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TMI Blog2014 (10) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... in the working accepted by the CIT(A) has been brought to our notice. In the aforementioned peculiar facts and circumstances being satisfied by the finding arrived at which has been reproduced in the earlier part of this order, we dismiss the departmental ground. X X X X Extracts X X X X X X X X Extracts X X X X ..... or adjudication. 5.1. "Brief facts of the case are as follows:- Heartland Delhi is a subsidiary of Heartland Asia (Mauritius) Limited with 99.99 per cent of shareholding held by it and 0.01 percent held by Heartland Medical Information Services Inc., USA. Heartland Delhi is primarily engaged in the provision of IT enabled services in the area of medical transcription to Heartland Medical Information Services Inc. The company undertakes the medical transcription services exclusively for Heartland Medical Information Services Inc., USA. The medical transcription business was carried out by an undertaking owned by the appellant which is a 100 percent Export Oriented Unit ("EOU") registered under the 'Software Technology Park Scheme' ("STPI") of the Department of Electronics, Government of India (hereinafter referred to as "eligible undertaking"). The eligible undertaking was set up during the Financial Year ("FY") 1998-99 relevant to the Assessment Year ("AY") 1999-2000. Heartland Delhi, is an IT enabled back-office medical transcription service provider to its associated enterprises and is remunerated on a total cost plus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, operates only with category (b) and (c) services. Also, the services carried on by the amalgamated company (i. e Nucleus Netsoft & GIS India Ltd) are neither segmented into IT Enabled Service nor into Software Development Service. Further, though the Notes to Accounts of the company has provided for a policy of recognizing revenue from IT Enabled Services and Software Development service but there are nil revenues from the said streams. The relevant extracts of the Annual Report are provided vide Annexure B for your kind perusal. Bearing in mind the aforesaid, your assessee would like to submit that it acts as captive service provider engaged in providing IT Enabled Service (medical transcription), the same has been elucidated in terms of Transfer Pricing: Documentation for the relevant year under consideration. Accordingly, Nucleus Netsoft & GIS India Ltd., (engaged in providing IT Enabled services as well as development of software product) should not be taken as a comparable for determining the arm's length price. Further, as evident in terms of financial disclosures made by Nucleus Netsoft & GIS India Lid., that the revenues for the period under consideration are not ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lgamation process during this year. The amalgamation came into effect from 01.04.2005. The abnormal increase in the profit margin of the company as compared to the earlier year may or may not due to the impact of the process. However, as the amalgamation came into effect from the next year, the independent existence of the company stands clear for the FY 2004-05. In view of this, I do not find any merit in the submission of the appellant. Therefore, this company stays in the set of comparables. 7. Vishal Information Technologies Ltd.: The submission of the appellant in this regard is reproduced below: (The appellant vide his submission dated June 17, 2008 and August 25, 2008 (Please refer Appendix-A, page no. 770 and 793 of paper book) before ld. TPO has submitted the reasoning for rejecting the company. In addition to the submissions made before ld. TPO the appellant humbly submits that, per website, the company is engaged in IT Enabled Service particularly in the area of print production industry. The services include data conversion, microfilming and microfilm scanning, data and document management, data processing, Digital Library Management etc. However, as per the Ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind perusal. Also, per the information available on the website, the company has a marketing unit, VSoft Technologies UK, which undertakes to perform marketing activities for Vishal Information Technologies. In the process, Vishal Information Technologies would stand to directly benefit from the marketing efforts and customer contracts that would be obtained by VSoft Technologies. In contrast, your appellant does not have any marketing arm and hence does not benefit from any sales promotion activity. It operates strictly offshore, as a captive medical transcription service provider. The relevant extracts are provided vide Annexure for your kind perusal. Accordingly, your appellant submits that, Vishal Information. Technologies Ltd., as a company acts as a distributor of services (outsourcing the contracted work to third party vendors) and thereby rendering the company as one not being functionally comparable to your appellant. As indicated, factors such as the controlling stake in the company and synergies accruing from onsite marketing are additional factors that render the company liable for rejection while determining the arm's length margin." Reasons for decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Technologies Ltd. Should be excluded from the list of comparables. 4. The Ld. CIT DR addressing the department's grievance to the finding in para 7.1 merely places reliance upon the TPO's order. However the specific reasoning taken by the CIT(A) on query was not opposed by him by making reference to any contrary fact, circumstance or position of law. 5. Ld. AR on the other hand relying upon the impugned order contended that the assessee has objected to the said comparable i.e Vishal Information Technology Ltd. during the assessment proceedings as well as before the CIT(A). It was argued that the mere fact that it was wrongly selected in the TP documentation by the assessee itself due to wrong facts does not preclude the assessee from making a claim for its rejection based on current year information and backed by real and cogent reasons. It was his submission that Vishal Information Technology as per various orders of the Tribunal rendered by Mumbai and Delhi Benches have consistently for this very assessment year has been rejected as a comparable on the reasoning that it has out sourced its work. Reliance was placed on order dated 09.09.2011 for 2005-06 in ITA No.-7466/Mum/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mer .Com Pvt. Ltd. vs DCIT, Cir11(2) I.T.A.No.227/Bang/2010 para 17.3 page no.801 - M/s Google India Pvt. Ltd. vs DICT, Circle-4, ITA No.1368/Bang/2010 para 15, page no.780 6. We have heard the rival submissions and taken ourselves through the case law filed. On a consideration of the same we are of the view considering the judicial precedent that the finding arrived at in the impugned order deserves to be upheld. The fact remains that Vishal has a different business model is a consistent fact on record qua the said comparable which finding has not been rejected by the Revenue. Following the judicial precedent the departmental ground fails. 7. The facts relatable to Ground No-2 raised by the Revenue show that during the proceedings before the TPO, the assessee asked for working capital adjustment in order to bring the comparables to the level of the assessee. The TPO whose order is placed at page 254-273 (specific page 269) para 6.4 rejected the same holding that the working capital adjustment based on year end figures may not have sufficient details. Relying upon the OECD Guidelines he held that the reliance placed on year end figures is not appropriate. 8. Aggrieved by this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e material effects are clearly identifiable from the Profit & Loss account and Balance Sheet of the tested party as well as of comparables. Therefore, a reasonably accurate adjustments can be made to eliminate the material effects of such differences as contemplated u/s 10B(3) of IT Rules. Rule l0B(3) of the Rules provides that an uncontrolled transaction shall be comparable to an international transaction if: None of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the prices, costs or the profit arising from, such transactions in the open market; or Reasonably accurate adjustments can be made to eliminate the material effects of such differences. Significant differences exist in economic circumstances in which the Assessee operates vis-a-vis the comparables. Hence, to improve the comparability of independent companies by eliminating such differences, working capital adjustments can be allowed. The adjustment ensures that the absolute levels of the relevant balance sheet items are normalized. The adjustment resulting from the different levels of accounts receivab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d relying upon the impugned order submitted that adjustment on account of deployment in working capital is required to be made for comparability analysis. It was contended that it is an accepted principle in terms of Rule 10B(3) of the Income Tax Rules, 1962 which provides for adjustment to eliminate the material differences. The position it was submitted is also substantiated by the OECD Guidelines 2010 and judicial precedent it was submitted on the issue is consistently in assessee's favour.Reliance was placed on the following decisions:- - Mercer Consulting (India) vs. DCIT-ITA No.966/Del/2014, para 16.2 page no-816 - M/s Verifone Sales India Private vs. ITO-ITA Nos. 5829/Del/2010 & 607/Del/2014 para 7, page no-823 - Nortel Networks India P. Ltd. vs. ACIT-ITA Nos.4765/Del/2011 & 427/Del/2013 para 11.8 page no.829 - Navisite India Pvt. Ltd. vs ITO [ITA No-5329/Del/2012] para 73, page no- 837 - Qualcomm India Pvt. Ltd. vs. ACIT [ITA No.5239/Del/2012] para 41, page no.845 - Cowi India Pvt. Ltd.-ITA No.5052/Del/2010 para 12, page no.861 - Westfalia Separator India vs. ACIT [ITA No.4445/Del/2007] para 14, page no.865 - Mentor Graphics (Noida) Pvt. Ltd.-ITA No.1969/Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .5307/M/2008] para 15, page no.- 932. 11. We have heard the rival submissions and perused the material available on record. On a consideration of the same we find that the finding arrived at in the facts as they stand cannot be faulted with. The assessee consistently has sought right from the assessment stage the adjustments for working capital deployment in its comparables, the working has been placed before the AO and again before the CIT(A). Whereas ld. AO on principle held it to be not allowable, the CIT(A) considering the same has come to the finding under challenge by the Revenue. Apart from the general argument which on facts is found to be not correct no infirmity in the working accepted by the CIT(A) has been brought to our notice. In the aforementioned peculiar facts and circumstances being satisfied by the finding arrived at which has been reproduced in the earlier part of this order, we dismiss the departmental ground. 12. In the result the departmental appeal is dismissed. CO-7/Del/2013 13. The assessee has also filed its C.O on the following grounds before us:- "On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (App ..... X X X X Extracts X X X X X X X X Extracts X X X X
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