Income Tax Appellate Tribunal - Delhi
Smart Cube India Pvt. Ltd, New Delhi vs Income Tax Officer, New Delhi on 27 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-2', NEW DELHI
BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER
AND
SH. O.P. KANT, ACCOUNTANT MEMBER
ITA No.1103/Del/2015
Assessment Year: 2010-11
M/s. Smart Cube India Pvt. Vs. Income Tax Officer,
Ltd., Ward -24(1), New Delhi
37 Hauz Khas Village, New
Delhi
PAN : AAHCS8978H
(Appellant) (Respondent)
Appellant by Sh. Ajay Vohra, Sr. Adv.; Sh. Neeraj
Jain, Adv.; and Sh. Sahil Sharma,
CA
Respondent by Sh. Sanjay Kumar Yadav, Sr. DR
Date of hearing 22.03.2018
Date of pronouncement 27.04.2018
ORDER
PER O.P. KANT, A.M.:
This appeal by the assessee is directed against order dated 14/01/2015 passed by the Income-tax Officer, Ward- 24(1), New Delhi (in short 'the Ld. Assessing Officer') in compliance to the direction issued by the Ld. Dispute Resolution Panel (DRP). The grounds raised in the appeal are reproduced as under:
21. That the Assessing Officer erred on facts and in law in completing assessment under section 144C read with section 143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs. 474,77,270/- as against income of Rs. 3,78,120/-
returned by the appellant.
1.1 That the Assessing Officer/DRP erred on facts and in law denying deduction of Rs.2,79,46,551/- claimed by the appellant under section 10B of the Act.
1.2 That the Assessing Officer/ DRP erred on facts and in law in holding that the appellant was ineligible to claim deduction under section 10B of the Act on the ground that the appellant had received approval from the Director of Software Technology Park of India (STPI ) and not by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of Industrial (Development arid Regulation) Act, 1951.
1.3 That the Assessing Officer/ DRP erred on facts and in law in not appreciating that the approval granted to the appellant by STPI, was under delegated powers from the Inter Ministerial Standing Committee in terms of Notification No. 4 (RE-95/92-97) dated 30.04.1995, issued by the Director General (Foreign Trade), Ministry of Commerce and Inter - ministerial communication letter No. D.O. No. 4(1)/2006 IPHW dated March 23rd 2006, issued by the Secretary of Ministry of Communications & Technologies.
Without Prejudice 1.4 That the Assessing Officer/ DRP erred on facts and in law in rejecting the claim of deduction under section 10B of the Act which has consistently been allowed since assessment year 2006-07.
1.5 The Assessing Officer/ DRP erred on facts and in law in not allowing the alternative claim made by the assessee under section 10A of the Act.
31.6 That the Assessing Officer/DRP erred in not taking cognizance of the review orders passed by the Delhi High Court pursuant to the review petitions in case of Regency Creations and Valiant Communications, wherein the alternate claim under section 10A was held to be allowable.
2. That the Assessing Officer erred on facts and in law in making an adjustment of Rs.1,91,52,594/- allegedly on account of difference in the arm's length price of the 'international transaction' of provision of IT enabled services on the basis of the order passed under section 92CA(3) of the Act by the TPO.
2.1 That the DRP erred on facts and in law in upholding additional filter of export sales at least 75% of the total income applied by the TPO, without appreciating that selection of comparable companies on the basis of such quantitative filters alone, defies the purpose of the benchmarking analysis.
2.2 That the DRP/TPO erred on facts and in law in rejecting following companies on the basis of filter of export sales greater than 75%, not appreciating that the companies were otherwise functionally comparable to the appellant and passing all other filters applied by the TPO:
S.No. Particulars
1 Allsec Technologies Ltd.
2 Linkson International Ltd.
3 Sundaram Business Services Ltd.
4 Axis - IT & T Ltd.
5 HDO Technologies Ltd.
6 Firstsource Solutions Ltd.
7 Aditya Birla Minacs Worldwide Ltd.
8 Cameo Corporate Services Ltd.
9 Nucleus Gis& ITES Ltd.
10 ICRA Online Ltd.
11 Hinduja Global Solutions Ltd.
12 Saraswatlnfotech Ltd.
13 Datamatics Financial Services Ltd.
4
2.3 That the DRP/TPO erred on facts and in law in rejecting Datamatics Financial Services Ltd. allegedly holding that the company fails the filter of service income greater than 75% and data for different financial has been considered by the appellant for the purpose of benchmarking analysis.
2.4 That the DRP/TPO erred on facts and in law in rejecting Optimus Global Services Ltd. and Sparsh BPO Services Ltd. allegedly holding that the said companiesare having negative networth and therefore affected by some peculiar economic circumstances.
2.5 That the DRP/TPO erred on facts and in law in considering Accentia Technologies Ltd. as comparable without appreciating that during the year the company was amalgamated with Asscentlnfoserve Pvt. Ltd. and accordingly, the financial results of the company are influenced with the financial statement of another company.
2.6 That the DRP/TPO erred on facts and in law in considering TCS E- Serve Ltd. and TCS E-Serve International Ltd. as comparable to the appellant without appreciating that these companies are providing services to a single customer and therefore, does not satisfy the filter of related party transactions applied by the TPO.
2.7 That the DRP/TPO erred on facts and in law in considering TCS E- Serve Ltd. in the final set of comparable companies without appreciating that the financial results of the company cannot be considered on account of (i) provision for errors amounting to Rs. 4,28,54 thousands made in the accounts and (ii) change in the method of revenue recognition.
2.8 That the DRP/TPO erred on facts and in law in considering following companies in the final set allegedly holding them to be functionally comparable to the appellant for the purpose of benchmarking analysis:
(i) Accentia Technologies Ltd.
(ii) TCS E-Serve Ltd.
(iii) E4e Healthcare 5
(iv)lnfosys BPO 2.9 That while undertaking benchmarking analysis of the transaction undertaken by the appellant, a captive service provider, the DRP/TPO erred on facts and in law in applying inconsistent approach in rejecting loss making companies and considering following companies earning super normal profit, in the final set of comparable companies:
S. No. Name of the company OP/TC (%)
1 TCS E-Serve Ltd. 53.80%
2 TCS E-Serve International Ltd. 63.38%
2.10 That the DRP/TPO erred on facts and in law in considering following companies in the final set of comparable companies without appreciating that companies with such high turnover does not satisfy the test of comparability laid down under Rule 10B(2) of the Income Tax Rules, 1962, for being operating in different market conditions and level of competition:
S.No. Turnover
Name of the comparable company
(crores)
1. Infosys BPO Limited 1,126
2. TCS E-Serve Limited 1,440
2.11 That the DRP/TPO erred on facts and circumstances of the case in rejecting Fortune Infotech Ltd. allegedly holding that the company is showing diminishing revenue on year on year basis.
2.12 That the DRP/TPO erred on facts and in law in not allowing appropriate risk adjustment to establish comparability on account of the appellant being a low-risk-bearing captive service provider as opposed to the comparable companies who were independent IT enabled service provider. 2.13 That on the facts and in the circumstances of the case and in law, the DRP/TPO erred in rejecting the contention of the appellant regarding risk adjustment, allegedly holding that no evidence has been provided by the appellant to prove that 6 risk has actually been undertaken by the comparable companies.
3. That the Assessing Officer erred on facts and in law in levying interest under Section 234B and Section 234C of the Act.
The appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal.
2. Briefly stated facts of the case are that the assessee is a subsidiary of M/s Smart Cube Limited, UK and was incorporated on 08/01/2004. The assessee company is engaged in providing research and analyst services by a team of professional, specialized in delivering high-value and customizing research and analysis to its Associated Enterprises (AEs). For the year under consideration, the assessee filed return of income on 30/09/2010 declaring income of Rs.3,78,120/- after claiming a deduction of Rs.2,79,46,551/- under section 10B of the Income-tax Act, 1961 (in short 'the Act'). The case was selected for a scrutiny and notice under section 143(2) of the Act was issued and complied with. During assessment proceeding, the Assessing Officer noticed following international transaction carried out by the assessee company:
S. No. Type of international Method selected Total value of transaction transaction (Rs.) MAM PLI
1. Provision of re-search and TNMM OP/TC 183,835,355 analyst services 7 2.1 For determining arm's-length price of the above international transaction, the Ld. AO referred the matter to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO in his order under section 92CA(3) of the Act dated 27/01/2014 proposed adjustment of Rs.1,91,52,594/-. The Assessing Officer was also of the view that the assessee was not entitled for deduction under section 10B of the Act. The alternative request of the assessee for allowing deduction under section 10A of the Act was also rejected by the Assessing Officer. The Assessing Officer issued a draft assessment order after incorporating the adjustment proposed by the learned TPO and disallowance of deduction u/s 10B/10A of the Act. Aggrieved with the draft assessment order, the assessee filed objections before the Ld. DRP. The Ld. DRP in its directions dated 24/12/2014 upheld the transfer pricing adjustment as well as disallowance of deduction under section 10B/10A of the Act.
The Assessing Officer in compliance to the direction of the Ld. DRP passed final assessment order under section 144C read with section 143(3) of the Act on 14/01/2015. Aggrieved with the said order, the assessee is before the Tribunal raising the grounds is reproduced above.
3. The ground No. 1 of the appeal being general in nature, we are not required to adjudicate upon specifically.
4. The ground Nos. 1.1 to 1.6 relates to disallowance of deduction under section 10B of the Act and alternate claim of deduction under section 10A of the Act.
4.1 At the outset, the Ld. Counsel of the assessee submitted that the Tribunal in the case of the assessee for assessment year 2007-08, has considered the alternative claim of the assessee for 8 allowing deduction under section 10A of the Act and restored the matter to the file of the Assessing Officer for deciding in accordance with the decision of the Hon'ble jurisdictional High Court in Regency creations Ltd 353 ITR 326 (Del) and CHT versus Valiant communication Ltd ( ITA 2002/2010). 4.2 The Ld. DR, on the other hand, could not controvert the finding of Tribunal in the case of assessee for assessment year 2007-08.
4.3 We have heard the rival submission and perused the relevant material on record. In assessment year 2007-08, the assessee made alternative claim for deduction under section 10A of the Act in proceedings under section 147 of the Act. The Assessing Officer denied the alternative claim of deduction under section 10A of the Act. In appeal having ITA No. 5473/Del/2016 for assessment year 2007-08, the Ld. DR contended that proceeding under section 147 of the Act are for the benefit of the Revenue and not for the assessee, whereas the Ld. AR submitted that it is open for the assessee to contend that the items sought to be brought to tax by initiating proceeding under section 147 of the Act, are non-taxable at all under section 10A of the Act. The Tribunal (supra) permitted the assessee to agitate the ground which rendered the escaped income as non-taxable and restored the matter to the file of the Assessing Officer to examine the allowability of deduction under section 10A of the Act. The relevant finding of the Tribunal (supra) is reproduced as under:
"12. Now coming to the submission of the learned AR basing on the decision of the jurisdiction High Court in review petitions in Regency Creations Ltd. (supra) and 9 Valiant Communications (supra), we find that the Regency Creations, the Hon'ble jurisdictional High Court held as follows:
"We have carefully considered the records and submissions. It appears that the assessee had claimed the benefit of Section 10A. Therefore, AO must in fairness consider the documents on the basis of the claim and ascertain whether they are proper and after verifying them, pass appropriate order as to whether the benefit of Section 10A can be granted."
Almost similar was the finding of the Hon'ble Jurisdictional High Court in the case Valiant Communications Ltd. (supra).
13. In the preceding paragraphs, while following the decisions of the Hon'ble High Court, we held that it is open to the assessee to put forth claim for non-taxability of the escaped income in view of Section 10A of the Act, while respectfully following the decision of Hon'ble jurisdictional High Court in Regency Creations Ltd. and Valiant Communications Ltd. (supra), we deem it just and proper to direct the learned AO to examine the claim of the assessee for deduction u/s 10A of the Act by affording an opportunity to the assessee. Accordingly, we set aside the matter to the fine of the AO to consider the case of the assessee u/s 10A of the Act."
4.4 Since in the year under consideration also the assessee has made alternative claim for allowing deduction under section 10A of the Act, we, therefore, respectfully following the above finding of the Tribunal, restore the matter to the file of the Assessing Officer for examining the claim of the assessee for allowing deduction under section 10A of the Act. It is needless to mention that assessee shall be afforded adequate opportunity of being heard. Accordingly, relevant grounds of the appeal are allowed for statistical purposes.
105. The Ground Nos. 2 to 2.13 relate to transfer pricing adjustment of Rs.1,91,52,194/-.
5.1 The facts in respect of the transfer pricing addition are that the assessee claimed to be engaged in providing research and analyst services to its Associated Enterprises (AEs) by employing a team of professional specialized in delivering high-value customizing research and analysis. The assessee in its transfer pricing study reported international transaction of providing research and analysis services having transaction value of Rs.18,38,35,355/-. For benchmarking of the international transaction, the assessee chosen Transaction Net Margin Method (TNMM) as most appropriate method for determining arm's-length price and selected Operating Profit/Total Cost(OP/TC) as Profit Level Indicator (PLI) using multiple year data. From the databases available, the assessee selected 35 comparables and average PLI of the comparables was worked out at 14.12%. According to the assessee, PLI of the assessee is 15.97%, which being higher than the average PLI of the comparables, the transaction was at arm's- length. The Ld. TPO rejected the approach of the assessee of using multiple year data. He also applied certain filters like related party transactions (RPT) exceeding 25% of sales, export income at least 75% of total income etc., for bringing the comparables nearer in terms of quality. The Ld. TPO made his own search of comparables and finally selected 9 comparables and also allowed working capital adjustment to the PLI of the comparables, list of which is reproduced as under:
11S.No. Company Name OP/OC Working Capital Adj. OP/OC i. Accentia Techologies Ltd. 43.07 42.20 ii. Cosmic Global Ltd. 18.28 22.29 iii. e4e Healthcare 31.03 33.55 iv. I-gate Global Ltd. 24.54 26.09 v. Infosys BPO Ltd. 31.46 32.17 vi. Jindal Intellicom Ltd. 13.62 16.95 vii. Omega Healthcare 15.31 16.74 viii. TCS E-Serve 53.80 57.43 International Ltd.
ix. TCS E-serve Ltd. 63.38 67.27
Average 32.72 34.97
5.2 The Ld. TPO computed the transfer pricing adjustment as under:
Particulars Amout
INR
Operating Cost 152,493,592
Arm's length margin (%) 34.97%
Arm's length margin (Rs.) 53,327,009
Arm's length price 205,820,601
Price charged by the assessee 186,668,007
105% of Price charged in international 196,001,407
transaction
Difference for which adjustment is proposed 19,152,594 to be made 5.3 Before the Ld. DRP, the assessee challenged applying of various filters and rejection of comparables selected by the assessee. The Ld. DRP rejected the contention of the assessee and approved the comparables selected by the Ld. TPO. The Ld. DRP also rejected the claim of the assessee for allowing risk adjustment.
5.4 Before us, the Ld. counsel argued for excluding few comparables from the set of comparables selected by the Ld. 12 TPO/DRP. Before adjudicating exclusion/inclusion of the comparables, we may like to mention the functions or services delivered by the assessee company to its Associated Enterprises (AEs) as set out in agreement between the assessee (SCIPL) and Smart Cube Limited, UK (TSC) as well as Smart Cube Inc., USA (SCI, USA). A copy of agreement between the assessee and Smart Cube Limited, UK is available on page 174 to 191 of the paper book (Volume-1) submitted by the assessee. According to this agreement, the Smart Cube Limited, UK outsourced its activity of analytic operation to the assessee. The relevant part of the agreement, available on page 175 reads as under:
"WHEREAS:
(A) TSC wishes to outsource its analytics operations to receive analytics and analysis services, and SCIPL wishes to provide analytics and analysis services to support TSC operations (B) ......................."
5.5 Further, under clause 3.1 (available on page 175 of the Paper Book- Volume 1) read with Scheduled - 2 to the agreement (available on page 188 of the Paper Book, Volume-1), the services and responsibilities of the assessee are mentioned as under:
"2.1.1 TSC analysts will provide support to all TSC users. SCIPL responsibilities include:
A) Taking phone and electronic requests from TSC personnel.
B) Scoping out the request before proceeding.13
C) Conducting a call to ensure clear understanding of the analytics request D) Entering the project details into the tracker E) Deliver the final output to TSC"
5.6 In agreement between the assessee and the Smart Cube Inc. USA, which is available on page 192 to page 209 of the Paper Book Volume- 1, also similar services are provided. 5.7 From the services rendered, it is evident that the assessee has rendered services of the analysis of the projects and entering those details into the tracker and deliver the final output to its AE. Thus, assessee can be characterized as engaged in providing "High-end ITes services".
5.7 In background of the above functional analysis of the assessee, now we are adjudicating grounds of appeal of the assessee seeking exclusion of following comparables:
Infosys BPO Limited
6. The learned counsel of the assessee submitted that the company is a part of Infosys group, a giant in the field of IT services and as a result of being a part of the Infosys group, it enjoys the benefits such as brand Infosys, availability of skilled manpower and technical know-how etc. During the year, the company has won many prestigious accolades, which has strengthen the reputation and goodwill of the company worldwide.
6.1 The Ld. counsel also submitted that during the year under consideration the company acquired MaCanish systems LLC, which provides premium business process 14 outsourcing services to the insurance, retirement and financial service industries and revenue of the company has increased from Rs. 1081.53 crores in preceding financial year to Rs. 1126.63 crores in current financial year. In support of contention of excluding the company from the set of comparables, the Ld. counsel relied on following judicial pronouncement:
(i) Delhi bench Tribunal in the case of Ameriprise India (P) Ltd Vs. DCIT (ITA No. 7014/Del/2014)
(ii) Hyderabad bench of Tribunal in the case of Hyundai Motors Engineering India Private Limited Vs. ITO (ITA No. 1850/Hyd/2012)
(iii) Delhi bench of Tribunal in the case of Equant Solutions India Private Limited Vs. DCIT (ITA No. 1202/Del/2015)
(iv) Delhi bench of Tribunal in the case of United Healthcare Information Services Private Limited versus DCIT( ITA No. 1038/Del/2015
(v) Delhi High Court in the case of New River software services Private Limited (ITA 924/2016) 6.2 The Ld. DR, on the other hand, submitted that the company is functionally similar to the assessee and merely part of "Infosys" Group cannot be a reason for excluding the company. He submitted that assessee has not been able to demonstrate how the company being a part of "Infosys" group has impacted on the profit level indicator of the company. On the claim of extraordinary event of merger of 'McCanish' systems LLC, the learned DR referred to page 151 of the 15 Annual Report and submitted that company has acquired the 'McCanish' as subsidiary and it is not merged with the company and thus there is no effect of the acquisition on the turnover of the company. He submitted that even otherwise there's a growth of only 4% in the turnover as compared to immediately preceding year, thus, there is no effect of the acquisition of McCanish over profitability of the company.
6.3 We have heard the rival submissions of the parties and perused the relevant material on record. In the decisions cited by the Ld. counsel, while comparing with BPO or ITes services, the company has been excluded from set of comparables mainly on the ground of huge turnover or giantness of the company as compared to the tested party. In the case of PCIT-1, Vs. New River Software Services Private Limited (ITA No. 924/2016), the Hon'ble jurisdictional High Court following the decision of the Hon'ble Bombay High Court in the case of CIT Vs Pentair Water India Private Limited, (2016) 69 taxmann.com 180 (Bom.) affirmed the exclusion of the company. In the case of Pentair Water India Private Limited (supra), the Hon'ble High Court confirmed the action of the Tribunal of excluding the company on the basis of high turnover of Rs. 649.56 crores as compared to the turnover of Rs. 11 crore of the assessee in that case. The relevant finding of the Hon'ble Bombay High Court is reproduced as under:
16"9. Shri Jain, learned Counsel has rightly relied upon the Judgment of the Delhi High Court reported in (2013) 36 taxmann.com 289(Delhi) in the case of Commissioner of Income-tax vs. Agnity India Technologies (P.) Ltd. Learned Counsel has also brought to our notice the Order of the Income Tax Appellate Tribunal whilst examining similar circumstances for the assessment year 2005-06. He has taken us through the findings therein to point out that the conclusions arrived at are based on a comparison that the condition in any uncontrolled transaction between an independent enterprises for the purpose of such comparison, economically relevant characteristics must be sufficiently comparable if two parties are to be placed in a similar situation. Learned Counsel as such submitted that it is not open for the appellant to now contend a different criteria to ascertain the comparability. In fact the Tribunal whilst passing the impugned Order has considered the said principles whilst coming to the conclusion that the said three Companies cannot be treated to be comparable to the Respondent-Assessee Company. The turnover is obviously a relevant factor to consider the comparability."
6.4 In the instant case also the turnover of the assessee is merely Rs. 18.67 crores as compared to turnover of Rs. 1126.63 crores of Infosys BPO i.e. the company under comparison. The decision of the Hon'ble jurisdictional High Court, being a binding precedent for the Tribunal, respectfully following the finding of the Hon'ble Delhi High Court in the case of New River Software Services Private Limited (supra), we direct the Ld. TPO/AO to exclude the Infosys BPO Limited from the set of comparables.
17Accentia Technologies Ltd.
7. The learned counsel submitted that during the year there was an extraordinary event of amalgamation of the company with Asscent Infoserve Pvt. Ltd (subsidiary) as approved by the Hon'ble High Court vide order dated 25/04/2009. He further submitted that the company is not functionally comparable with the assessee. According to him the company provided services to healthcare industry in the nature of medical transcription, medical coding, billing and receivable management etc. as against the data processing services provided by the assessee. The learned counsel submitted that the company is earning 98.59% of its revenue from medical coding, medical billing and receivable management, which cannot be construed as IT enabled services. He further submitted that the company provided services on a 'SaaS' model, which brings out the niche technologies adopted by it. He further submitted that the company owns proprietary software product such as insta- care, insta-scribe, inta-web etc., which can be demonstrated from the website of the company. The Ld. counsel further submitted that the company is engaged in two business segment, i.e., medical transcription and development of software products and due to non-availability of segment profitability in audited financial statements, the company cannot be compared with the assessee at entity level. 7.1 The Ld. counsel in support of his claim of exclusion of the company due to extraordinary events of amalgamation relied on numerous decisions including following:
18(i) The Delhi bench of the Tribunal in the case of Ameriprise India (Pvt.) Ltd. Vs. DCIT (ITA No. 7018/Del/2014
(ii) The Hyderabad bench of the Tribunal in the case of Excellence Data Research (P.) Ltd. Vs. ITO (ITA No. 159/Hyd/2014)
(iii) The Delhi bench of the Tribunal in the case of Techbooks International Private Limited Vs. DCIT (ITA No. 240/Del/2015) 7.2 Ld. CIT(DR), on the other hand, opposed the exclusion of the company and submitted that the Ld. counsel has not demonstrated, how the amalgamation has impacted profitability of the company. The Ld. CIT DR referred to para 13.4 of the order of the Ld. TPO, wherein he has compared the margin of the company in preceding years as compared to the year under consideration. He submitted that margin of the company in financial year 2009-10 is 43.07% as compared to margin of the company in financial year 2008-09 and 2007-08 as 52.50% and 44.34% respectively. Thus, according to the Ld. CIT(DR) there is no impact of amalgamation on the profitability of the company and, therefore, it cannot be a ground for exclusion on the basis of extraordinary event of amalgamation. The Ld. CIT(DR) also opposed the argument of the learned counsel of functional dissimilarity. According to him, the services in the nature of medical transcription, medical coding, billing etc have been classified by the CBDT as in the nature of BPO or ITes. The Ld. CIT(DR) submitted that in medical transcription, billing, 19 coding etc. also data is processed and, thus, the company is functional similar to the data analysis functions of the assessee. According to him, under the TNMM standards of comparability are relatively relaxed and only broad similarity of functions is required. On the issue of non-availability of segment data, the Ld. DR submitted that the company is not engaged in software development and entire revenue is from ITes services and thus it is comparable at entity level.
7.3 We have heard the rival submissions and perused the relevant material on record. We note that the company has been excluded from the set of comparables by the Tribunal in various cases mainly on the ground of extraordinary event. In the case of Ameriprise India (P) Ltd (supra) for assessment year 2010-11, the Tribunal, while excluding the company on the ground of extraordinary event observed as under:
8.3 We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report of this company, a copy of which has been placed in the paper book. Notes to Accounts of this company, indicate about the amalgamation of Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon'ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to\ mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015 and Techbook International P. Ltd. vs DCIT (ITA No. 20 240/Del/2015) vide its order dated 06.07.2015. In view of the fact that there was merger of Asscent Infoserve Pvt. Ltd. with Accentia Technologies Ltd. by way of amalgamation during the year itself we hold that this company cannot be considered as comparable due to 11 ITA No. 7014/Del./2014 this extraordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables. "
7.4 The appeal filed by the Revenue on the said issue has also been dismissed by the Hon'ble Delhi High Court (ITA 461/2016) in order dated 19/10/2016.
7.5 In other decisions cited by the learned counsel, also the company has been excluded on the ground of extraordinary event of amalgamation.
7.6 In view of the above, respectfully following the above decisions of the Tribunal, we direct the Ld. TPO/AO to exclude the company from the set of comparables.
TCS E-serve International (I) Ltd.
8. Before us the Ld. counsel submitted that operation of this company broadly comprises of transaction processing and technical service. The Ld. counsel submitted that as per notes to the account forming part of financial statements of the company, the technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities. According to him, the activity of software testing, verification 21 and validation falls under the functions of software development. There is no bifurcation available in respect of revenue of the company from transaction processing and technical services and therefore in absence of any segmental data, the company cannot be compared at entity level. 8.1 He further submitted that the company exploits the brand TATA and therefore enjoys the goodwill and recognition associated with the said brand leading to higher volume of business and/or premium pricing.
8.2 The learned counsel relied on the decision of the Tribunal in the case of Techbook International Pvt. Ltd Vs. DCIT (ITA No. 240/Del/2015), wherein the company has been excluded on account of unavailability of segmental information in the Annual Report of the company. 8.3 On the contrary, Ld. DR referred to the notes of accounts of the company and submitted that technical service of testing verification and validation of the software has been carried out at the time of implementation and data centre management activities and the company is not engaged in development of software separately. According to him these services are in relation to the software utilised by the company and thus in any manner it cannot be said that functions of the company include software development. Therefore, he submitted that entire revenue of the company is from IT enabled services and, thus, the company was fit for considering as comparable to the assessee. He also rejected claim of the Ld. counsel of the assessee of exploitation of brand TATA in absence of any evidence on record.22
8.3 We have heard the rival submissions and persused the relevant material on record. In the grounds it is raised that the company did not satisfy the related party filters due to supply of service to single customer. We do not agree with this contention because the party i.e. the City group entities to whom services have been supplied, is not related to the company and thus company satisfies related party transactions filter. The contention of supernormal profit is also rejected as under TNMM the company has to be compared on the basis of FAR analysis and super profit or loss cannot be reason for exclusion, if otherwise a company is functionally similar to an assessee.
8.4 The Ld. counsel of the assessee has contended that company was engaged in software development and therefore it is functionally dissimilar to the assessee. On perusal of page 31 of the Annual Report of the company, we find that background and principal activities have been mentioned under schedule N of notes to account. In the said background it is clearly mentioned that company was engaged in the business of providing information technology enabled services/ BPO services primarily to Citigroup entities globally. It is further mentioned that company's operation broadly comprises transaction processing and technical services. The transaction processing has been reported as including the activities involving the processing, collection, customer care and payments in relation to services offered by Citigroup to its corporate and retail clients. The technical services have been reported as involving software testing, verification and 23 validation of software at the time of implementation and data centre management activities. The contention of the learned counsel is that the activities of technical services are software development services. We do not agree with the above contention of the Ld. counsel due to the reason that in the notes to the account, the company has been characterised as information technology enabled services. Further, in our opinion, the technical services of software testing, verification and validation of the software have been carried out at the time of implementation of the software and no independent activity of software development has been carried out by the assessee. The Ld. counsel has not pointed out any expenditure, which has incurred towards software development. In view of the aforesaid facts and circumstances, the company is primarily engaged in IT enabled services only and functionally similar to the assessee. Further, the contention of the Ld. counsel of impact of TATA brand on profitability of the company is also not tenable in view of the facts that no evidence has been brought on record to support this contention. Further the expenditure corresponding to contribution to TATA brand by the company is also very small part (0.43% ) of the total operational expenses of the company. Further we may like to mention that this company has been found to be comparable to an assessee engaged in providing BPO services by the Tribunal in the case of Cadence Designs Systems (I) Ltd. Vs. DCIT in ITA No. 380/Del/2015. In view of discussion, we uphold the 24 finding of the Ld. DRP in retaining the company as comparable.
TCS E-serve Ltd.
9. The Ld. counsel submitted to exclude the company from the set of comparables on the reasons similar to the reasons taken in the case of TCS E-serve International Ltd. The Ld. DR also repeated same arguments, which he had taken in the case of TCS E-serve International Ltd.
9.1 We have heard the submission of both the parties and perused the relevant material on record. Since we have already directed the TPO/AO to retain the company TCS E- serve International Ltd in the set of comparables, to have consistency in similar circumstances, we direct the Ld. TPO/AO to retain the company in the set of comparables.
E4e health care services Private Limited.
10. The learned counsel of the assessee sumitted that audited financial statement of the company for the year under consideration are not available in public domain and therefore the TPO should be directed to exclude the company from set of comparables.
10.1 On the contrary, the Ld. DR submitted that matter may be restored back to the file of the TPO/AO for deciding a fresh after providing copy of the Annual Report of the company to the assessee.
2510.1 In view of the submission of the parties, we are of the opinion that the assessee should be provided the copy of the Annual Report of the company for deciding the issue of retaining the company in the set of comparables. Accordingly, we direct the Ld. TPO/AO to provide a copy of the annual financial statements of the company for the year under consideration and then decide the issue of retaining/excluding of the company from the set of comparables. It is needless to mention that the services shall be afforded adequate opportunity of being heard.
11. Accordingly, the grounds of the assessee related to exclusion of the companies from the set of the comparables, have been allowed partly for statistical purposes.
12. The Ld. counsel of the assessee further submitted that following four companies have been rejected incorrectly without considering submission of the assessee:
"1. Fortune Infotech Ltd:- The company has been rejected on diminishing revenue.
2. Datamatics financial services omitted:- The company has been rejected by the Ld. TPO on the ground of failure of export sales filter, whereas according to the assessee, company is earning export sales to total sales at 80%.
3. Optimus global services Ltd:- The company has been rejected by the Ld. TPO due to negative net worth, whereas according to the assessee, the company is having positive net worth of Rs.23,99,14,602/-.26
4. Sparsh BPO services Ltd:- The company has been rejected by the Ld. TPO due to negative net worth of the company, whereas according to the assessee the company is having positive net worth of Rs.18,75,87,253/-."
12.1 The Ld. DR objected for including these companies in the set of comparables and relied on the order of the Ld. TPO. 12.2 We have heard the rival submission of the parties on the issue of including companies in the set of comparables. On perusal of the grounds raised by the assessee challenging the comparables, we do not find mention of "Fortune Infotech Ltd." Since no ground has been raised specifically challenging the company for its inclusion, we reject the contention raised by the learned counsel seeking inclusion of the company "M/s. Fortune Infotech Ltd.". As regard the remaining three companies, since the objections raised by the assessee are of factual nature like positive net worth of the companies, export to sales ratio etc., in our opinion, these facts need to be analysed by the Ld. TPO from Annual Financial Statements of the companies, therefore, we feel it appropriate to restore the issue of inclusion of these companies in the set of comparables to the file of the Ld. TPO/AO for deciding afresh after providing adequate opportunity of being heard to the assessee. The related grounds are accordingly allowed for statistical purposes.
13. The learned TPO/AO is directed to recompute the adjustment to the international transaction in view of above directions for exclusion/inclusion of companies in the set of comparables.
2714. The ground No. 3 being consequential in nature, we are not required to adjudicate upon and dismissed as infructuous.
15. In the result, the appeal of the assessee is allowed partly for statistical purposes.
The decision is pronounced in the open court on 27th April, 2018.
Sd/- Sd/-
(AMIT SHUKLA) (O.P. KANT)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 27th April, 2018.
RK/-(D.T.D)
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar, ITAT, New Delhi