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TMI Blog2015 (6) TMI 677X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment unlike that of the assessee company which is engaged in the business of BPO services. The aforesaid comparable may be excluded for the purpose of benchmarking the arm’s length price of the international transactions entered into by the assessee. The software development company has a completely different functional profile as compared to a company engaged in BPO services. The risk undertaken and the assets employed by a software development company cannot be compared to a BPO company. The approach of the TPO by selecting the band of PLI between 10% and 50% is completely arbitrary and has no basis for reasons stated above. The selection of comparables by the TPO has led to arbitrariness wherein the loss making companies are excluded and comparables only in the range of 10% to 50% are selected. The benchmarking made by the TPO is not as per the principles governing Indian Transfer Pricing guidelines regulations or even the OECD guidelines.In view thereof the matter is restored to the file of the AO for making fresh search of comparables in view of the position of law enunciated in the present decision. - Decided in favour of assessee statistical purposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case, the Ld. TPO, Ld.Panel and consequently the Ld. AO has erred in applying the turnover filter with a very small range of turnover thereby rendering the comparative study defective. 6. That on the facts and in the circumstances of the case, the Ld. TPO, Ld.Panel and consequently the Ld. AO has erred in rejecting the transfer pricing analysis of the assessee to justify the arm's length nature of its international transactions on the ground that the assessee had used multiple year data while performing its benchmarking analysis and did not give consideration to the volume of sale. 7. That on the facts and in the circumstances of the case,, the Ld. TPO, Ld.Panel and consequently the Ld. AO has erred by determining the arm's length mark-up based on the data for financial year 2006-2007 to the exclusion of prior year date [as contemplated under Rule 10B(4) of the Rules]. 8. That on the facts and in the circumstances of the case, the Ld. TPO, Ld.Panel and consequently the Ld. AO held that proviso to section 92C(2) of the Act (as per Finance Act 2001) is not applicable to the assessee, instead proviso to section 92C (2) of the Act (as per Finance Act 2009) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee works as an IT enabled back office services provider which provides back office services to the client. The assessee does not own any intangibles interest in the intangibles owned by Acclaris Inc. and is only a service provider. Acclaris Inc., on the other hand, provides a range of BPO services to its clients with significant experience in managing people, process and technology, Acclaris Inc. owns the intellectual property rights (know-how copyrights etc.) and other commercial and marketing intangibles (brand names, trade marks etc.) and is involved in complex operations of developing proprietary technologies and marketing of the same. Acclaris Inc. also bears all the significant business and entrepreneurial risks of product acceptability and performance in the market. The assessee is entitled to seek compensation appropriate to the functional performance and capital employed in the business. 3.1. During the Assessment Yr. 2007-08, the assessee filed its return of income, declaring a taxable income of ₹ 1,08,583/-, on 16.01.2007. The return was duly processed u/s 143(1) of the Act and the case was selected for scrutiny for assessment by issuing notice u/s 143(2) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the aforesaid comparison calculated the arms length price of international transactions of the assessee for rendering services to its AE for BPO services to be at ₹ 12,04,93,962 instead of ₹ 10,73,26,265 declared by the assessee. Thus the upward adjustment made was ₹ 1,31,57,697. 3.6. AO relied upon the TPO's order and passed a Draft assessment order by making Transfer price adjustment of ₹ 1,31,57,697/-. The second addition made by AO was with respect to disallowance of exemption u/s 10A and 10B of the Act totaling to ₹ 4,54,183/- by deducting expenses amounting to ₹ 48,84,548/- which was incurred on account of expenses in foreign currency and connectivity charges, overseas insurance and world Internet charges (Vonnage) ISD lease line. With respect to the Transfer Pricing addition made, the assessee had raised grounds No.1 to 9. However during the course of hearing, the ld. Sr.counsel appearing on behalf of the assessee limited his submissions to only following two arguments. First, out of the five comparables selected by the TPO, two comparables namely Maple Esolutions Ltd. and Indusind Information Technology Ltd. were having different func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut of the comparables by holding as under vide its order dt.17.4.2014 : Maple esolutions Ltd. : TPO has considered Maple eSolutions Ltd. as a comparable and computed the margin in respect of this company @33.66%. We noted that the Hon'ble Delhi Tribunal in the case of ACIT vs CRM Services India Pvt. Ltd., 14 taxmann. Com 96 has held that this company could not be selected as comparable for ITES companies as the management of this company was tainted one as the Directors of the company were involved in a fraud. The business reputation of the Rastogi group which owns Maple eSolutions was in serious indictment. In view of the question mark on the reputation of its owners, albeit for earlier years, it would be unsafe to take their results for comparison of profitability of the assessee. In A.Y. 2006-07 we noted that the profit margin has been taken by the TPO at 28.75%. When the assessee went in appeal before CIT(A), CIT(A) has excluded this company for the purpose of comparison. No cogent material or evidence was brought to our knowledge by the ld.DRhow this company is not tainted one. The decision of the co-ordinate Bench is binding on us. We, therefore, respectfully following the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly into steel -do- 4. Tricom India Ltd. Non-voice based BPO as part of the business -do- 5. Ultramarine & Pigments Ltd. Non-voice based BPO as part of the business -do- 6. Tata Services Tata Management Training Center and other services to Tata group companies -do- "9.3. When we examine the facts of the case in the light of aforesaid conclusion, it is seen that none of the comparables selected by the TPO is shown to have the same business of voice based BPO as in the case of the assessee. C.S.Software Enterprises Ltd. is conducting the business of software. Carborundum Universal Ltd., is mainly in the line of manufacture of coated and bonded abrasive. The main business of Mukand Engineers Ltd. is production of steel. Tricom India, apart from other businesses is also carrying on the business of non-voice based BPO. Such is also the case of Ultramarine & Pigments Ltd. We have already mentioned about the business of Tata Services Ltd. All these companies have been carrying on their main businesses for a long period. The business models are not comparable. Therefore, we do not find any reason to disturb the order of the ld. CIT(A)in this matter." In view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the PLI at 25.44% as against the PLI at 3.5%, resulting an upward adjustment of ₹ 4,33,80,146/-. There is no justification on the part of the TPO to compare the financials of the assessee- company to those3 of BPO and KPO companies. The financials of the assessee should be compared only with software development companies. When a general comparison is made, huge expenditure incurred on research and development should be considered. It is also to be seen that the business model of the assessee was based more on turnkey projects, in which case cost overruns would have to be borne by the assessee-company. In the facts and circumstances of the case, we are not in a position to accept the PLI at 25.44% determined by the TPO on the ratio of operating profit to operating cost. This against the PLI returned by the assessee company at 3.5%. Therefore, we do not approve the upward adjustment of ₹ 4,33,80,146/- made by the Assessing Officer to its full extent. On same set of facts, the issue of ALP determination was considered by Dispute Resolution Panel at Chennai in assessee's own case for the assessment year 2008-09. In their direction dated 4-6- 2012 issued under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded. Coming to the cases of Cepha Imaging Private Limited and Asian Cerc Information Technology Ltd. (Seg.), we find that these companies are engaged in providing software development services as is evident from their annual reports available on pages 52 onwards and 64 onwards of the paper book. Thus these companies become functionally different. Insofar as WIPRO BPO Solutions Limited is concerned, we find that their turnover is eleven times greater than that of the assessee. This company having such a high brand value along with much higher turnover, in our considered opinion, has been rightly excluded by the ld. CIT(A). The last case being that of Airline Financial Support Services (I) Ltd. has 31.76% of the total service fees received from the controlled transactions with the related parties. This fact is evident from pages 62 of the paper book, which makes it incomparable with the assessee." 6.7. In ACIT vs M/s. Hapag Lloyd Global Services Private Limited in ITA No.8499/Mum/2010 vide order dated 28.02.2013 similar issue arose wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered as comparable. We, therefore, hold that this case was rightly excluded by the learned CIT(A). " 6.8. In view thereof, the aforesaid comparable i.e. Indusind Information Technology is excluded for the purpose of bench marking the international transactions of the assessee. Accordingly ground no.2 raised by the assessee is allowed. 7. As far as the second limb of the arguments of the ld. Sr.counsel for the assessee is concerned, it is contended that the two comparables out of the five comparables chosen namely Galaxy Commercial Ltd. And ICRA Online Limited are of high profit margin (OP/TC) and therefore should be excluded from the list of comparables. The profit margin declared by the assessee in its TP study is 15.2% and these two comparables objected to by the assessee have a profitability of 23.53% and 30.35% respectively. 8. Before adverting to decide the aforesaid issue raised by the assessee, it is pertinent to refer to Rule 10B(2) of IT Rules, 1962 which provides for parameter for comparing international transactions with uncontrolled transactions. Rule 10B(2) is extracted herein below :- "10B (2) : For the purposes of sub-rule (1), the comparability of an internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions. The approach of the TPO by selecting the band of PLI between 10% and 50% is completely arbitrary and has no basis for reasons stated above. The selection of comparables by the TPO has led to arbitrariness wherein the loss making companies are excluded and comparables only in the range of 10% to 50% are selected. The benchmarking made by the TPO is not as per the principles governing Indian Transfer Pricing guidelines regulations or even the OECD guidelines. 8.3. Similar issue arose for consideration before the ITAT Bangalore Bench in the case of Trilogy E Business Software India Pvt. Ltd. Vs DCIT (2013) 140 ITD 540 wherein the ITAT Bangalore Bench held as under :- 30.Alternatively it was submitted that the profit margin of 60.23 percent was abnormally high and deserves to be rejected on this ground, as not within the parameters of comparability. In this regard, reference was made to the decision of Special Bench of ITAT Chandigarh in the case of Quark Systems Pvt. Ltd. (supra) besides several other tribunal decisions laying down identical proposition. Further it was submitted that Visual Soft Technologies Ltd. merged with Megasoft Ltd. w.e.f. 01.10.2006. Therefore the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded from the samples, all sorts of extremes should be avoided. otherwise, samples selected for comparative study may not be representative." 33. Even in the aforesaid decision the point that has been emphasized is that when the margins of comparable companies are either extremely low or high, the approach should be to eliminate both and not consider only the high or low margin comparables as it suits either the TPO or the Assessee. 34. As far as the provisions of the Act are concerned, they lay down that the comparable companies should be functionally comparable to the tested party. There are no specific standards of comparability on the basis of abnormal profits or loss. Rule 10B(2) provides that the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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