TaxTMI 
TaxTMI 
2018 (3) TMI 938
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.... (ii) Selection / rejection of comparables in back office support service segment; and (iii) Benefit of working capital and risk adjustment. 3. Brief facts are, the assessee an Indian company is a subsidiary of ExxonMobil Corporation Group of USA. The assessee is basically involved in providing services of information dissemination, maintaining customer relationship and market development to its overseas Associated Enterprise (A.E) ExxonMobil Chemical Co., USA. It also provides application research and technical services as well as back office support services to its A.E. Though, as per the transfer pricing order, the assessee has entered into various international transactions with its A.E., however, in the present appeal, we are concerned with the international transaction relating to provisions of technical services and back office support services. As far as the provision of technical services to A.E. is concerned, the assessee bench marked such transaction by applying Transaction Net Margin Method (TNMM) as the most appropriate method. In the search process conducted by the assessee, ten companies stated to be functionally similar to the assessee were sele....
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....ed by the parties and record our finding in respect of each comparable disputed before us. As discussed earlier, as far as technical service segment is concerned, assessee has challenged rejection of three comparables which are as under:- PFIZER LIMITED 5. Learned Authorised Representative submitted, this company is functionally similar to assessee, hence, should not have been rejected as a comparable. He submitted, in assessee's own case for assessment year 2006-07, the DRP has accepted this company as comparable. He submitted, even the Transfer Pricing Officer in assessee's own case for assessment year 2009-10 and 2010-11, has accepted this company as a comparable. He submitted, there being no difference in fact there is no reason why it should be rejected as comparable in the impugned assessment year. In this context, he drew our attention to DRP's order for the assessment year 2006-07 as placed in the paper book. The learned Departmental Representative drawing our attention to the annual report of the company submitted that none of the segments can compare to the technical service segment of the assessee which is basically in the nature of ITES (Information Technolo....
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....tal Authorities have rejected this company. 8. Learned Departmental Representative submitted, though, the company has shown profit in the impugned assessment year, however, such profit is very low. He further submitted, the reason for loss in the preceding years and low profit in the impugned assessment year requires to be examined. Further, he submitted, the company is also not functionally similar to the assessee as it is basically a diagnostic service provider whereas the assessee is providing technical service. Therefore, he justified exclusion of this company. 9. We have heard rival contentions and perused material on record. No doubt, the Transfer Pricing Officer has rejected this company purely on the reasoning that it is a loss making company and the DRP has also approved it. It is also a fact that in assessment year 2006-07, the company did report a loss of Rs. 14.32 lakh, however, from the financial statements of the company submitted in the paper book it is evident that in the impugned assessment year the company has shown marginal profit of Rs. 23738=68. Therefore, to that extent, the finding of the Transfer Pricing Officer that it is a consistent loss making comp....
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....3. As far as the back office support service segment is concerned, the selection of the following comparables have been disputed before us. HCL COMNET SYSTEMS & SERVICES LTD. APEX KNOWLEDGE SOLUTIONS PVT. LTD. 14. Seeking exclusion of these two companies, the learned Authorised Representative submitted that both these companies are having Related Party Transaction (RPT) exceeding the threshold limit of more than 15%. Therefore, he submitted that these companies should be excluded. 15. Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and the DRP. 16. We have heard rival contentions and perused the material available on record. As per assessee's own submissions, the related party transaction in case of HCL Comnet Systems & Services Ltd. is 22.37%. In many of the orders including the orders where the Judicial Member is a party, threshold limit of related party transaction has been accepted at more than 25%. That being the case, we are of the view that HCL Comnet Systems & Services Ltd. cannot be excluded on account of high related party transaction. However, as far as Apex Knowledge Solutions Pvt. Ltd. is conce....
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..... However, the Transfer Pricing Officer without properly considering the objection of the assessee has selected this company which has been upheld by the DRP without proper application of mind. It is relevant to observe in a number of decisions of different Benches of this Tribunal, it has been held that e-Clerx Services Ltd. being a KPO service provider is not comparable to BPO service provider. In this context, we may refer to following decisions of the Tribunal, Hyderabad Bench:- i) Capital IQ Information Systems India Pvt. Ltd. v/s DCIT, [2013] 32 taxmann.com 21; and ii) HSBC Electronic Data Processing India Pvt. Ltd. v/s ACIT, [2014] 52 taxmann.com 136. 20. In fact, in case of Rampgreen Solution Pvt. Ltd., 377 ITR 533, the Hon'ble Delhi High Court referring to the decision of the Tribunal, Hyderabad Bench, in case of Capital IQ Information Systems Pvt. Ltd. (supra), has held that e-Clerx Services Ltd. being a KPO service provider cannot be compared to BPO service provider. In view of the aforesaid, we direct the Assessing Officer to exclude e-Clerx Services Ltd. from the list of comparables. 21. As far as Mouldtek Technologies Ltd. (SEG) is concerne....
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....any, a copy of which is at Page-481 of the paper book, it is stated that the company has only one segment which is software development. Considering the aforesaid factor, the Tribunal, Hyderabad Bench, in case of HSBC Electronic Data Processing India Pvt. Ltd. (supra), directed the Assessing Officer to examine this aspect. In view of the aforesaid, we direct the Assessing Officer to examine the functionality of this company and exclude the same if it is found that the company is engaged in the software development. ASIT C. MEHTA FINANCIAL SERVICE LTD. 25. Learned Counsel for the assessee objected to selection of this company as a comparable on the ground that the company lacks segmental details. Further, he submitted that the company has a low employee cost of 24.78%, hence, cannot be comparable to the assessee. 26. Learned Departmental Representative relied upon the findings of the Transfer Pricing Officer and the DRP. 27. We have heard rival contentions and perused the material available on record. As could be seen in the course of transfer pricing proceedings, in response to the show cause notice issued by the Transfer Pricing Officer the assessee has accepted ....
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....f its functional difference. It is evident from facts on record that this company does not carry out the activity relating to service segment itself but out sources the entire work to third parties. This is evident from low employee cost of the company. Considering the aforesaid aspect different Benches of the Tribunal have unanimously held that the company cannot be considered as a comparable. In this context, we may refer to the decision of the Tribunal, Hyderabad Bench, in Capital IQ Information System Pvt. Ltd. and HSBC Electronic Data Processing Pvt. Ltd. (supra). In fact, taking note of the aforesaid factual position, the Hon'ble Delhi High Court in Ramp Green Solutions Pvt. Ltd. (supra), has held that this company cannot be considered as a comparable. In view of the aforesaid, we direct the Assessing Officer to exclude this company as a comparable. 34. It is relevant to note in the course of hearing, learned Authorised Representative contended before us that the Transfer Pricing Officer has wrongly computed the margin of the comparable companies under both the segments. In this context, he drew our attention to the working of the correct margin as submitted in two sep....
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.... evidence. He submitted, without properly examining the evidence brought on record, the Assessing Officer should not have made disallowance on ad-hoc basis. 41. Learned Departmental Representative relied upon the findings of the Assessing Officer and the DRP. 42. We have heard rival contentions and perused the material available on record. As could be seen, the Assessing Officer disallowed 25% of the expenditure claimed on ad-hoc basis alleging that the assessee failed to explain the purpose for which such expenditure was incurred. It is also evident that the disallowance was made taking note of the fact that similar disallowance was also made in the assessment year 2006-07. In our view, only because the disallowance of similar nature was made in assessment year 2006-07 either for lack of evidence or some other reasons and the assessee accepted it, disallowance cannot be made in subsequent assessment years. If the assessee through proper documentary evidence is able to prove the genuineness of the expenses, there is no reason to disallow the same. In the facts of the present case, it appears that in the course of assessment proceedings, the assessee did produce sufficient doc....
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....ees by virtue of its business connection in India it is liable to be taxed in India. Therefore, the assessee was required to withhold the tax while making such payments. As far as the contention of the assessee that the payment made is not subject to TDS in view of specific provision of the tax treaty between India and Singapore, the Assessing Officer observed that the service rendered by EMCAP are crucial in carrying out the business activity and while rendering such service EMCAP had made available the technical skill and expertise to the assessee. Further, the Assessing Officer observed that the assessee under the provision of section 195 of the Act was duty bound to deduct tax at source while making the payment. It was not for the assessee to decide the taxability of income at the hands of EMCAP in India. Thus, the Assessing Officer disallowed the amount of Rs. 1,25,60,485. Being aggrieved of such disallowance, assessee raised objections before the DRP. 45. However, the DRP, did not find merit in the submissions of the assessee and confirmed the disallowance made by the Assessing Officer except the reimbursement of expenditure amounting to Rs. 6,72,753. In view of the afores....
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.... regarded as technical services and secondly; if they are considered as managerial or consultancy services they do not make available technical knowledge, expertise, knowhow, skill or process so as to enable the person acquiring the services to apply the technology contained therein. Learned counsel for the assessee submitted that, since, the treaty provisions override the domestic law, as per the provisions of treaty payment made cannot be regarded as fees for technical service. He submitted that the Assessing Officer has failed to establish that the services availed by the assessee has enabled it to apply the technology contained therein. Learned counsel for the assessee submitted, once the payment made is not treated as fees for technical service under Article-12(4)(b) of the tax treaty it cannot be taxed at the hands of EMCAP in view of Article-7 of the tax treaty as it has no P.E. in India. Learned counsel for the assessee submitted, the expression "make available" would mean recipient of such service would derive an enduring benefit and utilise knowledge or knowhow on his own in future without the aid of the service provider. He submitted, if the terms of the agreement were c....
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....e whether the payment made can at all be termed as fee for technical services as defined under Article-12 of India Singapore Tax Treaty. In our considered opinion, we have to address this issue at the very outset. Article-12(4) of India Singapore tax treaty defines fee for technical services as under:- "12.4 the term "fees for technical "services" as used in this Article means payments of any kind to any person in consideration of services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein." 49. The Assessing Offi....
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....e, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should he imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing inc service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se ....