TaxTMI 
TaxTMI 
2017 (4) TMI 1448
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....ompanies Act, 1956. It is a wholly owned subsidiary of ScanCafe Inc., USA. It is engaged in the business of providing digital imaging services falling within the category of IT enabled Services (ITeS) to its AEs. The assessee-company is compensated by the AE at cost +17% mark0up basis. It has filed return of income for the assessment year 2010-11 on 27/09/2010 declaring total income of Rs. 52,010/-. The assessee-company also reported international transaction of provision of digital imaging services (ITeS) of Rs. 17,58,08,037/- in its Form 3CEB. The assessee-company sought to justify the consideration received for the international transaction entered with its AE to be at arm's length. The assessee-company had also submitted transfer pricing study report adopting the operating profit to the total cost as profit level indicator (PLI) for the transfer pricing study. The assesseecompany also adopted TNMM which was considered to be the most appropriate method for the purpose of bench marking its international transaction. The assessee-company's profit margin was computed at 17.1% and the assessee-company claimed that the international transactions in the IT enabled Services (ITeS) segm....
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.... are functionally different from the taxpayer were excluded. • Companies that are having peculiar economic circumstances were excluded. 3.1 The TPO also considered foreign exchange fluctuation as non-operating in nature and accordingly re-computed operating margin of the assessee-company at 18.7%. Finally, the TPO selected the following 10 comparables: 3.2 The TPO computed operating margin of the comparables at 22.86%. After giving working capital adjustment of 0.02% adjusted arithmetic mean of PLI was determined at 26.63%. On the above basis, TPO computed TP adjustment as follows: 4. The AO passed draft assessment order dated 10/3/2014 u/s 143(3) incorporating the above TP adjustment after reducing telecommunication and freight expenditure incurred in foreign currency from export turnover for the purpose of calculating benefit u/s 10A of the Act. 5. Being aggrieved, assessee-company filed objections before the DRP contending inter alia that TPO ought to have considered operating foreign exchange fluctuations as operating income and ought to have applied upper turnover limit of Rs. 2 crores and ought not to have applied 0% RPT filter. The Hon'ble DRP, after....
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....upport of his contention, he placed reliance on the Tribunal order rendered in the case of M/s. Flextronics Tech. (India) Pvt. Ltd. v. DCIT in IT(TP)A No.l559(B)/2012 dated 23.10,2015, copy available on page Nos.17 to 38 of compilation of case laws submitted before the Tribunal. (a) Accential Tech. Ltd. (Seg.) (b) Acropetal Tech. Ltd. (Seg.) (c) Coral Hubs Ltd. (d) Crossdomain Solutions Ltd. (e) Eclerx Services Ltd. (f) Genesys International Corpn. Ltd, (g) Mold Tek Technologies Ltd," We further note that the functional comparability has been examined in detailed by the co-ordinate bench of this Tribunal in the case of Equant Solutions India (P.) Ltd. v. Dy. CIT [2016] 157 ITD 292/66 taxmann.com 192 (Delhi - Trib.) as well as in the case of ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxmann.com 103 (Bang. - Trib.). Further in the case of Acropetal Technologies Ltd. (Seg.), the co-ordinate bench of this Tribunal in the case of Kodiak Networks (India) Pvt. Ltd. v. Dy. CIT [IT(TP)A No.l540 (Bang) of 2012] has considered the functional comparability and found that this company is not comparable....
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....he view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entitles cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP." 14.2 As discussed by the Special Bench in the case of Maersk Global Centres (India ) (P.) Ltd. (supra), this company provides data analysis, operating management, audits, reconciliation, metrics management and operating services, it has two business verticals - financial services, retail and ma....
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....ia and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company, i.e., Infosys Technologies Ltd., be excluded form the list of comparable companies. 15.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 15.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record suff....
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....ntia Technologies Ltd (seg) on the ground that during the year extra ordinary event of merger and amalgamation occurred and therefore, in view of the decision of the Tribunal in the case of Symphony Marketing Solutions India Private Limited (supra) the said company cannot be considered a good comparable for determining the ALP. The findings of the Tribunal in the case of Symphony Marketing Solutions India Private Limited (supra) is based on the another decision of Hyderabad Bench of the Tribunal in the case of CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P.) LTD. v. DCIT [2013] 57 SOT 14 (ITAT[Hyd]). It is pertinent to note that an extra ordinary event of merger, amalgamation or acquisition is relevant only if such event affects the result and operating margin of the very segment of the company to be compared with the assessee. In case, of segmental results are taken in to account and extraordinary event of merging or demerging taken place in other division or segment of the comparable company then such event does not, affect the existing business model, function or margin of that particular segment. Therefore, the extraordinary event is a relevant factor for considering the comparabili....
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....d services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals - financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly....
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....ty of this company in para 24 of the decision which is reproduced below: "24. This company is listed at SI. 13 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the Id. counsel for the assesses that this company has a brand value and therefore there would be significant influence in the pricing policy which will impact the margins. Schedule 13 to the profit & loss account of this company for the F. Y. 2007-08 shows that this company incurred huge selling and marketing expenses. Page 133 of the annual report of this company for the F. Y 2007-08 shows that this company realizing its brand value has chosen to value the same on the basis of its earnings and that of Infosys. The brand value of the Assessee and Infosys has been valued at Rs. 3 1,863 Crores. Infosys BPO, being a subsidiary of Infosys, has an element of brand value associated with it This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only ....
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....nd top line reporting. As far as Acropetal Technologies Ltd. is concerned, this company does the business of export of software services. It is also seen from the segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it derives income from engineering design services and software development services. It is also pertinent to point out that before the TPO, the assessee raised an objection that this company performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the services rendered by this company fall in the definition of ITES. 13. We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No. 15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The per....
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....ot require adjudication. 17. Ground Nos.2 and 3 challenge the direction of the DRP applying turnover filter of Rs. 1 to Rs. 200 crores. Though there are decisions to the effect that the companies with the turnover filter of Rs. 1 to Rs. 200 crores should alone be considered as comparables, this proposition was diluted by the Mumbai bench of the Tribunal in the case of Willis Processing Services (I) P.Ltd. vs. DCIT [TS-49-ITAT-2013(Mum)-TP] wherein it was held that the turnover band of Rs. 1 to Rs. 200 crores is bereft of any rationality as the application of this rule does not enable comparison of a company with Rs. 200 crores with another company having a turnover of Rs. 201 crores. It was further observed by the Hon'ble Tribunal that the turnover was also not a criteria prescribed under rule 10B for selection of comparables. We are also of the considered opinion that the turnover cannot be relevant criteria in a service sector where fixed overheads are nominal and the cost of service is in direct proportion to the services rendered. Following this reasoning we hold that the above companies cannot be excluded from the list of comparables. Therefore, we direct that E-Clerk and I....
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.... therefore, the same has to be excluded from the list of comparables adopted by the TPO. Even if the percentage of RPT to total revenue is not 97 per cent but is more than 25 per cent even then, this comparable cannot be considered as uncontrolled comparable and the same has to be excluded from the list of comparables finally selected by the TPO. But for the same, the factual aspect has to be examined as to how much percentage of RPT to total revenue is there in the case of this comparable i.e., 3 DPLM Software Ltd. Hence, we set aside the assessment order and restore the entire matter to the file of the Assessing Officer for a fresh decision after examining the factual aspect of this claim of the assessee and after obtaining fresh directions from DRP. If it is found that the percentage of RPT to total revenue in the case of this comparable i.e., 3 DPLM Software is more than 25 per cent then this comparable should be excluded from the list of comparables selected by the TPO and the average mean should be worked out after excluding this comparable and if the same is within plus minus 5 per cent of the profit margin declared by the assessee then no transfer pricing adjustment is requ....
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....th the decision of the jurisdictional High Court in the case of CIT vs. Tata Elxsi Ltd. (349 ITR 98). Therefore, these grounds of appeal are dismissed. 21. In the result, the appeal filed by the revenue is partly allowed. 22. The cross objections filed by the assessee are dismissed as withdrawn. Order pronounced in the open court on 12th April, 2017. ============= Document 1 Sl. No. Particulars 1 Accentia Technologies Limited 2 Acropetal Technologies Limited (Seg) 3 E-Clerx Services Ltd 4 Fortune Infotech Limited 5 ICRA Online Ltd (Seg) Informed Technologies India Ltd Infosys BPO Cosmic Global Ltd Sundaram Business Services Ltd 8 9 10 Jeevan Scientific Technology Ltd (Seg) Document 2 Arm's Length Mean Margin on cost Less: Working Capital Adjustment (As per Annex. C) Adjusted margin Operating Cost 26.86% 0.23% 26.63% 14,81,10,096 Arms Length Price (ALP) 18,75,51,815 126.63% of Operating Cost) Price Received 17,58,08,037 Shortfall being adjustment u/s 92CA: 1,17,43,778 Document 3 General 1. Without prejudice to the above, the order of the learned AO and directions o....
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....rred in not including certain additional comparables requested by the Appellant to be considered for the comparability analysis, by upholding the approach of TPO in applying arbitrary filters. Jindal IntelecomPvt Ltd and Microgenetic System Ltd- Erroneously rejected based on different financial year ending filter. 10. The learned DRP erred in rejecting certain comparables considered by the TPO, which were not contended by the Appellant, without providing an opportunity of being heard. 11. Microland Ltd.- Erroneously rejected based on operating revenue filter and perceived unavailability of export turnover details, which are factually incorrect, since the TPO failed to consider the information pertaining to segmental results and the foreign exchange earnings provided in the annual report of the said company, while computing the margin and applying the said filters. The learned TPO and the learned AO have erred, in law and facts, by not making suitable adjustments to account for differences in the working capital position of the Appellant vis-Ã -vis the comparables. Document 5 12. The learned TPO and the learned AO have erred, in....
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....size, turnover and brand of the company are the deciding factors for treating a company as a comparable and accordingly erred in excluding M/s. E-Clerk Services Ltd. and Infosys Technologies Ltd. as comparables. On the facts and in the circumstances of the case, the Disputes Resolution Panel erred in excluding uncontrolled comparables having turnover more than Rs. 200 crores in the absence of Turnover criterion prescribed in Rule 10B of Income Tax Rules and also there being no correlation between turnover and profit margin. On the facts and in the circumstances of the case, the Disputes Resolution Panel erred in fixing the RPT filter at 0% of total revenue by ignoring the TPO's observation that the basis for determining the threshold limit for eliminating companies having RPT transactions more than 25% on sales was quite legitimate within the definition of Sec. 10A(a) which was through the determination of Indian Companies with foreign shareholding greater than 26% and therefore had its basis in the provisions of the IT Act and the AS 18. On the facts and in the circumstances of the case, the Disputes Resolution Panel erred in law in fix....