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TMI Blog2016 (3) TMI 1182X X X X Extracts X X X X X X X X Extracts X X X X ..... in law, the learned Assessing Officer based on the directions of the Hon'ble DRP has erred in making transfer pricing adjustment to the value of international transactions of rendering Information Technology Enabled Services (' ITES') and marketing support services entered into by the Appellant and not considering the comparability analysis as documented in the transfer pricing study report for AY 2009 -10 provided by the Appellant; 2. Use of financial information of comparable companies only for financial year 2007-08 and non-consideration of contemporaneous data On the facts and in the circumstances of the case and in law, the learned Assessing Officer based on the directions of the Hon'ble DRP has erred in not considering the multiple year data and contemporaneous data i.e. data available at the time undertaking the transfer pricing study for determining the arm's length price of international transaction pertaining to IT enabled and marketing support services; 3. Modification of quantitative and qualitative filters adopted by Appellant in the TP documentation On the facts and circumstances of the case, the learned Assessing Officer bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act On the facts and circumstances of the case, the learned Assessing officer based on directions of Hon'ble DRP has erred in concluding the transfer pricing provisions are applicable to the Appellant in-spite of the fact that the Appellant is enjoying the tax holiday regime under section 10A of the Act; 10. Penalty proceedings On the facts and in the circumstances of the case and in law, the learned Assessing Officer based on the directions of the Hon'ble DRP has erred in initiating penalty proceedings; 11. Levy of interest under section 234A, 234B and 234C of the Act On the facts and in the circumstances of the case and in law, the learned Assessing Officer based on the directions of the Hon'ble DRP has erred in levying interest under section 234A, 234B and 234C of the Act, as applicable, on account of unanticipated transfer pricing adjustments made to the total income of the Appellant. 3. The assessee filed modified ground of appeal, which reads as under:- 1. The Ground No.5 Inclusion of non-comparable companies is modified as follows: The learned Assessing Officer pursuant to the directions of the Hon ble DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of ₹ 4,27,42,770/-. Since the assessee had undertaken international transactions during the relevant year, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act in order to determine arm's length price of international transactions entered into by the assessee with its associate enterprises. 8. The TPO rejected some comparables and accepted certain other companies as comparables and determined final set of comparables consisted of 9 concerns whose arithmetic mean of PLI i.e. OP/OC worked out to 31.69%. The TPO further determined PLI after working out capital adjustment at 30.13% of the final set of comparables as against PLI of the assessee at 11.90% and computed adjustment of ₹ 2,11,83,084/- to be made to the international transactions relating to provision of ITES. 9. The objections raised before the DRP by the assessee were rejected and the Assessing Officer thereafter, passed an order under section 143(3) r.w.s. 144C(5) of the Act and the said TP adjustment was made in the hands of assessee. 10. The assessee is in appeal before us with regard to the aforesaid adjustment made to the international t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppropriate method for the purpose of determining arm's length price of international transactions. However, the TPO rejected certain companies selected by the assessee and included certain other companies as comparable in the final set of comparables. The TPO applied single year financials data of the said concerns and worked out the arithmetic mean PLI of final set of comparables at 30.13% as against the margins of 12.47% declared by the assessee. The adjustment worked out by the TPO was accepted by the DRP and the Assessing Officer thereafter made an addition of ₹ 2.11 crore s on account of arm's length price of international transactions entered into by the Indian branch of assessee with its parent office. 12. Before us, the first plea of the assessee is that the concern Accentia Technologies Ltd. is required to be excluded from the final set of comparables because during the year under consideration extra-ordinary events have taken place i.e. there is amalgamation and hence, the said concern was not functionally comparable. In this regard, the learned Authorized Representative for the assessee placed reliance on the following decisions:- a . Pune Bench of Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Before us, the Ld. Representative for the assessee has reiterated the submissions putforth 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 Tribunal found that during the year u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t contention of assessee i.e. exclusion of Crossdomain Solutions Ltd. The case of the assessee before us is that the said concern was engaged in business of KPO services and was having different business module and hence, was not functionally comparable. The assessee before us is admittedly engaged in the provision of ITES services. 16. We find that the Tribunal in Maximize Learning Pvt. Ltd. Vs. ACIT (supra) had also taken note of the fact that Crossdomain Solutions Ltd. was engaged in high end KPO services and was not comparable with the assessee which was a normal ITES provider. Relevant findings of the Tribunal are as under:- 19. The last plea raised by the assessee was for exclusion of Crossdomain Solutions Ltd. from the list of comparables. The said comparable was part of the final list of comparables selected by the TPO for benchmarking the international transaction of the assessee in assessment year 2008-09. The said comparable was engaged in high end KPO services and hence were claimed to be not a comparable with the assessee which was a normal ITES provider. The Tribunal accepting the said plea of the assessee in assessment year 2008-09 held the said concern was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of their competitors. Thus, they tend to command higher margins of profits. Low-end IT enabled service providers employ workers who have the basic knowledge and can be trained to perform the necessary functions. KPO firms earn extraordinary profits due to the highly skilled resources they employ in the form of highly-qualified professionals. 26. On the other hand, the Ld. CIT-DR appearing for the Revenue contended that the TPO as well as the DRP have rejected the plea of the assessee as the submissions were on a wrong footing. It was reiterated that the nature of services rendered by the said concern were falling in the category of IT enabled services which is also broadly the category of the services being rendered by the assessee. Therefore, the said concern was rightly included by the TPO in the list of comparables. 27. We have carefully considered the rival submissions. Ostensibly, the reason advanced by the TPO to reject the plea of the assessee are too general and are not justified. Even where two concerns may be undertaking activities which can be broadly categorized as ITES in common parlance but wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncern on the entity level. The TPO has rejected the plea of the assessee on similar grounds as taken by him for rejecting the assessee s plea for exclusion of Accentia Technologies Ltd.. 13. Before us, the Ld. Representative has relied upon the decision of the Mumbai Bench of the Tribunal in the case of DCIT vs. M/s Willis Processing Services (India) Pvt. Ltd. vide ITA No.2152/Mum/2014 dated 10.10.2014 in order to justify the exclusion of Crossdomain Solutions Ltd.. 14. We find that M/s Wills Processing Services (India) Pvt. Ltd. (supra) was a concern where the tested party was providing IT enabled services to its various group concerns and activities were quite similar to the activity of IT enabled services rendered by assessee to its affiliates. In this context, the concern, M/s Crossdomain Solutions Ltd. was found to be functionally not comparable by the DRP and such decision was affirmed by the Tribunal by making the following discussion :- 3. M/s Crossdomain Solutions Ltd. This company has been rejected by the DRP on the ground that it is indulged in high skill IT services which are not comparable to the routine I.T. Enabled services. The Tribunal Hyd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Cosmic Global Ltd. was held to be not comparable by the Tribunal in its order dated 02.02.2015 (supra) in the hands of the assessee because the said concern was operating in a different business model. The relevant findings of the Tribunal are as under :- 21. The third concern, which is sought to be excluded by 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered the rival submissions. The pertinent point made out by the Ld. Representative for the assessee is that the said concern is operating in a different business model wherein much of it s activities are outsourced whereas the business model of the assessee is different. In an outsourcing business model obviously the expenditure incurred 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. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... handigarh Tribunal in the case of Quark Systems Pvt. Ltd. (supra) had held that even if the assessee had not challenged the inclusion of the comparable before the authorities below, the same could be challenged before the Tribunal for the first time. Accordingly, we hold that the assessee at this point can raise the said issue. Now, the second part of the objection 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at ₹ 3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune of ₹ 6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot 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 ₹ 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 ₹ 86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at ₹ 27.76 lac is still on much lower side, the rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... final set of comparables is Eclerx Services Ltd., which was engaged in the business of KPO services and hence not functionally similar. We have in the paras hereinabove already held that the concern Crossdomain Solutions Pvt. Ltd. was engaged in the business of KPO services, was not functionally similar. Following the same parity of reasoning, where Eclerx Services Ltd. is engaged in the business of KPO services, is not functionally comparable to the assessee. We further find that the High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra) has also noted the functionality of Eclerx Services Ltd. being of KPO services and the Hon ble High Court of Delhi directed the same is to be excluded while benchmarking the international transactions of ITES provider. Following the same line of reasoning, we hold that Eclerx Services Ltd. is to be excluded from the final set of comparables. 21. The last concern objected to by the assessee is Genesys International Corporation Ltd. The case of the assessee before us is that the said concern is not functionally comparable to the assessee as it is engaged in the business of geospatial services content provider specializing in land b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern, Coral Hubs Ltd. was not comparable vis- - vis the tested party before the Mumbai Bench of the Tribunal. Similar is the situation before us also and therefore we are inclined to uphold assessee s plea of excluding Coral Hubs Ltd. from the final set of comparables on account of the aforesaid distinction in the business model. The Assessing Officer is directed accordingly. 23. Though the decision of Tribunal relates to assessment year 2008-09 but the ratio laid down by the Tribunal is squarely applicable to the present assessment year since for the year under consideration the assessee has shown high profit trend analysis. Accordingly, the said concern functionally is not comparable. In view thereof, we hold that following concerns are to be excluded from the final set of comparables while benchmarking international transactions of the assessee with its parent office:- i) Accentia Technologies Ltd. ii) Crossdomain Solutions Ltd. iii) Cosmic Global Ltd. iv) Eclerx Services Ltd. v) Genesys International Corporation Ltd. 24. We direct the Assessing Officer / TPO to compute the arm's length price of international transactions of the assessee accordingly. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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