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TMI Blog2014 (10) TMI 504X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee - the foreign exchange revenue is less than 1% of the total turnover - it fails the filter provided by the AO on the basis of the foreign exchange earnings - the Revenue from BPO is failing over a period of three years - the AO is directed to exclude this company from the list of comparables. Asit C Mehta Financial Services Ltd. - Employee cost filter – Held that:- Following the decision in M/s. HSBC Electronic Data Processing India Ltd. Versus Dy. Commissioner of Income-tax Circle 2(2), Hyderabad [2013 (9) TMI 485 - ITAT HYDERABAD] - this company cannot be selected as a comparable not only on the reason of failing employee cost filter, but also due to amalgamation during the year, which has changed the business model of the company – thus, the AO is directed to exclude this company from the list of comparables. Datamatics Financial Services Ltd. – Held that:- The assessee has objected to the inclusion of the aforesaid company for the reason that it fails RPT filter applied by the TPO himself as the RPT exceeds 25% of the sales - Following the decision in M/s. HSBC Electronic Data Processing India Ltd. Versus Dy. Commissioner of Income-tax Circle 2(2), Hyderabad [2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining the ALP at Nil, but, at the same time, he has considered the same while computing operating margin of the assessee - when the TPO is disallowing the payment of management fees, it cannot be considered for the purpose of computation of operating margin, otherwise, it will amount to double addition - the matter is to be remitted back to the AO/TPO to look into this aspect and decide the issue after affording reasonable opportunity of being heard to the assessee. Computation of working capital adjustment – Held that:- Though the assessee has raised similar arguments before the DRP but the DRP has rejected the same by stating that the assessee has not maintained segmental accounts, allocation of cost to respective segments cannot be ascertained - DRP held that since the TPO has worked out the working capital adjustment on the business of a transparent method adopted in case of all taxpayers it cannot be questioned - if the assessee has maintained separate records and can substantiate allocation of expenditure to the international transactions with AE and non-AE there is no reason why working capital adjustment should not be made accordingly – the matter is to be remitted back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Payment of License Fees 1,68,77,683/- Group overhead Allocation Costs 1,41,25,663/- Asia Pacific Overhead Allocation 1,48,54,475/- Trademark license fee 1,06,11,398/- Reimbursement of expenses (paid) 4,15,50,234/- Reimbursement of expenses (received) 2,13,26,742/- 2.1 For the impugned assessment year assessee filed its return of income on 30/11/2006 declaring net income of ₹ 9,71,44,588/- after claiming deduction u/s 10A of the Act. To benchmark its international transaction with AE assessee conducted a TP study by selecting Transaction Net Margin Method (TNNM) as the most appropriate method. By applying certain filters a search was conducted in the databases which yielded 17 companies in the ITES sector as comparables having average arithmetic mean of 11.76%. As assessee's margin on operating cost was 14.84%, the price charged to the AE for international transaction was found to be within arm's length. During the scrutiny ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the DRP. Though assessee had challenged the order of the TPO on various grounds but DRP rejected most of them. Only in case of reimbursement of ₹ 2,13,26,742/-, DRP after considering clarification of TPO directed for reduction of ₹ 2,13,26,742/- from the adjustment proposed by TPO. Further, with respect to deduction claimed u/s 10A also DRP confirmed the draft assessment order. In conformity with the direction of DRP, AO passed the impugned assessment order. 3. Though ground Nos. 1to 17 are on TP issues but at the outset learned AR expressed his intention to confine his argument to the following issues: (i) Selection of comparables. (ii) Rejection of comparables. (iii) Consideration of management fees disallowed in computation of operating margin. (iv) Computation of working capital adjustment. 4. Hereinafter, we will deal with each of the issues specifically argued before us at the time of hearing: I. Selection of comparables: (i) In Ground No. 10 of the main ground, assessee has objected to the following two companies: 1. Vishal Information Technology Ltd. 2. Goldstone Infratech Ltd. (ii) Before us, assessee has raised additional gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the aforesaid decision of the ITAT Mumbai Bench, the coordinate bench of this Tribunal in case of HSBC Electronic Data Processing India Ltd. (supra) has directed the AO to exclude this from the list of comparables. The finding of the coordinate bench is extracted hereunder for convenience: 9.2 After considering the rival contentions, we find considerable force in the contentions advanced by the learned counsel. There is no dispute with reference to the fact that most of the cost incurred by the company taken as comparable is outsourcing cost, as can be seen from the Annual report placed in the paper book and ITAT, Mumbai in the case of Maersk Global Service Centre (supra) has analysed and rejected this company as comparable, due to the reason that it has outsourced a considerable portion of its business and it is functionally different. This factor was also approved by the DRP in assessee's own case in the later year, as can be seen from the copy of the order placed on record, for assessment year 2008-09. In view of this, we direct the AO to exclude this company from the list of comparables. (iv) Since the aforesaid decisions of the coordinate benches pertain to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. AR is that of Goldstone Infratech Limited (Seg) (earlier known as Goldstone Teleservices Limited). Here it is relevant to note that the TPO, inter alia, applied filter of 'Companies with export revenues more than 25% of the revenues'. Annual accounts of Goldstone Teleservices Limited indicate total revenue of the company at ₹ 30.89 crore from three segments, viz., Telecommunication at ₹ 13.63 crore, BPO at ₹ 5.02 crore and Insulator at ₹ 12.23 crore. The break up of such revenue of Goldstone Teleservices Limited has been provided at page 236 of the paper book. Schedule forming part of the annual accounts of Goldstone Teleservices Limited divulges earnings in foreign currency at ₹ 4.24 lakh. Such detail is available at page 239 of the paper book. When we compare earning in foreign currency at ₹ 4.24 lakh with the earnings of BPO at ₹ 5.02 crore or for that purpose of the entity as a whole at ₹ 30.89 crore, it becomes manifest that this case does not pass through the filter adopted by the TPO, being, the 'companies whose export revenues are more than 25% of the revenues'. Therefore, we are of the opinion, that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the inclusion of the aforesaid company for the reason that it fails RPT filter applied by the TPO himself as the RPT exceeds 25% of the sales. In support of such contention, he relied on the decision of the coordinate bench in case of HSBC Electronic Data Processing India Ltd. (supra). On perusal of ruling of the coordinate bench in case of HSBCElectronic Data Processing India Ltd. (supra) it is see that on considering similar argument advanced by the assessee, it was held as under: 11. The assessee's objection to inclusion of this comparable is on the basis of Related Party Transactions filter. It was submitted that RPT exceeds 25% of the sales and therefore, to be excluded. The assessee relied on the decision of the coordinate Bench of the Tribunal (Mumbai Bench) in the case of Stream International Services Ltd. (supra), wherein, wherein with reference to this comparable company, it was held as under- 11. The first is M/s. Datamatics Financial Services Limited. It can be observed that the TPO applied filter of Companies with less than 25% related party transactions . The learned Counsel for the assessee took us through the Annual accounts of Datamatics Financial S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited as an 'international transaction' within the meaning of section 92B should be ignored simply because they represent reimbursement of expenses. If the contention of the ld. DR that the reimbursement of expenses not involving profit element should not be construed as a transaction, is taken to a logical conclusion, it would mean that all such dealings will cease to be transactions for the purposes of Chapter-X of the Act. Once these dealings are not considered as 'transactions', these will also cease to be international transactions, going out of the purview of section 92 itself. Obviously, such a view point is contrary to the clear intention and the language of the relevant provisions. A pure reimbursement of expenses by one AE to another AE is very much a 'transaction' as per section 92F(v) and consequently is equally an international transaction as per section 92B requiring consideration as per section 92 of the Act. Be that as it may, the learned Departmental Representative could not demonstrate the fact that such reimbursement of expenses was without any markup. As the so called comparable case of Datamatics Financial Services Limited was include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference to this company as under- 18. We are unable to uphold the contention raised by the learned Departmental Representative. It is apparent from two orders passed - one by the Delhi Bench and the other by the Hyderabad Bench of the Tribunal - that the case of Maple eSolutions Limited has been directed to be excluded from the list of comparables. As the assessment year under consideration is 2006-2007 and the Delhi Bench of the Tribunal has also considered the same assessment year while directing the exclusion of the case of Maple e Solutions Limited from the list of comparables, we are unable to accept the contention of the ld. DR in this regard. It is more so because no contrary view has been brought by the ld. DR to our notice. Respectfully following the precedents, we direct the exclusion of this case from the final list of comparables. Since the DRP in assessee's own case for assessment year 2007-08 also considered and excluded this company, we uphold the assessee's objection in this regard and direct the Assessing Officer to exclude this company from the comparables adopted. (iv) Following the consistent view of different benches of the Tribunal including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s such it is functionally different. Further, we have come across a number of cases where taxpayers have objected to the aforesaid company being treated as comparable to companies in ITES sector. That being the case, we are of the view that the aforesaid company cannot be considered as comparable to the assessee company. (vii) So far as Goldstone Technologies Ltd. is concerned, the coordinate bench in case of HSBC Electronic Data Processing India Ltd. (supra) has held that aforesaid company being engaged in providing consultation services with various middle ware products is not functionally similar to the companies in the ITES sector. In view of the aforesaid decision of the coordinate bench, this company cannot be considered as comparable to the assessee. (viii) So far as the Visual Soft Technologies Pvt Ltd. and Quantum e-solutions Services Pvt. Ltd., are concerned, it is seen that while the loss of Visual Soft Technologies Ltd. for the year under consideration is (-)57.63% that of Quantum e-solutions Services is (-) 14.11%. when the assessee is objecting to super normal profit making companies by applying same standard loss making companies also cannot be treated as compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y allocated to AE and non-AE transactions instead of negative working capital of 2.12%, it will be a positive figure of 2.29%. In this context, learned AR referred to summary of working capital adjustment at page 338 of the paper book. (ii) The learned DR, on the other hand, supported the orders of the TPO and DRP on this issue. (iii) We have considered the submissions of the parties and perused the materials on record. It is seen from the order of the DRP that though the assessee has raised similar arguments before the DRP but the DRP has rejected the same by stating that the assessee has not maintained segmental accounts, hence, allocation of cost to respective segments cannot be ascertained. DRP held that since the TPO has worked out the working capital adjustment on the business of a transparent method adopted in case of all taxpayers it cannot be questioned. However, we are of the view that if the assessee has maintained separate records and can substantiate allocation of expenditure to the international transactions with AE and non-AE there is no reason why working capital adjustment should not be made accordingly. In that view of the matter, we remit the issue back to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t been controverted by the assessee by bringing sufficient material to substantiate its claim. However, so far as alternative contention of the assessee for allowing claim of deduction u/s 10A of the Act due to conversion from DTA unit to STPI unit, we find force in such contention of the learned AR. It is not in dispute that ORSC unit is recognized as a STPI unit. On perusal of the order passed by the DRP for the AY 2008-09, it is seen that in para 12 of the said order, the DRP has held that when ORSC unit is converted from domestic tariff area to STPI unit, it is eligible for deduction u/s 10A of the Act for the remaining period out of 10 consecutive assessment years starting from the year in which it was approved as STPI unit. In view of such finding of the DRP for the AY 2008-09, we direct the AO to allow deduction u/s 10A of the Act for the impugned assessment year also. 8.1 The assessee has raised one more additional ground at the time of hearing before us which is as under: With reference to Ground No. 18 and 19, we request the Hon'ble Tribunal to direct the learned AO to consider the appellant's revised claim in respect of deduction u/s 10A of the Act made du ..... X X X X Extracts X X X X X X X X Extracts X X X X
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