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TMI Blog2015 (11) TMI 1749X X X X Extracts X X X X X X X X Extracts X X X X ..... tter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (2001 (10) TMI 4 - SUPREME COURT) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234B of the Act, if any, while giving effect to this order. X X X X Extracts X X X X X X X X Extracts X X X X ..... ologies Ltd. - 13.29 Average : 24.75 2.1.3 The average profit margin of the comparables selected by the TPO was 24.75%. After granting working capital adjustment of 0.07% the TPO computed out the ALP of the assessee's international transactions with its AEs, and proposed an adjustment of ₹ 6,40,54,571 which was computed as under :- Arithmetic Mean 24.75% Less - Working Capital Adjustment 0.07% Adjusted Arithmetic Mean 24.68% ALP @ 124.68% of operating cost. Rs.84,81,59,579 Price Charged in international transactions Rs.78,41,05,008 Short fall being adjustment u/s. 92CA Rs.6,40,54,571 The TPO passed an order under Section 92CA of the Act on 26.10.2011 proposing an adjustment of ₹ 6,40,54,571 to the ALP of the assessee's international transactions with its AEs. 2.2 After receipt of the TPO's order under Section 92CA of the Act dt.26.10.2011, the Assessing Officer completed the assessment under Section 143(3) rws 144C of the Act vide order dt.30.1.2012 determining the income of the assessee at ₹ 8,23,14,946 as against the returned income of ₹ 1,42,99,890 in view of the following additions / disallowances :- (i) Disallowance of excess cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the TP documentation and holding that current year (i.e. Financial Year 2007-08) data for companies should be used for comparability; d) Upholding the approach adopted by the learned TPO of collecting selective information of the companies by exercising powers granted to him under Section 133(6) of the Income Tax Act, 1961 (in short 'the Act') although the same was not in the public domain and was not available to the appellant at the time of conducting the TP Study or at the time of assessment. e) Upholding the TPO's approach of making an adjustment even in respect of transactions with Non AEs; f) Upholding the TPO's approach in not using data as prescribed in Rule 10B(4) and the proviso thereto, while arriving at arm's length price; g) Not providing any adjustments under Rule 10B towards the difference in the risk profile, working capital position, depreciation adjustment and market adjustment between the appellant and the entrepreneurial companies selected as comparables while determining the arm's length price; h) Upholding TPO's approach of arbitrarily granting an adhoc working capital adjustment of 2%, without calculating the same. i) Upholding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndependent searches for comparables. According to the learned Authorised Representative for the assessee the assessee seeks exclusion of these 3 companies from the list of comparables on the grounds that after it had finalized its TP Study, information available in the public domain has resulted in several judgments of the co-ordinate bench of this Tribunal wherein these companies have been held to be not purely engaged in ITES activities and excluded for reasons such as being functional dis-similar, having an extra-ordinary events, etc. Taking into account the factual matrix of the case on this issue and in the light of the judgment of the co-ordinate benches of this Tribunal referred to in respect of the exclusion of these three comparables, we are of the opinion that, in the interest of equity and justice, this ground be admitted for consideration and adjudication in the light of facts / judicial pronouncements placed before on record. The additional ground raised by the assessee is accordingly admitted for adjudication. 3.4 IT(TP)A No. 1645/Bang/2013 - Revenue's appeal for Assessment Year 2008-09. " 1. The order of the learned CIT (Appeals) is opposed to law and the facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arables from the TPO's final set of comparables. In the light of the above observations, we now proceed to adjudicate both the assessee's as well as Revenue's appeal hereunder. Assessee's appeal for Assessment Year 2008-09 - IT(TP)A No.1783/Bang/2013 5. The Grounds raised at S.Nos.1 to 3(a), 3(c) to (i) of the assessee's appeal being general in nature and not pressed or urged before us in this appeal are rendered infructuous and accordingly dismissed. 6. Ground No.3(b) - Assessee's appeal for exclusion of certain companies from the TPO's list of comparables. 6.1 As mentioned earlier in this order at para 4 (supra), in the course of proceedings before us, the learned Authorised Representative submitted that he would make and put forth arguments only questioning the comparability of individual companies included in the final set of comparables by the TPO. In this regard, the learned Authorised Representative submitted a chart and arguments seeking to explain the assessee's position regarding the non-comparability of eight companies, which in its opinion , were wrongly included by the TPO in his final set of comparables and which are listed as under :- 1. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as there were extraordinary events that took place in this company like acquisition of other concerns, etc. holding as under at paras 10 & 11 thereof :- " (1) Accentia Technologies Ltd. (Seg.) 10. This was considered as a comparable by the TPO and listed at Sl.No.1 of the comparable companies chosen by the TPO. The ld. counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was draw to the annual report of this company for the A.Y. 2007-08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger." 11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact ahs taken place, then the aforesaid comparable has to be excluded." We have considered the submissions of the ld. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. It is clear that during the previous year there were extra ordinary events t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in the case on hand. At paras 12 and 13 of its order, the co-ordinate bench has held as under :- "12. This company is listed at Sl.No.2 of the comparables chosen by the TPO. As far as this company is concerned, the objection of the assessee is that this company is not functionally comparable. The assessee is a BPO company that provides market analytics and data management services. To provide market analytics solutions, the assessee gives strategies that impact on client revenue including data based marketing strategies for customer acquisition, devising customer retention strategies and excluding loss mitigation strategies through cutting edge forecasting tools. The data management services provided by the assessee include routine business data reporting and management, website management, marketing data analysis and top line reporting. As far as Acropetal Technologies Ltd. is concerned, this company does the business of export of software services. It is also seen from the segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it derives income from engineering design services and software development services. It is also p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany from the list of comparables, the learned Authorised Representative, inter alia, placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) wherein this company was excluded from the list of comparables. 6.4.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.4.3 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncement placed reliance on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) held this company, formerly known as Vishal Information Technologies Ltd. to be functionally not comparable with low end ITES providers as it has outsourced most of its work, whereas the assessee in the case on hand is carrying out the work by itself. Further, this company has entered into an area of business known as new vertical digital library and print on demand whereas it is seen that the assessee in the case on hand provides ITES / BPO back end supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vertical Digital Library & Print on Demand in F.Y. 2007-08. In the case of Capital IQ Information Systems India Pvt. Ltd. (supra), the ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:- "IV. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): 16. The assessee has objected for this company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but the business model of the company is also different as it subcontracts majority of its ITES works to third party vendors and has also made significant payments to those vendors. The payments made to vendors towards the data entry charges also supports the fact that the company outsources its works. In the circumstances, it cannot be taken as a comparable to the ITES functions performed by the assessee. Since this company is acting as agent only by outsourcing its works to the third party vendors. In this context, the assessee relied upon the order of the DRP in assessee's own case for the assessment year 2008- 09, wherein the DRP, after taking into consideration, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at this issue had arisen in the assessee's own case for the assessment year 2006-07. This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR's argument that the employee cost filter is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot be said that the said filter is not applicable to ITES segment, where comparably less skilled employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employee cost filter to the ITES sector is also justified. In view of the same, we direct the TPO to apply the employee cost filter to exclude companies with employee cost of less than 25% from the list of comparables for the computation of ALP." 17. Applying the aforesaid de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 is 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." "Crossdomain's IT knowledge and domain compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial on record; including the judicial pronouncement relied upon by the assessee. We find that the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) has excluded this company i.e. Eclerx Services ltd. from the list of comparables to low end ITES / BPO support service providers as it renders high end KPO services in the field of data analytics and operations management which requires high level of skill sets. At paras 20 & 21 of its order, the co-ordinate bench has held as under :- " (5) Eclerx Services Ltd. 20. This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. It has further been submitted that extra ordinary 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dth in terms of economies of scale with diversity and worldwide geographical dispersion of customers. It is submitted that in view of these factors, Infosys BPO Ltd. is functionally dis-similar and different from the assessee in the case on hand. In support of its proposition for excluding this company from the list of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the set of comparables. 6.7.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.7.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 has excluded this company i.e. Infosys BPO Ltd. from the list of comparables to low end ITES / BPO support service providers as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee as it is functionally dis-similar; being engaged in KPO services providing structural design and detailing / structural engineering services, plant engineering, mechanical product design, IT Services and GIS Services, etc. which do not fall in the domain of provision of low end ITES support service, provided by the assessee in the case on hand. In support of the arguments put forth for excluding this company from the list of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the list of comparables. 6.8.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.8.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 has excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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." Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing low end ITES / BPO support services, this company i.e. Infosys BPO Ltd. is to be excluded from the list of comparables to the assessee in the case on hand. We hold and direct the TPO accordingly. 6.9 Wipro BPO Ltd. 6.9.1 This company was selected by the TPO as a comparable. In respect of this company, the learned Authorised Representative for the assessee submitted that the arguments and contentions put forth in respect of Infosys BPO Ltd. (supra) are similar and are reit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 to 6 of assessee's appeal : Deduction u/s.10A of the Act. 7.1 In these grounds the assessee challenges the action of the learned CIT (Appeals) in upholding the Assessing Officer's action in reducing telecommunication expenses attributable to the delivery of services outside India (Rs.1,55,13,784) and travel expenditure (Rs.26,79,067) incurred in foreign currency from 'export turnover' while computing the eligible deduction under Section 10A of the Act. Before us, the learned Authorised Representative for the assessee submitted that the above issue is covered by the decision of the Hon'ble jurisdictional High Court of Karnataka in the case of Tata Elxsi Ltd. & Others (349 ITR 98) wherein it has been held that the deduction is to be computed by reducing from the 'total turnover', the same amount by which the 'export turnover' has been reduced. 7.2 We have heard both sides and carefully perused and considered the material on record. On this very issue, the Hon'ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd and Others reported in (2011) 247 CTR 334 (Kar); (2011-TIOL-684-HC-KAR-II), has held that while computing the deduction under section 10A, if the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness × Export turnover of the undertaking (Export turnover + domestic turnover) Total Turnover." In the light of the above facts and respectfully following the decision of the Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. & Others (supra), we direct the Assessing Officer to exclude the above mentioned expenses on communication and travel incurred in foreign currency both from export turnover as well as from the total turnover while calculating the eligible deduction under section 10A of the Act. 8. In Ground No.7, the assessee has denied itself liable to be charged interest under Section 234B of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234B of the Act, if any, while giving effect to this order. 9. In the result, the assessee's appeal for Assessment Year 2008-09 is partly allowed. Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the relevant portion of the order of the learned CIT (Appeals), it is clear that the learned CIT (Appeals) has not factually examined the issue of the comparability of the comparable companies selected by the TPO or decided whether or not the comparables the assessee sought exclusion of, were functionally dis-similar to the assessee or not. No finding of fact has been rendered by the learned CIT (Appeals) as to the comparability of any of the TPO's list of comparables or as to which of them were functionally dis-similar. The learned CIT (Appeals) has merely directed the TPO to apply the test of functional dis-similarity in the light of the decision of the ITAT, Delhi Bench in the case of Actis Advisers P. Ltd. (supra); which action, in our considered opinion, is tantamount to setting aside the matter to the file of the Assessing Officer without rendering any factual finding as to which of the comparable companies are functionally dis-similar to the assessee and which the Act does not empower him to do. It was for the learned CIT (Appeals) to apply the test of functional dis-similarity and the concerned judicial decisions in the matter before him and after examining the judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X
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