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TMI Blog2014 (8) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... e Resolution Panel- I (,DRP'), Mumbai under section 143(3) r.w.s.l44C(13) of the Income-tax Act, 1961 (hereinafter referred to as the Act) on the following grounds which are independent and without prejudice to each other. On the facts and circumstances of the case and in law, the AO/ Transfer Pricing Officer (TPO') based on directions of DRP: General 1 erred in making a transfer pricing adjustment of Rs. 29,08,51,336/-; 2 erred in adopting an approach based on unsubstantiated presumptions, surmises, conjectures and allegations for the purpose of making an adjustment to the international transactions, thereby violating the provisions of section 92 C(3) read with 92GA(3) of the Act; 3 erred in ignoring the fact that since the Appellant is availing tax holiday u/s 10A of the Act, there is no motive or reason to shift profits out of India, curbing which is the basic intention of introducing the transfer pricing provisions; Rejection of economic and comparability analysis 4 erred in not accepting the economic analysis undertaken by the 4 Appellant in accordance with the provisions of the Act, read with the Rules, conducting a fresh search for the determination of the ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ltd. ♦ R Systems International Ltd. ♦ Spanco Ltd. ♦ Accentia Technologies Ltd. 13 Without prejudice to the above, while treating the Appellant's business activity similar to KPO, erred in not selecting the following 7 comparables in the comparability study undertaken by the TPO even though they fulfilled all the quantitative filters adopted by the TPO: ♦ Infosys BPO Limited ♦ Asit C Mehta Financial Services Ltd ♦ E4e healthcare Business Services Pvt Ltd Adjustment on account of cost of new hires/trainees 14 While computing margin for the appellant's comparables, erred in not granting adjustment on account of cost of new hires/trainees who remained unproductive during the year being under training; Risk Adjustment 15 erred by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparables." 2. At the time of hearing the ld. Authorized Representative of the assessee has submitted that subsequent to the directions of DRP dated 28.09.2012, the assessee has filed a rectification petition under Rule 13 of the Income Tax (Dispute Resolution Panel Rules 2009) on 27.12.2012. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Administrative services Rs. 774, 099/- 4. Technimont India Project Office Supply of engineering design and technical services Rs. 240,606,763/- TNMM 5. Tecnimont SpA Reimbursement of Cost allocation Rs. 15,275,686/- At cost 6 Tecnimont SpA Recovery of Expenses Rs.124,539,636/- At cost 5.2 The assessee filed its TP study report and shown the margin at 19.46% on operating income which has been benchmarked by the average PLI of comparables at 16.61% by applying TNMM as most appropriate method. Thus the assessee claimed that the price charged for its international transaction is higher than the arithmetical mean price and, therefore, the price charged by the assessee on its international transactions is at arm's length. The assessee has selected six comparables on the basis of search conducted in the public data bases, prowess and capital line plus. The TPO noted that the assessee has derived the net profit margin at 19.46% during the year under consideration and benchmarked its international transaction by taking a set of six comparable companies in ITES and BPO sector. He has further noted that the assessee has used three years data of these six compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice determined at Rs. 1,69,56,75,115/- by taking the mean margin at 49.88% of the six comparables finally selected by the TPO. The Assessing Officer framed the draft assessment order against which the assessee filed objections before the DRP. The DRP vide its direction dated 28.09.2012 directed the Assessing Officer/TPO to exclude one company namely M/s Coral Hubs Ltd from the set of comparables selected by the TPO. Further the DRP vide order dated 10.03.2014 have passed the modified directions on the rectification petition of the assessee in respect of mistake in the calculation of margin of M/s Moldtek Technologies Ltd. The DRP has directed the Assessing Officer/TPO to recompute the margin of Mold Tech Technologies in a manner similar to that of assessee's in respect of forex exchange gains and losses including that of derivatives. 6. Before us, the ld. Authorized Representative of the assessee has submitted that the TPO has rejected the comparables selected by the assessee on the basis of wrong facts and assumption and solely on the ground of KPO and BPO as a criteria of functional comparability. The ld. Authorized Representative has submitted that this issue of comparabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nical Engineering design services. Its clients include global Fortune 1000 manufacturing companies in the automotive, agricultural, heavy engineering, electrical equipments and Aerospace Industry. Thus the segment data used by the assessee having relation to the comparable business of the assessee. The ld. Authorized Representative then referred the business profile of TATA ELXSI LIMITED at page No. 755 of paper book and submitted that the said company is in the Prodcut Design Services, Innovation Design Engineering and Visual Computing Labs. The assessee has used segmental data of design engineering segment, therefore, the business of the design engineering segment providing integrated styling and mechanical design solution is similar to the assessee's business activity and, therefore it is a good comparable. The ld. Authorized Representative then referred the business profile of the Neil Soft Ltd. and submitted that the said company is also in the similar line of business providing engineering product/product lifecycle, CAD/CAM/CAE design automation application development etc. The last comparable of the assessee is Geometric Ltd and the ld. Authorized Representative has refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under:- "It was submitted that assessee is primarily engaged in providing engineering design support services to its AE's. The AE's of the assessee are in the business of executing turnkey engineering, procurement and construction contracts (EPC) for customers. Since the AE's do not possess their own technology for building plants; they approach global players like Mitshibushi. KBR etc. for licensing the basic design and technology. The core EPC team of the AE closely work with the customer and the technology provider to convert the basic design into workable detailed design. In order to save on labour cost; portion of the low-end design and drawing work is outsourced by the AE to the assessee. The employees of the assessee are largely draftsmen and CAD/CAM operators who convert the instructions provided by the core team into drawings. These drawings are checked and verified by the Core team of the AE; including the customer and the project managers appointed by the customer. The corrections suggested by the Core team are executed by EDTCIB and resubmitted to the Core team." 10. The assessee is a wholly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertise cannot be considered as comparables." 11. Thus it is clear that the classification of Information Technology Enabled Services (ITES) into low-end BPO services and high-end KPO services for comparability analysis is not just and proper, and, therefore, the action of the TPO in rejecting the comparables by applying the criteria of BPO and KPO is not sustainable in view of the decision of Special Bench. We further note that the assessee has used the segmental data for determining the arm's length price and taken the mean profit of each comparable only from the segmental data/results. Though the TPO initially raised an objection of using multiple year data, however, we note that during the course of proceedings before the TPO, the assessee furnished the updated current year data, mean margin of the comparables based on the current year data. This fact has been recorded by the TPO at page 23 of the order. The relevant part of the TPO order is as under:- "As regards years for which the data has been used in the documentation, the assessee submitted that the comparable data for FY 2007-08 was not available in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plus the companies adopted by the learned TPO: Sr. No Name of the Company Operating profit/operating cost 1 Rolta India Limited (Seq) 49.06% 2 Infotech Enterprise Limited (Seq) 15.38% 3 Tata Elxsi Limited (Seq) 18.18% 4 Onward Technologies Limited (Seq) -1.63% 5 Neilsoft Ltd 5.55% 6 Geometric Limited (Seq) 5.30% 7 Acropetal Technologies (Seq) 35.30% 8 Crossdomain Solutions Ltd 26.96% 9 Eclerx Services Ltd 65.88% 10 Mold-tek Technologies Ltd 15.05% 11 Triton Corp Ltd 23.81% Arithmetic Mean 23.53% 13. The assessee also filed the computation which shows that the assessee's operating profit by using PLI as OP/OC from the international transaction is 24.17% which is more than the arithmetic mean/ALP based on the set of eleven comparables including the assessee's as well as the TPO's selected companies. It is pertinent to note that even after accepting the comparable companies selected by the assessee, the TPO has power u/s 92 CA(3) to gather and consider all relevant materials and information apart from the evidence, information and documents provided by assessee as required under section 92 D(3) of Income-tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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