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2015 (6) TMI 805 - ITAT PUNE

2015 (6) TMI 805 - ITAT PUNE - TMI - Transfer Pricing adjustment - addition made to the value of international transaction entered into by the assessee with its associated enterprise in respect of Provision of Information Technology Enabled Service - selection of comparable - Held that:- Accentia Technologies Ltd. - As during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hol .....

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tomer 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.

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 .....

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st 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 the learned Assistant Commissioner of Income Tax, Circle 11(2), Pune ["ACIT"] under section 143(3) r.w.s. 144C of the Income-tax Act, 1961 ["the Act'] in pursuance of the directions of the .....

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f Information Technology Enabled Services ["ITES"], 2. Rejection of benchmarking done by the Appellant 2.1 The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in rejecting the benchmarking approach and methodology followed by the Appellant for benchmarking the international transaction of provision of ITES. 3. Binding directions of the DRP not followed 3.1 The learned ACIT pursuant to the directions of the learne .....

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bal Ltd. 4.4 Crossdomain Solutions Ltd. 4.5 E4e Healthcare Business Solutions Pvt. Ltd. 5. Benefit of the risk adjustment 5.1 The learned ACIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in not granting the risk adjustment. 6. Benefit of the variation / reduction of 5 percent from the arithmetic mean 6.1 The learned ACIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in .....

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llant 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 t .....

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at arm's length. It is, further, pointed out by the Ld. Authorized Representative for the assessee that the DRP had followed its order of earlier year in upholding that an adjustment needs to be made to the value of international transactions entered by the assessee with its associated enterprises in view of the assessee s margin being not comparable with the margin of the said comparables selected by the TPO. 4. The Ld. Departmental Representative for the Revenue placed reliance on the orde .....

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rendered ITES to its associated enterprise i.e. Apatara Inc.. During the year under consideration, assessee had provided E-learning and content management services (including IT enabled services) to its associated enterprises. The dispute arising in the present appeal is with regard to determination of arm's length of the aforesaid international transactions of providing IT enabled services to its associated enterprise. Admittedly, the assessee had applied Transactional Net Margin (TNM) Meth .....

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he determination of adjustment to be made under section 92CA(3) of the Act and subsequently the Assessing Officer re-worked the adjustment at ₹ 3,36,97,885/-, and added the same to the income of the assessee, against which assessee is in 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. (Formerl .....

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4.2 Coral Hub Ltd.; 4.3 Cosmic Global Ltd.; 4.4 Crossdomain Solutions Ltd.; and, 4.5 E4e Healthcare Business Solutions Pvt. Ltd. 8. However, while arguing the appeal, the submissions were against selection of four comparables i.e. (i) Accentia Technologies Ltd.; (ii) Coral Hub Ltd.; (iii) Cosmic Global Ltd.; (iv) Crossdomain Solutions Ltd. and no submissions were made in respect of the comparable E4e Healthcare Business Solutions Pvt. Ltd.. The case of the assessee before us was that the said f .....

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raised in the present appeal. The issue before the Tribunal was in respect of exclusion of four comparables (i) Accentia Technologies Ltd.; (ii) Coral Hub Ltd.; (iii) Cosmic Global Ltd.; (iv) Crossdomain Solutions Ltd. and also in respect of inclusion of two comparables in the final set of comparables. However before us, in the year under appeal the limited issue is in relation to exclusion of four comparables and there is no issue raised in respect of inclusion of any comparables. 10. The firs .....

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Hub Ltd. could not be selected as a comparable. The Relevant findings of the Tribunal are as under :- 16. The second concern, which is sought to be excluded from the list of comparables is Coral Hubs Ltd. (formerly Vishal Information Technologies Ltd.). In para 18.3 of the 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 assesse .....

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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 be replica of each other. 17 .....

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es Pvt. Ltd. vs. ACIT, (ITA No.1624/Hyd/2010). 18. We have considered the submissions of the Ld. Representative for the assessee as also the stand of the Revenue as emerging from the order of the TPO. We find that the inclusion of the Coral Hubs Ltd. as a comparable concern was a subject-matter of consideration by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) in circumstances which are similar to those before us. The Bangalore Bench of th .....

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was considered by 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 that since Vishal Information Technologies Ltd is outsourcing most of its work it ha .....

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s 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 .....

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Print on Demand in F.Y. 2007-08. In the case of Capital IQ Information Systems India (P.) Ltd. (supra), the ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:- 'IV. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): 16. The 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 bus .....

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his 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 .....

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prints upon clients request, concluded as follows- "18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped from the final list of comparables." In case of Maersk Global service Centre India (P.) Ltd. (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- "Insofa .....

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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 thei .....

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efore, the employee cost would definitely be more than 25% of the total expenses, it cannot be said that the said filter is not applicable to ITES segment, where comparably less skilled employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employee cost .....

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vide order dated 31.10.2014 had also rejected M/s Coral Hub Ltd. (formerly known as Vishal Information Technologies Ltd.) as a comparable. The relevant finding of the Tribunal vide order dated 31.10.2014 (supra) is as under :- 45. We have heard the rival contentions and perused the record. In the TP study carried out by the TPO in the ITES segments, fresh search criteria were applied by the TPO and list of comparables which were not selected by the assessee were picked up in the TP study and the .....

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he said company was providing IT enabled services 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 .....

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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 books. It has also been ascertained by referring to the Annual Report of the said concern that it is engaged in providing agency services by way of outsourcing the services to third party vendors and acting as an intermediary between the final customer a .....

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ayments made by the said concern for data entry and vendor payments, personnel costs and sales. It is, therefore, contended that the said concern is functionally dissimilar to that of the IT-Enabled services segment of the assessee. It has also been argued that the said concern has earned supernormal profits as high as 59.19% and therefore, the same is not includible in the list of comparables so as to avoid skewing of the comparability analysis. On the other hand, the stand of the Revenue as br .....

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the concern at para 7 of the said Notes at 86.92%, which breaches the RPT filter. Furthermore, the functional profile of the said concern brought out by the assessee also reveals differentiation in the activity profile. The TPO, in our view, has not appreciated the qualitative difference in the functions performed by the said concern as sought out to be brought out by the assessee. Considering the aforesaid, we therefore, find that the assessee was justified in ascertaining that the said concern .....

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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 .....

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ionally different activities. It was pointed out that the said concern is engaged in providing medical transaction, billing and coding services, application development & customization (segmental data not available). Moreover, it was contended that the sales/turnover of the said concern was more than ₹ 50 crores for the year under consideration which did not meet with turnover filter applied by the assessee. On this point, it was pointed out that the assessee had selected sales/turnove .....

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resentative for the assessee has reiterated the submissions put-forth before the TPO in order to justify exclusion of the said concern from the list of comparables. In particularly, it has been pointed out that for the very same assessment year, the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. vs. ITO, (2013) 38 taxmann.com 55 (Bang.) has excluded the said concern from the list of comparables in a similar situation following the decision of the Hyde .....

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of Symphony Marketing Solutions India Pvt. Ltd. (supra) is squarely applicable to the present case also. The aforesaid Benches of the Tribunal found that during the year under consideration there were extraordinary events that took 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 In .....

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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 Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (Indi .....

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be used as comparable in ITES segments of the assessee. 15. In view thereof, we hold that M/s Accentia Technologies Ltd. is to be excluded from the final set of comparables. 16. Similarly, the third concern i.e. Cosmic Global Ltd. was held to be not comparable by the Tribunal in its order dated 02.02.2015 (supra) in the hands of the assessee because the said concern was operating in a different business model. The relevant findings of the Tribunal are as under :- 21. The third concern, which is .....

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entative for the assessee referred to the objections raised before the DRP to point out that the said concern was liable to be excluded from the final set of comparables. Firstly, it is pointed out that the said concern was offering Accounts processing services and transcription services and was not comparable to the activities of the assessee as the said concern was into BPO and Translation services. It was also pointed out by referring to the website of the said concern that it was engaged in .....

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d 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 differe .....

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said concern was not a service provider but a recipient of the services and therefore it was rejected as a comparable. The Ld. Representative emphasized that if Ace Software Exports Limited was rejected by the TPO for having substantial software outsourcing charges then M/s Cosmic Global Ltd. also needs to be rejected for incurring a high proportion of expenditure on outsourced translation charges. 23. The Ld. CIT-DR appearing for the Revenue has primarily reiterated the stand of the TPO wherei .....

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whereas the business model of the assessee is different. In an outsourcing business model obviously the expenditure incurred on employee costs would be low in comparison to the expenditure incurred on outsourcing. Ostensibly, where IT enabled services are outsourced to a third party vendor then the margin derived by the said concern would be attributable to services rendered by the outsourced vendor. Per contra, where IT enabled services are being rendered by a concern through its own employees .....

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tion has also been upheld by the Hyderabad Bench of the Tribunal in the case of Brigade Global Services Private Limited (supra). Having regard to the aforesaid discussion, in our view, the said concern is not a good comparable to be included for the purposes of comparability analysis as it operates under a different business model which impacts operating margins. As a consequence, we direct the Assessing Officer to exclude the said concern from the final set of comparables. 17. We further find t .....

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ited 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 prece .....

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t in this regard :- 50. The next company as per the assessee which should not be taken as comparable is Cosmic Global Ltd. Admittedly, the assessee had not objected to its inclusion either before the TPO or DRP. However, the assessee challenged the exclusion of the said company as comparable before the Tribunal. 51. We find that the Special Bench of Chandigarh Tribunal in the case of Quark Systems Pvt. Ltd. (supra) had held that even if the assessee had not challenged the inclusion of the compar .....

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the companies outsourcing to vendors and held M/s. Vishal Information Technologies Ltd. to be not functionally comparable. Following the same parity of reasoning, we hold that M/s. Cosmic Global Ltd. is not functionally comparable. 18. Apart from the decision in the case of PTC Software (India) Private Limited (supra), the decision of Hyderabad Bench of the Tribunal in the case of M/s Capital IQ Information Systems (India) Pvt. Ltd. vs. Addl.CIT vide ITA No.124/Hyd/2014 dated 31.07.2014 has als .....

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otice :- 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, .....

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ute 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 accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at ₹ 7.37 crore divided into three segments, namely, Medical transcription and consultancy services at ₹ 9,90 lacs, Translation charges at ₹ 6.99 crore and Accounts BPO at ₹ .....

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her segments. 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 of ₹ 6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of .....

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10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at ₹ 27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables. " In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to excl .....

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, 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 ye .....

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ables selected by the TPO for benchmarking the international transaction of the assessee in assessment year 2008-09. The said comparable was engaged in high end KPO services and hence were claimed to be not a comparable with the assessee which was a normal ITES provider. The Tribunal accepting the said plea of the assessee in assessment year 2008-09 held the said concern was to be excluded from the final list of comparables by observing as under :- 25. The last plea of the assessee is to exclude .....

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cing services provider. Before the DRP, it was also contended that the said concern was engaged in high end KPO services which varies from a routine low end ITES provider in terms of skill set used and nature of services provided. It was also contended that the said concern has developed products for effectively servicing its customers and the same was entirely different than that of the assessee s business of rendering routine IT enabled services. At the time of hearing before us, the Ld. Repre .....

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are not very complex in nature and thus do not require highly skilled 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 K .....

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r 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 reiterated that the nature of services rendered by the said concern were falling in the category of IT enabled services which is also broadly the category of the services being rendered by the assessee. Therefore, the said concern was rightly included by the TPO in the list of comparables. 27. We have carefully considered the rival submissions. Ostensi .....

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in Solutions Ltd. ranged from high end KPO services, development of products and routine low and IT enabled services. For instant, the website extract and also the Annual report of the said concern shows that it was engaged in payroll outsourcing on a substantive scale. The Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for the very assessment year found that there was no bifurcation available for various diversified activities being carried o .....

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20. Further, the Tribunal in BNY Mellon International Operations (India) Private Limited vs. DCIT (supra), in assessment year 2009-10 had excluded the said concern as comparable by observing as under :- 12. Another plea raised by the assessee is for exclusion of Crossdomain Solutions Ltd. from the final set of comparables. In this regard, assessee canvassed before the TPO that the said concern was functionally not comparable to the activity of IT enabled services being carried out by the assess .....

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itability 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/ .....

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ecision was affirmed by the Tribunal by making the following discussion :- 3. M/s Crossdomain Solutions Ltd. This company has been rejected by the DRP on the ground that it is indulged in high skill IT services which are not comparable to the routine I.T. Enabled services. The Tribunal Hyderabad Bench in the case of M/s Market Tools Research Pvt. Ltd. in ITA No.1811/Hyd/2012 has held that this company is providing services which are in the nature of KPO. Further, the company is engaged in provid .....

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