TaxTMI 
TaxTMI 
2016 (7) TMI 1373
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....determine the arm's length price (ALP) of the international transactions undertaken by the assessee. 2.1 The Ld. TPO issued notice calling for various details from the assessee. The assessee accordingly filed documentation prescribed under Rule 10 D of the Income Tax Rules and other details sought by the ld.TPO. The ld.TPO observed that assessee had provided information technology enabled services to its AE, which is as under: S.N. Nature of Transaction Method Amount (INR) No.of comparables Arm's Length Result Result of assessee 1 Provision of information Technology Enabled Services TNMM 202,507,139 12 12.68 % 17.00% 2.2 The assessee had used the transactional net margin method (TNMM) as the most appropriate method (MAM) to benchmark the international transaction. The assessee used operating profits to operating cost (OP/OC) as the profit level indicator (PLI) to determine the margin of the comparables. 2.3 The Ld.TPO has not objected the MAM and the PLI calculated by the assessee. The only issue that has been disputed by the ld.TPO is in respect of the selection of comparables. Following are the set of comparables selected by the assessee for ITES segment.....
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....bjections of the assessee in respect of Eclerx services Ltd, ICRA Techno Analytics Ltd., and excluded these companies from the list of comparables. The DRP confirmed the addition made by the Ld.TPO in respect of foreign exchange fluctuation while computing the operating margins of the comparable companies as well as the assessee. On receipt of the directions passed by the DRP, the Ld. AO passed the assessment order on 21/01/2016, making the impugned additions. 3. Aggrieved by the order of the Ld.AO the assessee is in appeal before us on the following grounds: "1. That on facts and in law, the impugned order/directions passed by the Income Tax Officer, Ward - 8(4), New Delhi ("Learned AO")/ Deputy Commissioner of Income Tax - Transfer Pricing Officer - 1 (2)(1) {erstwhile TPO 1 (3)}, New Delhi ("Learned TPO")/ Hon'ble Dispute Resolution Panel ("Hon'ble DRP"), making an addition of INR 21,057,956 to the total income of the Appellant on account of adjustment in the arm's length price is bad in law. 2 That on facts and in law, the Ld. DRP/TPO/AO have erred in computing the total income of the Appellant at INR 26,456,900/- as against the returned income of INR 1,997,189....
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.... 10. That on the facts and in the circumstances of the case, the Ld. DRP/TPO/AO have erred, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies. 11. That on the facts and in the circumstances of the case, the Ld. DRP/AO have erred, by setting off unabsorbed depreciation from current year business profits prior to Setting off brought forward business losses. 12 That on the facts and in the circumstances of the case, the Ld. DRP/AO have erred, by initiating penalty proceedings under section 271(1)(c) of Act without recording any adequate reasons for such initiation. 13 That on the facts and in the circumstances of the case, the Ld. AO have erred, in charging interest under section 234 B of the Act. The above grounds of appeal are mutually exclusive & without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case." 4. We have heard the r....
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....Costs year and refers to all the operating direct and indirect expenses incurred by the assessee in rendering the specified IT enabled service to the E as per the agreement entered into between them. 5.3 Assessee is not exposed to market risk as it renders IT enabled services to its AE and is assured of a specified return on its cost. It does not bear any credit and collection risk. As the assessee receives its remuneration in foreign currency and any foreign exchange fluctuation loss is recovered along with the markup. Thus the assessee does not impair even the foreign exchange risk. Assessee does not employ any intangible assets with reference to the services rendered to the associated enterprise. Thus on the basis of the above functional analysis the assessee can be characterised as a routine service provider operating in a low risk or almost risk mitigated environment. 5.4 With the above understanding of the nature of services provided by the assessee to its AE's, we will now proceed to examine the compatibility or otherwise of the companies disputed by the assessee to the extent. Grounds 1 and 2 are general in nature. Ground No. 3 to 9 4. We shall 1st take up the comparabl....
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....in the nature of BPO or back office services and that nothing he is earned from sale of products. We have perused the annual reports of this company and have observed that Accentia owned a brand and goodwill on account of acquisition/amalgamation of a defendant in force. Further it is observed that this company is providing services in the field of medical transcription billing and collections income from coding etc for which complete segmental information are not available. In our considered opinion this company is functionally dissimilar to that of the assessee. Accordingly we direct the Ld. TPO to exclude this company from the list of comparables. Infosys BPO Ltd 6.4. The TPO included this company despite assessee's objections. Assessee had objected for inclusion of this company as it provides high-end integrated services in the nature of business platforms, customer service outsourcing, finance and accounting LPO, HR outsourcing, sourcing and procurement outsourcing etc. The company also has a high brand value of goodwill and has acquired a company or by the name McCsmish Systems LLC to provide end-to-end solutions. 6.5. Ld.DR, however, refer to the extracts made by the ld....
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....ure and abnormal profits. 6.9. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that TCS E serve Ltd. is a comparable company with that of assessee. The ld.DR relied upon the extract of the decision of Hon'ble Delhi High Court in the case of Chris Capital Investment vs DCIT (supra), which has been reproduced hereinabove. 6.10. After considering the rival submissions and pursuing the relevant material on record, we find that the financial results of this company shows that this company is into financial services to help its customers achieve their business objectives by providing innovative best in class services. During the year under consideration, this company has made payments towards use of Tata brand. Consequentially use of the TCS brand has substantially increased the operating profits post acquisition. The Ld. AR submitted that the DRP had excluded this company in the immediately preceding previous year. Without any proper reason or change in the functionality and financial data for the year under consideration, it cannot be held that this company can be considered as a comparable. The Ld. TPO has to bring some material on record to show that....
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....ilter could be deployed if the tested party is a risk bearing entrepreneur. However, to the facts of the present case, the assessee does not assume any risk and is remunerated at cost plus basis. Ld. A.R. has placed reliance in the case of Willis Processing Services Pvt. Ltd. in I.T.A.No. 4547/Mum/2012 wherein the Co-ordinate bench of this Tribunal has held as under: "The turnover is not a criteria as prescribed under the Rule 10B(2) for selecting the comparables. It is settled proposition that the decisive factor for determining inclusion or exclusion of any case as a comparable are prescribed under Rule 10B(2) which does not specify any such factor of turnover on the basis of which a particular case can be included or excluded in the list of comparables." "In service industry, turnover does not play any significant role as far as the margins are concerned.... This reinforces the view that turnover does not play a significant role in service industry and there is no link between turnover and margins.... The turnover is not a relevant factor for choice of comparables has been confirmed in many decision, as listed below." 7.4. Applying the ratio laid down by the coordinate benc....
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....where the tested party is following a different financial year ending (say 01/01/2010 to 31/12/2010), following the filter adopted by the ld.TPO, one would reject all the company with the financial year ending 31st of March 2010 and only consider companies with financial year ending 31/12/2010. The number of comparable companies available after using such a filter would be very limited and therefore, in such a case the net margin earned by the comparable companies would be different from the one that would be computed without using this filter. This view is supported by the coordinate bench of this Tribunal in the case of DCIT vs. McKinsey knowledge Centre India private limited in ITA No. 2195/del/2011 wherein it has been held that if a company is functionally comparable, it cannot be rejected merely on the ground that data for the entire financial year was unavailable, if the data can be reasonably extrapolated. Hon'ble tribunal further observed that rule 10 B (4) cannot be interpreted in such a rigid manner so as to defeat the basic objective of the rule. The relevant extract of the ruling are reproduced below: " 23. ..... However, in our considered opinion, if a comparable is ....
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....cordingly allow this ground of appeal raised by the assessee Ground No. 11 7. During the course of the assessment proceedings the Ld.AO had adjusted the amount of unabsorbed depreciation with the profits and gains from business pertaining to the year under consideration and has used the residual profit, post adjustment of the unobserved depreciation, to adjust the amount of brought forward losses. The Ld.AO computed the adjustment as under: Particulars Amount (in Rs.) Business profits before adjustment of brought forward loss and unabsorbed depreciation 3,401,754 Step-1- Less: brought forward depreciation 2,131,805 Business profits after adjustment of unabsorbed depreciation but beforeadjustment of brought forward loss (A) 1,269,949 Step 1- Less: Brought forward loss 1,269,949 Income taxable under the head "Profits and gains from business and profession" (B) NIL Income from other sources (c) 4,128,994 Total Taxable income (A+C) 5,398,994 The DRP upheld adjustment made by the Ld. AO. 7.1. The Ld. AR submits that the proposed adjustment is based on incorrect interpretations of provisions of section 32 (2) of the....