TaxTMI 
TaxTMI 
2017 (1) TMI 1570
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....e 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 also directed to allow depreciation on the licen....
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....ade 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 receivables and payables (including third party transactions) of the Appellant and making a negativ....
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....e 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 adjustment is to be made to t his situation, only a positive adjustment has to be made to the comparables so that they are brought on par with the applicant. ....
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....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 Technologies Ltd 51.19% 25 Wipro Ltd (Seg) 29.70% 10.2 There is no objection with reference to comparables selected at items 1 to 13. The objection is with reference to comparables at 14 to 25. It was submitted that many of the comparables were already excluded by the decisions in HSBC Electronic Data Processing India (P.) Ltd. v. Asstt. CIT [2015] 152 ITD 128/[2014] 52 taxmann.com 136 (Hyd. - Trib.) an....
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....ated 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 objection with regard to the aforesaid company held in the following manner:- "10. It is the submission of the assessee that this company cannot be treated as a comparable because of un-comparable 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 own case. It is seen that the DRP while considering similar objection placed b....
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....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 not considered either by the TPO or by the DRP. We therefore remit the matter to the file of the Assessing Officer who shall verify the fact whether merger has taken place during the year and if it found so, then the aforesaid company has to be excluded from the list of comparables. The Assessing Officer should also properly consider assessee's submissions with regard to functional difference also. 2. Accurate Data Convertors Private Ltd. 6.2.1. The learned autho....
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.... 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.1624/Hyd/10 and S.A.No.210/Hyd/2012 dated 28.06.2013, Avineon India P. Ltd., ITA.No.1989/Hyd/2011 dated 31.10.2013 and Zavata India P. Ltd., Hyderabad v. DCIT, Circle 3(3), Hyderabad ITA.No.1781/Hyd/2011 dated 07.06.2013. 6.3.2 The learned Departmental Representative, on the other hand, supported the orders of the revenue authorities. 6.3.3 We have considered the submissions of the parties and perused the material on record. From the information obtained u/s 133(6) of the Act by the TPO, it is seen that the....
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.... 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 Centres (India) P. Ltd., Mumbai v. ACIT, Circle 6(3), Mumbai dated 07.03.2014. 6.5.2 The learned departmental representative however supported the orders of the revenue authorities with regard to the aforesaid company. 6.5.3 We have heard rival submissions of the parties and perused the material on record. It is seen that in case of Capital IQ Information Systems (supra), the co-ordinate bench accepted the objection of the assessee with regard to the aforesaid company being treated as a comparable by holding that not only the said company is functionally ....
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....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 has shown super normal profit of 117.29% compared to the assessee as well as other comparable companies. It was further submitted that apart from having extraordinarily high profit Mold- Tek is also functionally different as it is engaged in providing structural engineering consulting services under the KPO division. It was submitted that M/s Mold Tek is providing highly technical and specialised engineering services and use of information technology is only incidental. The learned authorised representative of the assessee submitted that the Income-tax Appellate Tribunal, Hyderabad Bench considering these aspects has held M....
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.... "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 dtd. 21.01.2011) + (2011-TII-13-ITAT-DEL-TP), Delhi Bench of ITAT has held that exclusion of comparables showing supernormal profits as compared to other comparable is fully justified. We, therefore set aside the impugned order of the ld. CIT(A) on this issue and restore the matter to the file of the A.O. with a direction to decide the same afresh after taking into consideration the submissions made by the assessee before the learned CIT(A) and keeping in view the Delhi Bench of ITA in the case of Abode Systems India Pvt. Ltd. (supra). In this view of the matter, we accept the contentions of the assessee that this company cannot be treated as a com....
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....#39;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 final list of comparables." In case of ACIT v. M/s. Maersk Global service Centre (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- "Insofar as the cases of tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded." In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we acce....
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....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 observations the issue of selection of these companies as comparables is restored to TPO/AO to do the needful. 7. In ground no 10 assessee is seeking adjustment for differences in functions and risks undertaken. With reference to the risk adjustment, it was the submission of the assessee that assessee functioned under a limited risk environment with most of the risks being assumed by its AEs and comparables selected for analysis include companies which have fairly diversified areas of specialisation, bearing risks akin to any third party independent service provider. Since assessee is operating in a risk mitigated environment vis-à-vis the comparable companies performing entrepreneurial risk taking functions, the assessee seeks adjustment for the risk being t....
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....ter 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 considering the assessee's submissions and decide the issue in accordance with the principles on the subject.' 10.4. Since the above comparables were already considered in the Co-ordinate Bench decision, we direct the AO/TPO to examine the inclusion of items at 15, 20 and 22 as directed above in the above case and exclude the other comparables listed at 14, 16 to 19, 21, 23 to 25. We direct accordingly. 11. Ground No. 13: Adjustment for risk differences Not adjusting the net margins of the comparable companies taking into account the functional and risk differences between the international transaction of the Appellant and the comparable transactions in accordance with the provisions of Rule 10B(1)(e); 11.1. With reference to risk adjustment, it was fairly admitted that after e....
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....t 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 earlier one. 13.3. Ld. DR referring to the order of the ITAT in TNS India (P.) Ltd. v. Addl. CIT [2014] 48 taxmann.com 80 (Hyd.-Trib.) submitted that ITAT has given finding that ORSC is not a new unit but is eligible for un- allowed portion of the deduction u/s. 10A which was an alternate contention of assessee. 13.4. We have considered the rival contentions and perused the order on record. As far as the unit of ORSC is concerned in TNS India (P.) Ltd. (supra) has held as under: '8. We have heard the parties and perused the materials on record as well as the orders of the DRP on this issue. So far as the first contention of the assessee that ORSC is a new unit, we are unable to accept such contention in view of the specific finding of the AO, which has not been controverted by the assessee by bringing suffi....
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....irections 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 depreciation @ 25%. 22. Briefly the facts are, during the assessment proceeding, AO noticed that in the profit & loss a/c, assessee has debited an amount of Rs. 2,21,29,855 towards computer maintenance charges. From the break-up submitted by assessee, it was noticed by AO that assessee has claimed an amount of Rs. 1,00,99,916 on account of licence fee. AO asked assessee to explain why the expenditure claimed should not be disallowed as it is in the nature of capital expenditure. Though assessee objected to such view of AO, but, AO rejecting the objections of assessee disallowed the expenditure claimed and added the amount of Rs. 1,00,99,916 by treating it as capital expenditure. Assessee objected to the addition made before DRP. Ld. DRP, though, upheld AO's decision that the expenditure incurred is capital in nature, but, directed AO to allow depreciation at appropria....