TMI Blog2018 (8) TMI 712X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing the said order, we direct the AO to exclude the aforesaid comparable while working out the arm’s length price. Regarding exclusion of certain comparable, decision of DRP sustained. - Decided in favor of assessee and revenue partly. - ITA No. 1974/Del/2015, ITA No. 6201/Del/2015 And CO No. 23/Del/2016 - - - Dated:- 10-8-2018 - Sh. N. K. Saini, AM And Sh. Kul Bharat, JM For The Assessee : Sh. Ravi Sharma, Adv. For The Revenue : Smt. Binita Devi Neorem, Sr. DR ORDER Per N. K. Saini, AM: The appeal by the assessee for the assessment year 2010-11 is directed against the order dated 29.12.2014 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as the Act) while the appeal of the department and the Cross Objection of the assessee for the assessment year 2011-12 are directed against the order dated 23.09.2015 passed by the AO u/s 143(3) r.w.s. 144C(4) of the Act. 2. At the first instance, we will deal with the appeal of the assessee in ITA 1974/Del/2015 for the assessment year 2010-11. Following grounds have been raised in this appeal: 1. That on the facts and in the circumstances of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law, the Ld. AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act mechanically and without recording any adequate satisfaction for such initiation. 7. 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 Appellant 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. 3. Ground Nos. 1 5 are general in nature. Ground Nos. 2 4 were not pressed while ground no. 6 is pre-maturely raised, so these grounds do not require any comments on our part. 4. Vide ground Nos. 3 to 3.6, the grievance of the assessee relates to the Transfer Pricing adjustment amounting to ₹ 99, 14, 264/- on account of arm s length price by rejecting the comparables selected by the assessee and introducing new comparables. 5. The facts of the case in brief are that the assessee was engaged in the business of knowledge process outsourcing and data processing service. Primaril ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Informed Technologies India Ltd NA 22.61% 3.63% 10.89% 4. Nittany Outsourcing Services Pvt. Ltd. NA NA 19.38% 19.38% 5. Datamatics Financial Services Ltd. NA -6.46% 0.55% -3.03% 6. Omega Healthcare Management Services Pvt. Ltd. NA 15.43% -0.73% 9.34% 7. Jeevan Softech Ltd. (BPO ITES segment) NA 13.44% NA 13.44% 8. R System International Ltd 7.07% 14.08% 9.53% 10.43% 9. Caliber Point Business Solutions Ltd. (Segmental) 21.16% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing audit will only benchmark transactions with the AE, which are mainly export transactions. There are judicial pronouncements that support the case that exporters should not be compared with domestic companies. Hence, this filter is required to be applied with a threshold of 75%. vi. Reject companies where related party transactions exceed 25% of sales: There is no doubt that companies with significant related party transactions need to be excluded from the benchmarking process. On the issue of threshold of related party transactions, it can be stated that when the RPT exceeds 25% of sales, it can be said to be the stage when it will start affecting the price paid/received. Companies below 25% RPT transact business substantially with unrelated party and the prices can be construed to be market determined. The rationale given for the use of the limit of 25% is sound and this threshold limit has been approved explicitly an implicitly in quite a few judicial pronouncements. vii. Companies that have employee cost that is less than 25% of total cost: The rationale for this filter is that companies that are engaged in IT enabled services will require a minimum level of expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financials of the company aren t available on the public domain. Hence, not a suitable comparable. 7. Jeevan Softech Ltd. This company is having sales below ₹ 5 crores. Hence, not a suitable comparable. 8. R System International Ltd. This company is having financial year ending other than March. Hence, not a suitable comparable. 9. Caliber Point Business Solutions Ltd. (Segmental) This company is having financial year ending other than March. Hence, not a suitable comparable. 10. Ultramarine Pigments Ltd. This company is having significant RPT in respect of providing of IT Enables Services. Hence, not a suitable comparable. 11. First Object Technologies Ltd. Employee cost is less than 25% of total cost 12. Saraswat Infotech Fails export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel for the assessee submitted that the following comparables need to be excluded on account of functional dissimilarity: i. TCSE-Serve International Ltd. ii. TCS E-Serve Ltd. iii. Infosys BPO Ltd. iv. Accentia Technologies Ltd. v. e4e Healthcare Business Services Ltd. It was further submitted that segmental information were not available in respect of M/s TCSE-Serve International Ltd., M/s TCS E-Serve Ltd. M/s Accentia Technologies Ltd. and that M/s Infosys BPO Ltd. acquired M/s McCamish Systems LLC while in M/s Accentia Technologies Ltd. amalgamation of M/s Ascent took place. It was further submitted that M/s TCSE-Serve International Ltd. and M/s TCS E-Serve Ltd. were also having the intangibles and also made payment for TATA brand equity, therefore, the aforesaid five comparables need to be excluded. It was also submitted that this Bench of the Tribunal has rejected the first four comparables while deciding the appeal in ITA No. 12.02/Del/2015 for the assessment year 2010-11 in the case of Equant Solutions India Pvt. Ltd. Vs DCIT vide order dated 21.01.2016 (copy of which is placed at page nos. 114 to 144 of the assessee s compilation). I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a. The assessee further objected to inclusion of Infosys BPO Ltd as comparable which has a margin at 31.44%. Before the TPO assessee submitted that, this is the company, which has very high turnover and has huge brand value. Submission of the assessee that higher profits is because of highly established brand in the market place. TPO rejected the contention of the assessee holding that the assessee has failed to establish how the brand has influenced increased profitability of the comparable. The ld DRP also rejected the contention of the assessee. Before us, the assessee submitted that comparable is engaged in highend integrated services in improving the competitive position of their clients and manage their business process and providing value added services to them. Further, the Infosys also carrying huge brand value and therefore this comparable should not be taken. b. Ld DR Relied on the orders of lower authorities and stated that all the reasons have been considered by the TPO and DRP for inclusion of this comparable. c. We have considered the rival contention regarding exclusion of Infosys BPO Ltd. It is engaged in high and integrated services and therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect also makes this comparable as inappropriate and therefore we order to exclude this comparable. 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 been considered by the TPO. c. We have also considered the rival contention for exclusion of TCS e-service Ltd. It is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, verifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect the Assessing Officer to do so. 15. Since, the facts in assessee s case are similar to the facts of the aforesaid referred to case of M/s Bechtel India Pvt. Ltd. Vs DCIT (supra). So, respectfully following the aforesaid referred to order dated 21.04.2015 of the Co-ordinate Bench, these two comparables are also directed to be excluded. 16. As regards to Ground No. 7, it was the common contention of both the parties that charging and computing of interest u/s 234B and 234D of the Act is consequential in nature. We order accordingly. 17. In departmental appeal for the assessment year 2011-12 i.e. in ITA No. 6201/Del/2015, following grounds have been raised: 1. On the facts and in the circumstances of the case, the DRPII erred in directing to reduce the addition of ₹ 1, 52, 88, 220/- on account of proposed addition of arm's length price of the international transaction with its associated enterprises. 2. On the facts and in the circumstances of the case, the DRP-II erred in directing TPO to exclude 5 mentioned below companies from the final set of comparables : i) Acropetal Technologies Ltd. ii) e-Clerx Services Ltd. iii) ICR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. NA NA 15.43 15.43 8. R Systems International Ltd. -6.61 NC 14.08 4.37 9. Firstobject Technologies Ltd. NA 21.65 5.27 13.46 Mean 14.28 1 20. The TPO, however, selected the following nine comparables with average PLI at 25.54%: S. NO. Name of the Company OP/TC(%) 1. Accentia Technologies Ltd. 29.18 2. Acropetal technologies Limited(Seg) 14.36 3. e4e Healthcare Business Services Pvt. Ltd. 9.77 4. Eclerx Services Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Circel-5(2), New Delhi in ITA No. 6315/Del/2015 for the assessment year 2011-12 vide order dated 02.04.2018 reported at (2018) 93 Taxmann.com 227 (Del.). 23. After considering the submissions of both the parties and the material on record, it is noticed that the Hon ble High Court in the case of Pr. CIT Vs B. C. Management Services (P.) Ltd. (2018) 403 ITR 45 (supra) held as under: 10. So far as question no. 1 with respect to exclusion of four comparables is concerned, we notice that E-clerx was excluded on two grounds i.e. no segmental data was available, and it was functionally different as it was providing high end/BPO services. 11. This Court further notes that E-clerx is to provide financial services such as consultancy business solution and testing. 12. The Assessee provides IT enabled services in infrastructure development and testing, system and performance operations management and support etc. The ITAT excluded E-clerx as comparable after noticing that it provided high value financial services relating to consultancy business and solution testing besides the web content management merchandising execution, web analytics, etc. This functional dissimi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged in significant R D activities and incurring significant advertisement, marketing and promotion expenses as a percentage of sale. Learned TPO observed that there appears to be merely a difference in classification of expenses in the annual report for FY 2010-11, and if we look at figures for the FY 2011-12 in the annual report, the expenses on salary and wages are correctly classified, and, as such, this is a good comparable as it has also engaged in offshore model of work as that of the assessee. 26. Ld. DRP held that this company is in software development, passed the employee cost filter, there is no evidence of increase in margin profit on account of creation of incubation business unit, as per website the company started as engineering design services and expanded its foray of services to add software service capabilities and as per page 53 of annual report, segment wise breakup of the revenue is also available. For these reasons, ld. DRP recorded that it is a good comparable. 27. Ld. AR brought to our notice that the salaries and consultancy charges including bonus incurred by Acropetal was ₹ 13.51 crores whereas the technical sub contract expens ..... X X X X Extracts X X X X X X X X Extracts X X X X
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