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TMI Blog2025 (1) TMI 900X X X X Extracts X X X X X X X X Extracts X X X X ..... in at 22.37% - HELD THAT:- As IT and ITeS services are not comparable, the assessee rendering only IT services cannot be compared with a company which renders both IT and ITeS. In view of the foregoing discussion, we are satisfied that Vama Industries Ltd. is not a functionally comparable company and the same should be excluded from the list of comparables - See Approva Systems Private Limited [ 2019 (6) TMI 437 - ITAT PUNE] . I nclusion of the Thirdware Solutions Ltd.- as argued that nowhere the TPO has explained how he has worked out the margin of this comparable at 28.17% when as per the assessee, the margin comes at 19.63% - We are left with no choice but to restore this issue to the file of the TPO. TPO is directed to explain how he has computed the margin at 28.17% and re-determine the inclusion/exclusion of this comparable after affording a reasonable and adequate opportunity of being heard to the assessee. - SHRI NARENDRA KUMAR BILLAIYA, HON BLE ACCOUNTANT MEMBER SANDEEP SINGH KARHAIL, HON BLE JUDICIAL MEMBER For the Assessee : Shri Ketan Ved a/w Abdul Kadir Jawadwala, A/Rs For the Revenue : Shri Pravin Salunkhe, Sr. D/R ORDER PER NARENDRA KUMAR BILLAIYA, AM: This appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d team is sent back to the production team. 1.1.3. The production team of HERE India verifies the data captured on the NTNA's database i.e. the information received from the field team is plotted on the database by using the supporting software's which are also provided by NTNA. This data is verified by the production team. 1.1.4. In simple language, production team only verifies the data collected by the field team and captured into the database provided by the NTNA which automatically converts it into the electronic format of maps. Hence it can be stated that the Company is a low-risk captive service provider engaged in providing business process outsourcing services ('BPO') i.e. Information Technology Enabled Services ('ITES'). 1.2. Overview of Software Development Services (Information Technology Services - 'IT) 1.2.1. The Software Development group ('Group') at Mumbai is a part of global team responsible for innovating. design, development and building the technology. The global group generates content (Maps, Traffic, Points of Interest and Dynamic Content) and connects people to content. 1.2.2. The group's goals are to build new Map and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted the following comparables in its TP study report:- Sr. No. Name of Company Single year Margin for FY 2011-12 (OP/OC) 1 Caliber Point Business Solutions Ltd. 12.48% 2 Cosmic Global Ltd. 40.73% 3 Datamatics Financial Services Limited 0.05% 4 e4e Healthcare Business Services Pvt Ltd. 15.79% 5 ICRA Techno Analytics Limited 17.2% 6 Informed Technologies India Ltd 8.26% Arithmetic Mean 15.75% 8.1. The TPO adopted the following comparables:- Sr.No. Name of Company NCP 2011-12 1 e4e Healthcare Business Services Pvt Ltd 19.85 2 Informed Technologies India Ltd. 6.08 3 Universal Print Systems Ltd 52.46 4 BNR Udyog Limited 41.58 5 Excel Infoways Ltd 29.79 6 Microgenetics Systems Limited 19.61 7 Accentia Technologies Limited 11.75 Arithmetical mean 25.87% 8.2. As can be seen from the above, the arithmetical mean determined by the TPO was 25.87% against the arithmetical mean of the assessee determined at 15.85%. Accordingly, the TPO made the following upward adjustment:- Particulars Amount in Rs. Operating Income 452,891,521 Operating Income 390,945,976 ALP Operating Margin @ 25.87% (C = ALP%X B) 10,11,37,724 ALP Operating Income 49,20,83,699 105% of Transaction Value 475,536,097 95% of Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.89.67 Lacs which would surely distort the segmental results. Keeping in view the said factors, we direct for exclusion of this entity. 12. As the business profile of the assessee is inline with that of GTS eservices (supra), and finding that the Assessment Year is the same, therefore, respectfully following the decision of the Co-ordinate Bench (supra) we direct for the exclusion of this entity from the final set of comparables. 13. Similarly, the Co-ordinate Bench in the case of Credit Pointe Services Pvt. Ltd. vs. DCIT Circle 1(1) [ ITA No. 377/Pun/2017; AY 2012- 13], had the occasion to consider the comparability of Universal Print Systems Pvt. Ltd., and held as under:- 8. We have perused the case records and heard the rival contentions and have given considerable thought on the records and relevant documents placed before us. From the facts on record and more specifically from the Transfer Pricing Index and report of the assessee, the details of functional structure is provided and after perusal of the orders of the TPO and the Ld. CIT(A), we find that there is no specific findings as to the analysis regarding the functioning of Universal Print Systems Ltd vis a vis the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% from ITES segment and also functionally not comparable with that of the assessee company and also fails the filter of earnings from export against 75% of the total revenue and also fails the employee cost filter as employee cost is only 18.56% of the sales. iii) We heard the rival submissions and perused the material on record. We have perused the Annual Report of this company placed at pages 352 to 463 of paper book. From the page no. 354 it is stated as under. In 2011-12, Your Company faced many challenges ranging from historically steep fuel price increases, non-availability of power throughout the year and high raw material costs. The Labels and Offset divisions in particular were negatively impacted due to non-availability of power. Tamil Nadu on the whole, faced drastic power outages and restrictions, which were mainly directed at industries in order to keep the vote banks happy. The two divisions saw as much as 6 hours of power cuts in a day in addition to two days of ''power holidays in a week. Although this situation is expected to ease in the coming months, it has had an adverse impact on operations in 2011-12. The periodic fuel price increases through our 2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation had earned exceptionally higher operating margin at 40.62% which fact is apparent from the operating margin of the preceding and succeeding years wherein the average operating margin is 24.86%.The Hon'ble Tribunal in the case of Actis Advisors Pvt. Ltd. vs. DCIT in ITA No. 5277/Del/2011 has held that entities having high fluctuations in profit margins cannot be regarded as an appropriate comparable for the purpose of benchmarking analysis. In view of the above facts and circumstances we hold that BNR Udyog Ltd. is also not a suitable comparable and therefore we direct AO to exclude this comparable also for the purpose of benchmarking operating margin. 15.1. Which was subsequently followed by the Hon ble High Court of Delhi in the case of Evalueserve.com Pvt. Ltd. vs. Pr. Commissioner of Income Tax [ITA 127/2022], as under:- BNR Udyog Ltd. 11. After considering the aforesaid submissions, we find that, first of all, on perusal of the annual report it is seen that apart from medical transcription activities, it is also into medical billing and coding services. The functional profile of the medical transcription segment is almost akin to functions of Accentia Technologies Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities below, we find that the Co-ordinate bench in the case of Approva Systems Private Limited (now merged Infor (India) Private Limited) vs. DCIT Circle 1(1) [ITA No. 2444/Pun/2016], had considered the inclusion/exclusion of Vama Industries on similar business profile and held as under:- 3. We have heard both the sides and gone through the relevant material on record. The first issue taken up by the ld. AR is against the inclusion of Vama Industries Ltd. in the final set of comparables. In fact, the assessee chose this company as comparable. However, during the course of proceedings before the AO, it was contended that the same should be excluded. This contention did not find favour with the AO. The ld. CIT(A) upheld the inclusion of this company in the final set of comparables. The ld. AR submitted that this company should be excluded from the list of comparables on several reasons including different functional profile. The ld. DR raised a preliminary objection for non-exclusion of this company putting forth that it was a comparable chosen by the assessee itself and hence it cannot be allowed to resile from its own stand. 4. We are disinclined to sustain the preliminary object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Punjab Haryana High Court in CIT VS. Mercer Consulting (India) P. Ltd. (2017) 390 ITR 615 (P H). In view of the foregoing discussion, Approva Systems Private Limited we do not find any substance in the preliminary objection taken by the ld. DR. 6. Now we turn to examine the actual comparability of Vama Industries Ltd. Before proceeding to analyze the comparability of this company, it would be befitting to consider the functional profile of the assessee. At the cost of repetition, it is noted that the assessee is engaged in providing software development services and quality assurance (testing) services and the later are also admittedly in the nature of software development services. The nature of services has not been disputed by the AO. We have gone through the Annual report of Vama Industries Ltd. for the year under consideration, a copy of which has been placed on record. Profit and loss account of this company has been set out at page 29 of the Annual report, which indicates revenue from operations at Rs.14.01 crore. Bifurcation of such revenues is available in Note no. 20 as Sale of products (Domestic - Rs.9,55,70,528/- Export - Rs. Nil) at Rs.9,55,70,528/- and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices. The Tribunal's view in upholding the exclusion of such companies rendering engineering services was upheld by observing that the marketing services cannot be compared with engineering services. Similar ratio applies to the facts of the instant case as well. Whereas the assessee in question is engaged in rendering software development services, it cannot be compared with a company rendering software and technical services, more so, when the percentage of software development services is minuscule, at just 1.86%. 8. It is further pertinent to note that the Directors' report of this company contains `Segment-wise performance' at page 11, which states that : As of March 31, 2012 our main reportable segments are Software Development Services (IT ITeS) and Product/Hardware Sales Services . It is, thus overt that the Software Development Services segment of Vama Industries Ltd., which has been considered as comparable not only includes revenues from Software development services but also from I.T. enabled services as well. It goes without saying that I.T. services and I.T. enabled services are as distinct in connotation and nature as north pole is from the south pole. ..... 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