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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’
Before: SHRI N.V VASUDEVAN & SHRI S RIFAUR RAHMAN
Date of Hearing : 25-08-2015 Date of Pronouncement : 04-09-2015 O R D E R PER SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER :
This appeal by the assessee is against the order dated 22.10.2012 passed by the Circle-11(3), Bangalore u/s. 143(3) r.w.s.
IT(TP)A No.1678/12 2 144C of the Income-tax Act, 1961 [hereinafter referred to as “the Act” in short”] relating to assessment year 2007-08.
The grounds of appeal filed by the assessee are as under:
The assessment order dated Oct 22, 2012 passed by the learned AO pursuant to the directions passed by the Hon’ble Dispute Resolution Panel (DRP) is not in accordance with the law and is contrary to the facts and circumstances of the present case and in any case in violation of the principle of equity and natural justice.
2. The Hon’ble DRP and the learned AO have erred in law and on facts in confirming the action of the Transfer Pricing Officer (TPO) in making an adjustment amounting to Rs.91,14,06,057 to the price charged in relation to the international transactions carried out by the appellant and upholding the Arm’s Length Price (ALP) margin of 25.90 percent as determined by the TOP as against the ALP of 13.31 percent determined by the appellant.
3. The Hon’ble DRP and the learned AO have erred in upholding the action of the TPO in rejecting the Transfer Pricing (TP) documentation maintained and the detailed Functions, Assets, Risk and benchmarking analysis conducted by the appellant. 4. The Hon’ble DRP and the learned AO have erred in upholding the action of the TPO in disregarding the multiple/prior year data considered by the appellant in determining the ALP and adopting the financial data for a single year [i.e, the Financial Year (FY) 2007-08] of IT(TP)A No.1678/12 3 the comparable companies despite the fact that the same was not available to the appellant at the time of preparing the TP documentation.
5. The Hon’ble DRP and the learned AO have erred in upholding the action of the TPO in rejecting certain comparable companies identified by the appellant in its TP study using unreasonable comparability criteria and contrary to facts as evidenced by the audited financial statements of the said companies.
6. The Hon’ble DRP and the learned AO have erred in upholding the action of the TPO in applying certain additional filters finalizing the transfer pricing order with companies as comparable to the appellant despite such companies failing the test of comparability on some or all the factors such as the influence of extraordinary events, functional dissimilarity, high turnover/scale of operations and asset base, lower employee cost levels, different profile etc. and the failure of TPO’s own filters.
7. The Hon’ble DRP and the learned AO have erred in upholding the action of the TPO in using the information obtained u/s 133(6) of the Income-tax Act, 1961 (Act) despite such information being inconsistent with the information available in public domain, including the audited financial statements, of the comparable companies.
8. The Hon’ble DRP and the learned AO have erred in upholding the action of the TPO in computing the operating margins of the comparable companies and the appellant with certain factual errors and ignoring of certain items which ought to have been considered as operating or non-operating items, as the case may be.
9. The Hon’ble DRP and the learned AO have erred in upholding the action of the TPO in not accepting
IT(TP)A No.1678/12 4 the working capital and risk adjustment, as claimed by the appellant. 10. The Hon’ble DRP and the learned AO have erred in upholding the adjsutemtn made by the TPO without considering the upper range of 5 percent from the value of the international transaction, as allowed under the Act and the Income-tax Rules, 1962 (Rules).
11. The learned AO and the Hon’ble DRP have erred in law and on facts n re-computing the relief u/s 10A of the Act at Rs.46,96,88,074/- as against the amount of Rs.50,10,42,467/- claimed by the appellant in its return of income.
The Hon’ble DRP has erred in law and on facts in upholding the action of the AO in holding that the foreing currency expenditure was incurred by the appellant for rendering technical services outside India and thereby excluding such expenditure from the amount of ‘export turnover’ for the purpose of computation of relief u/s 10A of the Act. 13. Without prejudice to the above grounds, the Hon’ble DRP and learned AO erred in law and on facts by reducing an amount of INR 1,87,30,103 pertaining to link charges (forming part of communication expenses) from the export turnover of the appellant even though the same had already been reduced from the export turnover, by the appellant while computing the relief claimed u/s 10A of the Act. 14. Without prejudice to the above grounds, the Hon’ble DRP and learned AO have erred in law and on facts in holding that the communication expenses amounting to INR 10,27,77,400/- insurance expenses amounting to INR 6,18,880 and the foreign currency expenses amounting to INR 19,45,91,781 should not be IT(TP)A No.1678/12 5
reduced from ‘total turnover’ for the purpose of computation of relief u/s 10A of the Act even if these are reduced from export turnover.
15. The Hon’ble DRP and the learned AO/TPO has erred in law and on facts in levying interest u/s 234B and sec. 234D of the Act.\
Additional Ground: “The Honourable DRP has erred in law and on facts in upholding the action of the AO in holding that the foreign exchange losses are to be added back only to the “Total Turnover” and not to the “Export Turnover”. Without prejudice to the same, the Honourable DRP and the learned AO should have added back the foreign exchange loss to the Export Turnover as well.”
The assessee had filed additional ground as above. In the computation of relief u/s 10A of the Act, the assessee had reduced the quantum of foreign exchange losses from the export turnover and the total turnover. However, the AO has held that the same is to be reduced only from the export turnover and has proceeded to add the same to the total turnover.The jurisdictional Karnataka HC in the case of Tata Elxsi Ltd. (349 ITR 98), also followed by several rulings of this Hon’ble Tribunal, have upheld the principle that in the computation of deduction u/s 10A of the Act, 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 IT(TP)A No.1678/12 6 denominator, since the total turnover also includes the component of export turnover. Therefore according to the assessee rulings should equally apply to its case as well and the quantum of foreign exchange losses should not have been added back to the total turnover. In the alternative, the learned AO should have also added the same to the quantum of export turnover. Therefore, according to the assessee, the exchange losses should not have been added back to the total turnover. The assessee has prayed for admission of addl. Grounds.
We have considered the submission of the learned counsel for the assessee for admission of the additional ground and are of the view that the additional ground should be admitted for adjudication. The facts necessary for adjudication of the additional ground are already available on record. Keeping in view of the Hon’ble Supreme Court in the case of NTPC 229 ITR 383 (SC) we admit the additional ground for adjudication.
We shall now take up for consideration Ground no. 1 to 10 raised by the assessee. These grounds relate to determination of Arm’s Length Price (ALP) in respect of an international transaction entered into by the assessee with its Associated Enterprises (AE) u/s 92 of the Act. M/s Global-e Business Operations Pvt. Ltd. .ie., the assessee, (Global eBiz or Global-e) is part of the Hewlett-Packard
IT(TP)A No.1678/12 7 group (HP Group). Its ultimate Holding Company is Hewlett – Packard Company, USA. Global-e Business Operations Pvt. Ltd., is wholly owned subsidiary of HP Global Investments BV, Netherlands (HP Investments). Global-e undertakes HP’s worldwide accounting and transaction processing work as part of HP’s worldwide strategy of consolidating backroom operations. It manages operations that cover functionalities like fixed assets, intra-corporate accounting like debit and credit records, vendor payables, fixed asset tracking and non- finance operations like data processing & other IT enabled services, freight cost management and order processing for certain geographies.
There is no change in the ownership structure from the preceding year.
Business Profile of Global ebiz (the Assessee)
Its business profile continues to be the same as pointed out in the taxpayer’s case for the AY 2006-07. During the FY 2006-07, Global- e Business Operations Pvt. Ltd. provided data processing and other IT enabled services to its AEs located in various parts of the world.
IT(TP)A No.1678/12 8
The taxpayer is registered under the Software Technology Parks of India Scheme and has been claiming tax holiday benefit in respect of the profits earned by it from the research and development.
Financial Results of Global-e Business for the FY 2007-08 Description Amount (Rs.)
Operating Revenues 6153468919/- Operating Expenses (*) 5611497201/- Operating profit 541971718/- Operating Profit to 9.66% Expenses
10. Section 92C of the IT Act read with Rule 10B prescribes the different methods to be followed to determine ALP. Rule 10C further prescribes that any one of the 05 methods best suited to the facts and circumstances of the case shall be selected as the most appropriate method. In the TP study the taxpayer has selected TNMM as the most appropriate method. TNMM is the most appropriate method in the facts and circumstances of the taxpayer’s case and this was not IT(TP)A No.1678/12 9 disputed by the Transfer Pricing Officer (TPO) to whom the question of determination of ALP was referred to by the AO.
11. The assessee had identified 19 comparables in the TP study out of which TPO accepted 7 comparables as listed below:
Sl Name of the comparable company Operating No. Margin to Cost (FY 2007-08) 1 Caliber Point Business Solutions Ltd 10.97 2 Cosmic Global Ltd 23.30 3 Spanco Ltd (Seg.) (Earlier known as 8.81 Spanco Telesystems & Solutions Ltd) 4 R Systems International Ltd(Seg.) 4.30 5 Genesys International Corporations Ltd. 47.40 6 Datamatics Financial Services Ltd (Seg.) 29.11 IT(TP)A No.1678/12 10 7 Allsec Technologies Ltd., -13.29
11. The TPO added 13 more comparables and final set of comparables was considered by TPO, which are:
Sl.No. Name of the company OP/TC % 1 Accentia Technologies Ltd (Seg.) 41.77 2 Acropetal Technologies Ltd (seg.) 35.30
3 Aditya Birla Minacs Worldwide -4.00 Ltd (Earlir known as Transworks Information Services Ltd.)
4 Asit C Mehta Financial Services 9.42 Ltd (Seg.) 5 Caliber Point Business Solutions 10.97 Ltd. 6 Coral Hubs Ltd (Earlier Known 50.68 as Vishal Information Technologies Ltd 7 Cosmic Global Ltd 23.30 8 Crossdomain Solutions Ltd 27.03 IT(TP)A No.1678/12 11 9 Datamatic Financial Services Ltd 29.11 (Seg.)
10 e4e Healthcare Solutions 18.54 (Formerly known as Nittany Outsourcing Services Pvt. Ltd)
11 Eclerx Services Ltd. 58.80 12 Genesys International 47.40 Corporation Ltd. 13 Infosys BPO Ltd 19.66 14 IServices India Pvt. Ltd. 10.77 15 Jindal Intellicom Pvt. Ltd. -10.29 16 Mold-Tek Technologies Ltd 96.66 17 R Systems International Ltd 4.30 (Seg.)
18 Spanco Ltd (Seg.) (Earlier known 8.81 as S|panco Telesystems & Solutions Ltd)
19 Wipro Ltd (Seg.) 30.05 20 Allsec Technologies Ltd -13.29 IT(TP)A No.1678/12 12 AVERAGE 24.75
. The TPO thereafter determined ALP after giving negative working capital adjustment as follows:
“The arithmetic mean of the Profit Level indicators was taken as the arms length margin. Based on this, the arms length price of the software services rendered by the taxpayer to its AE(s) wss computed as under: Arithmetic mean PLI : 24.75% Less: Working capital adjustment (Annexure-G) : -1.15% -------------- Adj. Arithmetic mean PLI : 25.9% -------------- Arm’s Length Price:
Operating Cost Rs. Rs.5611497201/-* Arms Arms Length Margin 25.9% of the Operating cost Arms Length Price (ALP) @125.9% Rs.7064874976/-
*excluding Exchange loss, financial expenses
IT(TP)A No.1678/12 13
Price Received vis-à-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length as under:
Arms Length Price (ALP) @125.9% of operating Rs.7064874976/- Cost Price charged in the international transactions Rs.6153468919/- Shortfall being adjustment u/s 92CA Rs. 911406057/-
The above shortfall of Rs.911406057/- was treated as transfer pricing adjustment u/s 92CA in the ITES segment.”
The DRP confirmed the action of the TPO, hence the present appeal by the assessee before the Tribunal.
We have heard the submissions of both the parties. The ld. counsel for the assessee filed before us submissions on each of the companies that were considered as comparable by the TPO and has also explained as to why those companies cannot be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO and the directions of the DRP, wherein the DRP has given
IT(TP)A No.1678/12 14 reasons as to why the objections of the assessee to adopt comparable proposed by the TPO should not accepted. We will deal with these objections while we take up the individual comparable companies for consideration.
(1) Accentia Technologies Ltd. (Seg.)
This company was considered as a comparable by the TPO and listed at Sl.No.1 of the comparable companies chosen by the TPO.
The ld. counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was draw to the annual report of this company for the A.Y. 2007-08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had IT(TP)A No.1678/12 15 considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a comparable owing to extra ordinary events that took place during the previous year. The Tribunal upheld the order of the DRP observing as follows:-
“I. Accentia Technologies Ltd.
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 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.
IT(TP)A No.1678/12 16 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.”
IT(TP)A No.1678/12 17
We have considered the submissions of the ld. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. It is clear that during the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a comparable. We therefore hold that this company cannot be considered as a comparable.
(2) Acropetal Technologies Ltd. (Seg.)
This company is listed at Sl.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
IT(TP)A No.1678/12 18 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 IT(TP)A No.1678/12 19 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 Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPO].
(3) Coral Hubs Ltd.
This company is listed at Sl.No.6 of the list of comparable companies chosen by the TPO. As far as this company is concerned, it is seen that this company was earlier known as Vishal Information Technologies Ltd. The comparability of this company in the case of an ITES company by name 24 x 7 Customer.com Pvt. Ltd. was considered by the Tribunal in and by order dated 09.11.2012 the Tribunal held that this company is not functionally comparable with ITES for the following reason:-
“17.3 Vishal Information Technologies Ltd. (VIT) - In the case of this comparable, we find that the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd in by order dt.9.11.2011 has held that since Vishal Information Technologies Ltd is outsourcing
IT(TP)A No.1678/12 20 most of its work it has to be excluded from the list whereas the assessee in the cited case was carrying out the work by itself. In the instant case of the assessee also the assessee was carrying out its work by itself whereas in the case of VITL, it is outsourcing most of its work. We are therefore of the considered opinion that the decision of the ITAT, Mumbai in the cited case on the issue of excluding VITL as a comparable squarely applies. This decision was followed by the decision of the co-ordinate bench of this Tribunal in the case of Netlinx India(P) Ltd in dt.19.10.2012 wherein it was held that Vishal Information Technologies Ltd cannot be considered as a comparable. We, therefore, respectfully following the decision of the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd, direct the Assessing Officer / TPO to exclude Vishal Information Technologies Ltd. from the list of comparables.”
Following the decision of the Tribunal referred to above, we hold that Coral Hubs Ltd. cannot be considered as a comparable. It may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable on the basis of detailed discussion in the TP order for the A.Y. 2007-08. In fact in A.Y. 2007-08, there was no determination of ALP and therefore there was no occasion for any order being passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library & Print on Demand in F.Y. 2007-08. In the case of Capital IQ Information Systems India Pvt. Ltd. (supra), the IT(TP)A No.1678/12 21 ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:-
“IV. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): 16. The assessee has objected for this company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but the business model of the company is also different as it sub- contracts majority of its ITES works to third party vendors and has also made significant payments to those vendors. The payments made to vendors towards the data entry charges also supports the fact that the company outsources its works. In the circumstances, it cannot be taken as a comparable to the ITES functions performed by the assessee. Since this company is acting as agent only by outsourcing its works to the third party vendors. In this context, the assessee relied upon the order of the DRP in assessee's own case for the assessment year 2008-09, wherein the DRP, after taking into consideration, the aforesaid aspect, has accepted the claim of the assessee. The assessee further submitted that the Income-tax Appellate Tribunal Mumbai Bench in the case of Asstt. CIT v. Maersk Global Service Centre (India) (P.) Ltd. [2011] 133 ITD 543/16 taxmann.com 47 (Mum.), a copy of which is submitted before us, has also directed for the exclusion of the aforesaid company since it has outsourced a considerable portion of its business.
17. 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 IT(TP)A No.1678/12 22
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.”
It is also further noticed that the employee cost/operating sales of this company is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%. This Tribunal in the case of First Advantage
IT(TP)A No.1678/12 23 Offshore Services Ltd. v. CIT, IT(TP)A No.1086/Bang/2011, order dated 30.4.2013, has taken the following view:-
“36. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee’s own case for the assessment year 2006-07. This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR’s argument that the employee cost filter is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot be said that the said filter is not applicable to ITES segment, where comparably less skilled employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employee cost filter to the ITES sector is also justified. In view of the same, we direct the TPO to apply the employee cost filter to exclude companies with employee cost of less than 25% from the list of comparables for the computation of ALP.”
Applying the aforesaid decisions, we are of the view that Coral Hubs Ltd. cannot be considered as a comparable.
(4) Crossdomain Solutions Ltd.
IT(TP)A No.1678/12 24
This company was considered as a comparable and listed at Sl.No.8 of the comparables chosen by the TPO. It is the stand of the assessee that this company is not functionally comparable. As observed in the case of Coral Hubs Ltd., the TPO rejected the plea of the assessee on the basis of a non-existent TP order passed for the A.Y. 2007-08. It is seen that the business profile of this company is re-engineered payroll service. This company is also engaged in the development of information systems. These activities are totally different from the activities of the assessee which perform very limited/low end functions back office services. The review and business functions of Cross Domain is as follows:-
“With a decade of experience in Payroll Outsourcing, Crossdomain has created a re-engineered payroll service EFFIPAY – that processes and delivers accurate payroll to clients with headcount up to 1000 employees in just 4 hours*. With Effipay Lite and Effipay Lite Plus, our bouquet of services cover end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000.” “Crossdomain’s IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase
IT(TP)A No.1678/12 25 efficiency and turn-around-time for business critical processes.” Source: http://www.cross-domain.com As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider.
We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this company as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. We hold accordingly.
Eclerx Services Ltd. (5)
This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be IT(TP)A No.1678/12 26 classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. It has further been submitted that extra ordinary events and peculiar circumstances prevail in the case of the assessee in as much as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:-
“14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that that the concerned company is engaged in providing Knowledge Process Outsourcing(KPO) Services.
15. 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.”
IT(TP)A No.1678/12 27
We are of the view that in the light of the decision of the Hyderabad Bench referred to above, this company cannot be regarded as a comparable for the reason that it was functionally different.
(7) Infosys BPO Ltd
This company is listed at Sl.13 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the ld. counsel for the assessee 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.31,863 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
IT(TP)A No.1678/12 28 commands premium price and the customers would be willing to pay, for the services/products of the company.
Mold-tek Technologies Ltd. (8)
This company is listed at Sl.No.16 of the list of comparable companies chosen by the TPO. As far as this company is concerned, the submission of the assessee before us is that it is in the business of Knowledge Process Outsourcing and cannot be considered as a comparable. The functional profile of this company is as follows:-
As per the annual report for the F.Y. 2007-08, the company primarily operates in two business segments: Plastic division: The plastic division is engaged in the manufacture of tube & oils, paints, pet products, consumer products, etc. The company demerged the said segment effective 1 April, 2007 and transferred the business unit to the Company Plastics Lt. The extract from the annual report confirms the fact that the Company had restructured its operations resulting in demerging the plastic segment business. Information Technology (IT) division: The IT division (also referred to as the KPO division by the company) of the company specializes in providing structural design and detailing services which can be categorized as structural engineering services. The structural engineering services provided by the IT division of the company cannot be classified as falling with the scope and ambit of ITES services. On the contrary, the said services would fall under the category of engineering services.
IT(TP)A No.1678/12 29
Excerpts from the Annual Report of the company Page 10 of the Annual Report for the FY 2007-08 contains the following observation regarding the KPO division of the Company: ‘The Company has achieved about 56.49% growth in 2007- 08 to register a turnover of Rs.17.86 crore. The company having established its credentials in structural engineering services to US clients is devising aggressive marketing strategy to achieve rapid growth.”
(8) Wipro Ltd.
This company is listed at Sl.No.19 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the discussion made while deciding Infosys BPO Ltd. as a comparable will equally apply to this company also. This company owns substantial intellectual property on software products. This company cannot therefore be regarded as a comparable. For the reasons given while disregarding Infosys BPO Ltd. as a comparable, this company is also directed to be excluded from the list of comparables.
With the exclusion of the aforesaid comparables following are the 12 companies chosen by the TPO as comparable only remain and their arithmetic mean is as follows:
IT(TP)A No.1678/12 30 SN Name of the Company Margin (in%) computed by the TPO 1 Aditya Birla Minacs Worldwide Ltd -4.00 2 Asit C Mehta Financial Services Ltd (Seg) 9.42 3 Caliber Point Business Solutions Ltd. 10.97 4 Cosmic Global Ltd. 23.30 5 Datamatics Financial Services Ltd (Seg) 29.11 6 e4e Healthcare Solutions Ltd 18.54 (formerly Known as Nittany Outsourcing
Services Pvt Ltd)
6 Genesys International Corporation 47.40 7 IServices India Pvt Ltd 10.77 8 Jindal Intellicom Pvt Ltd -10.29 9 R Systems Internatinal Ltd (seg) 4.30
Spanco Ltd (seg) (formerly known as Spanco 8.81 10 Telesystems & Solutions Ltd 11 Allsec Technologies Ltd. -13.29
Arithmetic mean 11.25
IT(TP)A No.1678/12 31
It can be seen that arithmetic mean of profit margin to cost of remaining companies chosen by the TPO after excluding the aforesaid companies is only 11.25. Profit margin to cost of the assessee is 9.66% which is much lower than arithmetic mean of the comparable companies chosen by the TPO after exclusion of the some of the comparable companies chosen by the TPO for reasons set out in the earlier paragraphs. Therefore, no adjudication to ALP is called for.
We, therefore, hold that the additions sustained by the DRP deserves to be deleted and he is accordingly directed to be deleted. The grounds other than comparability of comparables are not taken up for consideration. We may also add that arguments were made on market risk adjustments and also working capital adjustment. We have not dealt with those arguments for the reason that on the basis of comparability, the arithmetic mean of the comparables is less than the margin of the assessee.
The plea of the assessee is that the aforesaid expenditure need not be excluded from the export turnover as per the definition of set of given in sec. 10A of the Act. The plea of the assessee is that if the IT(TP)A No.1678/12 32 aforesaid amount is excluded from the export turnover, the same should also be excluded from the total turnover.
As far as the alternative claim is concerned, we find that the Hon’ble High Court of Karnataka in the case of CIT v. Tata EIxsi Ltd [2012] 349 ITR 98 (Karn) has held that while computing deduction under section 10A of Act, expenditure incurred by the assessee, if excluded from the export turnover, should also be excluded from the total turnover. In view of the aforesaid decision of the Hon’ble High Court of Karnataka, the AO is directed to reduce the expenses incurred for travelling and internet connection charges from the export turnover as well as the total turnover, while computing deduction u/s. 10A of the Act. We hold and direct accordingly.
Similarly in the additional ground, the assessee has prayed that the foreign exchange loss should also be added to the total turnover and export turnover as against the action of the AO in excluding the said loss only from the Export turnover following the decision in the case of TATA ELXSI (supra) of the Hon’ble Karnataka High Court.
We held that the said loss should be excluded both from ETO and TTO. We hold and direct accordingly.
IT(TP)A No.1678/12 33
In the result, the appeal by the assessee is allowed.
Pronounced in the open court on this 4th of September, 2015.