TMI Blog2014 (12) TMI 1064X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of this company as a comparable - 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 clear that during the previous year there were extra ordinary events that took place in the company which warrants exclusion of the company and this company cannot be considered as a comparable. Coral Hubs Ltd. (Formerly known as Vishal Informatics Technologies Ltd. – Held that:- In Symphony Marketing Solutions India (P.) Ltd. Versus Income-tax Officer [2014 (2) TMI 83 - ITAT BANGALORE] it has been held that Coral Hubs Ltd. cannot be considered as a comparable - 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 – ‘Coral Hub’ is not a suitable comparable to the taxpayer and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M method stating the same to be the most appropriate method under the facts and circumstances of the case. He noted that the assessee has taken operating profit and operating cost ratio as the PLI in TNMM analysis. The assessee was remunerated at cost plus mark up of 15% on the entire cost incurred for rendering such ITES. The PLI of the assessee has been arrived at 17.45% whereas the average PLI of the comparables has been arrived at 14.86% as per the analysis of the TP document. However, the PLI of the comparables has been arrived at by considering weighted average margin of 2 years data for the F.Yrs. 2006-07 and 2007-08. Although the TPO accepted the TNMM method followed by the assessee as the most appropriate method, however, he did not agree with the adoption of weighted average margin of 2 years data. He, therefore, asked the assessee to furnish single year data for the comparables which the assessee submitted in case of the 12 companies, the details of which are as under : Sr.No. Company Name OP/OC (%) 1 Allsec Technologies Ltd. -13.76 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 Maple eSolutions Ltd., 20.67 7 Triton Corp. Ltd., (selected by the assessee) 25.26 Arithmetic Mean 31.94 Accordingly, the TPO proposed an adjustment of ₹ 7.38 crores. 2.3 The assessee challenged the matter before the DRP who directed the TPO to include 2 companies, i.e. Caliber point business solutions Ltd. and R systems International Ltd as comparables. Similarly, the DRP also directed the AO to include income in nature of other income and also to exclude foreign exchange loss/gain. The DRP also directed the AO to carry out working capital adjustment. Similarly, the DRP directed the AO to carry out the required rectification in making incorrect computation of margin on cost of comparable companies for A.Y. 2007-08. 2.4 Based on the direction of the DRP, the AO took revised set of comparables after rectification of margin and after including the 2 companies, i.e. Caliber point business solutions Ltd. and R Systems International Ltd. and determined the Arithmetic Mean at 28.43%, the details of which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the Hon'ble DRP erred in law and on the facts and in circumstances of the case and ought to have considered the profit % as per the annual report of Caliber. The learned ACIT erred in considering profit % as 34.02%. 3. Erroneous selection of comparable companies The learned ACIT erred in facts and circumstances of the case pursuant to the directions of the Hon'ble DRP in confirming the following as comparable companies: 3.1 Accentia Technologies Limited 3.2 Coral Hub Limited 4. Erroneous rejection of comparable company The learned ACIT pursuant to the directions of the Hon'ble DRP has erred in law and on the facts and in circumstances of the case in rejecting Transworks Information Services Limited as a comparable company. 5. Erroneous calculation of operating margin of companies selected by the learned TPO The learned ACIT pursuant to the directions of the Hon'ble DRP has erred on the facts and in circumstances of the case in computing the operating margin of two companies (namely Crossdomain Solutions Ltd. and Maple eSolutions Ltd.) selected by the learned TPO while arriving at a transfer pricing adjustment. 6. Erroneous selectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the shortfall in advance tax has resulted in view of the transfer pricing adjustment which have been objected in the grounds above. 14. Each one of the above grounds of appeal is without prejudice to the other. 15. The appellant reserves the right to amend, alter or add to the grounds of appeal. 4. Grounds of appeal No.1, 12, 13, 14 and 15 being general in nature are dismissed. 5. So far as grounds of appeal No.2 is concerned, the Ld. Counsel for the assessee submitted that the TPO while computing the operating margin of Caliber Point Business Solutions Ltd., has not reduced/apportioned unallocated cost of ₹ 3,96,39,162/- for which the margin of the comparable has gone up to 18.55% as compared to the correct working of 8.70%. Since the unallocated cost of ₹ 3,96,39,162/- has neither been reduced nor apportioned he submitted that the issue may be restored to the file of the Assessing Officer with a direction to pass appropriate orders by apportioning the unallocated cost. 6. The Ld. Departmental Representative has no objection for the same. We accordingly restore grounds of appeal No.2 to the file of the Assessing Officer with the direction to apportio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant observation of the Tribunal at Pages 6 to 9 of the order read as under : (1) Accentia Technologies Ltd. (Seg.) 10. This was considered as a comparable by the TPO and listed at Sl.No.1 of the comparable companies chosen by the TPO. The ld. counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was draw to the annual report of this company for the A.Y. 2007- 08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India ITA No.1316/Bang/2012 Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 has taken place, then the aforesaid comparable has to be excluded. 11. We have considered the submissions of the ld. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. It is clear that during the previous year there were extra ordinary events that took place in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner- 17.5. In addition to the above, the Director's Report of the company for the FY 2007-08 revealed the merger and the demerger. A company known as Techmen Tools Pvt. Ltd. had amalgamated with Mold-tek Technologies Ltd. with effect form 1st October, 2006. There was a demerger of Plastic Division of the company and the resulting company is known as Moldtek Plastics Limited. The de-merger from the Moldtek Technologies 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 demerger 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 ITA No.1316/Bang/2012 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer to exclude the said company as a comparable. 9.3 So far as Coral Hubs Ltd. (Formerly known as Vishal Informatics Technologies Ltd.,) is concerned we find the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (Supra) has held Coral Hubs Ltd. cannot be considered as a comparable. The relevant observation of the Tribunal from pages 10 to 14 read as under : (3) Coral Hubs Ltd. 14. This company is listed at Sl.No.6 of the list of comparable companies chosen by the TPO. As far as this company is concerned, it is seen that this company was earlier known as Vishal Information Technologies Ltd. The comparability of this company in the case of an ITES company by name 24 x 7 Customer.com Pvt. Ltd. was considered by ITA No.1316/Bang/2012 the Tribunal in ITA No.227/Bang/2010 and by order dated 09.11.2012 the Tribunal held that this company is not functionally comparable with ITES for the following reason:- 17.3 Vishal Information Technologies Ltd. (VIT) - In the case of this comparable, we find that the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd in ITA No.3774/Mum/2011 by order dt.9.11.2011 has held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 for the assessment year 2008-09, wherein the DRP, after taking into consideration, the aforesaid aspect, has accepted the claim of the assessee. The assessee further submitted that the Income-tax Appellate Tribunal Mumbai Bench in the case of Asstt. CIT v. Maersk Global Service Centre (India) (P.) Ltd. [2011] 133 ITD 543/16 taxmann.com 47 (Mum.), a copy of which is submitted before us, has also directed for the exclusion of the aforesaid company since it has outsourced a considerable portion of its business. 17. After considering the submissions of the learned Authorised Representative for the assessee, we find that the DRP, in the proceedings for the assessment year 2008-09 in assessee's own case, after taking note of the composition of the vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it prints upon clients re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of comparables for the computation of ALP. 17. Applying the aforesaid decisions, we are of the view that Coral Hubs Ltd. cannot be considered as a comparable. 9.4 Similarly, the Delhi Bench of the Tribunal in the case of United Health Group Information Services Pvt. Ltd., (Supra) has also held Vishal Informational Technologies Ltd. (Now Coral Hubs Ltd.,) as not comparable since it is engaged in e-publishing business. The relevant observation of the Tribunal from at pages 9 and 10 of the order read as under : Vishal Informatics 12.1. The TPO included this company in the list of comparables by noticing that it was engaged in providing BPO services. The assessee failed to convince him and the DRP that it was incomparable. 12.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it is mainly engaged in e-publishing business. It has more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclude all such income from computation . 11.1 He accordingly submitted that since Miscellaneous income of Cross Domain Solutions Ltd., and Foreign Exchange gains in case of Maple Solutions Ltd., has been considered as part of the operating revenue by the Assessing Officer/TPO despite the direction given by the DRP to exclude the same from the operating income, therefore, appropriate directions may be given to the Assessing Officer to exclude the same from the operating income. 12. The Ld. Departmental Representative also fairly conceded that the Assessing Officer is bound to obey the direction of the DRP. 12.1 In view of the direction of the DRP which is binding on the Assessing Officer, we direct him to exclude the Miscellaneous income and Foreign exchange gains from the operating income of the respective companies. Grounds of appeal No.5 by the assessee is accordingly allowed. 13. So far as grounds of appeal No.7 is concerned, we have already directed the Assessing Officer to exclude Accentia Technologies Ltd. and Coral Hubs Ltd., from the list of comparables, therefore, this ground in our opinion becomes infructuous. Accordingly, this ground by the assessee is dism ..... X X X X Extracts X X X X X X X X Extracts X X X X
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