9911796707
TMI Blog2015 (1) TMI 1063X X X X Extracts X X X X X X X X Extracts X X X X ..... determine whether this company falls within the filters as adopted by the TPO himself. If the company fails the employee cost filter, then the same cannot be accepted as a comparable company. In order to examine this aspect, we are of the opinion that selection of this comparable is to be restored to the file of the TPO for fresh examination, after giving due opportunity of hearing to the assessee. The issue is restored to the file of the TPO. For ECLERX SERVICES LTD. (seg.) this company cannot be regarded as a comparable for the reason that it was having extraordinary event and super normal profits. For GENESYS INTERNATIONAL CORPORATION LTD. from the notes to accounts of this company, it is seen that this company is engaged in providing geographical information services comprising of photogrammetry, remote sensing cartography, data conversion related computer based services and other related services. Further the business of this company requires skilled manpower and scientists, civil engineers, etc. Besides the above, this company also carries out R ble Special Bench in case of ITO vs Banyan Chemicals P. Ltd., (2008 (12) TMI 296 - ITAT AHMEDABAD) has held that foreign exchange ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on September 25, 2008 disclosing a taxable income of ₹ 65,76,218 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 and admitting a taxable income of ₹ 107,48,10,745 under MAT. 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 international transactions with AEs. 4. The international transactions of Asseessee with AEs during the year are as under : • Provision of BPO services - ₹ 1249,63,10,000; • Reimbursements to AEs - ₹ 61,02,49,716; • Reimbursements by AEs - ₹ 26,67,67,677; • Payment of bank charges - ₹ 50,85,988; • Payment of Guarantee commission - ₹ 15,174; and • Interest received on F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod 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. TPO conducted a fresh search on the databases (i.e., Prowess and Capitaline) during the assessment proceedings. TPO used powers u/s 133(6) of the Act to obtain selective 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. 7. The TPO has selected 20 companies as comparables with average margin of 29.26% after making a negative working capital adjustment of 0.10%. TPO also added the reimbursement related to travel costs received by assessee to the operating cost for determination of ALP. Accordingly, TPO made the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of the comparables in the final list of 18 comparables after the DRP order. The list of 18 Comparable companies as finally selected are as under : S.No. Company PLI 1. Accentia Technologies Ltd. 43.62% 2. Acropetal Technologies Ltd. (seg) 31.77% 3. Aditya Birla Minacs world wise Ltd -5.76% 4. Asit C Mehta Financial services Ltd 10.31% 5. Caliber Point Business Solutions Ltd. (seg) 10.09% 6. Cosmic Global Ltd., 27.26% 7. Crossdomain Solutions P. Ltd. 29.15% 8. Datamatics Financial Services (BPO) Div. 36.40% 9. e4e Health care Solutions(earlier known as Nittany Outsourcing Services P. Ltd.,) 17.60% 10. Eclerx Services Ltd 68.55% 11. Genesys International Corporation Ltd 48.21% 12. HCL Comnet Systems & Services Ltd. (seg.) 33.50% 13. ICRA Online Ltd. (seg.) 11.04% 14. Infosys BPO Ltd., 21.78% 15. I-services India Pvt. Ltd. 11.20% 16. R Systems International Ltd. (seg.) 5.99% 17. Spanco Ltd. (seg.) 6.42% 18. Wipro BPO 40.43% 12. We have heard submissions of both the parties. The learned Counsel gave detailed chart on each of the companies that were considered as comparable by the TPO and has also explained as to why some of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e compared as a comparable owing to extra ordinary events that took place during the previous year. The Tribunal upheld the order of the DRP observing as follows :- "I. Accentia Technologies Ltd. 10. It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable 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 relating to the assessment year 2008-09, has observed in the following manner- "17.5. In addition to the above, the Director's Report of the company for the FY 2007-08 revealed the merger and the demerger. A company known as Techmen Tools Pvt. Ltd. had amalgamated with Mold-tek Technologies Ltd. with effect form 1st October, 2006. There was a de- merger of Plastic Division of the company and the resulting company is known as Moldtek Plastics Limited. The de-merger from the Moldtek Technologies took place with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Solutions India(p) Ltd (supra) by the Bangalore Bench. It is clear that during the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a comparable. We therefore hold that this company cannot be considered as a comparable. ACROPETAL TECHNOLOGIES LTD. (Seg.) 14.2.1 This company is listed at Sl.No.2 of the comparables chosen by the TPO. As far as this company is concerned, the objection of the assessee is that this company is not functionally comparable. The assessee is a BPO company that provides CAD/ CAE services. As far as Acropetal Technologies Ltd. is concerned, this company does the business of export of software services. It is also seen from the segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it derives income from engineering design services and software development services. It is also pertinent to point out that before the TPO, the assessee raised an objection that this company performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has accepted the same in the TPO proceedings. Therefore, should not be excluded now. 14.3.3 While there was no objection for assessee objecting to the comparable even at a later stage when it comes to know of new facts, what we noticed is that the assessee's objections before the DRP have not been addressed by the DRP. It is for the TPO to determine whether this company falls within the filters as adopted by the TPO himself. If the company fails the employee cost filter, then the same cannot be accepted as a comparable company. In order to examine this aspect, we are of the opinion that selection of this comparable is to be restored to the file of the TPO for fresh examination, after giving due opportunity of hearing to the assessee. The issue is restored to the file of the TPO. ECLERX SERVICES LTD. (seg.) : 14.4.1 This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench. GENESYS INTERNATIONAL CORPORATION LTD. 14.5 This company is listed at Sl. No.12 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the stand of the assessee has been that this company is functionally not comparable and that it has a different employee skill set and that this company performs R&D services and also owns intangibles. This company is a geospatial services content provider specialising in land based technologies. From the notes to accounts of this company, it is seen that this company is engaged in providing geographical information services comprising of photogrammetry, remote sensing cartography, data conversion related computer based services and other related services. Further the business of this company requires skilled manpower and scientists, civil engineers, etc. Besides the above, this company also carries out R&D services and own intangibles. The aforesaid facts, in our view, will take this company out of the list of comparables. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. The decision of the Hyderabad ITAT Bench in the case of Hyundai Mot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 incurring losses and since comparable companies work in the market environment, the margins earned by the comparable companies would be comparatively more to reflect the higher level of functions and risks. It was further submitted that in the TP documentation submitted by the assessee, no risk adjustment was made as comparable selected were within the arm's length range. The assessee relied on a host of cases to submit that adjustment needs to be made to the margins of the comparables to eliminate difference on account of different functions, asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds 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 was the submission that TPO failed to appreciate that these transactions are to be excluded for working out the operative costs/operative margins, and it is the request that the amounts of reimbursement should be excluded for this purpose. Assessee relied on the decision of the Delhi Bench of the Tribunal in the case of DCIT V/s. Cheil Communications India P. Ltd. (2010 TII 60 ITAT DEL TP) and the coordinate bench decision of the Tribunal in the case of Four Soft Ltd. V/s. DCIT (ITA No.1495/Hyd/2010)(142 TTJ 358). 16.1 After considering the rival submissions and fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. Similar view was also taken in assessee own case in AY 2006- 07. Respectfully following the same, we direct the Assessing Officer /TPO to exclude the reimbursement costs while working out the operating costs. This ground is considered allowed. 17. In aforesaid view of the matter, we direct the Assessing Officer to determine the ALP keeping in view the directions given by us hereinbefore in respect of each of the comparables specifically objected to by the assessee. Assessee's grounds 1 to 12 are partly allowed. 18. Some of the legal issues raised in the grounds on thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing similar, we direct AO to treat Foreign exchange gain as business income and allow the deduction accordingly. Ground 14 is allowed. 20. In ground No.15, assessee has challenged the reduction of communication charges of ₹ 1,38,24,765 from the export turnover without reducing it from the total turnover while computing deduction u/s 10A of the Act. 20.1. 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, Chennai Special Bench in case of ITO vs. Sak Soft Limited (313 ITR 353 (AT)]. In fact, the DRP though accepts such position but has decided the issue against the assessee only to give an opportunity to the department to pursue the same. Therefore, following the decision of Hon'ble Bombay High Court in the case of CIT vs. Gem Plus Jewellery (supra) and of the Incometax Appellate Tribunal, Chennai Special Bench in case of ITO vs. Sak Soft Limited (supra), we direct the Assessing Officer to reduce communication charges both from the export turnov ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
