TMI Blog2020 (5) TMI 731X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. Inclusion/exclusion of certain comparables - Companies functionally dissimilar with that of assessee or any extraordinary events on account of amalgamation need to be deselected from final list. - ITA No. 46/Del/2013 - - - Dated:- 6-5-2020 - Shri R.K. Panda, Accountant Member And Ms. Suchitra Kamble, Judicial Member For the Assessee : Shri S.D. Kapila, Advocate Shri R.R. Maurya, Advocate. For the Revenue : Ms. Nidhi Sharma, Sr. DR. ORDER PER R.K. PANDA, AM: This appeal filed by the assessee is directed against the order dated 29th October, 2012 passed u/s 144C(5)/143(3) of the IT Act for A.Y. 2008-09. 2. Facts of the case, in brief, are that the assessee is a majority owned subsidiary of Worldzen Holdings Ltd. The assessee along with Keane Worldzen Inc. (KWZ) and Worldzen Collection and Recovery LLC (WZ C R) partners with global outsourcing companies and large global corporations to create dedicated and customized designed Indian facilities, for providing remote delivery of business processes services. Assessee has a state of the art facility located in Gurgaon, India, that is focused on servicing the business process services in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riate method, OP/OC as PLI and the assessee as the tested party. The TPO applied the following filters:- a) Companies whose data are not available for F.Y. 2007-8; b) Companies having turnover of less than 1 crore c) Excluded companies having RPT of more than 25%; d) Excluded companies having ITES revenue of the total operating revenue at less than 75%; e) Excluded companies for diminishing revenues/persistent loss making f) Excluded companies having different financial year g) Excluded functionally different companies h) Excluded companies having operating revenue as export less than 25%. 6. The TPO, after giving working capital adjustment of 1.32%, determined the arm s length PLI at 28.47 and proposed an adjustment of Rs.6,25,78,194/-. The DRP directed the exclusion of Coral Hub and Mold-tek and upheld the remaining 18 comparables. Post DRP direction, the OP/OC of the following 18 comparables comes to 25.47% and adjustment of Rs.4,70,19,716/-:- S. NO. Comparables as per TPO/DRP OP/OC% -As per TPO order u/s 144C(5)/Pg. 12AM 1. Accentia Technologies Ltd. (Seg.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O erred in principal and on facts on the following grounds The ld. AO/TPO has grossly erred in 1. Incorrectly accepting HCL Comnet Systems services Ltd (segmental), a company having significant (25.26 per cent) related party transactions, as comparable to the Appellant Company. 2 Arbitrarily rejecting comparable companies by use of inappropriate and insufficient filters 2. Computing the adjustment on account of difference working capital employed by the Appellant Company and the comparable companies. 4. Arbitrarily rejecting the comparable companies selected by the Appellant Company i.e. rejection without identifying any specific deficiency in the benchmarking analysis or fully appreciating the functional capabilities of the selected comparable companies. 5. Selecting super normal profit making companies as comparable to the Appellant Company. 6. Computation of operating margins of finally selected comparable companies by not allowing cost of Fringe Benefits Tax ( FBT ) as an allowable expenditure. 7. Not allowing the Appellant Company, a low risk entity i.e. captive service provider, adjustment towards differences in risk profile when compared with finall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the additional grounds filed by the assessee. 14. After hearing both the sides and considering the fact that no fresh facts are required to be investigated and these grounds go to the root of the matter, therefore, both the additional grounds raised by the assesseee are admitted. 15. The ld. Counsel for the assessee, at the time of hearing, did not press grounds of appeal No.6,7 and 8 for which the ld. DR has no objection. Accordingly, these grounds are dismissed as not pressed. 16. So far as Ground of appeal No.1 is concerned, the grievance of the assessee is that HCL Comnet Systems Services Ltd. (Seg.) has been incorrectly considered as comparable although this company is having significant RPT of 25.26% which is more than 25%. The ld. Counsel for the assessee drew the attention of the Bench to paper book page 262 and submitted that before TPO it was clearly brought to his notice that RPT transaction is 25.26%. Referring to page 265 of the paper book, he submitted that the RPT was shown at 27.99% of the sales. He accordingly submitted that this comparable should have been excluded by the TPO and DRP. 17. The ld. DR, on the other hand submitted that she has no object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause 4, it has been mentioned that Accentia Technologies has acquired M/s Thunga Software Pvt. Ltd., has purchased business in GSR Systems, purchased business in GSR Billing Services, purchased business in Denmed Transcriptions Services Inc., etc. Further, this company derives revenue from four sources, namely, Brokerage, Medical Transcription, Billing collection and income from investment in subsidiary. However, no segmental are available. He accordingly submitted that in view of the decision of the Tribunal in assessee s own case and in view of the decision of the Delhi Bench of the Tribunal in the case of Blackrock Services India (P). Ltd. and various other decisions as mentioned in the synopsis, this company should be excluded from the list of comparables. 22. The ld. DR, on the other hand, heavily relied on the order of the AO/TPO/DRP. 23. After hearing both the sides, we find, the Tribunal, in assessee s own case for A.Y. 2007-08 has excluded this company from the list of comparables by observing as under:- 5.3.2. We have perused the submissions advanced by both the sides in the light of the records placed before us. From the audited statements of this company pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent functions as well as extraordinary events such as acquisitions that have taken place. We, therefore, direct the TPO/Assessing Officer to exclude this company from the list of comparables. 25. The various other decisions relied on by the ld. Counsel for the assessee in the paper book also support his case to the proposition that Accentia Technologies has to be excluded from the list of comparables on account of extraordinary events that had taken place and absence of segmental data. We, therefore, direct the AO/TP to exclude Accentia Technologies from the list of comparables. 26. So far as Crossdomain Solutions Pvt. Ltd. is concerned, the ld. Counsel for the assessee submitted that Crossdomain Solution Pvt. Ltd., is functionally different since the business profile of this company is re-engineered pay roll services and development of information systems. Referring to the decision of Mumbai Bench of the Tribunal in the case of BP India Services Ltd. vs. ACIT 55 taxmann.com 150, he submitted that this company was excluded by the Tribunal on the ground that this company is engaged in development of products suits and routine low end ITES services. The business of Crossdomain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrect. 30. We find the Delhi Bench of the Tribunal in the case of H S Software Development and Knowledge Management Centre Pvt. Ltd. (supra) while excluding Cross Domain Solutions Pvt. Ltd., from the list of comparables, has observed as under:- 27.1 So, when it is not in dispute that the taxpayer is a low end BPO, the Cross Domain being a high end KPO and into developing of product suites, it cannot be a suitable comparable. Comparability of Cross Domain has been examined by the coordinate Bench of the Tribunal Symphony Marketing Solutions India Pvt. Ltd. (supra), relevant page 4 of the convenience paper book, wherein Cross Domain has been held to be not a suitable comparable vis- -vis Symphony Marketing Solutions India Pvt. Ltd. (supra) which is also low end BPO. Operative part of the findings of the coordinate Bench of the Tribunal in Symphony Marketing Solutions India Pvt. Ltd. (supra) is reproduced below :- As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re transfer agent as well as ITES. There is no segmental information available in the audited accounts. Therefore, the revenues from both the streams are not separable. It has been held in various decisions that when segmental details are not available, the company cannot be accepted as a comparable. Since admittedly in the instant case no ITA No.6408/Del/2012 segmental details are available, therefore, we direct the Assessing Officer/TPO to exclude Datamatics Financial Services Limited from the list of comparables. 35. However, we find the Delhi Bench of the Tribunal in the case ACIT vs. Techbook (supra) while deciding the issue has restored the issue to the file of AO/TPO with certain directions which are as under:- TPO has chosen this company as comparable by making following observations: This company can also be used as comparable. The services that it is providing are very much I T Enabled Services. The assessee challenged the inclusion of this company as comparable company on the grounds inter-alia that this is a functionally different company; that its segmental information is not available and this company had shown 450% profits in its P L account meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and exclude this company in case the figures are of entity level. 37. So far as eClerx Services Ltd. is concerned, the ld. Counsel for the assesseee submitted that this company is functionally different since it is engaged in the business of providing Knowledge Process Outsourcing (KPO). The company is operating in data analytics space and provides operations, management audit and reconciliation services. It falls in the domain of KPO segment. However, the assessee company, on the other hand, is providing back office support services to its AEs. Therefore, this company which is providing high end services should be excluded from the list of comparables. Referring to the decision of the Delhi Bench of the Tribunal in the case of Blackrock Services India (P). Ltd. (supra) and H S Software Development and Knowledge Management Centre Pvt. Ltd. (supra) and the decision of the Bangalore Bench of the Tribunal in the case of Flextronics Technologies (I) Pvt. Ltd. vs. DCIT, reported in 67 taxmann.com 244 and various other decisions as per the synopsis and paper book, he submitted that this company should be excluded from the list of comparables. 38. The ld. DR, on the other hand, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 40. We find, the Delhi Bench of the Tribunal in the case of IHG IT Services (India) (P) Ltd. vs. DCIT, reported in 64 taxmann.com.427, has thoroughly analysed the functions of e-Clerx Services Ltd. and directed exclusion of the said company from the list of comparables by observing as under:- 16. We have heard both the sides and perused the material available on record. The Hon'ble jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has held as under :- 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erx also offered financial services such as real- time capital markets, middle and back-office support, portfolio risk management services and various critical data management services and the Hon'ble High Court held that this company is engaged in KPO services and so, this company cannot be compared with the low end service provider like the assessee in this case. We order the exclusion of this company from the set of comparables. 41. We further find e-Clerx was excluded by the Tribunal in assessee s own case for A.Y. 2007-08 on account of different functionality. In view of the decisions cited (supra) and in view of the various other decisions relied on by the ld. Counsel for the assessee in the paper book where e-Clerx has been excluded from the list of comparables on account of different functionality, this company is directed to be excluded from the list of comparables. 42. So far as Infosys BPO is concerned, the ld. Counsel for the assessee submitted that this company has got high brand value and it is a large and diversified service provider. He submitted that its brand value is 31,863/- crore and has incurred 6.17% of the total revenue as sales and marketing expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id extra ordinary event brought to our notice, we exclude Infosys BPO from the list of comparables. 45. We find, the coordinate Bench of the Tribunal in the case of eValueserve.Com (P) Ltd. (supra) has excluded Infosys BPO from the list of comparables by observing as under:- 44.18 We have heard both the parties and perused all the relevant material available on record. There is an extraordinary event that of acquisition of a group during A.Y. 2008-09. The Hon'ble Delhi High Court in case of PCIT vs. Actis Global Services held that size and scale of operations of a company does make it unsuitable as comparable. Therefore, it will be appropriate to exclude this comparable. Therefore, we direct the TPO/AP to exclude this comparable from the final list of the comparables. 46. We further find this company was excluded by the Tribunal from the list of comparables in assessee s own case for A.Y. 2007-08 by observing as under:- 5.8.1 We have perused the submissions advanced by both the sides in the light of the records placed before us. From TP study placed at page 539-638 of the paper book, it is observed that this company has huge turnovers, owns IPR and brand value on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE services. As far as Acropetal Technologies Ltd. is concerned, this company does the business of export of software services. It is also seen from the segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it derives income from engineering design services and software development services. It is also pertinent to point out that before the TPO, the assessee raised an objection that this company performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the services rendered 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 maj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d value and is a market leader. It has incurred huge expenditure on R D. Referring to the decision of the Hon ble Delhi High Court in the case of PCIT vs. New River Software Services Pvt. Ltd., he submitted that the Hon ble High Court has directed to exclude this company from the list of comparables. Referring to the decision in the case of H S Software Development and Knowledge Management Centre Pvt. Ltd. (supra), he submitted that this company was excluded from the list of comparables on account of significant brand value and huge expenditure on R D apart from advertisement business activities. 54. After hearing both sides we find, the Tribunal at para 44 to 47 of the order has discussed this issue and excluded this company by observing as under:- 44. TPO retained Wipro As a comparable despite objections raised by the taxpayer. The taxpayer sought exclusion of Wipro from the final set of comparables on grounds inter alia that Wipro has significant ownership of intellectual property; that it has high turnover of Rs.17492.62 crores and that it has undergone extra ordinary events during the year under assessment and is having diversified business and relied upon the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi Tribunal in ICC India Pvt.Ltd., vs. ACIT (supra) has excluded this comparable by placing reliance upon Calibrated Healthcare Systems (I) (P) Ltd. Vs ACIT (OSD) reported in (2015) 54 Taxmann.com 53.lt is observed that in this decision this tribunal has examined comparability of WIPRO and ordered its exclusion on the ground that this is a giant entity with marked differences as regards risk profile, nature of services, ownership of IP rights, expenditure on R D, etc-* So, following the decision rendered by co-ordinate bench as well as the fact that the assessee company is a captive service provider taking minimum risk having no intangibles cannot be compared with WIPRO which is having diversified business, ownership of significant intangibles and huge expenditure on R D etc. So, it is directed to exclude this company from the final list of comparables 56. Similar view has been taken in the various other cases relied on by the ld. Counsel for the assesseee in the case law compilation. In view of the above discussion and considering the fact that Wipro BPO has significant brand value, has advertisement business activities, has incurred huge expenditure on R D and has undergon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It should be understood that businesses are so varied and no two transactions are similar. Business models followed by the AEs and assesses are different. 60. We have considered the rival arguments made by both the sides and perused the record. Although this company was selected by the assessee itself based upon the FAR analysis, however, the ld. Counsel for the assessee submitted that on the basis of the annual report of the said company, the various Benches of the Tribunal have held that Genesys International was functionally dissimilar and unverifiable. It has been held in various decisions that the assessee can challenge the comparable at the appellate stage even though the same was taken by it as a comparable in the TP study. We find, the Delhi Bench of the Tribunal in the case of Blackrock Services India (P). Ltd. (supra) while excluding Genesys International Corporation Ltd. as a comparable has held as under:- 30. So far as Genesys International Corporation Limited is concerned, we find this company also is functionally different from that of the functions of the assessee company. From the annual report of the company, we find it is engaged in the business of prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 61. We find, the Delhi Bench of the Tribunal in the case of H S Software Development and Knowledge Management Centre Pvt. Ltd. (supra) while excluding Genesys International Corporation Ltd. (supra) has observed as under:- 36. TPO retained Genesys as a comparable despite taxpayer's objections on the ground that in the preceding years, the taxpayer has itself not raised any objection to take Genesys as a comparable. However, the taxpayer sought exclusion of Genesys on the grounds inter alia that it is functionally different; that Genesys has different employee scale set; that it has significant intangibles and engaged in R D activities and having high fluctuation margins and relied upon Symphony Marketing Solutions India Pvt. Ltd. (supra). 37. When we examine functional profile of Genesys from the annual report, relevant at page 144 of the paper book. it is proved that Genesys is engaged in providing Geogra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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