TMI Blog2015 (4) TMI 1359X X X X Extracts X X X X X X X X Extracts X X X X ..... mal, course of business are to be included for determining the operating revenue while computing the margins. By the same analogy, those expenses which are not part of normal business activities should get excluded for determining the operating revenue while computing the margin. As donation is not in the nature of the normal business activity of the assessee, we hold and direct that donation requires to be excluded from operating revenue, while computing the margin. Comparable selection - Accentia Technologies Ltd. be excluded from the list of comparables in view of the occurrence of extra-ordinary event of the amalgamation which would impact financial results in the period under consideration thereby rendering it not comparable to the assessee in the case on hand. eClerx Services Ltd. is to be excluded from the final list of comparables since it is engaged in providing high end services involving specialized knowledge and domain expertise rendering it functionally different from an IT enabled service company, as in the assessee in the case on hand. Cosmic Global Ltd. was excluded because the only comparable segment, i.e. Accounts BPO segment has low volume of sales as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,00,000 2.2 The TPO passed an order under Section 92CA of the Act vide order Dt. 16.1.2013 making an adjustment of Rs. 1,04,14,489 to the international transactions of the assessee in I.T. Enabled Services. Subsequent to the receipt of the TPO's order under Section 92CA of the Act, the Assessing Officer passed a draft assessment order on 31.1.2013 proposing the following adjustments to the returned income of Rs. 94,82,385 :- (i) Transfer Pricing Adjustment: Rs. 1,04,14,489. (ii) Disallowance of excess claim u/s. 10A of the Act: Rs. 10,55,534 The total income was accordingly determined at Rs. 2,09,52,408. 2,3 Aggrieved by the draft assessment order for Assessment Year 2009-10 dt. 31.1.2013, the assessee filed its objections thereto before the DRP. The DRP issued its directions thereon vide order under Section 144C(5) of the Act dt. 30.10.2013. In pursuance of the DRP's directions, the Assessing Officer passed the final order of assessment under Section 143(3) rws 144Cof the Act, vide order dt. 29.11.2013, wherein the income of the assessee was determined at RS. 2,72,20,530; incorporating the T.P. Adjustment of Rs. 1,77,38,145 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 3) 4.1 In its T. P. Study, the assessee while conducting the comparability analysis for the international transactions with its AEs had adopted Transactional Net Margin Method ('TNMM') as the Most Appropriate Method ('MAM') using Net cost plus mark up and the Profit Level Indicator CPLI'). Based on its comparability analysis, the assessee chose 8 companies as comparable to the assessee, with the average profit margin of 4.34%. As the profit margin of the assessee computed at 18.94% was higher than that of the comparable companies, it was concluded by the assessee that its international transactions in IT enabled services were at arms length. 4.2 The TPO, however, on examination of the assessee's T.P. Study, rejected the comparability analysis of the assessee, conducted his own search process and selected the following set of 8 comparables with the average margin at 25.04%, the details of which are as under; ITES FINAL SET OF COMPARABLES SI,No. Name of the Company Margin % 1. Infosys BPO Ltd. 24.41 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . further submitted that he does not press the grounds related to the 'Turnover Filter' and that the assessee proposes to raise the following issues before us for consideration of the Bench :- i. Foreign exchange profit / loss to be part of operating revenue while computing the margin of the assessee. ii. Donation to be excluded from operating revenue while computing the margin of the assessee. iii. Exclusion of two comparables from the TPO's final set of comparables, namely, (1) Accentia Technologies Ltd. and (2) eClerx Services Ltd. on grounds of functional dis-similarity by relying on the decision of the co-ordinate bench of ITAT, Bangalore in the case of Mindteck (India) Ltd. (supra). iv. Exclusion of Cosmic Global Ltd., as a comparable by relying on the decision of the ITAT, Hyderabad Bench in the case of Parexel International Ltd. Vs: ACIT in ITA No. 144/Hyd/2014 dt. 30.9.2014. The issues listed above will now be examined in seriatum. 5. Foreign Exchange Gain as a part of Operating Revenue. 5.1 In respect of the issue raised at (i) in para 4.4 (supra), it is the contention of the assessee that the TPO erred in not treating the foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the foreign exchange gain. 6. Donation to be included in or excluded from Operating Revenue. 6.1 In respect of the issue raised at (ii) in para 4.4 (supra), the assessee contends that donations are not a part of normal business activities and hence it should be excluded from operating revenues. 6.2 In the preceding paragraphs, we have already expressed the view that those expenses incurred / incomes earned in the normal, course of business are to be included for determining the operating revenue while computing the margins. By the same analogy, those expenses which are not part of normal business activities should get excluded for determining the operating revenue while computing the margin. As donation is not in the nature of the normal business activity of the assessee,we hold and direct that donation requires to be excluded from operating revenue, while computing the margin. Comparables sought to be excluded by the assessee. 7. Accentia Technologies Ltd. 7.1 The assessee submits that this company needs to be excluded from the set of comparable companies as it is functionally different from the assessee and in this context, the learned Authorised Repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRPfor the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner- 17.5. In addition to the above, the Director's Report of accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial year 31.3. 2008. The assessee filed Form No. 21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar. 34. It appears to us that the decision rendered by the Tribunal in the case of Symphony Marketing Solutions would be applicable in the present assessment year also. Accordingly, Accentia Technology Ltd is directed to be excluded from the list of comparables. : 7.3.2 Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Mindteck (India) Ltd. (supra) for A.Y. 2009-10, we also hold and direct that this company; i.e. Accentia Technologies Ltd. be excluded from the list of comparables in view of the occurrence of extra-ordinary event of the amalgamation of Accentia Technologies Ltd. with M/s. Asscent Infoserve Ltd., which would impact financial results in the period under consideration thereby rendering it not comparable to the assessee in the case on hand. 8. eClerx Services Ltd. 8.1 The assessee contends that this company .needs to be excluded from the list of comparable companies as it is functionally different from the assessee and in this context, the learned Authorised Representative cited and relied on the decision of the co-ordinate bench of this Tribunal in the case of Mindteck (India) Ltd. (supra) for A.Y. 2009-10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service providers in the ITES segment; the salary cost of Cosmic Global Ltd. being only 21.32%. (iii) This company has earned abnormal profits during this year and therefore should be excluded as a comparable .. In support of the assessee Is contentions (supra), the learned Authorised Representative placed reliance on the decisions of the ITA T, Hyderabad Bench in the cases of (1) Parexel (India) Pvt. Ltd. for Assessment Year 2009-10 (supra) and (2) Excellence Data Research (P) Ltd. for Assessment Year 2009-10 in ITA No. 159/Hyd/2014 dt. 31.7.2014. 9.2 Per contra, the learned Dept. Representative supported the action of the TPO in including this company in the final list of comparables. 9.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon.. It is settled principle that a company cannot be excluded as a comparable merely because it has made abnormal profits. In fact, in the decision rendered by the co-ordinate bench in the case of Mindteck (India) Ltd. for Assessment Year 2009-10 (supra), cited and relied on by the assessee for exclusion of certain other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at Rs. 3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune of Rs. 6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment. 13.3. However, we find this case to incomparable on the alternative argument advanced by the Id. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs. 27.76 lacs. We have discussed this aspect above in the context of CGVAK's case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs. 86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs. 27.76 lac is still on much lower s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly and not on the entity level. It was also held that the entire outsourcing activity was confined to translation charges, which is in the realm of transaction segment and therefore the segment of Accounts BPO only needs to be considered and since the total revenues from the Accounts BPO segment at Rs. 27.76 lacs was very low, this company was removed from the list of comparables. 9.3.4 In view of the above, this company, namely, Cosmic Global Ltd., was excluded from the list of comparables in the aforesaid case, because the only comparable segment, i.e. Accounts BPO segment has low volume of sales as compared to the entity level. Whether this finding of fact is also applicable to the assessee Is case, requires fresh examination as it has not been examined by the TPO and neither has this issue been agitated by the assessee either before the authorities below or before us in the present appeal. In this view of the matter, we deem it appropriate to remand this issue to the file of the TPO to consider the comparability of this company afresh in the light of the judicial pronouncements cited I referred to and the principles and observations laid out therein. 10. Ground Nos. 1 to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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