M/S. ACUSIS SOFTWARE INDIA PVT. LTD.,,BANGALORE vs. ITO, BANGALORE

order dt.17.9.2010 passed under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short 'the Act') in pursuant to the directions of the Dispute Resolution Panel (in short ‘DRP’) dt.30.09.2010 for the Assessment Year 2006-07.

2 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd 2. The assessee is a company registered as a software technology park under STP, Govt. of India. The assessee has entered into an agreement for transcription service with its Associated Enterprise (‘AE’) Acusis LLC, USA which is the second stage of holding company. Thus the services provided by the assessee are in the nature of Information Technology Enabled Services. The TPO selected 13 comparable companies for determination of Arm’s Length Price (‘ALP’) as under :

3 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd Thus the TPO has worked out the adjusted Arithmetic Mean (‘AM’) of comparable prices at 22.48% in comparison to 9.43% of assessee. The TPO has accordingly proposed an adjustment under Section 92CA of Rs.2,27,83,360. The assessee has challenged the action of the TPO before the DRP but could not succeed.

Grounds of appeal relating to transfer pricing matters On the facts and in the circumstances of the case and in law: 3. the learned AO/Transfer Pricing Officer (‘TPO’) erred in making an addition of Rs. 2,27,83,360 to the total income of the Appellant on account of adjustment in the arm’s length price of the medical transcription services transaction entered by the Appellant with its associated enterprise; 4. the learned AO/TPO erred in disregarding the economic analysis undertaken by the Appellant and conducting a fresh economic analysis for the determination of the arm’s length price in connection with the impugned international transaction; 5. the learned AO/TPO have erred in ignoring the fact that since that Appellant is availing tax holiday u/s 10A of the Act, there is no intention to shift the profit base out of India, which is one of the basic intention of the introduction of transfer pricing provisions;

4 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd 6. the learned AO/TPO erred in determining the arm’s length margin/ price using only financial year 2005-06 data, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; 7. the learned AO/TPO erred in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters; a) the learned AO/TPO erred in rejecting certain comparable companies identified by the Appellant where consolidated results had been used for analysis. The Appellant had considered the consolidated results in only those cases where the medical transcription services related income of the Indian operations constituted more than 75 percent of the consolidated company-wide/ segmental revenues; b) the learned AO/TPO has erred by rejecting certain comparable companies identified by the Appellant using turnover < Rs. 1 Crore as a comparability criterion; c) the learned AO/TPO has erred by rejecting certain comparable companies identified by the Appellant as having economic performance contrary to the industry behavior (e.g. companies which showed a diminishing revenue trend); and d) the learned AO/TPO erred in rejecting certain comparables considered by the Appellant in the comparability analysis on the ground that the comparables were having different accounting year (other than March 31 or companies whose financial statements were for a period other than 12 months); 8. the learned AO/TPO erred in by accepting certain companies using unreasonable comparability criteria; 9. the learned TPO erred in obtaining information which was not available in public domain by exercising powers u/s 133(6) of the Act and relying on the information for comparability analysis; 10. the learned AO/TPO erred in not considering the foreign exchange fluctuation gain (loss) as part of the operating income while computing the operating margin; 11. the learned AO/TPO erred in not considering the provisions written back (which were claimed as expenses in earlier years) as part of the operating income while computing the operating margin; 12. the learned AO/TPO erred in not making suitable adjustments on account of differences in the risk profile of the Appellant vis-à-vis the comparables, while conducting comparability analysis;

5 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd 13. the learned AO/TPO erred in computing the arms length price without giving benefit of +/- 5 percent under the proviso to section 92C of the Act; 14. the learned AO erred in levying interest of Rs.41,74,951 and Rs.1,880 u/s 234B and 234D of the Act respectively; 15. the learned AO erred, in law, and in facts, in initiating penalty proceedings u/s 271(1)(c) of the Act.

The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon’ble Tribunal to decide on the appeal in accordance with the law.”

4. The assessee has also raised additional ground vide Petition under Rule 11 of ITAT for admission as under :

16) the learned TPO has erred in law and on facts by selecting the following companies as comparable which were functionally different from the Appellant; • Vishal Information Technologies Limited. • Maple eSolutions Limited. 17) The learned TPO has erred in law and on facts by selecting Asit C Mehta Financial Services Limited as comparable which was functionally different from the Appellant; 18) The learned TPO has erred in law and on facts by selecting Maple eSolutions Limited as comparable whose financial statements are not reliable for the relevant financial year.”

In the additional ground, the assessee is seeking exclusion of 3 comparable companies namely Vishal Information Technologies Ltd., Maple eSolutions Ltd. and Asti C Mehta Financial Services Ltd. two out of three companies are also part of the T.P. Study analysis of the assessee.

6 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd Admission of Additional Ground

8 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd find that the functional comparability of these companies requires a serious consideration. Accordingly in view of the decision of Special Bench in the case of DCIT Vs. Quark Systems Ltd. (supra), we admit the additional grounds raised by the assessee.

i) Apex Knowledge Solutions Ltd. ii) Vishal Information Technologies Ltd. iii) Goldstone Infratech Ltd.(Seg.) iv) Maple eSolutions Ltd. v) Asit C Mehta Financial Services Ltd. We will deal with functional comparability of these five companies one by one as under :

9.1 The learned Authorised Representative has submitted that this company is functionally not comparable as this company generated revenue from software exports amounting to Rs.4.92 Crores. He has referred to the Director’s Report/Annual Report of this company which has reported the revenue from export of software and related services of Rs.4.92 Crores. Thus in the absence of segmental details, this company

9 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd cannot be considered as functionally comparable. He has also referred to the information provided by this company in response to Notice under Section 133(6) wherein it is stated that this company has carried out electronic services and the GIS which include data convergent, data entry, electronic convergent, imaging, page composing, etc. in support of his contention, he has relied upon the decision of Bombay Benches of this Tribunal in the case of Willis Processing Services (I) Pvt. Ltd. Vs. DCIT 57 SOT 339.

9.2 On the other hand, the ld. DR has submitted that in reply to Notice under Section 133(6) this company has clearly stated that this company is engaged in the business of providing ITES and therefore this company is functionally comparable.

9.3 We have considered the rival submissions as well as the relevant material on record. We find from in the Annual Report of this company, that this company has reported revenue from export of software and ITES whereas the segmental details have not been given. An identical issue has been considered by the Mumbai Bench of this Tribunal in the case of Willis Processing Services (I) Pvt. Ltd. Vs. DCIT in & 4429/Mum/2012 Dt.1.3.2013 in para 24 as under :

10 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd “24 Having considered the rival submissions and other relevant material on record, we note that the assessee has accepted this comparable before the TPO. However, since this fact has brought to our notice that this company is deriving income from export of software and ITES and segment results are not available; therefore, it is not possible to consider this company as a functionally comparable. Hence, in the absence of segment results, this company has to be excluded from the comparables.”

The said decision is relating to the same assessment year and therefore following the earlier decision of this Tribunal, we hold that this company is functionally not comparable and accordingly the A.O./TPO is directed to exclude this company form the set of comparables.

10.1 The learned Authorised Representative of the assessee has relied upon the decision of this Tribunal in assessee's own case for the Assessment Year 2007-08.

10.2 On the other hand, the ld. DR has relied upon the orders of authorities below.

10.3 Having considered the rival submissions as well the relevant material on record, at the outset we note that the co-ordinate bench of this Tribunal in assessee's own case for the Assessment Year 2007-08 has examined the comparability of this company decided and found that this 11 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd company is operating on an outsource model and also having inventories therefore not functionally comparable. iii) Goldstone Infratech Ltd.(Seg)

11.1 The ld. AR of the assessee has submitted that this company fail the filter of 25% revenue from exports. He has relied upon to the details as well as the decision of this Tribunal in the case of HSBC Electronic Data Processing and submitted that the Tribunal has rejected this company by holding that the foreign currency earning was only Rs.4.24 lakhs out of the total earning of BPO segment of Rs.5.02 Crores and also the total turnover of Rs.30.89 Crores. Therefore the revenue from export is less than 25% as a filter applied by the TPO. The ld. AR has submitted that the export revenue is only 0.84% therefore it cannot be considered as a good comparable.

11.2 On the other hand, the ld. DR has relied upon the orders of the authorities below.

11.3 We have considered the rival submissions as well as the relevant material on record. We find that the co-ordinate bench of this Tribunal in the case of HSBC Electronic Data Processing India Ltd. Vs. ACIT vide

12 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd order dt.28.6.2013 in IT(TP)A No.1624/Hyd/2010 has considered this issue in para 10 as under :

13 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd Therefore, we are of the opinion, that this company cannot be considered as a comparable for the purpose of determining the ALP in this case. We direct the same to be excluded.”

We take note of the fact that as per the Schedule forming part of the accounts the total turnover of BPO Division of this company is Rs.5.02 Crores whereas the foreign exchange earning is Rs.4.24 lakhs. Therefore, the export revenue is less than 1% of turnover in the BPO segment and accordingly this company does not satisfy the filter of minimum 25% export revenue applied by the TPO. In view of the above facts as well as the decision of the co-ordinate bench, we direct the A.O./TPO to exclude this company form the set of comparables.

12.1 The learned Authorised Representative has submitted that financial statement of this company are not reliable as the Directors of this company were found to be involved in some fraud. He has relied upon the decision of this Tribunal in assessee's own case for the Assessment Year 2007-08.

12.2 On the other hand, the ld. DR has forcefully opposed the admission of additional ground and submitted that this comparable company was part of the assessee's TP Analysis then the TPO was not 14 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd having an opportunity to examine the objection raised by the assessee at this stage. The ld. DR has further submitted that the main objection of the assessee is unreliable financial statement whereas the allegation against the Directors of this company relates to a period in long past and also not relating to the business of this company.

12.3 Having considered the rival submissions as well the relevant material on record, we find that the decisions relied upon by the assessee regarding non-reliability of financial statements is not based on any evidence to show that the allegation on the Directors involving any fraud has any connection with the business of this company. Further the said allegations were levied in the past and does not pertain to the business of this company. We find that in the case of Willis Processing Services (I) Pvt. Ltd. Vs. DCIT (supra), an identical issue was examined by this Tribunal in para 51 as under :

“ 51 We have considered the rival submissions and relevant material on record. The first objection raised by the assessee is the involvement of the directors of this company in the fraud. The Tribunal in the case of Capital IQ Information (supra) as well as CRM rejected this company as comparable. Undisputedly, the alleged fraud relates back to the period of 1980 to 1990 and it was in respect of business in bicycle parts not connected with the business activity of this company. There was no allegation of any malpractice or fraud in the business of these companies and the allegation of fraud was against the directors in person. Though the Tribunal in the case of Capital IQ Information (supra) and CRM Services (supra) has taken one of the grounds for rejecting this company as a comparable because the director of this company was reportedly involved in the fraud, in our considered opinion the 15 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd said allegation of fraud against the directors and that too in the year 1980 to 1990 would not have influenced the business and margin of these companies when there is no allegation of any malpractice or fraud in connection with the business of these companies. Further, considerable time has passed when these allegations were reported up till the AY under consideration. Therefore, solely on the basis of the allegations of fraud and malpractice against a person in respect of unconnected business activity because the said person happens to be the director of these companies, cannot render these companies as non-comparables. There is no allegation against these companies or business activity of these companies. Therefore, it cannot be considered that the business or results of these companies are in any manner influenced or affected by the allegation of fraud against the directors in respect of other business activity that too more than two decades back. 51.1 So far as the Maple Esolution Ltd ., is concerned, this company was selected by the assessee itself in TP study as comparable; therefore, we are not inclined to accept the objection raised by the assessee before us that the directors of these companies were involve din the fraud. 51.2 However, since Triton Corpn Ltd., acquired by Maple Esolution Ltd., therefore, we are of the view that if extra ordinary events like merger and de- merger or amalgamation took place during the financial year relevant to the Assessment Year under consideration, and because of the merger/de-merger the company became functionally different then the said company should be excluded from the comparables. However, if the merger of the two functionally similar companies took place then the event of merger itself cannot be taken a factor for exclusion of the said comparable.. Accordingly, we direct the AO/TPO to verify this fact and accordingly decide the comparability of this company namely Accentia Technologies Ltd.”

The Tribunal has given a finding after considering the fact that the allegations were made during the period 1980 to 1990 and further there is nothing on record to show that the allegations were regarding any business activity of this company rather the allegation of the fraud against the Director was regarding some Bicycle business. Therefore in view of the facts and circumstances as well as the decision of the co- ordinate bench, we are of the opinion that this company cannot be 16 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd excluded from the set of comparables on the basis of mere allegation which has no connection with the business activity or affairs of this company.

(v) Asit C Mehta Financial Services Ltd. 13.1 The learned Authorised Representative has submitted that this company has failed employee cost filter as it is less than 23.35% as well as RPT is more than 15%. He has relied upon the decision of the Hyderabad Bench of the Tribunal in the case of HSBC Electronic Data Processing India Ltd. ACIT (supra) as well as ITO Vs. CRM Services India Pvt. Ltd. (supra).

13.2 On the other hand, the ld. DR has submitted that the TPO found that there is no other revenue except from ITES therefore this company is functionally comparable. He has relied upon the orders of the authorities below.

13.3 We have considered the rival submissions as well as the relevant material on record. We find from the Annual Report of this company that this company earns revenue from ITES, software, portfolio management and investment activity. Thus it is clear that this company is engaged in the diversified activity. Though the revenue from portfolio

17 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd management services and investment services is separately given however, the margin from this segment cannot be computed correctly in the absence of the apportionment of the expenditure among the various segments. Further we find that there is an amalgamation during the year under consideration as reported in the Annual Report. The co-ordinate bench of Hyderabad in the case of HSBC Electronic Data Processing India Ltd. Vs. ACIT (supra) has examined this issue in paras 13 & 14 as under :

18 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd 13.1 After considering the rival submissions, we are of the opinion that this company cannot be selected as a comparable not only on the reason of failing employee cost filter, but also due to amalgamation during the year, which has changed the business model of the company.

14. In view of the foregoing discussion, we agree with the assessee's objection that the above five comparables should be excluded.”

In view of the above facts and circumstances as well as the decision of the co-ordinate bench, we direct the Assessing Officer/TPO to exclude this company from the set of comparables.

(i) Geneysis International Corporation Ltd.

(ii) Mercury Outsourcing Management Ltd.

(i) Geneysis International Corporation Ltd. 15.1 The learned Authorised Representative of the assessee has submitted that the TPO has rejected this company on the ground that it has diminishing revenue whereas the Tribunal in the case of DCIT Vs. Netapp (India) Pvt. Ltd. (IT(TP)A No.881/Bang/2013 Dt.22.7.2016) has 19 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd held that applying diminishing revenue filter is not appropriate while considering the comparability of the company.

15.2 On the other hand, the ld. DR has submitted that apart from the persistent loss incurred by this company, the TPO also found that the RPT of this company is also more than 25%.

15.3 Having considered the rival submissions as well as the relevant material on record, we note that the RPT as found by the TPO in this case is 26.33%. Therefore, it is clear that this company does not satisfy the filter of 15% of Related Party or even 25% as applied by the TPO. The learned Authorised Representative has submitted that the RPT of this company is only 10.13% if a non-trading / revenue receipts are excluded.

We find that when the receipt from the Related Party are falling under the definition of international transactions then the same will be treated as part of the RPT as reported by the said company. Accordingly, in view of the fact that this company has more than 26% RPT cannot be considered as good comparable.

20 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd (ii) Mercary Outsourcing Management Ltd.

13.1 The learned Authorised Representative has submitted that the TPO has rejected this company on the similar reasoning of diminishing revenue and abnormal cost.

13.2 On the other hand, the learned DR has submitted that this company is incurring persistent losses and further the turnover of this company is less than Rs.1 Crore and therefore it does not satisfy the filter of turnover applied by the TPO.

13.3 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that turnover of this company in the ITES segment is only Rs.45.33 lakhs which in any case does not satisfy any filter of turnover in comparison to the assessee's turnover of more than Rs.27 Crores. Even if we apply the tolerance range of turnover of 10 times on both sides of the assessee's turnover then the company which is having less than Rs.2.7 Crores of turnover will be outside the said range of 10 times. Accordingly, we are of the view that this company which is having only Rs.45.33 lakhs turnover cannot be considered as a good comparable to the assessee.

21 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd 14. The next ground is regarding exclusion of expenditure incurred in foreign currency from the export turnover while computing the deduction under Section 10A of the Act.

14.1 We have heard the rival submission and perused the material on record. The Hon’ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others 349 ITR 98 (Kar) had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the Hon’ble jurisdictional High Court reads as follows:-

“………..Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define ‘total turnover’, the word ‘total turnover’ falls for interpretation by this Court;

……..In section 10A, not only the word ‘total turnover’ is not defined, there is no clue regarding what is to be excluded while arriving at the total

22 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term ‘total turnover’ in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, ‘export turnover’ is defined, and when the ‘total turnover’ includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same”.

23 IT(TP)A No.1287/Bang/2010 M/s.Acusis Software India Pvt Ltd In the light of the above binding precedents, we direct the A.O. to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while calculating deduction u/s.10A of the Act.