TMI Blog2015 (3) TMI 839X X X X Extracts X X X X X X X X Extracts X X X X ..... the company are with related parties. With such high RPT, this comparable could not be considered as a good comparable. Asit C. Mehta (Nucleus Net Soft).- almost the entire revenue, i.e., ₹ 6.09 crores is from information tech nology enabled services and only a sum of ₹ 23.26 lakhs is from portfolio management service which is insignificant and in our view will not have much impact on the margins. Content development is a high end service but as held earlier on this ground alone it cannot be excluded. As there is no material to show that in case of high end services in information technology enabled services industry margins are higher than those in the low segment. Caliber Point Business Solutions Ltd. - the entire revenue for the purpose of comparison which in our view will not be appropriate. We therefore, direct that the results of only BPO segment have to be considered for the purpose of comparability and subject to the above, the inclusion of this comparable is upheld. Argument based on high segment as held earlier has to be rejected. Cosmic Global Ltd. - the main revenue, i.e., ₹ 4.05 crores is from translation business where as revenue from medic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, data of current year and upto past two years in certain circumstances can only be considered and not the data of the subsequent year. It has not been shown before us that profit this year was exceptionally high compared to the last year due to some extraordinary factor, which affected the comparability. The argument raised is therefore rejected. With these observations we direct the Transfer Pricing Officer/Assessing Officer to verify the actual activities of the company from the annual account of the relevant year and include the same if it is found to be engaged in information technology enabled services activities. Mold Tek Technology Ltd. - the company is a good comparable subject to the verification of merger aspect and its impact on functional comparability. R Systems International Ltd. (Seg.) - the assessee has also a BPO division for which segmental results are available. The Transfer Pricing Officer has also taken only BPO segment for the purpose of comparability. We have already held that the company could not be excluded only on the ground of high end services. We hold that this company has to be included as a good comparable Vishal Information Technologi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party transactions more than 15 per cent. has to be excluded as comparable. Infosys BPO Ltd. - reject the argument advanced based on high marketing expenses and branding and as regards the quality of employees for exclusion of Infosys BPO Ltd. and accordingly hold that this has to be accepted as a good comparable. Wipro Ltd. (Seg.) - uphold the inclusion of this comparable by the Assessing Officer/the Transfer Pricing Officer for the same reasons given in case of Infosys BPO Ltd. .Maple E Solutions - there is also no material to show that this company had merged with Triton Corp. Ltd. in the relevant year. We accordingly, reject the argument raised based on merger. We are therefore, unable to accept the order of the Commissioner of Income-tax (Appeals) excluding this comparable and therefore the order is set aside and this company is included as a comparable Triton Corp. Ltd. - The revenue from trading in IT peripherals is small at about 11 per cent. which in our view will not have much impact on the margin. It is also clear from the fact that the margin in case of Triton Corp. Ltd. is 34.93 per cent. which is almost similar to the margin in case of Maple E Solutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the file of the Assessing Officer/the Transfer Pricing Officer for working out the working capital adjustment as per OECD guidelines and after allowing the opportunity of hearing to the assessee. Adjustment claim by the assessee on account of linked cost and other cost incurred by the associated enterprise on behalf of the assessee - Held that:- We agree with the submission of the learned Commissioner of Income-tax (Departmental representative) that adjustment on account of linked cost and other cost incurred by the associated enterprise on behalf of the assessee is not justified as the margins are unaffected in case these costs were incurred by the assessee. The claim is rejected and the order of the Commissioner of Income-tax (Appeals) on this point is upheld. Benefit of +/-5 % deviation in the computation of margin - Held that:- In this case proceedings were pending before the Assessing Officer/the Transfer Pricing Officer as on October 1, 2009. Therefore, the assessee is not entitled to the benefit of ± 5 per cent. as the arm's length price determined has exceeded the transfer price by more than 5 per cent. We therefore see no infirmity in the order of the Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33.07 (1.42) -4.29% 7 Transwork Information Services Ltd. 176.03 21.12 12.00% 8 Sparsh BPO Services Ltd. 81.70 5.76 7.05% 9 HTMT Global Solution Ltd. 253.16 12.32 4.87% Arithmetic mean 6.10% 3. The assessee submitted that the price charged by the assessee from the associated enterprise was cost plus a 7 per cent. mark-up. It was pointed out that margin on operating cost in case of comparables selected by it was 6.10 per cent. The assessee also submitted that certain costs such as linked cost and equipment cost had been incurred by the associated enterprise on behalf of the assessee and therefore in case the adjustments were made in relation to such costs, the margin of the assessee on operating cost would be 15.16 per cent. The Transfer Pricing Officer however conducted his own search ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e E solutions Ltd. 12.21 34.05 20. Mold-Tek Technologies Ltd. 11.4 113.49 21. R Systems International Ltd. (Seg.) 17.34 20.18 22. Spanco Ltd. (Seg.) 35 25.81 23. Triton Corp Ltd. 53.37 34.93 24. Vishal Information Technologies Ltd. 30.6 51.19 25. Wipro Ltd. (Seg.) 939.78 29.7 Arithmetic mean 33.09 4. In response to the new comparables selected by the Transfer Pricing Officer, the assessee submitted that Allsec Technologies and Transwork Information Ltd., were already selected by the assessee in its comparables. The assessee also submitted that Spanco was comparable to the case of the assessee. In respect of the other companies, it was submitted that quite a fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne comparables, eight from the list of comparables selected by the assessee and twenty three new comparable selected by him (excluding two common comparables) and computed the mean margin of these thirty one comparables at 25.25 per cent. as per details given below : 1 Allsec Technologies Ltd. 27.98% 2 Ask Me Info Hub Ltd. 0.34% 3 Godrej Upstream Ltd. 2.56% 4 NIIT Smartserve Ltd. 4.10% 5 Nipuna Services Ltd. 0.34% 6. Transworks Information Services Ltd. 12.00% 7. Sparsh BPO Services Ltd. 7.05% 8. HTMT Global Solution Ltd. 4.87% 9 Accentual Technologies 38.26% 10 Apex Knowledge Solutions P. Ltd. 12.83% 11 Apollo Healthcare Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions before the Commissioner of Income-tax (Appeals). The first objection was regarding applicability of transfer pricing provision in the case of the assessee whose income was exempt under section 10A of the Income-tax Act. It was submitted that the assessee had no advantage in transferring profit to low tax jurisdiction as the income of the assessee was exempt. The assessee placed reliance on the decision of the Tribunal of the Bangalore Bench in the case of Philips Software Centre P. Ltd. v. Asst. CIT [2008] 26 SOT 226 (Bangalore), in which it was held that in case the income of the assessee was exempt under section 10A, the transfer pricing provision would not be applicable. The Assessing Officer, however, did not accept the contentions raised. It was observed by him that in case the assessee had entered into international transactions and the transfer pricing provisions were applicable, then adjustment had to made as per law and it was not necessary to go to the intentions behind the regulations and the Assessing Officer was not required to prove that there was any manipulation by the assessee in shifting the profit outside India. The Commissioner of Income-tax (Appeals) also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 51.19% 8.1. The assessee requested that the above exceptionally high profit cases should be excluded. The assessee placed reliance on several decisions of the Tribunal in support of the said proposition. The Commissioner of Income-tax (Appeals) however, did not accept the contentions raised. It was observed by him that the high/low profit alone was not a factor for excluding the comparables and only in cases where such high/low profit was on account of factors affecting to the comparability of the companies, these cases could be excluded. The Commissioner of Income-tax (Appeals) placed reliance on the decision of the Mumbai Bench of the Tribunal in the case of Deputy CIT v. BP India Services P. Ltd. [2011] 48 SOT 253 in I.T.A. 4425/Mum/2013. The Commissioner of Income-tax (Appeals), accordingly, rejected the plea of the assessee to exclude the above four comparables on the ground of high profit margin alone. 9. The assessee also raised objections on the ground of functional comparability. It was submitted that out of the twenty three companies selected by the Transfer Pricing Officer, 21 were functionally not comparable with the assessee as they were not en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned that several companies selected by the Transfer Pricing Officer were in information technology enabled services/BPO segment and therefore these were functionally comparable. The Commissioner of Income-tax (Appeals) also observed that the assessee had submitted functional details of the companies on the basis of the details available on the website which was not correct as details only from audited accounts should be taken. After considering the details as per audited accounts, the Commissioner of Income-tax (Appeals) observed that in many cases functions of the company had been mentioned as computer software but in fact these were not in the development of computer software. He referred to Accentia Technologies Ltd. which had most of the revenue from medical transcriptions and therefore it was not a software company. Similarly Apex Knowledge Solution Ltd. was engaged in contact management and not providing any computer software services. The assessee had mentioned that Genesys International Corporation Ltd. was providing computer software services but actually the company was helping in the management of information creation flow and analysis through information technology and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no separate information technology enabled services segment, and, therefore, not comparable. 6. Maple E Solutions Ltd. This company was acquired by Triton Corp Ltd. with effect from January 1, 2007. Therefore non-comparable on the same ground on which Triton Corp Ltd. was excluded. Thus this company was also to be excluded from the comparables. 11. The assessee also pointed out errors in the margin of comparables computed by the Transfer Pricing Officer. It was pointed out that based on data available in the public domain, margins were found to be different than those computed by the Transfer Pricing Officer on the basis of information obtained under section 133(6) in case of four companies, i.e., Flextronics Software (Seg), HCL Comnet (Seg), Moldtek Technologies Ltd. and R. Systems International Ltd. It was pointed that in case correct margin was taken the mean margin of comparables would come to 29.26 per cent. against 30.75 per cent. computed by the Transfer Pricing Officer. 11.1. The Commissioner of Income-tax (Appeals) after considering the submissions of the assessee directed the Transfer Pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice. The Commissioner of Income-tax (Appeals), therefore, rejected the claim of the adjustment made by the assessee. 13. The assessee also claimed the benefit of 5 per cent. deviation to the on sale price as provided in the proviso to section 92C(2). The assessee referred to several decisions of the Tribunal in support of the claim. The Commissioner of Income-tax (Appeals) however observed that the second proviso to section 92C(2) was amended by the Finance Act, 2009 to provide that the standard deviation can be allowed only if the arm's length price was within the 5 per cent. of the transfer price. It was further clarified by the Finance Act, 2012 that the said amendment would apply to all assessments and reassessments pending before the Assessing Officer as on October 1, 2009. Since in this case, the proceedings were pending before the Assessing Officer/the Transfer Pricing Officer as on October 1, 2009 and the arm's length price determined by the Assessing Officer exceeded the transfer price by more than 5 per cent., the Commissioner of Income- tax (Appeals) did not allow the claim of the assessee. 14. The assessee further argued before the Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... six comparables selected by the Transfer Pricing Officer. 16. We first deal with the various disputes raised by the assessee in the appeal. The first dispute is regarding the selection of comparables and the decision of the Commissioner of Income-tax (Appeals) to uphold the selection of 15 comparables selected by the Transfer Pricing Officer and exclusion of one of the comparables selected by the assessee, i.e., Optimus Global Services Ltd. The learned authorised representative submitted that the 15 comparables selected by the Transfer Pricing Officer and upheld by the Commissioner of Income-tax (Appeals) were operating in different segments of information technology enabled services and were not providing services similar to that of the assessee, which was running a voice based call centre. The comparables selected by the Transfer Pricing Officer provided different services such as software services, geographical information service, medical transcription service, knowledge process outsourcing services etc., which were not comparable to the case of the assessee. It was pointed out that under rule 10B(2) the comparability of international transaction with uncontrolled transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to mean : (i) Back office operation ; (ii) Call centres ; (iii) Content development or animation ; (iv) Data processing ; (v) Engineering and design ; (vi) Geographic information system services ; (vii) Human resource services ; (viii) Insurance claim processing ; (ix) Legal database ; (x) Medical transcription ; (xi) Payroll ; (xii) Remote maintenance ; (xiii) Revenue accounting ; (xiv) Support centres ; and (xv) Website services. 17.1. The learned Commissioner of Income-tax (Departmental representative) argued that the services provided by the comparables selected by the Transfer Pricing Officer fell in the category of information technology enabled services. It was pointed out that in a particular category of service no distinction can be made between high-end and low-end services as argued by learned authorised representative as in transactional net margin method which the assessee had followed, standard of comparability was relatively relaxed and broad similarity of function was required. It was also submitted that the comparables selected by the Transfer Pricing Officer broadly performed functions similar to that of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d business to customer services 9. HTMT Global Solutions HTMT provides consultancy and development services covering business domain knowledge, technology and process in the domains of automotive, insurance, IT, customer services banking, finance and telecom 17.3. The learned Commissioner of Income-tax-Departmental representative further submitted that high profit margin or low profit margin could not be the basis for exclusion of a particular comparable, if the comparable is functionally comparable to that of the assessee. He therefore, objected to the argument of learned authorised representative to exclude the four comparables having very high profit margin starting from 50.27 per cent. to 101.77 per cent. He placed reliance on the latest decision of the Tribunal in the case of Willis Processing Services (I) P. Ltd. v. Deputy CIT in I.T.A. No.4547/Mum/2012 for the assessment year 2007-08. The learned Commissioner of Income-tax (Departmental representative) also supported the decision of the Commissioner of Income-tax (Appeals) to exclude the persistent loss making comparable, i.e., Optimus Global Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are no segmental available 3. Apollo Healthcare Ltd. Medical transcription-Medical BPO medical transcription is information technology enabled services as per notification No. 890 dated September 26, 2000 ([2000] 245 ITR (St.) 102). Medical transcription is information technology enabled services as per notification No. 890 dated September 26, 2000. In Willis Processing Services India P. Ltd. in paragraph 79 this company was excluded by the Income-tax Appellate Tribunal for the reason that there are related party transactions of 81 per cent. in this company 4. Asit C Mehta (Nucleus Netsoft) Information techno-logy enabled services/Portfolio Management Services and Investment The annual report of the company shows that the income is from information technology enabled services Content development is information technology enabled services as per notification No. #8194;890 dated September 26, 2000. 5. Caliber Point Business Solutions Ltd. Computer software-business process management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices-comprising data centre management services, end user computing services, networking services and tools and process consulting services The annual report of this company shows there are segmental results available for information technology enabled services segment which can be used for the purpose of comparison. 11. Informed Technologies India Ltd. Information technology enabled services/BPO-KPO services The annual report of the company shows that the revenue is derived from BPO activities. There is no reference in the annual accounts of the KPO activities. 12. I Services India P. Ltd. (i) Information technology enabled services/BPO-BPO unit providing back office services. Further as per the information under section 133(6) of the Act for the assessment years 2008-09 and 2009-10 the company is engaged in providing remote data services and GIS. The information collected by the Transfer Pricing Officer for subsequent year cannot be used for the current financial year since the functional profile of the company might change. GIS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to claim of exemption under sections 10A and 10B and referred to both products and services and, therefore, these could not be applied only to services. Moreover, the comparability had to be decided on the basis of characteristics of services rendered and functions performed which was not so in all the cases in the list. He referred to engineering and design services, GIS, and content development and animation appearing in the list to point out that these were totally different services involving skilled professionals, which was not so in case of call centre. It was also pointed out that if one were to go by the definition of information technology enabled services as per the notification, KPOs and BPOs which did not appear in the list have to be excluded. It was therefore urged that said classification was of no relevance to the issue under consideration. As regards the decision of the Income-tax Appellate Tribunal in the case of Actis Advisers P. Ltd. v. Deputy CIT [2012] 20 ITR (Trib) 138 (Delhi) referred to by the learned Commissioner of Income-tax-Departmental representative, it was submitted that facts of the case were different as the nature of service was consultancy and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India) P. Ltd v. Deputy CIT (International Taxation) in I.T.A. No. 1961/HYD/2011 for the assessment year 2007-08 [2013] 25 ITR (Trib) 185 (Hyd) noted that this company outsourced its work to third parties and, therefore, it had different model. Moreover, the said company had employed 75 seats (utilised 60 seats) as was clear from the order in the case of Willis Processing Services (I) P. Ltd. v. Deputy CIT [2014] 30 ITR (Trib) 39 (Mum). whereas the assessee had 2840 seats. It was pointed out that number of seats was nothing but asset employed and, therefore, because of huge difference in asset employed, the company should be excluded. He also referred to the decision of the Tribunal in the case of Asst. CIT v. Maersk Global Service Center (India) P. Ltd. I.T.A. No. 3774/Mum/11 [2012] 14 ITR (Trib) 541 (Mumbai) in which it was held that the company running on its own account cannot be compared to the company that was outsourcing work. It was therefore, submitted that this case was also not comparable. In relation to I Services India P. Ltd. it was submitted that though the profit in this year was 50.28 per cent. the profit in the next year was 9.66 per cent. which showed that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the assessee itself was placed. 20. We have perused the records and considered the rival contentions carefully. The dispute is regarding selection of comparables for benchmarking the international transaction entered into by the assessee. The assessee had selected 9 comparables as unrelated parties for comparing the transaction in case of the assessee. The Assessing Officer further selected 23 more comparables out of which 2 comparables, i.e., Spanco and Flextronics (Seg.) were accepted by the assessee as comparable and the 21 comparables were disputed by the assessee. Out of these 21 cases, the Commissioner of Income-tax (Appeals) has accepted the claim of the assessee in six cases holding that these cases are not comparable to the case of the assessee on different grounds. The remaining 15 comparables selected by the Transfer Pricing Officer have been upheld by the Commissioner of Income-tax (Appeals) as comparables to the case of assessee The assessee has disputed the said order of the Commissioner of Income-tax (Appeals). 20.1. The assessee has followed transactional net margin method for making the transfer pricing adjustment in relation to the international transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the characteristics of the services rendered are similar. Viewed from this angle, we find that all companies which are in information technology enabled services segment are providing similar services and the difference is in the internal working which is reflected through difference in qualifications and skills of the employees. In all these cases employees are the main assets who are providing various services using information technology (IT). The main difference is the skills/qualification of the employees engaged who are providing the services. The employees are the main assets of these companies and therefore, the difference is mainly in the assets employed. Therefore, we have to examine whether difference in the skill/qualification of the employees or their payment structure is going to affect the comparability in any significant manner. The transactional net margin method is tolerant to minor differences and, therefore, even if there are some differences unless they materially affect the margin, the comparables could not be excluded. This is clearly provided in rule 10B(3) as per which an uncontrolled transaction has to be taken as comparable to the international transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... knowledge is also applied. The Tribunal therefore, held that the KPO could not be excluded from the comparability list. The Tribunal in the case of Actis Advisers P. Ltd. [2012] 20 ITR (Trib) 138 (Delhi) have also held that any further dissections of information technology enabled services will not be proper as it would be a very subjective exercise. Even in the case of ITO v. CRM Services India P. Ltd. [2011] 48 SOT 41 (Delhi) (URO) on which the assessee has relied, there is no finding that margin in case of high end segment of information technology enabled services is higher. 20.4. We also note that even in the case of comparables selected by the assessee details of which have been given in paragraph 3 of the earlier order, there is wide fluctuation in the margins of the companies ; the lowest margin, i.e., 0.34 per cent. in case of Ask Me Info Hub Ltd. and the highest margin as 27.98 per cent. in case of Allsec Technologies Ltd. Obviously the cases selected by the assessee are not identical otherwise there would not have been so wide variation excluding the highest margin and the loss case, the average margin of other comparables of the assessee comes to only 4.5 per cent. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt available for information tech nology enabled services activity. This company had also been excluded by the Tribunal in the case of Willis Processing Services (I) P. Ltd. v. Deputy CIT [2014] 30 ITR (Trib) 39 (Mum). We therefore, hold that this company is not a good comparable and has to be excluded. 21.3. Apollo Helathcare Ltd. This company is also providing information technology enabled services. The objection of the assessee is on the ground that the services provided are in the high end segment of information technology enabled services, i.e., medical transcription and medical BPO. In our view, as held earlier, on this ground alone the comparable could not be excluded. However, it has been brought to our notice that 81 per cent. of the transactions in case of the company are with related parties. With such high RPT, this comparable could not be considered as a good comparable. This comparable had also been considered by the Tribunal in the case of Willis Processing Services (I) P. Ltd. v. Deputy CIT [2014] 30 ITR (Trib) 39 (Mum). and had been excluded on this ground. We therefore, hold that this comparable has to be excluded. 21.4. Asit C. Mehta (Nucleus Net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluded from the list of comparables. We accordingly direct the Assessing Officer to exclude this comparable. 21.7. Datamatics Financial Services Ltd. (Seg). The assessee has objected to this comparable on the ground that functions are different. The perusal of annual report of the company placed on record shows that this company is deriving substantial revenue from processing and printing and export of information technology enabled services. About 50 per cent. of the revenue is from printing services. The segment wise result from information technology enabled services is not available. Therefore in our view, this company could not be considered as a good comparable and accordingly we direct the Assessing Officer to exclude this company from the list of comparables. 21.8. Eclerx Services Ltd. This company is engaged in the BPO business which is an informa tion technology enabled service. The learned authorised representative for the assessee has argued against the company on the ground of super profit margins, which according to him makes the company non comparable. He has placed reliance on the decision of the Tribunal in the case of Capital IQ Information S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company on the ground that it is engaged in activities different from that of the assessee, i.e., telephone communication in addition to information technology enabled services. The learned Departmental representative has placed on record the annual report of the company to point out that segment wise result for information technology enabled services is available, which has been used by the Transfer Pricing Officer for the purpose of comparison. The learned authorised representative for the assessee however, pointed out that company had related party transaction up to 21.52 per cent. and on this ground this company had been excluded in the case of Willis Processing Services (I) P. Ltd. v. Deputy CIT (supra). We agree that related party transaction affect the comparability and in case of high RPT the company could not be really considered as independent unrelated party. In the case of Willis Processing Services India P. Ltd. the Tribunal held that related party transaction can be accepted only up to 15 per cent. We therefore accept the plea of the assessee to exclude this comparable. 21.11. Informed Technologies India Ltd. The assessee has objected to this comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arability. The argument raised is therefore rejected. With these observations we direct the Transfer Pricing Officer/Assessing Officer to verify the actual activities of the company from the annual account of the relevant year and include the same if it is found to be engaged in information technology enabled services activities. 21.13. Mold Tek Technology Ltd. The company has a separate IT division in which it is providing knowledge process outsourcing (KPO) services for which segmental results are available and which had been compared by the Transfer Pricing Officer with the case of the assessee. The assessee has objected to this comparable on the ground that it is working in the high end segment of information technology enabled services which involves highly skilled employees and, therefore, is not comparable to the assessee. Objections have also been raised on the ground of very high profit margin of the assessee. The learned authorised representative has referred to the annual report of the company placed on record in which it has been pointed out that the assessee during the year started engineering services to high rise buildings for clients in the US and Canada w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal representative) has placed on record the relevant portion of the annual report of the company which shows that the assessee has also a BPO division for which segmental results are available. The Transfer Pricing Officer has also taken only BPO segment for the purpose of comparability. We have already held that the company could not be excluded only on the ground of high end services. Therefore, following our decision in earlier part of this order, we hold that this company has to be included as a good comparable and accordingly uphold the order of the Commissioner of Income-tax (Appeals) on this point. 21.15. Vishal Information Technologies Ltd. The assessee has objected to the inclusion of this comparable on the ground that the company is engaged in high end BPO services and other functions such as digital library and print on demand. It has also been argued that the company should be excluded on the ground of high profit margin and high turnover as the assessee had 28.40 seats compared to 75 seats held by that company. The learned Commissioner of Income-tax (Departmental representative) has however placed on record the annual report of the company for the relevant y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax (Appeals) have excluded this comparable on the ground that the company was incur ring persistent losses for last three years. The argument of the assessee for inclusion of this comparable was that this company was engaged in the same business of call-centre and had been set up in the year 2002 which was around the same time the assessee-company started business. It has been argued that losses in the business in the initial years is quite normal and it has also been pointed out that in the next assessment year, i.e., assessment year 2008-09, the company has started making profit. We have carefully considered the various aspects of the matter. We have already held in the earlier part of this order that only loss or super normal profit could not be the sole ground for exclusion of a particular comparable unless there are some factors such as abnormal business conditions which affected the functioning of the company. However, in case, a company is making continuous losses year after year, it definitely reflects some abnormal circumstances and, therefore, the Tribunal in the case of Brigade Global Services P. Ltd. v. ITO in I.T.A. (1484/HYD/2010) held that the company cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each company separately for examination and analysis with a view to decide its comparability to the case of the assessee. 24.1 Bodhtree Consulting Ltd. (Seg.) The Transfer Pricing Officer had selected the company as an informa tion technology enabled services company holding it comparable to the case of the assessee the Commissioner of Income-tax (Appeals) held that the company was engaged in software business and therefore functionally not comparable and has thus excluded it. The learned Commissioner of Income-tax (Departmental representative) has placed some fresh materials before us, which has been collected by the Revenue under section 133(6) of the Income-tax Act. The information gathered shows that the assessee in addition to developing software, is also engaged in data cleansing services, the segmental results for which are available which is an information technology enabled services activity. The learned authorised representative for the assessee pointed out that there is some element of software develop ment also involved in providing such services. We find that this issue had come up for consideration by the Tribunal in the case of Willis Processing Services (I) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and had not been accepted. The learned authorised representative, however, pointed out that brand was a valuable asset which as per rules is one of the factors for deciding the comparability. It was pointed out that this aspect had not been considered by the Tribunal in the case of Actis Advisers P. Ltd. Besides, it has also been argued that the companies in the high end BPO segment of information technology enabled services on which ground also the company shall be excluded. It has been further argued that in the transfer pricing study the assessee had considered only the companies whose turnover was up to ₹ 500 crores, whereas the turnover of the assessee is ₹ 649.57 crores. It has therefore been argued that the company should also be excluded on the ground of high turnover. Reliance has been placed on some decisions of Tribunal in support of the turnover filter. It was also brought to our notice that the issue whether turnover could be the basis of exclusion of a comparable has been referred to the Special Bench recently. However, both parties agreed that the comparability of the company may be decided on the basis of existing decisions. 24.3.1. The learned Depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal (supra) and reject the arguments advanced based on high marketing expenses and branding. 24.3.3. The argument based on turnover has also been examined in detail by the Tribunal in the case of Willis Processing Services (I) P. Ltd. v. Deputy CIT [2014] 30 ITR (Trib) 39 (Mum) and in the case of Capgemini India P. Ltd. v. Asst. CIT in I.T.A. No. 7861/M/2011 [2013] 27 ITR (Trib) 74 (Mumbai) and not found acceptable. In that case material in the form of graph and chart had been placed by the Department before the Tribunal to point out that there was no linear relationship between turnover and margin and it was pointed out that in many cases with rise in turnover the margin came down. The Tribunal in both the cases referred to above also noted the argument based on concept of economy scale and held that it was relevant to manufacturing concerns and not applicable to service companies. The Tribunal in the case of Capgemini India P. Ltd. v. Asst. CIT [2013] 27 ITR (Trib) 74 (Mumbai) noted that employees in service companies were no doubt, valuable assets which have to be considered as a factor for comparability. The Tribunal observed that the assets employed had two dimensio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore, this company could not be excluded on the ground of RPT. We also note that this company had become a subsidiary of Triton Ltd. with effect from January 1, 2007. There was no merger or amalgamation of the two companies. The subsidiary company remains an independent company till it is merged. Therefore argument advanced by the learned authorised representative on the ground of merger could not be accepted. Further, even if there was merger, as held by the Tribunal in the case of Willis Processing Services (I) P. Ltd. v. Deputy CIT [2014] 30 ITR (Trib) 39 (Mum), only on the ground of merger, the comparable could not be excluded. It has to be examined if there are functional differences arising on account of merger. In this case, both companies are in the same line of business and, therefore, even if they had merged, it will not impact the comparability. It has been argued that merger and amalgamation gives the benefit of synergies and operational efficiencies which increases the margin. It may however be pointed out that after merger it takes sometime for rationalisation of workforce, etc., and, therefore, effects of synergies. etc., cannot be seen in the first year of me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also disputed the decision of the Commissioner of Income-tax (Appeals) to reject the claim of the assessee that no transfer pricing adjustment could be made as income of the assessee was exempt under section 10A of the Income-tax Act. The assessee has placed reliance on the decision of the Bangalore Bench of the Tribunal in the case of Philips Software Centre P. Ltd. v. Asst. CIT [2008] 26 SOT 226 (Bangalore) in which it has been held that in case the income of the assessee was exempt transfer pricing provisions could not be applied. The learned Commissioner of Income-tax (Departmental representative) has, however, pointed that the said decision of the Tribunal has been stayed by the hon'ble High Court of Karnataka in I.T.A. No. 49 of 2008. Therefore, the argument based on decision of the Bangalore Bench of Tribunal cannot be accepted. The argument of the learned authorised representative is that the purpose of the transfer pricing provisions is to ensure that the companies do not transfer profit to low tax jurisdiction through related parties for reducing tax. In the present case, it has been pointed out that the income of the assessee was exempt and, therefore, there was no t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the value added by the tested party. The method is therefore, suited to certain manufacturing or other asset intensive activities. He also referred to United Nations Practice Manual on transfer pricing provision paragraph (6.3.7.3) in which it has been mentioned that ROCA/ROA are typically used for manufacturing activities. He has also placed reliance on the decision of the Delhi Bench of the Tribunal in the case of Johnson Matthey India P. Ltd. in I.T.A. No. 344/ Del/2010 in which the Tribunal observed that profit level indicator selected should be appropriate to the transactions under consideration. The assessee in that case was engaged in the manufacturing of automobile exhaust catalyst and making import of raw material from its associated enterprise. The Tribunal held that the return on capital employed was not an appropriate profit level indicator in the case. The learned authorised representative on the other hand submitted that even the call centre activity is not possible without sophisticated equipments such as computers and telecommunication systems. Therefore, it has been argued that like manufacturing organisation, it also has to employ plant and machinery for carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be appropriate to make working capital adjustment to improve the comparability. Further we agree with the submissions of the learned Commissioner of Income-tax (Departmental representative) that while making the working capital adjustment guidelines framed by OECD must be followed. We therefore, do not uphold the order of the Commissioner of Income-tax (Appeals) rejecting the working capital adjustment. The issue therefore, is restored to the file of the Assessing Officer/the Transfer Pricing Officer for working out the working capital adjustment as per OECD guidelines and after allowing the opportunity of hearing to the assessee. 27.2. As regards the adjustment claim by the assessee on account of linked cost and other cost incurred by the associated enterprise on behalf of the assessee, it has been argued by the learned authorised representative that in case the associated enterprise had not incurred the cost, the assessee will have to incur it and the margin in that case may have been different. The learned Commissioner of Income-tax (Departmental representative), on the other hand submitted that the assessee was following cost plus 7 per cent. mark-up . Therefore in cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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