TaxTMI 
TaxTMI 
2015 (1) TMI 1063
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....ed Enterprises ('AE') across the globe. The Asseessee's service centres are registered as a 100% export oriented unit under the Software Technology Parks of India (STPI') scheme. Assessee has also established a branch in the UK to facilitate the identification and effective migration of work to India from AEs. The assessee renders services as a captive contract service provider and is remunerated on a cost plus mark-up basis for providing the services to its AEs. Assessee had filed return of income for the Assessment Year 2008-09 on September 25, 2008 disclosing a taxable income of Rs. 65,76,218 after claiming deduction u/s 10A of the Income Tax Act, 1961 in respect of the profits from export of services from the STPI units and admitting a taxable income of Rs. 107,48,10,745 under MAT. 3. During the course of assessment proceedings, The ACIT Circle-2(2) (herein after referred as 'Assessing Officer' or 'AO') selected the case for scrutiny assessment and issued a notice u/s 143(2) of the Act, and further made a reference u/s 92CA(1) of the Act to the Learned Additional Commissioner of Income-tax (Transfer Pricing) (herein after referred as 'Tran....
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....ces between the assessee and the comparables. However, no adjustments were undertaken in the TP report, since, the assessee's net margin from the provision of services to its AEs (13.30%) during the year was within the arm's length range determined. 6. There were series of submissions made by assessee before the TPO in response to the notices, to justify the arm's length nature of its international transactions. While the TPO accepted TNMM as the most appropriate method and the PLI (operating profit/Operating cost) adopted therein, he rejected the economic analysis undertaken by assessee in the TP documentation inter alia stating that the multiple year data has been used and the comparability analysis is defective. TPO conducted a fresh search on the databases (i.e., Prowess and Capitaline) during the assessment proceedings. TPO used powers u/s 133(6) of the Act to obtain selective information from certain companies and used the same for determining the ALP. TPO applied the following additional filters for comparative analysis: a) Rejection of companies having different financial year; b) Rejection of companies having diminishing revenues filter/persistent loss mak....
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....d in ground 8, the same was not pressed in the course of arguments. 11. In making the T.P. adjustment, the TPO selected 20 companies and arrived at an average PLI of 29.26% (OP/OC). After giving working capital adjustments, it was determined at 24.12%. Out of the 20 comparables selected by the TPO, the DRP however accepted the assessee's objections and excluded two comparables at Item No.6 and Item No.17 i.e., Coral Hub (Vishal Info.) and Mold Tek. The assessee is objecting to some of the comparables in the final list of 18 comparables after the DRP order. The list of 18 Comparable companies as finally selected are as under : S.No. Company PLI 1. Accentia Technologies Ltd. 43.62% 2. Acropetal Technologies Ltd. (seg) 31.77% 3. Aditya Birla Minacs world wise Ltd -5.76% 4. Asit C Mehta Financial services Ltd 10.31% 5. Caliber Point Business Solutions Ltd. (seg) 10.09% 6. Cosmic Global Ltd., 27.26% 7. Crossdomain Solutions P. Ltd. 29.15% 8. Datamatics Financial Services (BPO) Div. 36.40% 9. e4e Health care Solutions(earlier known as Nittany Outsourcing Services P. Ltd.,) 17.60% 10. Eclerx....
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....., Bangalore vs. ITO, Ward 12(2), Bangalore IT(T.P.)A.No.1316/Bang/2012 dated 14.08.2013. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India ITA No.1316/Bang/2012 Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a comparable owing to extra ordinary events that took place during the previous year. The Tribunal upheld the order of the DRP observing as follows :- "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 objection placed by the....
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....ace. 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." 14.1.2 We have considered the submissions of the ld. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. Similar View was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. It is clear that during the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a comparable. We therefore hold that this company cannot be considered as a comparable. ACROPETAL TECHNOLOGIES LTD. (Seg.) 14.2.1 This company is listed at Sl.No.2 of the comparables chosen by the TPO. As far as this company is concerned, the objection of the assessee is that this company is not functionally comparable. The assessee is a BPO company that provides CAD/ CAE s....
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....e with operating profits by total cost after adjustments of working capital was shown at 26.51% by the TPO. Assessee objected to the comparable on the reason that it fails employee cost filter. The employee cost shown was at Rs. 1.17 crores which is 19.96% of the operating revenue of Rs. 5.87 crores. It was submitted by the learned Counsel that employees cost filter determined by the TPO was between 45% to 60% whereas, this company has only 19.96% as employee cost. Accordingly, this company is not a comparable company as it may be outsourcing the work. 14.3.2 The learned D.R. however, submitted that assessee has accepted the same in the TPO proceedings. Therefore, should not be excluded now. 14.3.3 While there was no objection for assessee objecting to the comparable even at a later stage when it comes to know of new facts, what we noticed is that the assessee's objections before the DRP have not been addressed by the DRP. It is for the TPO to determine whether this company falls within the filters as adopted by the TPO himself. If the company fails the employee cost filter, then the same cannot be accepted as a comparable company. In order to examine this aspect, we are of t....
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....ompany, we accept the contention of the assessee that this company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, which is distinct from the nature of services provided by the assessee." 14.4.2 We are of the view that in the light of the decision of the Hyderabad Bench referred to above, this company cannot be regarded as a comparable for the reason that it was having extraordinary event and super normal profits. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. GENESYS INTERNATIONAL CORPORATION LTD. 14.5 This company is listed at Sl. No.12 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the stand of the assessee has been that this company is functionally not comparable and that it has a different employee skill set and that this company performs R&D services and also owns intangibles. This company is a geospatial services content provider specialising in land based technologies. From the notes to accounts of this company, it is seen that this company is engaged in providing g....
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....vision is similar to assessee the same can be considered after proper FAR analysis. Therefore we are of the opinion that TPO/AO can reconsider the comparables after giving due opportunity to assess and fairly analyzing its objections. In case the data (segmental or unit) is incomplete or functional profile etc are different AO/TPO should exclude the same. With these observations the issue of selection of these companies as comparables is restored to TPO/AO to do the needful. 15. In ground no 10 assessee is seeking adjustment for differences in functions and risks undertaken. With reference to the risk adjustment, it was the submission of the assessee that assessee functioned under a limited risk environment with most of the risks being assumed by its AEs and comparables selected for analysis include companies which have fairly diversified areas of specialisation, bearing risks akin to any third party independent service provider. Since assessee is operating in a risk mitigated environment vis-à-vis the comparable companies performing entrepreneurial risk taking functions, the assessee seeks adjustment for the risk being taken by the comparable, whose profit would be more ....
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....application of the above decisions and facts herein are to be examined vis-à-vis the assessee's business model, we, without giving any direction with reference to the risk adjustment and amount of risk adjustment required, restore the matter to the file of the Assessing Officer to re-examine this adjustment issue afresh, after considering the assessee's submissions and decide the issue in accordance with the principles on the subject. 16. Ground No.12, in TP issues, is with reference to inclusion of reimbursement transactions as part of operational cost. It was submitted that the assessee has paid certain amounts towards travel, air fare and site expenses relating to employees of AE travelling to India for business purposes. Similarly, the AEs also pay certain expenses of the assessee which were reimbursed to the AE. It was the submission of the assessee that these amounts were adjusted at cost, without mark up as the assessee or AE paid the amount on behalf of the other for administrative convenience and no significant additional functions are being performed in these transactions. Even though these transactions are considered as international transactions for the purpos....
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....ly the cost related to the transaction with the Associated Enterprises has to be considered and accordingly, we approve that segmental financials is to be considered for the purpose of arriving at the net margin on the international transaction with the assessee's enterprise in respect of software development services. In that process, bad debts/ reimbursements has to be excluded and segmental profitability has to be adopted. We find support in this behalf from various decisions of the Tribunal relied upon by the learned counsel for the assessee duly filing copies thereof in the paper-book, which have been noted hereinabove. That being so, the TPO should have determined the Arms Length Price for the international transactions with associated enterprises considering only the operating cost allocable to the Associated Enterprises segment. Since the assessing officer had no occasion to verify the veracity of the segmental financials prepared by the assessee company, for limited purpose, we direct the assessing officer to verify the segmental financials prepared by the assessee company and adopt the same for arriving at the net margin on the international transaction with AEs in re....
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....exchange gain on account of fluctuation qua exports business is eligible for exemption u/s 10B. Co ordinate bench at Hyderabad Tribunal in assessee's own case for AY 2006-07 held as follows: "27. Since this issue is no longer res integra and since foreign exchange gain is on account of fluctuations of the foreign exchange received for the services rendered by the assessee, this has to be treated as business income and it has to he considered as profits of the business for computing the deduction under s.10A of the Act. The Assessing Officer is directed to treat accordingly. The ground is considered as allowed. " The facts being similar, we direct AO to treat Foreign exchange gain as business income and allow the deduction accordingly. Ground 14 is allowed. 20. In ground No.15, assessee has challenged the reduction of communication charges of Rs. 1,38,24,765 from the export turnover without reducing it from the total turnover while computing deduction u/s 10A of the Act. 20.1. We have heard submissions of the parties and perused the material on record. This issue is squarely covered in favour of the assessee by the judgment of Hon'ble Bombay High Court in case of CIT....