AI Drafter 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2016 (1) TMI 1436
X X X X Extracts X X X X
X X X X Extracts X X X X
....re than Rs. 200 crores in the absence of Turnover criterion prescribed in Rule lOB of Income Tax Rules and also there being no correlation between turnover and profit margin. 3. The Hon'ble DRP erred in holding that foreign exchange loss/ gain is operating in nature when, such loss/gain though attributable to the operating activity is not derived from the operating activity. 4. The Hon'bie DRP erred in law as well as facts in directing the TPO to consider the foreign exchange fluctuation as operating in nature while determining the margin in the case of the taxpayer by applying the same principles as emerging from the orders of ITAT in the case of Sap Labs India Pvt. Ltd. 5 Whether the Id, DRP is justified in directing the TPO to grant risk adjustment without advising any reasonable accurate method in the absence of which the TPC had not provided the same. 03. Grounds 1 and 2 assails exclusion of M/s. E-clerk Services Ltd and Infosys BPO Ltd, from the list of comparables selected by the TPO, for bench marking the pricing of the international transactions of the assessee with the Associated Enterprise ('AE' in short). TPO had applied turnover fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....out by the TPO as under : SL.NO NAME PLI 1 ACCENTIA TECHNOLOGIES LTD 43.06% 2 ACROPETAL TECHNOLOGIES LTD (SEG.) 22.27% 3 E.CLERX SERVICES LTD 55.97% 4 FORTUNE INFOTECH I,TD 22.80% 5 ICRA ONLINE LTD(SEG) 43.39% 6 INFORMED TECHNOLOGIES INDIA LTD 26.15% 7 INFOSYS BPO 31.23% 8 COSMIC GLOBAL LTD 14.97% 9 SUNDARAM BUSINESS SERVICES LTD -12.31% 10 JEEVAN SCIENTIFIC TECHNOLOGY LTD.(SEG.) 21.05% AVERAGE 26.86% 07. TPO thereafter worked out the working capital adjustment component of comparables at 0.32%. ALP worked out by the TPO and recommendation made by him u/s.92CA is as under : Arm's Length Mean Margin on cost 26.86% Less: Working Capital Adjustment 0.23% (As per Annex. C) Adjusted margin 26.63% Operating Cost 15,48,06,930 Arms Length Price (ALP) 19,60,32,015 126.63% of Operating Cost) Price Received 16,64,84,587 Shortfall being Adjustment u/s 92CA: 2,95,47,428 Operating cost considered by the TPO was excluding donations and loss in current investments. 08. When the AO issued a draft assessment order proposing an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....obal Services P Ltd v. ITO [(2013) 33 taxmann.com 618] • M/s. e4e Business Solutions India P Ltd v. DCIT TS -262 - ITAT - 2015 (Bang) 12. We have perused the orders and heard the rival contentions. In so far as application of turnover filter is concerned, in the case of M/s. Pentair Water India P. Ltd, Hon'ble Bombay High Court had confirmed the order of the Tribunal, directing exclusion of HCL Comnet Systems & Services Ltd, Infosys BPO Ltd, and Wipro Ltd, from the list of comparables for a reason that its turnover was much higher than that of the tested party. Observations of Hon'ble Bombay High Court when the matter was carried in appeal before it by the Revenue in Tax Appeal No.18/2015, are reproduced hereunder : "5. On perusal of the impugned Order passed by the Tribunal dated 23.05.2014, we find that the Tribunal has recorded the reasons for not accepting the said three companies are comparable by stating as follows (1) HCL Comnet Systems & Services Ltd :- We find force in the submission of the Id. AR that this company cannot be a comparable as the turnover of this company is 260.18 crores while in the case of the Assessee, the turno....
X X X X Extracts X X X X
X X X X Extracts X X X X
....many words. The view taken by Mumbai bench of this Tribunal in the case of Capgemini India P. Ltd (supra), relied on by the Ld. DR, has to be seen based on the above observations of the Hon'ble Bombay High Court. Given this situation, we are of the opinion that the filters set out by the coordinate bench in the case of Genisys Integrating Systems (India) P. Ltd (supra), based on Dun and Bradstreets analysis can be followed. It was held as under in the said case by the coordinate bench in para 7 to 8.3 of its order : 7. As regards the filters selected by the assessee in making the transfer pricing study, the learned counsel for the assessee submitted that the assessee has adopted a turnover range of Rs. 1.00 crore at the lower end and Rs. 200 Crores at the higher end while choosing the comparables. He submitted that this adoption of upper limit of Rs. 200 Crores is based on the Dun and Bradstreet's analysis which has classified the software companies into the following categories; 1. Large size firms (Rs. 20,000 Mn) 2. Medium size firms (Rs. 2,000-20,000 Mn) 3. Small size firms (Rs. 2,000 Mn) &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....based on the turnover as follows; 1. Greater than USD I Billion (approximately 5,0000 crores) 2. Between USD 100 Million to USD 1 Billion(Rs. 500 crores to Rs. 5,OOO crores) and 3. Others having less than USD 100 Million (Rs. 500 croes) Thus. the learned counsel for the assessee submitted that an appropriate turnover range should be applied in selecting a comparable of uncontrolled companies and the assessee has accordingly, applied the turnover range of Rs. 1.00 crore to 200 crores based on Dun and Bradstreet's analysis. He submitted that in the alternative, the categories recognized by 1 NASSCOM may also be applied in selecting comparables. 8.3 The learned DR rebutted this argument and submitted that the Act or Rules do not provide for the turnover filter. He submitted that as rightly pointed out by the TPO in the case of service sector, the size of the company does not matter because, the infrastructure layout is very less and it will not affect the profit ratio in any way. He drew our attention to the particular portion of TPO's order wherein the TPO has t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ade if such adjustments could be made with reasonable accuracy. For the purpose of this study we have not attempted the risk adjustments as the price is at arms length. In light of the above, it is justified that there is no requirement of further adjustment to the operating income of Zyme India and the price charged is at arms length. 19. TPO also was of the opinion that an adjustment or risk factor could be made only if a reasonable accurate calculation could be made. His observations, with regard to risk adjustment read as follows : Risk adjustment involves two vital preconditions. They are that difference in risk level exists between the tested party and the uncontrolled comparables; and that it is possible to calculate in terms of numbers the differences in risk so that adjustment can be made. But in case of the taxpayer, both the prerequisites are missing. Neither the difference in risk level of the tested party and uncontrolled comparables has been established nor is it possible to convert the difference in risk level, if there is any, into numbers. If there is any difference, for a moment academically speaking, it res....
X X X X Extracts X X X X
X X X X Extracts X X X X
....should be made. Therefore no risk adjustment is allowed. However TPO is not against adjustment if reasonable accurate adjustment can be made and there is a method to do so, as is evident in respect of working capital adjustment which the TPO has given, if it is possible, In the light of above discussion, no adjustment on account of risk is allowed to the taxpayer. 20. DRP on the other hand, on assessee's application, held as under : 7.8.3 The objections of the tax payer have been considered. The decision of the jurisdictional ITAT which is binding on the Panel was examined. It is seen that the Hon'ble Bangalore ITAT in case of Intellinet Technologies India Pvt Ltd. vs ITO (ITA no. 1237/Bang/2007) rejected the tax department's argument that a single customer risk borne by the tax payer in its status of a captive service provider was equivalent to the marketing and technical risk attached to the comparables. The Hon'ble ITAT held that the risk of having a, single customer in anticipated risk which may or may not happen unlike the marketing and technical risks which have to be contemporaneously dealt with by the comparables. The ITAT....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rceived or hypothetical risk can never be factored while working out the Profit Level Indicator. In the circumstances, we are of the opinion that DRP ought not have directed the TPO to consider the risk adjustment at 1%. We find merit in this ground taken by the Revenue. Ground 5 of the Revenue is allowed. 24. Now we take up appeal of the assessee. Ld. Counsel for the Assessee, submitted at the outset that out of the various grounds raised by the assessee on TP matters only the grounds relating to selection of comparables, exclusion of rental income and rental expenditure while calculating the PLI and providing working capital adjustment need be considered. In other words according to him, out of grounds 1 to 9, he was pressing grounds 7(c), 7(d), 7(e), 7(h) and 7(i) only. 25. Ld. AR submitted that Accentia Technologies Ltd, selected by the TPO was functionally dissimilar to the assessee. According to him assessee was admittedly an ITES provider. Relying on the decision of Delhi bench of the Tribunal in the case of Rampgreen Solutions (P) Ltd v. DCIT [ITA.1066/Del/2015, dt.04.11.2015]. Ld. AR submitted that Accentia Technologies Ltd, was considered to be an improper comparabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as under: "10.1.2 . We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report of this company, a copy of which has been placed .on page 435 onwards of the paper book. Notes to Accounts of this company, which have been placed on page 443 of the paper book, indicate about the amalgamation or Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon'ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. D'Cl'T (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 bolstered 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. In view of the fact that there was merger of Asscent Infoserve Pvt. Ltd. with Accentia Technologies Ltd. by way of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore of the opinion that the above directions of the Tribunal would squarely apply here also. We direct the lower authorities to exclude Accentia Technologies Ltd, from the list of comparables. 29. Continuing his argument for exclusion, Ld. AR submitted that Acropetal Technologies Ltd (seg) had substantial income from Engineering Design Service ('EDS' in short). As per the Ld. AR, EDS done by Acropetal Technologies Ltd, took it out of the list of comparables. Ld. AR submitted that EDS was high-end services within the BPO which required high skills whereas assessee here was doing routine low end analytical work. Reliance was placed on the decision of coordinate bench in the case of Symphony Marketing Solutions India P. Ltd v. ITO [(2013) 27 ITR (Trib) 753] and also that of capital IQ Information Systems (India) P. Ltd v. ACIT and vice versa in ITA.124/Hyd/2014 & ITR 170/Hyd/2014, dt.31.07.2014 of the Hyderabad bench. According to him, the financial results of the above company for the previous year relevant to the impugned assessment year also show that it had significant revenue from EDS. 30. Per contra Ld. DR submitted that segmental results were available, in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of which has been placed before us. Its income from EDS came to Rs. 46,39,36,810/-. Its income from ITES came to Rs. 60,10,62,523/-. Its income from health-care services came to Rs. 32,98,709/-. No doubt against total revenue of Rs. 1,06,82,90,204/- about 43% alone came from EDS. It has also given the segmental revenue for its preceding financial year viz., year ending 31.03.2009. Income for that year from EDS was Rs. 32,14,94,320/- and ITES was Rs. 57,15,45,299/- totalling to Rs. 89,30,39,529/-. Proportion of revenue from EDS was lower at 36% in F. Y ending 31.03.2009 when compared to 43% for year ending 31.03.2010. Coordinate bench in the case of capital IQ Information Systems (India) P. Ltd, (supra) had directed its exclusion for A.Y. 2009-10, when its EDS revenue was low. However, in our opinion when segmental results were available, where expenditure have also been allocated, it would be improper to exclude the company only for a reason that it was into high-end services. Within a given segment there cannot be further classification based on high-end and low-end services. In taking this view we are fortified by the Special Bench decision in the case of Maersk Global Centres (I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d export sales which were less than 75% of its total revenues. The question whether an assessee can seek exclusion of a comparable which was in its own list, in our opinion, stands answered by the Special Bench in the case of DCIT v. Quark Systems P. Ltd (supra). Relevant para of the order reads as under : 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, we deem it fit and proper to remit the matter to the file of the AO for consideration of claim of the taxpayer and make a de novo adjudication of the ALP after providing reasonable opportunity of being heard to the assessee. We order accordingly. 38. Accordingly we....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng capital adjustment though directed by the TPO to be given in the order passed u/s.92CA of the Act, was not given by the AO, when he passed the assessment order. Vis-a-vis working capital adjustment that was required to be made, observations of the TPO were as under : The Balance payables not considered in calculation of net working capital of the tested party is due to the fact that they are invested either in fixed assets or in the current assets having no cost, wherein Transfer Pricing those receivables are taken into consideration that reduce the working capital requirement and accordingly the cost of working capital that must be recovered from the customers by factoring in the sales price. Any excessive advance which is received from the Holding company by the WOS cannot be factored in reducing the sales price and less sales price cannot be defended on the ground that due to negative cost of capital it is managing to have arm's length profit margin even if it is having low profit margin oil activity as discussed in the example given above. In a related party scenario, the entire payables/advances cannot be considered in working capital adjustment as in any busin....