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TMI Blog2014 (3) TMI 626X X X X Extracts X X X X X X X X Extracts X X X X ..... see filed a return of income declaring the total income at Rs.8,29,06,660. During the relevant financial year, the assessee had the following international transactions with its AE. (a) Provision of IT enabled services Rs.56,32,13,579 (b) Provision of business support services Rs. 4,19,34,643 For computing the Arm's Length Price (ALP) of the international transaction, the assessee adopted the Transactional Net Margin Method (TNMM). In the course of assessment proceedings under S.143(3), the Assessing Officer noticing that the assessee has received payment from international transactions undertaken with its AE made a reference to the transfer Pricing Officer(TPO) under S.92CA of the Act, to determine the ALP. On receiving the reference, the TPO issued a notice under S.92CA(2) calling upon the assessee to submit the documents maintained in terms of S.92B. After receiving the compliance of the assessee, the TPO issued another letter requiring the assessee's compliance on various issues raised therein. The TPO noticed that though the assessee in its Transfer Pricing Document claimed the ITES and Business Support Services to be two separate segments, in the Profit & Loss Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or are currently inactive were excluded. 4. Companies that are undertaking different functions compared to the tax payer were excluded. 5. Companies that do not have significant (<25%) foreign exchange earnings. 6. Companies which have been making pertinent operating losses were excluded. 7. Companies that have substantial (>25%) transactions with related parties were excluded 8. Companies which have been in their first year of operations and have incurred operating losses and 9. Companies that are duplicated in the data base with different names or merged to form another company." 4. On the basis of the search of data base, the assessee selected 15 comparables with an average profit margin of 21.15% on cost. Therefore, the margin earned by the assessee at 15.90% on operating cost was treated as at Arm's Length as the margin is within plus/minus 5% range. After analyzing the TP study report of the assessee, the TPO found the following defects/deficiencies- (a) The assessee has eliminated overwhelming number of companies by not applying the quantitative filters (such as, related party transactions, insignificant foreign exchange etc.), but by applying so called q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d scrutiny of FAR Analysis. The assessee has not selected on proper comparability analysis. The TPO on the basis of deficiencies pointed out as above proposed to reject to reject the TP study of the assessee and determine the ALP. The assessee objected to the proposed rejection of the TP study done by it vide its letter dated 25.6.2010 which has been summarized by the TPO as below- (i) The ALP in the case of international transaction has been determined by applying the prescribed method in accordance with sub-section (1) and (2) of S.92C of the Act. (ii) All the relevant information and the documents relating to the international transactions have been maintained as prescribed and provided to the department. (iii) The data used in the computation of ALP has been taken from widely recognised commercial information data-bases for obtaining publicly available financial information in India, namely Prowess and Capitaline. The very same data base is also used by the Department. Contemporaneous data has been used for computation of ALP as on the date of filing of return of income accordance with Rule 10D(4) and the data used for computation of ALP is reliable and correct. (iv) The t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) or data of the company does not fall within 12 months period i.e. 01.04.2005 to 31.03.2006, were rejected. * Companies that are functionally different form that of tax payer or working in peculiar economic circumstances after giving valid reasons, were excluded By applying the aforesaid filters, the TPO selected 11 out of the 15 comparables selected by the assessee and rejected four comparables. The comparables accepted are- Sl. No. Name of the company Margin adopted by the tax payer based on multiple year data Operating margin to Cost (FY 2006-07) 1. Allsec Technologies Ltd. 26.41% 27.31% 2. Apex Advanced Technology P. Ltd. 16.96% 39.89% 3. Cosmic Global Ltd 15.72% 12.40% 4. Flextronics Software Systems Ltd. 1.81% 8.62% 5. Genesys International Ltd. -11.31% 13.35% 6. Maple E-Solutions Ltd. 33.93% 34.05% 7. R-Systems International Ltd. 9.44% 20.18% 8. Spanco Telesystems and Solutions Ltd. (Seg) (now known as Spanco Ltd.) 16.47% 25.81% 9. Transworks Information Services Ltd. (Now known as Aditya Birla Minacs Worldwide Ltd) 13.36% 11.98% 10. Triton Corp Ltd. 17.11% 34.93% 11. Vishal Information Technologies Ltd. 39.23% 51.19% Arithmetical mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems & Services Ltd (SeR.) 260.1 8 44.99% 55.99 21.52% 260.18 100.00% 1.7 0.65% PSeg 15 ICRA Techno Analytics Ltd (SeR.) 7.23 12.24% (*)0. 17 (*) 1.85% (*) 7.7 (*) 83.64 0.02 0.28% P (Soil) 16 Informed Technologies India Ltd 4.08 35.56% 0.65 15.93% 4.08 100.00% 0.61 14.95% P 17 Infosys BPO Ltd 649.56 28.78% 48.3 7.44% 608.81 93.74% 41.49 6.39% P 18 IServices India Pvt Ltd 16.29 49.47% 0 0.0001 16.29 100.00% 02 1.23% C 19 Maple Esolutions Ltd 12.21 34.05% 0 0.00% 12.21 100.00% 0.02 0.16% P 20 Mold- Tek Technologies Ltd (Seg.) 11.4 113.49% 0.12 1.05% 11.31 99.21% (**)0. 85 7.46% P (Seg.) 21 R Systems International Ltd (Seg.) 17.34 20.18% 0.1 0.58% 17.34 100.00% 0.12 0.69% PSeg 22 Spanco Ltd (Seg.) 35 25.81 % 1.76 5.03% 35 100.00% 0.61 1.74% PSeg 23 Triton Corp Ltd. 53.37 34.93% 0 0.00% 47.5 89.00% 0.08 0.15% C 24 Vishallnformation Technologies Ltd 30.6 51.19% 0 0.00% 30.6 100.00% 0 0.00% P 25 Wipro Ltd (Seg.) 939.7 8 29.70% 21.41 2.28% 920.98 98.00% (*) 427.4 (*) 0.31% PSeg 26 Nittany Outsourcing Services Pvt Ltd 23.23 11.50% 0.8 3.44% 23.23 100.00% 0.1 0.43% C 27 Accurate Data Converters Ltd 4.33 50.68% 0.05 1.18% 4.33 100.00% 0 0.00% C (Soft) 28 Apex Advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO and not taking into consideration foreign exchange fluctuation gain/loss. The submissions of the learned Authorised Representative for the assessee with regard to each of the objected comparable companies, as tabulated by the assessee in the written submissions read as follows- S. No. Company Name Reason for non-comparability and rejection Page No. of Paper-book (which was also before DRP) Case law/document relied upon 1. Accentia Technologies Ltd. (Seg). * Uncomparable financial results as there is amalgamation in company in Dec. 2006 272 * DRP order of Appellant for AY 2008-09. In the case of the Mold Tek also merger has taken place in Oct 2006. 2. Mold Tek Technlologies Limited * Uncomparable financial results as there is merger from 1 Oct 2006 * Supernormal profit of 113% * Non-comparable services as it is into KPO 282 * DRP order of Appellant for AY 2008-09 Mumbai ITAT Judgment in Teva India Private Limited v. DCIT, Mumbai( ITA No.6107/Mum/2009) holding that companies with supernormal profits should be excluded at para 32. 3. Eclerx Services Limited * Supernormal profit of 89% * Non comparable services of KPO business 278 * Mumbai ITAT Judgment in Teva In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resentative submitted that the DRP's order relied upon by the assessee was for the assessment year 2008-09 and does not relate to the assessment year under dispute. However, the learned Departmental Representative submitted that the matter can go back to the TPO for examining the impact of merger on financial affairs for the assessment year under dispute. So far as the issue of functional dissimilarity of Mold Tek Technologies Ltd. is concerned, the learned Departmental Representative submitted that the observation made by the DRP in its order for the assessment year 2008-09 cannot apply to the present assessment year. Replying to the objections of the assessee in cases of HCL Comnet Systems and Services Ltd., Infosys BPO Ltd. and Wipro Ltd., the learned Departmental Representative submitted that in case of these comparables, the TPO has considered only the margin, but not the turnover. Therefore, these comparables cannot be rejected on the ground of high turnover. So far as Maple e-Solutions Ltd. and Triton Corps Ltd. are concerned, the learned Departmental Representative submitted that the assessee had not objected to selection of these comparables before the DRP. In case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logies took place with effect from 1st April, 2007. The merger and the de-merger needed the approval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial year 31.3. 2008. The assessee filed Form No.21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective date of the scheme of merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical and specialized engineering services, and use of information technology is only incidental. Lastly, it has been submitted that the company was having supernormal profit at 113%. Therefore, it cannot be taken as a comparable. In support of his contentions, learned Authorised Representative for the assessee has relied upon the orders of the DRP for the assessment year 2008-09 and the orders of the ITAT Mumbai Bench in the case of Teva India P.Ltd. v. DCIT. (2011-TII-28 ITAT- Mum-TP). 13. On careful consideration of the submissions of the assessee we find that the DRP, as already stated earlier, in the proceedings for the assessment year 2008-09 has accepted the assessee's contention that this company cannot be treated as comparable because of exceptional financial result due to merger/de-merger. In view of the aforesaid, we accept the assessee's contention that this company cannot be treated as comparable. That apart, it is also a fact that this company has shown super normal profit working out to 113%. The Income-tax Appellate Tribunal, Mumbai Bench in the case of Teva India (P.) Ltd. (supra) has observed that companies showing supernormal profit cannot be treated as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties 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. In the circumstances, it cannot be taken as a comparable to the ITES functions performed by the assessee. Since this company is acting as agent only by outsourcing its works to the third party vendors. In this context, the assessee relied upon the order of the DRP in assessee's own case for the assessment year 2008-09, wherein the DRP, after taking into consideration, the aforesaid aspect, has accepted the claim of the assessee. The assessee further submitted that the Income-tax Appellate Tribunal Mumbai Bench in the case of Asstt. CIT v. Maersk Global Service Centre (India) (P.) Ltd, a copy of which is submitted before us, has also directed for the exclusion of the aforesaid company since it has outsourced a considerable portion of its business. 17. After considering the submissions of the learned Authorised Representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, the business reputation of Rastogi group, owning Maple E. Solutions and Triton Corporation, is under serious indictment. They are also carrying on the business of data processing services and ITES services apart form 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. ..... Accordingly, it is held that none of these cases can be taken to be comparable case." It was submitted by the learned Authorised Representative for the assessee that since the above decision of the Delhi Bench of the Tribunal was delivered subsequent to the impugned order of the DRP, it could not have been relied upon by the assessee before the DRP. 19. We have considered the submissions of the assessee in relation to these two companies. In view of the aforesaid order of the Delhi Bench of the Tribunal cited above, wherein the comparability of these very same companies was examined, we agree with the contentions of the assessee and hold, that these two companies cannot be accepted as comparables. VII. HCL Comnet Systems & Services Limited: VIII. Infosys BPO Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal, 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 arm's length margin to 25.6%. It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the later is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited currency risk. Having considered these points, we are of the view that the case of the aforesaid Infosys and the assessee are not comparable at all as seen from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 Bench in the aforesaid decision, should also apply to the facts of the present case, considering the assessee's turnover of mere Rs. 60 crores. We therefor4e, 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. 22. We find from the orders of the DRP that though the assessee has made detailed arguments, specifically objecting to the selection of the aforesaid companies as comparables, the DRP has not properly considered the contentions raised by the assessee and has passed a very cryptic orders bereft of detailed reasons in support of the conclusions drawn. 23. To sum up, our conclusions are - (a) Companies with extra-ordinary circumstances, like those which suffered events like merger/de-merger, impacting the financial results, could not be treated as comparables. (b) Companies having supernormal profit cannot be considered as comparable; (c) Companies which are functionally dissimilar cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign exchange fluctuation gains is nothing but an integral part of the sales proceeds of an assessee carrying on export business. The Courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of exporter-assessee. The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company......." Following the aforesaid decision of the Bangalore Bench of the Tribunal, the Hyderabad Bench of the Tribunal held in the case of Four Soft Ltd. (supra) in the following manner- "16. With regard to the exclusion of gain on account of foreign exchange fluctuation while computing the net margin, as claimed by the assessee, we find that the exchange fluctuation gains arise out of several factors, for instance, realisation of export proceeds at higher rate, import dues payable at lower rate. Since the gain or loss on account of exchange rate fluctuation arises in the normal course of business transaction, the same should be considered while computing the net margin for the international transactions with the associated enterprises of the assessee. Our view in this behalf is fortified by the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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