TaxTMI 
TaxTMI 
2018 (10) TMI 1262
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....s of appeal in Cross Objection:- "1. Using financial information of the comparable companies relating to the financial year (FY) 2003-04 although such information was not available to the assessee at the time of preparation of documentation as per the requirement of the Act. 2. Rejecting certain functionally comparable companies on unjust grounds such as a. No foreign exchange revenue b. Startup entity 3. Not granting comparability adjustments on account of difference in risk assumed by the assessee vis a vis the comparable companies and in ignoring the quantification of the same. 4. Not adjudicating on the availability of the benefit of proviso to section 92CA of the Act to the assessee and 5. Rejecting the plea that the assessee is a STPI unit which is entitled to tax holiday and consequently there is no motivation of shifting profits through transfer pricing mechanism." 4. The assessee has also raised the additional ground of appeal in Cross Objection:- "1. That on the facts and circumstances of the case and in law AO/ TPO have erred in selecting certain companies which are not comparable to the assessee ....
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....operating margins as a percentage of operating cost (OP/OC) as the profit level indicator (PLI) . The assessee in its TP study report determined the average operating margin of 16 comparables at 14% and stated that the assessee's margin (PLI) is 10%. Assessee further adopted the (+)(- ) 5% range and stated that international transaction of the assessee is at arm's length. 9. The ld TPO accepted the characterization and choice of the tested party and the most appropriate method as TNMM adopted by the assessee. Even the PLI of the assessee was accepted. However, as the assessee has adopted multiple year data for three years the ld Transfer Pricing Officer rejected the same and adopted the relevant year data for computing the ALP. Out of 16 comparables selected by assessee, the ld Transfer Pricing Officer rejected 13 comparables. The TPO introduced three comparables and assessee requested for introduction of five new comparables. The ld TPO accepted out of the five, two comparables and thereby adopted the final set of 8 comparables. He also granted adhoc working capital adjustment of 2 %. He determined the adjusted margins of comparables of 33.1 % and determined ALP @ Rs. 1....
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.... at Sl No. 8 of title of his order. Hence, there was proper opportunity of hearing to the ld AO/TPO. Therefore, we do not find any infirmity in the order of the ld CIT(A) hence, this ground is dismissed. 16. Ground No. 2 of the appeal is against the order of the ld CIT(A) deleting the adjustment of Rs. 31616086/- on account of arm's length price of the international transaction. 17. The ld DR supported the order of the ld Transfer Pricing Officer and vehemently stated that the ld CIT(A) has erred in removal of the comparables such as Wipro BPO Solution Ltd and rejecting other comparables selected by the TPO. He read out the order of the ld TPO in this regard and supported his order. 18. The ld Authorised Representative vehemently contested that the ld CIT(A) erred in retaining Vishal Information Technologies, Ultramarine and Pigments Ltd, Fortune Infotech Ltd and Tricom India. He referred to his chart and stated that Vishal Information and Ultramarine are functionally not comparable. With respect to Fortune Infotech he submitted that the comparable has Unique Software for performing specialized services. With respect to Tricom India he submitted that company's prof....
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....ices has been specifically classified as KPO services as per Rule 10TA(g) of the Income Tax Rules. He further stated that knowledge processing outsourcing services is not at all comparable to the business of ITES Segment. The ld DR relied upon the order of the ld CIT(A) and stated that the ld CIT(A) has obtained the remand report and has held that Vishal Informtech is in the ITES segment therefore, it cannot be said that it is functionally different. Further, he stated that in the direct enquiry from Vishal it was stated that the payment are for the various step and is a payment for vendor who provided staff and personnel working from the premises of the company, therefore, there is no strength in the argument of the ld AR. We have carefully considered the rival contentions. The annual account of the above comparable company is furnished at page No. 431 of the paper book. According to the audited accounts as on 31.03.2004, the data entry charges and vendor payment of the assessee was Rs. 95478836/- compared to the income from IT enabled services of Rs. 138822227/-. It is almost 68.77% of the total revenue of the company. Further, as per Schedule 16 of the balance sheet ....
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....mself has rejected the same in AY 2005-06. The ld DR vehemently supported the orders of the lower authorities. We have carefully considered the rival contentions. The assessee is changing its stand every time Before the ld CIT(A) it was contended that this company has related party transactions of 25% of the sales. Therefore, the ld CIT(A) computed and found that the comparable has related party transaction of merely 10%. Before us the assessee has raised an altogether new argument and has not uttered a word about the related party transaction of this company. It is an admitted fact that assessee has stated the same to be functionally comparable before the ld TPO. The TPO has also accepted the argument of the assessee. We have perused the annual accounts placed by the assessee at page No. 548- 557 of the paper book. On perusal of the same it is evident that assessee has furnished the annual account of March 2003 and not March 2004. The arguments of the assessee are also based on balance sheet of the last year. The extract of the annual accounts are filed by the assessee, however, no complete annual accounts were filed. On the basis of limited information the assessee ha....
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....parable company was selected by the assessee in its TP study and further accepted by the ld TPO. Now the argument of the assessee is that profit of the company is impacted due to unique software. The above comparable company was also not contested before the ld CIT(A). We have examined the balance sheet placed at pg No. 604-648. The assessee has also once again picked up the use of the software by the assessee in carrying on its business. At page No. 617 relied by the ld AR shows that assessee has a process of continuous enhance R&D. we do not find that any such activity will make the company not comparable when the functions performed are similar. Further, the ld AR has also stated that there is an abnormal growth of 33% increase in PAT due to unique software developed by the comparable. We do not agree with this contention as the profitability statement does not say so. In view of this we do not find any infirmity in the order of the ld TPO in accepting the comparable selected by the assessee more so when same was not objected before the ld CIT(A). E. Wipro BPO Solutions Pvt. Ltd. Now coming to the comparables excluded by the ld CIT(A) and therefore, AO is aggrieved b....
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.... TPO has rejected this company stating that it provide services to a single customer. Following is the relevant extracts from the order of the TPO: "Here the question is where to categorize the customer of the company, but the question is that 100% of his services are bought by M/s. Apex Data Services Inc., USA, thereby the transactions can be controlled by Apex Data Services Inc., USA as he is the single customer. The same is alleged as a risk factor by the company itself in the Director's report. Since the taxpayer agrees that 100% of the services are rendered to Apex Data Services Inc., USA and a single party risks are identified by the company itself, the TPO sees no reason not to reject the company as a comparable. This view is taken without going in depth of the definition of the related parties uls.92A(2)." In response to this the appellant has submitted as under: "Ace Software Ltd.: The Id. TPO has rejected Ace Software Ltd on the ground that all the services are rendered to a single customer and therefore the transactions can be controlled by the customer. The TPO also at the time of assessment proceedings quoted section 92A(2)(i), and held that Ace Softw....
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....(2)(i) of the act by mentioning that, this view is taken without going in depth of the definition of the related parties uls.92A(2)". This shows the baised approach of Id TPO with only intention of making adjustments. On the basis of above we request your good self that the above comparable should be included as for the purpose of arm's length analysis." I have carefully considered the submission by the appellant and documents on record. The TPO has rejected this company primarily on the ground of single customer i.e. Apex Data Services. Admittedly the transaction with a single customer doesn't give rise to an association as envisaged under section 92A(2) of the Act. The TPO has failed grossly to demonstrate that whether the buyer i.e. Apex Data Services has controlled the price in this particular case. The TPO has not used any reliable data to prove that the Apex Data Services has any influence on Ace Software to affect the pricing. The TPO has no objection on the functional comparability of Ace Software Exports Limited and only rejected the comparable on this unsustainable ground of single customer. In view of above, appellant's plea in this ca....
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....able 7: Turnover of Tulsyan Technologies Ltd. On the basis of above discussion we humbly submit that the rejection of Tulsyan Technologies Limited is unjust and it should be accepted as comparable. I have considered the submissions made by the appellant before me and before the TPO in respect of this company. The rationale for > INR 1 crore filter, is to eliminate the companies which are often controlled by its key employees who are the shareholders in the company. The financial results of these companies may be tainted. Further, as per the TP Study submitted by the appellant, the filter of sales > INR1 crore is applied as the reliability of the financial data for companies with low levels of sales can be significantly reduced because the same persons are often both major shareholders and key employees, diminishing the economic distinction between profits and salaries. Further the appellant contended that for an effective analysis of the aforesaid filter it is imperative that this filter is applied on the basis of weighted average data of two years and the company has qualified this filter on the basis of weighted average data. I agree with the reasons stated by t....
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.... proper expenditure relating to the transaction be quantified, the company cannot be taken as a comparable for want of sufficient information. Further the taxpayer himself rejected the comparables (as per the TP document) if their ratio of Net fixed assets to sales is more than 200%. In this case it is 380%. This company cannot be considered even on this count." The appellant in this regard has submitted as under: "The appellant has introduced the company in the fresh search conducted by him. The Id. TPO has rejected this company in the order on the ground that the company has not utilized the assets properly and its net sales/fixed assets ratio is less than 26%. In this regard the appellant wants to put forward that the company is engaged mainly in two segments - Gas and Medical Transcription. The appellant has selected the medical transcription segment for the purpose of analysis. It would be worthwhile to note here that the appellant is also operating in the area of medical transcription, hence the appellant requests your good self that the company should be taken as comparable company for determining the arms length margin of the international transaction b....