TaxTMI 
TaxTMI 
2016 (4) TMI 1313
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....cting the benchmarking approach adopted/contemporaneous documentation maintained by the appellant and thereby making a transfer pricing adjustment of Rs. 1,95,83,147 to the income of the appellant by holding that the international transaction, pertaining to provision of Information Technology ('IT or software services') and IT enabled back office support services ("ITES Services or back office support services') to the associated enterprise ('AE'), are not at arm's length under the Incometax Act, 1961 ('the Act'). 2. On the facts and in the circumstances of the case, the Ld. DRP/AO erred in modifying the benchmarking analysis, as conducted by the appellant using Transactional Net Margin Method ('TNMM') for benchmarking its international transactions pertaining to provision of IT and ITES services to the AE, and thereby modifying the set of comparables. In doing so, the Ld DRP / AO specifically erred in: a) Including the companies which are not functionally comparable to the IT and ITES services rendered by the appellant in final set of comparables on an adhoc basis, thereby resorting to cherry picking of comparables; b) Rejecting companie....
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....(3) of the Act proposing an adjustment of Rs. 3,17,20,190/- to the arm's length price. As the Assessing Officer had passed the order under section 143(3) of the Act before receipt of order under section 92CA(3) of the Act passed by the TPO, the consequential adjustment as suggested by the TPO was not made. Thereafter, the original assessment was set-aside with direction to complete assessment proceedings in accordance with law. Accordingly, the Assessing Officer issued notice under section 143(2) of the Act to the assessee and made a reference to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act in order to determine arm's length price of international transaction entered into by the assessee with its associate enterprises. The TPO noted that the assessee was engaged in two kinds of activities i.e. software services segment and back office support services i.e. both in the field of IT services and ITES, respectively. The TPO passed an order dated 29.01.2014 under section 92CA(3) of the Act making an adjustment on account of provision of software services (IT) to the tune of Rs. 1.83 crores and provision of back office support services (ITES) to the tune of....
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.... dissimilar and having R&D expenditure of more than 3%. It was further pointed out by the learned Authorized Representative for the assessee that the said company was rejected by Pune Bench of Tribunal in assessee's own case in assessment year 2009-10 in respect of ITES segment. The assessee is aggrieved by the order of TPO in holding that there could be no sub-classification under ITES segment. He further pointed out that the sub-classification has to be done between KPO and BPO cases and where the concerns picked up by the TPO were engaged in KPO operations, then the margins of said concerns are not to be compared with the margins of assessee company, which is a BPO company. Relianc e for this proposition, was made on the ratio laid down by the Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. (TS-387-HC-2015(DEL)-TP), wherein, it has been laid down that you have to go to the functionality of concerns and if they are functionally different, then these are to be excluded, then sub-classification has been allowed by the Hon'ble High Court. Our attention was drawn to the ground of appeal No.3, wherein the Revenue is aggrieved by exclusion of Visesh Infotecnics Lt....
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....d. arose before Pune Bench of Tribunal in PTC Software (India) Pvt. Ltd. Vs. DCIT in ITA No.336/PN/2014, relating to assessment year 2009-10, wherein vide order dated 31.10.2014, the trend of OP/TC of Bodhtree Consulting Ltd. was noted as 13.87% in FY 2005-06, 80.15% in FY 2006-07, 19.89% in FY 2007-08, 62.27% in FY 2008-09, 33.42% in FY 2009-10 and (-) 4.46% in FY 2010-11. In view of the above said oscillation shown by the assessee and following the ratio laid down by Pune Bench of Tribunal in PTC Software (India) Pvt. Ltd. Vs. DCIT (supra), the said concern was directed to be excluded from final list of comparables. The Tribunal held as under:- "29. The assessee further has assailed the inclusion of Bodhtree Consulting Ltd. appearing at item No.6 in the list of comparables selected by the TPO. The said company was selected as a comparable by the TPO because in assessment year 2008-09, Bodhtree Consulting Ltd. was selected by the assessee itself. On the other hand, the objection raised by the assessee was that the current year's profits of the said company were on higher side and the same thus, was not functionally comparable. The trend of OP/TC of Bodhtree Consulting Ltd. was as....
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.... assessee. We hold and direct accordingly." 32. Further, the Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK, Vs. Dy.DIT, had on simil ar issue of exclusion of abnormal profit making concern held as under:- "8. We have carefully considered the rival stands on this aspect. In the context of the controversy relating to the exclusion of abnormal profit making concerns, a reference has been made to the decision of the Special Bench of the Tribunal in the case of Maersk Global Centres (India) Private Ltd. vs. ACIT vide ITA No.7466/Mum/2012 dated 07.03.2014. The relevant observations of the Bench are as under :- "In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately ....
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....eration as compared to the past three financial years. For the subsequent financial year, the revenue generation has taken a downward trend which again reflects a wide fluctuation. At the time of hearing, the learned counsel for the assessee has referred to the Annual Report of the said concern for the financial year under consideration to point out that the company has acknowledged a growth of 132.86% in its revenue generation as compared to the immediately preceding financial year. In our considered opinion, there is no material to say that the high profit margin of 34.71% declared by the said concern in the instant financial year is a normal business trend. Ostensibly, the financial results of either the three preceding financial years or of the succeeding financial year do not justify that the margin of 34.71% for the year under consideration is a normal business trend. Thus, in our considered opinion, the inclusion of the said concern in the final set of comparables would not lend credibility to the comparability analysis and therefore it deserves to be excluded. We hold so. 9. The plea setup by the CIT(A), and which has been reiterated before us is that the point setup by ....
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....nal list of comparables." 33. The Mumbai Bench of the Tribunal in NetHawk Networks India Pvt. Ltd. Vs. ITO in ITA No.7633/Mum/2012, dated 06.11.2013 had also excluded the company Bodhtree Consulting Ltd. as it was engaged in the production of software products and also because no segmental data was adequately available. The said company was rejected as it was not engaged in the software development services and there was no segmental data comparable were available. 34. With regard to the inclusion of Bodhtree Consulting Ltd., the objection raised by the assessee was on two accounts that first it was engaged in the sale of software products and no segmental data was available. However, on the other hand, the said company was picked up by the assessee as a comparable in the financial year 2008-09. We find that the profits declared by the said concern ought to be considered while selecting the said comparables. The perusal of the results shown by the said company reflected high margins in certain years and very low in other years, which do not reflect normal business conditions. Consequently, the margins of the said companies cannot be applied as comparables while benchmarking int....
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.... and adjustment of Rs. 1.83 crores was proposed by the TPO. The DRP directed to exclude certain companies based on which the arithmetic mean re-worked at 22.71% resulting in TP adjustment of Rs. 70,73,604/-. The final list of comparables was of 15 concerns and the assessee is aggrieved by the inclusion of margins of Vishal Information Technol ogies Ltd. / Coral Hub. We find that the issue of said concern being not functionally similar on account of its outsourcing model of business, was taken note of by the Pune Bench of Tribunal in PTC Software (India) Pvt. Ltd. Vs. ACIT in ITA No.1605/PN/201 1, relating to assessment year 2007-08, order dated 30.04.2013 and it was held that the said concern was not to be included in the final list of comparables. The year under appeal before the Tribunal was assessment year 2007-08 i.e. the year under appeal before us also and the relevant findings of the Tribunal are as under:- "30. The next point raised by the assessee is against the inclusion of Vishal Information Technologies Ltd., appearing at Item (10) in the Tabulation in para 25 as a comparable case. The TPO has discussed the issue in para 6.9.6. of the order. As per the TPO, the said co....
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....as not appreciated the qualitative difference in the functions performed by the said concern as sought out to be brought out by the assessee. Considering the aforesaid, we therefore, find that the assessee was justified in ascertaining that the said concern be excluded from the list of comparables for the reasons canvassed. Thus, on this aspect assessee succeeds. 32. The next issue raised by the assessee is with regard to the inclusion of M/s.Vishesh Infotechnics Ltd. (segment) in the list of comparables. The TPO has made the relevant discussion in para 6.9.7. of the order and as per the said discussion, the said concern is engaged in three different activities, namely ITSolutions and Products Support, Enterprise Software and IT-Enabled services. The IT-Enabled services segment of the said concern has been considered as a comparable to IT services Segment of the assessee. 33. The plea of the assessee before the lower authorities was that the said concern is engaged in rendering high end Knowledge Process Outsourcing (KPO) and Legal Process Outsourcing (LPO) services and the same cannot be compared with the routine back office support services rendered by the ITEnabled services ....
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....also engaged in IT enabled services and even PTC Software (India) Pvt. Ltd. was engaged in IT enabled services, said two concerns could not be compared and hence, the said concern is to be excluded from final list of comparables in order to compute arithmetic mean of comparables. We find support from the ratio laid down in Rampgreen Solutions Pvt. Ltd. (supra). Accordingly, we hold so. In view thereof, the issue raised by the assessee in its appeal both with regard to provision of software development services and back office support services segments are allowed. 15. Now, coming to the appeal filed by the Revenue. 16. The Revenue in ITA No.337/PN/2015 has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case, whether the Ld. Dispute Resolution Panel was right in law and on facts in excluding functionally comparable companies only on the basis of turnover. 2. On the facts and in the circumstances of the case, whether the Ld. Dispute Resolution Panel was right in law and on facts in excluding functionally comparable companies on the ground of non availability of segmental data, when the entire range of activity of the comparable was in th....
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.... turnover of Infosys Technologies Ltd. was Rs. 1314 crores. Accordingly, we uphold the directions of DRP in excluding Infosys Technologies Ltd. from the final list of comparables while benchmarking international transaction of the assessee on account of software development services. 20. Another concern which was directed to be excluded by the DRP was ICSA (India) Ltd. on the ground that it was functionally dissimilar and had R&D expenses of more than 3%. 21. We find that the issue of rejection of concern which had R&D expenses of more than 3% has been adjudicated by us in BMC Software India Pvt. Ltd. Vs. DCIT in ITA No.1425/PN/2010, relating to assessment year 2006 -07 vide order dated 16.03.2016, it was held as under:- "34. After considering various arguments raised by both the Authorized Representatives vis-a-vis the concern ICSA (India) Ltd., the first objection is that it is not functionally comparable and the second objection is that its R&D expenditure is 4.5% of revenue. The TPO rejected the plea of the assessee of not including the said concern in the final set of comparables on the said basis of R&D expenditure being more than 3% of revenue. However, we find that the T....
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....d in this connection a reference has been made to the Director's Report, a copy of which is appearing at page 268 of the Paper book. It is pointed out that in order to calculate the ratio of R&D expenses to total sales, it has to be calculated with reference to the sales in software services and embedded solutions segment of the said concern, because the R&D expenses pertain only to this segment. In this connection a reference has been made to page 297 of the Paper book which gives the break-up of the sales in different segments and after considering the R&D expenses of Rs. 6,71,86,184/- vis-à-vis the sales in software services/embedded services segment, the percentage comes to 3.84%. The Ld. Counsel pointed out that the percentage of 2.04% of R&D expenditure computed by the TPO was after considering the total turnover of the said concern including that of the product and projects related to power sector segment. It is submitted that the aforesaid action of the TPO is wrong, firstly the R&D expenditure has been incurred only for the software services/embedded services segment, and secondly, it is wrongly compared with total turnover which included the turnover of products an....
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....ctions raised by the Revenue, there could be no sub-classification of segment once such services falls under category of ITES. The DRP had directed the exclusion of Visesh Infotecnics Ltd., Eclerx Services Ltd. and CS Software Enterprises as all of them were KPO companies and the assessee was BPO company. 24. The learned Authorized Representative for the assessee pointed out that the Revenue is aggrieved by the order of DRP in excluding the concerns which were KPO companies. On the other hand, Accentia Technologies Ltd. was engaged in healthcare and Apex Knowledge Solutions Pvt. Ltd. was also excluded but against these two exclusions, there is no ground of appeal has been raised by the Revenue. The Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. (supra) has laid down the proposition that where a concern was engaged in providing KPO services, the margins of said concern cannot be compared with another concern which was engaged in the business of BPO services. The Hon'ble Delhi High Court thus, has applied the principle of subclassification under one segment of ITES services and had upheld the exclusion of Eclerx Services Ltd. being engaged in the business of KPO services ....