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TMI Blog2015 (6) TMI 805X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and in circumstances of the case in making an adjustment amounting to Rs. 3,36,97,885/- to the value of international transactions entered into by the Appellant with its Associated Enterprise in respect of provision of Information Technology Enabled Services ["ITES"], 2. Rejection of benchmarking done by the Appellant 2.1 The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in rejecting the benchmarking approach and methodology followed by the Appellant for benchmarking the international transaction of provision of ITES. 3. Binding directions of the DRP not followed 3.1 The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in not following the binding directions of the DRP with respect to exclusion of Crossdomain Solutions Limited from list of comparable companies. 4. Erroneous selection of comparable companies The learned ACIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in selecting the following comparable companies. 4.1 Accentia Technologies Ltd. 4.2 Coral Hub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin of the said comparables selected by the TPO. 4. The Ld. Departmental Representative for the Revenue placed reliance on the orders of the authorities below. 5. We have heard the rival contentions and perused the record. The assessee in the present appeal has raised multiple grounds of appeal but the grievance of the assessee is with regard to an addition of Rs. 3,36,97,885/- made to the value of international transaction entered into by the assessee with its associated enterprise in respect of Provision of Information Technology Enabled Services (in short "ITES"). 6. Briefly, in the facts of the case the assessee had rendered ITES to its associated enterprise i.e. Apatara Inc.. During the year under consideration, assessee had provided E-learning and content management services (including IT enabled services) to its associated enterprises. The dispute arising in the present appeal is with regard to determination of arm's length of the aforesaid international transactions of providing IT enabled services to its associated enterprise. Admittedly, the assessee had applied Transactional Net Margin (TNM) Method for the determination that the services provided to its associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08-09 vide order dated 02.02.2015 had deliberated upon the aforesaid issue which is raised in the present appeal. The issue before the Tribunal was in respect of exclusion of four comparables (i) Accentia Technologies Ltd.; (ii) Coral Hub Ltd.; (iii) Cosmic Global Ltd.; (iv) Crossdomain Solutions Ltd. and also in respect of inclusion of two comparables in the final set of comparables. However before us, in the year under appeal the limited issue is in relation to exclusion of four comparables and there is no issue raised in respect of inclusion of any comparables. 10. The first aspect of the issue is that the TPO had selected final set of comparables which have been referred to by us in the paras hereinabove. From the perusal of the said data, it appears that the TPO had selected M/s Coral Hub Ltd. (formerly known as Vishal Information Technology Ltd.) as a comparable while determining the PLI of the comparables for the year under consideration. The Tribunal in assessee's own case for assessment year 2008-09 (supra) vide paras 16 to 18 has given a finding that Coral Hub Ltd. could not be selected as a comparable. The Relevant findings of the Tribunal are as under :- "16. The seco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, as per the discussion in paras 14 to 17 of the order found it fit to exclude the said concern from the final set of comparables. The following discussion is relevant :- "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 cited case was carrying out the work by itself. In the instant case of the assessee also the assessee was carrying out its work by itself whereas in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9, 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' is not a suitable comparable to the taxpayer and hence needs to be dropped from the final list of comparables." In case of Maersk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. Applying the aforesaid decisions, we are of the view that Coral Hubs Ltd. cannot be considered as a comparable." 11. Further, the Tribunal in the case of PTC Software (India) Private Limited vs. DCIT in ITA No.336/PN/2014 relating to assessment year 2009-10 vide order dated 31.10.2014 had also rejected M/s Coral Hub Ltd. (formerly known as Vishal Information Technologies Ltd.) as a comparable. The relevant finding of the Tribunal vide order dated 31.10.2014 (supra) is as under :- "45. We have heard the rival contentions and perused the record. In the TP study carried out by the TPO in the ITES segments, fresh search criteria were applied by the TPO and list of comparables which were not selected by the assessee were picked up in the TP study and the margins of the said comparables were applied to determine the arm's length price of the transactions of the assessee in ITES segments. The assessee was aggrieved by the selection of the said comparables and the plea of the assessee was that in case said comparables were not included in the TP study, the margins shown by the assessee would be at arm's length. The first comparable referred to by the learned Authorized Representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the same is not includible in the list of comparables so as to avoid skewing of the comparability analysis. On the other hand, the stand of the Revenue as brought out by the TPO in para 6.9.6. of the order is to the effect that the said concern being categorized as an IT-Enabled services concern, the same is liable to be included. 31. We have carefully considered the rival submissions on this aspect. At the outset, we may refer to page 810 of the Paper book, wherein the Notes to Accounts for the year ended 31.3.2007 of the said concern have been placed. As per the available information, the said concern has related party transactions as reported by the concern at para 7 of the said Notes at 86.92%, which breaches the RPT filter. Furthermore, the functional profile of the said concern brought out by the assessee also reveals differentiation in the activity profile. The TPO, in our view, has not appreciated the qualitative difference in the functions performed by the said concern as sought out to be brought out by the assessee. Considering the aforesaid, we therefore, find that the assessee was justified in ascertaining that the said concern be excluded from the list of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re it is to be considered as a comparable. Before us, the Ld. Representative for the assessee has reiterated the submissions put-forth before the TPO in order to justify exclusion of the said concern from the list of comparables. In particularly, it has been pointed out that for the very same assessment year, the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. vs. ITO, (2013) 38 taxmann.com 55 (Bang.) has excluded the said concern from the list of comparables in a similar situation following the decision of the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited vs. DCIT, (2013) 32 taxmann.com 21 (Hyd.). 15. We have considered the submissions of the Ld. Representative for the assessee and also the stand of the Revenue as emerging from the order of the TPO. In our view, the ratio laid down by the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) and by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) is squarely applicable to the present case also. The aforesaid Benches of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is Cosmic Global Ltd.. The assessee has contended before the TPO that the said concern needs to be rejected on the ground that it was engaged in BPO and Translation services whereas assessee was an ITES provider, and therefore concern was functionally dissimilar. However, the TPO rejected the pleas of the assessee and considered the said concern as a comparable on the ground that export income of the said concern was more than 50%. 22. Before us, Ld. Representative for the assessee referred to the objections raised before the DRP to point out that the said concern was liable to be excluded from the final set of comparables. Firstly, it is pointed out that the said concern was offering Accounts processing services and transcription services and was not comparable to the activities of the assessee as the said concern was into BPO and Translation services. It was also pointed out by referring to the website of the said concern that it was engaged in the diversified business activity. It was also pointed out that though the activities of the said concern are in medical transcription, consultancy, translation and Accounts BPO services but there was no segmental informatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on employee costs would be low in comparison to the expenditure incurred on outsourcing. Ostensibly, where IT enabled services are outsourced to a third party vendor then the margin derived by the said concern would be attributable to services rendered by the outsourced vendor. Per contra, where IT enabled services are being rendered by a concern through its own employees, the margins from rendering of services by the said concern would be attributable to its own employees. Obviously, the level of margins in the two business models would not be comparable. The Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) has held that concerns who act as intermediateries having outsourced it activity cannot be said to be comparable with a concern who is rendering services through its own employees. The said proposition has also been upheld by the Hyderabad Bench of the Tribunal in the case of Brigade Global Services Private Limited (supra). Having regard to the aforesaid discussion, in our view, the said concern is not a good comparable to be included for the purposes of comparability analysis as it operates under a different business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was that the company had outsourced its vendor and was making high vendor payments as compared to the sales and hence was not comparable. While adjudicating the exclusion of M/s. Vishal Information Technologies Ltd., we have in paras hereinabove already considered this aspect of the companies outsourcing to vendors and held M/s. Vishal Information Technologies Ltd. to be not functionally comparable. Following the same parity of reasoning, we hold that M/s. Cosmic Global Ltd. is not functionally comparable." 18. Apart from the decision in the case of PTC Software (India) Private Limited (supra), the decision of Hyderabad Bench of the Tribunal in the case of M/s Capital IQ Information Systems (India) Pvt. Ltd. vs. Addl.CIT vide ITA No.124/Hyd/2014 dated 31.07.2014 has also been relied upon by the assessee to justify the exclusion of M/s Cosmic Global Ltd. from the final set of comparables. The Hyderabad Bench of the Tribunal considered an earlier decision of the Delhi Bench of the Tribunal in the case of M/s Mercer Consulting (India) P. Ltd. vs. DCIT vide ITA No.966/Del/2014 dated 06.06.2014 wherein also the said concern was found to be incomparable with an ITES provider. The fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment. 13.3. However, we find this case to incomparable on the alternative argument advanced by the Id. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs. 27.76 lacs. We have discussed this aspect above in the context of CG-VAK's case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs. 86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs. 27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables. " In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons." 19. The afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er (KPO) and not a simple business process outsourcing services provider. Before the DRP, it was also contended that the said concern was engaged in high end KPO services which varies from a routine low end ITES provider in terms of skill set used and nature of services provided. It was also contended that the said concern has developed products for effectively servicing its customers and the same was entirely different than that of the assessee's business of rendering routine IT enabled services. At the time of hearing before us, the Ld. Representative for the assessee has referred to the following Tabulation which brings out the difference between e-learning activities carried out by the assessee and the KPO activities carried out by the said concern :- E-learning KPO The assessee provides low-end IT enabled services in the form of e-learning solutions. KPO is a form of outsourcing, in which knowledge-related and information-related work is carried out by the service providers. E-learning solutions services provided by the assessee are not very complex in nature and thus do not require highly skilled professionals to perform the functions. Unlike the outsourcing of manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore on an entity level the said concern could not be compared to a normal ITES provider. In our view, following the decision of the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) which was also followed by the Hyderabad Bench of the Tribunal in the case of Market Tools Research Pvt. Ltd. vs. ACIT (ITA No.1811/Hyd/2012 dated 24.10.2013, the aforesaid concern is liable to be excluded from the list of comparables." 20. Further, the Tribunal in BNY Mellon International Operations (India) Private Limited vs. DCIT (supra), in assessment year 2009-10 had excluded the said concern as comparable by observing as under :- "12. Another plea raised by the assessee is for exclusion of Crossdomain Solutions Ltd. from the final set of comparables. In this regard, assessee canvassed before the TPO that the said concern was functionally not comparable to the activity of IT enabled services being carried out by the assessee. It was pointed out by the assessee before the TPO that the said concern was involved in various activities which involved outsourcing, human resources, insurance, healthcare/accounting and consulting, business excellence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plea for exclusion of Crossdomain Solutions Ltd. from the final set of comparables. We hold so." 21. The business activity carried on by the said comparable being at variance with business of the assessee before us and following the parity of reasoning laid down by the Tribunal vide various orders of different assessees, we hold that the said comparable is to be excluded from the final set of comparables. Following the same parity of reasoning, we hold that M/s Crossdomain Solutions Ltd. is to be excluded from the final set of comparables. 22. The Assessing Officer is thus directed to re-compute the margin of the comparables after excluding the four concerns i.e. (i) Coral Hub Ltd.; (ii) Accentia Technologies Ltd.; (iii) Cosmic Global Ltd.; and, (iv) Crossdomain Solutions Ltd. and determine the arm's length price of the international transactions in the hands of the assessee. 23. Apart from making submissions with regard to the ground of appeal No.4 no other plea has been raised by the assessee in respect of other grounds of appeal and hence grounds of appeal raised by the assessee are partly allowed. 24. The ground of appeal No.8 raised by the assessee against the levy of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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