TaxTMI 
TaxTMI 
2018 (5) TMI 2122
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....ion information technology enabled and financial support services do not satisfy the arm's length principle as envisaged under the Income Tax Act, 1961 ('The Act') and in doing so the Ld. AO/TPO has grossly erred in: 2.1 disregarding the arm's length price ('ALP') and the methodical benchmarking process carried out by the appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules'); and in particular modifying/ rejecting the filters applied by the appellant; 2.2 rejecting comparability analysis in the TP documentation and in conducting a fresh comparability analysis based on application of additional filters in an arbitrary manner while determining the arm's length price; 2.3 including companies in the comparability analysis which do not satisfy the test of comparability in terms of functions performed, assets employed and risks assumed; 2.4 resorting to arbitrary rejection of low profit/loss making companies based on erroneous and inconsistent reasons; 2.5 including companies having abnorma....
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....acts and in law in levying and computing interest under section 234B of the Act. 7. That the Ld. AO erred on facts and in law in initiating the penalty proceedings against the Appellant under section 271(1)(c) of the Act. The above grounds are without prejudice to each other. The appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing." 3. Ground No. 1 is general in nature and ground no. 7 is raised pre-maturely, so these grounds do not require any comment on our part. 4. Vide ground nos. 2 to 2.10, the grievance of the assessee relates to the confirmation of addition of Rs.3,78,55,211/- made by the AO on account of arm's length price. 5. Facts of the case related to this issue in brief are that the assessee was engaged in business of manufacturing of portable generating sets, I.C. Engines, Water Pumping sets and manufacture and processing of pressure Die-Casting parts. The assessee filed the return of income on 29.09.2009 declaring an income of Rs.13,98,57,008/-. Later on, the case was selected for scrutiny. During the course....
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.... 8. The assessee submitted before the TPO that it could not get the financial data of the comparable companies for the F.Y. 2008- 09 and considered the latest available data for the purpose of benchmarking analysis, however, it did not use the financial data of the companies for the financial year ended March 31, 2006 and prior years as per limitations imposed by the statutory provisions. The assessee also objected on the applicability of less than Rs. 1 crore filter and submitted that turnover criteria should not be applicable in case of an entity which operates on a cost plus pricing model. It was stated that the TPO had applied this filter to eliminate companies with export turnover less than 75%. 9. The TPO after considering the submissions of the assessee referred to the revised OECD guidelines, 2010 regarding economic circumstances for comparability and rejected the objections raised by the assessee by observing as under: "The domestic companies cannot be treated as comparable to the taxpayer who is wholly or mainly export oriented because: a) conditions prevailing in the export and domestic market in which the respective parties to the transactions opera....
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.... that geographical markets of the other party in the transactions i.e. customer is different in the case of domestic market which is India and export market of the taxpayer and also pricing mechanism is influenced by such factors for which reasonable adjustments cannot be made to account for the differences in geographical markets, and other prevailing market conditions like level of competition etc." 10. The reliance was placed on the following case laws: • M/s Chiron Behring Vaccines Pvt. Ltd. (2011-TII-30- ITAT-Mum-TP) • M/s CRM Services India (P) Ltd. (2011-TII-86-ITATDel- TP) • M/s Deloitte Consulting India Pvt. Ltd. in ITA No. 1082/Hyd/2010 • M/s Indo American Jewellery Ltd. (2010-TII-24-ITATMum- TP) • M/s Ranbaxy India 299 ITR (AT) 175 (Del.) 11. The TPO finally determined the arm's length price at Rs.22,80,33,381/- as against Rs.25,24,76,890/- determined by the assessee and directed the AO to enhance the income by Rs.3,78,55,211/- giving the calculation as under: Sl. No. Comparable OP/OC 1. AcroPetal Tech (Segment) 21.30% 2. Aditya Birla Minacs Worldwide Ltd. 0.50% 3. Cor....
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....erated the observations made therein. It was further submitted that comparables were rightly selected being functionally similar and that the income was earned only from IT enabled services in which the assessee was engaged. 15. We have considered the submissions of both the parties and perused the material available on the record. It is noticed that the ITAT Delhi Bench 'I', New Delhi in the case of M/s Mercer Consulting (India) (P.) Ltd. Vs DCIT, Circle-2, Gurgaon (supra) directed to exclude the Coral Hub Ltd. and the relevant findings are given in paras 12.1 to 12.3 which read as under: "12.1. This case was earlier included by the assessee in the list of comparables in the transfer pricing study by considering multiple-year data. However, when the TPO required the assessee to furnish data of comparables for the current year alone, the assessee requested for the exclusion of this case from the list of comparables. The ld. DR opposed this contention by urging that the assessee cannot be allowed to resile from its original stand. 12.2. We are disinclined to sustain the legal objection taken by the ld. DR that the assessee should be prohibited from taking a stan....
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....rucial factor, having a greater bearing on the profitability, makes it distinguishable from the assessee. The Mumbai Bench of the Tribunal in the case of Hapag Lloyd Global Services (supra) has held that Vishal Information Technologies Ltd. cannot be considered as comparable because of the overwhelming outsourcing activity carried out by it. This view was taken by relying on another order passed by the Mumbai Bench of the Tribunal in ACIT vs. Maersk Global Service Centre (India) Pvt. Ltd. (ITA No.3774/M/2011). In the later case also, the Tribunal held that the case of Vishal Information Technologies Ltd. or Coral Hub Ltd. was not includible in the list of comparables because of major outsourcing. Since the facts of the instant case are on all fours with these two cases, we are of the considered opinion that this case is required to be excluded from the list of comparables. We order accordingly." 16. Similarly, the ITAT Pune Bench 'A', Pune directed to exclude M/s Vishal Information Technologies Ltd. (now M/s Coral Hub Ltd.) and M/s Eclerx Services Ltd. and M/s Cosmic Global Ltd. vide order dated 31.10.2014 in ITA No. 336/PN/2014 for the assessment year 2009-10 by observing as un....
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...., copies of which have been placed in the Paper Book at pages 420.8 to 420.31. By referring to the written submissions, it is also sought to be pointed out that the intermediary functions performed by the said concern can be compared to that of a distributor which takes title to service/product for resale to the customers. The aforesaid assertion is sought to be substantiated by the details of payments made by the said concern for data entry and vendor payments, personnel costs and sales. It is, therefore, contended that the said concern is functionally dissimilar to that of the IT-Enabled services segment of the assessee. It has also been argued that the said concern has earned supernormal profits as high as 59.19% and therefore, the same is not includible in the list of comparables so as to avoid skewing of the comparability analysis. On the other hand, the stand of the Revenue as brought out by the TPO in para 6.9.6. of the order is to the effect that the said concern being categorized as an IT-Enabled services concern, the same is liable to be included. 31. We have carefully considered the rival submissions on this aspect. At the outset, we may refer to page 810 of the....
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.... comparable. 50. The next company as per the assessee which should not be taken as comparable is Cosmic Global Ltd. Admittedly, the assessee had not objected to its inclusion either before the TPO or DRP. However, the assessee challenged the exclusion of the said company as comparable before the Tribunal. 51. We find that the Special Bench of Chandigarh Tribunal in the case of Quark Systems Pvt. Ltd. (supra) had held that even if the assessee had not challenged the inclusion of the comparable before the authorities below, the same could be challenged before the Tribunal for the first time. Accordingly, we hold that the assessee at this point can raise the said issue. Now, the second part of the objection was that the company had outsourced its vendor and was making high vendor payments as compared to the sales and hence was not comparable. While adjudicating the exclusion of M/s. Vishal Information Technologies Ltd., we have in paras hereinabove already considered this aspect of the companies outsourcing to vendors and held M/s. Vishal Information Technologies Ltd. to be not functionally comparable. Following the same parity of reasoning, we hold that M/s....
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....r the clients. It s claimed that Eclerx is a different company with industry specialized services for meeting in two business verticals financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s. eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated t development automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s. eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this compan....