TaxTMI 
TaxTMI 
2016 (3) TMI 356
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...."Transfer Pricing Officer" or "TPO") ) to the extent prejudicial to the Appellant which was bad in law and in violation of principles of natural justice; 2 That the learned Panel! AO erred in upholding the arm's length price as determined by the TPO and thereby; i Conducting a fresh benchmarking analysis using non-contemporaneous data; ii Rejecting the comparable companies arrived in the Transfer Pricing documentation; iii Benchmarking transactions of captive service providers with fully fledged entrepreneurs without considering the differences in functions performed, assets employed and risks undertaken by the assessee; iv Upholding the additional filters applied arbitrary during the course of a fresh comparability analysis for determining the arm's length price; v accepting companies without considering the turnover and size of the assessee and comparables; vi rejecting companies having export revenue less than 25% of total operating revenue; vii rejecting companies with different year ending; viii rejecting companies having revenue from Information Technology Enabled Services less than 75% o....
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....d Nos.2(i), (vi), (vii) and (viii), ground Nos.3, 4 and 6 of the assessee's appeal are dismissed. 6. Ground No.2(ii) to (v), (ix) and (x) regarding transfer pricing adjustment made by the Transfer Pricing Officer (TPO) by selecting a different set of comparable. The assessee was incorporated in March 2000 and engaged in the business of end to end BPO services. The assessee has entered into service agreement dated 1/4/2005 with its Associated Enterprise (AE) to provide 24/7 contact centre outsourcing service. AE of the assessee M/s. ISPL, iSeva Inc. incorporated in November 1999 in United States of America and is holding company of the assessee. During the year under consideration, the assessee has reported the financial results and segmental results including international transactions as reported u/s 92C reproduced by the TPO at page 3 as under: Financial Results for the F Y 2008-09 Income (Excld other income) 759,115,479 Total Expenditure 717,227,484 Less : Interest 12,818,899 Operating Expenditure 704,408,585 Operating Profit 54,707,894 OP / OC 7.77% Segmental financials Particulars AE Non-AE Income from Services....
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....med Technologies India Ltd. The company qualifies all the filters applied by the TPO. Thus the company is considered as a comparable. 7 Infosys BPO Ltd. The company qualifies all the filters applied by the TPO. Thus the company is considered as a comparable. 8 Inhouse Productions Ltd. Export to sales is just 0.09%, hence rejected. 9 KPIT Cummins Global Business Solutions Ltd. RPT is 94.70%, hence rejected. Solutions Ltd. 10 NIIIT Smarserve Ltd. Rejected: RPT> 25%. 11 R Systems International Ltd. This company has year ending other than March. Reliable financial data will not be available for a 12 month period. This cannot be used as a comparable. The assessee arrived at the mean margin of the comparables at 9.30% in comparison to the operating margin of the assessee at 20.53%. Thus, the assessee claimed that the international transactions of the assessee are at arm's length. The TPO carried out the fresh search and selected 8 comparables as under: Sl.No. Name of the Company Margin 1 Infosys BP0 Ltd. 24.41% 2 Aditya Birla Minacs Worldwide Ltd. 23.86% 3 Microland Ltd,(both segments) 1 ....
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....to net foreign exchange gain of sale proceeds received from the AE. Thus, the learned AR of the assessee has submitted that the foreign exchange gain received from AE is part of the income from service provider to the AE and therefore should be part of the profit margin of the assessee and cannot be excluded for the purpose of operating margin to be compared with the comparables . In support of his contention, he has relied upon the decision of the Mumbai Bench of the Tribunal dated 26/4/2013 in case of Rusabh Diamonds vs. ACIT ITA No.7217/Mum/2012 and submitted that that the Tribunal, while considering an identical issue of foreign exchange gain being part of the operating profit has held that if the foreign exchange gain is earned by the assessee in respect of the import/export activity, then the same will be treated as part and parcel of the operating profit. On the other hand, learned Departmental Representative has referred to the finding of the DRP at page 64 of the directions and submitted that the DRP has considered the objections of the assessee and held that the foreign exchange gain is not dependent upon the operation carried out by the assessee but it is a resu....
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.... The assessee has entered into forward contracts for the purpose of hadging of foreign currency exposure on export and import of diamonds with AEs. Therefore, the hadging of foreign currency has nexus with the export and import activity of the assessee and the exposure of the assessee in relation to the export and import. The OECD guidelines in para 2.82 are as under; "2.82 Whether foreign exchange gains and losses should be included or excluded from the determination of the net profit indicator raises a number of difficult comparability issues. First, it needs to be considered whether the foreign exchange gains and losses are of a trading nature (e.g. exchange gain or loss on a trace receivable or payable) and whether or not the tested party is responsible for them. Second, any hedging of foreign currency exposure on the underlying trade receivable or payable also needs to be considered and treated in the same way in determining the net profit. In effect, if a transactional net margin applied to a transaction in which the foreign exchange risk is borne by the tested party, foreign exchange gains or losses should be consistently accounted for (either in the calculation of ....
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....of the assessee has referred to Annual report of Accentia Technologies Ltd., and submitted that this company has acquired M/s.Oak Technologies Inc, USA during the year under consideration and therefore, there is an extraordinary event of acquisition of another company. He has thus submitted that in view of the extraordinary event of acquisition, this company cannot be considered as a good comparable of the assessee. Apart from this objection, learned AR of the assessee has submitted that even otherwise this company is not functionally comparable with the assessee so far as services provided to the AE. He has referred to various business transactions and services provided by Accentia Technologies Ltd., and submitted that this company is in the various segments of activities like medical transcription, medical coding, medical billing, etc. The activity of medical transcription and medical coding is entirely different from the service of contact centre service provided by the assessee to its AE and therefore, this company cannot be considered as functionally comparable with the assessee. The learned AR of the assessee has referred to the revenue earned by the said company and submitte....
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.... an extraordinary event having impact on the revenue as well as business activity of Accentia Technologies Ltd. Accordingly, this argument of the learned AR of the assessee is rejected for want of complete facts. iii) As regards the functional dissimilarity, we note that Accentia Technologies Ltd is engaged in diversified activity of medical transcription, medical coding, billing, receivable management. Thus it is clear that the said company is engaged in the healthcare activity and providing BPO service in the healthcare sector, that too by providing specific services of medical transcription, medical coding, medical billing etc. We note that these activities are quite different from the service of contact centre provided by the assessee to its AE which is purely in the nature of call centre. Therefore, we are of the view that the company Accentia Technologies Ltd cannot be considered as a functionally comparable company with the services provided by the assessee to its AE. The TPO is directed to exclude this company from the set of comparables. 11.2. Eclerx Services Ltd. The learned AR of the assessee has submitted that this company is engaged in the high-end services an....
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....f Maersk Global Services (supra) in paras.82 & 83 as under : "82. In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt.....
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.... has pointed out that this company is having more than 17000 employees in comparison to only 6 employees of the assessee. Therefore, even on the parameter of the scale and strength of employees, this company cannot be considered as functionally comparable with that of the assessee. Further, he has referred to the Annual Report of the company and submitted that during the year under consideration, there is amalgamation of PAN Financial Services India Pvt. Ltd. w.e.f. 1/4/2008. The scheme of amalgamation has been approved by the Hon'ble High Court on 6/4/2009 and 10/3/2009. Therefore, there is an extraordinary event of amalgamation during the year under consideration and hence this company cannot be considered as a good comparable for the purpose of determining the ALP. Apart from the above objections, learned AR of the assessee has further submitted that this company is engaged in providing business process management services to organizations with outsourcing their business process. Therefore, this company is in a different kind of business activity in providing the management service of business processes and is not directly providing any business process outsource services. Thus,....
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....statements. Secondary segmental reporting is performed on the basis of the geographical location of customers. The accounting principles consistently used in the preparation of the financial statements are also consistently applied to record income in individual segments. These are set out in the note on significant accounting policies. Thus it is clear that the revenue earned by this company is from the activity inclusive of operation primarily relates to providing business process management services to other organization engaged in outsourcing business process. This company is not engaged in direct activity of BPO but it provides service to BPOs and that too management service to BPO. Therefore, in our considered view, this company is engaged in a different nature of activity to that of the assessee provided to its AE. Accordingly, we direct the AO/TPO to exclude this company from the list of comparables. 11.4 Cosmic Global Ltd. The learned AR of the assessee submitted that the assessee raised objection against inclusion of this company in the list of comparables before the TPO on the ground that this company has major revenue from translation services. Therefo....
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....s in the entirely different nature of activity and cannot be compared with the activity of providing contact centre of the assessee to its AE. In the case of Lam Research (India) Pvt. Ltd. (supra) the coordinate bench of this Tribunal had occasion to examine the comparability of this company in para. 34 as under: "34. With respect to Cosmic Global Ltd., Hyderabad bench of ITAT in the case of Capital IQ Information Systems (India) P. Ltd., in para 19 of its order, had held as under Cosmic Global Ltd. 19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable....
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....enue of BPO segment of Cosmic Global Limited at Rs. 27. 76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables." In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. Accordingly, we direct that Cosmic Global Ltd., also be excluded from the list of com pa rabies. " In view of the above discussion as well as the order of the coordinate bench of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables for the purpose of determining the ALP. 12. Since the assessee has not advanced any argument in respect of other comparables, therefore, we do not propose to decide the issue of comparability of other comparables selected by the TPO. Accordingly, the AO/TPO is directed to recomputed the ALP after excluding the above 4 companies from the set of comparables. Further, the TPO has also to consider the ben....
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....from export turnover as well for the purpose of computing deduction u/s 10A. The CIT(A) has followed the judgment of the Hon'ble jurisdictional High Court in the case of ACIT vs. Tata Elxsi (349 ITR 98). It is apparent that this issue is now covered by the judgment of the Hon'ble jurisdictional High Court in the case of Tata Elxsi (supra) wherein the Hon'ble High Court has held as under: "From the aforesaid judgments, what emerges is that. there should be uniformity in the ingredients of both the numerator and she denominator of the formula, since otherwise it would produce anomalies or absurd results. Sec. 10A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of s. 80HHC, the export profit is to be derive....