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TMI Blog2016 (2) TMI 1153X X X X Extracts X X X X X X X X Extracts X X X X ..... uating the international transactions of the assessee. 03. International transactions of the assessee with its AE for the relevant year were as under : International transaction Amount (Rs.) Business Process Outsourcing Services 42,02,31,741 Reimbursement of expenses(received) 27,41,792 Reimbursement of expenses (paid) 26,233 04. Financial results of the assessee company during the relevant previous year including international transactions with non-AEs were as under : Particulars Amount in (Rs.) Revenue* 63,32,19,482 Cost* 55,42,26,762 PBIT 7,89,92,720 PBIT as % of Cost 14.25% 05. TPO after going through the TP study filed by assessee in which it adopted TNMM for justifying its international transactions with its AE, rejected some of the comparable companies selected by the assessee and added some of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % adopting the formula given in OECD Guidelines, 2009. While making this work out, average PLR adopted by SBI was considered. Thereafter he computed the shortfall u/s.92CA as under : Ann's Length Mean Margin on cost 24.75% Less: Working Capita! Adjustment (as per Annexure-C) 0.94% Adjusted mean margin of the comparables 23.81% Operating Cost Rs.55,42,26,762/- Arms Length Price(ALP)@ 123.81% of Operating Cost Rs.68,61,88,154/- Price Received ₹ 63,32,19,482/- Short fall being adjustment u/s.92CA Rs.5,29,68,672/- 07. Assessment was thereafter completed by the AO making an addition of ₹ 5,29,68,672/- in so far as international transactions with AEs were concerned. 08. Aggrieved assessee moved in appeal before the CIT (A). In the first place assessee disputed the figure of cost adopted by the TPO while working out the shortfall under section 92CA of the Act. As per the assessee, cost cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover and abnormal profits filter, TPO was of the opinion that turnover filter had to be applied by virtue of the decision of coordinate bench in the case of Genisys Integrating Systems (India) P. Ltd, v. DCIT [ 53 SOT 159]. 13. CIT (A) also held that companies with abnormal losses had to be excluded from comparison since according to him, inclusion of such companies would erode proper comparability. By virtue of this direction, the following companies got technically excluded from the list of comparables selected by the TPO : Sl. No. Comparable company Turnover (Rs. Crore) OP/TC 1 Allsec Technologies Ltd. 99.53 -13.29 2 Aditya Birla MinacsWorldwide Ltd. 176.72 -4.00 3 Coral Hubs Ltd. 38.08 50.68 4 Eclerx Services Ltd. 116.98 58.80 5 Infosys BPO Ltd. 825.09 19.66 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT(A) erred in holding that the size and turnover of the company arc deciding factors for treating a company as a comparable and accordingly erred in excluding Ms. Allsec Technologies Ltd. M/s Aditya Birla Minacs Worldwide Ltd. M/s Coral Hubs Ltd. M/s Eclerx Services Ltd. M/s Infosys DPO Ltd. M/s Jindal Intellicom Pvt. Ltd. M/s Mold-Tek Technologies Ltd. M/s Wipro Ltd. (Seg) as comparables. 3. The learned CIT(A), in the facts and circumstances of the case. erred in directing the AO to exclude M/s Acccntia Technologies Ltd from the final set of comparables, after verifying the fact of acquisitions and amalgamations of the acquired entities with Acccntia. 4. The learned CIT(A), in the facts and circumstances of the case, erred in holding that M/s Genesys International Corporation Ltd being functionally different, cannot be taken as comparable. 5. The CIT(A) erred in not appreciating that if any filter or criteria applied by the taxpayer for search of comparables is accepted or any filter or criteria applied by the TPO is relaxed, the entire accept reject matrix changes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llsec Technologies Ltd, M/s. Aditya Birla Minacs Worldwide Ltd (seg), M/s. Coral Hubs Ltd, M/s. Eclerx Services Ltd, M/s. Infosys BPO Ltd, M/s. Jindal Intellicom P. Ltd M/s. Moldtek Technologies Ltd. According to him out of these, M/s. Coral Hubs Ltd, M/s. Eclerx Services Ltd, M/s. Moldtek Technologies Ltd, and M/s. Wipro Ltd (seg) had functionally different profile to that of the assessee. Ld. AR further submitted that Infosys BPO and Wipro Ltd, (seg), in addition to their compatibility due to huge turnover, would go out on application of functional filter as well. 23. We have heard the rival contentions. In so far as application of turnover filter is concerned, by virtue of Hon'ble Bombay High Court judgment in Pentair Water India P. Ltd, (supra), we are of the opinion that it is a valid criteria that could be adopted for inclusion or exclusion of companies in a comparability study. Hon'ble Bombay High Court had followed earlier decision of Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies P. Ltd [93 DTR 375]. No doubt Hon'ble Delhi High Court in the case of Cryscapital Investment Advisors India P. Ltd (supra) had taken a different line ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Ltd, M/s. Aditya Birla Minacs Worldwide Ltd and M/s. Jindal Intellicom P. Ltd, we are of the opinion that the matter requires a fresh look by the TPO. TPO has to verify whether these companies were functionally comparable with the assessee and whether losses suffered were due to any abnormal business conditions which were not there for the assessee. He shall decide on the comparability of these cases afresh. Ground.2 of the Revenue is therefore treated as partly allowed. 25. Vis-a-vis ground.3 raised by the Revenue, Ld. DR had argued that exclusion of the M/s. Accentia Technologies Ltd, was inappropriate. We find that Ld. AR has placed before us a decision of the coordinate bench in the case of Symphony Marketing Solutions India p. Ltd, [IT(TP)A.1316/Bang/2012, dt.14.08.2013]. Said company was also providing ITES services to its AE abroad and the list of comparables considered by the TPO for analysing the value of international transactions also included M/s. Accentia Technologies Ltd. Case before the Tribunal was also for the very same assessment year. Therefore in our opinion the decision of the Tribunal mentioned supra would apply here as well. In relation to M/s. Accentia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial year 31.3. 2008. The assessee filed Form No.21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective date of the scheme of merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data conversion related computed based services and other related services. Further the business of this company requires skilled manpower and scientists, civil engineers, etc. The assessee is a routine ITES provider who does not require such highly skilled employees. Besides the above, this company also carries out R D services and own intangibles. The aforesaid facts, in our view, will take this company out of the list of comparables. We may also point out that the objection of the assessee in this regard has been disregarded by the TPO by mere observation that it cannot be rejected on the basis that it is into different functional line within ITES. In this regard, we may refer to the decision of the ITAT Bangalore Bench in the case of First Advantage Offshore Services Ltd. (supra), wherein it was observed as under:- 39. Having heard both the parties and having considered their rival contentions, we find that the assessee had raised elaborate objections to each of the comparables in group 3 before the TPO. The TPO has also reproduced the said objection in his order para 6.5.1. of page 178 of his order. He has rejected the contention of the assessee by holding that every fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable and deserves to be excluded from the list of comparables. We are therefore of the opinion that CIT (A) was justified in directing exclusion of this company as well. 27. Coming to grounds 5 to 7 of the Revenue, crux of its contention is that once certain criteria or filters are applied afresh, it would change the matrix of the comparability and erode the quality of comparability analysis. In our opinion even after exclusion of various companies directed by the CIT (A), there would be more than ten companies left out of the total twenty comparables considered by the TPO. A representative sample of ten or more companies can in no way be considered as a low figure so as to erode a comparable study. We therefore do not find any merit in the contentions raised by the Ld. DR. Grounds 5 to 7 of the Revenue are dismissed. 28. Vide its grounds 8 to 10, grievance of the Revenue is that CIT (A) followed the judgment of Hon'ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd, (349 ITR 98), for directing exclusion of those expenditure which were reduced from the export turnover, also from the total turnover while calculating deduction available to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Limited ( Mold-Tek ) by the Hon'ble CIT(A). Without prejudice to the above, the Hon'ble CIT(A) erred in not adjudicating on the grounds pertaining to income earned from derivative trading, abnormal business activity (de-merger) and application of the related party transaction greater than 10% filter in case of Mold-Tek. Further, the learned CIT(A) also erred in concluding that Mold-Tek is functionally comparable to the Respondent. 3. On facts and circumstances of the case and in law, the Ld. AO / Ld. TPO erred in objecting to the exclusion of Wipro Limited ( Wipro ) by the Hon'ble CIT(A), on the ground of size and turnover of the Company. Without prejudice to the above, the Hon'ble CIT(A) erred in not adjudicating on the grounds pertaining to ownership of intangibles (intellectual properties and brand value) by the Wipro. 4. On facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in objecting to the rejection of Accentia Technologies Limited ( Accentia ) by the Hon'ble CIT(A) on the basis that the company witnessed extraordinary events like acquisitions and amalgamations during the relevant year. Without prejudice to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable, we find that the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd in ITA No.3774/Mum/2011 by order dt.9.11.2011 has held that since Vishal Information Technologies Ltd is outsourcing most of its work it has to be excluded from the list whereas the assessee in the cited case was carrying out the work by itself. In the instant case of the assessee also the assessee was carrying out its work by itself whereas in the case of VITL, it is outsourcing most of its work. We are therefore of the considered opinion that the decision of the ITAT, Mumbai in the cited case on the issue of excluding VITL as a comparable squarely applies. This decision was followed by the decision of the co-ordinate bench of this Tribunal in the case of Netlinx India(P) Ltd in ITA No.454/Bang/2011 dt.19.10.2012 wherein it was held that Vishal Information Technologies Ltd cannot be considered as a comparable. We, therefore, respectfully following the decision of the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd, direct the Assessing Officer / TPO to exclude Vishal Information Technologies Ltd. from the list of comparables. 15. Following the decision of the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it prints upon clients request, concluded as follows- 18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped form the final list of comparables. In case of Maersk Global service Centre India (P.) Ltd. (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- Insofar as the cases of tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded. In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inary events and peculiar circumstances prevail in the case of the assessee in as much as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:- 14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that that the concerned company is engaged in providing Knowledge Process Outsourcing(KPO) Services. 15. On considering the objections of the assessee in relation to this company, we accept the contention of the assessee that this company cannot be taken as a comparable both for the reasons that it was ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fall under the category of engineering services. Excerpts from the Annual Report of the company Page 10 of the Annual Report for the FY 2007-08 contains the following observation regarding the KPO division of the Company: The Company has achieved about 56.49% growth in 2007-08 to register a turnover of ₹ 17.86 crore. The company having established its credentials in structural engineering services to US clients is devising aggressive marketing strategy to achieve rapid growth. This company is also engaged in providing a host of engineering services like civil and structural engineering services, mechanical product design, plant engineering, IT services and GIS services. As we have already seen, this company is to be classified as KPO and cannot be compared with the assessee. The decision of the Bangalore Bench of the ITAT in the case of First Advantage Offshore Services Ltd. (supra) which we have referred to in the earlier part of this order will clearly apply to this company. We therefore direct this company to be excluded from the list of comparables. Accordingly we are of the opinion that M/s. Moldtek Technologies Ltd, cannot be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X
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