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TMI Blog2015 (1) TMI 554X X X X Extracts X X X X X X X X Extracts X X X X ..... n three segments. The research and development services division is engaged in providing research and development services to its group companies. For this purpose, assessee has set up a R&D centre at Somajiguda, Hyderabad. The corporate support services division is engaged in providing corporate support services (BPO services) to its group companies. Though, apart from these two divisions assessee also has a trading division, since no sales has been effected during the year, it has no relevance for the year under consideration. For the AY under consideration, assessee filed its Return of Income on 30/09/2009 declaring loss of Rs. 32,79,605. Subsequently, a revised return was filed declaring loss of Rs. 45,14,288. During the scrutiny assessment proceeding, AO noticed that assessee has entered into international transactions with its Associated Enterprises (AEs) as under: (Rs.) i) Provision of corporate support services 4,09,76,856 ii) Provision of R&D services to AE 6,91,62,304 iii) Payment of Management fee to AE 41,92,324 iv) Purchase of business undertaking from AE 13,18,91,892 v) Purchase of business finished goods from AE 1,42,234 vi) Reimbursement of expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 32.4%, the ALP was determined at Rs. 8,32,46,264 as against Rs. 6,91,62,304 shown by assessee. The resultant shortfall of Rs. 1,40,83,960 was recommended for addition towards TP adjustment to the ALP. Thus, the total addition recommended by the TPO under both the segments was to the tune of Rs. 2,10,05,323. TPO also did not allow any deduction on account of risk/working capital adjustment. In pursuance to the order passed by TPO, AO proposed a draft assessment by incorporating the additions recommended by TPO on account of TP adjustment. Assessee objected to the draft assessment order before the DRP. 5. In course of proceeding before DRP, assessee apart from challenging the decision of the TPO in rejecting two of the companies selected as comparable in the corporate support services segment also sought exclusion of three companies out of five companies retained by TPO which were also selected by assessee itself in the TP study. In respect of one company i.e. R Systems International Ltd., assessee raised objections with regard to margin computation. In so far as Research & Development Support Services is concerned, assessee challenged the selection of two additional comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0/07/14 2. Deloitte Consulting India Pvt. Ltd. ITA No. 1082/Hyd/10, 3. Symphony Marketing Solutions Pvt. Ltd. (2013) 38 Taxman.com 55 8.2 As regards Infosys BPO Ltd., the ld. AR submitted that considering the significant brand value, intangibles owned, economies of scale due to size and premium pricing, it cannot at all be considered to be a comparable with a start up captive service provide like assessee. In support of such contention, he relied on the decision of the Hon'ble Delhi High Court in case of CIT Vs. Agnity India Technologies Pvt. Ltd., judgment dated 10/07/2013 in ITA 1204/2011 and a number of decisions of ITAT. 8.3 The ld. DR strongly contesting the claim of assessee submitted before us that all these companies having been selected by assessee itself in the TP study, TPO has merely gone in to the functional profiles of these companies and did not apply any filter to accept/reject the comparables proposed by assessee. Therefore, TPO's decision in retaining these companies as comparable should be upheld. Further, ld. DR submitted that the issue whether Caliberpoint Business Solutions Ltd. has failed more than 25% RPT filter was never raised by assessee before TPO. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee suo motu included these two cases in its transfer pricing study. However, it was argued before the authorities below that these cases were not comparables. The special bench of the Tribunal in Dy. CIT Vs. Quark Systems (P.) Ltd., [2010] 38 SOT 307 (Chd.)(SB) has held that if the assessee has wrongly included some cases in the list of comparables, which position has not been disturbed by the TPO, then there can be no embargo on pleading by the assessee for the exclusion of such a case. In the light of the above special bench decision, we hold that the assessee can contend for the exclusion of these cases before the Tribunal notwithstanding the fact that it included such cases in the list of comparables." 8.7 Moreover, when the TPO has rejected two companies selected by assessee by going into their functionality by applying certain filters, in all fairness he should have done similar exercise in respect of other comparables also. 8.8 Having held that assessee is entitled to object to certain comparables selected by TPO which were also initially selected as comparables by assessee itself, we will now consider the merits of the arguments of the parties with regard to selecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee not only because of its size but also due its brand value, diversified activities, and other functional dissimilarities. Different benches of this Tribunal are consistent in their view that this company cannot be treated as a comparable to a captive service provider like assessee. Even the Hon'ble Delhi High Court has also affirmed such view in case of CIT Vs. Agnity India (supra). In the aforesaid view of the matter, we direct AO/TPO to exclude this company as comparable. 12. Assessee has also objected to rejection of the following two comparables: 1. CG Vak Software and Exports Ltd. 2. CEPHA Imaging P. Ltd. 13. As far as CG Vak Software and Exports Ltd. is concerned, the ld. AR submitted before us that TPO and DRP were not correct in rejecting the aforesaid company as comparables on ground of functional dissimilarity. The ld. AR submitted that segmental details of both software development segment and BPO Services segment are available in the annual report of the company. Hence, the TPO was not justified in rejecting the said company on the ground of low turnover from BPO sector. 13.1 As far as CEPHA Imaging P. Ltd. is concerned, ld AR referring to the annual report of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as objected to the selection of the following companies as comparables in this segment: 1. Celestial Biolabs Ltd. 2. TCG Life Science Ltd. 17.1 Objecting to the selection of the aforesaid two companies, ld. AR submitted before us that Celestial Biolabs Ltd. is a product company, hence, cannot be treated as comparable to a purely IT service provider like assessee. In support of such contention he relied on a decision of the ITAT Bangalore Bench in case of M/s Millipore (India) P. Ltd. Vs. DCIT, IT(TP)A No. 689/Bang/12, dated 04/07/2014. Ld. AR submitted for this reason also other benches of the Tribunal have also rejected this company from being treated as a comparable to a BPO service Provider. As far as TCG Life Science ltd. is concerned, ld. AR submitted before us that this company cannot be treated as comparable to assessee as it has substantial sales from manufacturing activity. Ld. AR referring to the annual report of the said company, submitted that a company which is selected as comparable should be engaged in substantial similar activity as the tested party. It was submitted by ld. AR that as the manufacturing activity amounts to 25.16% of the total sales of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capacity. He submitted that assessee is remunerated at a cost plus mark up basis and it functions under a limited risk environment as most of the risk is being assumed by its AEs. Hence, necessary risk adjustment has to be allowed while determining the ALP. He also submitted that necessary adjustment towards risk and working capital need to be made to the margins of comparable to eliminate differences on account of different functions, assets, and risks in determination of ALP. In support of such contention, he relied upon some decisions as referred to in the written submissions. 21. The ld. DR on the other hand submitted that under TNMM the standards of comparability are relatively relaxed and only broad similarity of functions is required. TNMM can be used with data for companies that are broadly comparable to the tax payer as functional differences are likely to be reflected in the level of operating expenses incurred by each company. These expenses are deducted in the calculation of operating profit and are accordingly taken account of in the comparability analysis. He submitted, considering these aspects assessee having adopted net margin or operating profit as the most reli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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