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TMI Blog2014 (2) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... rency for travelling and internet connection charges – Held that:- The decision in CIT v. Tata EIxsi Ltd. [2011 (8) TMI 782 - KARNATAKA HIGH COURT] followed - while computing deduction under section 10A of Act, expenditure incurred by the assessee, if excluded from the export turnover should also be excluded from the total turnover – the AO is directed to reduce the expenses incurred for travelling and internet connection charges from the export turnover as well as the total turnover, while computing deduction u/s. 10A of the Act – Decided in favour of Assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... parable companies chosen by the assessee as comparable. With regard to the other 7 companies, the TPO rejected the claim of the assessee that those companies were comparable with that of the assessee. The TPO finally proposed 18 more comparables and despite objection by the assessee with regard to its comparability, adopted them as comparable companies. The final set of 20 comparables chosen by the TPO and their arithmetic mean of net profit margins on cost of those comparable was as follows:- Sl.No. Name of the company OP/TC % 1 Accentia Technologies Ltd. (Seg.) 41.77 2 AcropetalTechnologies Ltd. (Seg.) 35.30 3 Aditya Birla Minacs Worldwise Limited (Earlier known as Transworks Information Services Ltd.) - 4.00 4 Asit C Mehta Financial Services Ltd. (Seg.) 9.42 5 Caliber Point Business Solutions Ltd. 10.97 6 Coral Hubs Ltd. (Earlier known as Vishal Information Technologies Ltd.) 50.68 7 Cosmic Global Ltd. 23.30 8 Crossdomain Solutions Ltd. 27.03 9 Datamatics Financial Services Ltd. (Seg.) 29.11 10 e4e Healthcare Solutions Ltd. (Formerly known as Nittany Outsourcing Services Pvt. Ltd.) 18.54 11 Eclerx Services Ltd. 58.80 12 Genesys Internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, relied on the order of the TPO and the directions of the DRP, wherein the DRP has given reasons as to why the objections of the assessee to adopt comparable proposed by the TPO should not accepted. We will deal with these objections while we take up the individual comparable companies for consideration. (1) Accentia Technologies Ltd. (Seg.) 10. This was considered as a comparable by the TPO and listed at Sl.No.1 of the comparable companies chosen by the TPO. The ld. counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was draw to the annual report of this company for the A.Y. 2007- 08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India (P.) Ltd. v. Dy. CIT[2013] 32 taxmann.com (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 providin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger." 11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This 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.' 11. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rformed by the Assessee are routine low end ITES functions. We therefore hold that this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPO]. (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 this comparable, we find that the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd in ITA No.3774/Mum/2011 by order dt.9.11.2011 has held that since Vishal Information Technologies Ltd is outsourcing most of its work it has to be excluded from the list whereas the assessee in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand (POD), wherein it prints upon clients request, concluded as follows- "18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost 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. (4) Crossdomain Solutions Ltd. 18. This company was considered as a comparable and listed at Sl.No.8 of the comparables chosen by the TPO. It is the stand of the assessee that this company is not functionally comparable. As observed in the case of Coral Hubs Ltd., the TPO rejected the plea of the assessee on the basis of a non-existent TP order passed for the A.Y. 2007-08. It is seen that the business profile of this company is re-engineered payroll service. This company is also engaged in the development of information systems. These activities are totally different from the activities of the assessee which perform very limited/low end functions back office services. The review and business functions of Cross Domain is as follows:-- "With a decade of experience in Payroll Outsourcing, Crossdomain has created a re-engineered payroll service EFFIPAY - that processes and delivers accurate payroll to clients with headcount up to 1000 employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that that the concerned company is engaged in providing Knowledge Process Outsourcing(KPO) Services. 15. On considering the objections of the assessee in relation to this company, we accept the contention of the assessee that this company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, which is distinct from the nature of services provided by the assessee." 21. We are of the view that in the light of the decision of the Hyderabad Bench referred to above, this company cannot be regarded as a comparable for the reason that it was functionally different. (6) Genesys International Corporation Ltd. 22. This company is listed at Sl. No.12 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the stand of the assessee has been that this company is functionally not comparable and that it has a different employee skill set and that this company performs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d involves the contracting of the operations and responsibilities of specific business functions or process to a third party services provider. Often business processes outsourcing are information technology based and referred to as ITES-BPO. KPO is one of the sub-segment of the BPO industry. It involves outsourcing of core information related business activities which are competitively important or form an integral part of a company's value chain. It thus requires advanced analytical and technical skills as well as a high degree of specialist expertise. The KPO services include all kinds of research and information gathering. Thus it can be seen that even though both BPO and KPO are offering information Technology based services, the skill and expertise and may be even the tools required are different which may result in different economic results of both the segments. Thus, in such circumstances, we are of the opinion that they cannot be compared with each other and have to be excluded from the list of comparables." 23. It is thus clear from the aforesaid decision of the Tribunal that among the ITES companies there is a hierarchy in terms of skill required to provide services. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of tube & oils, paints, pet products, consumer products, etc. The company demerged the said segment effective 1 April, 2007 and transferred the business unit to the Company Plastics Lt. The extract from the annual report confirms the fact that the Company had restructured its operations resulting in demerging the plastic segment business. Information Technology (IT) division: The IT division (also referred to as the KPO division by the company) of the company specializes in providing structural design and detailing services which can be categorized as structural engineering services. The structural engineering services provided by the IT division of the company cannot be classified as falling with the scope and ambit of ITES services. On the contrary, the said services would fall under the category of engineering services. Excerpts from the Annual Report of the company Page 10 of the Annual Report for the FY 2007-08 contains the following observation regarding the KPO division of the Company: The Company has achieved about 56.49% growth in 2007-08 to register a turnover of Rs.17.86 crore. The company having established its credentials in structural engineering services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter exclusion of some of the comparable companies chosen by the TPO for reasons set out in the earlier paragraphs). Therefore no adjustment to ALP is called for. We therefore hold that the addition sustained by the DRP deserves to be deleted and is accordingly directed to be deleted. We may also add that arguments were made on market risk adjustments and also working capital adjustment. We have not dealt with those arguments for the reason that on the basis of comparability, the arithmetic mean of the comparables is less than the margin of the assessee. 29. Grounds 3.1 to 3.3 raised by the assessee is with regard to the action of the revenue authorities in excluding expenses incurred in foreign currency comprising of a sum of Rs.39,55,638 on account of foreign currency expenses incurred in travelling and a sum of Rs.17,66,175 on account of internet connection charges, from the export turnover while computing deduction u/s. 10A of the Act. As a result of the action of the AO the deduction u/s.10A of the Act was allowed at a lesser sum than what was claimed by the Assessee. The Plea of the Assessee is that the aforesaid expenditure need not be excluded from the export turnover as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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