TMI Blog2015 (2) TMI 1103X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee as ITES provider. Cosmic Global Ltd. 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 14 consequence, we direct the Assessing Officer to exclude the said concern from the final set of comparables. Crossdomain Solutions Ltd. liable to be excluded from the list of comparables as there was no bifurcation available for various diversified activities being carried out by the said concern and therefore on an entity level the said concern could not be compared to a normal ITES provider. - ITA No. 2235/PN/2012 - - - Dated:- 2-2-2015 - SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER For the Appellant: Mr. Arvind Sondhe/Pramod Joshi/ Mr. Rugved Apte For the Respondent: Mrs. M. S. Verma, CIT ORDER PER G. S. PANNU, AM The captioned appeal has been preferred by the assessee pertaining to the assessment year 2008-09, which is directed against the order of the Asstt. Commissioner of Income Tax, Circle 11(2), Pune (in short the Assessing Officer ) passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not granting the benefit of +/- 5 percent as per proviso to section 92C (2) of the Act. 7. Initiation of penalty proceedings 7.1 The learned ACIT erred on the facts and in law in initiating 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. Although, assessee has raised multiple Grounds of Appeal but essentially the solitary grievance is with regard to an addition of ₹ 3,78,91,404/- made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d.; and, (iv) Crossdomain Solutions Ltd. in the list of comparables and at the same time the TPO erred in not including (i) Ace Software Exports Limited; and, (ii) Pentamedia Graphics Ltd. in the final set of comparables. The arguments of the assessee are primarily in relation to the aforesaid aspects. 7. In so far as the assessee s plea for inclusion of Pentamedia Graphics Ltd. is concerned, it is contended that the same has been unjustly excluded by the TPO. It was contended before the TPO that the said concern is engaged into ITES market in digital content development and therefore its activities are comparable to that of the assessee. It was also contended before the TPO that the said concern was accepted by the TPO himself as a comparable in assessment year 2007-08 and following the rule of consistency the said concern should also be included as a comparable this year. 8. The TPO rejected the plea of the assessee on the ground that the concern was not functionally comparable and that the Annual accounts of the said concern show an expenditure on multimedia development and web casting of ₹ 3.57 crores. The aforesaid arguments have been reiterated before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orts Ltd. as a comparable concern in order to benchmark assessee s international transaction of Provision of ITES to its associated enterprise. The order of the TPO is hereby affirmed and assessee fails on this aspect. 13. Next, assessee had contended that Accentia Technologies Ltd. has been wrongly included by the TPO as a comparable concern. As per the assessee, the said concern was engaged in functionally 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/turnover filter of 1-50 crores i.e. any concerns having a turnover exceeding ₹ 50 crores were excluded. Thirdly, it was pointed out that the activities of the said concern were not comparable to the activities of the assessee. 14. The TPO has noted the aforesaid objections of the assessee in pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 be replica of each other. 17. Before us, the Ld. Representative for the assessee vehemently pointed out that the difference in the operating model of the said concern from that of the assessee has to be appreciated by various decisions of the Tribunal, which are as under :- (i) Capital IQ Information Systems (India) Private Limited (supra); (ii) Symphony Marketing Solutions India Pvt. Ltd. (supra); (iii) Brigade Global Services Private Limited vs. ITO, (2013) 33 taxmann.com 618 (Hyd.); and, (iv) Cognizant Technology Services Pvt. Ltd. vs. ACIT, (ITA No.1624/Hyd/2010). 18. We have considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 business model of the company is also different as it sub-contracts majority of its ITES works to third party vendors and has also made significant payments to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' 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 Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR's argument that the employee cost filter is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,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 concern was not a service provider but a recipient of the services and therefore it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25. The last plea of the assessee is to exclude from the list of comparables Crossdomain Solutions Ltd.. In this context, before the TPO assessee submitted that the said concern was not comparable with the assessee. It was pointed out that the said concern was engaged in the payroll activity apart from being engaged in KPO services. The assessee also referred to the website of the said concern to point out that the said concern was identified as a Knowledge Process Outsourcing services provider (KPO) and not a simple business process outsourcing 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. Representative for the assessee has referred to the following Tabulation which brings out the difference between e-learning activities carried out by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at intrinsically the activities are not comparable, such a concern would not be included for the purposes of comparability analysis. In the context of the present case, the plea of the assessee is that the business of M/s Crossdomain 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 out by the said concern and therefore on an entity level the said concern could not be compared to a normal ITES provider. In our view, following the decision of the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) which was also followed by the Hyderabad Bench of the Tribunal in the case of Market Tools Research Pvt. Ltd. vs. ACIT (ITA No.1811/Hyd/2012 dated 24.10.2013, the aforesaid concern is liable to be exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X
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