Income Tax Appellate Tribunal - Hyderabad
Capital Iq Information Systems India ... vs Department Of Income Tax on 31 July, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No.124/Hyd/2014 : Assessment year 2009-10
M/s. Capital IQ Information V/s. Addl. Commissioner of Income-tax
Systems (India ) Pvt. Ltd., Circle 1(2), Hyderabad
Hyderabad
(PAN AACCS 8657 G)
(Appellant) (Respondent)
ITA No.170/Hyd/2014 : Assessment year 2009-10
Dy. Commissioner of Income- V/s. M/s. Capital IQ Information
tax Circle 1(2), Hyderabad Systems (India ) Pvt. Ltd.,
Hyderabad
(PAN AACCS 8657 G)
(Appellant) (Respondent)
Assessee by : Shri Saurabh Srivastava
Revenue by : Shri D.Sudhakara Rao CIT-DR
Date of Hearing 12.6.2014
Date of Pronouncement 31.7.2014
ORDER
Per B.Ramakotaiah, Accountant Member:
These are cross appeals by assessee and Revenue against the orders of the Assessing Officer under S.143(3) read with order under S.144(C)(5) of the Income Tax Act, 1961 on the directions of the Disputes Resolution Panel, Hyderabad, vide order dated 27.11.2013.
2 ITA No.124 & 170/Hyd/2014M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad
2. The issues in these appeals are with reference to Transfer Pricing adjustments made by the Assessing Officer/TPO.
3. Briefly stated, M/s. Capital IQ Information Systems (India) Pvt. Ltd. is a wholly owned subsidiary of Capital IQ Inc, USA and is engaged in providing IT Enabled Services (ITES) to its AE, Capital IQ US. Assessee processes annual/ quarterly financial reports and press releases of various international companies and extracts required data from financial statements, notes to financial statements, audit reports, etc. through utilization of tools developed in house and also prepares business descriptions, biographies of key executives and tracks key developments in the companies. Assessee functions as a captive contract service provider. For the assessment year 2009-10, assessee filed return of income on 30.9.2009 declaring an income of Rs.29,22,01,881. The Assessing Officer vide his draft assessment order enhanced the total income of assessee to Rs.46,10,25,879, on account of transfer pricing adjustment of Rs.15,20,07,732 in accordance with the Transfer Pricing Order passed under S.92CA(3) by the Addl. Commissioner of Income-tax TP II, Hyderabad(TPO). Assessee has reported Operating Revenue of Rs.179,67,97,166 and an Operating Cost of Rs.155.62, crores resulting in operating profit of Rs.24.06 crores. The OP/OC was arrived at 15.46%. The entire turnover of assessee is receipts from its AE as ITES provider.
4. Assessee in its Transfer Pricing Study undertaken by M/s. S.R. Batliboi & Co. selected itself as the tested party, and it has been characterized as provider of IT enabled services and selected TNMM as the most appropriate method and the search for uncontrolled comparables was done using Prowess and Capitaline Databases. Assessee undertook multiple year data and selected six comparables for analysis. In view of the limited data 3 ITA No.124 & 170/Hyd/2014 M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad base available at that time, the financial results for the year ending 31.3.2009 were considered only for two companies and in other four companies the data for the year ending March, 2008 was considered. The average profit margin of the six comparables of assessee worked out to 12.15%. Therefore, assessee submitted that its international transactions are at Arm's Length Price.
5. Even though there is no dispute with reference to the method adopted, the TPO rejected the documentation maintained by assessee on the reasons that multiple year data was used; has not applied export filters properly; and also selected some of the companies which are not functionally similar. After analyzing the reasons, vide para 7 of the TPO's order, the TPO undertook fresh search of comparables and after detailed analysis, gave a show cause notice to assessee for its objections to the selection of 14 comparables. Ultimately, the TPO determined the following twelve companies as comparables and arrived at the average Profit Level Indicator (PLI) of 27.42%, as per the details tabulated hereunder-
Sl. Company Name Operating Revenue
PBIT/
No. Rs.(in crores) Cost %
1. Accentia Technologies Limited 78.73 49.40
2. Acropetal Technologies Ltd. (Seg.) 33.13 25.01
3. Aditya Birla Minacs Worldwide Ltd. 231.57 0.53
4. Cosmic Global Ltd. 7.76 48.20
5. Crossdomain 33.76 29.38
6. Eclerx Services Ltd. 187.98 53.44
7. Infosys B P O Ltd. 101.62 16.90
8. Jeevan Softech Technology Ltd. 1.79 16.56
4 ITA No.124 & 170/Hyd/2014
M/s. Capital IQ Information systems (India )
Pvt. Ltd., Hyderabad
9. Microland Limited 144.05 2.35
10. Microgenetic Systems Ltd. 1.27 10.11
11. R.Systems International Ltd.(Seg.) 26.55 5.77
12. Genesys International Ltd. 83.18 71.50
AVERAGE 27.42
6. Having arrived at the Arithmetic Mean PLI at 27.42%, the TPO allowed working capital adjustment at 2.19%. The Arithmetic Mean PLI was determined at 25.23% and taking the Operating Cost of Rs.155.62 crores, the TPO suggested adjustment of Rs.15,20,07,732 under S.92CA.
7. The Assessing Officer issued a Draft Assessment Order proposing to make the adjustment and assessee filed its objections before the DRP. The DRP vide its order running into 11 pages rejected most of the grounds, except the ground regarding payment of gratuity, on which the revenue is in cross appeal.
8. As the DRP confirmed the Transfer Pricing adjustment made by the Assessing Officer and the TPO, assessee is in appeal before us, raising Grounds 1 to 9, which we shall consider in the later part of this order.
9. Ground No.10 pertains to not allowing credit for correct amount of TDS of Rs.2,28,156 claimed by assessee in the return of income, which requires verification by the Assessing Officer. We direct the Assessing Officer accordingly to verify the claim made by assessee and allow the credit for correct amount of TDS.
5 ITA No.124 & 170/Hyd/2014M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad
10. Ground No.11 pertains to computing interest under S.234B. It was the contention of assessee that the interest was wrongly computed at Rs.3,13,02,184 on the assessed income, as against the correct amount of Rs.3,00,01,783. This also requires verification of the computation of interest. Therefore, we direct the Assessing Officer to verify and re-determine the interest accordingly.
11. Now coming to the main grounds, viz. grounds No.1 to 9, on transfer Pricing adjustments made by the Assessing Officer/TPO, assessee has raised grounds on various aspects of Transfer Pricing adjustments, like rejection of assessee's TP Study, use of filters, obtaining data under S.133(6) of the Act which is not available in public domain, selection of comparables and risk profile of assessee company vis-à-vis comparable companies.
12. In the course of arguments, learned counsel restricted his arguments to the selection of comparables. Assessee is objecting to six comparables selected by the TPO and to the inclusion of two comparables selected by assessee in its TP study, which were rejected by the TPO.
13. We have heard the learned counsel for assessee and the learned Departmental Representative in detail, and their arguments are considered at the appropriate stages of this order.
14. As briefly stated, assessee is objecting to the following six comparables out of twelve comparables selected by the TPO.
6 ITA No.124 & 170/Hyd/2014
M/s. Capital IQ Information systems (India )
Pvt. Ltd., Hyderabad
Sl. Company Name
No.
1. Infosys B P O Ltd.
2. Genesys International Ltd.
3. Eclerx Services Ltd.
4. Cosmic Global Ltd.
5. Acropetal Technologies Ltd. (Seg.)
6. Accentia Technologies Limited
That apart, assessee wants the inclusion of the following two comparables-
(a) Allsec Technologies Limited
(b) Cepha Imaging Private Limited
It was submitted that if these comparables were considered, other issues become academic in nature.
15. We have considered the contentions of the parties and examined the documents and paper-books placed on record. Correctness of inclusion/exclusion of the above companies is decided hereunder case by case.
(1) Infosys B P O Ltd. :
16. It was the contention of assessee that this BPO is a giant in its area and has brand value of Infosys Technologies limited. Assessee's main contention was that it is not functionally similar and its turnover is much more when compared to that of assessee. It was also contended that the Infosys BPO has done brand building exercise by incurring large amounts of brand building and advertisement expenditure and undertaking brand campaigning outside India. Further, it also has huge asset base and therefore, this company is not functionally comparable to assessee. Assessee relied on the 7 ITA No.124 & 170/Hyd/2014 M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad decision of the Hon'ble Delhi High Court in the case of CIT V/s. Agnity India Technologies Pvt. Ltd. (2013) 219 Taxman 26 (Del), wherein it was held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee.
16.1 Even though we are not in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee's turnover is about Rs.129.8 crores, which as against turnover of Rs.1016 crores of the Infosys, ( which is only about 5 times) we are of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, just because of its big brand value, this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. Therefore, we direct the Assessing Officer/TPO to exclude this company.
(2) Genesys International Ltd.
17. It was the contention that this company functions in two horizontals, and is having super profits. It was further submitted that this company is not only in software development but also in Geospatial Services, which are highly technical. It also involves in consulting activity. It was the contention that this company was analysed by the coordinate Bench of the Tribunal at Delhi in the case of M/s. Mercer Consulting (India) Ltd. V/s DCIT (vide order dated 6th June, 2014 in ITA No.966/Del/2014), wherein this 8 ITA No.124 & 170/Hyd/2014 M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad company was excluded in that case. Learned counsel for assessee relied upon the findings of the Tribunal vide paras 14.2 and 14.3, in that case, which read as follows-
"14.2. We have heard the rival submissions and perused the rival materials on record. It has been noticed supra that assessee is basically providing various services to the customers of its AEs in relation to human resources which are more or less centered around the employees of the prospective clients. When we consider the nature of services provided by Genesys International Corporation Ltd., it comes to the forefront that they are providing full range of geospatial services to its customers. In simple terms, geospatial services means the services relating to the relative position of things on the earth's surface. These basically include 3D mapping, Navigation maps, Image processing, Cadastral mapping, etc. If we take into account the nature of services provided by the assessee, being financial and retirement security, health, productivity of employees and employment relationships and then try to compare them with those rendered by Genesys, it is manifested that both are totally incomparable.
14.3. The TPO on page 48 of his order has examined CBDT Circular SO 890 (E) dated 26.9.2000 which provides a detailed list of products or services that can be covered under the ITES for the purposes of Section 10A and 10B of the Act. In this Circular, Information Technology Enabled Products/Services have been divided into fifteen categories, starting with Bank Office operations, Call centres etc. and ending with Website services. From the very description of such services, it is palpable that even though these fall under the overall ITES category, but some of them are quite different from each other. To cite, service at Sl.No. (vi) of this Circular is 'Geographic Information System services and at Sl. No. (vii) is 'Human Resources Services.' No doubt, all these fifteen categories of products/services have been included under the major head of 'Information Technology Enabled Services' (ITES), but most of them are quite distinguishable from others. In our considered opinion, the fifteen broad categories set out in this Circular cannot per se be claimed as similar to each other. A cursory look at these products/services transpires that some of them are functionally quite different from each other. Further the level of investment required for providing such services is also not consistent. In our considered opinion, the mere fact that two services are placed under this category do not become automatically comparable. If a case providing one category of services under ITES is claimed as comparable with another in the category of 9 ITA No.124 & 170/Hyd/2014 M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad service under ITES as per this circular, then it must be shown ex facie that it is broadly similar. Adverting to the facts of the instant case, we find that the services rendered by Genesys fall under clause (vi) with the heading 'Geographical Information Systems Services', whereas those rendered by the assessee fall partly under clause (vii) with the heading 'Human Resources Services' and partly under clause (xi) with the heading 'Payroll'. On juxtaposition examination of these two sets of services, we find that there is a vast difference which make one quite distinct from the other. In view of such functional incomparability between assessee and Genesys, we hold that this company cannot be treated as comparable. We, therefore, direct to exclude this case from the list of comparables."
17.1. On careful consideration of the matter, respectfully following the above decision of the coordinate Bench, we are also of the opinion that there is vast difference between the functions of the above company and that of assessee. This company as such, cannot be treated as comparable on FAR analysis. We therefore, direct the Assessing Officer/TPO to exclude this company.
(3) Eclerx Services Ltd.
18. The objection of assessee to this comparable is that this company is functionally dissimilar. It is in the business of consultancy and advisory service and provides only analytical data. It is also involved in quality monitoring. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. Therefore, the functions of the above company are dissimilar to assessee, which is a captive service provider. On the principles laid down by the Hon'ble Special Bench of the ITAT (Mumbai) in the case of Maersk Global Centres (India) Pvt. Ltd. V/s. ACIT (ITA No.7466/Mum/2012 for assessment 10 ITA No.124 & 170/Hyd/2014 M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad year 2008-09 dated 7.3.2014) and the principles laid down by the coordinate bench of the Tribunal(Delhi) in the case of M/s. Mercer Consulting (India) Pvt. Ltd., (supra), assessee submits that this company cannot be selected as a comparable.
18.1 The Learned Departmental Representative, however, submitted that having accepted Aditya Birla Minacs Worldwide Ltd., as a comparable company, this company should also be included, as otherwise, both the companies should be excluded.
18.2 We have considered the issue and examined the Annual Report and the objections of assessee. As seen from the Annual Report, the above company is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee's services. We therefore, direct the Assessing Officer/TPO to exclude this company.
(4) Cosmic Global Ltd.
19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as 11 ITA No.124 & 170/Hyd/2014 M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under-
"13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at Rs.7.37 crore divided into three segments, namely, Medical transcription and consultancy services at Rs.9.90 lacs, Translation charges at Rs.6.99 crore and Accounts BPO at Rs.27.76 lac. The ld. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the ld. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at Rs.3.00 crore, which is strictly inthe realm of the Translation segment, revenues from which are to the tune of Rs.6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment.
13.3. However, we find this case to incomparable on the alternative argument advanced by the ld. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs.27.76 lacs. We have discussed this aspect above in the context of CG-VAK's case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs.86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs.27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables."
In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons.
12 ITA No.124 & 170/Hyd/2014
M/s. Capital IQ Information systems (India )
Pvt. Ltd., Hyderabad
(5) Acropetal Technologies Ltd. (Seg.)
20. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) Pvt. Ltd. and therefore, selection of the company by the TPO in this case, which is also in similar ITES services, is not proper.
20.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company.
13 ITA No.124 & 170/Hyd/2014M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad (6) Accentia Technologies Limited.
21. This company was objected to by assessee on the reason of super profits as well as extra-ordinary events. It was submitted that acquisition of Oak Technologies & Trans Services has impact on the profits of the company and has taken inorganic growth as strategy to increase the profits because of the peculiar economic circumstances and brand value. The same in these circumstances cannot be selected. It was submitted that assessee was in medical transcription services.
21.1. The Departmental Representative however, objected to the pleas of assessee stating that the extraordinary events occurred in earlier year and therefore, the same cannot be considered as having any impact in the year under consideration.
21.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected.
14 ITA No.124 & 170/Hyd/2014M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad 22 Now, we turn to the two companies, which as noted above the TPO excluded, but assessee wants to be included-
(a) Allsec Technologies Limited :
23. As far as this company is concerned, its comparable nature was analysed by the coordinate Bench of the Tribunal in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), in its order dated 6.6.2014. As seen from the TPO's order on comparables selected by the tax payer, this company is rejected as it fails export sales filter which was determined at 74.45% of its service revenue. On similar reason, the coordinate Bench in the above referred case has analysed and directed the TPO to include the said comparable, by stating as under-
"9.1. This case was included by the assessee in the list of comparables which was excluded by the TPO on the ground of diminishing sales for the last three years and the export revenues less than 75% of the total turnover. Here, it is relevant to mention that the TPO adopted certain filters which have been mentioned on pages 13 and 14 of his order. One of such filters is the exclusion of companies whose export sales are less than 75% of the total sales from ITES. Another filter applied by the TPO is the exclusion of cases with diminishing revenues. The TPO recorded that this company has some peculiar problems and hence the same is not in line with the growth in software industry. However, he did not delve into the actual figures of diminishing revenues of this company. As against this, it is observed that Allsec's operating revenue has increased in the financial year 2008-09 over the previous year which is apparent from the Statement of facts given by the assessee. On a specific query, the ld. DR could not point out any material to indicate or support the TPO's assertion in his order about the diminishing revenue of Allsec Technologies Ltd for the last three years. The second reason given by the TPO for discarding this case from the list of comparables is export less than 75% of the total turnover. We observe that albeit this contention of the TPO is correct that this case does not pass the filter or test laid down by the TPO, but the fact of the matter is that the actual ratio of export revenue to total turnover of Allsec Technologies stands at 74.45% as shown on page 84 of the paper book. If we literally 15 ITA No.124 & 170/Hyd/2014 M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad consider the filter applied by the TPO, this case does not pass the test. However, it is seen that the assessee included this case in the list of comparables by applying the filter of excluding thecases in which export revenue was less than 25% of the total revenue. There can be no hard and fast rule for putting a specific ceiling in a particular filter. The filters are not sacrosanct as not statutorily prescribed. These are used or modified for selection or rejection of comparables as per the convenience of the concerned party. If an assessee wants to include a certain case in the list of comparables which suits its requirements, then, it will suitably modify the filter itself or the ceiling in such filter, so as to fit the bill. Position is no different when it comes to the turn of the Revenue. If it wants to include a particular case in the list of comparables, it will also modify the filter or ceiling in such filter to suit its interest. Equally, if both the sides wantto exclude a case, they will modify the filter accordingly. The nutshell is that some sort of cherry-picking is done by both the sides.
9.2. The exclusion of this case has been done by increasing the limit in filter to 75% as against 25% applied by the assessee because the percentage was 74.45%. If the actual ratio in this case had been more than 75%, and the Revenue hell bent on excluding this case, then it would have resorted to increasing the ceiling in the filter to 80% or still more so as to ensure that it remains outside the limit set by it. As the ratio of 75% is not something which is scientifically proven and the export revenue of Allsec Technologies is 74.45% as against the TPO's filter of 75%, we are of the considered opinion that the same cannot be excluded for such a minuscule difference if it is otherwise comparable. It is patent that the TPO has not disputed the otherwise functional comparability of this case with that of the assessee. If we consider the case of Allsec Technologies on a criteria of preponderance of comparability, we find that the same merits inclusion in the list of comparables. Not only the TPO's reasoning about the declining revenue of Allsec Technologies over a period of three years is incorrect, this case is also passing the test of the ratio of export turnover to total turnover on a pragmatic rational basis. We, therefore, hold that this case should be included in the list of comparables."
For the reasons stated above, we are of the opinion that in this case also, this company should be included as a comparable. We direct the Assessing Officer/TPO accordingly.
16 ITA No.124 & 170/Hyd/2014M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad
(b) Cepha Imaging P. Ltd.
24. As for this company sought to be included as a comparable by the assessee, but excluded by the TPO, we find that this company was also analysed by the coordinate Bench of the Tribunal(Delhi Bench) in the case of M/s. Mercer Consulting (India) P. Ltd. (supra) and ultimately this company was directed to be excluded. The reasoning given by the coordinate Bench for arriving at such conclusion is as under-
"15.1. Apart from the inclusion and exclusion of the above discussed six cases, the ld. AR also challenged the non-inclusion of Cepha Imaging Pvt. Ltd., Micro Genetic Systems and Fortune Infotech in the list of comparables, which were argued to be included by the assessee during the course of proceedings before the authorities below. Firstly, we take up the case of Cepha Images which is engaged in the business of e- publishing services. E-publishing services include typesetting, composition, art work, proof reading, project management, XML conversions and multimedia services provided to publishers of books and journals. When we consider the nature of services provided by Cepha Imaging vis-a-vis those rendered by the assessee, which are basically in the nature of human resources or payroll, we find that the same are not comparable. The view taken by the TPO in excluding this case from the list of comparables is upheld."
Respectfully following the above decision, we are of the opinion that the said company is not comparable with that of the assessee on the basis of the services being provided. Accordingly, we uphold the view taken by the TPO in excluding this company from the list of comparables.
25. In view of the above discussion and decisions, in the context of the grounds of the assessee on selection of comparables, the TPO/Assessing Officer is directed to re-work out the Arithmetic Mean of the PLI after excluding six comparables discussed above, and including one comparable selected by the assessee but excluded by the TPO, viz. Allsec Technologies Ltd., and accordingly re-work out the addition, if any warranted. The 17 ITA No.124 & 170/Hyd/2014 M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad Assessing Officer/TPO should also allow the working Capital Adjustment already provided in the computation by the TPO.
26. With these directions, the assessee's grounds on selection of comparables are allowed for statistical purposes.
27. Other grounds raised in the assessee's appeal on TP adjustments are not required to be adjudicated, as the assessee submitted that they become academic once the issue relating to comparable companies, is decided. Those grounds are accordingly considered as academic and accordingly rejected.
28. In the result, assessee's appeal, being ITA No.124/Hyd/2014, is considered as partly allowed.
29. Now turning to the appeal of the Revenue, viz. ITA No.170/Hyd/2014, the grievance of the Revenue is on the issue of direction of the DRP in allowing deduction of contribution to the Gratuity Fund maintained with LIC. The Assessing Officer noticed that the assessee debited an amount of Rs.2,39,40,993 to the Profit & Loss Account on account of gratuity expenses. Out of the said amount, an amount of Rs.73,46,402 was disallowed under S.43B in the computation statement itself by the assessee. Net amount of Rs.1,66,94,591 was claimed as gratuity expenditure. The Assessing Officer disallowed the said amount on the reason that the said gratuity fund by the LIC was not approved by the Commissioner of Income- tax Hyderabad. Even though the assessee made the application for approval in the year 2004 itself, the Commissioner of Income-tax seems to have granted approval to the Gratuity Scheme with effect from 29.5.2012. On that reason, since the scheme was not approved for assessment year 2009-10, 18 ITA No.124 & 170/Hyd/2014 M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad the Assessing Officer disallowed the amount claimed in the Draft assessment order. On the objection raised by the assessee, the Disputes Resolution Panel, following the decision of the Hon'ble Supreme Court in the case of CIT V/s. Textool Co. Ltd. (Civil Appeal No.447 of 2003) allowed deduction.
30. Revenue is aggrieved by the relief granted by the DRP on this score, and hence preferred its appeal before the Tribunal.
31. We have considered the rival contentions and perused the material on record. We do not see any reason for the Revenue to contest on this issue. Obviously, the DRP has allowed the claim of the assessee, as the issue is crystallized in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of CIT V/s. Textool Ltd. (supra). The fact pattern in the case before the Hon'ble Supreme Court, which was similar to the facts of the assessee in the present case, was-
a) Gratuity fund was not recognized upto the end of the previous year.
b) Payment was made to LIC in the circumstances that the taxpayer was rendered out of control of funds.
c) The payment was meant for the gratuity fund which was eventually approved.
d) The approval was secured in the next previous year and the information as to approval was available with the AO at the time of assessment.
e) In the above facts, the SC permitted allowability in terms of S.36(1)(v) of the Act.
19 ITA No.124 & 170/Hyd/2014M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad
32. The DRP found that the principles laid down in the aforesaid decision are applicable to this case. Since the facts and circumstances are similar, we do not find any merit in the Revenue pursuing the dispute in the appeal before this Tribunal. The grounds of the Revenue are accordingly rejected.
33. In the result, Revenue's appeal is dismissed.
34. To sum up, while appeal of the assessee, being ITA No.124/Hyd/20p14 is partly allowed, appeal of the Revenue, being ITA No./170/Hyd/2014 is dismissed.
Order pronounced in the Court on 31st July, 2014.
Sd/- Sd/-
(Saktijit Dey) (B.Ramakotaiah)
Judicial Member Accountant Member
Hyderabad, Dt 31st July 2014.
Copy forwarded to:
1. M/s. Capital IQ Information Systems (India ) Private Limited, Survey No.12P, Kondapur Village, Serilingampally Mandal, Ranga Reddy District, Hyderabad
2. Addl. Commissioner of Income-tax Circle 1(2), Hyderabad
3. Dy. Commissioner of Income-tax Circle 1(2), Hyderabad
4. Dispute Rsolution Panel, Hyderabad
5. Additional Commissioner of Income-tax (Transfer Pricing) Hyderabad 6 Departmental Representative, ITAT, Hyderabad.
B.V.S.