TMI Blog2014 (9) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... arding the selection of comparable - exceptional events like merger/demerger does impact the profitability of a company - it is necessary to look into this aspect before selecting a particular company as comparable - when the assessee itself has selected it as a comparable in its TP Study, it is to be assumed that the assessee has considered all the aspects including the fact of outsourcing of ITES activities to third party vendors and functional comparability - the company has outsourced the IT enabled services to third party vendors, the matter is remitted back to the AO/TPO for fresh consideration of the issue of comparability - The TPO has admitted that the company has two segments, and only the IT Enabled Services Segment, relating to engineering design services was considered by the TPO for comparability analysis - the functions performed by the Engineering Design services segment of the company cannot be considered as a comparable to the ITES/BPO functions – Decided partly in favour of Assessee. Exclusion of communication charges – Computation of deduction u/s 10A – Held that:- The AO has excluded the amount from the export turnover, on the ground that expenses are attrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's case was selected for scrutiny assessment. During the scrutiny assessment proceeding, the Assessing Officer noticing that the assessee earned revenue from international transactions entered into with its AE, made a reference to the Additional. CIT(Transfer Pricing), Hyderabad for determining the Arm's Length Price(ALP) of the international transactions. For the year under consideration, the assessee reported earning of revenue from international transactions with its AE as under:- i) Provision of IT enabled back office supply services Rs.21,83,83,108 ii) Reimbursement of expenses ₹ 41,35,542 To find out whether the price charged for its international transactions is within the Arm's length, the assessee undertook a Transfer Pricing study based on analysis of the functions, assets and risks by considering itself as the tested party in view of the fact that it is a risk mitigated captive service provider. For comparative analysis, the assessee undertook a search in prowess and capitaline databases as on 15.2.2008 by taking into consideration the financial results of the comparables having financial years ending during the period 1.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harges of ₹ 80,15,215/- from the export turnover for the purpose of computing deduction u/s 10A of the Act. The assessee objected to the draft assessment order before the DRP. The DRP rejected the assessee's contention with regard to almost all the issues excepting assessee's objection with regard to two comparables selected by TPO i.e. M/s. Coral Hub and M/s. Mold Tek, which were directed to be excluded from the list of comparables. In pursuance to the aforesaid direction of the DRP, final assessment order was passed by the Assessing Officer reducing the addition on account of difference in ALP to ₹ 3,22,25,896. Being aggrieved, the assessee has filed the present appeal before us raising as many as 12 grounds. 5. Ground No.1 to 10 are on transfer pricing issues. At the outset, the learned Authorised Representative for the assessee submitted that he would only press the issue of selection of certain comparables as raised in grounds 4 and 6. In view of such submissions of learned Authorised Representative for the assessee, the rest of the grounds on transfer pricing issues are dismissed as not pressed. Insofar as ground No.4 and 6 are concerned, the learned Authorised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e companies from the list of comparables. 6.2 The learned Departmental Representative on the other hand, supporting the order of the DRP and TPO submitted that the TPO has considered the aforesaid companies as comparables citing valid reasons, which were also upheld by the DRP. He therefore, submitted that there is no valid reason to exclude the aforesaid companies from the list of comparables only because of their high turnover, when they are functionally similar to the assessee. 6.3 We heard the submissions of the parties and perused the material on record. It is not disputed that these three companies are having huge turnover, as compared to the assessee's turnover of about ₹ 22 crores during the year. The coordinate bench of this Tribunal in the case of Capital IQ Information Systems India Ltd. V/s. DCIT (supra), while considering the issue of selection of aforesaid companies as comparables, had categorically held that the companies having high turnover cannot be selected as comparable with companies having reasonably small turnover. Following the aforesaid decision in the case of Capital IQ Information Systems India Ltd. (supra), the ITAT in assessee's own case of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable, as it has shown exceptionally high margin at 66.50%. Learned Authorised Representative for the assessee further submitted that for the assessment year 2007-08 in assessee's own case, the Tribunal has directed the exclusion of the aforesaid company from the list of comparable. 7.2 The learned Departmental Representative, on the other hand, supporting the order of the DRP and TPO submitted that the TPO has considered the aforesaid company as comparable citing valid reasons, which were also upheld by the DRP. It was submitted that the issue of KPO company being functionally different from the ITES companies has been considered by the Income-tax Appellate Tribunal Mumbai Bench in the case of Willis Processing Services India P. Ltd. V/s. DCIT (ITA No.8722/Mum/2010), wherein it has been held that when the activity undertaken by the companies are materially same, then only because it is termed as KPO services, it cannot be treated as a functionally different company. 7.3 We have heard submissions of the parties and perused the materials on record. It is not disputed that the aforesaid company has shown very high profit of 66.91% during the year. The annual report of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd sanitary sewer design, site and survey plan, site utility plan, storm water management plan, wet land plan, google earth overlay plan. It was submitted that under its IT Division, the company renders services for the application development, maintenance and support services and testing services, in the above field. He further submitted that apart from the aforesaid activities, the said company is also engaged in R D Activities in the area of image intelligence and recognition, mobile mapping as well as "LIDAR". It was submitted that considering the wide range of activities in various fields rendered by this company, the assessee cannot be compared with it, as it is a risk mitigated company which does not undertake any R D activity. 8.2 The learned Departmental Representative, on the other hand, supported the orders of the DRP and TPO, and submitted that the aforesaid company was rightly selected as comparable. 8.3 We have heard submissions of the parties and perused the materials on record. As can be seen, the coordinate bench of the Tribunal had an occasion to consider the comparability of the aforesaid company in the case of Cognizant Technology Services P. Ltd. V/s. ACIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws a remarkable growth of the revenue to the tune of 78% and profitability by 110% after the acquisitions/amalgamations, which has increased the mark up of the company from 32% to 42.11% during the year under dispute. It was further submitted that apart from the fact that exceptional events have taken place, the aforesaid company is functionally different and cannot be compared with the assessee. It was submitted that the annual report of the said company of the financial year 2007-08 clearly shows that it is engaged in the development of software product. In support of his contentions, the learned Authorised Representative for the assessee relied on the decisions of the Hyderabad Bench or the Tribunal in the cases of Cognizant Technologies Ltd. (supra) and Capital IQ Information Systems I P. Ltd. (supra) and the decision of the Bangalore Bench in the case of Symphony India Marketing P. Ltd. (supra). 9.2 The learned Departmental Representative, on the other hand, supported the orders of the DRP and TPO, and submitted that the aforesaid company was rightly selected as comparable. 9.3 We have heard submissions of the parties and perused the materials on record. As can be seen, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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." 11. 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. 47. Facts being ident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id company was subcontracting the ITE Services to third party vendors. In support of such contention, the learned Authorised Representative for the assessee relied on the following decisions- (a) Capital IQ Information Systems P. Ltd. (supra) (b) ACIT V/s. Maersk Global Service Centre India (P)Ltd.(ITA No.3774/Mum/2011) (c) Symphony Marketing Solutions India P. Ltd. V/s. ITO (supra) 10.2 The learned Departmental Representative, on the other hand, contesting the contentions of the assessee, submitted that in the TP study the assessee itself has selected the aforesaid company as a comparable and the TPO also accordingly included it in the list of comparables. Hence, the assessee cannot now go back and dispute the selection of this comparable. 10.3 We have heard submissions of the parties and perused the materials on record. As can be seen from the facts and material on records, the assessee itself has selected the aforesaid company as a comparable in its TP Study and it has also been retained by the TPO in the final list of comparables. However, subsequently, the assessee objected the said company being treated as a comparable before the DRP on the ground that it is not fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctionally different, cannot be taken as a comparable for determining ALP. In support of these contentions, he placed reliance on the decision of the Income-tax Appellate Tribunal Bangalore Bench in the case of Symphony Marketing Services P. Ltd. (supra). 11.2 The learned Departmental Representative, on the other hand, submitted that the company is in data processing and insurance claim processing services, which are classified under ITES/BPO services. Therefore, the company has been correctly selected as a comparable. 11.3 We have heard the submissions of the parties and perused the material on record with regard to the aforesaid company. As can be seen from the website extract of the aforesaid company, it is engaged in providing services which are in the nature of KPO. Further, on perusal of the annual report of the company, furnished in the paper- book, it is seen that the said company is engaged in providing Niche services, as well as developed its own brand 'Exdion' to target the insurance industry in US. The Annual Report further reveals that the company has been running marketing campaigns in the US for expanding its plant base in relation to the brand developed by it. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, relating to engineering design services was considered by the TPO for comparability analysis. However, the Income-tax Appellate Tribunal Bangalore Bench in the case or Symphony Marketing Solutions India P. Ltd. (supra) has held that the functions performed by the Engineering Design services segment of the company cannot be considered as a comparable to the ITES/BPO functions. The relevant portion from the decision of the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India P. Ltd. (supra), is extracted below for ready reference- "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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