TMI Blog2014 (2) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... [2011 (8) TMI 782 - KARNATAKA HIGH COURT] followed - 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 – 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 – Decided in favour of Assessee. - IT( TP )A No. 1316/Bang/2012 - - - Dated:- 14-8-2013 - N. BARATHVAJA SANKAR AND N.V. VASUDEVAN, JJ. For the Appellant : K.R. Vasudevan. For the Respondent : Smt. Priscilla Singsit. ORDER:- PER: N.V. Vasudevan This appeal by the assessee is against the order dated 31.07.2012 passed by the ITO, Ward 12(2), Bangalore u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [hereinafter referred to as "the Act" in short"] relating to assessment year 2008-09. 2. Ground No.1 is general in nature and calls for no adjudication. Grounds 2.1 to 2.9 raised by the assessee are with regard to the adjustment to the Arm's Length Price (ALP) of an international transaction entered into by the assessee with its Associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .81% NA 14.48% Upper Quartile 19.73% 30.67% NA 16.27% 5. Since the net profit margin to cost of the Assessee was within +/- 5% range of the arithmetic mean of the 9 comparable, the Assessee claimed that the price charged by the assessee for providing ITES to its AE should be considered as at arm's length. 6. The TPO accepted two companies viz., Cosmic Global and Datamatic Technologies Ltd. out of the 9 comparable companies chosen by the assessee as comparable. With regard to the other 7 companies, the TPO rejected the claim of the assessee that those companies were comparable with that of the assessee. The TPO finally proposed 18 more comparables and despite objection by the assessee with regard to its comparability, adopted them as comparable companies. The final set of 20 comparables chosen by the TPO and their arithmetic mean of net profit margins on cost of those comparable was as follows:- Sl.No. Name of the company OP/TC % 1 Accentia Technologies Ltd. (Seg.) 41.77 2 AcropetalTechnologies Ltd. (Seg.) 35.30 3 Aditya Birla Minacs Wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r pricing adjustment u/s. 92CA in respect of software development segment of the taxpayer's international transactions." 8. The above adjustment suggested by the TPO was incorporated in the draft assessment order by the AO as an addition to the Total income. Against the draft assessment order of the AO incorporating the adjustment to the ALP as proposed by the TPO as an addition to the total income, the assessee filed objections before the DRP. The DRP did not agree with the objections raised by the assessee and confirmed the adjustment to the ALP as made in the draft assessment order. The AO passed the final assessment order as per the directions of the DRP against which the assessee has filed the present appeal before the Tribunal. 9. 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 reasons as to why the objections of the assessee to adopt comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 13. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 (P.) Ltd. (supra), the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erx Services Ltd. 20. 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 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 (P.) 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/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind that the assessee had raised elaborate objections to each of the comparables in group 3 before the TPO. The TPO has also reproduced the said objection in his order para 6.5.1. of page 178 of his order. He has rejected the contention of the assessee by holding that every function within BPO sector can be from low end to high end and the activities of the assessee such as accounting, web management, network management are BPO services using technology but these services are not categorized as KPO. He held that a call centre may offer support services like telemarketing to high end services like technical support services, where not only the level of knowledge, skill required would be high, but the technical knowledge as well would be high. According to him, back office transaction process services may be as remarkable and as complicated as insurance/market transaction processing services. He, therefore, rejected the contention of the assessee and treated the BPO as equivalent to KPO services. 40. 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 operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith it. This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comaparables. We therefore accept the contention of the assessee that this company cannot be regarded as a comparable. (8) Mold-tek Technologies Ltd. 25. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables. 27. With the exclusion of the aforesaid companies as comparables, the following are the 11 companies chosen by the TPO as comparable only remain and their arithmetic mean is as follows:- Sl.No. Name of the company TPO Margins (Return on Total Cost) for the year ended 2008 1 Aditya Birla Minacs Worldwise Limited - 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.-BPO) 29.11% 6 e4e (Nittany Outsourcing Ltd.) 18.54% 7 IServices India Pvt. Ltd. 10.77% 8 Jindal Intellicom Pvt. Ltd. - 10.29% 9 R Systems International Ltd. (Seg.-BPO) 4.30% 10 Spanco Ltd. (Seg.- Call Centre division) 8.81% 11 Allsec Technologies Limited - 13.29% Arithmetic Mean 7.97% Margin of Genpact India (Assessee) 14.91% 28. It can be seen that the arithmetic mean of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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