Income Tax Appellate Tribunal - Hyderabad
Acit, Circle-16(2), Hyd, Hyderabad vs Monster.Com (India) Pvt. Ltd., Hyd, ... on 30 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SHRI P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
S.No. ITA No. AY Appellant Respondent
1 1425/H/15 2010-11 Asst. M/s Monster.com
Commissioner of (India) Pvt. Ltd.,
Income-tax, Hyd.
Circle - 16(2),
Hyd. PAN -
AACCM3695G
2 5/H/16 2010-11 M/s Monster.com Dy. Commissioner
(India) Pvt. Ltd., of Income-tax,
Hyd. Circle - 16(2),
Hyd.
PAN -
AACCM3695G
3 1509/H/16 2011-12 Income-tax M/s Monster.com
Officer, Ward - (India) Pvt. Ltd.,
16(4), Hyd. Hyd.
PAN -
AACCM3695G
4 1175/H/16 2011-12 M/s Monster.com Asst.
India Pvt. Ltd., Commissioner of
Hyd. Income-tax, Circle
- 16(2), Hyd.
PAN -
AACCM3695G
Revenue by : Shri Mohan Kumar Singhania
Assessee by : Shri B. Satyanarayana Murthy
Date of hearing 27-07-2017
Date of pronouncement 30-08-2017
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
These appeals are preferred by the Assessee as well as Revenue against the orders of Commissioner of Income-tax (Appeals) 2 ITA No. 1425/H/15 and others Monster.Com (India) Pvt. Ltd.
(in short CIT(A)) for assessment years 2010-11 and 2011-12. As identical issues are involved in these appeals, they were clubbed and heard together and, therefore, a common order is passed for the sake of convenience.
ITA No. 5/H/16 by assessee and ITA No. 1425/H/15 by the revenuefor AY 2010-11.
2. Briefly the facts of the case are that the assessee company is engaged in the business of providing online recruitment services. It filed its return of income for AY 2010-11 on 11/10/2010 admitting total income of Rs. 33,65,95,390/-. The case was selected for scrutiny and after examining all the details and information submitted by the assessee, the AO completed the assessment by making the following additions and assessed the income at Rs. 88,36,13,747/-.
1. Accrued income shown as unmatured advances in the Balance Sheet of Rs. 51,89,30,155/-.
2. Arm's length Price adjustment u/s 92CA of Rs. 1,49,51,346/-
3. Disallowance of expenditure included in employees cost Rs. 1,43,70,180/-.
3. Aggrieved with the above order, the assessee preferred an appeal before the CIT(A) against the additions in respect of accrued income shown as unmatured advances and Arm's length price adjustment u/s 92CA of the Act.
4. As regards the issue of taxing of accrued income shown as unmatured advances in the balance sheet, the CIT(A) after considering the submissions of the assessee and relying on the decision of the coordinate bench of this Tribunal in assessee's own case for the Previous Years, deleted the addition made by the AO.
5. As regards the addition in respect of international transactions, the CIT(A) gave partial relief to the assessee.
3 ITA No. 1425/H/15 and othersMonster.Com (India) Pvt. Ltd.
6. Aggrieved by the order of the CIT(A), the revenue is in appeal before us against the deletion of addition on account of unmatured advances and the assessee is in appeal before us against partial relief on account of international transactions.
7. As regards the issue of taxing of accrued income shown as unmatured advances in the balance sheet, raised by the revenue in its appeal (Ground Nos. 1 & 2), the AO observed as under:
" 1. The advances shown by the assessee are already accrued to the assessee. These are not refundable receipts. As per notes to Accounts at Point No.2, it was mentioned that 'Unmatured income includes the amount whereof has not been linked and identified with the individual customers - contracts in view of volumes and heterogeneous nature of contracts. Besides, there are no uniform payment terms in the variety of contracts entered into during the year. This, however, does not impact income accrual and disclosure in the balance sheet except in case of debtors to the extent of amount not so determined.' This note to the accounts clearly indicates that the income is already accrued in respect of these advances.
2. The assessee-company was requested to submit confirmations from the companies from whom these advances are received to show that these amounts are appearing as liabilities in their balance sheet to prove the point that this income is not accrued to the assessee. If the paying company debits the full expenditure on these payments, the receiving company cannot show part of the amount as receipt and part of the amount as advance. The examination of agreement copies entered by assessee with others for providing on-line services, clearly indicate that the income is already accrued to the assessee. There is no clause for refund of these advances in the agreements entered by the assessee with others.
3. The assessee-company is following mercantile system of accounting and therefore, the company has to offer the entire amount as receipts and provide for provision for expenses to be incurred, if any, in respect of these amounts based on some scientific method or past experience and it cannot postpone the entire amounts to the subsequent period on the ground that the period of service is not yet completed. The assessee-company already debited huge direct or indirect expenses on these receipts and postponement of all these receipts results in distortion of true profits.4 ITA No. 1425/H/15 and others
Monster.Com (India) Pvt. Ltd.
4. Whatever be the method followed, recognition of revenue has to be in consonance with the method of accounting so followed vis-à-vis the nature and character of the amount accrued or received and the year of such accrual or receipt [State Bank of Travancore 158 ITR 102 (SC)]. The Assessing Officer has the power to adopt the correct method of valuation of closing stock instead of wrong method adopted by the assessee for a long period. Method of stock valuation followed should not only be consistent but should also be correct. British Paints India Limited 188 ITR 44 (SC).
Accordingly, the unmatured income of Rs. 51,89,30,155/- is treated as assessee's income and accordingly added back to the income returned."
8. The CIT(A) following the decision of the ITAT in assessee's own case, deleted the addition made by the AO.
9. Aggrieved, the revenue is in appeal before us.
10. Before us, the ld. DR has conceded that the issue in dispute is squarely covered by the decision of ITAT in assessee's own case, while, the ld. AR has relied on the order of the CIT(A).
11. Considered the rival submissions and perused the material facts on record. The issue is covered in favour of the assessee by the decision of the ITAT, Hyderabad in assessee's own case in ITA No. 1762/Hyd/11, for AY 2007-08, order dated 31/03/2017 wherein the coordinate bench observed as under:
"11. Considered the rival submissions and perused the material facts on record. The issue is covered in favour of the assessee by the decision of the ITAT, Hyderabad in assessee's own case in ITA No. 1081/Hyd/04, for AY 2001-02, order dated 10/08/2007 wherein the coordinate bench observed as under:
" In the second ground, the revenue is aggrieved against the deletion of the addition made on account of difference in professional receipts. It was noted by the AO that as per two TDS certificates, the assessee had received professional fees aggregating to Rs. 1,39,125 (Rs. 1,18,125 + 21,000). However, the assessee had shown total receipts of Rs. 60,558/- only. The explanation of the assessee was that it follows mercantile system of accounting and under the said system, it recognizes the 5 ITA No. 1425/H/15 and others Monster.Com (India) Pvt. Ltd.
revenue on the basis of proportionate completion method which is recognized by the Institute of Chartered Accountants of India (ICAI) in its Accounting Standard of Revenue Recognition. Under this method, revenue is recognized proportionately by reference to the performance of each act. The revenue recognized under this method would be determined on the basis of contract value, associate cost, number of acts or other suitable basis. When services are provided by an indeterminate number of acts over a period of time, revenue is recognized on a straight line basis over the specific period. However, the assessing officer was of the view that since the said Accounting Standard has not been notified recognized by the CBDT under s.145(2) of the IT Act 1961 (the Act), the receipts have to be accounted for on the basis of TDS certificates. Accordingly, the amount of Rs.78,567 was added as difference in professional receipts. The CIT(A) considered the explanation of the assessee and following the order of the Hyderabad Bench of the Tribunal in the case of Bharat Television Ltd. In ITA No.1797/Hyd/89 and of the Madras Bench in the case of Sakura Electronics (P) Ltd. allowed the claim of the assessee.
The contention of the learned Departmental Representative was that since the assessee has accounted for only proportional receipt, credit for the entire TDS cannot be allowed. On the other hand, the learned counsel supported the order of the CIT(A).
On due consideration of the matter, we uphold the order of the CIT(A). Whether a particular Accounting Standard has been notified or not is not material. What is to be seen is whether the assessee has followed a recognized method of accounting or not. If method followed by the assessee is such whereby correct income cannot be deduced, then only the assessing officer has the authority to adopt a reasonable basis to determine the total income. In the instant case,. It cannot be disputed that the assessee has followed a recognized method of accounting and hence, there is no question of adding any further amount to the total income. There being no infirmity in the order of the CIT(A), we uphold the same."
Therefore, we do not find any infirmity in the order of the CIT(A) in deleting the addition made by the AO following the decision of the ITAT and, accordingly, we uphold the order of the CIT(A) and dismiss the ground raised by the revenue in its appeal.
11.1 As the issue in the AY under consideration is materially identical to that of AY 2007-08, following the decision of the ITAT, we uphold the order of the CIT(A) and dismiss the ground raised by the revenue.
6 ITA No. 1425/H/15 and othersMonster.Com (India) Pvt. Ltd.
12. As regards the issue regarding ALP adjustment by TPO, raised by the assessee in its appeal (3-10 grounds of appeal), it is observed that the assessee made certain international transactions pertaining to BPO services to its AEs, commission received on selling other entities database from its associated enterprises and loans taken from associated enterprises. The AO referred the matter to TPO vide letter dated 06/08/2012 to determine Arm's Length Price (ALP). TPO vide his order u/s 92CA(3) of the Act dated 30/12/2013 determined the ALP adjustments of the international transactions at Rs. 1,49,51,346/- u/s 92CA(3) of the Act.
12.1 It is observed that as per 3CEB report, the international transactions reflected are as under:
AE Nature of Amount
transaction (Rs.)
Monster Worldwide Inc., USA Provisions of 3,96,48,126
ITES
Monster SG Pte Ltd., -do- 1,35,57,580
Singapore
Monster Technologies -do- 44,78,201
Malaysia Sds Bhd.
E-career (Beijing) Ltd. Commission 7,360
receivable
E-career (Beijing) Ltd. Commission 1,32,090
payable
Jobkorea Co. Ltd. Commission 25,917
receivable
Monster Jobs Mexico, S.de -do- 10,325
R.L. De C.V.
Monster Worldwide Canada -do- 1,51,355
Monster Worldwide Canada Commission 3,55,919
payable
Monster Worldwide Inc., USA Commission 2,28,050
receivable
Monster Worldwide Inc., USA Commission 1,08,87,680
payable
Monster Worldwide Ltd., UK Commission 50,61,270
receivable
Monster Worldwide Ltd., UK Commission 30,25,204
payable
Monster.com HK Ltd. Commission 2,32,647
receivable
7
ITA No. 1425/H/15 and others
Monster.Com (India) Pvt. Ltd.
Monster.com HK Ltd. Commission 1,15,107
payable
Monster.com SG Pte. Ltd. Commission 7,96,891
receivable
Monster.com SG Pte. Ltd. Commission 1,54,678
payable
Monster Recruitment Insan 7,550
Kaynaklari Danismanlik Ltd.,
Turkey
Monster Technologies 3,987
Malaysia Sds Bhd
Monster Worldwide Inc., USA 1,47,51,888
Monster Worldwide Inc., USA 2,31,30,276
Monster Worldwide Inc., USA 4,10,15,063
Monster.com SG Pte. Ltd. 63,28,497
Monster Technologies 66,36,314
Malaysia SDN Bhd
Monster Worldwide Inc., USA 27,25,896
17,34,67,871
12.1 After examining the TP study submitted by the assessee, the TPO observed that the assessee has carried out the economic analysis, however, he summarized it as under:
Sr.N Nature of Amount of MAM PLI Margin of Margin of o. international transaction taxpayer comparables transaction 1 Provision of ITES 5,76,83,907 CPM OP/ 15 15.5 OC 2 Commission 65,13,815 CUP NA 10 3 receivable 3 Commission payable 1,46,82,215 CUP NA 10 3 4 Paym ent of royalty 1,47,51,888 NA NA NA NA 5 Paym ent of Software 2,31,30,276 NA NA NA NA Charges 6 Reimbursement of 4,10,15,063 NA NA NA NA expenses paid 7 Reimbursement of 1,29,64,811 NA NA NA NA expenses received 8 Receipt of video 27,25,896 NA NA NA NA conference equipment 12.2 The TPO has observed that the taxpayer has carried out the economic analysis in search for comparables at pages 30 to 35 of the T.P. documentation. The taxpayer has used Capitaline data base in search for comparable companies. With regard to the transaction 8 ITA No. 1425/H/15 and others Monster.Com (India) Pvt. Ltd.
relating o provision of ITES, after applying certain filters, the taxpayer using CPM as MAM has short-listed 18 campa rabies with arithmetic mean PLI (OP/OC) was computed at 15.5% as against the PLI of the taxpayer at 15%. With regard to the transaction relating to sales commission, the taxpayer searched for comparables and found that the sales commission Is between 3% to 15% and whereas it has earned / paid commission of 10%. As regards royalty, the taxpayer stated that the brand royalty charged by the parent company is 1%, which is competitive as compared to normal rates of royalty. Similarly for the transaction relating to software service charges, the AE recovers the direct development cost plus 10% mark up, which is competitive as compared to normal rates. As regards the transaction relating to reimbursement, it is stated that the TP regulation do not apply as these are charged at cost. Accordingly, the taxpayer holds that the transactions are within arm's length.
12.3 As per the audited statement of accounts, the financials of the assessee are as under:
Description Amount (Rs.)
Operating revenue 1,22,37,57,108
Operating Cost 84,51,56,038
Operating Profit 37,86,01,070
OP/OR (%) 30.94
OP/OC (%) 44.80
12.4 TPO noted that as per the segmental statement of accounts submitted by the taxpayer during the course of hearing are as under:
Description Amount (Rs.)
Operating revenue 5,76,83,907
Operating Cost 5,01,61,751
Operating Profit 75,22,156
OP/OR (%) 13.04
OP/OC (%) 15.0
12.5 The TPO observed that the company had the following
transaction, which was not reported in Form 3CEB or but no bench marking analysis had been done in the TP study:
9 ITA No. 1425/H/15 and othersMonster.Com (India) Pvt. Ltd.
AE Nature of Amount
transaction (in Rs.)
Monster Worldwide Inc., Receivable 9,02,43,229
USA
Monster.com SG Pte. Ltd. Receivable 3,13,51,983
Monster Technologies Receivable 1,76,25,240
Malaysia Sdn Bhd
E-Career (Beijing) Ltd. Receivable 8,76,714
Monster italia Srl Receivable 53,039
Monster Recruitment Receivable 62,090
Insan Kaynaklari
Danismanlik Ltd., Turkey
Monster Worldwide Receivable 17,63,607
Canada
Monster Worldwide Receivable 12,238
Switzerland AG
Monster.com HK Ltd. Receivable 6,72,934
14,26,61,074
12.6 On going through the TP document, the TPO observed that the method of the search process is not in conformity with the TP regulations as also the choice of filters which resulted in selection of inappropriate comparables. The search criteria and the acceptance/rejection matrix applied by the company for screening the initially identified cases for arriving at a final comparable set and the remarks of the TPO were as under:
12.7 Comparables proposed by the TPO and accepted by the assessee are as under:
1. Acropetal Technologies Ltd. (Seg.)
2. Axis IT & T Ltd.
3. Cosmic Global Ltd.
4. Jeevan Softech Ltd. (Seg.)
5. Microgenetics Systems Ltd.
6. Crossdomain solutions Pvt. Ltd.
12.8 Comparables proposed by the TPO and objected by the assessee, are as under:10 ITA No. 1425/H/15 and others
Monster.Com (India) Pvt. Ltd.
1. Accentia Technologies Ltd.
2. Eclerx Services Ltd.
3. Infosys BPO Ltd.
4. TCS e-Serve International ltd.
5. TCS e-Serve Ltd.
12.9 The following final comparables selected by the TPO:
S.No. Name of the company OP/OC
1. Accential Technologies Ltd. 43.62
2. Acropetal Technologies Ltd. 10.12
(Seg.)
3. Axis IT & T Ltd. 11.89
4. Cosmic Global Ltd. 16.59
5. Eclerx Services Ltd. 42.17
6. Infosys BPO Ltd. 31.63
7. TCS e-Service International Ltd. 51.51
8. TCS e-Serve Ltd. 67.58
9. Jeevan Softech Ltd. (Seg.) 8.04
10. Microgenetics Systems Ltd. 6.60
11. Crossdomain Solutions Pvt. Ltd. 17.13
Total 306.88
Average 27.90
12.10 After applying the average margins of the comparables to the financials of the assessee, the TPO determined the arm's length price as under:
Description Amount
Arm's length margin 27.90%
Less: WCA 0.00%
Adjusted Arm's length price 27.90%
Operating Cost (OC) 5,01,61,751
Adjusted Arm's length Margin 27.90%
(%) AALM
Arm's Length Price = 6,41,56,880
(100+AALM)*OC
Price received (OR) 5,76,83,907
Adjustment u/s 92CA 64,72,973
12.11 Thus, the arm's length price of the assessee was Rs.
6,41,56,880/- and the shortfall of Rs. 64,72,973/- was treated as adjustment u/s 92CA of the IT Act and the total income of the 11 ITA No. 1425/H/15 and others Monster.Com (India) Pvt. Ltd.
assessee was enhanced to the extent accordingly u/s 92CA(3) of the Act.
13. Aggrieved with the above order, the assessee preferred an appeal before the CIT(A) and submitted that during the previous year relevant to the A. Y. 2010-11, the assessee company entered into certain International Transactions pertaining to BPO services by way of Tele-calling services and sales Agency Services in respect of data bank belonging to the Associated Enterprises. The assessee company has been adopting cost plus 15% mark up for invoicing these Associated Enterprises in respect of Tele-calling Services. The assessee company in respect of sales agency, has been charging and paying sales commission of 10%. For purpose of complying with Transfer Pricing Regulations, the assessee company adopted cost plus 15% mark up as Arms Length Price in respect of Tele-calling and Comparative Uncontrolled. This matter was referred by the Assessing Officer to the Additional commissioner(transfer Pricing). The assessee company has brought to the notice of the Transfer Pricing Officer that the Documentation filed in the preceding year is valid for this year in view of the proviso to Rule-lOD(4) of the Income Tax Rules.
13.1 It was submitted that the Company has been rendering these tele-sales services to three Associated Enterprises at USA, Singapore and Malaysia. All the direct and indirect costs are taken into account separately on a monthly basis and an invoice is raised at an agreed mark-up of 15% to all the Associated Enterprises. The cost and the management fees of 15% charged in respect of these three units, are as under:
Sl. Name of the Cost (Rs.) Mark-up Total (Rs.) No. company (Rs.)
1. Monster 3,44,76,631 51,71,495 3,96,48,12 Worldwide Inc., USA Monster SG Pte. 1,17,89,200 17,68,380 1,35,57,580 12 ITA No. 1425/H/15 and others Monster.Com (India) Pvt. Ltd.
Ltd., Singapore Monster 38,94,088 5,84,113 44,78,201 Technologies Malaysi 13.2 The assessee company has contended that it is earning sales commission and paying sales commission in respect of sale of data banks of the Associated Enterprises and that it is charging and paying a sales commission at 10%. The details were also provided to the TPO as detailed below:
Associated Enterprise Nature of Transaction Amount (Rs.) E-Career (Beijing Ltd.) Commission received 7,360 E-Career (Beijing Ltd.) Commission paid 1,32,090 Job Korea Co.Ltd. Commission received 25,917 Monster Jobs Mexico Commission received 10,325 S.de R.L.De.CV Monster Worldwide Commission received 1,51,355 Canada Monster Worldwide Commission paid 3,55,919 Canada Monster Worldwide Commission received 2,28,050 Inc.USA Monster Worldwide Commission paid 1,08,87,680 Inc.USA Monster Worldwide Commission received 50,61,270 Ltd., UK Monster Worldwide Commission paid 30,25,204 Ltd., UK Monster.Com HK Ltd. Commission received 2,32,647 Monster.Com HK Ltd. Commission paid 1,15,107 Monster SG Pte Ltd., Commission received 7,96,891 Singapore Monster SG Pte Ltd., Commission paid 1,54,678 Singapore Monster Recruitment Commisison paid 7,550 Insan Kaynaklari Daanishmanlil Ltd., Turkey Monster Technologies Commission paid 3,987 Malaysia Sdn Bhd.
13.3 It was submitted that the Transfer Pricing Officer in the final order u/s 90CA has recommended cost plus 27.90% as Arms Length 13 ITA No. 1425/H/15 and others Monster.Com (India) Pvt. Ltd.
Price and suggested an adjustment of Rs. 64,72,973/- in the total income of the assessee company. He did not consider the mark-up of 15% adopted by the assessee company in the case of cost plus relating to Tele-calling Services, as an Arm's Length Percentage. The Transfer pricing Officer has passed an order u/s 92CA on 28-10-2011, working out the adjustment finally as under:
"After applying the average mnrgins of the comparables to the financials of the tax payer, the results is as follows:
Arm's Lenth Margin 27.90%
Less: Working Capital adjustment 00.0%
Adjustment Arm's Length Margin 27.90%
Operating Costs(OC) Rs.5 ,01 ,61,751
Adjusted Ann's Length Margin(% ) (AALM) 27.90%
Arm's Length Price=(100+ AALM)*OC Rs. 6,41,56,880
Price received(OF) Rs. 5,76,83,967
Adjustment U /S.92CA Rs. 64,72,973
Thus, the Arm's length Price of the tax payer is Rs. 6,41,56,880/-and the shortfall of Rs 64,72,973/- is treated as adjustment u/s 92CA of I. T. Act and the total income of the tax payer will be enhanced to that extent accordingly u/s 92CA(3) of the I.T. Act".
13.4 It was submitted that ignoring the amounts of profits of Rs. 75,23,988/- shown by the assessee company in respect of international transactions, and in view of the increase in the markup in the cost plus method, the Transfer Pricing Officer has recommended an adjustment of Rs. 64,72,973/-. This amount was accordingly added by the Assessing Officer to the total income. The Transfer Pricing Officer and the assessing officer has also ignored the fact that The agreements in respect of TeIe-rolling activity were entered into the year relevant to the A.Y. 2007-08 and therefore, the mark-up as upheld by the CIT(Appeals) in the appeal in the A. Y. 2007-08, should be adopted far this year also.
13.5 It was submitted that the Transfer Pricing Officer has applied mark-Up of Rs. 12,96,481/- even on the reimbursement of expenses 14 ITA No. 1425/H/15 and others Monster.Com (India) Pvt. Ltd.
received without appreciating that the said reimbursement in the earlier years were not subjected to mark-Up, The Transfer pricing Officer has added, Rs. 30,75,456/- out of Brand Royalty and Rs. 41,06,436/- out of Software Charges as relating to prior period. While doing this, the Transfer Pricing Officer has ignored that the Parent Company raised the bill for the first time this year for Royalty and Software Charges. Therefore, the Transfer Pricing Officer should have seen that these expenses relate to the current year and not to prior period.
14. After considering the submissions of the assessee, the CIT(A) confirmed the addition made by the AO by observing as under:
"5.3 I have carefully considered the facts of the case, assessment order and submissions of the assessee. In this case the AO has taken several comparisons and adjustments after comparing arm's length price and several companies made the additions. The assessee mainly contested that the assessee company receiving sales commission and paying sales commission in respect of sale of data banks of the Associated Enterprises and charging and also paying sales commission at 10%. The Transfer Pricing Officer in the final order recommended Cost + 27.90% as Arm's Length Price as against 15% adopted by the assessee. The assessee has raised various objections against the order u/s 92CA(3) passed by the Transfer Pricing Officer. As per the assessee, the additions made by the Assessing Officer of Rs. 1,49,51,346/- consists of four items as below.
(a) Addition in respect of BPO operations Rs. 64,72,973/-
(b) Addition in respect of Royalty Rs. 30,75,456/-
(c) Addition in respect of Software Charges Rs. 41,06,436/-
(d) Mark-up in respect of reimbursement of
Expenses received Rs. 12,96,481/-
5.4 During the course of appeal proceedings, to substantiate its ground the assessee submitted CIT(A) order for the A.Y. 2007-
08 wherein the CIT(A) accepted 15% vide his order dated 25- 07-2011 as against 30.21% of mark-up adopted by the Transfer Pricing Officer. After considering all these, the submissions of the assessee are not accepted since the agreement entered with BPO operations by the assessee are varying from year to year. The Transfer Pricing Officer duly comparing with the 15 ITA No. 1425/H/15 and others Monster.Com (India) Pvt. Ltd.
companies and as per the detailed order, adopted the mark-up at 27.90% which was adopted by the Assessing Officer as against earlier of 30.21% as stated above. The Transfer Pricing Officer after duly considering the facts and explanation of assessee passed the order u/s 92CA. The Assessing Officer relying on the order of the Transfer Pricing Officer, adopted the same reasons furnished by the assessee and completed the assessment by accepting 27.90% as determined by the Transfer Pricing Officer. Aggrieved, by the assessment order passed, the assessee filed appeal before the CIT(A)-4, Hyderabad. The assessee in his submissions stated all facts and details as filed before Transfer Pricing Officer and as explained, the mark-up of 15% adopted by the assessee company in the case of cost plus relating to Tele-calling Services, as an Arm's Length Percentage, is not accepted by the Transfer Pricing Officer. The Transfer Pricing Officer has already recommended cost plus 27.90% as Arm's Length Price after considering all the submissions of the assessee. However, the assessee furnished the same submissions before me also which were already decided by the Transfer Pricing Officer. Therefore, I am not finding any reason to interfere with the mark up rate of 27.90% adopted by the Transfer Pricing Officer. Therefore, I am in agreement with the Assessing Officer with regard to adopting the mark up of 27.90% and completing the assessment based on the Transfer Pricing Officer's order. Hence, the addition made by the Assessing Officer is confirmed."
15. Aggrieved by the order of the CIT(A), the assessee is in appeal before us and submitted that the issues in dispute are squarely covered by the decision of the ITAT in assessee's own case for AYs 2007-08 to 2009-10 in ITA Nos. 1762/H/11 and others, vide order dated 31/03/2017.
16. Ld. DR neither controverted the submissions of the ld. AR nor brought any contrary decision in this regard.
17. Considered the rival submissions and perused the material facts on record. As submitted by the assessee, the issues in dispute are squarely covered by the decision of the ITAT in assessee's own case for AYs 2007-08 to 2009-10 (supra) wherein the coordinate bench has held as under:
"36. Considered the rival submissions and perused the material facts on record. As submitted by the ld. AR of the 16 ITA No. 1425/H/15 and others Monster.Com (India) Pvt. Ltd.
assessee, the six comparables objected by the assessee, have been excluded by the coordinate benches of this Tribunal in the aforesaid cases. For the sake of clarity, we extract the findings of the coordinate bench in the case of M/s Capital IQ Information Systems (India) Pvt. Ltd., (supra) as under:
"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 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 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-
17 ITA No. 1425/H/15 and othersMonster.Com (India) Pvt. Ltd.
"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 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.
18 ITA No. 1425/H/15 and othersMonster.Com (India) Pvt. Ltd.
(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 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 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 19 ITA No. 1425/H/15 and others Monster.Com (India) Pvt. Ltd.
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.
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 20 ITA No. 1425/H/15 and others Monster.Com (India) Pvt. Ltd.
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.
(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."
36.1 Therefore, following the said decision of ITAT as well as rule of consistency, the companies objected by the assessee in the additional grounds have to be excluded from the list of comparables. In view of the above, we direct the AO/TPO to exclude the aforesaid companies from the list of comparables and recompute the ALP afresh. Accordingly, the grounds raised by the assessee are allowed."
17.1 With regard to comparables i.e. Crossdomain Solutions Ltd. and TCS E Serve Ltd., the coordinate bench of this Tribunal in the case of S&P Capital IQ (India) Ltd., in ITA No. 200/Hyd/16, order dated 27/07/2016, has directed the TPO/AO to exclude from the list of comparables, by observing as under:
1. Crossdomain Solutions Ltd.21 ITA No. 1425/H/15 and others
Monster.Com (India) Pvt. Ltd.
This company was considered as a comparable and listed at Sl.No.7 of the comparables chosen by the TPO. It is the stand of the assessee that this company is not functionally comparable. It is seen that the business profile of this company is re-engineered payroll service. This company is also engaged in the development of information systems. The review and business functions of Cross Domain is as follows:-
"With a decade of experience in Payroll Outsourcing, Crossdomain. has created a re-engineered payroll service EFFIPAY - that processes and delivers accurate payroll to clients with headcount up to 1000 employees in just 4 hours", With Effipay Lite and Effipay Lite Plus, our bouquet of services cover end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000. "
"Crossdomain's IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and tum-a round-time for business critical processes. "
Source: http:/ www.cross-domain.com As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider.
III. 1. We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this c9mpany as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. We hold accordingly".
14.3. Facts are being similar in this year, the same has to be excluded. Moreover the web report placed indicates that this company is in market research and analysis and IT services which include software development and maintenance. There is no segmental information. In the absence of segmental data, it cannot be stated that the company is functionally similar. In view of the order in earlier year and based on annual report and web data of this year, it is better the same is excluded. We accordingly direct the TPO / AO to exclude the same.
22 ITA No. 1425/H/15 and othersMonster.Com (India) Pvt. Ltd.
2. TCS E-serve Ltd:
23. TPO included the same in the list of comparables on the reason that the turnover does not have any effect on profitability. DRP excluded the same by stating as under:
"Having considered the submissions, on perusal of annual report, it is noticed by us from the schedule to the financial statement that the company is engaged in the business of providing information technology - enabled services/ business processing outsourcing service, primary to the Citi group companies introduced globally the transaction processing include the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citi group to its corporate and retail clients. As per the annual report, the company also provide technical services involving software testing, verification and validation of software at the time of implementation and data centre management activities, which makes the company functionally incomparable with the assessee, accordingly, we direct the assessing officer to exclude the above company from comparables".
Even though, Ld. DR has argued vehemently for inclusion, we do not see any reason to include as this company is functionally different and being excluded in many cases in earlier years as well being unique in the functionality."
17.2 Even in the case of M/s Corporate Executive Board India Pvt. Ltd., ITA No. 6328/Del/2012 and others, order dated 17/03/2017, the coordinate bench at Delhi directed the TPO/AO to exclude the said companies as comparables.
17.3 Therefore, following the said decisions of ITAT as well as rule of consistency, the companies objected by the assessee have to be excluded from the list of comparables. In view of the above, we direct the AO/TPO to exclude the aforesaid companies from the list of comparables and recompute the ALP afresh. Accordingly, the grounds raised by the assessee are allowed.
18. As regards ground Nos. 11 & 12 regarding mark up of 27.90% on the reimbursement of expenses received of Rs. 12,96,481/-, this issue is squarely covered by the decision of ITAT Hyderabad in the case of Mylan Laboratories Ltd., (Formerly Matrix Laboratories Ltd.) 23 ITA No. 1425/H/15 and others Monster.Com (India) Pvt. Ltd.
in ITA No. 66/Hyd/2013 for AY 2008-09 vide order dated 01/01/2014, wherein the coordinate bench has held as under:
31. After considering the rival contentions, we are of the opinion that this issue required to be examined by the Assessing Officer/TPO in detail whether the said amount claimed to have received by the assessee as reimbursement expenses are indeed reimbursement or not. In case of reimbursement at cost of the expenditure incurred on behalf of the AEs and has not formed part of the expenditure claimed as operating cost of the assessee then, the reimbursement should not be considered as part of assessee's sales. The amounts should be excluded in computing the operating profits. Since the Assessing Officer has not examined and it is also not on record whether the said expenditure was not part of claim under section 37(1) of the I.T. Act in the regular computation or not, in the interest of justice, we remit the matter back to the file of the TPO to examine the facts and to exclude only in the case the said amount is reimbursement of expenditure and there was no claim by the assessee in its computation of income."
As the issue in the present case is materially identical to that of the said case, following the decision of the coordinate bench, we remit the issue back to the AO/TPO to decide the issue in line with the directions of the coordinate bench in the said case. This ground is allowed for statistical purposes.
19. Ground No. 13 is not pressed by the assessee, therefore, the same is dismissed as not pressed.
20. Ground No. 14 is regarding to charging of interest u/s 234B and 234C. Since charging of interest under these sections is consequential in nature, and the same will ultimately depend upon the outcome of the adjustment to be made to the ALP, the AO/TPO is directed to recompute the interest under the said sections accordingly.
ITA No. 1509/H/16 for AY 2011-12 by the revenue and ITA No.1175/H/16 for AY 2011-12 by the assessee.
24 ITA No. 1425/H/15 and othersMonster.Com (India) Pvt. Ltd.
21. As regards ground Nos. 1&2 raised by the revenue regarding accrued income shown as unmatured advances amounting to Rs. 73,61,67,985, similar issue has been decided by us in AY 2010-11 in revenue's appeal vide para No. 11(supra). As the issue is materially identical to that of AY 2010-11, following the conclusions drawn therein, we uphold the order of the CIT(A) in deleting the said addition and accordingly, dismiss the grounds raised by the revenue.
22. The grounds raised by the assessee in AY 2011-12 are similar to the grounds raised in AY 2010-11, following the conclusions drawn therein, we remit all the grounds to the file of the AO/TPO to decide the same in line with the directions given in AY 2010-11. Thus, all the grounds are allowed for statistical purposes.
23. To sum up, revenue appeals in AY 2010-11 & 2011-12 are dismissed and the appeals of assessee in AY 2010-11 and 2011-12 are allowed for statistical purposes.
Pronounced in the open court on 30 th August, 2017 Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 30 th August, 2017.
kv
Copy to:-
1. M/s Monster.Com (India) Pvt. Ltd., 8-2-293/82A11204 & 1201/1, Road No. 45, Jubilee Hills, Hyderabad.
2. DCIT, Circle - 16(2), 7 th Floor, Aayakar Bhavan, Hyderabad.
3. CIT(A) - IV, Hyderabad
4. Pr. CIT - 4, Hyd.
5. DR, ITAT, Hyderabad
6. Guard File