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TMI Blog2022 (12) TMI 923X X X X Extracts X X X X X X X X Extracts X X X X ..... IT enabled services to the associated enterprise. 2. On the facts and in the circumstances of the case and in law, Ld. AO / DRP / TPO erred in disregarding the separate transfer pricing benchmarking for IT enabled services and business support services segments maintained by the Appellant and aggregating the said segments for benchmarking the international transaction of provision of IT enabled services. 3* On the facts and in the circumstances of the case and in law, Ld. AO / DRP / TPO erred in: a. rejecting the transfer pricing study which was maintained in good faith and with due diligence; b. rejecting the search process followed by the Appellant for each segment and carrying out fresh comparability analysis for determining the Arm's Length Price of the IT enabled services segment as the only segment; c. rejecting the use of multiple year data and applying only single year data for comparability analysis which were not available at the time of preparation of transfer pricing study; and d. rejecting/ modifying certain filters as applied by the Appellant in selection of the comparable companies at the time ofTP documentation and applying certain additional filter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 72. 9. On the facts and in the circumstances of the case and in law, the Ld. AO erred in initiating the penalty proceedings under Section 271(1)(C) of the Act. It is prayed that the Ld. AO be directed to drop the penalty proceedings initiated u/s 271(1)(C) of the Act." 2. The brief facts of the case are that assessee company is engaged in the business of Service Sector, IT Enabled Services and BPO Providers, back office support services to its associated enterprise (`ITeS'). The assessee company filed its return of income for A.Y. 2014-15 on 25.11.2014 declaring total income of Rs.6,65,62,890/- and a book profit of Rs.15,40,31,493/-. The return of income was processed u/s 143(1) of the Act and the case was selected for scrutiny under CASS and required notices along with a questionnaire were issued to the assessee calling for information. The Asst. Commissioner of Income Tax, Circle - 17(1), Hyderabad has referred the assessee company u/s 92CA(1) of the Act for determination of Arm's Length Price in respect of the international transactions for the financial year 2013-14. 2.1 During F.Y 2013-14, assessee had entered into various international transactions with its AE. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who issued directions dt.05.09.2018. Later, the TPO, in compliance of DRP directions, passed order dt.25.10.2018 revising the transfer pricing adjustments. During the course of scrutiny proceedings u/s 143(3) r.w.s. 92CA(3) of the Act, an amount of Rs.10,10,327/- was treated as undisclosed income and added to the returned income. Though, assessee raised an objection for the same but failed to produce the necessary evidence before the DRP in this regard. The DRP has upheld the companies selected by the TPO in his final set of comparables and the same are listed below: Particulars 1. Microgenetics Systems Ltd 2. Infosys'BP0 Ltd 3. Microland Ltd. 4. Eclerx Services Ltd 5. BNR Udyog Ltd. 6. Crossdomain Solutions Private Limited 7. MPS Limited 5. Feeling aggrieved by the order passed by the Assessing Officer / DRP, the assessee is in now in appeal before us. At the outset, the ld.AR for the assessee has submitted that the assessee is seeking the exclusion of the 5 comparable out of total 7 comparable selected by the lower authority namely, Infosys BPO Ltd, Microland, Eclerx Services Limited, Crossdomain and MPS Ltd and seeking the inclusion of Allsec Technologies Limited. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices), as defined under Rule 10TA of the Safe Harbour Rule is to the following effect : "In this regard, reference is drawn from Rule 10TA of the Rules - Safe Harbor Rules for International Transaction - which define KPO service as: 'the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:- (i) Geographic information system; (ii) Human resources services; (iii) Engineering and design services; (iv) Animation or content development and management; (v) Business' analytics; (vi) Financial analytics; or (vii) Market research but does not include any research and development services whether or not in the nature of contract research and development services' It can be clearly identified from the extract of the annual report of Eclerx below that it is involved in the functions of financial services analytics and sales and marketing services which clearly fall within the ambit of KPO." 11. It was submitted that as per the Safe Harbour Rule, the services rendered by the assessee would fall within the broader ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per Book of the assessee and services mentioned hereinabove by Eclerx Services Limited, it is clear that both are falling in the same category. Hence, in our view, both are comparable. With respect to the objection of the assessee that there was inorganic growth and profit, during the year, in our view, this objection of ld.DR is devoid of any merit and is not sustainable for the simple reason that the Eclerx Services Limited has acquired the shareholding in Agilyst w.e.f. 05.04.2012, which had not taken place during the year and hence relevant and further assessee has failed to demonstrate how the acquisition of the Agilyst from 05.04.2012 had affected the profitability of the assessee for F.Y. 2013-14 (Relevant to A.Y. 2014-15). Law is fairly settled that no company can be excluded on the basis of high or low profit earned by it, if it is otherwise comparable with the assessee company on the yardstick of FAR analysis. Nonetheless, the Eclerx Services Limited has only noticed a growth of 48.98% during the assessment year under consideration and merely because it has higher growth in comparison to the assessee is no reason to discard this comparable. For the above said purposes, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etained as a comparable. 56. Having regard to the rival contentions and the material on record, we find that this company has been held to be a KPO service provider whereas the assessee has been categorised as a BPO by the TPO & DRP. Having held so, the said company cannot be treated as a comparable to the assessee. Further, in the assessee's own case for the earlier A.Y (to which both of us are signatories), we have held that this company cannot be a ITA Nos 161 and 2307 of 2018 Infor India P Ltd Hyderabad comparable to the assessee. Since there is no change in the activities of the said company, we do not find any reason to take any other view and therefore, we direct the AO/TPO to exclude this company from the final list of comparables." 15. If we look into the profile of Infor India Pvt. Ltd., then it is clear that the Tribunal has held it to be a BPO. Whereas in the present case, assessee is a routine contract IT-Enabled service provider and contract business support service provider. The reason for excluding the Eclerx services limited from the list of comparable in the case of Infor (supra) will not hold good for excluding it in the case of assessee, as profile of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. In this regard, assessee has relied upon the decision in the case of Rampgreen Solutions Pvt. Ltd (supra) and the decision of the Hon'ble Bombay High Court in the case of PCIT Vs. BNY Mellon International Operations (India) Pvt. Ltd. (2018) taxmann.com 363. In our respectful understanding, all these case laws are not applicable to the facts of the present case, as all the decisions in the said cases pertain to A.Ys. 2008-09 and 2009-10 only. As mentioned hereinabove, the Tribunal in the case of Hyundai Motor India Engineering Pvt. Ltd (supra) had categorically mentioned in para 32 that Eclerx Services Limited is a good comparable with Hyundai Motor India Engineering Pvt. Ltd (supra). However, for the reasons mentioned, the Tribunal has excluded the same for A.Y. 2014-15. In our view, once we have analyzed in details the functional profile of Eclerx Services Limited and compared with assessee then we are left with no doubt that the functions performed by the Eclerx Services Limited are similar to that of assessee. Therefore, both the lower authorities have rightly upheld the inclusion of Eclerx Services Limited with the assessee. Therefore, we reject the contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sal of Page 841 of the paper book (financials of the Microland) under the head Revenue Recognition, it is clearly mentioned that this company only derives its revenue from Information Technology Services. Microland has divided its Information Technology Services into two parts namely, infrastructural management and IT enabled services. However, the fact remains that both were treated as Information Technology Services and it is further clear from para 2.6 reproduced hereunder : "2.6 Revenue recognition Services The company derives its revenues primarily from Information Technology (IT) services. Revenue from IT services on time-and material basis is recognized as the related services are rendered. Revenue from fixed price contracts is recognized using the proportionate completion method, which is determined by relating the actual project cost of work performed to date to the estimated total project cost for each contract. Provision for estimated losses, if any, on incomplete contracts are recorded in the period in which such losses become probable based on the current contract estimates. Revenue from device management is recognized ratably over the period of the contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee to exclude the Microland is rejected. However, we may point out that there is a distinction between a company having verticals of ITeS and a company having various verticals including one as ITeS vertical. Admittedly, assessee is also having two ITeS verticals /segments namely, business support services and IT enabled services. Though, both have been clubbed together by the TPO / DRP under one head "ITeS" being inherently of same nature, however, the same was not objected to by assessee before us. Similarly, merely dividing one set (IteS) into two sub-sets (Infrastructural management services and IT enabled services) will not make the company as non ITeS. In view of the above, the contention of the assessee that Microland is not a comparable company is rejected. III. CROSSDOMAIN SOLUTIONS PRIVATE LIMITED. 22. In this regard, the assessee has drawn our attention to the order of the TPO wherein the TPO held that this company is primarily into IT enabled services in insurance, healthcare, HR and accounting domains which are included in the design of ITeS under Rule 10TA of the I.T Rules. However, the assessee has submitted that besides this company being the KPO, this company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee, it can be presumed that there exists the financial information of this company in the public domain, however, both Ld.AR and Ld.DR had failed to bring the same to our notice. In this regard, we may point out that all the companies, as per Companies Act and Income Tax are bound to maintain and file their, respective financials including balance sheets, annual reports etc., delineating functions performed by it and revenue earned thereof before competent authority. Further, these public listed companies are also required to publish their quarterly and annual results in terms of listing requirements of SEBI Laws. Therefore, the contention of Ld.AR that there was insufficient financial information including Balance Sheet in the public domain does not inspire confidence. Hence, this comparable cannot be excluded merely on the basis of this objection raised by the assessee. At this stage, we may point out that the decision of Hon'ble Bombay High Court relied upon by the assessee i.e., PCIT Vs. Aptara Technology Pvt. Ltd. (2018) 92 taxmann.com 240 was for A.Y. 2008-09 and therefore, the same cannot be applied to the current assessment year, as availability of financial inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company if deemed necessary. Accordingly, this ground is allowed for statistical purposes. IV. MPS LIMITED. 26. In this regard, the ld.AR for the assessee has submitted that this company is required to be excluded from the list of comparables as the company provides end-to-end print and digital publishing solutions to its partners across the entire value chain from content production, enhancement and transformation to delivery and customer support, making it a trusted partner to the biggest publishers in the world. Ld.AR for the assessee further submitted that the company is also engaged in website designing, development and website hosting. He had drawn our attention to page 1041 of the paper book to show that this company is functionally dissimilar to that of assessee company. It was submitted that this company is required to be excluded from the list of comparables. In support of his contentions, he relied upon the following decisions : 1) Emerson Electric Company (India) Pvt. Ltd. (Mumbai Tribunal) (ITA No.6098 & 531/Mum/2018) (Assessment Year 2014-15) 2) Symantec Software India Pvt. Ltd Vs. DCIT (Pune Trib) ITA No.1824/Pun/2018) (Assessment Year 2014-15) 3) FIS Solutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h companies operate in ITES segment it should not matter how many types of ITES services are provided by each company. Further, the taxpayer argued that MPS Ltd witnessed extra ordinary increase in profits compared to last year. There was 65% increase in profit compared to last year. It appears factually incorrect. Verification of annual report of MPS Ltd shows that EBDTA % during Financial Year 2012-13 is 29.21%. For Financial Year 2013-14 it has increased to 35.29% which is not steep increase as there is increase of only 6%. In view of the above, the contentions of the taxpayer are rejected and this company is retained as comparable. 28. We have heard the rival contentions of the parties and perused the material available on record. The profile of MPS Limited and exclusion thereof have been discussed in the case of Emerson Electric Company (India) Pvt. Ltd. (Mumbai Tribunal) (ITA No.6098 & 531/Mum/2018) for A.Y. 2014-15 given in Para 7.1 of order, it was mentioned as under : "7.1. The brief facts of this issue are that assessee is engaged in providing ITeS services for the in-house consumption of the AEs, primarily in the nature of database management, administration and hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the Corporate information disclosed in the financial statements for the year ending 31/03/2013, MPS Ltd., the company is engaged in the business of providing publishing solutions viz., typesetting and data digitization services for overseas publishers. The company has a 100% Export Oriented Unit in Bengaluru, and units registered under the Software Technology Park of India (STPL) scheme that are located in Chennai, Delhi, Gurgaon and Dehradun. The Company also operates through its branch in United States of America. The company provides publishing services relating to typesetting of books and journals, composing of yellow page advertisements and catalogues, data coding, conversion, indexing, editing, copy editing, editorial services, software development, maintenance and support to global publishers. b) MPS Ltd. is engaged in developing of software projects such as Digicore and Digitrack. c) MPS Ltd. has incurred outsourcing costs which indicate that it follows different business model. d) From the annual report of the said comparable it is noted as under:- ― MPS Ltd., provides content creation production, transformation and technology services to global academic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to agree with the finding of the TPO as confirmed by the DRP on this issue. Merely because, the assessee itself has not considered the said filter while making its TP study; it cannot be said that it cannot raise such an objection before the TPO. It is the TPO who has adopted this company as comparable. On such adoption, the assessee has every right to raise the objections as regards the functional differences between the assessee and comparable. It is the bounden duty of the TPO to consider the said objections in accordance with law. As brought out by the assessee, the assessee is in the TT enabled services, whereas the said company Apex Knowledge Salutation Pvt. Ltd., is in the business of E-publishing which cannot be 23 said to be in the same line of business. The functional differences are likely to affect the profit marking capacity of both the companies. In view of the same, we are of the opinion that this company is also to be excluded from the list of comparables. 9.3. In view of the above, we hold that the comparable chosen by the ld. TPO, M/s. MPS Ltd., is functionally not comparable with that of the assessee and accordingly, we direct the ld. TPO to exclude the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions with the user, advertiser etc. which are very similar to that of MPS Ltd. We are of the opinion that under the TNMM, the broad similarity is required to be ascertained while including the company in the list of comparables. 31.1. The other two judgments relied upon by the assessee i.e. Symantec Software India Pvt. Ltd Vs. DCIT (supra) and FIS Solutions Software India Pvt. Ltd. Vs. ITO (supra) are not applicable to the facts of the present case as the profile of the assessee is different to the said companies. Hence, we are of the opinion that MPS Ltd is a suitable comparable as it is functionally similar to that of the assessee. Thus, the challenge for exclusion of this company is not sustainable, and we uphold the order of TPO / DRP. V. ALLSEC TECHNOLOGIES LIMITED. 32. With respect to the inclusion of Allsec Technologies Limited, ld.AR had submitted that the ld. TPO has wrongly excluded this company on account of the persistent loss-making company and the learned DRP has also not included this company on account that this company fails on export turnover. 33. The ld.DR relied upon the order of lower authorities. 34. We have heard the rival contentions of the parties and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13) 5) Agilent Technologies Pvt. Ltd. Vs. ACIT (ITA No.6047/Del/2012) 6) NTT Data Global Delivery Services Ltd. Vs. ITO (ITA No.46/Del/2013). 36. On the other hand, the ld.DR relied upon the order passed by lower authorities. Our attention was drawn to the remarks of the TPO which are to the following effect : "Remarks of the TPO : * Functionally dissimilar:- The taxpayer has pointed that Infosys BPO in a variety of verticals including banking, capital markets, communication, media, manufacturing, insurance, retail, healthcare, energy etc. The fact that the company is engaged in different verticals across the industry does not change the nature of functions carried out. The functions are basically in the nature of business process out sourcing which can be classified as ITES. The company has earned revenues from business process management services offered to its global clients as evident from the annual report. The taxpayer has further pointed out that Infosys BPO is providing cloud based services. A cloud service is any resource that is provided over the Internet. Use of internet over the conventional telecommunication systems is very common in ITES industry. Just ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinguished based on the cloud-based services as the same is common in ITeS industry. 38. Though, both companies are earning good revenue from the huge scale of operations and are using cloud service and incurring expenses for brand building, and marketing of advertisements, however, considering the decisions relied upon by the assessee, Infosys BPO Limited is required to be excluded from the list of comparables being not comparable on account of huge turnover difference and on other aspects. Hence, we direct the TPO/AO to exclude the Infosys BPO Limited from the list of comparables. CORPORATE GROUND 39. The learned Assessing Officer has noted that there is a mismatch of the income shown by the assessee and the entries shown in Form 26AS. In this regard, the Assessing Officer has added Rs.10,10,372/- to the income of the assessee, treating the same as undisclosed income and the finding of the Assessing Officer was mentioned at Para 11 of the assessment order, which reads as under : "11. During the course of scrutiny proceedings u/s 143(3) r.w.s. 92 CA(3) of the IT Act, 1961, it was observed that there are credits in form 26AS to the extent of Rs.10,10,327/- but the same are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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