AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (12) TMI 1720
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.... 2.1. Assessee is involved in providing support services in connection with CAE/CAD modeling and iterative simulation. It receives the basic design from its group company with respect to CAD modeling and makes a 3D CAD modeling data of vehicle components using CAD software tools. Assessee is a routing support service provider and it assumes less than normal risk associated with carrying out such business. The International transactions reported by assessee are as under S.No. Name of the Associated Enterprise Nature of the international transactions Amount in Rs. 1. Hyundai Motor Company, Korea Engineering/Consulting Engineering Services/ IT enabled Services (ITeS) 43,57,37,674 2. Kia MotorCorporation, Korea 20,52,60,386 3. Hyundai Autoever Corporation, Korea Purchase of computers 2,64,56,224 Purchase of Security equipment 64,667 Annual License fee for software 98,95,527 Purchase of computer Software 23,07,715 Reimbursement of expenses 11,08,347 4. Hyundai Motor Company, Korea Reimbursement of expenses 2,72,10,590 3. Assessee has selected seven companies as comparables in its Transfer Pric....
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....Ld. Counsel for assessee and Ld. CIT-DR and also perusing the written submissions placed by assessee and Revenue. It is to be placed on record that on completion of hearing on 27-09-2016, Ld. CIT-DR wanted to file written submissions for which time was permitted up to 05-10- 2016. However, vide letter dt. 04-10-2016, the office of the CIT-DR sought further time of another two weeks to furnish, whereas the JCIT(TP) wanted time up to second week of November, 2016. Finally, the written submissions submitted by ITO, Ward-2(3) / DCIT, TPO-2 were placed on record with a covering letter dt. 11-11- 2016. In the written submissions, the officers have reiterated their submissions as considered by the TPO and the DRP only. Assessee's Appeal in ITA No. 128/Hyd/2016: 6. Aggrieved on the orders of the DRP/TPO, assessee has raised various grounds running from 1 to 20 and an additional ground Ground No. 16A on working capital adjustment which has arisen consequent to the directions of the DRP in the final order. 7. Ld. Counsel at the time of arguments has submitted that Ground Nos. 1, 2, 3 & 20 are general in nature along with Ground Nos. 13 to 15. Ground No. 16 pertains to adjustment of (+/....
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....ssee has objected to the above companies stating that they are functionally different but DRP has rejected them. 9.2. Ld. Counsel submitted that each of the company cannot be selected for the following reasons: i) Accentia Technologies Limited; 9.3. It was submitted that Accentia Technologies Limited cannot be considered as a comparable based on the functional dissimilarity as the said company is into diversified outsourcing services. It has relied on annual report for AY. 2010-11 showing that assessee is having multi location, diversified knowledge process outsourcing company and also it has products such as instaKare and instaweb which makes the company a product based company as well. Not only that, it was also submitted that there was no segmental information provided by the Accentia Technologies Limited in its annual report and margin calculated was done at over all entity level, whereas it was involved in various activities like medical transcription, billing and collections and income from coding etc. It was also further submitted that there are extraordinary events during the year like acquiring companies in USA such as GSR Physicians Billing Services INC, GSR Syst....
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....ies Ltd. is comparable with assessee. The ld. DR relied upon order dated 27.04.2015 passed by Hon'ble Delhi High Court in the case of Chris Capital Investment versus DCIT reported in I.T.A.No. No.417/2014, wherein Hon'ble Delhi High Court has held that: ".... the mere fact that an entity makes high / extremely high profits / losses does not ipso facto, lead to its exclusion from the list of comparables for the purpose of determination of ALP. In such circumstances enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable." 6.3. After considering the rival submissions and pursuing the relevant material on record, we find that functionally, this company is into development of software products for healthcare. It is submitted by the ld.AR that Accentia Technologies Ltd is engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DPO), high end software services. It is submitted by the ld.AR tha....
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....ere is no extraordinary event have been pointed out by the assessee similar to the earlier years in which the Hon'ble ITAT directed to exclude the company due to such event. Further, it appears to us that the high end function of the company were not brought to the notice of the Hon'ble ITAT, which resulted in exclusion of the above company. Accordingly, considering the function of the assessee, we are of the view that there is no infirmity in inclusion of the above company in comparables". 9.9. We notice that this company is categorised as KPO company and the services are similar being provided to the services being provided by the above company. Further, as seen from the so called extraordinary event, it is noticed that the said company has wound-up a subsidiary company w.e.f. 29-03-2011. Since it has not acquired the company whose turnover is included in assessee-company but only wound-up a dormant company, we are of the opinion that it does not have any bearing on assessee's operating results. Super normal profits cannot be a basis for exclusion of a company and since the DRP has considered the objections, we agree with the findings of DRP. Even though the company wa....
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....e contentions with reference to margin computation of the above said company after giving due opportunity to assessee to make submissions. This issue is considered partly allowed. 9.12. In the result, grounds are considered partly allowed. Ground No. 7. That on the facts and the circumstances of the case and in law, the AO/DRP erred in confirming the TPO's stand of treating the provision for bad and doubtful debts and bad debts written off as nonoperating expenses for the purpose of margin computation of comparable companies as selected by TPO. 10. This ground pertains to the issue of provision for bad and doubtful debts and bad debts written off which should be considered as operating in nature while computing the margin of comparable companies. This is a general ground pertaining to computation of margin of the comparable companies. It was the submission that the provision for bad and doubtful debts and bad debts written off are part of its operating expenditure as an entity undertakes marketing and creates a customer base for itself. Some of them fail to make the payment due to which the provision is created in the books of account. Since this provision is in rel....
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....DRP erred in excluding the following companies, viz., a. e4e Healthcare Business Services Private Limited; b. Mastiff Tech Private Limited. Ground No. 9. That the AO/DRP erred in excluding the companies without providing any show cause notice or a reasonable opportunity of being heard to the Appellant, completely disregarding the provisions of the Act and in utter disregard to the principles of natural justice. Ground No. 10. That the AO/DRP erred in excluding the companies not objected, when the AO/TPO had already examined and decided the issues based on the facts and material available on record. 11. As can be seen from the grounds, the two companies are excluded by the DRP, even though these are not objected to by assessee and Revenue also has raised objections in their grounds. Considering that TPO has included them as comparable companies and assessee has not objected to them and also on the fact that Revenue is raising the ground on the issue before us, we are of the opinion that DRP has wrongly excluded the above two companies on the reason of inconsistency in accounting and huge variation in the margin due to uncertainty of the receivables. These ....
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....of the assessee company and therefore, the above company in our view cannot be retained as a comparable". Since the turnover is very small in the IT Enabled Services Agreement, we affirm the findings of the DRP and reject the assessee's contentions. ii. R Systems International Limited; 12.3. It was submitted that this company was selected by the TPO in the earlier year and hence, this company should be selected as comparable. It was further submitted that TPO excluded the company on the basis of different financial year ending which was upheld by the DRP. It was contended that if the company is having financial year, data available in the public forum can be adjusted for the financial year ending 31-03-2011. Then, this company can be considered as a comparable. Assessee relied on the Co-ordinate Bench decision in the case of Techbooks International Private Limited (ITA No. 240/Del/2015) and also the decision of Hon'ble Delhi High Court in the case of CIT Vs. Mckinsey Knoweldge Centre India Pvt. Ltd., in ITA No. 217/2014 dt. 27-03-2015 for the proposition that if from the available data on record, the results for the financial year can reasonably be extrapolated then, t....
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....d is as under: Ground No. 12. That on the facts and circumstances of the case or in law, AO/DRP has erred in making the adjustment by considering total revenue of the Company without appreciating that the transfer pricing adjustment should be restricted only to the value of international transactions with the AE. 13.1. It was submitted that the adjustment should be restricted to the International transaction and assessee has furnished the segmental report reporting to the TPO. Assessee relied on the following case law: i. Saven Technologies Ltd. Vs. ACIT (ITA No. 1456/Hyd/2010); ii. DCIT Vs. M/s. Firestone International (P) Ltd (ITA No 4520/Mum/2011); and iii. DCIT Vs. M/s. Federal Mogul Bearing India Ltd (ITA No. 1255/Mum/2014; 13.2. In principle, we agree with assessee's contentions that the ALP adjustment should only be restricted to international transactions and not to the entire turnover of assessee. However, this requires verification by the AO/TPO. Therefore, we direct the AO/TPO to verify and restrict the adjustment only to the international transactions. Ground is considered allowed for statistical purposes. Working capital adjustment Ground No. 16....
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....ing capital risks. On this issue, the assessee submitted as under : "The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as : * The company does not bear any working capital risk since it is been fully funded by it's A.E. from 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 ....
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.... opinion that AO has not followed the directions of the DRP. DRP vide para 3 in page 26 has clearly directed the AO to verify the records and consider the submissions made in accordance with the provisions of the Act. AO in the order itself has stated that assessee filed revised return of income on 30-03-2013 revising the total income to Rs. 18,18,817/- after set-off of unabsorbed depreciation of earlier years. However, while computing the income, he has not started from the income returned, but has started from income from profits and gains of business and added income from other sources and the arm's length adjustment ignoring the set-off of unabsorbed depreciation. We direct the AO/TPO to follow the directions of the DRP and allow the unabsorbed depreciation as per the provisions of the Act. Ground is accordingly considered allowed. 16. Ground Nos. 18 & 19 pertaining to levy of interest u/s. 234A, 234B & 234D. The Grounds are as under: Ground No. 18: The AO has erroneously levied interest under section 234A though the assessee has filed its return of income within due date specified in section 139(1) of the Act. Ground No.19: That the consequential effect should be give....
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.... comparables. Even though the said conceptual contention may be correct generally, but as seen from the order of the DRP, they have very clearly specified why a particular company is not functionally comparable. We do not see any reason to interfere with such findings. Thus the issue does not arise from the order of DRP. Accordingly, Ground No. 1 is rejected. 18.4. Coming to Ground No. 2, we notice that DRP has excluded both Infosys BPO Ltd., as well as TCS E-serve Ltd. Revenue is objecting only one, Infosys BPO that it was wrongly excluded on the ground of high turnover as it does not influence the net margins of the company. However, there are other reasons also on which the DRP has excluded the above company. The DRP's order with reference to Infosys BPO Ltd., is as under: "2.13 Ground of Objection 13 Infosys BPO Limited ("Infosys" or "the Company") has to be rejected based on the presence of the brand thereby warranting adjustments are required to eliminate the impact of brand on profits earned. Since it might not be possible, Infosys is to be rejected as a comparable. Infosys BPO Limited ("Infosys" or "the Company") has to be rejected based on the fact that it is an o....
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....Infosys BPO spends 8.40% of its sales in advertisement, this has generated significant revenue and creation of brand value for Infosys spa as there is a high degree of correlation between advertising and sales. Size of the comparable The Learned TPO has failed to appreciate the fact that the ITES industry is clearly demarcated based on size and that Assessee cannot be compared to companies having sales disproportionate to the sales generated by the Assessee. If one were to look at the turnover/size of the 13 comparable companies selected by the Learned, TPO and plot it on a scattered diagram, then one could notice that both Infosys is a clear outlier. The scattered diagram of the 13 comparable companies is presented below: The assessee relied on the decision of the Hon'ble I TAT, Hyderabad in assessee's own case for A.Y. 2009-10 in which the Hon'ble ITAT held that 'We are in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee's turnover is about Rs. 15.79 crores, as against turnover of Rs. 1016 crores of the Infosys. We are also of the view that other contentions with regard to the br....