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TMI Blog2016 (5) TMI 1404X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances of the case, the learned Transfer Pricing Officer ('TPO') / Learned AO, under the directions of the Hon'ble DRP, erred on facts and in law in making an addition of ₹ 3,12,91,568 to the international transaction of the Appellant based on the provisions of Chapter X of the Act; 2. On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law in rejecting comparable companies and not appreciating that their functions, assets and risk profile was comparable to the Appellant. 3. On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law, in identifying new companies as comparable to the Appellant without appreciating the fact that the said companies were not comparable to the Appellant / did not meet the filters applied. 4. On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law; in considering erroneous margins, computing the margins erroneously, for arriving at the arm's length price/margin and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company on the basis of BPO/KPO without consideration the CBDT's instructions. 5. The appeal of the Revenue was filed late by 16 days. The Revenue has filed condonation application in this regard along with Affidavit and it was pointed out that the delay of 16 days in filing the appeal late before the Tribunal may be condoned. In the Affidavit, it has been explained that the date of passing the final order is mentioned as 11.02.2015, however, it was passed in the last week of February, 2015. It was further mentioned that the said order was served upon the assessee on 23.02.2015. Further, it is claimed that there was heavy workload in the first week of April, 2015 and date of passing of the order in the case of assessee could not be taken note in calculating limitation date and there was delay of 16 days in filing the appeal late. In the totality of the above said facts and circumstances of the case, we condone the delay of 16 days and proceed to decide the appeals filed by the Revenue and the assessee after hearing both the learned Authorized Representatives. 6. The learned Authorized Representative for the assessee at the outset pointed out that the issue raised in the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 271(1)(c) of the Act in the said ground of appeal No.9 was premature. 7. With regard to the Revenue's appeal, the learned Authorized Representative for the assessee pointed out that only the issue was exclusion of KPO i.e. companies which were engaged in Knowledge Processing Operation, since the assessee was a BPO company. In this regard, the learned Authorized Representative for the assessee stated that the issue was covered in favour of the assessee by the decision of Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. Vs. CIT in ITA No.102/2015 , judgment dated 10.08.2015, wherein two concerns i.e. Vishal Information Technologies Ltd . and e-Clerx Services Ltd. were directed to be excluded and were held to be not comparable with ITES companies. Further, reliance was placed on the decision of Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs. DDIT (Int. Tax,) in ITA No. 784/PN/2014, relating to assessment year 2009-10, order dated 30.03.2016 wherein e-Clerx Services Ltd. was excluded from the list of final companies as it was engaged in KPO services. 8. The learned Departmental Representative for the Revenue placed reliance on the orders of Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer in the hands of assessee, which in turn, was added to the income of assessee. The final set of comparables applied by the Assessing Officer pursuant to the directions of DRP were as under:- Sr. No. Name of company PLI (Adjusted for Working Capital) 1 Cosmic Global Limited 18.81 2 Informed Technologies India Limited 29.86 3 B N R Udyog Limited (Medical Transcription segment) 16.38 4 Accentia Technologies Limited 42.39 5 Jeevan Softech Limited (segment) 39.38 6 Fortune Infotech Limited 23.48 7 Caliber Point Business Solutions Ltd. (Seg) 19.35 8 Jindal Intellicom (P) Ltd. 16.65 Average 25.79 10. Before us, the learned Authorized Representative for the assessee has pleaded the TPO / Assessing Officer under the directions of DRP have erred in identifying and including (1) Accentia Technologies Ltd., (2) Cosmic Global Ltd. and (3) Informed Technologies India Ltd. in the final set of comparables. In respect of Jeevan Softech Ltd., the assessee is aggrieved by the working of PLI of that concern. The case of the assessee before us was that in case the above said concerns were excluded, the average margins of balance concerns would work out to 16.78% as ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociate enterprises, an endeavour is to determine the arm's length price of said transactions and for that purpose, comparison is made to the margins of unrelated parties, which are functionally similar to the assessee. While benchmarking the international transaction, an endeavour is to be made to select such concerns which are functionally similar and the margins of the said concerns are then, to be applied in order to determine the arm's length price of the international transaction undertaken. The assessee before us was engaged in providing ITES services and while benchmarking international transaction of the assessee with its associate enterprises, the TPO had selected Accentia Technologies Ltd. as functionally similar and had included the margins of said concern in order to work out the arithmetic mean of final set of comparables. 14. We find that the Tribunal in assessee's own case in assessment year 2008-09 in ITA No.2235/PN/2012, order dated 02.02.2015 had held that the said concern could not be considered as comparable because of certain extraordinary events. The said ratio was also applied in assessee's own case while benchmarking the international transaction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable." 15. Further, similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia Technologies Ltd. was not comparable to the entities engaged in ITES. Following the same parity of reasoning, we hold that Accentia Te chnologies Ltd. is to be excluded from the final set of comparables. 16. The next concern which is sought to be excluded by the assessee is Cosmic Global Ltd. The claim of assessee is that the said concern is not comparable due to the fact that it has high transaction charges and low employee cost to the total cost ratio and hence, works under di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 services. It was also pointed out by referring to the website of the said concern that it was engaged in the diversified business activity. It was also pointed out that though the activities of the said concern are in medical transcription, consultancy, translation and Accounts BPO services but there was no segmental information available in the Annual accounts of the said concern. Apart therefrom, it has been pointed out that the said concern has incurred a substantial expenditure of ₹ 2,86,29,348/- towards translation charges as is evident from the Annual Report of the said concern. The said translation charges are appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The said proposition has also been upheld by the Hyderabad Bench of the Tribunal in the case of Brigade Global Services Private Limited (supra). Having regard to the aforesaid discussion, in our view, the said concern is not a good comparable to be included for the purposes of comparability analysis as it operates under a different business model which impacts operating margins. As a consequence, we direct the Assessing Officer to exclude the said concern from the final set of comparables." 17. We further find that the Tribunal in PTC Software (India) Private Limited vs. DCIT (supra) and BNY Mellon International Operations (India) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies 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 the exclusion of M/s Cosmic Global Ltd. from the final set of comparables. The Hyderabad Bench of the Tribunal considered an earlier decision of the Delhi Bench of the Tribunal in the case of M/s Mercer Consulting (India) P. Ltd. vs. DCIT vide ITA No.966/Del/2014 dated 06.06.2014 wherein also the said concern was found to be incomparable with an ITES provider. The following discussion in the order of the Hyderabad Bench of the Tribunal is worthy of notice :- "19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP stu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables. " In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons." 19. The aforesaid discussion made by the respective Benches of the Tribunal reveals that in relation to the financial year under consideration, the business model in which M/s Cosmic Global Ltd. has functioned is quite dissimilar to the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Authorized Representative for the assessee stressed that following the principle laid down by the Tribunal in assessee's own case for assessment years 2008- 09 and 2009-10, wherein Cosmic Global Ltd. was found to be not comparable due to it being functionally dissimilar, similarly, Informed Technologies Ltd. is also to be excluded on the same ground. 21. Another aspect raised by the learned Authorized Representative for the assessee with regard to Informed Technologies Ltd. was that the said concern was showing abnormal profitability trend. The learned Authorized Representative for the assessee pointed out that Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs. DDIT (Int. Tax) in ITA Nos.161 & 269/PN/2013, relating to assessment years 2007-08 & 2008-09, order dated 29.09.2014 had rejected the said concern as comparable company. It was pointed out by the learned Authorized Representative for the assessee that even for the year under consideration, there was decline in the profitability at 6.97% as against in the earlier years i.e. 22.61% and 26.73%. 22. The learned Departmental Representative for the Revenue on the other hand, pointed out that the profitabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led to consider ERP segment revenue which is also classified in the audited financial statement of Jeevan Softech Ltd. as being from ITES segment and if the segmental margins of ITES segment are taken up, which includes total sales / income of ₹ 1,74,43,276/-. The margin of the said concern worked out to 8.04% as against 39.38% applied by the Assessing Officer in the order passed under section 154 of the Act. In this regard, the learned Authorized Representative for the assessee drew our attention to the segmental details of said concern which are placed at pages 838 to 846 of the Paper Book. With regard to working of the TPO, the learned Authorized Representative for the assessee referred to page 406 of the Paper Book. 27. The learned Departmental Representative for the Revenue fairly pointed out that the correction of margins is to be given in the hands of assessee while benchmarking its international transaction and by including Jeevan Softech Ltd. in the final list of comparables. 28. In the totality of the above said facts and circumstances of the case, we find merit in the claim of assessee and direct the Assessing Officer / TPO to work out the correct margins of said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of interest under sections 234A, 234B and 234C of the Act, is consequential and hence, the same is dismissed. In the said ground of appeal, the assessee has also raised plea against initiation of penalty proceedings under section 271(1)(c) of the Act, which is premature and hence the same is dismissed. The grounds of appeal raised by the assessee are thus, partly allowed. 33. Now, coming to the appeal filed by the Revenue, wherein the only issue is with regard to exclusion of Eclerx Services Ltd. being KPO company from the final list of comparables, whereas the assessee was BPO company. 34. We find that the issue is squarely covered by the detailed judgment of Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra), which has been applied by Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs. DDIT (Int. Tax) (supra) . The relevant findings of the Tribunal are as under:- "20. The next concern which the assessee wants to be excluded from 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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