TaxTMI 
TaxTMI 
2020 (10) TMI 1075
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....ce under section 143(2) and 142(1) of the Income Tax Act, 1961 (in Short Act) were issued and served on the assessee. On verification of audit report, it was noticed that assessee had transactions with its associated concerns. A reference was made under section 92 CA(1) of the Act to Transfer Pricing officer. 4. The TPO observed that General Mills India Private Limited (GMIPL) is engaged in the business of manufacturing ATTA, semiya, Pizza kits dry cake mix and Indian frozen breads and trading in Canned corn nib lets, cream style sweet corn and asparagus spears, sold under the brand name Green Giant. GMIPL also provides software development services and business process services to its associated enterprises. The assessee is 100% subsidiary of General Mills Mauritius Inc. 5. During the year, assessee has reported operating income, operating profit and operating margins from various segments as under: S.No. Segments Operating Income/Cost (Rs. in Crores) Operating Profit/ Gross profit (Rs in Crores)^ Operating Margin (%) 1 Import of food products for resale ('Trading') 29.15 0.09 0.30 2 Export of semi-processed food products ('Man....
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.... Arithmetic Mean 18.56 23.95 Assessee 20.00 6. TPO observed that the assessee has taken itself as the tested party and selected TNMM as the most appropriate method and carried out the search process and calculated the operating profit to operating cost margin for the comparable companies using single year data at 23.95%. In order to select proper comparables functionally similar to the assessee company, TPO adopted following filters: a) use of relevant financial data b) rejected use of multiple year data c) rejected companies with different accounting year d) companies with turnover less than 5 crore are rejected e) companies with income from IT enabled services more than 75% of the operating revenues are selected f) companies with less than 75% earnings from exports rejected g) companies with persistent losses/diminishing revenues are rejected h) companies with related party transactions more than 25% of the revenue are rejected i) companies with peculiar economic circumstances are rejected 7. Further, the TPO rejected 6 comparables out of 9 comparables selecte....
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....BPO services, the company has provided the segmental information in respect of the same on page 26 of its Annual Report for the financial year ending 31 March 2010 (attached as Annexure 3), wherein the company has bifurcated its revenues into 2 segments i.e. Software Services and BPO services. * Given that the segmental information in respect of the BPO services is separately available for analysis, the proportion of the BPO revenues of the company to its overall revenues should not be relevant Accordingly, it is not appropriate to reject the company merely on the basis that the company derives only 14% of its revenues from BPO services. ii) Turnover filter should not be applied for selection of comparables * Your goodself would appreciate that the assessee is remunerated for its services on a fixed cost plus mark-up basis and hence its margins are not impact by economies of scale. * Further, where a particular company is functionally comparable, turnover should not be a relevant criterion for acceptance / rejection of such a company. * Accordingly, it is submitted that no turnover filter should be applied for selection of comparables in....
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....nd threats' the company mentions that "Business process outsourcing spending in 2010 is expected to be increasingly driven by F&A segment and procurement, followed by HR outsourcing. Providers will increase their focus on developing platform BPO solutions across verticals and services." On page 66, it is also stated that "R Systems derives operating income principally from software development, customization services and from the business process outsourcing services." Further, the company has also given a break-up of the percentage of revenues from software development and customization services and business process outsourcing services. - Further, in the Risk Management Report from page 72-78 of the Annual Report, the company mentions at various places mentions the potential risks in the IT and ITES sector. In the Notes to Accounts on page 95, under the head Nature of operations it is stated as follows: "The Company is a leading global provider of IT solutions and Business Process Outsourcing (BPO) services. The Company's primary focus is to provide full service IT solutions, software engineering services, technical support, cu....
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....ncomplete) 11. The TPO finalized the 5 comparables and arrived at the average margin of 31.88%, accordingly calculated Transfer Pricing adjustment of Rs. 4,86,45,217/-. 12. Aggrieved with the above order, assessee preferred objection before the DRP and the objections are: a. rejection of the comparables viz., Aditya Birla Minacs, Cipla Imaging, CG-VAK and R Systems by the TPO, b. assessee also contended that the TPO not appreciated the fact that assessee is a captive service provider and economic adjustment for the difference between risk profile of the comparables and risk profile of the assessee, c. also contended that the working capital adjustment should have been provided by the TPO, d. the AO disallowed the exemption claimed under section 10 A of the act by setting off the losses of non-STPI units against the profit of the STPI unit. e. Objection against initiating penalty proceedings under section 271 (1) (c). 13. Assessee filed detailed submissions before DRP and DRP rejected the submissions of the assessee. The DRP considered the objections only on setting off of losses of non-STPI unit against the profit of STPI unit a....
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.... to account for the difference in the working capital levels between the companies identified as comparables and the Appellant; Risk 7. erred in not appreciating the fact that the Appellant is a captive service provider while comparing the activities of the Appellant to full-fledged information technology enabled service ('ITeS') providers and not making any economic adjustment for differences between the risk profile of the comparable companies vis-a-vis the risk profile of the Appellant; 8. erred in not considering the benefit of +/- 5% as allowed as per section 92C(2) of the Act. 15. With regard to appeal filed by the assessee, learned AR submitted that ground No. 1 is general and ground No. 2 and 3 are not pressed, ground No. 4 and 5 relating to 2 comparables which TPO has rejected and with regard to ground No. 6,7 and 8 relating to working capital adjustment and risk adjustment not provided by TPO. Accordingly ground No. 1, 2 and 3 are dismissed. 16. Ld AR submitted that TPO has rejected two comparables that is CG Vak and R Systems, which is selected by assessee as comparable companies in its studies. With regard to CG Vak, he brought t....
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....ng a similar services as of assessee therefore this company should be included as comparable company. 17. With regard to R System, he brought to notice page 7 of TPO order, TPO observed that it is a leading provider of outsourced product development and customer support services and observed that this company is not into ITeS service. In this regard Ld AR brought to our notice page 371 of paper book in which the company has declared in its annual report, in the segment "our services" includes the details of services it provides which includes BPO services. Further he brought to notice page 422 of paper book which is segmental report of the company in which it has disclosed Rs. 5791.77 lakhs as its turnover in BPO segment which is 19.93% of the total turnover. Further he brought to notice page 451 of paper book in which this company has declared primary segments in which BPO is one of the segment reported by it. He further submitted that the financial data reported by this company for the period January to 31st December, he submitted that the accounting year followed by the assessee is April to March, the three-month data from January to March can be worked out by obtaining the a....
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....f appeal. Hence, GC Vak is being eliminated on account of turnover filter. 3. Lower and upper limit of turnover has been approved by Hon'ble Bombay High Court in the case of CIT vs Pentair Water India Pvt. Ltd. in Tax Appeal No. 18 of 2015 in para 5. Similar view has been taken by Hon'ble Punjab and Haryana High Court in the case of Agilent Technologies (international) Pvt. Ltd. Vs ACIT in ITA No. 121 of 2014 (O & M). Hon'ble ITAT, Bangalore Bench in the case of Swiss Re Global Business Solutions Pvt. Limited vs DCIT ITA(TP)A No. 2315/ Bangalore/2016 (AY 2012-13), while following the Hon'ble Bombay High Court decision, has held in para 7 & 8 that- (i) The turnover is a relevant factor for the purpose of determining the comparability of the proposed companies for the purpose of determining the ALP. (Para 7) (ii) The Tribunal in a series of decision has taken a consistent view that in case turnover filter is applied it should be in the multiple of the assessee's turnover. Accordingly the Tribunal has taken a view that in normal circumstances ten times of the assessee's turnover on both sides lower as well as higher would be an appropriate tolerance range of....
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....es in Crore) A.Y. Turnover from BPO Service PBT (of BPO Service) 2009-10 21.22 (-) 22.87 2010-11 18.85 (-) 0.96 2011-12 23.39 (-) 1.05 2. The ratio of Hon'ble Delhi High Court in case of Steria India Ltd. Vs DCIT (2018) 92 taxmann.com 120 (Delhi) will be equally applicable for R System too where it has been held that "Persistent losses coupled with declining turnover over the period indicated abnormal functional circumstances, which rendered it non-comparable and justified the exclusion of such companies from the list of comparables." Conclusion- Hence, R System International Limited deserved to be excluded. II. Ground No. 6 & 7 of Assessee's Appeal- Request for allowing Working Capital & Risk Adjustments 1. The DRP in para 14 has observed that the assessee has not established that the alleged difference in risk and working capital would materially affect the amount of net profit margin in the open Market in terms of provisions of rule 10B(1)(e). Since adjustments of any type is not automatic, the rejection is correctly made. 22. Considered the rival submissions and material on record. We notice tha....
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.... the turnover of CG Vak is 59 times lessar than the assessee. "It is one of the reason that this company's revenues are coming down and its profits also declining. Since this company failed in revenue filter and as submitted by the Ld DR that this segment is declaring consistent losses over the years, we do not see any reason to include this as comparable company. Accordingly, contention of the assessee is rejected. 24. With regard to R Systems, we notice from the submissions of the Ld AR that R systems has disclosed their financial information and revenue generation from BPO segment. The financial information clearly indicate that this company has BPO segment and declared their financial results segment-wise. Therefore, this company is functionally comparable with this assessee company. The separate BPO segment financial results is available for the period January to December. Since the financial results are available only for Jan-December, we notice from the decisions of the coordinate benches that it has consistently approved the method of working out the segmental data from the existing records and obtaining last quarter i.e., January to March from R Systems to compile th....
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...., Ld. AR supported the orders passed by the revenue authorities. 29. Considered the rival submissions and material placed on record, we notice that the identical ground raised in the revenue's appeal has already been decided by the decision of Hon'ble Supreme Court in the case of CIT & Anr. Vrs. M/s Yokogawa India Ltd. in Civil Appeal No. 8498 of 2013, wherein the Hon'ble Supreme Court has disposed of the appeal. For the sake of clarity, which is reproduced below:- 17. If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of th....