TaxTMI 
TaxTMI 
2015 (6) TMI 98
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.... DRP erred both on facts and in law in confirming the Ld. AO/ TPO's action of making an adjustment of Rs. 17,324,009 to the income of the appellant holding that its international transactions of provision of Back Office and and Vessel Planning Support Services do not satisfy the arm's length principle envisaged under the Act. In doing so the Ld. DRP has grossly erred in agreeing with the Ld. TPO's action of: 2.1. aggregating the activities of Vessel Planning Support Services and Back Office Support Services carried out by the appellant for the purpose of economic analysis, based on incorrect presumptions and surmises, thereby ignoring the fact that these two activities have distinct functional profile and hence should be analysed separately; 2.2. resorting to arbitrary rejection of low-profit! loss making companies included in the comparable set, based on erroneous and inconsistently applied filtration criteria/ reasons, thereby retaining only high-profit making companies (in the final comparable set) for benchmarking the appellant's international transactions; not appreciating the functional profile of the appellant and in applying inconsis....
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....grounds as may be considered necessary either before or during the hearing." 2. The brief facts of the case are that the assessee filed its return of income declaring income of Rs. 11,68,763/- on 21.11.2006. Notice under section 143(2) of the Income-tax Act, 1961 was issued on 10.10.2007 and duly served. In response to this notice, Ms Neelu Bahl and Shri Anuj Mahajan, CAs, appeared from time to time and filed details. Books of accounts were produced and examined on test check basis. The case was discussed with the authorised representatives. During the relevant previous year the assessee was engaged in the business of providing vessel planning support services and other back office support services to CSAV Group companies. The assessee entered into the following international transactions with its Associated Enterprises, as defined in section 92A of the IT Act: Name of the AE Description of transaction Amount received ALP declared by the assessee NCLL Provisions of services 76223478 76223478 CSAVSA Provision of services 62898208 62898208 CNP Provision of services 14717006 14717006 CSVSA Reimbursement of Expenses received 2....
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....ions of assessee, AO held that the total income of the assessee has to be determined on the basis of ALP determined by the TPO. The assessee did not exercise the option of taking the ALP at plus/minus 5% of the arithmetic mean of ALPs based upon different comparables. The AO has to compute the total income of the assessee as per the ALP determined by the TPO. AO referred the judgment of the Hon'ble Delhi High Court in the case of Moser Baer vs. Additional Commissioner of Income-tax in Writ Petition (Civil) no. 6974/2008 wherein it has been held that "The Assessing Officer, after the amendment brought about by virtue of Finance Act, 2007, has no choice but to proceed to compute total income of the assessee under sub-section (4) of section 92C in conformity with the ALP determined by the TPO." The AO rejected this submission of the assessee and the total income of the assessee was assessed on the basis of ALP of Rs. 15,38,38,692/- as determined by the TPO. 2.3 AO made the addition of Rs. 1,73,24,009/-, being the difference between the Arm's Length Price and the price charged by the assessee and added to the income of the assessee u/s 92C(4) of the IT Act. 2.4 The Draft ....
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....he appellant's return of income for the relevant Assessment Year. 7.2 For the purpose of establishing compliance with the arm's length standard, the appellant segregated its income from provision of services into: a) Provision of vessel planning support services hereinafter referred to as 'vessel planning segment', and b) IT enabled back-office support services hereinafter referred to as 'back-office segment'. 7.3 The assessee's international transactions of reimbursement of expenses have been accepted by the Transfer Pricing Officer (Ld. TPO') to be-at arm's length. 7.4 For establishing the arm's length nature of its operations in the vessel planning segment and back-office segment, in its Transfer Pricing (TP) Report for the relevant FY, the assessee adopted Transactional Net Margin Method ('TNMM') as the Most Appropriate Method ('MAM') using the return on total cost (OP/TC margin) as the Profit Level Indicator ("PU"). 7.5 Using multiple year data (for FY 2003-04, FY 2004-05 and FY 2005-06, to the extent available at the time of the documentation), the appellant, in its TP documentation, carried out the benchma....
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....pon the set of top 5 high profit making comparable companies with a mean OPITC margin of 28.02 percent, thereby arriving at a TP adjustment of Rs. 17,324,009. 7.10 Pursuant to the order passed by the Ld. TPO, the Ld.AO issued a draft order computing the total income, of the asssessee at Rs. 18,492,770 after considering the TP adjustment of Rs. 17,324,009. 7.11 Aggrieved with the draft assessment order, the assessee filed its detailed submissions in the form of objections before the Learned Dispute Resolution Panel CDRP') as provided in section 144C of the Act. However, the Ld. DRP upheld the adjustment made by the Ld. TPO. (refer page no. 4 of the order of the DRP dt. June 3, 2010) 8. Now, with regard to the captioned appeal, the appellant wishes 'to submit the following against the Order of the Ld. DRP/Ld. TPO: A. 'Cherry picking' in selection of final comparables by the Ld. TPO Inclusion of High margin Companies 9. The Ld. TPO has undertaken a detailed analysis of the 13 comparable companies relied upon by the appellant, the Ld. TPO has erred in rejecting certain companies considered comparables by the appellant and ultimately resorted to a set of h....
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.... 12. The functions carried out by two of the comparable companies, i.e., Indus Networks and Twinstar Software Exports, rejected by the Ld. TPO on account of functional dissimilarity vis-a-vis Cosmic Global Services are given in Table 5 below for ready reference: Table 5: Functions performed by Indus Networks (ITES Segment) and Company name Cosmic Global Services Indus Networks Ltd. (ITES Segment) Twinstar Software Exports Functions performed The company's activities being IT enabled services include medical transcription, translation and software development. (for relevant extracts please refer Annexure 1 of this submission) Company's operations primarily comprise of providing software services, IT enabled services, manufacturing and others. (for relevant extracts please refer Annexure 2 of this submission) For the purposes of the benchmarking analysis the profitability of the company's ITES business segment has been considered. (please refer page no. 139 of the Paper Book) ITES in the nature of back office operation and medical transcriptions (domestic sales and exports) constitute the company's entire operations. (for relevant extracts please refe....
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....n please refer page no. 141 to 142 of the Paper book). Given such a low wages/ sales ratio, Vishal does not appear to be a service provider at all but is more of distributor. 18. Further, during the relevant year, the company's parent company Amex Information Technologies Limited ('Amex') undertook certain restructuring exercise resulting in its entire ITES operations being conducted through Vishal Information Technologies. 19. As a result of the restructuring exercise, Amex sold its 100% stake in Basiz Fund Accounting Services Limited (a separate entity formed by conversion of the Fund Accounting KPO & E Accounting division of Amex) to Vishal at market value. Further, Amex's E Publishing & Digital Library divisions were also shifted to Vishal during the said year. 20. With regard to the business operations of Vishal Information Technologies, the company besides providing IT. enabled services also provides technical services and solutions. For eg in respect of epublishing services being provided, the company has developed automated tools to make such conversion fast and accurate. In respect of digital library services, the company is working on text to spee....
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....sp; "30. Learned Special counsel for the revenue Shri Kapila has vehemently argued that "Datamatics" was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the learned CIT (Appeals) in appeal. Therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins. We are unable to accept above contention. In the first place, these are initial years of implementation of Transfer Pricing Legislation in India and taxpayers as well as tax consultants were not fully conversant, with this new branch of law when proceedings were initiated or even at appellate stage ................. 38. Accordingly on facts and circumstances of the case, we hold that taxpayer is not stopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on....
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....iew of this, we direct the AO exclude this company from the list of comparables." Since the aforesaid decisions of the coordinate benches pertain to the same assessment year, following the view expressed therein, we also direct the AO/TPO to exclude the aforesaid company from the list of comparables. 26. Ld. Counsel of the assessee also stated that the issue in dispute is squarely covered by the decision of the Tribunal in the case of M/s Google India Pvt. Ltd. vs. DCIT passed on 19.10.2012 in ITA No. 1368/Bang/2010 Assessment Year 2006-07 vide order dated wherein the Vishal Information Technologies Ltd. has been excluded from the list of comparables. The relevant finding of the Tribunal in this regard as under:- "15. As regards is issue of (8) Vishal Information Technologies Ltd., we find that, it is adopted by the TPO. The DRP held that Vishal Information Technologies has outsourced its call centre work and, therefore, the employee cost is less than 25% as is the common practice among other ITES services. The TPO as well as the DRP have recorded that in the ITES sector, employees filter of less than 25% alon....