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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R.BASKARAN
Date of hearing : 13.06.2019 Date of Pronouncement : 28.06.2019 O R D E R
Per N.V. Vasudevan, Vice President
This is an appeal by the Assessee against final order of assessment dated 25.8.2016 passed by the ACIT, Circle-7(1)(2), Bengaluru, u/s.143(3) read with Sec.144C of the Income-tax Act 1961 (‘the Act’) in relation to AY 2012-13.
This appeal was heard by this Tribunal on 15.10.2016 and an order dated 16.11.2018 was passed by this Tribunal disposing off the appeal of the Assessee. The Assessee filed M.P.No.16/Bang/2019 u/s.254(2) of the Act, pointing out that the order of the Tribunal suffered from certain apparent errors and needed to be rectified The Tribunal vide its order dated 5.4.2019 decided the MP and recalled its order for the limited purpose of considering the comparability of Three companies in the list of IT(TP)A No.1661/Bang/2016 Page 2 of 8 comparable companies chosen by the TPO viz., Infosys BPO, BNR Udyog Ltd., and Excel Info Ltd.
The issue that came up for consideration in the appeal was with regard to determination of Arms Length Price (ALP) in respect of international transaction u/s 92 of the Act. The assessee rendered information technology enabled services (ITES) to its Associated Enterprise (AE) which was subject matter of determination of ALP. The TPO had chosen 10 comparable companies. On objection by the assessee, the DRP excluded one company out of the 10 companies chosen by the TPO. In the appeal by the assessee it sought exclusion of 7 out of 9 remaining companies. The comparability of the three companies, which we now we need to examine, consequent to the order of the Tribunal in MP No.16/Bang/2019 are Infosys BPO, BNR Udyog Ltd., and Excel Info Ltd. We shall deal with each of these companies in the following paragraphs.
In the original order passed by the Tribunal, Infosys BPO, was retained as a comparable company. In the Misc. Petition, the assessee has pointed out that Infosys BPO Ltd., a comparable company chosen by the TPO as comparable company was upheld by the DRP. In the appeal before the Tribunal, the assessee had made submission that this company should be removed from the list of comparable companies because of huge turnover, functional difference and existence of related party transaction of more than 15% to its revenue. The Tribunal in its order however retained this company as a comparable company by observing in para 14.5 of its order that assessee did not press for exclusion of other comparable companies in which the name of Infosys BPO is also found. The assessee submitted that observation of the Tribunal in para 14.5 of its order is incorrect and contrary to the material available on record and it should be IT(TP)A No.1661/Bang/2016 Page 3 of 8 suitably modified. The Tribunal in its order in MP No. 16/Bang/2019 held as follows:
“4. We have considered the submissions and we find that the exclusion of this company was argued by the assessee and finds place in the chart filed before the Tribunal. There is nothing on record to indicate that the assessee did not press for exclusion of this company as a comparable company. In these circumstances, we are of the view that there is apparent error in the order of the Tribunal. The error has to be set right by recalling the order of the Tribunal to the extent of rendering decision only on exclusion of Infosys BPO as comparable company.”
We have heard the rival submissions on the comparability of Infosys BPO as a comparable company. The Delhi ITAT in the case of Baxter India Pvt. Ltd. Vs. ACIT for AY 2012-13 in the case of a company rendering ITES such as the Assessee, vide order dated 24.8.2017 Paragraph 23 held that Infosys BPO is not comparable with a company rendering ITES for the following reasons:-
“23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Officer/TPO/DRP is that Infosys BPO Ltd. is predominantly into areas like Insurance, Banking, Financial Services, Manufacturing and Telecom which are in the niche areas, unlike the assessee. Further it was also submitted that the Infosys BPQ Ltd. comprises brand value which will tend to influence its business operation and the pricing policy thereby directly impacting the margins earned by the Infosys BPO Ltd.. We find the submissions of the ld. counsel for the assessee before TPO/DRP that in order to maintain the brand image of Infosys BPQ Ltd. in the market, the company incurs substantial selling and marketing expenditure whereas the assessee being a contract service provider does not incur such expenses to maintain its brand has not been controverted by them. Further, Infosys BPO Ltd.
IT(TP)A No.1661/Bang/2016 Page 4 of 8 being a subsidiary of Infosys has an element of brand value associated with it. This can be further confirmed by the presence of brand related expenses incurred by Infosys BPO Ltd. Further, Infosys BPO Ltd. has acquired Australian based company M/s Portland Group Pty Ltd. during financial year 2011-12. They provide sourcing and category management services in Sydney, Australia. Therefore, this company also failed the TPO's own filter of rejecting companies with peculiar circumstances. In view of the above i.e. functionally not comparable, presence of brand and extraordinary event that has taken place during the year on account of acquisition of Australian based company, we are of the considered opinion that Infosys BPO Ltd. should not be included in the list of comparables. We accordingly direct the Assessing Officer/TPO to exclude Infosys BPO Ltd. from the list of comparables for the purpose of computing the average margin.”
It was also brought to our notice that the Hon’ble Delhi High Court in in the appeal filed by the Revenue against the aforesaid order dismissed the appeal at the admission stage observing that rationale given by the ITAT for exclusion was correct. In view of the aforesaid decision, we direct exclusion of Infosys BPO from the list of comparable companies chosen by the TPO.
The next company that is sought to be excluded by the assessee from the list of comparable companies chosen by the TPO is BNR Udyog Ltd. In original order passed by the Tribunal this company was retained as a comparable company. In the M.P. filed by the Assessee it was pointed out that the chart filed at the time of hearing before the Tribunal, the assessee company sought to exclude this company on the ground that the turnover of this company was only 1.7 cores and it cannot be compared with turnover of assessee which was 30.6 crores. It was also submitted on behalf of the assessee that this company has related party transaction (RPT) over and above the threshold limit of 15% and is also functionally
IT(TP)A No.1661/Bang/2016 Page 5 of 8 different. The assessee in this regard at the time of hearing placed reliance on the decision of ITAT Bangalore Bench in the case of Indegne Pvt. Ltd., Vs. ACDIT in IT(TP)A No.591/Bang2017 for asst. year 2012-13 order dated 2/8/2017 wherein at page 10 of this order in para 10.3.2 the Tribunal remanded the matter of comparability of this company with ITES company. Decision in the case of M/s e4e Business Solution India Pvt. Ltd., Vs. ITO in IT(TP)TP No.451/Bang/2017 was also filed in support of assessee’s claim for remand on functional comparability. The Tribunal in the impugned order however in paragaraph 13 to 13.2 followed the decision rendered in the case of CGI Information Systems and Management Consultation Ltd., Vs. ACIT-TS-320–ITAT-2018(Bang) wherein this company was considered as comparable with ITeS company. The Tribunal however did not render any decision on functional comparability of this company. On the above objections in the MP, the Tribunal recalled the original order for analysis the comparability of this company afresh, with the following observations:
“7. We have considered the submissions of the Ld. counsel for the assessee and are of the view that the contention in the MA that this company was sought to be excluded by the assessee on functional comparability and that the tribunal’s order in the case of CGI Information Systems (supra) did not consider functional comparability or application of RPT filter of this company is correct. Therefore there is error in the order of the Tribunal in as much as functional comparability of this company with ITeS company has not been considered by the Tribunal. We, therefore recall the order of the Tribunal for the limited purpose of examining the functional comparability of this company with the assessee company.”
We have heard the rival submissions on the comparability of the aforesaid company. The Delhi ITAT in the case of BT e-Service (India) Ltd. Vs. ITO for AY 2012-13 order dated 19.6.2018
IT(TP)A No.1661/Bang/2016 Page 6 of 8 considered the comparability of this company and came to the conclusion that this company was carrying out medical transcription, medical billing and coding whereas the Assessee was a captive service provider. The Tribunal followed its own ruling in the same Assessee’s case in AY 2011- 12 in reported in (2017) 87 taxmann.com 251 (Del) in BT e-Serve (India) Pvt.Ltd. Vs. ITO giving identical reasons for excluding BNR Udyog Limited from the list of comparable companies in the field of companies rendering ITES such as the Assessee. Respectfully following the aforesaid decision, we direct exclusion of the aforesaid company from the list of comparable companies chosen by the TPO.
The third and last company that is sought to be excluded from the list of comparable companies is Exclusion of Excel Info Ltd. The Tribunal had retained this company as a comparable company in its original order. The assessee sought exclusion of this company on the ground that this company was functionally different from the assessee company and the employee cost to the revenue was less than the threshold limit of 25% and that there were peculiar economic circumstances which impacted the profit margin of this company thereby rendering this company as not comparable company. The Tribunal while adjudicating of exclusion of this company in paragraph 14.3 of its order held that on application of employee cost filter that the Assessee has failed to show as to how the findings of the TPO and DRP are not correct.
The assessee has pointed out certain facts with regard to employee cost and diminishing revenue of this company which takes it out of the comparability and these aspects have not been considered by the Tribunal in its order. On the above objections in the MA, the Tribunal held as follows:-
IT(TP)A No.1661/Bang/2016 Page 7 of 8
“8. We have examined the contents in the misc. petition and we find that there has been omission to consider the application of employee cost filter by the Tribunal though attention of the Bench was invited to relevant pages pointed out in the misc. petition. We do not however agree with the assessee that functional comparability of this company has not been examined by the Tribunal in paragraph 14.4. The Tribunal has come to the conclusion that this company is a ITeS company and that cannot be reviewed in the misc. application. However there has been omission to adjudicated exclusion of this company on account of extraordinary events. We therefore recall the order of the Tribunal to the limited extent of examining of the employee cost filter and the presence of extraordinary events on warranty exclusion of this company.”
We have heard the rival submissions on the exclusion of this company on the basis of extraordinary events that occurred during the relevant previous year which had impact on the profit margin of this company and therefore rendering this company from being chosen as a comparable company. The Delhi ITAT in the case of BT e-Serve (India) Ltd. Vs. ITO for AY 2012-13 order dated 19.6.2018 considered the comparability of this company and came to the conclusion in paragraph 5.4 of its order that there was abnormal volatility of revenue of this company from 2009-10 to 2014-15 and therefore this company should not be regarded as comparable company. Respectfully following the aforesaid decision, we direct exclusion of the aforesaid company from the list of comparable companies chosen by the TPO.
IT(TP)A No.1661/Bang/2016 Page 8 of 8
In the result, the TPO is directed to compute ALP in accordance with the directions in this order apart from the directions contained in the earlier order passed by the Tribunal. The appeal to this extent is treated as partly allowed.
Pronounced in the open court on this 28th day of June, 2019.