TaxTMI 
TaxTMI 
2017 (11) TMI 526
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.... international transactions with its Associated Enterprises (AEs) : i. Provision of IT Services Rs.1,15,17,54,575/-. ii. Provision of IT Enabled Services Rs.8,14,01,681/-. 2.1 The assessee adopted Transactional Net Margin Method (TNMM) as the most appropriate method to benchmark its Arm's Length Price (ALP) with AE. In respect of ITS the assessee selected 16 companies as comparables and computed average arithmetic mean (OP/TC) of the comparable companies at 11.66% as against assessee's PLI of 16.42%. The Transfer Pricing Officer (TPO) accepted TNMM applied by assessee as the most appropriate method, however, the TPO did not agree with the selection of comparables. The TPO excluded certain companies from the list of comparables selected by assessee and included some more companies in the final list. The final set of comparables as selected by TPO are as under : Sr. No. Name of the comparable OP/OC (%) 1 Bodhtree consulting Ltd. 19.14 2 E-infochip Ltd. 30.32 3 eZest Solutions Ltd. 28.58 4 F C S Software Solution Ltd. 57.02 5 Goldstone Technologies Ltd. 27.06 6 Helios & Matheson Information Technology Ltd. 36.05 7 KALS Information Systems Ltd. (applicati....
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....s of the Ld. Dispute Resolution Panel („DRP') erred in rejecting the benchmarking approach adopted/contemporaneous documentation maintained by the appellant and thereby making a transfer pricing adjustment of Rs. 14,83,01,854 to the income of the appellant by holding that the international transaction, pertaining to provision of software services ('IT services') and customer support back office services ("ITES Services') to the associated enterprise ('AE'), are not at arm's length under the Income-tax Act, 1961 ('the Act'). 2. On the facts and in the circumstances of the case, the Ld. AO/DRP erred in modifying the bench marking analysis, as conducted by the appellant using Transactional Net Margin Method ('TNMM') for benchmarking its international transactions pertaining to provision of IT and ITES services to the AE, and thereby modifying the set of comparables. In doing so, the Ld AO/DRP specifically erred in : a) conducting selective fresh analysis by applying certain additional quantitative/qualitative filters for identifying the comparables resulting in cherry picking of comparables which contradicts with the principles of cond....
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....5 ITR 176]. The Hon'ble High Court vide order dated 26th September, 2016 dismissed the appeal of Department and confirmed the findings of Tribunal. Thus, exclusion of Kals Information Systems Ltd. from the final set of comparables has been upheld by the Hon'ble Jurisdictional High Court. 6. On the other hand Shri Rajeev Kumar representing the Department vehemently defended the order of TPO and the directions of DRP. The ld. DR submitted that the TPO in his order has considered all the submissions of the assessee. After examining the financial statements of Kals Information Systems Ltd. the TPO has observed that the expenditure on R and D is Nil as per annual report of the said company. The ld. DR contended that the documents on record show that Kals Information Systems Ltd. has actually not earned any revenue from sale of products. Therefore, Kals Information Systems Ltd. is a good comparables and there is not functionally difference between the assessee and Kals Information Systems Ltd. 7. Both sides heard. Orders of the authorities below perused. The assessee has assailed inclusion of Kals Information Systems Ltd. on the ground of functional disparity. It has been contended tha....
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....foresaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables." 8. Thereafter, in assessment year 2009-10 Kals Information Systems Ltd. was again included in the list of comparables by TPO and DRP. The matter travelled up to the Tribunal. The Co-ordinate Bench in ITA No. 336/PN/2014 (supra) by following its earlier order for assessment year 2007-08 excluded Kals Information Systems Ltd. from final set of comparables on account of functional difference. Further, we observe that the Hon'ble Bombay High Court in appeal by the Department in the case of Commissioner of Income Tax Vs. PTC Software (I) Pvt. Ltd. (supra) has upheld the order of Tribunal for assessment year 2007-08. Thus, in view of facts of the case and the decisions discussed above, we direct the Assessing Officer to exclude Kals Information Systems Ltd. from the list of comparables for the reasons stated above. 9. The ld. Counsel for the assessee submitted that the TPO has erred in including FCS Software Solutions Ltd. in the final set of comparables. The ld. Counsel submi....
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..... The Co-ordinate Bench of the Tribunal in the case of Barclays Technology Centre Vs. ACIT in ITA No. 2279/PN/2012 for assessment year 2008-09 decided on 28-01-2015 has again held that FCS Software Solutions Ltd. is liable to be excluded from the list of comparables on account of abnormally high profits and high fluctuation in profit margins. 11. On the other hand the ld. DR submitted that FCS Software Solutions Ltd. was originally selected by assessee as comparable in TP study report. The TPO in his detailed order has held that substantial part of the company's revenue comes from software development. Therefore, the company should be retained in the final list of comparables. 12. Both sides heard. The assessee has assailed inclusion of FCS Software Solution Ltd. in final set of comparables primarily on ground that the company is functionally different, fails to qualify filter of 75% income from software development services and has abnormally high profits. We find that the issue regarding exclusion/inclusion of FCS Software Solutions Ltd. has been considered by the Co-ordinate Bench of Tribunal in the case of TIBCO Software India Pvt. Ltd. Vs. Dy. Commissioner of Income Tax (su....
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....tions look at E-learning of web/CD based training programs as one of the ways to achieve organizational growth and improved business performance. E-learning helps employees, vendors, and dealers of a company to better their performance and deal with fast-changing environments. E-learning makes training highly efficient, by making it available anytime, anywhere and reduces total cost of training. E-learning is used to train employees, customers and service technicians on product knowledge, concepts, strategies, risk and finance, compliance and technology." 25. Ostensibly, the aforesaid services involve setting up of support centres and remote maintenance, which have been duly categorized as ITES by the CBDT's Circular dated 26.09.2000 itself, which has been reproduced by the TPO in the impugned order. Therefore, even the said segment is not to be included as part of the software development services, as asserted by the assessee. Once the segment of application support and infrastructure management services are removed along with the exclusion of E-learning and Digital consulting segment, then the income of the said concern from software development services falls below 75% of its ....
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....ing the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abnormal high profit margin." 29. The aforesaid discussion of the Special Bench reveals that a concern which has earned abnormally high profit margin cannot be excluded from the list of comparables straightaway without making appropriate investigations. As per the Special Bench, it would be appropriate to ascertain as to whether the high profit margin declared by the concern reflects a normal business phenomenon or it has resulted because of certain abnormal conditions prevailing in a particular year. As per the Special Bench, in order to carry out the aforesaid analysis, the profit margins earned by such concern in the proximate preceding and succeeding years should also be taken into consideration so as to establish whether the high profit margins reflect a normal business trend or otherwise. In this background of the matter, we find that in the case of FCS Software Solutions Ltd., the margins for the two preceding financial years are 14.75% and 19.94%, whereas in the financial year succeeding to the year under consideration, the mar....
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....final list of comparables is Helios & Matheson Information Technology Ltd. The said company should be excluded on the ground of functional disparity. The ld. Counsel contended that Helios & Matheson Information Technology Ltd. is engaged in rendering ITES including BPO services, Offshore delivery, Project management services, etc. Therefore, the services rendered by Helios & Matheson Information Technology Ltd. are not comparable to ITS rendered by the assessee. The ld. Counsel submitted that in assessee's own case in assessment year 2007-08 the Tribunal has excluded Helios & Matheson Information Technology Ltd. from the list of comparables. 16. On the other hand the ld. DR vehemently defended the findings of TPO in including Helios & Matheson Information Technology Ltd. in the final set of comparables. 17. Both sides heard. Orders of the authorities below perused. We find that the Co-ordinate Bench of the Tribunal in assessee's own case in assessment year 2007-08 have excluded Helios & Matheson Information Technology Ltd. from the final list of comparables for the reasons similar to exclude Kals Information Systems Ltd. The relevant extract of the findings of the order of Tribun....
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....sment year under appeal i.e. Financial Year 2007-08 Coral Hubs Ltd. commenced new line of business of printing on demand (POD). The POD is not IT Enabled Services. The ld. Counsel pointed that the financial statements of Coral Hubs Ltd. do not show segmented financial results. Thus, the Coral Hubs Ltd. cannot be accepted as comparable on account of functional difference. The ld. Counsel further submitted that the Tribunal in assessee's own case in assessment year 2007-08 has rejected Coral Hubs Ltd. as comparable on account of functional difference. 20. On the other hand the ld. DR vehemently supported the findings of TPO and DRP in including Coral Hubs Ltd. in the final set of comparables. 21. Both sides heard. The assessee is seeking exclusion of Coral Hubs Ltd. from the list of comparables on account of functional disparity. The ld. Counsel has pointed that the said company apart from providing IT Enabled Services is also providing diversified activities like custom application development services. The said company has also ventured into new line of business i.e. printing on demand. Our attention has been drawn to financial results of the company for the year ending 31st Marc....
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.... on account of functional difference. 23. In respect of Accentia Technologies Ltd., the ld. Counsel submitted that the said company is providing medical transcription services, medical coding, medical billing, receivables management with respect to the healthcare Receivables Cycle Management Sector. The ld. Counsel submitted that the said company has developed its own software products and owns intangibles in the form of Goodwill. Such software products are primarily the platforms required for rendering medical transcription services. The analysis of activities carried out by Accentia Technologies Ltd. using its own platform would show that the activities of the said company are distinguishable from other medical transcription service providers such as e4e Healthcare Solutions Ltd. The ld. Counsel further pointed that Accentia Technologies Ltd. during the Financial Year 2007-08 has entered into amalgamation/acquisition of other companies, therefore, the said company cannot be selected as comparable. The ld. Counsel in support of his contentions referred to Annual Report of Accentia Technologies Ltd. for Financial Year 2007-08 at page 800 of the paper book. 24. The ld. Counsel for....
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....a particular financial year of a company, the said company should not be selected as comparable. Thus, in the light of facts of the case and the decision of Coordinate Bench of Tribunal, Accentia Technologies Ltd. cannot be considered as good comparable. Therefore, the same is directed to be excluded from the final list of comparables. 28. Finally, the ld. Counsel for the assessee submitted that TPO has excluded Aditya Birla Minacs Worldwide Ltd. from the list of comparables for the reason that the said company incurred losses in Financial Year 2007-08. The ld. Counsel submitted that a company cannot be excluded from the list of comparables merely for the reason that the company has suffered losses in a particular year. The OP/TC of the company in Financial Years 2006, 2007 and 2008 are 19.92%, 13.72% and -4.36%, respectively. Therefore, the said company is not a consistent loss making company. It is only the consistent loss making companies that are rejected as comparables. The aforesaid company has incurred losses on account of foreign exchange fluctuation. Such a loss cannot be categorized as operating loss. The ld. Counsel further submitted that the Tribunal in the case of TIB....
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....ce of loss in business operations is a normal incident of business and there is nothing to suggest in the present case that it has been incurred in any abnormal situation. It is also not the case of the Revenue that the said concern is a consistently loss making concern. Therefore, the said concern cannot be excluded merely because of incurrence of loss in this year, especially when the said loss has not been established to be an abnormal business condition and more so in the context that the said concern is not denied to be functionally comparable to the assessee. Therefore, on this aspect, we uphold the plea of the assessee for including the said concern in the final set of comparables in order to determine the arm's length price of the international transaction. Thus, on this aspect, assessee succeeds." 31. The fact that activities of the assessee in ITES segment are similar to Aditya Birla Minacs Worldwide Ltd. has not been disputed by the authorities below. Thus, it is an accepted position that the said company is functionally comparable. Further, the fact that Aditya Birla Minacs Worldwide Ltd. is not a consistent loss making company has remained unrebutted. The Departme....