Deputy Commissioner of Income Tax, Circle-3(1)(1), Bengaluru V. M/s First American (India) Pvt Ltd, Bengaluru

ITA 2586/BANG/2017

• Counselvise Citation: [NaN] 107 COUNSELVISE.COM (IT) 2259 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-02-2022
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 01-12-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER Appeal No. and Assessment Year Appellant Respondent IT(TP)A No. 43/Bang/2018 2010-11 M/s. First American (India) Private Limited, Ground to 7 th Floor, Aveda Meta Building, No.184, BBMP PID No.82 – 105 – 8/1, Old Madras Road, Indiranagar PO, Bengaluru – 560 038. PAN: AABCF 3186 E Deputy Commissioner of Income Tax, Circle - 11(3), Bengaluru. ITA No. 2586/Bang/2017 2010-11 Deputy Commissioner of Income Tax, Circle – 3(1)(1), Bengaluru. M/s. First American (India) Private Limited, Level 1, Navigator Building, International Park, Whitefield Road, Bengaluru – 560 066. PAN: AABCF 3186 E Assessee by :Smt. Tanmayee Rajkumar, Advocate Revenue by:Shri. Sumer Singh Meena, CIT-I(DR)(ITAT), Bengaluru. Date of hearing:20.01.2022 Date of Pronouncement:02.02.2022 O R D E R Per N. V. Vasudevan, Vice President IT(TP)A No.43/Bang/2018 is an appeal by the assessee while ITA No.2586/Bang/2017 is an appeal by the Revenue. Both these appeals are directed against the order dated 18.09.2017 of CIT(A)-3, Bengaluru, relating to Assessment Year 2010-11. IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 2 of 23 2. The assessee is a company incorporated under the provisions of the Companies Act, 1956, and is a wholly owned subsidiary of Data Tree LLC, US (‘Data Tree’ for short), which is a group company of First American Corporation, a company based in California, USA. The assessee is primarily engaged in the provision of back office support services, i.e. Information Technology enabled Services (ITeS) and Software Development Services (SWD) services to Data Tree and First American Title Insurance Company (‘FATICO’ for short) which is also a group company. During the previous year relevant to the assessment year 2010-11, the assessee provided SWD services and ITE services to its Associated Enterprises, viz. Data Tree and FATICO. 3. In the TP Order dated 27.01.2014 passed by the TPO, he made an adjustment of Rs.2,92,93,318/- towards the assessee’s transaction of provision of SWD services and an adjustment of Rs.9,29,05,354/- towards the assessee’s transaction of provision of ITE services. Subsequently, the Assessing Officer (‘the AO’ for short) passed an assessment order dated 18.03.2014 in which he incorporated the aforesaid TP adjustments and also disallowed an amount of Rs.55,78,741/- from the deduction claimed under Section 10A of the Act by reducing the telecommunication charges and expenses incurred in foreign currency only from the export turnover without making a corresponding reduction of the said amounts from its total turnover. 4. Aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) – IV, Bangalore (‘the CIT(A)’ for short). IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 3 of 23 5. During the pendency of the appeal, the assessee entered into a unilateral Advance Pricing Agreement (‘APA’ for short) dated 28.03.2016 in respect of the international transactions of provision of SWD and ITE services to its AE, FATICO, for the period from AYs 2014-15 to 2018-19. The APA also covered the Rollback period of AYs 2010-11 to 2013-14, and thus included the AY in question in the above cross-appeals. The fact that the assessee entered into the above APA was brought to the notice of the CIT(A) by the assessee during the proceedings before him and the assessee, accordingly, withdrew the grounds in its appeal before the CIT(A) insofar as it related to the SWD and ITE services provided to FATICO. However, since the assessee did not have any transactions with its other AE, Data Tree, during the previous years relevant to AYs 2014-15 to 2018-19, the APA could not cover its transactions with Data Tree during AY 2010-11 as the Income-tax Rules, 1962 (‘the Rules’), do not permit APAs being entered into for the Rollback period if no such transactions take place during the period for which the APA is entered into. 6. Thereafter, the CIT(A) passed the impugned order dated 18.09.2017 vide which he granted partial relief to the assessee on the TP adjustment surviving insofar as it related to the SWD and ITE services provided by the assessee to its other AE, Data Tree, by accepting some of its contentions. Further, the CIT(A) granted relief to the assessee on the disallowance made under Section 10A by accepting its alternate contention on this issue. 7. To the extent it is aggrieved by the order passed by the CIT(A), the assessee has filed the above appeal before this Hon’ble Tribunal. So also, to IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 4 of 23 the extent the CIT(A) allowed the assessee’s grounds of appeal, the Revenue has filed the above appeal before this Hon’ble Tribunal. In view of the aforesaid APA entered into by the assessee in respect of its international transactions of provision of SWD and ITE services to its AE, FATICO, the cross-appeals filed before this Hon’ble Tribunal, insofar as they relate to the TP adjustment made by the TPO, survive only to the extent they pertain to the SWD and ITE services provided by the assessee to its other AE, viz. Data Tree, in FY 2009-10. The other aforesaid issue pertaining to the disallowance made under Section 10A also survives for consideration. 8. DETAILS OF THE ASSESSEE’S INTERNATIONAL TRANSACTIONS : Particulars Amount in Rs.Outcome of Transfer Pricing (“TP”) Order Software Development Services 84,46,80,097/- Adjustment of Rs.2,92,93,318/- Information Technology Enabled Services 36,81,19,896/-Adjustment of Rs.9,29,05,354/- 9. SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE ASSESSEE In so far as the SWD services segment is concerned, the assessee and the TPO proceeded to apply TNMM as the MAM for determining ALP under section 92 of the Act. The PLI chosen for the purpose of comparison of the assessee’s margin with comparable companies was OP/OC. Net margin on cost earned by Assessee (as reflected in the TP Order): Operating Income Rs. 29,64,92,641/- Operating Expenses Rs. 26,92,89,105/- Operating Profit (Op. Income – Op. Expenses) Rs. 2,72,03,536/- Operating/Net margin (OP/TC) 10.10% IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 5 of 23 Comparison of TP study done by assessee and TPO: Assessee TPO Methodology adopted TNMM TNMM Profit Level Indicator (PLI) OP/TC OP/TC Database used PROWESS & CAPITALINE PLUS PROWESS & CAPITALINE PLUS Comparables selected 16 11 10. The comparables selected by the TPO and the margin earned by these companies were as follows: Comparables selected by the TPO and their arithmetic mean: Sl. No. Name of the Company NCP Margins as per TPO Order (WC- Unadj) (%) NCP Margins as per TPO O65rder (WC- adj) (%) 1ICRA Techno Analytics Ltd.(Seg) 24.94 24.45 2Infosys Ltd. 44.98 44.48 3Kals Information Systems Ltd. (Seg) 34.41 30.21 4Larsen & Toubro Infotech Ltd. 19.33 19.20 5Mindtree Ltd. (seg) 14.83 12.52 6Persistent Systems & Solutions Ltd. 15.38 14.94 7Persistent Systems Ltd. 30.35 27.86 8R S Software (India) Ltd. 10.29 10.24 9Sasken Communication Technologies 17.36 16.18 10Tata Elxsi Ltd. 20.93 16.98 11Thinksoft Global Services Ltd. 17.05 13.75 AVERAGE MARGIN22.7120.98 IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 6 of 23 11. The TPO proceeded to compute the ALP and consequent addition to the total income as follows: Arm’s Length Mean Margin 22.71% Less: Working Capital Adjustment 1.73% Adjusted mean margin of the comparables 20.98% Operating Cost Rs. 26,92,89,105/- Arm’s Length Price (ALP) 120.98% of Operating Cost Rs. 32,57,85,959/- Price Received Rs. 29,64,92,641/- Short fall being adjustment u/S. 92CA Rs. 2,92,93,318/- 12. As already stated, during the pendency of the assessee’s appeal before the CIT(A), it entered into a unilateral APA dated 28.03.2016 in respect of the international transactions of provision of SWD and ITE services to its AE, FATICO, for the period from AYs 2014-15 to 2018-19. The APA also covered the Rollback period of AYs 2010-11 to 2013-14, and thus included the AY in question in the above cross-appeals. Accordingly, the assessee withdrew the grounds in its appeal before the CIT(A) insofar as it related to the SWD and ITE services provided to FATICO. However, since the assessee did not have any transactions with its other AE, Data Tree, during the previous years relevant to AYs 2014-15 to 2018-19, the APA could not cover its transactions with Data Tree during AY 2010-11 as the Rules do not permit APAs being entered into for the Rollback period if no such transactions take place during the period for which the APA is entered into. Nevertheless, since the functions performed, assets employed and risks assumed by the assessee for providing SWD and ITE services to Data Tree during the relevant previous year were the same as those in relation to the SWD and ITE services provided by it to FATICO, IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 7 of 23 the assessee requested the CIT(A) to apply the APA rates for the international transactions with Data Tree as well and, accordingly, dispose off the TP grounds in its appeal on this basis. However, the CIT(A) rejected the assessee’s request and proceeded to consider the TP grounds insofar as they pertain to the SWD and ITE services provided to Data Tree on merits. 13. The CIT(A) gave partial relief to the assessee in respect of determination of ALP in the SWD segment. The CIT(A) rejected the Assessee’s contentions that Infosys Ltd. and Persistent Systems Ltd. are not functionally comparable to its SWD service segment and consequently upheld their inclusion in the list of comparables. The CIT(A) accepted the Assessee’s contentions that Kals Information Systems Ltd., ICRA Techno Analytics Ltd. and Tata Elxsi Ltd. are functionally different to its SWD service segment and thus directed their exclusion form the list of comparables. Thinksoft Global Services Ltd., a company selected by the Assesse in its TP Study and accepted by the TPO as being comparable to it, was suo moto excluded by the CIT(A) on the ground that it is functionally different. The CIT(A) also held that the benefit of working capital adjustment is to be disallowed while computing the ALP of the above international transaction. 14. On giving effect to the order passed by the CIT(A), the final list of comparable companies and their respective margins, are as follows: IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 8 of 23 Sl. No. Name of the Company Mark-up on Total Costs (WC–unadj) (in %) 1.Infosys Ltd. 44.98 2.Larsen & Toubro Infotech Ltd. 19.33 3.Mindtree Ltd. (seg) 14.83 4.Persistent Systems & Solutions Ltd. 15.38 5.Persistent Systems Ltd. 30.35 6.RS Software (India) Ltd. 10.29 7.Sasken Communication Technologies Ltd. 17.36 ARITHMETICAL MEAN 21.79 15. In so far as the Revenue’s appeal in respect of determination of ALP in the SWD services segment is concerned, the grounds of appeal are: (i)That the CIT(A) erred in directing the exclusion of Kals Information Systems Ltd., ICRA Techno Analytics Ltd. and Tata Elxsi Ltd. as being functionally different. [Ground No.2] (ii)That the CIT(A) erred in not accepting the quantitative and qualitative filters applied by the TPO and in accordingly narrowing the functionality matrix used by the TPO by seeking exact comparability [Ground Nos.3 to 6] 16. In so far as the assessee’s appeal in respect of SWD services segment is concerned, the grounds that are being pressed are: That Infosys Ltd. and Persistent Systems Ltd. ought to be rejected from the list of comparables as being functionally dissimilar to the Assessee’s SWD service segment. [Ground No.6] 17. In so far as the Revenue’s appeal is concerned, in Ground No.2, the Revenue is challenging the exclusion of Kals Information Systems Ltd., ICRA Techno Analytics Ltd. and Tata Elxsi Ltd. as being functionally dissimilar to the assessee. IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 9 of 23 18. Kals Information Systems Ltd. : KALS is engaged in the development of software products and providing related services. It also provides implementation and maintenance of software products. It has developed a range of products such as Shine ERP software, Docuflo, Dac4Cast, CMSS, La Vision, Virtual Insure and Aldon, as is evident from its website. The annual report also confirms that the company is engaged in development of software and software products. The company holds significant inventories which account for 27% of the total current assets which demonstrates that it is a product development company as against a pure SWD service provider like the assessee. The functions carried out by Kals being substantially different, and therefore it ought to stand rejected as a comparable. 19. In the impugned order, the CIT(A) rightly noted the fact that Kals is engaged in development of software and software products and also has a training centre for training software professionals on online projects. It was also rightly noted by the CIT(A) that the revenue recognition policy of the company refers to software products. Pertinently, the CIT(A) gave a clear finding that there is no segmental information available in relation to software development and software products and, accordingly, he directed its exclusion. Since the Revenue has not placed any material on record challenging or controverting the above categorical findings, its exclusion is not liable to be interfered with by this Hon’ble Tribunal. 20. ITAT, Bengaluru Bench, in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang – Trib.) at paras 21-23] upheld exclusion of this company in the case of an assessee similar to the assessee herein. In the case of Target Corporation of India Pvt. Ltd. v. DCIT IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 10 of 23 [IT(TP)A No.343/Bang/2015], which was relied upon by the CIT(A) to direct exclusion of Kals, this Tribunal followed its aforesaid order in Electronics for Imaging while directing exclusion of Kals. 21. ICRA Techno Analytics Ltd.: This company is engaged in a diverse range of IT Solution Services. It is not a full-fledged software development company and provides such services among its other wide array of IT solution services like Business Analytics, IT Engineering and Business Process Outsourcing. This is evident from its annual report as well as the website extracts. Thus, functionally, the company is different from the assessee. Further, the services segment considered by the TPO contains revenues from all other business activities of the company such as engineering services, web development and hosting, business analytics and BPO services performed by ICRA and is not confined to SWD services. 22. ITAT, Bengaluru Bench, in the case of DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang – Trib.) at paras 14-16] upheld exclusion of this company in the case of an assessee similar to the assessee herein. In fact, the CIT(A) placed reliance on the said decision while directing the exclusion of ICRA and, hence, since the Revenue has not placed any material on record challenging or controverting the CIT(A)’s findings, its exclusion is not liable to be interfered with by this Hon’ble Tribunal. 23. Tata Elxsi Ltd.: For FY 2009-10, the company operated under two segments – (1) software development services and (2) systems integration and support. The business segment relating to software development and services considered by the TPO as being comparable to the assessee IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 11 of 23 comprises of services such as graphics, imaging & image processing, signal processing, routing and switching, VOIP, network management, product design services, innovation design services and visual computing labs which are related to high-end hardware and software product and development activities, which differ from routine SWD activities undertaken by the assessee. The company provides niche services which is not comparable to the low-end SWD services rendered by the assessee. Tata Elxsi has also invested heavily in R & D activities and has expenses amounting to nearly 3% of its sales which demonstrates that the company is engaged in innovation of products and services such as animation, content creation for advertisements as well as hardware related activities such as network management, engineering services capabilities for broadcast technology players, products for wireless communication etc. The difference in functions is evident from the annual report of the company. 24. This Tribunal, in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang – Trib.) at paras 30-33], upheld exclusion of this company in the case of an assessee similar to the assessee herein. In the case of Target Corporation of India Pvt. Ltd. v. DCIT [IT(TP)A No.343/Bang/2015], which was relied upon by the CIT(A) to direct exclusion of this company, this Tribunal followed its aforesaid order in Electronics for Imaging while directing exclusion of Tata Elxsi. 25. In the light of the aforesaid discussion, we find no merit in ground No.2 raised by the Revenue. Thus, the above ground is liable to be dismissed and the CIT(A)’s exclusion of the above 3 companies ought to be upheld by this Tribunal. IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 12 of 23 26. In so far as ground Nos.3 to 6 in the Revenue’s appeal is concerned, in these grounds, the Revenue is challenging the CIT(A)’s order to the extent he did not accept the quantitative and qualitative filters applied by the TPO and thereby narrowed the functionality matrix used by the TPO by seeking exact comparability. In this regard, we find that these grounds are general in nature calling for no specific adjudication from this Tribunal and are accordingly dismissed as such. 27. In so far as assessee’s appeal in respect of determination of ALP in SWD services segment is concerned, the assessee in ground No.6 is seeking exclusion of Infosys Ltd. and Persistent Systems Ltd. from the list of comparables. 28. Infosys Ltd. – We find that the turnover of this company for the year ended 31st March 2010 was Rs. 21,140 crores which is far higher than the turnover of the assessee. Infosys is a giant in the software development space while the assessee is a captive unit. The company also has high brand value and focusses on brand-building which occasions the high profits. Infosys owns products and leverages on its premium banking solution Finacle® as evidenced from its annual report. The company incurs sales and marketing expenses amounting to 4.6% of its sales and thus acts as an entrepreneur as against the assessee which is a captive unit. It also focusses heavily on R & D and thus the company is thus not comparable to the assessee. The company is being consistently excluded from the list of comparables in similar cases. This Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang – Trib.) at paras 17-20] upheld exclusion of this company in the case of an assessee similar to IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 13 of 23 the assessee herein. Hence, we direct exclusion of this company from the list of comparable companies. 29. Persistent Systems Ltd. - As afar as this company is concerned, that this company is engaged in rendering outsourced product development as against software development services and is thus not comparable to the assessee. This is evident from the annual report as well as the website extracts. Further, as per the annual report of the company, income is shown as “sale of software services and products” and no break-up is available between sale of software services and sale of products. The company is thus functionally dissimilar. In any event, during FY 2009-10, the company acquired assets in Paxonic Inc. and has been involved in merger / demerger activities and on account of this peculiar economic circumstance too, the company ought to be rejected as a comparable. This Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang – Trib.) at paras 24-26] upheld exclusion of this company in the case of an assessee similar to the assessee herein. We, therefore, direct exclusion of this company as a comparable company. 30. The other grounds raised in the appeal in relation to its international transaction of provision of SWD services were not pressed. The TPO is directed to compute ALP as per the directions contained in this order, after affording assessee opportunity of being heard. 31. Information Technology enabled Services Segment of the assessee: As far as the ITeS segment is concerned, it is not in dispute that TNMM was accepted as MAM for determining ALP. Net mark-up on cost earned by the assessee (as reflected in the TP Order), was as follows: IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 14 of 23 Operating Income Rs. 91,63,07,355/- Operating Expenses Rs. 79,67,88,812/- Operating Profit (Op. Income – Op. Expenses) Rs. 11,95,18,543/- Operating Profit/Operating Expense (OP/TC) 15% Comparison of the TP studies done by the assessee and TPO shows the following position: Assessee TPO Methodology adopted TNMM TNMM Profit Level Indicator (PLI) OP/TC OP/TC Database used PROWESS & CAPITALINE PLUS PROWESS & CAPITALINE PLUS Comparables selected 15 10 32. Comparables selected by TPO and their arithmetic mean: Sl. No. Name of the Company Mark up WC Unadj. (%) WC adjusted (%) 1 Accentia Technologies Ltd. 43.06 35.59 2 Acropetal Technologies Ltd. (Seg.) 22.27 17.67 3 E-Clerx Services Ltd. 55.97 52.98 4 Fortune Infotech Ltd. 22.80 20.05 5 ICRA Online Ltd. (seg) 43.39 40.72 6 Informed Technologies India Ltd. 26.15 25.94 7 Infosys BPO 31.23 28.68 8 Cosmic Global Ltd. 14.97 16.20 9 Sundaram Business Services Ltd. -12.31 -13.28 10 Jeevan Scientific Technology (seg) 21.05 37.99 ARITHMETIC MEAN 26.86 26.65 IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 15 of 23 33. The TPO computed ALP and consequent addition to total income as follows. Computation of arm’s length price by TPO and the adjustments made : Arm’s Length Mean Margin 26.86% Less: Working Capital Adjustment 0.20% Adjusted mean margin of the comparables 26.66% Operating Cost Rs.79,67,88,812/- Arm’s Length Price (ALP) 126.66 % of Operating Cost Rs.100,92,12,709/- Price Received Rs. 91,63,07,355/- Short fall being adjustment u/s. 92CA Rs. 9,29,05,354/- 34. As already stated, during the pendency of the assessee’s appeal before the CIT(A), it entered into a unilateral APA dated 28.03.2016 in respect of the international transactions of provision of SWD and ITE services to its AE, FATICO, for the period from AYs 2014-15 to 2018-19. The APA also covered the Rollback period of AYs 2010-11 to 2013-14, and thus included the AY in question in the above cross-appeals. Accordingly, the assessee withdrew the grounds in its appeal before the CIT(A) insofar as it related to the SWD and ITE services provided to FATICO. However, since the assessee did not have any transactions with its other AE, Data Tree, during the previous years relevant to AYs 2014-15 to 2018-19, the APA could not cover its transactions with Data Tree during AY 2010-11 as the Rules do not permit APAs being entered into for the Rollback period if no such transactions take place during the period for which the APA is entered into. Nevertheless, since the functions performed, assets employed and risks assumed by the assessee for providing SWD and ITE services to Data Tree during the relevant previous year were the same as those in relation to the IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 16 of 23 SWD and ITE services provided by it to FATICO, the assessee requested the CIT(A) to apply the APA rates for the international transactions with Data Tree as well and, accordingly, dispose off the TP grounds in its appeal on this basis. However, the CIT(A) rejected the assessee’s request and proceeded to consider the TP grounds insofar as they pertain to the SWD and ITE services provided to Data Tree on merits. 35. Briefly, the CIT(A) gave the following directions in his order: The CIT(A) rejected the assessee’s contentions that E-Clerx Services Ltd. and Infosys BPO Ltd. are not functionally comparable to its ITE service segment and consequently upheld their inclusion in the list of comparables. The CIT(A) accepted the assessee’s contention that Accentia Technologies Ltd. is functionally different to its ITE service segment and thus directed its exclusion form the list of comparables. The CIT(A) also held that the benefit of working capital adjustment is to be disallowed while computing the ALP of the above international transaction. 36. On giving effect to the order passed by the CIT(A), the final list of comparable companies and their respective margins, are as follows: SI. No.Name of the Company Mark-up on Total Costs (WC–unadj) (in %) 1. Acropetal Technologies Ltd. 22.27 2. E-Clerx Services Ltd. 55.97 3. Fortune Infotech Ltd. 22.8 4. ICRA Online Ltd. 43.39 5. Informed Technologies India Ltd. 26.15 IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 17 of 23 6. Infosys BPO Ltd. 31.23 7. Cosmic Global Ltd. 14.97 8. Sundaram Business Services Ltd. -12.31 9. Jeevan Scientific Technology Ltd. 21.05 ARITHMETICAL MEAN 25.06 37. In so far as the Revenue’s appeal relating to determination of ALP in ITeS segment is concerned, the grounds of appeal are: i. That the CIT(A) erred in directing the exclusion of Accentia Technologies Ltd. as being functionally different. [Ground No.2]. ii. That the CIT(A) erred in not accepting the quantitative and qualitative filters applied by the TPO and in accordingly narrowing the functionality matrix used by the TPO by seeking exact comparability [Ground Nos.3 to 6]. 38. In so far as it relates to assessee’s appeal, the ground which is being pressed is: That E-Clerx Services Ltd. and Infosys BPO Ltd. ought to be rejected from the list of comparables as being functionally dissimilar to the Assessee’s ITE service segment. [Ground No.6] 39. As far as Ground No.2 in the Revenue’s appeal is concerned, in this ground, the Revenue is challenging the exclusion of Accentia Technologies Ltd. as being functionally dissimilar to the assessee. Accentia is engaged in providing high end services in the nature of Knowledge Process Outsourcing (‘KPO’) which is evident from its annual report, unlike the Appellant. Further, the said company not only does medical transcriptions, but has also ventured into healthcare receivables cycle management and high end IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 18 of 23 consultancy to start-ups requiring field experts. Furthermore, as can be seen from its annual report, the company has ventured into coding to develop its own Electronic Medical Records (EMR) software and for this purpose, the company has invested huge sums. It is submitted that this activity is akin to software development activity, whereas the assessee is a mere provider of IT enabled services. Thus, it is apparent that the company is not only a provider of high-end services but is also engaged in the development of software products for the healthcare segment. What is more, segmental details for its various activities are unavailable. The company further owns significant intangibles. This clearly suggests that the company is an entrepreneurial company engaged in performing additional functions over and above routine functions by assuming high risks and developing intangible assets, which is completely unlike the functions performed and risks assumed by the Appellant. Furthermore, during the financial year 2009-10, Accentia acquired IQ group of companies, which are into software product design and development services. Therefore, during the current assessment year, the company suffers from an extraordinary event for which no reasonably accurate adjustment can be given to eliminate the material effects thereof on its margin. Hence, it is liable to be rejected as a comparable. 40. This Tribunal in DCIT v. Tesco Hindustan Service Centre (P.) Ltd. ([2017] 79 taxmann.com 259 (Bangalore – Trib)) at paras 9-13, ITO v. Interwoven Software Services Ltd. [2016] 74 taxmann.com 103 (Bangalore - Trib.) at para 20 and Zyme Solutions Pvt. Ltd. v. ITO [TS-65-ITAT- 2016(Bang)-TP] at paras 25-28 held Accentia to be functionally dissimilar to the assessees therein which are all similar to the assessee herein. In fact, the CIT(A) placed reliance on the said decision in Zyme Solutions while IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 19 of 23 directing the exclusion of accentia and, hence, since the Revenue has not placed any material on record challenging or controverting the CIT(A)’s findings, its exclusion is not liable to be interfered with by this Tribunal. Thus, the above ground is dismissed. 41. In so far as Ground Nos.3 to 6 in the Revenue’s appeal is concerned, in these grounds, the Revenue is challenging the CIT(A)’s order to the extent he did not accept the quantitative and qualitative filters applied by the TPO and thereby narrowed the functionality matrix used by the TPO by seeking exact comparability. These grounds are general in nature calling for no specific adjudication and are accordingly dismissed as such. 42. As far as assessee’s appeal is concerned, in ground No.6, the assessee is seeking the exclusion of E-Clerx Services Ltd. and Infosys BPO Ltd. from the list of comparables. 43. E-Clerx Services Ltd. - E-Clerx Service Ltd. provides data analysis, operating management, audits, reconciliation, metrics management and operating services. Further, it has two business verticals - financial services, retail and manufacturing and is recognized as an expert in these fields. Pertinently, it provides complete business solutions in the nature of high-end services. Thus, it is clearly a KPO service provider as it is mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the above fields. Hence, the nature and different field of services provided by this company clearly show that it cannot be compared with the assessee company which is mainly engaged in providing low-end services to its AEs. ITAT, Bengaluru, in DCIT v. Tesco Hindustan Service Centre (P.) Ltd. ([2017] 79 taxmann.com 259 (Bangalore – Trib)) at paras 14.1-14.2 and ITO v. Interwoven Software Services Ltd. [2016] 74 taxmann.com 103 IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 20 of 23 (Bangalore - Trib.) at para 21 excluded E-Clerx as functionally dissimilar to assessees which are similar to the assessee herein. 44. Infosys BPO Ltd. - This company is functionally dissimilar as it has substantial brand value, owns intellectual property rights and is a market leader with brand value. It is engaged in the provision of integrated IT and business process outsourcing solutions across a variety of verticals including Banking and Capital Markets, Communication Media and Entertainment, Manufacturing, Emerging Market Solutions, Insurance and Healthcare, Retail, Energy, Utilities and Resources, Automotive and Aerospace, Transportation and Services. The services rendered consist of Sourcing and procurement, customer service, financing and accounting, knowledge services and human resources. Further, the company is engaged in providing consultancy, management and strategic transformation services wherein business metrics and benchmarks developed by the company is used in assisting the client. The company is also engaged in the provision of cloud- based services such as ‘E-Discover’ as well as services in relation to compliance in Health, Safety and Environment. The company focuses of delivering solutions to its clients and, hence, these services cannot be compared to the services provided by the assessee. Also, Infosys BPO enjoys huge brand value and has also made significant investments in creating intangibles and owns several intellectual properties. In view of its substantial brand value, the company enjoys an advantage in the market and has high bargaining power. As a result of the brand value, the company receives a premium in the market. Therefore, Infosys BPO is not comparable to the assessee. Further, the company is being consistently excluded from the list of comparables in similar cases. IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 21 of 23 In DCIT v. Tesco Hindustan Service Centre (P.) Ltd. ([2017] 79 taxmann.com 259 (Bangalore – Trib)) at paras 15.1-15.4 Infosys BPO was held to be functionally dissimilar to the assessee therein which is similar to the Assessee herein. 45. Thus, ground No.6 raised by the assessee is allowed. The TPO is directed to compute ALP of the ITeS segment as per directions contained herein, after affording assessee opportunity of being heard. Therefore, the other grounds raised in the appeal in relation to its international transaction of provision of ITE services are not pressed at this stage. However, the assessee seeks liberty to urge the said grounds in any future proceeding, appellate or otherwise, and in these proceedings at a future point in time. 46. Ground Nos.7 and 8 in the Revenue’s appeal: The Assessee claimed a deduction of Rs.20,59,36,186/- under Section 10A of the Act. However, the AO recomputed the same by reducing only from the export turnover: (1) Rs.2,59,16,880/-, being telecommunication charges; and (2) Rs.50,24,876/-, being expenditure incurred in foreign currency. The AO did not, however, make a corresponding reduction of the said amounts from its total turnover. In this manner, the AO made a disallowance of an amount of Rs.55,78,741/- from the deduction claimed under Section 10A. In its appeal before the CIT(A), the Assessee contended that in the first place, the aforesaid telecommunication charges and expenses incurred in foreign currency should not be reduced from its export turnover while computing the deduction allowable to it under Section 10A. In the alternative, it contended that if the said amounts were to be reduced from its export turnover, then they should also be reduced from its total turnover in IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 22 of 23 terms of the decision of the Hon’ble High Court of Karnataka in CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98 (Kar). The CIT(A) accepted the Assessee’s contention by following the aforesaid decision in CIT v. Tata Elxsi Ltd. and directed the AO to reduce the above expenses both from the export turnover as well as the total turnover. In these grounds, the Revenue is challenging the CIT(A)’s order to the above extent. We are of the view that the CIT(A)’s order is right in law and on facts. The disallowance made by the AO is, therefore, directly contrary to the aforesaid decision of the jurisdictional High Court in CIT v. Tata Elxsi Ltd. which has now been affirmed by the Hon’ble Supreme Court in CIT v. HCL Technologies reported in [2018] 404 ITR 719 (SC). Therefore, in the light of the above judgment, the above grounds in the Revenue’s appeal are dismissed. 47. In the result, appeal of the Revenue is dismissed and that of the assessee is partly allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (CHANDRA POOJARI) (N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 02.02.2022. /NS/* IT(TP)A No.43/Bang/2014 ITA No.2586/Bang/2017 Page 23 of 23 Copy to: 1.Appellants2.Respondent 3.CIT4.CIT(A) 5.DR 6. Guard file By order Assistant Registrar, ITAT, Bangalore.