TaxTMI 
TaxTMI 
2022 (3) TMI 1567
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....etworks and ambulatory care centres. The assessee company is functioning as captive business process outsourcing (BPO) unit of its Parent Company (MDE USA). The assessee company filed its return of income on 11.10.2010 declaring total income of Rs.1,85,411/-. Since the assessee company, during the impugned assessment year, had entered into certain international transactions amounting to Rs.17,50,33,942/- with the Associated Enterprises covered under section 92CA of the Income Tax Act 1961, the A.O. referred the matter to the Transfer Pricing Officer ["TPO"] for determination of the Arms Length Price ["ALP"] of the international transaction. 2.1. During the course of T.P. assessment proceedings, the TPO noted that the assessee has entered into international transactions with it's A.Es in respect of ITES Services amounting to Rs.17,50,33,942/-. The assessee has used Transaction Net Margin Method ["TNMM"] as the method and OP/TC as the Profit Level Indicator [ "PLI"]. The assessee has arrived at a set of 15 companies with an average margin of 18.07%. The assessee's own margin is worked-out to be 2.75%. Based on the analysis, the assessee has concluded that its international transac....
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....nue are in appeal before the Tribunal by raising the following grounds : ITA.No.3840/Del./2018 [Assessee's Appeal] : 1. "On the facts, in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) - 44 ['CIT (A)'] erred in upholding the order of the Ld. Assessing Officer [AO]/ Ld. Transfer Pricing Officer [TPO] dated 28.04.2014 & 23.01.2014 respectively to the extent prejudicial to the appellant, is bad in law and liable to be rejected. 2. On the facts, in the circumstances of the case and in law, the Ld. CIT(A) grossly erred in confirming adjustments made by the Ld. TPO to the arm's length price of international transactions entered into by the appellant with overseas associated enterprises ('AEs'). 2.1 Approving comparables selected by the Ld. TPO on arbitrary ground even though such comparable functionally dissimilar to appellant. 2.2 Rejecting comparables selected by the appellant in the economic analysis in Transfer Pricing Study misconceived and arbitrary ground even though such comparable functionally similar to appellant. 2.3 Not granting an adjustment to the appellant for working capital and capaci....
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....ulatory Care Centres. Further it can be considered as a captive Business Process Outsourcing [ "BPO "] unit of its parent company MD USA. Therefore, this company cannot be compared with that of the assessee company and, therefore, the same should be excluded. 4.3. Referring to the decision of the Coordinate Bench of the Tribunal in the case of JCIT vs., Steria India (P.) Ltd., [2021] 123 taxmann.com 264 [Delhi-Trib.], he submitted that Acropetal Technologies Limited (Segmental) was excluded from the list of comparables on account of outsourcing of significant work. 4.3.1. Referring to the decision of Bangalore Bench of the Tribunal in the case of ACIT vs., Flextronics Technologies (India) Pvt. Ltd., reported in 101 taxmann.com 348 (Bang.Tribu.), he submitted that Acropetal Technologies Limited (Segmental) was excluded due to the functional difference as it is providing Engineering Design Services, whereas assessee was providing ITES Services. 4.3.2. Referring to the decision of Coordinate Bench of the Tribunal in the case of Bechtel India (P.) Ltd., vs., DCIT reported in [2019] 101 taxmann.com 385 (Delhi-Trib.), he submitted that Acropetal Technologies Limited (Segmental) ....
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....n'ble Delhi High Court in the case of CIT-II vs., Mckinsey Knowledge Centre India Pvt. Ltd., ITA.No.217/2014 order dated 27.03.2015, he submitted that the Hon'ble Delhi High Court in the said decision has held that different financial year ending cannot be the sole basis of rejection of comparable. He accordingly submitted that the Acropetal Technologies Limited (Segmental) should be excluded, CG-VAK Software and Export Limited and R System International Limited should be included and correct profit margin of Cosmic Global as well as the assessee should be re-computed. 5. The Ld. D.R. on the other hand heavily relied on the order of the Ld. CIT(A). He submitted that Acropetal Technologies Limited (Segmental) was rightly excluded by the Ld. CIT(A) on account of dissimilar functional profile and the assessee has not submitted the annual report of the abovementioned company. 5.1. So far as the exclusion of CG- VAK Software and Export Limited is concerned, the Ld. D.R. submitted that it fails the turnover filter of Rs.5 crores average by the TPO and, therefore, the turnover of CG- VAK Software and Export Limited being Rs.82.78 lakhs this company was rightly excluded by the TPO an....
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....ompany. We find the assessee during the course of appellate proceedings before the Ld. CIT(A) has categorically stated that Acropetal Technologies Limited (Segmental) is engaged in the development of computer software and the production and sale of such items cannot be expressed at any generic term. It had earned foreign exchange into the business of exporting software services and 100% of its revenue comprises of export earnings. The company identifies scope for huge business in the Middle East, Europe and U.S. From the various details furnished by the assessee we find Acropetal Technologies Limited (Segmental) has incurred significant expenditure on Research and Development and Advertising and Marketing and Sales Promotion. Further it has significant outsourcing of work. Therefore, we find merit in the submissions of the Learned Counsel for the Assessee that Acropetal Technologies Limited (Segmental) cannot be included in the list of comparables. 6.2. We find the Coordinate Bench of the Tribunal in the case of JCIT vs., Steria India (P) Ltd., (supra), while upholding the order of the DRP in excluding Acropetal Technologies Limited (Segmental) has observed as under : "....
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.... as comparable by a coordinate Bench of this Tribunal in the case of [TO v. Omniglobe Information Technology (I) (P.) Ltd. [IT Appeal No. 1380 (Delhi) of 2016, dated 15-1-20191 as comparable for AY 2011-12 to the companies like assessee who do not outsource the significant portion of their business. Similar exclusion was made by the Bangalore Bench of the Tribunal in the case of Asstt. CIT v. Flextronics Technologies (India) (P.) Ltd. [2019] 101 taxmann.com 348. 112. We have also gone through the observations of the Tribunal in respect of the Acropetal Technologies Ltd, wherein the arguments similar to the ones advanced in this matter are considered and this comparable is excluded. All these additions have application to the facts involved in this case for this assessment year, in such decisions we hold that Acropetal Technologies Ltd is not a proper comparable to the assessee and its exclusion by the Ld. DRP cannot be found fault with. Such an exclusion is accordingly confirmed." 6.3. We find the Bangalore Bench of the Tribunal in the case of ACIT vs., M/s. Flextronics Technologies (India) Pvt. Ltd., (supra) dismissed the appeal filed by the Revenue against the order o....
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....ing the company cannot be accepted. 10. The Id. Counsel for the assessee, on the other hand, submitted that the exclusion of this company by the DRP is fully justified and in this connection drew our attention to the Annual Report of this company which is at page 492 of PB-II filed by the assessee. Perusal of the Annual Report shows that this company has 4 divisions viz., Engineering Design Services, Healthcare, Enterprise Solutions and Infrastructure Solutions. Perusal of the order of TPO at page 25 shows that the TPO has considered engineering design services segment profit margin of this company for the purpose of comparison with the profit margins of the assessee company. The functions performed by the Engineering Design Services of this company are as follows:- Architectural, Structural, Electrical, Plumbing, Steel Detailing, External Utilities, Design Engineering." 11. The functions performed by the assessee, as we have already seen is back office services relating to finance and human resource functions, including accounts payable to assessee, remote server access, maintenance and management services, payroll processing, credit analysis, ledger mai....
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.... 22. Per contra, Ld. DR submitted that TPO had considered the argument of the assessee that BPO and KPO had to be distinguished. According to him, Acropetal Technologies Ltd, was giving engineering design services and the assessee was rendering insurance support services. Though these services did not fit in the same mould, the level of expertise required stood more or less oil the same pedestal. According to him, applying the yardsticks laid down by Hon'ble Delhi High Court in the judgment of Rampgreen Solutions P. Ltd (supra), Acropetal Technologies Lid. could be taken as a good comparable. 23. We have perused the orders and heard the rival contentions. There is no dispute that M/s. Acropetal was having at least three segments, namely, engineering design services, IT service and health care. TPO had taken engineering design service as a good comparable with that of the services done by the assessee. Engineering Design Sendees that were being rendered by Acropetal Technologies Lid, appears at page 8 of its annual report. It comprised of architectural, structural, electrical, plumbing, steel detailing, and utilities designing. Its revenue model appears at page 9 of i....
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....ally different and hence cannot be considered as a good comparable to the assessee in the case on hand who is providing only ITES services to its AE's. The AO/TPO are, therefore, directed to exclude this company from the list of comparables in the case on hand." 12. For the reasons stated above, we uphold the order of DRP excluding Acropetal Technologies Ltd. from the list of comparable companies. Consequently ground Nos. 1 to 10 raised by the revenue are dismissed." 6.4. Similar view has been taken in various other decisions relied on by the Learned Counsel for the Assessee. Under these circumstances, we hold that Acropetal Technologies Limited (Segmental) cannot be held as comparable on account of different functionality, significant expenditure on Research and Development and Advertising and Marketing and Sales Promotion Expenses and significant Outsourcing of Work. We, therefore, set aside the order of the Ld. CIT(A) on this issue and direct the A.O./TPO to exclude Acropetal Technologies Limited (Segmental) from the list of comparables. 6.5. So far as inclusion of R System International Limited is concerned, we find the Ld. CIT(A) rejected the contentio....
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.... suitable comparable on account of very low turnover. The relevant observation of the Ld. CIT(A) reads as under : "(ii) CG-VAK Software and Export Limited: (a) The above mentioned company has been rejected by the TPO on the ground that its revenue from ITES was only Rs.82.78 Lakhs and hence it fails the turnover filter of Rs.5 crore applied by the TPO. I agree with the reasons given by the TPO for the application of the said filter. The contention of the appellant is rejected." 6.9. We find the Coordinate bench of the Tribunal in the case of Ameriprise India Private Limited vs. DCIT (supra), following the decision of Hon'ble Delhi High Court in the case of Chrys Capital Investment Advisors (India) P. Ltd. vs. DCIT (supra), has held that CG-VAK Software and Export Limited cannot be excluded on account of low turnover as long as the said company is functionally comparable with that of the assessee company. The relevant observations of the Tribunal at para15.2 read as under : 15. CG-VAK Software and Exports Ltd. (Segd 15.1 The assessee included the segmental figures of this company in the list of comparables. The TPO eliminated this c....
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....O Limited as functionally dissimilar to the assessee, even when they are actually functionally similar comparables under TNM Method? 2. Whether on the facts and circumstances of the case, the Ld. CIT(A) is legally justified in rejecting high margin comparables contested by the assessee and allowing to retain other low margin comparables in the final set of the TPO's order unopposed by the assessee, which were discharging in similar nature of functions and also by ignoring the decision of the Hon'ble Supreme Court in the case of Mumbai International Airport Pvt. Ltd. vs. Golden Chariot Airport with regard to the "Doctrine of Elector and the "Doctrine of Approbation and Reprobation", wherein it has been laid down that a litigant is not altered to change and choose its stand to suit its convenience ? 3 Whether on the facts and circumstances of the case, the Ld. CIT(A) is legally justified in laying down very stringent standards of comparability and attempting to identify exact replica of the assessee for comparability analysis by ignoring the fact that the Indian Law and the International jurisprudence recognizes the reality that there cannot be exact comparables in ....
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....t has significant intangible assets whereas the assessee has no intangibles. Further during the A.Y. 2010-11 extraordinary events have taken place i.e., acquisitions/amalgamation whereas no such acquisition/amalgamation has taken place in the case of the assessee and Accentia Technologies Limited has shown abnormal high profit margin. 8.4 We find the Coordinate Bench of the Tribunal in the case of JCIT vs., Steria India (P.) Ltd., (supra) has dismissed the appeal filed by the Revenue challenging the direction of the DRP in excluding Accentia Technologies Limited from the list of comparables by observing as under : "51. We have carefully considered the submissions on behalf of either side. From the material papers on record, we notice that in respect of the argument of the assessee that Accentia has undertaken extraordinary events namely, amalgamation with Asscent Infoserve Private Limited during the year, Id. TPO observed that the acquisitions are made by companies to benefit from each other's strengths, but the acquisitions in themselves do not become extraordinary events, except when the company's functions change substantially after an acquisition the s....
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.... the comparables selected by the assessee are proper comparables for the purpose of determining Arm's Length Price after considering the following factors as per law: (i) Whether the companies have large volume of related party transactions. (ii) Whether companies have abnormally high profits or losses. (iii) Whether companies have gone for business re-structuring. (iv) Whether companies have shown high growth. (v) Whether companies are having high turnover. (vi) Whether companies are having larger inventory. (vii) Whether companies are having high marketing expenses." 54. This company was also directed to be excluded by a co-ordinate Bench of this Tribunal in the case of Smart Cube India (P.) Ltd. (supra) on the basis that it is engaged in provision of medical transcription services and sale of software and therefore cannot be regarded as comparable to a ITES service provider. It is pertinent to note that these observations are in respect of the AY 2011-12. We find it necessary and convenient to extract the relevant observations of the Tribunal: 46. Now we take up the issue of selection of various....
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....al list of comparables for both the years under consideration." 8.5. Similar view has been taken in various other decisions relied on by the Learned Counsel for the Assessee filed in the case law compilation. In absence of any contrary material brought to our notice by the Ld. D.R. against the various decisions holding that Accentia Technologies Ltd. has diversified business operation, significant intangible assets, abnormal high profits, occurring of extraordinary events, functional dissimilarity and absence of segmental details and, therefore, cannot be considered as a good comparable. We, therefore, uphold the order of the Ld. CIT(A) and the ground raised by the Revenue on this issue is dismissed. 8.6. So far as Fortune Infotech Limited is concerned, we find the Ld. CIT(A) while directing the TPO to exclude the above company from the final set of comparables has observed as under : "(ii) Fortune Infotech Limited: (a) The main contention of the appellant is that the above mentioned company has a dis-similar functional profile and that it owned unique intangibles. (b) The Hon'ble Delhi Tribunal in the case of Vertex Customers Services in ITA No. 15....
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....No. 1508/Del/2015 for AY 2010-11 has held the above mentioned company to be incomparable on the ground that the company had undergone amalgamation; was engaged in providing IT and ITES but no segmental information was available in annual report; had huge turnover of Rs. 932.18 crores. (c) In view of the above, Igate Global Solutions Limited is not comparable to the appellant which is a low end BPO company. In accordance with the principle of consistency and respectfully following the order of Hon'ble ITAT in the case of Vertex Customers Services (supra) the AO/TPO is directed to exclude Igate Global Solutions Limited from the final set of comparables." 8.9. We do not find any infirmity in the order of the Ld. CIT(A) on this issue. From the various details furnished by the Learned Counsel for the Assessee in the paper book, we find this company is functionally different and insufficient segmental information respect of IT and ITES services are available. Further this is an exceptional year of operation on account of amalgamation. Apart from M/s. Vertex Customer Services India Private Limited (supra) relied on by the Ld. CIT(A), we find the Coordinate Bench of the Tribuna....
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....nate Bench of the Tribunal in the case of JCIT vs., Steria India (P.) Ltd., (supra), while directing the TPO to exclude the above comparable has observed as under : "16. The next comparable contested by the Id AR is ICRA Techno Analytics Ltd stating that this company is functionally not comparable as it is engaged in business intelligence and analytics. 17. The Id DR contested the argument of the assessee and submitted that the assessee is engaged in such high end services. 18. We have carefully considered the rival contentions. This company as per its annual accounts placed at Page No.1210 shows that it is engaged in the business intelligence and analytics space. It is also engaged in software development and consultancy, engineering services, web development and hosting services. It is also noted that it has two income segments of services and sales and it does not have the complete segmental information with respect to both the segments of services and sales as fixed assets and services are used inter-changeability. In view of this we find that this company is functionally not comparable as well as it does not have complete segmental information with r....
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.... not made any acquisitions. 8.16 We find the Coordinate Bench of the Tribunal in the case of Steria (India) Ltd., vs., ACIT (supra) has directed the A.O./TPO to exclude BPO Infosys Limited from the list of final comparables by observing as under : "5.3. Having gone through the submissions of the assessee as well as the annual report of BPO Infosys Ltd. and the judicial precedents relied upon by the Ld. Authorized Representative, we arc of the considered opinion that Infosys BPO Ltd. cannot be considered as a comparable to the assessee company for the simple reason that the assessee company is engaged in rendering system integration, enterprise solutions and software development services to the clients of its Associated Enterprises (AE) and also to independent customers in the United Kingdom, the United State of America and others countries in Europe as well as India while being a subsidiary of Steria (UK). On the other hand Infosys BPO Ltd. is a part of the Infosys Group, a giant in the field of Information Technologies Services and being a part of the Infosys Group, 'Infosys', it thus enjoys significant brand presence and brand value plays a significant role in....