TMI Blog2015 (11) TMI 1648X X X X Extracts X X X X X X X X Extracts X X X X ..... which is engaged in the business of export of computer software filed its return of income for the A.Y. 2010-2011 on 07.10.2010 declaring an income of ₹ 4,38,286. Further, the company admitted the book profits of ₹ 3,11,28,917 under section 115JB of the Act. During the assessment proceedings under section 143(3) of the I.T. Act, the A.O. observed that the assessee has entered into international transactions with its Associated Enterprise (in short AE ) the gross receipts of which exceeded ₹ 15 crores. He therefore, made a reference to the TPO under section 92CA of the I.T. Act for determination of the arms length price ( ALP ) in respect of the international transactions reported by the assessee company after obtaining prior approval of the Ld. CIT, Hyderabad. The TPO passed the transfer pricing order dated 13.10.2013 under section 92CA(3) of the I.T. Act and proposed an adjustment of ALP of ₹ 10,38,23,246 under section 92CA of the I.T. Act. On receipt of the order of the TPO, the A.O. passed the draft assessment order and forwarded the same to the assessee on 29.01.2014. Assessee preferred its objections against the draft assessment order before the DRP a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Systems (India) P. Ltd., vs. DCIT ITA.No.1961/Hyd/2011. The DRP confirmed the order of the A.O. against which the assessee is in appeal before us. 5. The Ld. Counsel for the assessee placed reliance upon the decision of the Bangalore Tribunal in the case of Centillium India P. Ltd., ITA.No.1354/Bang/2010 in support of its contention while the Ld. D.R., supported the orders of the authorities below and submitted that the foreign exchange fluctuations gain or loss was part of the operating income/expenditure and has been taken into consideration to compute the margin of the assessee as well as the comparable companies. 6. Having regard to the rival contentions and the material available on record, it has been held by the various Benches of the Tribunal that the gain or loss on account of foreign exchange fluctuation is part of the operating income of the assessee. 1. M/s. Westfalia Separator India P. Ltd., (ITA.No.4446/Del/2007) 2. M/s. Lisco Systems Services B.E. India Brand vs. ADIT (ITA(T.P.) No.270/Bang/2014) 3. M/s. Four Soft Ltd., vs. DCIT (ITA.No.1495/Hyd/2010). 6.1. Respectfully following the above judgments, ground No.4 of the assessee is rejected. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MAM PLI Margin of tax payer Margin of comparables. Provision of ITES 458,326,756 TNMM OP/OC 11.47 9.97 Purchase of computers 20,232,916 TNMM OP/OC 11.47 9.97 Purchase of computer software 3,178,246 TNMM OP/OC 11.47 9.97 Reimburse- -ment of expenses paid 772,927 NA NA N.A. N.A. 9.2. On going through the T.P. document of the assessee, the TPO was of the opinion that the search process of the assessee suffers from defects which has resulted in selection of inappropriate comparables and rejection of comparables that are appropriate comparables. He, therefore, rejected the T.P. document of the assessee and proceeded to make independent analysis by aggregating all the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .O. proposed the draft assessment order. Aggrieved by the same, assessee raised its objections before the DRP which was partly allowed. In consonance with the directions of the DRP, the final assessment order dated 17.10.2014 was passed against which, both the Assessee as well as the Revenue are in appeal before us. Let us now deal with the objections of the assessee on each of the three companies challenged by the assessee as not comparable before us. COSMIC GLOBAL LIMITED : 10. We find that the assessee accepted this company as comparable before the TPO, but has raised objections against this company before the DRP stating that the revenue from BPO services is only ₹ 26,97,430 which is 4.67% of total revenue of the company while the company s major income arises from translation charges which is 94.31% of total revenue. It was submitted that the major cost also includes translation charges paid of ₹ 2,18,19,030 which is 43% of total costs and therefore, is not comparable to the assessee. The assessee also relied upon ITAT s decision in its own case for A.Y. 2009- 10 for exclusion of this company. The DRP however, rejected the assessee s objection by holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under- 13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing 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 ld. 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 ld. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objections in detail against the adoption of these two companies as comparables both before the TPO as well as DRP, but its objections were rejected. Before us also, the Ld. Counsel for the assessee reiterated these objections and relied upon the T.P. order in the case of M/s. IGS Imaging Services (India) P. Ltd., for A.Y. 2010-2011, where TPO has excluded both of these companies by holding that they are engaged in BPO activity and that they have reported exceptional circumstances in their annual report for the relevant financial year. 11.1. The Ld. D.R. on the other hand, supported the orders of the authorities below. 11.2. Having regard to the rival contentions and the material on record, we find that during the relevant financial year, the TCS e-Serve International Ltd., had acquired the Citi group India based Captive business processing outsourcing (BPO) arm for an all-cash consideration and in return, had acquired the business of an aggregate amount of $ 2.5 billion over a period of 9.5 years. This definitely is an exceptional circumstance which has been taken note of by the TPO in the case of M/s. IGS Imaging Services (India) P. Ltd., to exclude the same from the list ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of this company. The Hon ble Delhi High Court in the case of CIT vs. Agnity India Technologies P. Ltd., (2013) 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon ble High Court (supra), the turnover of the assessee was about ₹ 15.79 crores as against the turnover of ₹ 1016 crores of the Infosys. Considering these facts, the Hon ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS e-Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around ₹ 50 crores as against the turnover of TCS e-Serve Limited of ₹ 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hyd/2014 (Revenue s Appeal) : 14. Coming to the Revenue s appeal, we find that it is against the assessment order passed in consonance with the DRP order wherein the DRP has directed the A.O. to exclude Infosys BPO Ltd., Eclerx Services Ltd., and Accentia Technologies Ltd., from the final comparables. The relevant grounds raised by the Revenue are as under: 1. The DRP erred on facts and in law in excluding M/s. Infosys BPO Limited from comparables though in the ITES sector, brand value size does not matter, and also in service sector turnover and economies of scale do not play any significant role as far as the margins are concerned. 2. The DRP erred on facts and in law in excluding M/s. Eclerx Services Ltd., from com parables on the ground that diverse nature of services, though the said company is engaged in the ITES services. The ITAT ignored the fact that in the case of Agilent Technologies international pvt. Ltd, the ITAT, Delhi has upheld the selection of M/s.Eclerx. 3. The DRP erred on facts and in law in excluding M/s. Accentia Technologies Ltd. from the comparables on ground that the company operates in different business strategy of acquiring compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P. Ground No.2 is accordingly rejected. 18. As regards M/s. Accentia Technologies Ltd., is concerned, we find that the DRP has directed to exclude this company by placing reliance upon the order of the ITAT in the assessee s own case for the A.Y. 2009-10 by holding that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy and considering the profit margins of the company and insufficient segmental data, held that this company cannot be selected as a comparable. It was also held by the DRP that on the very same reason of acquisition of various companies, being an extraordinary event, it had an impact on the profit of the company and the said company was directed to be excluded. 18.1. For the relevant A.Y. 2010-11, the Ld. Counsel for the assessee has drawn our attention to the information available on Accentia Technologies Ltd., to demonstrate that the said company is into diversified knowledge process outsourcing activities. It is seen therefrom that the said company is involved in Healthcare documentation as well as receivables, management services including installation and maintenance of all software, hardware a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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