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TMI Blog2015 (5) TMI 354X X X X Extracts X X X X X X X X Extracts X X X X ..... or earlier years, hence the financial results of these companies are distorted and accordingly cannot be relied upon. Mold-tek Technologies Limited is engaged in providing engineering consulting services as part of its IT operations. The Company has specifically categorized its IT operations as KPO in its annual report. The Company has also accepted in its reply u/s 133(6) that the company provides engineering design drawing and detailed structural engineering using 3D and 2D software’s. The Engineering design services provided by the company are high end in nature involving special knowledge and domain expertise and therefore, not functionally comparable with the assessee company which is engaged in providing low end ITES enabled call centre services. Therefore, we hold CIT (A) is justified in excluding this company from the final list of comparable. - ITA No. 6034/DEL/2012, ITA No. 5934/DEL/2012 - - - Dated:- 27-4-2015 - Shri J. S. Reddy And Shri George George K.,JJ. For the Appellant : Shri Arun Chhabra Ms Kanika Makkar, CAs For the Respondent : Shri Judy James, Standing Counsel DR ORDER Per George George K., JM: These are the cross appeals di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to select the comparables and arrived at twenty five comparable companies. The TPO adopted the current year s data to compute the margins of the comparables. After providing the working capital adjustment, profit level indicator (PLI) of the comparables was computed at 28.29%. Since the assessee margin was not within the permissible range, adjustment of ₹ 1,43,39,353/- was made to international transaction. The computation of the arm s length price done by the TPO reads as follows:- 25. Computation of Arms Length Price : The arithmetic mean of the Profit Level indicator is taken as the arms length margin (Please see Annexure E for details of computation of PLI of the comparables). Based on this, the arms length price of the IT enabled services rendered by you is computed as under : Arithmetic mean PLI : 30.07% Less: Working Capital adjustment (Annexure-F): 1.78% Adj. Arithmetic mean PLI : 28.29% Arms Length Price: Operating Cost Rs.115,688,589 Arms Length Margin 28.29% of the Operating Cost Arms Leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involving special knowledge and domain expertise and hence the company ought not to be compared to a low end ITES service provider like the Appellant engaged in providing call centre services for various industries. The above is supported by this company s own reply to the notice u/s 133(6). (Refer page 976-979 of the paper-book) The Appellant draws your attention to the ruling of the Hon ble Special Bench in the matter of 'Maersk Global Centres (India) Private Ltd vs ACIT (I .T.A. No.7466/Mum/2012) (Please refer page 692-694 of the paper-book). The relevant portion of the said ruling is produced here-in-under: In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itsAE. It is respectfully submitted that majority of the workforce of the Appellant comprises of graduates and undergraduates and the services provided by Appellant does not require any specialized knowledge or skills. In view of the above it is pleaded that this company be rejected. The Appellant s contentions are fortified by several rulings of the coordinate benches of the Hon ble ITAT. These rulings are produced here-in-under for the kind perusal of your honours: M/s. United Health Group Information v/s ACIT (ITA No. 6312/Del/2012) AY 2008-09 ITO vs. M/s. Knoah Solutions (P) Ltd. (ITA No.1407/Hyd/13) AY 2007-08 Para 8 (Page 705-706 of the paperbook) M/s. Capital IQ Information Systems (India ) Pvt. Ltd. (ITA No.124/Hyd/2014) AY 2009-10 Para 18.2 (Page 700-701 of paperbook ) Cognizant Technology Services Pvt. Ltd. Vs. ACIT (ITA.Nos. 2106 1864/Hyd/2011) AY 2007-08 2008-09 (Page 709-719 of the paperbook) Zavata India Private Limited Vs. The DCIT (ITA No.1781/Hyd/2011) AY 2007-08 (page 722-723 of the paperbook) C3i Support Services P. Ltd. Vs. ACITT (TA.No.2183/Hyd/2011) AY 2007-08 (page 737-738 of the paperbook) M/s. Excellence Data Research ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble bench that the DRP has itself rejected Vishal on account of functional differences particularly taking note of its low employee cost and outsourcing model. Your Honours attention is also invited to the recent decision of the Honble Delhi bench in case of Techbooks International Pvt. Ltd. Vs. ACIT Cir-1, ITA No.4990/Del/2011, Noida, AY 2007-08 Para 21-24, (page 854 of the paperbook),wherein, after a detailed analysis, Hon ble Bench has rejected VishaL as a comparable even though the assessee had initially included the same as a comparable company. The Tribunal took note of the low employee cost of Vishal at 3% as compared to 60% and the outsourced model of operation as signified by data entry charges. The said decision pertains to AY 2007-08 and is squarely applicable to the Appellant's case, whose wages/total cost ration stands at 58.01%. (Refer page no. 92 361 of the paper-book). Similar view has been held by Hon ble Delhi Bench in the case of Heartland Delhi Transcription Services Private Limited vs ITO Ward - 12(3)AY 2005-06 (ITA No. 6043/Del/2012) (Refer page 1320-1321 of paperbook ) wherein the bench has rejected Vishal on account of the fact that it has differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ( Triton )(Refer page 24 of Chart of Issues) The Appellant humbly submits that the promoters of these companies were involved in the fraud, albeit for earlier years. Hence the financial results of these companies may be distorted and accordingly cannot be relied upon. The above view is fortified by the following judicial precedents: M/s. Capital IQ Information Systems (India ) Pvt. Ltd. vs. DCIT (ITA No.1961/Hyd/2011) AY 2007-08 Para 19 (page 831-832 of the paperbook) ITO vs. CRM Services India (P) Ltd.(ITA No. 4068 (Del)/2009) AY 2006- 07 (page 889-891 of the paperbook) M/s.Stream International Services Pvt.Ltd vs. ACIT AY 2007-08 (ITA No. 8290/Mum/2011) (page 1351-1352 of the paperbook) M/s. Pentair Water India Pvt. Ltd. vs. ACIT (ITA NO. 02/PNJ/2013) and ACIT vs. M/s. Pentair Water India Pvt. Ltd. (ITA NO. 05 /PNJ/2013) AY 2006-07 Para 4.3.1 (i) (page 893 of the paperbook) M/s. IVY Comptech Pvt. Ltd. vs. The ACIT (ITA No. 1558/Hyd/2010) AY 2005-06 Para 7(b) (page 899 of the paperbook) M/s. Market Tools Research Pvt. Ltd. vs. DCIT ((ITA No.1150/Hyd/2011) AY 2005-06 Para 16 (page 902 of the paperbook) M/s. HSBC Electronic Data Processing Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es for the reason that it is providing high end services involving specialised knowledge and domain expertise and same cannot be compared with companies which are mainly engaged in providing low end services to group companies. The relevant finding of the Hon ble Tribunal read as follows :- In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals - financial services and retail and manufacturing. It is claimed to be engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent from assessee. Further, the Hon ble Tribunal in the case of Techbooks International Pvt. Ltd. vs. ACIT Cir-1, in ITA No.4990/Del/2011 in AY 2007-08 has also rejected Vishal as a comparable even though the assessee in that case had initially included the same as comparable company. The Tribunal held Vishal was having low employee cost of 3% in comparison to 60% of assessee in that case. In the relevant year assessee wages/total cost ratio stands at 58.01%. and therefore not functionally comparable with the assessee company. Moreover, Vishal is very high profit making company and operates on outsourcing model and hence, has different business model to that of assessee. Further, the CIT(A) in the subsequent year i.e AY 2008-09 also rejected the same from the list of comparable in the assessee s own case. Therefore, we accept the contention of the Ld. Counsel and direct for the exclusion of this company from the final list of comparables. (iii) Maple E Solutions Ltd. and Triton Corporation Ltd. The promoters of the company were involved in the fraud for earlier years, hence the financial results of these companies are distorted and accordingly cannot be relied upon. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits of plastic division the company has to pay tax. It is not uncommon to see such financial results where the tax exempt unit has extraordinary profit while the taxpaying unit suffers losses under the same management control. The extraordinary profits in the ITES segment reaching upto 113% for the FY 2006-07 is a pointer in this direction. In the subsequent audited accounts, this fact of ending the tax holiday for ITES segment is mentioned by the annual report and some corrective entries have been passed. The employee cost filter might not have been used by the TPO but in the presence of extraordinary deviation from the ratio of employee cost to sales of the appellant's case cannot be simply brushed. Aside. As submitted by the appellant, this ratio (Employee cost / Sales) is much higher in the case of the appellant and 7.6% in the case of Mold-Tek Technologies Ltd. By implication, either Mold-Tek Technologies Ltd. has employed larger capital against the man power to get the kind of productivity to generate profit of 113% or the employees are so extraordinary that they have accepted the lower wages and still work so hard for the company to generate that kind of profitability. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... signed detailed more than 4000 buildings (120,000 tons) of various complexities following various US/ Canadian national state codes. Our team has expertise ranging from the conventional design detailing tools like CAD/CAM/Stadd Pro to the contemporary software tools like X-Steel, SDS-2 and RISA. The respondent would like to draw your attention to the fact that the company witnessed certain extraordinary circumstances in the year. As evident from the annual report of the company for FY 2006-07, the company has acquired Cross Road Detailing Inc., an engineering services KPO in April 2007. Further, the company has plans to merge M/s. Teck Men Tools Private Limited, while at the same time it also plans to demerge its entire plastic packaging business into a separate business entity. Further, the company has witnessed exponential growth as evidenced by the following statement from the annual report: Your Company has maintained accelerated growth as envisaged in the previous report, both in terms of Revenues and Net Profits. Overall sales have gone up by 35.17% from ₹ 70.87 crore to ₹ 95.80 crore largely fuelled by growth of 204% in the IT (KPO) Division billi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... design services with specialization in civil, structural and mechanical engineering services. It is stated to have a strong team of skilled resources with world class resources and skill sets. It is also stated to have consistently helped the clients to cut down design and development costs of civil, structural, mechanical and plant design by 30-40% and delivered technologically superior outputs to match and exceed expectations. It is claimed to have in-house software development team, quality control training and trouble-shooting facilities. M/s Mold-Tek is also rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of Mold-Tek as well on its website, we are of the view that the said company is mainly involved in providing high-end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low-end services. . It is also pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition of Cross Road Detailing Inc., an engineering service KPO. Further as evidenced from the annual report of the company for FY 2007-08, the company gave effect to the above scheme of amalgamation and demerger with effect from October 2006 and the entire accounts of the company for FY 2006-07 were also revised. In the case of Toluna India Private Limited vs. ACIT ay 2007-08 (ITA No.5645/Del/2011), it was held that a company cannot be considered as comparable because of exceptional financial results due to merger/ demerger. 19. Further, the company Moldtek Technology is engaged in providing engineering consulting services as part of its IT operations. The Company has specifically categorized its IT operations as KPO in its annual report. The Company has also accepted in its reply u/s 133(6) that the company provides engineering design drawing and detailed structural engineering using 3D and 2D software s. The Engineering design services provided by the company are high end in nature involving special knowledge and domain expertise and therefore, not functionally comparable with the assessee company which is engaged in providing low end ITES enabled call centre services. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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