Global e- Business Operations Private Limited, Bangalore V. DCIT, Bangalore

ITA 1678/BANG/2012

• Counselvise Citation: 167821114 RSA 2012
• Duration Of Justice: 2 year(s) 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 25-08-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 27-12-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 92C; 143(3); 234B; 133(6); 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI N.V VASUDEVAN, JUDICIAL MEMBER AND SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER IT(TP)A NO.1678/BANG/2012 (ASST. YE AR 2008-09) GLOBAL E:BUSINESS OPERATIONS PVT. LTD., KALYANI PLATINA, PHASE 2 BUILDING, SURVEY NO.1,6, & 24, KUNDALAHALLI VILLAGE, KR PURAM HOBLI, BANGALORE-560 066. . APPELLANT VS, THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-11(3), BANGALORE. . RESPONDENT APPELLANT BY : SHRI AJIT KUMAR JAIN, CA RESPONDENT BY : SMT. NEERA MALHOTRA, CIT DATE OF HEARING : 25-08-2015 DATE OF PRONOUNCEMENT : 04-09-2015 O R D E R PER SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER : THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DA TED 22.10.2012 PASSED BY THE CIRCLE-11(3), BANGALORE U/ S. 143(3) R.W.S. IT(TP)A NO.1678/12 2 144C OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFER RED TO AS THE ACT IN SHORT] RELATING TO ASSESSMENT YEAR 2007-08. 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE AR E AS UNDER: 1. THE ASSESSMENT ORDER DATED OCT 22, 2012 PASSED BY THE LEARNED AO PURSUANT TO THE DIRECTIONS PASSED BY THE HONBLE DISPUTE RESOLUTION PANEL (DRP) IS NOT I N ACCORDANCE WITH THE LAW AND IS CONTRARY TO THE FACT S AND CIRCUMSTANCES OF THE PRESENT CASE AND IN ANY CASE I N VIOLATION OF THE PRINCIPLE OF EQUITY AND NATURAL JU STICE. 2. THE HONBLE DRP AND THE LEARNED AO HAVE ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF THE TRANSFER PRICING OFFICER (TPO) IN MAKING AN ADJUSTM ENT AMOUNTING TO RS.91,14,06,057 TO THE PRICE CHARGED I N RELATION TO THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE APPELLANT AND UPHOLDING THE ARMS LENGTH PRICE (ALP) MARGIN OF 25.90 PERCENT AS DETERMINED BY THE TOP AS AGAINST THE ALP OF 13.31 PERCENT DETERMINED BY T HE APPELLANT. 3. THE HONBLE DRP AND THE LEARNED AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TPO IN REJECTI NG THE TRANSFER PRICING (TP) DOCUMENTATION MAINTAINED AND THE DETAILED FUNCTIONS, ASSETS, RISK AND BENCHMARKING ANALYSIS CONDUCTED BY THE APPELLANT. 4. THE HONBLE DRP AND THE LEARNED AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TPO IN DISREGA RDING THE MULTIPLE/PRIOR YEAR DATA CONSIDERED BY THE APPE LLANT IN DETERMINING THE ALP AND ADOPTING THE FINANCIAL D ATA FOR A SINGLE YEAR [I.E, THE FINANCIAL YEAR (FY) 200 7-08] OF IT(TP)A NO.1678/12 3 THE COMPARABLE COMPANIES DESPITE THE FACT THAT THE SAME WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF PREPARING THE TP DOCUMENTATION. 5. THE HONBLE DRP AND THE LEARNED AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TPO IN REJECTI NG CERTAIN COMPARABLE COMPANIES IDENTIFIED BY THE APPE LLANT IN ITS TP STUDY USING UNREASONABLE COMPARABILITY CR ITERIA AND CONTRARY TO FACTS AS EVIDENCED BY THE AUDITED FINANCIAL STATEMENTS OF THE SAID COMPANIES. 6. THE HONBLE DRP AND THE LEARNED AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TPO IN APPLYIN G CERTAIN ADDITIONAL FILTERS FINALIZING THE TRANSFER PRICING ORDER WITH COMPANIES AS COMPARABLE TO THE APPELLANT DESPITE SUCH COMPANIES FAILING THE TEST OF COMPARAB ILITY ON SOME OR ALL THE FACTORS SUCH AS THE INFLUENCE OF EXTRAORDINARY EVENTS, FUNCTIONAL DISSIMILARITY, HIG H TURNOVER/SCALE OF OPERATIONS AND ASSET BASE, LOWER EMPLOYEE COST LEVELS, DIFFERENT PROFILE ETC. AND TH E FAILURE OF TPOS OWN FILTERS. 7. THE HONBLE DRP AND THE LEARNED AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TPO IN USING T HE INFORMATION OBTAINED U/S 133(6) OF THE INCOME-TAX A CT, 1961 (ACT) DESPITE SUCH INFORMATION BEING INCONSIST ENT WITH THE INFORMATION AVAILABLE IN PUBLIC DOMAIN, INCLUDING THE AUDITED FINANCIAL STATEMENTS, OF THE COMPARABLE COMPANIES. 8. THE HONBLE DRP AND THE LEARNED AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TPO IN COMPUTI NG THE OPERATING MARGINS OF THE COMPARABLE COMPANIES A ND THE APPELLANT WITH CERTAIN FACTUAL ERRORS AND IGNOR ING OF CERTAIN ITEMS WHICH OUGHT TO HAVE BEEN CONSIDERED A S OPERATING OR NON-OPERATING ITEMS, AS THE CASE MAY B E. 9. THE HONBLE DRP AND THE LEARNED AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TPO IN NOT ACC EPTING IT(TP)A NO.1678/12 4 THE WORKING CAPITAL AND RISK ADJUSTMENT, AS CLAIMED BY THE APPELLANT. 10. THE HONBLE DRP AND THE LEARNED AO HAVE ERRED IN UPHOLDING THE ADJSUTEMTN MADE BY THE TPO WITHOUT CONSIDERING THE UPPER RANGE OF 5 PERCENT FR OM THE VALUE OF THE INTERNATIONAL TRANSACTION, AS ALLOWED UNDER THE ACT AND THE INCOME-TAX RULES, 1962 (RULES). 11. THE LEARNED AO AND THE HONBLE DRP HAVE ERRED IN LAW AND ON FACTS N RE-COMPUTING THE RELIEF U/S 10A OF THE ACT AT RS.46,96,88,074/- AS AGAINST THE AMOUNT OF RS.50,10,42,467/- CLAIMED BY THE APPELLANT IN IT S RETURN OF INCOME. 12. THE HONBLE DRP HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE ACTION OF THE AO IN HOLDING THAT THE FOREING CURRENCY EXPENDITURE WAS INCURRED BY THE APPELLANT FOR RENDERING TECHNICAL SERVICES OUTSIDE INDIA AND THEREBY EXCLUDING SUCH EXPENDITURE FROM THE AMO UNT OF EXPORT TURNOVER FOR THE PURPOSE OF COMPUTATION OF RELIEF U/S 10A OF THE ACT. 13. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE HONBLE DRP AND LEARNED AO ERRED IN LAW AND ON FACT S BY REDUCING AN AMOUNT OF INR 1,87,30,103 PERTAINING TO LINK CHARGES (FORMING PART OF COMMUNICATION EXPENSE S) FROM THE EXPORT TURNOVER OF THE APPELLANT EVEN THOU GH THE SAME HAD ALREADY BEEN REDUCED FROM THE EXPORT TURNO VER, BY THE APPELLANT WHILE COMPUTING THE RELIEF CLAIMED U/S 10A OF THE ACT. 14. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE HONBLE DRP AND LEARNED AO HAVE ERRED IN LAW AND ON FACTS IN HOLDING THAT THE COMMUNICATION EXPENSES AMOUNTING TO INR 10,27,77,400/- INSURANCE EXPENSES AMOUNTING TO INR 6,18,880 AND THE FOREIGN CURRENCY EXPENSES AMOUNTING TO INR 19,45,91,781 SHOULD NOT B E IT(TP)A NO.1678/12 5 REDUCED FROM TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF RELIEF U/S 10A OF THE ACT EVEN IF TH ESE ARE REDUCED FROM EXPORT TURNOVER. 15. THE HONBLE DRP AND THE LEARNED AO/TPO HAS ERRED IN LAW AND ON FACTS IN LEVYING INTEREST U /S 234B AND SEC. 234D OF THE ACT.\ 3. ADDITIONAL GROUND: THE HONOURABLE DRP HAS ERRED IN LAW AND ON FACTS I N UPHOLDING THE ACTION OF THE AO IN HOLDING THAT THE FOREIGN EXCHANGE LOSSES ARE TO BE ADDED BACK ONLY T O THE TOTAL TURNOVER AND NOT TO THE EXPORT TURNOVER. WITHOUT PREJUDICE TO THE SAME, THE HONOURABLE DRP A ND THE LEARNED AO SHOULD HAVE ADDED BACK THE FOREIGN EXCHANGE LOSS TO THE EXPORT TURNOVER AS WELL. 4. THE ASSESSEE HAD FILED ADDITIONAL GROUND AS ABO VE. IN THE COMPUTATION OF RELIEF U/S 10A OF THE ACT, THE ASSES SEE HAD REDUCED THE QUANTUM OF FOREIGN EXCHANGE LOSSES FROM THE EXPORT TURNOVER AND THE TOTAL TURNOVER. HOWEVER, THE AO HAS HELD THAT THE SAME IS TO BE REDUCED ONLY FROM THE EXPORT TURNOVER AND HAS PROCE EDED TO ADD THE SAME TO THE TOTAL TURNOVER.THE JURISDICTIONAL KARNA TAKA HC IN THE CASE OF TATA ELXSI LTD. (349 ITR 98), ALSO FOLLOWED BY S EVERAL RULINGS OF THIS HONBLE TRIBUNAL, HAVE UPHELD THE PRINCIPLE TH AT IN THE COMPUTATION OF DEDUCTION U/S 10A OF THE ACT, IF THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIVED AT AFTER EXCLUDING C ERTAIN EXPENSES, THE SAME SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVE R IN THE IT(TP)A NO.1678/12 6 DENOMINATOR, SINCE THE TOTAL TURNOVER ALSO INCLUDES THE COMPONENT OF EXPORT TURNOVER. THEREFORE ACCORDING TO THE ASSESS EE RULINGS SHOULD EQUALLY APPLY TO ITS CASE AS WELL AND THE QUANTUM O F FOREIGN EXCHANGE LOSSES SHOULD NOT HAVE BEEN ADDED BACK TO THE TOTAL TURNOVER. IN THE ALTERNATIVE, THE LEARNED AO SHOULD HAVE ALSO ADDED THE SAME TO THE QUANTUM OF EXPORT TURNOVER. THEREFORE, ACCORDING TO THE ASSESSEE, THE EXCHANGE LOSSES SHOULD NOT HAVE BEEN ADDED BACK TO THE TOTAL TURNOVER. THE ASSESSEE HAS PRAYED FOR ADMISSION OF ADDL. GROUNDS. 5. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE FOR ADMISSION OF THE ADDITIONAL GROUND AND ARE OF THE VIEW THAT THE ADDITIONAL GROUND SHOULD BE ADMITTED FOR A DJUDICATION. THE FACTS NECESSARY FOR ADJUDICATION OF THE ADDITIONAL GROUND ARE ALREADY AVAILABLE ON RECORD. KEEPING IN VIEW OF THE HONBL E SUPREME COURT IN THE CASE OF NTPC 229 ITR 383 (SC) WE ADMIT THE A DDITIONAL GROUND FOR ADJUDICATION. 6. WE SHALL NOW TAKE UP FOR CONSIDERATION GROUND NO . 1 TO 10 RAISED BY THE ASSESSEE. THESE GROUNDS RELATE TO DET ERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF AN INTERNATI ONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED EN TERPRISES (AE) U/S 92 OF THE ACT. M/S GLOBAL-E BUSINESS OPERATIONS PVT . LTD. .IE., THE ASSESSEE, (GLOBAL EBIZ OR GLOBAL-E) IS PART OF THE HEWLETT-PACKARD IT(TP)A NO.1678/12 7 GROUP (HP GROUP). ITS ULTIMATE HOLDING COMPANY IS HEWLETT PACKARD COMPANY, USA. GLOBAL-E BUSINESS OPERATIONS PVT. LTD., IS WHOLLY OWNED SUBSIDIARY OF HP GLOBAL INVESTMENTS BV , NETHERLANDS (HP INVESTMENTS). GLOBAL-E UNDERTAKES HPS WORLDWI DE ACCOUNTING AND TRANSACTION PROCESSING WORK AS PART OF HPS WOR LDWIDE STRATEGY OF CONSOLIDATING BACKROOM OPERATIONS. IT MANAGES OPER ATIONS THAT COVER FUNCTIONALITIES LIKE FIXED ASSETS, INTRA-CORPORATE ACCOUNTING LIKE DEBIT AND CREDIT RECORDS, VENDOR PAYABLES, FIXED ASSET TR ACKING AND NON- FINANCE OPERATIONS LIKE DATA PROCESSING & OTHER IT ENABLED SERVICES, FREIGHT COST MANAGEMENT AND ORDER PROCESSING FOR CE RTAIN GEOGRAPHIES. THERE IS NO CHANGE IN THE OWNERSHIP STRUCTURE FROM THE PRECEDING YEAR. 7. BUSINESS PROFILE OF GLOBAL EBIZ (THE ASSESSEE) ITS BUSINESS PROFILE CONTINUES TO BE THE SAME AS PO INTED OUT IN THE TAXPAYERS CASE FOR THE AY 2006-07. DURING THE FY 2006-07, GLOBAL- E BUSINESS OPERATIONS PVT. LTD. PROVIDED DATA PROCE SSING AND OTHER IT ENABLED SERVICES TO ITS AES LOCATED IN VARIOUS PART S OF THE WORLD. IT(TP)A NO.1678/12 8 8. THE TAXPAYER IS REGISTERED UNDER THE SOFTWARE TE CHNOLOGY PARKS OF INDIA SCHEME AND HAS BEEN CLAIMING TAX HOLIDAY B ENEFIT IN RESPECT OF THE PROFITS EARNED BY IT FROM THE RESEARCH AND D EVELOPMENT. 9. FINANCIAL RESULTS OF GLOBAL-E BUSINESS FOR THE F Y 2007-08 DESCRIPTION AMOUNT (RS.) OPERATING REVENUES 6153468919/- OPERATING EXPENSES (*) 5611497201/- OPERATING PROFIT 541971718/- OPERATING PROFIT TO EXPENSES 9.66% 10. SECTION 92C OF THE IT ACT READ WITH RULE 10B P RESCRIBES THE DIFFERENT METHODS TO BE FOLLOWED TO DETERMINE ALP. RULE 10C FURTHER PRESCRIBES THAT ANY ONE OF THE 05 METHODS BEST SUIT ED TO THE FACTS AND CIRCUMSTANCES OF THE CASE SHALL BE SELECTED AS THE MOST APPROPRIATE METHOD. IN THE TP STUDY THE TAXPAYER HAS SELECTED TNMM AS THE MOST APPROPRIATE METHOD. TNMM IS THE MOST APPROPRI ATE METHOD IN THE FACTS AND CIRCUMSTANCES OF THE TAXPAYERS CASE AND THIS WAS NOT IT(TP)A NO.1678/12 9 DISPUTED BY THE TRANSFER PRICING OFFICER (TPO) TO W HOM THE QUESTION OF DETERMINATION OF ALP WAS REFERRED TO BY THE AO. 11. THE ASSESSEE HAD IDENTIFIED 19 COMPARABLES IN THE TP STUDY OUT OF WHICH TPO ACCEPTED 7 COMPARABLES AS LISTED B ELOW: SL NO. NAME OF THE COMPARABLE COMPANY OPERATING MARGIN TO COST (FY 2007-08) 1 CALIBER POINT BUSINESS SOLUTIONS LTD 10.97 2 COSMIC GLOBAL LTD 23.30 3 SPANCO LTD (SEG.) (EARLIER KNOWN AS SPANCO TELESYSTEMS & SOLUTIONS LTD) 8.81 4 R SYSTEMS INTERNATIONAL LTD(SEG.) 4.30 5 GENESYS INTERNATIONAL CORPORATIONS LTD. 47.40 6 DATAMATICS FINANCIAL SERVICES LTD (SEG.) 29.11 IT(TP)A NO.1678/12 10 7 ALLSEC TECHNOLOGIES LTD., -13.29 11. THE TPO ADDED 13 MORE COMPARABLES AND FINAL SET OF COMPARABLES WAS CONSIDERED BY TPO, WHICH ARE: SL.NO. NAME OF THE COMPANY OP/TC % 1 ACCENTIA TECHNOLOGIES LTD (SEG.) 41.77 2 ACROPETAL TECHNOLOGIES LTD (SEG.) 35.30 3 ADITYA BIRLA MINACS WORLDWIDE LTD (EARLIR 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 INFORMATION TECHNOLOGIES LTD 50.68 7 COSMIC GLOBAL LTD 23.30 8 CROSSDOMAIN SOLUTIONS LTD 27.03 IT(TP)A NO.1678/12 11 9 DATAMATIC FINANCIAL SERVICES LTD (SEG.) 29.11 10 E4E HEALTHCARE SOLUTIONS (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 S|PANCO TELESYSTEMS & SOLUTIONS LTD) 8.81 19 WIPRO LTD (SEG.) 30.05 20 ALLSEC TECHNOLOGIES LTD -13.29 IT(TP)A NO.1678/12 12 AVERAGE 24.75 13. . THE TPO THEREAFTER DETERMINED ALP AFTER GIVI NG NEGATIVE WORKING CAPITAL ADJUSTMENT AS FOLLOWS: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS WAS TAKEN AS THE ARMS LENGTH MARGIN. BASED ON THIS, TH E ARMS LENGTH PRICE OF THE SOFTWARE SERVICES RENDERED BY T HE TAXPAYER TO ITS AE(S) WSS COMPUTED AS UNDER: ARITHMETIC MEAN PLI : 24.75% LESS: WORKING CAPITAL ADJUSTMENT (ANNEXURE-G) : -1.15% -------------- ADJ. ARITHMETIC MEAN PLI : 25.9% -------------- ARMS LENGTH PRICE: OPERATING COST RS. RS.5611497201/ -* ARMS ARMS LENGTH MARGIN 25.9% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) @125.9% RS.7064874976/- *EXCLUDING EXCHANGE LOSS, FINANCIAL EXPENSES IT(TP)A NO.1678/12 13 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRICE: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH AS UNDER : ARMS LENGTH PRICE (ALP) @125.9% OF OPERATING COST RS.7064874976/- PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS. 6153468919/- SHORTFALL BEING ADJUSTMENT U/S 92CA RS. 911406057/ - THE ABOVE SHORTFALL OF RS.911406057/- WAS TREATED A S TRANSFER PRICING ADJUSTMENT U/S 92CA IN THE ITES SEGMENT. 14. THE DRP CONFIRMED THE ACTION OF THE TPO, HENCE THE PRESENT APPEAL BY THE ASSESSEE BEFORE THE TRIBUNAL. 15. WE HAVE HEARD THE SUBMISSIONS OF BOTH THE PARTI ES. THE LD. COUNSEL FOR THE ASSESSEE FILED BEFORE US SUBMISSION S ON EACH OF THE COMPANIES THAT WERE CONSIDERED AS COMPARABLE BY THE TPO AND HAS ALSO EXPLAINED AS TO WHY THOSE COMPANIES CANNOT BE CONSIDERED AS COMPARABLE. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO AND THE DIRECTIONS OF THE DRP, WHEREIN THE DRP HAS GIVEN IT(TP)A NO.1678/12 14 REASONS AS TO WHY THE OBJECTIONS OF THE ASSESSEE TO ADOPT COMPARABLE PROPOSED BY THE TPO SHOULD NOT ACCEPTED. WE WILL D EAL WITH THESE OBJECTIONS WHILE WE TAKE UP THE INDIVIDUAL COMPARAB LE COMPANIES FOR CONSIDERATION. (1) ACCENTIA TECHNOLOGIES LTD. (SEG.) 16. THIS COMPANY WAS CONSIDERED AS A COMPARABLE BY THE TPO AND LISTED AT SL.NO.1 OF THE COMPARABLE COMPANIES CHOSE N BY THE TPO. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE FACT THAT THERE ARE EXTRA ORDINARY EVENTS THAT OCCURRED DURIN G THE PREVIOUS YEAR IN THIS COMPANY. OUR ATTENTION WAS DRAW TO THE ANN UAL REPORT OF THIS COMPANY FOR THE A.Y. 2007-08 WHEREIN THE FACT THAT THIS COMPANY HAD ACQUIRED THUNGA SOFTWARE PVT. LTD., GSR PHYSICIANS BILLING SERVICES INC., GSR SYSTEMS INC. AND DENMED INC. IS MENTIONED . OUR ATTENTION WAS ALSO DRAWN TO THE DECISION OF THE HYDERABAD ITA T BENCH IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. V. D CIT [ 2013] 32 TAXMAN.COM 21 (HYD. TRIB). IN THE AFORESAID DECISION, THE HYDERABAD BENCH OF THE TRIBUNAL HAD TO 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 . THE TPO HAD IT(TP)A NO.1678/12 15 CONSIDERED ACCENTIA TECHNOLOGIES LTD. AS A COMPARAB LE. THE DRP HOWEVER HELD THAT THE SAID COMPANY CANNOT BE COMPAR ED 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 UP ON 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 ASSESSE E IN THE CASE OF ANOTHER COMPANY, VIZ. MOLD TEK TECHNOLOGIES LTD., IN THE PROCEEDINGS RELATING TO THE ASSESSMENT YEAR 200 8-09, 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 LIMITED. THE DE-MERGER FROM THE MOLDTEK TECHNOLOGIES TOOK PLACE WITH EFFECT FROM 1S T APRIL, 2007. THE MERGER AND THE DE-MERGER NEEDED TH E APPROVAL OF THE HON'BLE HIGH COURT OF ANDHRA PRADES H AND ALSO THE APPROVAL OF THE SHAREHOLDERS. THE SHAREHOLDERS OF THE COMPANY GAVE APPROVAL FOR THE MERGER AND THE DE-MERGER ON 25.01.2008 AND THE HON'BLE HIGH COURT OF ANDHRA PRADESH HAD APPROVED THE MERGER AND DE-MERGER ON 25TH JULY, 2008. IT(TP)A NO.1678/12 16 SUBSEQUENTLY, THE 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 WIT H THE COMPANY. A PERUSAL OF THE ANNUAL REPORT REVEALE D THAT TO GIVE EFFECT TO THE MERGER AND DEMERGER, THE FINANCIAL STATEMENTS WERE REVISED AND RESTATED AFTE R SIX MONTHS FORM THE END OF THE FINANCIAL YEAR 31.3. 200 8. THE ASSESSEE FILED FORM NO.21 UNDER THE COMPANIES ACT WITH THE REGISTRAR OF COMPANIES ON 26TH AUGUST, 2008. THUS THE EFFECTIVE DATE OF THE SCHEME OF MERG ER AND DEMERGER WAS 26TH AUGUST, 2008. THE ANNUAL REPORT SUPPORTED THE ARGUMENT OF THE ASSESSEE THAT THERE WERE MERGER AND DEMERGER IN THE FINANCIAL YEA R AND IT WAS AN EXCEPTIONAL YEAR OF PERFORMANCE AS FINANCIAL STATEMENTS WERE REVISED BY THIS COMPANY MUCH AFTER THE CLOSURE OF THE PREVIOUS YEAR. THE PA NEL AGREES WITH THE CONTENTION 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-ORDIN ARY EVENT LIKE MERGER AND DE-MERGER WILL HAVE AN EFFECT ON THE PROFITABILITY OF THE COMPANY IN THE FINANCIAL YEAR IN WHICH SUCH EVENT TAKES PLACE. IT IS THE CONTENTION OF THE ASSESSEE THAT IN CASE OF THE AFORESAID COMPANY, THERE IS AMALGAMATION IN DECEMBER, 2006, WHICH HAS IMPACTED THE FINANCIAL RESULT. THIS FACT HAS TO BE VERIFIED BY T HE TPO. IF IT IS FOUND UPON SUCH VERIFICATION THAT THE AMALGAMATI ON IN FACT AHS TAKEN PLACE, THEN THE AFORESAID COMPARABLE HAS TO BE EXCLUDED. IT(TP)A NO.1678/12 17 17. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. COUNSEL 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 E XTRA ORDINARY EVENTS THAT TOOK PLACE IN THIS COMPANY WHICH WARRANTS EXCL USION OF THIS COMPANY AS A COMPARABLE. WE THEREFORE HOLD THAT TH IS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. (2) ACROPETAL TECHNOLOGIES LTD. (SEG.) 18. THIS COMPANY IS LISTED AT SL.NO.2 OF THE COMPAR ABLES CHOSEN BY THE TPO. AS FAR AS THIS COMPANY IS CONCERNED, THE OBJECTION OF THE ASSESSEE IS THAT THIS COMPANY IS NOT FUNCTIONALLY C OMPARABLE. THE ASSESSEE IS A BPO COMPANY THAT PROVIDES MARKET ANAL YTICS AND DATA MANAGEMENT SERVICES. TO PROVIDE MARKET ANALYTICS S OLUTIONS, THE ASSESSEE GIVES STRATEGIES THAT IMPACT ON CLIENT REV ENUE INCLUDING DATA BASED MARKETING STRATEGIES FOR CUSTOMER ACQUISITION , DEVISING CUSTOMER RETENTION STRATEGIES AND EXCLUDING LOSS MI TIGATION STRATEGIES THROUGH CUTTING EDGE FORECASTING TOOLS. THE DATA M ANAGEMENT SERVICES PROVIDED BY THE ASSESSEE INCLUDE ROUTINE B USINESS DATA REPORTING AND MANAGEMENT, WEBSITE MANAGEMENT, MARKE TING DATA IT(TP)A NO.1678/12 18 ANALYSIS AND TOP LINE REPORTING. AS FAR AS ACROPET AL TECHNOLOGIES LTD. IS CONCERNED, THIS COMPANY DOES THE BUSINESS OF EXP ORT OF SOFTWARE SERVICES. IT IS ALSO SEEN FROM THE SEGMENTAL REVENU E 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 POIN T OUT THAT BEFORE THE TPO, THE ASSESSEE RAISED AN OBJECTION THAT THIS COM PANY PERFORMS DIFFERENT FUNCTIONS AND MAINLY ENGAGED IN THE AREA OF SOFTWARE DEVELOPMENT SERVICES AND ENGINEERING DESIGN SERVICE S. THE TPO IN HIS ORDER HAS OBSERVED THAT THE SERVICES RENDERED B Y THIS COMPANY FALL IN THE DEFINITION OF ITES. 19. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LEARN ED COUNSEL FOR THE ASSESSEE. ON A PERUSAL OF THE NOTE NO.15 OF NO TES TO ACCOUNTS WHICH GIVES SEGMENTAL REVENUE OF THIS COMPANY, IT I S CLEAR THAT THE MAJOR SOURCE OF INCOME FOR THIS COMPANY IS FROM PRO VIDING ENGINEERING DESIGN SERVICE AND INFORMATION TECHNOLO GY SERVICES. THE FUNCTIONS PERFORMED BY THE ENGINEERING DESIGN S ERVICES SEGMENT OF THE COMPANY CANNOT BE CONSIDERED AS COMPARABLE T O THE ITES/BPO FUNCTIONS PERFORMED BY THE ASSESSEE. THE PERFORMAN CE OF IT(TP)A NO.1678/12 19 ENGINEERING DESIGN SERVICES IS REGARDED AS PROVIDIN G HIGH END SERVICES AMONG THE BPO WHICH REQUIRES HIGH SKILL WH EREAS 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 OUTS OURCING [KPO] WOULD DO AND NOT A BUSINESS PROCESS OUTSOURCING [BP O]. (3) CORAL HUBS LTD. 20. 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 V ISHAL INFORMATION TECHNOLOGIES LTD. THE COMPARABILITY OF THIS COMPAN Y IN THE CASE OF AN ITES COMPANY BY NAME 24 X 7 CUSTOMER.COM PVT. LT D. WAS CONSIDERED BY THE TRIBUNAL IN ITA NO.227/BANG/2010 AND BY ORDER DATED 09.11.2012 THE TRIBUNAL HELD THAT THIS COMPAN Y 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 TR IBUNAL IN THE CASE OF MEARSK GLOBAL SERVICES (I) PVT LTD IN I TA NO.3774/MUM/2011 BY ORDER DT.9.11.2011 HAS HELD THA T SINCE VISHAL INFORMATION TECHNOLOGIES LTD IS OUTSOU RCING IT(TP)A NO.1678/12 20 MOST OF ITS WORK IT HAS TO BE EXCLUDED FROM THE LIS T WHEREAS THE ASSESSEE IN THE CITED CASE WAS CARRYING OUT THE WORK BY ITSELF. IN THE INSTANT CASE OF THE ASSESSEE ALSO TH E ASSESSEE WAS CARRYING OUT ITS WORK BY ITSELF WHEREAS IN THE CASE OF VITL, IT IS OUTSOURCING MOST OF ITS WORK. WE ARE TH EREFORE OF THE CONSIDERED OPINION THAT THE DECISION OF THE ITA T, MUMBAI IN THE CITED CASE ON THE ISSUE OF EXCLUDING VITL AS A COMPARABLE SQUARELY APPLIES. THIS DECISION WAS FOLL OWED BY THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBU NAL IN THE CASE OF NETLINX INDIA(P) LTD IN ITA NO.454/BANG/201 1 DT.19.10.2012 WHEREIN IT WAS HELD THAT VISHAL INFOR MATION TECHNOLOGIES LTD CANNOT BE CONSIDERED AS A COMPARAB LE. WE, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF MEARSK GLOBAL SERVIC ES (I) PVT LTD, DIRECT THE ASSESSING OFFICER / TPO TO EXCL UDE VISHAL INFORMATION TECHNOLOGIES LTD. FROM THE LIST OF COMP ARABLES. 21. FOLLOWING THE DECISION OF THE TRIBUNAL REFER RED TO ABOVE, WE HOLD THAT CORAL HUBS LTD. CANNOT BE CONSIDERED AS A COMPARABLE. IT MAY ALSO BE RELEVANT TO POINT OUT THAT THE TPO IN H IS ORDER HAS OBSERVED THAT THIS COMPANY IS RETAINED AS A COMPARA BLE ON THE BASIS OF DETAILED DISCUSSION IN THE TP ORDER FOR THE A.Y. 20 07-08. IN FACT IN A.Y. 2007-08, THERE WAS NO DETERMINATION OF ALP AND THEREFORE THERE WAS NO OCCASION FOR ANY ORDER BEING PASSED BY THE T PO. IT IS ALSO SEEN THAT THIS COMPANY ENTERED INTO AN AREA OF BUSI NESS KNOWN AS NEW VERTICAL DIGITAL LIBRARY & PRINT ON DEMAND IN F.Y. 2007-08. IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. (SUP RA) , THE IT(TP)A NO.1678/12 21 ITAT HYDERABAD BENCH IN THE CASE OF ITES COMPANY CO NSIDERED THE COMPARABLE OF THIS COMPANY AS AN ITES COMPANY AND H ELD AS FOLLOWS:- IV. CORAL HUB LIMITED (EARLIER KNOWN AS VISHAL INFORMATION TECHNOLOGIES LTD.): 16. THE ASSESSEE HAS OBJECTED FOR THIS COMPANY BEING TAKEN AS COMPARABLE MAINLY ON THE GROUND THAT THE A CTIVITIES OF THE COMPANY IS NOT ONLY FUNCTIONALLY DIFFERENT, BUT THE BUSINESS MODEL OF THE COMPANY IS ALSO DIFFERENT AS IT SUB- CONTRACTS MAJORITY OF ITS ITES WORKS TO THIRD PARTY VENDORS AND HAS ALSO MADE SIGNIFICANT PAYMENTS TO THOSE VEN DORS. THE PAYMENTS MADE TO VENDORS TOWARDS THE DATA ENTRY CHARGES ALSO SUPPORTS THE FACT THAT THE COMPANY OUT SOURCES ITS WORKS. IN THE CIRCUMSTANCES, IT CANNOT BE TAKEN AS A COMPARABLE TO THE ITES FUNCTIONS PERFORMED BY THE A SSESSEE. SINCE THIS COMPANY IS ACTING AS AGENT ONLY BY OUTSO URCING ITS WORKS TO THE THIRD PARTY VENDORS. IN THIS CONTEXT, THE ASSESSEE RELIED UPON THE ORDER OF THE DRP IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2008-09, WHEREIN THE DRP, AFTER TAKING INTO CONSIDERATION, THE AFORESAID ASPECT, HAS ACCEP TED 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 OUT SOURCED 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 200 8-09 IN ASSESSEE'S OWN CASE, AFTER TAKING NOTE OF THE COMPO SITION OF THE VENDOR PAYMENTS OF CORAL HUB FOR THE LAST THREE YEARS, AND THE FACT THAT IT HAS ALSO COMMENCED A NEW LINE OF IT(TP)A NO.1678/12 22 BUSINESS OF PRINTING ON DEMAND(POD), WHEREIN IT PRI NTS UPON CLIENTS REQUEST, CONCLUDED AS FOLLOWS- '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 FO R EXCLUSION OF THE AFORESAID COMPANY, BY OBSERVING IN THE FOLLOWING MANNER- 'INSOFAR AS THE CASES OF TULSYAN TECHNOLOGIES LIMITED AND VISHAL INFORMATION TECHNOLOGIES LIMITED ARE CONCERNED, IT IS NOTICED FROM THEIR ANNUAL ACCOUNTS THAT THESE COMPANIES OUTSOURCED A CONSIDERABLE PORTION OF THEIR BUSINESS. AS THE ASSESSEE CARRIED OUT ENTIRE OPERATIONS BY ITSELF, I N OUR CONSIDERED OPINION, THESE 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 GLOBAL SERVICE CENTRE, (SUPRA), WE ACCEPT TH AT THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE. 22. IT IS ALSO FURTHER NOTICED THAT THE EMPLOYE E COST/OPERATING SALES OF THIS COMPANY IS A MERE 3%, WHEREAS THE THRESHOLD LIMIT 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 IT(TP)A NO.1678/12 23 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 CONSID ERED THEIR RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THIS ISSUE HAD ARISEN IN THE ASSESSEES OWN CA SE FOR THE ASSESSMENT YEAR 2006-07. THIS TRIBUNAL HAS HELD TH AT EMPLOYEE COST FILTER IS TO BE THE SAME EVEN FOR ITE S SEGMENT ALSO. THE LEARNED DRS ARGUMENT THAT THE EMPLOYEE COST FILTER IS APPLICABLE ONLY TO SOFTWARE DEVELOPMENT S EGMENT AND NOT TO ITES SEGMENT IS NOT ACCEPTABLE. THOUGH IT I S WITHOUT ANY DISPUTE THAT THE SOFTWARE DEVELOPMENT WOULD REQ UIRE SKILLED EMPLOYEES AND, THEREFORE, 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 I TES SEGMENT, WHERE COMPARABLY LESS SKILLED EMPLOYEES ARE EMPLOYE D. IN THE ITES SEGMENT, THE ENTIRE WORK IS TO BE DONE BY THE EMPLOYEES AND, THEREFORE, EVEN THOUGH THEY MAY BE L ESS SKILLED COMPARED TO SOFTWARE DEVELOPMENT SEGMENT, T HE NUMBER OF EMPLOYEES WOULD DEFINITELY BE MORE AND TH US THE EMPLOYEE COST WOULD BE HIGH AND THUS APPLICATION OF EMPLOYEE COST FILTER TO THE ITES SECTOR IS ALSO JUS TIFIED. IN VIEW OF THE SAME, WE DIRECT THE TPO TO APPLY THE EM PLOYEE COST FILTER TO EXCLUDE COMPANIES WITH EMPLOYEE COST OF LESS THAN 25% FROM THE LIST OF COMPARABLES FOR THE COMPU TATION OF ALP. 23. APPLYING THE AFORESAID DECISIONS, WE ARE OF T HE VIEW THAT CORAL HUBS LTD. CANNOT BE CONSIDERED AS A COMPARABLE. (4) CROSSDOMAIN SOLUTIONS LTD. IT(TP)A NO.1678/12 24 24. THIS COMPANY WAS CONSIDERED AS A COMPARABLE A ND LISTED AT SL.NO.8 OF THE COMPARABLES CHOSEN BY THE TPO. IT I S THE STAND OF THE ASSESSEE THAT THIS COMPANY IS NOT FUNCTIONALLY COMP ARABLE. AS OBSERVED IN THE CASE OF CORAL HUBS LTD., THE TPO RE JECTED THE PLEA OF THE ASSESSEE ON THE BASIS OF A NON-EXISTENT TP ORDE R PASSED FOR THE A.Y. 2007-08. IT IS SEEN THAT THE BUSINESS PROFILE OF THIS COMPANY IS RE-ENGINEERED PAYROLL SERVICE. THIS COMPANY IS ALS O ENGAGED IN THE DEVELOPMENT OF INFORMATION SYSTEMS. THESE ACTIVITI ES ARE TOTALLY DIFFERENT FROM THE ACTIVITIES OF THE ASSESSEE WHICH PERFORM VERY LIMITED/LOW END FUNCTIONS BACK OFFICE SERVICES. TH E REVIEW AND BUSINESS FUNCTIONS OF CROSS DOMAIN IS AS FOLLOWS:- 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, RETRI ALS, REIMBURSEMENT, TAX PROOF VERIFICATIONS UPTO ISSUE O F FORM 16 FOR EMPLOYEES OF OUR CLIENTS ACROSS DIFFERENT INDUS TRY 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 IT(TP)A NO.1678/12 25 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 SUITES AND ROUTINE LOW END ITES SERVICE. HOWEVER, THERE IS NO BIFURCATION AVAILABLE FOR SUCH VERTICALS OF SERVICES. THEREFOR E THE ASSESSEE CONTENDS THAT CROSS DOMAIN CANNOT BE COMPARED TO A ROUTINE ITES SERVICE PROVIDER. 25. WE ARE OF THE VIEW THAT IN THE ABSENCE OF AN Y REASONS GIVEN TO THE CONTRARY EITHER BY THE TPO OR THE DRP FOR REGAR DING THIS COMPANY AS A COMPARABLE, THIS COMPANY SHOULD BE EXCLUDED FR OM THE LIST OF COMPARABLES, ACCEPTING THE PLEA OF THE ASSESSEE. W E HOLD ACCORDINGLY. (5) ECLERX SERVICES LTD. 26. THIS COMPANY IS LISTED AT SL.NO.11 IN THE LIS T OF COMPARABLE COMPANIES CHOSEN BY THE TPO. IT IS THE STAND OF TH E ASSESSEE THAT THIS COMPANY OFFERS SOLUTIONS THAT INCLUDE DATA ANALYTIC S, OPERATIONS MANAGEMENT, AUDITS AND RECONCILIATION AND THEREFORE HAS TO BE IT(TP)A NO.1678/12 26 CLASSIFIED AS HIGH END KPO. IN SUPPORT OF THE STAN D OF THE ASSESSEE, EXTRACTS FROM THE ANNUAL REPORT OF THIS COMPANY HAV E BEEN POINTED OUT. IT HAS FURTHER BEEN SUBMITTED THAT EXTRA ORDI NARY EVENTS AND PECULIAR CIRCUMSTANCES PREVAIL IN THE CASE OF THE A SSESSEE IN AS MUCH AS THIS COMPANY ACQUIRED A UK BASED COMPANY WHICH H AS SIGNIFICANTLY CONTRIBUTED TO THE INCREASE IN THE CU STOMER AND REVENUE BASE OF THE COMPANY. THIS TRIBUNAL IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. (SUPRA) HAD AN OCCASION TO DEAL WITH COMPARABILITY OF THIS COMPANY IN THE CASE OF A N ITES COMPANY SUCH AS THE ASSESSEE AND THE TRIBUNAL HELD AS FOLLO WS:- 14. THE ASSESSEE HAS OBJECTED FOR THIS COMPANY BEI NG TAKEN AS COMPARABLE MAINLY ON THE GROUND THAT IT WA S HAVING A SUPERNORMAL PROFIT OF 89%, AND AS SUCH IT CANNOT BE TAKEN AS A COMPARABLE IN VIEW OF THE DECISION OF THE MUMB AI BENCH OF THE TRIBUNAL IN THE CASE M/S. TEVA INDIA L TD. (SUPRA). THAT APART, RELYING UPON THE ANNUAL REPORT OF THE COMPANY, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE HAS CONTENDED THAT THAT THE CONCERNED COMP ANY 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 ASSESSEE THAT THIS COMPANY CANNOT BE TAKEN AS A COM PARABLE BOTH FOR THE REASONS THAT IT WAS HAVING SUPERNORMAL PROFIT AND IT IS ENGAGED IN PROVIDING KPO SERVICES, WHICH IS DISTINCT FROM THE NATURE OF SERVICES PROVIDED BY TH E ASSESSEE. IT(TP)A NO.1678/12 27 27. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE D ECISION OF THE HYDERABAD BENCH REFERRED TO ABOVE, THIS COMPANY CAN NOT BE REGARDED AS A COMPARABLE FOR THE REASON THAT IT WAS FUNCTION ALLY DIFFERENT. (7) INFOSYS BPO LTD 28. THIS COMPANY IS LISTED AT SL.13 IN THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO. AS FAR AS THIS COMPAN Y IS CONCERNED, IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASS ESSEE THAT THIS COMPANY HAS A BRAND VALUE AND THEREFORE THERE WOULD BE SIGNIFICANT INFLUENCE IN THE PRICING POLICY WHICH WILL IMPACT T HE MARGINS. SCHEDULE 13 TO THE PROFIT & LOSS ACCOUNT OF THIS CO MPANY FOR THE F.Y. 2007-08 SHOWS THAT THIS COMPANY INCURRED HUGE SELLI NG AND MARKETING EXPENSES. PAGE 133 OF THE ANNUAL REPORT OF THIS CO MPANY FOR THE F.Y. 2007-08 SHOWS THAT THIS COMPANY REALIZING ITS BRAND VALUE HAS CHOSEN TO VALUE THE SAME ON THE BASIS OF ITS EARNINGS AND THAT OF INFOSYS. THE BRAND VALUE OF THE ASSESSEE AND INFOSYS HAS BEEN VA LUED AT RS.31,863 CRORES. INFOSYS BPO, BEING A SUBSIDIARY OF INFOSYS , HAS AN ELEMENT OF BRAND VALUE ASSOCIATED WITH IT. THIS IS ALSO CLEAR FROM THE PRESENCE OF BRAND RELATED EXPENSES INCURRED BY THIS COMPANY. P RESENCE OF A BRAND IT(TP)A NO.1678/12 28 COMMANDS PREMIUM PRICE AND THE CUSTOMERS WOULD BE W ILLING TO PAY, FOR THE SERVICES/PRODUCTS OF THE COMPANY. (8) MOLD-TEK TECHNOLOGIES LTD. 29. 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 BUSINES S UNIT TO THE COMPANY PLASTICS LT. THE EXTRACT FROM THE ANNUA L REPORT CONFIRMS THE FACT THAT THE COMPANY HAD RESTRUCTURED ITS OPERATIONS RESULTING IN DEMERGING THE PLASTIC SEGME NT BUSINESS. 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 DETAILING SERVICES WHICH CAN BE CATEGORIZED AS STRU CTURAL ENGINEERING SERVICES. THE STRUCTURAL ENGINEERING S ERVICES PROVIDED BY THE IT DIVISION OF THE COMPANY CANNOT B E CLASSIFIED AS FALLING WITH THE SCOPE AND AMBIT OF I TES SERVICES. ON THE CONTRARY, THE SAID SERVICES WOULD FALL UNDER THE CATEGORY OF ENGINEERING SERVICES. IT(TP)A NO.1678/12 29 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 DIVISIO N 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 CO MPANY HAVING ESTABLISHED ITS CREDENTIALS IN STRUCTURAL ENGINEERING SERVICES TO US CLIENTS IS DEVISING AGGRESSIVE MARKETING STRATEGY TO ACHIEVE RAPID GROWTH. (8) WIPRO LTD. 30. THIS COMPANY IS LISTED AT SL.NO.19 IN THE LI ST 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 COMP ANY OWNS SUBSTANTIAL INTELLECTUAL PROPERTY ON SOFTWARE PRODU CTS. THIS COMPANY CANNOT THEREFORE BE REGARDED AS A COMPARABLE. FOR THE REASONS GIVEN WHILE DISREGARDING INFOSYS BPO LTD. AS A COMPARABLE , THIS COMPANY IS ALSO DIRECTED TO BE EXCLUDED FROM THE LIST OF CO MPARABLES. 31. WITH THE EXCLUSION OF THE AFORESAID COMPARABLES FOLLOWING ARE THE 12 COMPANIES CHOSEN BY THE TPO AS COMPARABLE ON LY REMAIN AND THEIR ARITHMETIC MEAN IS AS FOLLOWS: IT(TP)A NO.1678/12 30 SN NAME OF THE COMPANY MARGIN (IN%) COMPUTED BY THE TPO 1 ADITYA BIRLA MINACS WORLDWIDE LTD -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) 29. 11 6 E4E HEALTHCARE SOLUTIONS LTD (FORMERLY KNOWN AS NITTANY OUTSOURCING SERVICES PVT LTD) 18.54 6 GENESYS INTERNATIONAL CORPORATION 47.40 7 ISERVICES INDIA PVT LTD 10.77 8 JINDAL INTELLICOM PVT LTD -10.29 9 R SYSTEMS INTERNATINAL LTD (SEG) 4.30 10 SPANCO LTD (SEG) (FORMERLY KNOWN AS SPANCO TELESYSTEMS & SOLUTIONS LTD 8.81 11 ALLSEC TECHNOLOGIES LTD. -13.29 ARITHMETIC MEAN 11.25 IT(TP)A NO.1678/12 31 32. IT CAN BE SEEN THAT ARITHMETIC MEAN OF PROFIT M ARGIN TO COST OF REMAINING COMPANIES CHOSEN BY THE TPO AFTER EXCLUDI NG THE AFORESAID COMPANIES IS ONLY 11.25. PROFIT MARGIN TO COST OF THE ASSESSEE IS 9.66% WHICH IS MUCH LOWER THAN ARITHMETIC MEAN OF T HE COMPARABLE COMPANIES CHOSEN BY THE TPO AFTER EXCLUSION OF THE SOME OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO FOR REASONS SET OUT IN THE EARLIER PARAGRAPHS. THEREFORE, NO ADJUDICATION TO ALP IS CALLED FOR. WE, THEREFORE, HOLD THAT THE ADDITIONS SUSTAINED B Y THE DRP DESERVES TO BE DELETED AND HE IS ACCORDINGLY DIRECTED TO BE DELETED. THE GROUNDS OTHER THAN COMPARABILITY OF COMPARABLES ARE NOT TAKEN UP FOR CONSIDERATION. WE MAY ALSO ADD THAT ARGUMENTS WERE MADE ON MARKET RISK ADJUSTMENTS AND ALSO WORKING CAPITAL ADJUSTMEN T. WE HAVE NOT DEALT WITH THOSE ARGUMENTS FOR THE REASON THAT ON T HE BASIS OF COMPARABILITY, THE ARITHMETIC MEAN OF THE COMPARABL ES IS LESS THAN THE MARGIN OF THE ASSESSEE. 33. THE PLEA OF THE ASSESSEE IS THAT THE AFORESAID EXPENDITURE NEED NOT BE EXCLUDED FROM THE EXPORT TURNOVER AS PER THE DEFINITION OF SET OF GIVEN IN SEC. 10A OF THE ACT. THE PLEA OF THE ASSE SSEE IS THAT IF THE IT(TP)A NO.1678/12 32 AFORESAID AMOUNT IS EXCLUDED FROM THE EXPORT TURNOV ER, THE SAME SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER. 34. 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 T HE ASSESSEE, 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 TH E EXPENSES INCURRED FOR TRAVELLING AND INTERNET CONNECTION CHA RGES FROM THE EXPORT TURNOVER AS WELL AS THE TOTAL TURNOVER, WHIL E COMPUTING DEDUCTION U/S. 10A OF THE ACT. WE HOLD AND DIRECT ACCORDINGLY. 35. SIMILARLY IN THE ADDITIONAL GROUND, THE ASSESSE E HAS PRAYED THAT THE FOREIGN EXCHANGE LOSS SHOULD ALSO BE ADDED TO T HE TOTAL TURNOVER AND EXPORT TURNOVER AS AGAINST THE ACTION OF THE AO IN EXCLUDING THE SAID LOSS ONLY FROM THE EXPORT TURNOVER FOLLOWING T HE DECISION IN THE CASE OF TATA ELXSI (SUPRA) OF THE HONBLE KARNATAKA HIGH COURT. WE HELD THAT THE SAID LOSS SHOULD BE EXCLUDED BOTH FROM ETO AND TTO. WE HOLD AND DIRECT ACCORDINGLY. IT(TP)A NO.1678/12 33 36. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 4 TH OF SEPTEMBER, 2015. SD/- SD/- (N.V VASUDEVAN) (S RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEM BER VMS /AM/- BANGALORE DATED : 04/09/2015 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER ASST. REGISTRAR, I TAT, BANGALORE.