IVYComptecs Private Ltd., Hyderabad V. DCIT, Hyderabad

ITA 667/HYD/2008

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4844 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 6 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 23-06-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 11-04-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: HARILAL NAYAK; SOLGY JOSE T KATTARAM
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 92F

Judgement Text

+IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 667/HYD/2008 ASSESSMENT YEAR : 2004-05 IVY COMPTECH PVT. LTD., HYDERABAD. PAN: AAAC18884K VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 2(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI DEEPAK CHOPRA AND SHRI RAVI BHARADWAJ REVENUE BY : SHRI HARILAL NAYAK AND SHRI SOLGY JOSE T. KATTARAM DATE OF HEARING : 24-10-2013 DATE OF PRONOUNCEMENT : 31-10-2013 O R D E R PER B. RAMAKOTAIAH, A.M.: THIS APPEAL PREFERRED BY ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE CIT(A)-III, HYDERABAD, DATED 31/12/2007 FOR THE ASSESSMENT YEAR 2004-05. 2. THE CASE WAS ORIGINALLY HEARD ON 14-10-2013. IT WAS NOTICED LATER THAT ASSESSEE HAS MENTIONED IN THE WRITTEN SU BMISSIONS THAT ONE COMPARABLE WAS DELETED BY THE LEARNED CIT(A), WHICH WAS NOT CORRECT. THE CASE WAS PUT UP FOR CLARIFICATION AND AFTER DISCUSSION WITH PARTIES, THE CASE WAS TAKEN AS HEARD. 3. THE ISSUE INVOLVED IN THIS APPEAL IS WITH REFERE NCE TO THE ADDITION MADE BY THE AO ON THE BASIS OF TRANSFER PR ICING ADJUSTMENTS 2 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. SUGGESTED BY THE TPO VIDE HIS ORDER PASSED U/S 92CA (3) OF THE ACT ON 22-12-2006. THE AO MADE THE ADDITION OF RS. 5,64 ,94,497/- IN RESPECT OF BPO/ITES SERVICES AND ADDITION OF RS. 46 ,41,194/- IN RESPECT OF SOFTWARE SERVICES BEING TWO SEGMENTS OF ASSESSEES BUSINESS UNDER TRANSFER PRICING PROVISIONS. 4. ON APPEAL, THE CIT(A) DELETED THE ADDITION ALTOG ETHER WITH REFERENCE TO THE SOFTWARE SERVICES AND THE ADDITION TOWARDS BPO/ITES WAS PARTLY MODIFIED BY THE CIT(A) SUSTAINING THE AD DITION TO THE EXTENT OF RS. 4,94,26,276/-. THE ADJUSTMENT IN THE SOFTWAR E DIVISION IS NOT BEFORE US AS REVENUE IS NOT IN APPEAL ON THAT, WHIC H WAS DELETED BY THE CIT(A). THE ISSUE BEFORE US IS WITH REFERENCE T O THE ADDITION UNDER TP PROVISIONS ON BPO/ITES SERVICES. 5. ASSESSEE, IVY COMPTECH PVT. LTD. IS A COMPANY PR IMARILY ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND PROVISION FOR INFORMATION TECHNOLOGY ENABLED SERVICES. ASSESSEE P ROVIDES THESE SERVICES TO ITS GROUP COMPANIES. ITS OFFICE IS SITU ATED IN HYDERABAD AND IT IS REGISTERED AS SOFTWARE TECHNOLOGY PARK (S TP) WITH SOFTWARE TECHNOLOGY PARKS OF INDIA, HYDERABAD. ASSE SSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS G ROUP CONCERNS. IT HAS REVENUES IN SOFTWARE DEVELOPMENT ABOUT RS. 12.85 C RORES AND ITES ABOUT RS. 40.69 CRORES, TOTALING TO RS. 53.54 CRORE S. ASSESSEE HAS ARRANGEMENT WITH THE GROUP CONCERNS TO REIMBURSE AT 15% OF THE ACTUAL COST INCURRED ON A COST PLUS METHOD, ACCORDI NGLY IT HAS OFFERED OPERATING PROFIT ON COST AT 15.01% ON IT ENABLED SE RVICES. ASSESSEE ADOPTED IN ITS TP STUDY AVERAGE TWO YEARS DATA OF 6 COMPARABLE COMPANIES, WHOSE OPERATING PROFIT ON COST HAS COME TO AVERAGE OF 9.33%. ASSESSEE COMPARABLES ARE AS UNDER: 1) ACE SOFTWARE EXPRESS LTD. 2) CS SOFTWARE ENTERPRISE 3) MAX HEALTH SCRIBE LTD. 3 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. 4) NORTHGATE BPO SERVICES LTD. 5) NUCELUS NETSOFT & GIS INDIA LTD. 6) MERCURY OUTSOURCING MANAGEMENT LTD. 6. THE TPO VIDE HIS ORDER HAS ACCEPTED ONLY TWO COM PARABLES I.E. M/S NUCLEUS NET SOFT AND GIS INDIA LTD, WHOSE OPERA TING PROFIT ON COST WAS AT 16.87% AND M/S MERCURY OUTSOURCING MANA GEMENT LTD., WHOSE OPERATING COST WAS ULTIMATELY ARRIVED AT 5.88 %. IN ADDITION TO THE TWO OUT OF 6 COMPARABLES SELECTED, THE TPO HAS SELECTED 5 MORE COMPARABLES. 7. THE TPO SELECTED THE FOLLOWING 5 COMPANIES INCLU DIBLE FOR COMPARISON: A) SPANCO TELESYSTEMS & SOLUTIONS LTD., B) VISHAL INFORMATION TECHNOLOGIES FORTUNE INFOTEC H LTD. C) FORTUNE INFOTECH LTD. D) TRICOM INDIA LTD. E) WIPRO BPO SOLUTIONS LTD. 8. AFTER OBTAINING ASSESSEES OBJECTIONS, TPO INCL UDED THEM AS FUNCTIONALLY COMPARABLE TO ASSESSEES BUSINESS ACTI VITIES AND ARRIVED AT ARITHMETIC MEAN AT 33% OF OPERATING PROFIT TO TH E COST. FROM THIS AVERAGE PLI DETERMINED, THE AO ALLOWED WORKING CAPI TAL ADJUSTMENT OF 2% AND ARRIVED AT THE REVISED PLI AT 31%. THERE AFTER, ON THE OPERATING COST OF 34.35, HE ARRIVED ARMS LENGTH PR ICE AT 46.29 CRORES AND BY REDUCING THE PRICE RECEIVED BY ASSESSEE, MAD E AN ADDITION OF RS. 5,64,94,497/-. 9. ASSESSEE OBJECTED BEFORE THE CIT(A) THAT 4 COMPA RABLES SELECTED BY IT WERE REJECTED BY THE TPO WITHOUT ANY VALID REASON. THE LEARNED CIT(A) EVEN THOUGH MENTIONED THAT HE WAS DI SCUSSING ( OUT OF FOUR COMPARABLES SELECTED BY ASSESSEE) 3 COMPARABLE S REJECTED BY 4 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. THE TPO, ( 4 TH ONE BEING ACCEPTED BY ASSESSEE) BY HOWEVER, WENT O N TO DISCUSS OTHER COMPARABLES ALSO, ON WHICH ASSESSE E HAS NOT PLACED ITS ARGUMENTS. ULTIMATELY, THE LEARNED CIT(A) REJEC TED THE COMPARABILITY OF MERCURY OUTSOURCING MANAGEMENT LTD ., WHICH WAS ACCEPTED BY THE TPO ALONG WITH ASSESSEE AS COMPARAB LE, ON THE REASON THAT FUNCTIONAL PROFILE OF THE COMPANY IS QU ITE DIFFERENT (AS DISCUSSED IN PARA 6.7.1 OF HIS ORDER IN PAGE 19). T HUS, OUT OF ASSESSEES COMPARABLES ONLY ONE COMPANY WAS ACCEPTE D BY THE CIT(A). 10. OUT OF THE COMPANIES SELECTED BY TPO, ASSESSEE OBJECTED TO THE INCLUSION OF FORTUNE INFOTECK LTD., TRICOM INDI A AND WIPRO BPO SOLUTIONS LTD. WHILE ACCEPTING SPANCO TELESYSTEMS S OLUTIONS LTD. AND VISHAL TECHNOLOGIES. EVEN THOUGH ASSESSEE OBJECTED TO 3 COMPARABLES AS CAN BE SEEN FROM THE SUBMISSIONS BEF ORE THE CIT(A) VIDE LETTER DATED 12-07-2007 PLACED IN THE PAPER BO OK AT PAGE 102 ONWARDS, THE LEARNED CIT(A) WENT ON TO DECIDE ABOUT 4 COMPARABLES VIDE PARA 6.8.2. HE ACCEPTED THAT PROFITS OF M/S FO RTUNE INFOTECH LTD. CANNOT BE INCLUDED AS COMPARABLE BECAUSE OF ABNORMA L VARIATION IN PROFITABILITY ON WHICH REVENUE IS NOT IN APPEAL. WI TH REFERENCE TO TRICOM INDIA LTD., HE ACCEPTED IT AS A COMPARABLE. WITH REFERENCE TO WIPRO BPO SOLUTIONS, ASSESSEES OBJECTION THAT IT HAS MORE THAN 10 TIMES TURNOVER THAN ASSESSEE AND HENCE NOT COMPARAB LE ON ACCOUNT OF ADJUSTABILITY ON THE SCALE OF TRANSACTIONS WAS N OT ACCEPTED BY THE CIT(A) AND INCLUDED IN THE LIST OF COMPARABLES. HOW EVER, IN PARA 6.9, THE LEARNED CIT(A) HAS ARRIVED AT THE AVERAGE PROFI T MARGIN OF ONLY 3 COMPANIES I.E. NUCLEUS NET SOFT & GIS INDIA LTD. (A CCEPTED BY ASSESSEE AND TPO), TRICOM INDIA LTD. AND WIPRO BPO SOLUTIONS, OUT OF THE SELECTION OF TPO. HE LEFT OUT THE COMPARABLE SPANCO TELESYSTEMS & SOLUTIONS LTD. ACCEPTED BY BOTH THE P ARTIES WITHOUT DISCUSSING ANYTHING AND LEARNED CIT(A) DID NOT IN CLUDE THE SAME IN THE FINAL LIST PREPARED BY HIM IN PARA 6.9. HE ARRI VED AT THE FINAL 5 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. MARGIN AT 32% OF OPERATING PROFIT TO COST ON THE BA SIS OF THREE COMPARABLES, THEN GAVE ADDITIONAL 1% ADJUSTMENT FOR MINOR FUNCTIONAL DIFFERENCE AND CONFIRMED THE ADDITION AT RS. 4,94,2 6,276/-. 11. ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF AP PEAL: BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE APPELLANT RESPECTFULLY SUBMITS THAT THE LEARNED CIT (A)-III, HYDERABAD ERRED ON THE FOLLOWING GROUNDS WHILE DETE RMINING THE ARMS LENGTH PRICE FOR THE INFORMATION TECHNOLOGY E NABLED SERVICES UNDER CHAPTER X OF THE ACT AT RS. 455,900, 296/- AS AGAINST THE ARMS LENGTH PRICE OF RS. 406,474,020 A S DETERMINED BY THE APPELLANT: I) ERRED IN NOT ACCEPTING THE COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT. II) ERRED IN ACCEPTING THE COMPARABLE COMPANIES IDE NTIFIED BY THE ADDL. CIT (TRANSFER PRICING), HYDERABAD. III) ERRED IN REJECTING ONE OF THE COMPARABLES ACCE PTED BY BOTH THE TPO AND THE APPELLANT IV) ERRED IN CONFIRMING THE ACTION OF TPO IN CONSID ERING THE COMPARABLE COMPANIES WHICH WERE NOT IN EXISTENCE IN THE PUBLIC DOMAIN AT THE TIME OF APPELLANT FILING ITS RETURN O F INCOME FOR THE PURPOSE OF THE TRANSFER PRICING ANALYSIS. V) ERRED IN CONFIRMING THE ACTION OF THE TPO IN IGN ORING THE PROVISIONS OF RULE 10B(4) OF THE RULES, WHICH AUTHO RIZE USAGE OF MULTIPLE YEAR DATA OF COMPARABLE COMPANIES FOR T HE PURPOSE OF DETERMINATION OF THE ARMS LENGTH PRICE AS DEFIN ED U/S 92F OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T, SUBSTITUTE OR AMEND THE ABOVE GROUND OF APPEAL, AT ANY TIME BE FORE OR AT THE TIME OF HEARING OF THE APPEAL, SO AS TO ENABLE THE INCOME- TAX APPELLATE TRIBUNAL TO DECIDE THIS APPEAL ACCORD ING TO LAW. 6 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. 12. THE LEARNED COUNSEL WHILE EXPLAINING THE FACTS, HOWEVER, RESTRICTED HIS ARGUMENTS TO THE EXCLUSION BY LD. CI T(A) OF MERCURY OUTSOURCING MANAGEMENT LTD., WHICH WAS ACCEPTED BY BOTH THE PARTIES I.E. ASSESSEE AND TPO AND HAS NOT CONTESTED BEFORE THE CIT(A). HE ALSO RESTRICTED HIS ARGUMENTS TO THE EXC LUSION OF WIPRO BPO SOLUTIONS LTD, WHICH HAS HIGH RANGE OF TURNOVER BASED ON THE DECISIONS OF COORDINATE BENCHES AT BANGALORE AND HY DERABAD AND ALSO THE DECISION OF HONBLE DELHI HIGH COURT IN TH E CASE OF AGNITY INDIA LTD. HE ALSO MADE SUBMISSIONS ON SPACO TELESY STEMS & SOLUTIONS LTD. 13. THE CONTENTION OF ASSESSEE WITH REFERENCE TO ME RCURY OUTSOURCING MANAGEMENTS WHOSE PLI IS AT 5.88% WAS THAT IT WAS HELD FUNCTIONALLY COMPARABLE BY TPO AND AO, WHICH T HE CIT(A) CANNOT REJECT. THE LEARNED COUNSEL, THEN, REFERRED TO THE SUBMISSIONS MADE BEFORE THE TPO AND BEFORE THE CIT(A) TO SUBMIT THAT MERCURY OUTSOURCING MANAGEMENT LTD. WAS CONSIDERED AS A BPO AND ACCEPTED BY ASSESSEE (PB-421). ACCORDINGLY, BOTH TH E AO AND TPO HAVE ACCEPTED IT AS FUNCTIONALLY COMPARABLE. HE FUR THER POINTED OUT TO THE FINDING OF THE CIT(A) THAT IT IS FUNCTIONALLY DIFFERENT WITHOUT ANY VALID REASON. HE CONTENDED THAT THE CIT(A) HAS NO ROLE TO PLAY IN REJECTING THE SAME BY HIS ANALYSIS. HE RELIED ON TH E DECISION OF ITAT, MUMBAI BENCH IN THE CASE OF CARLYLE INDIA ADVISORS PVT. LTD. VS. ACIT IN ITA NO. 7901/MUM/2011 FOR AY 2007-08 DTD. 0 4-04-2012. HE POINTED OUT TO THE FINDING OF THE BENCH VIDE PARA 3 0 OF ITS ORDER, WHICH IS AS FOLLOWS: 30. THE ONLY COMPARABLE CHOSEN BY ASSESSEE VIZ., M/S.IDC INDIA LTD., WHICH HAS ALSO BEEN RELIED UPO N BY THE TPO NOW SURVIVES FOR CONSIDERATION. THE COMPARA BLES CHOSEN BY ASSESSEE ON THE BASIS OF THE CONTEMPORANE OUS DATA FOR A.Y 2006-07 GIVES AN ARITHMETIC MEAN OF 18 .97% WHICH WE HAVE ALREADY MENTIONED. THIS IS THE HIGHES T ARITHMETIC MEAN OF THE COMPARABLE CHOSEN BY ASSESS EE. EVEN IF THIS ARITHMETIC MEAN IS TAKEN TO BE REFLECT ING THE OPERATING MARGIN OF THE COMPARABLE COMPANIES, THE S AME IS 7 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. WITHIN 5% RANGE OF THE OPERATING MARGIN OF ASSESSEE . WE FIND THAT THE TPO HAS NOT GIVEN ANY REASON WHATSOEV ER FOR REJECTING THESE COMPARABLES. AS WE HAVE ALREADY EXP LAINED THE REASONS GIVEN BY THE TPO DOES NOT ANY WHERE MENTIONED AS TO HOW THE COMPARABLES SELECTED BY ASS ESSEE WERE NOT FUNCTIONALLY COMPARABLE. THIS TRIBUNAL IN THE CASE OF MAESERKS GLOBAL SERVICE CENTRE INDIA PVT. LTD., IN ITA NO.3774/M/11, HAS TAKEN THE VIEW THAT IF TPO DOES N OT REJECT A COMPARABLE ON THE GROUND OF FUNCTIONAL INCOMPARAB ILITY THEN NEITHER THE AO OR THE REVENUE CAN TAKE A PLEA OF FUNCTIONAL IN COMPARABILITY OF THE COMPARABLES CHOS EN BY ASSESSEE IN ITS TP STUDY. WE ARE, THEREFORE, OF THE VIEW THAT ASSESSEES OPERATIVE MARGIN HAS TO BE HELD AS WITHI N THE RANGE OF 5% OF THE ARITHMETIC MEAN OF 18.97% OF COM PARABLE COMPANIES AND THE SAME HAS TO BE ACCEPTED AS ALP. F OR THE REASONS GIVEN ABOVE, THE ADDITION MADE BY THE A O AND CONFIRMED BY THE DRP IS DIRECTED TO BE DELETED. IT WAS HIS CONTENTION THAT THIS COMPANY IS REQUIRED TO BE INCLUDED AS COMPARABLE. 14. WITH REFERENCE TO WIPRO BPO SOLUTIONS LTD., LD. COUNSEL RELIED ON THE COORDINATE BENCH DECISION OF ITAT B BENCH IN THE CASE OF 24/7 PVT. LTD. VS. DCIT WHEREIN THE WIPRO BPO SOLUT IONS WAS EXCLUDED ON THE BASIS OF TURNOVER FOR THE RELEVANT PERIOD. HE, THEN, RELIED ON THE ORDER OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. DATED 10-07 -2013 WHEREIN THE HONBLE HIGH COURT ACCEPTED THE FINDING OF ITAT WH ERE IT REJECTED COMPARABLE OF INFOSYS TECHNOLOGIES FOR THE REASON T HAT IT WAS A GIANT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE AND IT ASSUMED OF RISKS LEADING TO HIGHER PROFITS WHEREAS RESPONDENT- ASSESSEE CAPTIVE UNIT OF ASSESSEE COMPANY ASSUMED ONLY LIMITED RISK. HE RELIED ON THIS DECISION TO SUBMIT THAT WIPROS TURNOVER BEING AT 4 30 CRORES CANNOT BE COMPARED WITH ASSESSEES TURNOVER OF RS. 40 CROR ES. THEREFORE, HE SUBMITTED THAT THE SAME IS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 8 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. 15. AS REGARDS SPANCO TELESYSTEMS & SOLUTIONS LTD. , THE LEARNED COUNSEL SUBMITTED THAT THIS COMPARABLE WAS NOT DISC USSED BY THE CIT(A). ASSESSEE IN THE TABLE PROVIDED IN PAPER BOO K STATED THAT THIS COMPARABLE WAS DELETED BY CIT(A) BUT WHEN POINTED O UT, THE LEARNED COUNSEL ADMITTED THE MISTAKE AND SUBMITTED THAT THE SAME CIT(A) FOR THE SAME ASSESSMENT YEAR IN ANOTHER CASE HAS CONSID ERED AND DELETED SPANCO TELESYSTEMS, CONSEQUENTLY, THE MISTA KE OCCURRED. THEN ON MERITS, IT WAS SUBMITTED THAT LEARNED CIT(A ) IN ANOTHER CASE OF HSBC ELECTRONIC DATA PROCESSING INDIA PVT. LTD., FOR THE SAME AY IN ITA NO. 379/DCIT CIR-2(2)/CIT(A)-III/06-07, DATE D 18-10-2007 CONSIDERED AND HELD AS UNDER: (III) SPANCO TELESYSTEMS & SOLUTIONS LTD.:- THE OPERATING PROFIT MARGIN OF THIS COMPANY HAS BEE N SHOWN TO BE ABOUT 40% FOR THE FINANCIAL YEAR. THE APPELLANT HAS OBJECTED TO ADOPTION OF THIS COMPANY ON THE GROUND THAT IT H AD RELATED PARTY TRANSACTIONS. ON DUE CONSIDERATION, I FIND THAT ALTHOUGH THE RELA TED PARTY TRANSACTIONS OF THIS COMPANY ARE NOT VERY SUBSTANTI AL, THIS COMPANY CANNOT BE ADOPTED AS A RELIABLE COMPARABLE, SINCE IT HAS SHOWN ABNORMAL VARIATIONS IN OPERATING PROFIT O VER THE YEARS. IN THE LAST YEAR, ITS OPERATING MARGIN WAS O NLY 4.22%, WHILE THIS YEAR IT HAS SHOWN A PROFIT MARGIN OF ABO UT 40% WHICH IS ABOUT 9 TIMES OF THE EARLIER YEARS OPERATING PR OFIT MARGIN. IN MY CONSIDERED OPINION A COMPANY HAVING ABNORMAL VAR IATION OF PROFIT SHOULD NOT BE ADOPTED AS A COMPARABLE IN TNM M ANALYSIS. I ALSO FIND THAT THIS COMPANY WAS EXCLUDE D IN THE COMPARABILITY ANALYSIS OF AY 2003-04 ALSO ON THE BA SIS OF FUNCTIONAL DIFFERENCE WITH THE APPELLANT. CONSIDERI NG ALL THESE FACTORS, I DO NOT CONSIDER IT APPROPRIATE TO ADOPT THIS COMPANY AS A COMPARABLE FOR THE COMPUTATION OF AVERAGE PROF IT MARGIN. 16. IT IS ALSO FURTHER SUBMITTED THAT THE COORDINAT E BENCH IN THE CASE OF M/S DELOITTE CONSULTING INDIA PVT. LTD., IN ITA NO. 1082/HYD/2010 FOR AY 2004-05 VIDE ORDER DATED 22-07-12 ALSO CONSI DERED THE SAME COMPARABLE AND HELD VIDE PARA 35 AS UNDER: 35. NOW, WE TURN TO THE ISSUE RELATING TO THE SELEC TION OF SPANCO TELE-SYSTEM AS COMPARABLE COMPANY IN THE BAC K OFFICE 9 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. SERVICES SEGMENT BY THE TPO. WE FIND THAT THE TPO H AS APPLIED THE CRITERIA OF EXCLUDING THE COMPANIES HAVING RELA TED PARTY TRANSACTION OF MORE THAN 25% OF THE TURNOVER FORM T HE LIST OF COMPARABLE COMPANIES. HAVING DONE SO, THE TPO SHOUL D HAVE EXCLUDED THE SPANCO TELESYSTEM FROM THE LIST OF COM PARABLE COMPANIES AS IT IS EVIDENT FORM THE PAPER BOOK FILE D BY ASSESSEE COMPANY THAT THE PERCENTAGE OF RELATED PAR TY TRANSACTION IN THE CASE OF SPANCO TELESYSTEM IS 28. 73% AND IT FAILS TO SATISFY THE TPOS OWN CRITERIA. IN VIEW OF THIS MATTER, WE FIND FORCE IN THE ARGUMENTS OF THE LEARNED COUNSEL FOR ASSESSEE THAT SPANCO TELESYSTEMS SHOULD BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE COMPANIES. WE DIRECT ACCORDINGLY. THE LEARNED COUNSEL RELIED ON THE ABOVE TO SUBMIT T HAT SPANCO TELESYSTEMS HAS TO BE EXCLUDED AS COMPARABLE AS IT DOES NOT SATISFY THE FILTERS PROPOSED AND IS FUNCTIONALLY DIFFERENT. 17. THE LEARNED CIT-DR, HOWEVER, REITERATED THE FIN DINGS OF THE CIT(A) TO SUPPORT THAT THE ORDER OF THE CIT(A) IS V ERY REASONABLE AND ON THE BASIS OF FACTS. 18. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE P APER BOOKS AND DOCUMENTS PLACED ON RECORD. AS FAR AS ASSESSEE S SIX COMPARABLES ARE CONCERNED, THERE IS NO DISPUTE THAT 4 COMPARABLES SELECTED BY ASSESSEE ARE NOT COMPARABLE EITHER ON F UNCTIONAL PROFILE OR ON OTHER PARAMETERS AS CONSIDERED BY TPO AND ACC EPTED BY ASSESSEE AFTER CIT(A)S ORDER. THERE IS NO DISPUTE WITH REFERENCE TO TWO COMPARABLES I.E. NUCLEUS NET SOFT & GIS INDIA, WHOSE OPERATING PROFIT BY COST IS AT 16.87%, WHICH IS ACCEPTED AS C OMPARABLE BY ASSESSEE AND TPO. THE OTHER COMPANY, WHICH IS ALSO ACCEPTED BY ASSESSEE AND TPO ARE MERCURY OUTSOURCING MANAGEMENT LTD., WHOSE OPERATING PROFIT BY COST IS AT 5.88%. WE ARE OF THE OPINION THAT WHEN TPO AND ASSESSEE ACCEPTED A PARTICULAR COMPANY AS FUNCTIONALLY COMPARABLE AND WHEN ASSESSEE HAS NOT A GITATED BEFORE THE CIT(A), IT CANNOT BE EXCLUDED FROM LIST OF COM PARABLES. CIT(A) MAY HAVE ORIGINAL JURISDICTION COTERMINOUS WITH AO, BUT, WHEN THE 10 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. ISSUE IS NOT AGITATED, WE ARE OF THE OPINION THAT H E CANNOT REVIEW THE DECISION OF AO/TPO ON SELECTION OF COMPARABLES. ONL Y WHEN CONTESTED, HE CAN CONSIDER THE ISSUE FOR ADJUDICATI ON BUT WHEN ACCEPTED BY BOTH PARTIES, IT COMES UNDER REVIEW AS CIT(A) FUNCTIONS AS AO ONLY. HE DOES NOT HAVE POWER OF REVIEW OR REV ISION ON ORDER OF AO WHICH WAS WITH CIT(ADMN.) U/S 263/ 264. THEREFOR E WE AGREE WITH ASSESSEES CONTENTION THAT THE SAID COMPARABLE CAN NOT BE EXCLUDED. 19. COMING TO THE COMPARABLES SELECTED BY TPO, ASSE SSEE CONTESTED THE FOLLOWING TWO COMPARABLES, ULTIMATELY APPROVED BY THE CIT(A). A . SPANCO TELESYSTEMS & SOLUTIONS LTD.: AS BRIEFLY STATED EARLIER, THIS COMPARABLE WAS NOT CONTESTED BEFORE THE CIT(A) AND AS STATED CIT(A) ALSO HAS NOT DECIDED ABOUT THIS, AS THERE IS NO OBJECTION FROM ASSESSEE BEFORE HIM. THE FACT IS THAT WHILE ULTIMAT ELY COMPUTING THE AVERAGE PLI, THE LEARNED CIT(A) DID NOT INCLUDE THI S COMPARABLE IN FINAL LIST, THEREFORE, THIS COMPARABLE GOT EXCLUDED , MORE PROBABLY BY MISTAKE. BEFORE US, THE LEARNED COUNSELS CONTENTI ONS WERE THAT THIS COMPARABLE WAS DELETED BY THE LEARNED CIT(A) IN ANO THER COMPANY AND ALSO EXCLUDED BY THE ITAT IN THE COORDINATE BEN CH DECISION IN CASE OF DELLOITE CONSULTING INDIA PVT. LTD. WHILE N OT DISPUTING THE ABOVE SUBMISSIONS OF ASSESSEE, WE HOWEVER, ARE NOT IN A POSITION TO ACCEPT THE CONTENTIONS RAISED BEFORE US. FIRST OF A LL, THIS COMPANY WAS ACCEPTED AS COMPARABLE BEFORE THE CIT(A) AFTER TPO HAS SELECTED IT. THEREFORE, ON THE SAME PRINCIPLES AS THAT OF THE DI SCUSSION MADE IN THE CASE OF MERCURY OUTSOURCING MANAGEMENT LTD ABOV E, WE ARE OF THE OPINION THAT THIS COMPARABLE CANNOT BE EXCLUDED . AS SEEN FROM THE FINANCIALS ALSO, WE DO NOT SEE ANY REASON TO EX CLUDE THE SAME. IN THE CASE OF HSBC ELECTRONIC DATA PROCESSING INDIA P VT. LTD., THE LEARNED CIT(A) EXCLUDED ON THE REASON OF ABNORMAL P ROFIT WHEN COMPARED TO THE EARLIER YEAR, HOWEVER, THERE IS NO SUCH ARGUMENT BY ASSESSEE IN THIS YEAR. IN FACT, BOTH TPO AND ASSESS EE HAVE AGREED THAT PROFIT MARGIN IS REASONABLE FOR THE YEAR AND N O SPECIFIC OBJECTION 11 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. WAS RAISED EITHER ON THE OPERATING PROFIT MARGIN ON THE RELATED PARTY TRANSACTIONS, WHICH WERE DECIDED IN ANOTHER CASE. S INCE ASSESSEE HAS NOT SPECIFICALLY RAISED ANY OBJECTION ON THIS C OMPARABLE BEFORE THE LEARNED CIT(A), WE DO NOT SEE ANY REASON TO EXC LUDE THE SAME FROM THE LIST OF COMPARABLES ULTIMATELY APPROVED BY THE TPO. WE DIRECT THE AO TO INCLUDE THIS COMPARABLE AS IT WAS MISTAKENLY EXCLUDED BY THE CIT(A), WITHOUT ANY DISCUSSION. B. WIPRO BPO SOLUTIONS LTD: NEXT COMPARABLE OBJECTED TO BY ASSESSEE IS WIPRO BPO SOLUTIONS LTD. ON THE BASIS O F TURNOVER FILTER. IT IS TRUE THAT COORDINATE BENCHES OF ITAT HAVE CON SIDERED TURNOVER FILTER AS ONE OF THE VALID REASONS TO EXCLUDE A COM PARABLE. IN THE CASE RELIED UPON BY ASSESSEE IN THE CASE OF AGNITY INDIA LTD. (SUPRA), THE HONBLE DELHI HIGH COURT HAS CONSIDERED THE PRINCIP LE OF TURNOVER PARAMETER AS ONE OF THE CONSIDERATION AND HAS ACCEP TED THE SAID COMPANY AS NOT COMPARABLE WITH THE ASSESSEE COMPANY . HOWEVER, IN ASESSEES CASE APPLYING THIS COMPARABLE FILTER FOR EXCLUDING WIPRO BPO SOLUTIONS LTD. CANNOT BE ACCEPTED AS ASSESSEE H AS ACCEPTED OTHER COMPARABLES IN THE CASE OF LOWER TURNOVER FIL TER. FOR EXAMPLE, ONE COMPARABLE, WHICH ASSESSEE HAS SELECTED AND HAS NOT OBJECTED BEFORE TPO OR BEFORE CIT(A) IS NUCLEUS NET SOFT AND GIS INDIA LTD., WHOSE OPERATING PROFIT ON COST WAS ACCEPTED AT 16.8 7% AND THE TURNOVER IN THIS CASE AS REPORTED IN VARIOUS STATEM ENTS WAS ABOUT 1.95 CRORES ONLY AS AGAINST ASSESSEES TURNOVER OF RS. 53.54 CRORES.( RATIO OF 1:26 APPROX) LIKEWISE, IN THE CASE OF MERC URY OUTSOURCING MANAGEMENT LTD., EVEN THOUGH THE ANNUAL REPORT SHOW ING THE TURNOVER OF RS. 17.24 LAKHS, IN OTHER STATEMENTS, T HE TURNOVER WAS CONSIDERED AT RS. 1.08 CRORES. (RATIO OF 1: 52 APPR OX). WHEN ASSESSEE HAS NO OBJECTION FOR INCLUSION OF NUCLEUS NET SOFT AND GIS INDIA LTD. AND MERCURY OUTSOURCING MANAGEMENT LTD. AS COMPARABLES, WHICH HAVE ALMOST MEAGER TURNOVER WHEN COMPARED TO ASSESSEES TURNOVER, WHY ASSESSEE RAISED OBJECTION TO THE TURNOVER OF WIPRO BPO SOLUTIONS, WHICH IS AT 430 CRORES AND THE SAME IS ABOUT 12 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. 10 TIMES HIGHER THAN THE ASSESSEES TURNOVER COULD NOT BE UNDERSTOOD. WHEN ON FUNCTIONAL PARAMETERS, COMPANIE S ARE CONSIDERED SIMILAR IN BUSINESS PROFILE, CONSIDERING THE TURNOVER ALONE FOR EXCLUSION OF COMPARABLE IS NOT CORRECT. IN FACT , THE COORDINATE BENCH IN THE CASE OF SIMONTEC SOFTWARE SOLUTIONS PV T. LTD. VS. ACIT, 46 SOT 48 (MUM) (TRIB.) HELD THAT IF THERE IS NOTHI NG TO SHOW THAT THE DIFFERENCE IN TURNOVER MADE THAT COMPARABLES NON-CO MPARABLE, THESE CANNOT BE EXCLUDED ON THE BASIS OF DIFFERENCE IN TU RNOVER. LIKEWISE, IN THE CASE OF CAPGEMINI INDIA PVT. LD. VS. ACIT, 33 T AXMAN.COM 5(MUM.) (TRIB.), IT WAS HELD THAT ECONOMY OF SCALE WAS NOT RELEVANT IN THE CASE OF SERVICE COMPANY. UNDER RULE 10B(2) COMP ARABILITY OF INTERNATIONAL TRANSACTIONS WITH UNCONTROLLED TRANSA CTIONS HAS TO BE JUDGED WITH REFERENCE TO FUNCTIONS PERFORMED, ASSET S EMPLOYED AND RISKS ASSUMED. ASSESSEE HAS NOT CONTESTED THAT DUE TO ANY OF THE ABOVE, SUCH COMPANY IS FUNCTIONALLY NOT SIMILAR. IT S OBJECTIONS ARE ONLY ON THE BASIS OF HIGH TURNOVER. IT WOULD NOT BE APPROPRIATE TO APPLY TURNOVER FILTER, WHEN IN FACT ASSESSEE HAS AC CEPTED VERY LOW TURNOVER COMPANY AS COMPARABLE. ASSESSEE EVEN CONT ESTED BEFORE US THE EXCLUSION OF COMPANY, (MERCURY OUTSOURCING M ANAGEMENT) WHOSE TURNOVER IS ALSO SO LOW, IT REQUIRED TO BE EX CLUDED ON THE SAME BASIS. ASSESSEE CAN NOT BLOW HOT AND COLD AT THE SA ME TIME. PRINCIPLE HAS TO BE APPLIED UNIFORMLY. SINCE ASSESSEE IS IN THE SERVICE SECTOR, SCALE OF OPERATIONS DO NOT HAVE ANY EFFECT ON MARGI NS UNLIKE IN MANUFACTURING COMPANIES. THIS FILTER CAN ONLY BE CO NSIDERED IN THE LIGHT OF THE FACTS AND CANNOT BE APPLIED IN EVERY C ASE UNIFORMLY ON THE BASIS OF DECISIONS IN OTHER CASES. IN THE CASE OF W ILIIS PROCESSING SERVICES (I) (P.) INDIA LTD. VS. DCIT, [2013] 30 TA XMANN.COM 350 (MUM. TRIB.), IT HAS DISCUSSION THE TURNOVER CRIT ERIA AS UNDER: ON TURNOVER IT IS HELD THAT IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) (P.) LTD. V. DCIT, [2012] 20 TAXMAN N. COM 715/53SOT 159 (BANG.-TRIB) (URO) IT HAS MADE A CLAS SIFICATION OF COMPANY HAVING TURNOVER OF 1 CRORE TO RS. 200 CR ORES AS THE COMPARABLE RANGE OF SIZE OF COMPANIES AND FURTHER F ROM RS. 200 CRORES TO RS. 2000 CRORES AS ANOTHER SLAB OF TU RNOVER. THIS CLASSIFICATION IS BASED ON DUN & BRADSTREET HAVING GIVEN 13 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. DIFFERENT RANGES OF SIZE OF COMPANIES I.E. LARGE, M EDIUM AND SMALLER. SUCH CLASSIFICATION BY DUN & BRADSTREET WA S NOT MADE IN THE CONTEXT OF COMPARABLES UNDER TP REGULATIONS. IT IS PERTINENT TO NOTE THAT AS PER THIS CLASSIFICA TION OF THE COMPANY ON THE BASIS OF TURNOVER FROM RS. 1 CRORE T O RS. 200 CRORES, AN ENTITY HAVING RS. 1 CRORE CAN BE COMPARE D WITH AN ENTITY HAVING RS. 200 CRORES TURNOVER; BUT AT THE S AME TIME, AN ENTITY HAVING RS. 200 CRORES TURNOVER CANNOT BE COM PARED WITH THE ENTITY HAVING RS. 201 CRORES TURNOVER. THUS, TH IS CLASSIFICATION GIVES UNREALISTIC RESULT AS FAR AS T HE COMPARABILITY OF TWO ENTITIES HAVING DIFFERENCE OF RS. 1 CRORE ON LY CANNOT BE COMPARED. FOR THE PURPOSE OF COMPARING THE PROFIT M ARGIN OF FUNCTIONALLY SIMILAR ENTITY THE CLASSIFICATION OF S UCH SLAB RANGE IS NOT PRACTICALLY WORKABLE. THEREFORE, AS IT IS APPAR ENT FROM THIS CLASSIFICATION THAT TWO ENTITIES CAN BE COMPARED HA VING DIFFERENCE IN THE TURNOVER UPTO RS. 199 CRORES; BUT AT THE SAME TIME, CANNOT BE COMPARED EVEN IF THE DIFFERENCE OF TURNOVER OF ONE CRORE, IT WAS REJECTED THE CLASSIFICATION OF CO MPARABLES ON THE BASIS OF FIXED SLABS OF TURNOVER. IT WAS ALSO NOTED THAT THERE IS NO RELATION BETWEEN THE TURNOVER AND MARGIN OF AN ENTITY AS IT SHOWS THAT THE HIGHES T MARGIN OF THE ENTITY HAVING RS. 50 CRORES TURNOVER AND THE LO WEST MARGIN IN CASE OF THE TURNOVER UPTO RS. 200 CRORES. THERE IS NOT MUCH DIFFERENCE IN THE MARGIN OF THE VARIOUS ENTITIES HA VING TURNOVER UPTO RS. 940 CRORES AS THE AVERAGE MARGIN OF THE EN TITIES UPTO THE TURNOVER OF RS. 50 CRORES IS 41.36%; WHEREAS TH E MARGIN OF THE ENTITIES HAVING TURNOVER UPTO RS. 940 CRORES IS 30.74%/ THUS, THERE IS NOT MUCH DIFFERENCE IN THE MARGIN WH EREAS THERE IS VAST DIFFERENCE IN THE TURNOVER. THE TURNOVER IS NOT A CRITERIA AS PRESCRIBED UNDER THE RULE 10B(2) FOR SELECTING C OMPARABLES. WHEN THE ASSESSEE HAS NOT MADE OUT A CASE AS HOW TH E HIGH OR LOW TURNOVER HAS INFLUENCED OPERATING MARGIN AND ON THE CONTRARY THERE IS NO DIRECT RELATION BETWEEN THE TU RNOVER AND MARGIN AS CLEAR FROM THE DETAILS AND GRAPHIC CHART REPRODUCED, THEN A COMPARABLE CANNOT BE REJECTED SOLELY ON THE BASIS OF HIGH TURNOVER. EVEN OTHERWISE, THE LARGER TURNOVER AND SIZE OF THE ENTITY MAY HAVE AN IMPACT OF ECONOMICAL COST OF PRODUCTION IN THE MANUFACTURING INDUSTRY DUE TO HUGE COST OF F IXED ASSET BUT NOT IN SERVICE SECTOR. FOLLOWING THE PRINCIPLES LAID DOWN IN THE ABOVE DEC ISION AND KEEPING IN MIND THAT ASSESSEE HAS ACCEPTED COMPARABLES OF EVEN 1 CRORE TURNOVER, WE ARE OF THE VIEW THAT EXCLUSION OF WIPR O BPO SOLUTIONS, WHOSE OPERATING PROFIT OVER THE COST IS LESS THAN T HE COMPANIES 14 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. ACCEPTED AS COMPARABLES BY ASSESSEE, IS NOT PROPER. IN VIEW OF THESE FACTS, WE ARE NOT IN A POSITION TO ACCEPT ASSESSEE S OBJECTIONS WITH REFERENCE TO EXCLUSION OF WIPRO BPO SOLUTIONS ON TH E BASIS OF THE TURNOVER ALONE. WE UPHOLD THE ORDER OF CIT(A) WHERE IN THE CIT(A) ALSO OPINED THAT AS FAR AS THE ISSUE OF PROFITABILITY VIS--VIS SCAL E OF OPERATIONS/TURNOVER IS CONCERNED, I AGREE WITH THE VIEW EXPRESSED BY THE TPO THAT IT WILL NOT HAVE SIGNIFICANT EFFECT ON THE PROFITABILITY OF A COMPANY, AS FAR AS THE BPO SECTOR IS CONCERNED. ACCORDINGLY, WE CONSIDER IT APPROPRIATE TO INCLUDE THE ABOVE COMPAN Y AS COMPARABLE FOR THE PURPOSE OF DETERMINING THE AVERAGE PLI IN T HE RELEVANT ASSESSMENT YEAR. 20. THE AO IS DIRECTED TO WORK OUT THE ADDITION A CCORDINGLY. HOWEVER, WE MAKE IT CLEAR THAT THE ADDITION ULTIMAT ELY RESULTED SHOULD NOT EXCEED THE AMOUNT CONFIRMED BY THE LEARNED CIT( A) AS REVENUE HAS NOT CONTESTED THE DELETION OF PART OF ADDITION MADE BY THE TPO. SO, THIS ORDER SHOULD NOT RESULT IN ENHANCING THE A DDITION, SO CONFIRMED BY THE LEARNED CIT(A). WITH THESE DIRECTI ONS, ASSESSEES APPEAL IS CONSIDERED AS PARTLY ALLOWED. 21. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALL OWED. PRONOUNCED IN THE OPEN COURT ON 31 ST DAY OF OCTOBER, 2013. SD/- SD/- (SAKTIJIT DEY) (B. R AMAKOTAIAH) JUDICIAL MEMBER ACCOUNT ANT MEMBER HYDERABAD, DATED: 31 ST OCTOBER, 2013. KV 15 ITA NO. 667/HYD/2008 IVY COMPTECH PVT. LTD. COPY TO:- 1) IVY COMPTECH PVT. LTD., 5 TH FLOOR, DIVYASREE OMEGA BLOCK B, PLOT NO. 13/E, SURVEY NO. 13 (POST) KONDAPUR, HYDERABAD 500 081. 2) DCIT, CIRCLE 2(1), ROOM NO. 804, 8 TH FLOOR, IT TOWERS, AC GUARDS, HYDERABAD. 3) CIT(A)-III, HYDERABAD. 4) CIT-II, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A. T., HYDERABAD.