TMI Blog2016 (4) TMI 1211X X X X Extracts X X X X X X X X Extracts X X X X ..... O, AM : This is an appeal filed by the assessee-company against the assessment order dated 29/09/2011 passed u/s 143(3) r.w.s.144C(3) of the Income-tax Act,1961 [ for short the Act ] by the Deputy Commissioner of Income-tax Circle 12(3),Bangalore [for short AO ] for the assessment year 2007-08. 2. The assessee-company raised the following grounds of appeal: The grounds stated here under are independent of, and without prejudice to one another: 1. Assessment and reference to Transfer Pricing Officer are bad in law a) The final order issued by the Deputy Commissioner of Income-tax - Circle 12(3) ['DCIT' or'AO'], is bad on facts and in law, and is in violation of the principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Societe Generale Global Solution Centre Private Limited ('the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. b) The AO has erred in law in making a reference to the Transfer Pricing Officer ['TPO'],inter alia, since he has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Transfer Pricing Study. d) The AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability. e) The AO/TPO also erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. f) The AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and arbitrarily applying a 25% related party criteria in accepting / rejecting comparables. g) The AO/TPO also erred on facts and in law in arbitrarily rejecting companies with 4 different year ending (i.e. other than 31 March 2007) and inconsistently applying such filter. h) The AO/TPO grossly erred on facts in arbitrarily rejecting companies having IT and ITeS service revenue less than 75% of total operating revenue and inconsistently applying such filter, without considering the specific segmental results. i) The AO/TPO erred on facts in arbitrarily rejecting companies earning less than 25% of revenue from exports. j) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion from the export turnover, the DRP and the DCIT erred in not making a corresponding reduction from the 'total turnover' while computing the deduction under section 10A. 9. Interest under section 234B of the Act The DCIT erred in levying and compounding the interest under section 234B of the Act of ₹ 14,708,020. 10. Initiation of penalty proceedings The DCIT erred in initiating penalty proceedings under section 271(1)(C) of the Act in the case of the Appellant. Directions issued by the DRP The DRP has erred in law and facts in not taking cognizance of the objections filed by the Appellant in relation to the draft assessment order issued by the AO/ TP order. The DRP erred in facts and law in confirming the draft order of the AO/TPO. Relief: a) The appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal. c) The appellant further prays that the adjustment in relation to T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy, the assesseecompany had chosen 55 companies as comparable entities in respect of software development services and 22 comparable entities in respect of ITeS segment and arithmetic average of operating profit margins of said comparables was computed at 14.64% in respect of software development services and 12.51% in respect of ITeS segment. According to the assessee-company, its PLI was much higher than the arithmetic mean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm s length. 4. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO). The TPO, by an order dated 26/10/2010 passed u/s 92CA of the IT Act, 1961 computed the transfer pricing adjustment at ₹ 3,98,63,492/- in respect of software development services and ₹ 1,86,46,103/- in respect of ITeS segment. The TPO accepted TNMM adopted by the assesseecompany as well as cost + margin as a profit level indicator but rejected the transfer pricing study report. The TPO proceeded to identify a different set of comparable entities for the purpose of determining the ALP. While doing so, the ld. TPO had applied the following filters in softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The TPO applied the following filters: Companies whose data is not available for the FY 2006-07 were excluded and the data for the FY 2006- 07 has been considered for the period from 01-04-2006 to 31-03-2007. Companies whose IT enabled service income Rs.1 crore were excluded. Companies whose IT enabled service revenue is less than 75% of the total operating revenues were excluded. Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the sales were excluded. Companies who have less than 25% of the revenues as export sales were excluded. Companies who have diminishing revenues/persistent losses for the period under consideration were excluded. Companies having different financial year ending (i.e. not March 31,2007) or data of the company does not fall within 12 month period i.e. 01-04-2006 to 31-3- 2007 were rejected. Companies that are functionally different from that of taxpayer or working in peculiar economic circumstances, after giving valid reasons, were excluded. and finally selected the following comparables: Thus arrived at average arithmetic mean of 30.21% and after giving working c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue of selection of comparables, the DRP confirmed the action of the TPO/AO and had not granted any relief. The AO completed the assessment u/s 143(3) r.w.c.144C(3) of the Act vide order dated 29/09/2011. 8. Being aggrieved, the assessee-company is in the present appeal before this Tribunal. 9. We shall take up the appeal segment-wise. At first instance, we shall now deal with Software Development Services. Before us, learned counsel for assessee-company argued that the following companies finally chosen by the TPO should be excluded for the reason of functional dissimilarity. i. Accel Transmatic Ltd. ii. Avani Cimcon Technologies Ltd iii. Celestial Biolabs Ltd. iv. E-Zest Solutions Ltd. v. Helios Matheson Information Technology Ltd. vi. Infosys Technologies Ltd., vii. Ishir Infotech Ltd. viii. KALS Information Systems Ltd. ix. Lucid Software Ltd. x. Persistent Systems Ltd. xi. Quintegra Solutions Ltd. xii. Thirdware Solution Ltd., and xiii. Wipro Ltd. In this regard, he relied on the decision of the co-ordinate bench (Bangalore) in the case of LSI Research (India) P.Ltd. vs. ITO in IT(TP)A No.1048/Bang/2011 dated 26/05/2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered the similar findings in respect of this company and excluded it from the list of comparables. The revenue had not brought any information on record controverting the above findings. Therefore, we have no hesitation to follow the decision of the co-ordinate bench of the Tribunal in the case of Trilogy E-Business software and LSI Research (India) P. Ltd and accordingly we direct the AO to exclude this company from the list of comparables. iii. Celestial Biolabs Ltd .: This company was excluded from the list of comparable companies in the case of LSI Research (India) P. Ltd on the ground that it was engaged in the clinical research and manufacture of bio products. The Tribunal further held that there was no clear basis on which the TPO concluded that this company was mainly in the business of software development services. The same findings were rendered in the following cases: Trilogy E-business Software vs. DCIT (TS 748 ITAT 2012(Bang) TP); Bearing Point Business Consulting P. Ltd. vs. DCIT (TS 758 ITAT 2012(Bang) TP); CSR Pvt. Ltd. vs. ITO (TS 68 ITAT 2013(Bang) TP); LG Soft India Pvt. Ltd. vs. DCIT (TS 68 ITAT 2013(Bang) TP); Transwitch India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous. 32. It has been pointed out that whilst the Tribunal in Willis Processing Services (India) Pvt. Ltd. v. DCIT (supra) held that no distinction could be made between KPO and BPO service providers, however, a contrary view had been taken by several benches of the Tribunal in other cases. In Capital IQ Information System India (P.) Ltd. v. Dy. CIT, (IT) [2013] 32 taxmann.com 21 and Lloyds TSB Global Services Pvt. Ltd. v. DCIT, (ITA No. 5928/Mum/2012 dated 21th November 2012 ) , the Hyderabad and Mumbai Bench of the Tribunal respectively accepted the view that a BPO service provider could not be compared with a KPO service provider. 33. The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra) struck a different cord. The Special Bench of the Tribunal held that even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra) , there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in M/s Capital Iq Information Systems (India) (P.) Ltd. v. Additional Commissioner of Income-tax (supra) , wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits. Respectfully following the ratio laid down by the Hon ble Delhi High Court, we hold that E-Zest Solutions Ltd., cannot be compared with the assessee-company as it is engaged in KPO services. v) Helios Matheson Information Technology Ltd . This company was excluded by the co-ordinate bench of this Tribunal in the case of This company was excluded by the coordinate bench of this Tribunal in the case of LSI Research (India) P. Ltd on the ground that it was engaged in the business of development and sale of software products. This finding has not been rebutted by the learned DR. Further, we find that Pune bench of the Tribunal in the case of PTC Software (India) Pvt. Ltd. vs. ACIT (TS 149 ITAT 2013(Pun) TP) also given similar findings in respect of this comparable. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TP(AY 2007-08] Logica Pvt. Ltd. vs. ACIT (TS 131 ITAT 2013(Bang) TP) Transwitch India Pvt. Ltd. vs. DCIT [TS 105 ITAT 2013(Bang) TP); Virtusa (India) Pvt. Ltd. vs. DCIT [TS 253 ITAT 2013 (Hyd) TP(AY 2007-08] Following the decisions cited supra, we hold that this company cannot be considered as comparable company which is engaged in providing software development services. Therefore, we direct the TPO/AO to exclude this company from the list of comparable. viii) Ishir Infotech Ltd.: This company was excluded from the list of comparables by the Hon ble Tribunal in the case of LSI Research (India) P. Ltd (supra) following the decision in the case of First Advantage Offshore Services Pvt. Ltd. vs. DCIT in IT(TP)A No.1086/Bang/2011, for assessment year 2007-08. Tribunal, in the case of First Advantage Offshore Services Pvt. Ltd.(supra) followed the decision of the Tribunal in 24/7 Company Pvt. Ltd., wherein it was held that Ishir Infotech Ltd., was outsourcing its work and therefore, had not satisfied 25% of the employee cost filter. Thus it was excluded from list comparables. We also find from the decision of this Tribunal in the case of Logica Pvt. Ltd. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices and no segmental details were available. Therefore, it was held that this company was not comparable with that of the assessee-company. Similar observations have been made in the following decisions: Bearing Point Business Consulting P.Ltd. vs. DCIT [TS 758 ITAT 2012(Bang) TP(AY 2007-08] CSR Pvt. Ltd. vs. ITO [TS 68 ITAT 2013(Bang) TP(AY 2007- 08] LG Soft India Pvt. Ltd. vs. DCIT [TS 64 ITAT 2013(Bang) TP(AY 2007-08] Mercedes Benz R D India Pvt.Ltd. vs. DCIT[TS 108 ITAT 2013(Bang) TP])AY 2007-08); NDS Services Pay-TV Technology Pvt. Ltd. vs. CIT [TS 127 ITAT 2013(Bang) TP(AY 2007-08] Following the decisions cited supra, we hold that this company cannot be considered as comparable company which is engaged in providing software development services. Therefore, we direct the TPO/AO to exclude this company from the list of comparable. xi) Quintegra Solutions Ltd.: This company was excluded from the list of comparable by this Tribunal in the case of LSI Research (India) P. Ltd ( supra) following the decision of this Tribunal in 24/7 Customer Service.com Pvt. Ltd. where it was held that it was engaged in in product engineering services, pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany which is captive service provider.: Bearing Point Business Consulting P. Ltd. vs. DCIT (TS 758 ITAT 2012(Bang) TP); Adaptec (India) Pvt. Ltd. vs. DCIT [TS 34 ITAT 2013 (Hyd) TP(AY 2007-08] LG Soft India Pvt. Ltd. vs. DCIT [TS 64 ITAT 2013(Bang) TP(AY 2007-08] CSR Pvt. Ltd. vs. ITO [TS 68 ITAT 2013(Bang) TP(AY 2007-08] Transwitch India Pvt. Ltd. vs. DCIT [TS 105 ITAT 2013(Bang) TP); Mercedes Benz R D India Pvt.Ltd. vs. DCIT[TS 108 ITAT 2013(Bang) TP])AY 2007-08); Furthermore, the Hon ble Delhi High Court in the case of CIT vs. Agnity India Technologies P.Ltd. [TS 189 HC 2013 (Del) TP] held that Wipro Ltd. was full-fledged risk bearing company and owns branded proprietary software. Therefore, this company cannot be compared with a low risk captive service provider, like the assessee-company. Following the decisions cited supra, we hold that this company cannot be considered as comparable company which is engaged in providing software development services. Therefore, we direct the TPO/AO to exclude this company from the list of comparable. 10. Learned AR of the assessee-company sought exclusion of the following companies from the list ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble opportunity to the assessee-company. Further, assessee-company also seeking exclusion of the following companies on functional dissimilarities: i. Bodhtree Consulting Ltd. ii. Eclerx Services Ltd. iii. Infosys BPO Ltd. iv. Mold-Tech Technologies Ltd., and v. Wipro Ltd. Placing reliance on the decision of the Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. vs. DCIT in ITA No.1086/Bang/2011 and Symphony Marketing Solutions India Pvt. Ltd. vs. ITO in ITA No.1316/Bang/2012. 12. Now, we shall deal with each of them. Bodhtree Consulting Ltd., Eclerx Services Ltd., and Mold-Tek Technologies Ltd., were excluded from the list of comparables by this Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. (supra) on the ground of functional dissimilarity. The Tribunal further observed that these companies are into the business of Knowledge Process Outsourcing (KPO). Accordingly, the Tribunal held that these companies cannot be compared with assesseecompany which is engaged in IT enabled services. The relevant paras of the order of the Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. (supra) are extracted hereunder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y cannot be compared with BPO company extracted supra. The learned DR has not controverted that these companies are KPO companies. In the result, we hold that these companies cannot be considered as comparables following the ratio laid down in the cases cited supra. Infosys BPO Ltd. and Wipro Ltd. 13. This Tribunal excluded these companies from the list of comparables in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) holding that Infosys BPO Ltd., was a subsidiary of Infosys Ltd., and having brand value etc. Similar observations were made by the Tribunal in the case of Capital IQ Information Systems (India) Pvt.Ltd. [TS 720 ITAT 2012(Hyd) TP]. Hon ble Delhi High Court in the case of Agnity India Technologies P.Ltd. (supra) held that these companies cannot be compared with smaller companies. Following the decision of Hon ble Delhi High Court as well as the Tribunal in the above cited cases, we direct the TPO/AO to exclude these companies from the list of comparables. 14. The assessee-company also raised additional grounds of appeal as regards selection of comparables, which were not pressed at the time of hearing. Hence, the same are dismissed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rived 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 the denominator cannot be different. Therefore, though there is no definition of the term term turnover in Section 10-A, 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 and in said formula, export turnover is defined, and when the total turnover includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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