TaxTMI 
TaxTMI 
2018 (8) TMI 1970
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....nged 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 pricing study report has reported that it is a cap....
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.... 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; * Account reconciliation reports; * Payment instructions for payment to vendors; * Card transaction process outputs; * Travel MIS reports per customers' specific requirements. Further, AEIPL also provides fall centre servi....
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....la 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 simply because it is using computer-based technology for its publishing activities. This is not a suitable comparable. 5. Cosmic Global Limited This is a suitable comparable 6. Informed Technologies Limited This is a suitable comparable 7. R Systems International Limited This company has year en....
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....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, transaction maintenance, risk analytics and reporting. It has different skills of employees and has very high significant intangibles. He pointed out that the Tribunal in assessee's own case for the assessment year 2007-08 (order dated 7.6.2017) has held that assessee is not into a high-end service provider in view of our specific attention to para 27 to 29 of the order. He further submitted that Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. Vs CIT I....
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.... 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, wherein the Tribunal had observed as under: - "28. On analysis of the functions of the assessee it is noted that it provides back office operations, revenue accounting, call centre services, support centre is naturally and ITES services and is definitely different from the Knowledge process outsourcing services. Further merely for the reason that AEGSEC services at Gurgaon unit provides certain data risk analysis services to detect high risk account activity does not make the servic....
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....gh-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 case, right from the assessment year 2005-06 to 2007-08 this company has been held to be non-comparable with the assessee company. On the other hand, Ld. DR submitted that its main work continues to be the IT segment only and functionally it is comparable and whether it is outsourcing the employees, it will not make much difference in the functionality. 15. After considering the aforesaid submissions and considering material placed on record, we find that it has a different business model in as much....
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.... 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, ledgers, trial balances and account payable and receivable analysis fixed assets register, bank account control reports and preparation of various other accounts of reports based on the inputs. Preparation of such reports and financial statements from a raw data cannot be held to be simple low end ITES services. 18. We have already discussed in the earlier part that the Tribunal in A.Y. 2007-08 has noted that back office operations, call centre services, revenue accounting is different from KPO. To that extent there....
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....s 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 find that the export turn over to the total turnover was at 74.45% and since it was assessee's comparable and the assessee at the time of search process has applied the filter of excluding the cases where export revenue is less than 25% of the total revenue, therefore this company was thrown in the search analysis. There is no rule or mechanism for putting specific ceiling of limit in a particular filter. These are only used for quantitative analysis while the selecting comparables by applying filter. The TPO cannot suo moto ....
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....anuary 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 is available then it cannot be rejected simply on the ground that it has a different financial year. As brought out on record by the Ld. Counsel before us submitted that the audited accounts of R-Systems for the year ending 31.12.2008 and for the quarter starting from 31.01.2008 to 31.03.2009 is available and once such an audited statement is available, then the proportionate working for 31.3.2009 can easily be deduced. If there are no major incident of factors disturbing the profit margin in that quarter, whose results are being worked out and....
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.... 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 the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus, so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R-System International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the i....
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....bly 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 reiterated the same principle that if the company is functionally comparable then same cannot be rejected on the basis of turnover. The Hon'ble High Court in its very detailed judgment, wherein it was required to answer, whether the comparable can be rejected on the ground that they have high profit margin as compared to the assessee in TP analysis, has also dealt upon the turnover factor in detail and held that if the company is functionally comparable then same cannot be rejected on the basis of turnover. Thus, following the ratio laid down by the Hon'ble Delhi High Court, we hold that the company cann....
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....er 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. 31. From the perusal of the impugned TPO order, we find that though there is a reference on account of purchase of fixed assets from the AE, but no adjustment was made by the TPO on this score. The TPO in the original order has stated that the assessee purchased assets amounting to Rs. 44,34,339/- from AE for which TPO asked the assessee to furnish the WDV of the aforesaid assets in the books of the AE. The WDV of the assets books was Rs. 25,28,872/- whereas assessee has purchased at a higher price. The assessee's contention has been that it has purchased the fixed assets on a fair market value determined by the valuer a....