TaxTMI 
TaxTMI 
2016 (6) TMI 1309
X X X X Extracts X X X X
X X X X Extracts X X X X
....urpose, ICCI has obtained the permission for setting up a new undertaking in a Software Technology Park (STP) for the development of software. As per the STP regulations, the entire production of ICCI is exported against hard currency except the permitted sales in the domestic tariff area. Interactive Composition Corporation, USA (ICC USA), the AE, is a 30-year-old book, journal, and multimedia publishing services company specializing in technical and scientific material. Now headquartered in Portland, Oregon, ICC USA has maintained a reputation as a high-quality vendor for educational and technical publishers. With offices in Portland and India, the company has staff strength of more than 300 full-time employees. ICC USA is responsible for sales, business development, client relationship and corporate management matters. The overall corporate management, tax and treasury functions are the responsibility of ICC USA. ICC USA solicits, bids and negotiates with clients and procures the projects. It enters into contracts with clients for providing the services. It then enters into a sub-contract with ICC India for rendering the said services. In other words, all the functions relating ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onsideration, the assessee filed its Income Tax return on 27.11.2007 declaring a total income of Rs. 1,31,87,570/-. Subsequently, during the course of assessment proceedings, the AO made a reference u/s 92CA(3) to the TPO and the TPO subsequently passed an order on 26.10.2010 makinga TP adjustment of Rs. 38,098,238/- by holding that the international transaction of provision of ITES entered into by ICC (India) with its AE does not satisfy the arm's length principle. 5. Aggrieved, the assessee approached the DRP and primarily objected to the Transfer Pricing Adjustment of Rs. 38,98,238/- and also objected to other additions aggregating to Rs. 99,18,986/-. Some of the objections of the assessee were accepted while some were overruled by the DRP and now the assessee has approached the Tribunal subsequent to the TPO having given effect to the directions of the DRP and after having calculated the revised transfer pricing adjustments at Rs. 42,417,049/-. The following grounds of appeal have been raised:- "1. Ld Dispute Resolution Panel, Ld. AO and Ld. TPO erred in amending the list of comparables and in recomputing the margins of the comparables on separate grounds which are both b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... h) by including the segments of the companies despite knowing that margin calculations of such segments are subjective; i) violating the principles of natural justice by not providing the appellant a reasonable opportunity of being heard while rejecting certain companies; j) denying a risk adjustment to the operating profit margins of the comparables, and in doing so have grossly erred in: i. stating that detailed working or formula applied for calculation of risk adjustment has not been provided by the appellant while also failing to clarify what would constitute the 'detailed working' for the purpose of undertaking a risk adjustment ; ii. reaching a conclusion that risk adjustment isrequired but in the absence of the formula cannot be provided for k) violating the principles of natural justice by not sharing with the appellant (despite having adequate time at their disposal to do so) the concerns/ issues in this regard (in terms of the alleged/ purported shortcomings/ deficiencies in the appellant's claim for a working capital adjustment) and thereby denying the appellant a reasonable opportunity to study/ examine the said basis and provide its comments/ objection....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ogies (Trivandrum) Ltd. & Iridium Technologies (India) Pvt. Ltd. amalgamated with Accentia during the year resulting into abnormal rise in profits. Acquired goodwill on amalgamation. It was also submitted that more than 68% of operating cost is towards overseas business expenses as against NIL of the assessee and hence is a different business model. Further, there were substantial marketing expenses to the extent of 28% of sales as against almost NIL of assessee. It was also submitted that the assessee gets assured business from its AE. Further, the assets-base of Accentia Technologies Ltd. has risen from 2.4 cr to 12.7 cr and, therefore, the company was not comparable. (ii) Apollo Healthstreet Ltd. - It was submitted that ESOP expenses of Rs. 31,57,324/- should be treated as operating expenses as they are part of employee cost i.e. salary in non-cash form. (iii) Bodhtree (Seg) - It was submitted that the company is Functionally dissimilar as the Co. is into software development and data cleansing segment is Software As A Service (SAAS). It was further submitted that in the revised order, the TPO has included foreign exchange earnings of the full entity amounting to Rs. 4,53.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at the company is functionally dissimilar. The Co is into remote IT infrastructure Management services, Data centre management, end user computing services, managed security services, networking services, tools & process consulting services. It is a highly capital intensive industry. It operates 24/7 i.e. 3 shifts whereas the assessee operates only single shift. The Co. is cited as 'Leader for Global delivery Infrastructure Management' by Foster Research Inc' and other magazines. There is significant brand value in the market of the company whereas assessee owns no intangibles/brand value. It was also submitted that the company has a huge asset base of 188.90 cr & ITES revenue of 260 cr. As against assessee which has turnover of merely 15.7 c. The Co. is a full risk bearing entrepreneur vis a vis assessee which is captive service provider to its AE. The functional, assets & Risk profile of co is completely different from that of the assessee. (vi) Vishal Information Technologies Ltd. - It is the AR's submission that the functional asset & risk profile is dissimilar. The Co. is working on outsourcing business model with a very low asset base. Employee cost is only 2% of turnover ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d knowledge. (viii) Infosys BPO Ltd. - It was submitted that Infosys BPO provides diversified business process management services which are high end in nature including end to end voice data, knowledge process outsourcing (KPO), customer relationship management, finance & accounting, knowledge services management, procurement and human resources in Banking & Capital Markets Communication Services Providers. High end Disorder Manufacturing Insurance & Healthcare, Retail, Energy, Utilities & Resources, Automotive & Aerospace, Transportation & Services. There is an increase in the mix of knowledge services in the mix of offerings and it provides end to end process solutions from Discovery, Transition and Steady State Operations. It was further submitted that it also provides product based solutions such as Source to pay business platform, Hire to retire business platform, Order management business platform. Newspaper in a box, Integrated Date Lifecycle Management solution, etc. It was submitted that Infosys BPO is a giant and a top BPO services provider. It has turnover of 649 cr and total asset base of approx. 450 cr (Gross Fixed assets Rs. 116 cr). It has employee base of 11,226....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ic circumstances. The CIT (A) has excluded this Co. from comparables' list in AY 2008-09. (xiii) R Systems International Ltd. - It was submitted that provision for doubtful debts of R.s 5.08 cr should be treated as operating expenses as debtors are operating item. Further, miscellaneous balance written off of Rs. 3.39 cr should be treated as an operating expense. (xiv) Flextronics Software Systems Ltd. - It has been submitted that in the revised order the TPO has included foreign exchange gain at entity level whereas segmental information has been used by the TPO which has resulted in a wrong increase in the OP/TC to 54.72% from 8.62%, the correct margin is 9.31%. (xv) Aditya Birla Minacs Worldwide Ltd. - It was submitted that the foreign exchange income on loan given/taken amounting to Rs. 119866000/-, is wrongly taken as operating income by the TPO in the revised order passed under the directions of DRP which is a nonoperating item and therefore ought to have been excluded. 8. In response, the Ld. DR placed heavy reliance on the order of the DRP and submitted that the DRP has duly considered all the objections of the assessee and has given a reasoned finding and hence....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h Street Ltd. : The assessee's plea is to treat the ESOP expenses of Rs. 31,57,324/- as part of the operating expenses being salary in non-cash form in the comparable. There cannot be any dispute that comparisons of margins between the assessee and the company has to be made under identical conditions. ESOP is an extraordinary item of expenditure and, therefore, in our view, for the purpose of making proper comparison of the margin, one time ESOP cost incurred by the comparable cannot be included as part of the operating expenses. We accordingly reject the assessee's contention on this issue. (iii) Bodhtree (Seg.) : The assessee is objecting to the aforesaid company on the ground that the company is functionally different as it is into software development and data cleansing segment. It is also the assessee's objection that the TPO has included the foreign exchange earning of the entire entity amounting to Rs. 4,53,842/- instead of the segment only. On both the counts, it appears that these facts were not properly considered by the TPO and, hence, we remit the matter back to the file of the TPO who shall consider the acceptability or otherwise of the company after properly consi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider 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 e....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... understood in the sense that whereas, BPO does not necessarily involve advancted skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B (2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested p....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... is working on outsourcing business model with a very low asset base. Employee cost is only 2% of turnover as against the assessee which is performing all functions in house and has employee cost/turnover ratio of apprx 62%. Major part of functions is outsourced by Vishal. The Hon'ble Delhi High Court in Rampgreen Solutions (P) Ltd. (supra) had the occasion to consider Vishal Information Technologies Ltd. Paras 37 & 38 are the relevant paragraphs and they read as under: "37.Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd. {supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various critical data managem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tal employed, number of shifts/working hours, dissimilar asset base, expenditure on Research & Development, number of employees, brand value, ownership of intangibles, global presence, risk-bearing, employee skills etc. The Delhi Bench of the ITAT in Calibrated Healthcare Systems India (P) Ltd vs. ACIT (OSD) in (2015) 54 Taxmann.com 53 (Delhi-Trib.) excluded Wipro Ltd (Seg.) from the list of comparables by observing as under:- "6. After hearing both the sides, here again we find that the facts and circumstances of this company nowhere match with the assessee company. This company is also a giant entity in comparison with the assessee company with marked differences as regards risk profile, nature of services, ownership of IP rights, expenditure on R & D etc. Drawing the strength from the judgment of Agnity India Technologic (P.) Ltd. (supra), we hold this company to be incomparable with the assessee. The same is, ergo, directed to be not treated as comparable." Here also we find that this company nowhere matches with the assessee company with marked differences as regards risk profile, nature of services, ownership of I.P rights, expenditure on R & D etc. Drawing streng....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the normal business condition, we are of the view that the high profit margin making entity should not be included in the list of comparable for the purpose of determining the arm's length price of an international transaction. Otherwise, the entity satisfying the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abno....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs, demergers etc. Similar view has also been taken by the Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd vs ACIT in ITA No. 5654/Del/2011. As there were amalgamations in the company during the financial year in question, this fact makes it incomparable with the assessee company. Further, the ITAT Delhi Bench has held in Calibrated Healthcare systems India (P) Ltd. Vs ACIT in ITA No. 5271/Del/2012 as under: "9. We have heard both the sides and perused the relevant material on record. Both these companies are inter-related entities. During the year under consideration, there was acquisition of 100% shares of Maple Esolutions Ltd. by Triton Corp. Ltd and "thus Maple Esolutions Ltd. became a wholly owned subsidiary of Triton Corp. Ltd. w.e.f 01.01.2007. It can be seen that this merger/acquisition has taken place during the year under consideration, thereby shattering their comparability. 10. The Ld. AR also pointed out that both these companies are owned by Rastogi Group and the reputation of the Directors of these companies was having question-mark in earlier years. In support of the contention for the exclusion of these companies, the Id. AR relie....