TMI Blog2018 (2) TMI 1821X X X X Extracts X X X X X X X X Extracts X X X X ..... brief, are that the assessee is a Private Limited Company incorporated under the Companies Act, 1956 in June, 2004 and is a wholly owned subsidiary of Helix Financial Group LLC. The assessee company is engaged in the business of providing Information Technology enabled back office process outsourcing and related services i.e. ITES to its Associated Enterprise (AE), Helix US. The IT enabled back office process outsourcing and related services performed by Blackrock India mainly include web search, data entry, data management support services etc. The assessee filed its return of income on 29.09.2008 declaring total income of ₹ 2,07,80,346/-. The Assessing Officer made a reference to the TPO for determining the arm s length price u/s 92CA(3) in respect of the international transaction entered into by the assessee during the financial year 2007-08 relevant to the impugned assessment year i.e. A.Y. 2008-09. During the TP assessment proceedings, the TPO observed that the assessee during the impugned assessment year has undertaken the following international transactions with its AE as per the report in Form No.3CEB :- 1) Provision of IT enabled b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs is taken as the arms length margin. (Please see Annexure E for details of computation of PLI of the comparables). Based on this, the arms length price of the IT enabled services rendered by you is computed as under : Arithmetic mean PLI 29.16% Less: Working Capital Adjustment 3.00% Arm s Length Price: 26.16% Operating Cost Rs.150,092,483 Arms Length Margin 26.16% of the Operating Cost Arms Length Price (ALP) Rs.189,356,676 b. Price Received vis- -vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under : Arms Length Price Rs.189,356,676 Price shown in the international transactions Rs.168,092,913 Shortfall being adjustment u/s 92CA Rs.21,263,763 The above shortfall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (Seg) 11.22 14 Infosys B P O Ltd. 19.66 15 I-service India Private Ltd. 10.92 16 Spanco Ltd. (Seg) 8.94 17 Acropetal Technologies Ltd. (Seg) 35.30% 18 Wipro Ltd. (BPO Division) 30.23% 19 R System International Ltd. (Seg) 4.30% 20 Mold Tech Technologies Deleted by DRP Average 25.34% Less: Working Capital Adjustment 2.88% Final Comparable Margin 22.46% 9. Accordingly, the TPO made an upward adjustment of ₹ 1,48,66,764/- as against earlier proposed addition of ₹ 2,12,63,763/-. 10. Aggrieved with such order of the Assessing Officer, the assessee is in appeal before the Tribunal by raising the following gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er than 25% of their sales; (iii) exclusion of companies with export sales that are less than 25% of their total revenue; (iv) exclusion of companies with diminishing revenues/persistent losses for last three years up to and including FY 2007-08; (v) exclusion of companies having different financial year ending (i.e. not March 31, 2008); and rejecting, in particular, the following filters applied by the Appellant in its fresh search: (i) companies having other operating income (i.e. income other than manufacturing and trading income) to sales greater than 50% were accepted; (ii) companies having research development costs to sales less than 3% were accepted; (iii) companies with net worth less than zero were rejected; (iv) companies having advertising, marketing and distribution costs to sales less than 3% were accepted. 3.6 including high-profit making companies with different scale of operations and high turnover in the final comparables' set for benchmarking a captive service provider such as the Appellant (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above grounds of appeal are without prejudicial to each other. The Appellant craves leave to alter, amend or withdraw all or any grounds herein or add any further grounds as may be considered necessary either before or during the hearing. 11. Although a number of grounds have been raised by the assessee in the grounds of appeal. Ld. counsel for the assessee confined his arguments to grounds of appeal no.3.6 to 3.9 wherein the assessee has challenged the selection of the following comparables :- S.No. Name of the company 1 Accentia Technologies Ltd. 2 Coral Hub Ltd. (Vishal Information Technologies Ltd) 3 Datamatics Financial Services Ltd. (Seg) 4 Eclerx Services Ltd. 5 Genesys International Corpn. Ltd. 6 H C L Comnet Systems Services Ltd. (Seg) 7 Acropetal Technologies Ltd. (Seg) 12. So far as inclusion of Accentia Technologies Limited is concerned, ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices on its own. Coral Hub Limited does not appear to be a service provider at all but is more of distributor and hence, it is not comparable to the assessee. For the above proposition, he relied on the following decisions :- a. BA Continuum India (P.) Ltd. vs. Addl.CIT, (2017) 79 taxmann.com 85. b. IT Cube Solutions (P.) Ltd. vs. ITO, (2016) 76 taxmann.com 187. c. Avaya India (P.) Ltd. vs. DCIT, (2016) 71 taxmann.com 76. 14. So far as Datamatics Financial Services Limited is concerned, he submitted that the said company is functionally different from that of the assessee company, since Datamatics is acting as Registrar and share transfer agent as well as providing ITES. Referring to page 150, 155 of the Annual Report Compendium, he submitted there is no segment information available, therefore, the revenues from both the streams are not separable. Relying on a number of decisions, he submitted that when the segmental details are not available, the company cannot be selected as a comparable. He accordingly submitted that the Datamatics Financial Services Limited is included from the list of comparable. 15. So far as E Clerx Services Limited is concerned, he submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch, 2008. Since the financial year of HCL ends on 30th June, 2008, therefore, it fails the TPO s own filter of different financial year. Relying on various decisions, he submitted that the above company has been excluded from the list of comparables on account of its functional difference as it is engaged in the business of providing telecommunication and remote infrastructure management services. 18. So far as Acropetal Technologies Limited (Engineering Design Service Segment) is concerned, he submitted that this company is engaged in development of software products whereas the assessee is doing ITES services which cannot be compared with the software development companies. He further submitted that as per information obtained u/s 133(6) by the Assessing Officer, it has been replied by the said company that they provided Engineering Design Services. Referring to Annual Report Compendium of Acropetal Technologies Limited, copy of which is placed at page 104, 106, 107 of the Paper Book, he submitted that the ITES activity of the assessee are not comparable to engineering services. Referring to the decision of the Hyderabad Bench of the Tribunal in the case of HSBC Electronic D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calculation. 22. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer/TPO/DRP and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. As mentioned earlier since the ld. counsel for the assessee confined his arguments to certain comparables only apart from the computation error of operating margin of Datamatics, therefore, we are straightway dealing with the same only without going into the other grounds raised by the assessee in the grounds of appeal which according to us are mere academic in nature. 23. So far as exclusion/inclusion of Accentia Technologies Limited is concerned, we find from the Annual Report Compendium that the company in its annual report at page 29 has mentioned about the acquisition of Thunga Software Pvt. Ltd., acquired GSR Physician s Billing Service, acquired GSR systems, a software company specializing in HRCM based in Florida, USA, acquired Denmed Inc., a medical transcription company based in salem, Oregon, USA. Further, this company is engaged in providing diversified services. This company is engaged in transcription services which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Co-ordinate Bench of Delhi in the case of United Health Group Information Services Pvt. Ltd. Vs. ACIT [ITA No.6312/Del/2012-AY 2008-09] dt. 28-08-2014, wherein the Co-ordinate Bench held as under: Vishal Informatics 12.1. The TPO included this company in the list of comparables by noticing that it was engaged in providing BPO services. The assessee failed to convince him and the DRP that it was incomparable. 12.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it is mainly engaged in e-publishing business. It has more than 10,000 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., e- publishing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has also been taken by the Hyderabad Bench of the Tribunal in the case of BA Continuum India (P.) Ltd. (supra) on the ground that this company is classified as high-end KPO and was having supernormal profit. The Bangalore Bench of the Tribunal in the case of Goldman Sachs Services (P.) Ltd. (supra) has also excluded this company from the list of comparables on account of the said company being mainly engaged in providing high-end KPO services involving specialized expertise in the field and the same cannot be compared with company mainly engaged in providing low-end services to its group concerns. Since the assessee in the instant case is a low-end service provider, therefore, following the decision of the Delhi Bench of the Tribunal in the case of Avaya India (P.) Ltd. (supra) and the various decisions citied (supra), we hold that the E Clerx Services Limited cannot be held as comparable with that of the assessee company. The various other decisions relied on by the ld. counsel for the assessee in the synopsis also support its case. We, therefore, direct the exclusion of E Clerx Services Limited from the list of comparables. 30. So far as Genesys International Corporation Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables . 14.3. Respectfully following the decision of the Co-ordinate Bench, we direct the AO/TPO to exclude Genesys International Corporation Ltd., from the list of comparables. 31. Similar view has been taken by the various other decisions relied on by the ld. counsel for the assessee in the synopsis. We, therefore, direct the TPO/Assessing Officer to exclude Genesys International Corporation Limited from the list of comparable on account of functionally different. 32. So far as HCL Comnet Systems and Services Limited is concerned, we find this company is into data centre management, end user computing, managed security services, networking services and tools and process consulting services which in our opinion is functionally different from that of the assessee company. We find the Hyderabad Bench of the Tribunal in the case of HSBC Electronic Data Processing India (P.) Ltd. (supra) has restored the issue to the file of the TPO with the following direction :- 14.6.2. We have heard rival submissions of the parties and perused the material on record. It is not disputed that these companies are having huge turnovers like that of assessee during the year. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by this company fall in the definition of ITES. 14.2.2 We have considered the submissions of the learned counsel for the Assessee. Ld Counsel submission was that this company was excluded in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench, so the same require exclusion. In the above case it was considered like this: 13. We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No.15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The performance of Engineering Design Services is regarded as providing high end services among the BPO which requires high skill whereas the services performed by the Assessee are routine low end ITES functions. We therefore hold that this company could not have been selected as a comparable, especially when it performs engineering des ..... X X X X Extracts X X X X X X X X Extracts X X X X
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