TMI Blog2018 (4) TMI 1064X X X X Extracts X X X X X X X X Extracts X X X X ..... d Assessing Officer(hereinafter called the AO ) u/s. 143(3) r.w.s. 144C(1) of the Income-tax Act,1961 (hereinafter called the Act ), which was passed by the AO in pursuance of directions dated 27-11-2015 issued by Dispute Resolution Panel-3,Mumbai (hereinafter called the DRP ) for assessment year 2011-12. 2. The grounds of appeal raised by Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called the tribunal ) in ITA no. 944/Mum/2016, reads as under:- 1. On the facts and in the circumstances of the case and in law, the Dispute Resolution Panel has erred in directing to reject M/s. Accentia Technologies Ltd (in respect of ITes Service) as comparable for benchmarking ALP of International Transaction of the assessee with the AEs. 2. On the facts and in the circumstances of the case and in law, the Dispute Resolution Panel has erred in directing to include M/s. R. System International Ltd and Caliber Point Business Solutions Ltd as the comparables for benchmarking ALP of International Transaction of assessee with the AEs. 3. The appellant craves leave to add, amend, or alter any grounds or add a new ground whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormed by the comparable companies selected to find out the relatively equal degree of comparability in accordance with Rule 10B(3) of the Income-tax Rules, 1962 ('the Rules'). 5. Incorrect selection of comparables by the learned TPO 5.1 On the facts and in the circumstances of the case and in law, the learned AO / TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of TPO in selection of two companies namely Acropetal Technologies Limited and Infosys BPO Limited as comparables. The Assessee submits the said companies ought not to be taken as comparables. 6. Additional filters are unwarranted in the comparability analysis 6.1. On the facts and in the circumstances of the case and in law, the learned AO / TPO erred and the Hon'ble DRP further erred in applying additional filter of rejecting companies with less than 75 percent earnings from exports, which is unwarranted in the comparability analysis. 6.2. On the facts and in the circumstances of the case and in law, the learned AO / TPO erred and the Hon'ble DRP further erred in applying additional filter of rejecting companies with losses / diminishing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned AO / TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the learned AO / TPO in not allowing risk adjustment in accordance with the Rules to account for difference between international transactions and the alleged comparable uncontrolled transactions selected by the learned AO / TPO. The Assessee craves leave to add, amend, delete, rectify, substitute and modify any of the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing the appeal. 4. The assessee is captive service provider engaged in IT enabled services such as back office support services. The assessee filed its return of income on 26.11.2011, which was selected for scrutiny by Revenue. The assessee had entered into international transaction and had filed reports in form no. 3CEB u/s. 92E r.w.r. 10E of the Income-tax Rules,1962 on 29.11.2011. A reference u/s. 92CA(1) was made by the AO to Transfer Pricing Officer(hereinafter called the TPO ) who made adjustments to the tune of ₹ 20,12,29,190/- in the value of Arm Length Price(ALP) of transactions and the said order was passed by TPO u/s. 92CA(3), dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision of Hon'ble ITAT in the assessee's own case for A.Y.2009-10, this company, is not considered as.a comparable. The TPO is directed accordingly. Both the parties have advanced their arguments before us for inclusion as well as rejection of the said comparable. Before we proceed further it is pertinent to mention at this stage that Special Bench of ITAT was constituted at Mumbai in the case of the assessee itself for AY 2008-09, and Special Bench had pronounced its order in ITA no. 7466/M/2012, dated 07-03-2014 wherein at para 80, it was held as under:- 80. A perusal of the functional profile of the assessee company shows that although the services claimed to be provided by it to the AEs as IT services such as process support, process optimization and technical support are not in the nature of low end services such as voice or data processing as they require some degree of special knowledge and domain expertise in the concerned field, the revenue generated from these services was only about 10% of the total revenue generated during the year under consideration. There were also some other services rendered by the assessee company to its AEs as IT enabled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices to its AE s which are in the nature of providing back office support services which are low end in nature. It is not brought on record by Revenue that there is any significant change in nature of business of the assessee during the impugned year under consideration warranting any interference by us to the aforesaid finding of the tribunal. In the impugned year also 98% of the work force is graduate and post graduate, while only 2% of the work force constitute professionals. The TP study report detailing FAR analysis for the year under consideration also stipulates assessee to be in the back office support services which are low end in nature. Thus, in our considered view finding of the Special Bench of the tribunal for AY 2008-09 will continue to apply to impugned assessment year i.e. AY 2010-11 under consideration before us as nothing has been brought on record by the Revenue as to any change in the nature and characteristic of the functions performed, assets deployed and risks assumed by the assessee during the year under consideration vis-a-vis AY 2008-09. The tribunal in the case of the assessee itself while adjudicating appeal for AY 2010-11 in ITA no. 1082/M/2015 vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal in Mearsk Global Service Centre India Pvt. Ltd., learned Departmental Representative submitted, the Tribunal itself has held that the BPO segment again cannot be further divided into high end and low end service. Learned Departmental Representative submitted, as all the functions of this company is similar to assessee, it is to be treated as comparable. Referring to the financials of the company, he submitted, all income has been reported under single segment and the software development, if any, is for own use of the company. 11. We have considered the submissions of the parties and perused the material available on record. Though, the Transfer Pricing Officer has categorized the assessee as a KPO service provider, however, as could be seen from the extracted portion from the order of the Tribunal, Special Bench decision in assessee s own case in Para 3.13 of the DRP s direction, the Special Bench has specifically observed that work force employed by the assessee comprised of 96% of graduates and post graduates and only 4% workforce was professional such as Chartered Accountant, B. Tech., etc., which goes to show that function performed by the assessee to its A.E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables included by the assessee. So far as R. System International Ltd. (Segmental) is concerned, it has been pointed out by the learned senior counsel that this company was accepted as a comparable by the TPO in assessee s own case in the A.Y. 2007-08 and also by the DRP in A.Y. 2008-09. The TPO has rejected this comparable in this year, simply on the ground that it is not purely a KPO service provider and having calendar year ending. On the contrary the BPO segment of R. System is functionally comparable to the assessee and simply because it is following calendar year accounting it cannot be rejected. In A.Y. 2008-09, the DRP in the light of functions performed by the assessee as well as BPO segment of R. System International, has accepted the same to be comparable company. This fact has also been noted by the Special Bench in para 12 of the order. 12. We have also noted, considering the aforesaid order of the Tribunal, the DRP in assessee s own case in assessment year 2011 12 and the Transfer Pricing Officer himself in assessment year 2012 13 have rejected Accentia Technologies Ltd. as a comparable. The Tribunal, Delhi Bench in Equant Solutions India Pvt. Ltd. v/s DCIT, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o not find any significant variation in the functions performed by the assessee vis-a-vis preceding year for which the tribunal has passed the above order dated 29-07-2016 for AY 2010-11. We have also gone through the financial statements of Accentia Technologies Limited which are placed by the assessee in paper book and we also found that there is no variation in the functions performed by the said company in the impugned year i.e. AY 2011-12 vis-a-vis earlier years. We do not find any reason to deviate from the afore-said decision of the tribunal in ITA no. 1082/M/2015 dated 29.07.2016 for AY 2010-11. Thus we uphold the decision of the DRP and dismiss the appeal of the Revenue on this ground. Revenue fails on this ground. We order accordingly. 6. Ground no. 2 raised by the Revenue is to challenge the decision of DRP wherein it directed TPO/AO to include R System International Ltd. and Caliber Point Solutions Ltd. as comparable. The TPO vide its order u/s. 92CA(3) had rejected R System International Ltd. and Caliber Point Solutions Ltd. on the ground that financial year of these two companies have ended in December while assessee is following financial year ending 31st March. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not accepted by the DRP in assessee s own case for assessment year 2008 09 and, in fact, DRP held R. Systems International Ltd. as comparable to the assessee. Taking note of the aforesaid observations of the DRP, the Transfer Pricing Officer himself in assessment year 2007 08, accepted R. Systems International Ltd. as a comparable. It further appears from record that in assessment year 2009 10, the Assessing Officer again rejected R. Systems International Ltd. as comparable on the ground that it is not comparable to KPO service provider like assessee and secondly it has a different accounting period. However, the Tribunal while deciding assessee s appeal for assessment year 2009 10, ITA no.2594/Mum./2014 dated 16th January 2015, accepted R. Systems International Ltd. as comparable to the assessee observing as under: 13. Now coming to the two comparables included by the assessee. So far as R. System International Ltd. (Segmental) is concerned, it has been pointed out by the learned senior counsel that this company was accepted as a comparable by the TPO in assessee s own case in the A.Y. 2007-08 and also by the DRP in A.Y. 2008-09. The TPO has rejected this comparable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider R. Systems International Ltd. as a comparable. Thus, ground no.6, is partly allowed. The assessee has also relied on the following case laws to contend that merely because the financial year of the comparable is ending on different date falling within the same financial year as that of the assessee, the comparable will not be liable to be rejected on this short ground only. The assessee relied upon following decision:- Hon'ble Delhi High Court in case of Mckinsey Knowledge Centre India Private Limited (ITA 217/2014) (Page no. 264 of PB II) confirming Hon ble Delhi Tribunal decision (ITA No. 2195/ Del/2011) (Page no. 286 of PB II) Hon'ble Punjab and Haryana High Court in the case of Mercer Consulting (India) Pvt Ltd [TS-664-HC-2016(P H)-TPJ (Page no. 246ofPB II) Hon'ble Mumbai Tribunal in the case of Aegis Limited (ITA No. 7694/Mum/20l4) - (Page no. 309 of PB II) Hon'ble Mumbai Tribunal in the case of Pangea3 Legal Database Systems Pvt. Lid [ITA Nos.2128 1958/M/2014] The Revenue on the other hand has relied upon decision of Hon ble Bombay High Court in the case of CIT v. PTC Software India P. Ltd.(2017) 395 ITR 176(B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1962. In the instant case, we have observed that no prejudice shall be caused to Revenue by inclusion of these comparables having financial year ending on 31st December vis-a-vis assessee closing its financial year on 31st March, which falls within the same financial year as that of the assessee. The data for nine months is common for both the comparable and the assessee, and if the same can be extra-polated with credible accuracy on the basis of data available on record then there is no reason why the said comparable should be rejected. The assessee has also placed reliance on case laws which are detailed above which we have duly taken note of. The tribunal has also accepted R System International Limited as comparable for AY 2009-10 in ITA no. 2594/Mum/2014 vide orders dated 16-01-2015 and also accepted said comparable R System International Limited as comparable for AY 2010-11 and rejected contention that merely because financial year is ending on 31st December vis-a-vis assessee s financial year ending on 31st March, the comparable cannot be accepted. Thus, we direct for inclusion of R System International Ltd. and Caliber Point Solutions Ltd. as comparable for computing ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Maersk GSC India. Findings: The assessee is a BPO. The comparable company is also into BPO activities and therefore both are functionally comparable. The assessee has also contended that Infosys BPO, is a giant company as compared to the assessee company. In this regard, it is relevant to note that the turnover of this company is ₹ 1129 crores which is only about 4 times that of the assessee company's turnover. Thus, the difference in turnover is not so huge so as to call this company a giant company vis-a-vis the assessee. In this context, the decision of ITAT, Bangalore in the case of Genesys.Integrating System P. Ltd.( ITA No.1231/Bang/2010) becomes relevant wherein the assessee having turnover of ₹ 8.15 crs. was held as comparable to a company of turnover upto ₹ 200-crs. i.e. around 25 times. Regarding the other arguments taken by the assessee, it may be mentioned that comparability of Infosys was considered by ITAT in the case of Willis Processing case (ITA No.4547/Mum/2012) and it has been held that comparability has to be decided strictly on functionality and these arguments are not relevant. Accordingly, Infosys BPO is held as valid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... director s report forming part of the annual report of the company, a copy of which is submitted in the paper book, learned Authorised Representative submitted during the relevant previous year this company had made acquisition by acquiring membership interest of an overseas company viz. Mccamish Systems LLC which provides premier business process outsourcing service to the insurance, retirement and financial service industry and has a large client base. Therefore, this company having operated in different geographic and market conditions cannot be a comparable to the assessee. Further, referring to Schedule 12 to the Profit Loss account of the company for the year ended 31st March 2010, learned Sr. Counsel submitted that the company has incurred selling and marketing expenses which signifies that it has taken marketing risk unlike the assessee. Further, referring to Schedule 13 of Profit Loss account, learned Sr. Counsel submitted, the provisions made for bad and doubtful debt signifies the risk taken by the assessee. Learned Authorised Representative submitted, because of its high turnover, brand value, etc., the Hon'ble Jurisdictional High Court in Pentair Water India Pv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service provider in the decisions referred to earlier. In view of the aforesaid, we exclude this company as a comparable . We do not find any reason to deviate from the aforesaid decision of the tribunal for AY 2010-11 directing for exclusion of Infosys BPO Limited as comparable for computing ALP of the assessee s international transactions with its AE. We have also gone through the financial statement of Infosys BPO Ltd. and that of the assessee which are placed in paper book and we do find any reasons to deviate from the decision already arrived at by the tribunal for earlier year i.e. AY 2010-11. The turnover of Infosys BPO Limited during the previous year relevant to the impugned assessment year was ₹ 1129.11 crores and it continued to be part of Infosys group. Thus, the contention of the assessee are allowed and we direct the AO to exclude this company Infosys BPO Limited as comparable for computing ALP of international transactions entered into by the asseseee with its AE. We order accordingly. 8. The assessee is also aggrieved by the inclusion of the Acropetal Technologies Ltd. as comparable for computing ALP of the assessee s international transactions with it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Technologies Ltd.is engaged in business of development of computer software products offering integrated enterprise solution. It is submitted that this company Acropetal Technologies Ltd. is offering cost effective solutions and created niche presence in BFSI, Health and Energy and is primarily an Engineering Design Services Company. It is claimed that the ratio of software expenses to total operating expenses is 65% and it was submitted that this company cannot be included as comparable because the assessee is in low end back office support services. The assessee has also contended that out of software development expenses to the tune of ₹ 69.92 crores, the amount allocated to healthcare segment is ₹ 4.8 crores. It is claimed that even in segmental analysis, the major expenditure including software development are allocations and not actual and hence the segmental result would require further investigation/analysis. The assessee relied upon the following case laws to contend that the companies carrying out business of software /product development cannot be compared with the assessee, as detailed hereunder:- Hon'ble Mumbai Tribunal in Assessee's own case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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