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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 ..... making a difference in margin earned by the assessee and the comparables. 2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal." 2. The relevant facts of the case are that the assessee filed its return on 27.10.2005 declaring an income of Rs. 24,710/-. The said return was processed u/s 143(1) and thereafter picked up for scrutiny by issuance of notice u/s 143(2) alongwith notice u/s 143(1) accompanied by questionnaires etc. The assessee company at the relevant point of time was involved in the business of providing IT enable services in the area of medical transcription to its group companies. The assessee is a 100% EOU under the STP schemes of the department of Electronics, Government of India. The assessee is a subsidiary of Heartland Asia (Mauritius) Limited with 99.99 percent of shareholding held by it and 0.01 percent held by Heartland Medical Information Services Inc., USA. 2.1. The assessee company selected transactional net margin method (hereinafter referred as to "TNMM") with operation profit/total cost (hereinafter referred as to "OP/TC") as the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial year ('FY') 2004-05 Heartland Delhi provided back office medical transcription services to its associated enterprises ('AE') amounting to INR 133,726,989 at the markup of 10% on total operating cost. 5.2. Transactional Net Margin Method (TNMM) was the most appropriate method. Operating Profit/ Total Cost (OP /TC) was the Profit Level Indicator (PLI). The appellant has selected 22 comparables which had an average PLI of 12%. Therefore, the TP documentation justified the international transaction undertaken by the appellant. 5.3. The TPO has rejected 12 companies from the set of comparables and arrived at the average margin of the comparables at 21.17% and therefore the difference of arm's length margin was added to international transaction of the appellant. 5.4. The appellant has objected to inclusion of two comparables, namely, Nucleus Netsoft & GIS (India) Ltd. and Vishal Information Technologies Ltd. The appellant has objected to the interpretation of proviso to Section 92C(2) of the IT Act and on the use of single year data by the TPO. The appellant had also asked for working capital adjustment and risk adjustment before the TPO which was not given. Thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormed by your assessee. Software development cannot be equated with provision of IT-enabled services, due to the differing skill sets, customer requirements and deliverables, leading to varying profit margins. This makes it essential to bifurcate software development and ITES revenues, for purposes of comparing the ITES segment with your appellant. In view of the above, we humbly submit that the company should be rejected as a comparable while determining the arm's length prices of the international transactions undertaken by your appellant. Further, during the FY 2004-05, the company was in the process of being amalgamated with Nucleus Securities Ltd., which finally became effective from April 1, 2005. Your appellant would like to submit that due to the amalgamation, there may be abnormal variations in the financials of the company. It should also be noted that the company has been witnessing abnormal variations in their operating margin when analyzed over a period of three years. For your good self's perusal we have tabulated the margin of the company as below: Company Name Unadjusted OP/TC Mar-03 Mar-04 Mar-05 Nucleus Netsoft & Gis India Ltd. -17% 16% 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -7, page no.958 of paper book) it is evident that the company outsources its work to the third party vendors (percentages of data entry charges and vendor payments to sales are in the range of 50%). A brief snapshot of these payment as a percentage of sales have been provided below for your ease of reference. Particulars 2003-04 2004-05 2005-06 Data entry and vendor payments 76,928,836 113,511,647 114,914,563 Sales 138,822,227 208,233,200 256,4428,476 Data entry charges as a % of sales 55.42% 54.51% 44.81% The above table depicts the percentage of data entry charges are in the range of 45% - 55% of the Sales of the Company. From the aforesaid analysis it may be concluded that the operating model of the company is different from that of your appellant and consequently the margins earned by Vishal Information Technologies Limited, are reflective of the functions performed by it which are not akin to the functional profile of your appellant. Hon'ble ITAT in the case of M/s Maersk Global Service Center (India) Pvt Ltd [ITA No. 3774/Mum/2011 and CO No. 111/Mum/2011] (Please refer Appendix-2, page no. 443 of paper book) held as under: "48. Insofar as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E. The entire activity of the appellant is conducted in house whereas Vishal Information Technologies Ltd. outsources its activity. The business model of the appellant is different from this company. For the AY 2005-06, the Hon'ble ITAT in case of Maersk Global Service Center (India) Pvt Ltd (supra) has held that Vishal Information Technologies Ltd. is not a comparable company for the reason that it outsourced its work. As the fact and circumstances of these two cases are similar, respectfully following the decision of the Hon'ble ITAT, I hold that Vishal Information Technologies Ltd. should be excluded from the list of comparables." 3. The finding of the CIT(A) thereon in para 6.1 and 7.1 is extracted for readyreference. The finding in para 6.1 is challenged by way of a specific ground by the assessee in its CO however it was not pressed at the time of hearing and only the finding arrived at in para 7.1 is challenged by the Revenue in the afore-mentioned facts. The two paras are reproduced hereunder:- 6.1. "I have considered the submission of the appellant as well as the order of the TPO. From the perusal of the Audited accounts of Nucleus Netsoft & GIS (India) Ltd., it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia) Pvt. Ltd. and following this decision the Delhi Benches in orders dated 2.4.2014 and 28.4.2014 at pages 715 and 725 of the Paper Book in the case Techbook International Pvt. Ltd. vs ACIT in ITA No-4990/Del/2011and ITA No. 722/Del/2014 has also directed the exclusion of this comparable despite the fact that it was offered as a comparable by the assessee. It was submitted that even though the said decisions in the case of Techbook International Pvt. Ltd. pertains to 2007-08 and 2009-10 assessment year however the facts remains that in the facts of the present case, the material facts are similar inasmuch it was argued referring to the chart of issues filed which captures the assessee's reliance and case law so as to argue that as the employee cost to sales ratio of 1.38% as against 78.28% of the assessee whose vendor payment and duty charges were 54% as was argued before the CIT(A) and reproduced by him at page 9 of his order. Reliance was placed upon the following decisions wherein the assessee's who were ITES Service provider in the facts of the case where consistently the Tribunal was pleased to exclude Vishal Technologies as a comparable:- - Techbooks international Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering the arguments advanced and relying upon the decision of Mentor Graphics (Noida) Pvt. Ltd vs. DCIT (2007) 109 ITD 1 (Del) specific para 27 and OECD guidelines including the decision of the Banglore Bench in Philips Software; the decision of the Delhi Bench in the case of Gain Communication Pvt. Ltd. (ITA No.-1685(Pune) of 2007); Vedaris Technology (Pvt.) Ltd. 131 TTJ 309 specific para 6.2; and also the decision in the Banglore Bench in ITA No1442(BNG)/08 in TNT India Pvt. Ltd. vs ACIT came to the conclusion that in comparing the margins earned by comparable companies vis-à-vis the assessee, difference on account of working capital employed should also be factored into. For ready-reference, we reproduce the relevant finding:- "I have examined the submissions made by the assessee as well as the order of the TPO. Most important fact to be kept in mind in this is that assessee is a captive entity providing different services to its AE. The major customer is AE. Therefore, assessee has no credit risk. As part of a major MNC, assessee has a low risk in terms of its realizables. This reflects in its working capital requirements. Working capital is measured by account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the comparable companies can be calculated, as described below. First, determining the difference between the tested party's ratio of accounts receivable to operating costs and the corresponding ratio of accounts receivable to operating costs of each comparable. This difference represents the "excess" or "shortage" of accounts receivable, held by the tested party relative to the comparable companies. Next, multiplying the above difference by an interest rate benchmarked in order to arrive at a figure representing the implicit interest expense or benefit to the comparable due to its different accounts receivable carrying costs. The Prime Lending Rate ("PLR") (computed by taking 12 month average of PLR rates for relevant Financial year), can be considered for arriving at the benchmark rate. Similar adjustments can be made to determine the interest carrying costs associated with different levels of accounts payable between the tested party and each of the comparable companies. Lastly, these adjustments are to be added to the unadjusted operating margin of the comparable companies, to identify the margin the comparable would have earned, if it had been operating with sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 309] para 6.2, page no.883 - Demag Cranes & Components (India) Pvt. Ltd. vs DCIT [ITA No.- 120/PN/2011] para 30, page no.-900 - Capgemini India Pvt. Ltd. vs ACIT [ITA No.7861/Mum/2011] para 6, page no.914 - ITO vs M/s Nextlinx India Pvt. Ltd. [ITA No.454/Bang/2011] para 15, page no.752 - Brigade Global Services Pvt. Ltd. vs ITO [ITA No.1494/Hyd/2010] para 56, page no.997 - Avineon India Pvt. Ltd. vs DCIT [ITA No.1606/Hyd/2010] para 9, page no.762 10.1. In the above background it was submitted that the arguments of Ld. CIT DR that the assessee has not been able to demonstrate the impact of the difference on the profit margin of the comparable companies by deploying working capital it was submitted is misplaced as the assessee has during the assessment proceedings and before the CIT(A) ddressed the mechanism of undertaking the working capital adjustment and has also quantified the effect of difference in working capital on the margins earned by the assessee and the comparables. For the said purpose attention was invited to the following submissions made as per the chart of issues filed:- - Working capital adjustment as per the methodology prescribed by the OECD was subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has erred in:- 1. Using financial information of the comparable companies relating to the financial year ("FY") 2004-05 although such information was not available to the assessee at the time of preparation of documentation as per the requirement of the Act. 2. Accepting Neucleus Netsoft and GIS India Limited as a comparable company. 3. Not granting comparability adjustments on account of difference in risk assumed by the assessee vis-à-vis the comparable companies and in ignoring the quantification of the same: and 4. Rejecting the plea that the assessee is a STPI unit which is entitled to tax holiday and consequently there is no motivation for shifting profits through transfer pricing mechanism." 14. As referred to right at the outset it was submitted by the ld. AR that Ground No-2 & 4 would not be pressed by the assessee, the same accordingly are dismissed as withdrawn. 15. Ground No-1 also was not seriously argued as the same it is seen is contrary to the Statutory Rules and on query was stated to have been raised solely to keep the issues alive. The Ld. CIT DR places reliance upon the orders of the authorities below. 16. We have heard the rival submissions an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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