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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI S.K.YADAV & SHRI A. K. GARODIA
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH ‘B’, BANGALORE
BEFORE SHRI S.K.YADAV, JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER
IT (TP) A No.1232(Bang) 2011 (Assessment year : 2007-08)
M/s Acusis Software India Pvt. Ltd., No.17/2, Dollar Chamber, Lalbagh Road, Bangalore -560 027 Pan No.AADCA2415P Appellant Vs The Income Tax Officer, Ward-11(1), Bangalore Respondent
Assessee by : Shri Chavali Narayan, CA Revenue by : Ms. Neera Malhotra, CIT
Date of hearing : 04-08-2016 Date of pronouncement: : 18-10-2016
O R D E R PER SHRI A.K.GARODIA, AM
This is an assessee’s appeal directed against the assessment order
dated 30-09-2011 passed by the AO u/s 143(3) r.w.s. 144C of the IT Act,
1961 as per the directions of DRP for assessment year 2007-08.
The grounds raised by the assessee are as under; Based on the facts and circumstances of the case and in law, Acusis Software India Private Limited (hereinafter referred to as 'Appellant') respectfully craves leave to prefer an appeal against the order passed by Income Tax Officer - Ward 11(1) ('AO') dated 30 September 2011 in pursuance of the directions issued by Dispute Resolution Panel ('DRP'), Bangalore dated 05 September 201 I, under section 253 of the Income-tax Act, 1961 (' Act') on the following grounds:
2 IT(TP)A No.1232(B)2011
That on the facts and circumstances of the case and in law,
1.the order of the learned AO, based on directions of the Hon'ble DRP, erred in assessing the total income at Rs. 2,86,60,019 as against returned income of NIL computed by the Appellant; Grounds of appeal relating to corporate tax matters
On the facts and in the circumstances of the case and in law, based on the directions of the DRP, the learned AO has erred in law and in fact by holding that the foreign currency expenses are towards technical services rendered outside India and should be reduced from "export turnover" while computing the profits eligible for deduction under Section 1O A of the Act. 3.On the facts and I the circumstances of the case and in law, based on the directions of the DRP, the ld. AO has erred in law by no considering that, if the telecommunication expenses (i.e. internet and ISDN service charge) and foreign currency expenses are reduced from export turnover, an equal amount should also be from total turnover for computing the deduction u/s 10 A of the Act. 4. On the facts and in the circumstances of the case and in law, based on the directions of the DRP, the ld. AO has erred in law and in facts, by not providing the assessee an opportunity of being heard in connection with reduction of unabsorbed depreciation from the profits of the undertaking before providing for deduction u/s 10 A of the Act.
Grounds of appeal relating to transfer pricing matters On the facts and in circumstances of the case and in law; 5. the ld. AO/TPO erred in making an addition of Rs.2,81,69,410/- to the total income of the appellant on account of adjustment in the arm’s length price of the medical transcription service transaction entered into by the appellant with its associated enterprise. 6. the ld. 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.
the ld. AO/TPO erred in disregarding the economic analysis undertaken by the appellant and conducting a fresh economic analysis or the determination of the arm’s length price in connection with the impugned international transaction. 8. the learned AOITPO erred in determining the arm's length margin! price using only financial year 2006-07 data, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; 8. the learned AOITPO erred in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters;
a) the learned AOITPO has erred by rejecting certain comparable companies identified by the Appellant using
3 IT(TP)A No.1232(B)2011
turnover < Rs. 1 Crore as a comparability criterion;
b) the learned AOITPO 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
c) the learned AOITPO 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).
d) the learned AOITPO 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-widel segmental revenues;
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;
the learned AOITPO erred by accepting certain companies using unreasonable comparability criteria;
the learned AOITPO erred by not providing the Assessee any opportunity of being heard in certain cases and accepting some companies without communicating the reasons thereof;
the learned AOITPO erred in not considering the foreign exchange fluctuation gain (loss) as part of the operating income while computing the operating margin;
the learned AOITPO erred in not making suitable adjustments on account of differences in the risk profile of the Appellant vis-a-vis the comparables, while conducting comparability analysis;
the ld. AO/TPO erred in computing the arms length price without giving benefit of += 5% under the proviso to sec.92C of the Act.
4 IT(TP)A No.1232(B)2011
the ld. AO/TPO erred in levying interest of Rs. 51,96,873 and Rs.,662 u/s 234B and 234D of the Act respectively. 17. the ld. AO/TPO 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 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”.
It was submitted by the ld.AR of the assessee that ground no.1 is
general in nature and ground no.2 to 4 are regarding Corporate Tax matters
and these grounds are covered in favour of the assessee by the judgment of
the Hon’ble Karnataka High Court rendered in the case of M/s Tata Elxsi
Ltd., reported in 349 ITR 98.
The ld. DR of the revenue supported the assessment order on this
issue.
We have considered the rival submissions. Regarding the first
ground, we hold that this ground is general and no separate adjudication is
required for this ground.
Regarding ground no.2 to 4, we find that the issues involved in
these grounds is covered in favour of the assessee by the judgment of the
Hon’ble Karnataka High Court rendered in the case of M/s Tata Elxsi Ltd.
(Supra) wherein it was held that the total turnover is sum total of domestic
turnover and export turnover and therefore, if an amount is reduced from
the export turnover then, the total turnover also gets reduced by the same
amount. Respectfully following this judgment of the Hon’ble Karnataka
High Court, we direct the AO to re-calculate the deduction allowable to the
5 IT(TP)A No.1232(B)2011 assessee u/s 10A of the Act by reducing the total turnover also by the same amount by which export turnover was reduced by the AO in respect of foreign currency expenses incurred towards technical services rendered outside India. Accordingly, ground no.2 to 4 are allowed for statistical purposes. 7. Thereafter, the ld. AR of the assessee submitted that the remaining ground are in respect of TP issues and in this regard, he submitted a chart before us and pointed out that the TPO had considered total 28 comparables out of which, the assessee is requesting for exclusion of 13 comparables which are divided in to four separate groups. First such group is of 3 comparables i.e. 1)M/s Bodhtree consulting Ltd.,(Seg.), 2)M/s Eclerx Services Ltd., and 3) Mold Tek Technologies Ltd., (Seg.). Regarding exclusion of this group, he submitted that these companies are functionally different because these companies are performing functions in the nature of KPO and therefore, should be excluded from the list of final comparables. Reliance was placed on the Tribunal order rendered in the case of First Advantage Offshore Services Pvt. Ltd., in IT(TP)A No.1086(Bang.)/2011 dated 30-04-2013, copy available on pages 527 to 564 of the paper book and in particular, our attention was drawn to para-36 & 37 of this Tribunal order which are as under; As far as 3rd group is concerned, the learned “36. counsel for the assessee submitted that this group consists of – 1) Bodhtree Consulting Ltd. 2) Eclerx Services Ltd. 3) Mold Tek Technologies Ltd.
6 IT(TP)A No.1232(B)2011 37. According to the learned counsel for the assessee, these companies are functionally different from the assessee. He submitted that the assessee is basically a ‘call centre’, whereas these three companies are into the business of ‘knowledge process out sourcing (KPO)’. He submitted that while the assessee is into simple activities like credit check, in house support, bill search, people search, high check, automated services, document management etc. while the ‘knowledge process outsourcing’ includes specialized customer & technical services. He submitted that Bodhtree Ltd. provides software solutions such as data cleansing, e-learning and e-paper solution and also earns revenue from software products As far as Eclerx Services Ltd. is concerned, he submitted that it is engaged in providing data process and analytics services as is evident from the website of the company. As regards Mold Tek Technologies Ltd., is concerned, he submitted that it is providing high-end engineering design and detailing services which are appropriately categorized as structural engineering services and are high end engineering services and cannot be considered as comparable to the ITES services rendered by the assessee. Thus, according to him, these three companies being functionally different from the assessee are to be excluded from the list of comparables. In support of his contention, he placed reliance upon the decision of ‘A’ Bench of the Tribunal at Hyderabad in the case of M/s Capital IQ Information Systems (India) Pvt. Ltd., in ITA No.1961/Hyd/2011 dated 23.11.2012, wherein the Tribunal
7 IT(TP)A No.1232(B)2011 has directed that Mold Tek Technologies Ltd. is to be excluded from the list of comparables because of ‘exceptional financial result’ due to merger/demerger and also on account of ‘super normal profit’ of 113%. He placed reliance upon the decision of this Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd., wherein it has been held that the companies showing abnormal profits cannot be treated as comparable.
He further submitted that the second group for which exclusion is being requested by the assessee is also group of three companies including M/s Infosys
BPO Ltd.,, M/s Wipro Ltd., (Seg.) and M/s HCL Comnet Systems & Services
Ltd. and exclusion of this group is requested by the assessee on account of turnover filter. He submitted that the turnover of the assessee company for ITES
is Rs.22.64 Crores whereas the turnover of each of these three companies is more
than 10 times of the assessee’s turnover and therefore, these companies should be
excluded from the list of final comparables, even as per the latest Tribunal orders wherein instead of applying turnover filter of 1- 200 Crores, the turnover filter of 1/10th or 10 times of the turnover of the assessee company is being applied.
Thereafter, he submitted that the third group of which exclusion is being requested by the assessee consists of five companies i.e. 1) M/s Vishal
Information Technologies Ltd., 2) M/s Informed Technologies India Ltd., 3) M/s
Accentia Technologies Ltd., (Seg.), 4) M/s Spanco Ltd., (Seg.) & 5) M/s Asit C Mehta Financial Services Ltd. He submitted that exclusion of this group of five
8 IT(TP)A No.1232(B)2011 companies is being requested by the assessee on account of employees’ cost
filter. He placed reliance on the Tribunal order rendered in the case of First
Advantage Offshore Services Pvt. Ltd., (Supra) and our attention was drawn to
para-35 of this Tribunal order available on page nol.554 of the paper book.
Thereafter, he submitted that the assessee is seeking exclusion of one more group
of companies consists of two companies i.e. M/s Maple E-solutions Ltd., and
2)M/s Triton Corp Ltd. and the assessee is requesting for exclusion of this group
on this basis that these companies should be rejected for fraudulent financial
statement and in this regard, reliance has been placed on the Tribunal order
rendered in the case of Capital IQ Information Systems (Ind.)Pvt. Ltd., in ITA
No.1961/Hyd/2011dated 23-11-2012, copy available on pages 499-526 of the
paper book. Thereafter, he submitted that if these 4 groups consisting of 13
companies are excluded from the list of final comparables, the net average
margin of the remaining 15 comparable companies will be 18.24 % and after risk
adjustment, the adjusted arithmetic mean will be 14.59% which is within +/- 5%
range of the operating margin of the assessee at 13.20% and therefore, no TP
adjustment is required to be made. As against this, the ld. DR of the revenue
supported the orders of the authorities below but he could not point out any
difference in facts in the present case and various cases on which reliance case
has been placed by the ld. AR of the assessee. 9. We have considered the rival submissions and we find some force in the submissions of the ld.AR of the assessee regarding exclusion of some of
9 IT(TP)A No.1232(B)2011
these four groups of companies consisting of 13 companies.
In the case of M/s First Advantage Offshore Services Pvt. Ltd.
(Supra), in para-36 of this Tribunal order, the Tribunal was examining the
issue regarding exclusion of three companies i.e. M/s Bodhtree Consulting
Ltd., (Seg.), 2) M/s Eclerx Services Ltd., and 3) Mold Tek Technologies Ltd.,
(Seg.) and it was held by the Tribunal that these three companies are
providing KPO services and therefore, cannot be considered as a comparable
in a case where the assessee is providing BPO services. Respectfully
following this Tribunal order, we direct the AO/TPO to exclude these three
companies from the list of final comparables.
Regarding the second group of three companies i.e. 1) M/s Infosys
BPO Ltd., 2) M/s Wipro Ltd., (Seg.) and 3)HCL Comnet Systems & Services
Ltd., (Seg.), we find that in the same Tribunal order rendered in the case of
First Advantage Offshore Services Pvt. Ltd., (Supra) in para-29 of this
Tribunal order, the Tribunal considered these three companies and held that
these three companies should be excluded because the turnover of these
three companies is more than Rs.200 Crores. Now, the Tribunal is adopting
a different turnover filter i.e. those companies are excluded which have
turnover less than 1/10th or more than 10 times of the assessee company’s
turnover. In the present case, these three companies are having turnover in
excess of 10 times of the turnover of the assessee company and hence, we
direct the AO/TPO to exclude these three companies also from the list of final
comparables by applying this turnover filter.
Regarding third group consisting of five companies i.e. 1) M/s
Vishal Information Technologies Ltd., ,2) Informed Technologies Ltd., 3)
10 IT(TP)A No.1232(B)2011
Accentia Technologies Ltd., (Seg.) 4) M/s Spanco Ltd., (Seg.) and 5) M/s Asit
C Mehta Financial Services Ltd., We find that the exclusion of this group is
being requested by applying the employees’ cost filter. In para-35 of the same
Tribunal order rendered in the case of M/s First Advantage Offshore Services
Pvt. Ltd., (Supra), the Tribunal had considered three companies out of these
five companies in the present case, i.e. 1) M/s Vishal Information
Technologies Ltd., 2) Informed Technologies Ltd., 3) Accentia Technologies
Ltd.(Seg.) and it was held by the Tribunal in that case that these three
companies are excluded because the companies were having employees’ cost
of less than 25%. Regarding the remaining two companies i.e. M/s Spanco
Ltd., (Seg.) and M/s Asit C Mehta Financial Services Ltd., the issue was not
before the Tribunal in that case and no evidence has been brought on record
before us to show that these two companies are having employees’ cost of less
than 25% of turnover. Hence, out of this group of five companies, we direct
the AO/TPO to exclude three companies i.e. 1) M/s Vishal Information
Technologies Ltd., 2)M/s Informed Technologies Ltd., 3) Accentia
Technologies Ltd.(Seg.).
Regarding the fourth group consisting of two companies i.e. M/s
Maple E-Solutions Ltd., and M/s Triton Corp Ltd., we find that reliance has
been placed on the Tribunal order rendered in the case of M/s Capital IQ
Information Systems (Ind.) Pvt. Ltd., (Supra) and our attention has been
drawn to para-18 & 19 of this Tribunal order available on pages 519 – 520 of
the paper book. As per these paras of the Tribunal order, it is seen that the
Tribunal had followed another Tribunal order of the Delhi Bench of the
Tribunal rendered in the case of ITO Vs CRM Services India Pvt. Ltd. in ITA
11 IT(TP)A No.1232(B)2011
No.4068(Del.)/2009 for assessment year 2004-05 dated 30-11-2011 and it
was held by the Tribunal that these companies are not good comparables.
Respectfully following these Tribunal orders, we direct the AO/TPO in the
present case also to exclude these two companies from the list of final
comparables.
As per the above discussion, we have held that out of 28 comparables
and against request of the assessee for exclusion of 13 comparables, 11
companies are to be excluded from the list of final comparables. The AO
should work out the ALP on the basis of remaining 17 comparables and after
allowing risk adjustment as well as the advantage of += 5% margin as per
law, the AO should find out whether any TP adjustment is required to be
made and if it is required to be made, he should do so as per law after
allowing sufficient opportunity of being heard to the assessee.
In the result, the appeal of the assessee stands partly allowed in
the terms indicated above.
Order pronounced in the open court on the date mentioned on the caption page.
(SUNIL KUMAR YADAV) (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER Place: Bangalore: D a t e d :18.10.2016 am* Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order
12 IT(TP)A No.1232(B)2011
AR, ITAT, Bangalore
ौुतलेख क� तार�ख……………………………………………………………………… DATE OF DICTATION………………………………………………………………………
2.तार�ख, �जस पर टाइप �कया हुआ मसौदे, संबंिधत सदःय के सामने रखा गया ह� DATE ON WHICH TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER………………………………………………………………………………………..
तार�ख �जस पर अनुमो�दत मसौदे व.िनजी सिचव/िनजी सिचव के पास वापस आए DATE ON WHICH THE APPROVED DRAFT COMES TO THE PS/Sr.PS……………….
घोषणा के िलए आदेश संबंिधत सदःय के सामने रखने क� ितिथ DATE ON WHICH THE ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT………………………………………………………………………………
आदेश िन.सिचव/व.िन.सिचव के पास वापस आने क� ितिथ DATE ON WHICH THE ORDER COMES BACK TO THE PS/Sr.PS……………………..
6 आदेश अपलोड करने क� ितिथ DATE OF UPLOADING THE ORDER ON WEBSITE………………………………………….. 7. अगर अपलोड नह�ं �कया तो, उसका कारण IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO…………………………. 8. ब�च िल�पक के पास फाइल जाने क� ितिथ DATE ON WHICH THE FILE GOES TO THE BENCH CLERK……………………………….. 9. आदेश ज़ेरो�स/पृ�ांकन के िलए भेजने क� ितिथ DATE ON WHICH ORDER GOES FOR XEROX &ENDORSEMENT……………………… 10. फाइल मु�य िल�पक के पास जाने क� ितिथ DATE ON WHICH THE FILE GOES TO THE HEAD CLERK………………………………… 11. आदेश पर हःता�र के िलए फाइल सहायक र�जःशार के पास जाने क� ितिथ THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER…………………………………………………………………………. 12. अिधकरण आदेश के ूेषण के िलए फाइल ूेषण �वभाग म� जाने क� ितिथ THE DATE ON WHICH THE FILE GOES TO DESPATCH SECTION FOR DESPATCH OF THE TRIBUNAL ORDER……………………………………………………………………………
आदेश क� ूेषण क� ितिथ DATE OF DESPATCH OF ORDER…………………………………………………………………….