TaxTMI 
TaxTMI 
2016 (6) TMI 1259
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....ation messaging products. The assessee had filed its return of income declaring an income of Rs. 13,53,49,060/-. During the year under consideration the assessee had reported following international transactions in form 3CEB: Nature of transaction Value of international Transaction Software Services rendered (SDS) 1,508,656,740 Marketing Support Services provided (MSS) 16,158,264 Back office support services function (ITES) 71,907,052 Purchase of fixed assets 62,293,945 Reimbursement of Expenses paid 26,741,824 Maintenance Services availed 259,688 3. Ld. TPO noticed that TNM method was selected as the most appropriate method for benchmarking these transactions. The OP/TC was taken as the PLI for all the transactions. 4. At the outset ld. counsel for the assessee pointed out that no adjustment has been made in regard to purchase of fixed assets, maintenance services availed and reimbursement of expenses paid. However, ld. TPO has made adjustment in regard to provision of SDS, provision of MSS and provision of ITES. 5. Ld. TPO noticed that as per the details submitted by assessee, the mean margin of comparables and number o....
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....red by you is computed as under: Arithmetic mean PLI : 29.16% Arm's Length price : 29.16% Operating cost Rs. 60,938,179 Arms Length margin 29.16% of the operating cost Arms length price (ALP) Rs. 78,707,752 b. Price received vis-à-vis the Arm's Length price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length price Rs. 78,702,752 Price charged in the international transactions Rs. 71,972,052 Shortfall being adjustment u/s 92CA Rs. 6,800,700 9. As regards the market support services, ALP was computed as under: a. Computation of Arms Length Price: The arithmetic mean of the profit level indicators is taken as arms length margin. (Please see Annexure Y for details of PLI of the comparables). Based on this, the arms length price of the IT enabled services rendered by you is computed as under: Arithmetic mean PLI : 21.76% Arm's Length price : 21.76% Operating cost Rs. 24,561,743 Arms Length margin 21.76% of the operating cost Arms length price (ALP) Rs. 29,906,378 ....
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....ected to be excluded from the list of comparables. It is seen that RITES is into an altogether different domain and Vapi has got a different economic model since it is akin to that of an Non Government Organisation." 14. In pursuance to the directions of Ld. DRP, AO passed the order determining the total income at Rs. 21,98,03,222/- after making addition on account of TPO's order of Rs. 8,44,55,162/-. 15. Being aggrieved, the assessee is in appeal before us and has taken following grounds of appeal: "That on the facts and circumstances of the case, and in law; 1. The Assessment Order passed in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel ('Hon'ble DRP') is a vitiated order as the Hon'ble DRP erred both on facts and in law in partially confirming the addition made by the Ld. Assessing Officer ('Ld. AO') to the Appellant's income by issuing an order without appreciation of facts and law; 2. The Hon'ble DRP erred both on facts and in law in partially confirming the transfer pricing adjustment to the income of the Appellant by holding that the international transactions pertaining to its provision of Softw....
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....that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 2.8. resorting to arbitrary rejection of low-profit/ loss making companies based on erroneous and inconsistent reasons; 2.9. excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 2.10. ignoring the business/ commercial reality that since the Appellant (vis-a-vis its IT, ITES & MSS) is remunerated on an arm's length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the Appellant undertakes minimal business risks as against comparable companies that are full fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact; 2.11. rejecting the Appellant's claim regarding Working Capital adjustment. 2.12. committing a number of factual errors in accept-reject of com parables and/ or in the computation of the operating profit margins of the com parables; 2.13. grossly erred in not providing the benefit of +/-....
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....nt of the Hon'ble jurisdictional High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. [(2013) 219 Taxman 26 (Del)] in which Infosys Ltd. has been held to be not comparable to a company that was engaged in the business of development of software for parent company. We, therefore, direct the exclusion of this case from the list of comparables. The assessee succeeds." In the light of the co-ordinate Bench finding, as afore-stated, we direct the exclusion of this company from the list of comparables. So, the assessee's objection is upheld. 17. Consistent with the view taken in AY 2007-08, we exclude this comparable from the list of comparables. Assessee succeeds. (xii) KALS Information Systems Ltd. (Seg.) Ld. AR contended that this company cannot be compared with, the assessee company because the company fails on software service revenue filter and has significant revenue from product. This company has no segmental details available. Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :-....
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....al on record, we have absolutely no doubt in our mind that this company cannot be considered as comparable to the assessee inasmuch as it is a giant company in terms of parameters discussed above while dealing with the case of Infosys Ltd. The Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) has upheld the exclusion of this company also from the list of comparables on the basis of certain parameters, which are fully applicable to the instant assessee as well. It is, therefore, directed to exclude this company from the list of comparables. The assessee succeeds." In the light of the co-ordinate Bench finding, as afore-stated, we direct the exclusion of this company from the list of comparables. So, the assessee's objection is upheld." 19. Consistent with the view taken in AY 2007-08, we exclude this comparable from the list of comparables. Assessee succeeds. ITES SEGMENT (i) Accentia Technologies Ltd. The TPO repelled the objections of the assessee and placed reliance on the response received to the notice issued under Section 133(6) to hold that Accentia is comparable, despite the fact that the company admitting in writing t....
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....ent cord. The Special Bench of the Tribunal held that even though there appears to be a difference between BPO and KPO Services, the line of difference is very thin. The Tribunal was of the view that there could be a significant overlap in their activities and it may be difficult to classify services strictly as falling under the category of either a BPO or a KPO. The Tribunal also observed that one of the key success factors of the BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 34. We have reservations as to the Tribunal's aforesaid view in Mae....
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....d be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower-end ITeS such as Call Centers etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold. 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP." In the light of the above, we find that Accentia is into high end service (KPO), which cannot be compared w....
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.... In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the compar....
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....under :- "56. We are in agreement with TPO in principle that this filter is appropriate to eliminate the companies which have controlled transactions and thereby have a significant influence on the margins earned. The TPO in his order has observed that in principle the tax payer has no objection for applying this filter. However, its two main contentions are-one-availability of RPT information and second the threshold limit of 15% in place of 25%. At the same time we also find considerable force in the submission of ld. Counsel for the assessee that ideally if sufficient number of 100% uncontrolled comparables are found, then no comparable having related party transactions should be considered. We are in agreement with ld. Counsel that only when sufficient comparables are not found, the related party threshold should be relaxed and ITA No. 5637/D/2011 99 only gradually to the extent that sufficient comparables are found, the limit should be relaxed. Therefore, we accept the assessee's plea that no sacrosanct threshold limit should be fixed for this filter. Ld. DRP has also noted that neither there is any judicial consensus on the numerical limit nor the section so pres....
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..... Ld. counsel referred to the decision of the ITAT Delhi Bench in the case of M/s Ciena India (P) Ltd. Vs. DCIT in ITA no. 2958 & 3324/Del/2013 dated 23.4.2015 for exclusion of these companies from list of comparables. 26. Ld. CIT(DR) relied on the orders of lower revenue authorities. 27. We have considered the submissions of both the parties and have perused the record of the case. Before we decide any inclusion/ exclusion of any comparable from the list of comparables, selected by ld. TPO, we have to examine the market support services rendered by assessee to its AEs. In the TP study, it is stated in para 3.3 that assessee provides marketing support services to Avaya Ireland. Assessee's marketing support activities include providing information about Avaya products, customer awareness etc. The assessee had renewed its Market Services Agreement effective from 1.4.2007, under which Avaya US compensates Avaya India at an increased mark up of cost plus six point five percent from the previous mark up of five percent. It is further stated in para 4.2 that assessee is responsible for briefing and updating the customers on various promotional initiatives and new product launches o....
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....ervices to the customers of its AE. The work of identifying customers is carried out by collecting market related information, attending trade exhibitions, etc. With this background in mind about the nature of services provided by the assessee under this segment, we now proceed to examine whether or not the companies under challenge are comparable". 29. From the above analysis of functions, performed by Ciena India Pvt. Ltd., it is evident that both, assessee and Ciena India Pvt. Ltd., are fully comparable to each other, as regards the functions performed by market support segment of these two viz. assessee and Ciena India Pvt. Ltd.. Therefore, the decisions in the case of Ciena India Pvt. Ltd. will be applicable to the facts of the present case also. 30. He pointed out that the first comparable which is disputed is Apitco Ltd. In this regard he submitted that this company is functionally different. In this regard he referred to page 275 of the PB containing the annual report of this company and pointed out that the company's major business segments were as under: - Asset reconstruction and Management Services (Rs. 201.93 lakhs) - Project related services (Rs. 201.64 La....
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..... We find that in the case of Ciena India Pvt. Ltd., Tribunal in para 17.2 has observed as under:- "17.2 . Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it is engaged in providing several services, viz., Micro Enterprises Development, Skill Development, Entrepreneurship Development, Research Studies, Project related Services, Infrastructure Planning & Development, Environment Management, Energy related Service, Cluster Development, Technology Facilitation, Asset Reconstruction & Management Services, Emerging Areas. It can be seen from the nature of operations carried out by this company that the same is towards Micro enterprises development, Skill development and Project related services, etc., also including Infrastructure planning and development along with Energy related service and Cluster development. A part of its activities has got some resemblance with the nature of service provided by the assessee under this segment. The ld. CIT(A) has recorded that 'only 12% of total income of this company is from research studies which is akin to the nature of services provided by the assessee co....
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....mparables". 40. Consistent with the view taken in the case of Ciena India Pvt. Ltd., supra, we direct for exclusion of Choksi Laboratories Ltd. from the list of comparables. 41. WAPCOS LTD. (Seg.): Ld. counsel referred to page 333 to 335 of the PB, wherein the annual report of this company is contained to demonstrate that this company was primarily carrying on high end technical activities by imparting consultancy services for engineering projects. Thus, this company is primarily a technical consultancy organization. 42. Ld. counsel further referred to page 381 of the annual report and pointed out that in the segment reporting this company has identified two business segments viz. consultancy and engineering projects and lump sum trunkey. He, therefore, submitted that this company has not reported any market support services segment separately. Therefore, both on the count of functional profile as well as segmental reporting, this company cannot be taken as comparable. He pointed out that this company has been directed to be excluded in the case of Ciena India Pvt. Ltd., supra. 43. Having heard both the parties, we find that this company is mainly imparting technical co....