TMI Blog2017 (12) TMI 650X X X X Extracts X X X X X X X X Extracts X X X X ..... SMT. BEENA A. PILLAI, JUDICIAL MEMBER For The Appellant : Sh. Nageshwar Rao, Adv. For The Respondent : Sh. HK Chaudhary, CIT, DR ORDER PER BEENA A. PILLAI, JM: The present appeal has been filed by the assessee against the final assessment order dated 30/11//2016, passed by ITO, Ward 8(2), u/s.143(3), read with section 144C of the Act. 2. The assessee filed its return of income for the year under consideration on 30/11/2012, declaring total income of ₹ 3,97,72,641/-. The return was selected under scrutiny and notices under section 143(2) of the Act was issued. The ld.AO observed that assessee entered into international transaction during financial year 2011-12, under consideration. A reference was thus made under section 92C (1) by the ld. AO to Transfer Pricing Officer (TPO) to determine arm s length price (ALP) of international transactions undertaken by assessee. 2.1 Ld. TPO issued notice calling for various details from assessee. Assessee accordingly filed documentation prescribed under Rule 10 D of the Income Tax Rules and other details sought by the ld.TPO. The ld.TPO observed from the details provided information technology enabled se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of comparables which included some of the comparables selected by the assessee. The comparables shortlisted by Ld.TPO are as under: S.No. Name of the company OP/OC % 1 Accentia Technologies Ltd. 12.82 2 Eclerx Services Ltd. 61.64 3 TCS E-serve Limited 65.82 5 BNR Udyog Ltd. 50.33 6 Excel Infoways Ltd 42.50 7 Microgenetics Systems Ltd 9.79 8. R Systems International Ltd. 1.91 9. Informed Technoligies India Ltd. 22.39 10. Infosys BPO Ltd. 36.75 11. E4e Healthcare Business Pvt.Ltd 23.13 12. Acropetal Technologies Ltd 19.51 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omplying with the TP documentation requirements 5. The Ld TPO has applied filters which are not justified in the facts and circumstances of the case. 6. That on the facts of the case and in law, the Ld DRP/TPO/AO have erred by using 'Turnover less than INR 1 crore as a comparability criterion and not rejecting companies with high turnover. 7. That on the facts of the case and in law, the Ld DRP/TPO/AO have erred by rejecting certain comparable companies identified by the Assessee for having different accounting year (i.e. companies having accounting year other than 1 April to March 31). 8. That on the facts of the case and in law, the Ld DRP/TPO/AO have erred by using Export earnings less than 75 percent of operating revenues as a comparability criterion 9. That on the facts of the case and in law, the Ld DRP/TPO/AO have erred by using Employee cost greater than 25 percent of Sales as a comparability criterion for the impugned transaction. 10. Without prejudice and in the alternative to the above ground, even if the criterion of Employee cost greater than 25 percent of Sales is accepted, the Ld DRP/TPO/AO have erred on facts and circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time of hearing of the appeal. The Appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case. 4. At the outset Ld.Counsel submitted that; Grounds 1 - 3 are general in nature. Grounds 4-6, 12 and 13 are Academic. Ground No. 16 is premature. Ground No. 17 is consequential in nature. 4.1. We are therefore left with adjudicating Ground No. 7-11 and Ground No. 14-15 . Ground No. 7-11 deals with the inclusion/exclusion of certain comparables in the final list by Ld.TPO. We have heard the rival contentions of both the sides, perused the orders passed by the authorities below, the paper books filed by the assessee and the case laws relied upon by both the sides. The dispute that arises is with respect to selection of comparables. To be precise, the controversy rotates around exclusion of following comparable in the list of comparables in respect of:- 1. Eclerx Services Ltd 2. Infosys BPO Ltd 3. TCS E-Serve Ltd 4. Excel Infoways Ltd. 5. BNR Udyog Ltd Apart from that, the assessee is insisting on inclusion of the following comparables which were not included by the DRP as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intangible assets with reference to the services rendered to the associated enterprise. Thus on the basis of the above functional analysis the assessee can be characterised as a routine service provider operating in a low risk or almost risk mitigated environment. 5.4 With the above understanding of the nature of services provided by assessee to its AE s, we will now proceed to examine the compatibility or otherwise of the companies disputed by assessee to the extent. 6. We shall first take up comparables where the assessee contends for exclusion. Eclerx services Ltd. 6.1. Ld.TPO considered this as a comparable. Assessee objects to the compatibility of this company due to functional incompatibility. Ld.AR submitted that this company is engaged in providing KPO services which is distinct from the nature of services provided by the assessee. It has been submitted by Ld. Counsel that there is no segmental information available in the financials for the year under consideration of this company. The financial statement of this company is placed at page 58- 59 of the paper book volume 2. It has further been submitted by Ld. Counsel that the DRP for assessment year 2011-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available in respect of each category of services rendered. It is also observed that during the year the company has acquired Agilyst Inc., a US company providing operations and a tantalizing support to some of the largest cable and telecommunications companies in the world. Whereas assessee is only providing services to its associated enterprises on a fixed cost base. In our considered opinion this company is functionally dissimilar to that of the assessee. Accordingly we direct the Ld. TPO to exclude this company from the list of comparables. Infosys BPO Ltd 6.6. The TPO included this company despite assessee s objections. Assessee had objected for inclusion of this company as it provides high-end integrated services in the nature of business platforms, customer service outsourcing, finance and accounting etc. it has been submitted by Ld. Counsel that this company has been excluded by this Tribunal in ITA No. 907/del/2016 vide order dated 25/07/16 in assessee s own case, for assessment year 2011-12. It has been submitted by Ld. Counsel that there has been no change in the functions of this company as well as that of assessee vis-a-vis assessment year 2011-12. 6.7. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited currency risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded. 6.7. Since there is no similarity in the functional profile of this company and assessee respectfully following the ratio laid down in Agnity India Technologies (supra), we direct the Ld.TPO/AO to remove this company from the list of comparables. 6.9. Ld. DR has not been able to bring out any distinguishing feature in the functions of this company vis-a-vis previous year. Respectfully following the same we do not find any reason to differ from the above. Accordingly we direct Ld. TPO to exclude this company from the list of comparables. TCS E-Serve Ltd 6.10. The ld.TPO had included this company as a comparable, despite objections by the assessee. The assessee objected the inclusion of this company, as it provided financial information processing and customer contact services with high-level of foreign expenditure and abnormal profits. Further Ld. Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel submitted that there is no separate segmental information available in respect of revenue generation as this company is categorised to be involved in information technology/BPO related services. It has been submitted by Ld.Counsel that this company does not fulfill the requirement of employee cost filter as applied by TPO in the case of comparables selected by assessee. 6.15. On the contrary Ld. DR submits that the TPO had called for the relevant details from this company by issuing notice under section 133 (6) wherein the company in reply to the notice has informed Ld. AO regarding employee cost of ₹ 2.02 crores and turnover pertaining to ITES/BPO segment. The relevant information sought from this company has been reproduced at page 24-25 of the order passed by Ld.TPO. Ld.AR submitted that on the basis of the information received from this company it has to be considered to be a fit comparable, however he submitted that these details have not been analysed by TPO vis-a-vis the financial report that is available in the paper book volume 2 at page 234-295. 6.16. We have considered the rival submissions and perused the relevant material on record. It is observed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall now take up the comparables where assessee contends for inclusion. CG-VAK software and exports Ltd 8.1. It has been submitted by Ld. Counsel that ld.TPO excluded this company from the list of comparables without giving any reasons. Datamatics Financial Services Ltd., Calibre Point Business Solutions Ltd., are concerned ld.TPO rejected these companies due to different financial year ending in the data submitted. 8.2. Ld. Counsel submitted that assessee has now obtained the data as required by ld.TPO in respect of these companies , and therefore may be set aside for reconsideration by Ld. TPO on the basis of the same. 8.3. The Ld. D.R. placed his reliance on the findings of the authorities below. 8.4. We have perused the submissions advanced by both the sides in the light of the records placed before us. On perusal of the order passed by Ld. TPO it is observed that there has been no cogent reason assigned by ld.TPO for rejecting these comparables. DRP in its order at page 68 to 69 has simply highlighted in a tabular form upholding the rejection of these comparables. It is observed that there has been no application of mind by ld.TPO vis-a-vis financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 and only consider companies with financial year ending 31/12/2010. The number of comparable companies available after using such a filter would be very limited and therefore, in such a case the net margin earned by the comparable companies would be different from the one that would be computed without using this filter. This view is supported by the coordinate bench of this Tribunal in the case of DCIT vs. McKinsey knowledge Centre India private limited in ITA No. 2195/del/2011 wherein it has been held that if a company is functionally comparable, it cannot be rejected merely on the ground that data for the entire financial year was unavailable, if the data can be reasonably extrapolated. Hon ble Tribunal further observed that rule 10 B (4) cannot be interpreted in such a rigid manner so as to defeat the basic objective of the rule. The relevant extract of the ruling are reproduced below: 23. .. However, in our considered opinion, if a comparable is functionally same as that of the tested party then the same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record the results were financial year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orted in 25 SOT 226 and * Mercer Consulting India Pvt. Ltd. reported in 150 ITD 1. 9.1. On the contrary Ld.CIT DR placed reliance upon the orders of authorities below 9.2. We have perused the submissions advanced by both the sides and the light of the records placed before us and the decisions relied upon by Ld. counsel. 9.3. Respectfully following the ratios laid down in the above judgments we are in agreement with the Ld. Counsel, that while comparing the margins earned by the comparable companies there is always the assessee, the difference on account of working capital employed should also be factored into. In order to improve the reliability of results, the financial data of comparable companies are required to be adjusted. The above stated decisions of this Tribunal has held that in practice such adjustments usually include adjustments for accounts payable, accounts receivable and inventory. 9.2. We accordingly allow this ground of appeal raised by the assessee. 10. Ground No. 16 deals with the initiation of penalty proceedings under section 271(1)(c ) of the Act. As this is premature we are not inclined to answer this question. 11. Ground No. 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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