M/s. Marlabs Innovations Pvt. Ltd., Bangalore V. Deputy Commissioner of Income Tax,Circle-4(1)(2), Bangalore

MA 12/BANG/2022

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 4567 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 29 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 28-04-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 30-01-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 133(6); 48

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER M.P. No. 12/Bang/2022 (in IT(TP)A No. 2029/Bang/2016) Assessment Year : 2012-13 M/s. Marlabs Innovations Pvt. Ltd., Bagmane World Technology Center, 14 th Floor, Citrine Block – 4, Marathahalli Outer Ring Road, Mahadevapura, Bangalore – 560 048. PAN: AACCM6627Q Vs. The Deputy Commissioner of Income Tax, Circle – 4(1)(2), Bangalore. APPELLANT RESPONDENT Assessee by : Shri Bharath R, CA Revenue by : Shri T.N. Prakash, Addl. CIT (DR) Date of Hearing : 08-04-2022 Date of Pronouncement : 29-04-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present miscellaneous petition is filed by assessee alleging certain typographic mistakes in the order passed by this tribunal dated 17/09/2021 as under: 2. The Ld.AR submits that the assessment year mentioned in the course title is 2013-14 whereas the appeal pertains to assessment year 2012-13. Page 2 of 7 M.P. No. 12/Bang/2022 (in IT(TP)A No. 2029/Bang/2016) 3. On perusal of the records we note that the typographic mistake has crept in and the cost title as submitted by the Ld.AR. Accordingly, in the cost title assessment shall be read as 2012-13 4. The next issue alleged by the Ld.AR is in respect of non-disposal of one comparable sort for exclusion being, Excel info was limited while considering Ground No.5. 5. On verification of the grounds of appeal raised by assessee, we note that, comparable Excel Infoways Ltd., was sought for exclusion by assessee in Ground No.5, however, inadvertently the same has not been considered while passing the order dated 17/09/2021 by this Tribunal. 6. Accordingly, we adjudicate the comparable Excel Infoways Ltd., having regards to FAR analysis carried out in the impugned order in para 4.3 to 4.6. 7. We note that, this Tribunal while considering the other comparables sought by assessee for exclusion had referred to the decision in case of VWR Labs Products Pvt. Ltd. vs. ACIT reported in (2020) 116 taxmann.com 244. We note that the assessee in this decision was also characterised as a risk mitigated contract service provider. Under identical situation this Tribunal excluded Excel Infoways Ltd., by observing as under: “11. (e) Excel Infoways Ltd. (segmental) This comparable elected by ld.TPO is alleged to be functionally not comparable with assessee, as it is handling business relations and managing customer relationships. It has been submitted by Ld.AR that this comparable fails employee cost filter. 12. Ld.CIT DR however contended that this company is compared only for segment of medical transcription and therefore should not be excluded. She placed reliance upon decision of this Tribunal in case of Mobily Infotech India (P) Ltd. (supra) in support. Page 3 of 7 M.P. No. 12/Bang/2022 (in IT(TP)A No. 2029/Bang/2016) 13. We have perused submissions advanced by both sides in light of records placed before us. Annual report of this company is placed at page 795 of paper book (Index for Annual Reports) volume 1. In the Significant Accounting Policies reported at page 830 of paper book, it is observed that these companies operating businesses are organized and managed separately, according to nature of business and services provided with each segment, representing different strategic business unit. Note 15 at page 834 refers to revenues from operations under the head information technology/BPO related services separately. It is observed that function performed by this company as reported at page 806 reveals that it is engaged in business of providing customer care services and handling client business relations on their behalf by maintaining relation with customers and also providing services by assisting in managing the workflow and updating the records. It is observed that this Tribunal in case of Zyme Solutions (P.) Ltd. (supra), this comparable is excluded by observing as under: " The third and last company that is sought to be excluded from the list of comparable companies is Exclusion of Excel Info Ltd. The Tribunal had retained this company as a comparable company in its original order. The assessee sought exclusion of this company on the ground that this company was functionally different from the assessee company and the employee cost to the revenue was less than the threshold limit of 25% and that there were peculiar economic circumstances which impacted the profit margin of this company thereby rendering this company as not comparable company. The Tribunal while adjudicating of exclusion of this company in paragraph 14.3 of its order held that on application of employee cost filter that the Assessee has failed to show as to how the findings of the TPO and DRP are not correct. 2. The assessee has pointed out certain facts with regard to employee cost and diminishing revenue of this company which takes it out of the comparability and these aspects have not been considered by the Tribunal in its order. On the above objections in the MA, the Tribunal held as follows:- "8. We have examined the contents in the misc. petition and we find that there has been omission to consider the application of employee cost filter by the Tribunal though attention of the Bench was invited to relevant pages pointed out in the misc. petition. We do not however agree with the assessee that functional comparability of this company has not been examined by the Tribunal in paragraph 14.4. The Tribunal has come to the conclusion that this company is a Page 4 of 7 M.P. No. 12/Bang/2022 (in IT(TP)A No. 2029/Bang/2016) ITeS company and that cannot be reviewed in the misc. application. However there has been omission to adjudicated exclusion of this company on account of extraordinary events. We therefore recall the order of the Tribunal to the limited extent of examining of the employee cost filter and the presence of extraordinary events on warranty exclusion of this company." 3. We have heard the rival submissions on the exclusion of this company on the basis of extraordinary events that occurred during the relevant previous year which had impact on the profit margin of this company and therefore rendering this company from being chosen as a comparable company. The Delhi ITAT in the case of BT e-Serve (India) Ltd. v. ITO ITA No.6690/Del/2016 for AY 2012-13 order dated 19.6.2018 considered the comparability of this company and came to the conclusion in paragraph 5.4 of its order that there was abnormal volatility of revenue of this company from 2009-10 to 2014-15 and therefore this company should not be regarded as comparable company. Respectfully following the aforesaid decision, we direct exclusion of the aforesaid company from the list of comparable companies chosen by the TPO. It is observed from order passed by Ld.TPO at page 10 that assessee objected this company that employee cost filter being more than 25% has not been examined by Ld.TPO. It is observed that in decision of coordinate bench of Delhi Tribunal in case of Baxter India private limited v. ACIT reported in (2017) 85 Taxmann.com 285 this comparable failing employee cost filter has been analyzed as under: “Further, from the order of the TPO we find he has obtained the employee cost and the sale for the ITES segment by exercise of his powers u s. 133(6). wherein the said company has allocated entire employee cost to IT - BPO segment with no allocation to Infra Activity segment which accounts to 49% of Excel's total revenue. In our opinion. it is highly impractical that no employee has been hired by Excel for Infra Activity segment. We therefore. find merit in the argument of the Id. counsel for the assessee that the information provided as per section 133(6) by Excel Infoways Ltd. is unreliable and should not be used to compute employee cost for ITES segment. The Delhi Bench of the Tribunal in the case of Motorola Solutions India (P.) Ltd. v. Assts. CIT [2014] 48 taxmann.com 24842015] 152 ITD 158 (Delhi) has held that a company should be rejected as comparable in case there is contradiction in the facts or data sourced from annual report and as per the information gathered u/s. 133(6). In view of above discussion, we hold that Excel Infoways Ltd. cannot Page 5 of 7 M.P. No. 12/Bang/2022 (in IT(TP)A No. 2029/Bang/2016) be considered as comparable and should be excluded from the list of comparables. We hold and direct accordingly". From the above observation by coordinate bench, objection raised by Ld.CIT DR stands clarified, as this company for year under consideration made a statement under 133 (6) regarding allocating entire employee cost to IT-BPO segment, with no allocation to other segment, which amounts to almost 49% of its total revenue during the year under consideration. At this stage, we clarify that, we are not inclined to express our opinion regarding functional similarities/dissimilarity of this company with that of present assessee before us and the same is kept open to be considered in an appropriate case. We therefore agree with contention raised by assessee regarding this comparable not satisfying employee cost filter. Respectfully following aforestated decision of Delhi Tribunal reproduced hereinabove, we direct Ld.TPO to exclude this comparable from the final list.” 8. Respectfully following the above view without commenting on the functional similarities/dissimilarity of this company with that of assessee before us, we agree with the contention raised by assessee regarding this comparable not satisfying the employee cost filter. Accordingly this comparable is directed to be excluded from the final list. 9. The next issue alleged by assessee in the present miscellaneous petition is in respect of the observation of this tribunal in respect of Ground No.6, wherein assessee raised an issue regarding improper computation of working capital adjustment. It is submitted that this Tribunal, while considering this ground, decided regarding a negative working capital adjustment, which was not the grievance raised. 10. We have perused the order passed by the Tribunal and the relevant observations in paragraph 5.1-5.3 of the impugned order. We note that the issue is remanded to the Ld.AO/TPO to compute the ALP by granting appropriate working capital adjustment on actuals. However to the extent of the observation that, there is a Page 6 of 7 M.P. No. 12/Bang/2022 (in IT(TP)A No. 2029/Bang/2016) negative working capital computed by the Ld.TPO, is contrary to the facts and accordingly is modified as under: “Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. We notice that the Coordinate Bench of the Tribunal has been consistently adjudicating that the working capital adjustment is permissible. In the following judicial pronouncements the Tribunal has held that working capital adjustment has been provided for the purpose of better comparability. (a) Swiss Re Global Business Solutions India (P.) Ltd. v. DCIT [2020] 116 taxmann.com 716 (b) Maxim India Integrated Circuit Design (P.) Ltd. v. D.CIT [2021] 123 taxmann.com 228 11. We respectfully follow the judicial pronouncement above and hold that the Ld.AO was not justified in denying the working capital adjustment to the assessee. We accordingly direct the Ld.AO to compute the working capital adjustment on actual.” Accordingly Ground no.6 raised by assessee stands allowed. Accordingly the miscellaneous petition filed by assessee stands allowed. Order pronounced in the open court on 29 th April, 2022. Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 29 th April, 2022. /MS / Page 7 of 7 M.P. No. 12/Bang/2022 (in IT(TP)A No. 2029/Bang/2016) Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore