TaxTMI 
TaxTMI 
2016 (5) TMI 1330
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....ounting to Rs. 257,620,255 in respect of software development services segment and Rs. 8,710,695 in respect of Information Technology enabled services segment of the Appellant. 3. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in; (a) Upholding the comparability analysis performed by the learned TPO in the TP Order. (b) Accepting the filters applied by the learned TPO in the TP Order, without providing an opportunity of being heard to the Appellant. (c) Disregarding application of multiple year/ prior year data and holding that curre.t year (i.e. Financial Year 2008-09) data for companies should be used for comparability. (d) Upholding the learned TPO's approach of using data as at the t im e of assessment proceedings. 4. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in; (a) Arbitrarily arriving at a set of companies as comparable to the software development and Information Technology enabled services of the Appellant. (b) Arbitrarily including companies that fail the test of comparability analysis (c) Rejecting companies simila....
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.... Operating Profit on cost % 15.18% b) Segmental Financials Description Software Services (Rs.) ITES (Rs.) Marketing Support Services (Rs.) Technical Support Services (Rs.) Operating Revenue 224,72,82,164 6,78,59,518 21,33,97,566 7,42,97,456 Operating Cost 204,29,83,785 6,16,90,471 20,32,35,777 6,75,43,142 Operating Profit 20,42,98,379 61,69,047 1,01,61,789 67,54,314 OP/OC 10% 10% 5% 10%" 4. The assessee has reported international transactions as under : " International Transactions (as mentioned in the 92CE Report) Description Amount Received (Rs.) Receipt for software development services 224,72,82,164 Receipt for IT Enabled Services 6,78,59,518 Receipt for Marketing Support Services. 21,33,97,566 Receipt for Technical Support Services. 7,42,97,456" As it is clear that there are four segments of international transactions however, the TPO accepted the international transactions in respect of marketing support services and technical support services at arm's length. The TPO proposed to determine the Arm's Length Price (ALP) in resp....
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....rived at 24.32% mean margin of the comparable companies and after allowing working capital adjustment of 1.71% the adjusted mean margin has been calculated at 22.61%. Accordingly, the TPO proposed the adjustment under Section 92CA of the Income Tax Act, 1961 (in short 'the Act') of Rs. 25.76,20,255 being shortfall in the assessee's price in comparison to the ALP in respect of international transactions in software development services segment. The assessee challenged the action of the TPO before the CIT (Appeals) but could not succeed. 7. Before us, the assessee is seeking exclusion of 3 companies from the final set of the comparable companies considered by the TPO as under : (i) Bodhtree Consultancy Ltd. (ii) Tata Elxsi Ltd. (Seg.) (iii) Infosys Technologies Ltd. (Now Infosys Ltd.) 7.1 Bodhtree Consultancy Ltd. : 7.1.1 The learned Authorised Representative of the assessee has submitted that it is a software solution company engaged in providing open and end-to-end solution, off shore data management, data warehousing, software housing designing and development of solution by using latest technology. Thus the learned Authorised Representative has submi....
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....ant material. 7.1.3 In a rejoinder the learned Authorised Representative has submitted that M/s. Citrix Research & Development India Pvt. Ltd.(supra) is engaged in software development services and therefore the main activity of the company is only software development. He has further contended that in the financials of Bodhtree Consultancy Ltd., it shows the revenue from the sales and expenditure of sale therefore it indicates that this company is selling software products and no sub-segmental details are available. Therefore, when the assessee is not in the saleable products, this company cannot be compared with the assessee. 7.1.5 We have heard the rival submissions as well as considered the relevant material on record. The learned Authorised Representative of the assessee has submitted that this company is found to be not comparable with software development services provider by the Tribunal in the series of cases including in the case of M/s. Citrix Research & Development India Pvt. Ltd. (supra). We note that the Tribunal in the case of M/s. Citrix Research & Development India Pvt. Ltd. (supra) has considered the comparability of this company in paras 10 & 13 as under : ....
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....the special Bench decision in the case of CIT Vs M/s Quark Systems Pvt.Ltd.,(2010) 38 SOT 0307, which was affirmed by the Hon'ble Punjab & Haryana High Court in (2011) 62 DTR 0182, assessee cannot be stopped from raising a plea for exclusion, especially when it had objected to the inclusion before the TPO and DRP. As mentioned at para- five above, assessee had objected to the inclusion of M/s Infosys Tech.Ltd. both before the TPO and DRP. In the normal course, in view of the judgment of the Hon'ble Punjab & Haryana High Court mentioned supra, the issue has to be remitted back to the TPO for considering its comparability. However, Hon'ble Delhi High Court in the case of CIT Vs M/s Agnity India Technologies Pvt. Ltd. (Supra) had affirmed an order of this Tribunal were M/s Infosys Technologies Ltd was directed to be excluded from the list of comparables considering the peculiar features of the said company. Hence, no purpose will be served in remitting the question of comparability of M/s Infosys Tech.Ltd back to the TPO/AO. In view of the above discussion, we direct exclusion of M/s Bodhtree Consulting Ltd., M/s Tata Elxsi Ltd.(Seg.) and M/s Infosys Tech.Ltd from the list of comparab....
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....of hearing to the assessee. As regards the objections of learned Departmental Representative that this company was part of T.P. Study analysis of the assessee and therefore the assessee cannot seek the exclusion of the same. It is pertinent to note that if a company is wrongly included in the T.P. Study would become comparable otherwise found dissimilar. (ii) Tata Elxsi Ltd. (Seg.) 8.1 The learned Authorised Representative of the assessee has submitted that the business of this company constitute product design services (design and development of hardware and software), innovation design, engineering (mechanical design & focus of industrial design) and visual computing lab division for animation and special effects. Thus the learned Authorised Representative has submitted that this company is not only engaged in software development services and services of the company includes embedded product design, industrial services and engineering services and visual computing labs and system integration services. Thus this company is not functionally comparable. He has relied upon various decisions of this Tribunal including the decision of M/s. Citrix R & D India Pvt. Ltd. (supra). ....
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....abases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of Rs. 230 crores in the total segment revenue of Rs. 263 cro....
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....further Hon'ble Delhi High Court in the case of Agnity India Technology Ltd. has confirmed the finding of the Tribunal that this company cannot be considered as a good comparable for a captive service provider. 9.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 9.3 We have heard the rival submissions as well as considered the relevant material on record. At the outset, we note that the comparability of this company has been examined by this Tribunal in a series of decisions. In the latest decision of Tribunal in the case of M/s. Citrix Research & Development India Pvt. Ltd. (supra) has considered the comparability of this company in para 12 as under : " 12. Observation of the Co-ordinate Bench in the very same order with regard to the comparability of M/s Infosys Ltd appears at para-26.2 of the order which is reproduced here under; "26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and h....
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.... has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company i....
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....t a particular company cannot be considered as a good comparable then the assessee cannot raise the objection against the decision of the TPO as it was not the comparable company selected by the assessee and rejected by the TPO. 11.3 We have heard the rival submissions as well as considered the relevant material on record. Undisputedly these companies were considered by the TPO in the search and also included in the show cause notice for inviting objections. Therefore, once these companies were considered for inclusion in the list of comparables and the assessee has not objected against the inclusion then even if the TPO decides to exclude these companies from the final set of comparables, the assessee would have been given an appropriate opportunity of hearing on the reasons and criteria on the basis of which the TPO proposed to exclude these companies. Accordingly, in the facts and circumstances of the case, we set aside this issue to the record of the Assessing Officer / TPO to reconsider the comparability of these companies after giving an opportunity of hearing to the assessee. 12.1 The next grievance of the assessee is that though the assessee has no objection in the ca....
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....ant material on record. We find that in Annexure C to the order passed under Section 92CA of the Act, the TPO has worked out the working capital adjustment in respect of various comparable companies which is much higher than what was finally taken by the TPO at 1.71%. The co-ordinate bench of this Tribunal in the case of M/s. Citrix Research & Development India Pvt. Ltd. (supra) has observed in para 14 as under : " 14. Insofar adjustment of working capital is concerned, we are of the opinion, that the AO cannot force an artificial limitation to the actual working capital adjustment ratio derived from the comparable companies considered for the arm's length study. The restriction of working capital adjustment based on PLR of SBI will be appropriate since it is based on a presumption with all lending or credit are having uniform interest rates as decided by the SBI. We therefore, direct the AO to give working capital adjustment considering the comparable companies after exclusion of the three companies mentioned by us at para thirteen (supra)." In view of the above facts and circumstances as well as the decision of the co-ordinate bench of this Tribunal in the case of M/s. Citr....
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....is into diversified activity of medical transcription, medical coding, bill & receivable management. This company is engaged in the health care activity and provides BPO services in specified sector. The learned Authorised Representative has submitted that this company is functionally dis-similar to that of the assessee. In support of his contention, he has relied upon various decisions of this Tribunal dt.30.9.2015 in case of Unisys India Pvt. Ltd. Vs. DCIT in ITA Nos.67 & 70/Bang/2015. 16.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that when the amalgamation is in the same segment and business activity then it cannot be considered as an extra-ordinary event. Further the said company is also in the ITES services though the services may be provided in the medical sector. 16.3 We have heard the rival submissions as well as considered the relevant material on record. We note that the functional comparability of this company has been considered and examined by the co-ordinate bench of this Tribunal in the case of Unisys India Pvt. Ltd. in paras 49 to 51 as under : " Accentia Technologies Ltd. :....
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....ith 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 demerger 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....
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....his company is engaged in the provision of translations which is different from ITES services provided to its AEs. The revenue from BPO accounts is only 4% of the total revenue and therefore this company cannot be considered as functionally comparable with the assessee. The learned Authorised Representative has relied upon various decisions of this Tribunal wherein functional comparability of this company has been considered including the decision in case of e4e Business Solutions India Pvt. Ltd. Vs. DCIT in IT(T.P)A Nos.1777 & 1845/Bang/2013 Dt.10.11.2015. Thus the learned Authorised Representative has submitted that the Tribunal has given finding on the functional comparability of this company. 17.2 On the other hand, the learned Departmental Representative has submitted that this company was selected by the assessee in its T.P. Study and therefore the assessee cannot seek exclusion of this company from the list of comparables. The TPO has examined the functional comparability of this company and found that this company is comparable with the assessee. She has relied upon the orders of the authorities below. 17.3 We have heard the rival submissions as well as considered the....
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....slations services and accounts BPO. The segmental revenue from the operations are given in schedule 8 to the Profit & Loss account which reveals that major revenue of Rs. 6,99,35,756/- out of total revenue of Rs. 7.37 crores has been earned by this company from the activity of translation services. We further note that the company has debited an expenditure of more than Rs. 3 crore on account of translations charges paid. Thus it is clear that this company is outsourcing its services of translation work which is the main activity of this company yielding major revenue earned during the year. Thus it is manifest from the record that this company is in the entirely different nature of activity and cannot be compared with the activity of providing contact centre of the assessee to its AE. In the case of Lam Research (India) Pvt. Ltd. (supra) the co-ordinate bench of this Tribunal had occasion to examine the comparability of this company in para. 34 as under: "34. With respect to Cosmic Global Ltd., Hyderabad bench of ITAT in the case of Capital IQ Information Systems (India) P. Ltd., in para 19 of its order, had held as under Cosmic Global Ltd. 19. The main ....
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....ch are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment. 13.3. However , we find this case to incomparable on the alternative argument advanced by the Id. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs. 27. 76 lacs. We have discussed this aspect above in the context of CG-VAK's case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs. 86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs. 27. 76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables." In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. Accordingly, we direct ....
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....ecord. At the outset, we note that an identical issue has been considered by the co-ordinate bench of this Tribunal in the case of e4e Business Solutions India Pvt. Ltd. (supra) in para 11.2 as under : " 11.2. Eclerx Services Ltd. The learned AR of the assessee has submitted that this company is engaged in the high-end services and therefore, this company is basically a KPO and not a BPO. He has referred to Annual Report of this company at page 26 of the paper book -II and submitted that as it is clear from the Annual Report that this company is a knowledge process outsourcing (K. P. O) providing data analytics and data process solutions to global enterprise clients. This company supports core and complex activities for its clients using proprietary processes and a scalable offshore delivery model. This company has access to the capital market and therefore, this company is a public listed KPO company in India. The company is also engaged in consulting services and process outsourcing as well as in the activity of process re-engineering and automation apart from middle office and back office support to capital market. Therefore, keeping in the diversified high-end services, t....
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....r specializing in two business verticals financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domai....
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....circumstances of the case, the CIT(A) erred in law in directing the Assessing Officer to reduce the telecommunication expenses incurred in foreign currency, both from the Export turnover as well as total turnover for the purpose of computation of deduction ujs lOA of the IT Act without appreciating the fact that the statute allows exclusion of such expenditure only from the ETO by way of specific definition of export turnover as envisaged by subclause (4) of Explanation 2 below sub-section 8 of section lOA. On the other hand, there is no specific provision in section lOA warranting exclusion of the above expenses from the total turnover also. 3. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 4. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above." 20.1 The only issue arises in the revenue's appeal is regarding exclusion of the telecommunication expenses incurred in foreign currency both from export turnover as well as total turnover. 20.2 We have hea....