TMI Blog2016 (5) TMI 1404X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Transfer Pricing Officer ('TPO') / Learned AO, under the directions of the Hon'ble DRP, erred on facts and in law in making an addition of ₹ 3,12,91,568 to the international transaction of the Appellant based on the provisions of Chapter X of the Act; 2. On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law in rejecting comparable companies and not appreciating that their functions, assets and risk profile was comparable to the Appellant. 3. On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law, in identifying new companies as comparable to the Appellant without appreciating the fact that the said companies were not comparable to the Appellant / did not meet the filters applied. 4. On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law; in considering erroneous margins, computing the margins erroneously, for arriving at the arm's length price/margin and making incorrect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xclude the company on the basis of BPO/KPO without consideration the CBDT s instructions. 5. The appeal of the Revenue was filed late by 16 days. The Revenue has filed condonation application in this regard along with Affidavit and it was pointed out that the delay of 16 days in filing the appeal late before the Tribunal may be condoned. In the Affidavit, it has been explained that the date of passing the final order is mentioned as 11.02.2015, however, it was passed in the last week of February, 2015. It was further mentioned that the said order was served upon the assessee on 23.02.2015. Further, it is claimed that there was heavy workload in the first week of April, 2015 and date of passing of the order in the case of assessee could not be taken note in calculating limitation date and there was delay of 16 days in filing the appeal late. In the totality of the above said facts and circumstances of the case, we condone the delay of 16 days and proceed to decide the appeals filed by the Revenue and the assessee after hearing both the learned Authorized Representatives. 6. The learned Authorized Representative for the assessee at the outset pointed out that the issue raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 271(1)(c) of the Act in the said ground of appeal No.9 was premature. 7. With regard to the Revenue s appeal, the learned Authorized Representative for the assessee pointed out that only the issue was exclusion of KPO i.e. companies which were engaged in Knowledge Processing Operation, since the assessee was a BPO company. In this regard, the learned Authorized Representative for the assessee stated that the issue was covered in favour of the assessee by the decision of Hon ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. Vs. CIT in ITA No.102/2015 , judgment dated 10.08.2015, wherein two concerns i.e. Vishal Information Technologies Ltd . and e-Clerx Services Ltd. were directed to be excluded and were held to be not comparable with ITES companies. Further, reliance was placed on the decision of Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs. DDIT (Int. Tax,) in ITA No. 784/PN/2014, relating to assessment year 2009-10, order dated 30.03.2016 wherein e-Clerx Services Ltd. was excluded from the list of final companies as it was engaged in KPO services. 8. The learned Departmental Representative for the Revenue placed reliance on the orders of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer in the hands of assessee, which in turn, was added to the income of assessee. The final set of comparables applied by the Assessing Officer pursuant to the directions of DRP were as under:- Sr. No. Name of company PLI (Adjusted for Working Capital) 1 Cosmic Global Limited 18.81 2 Informed Technologies India Limited 29.86 3 B N R Udyog Limited (Medical Transcription segment) 16.38 4 Accentia Technologies Limited 42.39 5 Jeevan Softech Limited (segment) 39.38 6 Fortune Infotech Limited 23.48 7 Caliber Point Business Solutions Ltd. (Seg) 19.35 8 Jindal Intellicom (P) Ltd. 16.65 Average 25.79 10. Before us, the learned Authoriz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said entity had extraordinary events. In this regard, reliance was placed on following decisions:- a. Techbooks International Pvt. Ltd. Vs. DCIT (ITA No.240/Del/2015) b. Xchanging Technology Services India Pvt. Ltd. Vs. DCIT (ITA No.1222/Del/2015 c. Amba Research (India) Pvt. Ltd. Vs. DCIT (ITA No.286/Bang.2015 d. Cognizant Technologies Services Pvt. Ltd. Vs. DCIT (ITA No.459/Hyd/2015 13. Under the transfer pricing provisions, while benchmarking the international transaction entered into by the assessee with its associate enterprises, an endeavour is to determine the arm's length price of said transactions and for that purpose, comparison is made to the margins of unrelated parties, which are functionally similar to the assessee. While benchmarking the international transaction, an endeavour is to be made to select such concerns which are functionally similar and the margins of the said concerns are then, to be applied in order to determine the arm's length price of the international transaction undertaken. The assessee before us was engaged in providing ITES services and while benchmarking international transaction of the assessee with its as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55 (Bang.) has excluded the said concern from the list of comparables in a similar situation following the decision of the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited vs. DCIT, (2013) 32 taxmann.com 21 (Hyd.). 15. We have considered the submissions of the Ld. Representative for the assessee and also the stand of the Revenue as emerging from the order of the TPO. In our view, the ratio laid down by the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) and by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) is squarely applicable to the present case also. The aforesaid Benches of the Tribunal found that during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable. 15. Further, similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal in its order dated 02.02.2015 (supra) in the hands of the assessee because the said concern was operating in a different business model. The relevant findings of the Tribunal are as under :- 21. The third concern, which is sought to be excluded by the assessee is Cosmic Global Ltd.. The assessee has contended before the TPO that the said concern needs to be rejected on the ground that it was engaged in BPO and Translation services whereas assessee was an ITES provider, and therefore concern was functionally dissimilar. However, the TPO rejected the pleas of the assessee and considered the said concern as a comparable on the ground that export income of the said concern was more than 50%. 22. Before us, Ld. Representative for the assessee referred to the objections raised before the DRP to point out that the said concern was liable to be excluded from the final set of comparables. Firstly, it is pointed out that the said concern was offering Accounts processing services and transcription services and was not comparable to the activities of the assessee as the said concern was into BPO and Translation services. It was also pointed out by referring to the websi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Ld. Representative for the assessee is that the said concern is operating in a different business model wherein much of it s activities are outsourced whereas the business model of the assessee is different. In an outsourcing business model obviously the expenditure incurred on employee costs would be low in comparison to the expenditure incurred on outsourcing. Ostensibly, where IT enabled services are outsourced to a third party vendor then the margin derived by the said concern would be attributable to services rendered by the outsourced vendor. Per contra, where IT enabled services are being rendered by a concern through its own employees, the margins from rendering of services by the said concern would be attributable to its own employees. Obviously, the level of margins in the two business models would not be comparable. The Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) has held that concerns who act as intermediateries having outsourced it activity cannot be said to be comparable with a concern who is rendering services through its own employees. The said proposition has also been upheld by the Hyderabad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) had held that even if the assessee had not challenged the inclusion of the comparable before the authorities below, the same could be challenged before the Tribunal for the first time. Accordingly, we hold that the assessee at this point can raise the said issue. Now, the second part of the objection was that the company had outsourced its vendor and was making high vendor payments as compared to the sales and hence was not comparable. While adjudicating the exclusion of M/s. Vishal Information Technologies Ltd., we have in paras hereinabove already considered this aspect of the companies outsourcing to vendors and held M/s. Vishal Information Technologies Ltd. to be not functionally comparable. Following the same parity of reasoning, we hold that M/s. Cosmic Global Ltd. is not functionally comparable. 18. Apart from the decision in the case of PTC Software (India) Private Limited (supra), the decision of Hyderabad Bench of the Tribunal in the case of M/s Capital IQ Information Systems (India) Pvt. Ltd. vs. Addl.CIT vide ITA No.124/Hyd/2014 dated 31.07.2014 has also been relied upon by the assessee to justify the exclusion of M/s Cosmic Global Ltd. from the final se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er other segments. The entire outsourcing is confined to Translation charges paid at ₹ 3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune of ₹ 6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment. 13.3. However, we find this case to incomparable on the alternative argument advanced by the Id. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at ₹ 27.76 lacs. We have discussed this aspect above in the context of CG-VAK's case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at ₹ 86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at ₹ 27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration also, the same needs to be excluded from the final set of comparables. Accordingly, we hold so. 20. The next concern which as per the assessee is to be excluded from the final set of comparables is Informed Technologies Ltd. The learned Authorized Representative for the assessee pointed out that first of all, the said concern is working on the same principle as Cosmic Global Ltd. because it has high transaction charges and low employee cost ratio. For the year under consideration, the employee cost to total cost ratio was 36.79% of Informed Technologies Ltd. compared to 71.26% of the assessee. The learned Authorized Representative for the assessee stressed that following the principle laid down by the Tribunal in assessee s own case for assessment years 2008- 09 and 2009-10, wherein Cosmic Global Ltd. was found to be not comparable due to it being functionally dissimilar, similarly, Informed Technologies Ltd. is also to be excluded on the same ground. 21. Another aspect raised by the learned Authorized Representative for the assessee with regard to Informed Technologies Ltd. was that the said concern was showing abnormal profitability trend. The learned Authorized Repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chmarking the international transaction in the hands of assessee is showing such differential profitability earned from year to year, then such a concern cannot be picked up as being functionally similar because of abnormal profitability trend. In this regard, we find that Pune Bench of Tribunal in case of Cummins Turbo Technologies Ltd., UK Vs. DDIT (Int. Tax,) (supra) had also held that Informed Technologies Ltd., because of its abnormal profitability trend, is to be excluded from the final list of comparables. Accordingly, we hold so. 26. Another concern which was selected by the TPO was Jeevan Softech Ltd. The learned Authorized Representative for the assessee before us pointed out that the TPO has erred in working of the margins of said concern by adopting sales at ₹ 1.41 crores, which admittedly is revenue from BPO operations. However, the TPO has failed to consider ERP segment revenue which is also classified in the audited financial statement of Jeevan Softech Ltd. as being from ITES segment and if the segmental margins of ITES segment are taken up, which includes total sales / income of ₹ 1,74,43,276/-. The margin of the said concern worked out to 8.04% as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of comparables, there is no merit in further claim of assessee for allowing risk adjustment, where no adjustment is to be made in the hands of assessee on account of arm's length price. Accordingly, this ground of appeal also becomes infructuous. 31. Now, coming to ground of appeal No.6 raised by the assessee i.e. against the plea that contemporaneous data for the past two years to be applied in order to benchmark the arm's length price of international transaction. In view of the provisions of section 10B(4) of the Act, we find no merit in the said claim of assessee and single year s data is to be used unless and until the assessee can bring on record evidence to prove that the single year s data of comparable is not functionally similar. Accordingly, ground of appeal No.6 is also decided against the assessee. 32. The issue in ground of appeal No.9 i.e. charging of interest under sections 234A, 234B and 234C of the Act, is consequential and hence, the same is dismissed. In the said ground of appeal, the assessee has also raised plea against initiation of penalty proceedings under section 271(1)(c) of the Act, which is premature and hence the same is dismissed. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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