AI Drafter 
TaxTMI 
TaxTMI 
2017 (1) TMI 1570
X X X X Extracts X X X X
X X X X Extracts X X X X
....spect of the profits from its ORSC unit. Since assessee has its international transactions with its Associated Enterprise [AE] to the tune of Rs. 59,79,99,396/- which includes both receipts and expenses and reimbursements, the matter was referred to the Transfer Pricing Officer [TPO] for determining Arm's Length Price [ALP] of its transactions. The TPO vide his order dt. 29-10-2010, has rejected assessee's comparables and made fresh search and arrived at 27 comparable companies having arithmetic mean of 30.21% after providing negative working capital adjustment of (-)0.21, the arithmetic mean was arrived at 30.42%. On a total operating cost including reimbursement of expenses of Rs. 95,24,16,536/-, the ALP sales were determined at Rs. 1,24,21,41,646/- and the adjustment proposed was at Rs. 17,08,62,793/-. On the basis of the TPO's report, AO has finalised the draft assessment order. 2.1 Assessee filed objections before the Dispute Resolution Panel [DRP]. DRP, Hyderabad vide its order dt. NIL has accepted assessee's objections with reference to management fee and license fee payments and also directed to delete two companies from its list of comparables. The DRP a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....maintained and therefore, TPO's contention that under TNMM, adjustment has to be made on entire turnover is not correct. 6.2 This issue has to be considered in favour of assessee and AO/TPO is directed to make adjustments only to the extent of transactions with AE and exclude the adjustment on the transactions with non-AEs. This issue is already decided in favour of assessee in assessee's own cases in earlier years and later years. AO/TPO is directed accordingly. Ground is considered allowed. 7. Ground No. 4: Margin computation of the Appellant under TNMM Non consideration of Work-In-Progress (WIP) movement for the computation of the operating margin of the Appellant; 7.1 This ground pertains to computation of margin under TNMM. It was submitted that the WIP movement for the computation of operating margin of assessee was not considered by the TPO. Since this issue is required to be examined by the TPO, we direct the AO/TPO to examine this issue and work out the correct margin. Ground is allowed for statistical purposes. 8. Ground No. 5: Incorrect computation of working capital adjustment Computing the working capital adjustment, by considering the total r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m its inception and has no working capital contingencies. * The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement." We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 03.08.2012 has given a finding as under : "7.7.4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustmen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Minacs Worldwide Ltd (Transworks Information Services Ltd) 11.98% 2 Allsec Technologies Ltd 27.31% 3 Apex Knowledge Solutions Pvt Ltd 12.83% 4 Apollo Health Street Ltd -13.55% 5 Caliber Point Business Solutions Ltd 21.26% 6 Cosmic Global Ltd 12.40% 7 Datamatics Financial Services Ltd (Seg) 5.07% 8 Flextronics Software Systems Ltd (Seg) 8.62% 9 Genesys Intl Corp Ltd (Seg) 13.35% 10 ICRA Techno Analytics Ltd (Seg) 12.24% 11 Nittany Outsourcing Services Pvt Ltd 11.50% 12 R Systems International Ltd (Seg) 20.18% 13 Spanco Telesystems & Solutions Ltd (Seg) 25.81% 14 Accentia Technologies Ltd (Seg) 30.61% 15 Accurate Data Convertors Pvt Ltd 50.68% 16 Asit C Mehta Financial Services Ltd (Seg) 24.21% 17 Bodhtree Consulting Ltd (Seg) 29.58% 18 Eclerx Services Ltd 89.33% 19 HCL Comnet Systems & Services Ltd (Seg) 44.99% 20 Informed Technologies India Ltd 35.56% 21 Infosys BPO Ltd 28.78% 22 Iservices India Pvt Ltd 49.47% 23 Mold Tek Technologies Ltd (Seg) 113.49% 24 Vishal Information Tech....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e learned authorised representative of the assessee also relied upon the decisions of Income-tax Appellate Tribunal, Hyderabad Bench in case of Avineon India P. Ltd., ITA.No.1989/Hyd/2011 dated 31.10.2013, Zavata India P. Ltd., Hyderabad v. DCIT, Circle 3(3), Hyderabad ITA.No.1781/Hyd/2011 dated 07.06.2013 and M/s. Capital IQ Information Systems India Pvt. Ltd., Hyderabad v. DCIT (Int. Taxation), Hyderabad (ITA No.1961/Hyd/2011 dated 23.11.2012. 6.1.2 The learned departmental representative, on the other hand, submitted that there is no reason to exclude the aforesaid company as the TPO has given justifiable reasons for treating it as a comparable company. 6.1.3 We have heard the contentions of the parties with regard to the aforesaid company and perused the material on record. From the facts and material available on record, it is seen that two companies viz., Iridium Technologies and Geosoft Technologies amalgamated with M/s. Accentia Technologies Limited which resulted in a higher profit for the company during the year. In case of Capital IQ Information Systems India Pvt. Ltd., the co-ordinate bench of this Tribunal while considering the assessee's objectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger." On 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 on 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 amalgamation in fact has taken place, then the aforesaid comparable has to be excluded." 6.1.4 As can be seen from the order of the co-ordinate bench, the aforesaid company was excluded since ex-ordinary events like merger and demerger had taken during the relevant financial year which must have impacted the financial results of the company. That besides the high volume of on-site operation of Accentia Technologies Limited also makes it functionally dissimilar to the assessee. These facts are ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....atter. The DRP has also over-looked this aspect. Another important aspect is the company has shown profit of 50.15% which may have weighed with the Assessing Officer for accepting this company as comparable. Be that as it may since the TPO has not given any opportunity to the assessee to raise its objections with regard to the aforesaid company, we are inclined to remit this issue to the file of the Assessing Officer who shall decide the acceptability or otherwise of the company as comparable after considering the assessee 's objections. 3. Asit C Mehta financial services Ltd. (Seg). 6.3.1. The learned authorised representative of the assessee objecting to the aforesaid company being selected as comparable submitted that the employee cost of the company is only 24.78% of its revenue compared to assessee's 56%. The learned authorised representative of the assessee further submitted that in many other cases for asst. year 2008-09 the DRP has excluded this company from the list of comparables. The learned authorised representative of the assessee also relied upon the decisions of Income-tax Appellate Tribunal, Hyderabad Bench in assessee's own case ITA.No....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lity or otherwise of the company after properly considering the objections of the assessee. 5. Eclerx Services Limited:- 6.5.1 Objecting to the aforesaid company being treated as comparable, the learned authorised representative of the assessee submitted that the company is engaged in providing knowledge process outsourcing (KPO). It was submitted that the assessee is providing data analytics, operations management and audit reconciliation. It was submitted that besides being functionally different from the assessee, the aforesaid company has shown extraordinarily high profit at 88.11% hence cannot be treated as comparable. In support of such contention, the learned authorised representative of the assessee relied upon the decisions of Co-ordinate Bench of Hyderabad Tribunal in cases of Avineon India P. Ltd., ITA.No.1989/Hyd/2011 dated 31.10.2013, Zavata India P. Ltd., Hyderabad v. DCIT, Circle 3(3), Hyderabad ITA.No.1781/Hyd/2011 dated 07.06.2013, M/s. Capital IQ Information Systems India Pvt. Ltd., Hyderabad v. DCIT (Int.Taxation), Hyderabad (ITA No.1961/Hyd/2011 dated 23.11.2012 and also Special Bench decision of the Mumbai Tribunal in the case of Maersk Global....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore the TPO or before the DRP. Hence, assessee's contention should not be entertained. 6.6.3 We have considered the submissions of the parties with regard to the aforesaid two companies and perused the material on record. On going through the orders of the TPO as well as DRP, we find the submissions made by the ld. DR to be valid. As can be seen from materials on record, the assessee has not raised any objection either before the TPO or before the DRP in respect of aforesaid companies. However neither the TPO nor DRP has examined why this year the company has exceptional profits. Whether due to mergers or any events or happenings the profit was exceptional require verification. The assessee has also not made any objection before the authorities. Hence, we are of the view that these two companies are to be reexamined by TPO/AO before being selected as comparables. TPO/AO is directed to consider the objections of assessee and decide the issue afresh. 10. Mold-Tek Technologies Limited:- 6.7.1 Objecting to the aforesaid company being treated as comparable, the learned authorised representative of the assessee submitted that during the year, the company ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has accepted the assessee's contention that this company cannot be treated as comparable because of exceptional financial result due to merger/de-merger. In view of the aforesaid, we accept the assessee's contention that this company cannot be treated as comparable. That apart, it is also a fact that this company has shown super normal profit working out to 113%. The Income-tax Appellate Tribunal, Mumbai Bench in the case of Teva India Pvt. Ltd. (supra) has observed that companies showing supernormal profit cannot be treated as comparable. The relevant observations of the Tribunal in that case are extracted hereunder for convenience "32. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that although a detail submission was made on behalf of the assessee before the learned CIT(A) on the basis of FAR analysis to show that the selection of M/s. Vimta Labs as comparable is not justified, the learned CIT(A) has not accepted the stand of the assessee on the issue without giving any cogent or convincing reasons. In its recent decision rendered in the case of Adobe Systems India Pvt. Ltd. (ITA No.5043/Del/2000 d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....formation Systems India Pvt. Ltd., Hyderabad v. DCIT (Int. Taxation), Hyderabad (ITA No.1961/Hyd/2011 dated 23.11.2012. 6.8.2 The learned departmental representative however supported the orders of the DRP and TPO. 6.8.3 We have heard rival submissions and perused the material on record. In case of Capital IQ Information Systems (India) Pvt. Ltd.,(supra) the co-ordinate bench after considering the objections of the assessee in respect of the aforesaid company held in the following manner :- "17. After considering the submissions of the learned Authorised Representative for the assessee, we find that the DRP, in the proceedings for the assessment year 2008-09 in assessee's own case, after taking note of the composition of the vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it prints upon clients request, concluded as follows- "18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped form the f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....submitted that, manually corrected and unaudited data from its TP report has been considered which cannot be said to be authentic. In support of his contention for excluding the aforesaid three companies as comparables, the learned authorised representative of the assessee relied upon the decision of Capital IQ Information Systems India P. Ltd. v. Addl. CIT, Circle 1(2), Hyderabad (ITA No.124/Hyd/2014 and ITA.No.170/Hyd/2014 dated 31.07.2014. 6.9.2 We have heard rival submissions of the parties and perused the material on record. It is not disputed that these three companies are having huge turnovers like that of assessee during the year. Therefore turnover filter as considered in other cases does not apply here. However as submitted the functional profile of companies as such is different. But, if the BPO division is similar to assessee the same can be considered after proper FAR analysis. Therefore we are of the opinion that TPO/AO can reconsider the comparables after giving due opportunity to assess and fairly analyzing its objections. In case the data (segmental or unit) is incomplete or functional profile etc are different AO/TPO should exclude the same. With these ob....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ered as a market risk adopted. However, the assessee is relying on two more cases of the coordinate Benches in the case of Sony India Ltd. (114 ITD 448)-Del, wherein the Tribunal determined the risk adjustment at 20% of the ALP for a risk mitigated distributor. It also relied on the decision of the Delhi Bench in the case of Rolls Royce Plc v. DCIT[2008] 19 SOT 42, wherein it was determined at 35% of the company's profitability allocated towards marketing activities. Therefore, it was submitted that since assessee does not have any marketing activities, a 35% adjustment is warranted for the difference in risks. It also submits that risk adjustment can also be computed under the Capital Asset Pricing Model (CAPM)/Sharpe Model for risk adjustments. In the previous year also matter was restored to TPO/AO in assessee own case. Since the application of the above decisions and facts herein are to be examined vis- à-vis the assessee's business model, we, without giving any direction with reference to the risk adjustment and amount of risk adjustment required, restore the matter to the file of the Assessing Officer to re-examine this adjustment issue afresh, after considerin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ss. Assessee also raised additional ground No. 1 with reference to additional claim. AO rejected the exemption claimed u/s. 10A in respect of ORSC unit by holding that as the aforesaid unit have been set up by splitting up/reconstruction of the existing business, the exemption claimed cannot be granted. Assessee objected to the denial of exemption before the DRP. DRP extracted the submissions in its order however, has upheld the AO's contentions stating that the issue was not free from doubt and has approved the AO's action as the appeals are pending on the issue. 13.2. Ld. Counsel while stating that ORSC unit has come up afresh in Financial Year 2004 and claimed the deduction for the first time in AY. 2006-07, however, submitted that the AO in AY. 2008-09 has passed a detailed order u/s. 154 stating that ORSC unit which is not eligible for deduction as the eligibility u/s. 10A has got expired by AY. 2004-05 itself and the deduction in AY. 2008-09 was not allowable to assessee. The issue is being contested. It was submitted that assessee was eligible for deduction on the new ORSC unit which was approved as STPI and therefore, the claim is entirely different than that of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ook into this aspect and take a decision in the matter after verifying the claim of the assessee and after giving due opportunity of hearing in the matter to the assessee'. 13.5. AO/TPO is directed to examine the issue in the light of the facts and if any un-availed portion was available for STPI unit, the deduction will be allowed. Accordingly, this issue is restored to the file of the AO to examine in the light of the directions given in the above order in AY. 2006-07. Grounds are considered allowed for statistical purposes. 14. Ground No. 19: Capitalisation of license fees Disallowance the license fees of Rs. 34,23,815 by considering the same capital in nature 14.1 This ground pertains to the disallowance of license fees of Rs. 34,23,815/- by considering the same as capital in nature. 14.2 It was submitted that this issue is covered by the directions of the ITAT in the case of TNS India (P.) Ltd., v. Dy. CIT [2015] 57 taxmann.com 165 (Hyd.-Trib.) vide paras 21 to 23. The decision of the Co-ordinate Bench is as under: "21. The issue raised in ground No. 17 is with regard to treating the software licence fee paid as capital expenditure and allowing depr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tal. In the present case, assessee has not brought any material on record to establish that by applying the functional test, the expenditure can be said to be of a revenue nature. Moreover, after 01/04/2003 computer software has been specifically brought into the schedule at par with computer as far as eligibility of depreciation is concerned. Therefore, after 01/04/2003, computer software in the nature of application software and not mere licence for renewal have to be treated as capital assets eligible for depreciation at the same rate as of computer. Therefore, expenditure incurred for acquiring such asset will be capital expenditure. However, we accept ld. AR's alternative contention that depreciation should be allowed at 60%. As per the new appendix applicable from AY 2006-07, depreciation on computer and computer software is to be allowed at 60%. As AO has not brought any material on record to show that computer software acquired by assessee is not in the nature of software as mentioned in the appendix, in our view, AO is not justified in allowing depreciation at 25%. We, therefore, direct AO to allow depreciation on the computer software at 60%. This ground is partly all....