TaxTMI 
TaxTMI 
2015 (9) TMI 1507
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....nology enabled services ('ITES') and e-learning back office support services ('e-learning') business segments do not satisfy the arms length principle ('ALP') envisaged under the Income-tax Act, 1961 ('the Act') and in doing so, the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO's action of: 2.1 not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 2.2 ignoring the fact that the appellant is entitled to tax holiday under section 10A of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; 2.3 disregarding the ALP as determined by the appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules') as well as fresh search; and in particular modifying/ rejecting the filters applied by the appellant; 2.3.1 interpreting the requirement of 'contemporaneous' data in the Rules to necessarily imply current/ single year (i.e. FY 2005- 06) data....
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.... to sales less than 3% were accepted; and 2.7.8 companies having advertising, marketing and distribution costs to sales less than 3% were accepted. 2.8 including high-profit making companies in the final comparables' set for benchmarking a low risk captive unit such as the appellant (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the single minded intention of making an addition to the returned income of the appellant; 2.9 including certain companies that are not comparable to the appellant in terms of functions performed, assets employed and risks assumed; 2.10 resorting to arbitrary rejection of low-profit/ loss making companies based on erroneous and inconsistent reasons; 2.11 excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the appellant in terms of functions performed, assets employed and risks assumed; 2.12 ignoring the business/ commercial reality that since the appellant (vis-à-vis both its ITES / e-learning business segments) is remunerated....
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....763 2. Salary Reimbursement 16,953,607 Accepted 3. Payment of service fee 20,777,272 Accepted 4. Reimbursement of IPLC cost (paid) 53,282,192 Accepted 5. Payment for Software and maintenance cost 6,817,878 Accepted 6. Purchase of Capital Goods 330,901 Accepted 7. Sale of Capital Goods 11,144,260 Accepted 8. Interest on Loan (paid) 1,92,29,077 Accepted 2.3 The transactions relating to point no. (2) to (6) was aggregated and analyzed appropriately with the international transactions relating the IT enabled services and e-learning back-office support services and benchmarked using Transactional Net Margin Method ('TNMM') with Operating Profit/ Total cost ('OP/TC') as the relevant Profit Level Indicator ('PLI'). Also, the transactions pertaining to point no. (7) and (8) was evaluated separately using Comparable Uncontrolled Price ('CUP') method (refer TP Study on 311 of the Paper book). 2.4 The following table summarizes the results for the TNMM analysis undertaken in the TP study for the ITES and the e-learning segments based on multiple year data (i.e. FYs 2003-04, 2004-05 and 2005-06 to the extent....
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....rred TP Order at page 304 of the Paper Book) (working capital adjustment provided by the TPO) Data used Current Year (He referred para 5 of TP Order at page 191 of the Paper Book) TPO Search strategy (He referred para 13.1 of TP Order at page 231of the Paper Book) Appellant's margin 15.38% (He referred para 2.2 of TP Order at page 173 of the Paper Book) Conclusion TP adjustment of Rs. 31,21,61,763 (He referred para 17.6 of TP Order at page 295 of the Paper Book) 2.8 However, the Ld. TPO rejected the appellant's contentions and he relied upon the set of following 14 companies (including 4 companies which were common with the appellant's fresh search , 1 company from TP Study and 9 new comparables introduced as part of fresh search conducted by the Ld. TPO) with a mean operating profit margin of 22.61%. (Refer TP Order on pg295 of Paper book). S. No. Company Name Working capital adjusted OP/TC Margin as per the TPO order (using data for FY 2005-06) Status 1 Maple eSolutions Ltd 30.20% New comparable introduced by the TPO 2 Allsec Technologies Ltd 28.62% New comparable introduced by the TPO 3 Datamatics Financial....
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....also has high AMP expenses , abnormal margin and has undergone business restructuring during the year. Further the Company also fails RPT criteria (refer DRP Objections on Pg 67 of the Paper Book). TPO: (refer TPO order on pgs 240 to 243 of the Paper Book) The Ld. TPO has stated that all the comparables are risk bearing entities. The TPO has also commented that the assessee has not shown how the business restructuring has affected the company's operations or results, thus, argument of the assessee is not acceptable. DRP: The Ld. DRP confirmed the action of the TPO (refer DRP Directions on pgs 165 of the Paperbook). 2 Asit C. Mehta Services Ltd. (segmental) (Nucleus Netsoft and GIS India Ltd) ('Asit') 34.99% Appellant: Asit has been contested by the appellant on account of diversified operations of the segment (engaged in ITES and software development), impact of amalgamation on financials, related party transactions and abnormal margins. (refer DRP Objections on pg 74 of the Paperbook) TPO: (refer TPO order on pg 219-221 of the Paperbook) * The TPO has stated that the arguments of the assessee on functional comparability and bu....
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....t prejudice to the other contentions against the approach followed by the Ld. TPO, the fundamental contentions of the Appellant against the Ld. TPO/Ld. DRP's approach are discussed in detail below: RE: GROUND NO. 2.9: Inclusion of functionally dissimilar companies Allsec Technologies Ltd. ('Allsec') TPO/DRP Submission's and Observations Appellant's Submission TPO Submission: Please refer to page no 456 to 458 of the paperbook TPO observation in the order: Please refer to page no 243 of paperbook DRP Submission: Please refer page no 67 of paperbook DRP Directions: Please refer page no 156 -167of paperbook Activities carried out by Allsec: All sec is engaged in the provision of voice and data services to its International and Domestic clients in the Information Technology Enabled Services segment. (Refer Page 31 of Compendium of Annual Reports) The Appellant would like to state that even if Allsec performs functions which are broadly comparable to the functions being performed by Convergys India, it cannot be considered as comparable due to the extraordinary events that have taken place during the year which neither can be quanti....
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....e 31.2 .... The Mumbai Bench of the Tribunal in Petro Araldite (P.) Limited v. DCIT [(2013) 154 TTJ (Mum) 176] has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/ demergers...... Unquote Abnormal growth during the year: The Company has recorded 59.94% growth in terms of export revenue and 74.85% in domestic revenue. The growth is mainly due to increased business from our existing clients and acquisition of new clients/ processes constitutes 29% of total revenue. (Refer Page 33 & 34 of Compendium of Annual Reports) Maple E Solutions Ltd. ('Maple') TPO/DRP Submission's and Observations Appellant's Submission TPO Submission: Please refer to page no 454-455 of the paperbook TPO observation in the order: Please refer to page no 239-240 of paperbook DRP Submission: Please refer to page no 65 of the Paperbook DRP Directions: Please refer to page no 156-167 of Paperbook The Appellant would like to state that even if Maple E Solutions Ltd. performs functions which are broadly comparable to the functions being performed by Convergys India, it cannot be considered as comparable ....
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....management inefficiencies and/or facing extra ordinary circumstances. Accordingly, typically the returns earned by Maple would also include return towards assuming such entrepreneurial risks. On the contrary, the appellant does not assume any entrepreneurial risks. Operating profit margin (%) of Maple from FY 2003-04 to 2008-09 2003-04 2004-05 2005-06 2006-07 2007-08 2008- -100% 37.38% 36.83% 34.32% 22.94% - 65.26% Accordingly, since the FAR profile of this company is different from the FAR profile of the Appellant (which is clearly reflected in the volatile margins of Maple), it cannot be considered for the purpose of comparability with the Appellant which earns a steady return for its activities. In this regard, reliance is also placed on the recent judgement of Delhi High Court in case of ChrysCapital Investment Investment Advisors (India) Private Limited v. DCIT (ITA 417/2014) Quote " 36.....In any case, in the event that volatility is on account of a materially different aspect incapable of being accounted for, the analysis under Rule 10(B)(3) would exclude such an entity from being considered as a comparable Unquote The....
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....Transfers) Commission (refer Page 183 of Compendium of annual reports). Business Restructuring/ Amalgamation The Appellant would like to state that even if Asit C Mehta perform functions which are broadly comparable to the functions being performed by Convergys India, it cannot be considered as comparable due to the extraordinary events that have taken place during the year which neither can be quantified nor suitable adjustments can be made for the same. The Appellant would like to bring your Honors' attention to the acquisitions made by this Company during the said year which has impacted the financial statements/profitability of the company. The relevant extracts from the annual report in relation to amalgamation are given below for your Honours' ready reference. (refer Page 159 of Compendium of annual reports) "The scheme of amalgamation ("the Scheme") of erstwhile Nucleus Netsoft and GIS (India) Ltd, the Transferor Company, with your Company was sanctioned by the Hon'ble High Court of Judicature of Bombay on February 22, 2006. On complying with the requisite formalities, the scheme became effective and operative retrospectively from the appointed ....
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....light of the fact that Assessing Officer has only chosen the companies which are showing profits and has rejected the other companies which showed loss. In this regard reliance can be placed upon ITAT Special Bench decision in the case of Quark System v. DCIT (2010) 38 SOT 307, which supports assessee contention of removal of Zenith Infotech from comparables, as it showed super profits." Unquote (Emphasis supplied) In view of the above pertinent judicial precedents, the Appellant cannot be estopped from rejecting a comparable company i.e. Asit C Mehta, merely on the ground that the same has been initially included in its TP Study. Vishal Information Technologies Ltd. (Coral Hub Limited) ('Vishal') TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page no 459 of the paperbook TPO observation in the order: Please refer to page no 245-248 of the paperbook DRP Submission: Please refer to page no 71-73of paperbook DRP Directions: Please refer to page no 156-167of the paperbook (a) Functionally Different (Significant payment towards vendors) During the FY 2005-06, the company has made sign....
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.... a risk adjustment based on the twelve reasons (Refer Page 284-285 of Paperbook) which have been specifically dealt with by the Hon'ble Delhi Tribunal in the case of Motorola Solutions India Private Limited v. DCIT (ITA No.5637/Del/2011). The relevant paragraphs are reproduced below: "Para 116.1 Ld. TPO, after detailed discussion, in respect of various risks claimed by assessee, rejected the assessee's claim for following reasons: 1. The tax payer has not given any details regarding the authority of the above method describing CAPM model for adjustment towards risk. It is not clear whether this type of calculation is acceptable in any tax jurisdiction for the purpose of risk premium adjustments. Its acceptability by any renowned and recognized research institution across the world has also not been shown. The manner in which the risk adjustment is computed by the taxpayer is not followed by any country or organization of international repute like OECD. In fact, even the OECD is reluctant to take the risk adjustment as part of the guidelines as there are divergent views on this issue among the member countries of OECD and many countries feel that there is no straigh....
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....able companies and also the tax payer assumed that its beta is zero, whereas when the return is guaranteed on sales or cost, the beta is not zero as the return on capital fluctuates with revenue. 8. The taxpayer did not consider the differential risk adjustment i.e. it did not considered the weighted cost of capital of comparables to bring it in line with the taxpayer. 9. The beta of a captive software service provider is not zero as the return on capital fluctuates with revenues as the taxpayer is following cost plus method on expenses. 10. As discussed above, the taxpayer bears significant single customer risk and political/country risk, which may not be compensated adequately by passing on other risks like marketing risks etc. to the parent. Further these risks are not considered in the case of taxpayer while computing the risk adjustment. 11. The taxpayer considered total assets including current assets and current liabilities, but the CAPM hinges upon return on equity or capital employed. The operating assets are the major indictor of capital employed rather than total assets. Operating assets includes fixed assets, trade receivables net of trade payabl....
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....s. In the absence of adverse market conditions, the assessee has not shown how these market risks borne by the independent enterprises had an effect on the price and, thus, on the profits during the F.Y. 2005-06. From these findings of ld. TPO, it is evident that he himself is agreeable that market conditions do influence the independent enterprises. Ld. TPO has denied this adjustment mainly on the ground that associated enterprise and other independent comparables are operating on a similar model i.e. one by establishing its subsidiary in low employee cost zone viz. India and the others by outsourcing their activities to other entities operating in India. Ld. TPO has drawn parity between independent comparables and the assessee on this basis. In our opinion, this reasoning cannot be fully accepted particularly because it is not that all the independent comparables are doing only the work outsourced to them by various AEs. This is only a conjecture on the part of ld. TPO. We, therefore, are of the opinion that market risk, if quantifiable, has to be adjusted in view of Rule 10B(1)(e)(iii)...... ........ We, therefore, in the interest of justice, restore this matter to the fil....
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....S India Ltd) (after margin correction) 34.99% X (a) Functionally incomparable (engaged in diversified operations of the segment (engaged in ITES and Software Development) (b) Impact of amalgamation on the financials and margins of the company (c) Abnormally high margin 8 Goldstone Infratech Ltd (Seg.) (Earlier known as Goldstone Teleservices Ltd) 23.89% 23.89% Accepted 9 Spanco Ltd. (segmental) 18.91% 20.80% Accepted 10 Ace Software Exports Ltd. 8.06% 8.06% Accepted 11 Apex Knowledge Solutions Pvt Ltd 21.74% 21.74% Accepted 12 R Systems International Ltd (Seg.) 14.29% 14.29% Accepted 13 Flextronics Software Systems Ltd (Seg.) 14.67% 14.67% Accepted 14 Apex Advanced Technologies Limited 19.15% 19.15% Accepted Arithmetic Mean 22.61% 18.09% 2.14 Without prejudice to the appellant's contentions against the approach used by the Ld. TPO, the Learned AR submitted that even if the assessee exclude four comparable companies for the reasons mentioned in the table above, the working capital adjusted arm's length....
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....ities carried out, full-fledged risk bearing entrepreneurial company, extraordinary events, abnormal growth during the year in the case of Allsec Technologies Ltd. Functionally incomparable, involvement of owner's fraudulent activities, ownership of intangible, Volatile margins, operating profit margin from financial year 2003-04 to 2008-09 in the case of Maple Esolution Ltd. Functionally incomparable, diversified operation of the segment, business restricting/amalgamation in the case of Asit C. Mehta and in the case of Vishal Information Technologies Ltd., these material aspects were its activities showing it functionally different. The Learned AR has discussed in detail as to how the above named comparables are not applicable in the case of the assessee and as to how the approach of the authorities below on the contentions of the assessee in this regard are contrary to the cited decisions hereinabove in para Nos. 2.12 & 2.13. We find substance therein and accordingly in the interest of justice set aside the matter to the file of the Assessing Officer/TPO to examine the validity of grievances shown by the assessee before the ITAT on the issue of choosing of the above four comparab....
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....ilters applied by the appellant; 2.4 disregarding multiple year/ prior years' data as used by the appellant in the TP documentation and holding that current year (i.e. FY 2006-07) data for comparable companies should be used despite the fact that the same was not necessarily available to the appellant at the time of preparing its TP documentation, and in doing so have grossly erred in; 2.4.1 interpreting the requirement of 'contemporaneous' data in the Rules to necessarily imply current/ single year (i.e. FY 2006-07) data; and 2.4.2 holding that at the time of creating/ maintaining the TP documentation, the appellant could have procured current/ single year data (i.e. FY 2006-07 data) from sources other than the electronic databases, when in fact practically no such other sources were available in case of most companies; 2.5 collecting information of the companies by exercising power granted to him under section 133(6) of the Act that was not available to the appellant in the public domain and relying on selective information for comparability purposes (and to the extent of completely ignoring reliable data available in public domain/ annual repo....
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....us and inconsistent reasons; 2.11 excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the appellant in terms of functions performed, assets employed and risks assumed; 2.12 ignoring the business/ commercial reality that since the appellant (vis-à-vis both its ITES and e-learning business segments) is remunerated on an arm's length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed markup based on a benchmarking analysis, the appellant undertakes minimal business risks as against comparable companies that are full fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the appellant on account of this fact; 2.13 not allowing the appellant the benefit of the (+/-) 5% range available to the appellant as per the old proviso to section 92C(2) of the Act; 2.14 disregarding judicial pronouncements in India in undertaking the TP adjustment. 3. The Ld. AO erred in not verifying the factual errors in accept/ reject of comparables and in computation of the operating margins of the comparables and accordingly re-computing the ALP while passing th....
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.... or add any further grounds as may be considered necessary either before or during the hearing." 7. Ground Nos. 1 to 3: 7.1 The Learned AR submitted that Convergys India Services India Private Limited ('CIS' or 'the Appellant') is a wholly owned subsidiary of Convergys Customer Management Group Inc. USA ('CMG').The Appellant is engaged in providing IT enabled services to its AE's. CIS provides customer care support services to CMG in the form of voice and web-based services. In return for rendering these services, the Appellant was remunerated on an arm's length cost plus basis i.e. it was compensated for all its operating costs, plus a pre-agreed mark-up thereon.(He referred to para 2.1 on pg 286 of the Appeal Set for the Transfer Pricing ('TP') Order for the Appellant's profile and TP study on para 1.2 of pg 9of the Paper Book for the brief on the business of the Appellant, para 4.3.9 of TP Study at pg 25of the Paper Book which clearly states that the Appellant is a customer support service provider). 7.2 He submitted that during the Financial Year ('FY') 2006-07, the Appellant, operated as a low risk captive unit providing ITES and elearning back office support services....
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....he TP Study) Comparables' mean margin 12% (Please refer to Page 50 of the Paper Book for the TP Study) 9% (Please refer to Page 51 of the Paper Book for the TP Study) Data used Multiple years - FYs 2004-05, 2005-06 and 2006-07 Multiple years - FYs 2004-05, 2005-06 and 2006-07 Appellant's margin 15% (Please refer to Page 67 of the Paper Book for the TP Study) 14% (Please refer to Page 67 of the Paper Book for the TP Study) Conclusion At arm's length At arm's length 7.8 The Learned AR also summarized the proceedings before the learned TPO with the submissions that during the course of the TP audit proceedings, the Ld. TPO directed the Appellant to submit updated current year data for the comparable companies considered in its TP study. In response to the same, without prejudice to its argument in favour of multiple year data, the Appellant submitted under the cover of the letter dated December 1, 2009 that a fresh search ought to be conducted to include additional companies for which data for FY 2006- 07 was available at the time of assessment proceedings but which was not available at the time of preparing TP documen....
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....f companies with advertising, marketing and distribution expenses to sales more than 3%. * Rejection of companies with the ratio of Net Fixed Assets to sales greater than 200% Adoption of following additional filters for screening of comparable companies * Rejection of companies whose data is not available for the current year (i.e. FY 2006-07); * Rejection of companies whose service income less than 75% of total operating revenues; * Rejection of companies with related party transactions (income as well as expenditure combined) more than 25% of operating revenue; * Rejection of companies with exports that are less than 25% of sales revenue; * Rejection of companies with diminishing revenues/ persistent losses for the year under consideration; * Rejection of companies with different financial year ends (i.e. not March 31, 2007) or whose data is not available for the 12 month period. i.e. April 1, 2006 to March 31, 2007; 7.12 However, the Ld. TPO rejected the segmental bifurcation undertaken by the Appellant and clubbed the garments under ITES. Finally, he relied upon the set of following 26companieswith a mean ope....
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.....70% 16 Informed Technologies India Ltd. 36.19% 17 Infosys BPO Ltd. 29.98% 18 I Services India Pvt Ltd. 50.02% 19 Maple E solutions Ltd. 31.59% 20 Mod-Tek Technologies Ltd. 117.03% 21 R systems International Ltd. (Seg.) 19.61% 22 Spanco Ltd. (Seg.) 20.96% 23 Triton Corp Ltd. 28.98% 24 Vishal information Technologies Ltd. 43.73% 25 Wipro Ltd. (Seg.) 31.53% 26 Nittany Outsourcing Services Pvt Ltd. 11.79% Mean OP/ TC 28.72% 7.16 Without prejudice to the other contentions against the approach followed by the Ld. TPO, the Learned AR pointed out that fundamental contentions of the Appellant against the Ld. TPO/Ld. DRP's approach are discussed in detail below: (i) Rule 10 B (2) of the Income Tax Rules, 1962 lays down the criterion for the application of functions, asset, risk (FAR) test for judging comparability of international transaction with an uncontrolled transaction. It provides: "10B (2). For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following....
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....(6). The relevant extract of the TPO's order is reproduced below: 14.1 Accentia Technologies Ltd (Seg.) The company was not part of the companies considered by the taxpayer in the accept/reject matrix give by the taxpayer. However, the company's data is available in the Capitaline database. The Annual Repo is not available for the FY 2006-07, 133(6) notice was issued. As per the reply received from the company, it has ITES segment which is into medical transcription services and qualifies all the filter applied by the TPO. Thus the company is proposed as a comparable vide this office show cause notice. I its response, the taxpayer did not object to it, but stated that the margin computation is incorrect as under: (He referred to para 1 on Page 356 of the Appeal Set for the TPO Order where the nature of services of Accentia have been discussed by the ld. TPO) We place reliance on the judgments of Avineon India Pvt Ltd. v. DCIT [ITA No. 1989/Hyd/2011, (TS-308-ITAT-2013(Hyd)-TP)], ITAT Hyderabad) (Please refer to para D-1 on Page no 14 of the Case Law Compendium) where Accentia has been excluded for the following reason: Extraordinary events like merger and deme....
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....the assessee's functioning, it has to be enter into the matrix and be appropriately considered... The other exercise which the TPO has to necessarily perform is that if there are some differences , an attempt to adjust them to eliminate material differences should be made Unquote (Learned AR referred to para 32on Page 96of the Case Law Compendium) High Advertising and Marketing Spend - 5.23% Allsec fails the advertising and marketing ('A&M') expense filter applied by the Appellant. (Please refer to Page 738of the Annual Report Compendium for the Profit and Loss Account) Related Party Transaction - 12% Allsec fails the RPT filter applied by the Appellant (He referred to Page 754-755 of the Annual Report Compendium for the details of the related party transactions) Bodhtree Consulting Limited (Seg.) ('Bodhtree') TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page no539-543 of the paperbook TPO observation in the order: Please refer to page no361-366 of the Appeal Set DRP Submission: Please refer to page no122-127 of the Appeal Set DRP Directions: Please refer....
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....s Solutions Ltd ('Caliber Point') TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page no 544-546 of the paperbook TPO observation in the order: Please refer to page no 366-369 of Appeal Set DRP Submission: Please refer to page no 127-130 of the Appeal Set Different financial year ending: It is submitted that the Ld. TPO himself has applied the different financial year ending filter clearly indicating that comparables with financial year ending with March 31 shall be selected. The relevant extract from the TPO Order is reproduced below: 9.5 Different year ending filter: The taxpayer follows the financial ending with March 31 (Relevant FY 2006-07 ending with 31-03-2007), where as in some of the comparable companies considered by the tax payer, the accounting year ends with June or September or any other month. Those companies whose accounting year does not end with March 31, 2007 and whose data is not available for the period from 01-04-2006 to 31-03-2007 were proposed to be rejected. This filter was proposed because it ensures that the transactions being compared took place during the same period/financ....
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....ctionally different: Eclerx is a Knowledge Process Outsourcing ('KPO') company engaged in providing data analytics and data process solutions to the customers. The data analytics services performed by Eclerx is functionally different, more value added and high end in nature compared to the low end back office services provided by the Appellant. In terms of functions, the operations of the company include high end activity in the nature of data analytics, competitive pricing and catalog analytics, data integration and reporting, custom research analysis and modeling, web analytics etc. eClerx's Knowledge Process Outsourcing teams do more than operate processes cost effectively, they transform and improve processes that make a difference to company's top and bottom line. Their expert project teams and proprietary technologies solve complex problems and make business opportunities possible for major global corporations every day. (The Learned AR referred to Page 35, 36,37 of the Annual Report Compendium for the information furnished by the company u/s 133(6) in respect of the business description of E-Clerx) In this regard, reliance is also placed on the recen....
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....7 of the Appeal Set DRP Submission: Please refer to page no 137-138 of the Appeal Set DRP Directions: Please refer to page no 23 of Appeal Set At the outset, it is submitted that the TPO's reply in the TP Order is a bundle of contradictions. For example, reference may be made to the extract from the TP order as re-produced below. "The taxpayer's main argument is that the TPO did not provide any information or annual report of the company for FY 2006-07. The above fact mentioned by the taxpayer is correct. But, this is an inadvertent mistake. But, it is a fact that this company finds its place in the accept-reject matrix of the TPO sent along with the notice issued by the TPO and is functionally similar as given below." Thus, the TPO himself admits that the relevant information was not shared with the Appellant. The above extracts highlight the callous manner in which the entire assessment exercise has been conducted with a pre-determined mindset to reach a TP adjustment outcome. This comparable should be excluded in the absence of any reliable information. Without prejudice to the same, the Appellant requests the Hon'ble ITAT to direct the TPO/AO to pr....
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....end user computing services, managed security services, networking services and tools and process consulting services. The relevant extract of the Annual Report is reproduced below: Your Company's Wholly Owned Subsidiary namely HCL Comnet Limited w focuses on Non-VSAT Services Business i.e. Sale, Installation and An Maintenance Contracts of VSAT equipments, Radio Communications, Communication Solution, Private Network Management and other Technical Professional Services, Remote Networking Solutions etc has made a profit of 1838.73 Lacs after Tax and Depreciation. (He referred to para 4 on page 68 of Annual Report Compendium for the business description of HCL Comnet) Related Party Transactions - 21.52% HCL Comnet fails the RPT filter of the Appellant. (He referred page 106-107 of Annual Report Compendium for the details of the related party transactions) Informed Technologies India Limited ('Informed Technologies') TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page No 546-547 of the paperbook TPO observation in the order: Please refer to page no 377-378of the Appeal Set DRP Subm....
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....all 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% alone is not applicable for the reason that in addition to the ample costs, the commission costs are also important. When company has outsourced its ITES services, it cannot be said that its business results would be comparable to any other ITES service provider rendering the services entirely on its own. In such circumstances, the net margins of the two comparables cannot be on the same basis. The decisions relied upon by the learned counsel for the assessee also held that the employee cost filter is important filter to be adopted for the purpose of computing ALP. In the case of Maersk Global Services Centre (India) Pvt. Ltd., in ITA No.3774/M/2011, the Tribunal at Mumbai has held that Vishal Information Technologies Ltd. has to be excluded from the list of comparables of ITES company as it has outsourced its services. In view of the same, we direct the AO to exclude this company also from the list of comparables." (He referred to para 19 and 20on Page no 164-16....
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.... Appellant's Submission TPO Submission: Please refer to page no 553 of the paperbook TPO observation in the order: Please refer to page no336-337 of the Appeal Set DRP Submission: Please refer to page no 141-142 of the Appeal Set DRP Directions: Please refer to page no 23 of Appeal Set Functionally Different (Business Restructuring) During the financial year 2006-07, Maple has become a subsidiary of Triton Corp Limited. Triton Corp Limited has acquired 100% shares of the company from Haryana Fibers Limited w.e.f 1st January 2007. The relevant extract from the Annual Report is reproduced below: Pursuant to acquisition of 100% equity shares from Haryana Fibres Ltd. by Tirol Corp Ltd. the Company has become Subsidiary of Taton Corp Ltd. w.e.f 01.01.2007 (He referred page 200 of Annual Report Compendium for the related party disclosures) Related Party Transactions - 14% Ample fails the RPT filter of the Appellant (He referred page 199-200of Annual Report Compendium for the details of related party transactions of Maple) * Unreliable Financial Information: In case of CRM Services India (P) Ltd. (ITA No.4068/Del/2009) it was held that since the rep....
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....80 crore largely fuelled by growth of 204% in the IT (KPO) Division billings from Rs. 375 lakhs in 2005-06 to Rs. 1140 lakhs in 2006-07. Apart from enhancing billings, IT (KPO) Division has contributed towards more than doubling the profitability of your Company. Your Company achieved a net profit of Rs. 830.71 Lakhs for the year as against a profit of Rs. 354.97 lakhs in the previous year, registering a growth of 134%. Cash profit was Rs. 1098.36 lakhs, compared to Company has set up stock gooding in southem and Eastern India, and has established its facility at Daman to cater to the Western Region. The IT (KPO) Division, which is providing structural Engineering & health care billing services, is growing rapidly and the personnel head count has increased to 200 from 110 last year. Rs.557.74 lakhs in the previous year. IT (KPO) Division net Profit rose sharply from Rs. 1.60 crore to Rs. 5.75 crore, registering a growth of 259.4%. IT (KPO) Division During the current year, the IT (KPO) Division commenced engineering services to high-rise buildings for clients in US & Canada, which offer excellent growth prospects. In April 2007, your Company ....
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....ompendium for discussion on the review of operations of Mold-Tek) Reliance may be placed on the following decisions of various tribunals which support the above view are as under: - Maersk Global Centre India Pvt. Ltd. v. DCIT (2009-TIOL-322-ITAT-Mumbai) (He referred to para 81 and 83 on Page no 248-251 of the Case Law Compendium) - Capital IQ Information Systems India Pvt. Ltd. (ITA No. 1961/Hyd/2011) (He referred to para 12-13 on Page no 45-46 of the Case Law Compendium) - CIT (I) v. Capital IQ Information Systems Pvt. Ltd. (I.T.T.A. NO.305 OF 2014, High Court of Hyderabad) (He referred to Page no 27 of the Case Law Compendium) Triton Corp. Limited ('Triton') TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page no 553-554 TPO observation in the order: Please refer to page no387 of the Appeal Set DRP Submission: Please refer to page no 150-152 of the Appeal Set DRP Directions: Please refer to page no23 of Appeal Set Functionally Different (Business Restructuring): During the financial year 2006-07, the company has acquired 100% shares of the company from Haryana Fibers Li....
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....n (more than 50%) of its sales. It is evident from the facts that the company provides agency services by way of outsourcing services to third parties and acting as an intermediary between the final customer and vendor. The intermediary functions of Vishal can only be compared to that of a distributor which takes title to service/ product for resale to the customer whereas the Appellant is a provider of back office services on its own. Thus, Appellant's ITeS services cannot be compared with the agency /distribution function of Vishal. (He referred page no 478of Annual Reports Compendium for the Profit and Loss Account Schedule detailing the Vendor expenses incurred by the Vishal) The Appellant would like to draw your Honours' attention to the Judgement of Mumbai Tribunal in the case of Maersk Global Centre India Pvt. Ltd. v. DCIT (2009-TIOL-322-ITAT-Mumbai) Quote "....insofar as the cases of Tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in your conside....
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....ces (He referred to page 495 and 496 of Annual Reports Compendium for the business description of Wipro) Non availability of standalone financial data for FY 2006-07 The stand alone financial data of Wipro for FY 2006-07 is not available in the public domain. The annual report of the company for FY 2006-07 provide the abridged financial data which would not provide the detailed financial information that would be required to determine the comparability of the company with the Appellant. As such, in the absence of detailed financial information it is submitted that Wipro not be considered as a comparable. The relevant extracts from the Annual Report is reproduced below: Financial Performance Key aspects of your Company's financial performance for the year 2006-07 are tabulated below : (Rs. in Million) Consolidated Parent 2007 2006 2007 2006 Sales and other income (net of excise duty) 152,945 107,566 139,726 103,795 Profit before tax 32,988 23,779 31,762 23,404 Provision for tax 3,868 3,391 3,341 3,199 (Please refer to page 506of Annual Reports Compendium for the co....
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....CD is reluctant to take the risk adjustment as part of the guidelines as there are divergent views on this issue among the member countries of OECD and many countries feel that there is no straight jacket formula for risk adjustment as it depends entirely on the facts and circumstances of the case. Thus risk adjustment is case specific, function specific and also depends on the nature of functions (including risks) carried out by the comparable companies. 14. The tax payer had not given any evidence or argument regarding how the assumptions of CAPM model are true in the case of the AE when it is doing business with the taxpayer. 15. The CAPM model has some weakness, the main being that the model does not recognize the presence of human capital, which is the main driving source for revenues in the software service industry. 16. The taxpayer considered only listed companies. But, there is a method of computation of similar nature in the index. There is a manner in which unlisted companies beta would be calculated. 17. Wherever market data was not available, the beta is computed based on guideline companies from the small cap and madcap indices of BSE and NSE. But, the ris....
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....loyed. The operating assets are the major indictor of capital employed rather than total assets. Operating assets includes fixed assets, trade receivables net of trade payables. 24. The tax payer has assumed that operating expenses of the comparables would not change after risk adjustment. But, after giving effect to risk adjustment, the financial statements of the comparables should look like that of the tax payer i.e., stripping the risk component. So, the expenses pertaining to the risk like sales and marketing expenses, bad debts etc. should be removed from operating expenses and corresponding risk premium adjusted amount has to be reduced from the operating revenues. Hence, as per the above detailed discussion, the computation of risk adjustment by the taxpayer is not acceptable. There is no scientific basis for working out the taxpayer company's beta or beta of the unlisted comparable companies. The taxpayer altogether forgotten that the risk adjustment, if at all to be computed, is to be computed based on the difference between the actual weighted cost of capital of the comparables and weighted cost of capital of the comparable companies assuming same level of equi....
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.... market risk, if quantifiable, has to be adjusted in view of Rule 10B(1)(e)(iii)...... We, therefore, in the interest of justice, restore this matter to the file of Assessing Officer/TPO to consider the computation of risk adjustment as per CAPM model by availing the services of technical experts. The experts of the field are to be appointed by both the sides to come to an acceptable conclusion."" (He referred to para 116-118 on Page no 467- 476 of the Case Law Compendium) It is the humble submission of the appellant that in light of the Motorola Solutions India Private Limited (supra) judgment, the appellant's may also restored back for fresh analysis on risk adjustment 7.17 Without prejudice to the Appellant's contentions against the approach used by the Ld. TPO, the Learned AR submitted that even if we exclude the comparable companies for the reasons mentioned above, the working capital adjusted arm's length margin works out to11.79%which is within 5% range of the OP/TC margin of 14.80% earned by the Appellant during FY 2006-07. This provides evidence that the international transactions entered into by the Appellant during the FY 2006-07 are at arm's le....
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....milar - Engaged in data centre management services, end user computing services, managed security services, networking services and tools and process consulting services (d) Related Party Transaction - 21.52% 15. I C R A Techno Analytics Ltd. (Seg.) 12.70% 12.70% Accepted 16. Informed Technologies India Ltd. 36.19% XX (a) Supernormal growth during FY 2006-07 17. Infosys BPO Ltd. 29.98% 29.98% Accepted 18. I Services India Pvt Ltd. 50.02% XX Rejected 19. Maple E solutions Ltd. 31.59% XX (a) Functionally incomparable (b) Rejected in CRM Services ruling on account of bad reputation of group owner (c) Volatile margins (refer the ruling of Actis Advisers Private Limited) 20. Mod-Tek Technologies Ltd. 117.03% XX (a) Functionally Different : KPO Company (b) Abnormally High Margin (c) Rejected in in ruling of Maersk Global Centres (India) Private Limited (2014) 43 taxmann.com 100) 21. R systems International Ltd. (Seg.) 19.61% 19.61% Accepted 22. Spanco Ltd. (Seg.) 20.96% 20.96% Accepted 23. Triton Corp Ltd. 28.98% XX (a) Functional Dissimila....
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....), Triton Corporation Ltd., Vishal Information Technologies Ltd. (Coral Hub Ltd.) and Wipro Ltd. (SEG). In support, the Learned AR has cited several decisions as to how these companies are not comparable for their some specific reason. Like in the case of Accentia Technologies Pvt. Ltd., the reliance has been placed on the decision of Hyderabad Bench of the ITAT in the case of Avineon India Pvt. Ltd. vs. DCIT (supra) wherein the Accentia Tehnologies Pvt. Ltd. has been excluded for the reason that there were extraordinary events like merger and demerger during the relevant financial year which must have impacted the financial results of the company. In the case of Allsec Technologies Ltd., it was submitted that its annual report clearly indicates that the comparable cases high risk in contrast with the assessee. Regarding Bodh Tree Consulting Ltd., it has been submitted that its annual report for financial year 2006-07 and its previous year's annual report indicates that it had earned an extra-ordinary profit. Likewise, the assessee has tried to discussed in detail as to how all the selected twelve comparables by the authorities below are functionally dissimilar with the assessee, w....
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....vide business transfer agreement dated 14.11.2005. Given this, the Software Technology Parks of India (STPI), issued a letter dated 01.12.2005, wherein it allows the assessee to take over the activities of DT India and approved the aforesaid transfer of the activities of the Hyderabad Undertaking. The undertaking was taken over and continued by the assessee on a going concern basis and the change which took place was the change in the ownership of the undertaking. 10.1 The Learned AR submitted further that during the assessment year 2006-07, the assessee had duly claimed the deduction under sec. 10A in respect of the Hyderabad Undertaking and Assessing Officer had not disputed the claimed deduction of the assessee in the said assessment year and had duly allowed the deduction. The assessment order of DT India for assessment year 2006-07 which clearly demonstrated that DT India was eligible and the claim for deduction under sec. 10A of the Act is allowed to it was also submitted to the Assessing Officer. The Learned AR drew our attention to page Nos. 1151 to 1196 of the paper book i.e. copies of ITR, Computation of income and balance sheet of DT India for the assessment years 2006-0....
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....n 10A(2) of the Act are not fulfilled because it was formed by the splitting up, or the reconstruction, of a business already in existence and it was formed by the transfer to a new business of Machinery or Plant previously used for any purpose. 10.4 Considering the above submission, we find that there is substance in the contention of the Learned AR that mere change in ownership does not result in denial of the deduction under sec. 10A of the Act. The only dispute raised in the ground is as to whether sec. 10A(2) of the Act applies or not. The CBDT Circular F. No. 178/84/2012 - ITA-1 dated 17.1.2013 has made it clear in relation to availability of tax benefit under sec. 10A, 10AA and 10B of the Income-tax Act, 1961 in case of slump sales of an undertaking that on the sole ground of change in ownership of an undertaking, the claim of assumption cannot be denied to an otherwise eligible undertaking and the tax holiday can be available of for the unexpired period at the rate as application for the remaining years, subject to fulfillment of prescribed condition. We thus set aside the matter to the file of the Assessing Officer to decide the issue afresh in view of the above submiss....
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....Rs. 5,75,706 paid to KMPL even though it was required to be deducted. The Assessing Officer also failed to appreciate the settled law that wherein two interpretation of law are possible, the one which is beneficial to the assessee should be given effect. The Assessing Officer disallowed Rs. 5,75,706 under sec. 40(a)(ia) of the Act due to non-deduction of tax at source. 11.4 Without prejudice to the above submission, the Learned AR reiterated that Finance Act, 2012 introduced second proviso to section 40(a)(ia) of the Act w.e.f. 01.04.2013 which provides that "where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter-XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of sec. 201 of the Act, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the residents payee referred to in the said proviso". He submitted that to understand the effect of this proviso, it is useful to refer to first proviso to sec. 201(1) introduced w.e.f. 01.07.2012, which provides....
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.... of sec.194A shall not apply where income is credited or paid to any banking company to which the Banking Regulation Act, 1949 applied, especially when there is no dispute that Kotak Mohindra Bank Ltd. is a banking company to which the Banking Regulation Act, 1949 applies and further that section 19 of Banking Regulation Act, 1949 provides that a banking company shall not form any subsidiary company except a subsidiary company formed for under taking of any business which is permissible for a banking company to undertake. Again there is substance in the alternative submission of the assessee which is supported by the above cited decisions in the case of Rajiv Kumar Aggarwal (supra), Dr. Jai Deep Kumar Sharma (supra) and Raja Chakravorty (supra) that the amendments made by the Finance Act, 2012 to section 201 and Section 40(a)(ia) of the Act sought to be applied to cases prior to 01.07.2012 since the amendments are procedural in nature and are intended to remove the hardship being faced by the assessee, the amendments are declaratory and curative in nature and shall have retrospective effect. We thus set aside the matter to the file of the Assessing Officer to examine the submission....
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.... further that the assessee has deducted and deposited the tax when expenses were actually booked during the year. He submitted that no tax was required to be deducted on these provisions as these were merely book entries in respect of expenses on a best estimate basis, where the final amount is not ascertained and in many cases where even the payee is not known. The sections 194C, 194I and 194 of the Income-tax Act, 1961 require the deduction to be made either at the time of credit of the sum to the account of the payee or at the time of payment thereof in cash or issue of a cheque or draft or by any other mode whichever is earlier. He pointed out that each of the section has an "Explanation" which clarifies that where the sum is credited to any account, whether called "suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of the section shall apply accordingly. He placed reliance on the decision of Hon'ble Supreme Court in the case of Gursahai Saigal vs. CIT (1962) - 48 ITR 1 (S.C). The Learned AR submitted that where in t....