Excellence Data Research v. Income Tax Officer

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multiple year data, etc. Issues in these appeals are with reference to Transfer Pricing adjustments made by the Assessing Officer/TPO. In the course of arguments, the learned counsel confined his arguments to the selection of comparables on various filters and the arguments are accordingly submitted. Even though the assessee has raised the ground for inclusion of comparables in its Transfer Pricing Study which were rejected by the TPO, in the course of arguments the grounds No.2.3.5 which seeks inclusion of comparables selected in its Transfer Pricing Study was not pressed. Therefore, the main arguments relate to exclusion of seven comparables included by the TPO in his transfer pricing order.

3. In addition to the issue of Transfer Pricing adjustment, ground No.3 pertains to exclusion of internet expenses from the export turnover while computing the deduction under S.10A and ground No.4 pertains to setting off of brought forward business losses.

4. We have heard the learned Authorised Representative and the learned Departmental Representative in detail, perused the paper-books placed on record along with the summary of the charts prepared about statements of various comparables. In the course of arguments, the learned counsel relied on various decisions of the coordinate benches for exclusion of certain comparables. What we notice is that many of the orders pertained to earlier years and not for the assessment year involved in this appeal. Transfer pricing issues mainly rely on the factual matrix of each case in each assessment year. Therefore, while

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considering some of the principles established in various decisions of the coordinate benches of earlier years, we could not completely rely on the findings thereon. Suffice to say that we have considered all case-law while deciding the issues, particularly, of the Hyderabad Benches of the Tribunal, in Hyundai Motors India Engineering P. Ltd., Hyderabad V/s. ITO Ward 2(2) Hyderabad (ITA No.1850/Hyd/2012 for assessment year 2008-09 dated 21.2.2014); in Capital IQ information Systems (India) Pvt. Ltd., Hyderabad V/s. Dy. CIT (ITA No.1961/Hyd/2011 for assessment year 2007-08 dated 23.11.2012), and M/s. Zavata India Private Ltd., Hyderabad V/s. ITO Ward 3(2), Hyderabad (ITA No.628/Hyd/2008 for assessment year 2004-05 dated 13.1.2013), and of the Bangalore Bench of the Tribunal in the case of Symphony Marketing (IT(TP)A No.1316/Bang/2012 dated 14.8.2013), which basically pertain to earlier assessment years and not for the year under appeal in this case.

5. Briefly stated, M/s. Excellence Data Research P. Ltd. is rendering back office data creation, content development and support services in relation to analysis, content search and projections for all types of business information. It is a wholly owned subsidiary of Data Monitor Ltd., UK. and the AE, in turn, was owned by Informa plc, UK. Assessee's activities comprise of provision of business (data creation, content development in relation to content search and analysis to the various business units within the group); to build and develop software tools and systems to facilitate delivery of group companies reports and data base

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subscription services; and provision of data processing and automatic support to populate the group's subscription databases.

6. For the assessment year 2009-10, assessee filed return of income on 30.9.2009 declaring an income of Rs.14,19,335 under normal provisions of the Act and Rs.4,68,35,769 under S.115JB of the Act. The Assessing Officer vide his draft assessment order enhanced the total income of assessee to Rs.4,07,62,951, on account of transfer pricing adjustment of Rs.4,85,12,912 in accordance with the Transfer Pricing Order passed under S.92CA(3) by the Dy. Commissioner of Income-tax (Transfer Pricing) II, Hyderabad(TPO). Assessee has reported Operating Revenue of Rs.42,06,39,815 and an Operating Cost of Rs.37,42,14,507, resulting in operating profit of Rs.4,64,25,308. The OP/OC was arrived at 12.41%. The entire turnover of assessee is receipts from its AE as ITES provider.

7. Assessee in its Transfer Pricing Study selected TNMM as the most appropriate method and the search for uncontrolled comparables was done using Prowess and Capitaline Plus Database. Assessee after applying certain filters, short listed around eleven comparables, for arriving at ALP under the segment ITES, and Arithmetic Mean PLI was computed at 12.55% as against the PLI of the assessee working out to 15.21%. Therefore, assessee submitted that its international transactions are at Arm's Length Price.

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8. Even though there is no dispute with reference to the method adopted, the TPO rejected the documentation maintained by assessee on the reasons that multiple year data was used; has not applied export filters properly; and also selected some of the companies which are not functionally similar. After analyzing the reasons, the TPO undertook fresh search of comparables and after detailed analysis, gave a show cause notice to assessee for its objections to the selection of 14 comparables. Ultimately, the TPO determined the following twelve companies as comparables and arrived at the average Profit Level Indicator (PLI) of 27.42%, as per the details tabulated hereunder-

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9. Having arrived at the Arithmetic Mean PLI at 27.42%, the TPO allowed working capital adjustment at 2.05%. The Arithmetic Mean PLI was determined at 25.37% and taking the Operating Cost of Rs.37.42 crores, the TPO suggested adjustment of Rs.4,85,12,912 under S.92CA.

10. The Assessing Officer issued a Draft Assessment Order proposing to make the adjustment and assessee filed its objections before the DRP. The DRP vide its order running into 16 pages rejected all grounds raised by the assessee. As the DRP confirmed the Transfer Pricing adjustment made by the Assessing Officer and the TPO, assessee is in appeal before us.

11. Assessee has raised grounds on various aspects of Transfer Pricing adjustments, like rejection of assessee's TP Study, use of filters, obtaining data under S.133(6) of the Act which is not available in public domain, selection of comparables and risk profile of assessee company vis-à-vis comparable companies. As already stated, In the course of arguments, learned counsel restricted his arguments to the selection of comparables. Assessee is objecting to seven comparables selected by the TPO.

12. We have heard the learned counsel for assessee and the learned Departmental Representative in detail, and their arguments are considered at the appropriate stages of this order. As briefly stated, assessee is objecting to the following seven comparables out of twelve comparables selected by the TPO.

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It was submitted that if these comparables were considered,

other issues relating to Transfer pricing adjustment become

academic in nature.

13. We have considered the contentions of the parties and examined the documents and paper-books placed on record. Correctness of inclusion of the above companies is decided hereunder case by case.

(1) Infosys B P O Ltd. :

14. It was the contention of assessee that this BPO is a giant in its area and has brand value of Infosys Technologies limited. Assessee's main contention was that it is not functionally similar and its turnover is much more when compared to that of assessee. It was also contended that the Infosys BPO has done brand building exercise by incurring large amounts of brand building and advertisement expenditure and undertaking brand campaigning outside India. Further, it also has huge asset base and therefore, this company is not functionally comparable to assessee. Assessee relied on the decision of the Hon'ble Delhi High Court in the case of CIT V/s. Agnity India Technologies Pvt.

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Ltd. (2013) 219 Taxman 26 (Del), wherein it was held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee.

14.1 We are in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee's turnover is about Rs.42.06 crores, as against turnover of Rs.1016 crores of the Infosys. We are also of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys BPO is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, because of its big brand value this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. Therefore, we direct the Assessing Officer/TPO to exclude this company.

(2) Genesys International Ltd.

15. It was the contention that this company functions in two horizontals, and is having super profits. It was further submitted that this company is not only in software development but also in Geospatial Services, which are highly technical. It also involves in consulting activity. It was the contention that this company was analysed by the

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coordinate Bench of the Tribunal at Delhi in the case of M/s. Mercer Consulting (India) Ltd. V/s DCIT (vide order dated 6^thJune, 2014 in ITA No.966/Del/2014), wherein this company was excluded in that case. Learned counsel for assessee relied upon the findings of the Tribunal vide paras

14.2 and 14.3, in that case, which read as follows-

"14.2. We have heard the rival submissions and perused the rival materials on record. It has been noticed supra that assessee is basically providing various services to the customers of its AEs in relation to human resources which are more or less centered around the employees of the prospective clients. When we consider the nature of services provided by Genesys International Corporation Ltd., it comes to the forefront that they are providing full range of geospatial services to its customers. In simple terms, geospatial services means the services relating to the relative position of things on the earth's surface. These basically include 3D mapping, Navigation maps, Image processing, Cadastral mapping, etc. If we take into account the nature of services provided by the assessee, being financial and retirement security, health, productivity of employees and employment relationships and then try to compare them with those rendered by Genesys, it is manifested that both are totally incomparable.

14.3. The TPO on page 48 of his order has examined CBDT Circular SO 890 (E) dated 26.9.2000 which provides a detailed list of products or services that can be covered under the ITES for the purposes of Section 10A and 10B of the Act. In this Circular, Information Technology Enabled Products/Services have been divided into fifteen categories, starting with Bank Office operations, Call centres etc. and ending with Website services. From the very description of such services, it is palpable that even though these fall under the overall ITES category, but some of them are quite different from each other. To cite,

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service at Sl.No. (vi) of this Circular is 'Geographic Information System services and at Sl. No. (vii) is 'Human Resources Services.' No doubt, all these fifteen categories of products/services have been included under the major head of 'Information Technology Enabled Services' (ITES), but most of them are quite distinguishable from others. In our considered opinion, the fifteen broad categories set out in this Circular cannot per se be claimed as similar to each other. A cursory look at these products/services transpires that some of them are functionally quite different from each other. Further the level of investment required for providing such services is also not consistent. In our considered opinion, the mere fact that two services are placed under this category do not become automatically comparable. If a case providing one category of services under ITES is claimed as comparable with another in the category of service under ITES as per this circular, then it must be shown ex facie that it is broadly similar. Adverting to the facts of the instant case, we find that the services rendered by Genesys fall under clause (vi) with the heading 'Geographical Information Systems Services', whereas those rendered by the assessee fall partly under clause

(vii) with the heading 'Human Resources Services' and partly under clause (xi) with the heading 'Payroll'. On juxtaposition examination of these two sets of services, we find that there is a vast difference which make one quite distinct from the other. In view of such functional incomparability between assessee and Genesys, we hold that this company cannot be treated as comparable. We, therefore, direct to exclude this case from the list of comparables."

15.1. On careful consideration of the matter, respectfully following the above decision of the coordinate Bench, we are also of the opinion that there is vast difference between the functions of the above company and that of assessee. This company as such, cannot be treated as comparable on FAR analysis. We therefore, direct the Assessing Officer/TPO to exclude this company.

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(3) Eclerx Services Ltd.

16. The objection of assessee to this comparable is that this company is functionally dissimilar. It is in the business of consultancy and advisory service and provides only analytical data. It is also involved in quality monitoring. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. Therefore, the functions of the above company are dissimilar to assessee, which is a captive service provider. On the principles laid down by the Hon'ble Special Bench of the ITAT (Mumbai) in the case of Maersk Global Centres (India) Pvt. Ltd. V/s. ACIT (ITA No.7466/Mum/2012 for assessment year 2008-09 dated 7.3.2014) and the principles laid down by the coordinate bench of the Tribunal(Delhi) in the case of M/s. Mercer Consulting (India) Pvt. Ltd., (supra), assessee submits that this company cannot be selected as a comparable.

16.1 The Learned Departmental Representative, however, submitted that having accepted Aditya Birla Minacs Worldwide Ltd., as a comparable company, this company should also be included, as otherwise, both the companies should be excluded.

16.2 We have considered the issue and examined the Annual Report and the objections of assessee. As seen from the Annual Report, the above company is involved in

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diverse nature of services, and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee's services. We therefore, direct the Assessing Officer/TPO to exclude this company.

(4) Cosmic Global Ltd.

17. 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 was selected as comparable 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

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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 ld. 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 ld. 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 ld. 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 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

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accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons.

(5) Acropetal Technologies Ltd. (Seg.)

18. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) Pvt. Ltd. and therefore, selection of the company by the TPO in this case, which is also in similar ITES services, is not proper.

18.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end, by the coordinate bench of the Tribunal in the

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case of Hyundai Motors India Engineering( supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company.

(6) Accentia Technologies Limited.

19. This company was objected to by assessee on the reason of super profits as well as extra-ordinary events. It was submitted that acquisition of Oak Technologies & Trans Services has impact on the profits of the company and has taken inorganic growth as strategy to increase the profits because of the peculiar economic circumstances and brand value. The same in these circumstances cannot be selected. It was submitted that assessee was in medical transcription services.

19.1. The Departmental Representative however, objected to the pleas of assessee stating that the extraordinary events occurred in earlier year and therefore, the same cannot be considered as having any impact in the year under consideration.

19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have

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impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected.

(7) Crossdomain solutions P.Ltd:

20. Assessee's main objection pertains to violation of principles of natural justice in selecting this comparable. Before the TPO, assessee objected to obtaining information under S.133(6) which is not available in the public domain. Vide Annexure 16 to the objection assessee raised two grounds, mainly on obtaining information under S.133(6) and violation of principles of natural justice. Before us also, the main contention is with a reference to the variation in Revenue between the information in the Annual Report and the figures adopted by the TPO. Even though an issue was raised that this company was not functionally comparable, we do not see any merit in that argument, as no such objection was raised before the Revenue authorities. Further, we have seen the Annual Report and most of the Revenue of this company is from services only. Company is in the pay roll service activity. Therefore, we are of the opinion that the company is functionally similar to the activities of the assessee company which is in the ITES field. In view of this, we are not inclined to exclude this company

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on the basis of functional dissimilarity, as contended by the assessee before us. But, we direct the AO/TPO to examine the variation in Revenue between the information in Annual Report and the figures adopted by the TPO. The Assessing Officer/TPO is directed to work out the PLI after giving proper opportunity to the assessee and considering the objections of the assessee. Subject to these remarks, assessee's contentions are rejected.

21. With reference to ground No.2.5 on risk profile, learned counsel for the assessee contended that the Assessing Officer/DRP have not considered the risk profile of the assessee and necessary adjustments have not been made in order to mitigate the differences between the assessee's risk profile and the comparables selected by the TPO. Assessee contends that adjustment of 1%, which was granted by the coordinate bench in the case of Hellosoft India P. Ltd. in ITA 645/Hyd/2009, should have been allowed. Even though it was contended that the coordinate Bench order in that behalf is binding on the Assessing Officer, we are not inclined to agree with that contention, as risk profile of each assessee differs depending on its own business activity when compared to that of the comparable company, and in each case separate risk profile has to be analysed in FAR analysis. Therefore, allowing deduction of 1% towards risk profile uniformly cannot be adopted as a norm. Further, this aspect requires to be re-examine by the TPO. Therefore, after excluding the above companies, if any adjustment is required to be made, Assessing Officer is directed to consider the risk profile and allow necessary

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deduction, based on the facts of each comparable case. The Assessing Officer/TPO should also allow the working Capital Adjustment already provided in the computation by the TPO. This ground is decided accordingly.

22. Ground No.3 pertains to exclusion of internet expenses from export turnover. The Assessing Officer, while computing deduction under S.10A of the Act reduced internet expenses of Rs.7,26,221 from export turnover. In doing so, the Assessing Officer relied on the definition of the term 'export turnover' in clause (iv) of Explanation 2 to S.10A of the Act. It was submitted that these communication expenses comprise of expenses incurred towards telephone expenses, and internet, and these are spent in India and do not come within the purview of the said Explanation. In the alternative, it was submitted that the same should also be excluded from the total turnover as well. The TPO rejected the contention and the DRP also declined to interfere on this ground.

23. We have heard the rival contentions on this issue. Hon'ble Bombay High Court in the case of Gemplus Jewellery (330 ITR 175) and the Special Bench (Chennai) of the Tribunal in the case of Sak Soft Ltd. (121 TTJ 865) have held that communication charges, though have to be excluded from the export turnover for the purpose of computing deduction under S.10A of the Act, the same should also be excluded from the total turnover. We therefore, direct the Assessing Officer to compute the deduction under S.10A, after reducing the communication expenses both from the export turnover as well as total

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turnover. Ground No.3 is accordingly treated as partly allowed.

24. Ground No.4 pertains to the contention that the Assessing Officer should have allowed deduction under S.10A, without setting off brought forward business losses of Rs.1,06,39,284. It was the contention that the Assessing Officer did not propose to make adjustment of carry forward business loss in the draft assessment order, whereas in the final order, the Assessing Officer set off the brought forward business loss before allowing deduction under S.10A. The assessee is mainly contesting that the Assessing Officer can not adjust the brought forward losses in the final order, after the directions of the DRP. While accepting that the Assessing Officer should not have differed from the draft order, as the same was also covered by the directions of the DRP, we cannot ignore the fact that as per law, brought forward business loss of the unit are to be set off before arriving at the deduction under S.10A. This principle was upheld by the Special Bench of the Tribunal(Ahd.) in the case of Goldmine Shares and Finance P. Ltd. (302 ITR (AT) 208)- Ahd. Therefore, if brought forward losses pertains to the undertaking which was claiming the deduction under S.10A, even if they are set off against other income in respective years, the same should be notionally set off against the income of this year. Therefore, we direct the Assessing Officer to give an opportunity to the assessee and examine the brought forward losses issue, and then make the disallowance, if any. Assessee should be given due opportunity to raise its contentions on this issue. Therefore,

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the ground of the assessee on this issue is considered allowed for statistical purposes.

25. In the result, assessee's appeal is treated as partly allowed.

Order pronounced in the Court on 31^stJuly, 2014. Sd/- Sd/-

(SAKTIJIT DEY) (B.RAMAKOTAIAH)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dt 31^stJuly 2014. Copy forwarded to:

1. M/s. Excellence Data Research Pvt. Ltd., The 'V' Park, Plot no.17, Vega Block, 8^thFloor, Software units Layout, Madhavpur, Hyderabad 500

081.

2. Income Tax Officer Ward 2(1), Hyderabad

3. Dispute Resolution Panel, Hyderabad

4. Additional Commissioner of Income-tax (Transfer

5. Pricing) d Departmental Representative, ITAT, Hyderabad.

B.V.S.