TaxTMI 
TaxTMI 
2016 (6) TMI 1296
X X X X Extracts X X X X
X X X X Extracts X X X X
....ning arm's length price. 4. passing the order without demonstrating that appellant had motive of tax evasion. 5. Ignoring the fact that the members of Dispute Resolution Panel also being jurisdictional Commissioner/Directors of Income Tax of the appellant, the constitution of the Dispute Resolution Panel is bad in law. 6. not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X' and therefore addition under Chapter X is bad in law. 7. adopting a flawed process of issuing notices u/s 133(6) and relying on the same without providing complete information and an opportunity to cross examine the companies concerned. 8. rejecting the comparables selected by the appellant and rejecting transfer pricing analysis of the appellant. 9. Performing fresh transfer pricing analysis and adopting inappropriate filters in doing fresh transfer pricing analysis. 10. selecting inappropriate comparables. 11. rejecting comparables proposed by the appellant. 12. inappropriately computing the operating margins of comparables and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ited (Seg.) as comparables; The TPO did not apply employee cost filter in the TP analysis conducted by him. Further, the TPO applied RPT filter of 25% for selection of comparables. The TPO has selected the above 4 companies as comparables in the order passed u/s 92CA. The Appellant had selected Wipro Ltd as a comparable in its TP study. With respect to application of filters, the ground pertains to question of law. With respect to rejection of a comparable, the ground pertains to question of law and facts. All the necessary facts for adjudicating this ground are already on record. The Appellant humbly prays that the additional grounds be admitted and adjudicated along with the other grounds of appeal in the course of hearing of the appeal. The Appellant prays accordingly." 4. We have heard the learned Authorised Representative as well as learned Authorised Representative on admission of the additional grounds. The learned Authorised Representative of the assessee has submitted that though the assessee has challenged the action of the A.O./TPO as well as the directions of the DRP in respect of the comparables selected by the TPO/A.O. and consequently adjustments however in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fore without pointing out any specific fault, a vague objection cannot be considered at this stage. He has objected to the admission of the additional ground raised by the assessee. 6. We have considered the rival submissions as well as the relevant material on record. By way of the additional grounds, the assessee is raising objection regarding the application of employee cost filter of 25% of the total cost, application of RP filter at 15% instead of 25% applied by the TPO and exclusion of four comparable companies which was considered by the TPO/A.O for determining the Arm's Length Price ('ALP') As regards the objection raised by the learned Departmental Representative that Wipro Ltd. (Seg.) was selected by the assessee in its T.P. Study, we are of the view that the assessee cannot be precluded from raising an objection against a company which is found to be not comparable even if the said company was wrongly selected by the assessee in its T.P. Study. This view was taken by the Special Bench of the ITAT, Chandigarh in the case of Quark Systems (P.) Ltd.(supra) in paras 30 and 38 as under : '"30. Learned special counsel for the Revenue Shri Kapila has vehem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee 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."' We note that the comparability of this company i.e. Wipro Ltd. (Seg.) has been examined by this Tribunal in a series of decisions and therefore when no fresh evidence, record or fact are required to be investigated then there is no bar in admitting the additional ground for adjudication of the issue of functional comparability of this company. Similarly, other three companies namely Accentia Technology Ltd. (Seg.), Asif C Mehta and Bodhtree Consultancy Ltd. (Seg.) the assessee has raised additional ground in view of the fact that the functional comparability of these companies have been examined by this Tribunal in a number of cases and on the basis of the finding of this Tribunal the assessee made ou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....3,439 Operating Profit 2,26,64,434 Operating Profit to Expenses 12.91%" 7.2 The assessee has reported its international transactions as under :- Nature of International transactions Amount (Rs.) Income from network admn. And technical support services. 16,80,79,426 Total amount of International transactions 16,80,79,426 Description IT Enabled Services (Rs.) Revenue 16,80,79,426 Operating Expenses 14,69,64,800 Operating Profit 2,11,14,626 Operating Profit onCost 14.36% Thus it is clear that the dispute is only with respect to the ITES provided by the assessee to its Associated Enterprises (AEs) have operating profit cost at 14.36%. To bench mark its international transactions, the assessee has selected 17 companies. The TPO rejected the T.P. Analysis of the assessee and also rejected the 12 companies out of 17 selected by the assessee. Thus the TPO accepted five companies selected by the assessee in its T.P. Study and after carrying out a fresh search added 20 more companies in the set of comparables. Subsequently the TPO has added 2 more companies and finally the TPO has consid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....et Ltd. 3. Asit C Mehta Financial Services. 4. Bodhtree Consulting Ltd. (Seg.) 5. Caliber Point Business Solutions Ltd. 6. Eclerx Services Ltd. 7. HCL Comnet Systems & Services Ltd. 8. Informed Technologies India Ltd. 9. Infosys BPO Ltd. 10. Mold-tek Technologies Ltd. (Seg.) 11. Vishal Information Technologies Ltd. 12. Wipro Ltd. (Seg.) 13. Accurate Data Converters Pvt. Ltd. At the time of hearing, the learned Authorised Representative of the assessee has submitted that an identical set of 27 comparables was involved in the case of Ariba Technologies India (P.) Ltd. v. ITO [2016] 67 taxmann.com 265 (Bang.-Trib) for the same assessment year which has been decided by this Tribunal vide order dt.2.2.2016. The learned Authorised Representative has pointed out that the functional comparability of the majority of the companies has been examined by the Tribunal in the said decision. Thus the learned Authorised Representative has relied upon the decision of this Tribunal in the case of Ariba Technologies India (P.) Ltd. (supra). so far as the functional comparability as well as the RPT filter at 15% should be ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tored back to the set of comparables having only 4.24% of RPT. (iii) Allsec Technologies Ltd. : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) and even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company is restored back to the set of comparables having only 11.90% of RPT. (iv) Apex Knowledge Solution Ltd. : This company was selected by the TPO/A.O and the assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue. (v) Apollo Health Street Ltd. : This company was selected by the TPO/A.O though the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....usion of any company / entity in the list of comparables. However, if the high profit margin is due to some abnormal circumstances or event, then, the said company/entity cannot be considered as good comparable due to the reason of abnormal event or circumstances resulting high profit margin. Therefore, in the absence of any abnormal/extraordinary event or circumstances leading to high profit margin this objection of the learned Authorised Representative is not acceptable and hence rejected. Even otherwise, the profit margin at 29.58% cannot be considered as an abnormal when the assessee itself has reported the margin at 19% which is modified to 18.66%. We further note that even in the case of Essential Technologies Ltd. the profit margin before working capital was considered at Rs. 30.61% and the assessee has accepted the said companyas a good comparable. Therefore, this objection of the assessee is without any merit or substance and deserves rejection. As regards the RPT at 38.54%, we find that the assessee raised this objection before the TPO/A.O and it has not been specifically dealt with by the authorities below. Further, from the Annual Report of this company, we find that th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the T.P. analysis of the assessee and also selected by the TPO/A.O. The CIT (Appeals) has also retained this company as a good comparable. The assessee did not object against this company. Accordingly, the comparability of this company is not in dispute before this Tribunal. (x) Datamatics Financial Services Ltd. (Seg.) : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A), even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company is restored back to the set of comparables having only 7.88% RPT. (xi) Eclerx Services Ltd. : This company was included by the TPO in the list of comparable. The assessee objected to this company on the ground of functional dis- similarity. The CIT (Appeals) has excluded this company on the ground of RPT that this company is having only 9.12% RPT. Therefore in view of our finding on RPT filter, the comparability of this company has to be decided on basis of functional similarity or dis- similarity. The ld. AR submitted that this company is rendering ser....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt.Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d by the Tribunal in a series of decisions that this company is into product development which is not comparable with the assessee of pure ITES segment. Accordingly, we do not find any error or illegality in the order of the CIT (Appeals) in excluding this company. (xiii) Genesys International Corporation Ltd. : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range this company having 5.84% RPT is restored back to the set of comparables. (xiv) HCL Comnet : This company was selected by the TPO/A.O though the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on RPT filter. We find that the RPT revenue of this company is 21.52%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables. (xv) I C R A Techno Analytics Ltd. (Seg.) : This company was selected by the TPO/A.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s DCIT (AY : 2004- 05) ITA No.227/Bang/2010 Agnity India Technologies P. Ltd. (ITA No. 1204/2011)(Del HC) Adaptec India Private Limited (AY : 2007-08) ITA No. 1801/Hyd/09. Misys Software Solutions India Private Limited - IT(TP) A No.1425/Bang/2010 - Turnover Mercedes Benz R & D India Pvt. Ltd. (AY : 2007-08) ITA No. 1222/Bang/2011. Verisign Services India Private Limited IT(TP)A No 1404 bang 2010 - Turnover CSR India Pvt. Ltd. (AY : 2007-08) ITA No. 1119/Bang/2011, [2013] Thoughtworks Technologies (India)Private Limited- IT(TP)A No.1326/Bang/2010 - Turnover Witness Systems Software India Pvt Ltd (AY : 2007-08) ITA No. 1366/Bang/2011. FOR CASES INVOLVING JOINTOPERATION, LARGE INTANGIBLES,HIGH BRAND VALUE, RISK BEARING& HIGH PROFIT MARGIN CASES Agnity India Technologies Pvt Ltd ITA No. 3856(Del)/2010], ITAT Delhi" This ruling has been upheld by the High Court (ITA No. 1204/2011, dated July 2013). Scale of operation, brand value etc. NTT Data India Enterprise Application Services Pvt. Ltd. [ITA No. 1612/Hyd/2010.] Motorola India Electronics Private Limited vs. ACIT ITA No. 1274 & 1413/Bang/2008. L....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. Having drawn the above conclusion, the TPO did not bother to quantify the revenues which can be attributed to software product development and software development service but adopted the margin of this company at the entity level. In terms of Rule 10B(3)(b) of the Rules, an uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reason....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as well as before the CIT (Appeals) on the ground of functional dissimilarity and super normal growth. The CIT (Appeals) has excluded this company form the list of comparables by applying 0% RPT as well as on functional dissimilarity. Before us, the learned Authorised Representative of the assessee has submitted that this company is into engineering services being in the nature of producing design, drawings, detailed structure of engineering drawings using 2D and 3D software. These services are high end in nature and cannot be compared with the software development services provided by the assessee. There is also super normal growth of 200% in this segment. In support of his contention, he has relied upon the following decisions :- Cases Pertaining to Asst. Year Market Tools Research Pvt. Ltd. (ITA No. 2066/Hyd/2011. Capital IQ Information Systems (India) Pvt Ltd.  ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....peals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue. (xxiv) Vishal Information Technologies Ltd. : This company was selected by the TPO and included in the list of comparables. The assessee objected against the inclusion of this company in the list of comparables on the ground that it fails R&D filter as well as functional dissimilarity. The assessee has also contested the inclusion of this company before the CIT (Appeals). However, the CIT (Appeals) has retained this company in the list of comparables. Before us, the learned Authorised Representative of the assessee has submitted that this company is functionally dissimilar to the assessee as this company is engaged in providing services by way of outsourcing services to the third party vendors. He has referred the relevant part of the Annual Report and submitted that the job work expenditure is significant which shows that this company is outsourcing the services to third party a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nancial Services Ltd., and Gold Stone Infratech Ltd., in the list of comparable companies chosen by the TPO, we find that the Hyderbad Bench of the ITAT in the case of HSBC Electronic Data Processing India Ltd. v. ACIT, ITA No.1624/Hyd/2010 by order darted 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 Financial Services Ltd.) Vishal Information Technologies Ltd. 9. The assessee's objection with reference to inclusion of this comparable is on the reason that the company is functionally different, also does not satisfy the filters such as employee cost and on-si....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom the list of comparables. ** ** **" ** ** **" 14. In view of the foregoing discussion, we agree with the assessee's objection that the above five comparables should be 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 Hyderbad Bench of ITAT and that of the case of the Assessee. Respectfully following the decision of the Hyderbad 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." In view of the above facts as well as the decision of the Tribunal in assessee's own case for Assessment Year 2006-07, we direct the A.O/TPO to exclude this company form the list of comparables. (xxv) Wipro Limited (Seg.) : This company was selected by the TPO and included in the list....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d getting the benefit of the innovation and R&D. In view of the above facts, this company cannot be treated as a good comparable for the assessee which is providing back office support services to its parent company without earning any benefit of the innovation and R&D. Accordingly, we do not find any reason to interfere with the finding of the CIT (Appeals) on functional dis-similarity of this company. (xxvi) Nittany Outsourcing Services Pvt. Ltd. : This company was selected by the TPO/A.O and assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue. (xxvii) Accurate Data Converters Ltd. : : This company was selected by the TPO/A.O and assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....herein segment-wise and product-wise performance has been reported as under : "Segment-wise and product-wise performance Bodhtree has only one segment, namely software development, being a software solutions company, it is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technology. Outlook Given the steady growth in the niche areas like data cleansing and software development, and the new initiatives in the areas of e-publication and e-learning, the management has reason to be optimistic about the future growth. Revenue Recognition Revenue from software development is recognized based on software developed and billed to clients." Thus it is clear that this company is having one segment namely software development under which this company is providing software solutions including open and end-to-end web solution, software consultancy, design and development of solution. Further, the company is also providing data cleansing and software development. These services are in the category of software development services and not in ITES. Accordingly, we are of the view that the softwar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iness Solutions India (P.) Ltd. v. Dy. CIT [2016] 69 taxmann.com 73 wherein the Tribunal has remanded the issue to the record of the A.O./TPO. Thus the learned Authorised Representative has submitted that the assessee be given the complete financial information of this company for filing its objections and comments against the comparability of this company. 11.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that the TPO has called the relevant information under Section 133(6) of the Act. Thus the TPO has considered this company after examination of the entire relevant record. 11.3 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the TPO in para 33.18 of the impugned order has stated that the Annual Report was not available for the year under consideration. Thus the notice under Section 133(6) was issued to the company. The company made available its Annual Report to the TPO and on the basis of the information received under Section 133(6), the TPO has concluded that this company is comparable with the assessee. The co-ordinate bench of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion including the decision of Special Bench in the case of Maersk Global Centres (India) (P.) Ltd. (supra). The co-ordinate bench of this Tribunal in the case of Ariba Technologies India (P.) Ltd. (supra) has held that this company is engaged in the engineering services being the nature of producing designs, drawings, detailed structure of engineering drawings using 2D and 3D software cannot be compared with the assessee and consequently the A.O./TPO is directed to exclude this company from the set of comparables. Accentia Technology Ltd. : 13.1 The learned Authorised Representative of the assessee has submitted that there is an extra-ordinary event of amalgamation during the year under consideration as this company has amalgamated its subsidiary namely Geo Soft Technologies Ltd. and Iridium Technologies India Pvt. Ltd. w.e.f. 1.4.2006 as per the respective orders of the Hon'ble High Court. He has further submitted that this fact has also been mentioned in the notes to accounts. Thus the learned Authorised Representative has submitted that due to the extra-ordinary event during the year under consideration, this company cannot be considered as good comparable. The learned....
X X X X Extracts X X X X
X X X X Extracts X X X X
....because of exceptional financial results due to mergers/demergers. Similar view has been adopted by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. v. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. The ld. DR contended that the mere fact of acquisition and merger should not be considered as a decisive test for exclusion of a company unless it has affected the profitability due to such merger etc. We are not inclined to accept this contention for the obvious reason that once acquisition and merger etc. has taken place, it is always likely to affect the profitability of such a company in the year of acquisition etc. There cannot be any standard yardstick to measure the impact of such a factor on the overall profitability of such a company. It is relevant to highlight that we are considering the exclusion of a company on this score. In our considered opinion, when other comparables are available, the exclusion of a probable comparable company cannot have much significance in contrast to a situation of inclusion of a probable incomparable. Respectfully following the above referred decisions, we hold that TCS Ltd. cannot be considered as com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red the rival submissions as well as the relevant material on record, we note that this company was selected by the TPO and Annual Report as well as Directors Report are the primary documents for analyzing functional comparability of a particular company. Therefore, we do not find any substance in the objections raised by the D.R. We note that in the Directors Report, the working of the company is reported as under : "WORKING OF THE COMPANY Income from software development during the year under review was Rs. 4,33,46,996 as against Rs. 431,71,568 for the year ended 31.3.2006. The net profit after taxes amounted to Rs. 66,87,665 as against Rs. 100,50,544 in the previous year." Thus it is clear that this company has earned income from software development during the year under consideration and the composite data has been considered. In view of the above facts brought to our notice, we set aside this issue to the record of the TPO/A.O for further verification and examination of the relevant record and financial data of this company. We make it clear that if this company is generating revenue from software development activity which is part of the operating revenue / margins ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as to be set off against the profits and gains if any, of any business or profession carried on by such assessee. Therefore as the profits and gains under section 10-A is not be included in the income of the assessee at a l, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current years depreciation u/s 32(2) is to be set off. As deduction u/s 10A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the appellate Commissioner as we l as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of section 10A to be assessee. Hence, the main substantial question of law is answered in favour of the assessees and against the revenue". 9.4.2 The Hon'....