TaxTMI 
TaxTMI 
2013 (3) TMI 415
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.... under section 10A of the Act in accordance with the provisions of sub-section (4) of section 10A of the Act. 1.4 The learned CIT(A) erred in not providing an opportunity to the appellant company before disallowing the deduction under the provisions of section 10A(2)(ii) and 10A(2)(iii) of the Act. 1.5 The appellant prays that the Hon'ble ITAT direct the learned Assessing Officer to delete the disallowance under section 10A of the Act. 2. Deduction of Technical Fees and Satellite Link Charges from Export Turnover 2.1 The learned CIT(A) erred in contending that this ground is inconsequential once the appellant company is held not eligible for the said deduction. 2.2 The appellant prays that the learned Assessing Officer be directed not to exclude satellite charges, technical fees, interest earned on bank deposit and miscellaneous income from export turnover for the purpose of computing deduction under section 10A of the Act. 3. Transfe....
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....the learned TPO has used the data which was not available as on the specified date (as defined in Section 92F(iv) of the Act). * The learned CIT(A) erred in confirming that the learned TPO had not violated the rules of natural justice by not providing/sharing the complete details of the benchmarking analysis carried out by him. * The learned CIT(A) erred in confirming TPO's stand in applying the filters adopted in the fresh search. 3.6 The learned CIT(A) disregard of Rule 10B(2) and Rule 10B(3) of the Income Tax Rules, 1962: * The learned CIT(A) erred in law and facts in disregarding the comparability factors specified under Rule 10B(2) of the Income-tax Rules, 1962 ['the Rules'] and the provisions contained in Rule 10B(3) of the Rules which specifies that an adjustment should be made to account for differenc....
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....d in not granting reasonable and adequate opportunity of being heard to the appellant." 3. Ground no.1 is regarding denial of deduction u/s 10A. 3.1 The assessee company is engaged in the business of processing information relating to insurance claims received from Trinity Processing Services Ltd. (TSPL). Thus, the total income earned by the assessee is from the services rendered to TPSL, UK. During the year under consideration, the assessee claimed deduction of Rs. 5,24,70,604/- u/s 10A of the IT Act. The Assessing Officer noted from Form No.56F that the assessee has computed the deduction u/s 10A with reference to the number of employees as it was done in the last year and not as prescribed in sub-section (iv) of sec. 10A of the Act. Thus, the Assessing Officer has observed that the claim is not in accordance with the provisions of sec. 10A and the same was disallowed as in the AY 2006-07. Apart from this, the Assessing Officer has also observed that the assessee has debited a sum of Rs. 50,00,615/- under the head 'satellite link charges' and Rs. 1,03,01,183/- under the head 'technical service fees'. The Assessing Officer asked the assessee as to why the same should not....
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.... Vikroli unit. For the AY 2005-06 also the Assessing Officer has accepted the claim of deduction u/s 10A for the Vikroli unit. The employees of the first unit i.e., SEEPZ Andheri were transferred to Vikroli unit and the assessee used to reduce the claim to the extent of the employees transferred from Andheri unit to Vikroli unit w.e.f AY 2004-05. 4.2 The ld. Sr. counsel has further submitted that for the AY 2006-07, the Tribunal has allowed the claim of the assessee. He has further submitted that when the claim of the assessee was allowed in the earlier year, then the Assessing Officer cannot disallow the claim for the year under consideration. In support of his contention, he has relied upon the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Paul Brother reported in 216 ITR 548 and submitted that the Hon'ble High Court has held that unless the relief granted to the assessee in the earlier year was withdrawn, the ITO could not disallow the relief granted in the subsequent years. He has also relied upon the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Western Outdoor Interactive P. Ltd. vide order dated 14.8.2010 in IT Appeal no.1....
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....e Vikroli unit. However, the Assessing Officer applied his mind and disallowed the claim for the first time only for the AY 2006-07 and this year. Therefore, the issue is covered by the decision of the Hon'ble jurisdictional High Court in the case of Paul Brothers (supra) as well as in the case of Western Outdoor Interactive P. Ltd. (supra) as well as the decision of the Tribunal for the AY 2006-07. 5. We have considered the rival submissions and relevant material on record. The Assessing Officer has disallowed the claim of deduction u/s 10A on the ground that the assessee has computed the deduction u/s 10A with reference to the number of employees which is not as per the provisions of sub-section 4 of section 10A of the Act. Thus, the Assessing Officer questioned the method adopted by the assessee for computation of the eligible profit of 10A unit on the basis of number of employees. Since no separate books of account are maintained for each unit one is eligible for deduction u/s 10A and another for not eligible unit. 5.1 At the outset, we note that an identical issue has been considered and decided by the Tribunal in assessee's own case for the AY 2006-07 in paras 9 to 9.3 as u....
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....down by Rs. 40 lakhs. The Assessing Officer, therefore, disallowed Rs. 40 lakhs from domestic unit and allocated to STP Unit. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer. On second appeal, the Tribunal upheld methodology adopted by the assessee and deleted the addition made by the Assessing Officer. On further appeal, the Hon'ble Delhi High Court held: "The fate of the appeals must depend upon the answer to the question whether the method adopted by the assessee, namely, that of apportioning the indirect expenses between the STP unit and the non-STP domestic unit on the basis of the 'head-count' is an unreasonable method and if it has been followed consistently by the assessee in the past and has also been accepted by the department, should the revenue authorities be permitted to disturb the same in the years under appeal. The settled position in such matters is to examine whether the method which is canvassed for acceptance is the one (a) which has been consistently accepted by both the parties, namely, the assessee and the revenue in the past; (b) which is a reasonable method having regard to the nature of the business and other relevant fa....
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....ting. All that they have said is that in their opinion the turnover basis of apportionment of the expenses is more logical and needs to be applied. In the instant case, the Assessing Officer has accepted the head-count method adopted by the assessee in the past but has rejected it only for the years under appeal. This would disturb or distort the profits. The question whether the head-count method is the most appropriate method has been raised by the Assessing Officer in the course of the assessment proceedings and it has been stated by the assessee that though the turnover basis preferred by the Assessing Officer may be more suited to manufacturing businesses, in the case of service industry such as the assessee's case the headcount method would be more appropriate to be followed for the purpose of apportioning the indirect expenses. It appears to be a plausible view, though it can possibly also be a debatable view. But merely because there can be more than one method of apportioning the common expenses between the STP and domestic units it cannot be said that the method of head-count followed by the assessee should be discarded, that too mid-way, even though it was not questioned....
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....penditure and turnover which were accepted by AO in earlier years. Assessee is eligible for deduction under section 10A and the reason for disallowing entire claim cannot be accepted. Even the DRP was not correct in rejecting the assessee objection stating that the issue is pending before the ITAT, the fact of which is not correct. However, in the anxiety of disallowing the entire claim, AO has not examined the apportionment of export turnover and expenses of units. Therefore, as this aspect was not examined by AO, for examination of the actual apportionment and arriving at the profits of the units the matter is restored to the file of AO. AO is free to examine the issue of deriving at the profits of eligible unit. While considering, the submissions with reference to the non-claiming of deduction on employees transferred from SEEPZ to Vikroli should also be examined. Assessee should be given due opportunity. We make it clear that the deduction of claim under section 10A is eligible on Vikroli unit and AO is only directed to examine the quantum of deduction. This quantum of deduction may also depend on the issues in other grounds which are dealt with later. The ground No.1 is consid....
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....al jurisdiction could not be exercised is a settled position having been concluded against the Revenue by several decisions of this court including CIT v. P. Muncherji and Co. [1987] 167 ITR 671. 5. The Calcutta High Court in the case of Russell Properties Pvt. Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 and the Allahabad High Court in K. N. Agrawal v. CIT [1991] 189 ITR 769 have held that where the Income-tax Officer's order is passed on the basis of a binding decision, revisional power under section 263 cannot be exercised to undo the said order. The Income-tax Officer is a quasi-judicial authority and the principle laid down is sound. We endorse the same. 6. Either in section 80HH or in section 80J, there is no provision for withdrawal of special deduction for the subsequent years for breach of certain conditions. Hence unless the relief granted for the assessment year 1980-81 was withdrawn, the Income-tax Officer could not have withheld the relief for the subsequent years. [See Gujarat High Court decision in the case of Saurashtra Cement and Chemical Industries Ltd. v. CIT [1980] 123 ITR 669]." ....
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....he assessee cannot be denied in the subsequent Assessment Year when the claim is accepted for the first Asst. Year. 7.1 However, in the case of the assessee, the CIT(A) has pointed out a new aspect to the issue for the first time during the AY under consideration that the assessee has formed a consolidated unit by restructuring of two existing units. But this fact is not clear from the record whether this new development had occurred during the year under consideration or it was already in existence right from the first year of assessment. 8. Since it is not clear whether the non-eligible unit at Andheri was still in existence or closed by the assessee to bring into existence the alleged consolidated unit as held by the CIT(A); therefore, this fact is required to be examined by considering inter alia the number of employees working in the two units when the new unit was established by the assessee at vikroli only after comparing the number of employees and machinery installed in both the units, it can be determined whether the two existing units were merged and consolidated to bring into existence a new unit and thereby a new unit has been set up by restructuring of the existing ....
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....view of the services rendered by TPSL UK assessee made payment of technical fees to TPSL, UK. At the time of making payment, it was the submission of assessee that the reduction of expenditure incurred in respect of technical fees in foreign exchange from export turnover arises only when assessee provides technical services outside India. Relying on the explanation to Clause (4) of section 10A, it was the submission that the entire processing of data takes place in India and therefore, there is no need to exclude the technical service fees. The learned CIT(A) in assessment year 2004-05 examined this issue elaborately and gave an opportunity to AO. After considering the report of AO and the facts of the case, the CIT(A) deleted the said adjustment made to the export turnover holding as under: "6.2 However, the submissions relating to technical fees are found to be having some force and merit in view of the fact that for excluding the expenses relating to technical services from the export turnover as per above definition the conditions required to be fulfilled are that the expenses, if any, has been incurred in foreign exchange in providing technical servic....
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....the purpose of deduction under section 80HHC, which is defined in Explanation (ba) at the end of section 80HHC in the negative term, means as not including freight and insurance attributable to transport of goods or merchandise beyond the custom station and profit on sale of licence, cash assistance, duty drawback, etc. Thus, the term 'export turnover' does not include freight and insurance attributable to transport. Explanation (c) to section 80HHE is similar to clause (iv) of Explanation 2 to section 10A. On an analysis of definition of 'export turnover' as provided in clause (iv) of the Explanation 2 to section 10A, it is clear that for the purpose of not including in the consideration received in or brought into India in convertible foreign exchange there are two types of expenditures. The first type of expenditure is freight, telecommunication charges, or insurance attributable to the delivery of article or thing or computer software out of India. The second type of expenditure is expenditure, if any, incurred in foreign exchange in providing technical services outside India. The basic idea or intention for deducting the first type of expenditure, i.e. freight, telecommunicat....
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....of goods at FoB. Therefore, the condition of delivery of goods at FoB has been put and the definition of 'export turnover' as provided in clause (iv) of the Explanation 2 to section 10A is required to be interpreted accordingly. In the instant case, the Assessing Officer had deducted the ISP expenses from foreign exchange consideration treating it as communication charges. The said expenditure on 'Internet Service Provider (ISP)' does not come within the scope of telecommunication charges as provided in clause (iv) of Explanation 2 to section 10A, because ISP is for transmitting the data, i.e., software developed by the assessee. The ISP expenses incurred were in respect of development of software, i.e., goods. The ISP expenses were not attributable to the delivery of computer software, outside India and, therefore, such expenses need not be excluded from consideration in foreign exchange. However, if for the sake of arguments it was presumed that the expenditure incurred was attributable to delivery of goods outside India even though same was not to be excluded. The words 'received' and 'but not include' used in clause (iv) of Explanation 2 to section 10A are significant. What is....
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....se they are considered as telecommunication charges this should also be excluded from the total turnover as considered by the Special bench in the case of ITO v. Sak Soft Ltd. 313 ITR 353 (AT)(SB) - 2009-TIOL-187-ITAT-MAD-SB wherein it was held that parity to be maintained with export turnover to that of total turnover and where expenses on telecommunication charges or insurance attributable to delivery of articles or things or computer software outside India or expenses incurred in foreign exchange in providing technical services outside India required to be excluded from export turnover, they are also to be excluded from total turnover. Since we have considered that the satellite link charges cannot be considered as telecommunication charges to be excluded as per the definition of export turnover there is no need to consider the alternate contention. Accordingly, this alternate ground raised is not considered as it becomes academic in nature. 10. After considering the facts of the case and the principles established by the Coordinate bench in the case of Patni Telecommunication (P) Ltd. v. ITO 22 SOT 26 (Hyd) - 2008-TIOL-665-ITAT-HYD, it is held that the....
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....d. 36 34.3% 6. Maars Software International Ltd. 3.8 -1.7% 7. MCS Ltd. 6.5 13.8% 8. Spanco Telesystems & Solutions Ltd. (seg) 22.3 21.5% 9. Sparsh BPO Services Ltd. -49.30 7.4% 10. Transworks Information Services Ltd. 14.50 12.4% 11. Visualsoft Technologies Ltd. 15.70 NA Arithmetic Mean 9.9 16.82 10.3 Thus, the assessee claimed that its cost plus margin is 10.54% which is more than the comparables cost plus margin of 9.90% and accordingly, its international transition is at ALP. 10.4 The TPO did not agree with the computation of margin of comparables by considering three years weighted average cost plus margin and proposed to consider the updated single year data of comparable which gives the average margin of 16.82%. The TPO has also found that only 9 comparables appearing at Sl. Nos. 1, 2, 3, 4, 5, 8, 9, 10 & 11 have functions broadly similarly to ITES functions ....
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....re, in nutshell, the TPO proposed to add 22 more comparables. 10.6 In response, the assessee filed its objection/submissions vide letter dt 6.10.2010 and broadly submitted that these are; (i) Functionally incomparable companies; (ii) Two of the comparables having super normal profit; (iii) Exceptional year of operation on account of demerger, (iv) Financial information not available in the public domain 10.7 The TPO rejected the objections raised by the assessee against the inclusion of 22 more comparables and cited the reasons that these 25 comparables (22 new plus 3 common) companies have been selected by the department for ITES only and thus, the assessee's claim for non acceptability is not correct. 10.8 As regards the super normal profit, the TPO has observed that the set of 25 comparables are variation in PLI ranging from (-) 13.55 % to 111.49% and TNMM arithmetic mean takes care of such variation on account of larger set of comparables in order to obtain better results. 10.9 As regards the exceptional event of demerger, the TPO held that even after merger function of t....
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.... TPO made an adjustment of Rs. 7,52,20,419 to ALP in the international transaction of the assessee vide order dt 26.10.2010. On appeal, the Commissioner of Income Tax (Appeals) confirmed the action of the TPO/Assessing Officer as far as the inclusion of 21 comparables and reject one comparable namely Vishal Information Technologies Ltd. 13. Before us, the ld. Sr. counsel for the assessee at the threshold challenged the action of the TPO in carrying out a fresh search for adding 22 more comparables when 8 comparables, out of 11 selected by the assessee were already accepted by the TPO. Thus, the ld. Sr. counsel has submitted that there was no requirement of any fresh search for selecting the other comparables once the TPO accepted the 8 comparables selected by the assessee which are more than sufficient for determination of the ALP. In support of his contention, the ld. Sr. counsel has relied upon the decision of the Delhi Benches of the Tribunal in the case of Haworth India P. Ltd. in ITA No.5341/Del/2010 = (2011-TII-64-ITAT-DEL-TP) as well as decision in the case of Vedaris Technology P. Ltd. in ITA No.4372/Del/2009 = (2010-TII-10-ITAT-DEL-TP)wherein the Tribunal has opined that ....
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....the action of the TPO on the ground that after accepting 8 comparables selected by the assessee, the TPO is not justified in carrying out fresh search and adding 22 more comparables. The contention of the ld. Sr. counsel is based on the logic that the 8 comparables, as selected by the assessee and accepted by the TPO, are more than sufficient for determination of the ALP and therefore, there was no requirement, which justified the fresh search carried out by the TPO in inclusion of 22 more comparables. 14.3 We do not agree with the proposition advanced by the ld. Sr. counsel for the assessee because there cannot be a fixed number of comparables to be considered as sufficient or appropriate number for determination of the ALP as a general parameter. The sufficient number of comparables depends upon the facts and circumstances of the each case and there cannot be a fixed criteria or parameter for number of comparables, which can be universally applied to each and every case for determination of the ALP. It is an accepted rule of sampling that larger size of sample would better and adequate represent the lot or population to which the sample belongs. Therefore, to get an adequate res....
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....hich the Tribunal has rested its decision. The other case of similar nature is Parrot Systems TSI India Ltd. v. DCIT (supra). Moreover, the comparable which has been Left was selected by the assessee itself in its TP study and no reason whatsoever is given that how the said comparable could not be taken to compute arm length price of the assessee. Therefore, we reject the submission of the assessee that on the basis of one comparable, the arm length price could not be determined and fresh search was required to be taken as per submissions made before DRP. The facts of the present case do not warrant the fresh search to be taken into consideration as there is no valid reason to do so." 14.6 The finding of the Tribunal is on the point whether in a case where only comparable is left which is selected by the assessee in the TP study, then the TPO is not bound to carry out a fresh search. Therefore, the Tribunal's decision is not on the point of restricting the power and jurisdiction of the TPO to carry out the fresh search; but it is in the peculiar facts of the said case when only one comparable was left and in view of the TPO, no fresh search was required, then the ALP can be determ....
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.... and Iridium Technologies (India) Pvt. Ltd. The amalgamation was approved in 2006. Hence, on the ground of such extra ordinary events, the financial numbers cannot be compared to assessee's financial numbers for the fiscal year. 17.1 On the other hand, the ld. DR has submitted that the Delhi Benches of the Tribunal in the case of Actis Advisors Pvt. Ltd. in ITA No. 5277/Del/2011 = (2012-TII-136-ITAT-DEL-TP)has rejected the contention of the assessee and accepted the Accentia Technologies Ltd. as a good comparable in ITES segment. 17.2 In rebuttal, the ld. Sr. counsel has submitted that in the case of Actis Advisors Pvt. Ltd, the Tribunal dealt with the objection against Accentia Technologies Ltd. on the ground of marking expenditure and not on account of extra ordinary events because no such objection was raised by the assessee in the said case. 18. We have considered the rival submissions and carefully perused the relevant material on record. The assessee has raised the objection against this company because of the alleged merger/amalgamation. It is to be noted that in the case of Actis Advisors Pvt. Ltd. (supra), the Delhi Benches of this Tribunal has dealt with the objection ....
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....nd accordingly decide the comparability of this company namely Accentia Technologies Ltd. (ii) Aditya Birla Minacs worldwide Ltd. & (iii) Allied Digital Services Ltd: 19. Both these comparables are common as selected by the assessee and accepted by the TPO; therefore, no dispute or objections are raised in this respect on this comparable. (iv) Allsec Technologies: 20. The ld. AR has submitted that this company is having related party transaction constituting 17.77% of the total revenue. Therefore, this company should not be considered as a comparable. In support of his contention, the ld. AR has relied upon the following decisions: (i) Avaya India P. Ltd. - ITA No. 5150/Del/2010 = (2011-TII-139-ITAT-DEL-TP) (ii) Sony India P. Ltd. - ITA No. 1731/Del/09 = (2009-TII-09-ITAT-DEL-TP) (iii) Philips Software Services Ltd. - ITA No.218/BNG/08 = (2008-TII-09-ITAT-BANG-TP) (iv) CRM Services India P. Ltd. - ITA No.4068/Del/2009 = (2011-TII-86-ITAT-DEL-TP) (v) ....
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....ia P. Ltd. (supra), the Tribunal in para 18 has opined as under: "18. We have carefully considered the rival submissions in the light of the material placed before us. So far as it relates to applying the filter for rejection of comparable companies having related party transactions as a percentage of sales more than 15%, we uphold the said filter. So as it relates to another filter rejecting the comparables whose current year financial data is not available we find that the said filter has been upheld by the DRP by following the decision of ITAT Delhi Bench in the case of Customer Services P. Ltd. v. ACIT 30 SOT 486 = (2009-TII-08-ITAT-DEL-TP) in which it has been held that commissioner of Income Tax (Appeals) was fully justified in holding that main rule of sec. 10B(4) was applicable to the facts of the assessee's case and it was mandatory on the part of the TPO to use data relating to financial year 2002-03 in which the international transactions were admittedly enter into by the assessee with its associate enterprises. Therefore, the second filter is also upheld." 21.2 The Tribunal has upheld the decision of the authorities below in applying filter fo....
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....0 to 15% related party transaction of total revenue for considering the entity as an uncontrolled comparable. 21.4 In the case of Philips Software Centre Pvt. Ltd. (supra), the Tribunal in para 5.71 (vii) has observed that for the purpose of the comparability companies with even a single rupee of transactions with AE cannot be considered as comparable. 21.5 In the case of CRM Services India P. Ltd. (Supra), the Tribunal has reaffirmed the view as taken in the case of Sony India (supra) and held that the tolerance limit of related party transactions would be in the vicinity of 10 to 15%. 21.6 In the case of Benetton India P. Ltd. (supra), a similar view was taken by the Tribunal that the related party transactions should not exceed 10 to 15% of the total revenue. 21.7 On the contrary, the Tribunal in the case of Actis Advisers (supra) has held that an entity can be taken as uncontrolled, if its related party transaction do not exceed 25% of the total revenue. This view of the Tribunal is based upon the criteria enumerated u/s 92A(2) of the IT Act wherein expression of associate Enterprises has been defined, if certain conditions and criteria as provided thereunder are satisfied.....
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.... with a view to make it possible that a larger number of entities are taken as comparable so that the ALP so determined should be based on a broad based and technically represents price in the free market. In a extreme case where only one or few comparables are available, then an entity having related party transactions not exceeding 25% of the total revenue can be considered so that the ALP should be determined having comparison broad based, though this extreme limit of 25% can be considered only in exceptional cases. 21.11 In the case in hand, as it is evident that the TPO has found sufficient number of comparables and finally took 30 companies as comparables; therefore, this case does not fall under the category of exceptional cases where criteria of related party transactions can be relaxed more than 15% of the total revenue of the entity. Hence, we are of the considered opinion that in the case in hand, when there is no shortage of comparables, an entity can be considered as uncontrolled, if the related party transaction do not exceed 15% of the total revenue. 21.12 Having applied this criteria, we find that the company Allsec Technologies Ltd. having related party transacti....
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....arty transaction is about 81% of the total turnover; therefore, this company can not be considered as comparable, solely on the ground of very high percentage of related party transactions to the total turnover. Accordingly, this company has to be excluded from the comparables. (vii) Asit C Mehta Financial Services Ltd: 26. The ld. AR has submitted that this company is functionally not comparable with the assessee because it was into software products which included provision of software services. He has referred page 4 of the TPO order and submitted that the TPO itself has recorded the profile of the company, as software. Apart from this, the ld. AR has submitted that this company had related party transactions of 15.17% of the total revenue. Therefore, this company should be excluded from the comparables. 26.1 On the other hand, the ld. DR has submitted that as per Schedule-8 of the financial account, out of total income of Rs 63,415, income from ITES is Rs.60,908/- which is 96% of the total revenue. He has further submitted that there are segment results available which may be adopted for ITES margins. 27. We have considered the rival submissions and....
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....y to the extent of Rs. 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3 In rebuttal, the ld. AR has submitted that the information filed by the ld. DR is not collected by the TPO of the assessee; but it was collected by the TPO of Hyderabad. Further, the annual report of this company clearly shows that the company is in the business of software development and therefore, this company is not a good comparable. 30. We have considered the rival submissions as well as the relevant material on record. The details filed by the ld. DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd. to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application. It is also made it clear in that letter that the said service is one of the sources which comes under the category of ITES which constitutes majority part of the data cleaning services. As per Annexure 2 of this letter, the said company received the revenue to the ex....
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....s company deriving income from printing business; therefore, this company cannot be taken on entity level. In support of his contention, the ld. AR has filed a copy of the P&L account of Datamatics Financial Services Ltd. 33. Having considered the rival submissions and relevant material on record, we find that the TPO has taken segmental results with respect to the ITES services. As per the profile of the company admittedly, the company is in the business of printing, processing and ITES segments. When the results at entity level are taken into consideration, then the income from printing and processing is also included, in our view that would de-hors the requirement of comparability. The P&L account of the company clearly segregates the income under three different segments; (i) printing and processing; (ii) exports of ITES services and (iii) other income. Accordingly, we do not find any error or illegality in the order of the TPO by considering the segmental results of this company. Hence, the objection raised by the ld. AR cannot be accepted. (xiii) Eclerx Services Ltd. 34. The ld. AR has submitted that this company cannot be considered as comparable ....
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.... under the category of ITES, then there is no sub classification of segment. Hence, in view of the various decisions of the Tribunal, it is contended that this company is a good comparable and cannot be excluded only on the basis of high profit margin. The ld. DR has further submitted that even in the products and services notified by the CBDT, the KPO is not recognized as a separate services. Therefore, the objection of the assessee is contrary to the services/products as notified by the CBDT under the category of information and ITES. 34.3 In rebuttal, the ld. AR has submitted that BPO focuses on mainly processing whereas KPO focuses on value addition/knowledge addition expertise. Therefore, KPO are not functionally comparable to ITES. He has reiterated that the extract of the annual report of the company states that this company is into KPO services, which is different from BPO services. He has relied upon the following decisions of the Tribunal: (i) SAP Labs - ITA No.398/Bang/2010= (2010-TII-44-ITAT-BANG-TP) (ii) Google India P. Ltd. - ITA NBo.1368/Bang/2010 (iii) ....
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....rned high profit. 34.6 In the case of Exmxon Mobil Company India P. Ltd. (supra), the Tribunal has discussing the issue in para 31(xi) as under: (xi) Now, coming to the alternative arguments of the assessee that abnormal profit making unit is also to be eliminated on the same analogy on which loss making units are excluded, we, in principle, do not dispute this proposition. The various case laws relied upon by the assessee lay down that a comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making unit cannot also be automatically eliminated just because the comparable company earned higher profits than the average. The reason for rejecting the two loss making units is not just because they were loss making units but for the reasons which are already stated in the preceding paragraphs. If similar reasons existed in the higher profit making unit, then, it is for the assessee to bring out those reasons and seek exclusion of the same. A general argument that, you have to exclude units which have high profit range, in case you exclude units which have made loss is a general submission which....
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....data processing and data analytics service's which is similar to the services of the assessee and therefore, it cannot be said that the business activity of the assessee and this company are materially and substantially different, which cannot be compared, specifically when services of both are in the nature of ITES. Further, the assessee has not raised such objection before the lower authorities and in particular before the TPO. Accordingly, we do not find any merit on this objection of the assessee. (xiv) Flextronics Software Systems Ltd: 35. The ld. AR has submitted that this company is in the business of development of software products and providing software consultancy services which cannot be considered as a comparable to assessee's case. In support of his contention, the ld. AR has submitted that in the case of Telecordia Technologies India Ltd. in ITA No. 7821/Mum/2011, this Tribunal had considered this company as comparable to the Telecordia as both were involved in development of software. The ld. AR has further submitted that this company is having related party transactions constituting more than 25% of the total revenue; therefore, it cannot....
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....I) of Explanation 2 of section l0B and Clause (b) of Explanation to section 80HHE of the Income- tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby specifies the following In formation Technology enabled products or services, as the case may be, for the purpose of said clauses, namely: (i) Back-office Operations; (ii) Call Centres; (iii) Content Development/Animation; (iv) Data Processing; (v) Engineering and Design; (vi) Geographic In formation System Services r- (vii) Human Resource Services; (viii) Insurance Claim Processing; (ix) Legal Databases; (x) Medical Transcription; (xi) Payroll; (xii) Remote Maintenance; (xiii) Revenue Accounting; (xiv) Support Centres; and (xv) Web-site Services". 38.1 When GIS is notified ITES/product, then undisputedly, this comparable and the asses....
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....) ICRA Online Ltd. 41. This company is a common comparable as selected by the assessee accepted by the TPO and therefore, no objection has been raised before us in respect of this company. (xviii) ICRA Techno Analytics Ltd: 42. The ld. AR has submitted that this company was engaged in the business of computer software development services, sub-licensing and web development & hosting services. He has further submitted that this Company is having related party transactions constituting 23.86% of the total turnover. Therefore, this company cannot be taken as a comparable. 42.1 The ld. DR on the other hand has submitted that the TPO has taken segmental results of this company and the segmental report shows that there is a revenue from professional services to the extent of Rs. 7,33,18,000/-, out of the total revenue of Rs. 92 crores which is almost 80% of the total revenue. Therefore, this company is functionally comparable with the assessee. 42.2 As regards the related party transactions to the extent of 23.86%, the ld. DR has relied upon the decision of the Delhi Benches of the Tribunal in the case of Actis Advisors P. Ltd. (supra). 43. We have consider....
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...., such a factor, if at all, may be considered for an appropriate adjustment as per Sub-rule 3 of Rule 10B subject to the fulfilment of the conditions provided therein. 45.2 Further, the Delhi Benches of the Tribunal in the case of Actis Advisors P. Ltd. (supra) has considered and decided an identical issue in para 26 as under: "26. We have heard the rival contentions and gone through the record carefully. On pages 24 to 26, learned TPO has considered this aspect. According to the learned TPO, the filters applied by the assessee in the TP Study report for eliminating the companies who had incurred expenses of more than 3% of the sales on advertisement and marketing is not an appropriate filter. According to the learned TPO independent enterprises has to incur marketing expenditure. In a service industries like I.T. enabled services, the assessee did not provide the basis on which such expenses resulted in any intangible unlike in manufacturing industries where substantial marketing expenditure create an intangible. Learned TPO invited the explanation of the assessee as to why this filter be not ignored. The assessee has filed a reply to the query of the TP....
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....curred 0.16% and shown profit at 32.06%. Visual Infra-tech did not incur any expenditure but shown profit at 44.15%. Thus, the details referred by the learned counsel for the assessee do not advance the case of the assessee. What is the actual impact on the earning of income could not be demonstrated on the basis of these comparative details, graph etc. The next reasoning is that such companies are functionally different. Creation of marketing intangible is brand by incurring such expenses may be helpful in future. But how their FAR is substantially so different could not be explained. Learned TPO has looked into this aspect. He observed that material showing impact on Information & Technology Industry by such expenses had not been produced by the assessee. After taking into consideration the discussion made by the learned TPO as well as the DRP on this issue, we do not find any merit in the contentions of learned counsel for the assessee for exclusion of eight companies, extracted supra from the list of comparables." 45.3 As it is clear that an identical contention has been considered and rejected by this Tribunal in the case of Actis Advisors (P.) Ltd. (supra). In the case in ha....
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....e of Agnity India Technologies (supra) 47.1 We note that in the case of Capital IQ Information (supra) the Tribunal has relied upon the decision in the case of Agnity India Technologies (supra) as well as in the case of Triniti Advanced Software Labs P. Ltd. (supra). We further note that all these decisions have primarily relied upon the decision of Bangalore Benches of this Tribunal in the case of Genesys Integrating Systems India P. Ltd. (supra) which has been relied upon by the Tribunal in case of Capital IQ Information in para 21 as under: "21. On considering the submissions of the assessee in relation to these three companies, we find that the TPO has excluded the companies whose turnover is less than Rs. One Crore, 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.60 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 mark....
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.... 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 the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet and NASSCOM has given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in the range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study." In view of the aforesaid consistent decisions of the Tribunal, we accept the contention of the learned Authorised Representative for the assessee that the aforesaid three companies cannot be treated as comparable, consid....
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....p; S. No. Name of the Company Margin Sales Mean Margin Sales Upto 1. Datamatics Financial Services Ltd. (Seg.) 5.07 2.92 2. Bodhtree Consulting (Segmental) 29.58 2.94 3. Informed Technologies India Ltd. 35.56 4.07 4. Cosmic Global Ltd. 12.04 4.27 5. Asit C Mehtra (Nucleus Netsoft) &nbs....
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....e chart that there is no relation between the turnover and margin of an entity as it shows that the highest margin of the entity having Rs. 50 crores turnover and the lowest margin in case of the turnover upto Rs. 200 crores. It makes further clear that there is not much difference in the margin of the various entities having turnover upto Rs. 940 crores as the average margin of the entities upto the turnover of Rs.50 crores is 31.36%; whereas the margin of the entities having turnover upto Rs. 940 crores is 30.74%. Thus, there is not much difference in the margin whereas there is a vast difference in the turnover. The turnover is not a criteria as prescribed under the Rule 10B(2) for selecting the comparables. It is settled proposition that the decisive factor for determining inclusion or exclusion of any case as a comparable are prescribed under Rule 10B(2) which does not specify any such factor of turnover on the basis of which a particular case can be included or excluded in the list of comparables. 47.6 In the case of M/s Symantec Software Solutions P. Ltd. (supra), this Tribunal (one of us-JM-is the party) has considered and decided the issue of turnover filter in para 12.15....
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....ns raised by the assessee in respect of this issue are general in nature and no specific fact has been brought on record to show that due to the difference in turnover the comparables become non-comparables. The assessee has not demonstrated as to how the difference in the turnover has influenced the result of the comparables. It is accepted economic principles and commercial practice that in highly competitive market condition, one can survive and sustain only by keeping low margin but high turnover. Thus, high turnover and low margin are necessity of the highly competitive market to survive. 15.1 Similarly, low turnover does not necessarily mean high margin in competitive market condition. Therefore, unless and until it is brought on record that the turnover of such comparables has undue influence on the margins, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself." 47.7 When the assessee has not made out a case as how the high or low turnover has influenced operating margin and on the contrary there is no direct relation between the turnover and margin as clear from the details and graphic ch....
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....relied upon the decision of the Delhi Benches of the Tribunal in the case of CRM Services Ltd. in ITA 4068/Del/2009 = (2011-TII-86-ITAT-DEL-TP). The ld. AR has further submitted that though Maple Esolution Ltd. is a comparable company selected by the assessee in the TP study; however, based on the above facts, Maple Esolution Ltd. and Triton Corpn Ltd., both are required to be rejected as comparable. In support of his contention, he has relied upon the order of this Tribunal in the case of Stream International India P. Ltd. in ITA No.8997/Mum/2010 = (2013-TII-42-ITAT-MUM-TP). 50.1 On the other hand, the ld. DR has submitted that as recorded by the Tribunal in the decision relied upon by the assessee, fraud was done in the year 1980 - 1990 and in a different business, not related with the business of the company Maple Esolution Ltd. The ld. DR has filed the newspaper report showing serious fraud office of UK to show that fraud was done in 1980 to 1990 in the bicycle parts and there was no relation with the business of Maple Esolution Ltd. Thus, the ld. DR has submitted that when the allegation of fraud against the directors was not related to the company in question, then this cann....
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....se companies were involve din the fraud. 51.2 However, since Triton Corpn Ltd., acquired by Maple Esolution Ltd., therefore, we are of the view that if extra ordinary events like merger and de-merger or amalgamation took place during the financial year relevant to the Assessment Year under consideration, and because of the merger/de-merger the company became functionally different then the said company should be excluded from the comparables. However, if the merger of the two functionally similar companies took place then the event of merger itself cannot be taken a factor for exclusion of the said comparable.. Accordingly, we direct the AO/TPO to verify this fact and accordingly decide the comparability of this company namely Accentia Technologies Ltd. (xxv) Mold Tex Technologies Ltd: 51.3 The ld. AR has referred threefold objections against inclusion of this company in the comparables. Firstly, this company has earned super normal profit; secondly this is not functionally comparable as it is engaged in the engineering services. He has referred page 301 & 302 of the paper book and submitted that the assessee raised these objections that there is a consi....
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....hi Benches of the Tribunal in the case of Actis Advisors P. Ltd. and submitted that related part transaction is less than 25% of the total turnover and therefore, it can be a good comparable. There is no dispute on related party transaction of this company constituting 21.19% of the turnover. Hence, in view of our finding in the foregoing paras on this issue, this company cannot be considered as a good comparable (xxvii) Specco Ltd. & (xxviii) Spanco Telesystems & Solutions Ltd: 54. The ld. AR has submitted that this company is functionally in comparable because of the fact that the revenue from ITES segment is only 8.21%. Thus, the ld. AR has submitted that this company is primarily engaged in telecom business and BPO is one of the smaller segment. Therefore, this company cannot be considered as a good comparable. 54.1 On the other hand, the ld. DR has submitted that the TPO has considered only segmental results and therefore, the other business activity has no role for determining comparability of these companies. He has further submitted that even the turnover from ITES segment is more than 35 crores....
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....but the same was claimed only after TPO proposed the adjustment. He has referred the rule 10B(3) of the IT Rules and submitted that onus is on the assessee to prove whether the risk adjustment is required because of the reasons that such factors has materially effect the price or cost charged or paid or the profit arising from such transaction in the open market. Thus, the ld. DR has submitted that as per Rule 10B, a reasonable and accurate adjustment can be made to eliminate the material effect of such difference. He has also referred and relied upon the UN Manual of transfer pricing and submitted that the assessee has to work out each and every individual risk factor as illustrated in the UN manual on Transfer Pricing. In the absence of such working, no adjustment can be given merely on the basis of submissions. He has further submitted that there are some risk involvements even in case of a single customer. Therefore, all these factors have to be taken into account while working out the risk factor and adjustment. He has further submitted that as per UN manual on Transfer Pricing, there is no universally accepted method for risk adjustment. However, in practice, certain methods ....
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....ese objections not only before the TPO but also before the DRP. Since information relied upon by the TPO is not available in public domain, it is incumbent on the TPD to furnish the relevant information to assessee. In a case where the information is not furnished to assessee it becomes secret information which can not be used against assessee. Most of the objections raised by assessee with reference to the selection of comparables by the TPO are with reference to the information not available in the public domain, but obtained by TPO and also with the various filters considered by the TPO in rejecting assessee's comparables. We also notice that there is no uniformity in rejection of assessee's comparables and selection of comparables by the TPO (a) on the reason that various filters considered by the TPO himself has not been followed and (b) that some of the companies selected by assessee were rejected on unreasonable grounds (loss making company etc). In order to compare a company with assessee, and to benchmark the same, proper and appropriate FAR analysis is required to be done and when assessee has given detailed objections both to the TPO as well as to the DRP, it is incumben....
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.... its appeal: "(a) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding amount of Rs. 47,13,384/-paid to Equant Network Services Ltd., was neither royalty nor fees for technical services without appreciating that the payment made to Equant Network Services Ltd., is in the nature of royalty payment since it involves the use of commercial equipment. (b) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the ratio the decision of ITAT Hyderabad in the case of Frontline Soft Ltd., wherein such payment was held to be royalty'. 2. (a) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the assessee's appeal to exclude Vishal Information Technology Ltd., as a comparable without appreciating the fact that the said company does not outsource its ITeS except for hiring additional manpower, hence is functionally similar to the assessee. (b) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing ITAT's order in case of Mearsk Global Services Centre (India....
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....ging to Willis group having their offices at Ipswich, UK and Nashville, USA. The intention of the assessee company was to avail connectivity services and it was not concerned as to which equipments were used to provide such connectivity services. The assessee had no right to access the equipments forming part of communication channel except for data communication and transmission. The assessee had no control over the said equipments or physical access to it. There is nothing to show positive act of utilization, application or employment of equipment for the desired purpose. The assessee could not come face to face with the equipments, operate it or control its functions in some manner. It had no possessory rights in relation to the said equipments. It only took advantage of a facility of use of sophisticated equipment installed and provided by the service provider. Having regard to all these facts of the case and keeping in view the decisions of Authority for Advanced Ruling (AAR) in the cases of ISRO Satellite Centre (supra) and Dell International Services (India) P. Ltd. (supra), we are of the view that the payment made by the assessee to Equant in connection with standard commun....