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TMI Blog2015 (10) TMI 2625X X X X Extracts X X X X X X X X Extracts X X X X ..... rables. R Systems International Ltd. - the company is product development and product seller. Accordingly, the DRP considered the same as not comparable with that of the assessee company. We do not find any infirmity in the order of the AO as well as the DRP on this issue. We find the Ld. Counsel for the assessee while arguing the case for exclusion of Cosmic Global Ltd. has argued that the same company had to be excluded since it had paid translation charges to third parties indicting outsourcing of work. For the above proposition, she also relied on various decisions. Therefore, once it has been found by the DRP from the director’s report that R Systems International Ltd. is leading provider of outsource product development services, business process, outsource service and also own product suites in BFSI, manufacturing and logistics verticals etc., therefore, in the own arguments of the Ld. Counsel for the assessee this company is functionally dissimilar and therefore the same cannot be accepted as comparable. In this view of the matter, we uphold the order of the AO/DRP on this issue. Risk adjustment - Held that:- The different benches of the Tribunal are taking the view t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Etudes ET Productions Schlumberger, France 2,81,49,402 3 WesternGeco AS, Norway 5,27,936 4 Schlumberger Vector SA, France 15,06,328 TOTAL 10,52,92,835 4. Since the international transactions were below ₹ 15 crores the case was not referred to the TPO. However, the AO examined the case of the assessee from transfer pricing angle. From the TP study report submitted by the assessee, the AO noted that the assessee has selected TNMM as the most appropriate method to benchmark its international transactions. The assessee has considered 5 companies as comparables by considering Weighted Average Margins of 3 years data for the F.Yrs. 2006-07 to 2008-09. Since according to the AO, as per Rule 10B(4), it is mandatory to use the current year data, i.e. data for F.Y. 2008-09 and that earlier 2 year data can be used only when it is shown that such earlier year data had an influence in determining the price, therefore, the AO asked the assessee to furnish the updat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Foreign exchange gain 5,531,304 Misc income - Operating Revenues 110,824,139 Expenditure Salaries, Wages other Benefits to employees 58,615,132 Administrative expenses 36, 738, 085 Depreciation 8,396,758 Provision for Fringe Benefit tax 1,015,272 Operating Cost 104,765,247 Operating Profit 8,058,892 Operating Profit / Operating Cost 5.78% 6. After considering the annual reports of the comparables, the AO noted that the PLI working in the case of the assessee taking PBIT/OC is 5.78% whereas the PLI working of the comparable companies finally selected by him comes to 29.02%. Similarly, the PLI working after considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c Technologies Ltd. and R Systems International Ltd. the AO rejected the various contentions of the assessee. 10. So far as the rejection of Cepha Imaging Ltd. is concerned the AO noted that the related party transactions of Cepha Imaging Ltd. are ₹ 4,01,87,048/- whereas its income is ₹ 14,44,25,927/-. Thus, the RPT is 27.82%. Therefore, Cepha Imaging Ltd. cannot be accepted as comparable in view of the filter applied by the assessee itself. 11. As regards Allsec Technologies Ltd. is concerned the AO noted that the assessee in its accept/reject matrix of the TP report had rejected this company as functionally different. However, the assessee has not at all discussed in any of the submissions made that how the company has become functionally comparable. He noted from the annual report for F.Y. 2007-08 of AlLsec Technologies Ltd. that there is abnormal increase in employee cost and general administration cost which was due to merger of B2K Corporation Pvt. Ltd. and new facilities started at 2 new locations. The same has effect on the current year also which can be seen from the annual report of F.Y. 2008-09. Thus, there is loss in earlier as well as in the current y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that since Microgenetics Systems Ltd. and Cosmic Global Ltd. were engaged in rendering Medical Transcription services during A.Y. 2009-10, therefore, in case Microgenetics Systems Ltd. is rejected, then in that case, Cosmic Global Ltd. should also be rejected as it is also engaged in rendering medical transcription services. 15. However, the AO was not satisfied with the explanation given by the assessee. He noted that in the accept/reject matrix of the TP report the assessee company had accepted Cosmic Global Ltd. company as functionally comparable. However, now the assessee is objecting the inclusion of the same on the ground that it is a super profit making company. The AO noted that the assessee does not have any definite idea as to what should be considered as super profit but has argued that practically any company, inclusion of which in the set may result in an inconvenient average PLI, should be rejected. The AO noted that in all the decisions relied on by the assessee the term super profit has been defined with mathematical accuracy. According to him normally companies having margins of near about 100% on cost have been treated as super profit companies. However, in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following grounds : On the fact and circumstances of the case, and in law; 1. The Honourable Dispute Resolution Panel ( Hon'ble Panel ) / Ld. Assessing Officer ( Ld. AO ) have erred in making the Transfer Pricing adjustment of ₹ 1,27,15,040 by re-computing arm's length price of the Appellant's international transaction of provision of technical support services (engineering back office services) to its Associated Enterprises. The Appellant prays that the arm's length price of the international transaction of provision of technical support services as computed by the Appellant be accepted and consequently the Transfer Pricing adjustment of ₹ 1,27,15,040 be deleted. 2. The Hon'ble Panel / Ld. AO have erred in considering certain companies as comparable to the Appellant. The Appellant prays for exclusion of these companies from the set of comparables used by the Hon'ble Panel / Ld. AO for determination of the arm's length price of the Appellant's international transaction of provision of technical support services. 3. The Hon'ble Panel / Ld. AO have erred in rejecting certain comparable companies from the set of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operations on 01-12-2007. It provides service related to preparation, correction and editing of data sheets and drawings to its Associated Enterprises. She submitted that the main grievance of the assessee is regarding the action of the AO in considering certain companies as comparable and exclusion of certain companies selected by the assessee as not comparable. 20. Now coming to the grounds raised the Ld. Counsel for the assessee submitted that she is not pressing ground of appeal No.1 being general in nature. Accordingly, the same is dismissed as not pressed . 21. So far as ground of appeal No.2 is concerned she submitted that the grievance of the assessee is regarding considering Cosmic Global Ltd. as comparable. She submitted that the AO while considering this company as comparable has held that the assessee has accepted this company as comparable in its TP study report. The assessee has applied an implied filter of rejecting companies showing super profits. According to the AO since the term super profit has not been defined with mathematical accuracy and normal companies with margin around 100% have been treated as super profit companies, therefore, this company with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is 53.15%. Therefore, functionally also, Cosmic Global Ltd. is incomparable to the assessee. She submitted that companies with low employee cost to sales ratio outsourcing substantial portion of work has to be rejected. For the above proposition she relied on the following decisions : 1. Xchanging Technologies Services India Pvt. Ltd. Vs. DCIT ITA No.1897/Del/2014 order dated 24-04-2015 2. Capital IQ Information Systems Ltd. Vs. Dy.CIT ITA No.1961/Hyd/2011 order dated 23-11-2012 3. ACIT Vs. Maersk Global Service Centre India Pvt. Ltd. ITA No.3774/Mum/2011 order dated 09-11-2011 25. She submitted that the decision of the Special Bench of the Tribunal in the case of ACIT Vs. Maersk Global Service Centres India Pvt. Ltd. has been upheld by the Hon ble Bombay High Court in the case of CIT Vs. Maersk Global Service Centres India Pvt. Ltd. vide ITA No.693 and 693/2012. The Revenue has not taken a plea on contesting exclusion of Vishal Information Technologies Ltd. by the Tribunal on account of outsourcing. She also relied on the following decision : 1. Symphony Marketing Solutions India Pvt. Ltd. Vs. ITO IT/TP(A) No.1316/Bang/2012 order dated 14-03-2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2-2012 2. ACIT Vs. Schafhorst Marketing Co. Ltd. ITA No.1960/Mum/2007 order dated 12-08-2011 30. So far as Allsec Technologies Ltd. is concerned she submitted that the AO rejected the same as comparable on the ground that the assessee rejected Allsec Technologies Ltd. in its TP study report. Further, in F.Y. 2007-08 there was abnormal increase in the employee cost, general and administration cost due to take over of B2K Corporation Pvt. Ltd. and new facility started at 2 locations. Further, assessee follows cost plus business model where it cannot incur a loss. Hence, the AO rejected the same. This was upheld by the DRP. She submitted that Allsec Technologies Ltd. was rejected by applying upper turnover filter of ₹ 15 crores in the TP report. The reference to being functionally different in the accept reject matrix was inadvertent . However, Allsec Technologies Ltd. was acceptable considering upper turnover filter of ₹ 200 crores. She submitted that Allsec Technologies Ltd. is functionally comparable and is not a persistent loss maker and therefore the same cannot be rejected on this ground. Further, TNMM requires broad comparability. Allsec Technologies Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk adjustment should be 6.96%. Particulars Ref. % Average prime lending rate during F.Y. 2008-09 (A) 12.96% Average bank rate during F.Y. 2008-09 (B) 6.00% Difference between the prime lending rate and bank rate (C=A-B) 6.96% Risk Adjustment (D) 6.96% 35.1 Referring to the decision in the case of Sony India Ltd. reported in 114 ITD 448 she submitted that risk adjustment of 20% has been allowed. Since in the instant case the assessee has demonstrated the risk adjustment at 6.96%, therefore, the same should be allowed. 36. The Ld. Departmental Representative on the other hand strongly relied on the order of the AO/DRP. She submitted that the TP study report conducted by the assessee suffers from various infirmities. 37. So far as Cosmic Global Ltd. is concerned she submitted that assessee itself has accepted this company as comparable in its TP study report. The assessee itself had applied an impl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in 30 taxmann.com 350 she submitted that the Tribunal in the said decision has held that risk adjustment and working capital adjustment can be made only on the basis of proper data and accurate calculations and not on adhoc basis. 44. The Ld. Counsel for the assessee in her rejoinder submitted that the assessee has prepared TP report on the basis of data available at the relevant time. Only when TPO asked to change the TP report on the basis of single year data and applying turnover filter that the assessee prepared the TP study report. She accordingly submitted that the grounds raised by the assessee be allowed. 45. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. So far as inclusion of Cosmic Global Ltd. as comparable by the AO is concerned we find the AO considered the same as comparable on the ground that the assessee accepted this company as comparable in its TP study report and the assessee has applied an implied filter of rejecting the companies showing super profit. Since this company with a margin o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the normal business condition, we are of the view that the high profit margin making entity should not be included in the list of comparable for the purpose of determining the arm's length price of an international transaction. Otherwise, the entity satisfying the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abnormal high profit margin. Question No. 2 referred to this special bench is answered accordingly . (emphasis supplied by us) 49. We find the Pune Bench of the Tribunal in the case of Q-Logic (India) Pvt. Ltd.(Supra) while excluding Bodhtree Consul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o turnover ratio comes to 21.32%. In the case of the assessee as against the total employee cost of ₹ 5,86,15,132/- the turnover is ₹ 11,02,81,913/- and the ratio of employee cost to turnover comes to 53.15%. Further, Cosmic Global Ltd. has paid translation charges of ₹ 3,00,25,306/- to third parties which is to the tune of 40.74% of its turnover which indicates outsourcing of work. Therefore, we find merit in the submission of the Ld. Counsel for the asessee that functionally Cosmic Global Ltd. is incomparable to the assessee. The various decisions relied on by the Ld. Counsel for the assessee to the proposition that companies with low employee cost/sales ratio outsourcing substantial portion of work has to be rejected. The Delhi Bench of the Tribunal in the case of Xchanging Technology Services India Pvt. Ltd. (Supra) at para 8 of the order has observed as under : 8. The TPO considered Cosmic Global Ltd. as comparable with the assessee company on entity level. We have examined the Annual report of this company for the year in question, which is available in the paper ITA No.1897/Del/2014 book. It can be noticed that its revenue from operations stands at S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for computing the RPT to sales, the details of which are as under : Particulars Amt. in Rs. Sales 96,01,016/- Income 20,41,849/- Expenses 1,39,54,466/- Interest 1,62,333/- Debtors 51,71,358/- Creditors 92,56,026/- Total 4,01,87,048/- 55. According to the assessee, if the debtors, creditors and interest expenses are excluded the RPT to sales comes to 17.72%, the details of which are as under : Particulars Amt. in Rs. Sales 96,01,016/- Income 20,41,849/- Expenses 1,39,54,466/- Interest NIL Debtors NIL Creditors NIL Total 2,55,97,331/- 56. From the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparability, controlled and uncontrolled transactions are regarded as comparable if their economically relevant attributes and the circumstances surrounding them are sufficiently similar to provide a reliable measure of an arm s length result. However, in reality, two transactions are seldom completely alike. To be comparable does not mean that the two transactions are necessarily identical, but that either none of the differences between them could materially affect the arm s length price or, where such material differences exist, then reasonably accurate adjustments can be made to eliminate their effect. It is important to note that the type and attributes of the comparables available in a given situation typically determine the most appropriate transfer pricing method. In general, closely comparable products/services are required if the comparable uncontrolled price ( CUP ) method is used for arms length pricing; the resale price, cost-plus methods generally require a lesser degree of products or services comparability and may be appropriate if functional comparables are available. The TNMM requires only broad functional and product/services comparability. In many instances, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. is engaged in data verification, processing of orders received on telephone calls, telemarketing, monitoring quality of calls and other call centres, customer centre, HR and payroll process and therefore it is functionally dissimilar. 64. It is the case of the Ld. Counsel for the assessee that TNMM requires a broad functional level and Allsec Technologies Ltd. being functionally comparable and being not a persistent loss making company should not have been rejected. It is also the case of the Ld. Counsel for the assessee that during the year there was no amalgamation and the reference to abnormal increase in employee and general administration costs is not borne out from the annual report of Allsec Technologies Ltd. for A.Y. 2008-09. We do not find any merit in the above submissions made by the Ld. Counsel for the assessee. First of all, the assessee itself has rejected Allsec Technologies Ltd. in its TP study. As observed by the Ld. DRP the company is engaged in the business of data verification, processing of orders received on telephone calls, telemarketing, monitoring of quality of calls and other call centres, customer services, HR and payroll process. Therefore, the fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue regarding risk adjustment, we find the draft assessment order is silent on this issue. The assessee for the first time took a stand before the DRP who also rejected the contention of the assessee on the ground that assessee has not produced complete analysis and complete spectrum of risk faced on the business entity. It has not carried out FAR on comparable and in the TP report during the proceedings has merely enumerated few reasons. Therefore, in absence of risk analysis of each comparable with the risk matrix of the assessee, the DRP held that no difference in risk profile by assessee and comparable can be made on account of risk. It is the submission of the Ld. Counsel for the assessee that assessee s business model is cost plus nature wherein there is no possibility of incurring losses. This has also been accepted by the AO. However, the comparables are normal risk bearing entities. Further, the observation of the DRP that assessee should provide a detailed risk analysis of each comparable is both onerous and impractical since the data belongs to third parties and beyond the control of the assessee. According to the Ld. Counsel, the assessee can be expected to conduct the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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