Income Tax Appellate Tribunal - Pune
Ptc Software (India) Pvt. Ltd.,, Pune vs Assessee
Author: G.S.Pannu
Bench: G.S.Pannu
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
Before Shri G.S.Pannu, Accountant Member,
and Shri R.S.Padvekar, Judicial Member.
ITA.No.1605/PN/2011
(Asstt. Year : 2007-08)
PTC Software (India) Pvt. Ltd.,
Survey No.15, Marisoft-II,
Vadgaonsheri, Kalyaninagar,
Pune - 411014. .. Appellant
PAN: AABCC1268J
Vs.
ACIT, Circle-4,
Pune. .. Respondent
Assessee by : Shri Rakesh Gupta
Department by : Shri S.K.Singh
ORDER
PER G.S.PANNU, AM:
This appeal by the assessee is directed against the order passed by the Assessing Officer dated 05.10.2011 u/s.143(3) r.w.s. 144C of the Income Tax Act, 1961, pertaining to the A.Y. 2007-08.
2. Although the assessee has raised multiple Grounds of appeal, but the substantive dispute raised by the assessee is against the action of the lower authorities in determining the Arm's Length Price (in short the ALP) of the appellant's international transactions at Rs.21,63,60,620/- as against Rs.11,25,20,500/- declared by the assessee.
3. In brief, the relevant facts are that assessee is a company incorporated under the provisions of the Companies Act, 1956, and is a wholly owned subsidiary of M/s.Parametric Technology Corporation, USA (in short 'PTC USA'). The parent company i.e. PTC USA, is engaged in developing, marketing and supporting Product Lifecycle Management (PLM) and Enterprise Content 2 Management (ECM) software solutions and related services for their clients. The assessee company is engaged in providing Information Technology (IT) services and IT-Enabled services to its parent company i.e. PTC USA. In the IT-Enabled services segment, assessee undertakes designing and developing of software for PTC USA, which in turn is utilized by PTC USA to provide PLM software solutions to its clients. In the IT-Enabled services segment, the assessee is rendering support services (Call Centre services) to the global client-base of PTC USA.
4. In this background, the assessee entered into the following 'international transactions' with its Associate Enterprise (in short 'AE') i.e. PTC USA:-
Sr. No. Nature of International Amount (Rs)
Transaction
1. Provision of IT services 95,59,54,385
2. Provision of IT enabled services 5,75,65,117
5. In order to determine the income arising from such international transactions having regard to the ALP as per section 92(1) of the Act, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) u/s.92CA(1) of the Act. Before the TPO, assessee contended that the aforestated two international transactions were undertaken at an Arm's Length Price and in the Transfer Pricing study conducted by it, the Transactional Net Margin Method (in short 'TNM method') was considered as the most appropriate method. As per the benchmarking analysis carried out by the assessee with respect to the IT-services segment, the PLI [Operating Profit (OP) / Operating Cost (OC)] of the assessee was computed at 14.02% and the arithmetic mean of the PLI of the comparable companies adopted by the assessee was 10.70%. Since the PLI of the assessee was favourable, assessee contended that the consideration stated for provision of IT-services to the AE at Rs.95,49,54,385/- was at an arm's length. Similarly, with regard to the IT-Enabled services segment, assessee adopted the TNM method for benchmarking its international transactions, 3 wherein the PLI of the assessee was computed at 14.23% and the same was found favourable in comparison to the arithmetic mean of the PLI of the comparable cases at 10.51%, and, accordingly the consideration of Rs.5,75,65,117/- declared by the assessee for provision of IT-Enabled services was also considered at an arm's length.
6. The TPO found that so far as the adoption of the TNM method as the most appropriate method to benchmark the international transactions was concerned, the same was in order. However, the TPO has differed with the assessee for determination of the ALP in both the segments. With respect to the provision of IT services, the ALP was determined at Rs.105,0006657 as against Rs.95,59,54,385/- declared by the assessee which resulted in an upward adjustment of Rs.9,40,52,272/- to the returned income. With regard to the IT-Enabled services segment, the ALP of the international transaction was determined by the TPO at Rs.6,73,52,967/- as against Rs.5,75,65,117/- declared by the assessee which resulted in an upward adjustment of Rs.97,87,850/- to the returned income.
7. The points of difference between the assessee and the TPO can be briefly summarized as follows. Firstly, while adopting the data of the comparable cases for the purposes of comparability analysis, assessee utilized the data of the comparable cases relating to three financial years, including the year under consideration. Accordingly, the PLI of the comparable cases was computed on the basis of the average of three years data, whereas the TPO has utilised the data for the single year, i.e., relating to the financial year under consideration during which the impugned international transactions have been carried out. Secondly, the TPO has applied Related Party Transaction (RPT) filter in order to ascertain the comparable cases, which was hitherto not considered by the assessee during its Transfer Pricing study. Notably in the proceedings before the TPO, assessee had put forth that the cases having 10% or more related party transactions (i.e., RPTs) should be 4 excluded. The TPO has, however, considered 25% of the appropriate base i.e. either sales or expenses, as the threshold limit for application of the RPT filter. Thirdly, the TPO rejected certain comparables selected by the assessee on the ground of functional dissimilarities and also loss making concerns.
8. The TPO accordingly passed an order u/s.92CA(3) of the Act dated 29.10.2010 determining an upward adjustment to the international transactions of Rs.10,38,40,122/-. The Assessing Officer thereafter made a draft assessment order u/s.144C of the Act in the aforesaid light against which assessee preferred objections before the DRP (DRP). Various objections of the assessee were disposed of by the DRP in terms of its directions u/s.144C(5) of the Act dated 20.05.2011. In terms of its directions dated 20.05.2011, the proposed action of the Assessing Officer was found appropriate. Resultantly, the Assessing Officer passed an order of assessment u/s.143(3) r.w.s. 144C(13) of the Act dated 05.10.2011, wherein the Arm's Length Price of the international transactions was determined by the Assessing Officer in terms of the order of the TPO. Accordingly, the Assessing Officer computed the total income of the assessee in relation to the international transactions in conformity with the ALP so determined by the TPO. As a result, the total income of the assessee was determined at Rs.21,63,60,620/- as against the income declared as per return of income at Rs.11,25,20,500/-, thereby resulting in an adjustment to the international transactions of Rs.10,38,40,122/-.
9. Before us, the primary grievance raised by the assessee at the time of hearing is with regard to the selection of certain comparable companies for the purposes of comparability analysis, which according to the assessee are excludible. The assessee has also asserted that some of the companies identified by the assessee as comparables have been unjustly ignored while undertaking the comparability analysis.
510. Firstly, we take up for consideration the rival contentions with regard to the adjustment of Rs.9,40,52,272/- made in the IT-services segment. On this aspect, the TPO undertook fresh analysis and finally selected the following comparables:
Sr.No. Company OP/OC%
1 F C S Software Solutions Ltd. 22.64
2 Goldstone Technologies Ltd. 24.75
3 S I P Technologies & Exports Ltd. 14.46
4 Sonata Software Ltd. 21.47
5 Synetairos Technologies Ltd. 19.24
6 Akshay Software Technologies Ltd. 4.78
7 Mindtree Consulting Ltd. 17.34
8 Compucom Software Ltd. (seg) 35.63
9 Helios & Matheson Information 36.63
Technology Ltd.
10 Transworld Infotech Ltd. 32.88
11 KALS Information Systems Ltd. (seg) 30.55
12 ICSA (India) Ltd. (seg) 56.16
13 ICRA Techno Analytics Ltd. 11.64
Arithmetic Mean 25.24
11. In this regard the first plea of the assessee is that the items at (1) and (8) namely, FCS Software Solutions Ltd. and Compucom Software Ltd. (seg) have been wrongly included by the TPO in the set of comparables. The argument set up by the assessee is that though the said concerns may be functionally comparable, so however, the same stand to be excluded on the basis of the RPT filter of 25% which has been adopted by the TPO himself but has been wrongly applied to include the two companies. In this regard we find that in the Transfer Pricing study undertaken by the assessee it had not applied the filter of RPT for the purposes of eliminating cases having related party transactions. In the course of transfer pricing proceedings, the assessee on being asked, stated that the RPT filter be applied to exclude cases from the list of comparables where the RPT transactions exceed 10% of the total transactions. The TPO however, decided to identify the companies where the quantum of RPT is more than 25% calculated with reference to the appropriate base, and excluded the same for the purposes of comparability analysis. Notwithstanding the assessee's 6 primary plea that the threshold limit of 25% adopted by the TPO was inappropriate, it has been submitted before us that even after applying the filter adopted by the TPO, the aforestated two concerns are liable to be excluded as they have related party transactions in excess of 25% of the total transactions. It has been pointed out that the RPT percentage has been wrongly calculated by the TPO and for that matter it referred to the detailed submissions made in this regard to the DRP which are placed at pages 815 - 816 of the Paper Book.
12. In this connection, we find that the TPO defined the RPT filter to mean that in cases where the RPT transactions exceed 25% of the total transactions, the same are liable to be excluded for the purposes of comparability analysis. The TPO further decided to compute the limit of 25% of RPT transactions with reference to the appropriate base, which was either sales or total operating expenses, as the case may be. In para 6.3.2. of his order, the TPO has noticed in relation to FCS Software ltd that the said company had sales revenues from related parties of Rs.36.89 crores against total sales of Rs.131.27 crores and it had incurred RPT expenses of nil against total expenses of Rs.107.58 crores. He computed the percentage of RPT to the total transactions at 15.40% by the following method:
RPT sales divided by (total sales + total expenses) multiplied by 100 i.e., Rs.36.89 crores divided by (Rs.131.27 + Rs.107.58) multiplied by 100.
13. Ostensibly, the aforesaid calculation results in RPTs of 15.40% which is below the filter of 25% adopted by the TPO and accordingly, it was not excluded. However, it is quite evident that the denominator of Rs.238.85 crores adopted by the TPO is wrong in as much as it includes total expenses also whereas as per TPO's own observations, there are no RPT expenses. The numerator comprises of only the sales to related parties and no RPT expenses. Therefore, the adoption of the denominator, i.e., the base, by considering total sales plus total expenses in the present case 7 where there is no RPT expenses would lead to a misleading result. If the denominator is restricted to the total sales in the present case, as there are only RPT sales, the result would be percentage of RPTs of 28.10%, i.e, Rs.36.89 crores divided by Rs.131.27 crores. The case of the assessee is that even by applying the RPT filter of 25% envisaged by the TPO, the said concern is excludible as it has RPTs vis-à-vis its total transactions in excess of 25%. In view of the aforesaid factual matrix, we hold that FCS software ltd is excludible from the list of comparables for the purpose of comparability analysis.
14. Similarly, in the case of Compucom Software Ltd., the TPO has observed in para 6.3.19 of his order that the said concern has nil sales revenue from related parties against total sales of 23.82 crores, but has incurred RPT expenses of Rs.6.65 crores against total expenses of 17.78 crores. The ratio of RPT to total transactions has been computed at 15.19% by the TPO. Again the TPO has adopted the denominator of Rs.41.60 crores inclusive of total sales whereas the numerator is Rs.6.65 crores, comprising of only RPT expenses and no RPT sales. Therefore, the denominator is to be corrected at Rs.17.78 crores and the correct percentage of RPTs would be 37.40%, i.e., RPT expenses/total expenses. The RPTs being in excess of the 25% filter adopted by the TPO, the said concern in our view is also liable to be excluded from the list of comparables for the purpose of comparability analysis.
15. Before parting, we may also observe that the manner in which the RPT filter has been applied by the TPO in the year is inconsistent with his own approach in the A.Y. 2006-07. For this purpose, the appellant has referred to pages 668 to 751 of the Paper book for the copy of the order of the TPO dated 29.10.2009 for A.Y. 2006-07, specifically at pages 689 to 690, where the TPO has taken either the sales or expenses as the appropriate base, as the case may be, and not aggregate of sales and total expenses even where related party transactions in one of the two was absent.
816. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Helios & Matheson Information Technology Ltd., and KALS Information Solutions Ltd. (Seg). The primary plea raised by the assessee to assail the inclusion of the aforesaid two companies from the list of comparables is to be effect that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT-services segment.
17. As per the discussion in para 6.3.2. of the order of the TPO, the reason advanced for including KALS Information Systems Ltd., is to the effect that the said concern's application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F.Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's IT-Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of some of the software products which are developed by it, however, the said concern was not into trading of software products as there 9 were no cost of purchases debited in the Profit & Loss Account. Though the TPO agreed that the quantum of revenue from sale of products was not available as per the financial statements of the said concern, but as the basic function of the said concern was software development, it was includible as it was functionally comparable to the assessee's segment of IT-Services.
18. Before us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceeding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which is the copy of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year.
19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern has not been found to be functionally comparable with the assessee in the immediately preceding assessment year and in the present year also, on the basis of the Annual Report, referred to in the written submissions addressed to the lower authorities, the assessee has correctly asserted out that the said concern was inter alia engaged in sale of software products, which was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the 10 immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services.
20. With regard to the inclusion of Helios & Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of KALS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, placed at page 432 of the Paper book has been pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables.
21. The assessee has assailed the inclusion of ICSA India Ltd., appearing at item (2) in the Tabulation in para 10 as a comparable by the TPO. In this context, the relevant discussion by the TPO is contained in para 6.3.23 of the order and the Annual Financial Statements of the said concern have also been placed in the Paper Book at pages 246 to 327 of the Paper book. The TPO noticed that in the transfer pricing study undertaken by the assessee the said concern was excluded/rejected by applying the quantitative filter of Research and Development expenditure being in excess of 3% of sales. The TPO has not differed with the adoption of the quantitative filter for R&D expenses, so however, according to him the research and development expenditure incurred by the said concern for the F.Y. 2006-07 is 6,71,86,184/- which is 2.02% of the total turnover of the concern and therefore, it is within the threshold of the quantitative filter of 3% of sales adopted by the 11 assessee, and accordingly he included the said concern in the list of comparables. The TPO also disagreed with the contention of the assessee raised before him that the said concern was functionally dissimilar. The TPO has noticed by referring to the Annual Report for the F.Y. 2006-07 that it has two distinct segments, namely
(i) software services and embedded solutions; and, (ii) Products and Projects related to power sector. The TPO considered the software services segment as a comparable to assessee's segment of IT-services and therefore he included the said concern in the list of comparables.
22. In this context, the Ld. Counsel has referred to the Annual Financial Statements of the concern to point out that the total research and development expenditure of Rs.6,71,86,184/- incurred by the said concern is in relation to the embedded solutions segment only, and in this connection a reference has been made to the Director's Report, a copy of which is appearing at page 268 of the Paper book. It is pointed out that in order to calculate the ratio of R&D expenses to total sales, it has to be calculated with reference to the sales in software services and embedded solutions segment of the said concern, because the R&D expenses pertain only to this segment. In this connection a reference has been made to page 297 of the Paper book which gives the break-up of the sales in different segments and after considering the R&D expenses of Rs.6,71,86,184/- vis-à-vis the sales in software services/embedded services segment, the percentage comes to 3.84%. The Ld. Counsel pointed out that the percentage of 2.04% of R&D expenditure computed by the TPO was after considering the total turnover of the said concern including that of the product and projects related to power sector segment. It is submitted that the aforesaid action of the TPO is wrong, firstly the R&D expenditure has been incurred only for the software services/embedded services segment, and secondly, it is wrongly compared with total turnover which included the turnover of products and projects related to power sector segment whereas the TPO has only adopted the software 12 services/embedded services segment for the purposes of comparability analysis. Factually speaking, we find no reasons to disagree with the plea set up by the assessee. Evidently, the TPO has not disputed the adoption of quantitative filter of 3% of R&D expenses. However, the TPO computed the R&D expenditure at 2.02% of the total sales which is ostensibly incorrect in as much as the expenditure in question has been incurred only for the software services/embedded services segment (which has been adopted as comparable segment) and it cannot be compared vis-à-vis the total turnover which includes the products and projects related to power sector segment, when factually no R&D expenses have been incurred for the latter segment. Therefore, without going into the merits of the assessee's other plea that the said concern is functionally dissimilar, we do not find any justification for inclusion of the said concern considering that R&D expenses are above the filter of 3% adopted for the purposes of the comparability analysis. Thus on this aspect the assessee succeeds.
23. The next point made by the assessee is with regard to inclusion of Transworld Infotech Ltd., appearing at item (10) in the Tabulation in para 10, as a comparable case. The TPO, as per his discussion in para 6.3.22 of the order, has included the said concern in the list of comparables on the ground that it was functionally similar to the assessee's IT-services segment. The short point made by the assessee before us is to the effect that the said concern was not includible because the assessee's financial period is from 1.4.2006 to 31.3.2007, whereas the relevant data of the said concern which has been considered is for the period 1.7.2006 to 30.06.2007. It was therefore pointed out that since the data of the comparable concern does not correspond to the financial year of the assessee, the said concern is incomparable. Factually, the aforesaid position is not disputed by the Revenue. In fact the provisions of Rule 10B(4) of the Income Tax Rules, 1963 (in short 'the Rules') provide that the data to be used in analyzing the comparability of an uncontrolled transaction with an international 13 transaction shall be the data relating to the financial year in which the international transaction has been entered into. In the present case, the data adopted of Transworld Infotech Ltd. does not relate to the financial year in which the international transaction has been carried out by the assessee. On this point the said concern is excludible from the list of comparables and we also find that the TPO has adopted such an approach while excluding Powersoft Global Solutions Ltd. from the list of comparables as per discussion in para 6.3.7. of the impugned order.
24. In so far as the IT services segment is concerned, there is no other specific plea raised by the assessee and therefore, we conclude on this aspect by holding that the Assessing Officer shall rework the ALP of the international transaction relating to the IT services segment in terms of our aforesaid discussion.
25. Now, we take for discussion the adjustments made in IT- Enabled services segment, wherein the TPO selected the following comparables:-
Sr.No. Company OP/OC%
1 Ask Me Info Hubs Ltd. (Shreejal Info Hubs 5.67
Ltd.)
2 Cosmic Global Ltd. (Tulsyan Technologies 11.75
Ltd.)
3 Maple E-Solutions Ltd. 34.32
4 Transworks Information Services Ltd. 12.45
(Aditya Birla Mandir)
5 Triton Corpn Ltd. 32.36
6 CMC Ltd. (seg) 31.92
7 National Securities Depository Ltd. (Seg) 29.17
8 Apex Advanced Technology Pvt. Ltd. 39.73
9 Visesh Infotechnics Ltd. (seg) 77.31
10 Vishal Information Technologies 51.19
11 Informed Technologies India Ltd. 34.32
Arithmetic Mean 32.74
26. In the IT-Enabled Services segment, an adjustment of Rs.97,87,850/- has been made by adopting the aforesaid comparables. The rival stands on this aspect are as under.
1427. Firstly, as per the assessee, entity at item (6) of the above Tabulation, M/s.CMC Ltd (seg.) has been wrongly included in the list of comparables. It has been explained that the RPTs in relation to sales / expenses are in excess of 25% of the total transactions, and for the reasons advanced regarding the exclusion of FCS Software Solutions Ltd (in the IT-services segment dealt with in earlier paragraphs), the said concern is not includible. In para 6.9.12 of the order of the TPO, the ratio of RPTs to total transactions has been computed at 24.05%, and as it was below the threshold of 25% adopted by the TPO, the same has been included in the list of comparables. The assessee has referred to page 892 of Paper Book, wherein the relevant details have been placed. In terms of the same, the RPT sales and RPT expenses are Rs.501.43 crores and Rs.87.78 crores respectively as against total sales and total costs of Rs.989.88 crores and Rs.853.19 crores respectively. In this context, the ratio of RPTs to total transactions has been calculated at 31.97% i.e. (Rs.87.78 crores plus Rs.501.43 crores) divided by (Rs.989.88 crores plus Rs.853.19 crores). As per the aforesaid calculation, ostensibly the said concern's RPTs exceed the threshold filter of 25% and the same is thus excludible. However, we find that the TPO in para 6.9.12 of the order has computed the ratio of RPTs to total transactions at 24.05%, but the relevant details of calculation are not emerging from the orders of TPO or even the DRP, before whom a specific objection was raised by the assessee. In this background, we remand the matter back to the file of the Assessing Officer, who shall reconsider the computation of the ratio of RPTs to the total transactions, as canvassed by the assessee and decide accordingly.
28. The next point raised by the assessee is against the inclusion of Apex Advanced Technology Pvt. Ltd., appearing at item (8) in the Tabulation at para 25 above. In this regard, the plea raised by the assessee is that the said concern is functionally different in as much as it is engaged in database creation business and the information in public domain does not throw any light on the exact 15 nature of services rendered by the said concern. In the absence of sufficient data for conducting the comparability analyses, the plea set up by the assessee is that the said concern be excluded from the list of comparables. The Ld. Counsel for the assessee had referred to the written submissions made before the lower authorities, which are placed at pages 420.28 and 823 of the Paper Book. The TPO has discussed the issue in para 6.9.5. of his order.
29. After having considered the rival submissions and the material referred to by the assessee, in our considered opinion, no justifiable grounds have been raised by the assessee to claim exclusion of the said concern. While the assessee may be correct in asserting that the said concern is engaged in database creation services and that the assessee does not engage in creation of any database for its clients. However, it is to be noticed that the functional aspects are similar in as much as in both cases the BPO facility is used and in our view the TPO was justified in observing that the IT-Enabled services performed by the assessee can be compared with the functions of the said concern. In the absence of any other objection raised by the assessee we deem it fit and proper to hold that the TPO was justified in including the said concern in the list of comparables.
30. The next point raised by the assessee is against the inclusion of Vishal Information Technologies Ltd., appearing at Item (10) in the Tabulation in para 25 as a comparable case. The TPO has discussed the issue in para 6.9.6. of the order. As per the TPO, the said concern is functionally comparable to the IT-Enabled services segment of the assessee and for that reason, the said concern has been included as a comparable for the purposes of comparability analysis. In this connection, the plea set up by the assessee is that the said concern is engaged in not only IT-Enabled services, but also in providing quality products and in the creation of animated films and books. It has also been ascertained by referring to the Annual Report of the said concern that it is engaged in providing agency services by way of outsourcing the services to third party 16 vendors and acting as an intermediary between the final customer and the vendor. The assessee furnished detailed submissions in this regard before the lower authorities, copies of which have been placed in the Paper Book at pages 420.8 to 420.31. By referring to the written submissions, it is also sought to be pointed out that the intermediary functions performed by the said concern can be compared to that of a distributor which takes title to service/product for resale to the customers. The aforesaid assertion is sought to be substantiated by the details of payments made by the said concern for data entry and vendor payments, personnel costs and sales. It is, therefore, contended that the said concern is functionally dissimilar to that of the IT-Enabled services segment of the assessee. It has also been argued that the said concern has earned supernormal profits as high as 59.19% and therefore, the same is not includible in the list of comparables so as to avoid skewing of the comparability analysis. On the other hand, the stand of the Revenue as brought out by the TPO in para 6.9.6. of the order is to the effect that the said concern being categorized as an IT-Enabled services concern, the same is liable to be included.
31. We have carefully considered the rival submissions on this aspect. At the outset, we may refer to page 810 of the Paper book, wherein the Notes to Accounts for the year ended 31.3.2007 of the said concern have been placed. As per the available information, the said concern has related party transactions as reported by the concern at para 7 of the said Notes at 86.92%, which breaches the RPT filter. Furthermore, the functional profile of the said concern brought out by the assessee also reveals differentiation in the activity profile. The TPO, in our view, has not appreciated the qualitative difference in the functions performed by the said concern as sought out to be brought out by the assessee. Considering the aforesaid, we therefore, find that the assessee was justified in ascertaining that the said concern be excluded from the 17 list of comparables for the reasons canvassed. Thus, on this aspect assessee succeeds.
32. The next issue raised by the assessee is with regard to the inclusion of M/s.Vishesh Infotechnics Ltd. (segment) in the list of comparables. The TPO has made the relevant discussion in para 6.9.7. of the order and as per the said discussion, the said concern is engaged in three different activities, namely IT-Solutions and Products Support, Enterprise Software and IT-Enabled services. The IT-Enabled services segment of the said concern has been considered as a comparable to IT services Segment of the assessee.
33. The plea of the assessee before the lower authorities was that the said concern is engaged in rendering high end Knowledge Process Outsourcing (KPO) and Legal Process Outsourcing (LPO) services and the same cannot be compared with the routine back office support services rendered by the IT-Enabled services segment of the assessee. The second objection taken by the assessee was that the said concern has earned extraordinarily high profit margin in this year of 77.31% as against margins of 49.64% and 53.66% for the preceding and succeeding years respectively. The TPO has justified the inclusion of the said concern in the list of comparables primarily on the ground that the activities carried out by the said concern are in the field of IT-Enabled services, which is comparable to the assessee.
34. In our considered opinion, the arguments set up by the assessee have not been appreciated by the lower authorities in its proper perspective. The assessee had pointed out that its IT-Enabled Services segment involves providing of back office services pertaining to the support to be provided to the customers of PTC USA. It was explained by the assessee that such queries are received through telephones, e-mails or the internet depending on the channel preferred by the customer and are attended to by the assessee in accordance with the instructions provided from time to time by PTC USA. On the contrary, the Annual Report of the Vishesh Infotech Ltd., placed at page 752 - 796 of the Paper Book, 18 it is revealed that the IT-Enabled services segment of the said concern is engaged in providing high end KPO and LPO services. Ostensibly, the assessee was justified in asserting that the quality and level of manpower/human resource involved in providing of high end KPO and LPO services is qualitatively different than the routine back office services provided by the assessee's IT-Enabled services segment and, therefore, the revenue/margins of the two concerns are not comparable. Justifiably, the said concern is showing a profit margin of 77.31% in this year and comparing it with 49.64% in the preceding year and 53.66% of the succeeding year, it is obvious that due to the qualitative difference in rendering of services, though in the IT-Enabled services segment, the two concerns cannot be meaningfully compared. Therefore, in our view, the said concern was liable to be excluded for the purposes of carrying out the comparability analysis.
35. The last issue raised by the assessee is with regard to the inclusion of M/s.Informed Technologies India Ltd., appearing at Item (11) in the Tabulation, in para 25 above. On this aspect also, the assessee has raised two-fold grievances, namely that the said concern was rendering high end KPO services apart from rendering the routine IT-Enabled services and secondly, there was inconsistency in operating margins in as much as in the earlier years, it had incurred losses of 66.34%, 76,24%, 44.44% on one hand and earned a meager profit of 5.34% in the instant financial year. The Ld. Counsel for the assessee referred to the written submissions made to the lower authorities on the above lines, copy of which is placed in the Paper Book at pages 420.33 to 420.35 as also the Annual Report of the said concern placed at page 844 to
883.
36. The TPO has discussed the issue in para 6.2.8. of the order and has justified the inclusion primarily on the ground that the said concern was in principle, engaged in Business Processing Outsourcing which is similar to that of the assessee. As per the TPO, the said concern was functionally comparable and that the 19 margins primarily comprised of the income from IT-Enabled services segment and not from rental/business centre charges, as made out by the assessee.
37. We had considered the rival stands and find that the stand of the TPO is liable to be affirmed. The assessee, in our view, has not been able to substantiate the propositions canvassed to support the exclusion of the said concern from the list of comparables. The assessee has not justified as to in what manner the profits are influenced by the inclusion of rental/business centre charges. The TPO has dealt with the plea set up by the assessee which is not found to be lacking and, therefore, we are inclined to upheld the action of the TPO in including the set concern in the said of comparables for carrying out the comparable analysis of the IT-Enabled services segment.
38. Another aspect raised by the assessee is with regard to M/s.Galaxy Commercial Ltd., which has not been considered as comparable by the TPO with regard to the IT-Enabled services segment of the assessee. The plea of the assessee is that the said concern is principally engaged in the provision of back office processing services and is, therefore, liable to be included in the list of comparables. The TPO in para 6.9.2. of the order, has not accepted the plea of the assessee on the ground that the said concern is not only engaged in BPO services, but also derives income from rental and transportation and in the absence of the availability of segmental results, it could not be considered as a comparable case.
39. On this aspect, the plea of the assessee, before the lower authorities as well as before us, is that the principal business of the said concern is providing of back office processing services and the transportation business is merely 7% of the income. It is also submitted that the rental income earned by the said concern has not been considered for the purposes of determining the margin of the said concern as is evident from the relevant extract of the Annual Report of the said concern placed at pages 190 to 191 of the 20 Paper book. A reference has also been made to the written submissions made to the lower authorities, copy of which has been placed in the Paper Book at page 420.25 to 420.26.
40. At the time of hearing the Ld. Counsel has referred to the extract of the Profit & Loss Account of the said concern, which is at page 420.26 of the Paper Book to point out that the analysis would show that the said concern is predominantly engaged in providing BPO services.
41. We have considered the rival stands and find that the plea of the assessee is well founded in as much as out of the total revenue of Rs.9.84 crores as much as Rs.8.63 crores is earned from BPO operations, which is 87% of the total revenue. The income from transportation and rental is quite insignificant compared to the total revenues earned, and therefore, in our view, the functional similarity of the said concern is liable to be appreciated and the same is includible in the list of comparables. The TPO, in our view, was not justified in excluding the said concern from the list of comparables.
42. The assessee has not raised any other specific plea with regard to the adjustment made in the IT-Enabled services segment and, therefore, we set aside the matter back to the file of the Assessing Officer who shall re-work the ALP of the international transactions relating to the IT-Enabled services segment in terms of our aforesaid discussion.
43. Before concluding, we may also refer to the plea raised by the assessee that no adjustment was merited in the IT-Enabled services segment even if there was a difference in perceiving the ALP of the international transactions, on the ground that the income of the assessee was exempt u/s.10A of the Act, and therefore, there was no motive on the part of the assessee in taking tax advantage by reporting a lower consideration. In our considered opinion, the purport of provisions of Chapter X providing for the transfer pricing adjustments is not jeopardized by presence or absence of any 21 motive of deriving tax advantage, vis-à-vis the exemption provided u/s.10A of the Act. Therefore, the aforesaid plea of the assessee is liable to be rejected.
44. In the result, the appeal of the assessee is partly allowed.
Pronounced in the open court on this the 30th day of April, 2013.
Sd/- Sd/-
( R.S.PADVEKAR ) ( G.S.PANNU )
JUDICIAL MEMBER ACCOUNTANT MEMBER
gsps
Pune, dated the 30th April, 2013
Copy of the order is forwarded to:
1. The Assessee
2. The ACIT, Circle-4, Pune.
3. The DRP, Pune.
4. The CIT concerned.
5. The DR "B" Bench, Pune.
6. Guard File.
By Order
//TRUE COPY//
Private Secretary,
Income Tax Appellate Tribunal,
Pune.