TaxTMI 
TaxTMI 
TaxTMI 
2015 (1) TMI 466
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....o 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 generate results prejudicial to the appellant would s....
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....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 search criteria for selecting the comparables in IT and ITES segments. a. On....
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....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, though being an important characteristic at the time of evaluation of comparability, cannot be the sole reason of rejection of comparables having similar f....
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.... 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 made by the learned Authorized Representative for the assessee before us. The assessee also raised an objection to the introduction of the additional companies by the TPO without providing any cog....
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....g 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 before the TPO. Consequent to that a draft order was issued to the assessee on 08.03.2013 and in response to the same, the assessee submitted objections before the Dispute Resolution Panel (DRP), Pune against the variations proposed in the draft assessment order. The DRP considered the objections of the assessee and the draft order passed by the Assessing Officer under section 144C(5) of the Act dated 09.12.2013. The DRP, Pune had chosen not to i....
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....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. However, the assessee for the year under consideration was aggrieved by the selection of the said company as a comparable as Bodhtree Consulting Ltd. was showing drastic fluctuation in the operating margins with a high of 80.15% and low of (-) 4.46% over period of six years. The learned Authorized Representative for the assessee placed reliance on the ratio laid down by the Bangalore bench of the Tribunal in M/s. Mindteck (India) Ltd. in I.T(TP)....
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....e 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 the TP study for the financial year 2008-09 and the additional filters considered by the TPO, on a without prejudice basis. The TPO in assessment year 2008-09 had accepted the fresh search conducted by the assessee. However, during the year under consideration, as per the assessee, the TPO had adopted a cherry picking approach for identifying comparables rather than a structured process. The assessee had identified the following companies to be includ....
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....s 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 the said concern was not comparable to the assessee's segment of IT services. 29. The assessee further has assailed the inclusion of Bodhtree Consulting Ltd. appearing at item No.6 in the list of comparables selected by the TPO. The said company was selected as a comparable by the TPO because in assessment year 2008-09, Bodhtree Consulting Ltd. was selected by the assessee itself. On the other hand, the objection raised by the assessee was that the current year's profits of the said company were on higher side and the same thus, was n....
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....o 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 vide ITA No.7466/Mum/2012 dated 07.03.2014. The relevant observations of the Bench are as under :- "In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the re....
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.... 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 material to say that the high profit margin of 34.71% declared by the said concern in the instant financial year is a normal business trend. Ostensibly, the financial results of either the three preceding financial years or of the succeeding financial year do not justify that the margin of 34.71% for the year under consideration is a normal business trend. Thus, in our considered opinion, the inclusion of the said concern in the final set of comparables would not lend credibility to the comparability analysis and therefore it deserves to be excluded. We hold so. 9. The plea setup by the CIT(A),....
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....ng 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., the objection raised by the assessee was on two accounts that first it was engaged in the sale of software products and no segmental data was available. However, on the other hand, the said company was picked up by the assessee as a comparable in the financial year 2008-09. We find that the profits declared by the said concern ought to be considered while selecting the said comparables. The perusal of the results shown by the said company reflected high margins in certain years and very low in other years, which do not reflect normal business conditions. Consequently, the margins of the said c....
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....ndor. 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 Ltd., UK in ITA No.161 & 269/PN/2013 relating to assessment year 2007-08 and 2008-09, order dated 29.09.2014, wherein the Tribunal had held the said company to have significantly outsourced its business. Our attention was drawn to the annual reports of the said company placed at pages 503 and 504 of the Paper Book. 39. The next objection raised by the learned Authorized Representative for the assessee was against the inclusion of Accentia Technologies Ltd. The learned Authorized Representative for the assessee pointed out that the said company renders medical transcription services, medical coding, medic....
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....lex 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 the TPO of DRP, the assessee had not contested the rejection of the said company, but however, it had come across certain decisions, wherein the said company had been rejected on account of having different business model. It was further pointed out by the learned Authorized Representative for the assessee that even though the assessee had not challenged the inclusion of said comparables in the TP study report, but the same could be challenged before the Tribunal as has been laid down by the Special Bench of the Tribunal in the case of DCIT Vs. M/s. Quark Systems Pvt. Ltd. in ITA No.115/Chd/2009 (SB), order date....
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....mparable 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 and acting as an intermediary between the final customer and the vendor. The assessee furnished detailed submissions in this regard before the lower authorities, copies of which have been placed in the Paper Book at pages 420.8 to 420.31. By referring to the written submissions, it is also sought to be pointed out that the intermediary functions performed by the said concern can be compared to that of a distributor which takes title to service/product for resale to the customers. The aforesaid assertion is sought to be substantiated by the details of payments made by the said concern for data entry and vendor payments, p....
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....on. 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 hold that the said company is not to be used as comparable in ITES segments of the assessee. 48. The next objection of the assessee was that with regard to inclusion of Eclerx Services Ltd. which admittedly was engaged in providing KPO services i.e. Knowledge Process Outsourcing, whereas the assessee was engaged in BPO services. The Special Bench of the Tribunal in the case of Maersk Global Centres (India) Pvt. Ltd. (supra) vide order dated 21.08.2014 had excluded the said company as a comparable while determining the margins under ITES segments. The Special Bench of the Tribunal vide paras 82 and 83 at pages 73 and 74 of the o....
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....td (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 period under consideration. Moreover, in the course of the Transfer Pricing assessment, the TPO modified certain filters and even for this reason, assessee was required to conduct a fresh search. The aforesaid comparables were found functionally comparable by the assessee and before the TPO, it was submitted that the same be considered. The TPO has rejected the same merely for the reason that such comparables were not a part of the original Transfer Pricing study carried out by the assessee. 54. Having regard to the aforesaid discussion, we find that the TPO wrongly rejected the aforesaid comparables without even examining as to whether they are functionally comparable or not. If at all the TPO was to reject the same, it was imper....