ORDER
Smt. Diva Singh, Judicial Member - By the present appeal filed by the assessee against the order of the CIT(A)-XX, New Delhi dated 21.12.2011 pertaining to the 2006-07 assessment year, the assessee assails the correctness of the aforesaid order on the ground that in the case of the assessee Nucleus Netsoft & GIS (India) Ltd. has wrongly been included as a comparable. Although the assessee has raised as much as 9 grounds before us, the sole issue agitated at the time of hearing was Ground no.-5 which reads as under:-5. "The TPO/AO/CIT(A) has erred in selecting Nucleus Netsoft and GIS (India) Limited for FY 2005-06 as the company is functionally non-comparable to the Appellant."
2. The relevant facts of the case are that the assessee as per the transfer pricing study which has been accepted by the Revenue has described itself as a wholly owned subsidiary of Ameriprise Financial Inc., USA ('Ameriprise USA'). The taxpayer is a captive contract service provider engaged in providing IT enabled back office services (impugned transaction) to Ameriprise US. For providing the above services, the taxpayer is compensated on a cost plus mark up basis for the services rendered to its associated enterprise (hereinafter referred to as "AE"). The IT enabled services rendered by the taxpayer are elaborated at page 3 which read as under:—
3. In order to justify that the transaction is at arm's length, the taxpayer used Transactional Net Margin Method (hereinafter referred to as "TNMM") as the most appropriate method and Operating Profit/Operating Cost (hereinafter referred to as "OP/OC") as the Profit Level Indicator (hereinafter referred to as "PLI"). 11 comparable companies were taken by the tax payer which were rejected by the Transfer Pricing Officer (hereinafter referred to as "TPO"). The margin earned by the taxpayer at the entity level was 14.42%. Considering the 10 comparables taken by the TPO who had disclosed 28.06% mean margin as a result thereof adjustment of Rs.38,60,675/- was arrived at.
4. The taxpayer before the CIT(A) succeeded in its without prejudice alternate prayer that the OP/OC margin of Nucleus Netsoft & GIS (India) Ltd. was wrongly taken as 89.67% and the correct margin ought to have been 48.64%. However on the arguments that it was wrongly taken as a comparable the taxpayer failed to convince the CIT(A). It is seen that before us although the assessee has raised other grounds agitating the used of single year instead of multiple year data and has also assailed the TPO's & CIT(A)'s action in resorting to use the data available in the public domain at the time of TP/Audit and have been faulted for not confining themselves to the data which was available at the time of TP study however none of these issues are argued before us. The Ld. AR instead placed reliance upon the order of the Co-ordinate Bench in HSBC Electronic Data Processing India Ltd. v. Addl. CIT [2013] 38 taxmann.com 141 (Hyd.- Trib.) , Hyderabad for the proposition that the said comparable has been directed to be excluded as a comparable considering the facts for the same specific assessment year namely 2006-07 assessment year. The reasons for so holding it was submitted is not only on the ground that it did not fulfil the cost filters but also on the ground that the fact of amalgamation in the year under consideration changed the business model of the company. The relevant finding and the arguments it was submitted are recorded at para 13 & 13.1 of the said order. The reasoning of the CIT(A) that Nucleus Netsoft & GIS (India) Ltd. at 67% of revenue came from export from IT enabled services compared to the tax payer whose 100% revenue was from IT enabled services was also assailed and it was submitted that the CIT(A) has erred in holding that in TNMM the 33% of the software development services should be a tolerable limit while choosing a comparable as a comparable company. It was submitted that the Annual Report of Nucleus Netsoft & GIS (India) Ltd. did not provide segment details for software for IT enabled service as it was considered that they were closely linked functions.
5. The Ld. CIT DR opposed the stand of the assessee on the ground that there are catena of orders of the Tribunal following the order in the case of Willis Processing Services (I) (P.) Ltd. v. Dy. CIT [2013] 57 SOT 339/30 taxmann.com 350 (Mum.- Trib) which on considering the identical prayer in the case of some other comparable has held that merger and demerger should not by itself make a comparable an incomparable unless by merger or demerger the company become functionally different. For the said purpose, out attention was invited to para 18.3 of the said order. Reference was also made to the order in Agilent Technologies International (P.) Ltd. v. Asstt. CIT [IT Appeal No. 6047 (Delhi) of 2012, dated 14-6-2013] copy filed in the Court wherein following the order of the Mumbai Bench in Willis Processing Services (I) (P.) Ltd. (supra) the issue was restored to the TPO to verify whether as a result of the amalgamation the company becomes functionally different. In similar line it was submitted the Tribunal in its order in the case of Vodafone India Services v. Dy. CIT [2014] 146 ITD 78/[2013] 36 taxmann.com 127 (Mum.- Trib) Mumbai the issue was restored for verification whether it can still be considered to be a good comparable. Accordingly it was his submission that in principle he opposed the prayer of the assessee for exclusion of the said comparable on the ground that amalgamation/merger or demerger would necessarily have already impacted the profits as the cost thereof is embedded in the financials. It was his argument that for the TNMM purpose operating cost anyway stands excluded and even otherwise unless the assessee demonstrates that the functionality of the comparable changes, the factum of amalgamation by itself should not be a ground for excluding the comparable however in the face of the judicial precedent he would have no objection if the issue is restored for verification at the end of the TPO. Addressing the other arguments that segmental details demonstrate that it is different, it was his submission that the TPO can examine that aspect also.
6. The Ld. AR in reply placed reliance upon another order of the Co-ordinate Bench in the case of Toluna India (P.) Ltd. v. Asstt CIT. [2014] 151 ITD 177/50 taxmann.com 24 (Delhi-Trib.) . Specific attention was invited to page 35 para 31.2 wherein Megasoft Ltd. was excluded as a comparable on the grounds that consequent to the amalgamation it was held that the said company cannot be held as a comparable because of the exceptional financial results due to mergers/demerger following the view taken in, the order of the Mumbai Bench of the Tribunal in Petro Araldite (P.) Ltd. v. Dy. CIT [2013] 144 ITD 625/31 taxmann.com 281 .
7. We have heard the rival submissions and perused the material available on record. On a careful consideration of the above decision it is seen that whereas the Ld. AR has relied upon judicial precedent for exclusion of the specific comparable on the ground that the factum of amalgamation makes the comparable an incomparable. The Ld. CIT DR on the other hand has referred to various decisions in support of the prayer that the assessee be required to demonstrate that as a result of the merger/demerger the functionality of the said comparable was impacted. Principally we are inclined to agree with the submissions of the Ld. CIT DR that amalgamation merger/demerger per se need not make a comparable an incomparable and the factum of amalgamation in a specific year would have impacted the profits of the said comparable logically speaking. Moreover since operating cost are anyway excluded while considering the PLI in TNMM situation we agree the factum of amalgamation by itself need not make a comparable an incomparable. We have taken into consideration the decisions of the Co-ordinate Bench wherein following the view taken in Willis Processing Services (I) (P.) Ltd. (supra) the issue has been restored to the TPO to verify whether the functionality of the comparable has also changed as that would be the relevant criteria to consider the prayer for excluding the comparable. However in the facts of the present case it is seen that the Co-ordinate Bench in the case of M/s HSBC Electronic Data Processing India Ltd. (supra) for this specific year i.e 2006-07 assessment year has given a categoric finding that it has changed the business model of the company. The said finding on fact has not been canvassed to be a finding contrary to facts or upset by a decision of a higher forum. In these peculiar facts and circumstances we find no merit in the arguments of the Revenue to still restore the issue for verification when a Co-ordinate bench on facts pertaining to the very same assessment year has held that the business model for Neclues Netsoft & GIS (India) Ltd. has changed as a result of the amalgamation. For ready-reference, we reproduce para 13 & 13.1 as under:—
Nuclues Netsoft & GIS (India) Ltd.
"13. The last objection was with reference to the above company, which is on similar facts as that of Vishal Information Technologies, discussed above. It was submitted that this company is functionally different and fails under the employee cost filter. It was further submitted that there is a scheme of amalgamation of earlier company by the orders of the Hon'ble High Court of Judicature of Bombay, on 22.2.2006 and in view of amalgamation, the financials have changed and the business model also changed. Referring to the annual report placed on record, it was submitted that as against Rs.24.02 lakhs of employee costs for the year ending 31st March, 2005, the employee cost has increased to Rs.132.59 lakhs. Further, the data processing charges is also to the extent of Rs.1.04 crores, which indicates that the assessee is outsourcing the work. Accordingly, it cannot be selected as a comparable. Due the amalgamation during the year, the assessee's business model has changed and because of employee cost filter also, this comparable has to be excluded.
13.1. After considering the rival submissions, we are of the opinion that this company cannot be selected as a comparable not only on the reason of failing employee cost filter, but also due to amalgamation during the year, which has changed the business model of the company."
7.1 While so deciding the issue in assessee's favour, we hold that the reliance placed by the assessee for exclusion of the said comparable on the order of the Co-ordinate Bench in the case of Toluna India (P.) Ltd. (supra) is found to be misplaced is in the facts of that case a bare reading of the para 31.2 of the said order, would show that Megasoft Ltd. (Consulting) Blue Alley Division was not considered a comparable on considering the Director's Report which set out that the financial results of the said year included the business performance of Visual Soft Technologies Ltd. w.e.f 01.10.2006 for which specific purpose the results of that company could not be taken to be comparable. In view thereof it was held that exceptional financial results on account of the inclusion after the merger of another company w.e.f specific date made the said company an incomparable. In the facts of the present case this position has not been demonstrated or canvassed. Although the Ld. AR in passing has made reference to the financial performance review and the 22nd Annual Report for 2005-06 assessment year filed in the Court. However we are not inclined to address the half hearted effort and confine our finding on the conclusion arrived at by the Co-ordinate Bench at Hyderabad in the case of M/s HSBC which considering the position for 2006-07 assessment year have held that the business model of the comparable has changed. In view of the above, the sole issue agitated by the assessee praying for the exclusion of the Nucleus Netsoft & GIS (India) Ltd. is allowed. Since the remaining grounds are not argued, they are dismissed as not pressed and the appeal of the assessee in view of the above is partly allowed.
8. In the result the appeal of the assessee is partly allowed.
RANJAN
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