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2019 (3) TMI 1815 - AT - Income TaxTP Adjustment - Comparable selection - HELD THAT - Excel Infoways Ltd was not considered as a comparable company for the reason that the profits of the company was declining and it was having super normal profits. The year-wise profit percentage would show that the same was consistently declining from 364.14% in FY 2009-10 to 0.43% in FY 2014-15. In view of the fluctuating profit, i.e., diminishing profit, the above said company was not taken as a comparable. Even though the D.R contended that the decision in the case of Emerson Climate Technologies (India) Pvt. Ltd, which was followed by the Pune bench of Tribunal in the case of Ocwen Financial Solutions P Ltd 2019 (1) TMI 1352 - ITAT PUNE was related to different assessment year and further the functions of M/s Emerson Climate Technologies (India) Pvt. Ltd. were different, yet we are of the view that the principle laid down in the above said case with regard to diminishing revenue and fluctuating profit can be adopted in the instant case. Further the Ld A.R has pointed out that there is difference in the functions performed between the assessee company and M/s Excel Infoways Ltd. In view of the above, we agree with the contentions of the assessee that M/s Excel Infoways Ltd cannot be considered as a comparable company in the hands of the assessee. M/s R System International Ltd - We notice that the assessee has collated the financial results of the above said company for the financial year 01-04-2011 to 31-03- 2012. Further the details furnished by the assessee also show that this company cannot be categorised as persistent loss making company. Hence both the reasons given by the TPO to exclude this company would, in our view, fail. However the details furnished by the assessee require examination at the end of AO/TPO. Accordingly we restore this issue to the file of the AO/TPO for examining the details furnished by the company and if no fault is found with them, then the above said company should be considered as a comparable company. ALP of international transactions requires re-examination. Accordingly we restore the same to the file of AO/TPO for examining them afresh in the light of discussions.
Issues Involved:
1. Inclusion of M/s. Excel Infoways Ltd. in the list of comparables. 2. Exclusion of M/s. R System International Ltd. from the list of comparables. Detailed Analysis: 1. Inclusion of M/s. Excel Infoways Ltd. in the List of Comparables: The primary grievance of the assessee was the inclusion of M/s. Excel Infoways Ltd. as a comparable company by the tax authorities. The assessee argued that M/s. Excel Infoways Ltd. is engaged in providing customer care services and handling client business relations through voice-based services, which is fundamentally different from the investment research support services provided by the assessee. The assessee highlighted several differences: - Employee Cost: M/s. Excel Infoways Ltd. had an employee cost of around 13%, whereas the assessee's employee cost was above 54%. - Risk Factor: The assessee is a captive service provider and risk-free, while M/s. Excel Infoways Ltd. provides services to third parties, involving higher risk. - Profitability: M/s. Excel Infoways Ltd. exhibited fluctuating and declining profit levels over the years. The Tribunal examined previous cases, such as M/s. Ocwen Financial Solutions Pvt. Ltd. and Emerson Climate Technologies (India) Pvt. Ltd., where M/s. Excel Infoways Ltd. was excluded as a comparable due to its fluctuating margins and diminishing revenue. The Tribunal noted that the profit margins of M/s. Excel Infoways Ltd. had declined consistently from 364.14% in FY 2009-10 to 0.43% in FY 2014-15, indicating diminishing profitability. The Tribunal concluded that the principle of excluding companies with fluctuating and diminishing profits should apply, and thus, M/s. Excel Infoways Ltd. should not be considered a comparable company. 2. Exclusion of M/s. R System International Ltd. from the List of Comparables: The assessee contested the exclusion of M/s. R System International Ltd. by the TPO and DRP, which was based on two reasons: - Different Financial Year: The company had a different financial year. - Persistent Losses: The company was alleged to be making persistent losses. The assessee provided collated financial results for M/s. R System International Ltd. for the financial year 01-04-2011 to 31-03-2012, showing a profit of 2.17% on sales. It was also submitted that the company had been making profits in earlier years. The Tribunal found that the reasons given by the TPO for exclusion were not valid, as the company was not a persistent loss-making entity. However, the Tribunal noted that the new information provided by the assessee required examination by the AO/TPO. Therefore, the Tribunal restored the issue to the AO/TPO for verification of the financial details provided by the assessee. If the details were found accurate, M/s. R System International Ltd. should be included as a comparable company. Conclusion: The Tribunal concluded that the assessment of the ALP of international transactions required re-examination. The issues were restored to the file of AO/TPO for fresh examination in light of the discussions. The appeal of the assessee was treated as allowed. The order was pronounced in the open court on 15th March 2019.
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