TaxTMI 
TaxTMI 
2015 (10) TMI 2576
X X X X Extracts X X X X
X X X X Extracts X X X X
....w in sustaining addition to the income of the appellant to the extent of Rs. 18,85,44,612 on account of adjustment to the arm's length price of the 'international transactions' of transaction processing and interest and voice based customer care services (hereinafter referred as IT enabled services). 2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding the appellant company as a captive unit of' the foreign associated enterprises and not an independent service provider. 2.1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that the appellant is to be considered as a hybrid unit having elements both from captive and entrepreneurial units and accordingly, the compensation received by the appellant should contain an clement of fixed return and a variable component based on risk assumption. 2.2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the arrangement between the appellant and the associated enterprises was not that of a captive service provider inasmuch as the appellant is responsible for effective utilization of its reso....
X X X X Extracts X X X X
X X X X Extracts X X X X
....im of depreciation, (ii) capacity utilization and (iii) certain risks, no appropriate adjustment could be made while determining the arms length price of 'international transactions' . 5. That the Commissioner of Income-tax (Appeals) erred on facts and in law in applying operating results for the relevant previous year as opposed to the contemporaneous data available at the time of effecting the Transfer Pricing documentation. a. The Commissioner of Income-tax (Appeals) erred on facts and in law in disregarding the multiple year data of operating results of the preceding two years of comparable companies relied upon for application of TNMM and accepted by the TPO. b. The Commissioner of Income-tax (Appeals) erred on facts and in law in considering only the current year's data of operating results. i.e., operating results for the relevant previous year for the purpose of benchmarking applying TNMM. c. That on facts and circumstances of the case. the Commissioner of Income-tax (Appeals) erred in not appreciating that preceding years' data of operating results of comparable companies had significant influence on determination of arm&....
X X X X Extracts X X X X
X X X X Extracts X X X X
....thout prejudice that the Commissioner of Income-tax (Appeals) erred in not considering the preceding year's operating results of Apex Logical Data Conversion Pvt. Ltd. and Giltedge lnfotcch for the purpose of benchmarking analysis applying TNMM. 9. That in case benchmarking had to be done using current year's data, then the lower authorities erred on facts and circumstances of the case, in not taking into account other LT. enabled companies (identified using 'Prowess' data base of CMIE), performing identical functions as comparable companies for the said benchmarking. 10. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the associated enterprise, too, incurred losses in the transactions undertaken with the appellant and there could not be an allegation of diversion of profit to justify transfer pricing adjustment in the hands of the appellant. 11. Without prejudice that the Commissioner of Income-tax (Appeals) erred in not appreciating that no adjustment to the arm's length price of international transactions' was warranted considering the overseas associated enterprises as tested par....
X X X X Extracts X X X X
X X X X Extracts X X X X
....management etc. are undertaken by the AE and the assessee only performs services which are outsourced by the AE. Consequently all the key resources like the top management of the group i.e CEO, COO, CFO, CMO, CTO etc. are all on the payrolls of the AE. The assessee is an independent low risk service provider inasmuch as the entire marketing effort is undertaken by the EXL US who bears the consequent risks and rewards. The assessee on the other hand it was submitted is exposed to the following risks:-(i) risk on account of receivable from its customers; (ii) marketing risk; (iii) price risk; (iv)recovery risk; (v) credit risk etc. However as far as the warranty risk is concerned it was submitted the risk is borne by the AE. In the event the customer is dissatisfied with the services provided by the assessee then the service liability risk falls on the AE. The assessee receives compensation for services rendered regardless of whether or not the AE receives payment from its buyers or not. The assessee it was submitted being a captive service provider operates on a cost plus basis and assumes limited risks. Accordingly the comparables considered by the TPO have assumed credit, marketin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Accordingly appropriate adjustments for un-utilized capacity relying upon Paper Book pages 78 to 82 was prayed for. The jurisprudence in support of such an action it was submitted is available. Reliance was placed on the following decisions:- (1) Global Turbine Services Inc. vs. ADIT (ITA No.3484/Del/2011); (2) ACIT vs Fiat India Pvt.Ltd. (ITA No.1848/Mum/2009); (3) Brintons Carpers Aisa Pvt.Ltd. vs ACIT (ITA No.1296/PN/2010); (4) E.I.Dupont India Pvt.Ltd. vs DCIT (ITA No.5336/Del/2010); (5) Transwitch India Pvt.Ltd. vs ACIT (ITA no.6083/Del/2010)-The said order of the Tribunal was upheld by the Jurisdictional High Court vide order dated 17.07.2013; (6) DCIT vs Panasonic AVC Networks India Co. Ltd. (ITA No.4620/Del/2011) 5.1. Reliance was also placed on the decision of the dated 10.07.2014 in ITA No.3547/Del/2010 in the case HCL Technologies BPO Services Ltd. vs ACIT (copy filed).after considering various decisions including the decisions has mandated such an adjustment. Accordingly relying upon Paper Book page 7882 it was his submission that after excluding the abnormal cost the operating profit margin of the assessee, the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bles:- S. No Name of the Company Margins (OP/TC) Weighted average 2003 2002 1. Ace Software Exports 11.64% 17.63% 14.88% 2. Allsec Technologies Ltd. 12.55% 9.53% 11.65% 3. Apex Logical Data Conversion Pvt. Ltd 14.30% 22.26% 17.80% 4. Compudyne WIngosystems Ltd. 0.18% 52.78% 20.05% 5. Fortune Infotech limited 107.46% 68.03% 96.87% 6. Mapro Industries Limited (4.19)% 21.43% 6.09% 7. Necleus Netsoft and GIS India Ltd. (17.70)% (10.37)% (13.92)% 8. Twinstar Software Exports Limited (73.35)% (25.81)% (45.80)% 9. Zigma Software Limited 0.78% 17.05% 6.96% Mean 12.73% Appellant's Margin (AY 04-05) 3.14% Appellant's margin (AY 04-05 & 05-06) 11.42% 8.3. These calculations it was submitted were without making adjustments on account of depreciation/idle capacity. The TPO as per internal page 8 of his order rejected 6 comparables out of the above list of comparables selected by the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....would emerge:- Comparable companies considered by the CIT(A) S. No. Name of the Company OP/TC (%) as per CIT(A) OP/TC(%) after depreciation adjustment 1. Ace Software Exports Limited 0.69% -21.21% 2. Fortune Infotech Limited 39.01% 4.41% 3. Nucleus Netsoft & GIS India Ltd. 16.87% -37.85% 4. Karvy Consultants Limited -5.37% -5.37% Arithmetic Mean 12.80% -15.00% Appellant's margin -3.14% 10. Considering the judicial precedent in assessee's own case the Ld. CIT DR stated that as far as the calculations are concerned the issue has to be verified by the TPO and in the face of the order of the Co-ordinate Bench as the issue has to go back it was submitted that he would have no objection if the calculations as considered by the TPO are taken on record and the departmental ground is allowed. The Ld. AR in reply submitted the let the TPO consider both the calculations and he would have no objection. 11. We have heard the rival submissions and perused the material available on record following the judicial precedent in the light of the su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cceeding year) was a year of consolidation in which it "sacrificed immediate profits for much larger gains by preparing ourselves for future growth". The Annual report of this company for the next year indicates that it developed its own intangibles in such next year. These factors indicate that financial year 2003-04 relevant to assessment year 2004-05 was abnormal for Fortune Infotech Ltd. But for that, its profit progressed from assessment year 2002-03 to assessment year 200304 in question. 8.4. Reference to the Tribunal order in the case of 24/7 Customer (supra), for seeking exclusion of Fortune Infotech Ltd., is again misplaced. The palpable reason for our this conclusion is that the Tribunal order in that case is for the assessment year 2004-05 and we have noticed from the Annual report of this company that it was an abnormal year of its operations in which it sacrificed immediate profits for larger gains in future by developing its own intangible. It is further relevant to note that the functional profile of this company is similar to that of the assessee company as it is also a BPO, as is the assessee. It was not due to some inadvertence that the assessee initially....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e for the assessee. The ownership of unique intangibles in the case of the said comparables in the year under consideration has been taken not of by the Co-ordinate Bench in asessee's own case in the immediately preceding assessment year where this fact was not in existence. Accordingly applying the principle that only companies which are on similar standard can only be comparables Fortune Infotech Ltd. is excluded from the list of the comparables in view of the fact that it holds unique intangibles which position is not disputed by the Revenue. 15. Addressing Ground no.10 it was submitted by the Ld.AR that on facts there was no transfer of profit by the assessee to AE in other jurisdictions. The issue in assessee's own case has been dismissed by the ITAT in ITA No.1939/Del/2008 for 2003-04 assessment year vide para 7.1 to 7.3 and in the present proceedings the assessee is not serious in contesting the issue as on facts the assessee is confident that there would be no transfer pricing adjustments. Thus the ground has been filed only to keep the issue alive and reliance is placed on Sony India Pvt. Ltd. vs CBDT 288 ITR 52 (Del.) and Sony Ericson Mobile Communications India Pvt. L....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sary evidence in support of its claim of provision for expenses. After considering the relevant material furnished by the assessee, the ld. CIT (A) deleted addition of ` 4.85 crore for which the invoices were available. As regards the remaining amount of ` 32.08 lac for which the invoices were not available, the ld. CIT (A) sustained the addition. The assessee is aggrieved against the sustenance of addition to this extent. 10.3. After considering the rival submissions and perusing the relevant material on record, it is observed that the assessee is constantly making provision for expenses on year-to-year basis on the estimate of reasonable expenses incurred but the bills not received up to the year-ending. When in the subsequent year, the bills are received, such provision is reversed. If the actual amount of expenses for which the provision was made falls short of such provision, then deduction is claimed for the excess expenditure and in the converse situation, the earlier excess provision created is reversed in the succeeding year. This method of accounting has been accepted by the Revenue in the past without any question. Now simply because the invoices were not availa....