TaxTMI 
TaxTMI 
2014 (3) TMI 626
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.... 'cost plus mark up' basis. For the impugned assessment year, the assessee filed a return of income declaring the total income at Rs.8,29,06,660. During the relevant financial year, the assessee had the following international transactions with its AE. (a) Provision of IT enabled services Rs. 56,32,13,579 (b) Provision of business support services Rs. 4,19,34,643 For computing the Arm's Length Price (ALP) of the international transaction, the assessee adopted the Transactional Net Margin Method (TNMM). In the course of assessment proceedings under S. 143(3), the Assessing Officer noticing that the assessee has received payment from international transactions undertaken with its AE made a reference to the transfer Pricing Officer(TPO) under S.92CA of the Act, to determine the ALP. On receiving the reference, the TPO issued a notice under S.92CA(2) calling upon the assessee to submit the documents maintained in terms of S.92B. After receiving the compliance of the assessee, the TPO issued another letter requiring the assessee's compliance on various issues raised therein. The TPO noticed that though the assessee in its Transfer Pricing Document claimed ....
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....on is not available to perform analysis were excluded. 3. Companies that have ceased business operations or are currently inactive were excluded. 4. Companies that are undertaking different functions compared to the tax payer were excluded. 5. Companies that do not have significant (<25%) foreign exchange earnings. 6. Companies which have been making pertinent operating losses were excluded. 7. Companies that have substantial (>25%) transactions with related parties were excluded 8. Companies which have been in their first year of operations and have incurred operating losses and 9. Companies that are duplicated in the data base with different names or merged to form another company." 4. On the basis of the search of data base, the assessee selected 15 comparables with an average profit margin of 21.15% on cost. Therefore, the margin earned by the assessee at 15.90% on operating cost was treated as at Arm's Length as the margin is within plus/minus 5% range. After analyzing the TP study report of the assessee, the TPO found the following defects/deficiencies- (a) The assessee has eliminated overwhelming ....
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....as to apply additional quantitative criteria such as export earning filters, diminishing revenue filter, etc. to make the economic circumstances comparable. (e) Most of the assessee's comparables do not stand scrutiny of FAR Analysis. The assessee has not selected on proper comparability analysis. The TPO on the basis of deficiencies pointed out as above proposed to reject to reject the TP study of the assessee and determine the ALP. The assessee objected to the proposed rejection of the TP study done by it vide its letter dated 25.6.2010 which has been summarized by the TPO as below- (i) The ALP in the case of international transaction has been determined by applying the prescribed method in accordance with sub-section (1) and (2) of S.92C of the Act. (ii) All the relevant information and the documents relating to the international transactions have been maintained as prescribed and provided to the department. (iii) The data used in the computation of ALP has been taken from widely recognised commercial information data-bases for obtaining publicly available financial information in India, namely Prowess and Capitaline. The very same data....
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....e excluded • Companies who have less than 25% of the revenues as export sales were excluded • Companies who have distinguishing revenue/persistent losses for the period under consideration were excluded • Companies having different financial year ending (i.e. not March 31, 2006) or data of the company does not fall within 12 months period i.e. 01.04.2005 to 31.03.2006, were rejected. • Companies that are functionally different form that of tax payer or working in peculiar economic circumstances after giving valid reasons, were excluded By applying the aforesaid filters, the TPO selected 11 out of the 15 comparables selected by the assessee and rejected four comparables. The comparables accepted are- Sl. No. Name of the company Margin adopted by the tax payer based on multiple year data Operating margin to Cost (FY 2006-07) 1. Allsec Technologies Ltd. 26.41% 27.31% 2. Apex Advanced Technology P. Ltd. 16.96% 39.89% 3. Cosmic Global Ltd 15.72% 12.40% 4. Flextronics Software Systems Ltd. 1.81% 8.62% 5. Genesys International Ltd. -11.31% 13.35% 6. Maple E-....
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..... Mehta Financial Services Ltd. 6.09 24.21% 0.96 15.76 4.18 68.64% 0.33 5.42% P Seg 7 Bodhtree Consulting Ltd (Seg.) 2.94 29.58% 0 0.00% 2.94 100.00% 0.01 0.34% P (Soft) 8 Caliber Point Business Solutions Ltd 39.3 21.26% 5.38 13.69 36.77 93.56% 0.24 0.61% P (Soft) 9 Cosmic Global Ltd 4.28 12.40% 0 0.00% 2.72 63.55% 0 0.00% P 10 Datamatics Financial Services Ltd (Seg.) 2.92 . 5.07% 0.23 7.88% 2.92 100.00% 0.13 4.45% P 11 Eclerx Services Ltd 86.12 89.33% 7.85 9.12% 79.54 92.36% 8.37 9.72% P 12 Flextronics Software Systems Ltd (Seg:.) 12.93 8.62% 0 0.00% 10.61 82.06% 0.11 0.85% PSeg 13 Genesys International Co-Operation Ltd : 19.11 13.35% 1.12 ., '5.84% 18.86 98.38% 0.13 0.68% CSeg 14 H C L Comnet Systems & Services LId (SeR.) 260.1 8 44.99% 55.99 21.52% 260.18 100.00% 1.7 0.65% PSeg 15 I C R A Techno Analytics Ltd (SeR.) 7.23 12.24% "- (*)0. 17 (*) 1.85% (*) 7.7 (*) 83.6....
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....larly, expenses and provisions which are non-operating were excluded form operating expenses. These included provisions other than provisions for bad debts, loss on sale of assets/investments, foreign exchange loss, loss on revaluation of assets. The TPO computed the ALP of the ITES rendered by the assessee to its AE in the following manner- Arithmetic Mean PLI 30.55% Less: Working capital adjusted 2.84% Adjusted Arithmetic Mean PLI 27.71% Arm's Length Price:- Operating Cost Rs.52,24,11,557 Arm's Length Margin 27.71% of the Operating Cost Arm's Length Price @ 127.71% of operating cost Rs.66,7171,799 Price charged for the international transactions Rs.60,51,48,222 Short fall being adjusted under S.92CA Rs. 6,20,23,577 Incorporating the adjustments of ALP made by the TPO, a draft assessment order was passed by the Assessing Officer, which was challenged by the assessee before the DRP. The DRP having confirmed the order of the TPO and directed the Assessing Officer to finalise the draft assessment order, the assessee is in appeal before us. 7. The assessee has raised as many as ten grounds before us. Groun....
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....RP hearing (29 June 2011) • Delhi Income-tax Appellate Tribunal judgment in the case of ITO V/s. CRM Services India Private Limited dated 30 June 2011 at para 17.2 holding that the financials of these companies are unreliable. 6 Triton Corp Limtied 7. HCL Comnet Systems & Services Limited • Industrial giants cannot be compared to captive service providers 280 • Delhi ITAT judgment in the case of Agnity India Technologies Pvt Ltd. at para 5 8 Infosys BPO Limited • Turnover grater than INR 200 crores whereas turnover of CIQ India is Rs.60 Crores 282 • Hyderabad ITAT T judgment in the case of Triniti Advanced Software Labs (P) Ltd. 9 Wipro Limited 287 • Bangalore Income-tax Appellate Tribunal judgment sin the case of Genisys Integrating Systems (India) Pvt. Ltd. at para 9 8. The learned Departmental Representative submitted before us that the TP Study report of the assessee cannot be said to be showing the correct results as he has not used the current year's data in case of the comparables selected by him. The learned Departmental Repre....
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.... form of paper-book. We have also examined the decisions cited at the bar. It is seen from the order of the TPO that he has accepted the method, i.e. TNMM applied by the assessee as the most appropriate method. The TPO also has not disputed the fact that the assessee has maintained document in accordance with the statutory provisions. The TPO has also accepted the two data bases used by the assessee for selecting the comparables. The TPO has even accepted as many as eleven out of fifteen comparables selected by the assessee. As is clear from the submissions of the parties before us, the dispute lies within the narrow compass of the comparables selected by the TPO, which have been objected to by the assessee. We shall deal herein below with each of the comparables disputed to by the assessee. I. Accentia Technologies Ltd. 10. It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar object....
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....ce. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact ahs taken place, then the aforesaid comparable has to be excluded. II. Mold Tek Technologies Ltd. 12. The assessee has objected for this company being taken as comparable mainly on the ground that since there is a merger from 1st October, 2006, the financial results of the company cannot be taken as a comparable. The assessee, relying upon the observations of the DRP, in the case of this particular company, in the proceeding for the assessment year 2008-09, which has been extracted in para 10 hereinabove, has submitted that the assessment year under dispute also, is an exceptional year of performance as there is impact of amalgamation of a company, namely, Techman Tools P. Ltd., with effect from 1st October, 2006 and the concerned company also revised its financial statement, after closure of the previous year. It has been submitted by the Authorised Representative for the assessee that the amalgamation was al....
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....ion rendered in the case of Adobe Systems India Pvt. Ltd. (ITA No.5043/Del/2000 dtd. 21.01.2011) + (2011-TII-13-ITAT-DEL-TP), Delhi Bench of ITAT has held that exclusion of comparables showing supernormal profits as compared to other comparable is fully justified. We, therefore set aside the impugned order of the ld. CIT(A) on this issue and restore the matter to the file of the A.O. with a direction to decide the same afresh after taking into consideration the submissions made by the assessee before the learned CIT(A) and keeping in view the Delhi Bench of ITA in the case of Abode Systems India Pvt. Ltd. (supra). In this view of the matter, we accept the contentions of the assessee that this company cannot be treated as a comparable. III. Eclerx Services Ltd. 14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended t....
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....yer and hence needs to be dropped form the final list of comparables." In case of Maersk Global service Centre India (P.) Ltd. (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- "Insofar as the cases of tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded." In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable. V. Maple e-Solutions Ltd. & VI. Tricom Corp Ltd. 18. The assessee has objected for these companies being taken as comparables mainly on the ground that the directors were involved in fraud and hence financials are unreliable. In this regard, learned Authorised Representative for the assessee has relied upon and order of the ITAT Delhi Bench in the case of ITO v. ....
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....260.19 (2) Infosys BPO Limited 649.57 (3) Wipro Limited 939.78 It is the contention of the assessee that these three companies are industrial giants in the area of software development and since these companies assume all risks, they earn higher amount of revenue resulting in higher profit, whereas the assessee being a captive unit of its parent company in the USA, it operates in a risk mitigated environment. Therefore, the margin of profit is also less. In this context, the learned Authorised Representative for the assessee relied upon the decision of the ITAT Delhi Bench in the case of Agnity India Technologies (P.) Ltd. v. ITO in ITA No.3856/Del/2010 dated 4th November, 2010 and in the case of Triniti Advanced Software Labs (P) Ltd. v. Asstt. CIT Ltd.(2011-TII-92- ITAT-HYD-TP).. The Authorised Representative for the assessee further contended that when the TPO has rejected companies with turnover of less than Rs.one crore, by stating that these companies may not be representing the industry trend, by applying the very same logic, he should not have also considered the companies having turnover of more than Rs.200 crores. In this context, the learned Authoris....
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....the parties and having considered the rival contentions and also the juridical precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain for the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal when companies which are loss making are excluded from comparables, then 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....
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....res cannot be taken as comparables. In the aforesaid view of the matter, we set aside orders of the DRP as well as the assessment order passed under S. 143(3) read with S. 144C of the Act, and restore the matter to the file of the TPO, who shall determine the ALP afresh in the light of our observations/directions hereinabove. 24. So far as the ground No.8 is concerned, the issue relates to non-consideration of gain/loss on account of foreign exchange fluctuation. The TPO has not considered the foreign exchange fluctuation gain/loss while determining the ALP, by observing that they do not relate to the business operation of the assessee, which has also been confirmed by the DRP. 25. It is the contention of the learned Authorised Representative for the assessee that the foreign exchange loss/gain should not be excluded while computing the margin of the assessee as well as the comparable companies, as the same is arising in the normal course of business of the assessee. The learned Authorised Representative for the assessee has submitted that in assessee's own case for the assessment year 2008-09, the gain/loss on account of foreign exchange fluctuation has been taken int....