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TMI Blog2017 (3) TMI 267X X X X Extracts X X X X X X X X Extracts X X X X ..... s arisen specific in the case of the ‘tested party’ then same needs to be analysed, firstly, by comparing it with uncontrolled transactions with independent entity; and secondly, if such peculiarity is not found in the case of the uncontrolled comparable transactions then the rule envisages that reasonable accurate adjustment should be made which materially affects the cost or profit. Hence, the contention put forth by Ld. CIT DR in our humble opinion is not acceptable. Whether Forex loss is to be reckoned as operating cost or not? - Held that:- As in this case as stated earlier it has not been brought on record that such kind of an exposure of hedging loss on cancellation of forward contracts is there in every comparable uncontrolled transaction, that is, in the case of the other comparables. Risk assumed by the assessee as well as by the comparable entity may be similar but quantum and scale of a risk factor if undermines the computation of PLI of the assessee vis-ŕ-vis the comparables, then our rules under the Indian Transfer Pricing provisions also enshrines that any material difference affecting the cost or profitability between the international transaction and comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D 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's Length Price (' ALP'). 5. GROUND NO. 5: 5.1 The Ld. AO/TPOIDRP has erred in law and on facts and in circumstances of the case in considering the foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ₹ 5,36,00,000 in his final computation instead of ₹ 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 and fact and on account of ign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviding 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. Sund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i. e-Clerx Services Limited 46.98 vii. Informed Technologies India Ltd. 23.13 Assessee s Comparables viii. Aditya Birla Mincas Worldwide Ltd. 1.85 ix. Crossdomain Solutions Pvt. Ltd. 26.92 Arithmetical Mean 29.57% Accordingly, an adjustment of ₹ 8,63,59,000/- was made on international transaction of ITS which was shown by the assessee at ₹ 33,24,40,607/-. 6. From the stage of the DRP two of the comparable companies viz., Metro Land Ltd. and Omega Healthcare Management Services Pvt. Ltd. selected by the TPO were excluded from the comparable list. Certain comparables which were submitted by the assessee before the TPO in the transfer pricing proceedings were also rejected. The DRP also allowed certain corrections in the working of operating profit margin of Acropetal Technologies Ltd. Accordingly, after the direction of the DRP the adjustment was reduced to ₹ 5,35,52,000/- a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orked out the operating profit margin at 15% considering foreign exchange loss of ₹ 3.41 as non-operating in nature as the same has been considered to be abnormal. He submitted that the TPO has erroneously re-determined the operating profit margin of the assessee at 2.85% by considering the Forex loss as operating expenses on the ground that since it is a regular occurrence in a business and therefore, should form part of the total operating cost. 8. Mr. Vora, as an alternative argument submitted that, at least out of Forex loss of ₹ 3.41 crores, the amount of ₹ 2,22,52,796/- which was towards loss on cancellation of forward contracts should be adjusted, because this was an abnormal situation particularly in the case of the assessee, as it had entered into forward contract to minimize the risk on account of exchange rate fluctuation. This is more so in the current financial year, because the exchange rate was so volatile that the assessee had to cancel the forward contracts. Before the authorities below the assessee had provided the data pertaining to the movement in the exchange rates of INR vs. US $ during the FY 2008-09. It was specifically pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract is considered as non-operating, then the operating margin of the assessee will be 10.46% as against 2.85% determined by the TPO. 9. By way of an alternative argument, Mr. Vora submitted that even if forex loss compared with the comparables, then also the forex loss in case of assessee was quite abnormal. The assessee has incurred Forex loss of ₹ 3.41 crores which is 11.79% of its total cost, whereas in the case of comparables it is in the range of 0.52% to 7.27%, (if the case of Aditya Birla is removed which had an abnormal rate of forex loss of 27.04%), the arithmetic mean of forex loss/total cost of all the comparables would come to 2.7%, which is almost four times the cost of assessee, i.e., 11.79%. By way of a chart he demonstrated before us, if the adjustment is to be made by taking the total forex loss of comparables which is 2.71%, then the Forex loss which can be treated to be operating in nature would come to ₹ 78.34 lakhs only and in that case the operating margin would come to 11.97% as compared to 15% taken by the assessee and not 2.85% as taken by the TPO. He further pointed out that if cancellation of forward contract of ₹ 2,22,52,795/- alo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to with the AE should be computed in relation to costs incurred or sales effected. For the purpose of determining the profit realized on the international transaction, all operating costs incurred for the purpose of providing the services to the AE have to be taken into account. Therefore, no question arises whether the foreign exchange gain or loss is non-operating in nature or not. This aspect of the matter has come up for consideration before the Tribunal in series of cases wherein the Tribunal has consistently held that foreign exchange gain or loss arising out of international transaction is in the nature of operating cost or revenues. She pointed out that, while coming to this conclusion, the Tribunal has considered that, when transactions are entered into foreign currency and assessee maintains its books of account in Indian currency, then such gain or loss is part and parcel of the relevant transaction and there is no basis to artificially segregate the loss or gain from the main transaction and give a different treatment. In support, she had relied on the following decisions: a) SAP Labs India Pvt. Ltd. -(2011) 44 SOT 156 (Bang.); b) Cisco Systems (India) Pvt. Ltd. - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is whether an item of expenditure is to be treated as operating in nature or not. The PLI so determined cannot be tinkered with by removing any part of the operating cost in the garb of comparability adjustment. In support, she strongly relied upon the following two decisions of the ITAT, Delhi Bench:- (i) Honda Motor Cycle Scooters India Pvt. Ltd. (2015) 56 taxmann.com 237 (Del. Trib.); (ii) JCB India Ltd. (2015) 59 taxmann.com 211 (Del. Trib.) 12. Coming to the issue, whether the loss or gain from hedging transaction can be given a separate treatment from the loss or gain of the same underlined transactions, she submitted that the contention of the assessee that loss on account of cancellation of forward contract amounting to ₹ 2.22 crores is abnormal and, therefore, should be excluded from the operating cost, is not tenable, because the hedging loss or gain has to be necessarily be given same treatment as is given to the loss or gain on the underlined transactions. In support she also referred to OECD commentary on this aspect and drew our attention to para 2.82, which read as under: 2.82 Whether foreign exchange gains and losses should be included or exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us comparability factors and the adjustments which are to be made are for the differences materially affecting the price or cost. She further submitted that Rule 10B (2) contains various comparability factors that should be employed for establishing the comparability between the international transaction and the uncontrolled transaction. The comparability of an uncontrolled transaction should be judged with reference to the factors mentioned in sub-clause (a), (b), (c) and (d) of Rule 10B (2). Sub-clause (b) of sub-rule (2) of Rule l0B provides that the functions performed taking into account assets employed and risks assumed by the respective parties to the transaction should be similar in the international transaction and the uncontrolled transaction. Thus, risk is one of the important comparability factors. Risk on account of foreign exchange fluctuation arises when a transaction is entered into with another party resulting in contractual obligations being denominated in a foreign currency as compared to the currency in which the accounts are maintained. In such an event, any difference in the rate of exchange between the rate prevailing on the date of entering into contract and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total cost actually incurred by it for the provision of ITE services to the AE along with mark up of 15%. The forex loss pertains to the transaction of provision of services by the assessee to the AE and, therefore, it has to be concluded that the forex loss incurred in this case for the purpose of providing services to the AE is as per the contractual arrangement, the same is required to be compensated by the AE and hence, it is to be recovered from the AE by the assessee. She also referred to a judgment of Hon ble Delhi High Court in the case of Morabeni India Pvt. Ltd. Vs. CIT (2013) 33 Taxmann.com 100. 15. By way of rejoinder, the Ld. Counsel for the assessee submitted that it is not the core contention of the assessee, that the forex loss should be considered as operating or non-operating. Forex loss may arise in the normal course of the business and can be reckoned as operating in nature, however the loss arising on account of abnormal fluctuation or on account of abnormal movement in forward exchange contracts has to be treated as non-operating in nature. In this regard, reliance placed on Honda Trading Corp. India Pvt. Ltd. Vs. ACIT; and SAP Labs India (P) Ltd vs. ACIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables) it was not possible to identify the amount of forex loss/gain as it has not been specifically mentioned in the financials available in public domain or as collected/provided by the TPO, therefore, it is very difficult to make any reasonable adjustment in the operating margins of that comparables that is, in absence of reliable data. In such situation making adjustment of comparables margin with partial information is unscientific and will give absurd results. In any case, ld. counsel submitted that on the facts of the present case, it will not make substantial difference whether forex loss adjustment if made on the PLI of the tested party or on the comparable companies. A separate working on approximate basis in the cases of the comparables where forex gain/loss details were available (out of set of 18 comparables 9 comparables) was given before us to demonstrate that the arithmetic mean of the comparables would then come down to 4.28% and after working capital adjustment is given then it would come around the PLI of 2.85% of TPO which would be under the arm s length consideration. Regarding the Ld. CIT, DR s contention that hedging operates in the reverse direction to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. DR was also distinguished by him. 18. We have heard rival submissions and considered the entire gamut of facts with reference to material referred to before us. The core issues before us are, firstly, whether the Forex loss or gain is operating cost or non-operating in nature; secondly, if yes, then, whether the PLI of the assessee (i.e., the tested party) can be adjusted so as to increase the profits earned from the international transaction for the purpose of making the comparability adjustments or not; and lastly, whether the loss or gain on cancellation of forward contract can be said to be abnormal factor materially affecting the cost/ margin in the case of the assessee so as to warrant any kind of adjustment. The assessee in its financials has worked out the PLI in the following manner:- Particulars Amount (Rs. in Lakhs) Operating Revenue Service Income 3,324.40 Total Operating Revenue 3,324.40 Operating Cost Personnel expenses 1806.48 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables); 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 net profit margin in the open market can be made in two kinds of situations, firstly, either between the international transaction and the independent third party comparables; or secondly, amongst the transactions between the AEs, that is, controlled transactions between the enterprises (related parties) which are entering into such kind of transactions. 20. Since, TNMM is one sided method and is applied to least complex party that does not contribute much to valuable or unique intangible assets, therefore, the determination of ALP is based on the amount of operating profits of that party to the controlled transaction. Such least complex party is referred to as tested party . Such a tested party is reckoned to be an enterprise who is the participant in the controlled transaction and whose operating profit is attributable to the controlled transactions which is verified using the relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifference 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 at the same net profit margin which is determined under sub-clause (iii), that is, under the comparability analysis. Lastly, sub-clause (v) provides that the net profit arrived should be at ALP. 22. In view of our understanding and analysis of Rule 10B as above, we are unable to appreciate the contention raised by the Ld. CIT DR that any adjustment if required to weed out the difference materially affecting the price or cost or profit can be made only in the case of the comparables while determining the profit margin and not in the case of the tested party. More so, in practical situations there may be absence of reliable data in the case of the uncontrolled transactions (comparables) for which such material difference is to be analysed or examined. Under the public domain at times in depth information of the financials or data of comparables are not available which renders th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, 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 extraordinary item which materially affects the cost base or profit, the same needs to be adjusted so as to eliminate the material effect of such difference. Because, the whole spirit of the transfer pricing exercise is to determine the appropriate arms length price. Such an adjustment definitely warrants at times the tinkering of PLI in the exercise of determination of arms length price. If any peculiar abnormality or extraordinary event which has arisen specific in the case of the tested party then same needs to be analysed, firstly, by comparing it with uncontrolled transactions with independent entity; and secondly, if such peculiarity is not found in the case of the uncontrolled comparable transactions then the rule envisages that reasonable accurate adjustment should be made which materially affects the cost or profit. Hence, the contention put forth by Ld. CIT DR in our humble o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds 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 has been explained that the assessee had entered into forward contracts to minimize the risk on account of exchange rate fluctuation. So far as entering into forward contracts to minimize such risks is absolutely no abnormal conduct on part of the assessee, because if the trade receivables or payables are in foreign currency, the parties generally resort to entering into forward contract and hence, it is to be reckoned as normal business transaction and any gain or loss in the normal course of business is to be accounted for in the accounts. However, if there is some hedging abnormality or any extraordinary event has occurred qua the tested party (assessee) which materially affects the cost or profit in the relevant financial year, which is not across the industry or is either absent or is of less magnitude in the case of comparable independent parties, then definitel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered 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 such kind of an exposure of hedging loss on cancellation of forward contracts is there in every comparable uncontrolled transaction, that is, in the case of the other comparables. Risk assumed by the assessee as well as by the comparable entity may be similar but quantum and scale of a risk factor if undermines the computation of PLI of the assessee vis- -vis the comparables, then our rules under the Indian Transfer Pricing provisions also enshrines that any material difference affecting the cost or profitability between the international transaction and comparable uncontrolled transaction needs to be eliminated by making suitable adjustments. Here in this case, a material difference has arisen in the case of the assessee due to abnormal feature which is qua the assessee in this particular year, (which is abnormal loss on cancellation of forward contract) which ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 companies have been seriously disputed before us, which are as under:- Sr. no. Name of the Company OP/OC % Assessee s stand i. Accentia Technologies 43.42 Disputed ii. Acropital Technologies 21.30 Disputed iii. eClerx Services Ltd. 46.92 Disputed iv. Datamatics Financial Services 3.05 Accepted v. e4E Healthcare Business Pvt. Ltd. 31.68 Accepted vi. Informed Technologies 23.13 Accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 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, services tax and any other taxes, duties or levies as applicable in US and in India. 29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 computer software development company cannot be said to be functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia [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 Deliverables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l direct cost (outsourcing charges + employee benefit expenses) 31.59% Rate of outsourcing charges to total direct cost 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 qualifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year ending 31.12.2009 which was calculated from the audited financials for the year ending 31.12.2008 and also audited accounts for the quarter ending on 31st March, 2008-09. The working 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company has been rejected not on the ground of functionality but on the ground that it is following the financial year from January to December (i.e., calendar year). Though a comparable company following a different financial year may not be generally taken for comparability analysis, however, if financial data is available for all the quarters including January to March and it is otherwise possible to determine the value of the transaction as well as the profitability during the corresponding period, then it suffices the comparability criteria. Because, ultimately the core point in comparability analysis is to benchmark the margin of a given period of a comparable uncontrolled transaction with controlled transaction. If the financials of the corresponding period is available then it cannot be rejected simply on the ground that it has a different financial year. As brought out on record by the Ld. Counsel before us that the audited accounts of R-Systems 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- 10B(4) The data to be used in analysing the comparability of an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus, so long as the data relating to the financial year is available, it matters not, if 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 agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusion was upheld by the DRP whereas the assessee has requested for its reinstatement before the ITAT. The Balance Sheet of Allsec can be referred to at Page 381 of the Paper Book containing the Balance Sheet of the comparable. This company is operating call centre and is predominantly operating within India. Its foreign exchange earnings during the year were 74% and with further growth taking place within India, the same has reduced to 50% in the subsequent year. As explained by the Delhi High Court in the case of Rampgreen Solutions, a call centre is in the nature of low end BPO service and is not comparable to high end services that require skilled manpower. Further, this company is also going through merger and acquisition during the relevant previous year. The same is evident from Pg 392-393 of the Paper Book. Further, the financial highlights of the company as appearing in its Balance Sheet for 2010-11 can be referred to Sr. No. V(l) of Revenue's Paper Book. It can be observed from 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 mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 64 taxmann.com 322 (Pune ITAT) V-5 Para 63,64 iv) Lason India Pvt. Ltd. (2016) 70 taxmann.com 259 (Chn. ITAT) V-6 Para 4.6.2 29.17. We have heard the rival submissions and also perused the relevant material placed on record. One of the arguments placed by the Ld. CIT DR is that, the foreign exchange earnings of this comparable during the year was 74% which has reduced to 50% in the subsequent year, therefore, it is below the threshold (filter) applied by the parties. However, we are unable to accept this contention, because, if the export is quite approximate to 75% in this year, then same cannot be held to be a very relevant factor for rejecting such minor difference in export turnover filter. This has been held so by the Hon'ble P H High Court in the case of Mercer Consulting India Pvt. Ltd., (supra). The Ld. CIT DR has also pointed out that this company had been going through merger and acquisition and right from the year 2008 to 2011 this company has been incurring loss. The merger and acquisition undertaken by this company has impacted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29.19. On the other hand, Ld. Counsel submitted that TPO has rejected the Microland on the ground that it was not selected by the assessee in its TP Study Report and income from ITES business is less than 75% of the total turnover. The DRP has upheld the selection of this company, because the supplementary data of ITES segment was available. Hence, this comparable company cannot be ignored for the reasons given by the TPO or by the Ld. CIT, DR. 29.20. After considering the aforesaid submissions and on perusal of the relevant finding given in the impugned order, we find that this company has been rejected by the TPO for the reason that firstly, it was not selected by the assessee in its original TP Study Report; and secondly, it has incurred loss during the year. The Ld. CIT, DR has also pointed out that the ITES segment was into loss in earlier year also. As regard the contention that the assessee has not selected the company in the T.P. Study Report, therefore, it is precluded from being considered as comparable by assessee at a later stage, we are unable to subscribe to the views of the TPO, because once the TPO has rejected most of the comparables and asked the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess and search of fresh comparables were carried out and from the said search the assessee pointed out that these comparables were also engaged in providing ITES services and hence should be accepted for comparative analysis. The first two companies have been rejected by the TPO mainly on the ground that, these companies are not forming part of the TP s study report. The DRP too has rejected these comparables on the ground that, inclusion of such comparables would amount to cherry picking of the comparables. The assessee before the authorities below had submitted the relevant extracts of annual report of the companies to substantiate the claim that these companies were engaged in providing ITES and they were not part of the T.P. Study report, because their data and financials were not available on public domain, which were now available. 29.31 We are of the considered opinion that once the annual report of the companies are available along with the functional profile and are capable of being analysed on FAR analysis then, we do not see any reason as to why these comparable companies should not be considered for comparability analysis. The TPO cannot preclude the assessee from pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that case, we direct the TPO to examine this issue in light of several decisions now available on this subject and the details submitted by the assessee. The assessee will provide the necessary details to substantiate its case, if required by the TPO/AO. 32. As regard the other grounds of appeal and comparables as raised by the assessee, it has been stated by the Ld. Counsel that some of these grounds are general and some of them are not been urged as they may become academic. Since other grounds have not been argued before us, therefore, we are not adjudicating the remaining grounds. 33. Lastly, in ground no. 3 the revenue had also challenged the direction of the DRP to the TPO to allocate administrative expenses and depreciation while computing the operative margin in respect of Acropetal Technologies Ltd, included as comparables. The TPO had accepted that the information technology segment is not similar to the functions performed by the assessee. However, he considered the engineering design service segment of Acropetal Technologies Ltd. is similar to ITES and considered the same for the operating margin of engineering service system. Once this comparable company has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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