TaxTMI 
TaxTMI 
2016 (6) TMI 1374
X X X X Extracts X X X X
X X X X Extracts X X X X
....he order issued by the AO is bad in law insofar as the fact that the AO did not issue to Siemens Information Processing Services Private Limited ('the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. b) The AO has erred in law in making a reference to the Transfer Pricing Officer ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The fresh comparable search undertaken by the TPO is bad in law c) The TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed. d) On the facts and in the circumstances of the case and in law, the learned TPO erred in and the Hon'ble Dispute Resolutions Panel ('DRP') further erred in upholding / confirming the action of the TPO in not demonstrating that the motive of the Appellant was to shift profits outsid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law in not applying the multiple-year data while computing the margin of alleged comparable companies. 4 Non-allowance of appropriate adjustments to the comparable companies, by the TPO The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure, and (c) risk profile between the Appellant and the comparable companies. 5 Mark-up on recovery transactions The AO/TPO erred on facts and in law, in making adjustments on the alleged ground that the Appellant should have charged a markup on pass-through transactions entered into with the associated enterprises, without appreciating the submissions filed by the Appellant in respect of the pass through transactions. 6 Variation of 5% from the arithmetic mean The AO/TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant. 7 Grant of lower deduction unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enues 95,21,87,409 Operating Expenses 84,39,56,717 Operating Profit 10,82,30,692 Operating Profit to Expenses 12.82% INTERNATIONAL TRANSACTIONS Amount (Rs.) IT enabled and support services 95,21,87,409 Recovery of salaries and allowances 8,02,389 Recovery of other expenses 42,17,427 Recovery of salaries and other expenses 1,81,54,111 In the Transfer Pricing ('T.P') document, the assessee has selected 22 comparable companies and applying Transactional Net Margin Method ('TNMM') as Most Appropriate Method ('MAM') for bench marking its international transactions in ITES segment. The TPO has rejected the TP study analysis of the assessee on the ground that the assessee has not applied certain filters which should have been applied. The TPO caried out a fresh search and selected 27 comparable companies including 7 comparables from the list of the assessee. The comparables selected by the TPO for determining the Arm's Length Price ('ALP') are as under : S.No. Name of the Company Operating Margin on Cost Adjusted Margin (Annexure C of TP Order) 1 Accentia Technologies Ltd. (Seg) 30.61% 25.55% 2 Aditya Birla Minacs Worldwide Ltd (Earlier ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as comparable in the order u/s 92CA without considering the differences in the business model employed by Spanco Limited (viz. outsourcing of services), being functionally dissimilar to the model employed by the Appellant for rendering of IT enabled services. 2. The learned TPO erred in selecting Wipro Limited and Infosys BPO Limited as comparables in the order u/s 92CA despite that the functional and risk profile, including the scale of operations, intangibles, etc. of Wipro Limited and Infosys BPO Limited cannot be compared to the IT enabled services rendered by the Appellant. 3. The learned TPO erred on facts in selecting Maple Esolutions Ltd. as comparable in the order u/s 92CA, despite that the said company was functionally not comparable to the IT enabled services rendered by the Appellant, in addition to having peculiar economic circumstances and extraordinary growth during FY 2006-07. 4. The learned TPO erred on facts in selecting Triton Corp. Ltd. as comparable in the order u/s 92CA, despite that the said company was functionally not comparable to the IT enabled services rendered by the Appellant. 5. The learned TPO erred on facts and in law in not applying an emp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sistent view that the RPT filter should not be more than 15% and therefore the companies which are having more than 15% related party transactions should be excluded from the list of comparables selected by the TPO. 6. On the other hand, the learned Departmental Representative has submitted that when the assessee selected these companies as comparables in the TP study, the assessee cannot be permitted to raise the objections against the comparability of those companies. He has further submitted that if the objections raised by the assessee is accepted then it will reverse the entire process of determination of ALP conducted by the TPO. He has further contended that neither the assessee nor the TPO has applied any employee cost filter therefore at this stage, the assessee cannotbe allowed to raise such an objection which requires investigation of new facts in respect of the companies selected by the TPO as well as by the assessee. As regards the RPT filter, the learned Departmental Representative has contended that the TPO has applied 25% which was not objected by the assessee either before the TPO or before the DRP and therefore at this stage the assessee cannot be allowed to rais....
X X X X Extracts X X X X
X X X X Extracts X X X X
....matics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics referred to by Shri Aggarwal. The Tribunal is a fact-finding body and, therefore, has to take into account all the relevant material and determine the question as per the statutory regulations." "38. Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the AO. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before Revenue authorities. Therefore, w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ITES and the TPO aplied the employee cost filter of 25% in software development segment but refused to apply the same in the ITES segment. In those circumstances the Tribunal held that once the TPO has applied the employee cost filter in software development segment, then the same shall be applied in the ITES segment as per the rule of consistency. In the case on hand when no filter was applied either by the assessee or by the TPO regarding employee cost therefore fixing a particular limit at this stage will not be appropriate as the TPO has to decide the appropriate filter of employee cost. Though in principle, we agree with the contention of the learned Authorised Representative that the employee cost filter should be applied at 25% however even if it is applied to 1 or 2% less or more will not cause any substantial effect or would be prejudicial to the interest of either of the party. We are of the view that the ITES sector is employee intensive and therefore the cost of the employees cannot be ignored for selecting the comparable companies. If in a particular case of company, the employee cost is less than the average cost previaling in the industry then it is necssary to find ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion. Therefore this company is not comparable to the service provided by the assessee. Further this company has launched new products as well as there was an extra-ordinary event of amalgamation of subsidiaries during the year under consideration. He has pointed out that the amalgamated subsidiary Iridium Technology Ltd. is a software product company therefore this company cannot be considered as a good comparable. The learned Authorised Representative has further pointed out that the employee cost of this company is only 16.58% and also incurred business promotion expenses to the extent of 28.34% of the total operating revenue. Therefore this company is not in the same business as provided by the assessee. He has further contended that this company also fails the ITES filter of 75% as its ITES service is only 67.21%. The learned Authorised Representative has relied upon the following decisions : i) M/s. Online India Pvt. Ltd. Vs. DCIT Dt.18.3.2016 in IT(TP)A No.1336/B/ ii) M/s. Stream International Pvt. Ltd. dt.10.10.2014 53 taxman.com 19 (Mum) 13. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been adopted by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. The ld. DR contended that the mere fact of acquisition and merger should not be considered as a decisive test for exclusion of a company unless it has affected the profitability due to such merger etc. We are not inclined to accept this contention for the obvious reason that once acquisition and merger etc. has taken place, it is always likely to affect the profitability of such a company in the year of acquisition etc. There cannot be any standard yardstick to measure the impact of such a factor on the overall profitability of such a company. It is relevant to highlight that we are considering the exclusion of a company on this score. In our considered opinion, when other comparables are available, the exclusion of a probable comparable company cannot have much significance in contrast to a situation of inclusion of a probable incomparab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re of ITES. He has relied upon the orders of the authorities below. 15.4 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of this company has been examined by this Tribunal in a series of decisions including the decisions relied upon by the learned Authorised Representative. At the outset we find that in the recent decision in the case of Pole to Win India Pvt. Ltd. (supra), we had the occasion to examine the comparability of this company and given the finding in para 7.3 as under : " 7.3 We have considered the rival submissions and the relevant material on record. In case of Ariba Technologies India Pvt. Ltd. (supra), the objections against this company was on the ground of extra-ordinary profit and therefore the Tribunal has no occasion to examine the functional comparability of this company except the ground raised by the assessee regarding extra-ordinary profit margin. The learned Authorised Representative of the assessee has referred to the Annexure to the Directors Report wherein segment-wise and product-wise performance has been reported as under : " Segment-wise and product-wise performance Bodhtree h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w. 16.3 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the functional profile of this company was examined by the Special Bench of Mumbai Tribunal in the ase of Maerk Global Centre (supra). By following the Special Bench decision, the Tribunal in the case of Flextronics Technologies India P. Ltd. (supra) has again considered the functional comparability of this company in paras 8.1.2 & 8.1.3 as under : " 8.1.2 We have considered the rival submissions as well as relevant material on record. We find that the company Eclerx Services Ltd. is engaged in diversified activity of providing services including analytic services and data process solutions to its global clients. The service provided by Eclerx Services Ltd., is in various areas including capital market and therefore, the services are in the nature of consultancy and end to end support through trade centre including trade confirmation, settlement, transaction, maintenance and analytic and reporting. Thus it is apparent from the nature of the activity of this company that it is not providing a simple service of data processing but it is engaged in the activity of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 entities 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. Thus it is clear that the Special Bench found that this company is not comparable with BPO company which are engaged only in low end services of data processing. Accordingly, we direct the AO/TPO to exclude Eclerx Services Ltd. from the list of comparables for the purposes of determining ALP. 8.1.3 We further note that the Hon'ble Delhi High Court in ITA No.102 of 2015 dated 10/8/2015 has confirmed the view taken by the special bench of the Tribunal in the case of Maerks Centre. Accord....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pital Advisors Pvt. Ltd. vs. ACIT (supra), the Tribunal vide its order dated 6/2/2013 held in para.10 to 10.3 as under: " 10. We have considered the rival submissions and relevant material on record. The TPO has rejected this comparable because the financial data for the Financial Year 2007- 08 were not available in the public domain and hence, if was held that this company is not a suitable comparable. There is no dispute that the data furnished by the assessee are regarding the financial results as on 30.6.2007. Therefore, as far as the financial year 2007-08 is concerned, the data available were only for 3 months. 10.1 As per Rule 10B(4), the data to be used in analysing the comparability of or uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Therefore, it is mandatory for the purpose of comparing the data of an uncontrolled transaction with an international transaction that the same should relating to the financial year in which the international transaction has been entered into. The information, data and documents should be contemporaneous. 10.2 Undis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ar decision of this Tribunal we direct the A.O/TPO to exclude this company from the list of comparables for the purpose of determining the ALP. 18. Informed Technology Limited. 18.1 The learned Authorised Representative of the assessee has submitted that this company is engaged in collecting and analysing data on financial fundamentals, corporate governance, Director / Executive compensation and capital market. The business promotion expenses of this company is 14.94% of the total operating revenue. Therefore this company cannot be considered functionally comparable with the assessee. He has further pointed out that this company has low employee cost at 22.69% and it fails the employee cost filter generally applied at 25%. He has relied upon the decision in the case of First Advantage Offshore Services Pvt. Ltd. Vs. DCIT (supra). 18.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that predominant activity of this company is ITES and even the assessee in its TP study has not gone into the verticals of the comparables. 18.3 We have considered the rival submissions as well as the relevant material....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ual Report reads as under: Amalgamation of PAN Financial Services India Private Limited The Board of Directors in their meeting held on October 6. 2008. approved, subject to the approval of the Honorable High Courts of Karnataka and Chennai, a Scheme of amalgamation ("the Scheme") to amalgamate PAN Financial Services India Private Limited (-PAN Financial"), a wholly owned subsidiary of the Company engaged in providing business process management of services, with the Company with effect from April 1. 2008 ("effective date"). The approval of the High Court was received on April 6, 2009 and filed with the respective Registrar of Companies of Karnataka and Tamilnadu on April 6, 2009 and March 10, 2009 respectively. Accordingly on the scheme becoming effective, the financial statement of PAN Financial has been merged with the company. It is clear that there was extraordinary event of amalgamation during the year under consideration. Therefore, in view of the extraordinary development of amalgamation of another company, this company cannot be considered as a good comparable for the assessment year under consideration. Apart from this, we further note that as per the segment report....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tmental Representative has submitted that when the TPO has obtained the complete information / data of this company and found that this company is functionally comparable with the assessee then mainly because the assessee was not having the information would not render this company non-comparable. He has relied upon the orders of the authorities below. 20.3 We have considered the rival submissions as well as the relevant material on record. We note that this Tribunal has taken a view that if the TPO has used the information obtained under Section 133(6) of the Act withut giving an opportunity to the assessee to counter the same then the decision of the TPO to include in the list of comparables is not sustainable. In the recent decision in the case of M/s. Pole To Win India Pvt. Ltd. (supra) dt.8.6.2016, both of us party to the same have considered an identical issue in para 11.3 as under : " 11.3 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the TPO in para 33.18 of the impugned order has stated that the Annual Report was not available for the year under consideration. Thus the notice under Section 133(6) was issu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the Act." We do agree with the earlier view taken by the Tribunal and accordingly we set aside this issue to the record of the A.O/TPO for deciding the comparability of this company after considering the reply of the assessee on furnishing of the information received under Section 133(6) of the Act. 21. Maple e-Solution Ltd. 21.1 The learned Authorised Representative of the assessee has submitted that this company is engaged in providing voice out bound, voice in bound data services. There is an extra ordinary event of amalgamation with Triton Corporation Ltd. (supra). He has also submitted that the financial results during the year of this company are unreliable as the Directors / owner of this company were in a serious indictment. Therefore, it is unsafe to take the result of this company for comparing the international transactions of the assessee. He has relied upon the decision of this Tribunal in the case of Flextronics Technologies India (P.) Ltd (supra). 21.2 On the other hand, the learned Departmental Representative has submitted that this company is in the ITES segment and it is irrelevant whether the ITES provided in the voice out bound and voice in bound in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ia P. Ltd. (supra). 22.2 On the other hand, the learned Departmental Representative has relied upon the orders of authorities below. 22.3 We have considered the rival submissions as well as the relevant material on record. Though this company is having very low revenue from ITES at 12.93% and further very low employee cost at 7.93% however, the functional comparability of this company was examined by this Tribual in the case of Flextronics Technologies India P. Ltd. (supra) in para 8.5.3 as under : " 8.5.3 We have considered the rival submissions as well as the material on record. At the outset, we note that functional analysis of the Co. has been examined by the Special Bench in case of M/s Maersk Global India Pvt.Ltd(Supra) in para-81 & 83 as under: "81. Insofar as the case of M/s Mold Tek Technologies Ltd is concerned, it is observed from the annual report of the said company for the FY: 2007-08 placed at pp.139 to 151 of the paper book that he said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further, information of M/s Mold Tek Technologies Ltd available ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hile computing the operating profit. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AE are compared with the functional profile of M/s eClerx Services(P)Ltd and Mold-Tek Technologies Ltd. it is difficult to find out any relatively equal degree of comparability and the said entities 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 directions of the DRP." Following the earlier years of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparables. 23. Spanco Limited. 23.1 The learned Authorised Representative of the assessee has submitted that this company fails the ITES filter of 75% as it earns only 8.21% from ITES segment. He has further contended that the employee cost of this company is very low at 7.16% and there is an extra-ordinary event of demerger of this division during the year under consideration. The learned A.R. has pointed out that the co-ordinate bench of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r hand, the learned Departmental Representative has submitted that this company is in the ITES segment and it is irrelevant whether the ITES provided in the voice out bound and voice in bound in the data sector. The incident of indictment of Director took place more than two decades ago therefore, the same cannot be the relevant factor for the Assessment Year under consideration. He has relied upon the orders of the authorities below. 24.3 We have considered the rival submissions as well as the relevant material on record. The assessee has raised objection regarding the functional comparability of this company as well as some extra ordinary event of merger and involvement of Director in some fraud activity. As far as the indictment of the Director is concerned, we are of the view that when the said incident was not in relation to the business of this Company but some other independent business of the Director and that too in long past therefore the alleged involvement of Director in such activity would not be a relevant factor to doubt the credibility of financials of this company for the year under consideration. Even otherwise apart from the allegation on the Director for some f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be moretha425% of the total expenses, it cannot he said that the said filter is not applicable to ITES segment, where comparably less employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employee cost filter to the IT1ES sector is also justified. In view of the same, we direct the TPO to apply the employee cost filter to exclude companies with employee cost of less than 25% from the list of comparables for the computation of ALP. " Similar view has been taken by the Tribunal in the other decisions. We further note that the Hon'ble High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has also decided this issue in favour of the assessee. Accordingly, we direct the AO to exclude this compan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....horised Representative has also pointed out that this company provides software development services and the financial details obtained under Section 133(6) of the Act has been used by the TPO without sharing with the assessee to reply/counter the same. Having considered the peculiar facts as pointed out by the learned Authorised Representative, we find that if these facts are found to be correct on verification then this company shall be excluded from the list of comparables. Accordingly we set aside this issue of comparability of this company to the record of the Assessing Officer / TPO for verification of the facts as pointed out before us as well as to provide the information collected by the TPO under Section 133(6) and then decide the comparability of this company after considering the reply of the assessee. 28. Since we have directed the A.O./TPO to exclude certain comparables and also re-examine certain issues therefore the ALP has to be recomputed after exclusion of the companies from the list of comparables as directed by us as well as re-examination of the comparability of certain companies. Needless to say that the benefit of the proviso to Section 92C also be consider....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assxcessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression "total turnover" has not been defined at all by Parliament for the purposes of s.10A. However, the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression "export turnover" cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament....