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TMI Blog2015 (8) TMI 607X X X X Extracts X X X X X X X X Extracts X X X X ..... poration Ltd., the Hyderabad Bench of the Tribunal in the case of Stream International Services P. Ltd. v. Asst. CIT (2014 (10) TMI 393 - ITAT MUMBAI ) in para 13(iii) at page-14 of the order held that the promoters of these two companies were involved in fraud for earlier years and hence the financial results of these companies are distorted and cannot be relied upon and in this regard relied on several decisions rendered by the various Benches of the Income-tax Appellate Tribunal. Respectfully following the same, we direct the aforesaid two companies be excluded from the list of comparable companies chosen by the Transfer Pricing Officer. Exclusion of the following four companies from the list of comparable companies by applying the employee cost to sales filter, viz., Asit C. Mehta Financial Services Ltd., (previously known as Nucleus Netsoft and GIS Ltd.), Informed Technologies Ltd., Vishal Information Technologies Ltd. (now known as Coral Hub Ltd.) and Accentia Technologies Ltd. - Held that:- In respect of the percentage of employee cost to turnover there is dispute in the case of Asit C. Mehta about the percentage of the employee cost to turnover. In respect of Asit C. Mehta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In our view the objections and the reasons given by the Transfer Pricing Officer for considering this company as a comparable are different and the objections raised by the assessee before the Transfer Pricing Officer were also different. On the facts as it transpired before the Transfer Pricing Officer and the arguments of the assessee before the Transfer Pricing Officer/Dispute Resolution Panel, we are of the view that this company was rightly regarded as comparable. Accurate Data Converters Ltd. - he request made by the assessee has to be accepted in view of the lack of opportunity provided by the Transfer Pricing Officer/Dispute Resolution Panel. Accordingly, the Transfer Pricing Officer/Assessing Officer is directed to furnish a copy of the annual report of this company to the assessee. The assessee will thereafter furnish his explanation as to whether this company can be considered as a comparable company or not. The Transfer Pricing Officer will thereafter decide the comparability of this company after affording an opportunity of being heard to this company. IServices India Ltd. - The Transfer Pricing Officer/Assessing Officer will obtain the annual report of the company f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,82,71,773 Operating profit to expenses 15.75% (*) excluding The associated enterprise, non-associated enterprise financial result of the company (as per the transfer pricing report) is as under : Particulars With AE With non-AE Total Operating income (*) 54,64,40,687 10,22,64,385 64,87,05,072 Operating expenses 46,55,99,540 9,48,33,759 56,04,33,299 Operating profits 8,08,41,147 74,30,626 8,82,71,773 Profit margin = operating profit/cost 17.36% 7.84% 15.75% The above segmental details are considered for transfer pricing analysis. 4. During the financial year 2006-07, the taxpayer entered into international transactions mainly in e-customer relationship manager (information technology enabled services). 5. International transactions (as mentioned in 92CE report) The following are the international transactions entered into by the taxpayer with its associated enterprises (AEs) as per the 3CB report and as per the reference received from the Assessing Officer. (Rs.) Services relating to e-customer relationship management 54,64,40,687 Reimbursement of telecom usage expenses 33,21,866 6. In this appeal we are concerned only with the computation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns Pvt. Ltd. 12.83 5 Appollo Health Street Ltd. -13.55 6 Asit C Mehta Financial Services Ltd. (Seg.) 24.21 7 Bodhtree Consulting Ltd. (Seg.) 29.58 8 Caliber Point Business Solutions Ltd. 21.26 9 Cosmic Global Ltd. 12.40 10 Datamatics Financial Services Ltd. (Seg.) 5.07 11 Eclerx Services Ltd. 89.33 12 Flextronics Software Systems Ltd. (Seg.) 8.62 13 Genesys International Corporation Ltd. 13.35 14 HCL Comnet Systems and Services Ltd. (Seg.) 44.99 15 ICRA Techno Analytics Ltd. (Seg.) 12.24 16 Informed Technologies India Ltd. 35.56 17 Infosys BPO Ltd. 28.78 18 IServices India Pvt. Ltd. 49.47 19 Maple E Solutions Ltd. 34.05 20 Mold-Tek Technologies Ltd. 113.49 21 R Systems International Ltd. (Seg.) 20.18 22 Spanco Ltd. (Seg.) (earlier known as Spanco Telesystems and Solutions Ltd.) 25.81 23 Triton Corp. Ltd. 34.93 24 Vishal Information Technologies Ltd. 51.19 25 Wipro Ltd. (Seg.) 29.70 26 Nittany Outsourcing Services Pvt. Ltd. 11.50 27 Accurate Data Converters Ltd. 50.68 Average 30.21 The Transfer Pricing Officer's working of turnover, related party transaction to sales, percentage of export sales to sales are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of the comparable companies chosen by the Transfer Pricing Officer are not comparable in the light of the decisions rendered by various Benches of the Tribunal in the case of similar information technology enabled services companies. The learned Departmental representative relied on the order of the Dispute Resolution Panel and made his submissions on some of the arguments advanced by learned counsel for the assessee. We will deal with each one of the comparables that are sought to be excluded. The assessee has also filed an additional ground of appeal which reads thus: "The learned Transfer Pricing Officer has in his fresh study, erred in selecting Accurate Data Converters P. Ltd., Accentia Technologies Ltd., Eclerx Services Ltd., Informed Technologies India Ltd., Maple eSolutions Ltd. and Triton Corporation Ltd. as comparable to the appellant despite the same failing to meet the legally acceptable criteria for comparability. The honourable Dispute Resolution Panel has also erred in confirming the order of the Transfer Pricing Officer in this regard. These companies should be rejected as comparables, notwithstanding that Triton Corporation Ltd. was earlier selected by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. Taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. For the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part." 12. In the light of the decision of the hon'ble Special Bench in the case of Quark Systems P. Ltd. (supra)we are of the view that the additional ground sought to be raised by the assessee has to be admitted and it has to be examined whether the claim made by the assessee in the additional ground can be sustained on merits or not. The assessee should not be precluded from raising contentions which will ultimately help in ascertaining the correct list of comparable companies. Moreover the assessee has objected to inclusion of the companies being chosen as comparables before the Dispute Resolution Panel on different parameters. What the assessee now seeks to do by way of additional ground is to seek exclusion of the comparable company mentioned in the additional ground on diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... list of comparable companies by applying the employee cost to sales filter, viz., Asit C. Mehta Financial Services Ltd., (previously known as Nucleus Netsoft and GIS Ltd.), Informed Technologies Ltd., Vishal Information Technologies Ltd. (now known as Coral Hub Ltd.) and Accentia Technologies Ltd. The employee cost filter is an accepted filter in the matter of choosing comparables. In the case of First Advantage Offshore Services P. Ltd., v. Deputy CIT IT (TP) A. No. 1086/Bang/2011 for the assessment year 2007-08 order dated April 30, 2013 in paragraph 35, this Tribunal has held that in information technology enabled services sector also the companies which has less than 25 per cent. of the sales as employee cost should not be selected for comparability analysis for determination of the arm's length price. 16. As far as the percentage of employees' cost to sales is concerned, the assessee has filed a chart showing the employee cost to sales in respect of the aforesaid four companies. The said chart is given as annexure-II to this order. In respect of the percentage of employee cost to turnover there is dispute in the case of Asit C. Mehta about the percentage of the emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is 13.70 per cent. The assessee has filed a chart before us showing related party transaction at 15.44 per cent. The same is given as annexure-III to this order. We therefore remand for fresh consideration by the Transfer Pricing Officer the related party transaction in the case of this company after affording an opportunity of being heard to the assessee. In the event of related party transaction being more than 15 per cent., the said company has to be excluded from the list of comparable companies. 18. With regard to (1) Eclerx Services Ltd. ; (2) Mold-Tek Technologies Ltd. (Seg.) at Sl. Nos. 11 and 20 of the list of comparable companies chosen by the Transfer Pricing Officer, being chosen as comparable companies, the Income-tax Appellate Tribunal, Bangalore Bench in the case of Symphony Marketing Solutions India P. Ltd. v. ITO in IT (TP) A No. 1316/Bang/2012 order dated August 14, 2013 [2013] 27 ITR (Trib) 753 (Bang) these companies were held to be not comparable with companies in information technology enabled services sector. The following were the relevant observations of the Tribunal : "5. Eclerx Services Ltd. 20. This company is listed at Sl. No. 11 in the list ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered as a comparable. The functional profile of this company is as follows : 'As per the annual report for the financial year 2007-08, the company primarily operates in two business segments : Plastic division : The plastic division is engaged in the manufacture of tube and oils, paints, pet products, consumer products, etc. The company demerged the said segment effective from April 1, 2007 and transferred the business unit to the Company Plastics Ltd. 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 information technology division (also referred to as the knowledge process outsourcing division by the company) of the company specialises in providing structural design and detailing services which can be categorised as structural engineering services. The structural engineering services provided by the information technology division of the company cannot be classified as falling with the scope and ambit of information technology enabled services. On the contrary, the said services would fall under the category of eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not comparables. As to whether the nature of services rendered by the assessee in the present case is similar to the one rendered by M/s. Maersk Global Centres (India) Pvt. Ltd., is an aspect which in our view will have to be looked into by the Transfer Pricing Officer/Assessing Officer. We accordingly remand the issue of deciding the comparability of the aforesaid two companies for fresh consideration in the light of the decisions referred to above. 20. The next company which was considered as comparable by the Transfer Pricing Officer/Assessing Officer is Bodhtree Consulting Ltd. (Seg). This company is listed at Sl. No. 7 of the list of comparables chosen by the Transfer Pricing Officer. The objection of the assessee in regard to choosing this company as a comparable was that this company is not in information technology enabled services, this company had made extraordinary profits, this company fails 75 per cent. information technology enabled services revenue filter, segmental results were obtained by the Transfer Pricing Officer by issue of notice under section 133(6) of the Act which were not available in public domain. 21. The Transfer Pricing Officer however held that seg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led services. The assessee did not dispute this fact before the Transfer Pricing Officer. The assessee took a plea of extraordinary profit due to hiving off of e-paper activity. The Transfer Pricing Officer however has demonstrated that the margin of data cleansing business alone was being considered for comparability and hence the plea of the assessee was not sustainable. The decisions referred to by learned counsel for the assessee are concerned, the facts as brought out by the Transfer Pricing Officer in his order are not discussed. In the case of NXP Semi Conductors India P. Ltd. v. Deputy CIT I. T. A. No. 1560/Bang/2012 [2015] 41 ITR (Trib) 23 (Bang) in its order the Tribunal at paragraphs 59 and 60 has held that the company profits are fluctuating and the same is owing to revenue recognition method followed by Bodhtree Ltd. The Tribunal also observed that Bodhtree Ltd. was into software development and not a pure information technology enabled services company. In our view the objections and the reasons given by the Transfer Pricing Officer for considering this company as a comparable are different and the objections raised by the assessee before the Transfer Pricing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispute Resolution Panel. Accordingly, the Transfer Pricing Officer/Assessing Officer is directed to furnish a copy of the annual report of this company to the assessee. The assessee will thereafter furnish his explanation as to whether this company can be considered as a comparable company or not. The Transfer Pricing Officer will thereafter decide the comparability of this company after affording an opportunity of being heard to this company. 29. The assessee seeks to challenge the action of the Transfer Pricing Officer in considering the IServices India Ltd., as a comparable. This company is listed at Sl. No. 18 of the list of comparables chosen by the Transfer Pricing Officer. For choosing this company as a comparable, the Transfer Pricing Officer has made the following observations : "33.18 IServices India P. Ltd. (operating profit/total cost for the financial year 2006-07-49.47 per cent.) The company was not part of the companies considered by the taxpayer in the accept/reject matrix given as Appendix-D to the transfer pricing report. However, the data of the company is available in Capitaline database. The annual report was not available for the financial year 2006 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e annual report of the company for the financial year 2006-07 and also furnish the assessee copies of the same together with the information obtained by the Transfer Pricing Officer pursuant to issue of notice under section 133(6) of the Act. The assessee will thereafter furnish its reply as to why this company should not be considered as a comparable company. The Transfer Pricing Officer/ Assessing Officer will thereafter decide the question of considering this company as a comparable company after affording opportunity of being heard to the assessee. 31. The assessee in the grounds of appeal before the Tribunal has also projected its grievance regarding the action of the learned Assessing Officer and the honourable Dispute Resolution Panel in excluding while computing deduction under section 10A of the Act, the telecommunication charges of ₹ 2,39,12,226 on the ground that these expenses are attributable to delivery of software outside India from the export turnover. It is the plea of the assessee that at all times during the relevant previous year, it was engaged in development of computer software and not in rendering any technical services. Without prejudice to its conte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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