TaxTMI 
TaxTMI 
TaxTMI 
2021 (1) TMI 911
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.... had rejected Jindal Intellicom Pvt. Ltd. and R System International Limited as non comparable companies while determining the Arm's Length Price (ALP) of the assessee for the assessment year 2013-14. The assessee wants their inclusion in the final list of comparable companies in respect of the relevant assessment year. 5. The brief facts of the case are that the assessee is a captive entity (i.e. risk mitigated entity) mainly engaged in providing Information Technology (IT) enabled services in the nature of call center and low end back office support to its associated enterprises (AE) and billing them at cost plus 15%. Accordingly, as mentioned by the assessee in transfer pricing study report for FY 2012-13, it has classified itself as IT enabled/BPO service provider. During the year under consideration i.e. AY 2013-14, the assessee company has undertaken following international transactions: Name of Transaction Amount(Rs.) Method Adopted Rendering IT enabled services to AEs. 94,69,33,224/- TNMM 5.1. The assessee used Transactional Net Margin Method (TNMM) to benchmark its international transactions with the Profit Level Indicator (PLI) of operating profit/operating co....
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....1) (ii) Goldman Sachs (India) Securities Private Limited Vs. ACIT, ITA No. 7724/MUM/2011 (iii) Advance Power Display Systems Limited Vs. ACIT, ITA No. 6732/MUM/2011 and ITA No. 6542/MUM/2011 wherein the Mumbai Bench of the Tribunal held that companies having persistent loss only should be rejected. The assessee submitted that Jindal Intellicom Private Limited is not a persistent loss making company. That further, the assessee also submitted that Jindal Intellicom Private Limited was accepted as a comparable in TP order for assessment years 2010-11, 2011-12 and 2012-13. 7. The assessee submitted that even for the subsequent assessment year i.e. 2014-15, this company i.e. Jindal Intellicom Private Limited was also accepted by the DRP by observing as follows: ".........However, in this year, as discussed above, the TPO has not given any specific reason for the rejection of this comparable. In A.Y. 2013-14, the company was held as not comparable only on the ground of Directors Report that it is in IT as well as ITes sector and no segmental available. However, as reproduced in the submission of the assessee, this entity has been duly held as comparable in AY 2010-11, 2011-12 and 2012....
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....services. This company is engaged in the call center business and hence, comparable company with that of the assessee. The TPO/AO is directed to include Jindal Intellicom Private Limited in the final list of comparables in respect of the assessee while determining the TP adjustment. (B) R. System International Limited: 10. The next company which the assessee wants to include in the final list of comparable is R. System International Limited. The reason for rejection of this company by the TPO is that it is having different financial year. The TPO observed that the Rule 10B(4) requires that the comparable data should pertain to the financial year in which the international transaction have been taken place. This Rule has been interpreted in number of decisions and it is held that it pertains to the data of the only previous year in which international transaction have taken place and multiple year data is not to be used. Therefore, such companies cannot be considered comparable with the assessee. 11. When the matter travelled before the Ld. DRP, it was observed that the assessee follows the financial year ending with March 31, whereas income of the comparable companies considered....
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....year, following adjustments are required to be carried out in order to bring the data at par with that of the assessee: i. While apportioning such data, adequate care needs to be taken so that the Profit Level Indicators are computed comparably. ii. While apportioning such data, adequate care needs to be taken so that the Profit Level indicators are computed comparably. For the determination of profit level indicators, certain entries having bearing on the cost and income are-interest, provisions, losses/gains on account of foreign exchange etc, which 'normally are accounted for at the end of the accounting year as per the business practice. Under both the situations, whether the data pertaining to the period prior to the accounting year or subsequent to the accounting year is integrated with the relevant portion of the accounting year of the comparable, the same gives a lopsided picture of the accounts so far as the financial data is concerned. Since there is no requirement as per company law or as per accounting standards that the data pertaining to a particular quarter needs to be closely compartmentalized by providing for various* provisions ete. for each quarter, the....
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....es which are not fully comparable. In view of the above discussion, we hold that companies whose accounting year ends on a different date, as compared to the assessee company, should normally not be taken as a comparable unless for such companies the accounts for the accounting period of the assessee can be determined to a reasonable degree of accuracy from the duly audited quarterly results." 12. The assessee heavily placed reliance on the decision of the Mumbai Bench of the Tribunal in the case of Pangea 3 & Legal Database Systems Pvt. Ltd. vs. Income Tax Officer, ITA No. 2128/M/2014 and ITA No. 1958/M/2014 for the assessment year 2009-10 wherein at Para 29.13 of the order, the Tribunal observed that "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 give....
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....d. Thus, ground No. 3 raised in appeal by the assessee is partly allowed. (C) Ninestars Information Technologies Limited: 15. The assessee vide Ground No. 4 submitted for exclusion of Ninestars Information Technologies Limited which was taken by the TPO as comparable company to the assessee. The Ld. DRP on this issue has held as follows: "5.2.1 We have considered the order of the TPO and the contentions of the assessee. The comparability of this company Viz. Ninestar Information Technologies Ltd. is discussed as under after examining the relevant issues raised by the assessee. i) Whether the company is functionally comparable to the assessee In the notes forming part of accounts of the company's Annual Report for the FY 2011-12, the following information has been provided under the head "Background": "Ninestars Information Technologies Limited (the Company) was incorporated as a limited company in 1999 under the Companies Act 1956. The Company is primarily engaged in the transformation of content from print media to digitization. The company is also engaged in the process of supplying enterprise management solutions and media monitoring services. It is also actively i....
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....tal operating revenue of the company. As the revenue from ITeS services accounts for a significant part of the overall revenue of the company, the non-availability of segmental financial results in the annual report has no bearing on the comparability of this company with the BPO services activity of the assessee. Thus, the company is clearly functionally comparable with the BPO activities of the assessee. 16. Therefore, the Ld. DRP had opined that Ninestars Information Technologies Limited was primarily engaged in the transformation of content from print media to digitization which is clearly an ITes activity. That further, the company was also engaged in media monitoring services which is also in the nature of IT enabled services. It was further held that both the digitization and media monitoring services activities carried out by this company are in the nature of IT enabled services (ITes) only. This ITes services therefore account for 77.72% of the total operating revenue of the company. That as the revenue from ITeS services accounts for a significant part of the overall revenue of the company, the non-availability of segmental financial results in the annual report has no b....
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....anagement. * Based on the above, it is evident that Ninestars engages high end tools to function its business capabilities. The same is further evident from the extract which is extracted in the TPO's order. B) Unique revenue share model * Further it is also significant to note that Ninestars follows unique revenue model in its business. The same is evident from the extract of the website and extracted in the TPO's order. * Based on the extract, it can also be inferred that Ninestars engaged an in-house R & D team for its internal process improvement. Also it follows a unique revenue share model through ads and subscriptions which cannot be compared to the cost plus model of the assessee. * Further as per the definition of information Technology enabled services provided in Rule 10TA of the Income Tax Rules, 1962 (the Rules) (a copy of the relevant extract of the said rule is enclosed as Attachment 7 for your good self ready reference), Ninestars rendered services other than those classified as ITes hence cannot be considered as comparable to the assessee's back office services segment. * It can be seen from the above paras in relation to the business operat....