TaxTMI 
TaxTMI 
2014 (10) TMI 862
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....emonstrate that the difference in the working capital deployed is making a difference in margin earned by the assessee and the comparables. 2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal." 2. The relevant facts of the case are that the assessee filed its return on 27.10.2005 declaring an income of Rs. 24,710/-. The said return was processed u/s 143(1) and thereafter picked up for scrutiny by issuance of notice u/s 143(2) alongwith notice u/s 143(1) accompanied by questionnaires etc. The assessee company at the relevant point of time was involved in the business of providing IT enable services in the area of medical transcription to its group companies. The assessee is a 100% EOU under the STP schemes of the department of Electronics, Government of India. The assessee is a subsidiary of Heartland Asia (Mauritius) Limited with 99.99 percent of shareholding held by it and 0.01 percent held by Heartland Medical Information Services Inc., USA. 2.1. The assessee company selected transactional net margin method (hereinafter referred as to "TNMM") wit....
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....terprises and is remunerated on a total cost plus basis for the services performed. During the financial year ('FY') 2004-05 Heartland Delhi provided back office medical transcription services to its associated enterprises ('AE') amounting to INR 133,726,989 at the markup of 10% on total operating cost. 5.2. Transactional Net Margin Method (TNMM) was the most appropriate method. Operating Profit/ Total Cost (OP /TC) was the Profit Level Indicator (PLI). The appellant has selected 22 comparables which had an average PLI of 12%. Therefore, the TP documentation justified the international transaction undertaken by the appellant. 5.3. The TPO has rejected 12 companies from the set of comparables and arrived at the average margin of the comparables at 21.17% and therefore the difference of arm's length margin was added to international transaction of the appellant. 5.4. The appellant has objected to inclusion of two comparables, namely, Nucleus Netsoft & GIS (India) Ltd. and Vishal Information Technologies Ltd. The appellant has objected to the interpretation of proviso to Section 92C(2) of the IT Act and on the use of single year data by the TPO. ....
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....es made by Nucleus Netsoft & GIS India Lid., that the revenues for the period under consideration are not generated by performing the functions akin to those performed by your assessee. Software development cannot be equated with provision of IT-enabled services, due to the differing skill sets, customer requirements and deliverables, leading to varying profit margins. This makes it essential to bifurcate software development and ITES revenues, for purposes of comparing the ITES segment with your appellant. In view of the above, we humbly submit that the company should be rejected as a comparable while determining the arm's length prices of the international transactions undertaken by your appellant. Further, during the FY 2004-05, the company was in the process of being amalgamated with Nucleus Securities Ltd., which finally became effective from April 1, 2005. Your appellant would like to submit that due to the amalgamation, there may be abnormal variations in the financials of the company. It should also be noted that the company has been witnessing abnormal variations in their operating margin when analyzed over a period of three years. For your good self's perusal we h....
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.... production industry. The services include data conversion, microfilming and microfilm scanning, data and document management, data processing, Digital Library Management etc. However, as per the Annual Report of the company (Please refer Appendix-7, page no.958 of paper book) it is evident that the company outsources its work to the third party vendors (percentages of data entry charges and vendor payments to sales are in the range of 50%). A brief snapshot of these payment as a percentage of sales have been provided below for your ease of reference. Particulars 2003-04 2004-05 2005-06 Data entry and vendor payments 76,928,836 113,511,647 114,914,563 Sales 138,822,227 208,233,200 256,4428,476 Data entry charges as a % of sales 55.42% 54.51% 44.81% The above table depicts the percentage of data entry charges are in the range of 45% - 55% of the Sales of the Company. From the aforesaid analysis it may be concluded that the operating model of the company is different from that of your appellant and consequently the margins earned by Vishal Information Technologies Limited, are reflective of the functions performed by ....
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....comparable to your appellant. As indicated, factors such as the controlling stake in the company and synergies accruing from onsite marketing are additional factors that render the company liable for rejection while determining the arm's length margin." Reasons for decision:- 7.1. The appellant is a captive unit of its AE. The entire activity of the appellant is conducted in house whereas Vishal Information Technologies Ltd. outsources its activity. The business model of the appellant is different from this company. For the AY 2005-06, the Hon'ble ITAT in case of Maersk Global Service Center (India) Pvt Ltd (supra) has held that Vishal Information Technologies Ltd. is not a comparable company for the reason that it outsourced its work. As the fact and circumstances of these two cases are similar, respectfully following the decision of the Hon'ble ITAT, I hold that Vishal Information Technologies Ltd. should be excluded from the list of comparables." 3. The finding of the CIT(A) thereon in para 6.1 and 7.1 is extracted for readyreference. The finding in para 6.1 is challenged by way of a specific ground by the assessee in its CO however it was not pr....
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....hal Information Technology as per various orders of the Tribunal rendered by Mumbai and Delhi Benches have consistently for this very assessment year has been rejected as a comparable on the reasoning that it has out sourced its work. Reliance was placed on order dated 09.09.2011 for 2005-06 in ITA No.-7466/Mum/2012 in the case of Maersk Global Service Center (India) Pvt. Ltd. and following this decision the Delhi Benches in orders dated 2.4.2014 and 28.4.2014 at pages 715 and 725 of the Paper Book in the case Techbook International Pvt. Ltd. vs ACIT in ITA No-4990/Del/2011and ITA No. 722/Del/2014 has also directed the exclusion of this comparable despite the fact that it was offered as a comparable by the assessee. It was submitted that even though the said decisions in the case of Techbook International Pvt. Ltd. pertains to 2007-08 and 2009-10 assessment year however the facts remains that in the facts of the present case, the material facts are similar inasmuch it was argued referring to the chart of issues filed which captures the assessee's reliance and case law so as to argue that as the employee cost to sales ratio of 1.38% as against 78.28% of the assessee whose vendor pay....
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....g capital adjustment in order to bring the comparables to the level of the assessee. The TPO whose order is placed at page 254-273 (specific page 269) para 6.4 rejected the same holding that the working capital adjustment based on year end figures may not have sufficient details. Relying upon the OECD Guidelines he held that the reliance placed on year end figures is not appropriate. 8. Aggrieved by this the assessee came in appeal before the CIT(A) who considering the arguments advanced and relying upon the decision of Mentor Graphics (Noida) Pvt. Ltd vs. DCIT (2007) 109 ITD 1 (Del) specific para 27 and OECD guidelines including the decision of the Banglore Bench in Philips Software; the decision of the Delhi Bench in the case of Gain Communication Pvt. Ltd. (ITA No.-1685(Pune) of 2007); Vedaris Technology (Pvt.) Ltd. 131 TTJ 309 specific para 6.2; and also the decision in the Banglore Bench in ITA No1442(BNG)/08 in TNT India Pvt. Ltd. vs ACIT came to the conclusion that in comparing the margins earned by comparable companies vis-à-vis the assessee, difference on account of working capital employed should also be factored into. For ready-reference, we reproduce the relev....
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....l effects of such differences. Significant differences exist in economic circumstances in which the Assessee operates vis-a-vis the comparables. Hence, to improve the comparability of independent companies by eliminating such differences, working capital adjustments can be allowed. The adjustment ensures that the absolute levels of the relevant balance sheet items are normalized. The adjustment resulting from the different levels of accounts receivable and accounts payable between the tested party and the comparable companies can be calculated, as described below. First, determining the difference between the tested party's ratio of accounts receivable to operating costs and the corresponding ratio of accounts receivable to operating costs of each comparable. This difference represents the "excess" or "shortage" of accounts receivable, held by the tested party relative to the comparable companies. Next, multiplying the above difference by an interest rate benchmarked in order to arrive at a figure representing the implicit interest expense or benefit to the comparable due to its different accounts receivable carrying costs. The Prime....
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....2010 & 607/Del/2014 para 7, page no-823 - Nortel Networks India P. Ltd. vs. ACIT-ITA Nos.4765/Del/2011 & 427/Del/2013 para 11.8 page no.829 - Navisite India Pvt. Ltd. vs ITO [ITA No-5329/Del/2012] para 73, page no- 837 - Qualcomm India Pvt. Ltd. vs. ACIT [ITA No.5239/Del/2012] para 41, page no.845 - Cowi India Pvt. Ltd.-ITA No.5052/Del/2010 para 12, page no.861 - Westfalia Separator India vs. ACIT [ITA No.4445/Del/2007] para 14, page no.865 - Mentor Graphics (Noida) Pvt. Ltd.-ITA No.1969/Del/2006 para 27, page no.874 - Vedaris Technology (P.) Ltd. vs ACIT [(2010) 1131 TTJ (Del) 309] para 6.2, page no.883 - Demag Cranes & Components (India) Pvt. Ltd. vs DCIT [ITA No.- 120/PN/2011] para 30, page no.-900 - Capgemini India Pvt. Ltd. vs ACIT [ITA No.7861/Mum/2011] para 6, page no.914 - ITO vs M/s Nextlinx India Pvt. Ltd. [ITA No.454/Bang/2011] para 15, page no.752 - Brigade Global Services Pvt. Ltd. vs ITO [ITA No.1494/Hyd/2010] para 56, page no.997 - Avineon India Pvt. Ltd. vs DCIT [ITA No.1606/Hyd/2010] para 9, page no.762 10.1. In the above background it was submitted that t....
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....challenge by the Revenue. Apart from the general argument which on facts is found to be not correct no infirmity in the working accepted by the CIT(A) has been brought to our notice. In the aforementioned peculiar facts and circumstances being satisfied by the finding arrived at which has been reproduced in the earlier part of this order, we dismiss the departmental ground. 12. In the result the departmental appeal is dismissed. CO-7/Del/2013 13. The assessee has also filed its C.O on the following grounds before us:- "On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) {CIT(A), while disposing the appeal u/s 250 of the Income Tax Act 1961 ('the Act')} has erred in:- 1. Using financial information of the comparable companies relating to the financial year ("FY") 2004-05 although such information was not available to the assessee at the time of preparation of documentation as per the requirement of the Act. 2. Accepting Neucleus Netsoft and GIS India Limited as a comparable company. 3. Not granting comparability adjustments on account of difference in risk assumed by the assessee vis-....