TMI Blog2015 (10) TMI 2653X X X X Extracts X X X X X X X X Extracts X X X X ..... SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER For The Appellant : Shri Ajit Kumar Jain, CA For The Respondent : Shri G.R. Reddy, CIT-I (DR) ORDER Per Asha Vijayaraghavan, Judicial Member This order is against the assessment order dated 27.09.2012 passed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [ the Act ]. 2. The assessee company is engaged in the manufacture of Printed Circuit Board Assembly which has application in the telecom, industrial electronics and consumer products segment. It also operated a shared services division for providing back office services relating to accounts payable processing and human resources record maintenance. 3. In the TP study of the taxpayer it has been stated that the search of the databases yielded a set of 7 comparables with an average profit margin @ 7.56% on cost. The mark-up on total cost of the taxpayer is arrived at 8.30% on cost. As the profit margin earned by the taxpayer is more than the arithmetical mean margin, the price charged by the taxpayer was treated as at arm s length. 4. The TPO selected the final set of comparables as follows:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sl. No. Name of the company Operating Margin to Cost (FY 2007-08) 1 Datamatics Financial Services Ltd. (Seg.) 29.11 2 Cosmic Global Ltd. 23.30 3 Allsec Technologies Ltd. - 13.29 4 R Systems International Ltd. (Seg.) 4.30 5 Aditya Birla Minacs Worldwide Ltd. (Earlier known as Transworks Information Services Ltd.) - 4.00 6. The average of 20 comparables selected by the TPO worked out 24.75. The TPO computed the working capital adjustment at 2.28%. The arm s length margin was worked out at 122.47% of the operating cost. The TPO treated the shortfall of ₹ 8,38,77,257 as transfer pricing adjustment u/s. 92CA of the Act in the software segment. 7. Aggrieved by the order of the TPO, the assessee preferred appeal before the DRP. 8. The Assessing Officer while passing the order u/s. 143(3) r.w.s. 144C of the Act held as under:- COMPUTATION OF TOTAL INCOME ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising out of amalgamation. He relied on the decision of the coordinate Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. v. ITO, IT(TP)A No.1316/Bang/2012, order dated 14.08.2013 (AY 2007-08), wherein it has been held 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 Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the 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 extraordinary event like merger and de-merger 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. 11. We have considered the submissions of the ld. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The performance of Engineering Design Services is regarded as providing high end services among the BPO which requires high skill whereas the services performed by the Assessee are routine low end ITES functions. We therefore hold that this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPO]. 14. Regarding Coral Hubs Ltd. (earlier Vishal Information Technologies Ltd.), the ld. counsel for the assessee submitted that it fails employee cost filter and functionally not comparable relying on the coordinate Bench decision of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra), where in was held at paras 14 to 17 of its order as under:- (3) Coral Hubs Ltd. 14. This company is listed at Sl.No.6 of the list of comparable companies chosen by the TPO. As far as this company is concerned, it is seen that this company was earlier known as Vishal Informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishal Information Technologies Ltd.): 16. The assessee has objected for this company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but the business model of the company is also different as it sub-contracts majority of its ITES works to third party vendors and has also made significant payments to those vendors. The payments made to vendors towards the data entry charges also supports the fact that the company outsources its works. In the circumstances, it cannot be taken as a comparable to the ITES functions performed by the assessee. Since this company is acting as agent only by outsourcing its works to the third party vendors. In this context, the assessee relied upon the order of the DRP in assessee's own case for the assessment year 2008-09, wherein the DRP, after taking into consideration, the aforesaid aspect, has accepted the claim of the assessee. The assessee further submitted that the Income-tax Appellate Tribunal Mumbai Bench in the case of Asstt. CIT v. Maersk Global Service Centre (India) (P.) Ltd. [2011] 133 ITD 543/16 taxmann.com 47 (Mum.), a copy of which is submitted before us, has also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot be said that the said filter is not applicable to ITES segment, where comparably less skilled employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employee cost filter to the ITES sector is also justified. In view of the same, we direct the TPO to apply the employee cost filter to exclude companies with employee cost of less than 25% from the list of comparables for the computation of ALP. 17. Applying the aforesaid decisions, we are of the view that Coral Hubs Ltd. cannot be considered as a comparable. 15. As regards Cross Domain Solutions Ltd., the ld. counsel for the assessee submitted that it is functionally not comparable relying on the decision of the coordinate Bench decision of this Tribunal in the case of Symphony Marketing Solutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that it had super normal profit and is functionally not comparable with the assessee company relying on the coordinate Bench decision of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra), where in was held at paras 20 21 of its order as under:- (5) Eclerx Services Ltd. 20. This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. It has further been submitted that extra ordinary events and peculiar circumstances prevail in the case of the assessee in as much as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led employees. Besides the above, this company also carries out R D services and own intangibles. The aforesaid facts, in our view, will take this company out of the list of comparables. We may also point out that the objection of the assessee in this regard has been disregarded by the TPO by mere observation that it cannot be rejected on the basis that it is into different functional line within ITES. In this regard, we may refer to the decision of the ITAT Bangalore Bench in the case of First Advantage Offshore Services Ltd. (supra), wherein it was observed as under:- 39. Having heard both the parties and having considered their rival contentions, we find that the assessee had raised elaborate objections to each of the comparables in group 3 before the TPO. The TPO has also reproduced the said objection in his order para 6.5.1. of page 178 of his order. He has rejected the contention of the assessee by holding that every function within BPO sector can be from low end to high end and the activities of the assessee such as accounting, web management, network management are BPO services using technology but these services are not categorized as KPO. He held that a call centre ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the coordinate Bench decision of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra), where in was held at para 24 of its order as under:- (7) Infosys BPO Ltd 24. This company is listed at Sl.13 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the ld. counsel for the assessee that this company has a brand value and therefore there would be significant influence in the pricing policy which will impact the margins. Schedule 13 to the profit loss account of this company for the F.Y. 2007-08 shows that this company incurred huge selling and marketing expenses. Page 133 of the annual report of this company for the F.Y. 2007-08 shows that this company realizing its brand value has chosen to value the same on the basis of its earnings and that of Infosys. The brand value of the Assessee and Infosys has been valued at ₹ 31,863 Crores. Infosys BPO, being a subsidiary of Infosys, has an element of brand value associated with it. This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achieved about 56.49% growth in 2007-08 to register a turnover of ₹ 17.86 crore. The company having established its credentials in structural engineering services to US clients is devising aggressive marketing strategy to achieve rapid growth. This company is also engaged in providing a host of engineering services like civil and structural engineering services, mechanical product design, plant engineering, IT services and GIS services. As we have already seen, this company is to be classified as KPO and cannot be compared with the assessee. The decision of the Bangalore Bench of the ITAT in the case of First Advantage Offshore Services Ltd. (supra) which we have referred to in the earlier part of this order will clearly apply to this company. We therefore direct this company to be excluded from the list of comparables. 20. With regard to Wipro Ltd. (Seg), the ld. counsel for the assessee submitted that it is distinguishable for different scale of operations on account of brand value of parent company and not comparable with the assessee relying on the decision of the coordinate Bench decision of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in this regard and not following the decision of Hon ble jurisdictional Karnataka High Court in the case of ACIT, 12(3) Vs Yokogawa India Ltd. (341 ITR 385) and ITO, Ward 12(2) Bangalore Vs SCT Software Solutions (India) Private Limited (ITA No.1014/Bang/2004). 6. The Honourable DRP has erred in law and on facts in upholding the AO s reasoning in re-computing the relief u/s. 10A of the Act and thereby computing the relief under section 10A of the Act at NIL (as against the amount of ₹ 60,892,020 claimed by the Appellant in its return of income). 25. Since the issue is covered by the judgment of Hon ble jurisdictional High Court in the case of ACIT, 12(3) v. Yokogawa India Ltd., 341 ITR 385 (Karn), we are of the view that the DRP has erred in upholding the AO s reasoning in recomputing the relief u/s 10A and thereby computed the relief u/s. 10A at Nil as against the amount of ₹ 60,892,020 claimed by the assessee in its return of income. This ground of appeal is allowed. 26. The 7th ground is an alternate ground and since we have decided ground Nos.5 6, the same is not adjudicated upon. 27. In the result, the assessee s appeal is allowed. Pronou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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