TMI Blog2016 (3) TMI 356X X X X Extracts X X X X X X X X Extracts X X X X ..... change gain or loss in their respective margins to arrive at the mean margin. Accordingly, this issue of the assessee is partly allowed. Selection of comparable - Held that:- Accentia Technologies Ltd is engaged in diversified activity of medical transcription, medical coding, billing, receivable management. Thus it is clear that the said company is engaged in the healthcare activity and providing BPO service in the healthcare sector, that too by providing specific services of medical transcription, medical coding, medical billing etc. We note that these activities are quite different from the service of contact centre provided by the assessee to its AE which is purely in the nature of call centre. Therefore, we are of the view that the company Accentia Technologies Ltd cannot be considered as a functionally comparable company with the services provided by the assessee to its AE Eclerx Services Ltd. company is not comparable with BPO company which are engaged only in low end services of data processing. Accordingly, we direct the AO/TPO to exclude Eclerx Services Ltd. from the list of comparables for the purposes of determining ALP. Infosys BPO Ltd. - revenue earned by thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inafter referred to as 'the Act' for short] in pursuance to the directions of the DRP dated 8/10/2013 for the assessment year 2009-10. 2. The assessee has raised the following grounds: Grounds of Appeal on Transfer Pricing matters 1 That the learned Deputy Commissioner of Income Tax Circle- 11(3) ( Assessing Officer or learned AO ) and the learned Dispute Resolution Panel ( Panel ) erred in upholding the order passed by the learned Additional Commissioner of Income Tax (Transfer Pricing)-I ( Transfer Pricing Officer or TPO ) ) to the extent prejudicial to the Appellant which was bad in law and in violation of principles of natural justice; 2 That the learned Panel! AO erred in upholding the arm's length price as determined by the TPO and thereby; i Conducting a fresh benchmarking analysis using non-contemporaneous data; ii Rejecting the comparable companies arrived in the Transfer Pricing documentation; iii Benchmarking transactions of captive service providers with fully fledged entrepreneurs without considering the differences in functions performed, assets employed and risks undertaken by the assessee; iv Upholding the additional filt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not require any specific adjudication. 4. At the time of hearing, learned AR of the assessee has stated that the assessee does not press ground No.2(i), (vi), (vii) and (viii), ground No.3, 4 and 6 and pleaded that the same may be dismissed as not pressed. 5. The learned Departmental Representative has raised no objection if these grounds of the assessee are dismissed as not pressed. Accordingly, ground Nos.2(i), (vi), (vii) and (viii), ground Nos.3, 4 and 6 of the assessee s appeal are dismissed. 6. Ground No.2(ii) to (v), (ix) and (x) regarding transfer pricing adjustment made by the Transfer Pricing Officer (TPO) by selecting a different set of comparable. The assessee was incorporated in March 2000 and engaged in the business of end to end BPO services. The assessee has entered into service agreement dated 1/4/2005 with its Associated Enterprise (AE) to provide 24/7 contact centre outsourcing service. AE of the assessee M/s. ISPL, iSeva Inc. incorporated in November 1999 in United States of America and is holding company of the assessee. During the year under consideration, the assessee has reported the financial results and segmental results including international tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mark its international transaction, the assessee selected 11 comparables which are reproduced by the TPO in para.3.4 as under: Sl. No. Name of the comparable Remarks 1 Allsec Technologies Ltd. The company qualifies all the filters applied by the TPO. Thus the company is considered as a comparable. 2 Caliber Point Business Solutions Ltd. This company has year ending other than March. Reliable financial data will not be available for a 12 month period. This cannot be used as a comparable. 3 Cosmic Global Ltd. The company qualifies all the filters applied by the TPO. Thus the company is considered as a comparable. 4 Datamatics Financial Services Ltd. Rejected: Income from Service to sales Ltd. Service income to sales is 62.44%, hence rejected. 5 ICRA Techno Analytics Ltd. The company is engaged in the software development consultancy, engineering services, web developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upward adjustment on account of working capital at the rate of 1.61% and finally computed the adjusted mean margin at 26.65%. Thus, by considering the assessee s operating margin at 12.68%, the TPO proposed upward adjustment of ₹ 7,80,00,855/-. The assessee raised objections before D.R.P against the action of the TPO/AO in re-computing the operating profit of the assessee by excluding the foreign exchange gain and the comparable selected by the TPO while determining the arms length price (ALP). The DRP did not accept the objections raised by the assessee and confirmed the action of the AO/TPO in making the proposed adjustment on account of transfer pricing. 8. Before us, the assessee has basically raised two arguments (i) regarding re-computation of the operating profit of the assessee by excluding foreign exchange gain and (ii) regarding functional comparability of the companies selected by the TPO. 9. First we will take up the issue of re-computation of the operating profit of the assessee by excluding foreign gain and other income. The learned AR of the assessee has pointed out that in the computation of the operating margin, the assessee included foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation is not considered as part of the operating revenue or the income of the assessee Foreign exchange gain or loss is dependent on the factors beyond the purview of the tax-payer and therefore, will not be considered as part of the operating revenue or income of the assessee. He has relied upon the orders of the authorities below. 10. We have considered the rival submissions as well as the relevant material on record. There is no dispute about the fact that as far as the amount of foreign exchange gain is concerned the same pertains to the income from service provided to the AE. Thus, it is clear that the foreign exchange gain has a direct nexus with international transaction and service provided by the assessee to the AE. As regards the contention of the learned Departmental Representative that the foreign exchange gain or loss depends on extraneous factors like market conditions, RBI policy, World market, micro economic conditions etc., the same factors are also affecting the business transactions and price determination between the parties and particularly when the transactions are cross-border transactions. Therefore, the extraneous factors which are taken as the reason f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... currency exposure on the export and import of diamond, the gain or loss arising of the said, will be treated as part and parcel of the operating profit. In view of the above discussion as well as the decision of the coordinate bench of the Tribunal in the case of Rusabh Diamonds (supra), we hold that the foreign exchange gain/income from service provided to AE will be part of the operating revenue/income of the assessee and consequently it will be part of the operating profit of the assessee for the purpose of determining the ALP in respect of the international transaction. However, the related aspect on this issue is also to be kept in mind that while taking the margins of the comparables, the effect of foreign exchange in the margins of the comparables should also be taken into account. Therefore, we direct the AO/TPO to re-compute the margin of the assessee by including foreign exchange gain but exclude other incomes on account of interest etc and further to consider the operating margin of the comparable after giving effect to foreign exchange gain or loss in their respective margins to arrive at the mean margin. Accordingly, this issue of the assessee is partly allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation Technology Service (ITES) company. The assessee is also engaged in the activity of providing ITeS to its AE and therefore, both the assessee as well as Accentia Technologies Ltd., are engaged in the similar business activity. He has referred to the findings of the TPO and the DRP and submitted that the DRP has rejected the objections raised by the assessee against this company. Therefore, this company is a good comparable for determination of the ALP in respect of international transactions of the assessee. i) We have considered the rival submissions as well as relevant material on record. The first objection has been raised by the learned AR of the assessee on account of extraordinary event of acquisition/purchase of business by Accentia Technologies Ltd., whereby M/s.Oak Technologies Inc, USA has been acquired by this company during the year under consideration. Though the extraordinary event of merger or acquisition, if influenced the business as well as the revenue of a company then said company is not considered as a good comparable for the purpose of determination of the ALP however, in this case, it is not clear from the Annual Report whether the business of M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s core and complex activities for its clients using proprietary processes and a scalable offshore delivery model. This company has access to the capital market and therefore, this company is a public listed KPO company in India. The company is also engaged in consulting services and process outsourcing as well as in the activity of process reengineering and automation apart from middle office and back office support to capital market. Therefore, keeping in the diversified high-end services, this company cannot be considered as functionally comparable with the assessee. In support of his contention, he has relied upon the decision of the Special Bench of the Mumbai Tribunal in the case of Maersk Global Services (147 ITD 83). i) On the other hand, learned Departmental Representative has submitted that this company is undisputedly in the business of ITeS and therefore, the nomenclature that of KPO will not make it functionally different from the assessee. He has relied upon the orders of the authorities below. ii) We have considered the rival submissions as well as relevant material on record. We find that the company Eclerx Services Ltd. is engaged in diversified activity of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company is in the same line of activity under the category of ITeS. He has relied upon the order of the authorities below. ii) We have considered the rival submissions as well as relevant material on record. We note that in para 16.2.15 of the Annual Report of this company, it has been reported that there was amalgamation w.e.f 1/4/2008. The relevant part of the information provided in the Annual Report reads as under: Amalgamation of PAN Financial Services India Private Limited The Board of Directors in their meeting held on October 6. 2008. approved, subject to the approval of the Honorable High Courts of Karnataka and Chennai, a Scheme of amalgamation ( the Scheme ) to amalgamate PAN Financial Services India Private Limited (-PAN Financial ), a wholly owned subsidiary of the Company engaged in providing business process management of services, with the Company with effect from April 1. 2008 ( effective date ). The approval of the High Court was received on April 6, 2009 and filed with the respective Registrar of Companies of Karnataka and Tamilnadu on April 6, 2009 and March 10, 2009 respectively. Accordingly on the scheme becoming effective, the financial state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the revenue has been earned from the activity of translation. The learned AR of the assessee has further pointed out that even otherwise this company is outsourcing the work of translation as it is evident from the profit and loss account of this company that an amount of ₹ 3,00,25,326/- has been paid on account of translation charges. Thus, learned AR of the assessee has submitted that this company cannot be considered as functionally comparable with the assessee for the purpose of determining the ALP. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of Lam Research (India) Pvt. Ltd. vs. DCIT in ITA No.1437/Bang/2014 dated 30/4/2015. i) On the other hand, learned Departmental Representative has submitted that the comparability of this company has been examined by the TPO as well as by the DRP. The TPO has rejected the objections raised by the assessee in respect of this company by holding that the translation service are in the nature of ITeS and therefore, it qualifies all the filters applied by the TPO. He has relied upon the orders of the authorities below. ii) We have considered the rival su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing 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 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 ₹ 27.76 lac. The Id. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the Id. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds in revenue appeal in ITA No.1777/Bang/2013 which are as under: 1. The order of the DRP is opposed to law and the facts and circumstances of the case. 2. The DRP erred in directing the AO to follow the ratio of the Hon'ble Court in the case of Tata Elxsi Limited 349 ITR 98 and exclude ₹ 1,31,56,646 being the telecommunication charges and travel expenses of ₹ 21,38,709 incurred in foreign currency from the total turnover also while computing the deduction u/s 10A of the I.T. Act as the decision of the High Court is binding, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover. 3. The DRP erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court. 4. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mponent, or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term total turnover in s. 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula ..... X X X X Extracts X X X X X X X X Extracts X X X X
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