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TMI Blog2015 (11) TMI 1749X X X X Extracts X X X X X X X X Extracts X X X X ..... ct') and the case was subsequently taken up for scrutiny. The Assessing Officer, on observing that the assessee had reported international transactions in the year under consideration, made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') to examine and compute the Arm's Length Price ('ALP')of the assessee's international transactions with its Associated Enterprises ('AEs'). 2.1.2 For Assessment Year under consideration, the assessee had filed a T.P. Study in which it adopted Transactional Net Margin Method ('TNMM') as the Most Appropriate Method ('MAM') and selected 13 comparables whose average profit margin on cost was 13.65%. As the margin of the assessee was higher at 15.26%, the assessee held its international transactions in the ITES segment to be at arm's length. The TPO after examining the assessee's T.P. Study, rejected the same and proceeded to carry out a fresh search for comparables. The TPO accepted the assessee's adoption of TNMM as the MAM and after carrying out his search and considering the objections put forth by the assessee, selected the following 20 companies as comparables to the assessee in which 5 of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s.92CA : Rs. 6,40,54,571. 2.3 Aggrieved by the order of assessment for Assessment Year 2008-09 dt.30.8.2012, the assessee preferred an appeal before the CIT (Appeals) - IV, Bangalore. The learned CIT (Appeals) vide order dt.8.10.2013 disposed off the appeal allowing the assessee partial relief. The learned CIT (Appeals) issued the following directions in respect of the following issues :- (i) to exclude functionally dis-similar companies from the list subject to the observations of the Delhi Bench of ITAT in Actis Advisers P. Ltd. 20 ITR (Trib) 138; (ii) to apply the turnover filter of Rs. 1 Crore to 200 Crores and to exclude companies having turnover in excess of Rs. 200 Crores; (iii) to apply the ratio of the Hon'ble Karnataka High Court in the case of CIT V Tata Elxsi Ltd. (349 ITR 98). 3. Aggrieved by the order of the CIT (Appeals) - IV, Bangalore dt.8.10.2013 for Assessment Year 2008-09, both the assessee and revenue has preferred appeals before 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 upholdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 92C(2) which is available at the option of the a.s irrespective of whether ALP falls within + / - 5% range of actual price. Corporate tax matters. 4. That the learned CIT (Appeals) erred in upholding the ACIT's approach of reducing entire 'telecommunication expenses' of Rs. 31,027,567 (includes cost of transmission within the territories of India) from the 'export turnover' as attributable to the delivery of services outside India while computing the deduction under Section 10A of the Act; 5. The learned CIT (Appeals) erred in upholding the Assessing Officer's approach in reducing the un-attributable portion of 'travel expenditure incurred in foreign currency' of Rs. 2,679,067 from the 'export turnover' while computing the deduction under Section 10A of the Act; 6. That the learned CIT (Appeals) erred in upholding the Assessing Officer's approach in not considering 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the TPO to exclude companies which are functionally dissimilar subject to the guidelines laid down by the Delhi Bench of the Tribunal in Actis Advisers P. Ltd. V DCIT 20 ITR (Trib) 138 without appreciating the fact that the directions issued are beyond the mandate of the provisions of section 251(1)(a) of the IT Act which does not empower the CIT (Appeals) to set aside the issue. 3. The learned CIT (Appeals) erred in not appreciating the fact that when any filter or criteria applied by the assessee is accepted or if any filter or criteria applied by the TPO is relaxed, the entire accept / reject matrix changes resulting in a new set of comparables including those comparables which are neither taken by the assessee or the TPO and which do not find a place in the order under Section 92CA. 4. The CIT (Appeals) erred in directing the Assessing Officer to follow the ratio of the Hon'ble Court in the case of Tata Elxsi Ltd 349 ITR 98 and exclude Rs. 1,55,13,784 being the communication charges and Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubs Ltd. 4. Crossdomain Solutions Ltd. 5. Eclerx Services Ltd. 6. Infosys BPO Ltd. 7. Mold-Tek Technologies Ltd. 8. Wipro Ltd. (Seg.) In support of the assessee's claim for exclusion of these 8 companies from the list of comparables, the learned Authorised Representative placed reliance on the decision of the coordinate bench of the Tribunal in the cases of Symphony Marketing Solutions Ltd., in IT(TP)A No.1316/Bang/2012 dt.14.8.2013 and Global Business Operations P. Ltd. in IT(TP)A No.1678/Bang/2012 dt.4.7.2015. It was submitted that both these cases being for Assessment Year 2008-09, in which like the assessee they were engaged in ITES activities and in which the TPO had adopted the very same 20 comparables, the decision therein would squarely cover the issue of exclusion of the aforesaid 8 comparables 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... took place during the previous year. The Tribunal upheld the order of the DRP observing as follows:- "I. Accentia Technologies Ltd. 10. It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner- "17.5. In addition to the above, the Director's Report of the company for the FY 2007-08 revealed the merger 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 ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore hold that this company cannot be considered as a comparable." Following the above decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra), we are of the view that in the case on hand also, where the assessee is providing ITES based support services, this company i.e. Accentia Technologies Ltd. requires to be excluded from the set of comparable companies. We, accordingly, hold and direct the TPO to exclude this company from the list of comparables. 6.3 Acropetal Technologies Ltd. 6.3.1 The learned Authorised Representative for the assessee submitted that this company, selected by the TPO, is functionally different from the assessee as apart from being engaged in the business of export of software services, 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 Repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the services rendered by this company fall in the definition of ITES. 13. We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No.15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The performance of Engineering Design Services is 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " (3) Coral Hubs Ltd. 14. This company is listed at Sl.No.6 of the list of comparable companies chosen by the TPO. As far as this company is concerned, it is seen that this company was earlier known as Vishal Information Technologies Ltd. The comparability of this company in the case of an ITES company by name 24 x 7 Customer.com Pvt. Ltd. was considered by the Tribunal in ITA No.227/Bang/2010 and by order dated 09.11.2012 the Tribunal held that this company is not functionally comparable with ITES for the following reason:- "17.3 Vishal Information Technologies Ltd. (VIT) - In the case of this comparable, we find that the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd in ITA No.3774/Mum/2011 by order dt.9.11.2011 has 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the Income-tax Appellate Tribunal Mumbai Bench in the case of Asstt. CIT v. Maersk Global Service Centre (India) (P.) Ltd. [2011] 133 ITD 543/16 taxmann.com 47 (Mum.), a copy of which is submitted before us, has also directed for the exclusion of the aforesaid company since it has outsourced a considerable portion of its business. 17. After considering the submissions of the learned Authorised Representative for the assessee, we find that the DRP, in the proceedings for the assessment year 2008-09 in assessee's own case, after taking note of the composition of the vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 ITES / BPO based support services, this company, i.e. Coral Hubs Ltd. is to be excluded from the list of comparables as it is not functionally comparable to the assessee, in the case on hand. We hold and direct the TPO accordingly. 6.5 Crossdomain Solutions Ltd. 6.5.1 In respect of this comparable, selected by the TPO, the learned Authorised Representative for the assessee submitted that this company i.e. Crossdomain Solutions Ltd. should be excluded from the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se efficiency and turn-around-time for business critical processes." Source: http://www.cross-domain.com As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider. 19. We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this company as a comparable, this company should be excluded from the list of comparables, accepting 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:- "14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that that the concerned company is engaged in providing Knowledge 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 rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conomies of scale and diversity and geographical dispersion of customers. At para 24 of its order, the co-ordinate bench has held as under :- " (7) Infosys BPO Ltd 24. This company is listed at Sl.13 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the ld. counsel for the assessee that this company has a brand value and therefore there would be significant influence in the pricing policy which will impact the margins. Schedule 13 to the profit & loss account of this company for the F.Y. 2007-08 shows that this company incurred huge selling 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 Rs. 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 serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing KPO services and a host of engineering services like plant engineering, mechanical product designs, civil and structural engineering services, etc and therefore not comparable to assessee's providing ITES / BPO low end support services, at para 25 of its order, the co-ordinate bench has held as under :- " (8) Mold-tek Technologies Ltd. 25. This company is listed at Sl.No.16 of the list of comparable companies chosen by the TPO. As far as this company is concerned, the submission of the assessee before us is that it is in the business of Knowledge Process Outsourcing and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upport service provider as it also owns substantial IPRs on software products, apart from massive brand value and goodwill of Wipro Ltd. and being a market leader has huge economies of scale and clients dispensed worldwide, whereas the assessee in the case on hand is a mere ITES / BPO provider of low end support services. In support of its contentions for exclusion of this company from the list of comparables in the case on hand, the learned Authorised Representative 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the total turnover in the denominator. The relevant operative portion of the finding of the Hon'ble jurisdictional High Court is extracted and reproduced as under : "if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover in the denominator also. The reason being that the total turnover includes export turnover. The components of the export turnover in the numerator and denominator cannot be different. 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 are general in nature and therefore no adjudication is called for thereon. 11.1 In the Ground at S.No.2 : Revenue contends that the learned CIT (Appeals) erred in directing the TPO to exclude the companies which are functionally dis-similar to the assessee by following the decision of the ITAT, Delhi Bench in the case of Actis Advisers P. Ltd. 20 ITR (Trib) 138, as such a direction is beyond the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned comparable companies rather than to direct the TPO to examine the matter and adjudicate thereon. We, therefore, finding merit in the contentions of Revenue that the learned CIT (Appeals) had acted beyond mandate in section 251(1)(a) of the Act in setting aside the issue of adjudication on the function dis-similarity of comparable companies raised by the assessee to the file of the 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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