL is adopted 1st January to 31st December as accounting year as against the accounting year adopted by the assessee as 1st April and 31st March. However, data for the financial year could be compiled from the audited accounts of RSIL. Hence, the assessee is directed to furnish data for the financial year 2009-10 (1st April and 31st March) to the TPO, who after due verification shall consider the same as comparable to the assessee's case so as to determine the ALP. This view of ours is fortified by the decision of the Tribunal in the following cases :—
(i)	 	Xchanging Technology Services India (P.) Ltd. v. Dy. CIT [2015] 70 SOT 842/62 taxmann.com 253 (Delhi - Trib.)	
(ii)	 	Mercer Consluting (India) (P.) Ltd. v. Dy. CIT [2014] 150 ITD 1/47 taxmann.com 84 (Delhi - Trib.)	
(iii)	 	Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 (Delhi - Trib.)	
(iv)	 	Maersk Global Service Centres (India) (P.) Ltd. v. Dy. CIT [2015] 56 taxmann.com 129/69 SOT 33 (URO) (Mum. - Trib.)	
(v)	 	Aegis Ltd. v. Addl. CIT [IT Appeal No. 1213 (Mum) of 2014, dated 27-7-2015]	
Accordingly, this ground is allowed.
7. Microgenetcis Systems Ltd. : This company was rejected on account of " insufficient financial information" at the time of TP study prepared by the assessee. According to the ld. AR, now, the data is available in public domain and it may be considered.
8. On the other hand, the ld. DR submitted that this did not form part of the assessee's choice of comparables before the TPO. The search process initiated by the TPO also did not result in these two comparables and therefore, they were not considered.
9. We have heard both the parties and perused the material on record. It is brought to our notice that that financials for the year ended March 2010 relating to this company was uploaded in the MCA portal on 15th December, 2011 and the assessee is in a position to place necessary financials of this company before the TPO. Accordingly, this issue is remitted to the file of the TPO for consideration and decide thereupon if it is functionally comparable to the assessee's case and turnover of that company is commensurated with the assessee company.
10. CG-VAK Software & Exports Ltd. : This company was not considered as comparable on the reason that the turnover is less than Rs. One crore and failed to satisfy this filter.
11. We have heard both the parties. Admittedly the turnover of CG-VAK Software & Exports Ltd. is around Rs. One crore as against the turnover of the assessee company is Rs. 317 crores. Accordingly, in our opinion, turnover of very small company cannot be compared with the assessee company's turnover. This ground is rejected.
12. Datamatics Financial Services Limited : This comparable was rejected by the assessee, as this was functionally different from the assessee. Before the DRP, the assessee has stated that both are in BPO operations and submitted that it is to be considered as comparable and placed reliance on the order of Tribunal, Mumbai Bench in the cases of Tata Power Solar Systems Ltd. v. Dy. CIT [2014] 41 taxmann.com 340 (Mum. - Trib.) and Sumit Diamond (India) (P.) Ltd. v. Addl. CIT [2013] 32 taxmann.com 394 (Mum. - Trib.), wherein it was held that a company wrongly included in TP study can be excluded at a later point of time. In a similar line, when the assessee has wrongly excluded a comparable company from the TP study and finds the same to be a comparable company, it could be included at latest stage. However, the DRP has not considered the argument of the assessee and rejected the same. In our opinion, if Datamatics Financial Services Limited is functionally comparable and if its turnover is commensurating with the assessee company's turnover, it is to be considered as comparable to determine the ALP. Accordingly, this issue is remitted to the TPO for fresh consideration.
13. Comparables excluded from the list of company, Fortune Infotech Limited is concerned, the ld. AR submitted that the said company is not considered as comparable for the reason that the above company is not functionally comparable to the assessee's case and annual maintenance charges are not considered as operating expenses.
14. We have heard both the parties and perused the material on record. The assessee is engaged in the business of developing unique intangibles to the group companies. Fortune Infotech Limited had developed and owns its unique web based software by which it provides niche services to its customers. The issue whether Fortune Infotech Limited is to be taken as a comparable with ITES entities having no intangibles of their own was considered in detail by the co-ordinate Bench of this Tribunal in the case of 24/7 Customer Com (P.) Ltd. v. Dy. CIT [2013] 140 ITD 344/[2012] 28 taxmann.com 258 (Bang.). At para 15.3.4. of that order, the Tribunal held that this company, Fortune Infotech Limited requires to be excluded from the list of comparables and the same decision was taken by the Delhi Bench in the case of Equant Solutions India (P.) Ltd. v. Dy. CIT [2016] 157 ITD 292/66 taxmann.com 192. In view of this, we direct the TPO to exclude Fortune Infotech Limited from the list of comparable companies.
15. Regarding e4e Healthcare Business Services Ltd., the ld. AR, submitted that the financial statement shows that the company has software development centres and therefore, should be rejected as comparables. He placed reliance on the order of the Tribunal in the case of Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxmann.com 6 (Delhi - Trib.) to support his case.
16. On the other hand, the ld. DR relied on the orders of the lower authorities.
17. We have heard both the sides and perused the material on record. This company was not functionally comparable to the assessee's case and this company is in health care outsourcing services and in addition, it also renders software development services and it is the fact that segmental information was not available. The company was also a 100% EOU, under STPI guidelines. Hence, we are inclined to accept the contention of the ld. AR that this company should be excluded from the comparables. Reliance placed on by the ld. AR also supports our view. Accordingly, we direct the TPO to exclude this company from the comparable companies.
17.1 Further, we make it clear that the ld. AR has not argued any other grounds relating to TP issues before us. Accordingly, all other grounds raised by the assessee in this appeal with reference to TP issue are dismissed as infructuous.
18. Coming to other ground not relating to TP, the contention of the ld. AR is that an alternate claim of the assessee relating to allowability of deduction is to be considered u/s. 10A instead of sec.10B of the Act.
19. We have heard both the parties and perused the material on record. The Tribunal is consistently holding that if the assessee is not entitled for deduction u/s. 10B of the Act, then the alternate claim of the assessee is to be considered. Accordingly, we remit the issue to the TPO to verify whether the assessee is entitled deduction u/s. 10A of the Act. This view of ours is fortified by the order of the Tribunal in the case of Annam Software (P.) Ltd. v. ACIT in ITA No. 2929 (Mds.) of 2014 dated 15.5.2015, wherein it was held as under :—
'5. Heard both sides. Perused orders of lower authorities and the case laws relied on. The assessee filed Form 56F dated 2.9.2011 from the Accountant, who certified that assessee is claiming deduction under section 10A of the Act. The assessee filed return claiming deduction under section 10B in the return of income. The Assessing Officer denied deduction under section 10B stating that assessee has not fulfilled the conditions specified therein. It was the submission of the assessee that claim was made under section 10A and all the conditions stipulated under section 10A were complied with. It was the submission of the assessee that its unit was granted approval for setting up of STPI unit by the Director of Software Technology Park of India which is a 100% export oriented undertaking. It was the submission of assessee that in case deduction under section 10B is not allowable, deduction under section 10A should be allowed.
6. The Hon'ble Delhi High Court in the case of CIT v. Regency Creations Pvt. Ltd.  (353 ITR 326) held that in order to claim exemption under section 10B, an undertaking must have been approved by the Board appointed in this behalf by the Central Government in exercise of powers conferred by section 14 of the Industries (Development & Regulation) Act, 1951 and rules made thereunder. In this case, assessee is a unit recognized by the STPI. It was not placed on record to suggest that unit was approved by the Board appointed by the Central Government under section 14 of Industries (Development and Regulation) Act, 1951, therefore assessee is not eligible for 10B deduction. However, if the assessee is not entitled for deduction under section 10B, the claim made by the assessee under section 10A of the Act should be considered by the lower authorities.
7. The Hon'ble Madras High Court in the case of CIT v. Heartland KG Information (supra) held as under:-
"Held, dismissing the appeal, (i) that the transfer was not that of plant and machinery alone but of sale of the whole business unit of the transferor company which was primarily only to the export of articles or things. Even though the assessee originally claimed relief under section 10B, it was cautious enough to make an alternative plea under section 10A in view of the fact that the assessee's vendor had the benefit under section l0A. It was not denied by the Revenue that the assessee had the whole business transferred to its favour and that the factum of transfer was also intimated to the Software Technology Park of India. Thus, as a software technology park, the assessee was entitled to place its claim under section l0A. In any event, even assuming for a moment, the assessee had not referred to the section correctly, the fact remained that if the claim could be favourably considered under any of those special deduction provisions and on the conditions specified therein being satisfied, there did not exist any justifiable ground for the Revenue to contend that the assessee shall not be entitled to have the benefit of section 10A. The assessee was entitled to exemption under section 10A."
8. Respectfully following the said decision, we set aside the orders of lower authorities and remit the matter back to the file of Assessing Officer with a direction to consider the claim of the assessee under section 10A after examining the allowability of the claim afresh in accordance with law and in light of the above observations.'
Accordingly, this issue is remitted to the file of the TPO/AO to consider the allowability of deduction u/s. 10A of the Act.
20. In the result, the appeal of the assessee is allowed for statistical purposes.
Pooja 

*Partly in favour of assessee.