M/s. Flagstone Underwriting Support Services India P. Ltd. Versus The DCIT, Circle 1(3), Hyderabad
Income Tax
2014 (11) TMI 690 – ITAT HYDERABAD – TMI
ITAT HYDERABAD – AT
Dated:- 19-11-2014
ITA. No. 1018/Hyd/2013, ITA. No. 990/Hyd/2013
Income Tax
Shri B. Ramakotaiah And Shri Saktijit Dey,JJ.
For the Petitioner : Mr. Ravi Bharadwaj
For the Respondent : Mr. D. Sudhakar Rao
ORDER
Per B. Ramakotaiah, A. M.
These are cross-appeals by Assessee and Revenue against the order of Ld. CIT(A)-II, Hyderabad dated 26.03.2013. The issue in appeal is with reference to T.P. adjustments made by A.O./TPO on assessee's international transactions under the provisions of section 92C of the Act. Assessee choose to prefer appeal before the Ld. CIT(A) rather than going before the Disputes Resolution Panel and accordingly, Ld. CIT(A) adjudicated the issues.
2. Briefly stated, Flagstone incorporated on October 10, 2005, is based in Hyderabad, Andhra Pradesh. Assessee is a wholly o
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AE. The TPO suggested an adjustment of Rs. l,84,52,948 under section 92CA of the Income-tax Act, 1961. Assessee decided to file an appeal before the CT(A) and accordingly did not file any objections before the DRP. Thus the AO on expiry of prescribed time limit, has passed the Assessment Order on 17th February, 2012. The Assessing Officer vide his order has added the amount determined by the TPO as Arms Length Price to the total income of assessee. The Assessing Officer has also made a disallowance of Rs. 20,37,817 on account of communication expenses as per Explanation 2 to section 10A and recalculated the exemption under section 10A of the l.T.Act, 1961.
3. Aggrieved by the assessment orders of the authorities assessee preferred appeal before the Ld. CIT(A) raising various contentions. Ld. CIT(A) mainly concentrated on selection of comparable companies. Ld. CIT(A) noted that TPO has selected the following 20 comparables by giving reasons
Sl. No.
Name of the comparable Company Tota
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clusion of 11 comparables.
Sl.No.
Name of the Comparable Company
1.
Aditya Birla Minacs
2.
Asit C. Mehta
3.
Caliber Point Business Solution (Segl.)
4.
Crossdomain Solution P. Ltd.,
5.
Datamatics Financial (BPO Div.)
6.
e4e (earlier known Nitanny Outsourcing)
7.
ICRA Online Ltd.,(Seg.)
8.
I-service India P. Ltd.,
9.
R System International Ltd., (seg.)
10.
Spanco Ltd., (seg.)
11.
Infosys BPO Ltd.,
3.2. But with reference to 9 comparables they have objected in terms of functionality. They are (1) Accentia Technologies Ltd., (2) Acropetal Technologies Ltd., (seg.) (3) Cosmic Global Ltd., (4) Eclerx Services Ltd., (5) Genesys Intl. Corporation Ltd., (6) HCL Comnet Systems & Services Ltd., (7) Wipro BPO Limited (8) Coral Hub and (9) Moldtek Technologies Ltd.,
3.3. After noting that assessee has objected to 9 comparables, the Ld. CIT(A) further noted that assessee mainly contested against inclusion of two comparables viz., Coral Hub and Moldtek Technologies.
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nue is aggrieved on the exclusion of two comparables and direction of Ld. CIT(A) on exclusion of communication charges from both export turnover as well as total turnover for the purpose of computing deduction under section 10A of the I.T. Act. Revenue has raised 5 grounds in their appeal on this issue.
5. On considering the rival contentions, we are of the of the opinion that there is no need to interfere with the orders of Ld. CIT(A) on the above issues. As far as Coral Hub is concerned, Ld. CIT(A) discussed the same vide para 5.1 and followed the decision of DRP in the case of Zavata India P. Ltd., for A.Y. 2008-09 and decision of ITAT 'A' Bench, Hyderabad in the case of Capital IQ Information Systems India P. Ltd., It was held that Coral Hub works as an agent by outsourcing its work to third party vendors and cannot be taken as a comparable to the ITES functions being involved by assessee. Since the decision of Ld. CIT(A) is in tune with the decisions already available of this com
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round No.4 is on the issue of exclusion of communication charges both from export turnover as well as total turnover. As briefly stated, A.O. excluded the communication charges from export turnover holding that they are not to be included in the Export turnover. Assessee contested the same stating that data link charges cannot be considered as attributable to export service, however, alternate plea was made that if the same was excluded from the export turnover, the same was also to be excluded from the total turnover while computing deduction under section 10A. Following the decision of ITAT in the case of CIT vs. Mentor Graphics (I) P.Ltd in ITA no.696/Hyd/2009 dated 18.08.2009 and Special Bench decision in the case of ITO vs. Saksoft 313 ITR (AT) 353, Ld. CIT(A) gave direction to exclude communication charges from the total turnover as well. Since, this direction is in tune with the decision of Coordinate Bench including Chennai Special Bench decision of ITAT in the case of ITO vs.
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However, since the issue of working capital adjustment was not adjudicated by Ld. CIT(A), assessee is objecting to the balance of comparables. It was submitted that 7 comparables objected by assessee before Ld. CIT(A) were already rejected as comparables in the case of Hyundai Motors India Engineering P. Ltd., Hyderabad vs. ITO, Ward 2(2), Hyderabad in ITA.No.1850/Hyd/2012 dated 21.02.2014 and Symphony Marketing Solutions India Pvt. Ltd. vs. ITO, Ward 12(2), Bangalore IT (T.P.)A.No.1316/Bang/2012 dated 14.08.2013. It was submitted that if these comparables are excluded, other grounds raised by assessee would be academic in nature.
8. Learned D.R. however, relied on the orders of TPO and A.O.
9. We have considered the issue and examined the contentions. As far as 7 comparables selected by TPO but objected to by assessee, these are already decided by Coordinate Bench in various orders which we do not repeat here but for the sake of record the orders in the case of Symphony Marketing S
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ion of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a comparable owing to extra ordinary events that took place during the previous year. The Tribunal upheld the order of the DRP observing as follows :-
“I. Accentia Technologies Ltd.
10. It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner-
“17.5. In addition to t
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mpany were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial year 31.3. 2008. The assessee filed Form No.21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective date of the scheme of merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger.”
11. On careful consideration of the matter, we also
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mpany as a comparable. We therefore hold that this company cannot be considered as a comparable.
II. ACROPETAL TECHNOLOGIES LTD. (Seg.)
This company is listed at Sl.No.2 of the comparables chosen by the TPO. As far as this company is concerned, the objection of the assessee is that this company is not functionally comparable. The assessee is a BPO company that provides CAD/ CAE services.. As far as Acropetal Technologies Ltd. is concerned, this company does the business of export of software services. It is also seen from the segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it derives income from engineering design services and software development services. It is also pertinent to point out that before the TPO, the assessee raised an objection that this company performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the serv
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rvices performed by the Assessee are routine low end ITES functions. We 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].
As can be seen above, even though the said company was excluded on the differentiation of high end services being provided by this company, as noticed assessee also provide high end services in CAD / CAE designing areas. These are High end services as considered by the Bangalore bench. Therefore we are of the opinion that functions of assessee are similar to the above Company. The objections of assessee are rejected.
III. COSMIC GLOBAL LTD., :
This comparable with operating profits by total cost after adjustments of working capital was shown at 26.51% by the TPO. Assessee has not objected to this comparable initially in the objections to the draft order and vide annexure-26, it
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D.R. however, submitted that assessee has accepted the same in the TPO proceedings. Therefore, should not be excluded now.
While there was no objection for assessee objecting to the comparable even at a later stage when it comes to know of new facts, what we noticed is that the assessee's objections before the DRP dated 30.07.2012 have not been addressed by the DRP. It is for the TPO to determine whether this company falls within the filters as adopted by the TPO himself. If the assessee fails the employee cost filter, then the same cannot be accepted as a comparable company. In order to examine this aspect, we are of the opinion that selection of this comparable is to be restored to the file of the TPO for fresh examination, after giving due opportunity of hearing to the assessee. The issue is restored to the file of the TPO.
IV. ECLERX SERVICES LTD. :
This company is listed at Sl.No.10 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that thi
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bai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that that the concerned company is engaged in providing Knowledge Process Outsourcing(KPO) Services.
15. On considering the objections of the assessee in relation to this company, we accept the contention of the assessee that this company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, which is distinct from the nature of services provided by the assessee.”
We are of the view that in the light of the decision of the Hyderabad Bench referred to above, this company cannot be regarded as a comparable for the reason that it was having extraordinary event and super normal profits. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench.
V. GENESYS IN
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r view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. In view of the above, we are of the view that this company cannot be regarded as a comparable and deserves to be excluded from the list of comparables.
VI HCL COMNET SYSTEMS & SERVICES LIMITED :
VII. WIPRO LIMITED :
The assessee has objected for these two companies being taken as comparables mainly on the ground that these companies are industrial giants considering their turnover compared to that of the assessee, whose turnover is only Rs. 15 crores. It is the contention of the assessee that these companies are industrial giants in the area of software development and since these companies assume all risks, they earn higher amount of revenue resulting in higher profit, whereas the assessee operates in a risk mitigated environment. Therefore, the margin of profit is also less. In this context, the learned Authorised Representative for the assessee relied upon the decision o
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e, on the ground that they may not be representing the industry trend. That very logic also applies to the companies having high turnover of over Rs. 200 crores as against the assessee's turnover of only Rs. 15 crores, and therefore, it would be fair enough to exclude those companies also. In the case of Agnity India Technologies P. Ltd. (supra), the Delhi Bench of the Tribunal, while considering the comparability with companies which are market leaders in their field, and having substantially high turnover, observed as follows-
“5.2. Various arguments, as stated earlier, were taken before the DRP which inter-alia included rejection of comparable cases; application of arbitrary filter of wage to sales ratio; ignoring that the assessee is a limited risk company; inclusion of Infosys Technologies ltd.; and inclusion of Satyam Computers Services Ltd. in spite of the fact that its data is not reliable as publicly known. On the basis of these arguments, the DRP excluded the case of Sat
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“9. Having heard both the parties and having considered the rival contentions and also the juridical precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain for the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal when companies which are loss making are excluded from comparables, then
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