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Income Tax Appellate Tribunal, ‘A’ BENCH, BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI INTURI RAMA RAO
O R D E R Per INTURI RAMA RAO, AM : These cross appeals by the revenue as well as the assessee and directed against the assessment order dated 29/01/2015
IT(TP)A Nos.452 & 598/Bang/2015 Page 2 of 22 passed u/s 143(3) r.w.s. 144C(13) of the Income-tax Act,1961 [‘the Act’ for short] for the assessment year 2010-11.
Briefly, facts of the case are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. The assessee is engaged in the business of providing IT Enabled Services to its parent company M/s.Sitel (UK) Ltd., The assessee has e-filed the return of income for the assessment year 2010-11 on 14/10/2010 declaring total income of Rs.17,66,610/-. The assessee- company also reported the following international transactions with its Associated Enterprises (AE):
The assessee-company sought to justify the consideration received for the international transactions entered with its AE to be at arm’s length price [ALP]. The assessee-company had also submitted transfer pricing study report adopting the operating profit to total cost (OP/TC) as profit level indicator for the transfer pricing study. The assessee-company applied Transactional Net Margin Method [TNMM] which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assessee-company’s profit margin was computed at 17.31% and the assessee-company claimed that the same was comparable with other companies rendering IT enabled services. For the purpose of transfer pricing study, the assessee-company had chosen 9 comparable entities whose arithmetic average of operating profit margins of said comparables was computed at 18.53%. According
IT(TP)A Nos.452 & 598/Bang/2015 Page 3 of 22 to the assessee-company, its PLI was within +/-5% of the arithmetic mean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm’s length. The assessee- company had chosen the following 9 entities:
The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO). The TPO, by an order dated 30/01/2014 passed u/s 92CA(3) of the IT Act, 1961 computed the transfer pricing adjustment at Rs.8,01,61,253/-. The TPO accepted the TNMM adopted by the assessee-company but rejected the transfer pricing study report, citing that the assessee has not used current financial year data in the TP study report and selected the companies which had not passed through the filters applied by the assessee itself. The TPO proceeded to identify a different set of comparable entities for the purpose of determining the ALP. While doing so, the ld. TPO had applied the following filters: i. Companies for which current year data was available. ii. Companies whose ITE Service income <1 cr. were excluded. iii. Companies whose service income is less than 75% of the total operating revenues were excluded. iv. Companies having more than 25% related party transactions (sales as well as expenditure combined) of the sales were excluded.
IT(TP)A Nos.452 & 598/Bang/2015 Page 4 of 22 v. Companies who have export sales less than 25% of the sales were excluded. vi. Companies who have persistent losses for the last three years upto and including FY 2009-10 were excluded. vii. 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. viii. Companies that are functionally different from the taxpayer were excluded. ix. Companies that are having peculiar economic circumstances were excluded.
The TPO rejected 5 comparables out of 9 of the comparables selected by the assessee-company in the TP study, introduced 6 new companies and finally selected the following comparables:
The TPO computed average profit margin of the comparables finally selected at 26.86% and after giving working capital adjustment of 0.23%, the adjusted arithmetical mean PLI was determined at IT(TP)A Nos.452 & 598/Bang/2015 Page 5 of 22 26.63%. On the above said basis, the TPO computed the transfer pricing adjustment as follows:
The AO passed draft assessment order u/s 143(3) r.w.s 144C dated 11/03/2014 incorporating the above adjustments and restricting deduction u/s 10-A of the Act by reducing the miscellaneous income, foreign exchange, dividends etc., from business profit for the purpose of computing 10-A benefit.
Being aggrieved, objections were filed before the Hon’ble Hon'ble DRP. The Hon’ble DRP had confirmed the findings of the TPO on ALP adjustment. However, in respect of 10A deduction, Hon'ble DRP held that the gain made on account of foreign exchange and the miscellaneous income should also be considered for the purpose of 10-A deduction.
After receipt of the directions from the Hon'ble DRP, the AO passed the final assessment order dated 29/01/2015 passed u/s 143(3) r.w.s 144C(13) of the Act incorporating the TP adjustments.
Being aggrieved, the assessee is before us in IT(TP)A No. 598/Bang/2015 against that part of the assessment order which is against the assessee and the revenue is in appeal in IT(TP)A No.452/Bang/2015 against the directions of the Hon'ble DRP in directing the AO to include foreign exchange/loss as operating in nature without ascertaining the nexus with the business activity of the assessee.
IT(TP)A Nos.452 & 598/Bang/2015 Page 6 of 22 9. Now, we shall take up the assessee’s appeal (IT(TP)A No.598/Bang/2015). The assessee raised the following grounds of appeal:
“On the facts and circumstances of the case and in law, the Learned AO, based on the directions of the Hon’ble DRP has: General Ground 1. erred in assessing the total income of the Appellant at Rs. 3,30,35,709 whereby making a transfer pricing adjustment of Rs. 3,11,63,967 to the Appellant’s return of income; Transfer Pricing Grounds 2. erred in making a transfer pricing adjustment of Rs. 3,11,63,967 to the total income of the Appellant on the premise that the international transactions entered by the Appellant with its associated enterprises (‘AE’) were not at arm’s length; Reference made to the Transfer Pricing Officer 3. erred in referring the Appellant’s case to the Learned Transfer Pricing Officer (‘TPO’) under Section 92CA(1) of the Act, without satisfying the conditions specified therein; Adjustment in respect of IT enabled services transaction 4. erred in determining the arm’s length operating margin in the case of the Assessee to be 26.86% on operating costs for the IT enabled services rendered by the Assessee.
Rejection of economic analysis undertaken by the Appellant and using single year data 5. erred in rejecting the benchmarking analysis undertaken by the Appellant for its international transaction of providing IT enabled services under Section 92C of the Act using 3 year weighted average data of comparables and determining the arm’s length margin/ price using data only for financial year (‘FY’) 2009-10, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements;
IT(TP)A Nos.452 & 598/Bang/2015 Page 7 of 22 Search process adopted by the TPO 6. erred in conducting a fresh comparability analysis at the time of assessment i.e., undertaking search for comparables from Prowess and Capitaline Plus databases on 5 October 2013 which was post the specified date i.e. 30 September 2010;
Accept / Reject criteria adopted by the TPO while selecting comparable companies 7. erred in applying certain accept / reject criteria/ filters, in an arbitrary, subjective, inconsistent and erroneous manner for the purpose of selection of comparable companies; 8. erred in applying a filter of rejecting companies which follow a financial year other than April to March; 9. erred in applying a filter of rejecting companies having turnover less than Rs 1 crore;
Rejection of comparables selected by the Assessee in its TP documentation 10. erred in rejecting CG-Vak Software and Exports Limited on the basis that it fails the turnover filter of Rs 1 crore; 11. erred in rejecting R Systems International Limited on the basis that it fails the different financial year filter;
Additional Comparables introduced by the Learned TPO 12. erred in considering Accentia Technologies Limited as comparable to the Appellant for benchmarking the international transaction of provision of IT enabled services, disregarding the fact that it is functionally different from the Appellant i.e. it is engaged in provision of software services, owns significant intangibles, has earned super normal profit and has exceptional year of operation and operates under peculiar circumstances; 13. erred in considering Acropetal Technologies Limited as comparable to the Appellant for benchmarking the international transaction of provision of IT enabled services, disregarding the fact that it is IT(TP)A Nos.452 & 598/Bang/2015 Page 8 of 22 functionally different from the Appellant i.e. it is engaged in provision of software services; 14. erred in considering Eclerx Services Private Limited as comparable to the Appellant for benchmarking the international transaction of provision of IT enabled services, disregarding the fact that it is functionally different from the Appellant i.e. it is engaged into Knowledge Process Outsourcing Services and also earns super normal profits; 15. erred in considering ICRA Online Limited as comparable to the Appellant for benchmarking the international transaction of provision of IT enabled services, disregarding the fact that it is functionally different from the Appellant i.e. it is engaged into Knowledge Process Outsourcing Services and also earns super normal profits; 16. erred in considering Infosys BPO Limited as comparable to the Appellant for benchmarking the international transaction of provision of IT enabled services, disregarding the fact that it is functionally different from the Appellant and has earned super normal profits; Working Capital and Risk adjustment 17. erred in wrongly computing the working capital adjustment without providing any basis, thereby disregarding the working submitted by the Appellant; 18. erred in not allowing the Assessee the benefit of the risk adjustment to account for the difference between the risks assumed by the Assessee and the risks assumed by the comparable companies Benefit of +/- 5% 19. Benefit of +/-5% under proviso to Section 92C(2) of the Act be granted to the Appellant if the adjustment under transfer pricing falls within the range specified therein.
Interest under Section 234B of the Act 20. erred in levy of interest of Rs 7,98,744 under Section 234B of the Act as against Rs 6,98,532;
IT(TP)A Nos.452 & 598/Bang/2015 Page 9 of 22 Initiation of penalty proceedings 21. erred in initiating penalty proceedings under Section 271(1)(c) of the Act Each of the above ground of appeal is without prejudice to and independent of one another. The Appellant craves leave to add, alter, amend or delete the above ground of appeal at or before the time of hearing of the appeal, so as to enable the Hon’ble Income tax Appellate Tribunal to decide this appeal according to law.”
9. The assessee-company also raised the following additional grounds:
“On the facts and circumstances of the case and in law, the Learned AO-
Non-reduction of telecommunication expenses incurred in foreign currency of Rs 57,83,610 from the total turnover for computing the relief under Section 10A of the Act
22 erred in not reducing the telecommunication expenses incurred in foreign currency amounting to Rs 57,83,610 from the total turnover, when the same was reduced from the export turnover
23 failed to appreciate that where the amount has been reduced from the “export turnover” under Explanation 2(iv) to Section 10A of the Act, the same amount should also be reduced from the “total turnover” while computing the deduction under Section 10A of the Act
TRANSFER PRICING GROUND:
28 The Hon’ble DRP erred in not adjudicating on the Appellant’s Ground relating to ‘miscellaneous income’ of Rs 485,207 to be considered as operating in nature for the purpose of computing the operating margin of the Appellant
IT(TP)A Nos.452 & 598/Bang/2015 Page 10 of 22 The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves to leave or add, alter, delete or modify all or any of the above grounds of appeal.”
The only effective ground of appeal raised by the assessee is challenging the rejection of two comparables viz. CG-VAK Software & Exports Ltd., (segmental) and R Systems International Ltd. (segmental) selected by the assessee-company and selection of the following comparables by the TPO as confirmed by the Hon'ble DRP:
Accentia Technologies Ltd., 2. Acropetal Technologies Ltd. 3. Eclerx Services Pvt. Ltd.’ 4. ICRA Online Ltd. 5. Infosys BPO Ltd.
Now, we shall deal with each one of them.
11.1 CG VAK Software & Exports Ltd. This company was selected by the assessee but rejected by the TPO on the ground that its turnover is less than Rs.1 crore in ITeS segment. The Hon'ble DRP upheld appropriateness of this filter of less than Rs.1 crore.
11.2 Being aggrieved, the assessee is challenging exclusion of this company on the ground that low turnover cannot be criteria for rejection of this company and in any event the TPO has not applied turnover filter, therefore, this cannot be a ground for exclusion. It is further argued that this company is functionally similar, though it is into both software services as well as BPO. Segmental information is available and reliance in this regard was placed on the following decisions: Techbooks International Pvt Ltd in i. dated 6 July 2015)[AY 2010-11] x CIT vs Nortel Networks India Pvt Ltd (ITA 115/2015 dated ii.
IT(TP)A Nos.452 & 598/Bang/2015 Page 11 of 22 24 February 2015)(Delhi HC) and iii. CIT v Mckinsey Knowledge Centre India Pvt Ltd in ITA 217/2014 dated 27 March 2015 (Del.HC)
11.3 On the other hand, the ld.CIT(DR) placed reliance on the orders of the lower authorities.
11.4 We heard rival submissions and perused the material on record. It is evident that when the company is functionally similar, the company cannot be rejected on the ground that the company’s turnover is less than Rs.1 crore especially when the companies with high turnover have not been rejected. To the same effect is the Hon’ble Delhi High Court decision in the case of CIT v Mckinsey Knowledge Centre India Pvt Ltd (ITA 217/2014 dated 27 March 2015 (Delhi HC). However, from perusal of the orders of the lower authorities, it is not clear whether the company passes through the filters applied by the TPO. Therefore, we deem it fit to remit this issue back to the file of the TPO with a direction to examine whether this company had passed through other filters applied by the TPO.
R Systems International Ltd. 12.1 This company was selected by the assessee-company but rejected by the TPO on the ground that it follows different accounting year. The Hon'ble DRP also confirmed the finding of the TPO.
12.2 Being aggrieved, the assessee is before us urging inclusion on the ground that even though the company has a different financial year ending, it was operating during the same period of time as the Assessee and was also facing similar business cycles, market and economic conditions that the other comparables and the Assessee (having a financial year of April to March) were facing. Further, the assessee-company has its financial year ending in December instead of March and hence the 9 month period i.e from April 2010 to December 2010 is common for the company and the IT(TP)A Nos.452 & 598/Bang/2015 Page 12 of 22 assessee-company. Accordingly, it can be said that 75% of the period covered in the financial statements of such company is common with the financial statements of the assessee. It was submitted that applying the same analogy, December year ending company may also be considered for comparability analysis. It was further submitted that difference in the financial year ending should not be relevant for comparability analysis as the assessee computed the operating margin of the company for the year April 2010 to March 2011, using audited quarterly results for the period January to March 2010 and January to March 2011 available on the company’s website. The revised operating margin of the company for the period April 2010 to March 2011 is -0.29 % on operating costs.
12.3 Reliance was placed on the following decisions: i. CIT v Mckinsey Knowledge Centre India Pvt Ltd (ITA 217/2014 dated 27 March 2015 (Delhi HC) ii. M/s CISCO Systems (India) Private Limited Vs. DCIT IT(TP)A No. 271/Bang/2014 dated 14 August 2014 iii. Aegis Limited vs DCIT - ITANo.7694/Mum/2014 dated 8 February 2017 [AY 2010-11] 12.4 On the other hand, ld.CIT(DR) supported the orders of the lower authorities.
12.5 We heard rival submissions and perused the material on record. Now, the Hon’ble Delhi High Court has held in Mckinsey Knowledge Centre India Pvt Ltd. (supra) that the company cannot be rejected simply because it follows different accounting year and results of adjusted period can be adopted. However, in the present case, the assessee-company had not discharged the onus of filing the results for adjusted period of the company. In absence of this segmental information, inclusion of this company is not possible. Further, no such plea was made before TPO. Hence, the ground of appeal filed in this regard is rejected.
IT(TP)A Nos.452 & 598/Bang/2015 Page 13 of 22
Accentia Technologies Ltd. 13.1 This company was selected by the TPO and objected by the assessee-company before the TPO on the ground that it is functionally different as it is engaged in healthcare revenue cycle management services, legal process outsourcing services, provision of software and no segmental information was available. The Hon'ble DRP also confirmed the inclusion.
13.2 Being aggrieved, the assessee-company is before us in the present appeal urging that the Accentia Technologies Ltd., is functionally different as: (i) It is engaged in healthcare revenue cycle management services, legal process outsourcing services, provision of software as a services and in the absence of separate segmental information, the company has to be rejected as a comparable. Our attention was drawn to page 3 of the annual report wherein it is mentioned that it is engaged in “multi location diversified Knowledge Process Outsourcing Company, operating from multiple locations in India, USA, UK and the Middle East. It was submitted that in addition to IT enabled services, the company is also engaged in provision of knowledge process outsourcing services, software services and also sale of software products / solutions which is not comparable to the Assessee. It was therefore, submitted that in the absence of segmental break-up, the company cannot be considered comparable. Exclusion of this company was sought on the following grounds: (ii) It owns significant intangibles. (iii) It has an exceptional year of performance. (iv) It earns super normal profits 13.3 Reliance was also placed on the co-ordinate bench decision in the case of M/s.Tesco Hindustan Service Centre Pvt. Ltd. vs. DCIT (IT(TP)A No.191/Bang/2015 dated 25/01/2017.
IT(TP)A Nos.452 & 598/Bang/2015 Page 14 of 22 13.4 We heard rival submissions and perused the material on record. The issue of comparability of this company was considered by the co-ordinate bench of Tribunal in the case of M/s.Tesco Hindustan Service Centre Pvt. Ltd. in IT(TP)A No.191/Bang/2015 dated 25/01/2017 wherein it has been held: “13. As regards Accentia Technologies Ltd. and ICRA Online Ltd. this Tribunal in the assessee's own case for the Assessment Year 2008-09 has excluded these two companies from the set of comparables in para 5 as under : “5. Thereafter he submitted that the following companies should be excluded on the basis of functional dissimilarity and in support of his contention, he placed reliance on the Tribunal order rendered in the case of M/s. Flextronics Tech. (India) Pvt. Ltd. Vs. DCIT in IT(TP)A No.1559(B)/2012 dated 23.10.2015, copy available on page Nos.17 to 38 of compilation of case laws submitted before the Tribunal. a) Accential Tech. Ltd. (Seg.) b) Acropetal Tech. Ltd. (Seg.) c) Coral Hubs Ltd. d) Crossdomain Solutions Ltd. e) Eclerx Services Ltd. f) Genesys International Corpn. Ltd. g) Mold Tek Technologies Ltd.” We further note that the functional comparability has been examined in detailed by the co-ordinate bench of this Tribunal in the case of Equant Solutions India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1202/Del/2015 as well as in the case of ITO Vs. Interwoven Software Services (India) Pvt. Ltd. in ITA No.461/Bang/2015. Further in the case of Acropetal Technologies Ltd. (Seg.), the co-ordinate bench of this Tribunal in the case of Kodiak Networks (India) Pvt. Ltd. Vs. DCIT in IT(TP)A No.1540/Bang/2012 has considered the functional comparability and found that this company is not comparable with a captive service provider. Accordingly we direct the Assessing Officer/TPO to exclude these companies from set of comparables.”
Respectfully following the decision of the co-ordinate bench of Tribunal, we direct the AO/TPO to delete Accentia Technologies Ltd. from the list of comparables.
IT(TP)A Nos.452 & 598/Bang/2015 Page 15 of 22 14. Acropetal Technologies Ltd.(Seg) 14.1 This company was selected by the TPO and objected by the assessee-company before the TPO on the ground that it is functionally different. The Hon'ble DRP also confirmed the inclusion.
14.2 Being aggrieved, the assessee-company is before us in the present appeal urging that Acropetal Technologies Ltd.(Seg) is functionally different and drawn our attention to page 5 of the Annual Report wherein it is mentioned that the company has recorded an impressive growth even in the days of slowdown in the software industry. Our attention was also drawn to page 8 of the annual report wherein under the head ‘foreign exchange earnings and outgo’, the company has mentioned that the company is engaged in the business of exporting software services and hence 100% of its revenues comprise of export earnings. Our attention was also drawn to Balance Sheet Abstract on page 25 of the Annual Report wherein it is mentioned that Acropetal Technologies Ltd.(Seg)mentions its product description as ‘software’ and is engaged in (i) Enterprise Development (ii) Software Development and (iii) Product development.
14.3 Reliance was also placed on the co-ordinate bench decision in the case of M/s.Tesco Hindustan Service Centre Pvt. Ltd. vs. DCIT (IT(TP)A No.191/Bang/2015 dated 25/01/2017.
14.4 We heard rival submissions and perused the material on record. The issue of comparability of this company was considered by the co-ordinate bench of Tribunal in the case of M/s.Tesco Hindustan Service Centre Pvt. Ltd. in IT(TP)A No.191/Bang/2015 dated 25/01/2017 wherein it has been held:
“13. As regards Accentia Technologies Ltd. and ICRA Online Ltd. this Tribunal in the assessee's own case for the Assessment Year 2008- 09 has excluded these two companies from the set of comparables in para 5 as under :
IT(TP)A Nos.452 & 598/Bang/2015 Page 16 of 22 “5. Thereafter he submitted that the following companies should be excluded on the basis of functional dissimilarity and in support of his contention, he placed reliance on the Tribunal order rendered in the case of M/s. Flextronics Tech. (India) Pvt. Ltd. Vs. DCIT in IT(TP)A No.1559(B)/2012 dated 23.10.2015, copy available on page Nos.17 to 38 of compilation of case laws submitted before the Tribunal. a) Accential Tech. Ltd. (Seg.) b) Acropetal Tech. Ltd. (Seg.) c) Coral Hubs Ltd. d) Crossdomain Solutions Ltd. e) Eclerx Services Ltd. f) Genesys International Corpn. Ltd. g) Mold Tek Technologies Ltd.” We further note that the functional comparability has been examined in detailed by the co-ordinate bench of this Tribunal in the case of Equant Solutions India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1202/Del/2015 as well as in the case of ITO Vs. Interwoven Software Services (India) Pvt. Ltd. in ITA No.461/Bang/2015. Further in the case of Acropetal Technologies Ltd. (Seg.), the co-ordinate bench of this Tribunal in the case of Kodiak Networks (India) Pvt. Ltd. Vs. DCIT in IT(TP)A No.1540/Bang/2012 has considered the functional comparability and found that this company is not comparable with a captive service provider. Accordingly we direct the Assessing Officer/TPO to exclude these companies from set of comparables.”
Respectfully following the decision of the co-ordinate bench of Tribunal, we direct the AO/TPO to delete Acropetal Technologies Ltd.(Seg) from the list of comparables.
E-clerx Services Limited 15.1 This company was selected by the TPO and objected by the assessee-company before the TPO on the ground that it is functionally different. The Hon'ble DRP also confirmed the inclusion.
15.2 Being aggrieved, the assessee-company is before us in the present appeal urging that E-clerx Services Ltd., is functionally different as it provides high end data analytics and customized process solutions and is a leading Indian provider of KPO services. Our attention was drawn to “balance sheet abstract and company ‘s general business profile” on page 70 of the annual report, wherein it
IT(TP)A Nos.452 & 598/Bang/2015 Page 17 of 22 is stated that the principal business of the company is “Knowledge Process Outsourcing” .It was submitted that as per the website of the company, the services rendered by the company are in the areas of sales and marketing support and financial services, the sales and marketing services include custom research, analysis and modelling, data integration and reporting, content and catalog management, CRM and business insights, etc. The financial services provided by the company include collateral management, product management, trade order management, etc. It was submitted that the above clearly indicates that the company is engaged in high end services and is not comparable to the routine BPO services provided by the Assessee.
15.3 We heard rival submissions and perused the material on record. The issue of comparability of this company was considered by the co-ordinate bench of Tribunal in the case of M/s.Tesco Hindustan Service Centre Pvt. Ltd. in IT(TP)A No.191/Bang/2015 dated 25/01/2017 wherein it has been held:
“14.1 We have considered the rival submissions and relevant record. At the out set, we note that the comparability of M/s Eclerx Services Ltd. has been examined by the Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P) Ltd (supra) in para 82 and 83 as under : “82. In so far as M/s eClerx Services Limited 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 IT(TP)A Nos.452 & 598/Bang/2015 Page 18 of 22 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, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns.
For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt.Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP.”
14.2 As discussed by the Special Bench in the case of Maersk Global Centres (India ) (P) Ltd (supra), this company provides data analysis, operating management, audits, reconciliation, metrics management and operating services. It has two business verticals – financial services, retail and manufacturing. It was found to have being providing complete business solutions in the nature of high end services. The nature and different field of services provided by this company clearly show that it is not functionally comparable with the ITES. Accordingly, we direct the TPO/AO to exclude this company from the set of comparables.
IT(TP)A Nos.452 & 598/Bang/2015 Page 19 of 22 Respectfully following the decision of the co-ordinate bench of Tribunal, we direct the AO/TPO to delete Eclerx Services Ltd. from the list of comparables.
Infosys BPO Ltd. 16.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the ITES segment. The Hon’ble Hon'ble DRP confirmed the same.
16.2 Being aggrieved, the assessee-company is before us in the present appeal urging that Infosys BPO Ltd., is functionally different as M/s.Infosys BPO Ltd., is functionally is different as (i) it is engaged in wide array of services which are high end in nature and hence, cannot be compared to low end service provider like SOCIL.
(ii) It is a part of the Infosys group which is an entrepreneurial group owning significant intangibles and brand name.
(iii) It commands a premium in the market because of the existence of the brand. Additionally, it assumes all risks, leading to higher profit whereas SOCIL is a low risk service provider.
(iv) Infosys has a turnover of Rs 1,126.63 crores as against SOCIL’s turnover of Rs 95.19 crores
(v) Further, Infosys has been rejected by the DRP in AY 2011- 12 due to high turnover.
IT(TP)A Nos.452 & 598/Bang/2015 Page 20 of 22 16.3 We heard rival submissions and perused the material on record. The issue of comparability of this company was considered by the co-ordinate bench of Tribunal in the case of M/s.Tesco Hindustan Service Centre Pvt. Ltd. in IT(TP)A No.191/Bang/2015 dated 25/01/2017 wherein it has been held: “15.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys BPO Ltd. is not functionally comparable since it has the benefit of market value as well as brand value. This company enjoys the benefits of scale and market leadership. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. Since we have directed the A.O/TPO to exclude these companies from the set of comparables therefore the TPO is directed to compute the ALP on the basis of remaining comparables. ” Respectfully following the decision of the co-ordinate bench of Tribunal, we direct the AO/TPO to delete Infosys BPO Ltd., from the list of comparables.
The only other ground of appeal is about risk adjustment. The assessee-company had not filed any information substantiating adjustment on account of risk. Hence, this ground of appeal is dismissed.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
IT(TP)A No.452/Bang/2015: 19. The only effective ground of appeal raised by the revenue is challenging the direction of the Hon'ble DRP to include earning of foreign exchange, miscellaneous income as part of business income for the purpose of calculating benefit u/s 10A of the Act. This issue
IT(TP)A Nos.452 & 598/Bang/2015 Page 21 of 22 is no longer res integra as it is resolved by the Hon'ble jurisdictional High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd., in dated 30/10/2017, in favour of assessee- company. The relevant paragraph is extracted hereunder:
“37. On the above legal position discussed by us, we are of the opinion that the Respondent assessee was entitled to 100% exemption or deduction under section 10-A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as ‘Income from other sources’ under section 56 of the Act. The incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessees covered under sections 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section10-A or section 10-B of the Act and cannot be taxed separately under section 56 of the Act.”
In the result, the appeal filed by the revenue is dismissed.