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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI JASON P BOAZ & SHRI LALIET KUMAR
O R D E R Per Shri Laliet Kumar, Judicial Member
These cross appeals are directed against the order dated 15.09.2014 of CIT(A) for the assessment year 2009-10. The assessee is a wholly owned subsidiary of Misys India Holding Ltd., UK and engaged in the business of providing
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 2 software development services, ITES and marketing support services to its AEs.
During the year under consideration the assessee has reported the financial results, segmental details and international transactions as reproduced by the TPO in para 2.2 to 2.3 as under.
2.2. Financial Results for the F Y 2008-09 : a) Overall Result:
Operating Revenues 141,59,06,091 Operating Expenses 125,01,01,547 Operating Profit 16,58,04,544 Op Profit on cost % 13.26% b) Segmental Financials as per the TP documentation:
Software Services ITES Sales Support Description (Rs.) (Rs.) (Rs.) Operating Revenue 133,21,65,918 5,82,93,156 2,54,47,017 Operating Cost 117,72 18,053 5,03,49,653 2,25,33,839 Operating profit 15,49,47,865 79,43,503 29,13,178 OP/OC 13.16% 15.78% 12.93% 2.3. International Transactions (as mentioned in the 92 CE report)
Description Amount Paid (Rs.) Amount Received (Rs.) Contract Software 127,96,01,655 Development Service Contract IT Enabled Service 5,82,93,156 Sales Support Services 2,54,47,017 Reimbursement of expenses 2,30,13,236 3,01,89,416
As regards the sales support service segment, the TPO accepted the same at arms length and therefore there is no dispute of arms length price in the said
segment. Since there are disputes with regard to the arms length price in respect of software development services of ITES we will discuss the issue involved in these two segments one by one.
Software Development Services:- To bench mark its international transaction in software development segment, the assessee selected 17 comparable companies with an average profit
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 3 margin of 13% of cost in comparison to the assessee’s margin at 13.16%. Thus, the assessee claimed its international transaction at arms length. The TPO did not accept the TP study analysis of the assessee and carried out a fresh search. The TPO finally selected 11 companies as under.
The TPO has computed the mean margin on cost at 24.32% and after allowing minus working capital adjustment 0.73% has computed adjusted margin at 25.05%. Thus the TPO has proposed an adjustment u/s. 92CA of Rs. 14,75,07,706/-. The assessee challenged the action of the TPO before the CIT(A).
The CIT(A) has granted part relief to the assessee by excluding certain companies from the set of comparable by applying turnover filter as well as allowing risk adjustment. Thus the assessee as well as revenue have challenged the impugned order of the CIT(A) and filed these cross appeals.
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 4 The effective grounds raised by the assessee are ground nos. 4, 5, 6, 8 and 9 of the revised grounds of appeal filed on 19.01.2018 are to the following effect.
4. The Honourable CIT(A) has erred in upholding the action of the TPO in finalizing the transfer pricing order with the following companies as comparable to the Appellant despite such companies failing the test of comparability on some or all of the factors such as the influence of extraordinary events, functional dissimilarity, product led revenues, differing turnover / scales of operation, lower employee cost levels, asset base, risk profile etc. and failure of TPO's own filters:
ITeS Segment Software development segment Infosys BPO Limited Bodhtree Consulting Limited Sasken Communication Aditya Birla Minnacs Worldwide Technologies Limited Persistent Systems Limited Accentia Technologies Limited Larsen & Toubro Infotech Informed Technologies India Limited Infosys Limited Cosmic Global Limited Eclerx Services Limited 5. Without prejudice to the above, the Hon'ble CIT(A) has erred in not giving a finding on the functional dissimilarity / failure to meet legally acceptable criteria, of the comparables while excluding the same from the final list of comparables:
Software development segment Persistent Systems Limited Infosys Limited L & T Infotech Limited
6. The Honourable CIT(A) has erred in upholding the action of the TPO in rejecting the following companies as comparable to the Appellant authority merely on the ground of high working capital adjustment, despite the companies being functionally comparable to the Appellant and forming part of the initial show-cause notice issued by the TPO himself: Software development segment Thinksoft Global Services Limited. FCS Software Solutions Limited
8. The Honourable CIT(A) erred in upholding the order of the TPO on applying cap on working capital and in not granting adequate working capital;
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 5 9. The Honourable CIT(A) erred in not determining the MAT credit eligible to the Appellant despite accepting the Appellant's arguments on the errors in the assessment order in relation to the same; The assessee has not insisted for adjudication of the remaining grounds raised before us.
Ground raised by the Revenue are as under :
Brief facts are as under.
“(a) The Assessee is a wholly owned subsidiary of Misys India Holding Ltd., United Kingdom, which is a part of the Misys Group. The Assessee in engaged in the business of provision of SWD services, ITE services and marketing support services to its Associated Enterprises ("AEs"). (b) During the previous year relevant to the assessment year 2009-10, two of the international transactions that took place between the Assessee and its AEs were the provision of SWD services by the Assessee at a price of Rs. 1,27,96,01,655/-, for which a TP Adjustment was made by the TPO to an extent of Rs.14,75,07,706/-and the provision of ITe Services by the Assessee at a price of Rs. 5,82,93,156/- in respect of which an adjustment of Rs.51,52,442/- was made by the TPO. (c) An assessment order dated 28.03.2013 came to be passed by the Assessing Officer (`AO' for short) upon incorporating the aforesaid TP adjustments. Aggrieved, the Assessee filed an appeal to the CIT(A) who, vide an order dated 15.09.2014, partly allowed the appeal. (d) Pursuant to the order of the CIT(A), the AO passed an order giving effect dated 11.11.2014 in which the TP adjustment was reworked to Rs. 18,65,88,396/-.
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 6 (e) The Assessee and Revenue have preferred cross-appeals to the extent it is aggrieved by the CIT(A)'s order.”
The ld. AR before us has submitted that the assessee is challenging the inclusion of 5 following companies i.e. a) Bodhtree Consulting Ltd. b) Sasken Communication Technologies Ltd. c) Persistent Systems Ltd. d) Larsen & Toubro infotech e) Infosys Ltd.
We deal with each of the comparable.
Bodhtree Consulting Ltd:-
The assessee has drawn our attention to the reply submitted by the assessee and it was submitted that the TP Officer has included Bodhtree Consulting Ltd. despite the fact that OP/TC of Bodhtree Consulting Ltd. is 62.27% whereas in the earlier years it was very low and further it was submitted that the said Bodhtree Consulting Ltd. is having fluctuating profit margins and abnormal profit margins. Further the ld. AR has drawn our attention to the Annual Report of Bodhtree Consulting Ltd. wherein our attention was drawn to page no. 12 of the Annual Report where at page no. 12 of the Annual Report it is mentioned as under. “Segment-wise and product-wise performance Bodhtree has only one segment, namely software development. Being a software solutions company, it is engaged in providing open and end-to-end web solutions, off shoring Data Management, Data Warehousing, software consultancy, design and development of solutions, using the latest technologies.”
In page 464 of the paper book it is mentioned as under. “Revenue Recognition Revenue from software development is recognised based on software developed and billed to clients.”
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 7 Similarly in page 467 of the paper book it is mentioned as under. “Segment Information The company has only one identifiable reporting segment i.e. software development services.”
On the basis of the above and also on the basis of the chart submitted by the assessee for Financial Years 2005-06 to 2010-11 where the OP / OC of Bodhtree Consulting Ltd. it was submitted that OP/OC was 15.99%, 80.15%, 19.89%, 62.27%, 33.28% and (-)4.46% respectively . Further, it was submitted that the accounting principle adopted by the Bodhtree Consulting Ltd. is entirely different then the accounting principle adopted by the assessee and therefore the same is required to be excluded. The ld. AR relied upon the order of M/s. Infinera India Pvt. Ltd. Vs. ITO in IT(TP)A No. 1008/Bang/2014, in page no. 968 to the following effect “2) M/s Bodhtree Consulting Ltd., For exclusion of this company also, reliance has been placed on the same Tribunal order rendered in the case of M/s Cisco Systems (Ind.) Pvt.Ltd.,(Supra) and in particular, our attention was drawn to para-26.1 available on page no.98 to 99 of Case Law Compendium. In this case, it is noted by the Tribunal that this company is in the business of software product and was engaged in providing open and end to end web solutions software consultancy and design and development of software using latest technology and therefore, the same cannot be considered as a comparable in the case of companies rendering software development services, as in the present case. Therefore, by respectfully following this Tribunal order, we hold that this company is also excluded from the list of final comparables.”
The ld. AR has also relied upon the judgment of coordinate bench in the matter of VMware Software India Pvt. Ltd. Vs. DCIT in IT(TP)A No. 1311/Bang/2014 to support its case .
On the basis of the above it was submitted that Bodhtree Consulting Ltd. is required to be excluded. On the other hand the ld. DR has submitted that from the perusal of the profile of the assessee, it is clear that the assessee is into software development and product support services, IT enabled back office services and marketing support services to and further it was submitted that the assessee is into product development services as clear from page 98 of the paper book to the following effect. “Product Development Services:
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 8 In case of new product or new modules for existing products, Misys India enters the product lifecycle at the development stage once the content (concept, design and functionality) is provided by Misys Group.”
On the basis of the above it was submitted that the profile of the assessee matches with the profile of Bodhtree Consulting Ltd. being the software development company and product development company and therefore Bodhtree Consulting Ltd. has been correctly included as comparable by the lower authorities .
We have heard the rival contention of the parties and perused the record. The coordinate bench in the matter of M/s. Infinera India Pvt. Ltd. Vs. ITO (supra) and VMware Software India Pvt. Ltd. Vs. DCIT (supra) had examined the profile of Bodhtree Consulting Ltd. from the Annual Report of the said company and have come to the conclusion that Bodhtree Consulting Ltd. is a product company and therefore it cannot be compared to software development company and therefore directed the TPO to exclude this company. We are bound by the finding of fact recorded by the coordinate bench in the matter of M/s. Infinera India Pvt. Ltd. Vs. ITO (supra) and VMware Software India Pvt. Ltd. Vs. DCIT (supra), therefore respectfully following the decision of the coordinate bench we direct the exclusion of Bodhtree Consulting Ltd.
Sasken Communication Technologies Ltd:-
For the Sasken Communication Technologies Ltd., the ld. AR of the assessee has submitted that Sasken Communication Technologies Ltd. is functionally different than the assessee company as Sasken Communication Technologies Ltd. is into software development product development and owns its own intangibles and develop own branded products. The assessee, relies upon the order of coordinate bench in the matter of VMware Software India Pvt. Ltd. Vs. DCIT (supra) reproduced elsewhere in this order. On the basis of the above it was submitted that Sasken Communication Technologies Ltd. is required to be excluded from the list of selected comparables by the TPO.
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 9 12. The ld. DR of revenue raised the same objections as raised by the ld. DR in respect of Bodhtree Consulting Ltd. treating Sasken Communication Technologies Ltd. as comparable with the assessee being the software development and product company.
We have heard the rival contentions of the parties and perused the record. In our view Sasken Communication Technologies Ltd. is required to be excluded as facts of the present case are similar to that of the VMware Software India Pvt. Ltd. Vs. DCIT (supra) wherein the coordinate bench held as under : Sasken Communication Technology Limited. 17. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that the co-ordinate bench of this Tribunal in the case of Novell Software Development India Pvt. Ltd. Vs. DCIT vide order dt.31.8.2015 in IT(TP)A No.1287/Bang/2011 has considered the comparbilty of this company in paras 25 & 30 as under :
“ 25. As for Sasken Communication Technologies Ltd (seg), findings of this Tribunal as appearing in para 13 of its order mentioned supra is given hereunder :
13) Sasken Communication Technologies Ltd.: “109. Ld TPO noticed that the company was rejected in the TP document on the ground that the company fails its filter of business review and R&D to sales was more than 3%. However, no reasons were given for the business review. 109.1 Ld. TPO pointed out that R&D to sales being more than 3% is not acceptable for which detailed discussion has already been made earlier. He further noticed that the company has software services segment and segmental results are available for software services. He further pointed out that on the basis of information obtained u/s 133(6), the company qualifies onsite revenue filter (onsite revenues were to the extent 27.27% of its export revenues). After considering the assessee’s reply, ld. TPO included this company in the list of comparables. Ld. counsel pointed out that this company has incurred significant expenditure on research and development activity the same being 6.07% of sales. He further submitted that the company had significant intangible inasmuch as it develops siskin branded products. The company owns IPR Further it was pointed out before TPO that during the year the company had acquired Botnia Hightech F. and its two subsidiaries and thus, it had under gone significant restructuring. However, ld. TPO ignored these facts He relied on the following decisions:
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 10 • IQ Information System (I) Pvt. Ltd., ITA No. 1961/Hyd./2012 (para no. 11 & 23, page 25); • Amerson Process Management India Pvt. Ltd., ITA No. 8118/Mum./2010 (para 16 page 15).
Ld. DR relied on the order of TPO and submitted that TPO considered the companies software services segment details only. We have considered the rival submissions and have perused the record of the case.
Ld. TPO has completely ignored the extraordinary business circumstances pointed out by assessee for which necessary adjustment was required to be made in accordance with Rule 10B(3) of Income Tax Rules. However, since this adjustment was not possible, therefore, this company should not have been included in the list of comparables. Further, we find that the company owns IPR and has branded products which also distinguishes it from the assessee and, therefore, keeping in view the decision of Hon’ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd.(supra), we direct the ld. TPO to exclude this comparable from the list of comparables. If we follow the coordinate bench decision in the case of Motorala Solution (India) P. Ltd, Sasken Communication Technologies Ltd needs to be excluded. However, as mentioned by us at para 24 above, where the contested comparable formed part of assessee’s own study, then the AO / TPO has to be given a chance for verification, in view of judgment of Hon’ble Pun jab & Haryana High Court in the case of Quark Systems India P. Ltd (supra). Accordingly we remit the issue of comparability of Sasken Communication Technologies Ltd back to the AO / TPO for consideration afresh as per law. Ordered accordingly.” “ 30. Accordingly we direct the AO to exclude Accel Transmatic Ltd (seg), Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd, Flextronics Software Systems Ltd (seg), Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid software Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd (seg), Tata Elxsi Ltd (seg), Thirdware Solutions Ltd (seg) and Wipro Ltd (seg) from the list of comparables considered by him.”
Following the earlier order of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparables.
In view of the above we direct the exclusion of Sasken Communication Technologies Ltd. Persistent Systems Ltd., Larsen & Toubro infotech Ltd. and Infosys Ltd 14. The assessee has now raised the objection of exclusion of Persistent Systems Ltd., Larsen & Toubro infotech Ltd. and Infosys Ltd. as comparable from IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 11 the list of comparables finally selected by the TPO with respect to software development segment.
In this regard it was submitted by the assessee that the TPO had taken the filter of more than Rs. 1 Crore and therefore has included these companies as comparables. On the other hand, the ld. CIT(A) by applying the turnover filter in the range of 1 to 500 Crores had directed the exclusion of these companies viz., Persistent Systems Ltd., Larsen & Toubro infotech Ltd. and Infosys Ltd. It was submitted by the ld. AR of the assessee that the ld. CIT(A) had not examined the objection raised by the assessee to the extent that these companies are functionally dissimilar to assessee on FAR analysis and had excluded these companies by applying the turnover filter.
Per contra ld. DR has submitted that the revenue has taken the grounds of application of turnover filter as ground no. 2 in their appeal and insisted for adjudication of the said ground.
We have heard the rival contention of the parties and perused the record. The question of application of turnover filter is a vast question and the Tribunal has been taking the stand of 1 to 200 Crores turnover filter, however thereafter 1/10 tribunal has decided to follow 10times to 1/10 times of turnover and thereafter now sending the matters to the TPO for the purposes of examining , whether the turnover of the comparables are having any effect on the profit margin / price charged by the comparable or assessee in the light of judgment of Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. Vs. DCIT as reported in 376 ITR 183.
In the present set of appeal Persistent Systems Ltd., Larsen & Toubro infotech Ltd. and Infosys Ltd. were required to be examined on the touch stone of FAR analysis by the ld. CIT(A) , but it has not been done as these comparables were removed from the list of comparables on account of turnover filter . Therefore we are remitting back the matter with respect to FAR analysis of Persistent Systems Ltd., Larsen & Toubro infotech Ltd. and Infosys Ltd. to the file of CIT(A) with the direction to decide the functionality of these companies in accordance with the rules
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 12 and regulations and by following the judicial pronouncements of High Court and Tribunal decisions. As we are remitting back FAR analysis of Persistent Systems Ltd., Larsen & Toubro infotech Ltd. and Infosys Ltd, to file of CIT(A) therefore the issue of turnover and applicability of turnover filter in these appeals became academic and leave it open to be decided in appropriate appeal. Hence Ground 2 of the Revenue appeal is disposed of being academic in nature . Further the assessee ground for exclusion of Persistent Systems Ltd, Larsen & Toubro Infotech Ltd and Infosys Ltd., are allowed for statistical purposes.
The appellant has also raised the ground for inclusion of two companies viz., FCS Software Solutions Ltd. and Thinksoft Global Services Ltd. In this regard it was submitted by the ld. AR of assessee that the TPO in the TPO order had examined the functionality of these companies as is clear from page 13 of TPO order. Further the ld. AR of assessee has submitted that the inclusion of Thinksoft Global Services Ltd. and FCS Software Solutions Ltd. had been examined by the coordinate bench in the matter of VMware Software India Pvt. Ltd. Vs. DCIT (supra) at page nos. 22 and 25 to the following effect.
“24. Comparable companies sought to be included are (I) Thinksoft Global Services Pvt. Ltd. and (ii) FCS Software Solutions Ltd.
25. The learned Authorised Representative of the assessee has submitted that these two companies were considered by the co-ordinate bench of this Tribunal vide order dt.31.8.2015 in the case of ARM Embedded Technologies Pvt. Ltd. Vs. DCIT in 1T(TP)A No.1659/Bang/2014.
On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below.
We have considered the rival submissions as well as relevant material on record. The TPO has rejected these two companies on the ground of high working capital adjustment. The working capital adjustment was computed by the TPO at 4.30% which was restricted to 1.71%. Therefore the TPO has initially proposed these two companies to be included in the set of comparables but finally excluded from the set of comparables on the ground that their respective lost of working capitals are very high and impacting the profit margin of more than 4%. We note that the co-ordinate bench of this Tribunal in the case of ARM Embedded Technologies Pvt. Ltd. Vs. DCIT (supra) has considered an identical issue in paras 20 to 23 as under : "20. Coming to the ground for inclusion of M/s. Thinksoft Global Solutions
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 13 Ltd and FCS Software Solutions Ltd, we find that TPO herself had suggested these in the show cause notice, but had thereafter come to o conclusion that working capital adjustment required for these two companies exceeded 4% of profits and could not be therefore taken as proper comparables. Reasons given by the TPO for excluding these two companies, appear at paras 3.6.5.1, of her order which reads as under: b) Two companies proposed in the show-cause notice are functionally similar to the taxpayer. However, when the working capital of these companies is considered, the profit margin gets distorted. It may not be out of context to mention that our search for comparable is primarily focus on those companies whose profit margin is predominantly from operating business and not from financial activities. This prerequisite is not different in case of software development companies as they do not need any interest bearing funds to manage their working capital requirement. Therefore, with the purpose to identify only those uncontrolled comparables who are having profit margin from core operating activities and not from financial activities, the following two companies having working capital impact of more than 4% on profit have been excluded.
TPO has accepted that these companies were functionally similar to that of the assessee. However, according to her, the margins of these companies had not come from its core operating activities but from financial activities. Profit and Loss account of M/s. Thinksoft Global Solutions for the relevant previous year is placed at paper book page.247. Software service revenues of the said company came to Rs.920921452/-. Other income of the said company came to Rs.35,738,801/-. Break-up of the other income as given at schedule 10 placed at paper book page.256 show that out of such amount Rs.26,536,978/- was exchange gain. Interest received from deposits with banks and others came to Rs.29,15,080/- only. For better clarity this break- up is given hereunder :
Other income Interest received on deposits with banks .. 2,371,740 Interest received from others .. 543,310 Profit on sale of fixed assets .. 6,276,773 Exchange gain (Net) .. 26,536,978 Miscellaneous income .. 10,000 --------------- 35,738,801
We cannot say that the 'other income' arose out of any financial services done by the assessee and would take away the sheen of its software services income. The amount, in our opinion, was insignificantly small and not enough to warrant a conclusion that its operating margins had come not from its core operational activities.
Coming to FCS Software Solutions Ltd, profit and loss account placed at paper book page 321 shows that its revenue from software
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 14 development and other services was Rs.1902547907/-. As against this, miscellaneous income was only Rs.7875588/-. Break-up of such miscellaneous income as given at schedule M, placed at paper book page. 328 reads as under : Interest .. 2,875,685 Rent income .. 4,515,000 Amount W/Back .. 484,902 -------------- 7,875,588 ------------- 23. Compared to the software development services income, interest received by M/s. FCS Software Solutions Ltd. Software Solutions Ltd, was in our opinion, insignificantly small. Thus the reasoning given by TPO for rejecting these two companies as proper comparables, was in our opinion, incorrect. We set aside the orders of the lower authorities in this regard and direct these two companies to be included in the list of comparables for working out the average PLI." Following the order of co-ordinate bench of this Tribunal, we direct the A.O./TPO to include these two companies in the set of comparables for determining the ALP.”
In view of the above, it was submitted that these two companies are required to be included. On the other hand, the ld. DR has supported the order passed by the lower authorities and has submitted that these companies are not required to be included.
We have heard the rival contentions of the parties. In our view, the observations made by the ld. TPO at page 13 of the TPO order it is similar to the observation recorded by the coordinate bench in the matter of VMware Software India Pvt. Ltd. Vs. DCIT (supra). In our considered opinion the case of inclusion of these two companies FCS Software Solutions Ltd. and Thinksoft Global Services Ltd. is covered in favour of the assessee and we accordingly hold the same.
Now we deal with the ITES. In this regard the ld. AR has submitted that the ld. CIT(A) has excluded this company viz., Infosys BPO Ltd. and Aditya Birla Minacs Worldwide Ltd. on the ground that these companies are required to be excluded on the ground of high turnover and therefore these are not comparable with the assessee. However it was submitted by the ld. AR of assessee that there was specific objection raised by the assessee with respect to functional dissimilarity of IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 15 Infosys BPO Ltd. and Aditya Birla Minacs Worldwide Ltd. However this aspect of functionality has not been examined by the CIT(A) and therefore it was urged by the AR of the assessee that these two companies we also send back to the file of CIT(A) for examining afresh on the FAR analysis without being influenced by the turnover filter.
21. On the other hand, the ld. DR has submitted that these companies as have not been examined by the CIT(A), as he had deleted these companies by following turn over filter , therefore the ld. DR has no objection that if these two companies are sent back to the file of CIT(A) for fresh examination.
22. We have heard the rival contention of the parties, IN our view these companies are required to be send back to file of CIT(A) for FAR analysis. We accordingly do so. As we are sending back for FAR analysis of Infosys BPO Ltd. and Aditya Birla Minacs Worldwide Ltd. to the file of CIT(A), therefore we are not examining the applicability of turnover filter. Accordingly we direct the CIT(A) to examine the functionality (FAR analysis) of these two companies on the tests of parameter laid down by the rules, by the judicial pronouncements of High Court as well as decision rendered by the coordinate bench while examining the Infosys BPO Ltd. and Aditya Birla Minacs Worldwide Ltd.
Now we deal with other aspect viz., exclusion of M/s. Accentia Technologies Ltd., M/s. Cosmic Global Ltd., M/s. Eclerx Services Ltd. In this regard it was submitted that these companies are required to be excluded as these companies have been examined by the coordinate bench in the matter of e4e Business Solutions India Pvt. Ltd. Vs. DCIT as reported in 67 taxmann.com 68 wherein the coordinate bench at paras 11.1, 11.2 and 11.4 it holds as under : “11.1. Accentia Technologies Ltd. The learned AR of the assessee has submitted that though the TPO has recorded the business profile of the assessee, however, the international transactions of the assessee are carried out only in respect of service of contact centre outsourcing to its AE as per the service agreement. The learned AR of the assessee has referred to Annual report of Accentia Technologies Ltd., and submitted that this company has acquired M/s.Oak Technologies Inc, USA during the year under consideration and therefore, there is an extraordinary event of acquisition of another company. He has thus submitted that in IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 16 view of the extraordinary event of acquisition, this company cannot be considered as a good comparable of the assessee. Apart from this objection, learned AR of the assessee has submitted that even otherwise this company is not functionally comparable with the assessee so far as services provided to the AE. He has referred to various business transactions and services provided by Accentia Technologies Ltd., and submitted that this company is in the various segments of activities like medical transcription, medical coding, medical billing, etc. The activity of medical transcription and medical coding is entirely different from the service of contact centre service provided by the assessee to its AE and therefore, this company cannot be considered as functionally comparable with the assessee. The learned AR of the assessee has referred to the revenue earned by the said company and submitted that substantial revenue has been earned by the said company from the business activity of medical transcription apart from billing and collection as well as medical coding activity.
i) On the other hand, learned Departmental Representative has submitted that this company satisfies the filter test applied by the TPO for selecting companies in the category of Information Technology Service (ITES) company. The assessee is also engaged in the activity of providing ITeS to its AE and therefore, both the assessee as well as Accentia Technologies Ltd., are engaged in the similar business activity. He has referred to the findings of the TPO and the DRP and submitted that the DRP has rejected the objections raised by the assessee against this company. Therefore, this company is a good comparable for determination of the ALP in respect of international transactions of the assessee. ii) We have considered the rival submissions as well as relevant material on record. The first objection has been raised by the learned AR of the assessee on account of extraordinary event of acquisition/purchase of business by Accentia Technologies Ltd., whereby M/s.Oak Technologies Inc, USA has been acquired by this company during the year under consideration. Though the extraordinary event of merger or acquisition, if influenced the business as well as the revenue of a company then said company is not considered as a good comparable for the purpose of determination of the ALP however, in this case, it is not clear from the Annual Report whether the business of M/s.Oak Technologies Inc has been acquired and merged with the said company during the year under consideration. It appears that Accentia Technologies Ltd., has purchased up to 96% of the share holding of M/s.Oak Technologies. If it is only a transaction of purchase of shares of the said company then it may be a case of purchase of ongoing business and may not be a case of merging the same with the business of Accentia Technologies Ltd. In the absence of the relevant fact that the business of the said company has been merged with Accentia Technologies Ltd., it may be a case of acquiring the shares and M/s.Oak Technologies still remains an independent entity and business activity. Therefore, in the absence
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 17 of complete relevant facts, it cannot be held that the so-called acquisition of M/s.Oak Technologies can be considered as an extraordinary event having impact on the revenue as well as business activity of Accentia Technologies Ltd. Accordingly, this argument of the learned AR of the assessee is rejected for want of complete facts. iii) As regards the functional dissimilarity, we note that Accentia Technologies Ltd is engaged in diversified activity of medical transcription, medical coding, billing, receivable management. Thus it is clear that the said company is engaged in the healthcare activity and providing BPO service in the healthcare sector, that too by providing specific services of medical transcription, medical coding, medical billing etc. We note that these activities are quite different from the service of contact centre provided by the assessee to its AE which is purely in the nature of call centre. Therefore, we are of the view that the company Accentia Technologies Ltd cannot be considered as a functionally comparable company with the services provided by the assessee to its AE. The TPO is directed to exclude this company from the set of comparables.
11.2. Eclerx Services Ltd. The learned AR of the assessee has submitted that this company is engaged in the high-end services and therefore, this company is basically a KPO and not a BPO. He has referred to Annual Report of this company at page 26 of the paper book -II and submitted that as it is clear from the Annual Report that this company is a knowledge process outsourcing (K. P. O) providing data analytics and data process solutions to global enterprise clients. This company supports core and complex activities for its clients using proprietary processes and a scalable offshore delivery model. This company has access to the capital market and therefore, this company is a public listed KPO company in India. The company is also engaged in consulting services and process outsourcing as well as in the activity of process re- engineering and automation apart from middle office and back office support to capital market. Therefore, keeping in the diversified high- end services, this company cannot be considered as functionally comparable with the assessee. In support of his contention, he has relied upon the decision of the Special Bench of the Mumbai Tribunal in the case of Maersk Global Services (147 ITD 83). i) On the other hand, learned Departmental Representative has submitted that this company is undisputedly in the business of ITeS and therefore, the nomenclature that of KPO will not make it functionally different from the assessee. He has relied upon the orders of the authorities below. ii) We have considered the rival submissions as well as relevant material on record. We find that the company Eclerx Services Ltd. is engaged in diversified activity of providing services including analytic services and data process solutions to its global clients. The service
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 18 provided by Eclerx Services Ltd., is in various areas including capital market and therefore, the services are in the nature of consultancy and end to end support through trade centre including trade confirmation, settlement, transaction, maintenance and analytic and reporting. Thus it is apparent from the nature of the activity of this company that it is not providing a simple service of data processing but it is engaged in the activity of providing high-end services involving decision making analysis which requires thought process and evaluation of various facts and factors. Functional comparability of this company with that of simple BPO’s service providing company has been examined by the Special Bench in the case of Maersk Global Services (supra) in paras.82 & 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 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.
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 19 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.
Thus it is clear that the Special Bench found that this company is not comparable with BPO company which are engaged only in low end services of data processing. Accordingly, we direct the AO/TPO to exclude Eclerx Services Ltd. from the list of comparables for the purposes of determining ALP.
11.4 Cosmic Global Ltd. The learned AR of the assessee submitted that the assessee raised objection against inclusion of this company in the list of comparables before the TPO on the ground that this company has major revenue from translation services. Therefore, this company is functionally different from the services provided by the assessee to its AE. The learned AR of the assessee has referred to the Annual report of this company and submitted that that out of the total revenue of Rs.7,37,02,584/-, this company has earned revenue from translation charges to the tune of Rs.6,99,35,756/-. Therefore, substantial part of the revenue has been earned from the activity of translation. The learned AR of the assessee has further pointed out that even otherwise this company is outsourcing the work of translation as it is evident from the profit and loss account of this company that an amount of Rs.3,00,25,326/- has been paid on account of translation charges. Thus, learned AR of the assessee has submitted that this company cannot be considered as functionally comparable with the assessee for the purpose of determining the ALP. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of Lam Research (India) Pvt. Ltd. vs. DCIT in dated 30/4/2015. i) On the other hand, learned Departmental Representative has submitted that the comparability of this company has been examined by the TPO as well as by the DRP. The TPO has rejected the objections raised by the assessee in respect of this company by holding that the translation service are in the nature of ITeS and therefore, it qualifies all the filters applied by the TPO. He has relied upon the orders of the authorities below. ii) We have considered the rival submissions as well as the relevant material on record. There is no dispute that this company is in the business of providing service of medical transcription and consultancy services, translations services and accounts BPO. The segmental revenue from the operations are given in schedule 8 to the Profit & Loss account which reveals that major revenue of Rs.6,99,35,756/- out
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 20 of total revenue of Rs.7.37 crores has been earned by this company from the activity of translation services. We further note that the company has debited an expenditure of more than Rs.3 crore on account of translations charges paid. Thus it is clear that this company is outsourcing its services of translation work which is the main activity of this company yielding major revenue earned during the year. Thus it is manifest from the record that this company is in the entirely different nature of activity and cannot be compared with the activity of providing contact centre of the assessee to its AE. In the case of Lam Research (India) Pvt. Ltd. (supra) the coordinate bench of this Tribunal had occasion to examine the comparability of this company in para. 34 as under:
“34. With respect to Cosmic Global Ltd., Hyderabad bench of ITAT in the case of Capital IQ Information Systems (India) P. Ltd., in para 19 of its order, had held as under Cosmic Global Ltd.
19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as M/s. Capital IQ Information systems (India) Pvt. Ltd., Hyderabad similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under-
"13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at Rs. 7.37 crore divided into three segments namely, Medical transcription and consultancy services at Rs. 9.90 lacs, Translation charges at Rs.6.99 crore and Accounts BPO at Rs.27.76 lac. The Id. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the Id. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 21 Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at Rs. 3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune of Rs.6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment. 13.3. However, we find this case to incomparable on the alternative argument advanced by the Id. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs.27. 76 lacs. We have discussed this aspect above in the context of CG-VAK's case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs.86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs.27. 76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables." In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. Accordingly, we direct that Cosmic Global Ltd., also be excluded from the list of com pa rabies. ” In view of the above discussion as well as the order of the coordinate bench of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables for the purpose of determining the ALP.”
On the other hand the ld. DR, relies upon the Annual Report of the assessee company and has submitted that the functional profile of the assessee company matches with these companies.
We have heard the rival contentions of the parties and perused the record. In our view this issue is covered by the decision rendered by the coordinate bench in the case of e4e Business Solutions India Pvt. Ltd. Vs. DCIT. Therefore following the decision of coordinate bench we direct the exclusion of these companies from the list of comparables. Thus the TPO / AO is directed to re-compute the arms length price in the ITES segment on the basis of the remaining comparable companies needless to say the benefit of second proviso to section 92C(2) be considered.
IT(TP)A Nos. 1392 & 1577/Bang/2014 Page 22
26. The assessee in ground no.8 objected to the putting a cap by the CIT (A) and the TPO on working capital adjustment. In this regard, we would like to mention that the law is settled to the extent that the assessee would be entitled to working capital adjustment in accordance with Act and Rules without any cap and therefore we direct the TPO to calculate the working capital adjustment of the assessee, vis-à-vis of the assessee on actual basis, if any. Accordingly the ground of working capital adjustment is allowed for statistical purpose.
27. The revenue is also challenging the order of the CIT(A) regarding the risk adjustment. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that though the CIT(A) has directed the TPO to work out the risk adjustment as per the prevailing norms and grant the same to the assessee however it is pertinent to note that the onus is on the assessee is to provide all the relevant details and computation of quantum of level of risk in the case of the assessee as well as comparables. Therefore we direct the AO / TPO that in case the assessee provides these details the TPO has to consider and decide this issue as per the rules. 28. In the result, the appeal filed by the assessee is partly allowed and revenue is allowed for statistical purposes . Pronounced in the open court on this 21st day of February, 2018. Sd/- Sd/- (JASON P BOAZ) (LALIET KUMAR) Accountant Member Judicial Member Bangalore, Dated, the 21st March, 2018. / MCN/ Copy to: