Income Tax Appellate Tribunal - Hyderabad
Knoah Solutions Pvt.Ltd., Hyd, ... vs Department Of Income Tax on 24 August, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 180/Hyd/2015
Assessment Year: 2010-11
Income Tax Officer, vs. Knoah Solutions Pvt. Ltd.,
Ward - 2(1), Hyderabad. Hyderabad.
PAN - AABCK 6861 B
(Assessee) (Respondent)
ITA No. 326/Hyd/2015
Assessment Year: 2010-11
Knoah Solutions Pvt. Ltd., vs. Income Tax Officer,
Hyderabad. Ward - 2(1), Hyderabad.
PAN - AABCK 6861 B
(Assessee) (Respondent)
Revenue by : Shri T. Venkat Reddy
Assessee by : Shri A.V. Raghuram
Date of hearing 10-08-2016
Date of pronouncement 24-08-2016
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
Both these appeals filed by the assessee and revenue are cross appeals directed against the order passed u/s 143(3) r.w.s. 92CA(3) r.w.s.144C(13) of the Income Tax Act, 1961 (in short 'Act') dated 30/01/2015 relating to AY 2010-11.
2ITA Nos. 180 & 326 /Hyd/2015 Knoah Solutions Pvt. Ltd.
ITA No. 180/Hyd/2015 - by the revenue2. Brief facts of the case are, the assessee company, which is engaged in the business process outsourcing, filed its return of income electronically on 23/09/2010 declaring income of Rs. 9,84,900/- after claiming deduction u/s 10A of Rs. 1,82,16,263/-. The AO has referred the case under section 92CA(1) of the IT Act for determination of arm's length price in respect of the international transactions reported by the taxpayer company for the FY relevant to the AY 2010-11. The AO passed a draft order dated 10/03/2014 u/s 143(3) read with section 92CA(3) of the IT Act for arriving at a total income of Rs. 3,61,30,302/-. The AO made adjustment as proposed by the TPO of Rs. 3,35,03,147/- towards adjustment of arm's length price. The AO also held that as per the proviso to sub-section (4) of section 92C, no deduction is allowable u/s 10A on the enhanced arms length price adjustment.
3. When the assessee filed objections before the DRP, the DRP vide its order dated 28/11/2014 has directed to exclude e-Clerx Services Ltd., TCS Eserve Ltd., and Infosys BPO Ltd., from the list of 11 comparables and also directed that negative working capital adjustment to the arithmetic mean margin of the comparable shall not be made. Accordingly, the TPO has recomputed the adjustment u/s 92CA at Rs. 1,26,74,678/-.
3.1 As regards exemption u/s 10A, the DRP has directed to reduce telecommunication charges not only from the export turnover but also from the total turnover for the purpose of computation of deduction i/s 10A of the Act.
4. Aggrieved by the order of the DRP, the revenue is in appeal before us raising the following grounds of appeal:
1. The DRP erred in directing to exclude e-Clerx Services Ltd, TCS Eserve Ltd., and Infosys BPO ltd., as comparable without any basis.3
ITA Nos. 180 & 326 /Hyd/2015 Knoah Solutions Pvt. Ltd.
2. The DRP erred in directing to exclude telecommunication charges from both total turnover and export turn over when definition was given only for Export Turn Over but not Total Turn Over which goes to defeat the spirit and intention of the parliament."
5. As regards ground No. 1 regarding exclusion of comparables of three companies, the same are to be decided as under:
5.1 eClerx Services Ltd.,
i) The TPO added this company as comparable which is functionally different being KPO company.
ii) The objections of the assessee are that the this company is a knowledge process outsourcing (KPO) entity providing consulting and outsourcing services for financial institutions. The assessee company rendering low end BPO services known as KPO services. The size of the comparable company is high with a turnover of Rs. 257 crores and cannot be compared with the assessee company which has only Rs. 20.40 crores. Moreover the skill sets of the employees engaged, the intangibles and the assets employed etc. in the comparable company are different from the assessee company.
5.2 Infosys BPO Ltd., and TCS Eservice Ltd.,
i) The TPO added these companies as comparable which are functionally different besides being super turnover company, which is above Rs. 200 crores.
ii) The objections of the assessee are that the comparable company under TNMM should be similar to the tested company in functionally, size, employees skill sets, brand value and intangibles. As these three companies are different from the assessee company in terms of the turnover, brand value, intangibles and other assets employed, employee skill sets, and also the customers that it caters all over the world, these cannot be comparables for assessee 4 ITA Nos. 180 & 326 /Hyd/2015 Knoah Solutions Pvt. Ltd.
company which renders low end BPO services as captive service provider to its AE company located in US on a cost plus model.
6. The DRP held as follows:
11.2 The taxpayer vehemently argued that the four companies should not be included in view of their brand value and high turnover as well as relying on the decision of the ITAT to exclude M/s. Infosys Technologies Ltd also argued that M/s Eclerx is KPO not comparable. The panel feels that only M/s Infosys SPO and TCS E serve Ltd should not be included as comparable in view of their advantageous brand value along with high turnover of 1000 crores and above. Similarly, M/s. Eclerx Services that also to be excluded as it renders high end services and considered as KPO. However, the argument of the taxpayer with regard to the comparable company M/s. TCS Eserve International Ltd. is not acceptable, as the said company has passed all the filters and it is true comparable to the taxpayer company. Hence, the taxpayer's objection for exclusion of TCS Eserve international Ltd. is rejected and direct the TPO/AO to exclude the following comparables from the final set of comparables and recompute the Arm's length price.
(i) eclerx Services Ltd.
(ii) TCS Eserve Ltd.
(iii) Infosys BPO Ltd.
Accordingly the TPO/AO is directed to rework the ALP by excluding the above three companies from the ALP Adjustment.
7. Considered the submissions of both the parties and perused the material facts on record. The issue in dispute is squarely covered by the decisions of the ITAT including the decision in assessee's own case for AY 2007-08 vide order dated 25/04/2014 in ITA No. 1407/Hyd/2013 and for AY 2009-10 vide order dated 31/10/2014 in ITA No. 392/Hyd/2014 wherein the coordinate bench directed to exclude the said companies from the list of comparables and recompute the ALP accordingly. Therefore, we do not find any infirmity in the order of the DRP in directing the AO/TPO to exclude the said companies from the list of comparables considering their advantageous brand value along with high turnover. Accordingly, this ground of appeal of revenue is dismissed.
5ITA Nos. 180 & 326 /Hyd/2015 Knoah Solutions Pvt. Ltd.
8., As regards ground No. 2 pertaining to exclusion of telecommunication charges, we do not find any infirmity in the order of the DRP as it is in conformity with the ratio laid down by the Hon'ble Bombay High Court in case of CIT vs. Gem Plus Jewellery (330 ITR 175) as well as different Benches of Tribunal including ITAT, Chennai Bench (SB) in the case of ITO vs. Sak Soft (313 ITR (AT)
853) wherein it is held that communication charges attributable directly to the export of article or thing outside India has to be excluded both from export turnover as well as total turnover while computing exemption u/s 10A of the Act. In view of the ratio laid down as above, the finding of the DRP on this issue is upheld and ground raised by the Revenue is dismissed.
9. In the result, appeal of the revenue is dismissed.
ITA No. 326/Hyd/2015 by assessee10. The assessee has raised the following grounds of appeal in its appeal:
1. The learned Assessing Officer/TPO/DRP have erred in making adjustment u/s 92CA(3) of Rs. 1,26,74,678, without taking into account the submission of the assessee for inclusion of 2 comparable companies proposed by the assessee and further by adding one company which is not functionally comparable.
2. The learned Assessing Officer/TPO/DRP ought to have included Interglobe Technologies Pvt Ltd and Mastiff Tech Pvt.
Ltd in the list of comparable companies since both the companies are fully and functionally comparable and further the assessee has provided the Data including annual reports of the above two companies.
3. The learned Assessing Officer/TPO/DRP ought not to have added one company i.e., TCS E-serve International Ltd, since the said company is not comparable functionally and is also a giant company with its Own brand image and huge turn over and hence not comparable."
6ITA Nos. 180 & 326 /Hyd/2015 Knoah Solutions Pvt. Ltd.
11. The assessee has not pressed ground Nos. 1 & 2 at the time of hearing before us, therefore, the same are dismissed as not pressed.
12. As regards ground No. 3, the TPO has selected the TCS E- Serve International Ltd. as comparable on the ground that this company belonging to ITES/BPO and it was viewed that brand does not play a role in the profitability.
13. The DRP upheld the action of the TPO.
14. The main arguments of ld AR of assessee for exclusion of the said company are that the company is functionally different, involving in transaction processing and technical services which are high end skill processes. Moreover, the OP/OC % is abnormally high being 51.51%. The ld. AR relied on the following case laws:
1. Market Tools Research Ltd. Vs. ACIT, 2013 32 Taxmann.com 358 (Hyd.).
2. HCL EAI Services Ltd. Vs. DCIT, [2013] 35 Taxmann.com 146 (Bang.)
3. Witness Systems Software India (P) Ltd. Vs. DCIT, [2013] 34 Taxmann.com 183 (Bang.)
4. Maersk Global Centres (India) (P) Ltd. Vs. ACIT (SB) Mum. ITAT
5. CNO IT Services (India) P. ltd. Vs. DCIT, [2014] 43 Taxmann.com 231 (Hyd.)
6. Cordys R & D (India) P. ltd. Vs. DCIT, 43 Taxmann.com 64 (Hyd.)
7. DE Shaw India (Software (P) Ld. Vs. ACIT, [2014] 42 Taxmann.com 74 Hyd.
8. M/s Avineon India P. Ltd. Vs. DCIT, ITA No. 152/Hyd/2015 and others, dated 20/01/2016.
9. C3i Support Services (P) Ltd. Vs. DCIT, 103/Hyd/2015, AY 2010-
11, 7 th April, 2016.
15. Ld. DR relied on the orders of revenue authorities.
7ITA Nos. 180 & 326 /Hyd/2015 Knoah Solutions Pvt. Ltd.
16. Considered the submissions of both the counsels and perused the material facts on record. We find that the issue in dispute is covered in favour of the assessee by various decisions of ITAT including the decisions of coordinate benches of Hyderabad. In the case of C3i Support Services (P) Ltd. Vs. DCIT (supra) has directed the AO/TPO to exclude the said company as comparable by observing as under:
"10. In so far as TCS eServe International Ltd., as rightly pointed out by the Ld. Counsel for the assessee, the sudden turn around of the said company, by earning high profit margin, was mainly on account of the brand value that TATA group carries. Under identical circumstances, while considering comparable case of Infosys BPO, the ITAT 'A' Bench, Hyderabad in the assessee's own case for the A.Y. 2008-09 observed that brand definitely commands premium price and the customer would be willing to pay for the services of a company which has a brand image. Thus, it was concluded that such company cannot be regarded as a comparable company. In the instant case also circumstances being identical, we are of the view that TCS eServe International Ltd., cannot be treated as comparable having regard to the brand value it commands. We, therefore, direct the A.O. to exclude the same as comparable."
16.1 In the case of Hyundai Motors India Engg. P. Ltd., in ITA No. 1743/Hyd/2014 for AY 2010-11 vide order dated 13/11/2015, wherein the Tribunal has held as follows:
"11.2.2. We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y. 2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of this company. The Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies P. Ltd., (2013) 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon'ble High 16 Court (supra), the turnover of the assessee was about Rs.15.79 crores as against the turnover of Rs.1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had 8 ITA Nos. 180 & 326 /Hyd/2015 Knoah Solutions Pvt. Ltd.
directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS e-Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs.50 crores as against the turnover of TCS e-Serve Limited of Rs.1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables."
16.2. In view of the above discussion, we therefore direct the Assessing Officer /TPO to exclude the said company from the list of comparables and determine the ALP keeping in view of our directions given hereinabove and if on such determination the price charged by the assessee for its international transaction is found to be within the arms length then no adjustment is required to be made.
17. In the result, appeal of the assessee is partly allowed.
18. To sum up, revenue appeal in ITA No. 180/Hyd/2015 is dismissed and the assessee's appeal in ITA No. 326/Hyd/2015 is partly allowed.
Pronounced in the open court on 24 th August, 2016.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 24 th August, 2016
kv
Copy to:-
1) Knoah Solutions Pvt. Ltd., Building No. 2A, 5 th Floor, Maximus Towers, Mindspace, Raheja IT Park, Cyberabad, Hyd - 500 081.
2) ITO, Ward - 2(1), Hyderabad.
3) DRP, Hyderabad
4. CIT, (International Taxation & TP), Income Tax Towers, 10-2-3, AC Guards, Hyderabad - 500 004.
5) The Departmental Representative, I.T.A.T., Hyderabad.
9ITA Nos. 180 & 326 /Hyd/2015 Knoah Solutions Pvt. Ltd.
De scri pti on Date Intls
S.No.
1. Draft dictated on Sr.P.S./P.S
2. Draft placed before author Sr.P.S/PS
Draf t propo sed & pl ac ed b ef ore the se con d Mem ber JM/AM
3
4 Draf t di scu ssed/a ppr ov ed by sec on d Mem ber JM/AM
5 Approv ed Draft comes to the Sr.P.S./PS Sr.P.S./P.S
6. Kept for pronouncement on Sr. P.S./P.S.
7. Fi l e sent to the B enc h Cl erk Sr.P.S./P.S
8 Dat e o n whi ch f i l e goe s t o t he H ea d Cl erk
9 Date of Di sp atch of order