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TMI Blog2016 (4) TMI 1211X X X X Extracts X X X X X X X X Extracts X X X X ..... R(DR). ORDER Per INTURI RAMA RAO, AM : This is an appeal filed by the assessee-company against the assessment order dated 29/09/2011 passed u/s 143(3) r.w.s.144C(3) of the Income-tax Act,1961 [ for short 'the Act'] by the Deputy Commissioner of Income-tax Circle 12(3),Bangalore [for short 'AO'] for the assessment year 2007-08. 2. The assessee-company raised the following grounds of appeal: The grounds stated here under are independent of, and without prejudice to one another: 1. Assessment and reference to Transfer Pricing Officer are bad in law a) The final order issued by the Deputy Commissioner of Income-tax - Circle 12(3) ['DCIT' or'AO'], is bad on facts and in law, and is in violation of the principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Societe Generale Global Solution Centre Private Limited ('the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. b) The AO has erred in law in making a reference to the Transfer Pricing Officer ['TPO'],inter alia, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Transfer Pricing Study. d) The AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability. e) The AO/TPO also erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. f) The AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and arbitrarily applying a 25% related party criteria in accepting / rejecting comparables. g) The AO/TPO also erred on facts and in law in arbitrarily rejecting companies with 4 different year ending (i.e. other than 31 March 2007) and inconsistently applying such filter. h) The AO/TPO grossly erred on facts in arbitrarily rejecting companies having IT and ITeS service revenue less than 75% of total operating revenue and inconsistently applying such filter, without considering the specific segmental results. i) The AO/TPO erred on facts in arbitrarily rejecting companies earning less than 25% of revenue from exports. j) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIT erred in not making a corresponding reduction from the 'total turnover' while computing the deduction under section 10A. 9. Interest under section 234B of the Act The DCIT erred in levying and compounding the interest under section 234B of the Act of ₹ 14,708,020. 10. Initiation of penalty proceedings The DCIT erred in initiating penalty proceedings under section 271(1)(C) of the Act in the case of the Appellant. Directions issued by the DRP The DRP has erred in law and facts in not taking cognizance of the objections filed by the Appellant in relation to the draft assessment order issued by the AO/ TP order. The DRP erred in facts and law in confirming the draft order of the AO/TPO. Relief: a) The appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal. c) The appellant further prays that the adjustment in relation to Transfer Pricing matters made by the learned AO/TPO and upheld by the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm's length. 4. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO). The TPO, by an order dated 26/10/2010 passed u/s 92CA of the IT Act, 1961 computed the transfer pricing adjustment at ₹ 3,98,63,492/- in respect of software development services and ₹ 1,86,46,103/- in respect of ITeS segment. The TPO accepted TNMM adopted by the assesseecompany as well as cost + margin as a profit level indicator but rejected the transfer pricing study report. The TPO proceeded to identify a different set of comparable entities for the purpose of determining the ALP. While doing so, the ld. TPO had applied the following filters in software segment: •· Use of current year data only; •· Turnover filter i.e. excluding companies having income from software development services less than INR 1 crore. •· Software development services income less than 75% of total operating revenues were excluded •· Related party transactions greater than 25% of operating revenue. •· Export sales less than 25% of ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . * Companies who have diminishing revenues/persistent losses for the period under consideration were excluded. * Companies having different financial year ending (i.e. not March 31,2007) or data of the company does not fall within 12 month period i.e. 01-04-2006 to 31-3- 2007 were rejected. * Companies that are functionally different from that of taxpayer or working in peculiar economic circumstances, after giving valid reasons, were excluded. and finally selected the following comparables: Thus arrived at average arithmetic mean of 30.21% and after giving working capital adjustment of 1.66% in respect of ITES segment, the adjusted arithmetical mean PLI was determined at 28.55% in respect of ITeS segment. On the above said basis, the TPO computed the transfer pricing adjustment in respect of ITes Segment as follows: Operating Cost (Rs. 13,62,77,652/- + Reimbursement of expenses received of ₹ 54,21,397/-) ₹ 14,16,99,049/- Arms Length Margin 28.55% of the Operating Cost Arms Length Price (ALP) @128.55% of operating cost ₹ 18,21,54,128/- Arms Length Price @128.55% of operating cost ₹ 18,21,54,128/- Price shown in the International transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bang/2011 dated 26/05/2015. He has also drawn our attention to relevant paragraphs of the said order. Now, we shall deal with each of the comparables. i) Accel Transmatic Ltd. We find from the order in the case of LSI Research (India) P.Ltd.(supra) that this Tribunal has deleted this company from the list of comparables on the ground of functional dissimilarities. While coming to this conclusion, this Tribunal has placed reliance on the decision of the Mumbai bench of the Tribunal in the case of Capgemini India (P) Ltd. vs. Addl.CIT (12 taxman.com 51). However from the perusal of the financial results of the company, it is clear that it is engaged in the business of software development services as well as media solutions and services. It has two divisions - Technologies Division and Animation Division. The co-ordinate bench (Bangalore)of the Tribunal subsequently in two decisions viz (i) Autodesk India Pvt. Ltd. vs. DCIT (TS 62 ITAT 2013) and Yodlee Infotech Pvt. Ltd. vs. ITO (TS 63 ITAT 2013) had not followed the decision of the Mumbai Tribunal in the case of Capgemini India (P) Ltd.(supra) and remitted the issue back to the file of the AO for fresh adjudication with respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . DCIT (TS 64 ITAT 2013(Bang) TP); * Mercedes Benz R&D India Pvt.Ltd. vs. DCIT (TS 108 ITAT 2013(Bang) TP); * IBM India Pvt. Ltd. vs. JCIT (TS 367 ITAT 2013(Bang) TP); * HCL EAI Services Ltd. vs. DCIT (TS 133 ITAT 2013(Bang) TP); * NDS Services Pay-TV Technology Pvt. Ltd. vs. ACIT ((TS 127 ITAT 2013(Bang) TP) * Logica Pvt. Ltd. vs. ACIT (TS 131 ITAT 2013(Bang) TP) * 3DPLM Software Solutions Ltd. vs. DCIT (TS 359 ITAT 2013(Bang) TP) iv. E-Zest Solutions Ltd.: This Company was held to be not comparable with the software development company as it is engaged in product development services, and high-end technical services which come under category of KPO services in the case of LSI Research (India) P. Ltd (supra). The co-ordinate bench of Tribunal had come to this conclusion following the decision of coordinate bench (Hyderabad) of the Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. The ld.DR had not brought any evidence on record controverting the above submissions. Te Hon'ble High Court of Delhi in the case of Rampgreen Solutions Ltd. vs. CIT in ITA No.102/2015 dated10/8/2015 "31. In the present case, the Tribunal noted that Vishal and eClerx ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O Services, the line of difference is very thin. The Tribunal was of the view that there could be a significant overlap in their activities and it may be difficult to classify services strictly as falling under the category of either a BPO or a KPO. The Tribunal also observed that one of the key success factors of the BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lowerend ITeS such as Call Centers etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold. 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP. 37. Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd. (supra), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in development of software products. Therefore, we direct the AO/TPO to exclude this company from the list of comparables. vi) KALS Information Systems Ltd.: This company was rejected as comparable to a software development service company in the case of LSI Research (India) P. Ltd. (supra). It is found by the Hon'ble Tribunal that it was also engaged in developing software products and not purely software development provider. It is also found that no segmental details were available and similar observations have been made in the following cases: * Bearing Point Business Consulting P.Ltd. vs. DCIT [TS 758 ITAT 2012(Bang) TP(AY 2007-08] * CSR Pvt. Ltd. vs. ITO [TS 68 ITAT 2013(Bang) TP(AY 2007-08] * Logica Pvt. Ltd. vs. ACIT [TS 131 ITAT 2013 (Bang) TP)(AY 2007-08)] * LG Soft India Pvt. Ltd. vs. DCIT [TS 64 ITAT 2013(Bang) TP(AY 2007-08] * Tranwitch India Pvt Ltd. Vs. DCIT (TS 105 ITAT 2013 (Bang) TP)(AY 2007-08)] * Mercedes Benz R&D India Pvt.Ltd. vs. DCIT[TS 108 ITAT 2013(Bang) TP])AY 2007-08); Following the decisions cited supra, we hold that this company cannot be considered as comparable company which is engaged in providing software development services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted party transactions of more than 15% of sales. However, we also find that this Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. vs DCIT in IT(TP)A No.1222/Bang/2011 [TS-108- ITAT-2013-Bang-TP] had restored the issue to the file of the TPO to examine the above aspects of this comparable. In the absence of any financial data on record in support of the proposition that it had outsourced its work and had related party transactions of more than 15%, we also restore this issue to the file of the TPO/AO to examine the issue afresh on the above lines. ix) Lucid Software Ltd.: This company was excluded from the list of comparables by this Tribunal in the case of LSI Research (India) P. Ltd (supra) on the ground of functional dissimilarities. The co-ordinate bench (Mumbai) in the case of Telecordia Technologies India Pvt. Ltd. vs. ACIT [TS 325 ITAT 2012(Mum)] observed that this company was predominantly engaged in the product development rather than service provider. Thus it was considered to be functionally dissimilar to a pure software service provider company. Similar observation has been made in the following decisions: * CSR Pvt. Ltd. vs. ITO [TS 68 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are provider. However, we find that the decision of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. was for the assessment year 2008-09. It is not clear whether similar facts were existing for the assessment year 2007-08 as no information was filed before us in support of the above propositions. In the circumstances, we remit the issue back to the file of TPO/AO for fresh evaluation of the comparable on the above lines. xii) Thirdware Solution Ltd., This company was excluded from the list of comparables by this Tribunal in the case of LSI Research (India) P. Ltd (supra) following the decision of Pune Bench of Tribunal in the case of Egain Communication P.Ltd. vs. ITO [TS 7 ITAT 2008(Pun)] on the ground of functional dissimilarities. The Pune Bench of the Tribunal observed that this company had income from other sources like interest and deposits which jacked up the profit margin of the company. It was also observed that it was into the purchase & sale of software licenses. Thus, ITAT held that it cannot be a comparable to a company which is engaged in software development. This decision was in relation to assessment year 2004-05, whereas, in the present case, we are conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems Ltd. (merged) 848.66 2 Igate Global Solutions Ltd. 747.27 3 Infosys Technologies Ltd. 13,149 4 Mindtree Ltd. 590.39 5 Persistent Systems Ltd. 293.74 6 Sasken Communication Technologies Ltd 343.57 7 Tata Elxsi Ltd. 262.58 8 Wipro Ltd. 961.09 The submissions of the learned AR of the assessee-company have been considered at length. Though there are decisions to the effect that the companies with the turnover filter of ₹ 1 to ₹ 200 crores should alone be considered as comparables, this proposition was diluted by the Mumbai bench of the Tribunal in the case of Willis Processing Services (I) P.Ltd. vs. DCIT [TS-49- ITAT-2013(Mum)-TP] wherein it was held that the turnover band of ₹ 1 to ₹ 200 crores is bereft of any rationality as the application of this rule does not enable comparison of a company with ₹ 200 crores with another company having a turnover of ₹ 201 crores. It was further observed by the Hon'ble Tribunal that the turnover was also not a criteria prescribed under rule 10B for selection of comparables. We are also of the considered opinion that the turnover cannot be relevant criteria in a service sector where fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emarketing to high end services like technical support services, where not only the level of knowledge, skill required would be high, but the technical knowledge as well would be high. According to him, back office transaction process services may he as remarkable and as complicated as insurance/market transaction processing services. He, therefore, rejected the contention of the assessee and treated the 131'O as equivalent to KPO services. 40. We have to now consider whether a BP0 and a KPO are functionally similar and are comparable to each, other. BPO is a subset if, outscoring arid involves the contracting of the operations and responsibilities of specific business functions or process to a third party services provider. Often business processes outsourcing are information technology based and referred to as ITES-BPO. KPO is one of the sub-segment of the BPO industry. It involves outsourcing of core information related business activities which are competitively important or form an integral part of a company's value chain. It thus requires advanced analytical and technical skills as well as a high degree of specialist expertise. The KPO services include all kinds of rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely covered by the decision of the jurisdictional High Court in the case of Tata Elxsi (supra) wherein the Hon'ble High Court held as follows: "From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10-A is a beneficial section. It is intended to provide incentives to promote section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of Section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in Section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X
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