9911796707
TMI Blog2015 (9) TMI 1507X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee during the year are at arm’s length. Disallowance of deduction under sec. 10A in respect of assessee’s undertaking at Hyderabad acquired by way of slump sale from Digital Think (India) Pvt. - Held that:- We find that there is substance in the contention of the Learned AR that mere change in ownership does not result in denial of the deduction under sec. 10A of the Act. The only dispute raised in the ground is as to whether sec. 10A(2) of the Act applies or not. The CBDT Circular F. No. 178/84/2012 – ITA-1 dated 17.1.2013 has made it clear in relation to availability of tax benefit under sec. 10A, 10AA and 10B of the Income-tax Act, 1961 in case of slump sales of an undertaking that on the sole ground of change in ownership of an undertaking, the claim of assumption cannot be denied to an otherwise eligible undertaking and the tax holiday can be available of for the unexpired period at the rate as application for the remaining years, subject to fulfillment of prescribed condition. We thus set aside the matter to the file of the Assessing Officer to decide the issue afresh in view of the above submissions of the assessee supported by the CBDT Circular and the decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . C. Sudhir (Judicial Member) ITA No. 5451/Del/2011 (Assessment Year: 2006-07): The assessee has questioned orders of the authorities below on the following grounds: That on the facts and circumstances of the case, and in law:- 1. The assessment order passed by the Learned Assessing Officer ( Ld. AO ) pursuant to the directions of Learned Dispute Resolution Panel ( Ld. DRP ) is bad in law and void ab-initio. 2. The Ld. DRP and the Ld. AO (following the direction of the Ld. DRP) erred both on facts and in the law in confirming the addition of ₹ 31,21,61,763 to income of the appellant proposed by the Transfer Pricing Officer ( Ld. TPO ) by holding that its international transactions to its Information Technology enabled services ( ITES ) and e-learning back office support services ( e-learning ) business segments do not satisfy the arms length principle ( ALP ) envisaged under the Income-tax Act, 1961 ('the Act') and in doing so, the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO s action of: 2.1 not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies with export sales that are less than 25% of their total revenue; 2.7.3 exclusion of companies with diminishing revenues/ persistent losses for last three years upto and including FY 2005-06; 2.7.4 retaining companies with related party transactions upto 25% of their sales; and rejecting, in particular, the following filters applied by the appellant in its TP documentation/ fresh search: 2.7.5 companies having other operating income (i.e. income other than manufacturing and trading income) to sales greater than 50% were accepted; 2.7.6 companies with net worth less than zero were rejected; 2.7.7 companies having research development costs to sales less than 3% were accepted; and 2.7.8 companies having advertising, marketing and distribution costs to sales less than 3% were accepted. 2.8 including high-profit making companies in the final comparables set for benchmarking a low risk captive unit such as the appellant (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the single minded intention of making an addition t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Para 4.6.1 of TP study on pgs 329 of the Paper book). 2.1 In return for rendering these services, the Appellant was remunerated on an arm s length cost plus basis i.e. it was compensated for all its operating costs, plus a pre-agreed mark-up thereon. (Please refer the ITES agreement provided separately). 2.2 During the relevant year, the Appellant undertook the following international transactions with its AEs (Form 3CEB on pg. 373 of the Paper book). Sl. No. Description of International Transaction Amount (Rs.) TP Order 1. Provision of Services 4,986,834,267 Adjustment of ₹ 31,21,61,763 2. Salary Reimbursement 16,953,607 Accepted 3. Payment of service fee 20,777,272 Accepted 4. Reimbursement of IPLC cost (paid) 53,282,192 Accepted 5. Payment for Software and maintenance cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % (He referred to Page 346of the Paper Book for the TP Study) 12% (He referred to Page 347of the Paper Book for the TP Study) Data used Multiple years - FYs 2004-05, 2005-06 and 2006-07 (He referred to Page 337 of the Paper Book for the TP Study) Multiple years - FYs 2004-05, 2005-06 and 2006-07 (He referred to Page 337 of the Paper Book for the TP Study) Appellant's margin 15% (He referred to Page 363of the Paper Book for the TP Study) 14% (He referred to Page 363of the Paper Book for the TP Study) Conclusion At arm's length At arm's length 2.6 Accordingly, the international transactions of the Appellant with its AEs during the AY 2006-07 was considered to be at arm s length. Proceedings before the Learned Transfer Pricing Officer (Ld. TPO) 2.7 However, the Ld. TPO rejected the segmental bifurcation undertaken by the Appellant and clubbed the garments under ITES. (Please refer TP Order at page 174 175of the Paper Book) Finally, he relied upon t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 13 comparables selected by the Appellant in its fresh search 4 Transworks Information Services Ltd 19.97% Considered by the TPO out of the 13 comparables selected by the Appellant in its fresh search 5 Cosmic Global Ltd (Seg.) 15.34% Considered by the TPO out of the 13 comparables selected by the Appellant in its fresh search 6 Vishal Information Technologies Ltd 41.84% New comparable introduced by the TPO 7 Asit C Mehta Financial Services Ltd (Earlier known as Nucleus Netsoft GIS (India) Ltd) 34.99% New comparable introduced by the TPO 8 Goldstone Infratch Ltd (Seg.) (Earlier known as Goldstone Teleservices Ltd) 23.89% New comparable introduced by the TPO 9 Spanco Ltd (Seg.) (Earlier known as Spanco Telesystems Solutions Ltd) 18.91% Considered by the TPO out of the 13 compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operations or results, thus, argument of the assessee is not acceptable. DRP: The Ld. DRP confirmed the action of the TPO (refer DRP Directions on pgs 165 of the Paperbook). 2 Asit C. Mehta Services Ltd. (segmental) (Nucleus Netsoft and GIS India Ltd) ('Asit') 34.99% Appellant: Asit has been contested by the appellant on account of diversified operations of the segment (engaged in ITES and software development), impact of amalgamation on financials, related party transactions and abnormal margins. (refer DRP Objections on pg 74 of the Paperbook) TPO: (refer TPO order on pg 219-221 of the Paperbook) The TPO has stated that the arguments of the assessee on functional comparability and business restructuring are not acceptable as the company was selected by the assessee himself in its TP study. Also, the Ld. TPO in the order has stated that the assessee was not able to demonstrate the effect of restructuring in the business operations or results in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 of the Paperbook). 2.12 Without prejudice to the other contentions against the approach followed by the Ld. TPO, the fundamental contentions of the Appellant against the Ld. TPO/Ld. DRP s approach are discussed in detail below: RE: GROUND NO. 2.9: Inclusion of functionally dissimilar companies Allsec Technologies Ltd. ('Allsec') TPO/DRP Submission's and Observations Appellant's Submission TPO Submission: Please refer to page no 456 to 458 of the paperbook TPO observation in the order: Please refer to page no 243 of paperbook DRP Submission: Please refer page no 67 of paperbook DRP Directions: Please refer page no 156 -167of paperbook Activities carried out by Allsec: All sec is engaged in the provision of voice and data services to its International and Domestic clients in the Information Technology Enabled Services segment. (Refer Page 31 of Compendium of Annual Reports) The Appellant would like to state that even if Allsec performs functions which are broadly comparable to the functions being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause of exceptional final results due to mergers/ de-mergers .. Unquote Toluna India Pvt. Ltd. v. ACIT (ITA No.5645/Del/2011) (Please refer to para 31.2 on Page 167 of the case law compendium) Quote 31.2 . The Mumbai Bench of the Tribunal in Petro Araldite (P.) Limited v. DCIT [(2013) 154 TTJ (Mum) 176] has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/ demergers Unquote Abnormal growth during the year: The Company has recorded 59.94% growth in terms of export revenue and 74.85% in domestic revenue. The growth is mainly due to increased business from our existing clients and acquisition of new clients/ processes constitutes 29% of total revenue. (Refer Page 33 34 of Compendium of Annual Reports) Maple E Solutions Ltd. ('Maple') TPO/DRP Submission's and Observations Appellant's Submission TPO Submission: Please refer to page no 454-455 of the paperbook TPO observation in the order: Please refer to page no 239-240 of paperbook DRP Submission: Please refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... like Maple. (Refer 144 of compendium of annual reports) Volatile Margins Maple showing significant variation in its profit trends over the years (as shown in the table below) reflects the fact that it assumes significant entrepreneurial risks (which may include market risk, price risk, capacity utilisation risk, etc.), which may be because of management inefficiencies and/or facing extra ordinary circumstances. Accordingly, typically the returns earned by Maple would also include return towards assuming such entrepreneurial risks. On the contrary, the appellant does not assume any entrepreneurial risks. Operating profit margin (%) of Maple from FY 2003-04 to 2008-09 2003-04 2004-05 2005-06 2006-07 2007-08 2008- -100% 37.38% 36.83% 34.32% 22.94% - 65.26% Accordingly, since the FAR profile of this company is di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on are discussed below: Functionally Not Comparable: On a perusal of the FY 2005-0 Annual Report of Nucleus Netsoft GIS India Limited as well a reply submitted by Company in response to notice u/s 133(6), it observed that the 'Income from operations' i.e., the revenue earned by this Company comprises revenues not only from provision of I enabled services but also from the software development service In view of the diversified nature of the company's operations the are more than just provision of IT enabled services, based o differences in functional profile, this company should not include as a comparable company. SCHEDULE 9 - INCOME FROM OPERATIONS IT Enabled Services and Software Development Portfolio Management Fees (Including Profit Sharing ₹ 1,212,500, Previuos year Rs. NIL) Arbitrage Income Money Changing (Including Inter Branch Transfers) Commission (refer Page 183 of Compendium of annual reports). Business Restructuring/ Amalgamation The Appellant would like to state that even if Asit C Mehta perform function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer .. 38. Accordingly on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable .. Unquote (Emphasis supplied) Further, reliance is also placed on the Sapient Ruling passed by the jurisdictional Hon'ble Delhi Tribunal, wherein the Hon'ble Tribunal held that the assessee cannot be estopped from rejecting a comparable company merely on the ground that the same has been initially included in its TP documentation report. The relevant extract from the ruling is given below for your Honours' ready reference: Quote The fact that assessee has himself included in the list of comparables, initially cannot act of estoppels particularly in light of the fact that Assessing Officer has only chosen the companies which are showing profits and has rejected the other companies which showed lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts work whereas the taxpayer was carrying out the work by itself and hence it is functionally different to the appellant. The relevant extract of Google ruling is produced below: Quote 15 ..When Company has outsourced its ITES services , it cannot be said that its business results would be comparable to any other ITES service provider rendering the services entirely on its own. In such circumstances net margins of the two comparables cannot be on same basis the Tribunal at Mumbai has held that Vishal Information Technologies Ltd has to be excluded from the List of comparables of ITES company as it has outsourced its services Unquote Secondary Contention GROUND NO. 2, 12 : Risk adjustment not allowed to the appellant TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page no 478-487 of the paperbook TPO observation in the order: Please refer to page no263-292 of the paperbook DRP Submission: Please refer to page no 7118-122 of paperbook DRP Directions: Please refer to page no 165-16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Wherever market data was not available, the beta is computed based on guideline companies from the small cap and madcap indices of BSE and NSE. But, the risk adjustment should always be based on the comparables selected by the taxpayer or the TPO and not on the other companies, which are not examined and otherwise, not comparable functionally. Thus, the beta of unlisted companies or companies where data was not available should be the average of the beta of the remaining comparable companies. 6. The taxpayer ignored negative risk adjustment in some of the comparable companies. This looks absurd as any risk undertaking enterprise may get a negative return for the risk undertaken and is possible due to the actual realization of risk bringing down the profitability below the risk free rate of return. Thus, its profitability would have been more but for the risk undertaken. Thus, negative risk adjustment has to be considered and cannot be ignored. For example, when the Indian stock markets tumbled in 2007 and 2008, the equity investments given a negative return even though the risk free return is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isk premium adjusted amount has to be reduced from the operating revenues. Hence, as per the above detailed discussion, the computation of risk adjustment by the taxpayer is not acceptable. There is no scientific basis for working out the taxpayer company's beta or beta of the unlisted comparable companies. The taxpayer altogether forgotten that the risk adjustment, if at all to be computed, is to be computed based on the difference between the actual weighted cost of capital of the comparables and weighted cost of capital of the comparable companies assuming same level of equity in the total finances and risk level as evidenced by beta of the taxpayer. This differential is altogether is ignored making the entire exercise redundant.............. 118.1 We have considered the submissions of both the parties and have perused the record of the case. We have perused the record of the case. We have also gone through the detailed written submissions filed by assessee from pages 92 to 104 of the written submissions The main contention of assessee is in regard to adjustment on account of market risk by applying CAPM Model. In this regard ld. TPO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduced in the case of Motorola Solutions India Private Limited ( supra ) judgement, the Appellant's would request your Honour to adjudicate its ground on risk adjustment on the same lines as is done in case of Motorola. Without prejudice to the appellant s contentions against denial of risk adjustment by the Ld. TPO, Learned AR submitted that even if we exclude the comparable companies for the reasons mentioned above, the working capital adjusted arm s length margin works out to 18.09% which is within 5% range of the OP/TC margin of 15.38%( He referred Page 173 of Paper book ) earned by the appellant during FY 2005-06. This provides evidence that the international transactions entered into by the appellant during the FY 2005-06 are at arm s length. The results of the analysis are given in the table below: S. No. Company Name Working capital Adjusted OP/ TC margin Working capital Adjusted OP/ TC margin (Excluding companies on account of reasons given in final disposition column) Final Disposition 1 Maple Esolutions Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Impact of amalgamation on the financials and margins of the company (c) Abnormally high margin 8 Goldstone Infratech Ltd (Seg.) (Earlier known as Goldstone Teleservices Ltd) 23.89% 23.89% Accepted 9 Spanco Ltd. (segmental) 18.91% 20.80% Accepted 10 Ace Software Exports Ltd. 8.06% 8.06% Accepted 11 Apex Knowledge Solutions Pvt Ltd 21.74% 21.74% Accepted 12 R Systems International Ltd (Seg.) 14.29% 14.29% Accepted 13 Flextronics Software Systems Ltd (Seg.) 14.67% 14.67% Accepted 14 Apex Advanced Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced reliance on the orders of the authorities below in this regard, however, in view of the cited decisions by the Learned AR that those aspects are material for consideration while selecting comparables for benchmarking the assessee s international transaction, we find substance in the grievance of the assessee that the authorities below while selecting the above stated four comparables have not considered those aspects. These material aspects are activities carried out, full-fledged risk bearing entrepreneurial company, extraordinary events, abnormal growth during the year in the case of Allsec Technologies Ltd. Functionally incomparable, involvement of owner s fraudulent activities, ownership of intangible, Volatile margins, operating profit margin from financial year 2003-04 to 2008-09 in the case of Maple Esolution Ltd. Functionally incomparable, diversified operation of the segment, business restricting/amalgamation in the case of Asit C. Mehta and in the case of Vishal Information Technologies Ltd., these material aspects were its activities showing it functionally different. The Learned AR has discussed in detail as to how the above named comparables are not applicable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; 2.3 disregarding the Arms Length Price ( ALP ), as determined by the appellant in the Transfer Pricing ( TP ) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ( the Rules ) as well as fresh search; and modifying/ rejecting the filters applied by the appellant; 2.4 disregarding multiple year/ prior years data as used by the appellant in the TP documentation and holding that current year (i.e. FY 2006-07) data for comparable companies should be used despite the fact that the same was not necessarily available to the appellant at the time of preparing its TP documentation, and in doing so have grossly erred in; 2.4.1 interpreting the requirement of contemporaneous data in the Rules to necessarily imply current/ single year (i.e. FY 2006-07) data; and 2.4.2 holding that at the time of creating/ maintaining the TP documentation, the appellant could have procured current/ single year data (i.e. FY 2006-07 data) from sources other than the electronic database ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and adequate application of mind with the single-minded intention of making an addition to the returned income of the appellant; 2.9 including certain companies that are not comparable to the appellant in terms of functions performed, assets employed and risks assumed; 2.10 resorting to arbitrary rejection of low-profit/ loss making companies based on erroneous and inconsistent reasons; 2.11 excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the appellant in terms of functions performed, assets employed and risks assumed; 2.12 ignoring the business/ commercial reality that since the appellant (vis- -vis both its ITES and e-learning business segments) is remunerated on an arm s length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed markup based on a benchmarking analysis, the appellant undertakes minimal business risks as against comparable companies that are full fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the appellant on account of this fact; 2.13 not allowing the appellant the benefit of the (+/-) 5% range available to the appellant as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34B of the Act. 9. The Ld AO has grossly erred in initiating penalty under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation. 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. 7. Ground Nos. 1 to 3: 7.1 The Learned AR submitted that Convergys India Services India Private Limited ( CIS or the Appellant ) is a wholly owned subsidiary of Convergys Customer Management Group Inc. USA ( CMG ).The Appellant is engaged in providing IT enabled services to its AE s. CIS provides customer care support services to CMG in the form of voice and web-based services. In return for rendering these services, the Appellant was remunerated on an arm s length cost plus basis i.e. it was compensated for all its operating costs, plus a pre-agreed mark-up thereon. (He referred to para 2.1 on pg 286 of the Appeal Set for the Transfer Pricing ( TP ) Order for the Appellant s profile and TP study on para 1.2 of pg 9of the Paper Book for the brief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following table, the Learned AR summarized the results for the TNMM analysis undertaken in the TP study for the ITES and the e-learning segments based on multiple year data (i.e. FYs 2004-05, 2005-06 and 2006-07 to the extent available). Benchmarking analysis Particulars Provision of ITeS Most Appropriate Method Transactional Net Margin Method ('TNMM') (Please refer to Page 39 of the Paper Book for the TP Study) PLI used Operating Profit ('OP')/ Total Cost ('TC') (Please refer to Page 10 of the Paper Book for the TP Study) Segment ITES E - learning No. of comparables 12 (Please refer to Page 50 of the Paper Book for the TP Study) 5 (Please refer to Page 51 of the Paper Book for the TP Study) Comparables' mean margin 12% (Please refer to Page 50 of the Paper Book for the TP Study) 9% (Please refer to Page 51 of the Paper Book for the TP Stu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers were analyzed qualitatively [including examination of related party transactions ( RPT ) to exclude companies with RPT greater than 25 percent] to select a set of comparable companies at the time of fresh search. 7.11 He provided a snapshot of the fresh search results as below. Particulars ITES E-learning No of comparables 13 4 Mean OP/TC 8% 5% Assessee's OP/TC 15% 14% (He referred to Page 39 of the Appeal Set for Form 35A) 7.11 The Learned AR contended that the Ld. TPO arbitrarily rejected the following filters adopted by the Appellant in the TP documentation and imposed additional filters for the selection of comparables as below: (He referred TP Order on Page 331 of Appeal Set for the list of the final filters selected by the ld. TPO) Selection of companies with ratio of other operating income (other than manufacturing and trading income) to sales greater than 50%; Rejection of companies with research and development ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment order. The Appellant filed detailed objections before the Dispute Resolution Panel (DRP) against the adjustment proposed by the Ld. AO. (The Learned AR referred to the DRP objections on Pg 28 to 275 of the Appeal Set and final assessment order on pgs 1 to 12 of the Appeal Set) . 7.14 The DRP upheld the entire addition made by the Ld. TPO and thus the Company filed an appeal before the Tribunal. 7.15 A snapshot of the results of the final comparable companies selected by the Ld. TPO is provided below: (He referred to the TP Order on Page 355-356, 438-439 of Appeal Set for the final comparables selected by the ld. TPO) . S. No. Company Name Working capital adjusted OP/ TC Margin as per the TPO order (using data for FY 2006-07) 1 Accentia Technologies Ltd. (Seg.) 27.47% 2 Aditya Birla Minacs Worldwide Ltd. (Earlier Transworks Information Services Ltd) 12.30% 3 Allsec Technologies Ltd. 27.03% 4 Apex Knowledge solution Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 10 B (2) of the Income Tax Rules, 1962 lays down the criterion for the application of functions, asset, risk (FAR) test for judging comparability of international transaction with an uncontrolled transaction. It provides: 10B (2). For the purposes of sub-rule (1), 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) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions ; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and the Government orders in force, costs of labour and capital in the market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the margin computation is incorrect as under: (He referred to para 1 on Page 356 of the Appeal Set for the TPO Order where the nature of services of Accentia have been discussed by the ld. TPO) We place reliance on the judgments of Avineon India Pvt Ltd. v. DCIT [ITA No. 1989/Hyd/2011, (TS-308-ITAT-2013(Hyd)-TP)], ITAT Hyderabad) (Please refer to para D-1 on Page no 14 of the Case Law Compendium) where Accentia has been excluded for the following reason: Extraordinary events like merger and demerger had taken place during the relevant financial year which must have impacted the financial results of the company - two companies Iridium Technologies and Geosoft Technologies amalgamated with Accentia Technologies Ltd which resulted in a higher profit for the company during the year. Allsec Technologies Ltd. ('Allsec') TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page no552-553 of the paperbook TPO observation in the order: Please refer to page no357-358 of Appeal Set DRP Submission: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok for the TP Study to understand the risk profile of the Appellant) In this regard, reliance is also placed on the recent judgement of Delhi High Court in case of ChrysCapital Investment Investment Advisors (India) Private Limited v. DCIT (ITA 417/2014) Quote 32 .. Now , the sequitur of Rule 10B(2) and (3) is that if the comparable entity or entity's transactions broadly conform to the assessee's functioning, it has to be enter into the matrix and be appropriately considered The other exercise which the TPO has to necessarily perform is that if there are some differences , an attempt to adjust them to eliminate material differences should be made Unquote (Learned AR referred to para 32on Page 96of the Case Law Compendium) High Advertising and Marketing Spend - 5.23% Allsec fails the advertising and marketing ('A M') expense filter applied by the Appellant. (Please refer to Page 738of the Annual Report Compendium for the Profit and Loss Account) Related Party Transaction - 12% Allsec fails the RPT filter applied by the Appellant (He referred to Page 754-755 of the Annual Report Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s: Operating Cost 36,998,127 31,203,235 47,169,155 58,049,032 88,052,353 Operating Profit 5,648,963 7,482,610 6,020,010 45,479,873 15,613,471 Operating Mark up on cost 15.27% 23.98% 12.76% 78.35% 17.73% (He referred to Page no 17 of the Annual Report Compendium for analysis of the financial and operational performance of Bodhtree and Page no 23 of the Annual Report Compendium for the Profit and Loss Account of Bodhtree) Related Party Transactions - 38.54% Bodhtree fails the RPT filter of the Appellant. (He referred to Page 31 of the Annual Report Compendium for the details of the related party transactions) Without prejudice to the arguments of the Appellant against the use of the info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars Schedule For the year ended 31st December, 2007 For the year ended 31st December, 2006 Rupees Rupees Rupees Rupees Income Income from Operation 518,141,057 355,776,308 Other income 6 17,61,486 441,221 Expenditure 519,902,543 356,217,529 He referred page 803 of Annual Report Compendium for the Profit and Loss Account of Caliber Point) E-Clerx Services Ltd. ('E-Clerx') TPO/DRP S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee's functioning, it has to be enter into the matrix and be appropriately considered The other exercise which the TPO has to necessarily perform is that if there are some differences, an attempt to adjust them to eliminate material differences should be made Unquote (He referred to para 32on Page 96of the Case Law Compendium) Extraordinary Margin @ 89.33% (He referred to Page 40 of the Annual Report Compendium for the financial results of E-Clerx and pg 49 of the Annual Report Compendium for the Profit and Loss Account of E-Clerx) Reliance has been placed on the following decisions in which E-clerx has been rejected as a comparable to those companies providing BPO/Low end services and having supernormal profits: - Maersk Global Centre India Pvt. Ltd. v. DCIT (2009-TIOL-322-ITAT-Mumbai) (He referred to para 82-83on Page no 249-251 of the Case Law Compendium) - Capital IQ Information Systems (India) Pvt. Ltd. (ITA No. 1961/Hyd/2011, ITAT Hyderabad) (He referred to para 14-15 on Page no 47-49 of the Case Law Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. This comparable should be excluded in the absence of any reliable information. Without prejudice to the same, the Appellant requests the Hon'ble ITAT to direct the TPO/AO to provide a copy of the Annual Report of the company so as to enable the Appellant to analyse the comparability of the company with that of the Appellant. Further, the TPO himself has admitted that the RPT of the company is 21.52% and hence, this company deserves to be excluded based on the Sony Ruling that permits only companies with RPT less than 10 -15% of their revenues. Different financial year ending: It is submitted that the Ld. TPO himself has applied the different financial year ending filter clearly indicating that comparables with financial year ending with March 31 shall be selected. The relevant extract from the TPO Order is reproduced below: 9.5 Different year ending filter: The taxpayer follows the financial ending with March 31 (Relevant FY 2006-07 ending with 31-03-2007), where as in some of the comparable companies considered by the tax payer, the accounting year ends with June or September or any other month. Those companies whose accounting year does not en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation. (He referred to para 4 on page 68 of Annual Report Compendium for the business description of HCL Comnet) Related Party Transactions - 21.52% HCL Comnet fails the RPT filter of the Appellant. (He referred page 106-107 of Annual Report Compendium for the details of the related party transactions) Informed Technologies India Limited ('Informed Technologies') TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page No 546-547 of the paperbook TPO observation in the order: Please refer to page no 377-378of the Appeal Set DRP Submission: Please refer to page no 138-140 of the Appeal Set DRP Directions: Please refer to page no 23 of the Appeal Set Functionally Different Informed Technologies provides high end IT enabled services and knowledge based back office processing (KPO). This is in contrast with the low end BPO services provided by the Appellant. A perusal of the website of Informed Technologies clearly indicates that it is in fact a hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices, it cannot be said that its business results would be comparable to any other ITES service provider rendering the services entirely on its own. In such circumstances, the net margins of the two comparables cannot be on the same basis. The decisions relied upon by the learned counsel for the assessee also held that the employee cost filter is important filter to be adopted for the purpose of computing ALP. In the case of Maersk Global Services Centre (India) Pvt. Ltd., in ITA No.3774/M/2011, the Tribunal at Mumbai has held that Vishal Information Technologies Ltd. has to be excluded from the list of comparables of ITES company as it has outsourced its services. In view of the same, we direct the AO to exclude this company also from the list of comparables. (He referred to para 19 and 20on Page no 164-168 of the Case Law Compendium) Related Party Transactions - 15.83% Informed Technologies fails the RPT filter of the Appellant. (He referred to Page 165 of the Annual Report Compendium for the details of the related party transactions We place reliance on the judgement of Motorola Solutions India Private Limited v. DCIT (ITA No.5637/Del/2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age no 553 of the paperbook TPO observation in the order: Please refer to page no336-337 of the Appeal Set DRP Submission: Please refer to page no 141-142 of the Appeal Set DRP Directions: Please refer to page no 23 of Appeal Set Functionally Different (Business Restructuring) During the financial year 2006-07, Maple has become a subsidiary of Triton Corp Limited. Triton Corp Limited has acquired 100% shares of the company from Haryana Fibers Limited w.e.f 1st January 2007. The relevant extract from the Annual Report is reproduced below: Pursuant to acquisition of 100% equity shares from Haryana Fibres Ltd. by Tirol Corp Ltd. the Company has become Subsidiary of Taton Corp Ltd. w.e.f 01.01.2007 (He referred page 200 of Annual Report Compendium for the related party disclosures) Related Party Transactions - 14% Ample fails the RPT filter of the Appellant (He referred page 199-200of Annual Report Compendium for the details of related party transactions of Maple) Unreliable Financial Information: In case of CRM Services India (P) Ltd. (ITA No.4068/Del/2009) it was held that since the reputation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chain which cannot be compared with the Appellant low end back office services. The relevant extract from the Annual Report is reproduced below: REVIEW OF OPERATIONS Your Company has maintained accelerated growth as envisaged in the previous report, both in terms of Revenues and Net Profits. Overall sales have gone up by 35.17% from ₹ 70.87 crore to ₹ 95.80 crore largely fuelled by growth of 204% in the IT (KPO) Division billings from ₹ 375 lakhs in 2005-06 to ₹ 1140 lakhs in 2006-07. Apart from enhancing billings, IT (KPO) Division has contributed towards more than doubling the profitability of your Company. Your Company achieved a net profit of ₹ 830.71 Lakhs for the year as against a profit of ₹ 354.97 lakhs in the previous year, registering a growth of 134%. Cash profit was ₹ 1098.36 lakhs, compared to Company has set up stock gooding in southem and Eastern India, and has established its facility at Daman to cater to the Western Region. The IT (KPO) Division, which is providing structural Engineering health care billing services, is growing rapidly and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (He referred page no 234 of Annual Reports Compendium for the Profit and Loss Account of Mold - Tek) Supernormal growth of more than 200%. The relevant extract from the Annual Report is reproduced below: Your Company has maintained accelerated growth as envisaged in the previous report, both in terms of Revenues and Net Profits. Overall sales have gone up by 35.17% from ₹ 70,87 crore to ₹ 95.80 crore Largely fuelled by growth of 204% in the IT (KPO) Division billings from ₹ 375 lakhs in 2005-06 to ₹ 1140 Lakhs in 2006-07. (please refer page no 213 of Annual Reports Compendium for discussion on the review of operations of Mold-Tek) Reliance may be placed on the following decisions of various tribunals which support the above view are as under: - Maersk Global Centre India Pvt. Ltd. v. DCIT (2009-TIOL-322-ITAT-Mumbai) (He referred to para 81 and 83 on Page no 248-251 of the Case Law Compendium) - Capital IQ Information Systems India Pvt. Ltd. (ITA No. 1961/Hyd/2011) (He referred to para 12-13 on Page no 45-46 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge no 49-50 of the Case Law Compendium) - CIT (I) v. Capital IQ Information Systems Pvt. Ltd. (I.T.T.A. NO.305 OF 2014, High Court of Hyderabad) (He referred to Page no 27 of the Case Law Compendium) - Market Tools Research Pvt. Ltd. (ITA No. 2066/Hyd/2011, TS-35-ITAT-2013 (HYD)-TP, ITAT Hyderabad)) (Please refer to para 10 on Page no 296 of the Case Law Compendium) Vishal Information Technologies Ltd. (Coral Hub Limited) ('Vishal') TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page no 543-546 of the paperbook TPO observation in the order: Please refer to page No 387-390 of the Appeal Set DRP Submission: Please refer to page no 147of Appeal Set DRP Directions: Please refer to page no23 of the Appeal Set Functionally Different (Significant payment towards vendors): During the FY 2006-07, the company has made significant payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T-2013(Hyd)-TP)], ITAT Hyderabad) (He referred to para D-4 on Page no 16 of the Case Law Compendium) Wipro Limited (seg) ('Wipro') TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page No 550-551 of the paperbook TPO observation in the order: Please refer to page No 390-394 of the Appeal Set DRP Submission: Please refer to page no152-154 of the Appeal Set DRP Directions: Please refer to page no23 of Appeal Set Substantial Research Development (R D) Wipro has invested in R D activities for development of IP and products during the relevant year which contributed to 8.5% of the revenue. Wipro therefore fails the R D filter of 3% applied by the Appellant. The relevant extracts from the Annual Report are reproduced below: Wipro is a US $3-5 Billion organization with over 75,000 employees and operations in more than 29 countries. We are a leading provider of IT Services, R D Services and Business Process Outsourcing Solutions for customers across the Americas, Europe, Asi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliance in this regard can be placed on the following rulings in which Wipro Ltd (seg.) has been considered incomparable to pygmy companies providing ITES services - CIT (I) v. Capital IQ Information Systems Pvt. Ltd . (I.T.T.A. NO. 305 OF 2014, High Court of Hyderabad) (He referred to Page no 27 of the Case Law Compendium) - Capital IQ Information Systems Pvt. Ltd. (ITA No.1961/Hyd/2011, AY 2007-08, ITAT Hyderabad) (He referred to para 20-23 on Page no 22-54 of the Case Law Compendium) - Market Tools Pvt. Ltd. (ITA No.2066/Hyd/2011, AY 2007-08, ITAT Hyderabad)) (He referred to para 7 on Page no 295 of the Case Law Compendium) Secondary Contention GROUND NO. 2.12: About Risk adjustment not allowed to the appellant, the Learned AR submitted as under: TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page no 527-532 of the paperbook TPO observation in the order: Please refer to page no 400-427 of the Appeal Set DRP Submission: Please refer to page 232-241 of the Appeal Set DRP Directions: Please refer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axpayer or the TPO and not on the other companies, which are not examined and otherwise, not comparable functionally. Thus, the beta of unlisted companies or companies where data was not available should be the average of the beta of the remaining comparable companies. 18. The taxpayer ignored negative risk adjustment in some of the comparable companies. This looks absurd as any risk undertaking enterprise may get a negative return for the risk undertaken and is possible due to the actual realization of risk bringing down the profitability below the risk free rate of return. Thus, its profitability would have been more but for the risk undertaken. Thus, negative risk adjustment has to be considered and cannot be ignored. For example, when the Indian stock markets tumbled in 2007 and 2008, the equity investments given a negative return even though the risk free return is decent. So, it is to ignore negative risk adjustment. 19. The risk adjustment has to be computed based on the risk differential if any, between the taxpayer and the comparable companies. However, the taxpayer ignored weighted cost of capital in the case of taxpayer and risk of the taxpayer in terms of be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nced by beta of the taxpayer. This differential is altogether is ignored making the entire exercise redundant. ............. 118.1 We have considered the submissions of both the parties and have perused the record of the case. We have perused the record of the case. We have also gone through the detailed written submissions filed by assessee from pages 92 to 104 of the written submissions The main contention of assessee is in regard to adjustment on account of market risk by applying CAPM Model. In this regard ld. TPO has observed that the services rendered by the assessee forms a component within the products developed by the assessee. Thus, the associated enterprise incurs marketing for its products and not on the services rendered by the assessee as they are considered in the product sold by the associated enterprise. The relationship between the tax payer and its parent company is exactly the same as that of the independent company and its client in the case of software design and development services. Ld. TPO has observed that it is a fact that the independent enterprises have to bear the vagaries of market conditions. But since the software sector is growing at mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the analysis are given in the Table below: S.No. Name of company Working Capital Adjusted OP/TC Margin Working capital Adjusted OP/ TC margin (Excluding companies on account of reasons given in final disposition column) Final Disposition 1. Accentia Technologies Ltd. (Seg.) 27.47% XX (a) Functionally Dissimilar - Engaged in medical transcription services (b) Two companies Iridium Technologies and Geosoft Technologies amalgamated with Accentia Technologies Ltd in FY 2006-07 2. Aditya Birla Minacs Worldwide Ltd. (Earlier Transworks Information Services Ltd.) 12.30% 12.30% Accepted 3. Allsec Technologies Ltd. 27.03% XX (a) Difference in Risk Profile (b) High Advertising and Marketing Spend - 5.23% (c) Related Party Transaction - 12% 4. Apex Knowledge solution Pvt. Ltd. 14.33% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices (d) Related Party Transaction - 21.52% 15. I C R A Techno Analytics Ltd. (Seg.) 12.70% 12.70% Accepted 16. Informed Technologies India Ltd. 36.19% XX (a) Supernormal growth during FY 2006-07 17. Infosys BPO Ltd. 29.98% 29.98% Accepted 18. I Services India Pvt Ltd. 50.02% XX Rejected 19. Maple E solutions Ltd. 31.59% XX (a) Functionally incomparable (b) Rejected in CRM Services ruling on account of bad reputation of group owner (c) Volatile margins (refer the ruling of Actis Advisers Private Limited) 20. Mod-Tek Technologies Ltd. 117.03% XX (a) Functionally Different : KPO Company (b) Abnormally High Margin (c) Rejected in in ruling of Maersk Global Centres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se grounds, the main grievance of the assessee is against inclusion of functionally dissimilar companies as comparables for benchmarking the international transaction during the year. In support of ground No.2.9 in this regard, the Learned AR has made above submissions company-wise which are twelve in number selected by the authorities below as to how they are functionally dissimilar to the assessee for the benchmarking. These companies are Accentia Technologies Pvt. Ltd., Allsec Technologies Ltd., Bodh Tree Consulting Ltd. (SEG), Cabliber Point Business Solutions Ltd., E-clerx Services Ltd., HCL Comnet System Services Ltd., Informed Technologies India Ltd., Maple E-solutions Ltd., Moldtek Technologies Ltd. (Segmental), Triton Corporation Ltd., Vishal Information Technologies Ltd. (Coral Hub Ltd.) and Wipro Ltd. (SEG). In support, the Learned AR has cited several decisions as to how these companies are not comparable for their some specific reason. Like in the case of Accentia Technologies Pvt. Ltd., the reliance has been placed on the decision of Hyderabad Bench of the ITAT in the case of Avineon India Pvt. Ltd. vs. DCIT (supra) wherein the Accentia Tehnologies Pvt. Ltd. has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the assessee of being heard. The ground Nos. 2 to 2.14 and 3 are thus allowed for statistical purposes. The ground No.1 being general in nature does not need independent adjudication. 10. In Ground No.4, the assessee has questioned the disallowance of deduction amounting to ₹ 93,36,864 under sec. 10A of the Act in respect of assessee s undertaking at Hyderabad acquired by way of slump sale from Digital Think (India) Pvt. In support of the ground, the Learned AR submitted that the undertaking at Hyderabad was acquired by the assessee from Digital Think (India) Pvt. Ltd. (DT India) under a slump sales arrangements, wherein all the assets and liability of the aforesaid undertaking were taken over by the assessee vide business transfer agreement dated 14.11.2005. Given this, the Software Technology Parks of India (STPI), issued a letter dated 01.12.2005, wherein it allows the assessee to take over the activities of DT India and approved the aforesaid transfer of the activities of the Hyderabad Undertaking. The undertaking was taken over and continued by the assessee on a going concern basis and the change which took place was the change in the ownership of the undertaking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys can be available of or the unexpired period at the rate as applicable for the remaining years, subject to fulfillment of prescribed condition. In support he placed reliance on the following decisions: * Heartland KG Information Ltd. [359 ITR 1 (2013) Madras H.C; * Heartland Delhi Transcription Services Pt. Ltd. [ITA No. 300/2011(2014) Delhi Hon'ble High Court; * Woco Motherson Elastomer Ltd. [TS-200-ITAT-2013(Delhi); * Sonata Software Ltd. [TS-164-H.C-2012(BOm); * The Calcutta High Court in the case of CIT vs. P.K. ENgg. Forging (P) Ltd. [1996] 87 Taxman. 101. 10.3 The learned CIT(DR) on the other hand tried to justify the orders of the authorities below. He submitted that the conditions of section 10A(2) of the Act are not fulfilled because it was formed by the splitting up, or the reconstruction, of a business already in existence and it was formed by the transfer to a new business of Machinery or Plant previously used for any purpose. 10.4 Considering the above submission, we find that there is substance in the contention of the Learned AR that mere change in ownership does not result in denial of the deduction under sec. 10A of the Act. The only di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utility vehicles and pre-owned cars. He submitted that sec. 19 of Banking Regulation Act, 1949 provides that a banking company shall not or any subsidiary company except a subsidiary company formed for undertaking of any business which is permissible for a banking company to undertake. 11.3 The Learned AR submitted that the Assessing Officer ignored the submissions filed by the assessee that the assessee was under a bona fide belief and has a reasonable cause by which the assessee construed that no tax was required to be deducted on the interest paid to KMPL and misconceived the submissions of the assessee by stating that the assessee himself accepted in his submissions that no tax was deducted at source on the interest of ₹ 5,75,706 paid to KMPL even though it was required to be deducted. The Assessing Officer also failed to appreciate the settled law that wherein two interpretation of law are possible, the one which is beneficial to the assessee should be given effect. The Assessing Officer disallowed ₹ 5,75,706 under sec. 40(a)(ia) of the Act due to non-deduction of tax at source. 11.4 Without prejudice to the above submission, the Learned AR reiterated that F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration. Further, taxes have also been paid by KMPL on such interest income for the year under consideration. In view of the amended provisions, the assessee cannot be termed as assessee in default and therefore, the amount of ₹ 5,75,706 sought to be disallowed under sec. 40(a)(ia) of the Act in the hands of the assessee. 11.7 The Learned CIT(DR) on the other hand placed reliance on the orders of the authorities below. 11.8 Considering the above submission, we, prima facie, find substance in the contention of the Learned AR that the assessee was under the bona fide belief that no tax was required to be deducted at source from the payment made to KMPL in terms of the exceptions carried out in sec. 194A of the Act as the provisions of sec.194A shall not apply where income is credited or paid to any banking company to which the Banking Regulation Act, 1949 applied, especially when there is no dispute that Kotak Mohindra Bank Ltd. is a banking company to which the Banking Regulation Act, 1949 applies and further that section 19 of Banking Regulation Act, 1949 provides that a banking company shall not form any subsidiary company except a subsidiary company formed for under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,674,576 5. Recruitment Professional 12,417,457 6. Rent Rent 2,001,036 7. Repairs Maintenance Contractor 1,550,266 8. Staff Welfare Contractor 6,594,285 9. Transport Contractor 24,160,965 Grand Total 68,255,576 12.2 The Learned AR submitted further that the amount of ₹ 6,82,55,576 was disallowed with included provisions amounting to ₹ 6,33,13,953 made by the assessee at the year end. As per the accounting policy followed by the assessee, such provisions have been reversed in the subsequent years and actual expenses have been debited to the profit and loss account. However, out of an abundant caution, the assessee while calculating the taxable income for the financial year 2005-06 disallowed the provisions created under sec. 40(a)(ia) of the Act. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the balance amount of ₹ 1,51,14,384. The learned DRP in their directions dated 08.08.2011 has accordingly directed the Assessing Officer to verify the above claim of the assessee. The Assessing Officer on verification, did not allow the claim of the assessee of the reversal of provisions on the balance amount of ₹ 1,51,14,384 and added back the same to the returned income of the assessee. Given that the above amount represents merely reversal of provisions made that was added back in the computation of income of the assessee in the assessment year 2006-07, it is requested that the same is allowed to the assessee. He placed reliance on the following decisions to support its above claim: i) Pfizer Ltd. [Mumbai ITAT (2012), 28 Taxman.com 17]; ii) Bank of Maharashtra [Ahmedabad ITAT (2010), 38 SOT 432]; iii) IDBI [Mumbai ITAT (2007), 10 SOT 497]; iv) Telco Construction Equipment Ltd. [Bangalore ITAT 2014, ITA No. 478/Bang/2012]; v) ACIT vs. Motor Industries [Karnataka H.C], 249 ITR 141]; vi) Calcutta Co. Ltd. [(S.C), 37 ITR 1] 12.4 The learned CIT(DR) on the other hand placed reliance on the orders of the authorities below. 12.5 After conside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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