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TMI Blog2014 (10) TMI 739X X X X Extracts X X X X X X X X Extracts X X X X ..... be. The Asseessee's service centres are registered as a 100% export oriented unit under the Software Technology Parks of India (STPI') scheme. Assessee has also established a branch in the UK to facilitate the identification and effective migration of work to India from AEs. The assessee renders services as a captive contract service provider and is remunerated on a cost plus mark-up basis for providing the services to its AEs. Assessee had filed return of income for the Assessment Year 2007-08 on October 29, 2007 disclosing a taxable income of Rs. 3,46,26,667 after claiming deduction u/s 10A of the Income Tax Act, 1961 in respect of the profits from export of services from the STPI units. 3. During the course of assessment proceedings, The ACIT Circle-2(2) (herein after referred as 'Assessing Officer' or 'AO') selected the case for scrutiny assessment and issued a notice u/s 143(2) of the Act, and further made a reference u/s 92CA(1) of the Act to the Learned Additional Commissioner of Income-tax (Transfer Pricing) (herein after referred as 'Transfer Pricing Officer' or 'TPO') for determination of Arm's Length Price (,ALP') of the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... response to the notices, to justify the arm's length nature of its international transactions. While the TPO accepted TNMM as the most appropriate method and the PLI (operating profit/Operating cost) adopted therein, he rejected the economic analysis undertaken by assessee in the TP documentation inter alia stating that the multiple year data has been used and the comparability analysis is defective and filters adopted by assessee. TPO conducted a fresh search on the databases (i.e., Prowess and Capitaline) and also used powers u/s 133(6) of the Act to obtain information from certain companies and used the same for determining the ALP. TPO applied the following additional filters for comparative analysis: a) Rejection of companies having different financial year; b) Rejection of companies having diminishing revenues filter/persistent loss making; c) Rejection of companies having related party transactions in excess of 25% of revenue ; and d) Rejection of companies having foreign exchange earnings less than 25% of revenue. 3.4 TPO has selected the following 27 companies as comparables with average margin of 30.48% after making a negative working capital adjustment of 0.27%. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions on the rejection of its Transfer Pricing documentation, rejection of multiple year data, obtaining information under S.133(6), use of additional filters, etc., the arguments are confined to selection of comparables and risk adjustment. In the course of arguments, the learned counsel fairly restricted his arguments to only comparables selected by the TPO. Even though comparables selected by assessee but rejected by the TPO were also contested in ground 8, the same was not pressed in the course of arguments. The final list of comparables as per AO order are as under. S. No. Company Name PLI 1. Accentia Technologies Ltd. (seg.) 28.14% 2. Accurate Data Convertors P. Ltd., 50.32% 3. Aditya Birla Minacs Worldwide Ltd., 12.92% (Transworks Information Services Ltd.,) 4. Allsec Technologies Ltd., 27.70% 5. Apex Knowledge Solutions P. Ltd., 14.95% 6. Apollo Health Street Ltd., -9.96% 7. Asit C. Mehta Financial Services Ltd., (Seg.) 24.74% (Nucleus Netsoft & GIS India Ltd.,) 8. Bodhtree Consulting Ltd., (seg.) 31.62% 9. Caliber Point Business Solutions Ltd., 22.15% 10. Cosmic Global Ltd., 13.26% 11. Datamatics Financial Services Ltd., (seg.) 11.19% 12. Eclerx Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there is no reason to exclude the aforesaid company as the TPO has given justifiable reasons for treating it as a comparable company. 6.1.3 We have heard the contentions of the parties with regard to the aforesaid company and perused the material on record. From the facts and material available on record, it is seen that two companies viz., Iridium Technologies and Geosoft Technologies amalgamated with M/s. Accentia Technologies Limited which resulted in a higher profit for the company during the year. In case of Capital IQ Information Systems India Pvt. Ltd., the co-ordinate bench of this Tribunal while considering the assessee's objection with regard to the aforesaid company held in the following manner:- "10. It is the submission of the assessee that this company cannot be treated as a comparable because of un-comparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded." 6.1.4 As can be seen from the order of the co-ordinate bench, the aforesaid company was excluded since ex-ordinary events like merger and demerger had taken during the relevant financial year which must have impacted the financial results of the company. That besides the high volume of on-site operation of Accentia Technologies Limited also makes it functionally dissimilar to the assessee. These facts are not considered either by the TPO or by the DRP. We therefore remit the matter to the file of the Assessing Officer who shall verify the fact whether merger has taken place during the year and if it found so, then the aforesaid company has to be excluded from the list of comparables. The Assessing Officer should also properly consider assessee's submissions with regard to functional difference also. 2. Accurate Data Convertors Private Ltd. 6.2.1. The learned authorised representative of the assessee objecting to the aforesaid company being treated as comparable submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned authorised representative of the assessee objecting to the aforesaid company being selected as comparable submitted that the employee cost of the company is only 24.78% of its revenue compared to assessee's 56%. The learned authorised representative of the assessee further submitted that in many other cases for asst. year 2008-09 the DRP has excluded this company from the list of comparables. The learned authorised representative of the assessee also relied upon the decisions of Income-tax Appellate Tribunal, Hyderabad Bench in assessee's own case ITA.No.1624/Hyd/10 and S.A.No.210/Hyd/2012 dated 28.06.2013, Avineon India P. Ltd., ITA.No.1989/Hyd/2011 dated 31.10.2013 and Zavata India P. Ltd., Hyderabad vs. DCIT, Circle 3(3), Hyderabad ITA.No.1781/Hyd/2011 dated 07.06.2013. 6.3.2 The learned Departmental Representative, on the other hand, supported the orders of the revenue authorities. 6.3.3 We have considered the submissions of the parties and perused the material on record. From the information obtained u/s 133(6) of the Act by the TPO, it is seen that the company has a employee cost of 24.78% compared to assessee's 56%. That besides it is also a fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the learned authorised representative of the assessee relied upon the decisions of Co-ordinate Bench of Hyderabad Tribunal in cases of Avineon India P. Ltd., ITA.No.1989/Hyd/2011 dated 31.10.2013, Zavata India P. Ltd., Hyderabad vs. DCIT, Circle 3(3), Hyderabad ITA.No.1781/Hyd/2011 dated 07.06.2013, M/s. Capital IQ Information Systems India Pvt. Ltd., Hyderabad vs. DCIT (Int. Taxation), Hyderabad (ITA No.1961/Hyd/2011 dated 23.11.2012 and also Special Bench decision of the Mumbai Tribunal in the case of Maersk Global Centres (India) P. Ltd., Mumbai vs. ACIT, Circle 6(3), Mumbai dated 07.03.2014. 6.5.2 The learned departmental representative however supported the orders of the revenue authorities with regard to the aforesaid company. 6.5.3 We have heard rival submissions of the parties and perused the material on record. It is seen that in case of Capital IQ Information Systems (supra), the co-ordinate bench accepted the objection of the assessee with regard to the aforesaid company being treated as a comparable by holding that not only the said company is functionally different being engaged in providing KPO services but it has also shown extraordinary high profits. Following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any objection before the authorities. Hence, we are of the view that these two companies are to be reexamined by TPO/AO before being selected as comparables. TPO/AO is directed to consider the objections of assessee and decide the issue afresh. 10. Mold-Tek Technologies Limited:- 6.7.1 Objecting to the aforesaid company being treated as comparable, the learned authorised representative of the assessee submitted that during the year, the company has shown super normal profit of 117.29% compared to the assessee as well as other comparable companies. It was further submitted that apart from having extraordinarily high profit Mold-Tek is also functionally different as it is engaged in providing structural engineering consulting services under the KPO division. It was submitted that M/s Mold Tek is providing highly technical and specialised engineering services and use of information technology is only incidental. The learned authorised representative of the assessee submitted that the Income-tax Appellate Tribunal, Hyderabad Bench considering these aspects has held M/s Mold Tek is not to be treated as comparable in case of M/s Capital IQ Information Systems Pvt. Ltd. (supra). The lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat although a detail submission was made on behalf of the assessee before the learned CIT(A) on the basis of FAR analysis to show that the selection of M/s. Vimta Labs as comparable is not justified, the learned CIT(A) has not accepted the stand of the assessee on the issue without giving any cogent or convincing reasons. In its recent decision rendered in the case of Adobe Systems India Pvt. Ltd. (ITA No.5043/Del/2000 dtd. 21.01.2011) + (2011-TII-13-ITAT-DEL-TP), Delhi Bench of ITAT has held that exclusion of comparables showing supernormal profits as compared to other comparable is fully justified. We, therefore set aside the impugned order of the ld. CIT(A) on this issue and restore the matter to the file of the A.O. with a direction to decide the same afresh after taking into consideration the submissions made by the assessee before the learned CIT(A) and keeping in view the Delhi Bench of ITA in the case of Abode Systems India Pvt. Ltd. (supra). In this view of the matter, we accept the contentions of the assessee that this company cannot be treated as a comparable. " As can be seen from the aforesaid finding of the Tribunal M/s Mold-Tek was not treated as comparables as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it prints upon clients request, concluded as follows- "18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped form the final list of comparables." In case of ACIT V/s. M/s. Maersk Global service Centre (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- "Insofar as the cases of tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded." In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable". As could be seen from the findings of the co-ordinate bench, the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lysis. Therefore we are of the opinion that TPO/AO can reconsider the comparables after giving due opportunity to assess and fairly analyzing its objections. In case the data ( segmental or unit) is incomplete or functional profile etc are different AO/TPO should exclude the same. With these observations the issue of selection of these companies as comparables is restored to TPO/AO to do the needful. 7. In ground no 10 assessee is seeking adjustment for differences in functions and risks undertaken. With reference to the risk adjustment, it was the submission of the assessee that assessee functioned under a limited risk environment with most of the risks being assumed by its AEs and comparables selected for analysis include companies which have fairly diversified areas of specialisation, bearing risks akin to any third party independent service provider. Since assessee is operating in a risk mitigated environment vis-à-vis the comparable companies performing entrepreneurial risk taking functions, the assessee seeks adjustment for the risk being taken by the comparable, whose profit would be more dependent on the risk involved. Since the assessee does not bear any risk of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is-à-vis the assessee's business model, we, without giving any direction with reference to the risk adjustment and amount of risk adjustment required, restore the matter to the file of the Assessing Officer to re- examine this adjustment issue afresh, after considering the assessee's submissions and decide the issue in accordance with the principles on the subject. 8. Ground No.12, in TP issues, is with reference to inclusion of reimbursement transactions as part of operational cost. It was submitted that the assessee has paid certain amounts towards travel, air fare and site expenses relating to employees of AE travelling to India for business purposes. Similarly, the AEs also pay certain expenses of the assessee which were reimbursed to the AE. It was the submission of the assessee that these amounts were adjusted at cost, without mark up as the assessee or AE paid the amount on behalf of the other for administrative convenience and no significant additional functions are being performed in these transactions. Even though these transactions are considered as international transactions for the purposes of TP, since there is no mark up on these reimbursements, it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s has to be considered and accordingly, we approve that segmental financials is to be considered for the purpose of arriving at the net margin on the international transaction with the assessee's enterprise in respect of software development services. In that process, bad debts/ reimbursements has to be excluded and segmental profitability has to be adopted. We find support in this behalf from various decisions of the Tribunal relied upon by the learned counsel for the assessee duly filing copies thereof in the paper-book, which have been noted hereinabove. That being so, the TPO should have determined the Arms Length Price for the international transactions with associated enterprises considering only the operating cost allocable to the Associated Enterprises segment. Since the assessing officer had no occasion to verify the veracity of the segmental financials prepared by the assessee company, for limited purpose, we direct the assessing officer to verify the segmental financials prepared by the assessee company and adopt the same for arriving at the net margin on the international transaction with AEs in respect of software development services. We direct accordingly." Simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B. Co ordinate bench at Hyderabad Tribunal in assessee's own case for AY 2006-07 held as follows: "27. Since this issue is no longer res integra and since foreign exchange gain is on account of fluctuations of the foreign exchange received for the services rendered by the assessee, this has to be treated as business income and it has to he considered as profits of the business for computing the deduction under s.10A of the Act. The Assessing Officer is directed to treat accordingly. The ground is considered as allowed. " The facts being similar, we direct AO to treat Foreign exchange gain as business income and allow the deduction accordingly. Ground 13 is allowed. 12. In ground No.14, assessee has challenged the reduction of communication charges of Rs. 5,53,90,914 from the export turnover without reducing it from the total turnover while computing deduction u/s 10A of the Act. 12.1. We have heard submissions of the parties and perused the material on record. This issue is squarely covered in favour of the assessee by the judgment of Hon'ble Bombay High Court in case of CIT vs. Gem Plus Jewellery Ltd (330 ITR 175) and the decision of Income-tax Appellate Tribunal, Chen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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