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TMI Blog2018 (2) TMI 2054X X X X Extracts X X X X X X X X Extracts X X X X ..... urnover and thereafter now sending the matters to the TPO for the purposes of examining, whether the turnover of the comparables are having any effect on the profit margin/price charged by the comparable or assessee in the light of judgment of Hon ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. [ 2015 (4) TMI 949 - DELHI HIGH COURT] In the present set of appeal Persistent Systems Ltd., Larsen Toubro infotech Ltd. and Infosys Ltd. were required to be examined on the touch stone of FAR analysis by the ld. CIT(A), but it has not been done as these comparables were removed from the list of comparables on account of turnover filter. Therefore we are remitting back the matter with respect to FAR analysis of Persistent Systems Ltd., Larsen Toubro infotech Ltd. and Infosys Ltd. to the file of CIT(A) with the direction to decide the functionality of these companies in accordance with the rules and regulations and by following the judicial pronouncements of High Court and Tribunal decisions. FCS Software Solutions Ltd. and Thinksoft Global Services Ltd. - inclusion of these two companies FCS Software Solutions Ltd. and Thinksoft Global Services Ltd. is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Member (J) For the Appellant : T. Suryanarayana, Advocate. For the Respondents : C.H. Sunder Rao, CIT (DR). ORDER Laliet Kumar, Member (J) 1. These cross appeals are directed against the order dated 15.09.2014 of CIT(A) for the assessment year 2009-10. The assessee is a wholly owned subsidiary of Misys India Holding Ltd., UK and engaged in the business of providing software development services, ITES and marketing support services to its AEs. During the year under consideration the assessee has reported the financial results, segmental details and international transactions as reproduced by the TPO in para 2.2 to 2.3 as under. 2.2. Financial Results for the FY 2008-09: a) Overall Result: b) Segmental Financials as per the TP documentation: 2.3. International Transactions (as mentioned in the 92 CE report) 2. As regards the sales support service segment, the TPO accepted the same at arms length and therefore there is no dispute of arms length price in the said segment. Since there are disputes with regard to the arms length price in respect of software development services of ITES we will discuss the issue involved in these two segments one by one. 3. Software Devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital and in not granting adequate working capital; 9. The Honourable CIT(A) erred in not determining the MAT credit eligible to the Appellant despite accepting the Appellant's arguments on the errors in the assessment order in relation to the same; The assessee has not insisted for adjudication of the remaining grounds raised before us. Ground raised by the Revenue are as under: 2. On the facts of the case and on law, the Ld. CIT(A) erred in considering the application of turnover filter in the selection of comparables, as the issue is contested and has not yet reached finality in the appellate proceedings. 3. On the facts if the case, the Ld. CIT(A) erred in giving the benefit of risk adjustment, as the difference in the risk level of the tested part and comparables was not established and also since it is not possible to convert the difference in risk level into numbers, quantitatively. Brief facts are as under. "(a) The Assessee is a wholly owned subsidiary of Misys India Holding Ltd., United Kingdom, which is a part of the Misys Group. The Assessee in engaged in the business of provision of SWD services, ITE services and marketing support services to its A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t technologies." In page 464 of the paper book it is mentioned as under. "Revenue Recognition Revenue from software development is recognised based on software developed and billed to clients." Similarly in page 467 of the paper book it is mentioned as under. "Segment Information The company has only one identifiable reporting segment i.e. software development services." 6. On the basis of the above and also on the basis of the chart submitted by the assessee for Financial Years 2005-06 to 2010-11 where the OP/OC of Bodhtree Consulting Ltd. it was submitted that OP/OC was 15.99%, 80.15%, 19.89%, 62.27%, 33.28% and (-) 4.46% respectively. Further, it was submitted that the accounting principle adopted by the Bodhtree Consulting Ltd. is entirely different then the accounting principle adopted by the assessee and therefore the same is required to be excluded. The ld. AR relied upon the order of M/s. Infinera India Pvt. Ltd. Vs. ITO in IT(TP)A No. 1008/Bang/2014, in page No. 968 to the following effect "2) M/s. Bodhtree Consulting Ltd., For exclusion of this company also, reliance has been placed on the same Tribunal order rendered in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment company and therefore directed the TPO to exclude this company. We are bound by the finding of fact recorded by the coordinate bench in the matter of M/s. Infinera India Pvt. Ltd. Vs. ITO (supra) and VMware Software India Pvt. Ltd. Vs. DCIT (supra), therefore respectfully following the decision of the coordinate bench we direct the exclusion of Bodhtree Consulting Ltd. 11. Sasken Communication Technologies Ltd:- For the Sasken Communication Technologies Ltd., the ld. AR of the assessee has submitted that Sasken Communication Technologies Ltd. is functionally different than the assessee company as Sasken Communication Technologies Ltd. is into software development product development and owns its own intangibles and develop own branded products. The assessee, relies upon the order of coordinate bench in the matter of VMware Software India Pvt. Ltd. Vs. DCIT (supra) reproduced elsewhere in this order. On the basis of the above it was submitted that Sasken Communication Technologies Ltd. is required to be excluded from the list of selected comparables by the TPO. 12. The ld. DR of revenue raised the same objections as raised by the ld. DR in respect of Bodhtree Consulting Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red these facts he relied on the following decisions: • IQ Information System (I) Pvt. Ltd., ITA No. 1961/Hyd./2012 (para No. 11 & 23, page 25); • Amerson Process Management India Pvt. Ltd., ITA No. 8118/Mum./2010 (para 16 page 15). 110. Ld. DR relied on the order of TPO and submitted that TPO considered the companies software services segment detaimageils only. We have considered the rival submissions and have perused the record of the case. 111. Ld. TPO has completely ignored the extraordinary business circumstances pointed out by assessee for which necessary adjustment was required to be made in accordance with Rule 10B(3) of Income Tax Rules. However, since this adjustment was not possible, therefore, this company should not have been included in the list of comparables. Further, we find that the company owns IPR and has branded products which also distinguishes it from the assessee and, therefore, keeping in view the decision of Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd.(supra), we direct the ld. TPO to exclude this comparable from the list of comparables. If we follow the coordinate bench decision in the case of Motoral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication of turnover filter as ground No. 2 in their appeal and insisted for adjudication of the said ground. 17. We have heard the rival contention of the parties and perused the record. The question of application of turnover filter is a vast question and the Tribunal has been taking the stand of 1 to 200 Crores turnover filter, however thereafter 1/10 tribunal has decided to follow 10times to 1/10 times of turnover and thereafter now sending the matters to the TPO for the purposes of examining, whether the turnover of the comparables are having any effect on the profit margin/price charged by the comparable or assessee in the light of judgment of Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. Vs. DCIT as reported in 376 ITR 183. In the present set of appeal Persistent Systems Ltd., Larsen & Toubro infotech Ltd. and Infosys Ltd. were required to be examined on the touch stone of FAR analysis by the ld. CIT(A), but it has not been done as these comparables were removed from the list of comparables on account of turnover filter. Therefore we are remitting back the matter with respect to FAR analysis of Persistent Systems Ltd., Larse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are very high and impacting the profit margin of more than 4%. We note that the co-ordinate bench of this Tribunal in the case of ARM Embedded Technologies Pvt. Ltd. Vs. DCIT (supra) has considered an identical issue in paras 20 to 23 as under: "20. Coming to the ground for inclusion of M/s. Thinksoft Global Solutions Ltd. and FCS Software Solutions Ltd., we find that TPO herself had suggested these in the show cause notice, but had thereafter come to of conclusion that working capital adjustment required for these two companies exceeded 4% of profits and could not be therefore taken as proper comparables. Reasons given by the TPO for excluding these two companies, appear at paras 3.6.5.1, of her order which reads as under: b) Two companies proposed in the show-cause notice are functionally similar to the taxpayer. However, when the working capital of these companies is considered, the profit margin gets distorted. It may not be out of context to mention that our search for comparable is primarily focus on those companies whose profit margin is predominantly from operating business and not from financial activities. This prerequisite is not different in case of software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co-ordinate bench of this Tribunal, we direct the A.O./TPO to include these two companies in the set of comparables for determining the ALP." In view of the above, it was submitted that these two companies are required to be included. On the other hand, the ld. DR has supported the order passed by the lower authorities and has submitted that these companies are not required to be included. 19. We have heard the rival contentions of the parties. In our view, the observations made by the ld. TPO at page 13 of the TPO order it is similar to the observation recorded by the coordinate bench in the matter of VMware Software India Pvt. Ltd. Vs. DCIT (supra). In our considered opinion the case of inclusion of these two companies FCS Software Solutions Ltd. and Thinksoft Global Services Ltd. is covered in favour of the assessee and we accordingly hold the same. 20. Now we deal with the ITES. In this regard the ld. AR has submitted that the ld. CIT(A) has excluded this company viz., Infosys BPO Ltd. and Aditya Birla Minacs Worldwide Ltd. on the ground that these companies are required to be excluded on the ground of high turnover and therefore these are not comparable with the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. Oak Technologies Inc., USA during the year under consideration and therefore, there is an extraordinary event of acquisition of another company. He has thus submitted that in view of the extraordinary event of acquisition, this company cannot be considered as a good comparable of the assessee. Apart from this objection, learned AR of the assessee has submitted that even otherwise this company is not functionally comparable with the assessee so far as services provided to the AE. He has referred to various business transactions and services provided by Accentia Technologies Ltd., and submitted that this company is in the various segments of activities like medical transcription, medical coding, medical billing, etc. The activity of medical transcription and medical coding is entirely different from the service of contact centre service provided by the assessee to its AE and therefore, this company cannot be considered as functionally comparable with the assessee. The learned AR of the assessee has referred to the revenue earned by the said company and submitted that substantial revenue has been earned by the said company from the business activity of medical transcription apar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, this argument of the learned AR of the assessee is rejected for want of complete facts. iii) As regards the functional dissimilarity, we note that Accentia Technologies Ltd. is engaged in diversified activity of medical transcription, medical coding, billing, receivable management. Thus it is clear that the said company is engaged in the healthcare activity and providing BPO service in the healthcare sector, that too by providing specific services of medical transcription, medical coding, medical billing etc. We note that these activities are quite different from the service of contact centre provided by the assessee to its AE which is purely in the nature of call centre. Therefore, we are of the view that the company Accentia Technologies Ltd. cannot be considered as a functionally comparable company with the services provided by the assessee to its AE. The TPO is directed to exclude this company from the set of comparables. 11.2. Eclerx Services Ltd. The learned AR of the assessee has submitted that this company is engaged in the high-end services and therefore, this company is basically a KPO and not a BPO. He has referred to Annual Report of this company at pag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the 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, operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 6,99,35,756/-. Therefore, substantial part of the revenue has been earned from the activity of translation. The learned AR of the assessee has further pointed out that even otherwise this company is outsourcing the work of translation as it is evident from the profit and loss account of this company that an amount of ₹ 3,00,25,326/- has been paid on account of translation charges. Thus, learned AR of the assessee has submitted that this company cannot be considered as functionally comparable with the assessee for the purpose of determining the ALP. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of Lam Research (India) Pvt. Ltd. vs. DCIT in ITA No. 1437/Bang/2014 dated 30/4/2015. i) On the other hand, learned Departmental Representative has submitted that the comparability of this company has been examined by the TPO as well as by the DRP. The TPO has rejected the objections raised by the assessee in respect of this company by holding that the translation service are in the nature of ITeS and therefore, it qualifies all the filters applied by the TPO. He has relied upon the orders of the authoritie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at ₹ 7.37 crore divided into three segments namely, Medical transcription and consultancy services at ₹ 9.90 lacs, Translation charges at ₹ 6.99 crore and Accounts BPO at ₹ 27.76 lac. The Ld. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the Ld. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at ₹ 3.00 crore, which is strictly in the realm of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies needless to say the benefit of second proviso to section 92C(2) be considered. 26. The assessee in ground No. 8 objected to the putting a cap by the CIT (A) and the TPO on working capital adjustment. In this regard, we would like to mention that the law is settled to the extent that the assessee would be entitled to working capital adjustment in accordance with Act and Rules without any cap and therefore we direct the TPO to calculate the working capital adjustment of the assessee, vis-à-vis of the assessee on actual basis, if any. Accordingly the ground of working capital adjustment is allowed for statistical purpose. 27. The revenue is also challenging the order of the CIT(A) regarding the risk adjustment. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that though the CIT(A) has directed the TPO to work out the risk adjustment as per the prevailing norms and grant the same to the assessee however it is pertinent to note that the onus is on the assessee is to provide all the relevant details and computation of quantum of level of risk in the case of the assessee as well as comparables. Therefore we direct the AO/ ..... 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