TMI Blog2020 (10) TMI 1148X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts, we direct that the foreign exchange/fluctuation (loss or gain) we treated as being operational in nature and PLI should be computed accordingly after giving effect to the treatment of foreign exchange/loss as operational. Comparable selection - Inclusion of Accentia Technologies Ltd. as a comparable company - As functional profile of the assessee being different from the functional profile of Accentia Technologies Pvt. Ltd., this company cannot be considered a good comparable. Accordingly, we direct the exclusion of this company from the final set of comparables. Inclusion of the company Mastif Tech Pvt. Ltd. - Referring to submission of the assessee that this company is functionally dissimilar to the assessee company - objections of the assessee against inclusion of this company in the final set of comparables has not been dealt with either by the TPO or by the Ld. CIT (A). In such a situation, it is our considered view that in the interest of substantial justice, the TPO should consider the objections of the assessee against the inclusion of this company and thereafter pass a speaking order . Exclusion of the comparable Caliber Point Business Solution Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Analytics Ltd. - As no segmental information and bifurcation between ITeS and Software Development Segments. For this reason, this company was directed to be excluded from the final set of comparables. Infosys BPO Ltd. excluded on the ground that it was a giant in the area of software development. - ITA No.3779/Del/2017, ITA No.3989/Del/2017, C.O. No.181/Del/2017 Arising out of ITA No.3779/Del/2017, ITA No.2745/Del/2018 - - - Dated:- 27-10-2020 - Shri N.K. Billaiya, Accountant Member And Shri Sudhanshu Srivastava, Judicial Member For the Appellant : Sh. Rahul Yadav, Adv., Sh. Suyash Sinha, Adv. For the Respondent : Ms. Maimun Alan, Sr.DR ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER: ITA No. 3779/Del/2017 is Department s appeal preferred against the order passed by the Ld. Commissioner of Income Tax (Appeals)-44, New Delhi {(CIT (A)} vide order dated 22.12.2016 whereas ITA No.3989/Del/2017 is the assessee s Cross Appeal against the said order and Cross Objection No.181/Del/2017 is preferred by the assessee in support of the order of Ld. CIT (A). These two appeals and the Cross Objection pertains to Assessment Year: 2011-12 and ITA No.2745/Del/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income. The case was selected for scrutiny under CASS. Since the assessee had entered into international transactions during the year under consideration, a reference u/s 92CA (1) of the Act was made by the Assessing Officer (AO) to the Transfer Pricing Officer ( TPO ) for determination of Arm s Length Price ( ALP ) in respect of the following international transactions: International transaction Value (Rs. In Crores) Method Arms Length results (as per transfer pricing documents Provision of Back Office Research Support Services 13.4 Transactional Net Margin Method ( TNMM ) -Net Profit Margin based on costs ( NCP ), being OP/OC for 6 comparables:6.65% -PLI of Assessee 14.81% Recovery of cost incurred towards maintaining extra floor area 0.55 cost-to cost N.A. Reimbursement of expenses (Received/Receivable) 0.05 cost-to-cost N.A. 2.2 The assessee selected six comparables to benchmark its transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer Pricing Adjustment. 2.4 Aggrieved, the assessee approached the Ld. First Appellate Authority who was pleased to confirm the Transfer Pricing Adjustment in principle but granted partial relief in terms of the following directions: To exclude comparable companies, viz. E-clerx Services Ltd., ICRA Techno Analytics Ltd. and Infosys BPO Ltd. from the final set of comparables. To include only the Healthcare Segment of Acropetal Technology Ltd. (and not Engineering Design Services Segment) in the final set of comparables. 2.5 The TPO passed order dated 23.06.2017 giving effect to the First Appellate Authority s order and computing the PLI (OP/OC) margin of the remaining comparables as under: S. No. Name of the Company PLI% (after working capital adjustment) 1. Accentia Technology Ltd. 27.93 2. Acropetal Technology Ltd. (Segmental) 13.56 3. E4E Healthcare Business Services Pvt. Ltd. 11.30 4. Jindal Intellicom Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies as comparable 2. That on facts and circumstances of the case, the learned CIT (Appeals) was justified by correctly excluding 'eClerx Services Limited' as comparable, in the final set of comparables. 3. That on facts and circumstances of the case, the learned CIT (Appeals) was justified by correctly excluding 'ICRA Techno Analytics Limited' as comparable, in the final set of comparables. 4. That on facts and circumstances of the case, the learned CIT (Appeals) was justified by correctly excluding 'Infosys Limited' as comparable, in the final set of comparables. General 5. The above grounds of cross-objections are without prejudice to each other and the respondent (crossobjector) craves leave to add, alter, vary, omit, substitute or amend the above grounds of cross-objections, at any time before or at the time of hearing of the appeal. 2.8 The assessee s Cross Appeal for Assessment Year 2011-2012 is captioned ITA No.3989/Del/2017 and the grounds raised by the assessee are as under: Based on the facts and circumstances of the case, the appellant company respectfully craves to prefer an appeal before your lordships agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed CIT (Appeals) has erred both on facts and in law in upholding the contention of AO/TPO by not allowing the risk adjustment. General 11. The above grounds of appeal are without prejudice to each other and the appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal. 3.0 The Ld. Authorized Representative (AR) submitted that ground No. 3 of the assessee s appeal challenged the action of the Ld. CIT (A) in considering the foreign exchange fluctuation gain/loss as non-operating . It was submitted that foreign exchange gains or loss arising directly from the normal course of business transaction of import/export should be taken as operating income/expenditure but the TPO had erroneously considered the same as non-operating item resulting in changing the PLI of the assessee from 14.81% to 9.59%. It was also submitted that the TPO had also placed reliance on the safe harbor rules while holding that the foreign exchange gain/loss was non-operating. It was also submitted that the Ld. CIT (A) had held that the determination of operating revenue/expenses should be as prescri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not an extraordinary event but in subsequent Assessment Year: 2012-13, the Ld. CIT (A) himself had excluded Accentia on the ground that there was an extraordinary event since it had acquired 17.85% in Accentia Physician Services. The Ld. AR also placed his reliance on numerous case laws wherein Accentia had been excluded on ground of functional dissimilarity. 3.2 With respect to Ground No.5 challenging the inclusion of the company Mastif Tech Pvt. Ltd. ( Mastif ), It was submitted that the order of the TPO and the Ld. CIT (A) were non-speaking in as much as the TPO had not dealt with the objection of the assessee against inclusion of this company. It was submitted by the Ld. Authorized Representative that this company was not functionally comparable with the assessee as this company was an emerging consulting service provider in consumer internet product domain. It was submitted that this company was a complete online media solution provider providing end-to-end services and was engaged in online content sharing, content delivering and social networking domain as compared to the assessee s activity of providing low-end ITeS Services. It was also submitted that during the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f comparables. 3.4 With respect of ground No.7 challenging the exclusion of Caliber Point Business Solutions Limited ( Caliber ), it was submitted by the Ld. AR that the TPO rejected this company on the ground of different financial year ending although the TPO had disputed the comparable on the basis of functional comparability. It was submitted that the quarterly financial statements for March, 31, 2011 were available on company s website and, therefore, functionally comparable company should not be rejected merely on the ground that it had a different financial year ending. Reliance was placed on numerous case laws wherein the Tribunal had directed that such companies need to be included which were functionally similar although having a different financial year ending if the quarterly data was available. 3.5 With respect to Ground No.8 challenging the exclusion of Cosmic Global Limited ( Cosmic ), it was submitted by the Ld. AR that the TPO had excluded this company on the ground that it failed export turnover filter of 75% but the TPO had not raised any objection regarding the functionally similarity. It was also submitted that there was no consistency in the approach of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the Department was also challenging the action of the Ld. CIT (A) in directing the TPO for excluding M/s E-Clerx Services Ltd. as a comparable when the assessee as well as M/s EClerx Services Ltd were both in the same ITES segment. It was also submitted that the Department was challenging the action of the Ld. CIT (A) in directing the TPO for exclusion of M/s ICPA as a comparable when the assessee as well this company were both in the same ITES segment. The Ld. Sr. DR also submitted that the Ld. CIT (A) had erred in directing the exclusion of Infosys BPO Ltd. from the final list of comparables by wrongly placing reliance of those cases where the facts and circumstances were totally different. The Ld. SR. DR placed extensive reliance on the order of the TPO/Assessing Officer and submitted that the Ld. CIT (A) had wrongly directed inclusion of M/s ICRA Techno Analytics Ltd. with healthcare segment only and had erroneously directed exclusion of E-clerx Services Ltd. and in support of her conention she quoted from the observations and findings of the TPO and the Assessing Officer and prayed that the errors committed by the Ld. CIT (A) be set right. 6.0 In response to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany cannot be taken as a comparable because this was engaged in software development as well as in consultancy, engineering services, web development and hosting services, business analytics and BPO services and further segmental information in respect of BPO services was not separately available. It was highlighted that this company also deals in purchase and re-sale of branded computer software and therefore, this company had been rightly excluded. 6.3 With respect to Department s Ground No.4 challenging the exclusion Infosys BPO Ltd. ( Infosys ), it was submitted that this had been excluded by the TPO on the ground that high turnover and presence of brand value does not affect the profit margin. It was submitted that this company cannot be taken as a comparable in view of the fact that this company had a turnover which was more than 87 times of the assessee company. It is also submitted that this company was functionally not comparable since it provided service in the niche areas and has presence of brand and high turnover. It was submitted that this company is an established market leader, enjoying huge brand value with huge economies of scale, diversity and geographical d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Informed Technologies India Limited 14.14% 6.59% 2. Jeevan Scientific Technology Ltd 14.75% 14.64% 3. Jindal Intellicom Limited 13.19% 1.72% 4. Cosmic Global Ltd. 11.52% 10.50% 5. Caliber Point Business Solution Ltd. (Segmental) 16.10% -4.29% 6. R Systems International Limited (Segmental) -6.61% 41.53% Average [Arithmetic Mean] 10.51% 11.78% OP/OC Margin Earned by SAIPL 15.40% 8.3 The TPO rejected 4 out of 6 comparables and included certain additional comparable companies based on his own quantitative filter arriving at a set of 11 comparables and proposed a Transfer Pricing Adjustment of ₹ 1,36,72,619/-. Thereafter, after the passing of the draft assessment order and the final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h huge turnover have been incorrectly accepted in the final set of comparables. Erroneous application of export to turnover filter 3. The learned CIT(Appeals) has erred both on facts and in law in upholding the inappropriate application of the export to turnover filter by the AO/TPO; and consequently, certain companies viz. ICRA Online Limited and Datamatics Financial Services Limited have been incorrectly rejected in the final set of comparables. Erroneous inclusion of certain companies as comparable 4. The learned CIT (Appeals) has erred both on facts and in law in upholding the contention of AO/TPO by including TCS e- Serve Limited , in the final set of comparable . Erroneous exclusion of certain companies as comparable 5. The learned CIT (Appeals) has erred both on facts and in law in upholding the contention of AO/TPO by not including TCRA Online Limited', in the final set of comparables. 6. The learned CIT (Appeals) has erred both on facts and in law in upholding the contention of AO/TPO by not including 'Datamatics Financial Services Limited', in the final set of comparables. 7. The learned CIT (Appeals) has erred b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT in Asst. Year: 2009-10 in assessee s own case had remitted the use of this filter to the TPO but in that year the TPO had applied the filter of 25% to export turn over whereas in this year it was enhanced to 75% without any basis. (iii) Datamatics Financial Services Ltd:- It was submitted that this company is engaged in Transaction Processing and back-office out sourcing offering customer care services. It was also submitted that it is the leading provider of business research transformational outsourcing of services and hence, functionally comparable and the TPO has not objected to the functional similarity but it was excluded because if failed the 75% export turnover filter. It was submitted that use of this turnover filter was not warranted and that this comparable deserved to be included. (iv) ACE BPO Services Limited- The Ld. AR submitted that the Ld. CIT (A) has erroneously excluded the company even though he accepted that this company is functionally comparable to the assessee. For this he drew our attention to page No.83 of the Ld. CIT (A) s order. It was also submitted that this company is a health care focused ITES Provider promoted by healthcare and managemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in [2017] 83 Taxaman.com 346 (Delhi Trib.). While rejecting this company as a comparable in the case of B.C. Management Service Pvt. Ltd. which was providing IT and Financial Back Office Support Services to various entitities, the Co-ordinate Bench of the Tribunal held that the operation of TCS e-Serve Ltd. broadly comprised of transaction processing and technology services including software testing, verification and validation for which no segmental bifurcation was available. The Co-ordinate Bench held that in absence of such vital information of the margins of the various segments, the company could not be considered a good comparable because of the difficulty in bench marking the correct profit margin. The Co-ordinate bench also noted that the presence of high brand value of the Tata brand also made TCS e- Serve Ltd. not a good comparable. The Relevant observations of the Tribunal are contained in paragraph -18 of the said order and the same are being reproduced herein under for a ready reference: 18. We have heard the rival submissions, perused the relevant finding giving in the impugned orders as well as the material placed on record. One of the main points of distinctio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s appeal challenges the action of the Ld. CIT (A) in considering the foreign exchange gain/loss as non-operational. The Ld. Authorized Representative has argued at length for the proposition that foreign exchange gain/loss in the assessee s case accrues directly from the normal course of business transactions on import/export and, therefore, the same should be taken as operating income/expenditure. It has also been brought to our notice that this issue was decided by a Co-ordinate Bench of the Tribunal in Assessment Year 2009-10 in assessee s own appeal in assessee s favour. We have gone through the order of the Tribunal in Assessment Year 2009-10 in assessee s own case in ITA No.410/Del/2014 vide order dated 20th Feb.,2015. We find that the contention of the Ld. Authorized Representative is correct in this regard in as much as the Co-ordinate Bench of the Tribunal, in paragraph 20 of the said order has held that foreign exchange fluctuation cannot be seen as independent of the operating income. Respectfully following the same, on identical set of facts, without the Department having pointed out any distinguishing factor on the facts, we direct that the foreign exchange/fluctua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in ITA No.1551/Del/2015 vide order dated 23.08.2018. A similar direction for exclusion of Accentia Technology Ltd. was given by the Delhi Bench of the ITAT in the case of Orange Business Service India Solutions Pvt. Ltd. vs. DCIT in ITA No.869/Del/2016 vide order dated 31.05.2016. Accordingly, in our considered view the functional profile of the assessee being different from the functional profile of Accentia Technologies Pvt. Ltd., this company cannot be considered a good comparable. Accordingly, we direct the exclusion of this company from the final set of comparables. 11.5 Ground No.5 of the assessee s appeal challenges inclusion of the company Mastif Tech Pvt. Ltd. It is the submission of the assessee that this company is functionally dissimilar to the assessee company. It has also been contended by the Ld. Authorized Representative (AR) that the objections of the assessee against inclusion of this company in the final set of comparables has not been dealt with either by the TPO or by the Ld. CIT (A). In such a situation, it is our considered view that in the interest of substantial justice, the TPO should consider the objections of the assessee against the inclusion of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness Solution Ltd. can be considered functionally similar to the assessee company. The TPO shall given proper opportunity to the assessee before adjudicating this issue in accordance with law. Accordingly, Ground No.7 of the assessee s appeal stands allowed for statistical purposes. 11.7 Coming to Ground No.8 of assessee s appeal which challenges the exclusion of Cosmic Global Ltd., it is the submission of the Ld. Authorized Representative that the TPO has excluded this company on the ground that it fails the export turnover filter of 75% although the TPO has not raised any objection regarding functional similarity. It has also been submitted that in Assessment Year 2009-10, the TPO had applied an export turnover filter of 25% whereas in this year 75% export turnover filter has been applied. It has also been submitted that the ITAT had agreed with the assessee s contention in Assessment Year 2009-10 that export turn over filter of 25% was not an appropriate filter. We note that the TPO has excluded this company solely on the ground that it fails the export turn over filter of 75%. The TPO has, however, not commented on the functional aspect of this company. It is also a fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany in the final set of comparables. Thus, Ground No.9 stands allowed for statistical purposes. 11.9 It has been submitted by the Ld. Authorized Representative that Ground No.10 challenging not providing the benefit of risk adjustment is not being pressed. Accordingly, Ground No.10 of the assessee s appeal stands dismissed as being not pressed. 11.10 Ground No.11 is general in nature not requiring any specific adjudication. 12.0 In the result, the assessee s appeal bearing ITA No.3989/Del/2017 for Assessment Year 2011-12 stands partly allowed. 13.0 Coming to the Department s appeal bearing ITA No.3779/Del/2017, the Department is contesting the direction of the Ld. CIT (A) for including the company Acropetal Technologies Ltd. as a comparable with only the financials of healthcare segment . The Ld. Authorized Representative while supporting the order of the Ld. CIT (A) has argued that Acropetal Technologies Ltd. is engaged in software development and Engineering Design Services (EDS) and that the EDS segment of the company was not functionally comparable to the assessee because this segment involves Research and Development activities resulting in creation of intan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion between ITeS and Software Development Segments. For this reason, this company was directed to be excluded from the final set of comparables. On similar reasoning, we uphold exclusion of this company by the Ld. CIT (A). Thus, Ground No.3 of the Department s appeal stands dismissed. 13.3 Ground No.4 of the Department s appeal challenges action of the Ld. CIT (A) in directing the exclusion of the company Infosys BPO Ltd. on the ground that it was a giant in the area of software development. The Ld. CIT (A) also noted that this company had substantial intangibles in the form of goodwill and had a different functional and risk profile. We have perused the annual report of Infosys BPO for the year under consideration and note that this company has a sales turnover ₹ 1129 Crores i.e., more than 87 times of that the assessee company which was a mere 13.48 Crores. The Hon ble Delhi High Court, while upholding the order of the Tribunal, in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856/Del/2010 vide order dated 10th July, 2013 has held that Infosys BPO Ltd. had been rightly excluded from the list of comparables for the reason that it was a giant company in the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the preceding paragraphs of this order. On similar reasoning, for Assessment Year 2012-13 also, this company is directed to be excluded from the final set of comparables. 17.3 The assessee has challenged the exclusion of the comparable ICRA Online Ltd. It is seen that this company has been excluded by the TPO by applying export turnover filter of 75%. It is the assessee s contention that this company is functionally comparable to the assessee s company and that the assessee had already applied foreign exchange filter while selecting comparables and, therefore, restricting export earnings to 75% was not warranted as the nature of services were identical. It has also been brought to our notice that the Tribunal in assessee s own case for Assessment Year 2009-10 had remitted the use of this filter to the TPO wherein in that year the export turnover filter of 25% had been applied. We note that in this year the export turnover filter has been enhanced to 75% by the TPO without assigning any reason and there is no finding by either of the Lower Authorities on the aspect of the functional similarity of the assessee company with this company. We also note that the ITAT in Assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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