TaxTMI 
TaxTMI 
2016 (8) TMI 1222
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.... certain functionally dissimilar companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed and excluding certain comparable companies on arbitrary/frivolous grounds; .......... 6. The Ld. AO erred in confirming the addition of imputed interest made by the Ld. TPO, without having considered the directions by the Ld.DRP and not giving any opportunity to the Appellant to be heard or to explain, that the Appellant has relevant documents to clearly lay out the terms of payment supported by the invoices and agreements in place (which clearly state the payment terms being 180 days)." 2. In the context of Ground No.4.5, the Ld.AR submitted that the assessee is engaged in IT enabled services and software development services to its group companies as per the TP study made available by the taxpayer. The assessee, it was submitted is primarily engaged in the provisions of Information Technology (hereinafter referred to as "IT") enabled back office support services in the nature of customized business/financial research support to Copal Group. In return for rendering these services the assessee was remunerated on ....
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....l Intellicom Pvt.Ltd. 13.92% 8. Microland Ltd.-IT Enabled Services -3.79% 9. Sparsh B P O Services Ltd. 2.77% 10. Tata Services Ltd. 1.39% 11. Techprocess Solutions Ltd. (Processing) 3.98% Arithmetic Mean 8.13% 2.3. The economic analysis in the TP study as well as the fresh search undertaken by the assessee was objected to by the TPO who issued a show cause notice and proposed to substitute the results of the assessee's economic analysis with the results of fresh search undertaken by himself applying his own set of quantitative and qualitative filters. 2.4. In response to the show cause notice, the assessee filed submissions dated 10.12.2013 setting out its arguments/contentions against the approach proposed to be followed by the TPO. Some of the comparables sought to be excluded/included by the TPO were objected to on the basis of specific documents. Copy of these it was submitted is placed at pages 316 to 447 of the Paper Book. 2.5. Referring to the TPO's order dated 16.01.2014 it was submitted that notwithstanding the detailed submissions, the assessee was served with the aforesaid order wherein OP/TC margin of the following ....
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....submitted have not been carried out. 2.8. In this background referring to the finally set up comparables companies selected by the TPO, it was submitted that the comparable found mentioned at Sl.No.3, 4, 5, 9 & 10 are objected to and the objections posed in the written submission to the comparables found mentioned at Sl.No.6 is not being pressed. 2.9. In this background it was submitted that relying upon the said ground 4.5, the assessee has two fold requests that is the exclusion of the 7 (now six) specific comparable companies introduced by the TPO and inclusion of 6 new comparable companies which have not been included by the TPO or the DRP. The reasons in support of their exclusion and exclusion it was submitted is based on judicial precedent and facts as set out in the synopsis filed. The 7 (now six) comparable companies whose exclusion is sought, it was submitted are found mentioned at serial No. 3, 4, 6,5, 7, 9 and 10 and they read as under:- (i) Infosys BPO Limited; (ii) Accentia Tech. Limited; (iii) E4E Healthcare; (iv) Igate global Solutions Limited; (v) TCSE-Serve International Limited; and (vi) TCSE-Serve Limit....
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....O Services Limited 2.77% 2.77% 14 In House Productions Limited -(Healthcare Segment) 17.30% 17.30% 15 TCSE-Serve Limited 63.42% X 16 AOK In House BPO Services Limited 0.27% 0.27% 17 Tata Services Limited 1.39% 1.39% Arithmetic Mean 20.79% 7.95% 3.1. Addressing the reasons for seeking exclusion of the 7 comparable companies which has been modified to a list of 6 comparable companies, the Ld. AR submitted that exclusion of Accentia Technologies Ltd is sought on the ground that the said comparable is engaged in diversified activities such as knowledge process, outsourcing, legal process outsourcing, data process outsourcing, thus it is engaged in high-end software services. It was his submission that without assigning any reasons, the comparable has been retained. The objections it was submitted were before the DRP also. 3.1.1. Apart from that it was submitted that during FY 2009-10, Accentia amalgamated with one of its subsidiaries. Consequently, the extraordinary event impacted the overall profitability of Accentia as its financial results for the year ended March 31,2010 are inclusive of the figures of t....
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....he 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." These objections it was submitted were before the DRP despite that the comparable has been retained without assigning any reasons. 3.6. Exclusion of TCS E-Serve Limited, it was submitted has been sought on the ground that this company is into provision of Business Process Outsourcing activities and technical services like software testing, verification and validation of the software. The ownership of IPRS also makes payment for the brand Tata, the said comparable an incomparable. 4. Addressing the inclusion of the 6 comparables which was requested the Ld.AR submitted that the comparables have been wrongly rejected by the TPO and the objections of the assessee have been over-ruled by the DRP. 4.1. Addressing Sparsh BPO services Ltd it was submitted it has been excluded by the TPO on the ground that it fails the export sales filter and the net worth filter on which reasoning the DRP has refused to interfere. The Ld. AR submitted that the assessee does no....
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....y raising arguments that there has been "restructuring" or "amalgamation" in the case of a company by itself can not lead to the conclusion that the net profitability of the comparable company has been impacted so as to exclude the same. It was his submission that the law requires that the assessee demonstrates that as a result of some extraordinary event the net profitability of the company is impacted only then it should be taken out from the list of comparables. Advancing general arguments without demonstrating this fact it was his submission can be of no help to the assessee. Relying upon judicial precedent where these facts were not argued by the Revenue and wherein on account of absence of any argument from the Revenue the mere event of amalgamation or restructuring has been taken to be a situation that the comparable has to be excluded, it was submitted cannot be said to be precedent for all times to come. The objection of the Revenue it was submitted has to be addressed by the assessee and the law requires the assessee to demonstrate the impact of the event on the comparables net profitability. It was his submission that the method followed is TNMM and the requirements of t....
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.... filter as per the TPO and Tech Process Solutions Limited Processing Services Segment though the TPO has given a finding that functionally it is not comparable, the DRP has categorically observed that it fails the export filter and thus the argument of the assessee may be dismissed. 6. We have heard the rival submissions and perused the material available on record. A perusal of the TPO's order shows that Copal India has an ITES agreement with Copal Group under which it provides services to its foreign AE. It primarily provides back office support for Copal Group's global operations through customized research and information support service, data entry and data mining services etc. It has been described that the range of services provided by the Company varies from business information/data gathering, transaction processing, library document services, data mining/entry and general business information research support services. In the year under consideration, the following international transaction was disclosed by the assessee in this transfer pricing report:- S.No. Description of the transactions Amount (In Rupees) 1. Provision of IT enabled back office suppor....
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....t geographical locations the same should be taken as a comparable. The rationale of this filter is discussed below: As per Sub-Rule (1) of Rule 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to conditions prevailing in the markets, the geographical location, the size of the market, costs of labour, overall economic development, level of competition etc. In this regard, the relevant portion of Rule 10B is reproduced as under: "conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail". ....... The domestic companies cannot be treated as comparable to the taxpayer who is wholly or mainly export oriented because: a) conditions prevailing in the export and domestic market in which the respective parties to the transactions operate are different b) geographical locations(domestic and expor....
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....tomer is different in the case of domestic market which is India and export market of the taxpayer and also pricing mechanism is influenced by such factors for which reasonable adjustments cannot be made to account for the differences in geographical markets, and. other prevailing market conditions like level of competition etc." 6.3. The said issue was agitated before the DRP and rejected on the following reasoning:- "On this issue, the reasoning of the TPO and the arguments of the taxpayer has been considered by this Panel. The taxpayer is mainly an export oriented software development service provider getting primarily revenues from exports in this segment. Hence, minimum threshold limit of 75% export earnings from software development services was applied wherein the companies whose export revenues from software developments services are less than 75% of the operating revenues were excluded as these companies operate predominantly in India when compared to the taxpayer whose practically entire revenue come from exports. Exports of taxpayer in IT enabled services are 100%,. So, comparable companies will be those companies where most of the income is from exports. Hen....
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.... The Hon'ble Delhi High Court in order dated 10.08.2015 has categorically held in the case of Rampgreen Solutions Pvt. Ltd. vs CIT that a company who is providing routine call centre services cannot be equated to a KPO. The Hon'ble Court has held that KPO indicates the involvement of advance skills; the services provided may include analytical services, legal research, engineering and design services, intellectual managements etc. A KPO is understood as a high-end value added process chain wherein the processes are dependent on advanced skills, domain knowledge and the experience of the persons carrying on such processes. Thus, the prayer on facts needs to be considered. We also find that instances where segmental have not been made available necessitate that the said comparable should be excluded. Instances where the services are shown to be outsourced or for that matter the services are performed off-site and it can be shown that the net profitability of the company is impacted would again necessitate their exclusion. Similar would be the position where related party transactions filter is not fulfilled would justify its exclusion. Instances where the assessee can demonstrate tha....
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....bility to the extent insisted upon by the taxpayer before the ITAT is not in the true spirit of the method and in fact violates and is contrary to the reasoning and rational of the methodology having been chosen and accepted. In the facts of the present case, we find that intense hair splitting exercise which has been done by the taxpayer on the basis of which exclusion of the 6 comparables is sought agreeing fundamentally that the judicial precedent is clear by the decision of the Hon'ble jurisdiction High Court in the case of Ramp Green Solutions Pvt. Ltd. vs CIT 377 ITR 533 (Delhi) that KPO cannot be said to be equated to a low-end ITES enabled company. We find that in the facts of the present case the FAR analysis characterization which is the fundamental foundational fact is an exercise which is required to be addressed. Considering the arguments raised, we find that the occasion to raise argument for exclusion of six comparables and inclusion of another six comparables which argument we have rejected has arisen solely on account of the fact that the foundational exercise of proper FAR analysis of the assessee has not been done. Drawing support from the order dated 13.07.2016 ....