TaxTMI 
TaxTMI 
2016 (2) TMI 1153
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.... Amount (Rs.) Business Process Outsourcing Services 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 So....
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....rals and such segment was entirely different from the ITES services rendered by it to its AE abroad. Assessee also pointed out to the CIT (A) that it had maintained separate segmental profit and loss account for each of these segments and had duly reported it 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), ....
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....ar acquired one Indian company and three foreign companies. By accepting this contention of the assessee, CIT (A) directed exclusion of M/s. Accentia Technologies Ltd, from the list of comparables. 15. Vis-a-vis contention of the assessee for excluding those companies having different functional profiles CIT (A) was of the opinion that M/s. Acropetal Technologies 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 fr....
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....d/2014, dt.31.07.2014] of the Hyderabad bench. Reliance was also placed on the judgment of Hon'ble Delhi High Court in the case of Cryscapital Investment Advisors India P. Ltd v. DCIT [ITA No.417 of 2014, dt.27.04.2015]. 20. In so far as application of abnormal profits filter was concerned, Ld. DR submitted that abnormal profits / loss by itself would not be a reason for taking out a company from the comparability 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 ....
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....uidelines provided for inter quartile range of bench marking results which by itself excluded outliers. As against this, Indian regulations require using arithmetic mean. Special Bench observed that potential comparables earning abnormally high profit margins could at the best trigger further investigation but would not per se be a reason for exclusion. Study has to be made to ascertain whether high profits earned or losses 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 ....
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....ness support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a comparable owing to extra ordinary events that took place during the previous year. The Tribunal upheld the order of the DRP observing as follows:- "I. Accentia Technologies Ltd. 10. It is the submission of the assessee that this company cannot be treated 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 w....
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....aid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. It is clear that during the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a comparable. We therefore hold that this company cannot be considered as a comparable. We are therefore of the opinion that CIT (A) was justified in direction exclusion of M/s. Accentia Technologies Ltd, 26. Vide ground 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 ....
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....bilities of specific business functions or process to a third party services provider. Often business processes outsourcing are information technology based and referred to as ITES-BPO. KPO is one of the sub-segment of the BPO industry. It involves outsourcing of core information related business activities which are competitively important or form an integral part of a company's value chain. It thus requires advanced analytical and technical skills as well as a high degree of specialist 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....
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.... AO I Ld. TPO erred in objecting to the exclusion of Coral Hubs Limited ("Coral Hubs") by the Hon'ble CIT(A). Without prejudice to the above, the Hon'ble CIT(A) ought to have adjudicated on the ground pertaining to functional non- comparability and application of employee cost greater than 25% filter for Coral Hubs. On facts and circumstances of the case and in law, the Ld. AO I Ld. TPO erred in objecting to the exclusion of Eclerx Services Limited ("Eclerx") 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 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 th....
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.... and in the case of Eclerx Services Ltd, it says that there were extra-ordinary events during the relevant previous year which took it out of the realm of comparable. In this regard, Ld. AR placed reliance on the decision of coordinate bench in the case of M/s. Symphony Marketing Solutions India P. Ltd. 31. As against this Ld. DR submitted that functional comparability was never seen by the CIT (A) while adjudicating the issue. Similarly according to him, CIT (A) also did not verify the comparability of M/s. Eclerx Services Ltd, on the criteria of extra 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....
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....is company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but the business model of the company is also different as it sub-contracts majority of its ITES works to third party vendors and has also made significant payments to those vendors. The payments made to vendors towards the data entry charges also supports the fact that the company outsources its works. In the circumstances, it cannot be taken as a comparable to the ITES functions performed by the assessee. Since this company is acting as agent only by outsourcing 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 ....
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.... the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot be said that the said filter is not applicable to ITES segment, where comparably less skilled employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employee cost filter to the ITES sector is also justified. In view of the same, we 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 ....
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....he rival contentions. Comparability of M/s. Moldtek Technologies Ltd, had come up before the Tribunal in the case of M/s. Symphony Marketing Solutions India p. Ltd (supra). Coordinate bench at para 25 had held as under : 2. This company is listed at Sl.No.16 of the list of comparable companies chosen by the TPO. As far as this company is concerned, the submission of the assessee before us is that it is in the business of Knowledge Process Outsourcing and cannot be considered as a comparable. The functional profile of this company is as follows:- As per the annual report for the F.Y. 2007-08, the company primarily operates in two business segments: Plastic 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....