AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (8) TMI 1321
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....r; Transfer Pricing Related General 2. The A O in pursuance of the directions of the Dispute Resolution Panel erred in law and on facts in making addition of Rs. 1,61,618/- to the total income made on account of adjustment in the Arm's Length Price of the International Transaction with the Associated Enterprise by disregarding the economic analysis undertaken by the Appellant and by substitution by the Transfer Pricing Officer of his own economics analysis even though the intention to shift the profit base out of India cannot be attributed to the Appellant being a beneficiary of sec. 10A of the Income-tax Act; 3. The AO in pursuance of the directions of the DRP erred in law and on facts by suing Single Year Data pertaining to FY 2005-06 and also by rejecting certain filters adopted by appellant such as rejection of comparables having turnover less than Rs.l crore, comparables having economic performance contrary to the industry behavior such as diminishing revenue trend and comparables having different accounting years; 4. The AO in pursuance of the directions of the DRP erred in law and on facts by accepting some comparables on the basis of information obtained u/s 133(6)....
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....ologies Ltd. even though the same should have been excluded as comparable on the ground of being functionally dissimilar with different business models having significant outsourcing activities wherein the Employee Cost incurred is in significant as compared to Operation Cost. (Additional Ground filed separately as this comparable was part of assessee 's own set of comparables); v. Goldstone Infratech Ltd. even though the same should have been excluded as comparable on the ground of being functionally dissimilar as per its own accord it is engaged in providing infrastructure on lease basis and provision of call center supports services besides having diminishing revenue in BPO segment; vi. Apex Knowledge Solutions Ltd. even though the same should have been excluded as comparable on the ground of being functionally dissimilar with different business models having significant activities in the business of e-publishing not in commensuration with that of the assessee. COMMON GROUND 10. The AG in pursuance of the directions of the DRP erred in levying interest u/s 234B and 234C of the IT Act and in initiating penalty proceeding u/s 27 l(l)(c) of the IT Act. Ground No.l is reg....
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....turnover' in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the Legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the Legislature is to be adopted while understanding the meaning of the total . turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the Legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, the....
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....ent transaction to both operating revenue and operating cost for the purpose of TNMM analysis. 9. At the time of hearing, the learned AR of the assessee has stated that the assessee does not want to press this ground and the same may be dismissed. 10. The learned DR has raised no objection if this ground of appeal is dismissed being not pressed. 10.1 Accordingly ground No.7 of the assessee appeal is dismissed being not pressed. 11. Ground Nos.5, 6, 8 and 9 is regarding comparability of certain companies included by the TPO in the set of comparables and consequential transfer pricing adjustment. 12. The assessee is a company incorporated under the Companies Act, 1956 and is wholly owned subsidiary of Akamai Technologies Inn., USA. The assessee provides back office support services and related IT enabled services (ITES) to its AE, which includes voice based support services, voice/non-voice based technical support services, invoice processing, accounts receivables and collection processing. The assessee is remunerated on cost plus 10% mark up basis for the above services. 13. The financial result and international transactions reported by the assessee are reproduced as under:- ....
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....2 8 Goldstone Infratech Ltd. (Seg.) (Earlier known as Goldstone Teleservices Ltd) 5.03 29.01 0 29.01 9 Spanco Ltd (Scg.) (Earlier known as Spanco Telesystems & Solutions Ltd.,) 82.32 20.86 0 20.86 10 Ace Software Exports Ltd. 4.97 7.72 0 7.72 11 Apex Knowledge Solutions Pvt. Ltd., 4.92 20.48 0 20.48 12 R Systems International Ltd (Seg.) 9.17 15.11 0.01 15.24 13 Flextronics Software Systems Ltd., (Seg.) 21.41 14.54 0.07 14.91 Average 24.00 24.28 16. Thus, the TPO computed the average PLI at 24% and after granting working capital adjustment. The adjusted average margin was computed at 20.03%. In the final set of comparable of the TPO, 5 companies are common as in the list of comparable selected in the TP analysis of the assessee which are as under:- (1) Vishal Information Technologies Ltd. (2) Goldstone Infratech Ltd. (3) Datamatic Financial Services Ltd.(seg) (4) Maple e-Solutions Ltd. (5) Nucleus Netsoft & GIS(India) Ltd. (now known as (Asit C, Mehta financial Services Ltd.) 17. The assessee is seeking exclusion of 6 companies from the set of comparables considered by the TPO. Out of these six compa....
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....ctions raised by the assessee is accepted then it will reverse the entire process of determination of ALP conducted by the TPO. He has further contended that neither the assessee nor the TPO has applied any employee cost filter therefore at this stage, the assessee cannot be allowed to raise such an objection which requires investigation of new facts in respect of the companies selected by the TPO as well as by the assessee. 22. We have considered the rival submissions as well as the relevant material on record. As regards the objections raised by the assessee against the companies namely Vishal Information Technologies Ltd., and Nucleus Netsoft and GIS India Ltd., we find that this Tribunal in a series of decisions has examined the functional comparability of these companies and therefore once it has been held that these companies cannot be regarded as functionally comparable then even if these companies has been selected in the TP Study, the assessee cannot be precluded from raising an objection against these companies which are found to be not comparable. This view is supported by the decision of the Chandigarh Special Bench of this Tribunal in the case of Quark Systems (P.) Lt....
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....her or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the AO. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before Revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the AO for consideration of claim of the taxpayer and make a de novo adjudication of the ALP after providing reasonable opportunity of being heard to the assessee. We order accordingly.' 23. Thus in view of the matter that the functional comparability has already been examined by this Tribunal, we admit the additional ground raised by the assessee regarding functional comparability of these 2 companies for deciding the same on merits. 24. Thus the comparable of 6 companies are disputed before us which are considered as under: 1. Datamatics Financial Services Ltd. (seg.) 25. The learned AR of the assessee submitted that this company fails related party transactions filter as related party transaction revenue is 49.08%. In support of his contention he has relied upon the ....
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....Representative contended that the major transaction of Rs. 99.14 lakh of Datamatics Financial Services Limited with Datamatics Limited was towards 'Reimbursement of expenses'. Since the reimbursement of expenses does not include any profit element, the Id. DR urged that the same be excluded. He stated that once this transaction is excluded, the other transaction of Rs. 14.31 lakh are less than 25% of the total transaction with related parties. 13. We do not find any force in the contention advanced by the learned Departmental Representative for the exclusion of transactions with Datamatics Limited towards 'Reimbursement of expenses ' from the overall transactions entered into by Datamatics Financial Services Ltd. with its AEs. Section 92F(v) defines 'transaction' in the context of transfer pricing provisions to include an arrangement, understanding or action in concert whether or not it is formal or in writing or whether or not it is intended to be enforceable by legal proceeding. There is no reference to any transaction having necessarily including profit element or mark-up so as to fall within the definition of 'transaction' under Chapter X of the....
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....ed by this tribunal in the case of Goldman Sachs Services (P.) Ltd. (supra) and therefore, this company cannot be considered as comparable. In support of his contention, he has relied upon the decision of co-ordinate bench in the case of NETTAJ India Ltd. v. Dy. CIT in IT Appeal No. l480 of 2010 as well as Haliba Technology India (P.) Ltd. v. ITO in IT Appeal No. 1179 of 2010 and submitted that consistent view has been taken by this tribunal in respect of this company. 30. On the other hand, the learned DR has submitted that the comparability of this company has been examined by this tribunal in the assessee's own case for the asst. year 2005-06 vide order dated 16/3/2016 in ITA No. IT(TP) No. 879/2013, wherein the Tribunal has held that the assessee has not brought on record any evidence in support of the function carried out by this company and, therefore in the absence of the supporting evidence to prove this dissimilarity of this company which cannot be excluded merely on the ground of high profit margin. 31. Having considered the rival submissions as well as relevant material on record, at the outset we know that the functional comparability of this company has been exam....
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.... AR of the assessee submitted that this company functionally is not comparable with the assessee as it has outsourcing a significant portion of its business as the employee cost of this company is 31.372% of the total cost and outsourcing cost 24.75% of the total costs. Therefore as further contended that there was extra ordinary event of amalgamation with Nucleus Securities Ltd., reported in annual report of this company w.e.f 1/4/2005 which is relevant to the asst. year under consideration. He has relied upon the decision of the co-ordinate bench of this tribunal in the case of Goldman Sachs Services (P.) Ltd. (supra). 36. On the other hand, the learned DR has relied upon the orders of the authorities below and submitted that when the prominent business activity of this company is comparable with the business activity of the assessee then other factor which are in segment and not affecting main business activity are not relevant for the purpose of selecting this company. He has submitted that this company satisfied all the filters applied by the TPO. II. Goldstone Infratech Ltd. (Seg) 37. The learned AR of the assessee has submitted that this company is functionally not compar....
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.... 25 of its order:- "24. We have considered the rival submissions. As far as comparable companies chosen by the TPO at S. No. 1, 3, 6, 7 & 8 viz., Maple ESolution Ltd., Datamatics Financial Services Ltd., Vishal Information Technological Services Ltd., Asit C. Mehta Financial Services Ltd., and Gold Stone Infratech Ltd., in the list of comparable companies chosen by the TPO, we find that the Hyderabad Bench of the ITAT in the case of HSBC Electronic Data Processing India Ltd. v. ACIT, ITA No. 1624/Hyd/2010 by order dated 28.6.2013 considered comparability of these companies in the case of a company engaged in rendering IT enabled services to its AE similar to that of the Assessee in the present case. The tribunal held that the aforesaid companies are not comparable. The following were the relevant observations of the Tribunal. "8. The first objection is with reference to selection of comparable data by the TPO with reference to the following five companies- (a) Vishal Information Technologies Ltd. (b) Goldstone Infratech Ltd. (c) Datamatic Financial Services Ltd. (seg) (d) Maple e-Solutions Ltd. (e) Nucleus Netsoft & GIS (India) Ltd. (now known as (Asit C. Mehta Financia....
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.... is functionally different. This factor was also approved by the DRP in assessee's own case in the later year, as can be seen from the copy of the order placed on record, for assessment year 2008-09. In view of this, we direct the Assessing Officer to exclude this company from the list of comparables. Goldstone Infratech Ltd 10. The assessee's objection for inclusion of this comparable is on the basis of the filter on foreign exchange earnings, diminishing revenue filter and functionality, being run on lease basis. It was submitted that this company was rejected in the case of Stream International Services Pvt. Ltd. v. ADIT (International Taxation) by the Mumbai Bench of the Tribunal, vide its order dated 11.1.2013 in ITA No. 8997/Mum/2010 for assessment year 2006-07. 10.1 After considering the rival contentions, we are of the opinion that the business model of the above company is different from that of the assessee. In this case, the foreign exchange revenue is less than 1% of the total turnover. Therefore, it fails the filter provided by the Assessing Officer, on the. basis of the foreign exchange earnings. Further, the Revenue from BPO is failing over a period of thr....
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....e as against total expenses of Rs. 1.84 crore. Referring to pages 319 and 320 of the paper book, our attention was drawn towards Annexure-2 to demonstrate that the "Transactions with the Associated Parties within the meaning of sections 92A and 92B of the Income-tax Act, 1961" showed one major transaction with Datamatics Limited towards 'Reimbursement of expenses' at Rs. 99.14 lakh. The learned AR contended that the transactions of Datamatics Financial Services Limited with other AEs amounted to Rs. 14.31 lakh making total of transactions with the AEs at Rs. 1.13 crore. It was submitted that the percentage of transaction with related parties is much more than 25%. being, the filter adopted by the. TPO himself and hence the same should be excluded. 12. In the opposition, the learned Departmental Representative contended that the major transaction of Rs. 99.14 lakh of Datamatics Financial Services Limited with Datamatics Limited was towards 'Reimbursement of expenses'. Since the reimbursement of expenses does not include any profit element, the Id. DR urged that the same be excluded. He stated that once this transaction is excluded, the other transaction of Rs. 14.3....
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....at much higher level, as against the filter adopted by the TPO himself being companies with less than 25% related party transactions. We order accordingly." In view of the above, since this company fails in this filter adopted by the TPO, we direct the TPO to exclude this company from the list of comparables adopted Maple e-Solutions Ltd. 12. The objection of the assessee with reference to this company is with regard to the financials of the company, on the ground of unreliability of data. It was submitted that selection of this company was rejected in the case of CRM Services India Pvt. Ltd. in ITA No. 468/Del/2009 and also in the case of Stream International Services (supra). Further, the assessee also relied on the DRP order in assessment year 2007-08, with reference to the above company. 12.1 We have considered the rival submissions. We agree with the objections of the assessee. In the case of Stream International Services P. Ltd. (supra), it is held with reference to this company as under: "18. We are unable to uphold the contention raised by the learned Departmental Representative. It is apparent from two orders passed - one by the Delhi Bench and the other by the Hydera....
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....e excluded. 25. The facts and circumstances and the Assessment year for which the aforesaid companies were not considered as comparable are identical to the case decided by the Hyderabad Bench of ITAT and that of the case of the Assessee. Respectfully following the decision of the Hyderabad Bench of ITAT, we direct the TPO to exclude the aforesaid companies from the list of comparable while arriving at the arithmetic mean of comparable. The relevant grounds of appeal of the Assessee are allowed." 13.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra), we hold and direct that the following five companies be excluded from the set of comparable companies for the ITES segment of the assessee:- (i) Maple eSolutions Ltd. (ii) Datamatics Financial Services Ltd. (iii) Vishal Information Technologies Ltd. (iv) Asit C Mehta Financial Services Ltd. (v) Goldstone Infratech Ltd. It is accordingly ordered. 14. Apex Knowledge Solutions Pvt. Ltd. 14.1 The assessee submitted that this company being engaged in electronic publishing services and GIS including data conversion, data ent....
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....ogies India Pvt. Ltd. (supra), for Assessment Year 2006-07, we hold and direct that this company, namely, Apex Knowledge Solutions Pvt. Ltd. be excluded from the list of comparables for the ITES segment of the assessee in the case on hand.' 42. As regards, the employee cost as well as outsourcing cost in case of Asit C Mehta Financial Services there is no dispute that this company is outsourcing part of its business and the cost of outsourcing is 24.75% of the total cost. This company was earlier know as Nucleus Netsoft and G1S India Ltd. As per schedule 9 of the balance sheet this company has reported operations which included IT enabled services and software development apart from portfolio management fee. Thus, this company derives its main income from the operations of the IT enabled and software development activities and there is no separate data of sub-segment IT enabled services and software development. Therefore, the composite data of income from IT enabled services and software development cannot be considered as comparable prices of the assessee's IT enabled services. Further, we find that this company paying data process charges to the extent of 24.75% which s....