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2015 (10) TMI 2625
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....10- 2009 declaring total income of Rs. 71,20,590/-. 3. During the course of assessment proceedings, the AO noted that the assessee has shown income from support services of Rs. 10,52,92,835/- and other income of Rs. 49,89,078/- on which a net profit of Rs. 65,01,060/- has been disclosed. The AO noted that the assessee has entered into the following international transactions with its Associated Enterprises the details of which are as under : Sr. No. Nature of the Associated Enterprises Amount (Rs.) 1 Schlumberger Technology Corporation, USA 7,51,09,169 2 Etudes ET Productions Schlumberger, France 2,81,49,402 3 WesternGeco AS, Norway 5,27,936 4 Schlumberger Vector SA, France 15,06,328 TOTAL 10,52,92,835 4. Since the international transactions were below Rs. 15 crores the case was not referred to the TPO. However, the AO examined the case of the assessee from transfer pricing angle. From the TP study report submitted by the assessee, the AO noted that the assessee has selected TNMM as the most appropriate method to benchmark its international transactions. The assessee has considered 5 companies as comparabl....
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.... Operating Profit 8,058,892 Operating Profit / Operating Cost 5.78% 6. After considering the annual reports of the comparables, the AO noted that the PLI working in the case of the assessee taking PBIT/OC is 5.78% whereas the PLI working of the comparable companies finally selected by him comes to 29.02%. Similarly, the PLI working after considering the working capital adjustment of the comparables selected by him comes to 24.33%. The companies selected by the AO at para 7 of the order is as under : Sr. No. Name of the comparable company PLI% (OP/OC) PLI% (OP/OC) after considering working capital adjustment Remarks 1 CG-VAK Software and Exports Ltd. 3.84 -0.44 As per assessee's working 2 Cosmic Global Ltd. 50.70 50.70 The assessee may provide capital working adjustment in this case 3 Informed Technologies India Ltd. 22.95 21.95 As per assessee's working 4 Vishal Information Technologies Ltd. 38.61 25.13 As per assessee's working Average 29.02 24.33 &nb....
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.... earlier years. Since assessee's business module is cost plus nature wherein there is no possibility of incurring losses, therefore, the AO held that Allsec Technologies Ltd. cannot be compared with the assessee company. He accordingly rejected the same from the list of comparables. 12. So far as R systems International Ltd. is concerned the AO noted that the assessee company in its accept/reject matrix of the TP report had rejected this comparable as functionally different. However, the assessee has not at all discussed in any of the submissions made as to how the company has become functionally comparable. According to the AO companies having different financial year data (other than march 2009) or data of the comparable companies not falling within the relevant financial year, i.e. 01-04-2008 to 31-03-2009 should not have been considered because only contemporary data should be considered. According to the AO if a tested party ends its accounting year by March, then taking companies whose accounting year ends with March will be more appropriate comparable and their selection will lead to proper comparability. Thus considering the overall circumstances the AO held that this co....
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..... Accordingly, he rejected the contention of the assessee and considered Cosmic Global Ltd. as comparable. Relying on various decisions the TPO rejected the contention of the assessee regarding the benefit of +/- 5%. The AO accordingly considered the following 5 companies as comparable whose PLI, i.e. OP/OC comes to 17.92%, the details of which are as under : Sr. No. Name of the comparable company PLI = (OP/OC)% after considering working capital adjustment Sr. No. Name of the comparable company PLI = (OP/OC)% after considering working capital adjustment 1. CG-VAK Software and Exports Ltd -0.44 2. Cosmic Global Ltd 43.75 3. Informed Technologies India Ltd 21.95 4. Microgenetics Systems Ltd. -0.77 5. Vishal Information Technologies Ltd 25.13 AVERAGE (89.62/5) 17.92 16. After considering the arithmetic mean of the profit level indicators of comparables as the arms length margin, the AO made an adjustment of Rs. 1,27,15,040/- to the total income of the assessee, the details of which are as under : (Amount in Rs.) Operating Cost 10,47,65,247 Arms Length Mean margin (OP/OC) 1....
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....he Appellant prays for computing the arm's length price of the Appellant's international transaction of provision of technical support services after conducting economic adjustment for differences in risk profile of the Appellant and the comparables. 5. The Hon'ble Panel / Ld. AO have erred in not considering multiple year financial data of the comparables while computing the arm's length price of the Appellant's international transaction of provision of technical support services. The Appellant prays for consideration of multiple year financial data of the comparables for determination of the arm's length price of the Appellant's international transaction of provision of technical support services. 6. The Ld. AO has erred in levying interest under Section 234A and Section 234B of the Act. The Appellant prays for deletion of interest levied by the Ld. AO under Section 234A and Section 234B of the Act. The above grounds are without prejudice to each other The Appellant craves leave to add, alter, vary, omit, substitute or amend one or more of the above grounds at any time before or at the time of proce....
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....t provided any specific super profit threshold of 50% or otherwise for rejection of Cosmic Global Ltd. She submitted that a cost plus 5% entity cannot be reasonably expected to earn a margin of 43.75%. Referring to the profitability trend of Cosmic Global Ltd. she drew the attention of the Bench to the following table : Year Sales Rs. Margin 2006-07 4,27,73,232 12.19% 2007-08 5,86,63,285 24.30% 2008-09 7,37,02,584 43.75% 2009-10 5,86,37,419 16.59% 2010-11 6,24,96,615 8.06% 23. She submitted that the above table demonstrates that while F.Y. 2008-09 was a year of abnormal profit therefore it is liable for rejection in view of the decision of the Special Bench of the Tribunal in the case of Maersk Global Centres India Pvt. Ltd. Vs. ACIT reported in 43 taxmann.com 100 (Mumbai) (SB). She submitted that in case Cosmic Global Ltd. is still to be considered, then its profits need to be averaged out by using multiple year data. The Ld. Counsel for the assessee further submitted that Cosmic Global Ltd. has paid translation charges to third parties which indicates outsourcing of work. The assessee however does not outsource th....
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..... fails the RPT filter. In the order of the DRP the directions are silent on the issue of wrong RPT to sales computation. However, they held that since Cepha Imaging Pvt. Ltd. is engaged e-publishing business and mainly carries out data conversion work for which the said company cannot be compared with that of the assessee company. 28. The Ld. Counsel for the assessee submitted that TNMM requires comparability at a broad functional level. Referring to page 189 of the paper book she submitted that Cepha Imaging Pvt. Ltd. is in the business of e-publishing services which include type-setting, composition art work, proof reading, project management etc. which is IT enabled service provider like that of the assessee. She submitted that the assessee in fact is also involved in file conversion, content modification, test editing etc. as part of its back office support services. This is similar to data conversion which is a key activity of Cepha Imaging Pvt. Ltd. She submitted that if the correct computation is made by excluding the debtors and creditors, then the RPT to sale in case of Cepha Imaging Pvt. Ltd. comes to 17.72%. Referring to the various decisions she submitted that TNMM ....
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....ms International Ltd. is concerned she submitted that the AO rejected the same on the ground that the assessee had rejected R Systems International Ltd. in its TP study report and the company has different financial year. The DRP upheld the action of the AO holding that R Systems International Ltd. is in product development and product seller and therefore it cannot be considered as comparable. 33. The Ld. Counsel for the assessee submitted that R Systems International Ltd. has reported its BPO segment separately. BPO segment is comparable to the back office activity of the assessee. She submitted that merely because accounting year is different the same does not imply that a company is functionally incomparable. The contemporaneous return for the functions irrespective of the accounting period would provide an appropriate comparable. 34. Referring to the following decisions, she submitted that different accounting year does not warrant rejection of comparable : "1. Pentair Water India Pvt. Ltd. Vs. ACIT - ITA No.2/PNJ/2013 order dated 17-04-2014 2. Maersk Global Service Centres India Pvt. Ltd. Vs. DCIT - ITA No.2594/Mum/2014 order dated 16-01-2015" 35. S....
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....arative zone. She accordingly submitted that the AO and DRP were justified in excluding this company as comparable. 40. As regards R Systems International Ltd. is concerned the Ld. Departmental Representative submitted that the assesee itself had rejected R Systems International Ltd. in its TP study report as functionally different. Further, DRP has also given a finding that R Systems International Ltd. is in product development and product seller, therefore, this company cannot be considered as comparable. 41. Referring to the decision of the Bangalore Bench of the Tribunal in the case of Genesis Integrating System (India) Pvt. Ltd. Vs. DCIT reported in 53 SOT 89, she submitted that the Tribunal has held that the TPO has to give reasons for inclusion/exclusion of a comparable company. Therefore, the same ratio also is applicable to the assessee. The assessee cannot be permitted to take different stand at different time before Revenue authorities. 42. As regards the risk adjustment is concerned she submitted that this issue was never before the AO. There is no finding by the AO on this issue. For the first time, the assessee took the ground before the DRP who rejected the ....
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.... it was 16.59% and for F.Y. 2010-11 it was 8.06%. However, for F.Y. 2008-09 the profit margin is 43.75%. Thus, during F.Y. 2008- 09 there is abnormal profit as compared to the 2 preceding and 2 succeeding years. 48. We find the Special Bench of the Tribunal in the case of Maersk Global Centres India Pvt. Ltd., (Supra) at para 99 of the order has observed as under : "99. The question No. 2 referred to this Special Bench is as to whether, in the facts and circumstances of the case, companies earning abnormally high profit margin should be included in the list of comparable cases for the purpose of determining arm's length price of an international transaction. As already observed, the issue involved in this question has become infructuous in so far as the case of the assessee before the Special Bench is concerned and the same therefore no more survives for consideration in the present case. In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as co....
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....succeeding years which has been pressed into service by the assessee to demonstrate abnormal profit trends of the said concern was not available with the assessee at the time of carrying out its Transfer Pricing Study. Therefore, having regard to the facts and circumstances of the present case, in our view, assessee has justifiably demonstrated that the concern M/s. Bodhtree Consulting Ltd. is liable to be excluded from the final set of comparables, even though the said concern was considered as a comparable initially in its Transfer Pricing Study. Therefore, on this aspect, we conclude by holding that the concern, M/s. Bodhtree Consulting Ltd. be excluded from the final list of comparables for carrying out the comparability analysis. We hold so." (emphasis supplied by us) 50. In view of the above decisions and considering the fact that Cosmic Global Ltd. had abnormal profit in the F.Y. 2008-09 as compared to 2 preceding and 2 succeeding years we are of the considered opinion that Cosmic Global Ltd. cannot be considered as a comparable and has to be excluded from the list of comparables. 51. Even otherwise also, we find merit in the submission of the Ld. Counsel for ....
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.... has outsourced major activities in comparison with the assessee doing its business in- house. It goes without saying that these two business models, namely, outsourcing services and providing in-house services, cannot be ITA No.1897/Del/2014 compared with each other because of their inherent differences. Since the TPO has considered this company as comparable on entity level, we hold that the same cannot be so treated. Similar view has been taken by the Tribunal in the case of United Health Group Information Services Pvt. Ltd. Vs. ACIT (ITA No.6312/Del/2012) vide its order dated 28.8.2014. Respectfully following the precedent, we direct the exclusion of this company from the list of comparables. Accentia Technologies Ltd." 52. Following the decision cited (Supra), we hold that even on this issue also Cosmic Global Ltd. cannot be considered as comparable. We accordingly direct the AO to exclude Cosmic Global Ltd. from the list of comparables. Ground of appeal No.2 is accordingly allowed. 53. So far as ground of appeal No.3 is concerned the grievance of the assessee is regarding rejection of certain companies which according to the assessee are comparable. 54. Coming to Cep....
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....SGSCL was established as a branch on 27th September 2007 and commenced operations on 1 December 2007. SGSCL is engaged in providing technical support servicdes (engineering back-office services) to various overseas Schlumberger group companies. SGSCL provides services related to preparation, correction and editing of datasheets and drawings to its associated enterprises ('AEs')." 59. We therefore find force in the submission of the Ld. Counsel for the assessee that TNMM requires broad comparability and since the activity carried out by the assessee is similar to data conversion which is a key activity of Cepha Imaging Pvt. Ltd, therefore, this company should not be rejected. 60. The Bangalore Bench of the Tribunal in the case of GE India Technology Centre (P) Ltd. Vs. Dy.DIT reported in 30 taxmann.com 249 (Bangalore-Tribunal) at para 34 of the order has observed as under : "34. As per the principles of comparability, controlled and uncontrolled transactions are regarded as comparable if their economically relevant attributes and the circumstances surrounding them are sufficiently similar to provide a reliable measure of an arm's length result. However, in reality, tw....
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....sorbed in this method." 62. In view of the above discussion, we hold that Cepha Imaging Pvt. Ltd. should be considered as a comparable, if the RPT to sales is less than 25%. 63. So far as Allsec Technologies Ltd. is concerned we find the AO excluded the same from the list of comparables on the ground that the assessee had rejected the same in its TP study and there was abnormal increase in the employee cost and general administration cost in F.Y. 2007-08 due to take over of B2K Corporation Pvt. Ltd. and new facilities started at 2 locations. This also has effect on the current year resulting in loss due to peculiar economic circumstances in earlier and current year. Since the assessee was following a cost plus business model where it cannot incur loss, therefore, the AO held that Allsec Technologies Ltd. is not comparable. We find the DRP apart from upholding the findings given by the AO held that Allsec Technologies Ltd. is engaged in data verification, processing of orders received on telephone calls, telemarketing, monitoring quality of calls and other call centres, customer centre, HR and payroll process and therefore it is functionally dissimilar. 64. It is the case o....
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....We find the Ld. Counsel for the assessee while arguing the case for exclusion of Cosmic Global Ltd. has argued that the same company had to be excluded since it had paid translation charges to third parties indicting outsourcing of work. For the above proposition, she also relied on various decisions. Therefore, once it has been found by the DRP from the director's report that R Systems International Ltd. is leading provider of outsource product development services, business process, outsource service and also own product suites in BFSI, manufacturing and logistics verticals etc., therefore, in the own arguments of the Ld. Counsel for the assessee this company is functionally dissimilar and therefore the same cannot be accepted as comparable. In this view of the matter, we uphold the order of the AO/DRP on this issue. 65.1 The ground of appeal No.3 by the assessee is accordingly partly allowed. 66. Now coming to the issue regarding risk adjustment, we find the draft assessment order is silent on this issue. The assessee for the first time took a stand before the DRP who also rejected the contention of the assessee on the ground that assessee has not produced complete analysi....