TMI Blog2017 (3) TMI 1302X X X X Extracts X X X X X X X X Extracts X X X X ..... okogawa India Ltd. (2011 (8) TMI 845 - Karnataka High Court) as well as the decision Mindteck India Ltd. ( 2015 (4) TMI 56 - ITAT BANGALORE), we decide this issue in favour of the assessee and direct the Assessing Officer to allow the carry forward of losses of the one unit without setting off against the profit of the other unit for the purpose of computing the deduction under Section 10A of the Act. - IT (TP) APPEAL NO. 1601 (BANG.) OF 2012 - - - Dated:- 16-12-2016 - VIJAY PAL RAO, JUDICIAL MEMBER AND INTURI RAMA RAO, ACCOUNTANT MEMBER For The Appellant : S. Raghunathan, Adv. For The Respondent : Y.D. Sharma, CIT (DR) ORDER Vijay Pal Rao, Judicial Member : This appeal by the assessee is directed against the assessment order dt.11.10.2012 passed under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short 'the Act') in pursuant to the directions of the Dispute Resolution Panel (in short 'DRP') dt.3.9.2012 for the Assessment Year 2008-09. 2. The assessee has raised the following grounds : 1. That the assessment order dated October 11. 2012 passed in pursuance to the directions issued by the Learned Dispute Resolution Panel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;) rendered by the Appellant. 4. The TPO has selected these companies as comparables in the order passed u/s 92CA. The Appellant had raised objection before lower authorities against inclusion of these companies in the list of comparables. With respect to rejection of a comparable, the ground pertains to question of law and facts. The Appellant submits that it is not estopped from rejecting companies selected as comparables in the Transfer Pricing study based on facts available in the public domain. 5. The Appellant humbly prays that the additional grounds be admitted and adjudicated along with the other grounds of appeal in the course of hearing of the appeal. 4. We have heard the learned Authorised Representative as well as learned Departmental Representative on the admission of additional ground. We find that the additional ground raised by the assessee pertains to the Ground No.2 of the main grounds which does not specify the companies which were selected by the TPO in the set of comparables and objected by the assessee as functionally not comparable. Thus in view of the fact that there is no fresh plea raised by the assessee in the additional ground, we admit the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd. 10.97 6 Coral Hubs Ltd. (Earlier known as Vishal Information Technologies Ltd. 50.68 7 Cosmie Global Ltd. 23.30 8 Crossdomain Solutions Ltd. 27.03 9 Datamatics Financial Services Ltd. (Seg.) 29.11 10 e4e Healthcare Solutions Ltd. (Formerly known as Nittany Outsourcing Services Pvt. Ltd.) 18.54 11 Eclerx Services Ltd. 58.80 12 Genesys International Corporation Ltd. 47.40 13 Infosys BPO Ltd. 19.66 14 I Services India Pvt. Ltd. 10.77 15 Jindal Intellicon Pvt Ltd. -10.29 16 Mold-Tek Technologies Ltd. 96.66 17 R Systems International Ltd. (Seg.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Rampgreen Solutions (P.) Ltd. v. CIT [2015] 377 ITR 533 and Kodiak Networks (India) (P.) Ltd. (supra). 11. On the other hand, the Id. DR has relied upon the orders of the authorities below and submitted that this company is in the ITES services therefore it is comparable to the assessee. (iii) Coral Hubs Ltd. (earlier known as Vishal Information Technologies Ltd.) 12. The learned Authorised Representative of the assessee has submitted that the employee cost of this company is only 2.93% as it is clear from the Annual Report of this company. Further this company is sub-contracting its work and has incurred the expenditure on data entry charges therefore this company is not functionally comparable. He has relied upon Rampgreen Solutions (P.) Ltd. (supra) and Kodiak Networks (India) (P.) Ltd. (supra). 13. On the other hand, the learned Departmental Representative has relied upon the order of the Assessing Officer/TPO and submitted that when the TPO has not applied any employee cost filter then it is not a relevant factor for deciding the comparability. (iv) E-clerx Services Limited. 14. The learned Authorised Representative of the assessee has submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not satisfy the filter of 75% export earnings. In support of his contention, he has relied upon the decisions in the case of Rampgreen Solutions (P.) Ltd. (supra) and Kodiak Networks (India) (P.) Ltd. (supra). 23. On the other hand, the learned Departmental Representative has relied upon the orders of authorities below. (ix) Wipro Limited. 24. The learned Authorised Representative has submitted that this company owns significant intangibles, IPRs and brand name. Since this company is having software products therefore this cannot be functionally compared with the assessee in support of his contention, he has relied upon the decisions in the case of Rampgreen Solutions (P.) Ltd. (supra) and Kodiak Networks (India) (P.) Ltd. (supra). 25. On the other hand, the learned Departmental Representative has relied upon the orders of authorities below. 26. Having considered the rival submissions as well as the relevant material on record, we find that an identical set of 20 comparables was involved in the case of Kodiak Networks (India) (P.) Ltd. (supra) wherein the assessee raised the objection against 9 comparables out of 20 comparables selected by the TPO. Therefore functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, in view of the decision of the Tribunal in the case of Symphony Marketing Solutions India Private Limited (supra) the said company cannot be considered a good comparable for determining the ALP. The findings of the Tribunal in the case of Symphony Marketing Solutions India Private Limited (supra) is based on the another decision of Hyderabad Bench of the Tribunal in the case of CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P.) LTD. v. DCIT 2014 (3) TMI 626 - ITAT HYDERABAD. It is pertinent to note that an extra ordinary event of merger, amalgamation or acquisition is relevant only if such event affects the result and operating margin of the very segment of the company to be compared with the assessee. In case, of segmental results are taken in to account and extraordinary event of merging or demerging taken place in other division or segment of the comparable company then such event does not, affect the existing business model, function or margin of that particular segment. Therefore, the extraordinary event is a relevant factor for considering the comparability of company only when it has resulted into abnormal influence on the functions and profit margins of the company. Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO. This aspect has been considered in the case of Maersk Global Centres (India) (P) Ltd (supra) in paras 73,75 and 78 and the Special Bench has observed and held as under: 73. On a careful study of the material placed before us to highlight the distinction between BPO services and KPO services, we are of the view that even though there appears to be a difference between the BPO and KPO services, the line of difference is very thin. Although the BPO services are generally referred to as the low end services while KPO services are referred to as high end services, the range of services rendered by the ITES sector is so wide that a classification of all these services either as low end or high end is always not possible. On the one hand, KPO segment is referred to as a growing area moving beyond simple voice services suggesting thereby that only the simple voice and data services are the low end services of BPO sector while anything beyond that are KPO services. The definition of ITES given in the safe harbour rules, on the other hand, includes inter alia data search integration and analysis services and clinical data-base management services excluding clinical trials. These serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility when the broad functional analysis based on ITES sector is taken into account by applying TNMM. In our opinion, this purpose of attaining a relatively equal degree of comparability can be achieved by taking into consideration the functional profile of the tested party and comparing the same with the entities selected as potential comparables on broad functional analysis taken at ITES level. The principal functions performed by the tested party should be identified and the same can be compared with the principal functions performed by the entities already selected to find out the relatively equal degree of comparability. If it is possible by this exercise to determine that some uncontrolled transactions have a lesser degree of comparability than others, they should be eliminated. The examination of controlled transactions ordinarily should be based on the transaction actually undertaken by the AE and the actual transaction should not be disregarded or substituted by other transaction. 77. A useful reference in this regard can be made to the OECD guidelines on Transfer Pricing (including paragraph No. 2.68 to 2.75 thereof relied upon by Shri Porus Kaka) to establish the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applying broad functional test at first stage and although the comparables so selected can be put to further test depending on feels of each case, by comparing the specific functions performed in the international transactions with that of uncontrolled transactions to attain the relatively equal degree of comparability as discussed above, the classification of ITES into low-end BPO services and high-end KPO services for comparability analysis would not be fair and proper. The first question referred to this Special Bench is whether for the purpose of determining the arm's length price of international transactions of the assessee company providing back office support services to their overseas associated enterprises, companies performing KPO functions should be considered as comparable ?. In our opinion, the answer to this question will depend on the facts and circumstances of each case inasmuch as if the assessee company, on the basis of its own functional profile, is found to have provided to its AE the low-end back office support services like voice or data processing services as a whole or substantially the whole, the companies providing mainly high- end services by using t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered the rival submissions and material available on record, we note that in the case of Symphony Marketing Solutions India (P) Ltd (supra), the Tribunal has noted that the said company is engaged in to provide end to end payroll solutions to clients. It is pertinent to note that Payroll Outsourcing, payroll services prima facie does not require any expertise and are routine low end ITES service. The pay roll outsourcing does not require any special skill or expertise etc and it is routine work of just like data entries. However, the issue has been examined by the Special Bench of the Mumbai Tribunal in the case of Maersk Global Centres (India ) (P) Ltd (supra) vide paragraphs 73 to 78. We have already quoted above paragraph at para 37 of this order. Accordingly, we set aside the issue of comparability of the company to the record of TPO/AO to examine the functional comparables, in view of the decision of Special Bench (supra). 5. Infosvs BPO Ltd 42. The Id. AR submitted that the assessee has raised objection against the inclusion of this company in the list of comparables on the ground that this company is having substantial IPR, software products and brand value. 43. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at of assessee and accordingly, we direct the AO/TPO to exclude from the list of comparables. 6. Mold-tek Technologies Ltd. (Seg.) 45. The Id. AR submitted that this company is functionally different and is engaged in the business of rendering high end services. This company is also having extra ordinary event of merger. He has also contended that this company is having floated profit over the period of 5 years, therefore, it cannot be considered as a good comparable. In support of this contention, he has relied upon the decisions in the cases of Accentia Technologies Ltd (supra) and Genesys International Corporation Limited (supra). 46. On the other hand, the Id.DR submitted that the TPO has taken into consideration only segmental result and therefore, extra ordinary event if not in the ITES segment, the same cannot render this company as non-comparable . He has relied upon the orders of authorities below. 47. We have considered the rival submissions as well as relevant material avilable on record. As regard the objection that this company is engaged in rendering high end services. This issue is required to be examined in the light of the decision of the Special Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding VITL as a comparable squarely applies. This decision was followed by the decision of the co-ordinate bench of this Tribunal in the case of Netlinx India (P.) Ltd. in ITA No.454/Bang/2011 dt 19.10.2012 wherein it was held that Vishal Information Technologies Ltd. cannot be considered as a comparable. We, therefore, respectfully following the decision of the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd., direct the Assessing Officer/TPO to exclude Vishal Information Technologies Ltd, from the list of comparables. 15. Following the decision of the 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsofar as the cases of tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business, As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded. In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable,' 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty on software products. This company cannot therefore be regarded as a comparable. For the reasons given while disregarding Infosys BPO Ltd, as a comparable, this company is also directed to be excluded from the list of comparables. 55. In view of the above findings and respectfully following the same, we direct the TPO/AO to exclude from the list of comparables. 9. Accentia Technologies Ltd (seg) 56. The Id. AR submitted that this company is functionally different and is engaged in the business of high end services. He has relied upon the decision of the Tribunal in the case of Symphony Marketing Solutions India (P.) Ltd. (supra). 57. The Id. DR relied upon the decisions of authorities below. 58. Having considered the rival contentions of both the parties and on perusal of the record, we note that functional comparability of this company has been examined by co-ordinate Bench of this Tribunal in the case of Symphony Marketing Solutions India (P.) Ltd. (supra) in paras 12 and 13 which are reproduced below: 12. This company is listed at SI.No.2 of the comparables chosen by the TPO. As far as this company is concerned, the objection of the assessee is that this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om engineering design services and software development services and segmental data of this company does not give separate revenue and margin relating to the software development services. Therefore, in view of the facts that this company is engaged in the various different functions including the design engineering services, this company cannot be considered as functionally comparable with the assessee. Accordingly, we direct the TPO/AO to exclude this company from the list of comparables. We find that in paras 55 56 of the above decisions, the name of company is mistakenly recorded as Accentia Technologies Limited instead of Acropetal Technologies Limited. In view of the above decision of the Tribunal as well as the decision of the Hon'ble High Court in the case of Rampgreen Solutions (P.) Ltd. (supra), we direct the A.O./TPO to exclude the following companies from the set of comparables : (i) E-clerx Services Ltd. (ii) Infosys BPO Ltd. (iii) Coral Hubs Ltd. (Vishal information Technologies Ltd.) (iv) Wipro Ltd. (Seg) (v) Acropetal Technologies Ltd. (Seg.) The comparability of the remaining four companies have set aside to the record of the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Mindteck (India) Ltd. v. ITO 2015 (4) TMI 56 - ITAT BANGALORE has decided in paras 36 37 as under: 36. We have considered the rival submissions. The legal position that emanates from the decisions referred to above can be summed up thus:- (i) The carried forward business loss of Sec.10A unit cannot be set off or carried forward during the tax holiday period against any income. (ii) The carried forward business loss to the extent it pertains to non- 10A unit can be set off against income of non-10A unit. (iii) Sec.l0A is an exemption provision and therefore will not enter the computation of total income and therefore there is no question of any carried forward loss being set off against the profits eligible for deduction u/s.10A of the Act; and (iv) the profit or loss of Sec.l0A unit during the tax holiday period is quarantined and loss if any is carried forward to the assessment years immediately following the last of the assessment years for which the Assessee is entitled to claim exemption u/s.10A, for being set off in accordance with law as if it were any other loss to be dealt with in accordance with Sec.70 to 72 and 32(2) of the Act. 37. We are also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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