TaxTMI 
TaxTMI 
2025 (7) TMI 1728
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....d, Acropetal Technologies Limited, ICRA Online Limited on the grounds of functional dissimilarity when on adequately considering the fact that these companies' core operations involve ITeS, which is the primary function of the assessee. 3) Whether the CIT (A) is right in excluding companies such as Accentia Technologies Limited, Acropetal Technologies Limited, ICRA Online Limited based on the fact that they operated in multiple segments. The core activities of these companies, including software development, are highly comparable to the tested entity, and the presence of additional segments should not lead to automatic exclusion. 4) Whether the CIT(A) is right in demanding comparability standards that may itself defeat the purpose of law relating to determination of ALP under the income tax Act. 5) Whether the CIT(A) is right in imposing conditions is beyond the scope of law and business reality by rejecting all close comparables on one or the other ground, without appreciating that not two companies can ever be same. 6) Whether the CIT(A) is right in trying to find out exact replica of the assessce for determining the Arm's length price ....
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.... on turnover differences unless the turnover has a direct impact on profitability (e.g., cconomies of scale). In the case of Infosys BPO Limited, no evidence has been provided to suggest that turnover affects its ITeS margins to the extent that it becomes incomparable with assessee. 15) Whether the learned CIT(A) is right in excluding Igate Global Solutions Ltd solely on the grounds of absence of segmental data. This exclusion disregards the fact that functional comparability is the primary criterion for determining the suitability of comparables in transfer pricing analysis 16) Whether the learned CIT(A) is right to not give due consideration to the functional comparability of the excluded companies, when functional comparability is the cornerstone of transfer pricing analysis, and companies should not be excluded solely due to the absence of segmental data if their core operations are comparable to those of the tested entity. 17)Whether the learned CIT(A) is right in not demonstrating that the excluded comparables were having extraordinary functional non-comparability that would justify their exclusion due to the lack of segmental data. 18) Whe....
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....ubmitted that the Ld.CIT(A) is wrong in taking the comparable companies when there are minor variations. Similarly, the Ld.DR argued that the other companies which were all excluded by the Ld.CIT(A) are also not correct since the companies are comparable to the core activities of the assessee company. The Ld.DR strongly relied on the grounds raised by the revenue and prayed that the appeal may be allowed. 6. The Ld.AR filed two paper books and also filed a synopsis of arguments in support of their case. In one of the paper books, the Ld.AR filed the annual reports of the six companies which are sought to be excluded for the purpose of determining the arms length price. In the other paper book, the assessee submitted the notices as well as their replies and the financial statements. The assessee also relied on the judgment of the Hon'ble Bombay High Court in ITA No. 1120/2014 dated 16/12/2016 in support of their case. The assessee also filed a chart in support of their pleadings. 7. We have heard the arguments of both sides and perused the materials available on record. 8. The Ld.CIT(A) had analysed the every company and compared them with the assessee company and excluded ....
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....h indicate that certain peculiar circumstances influencing the profit margin of the company and the company fails the revenue earning filter of 75% applied by the TPO, in view of the above differences, we direct the A.O. to exclude the above company from the comparables." 5.1.1.2 The appellant further relied on the decision of ITAT, Bengaluru in the case of Finastra Software Solutions (India) (P.) Ltd. vs. ACIT for A.Y.2011-12 wherein it is held that: "25. As far as Accentia Technologies Ltd., Accropetal Technologies Ltd., and Jeevan Scientific Technology Ltd., are concerned, ITAT Bangalore Bench in the case of Swiss Re Shared India Pvt. Ltd. v. Asstt. CIT [2016] 76 taxmann.com 22 (Bang-Trib), (a company which is also engaged in providing ITES such as the Assessee), was pleased to hold that these three companies cannot be regarded as comparable companies with companies providing ITES. Following the said decision, we hold that these three companies have to be excluded from the comparable companies." 5.1.1.3 The appellant also relied on the decision of ITAT, Bengaluru in the case of ACIT vs. AON Specialist Services (P.) Ltd. for A.Y.2011-12 wherein it is he....
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....company by the DRP does not require any interference." 5.1.1.4 Respectfully following the jurisdictional ITAT, Bengaluru decisions for the same A.Y.2011-12 in the above cases, this comparable is excluded from the list of comparables. 5.1.2 Exclusion of comparable Accentia Technologies Limited 5.1.2.1 The appellant contended that this comparable is functionally different and relied on the decision of ITAT, Bengaluru in the case of Amba Research (India) (P.) Ltd. vs. DCIT for A.Y.2011-12 wherein it is held that: "Accentia Technologies Limited 12. As regards the selection of Accentia Technologies Limited as comparable, the learned counsel for the assessee has relied on the decisions of this Tribunal in the cases of Capital IQ Information Systems (India) Pvt. Ltd. v. Addl./Dy. Commissioner of Income-tax, Circle 1(2), Hyderabad and vice versa (ITA No. 124 and 170/Hyd/2014 dated 31.7.2014); Excellence Data Research Pvt. Ltd., Hyderabad v. ITO Ward 2(1), Hyderabad (ITA No.159/Hyd/2014 dated 31.7.2014); and Hyundai Motors India Engineering P. Ltd., Hyderabad v. DCIT, Circle 2(2), Hyderabad (ITA No.255/Hyd/2014 dated 31.7.2014), wherein M/s. Acce....
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....ccentia Technologies Limited as comparable, the learned counsel for the assessee has relied on the decisions of this Tribunal in the cases of Capital IQ Information Systems (India) Pvt. Ltd. v. Addl./Dy. Commissioner of Income-tax, Circle 1(2), Hyderabad and vice versa (ITA No. 124 and 170/Hyd/2014 dated 31.7.2014); Excellence Data Research Pvt. Ltd., Hyderabad v. ITO Ward 2(1), Hyderabad (ITA No.159/Hyd/2014 dated 31.7.2014); and Hyundai Motors India Engineering P. Ltd., Hyderabad v. DCIT, Circle 2(2), Hyderabad (ITA No.255/Hyd/2014 dated 31.7.2014), wherein M/s. Accentia Technologies Limited(Seg) was excluded by the Tribunal from the list of comparables on the ground that it was a case of mergers and acquisition, and the company was also found to be functionally different. The relevant observations of the Tribunal as recorded in para 19.2 of the order passed in the case of Excellence Data Research Pvt. Ltd., Hyderabad (supra), being relevant in this case, are reproduced below- "19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years ....
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....rmation technology services. The function performed by the engineering design services of the company cannot be considered as comparable to the ITES/BPO function performed by the assessee. The performance of the engineering design services is regarded as providing high end services amongst the BPO which require high skill whereas the services performed by the assessee are routing low end ITES function. We therefore hold that this company could not have been selected as comparable, especially when it performs engineering design services which only a knowledge processing outsourcing (KPO) would do and not a business processing outsourcing (BPO).' Similar View was taken by Hon'ble Bangalore ITAT in the case of - Symphony Marketing Solutions India Pvt. Ltd. v. ITO (IT (TP) A No. 1316/Bang/2012), held that Acropetal cannot be considered as comparable as it performs engineering design services accordingly, we direct the assessing officer to exclude the company from the comparables." AON Specialist Services(P) Ltd "11. As far as Ground No. 2 in the Revenue's appeal regarding exclusion of Acropetal Technologies Ltd. ('Acropetal') by the DRP is concerne....
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....erprise solution infrastructural and health care etc. Since this company was more into engineering design services, it was held to be not functionally comparable." 5.1.3.2 Respectfully following the jurisdictional ITAT, Bengaluru decisions for the same A.Y.2011-12 in the above cases, this comparable is excluded from the list of comparables. 5.1.4 Exclusion of comparable ICRA Online Limited 5.1.4.1 The appellant contended that this comparable is functionally different and relied on the decision of ITAT, Bengaluru in the case of M/s Acusis Software India Pvt Ltd. for A.Y.2011-12 wherein it is held that: "31 .... (ii) ICRA Online Limited : The company is having turnover of Rs. 15.67 Crores and has three business segments namely, Information Services, Software Services and Outsourced Services and the TPO has considered the 'Outsourced Services' segment as comparable. Further the Annual Report of the company does not provide any description as to the nature of the services contained in the segment and the outsourcing segment of the company contains KPO services. Further functionally different as the company is eng....
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....n the list of final comparables be confirmed. 5.4 We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. The TPO has considered the operations of the 'Outsourced Services' segment of ICRA as comparable to the operations of the appellant. However, we find that the annual report of the company does not provide any description as to the nature of the services contained in this segment. As per page 532 of the P/B, a reference may be made to the annual report of ICRA Ltd., the holding company of ICRA from where it can be seen that the outsourced segment of the company relates to KPO and online software services. Also, page 8 of the annual report of ICRA Ltd. delineates the business of ICRA stating that the company is engaged in providing KPO and online software services. As per the description at page 532 of the P/B, the knowledge process outsourcing division provides financial and analytical services and support to clients in the area of data extraction, aggregation, electronic conversion of financial statements, validation and analysis, accounting and finance, research and analytics. ....
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....ts uncomparable size of operations. He has contended that the turnover of the said company was many times higher than that of the assessee during the year under consideration. Although the Learned Departmental Representative has contended that the size of operations does not matter as far as selection of comparables is concerned especially in the sector of IT Enabled services, it is observed that similar issue has been decided by the Hon'ble Delhi High Court in the case of CIT v. Agnity Technologies Pvt. Ltd. (219 Taxman 26) holding that huge turnover companies like Infosys and Wipro cannot be considered as comparables with smaller companies like the assessee in the present case. Respectfully following the decision of the Hon'ble Delhi High Court in the case of Agnity Technologies P. Ltd. (supra), we direct the Assessing Officer/TPO to exclude Infosys BPO from the list of comparables." 5.1.5.2 The appellant further relied on the decision of ITAT Bengaluru in the case of DCIT vs. M/s CGI Information Systems and Management Consultation Pvt Ltd for A.Y.2011-12 wherein it is held that: "6.11 For the reason that DRP there in noted the comparables having segment....
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....ove i.e. functionally not comparable, presence of brand and extraordinary event that has taken place during the year on account of acquisition of Australian based company, we are of the considered opinion that Infosys BPO Ltd. should not be included in the list of comparables. We accordingly direct the Assessing Officer/TPO to exclude Infosys BPO Ltd. from the list of comparables for the purpose of computing the average margin." It was also brought to our notice that the Hon'ble Delhi High Court in ITA No. 260/2018 in the appeal filed by the Revenue against the aforesaid order dismissed the appeal at the admission stage observing that rationale given by the ITAT for exclusion was correct. In view of the aforesaid decision, we direct exclusion of Infosys BPO from the list of comparable companies chosen by the TPO. From above, it is clear that this company is functionally not comparable with captive service provider and hence deservs to be excluded. We are therefore do not find any infirmity in exclusion of these comparables for high turnover. However, we have analysed the alledged comparable to be functionally not comparable with that of assessee. Accordingly, ....
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....h that of assessee and also because they have a high turnover. It is submitted that subsequently this Tribunal in case of Yodlee Infotech (P.) Ltd. v. ITO IT(TP)A No. 108/Bang/2014 For assessment year 2009-10, vide order dated 12/12/14, excluded these companies following Genesys Integrating Systems India (P.) Ltd. (supra). Hon'ble Delhi High Court in case of Chriscapital (supra), Hon'ble Court was of the opinion that assessee could not challenge functional differences before the court for first time and that assessee had included one of the companies in its earlier year. In the present case facts are not similar to that of Chryscapital Investment Advisory (India) (P.) Ltd. (supra). 6.8 Reliance is placed on decision of this Tribunal in case of Autodesk India (P.) Ltd. (supra), where this Tribunal followed similar view to exclude identical comparables by applying turnover filter, wherein all decisions relied upon by Ld. CIT DR has been considered and dealt with. 6.9 However, we have also analysed functional similarities/dissimilarities of these comparables with assessee having regard to annual reports placed in Index to Annual report paper book Volume I & I....
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....l on record. Before us, except for raising this ground and reiterating that this company, 'Datamatics' is functionally comparable to the assessee in the case on hand, no evidence was brought on record to controvert the observations and findings of the DRP. In this factual matrix of the case, we have no hesitation in upholding the decision of the TPO in rejecting this company, 'Datamatics' as a comparable to the assessee." 10. Insofar as the other issues, the revenue has not challenged the same and therefore we are not adjudicating the said issues. 11. We have also gone through the synopsis of arguments filed by the assessee in which the assessee had considered a through analysis of the each and every company and a detailed argument was submitted why the said companies are to be excluded for the purpose of calculating the arms length price. 12. The synopsis of the arguments filed by the assessee is as follows: "D. Assessee's submissions on Revenue's appeal.. (i) Acropetal Technologies Ltd. ("Acropetal"): It is submitted that the exclusion of this company was sought for the reasons that it was functionally dissimilar to the Assessee....
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.... This company is consistently excluded by this Hon'ble Tribunal in the case of similarly placed service providers as that of the Assessee. Reliance in this regard is placed on the following decisions: * JCIT v. Dell International Services India P. Ltd. (reported in (2021) 133 taxmann.com 532 (Bang.-Trib.)); * Aspect Technology Centre (India) P. Ltd. v. ITO (reported in (2020) 118 taxmannn.com 398 (Bangalore-Trib.)); * DCIT v. C-Cube Solutions (P. ) Ltd. (reported in [2019] 109 taxmann.com 293 (Bangalore - Trib.)): * ACIT v. AON Specialist Services Pvt. Ltd. (reported in [2020] 116 taxmann.com 368 (Bangalore - Trib.)); * Software Paradigms Infotech (P.) Ltd. v. ACIT (reported in [2020] 116 taxmann.com 923 (Bangalore - Trib.)) * Swiss Re Shared Services (India) (P.) Ltd. v. ACIT (reported in [2016] 76 taxmann.com 22 (Bangalore - Trib.)); * e4e Business Solutions India P. Ltd v. DCIT [Order dated 13.01.2017 in IT(TP)A No.1397/Bang/2016] * Finastra Software Solutions (India) (P. ) Ltd. v. Assistant Commissioner of Income-tax (reported in [2018] 93 taxmann.com 460 (Bangalore- Trib)). In view of ....
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....onsistently excluded by this Hon'ble Tribunal in the case of similarly placed service providers as that of the Assessee. Reliance in this regard is placed on the following decisions: * Aspect Technology Centre (India) P. Ltd. v. ITO (reported in (2020) 118 taxmannn.com 398 (Bangalore-Trib.)); * Assessee's own case for the assessment year 2010-11 (Order dated 09.03.2016 passed in IT(TP)A No. 286/Bang/2015); * Finastra Software Solutions (India) (P.) Ltd. v. ACIT (reported in [2018] 93 taxmann.com 460 (Bangalore - Trib.)); * Amba Research Ltd. v. DCIT (reported in [2016] 67 taxmann.com 342 (Bangalore - Trib.)); * Swiss Re Shared Services (India) (P.) Ltd. v. ACIT (reported in [2016] 76 taxmann.com 22 (Bangalore - Trib.)); * Acusis Software India Pvt. Ltd. v. ITO (Order dated 06.09.2019 passed in IT(TP)A No. 169/Bang/2016 for the assessment year 2011- 12) In view of the above, the decision of the CIT(A) ought to be affirmed by this Hon'ble Tribunal and Accentia ought to remain excluded from the final list of comparables. (iii) ICRA Online Ltd ("ICRA"): The Assessee sought exclusion of ICRA fro....
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....o an ITE service provider, on account of high turnover, on account of high brand value and on account of existence of extraordinary event of acquisitions. While so, the Revenue has challenged the exclusion of the company only on account of high turnover. Since there is no dispute on the other counts on which the company was excluded, this ground of the Revenue ought to be rejected, and the company ought to remain excluded from the final list of comparables. In any event, the company ought to remain excluded for the following reasons: The company is engaged in providing high-end integrated services by assisting its clients in improving their competitive positioning. The company is a market leader and an established player in the BPO industry. The brand value maintained by the company, which enables it to command the market and earn better margin renders it incomparable to the Assessee which is a captive service provider. Also, during the financial year 2010-11 under consideration, the company acquired McCamish Systems LLC, which constitutes a peculiar economic circumstance. Since no reasonably accurate adjustments can be made to eliminate the material effects there....
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....TPO's filter; (iii) the company fails the export earning filter; (iv) the margins of the company fluctuate widely. While so, the Revenue has challenged the exclusion of the company only on account of fluctuation in margin. Since there is no dispute on the other counts on which the company was excluded, this ground of the Revenue ought to be rejected, and the company ought to remain excluded from the final list of comparables. In any event, the company ought to remain excluded for the following reasons: It is submitted that this company is functionally not comparable to the Assessee for the reason that it is engaged in rendering diverse functions and the same are reported under one segment without segmental details regarding the same being made available. In any event, it is submitted that the ERP segment of the company is not comparable to the ITeS segment of the Assessee. The company suffers from huge fluctuations which indicate that certain peculiar circumstances influencing the profit margin of the company exist, for which appropriate adjustments cannot be made to balance the effect. It is submitted that the ERP implementation services are not in the nature....
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....n of the company only on account of lack of segmental details. Since there is no dispute on the other counts on which the company was excluded, this ground of the Revenue ought to be rejected, and the company ought to remain excluded from the final list of comparables. In any event, the company ought to remain excluded for the following reasons: The company is functionally dissimilar as it is engaged in rendering diverse functions which are reported under one segment without segmental details regarding the same being made available. The company's software services segment is clubbed with its ITeS segment and there is no breakup between the revenues generated from the two segments. The company renders these services both under the onsite and offshore model. Further, during the year under consideration, the company has acquired majority equity interest in Patni Computer Systems Ltd. This acquisition constitutes a peculiar economic circumstance, which is bound to have its effect on the company's margin. In the absence of any reasonably accurate adjustments capable of being made, which would eliminate the effects of the acquisition on the margin of th....
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....by the said company cannot be compared with the assessee company which was also accepted by the orders of this Tribunal and on that basis only, the Ld.CIT(A) had excluded the said company for the purpose of computing the arms length price. We, therefore, accept the finding of the Ld.CIT(A) in excluding Acropetal Technologies Ltd. as not a comparable. 14. Insofar as the Accentia Technologies Ltd., the assessee contended that the said company is functionally different and their segment details were not available and the revenue recognition is different and the company has faced inorganic growth. 15. The assessee submitted that the said company is also providing high end services in the nature of KPO and also entered into healthcare receivables cycle management and high end consultancy to start-ups. 16. We have also perused the annual report in respect of Accentia Technologies Ltd. and in the annual report, it was clearly mentioned that the company is developing their own EMR software rather than depending on third party offerings and propose to market the same all over US. Further, in the annual report, it was mentioned that the company realised that the adoption of EMR base....
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....id company and correctly came to the conclusion that ICRA Technologies Ltd. is to be excluded from the list of comparables taken by the Ld.TPO. we do not find any error in the said finding given by the Ld.CIT(A) and therefore we are accepting the deletion of the said comparable by the Ld.CIT(A) as a correct one. 20. The next company which was deleted by the Ld.CIT(A) for the purpose of taking the same as comparables is M/s. Infosys BPO Ltd. 21. We have considered the submission made by the assessee that the said company is having a high brand value and they are market leader and therefore the said company could not be taken as a comparable. We also consider the submission made by the assessee that the said company is functionally dissimilar and it has huge brand value and the said company has acquired McCamish Systems LLC and their turnover is Rs. 1129 crores. 22. We have considered the above said arguments and the Ld.CIT(A) had considered all the reasons for excluding the said company including the turnover. The revenue had challenged the said finding of the Ld.CIT(A) on the ground that the exclusion based on the huge turnover is not correct and insofar as the other reaso....
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.... from the comparables. 27. In the present appeal, the revenue had challenged the said finding only on the ground that the fluctuation in margin could not be a reason to exclude the said company. We find that the other details available in the audit report as well as in the orders of the Tribunal, the said company is liable for exclusion not only based on the wide fluctuation profit margin but also on different reasons which includes the functional differentiation and the failure in the turnover filter and also failure in the export earning filter. The entire facts were considered by the Ld.CIT(A) and the said company was excluded on various factors. In such circumstances, the order of the Ld.CIT(A) in excluding the said company is in order. 28. The next company which was deleted by the Ld.CIT(A) for the purpose of taking the same as comparables is M/s. iGate Global Solutions Ltd. 29. We have considered the submission made by the assessee that the said company is functionally different since they are engaged in development of software and ITeS. Further, the assessee submitted that the said company had acquired major shares in Patni Computer Systems Ltd. and therefore there ....