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TMI Blog2016 (8) TMI 1222X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue is restored to the file of the TPO to carry out this exercise and pass a speaking order in accordance with law. Needless to say that the assessee shall be afforded a reasonable opportunity of being heard. - I.T.A .No.-7079/Del/2014, And I.T.A .No.-1113/Del/2016 - - - Dated:- 16-8-2016 - SMT DIVA SINGH, JUDICIAL MEMBER, AND SH.PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Appellant : Shri Rohit Tiwari, CA Sh. Anubhav Rustogi, Adv. For The Respondent : Shri Amit Mohan Govil, CIT(DR) ORDER PER DIVA SINGH, JUDICIAL MEMBER Both these appeals have been filed by the assessee assailing the correctness of the orders u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 dated 28.11.2014 and 29.01.2016 of AO pertaining to 2010-11 2011-12 AYs respectively. 1.1. Although various grounds have been raised by the assessee, however, at the time of hearing, Ld.AR submitted that he would be arguing only Ground No.4.5 in both the years as identical issues are raised in them and Ground No. 6 in ITA No.7079/Del/2014. For readyreference, the Grounds from ITA No.7079/Del/2014 are reproduced hereunder:- 4.5. erroneously including certain functionally diss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies having other operating income (other than manufacturing and trading income) to sales greater than 50% were accepted; Companies having research development costs to sales less than 3% were accepted; Companies having net fixed assets to sales less than 3% were accepted; Companies having average sales less than INR 1 crore were rejected; Companies with net worth less than zero were rejected; and Companies having advertising, marketing and distribution costs to sales less than 3% were accepted. 2.2. The following comparable companies were selected in the fresh search process applying the above quantitative filters which were analyzed qualitatively [including examination of related party transactions to exclude companies with RPT greater than 10% and the assessee came up with the following comparables:- S.No. Name of the comparable OP/TC% Margin for FY 2009-10 1. A O K In-House B P O Services Ltd. 0.27% 2. Aditya Birla Minacs Worldwide Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tia Tech. Limited 42.52% 5.* E4E Healthcare 31.03% 6. Fortune Infotech Limited 22.80% 7.* Igate global Solutions Limited 24.54% 8. Microland (ITES Segment) -3.01% 9.* TCSE-Serve International Limited 54.03% 10.* TCSE-Serve Limited 63.42% 63.42% Average 29 . 87 % [*-challenged in the present proceedings] 2.6. Thus it was his submission that the grievance of the assessee is posed on the comparables included/excluded by the TPO. Pursuant to the order of the TPO, a draft assessment order it was submitted was issued proposing the adjustment recommended by the TPO. 2.7. Apart from the said grievance it was submitted that vide Ground No.6 the addition by way of adjustment of ₹ 3.30 lacs to the income of the assessee is assailed. Referring to the facts relatable to it. It was submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational Limited; and (vi) TCSE-Serve Limited. 2.10. Reiterating the request for modifying the request for seeking exclusion, it was submitted by the Ld. AR that instead of seeking exclusion of 7 comparable companies, he is under instructions to modify the request by stating that the exclusion of the comparable company at serial No. 6 i.e. Fortune Infotech Ltd is not being insisted upon and the request may be modified to seeking the exclusion of only the remaining 6 comparable companies. 2.11. The inclusion is sought of the following 6 comparable companies which have been excluded by the TPO:- (i) Sparsh BPO Services Ltd. ( Sparsh ) (ii) In House Productions Ltd. ( Healthcare Segment ) (In House) (iii) AOK In-House BPO Services Limited (iv) Informed Technologies India Ltd. ( Informed Technologies ) (v) Technoprocess Solutions Limited-Processing Services Segment ( Techprocess ) (vi) Cameo Corporate Services Limited ( Cameo ). 2.12. Accordingly it was his submission that if the assessee succeeds in his prayers to seek exclusion of 6 comparables and inclusion of another 6 comparables, the final margin of the comparable which would remain would show that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tata Services Limited 1.39% 1.39% Arithmetic Mean 20.79% 7.95% 3.1. Addressing the reasons for seeking exclusion of the 7 comparable companies which has been modified to a list of 6 comparable companies, the Ld. AR submitted that exclusion of Accentia Technologies Ltd is sought on the ground that the said comparable is engaged in diversified activities such as knowledge process, outsourcing, legal process outsourcing, data process outsourcing, thus it is engaged in high-end software services. It was his submission that without assigning any reasons, the comparable has been retained. The objections it was submitted were before the DRP also. 3.1.1. Apart from that it was submitted that during FY 2009-10, Accentia amalgamated with one of its subsidiaries. Consequently, the extraordinary event impacted the overall profitability of Accentia as its financial results for the year ended March 31,2010 are inclusive of the figures of the amalgamating subsidiary due to which, Accentia has earned an abnormally high OP/TC of 42.97%. (please refer page 89 and 96 of ARC). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of software at the time of implementation and data centre management activities. These objections it was submitted were before the DRP despite that the comparable has been retained without assigning any reasons. 3.6. Exclusion of TCS E-Serve Limited, it was submitted has been sought on the ground that this company is into provision of Business Process Outsourcing activities and technical services like software testing, verification and validation of the software. The ownership of IPRS also makes payment for the brand Tata, the said comparable an incomparable. 4. Addressing the inclusion of the 6 comparables which was requested the Ld.AR submitted that the comparables have been wrongly rejected by the TPO and the objections of the assessee have been over-ruled by the DRP. 4.1. Addressing Sparsh BPO services Ltd it was submitted it has been excluded by the TPO on the ground that it fails the export sales filter and the net worth filter on which reasoning the DRP has refused to interfere. The Ld. AR submitted that the assessee does not agree with the rejection of companies having the export sales filter less than 75% and has made detailed submissions to substantiate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the net profitability of the comparable company has been impacted so as to exclude the same. It was his submission that the law requires that the assessee demonstrates that as a result of some extraordinary event the net profitability of the company is impacted only then it should be taken out from the list of comparables. Advancing general arguments without demonstrating this fact it was his submission can be of no help to the assessee. Relying upon judicial precedent where these facts were not argued by the Revenue and wherein on account of absence of any argument from the Revenue the mere event of amalgamation or restructuring has been taken to be a situation that the comparable has to be excluded, it was submitted cannot be said to be precedent for all times to come. The objection of the Revenue it was submitted has to be addressed by the assessee and the law requires the assessee to demonstrate the impact of the event on the comparables net profitability. It was his submission that the method followed is TNMM and the requirements of the TNMM are well understood by this time and thus the arguments of the assessee after having selected the method to draw out fine distinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not comparable, the DRP has categorically observed that it fails the export filter and thus the argument of the assessee may be dismissed. 6. We have heard the rival submissions and perused the material available on record. A perusal of the TPO s order shows that Copal India has an ITES agreement with Copal Group under which it provides services to its foreign AE. It primarily provides back office support for Copal Group s global operations through customized research and information support service, data entry and data mining services etc. It has been described that the range of services provided by the Company varies from business information/data gathering, transaction processing, library document services, data mining/entry and general business information research support services. In the year under consideration, the following international transaction was disclosed by the assessee in this transfer pricing report:- S.No. Description of the transactions Amount (In Rupees) 1. Provision of IT enabled back office support services 462,105.21 6.1. In the FAR a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en as a comparable. The rationale of this filter is discussed below: As per Sub-Rule (1) of Rule 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to conditions prevailing in the markets, the geographical location, the size of the market, costs of labour, overall economic development, level of competition etc. In this regard, the relevant portion of Rule 10B is reproduced as under: conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail . . The domestic companies cannot be treated as comparable to the taxpayer who is wholly or mainly export oriented because: a) conditions prevailing in the export and domestic market in which the respective parties to the transactions operate are different b) geographical locations(domestic and export) are different c) size of the markets(domestic and export) to wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payer and also pricing mechanism is influenced by such factors for which reasonable adjustments cannot be made to account for the differences in geographical markets, and. other prevailing market conditions like level of competition etc. 6.3. The said issue was agitated before the DRP and rejected on the following reasoning:- On this issue, the reasoning of the TPO and the arguments of the taxpayer has been considered by this Panel. The taxpayer is mainly an export oriented software development service provider getting primarily revenues from exports in this segment. Hence, minimum threshold limit of 75% export earnings from software development services was applied wherein the companies whose export revenues from software developments services are less than 75% of the operating revenues were excluded as these companies operate predominantly in India when compared to the taxpayer whose practically entire revenue come from exports. Exports of taxpayer in IT enabled services are 100%,. So, comparable companies will be those companies where most of the income is from exports. Hence, the TPO was justified in applying a threshold of 75%. This will ensure further refinement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rampgreen Solutions Pvt. Ltd. vs CIT that a company who is providing routine call centre services cannot be equated to a KPO. The Hon ble Court has held that KPO indicates the involvement of advance skills; the services provided may include analytical services, legal research, engineering and design services, intellectual managements etc. A KPO is understood as a high-end value added process chain wherein the processes are dependent on advanced skills, domain knowledge and the experience of the persons carrying on such processes. Thus, the prayer on facts needs to be considered. We also find that instances where segmental have not been made available necessitate that the said comparable should be excluded. Instances where the services are shown to be outsourced or for that matter the services are performed off-site and it can be shown that the net profitability of the company is impacted would again necessitate their exclusion. Similar would be the position where related party transactions filter is not fulfilled would justify its exclusion. Instances where the assessee can demonstrate that the comparable has undergone an extraordinary event by way of amalgamation/Acquisition etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the method and in fact violates and is contrary to the reasoning and rational of the methodology having been chosen and accepted. In the facts of the present case, we find that intense hair splitting exercise which has been done by the taxpayer on the basis of which exclusion of the 6 comparables is sought agreeing fundamentally that the judicial precedent is clear by the decision of the Hon ble jurisdiction High Court in the case of Ramp Green Solutions Pvt. Ltd. vs CIT 377 ITR 533 (Delhi) that KPO cannot be said to be equated to a low-end ITES enabled company. We find that in the facts of the present case the FAR analysis characterization which is the fundamental foundational fact is an exercise which is required to be addressed. Considering the arguments raised, we find that the occasion to raise argument for exclusion of six comparables and inclusion of another six comparables which argument we have rejected has arisen solely on account of the fact that the foundational exercise of proper FAR analysis of the assessee has not been done. Drawing support from the order dated 13.07.2016 in Virage Logic International India Brand vs JCIT in ITA No.6918/Del/2014, we find that in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables selected if it can be demonstrated that these would impact the profitability of the comparable selected. Thus before considering the comparables the FAR analysis on the basis of the functions performed assets available and risks assumed need to be analyzed in detail if need be to the level of hair splitting which the tax payers attempt for the comparables. Thereafter the selection of comparables is an exercise which would be hugely facilitated and relatively free from the need to address micro variations. Accordingly, the issue is restored to the file of the TPO to carry out this exercise and pass a speaking order in accordance with law. Needless to say that the assessee shall be afforded a reasonable opportunity of being heard. 7. Ground No.6 stands restored to the TPO directing him to carry out the directions of the DRP wherein no infirmity has been pointed out by the parties. 8. In the result, ITA No.7079/Del/2014 is partly allowed for statistical purposes. 9. Since facts and arguments qua the issue of comparables addressed in Ground No.4.5 is stated to be identical to ITA No.7079/Del/2014. On account of similar reasoning on facts, the issue with identical directi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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