9911796707
TMI Blog2017 (3) TMI 1689X X X X Extracts X X X X X X X X Extracts X X X X ..... O") is bad in law and void ab-initio. 2. That on facts and circumstances of the case and in law, the reference made by the learned Assessing Officer suffers from jurisdictional error as the learned Assessing Officer 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 learned 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. The on facts and circumstances of the case and in law, the learned Assessing Officer erred in making an addition of Rs. 1,34,72,719/- 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. 4. The learned AO/Ld. TPO/Ld. DRP erred on facts and in law in the assessment of the arm's length price of the assessee's international transactions with associated enterprises in the following manner- 4.1 Using the power conferred under Section 133(6) of the Act for collecting information that was not available to the Assessing in the public domain and using the informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice. 4. The facts in brief of the case are that the assessee company was incorporated in India on 4th March, 2004 as a wholly-owned subsidiary of CEB India, which is based in United State of America (USA). The assessee company was engaged in providing data collection, web services, information research and related support services to its associated enterprises (AE). The assessee filed its return of income on 29th September, 2008, declaring total income of Rs. 21,306/-. The case was selected for scrutiny and notice under Section 143(2) of the Incometax Act , 1961 (for short 'the Act') was issued and complied with. The Assessing Officer referred the matter to the Transfer Pricing Officer (for short "TPO") under Section 92CA(1) of the Act for determination of arm's length price in respect of international transaction entered into by the assessee during the financial year relevant to the assessment year in consideration. In the Transfer Pricing Report submitted to the TPO, the assessee reported international transaction of call centre services amounting to Rs. 17,93,85,154/- and operating profit to cost (OP/OC) ratio of 15.26. The assessee company was chosen as tested party and selec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Private Limited 9.73 16. Spanco Limited (Seg.) 8.94 17. Acropetal Technologies Ltd. (Seg.) 35.30 18. Wipro BPO 30.23 19. R System International Limited (Seg.) 4.30 Average 25.61 4.1 Following the directions of the learned DRP, the Assessing Officer computed the revised average margin of 19 comparables at 25.61% and after allowing the working capital adjustments of 1.71%, the arm's length price margin was computed at 23.90%. Applying the said average margin over operating cost, the Assessing Officer computed the adjustment under Section 192CA of the Act, amounting to Rs. 1,34,72,790/- in the impugned order. Aggrieved with the adjustment so made, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 5. Before us, the learned Authorized Representative did not press grounds other than the ground no.4.3, wherein also he disputed the following 3 comparables only: A. Accentia Technologies Ltd. B. Coral Hub (earlier Vishal Information Technologies Ltd.) C. Eclerx Services Ltd. 6. The learned Authorized Representative submitted that if the above comparables are excluded from the set of comparables, the average margin of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub' subcontracts majority of its work to third party vendors ,which was evident from the profit and loss account of the company for relevant year. He submitted that the vendor payment is approximately 85.58% of the total cost incurred by the Coral Hub. A chart of such expenses was submitted by the learned Authorized Representative, which is reproduced as under: Assessment year Vendor Payments (INR) Vendor Payment/cost Employee cost (INR) Employee cost/Cost 2008-09 261,801,923 85.58% 11,140,357 4.40% 2009-10 398,376,162 81.83% 231,15,053 4.75% ii. The learned Authorized Representative further referred to page no. 29 of the paper book and submitted that as per Director's Report contained in the annual report, Coral Hub entered into a new vertical i.e. Digital Library & Print on Demand ("POD") in financial year 2007-08. He also referred to page no. 30 of the paper book and submitted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t needs, date analytics specialization in two business verticals - financial services and retail and manufacturing. (d) It also provides tailored outsourcing process and management services including multitude of data aggregation, mining and maintenance services. (e) It has employed over 1500 domain specialists and provides complete business solutions with the help of process improvement, automation and dedicated workforce. In view of above, learned counsel submitted that M/s. Eclerx Services Ltd. is functionally different from the assessee company, thus, the same need to be excluded from the set of comparables. iii. The learned counsel submitted that Eclerx Services Ltd. incurred INR 14.6 crores on advertising and marketing during the year, which is 12.50% of sales, which created a brand for the company, whereas the assessee company did not incur expenditure on advertisement 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 bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mphony Marketing solutions India (P) Ltd. Vs. Income Tax Officer (supra), 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 Tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pported 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Hyundai 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 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 ..... ts 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 Hub Limited (Earlier known as V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 only to ITA No.1316/Bang/2012 software development se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 on the basis of detailed discussion in the TP order for the A.Y. 2007-08. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 at least 25%. This Tribunal in the case of First Advantage Offshore Services Ltd. v. CIT, IT(TP)A No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shing, 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 accordingly allowed." 8.10 In view of the above discussion and the finding of the Tribunal (supra), we are of the opinion that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /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 Appellant falls squarely within the ambit of aforementioned principle 5. The Ld. AO/ Ld. TPO erred in disregarding the multiple year data selected by the Appellant in the TP Documentation and in selecting the curren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred 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 Igentica solutions Ltd (ITS) during the year and three subsidiaries of ITS were wound up to reduce the corporate structure and transfer the contracts to the parent. Further the company commissioned its SEZ facilitate Pune during the year. He submitted that in view of these extraordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 be nothing to forbid the assessee from claiming so, provided the TPO is satisfied that the case so originally reported as comparable is, in fact, not comparable. The Special Bench of the Tribunal in Dy. CIT v. Quark Systems Ltd. 120101 38 SOT 307 (Chd) has also held that a case which was included by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost 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 objection of assessee to this comparable is that this company is functionally dissimilar. It is in the business of consultancy and advisory service and provides only analytical data. It is also involved in quality monitoring. It is the stand of the assessee that this company offers solutions that include data analytics, operations manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee company from assessment year 2008-09 to 2012- 13. We do not find any reason why the working capital adjustment should not be allowed to the assessee, when it has been allowed in immediately preceding year. The Object of the entire comparability process is to reduce the difference between the comparables and the assessee company. The Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecifies 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 provisions of rule 10B(1)(e) to establish the ALP in relation to international transaction as per the TNPM, which is an undisputed method found applicable to the present case by both the parties. It is a settled accounting principle that the net margins can be influenced by some of the same factors which can influence price or gross margins. Further, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome 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 Rs. 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 comparable to the Appellant in terms of Functions, Assets and Risk profile and including companies with high/supernormal margins / turnover; 3.4 Not providing the benefit of economic adjustment on account of difference in working capital and 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 medical transcription encoding. (page 54 to 56 of the paper book referred). (c) that the acquisitions are reflected in the addition to fixed assert schedule by way of recognition of goodwill amounting to INR 19,06,51, 057/- (d)profitability of the company turned around dramatically from - 65.11% in financial year 2004-05 to 42% in financial year 2009-10. (i) The company earned revenue from sources like medical transcription, billing and coding and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NR 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 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. (C) TCS E-Serve International Ltd. 27.3 The Authorized Representative submitted that the company is not comparable to the assessee company due to the following reasons: (i) The company is not functionally comparable to the assessee. A chart of comparison submitted in the synopsis, by the Ld. counsel is reproduced as under: Particulars TCS E Serve International CEB India Functions TCS E Serve International provides ITES/BPO and technical services. Such technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities. [Refer page 61 of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g our decision in ITA No. 6328/Del/2012 for assessment year 2008- 09, we are of the opinion that this company cannot be compared with assessee company. Further , the company has shown income from medical transcription, billing and coding, and software development and implementation and no segment data in respect of ITES services is available in the annual report of the company, thus functions of this company cannot be compared at entity level with the functions of assessee company. Further we also note that Tribunal in the case of Ameriprise India Private Limited (supra) held the company as not comparable in absence of segmental information. The relevant finding of the Tribunal is reproduced as under: "A. Challenge to the inclusion of companies 8 Accentia Technologies Ltd. 8.1 The assessee objected to the inclusion of this company in the list of comparables on several reasons namely - "Reasons for rejection (1). Extraordinary events during AY 2010-11 (acquisitions) (pg.38,39,79 of Paperbook-1) (2). Functional dissimilarity - It's a KPO and has diversified business operations (pg. 4 of Paperbook-1) (3). Insufficient segmental details (pg. 81 of Paper book -1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) the company has been excluded from the list of comparables as it was engaged in software development and no segmental data available owned huge intangibles and extraordinary events during the year. The relevant part of the decision is extracted as under: "20. Accentia Technologies Ltd. a. The TPO has taken this comparable stating that the company is functionally similar and passes by the filters applied by the TPO. The TPO further stated that the assessee has not demonstrated how the acquisition has affected the profitability and pricing of the comparable. Before the DRP, the assessee reiterated argument made before TPO. Further, the DRP retained the comparable holding that FAR profile of the company is similar. Before us, the ITA No. 1202/Del./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010- 11 assessee contended that the comparable company provides high- end functions such as knowledge process outsourcing, legal process outsourcing. Further, the company is providing software as a service in healthcare outsourcing area. The company also developed software products in BPO management and healthcare therefore it is functionally dissimilar and should be excluded as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected." As pointed out by the learned counsel for the assessee, there was amalgamation of a company during the relevant year, and the said company, therefore, cannot be considered as comparable due to this extraordinary event which occurred in the relevant year as rightly held by the Tribunal inter alia in the case of Excellence Data Research P. Ltd. (supra). We, therefore, follow the decision of the coordinate bench of this Tribunal in the case of Excellence Data Research Services Pvt. Ltd. (supra) and direct the AO/TPO to exclude the Accentia Technologies Limited from the list of comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also note that Tribunal in the case of Ameriprise India private limited (supra) held the company as not comparable in absence of segmental information. The relevant finding of the Tribunal is reproduced as under: "12. TCS e-Serve Ltd. 12.1 The assessee objected to its inclusion by contending that this is exceptional year of operation for this company as it is the first full year of operations after its takeover by TCS. It was also contended that this company is functionally dissimilar and the segmental information are insufficient. The TPO repelled the assessee's objections and included it in the final set of comparables. 12.2. We have heard the rival submissions and perused the relevant material on record. A copy of the Annual report of this company is available on page 398 of the paper book. Ld. Counsel for the Assessee submitted that like TCS e- Serve International Limited, this Company is also engaged in providing 'Transaction processing' and 'Technical services'. By referring to Profit & Loss Account in standalone financials of the Company it was pointed out that during the relevant financial year, the Company has received Income of Rs. 1,35,94,110/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milarity is dispensed with under the TNMM, which is not so under the Comparable uncontrolled price method. The TNMM approves comparability on the basis of broader overall similarity. When we consider the nature of services provided by this company, being the ITES, which is similar to that of those rendered by the assessee, again the ITES, we cannot order its exclusion simply for the reason that the verticals of ITES are somewhat different. If one goes to make a comparison in the way suggested by the ld. AR under the TNMM, then it will be very difficult, if not impossible, to find out a ditto comparable. A company which satisfies the broader parameters of comparability in the overall same segment, cannot be excluded due to somewhat different nature of such overall activity. An examination of the comparables chosen by the assessee, which have been accepted by the TPO, also satisfy only the test of overall similarity and not the peculiar similarity, as has been now contrastly contended for the exclusion of this company. This argument, therefore, fails." 12.5 We have gone through the annual report of Company and have carefully considered the reasoning given by coordinate Bench in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice such as software testing, verification and ITA No. 1202/Del./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 validation. It is also developed a software such as transport management software therefore functionally this company is dissimilar to the assessee company. It also owns huge intangible and use of 'Tata' Brand, which has definitely benefited this comparable, it is directed to be excluded. 30.3 In view of above discussion 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 company as functionally dissimilar to the assessee company and accordingly we direct the AO/TPO to exclude the company from the set of the comparables. TCS E-Serve International Ltd. 31.1 On perusal of the page 61 of the paper book, we find that that the company was engaged in providing technical services such as software testing, verification and validation of software at the time of implementation and data centre management activities and it is evident from the page 63 of the paper book that no segment information was available to bifurcate the income and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical services' involve software testing, verification and validation of software item, implementation and data centre management activities. The `Technical services' rendered by this company are in the nature of servicing and maintenance of software. At this stage, it is relevant to note that a company providing software services may be of two types, viz., a company providing software development services and a company providing software services other than software development services (hereinafter also called 'a company providing non-development software services'). 11.3 At this juncture we are inclined to quote view taken by the Delhi Bench of Tribunal in Techbook International P. Ltd. (supra), while considering the same comparable, it is observed that - "In order to properly appreciate the vital difference between these two types of companies, it is significant to note that a company which develops software is called a company rendering software development services. Software development services also include maintenance of software and updation of the software so as to suit the ever changing requirements of the users. A company using, inter alia, a soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ison. Therefore, we order for the removal of this company from the final set of comparables." 31.2 In the case of Equant solutions India private limited (supra) the company has been excluded from the list of comparable. The relevant part of the decision is extracted as under: "23. TCS E Serve International Ltd. a. This comparable was taken by TPO where the margin is 54.02%. The TPO has taken this comparable considered this a company in IPS industry and considered it as a singled segment. The TPO was also of the view that there are no exceptional circumstances, which is related in the increase in the profit. Before DRP the argument of the assessee were rejected and it was held that far profile of the company is similar to that of the appellant. Before us it was submitted that in addition to BPO services this company is engaged in providing technical services like software testing, verification and validation of the software which falls under software development services activity, which also includes transaction processing, technical services, therefore it is functionally dissimilar. Further it was also ITA No. 1202/Del./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appeal is allowed. 33. No other grounds, except ground No. 3.3 and 3.4 of the appeal were pressed before us and, therefore, same are dismissed as infructuous. 34. In the result, appeal of the assessee is partly allowed. ITA No. 6683/Del/2015 for AY: 2011-12 35. Now we take up appeal in ITA No. 6683/Del/2015 for assessment year 2011-12, wherein following grounds have been raised. "1. That on the facts and in the circumstances of the case, the order passed by the Ld. Assessing Officer ("AO") is bad in law and void ab-initio. 2. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the 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 Rs. 5,19,95,761/- to the returned income of the Appellant by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... initiating penalty proceedings u/s 271 (l)(c) of the Act mechanically and without recording any adequate satisfaction for such initiation. 13. That the Ld. AO erred in facts and in law in charging and computing interest under section 234B and 234D of the Act. 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 grounds of objection either before or during the course of proceedings in the interest of the natural justice." 36. The facts of the case are more or less identical to the facts in ITA No. 6328/Del/2012 except the amount of provision of services and the profitability margins. During the year, the assessee has shown international transaction of Rs. 44,95,76,934/- from providing ITES services and shown OP/OC margin of 15.86%. In the transfer pricing study, the assessee computed average margin of of the comparables at 14.8% and thus submitted that the international transaction was at arm's length price. The Ld. DRP in its direction directed the AO/TPO to take average margin of comparables at 29.26%, which has resulted into adjustment of Rs. 5,30,64 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de from the set of comparables in appeals of the preceding years. For the year under consideration, the comparability of the above two companies is decided as under: TCS E-serve Ltd. 40.1 On perusal of the page 77 of the paper book, which is part of the annual report of the company, we find that the company was engaged in providing technical services as compared to the services of the assessee which are characterized as ITES services. The company is also having huge sales turnover as compared to the assessee. The company is also part of TATA group, which has impacted its profitability. In the circumstances, the company is functionally dissimilar to the assessee and cannot be compared with the assessee. The said company has also been excluded by the Tribunal as a comparable to ITES companies in the case of Goldman Sachs (India) securities private limited (supra). The relevant part of the decision is extracted as under: "4.2.b. In the case of Capitia India Pvt. Ltd. (supra) the Tribunal had held that TCS was not a valid comparable for IT-e services in following manner: "i) M/s TCS e-Serve:- From the perusal of its Annual reports, it is seen that, this company is engaged in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing given by the coordinate Bench in the case of Techbook International P Ltd (supra). On perusal of Schedule 'O' - Notes to Accounts of the Standalone financials of the Company, ITA(TP)/927/M/16(11-12)Goldman Sachs (India)Securities Pvt.Ltd. it is clear that the Company is engaged in "transaction processing" - and "technical services" activities. No separate segmental details are available. On a careful reading of the decision of coordinate Bench in Techbook International P td (supra) it is clear that Schedule 'O' - Notes to Accounts in respect to carried out by Company and relevant segmental details were never brought to the attention of the Bench. We find that in the absence of availability of any such segregation of the total revenue of this company, it is not possible to separately consider its profitability from rendering of "Transaction processing services". Thus, the entity level figures render this company as unfit for comparison. Following the above reasons also taken note in the case of TCS e-Service International Limited, we order for the elimination of this company from the final set of comparables". Subsequently in the case of Equant Solutions India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the company is engaged in offering solutions in the field of data analytics, operations management, audits and reconciliation, matrics management and reporting services. The functionality of the company was not only considered by the Tribunal, Mumbai Special Bench, in the case of Maersk Global Centres India Pvt. Ltd. (supra), but a host of other decisions referred to earlier, wherein, it has been held that the company is involved in providing high end services which is in the nature of KPO, hence, cannot be compared to a general ITES provider. In fact, the Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd., ITA no.102 o 2015, has held that this company being a KPO service provider cannot be considered as a comparable to ITES companies. We may further mention, many of the orders passed by the co-ordinate benches of the Tribunal rejecting Eclerx Services Ltd. as a comparable to ITES service provider is for the very same assessment year 2008-09. Therefore, respectfully following the view expressed by various judicial authorities, we hold that Eclerx Services Ltd. being functionally different cannot be treated as comparable to the assessee." XXXXXXX ITA(TP)/927/M/16( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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