TMI Blog2015 (8) TMI 607X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational Services P. Ltd. v. Asst. CIT (2014 (10) TMI 393 - ITAT MUMBAI ) in para 13(iii) at page-14 of the order held that the promoters of these two companies were involved in fraud for earlier years and hence the financial results of these companies are distorted and cannot be relied upon and in this regard relied on several decisions rendered by the various Benches of the Income-tax Appellate Tribunal. Respectfully following the same, we direct the aforesaid two companies be excluded from the list of comparable companies chosen by the Transfer Pricing Officer. Exclusion of the following four companies from the list of comparable companies by applying the employee cost to sales filter, viz., Asit C. Mehta Financial Services Ltd., (previously known as Nucleus Netsoft and GIS Ltd.), Informed Technologies Ltd., Vishal Information Technologies Ltd. (now known as Coral Hub Ltd.) and Accentia Technologies Ltd. - Held that:- In respect of the percentage of employee cost to turnover there is dispute in the case of Asit C. Mehta about the percentage of the employee cost to turnover. In respect of Asit C. Mehta the learned Departmental representative submitted that the data processi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Pricing Officer for considering this company as a comparable are different and the objections raised by the assessee before the Transfer Pricing Officer were also different. On the facts as it transpired before the Transfer Pricing Officer and the arguments of the assessee before the Transfer Pricing Officer/Dispute Resolution Panel, we are of the view that this company was rightly regarded as comparable. Accurate Data Converters Ltd. - he request made by the assessee has to be accepted in view of the lack of opportunity provided by the Transfer Pricing Officer/Dispute Resolution Panel. Accordingly, the Transfer Pricing Officer/Assessing Officer is directed to furnish a copy of the annual report of this company to the assessee. The assessee will thereafter furnish his explanation as to whether this company can be considered as a comparable company or not. The Transfer Pricing Officer will thereafter decide the comparability of this company after affording an opportunity of being heard to this company. IServices India Ltd. - The Transfer Pricing Officer/Assessing Officer will obtain the annual report of the company for the financial year 2006-07 and also furnish the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue 64,87,05,072 Operating expenses (*) 56,04,33,299 Operating profit 8,82,71,773 Operating profit to expenses 15.75% (*) excluding The associated enterprise, non-associated enterprise financial result of the company (as per the transfer pricing report) is as under : Particulars With AE With non-AE Total Operating income (*) 54,64,40,687 10,22,64,385 64,87,05,072 Operating expenses 46,55,99,540 9,48,33,759 56,04,33,299 Operating profits 8,08,41,147 74,30,626 8,82,71,773 Profit margin = operating profit/cost 17.36% 7.84% 15.75% The above segmental details are considered for transfer pricing analysis. 4. During the financial year 2006-07, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, filling out application form (sales support), etc. ISPL's telecom engineers set up a call routing process for all calls (or some set of calls based on certain pre-arranged rule) to be redirected to ISPL. Once the calls arrive in India, they will be handled by a dedicated set of agents who will answer the call and resolve the customer's queries. 8. Final set of comparable companies considered by the Transfer Pricing Officer and the operating profit to total cost per cent. Sl. No. Name of the company OP/TC % (1) (2) (3) 1 Accentia Technologies Ltd. (Seg.) 30.61 2 Aditya Birla Minacs Worldwise Ltd. (Earlier known as Transworks Information Services Ltd.) 11.98 3 Allsec Technologies Ltd. 27.31 4 Apex Knowledge Solutions Pvt. Ltd. 12.83 5 Appollo Health Street Ltd. 13.55 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciate some of the contentions that were taken up before us. The Transfer Pricing Officer after giving negative adjustments towards working capital adjustment of 1.58% arrived at an arithmetic mean of 31.79 per cent. and determined the adjustment to the arm's length price as follows : 18.6 Computation of the arm's length price : The arithmetic mean of the profit level indicators is taken as the arm's length margin. (Please see annexure E For details of computation of profit level indicator of the comparables). Based on this, the arm's length price of the software development services rendered by you is computed as under : Arithmetic mean profit level indicator 30.21% Less : Working capital Adjustment (Annexure-F) 1.58% Adj. Arithmetic mean profit level indicator 31.79% Arm s length price : Operating cost 56,04,33,299 Arm s length margin 31.79% of the operating cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as comparable to the appellant despite the same failing to meet the legally acceptable criteria for comparability. The honourable Dispute Resolution Panel has also erred in confirming the order of the Transfer Pricing Officer in this regard. These companies should be rejected as comparables, notwithstanding that Triton Corporation Ltd. was earlier selected by the appellant and notwithstanding that the abovementioned compa rables were contended before the lower authorities on different parameters. 11. In Deputy CIT v. Quark Systems P. Ltd. (2010) 38 SOT 307had to deal with argument as to whether the assessee or the Revenue having chosen a company as comparable is entitled to seek exclusion of the very same company before the Tribunal. The Special Bench held as follows : Contention that Datamatics was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the Transfer Pricing Officer or before the Commissioner of Income-tax (Appeals) in appeal and therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins is not sustainable. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the correct list of comparable companies. Moreover the assessee has objected to inclusion of the companies being chosen as comparables before the Dispute Resolution Panel on different parameters. What the assessee now seeks to do by way of additional ground is to seek exclusion of the comparable company mentioned in the additional ground on different parameters than the one which was raised before the Dispute Resolution Panel. We therefore admit the additional ground of appeal for adjudication. 13. We have considered the rival submissions. As far as comparables list at Sl. Nos. 17 and 25 of the list of comparables chosen by the Transfer Pricing Officer is concerned, viz., Infosys BPO Ltd. and Wipro Ltd., the turnover of these companies are admitted beyond ₹ 200 crores. It has been held by this Tribunal in several decisions like Trilogy E-Business Software India P. Ltd. v. Deputy CIT (supra), Huawei Technologies India P. Ltd. (IT (TP) A. No. 583/Bang/2012) that companies having turnover above ₹ 200 crores cannot be considered as comparable with companies having turnover of less than ₹ 200 crores. In the case of Infosys BPO Ltd. and Wipro Ltd., the turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the percentage of employees' cost to sales is concerned, the assessee has filed a chart showing the employee cost to sales in respect of the aforesaid four companies. The said chart is given as annexure-II to this order. In respect of the percentage of employee cost to turnover there is dispute in the case of Asit C. Mehta about the percentage of the employee cost to turnover. In respect of Asit C. Mehta the learned Departmental representative submitted that the data processing charges mentioned in Schedule 12 of the profit and loss account should also be considered as employee cost and the percentage worked out accordingly. In respect of Accentia technologies Ltd., also the issue should be remanded as the employee cost to turnover issue was not raised before the Dispute Resolution Panel/Transfer Pricing Officer by the assessee and the figures given by the assessee before the Tribunal needs verification. We are of the view that the plea put forth by the learned Departmental representative is acceptable and in respect of these two companies the employee cost to sales should be examined afresh by the Assessing Officer/Transfer Pricing Officer after due opportunity to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. v. ITO in IT (TP) A No. 1316/Bang/2012 order dated August 14, 2013 [2013] 27 ITR (Trib) 753 (Bang) these companies were held to be not comparable with companies in information technology enabled services sector. The following were the relevant observations of the Tribunal : 5. Eclerx Services Ltd. 20. This company is listed at Sl. No. 11 in the list of comparable companies chosen by the Transfer Pricing Officer. 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 knowledge process oursourcing. 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 extraordinary events and peculiar circumstances prevail in the case of the assessee inasmuch as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems (India) P. Ltd. v. Deputy CIT (International Taxation) (supra) had an occasion to deal with comparability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viding structural design and detailing services which can be categorised as structural engineering services. The structural engineering services provided by the information technology division of the company cannot be classified as falling with the scope and ambit of information technology enabled services. On the contrary, the said services would fall under the category of engineering services. Excerpts from the annual report of the company Page 10 of the annual report for the financial year 2007-08 contains the following observation regarding the knowledge process outsourcing division of the company : The company has achieved about 56.49 per cent. growth in 2007-08 to register a turnover of ₹ 17.86 crores. The company having established its credentials in structural engineering services to US clients is devising aggressive marketing strategy to achieve rapid growth. This company is also engaged in providing a host of engineering services like civil and structural engineering services, mechanical product design, plant engineering, information technology services and GIS services. As we have already seen, this company is to be classified as knowledge process out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnology enabled services, this company had made extraordinary profits, this company fails 75 per cent. information technology enabled services revenue filter, segmental results were obtained by the Transfer Pricing Officer by issue of notice under section 133(6) of the Act which were not available in public domain. 21. The Transfer Pricing Officer however held that segmental profit of data cleansing activity alone was taken for comparison and data cleansing activity was in information technology enabled services and not software development. The reply received by the company in this regard in response to notice under section 133(6) of the Act mentioned that its services can be categorised as information technology enabled services. With regard to abnormal profits, the Transfer Pricing Officer held that the profits of the information technology enabled services segment was only 29.58 per cent. was considered for comparison and cannot be regarded as extraordinary profit. Regarding the plea of the assessee that this company fails 75 per cent. information technology enabled services revenue filter, the Transfer Pricing Officer held that when the segmental revenue of data cleansing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowed by Bodhtree Ltd. The Tribunal also observed that Bodhtree Ltd. was into software development and not a pure information technology enabled services company. In our view the objections and the reasons given by the Transfer Pricing Officer for considering this company as a comparable are different and the objections raised by the assessee before the Transfer Pricing Officer were also different. On the facts as it transpired before the Transfer Pricing Officer and the arguments of the assessee before the Transfer Pricing Officer/Dispute Resolution Panel, we are of the view that this company was rightly regarded as comparable. 26. The next objection of the assessee is with regard to the Transfer Pricing Officer's action in considering Accurate Data Converters Ltd., which is at Sl. No. 25 of the list of comparables chosen by the Transfer Pricing Officer. The Transfer Pricing Officer for choosing this company as a comparable has, in his order referred to the fact of the Transfer Pricing Officer having called for certain information from the aforesaid company in exercise of his powers under section 133(6) of the Act. In reply the company had informed the Transfer Pricing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IServices India P. Ltd. (operating profit/total cost for the financial year 2006-07-49.47 per cent.) The company was not part of the companies considered by the taxpayer in the accept/reject matrix given as Appendix-D to the transfer pricing report. However, the data of the company is available in Capitaline database. The annual report was not available for the financial year 2006-07. Related party transaction information was not available. Thus notice under section 133(6) was issued to the company. As per the reply received from the company and the annual report submitted, it is seen that the company is into information technology enabled services and qualifies all the filters applied by the Transfer Pricing Officer. Thus the company is proposed as a comparable vide this office letter dated May 17, 2010. In response, the taxpayer in its letter dated June 28, 2010 did not offer any comments. Thus the company is considered as a comparable. However, there is a mistake in the computation of profit level indicator of the company. The same is rectified as under : Description Amount (Rs.) Operating revenues 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any as a comparable company after affording opportunity of being heard to the assessee. 31. The assessee in the grounds of appeal before the Tribunal has also projected its grievance regarding the action of the learned Assessing Officer and the honourable Dispute Resolution Panel in excluding while computing deduction under section 10A of the Act, the telecommunication charges of ₹ 2,39,12,226 on the ground that these expenses are attributable to delivery of software outside India from the export turnover. It is the plea of the assessee that at all times during the relevant previous year, it was engaged in development of computer software and not in rendering any technical services. Without prejudice to its contention that the aforesaid sums should not be excluded from the export turnover while computing deduction under section 10A of the Act, the assessee has also made an alternate prayer that expenses that are reduced from the export turnover should also be reduced from the total turnover and in this regard has placed reliance on the decision of the hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98 (Karn). 32. We have heard learn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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