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TMI Blog2011 (6) TMI 398X X X X Extracts X X X X X X X X Extracts X X X X ..... ether on the facts and in the circumstances of the case, the ld. CIT(Appeals) was right in -(i) treating the amount of Rs. 1,42,58,751/- as operating expenditure; and (ii) rejecting six companies identified by the TPO as comparables. 2.1 The facts of the case are that the assessee filed its return on 30.10.2004 declaring loss of Rs. 29,42,543/-. The case was initially processed u/s 143(1) of the Income-tax Act, 1961, and thereafter picked up for scrutiny by issuing statutory notice u/s 143(2). The assessee is conducting the business of providing call centre services. It is a subsidiary of Teleperformance, USA (TPUSA). In the course of scrutiny, it was found that the assessee has undertaken international transactions of the total value of Rs. 19,46,40,698/-. Therefore, the matter was referred to the Transfer Pricing Officer (the TPO) for determining arm's length price of the transactions u/s 92CA(3). The TPO suggested upward revision by an amount of Rs. 3,31,61,663/- to bring the value of international transactions in line with arm's length price. The adjustment was made and, thus, the total income for this year was determined at Rs. 3,02,19,100/-. After adjusting brought forward l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. Therefore, he made modification to the computation of the PLI submitted by the assessee and came to the conclusion that the same was (-) 0.92%. His computation is as under:- INCOME Income from Operations 19,46,40,698 Other Income Exchange Gain 56,47,297 Total income 20,02,87,995 EXPENDITURE Personnel costs 9,02,35,050 Admn. & Other Expenses 8,62,09,637 Depreciation 2,56,93,731 Total Expenditure 20,21,38,418 Operating Profit -18,50,423 OP/TC(%) -0.92 3.2 Coming to the comparable cases, the TPO analyzed the services rendered by the assessee. He came to the conclusion that the submission that it is primarily a voice based service provider is not correct. The assessee has undertaken a host of special services and the group is also not classified as a voice based service provider. The assessee has updated customer list after enforcement of Do Not Call regime ("DNC regime"). Consequently, it has been held that the assessee is an IT enabled service BPO (ITES BPO). It has been accepted that TNMM is the most appropriate method as it irons out rough edges, if any, that may exist while deciding the issue of comparability between voice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its business and was looking for prospective clients as the present facilities were likely to be exhausted in July, 2003; (iv) in anticipation of growth in business, the assessee took premises on lease by way of agreement dated 05.06.2003. The lease was taken for a period of five years and it provided for a lock-in-period of three years; (v) a press release on 5.2.2004 indicated that the IBM-Sprint business was awarded to TP USA and the operations were expected to commence from 01.04.2004. This necessitated the upgradation of facilities by the assessee; (vi) newspaper report dated 7.4.2004 indicated that the IBM acquired Daksh, an Indian BPO; (vii) an agreement was reached between the TP USA and the IBM-Sprint to pay winding up cost aggregating to US$ 60265; (viii)this resulted in non-utilization of the rented premises. However, the assessee was bound to pay the rent for 36 months due to the conditionality of lock-in-period. Accordingly, rent of Rs. 1.36 crore was paid for this year. 4.1 On the basis of aforesaid facts and by applying the principle of comparability, the ld. CIT(Appeals) came to the conclusion that the expenditure on rent and electrici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case that the assessee-company is a telemarketing company and it is wholly owned subsidiary of TP USA. It had provided services only to the parent company. The modes operandi is that the parent company enters into agreements with clients and thereafter engages the assessee to provide services to the clients of the parent company to the extent assigned to it. The TPO worked out the PLI at (-) 0.92% after including what has been termed by the assessee as extraordinary expenditure, not relating to operations of the assessee. The major expenditure is in respect of rent of vacant premises, which was to be used for providing services to IBM Sprint with which the parent company had entered into agreement for providing services. On the other hand, the ld. CIT(Appeals) has worked out the PLI in case of the assessee at 6.60% as against the PLI of only 3.24% worked out by the assessee. 5.1 It is further submitted that the other issue is in regard to choosing the comparable cases. The assessee had furnished a list of eight comparable cases, out of which five were rejected by the TPO. These cases included the case of Transworks Information Services Ltd., which was rejected on the ground that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture incurred on business development, including the rent, was the expenditure of the assessee and not that of its parent company. In this very connection, our attention has also been drawn towards the TP report obtained by the assessee, which shows that there was no restriction on the marketing functions of the assessee. In these circumstances, it is argued that the expenditure on rent was incurred in respect of expansion of the business but which could not be carried through. This expenditure had no nexus with any of the international transaction. No revenue had been received which could be related to this expenditure. Therefore, it is an abnormal expenditure which should be ignored for the purpose of working out the PLI. 6.1 Our attention has been drawn towards the findings of the ld. CIT(Appeals), in which it has been inter alia mentioned that the crux of comparability test is to compare like with the like and to eliminate differences, if any, by suitable adjustment. It is argued that this finding is in consonance with Rule 10B(3). 6.2 Coming to the rejection of six comparables chosen by the TPO, our attention has been drawn towards the findings of the ld. CIT(A) that for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s capacity. Therefore, new premises were hired and prepared for the work. Necessary approval was obtained from STPI. The representatives of IBM Sprint also visited the new facility. However, due to change in business strategy of IBM, the order was cancelled. Therefore, the winding up agreement came into existence. Under the agreement, initial costs were reimbursed but the rent and electricity charges for the premises were not reimbursed. The lease agreement had a lock-in-period of three years due to which the assessee had to perforce pay rent for three years whether the agreement was terminated or not. Further facts are that the transfer pricing report submitted by the assessee states in paragraph no. 7.4 that the TP USA is responsible for marketing the call centre capacity of its various call centres. The assessee has no responsibility to market for the business of the group. However, the assessee has independently marketed its capability to customers in the U.K, although the same has not resulted into any contract. The case of the ld. DR is that the assessee does not bear the market risks, which is borne by its parent company in the USA. This is true even as per the TP report sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee in the same manner as other costs were reimbursed as a consequence of winding up agreement. Therefore, it is held that the expenditure did not pertain to the assessee. In other words, the PLI of the assessee was low inter alia because it was bearing the cost of the parent company. In other words, the transactions were so arranged as to decrease the profits of the assessee. In such a situation, the revenue could have disallowed the expenditure. However, the AO has not done so but proceed with aligning the PLI of the assessee with arm's length PLI. 8.1 This bring us to the alternative argument that the assessee is entitled to get adjustment in respect of capacity under-utilization. No objection has been raised by the ld. CIT, DR in this matter. As a matter of fact, he has fairly accepted the proposition that adjustment in this regard is required to be made. It is also clear from the report of the TPO that the assessee runs substantial risk of idle capacity. In view of the aforesaid admitted position, we may deal with the matter rather in a summery manner. Rule 10B(3) specifies that an uncontrolled transaction shall be comparable to an international transaction if -(i) none of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic, the ld. CIT(A) rejected six cases selected by the TPO. 9.1 Before us, the ld. DR relied on the order of the TPO. It was strongly submitted that the case of Tata Services Ltd. was wrongly excluded. From the details of this company, it is seen that it is an in-house company providing services to other companies of Tata Group. For the sake of ready reference, the details submitted by the assessee to the ld. CIT(A) and mentioned on page no. 46 are reproduced below:- "....The company is an in-house group resource company providing certain centralized service to the Tata Group of Companies. The operations of the company are run on no-profit and no-loss basis. The company provides services to Tata Group companies against their requirements with the operations of various departments consists of Tata Management Training Centre, Corporate Affairs Department, Department of Economics & Statistics, Legal Department, Public Affairs Department, Labour Relation Bureau, Network Communication Department etc......" It will be seen that these details do not contain the nature of services provided but it is run on no-profit no-loss basis. 9.2 In the case of E-Gain Communications (P.) Ltd., it h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Enterprises Ltd., is conducting the business of software. Carborundum Universal Ltd., is mainly in the line of manufacture of coated and bonded abrasive. The main business of Mukand Engineers Ltd. is production of steel. Tricom India, apart from other businesses is also carrying on the business of non-voice based BPO. Such is also the case of Ultramarine & Pigments Ltd. We have already mentioned about the business of Tata Services Ltd. All these companies have been carrying on their main businesses for a long period. The business models are not comparable. Therefore, we do not find any reason to disturb the order of the ld. CIT(Appeals) in this matter. ITA No. 4796(Del.)/2010-Appeal of the assessee-A.Y. 2006-07 10. In this appeal, the assessee has taken up 15 grounds. However in the course of hearing before us, only some matters were argued by both the parties. Therefore, the appeal is decided on the basis of the arguments made before us. 11. The first issue taken up is regarding extraordinary expenditure of Rs. 2,13,99,841/- incurred by the assessee by way of rent and maintenance expenses of the leased premises, which have been termed as extraordinary expenditure. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Godrej Upstream Ltd. dealt only with associated enterprises i.e., all its transactions were related party transactions. No further argument was made in this behalf. On the other hand, the ld. DR relied on the decision in the case of Sony India (P.) Ltd. (supra). 12.2 Having considered the facts of the case and the arguments made before us, it is clear that the four comparables mentioned above had related party transactions exceeding 15% of the revenue. Therefore, these cases could not have been taken as comparables in view of the decision in the case of Sony India (P.) Ltd. The cases could have also not been considered at all in view of the decision in the case of Phillips Software Centre (P.) Ltd. (supra). Therefore, it is held that the TPO rightly rejected these four cases. 12.3 The TPO had considered the case of First Source Solutions Ltd. separately in paragraph no. 8.8. He wanted to reject this comparable on grounds of functional dissimilarity and substantial related party transactions. Upon hearing the assessee, the ground of functional dissimilarity was dropped, but the comparable was rejected as related party transactions formed 51.9% of the revenue. Thus, this case was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Surevin Internet Services Ltd. as a comparable company. In this connection, it is mentioned that the selection criteria applied by the assessee is to accept companies with sales of more than Rs. 1.00 crore. Thereafter, the second filter is applied by which cases having major income from trading and manufacturing operation are rejected. However, the assessee has not taken into account the criteria of percentage of revenue from the relevant activity to the total revenue. On the basis of filters applied by the assessee, a case having turnover of more than Rs. 100 crore may get selected if revenue from the relevant activity is less than Rs. 1.00 crore. Therefore, a case may get selected where turnover from the relevant activity is less than the threshold limit of Rs. 1.00 crore. This company has a turnover of Rs. 91.24 lakh from call centre activities, Rs. 7.46 lakh from software and Rs. 2.45 lakh from cable connection. There are no segmental accounts available. This company has share capital of Rs. 28.80 lakh and accumulated losses amount to Rs. 39.20 lakh. Accordingly, the comparable case has been rejected on these two grounds. 14.1 The case of the ld. counsel is that the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial factor in deciding comparability of the cases. The assessee renders services in USA while Shreejal Info Hubs Ltd. renders services in India. This fact alone is sufficient to exclude this comparable. Thus, it is held that the AO/TPO rightly rejected this case as a comparable case 16. Lastly, ground no. 4.6 is against rejection of Optimus Outsourcing Co. Ltd. as a valid comparable case on the ground that it has been incurring losses consistently and its net worth had eroded. No argument is made in respect of this ground by any party and the ground appears to have been wrongly taken up. Therefore, no decision is required on this ground. 17. Ground nos. 5 to 9 are against inclusion of Galaxy Commercial, Maple E Solutions, Triton Corporation, and Nucleus Netsoft and GIS (India) Ltd. as comparable cases by the TPO. In regard to Galaxy Commercial, the objection of the assessee before the TPO has been that it has diversified activities while the assessee is carrying on the business of voice based call centre only. The TPO mentioned that the company is carrying on BPO operation and transport operation. The results of only BPO operation are being considered for the purpose of determini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order, it is mentioned that this company is rendering ITES. The software part is handling of CAD/CAM services, which does not amount to software development. The related party transactions worked out to only 6.07% which is within the permissible range. The working of PLI at 44% is also correct. 17.4 In regard to inclusion of all these companies, the ld. CIT, DR relied on the order of the AO. 17.5 We have considered the facts of the case and submissions made before us. The admitted facts in respect of Galaxy Commercial are that it is carrying on three lines of businesses and segment profitability is not available. Obviously, overall profitability of the company cannot be applied in the case of the assessee as it will amount to comparing incomparable cases. Further, the business reputation of Rastogi group, owning Maple E Solutions and Triton Corporation, is under serious indictment. They are also carrying on the businesses of data processing services and ITES services apart from BPO services. In view of a question mark on the reputation of the owner, albeit for earlier years, it would be unsafe to take their results for comparison of the profitability of the assessee. Similarly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 32, unabsorbed depreciation of an earlier year become the depreciation of the current year. The deduction is also given under section 32, which is part of chapter IV-D. However, provisions regarding set off of brought forward losses are included in chapter VI, which cannot be taken into account for computing profits and gains of business. Therefore, it is held that the AO was not right in deducting brought forward losses. Thus, this ground is partly allowed. 19. Ground no. 14 is against not allowing the setting off of the interest income of Rs. 2,24,338/- against brought forward loss or depreciation. As mentioned earlier, brought forward depreciation become the current year's depreciation. Therefore, the income chargeable to tax under the head "other sources" can be set off against brought forward depreciation, as it becomes the business loss of the current year. However, it cannot be set off against brought forward business losses. The determination of the question will depend upon the availability of unabsorbed depreciation or depreciation computed for this year. The AO is directed to decide this ground again while giving effect to this order by following aforesaid dir ..... X X X X Extracts X X X X X X X X Extracts X X X X
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