TaxTMI 
TaxTMI 
2020 (9) TMI 819
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....gly, matter was referred to transfer pricing officer (TPO) - 3(2), Mumbai u/s 92 CA(3) of the Act. 3. The TPO observed that M/s M. Model Global Services Pvt. Ltd. provides IT services such as maintenance of software, management of servers, provision of technical support, documentation of software code and ITES service and Back Office services such as quality assurance, vendor management and investor relationship, etc. 4. M/s M. Modal Systems and Services Inc. (referred M. Modal US) is a group company of the assessee. M. Modal India and M Modal US are owned by a common set of shareholders. M. Modal US is engaged in servicing the contracts entered into with the existing customers, providing front-end and maintaining customer relationship. M. Modal India and M. Modal US are associated enterprises under the Indian Transfer Pricing Regulations and assessee has entered into the following international transactions with its AE during the year:- Sr. No. Transaction Amount (Rs.) Method adopted 1 Provision of IT and Quality Assurance-' Support Services 44,45,79,632 TNMM 2 Provision of Medical Transcription Services 251,75,40,207 CUP 3 Reimbursement of expenses (Receipts) ....
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....f PF and ESI. 9. Further, assessee made objections before DRP that AO did not allow any set off of brought forward losses and depreciation which he ought to have allowed. Since the DRP while passing the draft assessment order, observed that the draft assessment order has noted that total loss available for any set off in the current year on the basis of assessment orders passed in earlier years is NIL. The set off of brought forward losses has to be given on the basis of assessment orders passed i.e. the assessed income and therefore, no interference is called for. 10. Against the above order of DRP, assessee is in appeal before us raising the following grounds of appeal:- 1. On the facts and in the circumstances, and in law the learned AO and the learned Transfer Pricing Officer ('TPO') under the directions of the Hon'ble Dispute Resolution Panel (`DRP') have erred in making a Transfer Pricing adjustment of Rs. 1,44,69,701/- under chapter X of the Act in the hands of the Appellant. 2. On the facts and in the circumstances, and in law the learned AO and the learned TPO under the directions of the Hon'ble DRP have erred in rejecting the transfer pricing doc....
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....es, and in law the learned AO under the directions of the Hon'ble DRP have erred in not granting set-off of brought forward losses of previous years against the returned income of the current year. 12. On the facts and in the circumstances, and in law the learned AO has erred in levying interest under section 234B and 234C of the Act and initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the transfer pricing adjustment be deleted and relief may be granted accordingly. The Appellant craves leave to add, alter, amend or withdraw all or any of the grounds of appeal herein above and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law. 11. At the time of hearing, Ld AR submitted that assessee presses only ground no 6 relating inclusion of Excel Infoways Ltd as the comparable company and ground nos 9, 10 and 11. Therefore, we dismiss all other grounds as not pressed. 12. with regard to ground No. 3, Ld. AR brought to our notice the observation of TPO and direction of DRP on inclusion of Excel Infoways Ltd as comparable to the assessee company. She fur....
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....factors has impacted profitability and also quantifies the difference the profitability. 14. Further, Ld. AR submitted that Excel Infoways Ltd. cannot be taken as a comparable company for the following reasons: Covered by Hon'ble ITAT order for AY 2012-13 * The Hon'ble ITAT in the Assessee Company's own case for AY 2012-13 has rejected Excel Infoways Ltd. The said decision is squarely applicable to this case, as the DRP too has merely relied on its order for AY 2012-13. Fails TPO's own filter of 75% export earnings: * Foreign exchange earnings of Excel Infoways Ltd. is 21.77% which is less than 75% of the total sales, hence fails the filter adopted by the TPO. (Refer Handy Document-3) Widely fluctuating margins: * Excel Infoways cannot be considered as a comparable company due to widely fluctuating margins and diminishing revenue trend. The operating margin of the company has shown drastic fluctuations ranging from 247.74% in F.Y 2008-09 to 2% in FY 2014-15. In addition to that the revenue of the Excel Infoways is also diminishing. Financial Year OP/TC (%) Revenue* ('000) Paper Book ref. 2009-10 228% 2,04,161.34 PB Pg. 165 2010-11 253% 2,03,526.40 PB Pg. 16....
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....eliable * Further, merely because IT/BPO segment is employee oriented, it does not mean that the infra segment did not incur employee cost or incurred very less employee cost. Thus, a company having such low employee cost to total operating cost ratio (6.67%) cannot be said to be comparable, in the absence of employee cost break up for IT/BPO segment. Difference in asset profile: * Fixed asset turnover ratio of excel Infoways Ltd. is 104.65% which is substantially higher than the Assessee 11.80%. thus demonstrating difference in asset profile. (Refer Handy document -4) Difference in risk profile * Excel Infoways Ltd. undertakes various business risks such as macro-economic risk, global demand risk, market risk, etc. whereas the assessee is free from all entrepreneurial risks. Thus demonstrating difference in risk profile. 15. With regard to ground no. 9 & 10 in respect of disallowance u/s 36(1)(va) of the Act, Ld. AR submitted that Employee's contribution to provident fund & ESIC deposited before the relevant authorities prior to the due date of filling the return of income u/s 139 of the Act. Ld. Therefore, such amount cannot be disallowed. Ld. AR further submitted th....
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....rther submitted, DRP did not considered the objections filed by assessee and merely relied on the draft order. Further, she brought to our notice the chart as under:- Assessment Year Business Losses Unabsorbed Depreciation Total 2008-09 - 3,63,968 3,63,968 2009-10 - 1,07,29,670 1,07,29,670 2010-11 - 4,33,84,991 4,33,84,991 2011-12 4,95,38,284 6,11,02,381 11,50,84,385 TOTAL 4,95,38,284 11,55,81,010 16,95,63,014 20. She submitted that as per the below chart, in the respective year, the following amounts of business losses/ unabsorbed depreciation were carried forward and available for set-off. 21. Further she submitted that assessee has filed an application under section 154, providing all the relevant details in connection with above set-off of brought forward losses (refer Pages 309-312 of paper book). However, the AO is yet to dispose of the same. Further she relies on the decision of the coordinate bench decision in the Assessee's own case for AY 2012-13 whereby the bench has directed AO to decide the application of Assessee filed u/s 154 in seeking the setoff of brought forward business loss & unabsorbed depreciation in accordance wit....
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....te. The ld. AR also demonstrated that the fluctuating margin of this comparable in different Financial Year in the following manner: Financial Year OP/TC (%) Revenue (Rs.) 2008-09 247.74% 1,86,040.74 2009-10 267.31% 2,04,161.34 2010-11 238.71% 2,03,526.40 2011-12 41.48% 79,096.95 2012-13 75.70% 76,098.54 20013-14 30% 52,972.12 2014-15 2% 22,994.38 17. The ld. AR for the assessee strongly relied on the decision of co-ordinate bench in Clear Info Analytics Private Ltd. vs. ACIT (supra) wherein this comparable was held to be not comparable with captive service provider holding as under: "6. We have heard rival contentions and perused the record. We noticed that the Pune Bench of the Tribunal examined the comparable company, M/s. Excel Infoways Ltd., in the case of M/s. Ocwen Financial Solutions Private Limited Vs. ACIT in ITA No. 2669/PUN/2016, dt. 21-01-2019. For the sake of convenience, we extract below the relevant discussions made by the Pune Bench of the Tribunal in the above said case: "12. With regard to Excel Infoways Limited, we find that the Co-ordinate Bench of the Tribunal in the case of Emerson Climate Technologies (India) P....
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....plied diminishing revenue filter to exclude the companies from the comparable set whereas, the revenue of Excel Infoways Limited also clearly demonstrated diminishing revenue trend. In such situation, we refer to the decision of Co-ordinate Bench of the Tribunal, Delhi in the case of Baxter India Pvt. Ltd. Vs. ACIT (supra.) where the Tribunal has held as follows: "24. So far as exclusion of Excel Infoways Ltd. is concerned, we also find merit in the submissions of the Id. counsel for the assessee that the above company should be excluded from the list of comparables. This company fails TPO's own filter of diminishing revenue and abnormal volatility in revenue and margins. We find from the order of the TPO at para 7.5 (page 24 - 25 of the TPO order) where the TPO has observed that the department has applied consistent diminishing revenue/ loss making filter wherein the companies with losses/ diminishing revenue for the last three years upto and including the financial year 2010-11 were rejected as comparables. The department has excluded such companies with consistent losses/ diminishing revenue in an environment where Indian economy is growing at consistent rate. Having held so....
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.... annual report and as per the information gathered u/s. 133(6). In view of above discussion, we hold that Excel Infoways Ltd. cannot be considered as comparable and should be excluded from the list of comparables. We hold and direct accordingly." Therefore, it is examined that both, Universal Print Systems Limited and Excel Infoways Limited cannot be considered as comparable companies with that of the assessee company. Hence, ground No. 4 is, thus, allowed". 7. We notice that M/s Excel Infoways Ltd was not considered as a comparable company for the reason that the profits of the company was declining and it was having super normal profits. The year-wise profit percentage would show IT(TP)A No. 2299/Mum/2017 that the same was consistently declining from 364.14% in FY 2009-10 to 0.43% in FY 2014-15. In view of the fluctuating profit, i.e., diminishing profit, the above said company was not taken as a comparable. Even though the Ld D.R contended that the decision in the case of Emerson Climate Technologies (India) Pvt. Ltd, which was followed by the Pune bench of Tribunal in the case of Ocwen Financial Solutions P Ltd (supra) was related to different assessment year and further th....
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....ses/diminishing revenue in an environment where Indian economy is growing at consistent rate. Having held so, the Assessing Officer included Excel Infoways Ltd. as a comparable without considering the fact that the said company does not pass the diminishing revenue filter. From the submissions of the assessee before the TPO (at page 232 of Volume - 1 of the Paper Book) we find the details of the operating margin of the company from financial years 2009-10 to 201-15 are as under :- ..................... ..................... 25. From the above, it is clear that above company does not pass the diminishing revenue filter as adopted by the TPO himself since its revenue has decreased consistently from financial years 2009-10 to 2011-12 i.e. including the year under consideration. Further, the above company has super normal profits. We further find the submissions of the assessee that Excel Infoways Ltd. has super normal profits during the current year has not been controverted by the Revenue. We find the Mumbai Bench of the Tribunal the case of Willis Processing Services (India) Pvt. Ltd. (supra) has upheld the order of the DRP rejecting Excel Infoways Ltd. as comparable company o....