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TMI Blog2014 (4) TMI 925X X X X Extracts X X X X X X X X Extracts X X X X ..... T(Admn.) u/s 263/ 264 - thus, the comparable cannot be excluded. Spanco Telesystems & Solutions Ltd. – Held that:- Both TPO and Assessee have agreed that profit margin is reasonable for the year and no specific objection was raised either on the operating profit margin on the related party transactions, which were decided in another case - Assessee has not specifically raised any objection on the comparable before the learned CIT(A), there is no reason to exclude the same from the list of comparables ultimately approved by the TPO - the AO is directed to include this comparable as it was mistakenly excluded by the CIT(A), without any discussion. Wipro BPO Solutions Ltd – Held that:- The exclusion of Wipro BPO Solutions, whose operating profit over the cost is less than the companies accepted as comparables by Assessee, is not proper – the assessee's objections cannot be accepted that exclusion of Wipro BPO Solutions on the basis of the turnover alone - the order of CIT(A) is upheld as far as the issue of profitability vis-à-vis scale of operations/turnover is concerned – the view expressed by the TPO is accepted that it will not have significant effect on the profitabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... about Rs. 40.69 crores, totaling to Rs. 53.54 crores. Assessee has arrangement with the group concerns to reimburse at 15% of the actual cost incurred on a cost plus method, accordingly it has offered operating profit on cost at 15.01% on IT enabled services. Assessee adopted in its TP study average two years data of 6 comparable companies, whose operating profit on cost has come to average of 9.33%. Assessee comparables are as under: (1) Ace Software Express Ltd. (2) CS Software Enterprise (3) Max Health Scribe Ltd. (4) Northgate BPO Services Ltd. (5) Nucelus Netsoft GIS India Ltd. (6) Mercury Outsourcing Management Ltd. 6. The TPO vide his order has accepted only two comparables i.e. M/s Nucleus Net Soft and GIS India Ltd, whose operating profit on cost was at 16.87% and M/s Mercury Outsourcing Management Ltd., whose operating cost was ultimately arrived at 5.88%. In addition to the two out of 6 comparables selected, the TPO has selected 5 more comparables. 7. The TPO selected the following 5 companies includible for comparison: (a) Spanco Telesystems Solutions Ltd., (b) Vishal Information Technologies Fortune Infot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) has arrived at the average profit margin of only 3 companies i.e. Nucleus Net Soft Gis India Ltd. (accepted by Assessee and TPO), Tricom India Ltd. and Wipro BPO Solutions, out of the selection of TPO. He left out the comparable Spanco Telesystems Solutions Ltd. accepted by both the parties without discussing anything and learned CIT(A) did not include the same in the final list prepared by him in para 6.9. He arrived at the final margin at 32% of operating profit to cost on the basis of three comparables, then gave additional 1% adjustment for minor functional difference and confirmed the addition at Rs. 4,94,26,276/-. 11. Assessee has raised the following grounds of appeal: "Based on the facts and circumstances of the case, the appellant respectfully submits that the learned CIT(A)-III, Hyderabad erred on the following grounds while determining the arm's length price for the information technology enabled services under Chapter X of the Act at Rs. 455,900,296/- as against the arm's length price of Rs. 406,474,020 as determined by the appellant: (i) erred in not accepting the comparable companies identified by the appellant. (ii) erred in accepting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he finding of the Bench vide para 30 of its order, which is as follows: "30. The only comparable chosen by Assessee viz., M/S.IDC India Ltd., which has also been relied upon by the TPO now survives for consideration. The comparables chosen by Assessee on the basis of the contemporaneous data for A.Y 2006-07 gives an arithmetic mean of 18.97% which we have already mentioned. This is the highest arithmetic mean of the comparable chosen by Assessee. Even if this arithmetic mean is taken to be reflecting the operating margin of the comparable companies, the same is within 5% range of the operating margin of Assessee. We find that the TPO has not given any reason whatsoever for rejecting these comparables. As we have already explained the reasons given by the TPO does not any where mentioned as to how the comparables selected by Assessee were not functionally comparable. This Tribunal in the case of Maeserks Global Service Centre India Pvt. Ltd., in ITA No.3774/M/11, has taken the view that if TPO does not reject a comparable on the ground of functional incomparability then neither the AO or the revenue can take a plea of functional in comparability of the comparables chosen by A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company are not very substantial, this company cannot be adopted as a reliable comparable, since it has shown abnormal variations in operating profit over the years. In the last year, its operating margin was only 4.22%, while this year it has shown a profit margin of about 40% which is about 9 times of the earlier year's operating profit margin. In my considered opinion a company having abnormal variation of profit should not be adopted as a comparable in TNMM analysis. I also find that this company was excluded in the comparability analysis of AY 2003-04 also on the basis of functional difference with the appellant. Considering all these factors, I do not consider it appropriate to adopt this company as a comparable for the computation of average profit margin." 16. It is also further submitted that the coordinate bench in the case of Dy. CIT v. Deloitte Consulting India (P.) Ltdin ITA No. 1082/Hyd/2010 for AY 2004-05 vide order dated 22-07-12also considered the same comparable and held vide para 35 as under: "35. Now, we turn to the issue relating to the selection of Spanco Tele-system as comparable company in the back office services segment by the TPO. We find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the said comparable can not be excluded. 19. Coming to the comparables selected by TPO, Assessee contested the following two comparables, ultimately approved by the CIT(A). A . Spanco Telesystems Solutions Ltd.: As briefly stated earlier, this comparable was not contested before the CIT(A) and as stated CIT(A) also has not decided about this, as there is no objection from Assessee before him. The fact is that while ultimately computing the average PLI, the learned CIT(A) did not include this comparable in final list, therefore, this comparable got excluded, more probably by mistake. Before us, the learned counsel's contentions were that this comparable was deleted by the learned CIT(A) in another company and also excluded by the ITAT in the coordinate bench decision in case of Deloitte Consulting India (P.) Ltd. (supra) While not disputing the above submissions of Assessee, we however, are not in a position to accept the contentions raised before us. First of all, this company was accepted as comparable before the CIT(A) after TPO has selected it. Therefore, on the same principles as that of the discussion made in the case of Mercury Outsourcing Management Ltd above, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, which have almost meager turnover when compared to Assessee's turnover, why Assessee raised objection to the turnover of Wipro BPO Solutions, which is at 430 crores and the same is about 10 times higher than the Assessee's turnover could not be understood. When on functional parameters, companies are considered similar in business profile, considering the turnover alone for exclusion of comparable is not correct. In fact, the coordinate bench in the case of Simontec Software Solutions Pvt. Ltd. Vs. ACIT, 46 SOT 48 (Mum) (Trib.)held that if there is nothing to show that the difference in turnover made that comparables non-comparable, these cannot be excluded on the basis of difference in turnover. Likewise, in the case of Capgemini India Pvt. Ld. Vs. ACIT, 33 Taxman.com 5(Mum.) (Trib.), it was held that economy of scale was not relevant in the case of service company. Under Rule 10B(2) comparability of international transactions with uncontrolled transactions has to be judged with reference to functions performed, assets employed and risks assumed. Assessee has not contested that due to any of the above, such company is functionally not similar. Its objections are only on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables on the basis of fixed slabs of turnover. It was also noted 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. 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 41.36%; whereas the margin of the entities having turnover upto Rs. 940 crores is 30.74%/ Thus, there is not much difference in the margin whereas there is vast difference in the turnover. The turnover is not a criteria as prescribed under the Rule 10B(2) for selecting comparables. When the assessee has not made out a case as how the high or low turnover has influenced operating margin and on the contrary there is no direct relation between the turnover and margin as clear from the details and graphic chart reproduced, then a comparable cannot be rejected solely on the basis of high turnover. Even otherwise, the larger turnover and size of the entity may have an impact of economical cost of production in the manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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