TaxTMI 
TaxTMI 
2016 (6) TMI 1374
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....les of natural justice. Without prejudice to the above, the 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 th....
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....w in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies. 3 Erroneous data used by the TPO a) The AO/TPO has erred 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 thr....
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....act basis to overseas Siemens Group companies. The assessee has reported the financial results as well as international transactions which are reproduced in the order under Section 92CA of the Act by the Assessing Officer / Transfer Pricing Officer (in short 'TPO') in paras 2.4 and 2.5 as under : Description IT Enabled Services Operating Revenues 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 f....
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....ssessee challenged the action of the TPO/A.O by filing the objections before the DRP regarding the functional dissimilarity of the various companies selected by the TPO as well as erroneous computation of working capital adjustment. The DRP has rejected the objections raised by the assessee regarding functional dissimilarity of the companies selected by the TPO. However, the DRP has directed the TPO/A.O to consider the correct working capital adjustment. 4.1 Before us, the assessee is seeking exclusion of 16 companies out of the 20 companies selected by the TPO. 4.2 The assessee has also filed an additional ground vide application dt. 3.5.2016. The additional grounds raised by the assessee are as under : 1. " The learned TPO erred on facts in selecting Spanco Limited 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 function....
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....e assessee has taken a particular company as comparable in the TP study, the assessee is entitled to point out before this Tribunal that the said enterprise has wrongly been taken as comparable. The learned Authorised Representative has contended that the TPO has not applied the employee cost filter and therefore some of the companies selected by the TPO failed the test of employee cost factor of 25%. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of M/s. Google India Ltd. 29 taxman.com 412 and submitted that the Tribunal has held that the employee cost filtor of 25% should be applied in the ITES segment also. As regards the RPT filter of 15%, the learned Authorised Representative has submitted that in a series of decisions the Tribunal has taken a consistent 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 s....
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....n proceedings were initiated or even at appellate stage. Besides, Revenue authorities, including TPO were required to apply statutory provisions and consider for purposes of comparison functions, assets and risks (turnover), profit and technology employed by the tested party and other enterprises taken as comparable. Statutory duty is cast on them to undertake above exercise. This has not been done in this case. We would only say that prima facie, as per the material, to which reference has been drawn by Shri Aggarwal, Datamatics does not appear to be comparable. Even if the taxpayer or its counsel had taken Datamatics as comparable in its T.P. audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. 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 asset....
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....n exceptional case therefore in our view the extreme limit of 25% of RPT filter cannot be applied in this case. In view of the above facts, we admit the additional grounds raised by the assessee regarding the RPT filter at 15%. 9.1 The next additional ground raised by the assessee is regarding the application of employee cost filter at 25%. 9.2 Having considered the rival submissions as well as the relevant material on record, we find that neither the assessee nor the TPO applied any employee cost filter while selecting the comparable companies. The learned Authorised Representative of the assessee has placed reliance on the decision of the co-ordinate bench in the case of Google India Ltd. Vs. DCIT (supra). However, we find that in the said case, the TPO determined the ALP in respect of two segments i.e. software development services and 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 consi....
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....ted at 1.61% employee cost. Principally, we are of the view that such a low employee cost shows a different business model and it appears that these companies are outsourcing their business however since the TPO has not examined this issue therefore we set aside this issue to the record of the TPO/A.O for limited purpose of verification of the reasons for such a low employee cost and if it is found that low employee cost is due to a different business model then these companies shall be excluded from the list of comparables. 12. Accentia Technologies Limited : The learned Authorised Representative of the assessee has submitted that this company is functionally not comparable with the assessee as this company is engaged in the activity of medical transcription, billing and coding and software development and implementation. 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.....
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....i has extended the holding of the AGM to facilitate the consolidation of accounts." There is no dispute that amalgamation, merger or acquisition is considered as extra-ordinary event for the purpose of considering a particular entity as comparable. The co-ordinate bench of this Tribunal in the case of Sony Mobile Communications International AB (India Branch Office) (supra) in para 7.3 has observed as under : " 7.3. Significantly, page 23 of the Annual report of this company divulges that: 'During the year 2008- 09, the company has acquired Citigroup Inc.'s (Citi) 96.26% interest in TCS e-Serve Ltd. (formerly known as Citigroup Global Services Ltd.), the India-based capital BPO, for a total consideration of USD 504.54 million.' This indicates that this company made acquisition during the year in question which is an extraordinary financial event. The Mumbai Bench of the Tribunal in Petro Araldite (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 Cien....
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....presentative has pointed out that this company is following the method of revenue recognition from software development segment when the project is completed or software is finally developed and invoice to the client whereas the expenditure is recognised as and when the expenditure is incurred towards development of software. Thus the learned Authorised Representative has submitted that this company is not functionally comparable with the assessee. In support of his contention, he has relied upon the following decisions : i. AOL online India Pvt. Ltd. Vs. DCIT (IT(TP)A No.1036/Bang/2011 Dt.18.3.2016. ii. First Advantage Offshore Services Pvt. Ltd. Vs. DCIT ( IT(TP)A No.1086/Bang/2011 dt.30.4.2013) 15.3 On the other hand, the learned Departmental Representative has submitted that has the TPO obtained the specific information under Section 133(6) and therefore the TPO has considered only data cleansing segment which is in the nature 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 Tri....
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....), therefore we concur with our earlier view and accordingly direct the A.O/TPO to exclude this company from the list of comparables. 16. E-Clerx Services Ltd. 16.1 The learned Authorised Representative of the assessee has submitted that this company provides specialised services like data analytics, operations management and audits & reconciliation services which cannot be compared with a BPO or information technology of off-shoring company. This company has also launched an IPO in Dec., 2007 and had business promotion expenses to the extent of 10.52%. Thus this company is functionally not comparable with the assessee. In support of his contention, he has relied upon the following decisions : I. Flextronics Technologies India (P.) Ltd. Vs. DCIT (2016) 65 taxmann.com 258 (Bangalore - Trib.) II. Maersk Global Centres (India) Pvt. Ltd. Vs. ACIT (2014) 43 taxmann.com 100 (Mumbai-Trib.) (SB). 16.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 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 com....
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....ales 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 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, ....
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....ive has relied upon the authorities below and submitted that all the objections raised by the assessee have already been dealt with by the authorities below. 17.3 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 the case of M/s. Flextronics Technologies India P. Ltd. (supra) in para 8.2.1 as under : " 8.2.1 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that HCL Comnet System & Services Ltd.(seg.) is following its accounting year from 1st July to 30th June. For the year under consideration, the financial accounts are prepared for the year ended on 30th June, 2007. Therefore, it is clear that for the financial year under consideration, only partial data are available from 1st July 2006 to 31st March 2007. At the outset, we note that an identical issue has been considered by this Tribunal in a series of decisions as relied upon by the assessee and referred (supra). In the case of Sandstone Capital Advisors Pvt. Ltd. vs. ACIT (supra), the Tribunal vide its order dated 6/2/2013 held in para.10 t....
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....TA No 2012. Vide its order dated 06.02.2013, the Tribunal, after considering the prescription of Rule IOB(4) and an another case the Tribunal in Honeywell Automation India Lid, has mandatory for the purposes of comparing the data of m wpm transaction with an international transaction that the - to the financial year ending similar to that of the assessee The ld.DR contended that since the case of CMC Limited financial year ending vis-a-vis that of the assessee, have been excluded. No contrary precedent was brought to our notice by the learned AR. In fact, the argument advanced by this regard was not seriously challenged by the id. AR. following the precedent, we hold that this case should from the list of comparables." Accordingly, by following series of decisions of the Tribunal on the point, we hold that this company cannot be treated as a good comparable for the purpose of determining the ALP. Hence, the AO/TPO is directed to exclude this company from the list of comparable for the purpose of determination of ALP." No contrary view of the decision has been brought to our notice. Accordingly, following the earlier year decision of this Tribunal we direct the A.O/TPO t....
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....r advantages of brand value intangibles and Intellectual Property Rights, this company cannot be compared with the assessee being captive BPO. He has relied upon the decision of this Tribunal in the case of Flextronics Technologies India P. Ltd. (supra). 19.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 19.3 Having considered the rival submissions as well as the relevant material on record, we note that the functional comparability of this company has been examined by this Tribunal in a series of decisions. The Hon'ble Delhi High Court in the case of Agnity India Ltd (supra) has upheld the findings of the Tribunal that this company cannot be compared with captive services provider. In the case of M/s. Flextronics Technologies India Pvt. Ltd. (supra), the Tribunal has held in para 8.3.1 as under : " 8.3.1 We have considered the rival submissions as well as relevant material on record. We note that in para 16.2.15 of the Annual Report of this company, it has been reported that there was amalgamation w.e.f 1/4/2008. The relevant part of the information provided in the Annual Report reads as under: ....
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.... different nature of activity to that of the assessee provided to its AE. Accordingly, we direct the AO/TPO to exclude this company from the list of comparables." Thus it is clear that this company is having revenue from software products and also enjoy the benefit of huge intangible asset apart from brand value and leader in the market. Accordingly, by following the earlier order of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparables. 20. I-Services India Ltd. 20.1 The learned Authorised Representative of the assessee has submitted that this company is engaged in software development services and development of software products. The data of this company are not available in the public domain. The TPO has used the information obtained under Section 133(6) of the Act without sharing the same with the assessee. Thus the learned Authorised Representative has submitted that this company cannot be considered as good comparable of the assessee. He has relied upon the decision of the Mumbai Benches of this Tribunal in the case of Wills Processing Services (I) Pvt. Ltd. Vs. DCIT (2013) 30 taxmann.com 350 (Mumbai-Trib.). 20.2 On the other ....
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....asis of the information furnished by this company to the Assessing Officer in response to notice u/s.133(6) of the Act. We have considered the submissions and are of the view that the same deserves to be accepted. The TPO / Assessing Officer will obtain the annual report of the company for F. Y. 2006-07 and also furnish the assessee copies of the same together with the information obtained by the TPO pursuant to issue of notice u/s.133(6) of the Act. The assessee will thereafter furnish its reply as to why this company should not be considered as a comparable company. The TPO / Assessing Officer will thereafter decide the question of considering this company as a comparable company after affording opportunity of being heard to the assessee." Thus the Tribunal has observed that the TPO/A.O has to furnish the copies of the information to the assessee and thereafter the assessee has to furnish its reply as to why this company should not be considered as a comparable company. In view of the order of the co-ordinate bench, we set aside this issue to the record of the A.O./TPO for deciding the comparability of the same after considering the reply of the assessee on furnishing of....
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....has impacted the financials of this company during the year under consideration. Therefore, we do not find any substance in the objections raised by the assessee. As regards the extra-ordinary event of merger and functional dissimilarity, it is pertinent to note that this issue has not been examined by the authorities below and particularly the fact of the merger during the year. Accordingly, we set aside the examination of the fact of extra-ordinary event of merger as well as the functional dissimilarity to the record of the A.O/TPO for fresh consideration. 22. Mold-tek Technologies Ltd. 22.1 The learned Authorised Representative of the assessee has submitted that this company is engaged in engineering design services for construction of building by using design tools like CAD / CAM, Stadd Pro by employing highly skilled software engineers. This company is also having abnormal growth of 204% as well as abnormal profit of 113.49%. This company also fails the ITES filter as it earns the revenue of 12.39% from this segment. Further this company is having low employee cost of 7.59% of total sales therefore it cannot be compared with the assessee. He has relied upon the decision ....
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....olved in providing high end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low end services. It may be pertinent to note here that the financial year 2007-08 was a unique ear for Mold Tek Tech.Ltd. as the scheme of arrangement involving amalgamation between Tekmen Tool (P)Ltd and Mold Tek Tech.Ltd. and demerger between Mold Tek Technologies Ltd., simultaneously, was sanctioned by the Hon'ble Andhra Pradesh High Court by 15th July, 2008 with the appointed date for amalgamation and demerger being as October, 2007 and April 2007 respectively. It is also pertinent to note that while working out the operating margin of the said company provision for derivative loss of Rs. 6.43 Crores made by Mold Tek Tech.Ltd. was excluded by the AO treating the same as non-operating expenses whereas in the case of Rusabh Diamonds Vs Asst.CIT(reported at (2013) 155 TTJ (Mum.) 386 (2013) 89 DTR (Mum.)(Trib.) 57 Ed) it was held by the Division Bench of this Tribunal that the gain or loss arising from the forward contract entered for the purpose of foreign c....
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.... assessee is also having BPO services and employee cost is very less when compared to similar businesses. We are of the opinionthat this comparable canbe excluded from the list of comparables." Since the employee cost is only 7.16% and further the revenue form ITES is only 8.21% therefore by any yardstick this company cannot be considered as functionally comparable having a different business model of low employee cost and low revenue from the ITES segment. Accordingly, we direct the A.O./TPO to verify the alleged fact and if it is found correct, this company shall be excluded from the list of comparables. 24. Triton Corporation Limited : 24.1 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 Maple E- Solutions Ltd. 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 up....
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....ed that this company outsource to out vendors. He has relied upon the decision of the co-ordinate bench of this Tribunal in the case of Flextronics Technologies India P. Ltd. (supra). 25.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 25.3 We have considered the rival submissions as well as the relevant material on record. We note that the objections raised by the assessee before us have been considered by this Tribunal in the case of Flextronics Technologies India P. Ltd. (supra) in para 8.7.1 as under : " 8.7.1 We have considered the rival submissions as well as relevant material on record. We note that the comparability of this company with ITES providing service provider has been examined by the Tribunal in various cases as relied upon by the learned AR of the assessee. In the case of First Advantage Offshore Services Pvt. Ltd. (supra) it has been held in para.35 as under: "35. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee's own case for the assessment year 2006-07. This Tribuna....
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....his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of Flextronics Technologies India P. Ltd. (supra). 26.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 26.3 Having considered the rival submissions as well as relevant material on record, we note that the comparability of this company has been examined by this Tribunal in a series of decisions. In the case of Flextronics Technologies India P. Ltd. (supra), the Tribunal has held in para 8.8.1 as under : " 8.8.1 We have considered the rival submissions and relevant material on record. At the outset, we note that an identical issue of comparability of this company has been examined by this Tribunal in the case of GXS India Technology Centre Pvt.Ltd in IT(TP)A No.1444(Bang) 2012 dated 31/07/2015 wherein it has been held in paras.17.2 and 17.3 as under: "17.2 We have considered the rival submissions and relevant material on record. We note that in case of 3DPLM Software Solutions Ltd, (Supra), this Tribunal has considered the functional comparability of this company in para-12.4.1 and 12.4.2 as unde....
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.... above comes to around 17.85% which is within tolerance range of +/-5%. We direct the TPO to consider the claim of the assessee of granting the benefit of tolerance range +/-5% as raised in ground No.3 of the concise grounds." Following the orders of earlier years of this Tribunal, we direct the A.O/TPO to exclude this company from the list of comparables. 27. Accurate Data Systems Ltd. 27.1 The learned Authorised Representative of the assessee has submitted that the employee cost is only 1.16% which shows that this company outsources business to outside vendors. and also provides software development services and further the complete data of this company are not available in the public domain. The TPO has used the information obtained under Section 133(6) without sharing with the assessee. He has relied upon the decision of the co-ordinate bench of this Tribunal in the case of AOL Online India Pvt. Ltd. (supra). 27.2 On the other hand, the learned Departmental Representative has relied upon the orders of authorities below. 27.3 We have considered the rival submissions as well as the relevant material on record. The assessee has pointed out certain crucial facts of l....
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....ator. The relevant finding of the Hon'ble jurisdictional High Court reads as follows:- "...........Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define 'total turnover', the word 'total turnover' falls for interpretation by this Court; ........In section 10A, not only the word 'total turnover' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of t....
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....bunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same". 30.2 The Hon'ble Mumbai High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd. 330 ITR 175, in identical circumstances, held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced from the total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A of the Act. The relevant finding of the Hon'ble Mumbai High Court reads as follows:- "The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The ....