9911796707
TMI Blog2014 (9) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... hat during the previous year, the assessee has gross receipts from exports shown at Rs. 13,05,32,325, shown under BPO services, and foreign exchange gain of Rs. 11,46,821 and interest income of Rs. 1,470 shown under other sources. He further noticed that in the profit & loss account, the assessee has claimed an amount of Rs. 1,00,71,383 towards communication expenses, which was attributable to the delivery of computer software abroad, shown under BPO services. Referring to the definition of 'export turnover' as given in clause (iv) to Explanation-2 to section 10A of the Act, which says consideration in respect of export of articles or things or computer software received by an assessee in convertible foreign exchange, but does not include freight, telecommunication charges, insurance attributable to delivery of such article outside India and expenses if any, incurred in foreign exchange in providing technical services outside India, he held that such communication expenses, which was incurred by the assessee for delivery of the software under BPO services abroad, has to be excluded for computing the 'export turnover' for the purpose of computing deduction u/s. 10A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 92CA of the Act, assessee challenged selection of comparables. The assessee shown the value of the international transactions at Rs. 13,05,32,325 in addition to an amount of Rs. 19,16,518 towards Recharges. The assessee followed TNM Method for the purpose of analysing the transfer pricing as most appropriate method. For comparability analysis the assessee has used data belonging to the period April 2001 to 16th February, 2004 and has selected 17 comparables for A.Y. 2004-05. However, the TPO considering the provisions of Rule 10B(4) of the Income-tax Rules, 1962, further considering the contemporaneous data i.e., the data belonging to the financial year 2003-04, has excluded the companies from the list of comparables originally selected and furnished the comparative results in respect of 8 companies. However, out of the 8 companies in respect of which the assessee furnished the financial data, taking into account the financial results for the financial year 2003-04, the TPO selected two companies i.e., Nucleus Netsoft & GIS India Ltd. and Tricom India Ltd. and rejected the other six companies. Further he selected the following six companies for the purpose of comparable analysis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled to appreciate the entire issue in the right perspective, instead, the findings are totally against the facts on record. 1.4 The reliance placed by the learned Assessing Officer on the contemporaneous data of the financial year 2003-04 was not made available/ accessible, therefore, the orders passed are one sided and are contrary to the principles of natural justice. 1.5 Both the AO and as well as CIT(A) erred in rejecting the loss making comparables in violation of OECD guidelines, instead, summarily and without any basis concluded that the comparables shall be of those companies which have shown profit. 1.6 The learned CIT(A) erred in confirming the action of the Assessing Officer who rejected certain companies relied by the assessee as comparables, on the alleged ground of functional differences, which findings are not supported by cogent reasons acceptable under law. 1.7 The learned CIT(A) is not correct in approving the comparables selected by the AO/TPO, since under the facts, circumstances, the alleged comparables selected do n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . v. Addl. CIT (148 TTJ 581) (Mum). 11. The learned DR relied on the order of the CIT(A). 12. We have heard both the parties and perused the material on record. For transfer pricing analysis in this case, the assessee has used data of different companies pertaining to the period from April, 2001 to February 16, 2004. Thus, the assessee has used data of the preceding two financial years and partly of the current financial year, from April 1, 2003 to February 16, 2004. However, under Indian Transfer Pricing Regulation, for the purpose of comparability analysis, an assessee is bound to use the data of relevant financial year, in which it has entered into international transaction. Under Rule 10B(4), it says the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction, shall be the data relating to the financial year in which the international transaction has been entered into. Thus, as per the above provisions, user of data of the current financial year, in which international transaction has been entered into by an assessee, is mandatory. There is no option but to use the data of only the relevant financial year, in which the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Accepted both the Transfer Pricing Officer (TPO) and the Appellant A difference of about 7% in the Operating profit on Cost arrived by the Transfer Pricing Officer and the Appellant As per the TPO, the Operating profit/ cost equals 45.74% for the financial year 2003-04, but, factually it works out to 38.37% only. 3 Datamatics Technologies Limited Rejected by the Transfer Pricing Officer (TPO) and rejection accepted by the Appellant Rejection accepted by the Appellant. 4 Hinduja TMT Limited Rejected by the Transfer Pricing Officer (TPO) and rejection accepted by the Appellant Rejection accepted by the Appellant. 5 Weal Infotech Limited Rejected by the Transfer Pricing Officer (TPO) and rejection accepted by the Appellant The segmental data for 2004 was not available and no annual report had been produced by the Appellant Rejection accepted by the Appellant. 6 Carborundum Universal Limited Rejected by the Transfer Pricing Officer (TPO) and rejection accepted by the Appellant. The company is functionally different and segmental data for 2004 was not available. Rejection accepted by the Appellant. 7 Max Healthscribe Limited Rejected by the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit, loss is also a part and parcel of the business and to arrive at an industry average, loss suffering units cannot be ignored which is in line with the OECD guidelines clause 3.45 on application of TNMM. 12 M C S Limited Rejected by the Transfer Pricing Officer (TPO), but, rejection disputed by the Appellant. The reasons being there was no forex revenue and that it is functionally different from a BPO. The company is engaged in share registry services which is very much similar to BPO services and the financials of the company for the financial year 2003-04 discloses income on account of foreign currency and Point no. : 1(x) of 'Notes on accounts' talks about accounting policy adopted with respect to foreign exchange transactions. 13 Vans Information Limited Rejected by the Transfer Pricing Officer (TPO), but, rejection disputed by the Appellant. The company has incurred losses continuously for three years. The provisions related to Transfer Pricing do not provide for rejection based on losses. 14 Suprawin Technologies Limited Rejected by the Transfer Pricing Officer (TPO), but, rejection disputed by the Appellant. The company have incurred losses continuo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant. There is a difference of about 4% in the Operating profit on Cost arrived by the Transfer Pricing Officer and the Appellant. Factually, the financials of the company for the financial year 2003-04 indicate that the Operating profit / cost equals 35.34% only as against 39.35% adopted by the TPO. 19 Mercury Outsourcing Management Limited. Introduced by the Transfer Pricing Officer (TPO) and accepted by the Appellant. The comparable had been introduced by the Transfer Pricing Officer but, initially rejected by the Appellant since the data regarding the functions were not available in the public domain and the Director's Report and Notes to Accounts did not elaborate much on the functions of the Company. Subsequently, on obtaining all relevant information and data, the appellant accepted the comparable. 20 Vishal Information Technologies Limited Introduced by the Transfer Pricing Officer (TPO) but rejected by the Appellant. The comparable had been introduced by the Transfer Pricing Officer. The company's employee cost to total cost ratio is 2% as per its annual report whereas the industry average is 30-50%. The appellant company's Employee cost to Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate fluctuations. Even assuming for a moment that there are no exports sales from those companies, it cannot be rejected as comparables for the simple reason that it is not a pre-condition even domestic sales can be considered for the purpose of comparability. Thus, the Commissioner of Income Tax (Appeals) as well as TPO are not justified in rejecting those companies as comparables. 18. The DR submitted as follows over the above comparables: (1) C.S. Software Limited: It was submitted by the assessee that the TPO rejected the above company on the ground that there are no foreign exchange transactions. It was stated that operations are determined by prevailing market conditions and not merely by currency in which they transact. Stating that lack of foreign transactions will not be detrimental to the results, the AR contended that the TPO was unjustified in rejecting the above company as a comparable. As noted by the TPO, there was no foreign exchange revenue in the case of the above company during financial year 2003-04, and hence it was not catering to overseas market. It was submitted that normally the profit margin/return from export sales is higher when compared with the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of business transaction, the same should be considered while computing the net margin for the international transactions with the AEs of the assessee. Our view in this behalf is fortified by the order of the Tribunal Bangalore Bench in the case of SAP LABS India Ltd.(P.) Ltd. v. ACIT 44 SOT 156 (Bang) and also order of the Tribunal Mumbai Bench in the case of Deutsche Bank A.G. v. Dy. CIT [2003] 86 ITD 431. If the gain on account of foreign exchange rate fluctuation is to be taken as operating gain in nature, the net margin declared by the assessee for the international transaction with the AEs, goes up still further. However, if the loss of the comparable is abnormal and there is no trading activity of whatsoever, data of such company cannot be considered. Accordingly, we direct the Assessing Officer to consider the data of MCS Ltd. as comparable while computing the ALP and to exclude other two companies from comparables. 20. The AR submitted, in respect of F.I. Sofex Ltd., Vans Informations Ltd. and Suprawin Technologies Ltd. (items Nos. 11, 13 and 14 in the chart), that these companies were introduced as comparables by the assessee, but were rejected by both Learned TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered as a comparable. Therefore, and for the reasons stated by the TPO in para 7.2.3 of his order, he was justified in rejecting the above company i.e., FI Sofex Limited, as a comparable for the purpose of determining ALP in this case. 24. Regarding Vans Information Limited, it was submitted by the DR that as stated by the TPO in para 7.2.13(i) of his order, this company has been incurring losses continuously for three years. However, it was wrongly stated by the AR that the provisions relating to transfer pricing do not provide for rejection based on losses, the appellant contended that the TPO was not justified in rejecting the company. In the face of such continuous losses over the years and since there was no profit/positive income during the current financial year, for the reasons discussed in the case of Suprawin Technologies Ltd., the TPO was justified in not considering the above company as comparable. 25. Regarding Suprawin Technologies Ltd., it was submitted by the DR that this company was having losses continuously for three years. It is functionally different from that of the assessee and more over no segmental results are available in the case of this company. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... late the ALP after excluding only the data of the companies which have losses due to extraordinary reasons. In other words, if there is loss in ordinary course of business which is normal/nominal cannot be excluded from the comparables. However, we make it clear that if there is any abnormal loss or if there is continuous loss year by year, in such situation that company data cannot be considered as comparable with the assessee company. For example, F.I. Sofex Ltd., Vans Information Ltd. and Mukund Engineers Ltd. and these companies are to be excluded from the comparables. 27. The AR submitted that Wipro BPO Ltd. and Spanco Telesystems & Solutions Ltd. (items Nos. 21 and 22) introduced by the TPO as comparables and not accepted by the assessee, the scale of operation of those companies are exceptionally large and therefore, cannot be accepted as comparable. The Mumbai Tribunal in the case of DHL Express (India) (P.) Ltd. v. Asstt. CIT [2011] 11 taxmann.com 40 (Mum. - ITAT) held that where there is a large difference in the scale of operations, though operating in the same field, cannot be taken as comparable. Same position was reiterated again in the case of Symantec Solutions (P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the AO erred in treating the above company as functionally different from that of the assessee company. It was submitted that as seen from the annual report of Ace Software Ltd., for the year ended 31.03.2004, the sale transaction made by Ace Software Exports during the F.Y 2003-04 were controlled transactions and this company, should not be considered as a comparable. Therefore, the TPO was justified in rejecting the above company as comparable in this case. 32. We have heard both the parties on this issue. In our opinion, controlled transaction with related parties which makes it un-comparable with the assessee. In the present case, related party disclosure in Ace Annual Report shows no services are provided to Apex Data Services. Relationship has to be examined as per definition of Associated Enterprises (AEs) as per section 92A of the Act. It was stated before us that Apex Data Services is having 7% share capital in Ace Software Exports Ltd. Even otherwise provisions of section 92A(2)(i) deems two companies as AEs only, if 100% goods are purchased and sold. Though the transactions with related parties cannot be considered for the purpose of comparison, in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of Tulsyan Technologies Ltd. (item No. 15 in chart) introduced by the assessee but rejected by both the lower authorities on the ground of functional differences but as per the clarification given by the CBDT the business of the company constitutes ITES and therefore, cannot be rejected as comparable. 37. The DR submitted that Tulsyan Technologies Ltd : As stated by the TPO, in para-7.2.6.1 of his order, the business in the case of this company comprises both software development and ITES. Further stating that the service income was only Rs. 95,00,000 i.e. less than Rs. 1 crore, and no segmental results are available, the TPO rejected this company as a comparable. However, stating that the average turnover during financial year 2002-03 and 2003-04 was more than Rs. 1 crore and further stating the company was mainly into ITES, the assessee has contended that the above company qualifies as a comparable. However, it cannot agreed with such contention of the appellant. As may be seen, the assessee admitted that revenue from services in the case of the above company during financial year 2003-04 was less than Rs. 1 crore. In view of this fact, and since segmental results in case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the extraordinary profits earned in subsequent Financial Year 2004-05, is not relevant as the matter here pertains to F.Y. 2003-04. Having regard to such facts, the TPO was justified in considering the segmental results in respect of the above company, for comparability analysis in this case. Accordingly, the AO was also justified in accepting such segmental results in respect of the above company for comparability analysis in this case. 41. We have heard both the parties on this issue. It is an admitted fact that the cases which were showing abnormal trading results, as discussed in earlier paras, by relying on the order of the Bangalore Bench in the case of Genisys Integrating Systems India (P.) Ltd. (supra), companies showing abnormal results cannot be considered as comparables. It is an admitted view that the companies making abnormal profits as compared to the assessee cannot be considered as comparables while determining the ALP. For this purpose we place reliance on the decision of Special Bench in the case of Quark Systems (P.) Ltd. (supra). Accordingly, in our opinion, super profit companies per se are liable to be excluded from the comparables. 42. The AR submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's cost to total cost ratio is worked out at 2% as compared to the industry average of 30 to 40%. The assessee's employee's cost to total cost ratio is worked out at 47%. Since the employee's cost form major cost base in ITES service industries, the low ratio of comparables implies that it would not be providing services by employing its own sources. Being so, the assessee is not alike to M/s. Vishal Information Technologies Ltd. Accordingly, M/s. Vishal Information Technologies Ltd., cannot be considered as comparables and it is to be excluded from comparables. 47. As held in earlier paras elsewhere in this order, functionally different companies cannot be considered as comparables with the assessee company. Being so, Tata Services Ltd., which is operating on no profit no loss basis cannot be considered as a comparable case and the rejection is justified. 48. With regard to Nucleus Netsoft and GIS India and M/s. Tricom India (items Nos. 1 and 2 in the chart), the AR submitted that there is a difference of 7% in working out the percentage of operating profit and cost. In other words, only operating income should be considered. Reliance in this regard is placed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TTJ 33 (Mum) (URO); (4) Phoenix Mecano India Ltd. vs. DCIT in ITA No. 7647/M/2011; (5) ACIT vs. UE Trade Corpn (I) Pvt. Ltd. (2011) 136 TTJ 297 (Del.); (6) TNT INDIA P. Ltd., vs. ACIT (2012) 15 ITR (Trib.) 263 (Bang); (7) Schefenacker Mother Son Ltd. vs. ITO (2010) 2 ITR (Trib.) 1961 Delhi; (8) Cummins India Ltd. v. DCIT [2012] 15 ITR (Trib) 252 (Pune). 53. The AR submitted that the Mumbai Bench in the case of Emersons Process Management India (P.) Ltd. (supra) wherein it was held that prior to amendment in second proviso to Sec. 92C w.e.f. 01.10.2009, issues is no longer res integra and the benefit of 5% is to be allowed even in the cases where difference in value of international transactions at its ALP is more than 5%. 54. Regarding granting of deduction as per proviso to section 92C(2) of the Act, the DR submitted that if the difference between the ALP determined by the TPO does not exceed 5% of the price of the international transactions shown by the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as facts of the case in not accepting the arm's length price (ALP) determined by the appellant. 1.2 The learned CIT(A), as well as learned AO/TPO have erred in selecting and using certain companies as comparables to determine the ALP by not appreciating the fact that the comparable companies selected are not comparables to the appellant and hence, cannot be used in the instant case. 1.3 Both the learned CIT(A) and as well as AO/TPO erred in rejecting the loss making comparables, in violation of OECD guidelines, instead, summarily without any basis concluded that the comparables shall be of those companies which have shown profit. 1.4 The learned CIT(A) erred in confirming the disallowance of expenditure pertaining to internet services utilised from VSNL on the ground that the payment falls under the category of fees for technical services and assessee failed to deduct tax at source. 1.5 The learned CIT(A) is not correct in upholding the ad-hoc disallowance of 15% of the expenditure excluding rent, electricity charges, communicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ink, it cannot be said that the assessee is availing technical services. Stating that the company has availed general internet service like any other user, from VSNL, the AR contended that the payment made for the same cannot treated as fees for technical services. Further stating that such payment made by the assessee was not liable for deduction of tax at source, he contended that such disallowance made by the Assessing Officer in the assessment is not justified. In this regard, the AR relied on the decision of Madras High Court in the case of Skycell Communications Ltd., & Anr. vs. DCIT [251 ITR 53] and the decision of the ITAT, Delhi Bench, in DCIT vs. M/s. Estel Communications Pvt. Ltd., in ITA No. 3375/Del./2007 dated 10.03.2008 64. We have carefully considered the submissions of the AR and the facts of the case. First of all, it may be stated here that the Assessing Officer has made such disallowance after referring to the decision of Hon'ble ITAT, Kolkata, in the case of Hutchison Telecom East Ltd. v. Asstt. CIT [2007] 16 SOT 404. The assessee has submitted that in their case there was only purchase of internet bandwidth from VSNL. It is further stated that though ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same is upheld. This ground is rejected 66. Ground No. 1.5 reads as under: The learned CIT(A) is not correct in upholding the ad-hoc disallowance of 15% of the expenditure excluding rent, electricity charges, communication charges, insurance and foreign exchange loss. 67. Facts of the case are that the assessee has objected to the disallowance of expenditure of Rs. 2,15,33,810 made in the assessment. It is stated that books of accounts have been produced by the assessee before the Assessing Officer for his verification. It is further stated that the assessee being a registered STPI unit, eligible to claim exemption for its profits u/s. 10B, there is no need for the assessee to inflate its profits. As such, the ITO's claim that excessive expenditure had been recorded by the assessee is totally incorrect. It is further stated, accordingly, the disallowance of 15% of total expenditure to the tune of Rs. 2,15,33,810 is unwarranted and wrong. 68. We have heard both the parties and perused the material on record and gone through the submissions of the AR and the facts of the case. Thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissed. 71. The assessee filed additional ground that the CIT(A) ought to have appreciated that when the additions are made under 'business head', the same would only go to inflate the business income which qualifies for exemption u/s. 10A of the IT Act, 1961 as held by the Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. (330 ITR 175). 72. The assessee filed petition for admission of additional ground stating that the issue raised in additional ground is purely on question of law does not involve any investigation into the facts of the case. For the purpose of admission of additional ground, he relied on the judgement in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC) wherein held that the power of the Tribunal in dealing with the appeals is expressed in the widest possible terms and this Tribunal has jurisdiction to examine the question of law which arises from the facts before the authorities below and having bearing on the liability on the assessee even if such question was not raised before the authorities below. 73. We have heard both the parties on the issue relating to admission of additional ground and also on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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