TaxTMI 
TaxTMI 
2018 (8) TMI 2021
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....India derives business from the following four major segments:- a) Business Information EVS India renders research services primarily to its AEs. EVS India analysts cover a range of industries including - banking, insurance, telecommunications, pharmaceuticals and bio-technology, chemicals, energy and consumer goods, EVS India utilizes primary and secondary sources to conduct its research and analysis in this segment. Essentially, the research capabilities include: industry and value chain analysis, in-depth analysis of customer segments, products, channels, technologies, competitive benchmarking, monitoring and customized newsletters, forecasting, modeling, financial analysis, database content creation, management, up-gradation of existing research, commercialization analysis and business plans. The delivery is made on demand as well as on a continuous basis. b) Intellectual Property The services under this category include the following areas: • Patents drafting and prior art search • Intellectual property asset management EVS India is involved in carrying out patent assessment, intellectual property research ....
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.... the TPO used certain more filters and rejected 8 comparables from assessee's set and selected 10 new comparables. Thus, the TPO selected a set of 12 comparables (2 from assessee's set and 10 from new companies) whose average margin was 33.14% as against that of assessee's at 20.17%. Vide order dated 09.01.2014 the TPO proposed an addition of Rs. 18,66,87,657 and the Assessing Officer vide draft assessment order after considering the said addition, proposed to assess the assessee at an income of Rs. 19,57,81,350. 5. Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP passed directions vide order dated 23.09.2014. The Assessing Officer passed an Assessment Order dated 14.11.2014, thereby making addition of Rs. 19,57,81,350 to the income of the assessee. 6. Being aggrieved by the Assessment Order, the assessee has filed present appeal before us. The grounds of appeal are as follows: 1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("AO") is bad in law and void abinitio. 2. That on facts and circumstances of the case and in law, the Ld. A....
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....rred by selecting certain companies which were not comparable by way of functions and assets in order to determine the arm's length margin applicable to the Appellant and also erred by rejecting certain companies which were comparable by way of functions and assets in order to determine the arm's length margin applicable to the Appellant 4.4. The Ld. AO/ Ld. TPO/ Ld. DRP has erred in incorrectly computing margins of several comparable companies selected in the final comparable set 5. The Ld. AO/Ld. TPO/ Ld. DRP erred in treating provision for doubtful debts and donation expenses as an operating item instead of treating them as non-operating while computing the operating margin of the Appellant 6. The Ld.AO/Ld. TPO/ Ld. DRP erred in reclassifying expenses related to the non- unit of the Appellant which had been taken as non-operating by the Appellant to be operating expenses. Further, the Ld. AO/Ld. TPO/ Ld. DRP also erred in not considering the documentary evidence submitted to substantiate the non-operations in the said unit of the Appellant. 7. The Ld.AO/ Ld. TPO/ Ld. DRP erred in disregarding the multiple year data selected by the Appellant in the TP Document....
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....t pressed by the Ld. AR at the time of hearing. Hence, Ground No. 3 is dismissed. 8. The Ld. AR submitted that during the course of the Transfer Pricing Assessment proceedings, the Assessee had provided all the submissions and relevant back up documents in support of the arm's length nature of the international transactions. However, the TPO issued a show cause notice dated 25.11.2013 indicating therein to make a transfer pricing adjustment to the international transactions related to provisions of ITES. The TPO modified the comparability analysis conducted by the assessee for determining the arm's length price for the ITES and concluded that the filters used in TP Documentation are inappropriate and suffer from various lacuna and defects and that the economic analysis conducted is inadequate and hence cannot be accepted. The TPO applied certain additional/modified quantitative filters (reject companies with different financial year ending, export revenues as a percentage of sales less than 75%, reject companies with sales turnover INR 5 crores etc.) selected by the TPO which lacked valid and sufficient reasoning and selected companies which in terms of their functions, assets a....
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....hlighted that the filtering process adopted by the TPO and the companies finally arrived at by the TPO do not adhere to the comparability criteria set out under Rule 10B(2) of the Indian Regulations. Also, the companies finally selected by the TPO were engaged in a different set of functions as compared to that of the assessee and had related party transactions. Further the TPO wrongly computed the margins of comparable companies. The TPO wrongly computed the PLI of the assessee at 16.17% instead of 20.17% by considering provision for doubtful debts, donations and expenses relating to Noida unit as operating. Working capital adjustment to account for differences in the working capital policies of the assessee and comparables is also required. The TPO used the updated financial information of the comparables to determine their comparability and arrived at an arm's length margin. Such information was not available with the assessee at the time transfer pricing study was conducted. It was explained that the assessee is a company incorporated under the provisions of the Companies Act, 1956 and enjoyed tax holiday benefits conferred under Section 10A of the Act as per the Software Techn....
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....tional profile matches with the website information submitted by the Id DR. Looking at the order of the Id TPO for impugned AY 2006-07, we could not find, on the basis of services mentioned, whether assessee is classified as High end ITES or Low End ITES service provider. Even assessee has also not submitted its search criteria ( Para No (iv) at page no 15 of TPO order) and it is also mentioned that assessee has conducted fresh search process without assigning any reason for conducting fresh search and also not provided details of search process employed and its distinction with earlier search process for the same year. This has lead to an ambiguity in selection of comparables qua the functional profile of the assessee. On the basis of facts pointed out by the Id DR and examining the submission of the assessee before us coupled with the documents relied upon, we cannot close our eyes to this startling facts staring at us. In view of the above categorical finding of the coordinate bench for AY 2005-06 based on the T P Study report of the assessee itself now it is not possible to assume the functional profile of the assessee as low End ITES provider. Further it is also not possible t....
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....inclusion of comparables on ground of functional dissimilarity. 11. The Ld. AR in his rejoinder submitted that the Ld. DR cannot argue that assesse is a KPO as he cannot go beyond the order of the TPO. The Ld. AR submitted that Ld. DR cannot be permitted to go beyond the TPOs order. Once the TPO expressly accepts the functional profile of the Appellant, then Revenue cannot be allowed to argue beyond it. In our case at para 3 internal page 3, the TPO has given a categorical finding that he has pursued the TP Study and has found everything in order. The Ld. AR submitted that the Revenue cannot improve the assessment order. It is the prerogative of the TPO to accept or reject the functional profile after considering all the relevant aspects. Once the TPO accepts it, then that becomes final qua the Revenue. The Revenue cannot step into the shoes of the TPO to undo what was not done by him. If this is accepted and given a logical conclusion, then invariably all the cases pending before the Tribunal/ High Court will require restoration to the TPO, and fresh opportunity will be given to the TPO. The Ld. AR submitted that the role of the Ld. DR, in an appeal by the assessee is limited t....
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.... the first time in AY 2006-07, which is not the case in AY 2010-11 as all points have been contested since the TPO level • The assesse was wanting to exclude 2 comparables taken by it in its own TP Study • Assessee could not submit and explain why a different stance was being taken now • Assessee could not explain how these 2 comparables were initially taken as comparable in its own TP Study- the reason for retracting its own comparables, and initial search process of assesse is not known • There is no common comparable in AY 2006-07 and AY 2010-11, which is subject-matter of dispute. • AY 2006-07 was remanded back because the Ld. DR was against the admission of additional ground. • The Ld. DR made a statement that Dept, is in the process of filing an MA in AY 2007-08 order. However, till date no such MA has been filed and the even the time limitation has expired. It was incorrect on behalf of the Dept, to make such a statement, which has not subsequently been honoured. 12. The Ld. AR submitted that the Ld. DR submitted website print and stated that in that it is written that assesse is KPO. This is fa....
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....Hence, now principle of merger is applicable and since High Court has approved the ITAT order and passed an order and dismissed Department's contention that Assessee is a KPO, this view is now binding on Department. ITAT order of AY 2007-08, Department's appeal in High Court and High Court order dated 31.10.2017 is being filed herewith alongwith ITAT order of AY 2007-08. 13. The Ld. AR submitted the background of all cases as follows: • AY 2005-06- ITAT ruled in assessee's favour for this AY on 30.09.2016, on merits. No appeal filed by Department in High Court. • AY 2006-07- ITAT has remanded it back primarily because assesse wanted to change its own stand after 11.05.2017 and retract its own comparables. • AY 2007-08- ITAT ruled in assessee's favour for this AY on 13.12.2016, on merits. Appeal filed by Department in which both issues were raised and challenged- functional profile of assesse and comparables on merits. However, Delhi High Court vide order dated 31.10.2017, dismissed Department's appeal. • The Tribunal vide order dated 30.06.2017 has also ruled in case of sister concern, whereby case has not been remanded back (I....
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.... vi. TCS E-serve Ltd. vii. igate Global Solutions Ltd. viii. e4e Healthcare Ltd. ix. R Systems x. Omega Healthcare Ltd. 17.1 The Ld. AR submitted that for Accentia Technologies Ltd., Eclerx Services Ltd., ICRA Techno Analytics Ltd., Infosys BPO Ltd., TCS E-Serve International Ltd., TCS E-Serve Ltd., e4e Healthcare Ltd. have been excluded by the ITAT in the sister concern of the assessee i.e. E-Valuesez (Gurgaon) Pvt. Ltd. for A.Y. 2010-11 in ITA No. 1467/D/2015. The Ld. AR submitted that functional profile and FAR analysis of both the companies are identical. 17.2 The Ld. AR submitted that the ITAT erred in inadvertently not excluding igate global Solutions Ltd., from the list of comparables, by stating that igate global Solutions Ltd. is functionally comparable to the Assessee. The Ld. AR submitted that this is factually incorrect and igate global Solutions Ltd should be excluded. The Ld. AR submitted that Tribunal in the case of EVALUESEZ (GURGAON) PVT. LTD. for AY 2010-11- ITA No. 1467/D/15 in para 15 noted that igate global Solutions Ltd. is engaged in contract centre services and IT enabled services. This is factually incorrect. In....
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....ing the ITAT order qua this issue would only be an academic exercise. However, in the present case, the Assessee is very much challenging the finding qua igate global Solutions Ltd, on grounds mentioned above, stating that it should not be followed and igate global Solutions Ltd should be excluded. 17.3 The Ld. AR further submitted that regarding R Systems and Omega Healthcare Ltd., the ITAT remanded back these comparables with the directions to the TPO. The same findings may followed in the present case. 18. The Ld. DR relied upon the orders of the TPO/AO and directions of the DRP. 19. We have heard both the parties and perused all the relevant material available on records. It is pertinent to note that the Assessee for A.Y. 2010-11 has not argued the comparables before us but only submitted the chart to that extent and submitted that the same should be considered according to the directions given by the Tribunal for A.Y. 2010-11- ITA No. 1467/D/15 in case of E-Valueserve SEZ (Gurgaon) P. Ltd. vs. ACIT order dated 30.06.2017. From the records or from the arguments, the Ld. AR has not made out clear similarities between the E-Valueserve SEZ (Gurgaon) P. Ltd. and the assess....
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....et. Geographical location costs saving benefits are available to the exporter due to which it has high margin, unlike the company providing services in domestic market, and thus the FAR of export oriented companies are different from the FAR of companies providing services in domestic sector. The ITAT Delhi I-2 Bench in case of Actis Global Services Pvt. Ltd. ITA No. 30/Del/2015 dated 10.12.2015 has upheld the above filter after considering the Provisions of Rule 10B(2)(d)- "conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail". 22. The Ld. DR further submitted that exclusion of Companies having turnover less than Rs. 5 cr is not actually a turnover filter but a filter to exclude the companies with low capital base (vis-a-vis the turnover of Rs. 127 crore of assessee). These extremely low turnover (vis-a-vis the turnover of the assessee) companies lack competitive strength, operational effic....
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....ed. Hence, the Ld. AR submitted that 'miscellaneous income' should be non-operating as details are not known. Prima facie this appears to be true, but the TPO/AO has not made any effort to look upon this aspect. Therefore, it will be appropriate to remand back this issue to the file of the TPO/Assessing Officer for fresh adjudication. We therefore restore this issue to the file of the A.O/TPO for fresh adjudication of the issue after giving due opportunity of being herd to the assessee. Ground No. 4, more specifically Ground No. 4.4 is partly allowed for statistical purpose. 25. As regards Ground No. 5, relating to provisions of doubtful debts and donation expenses as an operating expenses item instead of treating them as non-operating while computing the operating margin of the assessee, the Ld. AR submitted that the TPO has taken donation and provision for doubtful debt to be an operating expense when calculating assessee's PLI. The Ld. AR submitted that donation has nothing to do with day to day operations of the Assessee and hence should be taken to be a non-operating expense. The Ld. AR relied upon the decision of Thyssenkrupp Industries India (P.) Ltd. vs. ACIT - [2013] 33....
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.... unit was in the process of shutting down due to certain business reasons. EVS India did not undertake any operations in the Noida unit while it continued to incur the fixed costs pertaining to this unit. These costs relate to rent and hire charges, depreciation, insurance, security charges, repair and maintenance, etc. The Ld. AR further submitted that the Assessee did not carry out operations in the Noida unit and the fixed costs incurred were unproductive costs and were not billed to the parent company. Thus, as the expenses incurred for the Noida unit were non- recurring and extraordinary in nature, these expenses have been excluded from the operating profit computation. This was mentioned in TP Study at page 499, 485. Also detailed submissions in this regard have been filed before TPO and DRP. The Ld. AR submitted that the comparables did not incur such extraordinary / non recurring expenses and hence for a like to like comparison, it is necessary to adjust such abnormal expenses from the computation of operating profit. The Ld. AR submitted that the very basis of Transfer Pricing Regulations is to undertake an exercise of comparability to eliminate differences, if any, by a s....
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....mputing the operating margin of the assesse. In the case of Marubeni India (supra), also the Revenue argued that since the assessee is a captive unit of its associated enterprise, it was actually the latter that undertook the entire risk. Even in assessee's case, the TPO states that assesse is a captive unit and risk is with the AE and hence AE should bear this expense and compensate. However, this was rejected by the Hon'ble Delhi High Court. The Ld. AR further submitted that the TPO cannot sit in the chair of the businessman and decide how the business is to be conducted. The incurring of expense are not doubted. TPO has not doubted that there is a material difference on this account. He has denied only on the ground that Assessee should have been compensated by the AE without realizing that the assesse is not charging on cost plus basis. The expense have been allowed u/s 37 of the Act and the limited reason for denying a higher PLI by the TPO is that the expenses should have been compensated by the AE, which is not correct. The DRP at para 11 has stated that evidence was not made available. This is factually incorrect. All evidences/bills/details/correspondence was made availabl....
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....ns of Section 10A as it stood prior to the amendment made by Finance Act, 2000 with effect from 1.4.2001; the amended Section 10Athereafter and also the amendment made by Finance Act, 2003 with retrospective effect from 1.4.2001. 13. The retention of Section 10A in Chapter III of the Act after the amendment made by the Finance Act, 2000 would be merely suggestive and not determinative of what is provided by the Section as amended, in contrast to what was provided by the un-amended Section. The true and correct purport and effect of the amended Section will have to be construed from the language used and not merely from the fact that it has been retained in Chapter III. The introduction of the word 'deduction' inSection 10A by the amendment, in the absence of any contrary material, and in view of the scope of the deductions contemplated by Section 10A as already discussed, it has to be understood that the Section embodies a clear enunciation of the legislative decision to alter its nature from one providing for exemption to one providing for deductions. 14. The difference between the two expressions 'exemption' and 'deduction', though broadly may appear to be the s....
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.... us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that, "The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision." 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....
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....estionnaire dated 19.09.2013. The assessee was asked to submit various details related to the return of income for A.Y. 2010-11. In compliance to the said notice, assessee attended and the relevant information and documents as asked for were provided by the assessee before the Assessing Officer from time to time. The Assessing Officer vide its draft order dated 12.03.2014 u/s 144C r/w Section 143(3) of the Act proposed an addition of Rs. 13,90,576 as prior period expense to the returned income. The Ld. AR submitted that the Assessing officer has not given any opportunity to explain/rebut the disallowances. During the year under consideration, the assessee company has 'Profit before tax and prior period items' amounting to Rs. 9,33,39,128/- as per the audited profit and loss account. The assessee had shown "prior period items" amounting to Rs. 37,40,361/- below the line in the profit and loss account. The Ld. AR further submitted that without prejudice to the above, the prior period income of Rs. 13,90,576 was in fact the reversal of the prior period expense for A.Y. 2009-10. The benefit of the said prior period expenses amounting to Rs. 32,055,199 was not claimed in the tax computa....
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....has not recorded any reasons in the assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. TPO for computation of the arm's length price, as is required under section 92CA(1) of the Act. 4. That the Ld. AO/ Ld. TPO/ Ld. DRP erred on facts and in law in the assessment of the arm's length price of the Appellant's international transactions with associated enterprises by- 4.1.Rejecting on the basis of subjective grounds and presumptions, the comparability analysis conducted by the Appellant for determining the arm's length price in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ("Rules") as well as fresh search. Further, the Ld. AO/ Ld. TPO/ Ld. DRP erred in modifying the comparable companies set adopted by the Appellant on the basis of additional/ modified quantitative filters selected by him and arbitrary statements which lacked valid and sufficient reasoning 4.1.1. Rejecting companies whose export revenues are less than 75 percent of the total revenues without taking cognizance of the Appellant's submissions 4.1.2. Rejecti....
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....in FY 2008-09 and Commissioner of Income Tax Appeals ("CIT(A)") had accepted the arm's length nature of the international transactions in FY 2004-05 and FY 2006-07 9. The Ld. AO/ Ld. TPO/ Ld. DRP has erred in not appreciating the fact that the Appellant is a company incorporated under the provisions of the Companies Act, 1956 and enjoying the tax holiday benefits conferred under Section 10A of the Act as per the Software Technology Park of India ("STPI") Scheme. Thus, there is no motive on the part of the Appellant to shift the profits to any other jurisdiction. Hence the case of the Appellant falls squarely within the ambit of aforementioned principle. 10.1. That, on the facts and in law, the order of the Ld. AO is erroneous to the extent of not incorporating the binding directions of the Hon'ble DRP while finalizing the order section 143(3) read with section 144C of the Act on the disallowances made by the Ld. AO of Rs. 13,90,576/- as prior period expense. 10.2. Without prejudice to Ground 10 and 11, the Ld. AO failed to understand that the appellant has computed the taxable income before giving any effect to prior period item in the profit and ....
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....5,772 The above shortfall of Rs. 18,91,35,772/- was treated as transfer pricing adjustment u/s 92CA of the Act by the TPO. The Assessing Officer made addition of Rs. 189,135,772/- to the income of the assessee. The assessee filed an objection before the DRP-1 against the draft assessment order passed by the Assessing Officer. The DRP-1 passed an order u/s 144C(5) for AY 2008-09 and directed the TPO to recompute the transfer pricing adjustment after reexamining the comparables and accordingly, TPO-1(2) gave the effect to the directions issued by DRP-1 and determined the Arm's Length Price at Rs. 12,77,12,819/- instead of Rs. 18,91,35,772/- as per the draft assessment order. The Assessing Officer further observed that the assessee claimed deduction u/s 10A of the Income Tax Act from the profits and gains of business and thereafter, set off the brought forward business loss of A.Y. 2002- 03 against the balance profits under the head. However, the Assessing Officer observed that this treatment adopted by the assessee was contrary to the provisions of the Act. The Assessing Officer observed that the assessment of the assessee for the assessment year 2007-08 was completed u/s 14....
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....t is written as "software development" and "engineering/ites". Hence, it shows that the comparable is inter-changeable by using the words 'software', 'engineering' and 'ites' and hence the data is not reliable. The Ld. AR submitted that the assessee cannot be compared with this comparable as it is functionally dissimilar. Acropetal Technologies is rendering software development and engineering design services. The Ld. AR submitted that these services are different from the services provided by the assessee. The assessee is not in software development and hence cannot be compared with other segment. The comparable company does not pass the service income filter of 75% as applied by the TPO i.e. ITES revenue is less than 75% of total revenue. The Ld. AR relied upon the decision of the Motorola Solutions India (P) Ltd. vs. ACIT (2015 152 ITD 158 (Del) and Baxter India vs. ACIT (ITA No. 6158/2016). 44.5 The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP. 44.6 We have heard both the parties and perused all the relevant material available on record. The assessee company is engaged in the business of providing IT enabled services to its AEs and ....
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.... i.e. amalgamation and acquisition. This company has acquired four companies and has had several other collaborations. The Ld. AR submitted that the Hon'ble Delhi High Court in case of PCIT vs. Ameriprise India P. Ltd. ITA No. 461/2016 upheld the exclusion of thecomparable on the ground of extraordinary events that had taken place. This comparable is functionally dissimilar to the assessee company. Accentia Technologies Ltd. is engaged in health care receivables cycle management. Its income is derived from three sources i.e. Medical Transcription, Billing and Coding and Software Development and Implementation. But Annual Report stated that it has only one segment. Thus, there is no segmental details available of this comparable. 44.11 The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP. 44.12 We have heard both the parties and perused all the relevant material available on record. Accentia Technologies Ltd. is engaged in health care receivables cycle management. There was extraordinary events during A.Y. 2008-09 i.e. amalgamation and acquisition. There is no segmental details available. Therefore, it will be appropriate to exclude this com....
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.... by Hon'ble Delhi High Court. There is extensive selling and marketing expenses of Rs. 50,87,97,083/- of this comparable company. 44.17. The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP. 44.18 We have heard both the parties and perused all the relevant material available on record. There is an extraordinary event that of acquisition of a group during A.Y. 2008-09. The Hon'ble Delhi High Court in case of PCIT vs. Actis Global Services held that size and scale of operations of a company does make it unsuitable as comparable. Therefore, it will be appropriate to exclude this comparable. Therefore, we direct the TPO/AP to exclude this comparable from the final list of the comparables. 44.19 Genesys International Ltd.: The Ld. AR submitted that the comparable company is functionally different. It is dealing with geospatial services and content providers. The Company caters to the needs of consumer mapping, navigation, internet portals as well as infrastructure players including state and local governments. This comparable also covers more than half a million kilo meters of all major Indian Highways. This company is engaged in provid....
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....company cannot be taken as a comparable. Thus, following the decision of the Tribunal in case of Baxter India (supra), it will be appropriate to exclude this comparable. Therefore, we direct the TPO/AP to exclude this comparable from the final list of the comparables. 44.25 Crossdomain Solutions Pvt. Ltd.: The Ld. AR submitted that this comparable company is functionally different. The company has developed product suites for payroll processing services and it develops information systems. It is into data processing and insurance claims processing and payroll processing. In P& L account it is mentioned that revenue is from International services, C&B SS services, Retrials services, Transition services and other services which is not comparable to the assessee company. 44.26 The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP. 44.27 We have heard both the parties and perused all the relevant material available on record. This comparable is functionally different, since this The company has developed product suites for payroll processing services and that it develops information systems. Thus, it is into product development. Further....