9911796707
TMI Blog2013 (3) TMI 415X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee at vikroli only after comparing the number of employees and machinery installed in both the units, it can be determined whether the two existing units were merged and consolidated to bring into existence a new unit and thereby a new unit has been set up by restructuring of the existing unit during the year under consideration - the matter is remanded to the records of the AO for examination, verification and then decide the issue as per law. Technical fee and satellite link charges excluded from export turnover - Held that:- After considering the facts of the case and the principles established by the Coordinate bench in the case of Patni Telecommunication (P) Ltd. v. ITO [2008 (1) TMI 452 - ITAT HYDERABAD-A] it is held that the expenses on satellite link charges does not come within the scope of 'telecommunication charges' as provided in clause (iv) of Explanation 2 to section 10A and accordingly, the A.O. is directed not to exclude the same from export turnover A.O. is directed to recalculate the deduction under section 10A -in favour of assessee. Selection of comparables – TP Adjustment - Assessee company was providing Information Technology Enabled Services (ITES) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in confirming the disallowance of the deduction of Rs. 5,24,70,604/-claimed under section 10A of the Act. 1.2 The learned CIT(A) erred in stating that the conditions specified under section 10A(2)(ii) and (iii) of the Act are not satisfied. 1.3 The learned CIT(A) erred in confirming that the appellant company has not computed the deduction under section 10A of the Act in accordance with the provisions of sub-section (4) of section 10A of the Act. 1.4 The learned CIT(A) erred in not providing an opportunity to the appellant company before disallowing the deduction under the provisions of section 10A(2)(ii) and 10A(2)(iii) of the Act. 1.5 The appellant prays that the Hon'ble ITAT direct the learned Assessing Officer to delete the disallowance under section 10A of the Act. 2. Deduction of Technical Fees and Satellite Link Charges from Export Turnover 2.1 The learned CIT(A) erred in contending that this ground is inconsequential once the appellant company is held not eligible for the said deduction. 2.2 The appellant prays that the learned Assessing Officer be directed not to exclude satellite charges, technical fees, interest earned on bank deposit and miscellaneous i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2: • The learned CIT(A) erred in law and facts in disregarding the comparability factors specified under Rule 10B(2) of the Income-tax Rules, 1962 ['the Rules'] and the provisions contained in Rule 10B(3) of the Rules which specifies that an adjustment should be made to account for differences between the transactions that may materially affect the price of such transactions. • The learned CIT(A) erred in not considering the additional evidence relating to the grant of working capital adjustment on the margin of the comparable companies proposed by the TPO and which was granted to the appellant by the TPO in AY 2006-07. • The learned CIT(A) erred in disregarding the differences in risk profile of the appellant (being a captive service provider) and the alleged comparable companies selected by TPO, by not allowing the risk adjustment made by the appellant. 3.7 The learned CIT(A) erred in not appreciating the fact that the margin earned by the appellant is reflective of the services rendered by a contract service provider. 3.8 The learned CIT(A) erred in confirming the selection of final comparable companies, selected by the TPO, without considering the diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical services outside India are to be excluded from the export turnover; but the same shall form part of the total turnover for the purpose of computation of deduction u/s 10A. Since the exclusion of technical service fee, satellite link charges, is an issue to be dealt with in ground No.2 raised by the assessee; therefore, ground No.1 is only with respect to the disallowance of deduction u/s 10A. 3.2 The CIT(A) held that the assessee does not fulfil all the conditions laid down u/s 10A(2) of the Act. Further, even the computation of so called eligible profit done by the assessee is not as per the provisions of sec. 10A(4). The CIT(A), apart from confirming the action of the Assessing Officer that the computation of the eligible profit by the assessee, is not as per the provisions of sec. 10A(4) has also held that the assessee has consolidated its SEEPZ unit at Andheri and its existing Vikroli unit. Such consolidation of existing unit would bring into existence of a consolidated unit and as such, the consolidated unit has come into existence, as a result of restructuring of business already in existence; thereby the conditions as prescribed under section 10A(2) are not satisfied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the relief for the first assessment year has not been withdrawn, the ITO cannot withdraw the relief granted for the subsequent years. Thus, the ld. Sr. counsel has submitted that when the claim of the assessee was accepted for the AY 2000-01 onwards till AY 2005-06, then the Assessing Officer cannot withdraws the deduction in the subsequent years. 4.3 On the other hand, the ld. DR has submitted that the unit at SEEZP (Andheri) had been consolidated with Vikroli unit and there are no separate books of account maintained by the assessee for both the units after such consolidation; therefore, the deduction u/s 10A cannot be allowed to such a consolidated unit as there is no concept of highbird on the basis of which, a part of the unit can be considered as eligible and other part would be considered as not eligible. Thus, the entire claim of the assessee is liable to be rejected as held by the CIT(A). She has pointed out that the ld. CIT(A) has found that the undertaking has been formed by the assessee by restructuring of the business already in existence and therefore, the deduction u/s 10A is not available to such undertaking. She has relied upon the order of the CIT(A) and sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ): For the purposes of [sub-sections (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking". 9.1 As can be seen, it is only a method provided for arriving at the profits derived from export of articles or things of computer software and assessee has followed head count method for arriving at the export turnover and expenditure for the Vikroli unit in the absence of separate books of account. This is one of the methodologies adopted in arriving at the export turnover and the profits so as to work out the profits of the Units. 9.2 Similar issue was considered by the Hon'ble Delhi High Court in the case of Commissioner of Income-tax v. EHPT India (P.) Ltd. 16 taxmann.com, 305 (Del.) = (2011-TIOL-839-HC-DEL-IT) wherein the facts are that the assessee was operating two units, one software Technological Park unit (STP), which was engaged in the development of software and its export, and the ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue authorities in accepting it in the past. The reasonableness or fairness of the method of head-count adopted by the assessee can be said to be indicated by the fact that in the assessment year 2002-03 the assessee apportioned more common expenses to the STP unit, thereby reducing its profits and consequently reducing the claim for deduction under section 10A and at the same time offering a higher income in the domestic unit than what would have been offered had the turnover method of apportionment adopted by the Assessing Officer been followed.It was only as a matter of principle that the Commissioner (Appeals) upheld the method adopted by the Assessing Officer even though the result was in favour of the assessee. Neither the Assessing Officer nor the Commissioner (Appeals) has raised any serious questions about the validity of the head-count method adopted by the assessee nor have they pointed out any commercial accounting principle or accounting standard that repudiates the method. [Para 8] Section 10A provides for deduction for profits derived from the export of software for a period of ten years. During the period of tax-holiday, it is desirable that the same method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... says that the export profits have to be apportioned on the basis of the ratio which the export turnover bears to the total turnover of all the businesses of the eligible undertaking. The instant case is not concerned with sub-section (4). That sub-section will apply when the combined profits - profits of the exempt unit and those of the non-exempt unit - have been ascertained; the next step will be to apportion them on the basis of the ratio which the export turnover bears to the total turnover. Instant case is concerned with the stage before that. Instant case is concerned with the method by which the indirect or common expenses - expenses which are incurred for both the exempt and taxable units - are to be apportioned between the two units. To apply the formula prescribed in sub-section (4) may be appropriate in a given case considering its peculiar facts. But applying the same formula to all cases of apportionment without having regard to the history of assessments and other relevant factors may not be justified. In a case where alternative methods of apportionment of the expenses are recognized and there is no statutory or fixed formula, the endeavour can only be towards appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the actual apportionment and profit of the units eligible for deduction u/s 10A and non-eligible unit respectively. 5.3 The CIT(A) has added one more reason for disallowance of the deduction u/s 10A that the assessee does not fulfil the condition as laid down u/s 10A(2) of the IT Act because the assessee has consolidated two existing units into one and thereby a consolidated unit came into existence by reconstruction of the already existing unit. Thus, the CIT(A) has made out a case that two existing units; one eligible for deduction u/s 10A; and another non-eligible unit were consolidated and by virtue of this consolidation, the new consolidated unit came into existence by reconstruction of the existing unit. Hence, it violates the conditions as prescribed under 10A(2)(ii)&(iii) of the Act. 5.4 There is no dispute on the legal proposition on the issue of denial of the deduction, if the deduction was allowed in the first year, then for the subsequent Assessment Year, the Assessing Officer cannot disallow the claim of the assessee without disturbing the order of the earlier year, more specifically first year, when eligibility of the new establishment/unit has to be tested. 5.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmed by splitting up of the first unit. In both the above decisions, this Court has held that where a benefit of deduction is available for a particular number of years on satisfaction of certain conditions under the provisions of the Income Tax Act, then unless relief granted for the first assessment year in which the claim was made and accepted is withdrawn or set aside, the Income Tax officer cannot withdraw the relief for subsequent years. More particularly so, when the revenue has not even suggested that there was any change in the facts warranting a different view for subsequent years. In this case for the assessment years 2000-01 and 2001-02 the relief granted under Section 10A of the Act to SEEPZ unit has not been withdrawn. There is no change in the facts which were in existence during the assessment year 2000-01 vis-a-vis the claim to exemption under section 10A of the Act. Therefore, it is not open to the department to deny the benefit of Section 10A for subsequent assessment years i.e. assessment years 2002-03 and 2003-04 and 2004-05. Besides that, on consideration of the facts involved both the Commissioner of Income Tax (Appeals) and the Tribunal have recorded a findi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, alternatively, the Assessing Officer has also reduced the satellite link charges of Rs. 50,00,615/- and technical service fee of Rs. 1,03,01,183 from export turnover while computing the deduction u/s 10A. The CIT(A) has held that once the issue of deduction u/s 10A has been decided against the assessee, then this ground of appeal has become consequential. 9. We have heard the ld. Sr. counsel for the assessee as well as the ld. DR and considered the relevant material on record. At the outset, we note that this issue has been considered and decided by this Tribunal in assessee's own case for the AY 2006-07 in paras 10 to 11.2 as under: "10. Ground no.2 is on the issue of reduction of technical fees and satellite link charges from export turnover. Assessing Officer while rejecting the entire claim of section 10A however alternatively also reduced the technical fees and satellite link charges of Rs. 1,73,59,069and Rs. 2,02,10,562 respectively from export turnover for the purpose of computing the deduction under section 10A thereby restricting the computation under section 10A. As stated in Ground No.1, the DRP declined to interfere as the matter was pending before the ITAT on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAT. Therefore, since the issue was already held in favour of assessee on facts, we are of the opinion that the principles of judicial consistency require that AO should not have excluded the amount from the export turnover. The DRP also was not correct in rejecting the issue. In view of this, we allow the ground raised by assessee on this issue of expenses for 'technical services'. 11.1 The other amount involved in Ground No. 2 is with reference to the 'satellite expenses'. AO excluded this amount also to arrive at the export turnover as defined under section 10A(4). After considering the submissions in assessment year 2004-05, the ITAT in ITA No.4329/Mum/08 2010-TIOL-576-ITAT-MUM held in favour of assessee as under: "7. However, while completing the assessment the A.O. treated the above satellite link charges as part of telecommunication charges. This issue was discussed elaborately by the Coordinate Bench in the case of Patni Telecom (P.) Ltd. v. ITO (wherein one of us, the J.M. was a member) 22 SOT 26 (Hyd) = (2008-TIOL-665-ITAT-HYD) wherein on similar facts the issue was considered with reference to export turnover as defined in clause (iv) of section 10A and held as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o types of conditions between the parties. One is where price quoted of goods is inclusive of all expenses or in other words price quoted is only in respect of goods. Another condition is where price of goods and charges of expenses are separately stated. In a case where such expenses are to be separately charged, invoices are prepared showing value of the goods and such expenses. If the quoted price is inclusive of such expenses, then consolidated value of the goods is only mentioned in the invoice. In a case where only value of goods is quoted, expense is borne by the supplier. In cases where expenses have not been separately charged, the convertible foreign exchange received is consideration of the goods only. Where such expenses are separately charged in the invoices, the consideration received in convertible foreign exchange includes the value of the goods and such expenses. If the consideration received is only against the goods, then there is no need to deduct such expenses from the consideration received in convertible foreign exchange. In case where such expenses are separately charged, the expenses are required to be reduced from the consideration received for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P expenses from consideration received in convertible foreign exchange while calculating export turnover for the purpose of section 10." 8. The ISP expenses considered in the above said decision are similar to the satellite link charges paid by the assessee. As seen from the bills placed on record before the authorities the assessee has paid satellite link charges to VSNL, MTNL and also to Software Technology Park India (STPI) towards bi-monthly half circuit charges/international half circuit charges and rent for TMI - Frame Relay CCT charges including port charges. The port charges, however, were calculated on the basis of USD per annum basis where as rest of the charges were paid on annual lease agreement periodically and these are fixed charges not connected with the delivery attributable to the export of goods. Even though the assessee has utilized the satellite link for receiving data and also for transferring data this cannot be considered as telecommunication charges for delivery of goods on FOB basis. Not only that what the assessee was getting was a fixed service charge for processing data from the foreign company, Trinity Processing Services Ltd. on a monthly basis in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's grievance on this issue. Ground No.2 is allowed." 9.1 Following the earlier order of this Tribunal, we decide this issue in favour of the assessee and against the revenue. 10. Ground no.3 is regarding transfer pricing adjustment in respect of services rendered by the assessee to its Associated Enterprise (AE). 10.1 The assessee is providing/rendering information Technology enabled Services (ITES) to its overseas affiliates/AEs namely Tyrinty Processing Services Ltd. (TPSL), UK and Willis Processing Services Inc., USA. ITES provided by the assessee to its AE includes; (i) processing of insurance claims, premiums, and treaties; (ii) Accounting for insurance underwriters and clients; (iii) Insurance accounting support services; and (iv) data processing. 10.2 The assessee furnished Transfer Pricing report in support of the arm's length price (ALP) of 10.54% by adopting TNMM as the most appropriate method and using PLI as operating profit to cost for benchmarking its international transactions after considering the three years weighted average margins which comes to 9.90%. The assessee carried out the search from Prowess and Capitaline databases and selected 11 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Allsec Technologies Ltd. 27.31 4. Apex Knowledge Solutions Pvt. Ltd. 12.83 5. Appollo Healthstreet Ltd. -13.55 6. Asit C. Mehta Financial Services Ltd. 24.21 7. Bodhtree Consulting Ltd. (Seg.) 29.58 8. Caliber Point Business Solutions Ltd. 21.26 9. Cosmic Global Ltd. 12.40 10. Datamatics Financial Services Ltd. (Seg.) 5.07 11. Eclerx Services Ltd. 90.43 12. Flextronics Software Systems Ltd. (Seg.) 14.54 13. Genesys International Corporation Ltd. 13.35 14. HCL Comnet Systems & Services Ltd. (Seg.) 44.99 15. ICRA Techno Analytics Ltd. (Seg.) 12.24 16. Informed Technologies India Ltd. 35.56 17. Infosys BPO Ltd. 28.78 18. IServices India Pvt. Ltd. 50.27 19. Maple Esolutions Ltd. 34.05 20. Mold-Tek Technologies Ltd. 113.49 21. R Systems International Ltd. (Seg.) 20.18 22. Spanco Ltd. (Seg.) 25.81 23. Triton Corp Ltd. 34.93 24. Vishal Informational Technologies Ltd. 51.19 25. Wipro Ltd. (Seg.) 29.70 Arithmetic Mean 30.75 10.5 Since 3 comparables are common companies as in the 8 comparables provided by the assessee in the TP report; therefore, in nutshell, the TPO proposed to add 22 more comparables. 10.6 In resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 13. Eclerx Ser Ltd. 90.43 Department 14. Flextroncis Software Sys Ltd. (seg) 11.54 Department 15. Genesys International Corpn. Ltd. 13.35 Department 16. HCL Comnet Sys & Ser Ltd. (seg) 44.99 Department 17. ICRA Online Ltd. 29.8 Assessee 18. ICRA Techno Analytics Ltd. (seg) 12.24 Department 19. Informed Technologies India Ltd. 35.56 Department 20. Infosys BPO Ltd. 28.78 Department 21. I Services India P. Ltd. 50.27 Department 22. Maple Esolutions Ltd. 34.05 Common 23. Mold -Tek Technologies Ltd. 113.49 Department 24. R Systems International Ltd. (seg) 20.18 Department 25. Spanco Ltd. (seg) 25.81 Department 26. Spanco Tele-systems & Solutions Ltd.(Seg) 21.5 Assessee 27. Sparsh BPO Services Ltd. 7.4 Assessee 28. Triton Corpn Ltd. 34.93 Department 29. Vishal Information Technologies Ltd. 51.19 Department 30. Wipro Ltd. (seg) 29.7 Department Arithmetic Mean 28.47 Assessee 10.54 10.12 Accordingly, the TPO made an adjustment of Rs. 7,52,20,419 to ALP in the international transaction of the assessee vide order dt 26.10.2010. On appeal, the Commissioner of Income Tax (Appeals) confirmed the action of the TPO/As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable was sufficient to determine the ALP. 14. We have considered the rival submissions and carefully gone through the relevant material as well as the provisions relating to the Transfer Pricing Regulations. As per the provisions of sec. 92CA(3), the TPO has jurisdiction/power to gather and consider all relevant material and information apart from the evidence, information and documents produced by the assessee as required u/s 92D(3) to determine the ALP in relation to the international transaction. 14.1 Sub sec. (7) of sec 92CA empowers the TPO for the purpose of determining the ALP to exercise any of the powers specified in clause (a) to (d) of sub. sec. (1) of sec 132 or sub. sec. (6) of sec 133 or 133A. Thus, under the TP regulations, there is no embargo on the powers of the TPO in carrying out fresh search for gathering more relevant information, documents etc., while determining the ALP in relation to international transactions. 14.2 The assessee has challenged the action of the TPO on the ground that after accepting 8 comparables selected by the assessee, the TPO is not justified in carrying out fresh search and adding 22 more comparables. The contention of the ld. Sr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly one comparable was left which was selected by the assessee itself in its TP study and the TPO did not choose to carry out a fresh search, then the said comparable can be taken to compute the ALP. The relevant part of the Tribunal's observation in para 77 is as under: 77. Now coming to the case Law relied upon by Id. DR which convey that only one comparable is sufficient and it has been held by the Tribunal in other cases that arm length price can be worked out even on the basis of one comparable. In the case of Vedaris Technology Pvt. Ltd. v. ACIT (supra) 20 comparables were short listed and mean margin was worked out at 16.585% and out of those only one comparable was Left namely Sophia Software Ltd. on the basis of which the arm Length price was determined. Here, it is the case of Ld. AR that the said case is not applicable to assessee's case as in that case both the parties had accepted one comparable only. But that is not the only basis on which the Tribunal has rested its decision. The other case of similar nature is Parrot Systems TSI India Ltd. v. DCIT (supra). Moreover, the comparable which has been Left was selected by the assessee itself in its TP study and no reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derabad benches of the Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. in 1961/Hyd/2011 = (2012-TII-148-ITAT-HYD-TP). He has referred paras 10 & 11 of the said decision of the Hyderabad Benches of the Tribunal and submitted that the Tribunal has rejected this comparable after taking note of the fact that there was an extra ordinary event like merger and de-merger in the said company which will have an effect on profitability in the financial year in which such event takes place. Thus, the ld. Sr. counsel for the assessee has submitted that the company's revenue and profit numbers are largely driven by extra ordinary event in the form of amalgamation. Therefore, the said company cannot be considered as a comparable for the purpose of determination of ALP. The ld. Sr. counsel has submitted that the company was formed as a result of amalgamation which took place between Geosoft Technologies (Trivandrum) Ltd. and Iridium Technologies (India) Pvt. Ltd. The amalgamation was approved in 2006. Hence, on the ground of such extra ordinary events, the financial numbers cannot be compared to assessee's financial numbers for the fiscal year. 17.1 On the other hand, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded." 18.3 We are also of the view that if extra ordinary events like merger and de-merger or amalgamation took place during the financial year relevant to the Assessment Year under consideration, and because of the merger/de-merger the company became functionally different then the said company should be excluded from the comparables. However, if the merger of the two functionally similar companies took place then the event of merger itself cannot be taken a factor for exclusion of the said comparable.. Accordingly, we direct the AO/TPO to verify this fact and accordingly decide the comparability of this company namely Accentia Technologies Ltd. (ii) Aditya Birla Minacs worldwide Ltd. & (iii) Allied Digital Services Ltd: 19. Both these comparables are common as selected by the assessee and accepted by the TPO; therefore, no disp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uncontrolled transaction between unrelated parties. Therefore, as a rule of prudence, so far as possible a comparable should be considered having no related party transaction. But as we are conscious and aware of the fact that such a situation is highly impractical and almost impossible to have a comparable without a single related party transaction. Therefore, related party transaction cannot be completely ruled out while selecting the comparables. The question arises as how much and to what extent related party transaction can be accepted for considering the company as a good comparable. This Tribunal has given various threshold limits in series of decisions. 21.1 In the case of Avaya India P. Ltd. (supra), the Tribunal in para 18 has opined as under: "18. We have carefully considered the rival submissions in the light of the material placed before us. So far as it relates to applying the filter for rejection of comparable companies having related party transactions as a percentage of sales more than 15%, we uphold the said filter. So as it relates to another filter rejecting the comparables whose current year financial data is not available we find that the said filter has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld also be taken in the list of comparables for working average / mean operating profit. Even as per OECD Guidelines, it is emphasized that large number of similar entities should be taken to make comparison broad based. Respectfully, following the order of the Tribunal, we do not find any infirmity in CIT(A)'s order. Accordingly ground No.1.3 of revenues appeal stands dismissed." 21.3 In the said case, the Tribunal has viewed that an entity can be taken as uncontrolled if its related party transaction do not exceed 10 to 15% of the total revenue. In this case, the Tribunal has not fixed any criteria of threshold; but laid down a range from 10 to 15% related party transaction of total revenue for considering the entity as an uncontrolled comparable. 21.4 In the case of Philips Software Centre Pvt. Ltd. (supra), the Tribunal in para 5.71 (vii) has observed that for the purpose of the comparability companies with even a single rupee of transactions with AE cannot be considered as comparable. 21.5 In the case of CRM Services India P. Ltd. (Supra), the Tribunal has reaffirmed the view as taken in the case of Sony India (supra) and held that the tolerance limit of related party tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elated party transaction. In the normal circumstances, where a good number of comparables are available, then the limit of related party transactions should be 15% of the total revenue and in such case, an entity can be considered as uncontrolled, if related party transactions do not exceed 15% of the total revenue. 21.9 We are also of the view that 15% is an average and should be generally accepted in normal cases as a related party filter. In cases where comparables are not available in sufficient number, then this threshold limit of related party transaction can be relaxed to 20% of the total revenue. 21.10 The relaxation upto 20% is purely with a view to make it possible that a larger number of entities are taken as comparable so that the ALP so determined should be based on a broad based and technically represents price in the free market. In a extreme case where only one or few comparables are available, then an entity having related party transactions not exceeding 25% of the total revenue can be considered so that the ALP should be determined having comparison broad based, though this extreme limit of 25% can be considered only in exceptional cases. 21.11 In the case in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the assessee has accepted this comparable before the TPO. However, since this fact has brought to our notice that this company is deriving income from export of software and ITES and segment results are not available; therefore, it is not possible to consider this company as a functionally comparable. Hence, in the absence of segment results, this company has to be excluded from the comparables. (vi) Apollo Healthstreet Ltd: 25. We have heard the ld. AR as well as the ld. DR and considered the relevant material on record. Undisputedly, in the case of Apollo Healhstreet Ltd., the related party transaction is about 81% of the total turnover; therefore, this company can not be considered as comparable, solely on the ground of very high percentage of related party transactions to the total turnover. Accordingly, this company has to be excluded from the comparables. (vii) Asit C Mehta Financial Services Ltd: 26. The ld. AR has submitted that this company is functionally not comparable with the assessee because it was into software products which included provision of software services. He has referred page 4 of the TPO order and submitted that the TPO itself has recorded th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest technologies. Further, the company has identified only one segment i.e software development. Therefore, the ld. AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables. 29.2 On the other hand, the ld. DR has filed the information collected u/s 133(6) of the IT Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs. 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3 In rebuttal, the ld. AR has submitted that the information filed by the ld. DR is not collected by the TPO of the assessee; but it was collected by the TPO of Hyderabad. Further, the annual report of this company clearly shows that the company is in the business of software development and therefore, this company is not a good comparable. 30. We have considered the rival submissions as well as the relevant material on record. The details filed by the ld. DR before us has been obtained by the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction and processing; shareholder services and customer care; corporate action and connectivity and statutory compliance & MIS. Thus, the ld. AR has submitted that instead of taking ITES segment margin of 5.07%, the entity level margin of (-) 18.09% should be considered. 32.1 On the other hand, the ld. DR has submitted that the P&L account of this company clearly shows that the company is deriving income from ITES to the extent of 29 million (Rs. 2.92 crores). Since this company deriving income from printing business; therefore, this company cannot be taken on entity level. In support of his contention, the ld. AR has filed a copy of the P&L account of Datamatics Financial Services Ltd. 33. Having considered the rival submissions and relevant material on record, we find that the TPO has taken segmental results with respect to the ITES services. As per the profile of the company admittedly, the company is in the business of printing, processing and ITES segments. When the results at entity level are taken into consideration, then the income from printing and processing is also included, in our view that would de-hors the requirement of comparability. The P&L account of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices P. Ltd. 34.2 As regards the functional difference, the ld. DR has submitted that there is no dispute on the point that the assessee as well as Eclerx Services Ltd. are in ITES services and as per the notification of CBDT dt 26.9.2010, the various products or services are notified in the category of ITES. Once a service falls under the category of ITES, then there is no sub classification of segment. Hence, in view of the various decisions of the Tribunal, it is contended that this company is a good comparable and cannot be excluded only on the basis of high profit margin. The ld. DR has further submitted that even in the products and services notified by the CBDT, the KPO is not recognized as a separate services. Therefore, the objection of the assessee is contrary to the services/products as notified by the CBDT under the category of information and ITES. 34.3 In rebuttal, the ld. AR has submitted that BPO focuses on mainly processing whereas KPO focuses on value addition/knowledge addition expertise. Therefore, KPO are not functionally comparable to ITES. He has reiterated that the extract of the annual report of the company states that this company is into KPO services, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that satisfy comparability analysis should not be rejected on the sale basis that they suffers loss or earned high profit. 34.6 In the case of Exmxon Mobil Company India P. Ltd. (supra), the Tribunal has discussing the issue in para 31(xi) as under: (xi) Now, coming to the alternative arguments of the assessee that abnormal profit making unit is also to be eliminated on the same analogy on which loss making units are excluded, we, in principle, do not dispute this proposition. The various case laws relied upon by the assessee lay down that a comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making unit cannot also be automatically eliminated just because the comparable company earned higher profits than the average. The reason for rejecting the two loss making units is not just because they were loss making units but for the reasons which are already stated in the preceding paragraphs. If similar reasons existed in the higher profit making unit, then, it is for the assessee to bring out those reasons and seek exclusion of the same. A general argument that, you have to exclude units which have high profit range, in case you exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, this company provides data processing and data analytics service's which is similar to the services of the assessee and therefore, it cannot be said that the business activity of the assessee and this company are materially and substantially different, which cannot be compared, specifically when services of both are in the nature of ITES. Further, the assessee has not raised such objection before the lower authorities and in particular before the TPO. Accordingly, we do not find any merit on this objection of the assessee. (xiv) Flextronics Software Systems Ltd: 35. The ld. AR has submitted that this company is in the business of development of software products and providing software consultancy services which cannot be considered as a comparable to assessee's case. In support of his contention, the ld. AR has submitted that in the case of Telecordia Technologies India Ltd. in ITA No. 7821/Mum/2011, this Tribunal had considered this company as comparable to the Telecordia as both were involved in development of software. The ld. AR has further submitted that this company is having related party transactions constituting more than 25% of the total revenue; therefore, it canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section l0B and Clause (b) of Explanation to section 80HHE of the Income- tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby specifies the following In formation Technology enabled products or services, as the case may be, for the purpose of said clauses, namely: (i) Back-office Operations; (ii) Call Centres; (iii) Content Development/Animation; (iv) Data Processing; (v) Engineering and Design; (vi) Geographic In formation System Services r- (vii) Human Resource Services; (viii) Insurance Claim Processing; (ix) Legal Databases; (x) Medical Transcription; (xi) Payroll; (xii) Remote Maintenance; (xiii) Revenue Accounting; (xiv) Support Centres; and (xv) Web-site Services". 38.1 When GIS is notified ITES/product, then undisputedly, this comparable and the assessee both are engaged in the ITES services; therefore, we do not find any substance or merit in the contention of the ld. AR that this company is functional different and cannot be considered as a comparable. We further note that even before the TPO, the assessee did not raise any such objection of functional difference. Hence, we find that this company is a good comparable of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Company is having related party transactions constituting 23.86% of the total turnover. Therefore, this company cannot be taken as a comparable. 42.1 The ld. DR on the other hand has submitted that the TPO has taken segmental results of this company and the segmental report shows that there is a revenue from professional services to the extent of Rs. 7,33,18,000/-, out of the total revenue of Rs. 92 crores which is almost 80% of the total revenue. Therefore, this company is functionally comparable with the assessee. 42.2 As regards the related party transactions to the extent of 23.86%, the ld. DR has relied upon the decision of the Delhi Benches of the Tribunal in the case of Actis Advisors P. Ltd. (supra). 43. We have considered the rival submissions and carefully perused the relevant material on record. Undisputedly, the related party transactions constituting 23.86% of the total revenue; therefore, in view of our finding in the foregoing paragraph on this issue, this company cannot be considered as a comparable. (xix) Informed Technologies India Ltd. 44. The ld. AR of the assessee has argued that this company undertakes substantial marketing expenditure and hence maki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the learned TPO, the filters applied by the assessee in the TP Study report for eliminating the companies who had incurred expenses of more than 3% of the sales on advertisement and marketing is not an appropriate filter. According to the learned TPO independent enterprises has to incur marketing expenditure. In a service industries like I.T. enabled services, the assessee did not provide the basis on which such expenses resulted in any intangible unlike in manufacturing industries where substantial marketing expenditure create an intangible. Learned TPO invited the explanation of the assessee as to why this filter be not ignored. The assessee has filed a reply to the query of the TPO which has duly been noted by the learned TPO on pages 24 & 25 of the impugned order. On due consideration of assessee's objections, learned TPO has observed that the operative force of the assessee's contention is that marketing and advertisement activities carried out by the comparable companies result in creation of marketing intangible, which would give return on such investment. In other words, the expenses incurred on advertisement and marketing creates a marketing intangible. Learned TPO re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elpful in future. But how their FAR is substantially so different could not be explained. Learned TPO has looked into this aspect. He observed that material showing impact on Information & Technology Industry by such expenses had not been produced by the assessee. After taking into consideration the discussion made by the learned TPO as well as the DRP on this issue, we do not find any merit in the contentions of learned counsel for the assessee for exclusion of eight companies, extracted supra from the list of comparables." 45.3 As it is clear that an identical contention has been considered and rejected by this Tribunal in the case of Actis Advisors (P.) Ltd. (supra). In the case in hand, the assessee has not brought out a case that advertisement and marketing expenditure is very high in relation to the turnover of the said company. Accordingly, this objection of the assessee is rejected. (xx) Inforsys BPO Ltd: & (xxi) Wipro Ltd. 46. The ld. AR has submitted that due consideration should be given to the fact that the company possesses brand value which will directly impact the margins of the company. He has further submitted that the turnover of this company was very high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submissions of the assessee in relation to these three companies, we find that the TPO has excluded the companies whose turnover is less than Rs. One Crore, on the ground that they may not be representing the industry trend. That very logic also applies to the companies having high turnover of over Rs.200 crores as against the assessee's turnover of only Rs.60 crores, and therefore, it would be fair enough to exclude those companies also. In the case of Agnity India Technologies P. Ltd. (supra), the Delhi Bench of the Tribunal, while considering the comparability with companies which are market leaders in their field, and having substantially high turnover, observed as follows- "5.2. Various arguments, as stated earlier, were taken before the DRP which inter-alia included rejection of comparable cases; application of arbitrary filter of wage to sales ratio; ignoring that the assessee is a limited risk company; inclusion of Infosys Technologies ltd.; and inclusion of Satyam Computers Services Ltd. in spite of the fact that its data is not reliable as publicly known. On the basis of these arguments, the DRP excluded the case of Satyam Computers Services Ltd., thereby reducing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in the range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study." In view of the aforesaid consistent decisions of the Tribunal, we accept the contention of the learned Authorised Representative for the assessee that the aforesaid three companies cannot be treated as comparable, considering their substantially high turnover as compared to that of the assessee. We also agree that the turnover filter of Rs. 1 crore to Rs. 200 crore as applied by the ITAT Bangalore Benchin the aforesaid decision, should also apply to the facts of the present case, considering the assessee's turnover of mere Rs. 60 crores. We therefore, hold that companies having turnover of Rs. 1 crore to Rs. 200 crore alone can be considered as comparable, in the case of the assessee." 47.2 In the case of Genesys Integrating Systems India P. Ltd.. (supra), the Tribunal has made a classification of company is having turnover of Rs. 1 crore to Rs 200 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Ltd. 51.19 30.6 15. Spanco Ltd. (Seg.) 25.81 35 16. Caliber Point Business Solutions Ltd. 21.26 39.29 17. Apollo Healthstreet Ltd. -13.55 47.84 31.36 Upto 50 18. Triton Corp. Ltd. 34.93 53.36 19. I C R A Techno Analytics Ltd. (Seg.) 12.24 72.32 20. Eclerx Services Ltd. 90.43 86.2 31.29 Upto 100 21. Allsec Technology Ltd. 27.31 113.27 31.10 Upto 120 22. Aditya Birla Minacs 11.98 197.06 30.23 Upto 200 23. HCL Comnet (Seg.) 44.99 260.18 30.87 Upto 300 24. Infosys B P O Ltd. 28.78 649.56 30.78 Upto 650 25. Wipro Ltd. (Seg.) 29.7 939.77 30.74 Upto 940 47.5 It is manifest from this details and the comparative chart that there is no relation between the turnover and margin of an entity as it shows that the highest margin of the entity having Rs. 50 crores turnover and the lowest margin in case of the turnover upto Rs. 200 crores. It makes further clear that there is not much difference in the margin of the various entities having turnover upto Rs. 940 crores as the average margin of the entities upto the turnover of Rs.50 crores is 31.36%; whereas the margin of the entities having turnover upto Rs. 940 crores is 30.74%. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferences of turnover in comparison to the turnover of the assessee, and if it is apparent due to such abnormal difference in the turnover, the operating profits of the comparables is got distorted then in such a case, those comparables should be excluded from the list of the ALP. 15. In the case in hand, the assessee raised these objections only because some of the comparables are having high profit and also high difference in the turnover and not because of the high or low turnover has influenced the operating margin of the comparables. All the objections and contentions raised by the assessee in respect of this issue are general in nature and no specific fact has been brought on record to show that due to the difference in turnover the comparables become non-comparables. The assessee has not demonstrated as to how the difference in the turnover has influenced the result of the comparables. It is accepted economic principles and commercial practice that in highly competitive market condition, one can survive and sustain only by keeping low margin but high turnover. Thus, high turnover and low margin are necessity of the highly competitive market to survive. 15.1 Similarly, low ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arables. (xxiii) Maple Esolution Ltd. & (xxiv) Triton Corpn Ltd: 50. The ld. AR has pointed out that Maple Esolution Ltd. acquired by Triton Corpn Ltd., therefore, Maple Esolution Ltd. was converted into Triton Corporation. He has further submitted that the Directors of Maple Esolution Ltd. were involved in fraud as has been considered and rejected by the Hyderabad Benches of the Tribunal in the case of Capital IQ Information (supra). He has also relied upon the decision of the Delhi Benches of the Tribunal in the case of CRM Services Ltd. in ITA 4068/Del/2009 = (2011-TII-86-ITAT-DEL-TP). The ld. AR has further submitted that though Maple Esolution Ltd. is a comparable company selected by the assessee in the TP study; however, based on the above facts, Maple Esolution Ltd. and Triton Corpn Ltd., both are required to be rejected as comparable. In support of his contention, he has relied upon the order of this Tribunal in the case of Stream International India P. Ltd. in ITA No.8997/Mum/2010 = (2013-TII-42-ITAT-MUM-TP). 50.1 On the other hand, the ld. DR has submitted that as recorded by the Tribunal in the decision relied upon by the assessee, fraud was done in the year 1980 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the business or results of these companies are in any manner influenced or affected by the allegation of fraud against the directors in respect of other business activity that too more than two decades back. 51.1 So far as the Maple Esolution Ltd., is concerned, this company was selected by the assessee itself in TP study as comparable; therefore, we are not inclined to accept the objection raised by the assessee before us that the directors of these companies were involve din the fraud. 51.2 However, since Triton Corpn Ltd., acquired by Maple Esolution Ltd., therefore, we are of the view that if extra ordinary events like merger and de-merger or amalgamation took place during the financial year relevant to the Assessment Year under consideration, and because of the merger/de-merger the company became functionally different then the said company should be excluded from the comparables. However, if the merger of the two functionally similar companies took place then the event of merger itself cannot be taken a factor for exclusion of the said comparable.. Accordingly, we direct the AO/TPO to verify this fact and accordingly decide the comparability of this company namely Acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... System International Ltd: 53. We have heard the ld. AR as well as the ld. DR and considered the relevant material on record. Apart from the other objections, the ld. AR of the assessee has submitted that this company had related party transactions of 21.19% of the total turnover; therefore, it cannot be considered as a comparable. 53.1 On the other hand, the ld. DR has relied upon the decision of the Delhi Benches of the Tribunal in the case of Actis Advisors P. Ltd. and submitted that related part transaction is less than 25% of the total turnover and therefore, it can be a good comparable. There is no dispute on related party transaction of this company constituting 21.19% of the turnover. Hence, in view of our finding in the foregoing paras on this issue, this company cannot be considered as a good comparable (xxvii) Specco Ltd. & (xxviii) Spanco Telesystems & Solutions Ltd: 54. The ld. AR has submitted that this company is functionally in comparable because of the fact that the revenue from ITES segment is only 8.21%. Thus, the ld. AR has submitted that this company is primarily engaged in telecom business and BPO is one of the smaller segment. Therefore, this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Tribunal in assessee's own case has accepted that the adjustment with respect to risk and working capital were to be given but remanded the issue to the Assessing Officer for quantification. 57.1 On the other hand, the ld. DR has submitted that the assessee has not claimed risk adjustment in the TP report; but the same was claimed only after TPO proposed the adjustment. He has referred the rule 10B(3) of the IT Rules and submitted that onus is on the assessee to prove whether the risk adjustment is required because of the reasons that such factors has materially effect the price or cost charged or paid or the profit arising from such transaction in the open market. Thus, the ld. DR has submitted that as per Rule 10B, a reasonable and accurate adjustment can be made to eliminate the material effect of such difference. He has also referred and relied upon the UN Manual of transfer pricing and submitted that the assessee has to work out each and every individual risk factor as illustrated in the UN manual on Transfer Pricing. In the absence of such working, no adjustment can be given merely on the basis of submissions. He has further submitted that there are some risk involvemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel and the learned DR. At the outset we have noted that the information obtained by AD by writing to various companies while selecting the comparables has not been provided to assessee at all. Assessee has raised these objections not only before the TPO but also before the DRP. Since information relied upon by the TPO is not available in public domain, it is incumbent on the TPD to furnish the relevant information to assessee. In a case where the information is not furnished to assessee it becomes secret information which can not be used against assessee. Most of the objections raised by assessee with reference to the selection of comparables by the TPO are with reference to the information not available in the public domain, but obtained by TPO and also with the various filters considered by the TPO in rejecting assessee's comparables. We also notice that there is no uniformity in rejection of assessee's comparables and selection of comparables by the TPO (a) on the reason that various filters considered by the TPO himself has not been followed and (b) that some of the companies selected by assessee were rejected on unreasonable grounds (loss making company etc). In order to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the record of the AO/TPO for verification and adjudication as per law after considering the rival submissions made before us. ITA No.4429/Mum/2012 (by Revenue): 59. The revenue has raised the following grounds in its appeal: "(a) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding amount of Rs. 47,13,384/-paid to Equant Network Services Ltd., was neither royalty nor fees for technical services without appreciating that the payment made to Equant Network Services Ltd., is in the nature of royalty payment since it involves the use of commercial equipment. (b) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the ratio the decision of ITAT Hyderabad in the case of Frontline Soft Ltd., wherein such payment was held to be royalty'. 2. (a) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the assessee's appeal to exclude Vishal Information Technology Ltd., as a comparable without appreciating the fact that the said company does not outsource its ITeS except for hiring additional manpower, hence is functionally similar to the assessee. (b) On the facts and circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cilitate data communication with its clients belonging to Willis group having their offices at Ipswich, UK and Nashville, USA. The intention of the assessee company was to avail connectivity services and it was not concerned as to which equipments were used to provide such connectivity services. The assessee had no right to access the equipments forming part of communication channel except for data communication and transmission. The assessee had no control over the said equipments or physical access to it. There is nothing to show positive act of utilization, application or employment of equipment for the desired purpose. The assessee could not come face to face with the equipments, operate it or control its functions in some manner. It had no possessory rights in relation to the said equipments. It only took advantage of a facility of use of sophisticated equipment installed and provided by the service provider. Having regard to all these facts of the case and keeping in view the decisions of Authority for Advanced Ruling (AAR) in the cases of ISRO Satellite Centre (supra) and Dell International Services (India) P. Ltd. (supra), we are of the view that the payment made by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er this company has outsourced its business or not. The ld. AR has referred the Schedule 15 to the balance sheet and pointed out that for a sale of Rs. 31 crors only Rs. 70 lacs were paid towards salary to the employees and Rs. 13 crores were paid to the vendors for outsourcing services which shows that the major business of the said company was outsourcing. In support of his contention, he has relied upon the following decisions: (i) Maersk Global Services Centre ITA No.3774/Mum/2011 = (2011-TII-133-ITAT-MUM-TP) (ii) Nextlinx India P. Ltd. ITA No.454/Bang/2011 = (2012-TII-139-ITAT-BANG-TP) (iii) 24/7 Customer Comm (P.) Ltd. ITA No.227/Bang/2010 = (2012-TII-143-ITAT-BANG-TP) (iv) Google India P. Ltd. ITA No.1368/Bang/2010 (vi) Brigade Global Services P. Ltd. ITA No.1494/Hyd/2010 63. We have considered the rival submissions and relevant material on record. As it is clear from the letter which was addressed to the TPO Chennai in response to the notice us 133(6) that the said information was not sought by the TPO of the assessee and therefore, this information has not been considered by the lower authorities. 63.1 We find that the CIT(A) while rejecting this comparable has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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