9911796707
TMI Blog2016 (8) TMI 1162X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company has entered into the following international transactions with its AE : Sr.No. Nature of Transaction Amount (Rs.) Method used 1 Provision of BPO Services 3,88,38,097 TNMM 3. From the TP study report submitted by the assessee and details/explanation submitted during the course of assessment proceedings, the AO noted that certain facts relating to the international transactions undertaken by the assessee and their benchmarking done does not comply to the Transfer Pricing Regulations of India. He, therefore, issued a show cause notice to the assessee asking him to justify the TP study. From the details furnished by the assessee, he observed that the assessee has selected the following 8 companies as comparable on the basis of the search conducted in the public database, i.e. Prowess and Capitaline. The PLI (operating profit to operating cost ratio) of the comparables considering data for A.Y. 2008-09 are as under : Sr.No. Company Name OP/OC(%) 1 Capricorn Systems Global Solutions Ltd. 1.83 2 Cat Technologies Ltd. 34.87 3 Infinite Data Systems Pvt. Ltd. 29.51 4 Net4Nuts Ltd. 8.60 5 Persistent Ebusiness Solutions Ltd. 3.55 6 Saven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome companies though qualify all the filters applied by the tax payer based on the data pertaining to the F.Y. 2007-08, they have not been selected. 3. The assessee selected companies having predominant domestic operations though the assessee is mainly an export oriented IT enabled service provider." In view of the above, he held that the ALP determined by the assessee is not reliable and correct. He, therefore, invoked the provisions of section 92C(3)(c). 7. From the various details furnished by the assessee, the AO noted that the operating revenue, operating expenses and operating profit of the assessee can be computed as under : Amount (Rs.) Sales 43773517 Forex gain 2696077 Operating income 46469594 Total cost 58964581 Less : Interest 135821 Operating Cost(OC) 58828760 Operating Profit (OP) -12359166 OP/OC (%) -21.01 8. He further observed that the assessee had also adjusted its PLI on account of expenses in relation to the raising of finance and buy back on the ground that these are extraordinary or non operating expenses. Since the assessee did not produce any documentary evidence to substantiate the claim and since there was no suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r range of +/-5%. It was submitted that it had incorrectly applied the filter of loss making companies resulting in exclusion of companies with losses as comparable. The TPO also accepted this filter as applied by the assessee and excluded loss making companies from the list of the comparable companies. However, it realized later that filter of loss making companies is not appropriate in the facts of its case. It was submitted that the assessee has incurred significant loss due to certain unprecedented and extraordinary events like ESOP issue, buyback of shares and fall in GDR issue. It was submitted that above extraordinary cost, if ignored, then the company would make significant operating profit. It was accordingly argued that it would not be appropriate to reject the companies with operating loss. Therefore, the filter applied by the assessee as well as the TPO to exclude the companies with negative PBIT will not be justified in this case. Further, incurring of profit or loss is part of the normal business cycle. Therefore, if viewed from this perspective, loss making companies should be excluded as comparables. 11. Based on the arguments advanced by the assessee the CIT(A) he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Form 3CD. The Appellant has not challenged this finding in any of the Grounds of Appeal filed before me nor has it filed additional evidence in support of expenditure in the appellate proceedings. When expenditure itself is not proved on facts, discussion on its extra-ordinary nature is Irrelevant. When the fact of expenditure is not established, it cannot be presumed to have been expended for the purpose of business or for that matter, as an operating expenditure. In these circumstances, I confirm the decision of the learned TPO to deny self-adjustment on account of extra-ordinary expenses. With the result, the Appellant will be a loss making company. 2.1.6 As far as comparability of loss making company is concerned, according to. me, it would be inappropriate to compare the same with profit making companies. It is fundamental that oranges cannot be compared with apples. Therefore, in my view filter of loss making company cannot be used to exclude such companies. The Appellant has also submitted that according to its business model, it has not provided services by following 'cost plus' business model. It has charged its AE on the hourly basis. It has furnished copies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciate that the finance raising cost, prior period items written off and extra ordinary items were to be excluded while determining the operating profit and operating cost while determining the ALP of the international transactions entered into by the appellant company. 3] The CIT(A) has failed to grant the working capital adjustment in respect of comparable companies selected by the Ld. TPO. 4] The assessee submits that it shall be allowed the credit for all the lawful prepaid taxes like advances tax and Tax Deducted at Source, which the appellant was eligible to claim. 5] The assessee submits that no interest is leviable u/s. 234A of the Act, as return of income was furnished within the time limit prescribed u/s. 139(1) of the act and that no interest may be levied u/s. 234B of the Act in respect of unanticipated additions made on account of transfer pricing adjustment. 6] The appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal." Grounds by the Revenue : "1. The order of the learned Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rginally from Rs. 1.11 crores to Rs. 1.22 crores in the financial year ending 31-03-2008 and 31-03-2009 respectively. Further, the related party transactions in this company is more than 25%. Referring to the decision of the Pune Bench of the Tribunal in the case of BNY Mellon International Operations (India) Pvt. Ltd., Vs. DCIT reported in (2015) 55 taxmann.com 386 he submitted that the Tribunal in the said decision, after considering the nature of business carried out has held that Coral Hubs Ltd. is to be rejected as a comparable. 16. So far as selection of Cross Domain Solutions Ltd. as a comparable is concerned, he submitted that this company is engaged in high skilled IT services which cannot be compared with the services rendered by the assessee company. Referring to the decision of the Pune Bench of the Tribunal in the case of BNY Mellon International Operations (India) Pvt. Ltd. (Supra) he submitted that Cross Domain Solutions Ltd. has been rejected as comparable on the above ground. 17. So far as e4e Healthcare Solutions Ltd. is concerned, he submitted that the above company is engaged in different business, i.e. business of providing healthcare outsourcing services for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igital Content Solutions Ltd. UK 100% - We therefore find merit in the submission of the Ld. Counsel for the assessee that in view of the low employee cost and high related party transactions Coral Hubs Ltd. should be excluded from the comparables. 20. We find the Pune Bench of the Tribunal in the case of BNY Mellon International Operations (India) Pvt. Ltd. (Supra) has held that Coral Hubs Ltd. (Formerly known as Vishal Information Technology Ltd.) cannot be included as comparable. The relevant observation of the Tribunal at Para 24 to 26 read as under : "24. The next objection of the assessee is with regard to the inclusion of Coral Hubs Ltd. (Formerly known as Vishal Informational Technologies Ltd.) in the final set of comparables. The plea of the assessee in this regard has been noted by the TPO in para 29 of his order. It was canvassed by the assessee that the said concern was functionally dissimilar to the activities undertaken by the assessee. It was pointed out that the said concern was involved in digitization activity and was also in e-publishing arena. It was also pointed out that it had entered into a new business of Digital Library & Print on Demand (POD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l centre and was providing technical support to its AEs. We find that the Tribunal in assessee's own case relating to assessment year 2006-07 in ITA No.1346/PN/2010 and in assessment year 2007-08 in ITA No.1605/PN/2011 had excluded the said comparables observing as under: "30. The next point raised by the assessee is against the inclusion of Vishal Information Technologies Ltd., appearing at Item (10) in the Tabulation in para 25 as a comparable case. The TPO has discussed the issue in para 6.9.6. of the order. As per the TPO, the said concern is functionally comparable to the IT-Enabled services segment of the assessee and for that reason, the said concern has been included as a comparable for the purposes of comparability analysis. In this connection, the plea set up by the assessee is that the said concern is engaged in not only IT-Enabled services, but also in providing quality products and in the creation of animated films and books. It has also been ascertained by referring to the Annual Report of the said concern that it is engaged in providing agency services by way of outsourcing the services to third party vendors and acting as an intermediary between the final custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment years 2006-07 and 2007-08 (supra), we uphold the plea of the assessee in excluding the margins of the said concern M/s. Vishal Technologies Ltd." 26. In the context of the aforesaid precedent, no cogent reasoning has been advanced by the Ld. Departmental Representative and therefore, we uphold assessee's plea for exclusion of Coral Hubs Ltd. (formerly known as Vishal Informational Technologies Ltd.) from the final set of comparables." 21. In view of the above discussion, we accept the plea of the Ld. Counsel for the assessee that Coral Hubs Ltd. has to be rejected as comparable. 22. So far as Cross Domain Solutions Ltd. is concerned, we find the Tribunal in the case of BNY Mellon International Operations (India) Pvt. Ltd. (Supra) has excluded the above company as not comparable. The relevant observation of the Tribunal from para 12 to 15 of the year read as under : "12. Another plea raised by the assessee is for exclusion of Crossdomain Solutions Ltd. from the final set of comparables. In this regard, assessee canvassed before the TPO that the said concern was functionally not comparable to the activity of IT enabled services being carried out by the assessee. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directions of the DRP for the rejection of this company from the final list of comparable." 15. Following the aforesaid precedent, which has been rendered in the context of the same assessment year, we uphold assessee's plea for exclusion of Crossdomain Solutions Ltd. from the final set of comparables. We hold so." 23. Following the decision of the Coordinate Bench of the Tribunal in the case of BNY Mellon International Operations (India) Pvt. Ltd. (Supra) and considering the fact that Cross Domain Solutions Ltd. is engaged in high skilled IT services which cannot be compared with the services rendered by the assessee, we direct the TPO to exclude the said company from the list of comparables. 24. So far as exclusion of e4e Health care Solutions is concerned, we find from page 243 of the paper book about the background of the company as given at para 1.1 and which reads as under : "1.1 Background : e4e healthcare Business Services Private Limited (formerly Nittany Outsourcing Services Private Limited) ['e4e Healthcare' or 'the Company'] is a Private Limited Company incorporated under the provisions of the Companies Act, 1956 ('the Act') on 26 February 2003. The registered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Bench to the letter received from the above company and the invoices raised by them. He submitted that the expenditure on GDR issue or buyback of shares is not relevant to providing of BPO services to these AEs. All these expenses have no connection to the providing of services to the AEs and therefore these expenses should be considered as non-operating expenses while determining the operating margin of the assessee. 28. As regards the observation of the CIT(A) that no details were submitted by the assessee he submitted that all those details in respect of the expenses incurred on raising of finance and buyback of shares were submitted to the AO and the CIT(A). Referring to pages 91 to 109 of the paper he drew the attention of the Bench to the letter addressed to the CIT(A) vide letter dated 21-12-2012 wherein the issue relating to the expenditure on raising of finance and buyback of shares is clarified. Referring to pages 180 to 197 of the paper book he drew the attention of the Bench to the letter addressed to the AO vide letter dated 26-12-2011 where all those details were submitted. 29. So far as rejected tax refund claim written off is concerned, he submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to page 100 of the paper book he submitted that relevant details were submitted to the CIT(A). Referring to pages 187 to 189 of the paper book he submitted that all these details were given to the AO. 32. The Ld. Counsel for the assessee submitted that all the above 4 expenses are non operating expenditure and has no relation to providing of services to the AEs. Since these expenses are not operating in nature, therefore, these are to be excluded while determining the operating margin of the assessee company. For the above proposition, he relied on the following decisions : 1. Marubeni India Pvt. Ltd. Vs. DIT reported in 354 ITR 0638 (Delhi) 2. HCL Technologies BPO Services Ltd. -ITA Nos. 3547 & 5071/Del/2010 order dated 10-07-2015 3. Exxon Mobil Gas India Pvt. Ltd. - ITA No.417/Del/2011 order dated 13-11-2014. 4. Transwitch India Pvt. Ltd. reported in 151 TTJ 177 33. He submitted that in this year the assessee has incurred loss due to the above extraordinary expenses/non-operating items. Referring to page 286 of the paper book he drew the attention of the Bench to the year-wise details of the operating revenue, expenditure and profit. He submitted that only in A.Y. 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,02,17,339/- 2 Rejected Service Tax refund claim expensed out 11,25,502/- 3 Salary expenses of accounting and MIS process 19,35,527/- 4 Salary expenses of Software Team 68,35,875/- 36. The AO in the assessment order held that the above adjustments made by the assessee as non operating expenditure is not justified since according to him these are neither extraordinary nor non-operating. Further, the AO held that the assessee has not given full details of such expenditure nor has made adjustment in the computation of income. We find the CIT(A) upheld the action of the AO on the ground that assessee has not proved the correctness of the expenses before the AO and further no documentary evidences were submitted to substantiate its claim. He further held that when the expenses itself is not proved the discussion on this extraordinary nature is irrelevant. 37. It is the submission of the Ld. Counsel for the assessee that full details were given justifying the exclusion of the above 4 items for computing the operating margin. However, the lower authorities have erroneously ignored such claim and held that assessee has not given full details. 38. We find merit in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book as was done in earlier years. Since the projects in which the employees were working were terminated and the assessee was capitalizing the cost incurred in the book till earlier year has debited such expenses to the profit and loss account during this year, therefore, this in our opinion is also an extraordinary item. 40. We find in the case of Marebeni India Pvt. Ltd. (Supra) the assessee company had paid compensation for closure of its India units and this expenditure was claimed as normal expenditure. The Hon'ble Delhi High Court held that this expenditure would represent abnormal cost and the same has to be excluded while computing the operating margin. The relevant observation of the Hon'ble High Court reads as under : "17. Question No.6 relates to the finding of the Tribunal that the expenses relating to the closure of the business were abnormal expenses and cannot be considered relevant while arriving at the ALP in respect of the international transaction. It also refers to the finding of the Tribunal that none of the comparable companies had incurred such expenses. The assessee had paid compensation for closure of its units, including the Delhi and Chennai offices, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n units may be a regular phenomenon but held that by closing down certain branches in India the assessee had actually reduced the costs of associated enterprise. It is according to the Tribunal meant that the closure of the branches had direct link with the international transaction. For these reasons the Tribunal held that the revenue was right in upholding that the costs of closure are not to be excluded from computing the operating expenses. 19. The contention of the counsel for the assessee before us is that the assessee was being compensated by way of a commission of fees by the associated enterprise and not on cost plus basis as erroneously held by the Tribunal. It was submitted that in this context, the compensation paid in connection with the closure of the Indian units represents abnormal costs which have to be excluded for determining the ALP. Counsel also posed the question whether the closure of the Indian units would benefit the associated enterprise and answered the same in the negative, and submitted that in such a case, the abnormal or external costs should not be taken into consideration while arriving at the ALP. 20. It may not be possible to lay down a formul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a relevant issue for inclusion in the operating costs. In arriving at such a decision, it seems to us that the revenue authorities and the Tribunal failed to keep in mind that even according to the assessing officer, the assessee was being compensated for its agency and market support service by way of handling commission and fixed service fee. It seems rather remote that considering the nature of the remuneration received by the assessee from its associated enterprise, the payment of compensation on closure of the Indian offices would have any impact on the transfer pricing issue or in the fixing of the ALP. It therefore, appears to us that having regard to the nature and manner in which the assessee is remunerated for its services, the payment of compensation to the Indian units on their closure would represent abnormal costs which have to be excluded in the determination of the ALP. In our view, the income tax authorities as well as the Tribunal have erred in holding to the contrary. We accordingly, answer the question No.6 in the negative, in favour of the assessee and against the revenue. 41. The Delhi Bench of the Tribunal in the case of HCL Technologies BPO Services Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0B(1)(e)(iii) of the Rules. We may observe that adjustment on the aspect of working capital difference between the tested party and the comparable uncontrolled entities/transactions is permissible only where the requirements of rule 10B(1)(e)(iii) r.w. rule 10B(3) of the Rules are satisfied. In this background, the learned counsel for the assessee stated that since assessee's plea has not been factually verified, it may be sent back to the Assessing Officer for verification. 20. The plea of the assessee has not been seriously opposed by the learned CIT(DR). 21. Therefore, we are inclined to remit the matter back to the file of the Assessing Officer who shall examine as to whether or not in the present case the working capital requirement constitute an item of difference so as to require adjustment as per the parameters laid down by rule 10B(1)(e)(iii) r.w.rule 10B(3) of the Rules for the purposes of analyzing the comparability of the comparable uncontrolled transactions with the international transactions of the assessee. Needless to say, the Assessing Officer shall allow the assessee a reasonable opportunity to put-forth material and submissions in support of its stand and onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the business characteristics of associated enterprises and any independent enterprises engaged in comparable uncontrolled transactions, because the range would permit results that would occur under a variety of commercial and financial condition." 14. We find that in respect of the selection of the comparables, the Tribunal has taken the consistent stand that as the super profit companies should not be included, the same way, super loss making companies should also be excluded. Though we agree with the TPO that some of the comparables for the purpose of PLI adopted by the assessee are showing the loss, but the burden is on the TPO to prove where those companies are consistently loss making companies. Moreover, except unsupported reasoning, no data has been brought on record by the TPO for excluding the comparables selected by the assessee in the Transfer Pricing study report. We, therefore, find no justification to the adjustment made u/s.92CA(3) of the Act. We accordingly delete the same. In the result, relevant grounds are allowed" 47. In view of the decisions cited above and in view of the detailed reasoning given by the CIT(A), we find no infirmity in his order directing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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