TaxTMI 
TaxTMI 
2011 (6) TMI 398
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....al, the revenue has taken two grounds as to whether on the facts and in the circumstances of the case, the ld. CIT(Appeals) was right in -(i) treating the amount of Rs. 1,42,58,751/- as operating expenditure; and (ii) rejecting six companies identified by the TPO as comparables. 2.1 The facts of the case are that the assessee filed its return on 30.10.2004 declaring loss of Rs. 29,42,543/-. The case was initially processed u/s 143(1) of the Income-tax Act, 1961, and thereafter picked up for scrutiny by issuing statutory notice u/s 143(2). The assessee is conducting the business of providing call centre services. It is a subsidiary of Teleperformance, USA (TPUSA). In the course of scrutiny, it was found that the assessee has undertaken international transactions of the total value of Rs. 19,46,40,698/-. Therefore, the matter was referred to the Transfer Pricing Officer (the TPO) for determining arm's length price of the transactions u/s 92CA(3). The TPO suggested upward revision by an amount of Rs. 3,31,61,663/- to bring the value of international transactions in line with arm's length price. The adjustment was made and, thus, the total income for this year was determined at Rs. ....
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....e PLI. However, the TPO was of the view that the expenditure was of TP USA and not of the assessee. Therefore, he made modification to the computation of the PLI submitted by the assessee and came to the conclusion that the same was (-) 0.92%. His computation is as under:- INCOME Income from Operations 19,46,40,698 Other Income Exchange Gain 56,47,297 Total income 20,02,87,995 EXPENDITURE Personnel costs 9,02,35,050 Admn. & Other Expenses 8,62,09,637 Depreciation 2,56,93,731 Total Expenditure 20,21,38,418 Operating Profit -18,50,423 OP/TC(%) -0.92 3.2 Coming to the comparable cases, the TPO analyzed the services rendered by the assessee. He came to the conclusion that the submission that it is primarily a voice based service provider is not correct. The assessee has undertaken a host of special services and the group is also not classified as a voice based service provider. The assessee has updated customer list after enforcement of Do Not Call regime ("DNC regime"). Consequently, it has been held that the assessee is an IT enabled service BPO (ITES BPO). It has been accepted that TNMM i....
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....ommunication for securing the contract since 15.4.2002. The representatives of IBM-Sprint visited the assessee in February, 2003 to assess the facility and the capability; (iii) the assessee wanted to expand its business and was looking for prospective clients as the present facilities were likely to be exhausted in July, 2003; (iv) in anticipation of growth in business, the assessee took premises on lease by way of agreement dated 05.06.2003. The lease was taken for a period of five years and it provided for a lock-in-period of three years; (v) a press release on 5.2.2004 indicated that the IBM-Sprint business was awarded to TP USA and the operations were expected to commence from 01.04.2004. This necessitated the upgradation of facilities by the assessee; (vi) newspaper report dated 7.4.2004 indicated that the IBM acquired Daksh, an Indian BPO; (vii) an agreement was reached between the TP USA and the IBM-Sprint to pay winding up cost aggregating to US$ 60265; (viii)this resulted in non-utilization of the rented premises. However, the assessee was bound to pay the rent for 36 months due to the conditionality of lock-in-period. Accor....
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....iture, at 6.60%. The mean of the comparable cases, as mentioned earlier, was worked out at 4.29%. Accordingly, it has been held that no adjustment was required to be made on account of transfer pricing. 5. Before us, the ld. CIT, DR furnished a brief background of the case that the assessee-company is a telemarketing company and it is wholly owned subsidiary of TP USA. It had provided services only to the parent company. The modes operandi is that the parent company enters into agreements with clients and thereafter engages the assessee to provide services to the clients of the parent company to the extent assigned to it. The TPO worked out the PLI at (-) 0.92% after including what has been termed by the assessee as extraordinary expenditure, not relating to operations of the assessee. The major expenditure is in respect of rent of vacant premises, which was to be used for providing services to IBM Sprint with which the parent company had entered into agreement for providing services. On the other hand, the ld. CIT(Appeals) has worked out the PLI in case of the assessee at 6.60% as against the PLI of only 3.24% worked out by the assessee. 5.1 It is further submitted that the ....
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....of the ld. counsel is that the assessee had been making efforts independently to develop its customer base. However, the business could be received only if the customer was satisfied with the infrastructure and human resources available with the assessee. Therefore, the expenditure incurred on business development, including the rent, was the expenditure of the assessee and not that of its parent company. In this very connection, our attention has also been drawn towards the TP report obtained by the assessee, which shows that there was no restriction on the marketing functions of the assessee. In these circumstances, it is argued that the expenditure on rent was incurred in respect of expansion of the business but which could not be carried through. This expenditure had no nexus with any of the international transaction. No revenue had been received which could be related to this expenditure. Therefore, it is an abnormal expenditure which should be ignored for the purpose of working out the PLI. 6.1 Our attention has been drawn towards the findings of the ld. CIT(Appeals), in which it has been inter alia mentioned that the crux of comparability test is to compare like with the ....
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....s of the case and submissions made before us. Insofar as payment of lease rent is concerned, briefly the facts are that TP USA, the parent company was to get a new business from IBM Sprint. It was decided that a part of this business will be allocated to the assessee. In order to carry out this work, the assessee was required to increase its capacity. Therefore, new premises were hired and prepared for the work. Necessary approval was obtained from STPI. The representatives of IBM Sprint also visited the new facility. However, due to change in business strategy of IBM, the order was cancelled. Therefore, the winding up agreement came into existence. Under the agreement, initial costs were reimbursed but the rent and electricity charges for the premises were not reimbursed. The lease agreement had a lock-in-period of three years due to which the assessee had to perforce pay rent for three years whether the agreement was terminated or not. Further facts are that the transfer pricing report submitted by the assessee states in paragraph no. 7.4 that the TP USA is responsible for marketing the call centre capacity of its various call centres. The assessee has no responsibility to market....
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....refore, the conclusion which can be drawn on the basis of this analysis is that the expenditure of the parent company has been shifted to the assessee. Thus, on the facts it is held that marketing risk in North America was being borne by the parent company and, therefore, the expenditure on rent should have been reimbursed by it to the assessee in the same manner as other costs were reimbursed as a consequence of winding up agreement. Therefore, it is held that the expenditure did not pertain to the assessee. In other words, the PLI of the assessee was low inter alia because it was bearing the cost of the parent company. In other words, the transactions were so arranged as to decrease the profits of the assessee. In such a situation, the revenue could have disallowed the expenditure. However, the AO has not done so but proceed with aligning the PLI of the assessee with arm's length PLI. 8.1 This bring us to the alternative argument that the assessee is entitled to get adjustment in respect of capacity under-utilization. No objection has been raised by the ld. CIT, DR in this matter. As a matter of fact, he has fairly accepted the proposition that adjustment in this regard is req....
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....is purpose. It was found that they were carrying on totally different lines of business against the business of the assessee of voice based BPO. The AO had rejected the case of IKF Technology Ltd. precisely on the ground that it was engaged in software services and those too were in the field of non-voice based industry. Following this very logic, the ld. CIT(A) rejected six cases selected by the TPO. 9.1 Before us, the ld. DR relied on the order of the TPO. It was strongly submitted that the case of Tata Services Ltd. was wrongly excluded. From the details of this company, it is seen that it is an in-house company providing services to other companies of Tata Group. For the sake of ready reference, the details submitted by the assessee to the ld. CIT(A) and mentioned on page no. 46 are reproduced below:- "....The company is an in-house group resource company providing certain centralized service to the Tata Group of Companies. The operations of the company are run on no-profit and no-loss basis. The company provides services to Tata Group companies against their requirements with the operations of various departments consists of Tata Management Training Centre, Corporate Aff....
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....lves many uncertainties and, therefore, if there are substantial differences it would be proper to reject the comparables. 9.3 When we examine the facts of the case in the light of aforesaid conclusion, it is seen that none of the comparables selected by the TPO is shown to have the same business of voice based BPO as in the case of the assessee. C.S. Software Enterprises Ltd., is conducting the business of software. Carborundum Universal Ltd., is mainly in the line of manufacture of coated and bonded abrasive. The main business of Mukand Engineers Ltd. is production of steel. Tricom India, apart from other businesses is also carrying on the business of non-voice based BPO. Such is also the case of Ultramarine & Pigments Ltd. We have already mentioned about the business of Tata Services Ltd. All these companies have been carrying on their main businesses for a long period. The business models are not comparable. Therefore, we do not find any reason to disturb the order of the ld. CIT(Appeals) in this matter. ITA No. 4796(Del.)/2010-Appeal of the assessee-A.Y. 2006-07 10. In this appeal, the assessee has taken up 15 grounds. However in the course of hearing before us, only ....
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.... has been taken that even if there is a single rupee transaction with the associated enterprise, such a case should not be considered as a comparable case. 12.1 Before us, the ld. counsel furnished synopsis termed as "broad proposition", which show that NIIT Smart Serve Ltd. had 32% related party transactions, Nupima Services Ltd. - 28%, Axis IT&T Ltd.- 48% and Godrej Upstream Ltd. dealt only with associated enterprises i.e., all its transactions were related party transactions. No further argument was made in this behalf. On the other hand, the ld. DR relied on the decision in the case of Sony India (P.) Ltd. (supra). 12.2 Having considered the facts of the case and the arguments made before us, it is clear that the four comparables mentioned above had related party transactions exceeding 15% of the revenue. Therefore, these cases could not have been taken as comparables in view of the decision in the case of Sony India (P.) Ltd. The cases could have also not been considered at all in view of the decision in the case of Phillips Software Centre (P.) Ltd. (supra). Therefore, it is held that the TPO rightly rejected these four cases. 12.3 The TPO had considered the case of ....
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....ncidence of profit and loss. While looking the situation from this angle, accounts of the company for financial year 2007-08 cannot be considered because as per the rule, the accounts of financial year 2005-06 only have to be considered. Therefore, we are of the view that this comparable was also rightly rejected by the TPO. 14. Ground nos. 4.3 and 4.4 are against rejection of Surevin Internet Services Ltd. as a comparable company. In this connection, it is mentioned that the selection criteria applied by the assessee is to accept companies with sales of more than Rs. 1.00 crore. Thereafter, the second filter is applied by which cases having major income from trading and manufacturing operation are rejected. However, the assessee has not taken into account the criteria of percentage of revenue from the relevant activity to the total revenue. On the basis of filters applied by the assessee, a case having turnover of more than Rs. 100 crore may get selected if revenue from the relevant activity is less than Rs. 1.00 crore. Therefore, a case may get selected where turnover from the relevant activity is less than the threshold limit of Rs. 1.00 crore. This company has a turnover of ....
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....sh information about the client-company. On the other hand, the case of the ld. DR is that Shreejal Info Hubs Ltd. is working for the clients in India while the assessee is providing services in USA, thus, business territories are totally different. 15.2 We have considered the facts and the submissions made in this behalf. We are of the view that territory of the business is a material factor in deciding comparability of the cases. The assessee renders services in USA while Shreejal Info Hubs Ltd. renders services in India. This fact alone is sufficient to exclude this comparable. Thus, it is held that the AO/TPO rightly rejected this case as a comparable case 16. Lastly, ground no. 4.6 is against rejection of Optimus Outsourcing Co. Ltd. as a valid comparable case on the ground that it has been incurring losses consistently and its net worth had eroded. No argument is made in respect of this ground by any party and the ground appears to have been wrongly taken up. Therefore, no decision is required on this ground. 17. Ground nos. 5 to 9 are against inclusion of Galaxy Commercial, Maple E Solutions, Triton Corporation, and Nucleus Netsoft and GIS (India) Ltd. as comparable....
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....s deriving revenue from ITES activities which are comparable to the business of the assessee. Thus, both the companies were included as comparables. 17.3 In regard to Nucleus Netsoft & GIS (India) Ltd., it was submitted that its business is functionally different and there are related party transactions to the extent of 21.60%. Its PLI works out to 32.47% against 44% computed by the TPO. In the order, it is mentioned that this company is rendering ITES. The software part is handling of CAD/CAM services, which does not amount to software development. The related party transactions worked out to only 6.07% which is within the permissible range. The working of PLI at 44% is also correct. 17.4 In regard to inclusion of all these companies, the ld. CIT, DR relied on the order of the AO. 17.5 We have considered the facts of the case and submissions made before us. The admitted facts in respect of Galaxy Commercial are that it is carrying on three lines of businesses and segment profitability is not available. Obviously, overall profitability of the company cannot be applied in the case of the assessee as it will amount to comparing incomparable cases. Further, the business reput....