TMI Blog2014 (11) TMI 840X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax [2014 (9) TMI 43 - ITAT HYDERABAD] followed - the TPO has admitted that the aforesaid 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 comparable to the ITES/BPO functions performed by the Assessee - this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPO] – the AO/TPO is directed to exclude the company from the list of comparables. Cosmic Global Ltd. - Outsourcing of main activity - Held that:- Following the decision in M/s. Capital IQ Information Systems (India) Pvt. Ltd. Versus Addl. Commissioner of Income-tax [2014 (9) TMI 125 - ITAT HYDERABAD] - outsourcing charges constitute 57.31% of the total operating costs - The entire outsourcing is confined to Translation charges paid at ₹ 3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and finance. Return of income for the year under consideration was filed by it on 24.9.2009, declaring total income of ₹ 15,39,573, after claiming deduction of ₹ 3,11,89,850 under S.10A of the Act. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee company has provided IT Enabled back office processing services to holding company, M/s. Capmark Finance Inc., USA and a total amount of ₹ 20,52,96,951 is charged for such services. In order to determine the Arm s Length Price(ALP) of three transactions of the assessee company with its Associated Enterprise(AE), a reference, therefore, was made by the Assessing Officer to the Transfer Pricing Officer (TPO) under S.92CA(1) of the Act. In the TP Study Report submitted by the assessee, TP analysis was done by applying Transactions Net Margin Method (TNMM), taking Operating Profit to Total Cost (OP/TC) as Price Level Indicator (PLI). In the said report, fourteen comparables were selected by the assessee by applying certain filters and since the Arithmetic Mean of OP/TC of the said fourteen comparables was 11.19%, as against the OP/TC of 14.62% of the assessee in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national Ltd. 83.18 71.50 AVERAGE 27.42 4. After allowing working capital adjustment of 1.15%, Arithmetic Mean margin of the selected comparables at 26.27% was taken by the TPO as adjusted Arm s Length Margin and applying the same to the corresponding Operating Cost of ₹ 17,84,82,779, the Arm s Length Price of the international transactions of the assessee company with its AE was worked out by him at ₹ 22,52,59,189, as against the price of ₹ 20,52,96,951 charged by the assessee. The difference of ₹ 1,83,11,450 accordingly was worked out by the TPO, as TP adjustment that is required to be made in respect of international transactions of the assessee with its AE. 5. When the addition on account of TP adjustment worked out by the TPO was proposed to be made by the Assessing Officer to the total income of the assessee in the draft assessment, objections were filed by the assessee before the Dispute Resolution Panel, which inter alia included the objections of the assessee in respect of comparability analysis carried out in the TP study r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in : Using the data available at the time of assessment proceedings instead of those available as on the date of preparing the TP documentation, Not applying multiple year data for comparable companies and using data for the financial year 2008- 09 alone, and Collecting selective information of the companies by exercising power granted to him u/s. 133(6) of the Income Tax Act, 1961 that was not available to the Appellant in the public domain. 8. That the Hon'ble DRP/learned AO erred in ignoring the limited risk nature of the contractual services provided by the Appellant and in not providing an appropriate adjustment towards the risk differential even when the full fledged entrepreneurial companies are selected as comparables. 9. That the Hon'ble DRP/Learned. Assessing Officer erred in not granting an adjustment for the difference in rate of depreciation charged by the Appellant and for comparable companies. 10. On the facts and in the circumstances of the case and in law, the learned Assessing Officer has erred in adding the transfer pricing adjustment made by the transfer Pricing Officer under Section 92C of the Act while determining the book p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer/TPO with a direction to decide the same afresh following the decision of the coordinate bench in the case of Market Tools Research P. Ltd. (ITA No.1811/Hyd/2011 dated 24.10.2013), wherein, it was held as under- 9.3 .. It is no doubt true that exceptional events like merger/demerger does impact the profitability of a company. Hence, it is necessary to look into this aspect before selecting a particular company as comparable. In the aforesaid circumstances and keeping in view the decisions of the coordinate benches as aforesaid, we remit the matter back to the file of the Assessing Officer, who shall verify the fact whether in fact, the exceptional events like amalgamation and acquisition, which have taken place in this case, has any impact on the profitability of the company as claimed by the assessee, and thereafter decide the issue of the acceptability or otherwise of the aforesaid company as a comparable. While doing so, the Assessing Officer shall also consider the contention of the assessee with regard to the functional difference of the said company with the assessee. The Assessing Officer shall accordingly redecide this issue in accordance with law after giving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPO]. Respectfully following the above decision of the Bangalore Bench of the Tribunal, we direct the Assessing Officer/TPO to exclude this company from the list of comparables while determining the Arm s Length Price. Facts being materially same, we follow the aforesaid view of the co-ordinate bench and direct the AO/TPO to exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2008-09. We also direct the Assessing Officer/TPO to take into consideration, the decisions of the Tribunal rendered in the cases of Capital IQ Information Systems (India) Pvt. Ltd. (supra); Excellence Data Research Pvt. Ltd., Hyderabad (supra); and Hyundai Motors India Engineering P. Ltd., Hyderabad (supra), cited by the learned counsel for the assessee while deciding this issue. Eclerx Services Ltd. 13. As regards selection of Eclerx Services Ltd. as comparable, it is observed that the said company was excluded by the Tribunal from the list of comparables in assessment year 2008- 09, after having found the same to be functionally different from that of the assessee-company. The relevant observations of the Tribunal as recorded in paragraph 7 of its order dated 11.4.2014 are reproduced hereunder- 25. We have heard the submissions of the parties and perused the materials on record. Undisputedly, the TPO has accepted the assessee as a purely ITES provider. It is a fact that the Income Tax Appellate Tribunal Hyderabad Bench in case of Market Tools Research Ltd. (ITA No.1811/Hyd/11 dated 24.10.2013), which is a purely IT enabled service provider like the assessee, cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee s own case for assessment year 2008-09 and direct the Assessing Officer/TPO to exclude Eclerx Service Ltd. from the list of comparables. Genesys International Ltd. 14. As regards the selection of Genesys International Ltd. as comparable, the learned counsel for the assessee has relied on the decisions of this Tribunal in the cases of Capital IQ Information Systems (India) Pvt. Ltd. (supra); Excellence Data Research Pvt. Ltd., Hyderabad (supra); and Hyundai Motors India Engineering P. Ltd., Hyderabad (supra), wherein M/s. Genesys International Ltd. was excluded by the Tribunal from the list of comparables on the ground that it was found to be functionally different. It is, however, observed that in assessee s own case for assessment year 2008-09 (ITA No.1812/Hyd/2012), the Tribunal vide its order dated 11.4.2014 has set aside the issue in relation to the selection of this comparable to the file of the Assessing Officer/TPO with a direction to decide the same afresh with the following observations- 13. We have hard submissions of the parties and perused the material on record. As can be seen, the coordinate bench of the Tribunal had an occasion to consider the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (supra), we direct the Assessing Officer/TPO to exclude Infosys BPO from the list of comparables. 16. As discussed above, the issue relating to inclusion/exclusion of the companies selected by the TPO from the list of finalized comparables as raised in grounds No.4 to 6 accordingly is decided in favour of the assessee in respect of three comparables, and in respect of the remaining three comparables, the matter is set aside to the file of the AO/TPO to decide the same afresh taking into consideration the respective directions, given hereinabove, after giving the assessee proper and sufficient opportunity of being heard. The Assessing Officer/TPO is accordingly directed to decide the final list of comparables and recompute the Arm s Length Price on the basis of Arithmetic Mean of OP/TC of the comparables finally selected. 17. As regards grounds no.7 to 9, the learned representatives of both the sides have agreed that the issues raised therein have become infructuous at this stage in as much as if the Arm s Length Price to be determined by the AO/TPO as per the directions given while disposing of grounds No.4 to 6 falls within the range of +/-5%, there would be no case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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