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Income Tax Appellate Tribunal, ‘A’ BENCH, BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI INTURI RAMA RAO
These cross appeals filed by the assessee company as well as the revenue directed against the assessment order dated 31.10.2013 passed u/s 143(3) r.w.s. 144 C of the Income Tax Act, 1961 for the assessment year 2009-10. Briefly the facts of the case are the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is a wholly owned subsidiary company of IMI Overseas International Ltd., UK. It is engaged in the business of providing IT enabled services, Support Services and are Manufacturers of Silencers.
The Return of Income for the assessment year 2009-10 was filed on 29.09.2009 declaring income of Rs.1,17,00,020 /- and it was revised on 31.3.2010 at the same total income. The assessee company also reported the following international transactions with its AEs:
International Transactions (as mentioned in 92 CE report)
Sl. Type of transaction Amount (Rs.) No. 1. Sale of Silencers 2,36,98,794/- 2. Receipt from IT Enabled 18,03,63,843/- Service 3. Receipt from Support 38,48,327/- Services 4. Reimbursement of 31,797/- expenses paid
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The assessee company sought to justify the consideration received for the above international transactions entered with its AE to be at arm’s length price. The assessee company also submitted a transfer pricing study report adopting the operating profit to total cost as a profit level indicator for the transfer pricing study. The assessee company applied the Transactional Net Margin Method (TNMM) which was considered to be the most appropriate method for the purpose of bench marking the international transactions. The assessee company’s profit margin was computed at 12%. And the assessee company claimed that the same was comparable with the other companies rendering IT enabled services. For the purpose of TP study, the assessee company had chosen 11 comparable entities and arithmetic margin and operating profit margin of said comparables was computed at 13%. According to the assessee company, its PLI was within the range of ± 5% of arithmetic margin of the comparable entities. Thus it was claimed that the transaction of the AE are at arm’s length. The assessee company for the purpose of its TP study had adopted the following filters for the purpose of its TP study:
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Applying the above filters, the following 11 entities were chosen as comparables whose average profit margin was computed at 13%.
The assessing officer after noticing above international transactions, referred the matter to the Transfer Pricing Officer (TPO). The TPO, by order dated 16.04.2013, passed under section 92CA(3) of Income Tax Act computed the transfer pricing adjustment at Rs.1,51,89,959/-. The learned TPO accepted the TNMM adopted by the assessee company but rejected the transfer pricing report. Then the TPO proceeded to identify the different set of comparables for the purpose of determining ALP. While doing so, the TPO had applied the following filters:
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The TPO has rejected 10 comparables selected by the assessee company in the TP study and introduced 7 new companies and finally selected 8 comparables. The reasons given by the learned TPO for rejection of the comparables chosen by the assessee company are as under:
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The final set of comparables chosen by the learned TPO are as under:
The TPO computed the average profit margin of the comparables finally selected at 25.04% and after giving working capital adjustment of 1.78%, adjusted Arithmetic Mean was determined at 26.82% and on the above said basis, TPO computed transfer pricing adjustment in respect of ITeS services as follows:
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The assessing officer passed draft order dated 05.03.2013 u/s. 143 incorporating the above adjustments and also disallowing the claim u/s 10A to the extent of Rs.23,28,704/- in respect of travel and communication expenditure incurred reducing the same from the export turnover.
Being aggrieved by the draft assessment order, the objections were filed before Hon’ble DRP contending interalia that the learned TPO ought to have accepted the use of multiple year data for computing the final margin of the comparables and the risk adjustment should be given to the assessee company on account of difference in risk level assumed by the assessing company and the comparable entities chosen. The assessee company also contended that the employee cost filter wherein only the companies having
IT(TP)A No.1757/Bang/2013 & IT(TP) No.4/Bang/2014 Page 8 of 22 employee cost more than 25% of the revenue should be applied. It was further contended entity M/s. Infosys BPO Limited should be excluded from the list of comparables both on the grounds of turnover as well as the entity having high brand value. And in respect of Accentia Technologies Ltd., it was contended that these entities should be rejected as it is engaged both in the software activities as well as ITeS activities and no segmental information was available on the domain.
As regards the entity M/s. Cosmic Global Limited, it was contended that it does not pass the filter of employee cost and the above should be rejected. And so far as M/s. Eclerx Services Ltd., is concerned, it was contended that this company cannot be compared with that of the assessee company as it is engaged in the high end KPO activities. The assessee company also objected to the exclusion of Microgenetics Systems Ltd., and R Systems International Ltd., as it is functionally similar to that of the assessee company. The assessee company also contended that in respect of travelling expenditure and telephone expenditure incurred in foreign exchange, reducing the same from export turnover alone is not correct.
After considering the objections of the assessee company, the Hon’ble DRP passed directions under section 144C(5) of the Act upholding the filter applied by the learned TPO and application of use of only current year data as against multiple data as adopted by the assessee. And in IT(TP)A No.1757/Bang/2013 & IT(TP) No.4/Bang/2014 Page 9 of 22 respect of selection of comparables is concerned, the objections of the assessee company has been overruled placing reliance on several decisions of the coordinate bench of the tribunal. However, in respect of travelling expenditure incurred in foreign currency and foreign exchange loss, the Hon’ble DRP directed the TPO/AO to reduce from both the export turnover as well as the total turnover for the purpose of computing of deduction under section 10A. Being aggrieved by that part of the assessment order, the assessee company is in appeal before us raising the following grounds of appeal in ITA No. 4/B/2014:
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Ground No. 1 is general in nature and do not require Ground No. 1 is general in nature and do not require Ground No. 1 is general in nature and do not require any adjudication. Ground No. 2 consist of any adjudication. Ground No. 2 consist of 5 sub grounds a sub grounds a to e. Sub grounds a, b, c & d are not pressed before us. to e. Sub grounds a, b, c & d are not pressed before us. to e. Sub grounds a, b, c & d are not pressed before us. The only ground of appeal urged by The only ground of appeal urged by learned AR is regarding is regarding the selection of comparables. The learned AR vehemently the selection of comparables. The learned AR vehemently the selection of comparables. The learned AR vehemently contended the the following comparables cannot be included in following comparables cannot be included in the list of comparables. Now we shall deal with each of the list of comparables. Now we shall deal with each of the list of comparables. Now we shall deal with each of them:
(i) Infosys BPO Ltd Infosys BPO Ltd : The learned AR vehemently : The learned AR vehemently contended that contended that entity M/s. Infosys BPO Ltd., cannot be M/s. Infosys BPO Ltd., cannot be compared with the assessee company as it is functionally compared with the assessee company as it is functionally compared with the assessee company as it is functionally dissimilar. It is submitted that this company is into dissimilar. It is submitted that this company is into dissimilar. It is submitted that this company is into providing high end integrated services and having high providing high end integrated services and hav providing high end integrated services and hav brand value and high turnover. Therefore this company brand value and high turnover. Therefore this company brand value and high turnover. Therefore this company cannot be compared with that of assessee company and cannot be compared with that of assessee company and cannot be compared with that of assessee company and reliance in this regard was placed on the following reliance in this regard was placed on the following reliance in this regard was placed on the following decision of the coordinate bench decision of the coordinate bench:
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On the other hand, the learned CIT(DR) vehemently argued that turnover is not a relevant criteria for the comparability.
We heard the rival submissions and perused the material on record. From the Annual Report of M/s. Infosys BPO Ltd., it is clear that it is wholly owned subsidiary of M/s. Infosys Ltd. It is an undisputed fact that the Infosys BPO possesses high brand value and intangibles. Such companies cannot be compared with companies like that of assessee company as held by Hon’ble Delhi High Court CIT vs. Agnity Technologies Pvt. Ltd., 219 Taxmann 26 and the same ratio has been followed by several coordinate benches like the case of Nova Nordisk India Pvt. Ltd.,[IT(TP) A No. 122/Bang/2014, AY 2009-10] dated 08.05.2015 wherein the coordinate bench following the decision of the Hyderabad tribunal in the case of IQ Information Systems Pvt. Ltd., vs. DCIT, Circle (1), Hyderabad dated 31.07.2014 held that the Infosys BPO cannot be compared with ITES company for the assessment year 2009-10. The relevant paragraphs are as under:
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We do not find any reason to differ with the decisions of the coordinate benches cited supra. Therefore, we direct TPO/AO to exclude this company from the list of comparables.
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(ii) Aditya Birla Minacs Worldwide Ltd: Aditya Birla Minacs Worldwide Ltd: The Aditya Birla Minacs Worldwide Ltd: learned AR contends that this company cannot be learned AR contends that this company cannot be learned AR contends that this company cannot be compared with that of assessee company as the related compared with that of assessee company as the related compared with that of assessee company as the related party transactions are more than party transactions are more than 15% i.e., 15.68% and % i.e., 15.68% and had placed reliance on the following decisions: had placed reliance on the following decisions:
We find that TPO had applied RPT filter of more than We find that TPO had applied RPT filter of more than We find that TPO had applied RPT filter of more than 25% of sales and 25% of sales and the assessee company had not challenge challenge the application of the filter of RPT more than 15% and any application of the filter of RPT more than 15% and any application of the filter of RPT more than 15% and any event, in the present case , in the present case, the RPT filter is only 15.68% the RPT filter is only 15.68% and the company qualifies qualifies all the filters applied by the TPO and the filters applied by the TPO and is found to be functional is found to be functionally comparable with that of the comparable with that of the assessee company and therefore we do not see any reason assessee company and therefore we do not see any reason assessee company and therefore we do not see any reason to exclude this company from the list of comparables. to exclude this company from the list of comparables. to exclude this company from the list of comparables. Therefore, we uphold inclusion of this entity in the list of Therefore, we uphold inclusion of this entity in the l Therefore, we uphold inclusion of this entity in the l comparables.
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(iii) Accentia Technologies Ltd: Accentia Technologies Ltd: It is contended It is contended before us that this company cannot be compared with before us that this company cannot be compared with before us that this company cannot be compared with that of the assessee company as it is functionally that of the assessee company as it is functionally that of the assessee company as it is functionally different and it is engaged in the business of product different and it is engaged in the business of product different and it is engaged in the business of product development and software developm development and software development. The financial ent. The financial results cannot be compared as extraordinary event of results cannot be compared as extraordinary event of results cannot be compared as extraordinary event of acquisition of M/s. Oak Technologies acquisition of M/s. Oak Technologies Inc. took place took place during the year having impact on the profitability of the during the year having impact on the profitability of the during the year having impact on the profitability of the entity. Reliance in this regard was placed on decision of : entity. Reliance in this regard was placed on decision of : entity. Reliance in this regard was placed on decision of :
We heard We heard the rival submissions and perused the the rival submissions and perused the material on record. The contention that because of material on record. The contention that because of material on record. The contention that because of extraordinary event like amalgamation extraordinary event like amalgamation, the financial results financial results of the Accentia Technologies cannot be of the Accentia Technologies cannot be compared is not compared is not acceptable. It is only during the . It is only during the financial year 2007-08 Iridium Technolog Technologies and Geosoft Technologies were merged were merged
IT(TP)A No.1757/Bang/2013 & IT(TP) No.4/Bang/2014 Page 15 of 22 with the Accentia Technologies Ltd. This can be found from page 29:
And during the financial year 2008-09 i.e., relevant to the assessment year under consideration, this company had only acquired 96% stake in Oak Technologies Inc. that means the financial results of Oak Technologies Inc. were not merged with the Accentia Technology Ltd. This fact is evident from the page No. 61 of the annual report for the financial year 2008-09. Therefore this contention cannot be accepted.
Now we shall deal with the other contentions of the assessee company that this company cannot be compared with that of ITES company on functionality. From the annual report for the financial year 2008-09, it is clear from page 3 of Annual Report placed at page No. 788 of the paper book, the business profile of the company is described as under:
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“The story of Accentia Technologies is indeed a truly inspirational one, unsurpassed in India. As the fastest growing BPO Company in the Healthcare Receivables Cycle Management sphere, we are not ready to rest on our laurels. We have very ambitious plans for the future, which we are sure of achieving with the enthusiastic management team, highly motivated employees, ever expanding clientele and supportive investors.
We are now entering the Data Processing Outsourcing business area, and hope to realize about 25% of our total revenues from this new business stream in the first year itself”
And from the schedule 8 of the audited accounts, the description of the income from operations are given as under:
From the above it is very clear that it is not engaged either in the software development or in the software development products. Therefore the contention that the company is in the software development and software products development cannot be accepted. From the nature of the description of the income, it is very clear that it is an IT(TP)A No.1757/Bang/2013 & IT(TP)A No.1757/Bang/2013 IT(TP) No.4/Bang/2014 IT(TP) No.4/Bang/2014 Page 17 of 22 ITES company. This entity is comparable with that of the company. This entity is comparable with that of the company. This entity is comparable with that of the assessee company. assessee company.
(iv) M/s. M/s. Cosmic Global Ltd: The AR vehemently The AR vehemently contended that this company is functionally different contended that this company is functionally different contended that this company is functionally different from that of the assessee company as it outsources its from that of the assessee company as it outsources its from that of the assessee company as it outsources its services to 3rd party and the major revenue is derived services to 3 or revenue is derived from the business of translation services and reliance in from the business of translation services and reliance in from the business of translation services and reliance in this regard was placed on the following decision of the this regard was placed on the following decision of the this regard was placed on the following decision of the coordinate bench: coordinate bench:
On the other hand, the learned DR relied on the On the other hand, the learned DR relied on the On the other hand, the learned DR relied on the orders of TPO. We heard the rival submissions and perused orders of TPO. We heard the rival submissions and perused orders of TPO. We heard the rival submissions and perused the material on record. Only the material on record. Only ground on which this company which this company was objected objected for inclusion was that it subcontracted its for inclusion was that it subcontracted its services to 3rd rd party. However, from the perusal of the from the perusal of the IT(TP)A No.1757/Bang/2013 & IT(TP) No.4/Bang/2014 Page 18 of 22 Annual Report of this company at page No. 75 of the Annual Report for the financial year 2008-09 placed at page No. 928 and page No. 76 it is clear that for earning the revenue of Rs.7,37,02,584/- the expenditure on salaries and wages of Rs. 1,57,11,460/- was incurred constituting to 21.31%. However, from the schedule 10 and 11, no expenditure was shown towards outsourcing of work. Thus the contentions advanced are not supported by the material on record. Therefore it cannot be accepted. Thus we uphold the inclusion of this company in the list of comparables.
(v) M/s. Exlerx Services: It is contended that this entity is a KPO company, knowledge processing engaged in providing data analytics and data processing solutions to its customers and intangibles like goodwill and earning abnormally high profits. Thus it was submitted that this company is functionally different from that of ITES company like the assessing company. Reliance in this regard was placed in the decision of :
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Now the law is quite settled that Now the law is quite settled that a KPO cannot be KPO cannot be compared with a compared with a purely ITES company. But having regard ITES company. But having regard to the nature of the functions performed by the comparable to the nature of the functions performed by the comparable to the nature of the functions performed by the comparable as well as the assessee company, a finding has to be as well as the assessee company, a finding has to be as well as the assessee company, a finding has to be rendered by the lower authori rendered by the lower authorities whether it is a KPO is a KPO company or ITES company. company or ITES company. We do not find any such finding We do not find any such finding on the record. record. In the absence of such finding, we deem it fit of such finding, we deem it fit to the remand the matter back to the file TPO/AO to decide to the remand the matter back to the file TPO/AO to decide to the remand the matter back to the file TPO/AO to decide whether this entity is whether this entity is a KPO company or ITES compan KPO company or ITES company. If it is found to be it is found to be a KPO company, we direct the TPO/AO to KPO company, we direct the TPO/AO to exclude it from the list of comparables. exclude it from the list of comparables.
In the result, the appeal filed by the assessee In the result, the appeal filed by the assessee In the result, the appeal filed by the assessee company is partly allowed for statistical purposes. company is partly allowed for statistical purposes.
IT(TP)A No.1757/Bang/2013 & IT(TP) No.4/Bang/2014 Page 20 of 22 Departmental appeal No. [IT(TP)A 1757/Bang/2013] Grounds of Appeal:
14. The only grievance of the revenue in this appeal is that the CIT(A) was not justified in directing the Assessing Officer (AO) to recompute the deduction allowable u/s 10A and 10AA of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’ for short] after reducing the expendiure incurred on travel, tele-communication charges and IT(TP)A No.1757/Bang/2013 & IT(TP) No.4/Bang/2014 Page 21 of 22 expenses incurred for travel in foreign currency both from the export turnover as well as the total turnover. According to the revenue, the order of the Hon’ble High Court in the case of CIT vs. Tata Elxsi Ltd. (349 ITR 98) has not been accepted by the department and a SLP has been filed before the Hon’ble Supreme Court. Therefore, the order of the CIT(A) should be reversed.
15. We heard the rival submissions and perused the material on record. We find that the CIT(A) has followed the decision of the Hon’ble Karnataka High Court in the case of Tata Elxi Ltd (supra) for holding that the expenses excluded from the export turnover should also be excluded from the total turnover for computation of deduction u/s 10A and 10AA of the Act. In view of the same, we see no merit in the appeal of the revenue. Hence, the same is dismissed.
In the result, the appeal filed by the assessee is partly allowed and the appeal filed by the revenue is dismissed.
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Order pronounced in the open court on this 09th day of November , 2016