TaxTMI 
TaxTMI 
2017 (6) TMI 1179
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....sociated Enterprise [hereinafter referred to as "the AE‟] , ld AO referred it to the Ld. Transfer Pricing Officer[ hereinafter referred to as "The TPO‟] for determination of the Arm‟s Length Price [ hereinafter referred to as "ALP‟] of those transaction. The Ld. Transfer pricing officer passed order u/s 92CA (3) of the Act on 26/10/2010 proposing an upward adjustment of Rs. 559965116/-. Ld. AO framed draft assessment order u/s 143(3) of the act on 29/12/2010. 4. The assessee filed objection before the Ld. Dispute resolution panel [hereinafter referred to as the "DRP‟]. The Ld. Dispute Resolution Panel issued directions on 10/8/2011 and consequently the Ld. AO in its final assessment order passed on 31/10/2011 incorporated those directions. Ld. AO, against the returned income of Rs. 666599500/-, transfer pricing adjustment of Rs. 550927343/- and withdrawal of deduction u/s 10 A of the Act of Rs. 407112732/- was made and assessed the total income u/s 143 (3) of the act at Rs. 1624639580/-. 5. Against that order, Assessee preferred an appeal before the coordinate bench who vide order dated 24th of August 2012 set aside the issue of Transfer Pricing ....
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....he returned income of INR 666,599,500/- and thereby made an upward adjustment of INR 593,929,260/-. Part - Transfer pricing grounds of appeal 3. That on facts of the case and in law, the TPO/AO/DRP have erred in rejecting the economic analysis undertaken by the Appellant by conducting a fresh economic analysis for international transaction pertaining to export of data processing and back office support services ("impugned transaction"). 4. That on facts of the case and in law, the TPO7A07DRP have erred in conducting a fresh economic analysis by using arbitrary filters for identifying companies comparable to the Appellant. The arbitrary filters applied by the TPO and confirmed by the DRP7AO inter-alia include the following: * To reject companies having IT enabled services income less than INR 1 Crore; * To reject companies having different accounting year than that of the * Appellant (i.e. the data of company does not fall within 12 month period starting from 1 April 2006 to 31 March 2007); and * To reject companies having peculiar economic circumstances which are not in line with the industry trend and companies which s....
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.... cognizance to the detailed analysis and technical arguments submitted by the Assessee. 13. The learned TPO/AO/DRP have erred in law by exercising his powers u/s 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes. 14. That on facts of the case and in law, the TPO/AO/DRP have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act. 15. That on facts of the case and in taw. the AO/DRP has erred in confirming that TPO/AO has discharged his statutory onus by establishing that the conditions specified in clause (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the arm's length price determined by the Appellant and proceeding to determine the arm's length price. 16. That on the facts of the case and in law, the learned AO has erred in charging excess interest u/s 234C of the Act. 17. That on the facts of the case and in law, the learne....
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.... and export of data management information analysis and control and providing tele servicing and transaction processing support. It only caters to the American Express group. It submitted that AE compensated assessee on a cost plus basis without regard to the success or failure of the activities. Assessee does not own any intangibles. It was submitted that it is a routine data processing and back-office support company, which bears significantly lower than normal risk with respect to its activities. It has three units, which are performing those functions. The unit wise functioning is shown by the assessee as under :- 1. FCE units (New Delhi and Gurgaon) a) input AEIPL receives raw data / raw information (''raw data") in electronic form or in the form of paper based inputs (documents, vouchers, reports etc.). The raw data is received through mail/courier, fax and electronic transmission from clients' respective locations to AEIPL servers through data links. The raw data comprises unprocessed or semi-processed accounting, financial and commercial information relating to the businesses of American Express locations worldwide. The raw data ....
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....business transaction reports; and • Other MIS reports per customers' specific requirements 2. AEGSC, Gurgaon This unit provides call centre services to Group companies, which involves answering incoming Amex card member calls for queries related to card member transactions. These queries include, iter alia, balance enquiry, product feature queries, change in personal information etc. The units also handles calls for AEFA participants (retirement services) to provide account related information/ account maintenance, and provides back office support in relation to resolving card member matter related to billing. This units also conducts certain data analysis to detect high risk account activity, and also supports initiates such as product redesign, consolidation/ migrations, organizational restructuring and project management support to implement recommendations. 14. The Ld. Transfer pricing officer out of the 16 comparables selected by the assessee accepted 10 comparables, introduced 16 comparables and thereby determined PLI of those comparables using OP/TC at 30.51%. Further, working capital adjustment of 3.62-percentage and risk adjustment at 5.88% was....
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.... 18. Assessee has submitted a chart before us stating that assessee is contesting 11 comparables and has stated that most of the companies for which appellant is seeking exclusion are covered by the decision of AOL Online India Private Limited ( TS -156-ITAT-2016) (bang) for AY 2007-08 and Magma Design Automation India Private Limited V ACIT ITA NO 1214/Bang/2011. For claim of risk adjustments it relied up on the decision of DCIT V Hellosoft india P Ltd ITA No 645/Hyd/2009 and 1411 of 2010 and KOB medical Textiles Limited . In the end it was also mentioned that all the grounds of appeal are being pressed and this synopsis is only for ease of reference during hearing and is not a substitute to the grounds of appeal and other paper books submitted on record. 19. We have carefully perused the above-cited decisions. We are of the view that for deciding a comparability the only guideline is Rule 10B (2) of the Income tax Rules 1962 and it cannot be said that a comparable can be decided on the basis of judicial precedent unless that precedent lay down some guiding factors to interpret rule 10B (2). Merely because a company is held not to be comparable with another company, it cannot ....
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....al profile of the company itself and submitted that assessee is not a low end IT service provider. He put a detailed written submission on this aspect wherein he has raised several issues. He first referred to the page No. 986 of the paper book, which is the summary of international transactions entered into by the assessee along with its AE. He then correlated these functions with the associated enterprise as to whom the services are being provided referring to page No. 993 of the paper book. From this, he submitted that the business being carried on by the associated enterprises who are receiving services from the assessee is very high-end business. He further referred to page No. 1010 of the paper book to show that the output provided by the New Delhi FCE units are ready to use business reports and competitions, which is a very high-end service. He therefore stated that it is necessary to look into what is the input for the services and what is the output that assessee generates. He further referred to the services provided by AEG SC unit, which carries out certain data analysis to detect high-risk account activity and also support initiatives such as product redesign consolidat....
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....n in this present note in the interests of brevity as also to comply with direction of Hon'ble Tribunal. Services which are subject matter of benchmarking under Chapter X continue to be provided under service agreement entered into in 2002. There has been no change in nature or scope of services over the years, including period relating to above cited appeal. Only the markup rate on cost has changed from time to time. Copy of agreements is available at page 1145 and 1154 of the paper book. During the period relevant to present appeals also there was no change in scope or nature of services and Appellant submits that services continued to be routine BPO back office support in nature - cursory reference to page 1009 and 1010 would establish this. The slightly different and erroneous conclusion reached by DRP which was relied upon and unduly over emphasised by Ld. DR at the time of hearing resulted from ignoring to consider all the information provided and available on record . As pointed out during the course of hearing by Appellant's Authorised representative, incorrect and selective reliance on portions of information by DRP. During proceedings be....
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....l activities. The other unit was a 100% export unit under the Software Technology Park Scheme of India namely AEGSC unit and was engaged in providing tele-servicing and transaction processing support. During the year 2004-05 the company has set up a new STP unit (FEC Gurgaon). AEIPL uses the trademark, processes, know-how, technical data software, operating / quality standards etc. developed / owned by American Express Group. AEIPL does not own any of the American Express Group's intangibles. AEIPL does not own any non-routine intangibles arising out of its functions, and as such assumes significantly less than normal risks, associated with the carrying out its business." Further, the detailed functions performed by AEIPL is placed on record at the page 1009 of the paper book vol 2 of 2 The same is reproduced below for your Honour's kind reference * Functions performed by AEIPL AEIPL is essentially a data processing and back office support company engaged in manufacture and export of data management, information analysis and control, and providing tele-servicing and providing tele-servicing and transaction processing support. AEIPL caters....
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....ng formats. Various types of inputs received for processing and recording in electronic or physical form are as follows: * Invoices * Vouchers * Vendor Purchase Orders * Employees Travel Expense Vouchers • Airlines / SES / Hotels Data: These pertain to data on transactions done for American Express travel business and include data on: * Sale of air tickets to customers and payments to airlines * Payment to service establishments for purchases made through American Express cards * Booking of hotels for customers and payments to hotels • Customers Bank Data: These include data on treasury and other transactions done by American Express card members b) Processing of inputs (Data management, information analysis and control) The Company uses the raw data as input and carries out a series of processes (i.e., reorganization, analysis and transformation and conversion of raw data) as per the processing requirements of its customers to generate customized output. c) Output The Company's output, which is exported to its customers including American Express locatio....
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....g to day-to-day transactions undertaken within American Express companies which need to be recorded and reported to the respective American Express companies ('customer country') in different reports and accounting formats. Various types of inputs received for processing and recording in electronic or physical form are as follows: * Invoices * Vouchers * Vendor Purchase Orders * Employees Travel Expense Vouchers • Airlines / SES / Hotels Data: These pertain to data on transactions done for American Express travel business and include data on: * Sale of air tickets to customers and payments to airlines * Payment to service establishments for purchases made through American Express cards * Booking of hotels for customers and payments to hotels • Customers Bank Data: These include data on treasury and other transactions done by American Express card members. e) Processing of inputs (Data management, information analysis and control) The Company uses the raw data as input and carries out a series of processes (i.e., reorganization, analysis and transformation and ....
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....nsaction shall be judged with reference to the following, namely :- (a) the specific characteristics of the property transferred or services provided in either transaction ; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions ; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions ; (d) 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. 27. Therefore, paramount importance is required to be given to characteristics of the services, Functions performed and assets and risk involved in performing those functions and then contractual terms and business conditions. ....
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....e have carefully considered the rival contentions. It is contested by the assessee that employee cost in case of the comparable is 5.52% and outside vendor cost is 65.36%, whereas in case of the assessee total employee cost is 59.05%. During the course of assessment proceedings, the Ld. transfer pricing officer issued notice u/s 133 (6) of the income tax act to seek information about the expenses of data entry and vendor payments. This was replied by the company stating that during the financial year 2007 -08 the company had infrastructure with a seating capacity of 475 seats for 3 shifts combined together, whereas the utilised capacity for the period was around 225 seats for 3 shifts combined. Looking to the various steps of the process, it was submitted that the vendor‟s personnel were occupying three shifts from 200 to 225 persons and the expenses incurred for vendor‟s personal debited to the data entry charges and vendor payments. On perusal of the about details, It is apparent that the information was given for the financial year 2007 - 08, whereas the impugned assessment year before us is assessment year 2007 - 08 i.e. financial year 2006 - 07. In view of this, th....
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....d versus CIT, dated 10th of August 2015 wherein it has been held that KPO cannot be taken as a comparable with BPO. 35. The Ld. departmental representative submitted that assessee is also engaged in to the business of high-end service provider and therefore it is only the difference of verticals hence, according to him this comparable company cannot be excluded. He further submitted that this company was part of the companies considered by the taxpayer. In it‟s accept reject matrix and there were no reasons given for rejection of this company on functionality ground. He further referred to page No. 374-379 of the appeal paper book to submit that Ld. assessing officer is given all the consideration of careful thought. 36. We have carefully considered the rival contentions. At page No. 378 of his order, the Ld. transfer pricing officer has held that this company is rendering 3 kind of services engineering services, BPO and data processing and all 3 parts are falling into the IT enabled services and hence the company‟s IT division is comparable to the taxpayer. We have also perused page no 642 of the paper book which is the starting of the annual report of that compa....
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....tion, coding and software development. Out of the total revenue of Rs. 287231664/-, Rs. 165433967/- consist of medical transcription, Rs. 27600281/- is from coding and Rs. 94197416/- from software development. Interestingly on reading note 6 at page No. 634 of the paper book wherein in significant accounting policy it is stated that this company is also engaged in production of a movie titled "Love in India.‟ Furthermore, pursuant to the order of the Bombay High Court the erstwhile subsidiaries of the companies Geosoft Technologies and Iridium Technologies have merged with the company w.e.f. 1st April 2006. Therefore, naturally the profit and loss account and balance sheet also incorporate the financial results of those companies, which makes this year an extraordinary year for this company. In view of the extraordinary events during the year of merger, the functional profile of medical transcription, software development and film production as well as absence of segmental information where the company has only stated that it has only one segment of activity namely healthcare receivable management, we do not have any hesitation in holding that this company is functionally not....
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....e coordinate bench held as under:- "17. Ground nos. 5 to 9 are against inclusion of Galaxy Commercial, Maple E Solutions, Triton Corporation, and Nucleus Netsoft and GIS (India) Ltd. as comparable cases by the TPO. In regard to Galaxy Commercial, the objection of the assessee before the TPO has been that it has diversified activities while the assessee is carrying on the business of voice based call centre only. The TPO mentioned that the company is carrying on BPO operation and transport operation. The results of only BPO operation are being considered for the purpose of determining arm's length price. In this regard, the functions are more or less similar. 17.1 Before us, it is submitted that the aforesaid company is engaged in customized BPO services and not in call centre activities. It is carrying on three distinct businesses, namely, -(i) BPO operations, (ii) transport operations and (iii) purchase and sale of shares and units. Although it is mentioned by the TPO that only BPO operations have been considered, but he applied entity-wise profit. Segment-wise profitability is not available in the audited accounts. Therefore, this case has been, wrongly cons....
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....ree lines of businesses and segment profitability is not available. Obviously, overall profitability of the company cannot be applied in the case of the assessee as it will amount to comparing incomparable cases. Further, the business reputation of Rastogi group, owning Maple E Solutions and Triton Corporation, is under serious indictment. They are also carrying on the businesses of data processing services and ITES services apart from BPO services. In view of a question mark on the reputation of the owner, albeit for earlier years, it would be unsafe to take their results for comparison of the profitability of the assessee. Similarly, it has not been contested by the ld. CIT-DR before us that related party transaction in case of Nucleus Netsoft & GIS (India) Ltd. amounted to 22.28% against the working of 6.07%. The high figure of 22.28% renders the case incomparable as the tolerable limit of related party transactions would be in the vicinity of 10% to 15%. Accordingly, it is held that none of these cases can be taken to be comparable case." 47. On reading the above order it is apparent that fraud has been committed in 1980s and mid 90s and not in the current year. The coordina....
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.... the coordinate bench in case of NTT Data India ITA No. 1862/Hyd/2012. The ld AR further referred to reply dated 5.02.2010 of the company u/s 133(6) of the Act which shows that the comparable is also engaged in software development. Therefore, he pleaded for its exclusion. 49. The ld DR vehemently objected to the same. 50. We have carefully considered the rival contentions and we have perused the annual account of the company at Page 1 to 34 of the paper book. According to the financial information available, this company is engaged in providing open and end-to-end web solutions, software consultancy, design, and development of solution. In response to queries u/s 133(6) enquiry letter of the TPO that it is engaged in the data cleansing services which are provided to a client for whom the company has developed a software application. Using the tool developed by the company it provides data cleansing services by constantly upgrading the application therefore, there is an element of software development in the services provided by the company. From the above information, it is apparent that the comparable is a software developer. We are of the opinion that software developer is....
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....Y 2004-05 and FY 2005-06 the assessee has incurred loss of 59.07% and 44.21% and in current year the profit is 34.30%. Therefore, this company has fluctuating profits. On the identical reasons the coordinate bench in Cummins Turbo Technologies Ltd Vs. DCIT (supra) considering the decision of the special bench in case of Maersk Global Centers India Pvt. Ltd Vs. ACIT (supra) has excluded this comparable holding as under:- "8. We have carefully considered the rival stands on this aspect. In the context of the controversy relating to the exclusion of abnormal profit making concerns, a reference has been made to the decision of the Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. v. Asstt. CIT [2014] 147 ITD 83/43 taxmann.com 100 (Mum. - Trib.). The relevant observations of the Bench are as under :- "In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertai....
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....aid concern over a period of time. In-fact, a further analysis of the financial data for the aforesaid years suggest that there is a wide fluctuation in the revenue generation of the said concern during the financial year under consideration as compared to the past three financial years. For the subsequent financial year, the revenue generation has taken a downward trend which again reflects a wide fluctuation. At the time of hearing, the learned counsel for the assessee has referred to the Annual Report of the said concern for the financial year under consideration to point out that the company has acknowledged a growth of 132.86% in its revenue generation as compared to the immediately preceding financial year. In our considered opinion, there is no material to say that the high profit margin of 34.71% declared by the said concern in the instant financial year is a normal business trend. Ostensibly, the financial results of either the three preceding financial years or of the succeeding financial year do not justify that the margin of 34.71% for the year under consideration is a normal business trend. Thus, in our considered opinion, the inclusion of the said concern in the final....
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....a of the Revenue to retain the said concern in the final list of comparables." 54. In view of the above decision of the coordinate bench, respectfully following it , we direct for exclusion of Informed Technologies India Ltd respectfully following the above decision of the coordinate bench. 55. The next comparable objected to by the assessee was HCL Comnet Services Ltd contesting that it is functionally dissimilar, follows different financial year, has different policy of revenue recognition and only segmental information received by the TPO u/s 133(6) of the Act was provided. 56. The ld DR submitted that it is also engaged in business of ITES Service provider therefore, it is functionally most comparable. 57. We have carefully considered the rival contentions. The companies accounting year-ends on June 2007, however, the 133(6) data was submitted by the comparable from 01.04.2006 to 31.03.2007. We have also perused the annual report of the company at page No. 57 to 128 of the paper book. The main income stream of the assessee is bandwidth and other services and IT enabled services. The company has also provided segmental information at page No. 101 with respect to its ....
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....PO to the assessee obtained u/s 133(6) of the Act and therefore, there is no objection about the functional dissimilarity with the company. Further, it was submitted by the ld AR that this company has operating revenue of Rs. 649 crores whereas the assessee gross revenue is only Rs. 55.94 lakhs, therefore, by mere size this company is required to be excluded. Hon'ble Delhi High Court in case of Pr CIT Vs. Actis Global Services finds merit that size and scale of the operations makes it inapposite comparable. In the present case the difference in the gross revenue from Rs. 649 crores of the comparable itself which is more than 1200 times of the turnover the assessee company. In view of this we direct the exclusion of the Infosys BPO ltd from the comparability analysis. 61. The next comparable is Wipro Ltd which is contested by the assessee stating that during the year there is an acquisition of the real business therefore, it makes an exceptional year. It was also contended that it has huge intangibles and therefore, there is difference in asset profile of the comparable. 62. The ld DR relied upon the orders of the lower authorities. 63. We have carefully considered the ....