AI Drafter 
TaxTMI 
TaxTMI 
2015 (11) TMI 1651
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....e assessee. 3. The Ld. TPO erred in rejecting the comparability analysis conducted by the appellant for determining the impugned arm Length price on the basis of wrong and subjective assumptions. 4. That on the facts and circumstances of the case and in law the Ld. DRP erred in upholding the action the TPO in rejecting the search process carried out by the assessee on the ground that it is flawed. 5. The Ld. AO/DRP erred in law by arbitrary rejecting certain com parables by applying lower turnover filter of Rs. 5 crores against Rs. 1 crores applied by the assessee. 6. The Ld. AO/DRP erred in not applying upper filter of turnover. 7. The Ld. AOI DRP erred in arbitrary qualitative filters on ad hoc basis resulting in exclusion of functionally appropriate comparables. 8. That on the facts and circumstances of the case Ld. DRP erred in upholding the employee cost filter more than 25% of total cost instead of applying range of +/- 15% of the said ratio in the assessee's own case. 9. The Ld.TPO/DRP erred in selecting certain entities in the final set of comparables, which are inappropriately functionally dis-similar. ....
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....ced that remuneration model of tested party was cost plus model which envisaged a mark up of 15% in the year under consideration. Assessee had earned a net margin of 17.43% as compared to the average margin of comparables mentioned in the TP report of 9.66%. He examined the filters used by assessee in search process and rejected the assessee's filters. As regards selection of companies based on financial information for FY 2007-08 to 2009-10 observing that as per Rule 10B(4) only current year data could be used. He also did not accept the asessee's filters, which resulted into selection of certain companies that had been declared sick or had persistent negative net growth. Ld. TPO also applied certain new filters in order to arrive at comparables having maximum proximity with the tested party. 4. Ld. TPO, inter alia, applied following filters: - Reject companies with different financial year - Reject companies where turnover is less than Rs. 5 crores - Select companies where the ratio of service income to total income is at least 75% - Select companies where income from exports is at least 75% of total income - Reject companies where ....
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....lobal Ltd. 23.97 3. 34e Healthcare 36.64 4. Fortune Infotech Ltd. 25.15 5. I-gate Global Ltd. 27.77 6. Infosys BPO Ltd. 38.96 7. Jindal Intellicom Ltd. 11.86 8. Microland Ltd. 1.46 9. Omega Healthcare 19.31 10. TCSE serve International Ltd. 59.13 11. TCSE Serve Ltd. 69.23 Average 32.53 9. At the time of hearing, ld. counsel for the assessee did not press ground nos. 1,3,4,6,7,8,11. Accordingly, they are dismissed as not pressed. Ground no. 15 is premature and, therefore, does not require any adjudication. 10. Apropos ground no. 5, ld. counsel submitted that turnover filter of Rs. 5 crore applied by TPO as against Rs. 1 crore applied by assessee, for inclusion/ exclusion of any comparable, is not correct in view of the decision of Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P) Ltd. Vs. DCIT (2015) 277 CTR 137 (Del), wherein it has been held that mere fact that entity makes high/ extremelyhigh profits/ losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP; in such ci....
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....d. (supra). Ld. counsel pointed out that in the present assessment year, only one comparable viz. C.G. Vak Software Export Ltd., has been excluded by applying this filter by TPO, which, in any case, is covered by the decision of the Tribunal in the case of Techbook International Pvt. Ltd. Therefore, in the present assessment year, matter need not to be restored. This ground is disposed off accordingly. 15. Ground nos. 9 & 10: These grounds are in regard to selection of comparables. Ld. counsel pointed out that essentially assessee is aggrieved by the inclusion of following comparables: i. Accentia Technologies Ltd. ii. I-gate Global Ltd. iii. Infosys BPO Ltd. iv. TCS E-serve International Ltd. v. TCS E-Serve Ltd. 16. As regards Accentia Technologies Ltd., ld. counsel referred to pages 350 & 351 of the PB-II, wherein the annual report of this company is contained. He pointed out that in the year under consideration Asscent Infoserve Ltd. amalgamated with this company w.e.f. 1-4-2008. He pointed out that Accentia Technologies Ltd. was engaged in the business of medical transcription and coding and had softwares which were being used by the Accential Technologies ....
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....s directed to be excluded from the final list of comparables." 19. Having gone through the annual report and keeping in view the extraordinary event in the year under consideration, we are in agreement with ld. counsel that this comparable cannot be taken into consideration while determining the average margin earned by the comparables. Ld. counsel has submitted that in the case of Techbook International Pvt. Ltd. (supra), this company has been excluded and, accordingly, in the present case also this should be excluded, because the functional profile of Techbook International Pvt. Ltd. (supra) and that of assessee is similar. We find that Tribunal in the case of Techbook International Pvt. Ltd. (supra), in regard to the business profile of Techbook International Pvt. Ltd. (supra), has observed as under: "Succinctly, the assessee was incorporated as a wholly owned subsidiary of Aptarausa. It is engaged in the development of customized electronic data. It converts data from hard copy or files into XML/SGML/HTML, creating electronic style files and modifying the user interface for CD-ROM delivery. In the process, raw data received from the customers in hard copy/ electronically,....
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....g Outsourcing (BPO) services, primarily to Citigroup entities globally. The Company's operations broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities." 23. Ld. counsel referred to page 467 and pointed out that in the notes forming part of the financial statements, it has been observed as under: "Segment information: Consequent to reorganization of its global organization with the objective of making industry practice its focal point for performance evaluation and internal financial report and decision making, the Company has reviewed and revised the manner in which it views the business risks and returns and monitors its operations. Accordingly, as required under Accounting Standard 17 "Segment Reporting" (AS-17), the format of reporting primary segment information has been changed to Business....
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.... of a software. From the above discussion, it is overt that a company providing software development services IS distinct from and incomparable with a company providing non-development software services. 10.2.3. We find that the assessee is a. company providing nondevelopment software services, in the nature of conversion of data from hard copy or files into electronic format. The assessee is not providing any software development services to its AE. On the other hand, this company IS also providing 'Technical services' to its AE involving software testing, verification and validation of software, which are akin to software maintenance services falling, within the overall category of software development services. The TPO has taken entity level figures of TCS E-Serve International Ltd. for comparison, There is no bifurcation available in respect of the revenues of this company from Transaction processing (which are in the nature of ITES, the same as provided by the assessee) and Technical services (which are in the nature or software developn1ent, absent in the assessee's case). In the absence of the availability of any such segregation of the total revenue of this c....
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....ical services carried out by the comparable, was given. He pointed out that on the same reasoning, as in TCS e-Serve International Ltd., this should also be excluded. 30. Having heard both the parties, we find that in the case of Techbook International Pvt. Ltd. (supra), the Tribunal has declined to exclude this comparable, inter alia, on the ground that this company was not providing any technical service involving software testing, verification and validation of software. We find that the Tribunal has observed as under: "10.3.2. We have heard the rival submissions and perused the relevant material on record. A copy of the Annual report of this company is available on page 466 of the paper book. The company's overview has been discussed on page 467 of the paper book, which divulges that this company : "is in the business of providing business process management services in the banking and financial services (BFSI), vertical ( i.e. industry vertical) to help its customers achieve their business objectives by providing innovative best-in-class services." We find that this company is also providing ITES. Unlike TCS e- Serve International Ltd. this company is not providing a....
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....fotech Ltd. and Infosys Technologies. The DRP excluded Sat yam Computer only. The Tribunal eluded only Infosys Technologies Ltd., by impliedly retaining L&T Infotech Ltd. as a good comparable. On appeal by the Revenue, the Honourable High Court upheld the Tribunal order excluding Infosys on the strength of certain relevant distinguishing features including its giantncss in terms of sales, nature of work and other factors. Thus it follows that L&T Infotech Ltd., which is otherwise a vast company with much higher turnover, finally found the status of a comparable with a captive company providing ITES to its AE alone. 10.3.4. Coming back to the facts of our case, we find that since TCS e- Serve Ltd. is functionally comparable with the assessee company on an overall basis and no special reasons for its higher profit/ turnover have been brought to our notice. Consequently, we hold that the authorities were justified in including this company in the list of comparables". 31. However, the main contention of ld. counsel for the assessee is that the assessee in Techbook International Pvt. Ltd. (supra), did not bring to the notice of the Tribunal, certain business characteristics, whic....
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.... set of comparables." 35. Respectfully following the Tribunal's decision in the case of Techbook International Pvt. Ltd. (supra), this company is excluded from the list of comparables. 36. Ld. counsel submitted that following entities have wrongly been excluded by ld. TPO/ DRP: - CG VAK Software and Exports Ltd. - Microgenetics Systems Ltd. 37. As regards CG VAK Software and Exports Ltd., brief facts are that TPO had rejected this company on the ground that it did not qualify the sales filter. He observed that the sales from the ITES segment was less than 5 crores, therefore, this company could not be considered as a suitable comparable. 38. We have heard rival contentions and perused the relevant material available on record. While deciding ground no. 5, we have held that in view of the decision of Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P) Ltd. (supra), high or low turnover cannot be the criteria for acceptance/ rejection of any comparable. Ld. TPO has not disputed that this comparable is carrying on the same functions as that of assessee. Further, we find that this comparable has been accepted by the ITAT in the case of....
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....party transactions are not even 5%. He pointed out that on functional aspect there is no dispute that tested party as well as this company are performing the same functions. He further pointed out that in the case of Techbook International Pvt. Ltd. (supra), this comparable has been accepted, on the same footing on which CG VAK Software and Exports Ltd has been accepted, observing as under: "12.3.2. We do not find any reason to exclude this company from the list of comparables merely on the ground that its turnover is less. The reasons given above while considering the comparability of CG- VAK Software and Exports apply to this company as well. We, therefore, order for the inclusion of this company in the list of comparables. However, the TPO is directed to verify the correctness of OP/OC of this company before its inclusion in the set of comparables. 42. In view of above discussion, we direct ld. TPO to include this company in the set of comparable. 43. As regards exclusion of Informed Technologies Ltd., ld. counsel did not dispute the same. 44. In view of above discussion, ground nos. 9 & 10 stand partly allowed for statistical puroses. 45. Ground no. 12: Brief fac....
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....amortization prior period normal business expenses, net foreign exchange loss, fringe benefit tax etc. and appropriate share of the common expenses apportioned. The learned TPO has in her order, considered foreign exchange gain or loss as a non-operating item. It is respectfully submitted that treatment of foreign exchange gain or loss as operating or non operating items depends upon the cornparability of the terms of conditions of the agreement of the Assessee with the terms of the business operations of the Assessee. As compared to tile Assessee the comparable selected by the learned TPO undertakes foreign exchange risk and the price charged by such comparables for undertaking such risk is in built in the sales remuneration model. Therefore, by treating foreign exchange gain or loss as a non-operating item, the comparability terms and conditions of business of the Assessee is not aligned to the comparables. Thus, in order to make a suitable comparison of the margin earned by the Assessee vis-a-vis that of the comparable companies, either of the following approaches needs to be followed: Consider foreign exchange gain or loss as operating item and benchmark the net margin ea....
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....itted that firstly there is no separate consideration of this aspect in that decision. He pointed out that perusal of the decision shows that forex loss/ gain, which had been considered by the Tribunal, was linked to other non-operational receipts. It was in this context that it was held that forex gain/ loss was non-operational. He pointed out that nature of foreign exchange fluctuation was not clear as to whether on capital account or on revenue account. 53. Ld. counsel relied on the decisions in the cases of : - Woodward Governor's 312 ITR 254 (SC); - CIT Vs. Priyanka Gems 367 ITR 575 (Guj); - Cordys R & D (India) (P) Ltd. Vs. DCIT (2014) 43 Taxmann.com 64 (Hyd. Trib) wherein the Tribunal has, inter alia, observed that the foreign exchange fluctuation gains is nothing but an integral part of the sale proceeds of an assessee, carrying on export business and, therefore, it could not be excluded from the computation of the operating margin of the assessee company. 54. Ld. CIT(DR) relied on the TPO's order. 55. We have considered the rival submissions and have perused the record of the case. We find considerable force in the submission of ld. counsel for the assess....