AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (1) TMI 238
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....ctor of Income Tax, Transfer Pricing Officer 11(1) ("Ld. TPO") for the international transaction pertaining to provision of IT enabled services (hereafter referred to as "impugned transaction")in his order passed under section 92CA(3) of the Act on the following grounds: Each of the ground is referred to separately, which may kindly be considered independent of each other. 1 That on facts and in law, the Ld. AO/TPO/CIT(A) have erred on facts and in law, by alleging that the Appellant is engaged in nonroutine, "high-end" services while failing to appreciate the risk-free and routine nature of the activities performed by the Appellant. In doing so, they have grossly erred in: 1.1 incorrectly characterizing the Appellant as a high-end service provider without conducting a proper Functional, Asset and Risk ("FAR") analysis of the international transactions; and 1.2 not considering that the Appellant in engaged rendering in routine coordination, administrative and Information Technology ("IT") enabled services to its AEs. 2. That on facts and in law, the Ld. AO/TPO/CIT(A) have erred in making an addition of INR13,318,981 to the returned incom....
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....onomic circumstances as comparables in the TP Order. 2.7 by wrongly rejecting certain companies and adding certain companies to the final set of comparables for the impugned transaction on an ad-hoc basis. The TPO has resorted to cherry picking of comparables to determine ALP for the impugned transaction without due cognizance to the FAR profile of the Appellant vis-a-vis the companies selected as comparable. 2.8 by selecting certain companies which are themselves controlled, having significantly high related parties transactions in excess of 25% of the sales. 2.9 by selecting certain companies which are earning super normal profits as comparable to the Appellant. 3. That on facts and in law, the Ld. AO/TPO/CIT(A)have failed to make appropriate adjustments to account for varying risk profile of the Appellant, which is a captive contract service provider, vis-avis the comparables. In the process, they have also neglected the Indian TP regulations, OECD guidelines on TP and judicial precedence. 4. That on facts and in law, the Ld. AO/TPO/CIT(A)have erred in incorrectly computing the operating margins of the companies selected as comparable....
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....1 The Assessee company filed return of income for the year under consideration on 31/08/2008 declaring income of Rs. 1,42,46,880/-. The case was selected for scrutiny and notice under section 143(2) of the Act was issued and complied with. The Assessing Officer noticed international transactions carried out by the assessee with its associated enterprises (AEs) and referred determination of arm's length price of those international transactions to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO proposed adjustment of Rs. 1,33,18,981/- to the income vide his order dated 31/10/2011. The Assessing Officer passed a draft assessment order on 08/12/2011. Since the assessee did not prefer to file objections before the Ld. Dispute Resolution Panel (DRP) against the draft assessment order within the stipulated period, the Ld. Assessing Officer passed the final assessment order under section 143(3) r.w.s. 144C of the Act assessing the total income at Rs. 2,75,65,860/-. Aggrieved with the transfer pricing adjustment, the assessee preferred appeal before the Ld. CIT-(A), who partly allowed the appeal of the assessee. Aggrieved with the finding of the Ld. CIT-(A), the assessee and the Revenu....
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....to its AE as an independent contractor and for which it is compensated on the cost plus markup basis of 15%. 6.2 The international transactions undertaken by the assessee with its associated enterprises as summarized by the Ld. TPO in his order are reproduced as under: No. Nature of transaction Method Value of transaction 1. Provision of collection co-ordination and technical support services TNMM 82,304,290/- 2. Collection on the behalf of AE CUP 104,175,401 3. Reimb. Of cost by AE TNMM 178,836 4. Reimb. Of cost to AE CUP 902,357 6.3 The Ld. TPO accepted the arm's length price of the international transaction except the transaction of support services. 6.4 The assessee for computation of arm's length price of the transaction of support services applied Transactional Net Margin Method (TNMM) taking Operating Profit to Total Cost (OP/TC) as Profit Level Indicator (PLI). The PLI of the company is arrived at 15% on cost whereas the average PLI of the comparables is arrived at 15.38%. The PLI of the comparables has been arrived at by considering the data for financial year 2005-06, 2006-07 and 2007-08. 6.5 The asse....
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....8,981 (Rs.9,56,23,271 - 8,23,04,290). 6.10 In the assessment order passed on 08/12/2011, the Ld. Assessing Officer, accordingly made adjustment of Rs. 1,33,18,981/- and assessed total income at Rs. 2,75,65,860/-. 6.11 Aggrieved, the assessee challenged that adjustment made before the Ld. CIT-(A) on various grounds. The Ld. CIT-(A) upheld the rejection of multiple year data for computing PLI. The Ld. CIT-(A) upheld exclusion of comparables, namely, Allsec Technologies Ltd, Ace Software Ltd. and MCS Ltd. The Ld. CIT-(A) accepted objection of the assessee for inclusion of the Acentia technologies Ltd, Coral hubs Ltd, Mold-Tek technologies Ltd and HCL Comnet Systems and Services Ltd. and directed the Ld. AO/TPO to exclude these from the list of final comparables. 6.12 The assessee also requested for exclusion of e-Clarx Services Ltd. from the list of final comparables, but in view of the fact that it was considered by the assessee itself as comparable, the Ld. CIT-(A) directed to retain the company as comparable in the final set of comparables. 6.13 The finding of the learned CIT-(A) on the issue of comparables is reproduced as under: "6.5 As discussed above, the A....
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.... assessee's own case for assessment year 2009-10. 7.3 Ld. CIT(DR), on the other hand, referred to page 504 to 506 of the assessee's paper book and submitted that assessee has not furnished its FAR analysis and no detail as to the exact function of the assessee are furnished before the Ld. TPO. He referred to page 32-37 of the paper book, which is a copy of agreement between the assessee and the AE and submitted that trademark/intellectual property generated in the process was to be transferred to the AE without any remuneration. He submitted that normal BPO cannot generate intellectual property and therefore, the assessee cannot be categorized as BPO. The Ld. CIT(DR) further submitted that the acquisition process has not affected the PLI of the company and therefore, there is no impact of extraordinary event during the year under consideration. In view of the arguments, the learned CIT(DR) requested for retaining the company in the final set of comparables. 7.4 The Ld. counsel in the rejoinder submitted that all information in respect of the FAR analysis of the assessee was already submitted before the learned TPO and a copy of which was also available in the pages 420 to 422....
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....middle and back office support, portfolio risk management services and various critical data management services." (Page 4 of Annual Report FY 2007-08) "Today, we employ over 1500 domain specialists working for our clients, working as them." Chairman's Message (Page 6 of Annual Report FY 2007-08) "We are a leading, third party data analytics KPO company. eClerx is a very different company, with industry specialized services for meeting complex client needs. We are sometimes compared to a BPO or an IT off shoring company, which we are not. We are a data analytics KPO service provider specializing in two business verticals - Financial Services and Retail and Manufacturing. We provide solutions that do not just reduce cost, but help our clients increase sales and reduce risk, by enhancing efficiencies and by providing valuable insights that empower better decisions." 7.9 It is evident from above that the company is engaged in high-end KPO activities and functionally dissimilar to the assessee. 7.10 Further, according to the page 14 of the annual report for financial year 2007-08, which is reproduced as under, the ....
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....ding global manufacturing, retail, travel and leisure companies through its pricing and profitability services. From the above narration of the nature of business done by Eclerx Services Pvt. Ltd., it is overt that it, being a KPO company, is providing data process solutions to its clients, which activity is way different from that of the asses see company, which is basically of providing accounts payable services and general accounting services to its AEs alone. Not only that, this company has significant intangibles which its uses for the purposes of rendering KPO services. As the assessee is a captive unit rendering services to its AEs without any intangibles, there can be no comparison between the assessee and Eclerx Services Pvt. Ltd. We, therefore, order for the exclusion of this company from the final set of comparables." 31. So, when the taxpayer is a routine ITES i.e. low end service provider, it cannot be a suitable comparable with Eclerx which is a KPO providing data analytics and data process solutions to global enterprise clients and it is having significant intangibles to the tune of 7.24%. So, high end KPO cannot be compared with low end routine ITES service....
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....IQ Information systems (India ) Pvt. Ltd.(ITA No. 1961/Hyd/2011)wherein it has been held "Accentia Technologies Ltd............ It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's oum. case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner......11. On care careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de- merger will have an effect the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamati....
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.... the Ld. AO/TPO to exclude the said company from the final set of comparables. Coral Hub Limited. 9. Inclusion of this comparable was challenged by the assessee on the ground that working model of the company is outsourcing based and therefore it cannot be compared with the assessee. The Ld. CIT-(A) directed the AO/TPO to exclude the company with observation as under: "6.4.2 As regards Coral Hubs Limited ("CORAL"), the appellant has stated that le employee cost of CORAL is only 4.39 percent of its operating cost and it has substantial vendor payments, hire charges etc. for Rs. 21.82 crores (i.e. 87 percent of its total expenditure) evidencing that the company has outsourced most part of its work and has not provided the services itself. The appellant has stated that the business model of CORAL is different from that of the appellant since the company outsources its work and therefore, is functionally dissimilar to the business undertaken by the appellant. The appellant has relied on the decision of the Hon hie ITAT in the case of Maersk Global Service Center India Private Limited (ITA No. 3774/MUM/2011) wherein it has been held that "48. Insofar as the cases of Tulsy....
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....lopment team, quality control training and trouble-shooting facilities, whereas NCSIPL is engaged in provision of coordination, liaisoning, administrative support and other IT enabled support services to NCS US, wherein NCS US achieves its objective to ensure smooth functioning of the tests in India by taking the services of NCSIPL. The appellant has further submitted that the Structural Engineering services are not functionally comparable to the Appellant's coordination, liaisoning, administrative support and other ITES activities. In the case of Maersk Global Centres (India) (P.) Ltd Vs ACIT [2014] 43 taxmann.com 100 (Mumbai - Trib.) (SB) the Special Bench of the Hon'ble ITAT Mumbai has held that *In so far as the case of Mold-Tek Technologies Ltd. is concerned, it is observed from the annual report of the said company for the financial year 2007-08 placed at page 139 to 151 of the paper book that the said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further information of Mold-Tek Technologies Ltd. available on their Website is furnished in the form of printout a....
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....e paper book, we find that the company was engaged in providing structural engineering services. The annual report has also mentioned that acquisition of the U.S. based structural engineering KPO has created scope of growth for the company in the near future. In our considered opinion, the activity of consultancy in structural engineering cannot be compared with routine services of coordination, administrative support and other IT enabled support services rendered by the assessee to its AE. Further, page 9 of the annual report, which is available on page 994 of the assessee's paper book, we find that 'M/s. Tech-men Tools Private Limited' merged with assessee company and Mold-tek Plastic Limited demerged from the assessee company during the year under consideration. In view of this extraordinary event also, this company cannot be compared with assessee company. In view of the above facts, we do not find any infirmity in the finding of the Ld. CIT-(A) on the issue in dispute in directing the Ld. AO/TPO for excluding the above company from the final set of comparables. 10.4 The ground of the Revenue in relation to the three companies is accordingly dismissed. 11. The ground No. ....
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....monstrated on margin of the comparables. 11.3 The Ld. counsel submitted that the Tribunal in the case of Westfalia Separator India Private Limited Vs. ACIT in ITA No. 4447/Del/2007 for assessment year 2003-04 has allowed working capital adjustment for service industry also. The Ld. counsel also relied on the decision of Tribunal in the case of Mercer Consulting India Private Limited, (2014) 47 taxmann.com 84 (Delhi-Trib) to support his proposition that working capital adjustment can be allowed to service industry also. 11.4 On the contrary, Ld. CIT(DR) relied on the finding of the lower authorities. 11.5 We have heard the rival submission and perused the relevant material on record. We find that the Tribunal in the case of Mercer Consulting (India) Private Limited (supra) on the issue of working capital adjustment has observed as under: "16.2 Having heard the rival submissions and perused the relevant material on record, we find that the viewpoint canvassed by the authorities below is sans merit. Working capital adjustment is ordinarily confined to inventory, trade receivables and trade payables. If a company carries on high trade receivables, it would mean that i....