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2014 (7) TMI 715 - AT - Income TaxTransfer pricing adjustment Selection of comparables - Allsec Technologies Ltd. Held that - Net profit margin realized from the BPO services segment is not separately reported by such company - the assessee proceeded to calculate the so called amount of net profit realised at 4.01% of the BPO segment by bifurcating operating income and operating expenses in the ratio of revenue from these segments - If such ratio of revenue of two segments is to be applied both to the operating income and operating expenses, that it would lead to the supposition that the net operating profit of both the segments are equal - If this presumption is brought to a logical conclusion then the very need to calculate the net profit realised from BPO segment comes to a naught - the result of the entity level have been taken into consideration in the garb of the net profit realised from the BPO segment - the exercise done by the assessee in considering this case as a comparable has frustrated the calculations. The turnover of CG-VAK from BPO services segment is only to the extent of ₹ 86 lac against the assessee s whopping turnover of ₹ 59 crore - the turnover of ₹ 86 lac can be compared with that of ₹ 59 crore Relying upon CIT Versus Agnity India Technologies Pvt. Ltd. 2013 (7) TMI 696 - DELHI HIGH COURT - a giant company cannot be compared with a captive unit, applies with full force to the instant case as well - the assessee is a giant company and BPO segment of CG-VAK is only a captive one - If a giant company cannot be considered as comparable to a small company, in the like manner, a small company cannot be equally compared with a giant company - the case of CG-VAK cannot be held to be comparable on the strength of its volume of business - the computation of net profit margin realised by the BPO unit of CG-VAK is not adequately workable and it is a captive unit vis-a-vis the assessee. R. Systems International Limited Held that - The assessee has adopted the figures of the company for the calendar year ending 31.12.2008 - the assessee is closing its accounts as on 31.3.2009, naturally, the data of R. Systems does not pass the test laid down in sub-rule (4) of Rule 10B - R. Systems International Ltd. has been excluded by the TPO solely for the reason that its financial year is different without considering that the data for the financial year adopted by the assessee can be easily compiled from the audited statements of such company thus, the matter is remitted back to the TPO/AO for including R. Systems International Ltd. in the list of comparables by working out the figures relevant to the financial year ending 31.3.09 from the audited accounts of R. Systems International Ltd. Coral Hub Ltd. Held that - Outsourcing charges constitute 90% of the total operating cost in this case the crucial factor, having a greater bearing on the profitability, makes it distinguishable from the assessee Relying upon Assistant Commissioner of Income-tax, Range - 10(1), Mumbai Versus Hapag Lloyd Global Services (P.) Ltd. 2013 (11) TMI 1314 - ITAT MUMBAI - Vishal Information Technologies Ltd. cannot be considered as comparable because of the overwhelming outsourcing activity carried out by it thus, this case is required to be excluded from the list of comparables. Cosmic Global Limited Held that - The case to incomparable on the alternative argument advanced by the assessee to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at ₹ 27.76 lacs - a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at ₹ 86.10 lacs - As the segmental revenue of BPO segment of Cosmic Global Limited at ₹ 27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable thus, the AO is directed to be excluded from the list of comparables. Genesys International Corporation Ltd. Held that - The assessee is basically providing various services to the customers of its AEs in relation to human resources which are more or less centered around the employees of the prospective clients - there is a vast difference which make one quite distinct from the other - In view of such functional incomparability between the assessee and Genesys, this company cannot be treated as comparable. Non-grant of working capital adjustment Held that - Working capital adjustment is ordinarily confined to inventory, trade receivables and trade payables - If a company carries on high trade receivables, it would mean that it is allowing its customers a relatively longer period to pay their amount which will result into higher interest cost and the resultant less profit - Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it to pay back its suppliers which lowers the interest cost and accelerates profits - To have a level playing field, it is sine qua non that the working capital adjustment should be carried out to bring two otherwise comparable cases at par with each other - the order of the TPO/AO is set aside for examining the assessee s claim for grant of working capital adjustment on merits and thereafter, allow the same, if it is available. Reduction of amount of deduction u/s 10AA of the Act Held that - In computing the total income of an assessee, a deduction of hundred percent of profits and gains derived from the export of the eligible articles or things shall be granted for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the unit begins to manufacture, etc. - a narrow interpretation of the phrase derived from would have been applicable - the interest income which falls under Chapter IV-D of the Act, viz., Profits and gains of business or profession is eligible for deduction u/s 10AA of the Act - As the necessary details about the nature of interest income are not available on record, it would be expedient to set aside the order and remit the matter to the file of the AO. Reduction of communication expenses Expenses incurred in foreign currency from the computation of export turnover u/s 10AA of the Act Held that - The assessee is a 100% exporter inasmuch as its export turnover as well as the total turnover before the reduction of telecommunication charges stood at ₹ 59.18 crore The decision in CIT vs. Genpact India 2011 (11) TMI 119 - DELHI HIGH COURT - communication expenses should also be excluded from total turnover for the purposes of computation of deduction Decided partly in favour of Assessee.
Issues Involved:
1. Transfer Pricing Adjustment 2. Inclusion/Exclusion of Comparables 3. Working Capital Adjustment 4. Deduction under Section 10AA of the Income-tax Act, 1961 Detailed Analysis: 1. Transfer Pricing Adjustment: The primary issue in the appeal is the transfer pricing adjustment of Rs. 6,16,24,726/- made by the AO based on the TPO's proposal and approved by the DRP. The assessee, a wholly-owned subsidiary of Mercer Mauritius Ltd., provides IT and IT-enabled services to its AEs. The dispute concerns the determination of the ALP for IT-enabled services rendered to Mercer (US) Inc., for which the assessee was compensated Rs. 59,19,89,199/-. The assessee used the TNMM method for benchmarking, but the TPO found defects in the TP analysis and chose five comparables, resulting in a proposed adjustment. 2. Inclusion/Exclusion of Comparables: The assessee contested the exclusion of three comparables and the inclusion of three others initially included by the assessee but later claimed to be non-comparable. a. Allsec Technologies Ltd.: The TPO excluded this company due to diminishing sales and export revenues less than 75% of total turnover. However, the tribunal found that Allsec's operating revenue increased in FY 2008-09 and its export revenue was 74.45%. The tribunal held that the exclusion for such a minuscule difference was unjustified and included Allsec in the list of comparables. b. CG-VAK Software & Exports Ltd.: The TPO excluded this company based on a turnover filter of less than Rs. 1 crore. The tribunal upheld this exclusion, noting the company's low revenue from BPO services and its status as a captive unit, making it incomparable to the assessee. c. R. Systems International Ltd.: The TPO excluded this company due to a different financial year ending. The tribunal directed the TPO/AO to include R. Systems by working out figures relevant to the financial year ending 31.3.09 from the audited accounts. d. Coral Hub Ltd.: The tribunal excluded this company due to significant outsourcing (90% of total operating cost), which made it functionally different from the assessee. e. Cosmic Global Ltd.: The tribunal excluded this company due to its low revenue from the Accounts BPO segment (Rs. 27.76 lac), making it incomparable to the assessee. f. Genesys International Corporation Ltd.: The tribunal excluded this company due to functional incomparability, as it provided geospatial services, unlike the assessee's human resources and payroll services. 3. Working Capital Adjustment: The tribunal found the authorities' rejection of the working capital adjustment claim unjustified. It directed the TPO/AO to examine the assessee's claim on merits and allow the adjustment if warranted. 4. Deduction under Section 10AA: The issue had two components: denial of deduction on interest income and reduction of communication expenses from export turnover. a. Interest Income: The tribunal held that interest income, if falling under 'Profits and gains of business or profession,' is eligible for deduction under Section 10AA. It remitted the matter to the AO to decide on the nature of interest income and allow deduction accordingly. b. Communication Expenses: The tribunal directed that communication expenses should be excluded from both export turnover and total turnover, following the jurisdictional High Court's decision in CIT vs. Genpact India. Conclusion: The appeal was partly allowed, with directions to include/exclude certain comparables, consider working capital adjustment, and reassess the deduction under Section 10AA based on the tribunal's findings.
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