TaxTMI 
TaxTMI 
2017 (11) TMI 182
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....excluding Air Financial Support Services (India) Ltd., Fortune Infotech Ltd., North Gate PO Services Ltd., Datamatics Technologies Ltd. and comparables adopted for Back Office Support Services without appreciating the fact that the assessee itself had given these companies as comparable before TPO (copy enclosed)". 3. "On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in excluding Datamatics Technologies Ltd and Tricom Ltd from the list of comparables, without appreciating the finding of the TPO that the related party in both these cases is a subsidiary which is also making profits out of the software purchased from them and that the comparables might have reduced the margins but not increased them". 4. "On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in allowing benefit of +/-5% as per proviso to Section 92C(2), without appreciating the fact that such benefit is available only when the actual Operating Margin and Arithmetic Mean of comparable companies is within the range of 5 % and is below the operating income actually earned by the assessee". 5. "The appellant prays that the order of the CIT(A) o....
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....ces to associated enterprises and in addition provides back office support services to the A.E. During the year under consideration for the purpose of benchmarking, the international transactions segmental have been prepared by assessee for working out profitability separately in respect of 1. Marketing services 2. Provision of application research and technical services 3. Provision of back office services 6. The AO referred the case to the TPO for determining the arm's length price in respect of the international transactions. The TPO passed an order under Section 92 CA(3) dated September 29,2008 and sent to the AO for his incorporation, making the following adjustments. Sr. No. Particulars Amount (Rs.) 1 Application research and technical services 6,693,975 2 Back Office support services 9,622,109 Total 1,63,16,075 7. In the order passed u/s.92CA(3), the TPO compared the profitability earned by assessee from the said transaction with the profitability of the comparable companies determined on the basis of the data available for Financial Year (FY) 2004-05 after having rejected / accepted certain comparables selected by the assessee which were forming....
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....e company is an incidental activity or that the company provides this activity on a marginal cost basis since. Keeping in view the functional profile of the company as aforesaid, and the: fact that same has been accepted by the DRP for AY 2006 *07 in the case of appellant only as comparable, it is arrived at that the company is a valid comparable for the international transaction in question and is accordingly directed to be included in the set of comparables. b. Vimta Labs Ltd.:- This company has been included by the TPO in the set of comparables for the reason that it was picked up by the appellant in the last year, and although it continues to do the same work, it has not been included by the appellant in its benchmarking analysis. The appellant has submitted that this company should be excluded from the set of comparables for the following reasons: a) During the year the company has achieved a growth rate of 66% in net profit after tax. (b) The company is engaged in the business of testing activities in various disciplines such as Contract Research, Clinical Specialty Diagnostic, Analytical Testing, Environmental Monitoring and Impact Assessment studies. Hence fu....
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....e ITAT, Mumbai in the: case of DCIT Vs. B.P. India Services Pvt. Ltd. wherein it has been held that the fact whether the comparable has a higher or lower profit rate has not been prescribed as a determinative factor to make a case incomparable. This is because profit is not a factor in itself, but a consequence of the effect of various factors. Only if the higher or lower profit rate results on account of the effect of factors given in rule 10B(2) read with sub-rule (3), that such case shall merit omission. If however such extreme profit rate is achieved because of factors other than those given in the rule, then such case would continue to find its place in the list of comparables. iv. The appellant has further referred to the part. 55.10 of circular 14/2001 of the CBDT, which in respect of-new legislation to curb tax avoidance by abuse: of transfer price. How the same is relevant to .he case of the appellant or to the selection of this company as comparable ha, no where been submitted by the appellant. This para actually gives the back ground or the justification for considering the arithmetic mean as the ALF as to what has been provided as proviso to section 92C(2) of the Act....
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....- In respect of this company also, the appellant has contended that the related party transaction is 33.87% and accordingly they should be rejected. However the revised computation of RPT based on the sales to the related parties over total sales was worked out at 25.56%. Accordingly it is seen that the related party transaction in this case is substantial and accordingly this comparables is directed to be excluded from the set adopted for the benchmarking. IV. Datamatics Technologies Ltd. - In respect of ibis company, the appellant has mentioned that this company should be rejected on account of substantial related party transaction of 61.81 % ( revised to 51.54 VD based on the sales to the related parties over total sales) for F. Y. 2004-05. It: ias been further submitted that this company is also engaged in the business of consultancy activities. Further be appellant has relied on judicial precedents for excluding extreme cases and have further relied on para 55.10 of CBDT Circular No. 14 of 2001. During the proceedings before the TPO, the appellant had contended for rejection of this comparable on account of substantial related party transaction. However, the AO observed tha....
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....nd accordingly, the same should be rejected. In respect of this company, the TPO has observed that the related party is a subsidiary which is also making profits out of the software purchased from the AE which shows the t the assessee might have reduced its margin but not increased the same. It is clear from the facts as above that the TPO has not disputed presence of high end party transaction to the extent of 58.03%.). Accordingly, this company is direct to be exclude from the set of comparables. viii. Ultramarine & Pigments Ltd. - The appellant has mentioned that this company should be rejected on account of abnormal high margin for F.Y. 2004-05 and further the business of the company comprises of ] .apz Digital Services and Lapiz Technical Services under ITES segment. It} as been mentioned that from the Management Discussion Analysis of F.Y. 2005-06, it is evident that the Lapiz Technical Services consists of rendering engineering services. Accordingly, this segment should be rejected. Further the appellant has relied upon the judicial precedents in which it has been held that extreme cases cannot be taken as a comparable and has further relied upon para 55.1(1 of CBDT Circu....
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.... How the same is relevant to the case of th e appellant or to the selection of this company as comparable has no where been submitted by the appellant. This para actually gives the back ground or the justification for considering the arithmetic mean as the ALP as to what has been provided as proviso to section 92(: (2) of the Act. Accordingly the contention of the appellant to exclude this comparable from the set of comparables is not found to be acceptable IX. Vishal Informational Technologies Ltd. - The appellant has mentioned that this company should be rejected as it sub contracts i:s business and further the: employee cost is less than 1 % of the total cost. During tie proceedings before the TPO, the assessee has not submitted anything which could have affected its functional comparability in the ITeS segment. In the annual accounts, under the Schedule 15 trading and operating expenses have been given which pertain to data entry charges and vendor payments, [t nowhere shows that such work has been outsourced. It only shows that the data entry charges and the related costs may have been grouped separately and have not been shown as employer cost. Because what has been sho....
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....5-05 and 2006-07 and therefore it is not a consistent loss maker. It has been brought out by the TPO that the profit in F.Y. 2003-04 were only on account of prior period income and not because of the operational reasons. Further even if the company has earned profit from F.Y. 2005-06 and 2006-07, the data' for the same cannot be considered for the purpose of comparability under rule 10B(4) of the IT.Rules, 1962 as in that rule, there is no provision to consider the data for the future years. The year under consideration is F.Y. 2004-05. Reliance i 3 placed on the ruling of Hon'ble IT A T Pune in the case of Honey-well Automation India Ltd. Vs. DCIT (2009- TIOL 104 ITAT-PUNE), (Pune). Accordingly, the contention of the appellant to include this company as comparable is not found to be acceptable. iii. TSR Darashaw - In respect of this company, it has been contended that the company I is one of the India's leading BPO organisation certified under ISO 900] -2000 guidelines having a total industry experience of over 35 years and accordingly, it has been contended that the same should be accepted. In the submission, the appellant has also mentioned that this company has b....
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....actions with its Associated Enterprises (AE's) within the meaning of Section 92 of the Income-tax Act, 1961 ('the Act'). The said international transactions were duly reported in Form 3CEB (under Section 92E of the Act), which was filed along with the return of Income for Assessment Year 2005-06 on October 30,2005. The international transactions entered into by the assessee, relevant to the Transfer Pricing Regulations are as under:- Sr.No Nature of transaction Method Adopted Amount (Rs.) 1 Marketing Services Transactional Net Margin Method 234,365,365 2 Application Research and Technical services Transactional Net Margin Method 68,720,007 3 Back Office Support Services Transactional Net Margin Method 44,591,700 14. The assessee has adopted TNMM method to support its benchmarking. After considering the TP report AO excluded Pfizer Limited as the valid comparable in respect of transactions relating to technical services. AO also excluded Airline Financial Support Services and Tricom Ltd., from the set of technologies adopted for back office support services. The AO also excluded Datamatics Technologies Ltd., and Tricom Ltd., from the set of comparables. TPO has d....
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....r profit in respect of this comparable is for the reasons other than normal business of the company. We also found that functional profile of the company has not changed from the last year to the year under consideration. When the functional profile of the tested party or the comparable has not changed and there is nothing extraordinary happened in the case of the comparable in the year under consideration, there is no reason to exclude such a company from the set of comparables. Detailed finding so recorded by CIT(A) for inclusion of Vimta Labs Ltd., have not been controverted, accordingly we do not find any infirmity in the ordre of CIT(A) for inclusion of Vimta Labs Ltd., in the set of comparables. 19. In view of the detailed discussion and finding the CIT(A) had directed to take set of 8 comparables including the above two companies and the 6 comparables which have not been disputed, as the final set of comparables for benchmarking the assessee's international transaction relating to rendering of application research and technical services. 20.For benchmarking Back Officer Support Services following the TNMM method, the TPO has adopted set of 17 comparables with their arit....