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2014 (12) TMI 1064 - AT - Income TaxTPA - Erroneous computation of operating margin of Caliber Point Business Solutions Ltd. ( Caliber ) in the final set of comparable - IT enabled services/business process outsourcing services provided to group companies Held that - Assessee contended that the TPO while computing the operating margin of Caliber Point Business Solutions Ltd., has not reduced/apportioned unallocated cost of ₹ 3,96,39,162/- for which the margin of the comparable has gone up to 18.55% as compared to the correct working of 8.70% - revenue has no objection for the same thus, the matter is remitted back to the AO for determination of working of margin of comparable Decided in favour of assessee. Selection of outliers companies as comparable Accentia Technologies Ltd. - Held that - Following the decision in Capital IQ Information Systems (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax (International Taxation) 2014 (3) TMI 626 - ITAT HYDERABAD - certain extraordinary events took place in the case of Accentia Technologies Ltd. for which it warrants exclusion of this company as a comparable - extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place - It is clear that during the previous year there were extra ordinary events that took place in the company which warrants exclusion of the company and this company cannot be considered as a comparable. Coral Hubs Ltd. (Formerly known as Vishal Informatics Technologies Ltd. Held that - In Symphony Marketing Solutions India (P.) Ltd. Versus Income-tax Officer 2014 (2) TMI 83 - ITAT BANGALORE it has been held that Coral Hubs Ltd. cannot be considered as a comparable - assessee has objected for this company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but the business model of the company is also different as it sub-contracts majority of its ITES works to third party vendors and has also made significant payments to those vendors - The payments made to vendors towards the data entry charges also supports the fact that the company outsources its works Coral Hub is not a suitable comparable to the taxpayer and hence needs to be dropped from the final list of comparables - assessee is not engaged in e-publishing business, therefore, Coral Hubs Ltd. cannot be considered as comparable Decided in favour of assessee.
Issues Involved:
1. Erroneous computation of operating margin of Caliber Point Business Solutions Ltd. 2. Erroneous selection of comparable companies. 3. Erroneous rejection of comparable company. 4. Erroneous calculation of operating margin of companies selected by the TPO. 5. Erroneous selection of ITES companies unlike BPO companies as comparable. 6. Erroneous selection of outliers companies as comparable. 7. Non-sharing of search matrix and FAR analysis by the TPO. 8. Incorrect calculation of working capital adjustment. 9. Non-consideration of risk adjustment. 10. Transfer pricing adjustment without giving benefit of +/- 5 percent. 11. Initiation of penalty proceedings. 12. Levying interest under section 234B of the Act. Issue-wise Detailed Analysis: 1. Erroneous computation of operating margin of Caliber Point Business Solutions Ltd.: The assessee argued that the TPO did not reduce or apportion the unallocated cost of Rs. 3,96,39,162/-, which inflated the margin of the comparable to 18.55% instead of the correct 8.70%. The Tribunal restored this issue to the Assessing Officer to apportion the unallocated cost and determine the margin correctly. 2. Erroneous selection of comparable companies: The assessee contended that Accentia Technologies Ltd. and Coral Hubs Ltd. had different functionalities. Accentia Technologies Ltd. was involved in SAAS software in the HRC area, and Coral Hubs Ltd. was engaged in data conversion, e-publishing, and Custom Application Development Service. The Tribunal, following decisions from various benches, held that these companies were not comparable due to extraordinary events (mergers and acquisitions) and different business models. The Tribunal directed the exclusion of these companies from the list of comparables. 3. Erroneous rejection of comparable company: The assessee did not press this ground, and it was dismissed as academic in nature. 4. Erroneous calculation of operating margin of companies selected by the TPO: The assessee pointed out that the TPO erroneously considered non-operating expenditure of Foreign Exchange Loss as operating in nature and non-operating income of 'miscellaneous income' as operating in nature. The Tribunal directed the Assessing Officer to exclude these items from the operating income of the respective companies. 5. Erroneous selection of ITES companies unlike BPO companies as comparable: This ground was not pressed by the assessee and was dismissed as academic in nature. 6. Erroneous selection of outliers companies as comparable: The Tribunal had already directed the exclusion of Accentia Technologies Ltd. and Coral Hubs Ltd. from the list of comparables, rendering this ground infructuous. 7. Non-sharing of search matrix and FAR analysis by the TPO: This ground was not pressed by the assessee and was dismissed as academic in nature. 8. Incorrect calculation of working capital adjustment: This ground was not pressed by the assessee and was dismissed as academic in nature. 9. Non-consideration of risk adjustment: This ground was not pressed by the assessee and was dismissed as academic in nature. 10. Transfer pricing adjustment without giving benefit of +/- 5 percent: This ground was not pressed by the assessee and was dismissed as academic in nature. 11. Initiation of penalty proceedings: This ground was not pressed by the assessee and was dismissed as academic in nature. 12. Levying interest under section 234B of the Act: This ground was not pressed by the assessee and was dismissed as academic in nature. Conclusion: The appeal was partly allowed for statistical purposes, with specific directions to the Assessing Officer to apportion the unallocated cost for Caliber Point Business Solutions Ltd., exclude Accentia Technologies Ltd. and Coral Hubs Ltd. from the list of comparables, and exclude non-operating income and expenditure from the operating income of the respective companies.
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