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TMI Blog2017 (4) TMI 1448X X X X Extracts X X X X X X X X Extracts X X X X ..... ility of this company to the record of TPO/AO and direct to decide the same as per law and functional comparability of this company. Eclerx Servivces Ltd - this company provides data analysis and data process solution and is recognised as experts in chosen market financial cruises, retail and manufacturing It was found to have being providing complete business solutions. The nature different field of services provided by this company clearly show that it is not functionally comparable with the software development services. Accordingly, we direct the TPO/AO to exclude this company from the set of comparables. Infosvs BPO Ltd engaged in the business of software product, therefore, it is clear that the company apart from having its own IPR and brand value also engaged in the software product. Therefore, this company cannot be considered functionally similar to that of assessee and accordingly, we direct the AO/TPO to exclude from the list of comparables. Accentia Technologies Ltd (seg) company is engaged in providing engineering design services and software development services. In the segment ITES this company is deriving income from engineering design services and software developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cross objections against the assessment order dated 30/01/2015 for the assessment year 2010-11. 2. Briefly, facts of the case are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is a wholly owned subsidiary of ScanCafe Inc., USA. It is engaged in the business of providing digital imaging services falling within the category of IT enabled Services (ITeS) to its AEs. The assessee-company is compensated by the AE at cost +17% mark0up basis. It has filed return of income for the assessment year 2010-11 on 27/09/2010 declaring total income of ₹ 52,010/-. The assessee-company also reported international transaction of provision of digital imaging services (ITeS) of ₹ 17,58,08,037/- in its Form 3CEB. The assessee-company sought to justify the consideration received for the international transaction entered with its AE to be at arm's length. The assessee-company had also submitted transfer pricing study report adopting the operating profit to the total cost as profit level indicator (PLI) for the transfer pricing study. The assesseecompany also adopted TNMM which was considered to be the most appropriate method for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period i.e. 01/04/2009 to 31/03/2010 were rejected. * Companies that are functionally different from the taxpayer were excluded. * Companies that are having peculiar economic circumstances were excluded. 3.1 The TPO also considered foreign exchange fluctuation as non-operating in nature and accordingly re-computed operating margin of the assessee-company at 18.7%. Finally, the TPO selected the following 10 comparables: 3.2 The TPO computed operating margin of the comparables at 22.86%. After giving working capital adjustment of 0.02% adjusted arithmetic mean of PLI was determined at 26.63%. On the above basis, TPO computed TP adjustment as follows: 4. The AO passed draft assessment order dated 10/3/2014 u/s 143(3) incorporating the above TP adjustment after reducing telecommunication and freight expenditure incurred in foreign currency from export turnover for the purpose of calculating benefit u/s 10A of the Act. 5. Being aggrieved, assessee-company filed objections before the DRP contending inter alia that TPO ought to have considered operating foreign exchange fluctuations as operating income and ought to have applied upper turnover limit of ₹ 2 crores and ought no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance on the Tribunal order rendered in the case of M/s. Flextronics Tech. (India) Pvt. Ltd. v. DCIT in IT(TP)A No.l559(B)/2012 dated 23.10,2015, copy available on page Nos.17 to 38 of compilation of case laws submitted before the Tribunal. (a) Accential Tech. Ltd. (Seg.) (b) Acropetal Tech. Ltd. (Seg.) (c) Coral Hubs Ltd. (d) Crossdomain Solutions Ltd. (e) Eclerx Services Ltd. (f) Genesys International Corpn. Ltd, (g) Mold Tek Technologies Ltd," We further note that the functional comparability has been examined in detailed by the co-ordinate bench of this Tribunal in the case of Equant Solutions India (P.) Ltd. v. Dy. CIT [2016] 157 ITD 292/66 taxmann.com 192 (Delhi - Trib.) as well as in the case of ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxmann.com 103 (Bang. - Trib.). Further in the case of Acropetal Technologies Ltd. (Seg.), the co-ordinate bench of this Tribunal in the case of Kodiak Networks (India) Pvt. Ltd. v. Dy. CIT [IT(TP)A No.l540 (Bang) of 2012] has considered the functional comparability and found that this company is not comparable with a captive service provider. Accordingly we direct the Assessing Officer/TPO to ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entitles cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP." 14.2 As discussed by the Special Bench in the case of Maersk Global Centres (India ) (P.) Ltd. (supra), this company provides data analysis, operating management, audits, reconciliation, metrics management and operating services, it has two business verticals - financial services, retail and manufacturing. It was found to have being providing complete business solutions in the nature of high end services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company, i.e., Infosys Technologies Ltd., be excluded form the list of comparable companies. 15.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 15.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dissimilar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited (supra) the said company cannot be considered a good comparable for determining the ALP. The findings of the Tribunal in the case of Symphony Marketing Solutions India Private Limited (supra) is based on the another decision of Hyderabad Bench of the Tribunal in the case of CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P.) LTD. v. DCIT [2013] 57 SOT 14 (ITAT[Hyd]). It is pertinent to note that an extra ordinary event of merger, amalgamation or acquisition is relevant only if such event affects the result and operating margin of the very segment of the company to be compared with the assessee. In case, of segmental results are taken in to account and extraordinary event of merging or demerging taken place in other division or segment of the comparable company then such event does not, affect the existing business model, function or margin of that particular segment. Therefore, the extraordinary event is a relevant factor for considering the comparability of company only when it has resulted into abnormal influence on the functions and profit margins of the company. Undisputedly, the TPO took the segmental result/data of this company for determination of ALP, hence, it becomes rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. 83. For the reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore there would be significant influence in the pricing policy which will impact the margins. Schedule 13 to the profit & loss account of this company for the F. Y. 2007-08 shows that this company incurred huge selling and marketing expenses. Page 133 of the annual report of this company for the F. Y 2007-08 shows that this company realizing its brand value has chosen to value the same on the basis of its earnings and that of Infosys. The brand value of the Assessee and Infosys has been valued at ₹ 3 1,863 Crores. Infosys BPO, being a subsidiary of Infosys, has an element of brand value associated with it This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comparables. We therefore accept the contention of the assessee that this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also pertinent to point out that before the TPO, the assessee raised an objection that this company performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the services rendered by this company fall in the definition of ITES. 13. We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No. 15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The performance of Engineering Design Services is regarded as providing high end services among the BPO which requires high skill whereas the services performed by the Assessee are routine low end ITES functions. We therefore hold that this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -49-ITAT-2013(Mum)-TP] wherein it was held that the turnover band of ₹ 1 to ₹ 200 crores is bereft of any rationality as the application of this rule does not enable comparison of a company with ₹ 200 crores with another company having a turnover of ₹ 201 crores. It was further observed by the Hon'ble Tribunal that the turnover was also not a criteria prescribed under rule 10B for selection of comparables. We are also of the considered opinion that the turnover cannot be relevant criteria in a service sector where fixed overheads are nominal and the cost of service is in direct proportion to the services rendered. Following this reasoning we hold that the above companies cannot be excluded from the list of comparables. Therefore, we direct that E-Clerk and Infosys Services cannot be excluded on the ground of turnover but these comparables came to be excluded in the ground of functionality in the case of assessee's appeal in IT(TP)A No.502/Bang/2015. 18. Ground Nos.4 and 5 challenge application of 0% RPT. While selecting comparables, assessee needs to ensure that the comparables are uncontrolled. Companies having controlled transactions need to be eliminated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... centage of RPT to total revenue is there in the case of this comparable i.e., 3 DPLM Software Ltd. Hence, we set aside the assessment order and restore the entire matter to the file of the Assessing Officer for a fresh decision after examining the factual aspect of this claim of the assessee and after obtaining fresh directions from DRP. If it is found that the percentage of RPT to total revenue in the case of this comparable i.e., 3 DPLM Software is more than 25 per cent then this comparable should be excluded from the list of comparables selected by the TPO and the average mean should be worked out after excluding this comparable and if the same is within plus minus 5 per cent of the profit margin declared by the assessee then no transfer pricing adjustment is required to be made. This ground of the assessee is allowed for statistical purposes. 6. It was submitted by the ld. counsel of the assessee that remaining grounds of the assessee may not be adjudicated upon at this stage and may be left open because the assessee is sure that it will succeed on this issue alone that the RPT in the case of 3 DPLM Software Ltd., is very high and hence that comparable has to be excluded and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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