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2014 (9) TMI 143
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....s. 13,30,153 u/s. 10A of the Act. During scrutiny of this return, the Assessing Officer noticed that during the previous year, the assessee has gross receipts from exports shown at Rs. 13,05,32,325, shown under BPO services, and foreign exchange gain of Rs. 11,46,821 and interest income of Rs. 1,470 shown under other sources. He further noticed that in the profit & loss account, the assessee has claimed an amount of Rs. 1,00,71,383 towards communication expenses, which was attributable to the delivery of computer software abroad, shown under BPO services. Referring to the definition of 'export turnover' as given in clause (iv) to Explanation-2 to section 10A of the Act, which says consideration in respect of export of articles or things or computer software received by an assessee in convertible foreign exchange, but does not include freight, telecommunication charges, insurance attributable to delivery of such article outside India and expenses if any, incurred in foreign exchange in providing technical services outside India, he held that such communication expenses, which was incurred by the assessee for delivery of the software under BPO services abroad, has to be exclu....
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....ted from total turnover also. 6. Regarding adjustment under ALP of the international transactions u/s. 92CA of the Act, assessee challenged selection of comparables. The assessee shown the value of the international transactions at Rs. 13,05,32,325 in addition to an amount of Rs. 19,16,518 towards Recharges. The assessee followed TNM Method for the purpose of analysing the transfer pricing as most appropriate method. For comparability analysis the assessee has used data belonging to the period April 2001 to 16th February, 2004 and has selected 17 comparables for A.Y. 2004-05. However, the TPO considering the provisions of Rule 10B(4) of the Income-tax Rules, 1962, further considering the contemporaneous data i.e., the data belonging to the financial year 2003-04, has excluded the companies from the list of comparables originally selected and furnished the comparative results in respect of 8 companies. However, out of the 8 companies in respect of which the assessee furnished the financial data, taking into account the financial results for the financial year 2003-04, the TPO selected two companies i.e., Nucleus Netsoft & GIS India Ltd. and Tricom India Ltd. and rejected the othe....
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.... are in violation of provisions of section 92C of IT Act. 1.3 That the authorities below failed to appreciate the entire issue in the right perspective, instead, the findings are totally against the facts on record. 1.4 The reliance placed by the learned Assessing Officer on the contemporaneous data of the financial year 2003-04 was not made available/ accessible, therefore, the orders passed are one sided and are contrary to the principles of natural justice. 1.5 Both the AO and as well as CIT(A) erred in rejecting the loss making comparables in violation of OECD guidelines, instead, summarily and without any basis concluded that the comparables shall be of those companies which have shown profit. 1.6 The learned CIT(A) erred in confirming the action of the Assessing Officer who rejected certain companies relied by the assessee as comparables, on the alleged ground of functional differences, which findings are not supported by cogent reasons acceptable under law. 1.7 The learned CIT(A) is not cor....
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....Asstt. CIT (109 TTJ 892) (Bang.) (SB), 107 ITD 141 (Bang) (SB) and reiterated by Mumbai Bench of ITAT in the case of Bayer Material Science (P) Ltd. v. Addl. CIT (148 TTJ 581) (Mum). 11. The learned DR relied on the order of the CIT(A). 12. We have heard both the parties and perused the material on record. For transfer pricing analysis in this case, the assessee has used data of different companies pertaining to the period from April, 2001 to February 16, 2004. Thus, the assessee has used data of the preceding two financial years and partly of the current financial year, from April 1, 2003 to February 16, 2004. However, under Indian Transfer Pricing Regulation, for the purpose of comparability analysis, an assessee is bound to use the data of relevant financial year, in which it has entered into international transaction. Under Rule 10B(4), it says the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction, shall be the data relating to the financial year in which the international transaction has been entered into. Thus, as per the above provisions, user of data of the current financial year, in which international tra....
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....d the credit of Rs. 11.15 lakhs arising on Deferred tax for computing 'Operating Profit', which is incorrect Excluding the same, the ratio works out to 9.85% only. 2 Tricom India Limited Accepted both the Transfer Pricing Officer (TPO) and the Appellant A difference of about 7% in the Operating profit on Cost arrived by the Transfer Pricing Officer and the Appellant As per the TPO, the Operating profit/ cost equals 45.74% for the financial year 2003-04, but, factually it works out to 38.37% only. 3 Datamatics Technologies Limited Rejected by the Transfer Pricing Officer (TPO) and rejection accepted by the Appellant Rejection accepted by the Appellant. 4 Hinduja TMT Limited Rejected by the Transfer Pricing Officer (TPO) and rejection accepted by the Appellant Rejection accepted by the Appellant. 5 Weal Infotech Limited Rejected by the Transfer Pricing Officer (TPO) and rejection accepted by the Appellant The segmental data for 2004 was not available and no annual report had been produced by the Appellant Rejection accepted by the Appellant. 6 Carborundum Universal Limited Rejected by the....
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.... entire investment as well as recoverable advance had been fully provided for in the books of account. The detailed revenue, PBIT and common costs of each segment is available in the database. Also, 'Provision for doubtful debts' is an operating expense for any company. Moreover, like profit, loss is also a part and parcel of the business and to arrive at an industry average, loss suffering units cannot be ignored which is in line with the OECD guidelines clause 3.45 on application of TNMM. 12 M C S Limited Rejected by the Transfer Pricing Officer (TPO), but, rejection disputed by the Appellant. The reasons being there was no forex revenue and that it is functionally different from a BPO. The company is engaged in share registry services which is very much similar to BPO services and the financials of the company for the financial year 2003-04 discloses income on account of foreign currency and Point no. : 1(x) of 'Notes on accounts' talks about accounting policy adopted with respect to foreign exchange transactions. 13 Vans Information Limited Rejected by the Transfer Pricing Officer (TPO), but, rejection disputed by the Appellant. The....
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.... (Previous year loss of Rs. 63 lakhs)". Hence, it appears that there has been an extraordinary movement during the year and the profit earned does not seem to be ordinary profit earned in the normal course of business. As such, the comparable is rejected. 18 Fortune Infotech Limited Introduced by the Transfer Pricing Officer (TPO) and accepted by the Appellant. There is a difference of about 4% in the Operating profit on Cost arrived by the Transfer Pricing Officer and the Appellant. Factually, the financials of the company for the financial year 2003-04 indicate that the Operating profit / cost equals 35.34% only as against 39.35% adopted by the TPO. 19 Mercury Outsourcing Management Limited. Introduced by the Transfer Pricing Officer (TPO) and accepted by the Appellant. The comparable had been introduced by the Transfer Pricing Officer but, initially rejected by the Appellant since the data regarding the functions were not available in the public domain and the Director's Report and Notes to Accounts did not elaborate much on the functions of the Company. Subsequently, on obtaining all relevant information and data, the appellant accepted the com....
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....ion as comparables on the sole ground that there was no foreign exchange earnings. The AR submitted that the "notes on accounts" of respective companies, reveal that there are gains or losses on account of foreign exchange, which implies that there are foreign exchange transactions. In any event, it is possible that the export proceeds would not have been received physically; but, they would have been shown as "receivables" on account of which there may be gains or losses on account of foreign exchange rate fluctuations. Even assuming for a moment that there are no exports sales from those companies, it cannot be rejected as comparables for the simple reason that it is not a pre-condition even domestic sales can be considered for the purpose of comparability. Thus, the Commissioner of Income Tax (Appeals) as well as TPO are not justified in rejecting those companies as comparables. 18. The DR submitted as follows over the above comparables: (1) C.S. Software Limited: It was submitted by the assessee that the TPO rejected the above company on the ground that there are no foreign exchange transactions. It was stated that operations are determined by prevailing market conditions....
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.... justified in not considering the above company as a comparable. 19. We have heard on this issue of rejection of comparables. With regard to exclusion of gain on account of foreign exchange fluctuation, while computing the net margin, as claimed by the assessee, we find that the exchange fluctuation gains arise out of several factors, for instance, realisation of export proceeds at higher rate, import dues payable at lower rate. Since the gain or loss is on account of exchange fluctuation arising in the normal course of business transaction, the same should be considered while computing the net margin for the international transactions with the AEs of the assessee. Our view in this behalf is fortified by the order of the Tribunal Bangalore Bench in the case of SAP LABS India Ltd.(P.) Ltd. v. ACIT 44 SOT 156 (Bang) and also order of the Tribunal Mumbai Bench in the case of Deutsche Bank A.G. v. Dy. CIT [2003] 86 ITD 431. If the gain on account of foreign exchange rate fluctuation is to be taken as operating gain in nature, the net margin declared by the assessee for the international transaction with the AEs, goes up still further. However, if the loss of the comparable is abnorm....
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....termining the PLI (OP/TC%). Further, while furnishing the segmental information in respect of the above company before the TPO, the PLI is shown at -73%. The details in this regard furnished by the assessee, are referred to at page-21 of the TP order. Since as per such segmental data furnished/worked out by the appellant in the case of the above company, there was no operational profit/positive income, but only loss, for the reasons discussed in the case of Suprawin Technologies Ltd, the said company, should not be considered as a comparable. Therefore, and for the reasons stated by the TPO in para 7.2.3 of his order, he was justified in rejecting the above company i.e., FI Sofex Limited, as a comparable for the purpose of determining ALP in this case. 24. Regarding Vans Information Limited, it was submitted by the DR that as stated by the TPO in para 7.2.13(i) of his order, this company has been incurring losses continuously for three years. However, it was wrongly stated by the AR that the provisions relating to transfer pricing do not provide for rejection based on losses, the appellant contended that the TPO was not justified in rejecting the company. In the face of such con....
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....over is above Rs. 1 crore. This view of ours is also supported by the order of the Tribunal Delhi Bench in the case of Sapient Corporation (P.) Ltd. v. Dy. CIT (15 ITR (Trib) 285), Genisys Integrating Systems India (P.) Ltd. v. Dy. CIT (15 ITR (Trib) 475) (Bangalore Bench) wherein held that when companies which are loss making are excluded from comparables, then super profit making companies are also to be excluded from the comparables for determining the ALP. Being so, in our opinion, the Assessing Officer has to recalculate the ALP after excluding only the data of the companies which have losses due to extraordinary reasons. In other words, if there is loss in ordinary course of business which is normal/nominal cannot be excluded from the comparables. However, we make it clear that if there is any abnormal loss or if there is continuous loss year by year, in such situation that company data cannot be considered as comparable with the assessee company. For example, F.I. Sofex Ltd., Vans Information Ltd. and Mukund Engineers Ltd. and these companies are to be excluded from the comparables. 27. The AR submitted that Wipro BPO Ltd. and Spanco Telesystems & Solutions Ltd. (it....
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....t according to the assessee, the TPO erred in excluding this company for comparison on the ground that Director's Report of the company mentions that it has catered service exclusively to Apex Data Services Inc, a group company, that makes both Ace Exports and Apex Data as Associated Enterprises u/s. 92A(2)(i) of the Act. It was stated that the TPO has ignored the fact that, the financial statements nowhere mention that any sale/ purchase transactions have taken place with Apex Inc. during the relevant financial year. It was further submitted that the AO erred in treating the above company as functionally different from that of the assessee company. It was submitted that as seen from the annual report of Ace Software Ltd., for the year ended 31.03.2004, the sale transaction made by Ace Software Exports during the F.Y 2003-04 were controlled transactions and this company, should not be considered as a comparable. Therefore, the TPO was justified in rejecting the above company as comparable in this case. 32. We have heard both the parties on this issue. In our opinion, controlled transaction with related parties which makes it un-comparable with the assessee. In the present ca....
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....erabad Bench of the Tribunal in the case of Four Soft Ltd. v. Dy. CIT (62 DTR 308) (Hyd).. Same view has been taken by the Tribunal in various cases stated by the assessee in its arguments. Being so, segmental data of the company F.I. Sofex Ltd., ought to be considered as comparable if there is normal loss. In this case, there is abnormal loss on account of extraordinary reasons, then it is not comparable and to be excluded from comparables. Thus, F.I. Sofex Ltd., has to be excluded by the Assessing Officer. 36. The AR further submitted, in respect of Tulsyan Technologies Ltd. (item No. 15 in chart) introduced by the assessee but rejected by both the lower authorities on the ground of functional differences but as per the clarification given by the CBDT the business of the company constitutes ITES and therefore, cannot be rejected as comparable. 37. The DR submitted that Tulsyan Technologies Ltd : As stated by the TPO, in para-7.2.6.1 of his order, the business in the case of this company comprises both software development and ITES. Further stating that the service income was only Rs. 95,00,000 i.e. less than Rs. 1 crore, and no segmental results are available, the TPO rejec....
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....er, the assessee itself has proposed this company as a comparable in their TP documentation. Further, it is seen that the TPO has considered only the segmental results, pertaining to F.Y 2003-04 in the case of the above company for comparability analysis in this case. As per the financial data pertaining to such segmental results, the amount of income is shown at Rs. 10.9 crores, which is comparable, keeping in view the turnover of Rs. 13.05 crores shown by the assessee for the Asst. Year 2004-05. It is also relevant to mention here that, the TPO has noted that the extraordinary profits earned in subsequent Financial Year 2004-05, is not relevant as the matter here pertains to F.Y. 2003-04. Having regard to such facts, the TPO was justified in considering the segmental results in respect of the above company, for comparability analysis in this case. Accordingly, the AO was also justified in accepting such segmental results in respect of the above company for comparability analysis in this case. 41. We have heard both the parties on this issue. It is an admitted fact that the cases which were showing abnormal trading results, as discussed in earlier paras, by relying on the order....
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....comparable for the purpose of determining ALP in this case. 45. The DR submitted with regard to Tata services Limited that the assessee has objected to rejection of this company by the TPO, in its grounds of appeal before the CIT(A). However, the assessee has accepted the rejection of the above company before the CIT(A) in its written submission filed on 23.7.2010. Accordingly, rejection of the above comparable by the TPO/AO was justified. 46. We have heard both the parties on the above two comparables. Regarding Vishal Information Technologies Ltd., the employee's cost to total cost ratio is worked out at 2% as compared to the industry average of 30 to 40%. The assessee's employee's cost to total cost ratio is worked out at 47%. Since the employee's cost form major cost base in ITES service industries, the low ratio of comparables implies that it would not be providing services by employing its own sources. Being so, the assessee is not alike to M/s. Vishal Information Technologies Ltd. Accordingly, M/s. Vishal Information Technologies Ltd., cannot be considered as comparables and it is to be excluded from comparables. 47. As held in earlier paras elsewher....
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....benefit of proviso to Sec. 92C(2) of 5% adjustment irrespective of range of actual variation between the margin disclosed by Assessee and the average mean margin so calculated as held by ITAT in the cases of :- (1) Emersons Process Management India Pvt. Ltd. vs. ACIT, 2011- TII-102-ITAT-MUM- TP; (2) M/s. Diageo India Pvt. Ltd. vs. DCIT 2011-TII-94-ITAT-Mum-TP; (3) Capgemini India (P) Ltd. vs. ACIT (2011) 141 TTJ 33 (Mum) (URO); (4) Phoenix Mecano India Ltd. vs. DCIT in ITA No. 7647/M/2011; (5) ACIT vs. UE Trade Corpn (I) Pvt. Ltd. (2011) 136 TTJ 297 (Del.); (6) TNT INDIA P. Ltd., vs. ACIT (2012) 15 ITR (Trib.) 263 (Bang); (7) Schefenacker Mother Son Ltd. vs. ITO (2010) 2 ITR (Trib.) 1961 Delhi; (8) Cummins India Ltd. v. DCIT [2012] 15 ITR (Trib) 252 (Pune). 53. The AR submitted ....
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....rnover, which are numerator and denominator, respectively in the formula. Accordingly, we confirm the order of the CIT(A) on this issue. 58. Coming to the assessment year 2005-06 in ITA No. 988/Hyd/ 2011. The assessee raised the following grounds of appeal: 1.0 The orders passed by the lower authorities, insofar as issues decided against the assessee are against the law, facts, circumstances, natural justice, equity and all other known principles of law. 1.1 The learned CIT(A) as well as the learned AO/TPO have erred in law as well as facts of the case in not accepting the arm's length price (ALP) determined by the appellant. 1.2 The learned CIT(A), as well as learned AO/TPO have erred in selecting and using certain companies as comparables to determine the ALP by not appreciating the fact that the comparable companies selected are not comparables to the appellant and hence, cannot be used in the instant case. 1.3 Both the learned CIT(A) and as well as AO/TPO erred in rejecting the loss making comparables, in violatio....
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....ory of fees for technical services and assessee failed to deduct tax at source. 63. Brief facts of the issue are that the assessee has objected to the disallowance of Rs. 13,09,362 made in the assessment. In the written submissions filed by the AR, it was submitted that during the previous year the assessee company has utilized internet services from VSNL and made payment towards the same. Objecting to such disallowance made by the AO, it was stated that mere purchase of Internet bandwidth does not lead to availing technical service. Though sophisticated equipments are used and the connection of the internet is through a satellite link, it cannot be said that the assessee is availing technical services. Stating that the company has availed general internet service like any other user, from VSNL, the AR contended that the payment made for the same cannot treated as fees for technical services. Further stating that such payment made by the assessee was not liable for deduction of tax at source, he contended that such disallowance made by the Assessing Officer in the assessment is not justified. In this regard, the AR relied on the decision of Madras High Court in the case of Skyce....
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....ering of any managerial, technical or consultancy services and the same cannot be disallowed u/s. 40(a)(i). However, having regard to the said decision of the Hon'ble ITAT, Kolkata Bench, relied on by the Assessing Officer and since there was human skill involved in the said internet bandwidth and other facilities availed by the assessee from VSNL, the said payment was in the nature of fee for technical services. Under the circumstance, for non deduction of tax at source on the same, the Assessing Officer was justified in disallowing the said amount u/s. 40(a)(ia) of the Act. We do not find any infirmity in the order of the CIT(A) and the same is upheld. This ground is rejected 66. Ground No. 1.5 reads as under: The learned CIT(A) is not correct in upholding the ad-hoc disallowance of 15% of the expenditure excluding rent, electricity charges, communication charges, insurance and foreign exchange loss. 67. Facts of the case are that the assessee has objected to the disallowance of expenditure of Rs. 2,15,33,810 made in the assessment. It is stated that books of accounts have been....
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....essee at this stage, cannot be acceded to. Further, it is difficult to comment on the sanctity of such vouchers in respect of those remaining expenses. Under the circumstance, we uphold the disallowance of 15% expenditure in respect of those expenses. We do not find any infirmity in the order of the CIT(A) and the same is upheld. This ground of the assessee is dismissed. 70. With regard to ground Nos. 1.6 and 1.7 in this appeal, this issue is already discussed by us in ITA No. 1494/Hyd/2010 elsewhere in earlier paras by placing reliance on the order of the Special Bench of Chennai in the case of Sak Soft Ltd. (supra). Accordingly, these grounds are dismissed. 71. The assessee filed additional ground that the CIT(A) ought to have appreciated that when the additions are made under 'business head', the same would only go to inflate the business income which qualifies for exemption u/s. 10A of the IT Act, 1961 as held by the Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. (330 ITR 175). 72. The assessee filed petition for admission of additional ground stating that the issue raised in additional ground is purely on question of law does not involve....