TaxTMI 
TaxTMI 
2016 (11) TMI 1566
X X X X Extracts X X X X
X X X X Extracts X X X X
....y of information technology enabled services ["ITES"] to its AEs i.e., Acusis LLC, USA. 3. The return of income for the assessment year 2004-05 was filed on 27.10.2004 declaring income of Nil under the normal provisions of Act. Against the said return of income, the case was selected for scrutiny by issuing notice under section 143(2) of the Act. The assessee company also reported the international transactions with its AE of "Provision of medical transcription services" at Rs. 10,93,59,573/-. 4. The assessee company sought to justify the consideration received for the above international transactions entered with its AE to be at arm's length price. The assessee company also submitted a transfer pricing study report adopting the operating profit to total cost as a profit level indicator for the transfer pricing study. The assessee company applied the Transactional Net Margin Method (TNMM) which was considered to be the most appropriate method for the purpose of bench marking the international transactions. The assessee company used the multiple year's financial data i.e., data pertaining to financial year 2001-02 to 2002-03. The assessee company's profit margin was computed at 11....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re excluded. 7. The TPO has rejected all comparables selected by the assessee company in the TP study and introduced 9 new companies which are in page No. 25 of the TPO order. The final set of comparables selected by TPO are as under: S1. No. Name Operative Cost Operative Revenue Operative Profit Operative Profit/Cost 1 Nucleus Net Soft & Gis India Ltd. 1.00 1.84 0.38 16.87% 2 Vishal information Technologies Ltd 8.37 13.88 4.61 48.13% 3 Wipro BPO Ltd 322.3 430.31 108.01 33.51% 4 Tricom India Ltd 6.34 9.24 2.9 43.74% 5 Fortune Infotech Ltd 8.08 11.38 3.3 40.84% 6 Mercury Outsourcing Ltd 1.02 1.08 0.058 5.7% 7 Spanco Telesystems & Solutions Ltd 10.32 15.44 4.57 40.1% 8 Allsec Technologies Ltd 24.10(adj.) 24.84 0.83 3.44% 9 Ultramarine Pigments Ltd 6.18 10.09 3.91* 63.27% Arithmetic mean 33.07% 8. The TPO computed the average profit margin of the comparables finally selected at 33% and after giving working capital adjustment of 2%, adjusted Arithmetic Mean was determined at 31% and on the above said basis, TPO computed transfer pricing adjustment in respect of ITeS services as follo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e company as these companies were making super abnormal profits. The assessee company also contended that in respect of travelling expenditure and telephone expenditure incurred in foreign exchange, reducing the same from export turnover alone is not correct. 12. After considering the above submissions of the assessee company, the learned CIT(A) vide order dated 21.01.2011, upheld the filter applied by the learned TPO and application of use of only current year data as against multiple data as adopted by the assessee. And in respect of selection of comparables is concerned, the learned CIT(A) held that the entities making super abnormal profits are to be excluded. However, in respect of travelling and telecommunication expenditure incurred in foreign currency, the CIT(A) directed the TPO/AO to reduce from both the export turnover as well as the total turnover for the purpose of computing of deduction under section 10A. The CIT(A) also held that the foreign exchange gain/loss should be considered as a part of operating profit for the purpose of computing margins. Being aggrieved by that part of the assessment order, the assessee company is in appeal before us raising the following ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....functionally different using unreasonable comparability criterion and rejecting companies which are primarily engaged in providing IT Enabled Services. 7. The learned Transfer Pricing Officer and the learned Assessing officer have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant as being persistent operating loss makers. The Appellant had used this criterion and rejected companies that had operating losses for a continuous period of three or more financial years. However, the learned transfer pricing officer has rejected the comparables identified by the Appellant although these companies have operating profit in one of the financial years and are not persistent operating loss makers. 8. The learned Transfer Pricing Officer and the learned Assessing officer have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant with no foreign exchange revenue and providing services only in the domestic market. The learned Transfer Pricing Officer has failed to accept that the Rules, for analysing comparability requires one to look into the functions performed, risks assumed and assets employed by a p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e. normalising certain operating expenses by taking an average of such expenses incurred by the company over prior and subsequent two years) thereby resulting in an upward adjustment to the arm's length price. 15. The learned Transfer Pricing Officer and the learned Assessing Officer have erred, in law and in facts, by considering an arbitrary downward adjustment of (-2 per cent) for differences in the working capital and differences in the risk profile. While doing so the learned transfer pricing officer and the learned Assessing Officer have disregarded the working capital adjustment provided by the Appellant. 16. The learned Transfer Pricing Officer and the learned Assessing Officer have erred, in law and facts, by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 per cent range as the Appellant has the right to exercise this option under the proviso to section 92C of the Act. 17. The learned Assessing Officer has erred, in law, and in facts, in assessing/computing the total income as Rs. 23,597,598 and the total net tax payable as Rs. 11,248,545. 18. The learned Assessing Officer erred, in law, and in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me of Arrangement and Reconstruction, the company is engaged in the providing the services in the information & Technology Enabled Services (ITES)/BPO : Transaction Processing to customers in overseas market." The decision of the coordinate bench in the case of 24/7 customers cited supra is based on the functional dissimilarity i.e., the company is engaged in the development of software products. But the evidence on the record as stated above is contrary. Therefore the decision of the coordinate bench in the case of 24/7 Customer is per incuriam, as said decision was rendered by the coordinate bench without referring to any material on record in support of the conclusion that company is engaged in software development. In the circumstances, we are unable to agree with the submission that the company was engaged in software development. Hence we uphold the action of TPO/AO in including this company in the list of comparables. (ii) M/s. Wipro BPO Ltd: The learned AR contends that this company cannot be compared with that of assessee company as it is functionally dissimilar having high brand value, goodwill and high turnover. The learned AR has placed reliance on the following dec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....are incurred not on account of any special reasons and is a normal business loss to include it in the list of comparables otherwise to exclude the same from list of the comparables. iv) M/s. Mercury Outsourcing Limited: The assessee company had argued for inclusion of this company in the list of comparables. There is no dispute about the functional comparability of this company. The CIT(A) had deleted this company from the list of comparables on the ground of low margins. Now it is trite law that the companies cannot be excluded for the reason of high/low profits as held by the special bench in the case of DCIT Vs. M/s. Quark Systems Pvt Ltd., [2010] 38 SOT 307 (Chd.) (SB). Therefore, the reasoning of the CIT(A) to exclude this company from the list of comparables is not in consonance with the settle position of law on the above issue. Therefore we direct the TPO/AO to include in the list of comparables. v) M/s. Mapro Industries Limited: The assessee company had pleaded for inclusion of this company as functionally comparable with the assessee company. He further submitted that the company made profit in the financial year 2001-02. It is only in the financial year 2002-03, 2003-0....
X X X X Extracts X X X X
X X X X Extracts X X X X
....RM Services India (P) Ltd., [2011] 48 SOT 41 (Del (URO), M/s. Stream International Services Pvt. Ltd v ADIT [2013] 31 taxmann.com 227 (Mum.). It is not the case of assessee company that it passes through the export filter of 25% to total revenue. Therefore the ratio laid down in the cases cited supra is squarely applicable to the facts of the present case. We therefore uphold the action of TPO/AO in including this company in the list of comparables. 15. Thus the grounds of appeal 2 to 12 are disposed off. The other grounds of appeal are neither pressed nor argued during the course of hearing of appeal and therefore dismissed as such. 16. In the result, the appeal filed by the assessee is partly allowed. Departmental appeal No. 444/Bang/2011 17. The revenue being aggrieved by that part of the order of CIT(A) which is against the revenue had filed the present appeal raising the following grounds of appeal: 1. The order of the Learned CIT (Appeals), insofar as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT (Appeals) was not justified in allowing relief out of the adjustment of Rs. 2,35,24,271/- ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the ITAT Banalore Bench in the case of Sap Labs Ltd. for the assessment year 2003-04 in ITA No.398 and 418/Bang/2008 dated 30.08.2010 without examining the facts and circumstances of the assessee's case in detail and without appreciating that the assessee company is not a risk mitigated company and that in the above mentioned ITAT decision, no benchmarks have been laid down for categorizing a company as a super profit or low profit case. 10. The learned CIT (Appeals) has erred in relying on the above mentioned ITAT, Bangalore Bench decision in the case of Sap Labs India (P.) Ltd. (supra), without pointing out any peculiar economic conditions to which the so-called super profit or low profits of the concerned companies ore attributable. 11. The learned CIT (Appeals) has erred in arriving at the adjusted mean PLI of 35.418% on page 15 of the appellate order after deducting working capital adjustment of 2% as worked out by the TPO which was based on the 9 (nine) comparables selected by the TPO, whereas, the working capital adjustment was required to be recomputed in consequence of the CIT (Appeals) direction to exclude 7 (seven) of the comparables selected by the TPO. 12. For ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....011(HYD)-TP * M/s. Capital IQ Information Systems (India) Pvt. Ltd v DCIT [2013] 32 taxmann.com 21 (Hyd.). * Brigade Global Services (P.) Ltd v ITO [2013] 33 taxmann.com 618 (Hyd-Trib.) First Advantage Offshore Services (P.) Ltd. v DCIT ITA No. 1086/B/11 21. Therefore we do not find any reason to interfere with the order of the CIT(A). 22. In the result, the grounds of appeal raised by the revenue in this regard are dismissed. 23. Ground Nos. 5 to 7 challenges the direction of CIT(A) to grant the benefit of the proviso to sub section (2) of section 92C of IT Act as a standard deduction. This issue is covered against the assessee by the decision of Bombay Bench in the case of Bayer crop Science Ltd. V. Addl. CIT [2012] 25 taxmann.com 575 (Mum. - Trib) wherein it has been held as follows: "Last ground of the assessee's appeal is against the rejection of benefit of 5% margin as prescribed in proviso to section 92C(2) in determining the Arm's Length Price (ALP) of its export transactions. Filtering out unnecessary details it is observed that the assessee's international transactions were referred to the TPO for determination of ALP. The TPO proposed adjustment of Rs.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d from the list of comparables mainly on the ground that the companies making abnormal profits without going into the reasons for such abnormal profits. Therefore the reasoning of CIT(A) is not acceptable and does not hold water. However, the AR had pleaded for exclusion of Ultramarine Pigments Ltd., and Vishal Information Technologies Limited for different reasons. We shall deal with each of them: (i) M/s. Ultramarine Pigments Limited: It is contended before us that this company cannot be compared with that of the assessee company as it is functionally different and it is engaged in the business of publishing, healthcare and litigation support. Thus it was submitted that it is functionally dissimilar with that of assessee company. This company was considered by the coordinate bench for the same assessment year in the case of 24/7 Customer.Com Pvt. Ltd., Vs. DCIT TS 708 ITAT 2012 (Bang. Trib) wherein it was held that the segmental results were available in the audited financial statements of said company. Hence, the coordinate bench found no reason to reject this company as a comparable. Therefore following the same reasoning, we uphold the inclusion of this company in the list of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctions entered with its AE to be at arm's length price. The assessee company also submitted a TP study report adopting the operating cost to the total cost as a profit level indicator for the TP study. The assessee company applied the Transactional Net Margin Method (TNMM) which was considered to be the most appropriate method for the purpose of bench marking the international transactions. The assessee company's profit margin was computed at 11.6%. The assessee company claimed that the same was comparable with the other companies rendering IT enabled services. For the purpose of TP study, the assessee company had chosen 12 comparables and weighted Arithmetic Margin of these comparables was computed at 8.48%. Thus it was claimed that the transactions with AE are at arm's length. The assessee company selected the following 12 comparables: Sl. No. Particulars 1 Ace Software Ltd. 2 Allsec Technologies Ltd. 3 Nucleus Netsoft & GLS Ltd. 4 Transworks Information Services Ltd. 5 Vishal Information Technologies Ltd. 6 Fortune Infotech Ltd. 7 Mercury Outsourcing Management Ltd. 8 Spanco Telesystems and Solutions Ltd, 9 CMC Ltd. 10 CS Software Enterprise Ltd. 11 Compu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... year 2004-05 and 2005-06 had held that the high profit companies and the low margin companies cannot be considered as comparables following the law laid by the jurisdictional high court in Sap Labs Pvt. Ltd. Thus the following 3 companies were held to be uncomparable with that of assessee company: 1. Vishal Info Tech Ltd 2. Nucleus Net Soft and GIS Ltd 3. Transworks Information Service Ltd 36. The CIT(A) also held that in respect of telecommunication and internet charges incurred to the extent of Rs. 19,93,519/-, the same should be reduced from the total turnover as well as from export turnover and in respect of tolerance, the benefit of proviso to sub section (2) of 92CA, the CIT(A) held that the same should be allowed as a standard deduction. 37. The CIT(A) also held that the foreign exchange fluctuations gain/loss should be considered as operating profit. Being aggrieved by the order, the revenue is in appeal before us raising the following grounds of appeal: 1. The order of the learned CIT (Appeals), insofar as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT (Appeals) was not justified in di....
X X X X Extracts X X X X
X X X X Extracts X X X X
....CBDT by way of a corrigendum dt. 30.9.2010. 10. The learned CIT (Appeals) has erred in directing the Assessing Officer to exclude 3 (three) comparable companies as being super profit making, cases and companies making profits at wide variance with the arithmetic mean of the PLI of the comparables, without appreciating the detailed reasons recorded in the TPO's order for the selection of such companies as functionally comparable companies following an elaborate search process and application of appropriate filters. 11. The learned CIT (Appeals) has erred in following the order of the ITAT, Bangalore Bench in the case of Sap Labs India (P.) Ltd. (supra) for the assessment year 2003-04 in ITA No. 398 and 418/Bang/2008 dated 30.08.2010 without examining the facts and circumstances of the assessee's case in detail and without appreciating that the assessee company is not a risk mitigated company and that in the above mentioned ITAT decision, no benchmarks have been laid down for categorizing a company as a super profit or low profit case. 12. The learned CIT (Appeals) has erred in relying on the above mentioned ITAT, Bangalore Bench decision in the case of Sap Labs Ltd. witho....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... decided by us in the assessee's own case for the assessment year 2004-05 in favour of the revenue following the same reasoning we dismiss the ground of appeal filed by the revenue. Hence dismissed. 42. Ground Nos. 10, 11 and 12 challenges the orders of the CIT(A). The directions of the CIT(A) to delete the entities M/s. Vishal Info Tech Ltd, M/s. Nucleus Net Soft and GIS Ltd and M/s. Transworks Information Service Ltd for the reasons that the high profit making companies and low margin companies cannot be considered as comparables. This reasoning of CIT(A) was reversed by us in the assessee's own case in the assessment year 2004-05. However, the learned AR submitted that these companies needs to be excluded for the reasons of functionality differences, which we shall deal with each of them as follows: i. M/s. Vishal Info Tech Ltd: The assessee company pleaded that this company cannot be compared with that of assessee company as it is functionally different. It was submitted that this company had outsourced its activities and has got very low employee cost compared to a typical ITES company. Thus it was submitted that this company cannot be compared with that of assessee company.....