TMI Blog2013 (7) TMI 843X X X X Extracts X X X X X X X X Extracts X X X X ..... able. IT ENABLED SERVICES - Accentia Technologies Limited (ATL) - Held that:- Agreeing with the contention that companies with extraordinary events such as merger and amalgamation should be rejected, if because of merger, de-merger the company becomes functionally different. However, as held in Wills Processing (2013 (3) TMI 415 - ITAT MUMBAI) if the merger of the two functionally similar companies took place, the event of merger itself cannot be taken as a factor for exclusion of the said comparable. Accordingly direct the AO /TPO to verify this fact and accordingly decide the comparability of this company namely Accentia Technologies Ltd. (ATL). Acropetal Technologies Limited & eClerx Services Ltd. - Held that:- As per the Notification of CBDT dated 26.9.2000 the various products and services are notified in the category of IT enabled products and services engineering and design services are very much included in the said list. These services are in the nature of ITES. Thus, no cogency in the assessee's submissions that these companies KPO Services are distinct from BPO services and not comparable. Hence inclusion of these two comparables confirmed. Genesys Internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Since the case was fixed only for a minor clarification from assessee, the adjournment application is rejected and clarification was given by the assessee. 2. The grounds of appeal read as under:- The learned assessing officer ('AO') has erred in passing the assessment order dated 25 October 2012 under section 143(3) read with section 144c of the income-tax act, 1961 ('the act') after considering the initial adjustments proposed by the learned Transfer Pricing Officer (TPO) in his order passed under section 92ca(3) of the act and the directions of the Hon'ble dispute resolution panel ('DRP') in that respect. Each of the ground is referred to separately, and may kindly be considered independent of each other. That, on the facts and circumstances of the case and in law, 1. The AO / DRP has erred in making an addition 251,958,313 to the total income of the appellant on account of adjustment in the arm's length price (ALP) of the international transactions related to contract it-e bled service contract software developments services entered into by the appellant with its associated enterprises (collectively referred to as 'impu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than march 31 or companies whose financial statements were for a period other than 12 months). 13. The TPO has passed an order under section 92CA (3) which has computational errors in the margin of certain comparables used in determination of ALP. 14. The AO/ DRP has erred, by not making suitable adjustments to account for differences in the risk profile of the appellant vis-a-vis the comparables. 15. The AO/ DRP has erred in not providing the benefit of the arm's length range as provided under proviso to section 92C of Act for purposes of computing the arm's length price under section 92F of the act. 16. The AO has erred by disallowing freight charges and hotel expenses under section 40(a)(ia) of the act without appreciating the fact that the appellant was not required to deduct tax on the payment of such expenses. without prejudice to this fact, AO has erred by not enhancing the deduction under section 10A of the act to the extent of the above disallowances as the same increased the income of the STP undertaking, despite clear directions from DRP in this regard. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arm s length margin as per Assessing Officer 21.23% 24.33% Adjustment (INR) 2,56,47,694 22,63,10,619 TNMM: Transactional Net Margin Method; OP: Operating Profit; OC: Operating Costs. 5. Now we proceed with the adjudication of the assessee's grounds regarding wrong inclusion of comparables. A. Software Services Segment (I) Avnani Cincom Technologies Ltd. With regard to the comparables TPO observed that as per information available in the public domain, it is a software development and consulting company. It is based in India with offices in U.S. The Company has a varied base in Australia, US, Africa, UK and the European Unions with major focus in travel and insurance industry. The TPO observed that Annual Report of the Company was not available. RPT information was not available. Hence, notice u/s. 133(6) was issued to the Company to get complete information. TPO further observed that as per the replyreceived from the company, it qualifies all the filters applied by the TPO. Hence, the same was proposed as comparable. The assessee objected to the same for the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regard. We find that Assessing Officer himself has rejected the software product companies like Cybermate Info Tech Ltd., Lucid Software Solutions and Zenith Info Tech. (Page 47 of the TPO's order) while finalizing set of comparable companies for software services. However, we note that the assessee has not objected before the TPO on this aspect. In our opinion, assessee's submissions is cogent that software product companies cannot be compared as comparable companies for software services. Hence, we remit this issue to the file of the Assessing Officer to examine as to whether the assessee's contention that this comparable is a software product company, is correct or not. If the same is found to be software product company, then same will be liable for exclusion from the comparable. II. Kals Infosystems Ltd. 7. The TPO in this regard has observed that this comparable was rejected by the assessee in the transfer pricing document saying that 'functionally different'. However, no reasons were given in the Annexures. TPO observed that this Company is mainly into the software development. As per the information submitted by the company in response to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALS to the notice under section 133(6), the company has stated that it derives income from two segments, Application software segment and Training segment. Given the above, your goodself would appreciate that software products revenue forms part of the Application software segment. if your goodself proposes to compare companies engaged in development of software products with the Assessee (software development services provider), it would defeat the whole purpose of doing an FAR analysis. Therefore, unless adequate breakup of software development services and software products is obtained, the aforesaid company should not be selected as a comparable. 8. The TPO observed that assessee has argued that the company has shown inventory and that a pure software services provider would not be able to disclose such details as it does not carry any such inventory or work in progress. However, the TPO was not in agreement with the proposition. He observed that this is factually incorrect and many software development service companies disclose inventory or work in progress or unbilled revenue. In this regard, TPO referred to the financial of Infosys. TPO further observed that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon the decision of the ITAT in Trilogy E-Business Software India Pvt. Ltd. in I.T.A. No. 1054/Bang/2011 which has specifically rejected Kals Infosystems Ltd. on the grounds that it is a software product company. Hence, it has been submitted that since software product companies have been rejected by the TPO himself and it is evident from the extracts of annual reports and case law of Triology that this Company is software product company. Hence, it has been submitted that this company should not be considered as comparable. 10. We have heard both the counsel and perused the records. We find that it is true that TPO has himself rejected the software product companies as comparable in the analysis of transaction related to software services. Assessee has allegedly that this company develops products and also provides services, but there is no breakup available between these two items in its annual report. As against he above, TPO has referred to the report obtained u/s. 133(6). From the above, TPO has observed that use of readymade object libraries is only 3.4 to 6.96% and training constitutes only 4.24-7.01% of its revenues for the Financial Year 2007-08 to 2008-09. Thus, the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores and should be rejected. In section 6.6 of this submission we have highlighted the detailed reasons for the application of an upper turn over filter of ₹ 450 Crores. In light of all of the above, it was considered that Infosys should be rejected as a comparable. 13. As regards the assessee's objections about turnover, Assessing Officer noted that there is no link between the margin and the turnover of the company. Companies having much lower turnover than Infosys have higher or similar margin and vice-versa. He further referred to analysis of Infosys which showed that even when it had a very low turnover the margin was almost the same. 14. Similarly, the TPO further noted that assessee's argument that brand has helped in better margin is also not correct. He observed that there is no linkage between the two. Companies like Kals, Celestial Biolab, Softsol, etc. with much lower turnover and with no brand name have earned margins which are either higher than Infosys or almost the same. TPO further observed that brand may bring more revenues but not necessarily higher margins. TPO further observed that any brand comes with a cost i.e. huge expenses are re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Routine software services Diversified operations encompassing products and services like technical consulting, design, development, reengineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services. Intangible assets employed No intangible assets Intangible including brand, goodwill and patents Bargaining power None Company commands premium pricing. In the article in The Economic Times on 12 Jan 2011 named Infy s premium pricing power for projects dips , it is written that in my mind, the premium pricing for us was between10 and 15%. It would have come down a bit, but we still command premium. Today it is definitely not 15% , SD Shibulal, COO of Infosys said in an interview last month. In many ways, Infosy s relationship with large customers such as BT and Goldman Sachs helped it bill its premium positioning in the past. IV. WIPRO LTD. 18. This Company was rejected in the TP document saying that it is 'functionally different'. However, TPO noted that no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices segment is into software development services and it qualifies all the filters applied by the TPO. TPO further observed that assessee objects that Wipro abnormally high profits is not correct. A margin of 28.38% by no stretch of imagination can be termed as abnormal. Similarly, the asseessee's objection on the ground of turnover and brand are not acceptable in view of the discussion made in the case of Infosys. Further, the TPO further observed that the assessee's contention that there has been exceptional year of performance because of amalgamation is also not acceptable. It has not been shown as to how the amalgamation has changed the functionality of the company particularly when software segment has been considered by the TPO. Secondly, even if amalgamation has been there the same has not impacted whatsoever on the profitability. The margins of the company in the software as well as consolidated levels have remained almost the same as in preceding year (s) viz around 28-30%. In view of the above discussion TPO observed that this company shall be retained as a comparable. 20. TPO further observed that assessee's objection that comparable having abnormally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Capagemini India Private Limited - I.T.A. No. 7861/Mum/2011 - ST Microelectronics Private Limited - I.T.A. No. 1806/Del/2008 23. Assessee's further submissions in this regard are as follows:- i. Inclusion of comparable by assessee in its transfer pricing study of preceding year: It is submitted that the assessee had included Infosys as a comparable company but during the proceeding before TPO, the assessee seriously disputed the inclusion of Wipro and Infosys in the preceding year and the dispute was also raised before the TPO, DRP and also before ITAT. However, the matter was remanded back by ITAT to TPO to provide information of 133(6) which was not shared by TPO in preceding year. It may be submitted that the assessee is entitled to dispute the inclusion of a comparable before TPO even though it is included in its Transfer Pricing Study. It is further submitted that since the matter has been remanded back by ITAT to TPO, proceeding for preceding years are not finalised and that cannot become the basis for inclusion of com parables. The com parables need to be included in the comparable set purely on the basis of comparability of its functions, asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rejected on account of high turnover and functional difference Para 21 Triniti Advanced Software Labs (P) Ltd. I.T.A. No. 1129/Hyd/2005 Wipro is an industrial giant undertaking working independently and hence cannot be compared to the appellant. Para 9 It may kindly be appreciated that majority of the decisions of the ITAT are in favour of the tax payer holding that Infosys are Wipro are not comparable due to high turnover. However, it is submitted that turnover by itself may not be sufficient ground to accept or reject a company but it could lead to examination of functional differences which are vital for comparability and if it is demonstrated that such differences exist (like the ones outlined above in -the table), then the company should not be considered as a comparable. The decision of Delhi Bench in case of Agnity holds these companies are non comparable not only on the basis of turnover but also due to functional differences which is exactly the case of the appellant. It is submitted that there are wide differences in the functions performed, risk assu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the assessee company as comparable or not. We find that this issue is covered in favor of the assessee by the decision of Delhi ITAT in the case of Agnity India Technologies Pvt. Limited (2010) ITA No. 3856/Del/2010. We find that the Wipro BPO is not at all comparable as the assessee company is pigmy compared to giant Wipro. Wipro Company's turnover is 20 times more than the assessee company. Hence, the assessee company is not comparable with Wipro BPO, the reasoning being that the latter is a giant company having 20 times more turnover than the assessee company. In view of this, based on the facts and the circumstances of the case, and following the decision of Delhi Bench of ITA T in the aforesaid case, we are of the view that Wipro BPO should be excluded from the list of comparable companies. Hence, the ground raised by the assessee on this issue is allowed. (Emphasis supplied) In the case MIs Telcordia Technologies India Private Limited Vs ACIT (ITA No. 7821/M um/2011) the Hon'ble ITA T held as follows: 7.4 The parameter for identifying comparable entity has to be seen from the angle of functions formed by the company, size of the company in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ills and Capgemini are per incuriam to that extent. The only decision which is apt to the facts and arguments advanced before the Hon'ble Bench is Agnity which is in favour of the taxpayer. 24. We have heard both the counsel and perused the records. We find that assessee has objected to the inclusion of Infosys and WIPRO on account of huge difference in size and turnover and functional difference. It has been inter-alia submitted by the assessee that majority of decisions from ITAT are in favour of the tax payers holding that Infosys WIPRO are not comparable due to higher turnover. We find that there are tribunal decisions both in favour of the proposition as well as against the proposition that huge difference in turnover affects comparability. Now it has come to our notice that a Special Bench has been constituted to consider the impact of turnover on comparability. Now when the Special Bench is seized with the matter, it would not be appropriate for us to adjudicate this issue. Hence, we remit the issue of inclusion of these comparables to the files of TPO. The TPO shall consider the same afresh, after the decision of Special Bench is available. B. IT ENABLED SERVICE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nologies for the same reason. It has further been submitted that ATL has been rejected in the case of Capital IQ Information Systems India Pvt, Ltd. vs. DCIT (I.T.A. No. 1961/Hyd./2011) for exactly this reason. Further in the case of Wills Processing Services (I) P Ltd. (Supra) also this contention's has been accepted and observation are as under:- We are also of the view that if extra ordinary events like merger and de-merger or amalgamation took place during the financial year relevant to the assessment year under consideration, and because of the merger / de- merger the company became functionally different then the said company should be excluded from the comparables. However, if the merger of the two functionally similar companies took place then the event of merger itself cannot be taken a factor for exclusion of the said comparable. Accordingly, we direct the Assessing Officer /TPO to verify this fact and accordingly decide the comparability of this company namely Accentia Technologies Ltd. 27. We have carefully considered the submissions and perused the records. We agree with the contention that companies with extraordinary events such as merger and amalgam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services Ltd. 29. As regards this comparable, TPO observed that it qualifies all the filters applied by the TPO. Hence, the same was considered as a comparable. 30. Now as regards the inclusion of the above comparables, assessee has submitted before us that Acropetal Ltd. is engaged in providing Engineering and Design Services. It has further been submitted that as regards the Eclerx Ltd., the company is providing data analytical Knowledge Processing Outsourcing (KPO) services, thus these two companies are not comparable to the assessee company. It has been submitted that these companies provide KPO Services and not BPO services. It has been submitted that KPO is used to describe outsourced support that requires deep domain knowledge and the exercise of judgement and interpretation. KPO's is, therefore, employ people with advanced educational degree, specific training, and specialized business experience. Hence, it has been submitted that Acropetal Ltd. and eClerx should be rejected. 31. We find that as to whether KPO should be included in the category of ITES services has been considered by this Tribunal in I.T.A. No. 6286/Del/2012 vide order dated 22.3.2013 in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing non-comparable services. It was further submitted that Company was engaged in the business of Geographical Information Services which includes the generation, processing, management and maintenance of data for GIS and other information management system and all other services necessary for successful geospatial data implementation. TPO was not in agreement with the above. He held that assessee cannot take a plea that data conversion, data migration, data maintenance services being provided by Genesys are not similar to IT Enabled Services being performed by the taxpayer. TPO further referred to the CBDT Circular No. SO 890(E) dated 26.9.2000 which gave a detailed list of products and services that could be claimed under ITES for the purpose of section 10A and 10B of the Act. Hence, TPO rejected the assessee's objection in this regard. 34. The assessee has submitted before us that Genesis International Ltd. is engaged in providing Geographical Information Services which includes the generation, processing, management, and maintenance of data for GIS and other information management systems and all other services necessary for successful geospatial data implementation. Gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its total expenditure) evidencing that the company has outsourced most part of its work and has not provided the services itself. It has been submitted that the Company which has outsourced most of its work will have a different business and revenue model as compared to service providers. It has further submitted that there are different business dynamics applicable to these two set of operating models respectively and a comparison of Coral Hub with the Assessee is inappropriate. However, TPO was not convinced. He referred to the information received from the comparable by issue of notice u/s. 133(6). TPO further observed as under:- It can be seen from above that data conversion services (ITES) rendered by the taxpayers involves 9-10 steps. Of this process, stages 1 to 5 are performed by manpower vendors' personnel in the office premises of the company and stages 6 to 9 are performed by the employees of the company. The expenses incurred for Vendors' personnel are debited to data entry charges, vendor payments etc. Thus, as clarified by the company, the expenses under the head 'data entry and vendor payments' are towards personnel of vendors' working fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur considered opinion, no two comparable companies can be replicas of each other. The application of Rule 10B should carried out and judged not with technical rigor, but on a broader prospective. In this view of the matter, we find no infirmity in the order of the Ld. Commissioner of Income Tax (A) in confirming the action of the TPO by selecting the VITL as comparable company. 41. Thus, we find that in the above exposition, it has been held that outsourcing of routine non-discretionary functions, call centre, data entry, claim processing etc. to other parties is very common feature of ITeS industry. There is no dispute that the assessee derives its entire revenue from ITeS industry. The financial results shows that the company earns income from single revenue stream of IT Enables services. Hence, following the above decision from the Tribunal in the case of RAMgreen Solutions Pvt. Ltd. (Supra), we uphold the inclusion of this comparable. VI. HCL COMNET SYSTEMS SERVICES LTD. 42. As regards this comparable, Assessing Officer held that it qualifies all the filters supplied by the TPO. The assessee objected to the said inclusion on various grounds including different fina ..... X X X X Extracts X X X X X X X X Extracts X X X X
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