TaxTMI 
TaxTMI 
2018 (8) TMI 1970
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....he transfer pricing issue has mainly challenged the inclusion and exclusion of various comparable companies. Besides this assessee has also raised, corporate tax issue on denial of deduction u/s 10A of Rs. 58,93,05,999/- in respect of AEGSC (STP Unit). Besides this assessee has also filed additional ground raising that AO has erred in not granting full credit of tax deducted at source to the assessee as claimed in the return of income. 3. We will first take up the transfer pricing adjustment made in the ITES service segment by the TPO. The brief facts are that the assessee i.e., American Express India Pvt. Ltd. (AEIPL) is 100% subsidiary of American Express International Inc. USA. It undertakes data management, information analysis and control activities for export to various American Express affiliates worldwide. The services are exported to the AEIPL customers mainly through telecom link whereby it receives input in the form of data in electronic form which is subsequently processed. It is compensated for services rendered with a cost-plus mark basis, that is, equal to operating expenses incurred plus an amount equal to 20% of operating expenses. The assessee in transfer prici....
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.... on: - Sale of air tickets to customers and payments to airlines: - Payment to service establishments for purchases made through American Express Cards; and - Booking of hotels for customers and payments to hotels. - Customers Bank Data: These include data on treasury and other transactions done by American Express card members. b) Processing of inputs (Data management, Information Analysis and Control): The company uses the raw data as input and carries out a series of processes (i.e. reorganization, analysis and transformation and conversion of raw data) as per requirements of its customers to generate customized output. c) Output * The Company's output includes the following items processed and prepared as per the customers' specifications: * Ready to use business reports and computations: * Financial statements such as balance sheets, profit and loss accounts, ledgers, trial balances, accounts payable analysis, accounts receivable analysis, and fixed assets registers; * Bank account control reports and bank transaction processing; * Payroll processing and reports....
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.... operating cost. The assessee's PLI was arrived at 19.06%. After carrying out detailed search process and analysis, the assessee shortlisted nine comparable companies as noted by the TPO in his order, namely: - S.No. Name of the Company Remarks of the TPO 1 Aditya Birla Minacs Worldwide Limited This is a suitable comparable 2. Allsec Technologies Limited Diminishing sales for the last three years. The export revenues are less than 75% of total turnover, hence not a suitable comparable 3. C G-VAK Software & Exports Ltd. Significant income of the company is from software development. The income from BPO operations is only Rs. 86 lakhs. This will not be a good comparable. 4. Cepha Imaging Private Ltd. The annual report of the company has been perused. The Company is in the business of E-Publishing Services. E-publishing services include Typesetting, Composition, Art work, Proof reading, project management, XML conversions and multimedia services provided to publishers of books and journals. This is quite different form your functional profile that has been described earlier. That apart, this company cannot be classified as an ITES entity si....
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.... Operating Expenditure (excluding reimbursement) 6566523449 Reimbursement received 15340901 Operating income (including reimbursement) 7870790548 Operating income (including reimbursement) 6581864350 Operating Profit 1288926198 OP /OC 19.58% Computation of arm's length price Operating Cost 65428557 Arm's Length Margin (%) 29.91% Arm's Length Price (ALP) 84998238 Price received 70437323 Shortfall being adjustment u/s 92CA 14,560,915 9. Now before us Ld. Counsel for the assessee had challenged inclusion of three comparable companies and exclusion of six comparables companies by the TPO. These comparables are discussed in brief herein below: i) E-Clerx Services Ltd. (OP/OC before working capital adjustment 53.23%) (included by the TPO): 10. Before us the Ld. Counsel, submitted that this company cannot be held to be comparable, because this company was into high end KPO services which provides data analytics, operation and management and audit reconciliation services. It is engaged in end to end support through the trade lifecycle, including trade confirmation, settlement,....
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....o before us. The functions carried out by the assessee for the export of data process and back of its support services has already been highlighted above, which is, the raw data comprised of unprocessed or semi-processed data relating to accounting, financial and commercial information pertaining to the business of American Express locations worldwide is received from various electronics means; and after receiving of such data the assessee carries out various kind of processing of output services as enlisted in the earlier part of the order, like preparation of various kinds of business, accounting and financial reports. On perusal of such functions, it is seen that some of the processing like ready to use business reports and computation; financial statement such as balance sheet, profit and loss accounts, ledger, trial balances, accounts payable analysis, accounts receivable analysis, bank account control reports etc. cannot said to be a simple lower ITES services provider. Though, other different services may be reckoned to be a routine ITES services, but not the entire functions. Before us, Ld. Counsel has strongly relied upon the decision of the Tribunal for A.Y. 2007-08, wher....
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....illion has been spent on 'contract services' apart from own employee cost of Rs. 577.31 million. This signifies that substantial part of its services is being outsourced. Such an outsourcing of services is definitely distinguishable from assessee. Moreover, we find that in A.Y. 2007-08, E Clerx has been held to be non-comparable with the assessee following the judgment of Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. (377 ITR 533). The High Court held that, it is high-end KPO and most of its work was outsourced to other service providers which affect the profitability. Thus, following the Jurisdictional High Court judgment, we hold that E Clerx Services Ltd. cannot be held as comparable to assessee. ii) Vishal Information Technologies Ltd.: - 14. This company too has been held to be non-comparable with the assessee by the Tribunal in A.Y. 2007-08. Moreover, it is an undisputed fact that this company operates on outsourcing model as more than 90% of employees have been outsourced. Before us, Ld. Counsel submitted not only it has a different business model of outsourcing activities, but it also functionally different; and in assessee's own ca....
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....nal profile is concerned, ICRA Online carries out almost similar functioning as that of the assessee, because this is also into financial and analytical services accounting and finance etc., and the assessee company is also into the preparation of business reports, computation, preparation of financial statements like balance sheet, profit and loss account, bank account control reports, account reconciliation and similar kind of services. These services cannot be said to be simple low end ITES services. The TPO has held that the ICRA Online provides financial and analytical services and support to the clients in the areas of data extraction, aggregation, electronic conversion of financial statement, validation and analysis accounting and finance, search and analytic services. He submitted that, though these services have been classified as KPO services, but in the case of the assessee also, from the functions performed it can be seen that it receives raw data / raw information in the electronic form for which assessee carries out detailed process and preparation ready to use business reports and computation, financial statements such as balance sheet profit and loss account, ledger....
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....creased in financial year 200809 from the previous year, hence it cannot be held that it has diminishing revenue trend. Moreover, the export income to service income ratio is 74.45% in the financial year 2008-09, which goes to show that this company was primarily engaged in export activity. He further pointed out that this comparable has been included by the TPO in assessee's own case in the A.Y.s 2005-06 and 2006-07. Ld. DR on the other hand submitted that there has been loss for two years in the case of Allsec Technologies Ltd. therefore it is a persistent loss making company which needs to be excluded. 21. After considering the rival submissions and on perusal of the relevant record as referred to at the time of hearing, we find that the main reason for exclusion by the TPO was that, this company has diminishing revenue for the last three years and export revenue is less than 75% of the total turnover. However, on perusal of the annual report, we find that operating revenue has increased in the financial year 2008-09 from the previous year and hence such a contention of the TPO is contrary to the facts and records. In so far as the export filter of 75% applied by the TPO, we ....
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...., 2009 to 31st March, 2009 are available, then there cannot be any difficulty to work out the proportionate profit margin. This issue has been discussed in detail by this Tribunal in the case of Cadence Design Systems (India) Ltd. (supra) wherein it has been observed as under :- "19.2 We have heard rival submissions and also perused the relevant finding given in the impugned order. This comparable company has been rejected not on the ground of functionality albeit on the ground that it is following the financial year accounting from January to December (i.e., calendar year). Though a comparable company following a different financial year may not be generally taken for comparability analysis, however, if financial data is available for all the quarters including January to March and it is otherwise possible to determine the value of the transaction as well as the profitability during the corresponding period, then it suffices the comparability criteria. Because, ultimately the core point in comparability analysis is to benchmark the margin of a given period of a comparable uncontrolled transaction with controlled transaction. If the financials of the corresponding period i....
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....ding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.3.2009 and 31.3.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.3.2008 are excluded and if the results for the quarter ending 31.3.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.3.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- "10B(4) The data to be used in analysing the comparability of an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analysing t....
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....lly affecting the cost or margin then only comparability analysis fails in such cases. Further, under the TNMM, the comparability of an international transaction with an uncontrolled transaction is to be seen with reference to functions performed after taking into assets employed and the risk assumed. While reckoning the comparability analysis under TNMM, the main emphasis is into net margin realized on the transactions undertaken and not the price of the product or services. The transfer pricing rules under Rule 10B and 10C also contemplate for eliminating the material effects and to make reasonably accurate adjustment for eliminating the differences on account of such material effects. Mere circumstance of a company which otherwise confirm to the comparability analysis in terms of Rule 10B(2) and (3), huge profit or huge turnover ipso facto does not lead to its exclusion unless and of course it is shown that turnover or huge profit is on account of factor leading to a different results in FAR analysis. We find that the Hon'ble Delhi High Court in the case of Chrys Capital Investment Advisors India Pvt. Ltd. Vs. DCIT (supra) after detailed analysis of rule 10B(3), has been reitera....
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....her parameters for inclusion or exclusion of this comparable. 29. In view of the aforesaid finding with regard to the comparables disputed before us, we direct the TPO to compute the margin and benchmark the same to the assessee's PLI. Accordingly, the issue relating to transfer pricing adjustment on provision for back office services is treated as partly allowed for statistical purposes. 30. The next ground raised by the assessee is regarding the ALP on purchase of fixed assets. Before us the Ld. Counsel for the assessee submitted that, first of all, no such adjustment was made by the TPO in his original draft order or in the final assessment order. Even the DRP has not given any direction to the AAO in this regard. The TPO has made these adjustments post DRP direction in the order passed u/s 154 on 24.7.2014, which is even after passing of the final assessment order. Thus, such an adjustment without any DRP's direction could not have been made. On the other hand Ld. DR submitted that though this issue was referred by the TPO in his order but no adjustment was made and that is why the TPO has passed order u/s 154, whereby he made the adjustment on purchase of fixed assets. ....