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TMI Blog2015 (10) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the action of the Transfer Pricing Officer (TPO) in making an adjustment amounting to Rs. 91,14,06,057 to the price charged in relation to the international transactions carried out by the appellant and upholding the Arm's Length Price (ALP) margin of 25.90 percent as determined by the TOP as against the ALP of 13.31 percent determined by the appellant. 3. The Hon'ble DRP and the learned AO have erred in upholding the action of the TPO in rejecting the Transfer Pricing (TP) documentation maintained and the detailed Functions, Assets, Risk and benchmarking analysis conducted by the appellant. 4. The Hon'ble DRP and the learned AO have erred in upholding the action of the TPO in disregarding the multiple/prior year data considered by the appellant in determining the ALP and adopting the financial data for a single year [i.e, the Financial Year (FY) 2007-08] of the comparable companies despite the fact that the same was not available to the appellant at the time of preparing the TP documentation. 5. The Hon'ble DRP and the learned AO have erred in upholding the action of the TPO in rejecting certain comparable companies identified by the appellant in its TP study using unrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educing an amount of INR 1,87,30,103 pertaining to link charges (forming part of communication expenses) from the export turnover of the appellant even though the same had already been reduced from the export turnover, by the appellant while computing the relief claimed u/s 10A of the Act. 14. Without prejudice to the above grounds, the Hon'ble DRP and learned AO have erred in law and on facts in holding that the communication expenses amounting to INR 10,27,77,400/- insurance expenses amounting to INR 6,18,880 and the foreign currency expenses amounting to INR 19,45,91,781 should not be reduced from 'total turnover' for the purpose of computation of relief u/s 10A of the Act even if these are reduced from export turnover. 15. The Hon'ble DRP and the learned AO/TPO has erred in law and on facts in levying interest u/s 234B and sec. 234D of the Act.\ 3. Additional Ground: "The Honourable DRP has erred in law and on facts in upholding the action of the AO in holding that the foreign exchange losses are to be added back only to the "Total Turnover" and not to the "Export Turnover". Without prejudice to the same, the Honourable DRP and the learned AO should have added back the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting and transaction processing work as part of HP's worldwide strategy of consolidating backroom operations. It manages operations that cover functionalities like fixed assets, intra-corporate accounting like debit and credit records, vendor payables, fixed asset tracking and nonfinance operations like data processing & other IT enabled services, freight cost management and order processing for certain geographies. There is no change in the ownership structure from the preceding year. 7. Business Profile of Global ebiz (the Assessee) Its business profile continues to be the same as pointed out in the taxpayer's case for the AY 2006-07. During the FY 2006-07, Globale Business Operations Pvt. Ltd. provided data processing and other IT enabled services to its AEs located in various parts of the world. 8. The taxpayer is registered under the Software Technology Parks of India Scheme and has been claiming tax holiday benefit in respect of the profits earned by it from the research and development. 9. Financial Results of Global-e Business for the FY 2007-08 Description Amount (Rs.) Operating Revenues 6153468919/- Operating Expenses (*) 5611497201/- Operating profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined ALP after giving negative working capital adjustment as follows: "The arithmetic mean of the Profit Level indicators was taken as the arms length margin. Based on this, the arms length price of the software services rendered by the taxpayer to its AE(s) wss computed as under: Arithmetic mean PLI : 24.75% Less: Working capital adjustment (Annexure-G) : -1.15% Adj. Arithmetic mean PLI : 25.9% Arm's Length Price: Operating Cost Rs. Rs. 5611497201/-* Arms Arms Length Margin 25.9% of the Operating cost Arms Length Price (ALP) @125.9% Rs.7064874976/- *excluding Exchange loss, financial expenses Price Received vis-à-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length as under: Arms Length Price (ALP) @125.9% of operating Cost Rs.7064874976/- Price charged in the international transactions Rs.6153468919/- Shortfall being adjustment u/s 92CA Rs. 911406057/- The above shortfall of Rs. 911406057/- was treated as transfer pricing adjustment u/s 92CA in the ITES segment." 14. The DRP confirmed the action of the TPO, hence the present appeal by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment 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 Moldtek 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 effect from 1st April, 2007. The merger and the de-merger needed the approval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitigation strategies through cutting edge forecasting tools. The data management services provided by the assessee include routine business data reporting and management, website management, marketing data analysis and top line reporting. 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 services rendered by this company fall in the definition of ITES. 19. We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No.15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparables." 21. Following the decision of the Tribunal referred to above, we hold that Coral Hubs Ltd. cannot be considered as a comparable. It may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable on the basis of detailed discussion in the TP order for the A.Y. 2007-08. In fact in A.Y. 2007-08, there was no determination of ALP and therefore there was no occasion for any order being passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library & Print on Demand in F.Y. 2007-08. In the case of Capital IQ Information Systems India Pvt. Ltd. (supra), the ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:- "IV. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): 16. The assessee has objected for this company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but the business model of the company is also different as it subcontracts majority of its ITES works to third party vendors a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken as a comparable." 22. It is also further noticed that the employee cost/operating sales of this company is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%. This Tribunal in the case of First Advantage Offshore Services Ltd. v. CIT, IT(TP)A No.1086/Bang/2011, order dated 30.4.2013, has taken the following view:- "36. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee's own case for the assessment year 2006-07. This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR's argument that the employee cost filter is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot be said that the said filter is not applicable to ITES segment, where comparably less skilled employees are employed. In the ITES segment, the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider. 25. We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this company as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. We hold accordingly. (5) Eclerx Services Ltd. 26. 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 company have been pointed out. It has further been submitted that extra ordinary events and peculiar circumstances prevail in the case of the assessee in as much as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of comparable companies chosen by the TPO. As far as this company is concerned, the submission of the assessee before us is that it is in the business of Knowledge Process Outsourcing and cannot be considered as a comparable. The functional profile of this company is as follows:- As per the annual report for the F.Y. 2007-08, the company primarily operates in two business segments: Plastic division: The plastic division is engaged in the manufacture of tube & oils, paints, pet products, consumer products, etc. The company demerged the said segment effective 1 April, 2007 and transferred the business unit to the Company Plastics Lt. The extract from the annual report confirms the fact that the Company had restructured its operations resulting in demerging the plastic segment business. Information Technology (IT) division: The IT division (also referred to as the KPO division by the company) of the company specializes in providing structural design and detailing services which can be categorized as structural engineering services. The structural engineering services provided by the IT division of the company cannot be classified as falling with the scope and ambit of ITES serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP is called for. We, therefore, hold that the additions sustained by the DRP deserves to be deleted and he is accordingly directed to be deleted. The grounds other than comparability of comparables are not taken up for consideration. We may also add that arguments were made on market risk adjustments and also working capital adjustment. We have not dealt with those arguments for the reason that on the basis of comparability, the arithmetic mean of the comparables is less than the margin of the assessee. 33. The plea of the assessee is that the aforesaid expenditure need not be excluded from the export turnover as per the definition of set of given in sec. 10A of the Act. The plea of the assessee is that if the aforesaid amount is excluded from the export turnover, the same should also be excluded from the total turnover. 34. As far as the alternative claim is concerned, we find that the Hon'ble High Court of Karnataka in the case of CIT v. Tata EIxsi Ltd [2012] 349 ITR 98 (Karn) has held that while computing deduction under section 10A of Act, expenditure incurred by the assessee, if excluded from the export turnover, should also be excluded from the total turnover. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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