TMI Blog2014 (9) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... e no reason to bar the assessee from claiming that it was wrongly included - Cosmic Global Ltd. is incomparable to the assessee – the TPO is directed to exclude the company from the comparables – Decided in favour of assessee. Eclerx Services Ltd. – Functionally different company – Held that:- The company is engaged in providing data analytics and customized process solutions to a host of global clients – from a look at the functional profile of the company from its Annual report, it can be seen that it is nowhere close to the assessee’s instant segment of ‘manual claim processing services’ - the TPO is directed to exclude the company from the comparables – Decided in favour of assessee. Genesys International Corpn. Ltd. – Different nature of work - Operated in single business unit - Held that:- The company is engaged in rendering geospatial services catering to the needs of consumer mapping, navigation and internet portals - It is providing mapping technologies managing the earth’s resources and surfaces at a time - Talent eco system with this company includes urban planners, cartographers, remote sensing scientists etc. and even rocket scientists, giving its skills in all k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the assessee – relying upon CIT vs. Agnity India Technologies Pvt. Ltd. [2013 (7) TMI 696 - DELHI HIGH COURT] - The parameters on which Infosys Technologies Ltd., was held to be not comparable with that assessee, are fully applicable here also – the TPO is directed to exclude the company from the list of comparables – Decided in favour of assessee. KALS Information System Ltd. – Held that:- The TPO adopted ‘Software development’ segment of this company - From the Annual report of this company it can be noticed that this segment also includes revenues from software products - the assessee is not engaged in selling any software products, the financials of the company under this segment cannot be compared with the assessee - The contribution by the sale of software products to the overall revenue of this segment cannot be precisely ascertained for determining the question of its comparability – Decided in favour of assessee. - ITA No. 6312/Del/2012 - - - Dated:- 28-8-2014 - Sh. R. S. Syal, AM And Sh. George George K., JM,JJ. For the Petitioner : Sh. Nitin Narang, CA, Harpreet Ajmani, Adv. Deepak Chopra, Adv. For the Respondent : Sh. Yogesh K. Verma, CIT DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are also proceeding accordingly. 5. We want to make it clear that there is no dispute as regards the application of TNMM as the most appropriate method; use of current year data alone; and the calculation of the assesee s PLI. The assessee chose eight companies as comparable under the segment in its TP study report by using multiple year data. On being called upon to re-run the databases using current year data and applying the correct filters, the assessee reduced the number of companies as comparable to six. The TPO carried out fresh search at his level and brought seven new companies as comparable. By eliminating two companies from the assessee s list of comparables, including seven companies chosen by him as comparable and one more company at the instance of assessee, the TPO drew a list of twelve comparable companies with their respective and arithmetic mean of such OP/TC as under:- Sl. No. Name of comparable OP/TC (%) 1. Cosmic Global Ltd. 23.3 2. Caliber Point Business Solutions Ltd. 10.97 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in health related insurance business. So the services provided by the assessee under this segment are mainly in the nature of processing on manual basis, the insurance claims lodged by its policy-holders. With the above background of the nature of functions performed by the assessee under this segment, we will proceed to decide as to whether the above referred four companies are comparable or not. Cosmic Global Ltd. 9.1. This company was initially chosen by the assessee as its comparable and resultantly, the TPO included the same in the final list of comparables without any discussion. The ld. AR contended that this company was inadvertently chosen as comparable and hence the same should be eliminated on account of functional differences. 9.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual Report of this company that the financial results in the Balance sheet and Profit and loss account are available only on entity level. Income from operations has been shown as ₹ 5.86 crore, the break-up of which is available in Schedule 9. It is discernible from the Schedule that the Medical transcription and con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, audit and reconciliation, metrics management and reporting services. This company also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. A look at the functional profile of this company from its Annual report, it can be seen that it is nowhere close to the assessee s instant segment of manual claim processing services . 10.3. It is further relevant to note that this company acquired UK based Igenica and Travel Solutions Ltd. on 27.7.2007 and the financial results of that company are also included in its. Recently, the Delhi Bench of the Tribunal in Toluna India Pvt. Ltd. Vs ACIT (ITA No. 5645/Del/2013) vide its order dated 26.8.2014 has held that the mergers/de-mergers in a company make such year as unfit for comparison. In reaching this conclusion, the Delhi Bench followed an order passed by the Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs DCIT (2013) 154 TTJ (Mum.) 176 in which it has been held that a company cannot be considered as comparable because of exceptional financial results due to merger/de-merger etc. In view of the foregoing discussion, we are of the consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rking capital adjustment, which was claimed before the TPO. The DRP echoed the TPO s order on this score by noticing that the assessee took the average of the amount of working capital deployed by the comparables on the first and last day of accounting period to compute the working capital adjustment and there were no means to ascertain the working capital deployed by the comparables throughout the year on daily basis. The assessee is aggrieved. 13.2. Having heard the rival submissions and perused the relevant material on record, it is manifest that the working capital adjustment is required with reference to stock, trade receivable and trade payables. By carrying the high trade receivables, a company allows its customers a relatively longer period to pay their accounts, which results into higher interest cost and lower profit. By carrying high trade payables, a company benefits from a relatively longer period available to it for paying back its suppliers, which results into its lower interest cost and higher profit. Similarly, high stock means blockage of funds and the resultant lower profit. These three ingredients directly impact the working capital and resultant profit of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e development segment by contending that firstly, the working capital adjustment ought to have been allowed and secondly, the following three comparables should have been excluded from the list of comparables : - i) 3K Technologies Ltd. ii) Infosys Technologies Ltd. iii) KALS Information Systems Ltd. (segment) 19. In order to examine and decide about the comparability or otherwise of these three companies, it is of utmost importance to consider the nature of job done by the assessee under this segment. Internal page 7 of the TP study report divulges that the assessee has certain self-developed data processing and data analytics software which are used for several internal purposes, including benefit design, benchmarking, claim processing, cost trading, marketing, managing relations and increasing efficiency and profitability. When we peruse the terms of the Service agreement between the assessee and its A.E, pursuant to which such services were rendered, it turns out that the assessee was supposed to do the following : - 1. Development, testing and maintenance of internal Company software pursuant to Company software development life cycle (SDLS) process. a) Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the software developed by the assessee do not vest in it but with its A.E. Further, the Ownership and Copyright of the software developed by the assessee also lie with its A.E and the assessee has no right in them. 22. With the above overview of the nature of work done by the assessee under the Software development segment , let us examine the comparability of the three disputed companies. 3K Technologies Ltd. 23.1. The TPO included this company in the list of comparables by observing that it was only engaged in the software development. The assessee objected to its inclusion by arguing that its employee cost was 3.74% of the total cost and hence it was not passing the filter of employees cost more than 25% of the total cost. The TPO rejected this contention by noticing that Onsite-expenses were also part of employees cost, which were not considered by the assessee. 23.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company that apart from Personnel cost of ₹ 1.15 crore, there are Onsite expenses to the tune of ₹ 26.74 crore and also Administrative and other expenses amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment also includes revenues from software products. In view of the fact that the assessee is not engaged in selling any software products, we hold that the financials of this company under this segment cannot be compared with the assessee. The contribution by the sale of software products to the overall revenue of this segment cannot be precisely ascertained for determining the question of its comparability. As such, this company is directed to be excluded. The assessee succeeds. 26. The ld. AR also assailed the impugned order in not allowing working capital adjustment under this segment as well. We have discussed the issue of working capital adjustment while dealing with A. ITES segment above. We adopt the same reasons here also and direct the A.O/TPO to consider the question of grant of working capital adjustment in accordance with our above directions. 27. In the final analysis, we set aside the Transfer Pricing Adjustment of ₹ 5.11 crore finally made by the A.O under the Software segment and send the matter back to A.O/TPO for a fresh computation of the ALP of the international transactions under this segment as per law, in consonance with our above directions. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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