9911796707
TMI Blog2016 (5) TMI 1330X X X X Extracts X X X X X X X X Extracts X X X X ..... are development services segment and Rs. 8,710,695 in respect of Information Technology enabled services segment of the Appellant. 3. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in; (a) Upholding the comparability analysis performed by the learned TPO in the TP Order. (b) Accepting the filters applied by the learned TPO in the TP Order, without providing an opportunity of being heard to the Appellant. (c) Disregarding application of multiple year/ prior year data and holding that curre.t year (i.e. Financial Year 2008-09) data for companies should be used for comparability. (d) Upholding the learned TPO's approach of using data as at the t im e of assessment proceedings. 4. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in; (a) Arbitrarily arriving at a set of companies as comparable to the software development and Information Technology enabled services of the Appellant. (b) Arbitrarily including companies that fail the test of comparability analysis (c) Rejecting companies similar to the Appellant while performing the comparability analysis (d) Rejecting otherwise comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort Services (Rs.) Technical Support Services (Rs.) Operating Revenue 224,72,82,164 6,78,59,518 21,33,97,566 7,42,97,456 Operating Cost 204,29,83,785 6,16,90,471 20,32,35,777 6,75,43,142 Operating Profit 20,42,98,379 61,69,047 1,01,61,789 67,54,314 OP/OC 10% 10% 5% 10%" 4. The assessee has reported international transactions as under : " International Transactions (as mentioned in the 92CE Report) Description Amount Received (Rs.) Receipt for software development services 224,72,82,164 Receipt for IT Enabled Services 6,78,59,518 Receipt for Marketing Support Services. 21,33,97,566 Receipt for Technical Support Services. 7,42,97,456" As it is clear that there are four segments of international transactions however, the TPO accepted the international transactions in respect of marketing support services and technical support services at arm's length. The TPO proposed to determine the Arm's Length Price (ALP) in respect of two segments i.e. software development services and ITES. We will deal with the issue of Transfer Price Adjustment in these two segments separately. Software Development Services 5. The assessee is charging cost pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of international transactions in software development services segment. The assessee challenged the action of the TPO before the CIT (Appeals) but could not succeed. 7. Before us, the assessee is seeking exclusion of 3 companies from the final set of the comparable companies considered by the TPO as under : (i) Bodhtree Consultancy Ltd. (ii) Tata Elxsi Ltd. (Seg.) (iii) Infosys Technologies Ltd. (Now Infosys Ltd.) 7.1 Bodhtree Consultancy Ltd. : 7.1.1 The learned Authorised Representative of the assessee has submitted that it is a software solution company engaged in providing open and end-to-end solution, off shore data management, data warehousing, software housing designing and development of solution by using latest technology. Thus the learned Authorised Representative has submitted that the functions of this company are entirely different from the software development services provided by the assessee to its AEs and therefore this company is functionally not comparable with that of assessee for determination of ALP. The learned Authorised Representative has further submitted that this company has been considered by the assessee in its T.P. Study, however, he has plea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale therefore it indicates that this company is selling software products and no sub-segmental details are available. Therefore, when the assessee is not in the saleable products, this company cannot be compared with the assessee. 7.1.5 We have heard the rival submissions as well as considered the relevant material on record. The learned Authorised Representative of the assessee has submitted that this company is found to be not comparable with software development services provider by the Tribunal in the series of cases including in the case of M/s. Citrix Research & Development India Pvt. Ltd. (supra). We note that the Tribunal in the case of M/s. Citrix Research & Development India Pvt. Ltd. (supra) has considered the comparability of this company in paras 10 & 13 as under : " 10. Vis-à-vis M/s Bodhtre Consulting Ltd, the observation of this Tribunal as it appeared at page no.26.1 of the order in the case of M/s Cisco Systems (Ind.) Pvt.Ltd. read as under; "26. COMPANIES INCLUDED IN THE FINAL LIST OF COMPARABLES WHICH THE ASSESSEE WANTS TO BE EXCLUDED:- 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO and DRP. In the normal course, in view of the judgment of the Hon'ble Punjab & Haryana High Court mentioned supra, the issue has to be remitted back to the TPO for considering its comparability. However, Hon'ble Delhi High Court in the case of CIT Vs M/s Agnity India Technologies Pvt. Ltd. (Supra) had affirmed an order of this Tribunal were M/s Infosys Technologies Ltd was directed to be excluded from the list of comparables considering the peculiar features of the said company. Hence, no purpose will be served in remitting the question of comparability of M/s Infosys Tech.Ltd back to the TPO/AO. In view of the above discussion, we direct exclusion of M/s Bodhtree Consulting Ltd., M/s Tata Elxsi Ltd.(Seg.) and M/s Infosys Tech.Ltd from the list of comparables. Ordered accordingly." Thus it is clear that the Tribunal has simply followed the earlier decisions in the case of CISCO System India Pvt. Ltd. which in turn followed the other decisions of the Tribunal without analyzing the relevant facts, details and financials of the said company. We find from the Annual Report of this company that as per the Directors Report, the segmentwise and product wise performance has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has submitted that the business of this company constitute product design services (design and development of hardware and software), innovation design, engineering (mechanical design & focus of industrial design) and visual computing lab division for animation and special effects. Thus the learned Authorised Representative has submitted that this company is not only engaged in software development services and services of the company includes embedded product design, industrial services and engineering services and visual computing labs and system integration services. Thus this company is not functionally comparable. He has relied upon various decisions of this Tribunal including the decision of M/s. Citrix R & D India Pvt. Ltd. (supra). 8.2 On the other hand, the learned Departmental Representative has contended that this company is not in a product but only in software development services as per the Annual Report and Directors Report. She has further submitted that this company is providing only software development services and it is functionally comparable with the assessee though the services may be provided in different fields but the main activity is only s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of Rs. 230 crores in the total segment revenue of Rs. 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : "It is very pertinent to mention here that the company was considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e comparability of this company has been examined by this Tribunal in a series of decisions. In the latest decision of Tribunal in the case of M/s. Citrix Research & Development India Pvt. Ltd. (supra) has considered the comparability of this company in para 12 as under : " 12. Observation of the Co-ordinate Bench in the very same order with regard to the comparability of M/s Infosys Ltd appears at para-26.2 of the order which is reproduced here under; "26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:- "11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of tur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the assessee has not objected against the inclusion then even if the TPO decides to exclude these companies from the final set of comparables, the assessee would have been given an appropriate opportunity of hearing on the reasons and criteria on the basis of which the TPO proposed to exclude these companies. Accordingly, in the facts and circumstances of the case, we set aside this issue to the record of the Assessing Officer / TPO to reconsider the comparability of these companies after giving an opportunity of hearing to the assessee. 12.1 The next grievance of the assessee is that though the assessee has no objection in the case of Sasken Communications Technologies Ltd. (Seg.) to be part of the comparable list of the TPO however, the TPO has considered incorrect expenditure to arrive at the margins of this company and therefore the correct margins of this company is required to be calculated for the purpose of determining the ALP. The learned Authorised Representative has submitted that the actual margin after taking into account unallocable segment expenses would be 13.73% and after adjustment it would be at 10.88%. Therefore the TPO may be directed to compute the correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g capital adjustment ratio derived from the comparable companies considered for the arm's length study. The restriction of working capital adjustment based on PLR of SBI will be appropriate since it is based on a presumption with all lending or credit are having uniform interest rates as decided by the SBI. We therefore, direct the AO to give working capital adjustment considering the comparable companies after exclusion of the three companies mentioned by us at para thirteen (supra)." In view of the above facts and circumstances as well as the decision of the co-ordinate bench of this Tribunal in the case of M/s. Citrix Research & Development India Pvt. Ltd. (supra), we direct the Assessing Officer/TPO to give the working capital adjustment after considering the objections of the assessee as well as after exclusion of the companies as directed by us from the list of comparables. I T E S Segment 14. The assessee has bench marked its international transactions in ITES segment by selecting 14 comparables having average PLI (OP/OC) at 11%. The TPO rejected 12 companies selected by the assessee and accepted 2 comparable companies from the list of assessee. The TPO carried out a sear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the same segment and business activity then it cannot be considered as an extra-ordinary event. Further the said company is also in the ITES services though the services may be provided in the medical sector. 16.3 We have heard the rival submissions as well as considered the relevant material on record. We note that the functional comparability of this company has been considered and examined by the co-ordinate bench of this Tribunal in the case of Unisys India Pvt. Ltd. in paras 49 to 51 as under : " Accentia Technologies Ltd. : 49. The comparability of this company was again considered by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions (supra) and it was held by this Tribunal as follows : "(1) Accentia Technologies Ltd. (Seg.) 10. This was considered as a comparable by the TPO and listed at Sl.No.1 of the comparable companies chosen by the TPO. The ld. counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was draw to the annual report of this company for the A.Y. 2007-08 wherein the fact that this company had acquired Thunga Soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger." 11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and demerger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact ahs taken place, then the aforesaid comparable has to be excluded." 50. The learned DR however put forth an argument that the case decided by the Tribunal was in relation to A.Y 2008-09 and there was an amalgamation during the previous year relevant to AY 2008-09 and therefore the aforesaid decision of the Tribunal cannot be applied blindly. In this regard, the learned counsel for the assessee brought to our notice that even during the previous year relevant to AY 2009-10 there was an amalgamation of Acentia Technologies Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand, the learned Departmental Representative has submitted that this company was selected by the assessee in its T.P. Study and therefore the assessee cannot seek exclusion of this company from the list of comparables. The TPO has examined the functional comparability of this company and found that this company is comparable with the assessee. She has relied upon the orders of the authorities below. 17.3 We have heard the rival submissions as well as considered the relevant material on record. The Tribunal found that this company is outsourcing its translation work which is the main activity yielding major revenue during the year. We find that the functional comparability of this company has been examined by the co-ordinate bench of this Tribunal in the case of e4e Business Solutions India Pvt. Ltd. (supra) in para 11.4 as under : " 11.4 Cosmic Global Ltd. The learned AR of the assessee submitted that the assessee raised objection against inclusion of this company in the list of comparables before the TPO on the ground that this company has major revenue from translation services. Therefore, this company is functionally different from the services provided by the assessee to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roviding contact centre of the assessee to its AE. In the case of Lam Research (India) Pvt. Ltd. (supra) the co-ordinate bench of this Tribunal had occasion to examine the comparability of this company in para. 34 as under: "34. With respect to Cosmic Global Ltd., Hyderabad bench of ITAT in the case of Capital IQ Information Systems (India) P. Ltd., in para 19 of its order, had held as under Cosmic Global Ltd. 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, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as M/s. Capital IQ Information systems (India) Pvt. Ltd., Hyderabad similar issue was discussed by the coord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exclude this comparable for the same reasons. Accordingly, we direct that Cosmic Global Ltd., also be excluded from the list of com pa rabies. " In view of the above discussion as well as the order of the co-ordinate bench of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables for the purpose of determining the ALP." The Tribunal after considering the fact that this company is mainly in the business activity of medical transcription and consultancy services as it is evident that this company has incurred substantial expenditure on translation charges which shows that the outsourcing business of this company is confined to the translation activity. Accordingly, by following the decisions of this Tribunal, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. As regards the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivery 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 re-engineering 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 providing services including analytic services and data process solutions to its global clients. The servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utomation 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 comparables finally taken by the AO/TPO as per the direction of the DRP. Thus it is clear that the Special Bench foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the Assessing Officer may be restored. 4. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above." 20.1 The only issue arises in the revenue's appeal is regarding exclusion of the telecommunication expenses incurred in foreign currency both from export turnover as well as total turnover. 20.2 We have heard the rival submissions as well as considered the relevant material on record. At the outset we note that this issue is now covered by the judgment of Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd. reported in 349 ITR 98. We further note that an identical issue has been decided by this Tribunal in assessee's own case for Assessment Year 2006-07 vide order dt.6.3.2015 in ITA No.1480/Bang/2010 in para 31 as under : " 31. We have heard the ld. Counsel for the assessee and the ld. D.R. on the issues raised in this regard. Taking into consideration the decision rendered by the Hon'ble High Court of Karnataka in the case of CIT V Tata Elxsi Ltd. (2012) 349 ITR 98 (Karn), we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude telecommunication charges and insuran ..... X X X X Extracts X X X X X X X X Extracts X X X X
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