2015 (8) TMI 656 - AT - Income Tax

Transfer pricing adjustment - selection of certain comparables in ITeS segment - Held that - In case of M/s. Capital IQ Information Systems (India) Pvt. Ltd vs. Addl. CIT 2014 (9) TMI 125 - ITAT HYDERABAD all these companies were found to be incomparable to a pure ITES provider (1) Infosys B P O Ltd because of its big brand value, this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. (2) Genesys International Ltd because there is vast difference between the functions of the above company and that of assessee. (3) Eclerx Services Ltd. beacause as seen from the Annual Report, the above company is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee s services. We therefore, direct the Assessing Officer/TPO to exclude this company. (4) Cosmic Global Ltd. because total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at ₹ 27.76 lacs. (5) Acropetal Technologies Ltd. (Seg.) company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system.allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports.Therefore, this company cannot be selected as a comparable.(6) Accentia Technologies Limited.company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. ALLSEC Technologies Ltd - during the relevant FY, it has acquired a company. Further, it is clear that company has made losses and it is not clear whether loss is on account of acquisition or not - we do not consider it appropriate to accept this company as a comparable. Non aggregating the software services transactions of the assessee for determining the ALP - Held that - It is apparent from the facts and materials on record, even after merger of Spacelabs with Rapiscan Systems India Ltd, maintenance of accounts is entity specific. Though, it may be a fact that software development services is a very wide term and takes within its ambit, whole software development services, such as medical, security, banking, accountancy etc., but for comparability analysis, verticals of the software development industry have to be looked into. All types of software development services cannot be clubbed together for comparability analysis, as in our view, it will not give an appropriate result. As in assessee s case also software development services are for two different sectors i.e. security system as well as medical services, we are not able to accept assessee s contention that operating profit to operating cost of the revenue earned from software development services segment should be considered as a whole for computing the margin of the assessee. Moreover, when assessee has maintained entity specific a/c with segmental details and has also conducted analysis on this basis in its TP study, we do not find any reasons to disturb the order of the TPO and DRP on this issue. Accordingly, having not found any merit in the submissions of the ld AR, we dismiss this ground. As far as Bodh Tree Consulting Ltd, Infosys Ltd, Kals Information Systems Ltd and Tata Elxsi Ltd are concerned, it is seen that they have been rejected as comparables in respect of software development service providers by different Benches of the Tribunal including the Hyderabad Benches, for the very same A.Y i.e. A.Y 2009-10 I-Gate Global Solutions Ltd - As relevant informations required for coming to a definite conclusion are not before us, we are inclined to remit the issue of comparability of this company to AO/TPO for considering afresh. Further, we may observe that in case of Triology E Business (2011 (6) TMI 392 - ITAT BANGALORE ) this company has been excluded on the basis of high turnover. Therefore, this aspect is also required to be examined by AO/TPO while deciding comparability of this company. CG-VAK Software Exports Ltd (Seg.) and Quintegra Solutions Ltd - It is seen from record that while the TPO rejected this company alleging that the foreign exchange revenue earned by the company only 57% of the total revenue earned, assessee s claim is foreign exchange revenue earned by the company is more than 92% of the total revenue. In this context, the ld. AR has placed reliance on the annual report of the company as submitted in the paper book. Having considered the submissions of the parties, we are of the view that this issue needs to be looked into afresh by the TPO, in view of the assessee s claim that the foreign exchange earning of the company is more than 92%. TPO must examine assessee s claim with reference to the facts and materials on record and decide the issue with a reasoned order after giving opportunity of being heard to the assessee. Non consideration of provision for bad and doubtful debts while computing the net margin of comparable companies under TNMM - Held that - As relying on case of M/s Kenexa Technologies Pvt. Ltd. Vs. DCIT 2014 (11) TMI 587 - ITAT HYDERABAD we direct A.O./TPO to recompute the margins of the comparable companies by including the provision for bad and doubtful debts as operating expenses. Working capital adjustment - Held that - We direct A.O./TPO to look in to this issue afresh keeping in view the submissions made by assessee as well as the workings submitted in this regard. The TPO must take a decision on the issue by assigning valid reasons after reasonable opportunity of being heard to assessee. Rejection of resale price method (RPM) selected by the assessee for determining the ALP of the international transactions of purchase of medical equipment for distribution - Held that - after considering a number of decisions on the very same issue from different Benches of the ITAT, it was held that in case of transactions related to purchase and sale of goods, RPM is the most appropriate method. The principles laid down in Danisco (India) Pvt. Ltd. Versus ACIT Circle 10(1) New Delhi 2014 (11) TMI 132 - ITAT DELHI applies to the facts of the present case not only because the assessee is involved purely in trading activity, but also in the TP study assessee has adopted RPM as the most appropriate method. Only because in the preceding assessment year for some reason assessee has not challenged the decision of DRP in upholding application of TNMM, assessee cannot be prevented from objecting to adoption of TNMM in the impugned assessment year. In view of the aforesaid, we remit the matter back to the file of the AO/TPO to examine assessee s analysis under the RPM and decide the issue accordingly after due opportunity of being heard to the assessee. Exclusion of communication and insurance expenses from total turnover particularly in absence of definition of the term total turnover under the provisions of section 10A/ 10B - Held that - This issue is no more res integra in view of a number of judgments of different High Court and different Benches of the Tribunal including the Special Bench holding that expenses relating to communication charges & insurance if excluded from export turnover, they have to be excluded from total turnover while computing exemptions u/s 10A/10B of the Act. In this context, a reference can be made to the decision of CIT Vs. Gem Plus Jewellery India Ltd 2010 (6) TMI 65 - BOMBAY HIGH COURT and the decision of the ITAT Chennai Special Bench in the case of Income Tax Officer vs. Sak Soft India Ltd (2009 (3) TMI 243 - ITAT MADRAS-D). - Decided against revenue.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Selection of Comparables
3. Aggregation of Software Services Transactions
4. Rejection of Resale Price Method (RPM)
5. Non-Consideration of Provision for Bad and Doubtful Debts
6. Working Capital Adjustment
7. Levy of Interest u/s 234B
8. Allowance of TDS Credit
9. Exclusion of Communication and Insurance Expenses from Total Turnover

Detailed Analysis:

1. Transfer Pricing Adjustments:
The primary issue revolves around the adjustments made by the Transfer Pricing Officer (TPO) concerning the Arm's Length Price (ALP) of international transactions between the assessee and its Associated Enterprises (AEs). The TPO used the Transactional Net Margin Method (TNMM) as the most appropriate method for determining the ALP, which led to adjustments in the income declared by the assessee.

2. Selection of Comparables:
The TPO selected various comparables to benchmark the assessee's transactions. The assessee objected to the inclusion of certain companies like Infosys BPO Ltd, Genesys International Ltd, Eclerx Services Ltd, Cosmic Global Ltd, Acropetal Technologies Ltd, and Accentia Technologies Ltd, arguing that these companies were not functionally similar. The Tribunal examined these objections and excluded these companies based on previous rulings indicating functional dissimilarity.

3. Aggregation of Software Services Transactions:
The assessee argued for aggregating the revenue earned from software development services post-merger of Spacelabs and Rapiscan India. The Tribunal rejected this argument, stating that even after the merger, separate books of accounts were maintained, and the nature of services provided by the two entities was different.

4. Rejection of Resale Price Method (RPM):
The assessee contended that RPM was the most appropriate method for determining the ALP of transactions related to the distribution of medical equipment. The TPO rejected RPM and applied TNMM instead. The Tribunal, however, held that RPM was indeed the most appropriate method for such transactions, as the assessee was purely a reseller without any value addition. The matter was remitted back to the TPO for re-evaluation using RPM.

5. Non-Consideration of Provision for Bad and Doubtful Debts:
The assessee argued that the provision for bad and doubtful debts should be considered part of operating expenditure while computing margins of comparable companies. The Tribunal agreed with the assessee, directing the TPO to include these provisions as operating expenses.

6. Working Capital Adjustment:
The assessee sought a working capital adjustment, arguing that it did not have to take much risk regarding working capital investment. The Tribunal directed the TPO to re-examine the issue, considering the assessee's submissions and workings.

7. Levy of Interest u/s 234B:
The issue of charging interest under Section 234B was deemed consequential in nature and was not adjudicated upon at this stage.

8. Allowance of TDS Credit:
The assessee claimed that the entire TDS credit was not allowed as claimed in the return of income. The Tribunal directed the Assessing Officer (AO) to verify this aspect and decide the issue after giving due opportunity to the assessee.

9. Exclusion of Communication and Insurance Expenses from Total Turnover:
The Department's appeal challenged the exclusion of communication and insurance expenses from total turnover while computing exemptions under Section 10A/10B. The Tribunal upheld the DRP's decision, citing settled legal positions that such expenses should be excluded from both export turnover and total turnover.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the Department's appeal. The issues were remitted back to the TPO/AO for re-evaluation based on the Tribunal's directions, ensuring that the principles of transfer pricing and appropriate methods for determining ALP were correctly applied.