Income Tax Appellate Tribunal - Delhi
Acit, New Delhi vs M/S H & S, Sofware Development And ... on 20 March, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-2' : NEW DELHI)
BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.436/Del./2013
(ASSESSMENT YEAR : 2008-09)
M/s. H & S Software Development vs. DCIT, Circle 10 (1),
and Knowledge Management Centre New Delhi.
Pvt. Ltd.,
301, E - Block,
International Trade Tower,
Nehru Place, New Delhi-110 019.
(PAN : AABCH2697E)
ITA No.496/Del./2013
(ASSESSMENT YEAR : 2008-09)
DCIT, Circle 10 (1), vs. M/s. H & S Software Development
New Delhi. and Knowledge Management Centre
Pvt. Ltd.,
301, E - Block,
International Trade Tower,
Nehru Place, New Delhi-110 019.
(PAN : AABCH2697E)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : S/Shri Manoneet Dala & Vishnu Goel, ARs
S/Shri Gaurav Bhutani & Veenu Agarwal, CAs
REVENUE BY : Shri H.K. Choudhary, CIT DR
Date of Hearing : 25.01.2018
Date of Order : 20.03.2018
ORDER
2 ITA No.436 & 496/Del/2013
PER KULDIP SINGH, JUDICIAL MEMBER :
Present cross appeals filed by the assessee as well as by the Revenue are being disposed of by way of consolidated order to avoid repetition of discussion.
2. The Appellant, M/s. H & S Software Development and Knowledge Management Centre Pvt. Ltd. (hereinafter referred to as 'the taxpayer') by filing the present appeal sought to set aside the impugned order dated 23.11.2012, passed by the ld. CIT (Appeals)- XX, New Delhi qua the assessment year 2008-09 on the grounds inter alia that :-
"1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. CIT (A) is bad in law and void ab-initio.
2. That on facts and circumstances of the case and in law, the jurisdictional error of the Ld. Assessing Officer ("AO") whereby he did not record any reasons in the assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. Transfer Pricing Officer ("TPO") for computation of the arm's length price, as is required under section 92CA(1) of the Act.
3. That on facts and circumstances of the case and in law, the Ld. CIT(A) erred in making an adjustment to the arm's length price of the Appellant's international transaction in the following manner:-
a. Ld. CIT (A) erred in upholding rejection of the Appellant's TP documentation, / comparable companies and analysis thereof.3 ITA No.436 & 496/Del/2013
b. The Ld. CIT (A) erred in permitting the use of unaudited data requisitioned by taking recourse to the provisions of Section 133(6) of the Act. The said action is in complete violation of the fundamental principles of natural justice as (a) information which was not available with the Appellant has been used; and (b) the Appellant was not given any opportunity to cross-examine the companies whose information has been used by the Ld. TPO.
c. The Ld. CIT (A) erred in confirming companies, selected by Ld. TPO/ AO, which were not functionally comparable to the Appellant and on the basis of application of additional/ modified quantitative filters and in rejecting comparable companies selected by the Appellant.
d. The Ld. CIT (A) erred in confirming the incorrect computation margins of comparable companies, selected by the Ld. TPO/ AO.
e. The Ld. CIT (A) erred in confirming the selection of current year (i.e. financial year 2007-08) data for comparability.
f. The Ld. CIT (A) erred in not appreciating the fact that there is no motive on the part of the Assessee to shift the profits to any other jurisdiction since it claims tax holiday benefits as per the Software Technology Park of India.
4. The Ld. CIT (A) erred in not examining the validity of initiation of penalty proceedings u/s 271 (1)
(c) of the Act."
3. The Appellant, Deputy Commissioner of Income-tax, Circle 10 (1), New Delhi (hereinafter referred to as 'the taxpayer') by filing the present appeal sought to set aside the impugned order dated 4 ITA No.436 & 496/Del/2013 23.11.2012, passed by the ld. CIT (Appeals)-XX, New Delhi qua the assessment year 2008-09 on the grounds inter alia that :-
"1. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in directing to exclude M/s Mold-Tek Technologies Ltd from the list of comparables?
2. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in restricting the addition from Rs.2,08,34,850/- to Rs.1,63,19,800/-, made in the income of the assessee being difference between the Arm's Length Price?
3. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law directing the AO to exclude the telecommunication expenses amounting to Rs.9,15,422/- from the total turnover while calculating the deduction u/s 10A?"
4. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. H & S Software Development and Knowledge Management Centre Pvt. Ltd., the taxpayer is a wholly owned subsidiary of Heidrick & Struggles Inc., USA ("HSI") which in turn is a subsidiary of Heidrick & Struggles International Inc., USA ("HSII"). The taxpayer is into providing Information Technology Enabled back office support services relating to creation and maintenance of database of prospective employers and candidates who have sent their resumes to HSII. The taxpayer is to peruse information content in the resumes in accordance with the 5 ITA No.436 & 496/Del/2013 preset criteria developed by HSII and including the same into its database.
5. During the year under assessment, the taxpayer entered into international transaction with its Associated Enterprises (AE) as reported in a report under section 92CE of the Income-tax Act, 1961 (for short 'the Act') as under :-
S.No. Description of the transactions Amount (in Rs.) 1 Database support and research 16,64,21,910 services 2 Interest on inter-company loan 7,45,950 3 Reimbursement of expenses 92,13,585 (paid/payable) 4 Reimbursement of expenses 33,77,669 (received / receivable)
6. The taxpayer in its TP study applied Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) with Operating Profit / Operating Cost (OP/OC) as Profit Level Indicator (PLI) to benchmark its international transactions. The taxpayer selected 10 comparables with weighted average margin of 14.28% as against taxpayer's margin of 10.64% and found its international transactions at arm's length. However, TPO by applying various filters finally selected 20 comparables having 6 ITA No.436 & 496/Del/2013 average of 29.16% by making addition of 15 comparable companies. TPO further granted working capital adjustment to the comparables and for that purpose computed margin at 26.97% and thereby made ALP adjustment of Rs.259,82,473/-.
7. The taxpayer carried the matter before the ld. CIT (A) by way of filing appeal who has rejected Moldtek Technologies Limited as a suitable comparable, however concurred with the remaining findings returned by the TPO and consequently average margin of comparables comes to 23.56%. Feeling aggrieved, now the taxpayer is before the Tribunal by way of present appeal seeking exclusion of (i) Accentia Technologies Ltd., (ii) Acropetal Technologies Ltd., (iii) Cross Domain Solution Pvt. Ltd., (iv) Eclerx Services Ltd., (v) HCL Comnet Systems & Services Ltd.,
(vi) Genesys International Ltd., (vii) Infosys BPO Ltd., (viii) Vishal Information Technologies Ltd., and (ix) Wipro Ltd.. On the other hand, the Revenue has also filed cross appeal seeking inclusion of Moldtek Technologies Limited rejected as comparable by the ld. CIT (A).
8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
7 ITA No.436 & 496/Del/2013TAXPAYER'S APPEAL (ITA NO.436/DEL/2013) GROUND NO.1
9. Ground No.1 is general in nature, hence does not require any adjudication.
GROUND NO.3b & 3d.
10. Grounds No.3b & 3d are dismissed having not been pressed during the course of arguments.
GROUNDS NO.3a, 3c, 3e & 3f
11. The taxpayer is providing back office services relating to creation and maintenance of database of prospective employers and candidates who have sent their resumes to HSII in accordance with the preset criteria developed by HSII and including into search palace. However, the ld. DR for the Revenue contended that the taxpayer is not a low end BPO rather it is high end BPO as it is responsible for maintaining and developing this software tool and other related tools. However, we are of the considered view that when the taxpayer is only providing back office services related to software development and maintenance in accordance with the preset criteria developed by HSII and including it into search palace to which HSII global operations have the access and it does not own any intangible, it cannot be treated as a high end BPO. 8 ITA No.436 & 496/Del/2013
12. Undisputedly, TNMM with OP/OC as PLI applied by the taxpayer for benchmarking its international transactions has been accepted by the TPO. So, the TPO after rejecting 5 of the comparables chosen by the taxpayer out of 10 comparables for its TP study introduced 15 new comparables after applying various filters finally selected 20 comparables having average mean 29.16%, which are as under :-
Sl. Company Name Revenues OP/TC
No. (Rs. cr.) (%)
1 Accentia Technologies Ltd. 50.48 44.50
2 Acropetal Technologies Ltd 20.80 35.30
(seg)
3 Aditya Birla Minacs Worldwide 183.07 -0.55
4 Asit C Mehta 4.28 9.42
5 Caliber Point Business Solution 53.13 10.97
Ltd. (seg)
6 Coral Hub (Vishal lnfo) 38.08 51.84
7 Cosmic Global 5.86 24.30
8 Crossdornain Solution Pvt. Ltd. 26.60 26.96
9 Datamatics Financial (BPO 6.19 34.87
Div)
10 e4c (earlier known Nitanny 25.81 16.87
Outsourcing)
11 Eclerx 122.19 66.25
12 Genesys International 47.19 48.15
13 HCL Comnet Systems & 388.73 32.97
Services Ltd. (seg)
14 ICRA Online Ltd.(Seg) 8.23 11.22
15 Infosys BPO 825.08 20.03
16 l-service India Pvt. Ltd. 13.39 9.73
17 Mold Tek Technologies Limited 17.85 96.66
18 R System International Ltd(seg) 21.33 4.30
19 Spanco Ltd (seg) 41.70 8.94
20 Wipro BPO 1, 158.80 30.13
Arithmetical Mean 29.16
9 ITA No.436 & 496/Del/2013
13. On the basis of aforesaid analysis, the TPO proposed the ALP adjustment as under :-
Arithmetic mean PLI 29.16%
Less : Working Capital Adjustment 2.19%
Arm's Length Price (ALP) 26.97%
Operating Cost Rs.151535310
Arms Length Margin 26.97% of the
Operating
Cost
Arms Length Price (ALP) Rs.192404383
Price shown in the international Rs.166421910
transactions
Shortfall being adjustment u/s 92CA Rs.25982473
14. Ld. CIT (A) concurred with the proposed adjustment made by TPO except rejecting Moldtek Technologies Ltd., one of the comparables chosen by the TPO and thereby margin of the comparables comes down to 23.56%.
15. The taxpayer challenged the inclusion of (i) Accentia Technologies Ltd., (ii) Acropetal Technologies Ltd., (iii) Cross Domain Solution Pvt. Ltd., (iv) Eclerx Services Ltd., (v) HCL Comnet Systems & Services Ltd., (vi) Genesys International Ltd.,
(vii) Infosys BPO Ltd., (viii) Vishal Information Technologies Ltd., and (ix) Wipro Ltd as comparables selected by TPO and accepted by ld. CIT (A) for benchmarking the international 10 ITA No.436 & 496/Del/2013 transactions. We would take aforesaid comparables one by one to examine their suitability vis-à-vis the taxpayer. ACCENTIA TECHNOLOGIES LTD. (ACCENTIA
16. The taxpayer challenged inclusion of Accentia on grounds inter alia that it has undergone extra ordinary events during the year under assessment; that sufficient segmental data is not available; that it fails employee cost filter and relied upon assessee's own case for AY 2007-08 in ITA No.6455/Del/2012 (available at pages 130-131 of convenience paper book), Ameriprise India Pvt. Ltd. in ITA No.7014/Del/2014 for AY 2010- 11 (available at pages 46 to 48 of the convenience paper book) and Equant Solutions India Pvt. Ltd. in ITA No.1202/Del/2015 for AY 2010-11 (available at pages 83 to 87 of the convenience paper book).
17. Perusal of TP order at page 286 of the paper book shows that the Revenue of Accentia from ITES is 80.87%, hence passed 75% revenue filter applied by the TPO.
18. Perusal of the schedule forming part of the profit & loss account, available at pages 118 and 119 of the paper book, which is part of the annual report shows that sufficient segmental data to work out profits from ITES is not available. Furthermore, Accentia fails employee cost filter as it has incurred 11.23% of its 11 ITA No.436 & 496/Del/2013 revenue on employee cost vis-à-vis 54.40% of the taxpayer as against the threshold limit of 25% of the revenue. Complete details have been given by the taxpayer in its TP study available at page 390 of the paper book-2.
19. Furthermore, during the year under assessment, the taxpayer undergone extra ordinary events leading to 75% increase in its revenue because of mergers and takeovers which have been highlighted in the annual report available at page 116 & 117 of the paper book, the snapshot of which is reproduced as under for ready perusal:-
• Acquired Thunga Software Pvt ltd. an 8-year old Medical Transcription & Coding Company with more than 8 years' track record in Bangalore.
• Consolidated the operations of Asscent Infoserve Pvt Ltd, the subsidiary of Accentia in Bangalore, by adding new clients and adding manpower. By having two productions centres in Bangalore, Accentia has become a major player in this space in the IT capital of India • Acquired GSR Physician's Billing Service, specialised in Billing and Collections, based in Florida, USA • Acquired GSR Systems, a software Company specialising in HRCM, based in Florida, USA • Acquired Denmed lnc., a Medical Transcription Company based in Salem, Oregon, USA, serving the Portland area 12 ITA No.436 & 496/Del/2013 • Listed Global Depository Receipts in the Singapore Stock Exchange. This listing was received with high enthusiasm by the investor community globally.
• Completely revamped the development centre at Kochi, the commercial capital of Kerala, by adding new stare-of-the-art infrastructure and increased the man-power strength four-fold • Accentia has acquired a new facility at the Technopark campus to accommodate 500 people. This facility has started already started functioning • in the current financial year.
• In the first half of the financial year 2008-2009, Accentia has acquired a very large MT Company in Hyderabad, with over 700 employees spread across multiple locations in the city and a unit in Bhubaneswar. This acquisition has given a big boost to Accentia's plans of having major presence in all the four southern states of India.
• Established an office at the Ras AI Khaimah Free Trade Zone, to spearhead the marketing operations in the Middle East market. The Middle East is one of the markets which have a huge potential in the HRCM segment, and Accentia is one of the first Companies in the world to recognize this opportunity. We are confident of having a sizable share of our revenues from this geographical area in the coming years.
20. Moreover, Accentia has been excluded as a comparable in taxpayer's own case for AY 2007-08 (supra). Keeping in view the aforesaid dissimilarities vis-à-vis the taxpayer, Accentia is ordered to be excluded as a comparable.
13 ITA No.436 & 496/Del/2013ACROPETAL TECHNOLOGIES LTD. (ACROPETAL)
21. Acropetal is TPO's comparable selected on the basis of information collected u/s 133 (6) of the Act. The taxpayer sought exclusion of Acropetal on ground of functional dissimilarity and also relied upon the case of Symphony Marketing Solutions India Pvt. Ltd. in IT(TP) A.No.1316/Bang/2912 for AY 2008-09 (available at pages 33 to 58 of the convenience paper book).
22. Undisputedly, Acropetal has two segments : one, ITES and another, engineering design services and TPO has taken engineering design service segment as a comparable to the taxpayer.
23. The ld. AR for the taxpayer drew our attention to Safe Harbour Rules notified by Department of Revenue, Central Board of Direct Taxes, relevant page 18 of the paper book, wherein engineering and design services have been considered as Knowledge Process Outsourcing. For facility of reference, relevant part of Safe Harbour Rules is reproduced as under :-
"(g) knowledge process outsourcing services" means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:-
(i) geographic information system;
(ii) human resources services;14 ITA No.436 & 496/Del/2013
(iii) engineering and design services;
(iv) animation or content development and management;
(v) business analytics;
(vi) financial analytics; or
(vii) market research."
24. So, when it is proved on record that the taxpayer is a low end BPO, the Acropetal being a KPO (being into engineering design services) cannot be a suitable comparable. Comparability of Acropetal has been examined by the coordinate Bench of the Tribunal Symphony Marketing Solutions India Pvt. Ltd. (supra), relevant page 41 of the convenience paper book, wherein Acropetal has been held to be not a suitable comparable vis-à-vis Symphony Marketing Solutions India Pvt. Ltd. (supra) which is also a low end BPO. Operative part of the findings of the coordinate Bench of the Tribunal in Symphony Marketing Solutions India Pvt. Ltd. (supra) are reproduced below :-
"13. We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No.15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The performance of Engineering Design Services is regarded as providing high end services among the SPO which requires high skill whereas the services performed by the Assessee are routine low end ITES functions. We 15 ITA No.436 & 496/Del/2013 therefore hold that this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing {KPO] would do and not a Business Process Outsourcing (BPO)."
25. In view of functional dissimilarity, we are of the considered view that Acropetal is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded.
CROSS DOMAIN SOLUTION PVT. LTD. (CROSS DOMAIN)
26. Cross Domain is a TPO's comparable. The taxpayer sought its exclusion on ground of functional dissimilarities. It being into the business of provision of high end KPO services and development of product suites for payroll processing services and relied upon the cases of Markit Tool Research Pvt. Ltd. in ITA No.1811/Hyd/2012 for AY 2008-09 and Symphony Marketing Solutions Pvt. Ltd. (supra).
27. Perusal of the information brought on record by the taxpayer from the website of the Cross Domain, available at pages 156 to 163 of the paper book, shows that Cross Domain is into combining extensive industry knowledge and advanced technical expertise to enable enterprises to realize significant return on investment; that Cross Domain has more than a decade of expertise in software 16 ITA No.436 & 496/Del/2013 development and delivery in payroll, HR and process automation/BPM domain; that Cross Domain solutions have enabled clients to reduce turnaround time, improve productivity and save on costs year after year and is offering solutions in software development & maintenance, software testing, infrastructure setup & management, consulting, architecture configuration & installation.. So, aforesaid profile of the Cross Domain shows that it is a KPO and also developing product suites for payroll processing services and as such is not a valid comparable vis-à-vis taxpayer which is a low end BPO.
24. So, when it is not in dispute that the taxpayer is a low end BPO, the Cross Domain being a high end KPO and into developing of product suites, it cannot be a suitable comparable. Comparability of Cross Domain has been examined by the coordinate Bench of the Tribunal Symphony Marketing Solutions India Pvt. Ltd. (supra), relevant page 4 of the convenience paper book, wherein Cross Domain has been held to be not a suitable comparable vis-à-vis Symphony Marketing Solutions India Pvt. Ltd. (supra) which is also low end BPO. Operative part of the findings of the coordinate Bench of the Tribunal in Symphony Marketing Solutions India Pvt. Ltd. (supra) is reproduced below :- 17 ITA No.436 & 496/Del/2013
"As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider.
19. We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this company as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. We hold accordingly."
25. In view of what has been discussed above and more particularly in view of functional dissimilarity, we are of the considered view that Cross Domain is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded. ECLERX SERVICES LIMITED (ECLERX)
26. Eclerx is again TPO's comparable included on the basis of information obtained u/s 133 (6) of the Act. The taxpayer sought to exclude Eclerx on grounds inter alia that it is functionally dissimilar and that it has undergone extra ordinary events due to acquisition.
27. Perusal of the extract of the annual report, available at pages 124 to 127 of the paper book, goes to prove that Eclerx is a KPO company providing data analytics/process solutions to some of the 18 ITA No.436 & 496/Del/2013 largest brand of the world. Eclerx is also into providing financial services and retail and manufacturing by providing a unique blend of consulting services and process outsourcing.
28. The ld. AR for the taxpayer drew our attention to Safe Harbour Rules notified by Department of Revenue, Central Board of Direct Taxes, relevant page 18 of the paper book, wherein engineering and design services have been considered as Knowledge Process Outsourcing. For facility of reference, relevant part of Safe Harbour Rules is reproduced as under :-
"(g) knowledge process outsourcing services" means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:-
(i) geographic information system;
(ii) human resources services;
(iii) engineering and design services;
(iv) animation or content development and management;
(v) business analytics;
(vi) financial analytics; or
(vii) market research."
29. Furthermore, Eclerx also proved to have undergone extra ordinary event due to acquisition, extract of the relevant information of the annual report, available at page 121 of the paper book, proves that Eclerx has acquired UK based Igentica Travel Solutions Limited on July 27, 2007, which has provided Eclerx 19 ITA No.436 & 496/Del/2013 with a set of 28 large customers primarily in Europe, thus strengthening the company's presence in that geography. Acquisition also given an entry platform into new vertical viz. travel and hospitality besides consulting the company's position in retail and manufacturing spaces and the integration was on track as on March 2008. So, because of the acquisition, the revenue of Eclerx during the year under assessment swelled from Rs.861.2 million to Rs.1216.57 million as per annual report, financial highlights available at page 122 of the paper book. Furthermore, the ld. AR for the taxpayer also pointed out that Eclerx has spent 12.50% of its sales to advertisement as against the taxpayer who is a captive service provider.
30. Suitability of Eclerx was examined by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2007-08 (supra) and was found to be not a valid comparable by returning following findings :-
"25. When we examine the functional profile of the assessee company which is into providing Information Technology (IT) Enables Back Office Support Services related to creation and maintenance of data base of prospective employers and candidates who sent their resumes to Hendrick & Struggles International Inc. (HSII), the assessee provides services to HSII only having minimal risks whereas as per the information supplied by ECLERX u/s 133 (6), it is into data analytical services; operation management services;
accounts reconciliation services which are aimed at 20 ITA No.436 & 496/Del/2013 reducing process errors and operational risks and that it is KPO rather than routine service provider as is evident from the annual report."
31. In view of what has been discussed above and following the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that because of functional dissimilarity of Eclerx which is a KPO engaged in consulting service, process outsourcing and automation services and the fact that it has undergone acquisition significantly impacting its profit, it is not a valid comparable vis-à-vis taxpayer for benchmarking the international transactions qua ITES undertaken by the taxpayer. HCL COMNET SYSTEMS & SERVICES LTD. (HCL COMNET)
32. Again, HCL Comnet is a TPO's comparable which is on the basis of information obtained u/s 133 (6) of the Act. The taxpayer sought exclusion of HCL Comnet on grounds inter alia that HCL is having different financial year ending; that it has significant related party transactions; that it has significant high turnover and relied upon the assessee's own case for AY 2007-08 (supra) and Motorola Solutions India Private Limited vs. ACIT in ITA No.5637/Del/2011 for AY 2007-08.
21 ITA No.436 & 496/Del/2013
33. When we peruse TP order, relevant pages 297 to 299 of the paper book, the taxpayer raised objection that HCL has failed related party transaction filter as well as it has having different financial year ending and the data obtained u/s 133 (6) is unreliable. However, the TPO has not disposed of all these objections. When apparently HCL has financial year from July 1 to June 30, it fails the filter not to adopt company having different financial year applied by the TPO himself. Furthermore, TPO has applied RPT filter. The taxpayer has given complete details of related party transactions carried out by the taxpayer at page 417 of the paper book which is 27.12% as against TPO's own filter of less than 25%.
34. Comparability of HCL for benchmarking the international transaction was examined in taxpayer's own case for AY 2007-08 (supra) and it was held to be an invalid comparable by returning following findings :-
"29. Identical issue has come up before the coordinate Bench in Motorola Solutions India Private Limited (supra) wherein it is held that by applying the threshold limit of 15% of RPT transaction sufficient comparables are available then there is no reason to further extend the limit to 25%. In the instant case, undisputedly, 25 comparables have been chosen by the assessee having RPT filter of 15%, out of which the TPO can get sufficient number of comparables for benchmarking international transactions. So far as ground of high turnover as raised by the assessee for exclusion of this 22 ITA No.436 & 496/Del/2013 comparable is concerned, the same has not been pressed during the course of argument.
30. Moreover, information supplied by HCL u/s 133(6) is inconsistent with the annual report as to adopting a different financial year beginning from July 1 to June 30 which does not pass the TPO's filter of comparable companies having different financial years.
So, we direct to exclude HCL from the list of comparables."
35. In view of what has been discussed above, we are of the considered view that because of different financial years, significant related party transactions as per TPO's own filter, HCL is not a valid comparable for benchmarking the international transaction, so we order to exclude HCL as a suitable comparable. GENESYS INTERNATIONAL LTD. (GENESYS)
36. TPO retained Genesys as a comparable despite taxpayer's objections on the ground that in the preceding years, the taxpayer has itself not raised any objection to take Genesys as a comparable. However, the taxpayer sought exclusion of Genesys on the grounds inter alia that it is functionally different; that Genesys has different employee scale set; that it has significant intangibles and engaged in R&D activities and having high fluctuation margins and relied upon Symphony Marketing Solutions India Pvt. Ltd. (supra).
37. When we examine functional profile of Genesys from the annual report, relevant at page 144 of the paper book. it is proved 23 ITA No.436 & 496/Del/2013 that Genesys is engaged in providing Geographical Information Services comprising Photogrammetry, Remote Sensing, Cartography, Data Conversion, related Computer based Services and other related services, which are certainly not routine ITES. Moreover, Genesys has been rejected by the DRP in taxpayer's own case for AY 2009-10 order dated 23.12.2013 on ground of functional dissimilarity by returning following findings :
"7.3.4 Genesys International Corporation This comparable is functionally different hence it is not a valid comparable.
• For sake of darity different extracts from AR is extracted below:-
• As per Page-5 of Annual Report-
"We are progressing well towards our goal to be an innovation and IP-led geospatial solutions provider touching a/l core areas of the economy."
Further, as per Page-6 of AR:-
"your company is the exclusive Reseller for Navteq data for the Enterprise space in India Navteq is the world leader in navigable maps and sheet data"
Further, as per Page-14 of AR -
"Genesys is today one of India's fastest growing geospatial services and content providers The Company caters to the needs of consumer mapping, navigation, internet 24 ITA No.436 & 496/Del/2013 portals as well as infrastructure players Including state and local governments."
Further, as per Page-16 of AR :-
"Our capabilities
1. GIS Consulting, 2. 3D Mapping, 3.
Navigation maps, 4. LiDAR. 5.
Photogrammetry Remote Sensing services, 6. Utility Services, 7. Image Processing, 8. Surveying, 9. Business Geographies & Logistics, 10. Cadastral Mapping, 11 City Scape, 12 Telecommunications From the above, it is observed that the functionality of this company is significantly different from that of the assessee. The TPO is directed to exclude this company from final set of comparables."
38. Furthermore, Genesys is engaged in R&D activities and creating significant intangibles as is event from pages 146 & 147 of the annual report. Moreover, the Genesys is having high fluctuating margin duly detailed at page 415 of the paper book by the taxpayer; in FY 2006-07 Genesys's margin was 13.35% and in FY 2007-08 it was 51.91% and 145.92% in the year under assessment. So, high fluctuating margin is also a ground to reject a comparable for benchmarking the international transaction.
39. Coordinate Bench of the Tribunal in Symphony Marketing Solutions India Pvt. Ltd. (supra) has rejected Genesys as a comparable vis-à-vis routine ITES company on ground of 25 ITA No.436 & 496/Del/2013 functional dissimilarity. So, in view of the matter, we order to exclude Genesys as a comparable on ground of its functional dissimilarity having significant intangibles and having been engaged in R&D activities and having high fluctuating margin and having highly skilled manpower.
INFOSYS BPO LIMITED (INFOSYS BPO)
40. TPO retained Infosys BPO as a comparable despite taxpayer's objection that it has high brand value and in case Infosys BPO is to be considered as a comparable then the revised margin calculation of 19.66% should be considered. The taxpayer sought exclusion of Infosys BPO for benchmarking the international transaction on the grounds inter alia that Infosys BPO possesses significant brand value; that it is a large and diversified service provider; that TPO used segmental information over entity level and relied upon assessee's own case for AY 2007-08 (supra).
41. Perusal of page 135 of the paper book shows that the Infosys BPO has significant expenditure on R&D and marketing to make its brand highly valuable, so the brand value of the Infosys BPO is Rs.31863 crores. Moreover because of high brand value, the Infosys BPO's revenue is abnormally higher having turnover of Rs.825.09 crores vis-à-vis taxpayer's turnover of Rs.16.64 crores. 26 ITA No.436 & 496/Del/2013 Comparability of Infosys BPO has been examined by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2007-08 (supra) and in Symphony Marketing Solutions India Pvt. Ltd. (supra) and has been ordered to be excluded as a comparable because of significant brand value having significant expenditure on R&D and that Infosys BPO is a market leader in ITES vis-à-vis the taxpayer which is a captive service provider taking minimal risk as against Infosys BPO which is a full-fledged risk bearing company having diversifying business. So, we order to exclude Infosys BPO from the final list of comparables. VISHAL INFORMATION TECHNOLOGIES LIMITED (VISHAL)
42. TPO retained Vishal as a comparable on the basis of information u/s 133 (6) of the Act despite the objections raised by the taxpayer; that it is functionally different; that erroneous margins have been calculated by the TPO and relied upon the decision of taxpayer's own case for AY 2007-08 (supra), Symphony Marketing Solutions India Pvt. Ltd. (supra) and Rampgreen Solutions Pvt. Ltd. in ITA No.102/2015 for AY 2008- 27 ITA No.436 & 496/Del/2013 09 (relevant paras 14 to 17, available at pages 42 to 46 of the convenience paper book)
43. Now, the taxpayer has sought exclusion of Vishal on grounds inter alia that it is functionally different and that it fails employee cost filter applied by the TPO. Perusal of page 138 of the annual report shows that Vishal has incurred expenditure on data entry charges and vendors payment as part of operating cost which is about 85.58% of the total operating cost incurred by the Vishal. Moreover, Vishal has insignificant employee cost of sales i.e. 2.93% as against employees cost/sales ratio of 54.40% of the taxpayer. Vishal has been ordered to be excluded in taxpayer's own case for AY 2007-08 (supra) on ground of functional dissimilarity, it being into the business of outsourcing services. Moreover, when we examine employees cost to sales, it is only 2.93% as against 54.40% of the taxpayer. Vishal has also been ordered to be excluded in Symphony Marketing Solutions India Pvt. Ltd. (supra) on ground of functional dissimilarity and on ground of the fact that it also outsourced most of its services to the private vendors. So, it also fails employee cost to sales filter applied by the TPO himself. Consequently, we ordered to exclude Vishal from final set of comparables.
28 ITA No.436 & 496/Del/2013WIPRO LIMITED (WIPRO)
44. TPO retained Wipro As a comparable despite objections raised by the taxpayer. The taxpayer sought exclusion of Wipro from the final set of comparables on grounds inter alia that Wipro has significant ownership of intellectual property; that it has high turnover of Rs.17492.62 crores and that it has undergone extra ordinary events during the year under assessment and is having diversified business and relied upon the decision of the coordinate Bench of the Tribunal in taxpayer's own case for AY 2007-08 and Symphony Marketing Solutions India Pvt. Ltd. (supra).
45. Perusal of page 140 of the paper book proves that the Wipro is into diversified business activities and excelled in areas of technologies and industry and incubate new practices for business growth; it is managing 60CoE's across different technologies and industry verticals, viz., Service Oriented Architecture, Virtualisatin, Unified Communication SaaS (Software as a Service), Data Privacy & Protection, IMS (IP multimedia subsystem), Remote Patient Monitoring, Image Processing, Supply Chains, Retail Instore, Retail Pharmacy, Automotive, Open Source and Gaming.
29 ITA No.436 & 496/Del/2013
46. Furthermore, Wipro has significant ownership of IPR whereas the taxpayer has no such ownership of IPR. Furthermore, Wipro is a giant company having turnover of Rs.17492.62 crores as against taxpayer's turnover of Rs.16.64 crores. Furthermore the Wipro has undergone extra ordinary events, duly detailed at page 440 of the paper book by the taxpayer by way of amalgamation of the companies viz. Wipro Infrastructure Engineering Limited, Wipro Healthcare IT Limited, Quantech Global Services Limited (subsidiary companies) with Wipro Limited, approved during the FY 2007-08 by the Hon'ble High Court of Karnataka and the Hon'ble High Court of Andhra Pradesh.
47. Wipro was ordered to be excluded by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2007-08 (supra) and in Symphony Marketing Solutions India Pvt. Ltd. (supra) on the ground that it has a significant brand value having high turnover and a market leader in its field whereas the taxpayer is a tiny company and having diversified business and huge expenditure on R&D. So, in view of what has been discussed above and following the decisions rendered by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2007-08 (supra) and in Symphony Marketing Solutions India Pvt. Ltd. (supra), we do not find Wipro as a suitable comparable, hence ordered to be excluded. 30 ITA No.436 & 496/Del/2013 GROUND NO.4
48. Ground No.4 qua initiation of penalty proceedings u/s 271(1)(c) of the Act being consequential in nature needs no specific findings.
REVENUE'S APPEAL (ITA NO.496/DEL/2013) GROUNDS NO.1 & 2
49. The Revenue challenged the impugned order passed by the ld. CIT (A) restricting the addition on account of ALP to Rs.1,63,19,800/- from Rs.2,08,34,850/- proposed by the TPO by excluding M/s. Moldtek Technologies Ltd. (Moldtek) from the list of comparables.
50. Ld. DR for the Revenue challenging the exclusion of Moldtek by the ld. CIT (A) by relying upon TP order contended that Moldtek being mainly engaged in ITES; its IT Division has been considered as functionally comparable as it qualifies all other filters applied by the TPO. However, ld. CIT (A) after accepting the objections raised by the taxpayer ordered to exclude Moldtek from the final set of comparables on ground of functional dissimilarity; that the Moldtek has insignificant employee cost to sales ratio vis-à-vis taxpayer and on ground of extra ordinary profit which is 96.66% for FY 2007-08.
31 ITA No.436 & 496/Del/2013
51. However, the taxpayer justified the exclusion of Moldtek made by ld. CIT (A) on the grounds inter alia that Moldtek is functionally dissimilar; that it has undergone extra ordinary circumstances during the year under assessment; that it has abnormal high margin and abnormal growth in its revenue and relied upon coordinate Bench of the Tribunal in taxpayer's own case in ACIT vs. H&S Software Development and Knowledge Management Centre Pvt. Ltd. in ITA No.6509/Del/2012 for AY 2007-08 and in Symphony Marketing Solutions India Pvt. Ltd. (supra).
52. Undisputedly, there is no change in business model of the taxpayer in the year under assessment. During the course of argument, ld. DR for the Revenue has failed to point out any cogent reason as to why the rule of consistency should not be followed in this case in the given circumstances as Moldtek has been found to be unsuitable comparable in taxpayer's own case for AY 2007-08 (supra). Coordinate Bench of the Tribunal directed to exclude Moldtek from the final set of comparables in taxpayer's own case in ITA No.6509/Del/2012 for AY 2007-08 (supra) by returning following findings :-
"11. When we examine the functional profile of assessee company vis-à-vis Mold-Tek Technologies Ltd., both are functionally dis-similar. Undisputedly, 32 ITA No.436 & 496/Del/2013 assessee company is into ITES services as a captive service providers whereas Mold-Tek is operating in two business segment i.e.
(i) plastic divisions which is into manufacturing of lube and oils, paints, pet projects, consumer products etc.; and
(ii) IT Division specialized in providing structural design and detailing services which could be categorized as structural engineering services.
CIT (A) has also excluded this company as comparable on ground of abnormal growth which is 204% in FY 2006-07 with a CAGR of 113% for 3 years.
12. Assessee relied upon the decisions rendered by ITAT, Hyderabad Bench in the case of Capital IQ Information Systems (India) Private Ltd. (ITA No.1961/Hyd/2011) (available at pages 812 to 839 of the Paper Book-III, wherein comparability of Mold-Tek Technologies Ltd. has been examined with Capital IQ Information Systems (India) Private Ltd. (supra) and ITES company almost on identical ITES company. Coordinate Bench in Capital IQ Information Systems (India) Private Ltd. (supra) while taking into consideration the factum of merger from 01.10.2006 impacting results of the company and also that the activity of the company is functionally different, it being engaged in providing high end engineering consulting services and structural engineering consulting services which are in the nature of KPO services and that the company was having super-abnormal profit at 113% and by following the decision rendered by ITAT, Delhi Bench in Adobe Systems India Pvt. Ltd. (ITA No.5043/Del/2000 dated 21.01.2011), order to exclude this company from the list of comparables.
13. The contention of the ld. DR that the findings of the CIT (A) are based upon conjectures and surmises is not tenable in the light of the facts discussed herein above. So, keeping in view the functional disparity and factum of super abnormal profit and by following the 33 ITA No.436 & 496/Del/2013 decision rendered by ITAT, Hyderabad Bench in case cited as Capital IQ Information Systems (India) Private Ltd. (supra), we hereby uphold the order passed by CIT (A)."
53. So, keeping in view the facts and circumstances of the case that the Moldtek has abnormal growth of 56% for FY 2007-08 with CAGR of 210% for three years and it is functionally dissimilar and following the decision rendered by the coordinate Bench of the Tribunal in taxpayer's own case in ITA No.6509/Del/2012 for AY 2007-08 (supra), we are of the considered view that ld. CIT (A) has rightly ordered to exclude Moldtek from the final set of comparables. So, grounds no.1 & 2 are determined against the Revenue.
GROUND NO.3
54. The Revenue challenged the exclusion of telecommunication expenses amounting to Rs.9,15,422/- from the total turnover in order to calculate deduction u/s 10A by the ld. CIT (A) by relying upon the order passed by the AO. Undisputedly, the taxpayer has sought to exclude the expenditure towards communication charges amounting to Rs.10,73,642/- from export turnover as well as total turnover. However, the AO has excluded the same form export turnover only. Perusal of findings returned by AO at page 5 of the 34 ITA No.436 & 496/Del/2013 assessment order shows that the AO has not disputed the expenditure but disallowed the same to be excluded from the total turnover for non-furnishing of the communication expenditure attributable to the delivery of the goods.
55. The ld. CIT (A) after thrashing the controversy at hand at length in the light of the settled proposition of law in various judgments rendered by the Tribunal as well as Hon'ble High Court particularly in DCIT vs. Binay Semantics Ltd. - (2007) 109 TTJ 556 returned the following findings :-
"7.4 I have carefully considered the submission of the appellant as well as the order of the AO. The AO is not right in excluding other income while computing the profit eligible for deduction u/s 10A once again when the appellant itself had deducted it while computing the eligible deduction u/s 10A. This amounts to double disallowance. Therefore, the AO is directed to delete the deduction of Rs.1,41,274/- while calculating 10A deduction.
There is merit in excluding the 20% of the telecommunication expenses as calculated by him from the total turnover a well. This issue has been decided by the Higher Authorities in Tata Elxsi and other cases (supra). Therefore, AO is directed to exclude the telecommunication expenses amounting to Rs.5,307,691/- (pertaining to this assessment year) from the total turnover while calculating the deduction u/s 10A of the IT Act. To this extent, relief is given to the assessee."
56. When it is not in dispute that for the purpose of section 10A, the term "total turnover" is to be interpreted by computing the 35 ITA No.436 & 496/Del/2013 entire export turnover as well as domestic turnover and in case, expenses are to be excluded from export turnover, the same are to be excluded from the total turnover also for the purpose of computing the deduction u/s 10A of the Act. So, we are of the considered view that ld. CIT (A) has rightly directed the AO to exclude the telecommunication expenses amounting to Rs.9,15,422/- from total turnover for the purpose of calculating the deduction u/s 10A of the Act. Ground No.3 is determined against the Revenue.
56. Resultantly, the appeal filed by the taxpayer is partly allowed and the appeal filed by the Revenue is dismissed. Order pronounced in open court on this 20th day of February, 2018.
Sd/- sd/-
(N.K. SAINI) (KULDIP SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 20th day of March, 2018
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)-XX, New Delhi.
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.