TaxTMI 
TaxTMI 
TaxTMI 
2012 (4) TMI 263
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....s to their comparability was provided during the appellate proceedings, which was also put to the department during the remand report proceedings, and have been accepted by the department after due examination and hence have become final. 3. The CIT(A) has erred in excluding the results of the loss making companies merely on the ground that they are loss making, without assigning any reason. The CIT(A) ought to have noted that exclusion of any company from the comparables can be on account of lack of comparability and the mere fact that they are loss making companies by itself cannot be a ground for exclusion. The crux of the above grounds is that the lower authorities not considered all the comparables which included certain loss making companies for the purpose of determining the ALP. 2. Brief facts of the case are that the assessee company is a 100% subsidiary of M/s Knoha Solutions Inc., USA and is engaged in the business of BPO/ITES. It is a captive contract service provider and renders BPO services to its AE at a cost plus mark up of 15% as per service agreement dated 29.8.2001. For the purpose of establishing the ALP of its international transactions, assessee....
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....the TPO before the CIT(A). In respect of computation of PLI, specially in respect of M/s Allsec Technologies Limited, the TPO had computed the PLI in respect of this company @ 3.44% while the assessee computed the same @ (-) 37.80%. The TPO stated in his report dated 19-11-2008 that this company i.e., M/s. Allsec Technologies Limited for the relevant financial year 2003-04 were affected by two items of abnormal expenses i.e., connectivity cost and data base cost which together amounted to more than 60% of the revenue. The director's report also stated that the full capacity of the company could not be used for a period of time. The excess cost incurred on account of this cannot be quantified. These unusual items distorted the margins making the data unreliable for comparability analysis. The TPO made a cost analysis of the company during the previous two years and next two years which clearly indicated that the extra expenses incurred in this year were not pertaining to the transactions of the year which had lead to the losses of the company. Since the extra expenses were incurred during the course of expansion of business and were not the items which used to be incurred year to ye....
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....hat only 23% of the operating revenues were derived from the ITES segment. Pentasoft Technologies Limited also has three segments (i) Engineering Services- CAD/CAM/CAE projects (2) Enterprise division and (3) Education and training. The segmental reporting indicates that only 26% of the operating revenues were derived from the engineering services segment and related party transactions and it is evident that these companies have diversified operations and are deriving their major revenues from functions different from the assessee company which is rendering BPO services to its associated enterprises. Hence, these companies are rejected by the CIT(A) as comparables for the purpose of bench marking the international transactions of the assessee. He has considered C.S. Software Enterprises and Mercury Outsourcing Management Limited as comparables for determining average PLI. Further, he has given 2% from the average profit margin towards risk adjustment. He has also given deduction under section 92C(2) at +/(-)5% placing reliance on the decision of ITAT, Kolkata in the case of Development Consultants (P) Ltd. v. Dy. CIT [2008] 23 SOT 455. 5. The CIT(A) also granted working capital ad....
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....e showing abnormal profits and that profit had come from other than business of software, then the result of that company is to be excluded from comparables. For this purpose, he relied on the following decisions:- (i) Pune Bench in the case of E-Gain Communication (P.) Ltd. v. ITO [2008] 23 SOT 385. (ii) Delhi Bench of ITAT in the case of Sapient Corporation (P) Ltd. v. Dy. CIT [2011] 46 SOT 56/11 taxmann.com 69. (iii) Bangalore Bench in the case of Philips Software Centre (P) Ltd. v. Asstt. CIT [2008] 26 SOT 226 (iv) Bangalore Bench "A" in the case of SAP Labs India (P) Ltd. v. Asstt. CIT [2011] 44 SOT 156/[2010] 8 taxmann.com 207 (v) Delhi Bench "A" in the case of Adobe Systems India (P) Ltd. v. Addl. CIT [2011] 44 SOT 49 (URO). 8. On the other hand, the learned departmental representative submitted that for determining the ALP is depended of facts of each case and as such the CIT(A) has not considered some of the companies as comparables in his impugned order. Being so, he relied on the order of the CIT(A). 9. We have considered the rival submissions of the parties and perused the material available on record. The determination of the ALP is depen....
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....es in the subsequent year. The extra expenses incurred on account of connectivity cost, data base cost and employees cost were not pertained to only the transaction of the current year. These expenses cannot be related to the transactions of the current year. Due to these extra expenses, the probability of the company has been adversely affected. As such, it is not possible to make reasonable accurate adjustment to eliminate the material effect of the differences between the transactions of this company. As such the data of this company cannot be considered as comparable to determine the ALP. This view of ours is supported by the order of the Tribunal in the case of Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (supra) wherein held that para (123.2) "While comparing controlled and uncontrolled transactions or enterprises, one has to look for the differences and whether such differences are likely to affect the price, cost charged or paid or profit arising from the transaction in the open market, it has further to be examined whether a reasonable accurate adjustment can be made to eliminate the material effect of the differences between the transactions or entities. I....