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TMI Blog2015 (6) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... ed:- 29-5-2015 - SHRI S.V. MEHROTRA AND SHRI H.S. SIDHU, JJ. For the Appellant : Sh. Rohit Tiwari, CA For the Respondent : Smt. Anuradha Mishra, CIT(DR) ORDER PER H.S. SIDHU : JM This appeal by the Assessee is directed against the assessment order dated 8.7.2010 of the Assessing Officer passed u/s. 143(3) of the I.T. Act, 1961 pertaining to assessment year 2006-07. The grounds raised by the Assessee read as under:- That on the facts and circumstances of the case, and in law; 1. That the Assessment Order passed in pursuance to the directions issued by the Learned Dispute Resolution Panel ('Ld DRP') IS a vitiated order as the Ld. DRP erred both on facts and in law in confirming the addition made by the Ld. Assessing Officer ('AO')/ Ld. Transfer Pricing Officer ('TPO') to the appellant's income by issuing a non-speaking order without appropriate application of mind and in undue haste; 2. The Ld. DRP erred both on facts and in law in confirming the Ld. AO/ TPO's action of making an adjustment of ₹ 17,324,009 to the income of the appellant holding that its international transactions of provision of Back Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtraordinarily high operating margins, thus signifying a high element of entrepreneurial risk as opposed to the limited risk bearing captive services provided by the appellant; 2.8. not appreciating the risk profile of the functions carried .out by the appellant and incorrectly agreeing with the Ld. TPO that the appellant is a risk bearing entity; 2.8.1. rejecting the detailed computation of risk adjustment submitted by the appellant during the assessment proceeding, based on various subjective premises/ presumption, while at the same time failing to provide an alternative basis for computation; 2.9. denying the benefit of (+!-) 5 percent [as per proviso to section 92C(2) of the Act] available to the appellant. The above grounds are without prejudice to each other The appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing. 2. The brief facts of the case are that the assessee filed its return of income declaring income of ₹ 11,68,763/- on 21.11.2006. Notice under section 143(2) of the Income-tax Act, 1961 was issued on 10.10.2007 and dul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 07.10.2009. In response thereto, the assessee stated vide its letter dated 22.10.2009 that its reply is as per its letter dated 3.8.2009 and 17.8.2009 addressed to the TPO. After considering the submissions of the assessee, the AO was agreed with the finding of the TPO by holding that the same is as per the law on the subject. As regards to the pleadings of the assessee regarding exercising the option of taking the ALP at 5% less or 5% more than the mean of comparable prices. The AO is of the view that firstly, this option could only be exercised if the assessee had suo-motto declared the ALP as the price of services charged by it to its Associated Enterprise as per section 92 of the IT Act. The assessee had this option at the time of filing of return which it failed to exercise. Secondly, even at the stage of assessment, the assessee has only stated that it wants to exercise the option of taking the ALP at 5% more or 5% less than the mean of comparable prices. The assessee has not specified which value (i.e., value more than or the value less than the mean of comparable prices) it wants to adopt. Thirdly, as per section 92CA(4) of the IT Act, the Assessing Officer has to comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervention . The AO has passed this order as per the draft assessment order dated 29.12.2009 and finally the income of the assessee was assessed as under:- Income from business as declared by the assessee: ₹ 11,68,763 Add: Addition U/S 92C(4) as discussed above: ₹ 1,73,24,009 Business income: ₹ 1,84,92,772 Total Income : ₹ 1,84,92,772 Total income (rounded off): ₹ 1,82,92,770 3. The AO assessed the income at ₹ 1,84,92,770/- vide his order dated 8.7.2010 passed under section 143(3) of the I.T. Act, 1961. 4. Against the above order of AO, assessee is in appeal before the Tribunal. 5. Ld. Counsel of the Assessee, Shri Rohit Tiwari, reiterated the contentions raised in the grounds of appeal and in order to substantiate his claim he filed the Synopsis. 6. On the other hand, Ld. DR relied upon the order of the AO. 7. We have heard both the parties and perused the relevant records available with us, especially the order of the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. TPO directed the assessee to submit the current year (i.e., FY 2005- 06) data for comparable companies considered in its TP study. Further, the Ld. TPO proposed to aggregate the 'vessel planning segment' and 'back-office segment' of the appellant and analyse it on an entity-wide basis. The following table summarizes the results of the fresh search undertaken by the appellant: Table 2: Summary of Fresh Search for Comparables Particulars Vessel Planning Services Back Office services PLI used OP/TC OP/TC No of comparables 7 13 Comparables' margin 11.16% 10.56% Appellant's margin 18% 13% Conclusion At arm s length At arm s length 7.7 However, the Ld. TPO rejected the segmented TP analysis carried out by the assessee and analyzed the appellant as an ITES/ back-office service company on an entity wide basis, computing the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has erroneously rejected only those 8 companies which were lossmaking/ low profit making companies on the alleged/ purported grounds of functional dissimilarity and retained the top 5 comparable companies with very high profit margins out of the 13 comparable companies selected by the appellant vide its fresh search. This can be clearly observed from Table below: . 1 Vishal lnformation Technologies Ltd. 63.56% Accepted 2 Triton Corp Ltd. 20.58%' Accepted 3 C S Software Enterprise Ltd. 19.87% Accepted 4 Transworks Information Services Ltd. 19.62% Accepted 5 Cosmic Global Ltd. 16.48% Accepted 6 TSR Darashaw Ltd 1.4.38% Rejected 7 Tutis Technologies 9.47% Rejected 8 National Securities Depository Ltd 6.21% Rejected 9 Ask Me Info Hubs Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rformed by Indus Networks (ITES Segment) and Company name Cosmic Global Services Indus Networks Ltd. (ITES Segment) Twinstar Software Exports Functions performed The company s activities being IT enabled services include medical transcription, translation and software development. (for relevant extracts please refer Annexure 1 of this submission) Company s operations primarily comprise of providing software services, IT enabled services, manufacturing and others. (for relevant extracts please refer Annexure 2 of this submission) For the purposes of the benchmarking analysis the profitability of the company s ITES business segment has been considered. (please refer page no. 139 of the Paper Book) ITES in the nature of back office operation and medical transcriptions (domestic sales and exports) constitute the company s entire operations. (for relevant extracts please refer Annexure 3 of this submission) Please refer page no. 138 TPO s Disposition Accepted Rejected Rejected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its own (appellant has a wages/ sales ratio of 55 percent as compared to a wages/sales ratio of 1.25 percent of Vishal). 17. It is an established fact that the distributor of services is functionally different from a contract service provider. (for detailed submission please refer page no. 141 to 142 of the Paper book). Given such a low wages/ sales ratio, Vishal does not appear to be a service provider at all but is more of distributor. 18. Further, during the relevant year, the company's parent company Amex Information Technologies Limited ('Amex') undertook certain restructuring exercise resulting in its entire ITES operations being conducted through Vishal Information Technologies. 19. As a result of the restructuring exercise, Amex sold its 100% stake in Basiz Fund Accounting Services Limited (a separate entity formed by conversion of the Fund Accounting KPO E Accounting division of Amex) to Vishal at market value. Further, Amex's E Publishing Digital Library divisions were also shifted to Vishal during the said year. 20. With regard to the business operations of Vishal Information Technologies, the company besides providing IT. enabled services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;) (for relevant extracts please refer page 110. 87 and 89 of the Compendium of Case Laws), wherein the Hon'ble Tribunal has opined in the following manner: 30. Learned Special counsel for the revenue Shri Kapila has vehemently argued that Datamatics was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the learned CIT (Appeals) in appeal. Therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins. We are unable to accept above contention. In the first place, these are initial years of implementation of Transfer Pricing Legislation in India and taxpayers as well as tax consultants were not fully conversant, with this new branch of law when proceedings were initiated or even at appellate stage .. 38. Accordingly on facts and circumstances of the case, we hold that taxpayer is not stopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles. Since the aforesaid decisions of the coordinate benches pertain to the same assessment year, following the view expressed therein, we also direct the AO/TPO to exclude the aforesaid company from the list of comparables. 26. Ld. Counsel of the assessee also stated that the issue in dispute is squarely covered by the decision of the Tribunal in the case of M/s Google India Pvt. Ltd. vs. DCIT passed on 19.10.2012 in ITA No. 1368/Bang/2010 Assessment Year 2006-07 vide order dated wherein the Vishal Information Technologies Ltd. has been excluded from the list of comparables. The relevant finding of the Tribunal in this regard as under:- 15. As regards is issue of (8) Vishal Information Technologies Ltd., we find that, it is adopted by the TPO. The DRP held that Vishal Information Technologies has outsourced its call centre work and, therefore, the employee cost is less than 25% as is the common practice among other ITES services. The TPO as well as the DRP have recorded that in the ITES sector, employees filter of less than 25% alone is not applicable for the reason that in addition to the ample costs, the commission costs are also important. When company has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm's length standard. Table 7.1: Computation of Arm's length Price as per the proviso to section 92C(2) of the Income Tax Act, 1961 Particulars Amount (INR) Total Revenue booked by appellant (A) 153,838,692 Total cost booked by appellant (B) 133,697,881 Operating Profit at 19.14% (C) 25,589,774 Operating Profit booked (D) 20,140,811 Difference (E) = (C)-(D) 5,448,963 Arm s length price (ALP) (F) = (A) (E) 159,287,655 105% of the ALP 167,252,038 95% of the ALP 151,323,272 30. In the background of the aforesaid discussions and respectfully following the precedents of the Tribunal in the case of M/s TNS India Pvt. Ltd. vs. Addl. CIT passed on 27.6.2014 in ITA No. 108/Hyd/2011 Assessment Year 2006-07 (Supra) and M/s Google India Pvt. Ltd. vs. DCIT passed on 19.10.2012 in ITA No. 1368/Bang/2010 (Supra) Assessment Year 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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