TMI Blog2014 (10) TMI 739X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO for verification. Accurate Data Convertors Private Ltd. – Asit C Mehta financial services Ltd. (Seg). – Employee cost filter - Held that:- The assessee was not given any opportunity/ information to examine the comparability of the company - Though the TPO is empowered under the provisions of the Act to obtain information with regard to selection of comparables, however before utilising the information obtained, he has to give fair opportunity to the assessee to have its say in the matter - since the TPO has not given any opportunity to the assessee to raise its objections with regard to the company, the matter is to be remitted back to the AO for considering the objections. Vishal Information Technologies Ltd. – Employee cost filter – Held that:- Following the decision in Capital IQ Information Systems (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax (International Taxation) [2014 (3) TMI 626 - ITAT HYDERABAD] - The company unlike the assessee has outsourced considerable portion of its business to third party vendor - Hence, it cannot be considered as a comparable. HCL Comnet Systems & Services Limited, Infosys BPO Limited and Wipro Limited – Functionally d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2010 (6) TMI 65 - BOMBAY HIGH COURT] - the AO is directed to reduce communication charges both from the export turnover as well as the total turnover for computing exemption u/s 10A of the Act – Decided in favour of assessee. - ITA. No. 1826/Hyd/2011 - - - Dated:- 24-10-2014 - Shri B. Ramakotaiah And Shri Saktijit Dey,JJ. For the Petitioner : Mr. Rajan Vora For the Respondent : Mr. D. Sudhakar Rao ORDER Per B. Ramakotaiah, A. M. This appeal is preferred by assessee against the order of AO dated 12-10-2011passed under Sec 143(3)read with Sec.144Cof the IT Act 1961 consequent to the directions of Disputes Resolution Panel, Hyderabad dated 26.09.2011 for the A.Y. 2007-08. 2. Briefly stated, HSBC Electronic Data Processing India Private Limited (hereafter referred to as ' HDPI ') is a wholly owned subsidiary of HSBC Holdings Plc (together with its associates referred to as 'HSBC Group'), one of the leading banking and financial services organisations in the world. HDPI provides a range of back office services including contact centre, data entry, data processing and related services (together referred to as 'BPO services') to its Gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted contract service provider and selected as the tested party ; Transaction Net Margin Method ('TNMM') was determined as the most appropriate method to determine the ALP ; The search was conducted on Prowess database and Capitaline database to select comparable companies ('comparables'); Operating margin i.e. operating profit/operating cost was selected as the Profit Level Indicator (PLI') for the purpose of determining ALP; Given the nature of the international transaction under review, economic conditions, differences in business or product life cycles and other similar factors and also the fact that audited financial data for the AY 2007-08 was not available in all cases, financial data of AY 2006-07 and AY 2005-06 was also considered, along with interim/unaudited results for AY 2007-08; The economic analysis yielded a set of 22 comparables with weighted average arithmetic mean of 12.31 %. There were functional and risk differences between the assessee and the comparables. However, no adjustments were undertaken in the TP report, since, the assessee's net margin from the provision of services to its AEs (3.37%) during the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 90,914 from the export turnover, in applying the prescribed formula. 3.6 Assessee has filed its objections with the DRP on the additions proposed by the AO in the Draft Order. As per the directions issued the DRP has principally agreed with the approach adopted and contentions of the Ld. TPO/AO and has upheld the Draft Order on all issues except accepting objections of assessee on two comparables and providing relief on the TP adjustments on re-characterisation of interest on short term deposits. AO has passed the final assessment order dated October 12, 2011 considering the directions given by DRP computing the total income of assessee at ₹ 170,50,55,178 and the tax payable thereon at ₹ 81,59,52,255 (including interest). Aggrieved by the AO/DRP order, assessee has preferred before the Tribunal. 4. We have heard the learned counsel for the assessee, Shri Rajan Vora and the learned Departmental Representative Sri D Sudhakar Rao in detail. The assessee has placed paper-book 'A' containing pages 1 to232 and Paper Book B containing pages 233 to 487 and paper-book C. The assessee is aggrieved in grounds No.1 to 12 on the TP adjustments made. In addition to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices India P. Ltd., 50.78% 20. Mold Tek Technologies Ltd., (seg.) 118.04% 21. Nittany Outsourcing Services P. Ltd., 12.41% 22. R Systems International Ltd., (Seg.) 20.26% 23. Spanco Telesystems Solutions Ltd., (Seg.) 21.62% 24. Vishal Information Technologies Ltd., 44.45% 25. Wipro Ltd., (seg.) 32.22% Arithmetic Mean 30.43% 6. The objection is with reference to selection of comparables by the TPO with reference to the following companies- 1. Accentia Technologies Limited 6.1.1. The learned authorised representative of the assessee objecting to the aforesaid company being treated as comparable submitted that the aforesaid company is functionally different from the assessee as more than 64% of the operating cost of the company is towards overseas business expenses. The company receives substantial revenue from on-site services which is more than 75%, hence cannot be considered as comparable on account of differences in geographical locati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner- 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. 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either by the assessee or by the TPO. It was submitted that no opportunity was given to the assessee to examine whether these companies are comparable to the assessee. It was submitted that the TPO relying upon unaudited information has treated the aforesaid company as comparable only because the high margin of profit shown at 50.15%. The learned authorised representative of the assessee also relied upon the order of the Coordinate Bench decision of the Delhi Tribunal in the case of ACIT vs. M/s. Toshiba India P. Ltd., 2010-TII-14-ITAT-DEL-T.P. 6.2.2. The learned departmental representative however supported the orders of the revenue authorities in selecting the aforesaid company as comparable. 6.2.3 We have heard the contentions of the parties and perused the material on record. On a perusal of the observation made by the TPO of his order, it is seen that the aforesaid company was not initially selected as a comparable by the TPO. Subsequently, the TPO conducted search in the data bases for finding additional comparable by applying 25% employee cost filter. After examining the information obtained from the company u/s 133(6) of the Act the TPO treated it as comparable by ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has excluded this company. Therefore, considering the totality of facts and the circumstances, we direct the exclusion of the aforesaid company from the list of comparables. 4. Bodhtree Consulting Limited:- 6.4.1 With regard to the aforesaid company, the learned authorised representative of the assessee submitted that the company is functionally different as it is into software services and provide services using the developed products. It was further submitted that in the information submitted in response to the letter issued u/s 133(6) of the Act, it has submitted that the company has developed a software tool used for providing data cleansing services and it involves an element of software development. The company is also engaged in providing e-paper solutions. It was further submitted that the annual report of the company also reveals that it has only software development segment. It was further submitted that the company has undergone re-organisation and cross booking of expenses unlike previous year which has impacted the profitability. It was submitted that un-audited segmental information has been used to compute margins which may not be authentic. 6.4.2 We have h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench of Tribunal in case of Capital IQ Information Systems, we hold that this company cannot be treated as comparable. 7. Informed Technologies India Limited and 9. Iservices India Private Ltd:- 6.6.1 Objecting to the aforesaid companies being treated as comparables, the learned authorised representative of the assessee submitted that both the companies have exceptional year of operation. With regard to Informed Technologies India Limited, it was submitted that the company had shown operating losses of (-)72.98% and (-) 43.96% in the financial year 2004-05 and 2005-06, whereas during the year under dispute, it has shown operating margin of 35.56% which indicates that this has been an year of exceptional operations. So far as I-services India Private Ltd., is concerned, the learned authorised representative of the assessee submitted that the margin of the company is more than one and half times the arithmetic mean of the comparable companies selected by the TPO. It was further submitted that the company is a private limited company with no information for the prior and future years to evaluate trend is available. The learned Authorised Representative has relied on the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntative of the assessee further submitted that even in assessee's own case for asst. year 2008-09, the DRP has directed for exclusion of M/s Mold-Tek from list of comparables. In support of such contention, the learned authorised representative of the assessee relied upon the decisions of Co-ordinate Bench of Hyderabad Tribunal in cases of Avineon India P. Ltd., ITA.No.1989/Hyd/2011 dated 31.10.2013, Zavata India P. Ltd., Hyderabad vs. DCIT, Circle 3(3), Hyderabad ITA.No.1781/Hyd/2011 dated 07.06.2013, M/s. Capital IQ Information Systems India Pvt. Ltd., Hyderabad vs. DCIT (Int. Taxation), Hyderabad (ITA No.1961/Hyd/2011 dated 23.11.2012 and also Special Bench decision of the Mumbai Tribunal in the case of Maersk Global Centres (India) P. Ltd., Mumbai vs. ACIT, Circle 6(3), Mumbai dated 07.03.2014. 6.7.2. The learned departmental representative however supported the orders of the revenue authorities. 6.7.3 We have heard contentions of the parties and perused the material on record with regard to the aforesaid company being treated as comparable. As can be seen from the facts on record M/s Mold-Tek during the year had shown extraordinarily high profit of 117%. The activiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extraordinarily high profit. It is also a fact that the DRP in assessee's case for asst. year 2008-09 has directed for removal of the aforesaid company from the list of comparables. Therefore, following the decision of co-ordinate Bench in case of Capital IQ (supra), we direct the Assessing Officer to exclude M/s Mold-Tek Technologies Limited from the list of comparables. 11. Vishal Information Technologies Ltd. 6.8.1 Objecting to the aforesaid company being selected as comparable by the TPO, the learned authorised representative of the assessee submitted before us that the aforesaid company is not only functionally different on account of employee cost filter as the employee cost of the company is only 2% of its revenue, but it also has huge vendor payment for data entry which is indicative of the fact that it does not provide IT enabled services by itself but outsources the work with a third party vendor. It was submitted that the DRP in assessee's own case for AY 2008-09 has rejected this company as comparables. The learned authorised representative of the assessee also relied upon the observation made by the Income- tax Appellate Tribunal, Hyderabad Bench with reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid company unlike the assessee has outsourced considerable portion of its business to third party vendor. Hence, it cannot be considered as a comparable. That besides the DRP in assessee's own case for asst. year 2008-09 has held that this company cannot be treated as a comparable. Therefore, considering the aforesaid fact, we are of the view that M/s Vishal Information Technology Ltd., cannot be taken as a comparable and direct for excluding the same from the list of comparables. 6. HCL Comnet Systems Services Limited, 8. Infosys BPO Limited and 12. Wipro Limited:- 6.9.1 Objecting to the aforesaid companies being treated as comparables, the learned authorised representative of the assessee submitted that HCL Comnet System is functionally different as it is engaged in the business of providing telecommunication and remote infrastructure management services. So far as Infosys BPO is concerned, it was submitted that this company cannot be compared with the assessee as there is differences in functions, risks and assets profile. It was submitted that Infosys brand has a premium and hence cannot be considered as comparables to risk mitigated contract servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any risk of incurring losses and since comparable companies work in the market environment, the margins earned by the comparable companies would be comparatively more to reflect the higher level of functions and risks. It was further submitted that in the TP documentation submitted by the assessee, no risk adjustment was made as comparable selected were within the arm's length range. The assessee relied on a host of cases to submit that adjustment needs to be made to the margins of the comparables to eliminate difference on account of different functions, assets and risks. 7.1. To the extent of principles involved, we agree with the assessee's submissions that some of the comparables may be undertaking market risks/entrepreneurial risks, which are not there in the case of the assessee. However, the issue boils down to quantification of such adjustment. In the written submissions, the assessee based on the decision of the ITAT Bangalore in the case of Philips Software Centre Private Ltd. Vs. ACIT (119 TTJ 721)(Bang), which provided for 4.5% of the risk adjustment as the difference between the average prime lending rate and average bank rate, as the basis. Since this worki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents, it was the submission that TPO failed to appreciate that these transactions are to be excluded for working out the operative costs/operative margins, and it is the request that the amounts of reimbursement should be excluded for this purpose. Assessee relied on the decision of the Delhi Bench of the Tribunal in the case of DCIT V/s. Cheil Communications India P. Ltd. (2010 TII 60 ITAT DEL TP) and the coordinate bench decision of the Tribunal in the case of Four Soft Ltd. V/s. DCIT (ITA No.1495/Hyd/2010)(142 TTJ 358). 8.1 After considering the rival submissions and following the principles laid down in the decisions of the Tribunal cited above, we are of the opinion that reimbursement costs should be excluded as they do not involve any functions to be performed so as to consider it for profitability purposes. In the case of Four Soft Ltd. (supra), Hyderabad Bench of the Tribunal considered this issue and held as under- 15. We have considered the rival submissions and perused the material on record. First, we will take up the issue relating to the adjustments made by the assessing officer in respect of the international transactions with its associated enterprises in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly. Similar view was also taken in assessee own case in AY 2006-07. Respectfully following the same, we direct the Assessing Officer/TPO to exclude the reimbursement costs while working out the operating costs. This ground is considered allowed. 9. In aforesaid view of the matter, we direct the Assessing Officer to determine the ALP keeping in view the directions given by us hereinbefore in respect of each of the comparables specifically objected to by the assessee. Assessee's grounds 1 to 12 are partly allowed. 10. Some of the legal issues raised in the grounds on this TP issue are not agitated before us, as exclusion of some of the comparables only were contested and by excluding them, the PLI determined from the rest of the comparables may fall within permissible range as per proviso to S.92C(2). Some of the issues also become academic in nature, if the ultimate ALP determined is within the permissible range of the assessee's PLI. However, this aspect cannot be examined by us, as the TPO was directed to verify other adjustments required, and therefore, we hold that it is premature to consider the grounds raised in this behalf. The Assessing Officer/TPO is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of Income-tax Appellate Tribunal, Chennai Special Bench in case of ITO vs. Sak Soft Limited (313 ITR 353 (AT)]. In fact, the DRP though accepts such position but has decided the issue against the assessee only to give an opportunity to the department to pursue the same. Therefore, following the decision of Hon'ble Bombay High Court in the case of CIT vs. Gem Plus Jewellery (supra) and of the Income- tax Appellate Tribunal, Chennai Special Bench in case of ITO vs. Sak Soft Limited (supra), we direct the Assessing Officer to reduce communication charges both from the export turnover as well as the total turnover for computing exemption u/s 10A of the Act. This ground No 14 of the assessee is allowed. 13. In ground Nos. 15 and 16, the assessee has challenged levy of interest u/s 234B and 234C of the Act and initiation of penalty proceedings u/s 271(1)( c) of the Act. The issues raised in these grounds being consequential to the final determination of income, these grounds have become infructuous, hence dismissed. 14. In the result, appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 24.10.2014. - - TaxTMI - TMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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