TaxTMI 
TaxTMI 
2013 (3) TMI 415
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.... 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. Transfer Pricing Adjustment 3.1 The learned CIT(A) erred in upholding adjustment of Rs. 7,52,20,419/- in respect of the Information Technology Enabled Services ("ITES") rendered by the appellant u/s. 92CA(3) read with 92C(3) of the Income Tax Act, 1961 ("....
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....d be made to account for differences between the transactions that may materially affect the price of such transactions. • The learned CIT(A) erred in not considering the additional evidence relating to the grant of working capital adjustment on the margin of the comparable companies proposed by the TPO and which was granted to the appellant by the TPO in AY 2006-07. • The learned CIT(A) erred in disregarding the differences in risk profile of the appellant (being a captive service provider) and the alleged comparable companies selected by TPO, by not allowing the risk adjustment made by the appellant. 3.7 The learned CIT(A) erred in not appreciating the fact that the margin earned by the appellant is reflective of the services rendered by a contract service provider. 3.8 The learned CIT(A) erred in confirming the selection of final comparable companies, selected by the TPO, without considering the differences in functional, risk and assets profile of the comparable companies vis-à-vis the appellant. 3.9 The learned CIT(A) erred in confirming the rejection of the use of multiple year data for computing the cost plus margin....
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.... the exclusion of technical service fee, satellite link charges, is an issue to be dealt with in ground No.2 raised by the assessee; therefore, ground No.1 is only with respect to the disallowance of deduction u/s 10A. 2.2 The CIT(A) held that the assessee does not fulfil all the conditions laid down u/s 10A(2) of the Act. Further, even the computation of so called eligible profit done by the assessee is not as per the provisions of sec. 10A(4). The CIT(A), apart from confirming the action of the Assessing Officer that the computation of the eligible profit by the assessee, is not as per the provisions of sec. 10A(4) has also held that the assessee has consolidated its SEEPZ unit at Andheri and its existing Vikroli unit. Such consolidation of existing unit would bring into existence of a consolidated unit and as such, the consolidated unit has come into existence, as a result of restructuring of business already in existence; thereby the conditions as prescribed under section 10A(2) are not satisfied. 3. Before us the ld. Sr. counsel for the assessee has submitted that the assessee had two units one at SEEPZ Andheri and other one at Vikroli. The unit at Vikroli qualifies for ....
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....nsel has submitted that when the claim of the assessee was accepted for the AY 2000-01 onwards till AY 2005-06, then the Assessing Officer cannot withdraws the deduction in the subsequent years. 3.3 On the other hand, the ld. DR has submitted that the unit at SEEZP (Andheri) had been consolidated with Vikroli unit and there are no separate books of account maintained by the assessee for both the units after such consolidation; therefore, the deduction u/s 10A cannot be allowed to such a consolidated unit as there is no concept of highbird on the basis of which, a part of the unit can be considered as eligible and other part would be considered as not eligible. Thus, the entire claim of the assessee is liable to be rejected as held by the CIT(A). She has pointed out that the ld. CIT(A) has found that the undertaking has been formed by the assessee by restructuring of the business already in existence and therefore, the deduction u/s 10A is not available to such undertaking. She has relied upon the order of the CIT(A) and submitted that this is not the case of allocation of the expenses into the eligible and non-eligible units and then deriving the separate profits for the purpose....
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....ll be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking". 9.1 As can be seen, it is only a method provided for arriving at the profits derived from export of articles or things of computer software and assessee has followed head count method for arriving at the export turnover and expenditure for the Vikroli unit in the absence of separate books of account. This is one of the methodologies adopted in arriving at the export turnover and the profits so as to work out the profits of the Units. 9.2 Similar issue was considered by the Hon'ble Delhi High Court in the case of Commissioner of Income-tax v. EHPT India (P.) Ltd. 16 taxmann.com, 305 (Del.) = (2011-TIOL-839-HC-DEL-IT) wherein the facts are that the assessee was operating two units, one software Technological Park unit (STP), which was engaged in the development of software and its export, and the other domestic unit (non-STP unit), which was engaged in the implementation of the telecom software for vendors an....
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....d of head-count adopted by the assessee can be said to be indicated by the fact that in the assessment year 2002-03 the assessee apportioned more common expenses to the STP unit, thereby reducing its profits and consequently reducing the claim for deduction under section 10A and at the same time offering a higher income in the domestic unit than what would have been offered had the turnover method of apportionment adopted by the Assessing Officer been followed. It was only as a matter of principle that the Commissioner (Appeals) upheld the method adopted by the Assessing Officer even though the result was in favour of the assessee. Neither the Assessing Officer nor the Commissioner (Appeals) has raised any serious questions about the validity of the head-count method adopted by the assessee nor have they pointed out any commercial accounting principle or accounting standard that repudiates the method. [Para 8] Section 10A provides for deduction for profits derived from the export of software for a period of ten years. During the period of tax-holiday, it is desirable that the same method of computing the profits of the STP unit is adopted so that any distortion is avoided.....
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....e ratio which the export turnover bears to the total turnover of all the businesses of the eligible undertaking. The instant case is not concerned with sub-section (4). That sub-section will apply when the combined profits - profits of the exempt unit and those of the non-exempt unit - have been ascertained; the next step will be to apportion them on the basis of the ratio which the export turnover bears to the total turnover. Instant case is concerned with the stage before that. Instant case is concerned with the method by which the indirect or common expenses - expenses which are incurred for both the exempt and taxable units - are to be apportioned between the two units. To apply the formula prescribed in sub-section (4) may be appropriate in a given case considering its peculiar facts. But applying the same formula to all cases of apportionment without having regard to the history of assessments and other relevant factors may not be justified. In a case where alternative methods of apportionment of the expenses are recognized and there is no statutory or fixed formula, the endeavour can only be towards approximation without any great precision or exactness. If such is ....
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.... of the units eligible for deduction u/s 10A and non-eligible unit respectively. 4.3 The CIT(A) has added one more reason for disallowance of the deduction u/s 10A that the assessee does not fulfil the condition as laid down u/s 10A(2) of the IT Act because the assessee has consolidated two existing units into one and thereby a consolidated unit came into existence by reconstruction of the already existing unit. Thus, the CIT(A) has made out a case that two existing units; one eligible for deduction u/s 10A; and another non-eligible unit were consolidated and by virtue of this consolidation, the new consolidated unit came into existence by reconstruction of the existing unit. Hence, it violates the conditions as prescribed under 10A(2)(ii)&(iii) of the Act. 4.4 There is no dispute on the legal proposition on the issue of denial of the deduction, if the deduction was allowed in the first year, then for the subsequent Assessment Year, the Assessing Officer cannot disallow the claim of the assessee without disturbing the order of the earlier year, more specifically first year, when eligibility of the new establishment/unit has to be tested. 4.5 The Hon'ble jurisdictional ....
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....r SEEPZ unit was set up/formed by splitting up of the first unit. In both the above decisions, this Court has held that where a benefit of deduction is available for a particular number of years on satisfaction of certain conditions under the provisions of the Income Tax Act, then unless relief granted for the first assessment year in which the claim was made and accepted is withdrawn or set aside, the Income Tax officer cannot withdraw the relief for subsequent years. More particularly so, when the revenue has not even suggested that there was any change in the facts warranting a different view for subsequent years. In this case for the assessment years 2000-01 and 2001-02 the relief granted under Section 10A of the Act to SEEPZ unit has not been withdrawn. There is no change in the facts which were in existence during the assessment year 2000-01 vis-a-vis the claim to exemption under section 10A of the Act. Therefore, it is not open to the department to deny the benefit of Section 10A for subsequent assessment years i.e. assessment years 2002-03 and 2003-04 and 2004-05. Besides that, on consideration of the facts involved both the Commissioner of Income Tax (Appeals) and the Trib....
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....the claim of deduction u/s 10A; however, alternatively, the Assessing Officer has also reduced the satellite link charges of Rs. 50,00,615/- and technical service fee of Rs. 1,03,01,183 from export turnover while computing the deduction u/s 10A. The CIT(A) has held that once the issue of deduction u/s 10A has been decided against the assessee, then this ground of appeal has become consequential. 8. We have heard the ld. Sr. counsel for the assessee as well as the ld. DR and considered the relevant material on record. At the outset, we note that this issue has been considered and decided by this Tribunal in assessee's own case for the AY 2006-07 in paras 10 to 11.2 as under: "10. Ground no.2 is on the issue of reduction of technical fees and satellite link charges from export turnover. Assessing Officer while rejecting the entire claim of section 10A however alternatively also reduced the technical fees and satellite link charges of Rs. 1,73,59,069and Rs. 2,02,10,562 respectively from export turnover for the purpose of computing the deduction under section 10A thereby restricting the computation under section 10A. As stated in Ground No.1, the DRP declined to interfe....
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....005-06 also deleted the same. Even in AY 2005-06 there is no appeal by the Revenue to ITAT. Therefore, since the issue was already held in favour of assessee on facts, we are of the opinion that the principles of judicial consistency require that AO should not have excluded the amount from the export turnover. The DRP also was not correct in rejecting the issue. In view of this, we allow the ground raised by assessee on this issue of expenses for 'technical services'. 11.1 The other amount involved in Ground No. 2 is with reference to the 'satellite expenses'. AO excluded this amount also to arrive at the export turnover as defined under section 10A(4). After considering the submissions in assessment year 2004-05, the ITAT in ITA No.4329/Mum/08 2010-TIOL-576-ITAT-MUM held in favour of assessee as under: "7. However, while completing the assessment the A.O. treated the above satellite link charges as part of telecommunication charges. This issue was discussed elaborately by the Coordinate Bench in the case of Patni Telecom (P.) Ltd. v. ITO (wherein one of us, the J.M. was a member) 22 SOT 26 (Hyd) = (2008-TIOL-665-ITAT-HYD) wherein on similar facts ....
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....y of goods outside India, such expenses are not required to be deducted from the consideration. Normally, in a transaction of purchase and sale, there are two types of conditions between the parties. One is where price quoted of goods is inclusive of all expenses or in other words price quoted is only in respect of goods. Another condition is where price of goods and charges of expenses are separately stated. In a case where such expenses are to be separately charged, invoices are prepared showing value of the goods and such expenses. If the quoted price is inclusive of such expenses, then consolidated value of the goods is only mentioned in the invoice. In a case where only value of goods is quoted, expense is borne by the supplier. In cases where expenses have not been separately charged, the convertible foreign exchange received is consideration of the goods only. Where such expenses are separately charged in the invoices, the consideration received in convertible foreign exchange includes the value of the goods and such expenses. If the consideration received is only against the goods, then there is no need to deduct such expenses from the consideration received in convertible ....
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....d for the purpose of 'export turnover', then on the same assumption, reason and analogy it should be excluded from 'total turnover'. Therefore, the Assessing Officer was not correct in excluding ISP expenses from consideration received in convertible foreign exchange while calculating export turnover for the purpose of section 10." 8. The ISP expenses considered in the above said decision are similar to the satellite link charges paid by the assessee. As seen from the bills placed on record before the authorities the assessee has paid satellite link charges to VSNL, MTNL and also to Software Technology Park India (STPI) towards bi-monthly half circuit charges/international half circuit charges and rent for TMI - Frame Relay CCT charges including port charges. The port charges, however, were calculated on the basis of USD per annum basis where as rest of the charges were paid on annual lease agreement periodically and these are fixed charges not connected with the delivery attributable to the export of goods. Even though the assessee has utilized the satellite link for receiving data and also for transferring data this cannot be considered as telecommunicati....
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....e giving relief on 'satellite charges'. In view of the order of the ITAT in assessment year 2004-05, we hold that the satellite charges cannot be considered as 'telecommunication charges' so as to exclude from the export turnover. We accordingly uphold assessee's grievance on this issue. Ground No.2 is allowed." 8.1 Following the earlier order of this Tribunal, we decide this issue in favour of the assessee and against the revenue. 9. Ground no.3 is regarding transfer pricing adjustment in respect of services rendered by the assessee to its Associated Enterprise (AE). 9.1 The assessee is providing/rendering information Technology enabled Services (ITES) to its overseas affiliates/AEs namely Tyrinty Processing Services Ltd. (TPSL), UK and Willis Processing Services Inc., USA. ITES provided by the assessee to its AE includes; (i) processing of insurance claims, premiums, and treaties; (ii) Accounting for insurance underwriters and clients; (iii) Insurance accounting support services; and (iv) data processing. 9.2 The assessee furnished Transfer Pricing report in support of the arm's length price (ALP) of 10.54% b....
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....llowed under TNMM a fresh search was carried out by the TPO. Consequently the TPO selected a set of 25 comparables of ITES purported to have been performed functions broadly comparable to the activity of the assessee related to ITES as under: S. No. Name of the Comparable Company PLI (%) 1. Accentia Technologies Ltd. 38.26 2. Aditya Birla Minacs Worldwide Ltd. (Earlier Transworks Information Services Ltd. 11.98 3. Allsec Technologies Ltd. 27.31 4. Apex Knowledge Solutions Pvt. Ltd. 12.83 5. Appollo Healthstreet Ltd. -13.55 6. Asit C. Mehta Financial Services Ltd. 24.21 7. Bodhtree Consulting Ltd. (Seg.) 29.58 8. Caliber Point Business Solutions Ltd. 21.26 9. Cosmic Global Ltd. 12.40 10. Datamatics Financial Services Ltd. (Seg.) 5.07 11. Eclerx Services Ltd. 90.43 12. Flextronics Software Systems Ltd. (Seg.) 14.54 13. Genesys International Corporation Ltd. 13.35 14. HCL Comnet Systems & Services Ltd. (Seg.) 44.99 15. ICRA Techno Analytics Ltd. (Seg.) 12.24 16. Informed Technologies India Ltd. 35.56 17. Infosys BPO Ltd. 28.7....
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.... Accentia Technologies Ltd. 38.26 Department 2. Aditya Birla Minacs Worldwide Ltd. (Earlier Transworks Information Ser Ltd.) 11.98 Common 3. Allied Digital Services Ltd. 26.3 Assessee 4. Allsec Technologies Ltd. 27.31 Department 5. Apex Knowledge Solutions P. Ltd. 12.83 Department 6. Appollo Healthstreet Ltd. 13.55 Department 7. Asit C Mehta Fin Services Ltd. 24.21 Department 8. Ask Me Info. Hubs Ltd. 0.3 Assessee 9. Bodhtree Consulting Ltd. (Seg) 29.58 Department 10. Caliber Point Business Solutions Ltd. 21.26 Common 11. Cosmic Global Ltd. 12.4 Department 12. Datamatics Fin. Services Ltd. (Seg) 5.07 Department 13. Eclerx Ser Ltd. 90.43 Department 14. Flextroncis Software Sys Ltd. (seg) 11.54 Department 15. Genesys International Corpn. Ltd. 13.35 Department 16. HCL Comnet Sys & Ser Ltd. (seg) 44.99 Department 17. ICRA Online Ltd. 29.8 Assessee 18. ICRA Techno Analytics Ltd. (seg) 12.24 Department 19. Informed Technologies India Ltd. 35.56 Department 20. Inf....
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....on of the Special Bench of this Tribunal in the case of Aztec Software and Technology Services Ltd. v. Assistant Commissioner of Income-tax reported in 294 ITR 32 = (2007-TII-01-ITAT-BANG-SB-TP)wherein it was held that 10 comparables are also not enough to determine the ALP under TMNN. The ld. DR has further submitted that the company Haworth India P Ltd. (supra) is in the business of sale of imported furniture and there were no adequate comparable companies available in the public domain. Therefore, in those peculiar circumstances, this Tribunal has held that even one comparable was adequate to determine the ALP. 10.2 In rebuttal, the ld. Sr. counsel for the assessee has submitted that in the case of Haworth India P. Ltd. (supra), the Tribunal has given the finding after considering the ruling of the Special Bench of this Tribunal in the case of Aztec Software and Technology Services Ltd. (supra) and therefore, it was held that even one comparable was sufficient to determine the ALP. 11. We have considered the rival submissions and carefully gone through the relevant material as well as the provisions relating to the Transfer Pricing Regulations. As per the provisions of sec....
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....Regulations, the number of comparables may be one or more than one; but there is no upper limit prescribed u/s 92C of the I T Act. However, the first proviso to se.92(2) indicates that more than one price can be considered for determination of ALP and in such a case, the ALP shall be taken to be arithmetic mean of such price. Therefore, the size of number of comparables has not been prescribed under the provisions of TP Regulations provided under the I T Act. However, the sufficiency of number depend largely on the availability of the comparables where the number of comparables available is large, then it is always better to consider as many as possible number of comparables which can give an adequate and proper representation of the price prevailing in open market in the said industry, business, trade etc., to which the comparables and international transactions belong. 11.5 In the case of Haworth India P Ltd. (supra). the Tribunal has observed that only one comparable was left which was selected by the assessee itself in its TP study and the TPO did not choose to carry out a fresh search, then the said comparable can be taken to compute the ALP. The relevant part of the Tribun....
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....isdiction of the TPO; but is on the point when one comparable which is left and accepted by both the parties and the TPO chose not to carry out a fresh search, then the ALP can be determined on the basis of one comparable. But where the TPO in his wisdom decides to exercise his power and jurisdiction to carry out a fresh search, then there is no such provision or law which restricts the powers/jurisdiction of the TPO to carry out the fresh search, if the comparables included by the TPO are found as good comparables for determination of the ALP. 12. In view of the above discussion, we do not find any substance or merits in the objections raised by the assessee against the fresh search carried out by the TPO. 13. Now, we take up the comparables selected by the TPO and the objections raised by the assessee one-by-one. (i) Accentia Technologies Ltd: 14. The ld. Sr. counsel for the assessee has pointed out that this company has been specifically rejected as comparable by the Hyderabad benches of the Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. in 1961/Hyd/2011 = (2012-TII-148-ITAT-HYD-TP). He has referred paras 10 & 11 of the said decision of ....
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.... ordinary events like merger and de-merger neither raised nor considered in the said decision. However, as far as the functional similarity and other objections raised by the assessee in the said case of Actis Advisors Pvt. Ltd. (supra), the company Accentia Technologies Ltd. was found as a comparable in the ITES segments. 15.2 In the case of Capital IQ information Systems India Pvt. Ltd. (supra), the Hyderabad Bench of the Tribunal has observed that if there is an amalgamation during the financial year relevant to Assessment Year under consideration, which has mixed the final results, then the aforesaid comparables has to be excluded and this fact of amalgamation was directed to be verified by the TPO. The relevant part of the order of the Tribunal in para 11 is as under: 11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financia....
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....dered as threshold. In support of his contention, he has relied upon the decision of the Delhi Benches of the Tribunal in the case of Actis Advisors Pvt. Ltd. (supra). The ld. DR has referred sec 92A of the Act and submitted that it requires 26% shareholding in another enterprise to constitute an Associated Enterprise; therefore, 25% as threshold limit for related party transaction would be appropriate. 17.3 In rebuttal, the ld. AR has submitted that under the provisions of sec. 92A, 26% of the shareholdings is only one of several criteria for determination of the AE. There are various percentage prescribed in the said section for determination of the AE. E.g. Guarantees should be more than 10% of the borrowings for it to be considered as AE. Thus, the ld. AR has submitted that fixing of 25% threshold limit of related party transaction is not justified. 18. We have considered the rival submissions and carefully gone through the various decisions relied upon by either of the parties. As per the TP regulations, the international transaction is required to be compared with a similar; but uncontrolled transaction between unrelated parties. Therefore, as a rule of prudence, so far....
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....nies were having controlled transactions with related parties. The TPO and on appeal, the learned CIT (Appeals) did not substantiate the allegation by furnishing figures of controlled transactions to show that such transaction had significant impact on the profits of these companies. The taxpayer, on the other hand, has given percentage of transaction with related parties and we are of view that they are not so high as to exclude them from the list of comparables. We are further of view that an entity can be taken as uncontrolled if its related party transaction do not exceed 10 to 15% of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitability of comparable. For the purposes of comparison, what is to be judged is the impact of the related party transaction vis-a-vis sales and not profit since profit of an enterprise is influenced by large number of other factors. No dispute having been raised by TPO or the Id. CIT(A) that the other filters of functions, economic activities, product profiles etc are satisfied, we are of view that these three entities should also be taken in the list of comparables for working average / mean....
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.... can be applied as a filter in respect of related party transactions for considering an entity as uncontrolled for the purpose of determination of the ALP. 18.8 In our view 0% related party transaction is an impossible situation and therefore, it is practically not possible to find out a comparable having no related party transaction. Therefore, a reasonable percentage of the total revenue from the related party transaction can be considered for selecting an uncontrolled comparable. There cannot be a single criteria/parameter which can be applied as general rule in all the cases. The related party transaction ranging from 10 to 25% of the total revenue can be considered having regard to the facts and circumstances of the given cases, 10% is the lowest limit and can be taken in the case where abundance number of comparables are available. Therefore, when there is no difficulty in searching the comparables, then the entity having more than 10% of the related party transaction should be excluded because the comparable should be an uncontrolled transaction and therefore, so far as it is possible, its result should not be influenced by related party transaction. In the normal circums....
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....company; but margin and results are taken on the entity level; therefore, having more than 15% of the revenue from related party, this company deserves to be excluded from the comparable. (v) Apex Knowledge Solutions P. Ltd.: 19. The ld. AR has submitted that this company is functionally not comparable as it was engaged in the business of software. He has referred the TPO order and submitted that the TPO itself has recorded the profile of the company as software. He has further submitted that there is no dispute that the company is in the business of software; therefore, the said company cannot be considered as comparable. 20 On the other hand, the ld. DR has submitted that before the TPO the assessee has accepted this company as comparable. He has referred the assessee's objection at page 283 of the paper book and submitted that the assessee did not object this comparable. However, the ld. DR has submitted that as per the annual report of this company, it is deriving income from both export of software and ITES and segment results are not available. 21. Having considered the rival submissions and other relevant material on record, we note that the assessee ha....
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.... the related party transactions are in respect of the total business and it is not clear as how much percentage of the related party transactions is in the ITES segment. Therefore, this matter is required verification and examination on the facts as brought before us by the ld. DR. Accordingly, we remit this comparable to the record of the Assessing Officer/TPO to reconsider the same after taking into account the segment results and related party transactions in ITES segments and accordingly decide the comparability of this company in view of our observations. (viii) Ask Me communication : 25. This comparable is common as it was assessee's own comparable; therefore, no dispute has been raised before us. (ix) Bodhtree Consulting Ltd: 26 The ld. Sr. counsel for the assessee has submitted that this company is engaged in the software product. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The ld. AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brou....
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.... this company to the record of the Assessing Officer/TPO for verification, examination of the complete information properly and then decide the issue after considering the objections of the assessee against this company. (x) Caliber Point Business Solutions Ltd: & (xi) Cosmic Global Ltd: 28. These two companies are selected as comparable by the assessee and also accepted by the TPO. Therefore, no dispute has been raised before us in respect of these companies except the margin taken by the assessee in respect of Cosmic Global Ltd. at 11.31%; but the TPO/Assessing Officer has computed the same at 12.4%. Therefore, the Assessing Officer/TPO is directed to consider the reasons for the difference in the margins taken by the assessee and TPO respectively. (xii) Datamatics Financial Services Ltd: 29. The ld. AR has submitted that this company is engaged in printing process and ITES services; therefore, this company cannot be considered as comparable at the entity level. The Ld AR has submitted that the information available at the website of the company indicates that the printing and processing services rendered by this company pertain to ....
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....lytics and data process solutions to some of the largest brands in the world. Thus, this company cannot be considered as comparable of the assessee. In support of his contention, the ld. AR has submitted that Hyderabad Benches of the Tribunal in chase of Capital IQ Information Systems India P. Ltd. (supra) has rejected this company as comparable on the ground of super profit and KPO services. 31.1 Per contra, The ld. DR has submitted that only objection raised by the assessee before the TPO was in respect of related party transactions constituting 9.12% of the total revenue. The assessee did not raise any objection of functional difference or super profit margin. The ld. DR has referred Rule 10B(2) of I T Rules and submitted that Rule 10B stipulates the various factors for determination of inclusion or exclusion of any case in the list of comparables. The said Rule does not prescribe the higher or lower profit rate as a deciding factor to make a case comparable. The ld. DR has also referred OECD transfer pricing guidelines on this point. In support of his contention, he has relied upon the following decisions: (i) Exxon Mobile Co India P. Ltd. (ii) BP India Ser....
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....eme results might consist of losses or unusually high profits itself cannot be a factor for potential comparables; but further examination would be needed to understand the reasons for such extreme results. If some reasons are detected which indicate a defect in the comparability or exceptional conditions for such an extreme results, then only the case may be excluded from the proposed comparables. The concluding remarks given under the OECD TP guidelines in para 3.65 & 3.66 are as under: "3.65 Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions! enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and where the losses incurred by third parties reflect a level of risks that is not comparable to the one assumed by the taxpayer in its controlled transactions. Loss-making comparables that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses. 3.66 A similar investigation should be underta....
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....esumed by the Id. CIT(A), has been prescribed as the determinative factor to make a case incomparable. Rightly so, because profit is not a factor in itself, but consequence of the effect of various factors. Only if the higher or lower profit rate results on account of the effect of factors given in rule 10B(2) read with sub-rule (3), that such case shall merit omission. If however such extreme profit rate is achieved because of factors other than those given in the rule, then such case would continue to find its place in the list of comparables." 31.8 The findings of the coordinate Benches of this Tribunal referred above are clear on this point that inclusion and exclusion of the comparables cannot be decided on the basis of the factors other than the factor specified under Rule 10B(2). Hence, in views of the above discussion we do not accept the objections of the assessee that because of the abnormal profit margin this company should be rejected as a comparable. 31.9 Similar view has been taken by this Tribunal in the case of Net Linx India P. Ltd. (supra) and Stream International Services P. Ltd. (supra) wherein it was held that comparables cannot be deleted on the ground o....
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....pany cannot be considered as a comparable. (xv) Genesys International Corporation Ltd. 34. The ld. AR of the assessee has submitted that this company was engaged in the business of software services and I T consultancy services and hence, should be rejected as a comparable. He has referred the order of the TPO and submitted that the TPO itself has recorded in the impugned order that this company has software service and IT consultancy services. 34.1 On the other hand, the ld. DR has submitted that this company has derived the revenue from Geographical Information systems (GIS) activity which is ITES activity. He has filed a copy of the notification no. SO 890(E) dt 26.9.2000 showing that GIS is ITES activity. Thus, the ld. DR has submitted that this company is a good comparable as far as the functional similarity is concerned. 35. We have considered the rival submissions and relevant material on record. As far as the functional comparability of this company is concerned, it is clear from the annual report of this company that this company is engaged in the business of GIS activity. As per the notification no. SO 890(E) dt 26.9.2000 of CBDT, GIS is one of the ITES ....
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....rative details and chart to show that comparability of various companies having different turnover and margins and submitted that it is clear from the table as well as the graphic chart that the company having high turnover has low margin whereas low turnover has high margin. In support of his contention, he has relied upon the decision of this Tribunal in the case of M/s Symantec Software Solutions P. Ltd. in ITA No.7894/Mum/2010 dt 31.5.2011 = (2011-TII-60-ITAT-MUM-TP) 36.2 As regards the related party transactions constituting 21.52%, the ld. DR has submitted that in the case of Astic Advisory (supra), the Delhi Benches of the Tribunal has took threshold limit of related party transactions at 25% hence, this company is a good comparable. 37. Having considered the rival submissions and relevant material on record, we find that since the related party transactions constituting 21.52% of the total revenue; therefore, in view of our findings in the foregoing paragraphs on this issue, this company cannot be considered as a comparable. We will consider the issue of turnover filter while discussing other comparables. (xvii) ICRA Online Ltd. 38. This company is a commo....
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....al in the case of Actis Advisors P. Ltd. (supra) it much below the threshold limit as considered by the Tribunal at 25%. 41.3 In rebuttal, the Ld AR has submitted that high marketing expenditure resulting in brand creation and hence, this comparable should be rejected. 42. We have considered the rival submissions and carefully perused the relevant material on record. As far as related party transactions constituting at 14.99% of the total revenue, in view of our finding on this issue of related party transactions, it is within the range of 15%; therefore, this comparable cannot be excluded on this ground alone. 42.1 On the objection of the marketing expenditure, we note that marketing expenditure has been shown by this company at Rs. 61,11,240/-which is otherwise not giving material effect on the price or cost charged or paid or profit arising from the operation of that company. Therefore, in the absence of any such factor or criteria provided under Rule 10B(2), a comparable cannot be excluded on the ground of marketing expenditure, which is not so material as to influence the profit margin significantly. Further, such a factor, if at all, may be considered for an appropri....
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....s over a period of time may create marketing intangible which will helpful to them for getting better business but it may not be applicable with equal force on service industries like I.T. Enabled Services. The instances of Infosys referred by the assessee has been specifically dealt with by the learned TPO, he has reproduced relevant portion of the annual report of Infosys on page 25. For buttressing this plea, learned counsel for the assessee mainly gave two explanation. In his first reasoning he pointed out that profit ratio of the companies who have incurred expenses less than 3% of the sales is 22.26%. The companies who have incurred expense more than 3% but less than 5% of the sales on AMP, their profit is 45.52%. Similarly, the companies who have incurred expense on AMP at 5% to 7% of sales, the profit is between 67.46%. These figure have been put from the result of comparable. We have extracted such comparable in para 24 on page 32 of this order. Contrary to this, Learned DR also pointed out that HCL Comnet System Services incurred 0.65% of sales on AMP but shown profit at 45.91%. Similarly, Maple E-solution incurred 0.16% and shown profit at 32.06%. Visual Infra-tech did n....
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....of M/s Symantec Software Solutions (P.) Ltd. - ITA 7894/Mum./2010. 43.2 In rebuttal, the ld. AR has submitted that in the case of Actis Advisors P. Ltd. (supra), the Tribunal has excluded this company on the ground of high turnover in para 31. He has also referred the Rule 10B(2) and submitted that the factor for comparability of an entity includes the size of markets; level of competition; assets employed for services. Therefore, the high turnover shows the size of market of the company is larger than the assessee. Similarly, the asset employed for services are also significantly more in comparison to the assessee. Hence, this company cannot be treated as a comparable. 44. We have considered the rival submissions as well as the relevant material on record. The assessee has mainly emphasised the objection of high turnover of Infosys BPO Ltd. in comparison to the assessee; therefore, this company cannot be treated as a comparable. The reliance was placed on the decision of the Hyderabad Benches of this Tribunal in case of Capital IQ Information (supra) as well as in the case of Agnity India Technologies (supra) 44.1 We note that in the case of Capital IQ Information (supra)....
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....lso been expressed by the Hyderabad Bench of the Tribunal in the case of Trinity Advanced Labs P. Ltd. (supra). In the case of M/s. Genesys Integrating India P. Ltd. (supra), the Bangalore Bench of the Tribunal has observed in the following manner- "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 ....
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.... with the entity having Rs. 201 crores turnover. Thus, this classification gives unrealistic result as far as the comparability of two entities having difference of Rs. one crore only cannot be compared. In our view for the purpose of comparing the profit margin of functionally similar entity the classification of such slab range is not practically workable. Therefore, as it is apparent from this classification that two entities can be compared having difference in the turnover upto Rs.199 crores; but at the same time, cannot be compared even if the difference of turnover of one cr. Therefore, with due respect, we are unable to accept such classification of comparables on the basis of fixed slabs of turnover. 44.4 Further, as brought to our notice by the ld. DR through the details and graphic chart there is no direct proportionate relation between the turnover and margin. The details applied by the ld. DR as shown in the graphic chart are as under: 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  ....
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....s 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. 44.6 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 12.15.1 as under: "12. Next objection of the assessee is regarding turnover filtering as well as difference in functions and risk profile of comparables. 13. The main contention of the Id AR of the assessee is that the comparables having more than 50 crores and less than 5 crores of turnover should be excluded for determining the ALP because the assessee's revenue from marketing support services is about Rs. 20 crores. He has pointed out that as per Rule 10B(3), if there are material difference between the tran....
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....urvive. 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." 44.7 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 chart reproduced above, then a comparable cannot be rejected solely on the basis of high turnover. Even otherwise, the larger turnover and size of the entity may has an impact of economical cost of production in the manufacturing industry due to huge cost of fixed asset but not in service sector. (xxii) I Services India P. Ltd.: 45. The ld. AR has referred the TPO order and contended that this company was engaged in the business of software and products. Apart from functionally different, the information about the company was not in public domain. Accordingly, the ld. AR has submitted that t....
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....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 cannot be a reason for rejection of the company as a comparables. 47.2 In rebuttal, the ld. AR has submitted that the Delhi Benches of this Tribunal in the case of CRM Services Ltd, has rejected this company as comparable after considering all these facts and arguments of the department. 48. We have considered the rival submissions and relevant material on record. The first objection raised by the assessee is the involvement of the directors of this company in the fraud. The Tribunal in the case of Capital IQ Information (supra) as well as CRM rejected this company as comparable. Undisputedly, the alleged fraud relates back to the period of 1980 to 1990 an....
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....erify this fact and accordingly decide the comparability of this company namely Accentia Technologies Ltd. (xxv) Mold Tex Technologies Ltd: 49.3 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 considerable differences in the business profile and the functions performed by this segment of Mold Tex vis-à-vis the business profile and functions performed by the assessee. The ld. AR has pointed out that this company operates in two business segments; plastic division and IT division. Plastic division is engaged in the manufacture of lube & oils, paints, pet products, consumer products etc., and IT division of the company specializes in providing structural design and detailing services which can be categorized as structural engineering services and in the nature of KPO. Thus, the I T segments of this company cannot be classified as falling within the scope ....
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.... 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. 51.1 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, which is comparable to the turnover of the assessee. Hence, this company is a good comparables. 52. We have considered the rival submissions and carefully perused the relevant material on record. The main objection of the assessee against this company is functionally different. It is not disputed that the TPO has considered only the segmental results of this company relating to ITES services. Therefore, other business activity has no role to effect the results of the ITES segments which is compared with the assessee. Further, the turnover of the ITES segments is more than 35 crores which is quite comparable to the turnover of the assessee of 46 crores which shows that this company had a significant business of ITE....
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....ng. 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 are adopted to quantify the fact of risk on anticipation profitability e.g weighed average cost of capital/capital asset pricing model. However, it has been mentioned that both the methods are based upon the risk models used in relation to risk of securities. Most statistical methods have their inherence known limitations. Therefore, risk adjustment must be carefully and only if a reasonable and actuate adjustment is possible. He has relied upon the following decisions: (i) M/s Symantec Software Solutions P. Ltd. - ITA 7894/Mum/2010= (2011-TII-60-ITAT-MUM-TP) (ii) Interra Inforamtion Technologies (I) Pvt. Ltd. ITA 5568/Del/2010 = (2012-TII-142-ITAT-DEL-TP) (iii) Marubeni India P. Ltd. ITA 80....
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....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 incumbent on them to rebut the objections. It is not proper to reject all the objections without discussing them in the order. We also notice that assessee has given detailed objections. There was no discussion at all by the DRP on these objections. As far as the working capital adjustment is concerned, how the same was arrived at could not be analyzed by us. Even the learned CIT (DR) has also accepted that this issue may be remitted to the TPO for fresh examination. 25. With reference to the risk adjustment so sought by assessee, there is merit in the CIT DR's argument that assessee has not provided any risk adjustment in TP study submitted by them. In our view, the claim for risk adjustment is only to make adjustments to the ALP so as to leverage the profit marg....
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....al 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) Ltd., in excluding Vishal Information Technology Ltd., as a comparable overlooking the fact that the Hon'ble ITAT did not have complete facts before it pertaining to the operation of the said company when it is evident from the details of the said company that no part of its ITeS job is outsourced to any outside vendors. (c) On the facts and circumstances of the case and in law, the Ld. CIT(A)'s decision to exclude Vishal Information Technology Ltd., ought to be restored as a comparable company for benchmarking the ALP of the international transactions." 57. Ground No. 1 is regarding royalty or fee for technical services. 57.1 We have considered the rival submissions and relevant material on record. At the outset we note that for the Assessment Year 2006-07, this Trib....
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....alled 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 communication services made available to anyone who is willing to pay was not in the nature of royalty but the same was in the nature of business profit and in the absence of any P.E. of Equant in India, it was not chargeable to tax in India. The assessee thus was not liable to deduct tax at source from the payment made to Equant for such services and it, therefore, could not be treated as assessee in default u/s 201(1) and interest u/s 201(1A) also could not be charged as rightly held by the learned CIT (Appeals). We, therefore, uphold the impugned order of the learned CIT(A) on this issue and dismiss this appeal filed by the Revenue. Since this issue was crystallized by the order of the Income Tax Appellate Tribunal in the same assessment, we are of the opinion that the disallowance u/s 40(a)(ia) does not arise, as there is no....