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TMI Blog2017 (11) TMI 1591X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Denial of claim under Section 10A of the Act On the facts and in the circumstances of the case and in law, the learned Deputy Director of Incometax, Circle 2(2), International Tax, New Delhi ('Ld. AO') under directions issued by the Hon'ble Dispute Resolution Panel - II, New Delhi ('Hon'ble DRP'), erred in not allowing the claim of benefit under section 10A of the Income-tax Act, 1961 ('the Act') of ₹ 58,57,059 to the Appellant's total income. 1.1 That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in denying and the Hon'ble DRP has erred in confirming the action of the Ld. AO on the disallowance of the Appellant's claim of deduction under section 10A of the Act amounting to ₹ 58,57,059. 1.2 That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding and the Hon'ble DRP has further erred in confirming the action of the Ld. AO, that there is no export of software by the Branch in India to the Head Office. 1.3 That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding and the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opting an arbitrary search strategy for selection of alleged comparable companies. Specifically, the Ld. TPO and Hon'ble DRP has grossly erred - 2.3.1 By adopting inappropriate filters in the process of selecting alleged comparable companies 2.3.2 By adopting companies as comparable to the Appellant having complete disregard to their functional comparability 2.3.3 By disregarding the multiple-year data approach and considering the data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. 2.4 That on the facts and in the circumstances of the case and in law, the Ld. TPO has erred and the Hon'ble DRP has further erred in upholding / confirming the action of the Ld. TPO in not allowing appropriate adjustment(s) in accordance with the provisions of rule 10B of the Rules. 2.5 That on the facts and in the circumstance of the case and in law, the Ld. TPO has erred and the Hon'ble DRP has further erred in upholding / confirming the action of the Ld. TPO in not following the principle of consistency. 2.6 That on the facts and in the circumstance of the case and in l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in the Associated Enterprises (AE) in respect of provisions of information technology (ITES). 4. The taxpayer in order to benchmark its international transactions qua ITES has chosen 20 comparables out of which the TPO has proposed to select 10 comparables by treating 3 more comparables having average of 68.69%. The ld. TPO after disposing of the objections raised by the taxpayer qua the proposed comparables to be taken for benchmarking the international transactions finally selected 5 comparables having average OP/OC of 38.03% and accordingly computed the Arm s Length Price (ALP) of international transaction qua provisions of ITES as under:- S.No. Comparables OP/OC (%) 1. Accentia Technologies Ltd. 52.52 2. Cosmic Global Ltd. 50.70 3. Crossdomain Solution Pvt. Ltd. 25.63 4. Infosys BPO 24.28 5. Coral Hub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 17.55% as against margin of comparables computed by the TPO/DRP at 36.17% for provision of ITES. It is also not in dispute that functional profile of the taxpayer has not undergone any change during the year under assessment. 12. However, the ld. DR contended that the taxpayer is not a low end service provider as its major clients are BSNL, MTNL, etc. and drew our attention towards page153 Vol.I of the paper book. In para 8(a) of Form No.3CD, available at page 153 of the paper book, shows that the taxpayer is engaged inter alia in the business of development and export of telecommunication software, services and marketing of telecom related equipment and planning, engineering, supply, installation, commissioning, testing, operation and maintenance of telecommunication turnkey projects. Further, the taxpayer also deals in supply of ADSL CPEs. Ld. DR for the Revenue further drew our attention towards Agreement between the taxpayer and UT Starcom Inc. US wherein taxpayer is shown to have set up an Escalation Centre in India for rendering IT Enabled services in connection with telecommunication network and providing Remote Maintenance Services. Ld. DR also drew our attention to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , available at page 225 of the paper book. 15. Now, we will examine comparables sought to be excluded by the taxpayer from final set of comparables for benchmarking the international transactions one by one. ACCENTIA TECHNOLOGIES LTD. (ACCENTIA) 16. The taxpayer sought the exclusion of Accentia on the grounds inter alia that there was extra ordinary events which have impacted its PLI; that there is functional dissimilarity in the Accentia vis- -vis the taxpayer as it is into health care receivables management services. However, ld. TPO/DRP brushed aside the objections raised by the taxpayer by observing that the acquisition by Accentia is situated in USA and has no bearing on its business in India and has also not impacted the revenue in the current financial year. 17. When we examine the annual report, available at pages 1 to 67 of the paper book, highlights of the achievement of the Accentia in the year 2008-09 are given as under :- Opened a production centre in Kolkata; Opened a production centre in Chandigarh; Consolidated the operations of the existing three production units in Hyderabad, and added on more production centre in this city; Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstantial global work force. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been taken by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. In view of the fact that there was merger of some entity with Accentia Technologies Ltd., we hold that this company cannot be considered as comparable. Accordingly, the same is directed to be excluded from the final list of comparables. 20. Accentia has also been ordered to be excluded from the final set of comparables for benchmarking international transactions in case of Ameriprise India Pvt. Ltd. vs. DCIT in ITA No.7014/Del/2014 order dated 19.01.2016 and the said order has already been upheld by the Hon ble jurisdictional High Court in ITA No.461/2016 dated 19.10.2016 by making following observations :- The assessee reported international transactions for the relevant year, with its AE. In its transfer pricing report, it included certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.06% 25. Hon ble High Court of Delhi in case of Rampgreen Solutions Pvt. Ltd. vs. CIT in ITA 102/2015 order dated 10.08.2015 affirmed the decision rendered by the Tribunal excluding the Vishal on the ground that Vishal s expenditure on employment cost during the relevant period vis- -vis tested party apparently for the reason that most of its work was outsourced to other vendors viz. service providers. So, in the instant case also, substantial work has been outsourced by the Cosmic which makes it unfit as comparable vis- -vis assessee company. 26. Furthermore in case cited as The Pr. CIT vs. Xchanging Technology Services India P. Ltd. in ITA 813/2015 order dated 20.10.2015 , Hon ble High Court upheld the findings returned by coordinate Bench of the Tribunal to exclude Cosmic from the final set of comparables on the ground that it has outsourced its major activities whereas the taxpayer was doing the business in-house. 27. Furthermore the Tribunal in case of Schlumberger Global Support Centre Ltd. vs. DDIT (Intl.Taxn.-II), Pune in ITA No.86/PN/2013 order dated 30.10.2015 ordered to exclude Cosmic for comparability with Schlumberger Global Suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tsourcing charges. Admittedly, outsourcing is confined to Translation, for which it paid charges at ₹ 3.00 crore. In our considered opinion, this company cannot be considered as comparable with the assessee company for the reason of its major activity, namely, Translation, with revenue of ₹ 6.99 crore (out of total revenue of ₹ 7.35 crore), being dissimilar with the assessee's activities under this segment. The second reason for considering this company as incomparable on entity level is the business model adopted by it. It can be seen that this company has outsourced major activities in comparison with the assessee doing its business in- house. It goes without saying that these two business models, namely, outsourcing services and providing in-house services, cannot be ITA No.1897/Del/2014 compared with each other because of their inherent differences. Since the TPO has considered this company as comparable on entity level, we hold that the same cannot be so treated. Similar view has been taken by the Tribunal in the case of United Health Group Information Services Pvt. Ltd. Vs. ACIT (ITA No.6312/Del/2012) vide its order dated 28.8.2014. Respectfully followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of coordinate bench cited before us wherein the functional profile of this comparable is discussed. In Global E: Business Operations Pvt. Ltd. vs. DCIT (IT (TP) A No.1678/Bang/2012. The functional profile of the company is as under:- ( 4) Crossdomain Solutions Ltd. 24. This company was considered as a comparable and listed at Sl.No.8 of the comparables chosen by the TPO. It is the stand of the assessee that this company is not functionally comparable. As observed in the case of Coral Hubs Ltd., the TPO rejected the plea of the assessee on the basis of a nonexistent TP order passed for the A.Y. 2007-08. 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 review and business functions of Cross Domain are as follows:- With a decade of experience in Payroll Outsourcing, Crossdomain has created a reengineered payroll service EFFIPAY that processes and delivers accurate payroll to clients with he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said report also indicates that KPO services are likely to span activities such as patent advisory, high-end research and analytics, online market research and legal advisory . 26. A Knowledge Process is understood as a high value added process chain wherein the processes are dependent on advanced skills, domain knowledge and the experience of the persons carrying on such process. 24. Therefore respectfully following the decision of honourable Delhi high court in Rampgreen Solutions P Ltd where the functional profile of company is very high end KPO services it cannot be compared with the assessee and hence we direct exclusion of this comparable. 32. Hon ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. (supra) explained the functional dissimilarity between BPO and KPO as under :- 25. Whilst Voice Call Center represents the lowerend of ITeS, KPO represents services involving a higher level of skills and knowledge. India has vast human resources and a large number of highly-skilled technical professionals. The expression KPO indicates the involvement of domain knowledge in providing ITeS. Typically, KPO includes involvement of advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the international transactions. INFOSYS BPO LIMITED (INFOSYS) 35. The taxpayer sought exclusion of Infosys on grounds inter alia that it is functionally dissimilar; that it has gone into merger and acquisitions; that it is a giant company having excellent profile of its employees. 36. Ld. DRP retained Infosys as comparable by merely stating that the TPO has given sufficient reasons to accept Infosys as a comparable company. 37. However, functional dissimilarity of Infosys with the taxpayer has already been examined by coordinate Bench of the Tribunal in case of Omniglobe Information Technologies (India) Pvt. Ltd. in ITA No.1052/Del/2014 order dated 07.09.2016 and directed to exclude this company by following the decision rendered by the coordinate Bench of the Tribunal in case of Equant Solutions India Pvt. Ltd. vs. DCIT in ITA No.1202/del/2015 for AY 2010-11 by returning following findings:- 26. We have considered the submissions of both the parties and perused the material available on the record. As regards to the issue relating to exclusion of Infosys BPO Ltd., TCS E-Serve International Ltd. and TCS E-Serve Ltd. is concerned, it is noticed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclude this company out of the list of comparables on ground of turnover to the tune of ₹ 649.56 crores as against the tested party at ₹ 11 crores which is more than 55 times of the taxpayer s turnover. 39. Furthermore appraisal of the annual report of Infosys, available at pages 106 to 151 of the paper book, goes to prove that Infosys has undergone reorganization of its subsidiaries as under :- Re-organisation of subsidiaries The shareholders may be aware that as part of making our company a truly global entity and also as part of investment strategy, our company concluded a sale and purchase agreement with Koninklijke Phillips Electronics N.V (Phillips) by means of which our company made a 100% investment in the share capital amounting ₹ 1 07.13 crore in P -Financial Services Holding BV, the Netherlands entity (Holding Company) which in turn made an investment in three entities situated in India (Chennai), Poland (Lodz) and Thailand (Bangkok) [Operating Company]. During the year under review, your company has re-organized the subsidiaries as follows: a. Transfer of shares from P-Financial Services Holding B.V. to Infosys BP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... March 31,2009 S.No. Name of subsidiary Country of incorporation Percentage of holding 1. Infosys BPO s.r.o Czech Republic 100% 2. Infosys BPO (Poland) Sp.Z.o.o. Poland 100% 3. lnfosys BPO (Thailand) Limited Thailand 100% 40. So, such a large scale of reorganization of subsidiaries certainly impacted its PLI. Even otherwise, its huge highly qualified work force as is event from pages 75 to 78 of the paper book goes to prove that this company is having no comparability with the taxpayer which is a low end ITES service provider. 41. So, in view of what has been discussed above, we order to exclude Infosys from the final set of comparables for benchmarking the international transactions. GROUND NO.3 42. Ground No.3 is consequential in nature. GROUND NO.4 43. Ground No.4 is premature and does not require ..... X X X X Extracts X X X X X X X X Extracts X X X X
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