Symphony Marketing Solutions India Private Limited, Bangalore V. ITO, Bangalore

ITA 1316/BANG/2012

• Counselvise Citation: 131621114 RSA 2012
• Duration Of Justice: 10 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 31-07-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 08-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRISCILLA SINGSIT CITIIIDR
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 234B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER IT( TP )A NO. 1316/BANG/2012 ASSESSMENT YEAR : 2008-09 SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD. [PRESENTLY MERGED WITH GENPACT INDIA], BLOCK NO.2, SALARPURIA SOFTZONE, BELLANDUR VARTHUR HOBLI, BANGALORE 560 087. PAN : AAKCS 6235N VS. THE INCOME TAX OFFICER, WARD 12(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI K.R. VASUDEVAN, ADVOCATE RESPONDENT BY : SMT. PRISCILLA SINGSIT, CIT-III(DR) DATE OF HEARING : 31.07.2013 DATE OF PRONOUNCEMENT : 14.08.2013 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER D ATED 31.07.2012 PASSED BY THE ITO, WARD 12(2), BANGALORE U/S. 143(3 ) R.W.S. 144C OF THE ITA NO.1316/BANG/2012 PAGE 2 OF 26 INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS T HE ACT IN SHORT] RELATING TO ASSESSMENT YEAR 2008-09. 2. GROUND NO.1 IS GENERAL IN NATURE AND CALLS FOR N O ADJUDICATION. GROUNDS 2.1 TO 2.9 RAISED BY THE ASSESSEE ARE WITH REGARD TO THE ADJUSTMENT TO THE ARMS LENGTH PRICE (ALP) OF AN IN TERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED EN TERPRISES [AE] UNDER SEC.92 OF THE ACT. 3. THE ASSESSEE IS A COMPANY WHICH IS WHOLLY OWNED SUBSIDIARY OF SMS, USA AND WAS FORMED THROUGH A SPIN OFF FROM SYM PHONY SERVICES CORPORATION PVT. LTD. [SSCPL]. THE ASSESSEE PROV IDES MARKET ANALYTICS AND DATA MANAGEMENT SERVICES TO THE CUSTOMERS OF SM S, USA. DURING THE PREVIOUS YEAR, THE ASSESSEE RENDERED INFORMATION TE CHNOLOGY ENABLED SERVICES [ITES] TO ITS AE. AS REQUIRED UNDER THE P ROVISIONS OF SECTION 92 OF THE ACT, INCOME ARISING FROM INTERNATIONAL TRANSACT ION WITH AE HAS TO BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE [A LP]. 4. THE ASSESSEE FILED A TRANSFER PRICING [TP] STUDY JUSTIFYING THE AMOUNT THAT IT RECEIVED FOR PROVIDING ITES TO ITS AE AS ON E AT ARMS LENGTH. THE ASSESSEE RECEIVED A SUM OF RS.43,88,05,684 FROM ITS AE FOR PROVIDING ITES. THE ASSESSEE IN ITS TP STUDY JUSTIFYING THE AMOUNT RECEIVED FROM ITS AE IS AT ARMS LENGTH, SELECTED THE TRANSACTIONAL N ET MARGIN METHOD [TNMM] AS THE MOST APPROPRIATE METHOD. THE ASSESSE E ADOPTED NET PROFIT MARGIN REALIZED BY IT IN RELATION TO THE COST AT 14 .91%, WHICH IS AS PER ITA NO.1316/BANG/2012 PAGE 3 OF 26 ANNEXURE-I TO THIS ORDER. THE ASSESSEE IDENTIFIED 9 COMPARA BLE COMPANIES TO ARRIVE AT THE ARITHMETIC MEAN OF 14.84 % AS FOLLOWS:- SL. NO. UNADJUSTED MARGINS NAME OF THE COMPANY 2006 2007 2008 AVERAGE 1 B N R UDYOG LTD. 19.86% 7.95% NA 13.91% 2 COSMIC GLOBAL LTD. 16.92% 12.04% NA 14.48% 3 DATAMATICS TECHNOLOGIES LTD. 7.13% 30.67% NA 18.90% 4 INFORMED TECHNOLOGIES INDIA LTD. 44.85% 32.34% NA - 6.25% 5 MAPLE ESOLUTIONS LTD. 31.74% 34.32% NA 33.03% 6 NITTANY OUTSOURCING SERVICES PVT. LTD. - 13.12% 11.58% NA - 0.77% 7 SPARSH B P O SERVICES LTD. 2.18% 5.63% NA 3.90% 8 TRANSWORKS INFORMATION SERVICES LTD. 19.73% 12.81% NA 16.27% 9 MCS LTD. 18.00% 13.58% NA 15.79% ARITHMETIC MEAN (SIMPLE AVERAGE) 6.40% 17.88% NA 12.14% LOWER QUARTILE 2.18% 11.58% NA 3.90% MEDIAN 16.92% 12.81% NA 14.48% UPPER QUARTILE 19.73% 30.67% NA 16.27% 5. SINCE THE NET PROFIT MARGIN TO COST OF THE ASSES SEE WAS WITHIN +/- 5% RANGE OF THE ARITHMETIC MEAN OF THE 9 COMPARABLE, T HE ASSESSEE CLAIMED THAT THE PRICE CHARGED BY THE ASSESSEE FOR PROVIDIN G ITES TO ITS AE SHOULD BE CONSIDERED AS AT ARMS LENGTH. 6. THE TPO ACCEPTED TWO COMPANIES VIZ., COSMIC GLOB AL AND DATAMATIC TECHNOLOGIES LTD. OUT OF THE 9 COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE AS COMPARABLE. WITH REGARD TO THE OTH ER 7 COMPANIES, THE TPO REJECTED THE CLAIM OF THE ASSESSEE THAT THOSE C OMPANIES WERE COMPARABLE WITH THAT OF THE ASSESSEE. THE TPO FINA LLY PROPOSED 18 MORE ITA NO.1316/BANG/2012 PAGE 4 OF 26 COMPARABLES AND DESPITE OBJECTION BY THE ASSESSEE W ITH REGARD TO ITS COMPARABILITY, ADOPTED THEM AS COMPARABLE COMPANIES . THE FINAL SET OF 20 COMPARABLES CHOSEN BY THE TPO AND THEIR ARITHMETIC MEAN OF NET PROFIT MARGINS ON COST OF THOSE COMPARABLE WAS AS FOLLOWS: - SL.NO. NAME OF THE COMPANY OP / TC % 1 ACCENTIA TECHNOLOGIES LTD. (SEG.) 41.77 2 ACROPETALTECHNOLOGIES LTD. (SEG.) 35.30 3 ADITYA BIRLA MINACS WORLDWISE LIMITED (EARLIER KNOWN AS TRANSWORKS INFORMATION SERVICES LTD.) - 4.00 4 ASIT C MEHTA FINANCIAL SERVICES LTD. (SEG.) 9.42 5 CALIBER POINT BUSINESS SOLUTIONS LTD. 10.97 6 CORAL HUBS LTD. (EARLIER KNOWN AS VISHAL INFORMAT ION TECHNOLOGIES LTD.) 50.68 7 COSMIC GLOBAL LTD. 23.30 8 CROSSDOMAIN SOLUTIONS LTD. 27.03 9 DATAMATICS FINANCIAL SERVICES LTD. (SEG.) 29.11 10 E4E HEALTHCARE SOLUTIONS LTD. (FORMERLY KNOWN AS NITTANY OUTSOURCING SERVICES PVT. LTD.) 18.54 11 ECLERX SERVICES LTD. 58.80 12 GENESYS INTERNATIONAL CORPORATION LTD. 47.40 13 INFOSYS BPO LTD. 19.66 14 ISERVICES INDIA PVT. LTD. 10.77 15 JINDAL INTELLICOM PVT. LTD. - 10.29 16 MOLD-TEK TECHNOLOGIES LTD. 96.66 17 R SYSTEMS INTERNATIONAL LTD. (SEG.) 4.30 18 SPANCO LTD. (SEG.) [EARLIER KNOWN AS SPANCO TELESYSTEMS & SOLUTIONS LTD.) 8.81 19 WIPRO LTD. (SEG.) 30.05 20 ALLSEC TECHNOLOGIES LIMITED - 13.29 AVERAGE 24.75 ITA NO.1316/BANG/2012 PAGE 5 OF 26 7. THE TPO AFTER GIVING ADJUSTMENTS TOWARDS WORKIN G CAPITAL ADJUSTMENT ARRIVED AT AN ARITHMETIC MEAN OF 22.28% AND DETERMINED THE ADJUSTMENT TO THE ALP AS FOLLOWS:- 4.4 COMPUTATION OF ARMS LENGTH PRICE : THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE B FOR DET AILS OF COMPUTATION OF PLI OF THE COMPARABLES). BASED ON TH IS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES R ENDERED BY THE TAXPAYER TO ITS AE(S) IS COMPUTED AS UNDER: ARMS LENGTH MEAN MARGIN ON COST 24.75% LESS: WORKING CAPITAL ADJUSTMENT (AS PER ANNEXURE-C) 2.47% ADJUSTED MEAN MARGIN OF THE COMPARABLES 22.28% OPERATING COST 38,81,85,932 ARMS LENGTH MARGIN 122.28% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) @ 122.28% OF OPERATING COST RS.47,46,73,758 PRICE RECEIVED RS.43,88,05,684 SHORTFALL BEING ADJUSTMENT U/S. 92CA RS.3,58,68,074 THE ABOVE SHORTFALL OF RS.3,58,68,074/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S. 92CA IN RESPECT OF SOFTWARE DEVELOPMENT SEGMENT OF THE TAXPAYERS INTERNATIONAL TRANSACTION S. 8. THE ABOVE ADJUSTMENT SUGGESTED BY THE TPO WAS IN CORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE AO AS AN ADDITION TO THE TOTAL INCOME. AGAINST THE DRAFT ASSESSMENT ORDER OF THE AO INCORP ORATING THE ADJUSTMENT TO THE ALP AS PROPOSED BY THE TPO AS AN ADDITION TO THE TOTAL INCOME, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. THE DRP DID NOT AGREE WITH THE OBJECTIONS RAISED BY THE ASSESSEE AND CONFIRMED THE ADJUSTMENT TO THE ALP ITA NO.1316/BANG/2012 PAGE 6 OF 26 AS MADE IN THE DRAFT ASSESSMENT ORDER. THE AO PASS ED THE FINAL ASSESSMENT ORDER AS PER THE DIRECTIONS OF THE DRP A GAINST WHICH THE ASSESSEE HAS FILED THE PRESENT APPEAL BEFORE THE TR IBUNAL. 9. WE HAVE HEARD THE SUBMISSIONS OF BOTH THE PARTIE S. THE LD. COUNSEL FOR THE ASSESSEE FILED BEFORE US SUBMISSIONS ON EAC H OF THE COMPANIES THAT WERE CONSIDERED AS COMPARABLE BY THE TPO AND HAS AL SO EXPLAINED AS TO WHY THOSE COMPANIES CANNOT BE CONSIDERED AS COMPARA BLE. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO A ND THE DIRECTIONS OF THE DRP, WHEREIN THE DRP HAS GIVEN REASONS AS TO WHY TH E OBJECTIONS OF THE ASSESSEE TO ADOPT COMPARABLE PROPOSED BY THE TPO SH OULD NOT ACCEPTED. WE WILL DEAL WITH THESE OBJECTIONS WHILE WE TAKE UP THE INDIVIDUAL COMPARABLE COMPANIES FOR CONSIDERATION. (1) ACCENTIA TECHNOLOGIES LTD. (SEG.) 10. THIS WAS CONSIDERED AS A COMPARABLE BY THE TPO AND LISTED AT SL.NO.1 OF THE COMPARABLE COMPANIES CHOSEN BY THE T PO. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE FACT THA T THERE ARE EXTRA ORDINARY EVENTS THAT OCCURRED DURING THE PREVIOUS YEAR IN TH IS COMPANY. OUR ATTENTION WAS DRAW TO THE ANNUAL REPORT OF THIS COM PANY FOR THE A.Y. 2007- 08 WHEREIN THE FACT THAT THIS COMPANY HAD ACQUIRED THUNGA SOFTWARE PVT. LTD., GSR PHYSICIANS BILLING SERVICES INC., GSR SYS TEMS INC. AND DENMED INC. IS MENTIONED. OUR ATTENTION WAS ALSO DRAWN TO THE DECISION OF THE HYDERABAD ITAT BENCH IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA ITA NO.1316/BANG/2012 PAGE 7 OF 26 PVT. LTD. V. DCIT [ 2013] 32 TAXMAN.COM 21 (HYD. TR IB). IN THE AFORESAID DECISION, THE HYDERABAD BENCH OF THE TRIBUNAL HAD T O DEAL WITH A CASE OF DETERMINATION OF ALP IN THE CASE OF AN ASSESSEE WHO WAS PROVIDING ITES BUSINESS SUPPORT SERVICES FOR THE A.Y. 2007-08. TH E TPO HAD CONSIDERED ACCENTIA TECHNOLOGIES LTD. AS A COMPARABLE. THE DR P HOWEVER HELD THAT THE SAID COMPANY CANNOT BE COMPARED AS A COMPARABLE OWING TO EXTRA ORDINARY EVENTS THAT TOOK PLACE DURING THE PREVIOUS YEAR. THE TRIBUNAL UPHELD THE ORDER OF THE DRP OBSERVING AS FOLLOWS:- I. ACCENTIA TECHNOLOGIES LTD. 10. IT IS THE SUBMISSION OF THE ASSESSEE THAT THIS CO MPANY CANNOT BE TREATED AS A COMPARABLE BECAUSE OF UNCOMP ARABLE FINANCIAL RESULTS ARISING OUT OF AMALGAMATION IN TH E COMPANY. IN THIS REGARD, THE ASSESSEE HAS RELIED UPON THE ORDER OF THE DRP FOR 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 T HE ASSESSMENT YEAR 2008-09, HAS OBSERVED IN THE FOLLOWING MANNER- '17.5. IN ADDITION TO THE ABOVE, THE DIRECTOR'S REP ORT OF THE COMPANY FOR THE FY 2007-08 REVEALED THE MERGER AND THE DEMERGER. A COMPANY KNOWN AS TECHMEN TOOLS PVT. LTD. HAD AMALGAMATED WITH MOLD-TEK TECHNOLOGIES LTD . WITH EFFECT FORM 1ST OCTOBER, 2006. THERE WAS A DE- MERGER OF PLASTIC DIVISION OF THE COMPANY AND THE RESULTING COMPANY IS KNOWN AS MOLDTEK PLASTICS LIMI TED. THE DE-MERGER FROM THE MOLDTEK TECHNOLOGIES TOOK PL ACE WITH EFFECT FROM 1ST APRIL, 2007. THE MERGER AND TH E DE- MERGER NEEDED THE APPROVAL OF THE HON'BLE HIGH COUR T OF ANDHRA PRADESH AND ALSO THE APPROVAL OF THE SHAREHO LDERS. THE SHAREHOLDERS OF THE COMPANY GAVE APPROVAL FOR T HE MERGER AND THE DE-MERGER ON 25.01.2008 AND THE HON' BLE HIGH COURT OF ANDHRA PRADESH HAD APPROVED THE MERGE R AND DE-MERGER ON 25TH JULY, 2008. SUBSEQUENTLY, THE ITA NO.1316/BANG/2012 PAGE 8 OF 26 ACCOUNTS OF MOLDTEK TECHNOLOGIES FOR FY 2007-08 WER E REVISED. ON A PERUSAL OF THE ANNUAL REPORT IT IS NO TICED 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 A ND DEMERGER, THE FINANCIAL STATEMENTS WERE REVISED AND RESTATED AFTER SIX MONTHS FORM THE END OF THE FINAN CIAL YEAR 31.3. 2008. THE ASSESSEE FILED FORM NO.21 UNDER THE COMPANIES ACT WITH THE REGISTRAR OF COMPANIES ON 26 TH AUGUST, 2008. THUS THE EFFECTIVE DATE OF THE SCHEME OF MERGER AND DEMERGER WAS 26TH AUGUST, 2008. THE ANNU AL REPORT SUPPORTED THE ARGUMENT OF THE ASSESSEE THAT THERE WERE MERGER AND DEMERGER IN THE FINANCIAL YEAR AND IT WAS AN EXCEPTIONAL YEAR OF PERFORMANCE AS FINANCIAL STA TEMENTS WERE REVISED BY THIS COMPANY MUCH AFTER THE CLOSURE OF THE PREVIOUS YEAR. THE PANEL AGREES WITH THE CONTEN TION OF THE ASSESSEE THAT IT IS AN EXCEPTIONAL YEAR HAVING SIGNIFICANT IMPACT ON THE PROFITABILITY ARISING OUT OF MERGER AND DEMERGER.' 11. ON CAREFUL CONSIDERATION OF THE MATTER, WE ALSO AGR EE WITH THE AFORESAID VIEW OF THE DRP THAT EXTRA-ORDINARY E VENT LIKE MERGER AND DE-MERGER WILL HAVE AN EFFECT ON THE PRO FITABILITY OF THE COMPANY IN THE FINANCIAL YEAR IN WHICH SUCH EVE NT TAKES PLACE. IT IS THE CONTENTION OF THE ASSESSEE THAT IN CASE OF THE AFORESAID COMPANY, THERE IS AMALGAMATION IN DECEMBE R, 2006, WHICH HAS IMPACTED THE FINANCIAL RESULT. THIS FACT HAS TO BE VERIFIED BY THE TPO. IF IT IS FOUND UPON SUCH VERIF ICATION THAT THE AMALGAMATION IN FACT AHS TAKEN PLACE, THEN THE AFOR ESAID COMPARABLE HAS TO BE EXCLUDED. 11. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. C OUNSEL FOR THE ASSESSEE AND ARE OF THE VIEW THAT THE RATIO LAID DO WN BY THE HYDERABAD BENCH OF THE ITAT IS SQUARELY APPLICABLE TO THE PRE SENT CASE ALSO. IT IS CLEAR THAT DURING THE PREVIOUS YEAR THERE WERE EXTR A ORDINARY EVENTS THAT TOOK PLACE IN THIS COMPANY WHICH WARRANTS EXCLUSION OF THIS COMPANY AS A ITA NO.1316/BANG/2012 PAGE 9 OF 26 COMPARABLE. WE THEREFORE HOLD THAT THIS COMPANY CA NNOT BE CONSIDERED AS A COMPARABLE. (2) ACROPETAL TECHNOLOGIES LTD. (SEG.) 12. THIS COMPANY IS LISTED AT SL.NO.2 OF THE COMPAR ABLES CHOSEN BY THE TPO. AS FAR AS THIS COMPANY IS CONCERNED, THE OBJE CTION OF THE ASSESSEE IS THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE . THE ASSESSEE IS A BPO COMPANY THAT PROVIDES MARKET ANALYTICS AND DATA MANAGEMENT SERVICES. TO PROVIDE MARKET ANALYTICS SOLUTIONS, T HE ASSESSEE GIVES STRATEGIES THAT IMPACT ON CLIENT REVENUE INCLUDING DATA BASED MARKETING STRATEGIES FOR CUSTOMER ACQUISITION, DEVISING CUSTO MER RETENTION STRATEGIES AND EXCLUDING LOSS MITIGATION STRATEGIES THROUGH CU TTING EDGE FORECASTING TOOLS. THE DATA MANAGEMENT SERVICES PROVIDED BY TH E ASSESSEE INCLUDE ROUTINE BUSINESS DATA REPORTING AND MANAGEMENT, WEB SITE MANAGEMENT, MARKETING DATA ANALYSIS AND TOP LINE REPORTING. AS FAR AS ACROPETAL TECHNOLOGIES LTD. IS CONCERNED, THIS COMPANY DOES T HE BUSINESS OF EXPORT OF SOFTWARE SERVICES. IT IS ALSO SEEN FROM THE SEGM ENTAL REVENUE OF THIS COMPANY (NOTE 15 TO THE NOTES ON ACCOUNTS TO ANNUAL REPORT FOR 07-08) THAT IT DERIVES INCOME FROM ENGINEERING DESIGN SERV ICES AND SOFTWARE DEVELOPMENT SERVICES. IT IS ALSO PERTINENT TO POIN T OUT THAT BEFORE THE TPO, THE ASSESSEE RAISED AN OBJECTION THAT THIS COMPANY PERFORMS DIFFERENT FUNCTIONS AND MAINLY ENGAGED IN THE AREA OF SOFTWAR E DEVELOPMENT SERVICES ITA NO.1316/BANG/2012 PAGE 10 OF 26 AND ENGINEERING DESIGN SERVICES. THE TPO IN HIS OR DER HAS OBSERVED THAT THE SERVICES RENDERED BY THIS COMPANY FALL IN THE D EFINITION OF ITES. 13. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LEARN ED 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 CLEA R THAT THE MAJOR SOURCE OF INCOME FOR THIS COMPANY IS FROM PROVIDING ENGINE ERING DESIGN SERVICE AND INFORMATION TECHNOLOGY SERVICES. THE FUNCTIONS PERFORMED BY THE ENGINEERING DESIGN SERVICES SEGMENT OF THE COMPANY CANNOT BE CONSIDERED AS COMPARABLE TO THE ITES/BPO FUNCTIONS PERFORMED BY THE ASSESSEE. THE PERFORMANCE OF ENGINEERING DESIGN SE RVICES IS REGARDED AS PROVIDING HIGH END SERVICES AMONG THE BPO WHICH REQUIRES HIGH SKILL WHEREAS THE SERVICES PERFORMED BY THE ASSESSEE ARE ROUTINE LOW END ITES FUNCTIONS. WE THEREFORE HOLD THAT THIS COMPANY CO ULD NOT HAVE BEEN SELECTED AS A COMPARABLE, ESPECIALLY WHEN IT PERFOR MS ENGINEERING DESIGN SERVICES WHICH ONLY A KNOWLEDGE PROCESS OUTSOURCING [KPO] WOULD DO AND NOT A BUSINESS PROCESS OUTSOURCING [BPO]. (3) CORAL HUBS LTD. 14. THIS COMPANY IS LISTED AT SL.NO.6 OF THE LIST O F COMPARABLE COMPANIES CHOSEN BY THE TPO. AS FAR AS THIS COMP ANY IS CONCERNED, IT IS SEEN THAT THIS COMPANY WAS EARLIER KNOWN AS VISHAL INFORMATION TECHNOLOGIES LTD. THE COMPARABILITY OF THIS COMPAN Y IN THE CASE OF AN ITES COMPANY BY NAME 24 X 7 CUSTOMER.COM PVT. LTD. WAS CONSIDERED BY ITA NO.1316/BANG/2012 PAGE 11 OF 26 THE TRIBUNAL IN ITA NO.227/BANG/2010 AND BY ORDER D ATED 09.11.2012 THE TRIBUNAL HELD THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE WITH ITES FOR THE FOLLOWING REASON:- 17.3 VISHAL INFORMATION TECHNOLOGIES LTD. (VIT) - IN THE CASE OF THIS COMPARABLE, WE FIND THAT THE MUMBAI TRIBUNA L IN THE CASE OF MEARSK GLOBAL SERVICES (I) PVT LTD IN ITA NO.3774/MUM/2011 BY ORDER DT.9.11.2011 HAS HELD THA T SINCE VISHAL INFORMATION TECHNOLOGIES LTD IS OUTSOURCING MOST OF ITS WORK IT HAS TO BE EXCLUDED FROM THE LIST WHEREAS TH E ASSESSEE IN THE CITED CASE WAS CARRYING OUT THE WORK BY ITSELF. IN THE INSTANT CASE OF THE ASSESSEE ALSO THE ASSESSEE WAS CARRYING OUT ITS WORK BY ITSELF WHEREAS IN THE CASE OF VITL, IT IS OUTSOU RCING MOST OF ITS WORK. WE ARE THEREFORE OF THE CONSIDERED OPINION TH AT THE DECISION OF THE ITAT, MUMBAI IN THE CITED CASE ON T HE ISSUE OF EXCLUDING VITL AS A COMPARABLE SQUARELY APPLIES. TH IS DECISION WAS FOLLOWED BY THE DECISION OF THE CO-ORDINATE BEN CH OF THIS TRIBUNAL IN THE CASE OF NETLINX INDIA(P) LTD IN ITA NO.454/BANG/2011 DT.19.10.2012 WHEREIN IT WAS HELD THAT VISHAL INFORMATION TECHNOLOGIES LTD CANNOT BE CONSIDERED A S A COMPARABLE. WE, THEREFORE, RESPECTFULLY FOLLOWING T HE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF MEARSK GLOBAL SE RVICES (I) PVT LTD, DIRECT THE ASSESSING OFFICER / TPO TO EXCL UDE VISHAL INFORMATION TECHNOLOGIES LTD. FROM THE LIST OF COMP ARABLES. 15. FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT CORAL HUBS LTD. CANNOT BE CONSIDERED AS A COMPARABL E. IT MAY ALSO BE RELEVANT TO POINT OUT THAT THE TPO IN HIS ORDER HAS OBSERVED THAT THIS COMPANY IS RETAINED AS A COMPARABLE ON THE BASIS OF DETAILED DISCUSSION IN THE TP ORDER FOR THE A.Y. 2007-08. IN FACT IN A.Y. 2007-08, THERE WAS NO DETERMINATION OF ALP AND THEREFORE THERE WAS NO OCC ASION FOR ANY ORDER BEING PASSED BY THE TPO. IT IS ALSO SEEN THAT THIS COMPANY ENTERED INTO AN AREA OF BUSINESS KNOWN AS NEW VERTICAL DIGITAL LIBR ARY & PRINT ON DEMAND ITA NO.1316/BANG/2012 PAGE 12 OF 26 IN F.Y. 2007-08. IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. (SUPRA) , THE ITAT HYDERABAD BENCH IN THE CASE OF ITES COMP ANY CONSIDERED THE COMPARABLE OF THIS COMPANY AS AN ITE S COMPANY AND HELD AS FOLLOWS:- IV. CORAL HUB LIMITED (EARLIER KNOWN AS VISHAL INF ORMATION TECHNOLOGIES LTD.): 16. THE ASSESSEE HAS OBJECTED FOR THIS COMPANY BEING TAKEN AS COMPARABLE MAINLY ON THE GROUND THAT THE ACTIVITIES OF THE COMPANY IS NOT ONLY FUNCTIONALLY DIFFERENT, BUT THE BUSINESS MODEL OF THE COMPANY IS ALSO DIFFERENT AS IT SUB-CO NTRACTS MAJORITY OF ITS ITES WORKS TO THIRD PARTY VENDORS A ND HAS ALSO MADE SIGNIFICANT PAYMENTS TO THOSE VENDORS. THE PAY MENTS MADE TO VENDORS TOWARDS THE DATA ENTRY CHARGES ALSO SUPP ORTS THE FACT THAT THE COMPANY OUTSOURCES ITS WORKS. IN THE CIRCU MSTANCES, IT CANNOT BE TAKEN AS A COMPARABLE TO THE ITES FUNCTIO NS PERFORMED BY THE ASSESSEE. SINCE THIS COMPANY IS ACTING AS AG ENT ONLY BY OUTSOURCING ITS WORKS TO THE THIRD PARTY VENDORS. I N THIS CONTEXT, THE ASSESSEE RELIED UPON THE ORDER OF THE DRP IN AS SESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2008-09, WHEREIN THE D RP, AFTER TAKING INTO CONSIDERATION, THE AFORESAID ASPECT, HA S ACCEPTED THE CLAIM OF THE ASSESSEE. THE ASSESSEE FURTHER SUBMITT ED THAT THE INCOME-TAX APPELLATE TRIBUNAL MUMBAI BENCH IN THE C ASE OF ASSTT. CIT V. MAERSK GLOBAL SERVICE CENTRE (INDIA) (P.) LTD. [2011] 133 ITD 543/16 TAXMANN.COM 47 (MUM.) , A COPY OF WHICH IS SUBMITTED BEFORE US, HAS ALSO DIRECTED FOR THE EXCLUSION OF THE AFORESAID COMPANY SINCE IT HAS OUTSOURCED A CONSIDERABLE PORTION OF ITS BUSINESS. 17. AFTER CONSIDERING THE SUBMISSIONS OF THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE, WE FIND THAT THE DRP, IN THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2008-09 IN ASSESSEE'S OWN CASE, AFTER TAKING NOTE OF THE COMPOSITION OF T HE VENDOR PAYMENTS OF CORAL HUB FOR THE LAST THREE YEARS, AND THE FACT THAT IT HAS ALSO COMMENCED A NEW LINE OF BUSINESS OF PRINTI NG ON DEMAND(POD), WHEREIN IT PRINTS UPON CLIENTS REQUEST , CONCLUDED AS FOLLOWS- ITA NO.1316/BANG/2012 PAGE 13 OF 26 '18.4. IN VIEW OF THIS MAJOR DIFFERENCE IN FUNCTIO NALITY AND THE BUSINESS MODEL, THIS PANEL IS OF THE VIEW T HAT 'CORAL HUB' IS NOT A SUITABLE COMPARABLE TO THE TAX PAYER AND HENCE NEEDS TO BE DROPPED FORM THE FINAL LIST O F COMPARABLES.' IN CASE OF MAERSK GLOBAL SERVICE CENTRE INDIA (P.) LTD. ( SUPRA ), THE ITAT MUMBAI BENCH HAS ALSO DIRECTED FOR EXCLUSI ON OF THE AFORESAID COMPANY, BY OBSERVING IN THE FOLLOWING MA NNER- 'INSOFAR AS THE CASES OF TULSYAN TECHNOLOGIES LIMIT ED AND VISHAL INFORMATION TECHNOLOGIES LIMITED ARE CONCERNED, IT IS NOTICED FROM THEIR ANNUAL ACCOUNTS THAT THESE COMPANIES OUTSOURCED A CONSIDERABLE PORTION O F THEIR BUSINESS. AS THE ASSESSEE CARRIED OUT ENTIRE OPERATIONS BY ITSELF, IN OUR CONSIDERED OPINION, TH ESE TWO CASES WERE RIGHTLY EXCLUDED.' IN VIEW OF THE OBSERVATIONS MADE BY THE DRP AS WELL AS THE DECISION OF THE ITAT MUMBAI IN THE CASE OF MAERSK G LOBAL SERVICE CENTRE, (SUPRA), WE ACCEPT THAT THIS COMPAN Y CANNOT BE TAKEN AS A COMPARABLE. 16. IT IS ALSO FURTHER NOTICED THAT THE EMPLOYEE C OST/OPERATING SALES OF THIS COMPANY IS A MERE 3%, WHEREAS THE THRESHOLD LI MIT FOR ACCEPTANCE AS A COMPARABLE ON THE BASIS OF EMPLOYEE COST TO SALES SHOULD BE AT LEAST 25%. THIS TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES LTD. V. CIT, IT(TP)A NO.1086/BANG/2011, ORDER DATED 30.4 .2013 , HAS TAKEN THE FOLLOWING VIEW:- 36. HAVING HEARD BOTH THE PARTIES AND HAVING CONSI DERED THEIR RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FI ND THAT THIS ISSUE HAD ARISEN IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2006-07. THIS TRIBUNAL HAS HELD THAT EMPLOYEE COST FILTER IS TO BE THE SAME EVEN FOR ITES SEGMENT ALSO. THE LEA RNED DRS ARGUMENT THAT THE EMPLOYEE COST FILTER IS APPLICABL E ONLY TO ITA NO.1316/BANG/2012 PAGE 14 OF 26 SOFTWARE DEVELOPMENT SEGMENT AND NOT TO ITES SEGMEN T IS NOT ACCEPTABLE. THOUGH IT IS WITHOUT ANY DISPUTE THAT THE SOFTWARE DEVELOPMENT WOULD REQUIRE SKILLED EMPLOYEES AND, TH EREFORE, THE EMPLOYEE COST WOULD DEFINITELY BE MORE THAN 25% OF THE TOTAL EXPENSES, IT CANNOT BE SAID THAT THE SAID FILTER IS NOT APPLICABLE TO ITES SEGMENT, WHERE COMPARABLY LESS SKILLED EMPLOYE ES ARE EMPLOYED. IN THE ITES SEGMENT, THE ENTIRE WORK IS TO BE DONE BY THE EMPLOYEES AND, THEREFORE, EVEN THOUGH THEY MAY BE LESS SKILLED COMPARED TO SOFTWARE DEVELOPMENT SEGMENT, T HE NUMBER OF EMPLOYEES WOULD DEFINITELY BE MORE AND THUS THE EMPLOYEE COST WOULD BE HIGH AND THUS APPLICATION OF EMPLOYEE COST FILTER TO THE ITES SECTOR IS ALSO JUSTIFIED. IN VIEW OF THE SAME, WE DIRECT THE TPO TO APPLY THE EMPLOYEE COST FILTER TO EXCLUD E COMPANIES WITH EMPLOYEE COST OF LESS THAN 25% FROM THE LIST O F COMPARABLES FOR THE COMPUTATION OF ALP. 17. APPLYING THE AFORESAID DECISIONS, WE ARE OF THE VIEW THAT CORAL HUBS LTD. CANNOT BE CONSIDERED AS A COMPARABLE. (4) CROSSDOMAIN SOLUTIONS LTD. 18. THIS COMPANY WAS CONSIDERED AS A COMPARABLE AND LISTED AT SL.NO.8 OF THE COMPARABLES CHOSEN BY THE TPO. IT IS THE ST AND OF THE ASSESSEE THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE. AS OB SERVED IN THE CASE OF CORAL HUBS LTD., THE TPO REJECTED THE PLEA OF THE A SSESSEE ON THE BASIS OF A NON-EXISTENT TP ORDER PASSED FOR THE A.Y. 2007-08 . IT IS SEEN THAT THE BUSINESS PROFILE OF THIS COMPANY IS RE-ENGINEERED P AYROLL SERVICE. THIS COMPANY IS ALSO ENGAGED IN THE DEVELOPMENT OF INFOR MATION SYSTEMS. THESE ACTIVITIES ARE TOTALLY DIFFERENT FROM THE ACT IVITIES OF THE ASSESSEE WHICH PERFORM VERY LIMITED/LOW END FUNCTIONS BACK O FFICE SERVICES. THE REVIEW AND BUSINESS FUNCTIONS OF CROSS DOMAIN IS AS FOLLOWS:- ITA NO.1316/BANG/2012 PAGE 15 OF 26 WITH A DECADE OF EXPERIENCE IN PAYROLL OUTSOURCING , CROSSDOMAIN HAS CREATED A RE-ENGINEERED PAYROLL SERVICE EFFIPAY THAT PROCESSES AND DELIVERS ACCURATE PAYR OLL TO CLIENTS WITH HEADCOUNT UP TO 1000 EMPLOYEES IN JUST 4 HOURS *. WITH EFFIPAY LITE AND EFFIPAY LITE PLUS , OUR BOUQUET OF SERVICES COVER END TO END PAYROLL, RETRIALS, REIMBURSEMENT, TAX PROOF VERIFICATIONS UPTO ISSUE OF FORM 16 FOR EMPLOYEES O F OUR CLIENTS ACROSS DIFFERENT INDUSTRY VERTICALS. OUR PROCESSES ARE HIGHLY SCALABLE AND PROVIDE END TO END PAYROLL SOLUTIONS TO CLIENTS WITH HEADCOUNT RANGING FROM 5 TO 65,000. CROSSDOMAINS IT KNOWLEDGE AND DOMAIN COMPETENCE H AS PROVIDED THE EDGE TO DEVELOP INFORMATION SYSTEMS TO IMPLEMENT PROCESS INNOVATION AND CONTINUOUSLY INCREASE EFFICIENCY AND TURN-AROUND-TIME FOR BUSINESS CRITIC AL PROCESSES. SOURCE: HTTP://WWW.CROSS-DOMAIN.COM AS CAN BE SEEN FROM THE ABOVE, THE BUSINESS OF CROS S DOMAIN RANGES FROM HIGH END KPO SERVICES, DEVELOPMENT OF PRODUCT SUITE S AND ROUTINE LOW END ITES SERVICE. HOWEVER, THERE IS NO BIFURCATION AVA ILABLE FOR SUCH VERTICALS OF SERVICES. THEREFORE THE ASSESSEE CONTENDS THAT CROSS DOMAIN CANNOT BE COMPARED TO A ROUTINE ITES SERVICE PROVIDER. 19. WE ARE OF THE VIEW THAT IN THE ABSENCE OF ANY R EASONS GIVEN TO THE CONTRARY EITHER BY THE TPO OR THE DRP FOR REGARDING THIS COMPANY AS A COMPARABLE, THIS COMPANY SHOULD BE EXCLUDED FROM TH E LIST OF COMPARABLES, ACCEPTING THE PLEA OF THE ASSESSEE. WE HOLD ACCORD INGLY. (5) ECLERX SERVICES LTD. 20. THIS COMPANY IS LISTED AT SL.NO.11 IN THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. IT IS THE STAND OF TH E ASSESSEE THAT THIS ITA NO.1316/BANG/2012 PAGE 16 OF 26 COMPANY OFFERS SOLUTIONS THAT INCLUDE DATA ANALYTIC S, OPERATIONS MANAGEMENT, AUDITS AND RECONCILIATION AND THEREFORE HAS TO BE CLASSIFIED AS HIGH END KPO. IN SUPPORT OF THE STAND OF THE AS SESSEE, EXTRACTS FROM THE ANNUAL REPORT OF THIS COMPANY HAVE BEEN POINTED OUT. IT HAS FURTHER BEEN SUBMITTED THAT EXTRA ORDINARY EVENTS AND PECUL IAR CIRCUMSTANCES PREVAIL IN THE CASE OF THE ASSESSEE IN AS MUCH AS T HIS COMPANY ACQUIRED A UK BASED COMPANY WHICH HAS SIGNIFICANTLY CONTRIBUTE D TO THE INCREASE IN THE CUSTOMER AND REVENUE BASE OF THE COMPANY. THIS TRIBUNAL IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. (SUP RA) HAD AN OCCASION TO DEAL WITH COMPARABILITY OF THIS COMPANY IN THE CASE OF AN ITES COMPANY SUCH AS THE ASSESSEE AND THE TRIBUNAL HELD AS FOLLOWS:- 14. THE ASSESSEE HAS OBJECTED FOR THIS COMPANY BE ING TAKEN AS COMPARABLE MAINLY ON THE GROUND THAT IT WAS HAVING A SUPERNORMAL PROFIT OF 89%, AND AS SUCH IT CANNOT BE TAKEN AS A COMPARABLE IN VIEW OF THE DECISION OF THE MUMBAI BE NCH OF THE TRIBUNAL IN THE CASE M/S. TEVA INDIA LTD. ( SUPRA ). THAT APART, RELYING UPON THE ANNUAL REPORT OF THE COMPANY, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE HAS CONT ENDED THAT THAT THE CONCERNED COMPANY IS ENGAGED IN PROVIDING KNOWLEDGE PROCESS OUTSOURCING(KPO) SERVICES. 15. ON CONSIDERING THE OBJECTIONS OF THE ASSESSEE IN RELATION TO THIS COMPANY, WE ACCEPT THE CONTENTION OF THE ASSES SEE THAT THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE BOTH FOR TH E REASONS THAT IT WAS HAVING SUPERNORMAL PROFIT AND IT IS ENG AGED IN PROVIDING KPO SERVICES, WHICH IS DISTINCT FROM THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE. ITA NO.1316/BANG/2012 PAGE 17 OF 26 21. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE DEC ISION OF THE HYDERABAD BENCH REFERRED TO ABOVE, THIS COMPANY CANNOT BE REG ARDED AS A COMPARABLE FOR THE REASON THAT IT WAS FUNCTIONALLY DIFFERENT. (6) GENESYS INTERNATIONAL CORPORATION LTD. 22. THIS COMPANY IS LISTED AT SL. NO.12 IN THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. AS FAR AS THIS COMPA NY IS CONCERNED, THE STAND OF THE ASSESSEE HAS BEEN THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE AND THAT IT HAS A DIFFERENT EMPLOYEE SKI LL SET AND THAT THIS COMPANY PERFORMS R&D SERVICES AND ALSO OWNS INTANGI BLES. THIS COMPANY IS A GEOSPATIAL SERVICES CONTENT PROVIDER SPECIALIS ING IN LAND BASED TECHNOLOGIES. FROM THE NOTES TO ACCOUNTS OF THIS C OMPANY, IT IS SEEN THAT THIS COMPANY IS ENGAGED IN PROVIDING GEOGRAPHICAL I NFORMATION SERVICES COMPRISING OF PHOTOGRAMMETRY, REMOTE SENSING CARTOG RAPHY, DATA CONVERSION RELATED COMPUTED BASED SERVICES AND OTHE R RELATED SERVICES. FURTHER THE BUSINESS OF THIS COMPANY REQUIRES SKILL ED MANPOWER AND SCIENTISTS, CIVIL ENGINEERS, ETC. THE ASSESSEE IS A ROUTINE ITES PROVIDER WHO DOES NOT REQUIRE SUCH HIGHLY SKILLED EMPLOYEES. BESIDES THE ABOVE, THIS COMPANY ALSO CARRIES OUT R&D SERVICES AND OWN INTANGIBLES. THE AFORESAID FACTS, IN OUR VIEW, WILL TAKE THIS COMPAN Y OUT OF THE LIST OF COMPARABLES. WE MAY ALSO POINT OUT THAT THE OBJECT ION OF THE ASSESSEE IN THIS REGARD HAS BEEN DISREGARDED BY THE TPO BY MERE OBSERVATION THAT IT CANNOT BE REJECTED ON THE BASIS THAT IT IS INTO DIF FERENT FUNCTIONAL LINE WITHIN ITA NO.1316/BANG/2012 PAGE 18 OF 26 ITES. IN THIS REGARD, WE MAY REFER TO THE DECISIO N OF THE ITAT BANGALORE BENCH IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES LTD. (SUPRA) , WHEREIN IT WAS OBSERVED AS UNDER:- 39. HAVING HEARD BOTH THE PARTIES AND HAVING CONSI DERED THEIR RIVAL CONTENTIONS, WE FIND THAT THE ASSESSEE HAD RA ISED ELABORATE OBJECTIONS TO EACH OF THE COMPARABLES IN GROUP 3 BE FORE THE TPO. THE TPO HAS ALSO REPRODUCED THE SAID OBJECTION IN H IS ORDER PARA 6.5.1. OF PAGE 178 OF HIS ORDER. HE HAS REJECTED TH E CONTENTION OF THE ASSESSEE BY HOLDING THAT EVERY FUNCTION WITHIN BPO SECTOR CAN BE FROM LOW END TO HIGH END AND THE ACTIVITIES OF THE ASSESSEE SUCH AS ACCOUNTING, WEB MANAGEMENT, NETWORK MANAGEM ENT ARE BPO SERVICES USING TECHNOLOGY BUT THESE SERVICES AR E NOT CATEGORIZED AS KPO. HE HELD THAT A CALL CENTRE MAY OFFER SUPPORT SERVICES LIKE TELEMARKETING TO HIGH END SERVICES LI KE TECHNICAL SUPPORT SERVICES, WHERE NOT ONLY THE LEVEL OF KNOWL EDGE, SKILL REQUIRED WOULD BE HIGH, BUT THE TECHNICAL KNOWLEDGE AS WELL WOULD BE HIGH. ACCORDING TO HIM, BACK OFFICE TRANS ACTION PROCESS SERVICES MAY BE AS REMARKABLE AND AS COMPLICATED AS INSURANCE/MARKET TRANSACTION PROCESSING SERVICES. HE, THEREFORE, REJECTED THE CONTENTION OF THE ASSESSEE AND TREATED THE BPO AS EQUIVALENT TO KPO SERVICES. 40. WE HAVE TO NOW CONSIDER WHETHER A BPO AND KPO A RE FUNCTIONALLY SIMILAR AND ARE COMPARABLE TO EACH OTH ER. BPO IS A SUB-SET OF OUTSCORING AND INVOLVES THE CONTRACTING OF THE OPERATIONS AND RESPONSIBILITIES OF SPECIFIC BUSINES S FUNCTIONS OR PROCESS TO A THIRD PARTY SERVICES PROVIDER. OFTEN BUSINESS PROCESSES OUTSOURCING ARE INFORMATION TECHNOLOGY BA SED AND REFERRED TO AS ITES-BPO. KPO IS ONE OF THE SUB-SEG MENT OF THE BPO INDUSTRY. IT INVOLVES OUTSOURCING OF CORE INFOR MATION RELATED BUSINESS ACTIVITIES WHICH ARE COMPETITIVELY IMPORTA NT OR FORM AN INTEGRAL PART OF A COMPANYS VALUE CHAIN. IT THUS REQUIRES ADVANCED ANALYTICAL AND TECHNICAL SKILLS AS WELL AS A HIGH DEGREE OF SPECIALIST EXPERTISE. THE KPO SERVICES INCLUDE ALL KINDS OF RESEARCH AND INFORMATION GATHERING. THUS IT CAN BE SEEN THAT EVEN THOUGH BOTH BPO AND KPO ARE OFFERING INFORMATION TE CHNOLOGY BASED SERVICES, THE SKILL AND EXPERTISE AND MAY BE EVEN THE TOOLS REQUIRED ARE DIFFERENT WHICH MAY RESULT IN DIFFEREN T ECONOMIC RESULTS OF BOTH THE SEGMENTS. THUS, IN SUCH CIRCUM STANCES, WE ARE ITA NO.1316/BANG/2012 PAGE 19 OF 26 OF THE OPINION THAT THEY CANNOT BE COMPARED WITH EA CH OTHER AND HAVE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 23. IT IS THUS CLEAR FROM THE AFORESAID DECISION OF THE TRIBUNAL THAT AMONG THE ITES COMPANIES THERE IS A HIERARCHY IN TERMS OF SKILL REQUIRED TO PROVIDE SERVICES. IT RANGES FROM PROVIDING ROUTINE SERVICE S WHERE NO SKILLS AND REQUIRED AND PROVIDING SERVICES WHERE HIGHLY PROFES SIONALIZED SKILLS ARE REQUIRED. DEPENDING ON THE SKILLS REQUIRED TO PERF ORM ITES THE COMPARABILITY HAS TO BE DONE. IN VIEW OF THE ABOVE , WE ARE OF THE VIEW THAT THIS COMPANY CANNOT BE REGARDED AS A COMPARABLE AND DESERVES TO BE EXCLUDED FROM THE LIST OF COMPARABLES. (7) INFOSYS BPO LTD 24. THIS COMPANY IS LISTED AT SL.13 IN THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. AS FAR AS THIS COMPANY IS CONCE RNED, IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THIS COMPANY HAS A BRAND VALUE AND THEREFORE THERE WOULD BE SIGNIFICAN T INFLUENCE IN THE PRICING POLICY WHICH WILL IMPACT THE MARGINS. SCHEDULE 13 TO THE PROFIT & LOSS ACCOUNT OF THIS COMPANY FOR THE F.Y. 2007-08 SHOWS THAT THIS COMPANY INCURRED HUGE SELLING AND MARKETING EXPENSES. PAGE 133 OF THE ANNUAL REPORT OF THIS COMPANY FOR THE F.Y. 2007-08 SHOWS T HAT THIS COMPANY REALIZING ITS BRAND VALUE HAS CHOSEN TO VALUE THE S AME ON THE BASIS OF ITS EARNINGS AND THAT OF INFOSYS. THE BRAND VALUE OF T HE ASSESSEE AND INFOSYS HAS BEEN VALUED AT RS.31,863 CRORES. INFOSYS BPO, BEING A SUBSIDIARY OF ITA NO.1316/BANG/2012 PAGE 20 OF 26 INFOSYS, HAS AN ELEMENT OF BRAND VALUE ASSOCIATED W ITH IT. THIS IS ALSO CLEAR FROM THE PRESENCE OF BRAND RELATED EXPENSES INCURRE D BY THIS COMPANY. PRESENCE OF A BRAND COMMANDS PREMIUM PRICE AND THE CUSTOMERS WOULD BE WILLING TO PAY, FOR THE SERVICES/PRODUCTS OF THE COMPANY. INFOSYS BPO IS AN ESTABLISHED PLAYER WHO IS NOT ONLY A MARKET LEAD ER BUT ALSO A COMPANY EMPLOYING SHEER BREADTH IN TERMS OF ECONOMIES OF SC ALE AND DIVERSITY AND GEOGRAPHICAL DISPERSION OF CUSTOMERS. THE PRESENC E OF THE AFORESAID FACTORS WILL TAKE THIS COMPANY OUT OF THE LIST OF C OMAPARABLES. WE THEREFORE ACCEPT THE CONTENTION OF THE ASSESSEE THAT THIS COM PANY CANNOT BE REGARDED AS A COMPARABLE. (8) MOLD-TEK TECHNOLOGIES LTD. 25. THIS COMPANY IS LISTED AT SL.NO.16 OF THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. AS FAR AS THIS COMPAN Y IS CONCERNED, THE SUBMISSION OF THE ASSESSEE BEFORE US IS THAT IT IS IN THE BUSINESS OF KNOWLEDGE PROCESS OUTSOURCING AND CANNOT BE CONSIDE RED AS A COMPARABLE. THE FUNCTIONAL PROFILE OF THIS COMPANY IS AS FOLLOWS:- AS PER THE ANNUAL REPORT FOR THE F.Y. 2007-08, THE COMPANY PRIMARILY OPERATES IN TWO BUSINESS SEGMENTS: PLASTIC DIVISION : THE PLASTIC DIVISION IS ENGAGED IN THE MANUFACTURE OF TUBE & OILS, PAINTS, PET PRODUCTS, C ONSUMER PRODUCTS, ETC. THE COMPANY DEMERGED THE SAID SEGME NT EFFECTIVE 1 APRIL, 2007 AND TRANSFERRED THE BUSINESS UNIT TO THE COMPANY PLASTICS LT. THE EXTRACT FROM THE ANNUAL REPORT CON FIRMS THE FACT THAT THE COMPANY HAD RESTRUCTURED ITS OPERATIONS RE SULTING IN DEMERGING THE PLASTIC SEGMENT BUSINESS. ITA NO.1316/BANG/2012 PAGE 21 OF 26 INFORMATION TECHNOLOGY (IT) DIVISION : THE IT DIVISION (ALSO REFERRED TO AS THE KPO DIVISION BY THE COMPANY) OF THE COMPANY SPECIALIZES IN PROVIDING STRUCTURAL DESIGN AND DETA ILING SERVICES WHICH CAN BE CATEGORIZED AS STRUCTURAL ENGINEERING SERVICES. THE STRUCTURAL ENGINEERING SERVICES PROVIDED BY THE IT DIVISION OF THE COMPANY CANNOT BE CLASSIFIED AS FALLING WITH THE SC OPE AND AMBIT OF ITES SERVICES. ON THE CONTRARY, THE SAID SERVIC ES WOULD FALL UNDER THE CATEGORY OF ENGINEERING SERVICES. EXCERPTS FROM THE ANNUAL REPORT OF THE COMPANY PAGE 10 OF THE ANNUAL REPORT FOR THE FY 2007-08 CON TAINS THE FOLLOWING OBSERVATION REGARDING THE KPO DIVISION OF THE COMPANY: THE COMPANY HAS ACHIEVED ABOUT 56.49% GROWTH IN 20 07-08 TO REGISTER A TURNOVER OF RS.17.86 CRORE. THE COMPANY HAVING ESTABLISHED ITS CREDENTIALS IN STRUCTURAL ENGINEERING SERVICES TO US CLIENTS IS DEVISING AGGRESSIVE MARKETING STRATEG Y TO ACHIEVE RAPID GROWTH. THIS COMPANY IS ALSO ENGAGED IN PROVIDING A HOST OF ENGINEERING SERVICES LIKE CIVIL AND STRUCTURAL ENGINEERING SERVICES, MEC HANICAL PRODUCT DESIGN, PLANT ENGINEERING, IT SERVICES AND GIS SERVICES. A S WE HAVE ALREADY SEEN, THIS COMPANY IS TO BE CLASSIFIED AS KPO AND CANNOT BE COMPARED WITH THE ASSESSEE. THE DECISION OF THE BANGALORE BENCH OF T HE ITAT IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES LTD. (SUPRA) WHICH WE HAVE REFERRED TO IN THE EARLIER PART OF THIS ORDER WILL CLEARLY APPLY T O THIS COMPANY. WE THEREFORE DIRECT THIS COMPANY TO BE EXCLUDED FROM THE LIST OF COMPARABLES. ITA NO.1316/BANG/2012 PAGE 22 OF 26 (8) WIPRO LTD. 26. THIS COMPANY IS LISTED AT SL.NO.18 IN THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. AS FAR AS THIS COMPAN Y IS CONCERNED, THE DISCUSSION MADE WHILE DECIDING INFOSYS BPO LTD. AS A COMPARABLE WILL EQUALLY APPLY TO THIS COMPANY ALSO. THIS COMPANY O WNS SUBSTANTIAL INTELLECTUAL PROPERTY ON SOFTWARE PRODUCTS. THIS C OMPANY CANNOT THEREFORE BE REGARDED AS A COMPARABLE. FOR THE REASONS GIVEN WHILE DISREGARDING INFOSYS BPO LTD. AS A COMPARABLE, THIS COMPANY IS A LSO DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 27. WITH THE EXCLUSION OF THE AFORESAID COMPANIES A S COMPARABLES, THE FOLLOWING ARE THE 11 COMPANIES CHOSEN BY THE TPO AS COMPARABLE ONLY REMAIN AND THEIR ARITHMETIC MEAN IS AS FOLLOWS:- SL.NO. NAME OF THE COMPANY TPO MARGINS (RETURN ON TOTAL COST) FOR THE YEAR ENDED 2008 1 ADITYA BIRLA MINACS WORLDWISE LIMITED - 4.00% 2 ASIT C MEHTA FINANCIAL SERVICES LTD. (SEG.) 9.42% 3 CALIBER POINT BUSINESS SOLUTIONS LTD. 10.97% 4 COSMIC GLOBAL LTD. 23.30% 5 DATAMATICS FINANCIAL SERVICES LTD. (SEG.-BPO) 29.11% 6 E4E (NITTANY OUTSOURCING LTD.) 18.54% 7 ISERVICES INDIA PVT. LTD. 10.77% 8 JINDAL INTELLICOM PVT. LTD. - 10.29% 9 R SYSTEMS INTERNATIONAL LTD. (SEG.-BPO) 4.30% ITA NO.1316/BANG/2012 PAGE 23 OF 26 10 SPANCO LTD. (SEG.- CALL CENTRE DIVISION) 8.81% 11 ALLSEC TECHNOLOGIES LIMITED - 13.29% ARITHMETIC MEAN 7.97% MARGIN OF GENPACT INDIA (ASSESSEE) 14.91% 28. IT CAN BE SEEN THAT THE ARITHMETIC MEAN OF PROF IT MARGIN TO COST OF THE REMAINING COMPARABLE COMPANIES CHOSEN BY THE TPO AF TER EXCLUDING THE AFORESAID COMPANIES IS ONLY 7.97%. THE PROFIT MARG IN TO COST OF THE ASSESSEE IS 14.91% WHICH IS MUCH HIGHER THAN THE AR ITHMETIC MEAN OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO (AFTER EXCLU SION OF SOME OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO FOR REASONS SET OUT IN THE EARLIER PARAGRAPHS). THEREFORE NO ADJUSTMENT TO AL P IS CALLED FOR. WE THEREFORE HOLD THAT THE ADDITION SUSTAINED BY THE D RP DESERVES TO BE DELETED AND IS ACCORDINGLY DIRECTED TO BE DELETED. WE MAY ALSO ADD THAT ARGUMENTS WERE MADE ON MARKET RISK ADJUSTMENTS AND ALSO WORKING CAPITAL ADJUSTMENT. WE HAVE NOT DEALT WITH THOSE ARGUMENTS FOR THE REASON THAT ON THE BASIS OF COMPARABILITY, THE ARITHMETIC MEAN OF THE COMPARABLES IS LESS THAN THE MARGIN OF THE ASSESSEE. 29. GROUNDS 3.1 TO 3.3 RAISED BY THE ASSESSEE IS WI TH REGARD TO THE ACTION OF THE REVENUE AUTHORITIES IN EXCLUDING EXPE NSES INCURRED IN FOREIGN CURRENCY COMPRISING OF A SUM OF RS.39,55,638 ON ACC OUNT OF FOREIGN CURRENCY EXPENSES INCURRED IN TRAVELLING AND A SUM OF RS.17,66,175 ON ACCOUNT OF INTERNET CONNECTION CHARGES, FROM THE EX PORT TURNOVER WHILE ITA NO.1316/BANG/2012 PAGE 24 OF 26 COMPUTING DEDUCTION U/S. 10A OF THE ACT. AS A RESU LT OF THE ACTION OF THE AO THE DEDUCTION U/S.10A OF THE ACT WAS ALLOWED AT A LESSER SUM THAN WHAT WAS CLAIMED BY THE ASSESSEE. THE PLEA OF THE ASSES SEE IS THAT THE AFORESAID EXPENDITURE NEED NOT BE EXCLUDED FROM THE EXPORT TURNOVER AS PER THE DEFINITION OF THE SAID TERM GIVEN IN SEC.10 A OF THE ACT. THE PLEA OF THE ASSESSEE, IN THE ALTERNATIVE, IS THAT IF THE AF ORESAID AMOUNT IS EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE E XCLUDED FROM THE TOTAL TURNOVER. 30. AS FAR AS THE ALTERNATIVE CLAIM IS CONCERNED, W E FIND THAT THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. TATA EIXSI LTD [2012] 349 ITR 98 (KARN) HAS HELD THAT WHILE COMPUTING DEDUCTION UNDER SECTION 10A OF ACT, EXPENDITURE INCURRED BY THE ASS ESSEE, IF EXCLUDED FROM THE EXPORT TURNOVER SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER. IN VIEW OF THE AFORESAID DECISION OF THE HONBLE HIGH COURT OF KARNATAKA, THE AO IS DIRECTED TO REDUCE THE EXPENSES INCURRED FOR TRAVELLING AND INTERNET CONNECTION CHARGES FROM THE EXPORT TURNOVER AS WELL AS THE TOTAL TURNOVER, WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT. WE HOLD AND DIRECT ACCORDINGLY. 31. GROUND NO.4 WITH REGARD TO CHARGING OF INTEREST U/S. 234B AND 234D IS PURELY CONSEQUENTIAL. THE AO IS DIRECTED TO GIV E CONSEQUENTIAL RELIEF. ITA NO.1316/BANG/2012 PAGE 25 OF 26 32. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 14 TH DAY OF AUGUST, 2013. SD/- SD/- ( N. BARATHVAJA SANKAR ) ( N.V. VASU DEVAN ) VICE PRESIDENT JUDIC IAL MEMBER BANGALORE, DATED, THE 14 TH AUGUST, 2013. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. C IT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE. ITA NO.1316/BANG/2012 PAGE 26 OF 26 ANNEXURE I TO THE ORDER