9911796707
TMI Blog2015 (9) TMI 1507X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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; 2.2 ignoring the fact that the appellant is entitled to tax holiday under section 10A of the Act on its profits 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 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 in particular modifying/ rejecting the filters applied by the appellant; 2.3.1 interpreting the requirement of 'contemporaneous' data in the Rules to necessarily imply current/ single year (i.e. FY 2005- 06) data; and 2.3.2 holding that at the time of creating/ maintaining the TP documentation, the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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-à-vis both its ITES / 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 mark-up based on a benchmarking analysis, the appellant undertakes minimal business risks as against comparable companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Goods 11,144,260 Accepted 8. Interest on Loan (paid) 1,92,29,077 Accepted 2.3 The transactions relating to point no. (2) to (6) was aggregated and analyzed appropriately with the international transactions relating the IT enabled services and e-learning back-office support services and benchmarked using Transactional Net Margin Method ('TNMM') with Operating Profit/ Total cost ('OP/TC') as the relevant Profit Level Indicator ('PLI'). Also, the transactions pertaining to point no. (7) and (8) was evaluated separately using Comparable Uncontrolled Price ('CUP') method (refer TP Study on 311 of the Paper book). 2.4 The following table summarizes 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 2003-04, 2004-05 and 2005-06 to the extent available). (refer TP Study on 311 of the Paper book). Particulars ITES E - learning No of comparables 14 4 Mean OP/TC 9% 12% Appellant's OP/TC 15% 14% 2.5 The Learned AR referred Snapshot of TP study Analysis as below: - Particulars Provision of ITeS Most Appropriate Method Transactional Net Margin Method ('TNMM') (He referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Book) 2.8 However, the Ld. TPO rejected the appellant's contentions and he relied upon the set of following 14 companies (including 4 companies which were common with the appellant's fresh search , 1 company from TP Study and 9 new comparables introduced as part of fresh search conducted by the Ld. TPO) with a mean operating profit margin of 22.61%. (Refer TP Order on pg295 of Paper book). S. No. Company Name Working capital adjusted OP/TC Margin as per the TPO order (using data for FY 2005-06) Status 1 Maple eSolutions Ltd 30.20% New comparable introduced by the TPO 2 Allsec Technologies Ltd 28.62% New comparable introduced by the TPO 3 Datamatics Financial Services Ltd (Seg.) 24.89% Considered by the TPO out of the 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 Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. * The TPO rejected the claim regarding abnormal margin by relying on the case of SAP Labs (supra). The TPO was silent on related party transactions carried out by this company. DRP: The Ld. DRP confirmed the action of the TPO. (refer DRP Directions on pgs 165 of the Paperbook) 3 Maple Esolutions Ltd. ('Maple') 30.20% * Appellant : Maple has been contested by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 performed by Convergys India, it cannot be considered as comparable due to the extraordinary events that have taken place during the year which neither can be quantified nor suitable adjustments can be made for the same. The Appellant would like to bring your Honors' attention to the acquisitions made by Allsec during the said year. In this regard, reliance is also placed on the recent judgement of Delhi High Court in case of Chrys Capital 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 sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ease refer to page no 239-240 of paperbook DRP Submission: Please refer to page no 65 of the Paperbook DRP Directions: Please refer to page no 156-167 of Paperbook The Appellant would like to state that even if Maple E Solutions Ltd. performs functions which are broadly comparable to the functions being performed by Convergys India, it cannot be considered as comparable due to the business reputation of Rastogi group, owning Maple E Solutions is under serious indictment. In view of the question mark on the reputation of owner, it would be unsafe to take the results for the comparison of the profitability of the assessee. 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) ruling of Hon'ble Delhi Tribunal in the case of CRM Services [2011] 14 taxmann.com 96 (Delhi) (refer Para 17.5 Page 73 to 73 of Compendium of case laws) wherein the Tribunal rejected Maple on account of doubts regarding the reputation of the owner of this Group (involved in fraudulent activities) and hence financial results cannot be taken for comparability purposes. The rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment Advisors (India) Private Limited v. DCIT (ITA 417/2014) Quote " 36.....In any case, in the event that volatility is on account of a materially different aspect incapable of being accounted for, the analysis under Rule 10(B)(3) would exclude such an entity from being considered as a comparable Unquote The above argument of the Appellant also finds support in the Tribunal ruling of Actis Advisers Private Limited ITA No. 5277/Del/2011 and ITA No. 958/Del/2012) (refer Para 30 & 31 Page 214, 215 of Compendium of case laws) Asit C Mehta ('Asit') Maple E Solutions Ltd. ('Maple') TPO/DRP Submissions and Observations Appellant's Submission TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page no 463 of the paperbook TPO observation in the order: Please refer to page 219-221 of the paperbook DRP Submission: Please refer to page no 74 of of the paperbook DRP Directions: Please refer to page no156-167 of the paperbook Functionally Incomparable The company is engaged in provision of both IT enabled services an software development services along with other diversified service in the nature of Portfolio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Transferor Company, with your Company was sanctioned by the Hon'ble High Court of Judicature of Bombay on February 22, 2006. On complying with the requisite formalities, the scheme became effective and operative retrospectively from the appointed date of 1 April, 2005 as per the scheme. In the accompanying financial statements, results of the transferor company have been incorporated and the figures given herein and elsewhere in this Annual Report are not strictly comparable with those of previous year." "The financial year under review of 2005-06 was year of growth and consolidation for your company. The company posted a strong top-line performance (post amalgamation) with total sales and services revenues of Rs. 56.77 million." (Emphasis supplied) The above extracts from the annual report of the company amply demonstrate that the financial statements of the company for FY 2005-06 have been impacted by the business restructuring exercise undertaken by the company during the relevant FY and hence, cannot be relied upon for judging appellant's profitability from rendering of IT enabled back office support services. The Appellant would like to rely on the Quark Ruli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page no 71-73of paperbook DRP Directions: Please refer to page no 156-167of the paperbook (a) Functionally Different (Significant payment towards vendors) During the FY 2005-06, the company has made significant payment towards vendors (approx. 45% of sales) (refer Page 238 of Compendium of annual reports). On the other hand, it has low personnel cost (1.25%) as a percentage of sales as compared to the appellant whose personnel cost constitute a major proportion (more than 50%) of its sales. It is evident from the facts that the company provides agency services by way of outsourcing services to third parties and acting as an intermediary between the final customer and vendor. The intermediary functions of Vishal can only be compared to that of a distributor which takes title to service/product for resale to the customer whereas the Appellant is a provider of back office services on its own. Thus, appellant's ITeS services cannot be compared with the agency /distribution function of Vishal. Further, Vishal has been rejected by the Hon'ble Tribunal in the rulings of Google India Pvt. Ltd. v. DCIT (ITA No. 1368/Bang/2010, TS-771-ITAT-2012 (Bang)-TP, ITAT Bangalore) (Please ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he risk adjustment as part of the guidelines as there are divergent views on this issue among the member countries of OECD and many countries feel that there is no straight jacket formula for risk adjustment as it depends entirely on the facts and circumstances of the case. Thus risk adjustment is case specific, function specific and also depends on the nature of functions (including risks) carried out by the comparable companies. 2. The tax payer had not given any evidence or argument regarding how the assumptions of CAPM model are true in the case of the AE when it is doing business with the taxpayer. 3. The CAPM model has some weakness, the main being that the model does not recognize the presence of human capital, which is the main driving source for revenues in the software service industry. 4. The taxpayer considered only listed companies. But, there is a method of computation of similar nature in the index. There is a manner in which unlisted companies beta would be calculated. 5. 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 bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndictor of capital employed rather than total assets. Operating assets includes fixed assets, trade receivables net of trade payables. 12. The tax payer has assumed that operating expenses of the comparables would not change after risk adjustment. But, after giving effect to risk adjustment, the financial statements of the comparables should look like that of the tax payer i.e., stripping the risk component. So, the expenses pertaining to the risk like sales and marketing expenses, bad debts etc. should be removed from operating expenses and corresponding risk 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 evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of Rule 10B(1)(e)(iii)...... ........ We, therefore, in the interest of justice, restore this matter to the file of Assessing Officer/TPO to consider the computation of risk adjustment as per CAPM model by availing the services of technical experts. The experts of the field are to be appointed by both the sides to come to an acceptable conclusion."" It is the humble submission of the Appellant that since the twelve reasons for rejection of CAPM as given in the Appellant's case have been verbatim reproduced 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 to18.09%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 transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 3. The learned CIT(DR) on the other hand placed reliance on the others of the authorities below. He submitted that it is very difficult to get exactly same concern as comparable to the assessee. The Learned AR has failed to establish in his submission as to how acquisition in the case of Allsec Technologies Ltd. (ALLSEC) has impacted is yet to be examined. Similarly, in the case of the comparable Maple Esolution Ltd. (Maple), the reputation of owner is not going to affect its functionality. Regarding the comparable, Vishal Information Technologies Ltd. (CORAL) Hub Ltd.) (Vishal), he submitted that it is not a functionally different concern. Regarding the comparable Asit C Mehta (Asit), the learned CIT(DR) submitted that as per decision of the Hon'ble Bombay High Court, the scheme of amalgamation of its Erstwhile Nuclear Net Soft & GIS (India) Ltd. with Asit was sanctioned. 4. Having gone through the submissions of the parties, we find that the main grievance of the assessee is regarding adoption of four comparables by the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. The issue raised in the ground Nos. 2.9 to 2.12 in this regard are thus set aside for statistical purposes. The other grounds consequential and connected to ground Nos. 2.9 to 2.12 are thus required to be adjudicated upon afresh. It is thus set aside to the file of the Assessing Officer to adjudicate upon these grounds afresh after affording opportunity of being heard to the assessee. The grounds are thus allowed for statistical purposes. 5. In the result, the appeal is allowed for statistical purposes. ITA No. 5745/Del/2011 : A.Y. 2007-08): 6. 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 directions of the Ld. DRP), erred both on facts and in law in confirming the addition of Rs. 75,35,72,993 to the income of the appellant proposed by the Ld. Transfer Pricing Officer ('TPO') by holding that its international transactions pertaining to its in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the appellant, in case of a number of comparables, the information/ reply received by the Ld. TPO/ Ld. AO u/s 133(6). 2.6 aggregating the appellant's two business segments namely ITES and e-learning back office support services segment without any justifiable basis; 2.7 rejecting comparability analysis in the appellant's TP documentation/ fresh search and in conducting a fresh comparability analysis based on application of the following additional/ revised filters in determining the comparable companies: 2.7.1 exclusion of companies having different financial year ending (i.e. not March 31, 2007); 2.7.2 exclusion of companies 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 up to and including FY 2006-07; 2.7.4 retaining companies with related party transactions up to 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case and in law, the Ld. AO/Ld. DRP erred in holding/confirming that the conditions stipulated in sub section 2 of section 10A of the Act (viz. not formed by splitting up or reconstruction of business already in existence and not formed by transfer of plant and machinery previously used for any purpose) are not satisfied. 4.2 That on the facts and in the circumstances of the case and in law, the Ld. AO/Ld. DRP erred in holding/confirming that the appellant is not registered with the Software Technology Park of India ('STPI') inspite of a letter dated 1 December 2005 from STPI already on record. 5. The Ld. AO/Ld. DRP has grossly erred in facts and in law in disallowing the interest of Rs. 5,75,706 paid to Kotak Mahindra Primus Ltd. ('KMPL') under section 40(a)(ia) of the Act for not withholding taxes without appreciating that KMPL being a subsidiary of Kotak Mahindra Bank Limited enjoys exemption under section 194A(3) of the Act. 6. That on the facts and in the circumstances of the case and in law, the Ld. AO while passing the final order under section 143(3) read with section 144C of the Act has grossly erred in adding Rs. 1,51,14,384 out of Rs. 6,33,13,953 to the appellant's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : Sl. No. Description of International Transaction Amount (Rs.) TP Order 1. Provision for IT enabled Services 6,215,256,812 ADJUSTMENT of Rs. 7,53,572,993 2. Reimbursement of salary expenses of expatriates 23,151,957 Accepted 3. Payment for IPLC cost 54,389,123 Accepted 4. Payment of employee skills development cost 1,290,655 Accepted 5. Payment of service fee 22,916,265 Accepted 6. Payment of interest on working capital loan 20,717,429 Accepted 7.4 The Learned AR submitted that the transactions relating to point no. (1) to (5) was aggregated and analyzed appropriately with the international transactions relating the IT enabled services and e-learning back-office support services and benchmarked using Transactional Net Margin Method ('TNMM') with Operating Profit/ Total cost ('OP/TC') as the relevant Profit Level Indicator ('PLI'). The transaction pertaining to point no. (6)was evaluated separately using Comparable Uncontrolled Price ('CUP') method. (He referred to the TP study on para 1.3.2 on pg 10 of the Paper Book for the summary of the economic analysis of the Appellant's business). 7.5 With the assistance of the following table, the Learned AR su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process at the time of fresh search: * Companies having other operating income (other than 'manufacturing' and 'trading' income) to sales greater than 50% were accepted; * Companies having research & development costs to sales less than 3% were accepted; * Companies having net fixed assets to sales less than 200% were accepted; * Companies having average sales less than INR 1 crore were rejected; * Companies with net worth less than zero were rejected; and * Companies having advertising, marketing and distribution costs to sales less than 3% were accepted. 7.10 The Learned AR pointed out that finally, the companies passing through the above quantitative filters 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the Ld. TPO which was upheld by the Ld. Assessing officer ('Ld. AO') in his draft assessment 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 Ltd. 14.33% 5 Appollo Healthstreet Ltd. -13.46% 6 Asit C Mehta Financial Services Ltd 24.09% 7 Bodhtree Consulting Ltd (Seg.) 30.93% 8 Caliber ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and accurate adjustments can be made to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method." Keeping with the tenants of Rule 10B(2), the Appellant submits as under: RE: GROUND NO. 2.9: About inclusion of functionally dissimilar companies, the Learned AR submitted as under: Accentia Technologies Pvt. Limited. ('Accentia') TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Not contested TPO observation in the order: Please refer to page no 356-357 of Appeal Set DRP Submission: Please refer to page no 156-157 of the Appeal Set DRP Submission: Please refer to page no 23 of Appeal Set Without prejudice to the Appellant's contentions against the use of the data provided under Section 133(6), it is submitted that Accentia is engaged in medical transcription services which are clearly different from the customer support services rendered by the Appellant. The Ld. TPO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pared to the captive service provider. A snapshot of the risks comparison between Allsec and the Appellant is given below: Risk Profile comparison Nature of risk Allsec Appellant Business risk Borne by Allsec Borne by the AE Financial risk Borne by Allsec Borne by the AE Exchange fluctuation risk Borne by Allsec Borne by the AE Cost arbitrage Borne by Allsec Borne by the Appellant Indian taxation risk Borne by Allsec Borne by the AE Technology risk Borne by Allsec Borne by the AE Infrastructure risk Borne by the Allsec Borne by the AE Human resource risk Borne by the Allsec Borne by the AE Credit risk Borne by Allsec Borne by the AE Capacity Utilization risk Borne by Allsec Borne by the AE Rework risk Borne by Allsec Borne by the AE (He referred to Page 730 of the Annual Report Compendium for the risk profile of Allsec and pg 30-31 of the Paper Book 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Bodhtree for FY 2006-07 and the previous year's annual report, indicates that Bodhtree had earned an extraordinary profit The profits are tabulated below: Particulars 2004 2005 2006 2007 2008 Operating Revenue 4 2,647,090 38,685,845 53,189,165 103,528,905 103,665,824 Less: 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 information under Section 133(6), it is submitted that a copy of the reply received from Bodhtree was not provided the Appellant. Caliber Point Business Solutions Ltd ('Caliber Point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43 356,217,529 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 Submissions and Observations Appellant's Submission TPO Submission: Please refer to page no 547-548 of the paperbook TPO observation in the order: Please refer to page no 369-371 of Appeal Set DRP Submission: Please refer to page no130-132 of the Appeal Set DRP Directions: Please refer to page no 23 of Appeal Set At the outset, it is submitted that E-Clerx ought to be excluded on account of the unusual/peculiar features which are apparent from the material on record which has been confirmed by the Special Bench in the case of Maersk Global Centre India Pvt. Ltd. v. DCIT and the Hon'ble Delhi High Court in the case of ChrysCapital Investment Investment Advisors (India) Private Limited v. DCIT. Difficult to find a relatively degree of comparability since services rendered are functionally different: Eclerx is a Knowledge Process Outsourcing ('KPO') company engaged in providing data analytics and data process solutions to the customers. The data analytics services performed by Ecl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it has earned supernormal profit and it is engaged in providing KPO services, which are distinct from the nature of services provided by the taxpayer. - Market Tools Research Pvt. Ltd. (ITA No. 2066/Hyd/2011, TS-35-ITAT-2013 (HYD)-TP, ITAT Hyderabad) He referred to para 8 on Page no 295-296 of the Case Law Compendium) - Avineon India Pvt Ltd [ITA No. 1989/Hyd/2011, (TS-308-ITAT-2013(Hyd)-TP)], ITAT Hyderabad) Please refer to para D-2 on Page no 15 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) HCL Comnet Systems and Services Ltd. (seg.) ('HCL Comnet') TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page no 546 of the paperbook TPO observation in the order: Please refer to page no 374-367 of the Appeal Set DRP Submission: Please refer to page no 137-138 of the Appeal Set DRP Directions: Please refer to page no 23 of Appeal Set At the outset, it is submitted that the TPO's reply in the TP Order is a bundle of contradictions. For example, reference may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO's observations on the application of different financial year ending filter) It is pertinent to note that the Ld. TPO has resorted to cherry picking in case of HCL Comnet as the financial year ending for the comparable is June 30. The relevant extract from the Annual Report is reproduced below: HCL Comnet Systems and Services Limited Profit and Loss Account for the year ended 30 June 2007 All amounts in Rupees Income Schedule For the year ended 30 June 2007 For the year ended 30 June 2006 Revenue 12 3,146,936,891 1,926,161,919 Other income 13 10,144,388 25,986,114 3,157,081,279 1,952,148,033 (He referred page 86 of Annual Report Compendium for the Profit and Loss Account of HCL Comnet) Functionally Different: The IT enabled services segment comprises of data centre management services, end user computing services, managed security services, networking services and tools and process consulting services. The relevant extract of the Annual Report is reproduced below: Your Company's Wholly Owned Subsidiary namely HCL Comnet Limited w focuses on Non-VSAT Services Business i.e. Sale, Installation and An Maintenance Contracts of VSAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporates. The focus also helps in enhanced expert is and domain knowledge. (He referred page 150 of annual report compendium for the business description of Informed Technologies) Low employee cost/sales ratio- 19% The Company during the FY 2006-07 has a low wages/ sales ratio of 19% as compared to the wages /sales ratio of 57% of the Appellant. (He referred page 162 and 163 of Annual Report Compendium for the Profit and Loss Account of Informed Technologies) He placed reliance on the judgement of Google India Pvt. Ltd. v. DCIT (ITA No. 1368/Bang/2010), wherein the Hon'ble Tribunal observed: "As regards the issue of (8) Vishal Information Technologies Ltd., we find that, it is adopted by the TPO. The DRP held that Vishal Information Technologies has outsourced its call centre work and, therefore, the employee cost is less than 25% as is the common practice among other ITES services. The TPO as well as the DRP have recorded that in the ITES sector, employees filter of less than 25% alone is not applicable for the reason that in addition to the ample costs, the commission costs are also important. When company has outsourced its ITES services, it cannot be said that its bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red page 150of Annual Report Compendium for a brief on the financial performance of Informed Technologies) Reliance has been placed on the following decision in which Informed Technologies has been rejected as a comparable on account of its abnormally high margins: - ChrysCapital Investment Investment Advisors (India) Private Limited v. DCIT (ITA 417/2014) (He referred to para 6-10 on Page no 61-66 of the Case Law Compendium) - Cummins Turbo Technologies Ltd, UK - India Branch (ITA No. 161 & 269/PN/2013, [TS-304-ITAT-2014(PUN)-TP], ITAT Pune) (He referred to para 6-10 on Page no 136-139 of the Case Law Compendium) Maple E Solutions Ltd. ('Maple') TPO/DRP Submissions and Observations Appellant's Submission TPO Submission: Please refer to page 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 acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Capital Investment Investment Advisors (India) Private Limited v. DCIT. Functionally Different: The company is engaged in the business of rendering structural engineering KPO services in the nature of producing designs, drawings, detailed structural engineering drawings etc. which are higher-up on the value 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 Rs. 70.87 crore to Rs. 95.80 crore largely fuelled by growth of 204% in the IT (KPO) Division billings from Rs. 375 lakhs in 2005-06 to Rs. 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 Rs. 830.71 Lakhs for the year as against a profit of Rs. 354.97 lakhs in the previous year, registering a growth of 134%. Cash profit was Rs. 1098.36 lakhs, compared to Company has set up stock gooding in southem and Easte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raordinary Margin @ 117% (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 Rs. 70,87 crore to Rs. 95.80 crore Largely fuelled by growth of 204% in the IT (KPO) Division billings from Rs. 375 lakhs in 2005-06 to Rs. 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 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 towards vendors (approx. 43% of sales). On the other hand, it has low personnel cost as compared to the Appellant whose personnel cost constitute a major proportion (more than 50%) of its sales. It is evident from the facts that the company provides agency services by way of outsourcing services to third parties and acting as an intermediary between the final customer and vendor. The intermediary functions of Vishal can only be compared to that of a distributor which takes title to service/ product for resale to the customer whereas the Appellant is a provider of back office services on its own. Thus, Appellant's ITeS services cannot be compared with the agency /distribution function of Vishal. (He referred page no 478of Annual Reports Compendium for the Profit and Loss Account Schedule detailing the Vendor expenses in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. We are a leading provider of IT Services, R&D Services and Business Process Outsourcing Solutions for customers across the Americas, Europe, Asia, Australia and the Middle East. Product Engineering Services Largest independent provider of R&D Services in the World. We enable firms to introduce new products rapidly. Our Services include Product Lifecycle Management, Engineering Design Ser DSP & Multimedia, Product Support Services, Semiconductor IP and Testing Services (He referred to page 495 and 496 of Annual Reports Compendium for the business description of Wipro) Non availability of standalone financial data for FY 2006-07 The stand alone financial data of Wipro for FY 2006-07 is not available in the public domain. The annual report of the company for FY 2006-07 provide the abridged financial data which would not provide the detailed financial information that would be required to determine the comparability of the company with the Appellant. As such, in the absence of detailed financial information it is submitted that Wipro not be considered as a comparable. The relevant extracts from the Annual Report is reproduced below: Financial Performance Key aspects of your ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culation is acceptable in any tax jurisdiction for the purpose of risk premium adjustments. Its acceptability by any renowned and recognized research institution across the world has also not been shown. The manner in which the risk adjustment is computed by the taxpayer is not followed by any country or organization of international repute like OECD. In fact, even the OECD is reluctant to take the risk adjustment as part of the guidelines as there are divergent views on this issue among the member countries of OECD and many countries feel that there is no straight jacket formula for risk adjustment as it depends entirely on the facts and circumstances of the case. Thus risk adjustment is case specific, function specific and also depends on the nature of functions (including risks) carried out by the comparable companies. 14. The tax payer had not given any evidence or argument regarding how the assumptions of CAPM model are true in the case of the AE when it is doing business with the taxpayer. 15. The CAPM model has some weakness, the main being that the model does not recognize the presence of human capital, which is the main driving source for revenues in the software service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich may not be compensated adequately by passing on other risks like marketing risks etc. to the parent. Further these risks are not considered in the case of taxpayer while computing the risk adjustment. 23. The taxpayer considered total assets including current assets and current liabilities, but the CAPM hinges upon return on equity or capital employed. The operating assets are the major indictor of capital employed rather than total assets. Operating assets includes fixed assets, trade receivables net of trade payables. 24. The tax payer has assumed that operating expenses of the comparables would not change after risk adjustment. But, after giving effect to risk adjustment, the financial statements of the comparables should look like that of the tax payer i.e., stripping the risk component. So, the expenses pertaining to the risk like sales and marketing expenses, bad debts etc. should be removed from operating expenses and corresponding risk 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awn parity between independent comparables and the assessee on this basis. In our opinion, this reasoning cannot be fully accepted particularly because it is not that all the independent comparables are doing only the work outsourced to them by various AEs. This is only a conjecture on the part of ld. TPO. We, therefore, are of the opinion that market risk, if quantifiable, has to be adjusted in view of Rule 10B(1)(e)(iii)...... We, therefore, in the interest of justice, restore this matter to the file of Assessing Officer/TPO to consider the computation of risk adjustment as per CAPM model by availing the services of technical experts. The experts of the field are to be appointed by both the sides to come to an acceptable conclusion."" (He referred to para 116-118 on Page no 467- 476 of the Case Law Compendium) It is the humble submission of the appellant that in light of the Motorola Solutions India Private Limited (supra) judgment, the appellant's may also restored back for fresh analysis on risk adjustment 7.17 Without prejudice to the Appellant's contentions against the approach used by the Ld. TPO, the Learned AR submitted that even if we exclude the comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial information unavailable (b) Different financial year ending - June 30 whereas the Appellant's accounts have been finalised on March 31 (c) Functionally Dissimilar - Engaged in data centre management services, end user computing services, managed security services, networking services and tools and process consulting services (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 (India) Private Limited (2014) 43 taxmann.com 100) 21. R systems International Ltd. (Seg.) 19.61% 19.61% Accepted 22. Spanco Ltd. (Seg.) 20.96% 20.96% A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 been excluded for the reason that there were extraordinary events like merger and demerger during the relevant financial year which must have impacted the financial results of the company. In the case of Allsec Technologies Ltd., it was submitted that its annual report clearly indicates that the comparable cases high risk in contrast with the assessee. Regarding Bodh Tree Consulting Ltd., it has been submitted that its annual report for financial year 2006-07 and its previous year's annual report indicates that it had earned an extra-ordinary profit. Likewise, the assessee has tried to discussed in detail as to how all the selected twelve comparables by the authorities below are functionally dissimilar with the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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. 10.1 The Learned AR submitted further that during the assessment year 2006-07, the assessee had duly claimed the deduction under sec. 10A in respect of the Hyderabad Undertaking and Assessing Officer had not disputed the claimed deduction of the assessee in the said assessment year and had duly allowed the deduction. The assessment order of DT India for assessment year 2006-07 which clearly demonstrated that DT India was eligible and the claim for deduction under sec. 10A of the Act is allowed to it was also submitted to the Assessing Officer. The Learned AR drew our attention to page Nos. 1151 to 1196 of the paper book i.e. copies of ITR, Computation of income and balance sheet of DT India for the assessment years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 Finance Act, 2012 introduced second proviso to section 40(a)(ia) of the Act w.e.f. 01.04.2013 which provides that "where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter-XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of sec. 201 of the Act, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the residents payee referred to in the said proviso". He submitted that to understand the effect of this proviso, it is useful to refer to first proviso to sec. 201(1) introduced w.e.f. 01.07.2012, which provides that "any person, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 taking of any business which is permissible for a banking company to undertake. Again there is substance in the alternative submission of the assessee which is supported by the above cited decisions in the case of Rajiv Kumar Aggarwal (supra), Dr. Jai Deep Kumar Sharma (supra) and Raja Chakravorty (supra) that the amendments made by the Finance Act, 2012 to section 201 and Section 40(a)(ia) of the Act sought to be applied to cases prior to 01.07.2012 since the amendments are procedural in nature and are intended to remove the hardship being faced by the assessee, the amendments are declaratory and curative in nature and shall have retrospective effect. We thus set aside the matter to the file of the Assessing Officer to examine the submission of the assessee that KMPL had dul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no tax was required to be deducted on these provisions as these were merely book entries in respect of expenses on a best estimate basis, where the final amount is not ascertained and in many cases where even the payee is not known. The sections 194C, 194I and 194 of the Income-tax Act, 1961 require the deduction to be made either at the time of credit of the sum to the account of the payee or at the time of payment thereof in cash or issue of a cheque or draft or by any other mode whichever is earlier. He pointed out that each of the section has an "Explanation" which clarifies that where the sum is credited to any account, whether called "suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of the section shall apply accordingly. He placed reliance on the decision of Hon'ble Supreme Court in the case of Gursahai Saigal vs. CIT (1962) - 48 ITR 1 (S.C). The Learned AR submitted that where in the case of assessee, it is not certain on the date on which the credit is made, whether a liability to pay will arise and if so in w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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