TMI Blog2019 (10) TMI 1439X X X X Extracts X X X X X X X X Extracts X X X X ..... upheld the order of the DRP rejecting Excel Infoways Ltd. as comparable company on the ground that the company has a super normal profit of 203.80% and low employee cost 10.02%. We, therefore, find merit in the submissions of the Id. counsel for the assessee that Excel Infoways Ltd. should be excluded from the list of comparable on account of super normal profit of the said company in the preceding year. Thus we direct the AO/TPO to exclude Excel Infoway Ltd. from the final set of comparable. Considering the fact that we have directed to exclude the Infosys BPO Ltd. and Excel Infoways Ltd., therefore, the AO/TPO is directed to recompute the ALP of IT support services with its AE as per direction/ observation hereinabove. Application u/s 154 - not granting set off of brought forward losses and unabsorbed depreciation against the income of current years - HELD THAT:- AO is directed to decide the application of assessee filed under section 154 in seeking the set off of brought forward business loss and unabsorbed depredation in accordance with law. - ITA No.970/Mum/2017 - - - Dated:- 16-10-2019 - SHRI SHAMIM YAHYA AND SHRI PAWAN SINGH, JJ. Appellant by : Ms. Karis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned AO and the Learned TPO under the directions of the Hon'ble DRP erred in levying interest under Section 2348 and 234C of the Act. 9. On the facts and in circumstances of the case, the Learned AO and the Learned TPO under the directions of the Hon'ble DRP erred in proposing to initiate penalty under Section 271(1)(c) of the Act. The Appellant claims relief on the above grounds and thereby deleting the adjustments made by the Learned AO in the final assessment order. 1. Brief facts of the case are that the assessee-company is a subsidiary of MModol Inc engaged in the business of medical transcription services, Information Technology (IT) services and quality assurance, technology support back office co-ordination, training and consultation. The assesseecompany filed its return of income for Assessment Year 2012-13 on 28.11.2012 declaring total income at ₹ 55,11,390/-. Along with the return of income, the assessee furnished report under Form 3CEB. The assessee selected Transaction Net Margin Method (TNMM) as most appropriate method to bench mark provision of Information Technology quality Assurance/ support services. The profit level indicator (PLI) sele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Infoservices India Pvt. Ltd. 9.44 1.61 19 Sparsh B P O Services Ltd. 1.56 (26.66) 20 Synetairos Technologies Ltd. 15.13 17.53 21 Visesh Infotecnics Ltd. (seg.) 15.14 36.02 Arithmetic Mean 12.52 11.86 3. The margin on comparable based on average of was 12.52% and the assessee s margin for international transaction was 15.02%. Thus, the assessee claimed its transaction at the Arms Length. The Assessing Officer made a reference to Transfer Pricing officer (TPO) under section 92CA for computation of Arms Length Price (ALP). During the proceedings before TOP, the TPO accepted 4 comparable and further added 4 additional comparable. The TPO carried out its own research and included the said 4 comparable: 4. The TPO after including 4 comparable worked out Arithmetic mean of Profit Level Indicator (PLI) of 8 comparable company and arrived at margin of 23.27 % against PL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 33.92 7 Excel Infoways Ltd. 49.38 ALP Margin 22.22 6. Further, aggrieved by the direction of DRP, the assessee has filed present appeal before the Tribunal. 7. We have heard the submission of ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the revenue and perused the material available on record. 8. On the various grounds of appeal raised by the assessee. The ld. AR of the assessee submits that Ground No. 1 to 6 relates to TP Adjustment and the ld. AR of the assessee is pressing only the exclusion of Infosys BPO and Excel Infosys BPO Ltd. It was further submitted that in case both these comparable are excluded the assessee s margin would be within tolerance range. For exclusion of Infosys BPO Ltd., the ld. AR of the assessee submits that this comparable is not functionally comparable due to Brand Value and high turnover of ₹ 1312.41 crore and extraordinary events during the year under consideration as its acquiring an Australian based company namely Portland Group Pty. Ltd. Func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate. The IT/BPO services of this comparable are employee oriented activity and therefore involved high employee cost. As per annual report of Excel Infoways, the ratio of total employee cost to the total operating cost is 15.44%, whereas such ratio in case of assessee is 17.80%. This comparable company has two business segment i.e. IT/BPO segment and infra segment. Infra segments accounts for 49% of its total revenue. Segmental details are provided in the annual report but no bifurcation or breakup of employee cost has been provided. In absence of such details, the contention of DRP that bulk of the employees cost is attributable to ITeS is unreliable. Further, merely because IT/BPO segment is employee oriented, it does not mean that the infra segment did not incur employee cost or incur very less employee cost. Thus, a company having low employee cost cannot be comparable to the assessee. It cannot be considered as comparable due to fluctuating margin and diminishing revenue trend. The operating margin of this company has shown drastic fluctuation ranging from 247.74% in F.Y. 2008-09 to 2% in A.Y. 2014-15. The ld. AR furnished the fluctuating margin of this comparable from F.Y. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes and cannot be rejected. On the objection of brand value, DRP concluded that unless the assessee demonstrate how brand or intangibles have impacted profitability and also quantifies the difference in profitability, this comparable cannot be rejected. For acquisition of otherentity, the DRP concluded that acquisition will impact only on the consolidated accounts of the company and its subsidiary and will not affect the account on stands alone basis. The co-ordinate bench of Mumbai Tribunal in Maersk Global Services vs. ACIT(supra) while considering the comparability/exclusion of Infosys BPO Ltd. held as under: 10. We have considered rival submissions and perused materials on record. From the material on record, it is evident that the assessee is not only a captive service provider, but the nature of service provided by the assessee can be categorized as simple BPO services. Even, the DRP has also accepted that the nature of service provided by the assessee will not come within the purview of High End BPO or KPO services. It is relevant to observe, the Transfer Pricing Officer while examining the functional profile as well as skill set employed by the assessee has observed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of Hon'ble Bombay High Court in CIT V/s Pentair Water India (P.) Ltd. [supra], in similar manner, we direct for exclusion of this entity. This is further fortified by the decision of Delhi Tribunal in Baxter India Pvt. Ltd. V/s ACIT [supra], for same AY, wherein the co-ordinate bench directed for exclusion of this entity on account of functional dissimilarity and extra-ordinary events which took place during the year. Similar is the view of Bangalore Tribunal in Mobily Infotech India Pvt. Ltd. Vs DCIT [supra]. 14. The Hon ble Bombay High Court in CIT vs. Principle Global Services (P.) Ltd. while considering the question of law whether Tribunal was right in excluding on turnover basis held as under: 8. Re Question (d):- (i) M/s. Infosys BPO Ltd., was excluded by the Tribunal from the list of comparable to determine ALP in respect of International Transaction of the Respondent's activity of rendering of back office support services to its AE. (ii) The impugned order of the Tribunal noted the facts that turnover of the comparable was to the tune of R.9028 Crores while the turnover of the Respondent-Assessee, as noted by the TPO was only ₹ 18 Crores. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gaged in the business of BPO and/or and ITeS provider and development of infrastructure facility. On the employee cost filter, the DRP concluded that out of total salary cost of ₹ 2.02 crore, bulk of this will be attributable to ITeS/BPO as it is universally acknowledged that ITeS/BPO is more work force intensive as compare to infra activity. Therefore, allocation of manpower expenses on the basis of ITeS/BPO segment and infra segment is not correct. On asset turnover ratio, the DRP concluded that once company is functionally comparable, is cannot be rejected on the ground of difference of fixed asset to operating income, low employee cost, unless the assessee demonstrate how these factors have impacted profitability and also quantify the difference in profitability. The ld. AR of the assessee vehemently submitted that this comparable cannot be comparable as its Director were considering closing of its ITeS/BPO segment and diversify in new area of construction, development of property and real estate. The ld. AR also demonstrated that the fluctuating margin of this comparable in different Financial Year in the following manner: Financial Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 247.74% 2009-10 267.31% 2010-11 238 .71%. 2011-12 41.48% 2012-13 75.70% 2013-14 30% 2014-15 2% 19. We find that the Tribunal in assessee's own case in assessment years 2011-12 2012-13 vide para 16 17 of the order of Tribunal has excluded Excel infoways Ltd., because of its fluctuating margins shown by the said concern. The Tribunal held that the said concern i.e. Excel Infoways Limited which is in the process of closing down its ITES segment and also because of the factum of fluctuating margins, could not be selected as functionally comparable to the assessee. Following the same parity of the reasons, we hold that the said concern i.e. Excel Infoways Limited, because of different factors and also fluctuating to be excluded from final set of comparables. Accordingly, we h ld The Assessing Officer is directed to recompute mean margin of the comparables and determine ALP of the international transactions of provision of Oracle suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year under consideration. Further, the above company has super normal profits. We further find the submissions of the assessee that Excel Infoways Ltd. has super normal profits during the current year has not been controverted by the Revenue. We find the Mumbai Bench of the Tribunal the case of DCIT vs. Willis Processing Services (India) Pvt. Ltd. vide ITA No.2152/Mum/2014 has upheld the order of the DRP rejecting Excel Infoways Ltd. as comparable company on the ground that the company has a super normal profit of 203.80% and low employee cost 10.02%. We, therefore, find merit in the submissions of the Id. counsel for the assessee that Excel Infoways Ltd. should be excluded from the list of comparable on account of super normal profit of the said company in the preceding year. 25.1 Further, from the order of the TPO we find he has obtained the employee cost and the sale for the 1TES segment by exercise of his powers u/s. 133(6), wherein the said company has allocated entire employee cost to IT - BPO segment with no allocation to Infra Activity segment which accounts to 49% of Excels total revenue. In our opinion, it is highly impractical that no employee has been hired by Exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the assesseecompany who is providing IT, ITeS, back office support and other related services to its group entity excluded this comparable holding as under: 5.3 Excel Infoways Limited With respect to this company, it has been submitted that this company was also functionally dissimilar as it was engaged in IT enabled BPO services and development of infrastructure facility. It has also been submitted that this company fails the employee cost filter as well as the diminishing revenue filter. We find that Excel Infoways Ltd was directed to be excluded by ITAT Delhi Bench in the case of Baxter India Pvt. Ltd vs. ACIT in ITA ITA 6690/Del/2016 Assessment year 2012-13 6158/Del/2016 which also provided captive IT Enabled Services to its AE. The year under consideration before the ITAT in the case of Baxter India (P) Ltd was also AY 2012-13. The relevant observations are contained in Para 24 and 25 of the said order and are being reproduced for a ready reference: 24. So far as exclusion of Excel Infoways Ltd. is concerned, we also find merit in the submissions of the ld. Counsel for the assessee that the above company should be excluded from the list of comparables. This company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that we have directed to exclude the Infosys BPO Ltd. and Excel Infoways Ltd., therefore, the AO/TPO is directed to recompute the ALP of IT support services with its AE as per direction/ observation hereinabove. In the result, Ground Nos.1 to 6 are allowed. 20. Ground No.7 relates to not granting set off of brought forward losses and unabsorbed depreciation against the income of current years. The ld. AR of the assessee submits that the assessee has filed an application under section 154 before the Assessing Officer, however, the assessee Assessing Officer has not disposed off the application. The ld. AR of the assessee prayed for appropriate direction be given to the Assessing Officer to decide the application under section 154. The ld. AR further submits that the Assessing Officer must grant the set off of business loss and unabsorbed depreciation except the years, qua which the A.Y. is in dispute. 21. On the other hand, the ld. DR for the revenue supported the orders of lower authorities. 22. We have considered the submission of both the parties and considering the submission of ld. AR of the assessee, the Assessing Officer is directed to decide the application of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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