TaxTMI 
TaxTMI 
2015 (11) TMI 1749
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....the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. The Assessing Officer, on observing that the assessee had reported international transactions in the year under consideration, made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') to examine and compute the Arm's Length Price ('ALP')of the assessee's international transactions with its Associated Enterprises ('AEs'). 2.1.2 For Assessment Year under consideration, the assessee had filed a T.P. Study in which it adopted Transactional Net Margin Method ('TNMM') as the Most Appropriate Method ('MAM') and selected 13 comparables whose average profit margin on cost was 13.65%. As the margin of the assessee was higher at 15.26%, the assessee held its international transactions in the ITES segment to be at arm's length. The TPO after examining the assessee's T.P. Study, rejected the same and proceeded to carry out a fresh search for comparables. The TPO accepted the assessee's adoption of TNMM as the MAM and after carrying out his search and considering the objections put forth by the assessee, selected the following 20 companies as com....
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.... assessee at Rs. 8,23,14,946 as against the returned income of Rs. 1,42,99,890 in view of the following additions / disallowances :- (i) Disallowance of excess claim u/s.10A : Rs. 53,51,850. (ii) T.P. Adjustment u/s.92CA : Rs. 6,40,54,571. 2.3 Aggrieved by the order of assessment for Assessment Year 2008-09 dt.30.8.2012, the assessee preferred an appeal before the CIT (Appeals) - IV, Bangalore. The learned CIT (Appeals) vide order dt.8.10.2013 disposed off the appeal allowing the assessee partial relief. The learned CIT (Appeals) issued the following directions in respect of the following issues :- (i) to exclude functionally dis-similar companies from the list subject to the observations of the Delhi Bench of ITAT in Actis Advisers P. Ltd. 20 ITR (Trib) 138; (ii) to apply the turnover filter of Rs. 1 Crore to 200 Crores and to exclude companies having turnover in excess of Rs. 200 Crores; (iii) to apply the ratio of the Hon'ble Karnataka High Court in the case of CIT V Tata Elxsi Ltd. (349 ITR 98). 3. Aggrieved by the order of the CIT (Appeals) - IV, Bangalore dt.8.10.2013 for Assessment Year 2008-09, both the assessee and rev....
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....ustment between the appellant and the entrepreneurial companies selected as comparables while determining the arm's length price; h) Upholding TPO's approach of arbitrarily granting an adhoc working capital adjustment of 2%, without calculating the same. i) Upholding the learned TPO's approach of not granting 5% standard deduction under Section 92C(2) which is available at the option of the a.s irrespective of whether ALP falls within + / - 5% range of actual price. Corporate tax matters. 4. That the learned CIT (Appeals) erred in upholding the ACIT's approach of reducing entire 'telecommunication expenses' of Rs. 31,027,567 (includes cost of transmission within the territories of India) from the 'export turnover' as attributable to the delivery of services outside India while computing the deduction under Section 10A of the Act; 5. The learned CIT (Appeals) erred in upholding the Assessing Officer's approach in reducing the un-attributable portion of 'travel expenditure incurred in foreign currency' of Rs. 2,679,067 from the 'export turnover' while computing the deduction under Section 10A of the Act; 6. That the learned CIT (Appeals....
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....ight of facts / judicial pronouncements placed before on record. The additional ground raised by the assessee is accordingly admitted for adjudication. 3.4 IT(TP)A No. 1645/Bang/2013 - Revenue's appeal for Assessment Year 2008-09. " 1. The order of the learned CIT (Appeals) is opposed to law and the facts and circumstances of the case. 2. The learned CIT (Appeals) erred in directing the TPO to exclude companies which are functionally dissimilar subject to the guidelines laid down by the Delhi Bench of the Tribunal in Actis Advisers P. Ltd. V DCIT 20 ITR (Trib) 138 without appreciating the fact that the directions issued are beyond the mandate of the provisions of section 251(1)(a) of the IT Act which does not empower the CIT (Appeals) to set aside the issue. 3. The learned CIT (Appeals) erred in not appreciating the fact that when any filter or criteria applied by the assessee is accepted or if any filter or criteria applied by the TPO is relaxed, the entire accept / reject matrix changes resulting in a new set of comparables including those comparables which are neither taken by the assessee or the TPO and which do not find a place in the order under ....
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....n the final set of comparables by the TPO. In this regard, the learned Authorised Representative submitted a chart and arguments seeking to explain the assessee's position regarding the non-comparability of eight companies, which in its opinion , were wrongly included by the TPO in his final set of comparables and which are listed as under :- 1. Accentia Technologies Ltd. (Seg.) 2. Aeropetal Technologies Ltd. (Seg.) 3. Coral Hubs Ltd. 4. Crossdomain Solutions Ltd. 5. Eclerx Services Ltd. 6. Infosys BPO Ltd. 7. Mold-Tek Technologies Ltd. 8. Wipro Ltd. (Seg.) In support of the assessee's claim for exclusion of these 8 companies from the list of comparables, the learned Authorised Representative placed reliance on the decision of the coordinate bench of the Tribunal in the cases of Symphony Marketing Solutions Ltd., in IT(TP)A No.1316/Bang/2012 dt.14.8.2013 and Global Business Operations P. Ltd. in IT(TP)A No.1678/Bang/2012 dt.4.7.2015. It was submitted that both these cases being for Assessment Year 2008-09, in which like the assessee they were engaged in ITES activities and in which the TPO had adopte....
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....erabad ITAT Bench in the case of Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business 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 f....
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....fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact ahs taken place, then the aforesaid comparable has to be excluded." We have considered the submissions of the ld. counsel for the assessee and are of the view that the ratio laid 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." Following the above decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra), we are of the view that in the case on hand also, where the assessee is providing ITES based support services, this company i.e. Accentia Technologies Ltd. requires to be excluded from the set of comparable companies. We, accordingly, hold and direct the TPO to exclude this company from the list of comparables. 6.3 Acropetal Technologies Ltd. 6.3.1 The learned Authorised Representative for the assessee submitted that this comp....
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....assessee include routine business data reporting and management, website management, marketing data analysis and top line reporting. As far as Acropetal Technologies Ltd. is concerned, this company does the business of export of software services. It is also seen from the segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it derives income from engineering design services and software development services. It is also pertinent to point out that before the TPO, the assessee raised an objection that this company performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the services rendered by this company fall in the definition of ITES. 13. We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No.15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment o....
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....ns India Pvt. Ltd. (supra) held this company, formerly known as Vishal Information Technologies Ltd. to be functionally not comparable with low end ITES providers as it has outsourced most of its work, whereas the assessee in the case on hand is carrying out the work by itself. Further, this company has entered into an area of business known as new vertical digital library and print on demand whereas it is seen that the assessee in the case on hand provides ITES / BPO back end support services only. At paras 14 to 17of its order, the co-ordinate bench has held as under :- " (3) Coral Hubs Ltd. 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 thi....
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.... 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 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 v....
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....ent, 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." Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing ITES / BPO based support services, this company, i.e. Coral Hubs Ltd. is to be excluded from the list of comparables as it is not functionally comparable to the assessee, in the case on hand. We hold and direct the TPO accordingly. 6.5 Crossdomain Solutions Ltd. 6.5.1 In respect of this co....
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....main has created a re-engineered payroll service EFFIPAY - that processes and delivers accurate payroll to clients with headcount up to 1000 employees in just 4 hours*. With Effipay Lite and Effipay Lite Plus, our bouquet of services cover end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000." "Crossdomain's IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and turn-around-time for business critical processes." Source: http://www.cross-domain.com As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider. 19. We are of the view that in the ab....
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....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) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:- "14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That ap....
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....as excluded from the set of comparables. 6.7.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.7.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 has excluded this company i.e. Infosys BPO Ltd. from the list of comparables to low end ITES / BPO support service providers as it is functionally different being an established market leader, enjoying huge brand value and goodwill, with huge economies of scale and diversity and geographical dispersion of customers. At para 24 of its order, the co-ordinate bench has held as under :- " (7) Infosys BPO Ltd 24. This company is listed at Sl.13 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the ld. counsel for the assessee that this company has a brand value and therefore there would be significant influenc....
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....is Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the list of comparables. 6.8.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.8.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 has excluded this company i.e. Mold-Tek Technologies Ltd., holding it to be functionally different and dis-similar as it is providing KPO services and a host of engineering services like plant engineering, mechanical product designs, civil and structural engineering services, etc and therefore not comparable to assessee's providing ITES / BPO low end support services, at para 25 of its order, the co-ordinate bench has held as under :- " (8) Mold-tek Technologies Ltd. 25. This company is listed at Sl.No.16 of the list of comparable compan....
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....he co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing low end ITES / BPO support services, this company i.e. Infosys BPO Ltd. is to be excluded from the list of comparables to the assessee in the case on hand. We hold and direct the TPO accordingly. 6.9 Wipro BPO Ltd. 6.9.1 This company was selected by the TPO as a comparable. In respect of this company, the learned Authorised Representative for the assessee submitted that the arguments and contentions put forth in respect of Infosys BPO Ltd. (supra) are similar and are reiterated. It is submitted that this company i.e. Wipro BPO Ltd. is functionally different and different from an ITES / BPO support service provider as it also owns substantial IPRs on software products, apart from massive brand value and goodwill of Wipro Ltd. and being a market leader has huge economies of scale and clients dispensed worldwide, whereas the assessee in the case on hand is a mere ITES / BPO provider of low end support services. In support of its contentions for exclusion of thi....
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....learned Authorised Representative for the assessee submitted that the above issue is covered by the decision of the Hon'ble jurisdictional High Court of Karnataka in the case of Tata Elxsi Ltd. & Others (349 ITR 98) wherein it has been held that the deduction is to be computed by reducing from the 'total turnover', the same amount by which the 'export turnover' has been reduced. 7.2 We have heard both sides and carefully perused and considered the material on record. On this very issue, the Hon'ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd and Others reported in (2011) 247 CTR 334 (Kar); (2011-TIOL-684-HC-KAR-II), has held that while computing the deduction under section 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, then the same should also be excluded from the total turnover in the denominator. The relevant operative portion of the finding of the Hon'ble jurisdictional High Court is extracted and reproduced as under : "if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover in the deno....
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.... as from the total turnover while calculating the eligible deduction under section 10A of the Act. 8. In Ground No.7, the assessee has denied itself liable to be charged interest under Section 234B of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234B of the Act, if any, while giving effect to this order. 9. In the result, the assessee's appeal for Assessment Year 2008-09 is partly allowed. Revenue's appeal for A.Y. 2008-09 I IT(TP)A No.1675/Bang/2013 10. The Grounds raised at S.Nos.1, 6 & 7 are general in nature and therefore no adjudication is called for thereon. 11.1 In the Ground at S.No.2 : Revenue contends that the learned CIT (Appeals) erred in directing the TPO to exclude the companies which are functionally dis-similar to the assessee by following the decision of the ITAT, Delhi Bench in the case ....
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....s to the comparability of any of the TPO's list of comparables or as to which of them were functionally dis-similar. The learned CIT (Appeals) has merely directed the TPO to apply the test of functional dis-similarity in the light of the decision of the ITAT, Delhi Bench in the case of Actis Advisers P. Ltd. (supra); which action, in our considered opinion, is tantamount to setting aside the matter to the file of the Assessing Officer without rendering any factual finding as to which of the comparable companies are functionally dis-similar to the assessee and which the Act does not empower him to do. It was for the learned CIT (Appeals) to apply the test of functional dis-similarity and the concerned judicial decisions in the matter before him and after examining the judicial and factual position, to come to a finding in respect of the exclusion or otherwise of each of the concerned comparable companies rather than to direct the TPO to examine the matter and adjudicate thereon. We, therefore, finding merit in the contentions of Revenue that the learned CIT (Appeals) had acted beyond mandate in section 251(1)(a) of the Act in setting aside the issue of adjudication on the function d....