TMI Blog2015 (11) TMI 273X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice provider like the assessee in this case. We order the exclusion of this company from the set of comparables. INFOSYS BPO - extra ordinary event of amalgamation during the year has helped Infosys BPO in acquiring domains skill sets in the finance, administration space as well as enhanced its global presence with centers at Thailand and Poland. In view of the said extra ordinary event brought to our notice, we exclude Infosys BPO from the list of comparables. WIPRO BPO - Since sufficient information for this comparable is not available, we direct exclusion of this company as a comparable HCL COMNET SYSTEMS & SERVICES LTD is functionally similar to that of the assessee. Ld. AR could not point out any functional difference to our attention. In the said scenario, we uphold the inclusion of the said company in the set of comparables. The assessee fails. GENESYS INTERNATIONAL is into mapping business and it provides geographical information services comprising Photogrammetry, Remote Sensing, Cartography, Data Conversion, related Computer based Services and Information Technology enabled and other related services, which cannot be by any stretch of imagination be said t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the Transfer Pricing Officer (TPO) for computation of Arm s Length Price (ALP) for international transaction. 5. The ALP of the international transactions representing the ITES provided to the Associated Enterprises (AE) is determined by applying of Transactional Net Margin Method (TNMM) which is stated to be the most appropriate method in the facts and circumstances of the case. The operating profit to total cost (OP/TC) ratio is taken as Profit Level Indicator (PLI) in the TNMM analysis. For comparing assessee s net profit, the assessee had identified 13 comparable companies and three years average PLI of these seven (7) companies was computed as 14.62% (page 3 of the TPO). The TPO vide order dated 27.10.2011 rejected the transfer pricing study of the assessee and took the following comparables to arrive at the PLI for computation of ALP :- Sl.No. Company PBIT/Cost (%) 1. Accentia 44.5 2. Aditya Birla Minacs -0.55 3. Asit C Mehta 9.42 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.168,742,180 Shortfall being adjustment u/s 92CA ₹ 14,632,310 The above shortfall of ₹ 14,632,310 is treated as transfer pricing adjustment u/s 92CA. Based on the above detailed discussion, the arm s length price of three international transactions pertaining to providing IT enabled services is determined at ₹ 183,374,490 instead of ₹ 168,742,180 charged in its international transactions, resulting in an adjustment to the extent of ₹ 14,632,310. Thereafter, the DRP vide order dated 03.09.2012 directed the TPO to recompute the transfer pricing adjustment after reexamining the ALP and excluded Moldtek from the list of comparables. As per the said direction, the revised final list of comparables is as under :- Sl.No. Name of Company NCP (%) 1. Caliber Point Business Solutions Limited 6.46 2. Cosmic Global Limited 23.24 3. R System International Ltd. 2.37 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions vis- -vis raised in the memo of appeal are confined to the inclusion / exclusion of certain comparables. (i) CORAL HUB (PREVIOUSLY VISHAL INFO TECH) 8. The assessee is aggrieved by the inclusion of this company in the final list of comparables though the said company was included by the assessee in its list of comparables to calculate the ALP. The assessee though had included the said company in its list of comparables has every right to object to its inclusion before the TPO because there is no estoppel against law. So the contention of the ld. DR against the assessee turning around to object to the said company being included in the list of comparables is rejected. 9. The objection of the assessee that this company is functionally dissimilar and has peculiar economic circumstances was rejected by the TPO as under:- The taxpayer contention for functionality of the company is not acceptable as neither the TPO nor the taxpayer considered functional lines within IT enabled services. Final comparables considered by the taxpayer as well as the TPO consists of companies engaged in both high end and low end IT enabled services. The taxpayer is also not denying the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables was accepted by the Tribunal and held as under :- 15. As regards the issue of (8) Vishal Information Technologies Ltd., we find that, it is adopted by the TPO. The DRP held that Vishal Information Technologies has outsourced its call centre work and, therefore, the employee cost is less than 25% as is the common practice among other ITES services. The TPO as well as the DRP have recorded that in the ITES sector, employees filter of less than 25% alone is not applicable for the reason that in addition to the ample costs, the commission costs are also important. When company has outsourced its ITES services, it cannot be said that its business results would be comparable to any other ITES service provider rendering the services entirely on its own. In such circumstances, the net margins of the two comparables cannot be on the same basis. The decisions relied upon by the learned counsel for the assessee also held that the employee cost filter is important filter to be adopted for the purpose of computing ALP. In the case of Maersk Global Services Centre (India) Pvt. Ltd., in ITA No.3774/M/2011, the Tribunal at Mumbai has held that Vishal Information Technologies Ltd. ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Eclerx incurred expenses under the head Contract for services and Outsourced services amounting to INR 150.72 million which is 20.39% of total cost of the company. 15. Ld. DR relied on the order of the TPO. 16. We have heard both the sides and perused the material available on record. The Hon ble jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has held as under :- 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP. 37. Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny cannot be compared with the low end service provider like the assessee in this case. We order the exclusion of this company from the set of comparables. (iii) INFOSYS BPO 17. Ld. AR submitted that the brand value of Infosys is at ₹ 31,863 crores and the said company incurred 6.17% of the total revenue as sales and marketing expenses and referred to page 20 25 of the Annual Report. He further submitted that the said comparable company charges premium being a market leader and the assessee is not a market leader and does not enjoy any such advantages. He submitted that the said comparable company has a turnover of more than 49 times to that of the assessee company and in this regard, he referred to page 20 of the Annual Report of Infosys BPO. He further submitted that during the year, Infosys BPO concluded a sale and purchase agreement with Koninklijike Philips Electronics N.V. (Philips) by means of which it made a 100% investment in the share capital amounting to ₹ 107 crores in P-Financial Services Holding B.V., the Netherlands entity (Holding Company) and this acquisition will help the said comparable in acquiring domain skill sets in the finance and ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on standalone basis and the same was provided by the Wipro. Therefore, he considered this company as a comparable. 21. Before us the learned counsel, vide written submissions, submitted as under :- (i) Annual Report not available in public database : The annual report of Wipro BPO was not available in public database for FY 2007-08. We have relied upon the segment wise financial statements on standalone basis of Wipro Limited. Directors Report and Notes to the Accounts are available in the public domain; (ii) High Turnover : Industrial giants considering turnover and market leaders; turnover of INR 1158.80 crores for FY 2007-08 vis- -vis INR 16.87 crores of assessee (nearly 68 times of the assessee); (iii) Data used not contemporaneous : Wipro BPO did not appear in the assessee s search process; (iv) Company not comparable on turnover criterion : The turnover of Wipro BPO for FY 2007-08 is around INR 1158.80 crores against INR 16.87 crores of the assessee. Hence, the company is not comparable on the basis of high turnover; (v) Substantial sales and marketing expenses and brand premium : Wipro BPO is a market leader in its industry which incurred substanti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny i.e. INR 495.1299 for FY 2007-08 vis - vis INR 16.87 crores of the assessee. The said comparable is market leader in its industry and incurred substantial selling and marketing expenses and has a brand value. He submitted that the customers of the said comparable pay a premium on their services and, therefore, the same should be excluded. He submitted that financials for FY 2007-08 are not available in public domain, hence it would not have been possible for the assessee to identify the company and at its functional profile for selection as comparable. He further submitted that the said comparable did not appear in the search process of the assessee during the preparation of documentation u/s 10(d), hence, it would not have been possible for the assessee to select the company as a comparable. Ld. AR also submitted that the company had a different year ending than March 2008 and the TPO considered clubbing the data of three quarters from April 2007 to December 2007 with data of quarter one of 2008 i.e. January 2008 to March 2008 and it would not have been possible for the assessee to undertake such an arbitrary activity while performing its search process. 25. Ld. DR relied on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional and vertical lines of the comparable companies on which issue the taxpayer has not raised objections. The taxpayer has not stated anything regarding the peculiar circumstances faced by this comparable. Therefore the company is retained as comparable. 28. Ld. AR submitted that the said comparable company is engaged in provision of geospatial and content providing services and it also provides geographical information services comprising of photogrammetry, remote sensing, cartography, data conversion, related computer based services. He submitted that the said comparable company also works in a single segment i.e GIS based service. Therefore, he submitted that the said comparable company is functionally different. He submitted that the comparable company has intangible assets constituting 22.57% of total fixed assets of the company. For buttressing his argument, the ld. AR took our attention to the Annual Report of Genesys International Corporation Ltd. wherein Schedule M Company s Background is stated that Genesys International Corporation Ltd. is engaged in providing Geographical Information Services comprising Photogrammetry, Remote Sensing, Cartography, Data Conver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any is retained as a comparable. 31. The ld. AR took our attention to page 62 wherein the TPO has issued 133(6) notice to the said company pursuant to which a reply was sent to the TPO vide letter dated 08.03.2011 which has been made part of the TPO order at page 43 of his order. He took our attention to the said page where, in para 3, the said company has written as follows :- 3. During those financial years our software development services were primarily confined in the field of Application Software Development, System Software Development and Web Development. Apart from the same we also used to provide Engineering Design Services which may be considered as Information Technology Enabled Services (ITES). 32. The ld. AR referred to the said para and pointed out that the said company is into software development. Since segmental information is not available for the relevant financial year and the assessee is not into developing any software, the same cannot be used as a comparable. 33. The ld. DR could not controvert the said facts which have been brought to our notice and he relied on the order of the TPO. 34. We have heard both the parties and perused the recor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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