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2020 (10) TMI 1148 - AT - Income TaxTP Adjustment - comparable selection - application of turn-over filter - HELD THAT - In absence of vital information of the margins of the various segments, the company could not be considered a good comparable because of the difficulty in bench marking the correct profit margin. In B.C. MANAGEMENT SERVICES PVT. LTD. 2017 (12) TMI 255 - DELHI HIGH COURT noted that the presence of high brand value of the Tata brand also made TCS e- Serve Ltd. not a good comparable. TCS e-Serve cannot be held to be a good comparable for the purposes of bench marking the assessee s PLI. Consedering foreign exchange gain/loss as non-operational - HELD THAT - As decided in own case foreign exchange fluctuation cannot be seen as independent of the operating income. Respectfully following the same, on identical set of facts, without the Department having pointed out any distinguishing factor on the facts, we direct that the foreign exchange/fluctuation (loss or gain) we treated as being operational in nature and PLI should be computed accordingly after giving effect to the treatment of foreign exchange/loss as operational. Comparable selection - Inclusion of Accentia Technologies Ltd. as a comparable company - As functional profile of the assessee being different from the functional profile of Accentia Technologies Pvt. Ltd., this company cannot be considered a good comparable. Accordingly, we direct the exclusion of this company from the final set of comparables. Inclusion of the company Mastif Tech Pvt. Ltd. - Referring to submission of the assessee that this company is functionally dissimilar to the assessee company - objections of the assessee against inclusion of this company in the final set of comparables has not been dealt with either by the TPO or by the Ld. CIT (A). In such a situation, it is our considered view that in the interest of substantial justice, the TPO should consider the objections of the assessee against the inclusion of this company and thereafter pass a speaking order . Exclusion of the comparable Caliber Point Business Solution Ltd. on the ground that it had a different financial year ending - Respectfully following the order of CIT vs. Mckinsey Knowledge Centre India Pvt. Ltd. 2015 (3) TMI 1226 - DELHI HIGH COURT we direct the TPO to reconsider the inclusion of this comparable after duly considering as to whether the data for the financial year ending can be easily compiled and after duly considering and verifying whether Caliber Point Business Solution Ltd. can be considered functionally similar to the assessee company - assessee s appeal stands allowed for statistical purposes. Exclusion of Cosmic Global Ltd - Exclusion as it fails the export turnover filter of 75% although the TPO has not raised any objection regarding functional similarity - TPO has not specified any reason for applying the export turnover filter of 75% as compared to export turn over filter of 25% applied in Assessment Year 2009-10. Therefore, it is our considered view that this comparable needs to be examined afresh by the TPO and the TPO is directed to do so after considering the arguments of the assessee with respect to the functional similarity of this company as well as after duly considering the objections of the assessee against the application of export turn over filter and also the fact that the ITAT had found the turnover filter of even 25% as inappropriate in assessee s own case in assessment year 2009-10. Exclusion of company Informed Technologies India Ltd. - turnover filter of ₹ 5 Crores cannot be applied in the case of the assessee. What only remains to be seen is whether the company Informed Technologies India Limited is functionally comparable to the assessee or not. Accordingly, this comparable is restored to the file of the TPO for examining the assessee s claim of functional similarity with the company Informed Technologies India Ltd. Department is contesting the direction of the Ld. CIT (A) for including the company Acropetal Technologies Ltd. as a comparable with only the financials of healthcare segment - CIT (A) was correct in directing that only the ITeS Segment of this company be included for the purposes of comparability analysis and that the engineering design services segment to be excluded. Exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits. ICRA Techno Analytics Ltd. - As no segmental information and bifurcation between ITeS and Software Development Segments. For this reason, this company was directed to be excluded from the final set of comparables. Infosys BPO Ltd. excluded on the ground that it was a giant in the area of software development.
Issues:
1. Inclusion and exclusion of certain companies as comparables for Transfer Pricing analysis. 2. Application of turnover filter and export turnover filter. 3. Treatment of foreign exchange fluctuation gain/loss as operational or non-operational. 4. Granting of Risk Adjustment. Detailed Analysis: 1. Inclusion and Exclusion of Certain Companies as Comparables Acropetal Technologies Ltd.: - The Department's appeal challenged the inclusion of Acropetal Technologies Ltd. with only the healthcare segment. The Tribunal upheld the CIT(A)'s direction to include only the healthcare segment, noting that the Engineering Design Services (EDS) segment was not functionally comparable to the assessee's ITES services. E-Clerx Services Ltd.: - The Department's appeal against the exclusion of E-Clerx Services Ltd. was dismissed. The Tribunal agreed with CIT(A)'s observation that E-Clerx provided high-end KPO services, which were not comparable to the assessee's low-end ITES services. ICRA Techno Analytics Ltd.: - The Tribunal upheld the CIT(A)'s direction to exclude ICRA Techno Analytics Ltd., noting that it was engaged in diverse activities including software development and consultancy, and lacked segmental information to separate BPO services. Infosys BPO Ltd.: - The Tribunal upheld the exclusion of Infosys BPO Ltd., agreeing with CIT(A) that it was a giant with substantial intangibles and a different risk profile, making it incomparable to the assessee. Accentia Technologies Ltd.: - The Tribunal directed the exclusion of Accentia Technologies Ltd., noting its functional dissimilarity as it provided KPO services and was involved in software development and sale. Mastif Tech Pvt. Ltd.: - The Tribunal remanded the issue of including Mastif Tech Pvt. Ltd. back to the TPO for a detailed examination of functional comparability. Caliber Point Business Solutions Ltd.: - The Tribunal directed the TPO to reconsider the inclusion of Caliber Point Business Solutions Ltd., noting that a different financial year ending should not be the sole reason for exclusion if quarterly data is available. Cosmic Global Ltd.: - The Tribunal remanded the issue of excluding Cosmic Global Ltd. back to the TPO for fresh examination, noting inconsistency in applying the export turnover filter. Informed Technologies India Ltd.: - The Tribunal directed the TPO to reconsider the inclusion of Informed Technologies India Ltd., rejecting the turnover filter of ?5 Crores and focusing on functional comparability. TCS e-Serve Ltd.: - The Tribunal directed the exclusion of TCS e-Serve Ltd. for both assessment years under consideration, noting its high turnover, brand value, and functional dissimilarity. ICRA Online Ltd. and Datamatics Financial Services Ltd.: - The Tribunal remanded the inclusion of ICRA Online Ltd. and Datamatics Financial Services Ltd. back to the TPO for fresh examination, questioning the application of the 75% export turnover filter. ACE BPO Services Ltd.: - The Tribunal remanded the issue of excluding ACE BPO Services Ltd. back to the TPO for re-examination of functional similarity. 2. Application of Turnover Filter and Export Turnover Filter - The Tribunal questioned the inconsistent application of the turnover filter and export turnover filter by the TPO across different assessment years. The Tribunal directed the TPO to re-examine these filters and provide a clear rationale for their application. 3. Treatment of Foreign Exchange Fluctuation Gain/Loss - The Tribunal directed that foreign exchange fluctuation gain/loss be treated as operational in nature, following the precedent set in the assessee's own case for Assessment Year 2009-10. 4. Granting of Risk Adjustment - The Tribunal noted that the assessee did not press the ground for risk adjustment, and hence, it was dismissed. Conclusion: - The Tribunal provided detailed directions for the inclusion/exclusion of various comparables, emphasizing functional comparability and consistency in applying filters. The Tribunal also clarified the treatment of foreign exchange fluctuation gain/loss as operational and dismissed the ground for risk adjustment as not pressed. The appeals were partly allowed, dismissed, or allowed for statistical purposes based on the specific issues raised.
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