TMI Blog2018 (3) TMI 1198X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to ₹ 9,15,422/- from total turnover for the purpose of calculating the deduction u/s 10A of the Act. - ITA No.436/Del./2013 And ITA No.496/Del./2013 - - - Dated:- 20-3-2018 - SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER For The ASSESSEE : Shri Manoneet Dala Vishnu Goel, ARs And Shri Gaurav Bhutani Veenu Agarwal, CAs For The REVENUE : Shri H.K. Choudhary, CIT DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : Present cross appeals filed by the assessee as well as by the Revenue are being disposed of by way of consolidated order to avoid repetition of discussion. 2. The Appellant, M/s. H S Software Development and Knowledge Management Centre Pvt. Ltd. (hereinafter referred to as the taxpayer ) by filing the present appeal sought to set aside the impugned order dated 23.11.2012, passed by the ld. CIT (Appeals)- XX, New Delhi qua the assessment year 2008-09 on the grounds inter alia that :- 1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. CIT (A) is bad in law and void ab-initio. 2. That on facts and circumstances of the case and in law, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elhi qua the assessment year 2008-09 on the grounds inter alia that :- 1. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in directing to exclude M/s Mold-Tek Technologies Ltd from the list of comparables? 2. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in restricting the addition from ₹ 2,08,34,850/- to ₹ 1,63,19,800/-, made in the income of the assessee being difference between the Arm's Length Price? 3. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law directing the AO to exclude the telecommunication expenses amounting to ₹ 9,15,422/- from the total turnover while calculating the deduction u/s 10A? 4. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. H S Software Development and Knowledge Management Centre Pvt. Ltd., the taxpayer is a wholly owned subsidiary of Heidrick Struggles Inc., USA ( HSI ) which in turn is a subsidiary of Heidrick Struggles International Inc., USA ( HSII ). The taxpayer is into providing Information Technology Enabled back office support services relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services Ltd., (vi) Genesys International Ltd., (vii) Infosys BPO Ltd., (viii) Vishal Information Technologies Ltd., and (ix) Wipro Ltd.. On the other hand, the Revenue has also filed cross appeal seeking inclusion of Moldtek Technologies Limited rejected as comparable by the ld. CIT (A). 8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. TAXPAYER S APPEAL (ITA NO.436/DEL/2013) GROUND NO.1 9. Ground No.1 is general in nature, hence does not require any adjudication. GROUND NO.3b 3d. 10. Grounds No.3b 3d are dismissed having not been pressed during the course of arguments. GROUNDS NO.3a, 3c, 3e 3f 11. The taxpayer is providing back office services relating to creation and maintenance of database of prospective employers and candidates who have sent their resumes to HSII in accordance with the preset criteria developed by HSII and including into search palace. However, the ld. DR for the Revenue contended that the taxpayer is not a low end BPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 66.25 12 Genesys International 47.19 48.15 13 HCL Comnet Systems Services Ltd. (seg) 388.73 32.97 14 ICRA Online Ltd.(Seg) 8.23 11.22 15 Infosys BPO 825.08 20.03 16 l-service India Pvt. Ltd. 13.39 9.73 17 Mold Tek Technologies Limited 17.85 96.66 18 R System International Ltd(seg) 21.33 4.30 19 Spanco Ltd (seg) 41.70 8.94 20 Wipro BPO 1, 158.80 30.13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue of Accentia from ITES is 80.87%, hence passed 75% revenue filter applied by the TPO. 18. Perusal of the schedule forming part of the profit loss account, available at pages 118 and 119 of the paper book, which is part of the annual report shows that sufficient segmental data to work out profits from ITES is not available. Furthermore, Accentia fails employee cost filter as it has incurred 11.23% of its revenue on employee cost vis- -vis 54.40% of the taxpayer as against the threshold limit of 25% of the revenue. Complete details have been given by the taxpayer in its TP study available at page 390 of the paper book-2. 19. Furthermore, during the year under assessment, the taxpayer undergone extra ordinary events leading to 75% increase in its revenue because of mergers and takeovers which have been highlighted in the annual report available at page 116 117 of the paper book, the snapshot of which is reproduced as under for ready perusal:- Acquired Thunga Software Pvt ltd. an 8-year old Medical Transcription Coding Company with more than 8 years' track record in Bangalore. Consolidated the operations of Asscent Infoserve Pvt Ltd, the subsidia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) A.No.1316/Bang/2912 for AY 2008-09 (available at pages 33 to 58 of the convenience paper book). 22. Undisputedly, Acropetal has two segments : one, ITES and another, engineering design services and TPO has taken engineering design service segment as a comparable to the taxpayer. 23. The ld. AR for the taxpayer drew our attention to Safe Harbour Rules notified by Department of Revenue, Central Board of Direct Taxes, relevant page 18 of the paper book, wherein engineering and design services have been considered as Knowledge Process Outsourcing. For facility of reference, relevant part of Safe Harbour Rules is reproduced as under :- ( g) knowledge process outsourcing services means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:- ( i) geographic information system; ( ii) human resources services; ( iii) engineering and design services; ( iv) animation or content development and management; ( v) business analytics; ( vi) financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the taxpayer from the website of the Cross Domain, available at pages 156 to 163 of the paper book, shows that Cross Domain is into combining extensive industry knowledge and advanced technical expertise to enable enterprises to realize significant return on investment; that Cross Domain has more than a decade of expertise in software development and delivery in payroll, HR and process automation/BPM domain; that Cross Domain solutions have enabled clients to reduce turnaround time, improve productivity and save on costs year after year and is offering solutions in software development maintenance, software testing, infrastructure setup management, consulting, architecture configuration installation.. So, aforesaid profile of the Cross Domain shows that it is a KPO and also developing product suites for payroll processing services and as such is not a valid comparable vis- -vis taxpayer which is a low end BPO. 24. So, when it is not in dispute that the taxpayer is a low end BPO, the Cross Domain being a high end KPO and into developing of product suites, it cannot be a suitable comparable. Comparability of Cross Domain has been examined by the coordinate Bench of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outsourcing services means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:- ( i) geographic information system; ( ii) human resources services; ( iii) engineering and design services; ( iv) animation or content development and management; ( v) business analytics; ( vi) financial analytics; or ( vii) market research. 29. Furthermore, Eclerx also proved to have undergone extra ordinary event due to acquisition, extract of the relevant information of the annual report, available at page 121 of the paper book, proves that Eclerx has acquired UK based Igentica Travel Solutions Limited on July 27, 2007, which has provided Eclerx with a set of 28 large customers primarily in Europe, thus strengthening the company s presence in that geography. Acquisition also given an entry platform into new vertical viz. travel and hospitality besides consulting the company s position in retail and manufacturing spaces and the integration was on trac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .5637/Del/2011 for AY 2007-08 . 33. When we peruse TP order, relevant pages 297 to 299 of the paper book, the taxpayer raised objection that HCL has failed related party transaction filter as well as it has having different financial year ending and the data obtained u/s 133 (6) is unreliable. However, the TPO has not disposed of all these objections. When apparently HCL has financial year from July 1 to June 30, it fails the filter not to adopt company having different financial year applied by the TPO himself. Furthermore, TPO has applied RPT filter. The taxpayer has given complete details of related party transactions carried out by the taxpayer at page 417 of the paper book which is 27.12% as against TPO s own filter of less than 25%. 34. Comparability of HCL for benchmarking the international transaction was examined in taxpayer s own case for AY 2007-08 (supra) and it was held to be an invalid comparable by returning following findings :- 29. Identical issue has come up before the coordinate Bench in Motorola Solutions India Private Limited (supra) wherein it is held that by applying the threshold limit of 15% of RPT transaction sufficient comparables are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity different extracts from AR is extracted below:- As per Page-5 of Annual Report- We are progressing well towards our goal to be an innovation and IP-led geospatial solutions provider touching a/l core areas of the economy. Further, as per Page-6 of AR:- your company is the exclusive Reseller for Navteq data for the Enterprise space in India Navteq is the world leader in navigable maps and sheet data Further, as per Page-14 of AR - Genesys is today one of India's fastest growing geospatial services and content providers The Company caters to the needs of consumer mapping, navigation, internet portals as well as infrastructure players Including state and local governments. Further, as per Page-16 of AR :- Our capabilities 1. GIS Consulting, 2. 3D Mapping, 3. Navigation maps, 4. LiDAR. 5. Photogrammetry Remote Sensing services, 6. Utility Services, 7. Image Processing, 8. Surveying, 9. Business Geographies Logistics, 10. Cadastral Mapping, 11 City Scape, 12 Telecommunications From the above, it is observed that the functionality of this company is signifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g significant expenditure on R D and that Infosys BPO is a market leader in ITES vis- -vis the taxpayer which is a captive service provider taking minimal risk as against Infosys BPO which is a full-fledged risk bearing company having diversifying business. So, we order to exclude Infosys BPO from the final list of comparables. VISHAL INFORMATION TECHNOLOGIES LIMITED (VISHAL) 42. TPO retained Vishal as a comparable on the basis of information u/s 133 (6) of the Act despite the objections raised by the taxpayer; that it is functionally different; that erroneous margins have been calculated by the TPO and relied upon the decision of taxpayer s own case for AY 2007-08 (supra), Symphony Marketing Solutions India Pvt. Ltd. (supra) and Rampgreen Solutions Pvt. Ltd. in ITA No.102/2015 for AY 2008- 09 (relevant paras 14 to 17, available at pages 42 to 46 of the convenience paper book) 43. Now, the taxpayer has sought exclusion of Vishal on grounds inter alia that it is functionally different and that it fails employee cost filter applied by the TPO. Perusal of page 138 of the annual report shows that Vishal has incurred expenditure on data entry charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extra ordinary events, duly detailed at page 440 of the paper book by the taxpayer by way of amalgamation of the companies viz. Wipro Infrastructure Engineering Limited, Wipro Healthcare IT Limited, Quantech Global Services Limited (subsidiary companies) with Wipro Limited, approved during the FY 2007-08 by the Hon ble High Court of Karnataka and the Hon ble High Court of Andhra Pradesh. 47. Wipro was ordered to be excluded by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2007-08 (supra) and in Symphony Marketing Solutions India Pvt. Ltd. (supra) on the ground that it has a significant brand value having high turnover and a market leader in its field whereas the taxpayer is a tiny company and having diversified business and huge expenditure on R D. So, in view of what has been discussed above and following the decisions rendered by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2007-08 (supra) and in Symphony Marketing Solutions India Pvt. Ltd. (supra), we do not find Wipro as a suitable comparable, hence ordered to be excluded. GROUND NO.4 48. Ground No.4 qua initiation of penalty proceedings u/s 271(1)(c) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice providers whereas Mold-Tek is operating in two business segment i.e. ( i) plastic divisions which is into manufacturing of lube and oils, paints, pet projects, consumer products etc.; and ( ii) IT Division specialized in providing structural design and detailing services which could be categorized as structural engineering services. CIT (A) has also excluded this company as comparable on ground of abnormal growth which is 204% in FY 2006-07 with a CAGR of 113% for 3 years. 12. Assessee relied upon the decisions rendered by ITAT, Hyderabad Bench in the case of Capital IQ Information Systems (India) Private Ltd. (ITA No.1961/Hyd/2011) (available at pages 812 to 839 of the Paper Book-III, wherein comparability of Mold-Tek Technologies Ltd. has been examined with Capital IQ Information Systems (India) Private Ltd. (supra) and ITES company almost on identical ITES company. Coordinate Bench in Capital IQ Information Systems (India) Private Ltd. (supra) while taking into consideration the factum of merger from 01.10.2006 impacting results of the company and also that the activity of the company is functionally different, it being engaged in pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TTJ 556 returned the following findings :- 7.4 I have carefully considered the submission of the appellant as well as the order of the AO. The AO is not right in excluding other income while computing the profit eligible for deduction u/s 10A once again when the appellant itself had deducted it while computing the eligible deduction u/s 10A. This amounts to double disallowance. Therefore, the AO is directed to delete the deduction of ₹ 1,41,274/- while calculating 10A deduction. There is merit in excluding the 20% of the telecommunication expenses as calculated by him from the total turnover a well. This issue has been decided by the Higher Authorities in Tata Elxsi and other cases (supra). Therefore, AO is directed to exclude the telecommunication expenses amounting to ₹ 5,307,691/- (pertaining to this assessment year) from the total turnover while calculating the deduction u/s 10A of the IT Act. To this extent, relief is given to the assessee . 56. When it is not in dispute that for the purpose of section 10A, the term total turnover is to be interpreted by computing the entire export turnover as well as domestic turnover and in case, expens ..... X X X X Extracts X X X X X X X X Extracts X X X X
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