TaxTMI 
TaxTMI 
2016 (7) TMI 1265
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.... financial statements and audit reports etc., and preparation of business descriptions, biographies of key executives and track key developments in the companies. For the year under consideration, assessee admitted income of Rs. 32,61,91,953/- under normal provisions of the Act and Rs. 32,43,92,789/- under the provisions of Section 115JB. As assessee has international transactions with its AE, AO made a reference to the TPO as per the provisions of Section 92CA for determination of Arm's Length Price [ALP]. Assessee provides the services to its AE on cost+15% mark up. However, assessee chooses Transactional Net Margin Method [TNMM] as the most appropriate method and PLI was determined at 15.04% by taking OP/OC. Assessee in its TP study used Prowess and Capitaline + database and selected certain comparable companies and arrived at ALP of 14.81%. Since that is less than margin of assessee, assessee submitted that transactions are within Arm's Length. Assessee had 248.14 Crores receipts from its AE. Its operating cost was taken at 215.70 Crores and Operating Profit at Rs. 32.44 Crores. The TPO in his study was of the opinion that the method of search process suffers from defects which....
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....ithmetic mean, the TPO has allowed working capital adjustment of 0.86% to arrive at adjusted Arm's Length margin at 24.87%. On an Operating Cost of 215.70 Crores, the TPO proposed adjustment u/s. 92CA at Rs. 21,20,42,235/- in his order u/s. 92CA. The AO following the order of the TPO, proposed a draft order incorporating the above adjustment vide order dt. 09-03-2015. 4. Assessee objected to various filters and also various comparables selected by the TPO and also requested for inclusion of certain comparables rejected by the TPO. The DRP vide its order dt. 02-12-2015, accepted the objections of assessee on certain comparables and rejected assessee's request for inclusion and also suo motto excluded some companies and consequently, directed the TPO/AO to re-work out the ALP. 5. The DRP has decided various comparables as under: S.No. Companies DRP Decision 1. Accentia Technology Limited It is noticed by us, that the assessee itself has selected this company as comparable in its TP study and now since some low margin cases selected by the assessee have been rejected by the TPO, it is now objecting against this comparables, which is not proper. &nb....
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....ubmission, respectfully following the decision of Hon'ble the ITAT for the AY 2009*10 in assessee's own case, as the functional profile of the assessee company and the above company remain the same, we direct the AO to exclude the above company from comparables. 5. TCS e-Serve Limited Having considered the submissions, on perusal of annual report, it is noticed by us from the schedule to the financial statement that the company is engaged in the business of providing information technology - enabled services/business processing outsourcing service, primary to the Citi group companies introduced globally the transaction processing include the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citi group to its corporate and retail clients. As per the annual report, the company also provide technical services involving software testing, verification and validation of software at the time of implementation and data centre management activities, which makes the company functionally incomparable with the assessee, accordingly, we direct the assessing officer to exclude the above company f....
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....sed the Annual Report, that the expenses on sub contracting is to the extent of 41%; which suggests a different working model, which may have significant effect on the margin and therefore, the company cannot be retained as comparable. This view finds support from the decision of the Han Delhi High Court in the case of Rampgreen Solutions Pvt Ltd (ITA 102/2015) in paragraph 38 of the decision wherein it is held that "plainly, a business model where services are rendered by own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing services by ............would have no bearing on the profitability of the said entity.' And also, from the decision of the Hon'ble A.P & Telengana High Court in the case of SA Continuum India Private Limited (ITTA 440 of 2014), Further on the same rationale, the company was directed to be excluded by the Hon'ble Hyderabad ITAT in the case of M/s Excellence Data Research Pvt Ltd in ITA No.159/Hyd/2014 and assessee's own case for the Year 2009-10, We direct the Assessing Office....
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....he year the bad debt written off are to the extent of Rs. 1,62,09,146/-, in such inconsistency of accounting, in our view, it is appropriate to exclude the above company from the comparables. 6. DRP rejected the other objections of assessee and directed the AO/TPO to make the adjustments accordingly. In the result, the arithmetic mean of four companies finally approved by the DRP stood at 24.20% and after giving working capital adjustment as originally proposed, the arm's length margin was determined at 23.34% and final adjustment was made at Rs. 17,90,40,176/-. Revenue is aggrieved on exclusion of nine comparables, whereas assessee is aggrieved on not accepting its objections. 6.1. Revenue in its appeal is mainly contesting the four grounds as under: "2. The learned DRP erred in rejecting companies on the ground of functional difference when the tax payer has not considered the vertical & horizontal (categorizing companies into BPO and KPO) of the ITES sector while selecting the comparables. 3. The learned DRP erred in not considering that the main search strategy of the tax payer as well as the TPO has been to identify the companies which are engaged in the ....
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....ropetal Technologies Limited, eClerx Services Limited., should not have been excluded by the DRP. Further, it was submitted that exclusion of Infosys BPO Limited and TCS e-Serve Ltd., on the reason of high turnover is also not correct as upper turnover filter was not incorporated by the TPO. He referred to the order of the TPO to explain that in the business of ITES, turnover does not have any effect on the profitability and accordingly, he argued that these companies should not have been excluded by the DRP. With reference to the three companies excluded by the DRP, ie. Cosmic Global Limited, Informed Technologies India Limited and Microgenetics systems ltd, he referred to the TPO's order to submit that these three companies are assessee's own comparables and therefore, should not have been excluded by the DRP. He also made submissions that e4e Healthcare Systems Limited should not have been excluded on the basis of forward contracts, the fact of which is not correct as it has no effect on the profitability of the company. He defended the order of the TPO in including the various companies as was done by him. 9. In reply, Ld. Counsel filed various charts and submitted that the ....
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....rom other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The ob....
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.... sake of record. i. Accentia Technologies Ltd., : 11. TPO included this company stating that the company earns income from medical transcription, billing and collections and coding. All these activities fall under the category of ITES and there is no income from sale of products or SAAS. Assessee contended that the company is functionally different as it is a diversified KPO providing high end software services which cannot be compared to the functions performed by assessee. It is the health care receivable cycle management company engaged in providing services in developing products. Accentia Technologies Ltd., has ventured into providing HRCM Services of an integrated end to end SAAS model. 11.1. It was submitted that there was no segmental information available and as can be seen from the annual report, assessee is engaged in KPO services, development of software products (Iridium and its variants) which are used to render such services. It was submitted that it has significant intangible assets like IP rights, brands and goodwill and it has adopted an arithmetic growth strategy in its business operations in earlier years. On that basis, it was excluded in earlier years....
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....etal Techologies Ltd (Seg): 12. This company is included by TPO but excluded by DRP for the following reasons: "Having considered the submissions, on perusal of the annual report, it is noticed by us that the assessing officer has considered the revenue from the engineering design segment. Hon'ble ITAT, Bangalore in IT(TP)/A/1678/Bang/2012 in the case of Global E Business Operations, directed to exclude the above company by observing that 'we have considered the submission of the learned counsel for the assessee, on perusal of note no.15 of notes to accounts, which gives segmental revenue of this company, it is clear that the major source of the income for this company is from providing engineering design services and information technology services. The function performed by the engineering design services of the company cannot be considered as comparable to the ITES /BPO function performed by the assessee. The performance of the engineering design services is regarded as providing high end services amongst the BPO which require high skill whereas the services performed by the assessee are routing low end ITES function. We therefore hold that this company could not h....
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....e's objection that it provides high end KPO services was rejected by the DRP. It was the submission that it is engaged in development of product suites, KPO services (in insurance, healthcare, HR and accounting domains), market research and data analytics and IT services. Further, it was submitted that no segmental information was available. 14.1. Assessee contends that this was excluded in the following cases: i. Hyundai Motors Engineering (ITA No. 1850/Hyd/2012); ii. Market Tools Research (ITA No. 1811/Hyd/2012); iii. Cummins Turbo Technologies (ITA No. 784/PN/2014); iv. Global e-Business Operations (ITA No. 1678/BAN/2012); and v. Symphony Marketing Solutions (ITA No. 1316/BAN/2012); 14.2. We have keenly perused the annual report placed on record and business profile of the company. It is also considered in earlier year in the case of Hyundai Motors Engineering (ITA No. 1850/Hyd/2012). The relevant para of the order is as under: "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....
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..... This company is included by TPO but excluded by DRP on the reason of inconsistency of accounting. It was contended that the DRP has disregarded the financial statements and not sustained its arguments. It was further submitted that the TPO has accepted in AY. 2012-13. Even the Revenue wants it to be included as can be seen from the grounds raised and arguments of DR. Even as per the annual report, the company provides health care outsourcing services to its AE and there are no other activities. The foreign exchange forward contracts are noted in Schedule-16 notes to accounts at page 14 and the accounting policy is same. There is no inconsistency as felt by DRP. However, assessee objected to the profit margin worked out by TPO as noted in page 13 of DRP order. Assessee contends that miscellaneous income was taken as operational income. This requires verification. So to that extent of verification of PLI of this company, we restore the same to TPO/AO while DRP order of excluding the same is set aside. TPO/AO is directed to include the same. Revenue's ground on this is allowed as well as assessee ground. vi. eClerx Services Ltd.,: 16. This company is included by TPO but exclud....
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....red the submissions, on perusal of annual report, it is noticed by us from the schedule to the financial statement that the company is engaged in the business of providing information technology - enabled services/business processing outsourcing service, primary to the Citi group companies introduced globally the transaction processing include the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citi group to its corporate and retail clients. As per the annual report, the company also provide technical services involving software testing, verification and validation of software at the time of implementation and data centre management activities, which makes the company functionally incomparable with the assessee, accordingly, we direct the assessing officer to exclude the above company from comparables". Even though, Ld. DR has argued vehemently for inclusion, we do not see any reason to include as this company is functionally different and being excluded in many cases in earlier years as well being unique in the functionality. 24. Assessee wants these companies to be included which were excl....
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....nally different as well. For the reasons, the exclusion is upheld. iii. Datamatics Financial Services Limited: 27. TPO did not select this company as it did not appear in search matrix. DRP rejected the same on the reason that no clear segmental information is available. 27.1. It was the submission that search process carried out by TPO is defective. Assessee had carried out a broad search and identified a domain of 1,599 companies (as against TPO's domain of only 154 companies). It was also submitted that DRP has not demonstrated that there are functional differences in international and domestic ITeS [Included as comparable by TPO himself in AY. 2012-13 (subsequent year)]. Further, it was submitted that the company passes 25% export earnings filter applied by TPO. 27.2. We have examined the annual report placed on record to examine the functionality. As seen from the annual report, there is no information about nature of work undertaken by company. The operation seems to be from ITES but the expenditure and receipts includes 'printing'. Segmental data is unavailable. The reasoning of DRP is as under: "Having considered the submission, it is noticed by us that out o....
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....Life India Service Centre (ITA No. 750/Del/2015); 29.1. We have considered the contentions and examined the documents placed on record. Even though, Co-ordinate Benches have held that different financial year ending cannot be a reason to exclude when data can be obtained for entire year, for the reasons best known to assessee, it has not placed any information on record. In the case of R. Systems Limited(discussed above), assessee not only took pains to include the data of annual report, but also prepared/compiled data from the quarterly reports and placed it on record. This aspect was discussed above. However, as far as this company is concerned, no data has been placed on record by assessee. Therefore, even though in principle the Coordinate Bench decisions are to be accepted, in the absence of any data available, we are unable to include this company as a comparable to the assessee's functions. The company is therefore excluded. 29.2. The AO/TPO is directed to rework out the PLI accordingly. Assessee's grounds and the Revenue grounds are partly allowed. 30. Before parting, we would like to note that both the parties have given incomplete information with reference to ce....