TaxTMI 
TaxTMI 
2015 (1) TMI 466
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....rt back office services ("ITES Services') to the associated enterprise ('AE'), are not at arm's length under the Income-tax Act, 1961 ('the Act'). 2. On the facts and in the circumstances of the case, the Ld. AO/DRP erred in modifying the benchmarking analysis, as conducted by the appellant using Transactional Net Margin Method ('TNMM') for benchmarking its international transactions pertaining to provision of IT and ITES services to the AE, and thereby modifying the set of comparables. In doing so, the Ld AO/DRP specifically erred in: a) conducting selective fresh analysis by applying certain additional quantitative / qualitative filters for identifying the comparables resulting in cherry picking of comparables which contradicts with the principles of conducting search (for comparables) in a scientific manner; b) rejecting the fresh search (using the data for FY 2008-09 only) for the IT and ITES segment provided by the appellant (on a without prejudice basis) without any cogent reasons, whereas the Ld. TPO had himself conducted a fresh search analysis. This inconsistency indicates a discriminatory mindset whereby only those approaches that ....
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....on, PTC India is also engaged in rendering technical support services (call center services) to PTC's global client base. 4. As per the Transfer Pricing document (TP) furnished for the year under consideration, the assessee was found to have entered into various international transactions with its Associate Enterprise (AE) i.e. PTC USA for the provision of software services and also for the provision of IT enabled services. The assessee had applied a search criteria for picking up the comparables and had selected certain companies in the IT segments and also in the ITES segments which are mentioned at pages 2 and 3 of the order passed under section 92CA(3) of the Act. As the assessee had entered into international transactions, the Assessing Officer made a reference under section 92CA(1) of the Act for computation of Arm's Length Price in respect of the international transactions mentioned in the form No.3CEB. The assessee had applied TNMM method and used Profit Level Indicator of Operating Profit (OP) over operating expenses (TC) as the PLI indicator. The TPO with a view to find comparable companies with more appropriateness, conducted a fresh search by using the following sear....
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....s not available in all the cases at the time of TP study. The TPO was of the view that only the current year's data to the exclusion of the earlier year's data was to be applied. In view of the provisions of Rule 10B(4) of IT Rules, as per the TP case mandated for the use of the data relating to the financial year in which the international transaction was entered into. The assessee raised objections to the search criteria sought to be applied by the TPO. The first objection raised by the assessee was that the earlier year's data could be applied for doing the benchmarking for selection of the comparable companies. Another objection raised by the assessee was against the selection of companies with income from IT services greater than 50% of the operating revenue or segmental revenue. 7. Another objection was raised against the selection of companies which had turnover between Rs. 1 crores to Rs. 200 crores. The plea of the assessee in this regard was that the strength of TNMM was that net margins (e.g. return on assets, operating income to sales, and possibly other measures of net profit) were less affected by transactional differences. The difference in the level of turnover, ....
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....y transaction of 25% 11. The TPO applied the ratio laid down by the Bangalore Tribunal in Kodiak Networks India Pvt. Ltd. Vs. ACIT (2012) 51 SOT, 191 (Bang), wherein it was held that under Rule 10D(4), information and documents should be contemporaneous and should exists latest by the specified date in section 92F(4) of the Act i.e. the due date for filing the return of income. As per the TPO, the obligation upon the tax payer was to keep and maintain the documents for that period by providing for specific data in the provisions, however, there was no cut off date up to which the information available in public domain could be taken into consideration by the TPO, while making the transfer pricing adjustment and arriving at the ALP. As per the TPO, the assessee by the new search carried out during the pendency of the proceedings could not do cherry picking and the same was rejected. 12. The assessee thereafter before the TPO, has raised the objections against the selection of different companies which has been considered by the TPO elaborately and we shall make a reference to the same while adjudicating the issue raised in the present appeal keeping in mind the submissions mad....
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....n Technology 36.99 36.52 7 Microgenetics -0.33 -0.77 Average 31.71 17. The PLI of the comparable companies thus worked out at 31.71 as against 15.04 of the assessee. 18. The ALP of the software services rendered by the assessee was worked out as under:- Rs. Operating revenue of the assessee R 101,596,764 Operating Cost (OC) 100,244,536 PLI of comparables P 31.71 Arm's Length Price (ALP) of the international transaction (ALP=OC*(1+P/100) A 132,032,078 Adjustment over operating income (Shortfall being adjustment u/s 92CA) A-R 30,435,314 19. In view of the above, an adjustment of Rs. 30,435,314/- was made to the international transaction relating to ITES segment to arrive at the arm's length value of the international transaction and as a consequence of this adjustment, income of the assessee was increased by Rs. 30,435,314/-. 20. The report by the TPO was submitted to the Assessing Officer which was show caused to the assessee and the learned Authorized Representative for the assessee relied upon the submissions made befor....
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....d. was primarily engaged in the business of software services and software products, whereas the assessee does not sell any software products and was a capital service provider. The learned Authorized Representative for the assessee made reference to the financial statement of KALS Information System Ltd. placed at pages 479 to 489 of the Paper Book and our attention was drawn to the notes to the financial statement and also the profit & loss account for the year ending 31.03.2009, under which the said company had declared the receipts from sales, services and training at Rs. 2.14 crores. The learned Authorized Representative for the assessee further referred to the notes on account at page 481 of the Paper Book and pointed out that it was reported that the company was engaged in the development of computer software and other related services. Further at pages 482 to 489 attached to the list of products dealt in by KALS Information Systems Ltd. In respect of the other comparables selected i.e. Bodhtree Consulting Ltd., it was pointed out that the TPO had selected the said company as a comparable because it was considered as a comparable in assessment year 2008-09 in TPO's order. Ho....
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....ble was declaring fluctuating profits, the same cannot be used a comparable and was not picked up by the assessee in its TP study. The assessee further was aggrieved by the selection of the FCS Software Solutions Ltd. and it was pointed out by the learned Authorized Representative that the said company was rendering diverse services and no segmental data was available. Even before the TPO, it was pointed out that segmental data was not available. The TPO had selected the said company as the software development was more than 50%. However, the said company does not fit into the said filter as it has software development only to the extent of 40% of the revenue and hence fails the filter. The learned Authorized Representative for the assessee pointed out that certain companies i.e. Mindtree Ltd. (5.52%), e-Infochips Ltd. (- 12.69%) should be taken as comparable. The learned Authorized Representative for the assessee further pointed out that it had carried out a fresh search during the proceedings before the TPO and the TPO rejected the fresh search conducted by the assessee. It was plea of the assessee that fresh search was conducted by applying the quantitative filters adopted in th....
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.... said concern was inter alia engaged in sale of software products, which was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services." 28. In the year under consideration also, the said company KALS Information Systems Ltd. is engaged in the sale of software products, which is apparent from the financial statements and notes to accounts filed by the assessee at pages 479 to 489 of the Paper Book. The said company being not functionally comparable in view of the factual aspects referred to by the assessee and in view of finding of the Tribunal in assessee's own case for assessment year 2007-08, we hold that the application of software segment of ....
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.... to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly." 32. Further, the Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK, Vs. Dy.DIT, had on similar issue of exclusion of abnormal profit making concern held as under:- "8. We have carefully considered the rival stands on this aspect. In the context of the controversy relating to the exclusion of abnormal profit making concerns, a reference has been made to the decision of the Special Bench of the Tribunal in the case of Maersk Global Centres (India) Private Ltd. vs. ACIT v....
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....e three preceding years and one succeeding financial year. Notably, for the financial year under consideration, the margin of the said concern is 34.71% whereas for the preceding three financial years of 2003-04, 2004-05 and 2005-06 it is -6.47%, -69.07% and -44.21% respectively and for the subsequent financial year of 2007-08, the margin is 3.67%. The aforesaid clearly suggests a wide fluctuation in the margins earned by the said concern over a period of time. In-fact, a further analysis of the financial data for the aforesaid years suggest that there is a wide fluctuation in the revenue generation of the said concern during the financial year under consideration as compared to the past three financial years. For the subsequent financial year, the revenue generation has taken a downward trend which again reflects a wide fluctuation. At the time of hearing, the learned counsel for the assessee has referred to the Annual Report of the said concern for the financial year under consideration to point out that the company has acknowledged a growth of 132.86% in its revenue generation as compared to the immediately preceding financial year. In our considered opinion, there is no materia....
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....deserve to be excluded from the list of comparables even if such an exercise involved examination of data of the comparables for more than one financial year. In the present case, as our discussion in the earlier paras reveal, the profit margin of 34.71% for the year under consideration is an abnormal business trend, and, accordingly the said concern is liable to be excluded. Therefore, we do not find any force in the plea of the Revenue to retain the said concern in the final list of comparables. 10. In conclusion, we set-aside the order of the CIT(A) on this aspect and direct the Assessing Officer to exclude Informed Technologies India Ltd. from the final list of comparables." 33. The Mumbai Bench of the Tribunal in NetHawk Networks India Pvt. Ltd. Vs. ITO in ITA No.7633/Mum/2012, dated 06.11.2013 had also excluded the company Bodhtree Consulting Ltd. as it was engaged in the production of software products and also because no segmental data was adequately available. The said company was rejected as it was not engaged in the software development services and there was no segmental data comparable were available. 34. With regard to the inclusion of Bodhtree Consulting Ltd....
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....TES segments. The first objection raised by the assessee is against the inclusion of M/s. Coral Hubs Ltd (formerly known as Vishal Information Technologies Ltd.). The plea of the assessee was that the said company, besides providing IT enabled services, also provides diversified activities like data capture and digitalization, data conversion, e-publishing, digital library solutions, fund accounting services, online books stores. Based on the analysis of the relevant financial data, it also outsourced the services to third party vendors and acted as an intermediary between the final customer and the vendor. Accordingly, the company was not functionally comparable to the assessee's ITES segment. Further, the said company had made significant payments towards vendor. 38. The learned Authorized Representative for the assessee pointed out that the Tribunal in assessee's own case in assessment years 2007-08 and 2006-07, had rejected M/s. Vishal Information Technologies Ltd. on account of being functionally non-comparable to the assessee's ITES segment since the said company provided high end services. Further, reliance was placed on the ratio laid down in Cummins Turbo Technologies L....
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....ee. The learned Authorized Representative for the assessee pointed out that the said company was rejected by the TPO in its study relating to assessment year 2008-09 on account of having super profits and the same was also not part of the final set of companies accepted by DRP in assessment year 2008-09. The learned Authorized Representative for the assessee further pointed out that the said company was a Knowledge Process Outsourcing (KPO) company engaged in providing data analytics and data process solutions to the customers based on the annual report for financial year 2008-09. Eclerx supports core and complex activities for its clients using proprietary processes and a scalable offshore delivery model. The plea of the assessee was that the said company was to be rejected on account of having super profits and also because it was engaged in providing KPO services. Reliance was placed on the ratio laid down by the Special Bench of the Mumbai in the case of Maersk Global Centres (India) Pvt. Ltd. in ITA NO.7466/MUM/2012 (SB). 42. The next comparable picked up by the TPO was Cosmic Global Ltd. The learned Authorized Representative for the assessee pointed out that either before ....
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....ee on the other hand was engaged in the running of a call centre and was providing technical support to its AEs. We find that the Tribunal in assessee's own case relating to assessment year 2006-07 in ITA No.1346/PN/2010 and in assessment year 2007-08 in ITA No.1605/PN/2011 had excluded the said comparables observing as under: "30. The next point raised by the assessee is against the inclusion of Vishal Information Technologies Ltd., appearing at Item (10) in the Tabulation in para 25 as a comparable case. The TPO has discussed the issue in para 6.9.6. of the order. As per the TPO, the said concern is functionally comparable to the ITEnabled services segment of the assessee and for that reason, the said concern has been included as a comparable for the purposes of comparability analysis. In this connection, the plea set up by the assessee is that the said concern is engaged in not only ITEnabled services, but also in providing quality products and in the creation of animated films and books. It has also been ascertained by referring to the Annual Report of the said concern that it is engaged in providing agency services by way of outsourcing the services to third party vendors a....
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....aid down by the Tribunal in assessee's own case in assessment years 2006-07 and 2007-08 (supra), we uphold the plea of the assessee in excluding the margins of the said concern M/s. Vishal Technologies Ltd. 47. The next objection of the learned Authorized Representative for the assessee was with regard to the inclusion of M/s. Accentia Technologies Ltd. which admittedly was engaged in developing its own software products and was rendering medical transcription services. Further, the said company during the year under consideration had made certain acquisitions which in turn affected the margins of the year of the acquisition. We find that Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Pvt. Ltd. (supra) had rejected Accentia Technologies Ltd. for having extra-ordinary circumstances i.e. amalgamation. Following the parity of reasoning as adopted by the Hyderabad Bench of the Tribunal, we hold that the said company had different functional profile as compared to the assessee, which in turn explained the abnormally high profit margins earned by the said company as compared to the assessee. Accordingly, we accept the plea of the assessee and hol....
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....rable. 52. An ominous objection was raised by the assessee with regard to non-consideration of the following comparables by the TPO:- Sr. No. Company Adjusted OP/TC of comparables considered by Ld. TPO OP/TC of comparables considered by the Assessee 8 Informed Technologies Ltd - 26.22% 9 Omega Healthcare Management Services Pvt. Ltd - 17.64% 10 Cameo Corporate Services Ltd. - 21.51% 11 Gebbs Infotech Ltd - 19.58% 12 Techprocess Solutions Ltd (Processing segment) - 24.57% 13 In House Production Ltd. (Healthcare segment) - 5.44% 14 AOK In House BPO Services Ltd - 14.57% 15 Aegis BPO Services (Gurgaon) Ltd (BPO Segment) - 7.44% 16 Delta Services (I) Pvt. Ltd. - 8.33% 17 Professional Management Consultants Pvt. Ltd. 18.01% 53. In this context, it was explained that since the adoption of multiple years data of the comparables by the assessee in its Transfer Pricing study was not accepted by the TPO, assessee was required to re-work the comparability analysis on the basis of the financial data of the comparables pertaining to the pe....