TMI Blog2015 (11) TMI 1749X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234B of the Act, if any, while giving effect to this order. - I.T. (T.P.) A. No.1765/Bang/2013, I.T.(T.P.) A. No.1783/Bang/2013 - - - Dated:- 4-11-2015 - SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER For The Assessee : Shri Ajit Kumar Jain, C.A. For The Revenue : Smt. Chandana Ramachandran, CIT-III (D.R) ORDER Per Shri Jason P. Boaz, A.M. : These are cross appeals, one by the assessee and the other by Revenue, directed against the order of the Commissioner of Income Tax (Appeals)-IV, Bangalore dt.8.10.2013 for Assessment Year 2008-09. 2. The facts of the case, briefly, are as under :- 2.1.1 The assessee (formerly known as iSeva Systmes P. Ltd.) is engaged in the business of providing customer relationship management services and related Business Process Outsourcing ( BPO ) service. For Assessment Year 2008-09, the assessee filed its return of income on 30.9.2008 declaring total income of ₹ 1,42,99,895. The return was processed under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealthcare Solutions Ltd. (Formerly known as NIttany Outsourcing Services Pvt. Ltd.) 18.54 11. Eclerx Services Ltd. 58.80 12. Genesys International Corporation Ltd. 47.40 13. Infosys BPO Ltd. 19.66 14. IServices India Pvt. Ltd. 10.77 15. Jindal Intellicom Pvt. Ltd. - 10.29 16. Mold-Tek Technologies Ltd. 96.66 17. R Systems International Ltd. (Seg.) 4.30 18. Spanco Ltd. (Seg.) (Earlier known as Spanco Telesystems Solutions Ltd. 8.81 19. Wipro Ltd. (Seg.) 30.05 20. Allsec Technologies Ltd. - 13.29 Average : 24.75 2.1.3 The average profit margin of the comparables sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal raising the following grounds :- 3.1 IT(TP)A No.1783/Bang/2013 Assessee's appeal for A.Y. 2008-09. Grounds of Apepal on Transfer Pricing matters. 1. That the learned CIT (Appeals) erred in upholding the rejection of Transfer Pricing documentation by the learned TPO/A.O and the adjustment made to the transfer price of the appellant in respect of the IT enabled services provided to its AEs. 2. That the learned CIT (Appeals) erred in upholding the determination of a new arm s length price as determined by the learned TPO. 3. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in : a) Upholding the rejection of comparability analysis of the appellant in the TP documentation by the learned TPO. b) Upholding the application of the following additional filters and selection of comparable by the learned TPO in his order, during the course of a fresh comparability analysis for determining the arm s length price; i. accepting companies that fall employee cost filter; ii. accepting companies incurring abnormal profits; iii. accepting companies that fall export turnover filter; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the decision of favourable judgment of appellant s own case for A.Y. 2003-04, wherein it was held that only to extent of 50% of the telecommunication expenditure should be reduced from export turnover. 7. That the learned CIT (Appeals) erred in upholding the ACIT s approach in making computation of interest under 234B of the Act. 3.2.1 In the course of appellate proceedings, the assessee also raised additional grounds :- 1. The learned TPO has, in his fresh study, erred in selecting Accentia Technologies Ltd., Crossdomain Solutions Ltd. and Elclerx Services Ltd. as comparable to the appellant despite the same failing to meet the legally acceptable criteria for comparability. The Hon'ble CIT (Appeals) has also erred in confirming the order of the TPO inthis regard. These companies should be rejected as comparables, notwithstanding that these grounds were not contended before the lower authorities, or were contended on a different parameters. 3.3 We have heard the rival contentions of both the learned Authorised Representative for the assessee and the learned Departmental Representative for revenue in the matter of admission of the additional ground of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to follow the ratio of the Hon'ble Court in the case of Tata Elxsi Ltd 349 ITR 98 and exclude ₹ 1,55,13,784 being the communication charges and ₹ 26,79,667 being expenditure in foreign currency from the total turnover also while computing the deduction under Section 10A of the IT Act as the decision of the High Court is binding, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced form the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only form the export turnover. 5. The CIT (Appeals) erred in not appreciating the fact that the jurisdictional High Court s decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court. 6. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed and that of the Assessing Officer be restored. 7. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables in favour of the assessee. 6. 2 Accentia Technologies Ltd. 6.2.1 The learned Authorised Representative for the assessee submitted that certain extraordinary events have occurred in this company during the relevant previous year that warrant exclusion of this company as a comparable. It was submitted before the bench that as per the Annual Report of this company for the F.Y. 2007-08 it evidences that this company has made acquisitions of Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc., etc. It is submitted that it is for these reasons that the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India (P) Ltd. (supra) has rejected this company i.e. Accentia Technologies Ltd. as comparable to an ITES company providing business support services for this year. 6.2.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee in the case on hand. 6.2.3 We have heard the rival contentions and perused and carefully considered the material on record including the judicial pronouncement cited by the assessee. We find that the coo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and the demerger. A company known as Techmen Tools Pvt. Ltd. had amalgamated with Mold-tek Technologies Ltd. with effect form 1st October, 2006. There was a de-merger of Plastic Division of the company and the resulting company is known as Moldtek Plastics Limited. The de-merger from the Moldtek Technologies took place with effect from 1st April, 2007. The merger and the de-merger needed the approval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is also engaged in rendering engineering design services and software development services which are high end service and require highly skilled employees, whereas the assessee in the case on hand is engaged in providing low end, routine BPO services. In support of its proposition for exclusion of this company from the list of comparables on grounds of functional differences, the learned Authorised Representative of the assessee, inter alia, placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for A.Y. 2008-09 wherein this company was excluded from the list of comparables. 6.3.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.3.3 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncement cited by the assessee. We find that the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt ltd. (supra) held this company to be functionally different from the assessees performing ITES / BPO ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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]. Following the above decision of the co-ordinate bench in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing ITES / BPO based low end support services, this company i.e. Acropetal Technologies Ltd. providing KPO services is to be excluded from the list of comparables as it not functionally comparable to the assessee, in the case on hand. We hold and direct the TPO accordingly. 6.4 Coral Hubs Ltd. (earlier known as Vishal Information Technologies Ltd.) 6.4.1 In respect of this comparable, selected by the TPO, the learned Authorised Representative for the assessee submitted that a perusal of the Annual Report of this company i.e. Vishal Inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held that since Vishal Information Technologies Ltd is outsourcing most of its work it has to be excluded from the list whereas the assessee in the cited case was carrying out the work by itself. In the instant case of the assessee also the assessee was carrying out its work by itself whereas in the case of VITL, it is outsourcing most of its work. We are therefore of the considered opinion that the decision of the ITAT, Mumbai in the cited case on the issue of excluding VITL as a comparable squarely applies. This decision was followed by the decision of the co-ordinate bench of this Tribunal in the case of Netlinx India(P) Ltd in ITA No.454/Bang/2011 dt.19.10.2012 wherein it was held that Vishal Information Technologies Ltd cannot be considered as a comparable. We, therefore, respectfully following the decision of the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd, direct the Assessing Officer / TPO to exclude Vishal Information Technologies Ltd. from the list of comparables. 15. Following the decision of the Tribunal referred to above, we hold that Coral Hubs Ltd. cannot be considered as a comparable. It may also be relevant to point out that the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prints upon clients request, concluded as follows- 18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped from the final list of comparables. In case of Maersk Global service Centre India (P.) Ltd. (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- Insofar as the cases of Tulsan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded. In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable. 16. It is also further noticed that the employee cost/operating sales of this company is a mere 3%, whereas the threshold limit for accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... list of comparables being functionally dis-similar to the assessee in the case on hand as it is engaged in rendering high end KPO services, development of product suites and information systems which are totally different from the low end ITES functions rendered by the assessee in the case on hand. In support of this proposition, the learned Authorised Representative placed reliance on, inter alia, the decision of the co-ordinate bench in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for A.Y. 2008-09 wherein this company was excluded from the list of comparables. 6.5.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.5.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited by the assessee. We find that the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 excluded this company i.e. Crossdomain Solutions Ltd. from the list of comparables as it was providing high end KPO services, and development of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the plea of the Assessee. We hold accordingly. Following the above cited decision of the co-ordinate bench in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing low end ITES / BPO support services, this company i.e. Crossdomain Solutions Ltd. is to be excluded from the list of comparables it is not functionally comparable to the assessee in the case on hand. We hold and direct the TPO accordingly. 6.6 Eclerx Services Ltd. 6.6.1 The learned Authorised Representative for the assessee submitted that this company is functionally dis-similar from the assessee in the case on hand as its business profile shows that it renders high end KPO services in the field of data analytics and operations management which require a high level of skill sets in comparison to the assessees which performs routine, low and ITES/BPO support services. In support of its proposition for excluding this company i.e. Eclerx Services Ltd., from the list of comparables, the learned Authorised Representative, inter alia, placed reliance on the decision of the co-ordinate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ledge Process Outsourcing(KPO) Services. 15. On considering the objections of the assessee in relation to this company, we accept the contention of the assessee that this company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, which is distinct from the nature of services provided by the assessee. 21. We are of the view that in the light of the decision of the Hyderabad Bench referred to above, this company cannot be regarded as a comparable for the reason that it was functionally different. Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing low end ITES support services, this company, i.e. Eclerx Services Ltd. is to be excluded from the list of comparables as it is functionally dis-similar from the assessee in the case on hand. We hold and direct the TPO accordingly. 6.7 Infosys BPO Ltd. 6.7.1 As far as this company, chosen by the TPO as comparable, is concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comaparables. We therefore accept the contention of the assessee that this company cannot be regarded as a comparable. Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be considered as a comparable. The functional profile of this company is as follows:- As per the annual report for the F.Y. 2007-08, the company primarily operates in two business segments: Plastic division: The plastic division is engaged in the manufacture of tube oils, paints, pet products, consumer products, etc. The company demerged the said segment effective 1 April, 2007 and transferred the business unit to the Company Plastics Lt. The extract from the annual report confirms the fact that the Company had restructured its operations resulting in demerging the plastic segment business. Information Technology (IT) division : The IT division (also referred to as the KPO division by the company) of the company specializes in providing structural design and detailing services which can be categorized as structural engineering services. The structural engineering services provided by the IT division of the company cannot be classified as falling with the scope and ambit of ITES services. On the contrary, the said services would fall under the category of engineering services. Excerpts from the Annual Report of the company Page 10 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 wherein Wipro BPO Ltd. was excluded from the list of comparables. 6.9.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.9.3 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements relied on by the assessee. We find that the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the list of comparables by holding as under at para 26 of its order :- (8) Wipro Ltd. 26. This company is listed at Sl.No.18 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the discussion made while deciding Infosys BPO Ltd. as a comparable will equally apply to this company also. This company owns substantial intellectual property on software products. This company cannot therefore be regarded as a comparable. For the reasons given while disregarding Infosys BPO Ltd. as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent. Therefore, though there is no definition of the term total turnover in section 10-A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes 'export turnover', the very same meaning given to the 'export turnover' by the legislature is to be adopted while understanding the meaning of the 'total turnover', when the 'total turnover', includes 'export turnover'. If what is excluded in computing the 'export turnover' is included while arriving at the 'total turnover', when the 'export turnover' is a component of 'total turnover', such an interpretation would run counter to the legislative intent and impermissible. If that w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e mandate of the learned CIT (Appeals) to set aside such issue since the learned CIT (Appeals) is not empowered to do so under Section 251(1)(a) of the Act. 11.2.1 We have heard both the learned Departmental Representative and the learned Authorised Representative in the matter. The learned CIT (Appeals) while disposing off the assessee's appeals for Assessment Years 2004-05, 2005-06 and 2008-09 by way of a common order at para 17 thereof which pertains to the impugned A.Y. 2008-09 has directed the TPO to apply the test of functional dis-similarity and exclude comparables selected by him as laid down in the order for A.Y.2004-05. At para 6.5 of the said order for Assessment Year 2004-05, the learned CIT (Appeals) has held as under :- 6.5 Recently, the Bangalore Bench of the Hon'ble Tribunal in Witness Systems Software India (P) Ltd. V. DCIT, Circle 11(1), (2013) 34 taxmann.com 183 (Bangalore-Trib.) has held that functionally dissimilar companies cannot be upheld as comparables. The Bangalore Bench of the Hon'ble Tribunal has ruled that functionally dissimilar companies cannot be upheld as comparables, whereas the Delhi Bench has categorically stated that compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO rather than adjudicate on it himself which he ought to do. However, this issue is now only of academic nature since we have in this order at paras 6 to 6.9 (supra) considered and adjudicated on the comparability of companies on the grounds of functional dis-similarity based on the material placed before us and the judicial pronouncements cited in the matter. This Ground No.2 is, therefore, disposed off as indicated above. 12 . In Ground No.3 , the Revenue alleges that the learned CIT (Appeals) did not appreciate that when any filter or criteria applied by the assessee is accepted and that of the TPO is relaxed, the result is that a new set of comparables emerges which are other than those comparables which were neither chosen by the assessee on the TPO in the order under Section 92CA of the Act. Before us, neither was this ground urged, nor was any material brought on record by Revenue to substantiate the claims made in the ground raised. In this view of the matter, this ground is rendered infructuous and is accordingly dismissed. 13. Ground Nos.4 5 Deduction u/s.10A of the Act. 13.1 In these grounds, the Revenue challenges the order of the learned CIT (Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X
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