TaxTMI 
TaxTMI 
2016 (2) TMI 1153
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....vices 42,02,31,741 Reimbursement of expenses(received) 27,41,792 Reimbursement of expenses (paid) 26,233 04. Financial results of the assessee company during the relevant previous year including international transactions with non-AEs were as under : Particulars Amount in (Rs.) Revenue* 63,32,19,482 Cost* 55,42,26,762 PBIT 7,89,92,720 PBIT as % of Cost 14.25% 05. TPO after going through the TP study filed by assessee in which it adopted TNMM for justifying its international transactions with its AE, rejected some of the comparable companies selected by the assessee and added some of his own relying on the capitaline and prowess data base. Final list of comparables selected by the TPO and its average PLI read as under : Sl. No. Name of the company OP/TC % 1 Accentia Technologies Ltd (Seg.) 41.77 2 Acropetal Technologies Ltd (Seg.) 35.30 3 Aditya Birla Minacs Worldwide Limited (Earlier known as Transworks Information Services Ltd.) -4.00 4 Asit C Mehta Financial Services Ltd (Seg.) 9.42 5 Caliber Point Business Solutions Ltd 10.97 6 Coral Hubs Ltd (Earlier known as Vishal Information Technologies Ltd 50.68 7 Cosmic Global Ltd 2....
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.... in its TP documents. As per the assessee adjustments for TP should be confined only to the value of international transactions with the AEs. 09. Apart from the above, assessee also objected to certain filters being adopted by the TPO and certain filters applicable being not applied or being wrongly applied as enumerated hereunder : i) Export sales filter of 75% ii) Non-application of turnover and abnormal profits filter iii) Non-application of fluctuating profits filter iv) Applying RPT filter at 25% v) Non-applying of knowledge process out sourcing filter vi) Non-application of extra ordinary events filter and vii) Improper application of functional profile filter 10. CIT (A) after considering the submissions of the assessee and the TPO's order held that incorrect segmental data was adopted by the AO for working out the adjustment recommended by him u/s.92C of the Act. According to the CIT (A), actual expenditure in the ITES segment for transactions with AE was only Rs. 36,03,66,273/- and this was duly reported by the assessee in Attachment 1A to Audit Report in Form 56F prescribed under Rule 16D for claiming deduction u/s.10A of the Act. He therefore directed the TP....
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....ogies Ltd, M/s. Asit C. Mehta Financial Services Ltd, M/s. Caliber Point Business Solutions Ltd, M/s. Cross Domain Solutions P. Ltd, M/s. Datamatics Financial Services Ltd, and M/s. Spanco Ltd, were not having activities which were functionally different from that of the assessee. He thus upheld the order of ITO in respect of the comparability of the above companies were concerned. However, he accepted the contention of the assessee that M/s. Genesys International Corporation Ltd, was functionally different from that of the assessee, since it performed R & D activities to develop proprietory products and also owned intangibles. 16. CIT (A) also rejected the general contention of the assessee that companies which were involved in knowledge process outsourcing, eventhough it fell within the ITES segment had to be excluded from the comparison. 18. Now before us grounds taken by the Revenue vis-a-vis the TP issue read as under : 1. The order of the learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT(A) erred in holding that the size and turnover of the company arc decid....
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....ty study if it qualifies otherwise. Reliance was placed on the Special Bench decision of this Tribunal in the case of Maersk Global Service Centres (I) P. Ltd, v. ACIT [ITA.7466/Mum/2012, dt.07.03.2014]. 21. In reply Ld. AR submitted that as against the judgment of Hon'ble Delhi High Court in the case of Cryscapital Investment Advisors India P. Ltd (supra), Hon'ble Bombay High Court in the case of CIT v. Pentair Water India P. Ltd. [Tax Appeal No.18 of 2015, dt.16.09.2015], had taken a view that turnover is a relevant criteria for choosing a company as comparable for TP study. 22. Ld. AR also submitted that even if extra ordinary profits / loss might not be a reason for exclusion of companies from a list of comparables, those companies which would come into the list if the said filter is applied, would still go out by application of functional filter. Companies which had extra ordinary loss / profits which were excluded by the CIT (A) were M/s. Accentia Technologies Ltd, M/s. Allsec Technologies Ltd, M/s. Aditya Birla Minacs Worldwide Ltd (seg), M/s. Coral Hubs Ltd, M/s. Eclerx Services Ltd, M/s. Infosys BPO Ltd, M/s. Jindal Intellicom P. Ltd & M/s. Moldtek Technolo....
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....ses suffered were due to certain abnormal conditional which applied to such comparables whether and such abnormal conditions were present absent in the case of the tested party. Or in other words in such cases, it is an essential requirement that a FAR analysis is carefully done. CIT (A) had directed exclusion of M/s. Allsec Technologies Ltd, M/s. Aditya Birla Minacs Worldwide Ltd, M/s. Coral Hub Ltd, M/s. Eclerx Services Ltd, M/s. Jindal Intellicom P. Ltd and M/s. Moldtek Technologies Ltd, probably adopting the yard stick of extra ordinary results. In view of the decision of Special bench mentioned supra, in our opinion this was not appropriate. However out of these companies assessee states that M/s. Coral Hub Ltd, M/s. Eclerx Services Ltd, and M/s. Moldtek Technologies Ltd, were functionally different from that of the assessee. This contention of the assessee will be taken up by us while disposing the appeal of the assessee. In so far as other companies namely, M/s. Allsec Technologies Ltd, M/s. Aditya Birla Minacs Worldwide Ltd and M/s. Jindal Intellicom P. Ltd, we are of the opinion that the matter requires a fresh look by the TPO. TPO has to verify whether these companies wer....
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.... as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner- "17.5. In addition to the above, the Director's Report of the company for the FY 2007-08 revealed the merger and the demerger. A company known as Techmen Tools Pvt. Ltd. had amalgamated with Mold-tek Technologies Ltd. with effect form 1st October, 2006. There was a de-merger of Plastic Division of the company and the resulting company is known as Moldtek Plastics Limited. The de-merger from the Moldtek Technologies took place with effect from 1st April, 2007. The merger and the de-merger needed the approval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'....
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....nd 4, Revenue is assailing exclusion of Genesys International Corporation Ltd, from the list of comparables. We find that the said company was also considered by the Tribunal in the decision of M/s. Symphony Marketing Solutions India P. Ltd (supra). In relation to Genesys International Corporation Ltd,it was held as under at para 22 and 23 of the order : 22. This company is listed at Sl. No.12 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the stand of the assessee has been that this company is functionally not comparable and that it has a different employee skill set and that this company performs R&D services and also owns intangibles. This company is a geospatial services content provider specialising in land based technologies. From the notes to accounts of this company, it is seen that this company is engaged in providing geographical information services comprising of photogrammetry, remote sensing cartography, data conversion related computed based services and other related services. Further the business of this company requires skilled manpower and scientists, civil engineers, etc. The assessee is a routine ITES provider who ....
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....ist expertise. The KPO services include all kinds of research and information gathering. Thus it can be seen that even though both BPO and KPO are offering information Technology based services, the skill and expertise and may be even the tools required are different which may result in different economic results of both the segments. Thus, in such circumstances, we are of the opinion that they cannot be compared with each other and have to be excluded from the list of comparables." 23. It is thus clear from the aforesaid decision of the Tribunal that among the ITES companies there is a hierarchy in terms of skill required to provide services. It ranges from providing routine services where no skills and required and providing services where highly professionalized skills are required. Depending on the skills required to perform ITES the comparability has to be done. In view of the above, we are of the view that this company cannot be regarded as a comparable and deserves to be excluded from the list of comparables. We are therefore of the opinion that CIT (A) was justified in directing exclusion of this company as well. 27. Coming to grounds 5 to 7 of the Revenue, crux of it....
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....dice to the above, the Hon'ble CIT(A) erred in not adjudicating on the grounds pertaining to extraordinary circumstances (amalgamation during the year), application of related party transaction greater than 10% filter, abnormal growth in CAGR and significant advertisement expenditure incurred by the Eclerx. Further, the learned CIT(A) also erred in concluding that Eclerx is functionally comparable to the Respondent. 2. On facts and circumstances of the case and in law, the Ld. AO I Ld. TPO erred in objecting to the exclusion of Infosys BPO Limited ("Infosys") by the Hon'ble CIT(A) on the ground of size and turnover of the Company. Without prejudice to the above, the Hon'ble CIT(A) erred in not adjudicating on the ground pertaining to ownership of intangibles (brand value) by the Infosys. On facts and circumstances of the case and in law, the Ld. AO I Ld. TPO erred in objecting to the exclusion of Mold-Tek Technologies Limited ("Mold-Tek") by the Hon'ble CIT(A). Without prejudice to the above, the Hon'ble CIT(A) erred in not adjudicating on the grounds pertaining to income earned from derivative trading, abnormal business activity (de-merger) and applicatio....
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....ra ordinary circumstances applicable to the said company during the relevant previous year. 32. We have heard the rival contentions. In so far as M/s. Coral Hub Ltd, is concerned, the coordinate bench in the case of M/s. Symphony Symphony Marketing Solutions India P. Ltd, (supra) has held as under at paras 14 to 17 of its order : 14. This company is listed at Sl.No.6 of the list of comparable companies chosen by the TPO. As far as this company is concerned, it is seen that this company was earlier known as Vishal Information Technologies Ltd. The comparability of this company in the case of an ITES company by name 24 x 7 Customer.com Pvt. Ltd. was considered by the Tribunal in ITA No.227/Bang/2010 and by order dated 09.11.2012 the Tribunal held that this company is not functionally comparable with ITES for the following reason:- "17.3 Vishal Information Technologies Ltd. (VIT) - In the case of this comparable, we find that the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd in ITA No.3774/Mum/2011 by order dt.9.11.2011 has held that since Vishal Information Technologies Ltd is outsourcing most of its work it has to be excluded from the list whereas the asses....
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....cing its works to the third party vendors. In this context, the assessee relied upon the order of the DRP in assessee's own case for the assessment year 2008-09, wherein the DRP, after taking into consideration, the aforesaid aspect, has accepted the claim of the assessee. The assessee further submitted that the Income-tax Appellate Tribunal Mumbai Bench in the case of Asstt. CIT v. Maersk Global Service Centre (India) (P.) Ltd. [2011] 133 ITD 543/16 taxmann.com 47 (Mum.), a copy of which is submitted before us, has also directed for the exclusion of the aforesaid company since it has outsourced a considerable portion of its business. 17. After considering the submissions of the learned Authorised Representative for the assessee, we find that the DRP, in the proceedings for the assessment year 2008-09 in assessee's own case, after taking note of the composition of the vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it prints upon clients request, concluded as follows- "18.4. In view of this major difference in functionality and the business model, this Panel is of....
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....e direct the TPO to apply the employee cost filter to exclude companies with employee cost of less than 25% from the list of comparables for the computation of ALP." 17. Applying the aforesaid decisions, we are of the view that Coral Hubs Ltd. cannot be considered as a comparable. 33. In so far as M/s. Eclerx Services Ltd, is concerned, in the very same decision this Tribunal had held as under at paras 20 and 21 of its order : 20. This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. It has further been submitted that extra ordinary events and peculiar circumstances prevail in the case of the assessee in as much as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. (supra)....
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....division: The plastic division is engaged in the manufacture of tube & oils, paints, pet products, consumer products, etc. The company demerged the said segment effective 1 April, 2007 and transferred the business unit to the Company Plastics Lt. The extract from the annual report confirms the fact that the Company had restructured its operations resulting in demerging the plastic segment business. Information Technology (IT) division: The IT division (also referred to as the KPO division by the company) of the company specializes in providing structural design and detailing services which can be categorized as structural engineering services. The structural engineering services provided by the IT division of the company cannot be classified as falling with the scope and ambit of ITES services. On the contrary, the said services would fall under the category of engineering services. Excerpts from the Annual Report of the company Page 10 of the Annual Report for the FY 2007-08 contains the following observation regarding the KPO division of the Company: 'The Company has achieved about 56.49% growth in 2007-08 to register a turnover of Rs. 17.86 crore. The company having ....