AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (8) TMI 712
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..... 2. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. Transfer Pricing Officer ("TPO") for computation of the arm's length price, as is required under section 92CA(3) of the Income Tax Act, 1961 ("Act"). 3. That on facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. Dispute Resolution Panel ("DRP") erred in making an addition of INR. 9, 914, 264/- to the returned income of the Appellant by re-computing the arm's length price of the international transactions under section 92 of the Act by: 3.1 Not accepting the quantitative tillers selected by the Appellant in its transfer pricing documentation/fresh search and by instead applying additional quantitative filters which lacked valid and sufficient reasoning; 3.2 Rejecting companies selected by the Appellant in its transfer pricing documentation/fresh search even when such companies were functionally comparable to the Appellant; 3.3 Accepting ....
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....10.2010 declaring an income of Rs. 1, 36, 30, 121/-. The case was selected for scrutiny. Since, the assessee had entered into international transactions with its associated enterprises (AEs). The AO referred the matter to the Transfer Pricing Officer (TPO) to determine the arm's length price of the international transactions u/s 92CA(3) of the Act. The TPO noticed that the assessee had entered into following international transactions: S. No. Type of international transaction Method selected Total value of transaction (Rs.) 1. Provision of ITES/BPO services TNMM OP/TC 9, 40, 46, 135 2. Reimbursement of expenses paid TNMM OP/TC 1, 29, 63, 118 6. The TPO also noticed that the arm's length price of the international transactions representing IT enabled services provided to the AEs was determined by the assessee by applying transactional net margin method (TNMM) and the operating profit to total cost ratio (OP/OC) was taken as the profit level indicator (PLI) in the TNMM analysis. He also noticed that the PLI of the company was arrived at 17.36% on cost whereas the average PLI of the comparables was arrived at 14.13% as per the analysis in the TP do....
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....rvice Income to total Income is at least 75%: As discussed above. v. Select companies where income from exports Is at least 75% of total Income: This filter is required to be applied since the taxpayer is primarily earning income from exports, as already discussed supra. Even in cases where an assessee is having income from domestic operations, the transfer pricing audit will only benchmark transactions with the AE, which are mainly export transactions. There are judicial pronouncements that support the case that exporters should not be compared with domestic companies. Hence, this filter is required to be applied with a threshold of 75%. vi. Reject companies where related party transactions exceed 25% of sales: There is no doubt that companies with significant related party transactions need to be excluded from the benchmarking process. On the issue of threshold of related party transactions, it can be stated that when the RPT exceeds 25% of sales, it can be said to be the stage when it will start affecting the price paid/received. Companies below 25% RPT transact business substantially with unrelated party and the prices can be construed to be market determined. The rationa....
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....main. Hence, not a suitable comparable. 7. Jeevan Softech Ltd. This company is having sales below Rs. 5 crores. Hence, not a suitable comparable. 8. R System International Ltd. This company is having financial year ending other than March. Hence, not a suitable comparable. 9. Caliber Point Business Solutions Ltd. (Segmental) This company is having financial year ending other than March. Hence, not a suitable comparable. 10. Ultramarine & Pigments Ltd. This company is having significant RPT in respect of providing of IT Enables Services. Hence, not a suitable comparable. 11. First Object Technologies Ltd. Employee cost is less than 25% of total cost 12. Saraswat Infotech Fails export filter. 13. Crossdomain Solutions Pvt. Ltd. Currently data is not available 11. Accordingly, the following comparables are proposed to be taken in your case for benchmarking the international transactions based on your functional profile: S. No. Company Name OP/OC (%) 1. Accentia Technologies Ltd. 43.07 2. Cosmic Global Ltd. 18.28 3. E4e Healthcare 31.03 4. Fortune Infotech Ltd. 22.80 5. I-gate Global Ltd. 24.54 6....
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....ion). It was further submitted that the said order was followed in the case of Omnigloble Information Technologies Pvt. Ltd. Vs ACIT, Circle-6(1), New Delhi reported at (2016) 74 Taxmann.com 25 (Del.) (copy of which is placed at page nos. 167 to 179 of the assessee's paper book). It was further submitted that the comparables M/s e4e Healthcare Business Services Ltd. has been directed to be excluded by the ITAT Delhi Bench 'I-2', New Delhi in ITA No. 1478/Del/2015 for the assessment year 2010-11 in the case of Bechtel India Pvt. Ltd. Vs DCIT vide order dated 21.12.2015 (copy of which is placed at page nos. 74 to 94 of the assessee's compilation). It was further submitted that in the subsequent years i.e. assessment year 2011-12, the ld. DRP has directed to exclude the aforesaid comparables. Therefore, the ld. DRP was not justified in rejecting the contention of the assessee and confirming the action of the TPO. 11. In his rival submissions, the ld. Sr. DR supported the orders of the authorities below and further submitted that while applying the TNMM method a broader view has to be taken and that the assessee is doing pick & choose because the assessee in one year has choosen the c....
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....issimilar. The Infosys brand is indisputably is a huge brand and definitely, result of that brand goes to this comparable. Therefore, the brand of Infosys definitely results in opening higher profits to this company. In view of the following decisions, the same is required to be excluded and hence it is ordered accordingly. 23. TCS E Serve International Ltd, a. This comparable was taken by TPO where the margin is 54.02%. The TPO has taken this comparable considered this a company in IPS industry and considered it as a singled segment. The TPO was also of the view that there are no exceptional circumstances, which is related in the increase in the profit. Before DRP the argument of the assessee were rejected and it was held that far profile of the company is similar to that of the appellant. Before us it was submitted that in addition to BPO services this company is engaged in providing technical services like software testing, verification and validation of the software which falls under software development services activity, which also includes transaction processing, technical services, therefore it is functionally dissimilar. Further it was also contended that there is no....
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....oftware such as transport management software therefore functionally this company is dissimilar to the assessee company. It also owns huge intangible and use of 'Tata' Brand, which has definitely benefited this comparable, it is directed to be excluded." 13. Since, the facts in assessee's case are similar to the facts involved in the case of Omniglobe Information Technologies Pvt. Ltd. Vs ACIT (supra). So, respectfully following the said order dated 07.09.2016, we direct the AO to exclude the aforesaid comparable while working out the arm's length price. 14. As regards to M/s Accentia Technologies Ltd. and M/s e4e Healthcare Business Services Ltd., it is noticed that these comparables are directed to be excluded by the ITAT Delhi Bench 'I-2', New Delhi in the case of M/s Bechtel India Pvt. Ltd. Vs DCIT (Supra) and the relevant findings have been given at page nos. 89 & 90 which read as under: "2) Accentia Technologies Limited This company has been included by the ld.TPO as a comparable. Functionally, Accentia Technologies Ltd., is into development of software products for healthcare. It is submitted by the ld.AR that Accentia Technologies Ltd is also engaged into diversified....
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....e for reserving the right to amend, modify, alter, add or forego any ground (s) of appeal at any time before or during the hearing of appeal." 18. From the aforesaid grounds, it is noticed that the grievance of the department relates to the direction of the ld. DRP to exclude the five comparables. Out of those five comparables, M/s Infosys BPO Ltd. and TCS E-Serve Ltd. were also directed to be excluded while deciding the assessee's appeal for the assessment year 2010-11 in ITA No. 1974/Del/2015. Therefore, our finding given therein shall apply mutatis mutandis. 19. As regards to the remaining three comparables, the facts in brief are that the assessee while working out the arm's length price of international transactions representing IT enabled services provided to the AEs applied TNMM method and had taken OP/TC ratio as PLI. The assessee worked out its PLI at 17.30% on cost whereas the average PLI of comparables was worked out at 14.28% as under: No. Company Name FY 2010-11 FY 2009-10 FY 2008-09 Average OP/OC (%) 1. Aditya Birla Minacs Worldwide Ltd. (segmental) NA NC 7.15 7. IS 2. Caliber Point Business Solutions Ltd. 11.04 21.16 NC 15....
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....e Ltd. were directed to be excluded by the Hon'ble Delhi High court in the case of Pr. CIT Vs B. C. Management Services (P.) Ltd. (2018) 403 ITR 45 (copy of which is placed at page nos. 23 to 34 of the assessee's paper book). It was further submitted that M/s Acropetal Technologies Ltd. is also functionally different and directed to be excluded by the ITAT Delhi Bench 'I-2', New Delhi in the case of Cadence Design Systems (I) (P.) Ltd. Vs ACIT, Circel-5(2), New Delhi in ITA No. 6315/Del/2015 for the assessment year 2011-12 vide order dated 02.04.2018 reported at (2018) 93 Taxmann.com 227 (Del.). 23. After considering the submissions of both the parties and the material on record, it is noticed that the Hon'ble High Court in the case of Pr. CIT Vs B. C. Management Services (P.) Ltd. (2018) 403 ITR 45 (supra) held as under: "10. So far as question no. 1 with respect to exclusion of four comparables is concerned, we notice that E-clerx was excluded on two grounds i.e. no segmental data was available, and it was functionally different as it was providing high end/BPO services. 11. This Court further notes that E-clerx is to provide financial services such as consultancy business ....
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....the exclusion of M/s Acropetal Technologies Ltd. is concerned, it is noticed that the ITAT Bench 'I-2', New Delhi in the case of Cadence Design Systems (I) (P.) Ltd. Vs ACIT, Circle-5(2), New Delhi (supra) held as under: "25. Assessee objected this company to be in the list of comparables mainly on the ground that this company employees cost is less than 25% of the total cost and also that this company is engaged in significant R &D activities and incurring significant advertisement, marketing and promotion expenses as a percentage of sale. Learned TPO observed that there appears to be merely a difference in classification of expenses in the annual report for FY 2010-11, and if we look at figures for the FY 2011-12 in the annual report, the expenses on salary and wages are correctly classified, and, as such, this is a good comparable as it has also engaged in offshore model of work as that of the assessee. 26. Ld. DRP held that this company is in software development, passed the employee cost filter, there is no evidence of increase in margin profit on account of creation of incubation business unit, as per website the company started as engineering design services and expande....