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2014 (8) TMI 871 - AT - Income TaxTransfer pricing adjustment - Selection of comparables Held that - Although a detail submission was made on behalf of the assessee before the CIT(A) on the basis of FAR analysis to show that the selection of Ms. Vimta Labs as comparable is not Justified, the CIT(A) has not accepted the stand of the assessee on the issue without giving any cogent or convincing reasons relying upon M/s Adobe Systems India Private Limited, Versus Additional Commissioner of Income tax 2011 (1) TMI 933 - ITAT NEW DELHI - exclusion of comparables showing supernormal profits as compared to other comparable is fully justified the order of the CIT(A) is remitted back to the AO for fresh consideration - the contentions of the assessee is accepted that this company cannot be treated as a comparable - among the ITES companies there is a hierarchy in terms of skill required to provide services - It ranges from providing routine services where no skills are required to providing services where highly professionalized skills are required - Depending on the skills required to perform ITES the comparability has to be done the company cannot be regarded as a comparable and deserves to be excluded from the list of comparables. Computation of the margin Rent for unutilized space as part of cost on which profit has to be earned Held that - The operating margin of 12.42% on cost as calculated by TPO is not in line with the operating margin of 15.18% as calculated and submitted by the assessee - while calculating operational margin no adjustment for expenses of rent relatable to substantial portion of unused floor space has been carried out - The assessee has adjusted a sum of ₹ 33 lacs towards the unutilized floor space including 10893 square feet acquired in new block for future expansion - TPO/AO is directed to re-workout the TP adjustment as per the provisions after excluding the comparables Decided partly in favour of Assessee. Addition made u/s 10A Held that - Following the decision in CIT v. Gem Plus Jewellery Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT - DRP though accepts such position but has decided the issue against the assessee only to give an opportunity to the department to pursue the same in higher forums - AO is directed to exclude the same from total turnover also Decided in favour of Assessee.
Issues Involved:
1. Transfer Pricing Adjustment 2. Margin Computation of the Assessee 3. Section 10A Deduction Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment: The primary issue is the selection of comparables by the Transfer Pricing Officer (TPO) and the computation of the margin of the assessee. The TPO rejected the assessee's Transfer Pricing (TP) study for several reasons, including the use of multiple-year data and the selection of companies with related party transactions exceeding 25% of operating revenue. The TPO conducted a fresh search and selected 27 comparables, resulting in a TP adjustment of Rs. 1,68,93,619. Selection of Comparables: - Accurate Data Converter and Nittany Outsourcing: These companies were included without prior notice and without discussion. The TPO is directed to reconsider their inclusion after providing the assessee an opportunity to raise objections. - Accentia Technologies Limited: The company is functionally different due to high overseas business expenses and substantial marketing expenses. Additionally, multiple acquisitions during the year impacted profitability. The TPO is directed to exclude this company. - Asit C Mehta Financial Services Ltd.: This company operates in a different vertical with a different cost structure. The TPO is directed to exclude it based on the coordinate bench decisions. - Vishal Information Technologies: Functionally different due to low employee cost and high vendor payments for data entry, indicating outsourcing. The TPO is directed to exclude this company. - Eclerx Services Limited: Engaged in knowledge process outsourcing (KPO) with extraordinarily high profit margins. The TPO is directed to exclude this company. - Mold-Tek Technologies Limited: Exhibited supernormal profit and is functionally different, providing structural engineering consulting services. The TPO is directed to exclude this company. - HCL Comnet Systems & Services Limited, Infosys BPO Limited, and Wipro Limited: These companies have significantly higher turnovers compared to the assessee. The TPO is directed to exclude these companies based on the turnover filter. - Genesys Corporation: Functionally different, requiring highly skilled manpower and performing R&D services. The TPO is directed to exclude this company. The TPO/AO is directed to rework the TP adjustment after excluding the aforementioned comparables and considering the objections raised by the assessee. 2. Margin Computation of the Assessee: The assessee's operating margin was calculated at 12.42% by the TPO, whereas the assessee calculated it at 15.18%. The discrepancy arose due to the exclusion of rent for unutilized floor space. The TPO/AO is directed to reconsider this issue, allowing the assessee to present objections and verifying the adjustments for unutilized floor space. 3. Section 10A Deduction: The assessee challenged the reduction of communication charges from export turnover without reducing it from total turnover while computing the deduction under Section 10A. This issue is covered by the judgment of the Hon'ble Bombay High Court in CIT v. Gem Plus Jewellery Ltd. and the ITAT Chennai Special Bench in ITO v. Sak Soft Ltd. The AO is directed to exclude the communication charges from total turnover as well. This ground is allowed in favor of the assessee. Conclusion: The appeal is partly allowed. The TPO/AO is directed to rework the TP adjustment and consider the cost issue as directed. The deduction under Section 10A should be computed by excluding communication charges from total turnover.
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