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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-2’ NEW DELHI
Before: SHRI N. K. BILLAIYA & MS SUCHITRA KAMBLE
ORDER PER SUCHITRA KAMBLE, JM These two appeals are filed by the assessee against the order dated 30/12/2014 passed by CIT(A)- 43, for Assessment Year 2010-11 & 2011-12 respectively.
The grounds of appeal
are as under:- GROUNDS OF APPEAL I.T.(TP) A No. 171/BANG/2015 (2010-11)
1. The Learned Deputy Commissioner of Income-tax (Transfer Pricing-IV), Bangalore (“Transfer Officer' or‘ Learned TPO”) grossly erred in determining
2 IT (TP)A No. 171/Bang/2015 & 207/Bang/2016 an adjustment to the arm’s length ALF‘)of the Appellant’s international transactions with Associated Enterprises (“AEs”) with ct to the information technology enabled services (“ITeS”) rendered by the tax payer, u/s . of the Income-tax Act, 1961. Post which, the Appellant appealed before the Dispute Resolution Panel (“DRP”) and subsequently, the Learned Assessing Officer (“Learned AO”) sc the final assessment order with a transfer pricing (“TP”) adjustment of Rs.1,75,37,569.
2. Learned AO / Learned TPO erred in rejecting the TP documentation maintained by the appellant on invoking provisions of sub-section (3) of 92C of the Act contending that the application or data used in the computation of the ALP is not reliable or correct. In doing so, the Learned AO / Learned TPO has grossly erred in:
2.1 rejecting comparability analysis carried in the TP documentation and replacing it with a fresh comparability analysis based on the application of the following additional/revised filters in determining the ALP:
2.1.1 Companies having different financial year ending (i.e. not March 31, 2010) or data of the company does not fall within 12 month period i.e. 01-04- 2009 to 31.-03- 2010, were rejected; and 2.1.2 Companies whose data is not available for the Financial Year 2009- 10 were excluded.
3. The Learned AO / Learned TPO, while conducting the comparability analysis, erred in rejecting companies like Nittany Outsourcing Services Private Limited, Datamatics Financial Services Limited, R Systems International Limited, Caliber Point Business Solutions Limited, Ultramarine & Pigments Limited and Jindal Intellicom Private Limited, which are functionally comparable to the Appellant.
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4. The Learned AO / Learned TPO erred in including companies like Accentia Technologies Ltd., Fortune Infotech Ltd. and Jeevan Scientific Technology Ltd. which do not satisfy the test of comparability.
5. The Learned AO / Learned TPO has erred in computation of employee cost filter of 25%, by selecting Jeevan Scientific Technology Limited, which has an employee cost to sales ratio of 20.67%.
6. The Learned AO / Learned TPO erred in not considering the multiple year / prior year financial data of comparable companies while determining the ALP.
7. The Learned AO / Learned TPO erred in using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining ALP.
8. The Learned AO / Learned TPO erred in not considering the provision for bad and doubtful debts as operating in nature.
9. The Learned AO / Learned TPO erred in determination of prime lending rate for the purpose of computation of working capital adjustment.
10. The Learned AO / Learned TPO erred in ignoring the limited risk nature of the contractual services provided by the Appellant and in not providing an appropriate adjustment towards the risk differential even when the full-fledged entrepreneurial companies are selected as comparable companies.
11. The Learned A.O/Learned TPO erred in not allowing the benefit of range of +-5% as provided in proviso to Section 92C(2) of the Act to the 4 IT (TP)A No. 171/Bang/2015 & 207/Bang/2016
Appellant, while determining the assessee ALP.”
Additional Grounds vide application dated 21.05.2015: “12. The learned AO / learned TPO erred in not appreciating the fact that the Appellant being a captive service provider does not bear any working capital risk and hence, a negative working capital adjustment is not warranted in this regard.
13. The learned AO erred in arbitrarily applying the 75% threshold on ‘export earning filter’ (rejecting comparable companies having export sales less than 75%) as per directions issued by the honourable Dispute Resolution Panel (‘DRP’), irrespective of the fact that 25% threshold had been proposed by the learned TPO in the Order issued on 29th January, 2014.”
I.T.(TP) A No. 207/BANG/2016
The Hon’ble DRP/Ld. Assessing Officer , erred on facts and in law in making the transfer pricing adjustment of Rs. 1,65,16,692/- holding that the international transactions pertaining to provision of Information Technology enabled Services (‘ITeS’) services do not satisfy the arm’s length principle envisaged under the Act and in doing so have grossly erred by: 1.1 Rejecting comparability analysis undertaken by the Appellant in the TP documentation/fresh search and replacing it with a fresh comparability analysis based on Application of the following additional/revised filters in determining the Arm’s Length Price (‘ALP’): 1.1.1 Companies who have export sales less than 25% of the sales in the case of ITeS cases were excluded; 1.1.2. Companies who have persistent losses for the last three years up to and including FY 2010-11 were excluded;
1.1.3. companies having different financial year ending (i.e. not March
5 IT (TP)A No. 171/Bang/2015 & 207/Bang/2016
31, 2011) or the data available does not fall within 12 month period i.e. 01- 04-2009 to 31-03-2010, were rejected;
1.1.4. companies whose data is not available for the Financial Year 2010-11 were excluded
1.2 including certain companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed;
1.3 excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed;
1.4 resorting to arbitrary rejection of low-profit/ loss making companies based on erroneous reasons;
1.5 considering the provision of bad and doubtful debts as non- operating for computation of margins of the Appellant. 1.6 committing factual errors in the computation of the operating profit margins of the comparable companies.
1.7 not providing appropriate economic adjustments as provided under Rule Income-tax Rules, 1962.
2. The Ld. A.O has grossly erred on facts and in law by disregarding judicial pronouncements in India TP adjustment.
The reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded many reasons in the assessment order based on which he reached the conclusion that it was ‘necessary or expedient’ to refer the matter to the Learned Transfer Pricing Officer (‘Ld. TPO’) for computation of the Arm's Length Price (‘ALP’), as is required under section 92CA(1) of the Act.
4. The Ld. A.O has grossly erred on facts and in law by initiating penalty under section 27l(l)(c) of and without recording any satisfaction for its initiation.
5. The Ld. A.O has grossly erred on facts and in law by proposing to compute interest under section 270 of the Act mechanically and without recording any 6 IT (TP)A No. 171/Bang/2015 & 207/Bang/2016
satisfactory reasons for the same.
The above grounds of appeal are without prejudice to each other.”
3. Firstly we are taking up the appeal for A.Y. 2010-11. The assessee company is engaged in the business of Data Research. During the year, the assessee company filed its return of income for the A.Y. 2010-11 on 22.09.2010 declaring a total income of Rs. 1,64,91,778/- after claiming deductions u/s 10A of the Income Tax Act, 1961 amounting to Rs. 89,28,796/- . During the year, it was observed that the assessee had international transaction exceeding Rs. 15 crores. Therefore, a reference was made to the Transfer Pricing Officer to determine the Arms’ Length Price as per the provisions of Section 92CA of the Act. The TPO passed an order dated 29.01.2014 thereby making adjustment to the extent of Rs. 1,55,01,790/-. Thereafter, the Draft Assessment Order was passed on 04.03.2014. Being aggrieved by the Draft Assessment Order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP passed directions dated 17.11.2014. Accordingly, the Assessing Officer vide assessment order dated 30.12.2014 assessed the total income at Rs. 3,40,29,347 and made various additions. Vide order dated 01.08.2016, the Assessing Officer/TPO has rectified the earlier order under Section 154 of the Act, thereby revising the original adjustment of Rs. 17537570 to Rs. 10936710/-. Thus, a relief of Rs. 45,65,080/- was granted to the assessee.
Being aggrieved by the assessment order, the assessee filed appeal before us.
The Ld. AR submitted that Ground No. 1 is general in nature as regards to Ground Nos. 5, 6, 7, 8, 9, 10 and 13, the same are not pressed. As regards to Ground No. 12, the same has become infructuous, as the TPO has passed an order dated 01/08/2016 under Section 154 of the Act.
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Thus, we are dismissing Ground No. 1, 5, 6, 7, 8, 9, 10, 12 and 13 of the appeal for A.Y. 2010-11.
As regards to Ground No. 2, 3 and 4, relating to final set of comparables selected by the TPO, the Ld. AR submitted that two comparables has to be excluded and one comparable has to be included on the following reasons:
i) Accentia Technologies Ltd.: This company has to be excluded from the final set of comparables as it is functionally dissimilar to the assessee’s ITeS segment. This company is engaged in rendering IT enabled services and renders gamut of services under single segment – Healthcare Receivable Cycle Management. The services range from medical transcription, billing and coding. Further, the company develops its own software products for Business Process Outsourcing. Accentia is the first company to offer Software as a Service (“SaaS”) model in the Healthcare Receivables Management area. The annual report of Accentia shows that it is providing software as a service to its clients and that the services provided include software and hardware products. On the other hand, the present assessee company is engaged in providing data research services to its AE and therefore, functions performed by Accentia cannot be compared with functions of the assessee company. The Ld. AR further submitted that Accentia, owns significant intangible assets which are sufficient to impact the profitability vis-à-vis assessee company. Accentia possesses brand value / IPR’s which will tend to influence the pricing policy and thereby directly impacting the margins of the company. However, the assessee company, on the other hand, does not have IPR recorded in its books. During the F.Y. 2009-10, Accentia had acquired IQ Group of Companies, UK which consists of 3 companies – Tactiq Ltd., Centric Ltd. and Neologiq Ltd. Further, during FY 2009-10, Ascent
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Infoserve was amalgamated with the impugned company, and the same has impacted the figures of the impugned company for FY ended March 31, 2010. The company states in its annual report that the current year data is not comparable to its earlier year data as the number of depicts including amalgamation of Ascent Infoserve Private Limited. The company has also made some acquisitions / amalgamations in the earlier years which depicts that the Accentia had plans to grow through tie-ups and acquisitions of other companies. This provides ample testimony to the fact that Accentia’s revenue and margin is more driven by acquisitions and amalgamations of other companies rather than by its operational activities. Accentia’s operations are classified under single segment ‘Healthcare receivables management’. There is no mention of revenues derived or profits attributable to the segment/(s) considered under ITeS services. TPO has considered profitability of Accentia at an overall entity level which is incorrect. Accentia has experienced abnormal / supernormal / inorganic growth for the FY 2009-10 as compared to previous years. A trend analysis conducted on the profit margins of Accentia depicted a widely fluctuating trend. The Ld. AR also relied upon the decision of the Delhi High Court in case of PCIT vs. B. C. Management Services (P) Ltd. (ITA No. 1064/2017), PCIT vs. Actis Global Service Pvt. Ltd. (ITA No. 94/2017), Ameriprise India (P) Ltd. vs. DCIT (ITA No. 7014 of 2014 and XL India Business Services (P.) Ltd. vs. Addl. CIT (ITA No. 1477 & 4833 of 2017) as well as decision of the Tribunal in case of Omniglobe Information Technologies (India) (P.) Ltd. vs. ITO (ITA No. 1003/Del/2016). ii) Fortune Infotech Ltd.: This company was not proposed by the TPO as a comparable company in the show cause notice dated 30/09/2013. However, the same was included as a comparable company in the final order passed by the TPO. This company is functionally dissimilar to the assessee company’s ITES segment.
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Fortune Infotech is a web development service provider which offers consulting and technical solutions in web application development. It develops CMS based websites and web application using Joomla which is used to offer various custom development services such as – custom design and template design services, e-commerce development, integration of Joomla with other web applications, search engine optimization, etc. Fortune Infotech has developed its own software called “Finetran” and “image index” for performing specialized services in medical transcription and patient record management. This company has developed unique software from which it would derive substantial benefits/advantages when compared with the assessee company which is a pure captive service provider and owns no intangibles. Hence the same is not comparable to the assessee company. The Ld. AR submitted that TPO in its benchmarking applied RPT filter of 25% of sales. For the year under consideration (i.e. FY 2009-10), related party transactions to revenue ratio is nearly 25% and for previous FY 2008-09, it is nearly 56%. This company has consistent decline in the turnover over the last 3 years. The Ld. AR relied upon the decision of the Tribunal in case of DCIT vs. Xansa India Ltd. (ITA No. 2283/Del/2011) and Equant Solutions India (P.) Ltd. vs. DCIT (2016) 157 ITD 292 (Del) for A.Y. 2010-11. 7.1 The Ld. AR also submitted the inclusion of R Systems International Limited. i) R Systems International Limited: This comparable company is functionally comparable to the assessee company. However, TPO rejected the same on the ground that it is following a different financial year ending. The law provides for the use of the latest available information and use of prior year data unless it can be shown that the years for which the data are available are unlikely to be representative. The Ld. AR submitted that the quarterly result for 10 IT (TP)A No. 171/Bang/2015 & 207/Bang/2016 the period 01.01.2009 to 31.03.2010 and 01.01.2010 to 31.03.2010 are available in public domain. Accordingly, margin for the period 01.04.2009 to 31.03.2010 can be computed. Accordingly, the company should be accepted as comparable company. Mere following a different financial year was not a valid reason for rejecting a comparable company as long as the data available were contemporaneous and in public domain at the time specified in the Rules. Further, the TPO ought to be consistent in his approach in selecting comparable year on year basis. R System has been accepted as a comparable company in the TP order passed by the TPO for the previous 3 Assessment Years i.e. 2006-07, 2007-08 and 2008-09, on the basis that is has an ITeS segment and qualifies all filters. Considering that there is no change in the business of R Systems in the current A.Y. 2010-11, rejecting this company as a comparable company would be inappropriate. The Ld. AR relied upon the decision of the Tribunal CIT vs. Mercer Consulting (India) P. Ltd. (2017) 390 ITR 615 (P&H) wherein the Delhi Tribunal order was confirmed by the Punjab and Harayana High Court. In CIT vs. Mckinsey Knowledge Centre India Pvt. Ltd. (ITA No. 217/2014), the Hon’ble Delhi High Court held that if the comparable is functionally same as that of tested party then same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record, the results for financial year can reasonably be extrapolated then the comparable cannot be excluded solely on the ground that the comparables have different financial year endings. The Ld. AR also relied upon the decision in case of XL India Business Services (P) Ltd. vs. Addl. CIT & 4833 of 2017 for A.Y. 2010-11.
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As regards to Ground No. 11, the Ld. AR submitted that the assessee should be given the benefit of range of +/- 5% as provided in proviso to Section 92C(2) of the Income Tax Act, 1961 (“the Act’), if required.
As related to exclusion of two comparables, the Ld. DR submitted that the TPO has taken all the cognizance of these comparables and after proper verification of these comparables has selected in the same in the final set. The Ld. DR relied upon the order of the TPO. The Ld. DR in respect of inclusion of one comparable submitted that the said company has a different financial year ending and cannot be taken as comparable.
We have heard both the parties and perused the material available on record. As regards exclusion of comparables, the assessee has demonstrated that Accentia Technologies Ltd. and Fortune Infotech Ltd. both are functionally dissimilar to assessee’s ITeS Segment. In fact in Accentia Technologies Ltd. there is an influence to the pricing policy because of its possession of Brand Value/IPRs. Accentia Technologies Ltd. has also made acquisition/amalgamation which depicts that the company had plans to grow through tie-ups and acquisitions of other companies. As regards to Fortune InfoTech Ltd., there is a product development element which cannot be compared to the assessee’s functioning. Therefore, both comparables selected by the TPO i.e. Accentia Technologies Ltd. and Fortune InfoTech Ltd. should be excluded. We direct the TPO to exclude these two companies from the final set of comparables. As regards inclusion of R Systems International Ltd., this comparable company appears to be functionally comparable with the assessee company. The only point which TPO raised is related to different Financial Year ending. This cannot be the sole reason for rejecting any comparable. Therefore, we direct the TPO to include this comparable i.e. R Systems International Ltd. Thus, Ground No. 2, 3 and 4 are partly allowed.
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As regards Ground No. 11, from the perusal of records, it is seen that the benefit of range of +/- 5% as provided in proviso to Section 92C(2) of the Act was not taken into account by the TPO. Therefore, we direct the TPO that wherever there is a necessity the said benefit should be given to the assessee after verification. Ground No. 11 is partly allowed.
Thus, appeal of the assessee being IT (TP) A 171/Bangalore/2015 for Assessment Year 2010-11 is partly allowed.
Now we are taking up the appeal for A.Y. 2011-12. During the year, the assessee company filed its return of income for the A.Y. 2011-12 on 29.11.2011 declaring a total income of Rs. 1,98,74,040/-. During the year, it was observed that the assessee had international transaction exceeding Rs. 15 crores. Therefore, a reference was made to the Transfer Pricing Officer to determine the Arms’ Length Price as per the provisions of Section 92CA of the Act. The TPO passed an order dated 14.01.2015 thereby making adjustment to the extent of Rs. 1,53,78,701/-. Thereafter, the Draft Assessment Order was passed on 12.02.2015. Being aggrieved by the Draft Assessment Order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP passed directions dated 13.11.2015. Accordingly, the Assessing Officer vide assessment order dated 23.12.2015 assessed the total income at Rs. 3,63,90,732 and made various additions. As per directions of the DRP, a relief of Rs. 2,49,564/- was granted to the assessee.
Being aggrieved by the assessment order, the assessee filed appeal before us.
The Ld. AR submitted that from the final set of comparables selected by the TPO following two comparables has to be excluded, in one comparable margin taken by the TPO should be rectified and two comparables should be included for the following reasons:
13 IT (TP)A No. 171/Bang/2015 & 207/Bang/2016 i) Accentia Technologies Ltd.: This comparable company is KPO and Product Development Company. Accentia renders KPO services in the healthcare sector by way of offering "SaaS” model. The software helps in managing all the healthcare documentation needs, receivables management needs, performance tracking and reporting. Therefore, “SaaS” model acts as a one-stop shop for a clinical service provider. Further, Accentia develops its own software products for Business Process Outsourcing. This comparable company offers complete healthcare documentation as well as receivables management services, including installation and maintenance of all software, hardware and bandwidth infrastructure. However, these services do not come under the purview of ITeS rather these are in the nature of software and software support services. The annual report of Accentia shows that it is providing software as a service to its client. Moreover, Accentia's business plan has been re-modeled, wherein the product development team is engaged in developing and designing cloud based hosted application. On the other hand, the assessee company is a routine Business Process Outsourcing ("BPO") service provider unlike Accentia which is engaged in KPO services which are highly specialized and knowledge based services. The assessee company is engaged in providing data research services to its AE and therefore, functions performed by Accentia cannot be compared with functions of the assessee company. While considering Accentia as a comparable company, due consideration should be given to the fact that Accentia possesses brand value / IPR’s which will tend to influence the pricing policy and thereby directly impacting the margins earned by Accentia. Presence of IPR is likely to command premium prices that the customers are willing to pay for the services / products. However, the assessee company, being a routine service provider does not own IPR or sophisticated technology. This comparable Company also maintains inventory of its software products developed. Further, the company has invested in Strategic Tangent Corporation, a software development company which is having expertise in development of software related to EMR and SaaS. During the current year, investment was made for acquiring 16% of 14 IT (TP)A No. 171/Bang/2015 & 207/Bang/2016 the total shares of the company. This shows this comparable company is expanding the area of software product development. This comparable company has also made some acquisitions / amalgamations in the earlier years which depicts that the Accentia had plans to grow through tie-ups and acquisitions of other companies This provides ample testimony to the fact that Accentia's revenue and margin is more driven by acquisitions and amalgamations of other companies rather than by its operational activities. Accentia's operations are not classified under single segment 'Healthcare receivables management'. There is no mention of revenues derived or profits attributable to the segment/(s) considered under ITeS services. TPO has considered profitability of Accentia at an overall entity level which is incorrect. The Ld. AR relied upon the following decisions: � PCIT vs B.C. Management Services (P.) Ltd.; (Delhi High Court) � Ominglobe Information Technologies (India) (P) Ltd Vs. ITO ITA NO. 1003/Del/2016 ii) ICRA Online Limited (Seg): ICRA is engaged in information services and technology solutions and therefore, functionally different from the assessee company. This Company is engaged in three segments i.e. Information Services, Outsourced Services, and Software Products & Services. The TPO has considered Outsourced Services Segment of ICRA as a comparable to the functions performed by the assessee company. In this regard, the Ld. AR submitted that the aforesaid segment is engaged in maintenance and management of data. Thus, it is engaged in the provision of KPO services to its clients. In view of above, this company is functionally different from the assessee company. Further, as per the website of the company, the company is engaged in providing outsourcing support in the fields of data services, research and analytics for which segmental breakup is not available. ICRA acquired new businesses for the provision of high-end services during the year. The Ld. AR further submitted that this company also fails the related party
15 IT (TP)A No. 171/Bang/2015 & 207/Bang/2016 transaction filter applied by the TPO in its own benchmarking (i.e. companies having more than 25% related party transactions of sales are excluded). Further, without prejudice to above contention, the Ld. AR submitted that mark-up computed by the TPO in case of ICRA is incorrect. The correct unadjusted margin should be 31.16% as against the margin computed by TPO as 34.21%. The TPO has erred in considering provision for doubtful debts as a non-operational expense. Accordingly, working capital adjusted margin is computed as 30.05%.
15.1 The Ld. AR submitted that in case of Jindal Intellicom Ltd., the TPO has made erroneous margin computation. The Assessing Officer while giving effect to the directions of the DRP directions has erroneously computed the margin of the company and not following the directions of the DRP. It has considered "bank charges" as non-operating and "miscellaneous balances written-off' operational expense. The correct margin (before working capital adjustment) should be 10.92% instead of 13.77%. Accordingly, working capital adjusted margin is computed as 11.86%.
15.2 The Ld. AR further submitted that the following two comparables should be included as comparable which was rejected by the TPO i) R Systems International Ltd.: R Systems is functionally comparable to the Appellant. However, TPO rejected the same on the ground that it is following a different financial year ending. The TPO applied a filter that the companies which have different financial year ending are to be rejected. The law provides for the use of the latest available information and use of prior year data unless it can be shown that the years for which the data are available are unlikely to be representative. The Ld. AR submitted that the quarterly result for the period 1 January 2010 to 31 March 2010 and 1 January 2011 to 31 March 2011 are available in public domain. Accordingly, margin for the period 1 April 2010 to 31 March 2011 can be computed. Accordingly this company should be accepted as comparable company. Merely following a different financial year
16 IT (TP)A No. 171/Bang/2015 & 207/Bang/2016 was not a valid reason for rejecting a comparable company as long as the data available were contemporaneous and in public domain at the time specified in the Rules. Further, the TPO ought to be consistent in his approach of selecting comparable companies year-on-year basis. R Systems has been accepted as a comparable company in the TP order passed by the TPO for the previous 3 A.Ys. i.e. A.Y. 2006- 07, 2007-08 and 2008-09, on the basis that it has an ITeS segment and qualifies all filters. Considering that there is no change in the business of R Systems in the current AY i.e. AY 2011-12, rejecting this company as a comparable company would be inappropriate. Thus, this comparable company should be excluded. ii) Microgenetics Systems Ltd.: The Ld. AR submitted that there is no dispute on the fact that Microgenetics is functionally comparable to the assessee company. In the search conducted by the TPO, this company was rejected as comparable for the data not available in the public domain. However, the data was available when the new search was conducted by the assessee company, hence this company was selected by the assessee company as comparable as it passes through all the filters applied by the TPO. The Ld. AR further submitted that the basis of rejection of this comparable by DRP is grossly incorrect. DRP had rejected this comparable on the premise that out of the total expenses of INR 1,07,91,015 debited in P&L a/c, the expenses to the extent of INR 24,98,323 has been incurred as medical transcription charges, which indicates that the expenses to the extent of 23% has been incurred on outsourcing of the medical transcription activity. The Ld. AR submitted that the amount of total expenses debited in P&L a/c and amount of medical transcription charges is not correct. In fact, these amounts pertain to subsequent FY 2011-12 (relevant to AY 2012-13). The Ld. AR further submitted that the correct amount of total expenses debited to P&L A/c and medical transcription charges is Rs.1,27,56,777 and INR 22,03,823 respectively. Hence, only expenses to the extent of 17% approx. (instead of 23% as erroneously mentioned by DRP) were incurred towards outsourcing medical transcription
17 IT (TP)A No. 171/Bang/2015 & 207/Bang/2016 activity. Moreover, the Ld. AR pointed out that the employee cost to total cost ratio during the year under consideration is approx. 61%. The proportion of outsourced activity is negligible and the basis of rejection of this comparable is grossly incorrect. During the year under consideration, the company satisfies the export sales / foreign exchange earnings greater than 25% to the total sales, applied by the TPO. In view of above, the Ld. AR submitted that during the year under consideration, the company has not only passed the functional comparability criteria but also the quantitative filter. Hence, this company should be considered as a comparable.
The Ld. DR relied upon the order of the TPO.
We have heard both the parties and perused all the relevant material available on record. As regards exclusion of comparables, the assessee has demonstrated that Accentia Technologies Ltd. and ICRA Online Ltd. (seg.) both are functionally dissimilar to assessee’s ITeS Segment. In fact in Accentia Technologies Ltd. there is an influence to the pricing policy because of its possession of Brand Value/IPRs. Accentia Technologies Ltd. has also made acquisition/amalgamation which depicts that the company had plans to grow through tie-ups and acquisitions of other companies. As regards to ICRA Online Ltd. (seg.), this company is functionally different and has three segment in which TPO has taken into account outsourced service segment which cannot be compared to the assessee’s functioning. Therefore, both comparables selected by the TPO i.e. Accentia Technologies Ltd. and ICRA Online Ltd. (seg.) Ltd. should be excluded. We direct the TPO to exclude these two companies from the final set of comparables. In respect of Jindal Intellicom Ltd. the Ld. AR pointed out that incorrect margin was taken by the TPO and prima facie it appears that the margin taken by the TPO is not proper. Therefore, we direct the TPO to take appropriate margin for taking this comparable i.e. Jindal Intellicom Ltd. in final list of comparables. As regards inclusion of R Systems International Ltd., this comparable company appears to be functionally
18 IT (TP)A No. 171/Bang/2015 & 207/Bang/2016 comparable with the assessee company. The only point which TPO raised is related to different Financial Year ending. This cannot be the sole reason for rejecting any comparable. Therefore, we direct the TPO to include this comparable i.e. R Systems International Ltd. As regards inclusion of Microgenetics Systems Ltd., this company was rejected solely on the ground of data not available, but the Ld. AR pointed out that the data is available. Therefore, we direct the TPO to include this comparable i.e. Microgenetics Systems Ltd. Thus, Ground No. 1.1, 1.2, 1.3, 1.4, 1.5, 1.6, 1.7 and 2 are partly allowed. As regards to Ground No. 3, the same is general and hence dismissed. As regards to Ground No. 4 and 5, the same re consequential, hence not adjudicated upon at this juncture. Thus, appeal of the assessee being IT (TP) A 207/Bangalore/2016 for Assessment Year 2011-12 is partly allowed.