SOCIETE GENERALE GLOBAL SOLUTION CENTRE PRIVATE LIMITED,BANGALORE vs. DCIT, BANGALORE

This is an appeal by the assessee against the order of assessment dated 29.09.2011 passed u/s. 143(3) r.w.s. 144C by the DCIT, Circle-12(3), Bengaluru, for assessment year 2007-08. This appeal was heard and an order dated 24.02.2016 was passed by this Tribunal. The assessee filed miscellaneous petition No.114Bang/2016 pointing out certain apparent errors in the order of the Tribunal.

The issue that arose for consideration in the above appeal is the Transfer Pricing ('TP' for short) adjustment of Rs.3,98,63,492 /- made by IT(TP)A No.1188/Bang/2011 Page 2 of 12 the Transfer Pricing Officer ('the TPO' for short) towards the international transaction of provision of software development services ('SWD services' for short) to the Appellant's Associated Enterprises ('AE' for short), and an adjustment of Rs. 1,86,46,103/- made by the TPO towards the international transaction of provision of information technology enabled services ('ITE services for short) to the Appellant's AEs aggregating to Rs. 5,85,09,595/- which was upheld by the Dispute Resolution Panel ('the DRP for short).

It was the plea of the assessee that the Tribunal while deciding the appeal in its order dated 22.04.2016 omitted to decide on the comparability of Celestial Biolabs Ltd., and Megasoft Ltd., in the software development services (SWD) segment and the following 10 comparable companies in the ITeS segment:

Besides the above, it was also submitted that foreign exchange / loss was not considered by the Revenue authorities as part of the operating

At the time of hearing, the learned DR submitted that in so far as SWD services segment is concerned, the AO has passed orders consequent to the order dated 21.04.2016 and in the said order no addition on account of determination of ALP has been made and therefore the grounds recalled in the MP have become academic and therefore should be dismissed. Learned Counsel for the assessee could not rebut this position and therefore the comparability of the 2 companies Celestial Biolabs Ltd., and Megasoft Ltd., and considering foreign exchange gains as operating in nature. In the SWD services segment, does not require any adjudication.

As far as the ITeS segment is concerned, the first issue to be decided is with regard to the foreign exchange gain / loss has to be considered as part of the operating profit for the purpose of considering the assessee’s profit margin as well as the profit margin of the comparable companies. This issue is no longer res-integra and has been adjudicated in several decision and it has been held that if the gains relate to the rendering of the main service, the same ought to be treated as operating in nature. Reliance in this regard was placed on the following decisions:

With regard to the comparability of the 10 companies listed in the earlier part of the order in the ITeS segment, the learned Counsel for the assessee brought to our notice the decision of the Tribunal rendered in the case of First Advantage Offshore Pvt. Ltd., Vs. DCIT order dated 30.04.2013 passed by this Tribunal in IT(TP)A No.1086/Bang/2011. It is not in dispute before us that the assessee in the present appeal and the assessee in the case referred to by the learned Counsel for the assessee has similar profile i.e., both the companies are engaged in software development services. In fact, in both the cases, the 26 comparable companies identified by the TPO are one and the same. The Tribunal in the aforesaid order considered the comparability of Accentia Technologies Ltd., Informed Technologies Ltd., and Vishal Information Technologies Ltd., excluded the aforesaid 3 companies in the list of comparable companies on IT(TP)A No.1188/Bang/2011 Page 5 of 12 the ground that the employees cost to operating revenue was less than 25% of the total cost. In this regard, it was also pointed out that the TPO applied the filter of employee cost to operating revenue being less than 25% for the SWD services segment but did not do so for ITeS segment. This Tribunal has been taking a consistent view on the application of the aforesaid filter on the ITeS segment also.

The Tribunal in the case cited by the learned Counsel for the assessee has applied the aforesaid filter in respect of the aforesaid 3 companies for Assessment Year 2007-08 and has found that the aforesaid companies has employee cost of less than 25% to operating revenue. Following are the relevant observations of the Tribunal:

According to the learned counsel for the assessee, these companies do not satisfy the employee cost filter of being more than 25%. He submitted that in the assessee's own case for the assessment year 06- 07, the Tribunal has held that the TPO cannot pick and choose ‘employee filter' for each sector when the same set of facts are available.

The learned DR on the other hand submitted that the employee cost filter of being more than 25% is applicable only to the software development and not to ITES sector. He submitted that as far as software development is concerned, the company would require highly skilled employees resulting in high cost of employees, whereas in the ITES which is a 'call centre', it would require only graduates

Having heard both the parties and having considered their rival contentions and the material on record, we find that 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.”

Respectfully following the aforesaid decision of the Tribunal, we direct exclusion of the aforesaid 3 companies

Allsec Technologies Ltd. : As far as the comparability of this company is concerned, the contention of the assessee before the TPO was that it has abnormal profits and therefore had to be rejected has a comparable company. This was not accepted by the TPO. Before DRP, the functional comparability and the fact that this company incurs huge marketing expenses were cited as reasons for exclusion of this company. But the same was not accepted by the DRP. Learned Counsel for the IT(TP)A No.1188/Bang/2011 Page 7 of 12 assessee submitted that this company was rejected on the ground of existence of peculiar economic circumstances and extraordinary event and IPO during the relevant previous year and on this ground this company has been excluded from the list of comparable companies by the ITAT, Bengaluru Bench in the case of Unisys India Pvt. Ltd., Vs. DCIT (2015) 60 taxmann.com 26 (Bangalore Tribunal). The Relevant observations of the Tribunal in this regard were as follows:

Respectfully following the aforesaid decision, we direct that the aforesaid company be excluded from the list of comparable companies.

Asit C. Mehta Financial Services Ltd. : As far comparability of this company is concerned, the assessee seeks exclusion of this company on the ground of low employee cost and functional dissimilarity besides the contention that it fails the related party transaction (RPT) filter of less than 15%. Our attention was drawn by the learned Counsel for the assessee to the decision rendered in the case of First Advantage Offshore Services Pvt. Ltd., (supra) wherein this Tribunal applied low employee cost filter to operating revenue. It is the submission of the learned Counsel for the assessee that the employee cost is only 17% of the operating revenue and therefore by applying the aforesaid filter, this company should be excluded from the list of the comparable companies. We are of the view that this issue has not been examined either by the DRP or the TPO and therefore we deem it fit and proper to restore this issue to the TPO/AO for fresh consideration. The TPO may also apply the RPT filter of 15% and if the RPT is more than 15%, to exclude this company by application of RPT filter as well.

HCL Comnet Systems and Services Ltd. : As far as this company is concerned, the prayer of the learned Counsel for the assessee is to apply the RPT filter of less than 15%. In this regard, it was the submitted that the threshold limit for applying RPT filter was considered as more than 15% in some decided cases and more than 25% in some other decided cases. The principle laid down is that if there are more comparables available, then the percentage of related party transaction can be considered with the threshold limit of 15%. It was submitted that since 25 comparable companies had been chosen, there cannot be any grievance of comparable companies not being available. In these circumstances, learned Counsel for the assessee submitted that the RPT filter with 15% of the threshold limit should be applied and if the RPT in the case of the aforesaid companies is more than 15%, it has to be excluded from the list of comparable companies. We agree with the submission made by the learned Counsel for the assessee and remand the question of comparability of this company to the TPO for fresh consideration.

Maple Solutions Ltd., and Triton Corp. Ltd. : As far as these 2 companies are concerned, the common ground on which the assessee seeks exclusion of these 2 companies is on the basis of unreliable financials of these companies for the period relevant to Assessment Year 2007-08. Our attention was drawn to decision of this Tribunal in the case of First Advantage Offshore Service Pvt. Ltd., (supra) wherein this Tribunal considered the financial results of this company for the relevant period and on that ground excluded these 2 companies from the list of comparable companies. The following were the relevant observations of the Tribunal in this regard:

Respectfully following the aforesaid decision of the Tribunal, we remand these issues to the TPO/AO for fresh consideration in the light of the decision of the Tribunal referred to above.

The next company which the assessee seeks to exclude is Spanco Ltd. The grounds on which the assessee seeks exclusion of this company is that the employee cost to operating revenue is less than 25%. We are of the view that it would be just and appropriate to remand this issue to the TPO/AO for fresh consideration as the DRP despite objection in this regard did not render any finding. We hold and direct accordingly.

Vishal Information Technologies Ltd. : This company as in the case of Spanco Ltd., is also sought to be excluded by application of the employee’s cost filter as in the case of Spanco Ltd., this objection was not considered by the DRP despite the assessee having raised the ground in this regard. We therefore remand this issue to the TPO/AO for consideration afresh.

Accurate Data Converts Pvt. Ltd. : This company as in the case of Spanco Ltd., is also sought to be excluded by application of the employee’s cost filter as in the case of Spanco Ltd., this objection was not considered by the DRP despite the assessee having raised the ground in this regard. We therefore remand this issue to the TPO/AO for consideration afresh.

The TPO is directed o give effect to this order after affording opportunity of being heard to the assessee.

In the result, appeal is partly allowed.