9911796707
TMI Blog2017 (3) TMI 267X X X X Extracts X X X X X X X X Extracts X X X X ..... as against the returned income of Rs. 11,61,076 and making adjustment of Rs. 5,36,00,000 in respect of the international transactions of the appellant based on the directions issued by the DRP. 2. GROUND NO. 2: The Learned Additional Commissioner of Income-tax [TP-II(2)] ('the learned TPO') has erred in law and on facts and in circumstances of the case in pointing out various defects in the Transfer Pricing Study ('TP Study') of the appellant without appreciating the correct facts of the case. Further, DRP has also erred in rejecting the objection of the Appellant. The DRP overlooked the fact that the Appellant had not used earlier years' data and misdirected itself in erroneously alleging that the Appellant had used earlier years' data. 3. GROUND NO. 3: The Ld. AO/TPO/DRP ought to have accepted the operating profit margin of the Appellant at 15% and the operating profit margin of the comparable cases at 5.04% as worked out by the Appellant as per TP Study. 4. GROUND NO. 4: The Ld. AO/TPO/DRP erred in holding that the data which was not available as on the due date of filing return of income could be taken into account in determining the Arm' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned AO/TPO/DRP have acted contrary to the record and erred in alleging that the Appellant had not demonstrated that working capital adjustment was essential in the facts of its case. 10. GROUND NO. 10: The learned AO/TPO/DRP have erred in law and on facts and in circumstances of the case in making upward adjustment exceeding the difference between total revenue earned by the AE from independent third party clients and revenue booked by the appellant from AE. 11. GROUND NO. 11: The learned AO/TPO/DRP have erred in law and on facts and in circumstances of the case in making the upward adjustment without considering inter alia the facts that during the year under consideration, the AE has incurred substantial operating loss and the assessee is STPI unit with 100% tax exemption and as such, there is no incentive to shift profit outside India. 12. GROUND NO. 12: The learned AO has erred in law and on facts and in circumstances of the case in making the upward adjustment of Rs. 5,36,00,000 in his final computation instead of Rs. 5,35,52,000 as per the body of his assessment order. 13. GROUND NO. 13: The orders of the Ld. AO/TPO/DRP are vitiated by errors in law a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding 'Information Technology Enabled Services' (ITES) to its associated enterprises. As per the agreement with the AE the remuneration for providing ITES to AE is Cost plus 15% mark up. To benchmark the international transaction of ITES with AE as well as margin of 15%, the assessee selected TNMM as the most appropriate method and the PLI was based on operating profit /operating cost. The working was given in the following manner: Particulars Amount (Rs. in lac) Operating Revenue (A) 3,324.40 Operating Cost (B) 2,890.78 Operating Profit (C=B-A) 433.62 Net Cost Plus % (C/B *100) 15.00% In its TP Study Report, the assessee had selected following five comparables: Name of company OP/Cost % i. Aditya Birla Mincas Worldwide Limited 21.43 ii. Allsec Technoligies Limited -16.44 iii. Sundaram Business Services Limited 2.54 iv. R Systems International Limited 16.91 v. Cross domain Solutions Private Limited 26.92 Arithmetic Mean 10.27 After claiming working capital adjustment of 5.23%, the adjusted arithmetic mean was arrived at 5.04% and hence, it was reported that the international transaction with the AE meets the arm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment of Forex loss and whether any adjustment on account of Forex loss can be made vis-a-vis the comparables. This issue has been raised by the assessee in ground no. 5.1 to 5.3. As stated earlier, the assessee has been set up as a STPI unit which is providing ITE services to its AE and is captive service provider. Before us the Ld. Counsel for the assessee, Mr. Rajan Vora submitted that the assessee had entered into a 'Service Agreement' dated 30.06.2006 for rendering back office local support services to its AE and for the year under consideration the assessee had received advance from its AE for meeting its operating cost requirement. During the year under consideration, the assessee had suffered Forex loss of Rs. 3.41 crores in the following manner: Particulars: Amount (in Rs.) Conversion of USD from EFC A/c to INR A/c: 62,80,115 Intercompany Receivables/Payables: 39,48,667 Cancellation of forward contracts: 2,22,52,796 Reinstatement of balances: 10,89,549 Open Contract: 6,96,633 Others: (1,22,986) Total 3,41,44,774 Mr. Vora further pointed out that, under clause 3 of the 'service agreement', the compensation for services to the assessee includes for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20.6 billion in foreign exchange market. The assessee had entered into majority of forward contracts during the FY 2007-08 when the value of INR was appreciating. However, the trend in exchange rate of INR vs. US $ completely turnaround in the FY 2008- 09 when the value of INR depreciated sharply particularly post September, 2008. In the notes to the accounts the assessee has highlighted its accounting policy in the past which was that, the assessee recognized marked to marked loss and gains if any, were not recognized till settlement. There was change in said accounting policy pursuant to the ICAI announcement on 29.03.2008 which was adopted by the assessee during the year under consideration. In the preceding year the accounting policy followed as per ICAI guideline was as such that profit or loss arising on settlement of forward contracts was recognized as income or expenses for the year. Thus, due to the fact that the assessee had entered into majority of 'forward exchange contracts' in the preceding year, i.e., FY 2007-08 and on account of change in accounting policy, there was double impact during the year under consideration. In the light of this background, Mr. Rajan Vora, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7/DEL/2014) dated 29 September 2016:- wherein the Hon'ble Delhi Tribunal has held that foreign currency fluctuations need to be taken into account for TP adjustment both for comparable companies as well as tested party. The Delhi Tribunal also observed that effect of adverse foreign exchange movement should be considered determining the arms' length price. (ii) Honda Trading Corp. India Pvt. Ltd. Vs. ACIT (ITA No. 5297/DEL/2011) dated 8 March 2013):- wherein the Hon'ble Delhi Tribunal has held that foreign exchange fluctuation loss on account of abnormal fluctuation in exchange rates should be treated as non-operating in nature. Accordingly, the Delhi Tribunal deleted the TP adjustment after considering foreign exchange fluctuation loss as non-operating in nature. Mr. Vora thus concluded that; firstly, either the Forex loss upto 2.7% of the assessee's cost i.e. Rs. 78.34 lakhs may be treated as operating in nature and balance Rs. 2.63 crores out of Rs. 3.41 crores should be treated as non-operating in nature, which will make the operating margin at 11.97%; or secondly, the cancellation of forward contract which is at abnormal feature in this year vis-à-vis the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Solutions India (P) Ltd - 67 taxmann.com 68 (Bang. ITAT). In the case of Rushab Diamonds, (supra) she pointed out that, the issue whether or not hedging profits are non-operating in nature was specifically considered and the Tribunal held that hedging profits are in the nature of operating income only. 11. On the issue whether PLI of the assessee/tested party can be adjusted so as to increase the profit earned from the international transaction by excluding any part of the operating cost is abnormal or not, she submitted that it is not permissible to make any comparable adjustment in the PLI of the tested party and adjustment if required to be made, can be only made in the case of comparables. After referring to the provisions contained in sub-clause (iii) of Rule 10B (1)(e), she submitted that the said clause provides that the net profit margin of the comparable uncontrolled transaction that is required to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which would materially affect the amount of net profit margin in the open market. This suggests that adjustment if any can be made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the net profit. In effect, if a transactional net margin is applied to a transaction in which the foreign exchange risk is borne by the tested party, foreign exchange gains or losses should be consistently accounted for (either in the calculation of the net profit indicator or separately)". Thus, she submitted that gain or loss on forward contract entered into for hedging of trade receivable or payable has to be given the same treatment, i.e., which is given to the loss or gain or trade receivable or payable. The reason being, the purpose of hedging is to compensate the loss or gain which is likely to arise on the realization of receivable or payable. If foreign exchange is likely to be received on realization of debtor at a future date, the hedging is done to sell foreign currency at the future date and if in the future date when the foreign currency is actually received and loss or gain is earned on the same, the reverse of the same transaction is done under the forward contract and if there is a profit earned on underlined transaction then there could be a loss also on the hedging and vice versa. Thus, the object of the hedging transaction is to minimize the profit or los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in foreign currency, the risk assumed by the assessee and the comparables have to be established to be similar. Having so established, there is no further requirement to ensure that actual loss or gain earned by the comparable should be matching with the actual loss or gain earned by the assessee. Therefore, she submitted that, once the comparables are also providing services and earning their receipts in foreign currency then there is no difference between the international transaction and the uncontrolled transaction that warrants an adjustment in terms of sub-rule (3). Further, once all the comparables are considered for the purpose of determining the ALP, then they also bear the same foreign exchange risk on account of fluctuation in the exchange rate, hence there would be no difference between the international transaction and the comparable uncontrolled transaction, because the loss figure would be more or less same and it does not imply that there is a difference in the risk borne by the assessee and not by the comparables. She contended that if the argument of the assessee's counsel is to be accepted then every item of expenditure or income forming part of the assessee's o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loss has arisen on account of cancellation of forward exchange contracts on account of abnormal variation in Forex rates. The assessee has merely contested that suitable adjustment need to be granted for the Forex loss to the extent it is extraordinary or abnormal. Thus, the judicial precedents relied upon by Ld. CIT DR are distinguishable on facts and merits. He submitted, such a huge loss was a peculiar phenomenon for the year under consideration in the assessee's case, because such abnormal event and abnormal loss has neither arisen to the assessee in the past or in subsequent years nor in case of comparable companies. Thus, it was submitted by him that forex loss though arising in the normal course of business is a non-recurring and extraordinary item qua the year under consideration and qua the comparables. Hence, the same should not be considered while determining the operating margin of the assessee. 16. Regarding adjustment to be made on the tested party's margin, Ld. Counsel for the assessee placed reliance on following decisions where adjustment to the tested party has been allowed to be made: (i) Pune Tribunal in case of Ariston Thermo India Limited vs. DCIT (ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crease the profit earned from the international transaction by excluding any part of the operating cost as normal, ld. counsel submitted that in the case of the assessee, forward contract was entered to minimize the risk on account of exchange rate fluctuation, however, the exchange rate became so volatile that assessee had to cancel the same and booked an abnormal/extraordinary exchange loss. He also made distinction of decision of Delhi ITAT in the case of Honda Motor Cycles & Scooters India Pvt. Ltd., (supra) and JCB India Ltd., (supra) by submitting that they are distinguishable on facts. In the case of Honda Motor Cycles & Scooters India Pvt. Ltd., he pointed out that while computing the operating margin, the assessee had reduced the operating cost incurred during the period of strike and on the basis of ad-hoc calculation adjustment in the operating margin was made. Similarly, in the case of JCB India Ltd., the assessee had reduced the operating expenses on ad-hoc basis to account for the excessive operating cost incurred in the first year of operation. As compared to these cases, in the case of the assessee, the forex loss arising on account of cancellation of Forward contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he breakup of foreign exchange loss of Rs. 3.41 crores is as under:- Particulars: Amount (in Rs.) Conversion of USD from EFC A/c to INR A/c: 62,80,115 Intercompany Receivables/Payables: 39,48,667 Cancellation of forward contracts: 2,22,52,796 Reinstatement of balances: 10,89,549 Open Contract: 6,96,633 Others: (1,22,986) Total 3,41,44,774 The assessee has adopted TNMM as the most appropriate method to determine the ALP of its international transaction of provision of legal process outsourcing services to the AE. 19. The relevant methodology of TNMM as contained in Rule 10 B (1)(e) for sake of ready reference is reproduced hereunder:- "10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction (or a specified domestic transaction) shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) ...... (b)....... ........ (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [ or a specified domestic transaction] entered into with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be done from a comparable uncontrolled transaction by an unrelated enterprise which is to be computed having regard to the same base, that is, the base adopted for determining the PLI of the enterprises entering into controlled transaction. * Sub-clause (iii) refers to the net profit margin under sub-clause (ii) which is the net profit margin realized by the enterprise visà- vis the unrelated enterprise from comparable uncontrolled transaction which is computed on the same base. Further, this clause envisages that the net profit margin arising in comparable uncontrolled transaction (that is, net profit margins of the independent comparables) is to be adjusted taking into account the differences, if any, either between the international transaction and the comparable uncontrolled transactions, (in other words, difference is to be adjusted in the net profit margins of the comparables); or between the enterprises entering into such transaction (that is, related party) which could materially affect the amount of net profit margin in the open market. Thus, sub-clause (iii) envisages that the adjustment on account of difference which could materially affect the amount of n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r profit should be made only to the uncontrolled transaction, that is, comparables and not to the 'tested party' whose transactions is being compared. This is apparently clear from the reading of sub clause (i) and (ii) which envisages that the net profit margin is to be computed and compared to in relation to or having regard to the same base, that is, of the 'tested party' or the comparables; and sub-rule (iii) provides that adjustment of net profit margin arising in comparable uncontrolled transaction, i.e., vis-à-vis the independent comparables is adjusted taking into account the difference both between the comparables or between the enterprises (related parties) entering into such international transaction. The adjustment can be made either in the case of the 'tested party', (i.e. controlled transaction) or the comparables (i.e. uncontrolled transactions) so that the difference which could materially affect the amount of net profit margin is removed. Further clause (iv) provides that the net profit realized by the enterprise as referred to in sub-clause (i) i.e., the 'tested party' or the enterprise entering into controlled international transaction is to be established ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic domain. In such situations, it would be very difficult to fathom a proposition that adjustment should be made only in the case of comparables and not in the case of the tested party. Making adjustment of comparable margins with partial information would at times result into absurdity or unscientific analysis of the profit margin which can never be the intention of the law as contained in Rule 10B(1). 23. One of the contention raised by the Ld. CIT, DR before us is that, for determining the net profit margin, all operating expenses should be taken into account and once any item is appearing as an operating cost which is taken into determining the PLI, then there cannot be any reason to exclude any part of the cost subsequently in the garb of making comparability adjustment; and while determining the PLI of the tested party the only information which is required to be seen is, whether the item of expenditure is operating or nonoperating. We are unable to fully subscribe to such proposition because, even if an item is taken as an operating cost, however the rule as enshrined under 10B (1)(e)(iii) and 10B(3) clearly contemplates that any difference or abnormality or any extraordina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial year and, therefore, should be excluded from the operating cost while computing the PLI. In principle, we agree with the contention of the Ld. CIT, DR that hedging loss or gain arising in the normal course of business has to be generally given the same treatment as is given to the loss or gain in the underlined transactions. It is imperative to see, firstly, whether the forex gain or loss are of trading nature that is, exchange gain or loss is on a trade receivable or payable and whether or not the tested party is responsible for them, that is, the foreign currency risk is that of the tested party or not; and secondly, whether the hedging of the foreign currency exposure on the underlined trade receivable or payable needs to be considered and treated in the same way in determining the net profit. If foreign exchange risk is borne by the tested party, then it needs to be accounted for by the tested party. This is the explanation given by the OECD as referred to by the Ld. CIT, DR. In all such cases, if forex is directly to be received on realization of debtors at a future date, hedging is done to sell or buy foreign currency at the future date. In the case of the assessee, it h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for which the reasonable accurate adjustment should be made to eliminate this effect, because it has to be reckoned as a difference between the international transaction and the comparable uncontrolled transactions. 25. Before us, the Ld. CIT, DR has also contended that comparability factors as contained in Rule 10B (2) also envisages risks assumed by the respective parties to the transactions and risk on account of forex fluctuation arises when a transaction is entered into with another party resulting in contractual obligations being denominated in foreign currency as compared to the currency in which accounts are maintained. In such an event, any difference in the rate of exchange between the rate prevailing on the date of entering into the contract and the date of realization will result any gain or loss. Therefore, all the comparables that have been considered should also bear the Forex loss. We agree with this contention of the Ld. CIT, DR that once a comparability factor of forex gain or loss is established to be similar then the transaction becomes comparable on account of Forex risk. However, here, in this case as stated earlier it has not been brought on record that suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contrary decisions relied by the opposing parties. Since we have analysed the issue as per our understanding of relevant provisions of the rules and also its application on the facts of the present case, therefore, we are not inclined to deal and discuss in detail about the various judgments on which both the parties have given their submissions and counter submissions. Other submissions on this issue made by both the parties are also not dealt with because; we have already given our finding on the issue of adjustment. 28. The next main issues relates to inclusion and exclusion of certain comparables which has been contested before us. As discussed in our earlier part of the order that the Ld. TPO has rejected most of the comparables shortlisted by the assessee and has also introduced his own set of comparables. During the course of the transfer pricing proceedings, the assessee gave a list of certain more comparables for bench marking the assessee's margin, which has been by and large rejected by the TPO. In all, out of the total set of 24 comparables which were subject matter of acceptance and rejection both by the revenue as well as by the assessee, some ten comparable compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kground reports and betting of curriculum vitae. d. Legal Research & Competitive Intelligence Services: P3 LDS conducts and analyzes research including federal, state, international case law, federal, state and municipal regulatory codes and legislative history using industry-standard databases; and also conducts multi-jurisdictional surveys i.e., 50 states survey. e. Marketing/Business Development: P3 LDS does not carry out marketing functions, since it is a captive entity and secures business by way of outsourcing from its parent company, P3 LLC. f. Finance: P3 LDS makes arrangements for the funds required for meeting working capital and fixed capital requirements. The funds are mainly provided by P3 LLC. g. Technology: P3 LDS uses the appropriate technologies for executing various projects. The choice of technologies to be used is only by P3 LDS without any inputs from P3 LLC. 3.1 In consideration of PLDS's performance of its duties and obligations under the Agreement, Client agrees to compensate PLDS monthly for all services based on the actual total cost incurred by PLDS per month for the Client plus a markup of 15% subject to withholding tax, se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 2016; g) Market Tools Research Pvt. Ltd. [ITA No.1811/Hyd/2012], AY 2008-09, dated 24 October 2013. 29.3 On the other hand, Ld. CIT, DR relying upon the order of the DRP submitted that DRP has already directed the TPO to consider only the relevant segment of TPO who has considered the margin of 21.3% in respect of engineering design services. The objection of the assessee has already been addressed by the DRP including the consideration of unallocated expenses and depreciation. 29.4 After considering the aforesaid submissions and on the perusal of the material available on record, we find that assessee is mostly into ITES relating to data processing of legal data base and other administrative support services. It has not been disputed that under the segment of 'Engineering Design Services', this company is providing broad spectrum of services which is mainly in the nature of software development. Its entire 'Engineering Design Services' is providing software services to its client and has portfolio of services which included concept design, product design and development and other reliable engineering services which is given through development of computer software. A comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 July 2014; h. Hyundai Motors India [ITA No. 255/Hyd/2014, AY 2009- 10, dated 31 July 2014; i. M/s. Avineon India Pvt Ltd. [ITA No. 1989/Hyd/2011], AY 2007-08, dated 31 October 2013; 29.6 The Ld. CIT, DR objecting to the exclusion of this company submitted that the assessee is not low end BPO service provider albeit assessee is into high end service which is in the nature of legal process outsourcing. Assessee's service agreement describes the scope of service at clause 3 of the said agreement, which reads as under: "PLDS SCOPE OF SERVICES 2.1 PLDS agreed to provide the Client various legal back office support services through its Resources. Each Project shall be performed by the Resources of the PLDS based on the, Client Data and Project Instructions and deliverable requirements of the Client as provided by the Client to PLDS from time to time. 2.2 Legal Support services and Project Deliverables shall be through Resources of PLDS. Service provision with respect to anyone Project will include: * receipt of the Project, review and acceptance of Project Instructions, * application of relevant Client Date and Client Resources; and * creation and delivery of Project Deli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be reckoned that both are providing high end services and functionally can be held as comparable. Thus, comparability cannot be rejected simply on the ground that assessee is mainly a BPO or low end ITES service provider. So far as the issue relating to impact on profitability on the margin involving significant merger and acquisitions, this definitely becomes a very crucial factor for carrying out the comparability analysis and its impact on sales/profit margin. Under such exceptional events of merger and acquisition, the accounts and the trading results does not reflect normal margin which are earned in the normal course of the business in a comparable uncontrolled scenario, because M & As generally have huge impact on the trading results and distort the profit margin. This factor mostly vitiates the comparability analysis at least qua the year in which such M & As are undertaken. But as pointed out by Ld. CIT DR there is no major impact in profit margin in the year of M & As, which aspect becomes very crucial and requires verification from the end of TPO/AO. Accordingly, we remit this issue to the file of the TPO to find out the impact of M & As on the trading results a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; Further Ld. Counsel relied upon the decision of Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd., (supra), wherein the Hon'ble High Court has directed the Assessing Officer to exclude one of the comparables on the ground that most of its work was outsourced to other service providers which affects the profitability. 29.9. On the other hand, the Ld. CIT DR submitted that the assessee too is providing high end legal outsourcing services which cannot be reckoned as low end ITES service provider, therefore, none of the decisions relied by the assessee are applicable to the facts of this case. Further, a comparable company cannot be rejected mainly for the reason that is showing high margin. 29.10. After considering the aforesaid submissions and on perusal of the relevant finding given in the impugned orders, we agree with the contention of the Ld. CIT, DR that assessee company cannot be regarded as low end ITES service provider because engagement of qualified and professional lawyers for providing legal outsourcing services is definitely high end services. We cannot reject this comparable simply on the ground that the comparable company is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of which has been given in the following manner: Particulars For the year ended For the quarter ended For the quarter ended For the year ended 31-Dec-08 31-Mar-08 31-Mar-09 31-Mar-09 (Audited) (Audited) (Audited) (Audited) A B C D = (A+B+C) Revenue 2,606 566 576 2,616 Cost (Revenue (-) PBIT) 2,229 520 466 2,175 Unallocable expense (Refer note-1) 105 49 18 74 Total cost 2,334 569 484 2,249 Operating profit 272 (3) 92 367 OP/OC 11.65% 0.53% 19.06% 16.33% Note-1: Unallocable expenses calculated on the basis of proportion of revenue from BPO segment to total revenue. Thus, it was pointed out that from the aforesaid figures which are from the audited accounts, it can be seen that operating margin of RSystems for the year ending 31st March 2009 can be calculated and based on such audited figures this comparable company cannot be rejected simply on the ground that it is following financial year from January to December. In support of this contention and cases where R Systems has been accepted despite following calendar year, reliance was placed on the following decisions: * Maersk Global Service Centre I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the year ending 31.12.2008 and for the quarter starting from 31.01.2008 to 31.03.2009 is available and once such an audited statement is available, then the proportionate working for 31.03 2009 can easily be deduced. If there are no major incidents of factors disturbing the profit margin in that quarter, whose results are being worked out and the transactions of the Company are carried out in the normal course of business, then we do not find any reason to reject the comparable out rightly on the aforesaid ground. The working of PLI based on audited accounts as incorporated above clearly clinches the point. The Hon'ble P&H High Court in the context of R-Systems only had made a very important observation which reads as under: "27. The TPO excluded the case of R-Systems International Limited from the list of comparables. The ITAT included the same. The Transfer Pricing Officer excluded the case of R-Systems International Limited on the ground that it follows the calendar year i.e. 1st January to 31st December for maintaining its annual account whereas the accounting year of the assessee is 1st April to 31st March. The Transfer Pricing Officer followed an order passed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial year followed is different. In the case before us the data relating to the relevant financial year of R-Systems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, the same cannot be held as not passing the test of sub-rule (4) of Rule 108." 29.14. So far as the decision of Hon'ble Bombay High Court as relied upon by Ld. CIT DR is concerned, in that case the revenue was contesting that the difference between two financial years was only of three months, therefore, same should be ignored. It was not brought before the Hon'ble High Court or anything was on record that the data for relevant two months was available or can be worked out on the proportionate basis based on audited accounts; then in that case whether it can be ignored or not. Nothing is borne out that, whether the assessee has provided the audited accounts of the intervening period and the proportionate working of two consecutive calendars years in which the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same that right from the year 2008 to 2011; this company is incurring only losses. Further, the ratio of export earnings to total earnings is also coming down annually. The impact of merger can be observed from the data of net margins in last few years. Rs. in Millions Year Ending Dec-02 Mar-04 Mar-O5 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Total Income 199.43 249.61 575.64 933.32 1171.35 1040.26 1098.46 1327.87 1451.21 Net Profit 23.79 -150.95 118.54 216.65 284.58 -107.98 -66.42 -64.39 -34.74 Profit Margin 11.93% -60.47% 20.59% 23.21% 24.30% -10.38% -6.05% -4.85% -2.39% The fall of profits over a period of three years as compared to good margins in the year 2005, 2006 and 2007 (shows that the merger and acquisition undertaken by this company and significant expansion within India has impacted the profitability over a period of three years up to March 20 1l. Refer pages VI, V2 and V3 of Revenue's Paper Book. It is therefore submitted that Allsec Technologies has been correctly excluded by the TPO as it is neither functionally comparable nor is it complying with the extraordinary event filter or the export filter. 34. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO, for limited purpose. (vi). Microland Ltd. (subject matter of Department's appeal):- 29.18 This comparable was selected by the assessee which has been rejected by the TPO but reinstated by the DRP. Such an inclusion of this comparable has been challenged by the department in its appeal. The TPO rejected this company mainly on the ground that ITES activity is not its main activity and the said company is primarily engaged in infrastructure management function which generates 80% of its revenue. This company has been reinstated by the DRP for the reason that separate profitability of ITES segment was available. Ld. CIT, DR pointed out that margin of this company's ITES segment is (-) 19.51% and this company has been consistent loss making company in the subsequent year, i.e., year ending 2010 and even prior to this year also this company was into loss. She pointed out that this comparable company has come up for consideration before ITAT, Hyderabad and Bangalore Benches in the following cases: S. No. Name of the Rulling Citation Revenue's paper book Reference Relevant para of judgment i) SA&P Capital IQ India Pvt. Ltd. (2016) 72 taxmann.com 326 (Hyd. ITAT) III-1 Para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29.21 This comparable was rejected by the TPO for the reason that its P&L Account was not available in the public domain. However, before the DRP the assessee pointed out that the Balance Sheet and Profit & Loss account was available in the public domain and copy of the same was furnished. Accordingly, DRP directed the TPO to verify the financials and include the same in the list of the comparables. 29.30 After considering the submissions of both the parties and on perusal of DRP's order, we do not find any reason to interfere on such a direction of the DRP, because if financials are available and profit margins are determinable along with functional profile, then the TPO should consider this comparable for comparability analysis. Accordingly, we direct that Omega Healthcare should be accepted subject to the availability of financial data. 29.30 Apart from the aforesaid comparables, the Ld. Counsel pointed out that there are three more comparables which assessee had submitted during the course of TP proceeding and TPO has erroneously rejected the same. These comparable companies are; (i) IKF Technologies Ltd.; (ii) Lee & Nee Software Exports Ltd.; and (iii) Jindal Intellicom Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee Company is into BPO/ITES services and assessee made available the financial data for 31st December 2008. Here, in this case also, if audited financials after 31st December 2008 are available and based on the data for next year the turnover as well as proportionate margin can be worked out, then we do not find any reason as to why this comparable should not be included. However, this exercise has to be done by the assessee to make available the audited accounts/data for 1st January 2009 to 31st March, 2009 as has been done in the case of R-Systems. Our finding given in relation to the RSystem will also apply here subject to the fulfillment of the aforesaid condition. Thus, this comparable is to set aside to the file of the TPO. 30. It has been admitted by both the parties that if the aforesaid comparables are decided then other comparables need not be adjudicated upon and accordingly, we are confining our finding qua the comparables which has been argued before us; and we are refraining ourselves in deciding the other comparables as the parties have not argued other comparables before us. 31. Regarding working capital adjustment as urged in ground no. 9 by the assessee, if as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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