TMI Blog2015 (6) TMI 805X X X X Extracts X X X X X X X X Extracts X X X X ..... providing technical support to its AEs. Cosmic Global Ltd. needs to be rejected on the ground that it was engaged in BPO and Translation services whereas assessee was an ITES provider, and therefore concern was functionally dissimilar. Crossdomain Solutions Ltd. was not comparable with the assessee as the said concern was engaged in the payroll activity apart from being engaged in KPO services. Also the said concern was identified as a Knowledge Process Outsourcing services provider (KPO) and not a simple business process outsourcing services provider, thus is to be excluded from the final set of comparables. - ITA No.267/PN/2014 - - - Dated:- 29-4-2015 - MS SUSHMA CHOWLA AND SHRI R.K. PANDA, JJ. For The Appellant : S/Shri Ketan Ved Rugved Apte For The Respondent : Shri Mukulesh Dube, CIT ORDER PER SUSHMA CHOWLA, JM: This appeal filed by the assessee is against the order of ACIT, Circle-11(2), Pune dated 27.01.2014 relating to assessment year 2009-10 passed under section 143(3) r.w.s. 144C of the Income-tax Act, 1961. 2. The assessee has raised the following grounds of appeal:- The Appellant objects to the order dated January 27, 2014 passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law in initialing penalty proceedings section 271(1) (c) of the Act. 8. Levy of interest obligation on account of transfer pricing adjustment 8.1 The learned ACIT has erred on the facts and in law by levying interest under section 234B of the Act on account of the unanticipated adjustments made by the learned TPO. 8.2 The Appellant pleads that the shortfall in advance tax has resulted in view of the adjustments which have been objected in the grounds above and accordingly is consequential in nature. 9. Each one of the above grounds of appeal is without prejudice to the other. 10. The Appellant reserves the right to amend, alter or add to the grounds of appeal. 3. The Ld. Authorized Representative for the assessee, at the outset, pointed out that the issue of transfer pricing arising in the present appeal is similar to the issue raised by the assessee before the Tribunal in assessment year 2008-09. It is, further, pointed out by the Ld. Authorized Representative for the assessee that in case the ground of appeal No.4 is adjudicated and the comparables selected by the TPO are excluded as has been found to be non-comparable by the Tribunal in the earlier year, then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n appeal. The TPO had selected the following set of comparables :- Sr.No. Name of the company OP/OC 1 R Systems International Ltd. (BPO Segment) 14.08 2 Accentia Technologies Ltd. 43.42 3 Cross Domain Solutions Ltd. 29.40 4 E4e-health Solutions Ltd. (Formerly Nittany Outsourcing) 33.31 5 Cosmic Global Ltd. 40.75 6 Eclerx Services Ltd. 46.92 7 Vishal Information Technologies Ltd. 35.48 8 Microgenetics 1.13 Average 30.56 7. Before us, the plea of the assessee was that the TPO had erred in including (i) Accentia Technologies Ltd.; (ii) Cross Domain Solutions Ltd.; (iii) Cosmic Global Ltd.; and, (iv) Coral Hub Ltd.. The assessee by way of ground of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the TPO, the submissions of the assessee for excluding the said concern from the list of comparable have been elucidated. The plea of the assessee is that the said concern is functionally not comparable to the assessee as it is engaged in IT enabled services particularly selling and purchasing of products and goods whereas assessee is engaged into e-learning and content development activity. Secondly, it was canvassed on the basis of the Annual report of the said concern that it outsources its work to sub-vendors and therefore the business operating model of the said concern was different from that of the assessee. Consequently, the margins earned by the said concern are reflective of the functions performed by it, which are not akin to the functional profile of the assessee. The aforesaid submissions of the assessee were considered by the TPO, but rejected. The solitary ground of rejection by the TPO was that the activities of the said concern are more or less in the field of IT enabled services which is similar to that of assessee. The point made out by the Revenue on this aspect is that the similarity has to be seen on a broad perspective and that no two concerns can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited case on the issue of excluding VITL as a comparable squarely applies. This decision was followed by the decision of the co-ordinate bench of this Tribunal in the case of Netlinx India (P) Ltd in ITA No.454/Bang/2011 dt. 19.10.2012 wherein it was held that Vishal Information Technologies Ltd cannot be considered as a comparable. We, therefore, respectfully following the decision of the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd, direct the Assessing Officer / TPO to exclude Vishal Information Technologies Ltd. from the list of comparables. 15. Following the decision of the Tribunal referred to above, we hold that Coral Hubs Ltd. cannot be considered as a comparable. It may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable on the basis of detailed discussion in the TP order for the A.Y. 2007-08. In fact in A.Y. 2007-08, there was no determination of ALP and therefore there was no occasion for any order being passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library Print on Demand in F.Y. 2007-08. In the case of Capital I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observing in the following manner- Insofar as the cases of tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded. In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable.' 16. It is also further noticed that the employee cost/operating sales of this company is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%. This Tribunal in the case of First Advantage Offshore Services Ltd. v. CIT IT(TP)A No.l086/Bang/2011, order dated 30.4.2013 has taken the following view:- 36. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee's own case for the assessment year 2006-07. This Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and was also engaged in other diversified activities. Further, it has outsourced its services to third party vendor and acted as intermediary between the final customer and the vendor. The assessee on the other hand was engaged in the running of a call centre and was providing technical support to its AEs. We find that the Tribunal in assessee s own case relating to assessment year 2006-07 in ITA No.1346/PN/2010 and in assessment year 2007-08 in ITA No.1605/PN/2011 had excluded the said comparables observing as under: 30. The next point raised by the assessee is against the inclusion of Vishal Information Technologies Ltd., appearing at Item (10) in the Tabulation in para 25 as a comparable case. The TPO has discussed the issue in para 6.9.6. of the order. As per the TPO, the said concern is functionally comparable to the IT-Enabled services segment of the assessee and for that reason, the said concern has been included as a comparable for the purposes of comparability analysis. In this connection, the plea set up by the assessee is that the said concern is engaged in not only IT-Enabled services, but also in providing quality products and in the creation of animated films and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see s own case had held that the said concern was found to be operating in different functional environment and the same was excluded for the purpose of comparability analysis. Following the ratio laid down by the Tribunal in assessee s own case in assessment years 2006-07 and 2007- 08 (supra), we uphold the plea of the assessee in excluding the margins of the said concern M/s. Vishal Technologies Ltd. 12. Further, the Pune Bench of the Tribunal in BNY Mellon International Operations (India) Private Limited vs. DCIT in ITA No.23/PN/2014 relating to assessment year 2009-10 vide order dated 11.02.2015 had also held that M/s Coral Hub Ltd. is to be excluded from the final set of comparables. Following the above said precedents, we hold that M/s Coral Hub Ltd. is to be excluded from final set of comparables. 13. Now, coming to the next contention of the assessee vis- -vis M/s Accentia Technologies Ltd. that the same has been wrongly included by the TPO as a comparable concern. The Tribunal in assessee s own case vide paras 13 to 16 had held that the said concern could not be considered as a comparable. The relevant findings of the Tribunal are as under :- 13. Next, assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable. 14. We find that the Tribunal in PTC Software (India) Private Limited vs. DCIT (supra) and BNY Mellon International Operations (India) Private Limited vs. DCIT (supra) and also in M/s Capital IQ Information Systems (India) Pvt. Ltd. vs. Addl.CIT in ITA No.124/Hyd/2014 relating to assessment year 2009-10 vide order dated 31.07.2014 had held that M/s Accentia Technologies Ltd. was not a comparable in IT segment for having extra-ordinary circumstances i.e. amalgamation. The relevant finding of the Tribunal in PTC Software (India) Private Limited vs. DCIT (supra) is as under :- 47. The next objection of the learned Authorized Representative for the assessee was with regard to the inclusion of M/s. Accentia Technologies Ltd. which admittedly was engaged in developing its own software products and was rendering medical transcription services. Further, the said company during the year under consideration had made certain acquisitions which in turn affected the margins of the year of the acquisition. We find that Hyderab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointed out that the said concern has incurred a substantial expenditure of ₹ 2,86,29,348/- towards translation charges as is evident from the Annual Report of the said concern. The said translation charges are approximately 60.17% of the total cost incurred by the said concern and the employee cost comprises of merely 17.32% of the total cost. It was therefore contended that the aforesaid facts justify an inference that the said concern was not adopting the normal and routine business model for an otherwise normal ITES provider. The proportion of expenditure incurred on outsourcing and employee costs show that the said concern seems to have outsourced the functions to different vendors. The aforesaid was highlighted to point out that the operating business model of Cosmic Global Ltd. was totally different from that of the assessee. In this context, the Ld. Representative pointed out that the TPO had rejected the Ace Software Exports Limited from the list of comparables and one of the reasons ascribed was that the said concern was incurring major expenditure on software sourcing charges. The TPO in the context of Ace Software Exports Limited came to conclude that the said conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer to exclude the said concern from the final set of comparables. 17. We further find that the Tribunal in PTC Software (India) Private Limited vs. DCIT (supra) and BNY Mellon International Operations (India) Private Limited vs. DCIT (supra) and also in M/s Capital IQ Information Systems (India) Pvt. Ltd. vs. Addl.CIT (supra) while deciding the appeals of the relevant assessees in assessment years 2009-10 had held that M/s Cosmic Global Ltd. is not to be considered as a comparable. The relevant observations of the Tribunal in BNY Mellon International Operations (India) Private Limited vs. DCIT (supra) are as under :- 16. The third concern, which is sought to be excluded by the assessee is Cosmic Global Ltd.. Before the TPO also, assessee had canvassed that the said concern was functionally not comparable to the assessee. It was pointed out that the said concern is engaged into translation, transcription of data which is entirely different from the functions being performed by the assessee. The TPO has rejected the plea of the assessee by merely noticing that in the preceding assessment year 2008-09, the stated concern was selected by the assessee as a comparable co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal is worthy of notice :- 19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under- 13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the respective Benches of the Tribunal reveals that in relation to the financial year under consideration, the business model in which M/s Cosmic Global Ltd. has functioned is quite dissimilar to the business model of the assessee while carrying out the activity of an ITES provider. Moreover, none of the objections raised by the assessee have been met by the TPO on the basis of any cogent reasoning. On that count also, we find that the plea of the assessee to exclude M/s Cosmic Global Ltd. from the final set of comparables is justified. The objection of the TPO that the said concern was found comparable by the assessee in earlier year cannot be the sole basis to include the said concern in the list of comparables, in view of the aforesaid discussion. Thus, assessee succeeds on this aspect. 18. Since the said concern, M/s Cosmic Global Ltd. was operating in different business model than the assessee in the year under consideration also, the same needs to be excluded from the final set of comparables and accordingly we direct the Assessing Officer to exclude the same from the final set of comparables. Following the same parity of reasoning, we hold that M/s Cosmic Global Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d professionals to perform the functions. Unlike the outsourcing of manufacturing or routine software services, this typically involves high-value work carried out by the highly skilled staff. E-learning solution provides cannot earn high margins of profits since they primarily derive their revenue from performing functions that are not exclusively provided by them and have close substitutes in the market. Most firms providing Knowledge processing possess exclusive information, knowledge and experience which cannot be found in most of their competitors. Thus, they tend to command higher margins of profits. Low-end IT enabled service providers employ workers who have the basic knowledge and can be trained to perform the necessary functions. KPO firms earn extraordinary profits due to the highly skilled resources they employ in the form of highly-qualified professionals. 26. On the other hand, the Ld. CIT-DR appearing for the Revenue contended that the TPO as well as the DRP have rejected the plea of the assessee as the submissions were on a wrong footing. It was reiterate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the TPO that the said concern was involved in various activities which involved outsourcing, human resources, insurance, healthcare/accounting and consulting, business excellence, market research/analysis and IT services. It was pointed out that the above functions being performed by the said concern were not comparable to the activity of an IT enabled service provider undertaken by the assessee. It was also canvassed that there was no segmental profitability available from the Annual financial statement of the assessee and the said concern was not a comparable concern on the entity level. The TPO has rejected the plea of the assessee on similar grounds as taken by him for rejecting the assessee s plea for exclusion of Accentia Technologies Ltd.. 13. Before us, the Ld. Representative has relied upon the decision of the Mumbai Bench of the Tribunal in the case of DCIT vs. M/s Willis Processing Services (India) Pvt. Ltd. vide ITA No.2152/Mum/2014 dated 10.10.2014 in order to justify the exclusion of Crossdomain Solutions Ltd.. 14. We find that M/s Wills Processing Services (India) Pvt. Ltd. (supra) was a concern where the tested party was providing IT enabled services to its ..... X X X X Extracts X X X X X X X X Extracts X X X X
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