TMI Blog2017 (3) TMI 1689X X X X Extracts X X X X X X X X Extracts X X X X ..... Cranes and Component (India) Private Limited (2012 (1) TMI 60 - ITAT PUNE), we direct the TPO/AO to allow the working capital adjustments to the assessee. The ground of the appeal is accordingly allowed. - ITA No. 6328/Del/2012, ITA No. 1088/Del/2014, ITA No. 963/Del/2015, ITA No. 6683/Del/2015 - - - Dated:- 17-3-2017 - SH. I.C. SUDHIR, JUDICIAL MEMBER And SH. O.P. KANT, ACCOUNTANT MEMBER Assessee by Sh. S.P. Singh, AR; Sh. Manoneet Dalal, Adv.; Sh. Yishu Goel, Adv.; Ms. Somya Seth, CA Respondent by Sh. Amrendra Kumar, CIT(DR) ORDER PER O.P. KANT, A.M.: These four appeals of the assessee are directed against separate orders of the Assessing Officer under Section 144C/143(3) of the Income-tax Act, 1961. All these four appeals are in respect of same assessee and the grounds raised in appeals are almost similar and thus same are heard together and disposed off by this consolidated order for convenience. ITA No. 6328/Del/2012 for AY: 2008-09 2. First we take up ITA No. 6328/Del/2012 for AY: 2008-09 for adjudication. Grounds raised in the appeal are reproduced as under: 1. That on the facts and in the 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 ..... e factual matrix, circumstances and the terms of international transactions continue to be the same as in earlier years. 6. The Ld. AO/Ld. TPO/Ld. DRP has erred in not appreciating the fact that the assessee is enjoying the tax holiday benefits conferred under the tax holiday benefits as per the Software Technology Park of India (herein after referred to as STPI ) Scheme. Thus, there is no motive on the part of the assessee to shift the profits to any other jurisdiction. 7. Ld. AO/Ld. TPO/Ld. DRP erred in not correctly appreciating the Function, Asset and Risk Profit of the appellant and thus erred in denying the adjustment for the difference in risk profile and other economic adjustment to the appellant. 8. Ld. AO/Ld. TPO/Ld. DRP erred in selecting the current year (i.e. financial year 2007-08) data for comparability despite the fact that at the time of comparison done by the assessee, the complete date for financial year 2007-08 was not available within the public domain. That the above grounds are independent and without prejudice to each other. The assessee craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transaction at ₹ 19,82,90,270/-. The learned TPO after reducing the amount of transaction price of ₹ 17,93,85,154/- with its AE s, computed the shortfall i.e. adjustment to the international transaction amounting to ₹ 1,89,05,116/-. After incorporating the transfer pricing adjustments as proposed by the TPO, the Assessing Officer issued draft assessment order to the assessee. Against the draft assessment order, the assessee filed objection before the learned Dispute Resolution Panel (for short DRP ), New Delhi. After taking into consideration the objections of the assessee, the learned DRP excluded one comparable M/s. Mold Tek Ltd. from the list of the comparables chosen by the TPO. A list of 19 comparables chosen finally by the learned DRP are as under: S. No. Name of Company OP/OC % 1. Accentia 44.50 2. Aditya Birla Minaes -0.55 3. Asit C Mehta 9.40 4. Caliber Point Business Solutions (Segment) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the comparables will be in the safe limit. The submissions of the Ld. counsel for excluding the above comparables are summarized as under: (A)Accentia Technologies Ltd. 6.1 The Learned Authorized Representative submitted to exclude the above comparable due to the following reasons: i. He referred to page no. 26 of the paper book and submitted that the comparable company had acquired five companies/business in the relevant year, namely, Thunaga Software Pvt. Inc. Ltd., purchase of business in GSR Systems Inc., purchase of business in GSR Physician Billing Service Inc., purchase of business in Denmed Transcription Services Inc. and investment in Accentia FZE and purchase of business in Denmed Transcription Service Inc and in post acquisition period the profitability of the company has gone substantially high , thus it cannot be considered as one of the comparables because of this extraordinary events during the year. ii. He referred to page 28 of the paper book and submitted that apart from the ITES enabled services, the company earned revenue from software development and implementation and for which no segment information is available in the annual report of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the company capitalized expenses of INR 4.27 crores pertaining to conversion of books into POD. iii. He referred to page no. 30 of the paper book and submitted that in schedule 6 of the profit and loss account, the company has huge inventories of POD publishing titles. iv. In view of the above, the learned counsel submitted that the Coral Hub is functionally dissimilar to the assessee company and need to be excluded from the set of comparables. v. In support of the above contentions, the learned counsel further submitted that in the following decisions, the Coral Hub was directed to be rejected as comparables to ITES Companies: 1. Delhi High Court ruling of Rampgreen Solutions Pvt. Ltd. Vs. CIT (ASSESSMENT YEAR-2008-09) Once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. 2. Symphony Marketing Solutions India (P) Ltd. Vs. Income Tax Officer (AY: 2008-09), 38 taxmannn.com 55 (Bangalore-Trib.) 3. BNY Mellon International Operations (India) P. Ltd. (ASSESSMENT YEAR 2008-09) Vs. Asstt. Commissioner of Income Tax [2014] 52 Taxmann.com 306 (Pune-Trib.) (c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertisement or marketing. iv. The learned Authorized Representative further relied on the following decisions wherein Eclerx Services Ltd. has been directed to be rejected as comparables to ITes companies: Delhi High court ruling of Rampgreen Solutions Pvt. Ltd. Vs. CIT (AY: 2008-09) Once again clear that both Vishal and eClerx could not be taken as comparables for determing the ALP. Vishal and eClerx, both are into KPO servies. Symphony Marketing Solutions India (P) ltd. Vs. Income Tax Officer (AY: 2008-09) [2013] 38 taxman.com 55 (Bangalore Trib.) 7. On the other hand, in respect of the exclusion of the three comparables, the learned CIT(DR) relied on the findings of the lower authorities. 8. We have heard the rival submission of the parties and perused the relevant material on record. In the appeal, the learned Authorized Representative has contested the comparability of 3 comparables out of the final set of 19 comparables in the order of the learned DRP. No other grounds have been argued before us. The comparability of above three comparables is decided as under: A) Accentia Technologies Ltd. 8.1The learned Authorized Representative has referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Accnetia Technologies Ltd has been excluded as one of the comparable to ITES companies by the Tribunal as under: (1) Accentia Technologies Ltd. (Seg.) 10. This was considered as a comparable by the TPO and listed at Sl.No.1 of the comparable companies chosen by the TPO. The ld. counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was draw to the annual report of this company for the A.Y. 2007- 08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India ITA No.1316/Bang/2012 Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger. 11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and demerger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact ahs taken place, then the aforesaid comparable has to be excluded. 11. We have considered the submissions of the ld. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. It is clear that during the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable 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 from 1st October, 2006. There was a demerger 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 Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dai Motors India Engineering (P.) Ltd. (supra) following the decision of the Bangalore Bench of the Tribunal has held Accentia Technologies Ltd. warrants exclusion as a comparable due to the happening of certain extraordinary events in this company during the impugned assessment year. The relevant observation of Tribunal from pages 7 to 9 of the order read as under: I Accentia Technologies Ltd. (Seg.) This was considered as a comparable by the TPO and listed at Sl. No. 1 of the comparable companies chosen by the TPO. The Id. Counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was drawn to the annual report of this company for the A.Y. 2007- 08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. was mentioned. Our attention was also drawn to the decision of the Hyderabad IT AT Bench in the case of Capital IQ Information Systems India JTA No.l316/Bang/2012 Pvt. Ltd. v. DC IT [2013] 32 Taxman.com 21 (Hvd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial year 31.3. 2008. The assessee filed Form No.21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective date of the scheme of merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger. 11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and demerger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has carried out its functions with own employees. Thus, the assessee company is functionally different from the Coral Hub. 8.8 In the case of Symphony Marketing Solutions India (P) Ltd. (supra), the Tribunal has directed to reject Coral Hub as comparables to ITES Companies. The relevant para of the decision (supra) is reproduced as under: 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 in his order has observed that this company is retained as a comparable on the basis of detailed discussion in the TP order for the A.Y. 2007-08. In fact in A.Y. 2007-08, there was no determination of ALP and therefore there was no occasion for any order being passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library Print on Demand ITA No.1316/Bang/2012 in F.Y. 2007-08. In the case of Capital IQ Information Systems India Pvt. Ltd. (supra), the ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:- IV. Coral Hu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 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 acceptance as a comparable on the basis of employee cost to sales should be at least 25%. This Tribunal in the case of First Advantage Offshore Services Ltd. v. CIT, IT(TP)A No.1086/Bang/2011, order dated 30.4.2013, has taken the following view:- 36. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee's own case for the assessment year 2006-07. This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR's argument that the employee cost filter is applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, ft may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tulsyan 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 acceptance as a comparable on the basis of employee cost to sales should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... classic books to its credit which are also converted into large font titles for visually challenged. Apart from e-publishing, this company is also engaged in Documents scanning Indexing. It can be seen from the financial results of this company that both the segments viz., epublishing and Documents scanning etc. have been combined and there are no separate financial results in respect of Documents scanning work, which may be comparable with the assessee to some extent. As the assessee is not engaged in any e-publishing business and the financials given by this company are on consolidated basis, we direct to exclude this company from the list of comparables. The assessee succeeds. 9.5 Since the assessee in the instant case is admittedly not engaged in epublishing business, therefore, Coral Hubs Ltd. in our opinion cannot be considered as comparable. In view of the 2 decisions cited (Supra) we hold that Coral Hubs Ltd. cannot be considered as a comparable. We accordingly direct the Assessing Officer to exclude Coral Hubs Ltd. also from the list of comparables. The Assessing Officer is directed to determine the ALP accordingly. Grounds of appeal No.3 by the assessee is accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al report of this company have been pointed out. It has further been submitted that extra ordinary events and peculiar circumstances prevail in the case of the assessee in as much as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing the order, the Ld. AO/Ld. TPO/Ld. DRP erred in: 3.1 Rejecting the comparable companies set adopted by the Appellant in its transfer pricing documentation on the basis of additional/modified quantitative filters which lacked valid and sufficient reasoning; 3.2 Accepting companies which were functionally not comparable to the Appellant in terms of Functions, Assets and Risk profile. 3.3 Including companies with high/supernormal margins in the comparable set adopted 3.4 Not providing the benefit of economic adjustment on account of difference in working capital profile 3.5 Denied the benefit of economic adjustments on account of difference in risk profile in arriving at the arm s length mean margin 4. The Ld. AO/ Ld. TPO has erred in not appreciating the fact that the Appellant is a company incorporated under the provisions of the Companies Act, 1956 and enjoying the tax holiday benefits conferred under the tax holiday benefits as per the Software Technology Park of India (herein after referred to as STPI ) Scheme. Thus, there is no motive on the part of the Appellant to shift the profits to any other jurisdiction. Hence the case of the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 66 crores pertaining to conversation of books into POD. He further submitted that the business model of the company is also different as it subcontracts majority of its work to third party vendors. The said vendor payments approximate 90.57% of the total cost incurred by the Coral Hub and the Coral Hub does not adopt the normal and routine business model for an otherwise pure play ITes company. The learned counsel further submitted that the Coral Hub outsources its services to vendor and does not perform services at its own. The ld. counsel referred to page 43 of the paper book and submitted that Coral Hub has huge inventories of POD publishing titles, which includes electronic publishing/digital publication of the books, he articles etc. ii. Ld. AR relied on the decision of the Tribunal in the case of Mercer consulting India private limited in ITA No. 966/Del/2014 wherein it is held that Coral Hub has outsourced most of its work. (B) Eclerx Services Ltd. ( Eclerx ) 14.2 The learned Authorized Representative submitted to reject the company due to following reasons: i. The Ld. AR referred to page 45 of the paper book and submitted that the company acquired Igentic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his contention by urging that the assessee cannot be allowed to resile from its original stand. 12.2 We are disinclined to sustain the legal objection taken by the Id. DR that the assessee should be prohibited from taking a stand contrary to the one which was taken at the stage of the TP study or during the course of proceedings before the authorities below. It goes without saying that the object of assessment is to determine the income in respect of which the assessee is rightly chargeable to tax. As the income not originally offered for taxation, if otherwise chargeable, is required to be included in the total income, in the same breath, any income wrongly included in the total income, which is not otherwise chargeable, should be excluded. There can be no estoppel against the provisions of the Act. Extending this proposition further to the context of the transfer pricing, if the assessee fails to report an otherwise comparable case, then the TPO is obliged to include it in the list of comparables, and in the same manner, if the assessee wrongly reported an incomparable case as comparable in its TP study and then later on claims that it should be excluded then, there should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d respectfully following the decision of the Tribunal in the case of Mercer Consulting (India) Private Limited (supra), the company is directed to be excluded from the set of comparables for the year under consideration. (B) Eclerx Services Ltd. 16.3 The functions performed by the company during the year are almost identical to the functions performed in the immediately preceding year, wherein we have held the company as functionally dissimilar to the assessee. It is evident from the page 50 of the paper book that the company is expert in the markets of financial services, retail and manufacturing. The company has employed 1500 specialist and provided complete business solution. In view of above, the research related services rendered by the assessee to its AEs is completely different from the services provided/functions performed by the company and thus it cannot be compared with the assessee. Further the Tribunal in the case of M/s Capital IQ Information Systems (India) Private Limited (supra) has directed to reject E-clerx as comparable to ITES companies. The relevant para of the said decision is reproduced as under: (3) Eclerx Services Ltd. 18. The objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that by allowing customers/creditors to defer payments for a certain period, any company foregoes the right to receive its revenue immediately and earn additional income by reinvesting these revenues over the deferral period. He further submitted that all companies have their own limit for deferring such payments and the limits determine that working capital cycles and such cycles would have direct impact on the revenue and cost of any entity. He further submitted that for due economic analysis, it becomes important to make an adjustment for different working capital positions so as to eliminate the impact of such factors from an arm s length comparison. In support of his contention, he relied on the decision of the Tribunal in the case of the Demag Cranes component ( India) Pvt Limited in ITA No. 120/PN/2011. 19.. On the other hand, the Ld. CITDR relied on the order of the lower authorities. 20. We have heard the rival submissions and perused the relevant materials on record. In the case of the assessee company, the working capital adjustment has been allowed in assessment year 2008-09 and 2012-13 and there has been no change in the functionality, risk and profile of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realized from a comparable uncontrolled transactions is computed having the same base; (iii) the NPM mentioned at (ii) is adjusted taking into account the differences, if any, which could materially affect the NPM in the open market. Thus, the scope of adjustments is defined, which is discussed by us in the preceding paragraphs. The sub clause (iii) specifies that the adjustments are to be made on account of differences, if any. Therefore, in this regard, the litmus test to be applied is if the difference, if any, is capable of affecting the NPM in open market? If any factor is capable of such affect, yes, TPO is under statutory obligation to consider and examine and eliminate such difference. AO/TPO/DRP cannot say that difference is likely exist in all accounts appearing in P L account or Balance sheet, which are likely to materially affect the NPM in open market and therefore, the demands of the assessee should be ignored, is not the correct approach. Revenue s reasoning that the demanded adjustments should not be entertained by the TPO merely on the basis the comparables are supplied by the assessee is not the correct. In our opinion, it is the duty of the TPO to apply the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was expedient and necessary to refer the matter to the Ld. Transfer Pricing Officer ( TPO ) for computation of the arm s length price, as is required under section 92CA(1) of the Income Tax Act, 1961 ( Act ). 3. That on facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. Dispute Resolution Panel ( DRP ) erred in making an addition of ₹ 4,20,24,399/- to the returned income of the Appellant by re-computing the arm s length price of the international transactions under section 92 of the Act. In passing the said orders, the Ld. AO/Ld. TPO/Ld. DRP erred in: 3.1 Not accepting the quantitative filters selected by the Appellant in its transfer pricing documentation/fresh search and has instead applied his own additional/ quantitative filters which lacked valid and sufficient reasoning; 3.2 Rejecting the comparable companies set adopted by the Appellant in its transfer pricing documentation; 3.3 Accepting companies which were functionally not comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eas, post DRP directions the TPO/AO computed average margin of 28.89%, which resulted into adjustment of ₹ 4,25,05,514/- to the international transaction. 26. At the time of hearing before us, the Ld. Authorized Representative preferred to argue only ground No. 3.3 and ground No. 3.4 of the appeal. In support of ground No. 3.3, the Ld. counsel of the assessee challenged the comparability of following three comparables: A. Accentia technologies Ltd B. TCS E-serve limited C. TCS E-serve international Ltd. 27. The arguments of the Ld. counsel in respect of the above three comparables are summarized as under: (A) Accentia technologies Ltd. 27.1 The learned Authorized Representative submitted that the company need to be rejected as comparable due to the following reasons: i. There are following extraordinary events during the year: (a)that during the year the company acquired IQ group companies namely Tactiq Ltd, centric Ltd and Neologig limited, which were engaged in full product development, software design and development etc. (b)that during the year the company also acquired Assent Infoserve private limited, which was engaged in business of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TA. [Refer page 68 of Cnv. Paperbook] Nil Payment of Royalty The company has paid INR 42,097 thousands to TATA Sons Limited as Tata Brand Loyalty. [Refer page 68 of Cnv. Paperbook] Nil Other Economies of scale Not applicable to the Appellant (ii) The company was having sales turnover of ₹ 1, 359.41 crores for the year under consideration as against the assessee s turnover of ₹ 40 crores for the said year, which is almost 34 times the turnover of the assessee (page 69 of the paper book referred) (iii) The company is a part of an eminent Tata group and received support from it in terms of its large-scale operation and clientele. During the year the TCS paid INR 42,097 thousands to Tata Sons Ltd towards Tata brand equity contribution (iv) That in following decisions of the Tribunal, the company has been excluded as comparable to ITES companies: (a) Ameriprise India Pvt. Ltd., ITA No. 7014/Del/2014, for AY 2010-11 (TCS E- Serve Ltd. is engaged in BPO and high end technical services and no segmental information avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence the pricing policy and thereby directly impacting the margins earned by the company. (vi) that in following decisions of the Tribunal, the company has been excluded as comparable to ITES companies: (a) Ameriprise India Pvt. Ltd., ITA No. 7014/Del/2014, for AY 2010-11 (TCS E service Ltd. is engaged in BPO and high end technical services and no segmental information available). (b) Equant Solutions India Pvt. Ltd. (Involved in software testing and high end technical services, it also owns huge intangible and use of TATA Brand), ITA No. 1202/Del/2015, AY 2010-11. 28. The Ld. CIT(DR), on the other hand, relied on the finding of the lower authorities. 29. We have heard the rival submissions and perused the relevant material on record. The comparability of the above companies is decided as under: (A) Accentia Technology Ltd. 29.1 The learned counsel has highlighted the extra ordinary events of merger and amalgamation of various companies with the company taken place during the year. The event of merger and acquisition of various company with assessee has impacted the profitability of the company during the year and in the circumstances, following our decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this company, a copy of which has been placed in the paper book. Notes to Accounts of this company, indicate about the amalgamation of Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon'ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015 and Techbook International P. Ltd. vs DCIT (ITA No. 240/Del/2015) vide its order dated 06.07.2015. In view of the fact that there was merger of Asscent Infoserve Pvt. Ltd. with Accentia Technologies Ltd. by way of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this extra-ordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables. 29.2 In the case of Equa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the order of lower authorities and also submitted that all these reasons have been considered by TPO while selecting the comparables. c. We have considered the rival contention. During the year this comparable has been gone into substantial business restructuring resulting into extraordinary circumstances during the FY 2009-10 subsidiary of Ascentia got amalgamated with this company and the figures of the business results for the year ending 31st March 2010. In this case also excluded the figures of amalgamated company and due to which the comparable has high OP by TC margin. The relevant observations of the Tribunal as recorded in para 19.2 of the order passed in the case of Excellence Data Research Pvt. Ltd., Hyderabad v. ITO Ward 2(1), Hyderabad (ITA No. 159/Hyd/2014 dated 31.7.2014); being relevant in this case, are reproduced below- 19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, ITA No. 1202/Del./2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onitoring and maintenan ce of Equant global network platforms and services, coordination, remote configuration, and implementation of quality customer networking solutions. Therefore this comparable is ordered for its exclusion accordingly. 29.3 In view of our discussion above and respectfully following the decision of the Tribunal in the case of Ameriprise India private limited (supra) and Equant solutions India private limited (supra), we hold that in absence of segmental information, the company cannot be compared functionally with assessee company and accordingly, we direct the AO/TPO to exclude the company from the set of comparables. TCS E-serve Ltd. 30.1 The company was engaged in providing high-end transaction processing, technical services involving software testing, verification and validation at the time of implementation, data centre management activities, which is evident from page 67 of the paper book. This fact makes the company functionally different from the assessee company which has been characterized as ITES company. Further, the brand value of being part of TATA group is certainly having impact on the profitability of the company. In the circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Banking Financial Services Industry (BFSI), which is considered as a single segment. 12.4 It was fairly conceded by Ld. AR that this company has been considered as Comparable by the Delhi Bench of Tribunal in Techbook International P. Ltd. (supra), by observing as follows : The company's overview has been discussed on page 467 of the paper book, which divulges that this company : is in the business of providing business process management services in the banking and financial services (BFSI), vertical ( i.e. industry vertical) to help its customers achieve their business objectives by providing innovative best-in-class services. We find that this company is also providing ITES. Unlike TCS e- Serve International Ltd., this company is not providing any technical services involving software testing, verification and validation of software etc. Since the functional profile of this company on a broader basis is no different from that of the assessee, both being involved in rendering ITES, we are not inclined to treat this company as incomparable. The ld. AR argued that the nature of the ITES provided by this company is different from that of the assessee and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions India private Limited (supra) the company has been excluded from the list of comparable as it was engaged in software testing and high-end technical services, owned huge intangibles and use of Tata Brand. The relevant part of the decision is extracted as under: 24. TCS E Serve Limited a. TPO included this comparable, which has a margin of 63.42%. The ld DRP has also held that the far profile of the company is similar. Before us, ld. AR submitted that the company is dissimilar functionally. In addition to BPO services, it is also engaged in technical services such as software testing, verification and validation. It has also developed software such as transport management software. It does not have segmental reporting too. It was further submitted that the company owns substantial intangible assets in form of software licenses and it makes a payment for Tata Brand and therefore it gets the benefit use brand value of Tata. b. Ld. DR relied on the orders of lower authorities and submitted that all the above reasons for selection of this comparable has bene considered by the TPO. c. We have also considered the rival contention for exclusion of TCS e-service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and perused the relevant material on record. Notes to Accounts indicate that this company is engaged in the business of providing IT enabled services/BPO services primarily to Citigroup entities globally. The operations of this company : 'broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities.' It is manifest that this company is engaged in rendering BPO services to the banking and financial services industry (BFSI) and Travel, Tourism and Hospitality (TTH). It is providing services to BFSI and TTH and such services include `Transaction processing' and `Technical services'. In other words, the remuneration of this company from the above referred two segments includes compensation for rendering `Technical services' and `Transaction processing'. Insofar as the `Transaction processing' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is overt that a company providing software development services is distinct from and incomparable with a company providing non-development software services. 11.4 We find that the assessee is a company providing non-development software services, in the nature of conversion of data from hard copy or files into electronic format. The assessee is not providing any software development services to its AE. On the other hand, this company is also providing `Technical services' to its AE involving software testing, verification and validation of software, which are akin to software maintenance services falling, within the overall category of software development services. The TPO has taken entity level figures of TCS E-Serve International Ltd. for comparison. We note that, there is no bifurcation available in respect of the revenues of this company from Transaction processing (which are in the nature of ITES, the same as provided by the assessee) and Technical services (which are in the nature of software development, absent in the assessee's case). In the absence of the availability of any such segregation of the total revenue of this company, it is not possible to separ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also owns intangible of substantial amount and is benefitted usually by the Tata Brad. The company is also making appellant for use of such brand. Therefore this aspect also makes this comparable is ITA No. 1202/Del./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 inappropriate and therefore we order to exclude this comparable. 31.3 In view of our discussion above and respectfully following the decision of the Tribunal in the case of Ameriprise India Private Limited (supra) and Equant Solutions India Private limited (supra), we hold that the company TCS E-Serve International Ltd. cannot be compared with assessee company and accordingly, we direct the AO/TPO for exclusion of the above company from the set of the comparable for computing average margin of the comparables. Thus ground No. 3.3 is allowed. 32. In ground No. 3.4, the assessee has challenged disallowance of the working capital adjustment. This issue of allowing working capital adjustment has already been decided by us in preceding paras in ITA No. 1088/Del/2014 for assessment year 2009-10. There is no substantial change in the functions of the company as compared to assessment year 2009-10, accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellant in the TP Documentation and in selecting the current year (i.e. financial year 2010-11) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for financial year 2010-11 was not available within the public domain. 8. The Ld. AO/Ld. TPO erroneously computed the margins of comparable companies selected by him. 9. The Ld. TPO, without prejudice, erred on facts and circumstances of the case by considering reimbursement of expenses received as operating in nature and consequently routed the same through Profit Loss account while computing the Operating Income and Operating Cost of the Assessee for arriving at the PLI. 10. The Ld. AO/ TPO/DRP erred in fact and in law by considering the arm s length value of fixed assets imported by the Assessee from its AEs during FY 2010-11 as NIL, thereby making an adjustment of INR 69,550. 11. The Ld. AO/ Ld. TPO has erred in not appreciating the fact that the Appellant is a company incorporated under the provisions of the Companies Act, 1956 and enjoying the tax holiday benefits conferred under the tax holiday benefits as per the Software Technology Park ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing sales turnover of INR 1442.42 crores for year under consideration as compared to turnover of INR 45 crore of the assessee for the said year, which is almost 32 times that of the assessee. ii. The company has been excluded from the list of comparables by the Tribunal in the case of Goldman Sachs (India) Securities Private Limited Vs. ACIT in ITA(TP) No. 927/Mum/2016. (B) Eclerx Services Ltd ( Eclerx ) 37.2 The learned AR submitted that the company is functionally dissimilar to the assessee company due to following reasons: (i) the company is engaged in providing data analytics and data process solutions to some of the largest brand in the word.( Page 73 of the paper book referred) (ii) the company is exporting in chosen market-trade processing support, reference data maintenance and margin and exposure management (page 74 of the paper book referred) (iii) it is an industry specialist company and helps in meeting complex clients need, that analytics specialisation into two business verticals-financial services and retail and manufacturing (page 75 of the paper book referred) (iv) it has a scalable delivery model and services offered including trade proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue across the world and also owns huge intangibles. Thus, there is a huge difference in the assets employed by this Company as compared to the assessee which also reflects in its revenue and profit margin. Its intangible assets itself is more than ₹ 3337.4 crores as on 1st April, 2010 and additions during the year were more than ₹ 756.24 crores. Thus, this company having huge intangibles assets cannot be compared with the assessee who has no significant intangibles. That apart, it has been pointed out by the Ld. Counsel that, this company has been emerged with TCS in the year 2009 which has led to shooting up of its profit margin to 13% to 68%-70%. This factor itself points out that its high profit margin were due to its huge brand value, which cannot be held to be comparable with captive service provider like Assessee Company. So far as the decision of ITAT Delhi Bench in the case of 'Techbooks International Pvt. Ltd' is concerned as pointed out by the Ld. Counsel, we find that this decision of the Tribunal has been distinguished and explained by the subsequent three decisions of the Delhi Bench of the ITAT, wherein, the Tribunal has categorically held that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parability list. Respectfully following the same, we hold that TCE e-Service cannot be considered a valid comparable in the case of the assessee. 40.2 In view of above and respectfully following the precedence in aforesaid case, we hold that the company cannot be compared with assessee and accordingly, we direct the AO/TPO to exclude the company from the set of the comparables for the year under consideration. Eclerx Services Ltd. 40.3 On perusal of the page 73 to 75 of the paper book, which are part of the annual report of the company, and the submission of learned Authorized Representative, We find that services provided by the company are completely different from the research related services rendered by the assessee to its AE and thus it cannot be treated as functionally similar to the assessee. Further we find that the Tribunal in the case of Goldman Sachs (India) securities private limited (supra) has excluded the above company for comparable to ITES companies. The relevant para of the decision is extracted as under: 4.2.a. We would like to deal with the inclusion/exclusion of the comparables by the DRP. We find that the Tribunal had excluded AT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons India Pvt. Ltd. (supra) has also held that the company cannot be treated as comparable to a company performing ITES / BPO functions. As these decisions rendered by the Tribunal are for the very same assessment year, respectfully following the same, we direct exclusion of this company from the list of comparables. It has been submitted before us by the learned Sr. Counsel that on exclusion of these companies, the margin of the assessee would be within +/- 5% tolerance band of the arithmetic mean of the comparable companies requiring no further adjustment to the price charged. In view of the aforesaid submissions of the learned Sr. Counsel, we do not consider it necessary to deal with the other comparables objected to by the assessee as it is merely of academic interest. Ground no.2, raised by the assessee is partly allowed. Respectfully following the same, we hold that AT and ECL have to be excluded from the list of the valid comparables. 40.4 In view of above discussion and respectfully following the decision of the Tribunal in the case of Goldman Sachs (India) securities private limited (supra), we are of the opinion that company cannot be considered as comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X
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