TaxTMI 
TaxTMI 
TaxTMI 
2015 (11) TMI 1592
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....the learned AO have erred on facts and in law in confirming the action of the TPO making an adjustment amounting to Rs. 39,779,596 to the Arm's Length Price ("ALP") of the international transactions of the Appellant, and upholding the ALP of 27.41 percent as proposed by the TPO. In doing so, the Honorable DRP and learned AO have erred in upholding the following action of the TPO: 2.1 rejecting the Transfer Pricing (TP") documentation maintained and detailed benchmarking analysis conducted by the Appellant; 2.2 disregarding the multiple/prior year data considered by the appellant in determining the ALP and adopting the financial data for a single year (i.e. the Financial Year (FY) 2006-07) of the comparable companies despite the fact that the same was not available to the appellant at the time of preparing the TP documentation; 2.3 Rejecting certain comparable companies identified by the appellant in its TP study using unreasonable comparability criteria and contrary to facts as evidenced by the audited financial statements of the said companies. 2.4 conducting a fresh search by rejecting/ modifying filters adopted by the Appellant. Further, application of additional fil....
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....s preferred by the appellant." 3. Ground No.1 and 2.1 are general in nature and do not require any specific adjudication. 4. At the time of hearing, learned AR of the assessee has stated that the assessee does not press ground Nos.2.2, 2.3, 2.6 to 2.10 and the same may be dismissed as not pressed. The learned departmental representative has raised no objection if these grounds as prayed by the assessee are dismissed as not pressed. Accordingly, ground Nos.2.1, 2.3, 2.6 to 2.10 are dismissed being not pressed. 5. Ground No.2.4 and 2.5 regarding transfer pricing adjustment and comparability of the companies selected by the TPO. 6. The assessee is a wholly owned subsidiary of Flextronics International Asia Pacific Ltd., Mauritius and engaged in the manufacturing of printed circuit board assembly which has application in the telecom, industrial electronics and consumer product segments. The assessee also operates support services division for providing back-office services relating to accounts, payable process and human resource related maintenance. The assessee has reported the financial results as well as segmental details for the year under consideration as under: Financial resu....
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....rvices Ltd. (Now known as Aditya Birla Minacs Worldwide Ltd.) 11.98% Apart from accepting some of the companies selected by the assessee, the TPO has also carried out a search and added 22 more comparables. Thus, the final list of comparables considered by the TPO consisting of 27 companies is as under: Sl. No. Company Name Sales (Rs.cr.) GP to Total Cost% 1 Accetia Technologies Ltd (Seg.) 16.57 30.61% 2 Aditya Birla Mimics Worldwide Ltd (earlier Transworks Information Services Ltd) 1968.06 11.98% 3 Allsec Technologies Ltd 113.28 27.31% 4 Apex Knowledge Solutions Pvt. Ltd 6.64 % 12.83 5 Appollo Healthstreet Ltd 47.84 13.55% 6 Asit C.Mehta Financial Services Ltd. 6.09 24.21% 7 Bodhtree Consulting Ltd. (Seg.) 2.94 29.58% 8 Caliber Point Business Solutions Ltd 39.3 21.26% 9 Cosmic Global Ltd 4.28 12.40% 10 Datamatics Financial Services Ltd (Seg.) 2.92 5.07% 11 Eclerx Services Ltd 86.12 89.33% 12 Flextronics Software Systems Ltd (Seg.) 12.93 8.62% 13 Genesys International Corporation Ltd 19.7 13.35% 14 HCL Comnet Systems & Services Ltd (Seg.) 260.18 44.99% 15 1 C R A Techno Analytics Ltd (Seg.) 7.23 1....
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....The company is also engaged in consulting services and process outsourcing as well as in the activity of process reengineering and automation apart from middle office and back office support to capital market. Therefore, keeping in the diversified high-end services, this company cannot be considered as functionally comparable with the assessee. In support of his contention, he has relied upon the decision of the Special Bench of the Mumbai Tribunal in the case of Maersk Global Services (147 ITD 83). 8.1.1 On the other hand, learned Departmental Representative has submitted that this company is undisputedly in the business of ITeS and therefore, the nomenclature that of KPO will not make it functionally different from the assessee. He has relied upon the orders of the authorities below. 8.1.2 We have considered the rival submissions as well as relevant material on record. We find that the company Eclerx Services Ltd. is engaged in diversified activity of providing services including analytic services and data process solutions to its global clients. The service provided by Eclerx Services Ltd., is in various areas including capital market and therefore, the services are in the nat....
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....ntrol over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP. Thus it is clear that the Special Bench found that this company is not comparable with BPO company which are engaged only in low end services of data processing. According....
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....d in para.10 to 10.3 as under: "10. We have considered the rival submissions and relevant material on record. The TPO has rejected this comparable because the financial data for the Financial Year 2007-08 were not available in the public domain and hence, if was held that this company is not a suitable comparable. There is no dispute that the data furnished by the assessee are regarding the financial results as on 30.6.2007. Therefore, as far as the financial year 2007-08 is concerned, the data available were only for 3 months. 10.1 As per Rule 10B(4), the data to be used in analysing the comparability of or uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Therefore, it is mandatory for the purpose of comparing the data of an uncontrolled transaction with an international transaction that the same should relating to the financial year in which the international transaction has been entered into. The information, data and documents should be contemporaneous. 10.2 Undisputedly, the final accounts of Arix Consultants Pvt Ltd are prepared on 30th June; therefor....
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....ected by the assessee, however, the assessee has raised objections against this company even before the TPO and further before the DRP. Therefore, this company is functionally different and has to be excluded from the list of comparables. The learned AR of the assessee 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 ....
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....ns primarily relate to providing business process management services to organizations that outsource their business processes. Accordingly. revenues represented along industry classes comprise the primary basis of segmental information set out in these financial 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. 8.4 Mapple ....
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....n going through the said order, we find that the Hyderabad Bench of the Tribunal has considered the decision of the Tribunal at Delhi in the case of ITO Vs. CRM Services India Pvt. Ltd., in ITA No.4068 of Del 2009 dated 30.06.2011 wherein it was held that the financial results of these two companies cannot be accepted as they were under serious indictment. Thus it is seen that the decision of the Tribunal in the case of CRM services relates to assessment year 2007-08 and the decision of the Hyderabad Bench also is for the assessment year 2007-08. Therefore, if the results of these two companies cannot be accepted for the same assessment year in the case of another company, we are unable to see how they can be taken as comparables in the case of the assessee herein for the very same assessment year. Therefore, we direct the TPO to exclude these two companies also from the list of comparables. As far the issue of considering the foreign exchange fluctuation as operating revenue is concerned, we hold that this amount also is to be considered as part of operating revenue in view of the decision of this Bench of the Tribunal in the case Trilogy E-Business Software India Pvt. Ltd. Theref....
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....its entire business comprised of providing only structural engineering services to various clients. Further, information of M/s Mold Tek Technologies Ltd available on their website is furnished in the form of printout at pp.158 to 165 of the paper book and a perusal of the same shown that it is a leading provider of engineering and design services with specialization in civil, structural and mechanical engineering services. It is stated to have a strong team of skilled resources with world class resources and skill sets. It is also stated to have consistently helped the clients to cut down design and development cost of civil, structural, mechanical and plant design by 30-40 percent and delivered technologically superior outputs to match and exceed expectations. It is claimed to have in-house software development team, quality control training and trouble shooting facilities. M/s Mold Tek is also rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of M/s Mold....
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..... was already found to be involved in providing structural engineering services coupled with extraordinary event of amalgamation and demerger. Following the decision of this Special Bench in case of M/s Maersk Global India Pvt. Ltd. (Supra),Mumbai Benches the Tribunal in the case of M/s Lionbridge Tech. Pvt. Ltd(Supra) also took a similar view in para-7 as under: "7. By applying the arithmetic mean of 30.10% an adjustment of Rs. 10,39,54,664/- was sustained by DRP. Out of the comparables taken by the DRP, learned AR has contended against three companies namely; Mold Tek Tech.Ltd. Exclerx Service :Ltd and Acropetal Tech.Ltd which were alleged to be functionally different from the assessee company being a low end back office support service provider. We found that Mold Tek Tech.Ltd provides KPO services in the field of engineering. We also found that Mold Tek has demerged its subsidiary Mold Tek Plastics Ltd w.e.f. April, 2007 which is an extra-ordinary event. Furthermore, since the Mold Tek is into providing KPO engineering services, hence, cannot be functionally compared with the assessee company which is engaged in the provision of back office operations. For this purpose, relia....
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.... ITES provider, cannot be considered as a good comparable. In support of his contention, he has relied upon the following decisions: i. Rampgreen Solutions Pvt. Ltd.(TS-387-HC-2015-TP) ii. First Advantage Offshore Services Pvt. Ltd. (ITA No.1086/Bang/2011) iii. Stream International Pvt. Ltd.(ITA No.8290/ Mum/2011) iv. Goldman Sachs Services Pvt. Ltd. (ITA No.1423/Bang/2010) v. C3i Support Services Pvt. Ltd. (ITA No.2183/Hyd/2011) On the other hand, learned Departmental Representative has relied upon the order of the authorities below. 8.7.1 We have considered the rival submissions as well as relevant material on record. We note that the comparability of this company with ITES providing service provider has been examined by the Tribunal in various cases as relied upon by the learned AR of the assessee. In the case of First Advantage Offshore Services Pvt. Ltd. (supra) it has been held in para.35 as under: "35. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee's own case for the assessment year 2006-07. This Tribunal has held that employee cost filter is to be t....
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....n record. We note that in case of 3DPLM Software Solutions Ltd, (Supra), this Tribunal has considered the functional comparability of this company in para-12.4.1 and 12.4.2 as under; "12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard,....
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....High Court in the case of CIT vs. Himatsinghika Seide Ltd. (156 Taxman 151) and submitted that that the decision of the jurisdictional High Court has been confirmed by the Hon'ble Supreme Court and the SLP filed by the assessee has been dismissed. 10.3 We have considered the rival submissions as well as the relevant material on record. There is no dispute that the Hon'ble jurisdictional High Court in the case of Himatsinghika Seide Ltd. (supra) had decided this issue in favour of the revenue and against the assessee. However, it is pertinent to note that the said decision of the Hon'ble jurisdictional High Court was in respect of the dispute for the assessment year 1994-95 and there is an amendment in the provisions of sec.10A and 10B of the Act vide Finance Act, 2000 w.e.f. 1/4/2001. By virtue of the amendment and substitution of provisions of sec.10A and 10B, the incentive u/s 10A and 10B was no longer in the nature of exemption but it is in the nature of deduction. By considering the amendment/substitution of sec. 10A and 10B vide Finance Act, 2000 w.e.f. 1/4/2001, Hon'ble jurisdictional High Court vide judgment in the case of Yokogawa India Ltd.(supra) has held in ....
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....ter the deduction under Chapter VI-A that the total income of an assessee is arrived at. Chapter VI-A deductions are the last stage of giving effect to all types of deductions permissible under the Act. At the end of this exercise, the total income is arrived at. Total income is thus, a figure arrived at after giving effect to all deductions under the Act. There cannot be any further deduction from the total income as the total income is itself arrived at after all deductions. 19. From the aforesaid discussion it is clear that the income of 10A unit has to be excluded before arriving at the gross total income of the assessee. The income of 10A unit has to be deducted at source itself and not after computing the gross total income. The total income used in the provisions of s. 10A in this context means the global income of the assessee and not the total income as defined in s. 2(45). Hence, the income eligible for exemption under s. 10A would not enter into computation as the same has to be deducted at source level. 2nd substantial question of law 20. Prior to the introduction of sub-s. (6) of s. 10A and s. 10B by the Finance Act, 2000, which came into effect from 1st April, 2....
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....ncentives in respect of such units sub-s. (6) in ss. 10A and 10B has been amended to do away with the restrictions on the carry forward of business losses and unabsorbed depreciation. The amendments have been brought into effect retrospectively from 1st April, 2001 and have been made applicable to business losses or unabsorbed depreciation arising in the asst. yr. 2001-02 and subsequent years." 22. It is interesting to note that such relaxation has not been made in s. 10C which provides for exemption in respect of profits of certain undertakings in north eastern region. This makes clear the legislative intention of providing relaxation wherever it deems fit and in the present case, such relaxation has been made in s. 10A but not in s. 10C. 23. It is to be noted that the aforesaid amendment read with the Board circular does not militate against the proposition that the benefit of relief under this section is in the nature of exemption with reference to the commercial profits. However, in order to give effect to the legislative intention of allowing the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income....
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....rward. In coming to the aforesaid conclusion, the AO expressed the opinion that provisions of section 10B are deduction provisions and therefore effect will have to be given to the provisions of section 72 of the Act, even in respect of profits of the 10B unit. Accordingly, the claim of the assessee for carry forward of loss of non-10B unit was not allowed by the AO. On appeal by the assessee, it was contended that the provisions of section 10A and section 10B are exemption provisions and therefore the profit of 10A and 10B units will not enter the computation of total income at all and therefore the profits of these units need not be set off against the loss of non-10B unit by invoking the provisions of section 72 of the Act. The CIT(Appeals) did not agree with the contention of the assessee and in doing so, he placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Himatsingike Seide Ltd., 286 ITR 255 (Kar). In the aforesaid decision, the Hon'ble High Court has taken the view that deduction u/s. 10B has to be allowed after set off of unabsorbed depreciation and unabsorbed investment allowance. The Hon'ble Court took the view that the aforesaid pr....
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....spect of newly established undertaking in free trade zone etc.,-(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the Previous-year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :" (emphasis supplied) 64. The expression "Deduction" and "shall be allowed from the total income of the Assessee" used in the aforesaid provisions was considered by the Hon'ble High Court and it held in para 13 to 15 of its judgment that the expression " shall be allowed from the total income of the Assessee" does not mean total income as defined u/s.2(45) of the Act but that expression means "profits and gains of the STP undertaking as understood in its commercial sense or the total income of the STP unit. Thus the view expressed is that income of the STP undertaking gets quarantined and will not be allowed to be set off against loss of either another STP undert....
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.... Civil Appeal No.1501 of 2008 dated 19.9.2013 against the aforesaid decision of the Hon'ble Karnataka High Court, the Hon'ble Supreme Court observed as follows while dismissing the appeal:- "Having perused the records and in view of the facts and circumstances of the case, we are of opinion that the civil appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly." 67. Thus the ratio has to be confined to the facts and circumstances of the case. The aforesaid observations have to be confined to the facts of that case and as applicable to a case where brought forward losses and depreciation of the very same STP undertaking are not adjusted while arriving at the profits of the 10B unit for allowing deduction u/s.10A/10B of the Act and not in respect of brought forward losses and depreciation of other undertakings/non-10A/10B units. S. 10A/10B(6) as amended by the FA 2003 w.r.e.f. 1.4.2001 provides that depreciation and business loss of the eligible unit relating to the AY 2001-02 & onwards is eligible for set-off & carry forward for set-off against income post tax holiday which means that they need not be so set off as mandated in the decision of the H....