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TMI Blog2016 (4) TMI 1292X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer ('Ld. AO') pursuant to the directions of Learned Dispute Resolution Panel ('Ld. DRP') is bad in law and void ab-initio. 2. The reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the Arm's Length Price ('ALP'), as is required under section 92CA(i) of the Act. 3. The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP), erred both on facts and in law in confirming the addition of ₹ 15,19,62,H2/- to the income of the appellant (as against the total addition of ₹ 15,03,12,595/- as proposed by the Ld. TPO/ AO in its draft assessment order u/s 143 (3) read with section 1440) by holding that its international transactions do not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. DRP and the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO's action of: 3.1 not appreciating that none of the conditions set out in section 92C(s) of the Act are sati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it margins of Infosys BPO by excluding foreign exchange gain/ loss from operating income and for which the Appellant has filed a rectification letter u/s 154 of the Act with the Ld. AO; 3.6 in line with the Ld. DRP directions for Infosys BPO, the Ld. TPO/ AO did not rectify the profit margins of Accentia Technologies Limited by excluding foreign exchange gain/ loss from operating income and for which the Appellant has filed a rectification letter u/s 154 of the Act with the Ld. AO; 3.7 including high-profit making companies in the final comparables' set for benchmarking a routine service provider such as the Appellant (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the single-minded intention of making an addition to the returned income of the Appellant and on the other hand resorting to arbitrary rejection of low-profit/loss making companies based on erroneous and inconsistent reasons; 3.8 including certain companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed; and 3.9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it with margin of the assessee @15.17% and thereby concluded that international transactions are at Arm s length. Against this ld. TPO examined the various comparables and filters used by the assessee and considered the various objections raised by the assessee used five comparables and determined OP/OC @38.03% and proposed an adjustment of 150312595/- . The final set up of comparables taken by the ld. TPO and their margin are as under:- Sl No. Comparables OP/OC(%) 1. Cosmic Global Ltd. 50.70 2. Crossdomain Solutions Pvt Ltd. 25.63 3. Infosys BPO Ltd. 24.28 4. Coral Hub Ltd. 37.03 5. Accentia Technologies Ltd. 52.52 Average 38.03 Based on this adjustment was worked out as under :- Operating cost (A) 659806536 OP/TC 38.03% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) Sub contracts with Vertex Group companies: under this arrangement, Vertex India provides IT Enables services to Vertex Group companies as per the rates mentioned in its sub-contracts with Vertex Group companies. The contracts with the third party customers have been directly entered into by the Vertex Group companies and not Vertex India. Billing Arrangement The billing rates for each service are mentioned in the price contract which forms a part of the sub-contract executed between Vertex Group companies and Vertex India. The billing rate differs for all the above mentioned business process accounts which are based on the nature of business of the end customers. For example, billings could be on the basis of per activity i.e. per voice call, per email, per hour etc. The per unit rate charged are pre-agreed with the end customers at the time of executing the contracts, depending upon the cost incurred along with a mark-up. Vertex India raises invoices on Vertex Group as per the billing rate (entity basis the sub contracts. Pricing is primarily based on an estimated volume of business expected by Vertex India. Vertex India budgets its fee quotes based on the expected vo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive parties to the transactions; (d) 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. Therefore it may so happen that a comparable company engaged in the similar business which is having the similar FAR may be generally included though same might have been held to be not includible by the courts in some other cases. Further the contractual terms as well as host of other factors stated in above sub rule may determine the comparability analysis. If the difference arising on comparability analysis does not affect the price or profitability of comparable or if so it can be reasonably adjusted same should be taken as good comparable for the Comparability analysis. Therefore it cannot be ever assumed that if a comparable is held to be excludible in one case , it shall always be excluded in the decisions to follow subsequently. Therefore while deciding the comparability the decisions cit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company has been directed to be excluded from the final list of comparable as under:- Accentia Technologies Ltd. 9.1. The TPO considered this company with profit margin of 52.52%as comparable. The assessee s objection for not treating it as comparable was jettisoned both by the TPO as well as the DRP. The assessee is aggrieved against the inclusion of this company in the final tally of comparables. 9.2. We have heard the rival submissions and perused the relevantmaterial on record. We have also gone through the Annual report of thiscompany for the year in question, which has been placed in the paperbook. It can be noticed from page 31 of the Annual report that during the year under consideration this company completed the acquisition of96% of M/s Oak Technologies Inc., a healthcare back-office processingcompany engaged in medical billing, coding and transcription activitiesand having substantial global work force. The Mumbai Bench of theTribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum)176, has held that a company cannot be considered as comparablebecause of exceptional financial results due to mergers/demergers.Similar view has been taken by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered 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 theassessee 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 inhouse.It goes without saying that these two business models, namely, outsourcing services and providing in-house services, cannot be 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 bythe Tribunal in the case of United Health Group Information ServicesPvt. Ltd. vs. ACIT (ITA No.6312/Del/2012) vide its order dated28.8.2014. Respectfully following the precedent, we direct the exclusionof this company from the list of comparables. 17. Therefore respectfully following the decision of coordinate bench we also direct for exclusion of this comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 non-existent 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 re-engineered payroll service EFFIPAY that processes and delivers accurate payroll to clients with headcount up to 1000 employees in just 4 hours*. With Effipay Lite and Effipay Lite Plus, our bouquet of services cover end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000. Cross domain s IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 25. The assessee has sought inclusion of Omega Healthcare Management Services Pvt. Ltd. which has margin of 15.43%. TPO has rejected the company that employee cost is not given. Assessee objected before TPO that just because cost is not available it cannot be rejected. TPO has given reason that the human resource drives the whole business and in absence of employee cost it should be rejected. Before assessee has filed application of admission of additional evidence under Rule Income Tax Appellate Tribunal wherein assessee has submitted vide annexure-VII certain details, vide annexure-VIII assessee has given the details of personal expenses. Against the admission of additional evidence ld. DR did not object and therefore the additional evidence filed by the assessee in the form of computation of the operating margin of the comparable is submitted. In view of this this comparable is set aside to the file of ld. TPO with a direction to consider same on mer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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