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2016 (3) TMI 1431
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....ding factors for treating a company as a comparable, and accordingly erred in excluding M/s Wipro BPO Solutions Ltd. as a comparable. 4) The ld. CIT(A) erred in holding that the assessee is eligible for a standard deduction of 5% from the Arm's Length Price (ALP) under the proviso to Section 92C(2) of the IT Act, 1961. 5) For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 6) The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above." 3. The assessee raised the following grounds of appeal: "The grounds stated here under are independent of, and without prejudice to one another: 1. Assessment and reference to Transfer Pricing Officer (`TP0') are bad in law a) The assessment order passed by the ACIT under section 143(3) of the Income-tax Act, 1961 ('the Act') and the order passed by the Commissioner of Income-tax (Appeals)-IV, ('the CIT(A)') under section 250 of the Act, are bad on facts and in law....
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....lity. c) The CIT(A) erred in facts in confirming the comparability analysis conducted by the TPO, without analysing the functional and risk profile of Appellant vis-à-vis comparables selected in the Transfer Pricing Order. d) The AO/TPO erred on facts in rejecting most of the comparable companies arrived at in the Transfer Pricing Study. 4. Erroneous data used by the AO/TPO a) The AO/TPO has erred in law and the CIT(A) further erred in confirming the use of data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law and the CIT(A) further erred in not applying multiple-year data while computing the margin of alleged comparable companies. 5. Non-allowance of appropriate adjustments to the comparable companies, by the A0/TPO a) The AGTPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure and (d) risk profile between the Appellant ....
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....st 4.2 Return of income for the assessment year 2005-06 was filed declaring loss of Rs. 28,53,770/- on 28/10/2005. The assessee-company also reported the following international transactions: i) Payment of royalties Rs. 2,35,87,653/- ii) Training and consultancy Rs. 5,08,342/- iii) Global Support Services Rs. 3,06,54,204/- iv) Telemarketing Rs. 84,66,812/- v) Software Development Rs. 73,11,315/- vi) Reimbursement of expenses Rs. 16,60,433/- 4.3 The assessee-company sought to justify consideration received for the international transactions entered with its AE to be at arm's length price [ALP]. The assessee-company had also submitted transfer pricing study report adopting the operating profit on cost (OP/TC) as a profit level indicator for the transfer pricing study. The assessee-company applied Transactional Net Margin Method [TNMM] which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assesseecompany's profit margin was computed at 8.82% and the assessee-company claimed that the same was comparable with other companies rendering the IT ....
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....date of the company not available for the 12 month period i.e. 01/04/2005 to 31/03/2006 were excluded. 5.1 The TPO finally selected the following comparables: Sl. No. Company Name Operating margin on cost Adj. Margin 1 Allsec Technologies Ltd. 29.85 26.81% 2 Safron Global Ltd. 24.88 20.61% 3 Vishal Information Tech Ltd 45.62 36.75% 4 Cosmic Global Ltd (Tulsyan Tech Ltd) 17.02 12.55% 5 Transworks Information Services Ltd. 2.81 0.02% 6 Wipro BPO Solution Ltd. 18.59 15.51% 7 Ace Software Exports Ltd. 14.5 11.75% 8 Nucleus Netsoft & GIS Ltd. 40.06 37.02% 9 Maple E-solutions Ltd. 28.75 24.11% Average 24.68 20.57% 5.2 The TPO computed average profit margin of the comparables finally selected at 24.68%. The TPO had allowed the adjustment on account of working capital to the extent of 4.11%. On the above said basis, the TPO computed the transfer pricing adjustment as follows: Arms length mean margin 24.68% Less: working capital adjustment 4.11% Adjusted mean margin after working capital adjustment 20.57% Operating co....
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.... relied on the decision of co-ordinate bench (Hyderabad) in the case of M/s.Deloitte Consulting India Pvt. Ltd. In ITA NOs.1082 & 1084/Hyd/2010. As regards Saffron Global Ltd., it was retained by the ld.CIT(A) rejecting the contention of the assessee-company that the financial data is not available on the public domain at the time of TP study. After the directions of the ld.CIT(A) the surviving comparables are only three viz.,Saffron Global Ltd., Vishal Information Tech.Ltd., and Cosmic Global Ltd., whose average operating margin worked out to 29.18%. The ld.CIT(A) further held that the gains or loss arising out of foreign exchange transactions are purely in the nature of operating revenue. The ld.CIT(A) rejected the claim of the assessee-company for adjustment on account of differences in accounting policies, marketing expenditure and risk adjustment. The ld.CIT(A) also rejected the claim for adjustment of extra-ordinary expenses incurred should be excluded from operating cost. 7. Being aggrieved by this order, both the assesseecompany as well as the revenue are in appeal before us. 8. We shall now take up the assessee-company's appeal viz., IT(TP)A No.22/Bang/2012. In the g....
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....-company and therefore, confirmed the action of the TPO in including this company in the list of comparables. The Mumbai bench of Tribunal in the case of ACIT vs. Maersk Global Service Center (India) P Ltd. (133 ITD 543)(Mum) held that this company cannot be considered as a comparable as it outsourced major portion of the business. This decision was subsequently followed by the same bench in the case of ACIT vs. Hapag Lloyd Global Services Pvt. Ltd. (TS-47-ITAT- 2013)(Mum); Nomura Fin Services (India) (P.) Ltd. Vs. ACIT (2013) 33 taxmann.com 4 (Mum-Trib); Hyderabad Bench in the cases of Brigade Global Services vs. ITO 33 taxmann.618(Hyd-Trib) and Capital IQ Information Systems (India) P.Ltd. vs. DCIT (25 ITR (Trib) 185)(Hyd) and Bangalore bench of Tribunal in the case of ITO vs. Netlinx India Pvt. Ltd. (TS-722-ITAT-2012(Bang). This comparable has been considered by the Hon'ble Delhi High Court in the case of Rampgreen Solutions P. Ltd. Vs. CIT (377 ITR 533) wherein the Hon'ble High Court, after considering the decisions of the Tribunal cited supra, held that this company cannot be considered as a comparable with ITeS company as it is engaged in the Knowledge Process Outsourcing Ser....
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.... reason that most of its work was outsourced to other vendors/ service providers. The Dispute Resolution Panel and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity." 8.3 Respectfully following the decision of the Hon'ble High Court and co-ordinate benches of Tribunal, we hold that Vishal Information Technologies cannot be considered as a comparable with the assessee-company. Hence, we direct the AO/TPO to exclude this company from the list of comparables for the purpose of bench marking the international transactions with its AE. 9. Saffron Global Ltd.: This comparable company was chosen by the TPO. The assessee-company objected for inclusion of this company in the list of comparables....
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....mpany fairly conceded for this submission. However, he objected for inclusion of Wipro BPO as a comparable in view of high turnover and having huge intangibles etc. 12.2 We heard rival submissions and perused material on record. The provisions of Section 92 provides that income arising from international transaction is to be computed having regard to ALP. Section 92F(ii) defines "arm's length price" to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. To compute ALP the results of the international transaction are bench marked against comparable uncontrolled transaction. The mandate of s. 92F(ii) is that ALP shall be computed considering price applied or proposed to be applied in transactions between non- AE's. 12.2 When selection of external comparables, one needs to ensure that such external comparables are uncontrolled. The companies having controlled transactions therefore needs to be eliminated. Then the issue that crops up is what should be the related party transaction ratio for excluding as comparable. This issue had come up before the Tribunal in numerous cases. The ....