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TMI Blog2016 (4) TMI 1313X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in ITA No.205/PN/2015, wherein various grounds of appeal have been raised, which read as under:- On the facts and circumstances of the case, and in law; 1. The Ld Assessing Officer ('AO') pursuant to the directions of the Ld. Dispute Resolution Panel ('DRP') erred in rejecting the benchmarking approach adopted/contemporaneous documentation maintained by the appellant and thereby making a transfer pricing adjustment of ₹ 1,95,83,147 to the income of the appellant by holding that the international transaction, pertaining to provision of Information Technology ( IT or software services') and IT enabled back office support services ( ITES Services or back office support services') to the associated enterprise ('AE'), are not at arm's length under the Incometax Act, 1961 ('the Act'). 2. On the facts and in the circumstances of the case, the Ld. DRP/AO erred in modifying the benchmarking analysis, as conducted by the appellant using Transactional Net Margin Method ('TNMM') for benchmarking its international transactions pertaining to provision of IT and ITES services to the AE, and thereby modifying the set of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n audit report in Form No.3CEB was required and proceedings under section 92CA(3) of the Act were to be considered and he passed the assessment order without following mandatory process. On the other hand, Form No.3CEB was filed by the assessee with the ACIT, Circle -4, who initiated the process with TPO, Pune and passed order under section 92CA(3) of the Act proposing an adjustment of ₹ 3,17,20,190/- to the arm's length price. As the Assessing Officer had passed the order under section 143(3) of the Act before receipt of order under section 92CA(3) of the Act passed by the TPO, the consequential adjustment as suggested by the TPO was not made. Thereafter, the original assessment was set-aside with direction to complete assessment proceedings in accordance with law. Accordingly, the Assessing Officer issued notice under section 143(2) of the Act to the assessee and made a reference to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act in order to determine arm's length price of international transaction entered into by the assessee with its associate enterprises. The TPO noted that the assessee was engaged in two kinds of activities i.e. software serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue before us has also raised several grounds of appeal. However, the learned Authorized Representative for the assessee pointed out that ends of justice would be met in case the directions of DRP are upheld in respect of exclusion of Infosys Technologies Ltd. for higher turnover under the software services IT segment and also ICSA (India) Ltd. for having functionally dissimilar and having R D expenditure of more than 3%. It was further pointed out by the learned Authorized Representative for the assessee that the said company was rejected by Pune Bench of Tribunal in assessee s own case in assessment year 2009-10 in respect of ITES segment. The assessee is aggrieved by the order of TPO in holding that there could be no sub-classification under ITES segment. He further pointed out that the sub-classification has to be done between KPO and BPO cases and where the concerns picked up by the TPO were engaged in KPO operations, then the margins of said concerns are not to be compared with the margins of assessee company, which is a BPO company. Relianc e for this proposition, was made on the ratio laid down by the Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of concern Bodhtree Consulting Ltd. from the final list of comparables on the basis that the said concern had shown unusual trend of profitability. The learned Authorized Representative for the assessee pointed out that the said company had been rejected as a comparable by Pune Bench of Tribunal in series of cases. 8. Similar issue with regard to exclusion of Bodhtree Consulting Ltd. arose before Pune Bench of Tribunal in PTC Software (India) Pvt. Ltd. Vs. DCIT in ITA No.336/PN/2014, relating to assessment year 2009-10, wherein vide order dated 31.10.2014, the trend of OP/TC of Bodhtree Consulting Ltd. was noted as 13.87% in FY 2005-06, 80.15% in FY 2006-07, 19.89% in FY 2007-08, 62.27% in FY 2008-09, 33.42% in FY 2009-10 and (-) 4.46% in FY 2010-11. In view of the above said oscillation shown by the assessee and following the ratio laid down by Pune Bench of Tribunal in PTC Software (India) Pvt. Ltd. Vs. DCIT (supra), the said concern was directed to be excluded from final list of comparables. The Tribunal held as under:- 29. The assessee further has assailed the inclusion of Bodhtree Consulting Ltd. appearing at item No.6 in the list of comparables selected by the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly. 32. Further, the Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK, Vs. Dy.DIT, had on simil ar issue of exclusion of abnormal profit making concern held as under:- 8. We have carefully considered the rival stands on this aspect. In the context of the controversy relating to the exclusion of abnormal profit making concerns, a reference has been made to the decision of the Special Bench of the Tribunal in the case of Maersk Globa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern over the five financial years i.e. for the three preceding years and one succeeding financial year. Notably, for the financial year under consideration, the margin of the said concern is 34.71% whereas for the preceding three financial years of 2003-04, 2004-05 and 2005-06 it is -6.47%, -69.07% and -44.21% respectively and for the subsequent financial year of 2007-08, the margin is 3.67%. The aforesaid clearly suggests a wide fluctuation in the margins earned by the said concern over a period of time. In-fact, a further analysis of the financial data for the aforesaid years suggest that there is a wide fluctuation in the revenue generation of the said concern during the financial year under consideration as compared to the past three financial years. For the subsequent financial year, the revenue generation has taken a downward trend which again reflects a wide fluctuation. At the time of hearing, the learned counsel for the assessee has referred to the Annual Report of the said concern for the financial year under consideration to point out that the company has acknowledged a growth of 132.86% in its revenue generation as compared to the immediately preceding financial year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise devoid of credibility, such comparables would deserve to be excluded from the list of comparables even if such an exercise involved examination of data of the comparables for more than one financial year. In the present case, as our discussion in the earlier paras reveal, the profit margin of 34.71% for the year under consideration is an abnormal business trend, and, accordingly the said concern is liable to be excluded. Therefore, we do not find any force in the plea of the Revenue to retain the said concern in the final list of comparables. 10. In conclusion, we set-aside the order of the CIT(A) on this aspect and direct the Assessing Officer to exclude Informed Technologies India Ltd. from the final list of comparables. 33. The Mumbai Bench of the Tribunal in NetHawk Networks India Pvt. Ltd. Vs. ITO in ITA No.7633/Mum/2012, dated 06.11.2013 had also excluded the company Bodhtree Consulting Ltd. as it was engaged in the production of software products and also because no segmental data was adequately available. The said company was rejected as it was not engaged in the software development services and there was no segmental data comparable were available. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oral Hub from the final list of comparables. 12. The learned Authorized Representative for the assessee pointed out that the said concern was functionally different as it had significant vendor payments and was outsourcing its business. 13. On perusal of record, we find that the assessee had applied TNMM method to benchmark the international transaction of provision of back office support services to its associate enterprises. The margins of assessee were 15.34% and they were held to be at arm's length price by selecting list of comparables in this regard by the assessee. However, the TPO re-worked the list of comparables in back office support services segment and the arithmetic mean of comparables were 33.33% and adjustment of ₹ 1.83 crores was proposed by the TPO. The DRP directed to exclude certain companies based on which the arithmetic mean re-worked at 22.71% resulting in TP adjustment of ₹ 70,73,604/-. The final list of comparables was of 15 concerns and the assessee is aggrieved by the inclusion of margins of Vishal Information Technol ogies Ltd. / Coral Hub. We find that the issue of said concern being not functionally similar on account of its outso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t out by the TPO in para 6.9.6. of the order is to the effect that the said concern being categorized as an IT-Enabled services concern, the same is liable to be included. 31. We have carefully considered the rival submissions on this aspect. At the outset, we may refer to page 810 of the Paper book, wherein the Notes to Accounts for the year ended 31.3.2007 of the said concern have been placed. As per the available information, the said concern has related party transactions as reported by the concern at para 7 of the said Notes at 86.92%, which breaches the RPT filter. Furthermore, the functional profile of the said concern brought out by the assessee also reveals differentiation in the activity profile. The TPO, in our view, has not appreciated the qualitative difference in the functions performed by the said concern as sought out to be brought out by the assessee. Considering the aforesaid, we therefore, find that the assessee was justified in ascertaining that the said concern be excluded from the list of comparables for the reasons canvassed. Thus, on this aspect assessee succeeds. 32. The next issue raised by the assessee is with regard to the inclusion of M/s.Vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the two concerns are not comparable. Justifiably, the said concern is showing a profit margin of 77.31% in this year and comparing it with 49.64% in the preceding year and 53.66% of the succeeding year, it is obvious that due to the qualitative difference in rendering of services, though in the ITEnabled services segment, the two concerns cannot be meaningfully compared. Therefore, in our view, the said concern was liable to be excluded for the purposes of carrying out the comparability analysis. 14. The Hon ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. (supra) held that Vishal Information Technologies Ltd. / Coral Hub was not functionally similar to BPO company. Following the same parity of reasoning, where the assessee before us is also engaged in IT enabled services and even PTC Software (India) Pvt. Ltd. was engaged in IT enabled services, said two concerns could not be compared and hence, the said concern is to be excluded from final list of comparables in order to compute arithmetic mean of comparables. We find support from the ratio laid down in Rampgreen Solutions Pvt. Ltd. (supra). Accordingly, we hold so. In view thereof, the issue raised by the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Pvt. Ltd. Vs. ACIT in ITA No.1319/PN/2011 , relating to assessment year 2007-08 vide order dated 10.10.2014 had held that Infosys Technologies Ltd. could not be considered as comparable entity with that of smaller companies, in turn, following the ratio laid down by the Hon ble Delhi High Court in CIT Vs. Agnity India Technologies Pvt. Ltd. in ITA No.1204/2011, judgment dated 10.07.2013 . The Hon ble Delhi High Court held that Infosys Technologies Ltd. should be excluded from the final list of comparables for the reason that it was a giant company in the area of development of software. Following the same parity of reasoning, we hold that Infosys Technologies Ltd. is not comparable to the assessee on the ground of higher turnover i.e. assessee s turnover was ₹ 26.28 crores and turnover of Infosys Technologies Ltd. was ₹ 1314 crores. Accordingly, we uphold the directions of DRP in excluding Infosys Technologies Ltd. from the final list of comparables while benchmarking international transaction of the assessee on account of software development services. 20. Another concern which was directed to be excluded by the DRP was ICSA (India) Ltd. on the ground that it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f comparables. The TPO also disagreed with the contention of the assessee raised before him that the said concern was functionally dissimilar. The TPO has noticed by referring to the Annual Report for the F.Y. 2006 -07 that it has two distinct segments, namely (i) software services and embedded solutions; and, (ii) Products and Projects related to power sector. The TPO considered the software services segment as a comparable to assessee s segment of IT-services and therefore he included the said concern in the list of comparables. 22. In this context, the Ld. Counsel has referred to the Annual Financial Statements of the concern to point out that the total research and development expenditure of ₹ 6,71,86,184/- incurred by the said concern is in relation to the embedded solutions segment only, and in this connection a reference has been made to the Director s Report, a copy of which is appearing at page 268 of the Paper book. It is pointed out that in order to calculate the ratio of R D expenses to total sales, it has to be calculated with reference to the sales in software services and embedded solutions segment of the said concern, because the R D expenses pertain onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee that the said concern is not functionally similar and the year of operation was exceptional year considering its growth is not being taken up since we are of the view that the said concern is not to be included in the final set of comparables on the aspect of R D expenditure. Accordingly, we direct the TPO to exclude ICSA (India) Ltd. 22. Following the same parity of reasoning, we uphold the order of DRP in excluding ICSA (India) Ltd. from the final list of comparables in the segment of provision of software development services. 23. Further, the Revenue is in appeal vide ground of appeal No.3 against exclusion of certain companies by the DRP on the basis that the services fall under another segment, while benchmarking international transaction under ITES segment. As per the objections raised by the Revenue, there could be no sub-classification of segment once such services falls under category of ITES. The DRP had directed the exclusion of Visesh Infotecnics Ltd., Eclerx Services Ltd. and CS Software Enterprises as all of them were KPO companies and the assessee was BPO company. 24. The learned Authorized Representative for the assessee pointed out t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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