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Income Tax Appellate Tribunal, ‘B’ BENCH: BENGALURU
Before: SHRI INTURI RAMA RAO & SHRI LALIET KUMAR
Date of hearing : 15/03/2017 Date of pronouncement : 12/04/2017 O R D E R Per INTURI RAMA RAO, AM : These cross appeals filed by the assessee-company as well as the revenue and cross objections by the assessee are directed
IT(TP)A Nos.502 & 450/Bang/2015 Page 2 of 26 against the order of assessment passed u/s 143(3) r.w.s. 144C of the of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] dated 30/01/2015 for the assessment year 2010- 11. The assessee also filed cross objections against the assessment order dated 30/01/2015 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. It is a wholly owned subsidiary of ScanCafe Inc., USA. It is engaged in the business of providing digital imaging services falling within the category of IT enabled Services (ITeS) to its AEs. The assessee-company is compensated by the AE at cost +17% mark0up basis. It has filed return of income for the assessment year 2010-11 on 27/09/2010 declaring total income of Rs.52,010/-. The assessee-company also reported international transaction of provision of digital imaging services (ITeS) of Rs.17,58,08,037/- in its Form 3CEB. The assessee-company sought to justify the consideration received for the international transaction entered with its AE to be at arm’s length. The assessee-company had also submitted transfer pricing study report adopting the operating profit to the total cost as profit level indicator (PLI) for the transfer pricing study. The assessee- company also adopted TNMM which was considered to be the most appropriate method for the purpose of bench marking its international transaction. The assessee-company‘s profit margin
IT(TP)A Nos.502 & 450/Bang/2015 Page 3 of 26 was computed at 17.1% and the assessee-company claimed that the international transactions in the IT enabled Services (ITeS) segment are at arm’s length. For the purpose of TP study assessee-company had chosen 9 comparable entities and and arithmetic average of operating profit margins of said comparables was computed at 18.53%. According to the assessee-company, its PLI was within +/- of the range of 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 as comparables whose average profit margin was computed at 18.53%:
Sl. Particulars Margin No. (%) 1 Accentia Technologies Ltd. 42.42% 2 Aditya Birla Minacs Worldwide Ltd. 1.00% 3 CG-VAK Software & Exports Ltd. -3.23% 4 Cepha Imaging Pvt.Ltd. 2.87% 5 Cosmic Global Ltd. 36.35% 6 Informed Technologies India Ltd. 11.05% 7 Infosys BPO Ltd. 23.02% 8 R Systems International Pvt. Ltd. 9.95% 9 Vishal Information Technologies Ltd. 43.33%
The AO referred the matter to the TPO for bench marking above international transactions. The TPO, by order dated 03/01/2014 passed u/s 92CA(3) of the Act, computed TP adjustment at Rs.1,17,43,778/-. The TPO accepted TNMM method adopted by the assessee-company as the most appropriate method and also operating profit to the operating cost (OP/OC) as IT(TP)A Nos.502 & 450/Bang/2015 Page 4 of 26 PLI, however, rejected the TP study report submitted by the assessee-company. The TPO then proceeded to identify different set of comparable entities for the purpose of determining ALP. While doing so, TPO applied the following filters:
• Companies for which current year data was available • Companies whose ITE Service income<Rs.1 cr. were excluded • Companies whose service income is less than 75% of the total operating revenues were excluded. • Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the sales were excluded. • Companies who have export sales less than 25% of the sales were excluded. • Companies who have persistent losses for the last three years upto and including FY 2009-10 were excluded. • 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. • Companies that are functionally different from the taxpayer were excluded. • Companies that are having peculiar economic circumstances were excluded.
3.1 The TPO also considered foreign exchange fluctuation as non-operating in nature and accordingly re-computed operating margin of the assessee-company at 18.7%. Finally, the TPO selected the following 10 comparables:
IT(TP)A Nos.502 & 450/Bang/2015 Page 5 of 26 3.2 The TPO computed operating margin of the comparables at 22.86%. After giving working capital adjustment of 0.02% adjusted arithmetic mean of PLI was determined at 26.63%. On the above basis, TPO computed TP adjustment as follows:
The AO passed draft assessment order dated 10/3/2014 u/s 143(3) incorporating the above TP adjustment after reducing telecommunication and freight expenditure incurred in foreign currency from export turnover for the purpose of calculating benefit u/s 10A of the Act.
IT(TP)A Nos.502 & 450/Bang/2015 Page 6 of 26 5. Being aggrieved, assessee-company filed objections before the DRP contending inter alia that TPO ought to have considered operating foreign exchange fluctuations as operating income and ought to have applied upper turnover limit of Rs.2 crores and ought not to have applied 0% RPT filter. The Hon’ble DRP, after considering the submissions, upheld the contentions of the assessee-company that foreign exchange fluctuation should be treated as operating in nature and upper turnover filter of Rs. 200 cores should also be applied. The Hon’ble DRP upheld the exclusion of RPT of E-Clerx services, Infosys BPO, Fortune Infotech Ltd., ICRA Online Ltd. Informed Technologies India Ltd. and Sundaram Business Services Ltd., applying RPT filter of 0% as against 25% RPT filter applied by the TPO.
6. After receipt of directions from the Hon’ble DRP, AO passed final assessment order dated 30/01/2015 u/s 143(3) r.w.s.144C of the Act incorporating the DRP’s directions.
Being aggrieved, the assessee-company is in appeal before us in . The assessee-company raised the following grounds of appeal:
IT(TP)A Nos.502 & 450/Bang/2015 Page 7 of 26 IT(TP)A Nos.502 & 450/Bang/2015 Page 8 of 26 The assessee-company raised the following additional grounds of appeal:
IT(TP)A Nos.502 & 450/Bang/2015 Page 9 of 26 8. The assessee-company is seeking vide above grounds of appeal, exclusion of the following companies:
Sl.No. Particulars 1 Accentia Technologies Ltd. 2 Acropetal Technologies Ltd.(seg) 3 E-Clerx Services Ltd. 4 ICRA Online Ltd. 5 Infosys BPO and inclusion of the following companies:
Sl.No. Particulars 1 R Systems International Ltd. 2 Jindal Intellicom P 3 Microgenetics Systems Ltd. 4 Microgenetics Systems Ltd. 5 Cepha Imaging Pvt. Ltd
During the course of hearing of the appeal, learned AR of the assessee had not pressed inclusion of the following comparable companies.
Sl.No. Particulars 1 R Systems International Ltd. 2 Jindal Intellicom P 3 Microgenetics Systems Ltd. 4 Microgenetics Systems Ltd. 5 Cepha Imaging Pvt. Ltd
As regards exclusion of the comparables, learned AR of the assessee submitted that these companies had come up for consideration before the co-ordinate bench of this Tribunal in Tesco Hindustan Service Centre Pvt. Ltd. (IT(TP)A
IT(TP)A Nos.502 & 450/Bang/2015 Page 10 of 26 No.569/Bang/2015 and 191/Bang/2015 wherein it was held as follows: “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. v. DCIT in IT(TP)A No.l559(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 (P.) Ltd. v. Dy. CIT [2016] 157 ITD 292/66 taxmann.com 192 (Delhi - Trib.) as well as in the case of ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxmann.com 103 (Bang. - Trib.). 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. v. Dy. CIT [IT(TP)A No.l540 (Bang) of 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.
E-clerx Services Limited 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. v. Asstt. CIT [2014] 43 taxmann.com 100/147 ITD 83 (Mum.)(SB) in paras 82 and 83 as under:
IT(TP)A Nos.502 & 450/Bang/2015 Page 11 of 26 "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.
83. 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 entitles cannot be taken as comparables for the purpose of determining
IT(TP)A Nos.502 & 450/Bang/2015 Page 12 of 26 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. Infosys BPO Ltd. 15.1 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. 15.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader with brand value, whereas the assessee is merely an ITES operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that:— (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. v. Dy. CIT [2013] 140 ITD 344/[2012] 28 taxmann.com 258 (Bang.) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market, it is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies (P.) Ltd. [IT Appeal No.3856 (Del.) of 2010] at para 5.2 thereof, that IT(TP)A Nos.502 & 450/Bang/2015 Page 13 of 26 Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company, i.e., Infosys Technologies Ltd., be excluded form the list of comparable companies. 15.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 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 dissimilar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT [2013] 29 taxmann.com 310/140 ITD 540 (Bang.) 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.”
IT(TP)A Nos.502 & 450/Bang/2015 Page 14 of 26 11. Further in the case of M/s.Siemens Technology & Services Pvt. Ltd. vs. ACIT (IT(TP)A No.1601/Bang/2012 dated 16/12/2016, the comparability of Accentia Technologies Ltd., Acropetal Tech. Ltd. (Seg.) E-Clerx Services Ltd., and Infosys BPO was considered by the co-ordinate bench of this Tribunal. The relevant para. is extracted below:
Accentia Technologies Ltd (seg). The ld, AR of the assessee has submitted that this company fails employee cost filter as well as there was an extraordinary event of amalgamation during the year, therefore, in view of the decision of the Co-ordinate Bench in the case of Symphony Marketing Solutions India Private Limited v. ITO in IT(TP) No.l316/Bang/2012 (AY-2008-09) dated 14.8.2013, this company cannot be considered as good comparable for determination of ALP.
On the other hand, the Id.DR submitted that the TPO has taken only segmental data of this company and therefore, the objection of functional non-comparable is not sustainable. He has referred to the order of TPO and submitted that TPO has given reason for selecting this company as comparable. He has further contended that the amalgamation is not in ITES segment and therefore the result of ITES segment are not affected by demerger or amalgamation., He has the upon the order of TPO and DRP.
We have considered the rival submissions and material available on record. The assessee has raised main objection against the Accentia Technologies Ltd (seg) on the ground that during the year extra ordinary event of merger and amalgamation occurred and therefore, in view of the decision of the Tribunal in the case of Symphony Marketing Solutions India Private Limited (supra) the said company cannot be considered a good comparable for determining the ALP. The findings of the Tribunal in the case of Symphony Marketing Solutions India Private Limited (supra) is based on the another decision of Hyderabad Bench of the Tribunal in the case of CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P.) LTD. v. DCIT [2013] 57 SOT 14 (ITAT[Hyd]). It is pertinent to note that an extra ordinary event of merger, amalgamation or acquisition is relevant only if such event affects the result and operating margin of the very segment of the company to be compared with the assessee. In case, of segmental results are taken in to account and extraordinary event of merging or demerging taken place in other division or segment of the comparable company then such event does not, affect the existing business model, function or margin
IT(TP)A Nos.502 & 450/Bang/2015 Page 15 of 26 of that particular segment. Therefore, the extraordinary event is a relevant factor for considering the comparability of company only when it has resulted into abnormal influence on the functions and profit margins of the company. Undisputedly, the TPO took the segmental result/data of this company for determination of ALP, hence, it becomes relevant and crucial to verify whether an extraordinary event of merger or demerger happened in the ITES segment or not We, therefore, set aside the issue of comparability of this company to the record of TPO/AO and direct to decide the same as per law and functional comparability of this company.
Eclerx Servivces Ltd: 32. The Id. AR submitted that this company is rendering services like engineering, designing services which requires highly skilled employees. Thus, this company cannot be selected as comparable because their functions are different He has relied upon the decision of Special Bench of Mumbai Tribunal in the case of Maersk Global Centres (India) (P) Ltd. v. ACIT in of 2012 dated March 7,2014(AY-2008-09) and submitted that this company is rendering highly skilled services and cannot be compared with the service of ITES and accordingly, this company should be deleted from the set of comparables 33: On the other hand, the Id. DR has relied upon the orders of authorities below and submitted that the TPO has considered the functional comparability at the time of selecting this company.
We have considered the rival submissions and relevant record. At the outset, 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 is claimed to be engaged in IT(TP)A Nos.502 & 450/Bang/2015 Page 16 of 26 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." 34.1 As discussed by the Special Bench in the case of Maersk Global Centres (India ) (P.) Ltd (supra), this company provides data analysis and data process solution and is recognised as experts in chosen market financial cruises, retail and manufacturing It was found to have being providing complete business solutions. The nature different field of services provided by this company clearly show that it is not functionally comparable with the software development services. Accordingly, we direct the TPO/AO to exclude this company from the set of comparables. ........................................................................................................... Infosvs BPO Ltd 42. The Id. AR submitted that the assessee has raised objection against the inclusion of this company in the list of comparables on the ground IT(TP)A Nos.502 & 450/Bang/2015 Page 17 of 26 that this company is having substantial IPR, software products and brand value.
On the other hand the Id. AR submitted that Infosys BPO Ltd is providing services which are in the nature of low ITES services and therefore, it is a good comparable of the assessee.
We Have considered the rival contentions and material available on record. The Id, AR has relied upon the series of decision rendered by this Tribunal including the decision in the case of Symphony Marketing Solutions India (P) Ltd (supra). At the outset, we note that in the case of Symphony Marketing Solutions India (P) Ltd (supra), the Tribunal has considered the issue of comparability of this company in para 24 of the decision which is reproduced below: "24. This company is listed at SI. 13 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the Id. counsel for the assesses that this company has a brand value and therefore there would be significant influence in the pricing policy which will impact the margins. Schedule 13 to the profit & loss account of this company for the F. Y. 2007-08 shows that this company incurred huge selling and marketing expenses. Page 133 of the annual report of this company for the F. Y 2007-08 shows that this company realizing its brand value has chosen to value the same on the basis of its earnings and that of Infosys. The brand value of the Assessee and Infosys has been valued at Rs.3 1,863 Crores. Infosys BPO, being a subsidiary of Infosys, has an element of brand value associated with it This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comparables. We therefore accept the contention of the assessee that this company cannot be regarded as a comparable." Apart from this, the company is also engaged in the business of software product, therefore, it is clear that the company apart from having its own IPR and brand value also engaged in the software product. Therefore, this company cannot be considered functionally similar to that of assessee and accordingly, we direct the AO/TPO to exclude from the list of comparables. .............................................................................................
In view of the above findings and respectfully following the same, we direct the TPO/AO to exclude from the list of comparables.
IT(TP)A Nos.502 & 450/Bang/2015 Page 18 of 26 9. Accentia Technologies Ltd (seg) 56. The Id. AR submitted that this company is functionally different and is engaged in the business of high end services. He has relied upon the decision of the Tribunal in the case of Symphony Marketing Solutions India (P.) Ltd. (supra).
The Id. DR relied upon the decisions of authorities below.
Having considered the rival contentions of both the parties and on perusal of the record, we note that functional comparability of this company has been examined by co-ordinate Bench of this Tribunal in the case of Symphony Marketing Solutions India (P.) Ltd. (supra) in paras 12 and 13 which are reproduced below: 12. This company is listed at SI.No.2 of the comparables chosen by the TPO. As far as this company is concerned, the objection of the assessee is that this company is not functionally comparable. The assessee is a BPO company that provides market analytics and data management services. To provide market analytics solutions, the assessee gives strategies that impact on client revenue including data based marketing strategies for customer acquisition, devising customer retention strategies and excluding loss mitigation strategies through cutting edge forecasting tools. The data management services provided by the assessee include routine business data reporting and management, website management, marketing data analysis and top line reporting. As far as Acropetal Technologies Ltd. is concerned, this company does the business of export of software services. It is also seen from the segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it derives income from engineering design services and software development services. It is also pertinent to point out that before the TPO, the assessee raised an objection that this company performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the services rendered by this company fall in the definition of ITES.
We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No. 15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The performance of Engineering Design Services is regarded as providing high end services among the BPO which requires high skill whereas the services performed by the Assessee are routine low end ITES functions. We therefore hold that this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge IT(TP)A Nos.502 & 450/Bang/2015 Page 19 of 26 Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPO].
It is not in dispute that this company is engaged in providing engineering design services and software development services. In the segment ITES this company is deriving income from engineering design services and software development services and segmental data of this company does not give separate revenue and margin relating to the software development services. Therefore, in view of the facts that this company is engaged in the various different functions including the design engineering services, this company cannot be considered as functionally comparable with the assessee. Accordingly, we direct the TPO/AO to exclude this company from the list of comparables.' We find that in paras 55 & 56 of the above decisions, the name of company is mistakenly recorded as Accentia Technologies Limited instead of Acropetal Technologies Limited. In view of the above decision of the Tribunal as well as the decision of the Hon'ble High Court in the case of Rampgreen Solutions (P.) Ltd. (supra), we direct the A.O./TPO to exclude the following companies from the set of comparables : (i) E-clerx Services Ltd. (ii) Infosys BPO Ltd. (iii) Coral Hubs Ltd. (Vishal information Technologies Ltd.) (iv) Wipro Ltd. (Seg) (v) Acropetal Technologies Ltd. (Seg.) ...............................................................................................
Learned DR has not brought any evidence on record controverting the above submission.
13. Therefore, respectfully following the decision of the co- ordinate bench, we hold that the above companies may be excluded for the reasons given by the Tribunal in the aforesaid decision.
IT(TP)A Nos.502 & 450/Bang/2015 Page 20 of 26 14. In the result, the appeal filed by the assessee is partly allowed.
: 15. The revenue raised the following grounds of appeal:
IT(TP)A Nos.502 & 450/Bang/2015 Page 21 of 26
Ground Nos.1, 10 and 11 are general in nature and do not require adjudication.
Ground Nos.2 and 3 challenge the direction of the DRP applying turnover filter of Rs.1 to Rs.200 crores. Though there are decisions to the effect that the companies with the turnover filter of Rs.1 to Rs.200 crores should alone be considered as comparables, this proposition was diluted by the Mumbai bench of IT(TP)A Nos.502 & 450/Bang/2015 Page 22 of 26 the Tribunal in the case of Willis Processing Services (I) P.Ltd. vs. DCIT [TS-49-ITAT-2013(Mum)-TP] wherein it was held that the turnover band of Rs.1 to Rs.200 crores is bereft of any rationality as the application of this rule does not enable comparison of a company with Rs.200 crores with another company having a turnover of Rs.201 crores. It was further observed by the Hon’ble Tribunal that the turnover was also not a criteria prescribed under rule 10B for selection of comparables. We are also of the considered opinion that the turnover cannot be relevant criteria in a service sector where fixed overheads are nominal and the cost of service is in direct proportion to the services rendered. Following this reasoning we hold that the above companies cannot be excluded from the list of comparables. Therefore, we direct that E-Clerk and Infosys Services cannot be excluded on the ground of turnover but these comparables came to be excluded in the ground of functionality in the case of assessee’s appeal in IT(TP)A No.502/Bang/2015.
Ground Nos.4 and 5 challenge application of 0% RPT. While selecting comparables, assessee needs to ensure that the comparables are uncontrolled. Companies having controlled transactions need to be eliminated. However, various Tribunals having been holding that an entity can be taken as uncontrolled if RPT does not exceed 25% of the total revenue. Reliance in this regard can be placed on the decision of Global Logic India P.Ltd. vs. DCIT (12 taxman.com 295(Del) (ii) ThyssenKrupp Industries
IT(TP)A Nos.502 & 450/Bang/2015 Page 23 of 26 (33 taxman.com107)(Bom) (iii) ADP P Ltd .vs. DCIT (45 SOT 172)(Hyd) and (iv) ACIT vs. Hapag Lloyd Global Services (34 taxman.com 241). The relevant para of the Tribunal order in the case of Global Logic India P.Ltd. (supra) is extracted below:
“5. We have heard the rival submissions and have gone through the material available on record. We find that the assessee had initially included 15 comparable including this company i.e., 3 DPLM Software Ltd., having OP/TC rate of 44.34 per cent. Out of these 15 comparable, the TPO has accepted four comparables i.e., 3 DPLM Software Ltd., M/s Soft Ware Ltd., M/s Lanco Global and M/s NSEIT. The average mean had been worked out by the TPO at 21.56 per cent. We also find that if this one comparable i.e., 3 DPLM Software is excluded from the four comparables selected by the TPO, the average mean of the remaining three comparables will be 13.97 per cent which is within plus minus 5 per cent of the operating profit margin of the assessee at 11.6 per cent. Now, regarding the claim of the assessee for exclusion of this comparable, it is the submission of the assessee that RPT of this comparable is 97 per cent. As per the Tribunal decision rendered in the case of Sony India Ltd. (supra), it was held by the Tribunal that comparables having RPT in the range of 10 to 15 per cent of total revenue cannot be taken or considered as controlled. No specific percentage of RPT had been pointed out by the Tribunal in this case which will render the comparable as controlled comparable. Still, if it is found that RPT is 97 per cent as has been claimed by the assessee before us, it has to be accepted that this comparable is not uncontrolled and therefore, the same has to be excluded from the list of comparables adopted by the TPO. Even if the percentage of RPT to total revenue is not 97 per cent but is more than 25 per cent even then, this comparable cannot be considered as uncontrolled comparable and the same has to be excluded from the list of comparables finally selected by the TPO. But for the same, the factual aspect has to be examined as to how much percentage of RPT to total revenue is there in the case of this comparable i.e., 3 DPLM Software Ltd. Hence, we set aside the assessment order and restore the entire matter to the file of the Assessing Officer for a fresh decision after examining the factual aspect of this claim of the assessee and after obtaining fresh directions from DRP. If it is found that the percentage of RPT to total revenue in the case of this comparable i.e., 3 DPLM Software is more than 25 per cent then this comparable should be excluded from the list of comparables selected by the TPO and IT(TP)A Nos.502 & 450/Bang/2015 Page 24 of 26 the average mean should be worked out after excluding this comparable and if the same is within plus minus 5 per cent of the profit margin declared by the assessee then no transfer pricing adjustment is required to be made. This ground of the assessee is allowed for statistical purposes.
It was submitted by the ld. counsel of the assessee that remaining grounds of the assessee may not be adjudicated upon at this stage and may be left open because the assessee is sure that it will succeed on this issue alone that the RPT in the case of 3 DPLM Software Ltd., is very high and hence that comparable has to be excluded and if that is done then no transfer pricing adjustment is required and therefore the remaining issues are of academic interest only. We find force in this argument of ld. AR of the assessee that if the assessee succeeds on this issue that RPT in the case of one comparable i.e., 3 DPLM Software Ltd. is high and for this reason that comparable has to be excluded resulting in bringing the average mean within plus minus 5 per cent of operating profit margin of the assessee then all other issues raised by the assessee in this appeal are of academic interest only and hence, we do not adjudicate upon on these issues at present. But in case, the assessee fails on that count then the assessee can raise these issues again before the Assessing Officer and the Assessing Officer should pass necessary order as per law in that situation. ”
Following this ratio, we hold that the DRP was not justified in applying 0% RPT. Accordingly, we reverse the findings of the DRP to this extent. Ground Nos.4 and 5 are allowed.
Ground No.6 challenges the direction of the DRP to treat foreign exchange gain as part of operating income. The direction of the DRP is in line with settled proposition of law, where foreign exchange fluctuation had arisen on account of sale proceeds, the same may be treated as operating income. Therefore, we do not find any reason to interfere with the directions of the DRP. Ground No.6 is dismissed.
IT(TP)A Nos.502 & 450/Bang/2015 Page 25 of 26 20. Ground No.7 is with regard to grant of working capital adjustment. The finding of the DRP is in line with settled proposition of law. Therefore we do not intend to interfere with the directions of the DRP.
21. Ground Nos.8 and 9 are against the direction of the DRP to reduce expenses incurred in foreign currency unrealized sales, foreign exchange loss, communication expenses, internet charges, freight and foreign travel expenses both from export turnover as well as from total turnover. The decision of the DRP is in consonance with the decision of the jurisdictional High Court in the case of CIT vs. Tata Elxsi Ltd. (349 ITR 98). Therefore, these grounds of appeal are dismissed.
In the result, the appeal filed by the revenue is partly allowed.
The cross objections filed by the assessee are dismissed as withdrawn.
Order pronounced in the open court on 12th April, 2017