AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2014 (6) TMI 1076
X X X X Extracts X X X X
X X X X Extracts X X X X
....ervices (ITES) for domestic and international clients. Assessee's Offshore Research Service Centre (ORSC) is registered with Software Technology Park of India and provides ITES to its group companies. During the year, assessee has provided ITES both in India as well as overseas earning total revenue of Rs. 87,09,36,063/-. So far as international transactions are concerned assessee has provided ITES to AE and Non-AE. However, revenue earned from international transactions with AE as per 92CE Report are as under: Sale of services i) Provision of Data Processing (IT Enabled Services) ii) Market Research 26,06,79,292/- 6,29,81,801/- Business Solutions License Fees 78,52,761/- Payment of License Fees 1,68,77,683/- Group overhead Allocation Costs 1,41,25,663/- Asia Pacific Overhead Allocation 1,48,54,475/- Trademark license fee 1,06,11,398/- Reimbursement of expenses (paid) 4,15,50,234/- Reimbursement of expenses (received) 2,13,26,742/- 2.1 For the impugned assessment year assessee filed its return of income on 30/11/2006 declaring net income of Rs. 9,71,44,588/- after claiming deduction u/s 10A of the Act. To benchma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arables who have paid management fee to market research industries, ALP of such transaction is to be treated as NIL (ZERO). Accordingly, management fee of Rs. 2,89,80,138/- was treated as adjustment to be made u/s 92CA. After receiving the order of the TPO, AO framed a draft assessment order incorporating the adjustments proposed by TPO. Further, AO also modified the deduction claimed u/s 10A of the Act. Assessee objected to the draft assessment order before the DRP. Though assessee had challenged the order of the TPO on various grounds but DRP rejected most of them. Only in case of reimbursement of Rs. 2,13,26,742/-, DRP after considering clarification of TPO directed for reduction of Rs. 2,13,26,742/- from the adjustment proposed by TPO. Further, with respect to deduction claimed u/s 10A also DRP confirmed the draft assessment order. In conformity with the direction of DRP, AO passed the impugned assessment order. 3. Though ground Nos. 1 to 17 are on TP issues but at the outset learned AR expressed his intention to confine his argument to the following issues: i) Selection of comparables. ii) Rejection of comparables. iii) Consideration of management....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e parties and perused the materials on record. As can be seen from the facts on record, assessee as well as TPO has not gone into verticals/horizontals of the ITES sector while selecting comparables. However, as can be seen from the materials placed on record, the employee cost of this company is abnormally low compared to the assessee, which presupposes that it has outsourced major portion of its work to third parties. ITAT Mumbai Bench in case of Maersk Global Services Centre (India) Pvt. Ltd., (14 ITR [Trib.] 541) after considering this aspect rejected it as a comparable. Following the aforesaid decision of the ITAT Mumbai Bench, the coordinate bench of this Tribunal in case of M/s HSBC Electronic Data Processing India Ltd., Vs. Addl. CIT in ITA No. 1624/Hyd/2014 dated 28/06/2013 has directed the AO to exclude this from the list of comparables. The finding of the coordinate bench is extracted hereunder for convenience: "9.2 After considering the rival contentions, we find considerable force in the contentions advanced by the learned counsel. There is no dispute with reference to the fact that most of the cost incurred by the company taken as comparable is outsourcing co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....company, followed the decision of ITAT Mumbai Bench in case of M/s Stream International Services Pvt. Ltd. in ITA No. 8997/Mum/10, dated 11/01/2013 and held as under: "10.1. After considering the rival contentions, we are of the opinion that the `business model of the above company is different from that of the assessee. In this case, the foreign exchange revenue is less than 1% of the total turnover. Therefore, it fails the filter provided by the Assessing Officer, on the basis of the foreign exchange earnings. Further, the Revenue from BPO is failing over a period of three years. This issue was considered by the coordinate Bench (Mumbai Bench) of the Tribunal in the case of Stream International Services Ltd.(supra)wherein it was considered as under- "14. The inclusion of second case objected to by the ld. AR is that of Goldstone Infratech Limited (Seg) (earlier known as Goldstone Teleservices Limited). Here it is relevant to note that the TPO, inter alia, applied filter of 'Companies with export revenues more than 25% of the revenues'. Annual accounts of Goldstone Teleservices Limited indicate total revenue of the company at Rs. 30.89 crore from three segments, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be excluded." iv) Since the view expressed by the coordinate bench pertains to same AY, we follow the same and direct the AO/TPO to exclude this company from the list of comparables. 4. Datamatics Financial Services Ltd. i) Learned AR sought exclusion of the aforesaid company for the reason that it fails related party transactions filter adopted by the TPO as RPT exceeds 25% of sales. In support of the said contentions, he relied on the following decisions: 1. M.s HSBC Electronic Data Processing India Ltd. Vs. ACIT, ITA NO. 1624/Hyd/2010. 2. CES Pvt. Ltd., ITA No. 1445/Hyd/2010. 3. M/s Stream International Services Pvt. Ltd. Vs. ACIT, ITA No. 8997/Mum/2010. iii) The learned DR, however, supported the order of the TPO and DRP on the selection of this company as comparable. iv) We have considered the submissions of the parties and perused the materials on record. As can be seen the assessee has objected to the inclusion of the aforesaid company for the reason that it fails RPT filter applied by the TPO himself as the RPT exceeds 25% of the sales. In support of such contention, he relied on the decision of the co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or the exclusion of transactions with Datamatics Limited towards 'Reimbursement of expenses' from the overall transactions entered into by Datamatics Financial Services Ltd. with its AEs. Section 92F(v) defines 'transaction' in the context of transfer pricing provisions to include an arrangement, understanding or action in concert whether or not it is formal or in writing or whether or not it is intended to be enforceable by legal proceeding. There is no reference to any transaction having necessarily including profit element or mark-up so as to fall within the definition of 'transaction' under Chapter X of the Income-tax Act. Since the TPO applied filter of having companies with less than 25% related party transactions, it is not open to argue that the transactions of reimbursement of expenses duly reported by Datamatics Financial Services Limited as an 'international transaction' within the meaning of section 92B should be ignored simply because they represent reimbursement of expenses. If the contention of the ld. DR that the reimbursement of expenses not involving profit element should not be construed as a transaction, is taken to a logical conclusion, it would mean that all s....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... iii) We have heard the parties and perused the materials on record. The fact that directors of the said company were found to be involved has not been controverted by the department. It is seen that in case of CRM Services India Pvt. Ltd. Vs. ITO, ITA No. 468/Del/09 and Stream International Services Pvt. Ltd., ITA No. 8997/Mum/2010, ITAT Delhi and Mumbai Benches have held that the aforesaid company cannot be treated as comparable as financials of the company are not reliable. Following the aforesaid decision of the ITAT Mumbai Bench in Stream International Services Pvt. Ltd., the coordinate bench of this Tribunal in case of HSBC (supa) while excluding the aforesaid company from the list of comparables held as under: "12.1. We have considered the rival sub missions. We agree with the objections of the assessee. In the case of Stream International Services P. Ltd. (supra), it is held with reference to this company as under- "18. We are unable to uphold the contention raised by the learned Departmental Representative. It is apparent from two orders passed - one by the Delhi Bench and the other by the Hyderabad Bench of the Tribunal - that the case of Maple eSol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat Visual Soft Technologies Ltd. as a whole is not a loss making company as only BPO segment is making loss. It was submitted that since one of the segment is loss making, the company should not be rejected as comparable. In respect of Quantum esolutions Pvt. Ltd., it is the contention of the learned AR that FY 2005-06 being first year of operation of the company it cannot be treated as persistent loss making company. v) The learned DR supporting the orders of the TPO and DRP submitted, since TPO's reasoning for exclusion of the aforesaid companies are well founded, there is no need to consider these companies as comparables. vi) We have considered the submissions of the parties and perused the materials on record. As can be seen from the annual report of the Genysis International Corp. Ltd., this company is engaged in geospatical and mapping activities, engineering services, etc. Its business model is completely different from the assessee and as such it is functionally different. Further, we have come across a number of cases where taxpayers have objected to the aforesaid company being treated as comparable to companies in ITES sector. That being the case, we a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sue back to the file of the AO/TPO to look into this aspect and decide the issue after affording reasonable opportunity of being heard to the assessee. IV. Computation of working capital adjustment i) As already discussed earlier, while computing adjusted arithematic mean PLI of comparables, the AO made negative capital adjustment of (-) 2.12%. The DRP also rejected assessee's objection to the same. The learned AR contended before us that the TPO while computing working capital adjustment has committed an error by allocating total receivables and payables to the international transactions with AE only. It was submitted by the learned AR that since the assessee has also entered into international transactions with non-AEs, AO should have allocated proportionate receivable and payables to non-AE transactions as the assessee has furnished all the details before the TPO. The learned AR submitted that if receivables and payables are properly allocated to AE and non-AE transactions instead of negative working capital of 2.12%, it will be a positive figure of 2.29%. In this context, learned AR referred to summary of working capital adjustment at page 338 of the paper boo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at if at all the AO's view is to be inferred as correct, then, the ORSC unit having been converted from domestic tariff area (DTA) unit into STPI unit deduction u/s 10A of the Act is admissible for the unexpired period. The learned AR submitted that upon considering similar argument, DRP in assessee's own case relating to AY 2008-09 has allowed the claim of assessee by holding that when DTA unit is converted into 100% EOU, it becomes eligible for deduction u/s 10A for the remaining period. In this context, he referred to a copy of the order of the DRP for AY 2008-09 placed at page 264 of the paper book. 7. The learned DR on the other hand supported the order of the DRP. 8. We have heard the parties and perused the materials on record as well as the orders of the DRP on this issue. So far as the first contention of the assessee that ORSC is a new unit, we are unable to accept such contention in view of the specific finding of the AO, which has not been controverted by the assessee by bringing sufficient material to substantiate its claim. However, so far as alternative contention of the assessee for allowing claim of deduction u/s 10A of the Act due to conversion from DTA unit....