TMI Blog2023 (3) TMI 456X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the assessee. Vishal Information Technologies Ltd - Percentage of outsourced business of the comparable company has been reported as 44.81% whereas before us the assessee has pointed out the ratio of outsourcing expenses to the total expenses as 65.98%. Therefore, it is essential to verify the exact quantum of outsourcing expenses in the case of the comparable company. Accordingly, we set aside the matter of exclusion of the company to the file of the Ld. TPO with the direction to ascertain quantum of outsourcing expenses and the business model of the company by way of issue of notice under section 133(6) of the Act and then if the business model of the company is found to be based on outsourcing, then same shall be excluded from the set of the comparables in accordance with law. Asit C Mehta financial services ([Nucleus netsoft and GIS (India) Limited ] - Concern with extraordinary events of merger/demerger cannot be comparable in the years of such merger/demerger we direct the Ld. AO/TPO to exclude this company from the set of the comparables for computing arithmetic mean of PLI of comparables. Transworks information services Ltd - We find that the Ld. TPO h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the Ld. AO/TPO for deciding afresh. Maple e-solutions Ltd - As relying on Commins turbo technologies Ltd [ 2018 (3) TMI 1588 - BOMBAY HIGH COURT] we direct the Ld. AO/TPO to exclude the company out of the set of the comparables on the ground of unreliability of financial data because of fraud committed by the owners/directors. C S software Enterprises Ltd - From the reporting in Annual Report, it is evident that company is having only one segment of Information Technology enabled services. Further on perusal of the other pages of the Annual Report also it is evident that company is primarily in the field of IT-BPO and no where it is reported that company is in software development. The observation of the CIT(A) that company is engaged in software development and there is no separate segment of ITes, is without any basis. Accordingly, The Ld. AO/TPO is directed to include the company into the set of the comparables. - ITA No. 8753/MUM/2011 , ITA No. 8823/MUM/2011 - - - Dated:- 13-9-2022 - SHRI ABY T VARKEY (JUDICIAL MEMBER) AND SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) For the Assessee : Mr.Niraj Sheth, AR For the Revenue : Mr. V.K. Agarwal, DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted by the Income-tax department for assessment year 2006-07 in an arbitrary manner and with a pre-determined mind set of making a transfer pricing adjustment. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed as the same is contrary to the provisions of law and has resulted in selection of companies suffering from quantitative and qualitative dissimilarities. 4. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and TPO have rejected the use of data for two preceding financial years (viz. FY 2004-05 and FY 2003-04) in addition to the previous year i.c. 2005-06 as permitted under the provisions of Rule 10D(4) of the Rules as elaborated in the TP Report. 5. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO have used secret comparable companies by considering companies for which data was not available in public domain at the time of preparation of transfer pricing study report and subsequently invoking the powers given under Section 133(6) of the Act for gathering data not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal ground of appeal challenging the rejection of certain comparables by the AO/TPO, which is reproduced as under: 9. The Ld. CIT(A) erred on the facts in upholding the order of the AO/TPO in rejecting functionally comparable companies selected by the Appellant in its transfer pricing report. 6. We have heard parties on the issue of admissibility of the additional ground. In view of settled principle laid down by the Hon ble Supreme Court in the case of CIT Vs NTPC 229 ITR 383 (SC), the additional ground raised by the assessee is admitted as issues involved being of legal nature and no investigation of fresh facts is required. 7. The brief facts relevant for the adjudication of the issue in dispute are that the assessee company M/s HSBC Professional Services (India) Private Limited is incorporated in India and 98% of the shareholding is held by HSBC holdings BV, Netherlands and balance two percent is held by Hong Kong and Shanghai banking Corp Ltd., India. The assessee company is engaged in providing personals to various entities of the HSBC group for conducting audit services. 7.1 For the year under consideration, the assessee filed its return of income on 17/11/200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the admission of the assessee that no independent comparable companies were identified in search of the Prowess and capitaline database, which rendered services identical to that of the assessee and therefore the assessee broadened its search criteria so as to include companies that are engaged in processing jobs [i.e. Information Technology (IT) enabled/Business Process Outsourcing services (BPO)] as broadly comparable to the functions and risk profile of the assessee. The assessee selected 11 companies as comparables and arithmetic mean of their weighted average of profit level indicator (operating profit/total cost) was worked out to 11.45%. The list of comparables selected by the assessee has been reproduced by the Ld. TPO in para five of his order. For ready reference, the said list of comparables is extracted as under : Sl. No. Name of the Company Wtd. Avg. 1. Ask Me Info Ltd. -1.10 2. MCS Ltd. 6.00 3. CMC Ltd. 6.37 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Allsec Technologies Ltd. Accepted 3. Apex Knowledge Solutions Pvt. Ltd. It is into software development In response to notice u/s 133(6), the company categorically stated that they are into IT enabled services. It also qualifies all the filters applied the TPO. The same is considered as a comparable. 4. Asit C Mehta Financial Services Ltd. (Earlier known as Nucleus Netsoft GIS (India) Ltd) Annual report uses word ITES and software development, therefore not acceptable It is mainly engaged in ITES, software may be a minor part, for this reason only the main segment is named as ITES by the company in its Annual Report. 5. Cosmic Global Ltd (Seg) It is functionally different with predominantly in transcription Notice u/s 133(6) was issued. As per the Information submitted by the company, it is into IT enabled services and qualifies all the filters applied by the TPO. Thus the company is considered as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Technologies Ltd It has related party transactions, therefore Uncontrolled In response to letter issued u/s 133/6), the company has stated that it did not have any transaction with any associated enterprise 7.5 The Ld. TPO rejected the contention of the assessee for providing working capital adjustment as well as risk adjustment in absence of any quantifiable data provided by the assessee. 7.6 The Ld. TPO vide his order dated 21/10/2009 computed the adjustment of ₹1,06,65,264/-as under: 5.8 Determination of Arms Length Price: Total Cost incurred by assessee on providing Office Services (In absence of separate accounts (proportionate cost being taken) (₹9,64,87,892/-/107507875*94470575) ₹8,47,86,967/- Mark Up as per comparables 10,51,35,839/- Transaction Price ₹9,44,70,575/- Adjustment ₹1,06,65,264/- 8. The Ld. Assessing Officer issued draft assessment order to the assessee proposing the addition for transfer pricing adjustment of ₹1,06,65,264/-, against which the assessee did not chose to object before the Ld. Dispute Resolution Panel (DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has filed a paperbook in two volumes containing pages 1 to 1107. 12. We have heard rival submission of the parties on the issue of exclusion/inclusion of comparables for determination of arms length price of the international transactions. As far as selection of most appropriate method as Transactional Net Margin Method (TNMM), there is no dispute between the parties. Under the TNMM, for comparison of the assessee with the comparable companies, functions carried out, assets deployed and risk assumed (FAR) by the assessee are to be compared with the FAR analysis of the comparable companies. Therefore, before we embark upon adjudication of exclusion/inclusion of comparables, it is necessary to refer the FAR analysis of the assessee company, available on page 13 to 16 of the paperbook, which is reproduced as under: 4. Functional Analysis 4.1 Functions Performed HPSI is responsible for providing appropriately skilled professionals to the Contracting Entity so as to enable the Contracting Entity to carry out its auditing activity. There are various departments within HSBC, which conduct internal audits relating to inter alia Retail, Credit, Genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses and recommendations for strengthening key controls / increasing operational efficiency are examples of key findings that are reported. While on assignment they perform services such as reviewing the existing operations of the Contracting Entities and assisting in the writing of the audit report, by completing the report for the sections that have been assigned to them. A typical overseas audit schedule for an auditor at HPSI would involve two weeks of onsite auditing and one week of compilation of findings/report writing (offsite work) at the HPSI office. Due to the specialisation aspect, an auditor would normally work for the same Contracting Entity all the time, although an auditor may be requested to assist an alternate Contracting Entity in case of manpower shortages. 4.1.1 Other functions HPSI avails of certain overdraft and loan facilities from the Bank. We understand that the Bank offers these facilities at terms and conditions similar to those offered to independent third parties. The Bank has seconded certain employees to HPSI. These employees remain on the payroll of the Bank and are accordingly paid salaries by the Bank. Such payroll cost i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spective entity who is using the services. These auditors perform services of reviewing the existing operations of the contracting entities and assist them in writing audit report. These auditors would do on-site auditing (at the place of the contracting entity) and one week of report writing (off-site work) at the office of the assessee. 14. The assessee has entered into agreement for provision of audit services with Associated Enterprises. A copy of one of such agreement with Associated Enterprise namely HSBC electronic data processing (Guangong) Limited (HDPG), is placed on page 121 to 127 of the paperbook. The range of professional audit services rendered by the assessee to HDPG is listed in clause -2 (on page 122 of PB) along with Schedule-I, available on page 126 of the paperbook. The details of said services is reproduced as under: 2. Services 2.1 HPSI will be responsible for providing sufficient auditors to enable the adequate execution of the Services. The range of professional audit services ( Services ) rendered by HPSI to HDPG is noted in the attached Schedule 1. 2.3 Both parties will follow the operational procedures and service levels as agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 65.98% of the total expenditure. Thus, according to the Ld. counsel, the business model of the comparable company being different from the assessee company, same is functionally different from the assessee. The Ld. counsel in support of his contention has relied on the decision of the Hon ble Punjab and Haryana High Court in the case of PCIT Vs IHG IT services India Private Limited for assessment year 2006-07 reported in (2017) 88 taxmann.com 642 (P H). On the contrary, the Ld. DR submitted that nowhere outsourcing world has been mentioned in the Annual Report and data entry charges incurred by the assessee might have been separately identified and grouped in the annual report, and merely on the basis of separate identifying of data entry charges, the company cannot be classified as outsourcing model company. 17. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that Hon ble Punjab and Haryana court in the case of IHG IT services India Private Limited (supra) for assessment year 2006-07 has observed as under: 5. As far as Vishal Information Technologies Limited is concerned, there is no difficulty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable at entity level. The Ld. DR on the other hand submitted that Ld. CIT(A) has directed to take the segment result relating to ITes for benchmarking instead of entity level results, therefore, company is functionally similar at segment level. 20. We have heard rival submission of the parties on the issue in dispute. As evident from the paperbook page 323 (Annual Report page 31), another company namely Nucleus Netsoft and GIS (India) Ltd. was amalgamated with the Company. The relevant information of the annual report is reproduced as under : 1. AMALGAMATION a. Pursuant to the scheme of amalgamation ('the scheme). Nucleus Netsoft And GIS (India) Ltd (NNGIL) was amalgamated with the Company with effect from the appointed date i.e. April 2005 as sanctioned by the Hon'ble High Court of Judicature at Bombay, on February 10, 2006, and filed with Registrar of Companies on February 22, 2006. All the assets and liabilities of erstwhile Nucleus Netsoft And GIS (India) Ltd stand transferred to and vested with the Company with effect from April 1, 2005, the appointed date. The scheme has accordingly been given effect to above financial statements. b. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services Ltd: 21. The Ld. counsel submitted that this company also outsource a considerable portion of its business and therefore business model being different from the assessee, the company cannot be accepted as valid comparable. The Ld. counsel however did not file financials of the company to support his contention and relied on the decision of the Tribunal Mumbai Bench in the case of Franklin Templeton International services India Private Limited Vs DCIT reported in (2018) 89 taxmann.com 439 (Mumbai-Trib). 22. The Ld. DR submitted that this comparable was not challenged by the assessee before the Ld. CIT(A) and it has been challenged for first time before the Tribunal. The Ld. DR further referred to objection of the assessee before the Ld. TPO and the remark of the Ld. TPO, wherein the assessee sought to exclude the company on being functionally different, whereas the Ld. TPO called for the information under section 133(6) of the Act and after verification that it qualifies all the filters and functions are in the nature of ITes only, he included the company into set of comparables. 23. We have heard rival submission of the parties. We find that the Ld. TPO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of turnover. The Ld. counsel also referred to the decision of the Tribunal Hyderabad Bench in the case of HSBC Electric data processing India Ltd Vs ACIT reported in (2013) 38 taxmann.com 141 wherein the company has been rejected on the basis of foreign exchange earning being less than 25% of the total revenue of the company. 28. The Ld. DR on the other hand referred to the remark of the Ld. CIT(A), wherein he has held that the Ld. TPO has only considered BPO division at segment level as comparable with its sales at ₹5.03 crores and not the total revenue . He submitted that the export turnover is with respect to another division of telecom sector and therefore said filter does not apply on the BPO segment of the company. 29. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. On perusal of the page 409 of the paperbook we find that sales of the company are from two divisions. The first division is telecom and insulated divisions, wherein the turnover has been bifurcated in domestic turnover at ₹25,84,43,794/- and export turnover of ₹2,29,721/-. The other division is BPO division wherein the turno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT versus Cummins Terbo technologies Ltd reported in (2018) 91 taxmann.com 307 for assessment year 2007-08. The Ld. counsel also submitted that company is in the call centre which is a specialised ITeS service and therefore also need to be excluded being functionally dissimilar. The Ld. DR on the other hand submitted that assessee itself has classified in the category of ITes/BPO and if assessee insist for exclusion of the company on the ground of call centre, then other comparables selected by the assessee also need to be excluded being functionally dissimilar. The Ld. DR further submitted that allegation of fraud on the owners/directors were pertaining way back to almost more than 20 years and therefore merely on substantiated allegation of fraud, company cannot be excluded. 34. We have heard rival submission of the parties on the issue in dispute. We find that on the issue of non-reliability of financial data of the company, the Hon ble High Court of Bombay in the case of Commins turbo technologies Ltd (supra) has held as under: 15. In our considered opinion, the difference in functions sought to be canvassed by the assessee is emerging from record. Merely because the tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Segment Reporting : The Company is engaged in providing Information Technology Enabled Services which in the context of Accounting Standard-17 issued by ICAI are considered to constitute one single segment. 39.1 From above reporting in Annual Report, it is evident that company is having only one segment of Information Technology enabled services. Further on perusal of the other pages of the Annual Report also it is evident that company is primarily in the field of IT-BPO and no where it is reported that company is in software development. The observation of the Ld CIT(A) that company is engaged in software development and there is no separate segment of ITes, is without any basis. Accordingly, The Ld. AO/TPO is directed to include the company into the set of the comparables. 40. The ground raised by the assessee challenging exclusion/inclusion of certain comparables is accordingly, allowed partly for statistical purposes. 41. In the result, the appeal filed by the Revenue is dismissed, whereas the appeal filed by the assessee is allowed partly for statistical purposes. Order pronounced in the open Court in 13/09/2022. - - TaxTMI - TMITax - Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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