TMI Blog2015 (1) TMI 1063X X X X Extracts X X X X X X X X Extracts X X X X ..... e company fails the employee cost filter, then the same cannot be accepted as a comparable company. In order to examine this aspect, we are of the opinion that selection of this comparable is to be restored to the file of the TPO for fresh examination, after giving due opportunity of hearing to the assessee. The issue is restored to the file of the TPO. For ECLERX SERVICES LTD. (seg.) this company cannot be regarded as a comparable for the reason that it was having extraordinary event and super normal profits. For GENESYS INTERNATIONAL CORPORATION LTD. from the notes to accounts of this company, it is seen that this company is engaged in providing geographical information services comprising of photogrammetry, remote sensing cartography, data conversion related computer based services and other related services. Further the business of this company requires skilled manpower and scientists, civil engineers, etc. Besides the above, this company also carries out R&D services and own intangibles. The aforesaid facts, in our view, will take this company out of the list of comparables. HCL Comnet Systems & Services Ltd., (Seg.) WIPRO Limited it is not disputed that these compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and the decision of Income-tax Appellate Tribunal, Chennai Special Bench in case of ITO vs. Sak Soft Limited (2009 (3) TMI 243 - ITAT MADRAS-D (AT)], thus we direct the Assessing Officer to reduce communication charges both from the export turnover as well as the total turnover for computing exemption u/s 10A of the Act. - Decided in favour of assessee. - ITA.No.1647/Hyd/2012 - - - Dated:- 24-10-2014 - SHRI B. RAMAKOTAIAH AND SHRI SAKTIJIT DEY, JJ. For The Assessee : Mr. Rajan Vora For The Pronouncement : Mr. D. Sudhakar Rao ORDER PER B. RAMAKOTAIAH, A.M. This appeal is preferred by assessee against the order of AO dated 20-09-2012 passed under Sec 143(3) read with Sec.144Cof the IT Act 1961 consequent to the directions of Disputes Resolution Panel, Hyderabad dated 30.08.2012 for the A.Y. 2008-09. 2. Briefly stated, HSBC Electronic Data Processing India Private Limited (hereafter referred to as ' HDPI ') is a wholly owned subsidiary of HSBC Holdings Plc (together with its associates referred to as 'HSBC Group'), one of the leading banking and financial services organisations in the world. HDPI provides a range of back office services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them. Based on the transfer pricing study, it was cconcluded that the international transactions of the assessee with AEs are at arm's length. 5. The key features of the Transfer Pricing ('TP') study undertaken in respect of international relating to provision of BPO services are summarised below : As per the functional analysis, assessee was categorised as a risk mitigated contract service provider and selected as the tested party ; Transaction Net Margin Method ('TNMM') was determined as the most appropriate method to determine the ALP ; The search was conducted on Prowess database and Capitaline database to select comparable companies ('comparables'); Operating margin i.e. operating profit/operating cost was selected as the Profit Level Indicator (PLI') for the purpose of determining ALP; Given the nature of the international transaction under review, economic conditions, differences in business or product life cycles and other similar factors and also the fact that audited financial data for the AY 2007-08 was not available in all cases, financial data of AY 2006-07 and AY 2005-06 was also considered, along with interi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibed formula. 8. Assessee filed its objections with the DRP on the additions proposed by AO in the Draft Order. As per the directions issued DRP has principally agreed with the approach adopted and contentions of the TPO/AO and has upheld the Draft Order on all issues except for providing relief on two comparables objected by assessee. Aggrieved by the AO/DRP order, assessee has preferred appeal before the Tribunal. 9. We have heard the learned counsel for the assessee, Shri Rajan Vora and the learned Departmental Representative Sri D. Sudhakar Rao in detail. The assessee has placed paper-book 1 containing pages 1 to 401 and Paper Book 2 containing pages 402 to 600. The assessee is aggrieved in grounds No.1 to 12 on the TP adjustments made. In addition to the TP adjustments, there are other issues on the corporate tax matters which are considered in the course of this order. 10. Even though assessee has raised various objections on the rejection of its Transfer Pricing documentation, rejection of multiple year data, obtaining information under S.133(6), use of additional filters, etc., the arguments are confined to selection of comparables and risk adjustment. In the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R Systems International Ltd. (seg.) 5.99% 17. Spanco Ltd. (seg.) 6.42% 18. Wipro BPO 40.43% 12. We have heard submissions of both the parties. The learned Counsel gave detailed chart on each of the companies that were considered as comparable by the TPO and has also explained as to why some of those companies cannot be considered as comparables. He mainly relied on the Coordinate Bench decisions in the case of Symphony Marketing Solutions India Pvt. Ltd. 38 Taxman.com 5 (Bang) dated 14.08.2013 which in turn, has relied on the ITAT, Hyderabad A Bench decision in the case of Capital IQ Information Systems India P. Ltd. 32 Taxman.com 21 dated November 23, 2012. Learned Counsel also relied on the decision of ITAT, Hyderabad B Bench in the case of Zavata India P. Ltd. vs. DCIT, Hyderabad reported at 35 Taxman.com 423 dated 07.06.2013. 13. The learned D.R. on the other hand, relied on the order of the TPO and directions of the DRP wherein the DRP has given reasons as to why the objections of the assessee to the comparables p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing 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 de- merger 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 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 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 named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it 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. 14.2.2 We have considered the submissions of the learned counsel for the Assessee. Ld Counsel submission was that this company was excluded in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench, so the same require exclusion. In the above case it was considered like this: 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 Des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee. The issue is restored to the file of the TPO. ECLERX SERVICES LTD. (seg.) : 14.4.1 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. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Hyundai Motors India Engineering P. Ltd., Hyderabad vs. ITO, Ward 2(2), Hyderabad ITA.No.1850/Hyd/2012 dated 21.02.2014, M/s. Market Tools Research P. Ltd., Hyderabad vs. DCIT, Circle 16(2), Hyderabad ITA.No.1811/Hyd/2012 dated 24.10.2013, Cognizant Technology Services P. Ltd., Hyderabad vs. ACIT, Circle 1(2), Hyderabad ITA.Nos. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related services. Further the business of this company requires skilled manpower and scientists, civil engineers, etc. Besides the above, this company also carries out R D services and own intangibles. The aforesaid facts, in our view, will take this company out of the list of comparables. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. The decision of the Hyderabad ITAT Bench in the case of Hyundai Motors India Engineering P. Ltd., Hyderabad vs. ITO, Ward 2(2), Hyderabad ITA.No.1850/Hyd/2012 dated 21.02.2014 is also similar. In view of the above, we are of the view that this company cannot be regarded as a comparable and deserves to be excluded from the list of comparables. HCL Comnet Systems Services Ltd., (Seg.) WIPRO Limited. 14.6.1 The above two companies are listed at Sl.No.13 and 20. Objecting to the aforesaid companies being treated as comparables, the learned authorised representative of the assessee submitted that HCL Comnet System is functionally different as it is engaged in the business of providing telecommunication and remote infrastructure management services. It was further submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the margins earned by the comparable companies would be comparatively more to reflect the higher level of functions and risks. It was further submitted that in the TP documentation submitted by the assessee, no risk adjustment was made as comparable selected were within the arm s length range. The assessee relied on a host of cases to submit that adjustment needs to be made to the margins of the comparables to eliminate difference on account of different functions, assets and risks. 15.1. To the extent of principles involved, we agree with the assessee s submissions that some of the comparables may be undertaking market risks/entrepreneurial risks, which are not there in the case of the assessee. However, the issue boils down to quantification of such adjustment. In the written submissions, the assessee based on the decision of the ITAT Bangalore in the case of Philips Software Centre Private Ltd. Vs. ACIT (119 TTJ 721)(Bang), which provided for 4.5% of the risk adjustment as the difference between the average prime lending rate and average bank rate, as the basis. Since this working was not accepted by the ITAT Mumbai Bench in the case of Willis Processing Services India Priv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rking out the operative costs/operative margins, and it is the request that the amounts of reimbursement should be excluded for this purpose. Assessee relied on the decision of the Delhi Bench of the Tribunal in the case of DCIT V/s. Cheil Communications India P. Ltd. (2010 TII 60 ITAT DEL TP) and the coordinate bench decision of the Tribunal in the case of Four Soft Ltd. V/s. DCIT (ITA No.1495/Hyd/2010)(142 TTJ 358). 16.1 After considering the rival submissions and following the principles laid down in the decisions of the Tribunal cited above, we are of the opinion that reimbursement costs should be excluded as they do not involve any functions to be performed so as to consider it for profitability purposes. In the case of Four Soft Ltd. Supra, Hyderabad Bench of the Tribunal considered this issue and held as under- 15. We have considered the rival submissions and perused the material on record. First, we will take up the issue relating to the adjustments made by the assessing officer in respect of the international transactions with its associated enterprises in the software development services. It is the contention of the assessee that bad debts incurred by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we direct the Assessing Officer /TPO to exclude the reimbursement costs while working out the operating costs. This ground is considered allowed. 17. In aforesaid view of the matter, we direct the Assessing Officer to determine the ALP keeping in view the directions given by us hereinbefore in respect of each of the comparables specifically objected to by the assessee. Assessee s grounds 1 to 12 are partly allowed. 18. Some of the legal issues raised in the grounds on this TP issue are not agitated before us, as exclusion of some of the comparables only were contested and by excluding them, the PLI determined from the rest of the comparables may fall within permissible range as per proviso to S.92C(2). Some of the issues also become academic in nature, if the ultimate ALP determined is within the permissible range of the assessee s PLI. However, this aspect cannot be examined by us, as the TPO was directed to verify other adjustments required, and therefore, we hold that it is premature to consider the grounds raised in this behalf. The Assessing Officer /TPO is directed to give effect to the provisions of S.92C, after deciding the PLI and ALP and then arrive at proper conc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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