2014 (9) TMI 126 - AT - Income Tax

Transfer pricing adjustment - Selection of comparables - Infosys B P O Ltd. Huge difference in turnover - Held that - The contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee s turnover is about ₹ 42.06 crores, as against turnover of ₹ 1016 crores of the Infosys is accepted - other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys BPO is functionally not similar to that of assessee - Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, because of its big brand value this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis the AO is directed to exclude this company. Genesys International Ltd. Eclerx Services Ltd. - Functionally different unit Held that - Following the decision in M/s. Mercer Consulting (India) Ltd. V/s DCIT 2014 (7) TMI 715 - ITAT DELHI - geospatial services means the services relating to the relative position of things on the earth s surface - These basically include 3D mapping, Navigation maps, Image processing, Cadastral mapping, etc. If we take into account the nature of services provided by the assessee, being financial and retirement security, health, productivity of employees and employment relationships and then try to compare them with those rendered by Genesys, it is manifested that both are totally incomparable - there is a vast difference which make one quite distinct from the other - In view of such functional incomparability between assessee and Genesys, this company cannot be treated as comparable Eclerx Services is involved in diverse nature of services, and there was no segmental data for diversified service port folio - the company can be considered as KPO and we are of the opinion that this company is not comparable to assessee s services - the AO is directed to exclude this company. Cosmic Global Ltd. Held that - Following the decision in M/s. Mercer Consulting (India) Ltd. V/s DCIT 2014 (7) TMI 715 - ITAT DELHI - Outsourcing charges constitute 57.31% of the total operating costs - The entire outsourcing is confined to Translation charges paid at ₹ 3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune of ₹ 6.99 crore - If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO - this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment the AO is directed to exclude this company. Acropetal Technologies Ltd. - R&D activity and developing sophisticated delivery system Held that - The company is involved in engineering design services and has products also, which makes it functionally not comparable - Even at the segmental level, it provides engineering design services, which was considered as high end relying upon Hyundai Motors India Engineering P. Ltd. Versus The ITO, Ward 2(2), Hyderabad 2014 (3) TMI 680 - ITAT HYDERABAD the AO is directed to exclude this company. Accentia Technologies Limited. different business strategies Held that - This company operates in a different business strategy of acquiring companies for inorganic growth as its strategy - on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded - the acquisition of some companies by that company may have impact on the profit relying upon M/s. Mercer Consulting (India) Ltd. V/s DCIT 2014 (7) TMI 715 - ITAT DELHI - the AO is directed to exclude this company. Crossdomain solutions P. Ltd. Held that - The Annual Report and most of the Revenue of this company is from services only - Company is in the pay roll service activity - the company is functionally similar to the activities of the assessee company which is in the ITES field exclusion of this company on the basis of functional dissimilarity cannot be granted - the AO/TPO is directed to examine the variation in Revenue between the information in Annual Report and the figures adopted by the TPO. Exclusion of internet expenses from the export turnover Computation of deduction u/s 10A Held that - Following the decision in The Commissioner of Income Tax Versus M/s. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT - communication charges, though have to be excluded from the export turnover for the purpose of computing deduction u/s 10A of the Act, it should also be excluded from the total turnover - the AO is directed to compute the deduction u/s 10A, after reducing the communication expenses both from the export turnover as well as total turnover Decided partly in favour of Assessee. Setting off of brought forward business losses Held that - Following the decision in Assistant Commissioner Of Income-tax, Circle - 4, Ahmedabad. Versus Goldmine Shares And Finance (P.) Limited 2008 (4) TMI 405 - ITAT AHMEDABAD - if brought forward losses pertains to the undertaking which was claiming the deduction u/s 10A, even if they are set off against other income in respective years, the same should be notionally set off against the income of this year - the AO is directed to give an opportunity to the assessee and examine the brought forward losses issue, and then make the disallowance, if any Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Exclusion of Internet Expenses from Export Turnover for S.10A Deduction
3. Setting Off of Brought Forward Business Losses for S.10A Deduction

Detailed Analysis:

1. Transfer Pricing Adjustments:
The primary issue in this appeal is the Transfer Pricing (TP) adjustments made by the Assessing Officer (AO)/Transfer Pricing Officer (TPO). The assessee's arguments focused on the selection of comparables used by the TPO in the TP order. The TPO had included twelve companies as comparables, determining an Arithmetic Mean Profit Level Indicator (PLI) of 27.42%, which was later adjusted to 25.37% after a working capital adjustment. This resulted in a suggested TP adjustment of Rs. 4,85,12,912 under S.92CA. The assessee objected to seven of these comparables, arguing functional dissimilarity and other factors.

(1) Infosys BPO Ltd.:
The assessee contended that Infosys BPO Ltd. is a giant in its field with a significant brand value and a turnover of Rs. 1016 crores compared to the assessee's Rs. 42.06 crores. The Tribunal agreed, citing functional dissimilarity and the company's significant brand value, and directed the exclusion of Infosys BPO Ltd. as a comparable.

(2) Genesys International Ltd.:
The assessee argued that Genesys International Ltd. operates in geospatial services, which are highly technical and not comparable to the assessee's services. The Tribunal, referencing a similar case (M/s. Mercer Consulting (India) Ltd.), agreed that there is a vast functional difference and directed the exclusion of Genesys International Ltd.

(3) Eclerx Services Ltd.:
The assessee claimed Eclerx Services Ltd. is involved in consultancy and advisory services, which are functionally dissimilar to the assessee's ITES services. The Tribunal agreed, noting the diverse nature of services provided by Eclerx and the lack of segmental data, and directed its exclusion.

(4) Cosmic Global Ltd.:
The assessee objected to Cosmic Global Ltd. due to its significant outsourcing costs and low employee costs. The Tribunal, referencing the Mercer Consulting case, agreed that the low revenue from the relevant segment and high outsourcing costs rendered it incomparable, and directed its exclusion.

(5) Acropetal Technologies Ltd. (Seg.):
The assessee argued that Acropetal Technologies Ltd. is involved in high-end engineering design services and has products in its inventory, making it functionally dissimilar. The Tribunal agreed, noting the company's involvement in high-end services and lack of proper segmental data, and directed its exclusion.

(6) Accentia Technologies Limited:
The assessee contended that Accentia Technologies Limited's profits were influenced by extraordinary events, such as acquisitions. The Tribunal agreed, noting the impact of inorganic growth strategies on profits, and directed its exclusion.

(7) Crossdomain Solutions P. Ltd.:
The assessee raised objections based on the principles of natural justice and discrepancies in revenue figures. The Tribunal found the company functionally similar but directed the AO/TPO to re-examine the revenue figures and work out the PLI after giving the assessee an opportunity to present its objections.

2. Exclusion of Internet Expenses from Export Turnover for S.10A Deduction:
The assessee argued that internet expenses should not be excluded from export turnover for S.10A deduction purposes. The Tribunal, referencing the Bombay High Court's decision in Gemplus Jewellery and the Special Bench's decision in Sak Soft Ltd., agreed that communication expenses should be excluded from both export turnover and total turnover. The AO was directed to recompute the deduction accordingly.

3. Setting Off of Brought Forward Business Losses for S.10A Deduction:
The assessee contended that the AO should not have set off brought forward business losses before allowing the S.10A deduction. The Tribunal noted that as per law, brought forward losses of the unit claiming S.10A deduction must be set off before arriving at the deduction. The AO was directed to examine the brought forward losses issue after giving the assessee an opportunity to present its contentions.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the exclusion of certain comparables for TP adjustments, the recomputation of S.10A deduction after excluding communication expenses from both export and total turnover, and the re-examination of the brought forward business losses issue.