Appeal Details
Counselvise Citation
[2014] 140 COUNSELVISE.COM (IT) 77913 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 5 month(s) 1 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
28-05-2014
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
A
Assessment Year
2007-2008
Appeal Filed On
27-12-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA.NO.2183/HYD/2011 ASSESSMENT YEAR 2007-2008 C3I SUPPORT SERVICES P. LTD. HYDERABAD PAN AACCC2082P VS. ACIT, CIRCLE 1(2) HYDERABAD (ASSESSEE) (RESPONDENT) FOR ASSESSEE : MR. TARUN CHATURVEDI FOR REVENUE : MR. P. SOMASEKHAR REDDY DATE OF HEARING : 02.04.2014 DATE OF PRONOUNCEMENT : 28.05.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL FILED BY ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER PASSED U/S 143(3)READ WITH SEC TION 144C OF THE INCOME-TAX ACT ON THE DIRECTION OF THE ORDER OF THE DISPUTES RESOLUTION PANEL (IN SHORT DRP) DATED 19. 09.2011 FOR THE A.Y. 2007-08. 2. BRIEFLY THE FACTS ARE, ASSESSEE A WHOLLY OWNED SUBSIDIARY OF C3I INC., USA (HEREINAFTER CALLED AS SOCIATED ENTERPRISE IN SHORT AE) PROVIDES BUSINESS PROCESS O UTSOURCING (BPO) SERVICES IN THE FIELD OF HEALTH CARE ADMINIST RATION TO ITS AE. THE ASSESSEE IS A 100% EOU REGISTERED UNDER THE SOFTWARE TECHNOLOGY PARK OF INDIA (STPI) SCHEME. FOR THE IMP UGNED ASSESSMENT YEAR, ASSESSEE HAS FILED ITS RETURN OF I NCOME CLAIMING DEDUCTION U/S.10A OF THE ACT IN RESPECT OF THE PROFITS OF THE STPI UNIT. IN COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, 2 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. THE ASSESSING OFFICER NOTICING THAT THE ASSESSEE HA S ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS AE MADE A R EFERENCE TO THE ADDL. CIT (TRANSFER PRICING), HYDERABAD (HEREIN AFTER CALLED THE TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP ). THE REVENUE EARNED BY THE ASSESSEE FROM THE INTERNATION AL TRANSACTION OF PROVIDING BACK OFFICE SUPPORT SERVIC ES TO ITS AE DURING THE ASSESSMENT YEAR WAS RS. 12.57 CRORES. 3. IN COURSE OF THE PROCEEDING BEFORE THE TPO, THE ASSESSEE SUBMITTED A TP STUDY CONDUCTED BY AN INDEP ENDENT EXTERNAL CONSULTANT AFTER UNDERTAKING A DETAILED AN ALYSIS FOR DETERMINING THE FUNCTIONS PERFORMED, RISKS ASSUMED AND ASSET UTILISED BY THE ASSESSEE AND ITS AE IN RESPECT OF T HE INTERNATIONAL TRANSACTIONS BETWEEN THEM. AS PER THE FUNCTIONAL ANALYSIS, THE ASSESSEE WAS CATEGORISED AS A RISK MI TIGATED CONTRACT SERVICE PROVIDER AND SELECTED AS A TESTED PARTY. TRANSACTION NET MARGIN METHOD (TNMM) WAS ADOPTED AS MOST APPROPRIATE METHOD IN THE TP STUDY TO DETERMINE THE ALP. SEARCH WAS CONDUCTED IN THE DATA BASES TO SELECT CO MPARABLE COMPANIES BY SELECTING THE OPERATING MARGIN I.E. OP ERATING PROFIT/OPERATING COST AS THE PROFIT LEVEL INDICATOR (PLI). THE SEARCH IN THE DATA BASES YIELDED 5 COMPANIES WHICH WERE FOUND TO BE FUNCTIONALLY SIMILAR, HENCE SELECTED AS COMPARABLES WITH WEIGHTED AVERAGE ARITHMETIC MEAN O F 6.98%. SINCE ASSESSEE'S NET MARGIN FROM THE PROVISION OF S ERVICES TO ITS AE DURING THE YEAR AT 15.18% WAS FOUND TO BE WI THIN ARMS' LENGTH, NO ADJUSTMENT WAS MADE 4. THE TPO HOWEVER REJECTED THE TP STUDY OF ASSESS EE BROADLY ON THE FOLLOWING REASONS :- 3 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. A. THE ASSESSEE HAS USED MULTIPLE YEAR DATA AND N OT THE CURRENT YEAR DATA. B. THE COMPANIES ENGAGED IN IT ENABLED SERVES WERE TREATED AS COMPARABLES IRRESPECTIVE OF THE VERTICAL S AND HORIZONTALS. C. MOST OF THE COMPANIES HAVE BEEN REJECTED BY APP LYING QUALITATIVE FILTERS WITHOUT FURNISHING DETAILS AS T O WHAT WERE THE QUALITIES WHICH WERE COMPARED FOR SELECTION/REJECTION OF COMPARABLES. D. THERE IS A COMPLETE DISCONNECT BETWEEN THE SEAR CH FOR THE COMPARABLES AND THE COMPARABILITY ANALYSIS. E. ASSESSEE HAS CONSIDERED COMPANIES AS COMPARABLE S ALTHOUGH THEY HAVE RELATED PARTY TRANSACTION OF MOR E THAN 25% OF THE OPERATING REVENUE. F. THE ASSESSEE HAS SELECTED COMPANIES WHICH ARE I NTO DOMESTIC OPERATIONS WITH MARGINAL AND NO EXPORT EARNINGS. 5. AFTER REJECTING THE TP STUDY, ASSESSING OFFICE R UNDERTOOK A FRESH SEARCH OF THE DATA BASES FOR SELE CTING COMPARABLES. WHILE DOING SO, THE TPO APPLIED CERTAI N ADDITIONAL FILTERS AND ALSO OBTAINED INFORMATION U/S 133(6) OF THE ACT. IN THIS PROCESS, THE TPO SELECTED 27 COMPA NIES AS COMPARABLES WITH AVERAGE MARGIN OF 30.21% AND FURTH ER MAKING NEGATIVE WORKING CAPITAL ADJUSTMENT OF (-)2. 69% DETERMINED THE ALP AT RS.14,26,28,298/- AGAINST THE PRICE SHOWN BY THE ASSESSEE FOR THE INTERNATIONAL TRANSAC TION AT RS.12,57,34,679/- THEREBY DETERMINING THE SHORTFALL OF RS.1,68,93,619/- AS THE TP ADJUSTMENT U/S. 92CA OF THE ACT. THE FOLLOWING WERE SELECTED AS COMPARABLE COMPANIES BY THE TPO : 4 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. S.NO. COMPANY NAME SALES MARGIN 1. ACCENTIA TECHNOLOGIES LTD 16.57 25.92% 2. MOLD- TEK TECHNOLOGIES LTD 11.40 115.17% 3. VISHAL INFORMATION TECHNOLOGIES LTD., 30.60. 42.12% 4. INFOSYS B P 0 LTD., 649.56 28.40% 5. WIPRO LTD (SEG.) 939.78 29.93% 6. HCL COMNET SYSTEMS & SERVICES LTD., (SEG.) 260.18 43.85% 7. ECLERX SERVICES LTD., 86.12 85.99% 8. ASIT C. MEHTA FINANCIAL SERVICES LTD., 6.09 22.54% 9. INFORMED TECHNOLOGIES HEALTHSTREET INDIA LTD., 4.08 34.60% 10. APPOLLO LTD., 47.84 -21.20% 11. DATAMATICS FINANCIAL SERVICES LTD., (SEG.) 2.92 -0.75% 12. FLEXTRONICS SOFTWARE SYSTEMS LTD., (SEG.) 12.93 5.81% 13. GENESYS INTERNATIONAL CORPORATION LTD., 19.17 8.30% 14. NITTANY OUTSOURCING 23.23 10.28% 15. ADITYA BIRLA MINACS WORLDWIDE LTD., 197.06 10.78% 16. COSMIC GLOBAL LTD., 4.28 11.11% 17. ICRA TECHNO ANALYTICS LTD., (SEG.) 7.23 11.18% 18. APEX KNOWLEDGE SOLUTIONS P. LTD., 6.64 12.80% 19. R SYSTEMS INTERNATIONAL LTD., (SEG.) 17.34 18.08% 20. SPANCO LTD., (SEG.) 35.00 19.40% 21. CALIBER POINT BUSINESS SOLUTIONS LTD., 39.30 19.97% 22. ALLSEC TECHNOLOGIES LTD., 113.28 25.47% 23. BODHTREE CONSULTING LTD., (SEG.) 2.94 29.36% 24. ACCURATE DATA CONVERTER 4.33 47.96% 25. ISERVICES INDIA P. LTD., 16.29 48.39% 26. MAPLE ESOLUTIONS LTD., 12.21 29.99% 27. TRITON CORP. LTD., 53.37 27.42% 27.51% 5 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. 6. IN PURSUANCE TO THE ORDER PASSED BY THE TPO PROPOSING THE AFORESAID TP ADJUSTMENT, THE ASSESSIN G OFFICER PASSED A DRAFT ASSESSMENT ORDER PROPOSING TO ADD TH E TP ADJUSTMENT TO THE RETURNED INCOME. IN THE DRAFT ASS ESSMENT ORDER, THE ASSESSING OFFICER ALSO REDUCED THE COMMU NICATION CHARGES OF RS.12,43,604/- FROM THE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A OF THE ACT. 7. THE ASSESSEE OBJECTED TO THE DRAFT ASSESSMENT ORDER BEFORE THE DRP. THE DRP REJECTED THE ASSESSEE 'S CONTENTION WITH REGARD TO ALMOST ALL THE ISSUES EXC EPT ASSESSEE'S OBJECTION WITH REGARD TO TWO COMPARABLES SELECTED BY TPO I.E. MAPLE E SOLUTIONS LIMITED AND TRITON CO RP LIMITED, WHICH WERE DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. IN PURSUANCE TO THE AFORESAID DIRECTIO N OF THE DRP, FINAL ASSESSMENT ORDER WAS PASSED BY THE ASSES SING OFFICER AFTER CONFIRMING THE ADDITION IN LINE WITH THE RELIEF PROVIDED BY THE DRP. 8. BEING AGGRIEVED, THE ASSESSEE HAS FILED THE PRE SENT APPEAL BEFORE US AND HAS ALSO SUBMITTED A CONCISE G ROUND OF APPEAL WHICH CONSISTS OF 5 GROUNDS. GROUNDS 1, 4 AN D 5 ARE GENERAL IN NATURE. GROUND 2 DEALS WITH TRANSFER PRI CING ADJUSTMENT AND GROUND 3 DEALS WITH THE ADDITION MAD E UNDER SECTION 10A. 9. AT THE OUTSET, LD COUNSEL SUBMITTED THAT ASSESSEE COMPANY ENJOYS 10A BENEFIT AND HENCE THER E SHOULD BE NO ADJUSTMENT AS THE ITAT AHMEDABAD DECIDED IN T HE CASE OF M/S. MOTIF INDIA INFOTECH PVT. LTD. VS. ACIT, AH MEDABAD IN 6 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. ITA.NO.3043/AHD/2010 DATED 25.03.2014 FOR THE PROPO SITION THAT ASSESSEES INCOME WAS EXEMPT INCOME AND THEREF ORE, ANY ADJUSTMENT MADE AT THE EXEMPT INCOME OF THE ASSESSE E WERE ALSO GETS EXEMPTED. WHEN IT WAS POINTED OUT TO THE LEARNED COUNSEL THAT THIS DECISION OF THE COORDINATE BENCH IS NOT IN TUNE WITH THE SPECIAL BENCH DECISION IN THE CASE OF AZTEC SOFTWARE & TECH. LTD. VS., ACIT (BANG) (SB), (2007) 107 ITD 141 (BANG.) (SB), LEARNED COUNSEL IMMEDIATELY CONSE NTED TO THE ABOVE AND WITHDREW THE CONTENTION WITH REFERENC E TO INCOME BEING EXEMPT UNDER SECTION 10A TO THE EXTENT OF ADDITION MADE UNDER SECTION 92CA. EVEN THOUGH LEARN ED COUNSEL WITHDREW THE CONTENTION, WE INTEND TO MAKE IT CLEAR THAT THIS ISSUE HAS BEEN CRYSTALLIZED BY THE DECISI ON OF THE SPECIAL BENCH IN AZTEC SOFTWARE & TECHNOLOGY SERVIC ES LTD., (SUPRA) WHEREIN IT WAS HELD AS FOLLOWS : 20. AT ONE STAGE OF HEARING, LEARNED COUNSEL FOR ASSESS EE HAS ALSO SUBMITTED BEFORE US THAT INCOME OF THE ASS ESSEE IS EXEMPT UNDER S. 10A OF THE ACT AND, THEREFORE, THE OVERPRICING OR UNDERPRICING OF AN INTERNATIONAL TRA NSACTION WOULD NOT AFFECT THE COMPUTATION OF INCOME. THIS AR GUMENT IS WITHOUT FORCE IN VIEW OF THE SPECIFIC PROVISIONS CO NTAINED IN THE FIRST PROVISO TO SUB-S. (4) OF S. 92C WHEREIN I T HAS BEEN CLEARLY STATED THAT NO DEDUCTION UNDER S. 10A/10AA OR S. 10B OR UNDER CHAPTER VI-A SHALL BE ALLOWED IN RESPE CT OF THE AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF THE A SSESSEE IS ENHANCED AFTER COMPUTATION OF INCOME UNDER THIS SECTION. 21. IT IS ABUNDANTLY CLEAR THAT LEGISLATURE WHILE INTRO DUCING THE ENACTMENT DID COMPREHEND A SITUATION REQUIRING INVESTIGATION AND ADDITION ON ACCOUNT OF COMPUTATIO N OF ALP IN CASES OF THE ASSESSEE ENTITLED TO BENEFIT UNDER S. 10A/10AA OR S. 10B OF THE ACT. IN THE LIGHT OF SPEC IFIC PROVISION, IT IS DIFFICULT TO CONTEND THAT ARMS LE NGTH PRICES CANNOT BE DETERMINED UNDER S. 92C OR 92CA WHERE ASS ESSEE IS ENTITLED TO BENEFIT OF ABOVE SECTIONS. 7 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. 22. IN THE LIGHT OF ABOVE DISCUSSION, WE HOLD THAT ALTH OUGH CHAPTER X HAS TITLE 'SPECIAL PROVISION RELATING TO AVOIDANCE OF TAX' AND AIM OF VARIOUS SECTIONS UNDER CHAPTER X IS TO CHECK AVOIDANCE OF TAXES, DIVERSION OF INCOME AND F UNDS BY NON-RESIDENTS FROM INDIA, IT IS NOT NECESSARY THAT AO MUST DEMONSTRATE SUCH AVOIDANCE AND DIVERSION OF TAX BEF ORE INVOKING PROVISIONS OF SS. 92C AND 92CA. CONSEQUENT LY, QUESTION NO. 1 IS ANSWERED IN NEGATIVE I.E. AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. IT IS FURTHE R HELD THAT THE LEARNED CIT(A) WAS WRONG IN ATTACHING IMPORTANC E TO THE FACT THAT THE TAXPAYER IS ENTITLED TO BENEFIT UNDER S. 10A/10AA OF IT ACT. 10. IN VIEW OF THE SPECIFIC DECISION OF THE SPECIA L BENCH OF THE ITAT, WE ARE BOUND TO FOLLOW THE DECIS ION OF THE SPECIAL BENCH AND THEREFORE, COORDINATE BENCH DECIS ION WHICH IS NOT IN TUNE WITH THE ITAT SPECIAL BENCH DECISION NEED NOT BE FOLLOWED. THIS CONTENTION OF THE ASSESSEE HOWEVE R, AS IT WAS WITHDRAWN AND NOT PRESSED, IS REJECTED AS NOT PRESS ED. 11. THE TRANSFER PRICING GROUND. 2 CONSIST OF THE FOLLOWING TWO MAIN ISSUES: A) SELECTION OF COMPARABLES DONE BY THE TPO; AND B) COMPUTATION OF THE MARGIN OF THE ASSESSEE B Y CONSIDERING RENT FOR UNUTILIZED SPACE AS PART OF CO ST ON WHICH PROFIT HAS TO BE EARNED. 12. WE HAVE HEARD LD COUNSEL AND LD. CIT DR IN DETAIL AND CONSIDERED THEIR CONTENTIONS. MOST OF TH E ARGUMENTS ARE SIMILAR TO ARGUMENTS ADVANCED BEFORE OTHER BENC HES AS TPO SELECTED SAME COMPARABLES AND ASSESSEES ARE OBJ ECTING TO INCLUSION OF SOME COMPARABLES. SIMILARLY ASSESSEE A LSO OBJECTED TO ABOUT 11 COMPARABLES AND RELIED ON COOR DINATE 8 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. BENCHES DECISIONS FOR EXCLUSION OF THEM. SINCE CONT ENTIONS ARE SIMILAR WE HAVE CONSIDERED THEM WHILE ANALYSING THE EACH OF THE COMPARABLE COMPANY OBJECTED TO. THE OBJECTIONS WITH RESPECT TO COMPARABLES ARE DEALT WITH BELOW: 12 .1 ACCURATE DATA CONVERTER AND NITTANY OUTSOURCING IT WAS THE OBJECTION THAT THESE COMPANIES WERE NEVE R A PART OF THE SHOW CAUSE NOTICE BUT WERE INCLUDED IN THE LIST OF FINAL COMPARABLES. THERE SEEMS TO BE NO DISCUSSION BY TPO WHILE INCLUDING THE ABOVE TWO COMPANIES. ASSESSEE A LSO DID NOT RAISE ANY OBJECTION BEFORE DRP. AS SEEN FROM OT HER CASES RELIED ON BY ASSESSEE FOR EXCLUSION OF CERTAIN COMP ARABLES, THESE TWO COMPANIES WERE NOT OBJECTED AND ARE ACCEP TED AS COMPARABLES. ONLY PRINCIPLES OF NATURAL JUSTICE WER E VIOLATED WHILE INCLUDING THEM. THEREFORE TPO / AO IS DIRECTE D TO GIVE AN OPPORTUNITY TO ASSESSEE TAKE THEIR OBJECTIONS AND C ONSIDER WHETHER THE ABOVE TWO COMPANIES CAN BE INCLUDED AS COMPARABLES. 12.2 ACCENTIA TECHNOLOGIES LIMITED THE ASSESSEE IS OBJECTING TO THE AFORESAID COMPANY BEING TREATED AS COMPARABLE SINCE THE AFORESAID COMPANY I S FUNCTIONALLY DIFFERENT FROM THE ASSESSEE AS MORE TH AN 64% OF THE OPERATING COST OF THE COMPANY IS TOWARDS OVERSE AS BUSINESS EXPENSES. FURTHER THE COMPANY HAS SUBSTANT IAL MARKETING EXPENSES WHICH WAS ALMOST 29% OF ITS SALE S AS COMPARED TO ALMOST NIL OF THE ASSESSEE. IT IS ALSO SUBMITTED THAT DUE TO MULTIPLE ACQUISITIONS BY THE COMPANY DU RING THE YEAR UNDER DISPUTE, IT WAS AN EXCEPTIONAL YEAR IMPA CTING THE 9 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. PROFITABILITY OF THE COMPANY. IN THIS CONNECTION AS SESSEE RELIED ON THE DECISION OF INCOME-TAX APPELLATE TRIBUNAL, H YDERABAD BENCH IN CASE OF CAPITAL IQ INFORMATION SYSTEMS IND IA PVT. LTD. (ITA NO. 1961/HYD/201 1), ZAVATA INDIA PVT.LTD, HYDERABAD VS ASSESSEE, ITA NO.1781/HYD/2011 AND [2014] 4 TAXMANN.COM 334 , AVINEON INDIA (P.) LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1(1). 12.2.1. IN CASE OF CAPITAL IQ INFORMATION SYSTEM S INDIA PVT. LTD., THE CO-ORDINATE BENCH OF THE HYD. IT AT WHILE CONSIDERING THE ASSESSEE'S OBJECTION WITH REGARD TO THE AFORESAID COMPANY HELD IN THE FOLLOWING MANNER:- '10. IT IS THE SUBMISSION OF THE ASSESSEE THAT THIS COMPANY CANNOT BE TREATED AS A COMPARABLE BECAUSE O F UN-COMPARABLE FINANCIAL RESULTS ARISING OUT OF AMALGAMATION ILL THE COMPANY. IN THIS REGARD, THE ASSESSEE HAS RELIED UPON THE ORDER OF THE DRP FOR T HE ASSESSMENT YEAR 2008-09 IN ASSESSEE'S OWN CASE. IT IS SEEN THAT THE DRP WHILE CONSIDERING SIMILAR OBJECTI ON PLACED BY THE ASSESSEE IN THE CASE OF ANOTHER COMPA NY, VIZ. MOLD TEK TECHNOLOGIES LTD., IN THE PROCEEDINGS RELATING TO THE ASSESSMENT YEAR 2008-09, HAS OBSERV ED 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. WIT H EFFECT FROM 1 ST OCTOBER, 2006. THERE WAS A DE-MERGER OF PLASTIC DIVISION OF THE COMPANY AND THE RESULTING C OMPANY IS KNOWN AS MOLDTEK PLASTICS LIMITED. THE DE-MERGER FROM THE MOLDTEK TECHNOLOGIES TOOK PLACE WITH EFFECT FRO M LST APRIL, 2007. THE MERGER AND THE DE-MERGER NEEDED THE 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 M ERGER AND THE DE-MERGER ON 25.01.2008 AND THE HON'HLE HIG H 10 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. COURT OF ANDHRA PRADESH HAD APPROVED THE MERGER AND DE-MERGER ON 25TH JULY, 2008. SUBSEQUENTLY, THE ACC OUNTS OF MOLDTEK TECHNOLOGIES FOR FY 2007-08 WERE REVISED . ON A PERUSAL OF THE ANNUAL REPORT IT IS NOTICED THAT T ECKMEN TOOLS PVT. LTD. AND THE PLASTIC DIVISION (IF THE COMPANY WERE DEMERGED AND THE RESULTING COMPANY WAS NAMED A S MOLDTEK PLASTICS LTD. THE KPO BUSINESS REMAINED WIT H THE COMPANY. A PERUSAL OF THE ANNUAL REPORT REVEALED TH AT TO GIVE EFFECT TO THE MERGER AND DEMERGER, THE FINANCI AL STATEMENTS WERE REVISED AND RESTATED AFTER SIX MONT HS FORM THE END OF THE FINANCIAL YEAR 31.3.2008 THE ASSESSEE FILED FORM NO.21 UNDER THE COMPANIES ACT W ITH THE REGISTRAR OF COMPANIES ON 26TH AUGUST, 2008. TH US THE EFFECTIVE DATE OF THE SCHEME OF MERGER AND DEME RGER WAS 26TH AUGUST, 2008. THE ANNUAL REPORT SUPPORTED THE ARGUMENT OF THE ASSESSEE THAT THERE WERE MERGER AND DEMERGER IN THE FINANCIAL YEAR AND IT WAS ALL EXCEPTIONAL YEAR OF PERFORMANCE AS FINANCIAL STATEMENTS WERE RE VISED BY THIS COMPANY MUCH AFTER THE CLOSURE OF THE PREVI OUS YEAR. THE PANEL AGREES WITH THE CONTENTION OF THE ASSESSEE THAT IT IS AN EXCEPTIONAL YEAR HAVING SIGN IFICANT IMPACT ON THE PROFITABILITY ARISING OUT OF MERGER A ND DEMERGER.' 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 TH E 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 THE TPQ. IF IT IS FOUND UPON SUCH VERIFICATION THAT THE AMALGAMATION IN FACT HAS TAKEN PLACE, THEN THE AFOR ESAID COMPARABLE HAS TO BE EXCLUDED. AS CAN BE SEEN FROM THE ORDER OF THE CO-ORDINATE BE NCH, THE AFORESAID COMPANY WAS DIRECTED TO BE EXCLUDED SINCE EX- ORDINARY EVENTS LIKE MERGER AND DEMERGER HAD TAKEN DURING THE RELEVANT FINANCIAL YEAR WHICH MUST HAVE IMPACTE D THE FINANCIAL RESULTS OF THE COMPANY. THAT BESIDES THE HIGH VOLUME 11 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. OF ON-SITE OPERATION OF ACCENTIA TECHNOLOGIES LIMIT ED ALSO MAKES IT FUNCTIONALLY DISSIMILAR TO THE ASSESSEE. A O IS DIRECTED TO EXCLUDE THE SAME. 12. 3. ASIT C MEHTA FINANCIAL SERVICES LTD. THE SUBMISSION WAS THAT THE AFORESAID COMPANY BEING SELECTED AS COMPARABLE IS NOT CORRECT SINCE IT BELONGS TO A DIFFERENT VERTICAL AND HENCE HAS A DIFFERENT COST STRUCTURE. IN THIS CONNECTION ASSESSEE RELIED ON THE DECISION OF ZAVAT A INDIA PVT. LTD, HYDERABAD VS ASSESSEE, ITA NO. 1 78L/HYD/2011 WHERE IN UNDER SIMILAR CIRCUMSTANCES THIS COMPANY HAS BEEN R EJECTED ON THE GROUNDS THAT THE EMPLOYEE COST OF THE COMPAN Y IS ONLY 24.78% OF ITS REVENUE COMPARED TO ASSESSEE'S 44%. CONSIDERING THE COORDINATE BENCH DECISIONS WE DIREC T THE TPO/AO TO EXCLUDE THE SAME. 12.4 . VISHAL INFORMATION TECHNOLOGIES THE AFORESAID COMPANY HAS BEEN REMOVED BY THE DRP A S A COMPARABLE IN THE CASE OF THE ASSESSEE FOR THE AY 2 008-09. FURTHER, THE AFORESAID COMPANY IS NOT ONLY FUNCTION ALLY DIFFERENT ON ACCOUNT OF EMPLOYEE COST FILTER AS THE EMPLOYEE COST OF THE COMPANY IS ONLY 2% OF ITS REVENUE, BUT IT ALSO HAS HUGE VENDOR PAYMENT FOR DATA ENTRY WHICH IS INDICAT IVE OF THE FACT THAT IT DOES NOT PROVIDE IT ENABLED SERVICES B Y ITSELF BUT OUT SOURCES THE WORK WITH THIRD PARTY VENDOR. IN TH IS CONNECTION ASSESSEE RELIED ON THE DECISION OF INCOM E-TAX APPELLATE TRIBUNAL, HYDERABAD BENCH IN CASE OF CAPI TAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. (ITA.NO.1961/HY D/2011), ZAVATA INDIA PVT.LTD, HYDERABAD VS. ASSESSEE, ITA 12 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. NO.1781/HYD/2011 AND [2014] 41 TAXMANN.COM 334 (HYDERABAD - TRIB.) AVINEON INDIA (P.) LTD. V. DEPU TY COMMISSIONER OF INCOME-TAX, CIRCLE-1 (1). 12.4.1. IN CASE OF CAPITAL IQ INFORMATION SYSTEM S (INDIA) PVT. LTD.,(SUPRA) THE CO-ORDINATE BENCH AFTER CONSI DERING THE OBJECTIONS OF THE ASSESSEE IN RESPECT OF THE AFORES AID COMPANY HELD IN THE FOLLOWING MANNER :- '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 O F THE COMPOSITION OF THE VENDOR PAYMENTS (IF CORAL HUB FOR THE LAST THREE YEARS, AND THE FACT THAT IT HAS ALSO COM MENCED A NEW LINE OF BUSINESS OF PRINTING ON DEMAND(POD), WHEREIN IT PRINTS UPON CLIENTS REQUEST, CONCLUDED A S FOLLOWS- '18.4. IN VIEW OF THIS MAJOR DIFFERENCE IN FUNCTION ALITY AND THE BUSINESS MODEL, THIS PANEL IS OF THE VIEW THAT 'CORAL HUB' IS NOT A SUITABLE COMPARABLE TO THE TAXPAYER A ND HENCE NEEDS TO BE DROPPED FORM THE FINAL LIST OF COMPARABLES. ' IN CASE OF ACIT VS. M/S. MAERSK GLOBAL SERVICE CENT RE (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 ( T ULSYAN TECHNOLOGIES LIMITED AND VISHAL INFORMATION TECHNOLOGIES LIMITED ARE CONCERN ED, IT IS NOTICED FROM THEIR ANNUAL ACCOUNTS THAT THESE COMPANIES OUTSOURCED A CONSIDERABLE PORTION OF THEI R BUSINESS. AS THE ASSESSEE CARRIED OUT ENTIRE OPERAT IONS BY ITSELF, IN OUR CONSIDERED OPINION, THESE TWO CASES WERE RIGHTLY EXCLUDED. ' 13 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. IN VIEW OF THE OBSERVATIONS MADE BY THE DRP AS WELL AS THE DECISIONS OF THE ITAT, WE ACCEPT THAT THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE. 12.5. ECLERX SERVICES LIMITED - ASSESSEE SUBMITTED THAT THIS COMPANY IS ENGAGED IN PROVIDING KNOWLEDGE PROCESS OUTSOURCING (KPO). IT WAS SUBMITT ED THAT THE ASSESSEE IS PROVIDING DATA ANALYTICS, OPERATION S MANAGEMENT AND AUDIT RECONCILIATION. IT WAS FURTHER SUBMITTED THAT BESIDES BEING FUNCTIONALLY DIFFERENT FROM THE ASSESSEE, THE AFORESAID COMPANY HAS SHOWN EXTRAORDINARILY HIGH PR OFIT AT 88.11 % HENCE CANNOT BE TREATED AS COMPARABLE. IN T HIS CONNECTION ASSESSEE RELIED ON THE DECISION OF INCOM E-TAX APPELLATE TRIBUNAL, HYDERABAD BENCH IN CASE OF CAPI TAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. (ITA NO.1961/HY D/2011), ZAVATA INDIA PVT. LTD, HYDERABAD VS. ASSESSEE, ITA NO.1781/HYD/2011 AND [2014] 41 TAXMANN.COM 334, AVI NEON INDIA (P.) LTD. V. DEPUTY COMMISSIONER OF INCOME-TA X, CIRC1E-1 (1). CONSIDERING THE DECISION OF COORDINATE BENCHES IN THE ABOVE CASES, WE HOLD THAT THIS COMPANY CAN NOT BE T AKEN AS COMPARABLE. 12.6. MOLD-TEK TECHNOLOGIES LIMITED DURING THE YEAR, THE COMPANY HAS SHOWN SUPER NORMAL PROFIT OF 117.29% COMPARED TO THE ASSESSEE AS WELL AS OTHER COMPARABLE COMPANIES. APART FROM HAVING EXTRAORDINA RILY HIGH PROFIT, MOLD-TEK IS ALSO FUNCTIONALLY DIFFERENT AS IT IS ENGAGED IN PROVIDING STRUCTURAL ENGINEERING CONSULTING SERVICE S UNDER THE KPO DIVISION. M/S MOLD TEK IS PROVIDING HIGHLY TECH NICAL AND 14 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. SPECIALISED ENGINEERING SERVICES AND USE OF INFORMA TION TECHNOLOGY IS ONLY INCIDENTAL. IN THIS CONNECTION A SSESSEE RELIED ON THE DECISION OF INCOME-TAX APPELLATE TRIBUNAL, H YDERABAD BENCH IN CASE OF CAPITAL IQ INFORMATION SYSTEMS IND IA PVT. LTD. (ITA NO. 1961/HYD/2011), ZAVATA INDIA PVT. LTD, HYDERABAD VS. ASSESSEE, ITA. NO. 1781/HYD/2011 AND [2014] 41 TAXMANN.COM 334 ,AVINEON INDIA (P.) LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-I (1). EVEN IN A SSESSEE'S OWN CASE FOR ASST. YEAR 2008-09, THE DRP HAS DIRECT ED FOR EXCLUSION OF M/S. MOLD-TEK FROM LIST OF COMPARABLES . 12.6.1. IN CASE OF CAPITAL IQ INFORMATION SYSTEM S (SUPRA) THE CO-ORDINATE BENCH OF THE TRIBUNAL HELD AS UNDER :- '13. ON CAREFUL CONSIDERATION OF THE SUBMISSIONS OF THE ASSESSEE WE FIND THAT THE DRP, AS ALREADY STATED EA RLIER, IN THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2008-09 HAS ACCEPTED THE ASSESSEE'S CONTENTION THAT THIS COMPAN Y CANNOT BE TREATED AS COMPARABLE BECAUSE OF EXCEPTIO NAL FINANCIAL RESULT DUE TO MERGER/DE-MERGER. IN VIEW O F THE AFORESAID, WE ACCEPT THE ASSESSEE'S CONTENTION THAT THIS COMPANY CANNOT HE TREATED AS COMPARABLE. THAT APART , IT IS ALSO A FACT THAT THIS COMPANY HAS SHOWN SUPER NO RMAL PROFIT WORKING OUT TO 1I3%. THE INCOME-TAX APPELLAT E TRIBUNAL, MUMBAI BENCH ILL THE CASE OF TEVA INDIA PVT. LTD. (SUPRA) HAS OBSERVED THAT COMPANIES SHOWING SUPERNORMAL PROFIT CANNOT BE TREATED AS COMPARABLE. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN THAT CASE ARE EXTRACTED HEREUNDER FOR CONVENIENCE- '32. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD IT IS OBSERVED THAT ALTHOUGH A DETAIL SUBMISSION WAS MADE ON BEHAL F OF THE ASSESSEE BEFORE THE LEARNED CIT(A) ON THE BASIS OF FAR ANALYSIS TO SHOW THAT THE SELECTION OF MS. VIMT A LABS AS COMPARABLE IS NOT JUSTIFIED, THE LEARNED CIT(A) HAS NOT ACCEPTED THE STAND OF THE ASSESSEE ON THE ISSUE WIT HOUT 15 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. GIVING ANY COGENT OR CONVINCING REASONS. IN ITS REC ENT DECISION RENDERED IN THE CASE OF ADOBE SYSTEMS INDI A PVT. LTD., (ITA.NO.5043/DEL/2000 DTD 21.01.2011) + (2011-TII- 13-ITAT-DEL-TP), DELHI BENCH O F IT AT HAS HELD THAT EXCLUSION OF COMPARABLES SHOWING SUPERNORMAL PROFIT S AS COMPARED TO OTHER COMPARABLE IS FULLY JUSTIFIED. WE , THEREFORE SET ASIDE THE IMPUGNED ORDER OF THE LD. C IT(A) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE O F THE A.O. WITH A DIRECTION TO DECIDE THE SAME AFRESH AFTER TA KING INTO CONSIDERATION THE SUBMISSIONS MADE BY THE ASSE SSEE BEFORE THE LEARNED CIT(A) AND KEEPING IN VIEW THE D ELHI BENCH OF 1TAT IN THE CASE OF ABODE SYSTEMS INDIA PV T. LTD. (SUPRA). IN THIS VIEW OF THE ABOVE, WE ACCEPT THE CONTENTION S OF THE ASSESSEE THAT THIS COMPANY CANNOT BE TREATED AS A C OMPARABLE. 12.7 HCL COMNET SYSTEMS & SERVICES LIMITED, INFOSYS BPO LIMITED AND WIPRO LIMITED. - WHILE THE ASSESSEE'S TURNOVER DURING THE YEAR WAS A BOUT 12.5 CRORES, THESE COMPANIES HAVE HUGE TURNOVERS CO MPARED TO THE ASSESSEE. THE TURNOVER OF THESE COMPANIES AR E AS UNDER: HCL COMNET SYSTEMS & SERVICES LIMITED 260.18 INFOSYS BPO LIMITED 649.56 WIPRO LIMITED (SEG.) 939.78. (IN RS. CRORES) IN THIS CONNECTION ASSESSEE RELIED ON THE DECISION OF INCOME- TAX APPELLATE TRIBUNAL, HYDERABAD BENCH IN CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA PVT. LTD. (ITA.NO.I961/HY D/2011), ZAVATA INDIA PVT. LTD, HYDERABAD VS ASSESSEE, ITA NO.1781/HYD/2011 AND [2014] 41 TAXMANN.COM 334, AV INEON INDIA (P.) LTD. V. DEPUTY COMMISSIONER OF INCOME-TA X, CIRCLE-L (1). 16 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. 12.7.1. THE COORDINATE BENCH OF THE TRIBUNAL IN CASE OF CAPITAL IQ INFORMATION SYSTEMS INDIA LTD. WHILE CON SIDERING THE ISSUE OF SELECTION OF COMPARABLE COMPANIES BY A PPLYING TURNOVER FILTER HAS HELD AS UNDER :- 21. ON CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IN RELATION TO THESE THREE COMPANIES, WE FIND THAT THE TPO HAS EXCLUDED THE COMPANIES WHOSE TURNOVER IS LESS T HAN RS. ONE CRORE, ON THE GROUND THAT THEY MAY NOT BE REPRESENTING THE INDUSTRY TREND. THAT VERY LOGIC AL SO APPLIES TO THE COMPANIES HAVING HIGH TURNOVER OF OV ER RS.200 CRORES AS AGAINST THE ASSESSEE 'S TURNOVER O F ONLY RS.60 CRORES, AND THEREFORE, IT WOULD BE FAIR ENOUG H TO EXCLUDE THOSE COMPANIES ALSO. IN THE CASE OF AGNITY INDIA TECHNOLOGIES P. LTD. (SUPRA), THE DELHI BENCH OF TH E TRIBUNAL, WHILE CONSIDERING THE COMPARABILITY WITH COMPANIES WHICH ARE MARKET LEADERS IN THEIR .FIELD, AND HAVING SUBSTANTIALLY HIGH TURNOVER, OBSERVED AS FOL LOWS - '5.2. VARIOUS ARGUMENTS, AS STATED EARLIER, WERE TA KEN BEFORE THE DRP WHICH INTER-ALIA INCLUDED REJECTION OF COMPARABLE CASES; APPLICATION OF ARBITRARY FILTER O F WAGE TO SALES RATIO; IGNORING THAT THE ASSESSEE IS A LIMITE D RISK COMPANY; INCLUSION OF INFOSYS TECHNOLOGIES LTD.; AN D INCLUSION OF SAT YAM COMPUTERS SERVICES LTD. IN SPITE OF THE FACT THAT ITS DATA IS NOT RELIABLE AS PUBLICLY KNOWN. ON THE BASIS OF THESE ARGUMENTS, THE DRP EXCLUDED THE CASE OF SATYAM COMPUTERS SERVICES LTD., THEREBY REDUCING THE ARM'S LENGTH MARGIN TO 25.6%. IT IS ARGUED THAT THE CASE OF THE ASSESSEE IS NOT COMPARABLE WITH INFOSYS TECHNOL OGIES LTD., THE REASON BEING THAT THE LATER IS GIANT IN THE ARE A OF DEVELOPMENT OF SOFTWARE AND IT ASSUMES ALL RISKS, L EADING TO HIGHER PROFIT. ON THE OTHER HAND, THE ASSESSEE I S A CAPTIVE UNIT OF ITS PARENT COMPANY IN THE USA AND I T ASSUMES ONLY LIMITED CURRENCY RISK. HAVING CONSIDER ED THESE POINTS, WE ARE OF THE VIEW THAT THE CASE OF T HE AFORESAID INFOSYS AND THE ASSESSEE ARE NOT COMPARAB LE AT ALL AS SEEN FROM THE FINANCIAL DATA ETC. OF THE TWO COMPANIES MENTIONED EARLIER IN THE ORDER. THEREFORE , WE ARE OF THE VIEW THAT THIS CASE IS REQUIRED TO BE EX CLUDED. ' 17 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. SIMILAR VIEW HAS ALSO BEEN EXPRESSED BY THE HYDERAB AD BENCH OF THE TRIBUNAL IN THE CASE OF TRINITY ADVANC ED LABS P. LTD. (SUPRA). IN THE CASE OF M/S. GENESYS INTEGRATING INDIA P. LTD. (SUPRA), THE BANGALORE BE NCH OF THE TRIBUNAL HAS OBSERVED IN THE FOLLOWING MANNER- '9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS AND ALSO THE JURIDICAL PRECED ENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTE D THE COMPANIES WHICH ARE MAKING LOSSES AS COMPARABLES. T HIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR I DENTIFYING THE COMPARABLES. IN SUCH A SITUATION, WE ARE LIABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER L IMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEA RNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN B USINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN FOR THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALS O HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO G IVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COM E DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE V ARIOUS BENCHES IF THE TRIBUNAL WHEN COMPANIES WHICH ARE LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPE R PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSI FICATION HAS TO BE MADE. DUN & BRADSTREET AND NASSCOM HAS GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER O F RS.1.00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE A ND THE ASSESSEE BEING IN THE RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1. 00 TO 200.00 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATI ON FOR THE PURPOSE OF MAKING TP STUDY. ' HAVING CONSIDERED THESE DECISIONS, WE ARE OF THE VI EW THAT THE AFORESAID COMPANIES ARE NOT COMPARABLE AT ALL. THER EFORE, WE ARE OF THE VIEW THAT THESE CASES ARE REQUIRED TO BE EXCLUDED. 18 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. 12.8 . GENESYS CORPORATION AS FAR AS THIS COMPANY IS CONCERNED, THE STAND OF T HE ASSESSEE IS AS FOLLOWS: FUNCTIONALLY NOT COMPARABLE; IT HAS A DIFFERENT EMPLOYEE SKILL SET; THIS FL COMPANY PERFORMS R&D SERVICES; AND OWNS INTANGIBLES. THIS COMPANY IS A GEOSPATIAL SERVICES CONTENT PROVI DER SPECIALISING IN LAND BASED TECHNOLOGIES. FROM THE N OTES TO ACCOUNTS OF THIS COMPANY, IT IS SEEN THAT THIS COMP ANY IS ENGAGED IN PROVIDING GEOGRAPHICAL INFORMATION SERVI CES COMPRISING OF PHOTO GEOMETRY, REMOTE SENSING CARTOG RAPHY, DATA CONVERSION RELATED COMPUTED BASED SERVICES AND OTHER RELATED SERVICES. FURTHER THE BUSINESS OF THIS COMP ANY REQUIRES SKILLED MANPOWER AND SCIENTISTS, CIVIL ENGINEERS, E TC. ASSESSEE IS A ROUTINE ITES PROVIDER WHO DOES NOT REQUIRE SUC H HIGHLY SKILLED EMPLOYEES. BESIDES THE ABOVE, THIS COMPANY ALSO CARRIES OUT R & D SERVICES AND OWN INTANGIBLES. THE REFORE SAID FACTS, IN OUR VIEW, WILL TAKE THIS COMPANY OUT OF T HE LIST OF COMPARABLES. IN THIS REGARD, WE MAY REFER TO THE DE CISION OF THE ITAT BANGALORE BENCH IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES LTD. (SUPRA), WHEREIN IT WAS OBSERVED AS U NDER :- '39. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THEIR RIVAL CONTENTIONS, WE FIND THAT THE ASSESSEE HAD RAISED ELABORATE OBJECTIONS TO EACH O F THE COMPARABLES IN GROUP 3 BEFORE THE TPO. THE TPO HAS ALSO REPRODUCED THE SAID OBJECTION IN HIS ORDER PARA 6.5.1. OF PAGE 178 OF HIS ORDER. HE HAS REJECTED THE CONTENTION OF THE ASSESS EE BY HOLDING THAT EVERY FUNCTION WITHIN BPO SECTOR CAN B E FROM LOW END TO HIGH END AND THE ACTIVITIES OF THE ASSES SEE 19 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. SUCH AS ACCOUNTING, WEB MANAGEMENT, NETWORK MANAGEMENT ARE BPO SERVICES USING TECHNOLOGY BUT TH ESE SERVICES ARE NOT CATEGORIZED AS KPO. HE HELD THAT A CALL CENTRE MAY OFFER SUPPORT SERVICES LIKE TELEMARKETING TO HIGH END SERVICES LIKE TECHNICAL SUPPORT SERVICES, WHERE NOT ONLY THE LEVEL OF KNOWLEDGE, SKILL REQUIRED WOU LD BE HIGH, HUT THE TECHNICAL KNOWLEDGE AS WELL WOULD HE HIGH. ACCORDING TO HIM, HACK OFFICE TRANSACTION PROCESS SERVICES MAY HE AS REMARKABLE AND AS COMPLICATED AS INSURANC E MARKET TRANSACTION PROCESSING SERVICES. I.E, THEREF ORE, 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 (IF SPECIFIC BUSINESS FUNCTIONS OR PROCESS TO A THIRD P ARTY SERVICES PROVIDER. OFTEN BUSINESS PROCESSES OUTSOUR CING ARE INFORMATION TECHNOLOGY BASED AND REFERRED TO AS ITES- BPO. KPO IS ONE OF THE SUB-SEGMENT OF THE BPO INDUSTRY. IT INVOLVES OUTSOURCING OF CORE INFORMATION RELATED BUSINESS ACTIVITIES WHICH ARE COMPETITIVELY IMPORTA NT OR FORM AN INTEGRAL PART O F A COMPANY'S VALUE CHAIN. IT THUS REQUIRES ADVANCED ANALYTICAL AND TECHNICAL SKILLS A S WELL AS A HIGH DEGREE OF SPECIALIST EXPERTISE. THE KPO S ERVICES INCLUDE ALL KINDS OF RESEARCH AND INFORMATION GATHE RING. THUS IT CAN BE SEEN THAT EVEN THOUGH BOTH RPO AND K PO ARE OFFERING INFORMATION TECHNOLOGY BASED SERVICES, THE SKILL AND EXPERTISE AND MAY BE EVEN THE TOOLS REQUI RED ARE DIFFERENT WHICH MAY RESULT IN DIFFERENT ECONOMIC RE SULTS OF BOTH THE SEGMENTS. THUS, IN SUCH CIRCUMSTANCES, WE ARE OF THE OPINION THAT THEY CANNOT BE COMPARED WITH EACH OTHER AND HAVE TO BE EXCLUDED FROM THE LIST OF COMPARABLE S. ' IT IS THUS CLEAR FROM THE AFORESAID DECISION OF THE TRIBUNAL THAT AMONG THE ITES COMPANIES THERE IS A HIERARCHY IN TE RMS OF SKILL REQUIRED TO PROVIDE SERVICES. IT RANGES FROM PROVIDING ROUTINE SERVICES WHERE NO SKILLS ARE REQUIRED TO PR OVIDING SERVICES WHERE HIGHLY PROFESSIONALIZED SKILLS ARE REQUIRED. DEPENDING ON THE SKILLS REQUIRED TO PERFORM ITES TH E 20 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. 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 LIS T OF COMPARABLES. 13. GROUND RELATING TO THE MARGIN COMPUTATION OF THE ASSESSEE IT APPEARS THAT THE OPERATING MARGIN OF 12.42% ON C OST AS CALCULATED BY LD. TPO IS NOT IN LINE WITH THE OPERATING MARGIN OF 15.18 % AS CALCULATED AND SUBMITTED BY THE ASSESSEE. IT APPEARS THAT WHILE CALCULATING OPERATIONAL MARGIN NO ADJUSTMENT FOR EXPENSES OF RENT RELATABLE TO SUB STANTIAL PORTION OF UNUSED FLOOR SPACE HAS BEEN CARRIED OUT. THE ASSESSEE HAS ADJUSTED A SUM OF RS 33 LACS TOWARDS T HE UNUTILIZED FLOOR SPACE INCLUDING 10893 SQUARE FEET ACQUIRED IN NEW BLOCK FOR FUTURE EXPANSION. THIS ISSUE WAS EXPL AINED TO THE DRP IN WRITING BUT THE DRP AND THE TPO HAVE NO T DEALT WITH IS IN AN APPROPRIATE MANNER AND HAVE MERELY RE JECTED THE CLAIM WITHOUT VERIFYING IT. WE THEREFORE DIRECT THE TPO/AO TO GIVE OPPORTUNITY TO ASSESSEE AND CONSIDER THE OBJEC TIONS ON THE ISSUE. 14. TPO/AO IS DIRECTED TO RE-WORKOUT THE TP AD JUSTMENT AS PER THE PROVISIONS AFTER EXCLUDING THE COMPARABL ES REJECTED ABOVE AND CONSIDERING THE COMPARABLES WHICH REQUIRE RECONSIDERATION AFTER GIVING OPPORTUNITY TO ASSESSE E. AO/TPO IS ALSO DIRECTED TO CONSIDER THE COST ISSUE AS DIRE CTED IN PARA 12 ABOVE. WITH THESE DIRECTIONS THE GROUND 2 IS CON SIDERED PARTLY ALLOWED FOR STATISTICAL PURPOSES. 21 ITA.NO.2183/HYD/2011 C3I SUPPORT SERVICES P. LTD., HYDERABAD. 15. GROUND NO .3 RELATING TO SECTION 10A IN THIS GROUND, ASSESSEE HAS CHALLENGED THE REDUCTI ON OF COMMUNICATION CHARGES FROM THE EXPORT TURNOVER WITH OUT REDUCING IT FROM THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT. THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT IN CASE OF CIT VS. GEM PLUS JEWELLERY LTD (330 LTR 175 ) AND THE DECISION OF INCOME-TAX APPELLATE TRIBUNAL, CHENNAI SPECIAL BENCH IN CASE OF ITO VS. SAK SOFT LIMITED (313 ITR 353 (AT)]. IN FACT, THE DRP THOUGH ACCEPTS SUCH POSITION BUT H AS DECIDED THE ISSUE AGAINST THE ASSESSEE ONLY TO GIVE AN OPPO RTUNITY TO THE DEPARTMENT TO PURSUE THE SAME IN HIGHER FORUMS. AO IS DIRECTED TO EXCLUDE THE SAME FROM TOTAL TURNOVER A LSO. GROUND IS ALLOWED. 16. IN THE RESULT APPEAL OF ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.05.2014 SD/- SD/- (ASHA VIJAYARAGHAVAN) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 28 TH MAY, 2015. VBP/- COPY TO 1. C3I SUPPORT SERVICES PVT. LTD., 2 ND FLOOR, ORION BLOCK, VANENBURG IT PARK, PLOT NO.17, SOFTWARE UNITS LAYOU T, MADHAPUR, HYDERABAD 500 081. 2. ACIT, CIRCLE 1(2), HYDERABAD. 3. DISPUTES RESOLUTION PANEL, HYDERABAD. 4. DIT(INTL. TAXATION), HYDERABAD 5. D.R. ITAT A BENCH, HYDERABAD
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