Income Tax Appellate Tribunal - Pune
M/.S Maximize Learning Private Ltd.,, vs Department Of Income Tax on 31 May, 2016
आयकर अपील�य अ�धकरण पुणे �यायपीठ "ऐ" पुणे म�
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
सु�ी सुषमा चावला, �या�यक सद�य एवं �ी �द�प कुमार के�डया, लेखा सद�य के सम�
BEFORE MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA, AM
आयकर अपील सं. / ITA No. 259/PN/2015
�नधा�रण वष� / Assessment Year : 2010-11
M/s. Aptara Technologies Pvt. Ltd.,
(Formerly known as Maximize Learning Pvt. Ltd.)
Flat No.16, Wing A, 4 th Floor, Shivakar Road,
Garnet Residency Co-op. Housing Society Ltd.,
Wanowri, Pune - 411040 .... अपीलाथ�/Appellant
PAN: AA ACC7416K
Vs.
The Asst. Commissioner of Income Tax,
Circle - 14, Pune .... ��यथ� / Respondent
आयकर अपील सं. / ITA No. 579/PN/2015
�नधा�रण वष� / Assessment Year : 2010-11
The Asst. Commissioner of Income Tax,
Circle - 14, Pune .... अपीलाथ�/Appellant
Vs.
M/s. Aptara Technologies Pvt. Ltd.,
(Formerly known as Maximize Learning Pvt. Ltd.)
Flat No.16, Wing A, 4 th Floor, Shivakar Road,
Garnet Residency Co-op. Housing Society Ltd.,
Wanowri, Pune - 411040 .... ��यथ� / Respondent
PAN: AA ACC7416K
Assessee by : Shri Ketan Ved
Revenue by : Shri S.K. Rastogi, CIT
सुनवाई क� तार�ख / घोषणा क� तार�ख /
Date of Hearing : 28.04.2016 Date of Pronouncement: 31.05.2016
2
ITA No.259/PN/2015
ITA No.579/PN/2015
M/s. Aptara Technologies P vt. Ltd.
आदे श / ORDER
PER SUSHMA CHOWLA, JM:
The cross appeals filed by the assessee and the Revenue are against order of ACIT, Circle 14, Pune, dated 11.02.2015 relating to assessment year 2010-11 passed under sections 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (in short 'the Act').
2. The cross appeals filed by the assessee and the Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience.
3. The assessee in ITA No.2 59/PN/2015 has raised the following grounds of appeal:-
1 On the facts and in the circumstances of the case, the learned Transfer Pricing Officer ('TPO') / Learned AO, under the directions of the Hon'ble DRP, erred on facts and in law in m aking an addition of Rs.3,12,91,568 to the international transaction of the Appellant based on the provisions of Chapter X of the Act;
2 On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law in rejecting comparable companies and not appreciating that their functions, assets and risk profile was comparable to the Appellant.
3. On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law, in identifying new companies as comparable to the Appellant without appreciating the fact that the said companies were not comparable to the Appellant / did not meet the filters applied.
4. On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law; in considering erroneous margins, computing the margins erroneously, for arriving at the arm's length price/margin and making incorrect adjustment.
5. On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law , in not considering the specific provisions of Rule 10B(i)(e)(iii) that provide for adjustments for taking into account differences between the Appellant and the comparable uncontrolled enterprises. In addition to this, the Learned TPO/ AO under the directions of the Hon'ble DRP, erred in law 3 ITA No.259/PN/2015 ITA No.579/PN/2015 M/s. Aptara Technologies P vt. Ltd.
and in facts by not making suitable adjustments for the difference in the risk profile of the Appellant vis a vis comparable companies and disregarded the computation mechanism for adjustment submitted by the appellant.
6. On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law in disregarding the economic analysis and comparable companies selected by the Appellant and considering non-contemporaneous single year data for the margin computation of the comparables which was not available at the time of conducting the transfer pricing documentation; thereby disregarding contemporaneous multiple year data which was considered by the appellant in accordance with the provisions of Rule 10B (4) of the Income-tax Rules, 1962 ('the Rules').
7. On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law , by not providing any reasons to show that the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied before making an adjustment to the income of the Appellant.
8. On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law, by not allowing the appellant the benefit of 5% variation envisaged in the proviso to Section 92C (2) of the Act.
9. On the facts and in the circumstances of the case, the learned TPO/ AO, under the directions of the Hon'ble DRP, erred on facts and in law , of initiating penalty proceeding under Sections 274 read with Section 271(1)(c) of the Act and levying interest under Section 234A, 234B and 234C of the Act.
4. The Revenue in ITA No.579/PN/2015 has raised the following grounds of appeal:-
1. Whether on the facts and circumstances and in law the DRP was correct to exclude the company on the basis of BPO/KPO without consideration the CBDT's instructions.
5. The appeal of the Revenue was filed late by 16 days. The Revenue has filed condonation application in this regard along with Affidavit and it was pointed out that the delay of 16 days in filing the appeal late before the Tribunal may be condoned. In the Affidavit, it has been explained that the date of passing the final order is mentioned as 11.02.2015, however, it was passed in the last week of February, 2015. It was further mentioned that the said order was served upon the assessee on 23.02.2015. Further, it is claimed that there was heavy workload in the first week of April, 2015 and date of passing of the 4 ITA No.259/PN/2015 ITA No.579/PN/2015 M/s. Aptara Technologies P vt. Ltd.
order in the case of assessee could not be taken note in calculating limitation date and there was delay of 16 days in filing the appeal late. In the totality of the above said facts and circumstances of the case, we condone the delay of 16 days and proceed to decide the appeals filed by the Revenue and the assessee after hearing both the learned Authorized Representatives.
6. The learned Authorized Representative for the assessee at the outset pointed out that the issue raised in the present appeal against the transfer pricing adjustment is similar to the issue raised before the Tribunal in assessment years 2008-09 and 2009-10. It was further pointed out by the learned Authorized Representative for the assessee that the assessee was engaged in ITES services and was providing the same to its associate enterprises as in the earlier years. He further stated that while applying the TNMM method, certain comparable companies were picked up by the TPO and if four of them are excluded, then the margins of assessee would be within +/- 5% of arithmetic mean of margins of comparable companies. In this regard, the learned Authorized Representative for the assessee placed reliance on the written submissions filed and the financial statements of each of the concerns pointing out as to how the said comparables were not to be taken in the final list of comparables. The second objection raised by the assessee was non- granting of risk adjustment to the margins earned by the comparable companies. The learned Authorized Representative for the assessee placed reliance on the ratio laid down by Pune Bench of Tribunal in Visteon Engineering Centre (India) Pvt. Ltd. Vs. DCIT in ITA No.358PN/2013, relating to assessment year 2008-09 and ITA No.331/PN/2014, relating to assessment year 2009-10, order dated 11.04.2016 in this regard. Another submission made by the learned Authorized Representative for the assessee was that it was also aggrieved by non-exclusion of several companies, but in case only one of the 5 ITA No.259/PN/2015 ITA No.579/PN/2015 M/s. Aptara Technologies P vt. Ltd.
company i.e. CSS Technology Ltd. is included in the final list set of comparables, then the same would be within accepted margins. The assessee for the year under consideration had worked out the PLI on Operating Profit / Operation Cost and the margin of assessee was worked out to 15.43% and the final list of comparables, if accepted would worked out to 13.46%, thus, within +/- 5%. The learned Authorized Representative for the assessee pointed out that grounds of appeal No.1, 7 and 8 were general in nature. In respect of ground of appeal No.6, it was pointed out that the issue raised was the application of single year's data disregarding contemporaneous data which was considered by the assessee in its TP study. The ground of appeal No.9 was consequential i.e. charging of interest under section 234A, 234B and 234C of the Act. The initiation of penalty under section 271(1)(c) of the Act in the said ground of appeal No.9 was premature.
7. With regard to the Revenue's appeal, the learned Authorized Representative for the assessee pointed out that only the issue was exclusion of KPO i.e. companies which were engaged in Knowledge Processing Operation, since the assessee was a BPO company. In this regard, the learned Authorized Representative for the assessee stated that the issue was covered in favour of the assessee by the decision of Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. Vs. CIT in ITA No.102/2015 , judgment dated 10.08.2015, wherein two concerns i.e. Vishal Information Technologies Ltd . and e-Clerx Services Ltd. were directed to be excluded and were held to be not comparable with ITES companies. Further, reliance was placed on the decision of Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs. DDIT (Int. Tax,) in ITA No. 784/PN/2014, relating to assessment year 2009-10, order dated 30.03.2016 wherein e-Clerx Services Ltd. was excluded from the list of final companies as it was engaged in KPO services.
6ITA No.259/PN/2015 ITA No.579/PN/2015
M/s. Aptara Technologies P vt. Ltd.
8. The learned Departmental Representative for the Revenue placed reliance on the orders of Assessing Officer / DRP and pointed out that correction could be given in the case of comparables i.e. Jeevan Softech Ltd. in respect of PLI asked for. The learned Departmental Representative for the Revenue placed reliance on Rule 10B(1)(e)(ii) of the Income Tax Rules, 1962.
9. We have heard the rival contentions and perused the record. The assessee has raised multiple grounds of appeal in the present Memo of Appeal before us. However, the grievance of the assessee is with regard to the addition made on account of transfer pricing provisions resulting in addition of Rs.3,12,91,568/- that was made to the value of international transaction entered into by the assessee with its associate enterprises in respect of provisions of Information Technology Enabled Services i.e. ITES . Briefly, in the facts of the case, the assessee was a service provider of e-learning solutions for its associate enterprise Aptara, INC. During the year under consideration, the assessee had undertaken ITES services with its associate enterprises. The issue arising in the present appeal is in relation to the determination of arm's length price of international transaction entered into by the assessee with its associate enterprises. The assessee had applied TNMM method for determining the services provided to associate enterprises. The PLI was determined by adopting OP / OC at 15.43%. The Transfer Pricing Officer (TPO) also applied TNMM method to determine the margins of comparables and had selected 10 comparable companies as functionally similar to the assessee whose average margins of PLI after adjustment of working capital worked out to 29.72%. The TPO thus, proposed an adjustment of Rs.4,17,14,482/-. The assessee filed objections before the Dispute Resolution Panel (DRP) and as per the directions of DRP, the Assessing Officer computed the average margins of PLI of comparables at 26.15%. The DRP had excluded two concerns and the 7 ITA No.259/PN/2015 ITA No.579/PN/2015 M/s. Aptara Technologies P vt. Ltd.
final set of concerns were total eight as against ten concerns picked up by the TPO. The Assessing Officer then passed order under section 154 of the Act, wherein the PLI of final set of concerns was re-worked after adjustment on account of working capital and the average margin worked out to 25.79% of final set of eight comparables as against 15.43% margin of the assessee. Thus, finally, the TP adjustment of Rs.3,02,40,518/ - was made by the Assessing Officer in the hands of assessee, which in turn, was added to the income of assessee. The final set of comparables applied by the Assessing Officer pursuant to the directions of DRP were as under:-
Sr. No. Name of company PLI (Adjusted for
Working Capital)
1 Cosmic Global Limited 18.81
2 Informed Technologies India Limited 29.86
3 B N R Udyog Limited (Medical Transcription 16.38
segment)
4 Accentia Technologies Limited 42.39
5 Jeevan Softech Limited (segment) 39.38
6 Fortune Infotech Limited 23.48
7 Caliber Point Business Solutions Ltd. (Seg) 19.35
8 Jindal Intellicom (P) Ltd. 16.65
Average 25.79
10. Before us, the learned Authorized Representative for the assessee has pleaded the TPO / Assessing Officer under the directions of DRP have erred in identifying and including (1) Accentia Technologies Ltd., (2) Cosmic Global Ltd. and (3) Informed Technologies India Ltd. in the final set of comparables. In respect of Jeevan Softech Ltd., the assessee is aggrieved by the working of PLI of that concern. The case of the assessee before us was that in case the above said concerns were excluded, the average margins of balance concerns would work out to 16.78% as against 15.43% shown by the assessee and hence, the same would be within +/- 5% of arithmetic mean of margins of comparable companies. Another point noted by the assessee was the inclusion of CSS Technologies Ltd. , which was excluded by the TPO in final set of comparables. 8 ITA No.259/PN/2015 ITA No.579/PN/2015
M/s. Aptara Technologies P vt. Ltd.
11. We proceed to discuss the functional comparability of each of the concerns in the paras hereinafter.
12. The first contention of the assessee was with regard to exclusion of margins of Accentia Technologies Ltd. from the final list of comparables. The learned Authorized Representative for the assessee pointed out that the said concern was picked up as comparable by the TPO in the preceding years in the case of assessee itself and the Tribunal vide its orders dated 02.02.2015 and 29.04.2015 respectively had held that the said concern Accentia Technolog ies Ltd. was not comparable for those years due to extraordinary events. In respect of extraordinary events taken place during the year under consideration, the learned Authorized Representative for the assessee pointed out that there was acquisition of IQ group of companies in the United Kingdom and in this regard, our attention was drawn to the Directors Report of the said concern, copy of which is placed at page 467 of the Paper Book. Further, there was amalgamation of Asscent Infoserve Pvt. Ltd. with the company as per notings on page 472 of Paper Book. Hence, there was the case of amalgamation and acquisition, which constituted extraordinary events taken place for the year under consideration. The learned Authorized Representative for the assessee pointed out that for the year under consideration i.e. assessment year 2010-11, the Tribunal in various other cases have held that Accentia Technologies Ltd. was not comparable to entities engaged in ITES activities since even during the year under consideration, the said entity had extraordinary events. In this regard, reliance was placed on following decisions:-
a. Techbooks International Pvt. Ltd. Vs. DCIT (ITA No.240/Del/2015) b. Xchanging Technology Services India Pvt. Ltd. Vs. DCIT (ITA No.1222/Del/2015 c. Amba Research (India) Pvt. Ltd. Vs. DCIT (ITA No.286/Bang.2015 d. Cognizant Technologies Services Pvt. Ltd. Vs. DCIT (ITA No.459/Hyd/2015 9 ITA No.259/PN/2015 ITA No.579/PN/2015 M/s. Aptara Technologies P vt. Ltd.
13. Under the transfer pricing provisions, while benchmarking the international transaction entered into by the assessee with its associate enterprises, an endeavour is to determine the arm's length price of said transactions and for that purpose, comparison is made to the margins of unrelated parties, which are functionally similar to the assessee. While benchmarking the international transaction, an endeavour is to be made to select such concerns which are functionally similar and the margins of the said concerns are then, to be applied in order to determine the arm's length price of the international transaction undertaken. The assessee before us was engaged in providing ITES services and while benchmarking international transaction of the assessee with its associate enterprises, the TPO had selected Accentia Technologies Ltd. as functionally similar and had included the margins of said concern in order to work out the arithmetic mean of final set of comparables.
14. We find that the Tribunal in assessee's own case in assessment year 2008-09 in ITA No.2235/PN/2012, order dated 02.02.2015 had held that the said concern could not be considered as comparable because of certain extraordinary events. The said ratio was also applied in assessee's own case while benchmarking the international transaction of assessee with its associate enterprises in assessment year 2009-10 in ITA No.267/PN/2014, order dated 29.04.2015. The Tribunal vide order dated 02.02.2015 had held that the concern Accentia Technologies Ltd. could not be included in the final set of comparables holding as under:-
"13. Next, assessee had contended that Accentia Technologies Ltd. has been wrongly included by the TPO as a comparable concern. As per the assessee, the said concern was engaged in functionally different activities. It was pointed out that the said concern is engaged in providing medical transaction, billing and coding services, application development & customization (segmental data not available). Moreover, it was contended that the sales/turnover of the said concern was more than Rs.50 crores for the year 10 ITA No.259/PN/2015 ITA No.579/PN/2015 M/s. Aptara Technologies P vt. Ltd.
under consideration which did not meet with turnover filter applied by the assessee. On this point, it was pointed out that the assessee had selected sales/turnover filter of 1-50 crores i.e. any concerns having a turnover exceeding Rs.50 crores were excluded. Thirdly, it was pointed out that the activities of the said concern were not comparable to the activities of the assessee.
14. The TPO has noted the aforesaid objections of the assessee in para 18.1 of his order and has rejected the same by merely noticing that 75% of the revenue/income of the said concern is from ITES and therefore it is to be considered as a comparable. Before us, the Ld. Representative for the assessee has reiterated the submissions put-forth before the TPO in order to justify exclusion of the said concern from the list of comparables. In particularly, it has been pointed out that for the very same assessment year, the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. vs. ITO, (2013) 38 taxmann.com 55 (Bang.) has excluded the said concern from the list of comparables in a similar situation following the decision of the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited vs. DCIT, (2013) 32 taxmann.com 21 (Hyd.).
15. We have considered the submissions of the Ld. Representative for the assessee and also the stand of the Revenue as emerging from the order of the TPO. In our view, the ratio laid down by the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) and by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) is squarely applicable to the present case also. The aforesaid Benches of the Tribunal found that during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable."
15. Further, similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia Technologies Ltd. was not comparable to the entities engaged in ITES. Following the same parity of reasoning, we hold that Accentia Te chnologies Ltd. is to be excluded from the final set of comparables.
16. The next concern which is sought to be excluded by the assessee is Cosmic Global Ltd. The claim of assessee is that the said concern is not comparable due to the fact that it has high transaction charges and low employee cost to the total cost ratio and hence, works under different business circumstances. In this regard, the learned Authorized Representative for the 11 ITA No.259/PN/2015 ITA No.579/PN/2015 M/s. Aptara Technologies P vt. Ltd.
assessee pointed out that the Tribunal in earlier years i.e. assessment years 2008-09 and 2009-10 had held that Cosmic Global Ltd. was not comparable to the assessee. Further, the Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra) had held that Vishal Information Technologies Ltd . was not to be considered as comparable due to its low employee cost ratio and hence, operates on different business module. Our attention was drawn to the data available at page 720 of the Paper Book i.e. the financials of the said concern for the year under consideration, wherein it was clear that employee cost ratio of Cosmic Global Ltd. was 39.54% as against the employee cost ratio of assessee at 71.26% during the year. Similarly, in the earlier year, the employee cost ratio of Cosmic Global Ltd. was lower than the employee cost ratio of the assessee in the respective years. It was further pointed out by the learned Authorized Representative for the assessee that the Hyderabad Bench of Tribunal in M/s. Cognizant Technology Services P. Ltd. Vs. DCIT in ITA No.459/Hyd/2015, relating to assessment year 2010-11, order dated 29.01.2016 had also held that Cosmic Global Ltd. is to be excluded from the final list of comparables.
17. We find merit in the claim of assessee as the Tribunal while deciding the appeal in assessment year 2009-10 had in turn, relied on the ratio laid down in assessment year 2008-09 in assessee's case and had held that Cosmic Global Ltd. is to be excluded from the final list of comparables as it was operating in a different business module. The relevant findings of the Tribunal are as under:-
"16. Similarly, the third concern i.e. Cosmic Global Ltd. was held to be not comparable by the Tribunal in its order dated 02.02.2015 (supra) in the hands of the assessee because the said concern was operating in a different business model. The relevant findings of the Tribunal are as under :-
"21. The third concern, which is sought to be excluded by the assessee is Cosmic Global Ltd.. The assessee has contended before the TPO that the said concern needs to be rejected on the ground that it was engaged in BPO and Translation services whereas assessee was an ITES provider, and therefore concern was functionally dissimilar.12 ITA No.259/PN/2015 ITA No.579/PN/2015
M/s. Aptara Technologies P vt. Ltd.
However, the TPO rejected the pleas of the assessee and considered the said concern as a comparable on the ground that export income of the said concern was more than 50%.
22. Before us, Ld. Representative for the assessee referred to the objections raised before the DRP to point out that the said concern was liable to be excluded from the final set of comparables. Firstly, it is pointed out that the said concern was offering Accounts processing services and transcription services and was not comparable to the activities of the assessee as the said concern was into BPO and Translation services. It was also pointed out by referring to the website of the said concern that it was engaged in the diversified business activity. It was also pointed out that though the activities of the said concern are in medical transcription, consultancy, translation and Accounts BPO services but there was no segmental information available in the Annual accounts of the said concern. Apart therefrom, it has been pointed out that the said concern has incurred a substantial expenditure of Rs.2,86,29,348/- towards translation charges as is evident from the Annual Report of the said concern. The said translation charges are approximately 60.17% of the total cost incurred by the said concern and the employee cost comprises of merely 17.32% of the total cost. It was therefore contended that the aforesaid facts justify an inference that the said concern was not adopting the normal and routine business model for an otherwise normal ITES provider. The proportion of expenditure incurred on outsourcing and employee costs show that the said concern seems to have outsourced the functions to different vendors. The aforesaid was highlighted to point out that the operating business model of Cosmic Global Ltd. was totally different from that of the assessee. In this context, the Ld. Representative pointed out that the TPO had rejected the Ace Software Exports Limited from the list of comparables and one of the reasons ascribed was that the said concern was incurring major expenditure on software sourcing charges. The TPO in the context of Ace Software Exports Limited came to conclude that the said concern was not a service provider but a recipient of the services and therefore it was rejected as a comparable. The Ld. Representative emphasized that if Ace Software Exports Limited was rejected by the TPO for having substantial software outsourcing charges then M/s Cosmic Global Ltd. also needs to be rejected for incurring a high proportion of expenditure on outsourced translation charges.
23. The Ld. CIT-DR appearing for the Revenue has primarily reiterated the stand of the TPO wherein the said concern was rejected on the ground that its export income was more than 50%. The Ld. CIT- DR reiterated that primarily the said concern was also engaged in ITES activities and the TPO was justified in including the same in the list of comparables.
24. We have carefully considered the rival submissions. The pertinent point made out by the Ld. Representative for the assessee is that the said concern is operating in a different business model wherein much of it's activities are outsourced whereas the business model of the assessee is different. In an outsourcing business model obviously the expenditure incurred on employee costs would be low in comparison to the expenditure incurred on outsourcing. Ostensibly, where IT enabled services are outsourced to a third party vendor then the margin derived by the said concern would be attributable to services rendered by the outsourced vendor. Per contra, where IT enabled services are being rendered by a concern through its own employees, the margins from rendering of services by the said concern would be attributable to its own employees. Obviously, the level of margins in the two business models would not be comparable. The Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) 13 ITA No.259/PN/2015 ITA No.579/PN/2015 M/s. Aptara Technologies P vt. Ltd.
has held that concerns who act as intermediateries having outsourced it activity cannot be said to be comparable with a concern who is rendering services through its own employees. The said proposition has also been upheld by the Hyderabad Bench of the Tribunal in the case of Brigade Global Services Private Limited (supra). Having regard to the aforesaid discussion, in our view, the said concern is not a good comparable to be included for the purposes of comparability analysis as it operates under a different business model which impacts operating margins. As a consequence, we direct the Assessing Officer to exclude the said concern from the final set of comparables."
17. We further find that the Tribunal in PTC Software (India) Private Limited vs. DCIT (supra) and BNY Mellon International Operations (India) Private Limited vs. DCIT (supra) and also in M/s Capital IQ Information Systems (India) Pvt. Ltd. vs. Addl.CIT (supra) while deciding the appeals of the relevant assessees in assessment years 2009-10 had held that M/s Cosmic Global Ltd. is not to be considered as a comparable. The relevant observations of the Tribunal in BNY Mellon International Operations (India) Private Limited vs. DCIT (supra) are as under :-
"16. The third concern, which is sought to be excluded by the assessee is Cosmic Global Ltd.. Before the TPO also, assessee had canvassed that the said concern was functionally not comparable to the assessee. It was pointed out that the said concern is engaged into translation, transcription of data which is entirely different from the functions being performed by the assessee. The TPO has rejected the plea of the assessee by merely noticing that in the preceding assessment year 2008-09, the stated concern was selected by the assessee as a comparable concern.
17. Before us, the Ld. Representative for the assessee pointed out that the plea of the assessee for exclusion of Cosmic Global Ltd. is supported by the decision of the PTC Software (India) Private Limited (supra), which has also been rendered in the context of a concern rendering similar services as the assessee. The following discussion in the order of the Tribunal dated 31.10.2014 is relevant in this regard :-
"50. The next company as per the assessee which should not be taken as comparable is Cosmic Global Ltd. Admittedly, the assessee had not objected to its inclusion either before the TPO or DRP. However, the assessee challenged the exclusion of the said company as comparable before the Tribunal.
51. We find that the Special Bench of Chandigarh Tribunal in the case of Quark Systems Pvt. Ltd. (supra) had held that even if the assessee had not challenged the inclusion of the comparable before the authorities below, the same could be challenged before the Tribunal for the first time. Accordingly, we hold that the assessee at this point can raise the said issue. Now, the second part of the objection was that the company had outsourced its vendor and was making high vendor payments as compared to the sales and hence was not comparable. While adjudicating the exclusion of M/s. Vishal Information Technologies Ltd., we have in paras hereinabove already considered this aspect of the companies outsourcing to vendors and held M/s. Vishal Information Technologies Ltd. to be not functionally comparable. Following the same parity of reasoning, we hold that M/s. Cosmic Global Ltd. is not functionally comparable."
18. Apart from the decision in the case of PTC Software (India) Private Limited (supra), the decision of Hyderabad Bench of the Tribunal 14 ITA No.259/PN/2015 ITA No.579/PN/2015 M/s. Aptara Technologies P vt. Ltd.
in the case of M/s Capital IQ Information Systems (India) Pvt. Ltd. vs. Addl.CIT vide ITA No.124/Hyd/2014 dated 31.07.2014 has also been relied upon by the assessee to justify the exclusion of M/s Cosmic Global Ltd. from the final set of comparables. The Hyderabad Bench of the Tribunal considered an earlier decision of the Delhi Bench of the Tribunal in the case of M/s Mercer Consulting (India) P. Ltd. vs. DCIT vide ITA No.966/Del/2014 dated 06.06.2014 wherein also the said concern was found to be incomparable with an ITES provider. The following discussion in the order of the Hyderabad Bench of the Tribunal is worthy of notice :-
"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 lacs, Translation charges at Rs.6.99 crore and Accounts BPO at Rs.27.76 lac. The Id. 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 Id. 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 in the 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 Id. 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 15 ITA No.259/PN/2015 ITA No.579/PN/2015 M/s. Aptara Technologies P vt. Ltd.
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."
19. The aforesaid discussion made by the respective Benches of the Tribunal reveals that in relation to the financial year under consideration, the business model in which M/s Cosmic Global Ltd. has functioned is quite dissimilar to the business model of the assessee while carrying out the activity of an ITES provider. Moreover, none of the objections raised by the assessee have been met by the TPO on the basis of any cogent reasoning. On that count also, we find that the plea of the assessee to exclude M/s Cosmic Global Ltd. from the final set of comparables is justified. The objection of the TPO that the said concern was found comparable by the assessee in earlier year cannot be the sole basis to include the said concern in the list of comparables, in view of the aforesaid discussion. Thus, assessee succeeds on this aspect."
18. Since the said concern, M/s Cosmic Global Ltd. was operating in different business model than the assessee in the year under consideration also, the same needs to be excluded from the final set of comparables and accordingly we direct the Assessing Officer to exclude the same from the final set of comparables. Following the same parity of reasoning, we hold that M/s Cosmic Global Ltd. is to be excluded from the final set of comparables."
18. We further find that Hyderabad Bench of Tribunal in Cognizant Technology Services P. Ltd. Vs. DCIT (supra) vide paras 12 to 12.4 at pages 11 to 19 of the said order have also directed to exclude the said concern from the final set of comparables.
19. The Hon'ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra) had upheld the exclusion of Cosmic Global Ltd. because of its low expenditure on employment cost being functionally dissimilar. In view of the findings of Tribunal in the case of assessee and another IT enabled service provider and the ratio laid down by Hon'ble Delhi High Court, we hold that where Cosmic Global Ltd. was operating in different business model than the assessee in the year under consideration also, the same needs to be excluded from the final set of comparables. Accordingly, we hold so.
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M/s. Aptara Technologies P vt. Ltd.
20. The next concern which as per the assessee is to be excluded from the final set of comparables is Informed Technologies Ltd. The learned Authorized Representative for the assessee pointed out that first of all, the said concern is working on the same principle as Cosmic Global Ltd. because it has high transaction charges and low employee cost ratio. For the year under consideration, the employee cost to total cost ratio was 36.79% of Informed Tec hnologies Ltd. compared to 71.26% of the assessee. The learned Authorized Representative for the assessee stressed that following the principle laid down by the Tribunal in assessee's own case for assessment years 2008- 09 and 2009-10, wherein Cosmic Global Ltd. was found to be not comparable due to it being functionally dissimilar, similarly, Informed Technologies Ltd. is also to be excluded on the same ground.
21. Another aspect raised by the learned Authorized Representative for the assessee with regard to Informed Technologies Ltd. was that the said concern was showing abnormal profitability trend. The learned Authorized Representative for the assessee pointed out that Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs. DDIT (Int. Tax) in ITA Nos.161 & 269/PN/2013, relating to assessment years 2007-08 & 2008-09, order dated 29.09.2014 had rejected the said concern as comparable company. It was pointed out by the learned Authorized Representative for the assessee that even for the year under consideration, there was decline in the profitability at 6.97% as against in the earlier years i.e. 22.61% and 26.73%.
22. The learned Departmental Representative for the Revenue on the other hand, pointed out that the profitability shown by the assessee for the year under consideration was similar to the profitability shown in the succeeding year and hence, comparable.
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23. On perusal of record and the orders of Tribunal in earlier years in assessee's own case and also our order in the paras hereinabove, wherein, we have directed that Cosmic Global Ltd. has to be excluded because of its high transaction charges and low employee cost to the total cost ratio, we find that Informed Technologies Ltd. for the year under consideration is also following different business module and the employee cost to the total cost ratio of the said concern for the year under consideration is 36.79% as against 71.26% of the assessee. Similarly, in the earlier years also, the employee cost ratio of Informed Technologies Ltd. was lower than the said ratio shown by the assessee. The Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra) have also excluded the concern due to its low employee cost ratio and operational on different business module. Following the same parity of reasoning, we hold that the said concern is to be excluded from the final list of comparables. We hold so.
24. Another aspect relating to the said concern was varying profitability shown by Informed Technologies Ltd. which is as unde r:-
Particulars FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 FY 2009-10 FY 2010-11 FY 2011-12 OP/OC -44.21% 34.71% 3.67% 22.61% 26.73% 6.97% 5.12%
25. Where comparable picked up by the TPO for the purpose of benchmarking the international transaction in the hands of assessee is showing such differential profitability earned from year to year, then such a concern cannot be picked up as being functionally similar because of abnormal profitability trend. In this regard, we find that Pune Bench of Tribunal in case of Cummins Turbo Technologies Ltd., UK Vs. DDIT (Int. Tax,) (supra) had also 18 ITA No.259/PN/2015 ITA No.579/PN/2015 M/s. Aptara Technologies P vt. Ltd.
held that Informed Technologies Ltd., because of its abnormal profitability trend, is to be excluded from the final list of comparables. Accordingly, we hold so.
26. Another concern which was selected by the TPO was Jeevan Softech Ltd. The learned Authorized Representative for the assessee before us pointed out that the TPO has erred in working of the margins of said concern by adopting sales at Rs.1.41 crores, which admittedly is revenue from BPO operations. However, the TPO has failed to consider ERP segment revenue which is also classified in the audited financial statement of Jeevan Softech Ltd. as being from ITES segment and if the segmental margins of ITES segment are taken up, which includes total sales / income of Rs.1,74,43,276/-. The margin of the said concern worked out to 8.04% as against 39.38% applied by the Assessing Officer in the order passed under section 154 of the Act. In this regard, the learned Authorized Representative for the assessee drew our attention to the segmental details of said concern which are placed at pages 838 to 846 of the Paper Book. With regard to working of the TPO, the learned Authorized Representative for the assessee referred to page 406 of the Paper Book.
27. The learned Departmental Representative for the Revenue fairly pointed out that the correction of margins is to be given in the hands of assessee while benchmarking its international transaction and by including Jeevan Softech Ltd. in the final list of comparables.
28. In the totality of the above said facts and circumstances of the case, we find merit in the claim of assessee and direct the Assessing Officer / TPO to work out the correct margins of said concern Jeevan Softech Ltd. and thereafter, determine the average margins of comparables. Accordingly, we direct the 19 ITA No.259/PN/2015 ITA No.579/PN/2015 M/s. Aptara Technologies P vt. Ltd.
Assessing Officer / TPO to exclude three concerns i.e. (1) Accentia Techn ologies Ltd., (2) Cosmic Global Ltd. and (3) Informed Technologies Ltd. from the final list of comparables and to correct the margins of Jeevan Softech Ltd. and work out the average margins of comparables. It was the case of learned Authorized Representative for the assessee before us that the same would be within +/- 5% and hence no addition on account of arm's length price of international transaction with the associate enterprises is to be made in the hands of assessee.
29. Now, coming to the concern M/s. CSS Technology Ltd. and the contention of the assessee that the same merits to be included while benchmarking the international transaction of the assessee. However, the plea of assessee before us was that in case the three concerns as listed above are excluded and the margins of Jeevan Softech Ltd. are corrected, then it is within +/- 5% of the average margins of comparables. In view thereof, we do not address the inclusion of CSS Technology Ltd. and the ground of appeal raised by the assessee in this regard becomes infructuous.
30. The last claim made by the assessee before us was to allow risk adjustment in the hands of comparables since the assessee was 100% captive service provider. Where the margins earned by the assessee were within +/- 5% of the average margins earned by the final list of comparables, there is no merit in further claim of assessee for allowing risk adjustment, where no adjustment is to be made in the hands of assessee on account of arm's length price. Accordingly, this ground of appeal also becomes infructuous.
31. Now, coming to ground of appeal No.6 raised by the assessee i.e. against the plea that contemporaneous data for the past two years to be applied 20 ITA No.259/PN/2015 ITA No.579/PN/2015 M/s. Aptara Technologies P vt. Ltd.
in order to benchmark the arm's length price of international transaction. In view of the provisions of section 10B(4) of the Act, we find no merit in the said claim of assessee and single year's data is to be used unless and until the assessee can bring on record evidence to prove that the single year's data of comparable is not functionally similar. Accordingly, ground of appeal No.6 is also decided against the assessee.
32. The issue in ground of appeal No.9 i.e. charging of interest under sections 234A, 234B and 234C of the Act, is consequential and hence, the same is dismissed. In the said ground of appeal, the assessee has also raised plea against initiation of penalty proceedings under section 271(1)(c) of the Act, which is premature and hence the same is dismissed. The grounds of appeal raised by the assessee are thus, partly allowed.
33. Now, coming to the appeal filed by the Revenue, wherein the only issue is with regard to exclusion of Eclerx Services Ltd. being KPO company from the final list of comparables, whereas the assessee was BPO company.
34. We find that the issue is squarely covered by the detailed judgment of Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra), which has been applied by Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs. DDIT (Int. Tax) (supra) . The relevant findings of the Tribunal are as under:-
"20. The next concern which the assessee wants to be excluded from final set of comparables is Eclerx Services Ltd., which was engaged in the business of KPO services and hence not functionally similar. We have in the paras hereinabove already held that the concern Crossdomain Solutions Pvt. Ltd. was engaged in the business of KPO services, was not functionally similar. Following the same parity of reasoning, where Eclerx Services Ltd. is engaged in the business of KPO services, is not functionally comparable to the assessee. We further find that the High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra) has also noted the functionality of Eclerx Services Ltd. being of KPO services and the Hon'ble High Court of Delhi directed the same is to be excluded while benchmarking the international transactions of ITES provider.21 ITA No.259/PN/2015 ITA No.579/PN/2015
M/s. Aptara Technologies P vt. Ltd.
Following the same line of reasoning, we hold that Eclerx Services Ltd. is to be excluded from the final set of comparables."
35. Following the ratio laid down by the Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra) as applied by Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs. DDIT (Int. Tax) (supra) , we uphold the order of CIT(A) in excluding Eclerx Services Ltd. The grounds of appeal raised by the Revenue are thus, dismissed.
36. In the result, appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed.
Order pronounced on this 31st day of May, 2016.
Sd/- Sd/-
(PRADIP KUMAR KEDIA) (SUSHMA CHOWLA)
लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य / JUDICIAL MEMBER
पुणे / Pune; �दनांक Dated : 31st May, 2016.
GCVSR
आदे श क� ��त�ल�प अ�े�षत/Copy of the Order is forwarded to :
1. The Appellant;
2. The Respondent;
3. The DIT (Intl. Taxation), Pune ;
4. The DRP, Pune ;
5. The DR 'A', ITAT, Pune;
6. Guard file.
आदे शानुसार/ BY ORDER, स�या�पत ��त //True Copy// व�र�ठ �नजी स�चव / Sr. Private Secretary आयकर अपील�य अ�धकरण, पुणे / ITAT, Pune