TaxTMI 
TaxTMI 
2018 (10) TMI 1395
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....erprise on the basis of order passed by the Transfer Pricing Officer ('TPO') under section 92CA(3) of the Act. 3. That the AO/TPO erred on facts and in law in computing the operating profit margin of the appellant at 6.99% as against the correct operating profit margin of 7.98%, allegedly holding that: i. The values reported in the Transfer Pricing Documentation for computation of operating profit margin of the appellant do not reconcile with the values reported in the audited financial statement for the financial year 2012-13. ii. The foreign exchange gain/loss is to be considered as nonoperating for computing operating profit margin of the appellant and the comparable companies. 4. That the AO/TPO, erred on facts and in law in considering exchange fluctuation income of Rs. 29,03,948 as non-operating item of income for computing the operating profit margin of the appellant disregarding the directions of the Dispute Resolution Panel ('DRP'). 4.1 That the AO/TPO erred on facts and in law in not appreciating that in terms of Rule 10B(1)(e) of the Income Tax Rules, 1963, while applying TNM method, net profit earned by the appellant from tra....
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....s for and on behalf of its parent company. The assessee company was covered under the transfer pricing audit and the case was referred to Transfer pricing Officer (TPO) on 05.08.2015 for determining the Arm's Length Price (ALP) u/s. 92CA(3) in respect of international transactions entered by the assessee with its AE. The ld. TPO included companies which were rejected by the assessee in the transfer pricing documentation either on account of functional dissimilarity or insufficient financial information and arrived at a set of the 13 comparable companies. Accordingly, he passed the order on 13.10.2016 and determined the ALP for the provision of ITeS after considering 13 companies and calculated average mean by OP/OC at 14.50% as under : Sr. No. Company Name OP/OC (%) 1. Accentia Technologies Ltd. 13.92 2. Informed Technologies India Ltd. 3.28 3. Microgenetics Systems Ltd. 16.25% 4. Jindal Intelecom Ltd. (-) 2.99% 5. Acropetal Technologies 14.98% 6. E4e Healthcare 17.11% 7. Capgemini Business Services (India) Pvt. Ltd. 26.30% 8. New VC Servces Pvt. Ltd. 20.07% 9. Datamatics Global Services Ltd. ....
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.... (ii). Companies having sales less than 1 Cr. were rejected (iii). Companies having service income to total income ratio more than 75% were selected. (iv). Companies having income from export sales at least 75% of the total income were selected. (v). Companies having employee cost to total cost less than 25% were rejected. (vi). Companies having RPT more than 25% of total income were rejected. (vii). Companies that are affected by some peculiar economic circumstances. (viii). Companies undertaking significantly different functions compared to assessee. Based on the aforesaid filters, the TPO in impugned order rejected all the comparable companies considered by the assessee in the transfer pricing documentation, for the reason submitted as under : S. No. Company Name Remarks of TPO 1. Allsec Technologies Limited This company fails Export income more than 75%. Hence, not a suitable comparables. 2. Nucleus GIS & Ites Limited This company fails Export income more than 75%. Hence, not a suitable comparables. 4. On the basis of the TPO order, the AO passed the draft assessment order. Agains....
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....perusing the entire material available on record and case laws cited by the assessee, we find that the AO was not justified in not following the directions given by the ld. DRP. We, therefore, remit this matter back to the AO/TPO to consider the foreign exchange gain as operating income of the assessee while working out the operating profit margin of the assessee, as directed by the ld. DRP. We further direct that the AO/TPO should calculate operating profit margin as per Rule 10B(1)(e) of the Income Tax Rules, 1963, if the assessee satisfies the conditions as per rules. Needless to say, the assessee shall be given reasonable opportunity of being heard. Accordingly, these grounds are allowed for statistical purposes. 10. Ground No. 5 challenges the rejection of comparable companies on the basis of additional filter of export sales less than 75% of the total income. In this context, we do not find any justification to discard the conclusion reached by the authorities below while considering this filter as appropriate filter for comparability analysis in the facts of the present case. The ld. AR of the assessee failed to rebut the finding of the ld. DRP that more than 86% of the o....
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.... - 322 of the paper book). It shall further be noted that the merging entity, i.e.IgateComputer Systems (formerly known as patni computer systems), is engaged in the business of providing IT and IT enabled services. The services rendered by the company under the IT segment includes, application development, application maintenance and support, verification and validation, enterprise application solutions, business intelligence and data warehousing (refer page 8 of the annual report of patni computer systems). (annual report enclosed at pages 536 - 605 of the paper book). Accordingly, even if it is assumed that the company, iGATESolutions Ltd is engaged in providing IT enabled services, which is akin to the services rendered by the appellant, pursuant to the merger of Igate computer Systems Ltd (formerly known as patni computer systems), iGateSolutions Ltd ought not be considered as comparable to the appellant, as the merging entity is also engaged in providing IT services, which includes application development etc. b) Functionally not comparable and segmental daughter not available The company is engaged in the business of providing information ....
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....Services vs. DCIt( ITA No. 7140 & 7097 / Mum/2012 ) ii. Macquire Global Services (P.) Ltd. (ITA 6803/ Delhi/2013) - CL 509-533 Hon'ble Tribunal in the case of appellant for the assessment year 2011 - 12[ITA No. 1003/Del/2016] excluded Accentia Technologies Ltd from the final set of comparable companies, interalia, on account of extraordinary event of a merger/acquisitions and nonavailability of segmental accounts. - CL 615 - 627. Further, Igate global Solutions Ltd itself has been rejected as comparable, on account of merger/acquisition and absence of segmental accounts, in the falling decisions; Vertex customer services vs DCIT, Circle 28 (1), India Private Limited vs DCIT (ITA number 1508/Del/2015) - CL 712 - 740 Evalueserve SEZ ( Gurgaon ) P. Ltd. Vs ACIT (ITA No. 1467/Del/2017) Ameriprise India Pvt. Ltd. vs DCIT (ITA No. 7014/Del/2014) - CL 759 - 786 The assessee has further relied on the following decisions : (i). ITA No. 461/2016, PCIT vs. Ameriprise India Pvt. Ltd. dated 19.10.2016 (Delhi H.C.) (ii). ITA No. 124/2018 PCIT vs. M/s. Oracle (OFSS)BPO Services Pvt. Ltd. (Delhi H.C.) 13. On the other hand,....
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....he financial year 2012 - 13. The company also provides operational control assessments, IT risk assessment, SAS 70, Assurance andRisk management services to many around the globe. It is submitted that the aforesaid services are in the nature of KPO services and cannot be considered comparable to the captive services rendered by appellant being in the phone activation. Reference in this regard is also made to Rule 10 TA of the income tax rules, which, the safe Harbour Rules, provides following services to be considered in the nature of KPO services: (g) " Knowledge process outsourcing services"means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:- (i) geographic Information System; (ii) human resource services; (iii) engineering and design services; (iv) animation or content development and management: (v) business analytics; (vi) financial analytics; or (vii) market research, but does not include any research and allotment services wh....
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.... in the case of appellant for the assessment year 2012 - 13 in ITA No. 6014/Del/2016, excluded Informed Technologies India Ltd from the final set of comparable companies, being engaged in provision of KPO services such as financial research services, data management services to the financial content industry. - CL 628 - 648. A company engaged in provision of KPO services cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transition of provision of BPO services[Rampgreen Solutions Pvt. Ltd vs. CIT (377 ITR 533)]. - CL 670 - 696 Reliance, in this regard, is praised on the following decisions, wherein, the Hon'ble Tribunal directed to exclude a company on account of non-availability of segmental data: iii. Vodaphone India Services vs. DCIT( ITA No. 7140 & 7097 / Mum/2012 ) iv. Macquarie Global Services (P.) Ltd. (ITA 6803/ Delhi/2013) - CL 509-535 16. The ld. DR, on the other hand, relied on the orders of authorities below. 17. In our opinion, it is clear from the business profile of this company that the company is engaged in providing BPO services in the nature of business process management ser....
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.... Enhance your margins Our 23 - year experience has taught us that there is no magic potion are silver bullet for improving financial performance. It can only be achieved by leveraging best practices, tested process, and innovative technology. Our approach historically addresses Revenue Cycle Management - from the moment a patient enters the system to the final dollar being collected or paid - all this, while delivering better outcomes in quality, turnaround times, and productivity. The various services and solutions provided by the company, as demonstrated on the website is reproduced hereunder Provider solutions Medical Billing Companies Integrated Practice and RCM Coding and Compliance Hospital Services Hospital Coding Payer Solutions Claims Management and Admin Cost Avoidance and Audit Medical Record Audit Contact Centre Solutions Technology Solutions Payer Platforms Computer - Assisted Coding Workflow Tools Value - Added Services Case Studies Healthcare & Life Science Analytics Detailed serv....
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....'s own case for A.Y. 2011-12, this company was selected as comparable on which no objection was raised by the assessee upto the stage of Tribunal. Similarly, in the case of assessee for A.Y. 2012-13, the DRP had mentioned that assessee has no objection on inclusion of this company. However, keeping in view the objection of assessee in the submissions made before the Tribunal, the ITAT remitted this matter back to the file of DRP for re-deciding the same after affording reasonable opportunity of hearing to the assessee. No further information pursuant to the remand proceedings, is furnished by the assessee before us. It is notable that before the ld. DRP, the assessee raised objection on this company only on account of non-comparability of employees cost and no objection was raised either on functional test. The objection regarding nonavailability of annual report was not raised by the assessee before the TPO. The ld. DRP was also of the view that when the assessee challenged the employees cost filter having not been passed, it leads to say that the assessee was having annual accounts of the said company. Keeping in view these facts, the ld. DRP remitted it to the AO to compare this....
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....mparables, even-while the assessee has objected the action of this office for not allowing any adjustment for difference in risk profile of the assessee and that of comparables. The primary' argument of the assessee is that it was remunerated on cost plus basis, i.e, the entire cost incurred by the assessee is reimbursed by its AE along with a certain markup and, accordingly, is was working in a risk free environment. 1'he assessee further contended that the profits are directly linked with the risk profile , t e., more is the risk more should be the profit and, therefore, since the assessee was not carrying any risk, it should have been allowed adjustment for assuming lower risk as compared to the compare' vs. This Panel has carefully considered the arguments of the assessee. The adjustment for function - : differences, if any. can be made only if those differences can be ascertained accurately and then impact on the margins can be assessed with reasonable accuracy. In this case, no information is available about the risk profile of the comparables, i.e. how much was the risk assumed in respect of functions carried out by them, what was their business model, i.e., eith....
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....rt, The assessee's claim that it does not bear market risk as it renders services- exclusively to its AE is not acceptable. In fact, the assessee bears a much bigger market risk viz. single customer risk, j As the assessee is wholly dependent on its AE, its entire existence is dependent on it. If the AE runs out of business or if AC - business gets reduced substantially, the assessees business will also get adversely affected The assessee being a captive service provider cannot even look, for other 1 customers. Thu?, in fact the assesses runs a greater risk than an average independent entity that can always look for other customers or other markets 2. Service liability Disclosed in transfer pricing report. The assesses argues that independent i comparables bear lull responsibility for delivery of final services to clients and hence exposed to service failures risk whereas the assessee is not exposed to this risk as it dries not have any contractual liability for losses or damages' for service failures and the cost of rework (if any) would be recoverable from AE on a cost plus basis. It is naive to argue that the assesses is not responsible for quality of service ....
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....ing report but actually borne by assesses, It is argued that the high attrition rate resulting in higher training costs, idle time etc will have an impact on the pricing of comparables. However, it is an ongoing phenomenon in any running company and the costs on account of the same are already factored in the P&L of comparables. As regards loss of valuable personnel and related human intangible, even the assesses is exposed to this risk. 11. Security risk Not disclosed m transfer pricing report but actually home by assesses. 12. Environmental risk Not disclosed in transfer pricing report but actually borne by assessee. 13. Technology Risk Comparable companies as well .as the assesses tire exposed to similar type of technological obsolescence or risk, further, technological changes are an ongoing phenomenon and place an additional cost burden which pull down the profitability of the comparable companies as well. It may be more relevant for companies which have substantial assets and run the risk of their products getting obsolete This risk is not very relevant for service industry. 8.3. Judicial decisions: In various judicial pronouncements the ri....
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....PO had made efforts to identify the comparables whose functions are similar to the assessee company by applying filter quantitatively and qualitatively to eliminate, the differences between the assesses companies with that of comparable companies neutralize the aforesaid risk factors. The argument of the learned counsel for the assessee in the written submissions as well as submissions made before us were all in the background of showing the assessee company its low end performer. We do not find force in the contention of the-learned counsel for the assessee that the assessee is a risk free service provider and sufficient adjustment needs to be allowed to compare with the other comparable companies. The learned counsel for the assessee placed reliance on several decisions in support of his case that there should be some adjustment for risk to be given However, we find that the first appellate authority utter going through the agreement, entered by the assessee company with the AE. observed that the assessee company is an independent contracting entity and shall be solely responsible for determining the manner, means and methods by which ii performs its obligation under the said con....
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....not done so. Adjustment can be allowed only if it is demonstrated that is leading to better comparability and only when a credible methodology is adopted for calculating a reasonably accurate adjustment. 8.8. Since, the methodology is nor well established and-requires making several assumptions, the risk adjustment calculated as per the methodology will not lead to reasonably accurate adjustment as required as per the Income Tax Act and Rules. Therefore, it will not be possible to give risk adjustment under the Indian law. 8.9. The discussion on the risk adjustment is summarized as under: a. As discussed above, the assessee has also undertaken several risks. Therefore, it is not correct to say that it is a risk mitigated entity. b. The assessee is totally dependent on the AE tor business. Thus the assessee takes the risks associated with heavy dependence on a single customer. In common business parlance it is known as "single customer risk'. c. The compensation model with the AE does not guarantee volume of business nor tire period. The agreement can be terminated by any party at any time after giving a stipulated period notice. Thus the....
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....the various decisions of the ITATs as referred to above no risk adjustment has been allowed in such cases in absence of any credible methodology to gram risk adjustment. In view of the above discussion it is held that no risk adjustment is to be given to the assessee. 8.10. Further the assessee has quantified the risk adjustment based on the difference between bank rate and PLR. It is mentioned here that reference to PLR and bank rates in the context of transfer pricing is not pertinent. Though the honorable ITAT was persuaded in the case of Philips that bank rates and PLR are in some way connected with the under lying risk of lending; in fact it is not. so. Loosely speaking bank rate is the rate at which the central bank (RBI in India) advances credit to other banks. The bank rate also refers to the rate of interest charges on interbank short term borrowings (call money). However it is in no way connected with the perceived under lying risks. Before setting the base fate system, banks used another rate system called Prime Lending Rate (PLR) to set their lending rates. It was noticed by the RBI that banks used to manipulate this PLR to lower level to offer discoun....
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.... therefore not acceptable. 8.14. Further, in the assessee own ease for AY 2012-13, the assessee has filed an appeal before DRP against the order u/s 92CA(3) passed by the TPO on this issue. However, the DRP vide its order dated 14.09.2016 has dismissed the assessee's ground with the remarks "It is also worth adding that it is not sufficient to merely spell out risks, it has to be shown which risk was actually undertaken by the comparables and to what extent it affected the profitability........... Since, the methodology is not well established and requires making several assumptions, the risk adjustment calculated as per the methodology will not lead to reasonably accurate adjustment as required as per the Income Tax Act and Rules. Therefore, it will not be possible to give risk adjustment under the India law." "DRP Directions: Objections ix and x are related to risk analysis and risk adjustments hence are being adjudicated together. Risk adjustment as a general rule cannot be allowed unless it is demonstrated that the comparables had actually undertaken such risk and how the same materially affected their margins. Unless it is shown that how the risk adj....