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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 ..... he action of the TPO in rejecting the comparables by applying the criteria of BPO and KPO is not sustainable. 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 - the objection of using multiple year data ceased to exist - once the criteria adopted by the TPO for rejecting the comparable of the set of companies selected by the assessee is not found proper then the comparability has to be analysed on the basis of real nature of the business activities of the assessee as well as the comparables and further where the segmental data are used then the only business activity of the particular segment of comparable has to be compared with the business activity of the assessee. The business profile of the six comparables selected by the assessee and particularity the segment of engineering design services are similar to that of the assessee's services provided to the AEs, therefore, when the International transaction of the assessee company in respect of the services provided to the AEs are similar to the business profile of the comparables and a particular segment of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the directions issued by Dispute 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 ₹ 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, cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems 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. The DRP disposed of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sofregaz S.A. Supply of engineering design and technical services Rs.5,198,550/- TNMM Administrative services ₹ 167,025 3. TWS SA Supply of engineering design and technical services ₹ 35,823,201/- TNMM Administrative services ₹ 774, 099/- 4. Technimont India Project Office Supply of engineering design and technical services ₹ 240,606,763/- TNMM 5. Tecnimont SpA Reimbursement of Cost allocation ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices. During the course of proceedings the assessee submitted before TPO that the entire set of KPO companies are not comparables as its activities are more akin to BPO and raised the objection against the comparability of each of the companies selected by the TPO. The TPO rejected the objections raised by the assessee and finally arrived at arithmetic mean margin at 49.88% by considering the operating profit to total cost as PLI. The TPO has also rejected the claim of the assessee for risk adjustment on account of difference in the risk profile vis-a-vis comparable selected by TPO. Accordingly the TPO made an adjustment of ₹ 29,08,51,336/- on the basis of arm's length price determined at ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing (CAD/CAE), design and modelling repair development engineering etc. Thus the business profile of the comparable is similar to the assessee's business. He has then referred the business profile of Rolta India at page 698 and 701 and submitted that the said company is also in the engineering and design business as one of its segment and, therefore, the said segment is comparable with the assessee. The next comparable selected by the assessee is Onward Technology and the business profile of the Onward Technology Ltd. has been referred in the Director's report at page 791 of the paper book. The Ld. Authorized Representative has submitted that the Onward Technology is in the Mechanical 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 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. 8. On the other hand, the ld. DR has strongly relied upon the orders of authorities below and submitted that the TPO has selected a set of companies which are similar and comparable to the business of the assessee and further the decision of Special Bench in the case of Maersk Global Centres (India) (P.) Ltd. (supra) was not available before the authorities below. 9. We have considered the rival submissions and carefully perused the relevant materials on record. We have given our deep thought on the issue of comparability of he companies selected by the assessee as well as by the TPO. The business profile of the assessee has been recorded by the TPO at page 22 of its order 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company providing back office support services to their overseas associated enterprises, companies performing KPO functions should be considered as comparable ?. In our opinion, the answer to this question will depend on the facts and circumstances of each case inasmuch as if the assessee-company, on the basis of its own functional profile, is found to have provided to its AE the low-end back office support services like voice or data processing services as a whole or substantially the whole, the companies providing mainly high-end services by using their specialized knowledge and domain expertise 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/r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sider the alternative submission of the assessee that the comparables selected if as well as the five comparables of the TPO after the DRP order rejecting one out of six comparables, the mean margin of eleven companies comprising six selected by the assessee and five of the TPO comes to 23.53%. The assessee has given the details of the operating profit of all the eleven companies comprising the six comparables selected by the assessee and five of the TPO as under: Margin of comparable companies as documented in the transfer pricing study of EDTICB 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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