DCIT vs. M/S IGS IMAGING SERVICES INDIA PVT. LTD.,,

International transactions of the assessee with its AE for the relevant year were as under :

Financial results of the assessee company during the relevant previous year including international transactions with non-AEs were as under :

TPO after going through the TP study filed by assessee in which it adopted TNMM for justifying its international transactions with its AE, IT(TP)A.470/Bang/2013 Page - 3 CO No.150/Bang/2015 rejected some of the comparable companies selected by the assessee and added some of his own relying on the capitaline and prowess data base. Final list of comparables selected by the TPO and its average PLI read as under :

On the above PLI, TPO made a negative working capital adjustment of .94% adopting the formula given in OECD Guidelines, 2009. While IT(TP)A.470/Bang/2013 Page - 4 CO No.150/Bang/2015 making this work out, average PLR adopted by SBI was considered. Thereafter he computed the shortfall u/s.92CA as under :

Assessment was thereafter completed by the AO making an addition of Rs.5,29,68,672/- in so far as international transactions with AEs were concerned.

Aggrieved assessee moved in appeal before the CIT (A). In the first place assessee disputed the figure of cost adopted by the TPO while working out the shortfall under section 92CA of the Act. As per the assessee, cost considered by the TPO was the aggregate cost of bothinternational transactions and domestic transactions as well. Thus according to the assessee adjustment u/s.92CA of the Act was made by the TPO on a wrong figure resulting in excess shortfall being worked out. As per the assessee, actual cost in relation to the BPO account came to Rs.36,03,66,273/- resulting in operative profit of Rs.5,98,65,468/- and a IT(TP)A.470/Bang/2013 Page - 5 CO No.150/Bang/2015 PLI of 16.61%. As per the assessee it had a domestic segment selling computer peripherals and such segment was entirely different from the ITES services rendered by it to its AE abroad. Assessee also pointed out to the CIT (A) that it had maintained separate segmental profit and loss account for each of these segments and had duly reported it in its TP documents. As per the assessee adjustments for TP should be confined only to the value of international transactions with the AEs.

Apart from the above, assessee also objected to certain filters being adopted by the TPO and certain filters applicable being not applied or being wrongly applied as enumerated hereunder : i) Export sales filter of 75% ii) Non-application of turnover and abnormal profits filter iii) Non-application of fluctuating profits filter iv) Applying RPT filter at 25% v) Non-applying of knowledge process out sourcing filter vi) Non-application of extra ordinary events filter and vii) Improper application of functional profile filter

With regard to the turnover and abnormal profits filter, TPO was of the opinion that turnover filter had to be applied by virtue of the decision of coordinate bench in the case of Genisys Integrating Systems (India) P. Ltd, v. DCIT [ 53 SOT 159].

CIT (A) also held that companies with abnormal losses had to be excluded from comparison since according to him, inclusion of such companies would erode proper comparability. By virtue of this direction, IT(TP)A.470/Bang/2013 Page - 7 CO No.150/Bang/2015 the following companies got technically excluded from the list of comparables selected by the TPO :

CIT (A) also rejected the general contention of the assessee that companies which were involved in knowledge process outsourcing, eventhough it fell within the ITES segment had to be excluded from the comparison.

It can be seen that ground 1 is general in nature. In its ground 2, Revenue is assailing application of turnover and abnormal profits filter.

Ld. DR submitted that turnover cannot be a proper criteria for excluding companies from comparability study. Reliance was placed on IT(TP)A.470/Bang/2013 Page - 10 CO No.150/Bang/2015 Capital IQ Information Systems (India) P. Ltd v. ACIT and vice versa [ITA.124/Hyd/2014 & ITR 170/Hyd/2014, dt.31.07.2014] of the Hyderabad bench. Reliance was also placed on the judgment of Hon'ble Delhi High Court in the case of Cryscapital Investment Advisors India P. Ltd v. DCIT [ITA No.417 of 2014, dt.27.04.2015].

In so far as application of abnormal profits filter was concerned, Ld. DR submitted that abnormal profits / loss by itself would not be a reason for taking out a company from the comparability study if it qualifies otherwise. Reliance was placed on the Special Bench decision of this Tribunal in the case of Maersk Global Service Centres (I) P. Ltd, v. ACIT [ITA.7466/Mum/2012, dt.07.03.2014].

In reply Ld. AR submitted that as against the judgment of Hon'ble Delhi High Court in the case of Cryscapital Investment Advisors India P. Ltd (supra), Hon'ble Bombay High Court in the case of CIT v. Pentair Water India P. Ltd. [Tax Appeal No.18 of 2015, dt.16.09.2015], had taken a view that turnover is a relevant criteria for choosing a company as comparable for TP study.

We have heard the rival contentions. In so far as application of turnover filter is concerned, by virtue of Hon'ble Bombay High Court judgment in Pentair Water India P. Ltd, (supra), we are of the opinion that it is a valid criteria that could be adopted for inclusion or exclusion of companies in a comparability study. Hon'ble Bombay High Court had IT(TP)A.470/Bang/2013 Page - 12 CO No.150/Bang/2015 followed earlier decision of Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies P. Ltd [93 DTR 375]. No doubt Hon'ble Delhi High Court in the case of Cryscapital Investment Advisors India P. Ltd (supra) had taken a different line of thinking that exceptionally high profit margins or fluctuating profits margin or turnover would by itself may not be a reason for exclusion. However in view of the judgment of Bombay High Court in the case of Pentair Water India P. Ltd, (supra) and also that of Hon'ble Delhi High Court in the case of Agnity India Technologies P. Ltd (supra) we are inclined to go by the decision of the coordinate bench in the case of Genesys International Corporation Ltd, (supra). Thus exclusion of Infosys BPO Ltd, which had a turnover of Rs.855 crores and M/s. Wipro Ltd (seg) which had a turnover of Rs.1,157 crores, by the CIT (A) cannot be faulted.

However, application of abnormal loss / profits filter made by the CIT (A) in our opinion falls foul of the Special Bench decision in Maersk Global Service Centres (I) P. Ltd (supra). Special Bench observed that Indian transfer pricing regulations had deviated in certain aspects from OECD guidelines. OECD guidelines provided for inter quartile range of bench marking results which by itself excluded outliers. As against this, IT(TP)A.470/Bang/2013 Page - 13 CO No.150/Bang/2015 Indian regulations require using arithmetic mean. Special Bench observed that potential comparables earning abnormally high profit margins could at the best trigger further investigation but would not per se be a reason for exclusion. Study has to be made to ascertain whether high profits earned or losses suffered were due to certain abnormal conditional which applied to such comparables whether and such abnormal conditions were present absent in the case of the tested party. Or in other words in such cases, it is an essential requirement that a FAR analysis is carefully done. CIT (A) had directed exclusion of M/s. Allsec Technologies Ltd, M/s. Aditya Birla Minacs Worldwide Ltd, M/s. Coral Hub Ltd, M/s. Eclerx Services Ltd, M/s. Jindal Intellicom P. Ltd and M/s. Moldtek Technologies Ltd, probably adopting the yard stick of extra ordinary results. In view of the decision of Special bench mentioned supra, in our opinion this was not appropriate. However out of these companies assessee states that M/s. Coral Hub Ltd, M/s. Eclerx Services Ltd, and M/s. Moldtek Technologies Ltd, were functionally different from that of the assessee. This contention of the assessee will be taken up by us while disposing the appeal of the assessee. In so far as other companies namely, M/s. Allsec Technologies Ltd, M/s. Aditya Birla Minacs Worldwide Ltd and M/s. Jindal Intellicom P. Ltd, we are of the opinion that the matter requires a fresh look by the TPO. TPO IT(TP)A.470/Bang/2013 Page - 14 CO No.150/Bang/2015 has to verify whether these companies were functionally comparable with the assessee and whether losses suffered were due to any abnormal business conditions which were not there for the assessee. He shall decide on the comparability of these cases afresh. Ground.2 of the Revenue is therefore treated as partly allowed.

Vis-a-vis ground.3 raised by the Revenue, Ld. DR had argued that exclusion of the M/s. Accentia Technologies Ltd, was inappropriate. We find that Ld. AR has placed before us a decision of the coordinate bench in the case of Symphony Marketing Solutions India p. Ltd, [IT(TP)A.1316/Bang/2012, dt.14.08.2013]. Said company was also providing ITES services to its AE abroad and the list of comparables considered by the TPO for analysing the value of international transactions also included M/s. Accentia Technologies Ltd. Case before the Tribunal was also for the very same assessment year. Therefore in our opinion the decision of the Tribunal mentioned supra would apply here as well. In relation to M/s. Accentia Technologies Ltd, it was held as under at para 10 and 11 of the order dt.14.08.2013 as under :

It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner- "17.5. In addition to the above, the Director's Report of the company for the FY 2007-08 revealed the merger and the demerger. A company known as Techmen Tools Pvt. Ltd. had amalgamated with Mold-tek Technologies Ltd. with effect form 1st October, 2006. There was a de-merger of Plastic Division of the company and the resulting company is known as Moldtek Plastics Limited. The de-merger from the Moldtek Technologies took place with effect from 1st April, 2007. The merger and the de-merger needed the approval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the IT(TP)A.470/Bang/2013 Page - 16 CO No.150/Bang/2015 merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial year 31.3. 2008. The assessee filed Form No.21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective date of the scheme of merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger."

On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact ahs taken place, then the aforesaid comparable has to be excluded.”

Vide ground 4, Revenue is assailing exclusion of Genesys International Corporation Ltd, from the list of comparables. We find that the said company was also considered by the Tribunal in the decision of M/s. Symphony Marketing Solutions India P. Ltd (supra). In relation to Genesys International Corporation Ltd,it was held as under at para 22 and 23 of the order :

We have to now consider whether a BPO and KPO are functionally similar and are comparable to each other. BPO is a sub-set of outscoring and involves the contracting of the operations and responsibilities of specific business functions or process to a third party services provider. Often business processes outsourcing are information technology based and referred to as ITES-BPO. KPO is one of the sub-segment of the BPO industry. It involves outsourcing of core information related business activities which are competitively important or form an integral part of a company’s value chain. It thus requires advanced analytical and technical skills as well as a high degree of specialist expertise. The KPO services include all kinds of research and information IT(TP)A.470/Bang/2013 Page - 19 CO No.150/Bang/2015 gathering. Thus it can be seen that even though both BPO and KPO are offering information Technology based services, the skill and expertise and may be even the tools required are different which may result in different economic results of both the segments. Thus, in such circumstances, we are of the opinion that they cannot be compared with each other and have to be excluded from the list of comparables.”

Coming to grounds 5 to 7 of the Revenue, crux of its contention is that once certain criteria or filters are applied afresh, it would change the matrix of the comparability and erode the quality of comparability analysis. In our opinion even after exclusion of various companies directed by the CIT (A), there would be more than ten companies left out of the total twenty comparables considered by the TPO. A representative sample of ten or more companies can in no way be considered as a low figure so as to IT(TP)A.470/Bang/2013 Page - 20 CO No.150/Bang/2015 erode a comparable study. We therefore do not find any merit in the contentions raised by the Ld. DR. Grounds 5 to 7 of the Revenue are dismissed.

Vide its grounds 8 to 10, grievance of the Revenue is that CIT (A) followed the judgment of Hon'ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd, (349 ITR 98), for directing exclusion of those expenditure which were reduced from the export turnover, also from the total turnover while calculating deduction available to the assessee u/s.10A of the Act. No justifiable reason was shown by the Revenue for interfering with the order of CIT (A) who had followed the Hon'ble jurisdictional High Court judgment, which he was bound to follow. Grounds 8 to 10 of the Revenue are dismissed.

Now we take the cross objection of the assessee. Grounds taken by the assessee in its cross objection are reproduced hereunder : 1.On facts and circumstances of the case and in law, the Respondent wishes to rely upon the order (dated 28 January 2013) passed under section 144C of the Income-tax Act, 1961 by the Hon'ble Commissioner of Income Tax (Appeals) - IV ("CIT(A)") and grounds of appeal

A reading of ground 1 show that assessee is seeking exclusion of M/s. Coral Hub Ltd, and M/s. Eclerx Services Ltd, which come back to the list of comparables. In the case of M/s. Coral Hub Ltd, assessee says that it was functionally uncomparable and in the case of Eclerx Services Ltd, it says that there were extra-ordinary events during the relevant previous year which took it out of the realm of comparable. In this regard, Ld. AR placed reliance on the decision of coordinate bench in the case of M/s. Symphony Marketing Solutions India P. Ltd.

As against this Ld. DR submitted that functional comparability was IT(TP)A.470/Bang/2013 Page - 23 CO No.150/Bang/2015 never seen by the CIT (A) while adjudicating the issue. Similarly according to him, CIT (A) also did not verify the comparability of M/s. Eclerx Services Ltd, on the criteria of extra ordinary circumstances applicable to the said company during the relevant previous year.

We have heard the rival contentions. In so far as M/s. Coral Hub Ltd, is concerned, the coordinate bench in the case of M/s. Symphony Symphony Marketing Solutions India P. Ltd, (supra) has held as under at paras 14 to 17 of its order :

After considering the submissions of the learned Authorised Representative for the assessee, we find that the DRP, in the proceedings for the assessment year 2008-09 in assessee's own case, after taking note of the composition of the vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it prints upon clients request, concluded as follows- "18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped form the final list of comparables." In case of Maersk Global service Centre India (P.) Ltd. (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- "Insofar as the cases of tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded." In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable.”

In so far as M/s. Eclerx Services Ltd, is concerned, in the very same decision this Tribunal had held as under at paras 20 and 21 of its order :

On considering the objections of the assessee in relation to this company, we accept the contention of the assessee that this company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, which is distinct from the nature of services provided by the assessee.”

In relation to ground 2, Ld. AR submitted that M/s. Moldtek Technologies Ltd, had to be excluded since it had income from derivative trading and demerger during the previous year.

Per contra, Ld. DR submitted that this issue was not considered by the CIT (A) at all.

We have heard the rival contentions. Comparability of M/s. Moldtek Technologies Ltd, had come up before the Tribunal in the case of M/s. Symphony Marketing Solutions India p. Ltd (supra). Coordinate bench at para 25 had held as under :

In so far as M/s. Infosys BPO is concerned, ground taken by the assessee is infructuous. It gets excluded by application of turnover filter.

In its ground 3, assessee is aggrieved that CIT (A) had not adjudicated the comparability of M/s. Wipro Ltd (seg), but had directed exclusion based on its turnover. Since we have already held that turnover filter was properly applied by the CIT (A), this ground, in our opinion, is infructuous.

In respect of ground 4, we find that in relation to Revenue's appeal we have held M/s. Accentia Technologies Ltd, was rightly excluded from the list of comparables by the CIT (A). Therefore, this ground raised by the assessee has also become infructuous.