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TMI Blog2015 (10) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... een 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]. Coral Hubs Ltd. cannot be considered as a comparable - It may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable on the basis of detailed discussion in the TP order for the A.Y. 2007-08. In fact in A.Y. 2007-08, there was no determination of ALP and therefore there was no occasion for any order being passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library & Print on Demand in F.Y. 2007-08. Crossdomain Solutions Ltd. - 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 business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has prayed that the foreign exchange loss should also be added to the total turnover and export turnover as against the action of the AO in excluding the said loss only from the Export turnover following the decision in the case of TATA ELXSI (supra) of the Hon’ble Karnataka High Court. We held that the said loss should be excluded both from ETO and TTO. We hold and direct accordingly. - Decided in favour of assessee - IT(TP)A No.1678/Bang/2012 - - - Dated:- 4-9-2015 - SHRI N.V VASUDEVAN, JUDICIAL MEMBER AND SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Appellant : Shri Ajit Kumar Jain, CA For The Respondent : Smt. Neera Malhotra, CIT ORDER PER SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER : This appeal by the assessee is against the order dated 22.10.2012 passed by the Circle-11(3), Bangalore u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [hereinafter referred to as the Act in short ] relating to assessment year 2007-08. 2. The grounds of appeal filed by the assessee are as under: 1. The assessment order dated Oct 22, 2012 passed by the learned AO pursuant to the directions passed by the Hon ble Dispute Resolution Panel (DRP) is not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatements, of the comparable companies. 8. The Hon ble DRP and the learned AO have erred in upholding the action of the TPO in computing the operating margins of the comparable companies and the appellant with certain factual errors and ignoring of certain items which ought to have been considered as operating or non-operating items, as the case may be. 9. The Hon ble DRP and the learned AO have erred in upholding the action of the TPO in not accepting the working capital and risk adjustment, as claimed by the appellant. 10. The Hon ble DRP and the learned AO have erred in upholding the adjsutemtn made by the TPO without considering the upper range of 5 percent from the value of the international transaction, as allowed under the Act and the Income-tax Rules, 1962 (Rules). 11. The learned AO and the Hon ble DRP have erred in law and on facts n re-computing the relief u/s 10A of the Act at ₹ 46,96,88,074/- as against the amount of ₹ 50,10,42,467/- claimed by the appellant in its return of income. 12. The Hon ble DRP has erred in law and on facts in upholding the action of the AO in holding that the foreing currency expenditure was incurred b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver. Therefore according to the assessee rulings should equally apply to its case as well and the quantum of foreign exchange losses should not have been added back to the total turnover. In the alternative, the learned AO should have also added the same to the quantum of export turnover. Therefore, according to the assessee, the exchange losses should not have been added back to the total turnover. The assessee has prayed for admission of addl. Grounds. 5. We have considered the submission of the learned counsel for the assessee for admission of the additional ground and are of the view that the additional ground should be admitted for adjudication. The facts necessary for adjudication of the additional ground are already available on record. Keeping in view of the Hon ble Supreme Court in the case of NTPC 229 ITR 383 (SC) we admit the additional ground for adjudication. 6. We shall now take up for consideration Ground no. 1 to 10 raised by the assessee. These grounds relate to determination of Arm s Length Price (ALP) in respect of an international transaction entered into by the assessee with its Associated Enterprises (AE) u/s 92 of the Act. M/s Global-e Business Operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identified 19 comparables in the TP study out of which TPO accepted 7 comparables as listed below: Sl No. Name of the comparable company Operating Margin to Cost (FY 2007-08) 1 Caliber Point Business Solutions Ltd 10.97 2 Cosmic Global Ltd 23.30 3 Spanco Ltd (Seg.) (Earlier known as Spanco Telesystems Solutions Ltd) 8.81 4 R Systems International Ltd(Seg.) 4.30 5 Genesys International Corporations Ltd. 47.40 6 Datamatics Financial Services Ltd (Seg.) 29.11 7 Allsec Technologies Ltd., -13.29 11. The TPO added 13 more comparables and final set of comparables was considered by TPO, which are: Sl.No. Name of the company OP/TC % 1 Accentia Technologies Ltd (Seg.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24.75% Less: Working capital adjustment (Annexure-G) : -1.15% Adj. Arithmetic mean PLI : 25.9% Arm s Length Price: Operating Cost Rs. ₹ 5611497201/-* Arms Arms Length Margin 25.9% of the Operating cost Arms Length Price (ALP) @125.9% Rs.7064874976/- *excluding Exchange loss, financial expenses Price Received vis- -vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length as under: Arms Length Price (ALP) @125.9% of operating Cost Rs.7064874976/- Price charged in the international transactions Rs.6153468919/- Shortfall being adjustment u/s 92CA ₹ 911406057/- The above shortfall of ₹ 911406057/- was treated as transfer pricing adjustment u/s 92CA in the ITES segment. 14. The DRP confirmed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner- 17.5. In addition to the above, the Director's Report of the company for the FY 2007-08 revealed the merger and the demerger. A company known as Techmen Tools Pvt. Ltd. had amalgamated with Moldtek Technologies Ltd. with effect form 1st October, 2006. There was a de-merger of Plastic Division of the company and the resulting company is known as Moldtek Plastics Limited. The de-merger from the Moldtek Technologies took place with effect from 1st April, 2007. The merger and the de-merger needed the approval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Mold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strategies for customer acquisition, devising customer retention strategies and excluding loss mitigation strategies through cutting edge forecasting tools. The data management services provided by the assessee include routine business data reporting and management, website management, marketing data analysis and top line reporting. As far as Acropetal Technologies Ltd. is concerned, this company does the business of export of software services. It is also seen from the segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it derives income from engineering design services and software development services. It is also pertinent to point out that before the TPO, the assessee raised an objection that this company performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the services rendered by this company fall in the definition of ITES. 19. We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No.15 of notes to accounts which gives segmental revenue of this company, it is clear tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (I) Pvt Ltd, direct the Assessing Officer / TPO to exclude Vishal Information Technologies Ltd. from the list of comparables. 21. Following the decision of the Tribunal referred to above, we hold that Coral Hubs Ltd. cannot be considered as a comparable. It may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable on the basis of detailed discussion in the TP order for the A.Y. 2007-08. In fact in A.Y. 2007-08, there was no determination of ALP and therefore there was no occasion for any order being passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library Print on Demand in F.Y. 2007-08. In the case of Capital IQ Information Systems India Pvt. Ltd. (supra) , the ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:- IV. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): 16. The assessee has objected for this company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable. 22. It is also further noticed that the employee cost/operating sales of this company is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%. This Tribunal in the case of First Advantage Offshore Services Ltd. v. CIT, IT(TP)A No.1086/Bang/2011, order dated 30.4.2013, has taken the following view:- 36. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee s own case for the assessment year 2006-07. This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR s argument that the employee cost filter is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider. 25. We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this company as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. We hold accordingly. (5) Eclerx Services Ltd . 26. This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. It has further been submitted that extra ordinary events and peculiar circumstances prevail in the case of the assessee in as much as this company acquired a UK ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. (8) Mold-tek Technologies Ltd. 29. This company is listed at Sl.No.16 of the list of comparable companies chosen by the TPO. As far as this company is concerned, the submission of the assessee before us is that it is in the business of Knowledge Process Outsourcing and cannot be considered as a comparable. The functional profile of this company is as follows:- As per the annual report for the F.Y. 2007-08, the company primarily operates in two business segments: Plastic division: The plastic division is engaged in the manufacture 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.77 8 Jindal Intellicom Pvt Ltd -10.29 9 R Systems Internatinal Ltd (seg) 4.30 10 Spanco Ltd (seg) (formerly known as Spanco Telesystems Solutions Ltd 8.81 11 Allsec Technologies Ltd. -13.29 Arithmetic mean 11.25 32. It can be seen that arithmetic mean of profit margin to cost of remaining companies chosen by the TPO after excluding the aforesaid companies is only 11.25. Profit margin to cost of the assessee is 9.66% which is much lower than arithmetic mean of the comparable companies chosen by the TPO after exclusion of the some of the comparable companies chosen by the TPO for reasons set out in the earlier paragraphs. Therefore, no adjudication to ALP is called for. We, therefore, hold that the additions sustained by the DRP deserves to be deleted and he is accordingly directed to be deleted. The grounds other than comparability of comparables are not taken up for considerati ..... 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