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TMI Blog2015 (4) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... logy enabled back office support services to its associated enterprise as well as other companies in the group. The services provided by the assessee are in the nature of back office support which include financial processors, finance and accounting, presentations and web services and remote information technology infrastructure services, etc. The assessee is 100 per cent. export oriented undertaking being registered under the Software Technology Park of India (STPI) Scheme of Government of India. For the assessment year under dispute the assessee filed its return of income on October 31, 2007 declaring income of Rs. 35,99,243. During the scrutiny assessment proceeding the Assessing Officer noticed that the assessee had entered into international transaction with its associated enterprise referred the matter to the Transfer Pricing Officer for determining the arm's length price. During the financial year relevant to the assessment year under dispute the assessee earned revenue of Rs. 1,51,24,44,000 from international transaction of providing information technology enabled back office support service to its associated enterprise. In course of the proceeding before the Transfer P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d record our finding in respect of each of these companies. 8. Mold-Tek Technologies Ltd. The learned authorised representative objecting to the aforesaid company to be treated as comparable submitted that the mark-up on cost of 113 per cent. earned by Mold-Tek is abnormally high and extraordinary as compared to the mark-up on cost of other comparables. He submitted that even the Transfer Pricing Officer during the transfer pricing proceeding had issued a show-cause notice inviting the assessee's objection on rejecting Mold-Tek as comparable by stating that the company has a high margin. The learned authorised representative relying upon the decision of the Income-tax Appellate Tribunal, Hyderabad Bench in the case of Capital IQ Information Systems (India) P. Ltd. v. Deputy CIT I.T.A. No. 1961/ Hyd/2011 dated November 23, 2012 [2013] 25 ITR (Trib) 185 (Hyd) submitted that companies having extraordinarily high profit cannot be treated as comparable. He further submitted that apart from having a super normal profit Mold-Tek is also functionally different as it operates in two segments, viz., plastic division and information technology knowledge process outsourcing (KPO) divisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Objecting to the aforesaid company being treated as comparable, the learned authorised representative submitted that the company has shown extraordinarily high margin as it has earned operating margin of 83.93 per cent. In this context, the learned authorised representative relied upon a decision Capital IQ Information Systems (India) P. Ltd. v. Deputy CIT [2013] 25 ITR (Trib) 185 (Hyd). The learned authorised representative further submitted that the information obtained by the Transfer Pricing Officer under section 133(6) of the Act reveals that Eclerx is engaged in data analytics, operations, management and audits, and reconciliation services. The learned authorised representative referring to the annual report of Eclerx submitted that in its annual report Eclerx has categorically stated that it is not a BPO or an information technology off-shoring company and cannot be compared with such companies. On the other hand, it has stated that it is a knowledge process outsourcing (KPO) service provider in two business verticals, viz., financial services and retail and manufacturing. It was submitted that the aforesaid fact makes it clear that Eclerx is functionally non-comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the Transfer Pricing Officer that the aforesaid company was selected as a comparable without inviting objections of the assessee. The Transfer Pricing Officer is empowered under the provisions of the Act, to obtain information while selecting comparables. However, before utilising the information obtained he has to give a fair opportunity to the assessee to have his say in the matter. Since the Transfer Pricing Officer has not given any opportunity to the assessee to raise his objection with regard to the aforesaid company we are inclined to remit this issue to the file of the Assessing Officer who shall decide the acceptability or otherwise of the company as comparable after considering the assessee's objection. 17. Vishal Information Technologies Ltd. (now known as Coral Hub Ltd). The learned authorised representative arguing for exclusion of the aforesaid company from the list of comparables submitted that the activities of the aforesaid company, as revealed from the annual report, is providing agency services by way of outsourcing the services to the third party vendor and acting as an intermediary between the final customer and vendor. The company has made payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral 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" is not a suitable comparable to the taxpayer and hence needs to be dropped form the final list of comparables.' In case of Asst. CIT v. Maersk Global Service Centre (India) P. Ltd. I.T.A. No. 3774/Mum/2011 [2012] 14 ITR (Trib) 541 (Mumbai), the Income-tax Appellate Tribunal Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- 'In so far as the cases of Tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluded as a comparable as it is having a turnover of more than Rs. 200 crores, we are unable to accept the same in view of our reasoning given in case of Infosys BPO Ltd and Wipro Ltd. hereunder. However, so far as the other contention of the assessee with regard to not providing details to the assessee it is seen from the record that the Transfer Pricing Officer himself has admitted the fact relevant information was not provided to the assessee. It is further revealed from the observations made by the Transfer Pricing Officer in his order during the financial year relevant to the assessment year under dispute HCL Comnet had related party transactions of 21.52 per cent. of the revenue. In the case of Sony India P. Ltd. [2009] 315 ITR (AT) 150 (Delhi) the Income-tax Appellate Tribunal Delhi Bench held in the following manner (page 231) : "We are further of the view that an entity can be taken as uncon trolled if its related party transaction do not exceed 10 to 15 per cent. of the total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assess ment year 2004-08 dated June 30, 2011, wherein it was held that the financial results of these very companies, which have been taken as comparable in the cited case also, cannot be accepted as comparables, with the following observations : '17.5 We have considered the facts of the case and submissions made before us. The admitted facts in respect of Galaxy Commercial are that it is carrying on three lines of business and segment profit ability is not available. Obviously, overall profitability of the company cannot be applied in the case of the assessee as it will amount to comparing incomparable cases. Further, the business reputation of Rastogi group, owning Maple E. Solutions and Triton Corporation, is under serious indictment. They are also carrying on the business of data processing services and information technology enabled services apart form BPO services. In view of a question mark on the repu tation of the owner, albeit for earlier years, it would be unsafe to take their results for comparison of the profitability of the assessee. . . . Accordingly, it is held that non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29. The learned Departmental representative however submitted that the assessee's turnover is also equally high amounting to about Rs. 151 crores, hence, the upper limit of Rs. 200 crores will not apply to the facts of the present case. 30. We have considered submissions of the parties and perused the material on record. We find force in the contention of the learned Departmental representative that the upper limit of Rs. 200 crores will not apply uniformly while applying the turnover filter. The upper limit has to be fixed keeping in view the turnover of the assessee. It is seen from the record that during the assessment year under dispute the assessee was having a turnover of more than Rs. 151 crores. Therefore, the upper limit of Rs. 200 crores for excluding companies as comparables will not apply so far as the present assessment year is concerned. It is further found from record while the turnover of Infosys BPO Ltd. is Rs. 649.56 crores that of Wipro Ltd. (Seg.) is Rs. 939.78 crores. Hence, the turnover of the aforesaid two companies are within accepted limit, hence, they cannot be excluded on account of extraordinarily high turnover. We, therefore, reject the contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssues. The learned authorised representative while arguing on these grounds confined his submissions to selection of certain companies being treated as comparables. The companies being objected to are as under : 38. Eclerx Services Ltd. We have dealt with this company in I.T.A. No. 2106/Hyd/11 (supra), In view of our conclusions drawn therein in paragraph 13 of the order, we hold that this company cannot be treated as a comparable. 39. Infosys BPO Ltd. and Wipro Ltd.(Seg). The learned authorised representative sought for exclusion of these two companies as their turnover is more than Rs. 200 crores. However, the assessee's turnover for the impugned assessment year is Rs. 252.73 crores. Therefore, in view of our reasoning with regard to the aforesaid two companies in paragraph 30 of the order, we uphold the order of the Revenue authorities with regard to these two companies. 40. HCL Comnet Systems and Services Ltd. In view of our finding with regard to the aforesaid company in I.T.A. No.2106/Hyd/11 (supra), we remit this issue to the file of the Assessing Officer with identical directions. 41. Geneysis International Corporation Ltd. The learned authorised representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating expense. He submitted that the Transfer Pricing Officer in his order had stated that provision of doubtful debt has been taken into consideration only if it incurred on a regular basis especially for the last preceding years. The learned authorised representative in this context had submitted a workout of the composition of provisions of doubtful debts as a percentage of turnover of Geneysis for the preceding three years. The learned authorised representative relying upon a decision of the Income-tax Appellate Tribunal, Delhi Bench in the case of Sony India P. Ltd. v. Deputy CIT [2009] 315 ITR (AT) 150 (Delhi) in I.T.A. No. 1189/Del/2005, 819/Del/2007 and 820/Del/ 2007 and in the case of Trilogy E-Business Software India P. Ltd. v. Deputy CIT [2013] 23 ITR (Trib) 464 (Bang) submitted that Geneysis should not be taken as a comparable for determining the arm's length price. 42. The learned Departmental representative on the other hand supported the orders of the Revenue authorities on this issue. 43. We have heard the contentions of the parties and perused the material on record. On going through the annul report of Geneysis as well as other materials as submitted in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al IQ Information Systems (India) P. Ltd. v. Deputy CIT [2013] 25 ITR (Trib) 185 (Hyd), Stream International Services P. Ltd. v. Asst. DIT I.T.A. No. 8997/Mum/2010 [2013] 23 ITR (Trib) 70 (Mum) and ITO v. CRM Services India P. Ltd. I.T.A. No. 4068/Del/2009. The learned authorised representative further submitted that the annual report of the Accentia for the financial year 2007-08 further reveals that the said company is engaged in rendering information technology enabled services in the fields of medical transcription, billing and coding as well as undertaking development of software and its implementation. The revenue from software business as per the audited financial report for March 31, 2008 is 19 per cent. of total revenue. The annual report further revealed that the said company is engaged in product development also. Therefore, it is also not functionally comparable to the assessee. 45. On the other hand, the learned Departmental representative relied upon the orders of the Revenue authorities. 46. We have considered the rival submissions and perused the material on record. We find that in the case of Capital IQ Information Systems (India) P. Ltd. v. Deputy CIT [2013] 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Registrar of Companies on August 26, 2008. Thus, the effective date of the scheme of merger and demerger was August 26, 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.' On a careful consideration of the matter, we also agree with the aforesaid view of the Dispute Resolution Panel that extraordinary event like merger and demerger 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 Transfer Pricing Officer. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded." 47. The fact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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